People's Republic of China: Harbin Water Supply Project [Loan 1995-PRC]

Evaluation Document | 31 December 2010
This report evaluates the performance of the Harbin Water Supply Project aimed at greater quality and reliability of residential water supply in Harbin urban areas of People's Republic of China.

Background

At the beginning of the 10th five-year planning period (2001-2005), water supply was irregular and of poor quality in parts of Harbin City. In 2002, water deficits in Harbin City were projected to increase to at least 450,000 m3 per day by 2007, and at least 950,000 m3 per day by 2020. While the Songhua River - the nearest water source - had ample stream flow to meet this water demand, it was becoming one of the most polluted rivers in the country with discharges from various chemical, petrochemical, fertilizer, metallurgical, and food processing industries. Its water quality did not meet the minimum quality standards set for potable water. Trace organics were present in the water, and serious health risks were identified from some chemical pollutants. Although some consumers pumped groundwater from aquifers under the city, and many preferred bottled water for drinking, the Songhua River remained the major source. At the same time, many groundwater wells had begun to run dry. A clean water-supply alternative was urgently needed.

In 2003, the Asian Development Bank (ADB) approved the Harbin Water Supply Project for $100 million. The project was envisaged to supply clean water to urban Harbin from a reservoir on the Lalin River as a viable alternative to the traditional but polluted water source, the Songhua River.

The actual project cost of $461.7 million was higher than the appraisal estimate of $399.5 million, owing to changes in the project's technical design, rising global steel prices, and an appreciating yuan. ADB approved a loan of $100 million to cover the entire foreign exchange costs; actual foreign exchange costs and ADB loan utilization were marginally lower, at $98.6 million. The 16% rise in overall capital costs was met entirely by increased counterpart funding. Domestic bank loans of more than $290 million accounted for over 60% of the actual capital costs. The balance was provided by the governments of the People's Republic of China (PRC), Heilongjiang province, and Harbin municipality, and the group company.

Summary of Assessment

The overall performance of the project is rated successful.

The project is rated relevant. The project design is consistent with the PRC's programs to reduce water shortages, and prevent and control water pollution in the 10th and 11th five-year planning periods (2001-2005 and 2006-2010). The project is also consistent with the national Water Law (2002), as it reinforces PRC's objectives of rationally developing, using, conserving, and protecting water resources. There was strong ownership from the provincial and municipal governments.

The project is rated effective in achieving the objectives, outputs, and outcomes. It has achieved the major objectives of improving water quality and reliability of supply. The project began alleviating the severe shortage of good-quality water by the end of 2006, i.e., 1 year earlier than envisaged at appraisal.

The project is rated efficient. The reevaluated economic internal rate of return is estimated at 12.5%, which shows that the project is economically viable. The project was commissioned about 1 year ahead of schedule and brought significant benefits to its customers.

The project is rated less likely sustainable. Static water tariffs since late 2001 suppressed the financial attractiveness of the project. The group company suffers financial losses from its water supply business that not even a government subsidy has offset. Harbin Water Supply Engineering Company (HWSEC) is nonetheless in a position to raise finances from the PRC commercial banks to meet working capital and planned capital investment requirements because (i) it is backed by the financially strong group company whose overall profits exceed losses from the water supply business, and (ii) the revenue receipts of the project exceed the annual cash expenses for operation and maintenance.

Key Issues

  • Water tariffs remained unchanged from December 2001 to December 2009 - the tariff change that came into effect on 1 January 2010 was the only increase in 8 years even though HWSEC's operation and maintenance costs increased.
  • Unaccounted-for water rose each year since 2002, owing not only to more construction activity on the distribution network, but also to the inability to properly maintain the network.
  • Changes in the water sector's institutional set-up made the wholesale water tariff agreement redundant and the financial viability of the sector less transparent.

Lessons

  • If tariffs are regulated, the long-term viability of the water utility will be affected.
  • If unaccounted-for water is allowed to rise unchecked, it becomes difficult to improve and sustain the financial viability of the water utility.
  • If close attention is given to sector and corporate governance aspects, the financial and operational performance of the utility is likely to improve.
  • If ADB is not in a position to influence future water tariffs in the PRC, it should reconsider the seeking of assurances and covenants for tariff increases.

Recommendations

Water tariff revisions. In future interventions, ADB should support water tariff-related policy research to bring to the attention of responsible authorities, requisite information to facilitate decisions on water tariff revisions. Such policy research may focus on (i) financial and other consequences of a non-remunerative tariff regime, and (ii) assessment of willingness-to-pay for various customer categories.

Reducing unaccounted-for water. Initiate a twinning arrangement for the group company with a suitable water utility in the PRC or elsewhere to enable group company officials to learn modern practices in water accounting and nonrevenue water reduction.

Contents 

  • Basic Data
  • Executive Summary
  • Introduction
  • Design and Implementation
  • Performance Assessment
  • Other Assessments
  • Issues, Lessons, and Follow-up Actions
  • Appendixes