China - Yunnan Environment Project

 ICRR 12219 Report Number : ICRR12219 ICR Review Operations Evaluation Department 1. Project Data: Date Posted : 09/27/2005 PROJ ID :P003599 Appraisal Actual Project Name :Yunnan Environment Project Project Costs 307.6 234 US$M ) (US$M) Country :China Loan /Credit (US$M) Loan/ US$M ) 150 106 Sector (s):Sub-national ): government US$M ) Yunnan Government: Yunnan Government: Cofinancing (US$M) administration; General 165.6; Industrial 125.6; Industrial water sanitation and flood firms: 4.3 firms: 2.3 protection sector; Petrochemicals and fertilizers L/C Number :C2892; L4055 FY ) Board Approval (FY) 96 Partners involved : Closing Date 12/31/2002 12/31/2004 Evaluator : Panel Reviewer : Group Manager : Group : Ashwin Digambar Fernando Manibog Alain A. Barbu OEDSG Bhouraskar 2. Project Objectives and Components a. Objectives To provide a sustainable environmental framework for the long term economic and social development of Yunnan Province, while providing a conducive foundation for industrial growth . The specific objectives are to : (a) strengthen policies, regulations and institutional arrangements for pollution control, and municipal water, wastewater, solid waste and nightsoil management; (b) support the improvement of the lakes environment in Gejiu and Kunming in order to allow the waters to be used for potable supply or other uses; (c) facilitate complementary sustainable investments in pollution control and municipally-provided environmental services; and (d) introduce a comprehensive approach to planning, prioritization, management, and financing of environmental infrastructure investments . b. Components (or Key Conditions in the case of Adjustment Loans ): The project consisted of 5 components: i) Lake Dianchi Basin Water Quality Recovery (U$167.01million at appraisal; US$157.21actual) to support the Dianchi Environmental Action Plan (DEAP) for improved control of pollution causing eutrophication in the lake basin, including through improved wastewater collection and treatment, municipal solid waste and nightsoil management; and strengthened water basin management . Investments in water-related infrastructure would increase Kunming's water supply; (ii) Industrial Pollution Control (US$30.08 million at appraisal; US$8.19 actual) to abate phosphorus loads in lake from 2 primary polluting enterprises; and provide abatement support to other enterprises through an Environmental Pollution Control Subloans (EPCSL) Facility; iii) Provincial Urban Environmental Services (US$39.43 million at appraisal; US$55.30 actual) to protect Gejiu Lake and other water bodies through wastewater and stormwater collection and treatment, and solid waste management; and water-supply expansion in Qujing; iv) Environmental and Water Quality Monitoring (US$5.06 million at appraisal; US$6.15 actual) to upgrade and modemize environmental management and water quality information and monitoring systems; and v) Institutional Development, Training and Construction Supervision (US$15.66 million at appraisal; US$7.0 actual) to strengthen provincial, municipal, project, and financial management; provide utility operations training; update environmental action plans and feasibility studies; and prepare future projects . Revised Components Due to savings that resulted from lower -than-expected costs and other factors, the project was restructured at Mid-term Review (1999) to include 3 additional components: vi) Solid waste management in Shilin Autonomous County to benefit primarily the popular attraction of the Stone Forest area; vii) Wastewater collection and treatment in Mengzi; and viii) Wastewater collection and treatment in Xuanwei . 5 subcomponents were cancelled due, generally, to high costs or lack of counterpart funding . c. Comments on Project Cost, Financing, Borrower Contribution, and Dates Project Cost The project cost at appraisal includes physical and price contingencies totaling US$ 50.34 million. Total estimated financing required, including interest during construction, was US$ 319.88 million. The actual project cost was US$234 million, only 76% of the estimated cost. After restructuring, US$19 million of the loan was cancelled and, since after closing US$25 million remained undisbursed, this amount was also cancelled . The ICR states that the reasons for the savings were overestimation of procurement contract costs and elimination of several components from the project, but does not provide any information on the cancelled components . Financing At appraisal, US$125 million of the loan/credit amount was in the form of a loan, with the remaining US$ 25 million as IDA credit (SDR US$17.4 million). The actual loan/credit amount was less than at appraisal because of the lower project cost. Borrower Contribution For the same reason, the Borrower's contribution of US$ 125 million was less than the est imated amount of US$165. Dates The project closed 2 years later than expected, after 2 extensions. According to the Region, the assessment of the borrower agencies' institutional capacity at start -up was over-optimistic, and the lack of capacity led to implementation delays. 3. Relevance of Objectives & Design : The project was highly relevant to the CAS goals of improving water quality and natural resource management . However, rural and small-town (non-point source) pollution could have figured more prominently in the project . Regarding the results framework, there is a lack of clarity regarding some of the objectives . According to the SAR and the ICR, an important project goal was to have municipal agencies transformed into financially autonomous utilities, with improved cost recovery . But whether this goal falls under Objective (a) or (c) is not clear from either of these documents. The targets framework for improved lake quality is sound, with specific annual targets . Yet, it is deficient for objective (a), as the monitoring indicators in the SAR are for municipal environmental service coverage, not for policies, regulations and institutional arrangements . The project was adequately designed, with physical infrastructure investments comp lemented by improved cost-recovery, policies, monitoring, and training . The causal chain between Bank lending and the intended outcomes was also sound . However, as the ICR also notes, the project was too ambitious, consisting of several physical infrastructure subcomponents . A focus on the key problems would have most likely led to greater success . 4. Achievement of Objectives (Efficacy) : Overall, while most of the targets for infrastructure were met , according to data in the ICR water quality levels in Lakes Dianchi and Gejiu were at the same low levels at project-end as they were when the project became effective . However, because industrial pollution of the lakes has been largely arrested , water quality has improved to a degree and may improve further in the future . (a) Strengthen policies, regulations and institutional arrangements for pollution control, and municipal water, wastewater, solid waste and nightsoil management Rating: Modest. While the ICR discussed the partial cost-recovery of municipal environmental agencies, it provides little information on what policies, regulations and arrangements were developed for water basin management and safeguarding long -term water quality. According to the SAR, the project was to address the problem of low pollution fee levels and collection rates through enhanced enforcement and collection, but this was not discussed in the ICR . It also states that training and equipment would be provided to municipal environmental protection bureaus for improved monitoring and regulatory effectiveness . Stated simply is that training was achieved, and solid waste recycling and waste minimization measures have been introduced. The meager information provided does not support a rating of Substantial . (b) Support the improvement of the lakes environment in Gejiu and Kunming in order to allow the waters to be used for potable supply or other uses Rating: Substantial. The major Kunming wastewater subproject was delayed due to a need for redesign and slow counterpart funding . However, wastewater treatment infrastructure (WTI) to handle about 95% of the city's wastewater was constructed, thus reducing a main source Lake Dianchi's pollution . The system's effluents meet national standards . With the added water treatment infrastructure, Kunming can provide 100% of its residents with potable water (from a baseline of 85%). Construction of 2 landfills and stations now prevent untreated run-off and solid waste dumping into the Lake . In Gejiu, WTI was built and effluents meet national standards . Gejiu's sewer system was completed late due to flooding. To address flooding threats, a sewer and flood control system was designed . In Qujing, a water treatment plant was built and the city can now provide water to 100% of its residents. Wastewater treatment and the city's first solid waste landfill were established, though the treatment process for the former does not meet the State's secondary standards (as it was not required to at appraisal ) because these standards were raised during implementation. Under the small towns wastewater and rural sanitation subcomponents, additional plants were built and pollutant treatment benefits were demonstrated .  In-house WTI was built in the 2 main polluting fertilizer plants. However, to meet the government's 5/1/99 deadline for reducing industrial pollutants, Kunming Chemical dropped out of the project and used its own funds for the WTI and converting to profit -enhancing technologies because counterpart funding was delayed . Lacking these funds, Kunyang Phosphate could not install the profit -enhancing technologies and this activity was cancelled . Despite the pollution control, which included WTI removal of 95% of the phosphorus entering Lake Dianchi (surpassing the target of 60%), according to the "actual/latest estimate" data in Annex 1 of the ICR lakewater quality at project-end (Class V) did not meet the target (Class III). The Kunming sewer system's late construction probably accounted in part for this, and now that industrial pollution has been largely arrested Lake Dianchi water quality may begin to improve. Gejiu Lake water quality remained relatively low at project-end (Class IV), but bird and aquatic life returned, and recent reports show that commercial fishing is now possible . (c) Facilitate complementary sustainable investments in pollution control and municipally -provided environmental services Rating: Modest. The ICR states that investments in municipal environmental services exceeded SAR expectations, but, as mentioned in Sec . 3, the meaning of and rationale for "complementary investments" is unclear. The indicator for this objective is percentage completion of the DEAP, but the ICR does not provide any information on the achievement of the DEAP, or on the target and actual investment figures . Full tariff adjustments for cost-recovery of water, wastewater and solid waste services were not made by project-end. The government was to convert 3 municipal agencies in Kunming, Gejiu and Qujing into autonomous enterprises but the process, including the valuation and transfer of assets, took several years to complete . Some utilities (in Qujing and Xuanwei) lacked the autonomy to control their financial performance, as they were not completely converted from departments to utilities . These outcomes were due to the government not having met the covenants for prompt creation of autonomous enterprises and full cost -recovery through tariff increases . The Pollution Control Subloans Facility, designed to provide funds for 7 small industrial enterprises in Yunnan, was uncompetitive relative to other local lending sources, and largely ineffective . (d) Introduce a comprehensive approach to planning, prioritization, management, and financing of environmental infrastructure investments Rating: Substantial. The ICR states that the project helped develop a long -term plan for environmental improvement, and equipped provincial agencies with the vision and tools to undertake planning and propose priority interventions . Yet even brief information on what constitutes this environmental plan is lacking . The ICR does not explain why only about half of the funding was spent to train the executing provincial and city agencies for their project responsibilities, including planning and future project preparation, and why the training was delayed . According to the Region, difficulties existed because beneficiary project units and utilities had insufficient capacity; high staff turnover rates made the absorption of large amounts of training problematic; and local staff were insufficiently involved in project preparation to fully appreciate what kind of training was needed . The delays that occurred resulted in weak implementing agency and subproject management, and significant implementation delays . Once training was conducted, it improved the agencies' abilities to manage subprojects . The involvement of 16 implementing agencies in the end made project management difficult . Additonal components: Rating: Satisfactory. A solid waste collection system and landfill were created for Shilin, and WTI was constructed in Mengzi and Xuanwei . The three components met their capacity targets . 5. Efficiency : As the ICR states, ex-ante and ex-post ERRs were not calculated for the project overall or for most of the subprojects because, it was believed that future benefits, such as on health, amenity and production, were difficult to quantify . For investments to improve Lake Dianchi's water quality, the appraisal compared these with the costs of a "do nothing" scenario, which would have involved increased treatment of the lake's water (since it is a water source) or replacing it with distant sources . This approach was acceptable to economically justify the component . The ICR, however, does not provide the estimated cost calculated for the "do nothing" scenario of and compare it to the actual cost of the investment. The ICR should have provided in Sec. 4.3 on the NPV and ERR the two cost figures so that the component's cost-effectiveness could be assessed . Given the delay in WTI and landfill structure completion, and the minimal improvement in lakewater quality that thus occurred, the cost -effectiveness of the investments achieved was less than at appraisal. For the proposed investments in Gejiu and Qujing, the 3 additional components in Shilin, Mengzi and Xuanwei, and the solid waste subcomponent in Kunming, alternative design options were analyzed to identify the least -cost method. Although the ICR does not make the estimated and actual costs of the 3 additional components available, making it is difficult to assess their efficiency, it should be noted that the Mengzi and Xuanwei sewerage systems were completed later than expected . For the Kunming water supply subcomponent, the appraisal compared the average economic incremental costs of the new supply with consumer willingness to pay for the supply . Since both values were nearly the same, it was presumed the NPV would be positive . Precise ex-ante or ex-post NPVs were not calculated because information on the shape of the demand curve, which would have been needed, was not available . Given that water tariffs do not yet cover costs, the actual cost -effectiveness is likely to be less than the level at appraisal . ERRs of 24% and 36% were estimated for the fertilizer plants, Kunyang Phosphate and Kunming Chemical, respectively. Since the latter dropped out, the pollution reduction and increased profitability benefits it achieved cannot be attributed to the project . As Kunyang Phosphate built only the WTI, its ERR was lower than estimated . Why an ex-post ERR for this plant was not conducted in unclear . No ex-ante or ex-post efficiency analysis for the pollution control subloan facility was done, but, based on its lack of success, the returns to the facility were low . Other China environment projects have similarly not provided ERR figures for the project overall, or for some components due to a lack of data, and have utilized a least -cost approach to assessing different alternatives . However, this Yunnan ICR lacks any kind of information to assess the efficiency of the project's components . The ICR should have at least provided the component cost figures at appraisal and project close, and the estimated and actual costs per unit of benefit achieved . As the ICR Guidelines state, "if an NPV or ERR was not calculated, the ICR analyses the project using a cost -effectiveness criterion to determine whether the project represented the expected least-cost solution to attain identified and measurable benefits by either an analysis of cost per unit of input or cost per unit of output. Whether benefits are measured in monetary or other terms, flows are adjusted to reflect real use of resources..." 6. M&E Design, Implementation, & Utilization: In the project's design, indicators exist to monitor and evaluate the project's impact on Lake Dianchi's water quality, along with precise annual targets for phosphorus reduction . Annual targets for municipal service tariff adjustments are also present. However, the indicators to assess progress in strengthening policies and regulations for pollution control are inappropriate, as they are more for measuring the coverage of municipal environmental service systems . Consequently, it appears that no proper monitoring of policy and regulatory development was done . The indicator for Objective (c), to assess whether complementary sustainable investments were made, lacks precision and clarity, as it is "percent achievement of the DEAP ". The project included a component for supplying the local agencies with the necessary water quality monitoring infrastructure and equipment, and management strengthening, so that M&E of the project's impact on Lake Dianchi could be done. The SAR cites the lake's water quality, specifically its phosphorus content, as the primary indicator of the project's environmental impacts, and gives milligrams per liter of phosphorus as a water quality indicator for monitoring. The ICR, however, does not discuss the collection of data . More seriously, the ICR provides no information on Lake Dianchi's phosporus content at project -end. Data for several other important indicators, relating to complementary investments, operational performance, and institutional development, which according to the SAR were to be used in project M&E, is also absent . 7. Other (Safeguards, Fiduciary, Unintended Impacts--Positive & Negative): The Resettlement Action Plan was implemented satisfactorily . A local university team assessed the resettlement and land acquisition activities and concluded that the plan was properly followed . This Category A project complied fully with the environmental assessment requirement . In 1999, the QAG review found that all relevant safeguard policies had been practiced. A positive side-effect of the project was the creation of over 280 permanent jobs in the public utility companies and over 10,000 temporary jobs during infrastructure construction . 8. Ratings : ICR IEG Review Reason for Disagreement /Comments Outcome : Satisfactory Moderately Satisfactory The outcome is rated "Moderately Satisfactory" (a rating which does not exist on the ICR's 4-point scale). Efficiency and relevance are rated Substantial. However, efficacy is rated Modest for the following reasons : cost-recovery and autonomy for municipal agencies was not achieved; water quality in Lakes Dianchi and Gejiu was still poor at project-end (but will likely improve in the latter in the future after the late completion of Kunming's WTI); the industrial pollution control component (including the subloans facility ) was not achieved; and comprehensive planning and management of investments was modest. Additionally, information on the achievement of Objective (a) is lacking. OED's 6-point scale requires a rating of Moderately Unsatisfactory for projects of this type. Institutional Dev .: Modest Modest Sustainability : Likely Likely But only marginally so, as tariff adjustments have not been completed to allow the utilities to operate on a  cost-recovery basis, and some of the utilities lack financial autonomy . However, the government does appear to support sound utility management and increased investments, and is gradually proceeding with the tariff increases while it considers their social and economic impacts. Bank Performance : Satisfactory Satisfactory Quality-at-Entry was weak though in terms of formulation of the objectives, M&E design, cost-effectiveness analysis, and assessment of Borrower capacity . Supervision suffered, as there were 4 TM's during the project's life and mission resources were at times inadequate . Also, the expectation that the government would promptly create autonomous institutions for environmental services and initiate full cost-recovery was perhaps unrealistic, even with the use of legal covenants, given China's political economy. Borrower Perf .: Satisfactory Satisfactory In addition to aspects of Borrower Performance under under "Sustainability" and "Bank Performance", delays in counterpart funding led to the late completion or abandonment of subcomponents. Quality of ICR : Unsatisfactory NOTES: NOTES - When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006. - ICR rating values flagged with ' * ' don't comply with OP/BP 13.55, but are listed for completeness . 9. Lessons: The Bank needs to consider providing technical assistance, limiting the number of components and using programmatic lending instruments for projects to be implemented by agencies that lack capacity and have little experience with the Bank. Procurement processing in the field can lead to more prompt reviews, and improved communication with and support for project implementing agencies . As long as the Borrower supports full cost recovery for municipal environmental services, the Bank may consider gradual instead of substantial tariff increases, to done in parallel with the progress being made in constructing and commissioning the service -providing infrastructure. 10. Assessment Recommended? Yes No Why? To verify the ratings. An assessment would also (1) determine what policy and regulatory actions were undertaken for pollution control ; and (2) explain why the move towards cost -recovery and financial autonomy for municipal environmental service providers was problematic for the Borrower in part by looking at the nature of China's sustainable development a genda and its priorities. The findings of the assessment on this issue might guide future environmental projects in China . 11. Comments on Quality of ICR: The ICR is rated Unsatisfactory for the following reasons : A lack of information on the activities implemented for long-term basin management and water quality under Objective (a), and their achievements. No information on Lake Dianchi's phosphorus content, which was regarded as the primary indicator of the project's environmental impact. An analysis of whether the project represented the expected least -cost solution was not made available . Given that some subcomponents were delayed in completion and tariff adjustments were not fully made, Sec . 4.3 should have reassessed the efficiency with which they achieved their benefits . For the fertilizer plant that remained in the project, the ERR should have been recalculated . Under "Revised Components", the ICR does not mention all of the various sub-components cancelled or added. Only the Borrower's Report discusses all the cancellations.