Tangshan and Chengde Environmental Improvement Project in the People's Republic of China (Loan 1270-PRC)

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Project Performance Audit Report

PPA: PRC 25023(Final)

Tangshan and ChengdeEnvironmental ImprovementProject in People’s Republic of China (Loan 1270-PRC)

December 2004

Operations Evaluation Department

Asian Development Bank



CURRENCY EQUIVALENTS

Currency Unit – yuan (CNY)

At Appraisal(15 Oct 1993)

At Project Completion(15 Jun 2002)

At Operations Evaluation(8 Jun 2004)

CNY1.00 = $0.173 = $0.121 = $0.121$1.00 = CNY5.787 = CNY8.276 = CNY8.277

ABBREVIATIONS

ADB – Asian Development BankADTA – advisory technical assistanceCMG – Chengde Municipal GovernmentCOD – chemical oxygen demandEA – Executing AgencyEIRR – economic internal rate of return

EPB – environmental protection bureauFIRR – financial internal rate of returnLPG – liquefied petroleum gasMRM – Management Review MeetingNO2 – nitrogen dioxideNOx – nitrogen oxidesO&M – operation and maintenanceOEM – Operations Evaluation MissionPCO – Project Coordination OfficePCR – project completion reportPIA – Project Implementation AgencyPPAR – project performance audit report

PPTA – project preparatory technical assistancePRC – People’s Republic of ChinaRRP – Report and Recommendation of the PresidentSO2 – sulfur dioxideSOE – state-owned enterpriseTA – technical assistanceTMG – Tangshan Municipal GovernmentTSP – total suspended particulate matterWACC – weight and average cost of capital



WEIGHTS AND MEASURES

km – kilometerm – meterm2 – square meterm3 – cubic meter

MJ – mega joulemm – millimeter

NOTE

In this report, "$" refers to US dollars.

Director, Operations Evaluation Division 2 : David EdwardsEvaluation Team Leader : C.C. Yu

Operations Evaluation Department, PE-654



CONTENTS

Page

BASIC DATA iii EXECUTIVE SUMMARY v I. BACKGROUND 1

A. Rationale 1 B. Formulation 1 C. Purpose and Outputs 1 D. Cost, Financing, and Executing Arrangements at Appraisal 3 E. Completion and Self-Evaluation 3 F. Operations Evaluation 3

II. PLANNING AND IMPLEMENTATION PERFORMANCE 4 A. Formulation and Design 4 B. Achievement of Outputs 6 C.

Cost and Scheduling 7

D. Procurement and Construction 7 E. Organization and Management 8

III. ACHIEVEMENT OF PROJECT PURPOSE 9 A. Operational Performance 9 B. Performance of the Operating Entities 11 C. Financial and Economic Reevaluation 12 D. Sustainability 13

IV. ACHIEVEMENT OF OTHER DEVELOPMENT IMPACTS 14 A. Socioeconomic Impact 14 B.

Environment and Health Impacts 14

C. Impacts on Institutions and Policy 15

V. OVERALL ASSESSMENT 16 A. Relevance 17 B. Efficacy 17 C. Efficiency 18 D. Sustainability 18 E. Institutional Development and Other Impacts 18 F. Overall Rating 19 G. Assessment of Asian Development Bank and Executing Agency Performance 19

C.C. Yu, senior evaluation specialist (team leader), was responsible for the preparation of thisreport; conducted document reviews and key informant interviews; and guided the fieldworkundertaken by Naiyi Hu, Dongming Li, and Zhaohui Hu (staff consultants).

In accordance with the guidelines formally adopted by the Operations Evaluation Department(OED) on avoiding conflict of interest in its independent evaluations, the Director General ofOED did not review this report and delegated approval of this evaluation to the Director ofOperations Evaluation Division 2. To the knowledge of the management of OED, there wereno conflicts of interest of the persons preparing, reviewing, or approving this report.



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VI. ISSUES, LESSONS, AND FOLLOW-UP ACTIONS 20 A. Key Issues for the Future 20 B. Lessons Identified 21 C. Follow-Up Actions and Recommendations 22

APPENDIXES

1. Subproject 1: Gas Supply and Distribution Network System 232. Subproject 2: District Heating System 283. Subproject 3: Coal Gasification Plants Under the New Gas Company 334. Subproject 4: Pollution Abatement at Tangshan No. 2 Porcelain Factory 355. Subproject 5: Pollution Abatement at Tangshan No. 6 Ceramics Factory 406. Subproject 6: Tangshan Dongjiao Wastewater Treatment Plant 457. Subproject 7: Coal Gasification Plant Under the New Gas Company 518. Project Costs 569. Assumptions for Financial Analysis 5910. Assumptions for Economic Analysis 6811. Environmental Indicators for Tangshan 78

Attachment: Management Response on the Project Performance Audit Report on Tangshanand Chengde Environmental Improvement Project in the People’s Republic ofChina and Operations Evaluation Department Comment on ManagementResponse



BASIC DATATangshan and Chengde Environmental Improvement Project (Loan 1270-PRC)

Project Preparation/Institution BuildingTANo.

Technical Assistance Name Type Person-Months

Amount($’000)

ApprovalDate

1831 Tangshan and Chengde EnvironmentalImprovement Project PPTA 4.0 100.0 31 Dec 1992

1916 Institutional Strengthening of the EnvironmentalProtection Bureaus of Tangshan and ChengdeMunicipalities

ADTA 22.5 450.0 28 Jul 1993

Key Project Data ($ million)As per ADB Loan

DocumentsActual

Total Project Cost 237.0 291.86Foreign Exchange Cost 140.0 124.93ADB Loan Amount/Utilization 140.0 124.93ADB Loan Amount/Cancellation 15.07 Key Dates Expected ActualFact-Finding 9–30 May 1993Appraisal I–III Aug 1993 17 Aug–2 Sep 1993Loan Negotiations III Oct 1993 25–27 Oct 1993Board Approval 23 Nov 1993 25 Nov 1993Loan Agreement 22 Mar 1994Loan Effectiveness 22 Jun 1994 9 Jun 1994First Disbursement 6 Dec 1994Project Completion May 1999 Jan 2000Loan Closing 30 Jun 1999 29 Sep 2000Months (effectiveness to completion) 60 66

ECONOMIC AND FINANCIAL

INTERNAL RATES OF RETURN (%)

Appraisal PCR PPAR

Economic Internal Rate of ReturnSubproject1 18.6 14.4 16.8

2 12.3 14.1 13.4

3 and 5 16.11

5.0 4.2

4 14.6 10.7 -4.2

6 - 14.1 13.5

7 14.0 10.1 17.6

Project - 11.9 14.7

Financial Internal Rate of Return1 12.1 9.8 11.5

2 10.8 5.9 6.23 and 5 13.8 3 -2.4

4 8.3 4.2 -8.5

6 11.8 7 3.6

7 10.7 7.6 11.7

Project 11.1 7.1 8.5

1Estimated for Subproject 5 only, not Subproject 3.



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Borrower People’s Republic of ChinaExecuting Agencies Tangshan Municipal Government

Chengde Municipal Government

Mission DataType of Mission No. of Missions Person-DaysFact-Finding 1 231Appraisal 1 96Project Administration

Review 7 59Project Completion 1 39Operations Evaluation 1 76



EXECUTIVE SUMMARY

Rapid industrialization and years of neglect of environmental protection resulted in severeenvironmental degradation and pollution in the People’s Republic of China (PRC), particularlyduring the 1980s and 1990s. In the urban areas, heavy use of coal for both industrial productionand heating/cooking, often based on obsolete and inefficient combustion technologies, caused

excessive air emissions. Government policies for addressing environmental problems and forensuring sustained, stable, and coordinated economic development were contained in theEighth Five-Year Plan (1991–1995), which, inter alia, addressed the need to developcomprehensive environmental management at the municipal level. The operational strategy ofthe Asian Development Bank (ADB) in the PRC in the early 1990s aimed to achieve threeobjectives: improving economic efficiency, reducing poverty, and improving the environment andconserving natural resources.

The Tangshan and Chengde Environmental Improvement Project (the Project) was anintegral part of the national plan for urban environmental improvement and a part of the long-term strategy for addressing the serious air and water pollution in these municipalities in HebeiProvince. The main purpose of the Project was to reduce air and water pollution in the twomunicipalities, which had reached severe levels. The Project also aimed to introduce the mostadvanced and environmentally friendly technologies to maximize the beneficial impact onenvironment, which would have beneficial externalities in terms of energy and industrialefficiency, and product quality. It was to consist of two parts. Part A, for Tangshan Municipality,was to comprise six subprojects: five to supply coal gas and district heating, and to convert old,inefficient, coal-fired industrial kilns to modern, efficient, gas-fired kilns; and one to build awastewater treatment plant. Part B, for Chengde Municipality, was to comprise one subprojectto build a coal gasification plant to supply the city with coal gas. In addition, an advisorytechnical assistance (TA) grant was approved, prior to loan approval, to strengthen thecapabilities of the Tangshan and Chengde environmental protection bureaus (EPBs), includingimproving their organizational arrangements, establishing a comprehensive computer-basedmanagement information system, developing of environmental planning guidelines, andaddressing short-term and long-term training and human resources needs.

A loan of $140.0 million, approved by ADB in November 1993, became effective in June1994. The total project cost was estimated at $237.0 million equivalent, including $140.0 millionin foreign exchange cost and $97.0 million equivalent in local currency cost. The foreignexchange cost was to be financed by ADB, while the local currency cost was to be financed bythe Executing Agencies’ own resources and by domestic banks.

The Operations Evaluation Mission (OEM) visited Beijing, Tangshan, and Chengde inJune 2004. It found that, while project components were mostly implemented as envisaged atappraisal, the quality of implementation varied, ranging from highly satisfactory or excellent todysfunctional. Despite the complexities of the Project and changes in scope, the loan wasclosed in September 2000 after one extension, 15 months behind schedule. The actual projectcost at completion was $291.86 million equivalent, comprising $124.93 million in foreign exchangecost and $166.93 million equivalent in local currency cost, resulting in a $54.86 million costoverrun, or 23% more than the appraisal estimate. ADB loan utilization amounted to $124.93million to cover the foreign exchange cost; the remaining $15.07 million was cancelled.

Since its commercial commissioning in October 1999, Subproject 1 (Gas Supply andDistribution) has increased the gas supply capacity of the Project Implementation Agency (PIA)by 85%, from 365,000 cubic meters per day (m3 /day) in 1993 to the present 670,000 m3 /day.The number of households served grew from 149,000 to 271,000 during the same period,



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presently covering 96.5% of the households in the city and exceeding the target of 90%.Subproject 2 (District Heating) had a slow start in reaching its design capacity due to delays inconstruction of the original heat source, the Xijiao Cogeneration Plant. However, the PIAsecured alternative heat sources, which have enabled the distribution network to reach 91% ofits design capacity. The coal gasification plant built under Subproject 3 on the premises ofTangshan No. 6 Ceramic Factory was operated safely for 5 years between 1996 and 2001

before being shut down. In 2002, the factory was connected to the city gas supply due to itsincreased capacity, cheaper costs, and safety concerns.

Subprojects 4 and 5 (both Pollution Abatement) encountered major problems with someof the equipment imported. In the case of Subproject 4, the kiln, the main piece of equipmentfinanced by the ADB loan, was never fully commercially commissioned after several failed trialruns. The PIA spent its own resources (after ADB loan closing) to convert its old, inefficient,coal-fired kilns to gas firing. In the case of Subproject 5, the kilns were performing well, but themolding and spraying equipment were never functional. The PIA was forced to spend additionalresources to procure domestically produced substitute equipment, which is less efficient andmore labor intensive.

Under Subproject 6, two identical wastewater treatment plants were built in Tangshaninstead of one as envisaged at appraisal, with a combined capacity of 300,000 m 3 /day. Theyhave been operating well. Together with two existing smaller plants, they brought the municipalwastewater treatment ratio to about 65%, making Tangshan one of the top cities in the PRC interms of wastewater treatment. Since its commissioning in September 1999, the gasificationplant built in Chengde under Subproject 7 has reached or exceeded its design capacity forproducing its key products, viz., coke and coal gas. The production of coke has broughtsignificant economic benefits to the Chengde Iron and Steel Company, the PIA, by ensuring astable supply of high-quality and low-cost coke. However, the coal gas produced, which was tobe transmitted through a 40-kilometer (km) gas distribution network linking the gasification plantto the city, located 20 km away, was consumed mostly on site by the PIA. The demand for gasby Chengde city has not materialized as envisaged at appraisal. The gas supply system, whichwas designed to serve at least 50,000 households in Chengde in order to break even financially,currently serves only 12,000 households.

To a varying degree, all seven subprojects achieved their main stated objective ofimproving air and water quality in the two cities. The appraisal targets of pollution reductionhave been mostly achieved with the exception of Subproject 2 and Subproject 7. In the case ofSubproject 2, about half of the appraisal targets of air emission reduction had been achieved asof 2003, even though the subproject achieved the highest overall air pollution reduction amongall the subprojects. In the case of Subproject 7, although the emission reduction targets werenot estimated and were probably achieved numerically, because of the fact that most of the gasproduced was consumed near the steel plant, the air quality of Chengde city has not benefiteddirectly in a significant manner. The air and water quality in Tangshan has improved significantlysince the early 1990s. On air quality, all three main pollutants, viz., total suspended particulates(TSP), sulfur dioxide, and nitrogen dioxide, experienced a decline from 1990 to 2003, rangingfrom 13% to 82%. The Project, with subprojects on coal gas supply, district heating, and kilnconversion from coal to gas, contributed significantly to pollution reduction, particularly that fromTSP. Tangshan’s water quality also experienced significant improvement during the sameperiod, although less dramatic compared with air quality. The quality of the Dou River, the mainriver that runs through Tangshan and benefits from the Project, met Class II standards, with twoof its six sections being monitored in 2003. The OEM was informed that the air quality inChengde has also improved in recent years.



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The Project was relevant to achieving the strategic goal of the Government onsustainable development and ADB’s operational strategy to improve economic efficiency and theenvironment. However, the relevance of Subprojects 3, 4, and 5 has lessened somewhat, asADB no longer provides assistance to state-owned enterprises (SOEs) directly for energyefficiency and technological improvement. Overall, the Project was relevant. The subprojectshave mostly achieved their environmental objectives, but the economic benefits for some

subprojects did not materialize; partly as a result, the concerned PIAs are in a very difficultfinancial situation. Overall, the Project was partly efficacious. The execution of differentsubprojects was generally on schedule, with some exceptions due to changes in scope. Theoverall recalculated economic internal rate of return is about 14.7%, but there are significantvariations across subprojects, ranging from negative to 17%. Overall, the Project was partlyefficient. With the exception of Subprojects 3, 4, and 5, the remaining subprojects are likely tobe sustainable in view of the strong capabilities of the PIAs to operate and maintain thefacilities, satisfactory financial performance of the operating entities and the subprojects, and/orstrong government policy and financial support. The Project has had a significant impact onenvironmental improvements, particularly in Tangshan and, to a lesser degree, in Chengde.Through the related advisory TA and other activities, the Project made a significant contributionto improving the institutional capacities of the Tangshan and Chengde EPBs. Overall, the

Project is rated partly successful, bordering successful, with the following ratings given toindividual subprojects: Subproject 1, highly successful; Subprojects 2, 5, and 6, successful;Subproject 3, partly successful bordering unsuccessful; and Subprojects 4 and 5, unsuccessful.The TA is rated successful.

Two main issues that continue to have relevance to ADB’s current operations in the PRCare identifiable. First, the experience of the Project appears to lend support to ADB’s currentoperational strategy in the PRC, i.e., more focus on noncommercial sectors through public utilitiesto achieve public goods including water supply and wastewater treatment, gas supply, and districtheating, and staying away from direct support to SOEs in essentially industrial projects. Second,environmental improvement has become a mainstay of ADB’s operations in the PRC.Compared with single-investment projects, integrated environmental improvement projects for a

city have several advantages including greater impact-staff input ratio. They also havesubstantial risks, including mixing “bad” with “good,” and difficulties in loan appraisal andimplementation due to the more diverse scope. On balance, however, the benefits can outweighthe risks. The challenge for ADB is to improve its capability to bridge the sector gap within theorganization in order to bring about greater impact with fewer resources. Three key lessons havebeen identified: (i) selecting suitable, not untested, technologies, and the need to address thetechnological risks explicitly and thoroughly; (ii) for a developing country like the PRC, achievingeconomic benefits is a prerequisite for sustainable environmental improvement, and ADB shouldnot try to “de-emphasize” the importance of achieving economic benefits in “environmentalimprovement” projects; and (iii) developmental impact is not achieved at loan approval and,despite generally sound implementation, given the strong performance by both the ExecutingAgencies and ADB, ADB could have done more to improve the implementation for some

subprojects.

Under the Loan Agreement, the Government is committed not to provide any subsidy orbudgetary grant to any PIA after 1993 and to ensure that utility enterprises set prices that allowfull recovery of operating and capital costs and provide an adequate return on investment.These were not fully complied with and should be complied with in a predetermined phasedmanner. Since decisions on subsidies and prices are often made at a higher level than PIAs andeven municipal governments, ADB needs to build on its strong past and ongoing efforts to assistthe Government in the areas of tariff reforms for water supply and wastewater treatment and to



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continue its dialogue with the Government on water and gas tariff reforms. The reforms are alsoimportant to ensure the financial viability of ADB’s ongoing and future environmentalimprovement projects.

David EdwardsDirectorOperations Evaluation DepartmentEvaluation Division 2



I. BACKGROUND

A. Rationale

1. Rapid industrialization and years of neglect of environmental protection resulted insevere environmental degradation and pollution in the People’s Republic of China (PRC),

particularly during the 1980s and 1990s. In the urban areas, heavy use of coal for both industrialproduction and heating/cooking, often based on obsolete and inefficient combustiontechnologies, caused excessive air emissions and wastewater. Air pollution in PRC cities,particularly in the north during the winter, was among the most severe in the world.

2. Environmental protection became a national priority in the PRC’s development strategyin the early 1990s. Government policies for addressing environmental problems and forensuring sustained, stable, and coordinated economic development were outlined in the EighthFive-Year Plan (1991–1995), which emphasized strict compliance with environmentalprotection, laws and regulations. The plan also aimed to develop comprehensive environmentalmanagement at the municipal level, to disseminate information on environmental protection, andto encourage development of environmental protection technologies. The operational strategy of

the Asian Development Bank (ADB) in the PRC in the early 1990s aimed to achieve threeobjectives: improving economic efficiency, reducing poverty, and improving the environment andconserving natural resources.

B. Formulation

3. During the February 1992 PRC Country Program Mission, the Government requestedADB to support the implementation of measures to improve air and water quality in Tangshanand Chengde municipalities, both in Hebei Province in the northern PRC. The Tangshan andChengde Environmental Improvement Project (the Project) was to be an integral part of thenational plan for urban environmental improvement and a part of the long-term strategy foraddressing the serious air and water pollution in these municipalities. In support of its request,

the Central Government, the Tangshan Municipal Government (TMG), and the ChengdeMunicipal Government (CMG) submitted to ADB detailed feasibility and environmental impactassessment reports for the Project. In December 1992, ADB approved technical assistance(TA)1 to review the feasibility reports and to ascertain the technical, financial, and economicfeasibility of the Project. Based on the consultants’ confirmation of the Project’s feasibility, and aseries of ADB missions, ADB approved the loan in 1993.2 The Project comprised sevensubprojects on coal gas supply, district heating, energy efficiency improvement in porcelain andceramic factories, wastewater treatment, and coal gasification. Many of the subprojects clearlyhad dual purposes in that they aimed at achieving both economic benefits in the form of energyefficiency and environmental benefits in terms of emission reduction. All of them targeted state-owned enterprises (SOEs) through investing in newer and cleaner production technologies orenvironmental improvement facilities.

C. Purpose and Outputs

4. The main purpose of the Project, as stated in the Report and Recommendation of thePresident (RRP), was to reduce air and water pollution in Tangshan and Chengde municipalities

1TA 1831-PRC: Tangshan and Chengde Environmental Improvement Project , for $100,000, approved on 31December 1992.

2Loan 1270-PRC: Tangshan and Chengde Environmental Improvement Project , for $140 million, approved on 25November 1993.



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which had reached severe levels. Since the Project was to introduce the most advanced andenvironmentally friendly technologies to maximize the beneficial impact on environment, itwould also have beneficial externalities in terms of industrial efficiency and product quality.

5. Part A of the Project, for Tangshan Municipality, comprised six subprojects (fivedesigned to improve air quality and one to improve water quality ), and Part B, for Chengde

Municipality, comprised one subproject designed to improve air quality . Table 1 provides thebrief scope at appraisal for each subproject. The detailed scope and evaluation findings for eachsubproject are presented in Appendixes 1–7. While no specific purposes were assigned toindividual subprojects, based on the scope it may be inferred that all except one targeted airquality improvement and/or production efficiency and quality improvement, while Subproject 6targeted water quality improvement.

Table 1: Summary of Subprojects

Location Subproject Brief Scope at Appraisal

TangshanMunicipality

Subproject 1: Gas Supply andDistribution Network System

Facilities needed to supply incremental town gas so as to bringthe total gas supply in Tangshan to about 670,000 cubic meters

per day (m3 /day)Subproject 2: District HeatingSystem

Space heating for about 8.5 million (m2) consisting of 4.93 million

m2of residential space and about 3.57 million m

2of space in

commercial establishments and public buildings Subproject 3: Coal GasificationPlants under the New GasCompany

Two coal gasification plants, one on the premises of TangshanNo. 2 Porcelain Factory and the other at No. 6 Ceramic Factory,to be established and operated by the Tangshan CeramicIndustrial Coal Gas Company, Ltd. (a new gas company) tosupply gas to the ceramic kilns at these two factories

Subproject 4: PollutionAbatement at Tangshan No. 2Porcelain Factory

All 5 coal-fired kilns to be demolished and 7 new gas-fired kilnsto be established; all 6 heavy, oil-fired roller-kilns to be convertedto gas; 2 new gas-fired roller kilns to be established, onefinanced under the subproject and the other financed from thefactory’s own resources

Subproject 5: PollutionAbatement at Tangshan No. 6Ceramics Factory

All 3 coal-fired tunnel kilns to be replaced by two 100-meter gas-fired tunnel kilns; upon completion of the 2 new kilns, demolitionof all 5 dome kilns and replacement with a new gas-fired tunnelkiln financed from its own resources

Subproject 6: TangshanDongjiao WastewaterTreatment Plant

Dongjiao Wastewater Treatment Plant to be established in thecentral district of Tangshan Municipality with a population of343,000

ChengdeMunicipality

Subproject 7: Coal GasificationPlant under the New GasCompany

Coal gasification plant, to supply gas to domestic householdsand commercial and industrial customers, with a design capacityof 720,000 m

3 /day, located 20 kilometers from the city center in

Luanhe Township and operated by the Chengde CoalGasification Company, Ltd.

6. In addition to the project preparatory TA (footnote 1), an advisory TA grant3 was

approved prior to loan approval. The TA aimed to strengthen the capabilities of the Tangshanand Chengde environmental protection bureaus (EPBs), including organizational improvements,establishment of a comprehensive computer-based management information system, anddevelopment of environmental planning guidelines, plus addressing short-term and long-termtraining and human resources needs.

3TA 1916-PRC: Institutional Strengthening of the Environmental Protection Bureaus of Tangshan and Chengde Municipalities , for $450,000, approved on 28 July 1993.



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D. Cost, Financing, and Executing Arrangements at Appraisal

7. Appendix 8 provides a cost breakdown by project component. At appraisal, the projectcost was estimated at $237.0 million equivalent, including $140.0 million in foreign exchangecost and $97.0 million equivalent in local currency cost. ADB was to finance the entire foreignexchange cost.4 The local currency cost was to be financed by the Executing Agencies (EAs)

own sources ($42.8 million equivalent) and from domestic commercial loans ($54.2 millionequivalent).

8. At appraisal, it was envisaged that TMG would be the EA for Part A, and CMG the EAfor part B. Each subproject enterprise would be the Project Implementation Agency (PIA) for itsrespective component.

E. Completion and Self-Evaluation

9. The project completion report (PCR), circulated in October 2002, reported that theProject was implemented mostly as envisaged at appraisal, with moderate delays of 6 months.The seven subprojects, however, experienced different levels of success in terms of completion

and operation.

10. With respect to the achievement of the Project’s main objective, the PCR providedambient air quality indicators for key pollutants for both cities since 1993. They indicated forTangshan a significant improvement of air quality, with sulfur dioxide (SO 2) reduced by morethan 60%, total suspended particulate (TSP) by 30%, and nitrogen oxides (NOx) by 30%.Significant improvement, particularly in terms of TSP, was also observed for Chengde.

11. The financial internal rate of return (FIRR) and economic internal rate of return (EIRR)were recalculated for the individual subprojects as well as for the Project as a whole. The FIRRand EIRR for the overall Project were above 7.1% and 11.9%, respectively (the appraisal didnot estimate the FIRR and EIRR for the Project as a whole). The recalculated FIRRs and EIRRs

for the subprojects are 30-70% lower than the corresponding appraisal estimates except in thecase of EIRR for Subproject 2. TA 1916 (footnote 3) was considered successful by both the TAcompletion report (carried out separately) and the PCR, although neither provides adequateinformation on the TA’s achievement of purposes and impact. The PCR concludes that theProject achieved its main objective of air quality improvement despite the population increase ofthe city. Overall the Project is rated successful in the PCR.

F. Operations Evaluation

12. This project performance audit report (PPAR) assesses various aspects of projectformulation, design, implementation, and sustainability, as well as the Project’s socioeconomic,environmental, and institutional impacts. The assessment is based on a review of ADB

documents, discussions with ADB staff, and findings of the Operations Evaluation Mission (OEM),which visited Beijing, and Tangshan and Chengde municipalities during 1–19 June 2004. TheOEM held discussions with the EAs–the Tangshan and Chengde municipal governments; sixPIAs; and the Ministry of Finance. The OEM inspected the project facilities and their operation andmaintenance (O&M), and held discussions with selected customers. Copies of the draft PPAR

4ADB’s loan terms to the Government included the pool-based variable lending rate for US dollars with a maturity of25 years and a grace period of 5 years. The terms of relending (to the Executing Agencies) and onlending (to theProject Implementing Agencies) were the same, i.e., no additional charges.



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were sent to the Government and concerned ADB departments for review; all comments receivedhave been considered in finalizing the PPAR.

II. PLANNING AND IMPLEMENTATION PERFORMANCE

A. Formulation and Design

13. In the early 1990s, Tangshan and Chengde relied on coal to meet about 90% of theirenergy demands. Industrial SOEs used much of the energy while employing outdatedcombustion technologies that lacked pollution control measures. The formulation of the Projectwas in line with ADB’s operational strategy for the country at the time, which included improvingeconomic efficiency and the environment. In this context, the Project was viewed by some ADBBoard members as “hitting two birds with one stone” by trying to address both economicefficiency and environmental improvement at the same time.

14. Several policy-oriented and project design-related issues emerged during loanformulation and processing. First, ADB Management encouraged the Appraisal Mission todiscuss with the Government in ongoing policy dialogue the introduction of the “polluter pays”

principle and the possibility of accepting a time-bound loan covenant with respect to theintroduction of a “polluter pays levy” for the major polluting industries. Second, someparticipants at the Management Review Meeting (MRM) felt that too much emphasis might havebeen given to industrial efficiency improvement and considered that the design of the Projectshould be more balanced so that it would have dual merits. As will be discussed further (para.61), the de-emphasis on industrial efficiency improvement as required by Management led to aheavy emphasis, perhaps overly so, on the Project’s environmental benefits by the AppraisalMission, creating a strong gap between the objectives and scope of the Project as outlined inthe ADB documents and those as understood by the PIAs. The differences in the perceivednature of the Project had implications for the design process and for the eventual outcome ofthe Project. Other points raised at MRM included the need for tariff increases and enterpriserestructuring; relationship of the Project with other and previous environmental projects by the

World Bank and ADB; and the need to address other more polluting sectors rather than just theceramic industry. In particular, questions were raised at the Board meeting as to whether ADBshould focus on areas that would help create a climate in which tapping of capital marketsdirectly by enterprises was possible. Such areas included price reform, cost recovery, enterpriseautonomy and financial accountability, and private financing and participation in enterprisemanagement and ownership.5

15. To partly address these broader policy-oriented and specific design-related issues, asmall-scale project preparatory TA (footnote 1) was provided to finance the services of fourinternational consultants, viz., an environmental economist, an expert on coal gasificationtechnology, a specialist on the ceramic industry, and a wastewater treatment specialist. Theirtask was assess the national environment policy framework as well as the policies of Tangshan

and Chengde with a view to identifying the major problems and issues affecting the

5This question continues to have relevance to the current lending program in the PRC, particularly for environmentalimprovement, since many end users of past and ongoing loans are SOEs, and the issues of price reforms andenterprise autonomy are still very much unresolved despite progress in some areas. However, it should also berecognized that these are macro-issues and cannot be resolved at the project level. ADB has been in continuousdialogue with and providing assistance to the Government in many of these areas. Furthermore, since the mid-1990s, ADB has increasingly reduced its portfolio in the area of industrial pollution abatement and energyconservation by SOEs, and placed more focus on providing assistance to address environmental problems throughpublic utilities, e.g., gas distribution, water supply, and wastewater treatment.



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implementation of pollution control measures, and to evaluate the technical details and viabilityof the Project with an aim to preparing it for ADB financing.

16. The OEM reviewed two available consultants’ reports, one prepared by theenvironmental economist’s team6 and the other by the ceramic specialist. 7 The OEM couldneither find nor confirm the existence of reports done by the coal gasification and wastewater

specialists. A major portion of the environmental economist’s report was devoted to explainingthe PRC’s environmental policy and institutional framework at the national level, which wasmore for the benefit of ADB than the Tangshan and Chengde municipal governments as theEAs of the TA. The OEM’s field visit confirmed this assessment, as the EAs had no recollectionof the TA. The second portion of the environmental economist’s report aimed to assess therelevance and cost effectiveness of the nine proposed subprojects at that time. 8

17. The environmental economist’s report provided several reasons for ADB assisting inenergy efficiency and environmental improvement, including acceleration of price and enterprisereforms and ADB’s unique ability to act as an “outside coordinator” across different levels ofgovernment so that special interests might be moderated. The consultants conducted a simplecost-effectiveness assessment for four subprojects with respect to air emissions and concluded

that the district heating subproject (Subproject 2) would achieve the highest cost effectivenessin terms of the amount of pollutants removed per million dollars invested, while the proposedthree ceramic industry subprojects would achieve similar but lower (about half) costeffectiveness. The OEM findings partly confirm this assessment.

18. The environmental economist’s report assessed the financial and cost-recovery policiesfor urban services in the two borrowing municipalities. It noted that prices for local governmentservices fixed by municipal price bureaus were generally too low to allow full cost recovery eventhough increasing understanding was evident that full cost recovery prices must be charged forwater, gas, electricity, and heat (steam). The report noted that the two municipalities hadprovided ADB with assurances that all services would be subject to full cost pricing includingconnection fees and depreciation.

19. The report of the ceramic industry specialist assessed the technical viability of theproposed subprojects for three ceramic enterprises. In the end, only the second and thirdenterprises, i.e., Tangshan No. 6 Ceramic Factory and Tangshan No. 2 Porcelain Factory, werechosen, while the first one, Tangshan Victory Ceramic (Group) Corporation, which consisted offour factories, was dropped from project financing. In general, the consultants provided apositive assessment of the proposed improvements for both factories. Specifically, TangshanNo. 2 Porcelain Factory was viewed as the “most advanced” and well-managed factory of all,and the proposed technical enhancements (under Subproject 4) and machines/equipmentenvisaged were believed to be justifiable and technically sound. For Tangshan No. 6 CeramicFactory, the proposed subproject (Subproject 5) was found to be logical and conformed to thelatest international technical standards. However, as will be seen (para. 21), both subprojects

experienced technical problems, and the problems with Subproject 4 may have been particularlydue to design and procurement of the equipment.

6Harvard Institute for International Development, March 1993, Improving the Environment in the People’s Republicof China: Tangshan and Chengde Environmental Improvement Project, for Asian Development Bank, Contract No.CPCS/93-069.

7GERI Engineering GmbH, July 1993, Ceramic Industry Technical Evaluation and Assessment of Project Viability:Tangshan Environmental Improvement Project, for Asian Development Bank.

8Subproject 1, Gas Supply and Distribution Network System, was not among the original nine subprojects, whichincluded an additional wastewater treatment plant, a ceramic factory, and an iron-making factory.



6

B. Achievement of Outputs

20. The details of the outputs from each subproject are presented in Appendixes 1–7. Ingeneral, the subprojects were implemented largely as envisaged, with only minor delays andmodifications in most cases. The quality of the equipment and installation was generally

satisfactory, and excellent in some cases. Several exceptions and modifications should bementioned. For example, under Subproject 2, 12 sets of radio signal transmission equipment and1 set of computer-based control equipment were procured instead of 85 sets and 2 sets,respectively, as envisaged by the original design and strongly advocated by the internationalconsultants. The purpose was to save costs by continuing to make use of the existing controlequipment. Under Subproject 3, the planned gasification plant for Tangshan No. 2 PorcelainFactory was cancelled, as the factory was able to secure its gas supply from Tangshan GasCompany, but the other gasification plant was constructed, as envisaged, on the premises ofTangshan No. 6 Ceramic Factory. Under Subproject 6, the Dongjiao Wastewater Treatment Plantwas implemented as envisaged and was commissioned in October 1997. Due to competition andother factors, there was a significant loan saving. With ADB’s approval, a second plant of identicaldesign, the Beijiao Wastewater Treatment Plant, was constructed and commissioned in

November 2001. The only subproject in Chengde, Subproject 7, was implemented largely asenvisaged at appraisal, with only minor delays. The quality of the construction was satisfactory toexcellent. The plant manager proudly informed the OEM that the plant is one of the best in thePRC with similar capacities.

21. Major problems were encountered with Subprojects 4 and 5. Under Subproject 4, theoriginal intention of the PIA was to use the ADB loan to procure a new gas-fired roller kiln toproduce high-quality porcelainware. The PIA would then use the money generated from the newproducts to finance the conversion of its old coal-fired and oil-fired kilns to gas firing. However,the new gas-fired roller kiln established using ADB loan proceeds was never commerciallycommissioned due to various problems related to poor design, adoption of untested technology,and the contractor’s poor performance. Its products were of unstable quality in terms of size and

color, and could not meet the quality standards of the intended export markets. The equipmenthas been idle since 2002. As a result, the PIA had to spend its own resources, after ADB loanclosing, to convert its old, inefficient, coal-fired kilns to gas firing. Under Subproject 5, thesubproject was constructed largely as envisaged, including two highly automated tunnel kilns,one shuttle-type kiln, one gas-fired dryer, one set of electrostatic spraying equipment, and 16pieces of high-pressure and 1 piece of mid-pressure molding equipment. However, the moldingequipment (from a German supplier) was never properly assembled. Due to its suddenbankruptcy, the supplier never dispatched any technicians to assemble the equipment and toconduct the training required.9 The PIA approached the former employees of the supplier in aneffort to bring them to the site to help with the installation, but the price they demanded was toohigh. In the end, all other efforts also failed, and the equipment, at a cost of $6 million, wasnever made functional. In addition, the spraying equipment, at a cost of about $500,000, could

not reach the performance standards and was not functional at the time of the OEM. As a result,the PIA had to invest additional resources to procure domestically produced molding andspraying equipment, which is less automated and efficient, and more labor intensive.

9According to the PIA and EA officials interviewed, the molding equipment was procured in advance in an effort bythe PIA to avoid paying import tax, which was to be introduced by the Government the following year.



7

C. Cost and Scheduling

22. The OEM tried to confirm the costs and scheduling for each subproject with therespective PIAs. The detailed accounts of the subproject costs contained in Appendixes 1–7point out the differences between the PCR cost estimates and the cost figures provided to theOEM by the PIAs, even though in many cases the differences are minor or moderate. However,

the OEM is generally of the view that the PCR estimates are correct on the ground that (i) atleast for the foreign exchange costs funded by ADB, the PCR estimates added up to the totalADB disbursement (i.e., $124.93 million); and (ii) later estimates of costs could be subject tomore errors and inconsistencies resulting from, for example, different exchange rates orchanges in accounting practices and personnel.

23. The total actual project cost at completion was $291.86 million equivalent, comprising$124.93 million in foreign exchange cost and $166.93 million equivalent in local currency cost,resulting in a $54.86 million cost overrun, or 23% more than the appraisal estimate (Appendix 8).The higher total cost was caused mostly by the higher local currency costs in Subproject 6, forwhich there was a doubling of the capacities built (Appendix 6), and in Subproject 7, for whichthere was an added component of waste gas recovery and longer pipelines connecting the plant

to Chengde city (Appendix 7). The ADB loan amounted to $124.93 million to cover the foreignexchange cost, and the remaining $15.07 million was cancelled.

24. Detailed information on implementation scheduling for each subproject is presented inAppendixes 1–7. For the Project as a whole, despite the complexities and changes in scope,the loan was closed in September 2000 after one extension, 15 months behind schedule.

D. Procurement and Construction

25. The PIAs indicated that the procurement of ADB-financed components was carried outin accordance with ADB’s Guidelines for Procurement , mostly using international competitivebidding and international shopping procedures, with assistance from the PRC International

Technical Tendering Company. The Project also provided loan proceeds for engaginginternational consultants for design review.10 The international consultants for these servicesand under TA 1831-PRC (footnote 1) and TA 1916-PRC (footnote 3) were engaged inaccordance with ADB’s Guidelines on the Use of Consultants .

26. While the EA officials and PIAs were generally satisfied with the tendering company’sperformance, they pointed out the Government’s approval procedures for procuring foreign goodswere extremely complex in the early and mid-1990s. The EAs and PIAs had to make visits toBeijing, which is about 300 kilometers (km) away, on a very frequent (sometimes weekly) basis.Although generally the quality of the goods procured was good, some subprojects experiencedproblems. For example, the PIA for Subproject 1 compared the prices of pipelines procured usingits own money and those using ADB loan proceeds, and concluded that the ADB-financed

pipelines were about 20% more expensive. The reason given was that only very large supplierswere eligible, since it was a large package. However, the winning vendor procured the pipelinefrom a local smaller company that had been supplying pipelines to the PIA.11 For someequipment, spare parts are very expensive, in part because the vendors do not sell separate partsbut only the assembled ones. Major problems were encountered in Subprojects 4 and 5 with the

10The Canadian consultants engaged to review the design of the ceramic/porcelain subprojects did not detect anypotential design or implementation problems.

11The OEM could not independently verify this claim. The price differential, if it indeed existed, could be caused byother factors as well, such as different quality or a different market situation during the different time periods.



8

molding and spraying equipment, and kiln (para. 21). In these cases, the vendor either nevercame to the site to assemble the equipment due to sudden bankruptcy, or came but failed toassemble and test the equipment to the designed performance level. Depending on thecomplexities of the subprojects and the PIAs’ own experience and technical capabilities, somePIAs, e.g., that under Subproject 7, had a large number of relatively small tendering packages (56in that case), whereas in other cases, e.g., Subprojects 4 and 5, the number of packages was

much smaller. A relatively large number of packages is probably conducive to cost control butneeds to be based on thorough PIA staff familiarity with the technologies involved.

27. The engineering and civil works were generally done in accordance with internationalstandards or generally accepted practices, and in some cases exceeded them.

E. Organization and Management

28. The Project was the first development agency-funded project for Tangshan andChengde municipalities, and the two municipal governments attached high priority to it. For PartA in Tangshan (Subprojects 1–6), a Project Coordination Office (PCO) was created, headed bythe first vice mayor. The deputy director of the PCO was concurrently the director of the

Tangshan EPB, and the PCO was physically located in the EPB building. Both the director andthe deputy director provided strong and dedicated leadership in coordinating and supervisingthe implementation of the subprojects by the PIAs and in coordinating with ADB. For Part B inChengde (Subproject 7), because there was only one subproject, the municipal governmentdelegated the day-to-day supervision and coordination (with other subprojects) to the PIA for thesubproject, Chengde Iron and Steel Group, while maintaining its leadership through a leadinggroup headed by Chengde’s first vice mayor and the general manager of the steel company.Table 2 lists the names of the PIAs for all the subprojects.

Table 2: Project Implementation Agencies

Subproject Project Implementation Agency

1 Tangshan Gas Company2 Tangshan Heat and Power Company3 Tangshan No. 6 Ceramic Factorya

4 Tangshan No. 2 Porcelain Factory5 Tangshan No. 6 Ceramic Factory6 Tangshan Wastewater Treatment Company7 Chengde Iron and Steel Group

aOriginally this subproject was to build two gasification plants on thepremises of Tangshan No. 2 Porcelain Factory and Tangshan No. 6Ceramic Factory, to be operated by a separate, single gas company.However, due to the cancellation of the first one, it was decided thatTangshan No. 6 Ceramic Factory would be the PIA for this subproject.

29. The PIAs reported that their initial intention was to use their own engineeringdepartments to manage and supervise the construction activities. However, ADB proceduresrequired them to engage an independent project management and supervision company tosupervise all the subprojects. To meet this requirement, a new company, Fangyuan EngineeringSupervision Company, was formed. Some PIA officials indicated that the company comprisedmostly former employees of the PIAs, so true “independence” was questionable. Several PIAsinformed the OEM that, despite the engagement of the new supervision company, the work wasdone mostly by the engineering departments and project management teams of the PIAs.



9

Overall, the model of having a PCO in the Government and separate PIAs to implementindividual subprojects appears to have worked well, given the strong commitment andownership at all levels.

III. ACHIEVEMENT OF PROJECT PURPOSE

A. Operational Performance

30. The details of the operational performance of each subproject, in terms of bothproduction and environmental benefits, are presented in Appendixes 1–7, with highlightssummarized below.

1. Improvement in Capacity and Quality of Production/Services

31. Since its commercial commissioning in October 1999, Subproject 1 Tangshan (GasSupply and Distribution) has increased the gas supply capacity of the PIA by 85% from 365,000cubic meters per day (m3 /day) in 1993 to the present 670,000 m3 /day. The number ofhouseholds served grew from 149,000 to 271,000 during the same period, presently covering

96.5% of households in the city and exceeding the target of 90%. Subproject 2 Tangshan(District Heating) had a slow start in reaching its design capacity due to delays in construction ofthe original heat source, the Xijiao Cogeneration Plant. However, the PIA secured alternativeheat sources, which have enabled the distribution network to reach 91% of its design capacity.With the measures already taken and firm evidence that more measures are being or will betaken, the OEM believes that the heating system will achieve its design capacity of 8.5 millionsquare meters (m2) by 2006. The coal gasification plant built under Subproject 3 on thepremises of Tangshan No. 6 Ceramic Factory was operated safely for 5 years between 1996and 2001 before it was shut down.12 In 2002, the factory was connected to the city gas supplydue to its increased capacity, cheaper costs, and safety concerns.

32. Subprojects 4 and 5 encountered major problems with some of the imported equipment

(para. 21). As a result, in the case of Subproject 4, the kiln, the main piece of equipmentfinanced by the ADB loan, was never fully commercially commissioned. The PIA had to spendits own resources (after ADB loan closing) to convert its old, inefficient, coal-fired kilns to gasfiring. In the case of Subproject 5, the kilns were performing well but the molding and sprayingequipment was never functional. The PIA was forced to spend additional resources to procuredomestically produced equipment, which is generally less efficient and more labor intensive.

33. The two wastewater treatment plants built in Tangshan under Subproject 6, with acombined capacity of 300,000 m3 /day, have been operating well. Together with two existingsmaller plants, they brought the municipal wastewater treatment ratio to about 65%, makingTangshan one of the best cities in the PRC in terms of wastewater treatment. Since itscommissioning in September 1999, the gasification plant built in Chengde under Subproject 7

has reached or exceeded its design capacity in producing its key products, viz., coke and coalgas. The production of coke has brought significant economic benefits to the Chengde Iron andSteel Company, the PIA, by ensuring a stable supply of high-quality and low-cost coke.However, the coal gas produced, which was to be transmitted through the 40-km gasdistribution network linking the gasification plant to the city located 20 km away, was consumedmostly on site by the PIA. The internal consumption of the gas arises because the external

12The OEM was informed that the PIA is trying to sell the facilities, perhaps to an industrial customer in a far awaylocation without access to the city supply of gas. However, the OEM feels that the chances of finding a buyer thatcan operate the plant safely are diminishing rapidly as time goes by.



10

demand for gas by Chengde city has not materialized as envisaged at appraisal due to the lowprice of coal, competition from liquefied petroleum gas, and the required high connection fees(para. 5 of Appendix 7). The gas supply system, which was designed to serve at least 50,000households in Chengde in order to break even financially, currently serves only 12,000households. The PIA wishes to sell a major portion of the gas to get higher additional revenue.

2. Environmental Improvement

34. Environmental improvement was stated as the main purpose of the Project. The sevensubprojects, to varying degrees, have achieved the objective of improving air and water quality.Table 3 provides a summary of the achievement by the six subprojects with an objective ofimproving air quality in terms of emission reductions. It indicates that the appraisal targets havebeen mostly achieved with the exception of Subprojects 2 and 7. In the case of Subproject 2,about half of the appraisal targets had been achieved as of 2003, even though the subprojectachieved the highest overall pollution reduction among all the subprojects. As discussed (para.33), in the case of Subproject 7, although the emission reduction targets were not estimated andprobably achieved numerically, as most of the gas produced was consumed near the steelplant, the air quality of Chengde city has not benefited directly in a significant manner.

Table 3: Summary of Air Pollution Reduction by Subprojecta (tons)

SubprojectSO2 ReductionAnnual Target

SO2 Reduction(2003)

TSP ReductionAnnual Target

TSP Reduction(2003)

1 4,340 4,200 6,510 6,5102 5,750 2,650 96,000 44,200

b

3+5 500 500 338 338c

4 500 500 338 338c

7 4,340 n.e. 50,000 n.e.

n.e. = not estimated; SO2 = sulfur dioxide TSP = total suspended particulate.aThese results were derived from comparisons of with- and without-project scenarios rather than absolute reduction.Due to economic growth, total emissions of the two cities may have decreased to a lesser extent or even increasedin the case of SO2.

bThe less-than-half reduction of emissions compared with the appraisal target is caused by the fact that thecapacity of the heat source (cogeneration plant) in 2003 was only half of the original design capacity .

cIn addition to TSP, there has been a large reduction of coal slag, which is not estimated.

Source: PIAs and OEM.

35. In terms of water quality improvement, with the doubled wastewater treatment capacityachieved under Subproject 6, the Project has largely achieved its objective. Table 4 contains thewastewater treatment parameters for the Dongjiao Wastewater Treatment Plant since 1999,showing that it runs at 60% of its capacity; the quality of effluents exceeded the national effluent

standards (Class II). The Beijiao Wastewater Treatment Plant also has similar performance(Appendix 6).



11

Table 4: Key Operational Performance Indicators of Dongjiao Wastewater Treatment Planta

1999 2000 2001 2004 (up to May)NationalEffluent

Influent Effluent Influent Effluent Influent Effluent Influent Effluent Standard

COD(mg/L) 849 46.3 335 57.6 300 68.7 386 52 120

BOD5

(mg/L)67.3 8.1 46.8 11.8 58.7 9.7 121 10 30

SS(mg/L)

874 37.7 536 26.7 569 27.6 334 21 30

pH — 7.2 — 6.9 — 6.1 6-9 6-9 6-9

— = not available, BOD = biological oxygen demand, COD = chemical oxygen demand, mg/L = milligrams per liter,NH3 = ammonia, pH = acidity value, SS = suspended solids.a

Capacity: 150,000 m3 /day, average flow rate = 90,000 m

3 /day.

Source: Tangshan Wastewater Treatment Company.

B. Performance of the Operating Entities

36. The details of the performance of the operating entities for each subproject arepresented in Appendixes 1–7, with highlights summarized below.

37. Generally, with the exception of those for Subprojects 4 and (3+5), the PIAs for the othersubprojects are performing satisfactorily. Subprojects 1, 2, 6, and 7 have generally improved thePIAs’ operational and financial performance, and they are capable of servicing at least a portionof the ADB debt. The strongest performers are the Tangshan Gas Company (Subproject 1),which achieved 17% annual growth in sales since 1995; the Tangshan Heat and PowerCompany (Subproject 2), which achieved 11% annual sales growth since 1995; and theChengde Coal Gasification Company, which achieved 26% annual sales growth since 2000.

These three PIAs are capable of fully servicing their ADB debt and other long-term debts. Forthe Tangshan Wastewater Treatment Company (Subproject 6), despite the fact that its salesalso experienced a 17% annual growth since 1998, it has not broken even financially and hasthe capability to service only about 25% of its ADB debt. This situation is due to the relativelylow wastewater tariff and underutilized capacities (with a 55% utilization rate for the combinedcapacities of the two new plants) because of the lower-than-expected demand due to industries’own initiatives of treating and recycling wastewater. A common problem for all of the PIAs isthat, despite the strong growth in sales, profitability has not improved as fast as sales, andthere is significant room for cost cutting. For example, the Tangshan Heat and PowerCompany had a staff of 2,700 people, and the OEM estimated that about 800 people workedto operate and maintain the subproject facilities. This yields a ratio of 9,669 m2 of heating areaper staff member, much lower than world levels and even lower than the PRC average.13

38. The PIAs for Subprojects (3+5) and 4, the Tangshan No. 6 Ceramic Factory and theTangshan No. 2 Porcelain Factory, are currently financially insolvent and have no capability torepay their debt. Although the failure cannot be blamed entirely on the ADB subprojects, asthere are other external factors such as fierce market competition, weak commercial decision-making structure at the SOEs, and poor management, the nonperformance of some keycomponents of the subproject has undoubtedly had a devastating impact of the performance of

13The PRC has an average of 10,000-12,000 m

2per staff member, while in the United States or Norway this ratio

could be 10 times higher.



12

the two factories. In this regard, the OEM noted that both PIAs had very low net fixed assetsrelative to ADB’s loan amounts at the time of loan formulation. This made them very vulnerablein terms of liabilities and debt-servicing capabilities if the subprojects failed, as has happened inthis case.14 Although in the RRP the forecast debt-equity ratio, less than 80:20 for all years, anddebt-service ratio, higher than 1 in all years, were both within the covenanted levels, theforecast relied mostly on assumed large amounts of retained earnings, which never materialized

or were much less than envisaged. ADB’s Updated Guidelines for the Financial Governance and Management of Investment Projects Financed by ADB , approved in 2001, suggests that thedebt-equity ratio indicator is normally only used for new enterprises such as “greenfield”industrial plants, for which application of the debt-service coverage ratio is not practical due tolack of earning records. The Guidelines also suggests that it is generally inappropriate to have adebt-equity ratio higher than 60:40 for most industrial projects. Exceptions can be made forenterprises having very dependable earning power such as public utilities, for which this ratiomay be raised to 70:30 or higher. The two ceramic and porcelain factories clearly fell into theformer category, i.e., industrial plants subject to market competition and a less dependableearning stream. It may be argued that ADB’s 80:20 covenanted level of debt-equity ratio, whichmay have been appropriate for the other subprojects targeting public utilities, was not stringentenough for Subprojects (3+5) and 4.

C. Financial and Economic Reevaluation

39. Appendixes 9 and 10 contain a recalculation of the FIRRs and EIRRs for the subprojectsand for the Project as a whole. All financial costs and benefits are denominated in the localcurrency at 2003 constant prices, while the economic costs and benefits are valued at economicprices at the border using the world price numeraire. As summarized in Table 5, therecalculated FIRRs for the subprojects are lower or substantially lower than those from theRRP, with the exception of Subproject 7 (the FIRR estimate for Subproject 7 was substantiallyinfluenced by recent price hikes in and high demand for the main product of the plant, coke). Incomparison with PCR estimates, however, subprojects 1 and 2 also show an improvement. Theoverall recalculated FIRR is 8.5%, lower than the appraisal estimate of 11.1%, but higher than

the PCR estimate of 7.1%, and higher than the recalculated weighted average cost of capital(WACC) of 5.4%. Despite the satisfactory overall FIRR, there were substantial variations acrosssubprojects. In particular, Subprojects (3+5) and Subproject 4 had negative FIRRs, andSubproject 6 had a FIRR of 3.6%, lower than the recalculated WACC of 4.3%. The recalculatedoverall EIRR was 14.7%, or about 20% higher than the 12% cutoff rate. Sensitivity analysesconducted for individual subprojects indicate that the EIRRs can fluctuate 10-20% as costs andprices vary by 10%, which could lead to an overall EIRR lower than the 12% cutoff value. Inaddition, as in the FIRR, the variations of EIRRs across subprojects are also significant, fromnegative in the case of Subproject 4 to a high of 16-18% in the cases of Subprojects 1 and 7.The Project’s main economic benefits accrued from several sources: (i) benefits fromimproved product quality; (ii) savings of coal, which otherwise would be consumed; (iii)environmental benefits from treated wastewater measured by consumers’ willingness-to-pay;

and (iv) environmental and health benefits from improved air quality. However, due to reasonsrelated to methodology and lack of site-specific data on the health impacts of air pollution, as

14In 1995, Tangshan No. 6 Ceramic Factory had net fixed assets of only CNY27.22 million. Yet it acquired a loanof $15.72 million (or CNY130.48 million) from ADB for the 2 subprojects. As a result, its net fixed assets quicklyincreased to CNY150.45 million in 2000, or 5.5 times in 5 years. The nonperformance of some projectcomponents, i.e., the molding and spraying equipment valued at $6.5 million or CNY54 million, and theunderutilization of the gasification plant, at a cost of $3.55 million, have had a devastating impact on the PIA’sfinancial performance. Similarly, Tangshan No. 2 Porcelain Factory had net fixed assets of CNY16.3 million in1995 (prior to the subproject) according to the RRP. Yet, it acquired loans of $8.12 million (or CNY67.4 million)from ADB and $9.86 million equivalent (or CNY81.84 million) from local sources for the subproject.



13

elaborated in Appendix 10, the last category of benefit from improved air quality was notquantified. This is consistent with the RRP but deviates from the PCR methodology. Fromdiscussions with various stakeholders, the health benefits of the Project are likely to be highlysignificant (para. 46).

Table 5: Summary of Financial and Economic Reevaluation (%)

Appraisal PCR PPARSubproject FIRR EIRR FIRR EIRR FIRR EIRR

1 12.1 18.6 9.8 14.4 11.5 16.82 10.8 12.3 5.9 14.1 6.2 13.43+5 13.0 16.1a 3.0 5.0 (2.4) 4.24 8.3 14.6 4.2 10.7 (8.5) (4.2)6 11.8 n.e. 7.0 14.1 3.6 13.57 10.7 14.0 7.6 10.1 11.7 17.6Overall 11.1 n.e. 7.1 11.9 8.5 14.7

EIRR = economic internal rate of return, FIRR = financial internal rate of return, n.e. = not estimated, PCR = project

completion report, PPAR = project performance audit report.a

Estimated for Subproject 5 only, not Subproject 3.

D. Sustainability

40. Proper and efficient maintenance is essential for the subprojects’ operation and long-termsustainability. Of all the subprojects visited by the OEM, most demonstrated adequate capabilityfor O&M. In particular, the Tangshan Gas Company (Subproject 1), Tangshan Heat and Power(Subproject 2), Tangshan Wastewater Treatment Company (Subproject 6), and Chengde Iron andSteel Group (Subproject 7) have been able to operate their facilities in a smooth manner withminimal interruptions and with regular checks on system leakages and other potential causes ofinterruption. They are all carrying out a regular staff-training program. The OEM observed thatmost project facilities are being kept in good to excellent condition, and the PIAs have theirmaintenance rules in compliance with national and international standards or commonly acceptedpractices. Assuming that the current maintenance level continues, the OEM believes that theproject facilities can continue to operate for another 20 years. However, there are exceptions,typically associated with high-cost imported components. For example, the centrifugal sludgedewater equipment (imported from Germany) under Subproject 6 is very expensive to operateand maintain relative to the current tariff levels of wastewater treatment.

41. A major concern for project sustainability arises from the poor financial performance ofsome subprojects and their operating entities. In particular, Subprojects (3+5) and 4 have negativeFIRRs, and two operating entities, Tangshan No. 6 Ceramic Factory and Tangshan No. 2Porcelain Factory, are financially insolvent (Appendixes 4 and 5). Sustainability of thesesubprojects is unlikely unless dramatic changes occur with the market and themanagement/ownership structure of the SOEs. In addition, Subproject 6 also has a FIRR lowerthan the cost of capital, which also causes some concerns for its long-term sustainability. Asdetailed in Appendix 6, the PIA for the subproject, the Tangshan Wastewater TreatmentCompany, has not achieved financial breakeven. However, due to the Government’s strong policy



14

on long-term water tariff increases,15 the city’s potential economic growth, and financial support forwastewater treatment, the subproject is likely to be sustainable.

IV. ACHIEVEMENT OF OTHER DEVELOPMENT IMPACTS

A. Socioeconomic Impact

42. The socioeconomic impact of the Project was mainly realized through improved qualityof life due to improved gas supply, district heating, and air and water quality. As an example, theOEM was informed that anglers (mostly retirees) are once again found along the Dou River (intowhich the treated effluents are discharged) due to the improved water quality. Real estate pricesare also reported to be rising near the Beijiao Wastewater Treatment Plant.

B. Environment and Health Impacts

43. Environmental improvement was stated as the primary objective of the Project, and theProject has substantially reduced emissions (para. 34). Partly as a result, Tangshan’s air qualityand water quality have improved significantly over the last 10 years or so.16 Appendix 11

provides the air quality monitoring results for Tangshan city. Table A11.1 shows the annualaverage ambient concentrations for three monitored air pollutants, viz., TSP, SO2, and nitrogendioxide (NO2). It indicates that, while all three pollutants experienced a decline from 1990 to2003, the decreases were modest for SO2 and NO2, about 13% in both cases. The mostsignificant drop occurred with TSP, i.e., 82%. This significant decrease may be largely attributedto the dramatic reduction in the city’s direct coal combustion, for household stoves (for bothheating and cooking) and industrial furnaces, partly due to the Project. However, Table A11.1also indicates that, despite the improvement, the TSP and SO2 annual averages in 2003 did stillnot meet National Class II standards. Furthermore, Table A11.2 presents an example of real-time air quality monitoring conducted by Tangshan EPB using one of its automatic monitoringdevices in a downtown location on 8 June 2004 (the day of the OEM’s visit). It provides anhourly record of ambient concentrations for particulate matter, SO2, and NOx, and the results,

published daily in local newspapers and on the EPB website, indicate a strong hour-by-hourchange in the pollutants. Even though the annual averages may not meet Class II standards,according to the EPB’s 2003 annual report, the number of days in 2003 for which the overall airquality, measured by a nationally adopted air quality index, met or exceeded the standards was242, an increase of 44 days over 2002.

15ADB has provided three TAs in the area of tariff setting for water supply and wastewater treatment services. TA2773: Water Supply Tariff Study, for $600,000, approved in 1997, and TA 3250: Water Tariff Study II, for $950,000,approved in 1999, helped the Government prepare the National Guidelines on Water Tariffs that will ensure fullcost recovery and develop institutional and methodological capacities to implement the Guidelines. TA 3749:

National Guidelines for Urban Wastewater Tariffs and Management, for $700,000, approved in 2001, aimed toimprove urban wastewater management and enable investment in wastewater infrastructure by developing nationalguidelines for wastewater tariffs, including tariff calculation methodologies that will allow for full cost recovery,taking into consideration affordability and social constraints.

16Prior to the approval of the Project, both Tangshan and Chengde municipalities formulated their own environmentalimprovement action plans covering 1991-2000. The Project formed parts of both plans. The action plans weresimilar in that they covered 6-7 main areas of improvement including gas supply arrangements, district heatingsystem, dust removal, waste treatment facilities, greenification, and relocation/shutting down of polluting industriesfor Tangshan and preservation of historical places and noise pollution reduction for Chengde. Based on the OEM’sobservations and interviews with Tangshan EPB officials, Tangshan appeared to have implemented most (if not all)the measures contained in the plan, and the resulting improvement of environmental quality is evident. Thesituation for Chengde is less clear.



15

44. Tangshan’s water quality also experienced significant improvement during the sameperiod, although compared with air quality the level of improvement may have been lessdramatic. The quality of the Dou River, the main river that runs through the city and benefitsfrom the Project, met Class II standards for two out of its six sections being monitored in 2003.The other four did not meet the standards despite the fact that the Project has helped Tangshanachieve a 65% wastewater treatment rate. This is partly due to the fact that Tangshan is located

in a semiarid area, and the quality of many of its rivers is directly related to their flow. During dryseason, water quality is much worse than during wet season.

45. The OEM was informed that the air quality in Chengde has also been improvedsignificantly in recent years. However, the OEM noticed that industrial stacks are visible over thecity’s horizon, and the emissions from some stacks are surely exceeding the standards. For thereason discussed in para. 33, Subproject 7 did not contribute much to improving Chengde city’sair quality. Most of the gas produced is consumed at the steel plant, 20 km from the city.However, the OEM was informed that the air quality near the steel plant has improved markedly.

46. An important aspect of environmental improvement is the indoor air quality of thesubproject enterprises, which affects workers’ health and safety. The OEM was informed that in

one case, Tangshan No. 6 Ceramic Factory, the improvement of the air quality around the plantafter the conversion of kilns from coal to gas firing was so dramatic that one plant workerreportedly expressed his “guilt” for working in such an improved environment and still taking thesame salary.17 However, the OEM found that the current working environment in the twoceramic and porcelain plants has room for improvement and could have been improved by theProject. In particular, the Project aimed to procure imported molding and spraying equipment forTangshan No. 6 Ceramic Factory. However, due to the nonperformance of the equipment, thefactory had to spend additional resources to buy domestically made equipment, which issemiautomatic or manual. The OEM observed that most workers operating the equipment werenot wearing masks, and the indoor air quality in the spraying section was particularly unsuitablefor long hours of work.18

C. Impacts on Institutions and Policy

47. The policy and institutional impacts of the Project were mainly achieved through therelated advisory TA (footnote 3). TA 1916 had a stated purpose to strengthen the capabilities ofthe Tangshan and Chengde EPBs (para. 6).

48. The TA consultants reviewed the current organizational structure of the EPBs anddeveloped recommendations for improving their structure and functions, including those relatedto monitoring and laboratory facilities; management of air, water, solid, and hazardous wastes;and environmental information. Many suggestions for restructuring the EPBs have already beenadopted. For example, Tangshan EPB created several new divisions including EnvironmentalPlanning, Nature Resource Management, Environmental Management Information Center,19

17The OEM was informed that the air pollution near the two ceramic and porcelain factories prior to the Project wasso severe that the international consultants of the appraisal mission refused to get out of their vehicles upon arrivalat the site.

18The OEM was unable to obtain any health-related data for the factory employees, nor air pollution health statisticsfor Tangshan city such as incidence of respiratory diseases.

19This center received CNY1 million from the Tangshan Municipal Government and a $150,000 grant from theJapanese Government. It has formed a local area network and Internet server system. With this hardware, theCenter established an environmental information system, an environmental database system, a decision supportsystem, and a geographical information system. These systems are playing an important role in Tangshan’senvironmental management and improvement.



16

Environmental Monitoring Center,20 and Environmental Research Institute. Against the broaderbackground in which the PRC Government is reducing its workforce, the fact that the TangshanEPB was able to acquire additional funding for increased functions and workforce is beingviewed by the Tangshan EPB as proof of the success of the TA. The OEM was informed thatChengde EPB also experienced a similar restructuring in accordance with TArecommendations.

49. Another important aspect of the TA was its provision of training and capacity-buildingopportunities for a group of 16 officials, 8 from each EPB, in the form of short-term overseastraining. At the time of the OEM, both EPBs still had five participants working at senior positions.Although the overseas training was short, it gave valuable exposure for the two EPBs toenvironmental management in Australia, and has inculcated a sense of the importance of stafftraining. The Tangshan EPB has since organized domestic training for its staff on a regularbasis. The OEM observed that the mid-level management team members of the Tangshan EPBare very knowledgeable in their fields and appear to be dedicated to their work.

50. Based on its observation, interviews, and comparisons with equivalent EPBs elsewherein the PRC, the OEM reached the following assessment: The TA was highly relevant for the two

recipient EPBs, which, like most other municipal EPBs in the PRC, were and still are therelatively weak link in the system, but they are often at the forefront of environmental law andregulation enforcement. The TA achieved its objective of strengthening the capabilities of thetwo EPBs. The results of the TA have been sustained, as the newly built departments andcapacities have been well institutionalized. The TA, together with the Project, has raised therelative importance and profile of environmental protection in the TMG’s agenda. Overall the TAis rated successful. Both the Tangshan and Chengde EPBs believe that the TA was a success,which they attribute largely to the good working relationship and close cooperation between thestaffs of the EPBs and the consultant team.

51. Additional institutional impacts of the Project were achieved through a series of trainingactivities conducted by the suppliers on the use and maintenance of the equipment procured

under the Project. Almost every PIA visited had a group of people who were involved in theplanning and execution of the Project and who later played a key role in operating the facilities.In terms of policy impact, ADB’s loan covenants require full cost recovery for each subproject.Although this was not implemented in full, important progress is being made in adjustingwastewater tariffs to a full cost recovery level. However, the fundamental structure of most PIAsas SOEs remains unchanged, and prices are not set nor management decisions made on acommercial basis.

V. OVERALL ASSESSMENT

52. A caveat may be warranted for the following overall assessment of the Project. Thecurrent Guidelines for the Preparation of Project Performance Audit Reports , approved in

September 2000, is largely tailored to the context of single-investment projects. When applied toprojects with several subprojects like this one, some conceptual and practical problems arise, aswill be demonstrated below. This is mainly due to the fact that, for such projects with multiple PIAs

20This center received $470,000 equivalent from the TMG to purchase a Ringelman smoke level auto-monitoringsystem, a pollution source on-line auto-monitoring system, and an air quality auto-monitoring system. The OEMvisited its central control room and observed that the EPB officers can monitor the city’s main stacks’ emission levelsin the control room through a bird’s-eye camera. If and when unusually high emissions occur, the EPB can quicklydispatch a patrol officer to a site. Since its establishment, the center has served as a very useful tool for the TMG toensure effective air quality monitoring and management.



17

and even being in multiple cities, the achievement of project outputs and purposes by differentsubprojects is largely independent of each other; some subprojects can achieve completesuccess, while others may suffer from catastrophic failure. The five building blocks of evaluation(relevance, efficacy, efficiency, sustainability, and institutional development and other impacts)may be conceptually and practically difficult to apply. The OEM adopted an approach of providinga rating for individual subprojects as well as an overall rating for the Project as a whole, but this is

likely to only partly address the problems.

A. Relevance

53. The Project was relevant at the time of appraisal in that it aimed to address the severe airand water pollution problems that plagued most PRC cities. It was also consistent with ADB’soperational strategy in the PRC, in which environmental improvement has been one of the mainpillars. Despite the significant improvement in environmental quality in many cities includingTangshan and Chengde, the relevance has not abated, as much remains to be done to furtherimprove the environment. The Government continues to place high priority on and to commitincreasing resources for this purpose. In terms of actual project formulation, the Project had sixsubprojects addressing energy efficiency/air pollution problems and one subproject addressing

wastewater treatment, which reflected the urgency and priority of the environmental problems atthe time and today. However, two of the seven subprojects (Subprojects 4 and 5) went beyondconventional environmental improvement technologies by financing high-risk ceramic andporcelain industrial projects, which failed. ADB has since exited from industrial projects with SOEson energy efficiency and fuel conversion, and has focused more on achieving environmentalimprovement through working with public utilities in the areas of water supply, wastewatertreatment, gas supply, etc. Subprojects 3, 4, and 5 were assessed as partly relevant, while theothers were assessed as highly relevant. Overall, the Project is assessed as relevant.

B. Efficacy

54. Of the seven subprojects, four, to a varying extent, have achieved both environmental

improvement and economic benefits, and the remaining three have achieved someenvironmental improvement, but the impact on the financial and economic performance of thesubproject enterprises has been either less positive or adverse, or even devastating. Subproject1 (Gas Supply and Distribution), Subproject 2 (District Heating System), and Subproject 6(Tangshan Wastewater Treatment Plant) have contributed significantly to the improvement of airand water quality in Tangshan. Subproject 7 (Chengde Coal Gasification Plant) contributedmoderately to the improvement of air quality in Chengde since most gas produced is beingconsumed near the plant rather than in the city.

55. Subproject 3 (Coal Gasification Plants), which was to build and operate two coalgasification plants on the premises of two porcelain and ceramic factories, was partlyimplemented, with one such gasification plant built and the other one cancelled. However, the

gasification plant at Tangshan No. 6 Ceramics Factory was operated for only 5 years before itwas shut down when the municipal supply of gas, which is cheaper and safer, becameavailable. Subproject 4 (Pollution Abatement at Tangshan No. 2 Porcelain Factory) andSubproject 5 (Pollution Abatement at Tangshan No. 6 Ceramics Factory) have experiencedmajor problems with the installation, testing, and commissioning of imported equipment and,consequently, as of the OEM’s visit, some items imported by the factories were nevercommercially commissioned.



18

56. The Project has substantially achieved its stated main objective of environmentalimprovement. However, the stated secondary objective, to introduce the most advanced andenvironmentally friendly technologies to maximize the beneficial impact on environment, and tohave beneficial externalities in terms of industrial efficiency and product quality, was not achievedfor Subprojects 4 and 5, nor, to a lesser degree, for Subproject 3. Subprojects 1 was assessed ashighly efficacious, Subprojects 2, 6, and 7 as efficacious, Subproject 3 as less efficacious, and

Subprojects 4 and 5 as inefficacious. Overall, the Project was assessed as less efficacious.

C. Efficiency

57. The Project was generally implemented smoothly, with some delays for most subprojects.The overall recalculated EIRR is 14.7%, with EIRRs for individual subprojects ranging fromnegative to 17%. The overall recalculated FIRR for the Project was 8.5%, higher than the averagecost of capital of 4.3%. However, even more so than in the case of the EIRR, there is significantvariation in FIRRs across subprojects, with three ([3+5], and 4) having negative FIRRs andSubproject 6 having a FIRR lower than the average cost of capital. Subprojects 1, 2, and 7 wereassessed as efficient; Subproject 6 as less efficient; and Subprojects 3, 4, and 5 as inefficient.Overall, the Project was assessed as less efficient.

D. Sustainability

58. O&M of the project facilities was generally satisfactory. Some, e.g., the wastewatertreatment plant, are facing more difficulties than others in operating and maintaining the importedequipment, as the cost is much higher and it takes longer to procure spare parts (compared withdomestic equipment). In terms of financial viability, Subprojects 4 and (3+5) have negative FIRRs.The respective PIAs are also insolvent. Unless things change dramatically in terms of market andtechnological improvement of the project equipment, these three subprojects are presently notsustainable. Subproject 6 has a positive FIRR of 3.6% but lower-than-recalculated WACC, andthe PIA has not achieved full financial breakeven. However, given the strong government policyand financial support, the subproject is likely to be sustainable. The other subprojects all have

FIRRs significantly higher than their respective WACCs, and their PIAs have achieved financialbreakeven at least against operating expenses. Subprojects 1 was assessed as most likelysustainable; Subprojects 2, 6, and 7 as likely; and Subprojects 3, 4, and 5 as unlikely. Overall, theProject is less likely to be sustainable.21

E. Institutional Development and Other Impacts

59. The Project, including the related advisory TA 1916, appears to have had a significantimpact on the institutional development of the EPBs and PIAs. A large number of young and mid-age professionals and engineers were trained through the TA and/or through implementing theProject, and subsequently formed the backbones of their respective entities. The Projectsignificantly raised the profile of the environment sector in the two cities’ overall development

planning, which led to more investments and initiatives in subsequent years. Other social anddevelopment impacts include the health impact of air quality improvement, and the impacts onquality of life and real estate value. In terms of aggregate institutional and other impacts,Subprojects 1, 2, and 6 were assessed as substantial; Subproject 7 as moderate; andSubprojects 3, 4, and 5 as little. Overall, the impact is assessed as moderate.

21The four categories are most likely, likely, less likely, and unlikely. Given the sustainability ratings for individualsubprojects, a “less likely” rating is given to the overall Project. However, this should be interpreted somewhatdifferently, i.e., partly sustainable rather than less likely, since most subprojects are sustainable.



19

F. Overall Rating

60. Because of the diverse and relatively independent nature of the seven subprojects,ratings are given to individual subprojects as well as to the overall Project (Table 6). The overallrating of “partly successful” was given despite the high aggregated FIRR and EIRR to recognizethe fact that the benefits and costs of different subprojects are not perfectly substitutable, not

least because they accrued to different PIAs and even to different cities. The overall rating,which is lower than the PCR’s successful rating, reflects the insolvency of the two PIAs in thecase of Subprojects 3, 4, and 5, relatively low tariffs (compared to what is required to achievebreakeven) in the case of Subprojects 2 and 6, and not contributing significantly to theimprovement of Chengde’s air quality in the case of Subproject 7.

Table 6: Subproject and Overall Project Ratings

Subproject/Project Rating

Subproject 1: Gas Supply and Distribution Network System Highly SuccessfulSubproject 2: District Heating System Successful

Subproject 3: Coal Gasification Plants under the New Gas Company Partly Successful(BorderingUnsuccessful)

Subproject 4: Pollution Abatement at Tangshan No. 2 Porcelain Factory UnsuccessfulSubproject 5: Pollution Abatement at Tangshan No. 6 Ceramics Factory UnsuccessfulSubproject 6: Tangshan Dongjiao Wastewater Treatment Plant SuccessfulSubproject 7: Coal Gasification Plant under the New Gas Company SuccessfulProject Partly Successful

(BorderingSuccessful)

G. Assessment of Asian Development Bank and Executing Agency Performance

61. A total of 10 missions were fielded by ADB related to project preparation,implementation, and completion. The EAs and the PIAs are highly appreciative of successiveADB officers’ assistance at all stages; their dedication was credited by the EAs as a key factorin the relatively smooth implementation of the Project despite difficulties encountered. The EAsindicated that the ADB project officer was instrumental in helping select the subprojects. Duringimplementation, ADB was generally very responsive in providing assistance in explaining ADB’sguidelines on procurement and in approving the scope changes. The delays were largelycaused by domestic procedures. However, the OEM is of the opinion that ADB should at leastshare responsibility for the essentially design failures associated with Subprojects 3, 4, and 5.The financial and operational viability and the difficulties of operating separate gasificationplants at the ceramic and porcelain factories under Subproject 3 were not fully assessed. The

underlying objective behind Subprojects 4 and 5 (not the stated one), i.e., to obtain the mostadvanced and environmentally friendly technologies, proved to be a risky strategy. The OEMalso feels that the emphasis on the environmental nature of the Project was disproportionate toits intended and actual benefits and thus somewhat misleading.22 Lastly, in the case ofSubprojects 4 and 5, ADB could have done more in terms of preventing the incidents fromhappening through, for example, providing advice to the PIAs on the potential risks of advance

22For example, the Chengde Gasification Plant was referred to as a gasification plant in all ADB project

documentation, while the PIA called it a coking plant. In reality, the sales from industrial coke are more than doublethat of gas, and yet the RRP referred to gas as the main product and coke as a by-product.



20

procurement by a year in order to avoid paying import tax, or helping the PIAs to identify theright type of expertise to install the equipment once the incidents occurred (para. 21 andfootnote 9) Overall, ADB’s performance is assessed as partly satisfactory. The performance ofthe EAs and PIAs was satisfactory. Despite difficulties, the EAs and PIAs showed very strongownership of the Project, and the Project was mostly implemented as scheduled. TMG showedstrong leadership in coordinating the execution of the Project.

VI. ISSUES, LESSONS, AND FOLLOW-UP ACTIONS

A. Key Issues for the Future

1. Continued Support for SOEs to Achieve Public Goods?

62. The six PIAs were and continue to be either public utilities or SOEs. Although both arestate-owned, the former refers to utilities providing water and gas distribution services, which havebeen traditionally provided by public entities, while the latter refers to state-owned industrialenterprises. A question was raised at loan formulation by Board members with respect to thewisdom of supporting SOEs directly rather than creating an enabling environment for them to

access the capital market (para. 14). The question has relevance for ADB’s current activities inthe PRC (footnote 5). Despite the strong economic growth over the last 10 years, much of itspurred by new investments from the private sector (particularly from overseas), reforms in SOEshave been taking place in a piecemeal manner due to the implications for the society at large interms of employment and social stability. Prices for essential commodities such as water and gascontinue to be set by the Government. In terms of credit and financing, the SOEs, especially thebetter performing ones, are currently experiencing a period of easing credit and financing fromdomestic banks. As such, several PIAs informed the OEM that they would not consider borrowingfrom ADB again as long as domestic financing is available due to the latter’s more flexible andspeedy approvals.

63. The experience of the Project appears to lend support to ADB’s current operational

strategy in the PRC, i.e., more focus on noncommercial sectors through public utilities to achievepublic goods including water supply and wastewater treatment, gas supply, and district heating,and staying away from direct support to SOEs in essentially industrial projects even though theprojects have positive repercussions for environmental/energy efficiency improvement. Asdemonstrated by Subprojects 4 and 5, the line between environmental improvement and industrialtechnology upgrading projects could be blurred, and the risks associated with industrial projects,both technological and market related, are much higher. The large amount of liquidity that exists inPRC domestic banks and their faster processing time make domestic funding more suitable forsound industrial projects, and ADB should not try to compete with and, thus, “crowd out,” domesticfinancing.

2. Integrated vs. Single-Investment Environmental Improvement Projects

64. Environmental improvement has become a mainstay of ADB’s operations in the PRC.Integrated environmental improvement projects for a city like Tangshan have severaladvantages. First, through targeting use of resources for a city, as opposed to spreading tomultiple cities, better developmental and environmental impacts may be achieved, sinceenvironmental improvement as well as economic development needs a certain “threshold” levelto accumulate momentum. Second, it also implies more efficient processing from the staff input-to-impact point-of-view. Third, experiences can be easily shared, and were shared in this case,among various PIAs through the coordinating EA. On the other hand, multicomponent projects



21

also entail certain risks, as demonstrated by the Project. One such risk relates to mixing “bad”with “good,” thus affecting the overall project performance. Another such risk may be problemsrelated to less-than-thorough appraisal and to administrative difficulties due to the more diversescope. However, based on the experience of this particular Project, the OEM is inclined tobelieve that the benefits outweigh the risks (particularly from the borrowing country’s point ofview), and, most importantly, the developmental impact achieved has the potential to be

significant and cost efficient (with the exception of some subprojects). A point of concern relatesto ADB’s capability to think and act in a cross-sector manner. For example, presentlywastewater treatment and water supply are part of the social sector divisions, while districtheating and gas supply belong to the energy divisions, although they are within the sameregional departments. The challenge for ADB is how to bridge this sector gap within itself inorder to bring about greater impact with fewer resources.

B. Lessons Identified

1. Choice of Technology: Suitable, Not Untested, Technology

65. One of the lessons learned from the Project is related to the selection of technologies at

the project design phase. Under Subproject 4, the selection of an untested technology forproducing high-quality porcelain, which was to be the second such production line in the world,23 was one of the main reasons for its failure in commercial production. Neither the PIA for thesubproject nor the consultants nor even the supplier of the equipment had enough experience inbuilding and operating such a production line. Both ADB and the PIA engaged separate technicalexperts to review the design, who provided positive assessment of the design and technologychosen. Perhaps partly due to the positive assessment made by these experts and partlybecause of the overemphasis on the environmental nature of the project, potential technologicalrisks associated with the kiln technology were not explicitly discussed in the RRP.24 Despite thefact that ADB has exited from such industrial projects, choice of appropriate technology as alesson learned continues to have its relevance, even in such well-developed fields as wastewatertreatment.

2. Economic Benefits as a Prerequisite for Environmental Benefits

66. For a developing country like the PRC, achieving economic benefits (through improvedquantity and quality of products/services) is a prerequisite for sustainable environmentalimprovement, and they are two sides of the same coin. In the course of project formulation andapproval, ADB overemphasized the Project’s environmental benefits while downplaying theeconomic gains. In contrast, the PIAs visited by the OEM were clearly much more concernedabout the financial returns. A good example is Subproject 4: The PIA informed the OEM that theoriginal plan was to use the ADB loan to procure a new gas-fired roller kiln to produce high-qualityporcelainware. The PIA would then use the money generated from the new products to financethe conversion of its old coal-fired and oil-fired kilns to gas firing (para. 21). This highlights the

dependence of environmental benefits on economic benefits of the subproject, but it was notmentioned in the RRP. For future “environmental improvement” projects, ADB should not try tode-emphasize the importance of achieving economic benefits in the process of achievingenvironmental improvement.

23The first one was operating in Japan.

24The OEM recognizes that it is unreasonable to expect ADB staff to be experts on ceramic and porcelain.



22

3. Emphasis on Implementation

67. The Project once again highlights the importance of implementation and thatdevelopmental impact is not achieved at loan approval. At the time of loan implementation, theearly to mid-1990s, ADB Management had initiated efforts to fight the “approval” culture withinADB and had placed increasing emphasis on project implementation. On the whole, the

Project’s implementation was satisfactory, given the strong performance of the EAs and PIAs,and ADB provided necessary and timely support. However, in the case of Subprojects 4 and 5,ADB could have done more in terms of preventing the incidents from happening through, forexample, providing advice to the PIAs on the potential risks of advancing procurement by a yearin order to avoid paying import tax, or helping the PIAs to identify the right type of expertise toinstall the equipment once the incidents occurred (para. 21 and footnote 9). The OEM wasinformed that the former employees demanded “very high prices” (although it was not clear howhigh), but in the end the PIA spent about half a million dollars hiring other expertise, whichresulted in no success. There were other “lessons” regarding models for effectiveimplementation. Successfully implemented subprojects appeared to share one common trait:strong participation by PIA staff. In the case of Subproject 7, for example, the Chengde Iron andSteel Company dispatched 600 engineers for training before and during the construction of the

subproject; they have subsequently formed the backbone of the operating entity.

C. Follow-Up Actions and Recommendations

1. Government and Project Implementation Agencies

68. Under the Loan Agreement, the Government is committed not to provide any subsidy orbudgetary grant to any PIA after 1993. Furthermore, the Government was covenanted to ensurethat utility enterprises set prices that allow full recovery of operating and capital costs andprovide an adequate return on investment. These have not been fully complied with and shouldbe heeded in a predetermined, phased manner. Compliance with these loan covenants isessential for the long-term sustainability of the Project and the environmental benefits it has

brought about.

2. Asian Development Bank

69. As decisions on subsidies and prices are often made at higher level than PIAs and evenmunicipal governments, ADB needs to continue its ongoing dialogue with the Government onwater and gas tariff reforms. In this regard, ADB has provided substantial assistance in the areaof tariff reforms for water supply and wastewater treatment (footnote 14), and more assistancemay be warranted in gas tariff reforms. The reforms are also important to ensure the financialviability of ADB’s ongoing and future environmental improvement projects.



Appendix 1 23

SUBPROJECT 1: GAS SUPPLY AND DISTRIBUTION NETWORK SYSTEM

A. Project Purpose and Scope at Appraisal

1. The Report and Recommendation of the President did not specify a clear purpose for the

subproject. However, based on the purpose of the overall Project and the scope of the subproject, itmay be inferred that the subproject had a dual purpose: (i) air pollution reduction, and (ii) improvingenergy efficiency and quality of life. In the early 1990s, the Tangshan Gas Company was planningto expand its gas supply and distribution network to supply about 305,000 cubic meters per day(m3 /day) of additional town gas (or coal gas, as it is commonly referred to in the People’s Republicof China) to households and commercial establishments.1 The subproject was to provide thefacilities needed to supply the incremental town gas so as to bring the total gas supply in Tangshanto about 670,000 m3 /day. It would supply town gas to an additional 55,000 households and thusbring the total to 90% of the households in Tangshan. Major components were to include (i)installation of a 23.8-kilometer (km) medium-pressure pipeline network system; (ii) installation of a36.3-km low-pressure pipeline network system; (iii) provision of two low-pressure gas holders, eachwith a 50,000-m3 /day capacity gas compression and booster station; (iv) provision of two gas

purification plants; (v) instrumentation; (vi) a control and monitoring system; and (vii) staff training.


2. The subproject was largely implemented as envisaged, with minor delay andmodifications. The main modification included cancellation of the planned Balizhuang GasPurification Plant, as the incoming gas was already purified by the gas supplier, the TangshanIron and Steel Corporation. The money saved was used to partly finance the construction of agas blending station (to mix low-heat waste gas from a ceramic factory with high-heat liquefiedpetroleum gas to meet the peak demand during winter. In addition to the two low-pressuregasholders at Zhaozhuang as envisaged, one more such gasholder of 50,000 m3 /day wasconstructed at Banbidian in order to balance the daily demand fluctuation. The Operations

Evaluation Mission confirmed that the quality of the equipment and installation was generallysatisfactory.


3. The actual cost of the subproject was $16.03 million according to the project completionreport, consisting of $5.87 million in foreign exchange cost and $10.16 million equivalent in localcurrency cost.2 The cost overrun of 45.7% relative to the appraisal estimate of $11 million wasattributable mainly to the construction of the gas blending station (not in the original scope) andone additional gasholder at Banbidian.

4. Commissioning was scheduled for December 1998, but actual commissioning took place

in October 1999. A main reason was the procurement and construction of the additionalgasholder and gas mixing station at Banbidian.

1The town gas was to be purchased from the coke and gas-making plants of the Tangshan Iron and Steel Companyand the Tangshan Coke Making plant, both of which were expanding their existing operations from their ownresources.

2The total cost is slightly different from the number that the PIA provided to the OEM, i.e., $15.997 million, probablybecause of different exchange rates used.



24 Appendix 1

D. Operational Performance

5. Since its commercial commissioning in October 1999, the subproject has increased thegas supplying capacity of the Project Implementation Agency (PIA) by 85% from 365,000m3 /day in 1993 to the present 670,000 m3 /day. Table A1.1 indicates that gas sales haveincreased steadily since 1999, from 336,986 m3 /day, or 50% of the design capacity, to 441,096

m3 /day in 2003, or 66% of the design capacity. The number of households served grew from149,000 in 1993 to 213,000 in 1999, and further to 271,000 in 2003, presently covering 96.5%of the households in the city and thus exceeding the target of 90%. An interview with acommercial customer (a hotel/restaurant) showed that it is highly satisfied with both the qualityand price of the gas supply (compared with alternative energy sources such as electricity orheavy oil). The restaurant recently converted all of its fuel to gas, including cooking and airconditioning, in part because of the skyrocketing and highly fluctuating prices of diesel, which itused for air conditioning. Overall, the subproject contributed significantly to the improvement ofTangshan’s air quality. The PIA estimated that in 2003, compared with the baseline 1993 level,it reduced sulfur dioxide emissions by 4,200 tons (compared with the 4,340-ton target atappraisal), total suspended particulates by 6,510 tons (compared to the target of 6,510 tons).

Table A1.1: Operational Performance Indicators of Tangshan Gas Company

Year

Annual GasSale

(million m3)

Daily AverageSale(m3)

As a % of theDesign Capacity

No. ofHouseholds

ServedService

Coverage

1999 123.0 336,986 50% 213,000 90.0%2000 128.0 350,685 52% 232,000 91.0%2001 128.0 350,685 52% 246,000 93.1%2002 156.0 427,397 64% 262,000 94.7%2003 161.0 441,096 66% 271,000 96.5%

m

3

= cubic meter.Source: Tangshan Gas Company.

E. Performance of the Operating Entity

6. Table A1.2 provides the financial tables of the Tangshan Gas Company. It indicatesthat total sales increased steadily from CNY38.37 million in 1995 to CNY138.09 million in2003, averaging 17% per year. From 1999 (when the subproject was commissioned) to 2003,the growth rate was 14% per annum. In other words, there was no acceleration of the growthrate after the subproject was commissioned. Furthermore, despite more than three timesgrowth in sales and in net fixed assets partly due to the subproject, the PIA’s profitability, bothbefore and after tax, has not improved significantly. In 2003, it made a modest before-taxoperating profit of CNY7.81 million, with a return on net fixed assets at 4.8%. 3 During 2001 and2002, the PIA could not service its debt.4 The debt service ratio in 2003 was only 0.18 and didnot meet ADB’s loan covenant of at least 1.3. The PIA had enough cash reserve from 2001 and2002 to service its debt. Overall the PIA is in a good cash flow situation with a positive cashreserve of CNY81 million at the end of 2003. However the long-term cash flow situation, is

3Although a rate of return of 8% or higher is considered sound, the ADB loan did not include a covenant for this.

4The Tangshan Government has a flexible policy on meeting the debt-service requirement for subprojectenterprises. If the financial performance of an enterprise is not good, it will allow the taxes it pays for the year to beswapped for debt servicing.



Appendix 1 25

uncertain, since the gas business does not seem to generate enough cash to service the debt.The debt-equity ratio since 2001 has been around 78:22, meeting the Asian Development Bank(ADB)-covenanted level of 80:20 or lower.

F. Overall Assessment

7. Using ADB’s five building blocks of evaluation, the subproject is assessed as highlyrelevant, highly efficacious, efficient, most likely to be sustainable, with substantial institutionaldevelopment and other impacts. Overall, the subproject is rated as highly successful.



26 Appendix 1

1995 1996 1997 1998 1999 2000 2001 2002 2003

Income Statements

Sales 38.37 49.74 60.97 61.52 81.61 95.77 96.45 119.07 138.09

Less: Cost of Sales 35.00 42.84 50.93 53.99 64.69 81.54 84.32 98.23 114.97Gross Profit 3.37 6.90 10.04 7.54 16.92 14.23 12.13 20.84 23.12

Other Operating Income 7.18 5.59 7.54

Less: Total Operating Expenses 5.05 7.02 9.77 11.61 15.02 16.96 18.48 20.87 22.03

Selling Expenses 1.96 2.60 0.01

Administrative Expenses 16.51 18.27 22.02

Operating Income (1.68) (0.12) 0.27 (4.08) 1.89 (2.73) 0.84 5.55 8.63

Less: Financial Expenses (income) (0.90) (1.58) (1.00) (2.46) (0.59) (1.83) (1.47) (1.49) (1.67

Non-Operating Income/(Expense) 2.73 3.17 6.05 3.62 3.76 4.21 0.41 (0.80) (2.49

Other Adjustments 0.45 (3.13) 0.07

Net Income Before Tax 1.96 4.63 7.32 2.45 3.12 3.37 2.71 6.24 7.81

Net Income After Tax 1.96 4.63 7.32 1.64 2.09 2.26 1.82 1.47 2.13

Cash Flow Statements


Add: Non-Cash Charges 5.66 7.04 5.40 5.76 7.06 13.64 17.03 32.51 2.21

Interest Expense (1.47) (1.49) (1.67

Internal Cash Generation 7.62 11.66 12.73 7.40 9.14 15.90 17.38 32.50 2.67

Borrowings 42.60 18.91 10.77 12.21 31.98 17.16 0.00 10.00

Equity Contributions and Grants Received 6.70 1.21

Proceeds from Investments 0.32 0.35 1.79

Other Local Sources 2.16 11.48 4.14 1.74 1.88 92.71

Total Sources of Funds 52.38 42.05 27.63 21.35 43.01 125.77 17.71 39.55 15.67

Capital Expenditures 36.39 52.94 28.00 27.48 29.57 17.29 21.26 4.88 8.76

Debt Service 1.96 4.63 7.32 1.64 10.29 8.21 0.00a

0.00a

15.00

Other Payments 3.00 0.00 19.20

Change in Working Capital 14.43 (28.72) (22.89) (9.02) (21.67) 81.69

Total Application of Funds 52.77 28.85 12.43 20.10 18.19 107.19 24.26 4.88 42.96

Changes in Cash (0.39) 13.19 15.20 1.24 24.82 18.58 (6.55) 34.67 (27.29

Cash Balance, Beginning of Year 7.99 7.59 20.79 35.98 37.22 62.04 80.62 74.07 108.74

Cash Balance, End of Year 7.59 20.79 35.98 37.22 62.04 80.62 74.07 108.74 81.45

Year Ending December 31

Table A1.2: Financial Performance of Tangshan Gas Company 1995–2003

(CNY million)



1995 1996 1997 1998 1999 2000 2001 2002 2003

Balance Sheets

Current Assets 53.09 46.28 83.89 74.21 107.06 162.42 171.97 206.65 192.87

Cash and Deposits 7.59 20.79 35.98 37.22 62.04 80.62 74.07 108.74 81.45

Accounts Receivable, net 11.12 11.07 25.78 17.44 18.16 37.16 37.26 22.26 27.16Inventories, net 26.59 7.25 15.88 19.31 21.31 37.38 43.74 40.68 49.12

Other Current Assets 7.79 7.17 6.25 0.25 5.55 7.25 16.89 34.98 35.14

Long-Term Investments 0.05 0.15 0.62 0.68 0.63 0.77 3.77 3.77 22.97

Fixed Assets 110.71 115.18 117.77 126.13 195.54 219.59 270.52 296.11 301.44

Less: Accumulated Depreciation 54.76 61.80 67.20 72.96 80.01 93.65 104.22 113.61 126.35

Fixed Assets, net 55.95 53.38 50.57 53.17 115.53 125.94 166.30 182.50 175.09

Construction in Progress 41.03 89.41 113.37 132.41 92.68 76.89 44.90 17.19 20.05

Other Assets 0.00 0.00 0.97 1.00 0.94 0.82 1.84 5.38 4.72

Total Assets 150.12 189.22 249.42 261.47 316.83 366.82 388.77 415.48 415.70

Current Liabilities 7.03 15.75 61.05 59.16 86.88 122.05 135.36 156.41 155.22

Accounts Payable 2.85 1.99 11.96 11.06 4.91 9.86 6.27 9.97 9.34

Short-Term Loans 0.00 0.00 5.00 0.00 15.00 15.00 15.00 10.00

Others 4.19 13.76 49.10 43.09 81.96 97.20 114.09 131.44 135.88

Long-Term Debt 69.39 88.30 99.06 111.27 137.02 62.89 55.41 55.41 55.41

Other Long-Term Liabilities 5.77 9.96 11.28

Equity 73.70 85.17 89.31 91.05 92.93 181.88 192.24 193.71 193.79

Paid-in Capital 68.07 68.07 68.07 68.07 68.07 76.98 76.98 73.95 73.95

Surplus, Reserves, and Retained Earnings 5.63 17.10 21.24 22.98 24.86 104.90 115.26 119.76 119.84

Total Liabilities and Equity 150.12 189.22 249.42 261.47 316.83 366.82 388.77 415.48 415.70

Financial Indicators

Return on Net Fixed Assets (%)b

(3.00) (0.23) 0.52 (7.86) 2.24 (2.26) 0.57 3.18 4.83

Debt-Service Coverage Ratio (times)c

3.90 2.52 1.74 4.51 0.89 1.94 n.a. n.a. 0.18

Debt/Debt Plus Equity (% of debt)d

48.50 50.90 52.59 55.00 59.59 25.69 22.37 22.24 22.23

n.a. = not available.a

bNet operating income after taxes as a percentage of average net fixed assets in operation.

cRatio of internal cash generation to annual debt service.

dRatio of long-term debt to long-term debt plus equity.

Source: Tangshan Gas Company.

Debt servicing during 2001-2002 was not by cash but through swapping tax payments for partial debt servicing. No actual figure

were available.

Note: Accounts are for the consolidated operations of the company. Cash flow statements have been reconstructed from availab

accounts.


Appendix 1 2



28 Appendix 2

SUBPROJECT 2: DISTRICT HEATING SYSTEM


1. The Report and Recommendation of the President did not specify a clear purpose for thesubproject. However, based on the purpose of the overall Project and the scope of the subproject, it

may be inferred that the subproject had a dual purpose: (i) air pollution reduction, and (ii) improvingenergy efficiency and quality of life. Under the subproject, the Asian Development Bank (ADB)was to finance the installation of a pipeline network system for the transmission and distributionof heat for the district heating system. The heat was to be generated by the Xijiao CogenerationPower Plant, which was to be financed from domestic resources and completed in two phases,in 1994 and 1997. The subproject would supply space heating to about 8.5 million squaremeters (m2) consisting of 4.93 million m2 of residential space and about 3.57 million m2 of spacein commercial establishments and public buildings. This would satisfy almost 100% of theheating requirement of the western section of the central district of Tangshan. Majorcomponents were to include (i) electrical equipment, (ii) heat exchangers, (iii) instrumentationand control, (iv) computer-based heat supply, (v) control and monitoring system, (vi) watertreatment facilities, (vii) installation of a 29.5 kilometer (km) pipeline network system, and (viii)

staff training.


2. The subproject was implemented as envisaged with respect to the heat distributionnetwork and all associated facilities with some modifications. The modifications included (i)construction of 33.5 km of pipeline compared with the appraisal estimate of 29.5 km; (ii) 12 setsof radio signal transmission equipment, used for communications between the central controland the heat exchange stations, procured instead of 85 sets as envisaged by the original designand strongly advocated by the international consultants;1 and (iii) reduction in the number ofsets of computer-based control equipment from 2 to 1 (to cover only the western district system)in order to save costs by continuing to make use of the existing control equipment for the central

district. Since the completion of the Project, significant additions have been made, using theProject Implementation Agency’s (PIA) own funding, to improve the service coverage and thequality of service. These included (i) procurement of 6 km of additional pipeline, necessary toserve the new residence area developed during 1998–2003, bringing the total length of thepipeline network to 39.5 km, (ii) establishment of a Pressure and Temperature ReductionStation at the Xijiao Cogeneration Power Plant in order to acquire an additional 1.3 milliongigajoules per year of heat from the cogeneration plant. The Operations Evaluation Mission(OEM) confirmed that the quality of construction was satisfactory to excellent. The engineeringand civil works were generally done in accordance with international standards. Specialcompliments were given by PIA officials to the high quality manual and automatic valves, theheat exchangers, and the high reliability of the network control system, supplied by both foreignand People’s Republic of China (PRC) contractors.

1There was a strong disagreement between the international consultants, who insisted that 85 sets were necessaryto achieve safe operation and operational efficiency, and the Project Implementation Agency, which felt that thecosts were too high and the function of the radio equipment could be performed (without compromising safety) byits surplus labor.



Appendix 2 29


3. The OEM confirmed that the project completion report cost estimates were correct. Theactual cost of the subproject was $40.15 million, consisting of $16.94 million in foreign exchangecost and $23.21 million equivalent in local currency cost. In addition to strong competitionamong suppliers, the reduction in procurement of radio signal equipment and computer control

facilities contributed to the cost underrun of about 30%, relative to the appraisal estimate of $57million, in both foreign exchange and local currency costs.

4. The actual commission time was January 1998, almost one year ahead of the originalscheduled time of December 1998.


5. Although the subproject was implemented as envisaged, with some modifications, theheat source was not established as planned (the heat capacity of the heat source in the XijiaoCogeneration plant in 2001 was only half of the original design capacity). Therefore, thedistribution network was operating at half capacity. Since then, the PIA has actively searched for

an alternative heat source to make up the shortfall. Four measures have been or will be taken,using its own resources. First, it has installed a main pipeline to link the West District heatingsystem to the Central District heating system. This pipeline linkage temporarily provided about1.05 million square meters (m2) of space equivalent of heat to the West District heating systemfrom 2001 to 2002. Second, it established a Pressure and Temperature Reduction Station in theXijiao Cogeneration Plant in 2003 to directly use the steam from the No. 3 utility boiler in thecogeneration plant. This has supplied an additional 2.55 million m2 equivalent of heat to theWest District heating system. The first two measures have enabled the distribution network toreach 91% of its design capacity. Third, it has secured heat from a 200 megawatt cogenerationunit in the Xijiao Cogeneration Power Plant, which is under construction and is scheduled to becommissioned in 2005. Fourth, it will establish 22 additional heat exchange stations during 2005and 2006 to keep pace with the city’s development in the West District. The OEM believes that,

with the measures already taken and the firm evidence that more measures are being or will betaken, the heating system will achieve its design capacity of 8.5 million m2 by 2006.

6. The subproject has contributed significantly to the improvement of Tangshan air qualitythrough eliminating 220 boilers, 136 stacks, and more than 100,000 coal-fired householdstoves. In terms of emission reduction, the PIA estimated that in 2003 the subproject reducedsulfur dioxide emissions by 2,650 tons (compared with the target of 5,750 tons), and totalsuspended particulates by 44,200 tons (compared with the target of 96,000 tons).


7. The financial tables for the Tangshan Heat and Power Company (Table A2) indicate

that total sales increased from CNY86.71 million in 1995 to CNY203.65 million in 2003,averaging 11% per year. From 1998 (when the subproject was commissioned) to 2003, thegrowth rate was nearly 15%. It appears that the subproject has significantly enabled the PIAto meet growing demand, and the system has reached 91% of the design capacity. However,although the fast-growing sales numbers have probably been responsible for the net operatingincome turning positive since 2002, they have not translated into higher overall profitability,with net income before tax decreasing to CNY2.31 million in 2003 from CNY3.23 million in1995, in part because of declining non-operating income. Unlike the Tangshan Gas Companywhich used 66% of its capacity in 2003, capacity utilization for the Tangshan Heat and Power



30 Appendix 2

Company has already reached 91%. The low profitability indicates either that tariffs, currentlyCNY15.93/m2 per year for industrial customers and CNY17.70/m2 per year for households, arelow or there is significant room for cost cutting. For example, while total sales between 1995and 2003 increased by 2.36 times, total operating expenses during the same period increasedfaster than sales by 2.56 times. In 2003, it had a staff of 2,700, and the OEM estimated about800 people worked to operate and maintain the subproject facilities. This yields a ratio of

9,669 m2 per staff member, much lower than world levels and even lower than the PRCaverage.2 The returns on net fixed assets for 2002 and 2003 were very low at less than 1%,although the PIA has been in a position to service its debt, with the average debt-servicecoverage ratio at 1.64 (exceeding the ADB-covenanted level of 1.3). However, the long-termcash flow situation is uncertain, since the heating business does not seem to generate enoughcash to service the debt, unless there will be significant increases in prices and/or cost cuttingmeasures. The debt-equity ratio since 1999 has been around 60:40, meeting the ADB-covenanted level of 80:20 or lower.


8. Using ADB’s five building blocks of evaluation, the subproject is assessed as highly

relevant, efficacious, efficient, likely to be sustainable, with substantial institutional developmentand other impacts. Overall, the subproject is rated as successful.

2The PRC has an average of 10,000-12,000 m

2per staff member, while in the West this ratio could be 10 times

higher.



1995 1996 1997 1998 1999 2000 2001 2002 2003

Income Statements

Sales 86.71 86.94 101.63 102.33 146.28 159.72 167.86 185.62 203.65Less: Cost of Sales 83.99 80.94 93.17 99.79 136.03 145.46 153.77 168.31 185.62

Gross Profit 2.72 6.00 8.46 2.54 10.25 14.26 14.09 17.31 18.03

Other Operating Income


Selling Expenses

Administrative Expenses

Operating Income (3.86) (0.80) (1.34) (8.54) (4.59) 0.43 (1.10) 0.70 1.17

Less: Financial Expenses (income) (1.31) (1.45) (1.82) (3.26) (2.10) (1.94) (1.48) (0.79) 0.73

Non-Operating Income/(Expense) 4.04 4.19 3.79 5.86 5.07 (0.46) 2.05 1.27 1.87

Other Adjustments 1.74 0.03 0.00 0.00

Net Income Before Tax 3.23 4.84 4.27 0.61 2.58 1.91 2.43 2.76 2.31




Add: Noncash Charges 11.35 10.11 14.91 53.15 40.52 12.96 32.06 43.56 38.15

Interest Expense (3.26) (2.10) (1.94) (0.79) 3.12

Internal Cash Generation 14.09 13.35 17.77 50.28 40.04 12.30 32.62 43.52 41.63

Borrowings 8.92 3.79 12.64 1.00 264.14 30.00

Equity Contributions and Grants Received

Proceeds from Investments 0.11 0.18 0.04 0.47

Other Local Sources 0.02 6.28

Total Sources of Funds 23.03 23.42 30.41 51.39 304.18 12.48 32.62 43.56 72.09

Capital Expenditures 47.27 73.19 32.70 3.86 300.23 5.00 54.55 43.97

Debt Service 0.00 6.18 2.02 34.70 40.32 9.81 2.97 19.06 38.04

Other Payments 27.10 0.01 14.88 40.75 17.00Change in Working Capital (26.49) (69.04) (39.90) (109.90)

Total Application of Funds 20.78 10.33 21.92 38.57 230.65 14.81 17.85 114.36 99.01

Changes in Cash 2.25 13.09 8.49 12.82 73.53 (2.32) 14.77 (70.80) (26.91)

Cash Balance, Beginning of Year 11.76 14.01 27.10 35.59 48.41 121.94 119.62 134.39 60.80

Cash Balance, End of Year 14.01 27.10 35.59 48.41 121.94 119.62 134.39 60.80 33.89

Appendix 2 31


Table A2: Financial Performance of Tangshan Heat and Power Company 1995–2003

(CNY million)



32 Appendix 2

1995 1996 1997 1998 1999 2000 2001 2002 2003

Balance Sheets

Current Assets 95.93 133.43 163.89 144.20 168.90 208.33 239.35 135.04 175.96

Cash and Deposits 14.01 27.10 35.59 48.41 121.94 119.62 134.39 60.80 33.89

Accounts Receivable, net 7.33 8.62 2.04 7.58 4.36 3.03 1.73 2.28 2.24Inventories, net 8.55 16.42 17.96 14.36 12.24 13.67 16.94 9.39 10.14

Other Current Assets 66.04 81.29 108.30 73.85 30.36 72.01 86.29 62.57 129.69

Long-Term Investments

Fixed Assets 313.04 372.53 364.25 380.65 682.38 678.58 679.75 697.41 743.00

Less: Accumulated Depreciation 191.08 204.41 212.84 223.08 261.50 290.72 319.26 345.55 374.06

Fixed Assets, net 121.96 168.12 151.41 157.57 420.88 387.86 360.49 351.86 368.94

Construction in Progress 23.72 1.37 1.72 3.70 2.55 5.39 15.30 121.07 59.75

Other Assets 1.55 1.57 1.45 1.48 1.13 1.11 1.07 41.82 58.82

Total Assets 243.16 304.49 318.47 306.95 593.46 602.69 616.21 649.79 663.47

Current Liabilities 56.65 110.85 118.52 117.63 173.24 185.31 208.88 245.10 265.59

Accounts Payable 0.31 0.22 0.74 0.49 0.71 0.24 0.22 5.56 3.77

Short-Term Loans 0.00 17.60 19.20 0.00 0.00 0.00 0.00 0.00 0.00Others 56.34 93.03 98.58 117.14 172.53 185.07 208.66 239.54 261.82

Long-Term Debt 30.35 34.14 46.78 29.31 259.65 255.78 251.53 218.71 212.33

Other Long-Term Liabilities 29.36 28.57

Equity 156.16 159.50 153.17 160.01 160.57 161.60 155.80 156.62 156.98

Paid-in Capital 145.41 151.69 144.52 150.94 150.94 150.94 150.94 150.94 150.94

Surplus, Reserves, and Retained Earnings 10.75 7.81 8.65 9.07 9.63 10.66 4.86 5.68 6.04

Total Liabilities and Equity 243.16 304.49 318.47 306.95 593.46 602.69 616.21 649.79 663.47


Return on Net Fixed Assets (%)a

(3.16) (0.55) (0.84) (5.53) (1.59) 0.11 (0.29) 0.20 0.32

Debt-Service Coverage Ratio (times)b

n.a 2.16 8.80 1.45 0.99 1.25 10.98 2.28 1.09

Debt/Debt Plus Equity (% of debt)c

16.27 17.63 23.40 15.48 61.79 61.28 61.75 58.27 57.49

a

Net operating income after taxes as a percentage of average net fixed assets in operation.b

Ratio of internal cash generation to annual debt service.c

Ratio of long-term debt to long-term debt plus equity.

Source: Tangshan Heat and Power Company.

Note: Accounts are for the consolidated operations of the company. Cash flow statements have been reconstructed from available

accounts.




Appendix 3 33

SUBPROJECT 3: COAL GASIFICATION PLANTS UNDER THE NEW GAS COMPANY



may be inferred that the subproject had a dual purpose: (i) air pollution reduction, and (ii) improvingenergy efficiency for the subproject enterprise. Under the subproject, two coal gasification plants,one on the premises of Tangshan No. 2 Porcelain Factory and the other at Tangshan No. 6Ceramic Factory, were to be established and operated by the Tangshan Ceramic Industrial CoalGas Company, Ltd. (a new gas company) to supply gas to the ceramic kilns at these twofactories. The gasification plant at Tangshan No. 2 Porcelain Factory was designed to produceabout 288,000 cubic meters (m3) of gas per day with heating value of about 6,000 kilojoules perm3. As an auxiliary plant, a wastewater treatment plant was to be constructed with a capacity toprocess 7,800 m3 /day of industrial wastewater, of which about 6,920 m3 /day of the treated waterwas to be recycled to meet 88% of the plant’s total requirements. The gasification plant atTangshan No. 6 Ceramic Factory was to produce gas at 144,000 m3 /day, of which 100,800m3 /day was to provide pollution abatement work at the two kilns also financed under the Loan

(see Subprojects 4 and 5), with the balanced supplied to the third kiln financed by the factory.Major components of the subproject for each site included (i) a coal preparation plant, (ii) a gas-making plant, (iii) wastewater treatment facilities, (iv) a pipeline system, and (v) staff training.


2. The planned gasification plant for Tangshan No. 2 Porcelain Factory was cancelled, asthe factory was able to secure its gas supply from Tangshan Gas Company (benefiting from theincreased gas-supplying capacity financed under Subproject 1). A gasification plant wasconstructed as envisaged on the premises of Tangshan No. 6 Ceramic Factory.


3. The Operations Evaluation Mission (OEM) could not independently confirm the projectcompletion report (PCR) cost estimates, in part because the subproject was procured togetherwith Subproject 5 by the same Project Implementation Agency (PIA) (paras. 34 and 37 of themain text). The actual cost of Subproject 3, according to the PCR, was $3.55 million, consistingof $2.54 million in foreign exchange cost and $1.01 million equivalent in local currency cost.This represents an 80% cost underrun, the main reason being, in addition to competition amongsuppliers, cancellation of half of the subproject and over-budgeting by ADB. The PIA providedthe cost figures to the OEM for combined Subprojects 3 and 5, which was $23.23 million,including $14.69 million in foreign exchange cost (funded by the Asian Development Bank[ADB]) and $ 8.54 million equivalent in local currency cost. These figures are slightly higher thanthe combined costs of Subprojects 3 and 5 as estimated by the PCR.

4. Mainly due to the cancellation of half of the scope, the actual commissioning time was2.5 years ahead of schedule in June 1996.


5. The gasification plant built on the premises of Tangshan No. 6 Ceramic Factory wasoperated safely for 5 years between 1996 and 2001 before it was shut down, and hascontributed significantly to environmental improvement in Tangshan. All 15 stacks and



34 Appendix 3

associated coal-fired kilns were demolished. However, since 2002, the factory was alsoconnected to the city gas supply due to the increased gas-supplying capacity benefiting fromSubproject 1, cheaper costs, and safety concerns (as there are potentially high health andsafety risks associated with operating an in-situ gasification plant). The OEM inspected the idlegasification plant. Although the plant manager claimed that it was in working condition, thefacilities were not mothballed, and rust was visible. The OEM was informed that the PIA was

trying to sell the facilities, perhaps to an industrial customer in a far away location withoutaccess to the city supply of gas. However, the OEM feels that the chances of finding a customerthat can operate the plant safely are diminishing rapidly as time goes by.

6. The PIA estimated that, during the 5 years of operation, the gasification plant achievedits intended environmental targets, i.e., sulfur dioxide emission reduction of 500 tons per yearand total suspended particulates reduction of 338 tons per year. In addition, a large reduction ofcoal slag was achieved.


7. See the same section for Subproject 5 (Appendix 5).


8. Using ADB’s five building blocks of evaluation, the subproject is assessed as partlyrelevant, less efficacious, inefficient, unlikely to be sustainable, with little institutionaldevelopment and other impacts. Overall, the subproject is rated as partly successful, borderingunsuccessful.



Appendix 4 35

SUBPROJECT 4: POLLUTION ABATEMENT AT TANGSHAN NO. 2 PORCELAIN FACTORY


1. The factory, established in 1952, was operating five coal-fired tunnel kilns, two push-slabkilns, and six heavy oil-fired roller kilns. The production facilities were located in the main

residential area of the city and caused severe air pollution. Due to outdated technology, stokingand tapping of coal in the tunnel were undertaken manually, which not only constituted a healthhazard but resulted in intermittent heat supply to the kilns. Energy efficiency in these coal-firedkilns was only about 7.2%.

2. The Report and Recommendation of the President (RRP) did not specify a clear purpose forthe subproject. However, based on the purpose of the overall Project and the scope of thesubproject, it may be inferred that the subproject had a dual purpose: (i) air pollution reduction, and(ii) improving the energy efficiency and quality of porcelain products. Under the subproject, all fivecoal-fired kilns were to be demolished and seven new gas-fired kilns were to be established. Allsix heavy oil-fired roller-kilns were to be converted to gas. Two new gas-fired roller kilns were tobe established, with one financed under the subproject and the other financed from the factory’s

own resources. The two push-slab kilns were to be demolished without replacement. Overall,there would be no increase in production capacity, and gas to these kilns was to be suppliedfrom the coal gasification plant under Subproject 3. Major components included (i) provision ofequipment and machinery, (ii) instrumentation and control, and (iii) staff training.


3. Although the components under the subproject were mostly implemented as of theOperations Evaluation Mission’s (OEM) visit, they were not done in the manner and sequenceoriginally intended. The original intention, at least from the Project Implementation Agency’s(PIA) point of view, was to use the Asian Development Bank (ADB) loan to procure a new gas-fired roller kiln to produce high-quality porcelainware, which was in high demand by the

international market at profitable prices. The PIA would then use the money generated from thenew products to finance the conversion of its old coal-fired and oil-fired kilns to gas firing. As ithappened, the new gas-fired roller kiln was established using ADB loan proceeds. However,due to various problems related to poor design, adoption of untested technology, and thecontractor’s poor performance, the kiln equipment was never commercially commissioned afterseveral failed trials. The products it produced were of unstable quality in terms of size and color,and could not meet the quality standards set by the intended export markets. As a result, aftersome limited test production in the first 2 years of completion, the equipment has been idlesince 2002. Another major item procured using ADB loan proceeds was molding equipment.1 The equipment was designed to produce 7 million molded clayware annually to match thecapacity of the kiln. However, due to the sudden bankruptcy of the German supplier after theequipment arrived at site, the supplier did not dispatch any staff to install, adjust, or test it or to

train local staff as required by the contract.2

Strong efforts made by the PIA to invite thesupplier’s former employees to complete the work with additional payment failed due to the veryhigh prices demanded by the technicians.

1Molding is the preprocessing in porcelain production, which results in molded, half-dried clayware for kilns to baketo produce the final porcelain.

2According to the PIA and Executing Agency officials interviewed, the molding equipment was procured in advancein an effort by the PIA to avoid paying import tax, which was to be introduced by the Government the followingyear.



36 Appendix 4

4. The nonperformance of the new kiln and the molding equipment in terms of cashgeneration seriously delayed the conversion of the old kilns. As such, at loan closing in 2000,the work had not even started. However, the PIA subsequently completed the conversion usingits own funding. Of the five coal-fired kilns, three were modified for gas-based combustion (witha combined capacity equivalent of that of the previous five coal-fired kilns), one was retrofittedwith a bag-house dust collector, and one was demolished without replacement. The six oil-fired

kilns were also converted to gas.


5. According to the project completion report (PCR), the actual cost of the subproject was$17.98 million, consisting of $8.12 million in foreign exchange cost and $9.86 million equivalentin local currency cost. However, these cost estimates are somewhat lower than the figuresprovided to the OEM by the PIA, which were $19.08 million for the total cost, including $9.15million in foreign exchange cost (funded by ADB) and $9.33 million equivalent local currencycost. The difference of $1.1 million in total cost was unaccounted for but likely caused byseveral factors. In addition to exchange rates and accounting inconsistency or errors, the issueof “what constituted the subproject” may also play a role, since some of the components were

financed using the PIA’s own resources after the loan was closed, and part of costs may havebeen erroneously included in the latest cost figure provided to the OEM. Assuming that the PCRestimates are correct, there was a significant cost saving of about 14.4% compared with theappraisal estimate of $21 million. In addition to strong competition among suppliers, the delay inrenovation of the five existing coal-fired kilns (estimated cost of $2.65 million) until after the loanwas closed was the main factor for the cost underrun.

6. The actual commercial commission time was indicated as April 1998, 9 months ahead ofschedule. However, the kilns and the molding equipment never passed the test run stage, andwere never fully commercially commissioned.


7. The gas-fired kiln was the primary component financed using ADB loan proceeds. Itincluded two kiln furnaces of about 40 meters long. The primary furnace was to be used tomake biscuit porcelain, and the secondary furnace to make glazed porcelain. The furnaces weredesigned to produce 7 million pieces of high-quality porcelainware annually in order for the No.2 Porcelain Factory to have the financial strength to renovate its five existing coal-fired kilns.The performance test for the gas-fired kiln was delayed by the vender, a United Kingdom-basedcompany, but later on carried out. However, the test runs could not produce the specified high-quality porcelainwares. Later adjustments by the vendor showed some improvement inoperation, but it was not enough to solve the problem.3 The supplier eventually withdrew fromthe site without meeting performance specifications. The OEM was informed that, before thesubproject, there was only one kiln of this type in the world operating successfully (in Japan).

The strategy as set out at appraisal to select the “the most advanced and environmentallyfriendly technologies” failed.4 The second major piece of equipment procured under ADB loanwas also never commercially operational due to sudden bankruptcy of the supplier.

3The problem appeared to be that the kiln could not maintain a section in an oxygen-deficit environment (carbonmonoxide rich) as it was designed.

4Subsequently, the PIA has made various efforts to engage domestic and overseas companies to adjust theequipment, but without success.



Appendix 4 37

8. Despite the severe setback in terms of economic losses of the ADB-financedcomponent,5 the other components of the subproject, i.e., conversion of coal-fired and oil-firedkilns to gas, were eventually built although not under ADB financing. The conversion hascontributed to the marked improvement of Tangshan’s air quality. The PIA estimated that in2003 reduction of about 500 tons of sulfur dioxide emissions and 338 tons of total suspendedparticulates emissions was achieved as targeted at appraisal.


9. Table A4 provides the financial tables for Tangshan No. 2 Porcelain Factory. An assetrestructuring at the completion of the subproject allocated ADB-financed assets to the PIAwhile leaving all the existing assets prior to the subproject to a joint venture company betweena Hong Kong group and the Tangshan Municipal Government. Therefore, the financial tablesas provided are only for the performance of the new Tangshan No. 2 Porcelain Factory, whichcomprises entirely the ADB-financed assets, and are only for after 1999 (the subprojectstarted commercial operation in 1998).

10. The income statements indicate that the total sales fluctuated at a very low level, and

in 2003, were down to CNY1.35 million from CNY3.91 million in 1999. The reason, asdiscussed, was that the equipment procured under the subproject was never fully tuned toproduce quality products that met the export market standards. The current sales figures weremostly the results of the piecemeal sale of substandard products. Similar to the case of No. 6Ceramic Factory, the PIA, with net fixed assets of CNY16.3 million in 1995 (prior to thesubproject) according to the RRP, was able to acquire a loan of $8.12 million (or CNY67.4million) from ADB and $9.86 million equivalent (or CNY81.84 million) from local sources forthe subproject. As a result, its net fixed assets quickly increased to CNY136.85 million in1999, or 8.4 times in 4 years. The low performance or nonperformance of virtually all theproject components using ADB loan proceeds, i.e., the kiln and the molding equipment,valued at $8.12 million or CNY67 million, had a devastating impact on the PIA’s financialperformance. The returns on net fixed assets since 1999 have been negative, and the PIA is in

no position to service its debt. The debt as a percentage of debt and equity has exceeded 100%since 2001 due to the diminishing and currently negative equity base, which means that the PIA,as a state-owned enterprise, is insolvent and is using debts from state-owned domestic banks tomaintain its daily operations.


11. Using ADB’s five building blocks of evaluation, the subproject is assessed as partlyrelevant, inefficacious, inefficient, unlikely to be sustainable, with little institutional developmentand other impacts. Overall, the subproject is rated as unsuccessful.

5The new factory management, however, is determined to make use of the equipment for producing a different typeof porcelain product and the production is scheduled to start in mid-July of 2004.



38 Appendix 4

1999 2000 2001 2002 2003

Income Statements

Sales 3.91 4.17 0.79 4.56 1.35Less: Cost of Sales 3.98 5.22 1.25 5.50 1.32

Gross Profit (0.07) (1.05) (0.46) (0.95) 0.04

Other Operating Income 1.24 1.31 0.63 (2.18)

Less: Total Operating Expenses 7.74 3.24 2.61 3.30 3.77

Selling Expenses 0.16 0.04 0.10 0.19

Administrative Expenses 3.08 2.57 3.20 3.58

Operating Income (7.82) (3.05) (1.76) (3.62) (5.92)

Less: Financial Expenses (income) 6.15 7.41 5.11 5.03 5.14

Non-operating Income/(Expense) 0.03 (2.17) (1.97) (0.81) 0.28

Other Adjustments 0.16

Net Income Before Tax (13.77) (12.63) (8.84) (9.46) (10.78)

Net Income After Tax (13.77) (12.63) (8.84) (9.46) (10.78)


Net Income After Tax (13.77) (12.63) (8.84) (9.46) (10.78)

Add: Non cash Charges 6.23 5.30 3.36 5.01 5.11

Interest Expense 6.15 7.01 5.11 5.03 5.14

Internal Cash Generation (1.39) (0.32) (0.37) 0.58 (0.53)

Borrowings 15.94 0.85 0.00 0.01


Proceeds from Investments

Other Local Sources (10.63)

Total Sources of Funds 3.92 0.53 (0.37) 0.59 (0.53)

Capital Expenditures 2.00 0.12 0.04

Debt Service 6.15 0.62 0.01 0.09 0.00

Other Payments 0.02 0.00Change in Working Capital (3.61)

Total Application of Funds 4.54 0.64 0.01 0.21 0.04

Changes in Cash (0.62) (0.12) (0.38) 0.38 (0.57)

Cash Balance, Beginning of Year 1.32 0.70 0.59 0.21 0.59

Cash Balance, End of Year 0.70 0.59 0.21 0.59 0.01

Table A4: Financial Performance of Tangshan No. 2 Porcelain Factory 1999–2003


(CNY million)



1999 2000 2001 2002 2003

Balance Sheets

Current Assets 14.96 8.52 11.46 9.09 36.71

Cash and Deposits 0.70 0.59 0.21 0.59 0.02Accounts Receivable, net 0.88 0.20 1.10 1.11 1.13

Inventories, net 12.31 6.30 5.29 5.89 5.21

Other Current Assets 1.07 1.44 4.86 1.51 30.35

Long-Term Investments 10.61 10.60 10.60 10.60 10.60

Fixed Assets 150.83 145.05 139.02 140.17 102.62

Less: Accumulated Depreciation 13.98 20.71 23.15 26.11 20.41

Fixed Assets, net 136.85 124.35 115.87 114.07 82.21

Construction in Progress 8.67 2.77 0.00 0.49 0.31

Other Assets 21.76 8.28 7.42 6.56 5.70

Total Assets 192.85 154.52 145.35 140.81 135.53

Current Liabilities 25.93 11.69 15.55 15.16 16.34

Accounts Payable 4.57 4.24 2.03 1.23 1.28

Short-Term Loans 7.42 0.01 8.16 8.16 8.16

Others 13.95 7.45 5.36 5.77 6.89

Long-Term Debt 128.12 80.22 130.15 134.47 138.79

Other Long Term -Liabilities

Equity 38.80 62.61 (0.36) (8.82) (19.60)

Paid-in Capital 20.63 82.79 28.66 28.66 28.66

Surplus, Reserves, and Retained Earnings 18.16 (20.19) (29.02) (37.49) (48.27)

Total Liabilities and Equity 192.85 154.52 145.35 140.81 135.53


Return on Net Fixed Assets (%)a

(5.71) (2.33) (1.46) (3.15) (6.03)


(0.23) (0.51) (44.87) 6.82 n.a


76.76 56.16 100.28 107.02 116.44

aNet operating income after taxes as a percentage of average net fixed assets in operation.

bRatio of internal cash generation to annual debt service.

cRatio of long-term debt to long-term debt plus equity.

Source: Tangshan No. 2 Porcelain Factory.

Note: Accounts are for the consolidated operations of the company. Cash flow statements

have been reconstructed from available accounts.


Appendix 4 39

n.a. = not available.



40 Appendix 5

SUBPROJECT 5: POLLUTION ABATEMENT AT TANGSHAN NO. 6 CERAMICS FACTORY


1. The factory was established in 1943, located in the main residential area of the city. Itwas operating three coal-fired tunnel kilns and five coal-fired dome kilns. The coal-fired tunnel

kilns required about 15,900 tons of saggar,1 which reduced the output capacity by around 50%and absorbed extra heat. Coal consumption in the factory was 51 mega joules per kilogram(MJ/kg) of ceramics, compared with the average 11 MJ/kg of ceramics using a gas-fired system.

2. The Report and Recommendation of the President did not specify a clear purpose for thesubproject. However, based on the purpose of the overall Project and the scope of the subproject, itmay be inferred that the subproject had a dual purpose: (i) air pollution reduction, and (ii) improvingthe energy efficiency and quality of ceramic products. Under the subproject, all three coal-firedtunnel kilns were to be replaced by two 100-meter gas-fired tunnel kilns. Upon completion of thetwo new kilns, the next step was to demolish all five dome kilns and replace them with one newgas-fired tunnel kiln financed from the factory’s own resources. Gas to the rehabilitated kilnswould be supplied from the gasification plant built under Subproject 3. Major components

included (i) provision of equipment and machinery, (ii) instrumentation and control, and (iii) stafftraining.


3. The subproject was constructed largely as envisaged, including two highly automatedtunnel kilns, one shuttle-type kiln, one gas-fired dryer, one set of electrostatic sprayingequipment, and 16 pieces of high-pressure and one piece of mid-pressure molding equipment.The Operations Evaluation Mission (OEM) observed that the three kilns procured using AsianDevelopment Bank (ADB) loan proceeds were in good condition, and the factory managementindicated that they had performed very well since their commissioning in June 1996. However,the molding equipment from the same German supplier as in Subproject 4 was never properly

constructed. Due to the sudden bankruptcy of the German supplier after the equipment hadarrived at site, the supplier did not dispatch any staff to install, adjust, or test it or to train localstaff as required by the contract.2 Strong efforts made by the Project Implementation Agency(PIA) to invite the supplier’s former employees to complete the work with additional paymentfailed due to the very high prices demanded by the technicians. In the end, all other efforts alsofailed, and the equipment, at a cost of $6 million, was never functional. In addition, the sprayingequipment, at a cost of about $500,000, could not reach the performance standards and wasnot operational as of the OEM’s visit. As a result, the PIA had to invest additional resources toprocure domestically produced molding and spraying equipment. The OEM observed theoperation of the domestic equipment, particularly the spraying equipment, which is laborintensive and entails considerable health risks to the operators.

1Saggar is a box made of fine clay in which ceramic pieces are placed and fired in the kiln. In a coal-fired kiln,saggar is needed to protect the ceramic ware from direct contact with soot, fly ash and other impurities. Coalconsumption, due to saggar in kilns, is almost twice the normal energy consumption.

2According to the PIA and Executing Agency officials interviewed, the molding equipment was procured in advancein an effort by the PIA to avoid paying import tax which was to be introduced by the Government in the followingyear.



Appendix 5 41


4. Subproject 5 was implemented together with Subproject 3, and the PIA provided the costfigures to the OEM for combined Subprojects 3 and 5. Therefore, the OEM could notindependently confirm the project completion report (PCR) cost estimates for Subproject 5.Assuming the PCR estimates were correct, the actual cost of the subproject was $19.08 million,

consisting of $13.18 million in foreign exchange cost and $5.90 million equivalent in localcurrency cost. This represents a significant 59% cost overrun. The cost overrun occurred in theforeign exchange cost, from the budgeted $6 million to the actual $13.18 million, while theactual local currency cost was within the budgeted $6 million. The main reason for thesignificant cost overrun was the higher cost of the molding equipment due to the limited numberof venders that participated in the bid. The high cost coupled with nonperformance of themolding equipment has had a serious adverse impact on the performance of the subproject andthe PIA.

5. Commissioning in June 1996 was well ahead of schedule by more than 2 years. Thiswas partly attributed to the earlier than-usual procurement of key equipment including the kiln.


6. Despite the nonperformance of the molding and spraying equipment, unlike the kilnsprocured under Subproject 4, the three highly automated kilns perform very well and fully meetexpectations. The products, which are low-end sanitary wares, are currently 100% for export.According to the factory manager, without the equipment, the factory would not have survived intoday’s fierce market competition.

7. In addition, with the gasification plant constructed under Subproject 3, which providedcoal gas from 1996 to 2001, and coal gas supply from the city system afterwards, all eight coal-fired dome kilns and three coal-fired tunnel kilns have been demolished. The average energyefficiency for the ceramics production process has improved almost five times, with energy

intensity decreasing from 51 MJ/kg of ceramic product (when using coal firing) to 11 MJ/kg ofceramic product (current gas firing). Coal consumption at the plant has been eliminated. Theenvironmental targets, as cited in Appendix 3 for Subproject 3, were fully achieved.


8. Table A5 indicates that the total sales of the PIA increased from CNY18.15 million in1995 to CNY27.64 million in 2003, averaging 5.4% per year. All the increases occurred after1996 (when Subprojects 3 and 5 were commissioned), and the growth was subject to severefluctuations. However, compared with other subproject enterprises, which have experiencedmostly double-digit growth in sales, the average 5% growth was not enough to bring the PIAinto positive territory, with a negative net income before tax for all years since 1998 with the

exception of 2003, for which it had a CNY4.35 million surplus. As in the case for of the No. 2Porcelain Factory, in 1995 the PIA had net fixed assets of only CNY27.22 million. Yet, itacquired a loan of $15.72 million (or CNY130.48 million) from ADB for the two subprojects. Asa result, its net fixed assets quickly increased to CNY150.45 million in 2000, or 5.5 times in 5years. The nonperformance of some project components, i.e., the molding and sprayingequipment valued at $6.5 million or CNY54 million, and the underutilization of the gasificationplant, at a cost of $3.55 million, have had a devastating impact on the PIA’s financialperformance. The returns on net fixed assets for most of the years have been negative, and thePIA is in no position to service its debt. In 2001, its debt as a percentage of debt plus equity was



42 Appendix 5

142%, which means the PIA, as a state-owned enterprise (SOE) was insolvent and using debtsfrom state-owned domestic banks to maintain its daily operations. It should be said that the poorperformance of the PIA in a fiercely competitive ceramics market cannot be entirely attributed tothe investments made under the subproject. Other factors such as poor management and manyother constraining factors facing the SOE also contribute to the results.


9. Using ADB’s five building blocks of evaluation, the subproject is assessed as partlyrelevant, inefficacious, inefficient, unlikely to be sustainable, with little institutional developmentand other impacts. Overall, the subproject is rated as unsuccessful.



1995 1996 1997 1998 1999 2000 2001 2002a

2003a

Income Statements

Sales 18.15 18.15 21.65 26.83 26.38 19.16 7.00 14.22 27.64Less: Cost of Sales 9.64 11.19 11.98 18.88 29.74 27.60 10.74 10.57 17.59

Gross Profit 8.51 6.95 9.67 7.95 (3.36) (8.44) (3.74) 3.64 10.05

Other Operating Income 0.00


Selling Expenses 2.06 2.96

Administrative Expenses 2.27 2.68

Operating Income 0.20 (1.36) 2.79 (1.53) (15.27) (19.92) (14.79) (0.69) 4.41

Less: Financial Expenses (income) 0.00 1.84 1.54 1.49 13.02 10.31 6.97 0.02 0.05

Non-operating Income/(Expense) 0.00 0.25 0.03 0.03 0.01 (0.58) 0.61 0.00

Other Adjustments 0.00 3.10 0.05 0.18 25.28 (46.80)

Net Income Before Tax 0.20 0.15 1.33 (2.80) (3.00) (77.61) (21.15) (0.71) 4.35

Net Income After Tax 0.20 0.15 1.33 (2.80) (3.00) (77.61) (21.15) (0.71) 2.92


Net Income After Tax 0.20 0.15 1.33 (2.80) (3.00) (77.61) (21.15) (0.71) 2.92

Add: Noncash Charges 3.67 8.42 0.63 3.23 2.48 9.67 5.07 0.00

Interest Expense 1.84 1.54 1.49 13.02 10.31 6.97 0.02 0.05

Internal Cash Generation 3.87 10.42 3.50 1.92 12.50 (57.64) (9.11) (0.69) 2.97

Borrowings 6.44 10.41 0.90 5.33 60.00 62.90 66.17

Equity Contributions and Grants Received 0.00


Other Local Sources 14.23 19.55 0.10 1.19 59.83 (59.13) 65.52

Total Sources of Funds 24.53 40.37 4.40 7.34 73.69 65.10 (2.07) 64.83 2.97

Capital Expenditures 96.50 41.07 16.55 3.02 60.42 109.06 0.00 0.00 0.00

Debt Service 14.26 12.39 1.54 0.00 5.46 8.01 10.02 0.00 0.00

Other Payments 0.00 0.09Change in Working Capital (86.23) (14.24) (14.05) 5.18 7.59 (53.82) (10.97) 62.97 0.00

Total Application of Funds 24.53 39.22 4.04 8.20 73.47 63.25 (0.95) 62.97 0.09

Changes in Cash (0.00) 1.15 0.36 (0.86) 0.22 1.84 (1.12) 1.86 2.88

Cash Balance, Beginning of Year 0.00 (0.00) 1.15 1.52 0.66 0.88 2.72 1.60 3.46

Cash Balance, End of Year (0.00) 1.15 1.52 0.66 0.88 2.72 1.60 3.46 6.34

Appendix 5 43


Table A5: Financial Performance of Tangshan No. 6 Ceramic Factory 1995–2003

(CNY million)



44 Appendix 5

1995 1996 1997 1998 1999 2000 2001 2002a

2003a

Balance Sheets

Current Assets 18.01 26.18 52.56 66.12 73.40 39.72 39.46

Cash and Deposits 0.00 1.15 1.52 0.66 0.88 2.72 1.60

Accounts Receivable, net 9.89 13.61 17.12 15.82 13.38 13.60 12.66

Inventories, net 6.50 3.09 0.62 0.79 3.77 9.79 15.24

Other Current Assets 1.62 8.33 33.30 48.86 55.37 13.62 9.96

Long-term Investments 0.01 0.11 0.11 0.11 0.11 0.11 4.59

Fixed Assets 46.79 74.12 74.14 74.14 134.03 194.46 189.00

Less: Accumulated Depreciation 19.58 28.00 28.63 31.86 34.34 44.00 49.07

Fixed Assets, net 27.22 46.12 45.50 42.28 99.69 150.45 139.93

Construction in Progress 2.74 15.40 12.61 15.63 16.16 64.79 57.34

Other Assets 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total Assets 47.97 87.81 110.78 124.14 189.35 255.07 241.32

Current Liabilities 19.52 39.80 60.53 71.26 78.28 98.88 100.83

Accounts Payable 3.55 2.50 4.57 5.78 5.54 19.38 19.10

Short-Term Loans 0.00 12.71 12.34 16.91 17.11 25.16 25.22Others 15.97 24.59 43.62 48.57 55.63 54.34 56.51

Long-Term Debt 5.80 5.66 6.56 11.88 71.88 134.78 199.36

Other Long Term Liabilities

Equity 22.66 42.36 43.69 40.99 39.19 21.40 (58.87)

Paid-in Capital 29.31 14.82 26.60 26.60 27.10 86.93 27.80

Surplus, Reserves, and Retained Earnings (6.66) 27.54 17.09 14.39 12.09 (65.53) (86.67)

Total Liabilities and Equity 47.97 87.81 110.78 124.14 189.35 255.07 241.32



0.74 (3.70) 6.08 (3.48) (21.52) (15.93) (10.18) n.a n.a


0.27 0.84 2.28 n.a 2.29 (7.19) (0.91) n.a n.a


20.37 11.78 13.05 22.48 64.72 86.30 141.90 n.a n.a

a



Source: Tangshan No. 6 Ceramic Factory.

Note: Accounts are for the consolidated operations of the company. Cash flow statements have been reconstructed from available

accounts.


Tangshan No. 6 Ceramic Plant has been held in trust by the Hua Tian Cheng Ceramic Company Ltd since April 2002. The

financial statements for 2002-2003 presented here are for the Hua Tian Cheng Ceramic Company, but reflect the performance

of the subproject.

n.a. = not available.

Net operating income after taxes as a percentage of average net fixed assets in operation.



Appendix 6 45

SUBPROJECT 6: TANGSHAN DONGJIAO WASTEWATER TREATMENT PLANT



may be inferred that the subproject had the purpose of improving Tangshan’s water quality. Underthe subproject, the Dongjiao Wastewater Treatment Plant was to be established in the centraldistrict of Tangshan Municipality with a population of 343,000. Prior to the subproject, allsewerage and industrial effluent, amounting to about 214,000 cubic meters per day (m3 /day)was discharged, mostly untreated, into the Dou River, causing contamination of the municipalwater resources.

2. The design capacity of the plant was about 150,000 m3 /day, of which industrialwastewater would amount to 100,000 m3 /day and domestic sewerage to about 50,000 m3 /day,with the main design parameters given in Table A6.1 The wastewater plant would handlewastewater from the southeastern part of the central district. Major components included (i) asecondary wastewater treatment plant with a capacity of about 150,000 m3 /day, (ii) installation

of one lift pump station outside the plant with a total capacity of about 50,000m3 /day, (iii)installation of an approximately 5-kilometer (km) pipeline network system, and (iv) staff training.

Table A6.1: Design Parameters of Dongjiao Wastewater Treatment Plant

Water Quality IndicatorsPollutant Influent (mg/l) Effluent (mg/l)a Removal Ratio (%)

Biochemical Oxygen Demand 130 15 88Chemical Oxygen Demand 180 40 78Suspended Solids 170 20 88Ammonia 30 10 67

mg/l = milligram per liter.a

Effluent quality above the national standards.


3. The Dongjiao Wastewater Treatment Plant was implemented as envisaged andcommissioned in October 1997 ahead of schedule. Due to competition and other factors, therewas a significant loan saving. With the Asian Development Bank’s (ADB) approval, a secondplant of identical design, the Beijiao Wastewater Treatment Plant, was constructed andcommissioned in November 2001. Both plants provide secondary treatment to influents usingthe oxidation ditch technology.1 Other outputs of the subproject included (i) installation of one lift

pump station outside each plant, with a total capacity of about 50,000 m

3

/day; (ii) installation ofan approximately 5-km pipeline network system; (iii) staff training; and (iv) installation of oneeffluent deep treatment/distribution pumping station at the Beijiao plant, with a capacity of70,000 m3 /day, and main pipes 1,449 meters (m) long of diameter 1,000 millimeters (mm) and1,827 m long of diameter 1,200 mm. The Operations Evaluation Mission inspected the Beijiao

1The Operations Evaluation Mission views the selection of the oxidation ditch technology as appropriate. Although ittakes a larger area than some other treatment technologies, this technology has some crucial advantages: buffer topeak load, high-quality effluent, better treatment system stability, and easy to control/operate.



46 Appendix 6

plant and found that the engineering and civil works were generally done in accordance withinternational or national standards or with generally accepted practices. The quality ofequipment and installation was satisfactory to excellent.


4. The Project Implementation Agency (PIA) indicated that the project completion reportcost estimates were correct. The actual cost of the subproject was $47.57 million, consisting of$23.28 in million foreign exchange cost and $24.29 million equivalent in local currency cost.This represents a 64% cost overrun compared with the appraisal estimate of $29 million. Themain reason was that the subproject’s scope was essentially doubled to construct twowastewater treatment plants of identical design instead of one. The cost increase was mainly inthe local cost category, possibly reflecting larger-than-expected procurement from domesticgoods and services and/or strong competition among international venders, which brought downprices.

5. The first wastewater treatment plant was commercially commissioned in October 1997,ahead of the original schedule by almost 2 years. However, the procurement and construction of

the second plant took an additional 4 years. It was commissioned in October 2001.


6. Since their commission in October 1997 and October 2001, respectively, the two plants,with a combined capacity of 300,000 m3 /day and both located in the eastern industrial section ofthe city, together with two existing smaller plants in the western residential areas of the city andFengrun District, brought Tangshan’s municipal wastewater treatment ratio to about 65%,making it one of the best cities in terms of wastewater treatment in the People’s Republic ofChina (PRC). As shown in Tables A6.2 and A6.3, the treated water exceeds the PRC’s Class Ieffluent standard and has mostly met the design parameters (Table A6.1). Water quality in thecity’s main river, the Dou River, has improved markedly, and fish are once again visible.

Table A6.2: Key Operational Performance Indicators of Dongjiao Wastewater Treatment Planta

1999 2000 2001 2004 (up to May)NationalEffluent

Item Influent Effluent Influent Effluent Influent Effluent Influent Effluent Standard

CODcr(mg/L)

849 46.3 335 57.6 300 68.7 386 52 120

BOD5 (mg/L)

67.3 8.1 46.8 11.8 58.7 9.7 121 10 30

SS(mg/L)

874 37.7 536 26.7 569 27.6 334 21 30

pH — 7.2 — 6.9 — 6.1 6-9 6-9 6-9

— = not available, BOD = biological oxygen demand CODcr = chemical oxygen demand m3/ day = cubic meter per day,

mg/L = milligram per liter, pH = acidity value, SS = suspended solid.a

Capacity =150,000 m3 /day average flow rate = 90,000 m

3 /day.




Appendix 6 47

Table A6.3: Key Operational Performance Indicators of Beijiao Wastewater Treatment Planta

2001 2002 2004 (up to May)National

DischargeItems Influent Effluent Influent Effluent Influent Effluent Standard

CODcr (mg/L) 370.6 58.1 383.9 31.8 575 47 120

BOD5 (mg/L) 164.1 16.3 161.6 5.8 275 15 30SS (mg/L) 236.1 27.6 189.5 17.5 327 6 30NH3

(mg/L) 23.7 2.3 47.2 4.4 25

PH — 7.2 — 6.9 8 8 6-9

— = not available, BOD = biological oxygen demand, CODcr = chemical oxygen demand, m3 /day = cubic meter

per day, mg/L = milligram per liter, pH = acidity value, SS = suspended solids, NH3 = ammonia.a

Capacity =150,000 m3 /day, average flow rate = 80,000 m

3 /day.



7. Table A6.4 indicates that total sales increased from CNY27.12 million in 1998 toCNY60.32 million in 2003, averaging 17% growth per year. However, the fast-growing saleshave not translated into higher profitability, with net income before tax actually decreasingfrom CNY0.75 million in 1998 to CNY0.31 million in 2003. More importantly, the operatingincome (from wastewater treatment after deducting total operating expenses) has beennegative since 2000. In addition to rising operating expenses, two other factors contributed tothis result. First, due to the rising water tariff (in which wastewater treatment charge forms acomponent) in Tangshan, many industrial users have increased their level of water reuse andrecycle through increasing self-treatment. This has effectively reduced the demand for waterand for municipal wastewater treatment services. The two plants built under the subproject arecurrently running at 57% of their capacities (combined average flow rate of 170,000 m3 /daycompared with the 300,000 m3 /day capacity, Tables A6.2 and A6.3). Second, despite severalincreases of tariffs in recent years,2 the revenues generated are still below what is required tobreak even. The future prospect is less optimistic because the PIA is already charging a

wastewater treatment fee for 100% of the wastewater generated but is able to collect andtreat only about 65% of it.3 It appears at this particular time, the two plants financed by thesubproject were “over built” in terms of their combined capacities relative to the actualdemand that materialized. However, it is also true that if only one plant had been built asenvisaged at appraisal, the capacity would have been short by at least 7% to meet thedemand. The return on net fixed assets since 2000 has been negative. The debt-servicecoverage ratio, though not calculated due to lack of information, is understood to be well below1, since the PIA was able to service only 25% of its debt to ADB (with the remaining portionserviced by the Government). The debt-equity ratio since 1998 has been below 65:35, meetingthe ADB covenanted level of 80:20 or lower.

2Since 1997, there have been three increases in water tariff. As a result, wastewater treatment charges forhouseholds, as a portion of the water tariffs, increased from CNY0.20/m

3in 1997 to CNY0.60/m

3in 2003. For

industries, the costs increased from CNY0.40/m3

to CNY0.85/m3

during the same period. The present average tarifffor Tangshan city is CNY0.67/m

3, the highest in the province. The fourth increase is planned for later in 2004,

which will bring the average to CNY0.85/m3.

3Currently, the wastewater treatment tariff is charged and levied together with the water supply tariff, and theamount of wastewater generated is assumed to be 80% of the consumed water. However, the actual treatment rateis only 65% of the wastewater generated. In other words, 35% of the wastewater generated but not collected by thecity’s sewerage system is charged but not treated. The city is currently expanding its collection pipeline system toimprove the collection rate.



48 Appendix 6


8. Using ADB’s five building blocks of evaluation, the subproject is assessed as highlyrelevant, efficacious, less efficient, likely to be sustainable, with substantial institutionaldevelopment and other impacts. Overall, the subproject is rated as successful.



1998 1999 2000 2001 2002 2003

Income Statements

Sales 27.12 28.45 34.56 43.82 52.51 60.32

Less: Cost of Sales 19.96 20.33 32.00 40.75 47.93 53.76

Gross Profit 7.16 8.12 2.56 3.07 4.58 6.56

Other Operating Income 1.84 0.93 0.11

Less: Total Operating Expenses 6.43 7.56 3.91 6.67 6.40 8.12

Selling Expenses

Administrative Expenses 6.67 6.40 8.12

Operating Income 0.73 0.56 (1.35) (1.76) (0.89) (1.44)

Less: Financial Expenses (income) (0.02) 0.01 (0.00) 0.01 0.20 0.11

Non-operating Income/(Expense) (0.02) 2.05 2.01 1.85 1.86

Net Income Before Tax 0.75 0.52 0.70 0.25 0.76 0.31

Net Income After Tax 0.50 0.35 0.47 0.17 0.51 0.20


Net Income After Tax 0.50 0.35 0.47 0.17 0.51 0.20

Add: Noncash Charges 6.32 6.66 9.89 13.10 4.70 14.20

Interest Expense (0.02) 0.01 (0.00) 0.07 0.20 0.11

Internal Cash Generation 6.80 7.02 10.35 13.33 5.40 14.52

Borrowings 70.20 1.48 71.66 24.25 0.00



Other Local Sources 79.24 0.01 1.20 0.00

Total Sources of Funds 156.23 8.51 83.22 37.58 5.40 14.52

Capital Expenditures 144.48 56.87 134.76 46.73 7.79 13.49Debt Service 0.05 7.79 18.58 4.25 0.00

a0.00

a

Other Payments 3.08

Change in Working Capital 10.36 (58.86) (86.41)

Total Application of Funds 154.89 5.79 66.93 54.06 7.79 13.49

Changes in Cash 1.34 2.72 16.29 (16.48) (2.39) 1.02

Cash Balance, Beginning of Year 0.00 1.34 4.05 20.34 3.86 1.47

Cash Balance, End of Year 1.34 4.05 20.34 3.86 1.47 2.50


Appendix 6 49

Table A6.4: Financial Performance of Tangshan Wastewater Treatment Plant 1998–2003

(CNY million)



50 Appendix 6

1998 1999 2000 2001 2002 2003

Balance Sheets

Current Assets 14.33 24.33 55.84 36.62 44.02 54.55

Cash and Deposits 1.34 4.05 20.33 3.86 1.47 2.50

Accounts Receivable, net 5.25 9.62 14.70 9.35 11.06 10.55

Inventories, net 0.20 0.54 0.59 0.67 0.93 0.96

Other Current Assets 7.54 10.12 20.22 22.74 30.57 40.54

Long-Term Investments 0.16 0.54 0.54 3.62 3.62 3.62

Fixed Assets 144.06 145.25 247.56 249.46 307.49 309.39

Less: Accumulated Depreciation 6.32 12.98 22.87 32.84 118.88 134.95

Fixed Assets, net 137.74 132.27 224.69 216.62 188.60 174.44

Construction in Progress 0.18 10.85 43.32 88.82 108.42 119.83

Other Assets 0.08 0.06 0.04 0.02 0.01 0.00

Total Assets 152.49 168.04 324.44 345.70 344.68 352.45

Current Liabilities 2.61 16.57 107.14 111.47 23.36 30.94

Accounts Payable 0.19 0.30 0.14 0.26 0.56 0.79Short-Term Loans 0.00 7.00 1.00 1.00 1.00 1.00

Others 2.42 9.27 106.00 110.21 21.80 29.15

Long-Term Debt 70.20 71.68 136.86 153.50 156.43 156.43

Equity 79.69 79.80 80.44 80.74 164.89 165.08

Paid-in Capital 72.49 72.49 72.49 72.49 147.10 147.10

Surplus, Reserves, and Retained Earnings 7.20 7.32 7.96 8.25 17.79 17.98

Total Liabilities and Equity 152.49 168.04 324.44 345.70 344.68 352.45



0.53 0.41 (0.76) (0.80) (0.44) (0.80)


135.98 0.90 0.56 3.14 2.62e

7.05e


46.83 47.32 62.98 65.53 48.68 48.65

a

bNet operating income after taxes as a percentage of average net fixed assets in operation.



eDebt-service coverage ratios for 2002 and 2003 were calculated based on actual noncash debt service.

Source: Tangshan Wastewater Treatment Plant.

Interest payment of CNY2.06 million each year during 2002 and 2003 were not made by cash but through

swapping tax rebates and government subsidies for partial debt serving.

Note: Accounts are for the consolidated operations of the company. Cash flow statements have been reconstructed

from available accounts.




Appendix 7 51

SUBPROJECT 7: COAL GASIFICATION PLANT UNDER THE NEW GAS COMPANY


1. The Report and Recommendation of the President (RRP) did not specify a clear purpose forthe subproject. However, based on the purpose of the overall Project and the scope of the

subproject, it may be inferred that the subproject had a dual purpose: (i) air pollution reduction, and(ii) ensuring the supply of low-cost, high-quality coke in order to improve the quality of steelproducts. Under the subproject, Chengde Municipality was to establish a coal gasification plantto supply gas to domestic households and to commercial and industrial customers. It was tohave a design capacity of 720,000 cubic meters per day (m3 /day), to be located 20 kilometers(km) from the city center in Luanhe Township, and to be operated by the Chengde CoalGasification Company, Ltd. (a new gas company). Of the gas produced per day, plantconsumption would amount to 250,000 m3, 140,000 m3 would be sold to domestic households(about 80% of total households in the municipality) 65,000 m3 to commercial users and publicfacilities, and 265,000 m3 to industrial users including the Chengde Iron and Steel Corporation.The plant was also to produce by-products for sale, such as coke, coal tar, benzol, and sulfur.Main components included (i) coal preparation plant, (ii) coke making plant, (iii) gas making

plant, (iv) gas purification plant, (v) wastewater treatment plant, (vi) auxiliary plant and facilities,(vii) gas distribution network and storage facilities, and (viii) staff training.


2. As the only subproject in Chengde, Subproject 7 was implemented largely as envisagedat appraisal, with minor delays. The main components included (i) a coal-preparation plant (atraditional design with conveyer belts and coal blending facilities, close-sealed for environmentalprotection); (ii) a coke production plant, consisting of two coke oven units with the capacity of300,000 tons/year of dry coke each, which also generates 720,000 m 3 /day coking gas;1 (iii) agas purification plant (to treat coking gas); (iv) a small industrial wastewater treatment facility;(v) a gas distribution network and storage facilities, including 85 km of gas pipelines (to link the

plant to Chengde City), 17 pressure adjustment stations, and three gasholders with capacities of50,000 m3, 50,000 m3, and 100,000 m3, respectively; and (vi) a waste gas recovery station,which mixes the coking gas with the blast furnace gas from the iron production process inChengde Iron and Steel Plant, the Project Implementation Agency (PIA) for the subproject. Thecapacities of the coking plant, gasholders, and other equipment and facilities are generally thesame as those envisaged during project design except for the length of the gas pipelines, whichexceeded the original length by about 40 km. The quality of the construction was satisfactory toexcellent and the facilities are in good condition. The Operations Evaluation Mission (OEM) sitevisit found that the coking cells were well sealed and there was no smoke visible duringoperation. The plant manager proudly informed OEM that the plant is one of the best in thePeople’s Republic of China (PRC) with similar capacities.


3. The PIA indicated that the project completion report cost estimates were correct. Theactual cost of the subproject was $147.50 million, consisting of $55.00 million in foreignexchange cost and $92.50 million equivalent in local currency cost. The main reason for the

1The RRP seems to suggest that that coke production and gas production are two different processes, with whichthe OEM disagrees. The RRP also suggests that coke is a by-product of coking gas, while the prevalent view at theplant is the opposite in terms of the market value of the products.



52 Appendix 7

cost overrun of 65.7%, compared with the appraisal estimate of $89.00 million, was theconstruction of a waste gas recovery station and longer pipelines.

4. There was a 6-month delay in commercial commission time, from December 1998 toJune 1999, the main reason, according to the PIA, being that the original schedule was too tightto accommodate the Asian Development Bank’s (ADB) complex procurement procedures.


5. Since its commissioning in September 1999, the plant has reached or exceeded itsdesign capacity for producing its key products, e.g., coke and coal gas. 2 The production of cokehas brought significant economic benefits to the Chengde Iron and Steel Company, the PIA, byensuring a stable supply of high-quality and low-cost coke. However, the coal gas it produces,which was to be transmitted through the gas distribution network linking the gasification plant tothe city located 20 km away, was consumed mostly on site by the Chengde Iron and SteelCompany. Of the 720,000 m3 of gas produced each day, the coking plant consumes about250,000 m3 as originally intended. However, for several reasons, the external demand has notmaterialized as envisaged at appraisal, and, as a result, the remaining gas is being consumed

on site by the steel plant including supplying the company’s resident apartment blocs. The gassupplying system, which was designed to serve at least 50,000 households in Chengde in orderto break even financially, currently serves only 12,000 households. Chengde is one of thepoorer municipalities in the province. A large number of households that have used liquefiedpetroleum gas (LPG) at home are not willing to pay CNY2500 as a connection fee, which is theequivalent of the LPG cost for 10 years for an average household. The commercial, public andindustrial users have been using coal, oil, and LPG. During the last 10 years (until veryrecently), coal and oil prices were low. However, due to recent oil price hikes, some customershave started to switch to coal gas. Another reason is related to the difficulties in connecting oldhouses/apartment blocs to the distribution system, while the newly developed apartmentbuildings have mostly been connected.

6. The subproject intended to reduce coal consumption in Chengde City by 100,000 tons,total suspended particulates and ash discharges by 50,000 tons, and sulfur dioxide emissionsby 4,340 tons annually. The PIA and the OEM estimated that, except coal consumption, thesetargets have generally been achieved, but most of the reduction was achieved near by the steelplant, not in Chengde city. In general, the subproject has drastically improved the air quality inand around the steel plant, where many steel workers and their families live, but the contributionto the city’s air quality has been much lower than intended.


7. The Chengde Iron and Steel Group executed the subproject. A new company, theChengde Coal Gasification Company, Ltd., was formed under the Group to operate the plant.

Table A7 indicates that the total sales of the Chengde Coal Gasification Company increasedfrom CNY395.34 million in 2000 to CNY782.76 million in 2003, averaging 25.6% growth per

2In all Asian Development Bank project documentation including the RRP, the plant is referred to as a coalgasification plant, and the coal gas is referred to as the primary product, while coke, the other main product, isreferred to as a by-product. This was probably caused by Management’s desire to emphasize the Project’senvironmental benefits while downplaying the economic benefits. This has clearly contrasted with the impression ofthe PIA which always refers to the plant as a coking plant. The 2003 sales figures also reflect this. Coke accountedfor 64.2% of the total sales of the plant, while coal gas accounted for 30.6%. The plant also produces by-productsincluding coal tar, benzol, and sulfur.



Appendix 7 53

year. Industrial coke accounts for more than 65% of the total sales, coal gas for about 25%,while other by-products including coal tar and sulfur account for the rest. Of all the six PIAs,the Chengde Coal Gasification Company is probably the most financially sound, in part due tothe strong demand by both international and domestic markets for its main product, industrialcoke. The return on net fixed assets for 2002 was about 6.2% but increased to 37.6% in 2003due to strong demand and higher prices for coke. With a debt-service coverage ratio well above

1.3, the company has no problem in servicing its debt. However, its debt-equity ratio, at 83:17 in2003, is above the ADB covenanted level of 80:20.


8. Using ADB’s five building blocks of evaluation, the subproject is assessed as highlyrelevant, efficacious, efficient, likely to be sustainable, with moderate institutional anddevelopmental impacts. Overall, the subproject is rated as successful.



2000 2001 2002 2003

Income StatementsSales 395.34 477.14 532.58 782.76

Less: Cost of Sales 398.07 444.66 475.40 506.56

Gross Profit (2.73) 32.48 57.18 276.20

Other Operating Income (1.33) (11.48)

Less: Total Operating Expenses 8.96 12.17 4.86 6.90

Selling Expenses

Administrative Expenses

Operating Income (11.69) 20.31 50.99 257.82

Less: Financial Expenses (income) 36.17 23.56 48.71 26.38

Non-operating Income/(Expense) (0.16) (0.18)

Other Adjustments (15.36) (0.68)

Net Income Before Tax (63.37) (4.11) 2.28 231.44

Net Income After Tax (63.37) (4.11) 2.28 231.44


Net Income After Tax (63.37) (4.11) 2.28 231.44

Add: Noncash Charges 20.18 43.24 142.44 53.61

Interest Expense 36.17 23.56 48.71 26.38

Internal Cash Generation (7.02) 62.70 193.43 311.43

Borrowings 1.96 14.03



Other local Sources 9.11 0.80Total Sources of Funds 4.05 77.52 193.43 311.43

Capital Expenditures 139.71 73.87 7.85

Debt Service 49.31 60.39 48.71 26.38

Other Payments 129.44 16.42

Change in Working Capital (188.72) (60.03) 22.30 260.51

Total Application of Funds 0.30 74.24 200.45 311.15

Changes in Cash 3.74 3.28 (7.02) 0.28

Cash Balance, Beginning of Year 0.99 4.73 8.01 0.99

Cash Balance, End of Year 4.73 8.01 0.99 1.26

54 Appendix 7


Table A7: Financial Performance of Chengde Coal Gas Company 2000–2003

(CNY million)



2000 2001 2002 2003

Balance Sheets

Current Assets 107.17 53.54 41.83 34.09

Cash and Deposits 4.73 8.01 0.99 1.26

Accounts Receivable, net 0.00 0.00 0.26 4.69

Inventories, net 39.17 22.58 9.26 1.15

Other Current Assets 63.27 22.95 31.32 26.98

Long-Term Investments 0.00 0.00

Fixed Assets 805.60 1,007.04 918.02 919.36

Less: Accumulated Depreciation 20.51 63.75 206.19 259.79

Fixed Assets, net 785.09 943.29 711.83 659.56

Construction in Progress 316.56 190.07 172.94 174.90

Other Assets 28.17 27.10 16.99 22.88

Total Assets 1,237.00 1,214.00 943.59 891.43

Current Liabilities 628.49 603.31 576.33 307.80

Accounts Payable 87.86 154.19 31.53 17.63

Short-Term Loans 0.00 0.00 0.00 0.00

Others 540.63 449.12 544.80 290.17

Long-Term Debt 521.26 526.75 500.52 485.44

Other Long-Term Liabilities 0.00

Equity 87.24 83.94 (133.26) 98.18

Paid-in Capital 123.20 123.20 123.20 123.20

Surplus, Reserves, and Retained Earnings (35.96) (39.26) (256.46) (25.02)

Total Liabilities and Equity 1,237.00 1,214.00 943.59 891.43

Financial IndicatorsReturn on Net Fixed Assets (%)

a(1.49) 2.35 6.16 37.60


(0.14) 1.04 3.97 11.81


85.66 86.26 136.28 83.18

aNet operating income after taxes as a percentage of average net fixed assets in operation.

bRatio of internal cash generation to annual debt service.

cRatio of long-term debt to long-term debt plus equity.

Source: Chengde Coal Gas Company.

Appendix 7 55

Note: Accounts are for the consolidated operations of the company. Cash flow statements have been

reconstructed from available accounts.




56 Appendix 8

Component FX LC Total FX LC Total

A. By Subproject

Subproject 1: Gas Supply and Distribution Network System

Land 0.00 0.00 0.00 0.00 0.54 0.54Site Preparation 0.00 0.00 0.00 0.00 0.00 0.00Equipment and Machinery 4.15 2.49 6.64 5.15 0.95 6.10Civil Works 0.00 1.17 1.17 0.00 7.34 7.34Engineering and Domestic Design 0.00 0.28 0.28 0.00 0.26 0.26Training 0.15 0.03 0.18 0.07 0.05 0.12Consultants 0.08 0.00 0.08 0.04 0.02 0.06Base Cost 4.38 3.97 8.35 5.26 9.16 14.42

Physical Contingency 0.44 0.40 0.84 0.00 0.00 0.00Subtotal 4.82 4.37 9.19 5.26 9.16 14.42

Price Contingency 0.57 0.62 1.19 0.00 0.00 0.00IDC (including Financial Charges) 0.61 0.01 0.62 0.61 1.00 1.61

Total 6.00 5.00 11.00 5.87 10.16 16.03

Subproject 2: District Heating System

Land 0.00 0.00 0.00 0.00 0.81 0.81Site Preparation 0.00 0.26 0.26 0.00 0.68 0.68Equipment and Machinery 17.66 15.61 33.27 14.12 5.85 19.97Civil Works 0.00 1.90 1.90 0.00 9.69 9.69Engineering and Domestic Design 0.00 1.07 1.07 0.00 5.68 5.68Training 0.17 0.06 0.23 0.17 0.06 0.23

Consultants 0.50 0.00 0.50 0.23 0.00 0.23Base Cost 18.33 18.90 37.23 14.52 22.77 37.29



Total 26.00 31.00 57.00 16.94 23.21 40.15

Subproject 3: Coal Gasification Plants

Land 0.00 0.00 0.00 0.00 0.00 0.00Site Preparation 0.00 0.00 0.00 0.00 0.00 0.00

Equipment and Machinery 10.28 1.03 11.31 2.35 0.92 3.27Civil Works 0.00 0.67 0.67 0.00 0.00 0.00Engineering and Domestic Design 0.00 1.14 1.14 0.00 0.00 0.00Training 0.20 0.02 0.22 0.00 0.00 0.00Consultants 0.10 0.00 0.10 0.09 0.00 0.09Base Cost 10.58 2.86 13.44 2.44 0.92 3.36



Total 14.00 4.00 18.00 2.54 1.01 3.55

PROJECT COSTS($ million)

Appraisal Estimate Actual Costs



Appendix 8 57


Subproject 4: Pollution Abatement at No. 2 Porcelain Factory

Land 0.00 0.35 0.35 0.00 0.43 0.43

Equipment and Machinery 8.36 4.40 12.76 5.85 0.00 5.85Civil Works 0.00 0.58 0.58 0.00 2.50 2.50Engineering and Domestic Design 0.00 0.39 0.39 0.00 5.56 5.56Training 0.10 0.02 0.12 0.06 0.27 0.33Consultants 0.09 0.00 0.09 0.03 0.00 0.03Base Cost 8.55 5.74 14.29 5.94 8.76 14.70



Total 12.00 9.00 21.00 8.12 9.86 17.98

Subproject 5: Pollution Abatement at No. 6 Ceramic Factory

Land 0.00 0.00 0.00 0.00 0.00 0.00Equipment and Machinery 4.54 2.00 6.54 11.96 0.00 11.96Civil Works 0.00 1.50 1.50 0.00 5.15 5.15Engineering and Domestic Design 0.00 0.60 0.60 0.00 0.00 0.00Training 0.10 0.02 0.12 0.07 0.00 0.07Consultants 0.03 0.00 0.03 0.03 0.00 0.03Base Cost 4.67 4.12 8.79 12.06 5.15 17.21



Total 6.00 6.00 12.00 13.18 5.90 19.08

Subproject 6: Tangshan Dongjiao Wastewater Treatment Plant

Land 0.00 0.11 0.11 0.00 1.82 1.82Equipment and Machinery 15.65 4.41 20.06 19.61 0.64 20.25Civil Works 0.10 0.41 0.51 0.00 1.15 1.15Engineering and Domestic Design 0.00 0.85 0.85 0.00 18.62 18.62Training 0.11 0.07 0.18 0.14 0.92 1.06Consultants 0.27 0.00 0.27 0.17 0.00 0.17

Base Cost 16.13 5.85 21.98 19.92 23.15 43.07Physical Contingency 0.81 0.59 1.40 0.00 0.00 0.00

Subtotal 16.94 6.44 23.38 19.92 23.15 43.07


Total 21.00 8.00 29.00 23.28 24.29 47.57

Actual Costs ($ million)Appraisal Estimate



58 Appendix 8


Subproject 7: Chengde Coal Gasification Plant

Land 0.00 1.00 1.00 0.00 6.63 6.63Equipment and Machinery 39.56 14.33 53.89 47.49 5.12 52.61Civil Works 0.00 5.17 5.17 0.00 74.33 74.33Engineering and Domestic Design 0.00 3.16 3.16 0.00 2.44 2.44Training 0.20 0.10 0.3 0.05 0.41 0.46Consultants 0.60 0.00 0.6 0.16 1.08 1.24Base Cost 40.36 23.76 64.12 47.70 90.01 137.71


Price Contingency 3.30 5.16 8.46 0.00 0.00 0.00

IDC (including Financial Charges) 7.30 2.74 10.04 7.30 2.49 9.79 Total 55.00 34.00 89.00 55.00 92.50 147.50

B. Total Project Costs

Land 0.00 1.46 1.46 0.00 10.23 10.23Site Preparation 0.00 0.26 0.26 0.00 0.68 0.68Equipment and Machinery 100.20 44.27 144.47 106.53 13.48 120.01Civil Works 0.10 11.40 11.50 0.00 100.16 100.16Engineering and Domestic Design 0.00 7.49 7.49 0.00 32.56 32.56Training 1.03 0.32 1.35 0.56 1.71 2.27Consultants 1.67 0.00 1.67 0.75 1.10 1.85Base Cost 103.00 65.20 168.20 107.84 159.92 267.76



Total 140.00 97.00 237.00 124.93 166.93 291.86

FX = foreign currency, IDC = interest during construction, LC = local currency.

Chengde Coal Gasification Plant

Appraisal Costs Actual Costs



Appendix 9 59 ASSUMPTIONS FOR FINANCIAL ANALYSIS

A. General

1. Recalculation of the financial internal rate of return (FIRR) was carried out on anincremental and after-tax basis in 2003 constant prices. Investment costs and benefits are

expressed in real terms. The economic life of the project facilities is assumed to be the same asthose in the Report and Recommendation of the President (RRP) and the project completionreport (PCR), namely 20 years for No. 2 Tangshan Porcelain Factory (Subproject 4), No. 6Tangshan Ceramic Factory (Subprojects 3 and 5), Chengde Coal Gasification Company(Subproject 7), and Tangshan Wastewater Treatment Plant (Subproject 6); and 25 years forTangshan Gasification Company (Subproject 1) and Tangshan Heat and Power Company(Subproject 2), with no salvage value. The exchange rate used in FIRR recalculation wasCNY8.3 per US dollar.

B. Capital Investment

2. The investment costs are based on the actual capital investment costs recorded at the

time of loan closing and excluded interest during construction. The capital investment cost forSubproject 5 at Tangshan No. 2 Porcelain Factory excluded domestic financing that occurredafter the time of loan closing but was previously envisioned in the project cost estimate in theRRP.1

C. Project Output and Benefits

3. The incremental project outputs are based mainly on sales of products and servicesfrom the project facilities, with the output prices responding to market demand.

4. The benefit from environmental improvement in financial terms is realized in thereduction of environmental mitigation costs at the subproject enterprises concerned. The

benefits from energy displacement and efficiency improvement are reflected in the reduction ofproduction cost and the enhancement of production volume.

5. In the case of Subproject 5 at Tangshan No. 2 Porcelain Factory, as the factory isplanning to use the Asian Development Bank (ADB) financed facilities to produce fine bonechina from the second half of 2004, instead of steatite china, which was originally designed forthe project facilities at appraisal, the project output of the ADB-financed facilities reflects theactual production of steatite china before 2004 and the projected production of fine bone chinafrom 2004 onward.

6. Benefits from the old production facilities were adjusted to the actual product/serviceprices. Output volumes from the old facilities after the project commissioning year are assumed

to remain the same level in the year just before project commissioning. However, in the case ofSubprojects 3 and 5 at Tangshan No. 6 Ceramic Plant, by the time the ADB-financed facilitieswere commissioned, the old production facilities had either reached or surpassed their servicelives. In addition, the items produced by the old facilities had little market demand at that time.

1Strictly speaking, the costs using domestic financing after the loan was closed should also be included as projectcosts since the components financed were envisaged as a part of the Project. However, the factory has beenphysically split into two portions, and the portion that received the domestic financing belongs to a joint venturecompany. The costs provided to the Operations Evaluation Mission by the factory did not include that portion.



60 Appendix 9

Keeping the operation of those old facilities would not only have incurred heavy financial losses,but would also severely violate the local environmental protection regulations. It is thereforeassumed that, without the project, Tangshan No. 6 Ceramic Plant would have been forced tocease utilization of those old production facilities in 1996, and to retain all related employeesdue to local human resources policies. As such, without the project, benefits from the oldfacilities at Tangshan No. 6 Ceramic Plant are assumed to be zero from 1996 onward, while the

operation cost related to the old facilities for the same period is assumed to be the managementand administrative expenses at the1995 level.

D. Operation Costs

7. The incremental operation costs were based on actual costs incurred during theoperation of project facilities, while depreciation and financial charges were excluded. Certainadjustments were made to reflect the assumed increases in production volume and actual inputprices.

8. Operation costs of the old production facilities include the additional replacement costsof worn-out equipment and facilities wherever applicable. Certain adjustments were made to

reflect actual input prices. The operation costs of old facilities at Tangshan No. 6 Ceramic Plantfrom 1996 onwards are assumed to be the management and administrative expenses at the1995 level.

E. Projection

9. As in the RRP and the PCR, the projections for each subproject were made for a periodof either 20 or 25 years, wherever applicable. Projections on production volume, sales volume,sales price, and production cost for the ADB-financed facilities were based on the forecastfigures provided by each subproject enterprise, with the market trend taken into consideration.

F. Weighted Average Cost of Capital (WACC)

10. The WACC was recalculated in real terms, and based on the shares of financingsources as well as the average nominal costs with respect to the ADB loan, domestic loans, andequity participation. The domestic inflation rate is averaged at 2%.

G. Sensitivity Analysis

11. Sensitivity analysis was carried out to analyze the impacts of changes in output prices,raw material prices and overall operation cost, on the sustainability of the Project.



Appendix 9 61

Year

Ending

Dec 31

1993 11.48 (11.48)

1994 6.37 4.66 5.03 (6.90)

1995 33.08 5.72 4.47 (32.02)

1996 17.73 19.03 18.89 (18.23)

1997 21.37 31.74 23.90 (15.20)

1998 4.72 26.03 29.29 (8.85)

1999 8.43 36.28 44.04 (17.39)

2000 17.43 52.31 49.35 (16.21)

2001 1.60 53.36 62.41 (12.42)

2002 64.11 77.69 (15.71)

2003 75.74 85.22 (11.99)

2004 89.23 88.01 (1.75)

2005 91.96 83.93 4.94

2006 98.12 80.67 11.12

2007 106.34 78.38 17.97

2008 119.34 76.18 27.87

2009 128.95 73.15 36.12

2010 128.95 64.15 42.15

2011 128.95 55.15 48.18

2012 128.95 46.15 54.21

2013 128.95 37.15 60.24

2014 128.95 28.15 66.27

2015 128.95 19.15 72.30

2016 128.95 10.15 78.33

2017 128.95 1.15 84.36

2018 128.95 (7.85) 90.39

2019 128.95 (16.85) 96.42

2020 128.95 (25.85) 102.45

2021 128.95 (34.85) 108.48

2022 128.95 (43.85) 114.51

2023 128.95 (52.85) 120.54

FIRR 11.5%

WACC 6.6%

Items FIRR

Base case 11.5%Gas sales price +10% 12.6%

Gas purchase cost +10% 9.9%

Total operation cost +10% 9.8%

Combination of:

Gas sales price +10%, while total operation cost +10% 11.1%

After Tax

Table A9.1: FIRR for Subproject 1- Tangshan Gas

(CNY million)

Capital

Cost

Incremental

Revenue

Incremental

Operating

Cost

Net Cash



62 Appendix 9

Year

Ending

Dec 31

1993

1994 3.31 (3.31)

1995 8.78 (8.78)

1996 43.50 (43.50)

1997 71.08 (71.08)

1998 32.81 16.88 10.23 (26.72)

1999 62.20 33.22 18.21 (48.83)

2000 46.91 40.79 22.28 (31.37)

2001 38.54 45.06 20.90 (19.30)

2002 12.24 60.41 36.83 6.27

2003 69.73 45.87 18.49

2004 24.20 65.54 45.87 (8.43)2005 82.14 52.53 22.06

2006 102.67 56.61 32.63

2007 102.67 56.61 32.63

2008 102.67 56.61 32.63

2009 102.67 56.61 32.63

2010 102.67 56.61 32.63

2011 102.67 56.61 32.63

2012 102.67 56.61 32.63

2013 102.67 56.61 32.63

2014 102.67 56.61 32.63

2015 102.67 56.61 32.63

2016 102.67 56.61 32.63

2017 102.67 56.61 32.632018 102.67 56.61 32.63

2019 102.67 56.61 32.63

2020 102.67 56.61 32.63

2021 102.67 56.61 32.63

2022 102.67 56.61 32.63

2023 102.67 56.61 32.63

FIRR 6.2%

WACC 5.1%

Items FIRR

Base case 6.2%

Heat sales price +10% 7.6%

Heat purchase cost +10% 5.8%


Combination of:

Heat sales price +10%, while total operation cost +10% 6.8%

Incremental

Capital Incremental Operating Net Cash

Table A9.2: FIRR for Subproject 2 - Tangshan Heating Power

(CNY million)

Cost Revenue Cost After Tax



Appendix 9 63

Year

Ending

Dec 31

1994

1995 93.62 (93.62)

1996 40.30 20.65 14.97 (35.01)

1997 17.15 21.91 15.51 (11.15)

1998 0.33 27.28 22.50 3.95

1999 10.95 27.22 23.15 (7.38)

2000 0.10 19.79 36.06 (16.73)

2001 0.10 7.41 12.46 (5.28)

2002 0.60 14.68 10.68 3.12

2003 28.00 18.94 7.85

2004 0.40 46.44 41.23 3.96

2005 69.48 61.76 6.43

2006 69.48 61.76 6.43

2007 69.48 61.76 6.43

2008 69.48 61.76 6.43

2009 69.48 61.76 6.43

2010 76.39 61.76 10.98

2011 76.39 61.76 10.98

2012 76.39 61.76 10.98

2013 76.39 61.76 10.98

2014 76.39 61.76 10.98

2015 84.00 61.76 15.98

2016

2017

2018

FIRR -2.4%

WACC 4.6%

Items FIRR

Base case -2.4%

Product price +10% 1.7%

Raw material price +10% -3.5%

Heat purchase cost +10% -2.6%

Salaries and welfare expenses -10% -1.8%

Total operation cost +10% -6.8%

Combination of:

Product price +10%, while heat purchase cost +10% 1.6%

Product price +10%, while total operation cost +10% -0.1%


Capital Incremental Operating Net Cash

(CNY million)

Table A9.3: FIRR for Subprojects 3&5: Tangshan No. 6 Ceramic

Incremental



64 Appendix 9

Year

EndingDec 31

1994 0.06 (0.06)

1995 28.89 (28.89)

1996 25.96 (25.96)

1997 48.00 (48.00)

1998 8.48 (8.48)

1999 2.66 3.98 5.42 (4.17)

2000 2.00 4.23 0.81 1.34

2001 0.79 1.61 (0.83)

2002 4.59 5.49 (0.99)

2003 1.35 1.58 (0.25)

2004 11.05 8.93 1.92

2005 21.31 19.21 1.70

2006 25.07 22.60 2.012007 25.07 22.60 2.01

2008 25.07 22.60 2.01

2009 25.07 22.60 2.01

2010 25.07 22.60 2.01

2011 25.07 22.60 2.01

2012 25.07 22.60 2.01

2013 25.07 22.60 2.01

2014 25.07 22.60 2.01

2015 25.07 22.60 2.01

2016 25.07 22.60 2.01

2017 25.07 22.60 2.01

2018 25.07 22.60 2.01

FIRR -8.5%

WACC 4.9%

Items FIRR

Base case -8.5%

Raw material price -10% -7.2%

Ceramic product price +10% -4.0%

Utility cost +10%

Manufacturing cost -10% -6.8%

Total operation cost -10% -4.2%

Combination of:

Product price +10%, while utilities cost +10% -4.7%


Net Cash


Incremental

Capital Incremental Operating

Table A9.4: FIRR for Subproject 4 -Tangshan No. 2 Porcelain

(CNY million)



Appendix 9 65

Year

Ending

Dec 311994 11.69 (11.69)

1995 19.64 (19.64)

1996 80.56 (80.56)

1997 39.38 (39.38)

1998 9.44 15.80 6.40 (0.57)

1999 57.21 17.37 7.37 (47.78)

2000 102.97 18.08 4.81 (90.30)

2001 35.71 22.59 11.07 (24.94)

2002 0.00 36.13 11.63 21.50

2003 17.40 48.77 16.64 8.93

2004 18.39 61.83 23.57 11.76

2005 73.17 28.42 34.24

2006 73.17 28.42 34.24

2007 73.17 28.42 34.24

2008 73.17 28.42 34.24

2009 73.17 28.84 33.96

2010 73.17 28.84 33.96

2011 73.17 28.84 33.96

2012 73.17 28.84 33.96

2013 73.17 28.84 33.96

2014 73.17 29.18 33.73

2015 73.17 29.18 33.73

2016 73.17 29.18 33.73

2017 73.17 29.18 33.73

2018

2019

2020

FIRR 3.6%

WACC 4.3%

Items FIRR

Base case 3.6%

Wastewater treatment tarrif +10% 4.5%

Electricity cost +10% 3.6%


Combination of:

Tariff +10%, while total operation cost +10% 4.2%

Net Cash


Incremental


(CNY million)

Table A9.5: FIRR for Subproject 6 - Tangshan Wastewater



66 Appendix 9

Year

Ending

Dec 31

1994 22.62 (22.62)

1995 2.97 (2.97)

1996 82.67 (82.67)

1997 194.12 (194.12)

1998 283.12 (283.12)

1999 376.68 (376.68)

2000 125.42 460.60 391.17 (60.73)

2001 65.85 480.39 414.54 (4.39)

2002 538.56 428.33 90.53

2003 820.57 521.00 216.28

2004 807.06 521.13 207.20

2005 807.30 521.13 207.36

2006 807.53 521.13 207.512007 807.77 521.13 207.67

2008 808.00 521.13 207.82

2009 808.23 521.17 207.96

2010 808.47 521.17 208.11

2011 808.70 521.20 208.24

2012 808.93 521.24 208.38

2013 809.17 521.27 208.51

2014 809.40 521.31 208.64

2015 809.63 521.34 208.77

2016 809.87 521.38 208.90

2017 810.10 521.41 209.04

2018 810.33 521.45 209.17

2019 810.57 521.49 209.302020

FIRR 11.7%

WACC 5.9%

Items FIRR

Base case 11.7%

Coal gas price +10% 12.2%

Coke price -10% 10.3%

Coal price +10% 10.7%

Operation cost +10% 10.3%Growth of households and commercial users -20% 11.7%

Combination of:

1. Coal gas unchanged, coke price -10%, production cost +10%,

and growth of households and commercial users -20% 8.6%

2. Coal gas price +10%, coke price -10%, operation cost +10%,

and growth of household and commercial users -20% 9.3%

Net Cash


Incremental


(CNY million)

Table A9.6: FIRR for Subproject 7 - Chengde Coal Gas



Year

Ending

Dec 311993 11.48 0.00 0.00 (11.48)

1994 44.05 4.66 5.03 (44.58)

1995 187.00 5.72 4.47 (185.93)

1996 290.74 39.67 33.86 (285.94)

1997 391.10 53.65 39.41 (378.94)

1998 338.90 85.99 68.42 (323.78)

1999 518.13 118.07 98.19 (502.23)

2000 294.84 595.79 504.49 (214.00)

2001 141.79 609.61 523.00 (67.16)

2002 12.85 718.47 570.66 104.72

2003 17.40 1,044.16 689.24 239.31

2004 42.99 1,081.16 728.73 214.65

2005 0.00 1,145.36 766.98 276.742006 0.00 1,176.05 771.19 293.94

2007 0.00 1,184.51 768.90 300.95

2008 0.00 1,197.74 766.70 311.00

2009 0.00 1,207.58 764.12 319.11

2010 0.00 1,214.73 755.12 329.84

2011 0.00 1,214.96 746.15 336.00

2012 0.00 1,215.19 737.19 342.16

2013 0.00 1,215.43 728.22 348.32

2014 0.00 1,215.66 719.60 354.26

2015 0.00 1,223.50 710.64 365.42

2016 0.00 1,139.73 639.92 355.60

2017 0.00 1,139.97 630.95 361.76

2018 0.00 1,067.03 592.81 334.192019 0.00 1,042.18 561.24 338.34

2020 0.00 231.62 30.76 135.07

2021 0.00 231.62 21.76 141.10

2022 0.00 231.62 12.76 147.13

2023 0.00 231.62 3.76 153.16

FIRR 8.5%

WACC 5.4%

Appendix 9 67

Net Cash


Incremental


(CNY million)

Table A9.7: Overall FIRR for Tangshan-Chengde

Environment Improvement Project



68 Appendix 10

ASSUMPTIONS FOR ECONOMIC ANALYSIS

A. General

1. Recalculation of the economic internal rate of return (EIRR) was carried out on anincremental basis using a domestic currency world price numeraire, i.e., bringing all costs and

benefits into the world price equivalent at the border using CNY. Incremental costs and benefitsare determined by comparing situations with and without the Project for each subproject. Theeconomic life of the project facilities remained the same as those in the Report andRecommendation of the President and the project completion report, namely 20 years for No.2Tangshan Porcelain Factory (Subproject 4), No. 6 Tangshan Ceramic Factory (Subprojects 3and 5), Chengde Coal Gasification Company (Subproject 7), and Tangshan WastewaterTreatment Plant (Subproject 6), and 25 years for Tangshan Gasification Company (Subproject 1)and Tangshan Heat and Power Company (Subproject 2), with no salvage value. All prices wereexpressed in 2003 constant prices.

2. Environmental benefits in the form of health impacts such as reduction of respiratorydiseases of the employees of the subproject enterprises and the citizens in the two cities were

not quantified due to the following reasons even though they may be significant: First,estimation of the health impact of air pollution requires modeling or coefficients relating damageof air pollution to human health to actual pollution or dose levels. Presently such methodologieshave not been fully developed. Second, in the context of the People’s Republic of China (PRC),the data required, particularly dose-response data, are not available and, as a result, they wouldhave to be “borrowed” from elsewhere such as the United States. Third, there is the issue ofattribution – to what extent the observed improvement in health, if any, can be attributed to theProject. Other factors that need to be taken into account include how to evaluate sickness orhuman lives. Based on these considerations, the environmental benefits were not quantified buthave been taken into account in the overall project assessment.

B. Converting Financial Prices to Economic Prices

3. Economic values of capital costs were derived by converting actual financial capital costcomponents with applicable conversion factors. Taxes, duties, and interest during constructionwere excluded. Imported equipment was valued at international prices (cost, insurance, andfreight), while local equipment was valued by applying a conversion factor of 1.1 to therespective financial costs to adjust them to border prices, assuming that domestic prices forequivalent items are lower than world prices due to fierce price undercutting among domesticmanufacturers. The conversion factor for civil works was 1.1, while the conversion factor for therest of capital cost components was 0.926.

4. Economic costs for inputs to all subprojects were derived by converting their financialcosts with applicable conversion factors. A conversion factor of 0.926 was applied to all inputs

and outputs except for coal, heat, coal gas, and electricity. The conversion factor for electricitywas assumed to be 0.9. As coal is an exportable input, its economic price was valued at its freeon board (FOB) price minus local transport and handling costs, adjusted to the source of supply.Coal gas and heat were considered to be nontradable goods, so the economic values weredetermined based on the replacement of fuels that would have been otherwise consumed in theabsence of the subprojects. Specifically, coal gas was valued based on the border price ofliquefied petroleum gas (LPG) or heavy oil, whichever was applicable, while heat was valuedbased on the border price of coal. Other project outputs such as porcelain/ceramic products andthose by-products such as coke, coal tar, sulfur, benzol, and heavy oil, were all valued at their



Appendix 10 69 border price with adjustments for local transportation and handling costs depending on whetherthey were exportable output or import substitute or both.

C. Assumptions Used to Estimate Economic Benefits and Costs

5. Economic benefits of subprojects included incremental economic benefits/costs to the

society at large. Environmental benefits accrued to the society at large (e.g., improved health)were not quantified and, thus, not included in the analysis. The benefits from energydisplacement and efficiency improvement were reflected in the reduced production cost and/orenhanced production volume. Other subproject-specific assumptions are given below.

1. Subproject 1: Tangshan Gas Supply and Distribution Network

6. The economic benefits of coal gas included coal displacement adjusted for energyefficiency improvement. For domestic coal gas users, the economic price of coal gas wasvalued at the cost of LPG. For industrial users, the economic price of coal gas was valued at thecost of coal.

7. It is assumed that the thermal efficiency of coal gas is three times that of coal burningusing domestic stoves, and two times that of coal burning using industrial furnaces. Savingsfrom local delivery cost of coal to domestic coal users was calculated on the basis that the in-city delivery distance was 5 kilometers (km) at CNY12/km/ton. It was then estimated that, afterthe subproject reaches full capacity in 2009, about 378,122 tons of coal will be replaced by coalgas per year, of which direct coal displacement will account for 113,550 tons and thermalefficiency improvement for 264,572 tons.

2. Subproject 2: Tangshan District Heating System

8. Economic benefits of heat comprise those associated with coal displacement adjustedfor thermal efficiency improvement. The economic price of heat was valued at the economic

price of an equivalent amount of coal. It is assumed that the thermal efficiency of heatproduction is 1.9 times that of individual boilers. Savings in terms of local delivery cost to coalusers was taken into consideration, calculated on the basis that the in-city delivery distance was5 km at CNY12/km/ton. It was then estimated that, after the subproject reaches its full capacityin 2006, 321,846 tons of coal will be replaced by heat from district heating systems per year, ofwhich direct coal displacement will account for 169,392 tons and thermal efficiencyimprovement for 152,453 tons.

3. Subproject 4: Pollution Abatement at Tangshan No. 2 Porcelain Factory

9. Benefits from energy displacement and efficiency improvement were reflected implicitlyin reduced production cost and enhanced production output, both in volume and in quality.

10. The porcelain products were treated as an import substitute, as the factory sold all itsproject products in the domestic market, even though the original intention was to export them.It assumed that, without the subproject, the products would have to be imported. The averageeconomic price of porcelain products was estimated at CNY4.1 per unit, which was calculatedon basis of the border price of porcelain products of the same kind with adjustments for localtransportation and handling costs.



70 Appendix 10

4. Subprojects 3 and 5: Pollution Abatement at Tangshan No. 6 CeramicFactory

11. Benefits from energy displacement adjusted for efficiency improvement were reflectedimplicitly in reduced production cost and enhanced production, both in volume and in quality.

12. The ceramic products were treated as both an import substitute and an exportableoutput. The subproject factory exported 42% of the products from project facilities to theoverseas market. It was assumed that, without the subproject, the 58% of the products sold inthe domestic market would have to be imported. The average economic price of the ceramicproducts was CNY79.18 per unit, which was calculated on the basis of the border price ofceramic products of the same kind, with adjustments for local transportation and handling costs.

5. Subproject 6: Tangshan Wastewater Treatment Plant

13. The service of wastewater treatment is nontradable. The economic benefit of wastewatertreatment was in principle valued at a price which customers were willing to pay in order toenjoy the amenity and health benefits of cleaner rivers and water bodies. Due to a lack of

empirical survey data in the PRC, after consultation with the domestic consultant wastewatertreatment specialist, a conversion factor of 1.5 was believed to be a “reasonable” approximationto convert the current financial tariff of wastewater treatment to the economic benefit ofwastewater treatment. This implies a 50% consumer surplus. Further, the economic price ofrecycled water, which can be used for most industrial purposes but not for drinking and bathing,was also valued at the price that customers were willing to pay, which was estimated asCNY0.44 per cubic meter, by the Operations Evaluation Mission based on information providedby the subproject enterprise.

6. Subproject 7: Chengde Coal Gasification Plant

14. For domestic coal gas users, the economic price of coal gas was valued at the cost of

LPG, while for industrial users, the economic price of coal gas was valued at the cost of theborder price of heavy oil with adjustments for local transport and handling costs. Savings interms of cost of local coal delivery was calculated by assuming that the local delivery cost wasCNY12/ km/ton and that the average in-city delivery distance was 5 km. Economic prices for by-products such as coke, coal tar, sulfur, and benzol, were valued at their border prices, withadjustments for local transportation and handling costs. It was estimated that, as the subprojecthad already reached full capacity, 7,302 tons of coal and 152,806 tons of heavy oil were savedon an annual basis, being replaced by coal gas.

D. Projections

15. The projections for each subproject were made for a period of either 20 or 25 years,

whichever was applicable. Projections on production volume, sales volume, sales price, andproduction cost for the Asian Development Bank-financed facilities were based on forecastfigures provided by each subproject enterprise, with the market trend taken into consideration.



Year Incremental

Ending Capital Incremental Operating Net

Dec 31 Cost Benefit Cost Benefit

1993 12.08 0.00 0.00 (12.08) 1994 6.70 1.19 5.21 (10.73)

1995 34.81 4.83 4.63 (34.61)

1996 18.66 16.16 19.56 (22.07)

1997 22.49 31.45 24.75 (15.79)

1998 4.97 35.24 30.34 (0.06)

1999 8.87 37.05 45.61 (17.43)

2000 18.35 49.55 51.11 (19.90)

2001 1.68 54.73 64.63 (11.59)

2002 78.15 80.46 (2.31)

2003 91.75 88.26 3.49

2004 105.31 91.15 14.17

2005 111.56 86.92 24.64

2006 118.76 83.54 35.22 2007 128.17 81.17 46.99

2008 143.95 78.89 65.06

2009 155.62 75.76 79.86

2010 155.62 66.44 89.18

2011 155.62 57.12 98.50

2012 155.62 47.80 107.82

2013 155.62 38.48 117.14

2014 155.62 29.15 126.46

2015 155.62 19.83 135.78

2016 155.62 10.51 145.10

2017 155.62 1.19 154.42

2018 155.62 (8.13) 163.74

2019 155.62 (17.45) 173.06 2020 155.62 (26.77) 182.39

2021 155.62 (36.09) 191.71

2022 155.62 (45.41) 201.03

2023 155.62 (54.73) 210.35

EIRR 16.8%

Items EIRR

Base case 16.8%

Gas sales price +10% 15.7%

Gas purchase cost +10% 15.4%Total operation cost +10% 15.3%

Combination of:

Gas sales price +10%, while total operation cost +10% 14.1%

Table A10.1: EIRR for Subproject 1 - Tangshan Gas

(CNY million)

Appendix 10 71



Year Incremental



19931994 3.40 (3.40)

1995 9.04 (9.04)

1996 44.79 (44.79)

1997 73.19 (73.19)

1998 33.79 1.08 8.21 (40.92)

1999 64.04 24.35 14.63 (54.32)

2000 48.30 46.97 17.90 (19.24)

2001 39.68 46.60 20.28 (13.36)

2002 12.33 56.93 29.59 15.02

2003 81.99 36.85 45.14

2004 24.20 79.05 36.85 18.00

2005 96.40 42.20 54.20

2006 120.50 45.47 75.03 2007 120.50 45.47 75.03

2008 120.50 45.47 75.03

2009 120.50 45.47 75.03

2010 120.50 45.47 75.03

2011 120.50 45.47 75.03

2012 120.50 45.47 75.03

2013 120.50 45.47 75.03

2014 120.50 45.47 75.03

2015 120.50 45.47 75.03

2016 120.50 45.47 75.03

2017 120.50 45.47 75.03

2018 120.50 45.47 75.03

2019 120.50 45.47 75.03 2020 120.50 45.47 75.03

2021 120.50 45.47 75.03

2022 120.50 45.47 75.03

2023 120.50 45.47 75.03

EIRR 13.4%

Items EIRR

Base case 13.4%

Heat sales price +10% 14.1%

Heat purchase cost +10% 13.2%Total operation cost +10% 12.9%

Combination of:

Heat sales price +10%, while total operation cost +10% 13.7%

(CNY million)

Table A10.2: EIRR for Subproject 2- Tangshan Heating Power

72 Appendix 10



Year Incremental



19941995 96.31 (96.31)

1996 41.12 21.61 13.78 (33.29)

1997 17.31 22.96 14.27 (8.62)

1998 0.00 28.69 20.71 7.98

1999 10.82 28.61 21.31 (3.51)

2000 0.10 20.70 33.18 (12.59)

2001 0.10 7.51 11.47 (4.06)

2002 0.60 15.25 9.83 4.82

2003 29.45 17.43 12.03

2004 0.40 49.10 37.94 10.76

2005 73.66 56.84 16.82

2006 73.66 56.84 16.82

2007 73.66 56.84 16.82 2008 73.66 56.84 16.82

2009 73.66 56.84 16.82

2010 81.02 56.84 24.18

2011 81.02 56.84 24.18

2012 81.02 56.84 24.18

2013 81.02 56.84 24.18

2014 81.02 56.84 24.18

2015 89.12 56.84 32.29

2016

2017

2018

EIRR 4.2%

Items EIRR

Base case 4.2%

Product price +10% 7.5%

Raw material price +10% 3.6%

Heat purchase cost +10% 4.1%

Salaries and welfare expenses -10% 3.7%


Combination of:

Product price +10%, while heat purchase cost +10% 7.4%Product price +10%, while total operation cost +10% 6.1%

(CNY million)

Appendix 10 73

Table A10.3: EIRR for Subproject No. 3&5: Tangshan No. 6 Ceramic



Year Incremental


Dec 31 Cost Benefit Cost Benefit1994 0.06 (0.06)

1995 28.46 (28.46)

1996 25.57 (25.57)

1997 47.23 (47.23)

1998 8.34 (8.34)

1999 2.61 4.10 5.13 (3.65)

2000 1.97 4.36 0.77 1.61

2001 0.82 1.52 (0.71)

2002 4.72 5.20 (0.48)

2003 1.39 1.49 (0.10)

2004 11.39 8.45 2.94

2005 21.96 18.18 3.77

2006 25.83 21.39 4.44 2007 25.83 21.39 4.44

2008 25.83 21.39 4.44

2009 25.83 21.39 4.44

2010 25.83 21.39 4.44

2011 25.83 21.39 4.44

2012 25.83 21.39 4.44

2013 25.83 21.39 4.44

2014 25.83 21.39 4.44

2015 25.83 21.39 4.44

2016 25.83 21.39 4.44

2017 25.83 21.39 4.44

2018 25.83 21.39

EIRR -4.2%

Items EIRR

Base case -4.2%

Raw material price -10% -3.6%

Ceramic product price +10% -1.4%

Utility cost +10% -4.9%

Manufacturing cost -10% -3.4%

Total operation cost -10% -1.8%

Combination of:Product price +10%, while utilities cost +10% -1.8%


(CNY million)

Table A10.4: EIRR for Subproject 4 -Tangshan No. 2 Porcelain

74 Appendix 10



Year Incremental



1994 14.22 (14.22)

1995 19.54 (19.54)

1996 73.83 (73.83)

1997 37.04 (37.04)

1998 8.88 23.70 6.29 8.52

1999 55.63 26.06 7.24 (36.81)

2000 103.33 27.11 4.73 (80.94)

2001 33.72 33.88 10.88 (10.72)

2002 54.20 11.43 42.77

2003 17.40 73.16 16.36 39.40

2004 18.39 89.78 22.89 48.50

2005 103.82 27.39 76.43

2006 103.82 27.39 76.43 2007 103.82 27.39 76.43

2008 103.82 27.39 76.43

2009 103.82 27.79 76.03

2010 103.82 27.79 76.03

2011 103.82 27.79 76.03

2012 103.82 27.79 76.03

2013 103.82 27.79 76.03

2014 103.82 28.13 75.69

2015 103.82 28.13 75.69

2016 103.82 28.13 75.69

2017 103.82 28.13 75.69

2018

20192020

EIRR 13.5%

Items EIRR

Base case 13.5%

Wastewater treatment tariffs +10% 14.4%

Electricity cost +10% 13.4%


Combination of:Tariff +10%, while total operation cost +10% 14.2%

Table A10.5: EIRR for Subproject 6 - Tangshan Wastewater

(CNY million)

Appendix 10 75



Year Incremental



1994 23.61 (23.61)

1995 3.10 (3.10)

1996 86.28 (86.28)

1997 202.57 (202.57)

1998 295.46 (295.46)

1999 393.10 (393.10)

2000 130.88 521.63 454.61 (63.85)

2001 68.72 606.42 481.77 55.94

2002 674.74 497.79 176.95

2003 955.57 605.49 350.08

2004 931.64 605.64 325.99

2005 958.01 605.64 352.37 2006 956.03 605.64 350.39

2007 954.26 605.64 348.62

2008 952.48 605.64 346.84

2009 950.71 605.68 345.03

2010 948.93 605.68 343.25

2011 947.16 605.72 341.44

2012 945.39 605.76 339.62

2013 943.61 605.80 337.81

2014 941.84 605.84 335.99

2015 940.06 605.89 334.18

2016 938.29 605.93 332.36

2017 936.51 605.97 330.55

2018 934.74 606.01 328.73 2019 932.97 606.05 326.91

2020

EIRR 17.6%

Items EIRR

Base case 17.6%

Coal gas price +10% 18.0%

Coke price -10% 16.0%

Coal price +10% 16.5%

Operation cost +10% 16.0%Growth of households and commercial users -20% 16.7%

Combination of:

1. Coal gas unchanged, coke price -10%, production cost +10%,

and growth of households and commercial users -20% 14.3%

2. Coal gas price +10%, coke price -10%, operation cost +10%,

and growth of household and commercial users -20% 14.9%

Table A10.6: EIRR for Subproject 7 - Chengde Coal Gas

(CNY million)

76 Appendix 10



Year Incremental



1993 12.08 0.00 0.00 (12.08)

1994 48.00 1.19 5.21 (52.03)

1995 191.27 4.83 4.63 (191.06)

1996 290.24 37.76 33.34 (285.82)

1997 399.83 54.42 39.03 (384.44)

1998 351.44 88.71 65.55 (328.28)

1999 535.08 120.17 93.92 (508.83)

2000 302.93 670.32 562.30 (194.91)

2001 143.90 749.96 590.55 15.51

2002 12.93 884.00 634.30 236.77

2003 17.40 1,233.31 765.87 450.04

2004 42.99 1,266.26 802.92 420.36 2005 - 1,365.40 837.17 528.23

2006 - 1,398.60 840.27 558.32

2007 - 1,406.23 837.90 568.33

2008 - 1,420.24 835.62 584.62

2009 - 1,430.13 832.93 597.20

2010 - 1,435.72 823.61 612.11

2011 - 1,433.95 814.33 619.61

2012 - 1,432.17 805.05 627.12

2013 - 1,430.40 795.77 634.63

2014 - 1,428.63 786.83 641.79

2015 - 1,434.95 777.55 657.40

2016 - 1,344.06 711.44 632.62

2017 - 1,342.28 702.16 640.12 2018 - 1,236.69 664.75 571.94

2019 - 1,209.08 634.08 575.01

2020 - 276.12 18.70 257.41

2021 - 276.12 9.38 266.73

2022 - 276.12 0.06 276.05

2023 - 276.12 (9.26) 285.37

EIRR 14.7%

(CNY million)

Tangshan-Chengde Environment Improvement Project

Appendix 10 77

Table A10.7: Overall EIRR for



78 Appendix 11

ENVIRONMENTAL INDICATORS FOR TANGSHAN

Table A11.1: Tangshan Air Quality Monitoring Results (2003) (mg/m3)

National

Annual Average Class IIPollutant 1990 2002 2003 Standard

TSP 0.690 0.157 0.127 0.10SO2 0.104 0.091 0.091 0.06NO2 0.045 0.047 0.039 0.08

mg/m3 = milligram per cubic meter, NO2 = nitrogen dioxide, SO2 = sulfur dioxide, TSP = totalsuspended particulates.Source: Tangshan Environment Protection Bureau.

Table A11.2: Real Time Air Quality Monitoring Results for 8 June 2004 (Downtown)

Day/Time

PM10

(mg/m3)SO2

(mg/m3)NOx

(mg/m3)NO2

(mg/m3)NO

(mg/m3)

00:00 0.157 0.010 0.068 0.053 0.01401:00 0.165 0.010 0.053 0.042 0.01102:00 0.181 0.011 0.044 0.034 0.01003:00 0.163 0.011 0.037 0.028 0.00904:00 0.126 0.009 0.033 0.024 0.00905:00 0.200 0.006 0.040 0.030 0.01106:00 0.178 0.006 0.039 0.028 0.011

07:00 0.125 0.012 0.059 0.042 0.01708:00 0.098 0.009 0.057 0.039 0.01709:00 0.102 0.024 0.067 0.045 0.02210:00 0.066 0.048 0.050 0.035 0.01511:00 0.062 0.061 0.050 0.036 0.01412:00 0.073 0.059 0.048 0.036 0.01213:00 0.095 0.055 0.043 0.034 0.01014:00 0.038 0.052 0.045 0.036 0.00915:00 0.060 0.055 0.047 0.040 0.00716:00 0.012 0.057 0.059 0.051 0.00717:00 0.054 0.046 0.059 0.052 0.007

mg/m3 = milligram per cubic meter, NOx =nitrogen oxide, NO2 = nitrogen dioxide, PM = particulatematter , SO2 = sulfur dioxide.Source: Tangshan Environment Protection Bureau.



MANAGEMENT RESPONSE ON THE PROJECT PERFORMANCE AUDIT REPORTON THE TANGSHAN AND CHENGDE ENVIRONMENTAL IMPROVEMENT PROJECT

IN PEOPLE’S REPUBLIC OF CHINA (Loan 1270-PRC)

On 7 February 2005, the Director General, Operations Evaluation Department, receivedthe following response from the Managing Director General on behalf of Management:

1. Management and staff have reviewed the Project Performance AuditReport (PPAR) for Loan 1270-PRC: Tangshan and Chengde EnvironmentalImprovement Project (the Project), and would like to provide the followingcomments.

2. The Project included seven components of varying scope and therebydifferent costs and benefits. The Project Completion Report (PCR) circulated on9 October 2002, rated the project as “successful”.1 OED reviewed the PCR and

validated the methodology used, and the rating. The PPAR has now adopted adifferent methodology and rated the Project as partly successful.

3. Due to the multi-component feature of the Project, the PPAR hasidentified the limitation of applying the current “Guidelines for the Preparation of Project Performance Audit Report” to determine the overall project rating, andexplained the new approach that it used. However, the new approach does notprovide a direct link between the ratings of individual components and that of theoverall project. In our view, the overall Project rating in the PPAR is conservative,because it does not take into account the overall weighted average (OWA), orthe overall EIRR and FIRR.

4. A lack of clarity regarding the methodology for determining overall ratingin multi-component projects will lead to inconsistencies in project evaluation. Wesuggest that OED augment the guidelines for evaluating multi-componentprojects.

5. We have taken note of the key lessons and follow-up actions stated in thePPAR and will take them into account for the design of similar future ADBprojects, as outlined below:

(i) The low rating of some subprojects highlights the importance of(a) more rigorous analysis of assumptions in the case of linkedsubprojects, and (b) technical recommendations of consultants

being verified by in-house experts, and where in-house capacity islacking, avoidance of investments in such subprojects.

(ii) The PPAR supports the current operational strategy in PRC thatfocuses on achieving public goods through public utilities andstaying away from supporting industrial projects. Similarly,

1"With the achievement of the main objective of air improvement despite the about 1.3% increase in the citypopulation in the last 10 years and an annual economic growth rate of about 10% per annum, the Project is ratedas successful."



integrating subprojects in selected cities will enhance the impactof environmental improvement projects.

(iii) Choice of appropriate technologies is considered important,particularly because of the rapid technological developments inenvironmental engineering and cleaner production. Further,

sustainability of subprojects and environmental benefits must begiven equal emphasis.

(iv) Staff review of project implementation has been strengthened tohelp identify potential contractual problems and seek alternatesolutions for successfully commissioning equipment.



OPERATIONS EVALUATION DEPARTMENT COMMENT ON MANAGEMENT RESPONSETO THE PROJECT PERFORMANCE AUDIT REPORT ON THE TANGSHAN AND

CHENGDE ENVIRONMENTAL IMPROVEMENT PROJECTIN PEOPLE’S REPUBLIC OF CHINA (Loan 1270-PRC)

On 10 February 2005, the Director General, Operations Evaluation Department (OED),issued the following comment on the Management response:

1. With reference to your memo dated 4 February 2005 regardingManagement Response to OED Report: Loan 1270-PRC: Tangshan andChengde Environmental Project—Project Performance Audit Report (PPAR),OED has taken note of your observation on the overall project rating and theneed for consideration of an appropriate approach to aggregating ratings of multi-subproject projects.

2. OED is currently revising the Guidelines for the Preparation of Project Performance Audit Report , which will consider the complexities associated withevaluating multi-subproject projects like this one.