Document of The World Bank Report No: 27283-CHA IMPLEMENTATION COMPLETION REPORT (TF-22776 SCL-40450 TF-29174 TF-28471) ON A LOAN IN THE AMOUNT OF US$170 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A CHONGQING INDUSTRIAL POLLUTION AND REFORM PROJECT June 17, 2004 Urban Development Sector Unit East Asia and Pacific Region Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
CAS Country Assistance StrategyC/DLP Country or district level projectsCEPB Chongqing Environmental Protection BureauCISGC Chongqing Iron and Steel Group CompanyCIPCRP Chongqing Industrial Pollution Control and Reform ProjectCLB Chongqing Labor BureauCMG Chongqing Municipal GovernmentCPC Chongqing Planning CommissionCPMO Chongqing Project Management OfficeCSSC Chongqing Special Steel CompanyCUEP Chongqing Urban Environment Project (Ln. 4561-CHA)EAF Electric Arc FurnaceEIA Environmental Impact AssessmentICB International Competitive BiddingLOC Line of CreditMIS Management Information SystemMLP Municipal level projectsMOF Ministry of FinancePMO Project Management OfficeRAF Restructuring Advisory FacilitySAR Staff Appraisal ReportSARS Severe Acute Respiratory SyndromeSOE State Owned EnterpriseSO2 Sulfur DioxideTA Technical AssistanceTSP Total Suspended Dust ParticlesZICC Zhongxing Industrial and Commercial Company
Vice President: Mr. Jemal-ud-din Kassum, EAPCountry Director: Mr. Yukon Huang, EACCF
Sector Director: Mr. Keshav Varma, EASUR Task Team Leader: Mr. Wiebe Moes, AFTU2
CHINAChongqing Industrial Pollution Control and Reform Project
CONTENTS
Page No.1. Project Data 12. Principal Performance Ratings 13. Assessment of Development Objective and Design, and of Quality at Entry 24. Achievement of Objective and Outputs 65. Major Factors Affecting Implementation and Outcome 146. Sustainability 157. Bank and Borrower Performance 178. Lessons Learned 199. Partner Comments 2010. Additional Information 24Annex 1. Key Performance Indicators/Log Frame Matrix 25Annex 2. Project Costs and Financing 27Annex 3. Economic Costs and Benefits 29Annex 4. Bank Inputs 30Annex 5. Ratings for Achievement of Objectives/Outputs of Components 33Annex 6. Ratings of Bank and Borrower Performance 34Annex 7. List of Supporting Documents 35
Project ID: P003646 Project Name: Chongqing Industrial Pollution Control and Reform Project
Team Leader: Wiebe Moes TL Unit: EASURICR Type: Core ICR Report Date: June 17, 2004
1. Project DataName: Chongqing Industrial Pollution Control and
Reform ProjectL/C/TF Number: TF-22776; SCL-40450;
TF-29174; TF-28471Country/Department: CHINA Region: East Asia and Pacific
Region
Sector/subsector: Other industry (96%); Sub-national government administration (3%); Other social services (1%)
Theme: Pollution management and environmental health (P); Environmental policies and institutions (P); Municipal governance and institution building (P); Social risk reduction (S); Technology diffusion (S)
KEY DATES Original Revised/ActualPCD: 09/23/1993 Effective: 03/07/1997
Borrower/Implementing Agency: PEOPLE'S REPUBLIC OF CHINA/CHONGQING MUNICIPALITYOther Partners:
STAFF Current At AppraisalVice President: Jemal-ud-din Kassum Russell CheethamCountry Director: Yukon Huang Nicolas HopeSector Manager: Keshav Varma Katherine SierraTeam Leader at ICR: Wiebe Moes Neil HughesICR Primary Author: Neil Hughes; Herbert Boehm
3. Assessment of Development Objective and Design, and of Quality at Entry
3.1 Original Objective:Introduction. For over two decades, China has been undergoing a transformation from a centrally planned economy to a market oriented one. By the early 1990s, it was evident that China's coastal provinces were the main beneficiaries of economic opening, so the government asked for Bank support in developing the country's lagging interior provinces. Chongqing Municipal Government (CMG) was selected because it was (a) the largest repository of accumulated capital and technical skills in the southwest; (b) was dealing with serious enterprise productivity and pollution problems; (c) had a municipal government committed to reducing industrial pollution and restructuring state-owned enterprises (SOEs); and (d) had the strong support of the central government to take a lead role in carrying out enterprise reforms.
Both the government and the Bank felt that environmental pollution control and enterprise reform provided a sound basis for an industrial sector project which would help SOEs make the difficult transition to market-oriented operations. Both agreed that reform objectives needed to be closely allied to environmental pollution control objectives to ensure that project outcomes would be environmentally sustainable.
Against this backdrop, the Chongqing Industrial Pollution Control and Reform Project (CIPCRP) was conceived to assist CMG in attaining three main objectives: Objective (a), to achieve a significant reduction in pollution and restructure productive facilities in Chongqing’s most polluting industry, iron and steel, which was still using highly obsolete and inefficient 1940s and 1950s technology in steel making; Objective (b), to increase the effectiveness of Chongqing’s environmental regulatory framework and pollution management capacity as part of a plan to reduce industrial pollution overall; and Objective (c), to assist industrial enterprises outside the steel sector to reduce pollution and modernize their facilities.
Assessment of objectives. The project objectives were clearly defined and consistent with the Bank’s evolving strategy in supporting SOE reform and industrial pollution control. They supported the Bank’s Country Assistance Strategy (CAS) objectives and sector work recommendations, were responsive to both national and municipal government developmental priorities, and were realistic given the Borrower’s firm commitment to carry out its economic reform program.
3.2 Revised Objective:Following the cancellation of the Line-of-Credit (LOC) component in 1999, Objective (c) was no longer applicable. Objectives (a) and (b) did not change because they did not depend on Bank financing. Schedule 2 of the Loan Agreement was not amended to reflect this change because it was felt that the project’s overall objectives remained substantially the same.
3.3 Original Components:The Bank loan was approved by the Board on June 18, 1996 and became effective on March 7, 1997. Its four main parts are described below.
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PART A included economic and environmental policy agendas and action plans designed to assist CMG in implementing its economic reforms and in improving its monitoring and control of environmental pollution, and enforcement of environmental laws and regulations;
PART B consisted of two parts. The industrial relocation subcomponent included closure of Chongqing’s two obsolete and most polluting steel plants located in the center of Chongqing, and their construction of modern non-polluting productive facilities outside the city center. The Restructuring Advisory Facility (RAF) subcomponent was to assist SOEs in preparing restructuring plans and related investment strategies in order to meet the creditworthiness standards of banks wishing to finance such enterprises under Part D (see below) of the Project;
PART C included a LOC to support industrial enterprises that had adopted a corporate structure, had a viable business plan prepared by the RAF or other certified entity, had completed an environmental audit by the Chongqing Environmental Protection Bureau (CEPB), and required financing to restructure productive facilities and clean up pollution;
PART D provided for technical assistance to strengthen the CEPB’s environmental monitoring and regulatory capability, to enable the Chongqing Labor Bureau (CLB) to train and re-employ surplus labor and assist the Chongqing State Asset Management Bureau to establish a new form of state asset management organization.
Assessment of project design. The project components were reasonably well related to achieving the project objectives. However, the project was quite complex and involved numerous implementing agencies, none of which had any prior experience with the Bank's policies and procedures. Coordinating this project was recognized as a challenge for CMG.
3.4 Revised Components:At the request of the central government, a total of $104 million was cancelled in 1999 in two separate increments of $42,000,000 and $62,000,000 from Part B (industrial restructuring and relocation) of the project. The three participating banks under Part C (LOC) withdrew from the project, and the $50 million allocated to this component was cancelled in two separate cancellations of $16,000,000 and $34,000,000, at the request of the central government in 1999. In 2000, the central government requested cancellation of $10,828,690.48 including $10,000,000 that was unallocated, $630,000 for the surplus labor re-deployment and $120,000 to establish a model cross-sectoral state asset operating company from Part D (institutional strengthening), and $78,690.48 for interest during construction for CSSC. Total cancellations amounted to US$166,149,161.40 at closing. The legal documents were not formally amended, but the cancellations were likely reported in the Monthly Report to the Executive Directors. The reasons for the cancellations are summarized below.
Cancellation of Steel Plant Restructuring and Relocation (Part B): Initially, investments in new plant and equipment for both the Chongqing Iron and Steel Group Company (CISGC) and the Chongqing Special Steel Company (CSSC), were not allowed to proceed because the central government was concerned about excess capacity in the steel industry, and central government objected to CSSC's intention to establish its new steel plant in a rural area (there was a freeze on using agricultural land for nonagricultural purposes). During the East Asia financial crisis of
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1997-1998, declining demand and falling international steel prices led to increasing competition from low-priced imports, and the financial performance of the two companies suffered.
With its 1950's steel making technology and many redundant workers, CSSC was a very high cost and inefficient operation. It could not match competitors' prices, and between 1993-1996, its regional market share in special steels declined from 60 to 35 percent. By 1998, in spite of drastic cost-cutting, the outlook for CSSC looked grim, and the Bank and the Borrower decided to cancel this part of the project.
CISGC was listed on the Hong Kong stock exchange in 1997 and raised $85 million in new equity. The company actually increased its sales volume during the difficult 1997-1998 period. However, severe competition resulted in much lower margins on sales, and it could not meet its debt service coverage requirement with the Bank. In 1999, the Bank temporarily halted implementation of the entire project. It informed CMG that the project could restart once: (a) CMG furnished the Bank with a financial restructuring plan demonstrating that CISGC would meet its financial obligations under the project; and (b) CMG would commit to providing the equity financing required by CISGC. The Bank further required that CISGC prepare an appropriate study of its restructuring needs which the Bank could then use as the basis for its appraisal of the company’s restructuring. As the financial outlook and thus the long-term sustainability of the company remained uncertain and, in addition, local currency loans became available markedly below the Bank Loan’s interest rates, it was decided that cancellation of Part B and most of Part D of the project was the rational and preferred option under the circumstances.
Cancellation of Line-of-Credit Component (Part C). Cancellation of this component occurred because participating banks could provide local currency financing at lower interest rates than the Bank loan without having to meet Bank requirements governing enterprise eligibility, project appraisal and procurement. By borrowing in local currency, enterprises could also avoid the foreign exchange risk which they had to assume on Bank sub-loans.
Cancellation of Surplus Labor Re-employment Support (subcomponent of Part D). The magnitude of Chongqing's surplus labor problem became apparent only in 1997, when Chongqing doubled in size and population and the Asian financial crisis affected SOE performance. CLB therefore decided to expand its job training and re-employment facilities from one center to 43 centers, and to create a management information system (MIS) dealing with the whole social security system. The Bank was asked to agree to use $10 million of unallocated Loan proceeds to finance this effort. When project implementation was temporarily halted by the Bank in 1999, senior Ministry of Finance (MOF) and CMG officials requested the Bank to allow work to continue on this component. The Bank, however, suggested this component be included in a new Chongqing project focused on social protection issues. CMG eventually requested cancellation of this component, citing the ready availability of local currency at low interest rates as the reason.
3.5 Quality at Entry:Quality at entry is rated satisfactory. The Project was consistent with the Bank’s CAS objectives of supporting the Chinese government’s efforts to develop China’s interior provinces, improving environmental protection, and advancing SOE reform. This approach was validated by Bank sector work ("Policy Options for Reform of Chinese State-Owned Enterprises", World Bank
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Discussion Paper No. 335 of 1996, and "China's Management of State Assets: the State as Shareholder" (1997).) The project also incorporated lessons learned from industrial restructuring projects in China, as well as world-wide. Its design of a pollution control strategy was based on the results of four studies carried out under grant financing from the Japanese government. A World Bank Project Management Office (PMO) was established to coordinate implementation of the project, and a Leading Group under a vice mayor was formed to provide direction and leadership to PMO.
The project's compliance with Bank safeguard policies was satisfactory. The project was correctly determined to be a Category "A". Environmental assessments were prepared by the Chongqing Iron and Steel Design Institute, reviewed by the Bank, approved by the National Environmental Protection Agency, and submitted to the Bank's Board. The steel companies committed themselves to implementing the environments mitigation plans at negotiations. In addition to tackling air pollution, the project can be credited with making a head-start in addressing water pollution and hazardous waste management and disposal, as part of its overall industrial pollution control plan.
With regard to involuntary resettlement, the project included a resettlement action plan (RAP) for the CSSC. The RAP covered resettlement of some 3,018 individuals in 1,014 households. A socioeconomic survey of all 1,014 households on the affected site (Jinkou Farm) was carried out, and the RAP revised accordingly. The project had available agreed terms of reference, selection criteria and procedures for an external monitor for the RAP. The project's resettlement policy framework was provided in the SAR (Annex 3.10). Finally, the PMO had established a resettlement unit to ensure that resettlement policies and procedures would be followed, to coordinate with stakeholders, to supervise the mitigation actions, and to provide periodic reports to the government and the Bank.
Risk assessment. The project's risk assessment was mixed. The first major challenge cited was CMG's possible inability to maintain the political will to carry through the full range of reforms. In fact, CMG has sustained its will for environmental reform steadily to the present. The second significant risk relating to the commitment by the financial institutions to implement the line-of-credit component was also correctly identified as the banks would be unwilling to carry the financial risks of high priority environmental projects. Another major risk cited, the CMG's lack of experience in implementing a Bank project, particularly CEPB, was borne out in implementation. In contrast, the risk that there could be a shortage of counterpart funding never became an important issue.
Demand for project outputs. The assumption that the Chinese economy would continue to grow along established patterns, thereby maintaining demand for steel and iron products, seemed reasonable at the time of appraisal in November 1995. However, that assumption turned out to be incorrect, particularly with regard to the steep decline of the iron and steel markets in the late 1990s when the East Asia financial crisis hit.
4. Achievement of Objective and Outputs
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4.1 Outcome/achievement of objective:
The overarching goal of the project was to assist CMG in significantly reducing air pollution in the metropolitan area. Despite cancellation of most of the Loan amount, the project’s key development objectives were substantially achieved. However, as it is exceedingly difficult to determine the project's actual contribution to achieving these objectives, its performance is cautiously rated moderately satisfactory. The project achieved its primary goal of eliminating the two major sources of air pollution in Chongqing’s iron and steel industry. This goal was achieved even though Bank support to construct modern non-polluting steel production facilities, to replace those being closed down, was no longer available. Chongqing's improved air quality has been confirmed by Bank supervision missions and is further substantiated by the project’s development objective indicators (see tables below).
Two of the three project institutional objectives have been achieved in spite of the loan cancellations. Both CMG and the central government have taken steps to ensure that Objective (a), pertaining to reducing air pollution, was carried out. Objective (b), which involved strengthening pollution monitoring, regulation and control at CEPB, has been achieved now that monitoring data is available to enable CEPB to establish a pollution control plan covering the entire industrial sector. Objective (c) pertaining to the utilization of the LOC was no longer applicable after cancellation of the LOC component.
Achievement of Objective (a). The project outcome, in terms of the satisfactory rating for CMG’s efforts to control and regulate environmental pollution, was achieved because CMG’s commitment to carry out the environmental policies and action plans included in the project, remained firm throughout project implementation. This level of commitment was sustained even when the project was in abeyance between May 1999 and March 2000 because project action plans were such an integral part of CMG’s own policy reform agenda, and because the central government provided strong leadership support and enacted key legislation for strengthening the pollution control regulatory framework. Most of all, this was due to CMG's realization that economic growth had to be environmentally sustainable if permanent damage to the environment and its inhabitants was to be avoided.
The project’s development objective indicators measure the degree to which air pollution, in the form of ambient concentrations of particulate matter, were reduced in the Jiangbei and Shapingba urban districts, where CISGC's and CSSC's most polluting facilities were located. To achieve the targeted particulate reductions, CISGC and CSSC agreed to shut down their steel making plants in the two districts. The development objectives also sought to measure whether particulate air pollution would increase in the districts in which new steel making facilities were to be built. Air quality measurements at Jinkou Farm are no longer required, because the new steel making facilities, which were expected to be built there, were not constructed (See sections 3.4, 5.2 for details).
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CISGC closed down all steel making facilities at Jiangbei, except for a steel pipe rolling mill powered by natural gas, which has a negligible impact on air quality. The project’s objective of eliminating air pollution at the Jiangbei plant has therefore been effectively met, and this is confirmed by monitoring tests required to meet the project’s development objectives.
CSSC closed down eight of ten highly polluting electric arc furnaces (EAFs) at its Shapingba plant, installed dust control equipment on the other two EAFs, and added one new EAF with dust control equipment, which was financed by the Government through its technical reform investment company. The positive impact of these actions has been confirmed by air quality monitoring tests carried out in accordance with the project’s development objectives. CSSC did not go ahead with its intended expansion and has reduced its steel-making capacity by 67 percent and its workforce by 88 percent.
4.1: DEVELOPMENT OBJECTIVE INDICATORSAmbient air quality: micrograms of total suspended dust particles (TSP)
per normal cubic meter (uNm3)
OBJECTIVE A 1995 1996 1997 1998 1999 2000 2001 2002
Shapingba District 570 310 300 290 330 310 270 260
Jiangbei District 520 310 330 260 200 290 240 260
Dadukou District 360 250 260 220 220 210 240 290
Jinkou Farm not applicable (see section 5.2 on prohibition of agricultural land for industrial development)
In 1995, CSSC's steel making facilities were responsible for 44 percent of ambient TSP levels in Shapingba District and CISGC's steel plant in Jiangbei was responsible for 22 percent of ambient TSP levels there. CISGC also had a steel plant at Dadukou, and the new facilities, which were to have been financed by the project, were to have relocated there. The reductions in ambient TSP levels, reflected in table 4.1 above, show steep drop-offs in TSP, and vividly indicate CMG's serious commitment to reducing air pollution from the steel sector. The closure of two-thirds of CSSC's outmoded and highly polluting facilities in Shapingba, and the installation of pollution control equipment on the rest, clearly had the biggest impact on TSP levels, especially as CSSC was responsible for almost one-half of dust emissions in the district. CISGC's contribution to reducing TSP levels in Jiangbei was also very significant. Since both these districts contained a large urban population, the positive impact on human health was immediate and is one of the major benefits resulting from reducing pollution from Chongqing's most polluting industry. CISGC's facilities in Dadukou District were more modern and less polluting. Nevertheless, the effects of pollution control efforts there are also quite notable.
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Achievement of Objective (b). Objective (b) was satisfactorily met. Four priority actions were required to improve CEPB’s pollution monitoring, regulatory capacity and control. CEPB's compliance with these four actions, comparing percentage targets to actual percentages achieved, is noteworthy:
Tables 4.2 and 4.3 below give institutional targets at appraisal and actual achievements. The paragraphs on "environmental regulatory reform program and action plan" in section 4.2 below provide further details.
*MLP: municipal level projects**C/DLP: county or district level projects
OBJECTIVE C
Not applicable after cancellation of LOC component.
Achievement of Objective (c). After the cancellation of the Loan proceeds for the Line of Credit component, this objective was no longer applicable.
4.2 Outputs by components:Part A: Economic Reform and Environmental Pollution Control Action Plans
The Chongqing Municipality Economic Policy Reform Agenda and Action Plan was used as both a planning and implementation tool by CMG during project implementation. Specific objectives monitored during Bank supervision missions were: (a) achieving corporatization and management autonomy of SOEs; (b) divesting SOEs of social welfare functions; (c) facilitating mergers or bankruptcy of nonviable SOEs; (d) retraining and redeployment of redundant labor; (e) developing a residential housing market by selling public housing to private owners and increasing public housing rents; and (f) establishing a municipality-wide social insurance system. CMG’s progress in carrying out these reforms has been mixed because:
• divestiture and corporatization of SOEs has progressed more slowly than anticipated;• Government loans, interest rate subsidies and debt restructuring have been required to
maintain SOE financial solvency;• progress in social welfare and insurance reform has slowed until a national system is in
place;• CMG has been successful in placing two-thirds of laid-off workers in new jobs; and• over 90 percent of public housing has been sold to private owners, and rents on public
housing have been increased to meet the targeted level of 9 percent of average household income.
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The Environmental Regulatory Reform Program and Action Plan has played a crucial role in establishing a monitoring system covering new businesses and projects. Every new enterprise has to register with CEPB once it becomes a legal entity. Every new project not only has to submit an environmental impact assessment (EIA) to CEPB for approval, but projects which include pollution control equipment also have to be inspected by CEPB at the design, construction and commissioning stages (the "three synchronizations"). The plan also initiated actions to implement new national legislation governing emissions of SO2, lead and polycyclic hydrocarbons, and it increased pollution levy collections. Nevertheless, collections have been less than assessments. To stimulate collections, polluters are allowed to buy new pollution control equipment and deduct the cost from the amount of the assessment. One of the plan’s main contributions was to implement a municipality-wide plan to control industrial pollution. Implementation of the plan was delayed because procurement for the necessary monitoring equipment was completed only in June 2003.
The automated air quality monitoring system financed under the project included re-equipping seven existing stations and establishing four new stations. From this data, CEPB issues daily reports and forecasts by district; the reports are published in local newspapers, broadcast on television, and are sent to the State Environmental Protection Agency in Beijing as input to the national air quality monitoring system. The Bank also financed four mobile systems (two water quality, one gas monitoring and one environmental auditing) which are used for point-source monitoring, an environment management information system (MIS) and a water quality analysis laboratory. The laboratory has been rated as one of the most modern in China.
In the six areas discussed below, compliance with reform targets has been highly satisfactory for enterprise registration and environmental impact assessment, and enforcement of the “three synchronizations.” Compliance has been satisfactory for SO2 emissions reduction, pollution levy collections and monitoring of lead and polycyclic hydrocarbons. Progress in preparing a municipal industrial pollution control plan has been unsatisfactory. The overall compliance rate for this component is satisfactory.
• SO2 emissions. A SO2 emissions tax on industrial enterprises was enacted in 1996. The number of priority SO2 polluting firms being monitored rose from 70 percent in 1997 to 100 percent in 2000, 2001 and 2002. Between 1997-2000, collection of emission levies fluctuated between RMB 7.3 million and RMB 24.2 million because a single entity, Chongqing Electrical Generating Company, was responsible for almost one-half of SO2 emissions, and the actual levy it paid depended upon its cash flow and willingness to pay. Other large polluters behaved similarly. In 2001, CMG took a much tougher line with large SO2 polluters and levy collections increased to RMB 63 million. CMG is also now requiring major SO2 polluters to install pollution control equipment at the source, or to close down the polluting facilities.
• Enterprise compliance with registration and EIAs. In 1996, CMG issued a regulation requiring all new enterprises to register with CEPB. The compliance rate increased from 90 percent in 1997 to 100 percent in 2001 and 2002. The doubling in size of Chongqing
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municipality in 1997 by an administrative decree complicated monitoring of registrations, especially in remote areas, and it was not possible to register all new projects that year. The compliance rate for enterprises undergoing EIAs increased from 85 percent in 1997 to 100 percent in 2002.
• Enforcement of "three synchronizations." This system has worked well, but compliance was low in 1998, when only 73 percent of projects completed all three pollution checks. This was due to the failure to complete projects, resulting from the bursting of the real estate “bubble” in 1998, when 226 mostly construction projects never reached final commissioning. By 2001, the compliance rate was 99.7 percent and in 2002 was 100 percent.
• Enforcement of the pollution levy. There are three sources of pollution levies: air emissions and wastewater discharges that exceed the established standard, and violations of environmental pollution control laws and regulations. Most of the violations are for falsely reporting emission and discharge levels. Collections amounted to RMB 37.9 million in 1997, dropped to a low of RMB 26.9 million in 1999, and rose to RMB 65.5 million in 2001.
• Air quality standards for lead and polycyclic hydrocarbons. National ambient air quality standards for these substances became law at the end of 1996. A monitoring plan prepared by CEPB was approved by the Bank in 1998. Because of equipment procurement delays, the required monitoring equipment was not procured until late 2001. It is now in operation.
• The municipal industrial pollution control plan could not be prepared because one year of data is needed from the monitoring equipment to be financed under the project’s technical assistance component. Procurement delays resulted in a major setback to the timetable for preparing the plan. The necessary monitoring equipment is now in operation, and CMG should be able to move forward with the preparation of the plan.
The Iron and Steel Sector Pollution Control Action Plan consisted of eight high priority actions, described below, to be taken by CISGC and CSSC to significantly reduce pollution from Chongqing’s most polluting industry, iron and steel. All steel industry pollution control priorities have been completed. For priorities four and five, the plan's expectations were exceeded because the polluting facilities were closed down rather than being equipped with pollution control equipment.
• Priority 1. A CISGC subsidiary, Zhongxing Industrial and Commercial Company (ZICC), was to close down its steel plant at Jiangbei. This was done, except for a steel pipe rolling mill powered by natural gas, which is producing about 10,000 tons of steel annually. The plant is still operating because CISGC’s plans to sell the site for more appropriate urban development have been delayed. As the plant has a negligible impact on air quality, the project’s objective of effectively eliminating air pollution at the Jiangbei plant has been met, and is being confirmed by monitoring tests required to meet the project’s development objectives (see also Table 4.1 for achievements).
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• Priority 2. CSSC had 10 highly polluting EAFs at its Shapingba plant. It installed dust control equipment on two EAFs, and closed down the other eight EAFs, the last two in 2002.
• Priority 3. Construction of a de-sulfurization plant at CISGC’s Dadukou plant was completed at the end of 2001.
• Priority 4. Rather than install pollution control equipment on its Shuangbei rolling mill, CSSC closed it down in 2000.
• Priority 5. CISGC had planned to install dust control equipment on its Chang Shou iron alloy plant. However, the plant was closed in 1997. Part of the building is now being used to manufacture aluminum contacts for integrated circuits. This work will continue until 2005, when the site will be vacated prior to its being submerged by the reservoir for the Three Gorges Dam.
• Priority 6. Dust control equipment at CSSC’s Shuangbei Refractory Plant was installed in 2000.
• Priority 7. Dust control equipment on CISGC’s blast furnace at Jiang Jin was installed in 1998.
• Priority 8. A wastewater treatment system at CISGC’s Ba Lan Seamless Pipe Plant was installed in 1999.
Part B: Industrial Relocation and Restructuring
The project did not achieve its physical output objective of assisting CISGC and CSSC to restructure their steel making facilities by constructing modern, non-polluting steel plants, which were expected to have enabled them to compete successfully in more specialized and quality conscious steel markets. CISGC subsequently built a high speed wire and rod mill with a loan from the Industrial and Commercial Bank of China. CSSC did not obtain financing for its own expansion plans. The project also did not achieve its goal of providing financing through a line-of-credit as a pilot program to assist non-state industrial enterprises to restructure and clean up their productive facilities. The reasons why Bank financing was not used are discussed in Section 3.4.
Part C: Line of Credit
Financing for this component was cancelled as discussed in Section 3.4.
Part D: Institutional Strengthening
Technical assistance to CEPB involved both consultant services and equipment to enable it to upgrade its monitoring and regulatory capability. The success of Part D is rated satisfactory. Consultant services were provided according to schedule, but procurement of equipment fell far
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behind the schedule anticipated in the SAR. Cancellation of technical assistance to be provided under the project to the CLB is discussed in Section 3.4. Bank funds were also not utilized to provide technical assistance to the Chongqing State Asset Management Bureau. However, the study recommended by the Bank was financed by CMG, prepared by consultants, and utilized as a guideline by CMG when it transformed municipal line bureaus into state asset management companies.
4.3 Net Present Value/Economic rate of return:At appraisal, financial projections, economic rates of return and sensitivity tests were prepared for CISGC and CSSC. Since the steel plant restructuring and relocation component was cancelled, no new estimates for these companies were prepared.
4.4 Financial rate of return:Similarly, the SAR gave financial rates of return for the two steel companies under alternative scenarios. With the cancellation of Part B of the project, a re-calculation of these returns is not meaningful.
4.5 Institutional development impact:The project's institutional impact is rated modest.
The project played a major role in helping CMG to define, develop and implement environmental policy initiatives, under the overall direction of the mayor's office leading group and coordinated by the Chongqing Planning Commission (CPC). Policy instruments developed by project stakeholders and Bank staff were an Economic Reform Agenda and Action Plan, an Environmental Regulatory Reform Program and an Action Plan, and an Iron and Steel Sector Pollution Control Action Plan. Highly successful implementation of these plans, along with other actions taken by CMG, resulted in a marked decrease in air pollution in the municipality.
The project was also able to provide significant institutional support to CEPB. Nationwide cutbacks in government staff, plus the greatly expanded workload resulting from the doubling in size of Chongqing municipality in 1997, put enormous pressure on CEPB to carry out its responsibilities. In spite of these difficulties, CEPB fully reached all targets under the four priority actions identified by the project to improve CEPB's pollution monitoring, regulation and control. The project also enabled CEPB to become more effective by automating and systematizing its air pollution monitoring, by providing mobile rapid-response point source monitoring equipment, and by developing a management system for solid and hazardous waste disposal.
Through the project preparation process and the challenges brought on by implementation, CPC was significantly strengthened in terms of its project development and management capacity. This increased capacity allowed CPC to contribute meaningfully to the preparation and implementation of the Chongqing Urban Environment Project (CUEP: Ln. 4561-CHA, approved in FY00), which supports a major environmental protection program for water and wastewater. CPC is now in the midst of preparing a proposed small infrastructure improvement program for Chongqing's peri-urban areas.
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The Bank's attempt to strengthen CLB's capability to deal with Chongqing's unemployment problem was less successful. During project identification, the Bank concluded that redundant labor was going to be CMG's number one SOE reform problem. CMG did not agree, but at the Bank's insistence, did agree to include a small amount in the project for redundant labor re-training and re-employment. The magnitude of the labor problem became clear to CMG officials only in 1997, when laid-off workers in Chongqing reached 440,000. CLB asked the Bank to use $10 million from the project's unallocated funds and to increase the allocation for this component from $630,000 to $10,630,000. However, as the Bank had temporarily stopped further work on the project, this request was not acted upon for about one year. In the meantime, CLB had decided to use local currency financing instead.
5. Major Factors Affecting Implementation and Outcome
5.1 Factors outside the control of government or implementing agency:The East Asia financial crisis of 1997-1998 resulted in a slowdown in economic activity in China, while savings rates remained high. Banks were, therefore, very liquid, and by 1999, local currency financing had become widely available at lower interest rates than World Bank lending. In addition, such loans carried less conditionalities and less stringent procurement requirements. Such financing became available at a time when CMG's discussions with the Bank over re-designing the CISGC and CLB sub-components had become protracted and had halted project implementation. Under the circumstances, the Borrower decided to seek local currency financing for the new CISGC steel mill rather than use Bank funds.
Lengthy procedures. Lengthy Bank preparation and appraisal procedures, such as carrying out studies necessary to prepare the project and to determine the feasibility of sub-borrowers may not be appropriate for projects in dynamic sectors like industry. This is especially true for an economy in transition, as is the case in China. Opening up the economy made it much more dynamic, and subject to a fast changing competitive situation. In addition, SOE sub-borrowers under intense competitive pressures are less likely to be able to meet financial covenants, as was the case for CISGC and CSSC.
5.2 Factors generally subject to government control:Changes in land use policy. Originally, CSSC was to relocate to a new site known as Jinkou Farm. However, changes in government policy prohibiting the urbanization of agricultural land and not allowing further increases in basic steel production, halted implementation of the industrial relocation component and required its redesign.
SOE reform moved considerably more slowly and cautiously than was anticipated during project preparation. CMG’s Economic Policy Statement of December 11, 1995 has the objective of establishing the basic framework for a socialist market economy by 1998. This included establishing a modern enterprise system in which enterprise governance structures gave managers full authority to operate with autonomy in decision-making, enterprises were subject to hard fiscal and budgetary constraints, and government would separate itself from the commercial, productive functions of enterprises. It was not until 1997 that SOEs were facing real and intense competition for the first time and, with sharply reduced revenues, were unable to meet their financial commitments to banks, tax authorities or even their own payrolls and pensions. Competition
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became so fierce that the central government protected key SOEs from the full impact of competitive forces by continuing to subsidize core SOE group companies. Provincial governments maintained trade barriers to protect SOEs under their jurisdictions. Subsidies were seen by the government as still necessary to keep SOEs operating and keep redundant workers on the payroll. CISGC and CSSC received financial assistance from the Government, either directly as loans from state banks and non-Bank financing entities, or indirectly through debt:equity swaps and interest rate subsidies. In addition, CSSC had to lay off 85 percent of its workforce (16,000 workers), and until these workers found employment elsewhere, they received a subsistence stipend from the Government.
5.3 Factors generally subject to implementing agency control:CEPB’s inexperience in Bank and Chinese procurement procedures, and poor internal controls over processing and authorizing procurement documents, led to major delays in procuring pollution monitoring and laboratory equipment. To be fair, CEPB claims that this was due principally to a factor outside its control – staff down-sizing imposed by the government, which resulted in high staff turnover, reduced the number of staff working on procurement and required the hiring of part-time staff. Nevertheless, it was up to CMG to make sure that CEPB was given the resources needed to implement the project, and it was up to CEPB management to ensure that staff were trained in their respective responsibilities, so that CEPB could meet its project commitments.
In contrast, the Bank's ICB procurement procedures for the LOC component were cumbersome and time-consuming and may have contributed to non-completion of the component. In addition, requiring industrial sub-borrowers to assume the foreign exchange risk places an unacceptable burden of uncertainty on these companies.
5.4 Costs and financing:Compared to the original appraisal project cost estimate of $478.1 million, actual project costs amounted to a mere $22.1 million, as shown in Annex 2. After cancellations, Bank financing, totaling $3.9 million, was limited to the environmental monitoring component of the project (see Annex 2). The project closing date was extended from December 31, 2002 to June 30, 2003 to enable delivery and installation of environmental pollution control equipment. (Delays were attributed to the SARS outbreak.)
6. Sustainability
6.1 Rationale for sustainability rating:Sustainability is rated likely.
Environmental policy agenda. The project’s environmental benefits are very likely to be sustained. All the environmental pollution control targets supported by the project have been substantially met except one (Section 4.2). The institutional strengthening of CEPB is a work in progress. When Chongqing municipality doubled in size, so did CEPB’s responsibilities, while Chongqing, like local governments all over China, was downsizing. CEPB has had to rely on part-time staff to fill in the gaps in personnel. CMG needs to re-assess the staffing situation, and determine what steps need to be taken to enable CEPB to continue to carry out its mission. CEPB's staffing situation is being monitored through the Bank's participation in the ongoing
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CUEP.
CISGC and CSSC. Sustainability of the two steel companies is no longer being supported by Bank financing. The question remains whether or not they will be survivors in the competitive winnowing taking place in China’s socialist market economy. The government seems determined to ensure they will be. Like most SOEs in traditional industries, both CISGC and CSSC have had difficulty adjusting to increased competition and still depend upon government assistance to maintain financial viability and creditworthiness (Section 5.2). CSSC became a CISGC subsidiary in 2000. With the recent burgeoning demand for steel in China and elsewhere, sustainability of the company has taken a much more favorable outlook.
Environmental Pollution Control. When this project was identified, Chongqing municipality had what were said to be the highest levels of sulfur dioxide atmospheric pollution in the world, as well as high concentrations of small particulate matter that were extremely hazardous to human health. These pollution levels were the result of decades of fast growing energy use fueled by high sulfur coal, and the result of economic growth being given priority over pollution control. Eventually CMG became convinced that growth must be environmentally sustainable, if long-term damage to the environment and to the inhabitants of Chongqing was to be avoided. The project, therefore, focused on controlling air pollution as the number one environmental problem.
In the past two years, CMG has embarked on a major effort to bring urban pollution under control. It is presently converting or closing down all coal-fired boilers with a capacity of ten tons of steam per hour or less, and is requiring larger boilers to install de-sulfurization equipment. With the support of the Bank under this project, it closed down the polluting facilities of its most polluting industry, iron and steel. It is also closing down all coal-fired electricity generating plants below 50 megawatts capacity, and requiring larger generating plants to install de-sulfurization equipment. In 2000, CMG was able to reduce city-wide sulfur dioxide emissions by 50,000 tons. Moreover, pollution control standards are being much more rigorously enforced, supported by the project’s environmental regulatory enforcement action plan. Chongqing is also one of the first cities to begin to deal with solid and toxic waste control and disposal because the project helped CMG to develop a management system for site selection, disposal and storage of such wastes.
Further support for urban environment improvement in Chongqing is being provided by the CUEP. This project focuses on improving urban environmental services to reduce environmental degradation of its water and land resources; providing an adequate supply of safe water to Chongqing's growing urban population and economy; maintaining water quality at levels compatible with the needs of the wider Yangtze River basin; and managing and conserving historical sites. CEPB is getting technical assistance, including development of an environmental MIS, through this project. Another project to improve infrastructure in Chongqing's smaller towns is under preparation.
6.2 Transition arrangement to regular operations:Since most of the physical parts of the project were cancelled, no operational transition arrangements were required.
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7. Bank and Borrower Performance
Bank7.1 Lending:Bank performance during identification and preparation was satisfactory. The Bank worked closely with CMG to ensure that the project became an integral part of the municipality's economic reform program. A great deal of attention was paid to designing joint policy initiatives that would lay the foundation for a broadly based program to reform industrial enterprises and clean up industrial pollution. The investment components were designed to support these policy initiatives.
Project preparation was a lengthy process, as it was Chongqing’s first experience with the Bank, and it was necessary to carry out studies to determine how the project could enhance Chongqing’s environmental pollution control strategy. Preparation was delayed when the original engineering consultants’ feasibility study for the CISGC and CSSC investments was found to be unsatisfactory, and the study had to be re-done by CISGC, CSSC and Chongqing Iron and Steel Design Institute with the assistance of the Bank. Preparation was further complicated when Bank management took the position that pollution control objectives should be paramount in the project. Initially, the project as identified, combined both enterprise reform and pollution control objectives as integral parts to achieving environmentally sustainable development. Both the Ministry of Finance (MOF) and CMG at first expressed some reservations about the project’s refocus, which primarily impacted on eligibility criteria of industrial enterprises looking to be assisted by the RAF. It meant that enterprises would be ranked according to the severity of their pollution problems prior to being ranked on their technical, financial and economic merits. The placing of policy considerations above commercial ones may have contributed to the cancellation of this component.
The Bank's performance in appraisal is satisfactory, as borne out in the satisfactory rating for quality at entry as described in section 3.5.
7.2 Supervision:The Bank’s performance is rated satisfactory except for an about two-year period (1999-2000) when project implementation was halted. The SAR recommended intense supervision during initial implementation, and in 1997-1998, two supervision missions did visit Chongqing each year. Bank supervision was satisfactory from 1997 through mid-1999. However, after the May 1999 supervision mission, the Bank decided to temporarily halt project implementation, and no further supervision missions took place until June 2001, although there were brief missions to discuss specific issues. During this time, changes in task management negatively affected continuity of project supervision. The SAR projected that 13 supervision missions should be carried out over the life of the project. Nine took place in view of the events described earlier. All told, the project had six different task managers.
The Bank’s request that CISGC prepare a satisfactory financial restructuring plan, which would include a commitment from CMG to provide the equity required by the plan, was reasonable. In light of the company’s precarious financial situation, this request was justified; however, it appears to have been made without prior consultation with Chinese authorities. Moreover, the
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Bank’s subsequent insistence that the project could not continue without either a cancellation of the CISGC component or a restructuring of the company followed by a full re-appraisal of CISGC by the Bank, would have caused significant delays in project implementation and in hindsight appears onerous.
During the pause in implementation between 1999 and 2000, the Chongqing vice mayor in charge of this project, the vice director of the Chongqing Planning Commission and the vice director of MOF’s international department, urged the Bank to allow the CLB component to be implemented. The Bank delayed a response to what could be termed an unreasonably long period of time (over one year), by which time developments in the financial markets had rendered the Borrower’s request moot. In fact, the Bank-imposed abeyance of project implementation effectively ended further work on the CLB component.
During this hiatus period, the project had a total of three task managers, none of whom carried out a formal supervision mission. Work on the project on the part of the Bank continued in March 2000, when a new task manager, who was a pension specialist, visited Chongqing to review a feasibility study for a social security MIS prepared by CLB. The study proposed designing an MIS that would include the pension system, health insurance, unemployment insurance, insurance coverage for work-related injury and maternity leave payments. The Bank mission was favorably impressed with the study's objectives and strategy for achieving them, and expressed the Bank's desire to support this initiative under the project. After some discussion, CLB decided not to ask for the Bank's assistance because local currency financing had become available at lower interest rates.
The Bank's supervision from mid-2000 to closing in 2003 was again satisfactory. When the project was transferred to the urban development unit in late FY01, the urban staff recognized the importance of completing implementation of the economic reform and environmental pollution control action plans as well as the environmental regulatory reform program and action plans, relating to objectives (a) and (b) of the project. A formal supervision mission was mounted in June 2001. The June 2001 mission found that under the Steel Sector Pollution Control Action Plan, CISGC would meet all its goals by the end of 2001 (it did), while CSSC would not complete its program until 2003 (it did). Enforcement of pollution control regulations by CEPB under the environmental regulatory reform program was on schedule and expected to reach its full targets by 2002 (it did). CMG had exceeded project expectations by closing down or installing pollution control equipment on all electrical generation plants (the largest source of air pollution in Chongqing), and by requiring all coal-fired boilers to either install pollution control equipment or find an alternative energy source. However, preparation of a sector-wide industrial pollution control plan was delayed by slow procurement of pollution monitoring equipment (equipment was in place and monitoring began in mid-2002).
With the project's transfer to the urban unit in 2001, the urban unit worked closely with CMG to complete the remaining components, in conjunction with implementation of the CUEP, which became effective in April 2001. This strengthened relationship is continuing with preparation of a proposed infrastructure improvement project for Chongqing's peri-urban areas.
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7.3 Overall Bank performance:The Bank's overall performance was satisfactory with reservations. From identification through appraisal as well as during the early and latter phases of implementation, Bank performance was satisfactory. However, between 1999-2001, when the Bank temporarily halted project implementation, the Bank did not succeed in promoting a constructive and proactive dialogue with the Borrower on how to overcome the financial constraints of CISGC.
Borrower7.4 Preparation:CMG was fully committed to the project, and Borrower performance was satisfactory. Strong ownership at the local level was particularly noteworthy given the complexity of the project and because this was Chongqing’s first experience with the Bank. A Leading Group under a Vice Mayor was established to provide the necessary political support, and a project management office was established under the direction of the Chongqing Planning Commission (CPC). Chongqing prepared an Economic Policy Statement, and worked actively with the Bank to develop a municipal Economic Reform Agenda and Action Plan, which was included in the project and environmental action plans and became part of CMG's own policy reform agenda.
7.5 Government implementation performance:Despite lack of supervision by the Bank from mid-1999 to mid-2001, the Borrower’s strong commitment to carry out its environmental pollution control policy reform program enabled it to make satisfactory progress in implementing the project’s policy agenda and action plans. CMG was less successful in carrying out its SOE reform objectives. Government subsidies to SOEs have continued, and while government administered mergers ensure the survival of weaker enterprises, they pose a threat to the financial viability of the group (See section 5.2).
7.6 Implementing Agency:The highly successful implementation of CMG's Environmental Regulatory Reform Program and Action Plan and the Iron and Steel Sector Pollution Control Action Plan was due to excellent coordination by CPC and excellent implementation by CEPB, CISGC and CSSC. Procurement for the environmental monitoring equipment by CEPB was less than satisfactory, and the project's closing date had to be extended for six months to enable procurement, delivery and installation to be completed. Because of the Loan cancellations, the performances of CLB, CISGC and CSSC have not been rated. The overall performance rating of implementing agencies is satisfactory.
The performance of the Chongqing PMO was also satisfactory. This office continues to maintain close contact with the Bank as part of the follow-on CUEP. All audit reports were prepared in a satisfactory and timely manner.
7.7 Overall Borrower performance:The Borrower's performance in carrying out the objectives of this project is rated satisfactory, and its commitment to the project was clear when it continued to fulfill the project's policy agenda even after most of the investment had been cancelled.
8. Lessons Learned
Bank Procedures and Covenants. Lengthy Bank preparation and appraisal procedures,
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entailing studies necessary to prepare the project and to determine the feasibility of sub-borrowers, are not appropriate for projects in dynamic sectors such as industry. This is especially true for an economy in transition, as is the case in China. Opening up the economy made it much more dynamic and subject to a fast changing competitive situation. In addition, SOE sub-borrowers under intense competitive pressure are less likely to be able to meet financial covenants, as was the case for CISGC and CSSC.
Under the LOC component, both the Bank and the Borrower needed to be assured that the sub-borrowers would be creditworthy and have a satisfactory business plan, with a clear market justification for the product to be financed. At the same time, the terms of such financing ought to be responsive to changing competitive conditions and the dynamics of particular product markets. Under these circumstances, the Bank’s ICB procurement procedures were overly cumbersome. International Shopping may have been the preferable alternative. In addition, requiring sub-borrowers to assume the foreign exchange risk places an unacceptable burden on them, especially if the sub-borrower does not have the experience or sophistication to hedge against such a risk. This, again, is particularly the case in China, where almost all SOEs are already far too heavily in debt.
Procurement. CEPB’s original procurement plan was prepared in 1997 and revised in 1999. Actual procurement lagged far behind plan targets. Procurement was delayed principally due to the following factors: (a) lack of sufficient understanding by the Borrower and its agencies of Bank procurement procedures; and (b) CEPB’s nebulous internal procedures for reviewing and approving bid documents. This is reflected in the time required to obtain internal clearances and signatures of bid documents, which can take months to complete. CEPB has also had difficulties working with tendering companies and in following Chinese government procedures, which resulted in excessively lengthy reviews by the Ministry of Foreign Trade. CEPB says this was mainly due to staff turnover resulting from the government’s own reduction in force program of 1998-2000. Nevertheless, CEPB clearly needs to upgrade its management of the procurement process and to train and familiarize staff with both government and Bank procurement procedures. This issue continues to be improved and monitored by the Bank under CUEP.
9. Partner Comments
(a) Borrower/implementing agency:Major Factors Affecting Implementation and Outcome
9.1 Factors Generally Subject to Government ControlThe decision by the Central Government on establishing China’s market economy system and its increasing emphasis on a social and economic sustainable development provided a policy promotion and a favorable social, political and macroeconomic background for achieving the Project’s objectives – pollution control and reform. The current social and economic policies adopted by Chongqing Government, including its environmental policies and regulatory regime, as well as the reform plans, are highly conformed with the project objectives designed, especially those concerning urban pollution control strategy, environmental policies, reform of SOEs, non-SOE economy development, deployment of surplus labor force, establishment of
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social security system, housing policy reform, change of government function, etc..
Project management effectiveness. Chongqing set up a Project Leading Group headed by a responsible Vice Mayor with CPMO as its daily coordinating and management agency equipped with qualified staffing. In addition, in relevant government agencies and sub-project implementation units, responsibilities were clearly defined and qualified staff were in positions, which created an institutional base for effective management and implementation. Effectiveness stemming from intensified training, foreign consultation activities, and constant knowledge replenishing on the Bank’s principles and procedures help to quicken the implementation. Normal functioning of relevant government agencies, implementation agencies and external monitoring agencies, and coordination among them reduced the complexity in project preparation and implementation.
Close communications and friendly cooperation with the Bank’s staff. Good understanding, timely communications and mutual-trust help to eliminate conflicts during project preparation and implementation. To achieve this end, both the heading officials of local PMO and the task managers from the Bank could play decisive roles. The relation and cooperation between CPMO and the staff of the Bank were very satisfactory.
9.2 Factors Outside Government or Implementation Agency ControlShift of State policy focus. CSSC had to give up its original plan to acquire a new land in a distant rural area for re-locate production facility owing to the Central Government’s increasing strong emphasis on protection of rural farm land, and had to depend on its existing production site which is in the urban area of Shapingba District. This caused more difficulties in implementation.
Changes in economic policies. With China’s rapid development in the direction towards market economy, the traditional interference in competitive industrial sectors by both the Central and local governments were greatly lessened, SOEs like CSSC and CISGC gradually received less and less preferential support from the government. They had to face a new situation in which they were equally treated and selected by the market with those non-SOE enterprises. Besides, their own poor performance and financial conditions proved to be not viable for the loan.
Changes in market situation. Under commodity economy, market changes very rapidly, which makes enterprises’ decisions more difficult. CISGC’s constant changes, after the effectiveness of the Loan Agreement, on its original project plans reflected its reluctance in decision-making in response to such changes. A reform and the rapid commercialization process within China’s banking sector forced the local banks participating in the Line of Credit to take a very prudent and cautious attitude towards the selection of projects for relending. In such a transition period from planned economy to market economy, the three local banks, facing a situation under which they had been strongly requested by both the Bank and their Headquarters to operate with commercial principles; the local government made it clear that it would neither interfere with the banks’ autonomy nor provide any form of financial guarantee to ensure the payback of LOC, finally chose a very conservative but safe policy – withdrawal from LOC after their judgment on their own abilities to control risks and their consideration
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on poor performances by those majority candidate enterprises.
Slowness in project implementation caused by the strict project appraisal and procurement procedures. A timely response to changes in market demand is always decisive for industrial competitive sectors. A over-heavy complexity of project cycle, in this sense, means a loss of market opportunities, moreover, it also means a give-up of traditional familiarity and mutual-trust with those known clients as long established purchasing sources, which limited the autonomy of enterprises in free selection of clients and commodities. Some candidate enterprises, especially those financially sound private companies, finally withdrew from LOC and turned to local banks for loans since the local banks did not impose much limitations. “I’m applying for my loan, not my boss ”said by a private entrepreneur expressed such a feeling. It seems that the Bank’s loan is more applicable to projects to be financed publicly or by governments, not for projects in competitive sector or to be financed by privates.
Sustainability of the Project
9.3 China’s macro-economic and environmental reform policies contribute to the sustainability of the project. The adoption of market economy development model and strong commitments by both Central and local government to protect environment contributed institutionally to the sustainability and acted as incentives to gain a longer life cycle for project objectives. A change of governments’ policy, both Central and local, from traditional focus on economic development onto a combined healthy development of both economy and environment make such sustainability more realistic. Accelerated reform in legal and regulatory system provide a long term possibility for such a sustainability. New laws and regulations binding economic activities compelled an increasing conformity with environmental policy.
9.4 A policy of further opening to outside world make the sustainability more close to international practices. With more than 20 years of reform and opening policies, the performances of government and enterprises began to follow international practices. The Bank’s principles and project procedures were more known, familiar with and accepted by government agencies and enterprises. Especially on institutional matters, the locals gradually realized that the sustainability created by capital investment must be strengthened and guaranteed by institutional arrangement. Besides, more sustainable effects brought about by institutional innovation can be expected, as in the case of this project.
Performance of the Bank
9.5 Satisfactory Performance in Project Objective Design and Preparationa. Combination of investment projects with policy and institutional reform;b. More emphasis on environment protection and sustainability;c. Far-sighted objective designing on surplus labor deployment, SOE reform, state assets
management, environmental regulatory reform, social security system, etc., some of which soon became social and economic focuses in the late coming years.
9.6 Satisfactory Performance of Bank Staff in Project Implementation
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a. Devoted working efforts and hard working spirits of the Bank’s staff;b. Realistic attitude towards variations and adjustments;c. Equal and friendly relation, mutual-trust and good cooperation with local agencies and
staff;d. Rich professional knowledge and experiences;e. Constant communication, guidance and timely feedback with CPMO on progress and
relevant issues .
9.7 Performance to be Improveda. Shortcomings in designing and combination of project objectives:b. Over-emphasis on achieving multi-objectives in a specific project and a neglect on the
potential conflicts, which might arise among those objectives. For example, a combination of public pollution control policy (public interest pursuit) with the commercial operation by commercial banks (profit maximization pursuit), although very optimistic in theory, is not realistic in practice.
c. In designing the project selection criteria for LOC, improper inclusion of pollution control as the top priority for selection of candidate applicants resulted in a controversy to local banks’ principles of commercialization and efficiency. In fact, polluting enterprises were often those which financially were also poor. Consequently, the relending banks felt reluctant to lend to them. The final withdrawal of the local banks from LOC partially resulted from this.
Performance of the Borrower
9.8 Satisfactory Performance a. High importance to the project attached by both Central and local governments;b. Effective project management and qualified management staff;c. Supporting policies and administrative measures by the local government to strengthen
the management and implementation of the project (e.g. the Mayor's Order on Implementation of Levy System), and relevant institutional reform and adjustments fitting with the designed project objectives;
d. Full communication and cooperation with the Bank and its staff;e. Adherence to market principles by Chongqing Government, and its non-interference with
autonomy of both the local banks and enterprises, equal treatment to SOEs and non-SOEs in operation;
f. Full implementation of government commitments in the process of the project and in following the Bank’s principles and procedures.
9.9 Performance to be Improveda. In addition to policy constraints, CSSC’s own poor financial condition could not meet
credit requirement;b. Constant changes in project plan by CISGC reflected an inadequacy in project
preparation and market research;c. The withdrawal by local banks from LOC shows their uncertainty or less ability to
control risks.
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9.10 Evaluation on Project Implementationa. The policy reform objectives and reform action plan specified in project SAR have been
mostly achieved.b. The relocation of CSSC and CISGC specified in project SAR hasn’t been implemented.c. The line-of-credit component specified in project SAR hasn’t been implemented.d. The industrial pollution control objectives and environmental regulatory enforcement
action plan specified in project SAR have been mostly achieved.
9.11 Lessons Learned
Good policy environment is the pre-condition for achieving some of the project objectives. The successful achievement of most of the environment and economic reform objectives depended on the overall policy reform by both Central and local governments. The commitment and coordination by government contributed positively to the realization of objectives. Good management and qualified management staff proved to be an organization base. The project objectives designed are in conformity with actual policy and regulatory reform trend. The close cooperation between the World Bank and Chongqing Municipality has promoted the realization of project objectives. The capital investment behaviors should have the policy and institutional reform objective as its guidance. The achievement of most of the objectives on economic reform agenda and objectives of pollution control proved: (1) capital investment was a necessary condition to achieve a success of a project’s objective, but not the full condition for this end; (2) some objectives could also be achieved through means of institutional and policy arrangement with, or even necessarily without large capital input.
The Bank’s loan, including most of its procedures, in its nature, is more applicable to public or government infrastructure projects rather than those projects in competitive sectors. In designing project objectives, especially in designing multi-objectives, attention should be given to the potential conflicts among those objectives. International consultants should look for right source for information. For example, one firm, when it first started its consulting work in Chongqing, always over-emphasized its autonomy and independence, and rejected several times the opinions by CPMO and relevant agencies on the reliability of financial statements provided by some candidate enterprises. Consequently, the majority of the 10 feasibility studies prepared by this firm were finally turned down by the relending banks.
1/ Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies.2/ Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff
of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units.
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Annex 3. Economic Costs and Benefits
At appraisal, financial projections, economic rates of return and sensitivity tests were prepared only for CISGC and CSSC. Since the steel plant restructuring and relocation component was cancelled, a revised economic analysis for these entities would not be meaninigful.
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Annex 4. Bank Inputs
(a) Missions:Stage of Project Cycle Performance Rating No. of Persons and Specialty
(2), SR. ECONOMIST (1), PR. ENVIRONMENTAL ENGINEER (1), PR. PRIVATE SECTOR DEVELOPMENT SPECIALIST (1), FINANCIAL ANALYST (1), PR. BANKING SPECIALIST (1), PR. CHEMICAL ENGINEER (1), STEEL ENGINEER (1),
Regional direct to full costs mark-up is 25% for prior fiscal years up to 1999.
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Annex 5. Ratings for Achievement of Objectives/Outputs of Components(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)
RatingMacro policies H SU M N NASector Policies H SU M N NAPhysical H SU M N NAFinancial H SU M N NAInstitutional Development H SU M N NAEnvironmental H SU M N NA
SocialPoverty Reduction H SU M N NAGender H SU M N NAOther (Please specify) H SU M N NA
Private sector development H SU M N NAPublic sector management H SU M N NAOther (Please specify) H SU M N NA
Lending HS S U HUSupervision HS S U HUOverall HS S U HU
6.2 Borrower performance Rating
Preparation HS S U HUGovernment implementation performance HS S U HUImplementation agency performance HS S U HUOverall HS S U HU
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Annex 7. List of Supporting Documents
Staff Appraisal Report, China, Chongqing Industrial Pollution Control and Reform Project, Report No. 15387-CHA, May 15, 1996
Loan No. 4045-CHA, Loan Agreement between People's Republic of China and International Bank for Reconstruction and Development, dated December 4, 1996
Loan No. 4045-CHA, Chongqing Project Agreement between International Bank for Reconstruction and Development and Chongqing Municipality, dated December 4, 1996
Loan No. 4045-CHA, Steel Companies Project Agreement, between International Bank for Reconstruction and Development and Chongqing Special Steel Company (Group) Limited and Chongqing Iron and Steel Company (Group) Limited, dated December 4, 1996
Loan No. 4045-CHA, Financial Intermediaries Project Agreement, between International Bank for Reconstruction and Development and Agricultural Bank of China, and China Merchants Bank and Everbright Bank of China, dated December 4, 1996
Agreed Minutes of Negotiations between the World Bank and People's Repubic of China, for the Chongqing Industrial Pollution Control and Reform Project, dated April 26, 1996
Memorandum from the Regional Vice President, authorizing appraisal of the Chongqing Industrial Pollution Control and Reform Project, dated November 22, 1995
World Bank Supervision Reports for the Chongqing Industrial Pollution Control and Reform Project, 1997-2002
Correspondence dealing with various cancellations of Loan No. 4045-CHA, 1999-2001
Aide-Memoire, Implementation Completion Mission, January 13-19, 2002
