Report and Recommendation of the President to the Board of Directors
Project Number: 44011 September 2012
Proposed Loan People’s Republic of China: Heilongjiang Energy Efficient District Heating Project
CURRENCY EQUIVALENTS (as of 23 August 2012)
Currency unit – yuan (CNY)
CNY1.00 = $0.1574 $1.00 = CNY6.3529
ABBREVIATIONS
ADB – Asian Development Bank btce – billion tons of standard coal equivalent CHP – combined heat and power CO – carbon monoxide DHS – district heating system EIRR – economic internal rate of return EMP – environmental management plan FIRR – financial internal rate of return GDP – gross domestic product HPG – Heilongjiang provincial government IEE – initial environmental examination LIBOR – London interbank offered rate m2 – square meter NOx – nitrogen oxide PAM – project administration manual PRC – People’s Republic of China SO2 – sulfur dioxide SOE – state-owned enterprise t – ton
NOTE
In this report, "$" refers to US dollars
Vice-President S. Groff, Operations 2 Director General R. Wihtol, East Asia Department (EARD) Director A. Bhargava, Energy Division, EARD Team leader T. Oi, Senior Energy Specialist, EARD Team members S. Kawazu, Senior Counsel, Office of the General Counsel N. W. Kim, Environment Specialist, EARD X. Liu, Senior Project Officer (Energy), People's Republic of China
Resident Mission, EARD G. Nave, Associate Project Analyst, EARD M. Pajarillo, Senior Finance Specialist, EARD S. Yamamura, Energy Specialist, EARD Peer reviewer A. Maxwell, Senior Energy Specialist, Pacific Department In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.
CONTENTS
Page PROJECT AT A GLANCE
I. THE PROPOSAL 1
II. THE PROJECT 1
A. Rationale 1 B. Impact and Outcome 3 C. Outputs 3 D. Investment and Financing Plans 3 E. Implementation Arrangements 4
III. DUE DILIGENCE 5
A. Technical 5 B. Economic and Financial 6 C. Governance 6 D. Poverty and Social 7 E. Safeguards 8 F. Special Features 9 G. Risks and Mitigating Measures 9
IV. ASSURANCES AND CONDITION 10
V. RECOMMENDATION 10
APPENDIXES
1. Design and Monitoring Framework 11
2. List of Linked Documents 13
PROJECT AT A GLANCE
I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed loan to the People’s Republic of China (PRC) for the Heilongjiang Energy Efficient District Heating Project.1 2. The proposed project will expand and upgrade district heating systems (DHSs) in eight cities of Heilongjiang province to make the systems energy efficient, thereby reducing emission of greenhouse gases and air pollutants.2 The project will install energy efficient heating sources and heat exchangers, insulated pipelines, and computerized monitoring and control systems. The design and monitoring framework is in Appendix 1.
II. THE PROJECT A. Rationale 3. The PRC has experienced a rapid increase in energy consumption in tandem with sustained economic growth, especially since 2000. By the end of 2010, the primary energy demand in the PRC had increased to more than 3.00 billion tons of standard coal equivalent (btce), compared to 1.39 btce in 2000. The PRC relies heavily on carbon-intensive coal, which provided about 70% of its primary energy in 2010.3 Electricity generation and heat supplies account for about half of the total coal consumption in the PRC. The Government of the PRC has recognized the challenges posed by the rapid rise in energy consumption and associated emissions. It has committed to achieve 40%–45% carbon intensity reduction by 2020 compared with 2005, primarily by targeting energy intensity reductions.4 During the Eleventh Five-Year Plan, 2006–2010 the energy intensity was reduced by 19.06% compared with a target of 20.00%. During the Twelfth Five-Year Plan, 2011–2015 the PRC has set a further energy intensity reduction target of 16%, an 8% reduction of sulfur dioxide (SO2), and a 10% reduction of nitrogen oxide (NOx). Heilongjiang province has set corresponding targets of reducing energy intensity by 16.0%, SO2 emission by 2.0% (10,000 tons [t]), and NOx emission by 3.1% (23,000 t) by 2015 compared to 2010.5 4. The PRC is the second-largest district heating market in the world, the Russian Federation being the largest. Because of the large demand, 13 provinces, 3 autonomous regions, and two cities have adopted centralized heating. 6 The DHS coverage area is continuously expanding to keep pace with the rapid economic growth and urbanization. Between 2003 and 2010, centralized heating coverage in the PRC increased from 1.9 billion square meters (m2) to 4.4 billion m2. However, DHS still covers only 30% of the total floor area
1 The Asian Development Bank (ADB) provided project preparatory technical assistance. ADB. 2010. Technical
Assistance to the People’s Republic of China for Preparing Heilongjiang Energy Efficient District Heating Project. Manila.
2 The cities included in the project are Harbin, Jiagedaqi, Jiamusi, Jixi, Qitaihe, Raohe, Tongjiang, and Yichun. 3 China Statistics Press. 2010. China Energy Statistical Year Book. Beijing. 4 Carbon intensity is the amount of greenhouse gas emissions per unit of gross domestic product (GDP). Energy
intensity is the amount of energy consumed per unit of GDP. In the PRC, the energy intensity is generally measured in tons of coal equivalent per CNY10,000 of GDP.
5 State Council. 2011. Circular of the State Council on Issuing the Comprehensive Work Plan for Energy Conservation and Emission Reduction during the Twelfth Five-Year Plan Period, Decree No. 26. Beijing.
6 The provinces are Anhui, Gansu, Hebei, Heilongjiang, Henan, Hubei, Jiangsu, Jilin, Liaoning, Qinghai, Shaanxi, Shandong, and Shanxi. The autonomous regions are Inner Mongolia, Ninxia, and Xinjiang. The cities are Beijing and Tianjin.
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compared to coverage of about 60% in European countries. Coverage is particularly low in low-income urban areas. 5. Heilongjiang is an underdeveloped inland province in the northeastern region of the PRC. Heating service in Heilongjiang, where temperatures fall below –40°C and the heating season lasts for up to 6 months, meets one of the basic human needs and provides essential support to socioeconomic activities. Northeastern provinces, including Heilongjiang, are a source of transboundary air pollution such as acid rain. The centralized heating area in Heilongjiang has increased from 199 million m2 in 2003 to 384 million m2 in 2010. By 2015, the province plans to increase the district heating coverage area by another 200 million m2, which will cover up to 70% of the cities and counties in the province. Many existing heating systems in the province are old and inefficient, and lack modern emission control equipment. Combustion efficiency of existing small heat-only boilers of 55% in many cities is far below the 87% that can be achieved in modern combined heat and power (CHP) plants or large heat-only boilers. 6. The existing inadequate coverage of district heating in low-income urban areas in Heilongjiang compels households to use coal stoves for heating, and these are a major cause of indoor air pollution and respiratory diseases. The poor indoor air quality in households has a disproportionately high effect on women and children, who spend most of their time indoors. There were 18 cases of carbon monoxide (CO) poisoning and 10 fire accidents caused by household stoves from 2008 to 2010 in the project areas. Emissions from existing small and inefficient neighborhood boilers, most of which lack emission control equipment, also worsen outdoor air quality and cause significant cumulative harm to public health. Providing cleaner and reliable district heating services to households and other community areas will (i) reduce cases of respiratory diseases through improved indoor and outdoor air quality, reduce CO poisoning by providing safer district heating services, and improve the medical environment; (ii) improve living conditions; (iii) reduce heating expenditure by switching from individual household stoves and decentralized heating systems to centralized energy efficient heating systems; (iv) provide a better schooling environment during the winter; and (v) increase incomes through job opportunities created during construction and operation. Women and vulnerable people connected to the modern district heating networks will enjoy a cleaner, safer living environment. 7. The project will target selected cities where the poverty ratio is as high as 8.7% (compared to the national average of 7.7%) and district heating coverage is particularly low. The project will demonstrate that significant expansion of energy efficient DHSs to an additional 27 million m2 (270,000 households) can be introduced without increasing net emissions. The project will remove small, inefficient, and polluting neighborhood coal-fired boilers and coal-fired household stoves; and construct centralized district heating networks where heat is supplied by highly energy efficient CHP plants and large boilers, thereby reducing the overall carbon and air pollution footprints of district heating. 8. The project is closely aligned with Strategy 2020, where moving developing member countries onto low-carbon growth paths by improving energy efficiency has been identified as one of the key means of achieving environmentally sustainable growth. 7 The Asian Development Bank (ADB) Energy Policy prioritizes projects on energy efficiency and access to energy for all, including district heating, for energy efficiency improvement and access to modern cleaner heating services for all.8 The country partnership strategy, 2011–2015 for the
7 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, 2008–2020.
Manila. Supporting environmentally sustainable growth is one of the core areas of Strategy 2020. 8 ADB. 2009. Energy Policy. Manila.
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PRC identifies environmental sustainability as one of the three pillars of ADB assistance to the PRC. 9 B. Impact and Outcome 9. The impact will be improved energy efficiency and a cleaner environment in Heilongjiang province. The outcome will be improved air quality and reduced greenhouse gas emissions in eight urban areas in Heilongjiang province. C. Outputs 10. The outputs will be (i) expanded district heating coverage in eight project cities (footnote 2) without net increase in emissions, (ii) improved energy efficient heat generation capacity in three project cities,10 and (iii) promotion of private sector participation in district heating in two project cities.11 The components of each subproject are summarized in Table 1.
Table 1: Summary of Subprojects Subproject
New Heating Source (MWth)a
No. of Heat Exchangers
SCADA System
Heating Pipeline
(km)
Small Boiler
Closure
Heating Area
(million m2)
1. Harbin Taiping HP and DH
2 x 116 MWth CFBP
40 Yes 22 18 4.0
2. Jiagedaqi DH 30 Yes 21 68 6.0
3. Jiamusi West DH 111 Yes 68 218 14.8
4. Jidong County DH 34 Yes 7 32 0.9
5. Qitaihe DH 33 Yes 30 15 7.6
6. Raohe Town HP and DH 3 x 14 MWth
CFBP 0b Yes 8 19 0.6
7. Tongjiang City HP and DH
3 x 58 MWth CFBP
24 Yes 17 36 2.7
8. Yichun City–Tangwanghe DH
22 Yes 27 16 1.5
9. Yichun City–Xinqing DH 27 Yes 17 48 2.7 Total 448 321 217 470 40.8
CFBP = circulating fluidized-bed plant, DH = district heating, HP = heating plant, km = kilometer, m2 = square meter, MWth = megawatt thermal, No. = number, SCADA = supervisory control and data acquisition. a The subprojects which do not have new heat source installation will purchase heat from existing combined heat
and power plants. b As the heating area is small, the subproject adopts direct heating systems which do not require heat exchangers. Sources: Subproject feasibility studies. 11. Support for project management including consulting services, training, and equipment will be provided to the executing agency, the project management office, and the nine project implementing agencies to assist them in (i) supervising project management, procurement, and environmental monitoring to ensure successful project completion; and (ii) knowledge sharing. D. Investment and Financing Plans 12. The project is estimated to cost $353 million (Table 2). 9 ADB. 2012. Country Partnership Strategy: People’s Republic of China, 2011–2015. Manila. 10 The three project cities are Harbin, Raohe, and Tongjiang. 11 The two project cities are Raohe and Tongjiang.
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Table 2: Project Investment Plan ($ million)
Item Amounta A. Base Cost
1. Harbin Taiping heating plant and district heating 47 2. Jiagedaqi district heating 34 3. Jiamusi West district heating 86 4. Jidong county district heating 6 5. Qitaihe district heating 55 6. Raohe town heating plant and district heating 10 7. Tongjiang city heating plant and district heating 38 8. Yichun City–Tangwanghe district heating 10 9. Yichun City–Xinqing district heating 14 10. Project implementation consulting services 1
Subtotal (A) 301 B. Contingencies 37 C. Financing Charges During Implementation 15 Total (A+B+C) 353
a The base cost includes taxes and duties estimated at $27 million, of which $12 million will be for Asian Development Bank (ADB)-financed components. The taxes and duties to be financed by ADB are not considered to be excessive and are in compliance with the country cost-sharing ceiling and financing parameters for the PRC, approved on 18 March 2011.
Sources: Heilongjiang provincial government and ADB estimates. 13. The government has requested a loan of $150 million from ADB’s ordinary capital resources to help finance the project. The loan will have a 25-year term, including a grace period of 5 years, an annual interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.15% per year, and such other terms and conditions set forth in the draft loan and project agreements. 12 The government has provided ADB with (i) the reasons for its decision to borrow under ADB’s LIBOR-based lending facility based on these terms and conditions, and (ii) an undertaking that these choices were its own independent decision and not made in reliance on any communication or advice from ADB. The financing plan is in Table 3.
Table 3: Financing Plan Source
Amount Share of Total (%) ($ million)
Asian Development Bank 150 42 Implementing agencies 117 34 Domestic banksa 86 24 Total 353 100
a Unconditional commitment letters have been obtained from domestic banks. This may lead to a collaborative cofinancing upon signing of memorandum of understanding between Asian Development Bank and domestic banks.
Source: Asian Development Bank and project implementing agencies estimates.
E. Implementation Arrangements
14. The implementation arrangements are summarized in Table 4 and described in detail in the project administration manual (PAM).13
12 The interest includes a maturity premium of 0.10%. This is based on the above loan terms and the government’s
choice of repayment option and dates. 13 Project Administration Manual (accessible from the list of linked documents in Appendix 2).
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Table 4: Implementation Arrangements Aspects ArrangementsImplementation period January 2013–December 2017 Estimated completion date 31 December 2017 Management (i) Oversight body The project leading group
Chair: Vice-governor of Heilongjiang provincial government Members: Representatives from the Provincial Development and Reform Commission, Finance Bureau, Construction Bureau, and Environment Protection Bureau
(ii) Executing agency Heilongjiang provincial government (iii) Key implementing
agencies 1. Harbin Taiping Heating Company 2. Daxing'anling Power Industrial Bureau 3. Jiamusi Xinshidai Urban Infrastructure Investment Company 4. Jidong Heat and Power Company 5. Qitaihe Heating Company 6. Raohe County Chenguang Heating Company 7. Tongjiang Changheng Cogeneration Company 8. Heilongjiang Tangwanghe Forest Bureau 9. Heilongjiang Xinqing Forest Bureau
(iv) Implementation unit Project management office, Harbin, Heilongjiang, four staff Procurement ICB 21 contracts $133 million
NCB 2 contracts $7 million Shopping 0 contracts 0
Consulting services Individual 48 person-months $0.28 million Retroactive financing and/or advance contracting
The executing agency has requested advance contracting and retroactive financing. This will include the recruitment of consulting services, civil works, and the procurement of goods. The amount to be retroactively financed will not exceed $30 million (equivalent to 20% of the ADB loan) and may finance costs incurred prior to loan effectiveness but not earlier than 12 months before the signing date of the loan agreement.
Disbursement The loan proceeds will be disbursed in accordance with ADB's Loan Disbursement Handbook (2012, as amended from time to time) and detailed arrangements agreed upon between the government and ADB. Direct payment will be primarily used for the payment of goods, civil works, and capacity building. Other disbursement methods will also be used, as appropriate.
ADB = Asian Development Bank, ICB= international competitive bidding, NCB = national competitive bidding. Sources: Heilongjiang provincial government and ADB estimates.
III. DUE DILIGENCE
A. Technical
15. Several energy efficiency measures have been adopted in designing the project, including (i) purchasing heat from existing CHP plants or constructing large heat-only boilers with circulating fluidized-bed technology, (ii) adopting computerized systems to control the demand and supply of heat which prevents the overheating of buildings, and (iii) pilot testing the household-consumption-based billing system in two subprojects to moderate the heating demand. 14 16. The alternative heat sources considered include renewable sources (heat pumps, geothermal, biomass, and solar), natural gas, heat from existing CHP plants, and large coal-fired boilers. On further evaluation, natural gas was considered unfeasible due to limited supply in the project area. There are no renewable energy sources available that are technically and financially viable with incremental cost and reasonable time frame in the project area. CHP
14 Install a supervisory control and data acquisition system, which allows for regulation of the temperature and flow of
hot water automatically based on actual heat consumption and outdoor temperature.
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plants (with thermal efficiencies of 90% or higher) and large coal-fired boilers (with combustion efficiency of 87% or higher) with post-combustion emission control devices to meet the national standards in reducing air emissions were found to be the least-cost feasible option to meet the heating requirements reliably in the project cities. The circulating fluidized-bed combustion technology was selected among available technologies for all the heating plants under the project as it has higher combustion efficiency, lower NOx emission, and lower desulfurization cost. Compared to the existing small and inefficient heating boilers (42% combustion efficiency), new heating boilers improve thermal efficiency to 87% and reduce associated carbon dioxide and other emissions. Small heating boilers owned by the implementing agencies will be decommissioned after heating networks are connected to the new heat sources. B. Economic and Financial
17. The financial internal rate of return (FIRR) is calculated for each subproject. The financial analysis of the subprojects indicates FIRRs of between 8.6% and 9.9%, which for each case is higher than the corresponding weighted average cost of capital. The overall FIRR for the whole project is 9.5%, compared with the weighted average cost of capital of 2.3%. Sensitivity analysis shows that the project is likely to be sustainable under various adverse scenarios. 18. The economic benefits of the upgraded district heating supply include improved heating efficiency and environment. The calculations reflect all the project-related costs, benefits from cost savings from alternative fuels and efficiency improvements, plus local and global environmental benefits. Analyses for each subproject indicate economic internal rates of return (EIRR) without environmental benefits ranging from 12.5% to 20.6%. The EIRR of the whole project without environmental benefits is 17.9%, which is more than the 12.0% economic cost of capital. The analyses for each subproject indicate EIRRs with environmental benefits ranging from 16.4% to 25.3%. The EIRR of the whole project with environmental benefits is 21.1%, which is more than the 12.0% economic cost of capital. Therefore, the project is economically feasible. Sensitivity analysis shows that the project is likely to be sustainable under various adverse scenarios. C. Governance
19. Financial management assessment was conducted for the implementing agencies.15 All companies have large shareholder equity, which can support more debt financing from commercial banks. The assessment indicates that accrual based accounting and the PRC business accounting standards are followed. The accounting procedures used by the implementing agencies are aligned with the regulations and policies issued by the Ministry of Finance, and are considered effective and adequate for the project. The executing agency has experience in implementing several projects financed by ADB, and has a good track record in financial management of those projects.16
15 Financial management assessment was conducted under project preparatory technical assistance in 2011.
Financial Management Assessment of the Implementing Agencies (accessible from the list of linked documents in Appendix 2).
16 The Heilongjiang provincial government is administering four ADB loans: ADB. 2005. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People’s Republic of China for Sanjiang Plain Wetlands Protection Project. Manila; ADB. 2006. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People’s Republic of China for Heilongjiang Road Network Development Project. Manila; ADB. 2008. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People’s Republic of China for Songhua River Basin Water Pollution Control and Management Project. Manila; and ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People’s Republic of China for Second Heilongjiang Road Network Development Project. Manila.
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20. Procurement capacity assessment was performed on the executing and implementing agencies. 17 The executing agency has skilled and experienced staff supported by well-established procedures and systems to manage procurement that is consistent with ADB requirements. Implementing agencies lacking experience in conducting international competitive bidding will be trained in various aspects of procurement and project management (para. 11). 21. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government and the Heilongjiang provincial government (HPG). The specific policy requirements and supplementary measures are described in paras. 57 and 58 of the PAM. D. Poverty and Social
22. Social benefits. The project will directly benefit more than 1.63 million urban residents of the project cities, about half of whom (0.81 million) are female and 37,000 of whom are from poor households, and provide direct benefits to 174,625 children in 314 schools and patients and medical staff in 108 hospitals. The project will
(i) reduce cases of respiratory diseases through improved indoor and outdoor air quality, reduce CO poisoning by providing safer district heating services, and provide a better medical environment by providing cleaner and reliable heating services to hospitals;
(ii) improve living conditions through adequate and reliable heating services; (iii) reduce heating expenditure by switching from individual household stoves and
decentralized heating systems to centralized energy efficient heating systems; (iv) provide a better schooling environment during the winter by providing cleaner
and reliable heating services; and (v) increase income through job opportunities created during construction and
operation (3,413 jobs during construction and 1,339 during operation). 23. Labor retrenchment. A total of 2,075 boiler workers (520 full-time and 1,555 seasonal workers) will be affected by the closure of around 470 small coal-fired boilers. A labor retrenchment and reemployment plan was prepared to safeguard the livelihoods of the affected workers.18 All of the 520 full-time workers under the Jiagedaqi, Jiamusi, Yichun City–Xinqing, and Yichun City–Tangwanghe subprojects will be transferred to the operation and maintenance of heat exchange stations. The temporary seasonal workers will be informed by the implementing agencies of the status of boiler closures before the end of the final heating season. Since they are contractual seasonal workers, the implementing agencies are not obliged to retain them and provide employment assistance. However, if the workers would like to work at the heat supply plants as seasonal workers, they are eligible to participate in the technical training for potential new positions. Those who have completed the training course may be hired on a contractual or permanent basis depending on vacancies and proficiency. 24. Gender impact. The project’s impact on women includes (i) access to cleaner, safer, and reliable heating system; (ii) reduced domestic chores related to space heating (1 hour per day); (iii) reduced incidence of respiratory diseases related to indoor air pollution; and (iv) reduced incidence of CO poisoning and accidental fires. There are some areas to be improved to make the project more gender responsive, such as raising awareness on energy
17 Procurement Capacity Assessment Report and Recommendations (accessible in the list of linked documents in
Appendix 2.) 18 Labor Retrenchment and Reemployment Plan (accessible from the list of linked documents in Appendix 2).
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conservation focusing on women, and improving gender-responsive customer orientation in heating service delivery. 25. A gender action plan was prepared to maximize the project benefit on women, safeguard poor households headed by women, increase the participation of women in the district heating industry, and monitor the project impact on women.19 Under the project
(i) job opportunities will be promoted for women as heating bill collectors, targeting 50% as women;
(ii) heating assistance will be ensured for the 1,300 poor households headed by women by subsidizing 70% of the heating tariff (by the local government) and waiving connection fees (by the heating companies);
(iii) energy conservation awareness campaigns will be organized, targeting about 800,000 women (100% of the women in subproject areas) in partnership with the women’s federation;
(iv) a targeted session on women and district heating will be held in the knowledge-sharing workshop between private and state-owned district heating companies; and
(v) a separate session on women and district heating will be held at the regional conference on district heating.
E. Safeguards 26. Environmental benefits. The project results in substantial environmental benefits by replacing around 470 small, old, and inefficient heating boilers and 275,166 household stoves (equivalent to about 1,014 megawatt thermal) with energy efficient CHP or heating boilers, and rehabilitating heating pipes to reduce heat losses. The net reduction in annual coal consumption is estimated at 418,889 t, which results in the reduction of 1 million t of carbon dioxide,20 4,500 t of SO2,
21 1,961 t of NOx22 and 22,819 t of particulate matter.
27. The project is classified category B for environment and C for involuntary resettlement and indigenous peoples. The potential adverse environmental impacts of the project include (i) soil erosion during construction, (ii) increased noise and dust affecting local residents during construction, (iii) inappropriate storage of hazardous materials and wastes during operation, (iv) safety risks to community members and workers during construction and operation, and (v) flue gas emissions during operation. Specific potential adverse impacts caused by the demolition of small boilers are (i) wastes such as equipment and building materials, and (ii) dust and noise from demolition of boiler houses and chimneys. The initial environmental examination (IEE) concludes that the potential adverse environmental impacts can be adequately mitigated through appropriate mitigation measures, as outlined in the project environmental management plan (EMP) presented in the IEE, and the project will result in environmental and socioeconomic benefits that significantly outweigh potential negative impacts. 28. The HPG and the implementing agencies shall ensure that the project is designed, constructed, and operated in accordance with relevant PRC national and local environmental laws, regulations, procedures, and guidelines; ADB's Safeguard Policy Statement (2009); and
19 Gender Action Plan (accessible from the list of linked documents in Appendix 2). 20 ADB will support the efforts of obtaining clean development mechanism benefits through its technical support
facility. 21 Equivalent to 45% of provincial reduction target. 22 Equivalent to 8.5% of provincial reduction target.
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the EMP. 23 The HPG will ensure the boilers constructed under the project comply with both PRC flue gas emissions standards stipulated in the Emission Standard of Air Pollutants for Coal-burning, Oil-burning, Gas-fired Boilers (GB 13217-2001) and in the World Bank’s Environmental, Health, and Safety Guidelines for Thermal Power Plants. 24 Environmental monitoring reports will be submitted to ADB biannually during construction, and then annually during operations. The EMP including mitigation measures, a monitoring plan, and institutional arrangements will be updated during engineering design and incorporated in the bidding documents and civil works contracts. The project has fully complied with the ADB information disclosure and meaningful consultation requirements. F. Special Features 29. Heating service delivery in Heilongjiang is primarily by state-owned enterprises (SOEs). Although the heating subsector’s high growth rate provides significant opportunity for private sector participation, this has been slow primarily because of (i) high investment costs but marginal returns due to low heating tariffs; (ii) reluctance of local financial institutions to provide debt financing, particularly in remote urban areas with smaller consumer bases, because of perceived high risks; and (iii) the small number of private companies with the required technical, financial, and managerial capacity to operate such utilities. Weak customer orientation in service delivery by SOEs causes low tariff collection rates. Modernization of state-owned heating companies and capacity strengthening in critical areas of financial management, tariff collection, and customer service can help to increase the viability of heating businesses. 30. The project will provide affordable financial support to two private enterprises25 and play a catalytic role in mobilizing commercial financing. To benefit from good business practices of private sector enterprises, knowledge-sharing sessions will be organized between private enterprises and SOEs to draw suggestions on reforms to the business environment. A regional conference on district heating with the likely participation of neighboring northern provinces and countries (i.e., Japan, Republic of Korea, and member countries of Central Asia Regional Economic Cooperation) fostering regional cooperation through knowledge sharing will be organized by the HPG using the proposed loan. All of these activities will help increase private sector development and subregional cooperation. G. Risks and Mitigating Measures
31. Major risks and mitigating measures are summarized in Table 5 and described in detail in the risk assessment and risk management plan.26
23 ADB. 2009. Safeguard Policy Statement. Manila. 24 World Bank. 2008. Environmental, Health, and Safety Guidelines for Thermal Power Plants. Washington, DC. 25 For Raohe town heating plant and district heating subproject and Tongjiang city heating plant and district heating
subproject. Provincial government has selected these two private heating companies which operate in remote small cities as they need government support to be able to mobilize commercial financing. The experience of these two companies will be shared with other subproject companies as examples of private sector driven district heating systems.
26 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).
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Table 5: Summary of Risks and Mitigating Measures
Risks Mitigating Measures Delays in project implementation
The PMO is implementing four ADB-financed projects and has gained experience in ADB procedures. The PMO has agreed to incremental staff increases to manage the additional workload of the project. The capacity of implementing agencies has been strengthened by (i) advanced procurement and disbursement trainings during loan preparation, (ii) follow-up procurement and disbursement trainings during loan implementation, and (iii) provisions for the supervision and management consultants during the loan implementation.
ADB = Asian Development Bank, PMO = project management office. Source: Asian Development Bank.
32. Overall, the risks associated with the project have been adequately addressed. The integrated benefits and impacts are expected to outweigh the costs.
IV. ASSURANCES AND CONDITION
33. The government and the HPG have assured ADB that implementation of the project shall conform to all applicable ADB policies, including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the PAM and loan documents. 34. The government and the HPG have agreed with ADB on certain covenants for the project, which are set forth in the loan agreement and project agreement.
V. RECOMMENDATION
35. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the loan of $150,000,000 to the People’s Republic of China for the Heilongjiang Energy Efficient District Heating Project, from ADB’s ordinary capital resources, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; for a term of 25 years, including a grace period of 5 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan and project agreements presented to the Board.
Haruhiko Kuroda President
4 September 2012
Appendix 1 11
DESIGN AND MONITORING FRAMEWORK
Design Summary Performance Targets and Indicators with Baselines
Data Sources and Reporting Mechanisms Assumptions and Risks
Impact Assumptions Improved energy efficiency and a cleaner environment in Heilongjiang province
By 2020, energy intensity improved by 20% compared with 2010a
Data from Heilongjiang Provincial Environment Protection Bureau
The required investments are made by the Heilongjiang provincial government and enterprises in other urban areas. Local environmental protection bureaus enforce air pollution laws and standards. Risk Air emission improvements are negated by the establishment of new polluting industries.
By 2020, emission of SO2 is reduced by at least 2% and NOx by 3% compared with 2010 (baseline: 513,000 t of SO2,
and 753,000 t of NOx)
Outcome Assumptions Improved air quality and reduced greenhouse gas emissions in eight urban areas in Heilongjiang province
By 2018, the project reduces annual coal consumption of more than 418,889 t, thereby avoiding annual emissions of 1 million t of carbon dioxide, 4,500 t of SO2, 22,819 t of total suspended particulates, and 1,961 t of NOx, compared with 2012
Heilongjiang province statistical year book
Heating sector reforms and demand-side energy conservation measures are implemented. The energy efficiency improvements in district heating remain a priority for the government. Risk Delays in project implementation.
By 2018, the air quality in the project targeted areas improves to at least class II (baseline: Class III in 2011)b
Outputs Assumption 1. Coverage of the
district heating system in eight project cities without net increase in emissions expandedc
2. Energy efficient
heat generation capacity in three project cities improvedd
By 2017, 427,000 urban households (270,000 new and 157,000 existing households including 37,000 poor households and 1,300 households headed by women), covering about 40.8 million square meters of heating area, have access to district heating systems By 2017, energy conservation awareness campaign targeting women is organized in each subproject area (target: 800,000 women) By 2017, 448 megawatt thermal-equivalent of energy efficient heat generation capacity is successfully installed (at least 87% efficiency) (baseline: 55% efficiency)
Heilongjiang province statistical year book Environment monitoring report Loan review missions and project performance reports
Sufficient counterpart funds available. Risk Inadequate capacity of the project implementing agencies.
12 Appendix 1
Design Summary Performance Targets and Indicators with Baselines
Data Sources and Reporting Mechanisms Assumptions and Risks
By 2017, around 470 small and inefficient boilers are closed, and 275,166 household stoves are replaced (equivalent to 1,014 megawatt-thermal)
3. Private sector
participation in district heating in two project cities promotede
By 2017, supported two private heating companies By 2017, five knowledge-sharing sessions between private and state-owned heating companies conducted By 2017, 50% of heating bill collectors are women (baseline: 30%)
Activities with Milestones Inputs1. Coverage of district heating system in eight project
cities without net increase in emissions expanded 1.1 Construct 217 kilometers of heating pipeline and 321 heat
exchange stations, and install nine SCADA systems in nine urban areas (from Q2 2014 to Q3 2017).
1.2 Conduct energy conservation awareness campaigns in subproject cities (from Q2 2014 to Q3 2017).
2. Energy efficient heat generation capacity in three
project cities improved 2.1. Construct three energy efficient boilers (from Q2 2014 to Q3
2017). 2.2. Decommission around 470 small boilers and household
stoves (from Q4 2015 to Q4 2017). 3. Private sector participation in district heating in two
project cities promoted 3.1 Conduct knowledge-sharing workshops (annually from 2014
to 2017). 3.2 Conduct regional knowledge-sharing workshop (2015 and
2017). 3.3. Pilot household heat metering (Q2 2016 and Q2 2017).
Loan ADB: $150 million Item Amount ($ million) Civil works Equipment Finance charge during construction Project management
12.4 127.4
9.0
1.2 Implementing agencies: $117 millionItem Amount ($ million)
Civil works Equipment Other engineering cost Contingencies
40.0 8.0
32.0 37.0
Domestic banks: $86 million Item Amount ($ million) Civil works Equipment Other engineering cost Finance charge during construction
41.0 34.0 5.0 6.0
ADB = Asian Development Bank, NOx = nitrogen oxide, Q = quarter, SCADA = supervisory control and data acquisition, SO2 = sulfur dioxide, t = ton. a Energy intensity is calculated as units of energy per unit of gross domestic product. Energy intensity reduction rate
from 2006 to 2010 in Heilongjiang province was 20.79%. b Ambient air quality standard is categorized from class I to III, which measures pollutants of sulfur dioxide, inhalable
particulate matter and nitrogen oxide, as stipulated in the People’s Republic of China Ambient Air Quality Standard (GB3095-1996) and its amendments in 2000.
c The eight project cities are Harbin, Jiagedaqi, Jiamusi, Jixi, Qitaihe, Raohe, Tongjiang, and Yichun. d The three project cities are Harbin, Raohe, and Tongjiang. e The two project cities are Raohe and Tongjiang.
Appendix 2 13
LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=44011-013-3
1. Loan Agreement 2. Project Agreement 3. Sector Assessment (Summary): Energy 4. Project Administration Manual 5. Contribution to the ADB Results Framework 6. Development Coordination 7. Financial Analysis 8. Economic Analysis 9. Country Economic Indicators 10. Summary Poverty Reduction and Social Strategy 11. Gender Action Plan 12. Initial Environmental Examination 13. Risk Assessment and Risk Management Plan Supplementary Documents 14. Labor Retrenchment and Reemployment Plan 15. Financial Management Assessment of the Implementing Agencies 16. Procurement Capacity Assessment Report and Recommendations
