People s Republic of China: Acid Rain Control and Environmental Improvement Project

Transcription

1 Validation Report Reference Number: PCV: PRC Project Number: Loan Number: 1890 September 2010 People s Republic of China: Acid Rain Control and Environmental Improvement Project Independent Evaluation Department

2 ABBREVIATIONS ADB Asian Development Bank ADF Asian Development Fund APG Anhui Provincial Government ATC Anhui Tongdu Copper CNM Chizhou Nonferrous Metals Group EI-ARD environmental improvement and acid rain damage EIRR economic internal rate of return FIRR financial internal rate of return HWC Huangshan Water Company IED Independent Evaluation Department JTC Jiuhua Tourism Company Group m 3 cubic meter M&E monitoring and evaluation OCR ordinary capital resources PCR project completion report PMO project management office PRC People's Republic of China RRP report and recommendation of the President SO 2 sulfur dioxide TA technical assistance TCG Tongling Yaxing Coking Gas TSP total suspended particulates WSC Wuhu Shanjiang Chemicals NOTE In this report, $ refers to US dollars. Key Words people s republic of china, prc, adb, asian development bank, acid rain, environment, ecological areas, so2, lessons, independent evaluation department, performance evaluation Director Team leader Team members H. Hettige, Independent Evaluation Division 2, Independent Evaluation Department (IED) K. Mohit, Evaluation Specialist, Independent Evaluation Division 2, IED O. Nuestro, Evaluation Officer, Independent Evaluation Division 2, IED C. Roldan, Assistant Operations Evaluation Analyst, Independent Evaluation Division 2, IED In preparing any evaluation report, or by making any designation of or reference to a particular territory or geographic area in this document, the Independent Evaluation Department does not intend to make any judgments as to the legal or other status of any territory or area.

3 PROJECT COMPLETION REPORT VALIDATION A. Basic Project Data PCR Validation Date: September 2010 Project Number: Approved Actual Loan Number: 1890 Project Name: Acid Rain Control and Environmental Total Project Costs Improvement Project ($ million): Country: People s Republic of China Loan/Grant ($ million): Sector: Multisector Total Cofinancing ($ million): ADB Financing ADF: 0.00 Borrower ($ million): ($ million): OCR: Beneficiaries ($ million): ( net of cancellations) Cofinanciers: None Others ($ million): Approval Date: 19 Dec 2001 Effectiveness Date: 10 Jul Jul 2002 Signing Date: 11 Apr 2002 Closing Date: 30 Jun Aug 2008 Project Officers: Name: S.F. Wong D. Millison P. Abeygunawardena Location: ADB headquarters ADB headquarters ADB headquarters From To Validator: Quality Control Reviewers: Clifford Brown, Consultant K. Mohit, Evaluation Specialist, IED2 O. Nuestro, Evaluation Officer, IED2 Director: B. Project Description (summarized from the report and recommendation of the President) H. Hettige, IED2 (i) (ii) Rationale. As reported in the report and recommendation of the President (RRP), 1 rapid economic development in the People s Republic of China (PRC) has brought with it environmental degradation. Industrial enterprises in the Yangtze River Valley of Anhui are among the largest emitters of sulfur dioxide (SO 2 ), the prime cause of acid rain, in the PRC. The Yangtze Valley is home to 17 million people and also home to the ecological areas of the Huangshan and Jiuhua mountains. Incidents of acid rain potentially have serious impacts for public health, the biophysical environment, and economic development. The government has provided the legal basis for acid rain control in the PRC with the 1995 Amendment of Air Pollution Prevention and Control Law. The Anhui Provincial Government (APG), which was designated as the executing agency for this project, has been developing a provincial acid rain control strategy and has identified subprojects to fit into this strategy. The project, as designed at the time of appraisal, adopted a number of these subprojects and has become an integral part of the provincial acid rain control plan. It was consistent with the Asian Development Bank's (ADB s) operational strategy to support measures for environmental improvement and natural resource management in the PRC. Impact. As envisaged at appraisal, due to reduced pollution levels (particularly acid rain), the project was expected to have a significant positive impact on the health and social well-being of the people living and working in the project area. Agricultural and forestry productivity and water quality were expected to improve, and material damage reduced. Environmental improvement subprojects would upgrade and expand project facilities in the Huangshan and Jiuhua ecological areas. Health and welfare improvements and investment in the subprojects were expected to improve the regional economy. Adverse effects of project construction and operation on the surrounding environment would be minimized with little negative impact on the communities. 1 Parts of this validation report are paraphrased and/or copied from the RRP (Asian Development Bank [ADB] Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People's Republic of China for the Acid Rain Control and Environmental Improvement Project. Manila) and project completion report (ADB Project Completion Report: Acid Rain Control and Environmental Improvement Project for the People's Republic of China. Manila), as appropriate.

4 2 (iii) (iv) Objectives or expected outcomes. (a) Objectives. The main objective of the project was to improve ambient air quality and reduce acid rain to improve the environment in the Yangtze River Valley in Anhui Province. Broader associated objectives included updating legislation for stronger enforcement of environmental regulations, improving environmental monitoring, providing new incentives to industry to reduce pollution, continuing market reforms, introducing technology modernization, creating sustainable industry management policy, and creating an energy policy promoting alternate resources and non-fossil-fuel energy supplies. (b) Expected outcomes. Expected outcomes included overall improved ambient air, soil, and water quality in the project area; reduced acid rain frequency by 50% and improved rain ph levels; reduced air pollution in urban areas to meet national standards; improved wastewater and solid-waste treatment (by rehabilitating environmental damage); institutionally strengthened government agencies; and improved corporate governance and operations management in industrial enterprises. Components and/or outputs. (a) Components. At appraisal, the project had three main components: (1) six cleaner production subprojects undertaken by industrial enterprises, (2) three environmental improvement and acid rain damage (EI-ARD) rehabilitation subprojects in ecologically protected areas (Huangshan and Jiuhua mountains), and (3) one institutional strengthening component to be undertaken by provincial and local environmental agencies and subproject enterprises. (b) Outputs. Although the scope of work was well defined at the time of appraisal, there were three major changes initiated by the enterprises and APG during implementation, which resulted in a reduction in the number of cleaner production subprojects from six to four and a reduction in the number of EI-ARD rehabilitation subprojects from three to two. ADB approved these changes as they did not alter the basic objectives of the project. Following the major changes, the project outputs became: 1. Four cleaner production enterprises: - Anhui Tongdu Copper (ATC) subproject to upgrade the 65,000 tons (t) per year smelter and blast furnace system for producing blister copper and the 15,000 t/year system for electrolytic copper, and install a double conversion and double absorption process to replace the current single conversion and single absorption process. This subproject was expected to result in a 38% (14,890 t/year) reduction in SO 2 emission in Tongling City, where the subproject was located. - Chizhou Nonferrous Metals (CNM) Group subproject to upgrade the 20,000 t/year main process line for producing electrolytic copper with a more efficient system, capture SO 2 emissions for conversion to high-quality sulfuric acid, and relocate the process lines away from a residential area to a new industrial zone. The subproject was expected to reduce SO 2 emission in the city of Chizou by 59% (6,040 t/year) and eliminate the threat posed by toxic metal emissions. - Wuhu Shanjiang Chemicals (WSC) subproject to upgrade the caustic soda production line from the diaphragm process (35,000 t/year) to the ion-membrane process (30,000 t/year); construct a cogeneration station to supply electricity and process heat in the Wuhu Industrial Development Zone and demolish 29 small boilers; and relocate a dyestuff processing facility to reduce water pollution. It was designed to reduce SO 2 by 20% (4,533 t/year) in Wuhu City. - Tongling Yaxing Coking Gas (TCG) subproject included constructing a new coal gasification plant in an industrial zone, introducing technology to expand gas production capacity to 307 million cubic meters (m 3 ) per year and coke production capacity to 700,000 t/year, using cleaner production technology to control or eliminate highly polluting products and processes, and closing the existing plant. It was designed to reduce SO 2 by 3,361 t/year at the subproject design stage.

5 3 2. Two EI-ARD rehabilitation subprojects: - Huangshan Water Company (HWC) subproject included upgrading and expanding a water supply system to treat 50,000 t/day of wastewater, upgrading and expanding a solid-waste management system, and constructing a forest fire protection system. Improvements in environmental monitoring systems to document acid rain impacts were also provided. - Jiuhua Tourism Company (JTC) Group subproject included improvements in electricity supply, water supply, sewage treatment, forest fire protection, and solid-waste management (with two solid-waste transfer stations and a waste management facility having the capacity to process 300 t/day of waste material). Improvements in environmental monitoring systems to document acid rain impacts were also provided. 3. Institutional strengthening: - For the subproject enterprises, there were two outputs planned: improved corporate governance (by creating diversity in the board of directors and appointing cross-industry and cross-regional members), and strengthened overall financial and operations management. - For the APG and provincial regulating authorities, there were five outputs planned to strengthen project administration capabilities of the project management office (PMO) and executing agency capability in processing ADB s procurement and reporting procedures, including adopting modern international practices; environmental policy-making capabilities and environmental monitoring capabilities; financial management skills; environmental awareness programs; and public health programs. C. Evaluation of Design and Implementation (project completion report assessment and validation) (i) Relevance of design and formulation. The project implemented facilities that assist in reducing SO 2 emissions and acid rain levels in the project areas and rehabilitate and improve areas impacted by acid rain. It provided initiatives for institutional development of government agencies and supported the restructuring and reform of state-owned enterprises. The project forms a part of the APG ongoing environmental strategy and ADB's country partnership strategy, from a cleaner production point of view. 2 However, from the information available in the project completion report (PCR), it appears that inputs provided and outcomes achieved under the institutional strengthening component were not adequate. For instance, under the institutional strengthening component project achievements mentioned in the design and monitoring framework (PCR Appendix 1, p. 17), no information is given as to how many staff of the subproject enterprises were trained or what type of monitoring systems were installed and how many. While recognizing the importance of acid rain and its implications for Anhui, in light of the foregoing observations, this validation recognizes the project to be relevant to the objectives of the project and the needs of Anhui Province. (ii) Project outputs. (a) Cleaner production subprojects. In addition to the major changes discussed above, there were a number of other ongoing changes during project implementation, which changed the scope of the project. The following sections discuss the changes to the scope of work and outputs on project completion: 1. The ATC subproject was implemented as designed, but with much higher capacity. The blister copper furnace, using advanced technology, enabled ATC to increase production of blister copper to 130,000 t/year (compared with the appraisal design of 65,000 t/year) and production of electrolytic copper to 180,000 t/year (compared with the design of 15,000 t/year). With the new plant, the subproject reduced SO 2 emissions by 17,892 t/year (compared with the 14,890 t/year expected at appraisal), reduced total 2 ADB Country Partnership Strategy: People's Republic of China, Manila.

6 4 (b) (c) (d) suspended particulates (TSP) by 855 t/year, and reduced chemical oxygen demand by 178 t/year. 2. The CNM subproject was implemented as planned during appraisal with the installation of nonferrous metal smelting and refining, but with higher capacity. ADB funded facilities with a production capacity of 40,000 t/year, and CNM expanded this further to 80,000 t/year with its own financing (compared with the original scope of work to upgrade the 20,000 t/year facilities). In 2008, the new owner took a strategic decision to produce lead instead of copper and used its own funds to make the necessary changes to the production process. Actual SO 2 reduction of 6,466 t/year exceeded the appraisal target of 6,040 t/year. 3. The WSC subproject was implemented as planned, except two ion membrane caustic soda production lines that were constructed, each of 30,000 t/year capacity (instead of upgrading one line to 30,000 t/year capacity in the original scope of work at appraisal). Only one of the lines was funded by ADB. Also, during implementation, WSC discontinued processing of dyes and demolished the existing dye plant. Loan proceeds for upgrading the dye plant were instead used to construct a wastewater treatment plant with a capacity of 4,500 m 3 per day. SO 2 reduction under this subproject amounted to 5,348 t/year compared with 4,533 t/year at appraisal. 4. Actual implementation of the new coking plant for the TCG subproject included two modern tamping coke ovens with a higher total coke production capacity of 900,000 t/year (compared with 700,000 t/year at the design stage); a chemical recovery system to recover such by-products as coke oven gas, tar, and benzene; a 12-megawatt coke oven gas cogeneration plant to supply electricity and steam; and other supporting facilities. Because of the late start up of the facilities in 2009, the reduction in emissions was not known at the time of PCR preparation. However, reduction of SO 2 emissions is expected to reach 4,359 t/year as gathered during the project completion stage review mission, which is about 30% more than the 3,361 t/year estimated at the subproject design stage. EI-ARD rehabilitation enterprises. 1. Construction of the wastewater system under the HWC subproject was carried out as planned, with a capacity to treat 50,000 t/day of wastewater. The HWC upgraded the water supply system and constructed a forest fire protection system with its own funds. The loan proceeds for these components were reallocated for solid-waste and wastewater treatment systems. The solid-waste management system was implemented with a total capacity of 330 t/day. 2. Environmental improvement work under the JTC subproject was generally carried out as planned, with implementation of an upgraded reservoir and water supply facility, as well as a wastewater treatment facility to service Kecun Village at the foot of Jiuhua mountain where commercial businesses on the mountain are to be relocated; two water supply plants (capacity of 5,000 m 3 per day each) to provide sufficient clean water to local residents and tourists; wastewater treatment facilities at Kecun; and two solid-waste transfer stations and a waste management facility with capacity to process 300 tons of waste material per day. Institutional strengthening. The institutional strengthening for the project was achieved as planned. The institutional strengthening subproject has been effective in supporting the management strengthening capabilities of APG and associated government agencies. Emission control and monitoring systems were also established under the project at the implementing agency, and at provincial and municipality environmental laboratories. No commentary has been provided on the type of monitoring systems used and the performance of these systems or the establishment of an environmental and acid control monitoring network in the project area (RRP, para. 44). Cleaner production subproject and institutional strengthening issues. There are two issues with regard to the project outputs: 1. There is a difference in the production capacities for the cleaner production subprojects from what was planned at appraisal to actual. In the PCR, the ATC plant capacity for blister copper increased 100% from a planned upgrading of 65,000 t/year

7 5 to actual installation of 130,000 t/year, and electrolytic copper increased 1,200% from 15,000 t/year to 180,000 t/year. Similar increases in capacity are noted for the CNM and HWC subprojects. The PCR should have reported on why the plant capacities changed so markedly after appraisal (appraisal is supposed to define such critical issues as capacity and the related costs for investment). 2. A number of questions arise on the reduction of cost for the institutional strengthening component: Was the reduction in scope of work developed in consultation with ADB or was this a unilateral action on the part of APG? What tasks were actually performed under these two projects? What tasks were not undertaken by either project? Also, the PCR does not mention if any training was conducted on cleaner production techniques. (iii) Project cost, disbursements, borrower contribution, and conformance to schedule (as relevant to project performance). (a) (b) (c) (d) Project cost. The differences in cost between appraisal and actual were due to the following: 1. Cancellation of the three cleaner production subprojects, resulting in a net reduction in total cost of $121.3 million. 2. TCG s actual subproject cost rose by $72.0 million. This was because the new owner expanded the scope and capacity of production and acquired more land than anticipated, resulting in additional costs for site preparation. 3. The ATC subproject was $45.8 million lower, and CNM subproject was $8.0 million lower mainly due to design changes enabling savings to be made on equipment. 4. HWC s actual costs were $22.8 million, compared with $31.54 million savings from design changes. 5. Decrease in the institutional strengthening component, which was a result of the cancellation of the three subprojects and selected training undertaken under another project. The final total project cost was $277.3 million, about 15% lower than the $325.0 million at appraisal. At loan closing, the ADB loan had been reduced from $147.0 million to $112.4 million. The borrower s contribution also decreased from $178.0 million to $152.3 million. There was no external financing at appraisal, but $12.6 million had been provided at completion by domestic commercial banks. The percentage contributions on completion were ADB 40.5%, borrower 55.0%, and other financing 4.5% of total cost. Cost issues. The changes to the project design after loan approval greatly affected the cost. As noted in section C(ii)d, the production capacity of the ATC subproject increased markedly from appraisal to actual, while the cost decreased by 62%. The PCR should elaborate on why the appraisal cost estimate is so high. The PCR indicates that there was strong competitive bidding and changes in construction material prices. However, these conditions would not explain such a marked change in price. Similar cost decreases are found for the CNM and HWC subprojects. Disbursements. Disbursements were delayed throughout the implementation period, following the delays in procurement and construction as outlined in (d) below. Disbursement progress improved as the project got under way but varied by subproject, with delays mainly due to the disruptions arising from enterprise restructuring. Notwithstanding the disruptions to the project, counterpart funds were adequately provided and loan proceeds were disbursed in accordance with ADB s Loan Disbursement Handbook (2007, as amended from time to time). Conformance to schedule. The initial delays in implementation caused by the lengthy internal government processing and review procedures, coupled by the lack of understanding of ADB procurement and disbursement procedures, made it difficult to meet the original target dates for each succeeding project activities. The loan closed 2 years after the original closing date even though ADB, the borrower, and APG made efforts to catch up. Other reasons for the delay were reaction to the severe acute respiratory syndrome outbreak in 2003, the accelerated restructuring and enterprise reforms, and the global financial crisis in 2008.

8 6 (iv) (v) (vi) Implementation arrangements, conditions and covenants, related technical assistance, and procurement and consultant performance. (a) Implementation arrangements. The APG provided overall supervision and coordination through its PMO. The subproject enterprises were the implementing agencies responsible for their respective components. Each implementing agency established a project implementation office to supervise day-to-day implementation of the subproject. In general, the implementation arrangements were satisfactory. (b) Conditions and covenants and related technical assistance. Of the 16 covenants, 13 were complied with while 2 were generally complied with and 1 was not. The current ratios of ATC, WSC, and HWC are less than 1. While the performance of these enterprises is expected to improve from 2013, this may impact on the project's sustainability. No covenant was modified, suspended, or waived. The project preparatory technical assistance (TA) was carried out in 2000/2001 with the final report submitted in August (c) Procurement and consultant performance. 1. Procurement. Procurement from the loan followed ADB s Procurement Guidelines (2007, as amended from time to time). Civil works were generally procured using national competitive bidding in accordance with government procedures acceptable to ADB. Uncertainties during enterprise restructuring and unfamiliarity with ADB procedures caused delays in the early bidding processes. These were resolved in time through seminars and workshops and the assistance of the implementation consultant. 2. Consultant performance. The APG engaged the services of an international consultant, in association with local consultants, to assist the PMO and implementing agencies. The implementing agencies engaged domestic design institutes to prepare detailed engineering design and performance specifications for the subprojects (with contractors taking on responsibility for the process and related equipment design). The PCR reported that the performance of the consultants, contractors, and suppliers was satisfactory, and this validation concurs with that rating. Performance of the borrower and executing agency. Delays in implementation were often caused by APG agencies processing and review procedures. However, the APG and PMO took ownership of the project, and the quality of the subprojects was not compromised. Counterpart funds, which were a concern to ADB during appraisal, were made available as required. Overall, the performance of the borrower and the APG was rated satisfactory by the PCR, and this validation agrees with that rating. Performance of the Asian Development Bank. ADB maintained close coordination and good working relationships with the borrower and the APG, while addressing all of the problems associated with delays, enterprise restructuring and reform, procurement, and implementation. This validation has some concerns considering the problems that many past projects have had with procurement. ADB should have ensured that the APG and the enterprises were capable of handling the procurement procedures before any such procedures were required on the project. Also, closer monitoring and evaluation (M&E) should have been applied to the institutional strengthening subproject, as discussed in section C(ii)d. The PCR rated the performance of ADB satisfactory. On balance, this validation recognizes the complexity of the project and also rates the performance of ADB satisfactory. D. Evaluation of Performance (project completion report assessment and validation) (i) Relevance. The project targeted acid rain, which was and remains a major environmental issue in Anhui Province. The project also contributed to institutional strengthening of associated government agencies and reform of state-owned enterprises. Overall, the project is assessed relevant by the PCR. The project was relevant to the government s priorities at the time of appraisal and even more relevant now since the government has emphasized energy conservation and environmental improvement as part of its Eleventh Five-Year Plan. The project was also consistent with ADB s operational strategy for the PRC in which environmental improvement is one of the pillars. This validation rates the project relevant.

9 7 (ii) Effectiveness in achieving outcome. As indicated in the PCR, all subprojects with SO 2 emissions exceeded the environmental reduction targets envisaged at appraisal. The PCR reported that the project as a whole reduced SO 2 by 36,669 t/year, TSP by 6,171 t/year, and chemical oxygen demand by 4,713 t/year. In addition, the project increased solid-waste treatment capacity by 700 t/year and wastewater treatment capacity by 58,000 m 3 /day. Hence, the project was effective and contributed greatly to the control of acid rain, as well as improved air and water quality in Anhui Province. The project also supported a successful program of restructuring of the industrial enterprises and improved operations management for the government agencies involved in the project. It is recognized as a positive achievement that the PCR data on performance of the facilities show that the subprojects achieved or exceeded their individual goals in reducing emissions. However, as stated in the RRP and the PCR, The main objective of the project was to improve ambient air quality and reduce acid rain, thereby improving the environment in the Yangtze River Valley in Anhui Province (footnote 1). On this point, it is indicated in the PCR that the cleaner production subprojects were expected to reduce SO 2 emissions in their respective cities by 20% 59%. This validation considers it important to quantitatively determine how effective the subprojects are in achieving the main objective of the project, i.e., in terms of reduction of ambient SO 2 (not emissions alone) and acid rain (ph) values in the subproject areas. This task should go further and determine how the project has helped the APG achieve its goals of improving the ambient air quality (i.e., is the APG s strategy working?). The PCR does not give any information on what was the impact of omitting the three cleaner production enterprises Wuhu Zhengxing Materials, Wuhu Hengchang Copper, Wuhu Feiying Wood Chemicals from the project. In the RRP, all three are noted to be substantial SO 2 emitters in Anhui. The RRP also quotes that the project will provide a summary of Anhui's environmental protection plan. The PCR has not provided any information on that subject. Also, not much information is given in the PCR on to what extent the rehabilitation measures were implemented in the protected areas for biodiversity protection (RRP, para. 85). Emphasis seems to have been on environmental improvement rather than acid rain rehabilitation measures per se. Notwithstanding the above comments, this validation recognizes the achievements of the individual subprojects in reducing emissions from their facilities and rates the project effective, the same as the rating of the PCR. (iii) (iv) Efficiency in achieving outcome and outputs. All of the facilities (except Wuhu Zhengxing Materials, Wuhu Hengchang Copper, and Wuhu Feiying Wood Chemicals that did not participate in the project) were successfully put into operation, and outputs at each of the facilities achieved or exceeded the targets set at appraisal. The efficiency of the individual subprojects varied widely, with the economic internal rate of return (EIRR) ranging from 14.95% to 47.16%. ATC and CNM had EIRRs higher than estimated at appraisal, while TCG and WSC, and both EI-ARD rehabilitation subprojects, had EIRRs that were lower than expected. Lower than expected EIRRs on some subprojects could generally be attributed to a drop in commodity prices for cleaner production enterprises. However, as reported in the PCR, the EIRR for the overall project on completion is 22.9%, compared with 20.4% estimated at appraisal. All subprojects exceeded the 12% economic opportunity cost of capital. The PCR rated the project efficient, with an EIRR of 22.9%. The high EIRR score is noted; however, there were delays in the implementation of the project. Hence, this validation also rates the project efficient. Preliminary assessment of sustainability. Installation of state-of-the-art technologies has ensured that the project facilities are appropriate to meet the PRC s environmental protection standards for solid, liquid, and gaseous waste discharges and disposal. Trained personnel are in place to operate the facilities. ATC has been operating and maintaining the facilities successfully since 2005, WSC since 2006, and CNM since Commissioning of the first coke oven at the TCG plant took place in September 2009 and the second in December TCG is also expected to be successfully operated and maintained. The upgraded facilities at Mount Huangshan and Mount Jiuhua ecological sites are in successful operation. The cleaner enterprises and EI-ARD operators have taken on ownership of the subprojects, and there is considered to be little risk that the quality of operation and maintenance of the facilities will diminish. The financial internal rate of return (FIRR) ranged from 6.3% to 13.6%. The ATC

10 8 subproject (a cleaner production subproject) and JTC subproject (an EI-ARD rehabilitation subproject) had FIRRs higher than estimated at appraisal, while the CNM, TCG, and WSC subprojects (cleaner production subprojects) and the HWC subproject (an EI-ARD rehabilitation subproject) had lower than expected FIRRs. As reported in the PCR, the FIRR of each subproject exceeded the financial cost of capital for each subproject ranging from 2.09% to 4.48%, and each subproject appears to be financially viable. Also, the project appears to be a high priority of the APG and should continue to receive attention and support. Therefore, each individual subproject and the project as a whole is rated by the PCR and this validation likely sustainable. (v) Impact (both intended and unintended). The impact of the project is considered substantial. The project's main impact will be on the human health and well-being of the people living and working in the project area, arising from reduced pollution levels, particularly acid rain. On-land benefits will come from improvements in domestic water supply, industrial wastewater discharges, solid-waste treatment, and pollution abatement in the workplace. The project facilities are successfully operating with improved governance and financial strength that will contribute to economic development in the region. In consideration of negative aspects of construction noise, dust, construction-related pollution, and land acquisition (which affected about 40 households for the reservoir that supplies water to Kecun Village) environmental control plans and resettlement plans were developed well in advance of the construction. Compensation was provided for land acquisition and resettlement according to applicable PRC laws and ADB s Involuntary Resettlement Policy (1995). No complaints were received. E. Overall Assessment, Lessons, and Recommendations (validation of project completion report assessment) (i) (ii) Overall assessment. The basic design of the subproject facilities and construction was sound, as seen from the successful implementation of the subprojects, and the facilities are assessed as likely to be successfully operated and maintained in the long run, although it should be noted that the cancellation of three cleaner production enterprises (part of the project at RRP stage) was not envisaged. The resulting delay did impact the loan closing date. The performance of the facilities has achieved or exceeded expectations. The project was effective in reducing plant emissions, particularly SO 2 (the main contributor to acid rain), and in treating domestic water, solid waste, and wastewater. Adequate time should have allowed for completion, taking into account the complexity of enterprise restructuring and reform and the addition of TCG to the project at the late stage in Financial and economic viability of the project has been confirmed. Although this validation has raised a few questions, the project is operating successfully. Overall, the PCR and this validation rate the project successful. Lessons. The lessons as provided in the PCR are appropriate and paraphrased below. This validation provides a number of additional lessons. (a) PCR lessons: 1. Industries continue to be a major source of pollution in the PRC, and reduction of pollutants can be partly achieved by upgrading existing process plants. 2. The project demonstrated the environmental benefits of financing such projects. 3. ADB participation has spurred the subproject companies to adopt enterprise reforms and high international technological facilities and operation. 4. Project designers should recognize that projects implemented by enterprises undergoing restructuring and reform pose particular challenges in meeting project completion deadlines and complying with some covenants. 5. Close cooperation and coordination between ADB, PMOs, and implementing agencies are important to ensure that implementation issues are understood and resolved quickly. 6. Investors, financial analysts, and designers must recognize and take into account that the financial performance of industrial enterprises is subject to business cycles. International and domestic prices of copper, caustic soda, and coke fell with the global economic slowdown. With global economic recovery, the prices are expected to increase again. The cleaner production enterprises, with newly upgraded technologies, will be better placed to derive high returns while having minimal impact on the environment.

11 9 (b) Lessons provided by this validation: 1. The APG and ADB should ensure that the executing agency and/or PMO staff has the capacity to carry out the procurement in accordance with ADB guidelines before project procurement starts. This requirement should be made integral to the outputs of the project preparatory TA and recorded in the RRPs. 2. ADB should obtain a stronger commitment from executing agencies to institutional strengthening and provide stronger M&E to meet that commitment. (iii) Recommendations. The recommendations as provided in the PCR are appropriate and paraphrased below. This validation also provides an additional recommendation. (a) (b) PCR recommendations: 1. Project-related recommendations: - The government should continue to monitor the construction of the second coke oven at TCG, targeted for completion at the end of December A performance evaluation of the project could be considered in 2011 or later. By that time, all subprojects will have been in operation for at least 6 months. The project performance evaluation report (PPER) should revisit and confirm the downward trends in SO 2 reduction and other related environment quality parameters for the selected industrial enterprises. It should also confirm the continued emphasis of the APG on enterprise reform and related initiatives that facilitate adoption of cleaner production processes, environment improvement, and consequent reduction in acid rain incidents. The PPER is important to support and further validate this important policy initiative of ADB and the APG. 2. General recommendations: - The project has catalyzed much-needed enterprise reforms in state-owned enterprises, while at the same time improving the environment by modernizing industrial processes. ADB should continue to assist financially viable projects that can provide significant environmental benefits. - A longer implementation period should be considered for projects in which ADB expects enterprise restructuring to take place. Recommendation provided by this validation: To address the main objective of the project, the government should quantitatively assess the impact of each subproject on the ambient air quality in the subproject area (city), particularly for SO 2, and acid rain/ph concentrations, as discussed in section D(ii). F. Monitoring and Evaluation Design, Implementation, and Utilization (project completion report assessment and validation) ADB provided close M&E of the project during implementation through review of progress reports, regular communications, site visits, and meetings with the borrower and the APG. The ADB loan included provision for recruiting international consultants in association with national consultants to assist the APG and implementing agencies in project management, including environmental management and monitoring. Thus, the APG was able to monitor and control construction activities, which strengthened project implementation. Each enterprise established an environmental management and monitoring unit to ensure compliance with environmental standards. Emission control and monitoring systems were also established at each implementing agency and at the provincial and municipality environmental laboratories. These control and monitoring systems will be used in the ongoing operation of the facilities. However, additional commentary is required in the PCR on the type of monitoring systems being used, i.e., are they continuous emission monitoring systems or high-volume samplers, and how robust is the data? Also, no mention is given as to what system is in place for independent review of the monitoring results.

12 10 G. Other (e.g., safeguards, including governance and anticorruption; fiduciary aspects; government assessment of the project, as applicable) (project completion report assessment and validation) (i) (ii) Safeguards. The project was essentially an environmental improvement project, implemented in accordance with the PRC and APG environmental laws and ADB guidelines. Adverse impacts of the project were minimal because of the safeguard measures adopted at project appraisal, including a resettlement plan that was prepared early and approved by ADB. Government assessment of the project. There is no report in the PCR on the government s assessment of the project. However, considering that the project was designed and implemented in accordance with the government s development strategy success, the government must be satisfied. H. Ratings PCR IED Review Reason for Disagreement/Comments Relevance Relevant Relevant While the project effectively targeted the acid rain problem, the omission of three major SO 2 polluting cleaner production enterprises after RRP stage points to a weakness in project design. Effectiveness in Achieving Outcome Effective Effective Efficiency in Achieving Outcome and Outputs Preliminary Assessment of Sustainability Likely sustainable Likely sustainable Borrower and Executing Agency Satisfactory Satisfactory Performance of ADB Satisfactory Satisfactory Impact Substantial Overall Assessment Successful Successful Quality of PCR Satisfactory I. Comments on PCR Quality Efficient Efficient Overall, the project had an EIRR of 22.9%. However, delays in project implementation did occur. The PCR should have commented on the achievements status for the associated objectives for the project, outlined in section B(iii), i.e., update legislation for stronger enforcement of environmental regulations, etc. The PCR should also have given details on how environmental and social safeguards were met for the demolition activity carried out for the various subprojects. The reason for the large differences between the design production capacities at appraisal and the actual production capacities on completion for cleaner production subprojects, as discussed in section C(ii)(d), should have been explained in the PCR. The reasons behind the significant reduction in scope of work for institutional strengthening and its impact on the project should have been provided in the PCR, as discussed in section C(ii)(d), cleaner production subproject, and institutional strengthening issues. The PCR should have explained why, for some subprojects, the cost estimate at appraisal was significantly higher than actual costs, as discussed in section C(iii)(b). The PCR has provided substantial documentation on the project to support the overall assessment and recommendations. However, this validation has certain comments on technical issues as above and as provided in the lessons and recommendations. Notwithstanding these comments on the PCR, this validation has noted the complexity of the project and overall rates the PCR satisfactory.

13 11 J. Recommendation for Independent Evaluation Department Follow Up A PPER can be considered as optional, in 2012 to verify in particular whether SO 2 emissions are maintaining their downward trend. It is also important to check at PPER stage among other financial indicators if the ratio of current assets to current liability for all cleaner production enterprises is below 1. K. Data Sources for Validation Data sources included the RRP, PCR, minutes of Management Review Meeting and Staff Review Committee, as well as back-to-office reports.

14 REGIONAL DEPARTMENT'S RESPONSE TO THE PROJECT COMPLETION REPORT VALIDATION REPORT On 16 April 2010, Director, IED2, Independent Evaluation Department, received the following comments from the Energy Division, East Asia Department. We appreciate that comments we made on the earlier draft were considered and incorporated in the final draft. EAEN has no further comments on the final draft.