Validation Report

Reference Number: PVR-353 Project Number: 36507-013 Loan Number: 2175 November 2014

People’s Republic of : Water Supply and Sewerage Development Project

Independent Evaluation Department

ABBREVIATIONS

ADB – Asian Development Bank EIRR – economic internal rate of return FIRR – financial internal rate of return JPG – Jilin Provincial Government m3 – cubic meter NRW – non-revenue water PCR – project completion report PMO – project management office PRC – People’s Republic of China RRP – report and recommendation of the President SRB – Songhua River Basin WWTP – wastewater treatment plant

NOTE

In this report, “$” refers to US dollars.

Key Words

asian development bank, independent evaluation department, municipal government, people’s republic of china, wastewater treatment, water treatment, validation

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.

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: 36507-013 PCR Circulation Date: Sep 2012 Loan Number: 2175 PCR Validation Date: Nov 2014 Project Name: Jilin Water Supply and Sewerage Development Project Country: People’s Republic Approved Actual of China ($ million) ($ million) Sector: Water and Other Total Project Costs: 232.2 234.5 Municipal Infrastructure and Services ADB Financing: ADF: 0.0 Loan: 100.0 92.7 ($ million) Borrower: 132.2 141.8 OCR: 100.0 Beneficiaries: 0.0 0.0 Others: 0.0 0.0 Cofinancier: Total Cofinancing: 0.0 0.0 Approval Date: 18 Jul 2005 Effectiveness Date: 28 Dec 2005 13 Dec 2005 Signing Date: 29 Sep 2005 Closing Date: 30 Jun 2010 13 Jul 2012 Project Officers: Location From To S. Penjor ADB headquarters Jul 2005 Dec 2006 Y. Li ADB headquarters Jan 2007 Aug 2007 A.S. P. Leung ADB headquarters Sep 2007 Nov 2007 S. Penjor ADB headquarters Dec 2007 Aug 2008 S. Popov ADB headquarters Sep 2008 Nov 2009 J. Huang ADB headquarters Dec 2009 Jul 2012 Validator: I. Green, Consultant Peer Reviewer: M. G. Agapito, Evaluation Officer, IED1 Quality Reviewer: E. Gozali, Principal Director: W. Kolkma, IED1 Evaluation Specialist, IED1 ADB = Asian Development Bank; ADF = Asian Development Fund; IED1 = Independent Evaluation Department, Division 1; OCR = ordinary capital resources; PCR = project completion report.

I. PROJECT DESCRIPTION

A. Rationale

1. Rapid economic growth and urbanization in its basin has made the Songhua River one of the most polluted major rivers of the People’s Republic of China (PRC), and this has constrained sustainable economic development. Focusing on three cities and one district of Jilin Province, the project aimed to contribute significantly to controlling water pollution in the Yitong and Yongchun rivers, which flow into the Songhua River Basin (SRB) and in the upstream section of the basin. The project aimed to help solve water shortages in the region and meet future demand for high-quality treated water. The project responded to the government’s objectives to increase the rate of wastewater treatment as indicated in the Tenth Five-Year Plan (2001–2005) and contribute to implementing the PRC country partnership strategy1 and water policy2 of the Asian Development Bank (ADB).

1 ADB. 2003. Country Strategy and Program Update: People’s Republic of China, 2004–2006. Manila. 2 ADB. 2001. Water for All: The Water Policy of the Asian Development Bank. Manila.

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B. Expected Impact

2. The design and monitoring framework in Appendix 1 of the report and recommendation of the President (RRP) stated that the project’s expected impact was an “enhanced urban environment and improved public health and quality of life for the urban residents in the cities of , , and Meihekou.”3 Associated performance indicators and targets were to (i) eliminate water supply interruption, from 5–7 hours per day to zero, by 2010; (ii) improve the water quality of the Yitong and Yongchun rivers, which flow into the Songhua River Basin, from class IV–V to class III, by 2010; and (iii) lower the composite incidence of diarrhea and hepatitis A to below 2003 levels of 1.83 per 1,000 persons in Changchun, 1.53 per 1,000 persons in Liaoyuan, and 1.49 per 1,000 persons in Meihekou.

C. Objectives or Expected Outcome

3. The outcome statement of the RRP’s design and monitoring framework was: “improved management and utilization of water resources in the upper Songhua River Basin.” Associated performance indicators and targets were to (i) reduce wastewater effluent pollutant loadings from Changchun to the Songhua River Basin by the following amounts annually until 2010: 15,500 tons of biochemical oxygen demand, 27,600 tons of chemical oxygen demand, 17,900 tons of suspended solids, 1,570 tons of ammonia nitrogen, 270 tons of total phosphorous; (ii) recover the groundwater aquifer in Shuangyang and Meihekou by more than 85%, by 2011; (iii) increase water supply service coverage of the urban population in Shuangyang (90%), Meihekou (85%), and Liaoyuan (85%) by 2010; and (iv) reduce by more than 50% disruption and damage due to flooding in Liaoyuan and along the Yongchun River in Changchun by 2010.

D. Outputs

4. The project had five physical components: (i) Changchun wastewater treatment and sewerage system; (ii) Shuangyang water supply system; (iii) Changchun Yongchun River flood control capacity; (iv) Liaoyuan water supply system; and (v) Meihekou water supply system. The project completion report (PCR) explained that the five components were regrouped into seven subprojects: (i) upgrading the existing Beijiao wastewater treatment plant (WWTP) to secondary treatment with a capacity of 130,000 cubic meters (m3)/day; (ii) constructing the 150,000 m3/day Nanjiao WWTP; (iii) constructing and rehabilitating the Beijiao sewer mains, including sewerage pipelines, pumping stations, and maintenance and management stations; (iv) constructing the 36,000 m3/day Shuangyang water treatment plan (WTP); (v) improving the Yongchun river flood control system in Changchun; (vi) upgrading the Liaoyuan water supply and drainage system, including two existing WTPs; and (vii) constructing the 100,000 m3/day Meihekou WTP and a 40-kilometer raw water transmission pipeline and upgrading 56 kilometers of the existing water distribution network.4

5. By the time of the Eleventh Five-Year Plan (2006–2010) and the Songhua River Basin Water Pollution Prevention and Control Plan (2006–2010), the SRB pollution control strategic focus was renewed and led to the adjustment of the project’s physical subprojects. Subprojects (iii), (iv), and (v) were canceled. The $28.2 million savings was reallocated for (i) increasing the Beijiao WWTP capacity from 130,000 m3/day to 390,000 m3/day, the Nanjiao WWTP to a

3 ADB. 2005. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People’s Republic of China for the Jilin Water Supply and Sewerage Development Project. Manila. 4 ADB. 2012. Completion Report: Jilin Water Supply and Sewerage Development in the People’s Republic of China. Manila. 3

capacity of 150,000 m3/day, and treated wastewater reuse to a capacity of 50,000 m3/day ($21.8 million); and (ii) the Meihekou water supply subproject ($6.4 million).

E. Provision of Inputs

6. The actual project cost $234.5 million, of which ADB financed $92.7 million, and $141.8 million was financed through a combination of equity from the Changchun, Liaoyuan, and Meihekou municipal governments; water and wastewater tariff increases; and borrowing from the domestic commercial bank.

7. About 30 person-months of international consulting and 120 person-months of domestic consulting were estimated to be required. This was increased to 125 person-months of domestic consulting and 33.7 months of international consulting. The project complemented ADB’s efforts to develop an integrated plan and action plan for pollution control in the SRB through the ongoing advisory technical assistance projects—the Songhua River Water Quality and Pollution Control Management5 and the Songhua Pollution Control6—which reinforced project activities.

F. Implementation Arrangements

8. The Jilin Provincial Government (JPG) was to be responsible for overall project supervision and coordination. The JPG would establish a project steering committee, headed by a vice governor. The project management office (PMO) established at the JPG would be led by the Jilin Construction Commission and serve as the project steering committee secretariat. Project implementation units reporting to the PMO would be established in the Changchun, Liaoyuan, and Meihekou municipal governments to coordinate and monitor the activities of the five implementing agencies (Changchun Water Group Urban Drainage Company Limited, Changchun Shuangyang Water Supply Company, Changchun High-Tech Industry Development General Company, Liaoyuan Water Company, and Meihekou Water Supply Company). The arrangements were implemented as planned and the China International Tendering Company was hired to provide procurement support to the project.

9. The conditions and covenants were generally complied with. Covenants on domestic water tariffs, which took account of social factors in government interventions, were followed in 3 Meihekou and Liaoyuan. In both cities, the domestic water tariffs were adjusted to CNY2.35/m 3 3 on 1 January 2008 (versus CNY1.85/m in the RRP), and to CNY2.8/m on 1 January 2010 3 (versus CNY2.65/m in the RRP). The wastewater tariff in Changchun City has stayed at 3 3 CNY0.40/m since 2001, significantly below the CNY0.77/m projected in the loan covenant.

II. EVALUATION OF PERFORMANCE AND RATINGS

A. Relevance of Design and Formulation

10. The PCR rated the project highly relevant. The project responded to the government’s objective to increase the rate of wastewater treatment as indicated in the Tenth Five-Year Plan (2001–2005). The State Council approved the Songhua River Basin Water Pollution Prevention

5 ADB. 2002. Technical Assistance to the People’s Republic of China for the Songhua River Water Quality and Pollution Control Management. Manila. 6 ADB. 2007. Technical Assistance to the People’s Republic of China for Preparing the Songhua River Basin Water Pollution Control and Management Project (Cofinanced by the Cooperation Fund for the Water Sector). Manila. 4 and Control Plan (2006–2010)7 in 2006 with a total budget of CNY13.4 billion, which included major projects involving water pollution control and management technology, and encouraged the use of new wastewater treatment technology and wastewater recycling in the SRB. The project was consistent with ADB’s efforts to develop an integrated plan and action plan for pollution control in the SRB through ongoing advisory technical assistance, the Songhua River Water Quality and Pollution Control Management project, and the complementary Songhua Pollution Control project. The project impact and outcome remained mostly unchanged throughout implementation, particularly with regard to wastewater management.

11. This validation, however, found a design weakness. As with the related Jilin Urban Environment Improvement Project, some subprojects8 were designed with a capacity that far exceeded the medium-term demand in Changchun and Meihekou. Future projects should strongly look into the level of demand at completion to avoid the issue of overcapacity. However, despite these few cases, majority of the remaining subprojects were found to have operated at full or close to full capacity at completion. This validation therefore rates the project relevant.

B. Effectiveness in Achieving Project Outcome and Outputs

12. The PCR rated the project effective. At appraisal, there were four outcome indicators: (i) reduction in wastewater effluent pollutant loadings from Changchun to the SRB; (ii) more than 85% recovery of the groundwater aquifer in Shuangyang and Meihekou by 2011; (iii) increase in water supply service coverage of the urban population in Shuangyang, Meihekou, and Liaoyuan by 2010; and (iv) less disruption and damage due to flooding in Liaoyuan and along the Yongchun river in Changchun by 2010. At completion, the fourth outcome indicator was dropped because the subproject was canceled (change in scope). The PCR reported that, with the adjusted scope, the project was effective in achieving its intended outcome and outputs.

13. This validation acknowledges the achievement of some outcome indicators but questions the achievement in two indicators. First is the reduction in wastewater effluent pollutant loadings from Changchun to the SRB. At appraisal, there were five sub-indicators (biochemical oxygen demand, chemical oxygen demand, suspended solids, ammonia nitrogen, and phosphorous) with corresponding target reductions. At completion, only two sub-indicators were reported because of unavailable data. Such sub-indicators are common measures of water quality, which can easily be taken. As proxy for this, the PCR stated that data from the Ministry of Environmental Protection suggested that by the end of 2010, water quality at more than 50% of the monitoring sections on the river met at least the class III standard9 for surface water. The expansion of the Beijiao WWTP capacity from 130,000 m3/day to 390,000 m3/day reduced pollution in the Yitong and Yongchun rivers to a greater extent than originally planned and contributed to pollution control in the SRB. Second, another outcome indicator—the recovery of the groundwater aquifer in Shuanghyang and Meihekou in 2010—was not achieved. Recovery rate was significantly below the 2011 target (66% in 2010 versus 85%). Baseline data was also not available, which could have helped assess the improvement contributed by the

7 The plan was approved by the State Council on 29 March 2006. It is a pollution control plan for the SRB and includes the provinces of Heilongjiang, Jilin, , and Inner Mongolia. 8 Subproject 2 Nanjiao treated wastewater reuse facilities was designed to have a capacity of 50,000 m3/day but operational capacity was at 3,000 m3/day. Subproject 6 Meihekou WTP was designed with a capacity of 100,000 m3/day but started operations at only 24,000 m3/day. 9 The water quality standards of the PRC have five classes of quality with about 40 pollution parameters. Class I water is pristine, while class V water is suitable only for industrial use. Class III is the minimum water quality required for municipal water supply. 5

project. Out of the three outcome indicators, the increase in water supply service coverage was the only one clearly achieved. Based on these, this validation rates the project less than effective.

C. Efficiency of Resource Use in Achieving Outcome and Outputs

14. The PCR rated the project efficient although efficiency of subprojects varied. The methodology used for reevaluating the economic internal rate of return (EIRR) was the same as that adopted during appraisal.

15. Two socioeconomic surveys, in 2009 and 2011, indicated that the public was willing to pay higher water tariffs in the cities of Changchun, Liaoyuan, and Meihekou; and tariffs were increased through the official tariff adjustment process. The local governments allowed tariff exemption and reduction for poor families.

16. The reevaluated EIRR for the whole project was 15.5% versus 21.1% at appraisal, using the quantifiable project benefits of increased water supply and distribution services, improved wastewater treatment, and reuse of treated wastewater. A 150,000 m3/day tertiary treatment facility was built in the Beijiao and Nanjiao WWTPs, but the PCR reported that because of low facility demand, operating capacity was below 15,000 m3/day.

17. By the original loan closing date of 30 June 2010, four subprojects were fully completed, and the loan closing date was extended by 18 months pending the government’s decision on whether the Shuangyang water supply subproject (subproject 4) should be implemented under the project. This validation rates the project efficient.

D. Preliminary Assessment of Sustainability

18. The PCR rated the project likely sustainable. The recalculated financial internal rate of return (FIRR) reduced demand projections, made more conservative tariff increase assumptions, and considered the high cost of non-revenue water (NRW). The recalculated FIRR for the Liaoyuan water supply and wastewater component was 6.3% versus 9.5% at appraisal, but still higher than the weighted average cost of capital (WACC) of 2.1%. For the Meihekou component, the recalculated FIRR was 6.2% (5.5% during appraisal), higher than the WACC of 4.5%. This validation, however, notes the subproject’s low capacity utilization and high NRW in 2010. The Changchun City WWTP had recalculated FIRRs of 5.4% (5.7% during appraisal) against a WACC of 4.5%. Sensitivity analyses showed that the performance of the subprojects responds favorably to increases in tariffs; and as the FIRRs are higher than the WACC, the projects are considered financially viable.

19. The operation of the water supply companies is considered to be sustainable, and adjusted water tariffs ensure profitable operations. The clients’ willingness to pay signifies the likelihood of future increases. However, the operation of the Changchun City wastewater facilities under the project is less likely sustainable as these were not developed into companies, and they rely on government subsidies, which cover only basic operations and do not provide for repairs, maintenance, or capital investments. Sustainability of the wastewater components can be improved by increasing wastewater tariffs to achieve cost recovery. Overall, this validation rates the project likely sustainable.

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E. Impact

20. The PCR did not provide a rating for impact. This validation rates the project significant. By upgrading the Beijiao WWTP and constructing the Nanjiao WWTP, the project improved the urban environment and surface water quality primarily in the Yitong and Yongchun rivers in Changchun, which flow into the Songhua River. By expanding the Beijiao WWTP, the project increased its capacity for substantial pollution-cleaning benefits in Changchun City, with significant positive effects on water pollution control in the upper reaches of the SRB. In the whole SRB, the newly built wastewater treatment capacity at the end of the Eleventh Five-Year Plan period was 2.95 million m3/day, of which the project contributed about one-fifth.

21. The project improved the quality of life of about 3 million urban residents in the cities of Changchun, Liaoyuan, and Meihekou, including about 200,000 poor people. However, targeted reduction in the incidence of diarrhea and hepatitis A were not achieved. The targeted composite incidences versus actual incidences in 2010 are as follows: 1.83 per 1,000 persons versus 3.32 per 1,000 persons in Changchun, 1.53 versus 12.8 in Liaoyuan, and 1.49 versus 10.4 in Meihekou.10

22. The project had a safeguard category of A for environment and involuntary resettlement, and C for indigenous peoples. Environmental supervision agencies were hired for each subproject to monitor environmental protection measures undertaken by contractors. The local environmental monitoring organizations monitored surface water and air quality, as well as noise levels at project sites. Three annual environmental supervision reports—for 2007, 2008, and 2009—were submitted to ADB and posted on the ADB website. The mitigation measures during construction were well implemented. Negative effects of project construction on the surrounding environment were avoided, and the project fully complied with both the environmental monitoring plan and the PRC’s requirements.

23. Permanent land acquisition affected 150 households or 575 persons; temporary land occupation affected 1,497 households or 4,580 persons; the demolition of residential structures affected 599 households or 2,278 persons; and the demolition of their structures affected 6 enterprises or government units and 25 small shops with a total of 120 employees. In total, affected people totaled 7,553. All households, enterprises, and shops were relocated consistent with ADB’s safeguard requirements. The monitoring and evaluation completion report reported that the incomes of affected people have been restored.

III. OTHER PERFORMANCE ASSESSMENTS

A. Performance of the Borrower and Executing Agency

24. The overall performance of the borrower, JPG, and the implementing agencies was rated satisfactory by the PCR. The borrower, JPG, and the implementing agencies fulfilled their obligations during project implementation and communicated regularly with ADB. The PMO ensured adequate coordination between ADB, the implementing agencies, the contractors, and the consultants. At output level, the JPG and the implementing agencies were able to implement the adjusted physical subprojects on time, but at outcome level, project performance monitoring was weak. The task manager in the PMO changed several times during the project, and some special demonstration features relating to water tariff adjustment and NRW management were only partially achieved. The validation agrees with the PCR rating.

10 Baseline data of the incidence of diarrhea and hepatitis A are 5.32 per 1,000 persons in Changchun (2006); 13.7 per 1,000 persons in Liaoyuan (2004); and 13.2 per 1,000 persons in Meihekou (2007). 7

B. Performance of the Asian Development Bank

25. ADB’s performance in managing and administering the project was rated satisfactory by the PCR. The validation agrees with this rating. ADB provided technical assistance,11 fielded seven review missions, and responded to the government’s requests for changes in project scope and fund reallocation to keep the project design relevant and implementation efficient. The midterm review mission in November 2008 provided clear guidance and action plans to resolve financial management, environment and resettlement monitoring and reporting, and other project issues.

IV. OVERALL ASSESSMENT, LESSONS, AND RECOMMENDATIONS

A. Overall Assessment and Ratings

26. Overall, the validation rates the project successful (see table). The project was relevant to the government’s development strategy, ADB’s country strategy and program, and the PRC’s water sector policy. The project’s outcome was largely achieved although some outcome performance indicators were not usable because data was not available. Original outputs were partially met because of the change in scope. The project is rated less than effective because the expected outcome was not completely achieved despite achievement in the adjusted outputs. Despite a delay in project closure, the EIRR results and overall implementation performance led to a rating of efficient. The project is also rated likely sustainable. No serious land acquisition or resettlement issues arose. The project had positive environmental impact and immediate social impact. The institutional development of the implementing agencies was successful, and the local governments’ institutional capacity was strengthened.

Overall Ratings Criteria PCR IED Review Reason for Disagreement and/or Comments Relevance Highly relevant Relevant Some subprojects were designed with a capacity that exceeded demand (paras. 10-11). Effectiveness in Effective Less than Two out of three outcome indicators achieving project effective were not clearly achieved (paras. 12- outcome and outputs 13). Efficiency in achieving Efficient Efficient outcome and outputs Preliminary assessment Likely Likely of sustainability sustainable sustainable Overall assessment Successful Successful Borrower and executing Satisfactory Satisfactory agency Performance of ADB Satisfactory Satisfactory Impact Not rated Significant Quality of PCR Satisfactory See para. 30. ADB = Asian Development Bank, IED = Independent Evaluation Department, PCR = project completion report. Note: From May 2012, the Independent Evaluation Department views the PCR's rating terminology of "partly" or "less" as equivalent to "less than" and uses this terminology for its own rating categories to improve clarity. Source: ADB Independent Evaluation Department.

11 ADB. 2003. Technical Assistance to the People’s Republic of China for the Jilin Water Supply and Sewerage Development Project. Manila. 8

B. Lessons

27. This validation agrees with the lessons identified in the PCR, including the observations on ways to raise water and wastewater tariffs to allow for cost recovery. This validation agrees on the relevance of the lessons pertaining to NRW management, corporate governance, and enterprise reform to other similar projects. More attention should be given in estimating the projected demand to ensure full utilization and allow resources to be used more efficiently.

C. Recommendations for Follow-Up

28. This validation agrees with the PCR’s recommendations for follow-up, particularly the following: (i) increase the wastewater tariff in Changchun City and conduct regular review of the water tariff to ensure cost recovery and financial sustainability, with due consideration for affordable tariff to the poorest households; (ii) a public awareness campaign to encourage people to be more receptive to the proposed increase in water and wastewater tariff; and (iii) continuous cleanup of the Songhua River. In general, it is agreed that policy dialogue should be carried out with the government to corporatize the wastewater treatment companies, for better performance and financial autonomy.

V. OTHER CONSIDERATIONS AND FOLLOW-UP

A. Monitoring and Evaluation Design, Implementation, and Utilization

29. Socioeconomic surveys and project benefit identification provided evidence of effective project monitoring and evaluation but no details on the monitoring and evaluation undertaken are available other than the information provided in the midterm review mission report.

B. Comments on Project Completion Report Quality

30. The PCR quality is rated satisfactory. The PCR is consistent with the PCR guidelines and provided adequate evidence and analysis to substantiate ratings. The PCR presented information in a candid and frank manner but it did not present clearly and in detail the relevant subprojects that resulted from the change of scope and the utilization of the capacity of all subprojects. More attention could also have been given to outcome level monitoring results.

C. Data Sources for Validation

31. Apart from the PCR, the RRP and loan review mission reports were available and used for this validation.

D. Recommendation for Independent Evaluation Department Follow-Up

32. A project performance evaluation report should be conducted in 2015 or beyond to better assess the use, maintenance, physical condition of the project facilities, benefits provided, and impact on resettlement and poverty reduction.