China - Ozone Depleting Substance Phaseout Projects

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 17299 IMPLEMENTATION COMPLETION REPORT CHINA OZONE DEPLETING SUBSTANCE PHASEOUT PROJECTS (TF021921 AND TF021981) January 14, 1998 Private Sector Development Unit East Asia and Pacific Regional Office This document has a restricted distribution and may be used by recipients only in the perform-ance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency = Renminbi (RMB) Currency Unit = Yuan (Y) 1989 $1 = Y 3.71 1990 $1 = Y 4.72 1991 $1 = Y 5.22 1992 $1 = Y 5.38 1993 $1 = Y 5.45 1994 $1 = Y 8.70 1995 $1=Y8.31 1996 $1 = Y 8.30 1997 $1=Y8.30 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES Metric System ABBREVIATION AND ACRONYM ICR - Implementation Completion Report MOD - Memorandum and Recommendation of the Director CFC - Chlorofluorocarbons Vice President Jean-Michel Severino, EAP Country Director Yukon Huang, EACCF Sector Manager Hoon Mok Chung, EASPS Staff Member Lily Uy Hale, Operations Officer, EASPS  FOR OFFICIAL USE ONLY -3 - CONTENTS PREFACE............................................................................................4 EVALUATION SUtMMARY ................................................................ 5 PART I: PROJECT IMPLEMENTATION ASSESSMENT .......................................................8 A. PROJECT OBJECTIVES AND DESCRIPTION ................................................................ 8 B. ACHIEVEMENT OF PROJECT OBJECTIVES ...............................,.9 C. MLEM TATAON RECORD AND MAJOR FACTORS AFFECTING TIE PROJECT ......... ..... I 0 D. PROJECT SUSTAINAB Y ....................................................... 12 E. BA PERFORMANCE ....................................................... 13 F. RECIPIENT PERFORMANCE ....................................................... 14 G. ASSESSMENT OF OuTcoME ....................................................... 15 H. FUruRE OPERATION ............................................ 15 I. KEY LESSONS LEARNED ............................. 16 PART II: STATISTICAL TABLES .................................... 19 TABLE 1: SUMMARY OF ASSESSMENTS .................................... 9 TABLE 2: RELATED BANK LoANS/CREDITS ................................... 20 TABLE 3: PROJECT TIMETABLE ................................... 21 TABLE 4: LOAN/CREDIT DISBURSEMENT: CUMULATIVE ESTIMATE AND ACTUAL ......... 22 TABLE 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION ......................................... 23 TABLE 6: PROJECT FINANCING ......................................................... 24 TABLE 7: BANK RESOURCES: STAFF INPUTS ............................... 25 ANNEX A: RECIPIENT' S CONTRIBUTION TO THE ICR .26 ANNEX B: ICR MISSION'S AIDE MEMOIRE .30 This document has a restricted distribution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   -4 - IMPLEMENTATION COMPLETION REPORT CHINA OZONE DEPLETING SUBSTANCE PHASEOUT PROJECTS (TF021921 AND TF021981) PREFACE This is the Implementation Completion Report (ICR) for the First and Second Ozone Depleting Substance Projects in China, for which Grants TF021921 and TF021981 in the amount of $7.825 million (which includes $900,000 from PPA I ') and $5.465 million equivalent (which includes $600,000 from PPA I) were approved by the East Asia and Pacific Regional Vice President in November 1993 (ODS I) and June 1994 (ODS II) and made effective on April 21, 1994 and August 31, 1994 respectively for ODS I and II. The estimated investment costs were $15.1 million (ODS I) and $6.3 million (ODS 11). Actual costs were $15.66 million (ODS I) and $8.76 million (ODS II), which included a $1.5 million Project Preparation Advance for both projects. The grants were closed on June 30, 1997. They were fully disbursed, and the last disbursement took place on July 2 and July 14, 1997 respectively for ODS I and II. The ICR was prepared by Lily Uy Hale (Task Manager) in the Private Sector Development Unit of East Asia and the Pacific Region, and reviewed by Hoon Mok Chung, Sector Manager, EASPS and Yukon Huang, Director, China Country Unit. The recipient provided comments that are included as an annex to the ICR. Preparation of this ICR began during the Bank's final supervision mission in April 1997, and an ICR mission visited Beijing in August 1997. The ICR is based on materials in the project file. The recipient helped to prepare the ICR by contributing views reflected in the mission's aide-memoire, preparing its own evaluation of the project's execution and initial preparation, and commenting on the draft ICR. Total amount for the Project Preparation Advance (PPA 1) is S 1.5 million and is allocated to ODS I for $ 900,000 and ODS II for $ 600,000.  \\  CHINA OZONE DEPLETING SUBSTANCE PHASEOUT PROJECTS (TF021921 AND TF021981) EVALUATION SUMMARY Introduction 1. ODS I and II Projects are the first two investment projects in China aimed at phasing out the use of ozone depleting substances in the halon, aerosol and foam subsectors. There are five subprojects under ODS I and nine subprojects under ODS II. Preparation of the first project started shordy after the China Country Program was approved by the Multilateral Fund for Implementation of the Monteal Protocol on Substances that Deplete the Ozone Layer (MLF) in January 1993. A Project Preparation Advance (PPA) in the amount of $1.5 million was granted by the MLF to initiate implementation of the two ODS Projects. Project Objectives and Description 2. The ODS Projects have several objectives: (a) to support the Government's actions to reduce ODS consumption; (b) to establish a project implementation mechanism through local institutions; (c) to implement cost-effective, priority subprojects; and (d) to support the adoption and commercialkation of 50 percent reduced ODS foam applications. The target ODS phaseout for ODS I and II are 15,400 and 400 MT ODP respectively. The actual ODP phaseout were 5,066 and 780 MT respectively for ODS I and II. While ODS II Project exceeded its target ODP phaseout, ODS I achieved only 33 percent of its target at project completion. Tianjin and Shanghai aerosol subprojects have great influence on the level of ODP achieved under ODS I as they accounted for 82 percent (i.e., 12,600 MT) of total ODP phaseout target. These two subprojects have not yet achieved their target ODP phaseout but are projected to do so before 2000. 3. Although the two aerosol factories have not yet achieved their phaseout targets, they are credited with encouraging several local fillers to stop using CFCs. As a result local CFC consumption statistics induated a drop between 1995 and 1996: in the Tianjin area, from 3500 metric tons to 940 metric tons; in the Shanghai area from 4300 metric tons to 1320 metric tons; and in the Guangdong area from 7000 metric tons to 1290 metric tons. The direct CFC phaseout of the two subprojects plus the indirect project benefits led to total CFC reduction in the aerosol sector to reach 14,316 metric tons to date.  - 6 - Implementation Experience and Results 4. All the fourteen subprojects of ODS I and II were listed as priority subprojects under the China Country Program and have met the foliowing criteria: (a) have a direct and demonstrable result in reducing ODS consumption in-the country; (b) cost effective and take into account the country's national industrial policy; and (c) based on environmentally sound technologies, or substitutes for the substances controlled by the Montreal Protocol. Based on the objective of phasing out 15,400 and 400 metric tons of ODP for ODS I and II respectively, the outcome of the projects is considered satisfactory. ODS II almost double its target of 400 tons. For ODS L the direct and indirect phaseout reaches over 90 percent of the target and is projected to reach 100 percent by 2000. The policy environments surrounding the respective subsectors play an important role in the effectiveness of achieving the phaseout targets. For instance, there was a ban on new ODS-based production facilities in halon and aerosol sectors, in 1990 and 1991 respectively, but there has been no outright ban on the use of aerosol or halon at the beginning of the ODS phaseout activities. This explains partly the reason for the two aerosol subprojects under ODS I not being able to phase out their target on time of project completion. 5. In assessing the outcome of the projects, NEPA has recognized the importance of policy enforcement mechanism and has already started a close dialog with respective line ministries in the subsectors and has already put enforcement mechanism in place. For example, the relevant line ministry responsible for aerosol products announced on June 5, 1997 that a ban on CFC use in aerosols would become effective by the end of 1997. In the halon sector, efforts to ban halon include the sector phaseout program which covers policy measures and enterprise level actions that will enable a step-by-step phaseout with a target to achieve complete halon phaseout by 2010. Summary of Findings, Future Operations, and Key Lessons Learned 6. With experience from the two ODS projects and the implementation mechanism built under ODS I and II, China is continuing the implementation of ODS m subprojects and is ready to enter the next phase of ODS phaseout, i.e., the sector phaseout approach developed with the assistance of the Bank under ODS IV Project. Efforts are continuing in the preparation of phaseout of other ODS subsectors and the Government is optimistic that the target of complete ODS phaseout in 2010 will be achieved, provided the multilateral grant funding will be forthcoming. 7. From a technical audit of the completed subprojects under ODS I and II whereby the Bank mission visited the subproject factories and discussions with factory officials and also through discussions among the Chinese agencies who were involved in ODS operations and project implementation, the following valuable lessons were drawn: (a) Policy and enforcement: Policy enforcement is beyond subproject implementation scope. NEPA plays a very important role in ensuring that complementary policy enforcement is in place;  - 7 - (b) More accurate ODS estimates are needed during project preparation and appraisal. During the implementation of the first two projects, the ODP target was revised several times. NEPA and the financial agents are currently preparing and analyzing the methodology for estimating the ODS and are expecting to formulate a systematic and unified method that will be used in all future subproject preparation; (c) Project Implementation Schedule: a more realistic estimate of project implementation length should be considered which includes the time needed to obtain environmental summary and counterpart funding for subprojects, time for Bank approval of subprojects, identification of technology or equipment suppliers and the time needed to carry out procurement process. Due to unrealistic estimate for the time to implement the project, many implementation steps were carried out in a rush. For instance, supplier background has not been checked thoroughly before signing a contract agreement. Although the projects were ultimately implemented alright, however, many inconveniences and extra work could have been avoided, had the procurement agent checked the background of suppliers more carefully before signing the contract; (d) Suppliers must be carefully selected according to their technical and financial capability and contracts with them enforced to ensure that the enterprise gets what had been negotiated in the contract. During the technical audit, the mission found that in one of the subprojects, the contractor did not provide adequate electrical diagrams of the equipments nor did the contractor conduct the training activities as specified in the contract. Despite this lack of compliance to the contract, the full contract amount to the supplier was disbursed. One of the reasons explained for this disbursement was that since the project was already in long delay in disbursement, in the interest of catching up the time, the money was disbursed without demanding the contractor to comply fully its contract; (e) Data on production, consumption of ODS and baseline equipment as well as proposed equipment for the project should be prepared with extra care and attention. Clear and concise data at project preparation will help in project implementation and supervision; and (f) NEPA and the FA should work with project enterprises from early on to help them obtain counterpart funding and the environmental summary. Lack of counterpart funding and local environmental certifications has delayed approval by the Bank of many subprojects, and consequently, their implementation.  - 8 - CHINA OZONE DEPLETING SUBSTANCE PHASEOUT PROJECIS (TF021921 AND TF021981) PART I: PROJECT IMPLEMENTATION ASSESSMENT A. PROJECT OBJEcTivEs AND DESCRIPTION 1. The objectives of the two ODS Projects are multi-fold: (a) to support the Government's actions to reduce ODS consumption; (b) to establish a project implementation mechanism through local institutions; (c) to implement cost-effective, priority subprojects; and (d) to support the adoption and commercialization of 50 percent reduced ODS foam applications. The underlying goal for these objectives is to phase out ODS consumption of 15,400 MT and 400 MT respectively for ODS I and II Projects. 2. There were five subprojects under ODS I. These subprojects, listed as priority subprojects in China's ODS Country Program, aimed to introduce non-ODS technology in aerosols, foam and halon subsectors and to eliminate the use of ODS. In addition, the Project will help strengthen the PMO's project management capabilities. The 50% foam subprojects under ODS II were originally part of ODS I. But as MLF required individual proposals for each enterprise, preparation was delayed. To avoid slowing down ODS I, these 50% foam subprojects were split as a separate project to become ODS II. The implementation of ODS I and II Projects foliow closely with each other and both have closing dates of June 30, 1997. 3. Under ODS II, there were originally 10 subprojects which received MLF grant to support the adoption and commercialization of 50 percent foam applications through the implementation of cost-effective priority subprojects. In addition, it shared the same objective as ODS I which is to fiurther develop the project implementation mechanism and institutional strengthening of local capacity. The beneficiary of the ten subprojects included a research institute which develops 50 percent CFC substitute technology, two polyolVblended polyol producers, two insulation foam producers, a polyol/blended polyol and insulation producer (this subproject was later on canceled and transferred to UNDP due to a similar project it has and is already under UNDP implementation, leaving only nine subprojects under ODS II), and four household refrigerator foam insulator producers that are to convert their manufacturing processes to reduced ODS formulations. The grant financing is provided for technology transfers, equipment purchase, training, trial runs and recurring incremental chemical costs for the nine project beneficiaries.  - 9 - B. ACEHEVEMENT OF PROJECT OBJECTIVES 4. Through these first two projects, the Government has built up an ODS Program implementation mechanism. From the Ozone Leading Group which was founded to undertake the China ODS Country Program, there is currently a Project Management Office (PMO) established by the National Environmental Protection Agency (NEPA) which is devoted solely to implement the ODS phaseout program in China. The PMO developed from a handful of inexperienced staff during the program inception to a body of full-time experienced staff who oversee the entire ODS phaseout program. Among others, the two projects helped strengthened capabilities of PMO in project management and the financial agent in project appraisal and supervision of ODS projects. 5. Both projects achieved varying degrees of success in their ODP phaseout target. ODS II in fact exceeded the target. Due to increased demand of 50 percent CFC and CFC-free refrigerators, most of the project refrigerating companies expanded their production and thus increased the use of 50 percent CFC in the refrigerators. Shenyang Petrochemical Factory not only achieved its project scope of developing 50 percent polyol/blended polyol feedstocks, but through its own research, and financed partially from the contingency fund of ODS II Project, has successfully developed the 141b technology for polyol/blended polyol feedstocks which are to be used by household refrigerator and insulation panel producers. 6. Based on the CFC consumption data in the aerosol sector and the enterprise CFC consumption data provided by NEPA, the two aerosol subprojects under ODS I did not meet the target ODP phaseout at project completion in June 1997. However, they are projected to do so between 1998 and 2000. As reported, both Tianjin and Shanghai have not been able to achieve their projected sales of purified Liquid Petroleum Gas (LPG) due to lack of demand as the ban on CFC use in aerosols will take effect only in December 1997. Nothwithstanding, total CFC reduction in the aerosol sector reached 14,316 metric tons to date. This includes the direct CFC phaseout of the two subprojects plus the indirect project benefits. Although the two aerosol subprojects have not yet achieved their phaseout targets, they are credited with encouraging several local fillers to stop using CFCs. As a result, local CFC consumption statistics indicated a drop between 1995 and 1996: in the Tianjin area, from 3500 metric tons to 940 metric tons; in the Shanghai area from 4300 metric tons to 1320 metric tons; and in Guangdong area from 7000 metric tons to 1290 metric tons. 7. According to a Bank aerosol consultant who recently conducted a field mission to China, there is no real answer to how much CFC was actually phased out by the first three filling center projects (i.e., Tianjin and Shanghai subprojects under ODS I and Zhongshan subproject under ODS III). According to him, CFC may have never been consumed significantly in the aerosol sector. The official CFC consumption figures reported to the Bank were based on "projected unconstrained demand" in the China Country Program. His findings confirmed that no significant amount of CFC has been consumed in the aerosol sector in 1996 and that CFC usage never grew to the size projected by the  -10- unconstrained demand calculations. On this basis, the two aerosol subprojects have not achieved their planned CFC reduction in the project as there may have never been the basis on which to start. Foliowing this line of thought, there should have not been any phaseout project for the aerosol sector. However, as the consultant also confirmed that there has been a proliferation of filling centers that used LPG in the early 1990s owing to Government efforts to phase out CFC in the aerosol sector. This corresponded with NEPA's argument that the two subprojects have great indirect influence in encouraging local fillers to stop using CFCs. 8. The assessement of the two aerosol subprojects should be viewed in light of their ultimate objective of CFC phaseout in the aerosol sector. One need not therefore attach the importance of the means of achieving this objective, either directly or indirectly. The fact is that as of today, both the Government and the Bank consultant confirmed that there is only a negligible amount of CFC consumption in the sector. This provides a good basis for claiming the credit of CFC phaseout in the sector. 9. The third subproject under ODS I that did not reach its ODP phaseout target at project completion is the Beijing halon project. But it is projected to do so by 2000. The problem for this was that Beijing Factory did not obtain enough demand for its ABC powder fire extinguishers, partly due to its less than aggressive marketing efforts for its relatively good quality ABC powder. Other reasons may be attributed to the following: a) the ban on using Halon 1211 in non-essential places was enforceable only to the extent of newly installed fire extinguishers; existing halon 1211 fire extinguishers in non-essential places can continued to be used; b) fire extinguisher specifications for newly constructed buildings are still in the process of being formulated by the government; hence, users can choose the cheaper ABC powder regardless of quality; c) users' beliefs that Halon 1211 is cleaner and more efficient than ABC powder still prevail; and d) higher profitability of Halon 1211 for wholesalers and retailers. The enforcement problem-in the halon and CFCs in aerosols is closely linked to the insufficient policy and weak regulatory framework in the ODS sectors. Development-of appropriate policy and regulatory framework for ODS has been slow. Institutions involved in regulating ODS-related matters are weak and inexperienced, and ODS policy implementation has often been sporadic and incomplete. Furthermore, the Government has had little incentive to regulate ahead of MLF controls and has many other higher priorities. Enforcement mechanisms are therefore inadequate. C. IPLEMENTATION RECORD AND MAJOR FACTORS AFFECTING THE PROJECT 10. Project Preparation and Appraisal: Since ODS I and II are the first two ODS projects, preparation was lengthy. All parties including PMO, the financial agent, project enterprises and procurement agencies were not very familiar with Bank and MP (The Montreal Protocol on Substances that Deplete the Ozone Layer) procedures which were themselves evolving, and this led to protracted delays during project preparation and appraisal. Procurement of technology and equipment also experienced delays in finalizing contracts due to a lack of understanding of the general background of technology suppliers. To overcome some of these problems, the Bank invited technical experts to  - 11 - conduct seminars to familiarize participants with the nature of ODS projects, their eligibility criteria, MN procedures, Bank project processing guidelines and procedures, and the latest technology available in each of the subsectors. Both projects were completed by the closing date of June 30, 1997 and before mid-July total grants were fully disbursed. All subprojects have been commissioned and all beneficiary enterprises have since stopped using ODS or reduced to 50 percent as agreed, a condition required by NEPA before each subproject is eligible for commissioning. 11. Project Cost: Actual project costs for both ODS I and II exceeded estimates at appraisal. Cost overrun for ODS I is 3.8 percent and for ODS II 40 percent. The highest subproject cost overrun was 134 percent for Xinfei Refrigerating Company and 71 percent for Zhejiang Huajiang Plastics. Reasons for the cost overrun were: (a) equipment costs were underestimated and final purchase prices were much higher than anticipated at appraisal partly due to inflation; (b) trial production cost exceeded estimate due to raw material price increases and domestic inflation and underestimate of trial production loss; and (c) underestimate of safety measure cost related to the project, and specifically for Zhejiang Huajiang Plastics Plant which uses butane as substitute for CFC- 12 in the manufacture of polystyrene and polyethylene extruded foam sheet. Zhejiang Huajiang Plastics Plant has adopted extensive safety measures and installed anti-explosion devices to control potential hazards of using butane, a highly flammable blowing agent. The anti-explosion area in the plant was also increased. 12. Institutional Strengthening: All the players in the ODS Program were new to ODS operations. NEPA staff assigned to these projects were also new to Bank guidelines in project processing and MN procedures. This was recognized at the outset, hence an institutional strengthening component was built into the training fund for NEPA and CIB staff in project management, appraisal and supervision under the projects. This was essential to the whole project implementation process. A series of seminars were also conducted for branch office staff of CIB. In addition, the Bank also conducted several procurement and disbursement seminars for all participants in the ODS operations, including some enterprises implementing the projects. The Bank also worked closely with NEPA and the financial agent in designing project processing steps and procedures, and in defining roles and functions for each of the agencies involved in project implementation. 13. During ODS I and II implementation, other factors affecting the success of project implementation were also detected. At the beginning, the financial agent lacked management experience, leading to inadequate supervision of its branch office staff. The handling of the delicate relationship among the Chinese agencies involved in ODS operations, including the Ministry of Finance, NEPA, the financial agent and line ministries is of particular importance. The Bank has continuously worked with relevant agencies to resolve these types of problems through open dialog among agencies, secure consensus on pending issues and extract commitments from them.  -12- 14. Procurement: Most implementation delays originated from procurement problems: (a) Preparation. i.e.. the identification of an acceptable procurement agent and preparation of bidding documents: coordination among the procurement agencies, the financial agent and the enterprises sometimes took a lengthy process. Zhejiang Huajiang Plastics Plant subproject under ODS I provided a good example. It took months of negotiation among the financial agent, NEPA and the Plant before an acceptable procurement agency was agreed upon. The Plant wanted to use an agent in Zhejiang city while NEPA and the financial agent thought an agent in Beijing would be more efficient. Furthermore, it took sometime for the financial agent and NEPA to explain to the Plant managers the requirement set by the Ministry of Finance for the use of an accreditated national procurement agency to handle procurement for items to be procured under international competitive bidding; (b) Lack of knowledge of the technology suppliers: Upfront procurement preparation work has been delayed for a long time so that when finally potential suppliers for project equipments were found, many months have already passed beyond the original implementation schedule. To catch up with the schedule, contracts were signed in a hurry without undergoing a thorough check of the technical and financial background and the types of services suppliers offered. Due to this insufficient knowledge about suppliers, misunderstandings arose during implementation which led to further delay in the clarification process. Tianjin, Shanghai aerosol and Beijing halon subprojects provided good examples for these types of experiences. Although the problems were resolved, had a more thorough job undertaken at the beginning, much inconveniences and misunderstandings could have been avoided; and (c) Slow action when faced with problems: Sometimes the problem is not serious, but due to slow action or sometimes inaction, it was resolved slowly and therefore delayed progress. D. PROJECT SUSTAINABIL11Y 15. The objective of the projects to phase out ODS consumption of the 14 subprojects has been largely achieved. While some subprojects have attained their objective by project completion, others are projected to complete the phaseout between 1998 and 2000. The institutional capacity of NEPA and the financial agent have been substantially improved. The manufacturing process of the subprojects has been permanently converted to non- ODS or 50 percent as agreed. All these factors point to the sustainability of the project. In 1993, the Chinese Government completed its Country Program for Phaseout of Ozone Depleting Substances and received approval from MLF. This established a Government commitment to a complete phaseout of controlled ODS by 2010, provided sufficient funds to support eligible incremental costs were made available by the MLF and the technologies  - 13 - needed for non-ODS substitutes were transferred. This commitment has become more important now that CFC consumption and production in developing countries is to be frozen in 1999 2. 16. China's overall phaseout strategy has been articulated in sector plans for each of the major ODS sectors which include policies and enterprise level action plans. Furthermore, many ODS phaseout policies have already been initiated. For example, China banned new ODS-based production facilities in halon and aerosol sectors, in 1990 and 1991, respectively. New CFC production facilities were banned in February 1994. Effective January 1995, imports of refrigerators and freezers using CFCs and manufacturing devices for automobile air-conditioning with CFC-12 refrigerants were banned, and import duties on non-CFC equipment used for producing refrigerators, freezers and compressors were reduced. These are all important steps towards achieving its goal of complete ODS phaseout by 2010. The latest Government effort is a sector phaseout project which includes halon, production and other sectors, under the Bank's Fourth ODS Project. The halon sector phaseout component is expected to start implementation in early 1998. Other subsector phaseout strategies are being discussed and prepared. To ensure that China would be able to carry out its commitment of complete ODS phaseout by the deadline, the Government needs to further step up its effort in promoting and raising awareness of the ODS concept, China's obligation as well as its plans to phase out ODS by 2010 among the government agencies as well as the general public. The Bank would continue its effort in assisting the Government in building its capacity to meet the obligations. E. BANK PERFORMANCE 17. Throughout the project life, Bank staff worked closely with NEPA, the financial agent, procurement agencies and line ministries to identify, prepare, appraise, and supervise subprojects. In the early stages of project implementation the newness of the operation for all parties delayed transfer of funds to enterprises. Bank staff provided rapid assistance to resolve problems by electronic mail and worked with Chinese counterparts to streamline and simplify documentation and procedures. For example, the format of appraisal reports has been simplified several times; the Bank identified a foam manufacturing safety specialist to help Zhejiang Huajiang Plastics Plant when it encountered safety problems; the Bank provided different sector specialists to help enterprises prepare projects and provide advice on technology choice. 18. As these are the first two ODS projects, it was a learning process also within the Bank. For example, during the early stage of project implementation, there was a lack of coordination and support within the Bank that resulted in delays in project implementation. Originally, the ODS I Project was managed out of the Asia Technical Department. The project was not fully integrated into the then Country Department's (CD) overall program. The lack of early operational involvement by then CD staff meant 2 The freeze is to the average 95-97 production and consumption level.  - 14- the project did not benefit from the Bank's operational expertise in China. Beginning in FY94, the Industry and Energy Division of then CD assumed management of the program, integrated it into the overall business plan, and assigned experienced division staff to lead the program (with resources for one full-time position assigned to an experienced Task Manager). This solved the coordination problem and led to successful implementation of ODS I and II. The preparation of subprojects under ODS I and II were considered deficient. In the early phase of subproject preparation, MLF did not have a set of uniformed implementation guidelines and eligibility criteria for projects. The consultants hired by the Bank to prepare these projects could only rely on their own professional judgement to determine what would have been technically appropriate for the beneficiary enterprises to phaseout the ODS. The MLF guidelines continued to evolve and as all parties gained increasing familiarity with MLF guidelines and eligibility criteria, the supervision mission found that many of the project activities or equipments included in the subprojects would have been deleted, were these subprojects prepared and appraised at a later stage. 19. As China is one of the largest consumer and producer of ODS in the world, the task of assisting China to meet its obligation of complete ODS phaseout is substantial. The Bank would continue to work with the Government and MLF to complete the existing projects as well as identifying the most efficient and cost effective way to implement the ODS phaseout program that would cover the rest of sectors/enterprises that consume/produce ODS in China. F. RECIPIENT PERFORmANCE 20. The implementing agency and the financial agent started off with very weak institutional setup, i.e., PMO staff members were inadequate and unfamiliar with Bank project processing procedures; CIB branch office staff were unfamiliar with ODS operations. Under Bank projects, countries are ultimately responsible for project implementation. It is therefore critical to establish local capacity to assume this responsibility. The Bank has emphasized the importance of training and is providing an increasing amount of funds for local preparation of subprojects. In addition, in its assistance with Country Program preparation, the Bank is emphasizing the importance of a strong intitutional strengthening component. With the institutional strengthening components incorporated in these first two projects, both PMO and CIB staff received training which improved all aspects of their performance. At the start of project implementation, both NEPA and CEB were not very clear about their respective roles and they felt the compensation levels were inadequate for them to carry out the ODS operations. The Bank spent a great deal of time working with NEPA, CIB and the relevant ministries to explain fund eligibility criteria, incremental cost calculation methodology and to develop and agree on roles and responsibilities of all participants. Furthermore, in order to introduce competition and improve the performance of the financial agent, a second financial agent was introduced in the Third ODS Project which will share some project responsibilities.  - 15 - 21. Compliance with project covenants by the enterprises was largely achieved. One of the criteria of appraisal and approval of subprojects by the Bank was to ensure that the financial viability of enterprises will not jeopardize project implementation. Through assurances provided by NEPA and the financial agent in terms of project quality and the financial well-being of the enterprises, the Bank has simplified subproject approval process, including a simplified appraisal report format and the acceptance of the minimum financial viability level of enterprises. This proved to be practical as witnessed by completion of many of the subprojects and the continued existence of the enterprises. Overall, NEPA and the financial agent have moved a big step from where they have started in the ODS phaseout activities in China. So far, the approved subprojects under ODS III are continued to be implemented, albeit with delays in some. Both NEPA and the financial agents need to continue their efforts in strengthening their project management capability and to raise their level of awareness of the impending deadline for complete ODS phaseout. G. ASSESSMENT OF OuTcoME 22. Based on the objective of phasing out 15,400 metric tons of ODP for ODS I and 400 metric tons of ODP for ODS II, the outcome of the projects is considered satisfactory. ODS II exceeded its target of 400 tons by almost 100 percent. ODS I did not achieve the target at project completion but it is projected to do so between 1998 and 2000. Moreover, the aerosol subprojects which accounted for the largest phaseout estimate for ODS I are also credited with encouraging several local fillers to stop using CFCs. The direct and indirect phaseout reaches over 90 percent of the target with projections of reaching 100 percent by 2000. The fact that the subprojects did not achieve their target phaseout amount should be analyzed in view of policy environments surrounding the respective subsectors. For aerosol subsector, agencies involved should be more aggressive in policy formulations in banning the use of CFCs. In the halon sector, the issue with lack of specification on the quality of ABC powder undermines the demand on a higher quality of ABC powder produced by Beijing Fire. A common problem for both sectors lies with the enterprises themselves in their own marketing efforts to sell the new product. The project enterprises in the two sectors have not demonstrated their ability to market their products more aggressively. In assessing the outcome of the projects, NEPA has recognized the inadequacy of policy enforcement mechanism and has already started a close dialog with respective line ministries in the subsectors. H. FUTURE OPERATION 23. China joined the Vienna Convention for the Protection of the Ozone Layer in September 1989, and ratified the London Amendment of the Montreal Protocol on Substances that Deplete the Ozone Layer in 1991. As one of the Article 5 countries classified by the Protocol, China has formally committed to phasing out ODS by 2010. The preparation and approval of the Country Program for Phaseout of Ozone Depleting Substances in January 1993 further established a Government commitment to phase out ODS as quickly as possible and ahead of the MP required schedule, provided sufficient  - 16- funds to support transition costs were made available by the MLF and the technologies needed for non-ODS substitutes were transferred. In addition, to facilitate its work to carry out the phaseout activities, the Government needs to raise the level of awareness of ODS phaseout concept and China's obligation among the government agencies as well as the general public. 24. The successful completion of the ODS I and II Projects demonstrated China's capability in project implementation. There are currently at least 50 other subprojects under implementation under an umbrella Grant Agreement for ODS III Project. The ODS IV Sector Phaseout Project would initiate a sectoral policy-based approach to ODS phaseout and will be implemented in early 1998. NEPA is also currently preparing other sectoral phaseout projects. Once the MLF approves such an approach for ODS phaseout activities, there would be no further need for additional stand-alone Bank ODS projects for China. All future phaseout activities for individual subprojects would be covered under ODS HI and phaseout programs on a sectoral basis would be covered under ODS IV. The experience in project implementation of ODS I and II lends valuable inputs for future project implementation. With NEPA gaining more experience in ODS operations, and the two financial agents sharing the appraisal and supervision work for the ODS HI subprojects and a third financial agent will assist in the implementation of the sector phaseout program, the implementation mechanism is in place for carrying out future operations. All these are designed to reaching the objective of complete ODS phaseout by 2010. L KEY LESSONS LEARNED 25. The Bank performed a technical audit of the completed subprojects under ODS I and II which provided valuable lessons for the future. a) Policy Enforcement: Due to lack of policy enforcement mechanism in the aerosol and halon sectors during ODS I and II project implementation, the outcome of the subproject objectives is less than anticipated. The success of ODS phaseout objective is highly linked to the enforcement of sector policies which are complementary to the projects. NEPA realized this inadequacy and has already started taking action to ameliorate the situation. The halon sector policy issues are being addressed in the halon sector phaseout project currently under preparation. The ban on CFC use in the aerosol sector is taking effect by the end of 1997 and an aerosol sector phaseout approach is also under consideration. b) ODS Estimates at Project Preparation: Since the start of ODS I and II project activities, there has been no agreement as to how ODS estimates should be calculated, resulting in reporting different figures from various iterations of what the correct ODS phaseout amount should be. A definition or equation for calculating ODS phaseout amount needs to be formulated and accepted by all parties. The definition of a baseline equipment list and the amount of ODS consumption set by the MLF will help eliminate such problems. NEPA and the  - 17 - financial agents are currently working on the formulation of a systematic methodology in the calculation of ODS estimates along the lines established by MLF. c) Project Implementation Schedule: From the experience of ODS I and II, unrealistic implementation schedules have led to hasty and regrettable decisions. To respond to time pressure, enterprises rushed to sign a contract without a thorough evaluation of suppliers. Disbursement pressures contributed to rush actions that may not have been in the best interest of the project. More realistic estimate of implementation schedule should be established, taking into consideration the time to obtain environmental summary for the subprojects, time for securing counterpart fund commitment, the time for Bank approval of the subprojects and the time needed to complete the procurement and disbursement processes. d) Selection of Suppliers and Enforcement of Contract: There should be a more thorough selection process which includes checking the technical and financial background of the suppliers. The Bank expects the procurement agency to investigate the supplier for each contract. However, the audit revealed that some contracts were signed with suppliers without going through this process. Due to this insufficient knowledge about suppliers, misunderstandings arose during implementation which led to further delay in the clarification process. During the technical audit, the mission found that in one of the subprojects, the contractor did not provide adequate electrical diagrams of the equipments nor did the contractor conduct the training activities as specified in the contract. Despite this lack of compliance to the contract, the full contract amount to the supplier was disbursed. One of the reasons explained for this disbursement was that since the project was already in long delay in disbursement, in the interest of catching up the time, the money was disbursed without demanding the contractor to comply fully its contract. In cases such as this where the suppliers did not perform as stipulated in the contract, the enterprise and the financial agent should take action to enforce the contract. e) Project Preparation Data: Data on production, consumption of ODS and baseline equipment as well as proposed equipment for the project should be prepared with extra care and attention. Clear and concise data at project preparation will help in project implementation and supervision. f) Management Capability of Project Enterprises: Both NEPA and CIB considered this a very important factor in the success of the ODS projects. Management capability includes factors such as who will be the project team leader. In the past, usually chief engineer of the factory becomes project team leader. However, this proved to be ineffective in the sense that the chief engineer does not have the authority to implement the non-engineering aspects of the project which could be crucial to the success of the project. They usually also don't have the marketing  -18- capability which is key to the survival of the new non-ODS product. The Beijing Fire and Aerosol subprojects provided examples of this factor. NEPA felt that attention to the organization of the project team during project proposal stage will be an important aspect that NEPA will review before recommending the project for grant application.  -19- PART n: STATISTICAL TABLES TABLE 1: SUMMARY OF ASSESSMENTS A. Achevenmet of Objetves Subsntal Partal Negligible Not Applicable Macroeconomic policies x Sector policies x Financial Objectives x Institutional development x Physical objectives x Envrnmental objectives x B. Project Sustaiability Likely Unliely Uncertain ODSI x ODS II x C Bank Performance Highly Satisactory Satisfactory Deficient Identification x Preparation asistan x Appal x Supervision x D. Borrower Performance Highly Safactory Satifctoy Deficient Prwpaafion x Implementation x E Assessment of Outcome Highly Satctoy Unsatisfictory Highly Satisfactory Unsatisfcory ODS I x ODS II x  -20 - TABLE 2: RELATED BANK LoANs/CREDITs Year of Loan/Credit Title Purpose Approval Status Third ODS Project To SUpport China's ODS phaseout 1995 Under progam to enable the country to implementDtion phase out ODS ahead or at cumuent schedule Fourth ODS Project To phase out ODS using a sectoral 1997 To be apprach. implemented in eal 1998  - 21 - TABLE 3: PROJECT TIMETABLE Steps in project cycle Date planned Date actual ODS I Identification 6/1/92 Preapprisal 4/22/92 8/17/92 Appraisal 8/92 4/24/93 Negodatons 9/93 10/6/93 Sigping 10/93 11/30/93 Effectiveness 2/94 4/21/94 Proect completion 6/30/97 6/30/97 Grant closing 6/30/97 7/02/97 ODSII Identfication 5/93 4/93 Preappraisal 9/20/93 9/14/93 Apprais 12/93 1211/93 Negobations 5/94 3/14/94 Signing 6/94 6/16/94 Effectiveness 8/94 8/31/94 Project completion 6/30/97 6/30/97 Grant closing 6/30/97 7/14/97  - 22 - TABLE 4: GRANT DISBuRSEMENT: CUMULATIVE ESTIMATE AND AcTuAL ($ milUion) FY93 FY94 FY95 FY96 FY97 FY98 ODS I Appraisal estimate 2.00 4.00 7.00 7.8253 Actul .40 2.772 7.576 7.825 Actual as % ofadjused esimate 20 69 108 100 Date of fimal disbursement 7/2/97 ODSI Appraisal sdmate 1.400 3.400 5.465k Actul 1.334 2.483 4.826 5.0223 Achtu as % ofadjusted esimate 95 73 88 100 Date of fial disbursement 7/14/97 3 Includes US $ 0.9 million from Project Preparation Advance. 4 Includes US $ 0.6 million from Project Preparation Advance. 5 Actual disbursement includes original grant amount ($4.865 mil.) plus PPA ($600,000) and net of a cancelled subproject ($443,100)  -23 - TABLE 5: KEY INDICATORS FOR PROJECT IMPLENT NATION Key implementation inditrs in MOD Target Achtal ODP ODP ODS Phaseout (M ODS I 1. Shanghai Aerosol 6,300 66 2. Tianjin Aermsol 6,300 3000 3. BeijingHalon 1,200 400 4. Zhejiang Hlon 1,200 1,200 5. Zhwjiang Huajiang Plastics Plant 400 400 Total 15,400 5,066 ODS I 1. Liming 0 0 2. Shenyang 0 0 3. Wuxi 0 0 4. Chengde 32 50 5. Dalian 14 30 6. Qingdao 120 232 7. Xinfei 103 250 8. Shangling 103 155 9. Shuangyan 28 63 Total 400 780  - 24 - TABLE 6: PROECT FINANCING ($ million) Appraial etimnate Actual/late estimate Source Grant Counterpart Total Grant* Counterpart Total ODS I Shanghai Aerosols 2.309 2.512 4.821 2.309 2.786 5.095 Tianjin Aerosol 2.770 3.965 6.735 2.770 3.124 5.894 BeijingHalon 0.930 0.250 1.180 0.930 0.458 1.388 ZhejiangHalon 0.730 0.346 1.076 0.730 0.366 1.096 ZhejiangHuajiangPlaslics 0.993 0.284 1.277 0.993 1.193 2.186 Total 7.732 7.357 15.089 7.732 7.927 15.659 ODS II Liming 0.457 0.077 0.534 0.523 0.082 0.605 Shenyang 0.152 0.340 0.492 0.254 0.340 0.594 Wxi 0.264 0.159 0.423 0.317 0.160 0.477 Chengde 0.163 0.026 0.189 0.229 0.018 0.247 Dalian 0.275 0.096 0.371 0.333 0.095 0.428 Qingdao 0.476 0.065 0.541 0.567 0.115 0.682 Xunfei 1.042 0.300 1.342 1.106 2.037 3.143 Shangling 0.958 0.278 1.236 1.000 0.316 1.306 Shuangan 0.485 0.658 1.143 0.575 0.700 1.275 Total 4.272 1.999 6.271 4.904 3.853 8.757 * Actual grant amount included a PPA of $900,000 for ODS I and $600,000 for ODS II which also included contingencies. Appraised Grant amount for ODS II (including PPA of $600,000) $ 4,272,000 Appraised contingency for ODS II 632.000 Total appraised grant for ODS II S 4,904,000 Actual ODS II project grant $ 4,272,000 Actual disbursed contingencies: Liming $ 65,721.72 Shenyang 101,866.91 Wuxi 53,000.00 Chengde 65,731.50 Dalian 58,546.00 Qingdao 91,200.00 Xinfei 64,560.00 Shangling 41,673.87 Shuangyan 89.700. $ 632.000 Total Actual grant for ODS 11 S 4,904,000  - 25 - TABLE 7: BANK RESOURCES: STAFF INPUTS (STAFF WEEKS) FY 1993 1994 1995 1996 1997 1998 Total O)S I Preappraisal 35.8 35.8 Appraal 7.0 18.8 25.8 Negotiations 06 Supervision 5.1 16.5 10.4 8.8 1.3 42.1 Completion 2.6 3.0 5.6 Total 109.3 ODS I Pappaisal 23.8 23.8 Appraisal 14.7 14.7 Negotiations 3.4 3.4 Supeision 0.8 26.2 12.0 10.1 1.3 50.4 Completion 5.7 3.2 8.9 Total 100.8 6 Project negotiated by correspondence.  -26 - ANNEX A: RECIPIENT'S CONTRIBUTION TO THE ICR I. Project Background and Objectives China ratified the Montreal Protocol London Amendment in June 1991, becoming one of the Parties operating under paragraph 1 of Article 5 . The World Bank set up a Ozone Project Trust Fund (OTF) to support financially to the global ODS phaseout activities so as to promote the green and sustainable economic development in accordance with the 91/5 decision of the World Bank Executive Board made on March 14, 1991. The Executive Committee signed an agreement with the World Bank, which became effective from July 9, 1991. According to this agreement, the Executive Committee agreed to provide funds for the OTF, whom became the trustee of the said agreement and decision. The World Bank is the trustee's managing agency. There were five subprojects under the First Ozone Depleting Substance Project in China (ODS I), which was approved in the Ninth Montreal Protocol Executive Committee of Multilateral Fund in March 1993, with World Bank as its international implementing agency in a grant of US$ 7,732,000. The Chinese government and the World Bank signed the Ozone Projects Trust Grant Agreement for ODS I on August 1993. The grant total of the Agreement was US$ 7,825,000, including the domestic implementing agency fee. The ODS phaseout target was 15,400 for five subprojects. The Tenth Montreal Protocol Executive Committee of Multilateral Fund in June 1993 approved the Second Ozone Depleting Substance Project in China (ODS II) which included nine subprojects with the World Bank as its international implementing agency. The ODS II Project aimed at adoption of 50 percent CFC substitute technology. The Ozone Projects Trust Grant Agreement for ODS II was signed between the Chinese government and the World Bank on March 1994. The grant total of the above'Agreement was US$ 5,021,900, including the domestic implementing agency fee. The target ODP was 400 tons for the ODS II Project. II; Implementation Review The five subprojects under ODS I, were: Shanghai Jiale Aerosol Products Plant, Tianjin No. 1 Daily Use Chemistry Plant, Beijing Fire-Fighting Equipment Plant, Zhejiang Fire-Fighting Equipment General Factory and Zhejiang Huajiang Plastic Plant. All these five subprojects have been implemented in accordance with the projects documentation and commissioned.  - 27 - Since this was the first ODS substitution project, all parties involved in implementation were not very familiar with the NO and the Bank project implementing procedures and just established cooperative relationship. This led to the delay of actual project implementations. All five subprojects have achieved their objectives. Zhejiang Huajiang and Zhejiang Fire have already reached the ODS phaseout target of the project. Beijing Fire, Tianjin and Shanghai Aerosol did not meet the target ODP at project completion owing to the reason that a period is needed from trial production to full design output. However, the full CFC target of the later three projects are anticipated to be achieved between 1998 and 2000. Meanwhile, the two aerosol projects have very good indirect influences as the local consumption of ODS in Tianjin region and Shanghai region dropped rapidly both during the project implementation and after the project completion. ODS I phased out 5,066 tons of CFC in 1996 directly. Nme subprojects under ODS II were as below: Liming Chemistry & Industry Research Institute, Shenyang Petrochemical Factory, Wuxi Kezhao, Chengde Commercial Machinery Factory, Shuangyan Refrigerator Factory, Qingdao Haier Refrigerator Factory, Xinfei Refrigerator Factory, Shangling Refrigerator Factory and Dalian Freezer Factory. Among them, Liming, Wuxi and Shenyang were polyol manufacturers. These three subprojects aimed at converting the original production lines to 50 CFC substitute lines by using the 50 CFC substitute technology. However, they did not substitute CFC directly. The rest 4 refrigerator projects and 2 panel projects were converted from the original production lines to 50 percent CFC free. Based on project implementation, all other 8 projects except Shenyang have been completed in conformity with the targets given in the project document. The objective of Shenyang project differed greatly from that given in the project document. Shenyang adopted the most recently technology, changing from the 50 CFC substitute to the project that enabled it to be in compliance with 141b polyol production. This adjustment helped to phase out more ODS than the target given in the project summary. NEPA and the World Bank supported and approved the alteration since this was in line with the principle of MLF. All subprojects under ODS II actually exceeded their design ODP phaseout target by almost 100 percent. The implementations of ODS II projects were proved to be successful. m. NEPA'S Role in the Project NEPA played an very important role in the first two Projects implementation by working closely with the Bank, line ministries, financial and procurement agents and the beneficial-enterprises. NEPA took the following activities through the Project Management Office of the Leading Group for Ozone Layer Protection (PMO): a. to organize relevant ministries to select proper projects according to the Country Programme and the sectors' strategies during project preparations;  -28 - b. cooperate with related ministries, subproject-undertaking enterprises and domestic financial agent in helping the enterprises solve the problems occurred during project implementations; and c. jointly with relevant ministries in organizing project commissions, and supervise the project operation after the commission. PMO developed with the implementation of ODS I and II Projects. At the start of project implementation, PMO stuff were new, inadequate and inexperienced with the Bank project procedures. Despite the hard work of the PMO officers, some problems still occurred in project preparation and implementation as follows: a) confusion of project preparation. One project was once submitted to two international implementing agencies; b) lack of strict supervision and management of procurement during supervising the project implementation; and c) inaction to urge the financial agent and procurement agent to take strong measures when the technology supplier failed to follow the contract. Due to unclear definition about the respective roles and functions, PMO and China Investment Bank (CIB) experienced some difficulty at the first stage of cooperation. Through the efforts done by the Ministry of Finance, NEPA, the World Bank, the relationship between these two partners worked towards friendly. CIB worked hard and made some achievements during project implementation despite the low financial agent fee. The experience learned from ODS I and II Projects implementation is invaluable and has helped a lot during implementing ODS HI Project. China no longer implement ODS HI in the old ways as ODS I and II, but put ODS III in the umbrella project instead, which result in improving the working efficiency and speeding up the project implementation. NEPA realized in project implementation that the formulation and strict enforcement of policies is a very important fictor that linked with the success of project implementation. NEPA will work closely with the line ministries concerned to research, formulate and promulgate policies that practical, encouraging the ODS enterprises to take an active part in the ODS substitute activities at an early time. IV. Cooperation with the World Bank The successful implementation of the ODS I and ODS II Projects demonstrated the China's capability of ODS project implementation. NEPA enjoyed a good cooperative relationship with the World Bank while implementing the Projects. Although some difficulties and problems occurred during implementation, the two parties worked together through friendly discussion and consultation and solved them finally. The World Bank project officers involved in project evaluation and implementing supervise worked hard and efficiently, making important contributions to the successful implementation of the  - 29 - Projects. PMO stuff received training from the seminar held by the Bank, which improved its performance and a better understanding of the Bank project process procedure as well as strengthening its organizational capability. Officers from PMO have learned a great deal through working with the Bank officers, accumulating project managing experience as well as improving the capability of project management.  - 30 - ANNEX B: ICR MISSION'S AIDE MEMOIRE 1. An ICR mission visited Beijing and held meetings with NEPA and CIB officials to discuss the draft ICR for ODS I & II Projects on August 21-22, 1997.' The draft ICR was prepared after the last Bank supervision of the two ODS Projects and a technical audit on the ODS phaseout status of the subprojects in April 1997. The mission reviewed with NEPA and CIB the implementation experience of the two Projects and discussed their ODP phaseout results. 2. There was a consensus between the Bankt mission and the Chinese officials that the two projects achieved varying degrees of success in implementation. A few subprojects did not meet their ODP phaseout target at project completion but are expected to do so between 1998-2000. Reasons for not meeting the targets were discussed. The implementation experience from ODS I and II provided valuable lessons for future operations in ODS activities. 3. Whereas ODS II subprojects exceeded their ODP phaseout target by almost 100 percent, ODS I subprojects achieved only 33 percent of their targets. However, if both the direct and indirect phaseout amounts were considered, ODS I Project reached 90 percent of its target. Although the two aerosol subprojects which accounted for 82 percent of the ODP phaseout target of ODS I did not meet their ODP phaseout by project completion, they are credited with encouraging several local fillers to stop using CFCs. Reason for not meeting their target was partly due to the sharp increase in market competition and partly due to their insufficient marketing efforts to attract smaller fillers. On June 5, 1997 Chinese Government issued a ban on the use of CFCs in aerosols sector to be effective from end December 1997. It is expected that market demand for LPG will increase. This will enable both Tianjin and Shanghai aerosol factories to expand their production and market share of LPG supply to reach smaller fillers as well as daily care product fillers. The fact that the Government was able to issue the ban on the use of CFCs in the aerosol sector should also be credited to the implementation of the three aerosol projects (Tianjin, Shanghai and Guangdong) which have created increased demand on LPG and implicitly prepared the sector for the ban which will be effective by the end of 1997. 4. An updated statistic for CFC consumption (in metric tons) in the aerosol sector was provided to the mission for 1995 and 1996 as follows: 7 Bk mimssion compnsed Mmes. Lily Uy Hale (EASPS) and Naiqm Lu (EACCF) NEPA officials included Mines. Sang Xiaozbi and Zhu Yun, Messrs. Xiong Kang and Hong Yun, CIB officials included Mines. Jiang Shijing and Wu Fuymg8 and Mr. Yang Xiaoqiang.  - 31 - 1995 1996 Reduction amount Tianjin area 3500 940 2560 Shanghai area 4300 1320 2980 Guangdong area 7000 1290 5710 Total reduction 11,250 Total CFC consumption in 1996 amounted to 5,000 mt (of which about 1450 mt was in pharmaceutical), instead of 8200 mt as reported to the June mission. 5. The mission was informed that NEPA has decided for UNDP to prepare the proposed pharmaceutical project discussed with the Bank mission in June 1997. The proposed Fujian aerosol central filling station project was also put on hold. NEPA has suggested to NCLI to prepare an aerosol sector policy paper which would include its plan for CFC phaseout in the sector for submission to the Bank for consideration as a sector phaseout project. NEPA will submit the proposed aerosol paper to the Bank as soon as it is ready. 6. The target halon phaseout amount of 1200 ODP of the Zhejiang Fire Extinguisher Manufacturing Plant was considered achieved upon project completion in 1996 since it has stopped using halon completely by the time of project commissioning. The fact that Zhejiang has not reached its full production capacity of ABC powder fire extinguishers should be dealt with separately. It was reported that new products such as ABC powder has to pass a performance test before it could be mass produced. It took a relatively long time for Zhejiang to get its ABC powder pass the performance test, thus preventing its mass productiion of the powder at an earlier stage. 7. Beijing Fire's ODP phaseout amount was calculated to be 400 mt ODP as follows: The objective of the project for Beijing Fire was to build a production line for ABC powder at 3000 mt per annum. During project preparation, a target ODP of 1200 mt was set for Beijing Fire. Based on actual ABC powder production for one month at 80 mt upon project completion, total actual production would be about one-third of its original design capacity. The phaseout amount was therefore taken as one-third of the original target amount at 400 mt. It is expected that Beijing Fire will reach its target ODP of 1200 mt by 2000. Factors leading to this projected outcome will depend on the successful implementation of ABC powder quality standard currently being designed and discussed by relevant agencies; the improvement of domestic raw materials used to produce ABC powder that would be adopted to the imported equipment at the Beijing Fire; and the marketing effort by the Beijing Fire management. 8. In addition to the lessons discussed in the draft ICR, one important lesson learned from the implementation of ODS I and II is the importance of the management capability of the project enterprises. This has tremendous impact on the success of the project. A few subprojects which did not achieve their ODP target can be traced to the lack of management capability of the enterprise either in slow project implementation or  - 32 - insufficient marketing efforts which jeopardize their sale of non-ODS products. For future projects, in addition to evaluation of the financial viability of the enterprise, NEPA would require an enterprise to organize a project team to be headed by a capable manager from the factory as part of the pre-evaluation of the enterprise capability before recommending the project for submission to EXCOM. 9. Finally, early preparation of environmental summary for the project and obtaining the counterpart commitment fund should be enforced to expedite Bank approval of the project. LUHale NA\ODS\GENERAL\ODS4CRI .doc 01115/9S 11:41 AM