China - Beijing Environmental Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No.: 20670-CHA CH-PE-3564 IMPLEMENTATION COMPLETION REPORT CHINA BEIJING ENVIRONMENTAL PROJECT (LOAN 3415-CHA/CREDIT 2312-CHA) June 30, 2000 Urban Development Sector Unit China Country Management Unit East Asia and Pacific Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Name = Renminbi (RMB) Currency Unit = Yuan (Y) 1991 $1 = Y5.28 1992 $1=Y5.43 1993 $1 = Y5.73 1994 $1 = Y5.80 1995 $1 = Y8.46 1996 $1 = Y8.32 1997 $1 = Y8.29 1998 $1 = Y8.28 1999 $1 = Y8.28 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS ADB - Asian Development Bank BDHC - Beijing District Heating Company BDC - Beijing Drainage Company BEMPS - Beijing Environmental Master Plan Studies BEP2 - Second Beijing Environment Project (FY2000) BEPO - Beijing Environmental Project Office BMEB - Beijing Municipal Engineering Bureau BMEPB - Beijing Municipal Engineering Bureau BMFB - Beijing Municipal Finance Bureau BMG - Beijing Municipal Government ICB - International Competitive Bidding ICR - Implementation Completion Report IPC - Industrial Pollution Control IRR - Internal Rate of Return JGF - Japan Grant Facility RAP - Resettlement Action Plan SAR - Staff Appraisal Report WWTP - Wastewater Treatment Plant Vice President Jemal-ud-din Kassum, EAPVP Sector Director Keshav Varma, EASUR Country Director Yukon Huang, EACCF Task Manager Songsu Choi, EASUR  FOR OFFICIAL USE ONLY CONTENTS CONTENTS ......................................................... I PREFACE ........................................................ III EVALUATION SUMMARY .........................................................V PART I: PROJECT IMPLEMENTATION ASSESSMENT ..................................1 A. Project Objectives and Description ........................................................l 1 B. Achievement of Project Objectives ......................................................... 4 C. Implementation Record and Major Factors Affecting the Project ................7 D. Project Sustainability ...............9.........................................9 E. Bank Performance ........................................................ 10 F. Borrower Performance ........................................................ 11 G. Assessment of Outcome ........................................................ 13 H. Future Operation ........................................................ 13 Table 1: Summary of Assessments ........................................................ 15 Table 2: Related Bank Loans/Credits ........................................................ 16 Table 3: Project Timetable ........................................................ 16 Table 4: Loan/Credit Disbursement: Cumulative Estimate and Actual .......... 16 Table 5: Key Indicators for Project Implementation ....................................... 17 Table 6: Key Indicators For Project Operations .............................................. 17 Table 7: Studies included in Project ........................................................ 18 Table 8a: Project Costs ........................................................ 19 Table 8b: Project Costs ........................................................ 19 Table 8c: Project Financing ........................................................ 19 Table 9: Economic Costs and Benefits ........................................................ 20 Table 10: Status of Legal Covenants ........................................................ 21 Table 11: Compliance with Operational Manual Statements .......................... 22 Table 12: Bank Resources: Staff Inputs (SWs/$000s) ................................... 22 Table 13: Bank Resources: Missions ........................................................ 23 Table 14: Physical Results of Industrial Pollution Control Component ......... 24 ANNEX A: SUMMARY OF BORROWER'S CONTRIBUTION TO THE ICR ........................................................ 25 ANNEX B: ICR MISSION'S AIDE MEMOIRE ................................................... 32 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.  11
I .1 ...  - 111 - IMPLEMENTATION COMPLETION REPORT CHINA BEIJING ENVIRONMENTAL PROJECT (LOAN 3415-CHA/CREDIT 2312-CHA) PREFACE This is the Implementation Completion Report (ICR) for the Beijing Environmental Project in the People's Republic of China, for which Loan 3415-CHA in the amount of US$45 million equivalent and Credit 2312-CHA in the amount of SDR 60.1 million (US$80 million equivalent) were approved on November 19, 1991 and made effective on March 2, 1992. Full amount of the loan and credit was on-lent to the Beijing Municipality. The loan and credit were closed on June 30, 1999, two years after the original closing date of June 30, 1997. The final disbursement took place on October 8, 1999 and brought the total disbursement of the loan to US$35,462,679 and total disbursement of credit to SDR 59,128,327. The project was also supported by a Japan Grant Facility, TF 025230, in the amount of Full amount of Yen 225.6 million under an agreement dated December 1, 1991. The grant financed a large part of the master plan studies and associated equipment. The Grant was fully disbursed by November 1998. The ICR was prepared by Songsu Choi, George Plant, and Joanne Nickerson in the Urban Development Sector Unit of the East Asia and Pacific Region (EASUR), and was reviewed by Mr. Keshav Varma, Director, EASUR. Preparation of this ICR was begun during the Bank's final supervision mission in November 1998, and the ICR mission visited Beijing in May 1999. The ICR is based on findings of these missions, materials in the project file, the beneficiary's contributions and comments. The beneficiary, Beijing Municipality, provided an Operations Report whose summary is included as Annex A to the ICR, and also extensive comments that have been incorporated in the ICR.   - v - IMPLEMENTATION COMPLETION REPORT CHINA BEIJING ENVIRONMENTAL PROJECT (LOAN 3415-CHAICREDIT 2312-CHA) EVALUATION SUMMARY Background 1. During the 1980s, the Government of China stepped up efforts to reverse the environmental degradation that resulted from the past industrialization drives and to minimize additional environmental strains from urban and industrial growths that were accelerating then. These measures included a set of new environmental laws and standards, requiring, for example, environmental assessment of major projects. Direct investments by the government also played a major part, not only for normal public services but also for energy and industrial sectors. The government allocated a large part of the financial resources of its own as well as the banking system to enterprises for industrial retooling, which usually resulted in cleaner production, as well as pollution control facilities that it required. In short, China's enviromnental protection system until recently can be characterized by a close blend of regulatory actions and financial supports by the government. Most of these actions have been carried out by local governments, under the general framework provided by the national laws and guidelines. 2. Beijing Municipal Government (BMG) has been among the most active in China in environmental protection and improvement partly due to its status as the national capital but mainly due to the city's semi-arid climate that heightens the impact of air and water pollution. The project was the first of the projects addressing a broad array of urban environmental issues supported by the Bank group. It was followed by many similar projects in China, and a Second Beijing Environment Project approved by the Board in June 2000. Project Objectives and Components 3. The objectives of the project were (i) to assist BMG to improve its environmental planning and management capabilities, and (ii) to plan and carry out specific pollution abatement efforts for improving environmental conditions in the city. The project was comprised of the following components, in the order of decreasing cost: district heating, industrial pollution control, sewerage, solid waste management, technical assistance and training for policy and institutional development, and hazardous waste management. 4. The project closely followed BMG's environmental priorities at the time of appraisal, financing important parts of existing investment programs of BMG bureaus. Naturally, therefore, the borrower's ownership of the project was strong. The sectoral  - vi - plans themselves, on the other hand, were undergoing major evolution along with the rapid transition of the overall economy. The resulting uncertainties in the strategic and sectoral frameworks were not amenable for quick and adequate resolution during project preparation, especially given the range of sectors and issues involved, and given the fact that this was the first Bank-financed project of the kind in China. In view of this, the project appropriately made it the main project objective to improve the environmental planning and management. The objective was supported by technical assistance, training, and equipment for sector agencies, which were again derived largely from their existing plans, as well as financial and institutional action plans for heating and sewerage utilities. The main component to improve the environmental planning was a set of planning studies for water, air, and solid waste sectors. In addition, the preparation and implementation of the physical investment components were to serve as good practice models. 5. The project's effectiveness and limitations largely stemmed from these contexts. By involving diverse components, the project helped BMG and the Bank to address important environmental issues across sectoral boundaries and learn from the experience. This on the other hand made the project complex since the components remained largely disparate technically and institutionally, despite apparent attempts to integrate them with a strong focus on policy, institutions, and planning. However, implementation risks commonly associated with complexity were mitigated by strong competence and commitment of implementing agencies. The more important drawback of the broad project scope was that it did not allow the Bank to provide critical in-depth review and assistance necessary for major technical and policy advances. It is doubtful, however, if this would have been possible with the country-sector knowledge available at the time. Implementation Experience and Results 6. The project achieved most of its target outputs with some delays and minor shortfalls and the resulting assets have been utilized well, as reviewed below by component. Nevertheless, the city's overall environmental conditions did not improve since the pollution abatement under the project, significant as it was, was overwhelmed by the increases in pollution resulting from the rapid growth of the city's population and economy. This confinns the importance of the project's main stated objective - improving BMG's environmental planning and management framneworks. These frameworks underwent significant improvements and structural changes during the project period. The project made a substantial contribution to this change, but it is difficult to evaluate the contribution precisely, again in the overarching transition of overall institutional and economic systems including the environmental management systems. 7. The project experienced a delay of two years but it was mainly due to actions for good purposes: suspension of a part of the district heating system construction pending tariff increases, delay in the environmental master plan studies in order to ensure full participation of sector agencies, and a delay in sewer construction to ensure completion of satisfactory resettlement.  - vii - 8. District Heating. The project financed heat transmission pipelines from a cogeneration plant, built before the project, and a peak heat plant. These extended the coverage of the integrated municipal heating system from 17 million m2 of building floor space to an additional 15 million m2 serving some 1.2 million people, and replaced some 1050 scattered coal-fired boilers. The economic IRR is estimated to be about 13% p.a., compared with the appraisal estimate of 10.7%, mainly due to the savings in fuel consumption and operating labor, whose costs increased more than projected. Low heating and steam tariffs and the consequent non-compliance with the financial covenants were the major issue for the project. However, the tariffs were eventually raised by over 100%, bringing the district heating company to financial health and setting a good example for the country. The component also supported various measures to improve the efficiency of the district heating system. Nevertheless, the experience under the project revealed the limitation of district heating in terms of energy, pollution control, and institutional efficiencies and indicated that an optimal solution is likely to be smaller, market-based operations. 9. Industrial Pollution Control. The project financed 10 industrial pollution control subprojects for replacement of polluting production lines with cleaner ones, relocation of polluting factories, and installation of waste treatment facilities. In all cases, the new facilities have enabled the formerly heavy polluters to comply with the environmental regulations. (See table 14 for a summary of the subproject achievements, and Borrower's Operational plan for details). The component, however, presents a major detraction from the project's sustainability for three reasons. First, at least three of the subproject facilities are currently unused or underutilized for insufficient demand for the specific product lines or for the borrowing enterprise as a whole. Second, these as well as other four subloans are in serious arrears, putting a heavy fiscal burden for BMG. Third, even without these financial problems, cost-effectiveness of such publicly-sponsored industrial credits is low in terms of pollution control efficacy per public investment, as is the demonstration effect. 10. Wastewater. The project supported the construction of 25.3 kilometers of trunk sewers and interceptors, as well as procurement of maintenance and monitoring equipment. These large achieved the objectives of protecting two main urban streams and a source of drinking water, and conveying wastewater to the city's main wastewater treatment plant. Less sewers were built than the appraisal target, however, because of cost increases and realignments, both mainly due to resettlement requirements that turned out far more expensive and stringent than originally estimated. The cost of civil works also increased more than general inflation. As a result, the actual IRR is estimated to be lower than the appraisal estimates: about 8% for sewerage works in the south and 21% for the northwest, compared with the appraisal estimates of 10% and 28% respectively. 11. Under the project agreement, BMG established a Beijing Drainage Company (BDC) to operate a part of sewerage and drainage service, in place of a Division of the Beijing Municipal Engineering Bureau (BMEB). The Company initially was only a pro forma corporate entity lacking financial and operational autonomy. In the final stage of  - viii - the project, however, BMG increased sewerage tariffs significantly to cover full operating costs and also increased the Company's business authority and autonomy, as a part of the broad restructuring of the governmental organizations and public service pricing, and partly as a result of discussions for the Second Beijing Environment Project (BEP2). The project also financed equipment for river-course cleaning, sewer maintenance equipment and wastewater monitoring instruments --all of which are being used as intended. 12. Solid Waste. The project supported China's first sanitary landfill which was commissioned in 1995. The site has an eight-year design period and continues to be operated in accordance with the plan. A leachate problem developed in 1996 but was resolved with an on-site wastewater treatment plant. This landfill has served as an effective demonstration, for additional landfills in Beijing and in other cities in China. 13. Hazardous Waste. The project financed an in-depth study of hazardous waste management, a storage house, a weigh-bridge, and a small set of transportation and monitoring equipment. The scope of the main physical components were reduced in view of the overlapping component of a parallel project that Asia Development Bank (ADB) approved in 1995. The study has been utilized for design of relevant regulations and the design of ADB-financed facilities, which will be integrated with the facilities built under the project. 14. Environmental Master Plan Studies. A Japan Grant Facility and the credit financed a set of large-scale studies and training for water, air, and solid waste management. The studies were carried out with full participation of sector agencies. The studies produced a set of long-term plans to 2015 for the respective sectors and in particular broke new grounds in the study of air pollution issues linked with energy consumption. Many of the results have been incorporated in Beijing's ninth Five-Year plan for 1996 - 2000, and utilized for the preparation of BEP 2. However, they have not been fully incorporated in the statutory urban plan nor have they been updated systematically. 15. Environmental Monitoring. The project financed equipment for air and water quality monitoring as well as data analysis, as a part of the expanding environmental monitoring system of Beijing Environmental Protection Bureau (BMEPB). The system produces, for example, real-time air quality data in key spots in the city published in newspapers. Future Operations 16. Operational plans (summarized in Annex A) have been submitted from the various implementing agencies and found satisfactory. They generally focus on further improvements planned for the future, outlined below: (a) District Heating: programs to improve bill collection and staff capabilities; a plan to broad heat metering.  - ix - (b) Sewerage: organizational restructuring toward full autonomy and training for increased efficiency; a major expansion of the sewerage system almost quadrupling the treatment capacity by 2010; tariff increases for full cost recovery. (c) Solid waste management: as the Asuwei landfill first section will fill in 2003, construction of the adjoining section will start in 2000. (d) Harardous waste management: training of staff while the ADB-financed disposal facility is in progress. (e) Environmental studies: utilization of the data and models for various planning work. 17. On the basis of the knowledge and mutual trust developed over the project, a Second Beijing Environment has been prepared and a loan of $349 million and a GEF grant of $25 million were approved in June 20, 2000. BEP2 would address air and water pollution issues exclusively, first through conversion of scattered coal-fired boilers for natural gas and energy conservation in heating, and the second through a construction of a full sewerage system in the most neglected of four river basins within the city. These have been identified as the two major priorities in the studies during the first project. By directing the large resources in the two components, the project aims to bring a visible and substantial improvement in the air and water quality, and establishing full cost recovery and autonomy for sector institutions as outlined in 16 (b) above Key Lessons Learned 18. Achievements and shortcomings of the project provide the following key lessons: (a) A broad and complex project provides a good opportunity to learn while supporting the borrower's comprehensive programs, but limits the opportunity for significant physical and institutional improvement and the Bank's contribution to them. (b) Industrial pollution can most effectively be addressed with strictly market-based financing focusing on commercial viability, and strong regulations and limited public assistance focused solely on pollution control. (c) Institutional development needs to be in step with the broader policy and governance context and focus on performance, rather than form and structure. (d) Energy, pollution control, and managerial efficiencies of district heating does not necessarily increase with its size, indicating the desirability of smaller market-based systems. (e) To maximize the value of large-scale studies, clear policy motivation and an institutional basis to maintain and update them are essential.   IMPLEMENTATION COMPLETION REPORT CHINA BEIJING ENVIRONMENTAL PROJECT (LOAN 3415-CHA/CREDIT 2312-CHA) PART I: PROJECT IMPLEMENTATION ASSESSMENT A. PROJECT OBJECTIVES AND DESCRIPTION 1. Background. During the 1980s, the Government of China accelerated efforts to reverse the environmental degradation that resulted from the past industrialization drives and to minimize additional environmental strains from urban and industrial growths that were accelerating then. These measures included a set of new environmental laws, standards, and plans as well as environmental assessment requirements of major projects. Direct investments by the government also played a major part, much more than in market economies. Public investments were directed not only for such services as sewerage, but also for energy and even industries. The government allocated a large part of the fiscal resources, as well as most of the financing through the banking system, to industrial investments. Most of industrial retooling resulted in cleaner production, and the government also helped finance a large part of industrial pollution control facilities that it required. In other words, the government did not stop at regulations but provided financial and technical support necessary for meeting the regulatory requirements. Most of these actions have been carried out by local governments, under the general framework provided by the national laws and guidelines. 2. Beijing Municipal Government (BMG) has been among the most active in environmental protection and improvement in China partly due to its status as the national capital but mainly due to the city's semi-arid climate that heightens the impact of air and water pollution. Past development programs had located heavily polluting industries in the midst of the city, ranging from textile to chemical and steel plants. BMG therefore focused on reducing the industrial pollution, mainly through industrial renovation programns financed by the central and municipal governments as well as the banks, that also increased the efficiency and quantity of production. It also required and assisted the enterprises to install waste pretreatment facilities. A later study found that these programs as well as strict control of new pollution sources began to have significant effects by the late 1980s, but industries as a whole still remained a serious and the most visible source of sewage, air pollution, noise, and hazardous wastes. 3. With an urban population of over 5 million that was incrcasing rapidly, domestic wastes were becoming an increasingly important source of pollution. In particular, with the almost exclusive dependence on low-grad coal, heating by scattered coal-fired boilers turned the winter air quality seriously hazardous to human health, exceeding the national air quality standard for industrial areas. To ameliorate the problem, BMG invested in a  - 2 large-scale district heating system that by 1990 met a little over 10% of the heating demand of the city, and wanted to expand the system much further. BMG also built coal gas production and distribution facilities and was initiating a program to bring in LPG and natural gas, mainly as fuel for cooking. 4. Water scarcity had been a perennial problem for Beijing, but heavy investments in water resource development and industrial water reuse brought the supply in adequate balance to the demand by the late 1980s. However, the city had practically no remaining surface or groundwater resources that could dilute wastewater, turning most of the urban streams into sewage canals. Sewerage systems mostly in the form of combined sewers and a few minor treatment plants existed, but were falling rapidly behind the increasing generation of wastewater from the population growing in size and affluence. BMG therefore started building a large (500,000 m3/day capacity) wastewater treatment plant in 1991. Municipal solid waste was on the rise similarly, which was collected efficiently but was dumped in scattered unsanitary depositories. BMG therefore was planning to establish a composting plant and a sanitary landfill. 5. Objectives. The objectives of the project were to (i) assist BMG to improve its environmental planning and management capabilities, and to (ii) plan and carry out specific air, water and solid waste pollution abatement efforts for improving environmental conditions in the municipality. The project was to strengthen the policy and institutional framework required, and support the initial investments needed to start the process. 6. Description. The project's objectives were to be achieved through the following components: (a) Wastewater: (estimated cost: US$44.2M) Construction of 8km of reinforced concrete box culverts; 35km of circular sewers; procurement of equipment to clean rivers and maintain sewers; procurement of a monitoring system; (b) Solid Waste: (US$8.OM) Construction of a sanitary landfill of about 72 ha; (c) District Heating: (US$124.6M) Construction of 32km of heat transmission pipeline; a 348MW oil-fired peak heating plant; two booster pumping stations; equipment, installation of a computerized monitoring system; (d) Industrial Pollution Control: (US$98.6M) A $45 M line of credit to finance selected investments for industrial pollution abatement; (e) Hazardous Waste Management: (US$1.9M) Construction of an office and laboratory space and a storage facility for highly hazardous waste with a capacity of 650 tons per year for five years; and (f) Technical Assistance: Project support (US$10.7M) on detailed design, procurement, management, construction supervision; capacity-building  - 3 support (US$3.3M) for training staff in environmental protection, planning, research, monitoring; and policy development (US$7.4M) for studies to develop a long-term integrated environmental master plan. 7. Evaluation of Objectives. The project's objectives were appropriate for the needs and plans of BMG at the time of appraisal. In particular, the second stated objective, planning and implementing specific pollution abatement efforts, and the project components were closely aligned with BMG's priorities. In fact, the project by and large financed important parts of existing investment programs of BMG bureaus responsible for respective sectors. Naturally, therefore, the borrower's ownership of the project was strong. Such a close alignment of the project objectives and components with the government programs was appropriate also for the first comprehensive urban environmental project in China. Given the stock of knowledge in the environmental sector available to the Bank at the time (the first sector work on general environmental issues in China was completed in 1992), there was no solid ground to suggest a much different alternative. It is interesting to note that SAR is careful not to promise specific impact of the project on the city's ambient air or water quality. 8. The relative lack of knowledge and certainties in the strategic framework was not amenable to quick and adequate resolution during project preparation. Not only was the Bank new to China's urban environment issues other than one sewerage project, but also the sector was in a state of rapid transition along with that of the basic economic and governance structure. The nature of major pollution issues were undergoing rapid changes, for example from industrial to municipal pollution, and BMG was reviewing options fundamentally different from what had been the norm before. In addition, the old central planning and command control system was weakening, making it difficult to establish a coherent strategic framework transcending the organizational boundaries within the government. 9. The primary emphasis given to the objective of improving the environmental planning and management reflects the uncertainty of the strategic and institutional contexts of the investment components of the project, as well as the critical importance of the objective. It appears, however, that BMG did not fully agree on the relative importance of the objective nor was the Bank able to articulate how various parts of the project support this objective. Eventually the Bank was able to mobilize a sizable Japanese grant to support the environmental master plan studies, which apparently helped facilitate the participation of various sector agencies in Beijing in the integrated long-term planning exercise. 10. The project therefore remained a collection of several disparate components, including the studies. Such complexity usually risks various difficulties in preparation and implementation, but the competence and commitment of the BMG agencies mitigated the risks. The project did not have quantifiable indicators at Board. It was retrofitted with indicators in 1997, a little before project closing, mainly on the basis of the component-by-component physical targets agreed at appraisal. Given the loose structure the project, and even within individual components, it was not possible to  -4 retrofit a set of indicators that would have fairly represented the overall project objectives. B. ACHIEVEMENT OF PROJECT OBJECTIVES Physical Objectives 11. The project's physical targets were mostly met, with minor shortfalls and two- year delay. The assets constructed under the project are functioning well. However, the rapid increase in pollution has overtaken the pollution abatement benefits of the various components, although the environmental quality would clearly have been worse without the achievements. Details by component follow. 12. Wastewater Management. Under this component, 7.9 kilometers of concrete culverts, and some 17.4 km of sewers and interceptors were constructed. The actual length of sewers constructed is less than was foreseen at appraisal because some minor sewers were built by developers or BMG departments without the Bank fmancing, some others could not be built as the complementary facilities such as the road were delayed, and in the case of essential sewers, resettlement expenses induced realignmient of the sewers. In addition, equipment for river-course cleaning, sewer maintenance equipment and wastewater monitoring instruments was purchased --all of which are being used as intended. The IRR at appraisal for the sewerage works in the south was 10% and 28% for sewerage works in the northwest. Due to the increase in resettlement and civil works costs, the actual IRR is estimated to be 8% and 21%, respectively. 13. Solid Waste Management. China's first sanitary landfill was constructed under this project and was commissioned in 1995. A leachate breakout problem developed in 1996 but was expeditiously resolved by building an wastewater treatment facility. The site, 72 ha, has an eight-year design period at the rate of 2000 tons a day on average, and continues to be operated in accordance with the plan. Regular groundwater monitoring has indicated no negative impact. This landfill is considered best practice in China and the Beijing officials have provided advisory assistance on design and operation to several other Chinese cities. 14. District Heating. Under this component, heat transmission pipelines and a 384 Megawatt peak heating plant were built to form a large district heating system around an existing large power-heat cogeneration plant. The system provides heat to a total floor space of 15 million m2 and some 1.2 million people (compared to the 18.5 million m2 and 1.5 million people foreseen at appraisal) as well as steam for industrial use. This almost doubled the interconnected municipal heating system's coverage that stood at 17 million m2 at appraisal. The additional capacity replaced approximately 1050 sets (operational plan targets 1370 sets) of coal-fired scattered boilers. The differences between the appraisal targets and actual outcomes were due to the exclusion of two residential areas whose conversion into district heating was found to be uneconomical on detailed re-  -5. evaluation. The Peak Heating Plant, that was to be oil-fired at appraisal, was redesigned for natural gas when it became available. 15. The economic IRR of the component is estimated to be about 13% a year, compared with the appraisal estimate of 10.7%. This is mainly because the replacement of scattered coal-fired boilers resulted in higher savings in fuel and operating labor, whose unit costs increased more than projected, offsetting the cost increases of the transmission pipelines. On the other hand, the benefits appear to be less than what could have been achieved with consolidation of small boilers into medium-sized (20-50 ton per hour capacity) district heating systems that can realize similar operating efficiency at less capital and organizational costs. The component also supported technical assistance and equipment to improve the heat control and monitoring system, and staff skills. Savings from the reduction of conversion scope, of about US$6 million, were used for an experimental program to install end-user heat control and metering implemented just before the project closing. 16. Industrial Pollution Control. This component financed 10 subprojects which assisted heavily polluting local enterprises to comply with the environmental regulations promulgated by BMG and the central government. The subloans financed such things as replacement of production lines, relocations costs, technical renovations, safe disposal of hazardous waste, adoption of pollution control measures, etc. These subprojects resulted in substantial environmental benefits (see table 14 for a summary of the subprojects' achievements, or see Borrower's ICR/operational plan for complete details). However, the efficacy in terms of pollution reduction for the given amount of public financing is much lower than that of public facilities, and the demonstration effect is also limited. 17. Hazardous Waste Management. The main element of the component was a hazardous waste management study which provided significant input for BMG's hazardous waste management strategy and regulations, as well as a parallel component under a Beijing Environment Project financed by Asian Development Bank's (ADB) since 1995. Physical elements of this component were redesigned during implementation for two reasons: (a) the amount of industrial hazardous waste requiring centralized treatment decreased over time; and (b) an overlap with a similar component under the ADB-financed project. The Bank eventually financed a pump station and a weigh-bridge station, a storage house of reduced size, and renovation of an existing facility. The city's first operating license for hazardous waste storage was obtained. The facilities are now being used according to the revised plans, and are expected to see far higher activities as soon as the facilities financed by ADB are completed. Sector Policy Objectives 18. Environmental Planning. The project deployed various measures to achieve the project's main objective of improving BMG's environmental planning and management capabilities. Of these, studies to improve the long-term planning were the primary means applied to all major environmental sectors and were apparently given the most explicit attention in project design. The most important of the studies were carried out under an umbrella activity called the Beijing Environmental Master Plan Studies, assisted by an  -6 international consulting firm and financed largely by a Japanese Grant (TF025230). These studies produced a broad assessment of water, wastewater, air quality, solid waste management, and industrial pollution control issues as well as the respective sectoral plans for the period up to 2015. The studies were carried out with an exceptionally high level of participation by sector agencies, coordinated by the BMEPB. These studies were supplemented by various training and overseas tours, an integrated environmental modeling work and a hazardous waste management study. 19. These studies were of high technical quality, generating very useful data and models as well as invaluable plans and insights. For example, these studies have shown the large and growing importance of non-point sources such as domestic wastewater, scattered heating boilers, and motor vehicles. Due to the high quality and the strong agency ownership, various policy and investment proposals from the studies were incorporated in various municipal regulations and in the Municipal Ninth Five-Year Plan. The study also provided a solid basis for design of follow-on projects financed by ADB (from 1995) and the Bank (BEP2 approved in 2000). 20. The SAR stipulated that recommendations of the studies should be incorporated in official urban master plans and environmental regulations in consultation with the Bank. This has happened only partially and gradually, but a much higher expectations would only be unrealistic as the studies stand out among the best used. Their usefulness could have been enhanced if more attention had been paid to the development and use of cost- effectiveness evaluation for environmental planning, as the SAR specified. A trade-off was apparently made between this aspect and the production of well-researched but static sectoral plans. 21. Institutional objectives. Substantial institutional development was achieved during the project although institutional objectives were not defined precisely at appraisal. Institutional objectives defined most explicitly for the sewerage sector, with a covenant to establish a corporate entity. The Beiing Drainage Company (BDC) was set up in December 1993 as a state enterprise. Although the SAR expresses an expectation that it would develop as an autonomous self-financing enterprise, no concrete action or performance measures were stipulated, and the Company initially little more than a different form of the Drainage Division of the Beijing Municipal Engineering Bureau with limited scope of business and autonomy. With an overall restructuring the government functions and the progress of discussions on BEP2, BMG has greatly enlarged the Company's business scope and autonomy as well as increasing sewerage tariffs. At project closing, the Company has taken over the investment planning and implementation as well as operation of WWTP. 22. Another major area of institutional strengthening supported under the project was that of the Beijing Environmental Protection Bureau and its affiliated institutes. Their monitoring, analysis, and planning capabilities have been strengthened through workshops, consultant interactions, better monitoring and analytical equipment and direct involvement in the Environmental Master Plan Studies. These capabilities are proving useful as BMG is stepping up enforcement of environmental regulations. The project also supported upgrading of technical competency of BDC and the Beijing District  Heating Company (BDHC) through technical assistance and equipment for monitoring and operation of the district heating and sewerage systems as well as staff training. 23. Financial objectives were partially met. The project included two explicit financial performance covenants related to the BDHC and the industrial pollution control (IPC) subloans. Low heating and stearn tariffs and the consequent violation of the financial covenants from 1993 to 1995 were the major issue for the project. After suspension of the district heating components, however, the tariffs were raised in 1995 and 1996 by over 100% and brought financial health to BDHC as well as setting an important example for the country. For example, steam tariffs jumped from Y10.6 to Y30 in 1995, and to Y40 and Y 60 in 1996 and 1997. 24. Achievement of the financial objectives of the IPC component, however, remained negligible at project closing. Of the 9 subloans due, seven are in arrears. The last subloan is not yet due but the prospect is cloudy given the counterpart financing problem during construction. These bad debts present a serious fiscal risk for BMG, the lender of record. To some extent the bad debts are due to the underlying lack of financial viability of the subprojects. At least three of the facilities are currently unused or underutilized for insufficient demand for the specific product line or for the borrowing enterprise as a whole. This is partly the realization of market risks, which are common, but also due to the arrangement for the component - ambiguous objectives of the subloans and weak accountability. The subloans were supported partly for environmental reasons by BMEPB, partly for commercial reasons by the borrower, and partly by Beijing Economic Commission to preserve local jobs. The appraisal responsibilities were given to the China Investment Bank, while the credit risk was taken by the Beijing Municipal Finance Bureau which is not equipped to handle this type of operations. As a result, little action has been taken against arrears even when the subborrowers or their parent corporations have sufficient resources. After project closing consultant was hired by the BMFB in accordance with advice and draft terms of reference provided by the Bank, and is working to analyze the bad debts and prepare actions to collect them. 25. Although specific financial objectives were not defined for the wastewater services at appraisal, the tariffs have been nearly doubled over 1998 and 1999 to levels to generate sufficient revenues to cover the existing operations and maintenance and depreciation charges. With the large planned increase in the sewerage capacity in the near future, BMG has committed to increasing the tariffs by about 200% in the next five years. C. IMPLEMENTATION RECORD AND MAJOR FACTORS AFFECTING THE PROJECT 26. Major Factors Not Subject to Government Control. (In this Section, the government refers to BMG, as it has nearly full control of most local environmental matters under a broad guidelines of national laws; and implementing agencies refer to individual units directly responsible for individual components.) The most important factor only weakly under the government control was the rapid growth in population and economy of Beijing, which outpaced the pollution abatement measures under the project as well as others undertaken by the government and other entities. The rate of growth  -8. and shift in the composition of pollution were not foreseen at appraisal, nor the inability of the government to control them, as the economic growth and transformation were of unprecedented pace and direction. 27. In 1993, dramatic escalations in resettlement costs and to a slightly less extent, civil works costs caused the BMEB to reconsider plans for various sewers. For example, realigmnent of the Tonghui interceptor raised the civil works cost by about Y30 million but saved land and resettlement costs by some Y200 million. BMEB made other adjustments to limit the overall cost escalation but managed to build most of the essential sewers. BDHC faced similar difficulties with heat transmission lines built at a late stage, but was able to limit the project investments partly using the savings from ICB procurement of equipment and from elimination of uneconomical portion of the planned transmission line. 28. Early in project implementation, after detailed technical and financial analyses were conducted, inefficiencies in district heating over large distances became apparent. (This still needs to be confirmed through systematic study.) Upon reaching this conclusion, two residential areas, which were physically too far from the heating source, had to be eliminated from the heating system because the heat losses would have been significant. As a result of this experience, BMG is moving away from using this heating arrangement. 29. Major Factors Subject to Government's Control. On the other hand, the rapid increase in pollution was partly due to the ineffectiveness of environmental regulation and insufficient investments in environmental infrastructure by BMG. Few governments would have been prepared for the rapid growth and structural change that rendered the institutions and infrastructure ineffective. BMG, however, made quick adjustments, and by the project closing, established a solid basis to contain and even reverse the deterioration. This included much strengthened environmental regulation which forced increased closure of polluting industries, natural gas pipelines and distribution network under a new energy strategy, and plans for a great increase in sewerage capacity. In modifying the relevant plans and regulations, BMG selectively adopted findings from the studies and experiences under the project but did so within its existing procedures of policy deliberation rather than as specified in the Project Agreement. 30. The delay in heating tariff increases were mainly due to the BMG as well as the central government's reluctance to raise public prices in the time of high inflation. BMG instead chose to subsidize BDHC as needed, in violation of the project covenant. This led to a 15-month suspension of the major part of the district heating component, a main cause for the two-year delay of project completion. 31. Major Factors Subject to the Implementing Agencies' Control. The implementing agencies in general fully used the powers and technical expertise they have to carry out their components and adapt to changes in external factors. BMEB and BDHC exercised sound technical judgments to adjust their components when faced with large cost increases and with a new evidence of questionable viability of heat supply in isolated areas, respectively. The Environmental Sanitation Bureau resolved the problem of  -9 unexpectedly high contamination of the landfill leachate promptly and effectively. BMEPB managed the BEMPS effectively and all the sector agencies participated seriously in them and utilized the results effectively in their own planning. The only major failing in this regard is BMFB's insufficient attention to the repayment problems of IPC subloans, which can be partly explained by its limited involvement in selection, appraisal, and supervision of the subprojects. Although belatedly, it started taking actions to resolve the issue. BMFB's main role during implementation was to manage financing of the overall project, which it has competently carried out. D. PROJECT SUSTAINABILITY 32. Most of the project's achievements are likely to be sustained. However, questions regarding the two major components - industrial pollution control and district heating - present a large element of uncertainty. The framework of the IPC component and the physical assets created under it are unlikely to be sustained; and the replicability of district heating is likely to be limited. For the project as a whole, however, not only the physical assets but also lessons learned and capabilities developed are likely to have continued beneficial effect for the environmental management of Beijing and China. The benefits and sustainability will be enhanced through the BEP2 approved in June 2000. 33. Sustainability of the core environmental components - wastewater, solid waste, and hazardous waste management - is highly likely. The physical assets have been well utilized and have set off a great expansion of the respective environmental infrastructure systems. While operation and expansion of these facilities are assured by BMG's strong environmental orientation and fiscal strength (about Y 20 billion a year), BMG is taking major steps to enhance their long-term financial and institutional sustainability. As discussed earlier, BMG is proceeding to allow full financial and operational autonomy of the sewerage services. Similar steps are being taken for solid and hazardous waste management systems, which are now financed with both beneficiary and budget financing. 34. Similarly, knowledge and skills gained from various studies and technical assistance as well as equipment have been fully utilized. A result has been an ambitious new environmental improvement program of BMG that aims at a swift reversal of the past environmental deterioration to meet all major enviromnental quality standards by about 2005. BEP2 is intended to make an important contribution to this new BMG program. A part of the program is to increase the quality and timeliness of the pollution data in order to make them more useful for policy and regulatory actions. 35. The existing district heating system is likely to be adequately operated and utilized and its efficiency improved, due to the financial and technical improvements during the project and further improvements planned by BDHC, such as in bill collection and staff skills. Nevertheless, it is unlikely that such a large integrated system as operated by a public monopoly would be an optimal heating system for the future in Beijing. While larger systems exhibit superior efficiency in combustion and pollution  -10 control, they compare poorly with smaller system in transmission efficiency, the cost of capital and land, and the organizational efficiency. These disadvantages of size are accentuated as the fuel structure changes in favor of gas and oil. Therefore, replicability of the large integrated heating system is likely to be limited. 36. The large part of the modem production and waste treatment facilities financed under the industrial pollution component is likely to be profitably utilized until they become technologically obsolete, due to the strong regard paid to the economic viability of the subprojects. However, a few of the underutilized facilities may prove to unviable investments. Further, a large part of the subloans may have to be written off even after strong collection efforts, imposing substantial fiscal losses for BMG. In general, the experience under the project has served to reinforce the general transition toward separation of the government and enterprise functions, and various levels of the government in China and in particular BMG are discontinuing the practice of financial support for industrial investments under most guises. E. BANK PERFORMANCE 37. Identification and Preparation. The Bank's perfornance in identification was satisfactory. The project was closely aligned with BMG's strategy and programs. The Bank identified weaknesses in BMG's strategic plans and included appropriate components to improve environmental planning. The amount of technical assistance included under the project was appropriate given the institutional and policy development needs. However, specific needs and counter measures were not sufficiently specific nor integrated to provide a clear guide for these efforts. The Bank's performance in preparation was satisfactory. Although the task team was changed significantly during preparation, the change brought important improvements in communication and preparation pace. The missions covered all major aspects (technical, financial, economic, institutional, environmental) and brought substantial improvement in technical and implementation planning. The Bank's successful mobilization of the Japanese grant funds to finance the environmental studies was critical to the success of the overall project. 38. Appraisal. The Bank's performance in appraisal was satisfactory, with a well- rounded team fielded. The project was ready for implementation at Board, with detailed terms of reference prepared for the environmental studies, and most design work complete. The mission correctly appraised BMG's commitment to the project's objectives as high. The project's design was somewhat complex especially for a first- time borrower, but BMG's high commitment and implementation capacity mitigated that risk. The Bank helped eliminate questionable components such as a composting plant and investments in textile industry. On the other hand, the Bank overlooked several important risks, such as the uncertain prospect of BDHC's finances, the extent and cost of resettlement, and the risks of the industrial pollution control component. 39. Supervision. The Bank's supervision was highly satisfactory. The project was supervised at regular six-month intervals, with well-rounded teams often composed of at least one engineer, an economist and a financial analyst. Specialists in hazardous waste  -14 and solid waste management and resettlement also conducted limited supervision mission in their respective fields. Team continuity was good with one engineer having been involved from appraisal to completion, another engineer continuing for six years, and the team leader and a main financial analyst serving for the last four and half years. The resident mission in Beijing was,well utilized. Relations with the borrower's various implementing agencies were generally very good. The Bank showed flexibility in its approval of design modifications such as the conversion of the Peak Heating Plant from oil to natural gas, or the sewer realignment to reduce resettlement along the Tonghui River. The Bank allowed Loan savings from ICB procurement to renovate a secondary heating system, to make further improvements to air quality. 40. Bank supervision teams addressed three substantive issues over the course of implementation. First was BDHC's non-compliance with financial performance covenants for several years. The Bank highlighted this issue in correspondence with the borrower, and finally downgraded the project to unsatisfactory in "development objectives" in 1995. The Bank also suspended disbursements relating to the heating component for 15 months until June 1996 when an action plan was agreed upon. The Bank further informed the borrower that it would not proceed with preparation of the follow-on project unless the action plan for BDHC to recover full costs from 1997 was pursued satisfactorily. These actions prompted BMG to raise tariffs three-fold in 1995, and this increase was followed by subsequent tariff increases in 1996 and 1997. These actions brought BDHC back into financial health and the Bank upgraded the project to satisfactory just over one year later. The second issue was resettlement whose greatly increased cost presented a serious implementation contraint. The Bank took a position to force the implementing agency to respect a new stringent resettlement regulation, at the cost of considerable delay. The third issues was large arrears on the industrial pollution line of credit. Late in recognizing the seriousness of the issue, the Bank provided an initial analysis of the problems, suggested various alternatives to resolve the issues, and on reaching an agreement on a course of action, provided draft terms of reference for consulting services. The consultants were to help BMFB analyze and resolve the problems. BMFB subsequently hired the consultants according to the recommended TOR and the work is in progress as of this writing. F. BORROWER PERFORMANCE 4lPreparation. The borrower's performance in preparation was highly satisfactory. The borrower's commitment to improving the environment was strong from the beginning. By April 1989, Beijing Municipality had identified the key environmental sectors to tackle with the Bank support, and had drawn up a list of 12 subprojects converging on the theme of environmental improvement. These 12 subprojects were largely retained at appraisal. The borrower's only notable oversight was in not including provision for technical assistance and training which would be needed to strengthen local environmental institutions, to enforce environmental protection regulations, and to plan and implement clean-up programs with polluters. During project preparation, the various implementing agencies responded in a timely manner to the Bank's requests for  -12 information and met processing deadlines. The project was ready for implementation at Board. Detailed designs for all components, except the industrial pollution line of credit, were complete, and one contract for a heating pipeline had been awarded and was retroactively financed. 42. Implementation. The borrower's overall performance in implementation was satisfactory. BMG's actions for financial and institutional improvement of BDC and BDHC were late, but in the end exemplary. An agency-by-agency summary is provided below. BEPO's coordination and monitoring of the project were excellent. BEPO staff were highly motivated and competent. Following the 1994 devaluation of the yuan, project cost estimates and disbursement projections were updated. Progress reports were submitted on a timely basis and were thoroughly prepared. The borrower's operational plan, which also contained its ICR, was coordinated and executed with professionalism. Beijing Municipal Engineering and BDC. The Engineering Bureau and BDC successfully completed and tested the physical assets of the project. Some delays resulted from realigning the sewers to avoid excessive resettlement and land acquisition costs, and due to difficulties in obtaining approval for railway underpasses. Beijing Environmental Sanitation Bureau's performance in developing the landfill site, operating it as a sanitary landfill, and resolving leachate problems was highly satisfactory. The landfill serves as best practice for China. BDHC performed satisfactorily in project implementation, but its overall performance responds to its incentive system, as it depends mainly on the government for pricing of its inputs and outputs and investment financing. It tended to exaggerate its financial losses, keep excess cash, and relatively unconcerned of the end-users' needs. BMFB's performance was satisfactory in its main responsibility for arranging counterpart financing and financial management of the project. However, its perforrnance in collecting repayment of IPC subloans were deficient, mainly due to its staffing constraints and limited involvement in upstream activities on the subloans. It has, however, started pursuing the issue seriously. BMEPB's efforts to manage the environmental studies were highly satisfactory. A core study team composed of two dozen experts was set up shortly after Board approval. BMEPB also organized 30 other departments and colleges to cooperate for the study's tasks. Local staff exchanged ideas with foreign experts in a broad field through brain-storming sessions, workshops. Advanced technology was coupled with the local situation to the maximum benefit.  -13 G. ASSESSMENT OF OUTCOME 42. The overall assessment of outcome is satisfactory. The project substantially met its physical objectives, and more importantly, its sector policy objectives of improving management and planning. Financial objectives were partially met, and the improvement would continue under the follow-on project. Although the project's individual investments did not add up to a reduction in the city's overall ambient pollution due to the great increase in pollution during the project implementation period, the reason for this was beyond the control of the government or implementing agencies. Many of the project's benefits are sustainable, and the great deal of learning and mutual trust was developed during implementation. The Second Beijing Environment Project will build upon these to achieve visible improvements in the city's environmental quality. H. FUTURE OPERATION 43. An operational plan has been submitted for the various implementing agencies and found satisfactory. Important aspects of the operation plans of individual agencies are summarized below, and details attached in Annex A to this ICR: BDHC is moving toward setting up a standardized collection mechanism to strengthen bill collection, and plans are underway to upgrade human resources accordingly. Furthermore, BDHC would expand the experiment for heat metering and control at the user-end and comply with a recent document issued by the Ministry of Construction that encourages metering. BDC is planning a major upgrading of its organizational structure and staff capabilities in order to dispose of the greatly expanding sewerage service scope and autonomy. BMEPB is planning to organize a review and revision of the recommendations of the BEMPS, covering: (a) a comparison of the original plan and actual implementation to date; (b) a study a new environmental issues to supplement the original study; and (c) organization of a new environmental master plan study or preparation of a five-year environmental plan at the appropriate time. BMEPB is aiming to develop a dynamic study, using the technical approaches and tools developed under the study. Beijing Environmental Sanitation Bureau has started preparation of a plan to build the second stage of the Asuwei landfill, as the site's first phase, built under the project would be filled in 2003. 44. The project engendered a great deal of mutual learning by BMG and the Bank, as well as mutual trust. These, along with considerable technical and institutional achievements under the project, have provided a productive basis for a major cooperative effort to reduce the serious pollution of the city, which has worsened despite effective  -14 partial solutions achieved under the project. During the project period, there have also been significant changes in the economic and institutional framework in favor of different and accelerated environmental improvement efforts: a rapid increase in personal income in the city, a much increased demand among the population and leadership for better environment, a greater reliance on market mechanisms, and availability of natural gas. On this basis, a Second Beijing Environment has been prepared and a loan of $349 million and a GEF grant of $25 million were approved in June 20, 2000. BEP2 would address air and water pollution issues exclusively, first through conversion of scattered coal-fired boilers for natural gas and energy conservation in heating, and the second through a construction of a full sewerage system in the most neglected of four river basins within the city. In view of the lessons learned, a proposal similar to the first project that would have directed the Bank support to a large number of components, particularly to industrial and utility operations, was rejected in favor of the more focused assistance. By focusing the large resources in the two components, and in conjunction with a broader BMG program for environmental improvement partly facilitated in the process of project preparation, the project aims to bring a visible and substantial improvement in the air and water quality, and establishing full cost recovery and autonomy for sector institutions. I. Key Lessons Learned 45. Achievements and shortcomings of the project provide the following key lessons: (a) A broad and complex project provides a good opportunity to learn while supporting the borrower's comprehensive programns, but limits the opportunity for significant physical and institutional improvement and the Bank's contribution to them. (b) Industrial pollution can most effectively be addressed with strictly market-based financing focusing on commercial viability, and strong regulations and limited public assistance focused solely on pollution control. (c) Institutional development needs to be in step with the broader policy and governance context and focus on performance, rather than form and structure. (d) Energy, pollution control, and managerial efficiencies of district heating does not necessarily increase with its size, indicating the desirability of smaller market-based systems. (e) To maximize the value of large-scale studies, clear policy motivation and an institutional basis to maintain and update them are essential.  -1-5 PART II: STATISTICAL TABLES TABLE 1: SUMMARY OF ASSESSMENTS A. Achievement of Objectives Substantial Partial Negligible Not Applicable Macroeconomic policies X Sector policies X Financial objectives X Institutional development X Physical objectives X Poverty reduction X Gender issues x Other social objectives X Environmental objectives X Public sector management X Private sector development X B. Project Sustainability Likely Unlikely Uncertain x C. Bank Performance Highly Satisfactory Satisfactory Deficient Identification x Preparation Assistance X Appraisal X Supervision X D. Borrower Performance Highly Satisfactory Satisfactory Deficient Preparation X Implementation X Covenant compliance x Operation (if applicable) X E. Assessment of Outcome Highly Satisfactory Unsatisfactory Highly Satisfactory Unsatisfactory x  -16 TABLE 2: RELATED BANK LOANS/CREDITS Year of Loan/Credit Title Purpose Approval Status Shandong Envmt Augmentation of water supply and alleviation of water 1996 Ongoing pollution in Jinan through construction of water supply reservoir and pipelines and major trunk interceptor sewers, together with strengthening of water and sewerage compamnes. Tianjin Urban A multi-faceted urban operation, including alleviation of 1992 Almost Development and water pollution through construction of trunk interceptor Completed Environment sewers and major pumping stations. Liaoning Alleviation of water pollution through construction of 1993 Ongoing Environment trunk interceptor sewers and treatment plants in several cities, alleviation of air pollution through expansion of district heating Second Beijing Aims at a visible and sustained alleviation of air and 2000 Appproved in Environment Project water pollution in Beijing by converting scattered coal- June 2000 fired heating boilers to natural gas; promote energy conservation; construct key wastewater trunk interceptors and treatment facilities; and strengthen environmental management institutions of Beijing TABLE 3: PROJECT TIMETABLE Steps in project cycle Date planned* Date actual Identification 04/89 Preappraisal Appraisal 7/12/90 02/1991 Negotiations 9/30/91 - 10/4/91 Board presentation 3/12/91 11/19/1991 Signing 12/16/1991 Effectiveness 2/92 3/2/1992 Project completion 12/31/1996 6/30/1999 Loan closing 6/30/1997 6/30/1999 * dates per the Initial Executive Project Sunm