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LESSONS:

Wuhan Wastewater and Stormwater Management Project: Completion Report

sector: Water and Other Urban Infrastructure and Services | country: China, People’s Republic of

The project experienced significant delay in implementation and in delivering the project outputs. This was mainly caused by the construction delay of the Huangpu Road WWTP, which was completed in August 2015, 1.5 years after the loan closing. The delay of constructing the Huangpu Road WWTP attributed mainly to (i) delay in securing domestic approval for the required flooding control permission, which took 4 years from the loan approval in June 2006 to the certificate issuance in June 2010, and (ii) prolonged procurement of the plant equipment, which took 3 years from the preparation of the bidding documents to the contract approval.

The lessons from delayed construction of the Huangpu Road WWTP showed necessity of securing domestic approval in advance, prior to the loan effectiveness. If flooding control permission had been approved earlier, construction of the plant could have been completed on schedule and thus the overall project output could have been delivered completely. The lessons learned from procuring the design, supply, and installation contract for the Huangpu Road WWTP were meaningful for improving procurement efficiency in similar projects and contracts. The lessons include: (i) the contract type should be thoroughly justified by considering necessary technical factors – for example, the treatment process in this case – during project preparation; (ii) domestic approval for land or other administrative permissions should be coordinated closely with the detailed engineering design to ensure consistent and organized implementation; and (iii) expert support is needed when preparing the bidding documents, particularly in formulating technical specifications.

The project cost overrun is another major lesson learnt. Regardless of common factors, such as Chinese yuan appreciation and raise of labor and material prices, inadequate project preparation and insufficient engineering design contributed directly to the project cost increase because they resulted in costs underestimate at appraisal and frequent contract variations during implementation. Lessons from the project cost overrun suggest the great importance of sound engineering design that can (i) support more accurate cost estimates, (ii) preclude or minimize contract variations during construction, and (iii) secure a more reasonable implementation schedule.

The potential close-down and reconstruction of the Erlangmiao WWTP was totally unanticipated. ADB was not notified of this matter until the project completion review in December 2014. This indicates the lack of thorough and serious policy dialogue with the executing agency. If WMG notified ADB early of its urban plan updates related to the activities (e.g. Erlangmiao WWTP in this case) under the project, such low effective subproject could have been avoided through a scope change. In this regard, more effective policy dialogue with the executing agency should mainstream into the whole process of the project and the preparation of the new projects in the same project area.

Lessons from Validation

People’s Republic of China: Wuhan Wastewater and Stormwater Management Project

The project completion report (PCR) identified three major lessons learned through the project: (i) the necessity of obtaining domestic approvals early to ensure expeditious implementation, (ii) the importance of project preparation and sound engineering design to minimize delays and cost overruns, and (iii) the importance of effective policy dialogue with the executing agency.

The PCR pointed out rightfully that obtaining domestic approval for flood control permission in advance, possibly prior to the loan effectiveness, would have improved efficiency in project implementation and reduced the delays in project completion. The main lesson that can be learned is the need for the project preparation team to accurately identify the following: (i) all approvals that may be required, (ii) the authorities responsible for such approval, and (iii) the documentation and process required to obtain the necessary approval. The project preparatory technical assistance team should also recommend advance action to address and minimize the risk of implementation delays resulting from approval processes.

Inadequate project preparation and insufficient engineering design resulted in the significant underestimation of project costs at appraisal and the need for frequent contract variations during implementation. The PCR suggested that lessons from this stress the need to attach greater importance to sound engineering design during preparation and recommended the following: (i) support more accurate cost estimates, (ii) preclude or minimize contract variations during construction, and (iii) secure a more reasonable implementation schedule. While this validation agrees that sound engineering design is critical during project preparation, and that proper cost estimates and appropriate scheduling are key, it does not agree with the recommendation to preclude or minimize contract variations during construction. While contract variations are sometimes the result of inadequate or incomplete engineering, it may also reflect necessary changes required during implementation that may not have been possibly foreseen. Hence, a degree of flexibility is required in project implementation to address such contingencies. This validation is of the opinion that the lesson learned is to ensure recruitment of highly qualified firms and/or individuals, and provision of adequate resources and scheduling to ensure complete and accurate engineering design. To this end, ADB favors the use of quality- and cost- based selection (QCBS) as the preferred method of recruiting consultants. While the QCBS promotes efficiency and economy, it introduces an element of cost in the process, which may sometimes result in the selection of a lesser quality technical proposal because of a lower price. For project preparatory technical assistance with high technical material, a quality-based selection or even QCBS with a quality-to-cost ratio of 90:10 needs to be considered instead of the standard 80:20, to ensure the best qualified expertise available.

Another lesson from inadequate project preparation is the lack of efficiency in procurement. The PCR claimed that better preparation and engineering design might have recognized that the turnkey contract for the Huangpu Road wastewater treatment plant may not have been the most efficient method of procurement. This validation agrees with this conclusion.

The third lesson identified by the PCR is on the lack of policy dialogue. This referred to the executing agency’s failure to notify ADB on a timely basis regarding its updated urban development plan, resulting in the closure of the Erlangmiao wastewater treatment plant and four other wastewater treatment plants (WWTPs). While it most certainly seemed to suggest a substantial lack of communication, this conclusion seems overly simplistic. A number of policy dialogue mechanisms are in place in the PRC, both with ADB and with other major multilateral and bilateral partners. Furthermore, ADB is active in a number of other projects in the sector, which should have been sufficient to identify such issues at the earliest stage. This validation does not have sufficient information to conclude on the reason for the breakdown in communication, but this issue is singularly important and may have significant impact on the economic viability and sustainability of the project, as well as the financial viability of the operating entity. ADB needs to follow up on this matter and develop a plan of action for discussion with the borrower and the executing agency to ensure this scenario does not recur.

Another lesson that was not raised by the PCR is the issue of tariff and cost recovery. The project agreement specified that wastewater tariffs were to be reviewed annually and adjusted as needed to achieve the cost-recovery targets. A special loan administration mission fielded in September 2010, however, reported that the process of increasing tariffs had been postponed for over 4 years. The auditor also raised concerns that the tariff revenue being received was insufficient to maintain the operation as well as meet debt obligations. Tariffs were eventually raised on 1 August 2014, nearly 9 years later than planned. The lesson learned from this experience is the need during project preparation to ensure the full commitment of the government and the executing agency to implement potentially unpopular policies, and to develop realistic implementation schedules for such policies.

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