Completion Report

Project Number: 49232–001 Loan Number: 3356 September 2018

People’s Republic of China: Beijing–Tianjin–Hebei

Air Quality Improvement–Hebei Policy Reforms

Program

This document is being disclosed to the public in accordance with ADB’s Public Communications Policy 2011.

CURRENCY EQUIVALENTS

Currency unit – yuan (CNY)

At Appraisal At Project Completion 2 September 2015 3 June 2016

CNY1.00 = $0.157 $0.152 $1.00 = CNY6.364 CNY6.567

ABBREVIATIONS ADB – Asian Development Bank BTH

DMF HCAAP HPG km LIBOR PBL PM2.5 PRC PATA

– – – – – – – – –

Beijing–Tianjin–Hebei design and monitoring framework Hebei Clean Air Action Plan Hebei provincial government kilometer London interbank offered rate policy-based loan particulate matter less than 2.5 micrometers in diameter People’s Republic of China policy advisory technical assistance

NOTE

In this report, “$” refers to United States dollars.

Vice-President Stephen Groff, Operations 2 Director General Amy S. P. Leung, East Asia Department (EARD) Director Ying Qian, Public Management, Financial Sector and Regional

Cooperation Division, EARD Team Leader Bo An, Public Management Specialist, EARD Team Members Maria Pia Ancora, Climate Change Specialist, EARD

Consuelo Javier, Project Analyst, EARD Lin Lu, Senior Operations Coordination Specialist, Sustainable Development and Climate Change Department (SDCC)

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. PROGRAM DESCRIPTION 1

II. DESIGN AND IMPLEMENTATION 2

A. Program Design and Formulation 2 B. Program Outputs 3 C. Program Costs and Financing 5 D. Program Schedule 5 E. Implementation Arrangements 5 F. Technical Assistance 5 G. Safeguards 5 H. Monitoring and Reporting 6

III. EVALUATION OF PERFORMANCE 6

A. Relevance 6 B. Effectiveness 8 C. Efficiency 10 D. Sustainability 11 E. Development Impact 11 F. Performance of the Borrower and the Executing Agency 11 G. Performance of Cofinanciers 12 H. Performance of the Asian Development Bank 12 I. Overall Assessment 12

IV. ISSUES, LESSONS, AND RECOMMENDATIONS 12

A. Issues and Lessons 12 B. Recommendations 13

APPENDIXES 1. Design and Monitoring Framework 15 2. Status of Compliance with Loan Covenants 18 3. Policy Matrix 20 4. Country Economic Indicators 24

BASIC DATA A. Loan Identification

1. Country People’s Republic of China 2. Loan number and financing source 3356-PRC; ordinary capital resources 3. Program title Beijing–Tianjin–Hebei Air Quality

Improvement—Hebei Policy Reforms Program

4. Borrower People’s Republic of China 5. Executing agency Hebei provincial government 6. Amount of loan $300,000,000 7. Program completion report number

1731

8. Financing modality Policy-based loan B. Loan Data

1. Appraisal – Date started – Date completed

7 September 2015 15 September 2015

2. Loan negotiations – Date started – Date completed

5 November 2015 10 November 2015

3. Date of Board approval 10 December 2015 4. Date of loan agreement 23 February 2016 5. Date of loan effectiveness – In loan agreement – Actual – Number of extensions

20 May 2016 20 May 2016 Not applicable

6. Project completion date – Appraisal – Actual

31 December 2016 3 June 2016

7. Loan closing date – In loan agreement – Actual – Number of extensions

30 June 2017 3 June 2016 0

8. Financial closing date – Actual

3 June 2016

9. Terms of loan – Interest rate – Maturity – Grace period

LIBOR–based lending facility 15 years 3 years

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10. Disbursements

a. Dates

Initial Disbursement 3 June 2016

Final Disbursement 3 June 2016

Time Interval 0

Effective Date 20 May 2016

Actual Closing Date 3 June 2016

Time Interval 14 days

b. Amount ($’000)

Category

Original Allocation

(1)

Increased during Implementation

(2)

Cancelled during

Implementation (3)

Last Revised

Allocation (4=1+2–3)

Amount Disbursed

(5)

Undisbursed Balance (6 = 4–5)

Total 300,000 0.000 0.000 300,000 300,000 0.00

C. Program Data

1. Program cost ($)

Cost Appraisal Estimate Actual

Foreign exchange cost 300,000 Local currency cost 0.000 Total 300,000

2. Cost breakdown by project component ($’000)

Component Appraisal Estimate Actual

ADB Financed Single Tranche

300,000

300,000

Total 300,000 300,000

3. Program Performance Report Ratings

Implementation Period Ratings

10 December 2015–30 June 2017 No ratings in e-Operations for program loans

D. Data on Asian Development Bank Missions

Name of Missiona Date No. of

Persons No. of

Person-Days Specialization of

Membersb

Consultation Consultation Consultation Senior-level official dialogue and consultation

19–20 March 2015 14–15 May 2015 17–19 Jun 2015 21–23 July 2015

5 8 6

11

10 16 18 33

b, c, e, g, k c, d, e, f, h, i, j, l

c, d, h, i, k, l a, b, c, d, e, f, h,

i, j, k, l

iii

Name of Missiona Date No. of

Persons No. of

Person-Days Specialization of

Membersb

Tripartite meeting and consultation Fifth consultation Fact-finding Loan review 1 Loan Review 2 Project completion review

31 July–4 Aug 2015 24–27 Aug 2015 7–15 Sep 2015

1 July 2016

27 Sep 2016 27–29 June 2018

7 7 9 4 2 4

35 28 53

4 2

12

c, d, e, f, i, j, k c, d, f, i, j, k, l

a, c, d, e, f, i, j, k, l

g, e, j, m g, m

g, e, m, I

a = deputy director general, b = director, c = senior urban development specialist, d = senior transport specialist, e = energy specialist, f = financial sector specialist, g = public management specialist, h = social sector specialist, i = urban development specialist, j = senior project officer, k = consultants (environment, social development, transport, and project coordination), l = climate change specialist, m =

I. PROGRAM DESCRIPTION

1. Beijing municipality (Beijing), Tianjin municipality (Tianjin), and Hebei province (Hebei) make up the economically important Beijing–Tianjin–Hebei (BTH) region in the northern part of the People’s Republic China (PRC). The region is home to 109.2 million people and generates a gross domestic product (GDP) of about CNY6.2 trillion, accounting for 10% of national GDP in 2013. The BTH region is an engine of the PRC’s socioeconomic development, but poor air quality jeopardizes sustainable growth. 2. Air pollution is a common environmental problem in many developed countries. However, the BTH region in the PRC is confronted with a unique challenge. As part of a fast-developing, upper-middle-income country, the BTH region has experienced unprecedented rates of growth, but is adversely affected by rising air pollution resulting from rapid industrialization, urbanization, and motorization. The PRC government has been scaling up its efforts to combat regional environmental challenges. In 2013, the State Council issued the Action Plan on Prevention and Control of Air Pollution, 2013–2017.1 In the BTH, the three local governments each formulated their own air pollution prevention and control plan for the same period. Under the 5-year Hebei Clean Air Action Plan (HCAAP),2 the Hebei provincial government (HPG) committed to reduce by 2017 (i) inhalable particulate matter of less than 2.5 micrometers in diameter (PM2.5) concentration in the province by 25% from 2012 level, (ii) steel-making production capacity by 60 million tons, (iii) cement production capacity by 60 million tons, (iv) coal consumption by 40 million tons, and (v) glass production capacity by 38 million weight boxes.

3. With its vast periurban rural hinterland, Hebei was lagging in terms of regional development compared with Beijing and Tianjin. Its gross domestic product per capita in 2014 was only 40% of Beijing’s and 38% of Tianjin’s. About 88% of the 3.1 million poor people living under the national poverty line in the BTH region lived in Hebei. Its economy relied heavily on polluting industries—coal-fired power generation, coking, iron and steel making, and cement and glass production—while Beijing and Tianjin mainly depended on the service sector. In 2014, seven of the 10 most air-polluted cities in the PRC were in Hebei. Hebei accounted for more than 80% of primary PM2.5 emissions in the BTH region. To improve air quality in the BTH, addressing Hebei’s problems was a priority, along with improving coordination of air quality improvement efforts in the region. 4. The HPG had difficulty mobilizing financing to implement the HCAAP since 2013. Hebei’s financing needs, combined with the introduction of HCAAP and urgent air pollution mitigation requirements, resulted in a fragmented policy framework for Hebei. To remove policy constraints and support the province’s long-term development, Hebei needed to introduce a basic and comprehensive air pollution control policy framework and strengthen the institutions in charge of monitoring and enforcing them. While reducing the capacity of polluting industries is an effective measure to mitigate air pollution, policy reform must be considered in the context of medium- to long-term industrial transformation and inclusive socioeconomic development. Industries in Hebei provide a number of job opportunities to local skilled and unskilled laborers. Air pollution control measures need to consider social aspects as its integral part because industrial transformation may not be successful without an adequate and inclusive social protection system and employment opportunities to support affected laborers during the socioeconomic transition.

1 Government of the PRC. 2013. Action Plan on Prevention and Control of Air Pollution, 2013–2017. Beijing. 2 Government of Hebei Province.2013. Hebei Clean Air Action Plan, 2013-2017. Shijiazhuang.

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5. The Asian Development Bank (ADB) has been actively supporting the PRC to promote Hebei’s economic development and air quality control through loans, introduction of international development experience, and technology transfer; ADB has been an important development partner of Hebei since 1998.3 Through policy advisory technical assistance (PATA) during 2002–2005, ADB supported the design of Hebei’s provincial development strategy to accelerate its economic integration with Beijing and Tianjin. This was the first provincial development strategy that ADB supported in the PRC. The strategy emphasized the need for structural reforms to promote ecological and environmental sustainability. ADB invested in energy efficiency improvement and emission-reduction projects in Hebei. In 2014, poor air quality in the BTH region indicated that past pollution control measures were insufficient. Since mid-2014, policy dialogues between ADB and the HPG have intensified. Through these intensified dialogues, both ADB and HPG have identified measures that will contribute to building a framework to promote coordinated action and investment to reduce air pollution. Hebei required urgent policy actions in 2015–2016 to redirect future air pollution control actions and investments. These policy reforms required substantial budgetary support. ADB approved a $300 million policy-based loan (PBL) to support the HPG on 10 December 2015. 4 KfW contributed cofinancing of $167 million to the ADB program. The World Bank provided $500 million to support Hebei’s clear air action plan through a program-for-results lending modality in 2016–2017. Loans from international development institutions accounted for one-fourth of the HPG’s total investment in air quality improvement during 2013–2017. The ADB–KfW and World Bank programs were closely coordinated to ensure complementarity. 6. The program impact was reduced air pollution and improved public health in the BTH region. The outcome was a strengthened framework for incremental policy and investment actions in Hebei to improve air quality in the BTH region. The outputs were composed of 17 policy actions related to adjusting the energy structure, updating environmental monitoring and enforcement systems, and promoting employment for inclusive industrial transformation.

II. DESIGN AND IMPLEMENTATION A. Program Design and Formulation 7. The program was designed to support the PRC’s Twelfth Five-Year Plan, 2011-2015 and Thirteenth Five-Year Plan, 2016–2020 on environmental improvement. The program was aligned with (i) ADB’s country partnership strategy for the PRC, 2016–2020,5 (ii) ADB’s paper on a new partnership with upper-middle-income countries, 6 and (iii) ADB’s operational directions for investing environmental goods and services for future economic growth.7

3 ADB. PRC: Hebei Provincial Development Strategy. https://www.adb.org/projects/documents/hebei-provincial-

development-strategy; ADB. 2009. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Administration of Grant to the People’s Republic of China for the Hebei Small Cities and Towns Development Demonstration Sector Project. Manila; and ADB. 2011. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People’s Republic of China for Hebei Energy Efficiency Improvement and Emission Reduction Project. Manila.

4 ADB. 2015, Report and Recommendation of the President to the Board of Directors: Proposed Policy-Based Loan to the People’s Republic of China for the Beijing–Tianjin–Hebei Air Quality Improvement—Hebei Policy Reforms Program. Manila.

5 ADB. 2016. Country Partnership Strategy: People’s Republic of China, 2016–2020—Transforming Partnership: People’s Republic of China and Asian Development Bank. Manila.

6 ADB. 2015. Clients–Contributors–Collaborators: A New Partnership with Upper Middle-Income Countries. Manila; 7 ADB. 2013. Environment Operational Directions 2013–2020: Promoting Transitions to Green Growth in Asia and the

Pacific. Manila.

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8. The PRC officially requested ADB’s financial assistance during an ADB country programming mission from 4–6 August 2015, as an additional component of the ADB Country Operations Business Plan, 2015-2017. Air pollution control and abatement in the BTH region is complex. The HPG required urgent policy actions during 2015–2016 to redirect future air pollution control actions and investments. The reform approach had three areas: (i) transferring Hebei’s economic structure to be more environment-friendly; (ii) holistically improving environmental regulation, monitoring, and enforcement in Hebei; and (iii) promoting social inclusiveness. The policy actions were designed to ensure that affected workers would not be disadvantaged under the industrial transformation. The single-tranche PBL was formulated considering ADB’s then-ongoing policy work with the Hebei authorities, and the need for channeling financial resources to implement the HCAAP. The loan agreement was signed on 23 February 2016, and the loan proceeds were disbursed to Hebei on 3 June 2016—after the HPG had completed the policy actions. B. Program Outputs 9. The program outputs were (i) policies and actions to reduce air pollution from key sectors issued and approved, (ii) environmental policy and institutional framework for implementation strengthened, and (iii) employment promotion for inclusive industrial transformation enhanced. The design and monitoring framework is in Appendix 1. The program had 17 policy actions, as detailed in the policy matrix (Appendix 3). All policy actions were complied with before the loan proceeds were disbursed. 10. Output 1: Policies and actions to reduce air pollution from key sectors issued and approved. Under this output, the program aimed to accelerate the switch from coal to cleaner sources of energy in Hebei by adopting nine policy actions to address aspects of energy supply and demand. On the supply side, policy dialogue identified early deployment of natural gas as an important trigger to encourage the switch away from coal. HPG issued one natural gas development plan, supported by sufficient financing, to accelerate the development of cleaner energy in Hebei. Another policy was designed to promote the production of synthetic gas recycled from coke oven flue gas. On the demand side, the HPG improved the monitoring and supervision of municipal coal consumption reduction activities by imposing annual quantitative targets for all municipal governments during 2015–2017. Small, obsolete, and energy-inefficient coal-fired boilers were phased out and replaced with centralized heating systems and boilers using cleaner energy. The policy was accompanied by a comprehensive study of financial and market-based mechanisms to support the measures. 11. Requested by ADB, HPG conducted policy reform to reduce seasonal biomass burning and promote clean energy in rural areas. In 2014, 86.5% of biomass stalk was collected by farmers, but only 10% of that is used to recover energy. The HPG designed an integrated policy package to (i) ban biomass burning to reduce air pollution, (ii) promote the beneficial use of biomass resources to replace coal, (iii) commit to a higher energy recovery target and set clear objectives, and (iv) allocate sufficient financial support to implement the policy package. 12. Local consultants were engaged under TA-PRC: Study on the Coordinated Development of Beijing–Tianjin–Hebei Project to assist HPG with implementation of the broad range of policy actions.8 The consultants’ activities under this TA included a study to collect basic data and prepare an evaluation report on the program’s 17 policy actions in the BTH region. In July 2017,

8 ADB. People’s Republic of China: Study on the Coordinated Development of Beijing–Tianjin–Hebei Project (PRC:

TA 9042). https://www.adb.org/projects/48462-001/main.

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the consultants submitted the evaluation report to ADB. Under Output 1, only one target was missed. Percentage of collected agricultural stalk for energy recovery under “Policy Action 1.3: Reduction of seasonal stalk-burning and promotion of clean energy in rural area” should reach 12% in 2016 and 15% in 2017 (baseline = less than 10% in 2014). The percentage of collected agricultural stalk for energy recovery did not increase as expected; instead, it declined from 10% in 2014 to 5.1% in 2016 and 4.9% in 2017. With the implementation of rigid environmental protection monitoring and penalties, seasonal biomass stalk burning was banned in Hebei. The percentage of collected agricultural stalk for energy recovery declined mainly because of (i) the low price of coal compared with the high cost of biomass fuel, (ii) the high investment costs required to produce biomass for energy recovery disincentivized its development, and (iii) the introduction of improved biomass utilization technologies for other purposes (green stalk fertilization, stalk for animal feed, stalk used as production inputs). From 2014 to 2017, the rate of comprehensive crop stalk utilization increased from 86.5% to 96.8%, which pointed to a reduction in the unhealthy burning of biomass in the field. 13. Promotion of public transport in urban areas was an important medium- to long-term measure for HPG to develop an environment-friendly city and to improve the quality of life. The HPG drafted a policy evaluating the urban public transport promotion investment and institutional framework in 11 municipal governments. The policy applied a uniform standard to assess, evaluate, and compare the status of public transport in cities, thereby raising awareness among decision makers about the importance of urban transport in their cities. The policy impact under policy action 1.2 (promotion of public transport in urban areas) was achieved, although the proposed provincial policy was not issued. The Hebei Transport Department prepared the policy and submitted it to the HPG for approval, but it was denied because of a central government ban on additional administration and monitoring targets for local government officials. Nevertheless, the Hebei Transport Department took measures to (i) promote the use of clean-energy-powered urban public transport, and (ii) promote public transport through selected demonstration cities (six municipal-level cities and 12 county-level cities). As of end of June 2018, three municipal-level cities and six county-level cities had been chosen for the first batch. 14. Output 2: Environmental policy and institutional framework for implementation strengthened. Output 2 had seven policy actions designed to assist Hebei in (i) enhancing the legal and policy framework, (ii) developing a comprehensive monitoring and analytical system, and (iii) strengthening regulatory enforcement capacity in the field of environment through trainings for targeted officials. 15. The policy impacts of Output 2 were achieved, albeit with a minor shortfall on policy action 2.2.1 (budget allocated for upgrading the ambient air quality monitoring capacity of the Hebei Environment Protection Department). For the implementation indicators, ADB requested Hebei Environment Protection Department to monitor ammonia, volatile organic compound, heavy metals and organic carbon. Organic carbon is still not monitored and regional transport monitoring stations are not fully completed. However, significant improvement was achieved in Hebei Environment Protection Department’s emissions and air quality monitoring capacity and consequent progress in understanding the ambient air quality and air pollution patterns. An absence of national organic carbon monitoring requirements and a lack of technical capacity deterred the HPG’s monitoring team from adopting organic carbon monitoring technology. But the Hebei Environment Protection Department’s capacity to monitor key polluting sources was strengthened. At the time of the ADB project completion mission, more than 30 monitoring stations were operational in industrial parks (which exceeded ADB’s target); the HPG will build more than 200 additional stations before the end of 2018. However, construction of regional transport monitoring stations is slightly behind schedule: the central government constructed four stations

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(Handan, Zhangjiakou, Baoding, and Hengshui) against a target of six; the HPG plans to build eight additional stations in 2018 (Tangshan, Cangzhou, Baoding, Hengshui, Shijiazhuang, Xingtai, Handan, and Langfang).

16. Targets under Output 3 need further recalibration. Based on the statistical data of the Hebei Human Resources and Social Security Department, the HPG reemployed and redeployed 107,982 affected workers during 2015–2016. All of the redeployed workers received proper training to perform their new roles. C. Program Costs and Financing 17. ADB provided $300 million from its ordinary capital resources. The loan was disbursed on 3 June 2016. Originally the loan proceeds were to be disbursed before April 2016. The delay was mainly because (i) the HPG required a longer time to open a foreign currency account than originally envisaged, and (ii) some policy actions were not fulfilled on schedule. D. Program Schedule 18. The program was implemented in less than 6 months, from 10 December 2015 to 3 June 2016. The program was approved on 10 December 2015 and the loan became effective on 20 May 2016. The program was completed on 3 June 2016, about 6 months ahead of schedule. E. Implementation Arrangements 19. The implementation arrangements designed at appraisal were satisfactory and no changes were made during the program. The HPG was the executing agency. The “program leading group” for utilization of international financial institution loans on prevention and control of air pollution in Hebei, chaired by the vice-governor, was established by HPG on 3 August 2016 to provide overall guidance and coordinate program implementation. The program leading group set up a coordination office in the Hebei Development and Reform Commission and a fund management office in the Hebei Finance Department. The Hebei Development and Reform Commission and Finance Department were directly responsible for program implementation. ADB closely coordinated with the other partners involved, including the World Bank and KfW. ADB sector specialists from different divisions worked together to implement the program. F. Technical Assistance 20. The program did not include transaction technical assistance because it built on extensive policy dialogue and reforms achieved under previous ADB engagements with the HPG. These engagements covered areas such as provincial development strategy design, BTH integration, and support for air pollution control policy reforms and investments. To facilitate program implementation, Output 3 was designed under the TA 9042 as part of the BTH development study to assist HPG with implementation of the program (paragraph 12). Consultants delivered the satisfactory report contributing to the preparation of this project completion report. G. Safeguards 21. Program activities were limited to policy reforms. No policy actions were judged likely to result in, or lead to, involuntary resettlement or to adversely affect indigenous peoples. The program was categorized C for environment, involuntary resettlement, and indigenous peoples. ADB assessed the potential safeguard impacts of policy actions as part of the preparation of the

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program.9 The report provides a summary assessment of the impact of each policy action on social safeguards and the environment. It showed that the environmental impacts of the program were overwhelmingly positive. The anticipated social impacts of the program were also positive and will continue to be positive in the long-term, as reducing air pollution will bring socioeconomic benefits and improve the health of the local residents. To strengthen the program and its safeguard system, ADB issued three recommendations to the HPG during due diligence: (i) secure HPG’s formal commitment to adhere to safeguards regulations, (ii) activities supported by the program should not trigger any of ADB’s safeguards policies, and (iii) conduct multi-stakeholder program evaluation (paragraph 12). There were no safeguard-related issues and executing agency did not prepared any safeguard corrective action plans during implementation. Overall, the assessment of potential safeguard issues was appropriate for the program. H. Monitoring and Reporting 22. The government successfully achieved all policy actions under the program and complied with all program assurances, conditions, and covenants in the loan agreement (Appendix 2). The program leading group met as needed to manage coordination and monitor progress in achieving outputs. 23. The country assessment concluded that the Hebei Finance Department had strong capacity for financial management based on its well-established and operational financial management system, and that its existing mechanism to manage HCAAP-related funds could be applied to the program.

III. EVALUATION OF PERFORMANCE A. Relevance 24. The program design was highly relevant. Air pollution is a common environmental problem for developed countries. The situation in the PRC is unique, however. The PRC is undergoing unprecedented rates of growth that has quickly made it prone to many types of air pollution resulting from rapid industrialization, urbanization, and motorization. With a population of more than 100 million, the BTH region is a key engine of socioeconomic development for the PRC, and poor air quality jeopardizes the sustainability of that development. 25. The program’s rationale was consistent with the government’s reform program and ADB’s country partnership strategy for the PRC; hence, the program was valid at appraisal and during implementation. It was also valid at the time of evaluation, as the program’s rationale is in line with the PRC’s Thirteenth Five-Year Plan, 2016–2020 and ADB’s country partnership strategy for the PRC, which prioritizes managing climate change and the environment and promoting inclusive economic growth. 26. The program’s policy actions entailed important reforms to help Hebei strengthen its framework for incremental policy and investment actions to improve air quality in the BTH region, including measures to reduce air pollution from key sectors, strengthen environmental policies and institutions, and promote employment for inclusive industrial transformation. These measures

9 ADB. 2015. Report and Recommendation of the President to the Board of Directors: Proposed Policy-Based Loan

to the People’s Republic of China for the Beijing–Tianjin–Hebei Air Quality Improvement—Hebei Policy Reforms Program. Environmental and Social Impact Assessment of the Policy Matrix (accessible from the list of linked documents in Appendix 2). Manila.

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were highly relevant because they helped the HPG reduce coal consumption, promote urban public transport, strengthen air quality monitoring and administration, and facilitate the affected workers’ reemployment and redeployment. These policy actions were well designed and, together with existing HCAAP policies, enabled the HPG to achieve its air pollution prevention and control targets. The design and monitoring framework (DMF) caught the key policy gaps in Hebei’s air pollution prevention and control framework, and the DMF’s outputs and targets were well designed to monitor the project impact. 27. The program remains highly relevant even after the completion date. On 27 June 2018, the State Council issued a new plan on air pollution prevention and control—the Three-Year Action Plan to Win the Blue Sky Protection Campaign (three-year plan).10 Through this plan, the PRC will continue its efforts to substantially improve air quality by 2020. In this document, the BTH region is listed as one of three national priority regions. In 2017, the annual average PM2.5 concentration in Hebei was 65 micrograms/cubic meter, dropping 66% from the 2013 level (108 micrograms/cubic meters). However, the World Health Organization’s recommended target for annual average PM2.5 concentration is 10 micrograms/cubic meters.11 International experience tells us that improving regional air quality requires long-term, sustained efforts. Cleaner air quality will provide enduring economic as well as social benefits that, in the long-run, will outweigh the costs of switching from coal to alternative and/or renewable sources of energy. The economic structure will tilt toward tertiary service industries, ensuring that the environment is well protected. Hebei is moving toward cleaner air quality. Efforts to further reduce production capacity in heavy-pollution industries are ongoing. In 2018, the HPG committed to reduce its steel and iron production capacity by 10 million tons, reduce coal production by about 11 million tons, and reduce coke production by 5 million tons. Other targeted reductions include a 1 million ton decline in cement production, 5 million fewer weight boxes of glass produced, and a reduction of coal-based power generation capacity by 500 megawatts. Accordingly, more than 30,000 affected workers will require reemployment in 2018. The policy actions under the program helped the HPG develop a sound framework to control air pollution and will help the HPG adhere to its air quality improvement implementation plan. 28. The program design was appropriate for achieving the intended outcomes. Experience in the PRC and lessons learned from ADB policy-based loan (PBL) operations in other countries were reviewed and incorporated into the program design. The policy matrix included performance indicators to measure the effectiveness of the policy actions. Technical assistance was integrated to support the implementation of the agreed policy actions, and to monitor and evaluate the performance, while strengthening air pollution control coordination in the BTH region. Although a programmatic approach was recommended to provide more flexibility in translating complex structural-reform objectives into implementable policy actions, the program was disbursed in one tranche to accommodate the HPG’s unique situation. First, ADB had been working with the HPG since 2002 to design policies on air pollution prevention and control, and the HPG had already absorbed some of ADB’s suggestions. Second, air quality improvement in the BTH region was directly guided by the PRC central government through the issuance of its Action Plan on Prevention and Control of Air Pollution, 2013–2017. 12 This action plan outlined the central government’s air pollution prevention and control principles, key policies and methods, and priority areas. Since many central government fund disbursements are linked to local implementation of

10 PRC Central Government Website. Three-Year Action Plan to Win the Blue Sky Protection Campaign. Chinese

version. http://www.gov.cn/zhengce/content/2018-07/03/content_5303158.htm. 11 World Health Organization, WHO Air Quality Guidelines for Particulate Matter, Ozone, Nitrogen Dioxide and Sulfur

Dioxide: Global Update 2005. http://apps.who.int/iris/bitstream/handle/10665/69477/WHO_SDE_PHE_OEH_06.02 eng.pdf;jsessionid=B1B085F1CBA455989B1F827A3764F03C?sequence=1.

12 Government of the PRC. 2013. Action Plan on Prevention and Control of Air Pollution, 2013–2017. Beijing.

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policies and regulations, the HPG had to quickly develop a detailed air pollution control policy framework following the guidelines of the national action plan. A single-tranche approach was chosen to accommodate the HPG’s urgent need for additional financial resources to quickly complete this framework.

B. Effectiveness 29. The program successfully met all performance indicators before the designated deadline. It is therefore rated highly effective. 30. The fund disbursement rates for air pollution control measures increased to 93% for the PRC central government, 99% for the HPG, and 94% for municipal governments at the end of 2016. The outcome targets were achieved ahead of schedule. Thus, the program achieved its intended outcome of strengthened framework for incremental policy and investment actions in Hebei to improve air quality in the BTH region. Also, after the completion of the Budget Law amendment in 2014,13 the PRC government enhanced the efficiency of budget management which contributed to achieving the program outcome. 31. The 17 output indicators in the DMF were achieved by the second quarter of 2016. The completion of all 17 policy actions was a precondition for loan disbursement. Six policy actions were fulfilled behind the original schedule. The main factors leading to delays were: (i) at the end of each year, the HPG had a tight agenda to approve policies, so it had to push some approvals back to the following year; (ii) celebration of Chinese traditional lunar new year in early February complicated compliance with the schedule; and (iii) implementation of some provincial policies were put on hold after finalization to give the government time to ensure that these policies were properly aligned with newly issued or impending central government policies. Such delays did not negatively affect the effectiveness of the output and outcome achievements. 32. Output 1: Policy and actions to reduce air pollution from key sectors issued and approved. Output 1 had nine output indicators:

(i) Natural gas network expansion plan with time-bound investment approach to accelerate implementation issued by the Hebei provincial government. In 2015, the Hebei Energy Department issued the Hebei natural gas network expansion plan during the 13th Five-Year Plan Period. But because of the confidential nature of the report, the file was not made accessible to the public. In January 2017, the HPG published its natural gas development plan during the same period disclosing the natural gas network expansion plan, which targeted construction of 8,087.6-kilometer (km) mainstream and gathering pipelines, plus about 8,000 km of regional network pipelines, by 2020.14

(ii) Enabling regulation to encourage capture of synthetic natural gas from coke oven flue gas and allow its injection into the natural gas distribution network issued by Hebei provincial government. The Hebei Provincial Opinion on Promotion of Production of Synthetic Natural Gas from Coke Oven Flue Gas was issued on 23 March 2016.

(iii) Action plan for accelerated decommissioning of decentralized heat-only boilers and substitution with centralized combined heat and power plant with

13 People’s Congress of the PRC. 2014. Decision on the Amendment of Budget Law. Beijing. 14 Hebei Development and Reform Commission. 2017. Hebei Natural Gas Development Plan, 2016-2020.

Shijiazhuang.

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enhanced emission reduction measures issued by Hebei provincial government. The HPG published the Hebei Implementation Plan for Coal-based Boilers Management on 19 March 2015, in which the HPG committed to decommissioning 11,071 coal-based boilers and upgrading the remaining 23,562 units to meet higher energy-saving and environmental-protection standards by the end of 2017.

(iv) Policy on quantitative targets for raw coal reduction and promotion of centralized and non-coal-fired heating service adopted by all 11 municipalities. All 11 municipalities drafted clean energy replacement implementation plans and secured the HPG’s approval during 2015–2016.

(v) Analysis of financial and market-based incentive schemes for urban and rural heating service from low-carbon and low-emission cleaner energy sources started by the engaged institute. The Hebei Development and Reform Commission assigned the decision-making consultation committee of the Hebei provincial government to conduct the research. The research report was finalized in the first half of 2016.

(vi) Provincial policy on evaluating performance of investment and institutional framework for promoting urban public transport in all 11 municipal governments submitted for government approval. The Hebei Transport Department drafted the policy to promote urban public transport in 2015. But the HPG rejected this policy because of a central government ban on setting new administration and monitoring targets for local government officials (paragraph 13).

(vii) Policy on promotion of crop stalks utilization and prohibition of agriculture biomass burning in rural area issued by the standing committee of Hebei’s provincial people’s congress. On 29 May 2015, the Hebei People’s Congress approved the Decision on Promotion of Agriculture Biomass Comprehensive Utilization and Ban on Open-Air Stalk-burning, which became effective on 1 June 2015.

(viii) Provincial crop stalks utilization plan with higher energy recovery target of 15% the collected amount drafted by Hebei’s Agriculture Department. The Hebei Agriculture Department finalized the draft Hebei Agriculture Stalk Comprehensive Utilization Program in June 2016.

(ix) Supporting policy on cleaner energy in rural areas with appropriate financial and market-based incentives to promote biomass-based fuel production, storage, transportation, and utilization for raw coal replacement drafted and issued by the Hebei provincial government. The Hebei Finance Department and Agriculture Department jointly issued Administration Regulation on the Provincial Subsidy Fund for Promotion of Clean Energy Development and Utilization in Rural Area on 10 October 2015.

33. Output 2: Environmental policy and institutional framework for implementation strengthened. Output 2 included seven output indicators.

(i) Amendment of the Hebei Air Pollution Prevention and Control Regulations with clear and binding provisions on volatile-organic-compound control, Beijing–Tianjin–Hebei air-quality-management coordination mechanisms, and accountability for environmental performance submitted to Hebei’s provincial people’s congress for review. The fourth session of Hebei’s 12th People’s Congress amended and approved the Air Pollution Prevention and Control Ordinance on 13 January 2016.

10

(ii) Provincial volatile-organic-compound emission standards for key industries issued by the Hebei provincial government. On 24 February 2016, the HPG published Industrial Volatile Organic Compound Emission Standard, which was drafted by the Hebei Environment Protection Department.

(iii) Assessment of air pollution control strategies for heavy diesel trucks started by engaged institutes. The Hebei Environment Protection Department issued the Notice on Initiating Heavy-Duty Diesel Vehicle Emission Control Study to the Hebei Motor Vehicle Emission Monitoring Center on 21 April 2016, requiring the center to initiate in-depth research to improve emission controls for heavy-duty diesel vehicles.

(iv) Budget for upgrading the ambient air quality monitoring capacity (including for emergency air-quality forecasting) allocated in the 2016 annual work plan. The HPG issued the 2016 Hebei Province Air Pollution Control Work Key Points on 30 March 2016. This requires the HPG to make further hardware investments to monitor capabilities, and to update its three-tiered (provincial, municipal, and county) automatic air-quality monitoring and information dissemination systems.

(v) The quantity of monitoring equipment to verify compliance with air emission standards of key polluting sources increased. The Hebei Environment Protection Department issued the 2016 Hebei Environment Information System and Pollutant Source Automatic Monitoring Priorities on 22 March 2016. It listed capability enhancement of pollutant source automatic monitoring as a key priority and committed to install additional automatic monitoring devices in key state- and province-controlled pollution sources, standardize automatic monitoring stations, and improve the quality of monitoring data.

(vi) Provincial policy on ecological and environmental accountability measures issued by the Hebei provincial government. The HPG issued the Interim Regulation on Ecological and Environmental Accountability on 19 February 2016, and it became effective on 1 March 2016.

(vii) Budget for training plans on air quality monitoring, modeling, forecasting, and regulatory enforcement in counties and townships allocated. In 2016, the HPG allocated about CNY3 million to organize trainings for about 220 environmental protection officials on air-quality monitoring, modeling, and forecasting, and to train more than 1,500 officials in environmental protection enforcement.

34. Output 3: Employment promotion for inclusive industrial transformation enhanced. One policy indicator is listed under this output.

(i) Provincial government opinion on improvement in employment and entrepreneurship issued by the Hebei provincial government. The HPG published the Implementation Opinion on Further Improvement of the Reemployment and Redeployment under New Circumstance on 29 June 2015.

C. Efficiency 35. The implementation of the program was efficient. Almost all policy actions were completed without delay and no policy waiver was required. Some policy actions were issued with some delay, which caused a 2-month deferment for loan proceeds to be disbursed.

11

D. Sustainability 36. The program is most likely sustainable. Air pollution prevention and control continues to be a priority for the PRC central government and for the HPG. Strong political commitment is being sustained, and a strengthened framework to accommodate new polices and investments in Hebei to improve air quality throughout in the BTH region has been successfully established. In the PRC central government’s 2018 annual work plan, pollution prevention and control was listed as one of “three tough battles” (along with “targeted poverty alleviation” and “preventing and defusing financial risks”). Further reductions in annual pollutant emissions are expected. The HPG committed to reduce 5% of PM2.5 concentration in 2018 from 2017 level. The State Council’s three-year plan (paragraph 28), designates the BTH region and its surrounding areas as one of the three national priority regions. Based on the three-year plan, the HPG will prepare its provincial plan. 37. Most of ADB’s recommended policy actions have been incorporated and strengthened in the three-year plan, including (i) adjusting the energy structure by increasing natural gas consumption, (ii) promoting cleaner district heating, (iii) decommissioning coal-based boilers, (iv) control of heavy-diesel truck emissions, (v) promoting comprehensive use of agricultural stalk, (vi) volatile-organic-compound control, (vii) updating the environmental monitoring and assessment system, (viii) strengthening the automatic monitoring of key pollution sources, and (ix) improving the quality of monitoring data and enhancing enforcement of environmental protection.

38. During implementation of the HACCP and the loan program, the HPG developed a strengthened policy and operational framework to carry out incremental policy and investment actions in Hebei to improve air quality in the BTH region. The HPG updated its air quality monitoring network, invested in equipment, enhanced its air quality regulatory enforcement capacities, and strengthened its air quality monitoring and evaluation system. Its enhanced institutional capacity will be helpful in implementing the new policy package designed under the three-year plan.

E. Development Impact 39. The program’s development impact was highly satisfactory. The program was focused on adjusting the energy structure, strengthening the provincial regulatory framework, and enhancing the HPG’s institutional capacity to control air pollution. This led to a significant annual reduction in coal consumption, as well as annual reduction in pollutant emissions. The social impacts of the program have been positive (paragraph 21). The program has contributed to improved access to cleaner and safer energy and heat sources and improved urban public transport services. The program has facilitated the reemployment and redeployment of affected workers through vocational training or administrative support for opening and managing small businesses, especially for rural migrant workers. F. Performance of the Borrower and the Executing Agency 40. The performance of the PRC and the executing agency were highly satisfactory. The Hebei Development and Reform Commission and Hebei Finance Department demonstrated strong commitment to the program and to the agreed policies. The program leading group worked with the Development and Reform Commission and the Finance Department to ensure strong coordination in delivering the 17 policy actions. All policy actions were met, and all program assurances were adhered to. The program did not require an extension and was closed ahead of

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schedule. The achievement of all outcome indicators was indicative of the HPG’s strong performance. G. Performance of Cofinanciers 41. ADB worked closely with KfW during the entire life cycle of the project. An ADB–KfW joint fact-finding mission took place in September 2015 to finalize the program design, financing plan, and DMF, and to conduct due diligence analysis and agree on the draft legal documents and project assurances. In July and September 2016, two joint program review missions were organized to check the implementation status of the policy actions. ADB and KfW maintained a good working relationship, and coordination was smooth throughout program design and implementation. H. Performance of the Asian Development Bank 42. ADB’s performance was highly satisfactory. The program was a continuation of ADB’s long-term support for environmental protection and air pollution control in the PRC, and it highlighted ADB’s role as Hebei’s main development partner since 1998. After the initial dialogue in January 2015, ADB organized a program team and fielded five consultation missions before finalizing the program design during the fact-finding mission in September 2015. Despite the short processing time, ADB coordinated closely with other development partners—especially KfW and the World Bank—to ensure complementarity. During program implementation, ADB and KfW organized joint missions to review program progress and push forward the preparation and issuance of policy papers. I. Overall Assessment 47. The program is rated highly successful. The program is highly relevant to the PRC considering its national priorities and ADB’s country strategy. The program outcome was achieved earlier than planned, and outputs were completed in a timely manner. Based on the present PRC government policy design, improving air quality in the BTH will be a long-term governmental priority. The enhanced policy framework in Hebei will help usher in the next stages of air quality improvement in the BTH region.

Overall Ratings Criteria Rating

Relevance Highly relevant Effectiveness Highly effective Efficiency Efficient Sustainability Most likely sustainable Overall Assessment Highly successful Development impact Highly satisfactory Borrower and executing agency Highly satisfactory Performance of the Asian Development Bank Highly satisfactory

Source: Asian Development Bank.

IV. ISSUES, LESSONS, AND RECOMMENDATIONS

A. Issues and Lessons 48. The program is ADB’s first PBL in PRC. The strong performance of the program can be attributed to ADB’s deep involvement in the HPG’s development strategy and policy design,

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strong political commitment from both the government and ADB to support this program, close cooperation with development partners, and the design of a realistic policy framework. 49. A major lesson from the program is that sustained engagement by ADB is important in undertaking policy reforms that may take many years to implement. As a long-term development partner of Hebei, ADB has been actively engaged in policy preparation for many years (paragraph 5). Long-term engagement, deep involvement of the Hebei provincial government in policy design, and the active involvement of the PRC government in national environmental policy discussions helped ADB design an effective program. 50. The strong commitment of ADB, the HPG, and the PRC government to systematically improving air quality in the BTL region made the delivery of the first PBL in the PRC feasible. The HPG sustained its political commitment throughout the program and offered support to implement the policy reforms. ADB quickly mobilized resources and coordinated with other development agencies to process and implement the program. ADB has also committed to offering long-term financial assistance to help the HPG continue to improve air quality in the BTH region. For 2016–2020, ADB is making $500 million in loans available annually to the Government of the PRC to support air quality improvement in the BTH region. 51. ADB’s efforts to coordinate development partners to scale up the effectiveness of air-pollution-control policies was tested and successfully justified during the program preparation and implementation. Facing a huge financing gap to implement the HCAAP, the HPG welcomed the support of $300 million from ADB, $500 million from World Bank, and $167 million from KfW. 52. Another key lesson is that a realistic policy framework with manageable policy actions is needed to implement air quality reforms. The 17 policy actions under the program, all of which were fulfilled on schedule or close to on schedule, were realistic, and the policies are likely to remain in place after the program closes. B. Recommendations 53. Policy-based loans have significant potential in the People’s Republic of China. The successful implementation of the first PBL justified that PBL is a rational modality to engage the PRC government pushing forward their sectoral reforms. ADB should consider offering additional PBLs in the PRC. Subsequent loans might target other areas including the rural vitalization, education, livable and healthy city development in the BTH region or other provinces, or they might target environment reform in other provinces or regions. 54. Future monitoring. ADB should continue to engage with the HPG through follow-on loans, policy dialogue, and focused strategic technical assistance. Regular review missions and dialogue with stakeholders will deepen the impact of policy reforms achieved under this program and facilitate the preparation of future ADB air-quality-improvement projects in Hebei and the BTH region. 55. Covenants. The covenants were relevant and ADB should retain all covenants in their existing form. 56. Further action or follow-up. In implementing the State Council’s three-year plan (paragraph 28), the HPG may require additional support from ADB. ADB should work closely with the HPG to ensure that it has the resources to further revise the present policy framework and implement additional reforms to improve air quality in the BTH region. ADB should continue to

14

engage the HPG in policy dialogue to address air quality improvement in the long term. A PBL is an excellent vehicle to introduce international good practices, offer policy advice, and justify ADB’s value beyond project financing. 57. Timing of the project performance evaluation report. ADB’s Independent Evaluation Department can prepare the project performance evaluation report after two years to evaluate the results of the policy reforms in Hebei Province.

Appendix 1 15

DESIGN AND MONITORING FRAMEWORK

Impacts the Program is Aligned with Air pollution in the BTH region reduced and public health in the BTH region improved. (Action Plan on Prevention and Control of Air Pollution in Hebei Province, 2013-2017)a

Results Chain Performance Indicators with Targets and Baselines

Program Achievements

Outcome Framework for incremental policy and investment actions in Hebei to improve air quality in the BTH region strengthened

By Q2 2017 Fund disbursement rates for air pollution control measures increased to 80% for the PRC central government and HPG, and 90% for municipal governments (2014 baseline: 71% for the PRC central government, 65% for HPG, 87% for municipal governments)

The fund disbursement rates for air pollution control measures increased to 93% for the PRC central government, 99% for HPG, and 94% for municipal governments at the end 2016; the outcome targets were achieved 6 months ahead of schedule.

Outputs 1. Policies and actions to reduce air pollution from key sectors issued and approved

By Q2 2016 (All baselines: Not applicable) 1a. Natural gas network expansion plan with time-bound investment approach to accelerate implementation issued by HPG

In 2015, the Hebei Energy Department issued the Hebei Natural Gas Network Expansion Plan during the 13th Five-Year Plan period. But due to the confidential nature of the document, the copy was not made accessible to the public. In January 2017, HPG published its natural gas development plan during the 13th Five-Year plan period announcing its gas network expansion plan for 2016–2020.

1b. Enabling regulation to encourage capture of synthetic natural gas from coke oven flue gas and allow its injection into the natural gas distribution network issued by HPG

Hebei Provincial Opinion on Production of Synthetic Natural Gas from Coke Oven Flue Gas was issued on 23 March 2016.

1c. Action plan for accelerated decommissioning of decentralized heat-only boilers and substitution with centralized combined heat and power plants with enhanced emission

HPG published the Hebei Implementation Plan for Coal-based Boilers Management on 19 March 2015.

1d. Policy on quantitative targets for raw coal reduction and promotion of centralized and non-coal-fired heating service adopted by all 11 municipalities

All 11 municipalities had drafted their Clean Energy Replacement Implementation Plans and secured the approval of HPG during 2015–2016.

1e. Analysis of financial and market-based incentive schemes for urban and rural heating service from low-carbon and low-emission cleaner energy sources started by the engaged institute

The Hebei Development and Reform Commission assigned the Hebei Provincial Government Decision-Making Consultation Committee to conduct the research. The report “Research on Fiscal Incentive Policy to Promote Centralized Clean Energy-based Heating” was finalized in the first half of 2016.

16 Appendix 1

1f. Provincial policy on evaluating performance of investment and institutional framework for promoting urban public transport in all 11 municipal governments submitted for government approval

The Hebei Transport Department drafted the policy to promote urban public transport in 2015. But HPG denied this policy due to the central government’s ban on additional administration and monitoring targets setting for local government officials. However, HPG has been undertaking detailed urban public transport promotion policy package.

1g. Policy on promotion of crop stalks utilization and prohibition of agricultural biomass burning in rural area issued by the standing committee of Hebei’s provincial people’s congress

On 29 May 2015, the Hebei People’s Congress approved the Decision on Promotion of Agriculture Biomass Comprehensive Utilization and Ban on Open-air Stalk-burning, which became effective since 30 June 2015.

1h. Provincial crop stalk utilization plan with higher energy recovery target of 15% of the collected amount drafted by Hebei’s Agriculture Department

The Hebei Agriculture Department finalized the draft Hebei Agriculture Stalk Comprehensive Utilization Program in June 2016.

1i. Supporting policy on cleaner energy in rural areas with appropriate financial and market-based incentives to promote biomass-based fuel production, storage, transportation, and utilization for raw coal replacement drafted and issued by HPG

The Hebei Finance Department and Agriculture Department jointly issued the Administration Regulation on the Provincial Subsidy Fund for Promotion of Clean Energy Development and Utilization in Rural Area on 10 October 2015.

2. Environmental policy and institutional framework for implementation strengthened

2a. Amendment of the Hebei Air Pollution Prevention and Control Regulations with clear and binding provisions on VOC control, BTH air quality management coordination mechanisms, and accountability for environmental performance submitted to Hebei’s provincial people’s congress for review

Air Pollution Prevention and Control Ordinance was amended and approved by the fourth session of Hebei’s 12th People’s Congress on 13 January 2016.

2b. Provincial VOC emission standards for key industries issued by HPG

On 24 February 2016, HPG has published Industrial Volatile Organic Compound Emission Standard, which was drafted by the Hebei Environment Protection Department.

2c. Assessment of air pollution control strategies for heavy diesel trucks started by engaged institutes

The Hebei Environment Protection Department issued the Notice on Initiating Heavy Duty Diesel Vehicle Emission Control Study to the Hebei Motor Vehicle Emission Monitoring Center on 21 April 2016.

2d. Budget for upgrading the ambient air quality monitoring capacity (including for emergency air quality forecasting) allocated in the 2016 annual work plan

The 2016 Hebei Province Air Pollution Control Work Key Points was issued by HPG on 30 March 2016.

Appendix 1 17

2e. The quantity of monitoring equipment to verify compliance with air emission standards of key polluting sources increased

The 2016 Hebei Environment Information System and Pollutant Source Automatic Monitoring Priorities was issued by the Hebei Environment Protection Department on 22 March 2016, which listed pollutant source automatic monitoring capability enhancement as one of the key priorities and committed to install additional automatic monitoring devices in state- and province-controlled key pollution sources, standardization of automatic monitoring stations, and improvement of monitoring data quality.

2f. Provincial policy on ecological and environmental accountability measures issued by HPG

HPG issued the Interim Regulation on Ecological and Environmental Accountability on 19 February 2016, which became effective 1 March 2016.

2g. Budget for training plans in air quality monitoring, modeling, forecasting, and regulatory enforcement in countries and townships allocated

In 2016, HPG allocated about CNY3 million to organize air quality monitoring, and modeling and forecasting training to around 220 environmental protection officials, and environmental protection enforcement training to over 1,500 officials.

3. Employment promotion for inclusive industrial transformation enhanced

3.Provincial government opinion on improvement in employment and entrepreneurship issued by HPG

HPG published the Implementation Opinion on further improvement of the Reemployment and Redeployment under New Circumstance on 29 June 2015.

BTH=Beijing-Tianjin-Hebei, HPG = Hebei Provincial Government, PRC = People’s Republic of China, VOC = volatile organic compound. a Government of Hebei Province. 2013. Action Plan on Prevention and Control of Air Pollution in Hebei

Province. Shijiazhuang. Source: Asian Development Bank.

18 Appendix 2

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant

Reference in Loan Agreement

Status of Compliance

The Borrower shall, through HPG, cause the program to be carried out with due diligence and efficiency and in conformity with sound applicable technical, financial, business and development practices.

Article IV, Section 4.01 (a)

Complied with.

In the carrying out of the Program, the Borrower shall perform, or cause to be performed, all obligations set forth in Schedule 4 to this Loan Agreement.

Article IV, Section 4.01 (b)

Complied with.

The Borrower shall cause HPG to implement the Program in accordance with this Loan Agreement and the Program Agreement.

Schedule 4, paragraph 1

Complied with.

The Borrower shall designate HPG as the Program Executing Agency, which shall be responsible for overall coordination and shall cause the Hebei Provincial Development and Reform Commission, Department of Finance, Agriculture Department, Environmental Protection Department, Energy Administration, Human Resources and Social Security Department and Transport Department to timely implement the Policy Actions.

Schedule 4, paragraph 2

Complied with.

The Borrower shall cause HPG to establish a “Program Leading Group”, chaired by a vice governor of HPG and including senior representative from the Hebei Provincial Development and Reform Commission, Department of Finance, Agriculture Department, Environmental Protection Department, Transport Department, Human Resources and Social Security Department and Energy Administration, which shall (a) review and confirm attainment and compliance with the Policy Actions; and (b) provide overall guidance for the Program.

Schedule 4, paragraph 3

Complied with, established on 3 August 2016.

The Borrower shall cause HPG to ensure that the Counterpart Funds are used to finance the implementation of the Program and the HCAAP; provided that no such funds shall be used for expenditures for items listed in Appendix 5 (prohibited investment activities) to ADB’s Safeguards Policy Statement (2009) or for expenditures for direct infrastructure development, or land use adjustments and re-development, that has potentially adverse environmental, involuntary resettlement or indigenous peoples impacts within the meaning and ADB’s Safeguard Policy Statement (2009) and the Borrower shall cause HPG to furnish to ADB all such reports and information s ADB shall reasonably request concerning the local currency so generated and the use thereof.

Schedule 4, paragraph 4

Complied with.

The Borrower shall and shall cause HPG to ensure that all the Policy Actions continue to be in effect for the duration of the Program.

Schedule 4, paragraph 5

Complied with.

The Borrower shall and shall cause HPG to keep ADB informed of policy discussions with other multilateral and bilateral aid agencies that may have implications for the implementation of the Program and shall provide ADB with an opportunity to comment on any resulting policy proposals. The Borrower shall and shall cause HPG to take into account ADB’s view before finalizing and implementing such proposal.

Schedule 4, paragraph 6

Complied with.

Appendix 2 19

Covenant

Reference in Loan Agreement

Status of Compliance

The Borrower shall and shall cause HPG to provide ADB with the opportunity to review and comment on relevant studies, draft legislation, decrees, orders, rules and regulations which are likely to impact the objectives and implementation of the Program.

Schedule 4, paragraph 7

Complied with.

The Borrower shall and shall cause HPG to (a) ensure that the Program complies with the provisions of ADB’s Anticorruption Policy (1998, as amended to date) and shall take and cause HPG to take all appropriate and timely measures to prevent, detect and respond to allegations of corrupt, fraudulent, collusive or coercive practices relating to the Program;

Schedule 4, paragraph 8

Complied with.

The Borrower shall cause HPG to monitor implementation of the Policy Actions, their attainment, impact on environment, involuntary resettlement and social safeguards and progress from the commencement of their implementation to the delivery of the program completion report to ADB.

Schedule 4, paragraph 9

Complied with.

The Borrower shall, through HPG, make available, promptly, as needed, the funds, facilities, services, as required, in additional to the proceeds of the Loan, for carrying out the Program.

Article IV, Section 4.02

Complied with.

The Borrower shall, through HPG, ensure that the activities of its departments and agencies with respect to the carrying out of the Program are conducted and coordinated in accordance with sound administrative policies and procedures.

Article IV, Section 4.03

Complied with.

The Borrower shall maintain, or cause to the maintained, records and documents adequate to identify the Eligible Items financed out of the proceeds of the Loan and to indicate the progress of the Program.

Article IV, Section 4.04 (a)

Complied with.

The Borrower shall enable ADB’s representative to inspect any relevant records and documents referred to in paragraph (a) of this Section.

Article IV, Section 4.04 (a)

Complied with.

As part of the reports and information referred to in Section 7.04 of the Loan Regulations, the Borrower shall furnish, or cause to be furnished, to ADB all such reports and information as ADB shall reasonably request concerning (i) the Counterpart Funds and the use thereof; and (ii) the implementation of the Program, including the accomplishment of the targets and carrying out of the actions set out in the Policy Letter.

Article IV, Section 4.05

Complied with.

20 Appendix 3

POLICY MATRIX

Policy Actions Implementation Status

Output 1: Pollution from Key Sectors Reduced

1.1 Adjustment of energy structure by reducing coal consumption and promoting clean energy

1.1.1. Natural gas network expansion plan with time-bound investment approach to accelerate its implementation drafted by Hebei energy administration and issued by Hebei provincial government (December 2015)

1.1.2. Enabling regulation to encourage capture of synthetic natural gas from coke oven flue gas and allow its injection into the natural gas distribution network drafted by Hebei development reform commission and issued by Hebei provincial government (December 2015)

1.1.3. Action plan for accelerated decommissioning of decentralized heat only boilers and substitute them with centralized combined heat and power plants with enhanced emission reduction measures drafted by Hebei development and reform commission and issued by Hebei provincial government (2015, Completed)

1.1.4. All 11 municipalities adopted policy on quantitative targets for raw coal reduction and promotion of centralized and non-coal fired heating service (December 2015)

1.1.5. Hebei development and reform commission engaged an institute to explore financial and market-based incentive schemes for urban and rural heating service from low-carbon and low-emission cleaner energy sources (March 2016)

Complied with (Hebei Energy Department issued Hebei Natural Gas Expansion Plan in December 2015) Complied with (HPG issued Hebei Provincial Opinion on Production of Syntenic Natural Gas from Oven Flue Gas in March 2016) Complied with (HPG issued Hebei Implementation Plan for Coal-based Boilers Management in March 2015) Compiled with (the 11 municipalities adopted policy action in December 2015) Complied with (Hebei Development and Reform Commission assigned Hebei Provincial Government Decision-Making Consultation Committee to do the research and the report was completed in March 2016)

Appendix 3 21

Policy Actions Implementation Status

1.2 Promotion of public transport in urban area

1.2.1. Provincial policy on evaluating performance of investment and institutional framework of promoting urban public transport in all 11 municipal governments drafted by Hebei Transport Department and submitted for the government approval (March 2016)

Complied with (Hebei Transport Department drafted Provincial policy in 2015)

1.3 Reduction of seasonal stalk-burning and promotion of clean energy in rural area

1.3.1. Policy on promotion of crop stalks utilization and prohibition of agricultural biomass burning in rural area drafted by Hebei Agriculture Department and issued by the standing committee of Hebei provincial people’s congress (2015, Completed)

1.3.2. Provincial crop stalk utilization plan with higher energy recovery target of 15% of the collected amount drafted by Hebei Agricultural Department (December 2015)

1.3.3. Supporting policy on cleaner energy in rural area

with appropriate financial and market-based incentives to promote biomass-based fuel production, storage, transportation and utilization for raw coal replacement drafted by Hebei agricultural Department and issued by Hebei provincial government (December 2015)

Complied with (Hebei People’s Congress issued the Decision on Promotion of Agriculture Biomass Comprehensive Utilization and Ban of Open-air Stalk burning in March 2015) Compiled with (Hebei Agriculture Department finalized the drafted Hebei Agriculture Stalk Comprehensive Utilization Program in June 2016) Complied with (HPG issued the Administration Regulation on Provincial Subsidy Fund for Promotion of Clean Energy Development and Utilization in Rural Area in October 2015)

Output 2: Environmental Policy and Institutional Framework for Implementation Strengthened

2.1 Enhancement of legal and policy framework

2.1.1 Amendment of the Hebei Air Pollution Prevention and Control Regulations improved and drafted with clear and binding provisions on (i) VOC control, (ii) BTH air quality management coordination mechanisms, and (iii) accountability for environmental performance by Hebei environment protection department and submitted to Hebei

Complied with (Hebei People’s Congress approved the Air Pollution Prevention and Control Ordinance in January 2016)

22 Appendix 3

Policy Actions Implementation Status

Provincial People’s Congress review (January 2016)

2.1.2 Provincial VOCs emission standard for key industries drafted by Hebei environment protection department and issued by Hebei provincial government (December 2015)

2.1.3 Hebei Environment Protection department engaged an institute to assess air pollution control strategies for heavy diesel trucks (March 2016)

Complied with (HPG issued Hebei Industrial Volatile Compound Emission Standard on 24 February 2016) Complied with (Hebei Environment Protection Department engaged Hebei Environment Protection Department and Hebei Motor Vehicle Emission Monitoring Center to do the research on 21 April 2016)

2.2 Development of comprehensive monitoring and analytical system

2.2.1 Hebei environment protection department allocated budget for upgrading the ambient air quality monitoring capacity (including for emergency air quality forecasting) in its 2016 annual work plan (December 2015)

2.2.2 Hebei environment protection department increased the number of monitoring equipment to verify compliance with air emission standards of key polluting sources (January 2016)

Complied with (HPG issued the 2016 Hebei Province Air Pollution Control Work Key Points on 30 March 2016) Complied with (Hebei Environmental Protection Department issued the 2016 Hebei Environmental System and Pollutant Source Automatic Monitoring Priorities on 22 March 2016)

2.3 Enhancement of regulatory enforcement capacities

2.3.1 Provincial policy on ecological and environmental accountability measures drafted by Hebei environment protection department and issued by Hebei provincial government (December 2015)

2.3.2 Hebei environment protection department approved and allocated budget for training plans on (i) air quality monitoring, modeling, and forecasting, and (ii) regulatory enforcement in counties and townships (March 2016)

Complied with (HPG issued Interim Regulation on Ecological and Environmental Accountability issued on 19 February 2016) Complied with (Hebei Environment Protection Department approved the budget in March 2016)

Appendix 3 23

Policy Actions Implementation Status

Output 3: Employment Promotion for Inclusive Industrial Transformation Enhanced

3.1 Provision of good quality training and supports for employment

3.1.1 Provincial government opinion on improvement in employment and entrepreneurship drafted by Human Resources and Social Security Department and issued by Hebei provincial government (2015, Completed)

Complied with (HPG issued the Implementation Opinion on further Improvement of the Reemployment and Redeployment under New Circumstance on 29 June 2015)

Source: Asian Development Bank.

24 Appendix 4

COUNTRY ECONOMIC INDICATORS

Item 2013 2014 2015 2016 2017

A. Income and Growth

1. GDP per capita ($, current prices) 7,078.0 7,684.7 8,069.6 8,107.1 8,848.6 2. GDP growth (%, constant prices) 7.8 7.3 6.9 6.7 6.9

a. Agriculture 3.8 4.1 3.9 3.3 3.9 b. Industry 8.0 7.4 6.2 6.3 6.1 c. Services 8.3 7.8 8.2 7.7 8.0

B. Saving and Investment (% of GDP, current prices)

1. Gross domestic investment 47.4 47.0 45.4 44.3 43.6 2. Gross domestic saving 49.5 49.0 47.4 46.2 47.4 3. Gross national saving 48.6 49.2 46.9 45.7 47.0

C. Money and Inflation (annual % change)

1. Consumer price index 2.6 2.0 1.4 2.0 1.6 2. Liquidity (M2) 13.6 11.0 13.3 11.3 8.2

D. Government Finance (% of GDP)

1. Revenue and grants 21.7 21.8 22.1 21.5 20.9 2. Expenditure and onlending 23.6 23.6 25.5 25.2 24.6 3. Overall fiscal surplus (deficit) (1.8) (1.8) (3.4) (3.8) (3.7)

E. Balance of Payments

1. Merchandise trade balance (% of GDP)

3.7 4.1 5.2 4.4 3.9

2. Current account balance (% of GDP) 1.5 2.3 2.7 1.8 1.3 3. Merchandise exports ($) growth

(annual % change) 8.9 4.4 (4.5) (7.2) 11.4 4. Merchandise imports ($) growth

(annual % change) 7.7 1.1 (13.4) (4.2) 16.0

F. External Payments Indicators

1. Gross official reserves (including gold, $billion) 3,880.4 3,899.3 3,406.1 3,097.8 3,235.9

2. External debt service (% of exports of goods and services) 1.6 2.6 5.0 6.0 7.0

3. External debt (% of GDP) 9.0 17.0 12.8 12.7 13.9 G. Memorandum Items

1. GDP (current prices, CNY billion) 59,524.4 64,397.4 68,905.2 74,358.6 82,712.2 2. Exchange rate (CNY/$, average) 6.2 6.1 6.2 6.7 6.7 3. Population (end-year, million) 1,360.7 1,367.8 1,374.6 1,382.7 1,390.1

( ) = negative, GDP = gross domestic product, and CNY= Chinese Yuan. Source: Asian Development Outlook database.