China - Shandong Environment Project

 ICRR 12511 Report Number : ICRR12511 IEG ICR Review Independent Evaluation Group 1. Project Data: Date Posted : 09/26/2006 PROJ ID :P040185 Appraisal Actual Project Name :Shandong Environment Project Costs 202.0 224.4 Project US$M ) (US$M) Country :China Loan/ Loan US$M ) /Credit (US$M) 95.0 91.3 Sector (s):Board: ): US$M ) UD - District heating Cofinancing (US$M) and energy efficiency services (43%), Water supply (30%), General water sanitation and flood protection sector (18%), General industry and trade sector (5%), Sub-national government administration (4%) L/C Number :L4237 FY ) Board Approval (FY) 98 Partners involved : Closing Date 12/31/2003 12/31/2005 Evaluator : Panel Reviewer : Division Manager : Division : Peter W. Whitford Roy Gilbert Alain A. Barbu IEGSG 2. Project Objectives and Components a. Objectives Objectives were stated differently in various documents . This review follows the Loan Agreement (LA) formulation, as it is legally binding: "To assist Shandong [Province] to: (a) strengthen its policies, regulations and institutional arrangements for municipal water, wastewater, and district heating management and environmental pollution control; (b) improve water resource quality and management in the Xiaoqing river basin to allow for the optimal use of water resources for potable supply, industry and agriculture; (c) expand surface water supply to Jinan to prevent further depletion of groundwater aquifers; and, (d) facilitate sustainable management of investments in pollution control and municipally -provided urban environmental services ". In the SAR (para.3.1) and ICR (Section 3.1) , LA sub-objectives (a), (c) and (d) are included, together with a new sub-objective referring to "updating the information database ". A third formulation of sub-objectives is found in the SAR Logframe (para. 3.5 and Annex 9) and in Annex 1 of the ICR. This set specifically mentions "air quality improvements" (which indeed were a major aim of the project ) and "support financially sustainable expansion of urban environmental services ". This review has considered air quality and financial sustainability achievements under sub-objective (d). Project objectives were not revised . b. Components (or Key Conditions in the case of Adjustment Loans ): A. Jinan Water Supply Management (Appraisal Cost: $40.5 million; actual: $58.4 million) Expansion of the water supply system of Jinan, through a trans -basin diversion from the Yellow River, including pump stations, a settlement basin, regulating reservoir (with 12 km of earthen embankments of about 10 m height), a river crossing, transmission pipelines and a highway diversion . B. Jinan Wastewater Management (Appraisal Cost: $26.8 million; actual: $22.9 million) Expansion of the sewerage network of Jinan, through construction of trunk, secondary and link sewers and force mains, pump stations and property connections . C. Weihai District Heating (Appraisal Cost: $35.2 million; actual: $37.0 million) A combined heat and power plant of 144 MW capacity, heat and steam networks, and heat exchanger stations . D. Yantai District Heating (Appraisal Cost: $41.0 million; actual: $44.2 million) A boiler plant of 112 MW capacity, a heat network, and heat exchanger stations . E. Industrial Pollution Control (Appraisal Cost: $10.0 million; actual: $10.0 million) Provision of a fund to support cleaner production and pollution control sub -projects in industry. F. Institutional Development and Training (Appraisal Cost: $3.9 million; actual: $2.8 million) Strengthening of four utility companies and two government agencies, and updating environmental data collection for water quality and management. Other project costs - for land acquisition and resettlement, construction supervision, and administration and project management - totalled $44.6 million at appraisal and $48.8 million actually. The above costs are from Annex 2 of the ICR, where "other project costs" have not been distributed by component, because it allows a comparison with SAR estimates. Component costs in Section 3.3 of the ICR appear to be consistent with these figures . The LA was amended on December 16, 2004 to add further works to Components A, C and D utilizing cost savings of $17 million. c. Comments on Project Cost, Financing, Borrower Contribution, and Dates Project costs appear to have been overestimated at appraisal and the resulting savings (Section 3.4 of the ICR) were used to finance additional works of similar type to those in the original project . Some of these works under Component A were originally planned to be financed by the water utility without Bank support . Apart from this instance, there do not appear to have been problems with counterpart funding, The additional works also caused the loan closing date to be extended by a second year . $1.4 million was cancelled owing to misprocurement . 3. Relevance of Objectives & Design : The project objectives were consistent with the Bank's 1995 CAS and with the priorities of Shandong Province, both in improving the efficiency of municipal services and in meeting a growing demand in China for a cleaner environment, specifically reducing air and water pollution . The objectives remain highly relevant . Specifically, the project was in line with the Xiaoqing River Basin Environmental Action Plan, with respect to water pollution . However, the origin of the district heating components is less clear, although their priority is not . The cities and components appear to have been well chosen and the resulting large and complex project was not an insurmountable challenge for the implementing agencies . Component E was innovative and well -designed. The ICR does not provide sufficient information to judge whether project objectives remain relevant today but this appears likely. Overall relevance is rated High. High Quality at entry was satisfactory, though with some qualifications : environmental safeguards (see Section 7); the lack of a social assessment and /or willingness to pay study; short cut methods for economic analysis and no financial rates of return (section 5); and, performance indicators for which baseline data was not shown in the SAR (section 6). 4. Achievement of Objectives (Efficacy) : Achievement of the specific project objectives (LA version) is assessed as follows: (a) Policies, Regulations and Institutions . Substantial . Achievements include: increasing autonomy for and commercialization of the water supply, wastewater and district heating utilities; a public -private partnership for water supply; increased cost recovery for wastewater; improved environmental conditions (for example, a 30% reduction in discharge of industrial effluent to the Xiaoqing River and reductions of 60 to 85 % in key air pollution indicators, as a result of the project-induced switch from small heating units to district heating ); elimination of coal fired heating sources in areas of Weihai and Yantai served by the project works; introduction of regulatory instruments to reduce industrial pollution; and, successful reduction of industrial pollution in 35 enterprises, through Component E . Shortcomings include: continued subsidies to the water and wastewater utilities; failure to enforce a ban on self-supply from groundwater by industries and thus only partial achievement of the goal of arresting depletion of that resource (about 70% of the appraisal target). (b) Water Resource Management in the Xiaoqing River Basin . Substantial . The Province now has a comprehensive policy for pollution prevention and control on the basin and has introduced regulations on the phased closure of smaller paper mills; tighter regulation of other paper mills, relocation of certain industries; and, standards for wastewater recycling. Implementation of these measures appears to be proceeding satisfactorily, as shown by a 50% reduction in pollution of the Daming Lake, though Annex 1D of the ICR is somewhat vague as to the quantitative achievements of the "Main Polluters" Environmental Action Plans" required under the LA for three major industries . High A reliable and secure surface water source, meeting the appraisal target (c) Surface Water Supply to Jinan . High. of 440,000 m3 per day, is now available to meet demand until 2020. (d) Sustainable Management of Investments . Substantial . Cost recovery is satisfactory for the heating utilities but problems remain for the Jinan water and wastewater companies, for the reasons noted under (a). Overall, the efficacy of the project is rated Substantial . 5. Efficiency : Economic rates of return were calculated at appraisal for Components A, C and D only . For Component B, the ICR states that data were not readily available . Economic evaluation of Component E is not mentioned in either the SAR or ICR. For A, the appraisal estimate of 18% is reduced in the ICR to a still satisfactory 14%, while the district heating components are still expected to show very high rates of return, from 31% to 70% depending on assumptions on environmental benefits. Annex 3 of the ICR does not provide enough detail to allow the ERR calculations to be checked. The Borrower's ICR (Annex 9) states that "there are insufficient data to estimate the NPVs and ERRs for the five components at project completion ." Because of the inadequacy of the data reviewed, project efficiency is Non -Evaluable . rated Non- 6. M&E Design, Implementation, & Utilization: For monitoring project outcomes, the SAR specified an appropriate limited set of performance indicators and assigned responsibility for their measurement and reporting . However, a weakness was that baseline values were to be finalized only at the project launch workshop . Annex 1 of the ICR present time series data and graphs for the performance indicators and represents best practice for a project of this kind . These data should be of great benefit in planning the next stages of investment in Shandong or in any other province . 7. Other (Safeguards, Fiduciary, Unintended Impacts--Positive & Negative): Safeguards. As a major infrastructure project with substantial resettlement (originally estimated at 2,000 people to be relocated plus 5,000 with livelihoods affected, but actually over 16,000 people - mostly, one assumes, from the area of the reservoir under Part A), the project was appropriately classified as 'A' for the purposes of OD 4.01, which was in force at the time of appraisal. Environmental and Resettlement Action Plans (under OD 4.12) were prepared for all relevant project components (including industrial sub-projects under Component E, the three "Main Polluters", and the additional works funded by savings - not available for review) and their implementation mandated under the LA . The resettlement plans appear comprehensive and were satisfactorily carried out, though a dispute in one case held up implementation of a sewer line for two years . The Environmental Action Plan (EAP) for Components A, B, C was less satisfactory. There is no evidence of a scoping phase and the following issues were not covered : impacts of trans-basin diversions on regional water resources; downstream impacts; dam safety; operation of the wastewater treatment plant (previously built but to become operational as a result of the project ); cooling water supply for the heating stations; and, worker health and safety . There is no evidence in the SAR, EAP or ICR that the draft EA was disclosed in the project area and public consultation appears to have been confined to a written questionnaire . However, the region has since informed IEG that all consultation and disclosure requirements were met . Although the reservoir under Component A is classified as a "small dam", OP 4.37 still requires "generic safety measures designed by qualified engineers ", and the documents reviewed do not show evidence of that . The ICR has several references to the effect that adequate EA mitigation measures were designed and implemented but does not provide details. No unforeseen impacts are mentioned . Fiduciary Satisfactory . The ICR mentions one case of misprocurement and some problems with contract administration . Financial management systems are said to have improved . 8. Ratings : ICR ICR Review Reason for Disagreement /Comments Outcome : Satisfactory Satisfactory This large and complex infrastructure project (with an innovative industrial pollution fund) was carried out close to budget, with an extension of time to allow additional works to be funded by savings . ERRs were good to excellent. However, further efforts are needed on sewer tariffs and enforcing the ban on self -supply. Institutional Dev .: Modest Modest Sustainability : Likely Likely Bank Performance : Satisfactory Satisfactory However, compliance with environmental safeguard policies was only Marginally  Satisfactory. Borrower Perf .: Satisfactory Satisfactory Quality of ICR : Satisfactory 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: 1. China's rapid progress in the last decade in recognizing the size and health impact of its many environmental problems and in acting vigorously to address them, provides a useful model for other rapidly developing economies . 2. As a result of a firm approach by the Bank, involuntary resettlement issues in this case were handled in full compliance with Bank policies. 3. Setting up new institutions, such as utility companies, and bringing them to full self -sufficiency typically takes longer than a single project. 4. The Borrower reports that the project experience was valuable in accessing international experience in project management and institutional development . 10. Assessment Recommended? Yes No Why? As a contribution to the IEG study "Assessing the Effectiveness of World Bank Group Assistance fro the Environment", an audit could assess whether project achievements were in fact sustained and deepened . 11. Comments on Quality of ICR: The ICR is informative, well balanced and persuasively argued . Annex 1 (Log Frame) is best practice and the lessons are well drawn. However, the ICR could have tried to resolve the confusion over project objectives and reviewed safeguards performance more critically .