Loan Municipal District Energy Infrastructure Development ...

Extended Annual Review Report

Project Number: 41957-014 Investment Number: 7279 Loan Number: 2422 August 2016

Loan Municipal District Energy Infrastructure Development Project (People’s Republic of China)

This is the abbreviated version of the document that excludes commercially sensitive and confidential business information that is subject to exceptions to disclosure set forth in ADB’s Public Communications Policy 2011.

CURRENCY EQUIVALENTS Currency Units – yuan (CNY)

At Appraisal At Project Completion

15 April 2008 31 December 2015 CNY1.00

$1.00 – –

$0.14 CNY7.00

$0.15 CNY6.49

ABBREVIATIONS

ADB – Asian Development Bank CHP – combined heat and power CO2 – carbon dioxide DES – district energy system DHS

EIA – –

district heating system environmental impact assessment

ISO – International Organization for Standardization OHSAS – occupational health and safety assessment services PRC

PSD QEHS

– – –

People’s Republic of China private sector development quality, environment, health, and safety

RRP – report and recommendation of the President

NOTES

(i) The fiscal year (FY) of the borrower ends on 31 December. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2010 ends on 31 December 2010.

(ii) In this report, "$" refers to US dollars.

Vice-President D. Gupta, Private Sector and Cofinancing Operations Director General M. Barrow, Private Sector Operations Department (PSOD) Director

C. Roberts, Portfolio Management Division, PSOD

Team leader J. Limjap, Investment Specialist, PSOD Team members C. Dizon, Associate Investment Officer, PSOD

M. Manabat, Senior Investment Officer, PSOD A. Porras, Senior Safeguards Officer, PSOD M. Principe, Senior Social Development Officer, PSOD

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

BASIC DATA i

I. THE PROJECT 1

A. Project Background 1 B. Key Project Features 1

II. EVALUATION 3

A. Project Rationale and Objectives 3 B. Development Impact 3 C. ADB Additionality 7 D. ADB Investment Profitability 8 E. ADB Work Quality 8

III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS 9

A. Issues and Lessons 9 B. Recommendations and Follow-Up Actions 10

APPENDIXES 1. Project-Related Data 11 2. Results and Ratings for Project Contributions to Private Sector Development and ADB

Strategic Development Objectives—Infrastructure 13 3. Industry and Operations Review 22 4. Environmental Impact 25 5. Social Impact 31

BASIC DATA Municipal District Energy Infrastructure Development Project

(L2422/EI7279-PRC)

Key Project Data

As per ADB Loan Documents (CNY million)

Actual (CNY million)

Total Project Cost ADB Investment:

A Loan: Committed Disbursed Outstanding

B Loan1: Committed Disbursed Outstanding

8,996

1,400 950

1,400 0 0

2,240

950 950 537

0 0 0

ADB = Asian Development Bank. Note: Actual project cost is less than the original estimate in the RRP as the original estimate was projected for 8-10 projects. Actual financing was used for only 2 projects. 1 The B loan was terminated on 27 January 2016.

Key Dates Expected Actual

Concept Clearance Approval Board Approval Loan Agreement

Tranche 1 Tranche 2 Tranche 3

Loan Effectiveness Tranche 1 Tranche 2 Tranche 3

First Disbursement

23 Nov 2007 2 Jun 2008

19 Jun 2008 27 Jul 2012 27 Jul 2012

19 Jun 2008 27 Jul 2012 27 Jul 2012 8 Dec 2009

23 Nov 2007 2 Jun 2008

19 Jun 2008 27 Jul 2012 27 Jul 2012

4 Dec 2009 9 Oct 2013

12 Dec 2012 8 Dec 2009

Note: Tranches 2 and 3 have been considered in the Facility Agreement signed on 19 June 2008.

Project Administration and Monitoring Number of Missions Number of Person-Days

Due Diligence and Appraisal Loan Negotiations and Signing Loan and TA Administration XARR Mission

3 7 3 1

16 21 13 25

TA = technical assistance, XARR = extended annual review report.

I. THE PROJECT

A. Project Background

1. On 2 June 2008, the Asian Development Bank (ADB) approved (i) a direct loan (A loan) of up to CNY1,400,000,000 from ADB’s ordinary capital resources without government guarantee, and (ii) a complementary loan (B loan) of up to CNY1,400,000,000, to be funded by international or local banks, to Veolia (Harbin) Heat Power Co., Ltd.,1 Veolia (Jiamusi) Urban Heating Co., Ltd.,2 and Veolia Changyang Thermal Energy (Chongqing) Co., Ltd.3 The A loan had a tenor of 10 years, inclusive of a grace period of 2 years.4 The unutilized A and B loans were terminated on 27 January 2016.5 The funds were used to support Veolia’s investment plan to fund a series of district energy infrastructure projects in municipalities in the People’s Republic of China (PRC) known collectively as the Municipal District Energy Infrastructure Development Project. Veolia Environnement irrevocably and unconditionally guarantees the loans.6 2. The project involved the establishment, acquisition, rehabilitation, and operation of district energy systems (DES) to address the operational inefficiency and financial constraints faced by municipalities. The A loan supported the investment plan of Veolia to rehabilitate and expand DES in municipalities through joint ventures with local partners across the PRC. The joint ventures sought to provide DES services to residential clients and industrial and commercial businesses. Veolia operates two joint ventures funded by the ADB loan, namely: (i) Veolia Jiamusi, a joint venture between Veolia Energy Asia Pte. Ltd. (65%) and Jiamusi Yongxu Environmental Protection Energy Co. Limited (35%), and (ii) Veolia Harbin, a joint venture between Veolia Energy Asia Pte., Ltd. (95%) and Harbin Property Heating Group Co., Ltd. (5%). 3. The ADB assistance funded the construction and operation of two district heating networks serving Jiamusi, the third largest city in Heilongjiang Province, and southwest Harbin, capital of Heilongjiang Province. B. Key Project Features

4. District heating refers to the distribution of steam and hot water generated from a heat source via a pipeline network to a city or municipality for household and commercial use. The technologies used in providing district heating include (i) heat-only boilers, and (ii) combined heat and power (CHP), also known as cogeneration. CHP is one of the most effective ways to maximize the energy efficiency of heating and the electricity generation process. When the district heating’s small coal-fired heat-only boilers are replaced with CHP boilers with the same production capacity, CHP technology reduces local air pollution and carbon dioxide (CO2)

1Formerly Dalkia Sunshine (Harbin) Heat Power Co., Ltd.

2Formerly Dalkia (Jiamusi) Urban Heating Co., Ltd.

3Formerly Dalkia Changyang Thermal Energy (Chongqing) Co., Ltd.

4 The A loan was disbursed in three tranches: Tranche 1 of CNY700 million was disbursed to Veolia Harbin (CNY500

million) and Veolia Jiamusi (CNY200 million), Tranche 2 of CNY100 million was disbursed to Veolia Harbin, and Tranche 3 (CNY150 million) was disbursed to Veolia Harbin.

5 Veolia has indicated that it has sufficient internal cash to fund future expansions of Veolia Harbin. As for the B loan,

certain international commercial banks offered USD-denominated B loans, but Veolia preferred CNY-denominated financing to minimize foreign currency risks since their revenues are in local currency.

6 Dalkia SAS, a subsidiary of Veolia, was formerly the guarantor of the loan facility. In August 2008, due to a change

in the Veolia Group’s financial policy, Dalkia SAS requested that it be replaced by Veolia Environnement (ultimate parent) as guarantor.

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emissions in addition to saving energy through economy of scale in heat production and reuse of waste energy. Heat supply efficiency of CHP is 50% more than that of small boilers. The project is the first private sector district energy project under ADB’s Energy Efficiency Initiative. 5. Veolia Jiamusi is involved in heating distribution. Its main heat production sources are from two CHPs, belonging to third parties.7 Veolia Harbin, on the other hand, is involved in both heat production and distribution. Its main heating source comes from heat-only boilers and its own CHP.8 Both Veolia Harbin and Veolia Jiamusi build network systems to supply heat to residential and commercial customers. Table 1 shows the sources of Veolia Jiamusi and Veolia Harbin’s heating networks.

Table 1. Source of Production - Veolia Harbin and Veolia Jiamusi

Heating Source Veolia Jiamusi Veolia Harbin

Fuel source Production capacity Fuel source Production capacity

West Cogeneration (Third Party)

Coal Boilers 2x220 t/h Turbines 1x50 MWe + 1x25 MWe

East Cogeneration (Third Party)

Coal Boilers 1x1,050 t/h Turbines 1x300 MWe

Jinjiang Boiler House Coal Boilers 3x29 MWth (+1x29 MWth back-up)

Small Boiler House Coal Boilers 7.35 MWth Heat-Only Boilers (Phase 1)

Coal Boilers 6x58 MWth

Combined Heat and Power (Phase 2)

Coal Boilers 4 x 220 t/h Turbines 2x50 MWe

Gas-Fired House Gas Boilers 3x2 t/h

6. The joint ventures (Veolia Harbin and Veolia Jiamusi) are based on a concession agreement or similar contractual arrangements with the municipal government, wherein the agreed tariff and tariff revision mechanism are documented. Concessions are awarded on an exclusive basis for a 25-year period. In these joint ventures, Veolia takes more than 50% direct ownership of the project companies. This strategy ensures stable operation under exclusive rights and fully leverages Veolia’s technical expertise and operational know-how. 7. The project risks are effectively mitigated by the unconditional and irrevocable guarantee from a strong guarantor, Veolia Environnement, a leading provider of environmental services worldwide. Veolia is rated Baa1/Stable by Moody’s, and BBB/Stable by Standard & Poor’s. 8. ADB’s intervention has achieved important improvements in energy savings and pollution reduction, and improved heating service quality at the same time. Operations of both Veolia Jiamusi and Veolia Harbin have had a positive impact on the environment. Table 2 summarizes the standard coal savings due to heat efficiency improvement and the corresponding emission savings resulting from the coal savings.9 The savings came from the decommissioning of inefficient small coal-fired boilers.

7 Veolia Jiamusi also owns one big peak-boiler house and one small boiler house.

8 Veolia Harbin owns 6 boilers, a CHP plant consisting of 4 boilers and 2 turbines, and a gas-fired boiler house. ADB

did not fund the construction of Harbin’s CHP. 9 This calculation is based on the year-on-year heating KPI (kWh/m2/DD) improvement; the lower the heating KPI,

the better heat efficiency is achieved. Specifically, energy saving of Year n= (heating KPI of Year n-heating KPI of

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Table 2. Summary of Standard Coal Savings and Emission Savings

Accumulated Data until heating season 2015/2016

Parameters Unit Veolia Jiamusi

Veolia Harbin

Savings on Nitric Oxide (NOx) Tons 6,549 3,826

Savings on Sulfur Oxide (SOx) Tons 13,099 7,651

Savings on Carbon Oxide (CO) Tons 9,843 5,749

Savings on Carbon Dioxide (CO2)

Tons 349,752 216,348

Savings on Standard Coal Tons 134,109 78,335

Dust Reduction Tons 13,357 7,802

II. EVALUATION

A. Project Rationale and Objectives

9. The project has achieved the project objectives by successfully undertaking district heating projects and increasing the connected area from approximately 12 million m2 in the 2009/2010 heating season to 31 million m2 in the 2015/2016 heating season. Specifically, the project has (i) provided cleaner, reliable, safe, and high-quality heating services to the people living in Harbin and Jiamusi, where adequate district energy system infrastructure was lacking and demand was not being met; (ii) reduced pollution from scattered small coal-fired heat-only boilers and inefficient district heating networks; (iii) assisted in energy efficiency and improved environmental conditions in PRC; (iv) provided highly skilled employment and know-how transfer opportunities to the local community; and (v) set a model for private sector investment, including strengthening ties between the leading international investor and local municipalities and service providers . B. Development Impact

1. Contributions to Private Sector Development and ADB’s Strategic Development Objectives

10. The results and ratings for project contributions to private sector development and ADB’s strategic development objectives are in Appendix 2. 11. The project is consistent with ADB’s country strategies in PRC, under which ADB private sector operations focus on the development of infrastructure and environmental improvement. The project promotes the development of municipal district energy supply infrastructure while contributing to environmental improvement through energy efficiency. 12. By introducing cleaner technologies, the project is also consistent with ADB’s Energy Policy, which recommends a reorientation of energy sector activities to address regional and global environmental impacts.

Year n-1)* heating surface of Year n*DD of Year n. Standard coal savings and pollutant emission savings are all converted from the energy savings (heat value of Standard Coal is 7000 kcal/kg).

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13. Over the years, Veolia Jiamusi and Veolia Harbin achieved important improvements in energy savings and pollution reduction, while also improving heating service quality. This is highlighted by the improvement in the joint ventures’ energy efficiency. Since the start of operations in the 2009/2010 heating season until the 2015/2016 heating season, Veolia Jiamusi achieved a heat efficiency improvement of 13.6% (brought about by the technical modifications and improvements in the network), while a 2.3% improvement was realized for Veolia Harbin (brought about by the operation of the cogeneration plant in October 2013 and a well-managed heat distribution network). However, the full operation of Veolia Harbin’s cogeneration plant (Phase II) and the expansion of the heated area led to a corresponding increase in coal consumption, which resulted in an increase of 16.4% in CO2 emissions. Despite the increase in emissions and the corresponding increase in the amount of CO2 per square meter (due to the increase in coal consumption), Veolia Harbin achieved 216,348 tons of CO2 savings by the end of the heating season 2015/2016 because of the higher efficiency of the cogeneration plant, which replaced inefficient small coal-fired boilers. Likewise, Veolia Jiamusi achieved 349,752 tons of CO2 savings by the same period.10 14. Veolia Jiamusi and Veolia Harbin have steadily reduced heat supplied by small coal-fired boilers. As of the end of the heating season 2015/2016, Veolia Harbin had decommissioned 237 small boilers, while Veolia Jiamusi had decommissioned 166 small boiler houses. 11 The increase in the heated area and development of the networks, as well as the reduction of small coal-fired boilers, have had a positive impact on the environment. By September 2012, Veolia Jiamusi and Veolia Harbin were certified with International Organization for Standardization (ISO) 9001, ISO 14001, and occupational health and safety assessment services (OHSAS) 18001. 15. The project has had a positive impact on the economy and the sector. The availability of reliable heating services supported the growth in construction, which provided employment opportunities. The project’s contribution to private sector development and ADB’s strategic development objectives is rated satisfactory.

2. Environment, Social, Health, and Safety Performance

a. Environment 16. The project was categorized as financial intermediary for environmental impacts in accordance with ADB’s Environment Policy (2002).12 An environmental and social management system (ESMS) has been established and staff have been assigned to manage it. For each subproject, the required environmental impact assessment (EIA) report, including an environmental management and monitoring plan (EMMP), was prepared, and the necessary environmental clearances were obtained prior to implementation.13 The mission confirmed that the project sites for both Veolia Jiamusi and Veolia Harbin are located in highly urbanized and

10

CO2 savings is defined as emissions avoided through Veolia's heat supply. Source: Operations Report 2015. 11

One boiler house may have one or more boilers. The number of demolished boilers is estimated to be 300. 12

A project is classified as financial intermediary if it involves a credit line through a financial intermediary or an equity investment in a financial intermediary. The financial intermediary must apply an environmental management system, unless all subprojects will result in insignificant impacts. 13

The Environmental Impact Assessment for Veolia Harbin was prepared by Harbin Institute of Technology and Harbin Environmental Protection Science and Research Institute in 2003. The Veolia Holding Company was responsible for reviewing the EIA and the local government had to approve it. A copy of the EIA Report and environmental approval (both in Chinese) has been submitted to ADB.

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industrialized areas and no endangered flora or fauna has been affected. Primary and secondary network pipelines are located along the right-of-way of existing roads to avoid disturbing the ecosystem, and there was no change in land use. No protected area or sensitive habitat has been affected by the installation of the network pipelines from the district heating plants. 17. Environmental impacts were assessed to be minor, short term and temporary in nature during construction. During operation, the few issues identified related to air emission, noise level, groundwater abstraction, wastewater quality, solid waste (bottom and fly ash), and occupational health and safety; environmental management and monitoring activities had to be undertaken to address these issues. A third party environmental monitoring agency was hired to take measurements and conduct monitoring activities. With the installation of appropriate environmental protection and prevention equipment, the new regulations and standards for air emission and noise level have been met. 14 Budget for environmental management and monitoring activities has been allocated to cover the maintenance and repair expenses for all environmental pollution protection equipment, as well as the costs for environment, health and safety training. The integrated quality, environment, health and safety (QEHS) management system established at the corporate and project levels strengthen the management of QEHS issues to comply with best international practices and the national and local laws, regulations, standards, and codes. Pollution control procedures and emergency response plans are in place and well documented. Both Veolia Jiamusi and Veolia Harbin have demonstrated their commitment to addressing environmental issues by implementing the well-established management system, adhering strictly to the stipulated operational procedures and good practice, and meeting the national standards and ADB requirements.

b. Social Safeguards

18. The project was classified B/C under the ADB involuntary resettlement policy (1995). Local governments acquired the land before concessionaires were selected to manage rehabilitation and construction, and carry out operations and maintenance. Expansion of district heating network pipelines was carried out on existing public roads. New substations were generally built using existing basements, the locations of old boiler houses or state-owned land freely provided by the municipal governments; exceptions were the four substations in Jiamusi, which used properties leased from private individuals. A social due diligence report was prepared for each subproject in accordance with the requirements of ADB’s involuntary resettlement policy and the PRC’s laws and regulations. 19. The Veolia Harbin heating plant was constructed on 440 mu of land, which had been acquired in 2005 by Nangang District Land Resource Bureau and other government agencies for the Yangguang Company, which was in charge of the development and operation of Harbin City’s southwest heating network.15 In 2007, Veolia acquired the majority of the company shares and formed a joint venture named Veolia Harbin. The land use right of the state-owned land was transferred to Veolia Harbin in 2007. The land acquisition affected Qianjin Village of Chaoyang Township, located near the urban area and included in the new zone for urbanization. The land compensation and resettlement subsidy was 16 times the annual average output value. Agricultural income accounted for only 20% of the total per capita income in this village. The

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The new emission standard for air pollution for thermal power plants (GB 13223-2011) took effect in July 2014. 15

A mu is a unit of land measurement in the PRC, the size of which varies with location but is commonly placed at 806.65 square yards (0.165 acre, or 666.5 square meters). Source: The Encyclopedia Britannica. Mou. http://www.britannica.com/science/mou

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affected villagers lost 0.4 mu of farmland per capita, which is 20% of the 2 mu average per capita landholding in the village before land acquisition. The land acquisition led to an income loss of 8% per capita on average in 2005. All compensation was paid to the affected villagers by August 2005. The Chaoyang Township government officials confirmed that domestic procedures for land acquisition had been completed and no grievance had been received from the affected villagers. 20. Local governments consulted with affected communities and people throughout the process of land acquisition. The grievance redress mechanism for the land acquisition worked well and, according to local officials in both Harbin and Jiamusi, there are no outstanding issues. In particular, there are no pending unpaid compensation or legal issues related to the land and other assets. 21. For the Veolia Jiamusi plant network, the joint venture arrangement included the transfer of the municipal heating company’s assets (including the Jinjiang boiler, heating pipeline network and other equipment) and 575 employees to the new joint venture company in 2007. In August 2011, the Jiamusi Government issued the state-owned land certificate to Veolia Jiamusi for the Jinjiang boiler house and the land measuring 9,170 m2. Veolia Jiamusi is leasing its office building for 10 years (2007 to 2017). In 2010, there was a court issue; Veolia Jiamusi had allegedly not paid the rent, while the owner was alleged to have failed to carry out building repairs and pay related taxes and fees. In June 2013, the two parties settled the issue with Veolia Jiamusi paying the rent from June 2011 to June 2013 with interest, and renegotiating the lease for June 2013 to June 2017. 22. Veolia Jiamusi’s rehabilitation and expansion of the primary heating network, covering 90 kilometers, was aligned with the road design of the local government and carried out on existing public roads. No land was acquired. Veolia Jiamusi has also invested in the reconstruction and new construction of substations. As of December 2015, Veolia Jiamusi had a total of 308 substations – 241 occupy the land allocated by the land developers or municipal government for free, 63 are using the location of the dismantled small boiler houses, and 4 substations occupy properties leased from private individuals. 23. The project was classified C under the ADB Policy on Indigenous Peoples (1998), and neither subproject triggered application of the policy. Harbin and Jiamusi are cities with several ethnic groups, yet no group is excluded from the areas served by the project. Ethnic minorities account for only 6.55% of Harbin’s population. The two villages affected by permanent land acquisition are Han villages. While the Man are the main ethnic minority group, they speak the same language as the Han and have the same socio-economic profile. Jiamusi city is inhabited by Han, Korean, and Manchu ethnic groups, but there is no discrimination as to who benefits or has access to the heating services provided by the Veolia heating networks. 24. The construction and operation activities of Veolia Harbin and Veolia Jiamusi’s plants generated employment, benefiting local communities. Both Veolia Harbin and Veolia Jiamusi have an employee handbook and a human resource policy that comply with the country’s labor laws as well as with the relevant core labor standards, which prohibit child labor, forced labor, and discrimination. The company provides social benefits such as pension, medical insurance, maternity insurance, unemployment insurance, work injury insurance, and a social housing fund. 25. With the government’s mandate to close small boiler houses and expand the areas to be connected to the municipal heating system, workers from the small boiler houses were affected.

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Measures were implemented to minimize job displacement for the affected workers and help facilitate their re-employment. 26. Both Veolia Harbin and Veolia Jiamusi have their respective call centers open 24/7 to obtain feedback, reports on incidents, and complaints from customers, and to ensure a quick response. With regard to complaints from communities, both Veolia plants have their own internal grievance redress procedures. For example, Veolia Jiamusi and Veolia Harbin received complaints related to dust coming from the Jinjiang boiler house and the coal yard, respectively. While these were addressed by each plant, it was noted that their current grievance mechanism can be further improved by enhancing the documentation process (logging complaints, documenting the consultation process with the complainants), integrating a feedback mechanism to the complainants on actions taken, and establishing an indicative timeframe for each of the steps in the grievance process. No complaints were received from NGOs or civil society groups. 27. The project’s environment, social, health, and safety performance is rated satisfactory.

3. Business Success 28. Veolia Harbin and Veolia Jiamusi have achieved important improvements in energy savings and pollution reduction while also improving heating service quality. The increase in heating area for both joint ventures demonstrated the efficiency of the joint ventures’ operations and their strong commitment to alleviating environmental pollution.

4. Overall development impact rating 29. The overall development impact rating is satisfactory. The project has improved environmental conditions through improved energy efficiency and has supported government efforts to rebuild more energy efficient district heating infrastructure in Harbin and Jiamusi. It has contributed significantly to private sector development and ADB’s strategic objectives by having good demonstration effects, setting new standards, and improving people’s quality of life. The project has also demonstrated business success, economic sustainability, and sound environmental performance and socioeconomic impact. C. ADB Additionality

30. In 2007, the PRC had a very strong policy framework to promote district heating, but external financing was limited since the financial sector was not yet fully comfortable with the risks inherent in the district heating business. Since the sector was expanding rapidly, Veolia needed a flexible financing facility, which ADB offered. ADB financing supported the project’s network expansion and attracted other market players. Certain international banks led by Australia and New Zealand Banking Group expressed a strong interest in financing Veolia Harbin’s Phase 2 expansion via US dollar-denominated B loans, but Veolia preferred CNY-denominated financing to minimize foreign currency risks, since their revenues are in local currency. 31. The project is the first private sector district energy project under ADB’s Energy Efficiency Initiative. Use of the district energy system, including integrated centralized CHP, is one of the most effective ways to maximize the energy efficiency of heating and the electricity generation process. In the PRC, heating needs have been met mainly by stoves and small coal-fired heat-only boilers, which contribute to urban air pollution. In addition, existing pipeline

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networks are aging and cause significant breakdowns in many PRC cities. The leakage of hot water from the aging pipeline networks also causes significant energy loss. District heating with CHP was therefore selected by the PRC government as one of 10 priority energy efficiency projects in the Medium- and Long-Term Energy Conservation Plan. However, to achieve the targets set out in the Plan, municipalities required fresh capital, modern technology, and management expertise for the rehabilitation and expansion of the district heating infrastructure. To support this priority, ADB provided financing, which was difficult to obtain at that time. 32. ADB additionality is rated satisfactory. D. ADB Investment Profitability

33. The loan margin and fees yielded a gross contribution to ADB income that exceeds (i) the level compatible with direct transaction costs, (ii) the risk profile of the project,16 and (iii) the country risk at the time of investment. The project is rated satisfactory for ADB investment profitability. E. ADB Work Quality

34. Screening, appraisal and structuring. Veolia (then Dalkia, the world’s leading district energy system management company) first approached ADB for assistance to fund the required capital investments in early 2007. After concept clearance in November 2007, ADB conducted due diligence, efficiently examining technical, legal, environmental, social, and financial aspects. ADB took the lead in structuring and negotiating the terms of the legal documentation. In June 2008, ADB received Board approval for a direct loan of up to CNY1.4 billion. The Facility Agreement was signed on 19 June 2008 for an initial commitment of CNY950 million. An Amendment Agreement, signed in November 2009, decreased the commitment to CNY700 million (Tranche 1), which was fully disbursed in December 2009. In July 2012, the agreement was amended to accommodate an increase in the commitment of CNY250 million (CNY100 million Tranche 2 and CNY150 million Tranche 3). All 3 tranches were fully disbursed by October 2013. Initially, ADB did not legally commit the entire approved amount of CNY1.4 billion because ADB did not have sufficient CNY funding capacity at that time. As a soft commitment, a provision was included in the Amended and Restated Facility Agreement providing for an increase in the commitment amount of up to CNY1.85 billion (inclusive of the approved B loan amount).17 However, Veolia has indicated that it no longer needs the remaining amount as its internal cash flows are already sufficient to fund its expansion and working capital. The unutilized A loan amount of CNY450 million was cancelled in September 2015, while the uncommitted CNY1.4 billion B Loan Facility was terminated in January 2016. Veolia only has two joint ventures instead of at least 8 as stated in the RRP. This was the result of the change in regulation, which prevents a non-PRC entity from taking a controlling interest in a joint venture. Veolia managed to close the Veolia Jiamusi and Veolia Harbin deals prior to the regulatory change. ADB’s performance in relation to screening, appraisal and structuring is rated satisfactory.

16

At the time of investment, the transaction was rated 5.1 (RR5, equivalent to NSO11 to NSO9 range). Veolia Harbin and Veolia Jiamusi’s current obligor risk rating (ORR) and facility risk rating (FRR) are NSO9 and NSO3, respectively, for Harbin, and NSO8 and NSO3 for Jiamusi.

17 The provision states “If such increase of the Commitment amount is mutually agreed, the Parties shall execute and deliver such additional agreements or documents and perform all other acts or things as ADB shall reasonably request to effectuate such increase of the Commitment amount and the transactions contemplated thereby.”

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35. Monitoring and supervision. Despite the complex multi-tranche drawdowns, the disbursements were made smoothly. ADB closely monitored project implementation through regular site visits, reports, financial statements, annual business plans, environmental and social monitoring and reporting, and annual reviews that comprised both field and desk reviews. The borrowers have complied with all reporting requirements in a timely manner. ADB has been prompt in giving its consent to waivers and requests for amendments of existing agreements, subject to thorough review. ADB has kept itself up to date and fully informed about the project, borrowers, and guarantor performance in all material areas, and has used this knowledge proactively to improve the project development outcome. ADB’s performance in relation to monitoring and supervision is rated satisfactory. 36. ADB’s overall work quality is therefore rated satisfactory.

III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS

A. Issues and Lessons

37. Tariff setting and regulations. The PRC Pricing Law requires that heating tariffs be included in the government-fixed pricing category, under which only the government is authorized to determine the price. Prices are controlled by the government in order to preserve social peace and production. Heating companies may propose tariff adjustments to the pricing bureau. However, a public hearing is required when the tariff involves payment by residential users. Ideally, price is adjusted based on a joint action mechanism between coal price and heat price. This mechanism provides for a change in the price of heat if the coal price changes over 10%. Adjustment is undertaken through review and approval by the local pricing bureau. However, current regulations allow the government the option to adjust or not to adjust the tariff. The heating tariff was reduced in the 2015-2016 heating season because of a lower coal price. The pricing bureau finds it easier to reduce the tariff than increase it, even if warranted. This has an adverse impact on heating companies’ profitability. 38. Pricing mechanism. Tariffs are based on a fixed rate per square meter of the heated area rather than actual heat consumption. This impacts the heating company’s profitability and does not incentivize the consumers to save energy. 39. Availability of local currency. There are challenges in the PRC local currency market, specifically with regard to government approvals. Any additional CNY bond issue is subject to government approval, which may take a long time. Because of the uncertainty of the availability of CNY, projects are not readily financed. Clients resort to local commercial lenders, which give them financing at a higher price. If ADB commits to providing local currency financing and if it is not able to get approval from the government, there remains an issue as to how the project is going to be financed. Hence, a currency substitution clause needs to be included in the agreement to give ADB the flexibility to continue financing the project. It should be noted, though, that this will create foreign exchange risk since revenues are in local currency. 40. Regulatory environment. Variations between actual performance and the assumptions in the RRP were largely precipitated by regulatory challenges. Veolia’s decision to acquire only two concessions was due to a regulatory change that prevents a non-PRC entity (such as Veolia) from taking majority control in a joint venture. 41. Complex multi-tranche drawdown of the transaction. The multi-tranche drawdown structure was intended to minimize the carrying cost for projects with various phases of

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expansion and to enable lenders to assess the profitability of the projects prior to committing additional funding. Disbursements on the later tranches would be dependent on ADB’s experience with the first tranche and the guarantor’s creditworthiness. 42. Closer cooperation among the project company, government, and academe. PRC is focused on improving air quality and reducing air pollution. However, a closer partnership and stronger cooperation are needed among the project company, the government, and academe in order to facilitate monitoring of emissions brought about by the operations of the company. B. Recommendations and Follow-Up Actions 43. In future policy dialogue with the PRC government, ADB should focus on incorporating energy efficiency and district heating systems into the urban development program, as these are huge growth areas and present financing opportunities for ADB. District heating systems can improve energy efficiency by 20-30%. Fossil fuel will remain the source of the bulk of energy supply for many years, especially for developing countries. However, fossil fuel consumption can be reduced if ADB continues to support energy efficiency and district heating system projects, not only in PRC but in other developing countries as well. 44. District heating requires significant investment and many cities are having difficulty in securing adequate funding. ADB can step up efforts to prioritize district heating infrastructure and provide funding to these projects. 45. In future ADB engagements in the PRC private sector, it would be worthwhile to involve regulatory bodies in due diligence in order to fully understand the likely future plans of the government for its industries. Transparency in regulations and a full understanding of policies, such as those related to public–private partnerships, would also help in the structuring of future financing in the district heating sector. Involvement of the Resident Mission would also be significant for the timely monitoring of changes in the regulatory environment, and would also address the communication gaps that are typically encountered in projects in the PRC.

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PROJECT-RELATED DATA

A. Investment Identification 1. Country People’s Republic of China 2. Loan Number LN2422/EI7279/CF48 3. Type of Business Municipal District Heating 4. Project Title Municipal District Energy Infrastructure

Development Project 5. Investee Company and/or Borrower Veolia (Harbin) Heat Power Co., Ltd. and Veolia

(Jiamusi) Urban Heating Co., Ltd. 6. Amount of Approved ADB Assistance CNY1.4 billion (A Loan), CNY1.4 billion (B loan)

ADB = Asian Development Bank, CNY = Chinese yuan

B. Investment Data 1.

Concept Clearance Approval 23 November 2007

2.

Date of Board Approval 2 June 2008

3. Signing Date of Legal Documents A loan Tranche 1 Tranche 2 Tranche 3

19 June 2008 27 July 2012 27 July 2012

4. Date of Loan Effectiveness In Loan Agreement

A Loan Tranche 1 Tranche 2 Tranche 3

4 December 2009 9 October 2013 12 December 2012

Number of Extensions

None

5. Loan Closing Date (end of availability period) In Loan Agreement A loan

Tranche 1 Tranche 2 Tranche 3

12 November 2013 9 October 2018 12 December 2017

Number of Extensions None 6. Disbursements

A loan

Initial Disbursement Final Disbursement Time Interval

8 December 2009 21 Oct 2013 4 years Effective Date Original Closing Date Time Interval

19 June 2008 19 June 2008 0

Amount Disbursed: CNY950,000,000.00

7. Loan Repayment

Initial Repayment Date A loan Tranche 1 A loan Tranche 2 A loan Tranche 3

8 December 2011 21 October 2015 14 October 2014

Final Repayment Date A loan Tranche 1 A loan Tranche 2 A loan Tranche 3

8 December 2019 4 November 2023 14 October 2022

12 Appendix 1

C. Data on ADB Missions Name of Mission Date

No. of Person-Days

No. of Persons Specialization of Members

Project Development Fact-Finding

30 Oct 2007 3-6 Mar 2008 3-5 Mar 2008

1

12

3

1

3

1

Investment Specialist Safeguards Specialist, Investment Specialist, Safeguards Officer Principal Investment Specialist

Investment Negotiations

18-19 Feb 2008 21-24 Apr 2008 25-29 Apr 2008 26-27 May 2008 25-28 May 2008 19-20 Jun 2008 19-20 Jun 2008

2

4

5

2

4

2

2

2

1

1

1

1

1

1

Director, Investment Specialist Principal Investment Specialist Principal Investment Specialist Counsel Principal Investment Specialist Director Principal Investment Specialist

Loan Administration XARR Mission

28 Jan 2010 15-17 Feb 2012 10-11 Apr 2012 4-9 April 2016

1

6

6

25

1

2

3

5

Director Investment Specialist, Associate Investment Officer Investment Specialist, Associate Investment Officer, Co-guarantees Specialist Investment Specialist, Associate Investment Officer, Senior Investment Officer, Senior Safeguards Officer, Senior Social Development Officer

ADB = Asian Development Bank, XARR = extended annual review report.

Sources: ADB mission authorization requests.

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RESULTS AND RATINGS FOR PROJECT CONTRIBUTIONS TO PRIVATE SECTOR DEVELOPMENT AND ADB STRATEGIC DEVELOPMENT OBJECTIVES—INFRASTRUCTURE

Results area Actual achievements Ratinga Justification Potential future

achievements Risk

1. Within company PSD effects

1.1 Improved skills. New or strengthened strategic, managerial, operational, technical or financial skills

Veolia is committed to developing and training their employees by providing a wide range of professional skills training and personal development programs. These include in-house and external training courses, including health and safety, quality, and environmental training. Veolia Jiamusi and Veolia Harbin implemented several health and safety training courses for management, workers, and subcontractors. In 2015, 336 training hours for Veolia Jiamusi and 1,745 training hours for Veolia Harbin have been carried out.

Excellent Experience and competencies are continuously shared within Veolia Environnement’s entities all over the world. Local teams proactively work with the mother company (Veolia) to benefit from their knowledge and experience.

Veolia will continue to implement and improve its management, technical solutions and design, risk management and internal controls, QEHS, and IT tools.

Low

1.2 Improved business operations. Improved ways to operate the business and compete, as seen in investee operational performance against relevant best industry benchmarks or standards

Both Veolia Jiamusi and Veolia Harbin have a well-organized environmental structure and management system in accordance with the following requirements: (i) Environmental Management System Certificate (GB/T24001-2004/ISO14001:2004), (ii) Conformity of Occupational Health and Safety Management System Certificate-GB/T28001-2001/OHSAS 18001:2007, and (iii) Quality Management System Certificate (GB/T19001-2008/ISO9001:2008). Veolia Jiamusi and Veolia Harbin strictly follow Veolia’s standard management system and operational procedure requirements in their daily operations.

Excellent In recent years, Veolia has received awards locally and internationally for its involvement in both Veolia Jiamusi and Veolia Harbin. The main awards and recognitions are summarized below: 2015 Veolia Jiamusi

(i) Excellent Organization Company in the 3

rd Jiamusi

Professional Skills Contest (ii) Model Company for Employees Solidarity (iii) “The 12

th Five-year

plan” water saving company

Veolia aims to implement the same standards in all its operational sites and entities. Local teams proactively work with Veolia France, as well as with other Veolia entities all over the world, to benefit from their knowledge and experience. The scope of cooperation is mainly focused on implementing and improving management, technical solutions and design, risk management and internal controls,

Low

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2014 Veolia Harbin

(i) Customer Approved Heating Company (ii) Pioneer Company for Social Responsibility 2013 Veolia Jiamusi

(i) Advanced individual -Mr. Han Jingbin (ii) “2011-2012 Credit Unit 2012 Veolia Jiamusi

(i) Model Heating Unit (ii) Advanced population and family planning collectives (iii) Women’s Excellency 2011 Veolia Harbin

(i) Award of Municipal/District Excellent Party Members (given to various staff) Veolia Jiamusi

(i) Fraternity (Volunteer Enterprises) (ii) Model Unit (iii) Organization Excellency

2010 Veolia Harbin

(i) Advanced Individual of Urban Heating (ii) Top 10 Heating

QEHS, and IT tools.

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Individuals Veolia Jiamusi

(i) Democratic Management – advanced unit (ii) Provincial Trustworthy Enterprise (iii) Cities heating industry service – model unit (iv) ”2009 trade union objectives management units” and “Advanced unit on creation, openness, democratic management” (v) Jiamusi 3-stars company of 2009 (vi) People of good reputation of Heilongjiang Province – honor unit (vi) Fraternity Volunteer enterprise.

1

(Source: Operations Report 2010-2015)

1.3 Improved governance. As evident in set standards related to corporate governance, stakeholder relations, EHS fields, and/or energy conservation, and their implementation

Under the responsibility of Veolia China and the Chief Operating Officer of Veolia China, specific departments have been involved in E&S matters, in which qualified employees are continuously involved in the implementation of QEHS procedures and standards. Upper management employees are also responsible for the good implementation of these procedures. A wide range of training courses and seminars

Satisfactory Special handbooks and guidelines from Veolia headquarters have been introduced and implemented for the management and operation of subsidiaries. Veolia local subsidiaries annually report to the

Veolia operations comply with ISO and OHSAS standards, as well as with national and local regulations and standards.

Low

1 Veolia Jiamusi voluntarily contributed donations for the victims of the Wenchuan and Yushu earthquakes, and also for the local poor people. The local Red Cross

gave the company an award for its generosity towards the community.

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were held to enhance the ability and performance of Veolia’s local team. The training targeted not only the employees in charge of QEHS, but also operators and technicians, managers, and laboratory managers. The training included de-NOx and de-SOx activities. Along with the supervision and auditing of ISO and OHSAS standards at all sites, the general manual of Veolia China and sub-manual for every site were improved to ensure consistency in the managerial and operations and maintenance standards.

headquarters and the Group about its energy consumption and general efficiency, emission level, H&S situation, etc. This reporting is mandatory for each entity worldwide and enables Veolia to follow up and develop tools and procedures to harmonize Veolia Company’s overall operations.

1.4 Innovation. New or improved infrastructure design, technology, and service delivery; ways to cover or contain costs, manage demand or optimize utilization; improved risk allocation between private companies and government; financial structure, etc.

Veolia has implemented the automation of its management tools to assist project and construction managers in developing plans, assigning resources to tasks, tracking progress, managing budgets and analyzing workloads. The following are the computerized systems installed by Veolia for Veolia Jiamusi and Veolia Harbin: (i) web-based Veolia (China) Monitoring System; (ii) Navision (for the optimization of technical and financial follow-ups during operation and construction; (iii) Scada System (Supervisory Control and Data Acquisition for real-time remote supervision and control of key operation parameters to realize operation and energy saving targets; (iv) Geographic Information System, which allows online heating network monitoring, and captures, manages, analyzes, and displays all forms of geographically referenced information; (v) Data Centre Management Information System; (vi) Continuous Monitoring System; (vii) Help Desk monitoring and tracking system; and (viii) Centralized Collecting Office.

Satisfactory Through continuous innovation and improvement in technology and service delivery, in April 2015, Veolia received the award of “Customer Approved Heating Company” from the Harbin Housing Insurance and Management Bureau Harbin Daily. Based on the services survey system, Veolia gained a 92.2% satisfactory rating in the first half of 2014, representing an increase of 4.2% compared to the previous year.

Veolia has a strong social policy, which is reflected in its entities. It builds a better environment not only through energy but also through Its active involvement in the local community.

Low

1.5 Catalytic element.

Mobilizing or inducing more local or foreign market financing or

The approved but unsigned B loan facility was terminated in January 2016 as the borrower had sufficient funds for its working capital needs, and

Satisfactory The company’s shareholders provide funding for the

Continued technical modifications and improvements in

Low

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foreign direct investment in the company

thus no longer needed further financing. Potential B loan lenders led by ANZ Bank expressed strong interest in providing financing to Veolia Harbin back in 2012. Veolia Harbin, however, declined, since preference was for CNY-denominated loans.

company’s working capital requirements.

Veolia Jiamusi, and network expansion in Veolia Harbin may entail additional funding in the future.

2. Beyond company PSD effects

2.1 Private sector expansion.

Contribution by a pioneering or low-profile project that facilitates in its own right, or paves the way for, more private participation in the sector and economy at large

ADB financed two project companies, Veolia Jiamusi and Veolia Harbin, and supported partnerships between a private firm (Veolia Asia) and state-owned district heating companies (Harbin Sunshine Heat Power Co., Ltd. and Jiamusi Yongxu Environmental Protection Energy Co., Ltd.). The successful implementation of the projects of Veolia Asia and the recognized carbon emission reductions of its joint ventures demonstrate the efficiency of the company and its strong commitment to alleviating environmental pollution. In recent years, Veolia has received awards locally and internationally for its involvement in both Veolia Jiamusi and Veolia Harbin. In April 2015, Veolia Harbin received the following awards: “Customer Approved Heating Company” and “Pioneer Company for Social Responsibility.” In 2009, Jiamusi received the “Global District Energy Climate Award” issued by the International Energy Agency. See item 1.2 above for other awards and achievements.

Satisfactory Together with government policies to reduce pollutant boilers, the adoption of the PPP model in the district heating sector will continue to drive private sector expansion and participation.

The central government has issued a series of policies to encourage PPPs in municipal services (including district heating). The State Council, the National Development and Reform Commission, and the People’s Bank of China (the central bank) jointly issued “Guidelines to promote Public–Private Partnership in public service sectors” on 22 May 2015. On 12 Jan 2016, the NDRC published a list of 2,125 PPP projects nationwide.

Low

2.2 Competition. Contribution of new competition pressure on public and other sector players to raise efficiency and improve access and service levels in the

Veolia Environnement’s main competitors in the district heating sector in PRC are the 5 Chinese generation companies, local public heating companies, and some private and listed companies. Veolia has set market standards and

Satisfactory Veolia Harbin and Veolia Jiamusi have their respective concession areas to develop. The

No competitor is anticipated in the near future as each district heating company is given its

Low

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industry benchmarks to compete with these companies. government allows only one district heating company to develop a concession area.

own concession areas to develop.

2.3 Demonstration effects. Adoption of new skills, improved infrastructure assets and services, more efficient processes, maintenance regimes, improved standards, risk allocation and mitigation beyond the project company

Veolia Harbin and Veolia Jiamusi are considered demonstration project companies. Veolia Harbin’s standards are stricter than the national standards, while Veolia Jiamusi has enforced strict compliance through monetary penalties.

Satisfactory In order to develop the network, Veolia Harbin and Veolia Jiamusi destroy connected small boilers or use them as sub-stations, thus contributing significantly to the reduction of emissions.

Veolia has a good management system in place during construction and operation.

Low

2.4 Linkages. Relative to investments, the project contributes notable upstream or downstream linkage effects to business clients, consumers, suppliers, key industries etc. in support of growth.

Veolia Harbin and Veolia Jiamusi are implementing new systems for their operational sites in order to improve the service quality of the entities and ensure customer satisfaction. Veolia Harbin’s expansion of its operations and network contributes to the growth of construction and other industries in Harbin.

Satisfactory Cheaper fuel translates to savings, which can be passed on to customers through better service and improvement in operations.

Veolia has a strong social policy, which is reflected in Veolia Harbin and Veolia Jiamusi.

Low

2.5 Catalytic element.

Mobilizing or inducing more local or foreign market financing or foreign direct investment in the sector (beyond the company) through pioneering or catalytic finance

The shareholders continue to support the borrowers for their working capital requirements. As of December 2015, Veolia Harbin’s shareholder loans amounted to CNY760 million, which is 67% of Veolia Harbin’s long-term loans as of the end of 2015. The rest are loans from ADB. Veolia Jiamusi has no shareholder loans.

Satisfactory The projects are funded by ADB and shareholder loans. Standard Chartered Bank provides a working capital facility.

Veolia Jiamusi and Veolia Harbin may tap additional funding from commercial banks if network expansion and modification continues.

Low

2.6. Affected laws, frameworks, regulation.

Contributes to improved laws and sector regulation for PPPs, concessions, joint ventures, and build-operate-transfer projects; and liberalizing markets as applicable for improved sector efficiency

Comprehensive air pollution policies and targets have become the focus of PRC’s top leadership. The persistent media attention paid to the very high levels of air pollution in major PRC cities has pushed the government to ramp up efforts to tackle it. In January 2015, the PRC government published new emission regulations. Harbin city government

Satisfactory Encouraged by PPP laws and regulations, local governments have begun to promote PPP projects. By Jan 2016, the NDRC has listed 2,125 PPP projects nationwide.

Carbon markets have been set up in 5 cities and 2 provinces, namely: Shenzhen, Beijing, Shanghai, Guangdong, Tianjin; and Hubei and Chongqing.

Low

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has issued its specific regulation, which is stricter than the national standard. Jiamusi city enforced its emission regulation by setting a penalty for non-compliance up to CNY100,000 per day for polluting companies. In May 2015, the State Counsel, NDRC, and People’s Bank of China jointly issued “Guidelines to promote Public–Private Partnership in public service sectors.

3. Contribution to other ADB strategic objectives

3.1 Sector development outputs. Contribution to other sector development outputs and outcomes not captured under point 2, such as capacity or network expansion

Two municipalities provided concessions: Harbin and Jiamusi. This was below the RRP target of eight municipalities by 2018.

2 A connected area of

56 km2 was achieved by 2015, below the RRP

target of 60 km2 by 2018. Nevertheless, this was a

significant achievement considering there are only two concessions for heating services, rather than eight. General network failures have been reduced with the development and modernization of the networks in Jiamusi and the operation of the CHP in Harbin.

Satisfactory Targets may be below those stated in the RRP, but these targets assumed development of 8 municipalities (compared to 2 as of 2015).

The increase in the heated area and the development of networks, as well as the reduction of coal-fired boilers, have had a positive impact on the environment.

Low

3.2 Sector development outcomes. Contribution to other sector development outputs and outcomes not captured under point 2, such as increased infrastructure utilization or consumption, improved in-country connectivity, improved energy security

Construction of Harbin’s cogeneration plant increased the municipality’s access to high-quality heating services.

Excellent The projects have improved access to clean, reliable, safe, and high-quality heating services for the people in Harbin and Jiamusi.

With Phase 3 expansion, Veolia is expected to further expand its service area and deliver better service to its customers in Harbin.

Low

3.3 Inclusion. Improved access to, availability or affordability of infrastructure services for the poor and other disadvantaged

Before they were acquired, the entities relied heavily on “fee collectors” to recover heating fees. As this method is not efficient, the company decided to centralize the recovery of fees in a

Satisfactory The company received the following awards in 2014: “Customer Approved Heating

Veolia Harbin and Veolia Jiamusi are committed to delivering high

Low

2 This was the result of the change in regulation, which prevents a non-PRC entity from taking majority control in a joint venture. Veolia managed to close the

Veolia Jiamusi and Veolia Harbin deals prior to the regulatory change.

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groups single collecting office. This method has the following advantages (i) facilitates and accelerates fee collection, (ii) easy for customers to come and pay, and (iii) the collecting office’s cars are available to pick up old and handicapped people. A Help Desk is also available to ensure 24/7 availability of the heating supply.

Company” and “Power Company for Social Responsibility.”

quality service.

3.4 Job creation. Creation of additional sustainable jobs or self-employment; distinguish between jobs created within and beyond the company

The construction and operation of the Veolia Harbin plant and the construction and upgrading of the Veolia Jiamusi primary networks contributed to the creation of local employment opportunities. About 100 people were employed by Veolia Jiamusi during construction and 620 during operations, while Veolia Harbin employed 749 during construction and 927 during operations. All job opportunities were generally from local surrounding areas.

Satisfactory Construction and expansion of pipeline networks require an efficient workforce.

As Veolia Harbin and Veolia Jiamusi undergo network expansion, they will require more staff, leading to an increase in job creation.

Low

3.5 Environmental sustainability. Project net impact on GHG emissions; any other contributions to environmental improvements

The operations of both Veolia Jiamusi and Veolia Harbin have had a relatively positive impact on the environment. By the end of the heating season 2015/2016, Veolia Jiamusi had saved 6,549 tons of Nitric oxide (NOx), 13,099 tons of sulfur dioxide (SOx), 9,843 tons of carbon monoxide (CO), 349,752 tons of carbon dioxide (CO2), 134,109 tons of standard coal and 13,357 tons of dust. Veolia Harbin achieved the following savings: 3,826 tons of NOx, 7,651 tons of SOx, 5,749 tons of CO, 216,348 tons of CO2, 78,335 tons of standard coal and 7,802 tons of dust. The savings arose as a result of the decommissioning of inefficient small coal-fired boilers.

Excellent Veolia Jiamusi and Veolia Harbin are committed to optimizing energy performance and reducing environmental emission, as evidenced in the total savings in NOx, SOx, CO, CO2, coal, and dust. For Veolia Harbin, 237 small boilers were decommissioned, while 166 small boiler houses were decommissioned for Veolia Jiamusi.

The potential for achieving an environmentally sustainable business is high.

Low

3.6 Regional integration.

Project contributions to regional cooperation and integration by facilitating trade, cross-border

Veolia Harbin’s main fuel (coal) is sourced partly from Inner Mongolia, which costs less than local coal. A railway connecting the source to the project site, which is currently being planned, will

Satisfactory Veolia was awarded in 2015 the National Model of Grassroots Trade Union by the All-

The projects are based in the municipalities where they provide

Low

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mobility, cross-border power supplies, etc.

enable transport of coal at a lower cost and in an efficient manner.

China Federation of Trade Unions.

services; hardly any cross-border transactions take place, except for the importation of coal from Inner Mongolia.

4. Overall Ratingb Satisfactory

ADB = Asian Development Bank; CHP = combined heat and power; CO = carbon monoxide; CO2 = carbon dioxide; EHS = environmental, health and safety, ISO = International Organization for Standardization; NDRC = National Development and Reform Commission; NOx = nitric oxide; OHSAS = occupational health and safety assessment services; PPP = public–private partnerships; PSD = private sector development; QEHS = quality, environment, health, and safety; RRP = report and recommendation of the President; SOx = sulfur dioxide. aThe rating scale for each results area is: Unsatisfactory, Less than Satisfactory, Satisfactory, Excellent, Not applicable. ”Excellent” reflects a high level of

achievement, usually exceeding targets. “Satisfactory” denotes a good level achievement in line with expectations and set targets. “Less than satisfactory” reflects a low level of achievement below expectations. “Unsatisfactory” reflects no achievement or significant negative effects. “Not applicable” is used if the project report and recommendation of the President does not mention this aspect in its presentation of envisaged project development results, project justification, ADB’s additionality, or the Design and Monitoring Framework itself, and if negative effects are not apparent. bThe overall rating scale is: Unsatisfactory, Less than Satisfactory, Satisfactory, Excellent.

Sources: 2016 Presentation Documents from Veolia Harbin and Veolia Jiamusi, 2015 Operations Report, 2015 Business Plan, 2015 Annual Environmental and Social Performance Report.

22 Appendix 3

INDUSTRY AND OPERATIONS REVIEW

A. Industry Review1

1. Background

1. Market. The district heating (or centralized heating) scheme in the People’s Republic of China (PRC) is being implemented in 16 provinces and 2 municipalities (Beijing and Tianjin). PRC is the second largest market in terms of heating networks after Russia; their shares in this market are 20% for PRC and 50% for Russia (the worldwide heating network market is estimated at 100 billion Euros). Since the West is sparsely populated and the South rarely needs heating during winter, heat demand is concentrated in the Northeast of PRC. In terms of heated floor surface, the 3 provinces of the Northeast Region (Heilongjiang, Jilin, and Liaoning) account for the largest share (approximately 35%). Hebei and Shandong represent approximately 20%, and the capital area of Beijing with Tianjin represents approximately 15%. The proportion by provinces is quite stable; however, the penetration rate of the centralized heating system will increase significantly in the near future (especially in Hebei and Shandong, which are the most polluting provinces) in order to dismantle polluting heating sources. 2. PRC is facing huge pollution problems. Comprehensive air pollution policies and targets have become the focus of the top leadership. The persistent media attention paid to the high levels of air pollution in major PRC cities like Beijing and Shanghai has pushed the government to ramp up efforts to address the problem. 3. The government has enforced the “air pollution control and responsibility” contract, and local governments have been implementing it through regulatory measures. The central government published a new emission regulation on 1 January 2015, while Harbin city government is issuing its specific regulation, which is expected to be more severe than the national standard. Jiamusi city government has enforced its emission regulation by setting a penalty for non-compliance of up to CNY100,000 per day for polluting companies. 4. In many provinces, the construction of new coal-fired power plants is prohibited. In addition, since early 2015, large industrial polluting companies (air emission and waste water), including 15,000 of the largest state-owned enterprises (SOEs), have their real-time data on air and water pollution accessible via mobile app; SOEs historically have been some of the least transparent and often greatest pollution offenders. Media pressure has increased and public opinion has become more sensitive to environmental issues. 5. Regulatory or policy changes. The central government issued a series of policies to encourage public–private partnerships (PPPs) in municipal services, including energy, water supply, environmental facilities, transport and other public services such as district heating. The State Counsel, the National Development and Reform Commission (NDRC) and the People’s Bank of China (the central bank) jointly issued the “Guidelines to promote Public–Private Partnership in public service sectors” on 22 May 2015. On 12 January 2016, the NDRC published a list of 2,125 PPP projects nationwide.

1Veolia Harbin and Veolia Jiamusi Business Plan for 2015.

Appendix 3 23

B. Operations Review 6. During the 2015/2016 heating season, Veolia Jiamusi increased its heating area by 1.7% from 11.4 million m2 during the 2014/2015 heating season to 11.6 million m2 in 2015/2016; Veolia Harbin increased its heating area by 19.4% from 16.2 million m2 during the 2014/2015 heating season to 19.3 million m2 in 2015/2016. Network expansion of 7.3 kilometers and the addition of 22 network substations during the 2015/2016 heating season contributed to Veolia Harbin’s growth. 7. Veolia Jiamusi did not develop its network as much as Veolia Harbin because of saturation from the two third-party cogeneration plants that supply heat to Veolia Jiamusi. Network failures increased a little in both Veolia Jiamusi and Veolia Harbin. 8. Energy efficiency for both Veolia Harbin and Veolia Jiamusi during the heating season 2015/2016 is highlighted below.

(i) Heat efficiency.2 Efficiency has improved by 13.6% for Veolia Jiamusi, and by 2.3% for Veolia Harbin. The improvement was due to the higher efficiency of the power plant and the well-managed network operations.

(ii) Electricity efficiency. Veolia Harbin’s efficiency improved 8.1% despite a 19.4%

increase in the heated area. (iii) Water loss. The improvement compared with the previous heating season is

13.2% in Veolia Jiamusi and 22.1% in Veolia Harbin. 9. The following main indicators show that operations in both Veolia Jiamusi and Veolia Harbin have had a relatively positive impact on the environment: (i) coal savings and CO2 savings are positive for both entities;3 (ii) SO2 and NOx emissions in Veolia Jiamusi dropped significantly (-66.7%) due to the huge coal consumption decrease at its Jinjiang boiler house; and (iii) even though coal consumption was increasing, SO2 and NOx emissions in Veolia Harbin decreased significantly: -11.6% for SO2 and -46.1% for NOx. This improvement largely resulted from the better quality control for limestone and the commissioning of the de-NOx project for both the heat-only boiler and the CHP boiler in Veolia Harbin. 10. The key operating indicators for the 2014/2015 and 2015/2016 heating seasons are summarized in Table A3.1.

Table A3.1. Selected Operational Indicators Heating Seasons 2014/2015 and 2015/2016

Items Veolia Jiamusi Veolia Harbin

2014/2015 2015/2016 2014/2015 2015/2016

Heating season 14 Oct-15 Apr 8 Oct-20 Apr 14 Oct-20 Apr 14 Oct- 21 Apr Heated area supplied (m2)

11,396,776 11,593,175 16,186,801 19,331,239

Primary network 86 90 92 99.3

2 The ratio calculates the energy used to heat a square meter in accordance with the exterior temperature.

3The calculation of coal savings is based on the difference of heating [KPI GJ/m2/DD], and not on the absolute value

of coal consumption each year. As the efficiency improved in 2014 compared with 2013, this resulted to coal savings for both Harbin and Jiamusi. CO2 savings is calculated in the same way.

24 Appendix 3

length (km)

Substations (number)

289 308 168 190

Day Degree (base 18ºC)

4,871 5,067 4,680 4,768

Heat efficiency (Wh/m2*DD)

27.4 23.7 25.2 24.6

Electricity Efficiency plants (Wh/G)

7,087 11,975 7,603 6,990

Water Efficiency (kg/m2*DD)

0.10 0.09 0.0046 0.0035

CO2 emissions (t) 510,702 480,513 822,921 957,903 CO2 savings (t) 17,012 61,078 32,977 17,874 *CO2 savings is defined as emissions avoided through Veolia’s heat supply. Source: Veolia Environnement Operations Report 2015.

Appendix 4 25

ENVIRONMENTAL IMPACT

I. INTRODUCTION

1. The project involves the construction and operation of two district heating companies (DHCs), including their power plants, boilers, primary heating networks, and substations. The DHCs, which are located in Jiamusi and Harbin in PRC, use clean and efficient technologies to supply heat to their target concession areas.

2. The project was categorized as financial intermediary (FI) for environmental impacts in accordance with ADB’s Environment Policy (2002). 1 Veolia (formerly Dalkia) formulated a corporate policy for the environmental and social management of its business, established an environmental management system (EMS) Deployment Plan for all its subsidiaries and started to implement it on 2 September 2008, and appointed a staff member in Beijing with responsibility for EMS implementation. This system covers: (i) the environmental policy; (ii) structure and responsibility; (iii) impact assessment; (iv) monitoring and reporting; (v) employee training; (vi) management review; and (vii) customer relationship. These have all been fully integrated into the overall operations at both the corporate and project site levels.

3. Veolia prepared the required Environmental Impact Assessment (EIA) Report, including an Environmental Management and Monitoring Plan, and obtained the necessary environmental clearances prior to project implementation.2 The two DHCs (Veolia Jiamusi and Veolia Harbin) were visited during the XARR mission from 4 to 7 April 2016. An evaluation of the implementation of the mitigating measures, monitoring activities, and the degree of compliance with environmental safeguards requirements was conducted for the two DHCs and their power plants. Table A4.1 summarizes the project components and other details of each DHC.

Table A4.1: Summary of Project Components and Associated Facilities

Project Details Veolia (Jiamusi) Urban Heating Co., Ltd.

Veolia (Harbin) Urban Heating Co., Ltd.

Incorporation 2007-4-5 2007-7-13 Corporate Structure Veolia Energy Asia Pte. Ltd.

(65%) Veolia Energy Asia Pte. Ltd. (95%)

Jiamusi Yongxu Environmental Protection Energy Co., Ltd. (35%)

Harbin Property Heating Group Co. Ltd. (5%)

Description Owner and operator of a district

heating network serving the city of Jiamusi, third largest city in Heilongjiang Province, under a 25-year concession contract.

Owner and operator of a district heating plant and network in the southwest of Harbin, capital of Heilongjiang Province

Primary Network Length (km) West Network:31 99.3

1 A project is classified as financial intermediary if it involves a credit line through a financial intermediary or an equity

investment in a financial intermediary. The financial intermediary must apply an environmental management system, unless all subprojects will result in insignificant impacts. 2 An Environmental Impact Assessment (EIA) for Veolia Harbin (in Chinese) was prepared by Harbin Institute of

Technology and Harbin Environmental Protection Science and Research Institute in 2003. A copy of the EIA Report and environmental approval (both in Chinese) has been submitted to ADB to satisfy the requirements.

26 Appendix 4

East Network: 59 Number of Substations West Network: 101 190 East Network: 207 Primary Network Temperature West Network:120

0C/70

0C 130

0C/70

0C

East Network: 950C/60

0C

Heating Season 15 October to 15 April (183 days) 20 October to 20 April (183 days) Heating Area (m

2) 11,593,175 19,331,239

Veolia Concession Area (km

2) 38.0 51.6

Heating Source West Cogeneration (owned by

third party) Main Plant (Phase 1: six (6) units of HOBs and Phase 2: CHP)

East Cogeneration (owned by third party)

Jinjiang Boiler House (operated during peak hours only)

Gas-fired Peak Boiler House

One (1) unit of Small Boiler House

Environment Protection Equipment and System

Fabric filter/dust removal Limestone de-SO2 system

De-NOx system Flue Gas Online System Dust Filter Coal Storage shed Coal yard equipped with wind and

dust suppression shield. HOB= heat-only boiler, CHP= combined heat and power. II. Mission Findings

4. Compliance with government permits and ADB’s requirements. Prior to actual operation of the two DHCs, the following government permits were secured: (i) Environmental Permit, (ii) Final Acceptance Permit, (iii) Water Permit, (iv) Wastewater Permit, and (v) Hazardous and Toxic Permits from the concerned municipal and provincial government offices in Heilongjiang Province. Veolia Harbin’s water requirement is provided by the municipal water supply; however, existing groundwater wells are used on a standby basis. The necessary groundwater extraction permits for those wells are now renewed for 2016. Veolia Harbin’s management confirmed that no complaints had been received from local residents about groundwater extraction and well interference. Based on the records, Veolia Harbin has received three penalties due to the following: (i) Phase I HOB’s operation without an approved production application in 2011; (ii) exceedance of HOB dust emission in 2014; and (iii) exceedance of HOB NOx emission in 2015. For these three violations, Veolia Harbin paid a total penalty of about CNY 120,000 to the local Environmental Protection Bureau. To meet the new and stricter emission regulations and standards for power plants, Veolia addressed the complaints through installation of environmental protection equipment such as: (i) de-NOx facility of Veolia Harbin Phase I; (ii) upgrade of CEMS for Veolia Harbin Phase I; and (iii) renovation of the dust filters of

Appendix 4 27

Veolia Harbin Phase 1 and boiler #1, #2, and #3 in Veolia Jiamusi.3 Plant visits and work inspections from the Heilongjiang Official, Municipal Party Committee, and Municipal Government have been regularly conducted in Veolia Jiamusi, and no major non-compliances have been observed since installation of the environmental protection equipment.4

5. QEHS Staff Resources, Training Programs and Awards. Quality, Environment, Health and Safety (QEHS) departments for both Veolia Jiamusi and Veolia Harbin have been established at corporate and project site levels. The QEHS organizational set-up consists of an EHS manager supported by five (5) technical staff with extensive experience in and exposure to environmental protection, health, and safety aspects of district heating plants. The EHS manager reports directly to the General Manager and Chairman. The QEHS department monitors the implementation of the (i) Occupational Health & Safety Management System (OHSAS) 18001-2007, (ii) ISO EMS 14001-2008, and (iii) ISO Quality Management System (QMS) 9001-2008. Veolia Jiamusi and Veolia Harbin have established and maintained a good relationship with the relevant government agencies such as the municipal and provincial Environmental Protection Bureau, in order to guarantee the legal operation of the company. A third party environmental monitoring agency, namely Jiamusi Environmental Protection Monitoring Station, has been hired to perform measurements and monitoring activities. Both Veolia Jiamusi and Veolia Harbin have made allocations in their budget for environmental management and monitoring activities. The environmental budget covers the maintenance and repair expenses for all environmental protection and monitoring equipment. Several health and safety training courses for management, workers, and subcontractors have been conducted, such as (i) fire alarm system checking, (ii) conducting fire evacuation drills, (iii) first aid, and (iv) safety awareness during construction and operation. In 2015, 336 training hours for Veolia Jiamusi and 1,745 hours for Veolia Harbin have been carried out. In 2009, Veolia Jiamusi was given the “Global District Energy Climate Award” issued by the International Energy Agency. Both Veolia Jiamusi and Veolia Harbin have received certifications and honors from local and international organizations from 2007 to 2015. To meet ADB legal requirements, between 2011 and 2015 the two DHCs have regularly submitted semi-annual monitoring reports on the status of environmental and social compliance. 6. Environmental Impacts. Environmental impacts were assessed to be minor, short term, and temporary in nature during construction. Updates on the installation of the pollution abatement equipment, such as the dust remover, de-NOx system, and limestone injection system, are reported in the semi-annual monitoring report. Construction performance was generally compliant with regulatory requirements. The mission confirmed that the project sites for both Veolia Jiamusi and Veolia Harbin are located in highly urbanized areas and no endangered flora or fauna has been affected. Primary and secondary network pipelines, which are buried, are located along the right-of-way of existing roads to avoid disturbing the ecosystem, and there was no change in land use. No protected area or sensitive habitat has been affected by the installation of the network pipelines from the district heating plants. During operation, the few issues identified related to air emission, groundwater abstraction, wastewater quality, solid waste (bottom and fly ash), occupational health and safety; environmental management and monitoring activities had to be undertaken to address these issues. The following paragraphs consider each of these issues:

3 The new emission regulations and standards for air pollution for thermal power plants (GB 13223-2011) took effect

in July 2014. Both Veolia Harbin and Veolia Jiamusi complied with the new emission regulations and standards and necessary corrective actions have been implemented. 4 Representatives from the local Environmental Protection Bureau conduct monitoring and site inspection for both

projects every quarter.

28 Appendix 4

a. Air Emissions. To comply with the requirement of the local Environmental Protection Bureau (EPB), Veolia Harbin has installed two Continuous Environmental Monitoring System (CEMS) units--one at the heat-only boiler (HOB) and the second at the Combined Heat and Power (CHP) boilers. Both CEMS monitor all parameters, such as dust, nitrogen oxides and sulfur oxides. In 2014, NOx emissions for both the HOB and CHP exceeded the limit; however, with the installation of the de-NOx facility in 2015, the NOX emission has met the required national standard. The level of dust emission exceeded the national standard in 2015, but with the replacement of the fabric filter, the standard has been met. The local EPB can access the company’s CEMS. Table A4.2 summarizes the CEMS monitoring results from 2014 to 2015.

Table A4.2: Summary of CEMS Monitoring Data

Power Plant Stack Date CEMS

Installed

CEMS Monitoring Data (mg/Nm3) 2014 2015

Dust NOx SOx Dust NOx SOx

Veolia Harbin Heat-Only Boilers (HOBs)

Stack 1 – 120m

1

June 2012

41 423 242 50 255 186

Local Standard (mg/Nm

3)

Heat-Only Boilers (HOB)

50 300 300 50 300 300

Evaluation Results

Exceeded the limit

Borderline (Note: New fabric filter has been installed in October 2015.)

CHP-Boiler 1 Stack 2 – 120m

June 2013

15 311 180 18 177 154 CHP-Boiler 2 CHP-Boiler 3 CHP-Boiler 4 Local Standard (mg/Nm3)

CHP 30 200 200 30 200 200

Evaluation Results

Exceeded the limit

1 The six (6) HOBs are interconnected into only one stack where the CEMS is installed.

For Veolia Jiamusi, the third party East and West cogeneration plants provided the heating resources and therefore are responsible for their own SO2 and NOX monitoring and reporting to the local EPB. No CEMS has been installed for Jinjiang Power Plant since its role is to supply heating resources during peak hours only. The peak period is the coldest time of the year, normally in December and January when the heat source capacity from the East and West cogeneration plants is not enough to cover the demand. The company hires the Jiamusi Environmental Protection Agency to conduct the sampling and monitoring of the air emissions. No ambient air quality monitoring is done by Veolia. Several factors, such as vehicle traffic, industrial plants, and construction activities, affect ambient air quality.

Appendix 4 29

b. Environmental Complaints and Corrective Actions. Veolia Harbin received some minor environmental complaints from nearby residences such as: (i) airborne coal dust pollution from the coal yard storage, which usually happened when there were sudden gusts of wind; and (ii) noise pollution from the heat substations. To address the complaints, a wind and dust suppression shield was erected around the perimeter of the coal yard storage in the East Gate and the coal yard is being regularly sprayed with water. Noise pollution has been addressed through: (i) adding sufficient lubricating oil to bearings, and (ii) providing silencers and mufflers to meet the allowable noise level.5 For Veolia Jiamusi, the reported dust pollution coming from the Jinjiang boiler house was solved through renovation of the three dust removers with a bag filter precipitator, which was completed in 2014, and of boilers #1 and #2, which was completed in 2015. No other complaints have been reported to ADB by Veolia Harbin and Veolia Jiamusi during the XARR mission.

c. Decommissioning of Existing Old Small Independent Boilers. The government provides the overall program and targets for the decommissioning of existing old small boilers. Implementation then becomes the responsibility of the DHCs. For Veolia Jiamusi, a third party contractor was hired to decommission and dismantle existing old small boilers and the support appurtenances (e.g. chimneys). The contractor was required to possess boiler decommissioning qualifications and follow the requirements as indicated in Veolia’s EHS Handbook for Sub-Contractors such as (i) preparing a safety construction plan that includes the health and safety of its workforce; (ii) implementing dismantling procedures only upon review and acceptance by Veolia Jiamusi management; (iii) prohibiting usage of asbestos in products, devices, and installations during construction or dismantling; and (iv) complying with national and local EHS laws and regulations including proper disposal of coal dust and contaminated waste. For Veolia Harbin, the arrangement with the government was that the previous owner of each existing old small boiler would be responsible for the decommissioning and dismantling activities. Records show that 237 small boilers with an average capacity of 3.6 tons/hour have been decommissioned in Veolia Harbin, and 166 small boiler houses in Veolia Jiamusi.

d. Ground Water Resource Abstraction. Veolia Harbin’s water requirement is provided by the municipal water supply; existing groundwater wells within the plant complex are used on a standby basis only. For Veolia Jiamusi, the main source of water for the Jinjiang boiler house is the existing five groundwater wells. The necessary groundwater abstraction permit for Harbin’s wells is valid until April 2021, while for Veolia Jiamusi, the permit for the operation of the five wells is valid until March 2020. No complaints have been made by local residents about the use of wells for the district heating plants. Water quality results showed that the parameters tested are within the local standards.

e. Wastewater Effluent Management and Recycling. Wastewater coming, for example, from the boilers, and equipment and machine washing, are treated at the wastewater treatment plant using the filtration, flocculation, and flotation method. The volume of sludge generated per year is 50 kg and it is disposed of at the sludge drying bed. In Harbin, all the wastewater was recycled inside the plants and no wastewater is discharged into the nearby receiving water. In Jiamusi, no wastewater treatment facility has been installed in the Jinjiang boiler house due to its limited operations (i.e. less than

5 Veolia Harbin monitors the noise level at the boundary of the power plant once a year. And for the last two years

(2015 and 2016) noise monitoring results are within the standards from 50 to 55 decibel.

30 Appendix 4

two months only); therefore, wastewater generation is very limited and normally used for the coal yard spraying. f. Solid Waste and Ash Disposal Management. During full operation (entire heating season of 183 days), Veolia Harbin generates 19,090 tons of bottom ash and 76,363 tons of fly ash annually. Three third party contractors have been hired by Veolia Harbin to collect, transport, and dispose of the ash using a sealed tanker to avoid re-suspension of coal dust during transportation.6 The contractor’s workers and vehicles need to be registered prior to issuance of the transportation pass. The handling and disposal of the ash has to be compliant with relevant laws and regulations. The contractor is accountable if there are environmental, health, and safety problems during the transportation and disposal of the ash. The contractor is responsible for testing the heavy metal of the bottom ash and also the fly ash, and then sells all the ash to third parties like cement manufacturers. For Veolia Jiamusi, 6,900 tons of combined bottom ash and fly ash are generated per year. A third party contractor collects and disposes of all the ash.7 Contracts for the third party contractors are renewed annually. Domestic waste generated by both power plants is also collected, transported, and disposed of by third party contractors.

7. Integrated QEHS Management System and Awards. The process for implementation of ISO QMS, ISO EMS, and OHSAS standards started in April 2011 at the corporate level and at all Veolia China’s entities. The integrated QEHS management system strengthens the standardization of the Veolia management on QEHS issues. Throughout its implementation, a list of strengths and weaknesses was drawn up in order for Veolia China and its entities to comply with the best international practices required by the management and the national and local laws, regulations, standards, and codes.8 Pollution control procedures and emergency response plans are in place and well documented. Both Veolia Jiamusi and Veolia Harbin have demonstrated their commitment to implementing the well-established management system and adhering strictly to the stipulated operational procedures and good practice. To improve the safety and efficiency of the boilers and network, continuous internal audit, safety inspections, and regular maintenance activities are conducted by EHS staff. Major maintenance activities consist of (i) repair and replacement of aging electrical equipment and wires, (ii) repair of lights for maintenance sites, and (iii) positioning of new valves at an appropriate height and direction. In 2015, there were no reported incidents such as fires, explosions, or major accidental gas releases into the environment.

III. CONCLUSIONS AND RECOMMENDATIONS

8. Based on a review and evaluation of available safeguard documents and the site visit, the national and ADB requirements related to environmental and social impacts of the district heating facilities, including the power plants, are considered to have been adequately met.

6 The three third party contractors hired by Veolia Harbin management are: (i) Jun’er Haidan, (ii) Mingyangdianli and (iii) Yatai Group and their contract agreements are renewable every year. 7 The third party contractor hired by Veolia Jiamusi management is Jiamusi Yangguang Weiye Transportation Company and the contract agreement is renewable every year. 8 Both Veolia Jiamusi and Veolia Harbin have a well-organized environmental structure and management system in accordance with the following requirements: (i) Environmental Management System Certificate (GB/T24001-2004/ISO14001:2004), (ii) Conformity of Occupational Health and Safety Management System Certificate-GB/T28001-2001/OHSAS 18001:2007 and (iii) Quality Management System Certificate (GB/T19001-2008/ISO9001:2008). Veolia Harbin and Veolia Jiamusi strictly follow Veolia’s standard management system and operational procedure requirements in their daily operations.

Appendix 5 31

SOCIAL IMPACT A. Project Overview

1. ADB provided a loan to Veolia for the establishment, acquisition, rehabilitation, and operation of two DHCs, including power plants, boilers, heating networks, and substations, located in the cities of Jiamusi and Harbin. Veolia would use clean and efficient technologies to supply heat to the target concession areas. ADB financing was utilized to support the improvement of two district heating companies: (i) Veolia Jiamusi, and (ii) Veolia Harbin. These companies were reviewed during the XARR mission from 4-7 April 2016. The project was classified B/C under the Asian Development Bank (ADB) involuntary resettlement policy (1995) and C under the ADB Policy on Indigenous Peoples (1998).

B. Review Findings

2. Social Safeguards. Local governments carried out land acquisition prior to award of concessions to Veolia to manage the rehabilitation, construction, operation, and maintenance of the district heating companies in Jiamusi and Harbin. Expansion of district heating network pipelines was carried out on existing public roads. New substations were generally built using the existing basements, the locations of the old boiler houses, or on state-owned land freely provided by the municipal governments and developers; the exception was four substations in Jiamusi where houses were leased from private individuals. There are no pending issues on land acquisition and involuntary resettlement impacts. Harbin and Jiamusi are cities with Han, Man and Korean ethnic groups and no group is excluded from the areas served by the project. The XARR mission confirms that no indigenous peoples were affected by the project.

3. Veolia Harbin. ADB’s loan, initially disbursed in 2009, assisted in Veolia Harbin’s Phase 1 and Phase 2 development, which included the construction of boilers, upgrading and expansion of heating network pipelines, and establishment of substations. The Harbin Heating Plant occupies an area of 440 mu,1 which had been acquired in 2005 by Nangang District Land Resource Bureau and other government agencies for the Yangguang Company. The Certificate of Land Use Right on State-Owned Land was issued in August 2005. The boilers were constructed within the existing land acquired for the main plant. The upgrading and expansion of the Harbin district heating pipelines system was carried out under existing public roads or together with the construction of the new roads in Nangang District, mainly in Haxi New Development Zone. Veolia Harbin paid road digging fees to the Construction Bureau and restored the road after laying the pipelines. Veolia Harbin’s substations used the existing basements or the locations of the disconnected old boilers. For newly built substations, state-owned land was freely provided by the clients. 4. The land acquisition in 2005 affected the Qianjin Village of Chaoyang Township. The land compensation and resettlement subsidy was 16 times the annual average output value (AAOV), which was 40,533 yuan/mu for vegetable land and 29,760 yuan/mu for dry land.2 The affected village is located near the urban area and is included in the new zone for urbanization. Agricultural income accounted for only 20% of the total income per capita in this village. The

1 A mu is a unit of land measurement in the PRC, the size of which varies with location but is commonly placed at

806.65 square yards (0.165 acre, or 666.5 square meters). Source: The Encyclopedia Britannica. Mou. http://www.britannica.com/science/mou

2 Calculated based on Land Administration Law of the People’s Republic of China (effective from January 1, 1999), Land Administration Regulation of Heilongjiang Province (effective from January 1, 2000), and Notice of Annual Average Output Value of farmland issue by Harbin People’s government (Hazhengfa [2000] 21).

32 Appendix 5

affected villagers lost 0.4 mu of farmland per capita, which is 20% of the 2 mu average per capita land holding in the village before land acquisition. Thus, the land acquisition led to an income loss of 8% per capita on average in 2005, and the impact was minor. All compensation was paid to the affected villagers by August 2005, before land acquisition activities started. During the XARR mission, interviews with the officials of Chaoyang Township Government verified that all domestic procedures for land acquisition had been completed and they had not received any grievance from the affected villagers. 5. Veolia Harbin proceeded with their Phase 3 development without ADB financing. Their phase 3 included the construction of a railway, connecting the plant to the Southern Harbin Station, which is envisaged to be more efficient in transporting coal for the boilers than the current means of transportation through trucks. Land was acquired for the railway, and compensation for land, crops and trees was paid following the Notice of Implementation Measures for Collective Land Acquisition and Resettlement ([2010]No.17). All compensation has been paid and there is no remaining issue.

6. Local governments (Nangang and Xiangfang District Government) were responsible for land acquisition and resettlement under PRC’s laws and regulations. The relevant village committee, land resource bureau, labor and social security bureau, and civil affairs bureau participated in implementation, supervision, and monitoring of resettlement (e.g., delivery of entitlements, restoration of incomes, and other economic measures). The company received the Certificate of State-owned Land Use Right from the local government for the plant; this is the final approval document in PRC, which means that all domestic procedures are completed and there is no remaining issue. The institutional arrangements for land acquisition and resettlement were well organized and efficient.

7. Leaders of the affected Qianjin Village and some affected villagers confirmed that stakeholder participation and consultation took place throughout the project cycle. Various stakeholders, including affected households, affected villages, local government, and design institutes, participated in formulating the resettlement and relocation plan, compensation fund delivery, and income rehabilitation programs during land acquisition for the plant and railway. The rent for the leased land for the railway was finalized based on negotiation.

8. Veolia Jiamusi. Veolia signed in 2007 a concession agreement with the municipality of Jiamusi for 25 years to manage the former municipal heating company’s network established in 1984. Veolia set up with the municipality government a new joint venture named Veolia Jiamusi. The joint venture arrangement included the transfer of the municipal heating company’s assets (including the Jinjiang boiler, heating pipeline network, and other equipment) and 575 employees to the new joint venture company in 2007. In August 2011, the Jiamusi Government issued the state-owned land certificate to Veolia Jiamusi for the Jinjiang boiler house and land measuring 9,170 m2.

9. The office building of Veolia Jiamusi is being leased from a private person for 10 years from 2007 to 2017. In 2010, there was a court issue between the two parties; Veolia Jiamusi was alleged to have not paid the lease while the owner was alleged to have failed to carry out building repairs and pay related taxes and fees. In June 2013, the two parties settled the issue with Veolia Jiamusi paying the rent from June 2011 to June 2013 with interest, and renegotiating the lease for June 2013 to June 2017.

Appendix 5 33

10. Using ADB financing, Veolia Jiamusi upgraded and expanded the primary heating network totaling 70 kilometers and connected approximately 560 kilometers of secondary network. The heating network digging was aligned with the design of the local government and carried out within the existing public roads. No land was acquired. Before digging started, the company paid the digging cost and road recovery expenses to the Urban Construction Management Bureau. The contractor and Veolia’s Engineering Department met with the people and businesses on the temporary impact of the digging to be carried out. No disturbance fee was paid as people understood that the temporary disturbance was required to improve the city’s heating service.

11. Veolia Jiamusi also invested in the reconstruction and new construction of substations with heat exchanger units. As of December 2015, Veolia Jiamusi has a total of 308 substations – 241 occupy the land allocated by the land developers or municipal government for free, 63 are using the location of the dismantled connected small boiler houses, and 4 substations occupy properties leased from private individuals.

12. In 2008, the government asked Veolia to build the Sihe boiler house to provide a heating system to the Anju community. This facility was built without ADB financing.

13. With regard to impacts on indigenous peoples, Harbin is not an ethnic minority concentrated city. Ethnic minorities account for 6.6% of the total population. The two villages affected by permanent land acquisition are Han villages. While the Man are the main ethnic minority group, they speak the same language as the Han and have the same socio-economic profile. At the plant, there are five Hui Muslim employees. As there is no Muslim canteen, Veolia Harbin provides a subsidy to them. Jiamusi city is inhabited by Han, Korean, and Manchu ethnic groups, and there is no discrimination as to who benefits or has access to the heating services provided by the project. The Harbin and Jiamusi projects did not trigger ADB’s Policy on Indigenous Peoples (1998).

14. Other Social Dimensions. Labor. The construction and operation of the Veolia Harbin plant contributed to the creation of local employment opportunities. During the construction of the heat-only boilers and the CHP plant, 749 local workers were employed, while 3,970 were employed during the expansion of the heating networks. As of March 2015, Veolia Harbin has 633 regular employees, of which 19% are women. Free dormitory, meal, and shuttle bus are provided to employees.

15. Construction and upgrading of the Veolia Jiamusi primary networks created over 100 jobs for local workers, of which 5% were women. For the operation of the heating network, Veolia Jiamusi employs about 620 employees, 575 of whom were transferred from the old heating company. When Veolia entered into the new joint venture in 2007, the old heating company had about 700 employees. The government created a team from relevant agencies (including those from labor, finance, and construction bureaus) to handle the transition for the transfer and absorption of the affected employees. The human resources departments of the old heating company and the new Veolia Jiamusi made an assessment of the human resource structure and skills. From the old heating company, 575 employees have opted to transfer to Veolia Jiamusi. During the mission, one engineer from the Jinjiang boiler house shared that he used to be with the old heating company and he volunteered to be absorbed by the new company because of the higher salary and better benefits including annual leave, bonuses, insurance, and a housing fund.

34 Appendix 5

16. Both Veolia Harbin and Veolia Jiamusi have an Employee Handbook and Human Resource Policy that complies with the country’s labor laws as well as with the relevant core labor standards, which prohibit child labor, forced labor, and discrimination. The company provides social benefits such as pension, medical insurance, maternity insurance, unemployment insurance, work injury insurance, and social housing fund. Veolia also provides commercial major disease insurance and traffic accident insurance for employees. Employees interviewed believe that they are provided with benefits as mandated by the law and higher salaries compared with other competitor companies, and appreciate the regular training and fair competition. National identification cards are also required for all types of workers to ensure that the project is not employing children during construction and operation. During the peak heating period, Veolia also employs some seasonal workers through a qualified labor dispatch company accredited by the Labor Bureau.

17. During construction and operation, dedicated Veolia staff from the legal and HR departments carried out monitoring to ensure that labor conditions were compliant with the local laws. In Harbin, the Labor Bureau assigned staff to monitor performance including labor conditions. Moreover, the company confirmed that the contract with the contractors also included a clause on compliance with the national labor laws and the required health and safety standards; any noncompliance, including nonpayment of mandated wages or benefits, found by the government or Veolia would entail deductions in the contractors’ guarantee bond.

18. Both Veolia Harbin and Veolia Jiamusi have established trade unions covering all employees. The union serves as an avenue for staff to share and suggest how to improve labor relations in the company. It also supports activities for workers’ social welfare including festival benefits, subsidies, and assistance to needy employees, and organizes social and sports activities. A worker grievance mechanism also exists on three levels: workshop, plant, and HR department (headquarters). Consultations on regulations related to workers including shift arrangements, employee attendance, canteen, personal protective equipment, and salary and benefits are done through disclosure on bulletin boards to get comments from employees.

19. The government’s mandate to connect areas to the municipal heating system and close small boiler houses affected the workers of these boiler houses. Measures were implemented for these affected workers to minimize job displacement and facilitate their re-employment. In 2015, Veolia Jiamusi closed down 126 small boiler houses affecting over 700 workers. A total of 197 regular workers were either reassigned to another job in the company or absorbed in other regional boiler houses where the central district heating network is not yet connected. Meanwhile, about 50 workers who were near retirement age opted to apply for advanced retirement. The remaining seasonal workers, whose contracts are from October to April each year, were provided with vacancy and re-employment information by the administrative districts.

20. For Veolia Harbin, Harbin Haxi District Reconstruction Administration Office informed the owners before the small boilers were dismantled so that either they or the property management company could consult the affected workers. From 2009-2015, 206 boiler houses were disconnected, affecting almost 500 workers, including 274 regular employees and 184 seasonal employees. Some owners assigned their regular employees to other positions, such as guards or car washers, or to other units. For the seasonal workers whose contracts only run from October to April, the Local Labor & Social Security Bureau helped these affected seasonal workers by sharing employment information and giving them priority when there were job vacancies. According to the interviews and surveys conducted by Veolia Harbin, all of them have found jobs as there are a lot of seasonal job opportunities in Harbin. The Harbin Haxi

Appendix 5 35

District Reconstruction Administrative Office confirmed that they have not received any employment-related complaint from these workers. The regular employees near retirement age opted to avail of their advanced retirement benefits.

21. Consultation and Grievance Mechanism. To obtain feedback on the heating services or complaints from customers, both Veolia Harbin and Veolia Jiamusi have their respective call centers open 24/7 to ensure a quick response. Contact numbers are published in the newspapers and on flyers, and broadcasted on the radio to ensure that customers are aware of how they can convey any concerns regarding the heating district services. Based on interviews with the call center staff, most of the calls received pertain to inquiries about bills and requests to increase the heating temperature. All inquiries and complaints are logged in the system and then referred to the relevant department.

22. With regard to complaints from communities, Veolia Jiamusi shared that in 2013 one person visited the Veolia Jiamusi office and met with the Customer Services Supervisor to complain about the dust coming from the Jinjiang boiler. The issue was raised to the QEHS department and, in 2014, the concern was addressed through the renovation of the three dust removers into a bag filter precipitator. The mission met with a woman village leader and she confirmed that the community near the Jianjiang boiler had no more complaints related to dust and noted that the heating service from Veolia Jiamusi is reliable, more environment friendly compared with the small boilers, and less costly, as they do not need to buy additional fuel to supplement heating for their households. In Veolia Harbin, a number of residents from nearby new residential buildings approached the plant and raised concerns about the coal dust coming from the coal yard. The grievance was relayed to the grievance unit under the commercial department. The commercial department created a team to address the issue and this was addressed by installing a wind and dust suppression shield within the perimeter of the coal yard. While the two separate complaints were addressed by the Jiamusi and Harbin plants, the grievance process can still be enhanced by adequately documenting the whole process from when the complaint was received, including details of the dialogue with the complainants, and integrating a feedback mechanism to complainants on the plan of action to address the complaints.

23. Corporate Social Responsibility (CSR). Veolia Harbin and Veolia Jiamusi build their relationship with the communities they serve through their corporate social responsibility programs.

• Veolia Harbin has established a long-term support relationship with the Harbin Children Welfare Institute and Harbin Elder Welfare Institute by (i) providing donations from Veolia employees’ contributions; (ii) organizing festival activities; and (iii) providing a special operation and maintenance service. Before each heating season, Veolia Harbin assists special groups (i.e., those eligible to obtain a subsidy from the government) with their applications to the Heating Management Office. These groups include households that (i) are receiving the Minimum Living Standard Subsidy; (ii) have unemployed family members and are receiving a subsidy from the civil affairs bureau; and (iii) have unemployed family members laid off from state-owned factories. Poor retired army soldiers enlisted before 1949 constitute another special group.

• Veolia Jiamusi undertakes activities to reach out to the communities it serves. An annual conference with community leaders is conducted in the Veolia Jiamusi office to discuss issues related to heating services. The company also visits communities to conduct an information and education drive on simple maintenance tips on the heating system, how

36 Appendix 5

to diagnose problems and improve heating in the house. A volunteer team was also organized to help the elderly and disabled maintain and improve their heating system for free. Moreover, the company also engages with community women to sew and sell curtains for use by the company to help them earn additional income. Other CSR activities undertaken also include donations to poor households during the spring festival and donations to the Heilongjiang province for the flood rehabilitation program.

C. Conclusions and Recommendations

24. Land acquisition and resettlement were implemented well and in accordance with ADB’s Involuntary Resettlement Policy (1995) and PRC’s laws and regulations. Consultations with affected communities and people were conducted by local governments throughout the implementation of land acquisition. All agencies related to land acquisition worked proactively to solve any concerns raised by affected communities. The grievance redress mechanism for the land acquisition worked well, and there are no outstanding issues according to the local officials. Veolia Harbin and Veolia Jiamusi officials have confirmed that there are no pending unpaid compensation or legal issues related to the land and other assets.

25. Complaints and feedback from customers are covered and documented through the call centers for both Veolia Jiamusi and Veolia Harbin. However, the grievance redress mechanism for communities and other stakeholders can be further enhanced by (i) improving the documentation process (logging complaints, documenting the consultation process with the complainants), and (ii) establishing an indicative timeframe for each of the steps in the grievance process. The grievance mechanism may also be improved by including in its process a feedback mechanism to the complainants to assure them that their concerns have been heard and measures will be identified to address legitimate concerns.

26. The construction and operation of the plants and pipelines contributed to new jobs, offering local employment to communities. Activities during the construction were monitored by government agencies and Veolia staff. A human resource policy, covering the company’s operations and aligned with the national labor laws, has been implemented. Staff interviewed expressed satisfaction with their salaries, benefits, and training provided by the company. For the workers affected by the closure of the small heat-only boilers, local government and affected agencies have worked together to address the re-employment issues to comply with the China Labor law (1994). Measures were implemented for these affected workers by the local governments and their employers to minimize job displacement and facilitate workers’ re-employment, and ensure all can achieve equal, or better, income and living standards.

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