Shanxi Energy Efficiency and Environment Improvement Project

Completion Report

Project Number: 44013-013 Loan Number: 2885 October 2019

People’s Republic of China: Shanxi Energy Efficiency and Environment Improvement Project

This document is being disclosed to the public in accordance with ADB’s Access to Information Policy.

CURRENCY EQUIVALENTS

Currency unit – yuan (CNY)

At Appraisal At Project Completion 2 August 2012 11 December 2017 CNY1.00 = $0.1570 $0.1512 $1.00 = CNY6.3698 CNY6.6152

ABBREVIATIONS

ADB – Asian Development Bank CHP – combined heat and power CMM – coal-mine methane CO2 – carbon dioxide DDR – due diligence report DHS – district heating system EIRR – economic internal rate of return EMP – environmental management plan EPB – Environmental Protection Bureau EMR – environmental monitoring report EMU – Environmental Management Unit FIRR – financial internal rate of return GAP – gender action plan HES – heating exchange station IEE – initial environmental examination NOx – nitrogen oxide O&M – operation and maintenance PIA – project implementing agency PIU – project implementation unit PMO – project management office PPMS – project performance monitoring system PRC – People’s Republic of China SCADA – supervisory control and data acquisition SDRC – Shanxi Provincial Development and Reform Commission SFD – Shanxi Provincial Finance Department SO2 – sulfur dioxide TA – technical assistance WACC – weighted average cost of capital

WEIGHTS AND MEASURES km – kilometer m2 – square meter m3 – cubic meter mu – equivalent to 666.67 square meters MW – megawatt MWt – megawatt thermal

NOTE

In this report, "$" refers to United States dollars.

Vice-President Ahmed M. Saeed, Operations 2 Director General Amy S. P. Leung, East Asia Department (EARD) Director Yolanda Fernandez Lommen, People’s Republic of China Resident Mission, EARD

Team leader Xinjian Liu, Senior Project Officer (Energy), EARD Team members Yan Dong, Associate Project Analyst, EARD Ning Li, Senior Environment Officer, EARD Fang Wang, Senior Project Officer (Financial Management), EARD Wenlong Zhu, Senior Safeguards Officer (Resettlement), EARD Ciwang Zhuoga, Associate Social Development Officer (Safeguards), EARD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS Page BASIC DATA i I. PROJECT DESCRIPTION 1 II. DESIGN AND IMPLEMENTATION 1 A. Project Design and Formulation 1 B. Project Outputs 2 C. Project Costs and Financing 4 D. Disbursements 4 E. Project Schedule 5 F. Implementation Arrangements 5 G. Technical Assistance 6 H. Consultant Recruitment and Procurement 6 I. Gender Equity 6 J. Safeguards 7 K. Monitoring and Reporting 8 III. EVALUATION OF PERFORMANCE 8 A. Relevance 8 B. Effectiveness 9 C. Efficiency 9 D. Sustainability 10 E. Development Impact 11 F. Performance of the Borrower and the Executing Agency 12 G. Performance of the Asian Development Bank 12 H. Overall Assessment 12 IV. ISSUES, LESSONS, AND RECOMMENDATIONS 13 A. Issues and Lessons 13 B. Recommendations 14

APPENDIXES

1. Design and Monitoring Framework 16 2. Project Cost at Appraisal and Actual 18 3. Project Cost by Financier 23 4. Disbursement of ADB Loan Proceeds 25 5. Project Implementation Schedule 26 6. Chronology of Major Events 27 7. Project Implementation Arrangement and Fund Flow 28 8. Contract Awards of ADB Loan Proceeds 30 9. ADB-financed Contract Packages 31 10. Gender Equality Action Plan Analysis 32 11. Environmental Impact Analysis 36

12. Evaluation of Land Acquisition and Resettlement Implementation 40 13. Status of Compliance with Loan Covenants 43 14. Economic Reevaluation 54 15. Financial Reevaluation 60 16. Social Impact and Labor Retrenchment Plan 64

BASIC DATA

A. Loan Identification

1. Country People’s Republic of China 2. Loan number and financing source 2885-PRC, ordinary capital resources (OCR) 3. Project title Shanxi Energy Efficiency and Environment Improvement Project 4. Borrower People’s Republic of China 5. Executing agency Shanxi Provincial Government 6. Amount of loan $100 million 7. Financing modality Project loan

B. Loan Data 1. Appraisal – Date started 24 October 2011 – Date completed 4 November 2011 2. Loan negotiations – Date started 18 July 2012 – Date completed 19 July 2012 3. Date of Board approval 31 August 2012 4. Date of loan agreement 27 March 2013 5. Date of loan effectiveness – In loan agreement 25 June 2013 – Actual 24 April 2013 – Number of extensions 0 6. Project completion date – Appraisal 30 June 2017 – Actual 31 December 2017 7. Loan closing date – In loan agreement 31 December 2017 – Actual 31 December 2017 – Number of extensions 0 8. Financial closing date – Actual 8 June 2018 9. Terms of loan – Interest rate London interbank offered rate (LIBOR) + 0.6% less credit of 0.2% – Maturity (number of years) 20 years – Grace period (number of years) 5 years 10. Terms of relending (if any) – Interest rate LIBOR + 0.6% less credit of 0.2% – Maturity (number of years) 20 years – Grace period (number of years) 5 years – Second-step borrower Shanxi Provincial Government

11. Disbursements

a. Dates Initial Disbursement Final Disbursement Time Interval 21 January 2014 4 December 2017 46 months

Effective Date Original Closing Date Time Interval 24 April 2013 31 December 2017 56 months

b. Amount ($ million) Last Net Original Revised Amount Amount Amount Undisbursed Category Allocation Allocation Canceled Available Disbursed Balance Jinzhong District Heating Subproject Works 1.85 1.90 1.90 1.90 0.00 Equipment 39.12 38.93 38.93 38.93 0.00 Consulting services 0.90 0.00 0.00 0.00 0.00

Licheng District Heating Subproject Works 2.30 2.17 2.17 2.17 0.00 Equipment 15.1 14.82 14.82 14.82 0.00 Consulting services 0.33 0.00 0.00 0.00 0.00

Qin District Heating Subproject Works 4.53 6.88 6.88 6.88 0.00 Equipment 17.09 17.05 17.05 17.05 0.00 Consulting services 0.46 0.00 0.00 0.00 0.00

Zhongyang District Heating Subproject Works 1.03 1.58 1.58 1.58 0.00 Equipment 3.26 3.27 3.27 3.27 0.00 Consulting services 0.08 0.00 0.00 0.00 0.00

Liulin Coal Mine Methane Subproject Equipment 10.62 10.49 10.49 10.49 0.00 Consulting services 0.23 0.00 0.00 0.00 0.00

Interest and 3.10 2.91 2.91 2.91 0.00 Commitment Charges Total 100.00 100.00 100.00 100.00 0.00 Note: Amounts may not add up precisely due to rounding. Source: Asian Development Bank.

C. Project Data

1. Project cost ($ million)

Cost Appraisal Estimate Actual Foreign exchange cost 109.85 100.00 Local currency cost 56.27 54.01 Total 166.12 154.01

iii

2. Financing plan ($ million) Cost Appraisal Estimate Actual Implementation cost Borrower financed 66.12 51.10 ADB financed 96.90 100.00 Total 163.02 151.10 Interest during construction costs Borrower financed 0 0 ADB financed 3.10 2.91 Other external financing 0 0 Total interest during construction costs 3.10 2.91 ADB = Asian Development Bank.

3. Cost breakdown by project component ($ million) Component Appraisal Estimate Actual A. Base costs Part A: District heating supply 115.62 125.50 Part B: CMM supply and distribution 15.17 15.99 Part C: Project management and capacity building 16.70 9.61 Subtotal (A) 147.49 151.10 B. Contingencies Physical contingencies 7.30 0 Price contingencies 8.24 0 Subtotal (B) 15.54 0 C. Financing charges during implementation 3.09 2.91 Total (A+B+C) 166.12 154.01 CMM = coal-mine methane.

4. Project Schedule Item Appraisal Estimate Actual Date of contract with consultants a December 2013 Completion of engineering designs December 2014 September 2015 Civil works contract Date of award January 2014 January 2014 Completion of work March 2016 November 2017 Equipment and supplies Dates First procurement December 2013 December 2013 Last procurement April 2014 June 2016 Completion of equipment installation September 2016 October 2017 Start of operations Completion of tests and commissioning October 2016 November 2017 Beginning of start-up October 2014 October 2014

a Recruitment using domestic funds.

5. Project performance report ratings Implementation Period Ratings From June 2013 to June 2015 On-track From July 2015 to September 2015 Potential problem From October 2015 to December 2017 On-track

D. Data on Asian Development Bank Missions No. of No. of Specialization of Name of Mission Date Persons Person-Days Members Fact-finding 25 October– 8 30 a, c, d, e, f, g, h, n 3 November 2011 Pre-inception 21–22 March 2013 3 6 f, b, g Inception 11–13 November 2013 3 9 g, b, m Review 1 1–2 July 2014 3 6 g, a, b Review 2 18–22 September 2014 2 10 g, i Review 3 23–25 March 2015 2 4 a, b, g, i, j Midterm review 8–12 August 2016 3 11 a, b, k Review 4 11–15 September 2017 2 8 a,b Project completion review 6–14 March 2018 6 40 a,b, i, j, k, l a = senior project officer(energy), b = associate project analyst, c = senior control officer, d = senior procurement officer, e = senior counsel, f = senior financial specialist, g = energy specialist, h = young professional, i = safeguards officer (environment), j = senior safeguards officer (resettlement), k = senior project officer (financial management), l= safeguards officer (social development), m = environment specialist, n = senior operations assistant.

I. PROJECT DESCRIPTION

1. About half the carbon dioxide (CO2) emissions in the People’s Republic of China (PRC) come from generating electricity and heat. Demand for centralized heating (or district heating) is growing rapidly along with economic development and urbanization. Like in many other provinces, Shanxi's rapid urbanization is fueling demand for housing and urban infrastructure. Likewise, strong economic growth, higher incomes, and the privatization of housing are driving demand for district heating. Because locally produced coal is abundant, district heating in Shanxi relies primarily on coal. Many of the heating systems in urban areas are old, inefficient, and lack proper emission control equipment. Environmental impacts from these systems are disproportionately high for the poor and women. Urban pollution from small boilers worsens outdoor air quality and causes significant cumulative harm to public health. Inadequate coverage of district heating in low-income urban areas drives residents to use indoor coal stoves for heating, a major cause of respiratory diseases. Women and small children are particularly vulnerable to high indoor pollution, as they tend to spend more time indoors.

2. The Shanxi Energy Efficiency and Environment Improvement Project aimed to help solve heating sector issues by extending and expanding energy-efficient district heating to over 270,000 residents in five highly polluted urban areas in Shanxi. 1 The project aimed to replace small, inefficient, and polluting inner-city coal-fired boilers and coal-fired household stoves with a highly energy-efficient combined heat and power (CHP) plant and large heat boilers, with coal-mine methane (CMM) supply, thereby reducing the overall environmental footprint of district heating.2 The Asian Development Bank (ADB) Board approved a loan of $100 million from its ordinary capital resources for the project on 31 August 2012; project implementation was completed in December 2017 as scheduled.

3. The expected impact of the project was greater energy efficiency and a cleaner environment in Shanxi Province. The expected outcome was better air quality and reduced greenhouse gases emission in five urban areas in Shanxi Province. The expected outputs of the project were (i) improved district heating supply in the urban areas of four project cities; (ii) expanded CMM gas supply and distribution system in Liulin county of Luliang city; and (iii) enhanced institutional capacity.

II. DESIGN AND IMPLEMENTATION

A. Project Design and Formulation

4. The project was in line with (i) the government’s high priority on shifting economic growth from relying heavily on coal to green development; (ii) the Twelfth Five-Year Plan of the PRC, 2011–2015; and (iii) ADB’s country partnership strategy for the PRC, 2011–2015, which feature managing climate change and the environment to support the government’s priorities in realizing an “ecological civilization.”3 Through the project, ADB helped the PRC government to implement

1 ADB. 2012. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People's Republic of China for the Shanxi Energy Efficiency and Environment Improvement Project. Manila. 2 Small heat-only boilers operate at 50%–60% combustion efficiency compared with 80%–90% for new large boilers. Household heating stoves have an even lower combustion efficiency at only 35%–40%. CMM refers to methane released from the coal and surrounding rock strata during mining. Methane is a nontoxic combustible greenhouse gas, about 21 times more potent than CO2. In underground mines, the methane is drained before the mining operation can take place to avoid explosions and injuries to miners. 3 ADB. 2012. Country Partnership Strategy: People’s Republic of China, 2011–2015. Manila. An “ecological civilization” refers to achieving harmony between growth, people, and nature. It includes activities to mitigate ecological damage, relieve pressures on natural resources, and improve the balance between the environment and the economy.

the strategic shift from coal-reliant economic growth to a green development track in Shanxi, and helped the Shanxi Provincial Government build the capacity of city and county governments to implement the energy efficiency and environment improvement project and ensure proper safeguards. The project has a very good fit and direct relevance to the PRC’s ongoing and targeted energy efficiency improvements to lower carbon intensity by 45% by 2020, compared with 2005. At the time of appraisal, the PRC government’s long-term development goal was to maintain steady economic growth and improve people’s living standards. The project supported the PRC’s Twelfth Five-Year Plan that reiterated energy efficiency improvement and pollution emission reduction.

5. ADB’s support for environment-friendly economic growth in Shanxi was relevant to the government’s programs and has remained consistent with ADB’s strategy since appraisal. To support the PRC government’s strategy, ADB’s operations focused on (i) promoting equitable and inclusive growth, (ii) making markets work better, (iii) improving the environment, and (iv) promoting regional cooperation. ADB’s country partnership strategy for the PRC, 2011–2015 also emphasized balanced and sustainable growth with more efficient uses of resources and more stringent protection of the environment. ADB aims at inclusive economic growth in an efficient, equitable, and sustainable manner. In its Long-Term Strategic Framework II, 2008–2020, ADB identified energy as a core operational sector and achieving environmental sustainability as a strategic priority.4 In line with ADB’s energy policy, the project adopted an integrated approach to improve energy efficiency. The project prioritizes energy efficiency, including district heating, and promotes access to energy for all. The project fits the ADB operational strategy for the PRC well.

6. The project design was appropriate to help achieve the outcome, and the formulation was adequate. During project implementation, minor changes in project design responded to changes in local government development plans.5 These changes did not affect project outputs, and they enhanced the project impact and outcome. The project design and monitoring framework at appraisal, along with the achievements at completion against the framework’s targets and indicators, is in Appendix 1.

B. Project Outputs

7. The project has three parts as described below.

8. Part A: District heating supply. As designed at appraisal, part A consisted of four district heating subprojects in Jinzhong city, Licheng county, Qin county, and Zhongyang county to install (i) five large, efficient coal-fired boilers with an aggregate capacity of 261 megawatt thermal (MWt), to allow closure of 232 small, inefficient coal-fired boilers with an aggregate capacity of 340 MWt and 4,000 household heating stoves with an aggregate capacity of 60 MWt; (ii) a heat transmission and distribution network with 100 heat exchange stations (HESs) and heating pipelines; and (iii) supervisory control and data acquisition (SCADA) systems.

9. At completion, the four district heating subprojects delivered the following outputs: (i) heat access from a new CHP plant of 195 megawatts (MW) of heat generation capacity connected for

4 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, 2008-2020. Manila. 5 During implementation, the following changes were made: (i) heat source for Zhonyang district heating supply subproject was changed from a coal-fired boiler to a gas-fired boiler; and (ii) some design changes of CMM gas supply and distribution subproject: (a) location change of CMM gas storage station; (b) change from one gas storage tank with the total capacity of 100,000 m3 to one gas storage tank of 50,000 m3 with potential expansion in future; and (c) layout changes of gas pipelines due to the change of CMM gas storage station location.

the Jinzhong subproject; (ii) 261 MW of heat generation capacity using large high-efficiency pulverized coal boilers (Licheng and Qin) or natural gas boiler (Zhongyang) equipped with flue gas desulfurization scrubbers and filter baghouse emission control established; (iii) 132 heat exchange stations constructed and installed or upgraded; (iv) 125.6 kilometers (km) of heat supply pipeline installed; (v) SCADA systems for the four subprojects installed; and (vi) 355 small inner- city small, inefficient coal-fired boilers with an aggregated capacity of 374 MWt and 4,000 coal- fired household stoves closed. The total service capacity of these four district heating subprojects reached 7.57 million square meters (m2) by the 2017–2018 heating season and 8.12 million m2 by the 2018–2019 heating season, supplying heating services to 297,600 residents and exceeding the original target of 6.8 million m2. Table 1 compares the scope of part A at appraisal and at completion.

Table 1: Part A Scope Comparison Heating Heating Area Heat Sourcea Pipelineb Heat Exchange Stations 2 Subprojects (million m ) (MWt) (kilometer) (No.) Appraisal Completion Appraisal Completion Appraisal Completion Appraisal Completion Jinzhong 3.0 4.27 71.2 89.9 58 92 Licheng 1.6 1.67 2x58 2x58 10.1 10.1 10 10 Qin 1.7 1.68 2x58 2x58 14.9 14.8 25 25 Zhongyang 0.5 0.50 1x29 1x29 10.8 10.8 7 5 Total 6.8 8.12 261 261 107.1 125.6 100 132 m2 = square meter, MWt = megawatt thermal, SCADA = supervisory control and data acquisition system. a The heat source for the Jinzhong subproject is a newly constructed 195 MWt combined heat and power plant. b Excludes pipeline system inside buildings and households. Sources: Project management office, Shanxi Provincial Government.

10. Part B: Coal-mine methane gas supply and distribution. At appraisal, the envisaged part B would construct a CMM gas supply and distribution system in Liulin to supply 88.8 million cubic meters (m3) of gas annually to about 30,000 households and 120 commercial customers.6 By completion, the subproject delivered CMM gas supply and distribution facilities including: (i) gas supply pipelines with total length of 10 km from the extraction points at each of the three coal mines to the storage station and gas distribution pipelines of 33 km, including 12 km low pressure and 21 km medium pressure pipelines; (ii) a gas storage station with one storage tank of 50,000 m3 capacity constructed;7 (iii) 20 pressure-regulating stations installed; and (iv) a SCADA system installed. At completion, the subproject has the capacity to supply CMM gas to about 30,000 households and 134 commercial customers, with an annual gas supply capacity of 88.6 million m3. The subproject achieved 40% of CMM gas supply capacity in 2018 and expects to achieve full gas supply capacity by 2020. It can provide heating to 1.17 million m2 of floor area, and cold water for summer air conditioning to 0.3 million m2 of building area by 2020. In addition, 43 small coal-fired boilers with the total capacity of 46 MWt have been closed.

11. Part C: Institutional strengthening. At appraisal, part C was designed to (i) provide consulting services, training, and equipment and (ii) strengthen the capacity of the executing agency, the project management office (PMO), and the five subproject implementing agencies to supervise and manage implementation of the project. The PMO and the project implementation units (PIUs) assigned full-time staff to daily management activities. With support from procurement agencies, the PMO procured civil works, equipment, and materials fully in line with ADB and domestic requirements. PIU is implementing the environmental management plan (EMP)

6 CMM gas users include households (accounting for 22. 9% of total gas volume), enterprises and institutions (11.5%), boilers (50.5%), and other contingencies (15.1%). For heating, gas-fired boilers are used and funded by those users in addition to by local government budget in coal shift to gas initiatives. 7 Although the capacity of the gas tank is reduced from the original design of 100,000 m3, the gas supply capacity can be maintained at about 88.6 million m3 annually as the sources of CMM are very stable.

in order and furnished monitoring reports on EMP and social related plans implementation to the ADB on a regular basis. The PMO submitted five semiannual or annual progress reports, seven environmental monitoring reports, three social monitoring reports, and a domestic project completion report to ADB.

12. The subproject organized and implemented five project management staff training courses for overall project management, environmental management, and land acquisition and resettlement. The subproject carried out one session on health, safety, and energy conservation awareness campaign and knowledge-sharing.8 The plan to engage an ADB-financed consulting firm to provide assistance and advice for the PMO and PIUs, using the quality- and cost-based selection procedure as designed at appraisal, experienced recruitment delays (para. 22). In early 2016, the executing agency engaged individual consultants using domestic counterpart funds to provide the required assistance and advice for project implementation.

C. Project Costs and Financing

13. At appraisal, the project cost was estimated at $166.12 million equivalent, comprising $109.85 million of foreign exchange costs (66.1%) and $56.27 million equivalent of local currency costs (33.9%). At the project completion, project costs totaled $154.01 million, including $100.00 million of foreign exchange (64.9%) and $54.01 million equivalent of local currency (35.1%). The total amount ADB loan of $100.00 million was fully used. The project costs and financing plans are in Appendix 2. A detailed cost breakdown, by project component, is in Appendix 3.

14. Compared to the appraisal estimate, the costs for land acquisition and resettlement, project management, and capacity development decreased, but the costs for civil works, equipment, and materials increased. As a whole, total project expenditures decreased by 7.3% compared to the appraisal estimate, and the project did not use contingencies budgeted at appraisal.

D. Disbursements

15. Loan proceeds totaling $100.00 million were disbursed from January 2014 to December 2017 in accordance with the provisions in the loan agreement and ADB’s Loan Disbursement Handbook (2012, as amended from time to time). The Shanxi Provincial Finance Department (SFD) adopted advance fund and direct payment procedures.9 The interval between initial and final disbursements was 46 months against the 56 months between the actual effective date and the loan closing date. Of the amount disbursed, $12.53 million was for civil works, $84.56 million for equipment and materials, and $2.91 million for interest during construction and commitment charges.

16. SFD used the advance fund procedure for most withdrawals of loan proceeds, and made some withdrawals of loan proceeds through the direct payment procedure. SFD was responsible for setting up and maintaining the advance fund. SFD reported no problems on the use of the advance fund procedure and observed regular replenishments to the advance fund during the project implementation period, although with varying frequency. The external auditors provided an unqualified opinion on the project financial statements during the entire project implementation

8 The participants included staff from all five project companies as the PIUs, PMO, and relevant government authorities at the provincial and county levels, including the development and reform committee, financial bureaus, and environment protection bureaus. 9 All references to advance fund and advance account refers to formerly called imprest fund and imprest account.

period and raised no significant issues on the management of the advance fund. The initial advance fund ceiling for the project was set at $10 million, based on a six-month estimate of expenditures submitted from the Shanxi Provincial Government to ADB after loan effectiveness. As a whole, the utilization efficiency of the ADB loan is comparatively satisfactory. The projected and actual disbursements are in Appendix 4.

E. Project Schedule

17. The project was approved on 31 August 2012. The loan and project agreements were signed on 27 March 2013 and the loan became effective on 24 April 2013. The original and actual loan closing date was 31 December 2017, without extensions. The financial closing date was 8 June 2018. Overall project implementation generally followed the project implementation schedule at appraisal, with some delays for subproject implementation (mainly the Liulin subproject) (para. 28). The planned and actual implementation schedules are in Appendix 5. A chronology of major events is in Appendix 6.

F. Implementation Arrangements

18. The project was implemented following the arrangements outlined at appraisal and did not require changes in the implementation arrangement. The Shanxi Provincial Government was the executing agency and the five participating cities and counties were the implementing agencies (PIAs), including Jinzhong city, Licheng county, Qin county, Zhongyang county, and Liulin county. To oversee and coordinate project implementation, the provincial government established a project leading group headed by the vice governor of Shanxi and comprising the Shanxi Provincial Development and Reform Commission (SDRC), SFD, and the Shanxi Environment Protection Department. Established within the Shanxi Provincial Foreign Loan Project Management Services Center under the SDRC, the PMO is responsible for daily project management with SFD support and also functions as the secretariat for the leading group. Five project entities—Jinzhong Ruiyang CHP Heat Supply Company, Licheng County Wantong Heat Supply Company, Qin County Huayang Heat Supply Company, Zhongyang Heating and Gas Supply Center, and Liulin County Gasification Company—serve as the PIUs that undertake specific implementation activities. Appendix 7 shows the project implementation arrangements and fund flow.

19. The PMO had overall responsibility for project management. It coordinated and directed subproject implementation by directing subproject implementing activities, assisting PIUs in planning and managing their subproject works, setting up and managing finances, conducting necessary coordination for monitoring land acquisition and resettlement and environment management, and establishing project monitoring systems. The PMO regularly reported project progress and issues to the project leading group, which met as required when there were key issues to discuss and resolve.

20. The project was implemented in a generally satisfactory manner in line with the arrangements agreed at project appraisal. There were no changes in the implementation arrangements.

G. Technical Assistance

21. A project preparatory technical assistance (TA) helped formulate the project.10 The TA helped the Shanxi Provincial Government (i) review, assess, and identify cost-effective district heating systems and CMM gas supply and distribution system in five cities; and (ii) formulate an improved and integrated energy efficiency improvement investment project with environmental impact assessment and resettlement plans consistent with ADB’s policy and guidelines. The TA provided all the inputs needed to prepare the project for ADB financing. Stakeholders were consulted during planning, design, and implementation to determine the project’s scope and implementation arrangements.

H. Consultant Recruitment and Procurement

22. In order to support project implementation and management, ADB-financed consulting services were designed at appraisal to assist and advise the executing and implementing agencies and the PMO in undertaking their responsibilities. Using quality- and cost-based selection, the recruitment of the consulting firm experienced substantial delays and could not keep pace with the rapid progress of project implementation, so in early 2016 PMO employed the required consulting services using local counterpart funds instead of the ADB loan. In addition to these consultants, the PMO and PIUs engaged the following agencies and experts with local counterpart funds in line with PRC regulations: (i) five design institutes for preliminary and engineering designs, (ii) two procurement agencies, (iii) procurement and bidding advisory experts randomly selected from national or provincial databases, and (iv) construction supervision firms for civil works contracts (financed by ADB and local counterpart funds) under the five subprojects.

23. The contract awards of ADB loan proceeds are shown in Appendix 8. The project awarded nine goods or works contracts for ADB financing, comprising: (i) five goods contracts through international competitive bidding for the supply and installation of boilers and auxiliary equipment, heating exchange station equipment, heat supply and distribution networks pipelines, CMM gas storage station equipment, pressure-regulating station equipment, and gas supply and distribution network pipelines; and (ii) four civil works contracts through national competitive bidding for constructing boiler houses and installing pipelines. All packages financed by ADB were procured in accordance with ADB’s Procurement Guidelines (2010, as amended from time to time), without major deviations or misprocurement cases. Appendix 9 shows the ADB-financed contract packages. PIAs incorporated relevant sections of ADB's Anticorruption Policy (1998, as amended to date) into bidding documents and contracts, and implemented them. In addition, the project widely applied domestically prevailing anticorruption practices in civil works construction. PMO and PIAs found no serious issues or difficulties that significantly constrained the project implementation in the packaging of contracts, preparation of bidding documents and evaluation of bids. The bidders issued no complaints or dissents during procurement.

I. Gender Equity

24. The project is classified effective gender mainstreaming for gender equity category and a gender action plan was prepared to ensure women equally benefited from the project. The project successfully achieved the gender actions and targets. The five subprojects achieved most of their gender actions and targets. A gender equality action plan analysis is in Appendix 10.

10 ADB. 2010. Technical Assistance to the People’s Republic of China for Preparing the Shanxi Energy Efficiency and Environment Improvement Project. Manila.

J. Safeguards

25. The project is classified as environment category B, in accordance with the ADB environmental categorization. The Shanxi Provincial Environmental Protection Bureau (EPB) and the relevant municipal EPBs prepared and approved the domestic environmental impact assessment documents for all subprojects under part A and part B in 2009–2012. PMO prepared the initial environmental examination (IEE) in accordance with the ADB Safeguard Policy Statement (2009) and submitted it to ADB in 2012. PMO also prepared an environment and social due diligence report in accordance with the Safeguard Policy Statement (2009) and submitted it to ADB in 2014; the report took into account the minor project changes to accommodate relocating the CMM gas storage station in the Liulin subproject and substituting natural gas-fired boiler for coal-fired boiler in the Zhongyang subproject, as well as the domestic environmental impact assessment document approval by the Luliang Municipal Environment Protection Bureau in 2014.

26. The PMO established under the SDRC was responsible for managing, coordinating, and supervising EMP implementation. Each PIA established an environmental management unit responsible for EMP implementation and monitoring during subproject construction and operation. The PMO designated environmental staff to coordinate with each environmental management unit, undertake environmental management of subprojects, and oversee EMP implementation and monitoring for all subprojects, with assistance from consultant. Regularly submitted EMRs confirmed that the project addressed key environmental impacts—including soil erosion and contamination, wastewater disposal, noise and dust generation during construction—in accordance with mitigation measures in the EMP. During operation for part A and part B, the project also addressed mitigation measures in the EMP such as compliance with the boiler emission standard and natural gas leakage detection (Appendix 11). As required under national laws and regulations, the Shanxi provincial and municipal EPBs will review all subprojects (part A and part B) in the environment protection completion audit by 2019, excluding the Licheng subproject, which was completed in 2017.

27. The project was category B for involuntary resettlement safeguards during project preparation. At appraisal, the Liulin CMM subproject involved land acquisition and resettlement; the four other subprojects entailed no land acquisition, restriction in land use, or structure demolition because they were implemented on government land or existing premises. In the draft resettlement plan, based on a feasibility study report in 2012, the Liulin CMM subproject would permanently acquire 24.7 mu, including 15 mu of cultivated land that would affect 17 people from 4 households.11 In 2015, the Liulin CMM subproject’s scope changed, moving the CMM storage station from Jiajiayuan village to Hechang village. An updated resettlement plan appended to a due diligence report (DDR) for the scope change was prepared and submitted to ADB in 2016. The DDR concludes that (i) 12.6 mu used for the CMM storage station is part of the land acquired for Hechang central heating plant, (ii) 45 mu was acquired for the plant in 2013 and transferred to state-owned land, (iii) the acquired land was not contracted by households so that land acquisition did not affect individuals, and (iv) land compensation was fully paid to Hechang village and use of land compensation fund was transparent. In addition, 20 gas pressure adjustment stations did not acquire any land because these stations are in existing boiler houses. Construction of heating pipelines temporarily used existing state-owned roads. The cost for digging and recovering roads for the pipeline installation was included in the pipeline civil works. The resettlement completion report prepared by the PMO indicates that all the temporarily affected state-owned roads were rehabilitated. A detailed evaluation of land acquisition and resettlement implementation is provided in Appendix 12.

11 A mu is a Chinese unit of measurement, the equivalent of 666.67 m2.

K. Monitoring and Reporting

28. The loan covenants were considered adequate, and the project complied with majority of the covenants, except for partial compliance on the timing for mobilizing local counterpart funds and financial performance indicators of project entities. The implementation arrangement was adequately set up and the ADB loan was appropriately used and disbursed. The PMO submitted the necessary reports, audited project accounts, and financial statements to the ADB as required in the loan agreement. The reports were generally acceptable to ADB, albeit with some delays during the initial periods of project implementation. In general, project financial management is satisfactory, with timely submissions of annual project financial statements audited by the Shanxi Provincial Auditing Department. The auditor issued unqualified auditor’s opinion every year. Except for the Liulin subproject, the local counterpart funds for the subprojects were generally mobilized on time as required for the project implementation, which fully complied with the loan covenant on local counterpart funds. However, the counterpart funds for the Liulin subproject were not mobilized on time to meet the project construction demands, to some extent causing the Liulin subproject to fall behind the planned schedule, but this partial compliance with the loan covenants did not materially impact project performance.

29. According to the project agreement, in each fiscal year beginning 2 years after project operations, the PIA for the each of five subprojects would maintain (a) a minimum debt–service coverage ratio of 1.2:1, (b) a maximum debt–equity ratio of 70:30, and (c) a minimum ratio of current assets to current liabilities of 1:1. The Jinzhong subproject demonstrated strong financial performance and satisfied all the covenanted ratios, but the other PIAs did not satisfy the covenanted ratios. A summary of compliance with loan covenants is in Appendix 13.

30. The project design required the Shanxi Provincial Government, through the PMO, to ensure that the PIAs use a project performance monitoring system (PPMS) to monitor and evaluate project outcomes and outputs. The project preparatory TA prepared the PPMS, including a set of measurable indicators based on the project design, impact, and risks. The consultants supervising implementation were required to help the provincial government monitor project impacts and prepare periodic reports. However, because the designed ADB-financed consulting services were not recruited as scheduled and local counterpart funds-supported consulting services were in place only in early 2016, there was inadequate project management support during early project implementation (para. 22). The PPMS was not established in time or operated effectively. In addition, some targeted indicators of project performance did not fit well with routine statistics issued by government authorities. 12 There were delays in submitting the project progress and monitoring reports during early stages of project implementation.

III. EVALUATION OF PERFORMANCE

A. Relevance

31. The project’s expected impact at appraisal, greater energy efficiency and a cleaner environment in Shanxi, remained relevant at completion. Overall, the project is rated highly relevant. The project was fully aligned with (i) the government’s high priority on shifting economic growth from heavy reliance on coal to green development; (ii) the Twelfth and Thirteenth Five-

12 For example, the targeted indicator related to impact, “energy intensity of Shanxi economy reduced by 0.7% compared with 2010 due to improved district heating system,” is difficult to collect as the data reflecting this indicator published by the statistic authority is unavailable.

Year Plans of the PRC, 2011–2015 and 2016–2020; and (iii) ADB’s country partnership strategies for the PRC, 2011–2015 and 2016–2020.13 The project helped improve energy efficiency and was in line with ADB’s energy policy and Energy Operational Plan, 2011–2020, which prioritize promoting energy efficiency. The minor changes during project implementation (para. 6) were not foreseeable during project preparation and did not affect achievement of the project outcome. The project helped develop the first use of gas-fired boiler for district heating for a county-level urban area in Shanxi, which the provincial government showcased as an environmentally friendly, sustainable approach for clean energy heating in Shanxi.

B. Effectiveness

32. Overall, the project was effective in achieving the intended outcome: greater energy efficiency and a cleaner environment in Shanxi. The project largely achieved its envisaged outcomes at appraisal. As of 2018 the project heated floor area of 7.57 million m2, benefited 297,600 residents with adequate and reliable heat from the district heating systems, and installed a CMM gas supply and distribution network capable of transporting 88.6 million m3 of CMM gas and servicing an additional 30,000 urban households and 134 commercial customers. Operation of the project facilities created 306 permanent jobs. By 2018, the project’s energy savings from district heating systems reached 73,063 tons of standard coal annually. The operation of project heating facilities reduced annual emissions of CO2 by 194,025 tons, sulfur dioxide (SO2) by 3,195 tons, nitrogen oxide (NOx) by 2,121 tons and total suspended particulates by 12,588 tons. The project helped improve air quality in the five urban areas by increasing 16% to 27% of the record in meeting Class II air quality standard in 2017–2018 heating season compared with 2011–2012 heating season.14

C. Efficiency

33. The project is rated efficient both as an investment and in implementation. The project’s overall economic internal rate of return (EIRR) was estimated at 15.9% at completion, over the appraisal estimate of 15.0%, demonstrating economic viability at completion. The five subprojects were economically viable as well, with completion EIRR estimates in the range of 12.9%–24.4%, without significant differences from the appraisal estimates. The slight differences between the appraisal and completion EIRRs resulted principally from (i) changes in capital and operation and maintenance (O&M) costs and (ii) changes in economic benefits because the district heating areas of the Jinzhong subproject increased by 42% as a result of its higher operation efficiency. Sensitivity analyses found that all five subprojects and the project overall would remain economically viable in any scenario, indicating robust economic viability at completion. The detailed economic reevaluation is in Appendix 14. The project is rated highly efficient for implementation because it was generally completed within the planned implementation period without extending the loan closing date.

13 ADB. 2016. Transforming Partnership: People’s Republic of China and Asian Development Bank, 2016–2020. Manila. 14 The Ambient Air Quality Standards that are currently effective, GB 3095-2012, were released by the then Ministry of Environmental Protection on February 29, 2012. The Standards set mandatory limits for the primary pollutants— SO2, nitrogen dioxide (NO2), carbon monoxide (CO), O3, PM10, and PM2.5—and took effect nationwide on January 1, 2016. The Standards set two classes of limit values: Class I standards apply to regions that need special protection such as natural reserves and natural scenic areas, while Class II standards apply to all other areas including residential, mixed-use, industrial, and rural areas.

D. Sustainability

34. The project is likely sustainable overall considering its (i) operational sustainability, (ii) financial sustainability, and (iii) environmental and social sustainability.

35. District heating and gas supply are two essential public services, and demand for them in urban areas is expected to multiply as the public becomes increasingly aware of the need for a cleaner environment. The operating parameters of the subprojects suggest that they are sustainable. The operating facilities were designed and installed properly, and function well. The five PIUs, which are key agencies responsible for the O&M of the district heating systems and CMM gas supply facilities, possess the institutional capability and expertise required to manage and operate the facilities effectively and efficiently, and are quite stable in their human resources, finance, organizational arrangements, and governance.

36. The financial viability of five subprojects was reevaluated at completion (Appendix 15). The financial internal rates of return (FIRRs) for the five subprojects ranged from 2.83% to 8.67%, while the FIRR for the overall project was 6.24%. The FIRRs for the five subprojects and the overall project exceeded the weighted average cost of capital (WACC) at completion, indicating their financial viability. The Jinzhong subproject’s FIRR at completion was higher than at appraisal mainly because of its higher operation efficiency. The four other subprojects and the overall project had lower FIRRs, mainly because of higher O&M costs, longer construction periods, and lower tariffs at completion than anticipated at appraisal. Despite concerns over inadequate heating and gas tariffs, projected net revenue flows for each subproject are positive. Higher heating and CMM gas tariffs will improve the sustainability of the subprojects. The revenues for all the subprojects can cover full capital investment and operating costs during the operational period.

37. The financial performance of the five project PIAs were assessed at completion based on their respective agencies’ entity financial statements for fiscal year 2017. According to the project agreement, in each fiscal year starting 2 years after project operations, the PIA for the each of five subprojects would maintain (a) a minimum debt–service coverage ratio of 1.2:1, (b) a maximum debt–equity ratio of 70:30, and (c) a minimum ratio of current assets to current liabilities of 1:1. Jinzhong Ruiyang CHP Heat Supply company demonstrated strong financial performance and satisfied all the covenanted ratios, but the other PIAs did not satisfy the covenanted ratios, mainly because of high debt ratios and operating losses from low heat tariffs, high coal costs, and low operational efficiency. To improve the situation, their immediate task is to increase the tariff collection ratio (currently under 80%) and install heat measuring devices at client level to the support consumption-based billing system. Because of the project’s benefits to public welfare, local governments have committed to support these companies through debt restructuring and subsidies to help meet debt service obligations and fill the gap between tariff collection and recurring operating costs. County governments could periodically review the heat tariff and gas supply price and initiate timely tariff adjustment to ensure cost recovery as well as debt payment. Based on current assumptions and forecast, the financial performance will improve in the long term.

38. The project operations will have no adverse environmental or social impacts, and will continue to service people in the project area, including people affected by land acquisition and resettlement under the project and vulnerable people.

E. Development Impact

39. The development impacts of the project are positive, while the performance of related agencies, including ADB, the borrower, and the executing agency, that provided guidance and assistance for project implementation is satisfactory.

40. The project created significant social and environmental benefits in the project area and helped reduce poverty. Adverse environmental impacts during construction were minor and adequately mitigated. The project effectively implemented safeguard measures for land acquisition and resettlement and generated positive social development and gender impacts.

41. Environment impact. The project’s development impact is considered satisfactory because it achieved its intended impact of an improved environment resulting from reduced atmospheric pollution. The project is improving energy efficiency of the district heating in the project area by 30%, resulting in an estimated energy savings of 104,960 tons of coal equivalent per year. It is delivering substantial environment benefits by avoiding annual net emissions from part A and part B: 315,046 tons of CO2 (254,379 tons at appraisal); 4,611 tons of SO2 ( 4,121 tons at appraisal), 18,288 tons of total suspended particulates (16,234 tons at appraisal), 7,300 tons of particulate matter (6,494 tons at appraisal), 3,181 tons of NOx (1,942 tons at appraisal), and 134,417 tons of coal stove ash and slag.

42. Gender impacts. The gender action plan (GAP) implementation had positive impacts on the lives of women in project areas, who are more exposed to the hazards of using coal in district heating and cooking and more vulnerable to the environmental impacts. The project benefited over 143,961 women by changing heating from household stoves to the district heating system. A total of 52,800 women benefited from switching from coal to natural gas, avoiding indoor air pollution. Women and children benefit more from the heating service and use of CMM gas for cooking than men, as women spend more time at home and take more responsibility for household activities. The project provided 134 temporary jobs to women during construction and 107 regular jobs to women during operation. Women filled over 50% of heating bill collector positions. The project is also expected to support poor, female-headed households by providing heating assistance from the local government and implementing agencies at the full development of the project.

43. Social impact. The project social impact is assessed successful, because the project directly benefited (i) over 297,600 residents in five highly polluted urban areas of Shanxi by providing safer, cleaner, and more reliable heating services and (ii) an additional 30,000 urban households and 134 commercial customers by installing the CMM gas supply and distribution network (Appendix 16). The project improved energy efficiency and reduced emission of greenhouse gases and other pollutants. The expanded district heating systems and increased use of CMM reduced the use of raw coal, wood, and coal briquettes for indoor heating and cooking and benefited public health, particularly the health of the poor and women, through better quality of indoor and outdoor air. The incidence of respiratory diseases and other air pollution related health risks in the project areas are expected decrease at the full development of the project. The project also achieved the following social benefits: (i) improved residents’ living conditions, especially in schools and hospitals during winter for children, patients, and medical staff; (ii) reduced heating costs from switching to centralized, energy-efficient heating systems; and (iii) job opportunities created during construction and operation. The project demonstrated the benefits of improving energy efficiency, created jobs, and helped reduce poverty, which contribute to the economic development of Shanxi.

F. Performance of the Borrower and the Executing Agency

44. The borrower, the executing agency, and the PIAs performed the obligations in the loan agreement and the project agreement. The borrower, represented by the Ministry of Finance, signed the loan agreement on 27 March 2013, almost 7 months after ADB Board approval, and completed the requirements for loan effectiveness on 24 April 2013. The Ministry of Finance fulfilled its responsibilities, including submitting an official request to ADB to reallocate ADB loan proceeds and increase the ADB disbursement percentage for some civil works contracts to fully use ADB loan proceeds. In general, the Shanxi Provincial Government had a strong institutional setup and provided adequate funds and policies to ensure successful project implementation. The PMO took proactive measures to address project implementation issues, and helped successfully implement project procurement, construction, and completion by the loan closing date without extensions by coordinating, directing, and providing necessary support to the PIUs. The project leading group also resolved various issues in project implementation. Overall, the performance of the borrower and the executing agency is rated satisfactory.

45. All contractors fulfilled their contractual responsibilities and organized construction activities well. They completed the assigned civil construction and mechanical and electrical installation works satisfactorily in accordance with the contract requirements, albeit with some delays. The PIUs generally rated most of the contractors’ performance as satisfactory. Similarly, the performance of the suppliers of equipment and materials was satisfactory: they delivered equipment and materials on time, installed them properly, and provided necessary technical trainings and services in accordance with the terms and conditions of their respective contracts. During implementation, there were a few minor disputes or contractual difficulties and they were mostly resolved amicably.

46. The performance of the agencies and experts engaged by the PMO or PIUs by self- funding (para. 22) was also satisfactory. The performance of the domestic consultants involved in detailed engineering design, tendering, and construction supervision was generally satisfactory as well.

G. Performance of the Asian Development Bank

47. ADB’s performance is rated satisfactory. ADB conducted seven review missions during implementation, including the midterm review mission. These missions addressed various requirements for project implementation such as procurement, disbursements, loan reallocation, monitoring and evaluation of land acquisition and resettlement, improvement of environmental management, and monitoring of project progress. The PMO viewed ADB’s review and supervision of project implementation as adequate. Disbursement of funds was managed efficiently and there were no disagreements with the executing agency. ADB responded promptly and constructively to PMO and PIU inquiries and requests. The PMO and PIUs expressed appreciation for ADB’s advice and timing in resolving implementation issues. There was no significant problem with ADB procedures.

H. Overall Assessment

48. The project is rated successful overall based on its ratings on the four core evaluation criteria following the methodology provided in the Guidelines for the Evaluation of Public Sector Operations.15 It was highly relevant, effective, efficient, and likely sustainable. All five subprojects

15 ADB. 2016. Guidelines for the Evaluation of Public Sector Operations. Manila.

were implemented and are operating satisfactorily. It was rated highly relevant because the project fully aligned with the Government of the PRC’s high priority on improving energy efficiency, its five-year plans, and ADB’s country partnership strategies for the PRC, energy policy, and energy operational plan. The project was rated effective because it achieved its intended outcome and substantially achieved the output targets. It was rated efficient because of the efficient investment and highly efficient implementation process. The project’s likely sustainable rating relied on several factors: the positive results of the financial sustainability analysis, adequate staff capacity for and continuing training on project facilities operation, and the absence of adverse environmental and social impacts. The project has had a strong and positive environmental and developmental impact.

49. Due to its highly satisfactory performance, the project was selected as the 2016 best performing project in the PRC, awarded at the ADB–PRC Country Portfolio Review Meeting in December 2017.16 In addition, the project actively played a leading and demonstrating role in transforming and developing Shanxi Province. The Jinzhong district heating subproject became a pioneer in innovating and constructing international, advanced level heat-exchanger units and box-type heat stations to improve energy efficiency and reduce energy consumption; and the Zhongyang district heating subproject developed the first district heating supply with gas-fired boiler as the heat source for a county-level urban area in Shanxi, which the Shanxi Provincial Government showcased as an environmentally-friendly, sustainable approach using clean energy for heating.

Table 2: Overall Ratings Criteria Rating Relevance Highly relevant Effectiveness Effective Efficiency Efficient Sustainability Likely sustainable Overall Assessment Successful Development impact Satisfactory Borrower and executing agency Satisfactory Performance of ADB Satisfactory ADB = Asian Development Bank. Source: Asian Development Bank.

IV. ISSUES, LESSONS, AND RECOMMENDATIONS

A. Issues and Lessons

50. A key factor in project’s success was the strong commitment of the project proponents. Because project’s targets—greater energy efficiency and a cleaner environment in Shanxi, with reliable heat services for more people—fully aligned with the government’s high priority socioeconomic development strategy, the provincial and local governments attached high importance to project implementation by listing it in the priority project pipelines and practical projects for civilian affairs. The provincial and county governments provided policy, moral, technical, and financial support for the project. All concerned parties demonstrated ownership of the project. With the firm commitment of the governments, all the participants (both project

16 On 4-5 December 2017, ADB-PRC 2017 country portfolio review workshop was jointly organized by MOF and ADB in Beijing, PRC. Loan 2885-PRC was awarded 2016 Best Performing Project in the PRC by ADB during the workshop. The award recognizes projects that demonstrated effective institutional setup, timely start-up of implementation, smooth disbursement and procurement, strict compliance of loan covenants, and effective delivery of scheduled project outputs.

proponents and management staff) felt a greater sense of responsibility in ensuring that the subprojects were implemented successfully.

51. Meticulous surveys and studies thoroughly analyzed problems during project preparation, and the project design had feasible technical scenarios that fully fit the actual local demands. All project preparation activities, including the approval of project documents required by PRC regulations, were in place before the loan effectiveness, which facilitated the rapid start of project implementation after loan effectiveness. The major procurement activities were completed within 2 years of loan effectiveness. During implementation, no significant contract variations, disputes or difficulties occurred. Furthermore, the project did not require significant design changes and implementation followed the planned schedule.

52. Executing agency set up effective organization and procedures to ensure adequate guidance from management and proper monitoring of field implementation. On-the-job training also helped project staff fully understand PRC and ADB requirements for the project implementation and improved staff project management skills. PMO and relevant project management authorities effectively supervised, monitored, and controlled costs of project implementation. The PMO and relevant project management authorities intensified project implementation supervision for each of subprojects to identify and address the issues and difficulties during the implementation in a timely manner to keep project implementation on schedule.

53. The consulting services to be financed by the ADB loan, as designed at appraisal, were not recruited successfully as planned, so project management support could not keep pace with the rapid project implementation. Without the project management consulting service support, during early implementation there were gaps in project implementation management compared to the requirements at appraisal: in particular, the PPMS was not established in time and operated effectively, and progress reports were not always submitted in a timely fashion. In addition, some targeted indicators of project performance did not fit well with the routine statistics issued by the government authorities.

B. Recommendations

54. Project completion settlement. It is recommended that the Shanxi Provincial Government should ensure the relevant PIAs carry out the activities of the project completion settlement in line with the PRC’s relevant regulations.

55. Heating and coal-mine methane gas tariff. The Shanxi Provincial Government should ensure county and city governments monitor the financial position of the project entities and take necessary measures to reduce the debt ratio for the Licheng, Qin, and Zhongyang subprojects. Through a regular review, the Shanxi Provincial Government should monitor heating and CMM gas tariffs to determine if they can meet normal full cost recovery criteria for sustainable heating and gas supply services, and consider increasing the tariff and gas tariff as needed.

56. General. Recommendations for the design and implementation of future projects are:

(i) During project preparation, ADB and executing agency should fully analyze the needs for project implementation support to design reasonable consulting services. For well-prepared projects that can start quickly, individual consultants should support project implementation and management, because they can be recruited easily and more quickly through the individual consultant selection procedure, and

their qualifications will more likely meet the requirements of project implementation and management support. (ii) During project preparation, targeted indicators of project performance should be easily accessible and designed to make use of routine statistics from government authorities, which will help accurate monitoring and evaluating of project results.

57. Future monitoring. To ensure the sustainability of project facilities, the Shanxi Provincial Government and/or local governments should ensure the respective operators operate and maintain the completed district heating and CMM gas supply facilities in accordance with sound administrative, financial, engineering, environmental, and O&M practices at all times. Monitoring should ensure that they are properly maintained and remain operational. The provincial and/or local governments should assess the project’s effect on energy efficiency and environment using statistics on energy consumption and emissions, as well as its impact on income and poverty.

58. Covenants. It is recommended that the covenants in the loan and project agreements for operations of project facilities be maintained in their existing form during operation.

59. Timing of the project performance evaluation report. A project performance review should be conducted in 2021 or later. By that time, all subprojects should have been in operation for over four years, and this will allow proper evaluation of the project’s impact on energy efficiency and environment improvement in the Shanxi based on accumulated statistics.

16 Appendix 1

DESIGN AND MONITORING FRAMEWORK Performance Targets and Design Summary Achievements Indicators with Baseline Impact Greater energy efficiency By 2020, energy intensity of In 2017, energy intensity of Shanxi and cleaner environment in Shanxi economy reduced by 0.7% economy was 1.29 tons standard Shanxi province compared with 2010, due to coal per CNY10,000, which has improved district heating system. reduced by 38% compared with 2010.

By 2020, emission of SO2 is In 2017, emission of SO2 and reduced by at least 12% and NOx NOx has been reduced by 20% by 15%, compared with 2010. and 25%, respectively, compared with 2010. Outcome Better air quality and By 2018, district heating in the five By 2018, district heating in the five reduced greenhouse gases urban areas reduces aggregate urban areas reduced aggregate emission in five urban areas annual coal consumption by annual coal consumption by in Shanxi province 53,493 tons, thereby avoiding 73,063 tons, which has avoided annual emissions of 133,358 tons annual emissions of 194,025 tons of CO2, 2,677 tons of SO2, 802 of CO2, 3,195 tons of SO2, 2,129 tons of NOx, 10,534 tons of TSP, tons of NOx, 12,588 tons of TSP, compared with 2012. compared with 2012.

By 2018, the CMM distribution By 2018, the CMM distribution system in Liulin city reduces system in Liulin city reduced annual coal consumption by annual coal consumption by 31,897 tons, thereby avoiding 31,897 tons, which has avoided annual emissions of 121,021 tons annual emissions of 121,021 tons of CO2, 1,444 tons of SO2, 1,140 of CO2, 1,426 tons of SO2, 1,052 tons of NOx, and 5,700 tons of tons of NOx, and 5,700 tons of TSP, compared with 2012. TSP, compared with 2012.b

By 2018, the five urban areas By 2018, the five urban areas had improve their record, by at least improved their records, by 20%, in meeting class IIa air quality 16%~27%, in meeting class II air standards (2012 baseline – days quality standards (days standards are met during heating standards were met during 2017- season: Jinzhong-69, Licheng- 68, 2018 heating season: Jinzhong- Qin- 73, Zhongyang- 70, Liulin-70) 82(+19%), Licheng- 80(+18%), Qin- 88(+21%), Zhongyang-89 (+27%), Liulin-81 (+16%).

Appendix 1 17

Performance Targets and Design Summary Achievements Indicators with Baseline Outputs 1. Energy-efficient district By 2017, modern district heating By 2017, modern district heating heating in five urban covering 8.2 million m2, servicing covering 7.57 million m2 servicing areas 270,000 urban residents (83,300 297,600 urban residents (82,186 urban households, 5,300 of which urban households, 490 of which are poor including 703 households are poor including 207 headed by women), and households headed by women), employing 50% women as heating and 58 out of 93 heating bill bill collectors is implemented collectors were women which represents over 62%.

2. Expanded CMM By 2017, CMM gas supply and By 2017, CMM gas supply and distribution network in distribution network are installed, distribution network are installed, Liulin capable of transporting 88.8 capable of transporting 88.6 million m3 of CMM and servicing million m3 of CMM and servicing an additional 30,000 urban an additional 30,000 urban households and 120 commercial households and 134 commercial customers customers

3.Institutional strengthening By 2017, at least 150 staff of By 2017, 150 staff of executing and capacity building executing and implementing and implementing agencies have agencies are trained, including all been trained, including all female female staff directly involving the staff directly involved in project project management, through six management, through six workshops workshops. In total, 61 female staff (100%) directly involved with the project attended training on capacity building.

By 2017, at least one health, By 2017, one health, safety, and safety, and energy conservation energy conservation awareness awareness campaign and campaign and knowledge-sharing knowledge-sharing session session has been conducted. 2 ADB = Asian Development Bank, CMM = coal-mine methane, CO2 = carbon dioxide, km = kilometer, m = square 3 meter, m = cubic meter, NOx = nitrogen oxide, SO2 = sulfur dioxide, TSP = total suspended particulates. a As provided under the Ambient Air Quality Standards GB 3095-1996, class I standards apply to especially protected areas such as natural conservation areas, scenic spots, and historical sites; class II standards apply to residential areas, mixed commercial–residential areas, and cultural, industrial, and rural areas; and class III standards apply to special industrial areas. b The discrepancies of SO2 and NOx emissions are due to different emission factors were used (at completion: 0.313kg 3 3 3 3 SO2/kNm methane, 0.994kg NOx/kNm methane; versus at appraisal: 0kg SO2/kNm methane, 0kg NO2/kNm methane), referring to actual monitoring data in Zhongyang district heating subproject.

18 Appendix 2

PROJECT COST AT APPRAISAL AND ACTUAL

Table A2.1: Cost Estimates by Financier at Appraisal ADB Loan Equity Total Amount Amount Amount ($ million) ($ million) ($ million) Item % % A. Jinzhong District Heating Supply 1 Base cost a. Civil works 1.85 8.83 19.11 91.17 20.96 b. Equipment and materials 39.12 100.00 0.00 0.00 39.12 c. Land acquisition 0.00 0.00 0.00 0.00 0.00 d. Project management/ Others 0.00 0.00 5.40 100.00 5.40 e. Capacity building 0.90 100.00 0.00 0.00 0.90 2 Contingencies a. Physical 0.00 0.00 3.31 100.00 3.31 b. Price 0.00 0.00 3.54 100.00 3.54 Subtotal 41.87 57.18 31.36 42.82 73.23 B. Licheng District Heating Supply 1 Base cost a. Civil works 2.30 42.67 3.22 58 5.52 b. Equipment and materials 15.11 100.00 0.00 0.00 15.11 c. Land acquisition 0.00 0.00 0.22 100 0.22 d. Project management/ Others 0.00 0.00 3.11 100 3.11 e. Capacity building 0.33 100.00 0.00 0.00 0.33 2 Contingencies a. Physical 0.00 0.00 1.17 100 1.17 b. Price 0.00 0.00 1.51 100 1.51 Subtotal 17.74 65.78 9.23 34.22 26.97 C. Qin District Heating Supply 1 Base cost a. Civil works 4.53 40.74 6.59 59.26 11.12 b. Equipment and materials 17.09 100.00 0.00 0.00 17.09 c. Land acquisition 0.00 0.00 1.16 100.00 1.16 d. Project management/ Others 0.00 0.00 3.82 100.00 3.82 e. Capacity building 0.46 100.00 0.00 0.00 0.46 2 Contingencies a. Physical 0.00 0.00 1.67 100.00 1.67 b. Price 0.00 0.00 2.05 100.00 2.05 Subtotal 22.08 59.08 15.29 40.92 37.37 D. Qin District Heating Supply 1 Base cost a. Civil works 1.03 50.24 1.02 49.76 2.05 b. Equipment and materials 3.26 100.00 0.00 0.00 3.26 c. Land acquisition 0.00 0.00 0.00 0.00 0.00 d. Project management/ Others 0.00 0.00 0.64 100.00 0.64 e. Capacity building 0.08 100.00 0.00 0.00 0.08 2 Contingencies a. Physical 0.00 0.00 0.30 100.00 0.30 b. Price 0.00 0.00 0.38 100.00 0.38 Subtotal 4.37 65.13 2.34 34.87 6.71 E. Liulin Coal Mine Methane Gas Distribution 1 Base cost a. Civil works 0.00 0.00 4.19 100.00 4.19 b. Equipment and materials 10.62 100.00 0.00 0.00 10.62

Appendix 2 19

ADB Loan Equity Total Amount Amount Amount ($ million) ($ million) ($ million) Item % % c. Land acquisition 0.00 0.00 0.36 100.00 0.36 d. Project management/ Others 0.00 0.00 1.72 100.00 1.72 e. Capacity building 0.23 100.00 0.00 0.00 0.23 2 Contingencies a. Physical 0.00 0.00 0.85 100.00 0.85 b. Price 0.00 0.00 0.76 100.00 0.76 Subtotal 10.85 57.92 7.88 42.07 18.73 F. Total Investment Cost 1 Base cost a. Civil works 9.71 22.15 34.14 77.85 43.84 b. Equipment and materials 85.20 100.00 0.00 0.00 85.20 c. Land acquisition 0.00 0.00 1.74 100.00 1.74 d. Project management/ Others 0.00 0.00 14.70 100.00 14.70 e. Capacity building 2.00 100.00 0.00 0.00 2.00 Subtotal 96.91 65.72 50.58 34.38 147.49 2 Contingencies 0.00 0.00 15.54 100.00 15.54 3 Interest During Construction and Commitment Charges 3.09 100.00 0.00 0.00 3.09 Total 100.00 60.20 66.12 39.80 166.12 ADB = Asian Development Bank. a ADB financing percentage for civil works categories are different from the disbursement percentages stated in the loan agreement as some of the civil work contracts will be procured based on the government procedures and totally financed by the equity, as shown in Table 10 of the project administration manual. Sources: Project implementing agencies and Asian Development Bank estimates.

20 Appendix 2

Table A2.2: Cost Estimates by Financier at Completion

ADB Loan Equity Total Amount Amount Amount Item ($ million) % ($ million) % ($ million) A. Jinzhong District Heating Supply 1 Base cost a. Civil works 1.90 9.63 17.84 90.37 19.74 b. Equipment and materials 38.93 80.68 9.32 19.32 48.25 c. Land acquisition 0.00 0.00 0.00 0.00 0.00 d. Project management/ Others 0.00 0.00 6.33 100.00 6.33 e. Capacity building 0.00 0.00 0.00 0.00 0.00 2 Contingencies a. Physical 0.00 0.00 0.00 0.00 0.00 b. Price 0.00 0.00 0.00 0.00 0.00 Interest During Construction and 3 Commitment Charges 1.31 100.00 0.00 0.00 1.31 Subtotal 42.14 55.72 33.49 44.28 75.63 B. Licheng District Heating Supply 1 Base cost a. Civil works 2.17 30.43 4.96 69.57 7.13 b. Equipment and materials 14.82 90.92 1.48 9.08 16.30 c. Land acquisition 0.00 0.00 0.00 0.00 0.00 d. Project management/ Others 0.00 0.00 1.29 100.00 1.29 e. Capacity building 0.00 0.00 0.00 0.00 0.00 2 Contingencies a. Physical 0.00 0.00 0.00 0.00 0.00 b. Price 0.00 0.00 0.00 0.00 0.00 Interest During Construction and 3 Commitment Charges 0.53 100 0.00 0.00 0.53 Subtotal 17.52 69.39 7.73 30.61 25.25 C. Qin District Heating Supply 1 Base cost a. Civil works 6.88 58.90 4.80 41.10 11.68 b. Equipment and materials 17.05 100.00 0.00 0.00 17.05 c. Land acquisition 0.00 0.00 0.24 100.00 0.24 d. Project management/ Others 0.00 0.00 0.38 100.00 0.38 e. Capacity building 0.00 0.00 0.00 0.00 0.00 2 Contingencies a. Physical 0.00 0.00 0.00 0.00 0.00 b. Price 0.00 0.00 0.00 0.00 0.00 Interest During Construction and 3 Commitment Charges 0.48 100 0.00 0.00 0.48 Subtotal 24.41 81.83 5.42 18.17 29.83

Appendix 2 21

ADB Loan Equity Total Amount Amount Amount Item ($ million) % ($ million) % ($ million) D. Zhongyang District Heating Supply 1 Base cost a. Civil works 1.58 76.33 0.49 23.67 2.07 b. Equipment and materials 3.27 100.00 0.01 0.00 3.28 c. Land acquisition 0.00 0.00 0.00 0.00 0.00 d. Project management/ Others 0.00 0.00 0.44 100.00 0.44 e. Capacity building 0.00 0.00 0.00 0.00 0.00 2 Contingencies a. Physical 0.00 0.00 0.00 0.00 0.00 b. Price 0.00 0.00 0.00 0.00 0.00 Interest During Construction and 3 Commitment Charges 0.16 100.00 0.00 0.00 0.16 Subtotal 5.01 84.20 0.94 15.80 5.95 E. Liulin Coal Mine Methane Gas Distribution 1 Base cost a. Civil works 0.00 0.00 5.50 100.00 5.50 b. Equipment and materials 10.49 100.00 0.00 0.00 10.49 c. Land acquisition 0.00 0.00 0.17 100.00 0.17 d. Project management/ Others 0.00 0.00 0.76 100.00 0.76 e. Capacity building 0.00 0.00 0.00 0.00 0.00 2 Contingencies a. Physical 0.00 0.00 0.00 0.00 0.00 b. Price 0.00 0.00 0.00 0.00 0.00 Interest During Construction and 3 Commitment Charges 0.43 100.00 0.00 0.00 0.43 Subtotal 10.92 62.94 6.43 37.06 17.35 F. Total Investment Cost 1 Base Cost a. Civil works 12.53 19 33.59 81 46.12 b. Equipment and materials 84.56 86 10.81 14 95.37 c. Land acquisition 0.00 0.00 0.41 100.00 0.41 d. Project management/ Others 0.00 0.00 9.20 100.00 9.20 e. Capacity building 0.00 0.00 0.00 0.00 0.00 Subtotal 97.09 60 54.01 40 151.10 2 Contingencies 0.00 0.00 0.00 0.00 0.00 Interest During Construction and 3 Commitment Charges 2.91 100.00 0.00 0.00 2.91 Total 100.00 64.93 54.01 35.07 154.01 Sources: Asian Development Bank. Project completion report prepared by the executing agency.

22 Appendix 2

Table A2.3: Project Financing at Appraisal and Completion ($ million) Source At Appraisal At Completion Total % Total % A. Asian Development Bank 100.0 60.2 100.0 64.9 B. Equity 66.1 39.8 54.0 35.1 Total (A+B) 166.1 100.00 154.0 100.00 Sources: Asian Development Bank. Project completion report prepared by the executing agency.

Appendix 3 23

PROJECT COST BY FINANCIER ($ million)

Appraisal Actual % Increase (Decrease) Amount Amount Item ($ million) ($ million) A. Jinzhong District Heating Supply 1 Base cost a. Civil works 20.96 19.74 (5.82) b. Equipment and materials 39.12 48.25 23.34 c. Land acquisition 0.00 0.00 0.00 d. Project management/ Others 5.40 6.33 17.22 e. Capacity building 0.90 0.00 (100.00) 2 Contingencies 6.85 0.00 (100.00) 3 Interest During Construction and Commitment Charges 1.35 1.31 (2.96) Subtotal 74.59 75.63 1.39 B. Licheng District Heating Supply 1 Base cost a. Civil works 5.52 7.13 29.17 b. Equipment and materials 15.11 16.30 7.88 c. Land acquisition 0.22 0.00 (100.00) d. Project management/ Others 3.11 1.29 (58.52) e. Capacity building 0.33 0.00 (100.00) 2 Contingencies 2.68 0.00 (100.00) Interest During Construction and 3 Commitment Charges 0.64 0.53 (17.19) Subtotal 27.62 25.25 (8.58) C. Qin District Heating Supply 1 Base cost a. Civil works 11.12 11.68 5.04 b. Equipment and materials 17.09 17.05 (0.00) c. Land acquisition 1.16 0.24 (79.31) d. Project management/ Others 3.82 0.38 (90.05) e. Capacity building 0.46 0.00 (100.00) 2 Contingencies 3.72 0.00 (100.00) Interest During Construction and 3 Commitment Charges 0.67 0.48 (28.36) Subtotal 38.04 29.83 (21.58) D. Zhongyang District Heating Supply 1 Base cost a. Civil works 2.05 2.07 0.00 b. Equipment and materials 3.26 3.28 0.00 c. Land acquisition 0.00 0.00 0.00 d. Project management/ Others 0.64 0.44 (31.25) e. Capacity building 0.08 0.00 (100.00) 2 Contingencies 0.68 0.00 (100.00) Interest During Construction and 3 Commitment Charges 0.14 0.16 14.29 Subtotal 6.86 5.95 (13.28) E. Liulin Coal Mine Methane Gas Distribution 1 Base cost a. Civil works 4.19 5.50 31.26

24 Appendix 3

Appraisal Actual % Increase (Decrease) Amount Amount Item ($ million) ($ million) b. Equipment and materials 10.62 10.49 (1.22) c. Land acquisition 0.36 0.17 (52.78) d. Project management/ Others 1.72 0.76 (55.81) e. Capacity building 0.23 0.00 (100.00) 2 Contingencies 1.61 0.00 (100.00) Interest During Construction and 3 Commitment Charges 0.29 0.43 48.28 Subtotal 19.01 17.35 (8.73) F. Total Investment Cost 1 Base Cost

a. Civil works 43.84 46.12 520 b. Equipment and materials 85.20 95.37 11.94 c. Land acquisition 1.74 0.41 (91.95) d. Project management/ Others 14.69 9.20 (36.70) e. Capacity building 2.00 0.00 (100.00) 2 Contingencies 15.54 0.00 (100.00) Interest During Construction and 3 Commitment Charges 3.09 2.91 (5.83) Total 166.12 154.01 (7.29)

Appendix 4 25

DISBURSEMENT OF ADB LOAN PROCEEDS

Table A4.1: Annual and Cumulative Disbursement of ADB Loan Proceeds ($ million) Annual Disbursementa,b Cumulative Disbursementa,b Amount Amount Year ($ million) % of Total ($ million) % of Total 2013 0.03 0 0.03 0 2014 56.80 57 56.83 57 2015 23.06 23 79.89 80 2016 14.93 15 94.82 95 2017 5.17 5 99.99 100 2018 0.00 0 99.99 100 Total 100.00 100 100.00 100 Note: Numbers may not sum precisely because of rounding. a Includes disbursements to advance account, formerly called imprest account. b From eOps after actualization. Source: Asian Development Bank.

Figure 4.1: Projection and Cumulative Disbursement of ADB Loan Proceeds ($ million)

26 Appendix 5

PROJECT IMPLEMENTATION SCHEDULE

2013 2014 2015 2016 2017 Activities Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

A Jinzhong DH System Development