IFC requires that this document is made available through the World Bank InfoShop and to the locally affected community no less than 30 days prior to project consideration by the IFC Board of Directors. The Summary of Project Information (SPI) also provides details of where the ERS has been made available to the locally affected community. The SPI must be sent to World Bank InfoShop no less than 30 days prior to project consideration by the IFC Board of Directors.

This is a Category B project according to IFC’s Procedure for Environmental and Social Review of Projects because a limited number of specific environmental and social impacts may result which can be avoided or mitigated by adhering to generally recognized performance standards, guidelines or design criteria. The review of this project consisted of appraising information submitted by the project sponsor and a report prepared by a technical consultant to IFC. The review addressed the compliance status of Xinao's current operations as well as its management system for the environmental, social, and safety aspects of its current and future operations. The company's procedures for land acquisition and how liabilities such as land contamination and labor obligations are managed were reviewed. Opportunities for social responsibility and community development programs were also assessed.

The sponsor has plans in place that address these impacts to ensure that the proposed project will, upon implementation of the specific agreed measures, comply with the environmental and social requirements - the host country laws and regulations and the World Bank/IFC environment and social policies and the environmental, health and safety guidelines. The information about how these potential impacts will be addressed by the sponsor/project is summarized in the paragraphs that follow. - Environmental and Social Benefits Resulting from Use of Natural Gas China’s air pollution problems are well known. Government initiatives to encourage the use of natural gas are expected to show progress in improving air quality as natural gas displaces other fuels. Xinao's gas distribution operations are central to fuel substitution. Xinao’s programs for vehicle conversions to natural gas are targeted at city bus and taxi fleets; such conversions have been shown to have a significant impact on urban air quality. Use of natural gas also reduces emissions of carbon dioxide, a greenhouse gas associated with global warming. Xinao supports an active program in four cities to convert taxis from gasoline to compressed natural gas (CNG) and buses from diesel fuel to CNG. Vehicle conversions to CNG contribute to ambient air quality improvements in China's urban areas and reduce exhaust emissions of CO2. Xinao ultimately expects to have vehicle conversion programs in most of its operating subsidiaries. Xinao's development of new operating subsidiaries and expansion of existing operations will advance the market penetration of natural gas and, through substitution for other fuels, result in significant reduction over time in the emissions of greenhouse gases that contribute to global warming. Based on IFC's estimates of Xinao's total natural gas sales from 2004 through 2009, and displacement of other energy sources proportionally to China's energy consumption (in 2000 - 62% coal, 28% oil, 3% gas, and 7% other fuel), as much as 4,000,000 tons of CO2 equivalent could be avoided over this 6-year period. Natural gas has important cost advantages over other fuels such as LPG and oil when measured on an energy-equivalent basis. Although coal is cheaper than gas, other factors such as convenience, simpler required infrastructure (no transport, storage, handling and disposal costs), and improved living and health standards also favor gas. Xinao's potential residential customers mainly use propane and coal as fuel. Over time, implementation of the project will result in greater disposable income to local households and improved access to a reliable energy source. - Safety and Environmental Compliance Status of Xinao's Current Operations Xinao generally forms a joint venture with a city’s existing gas distribution company and maintains operating control of all its operations. The joint venture constructs and operates a piped natural gas distribution network in accordance with a development plan agreed with the city. The city’s existing gas distribution assets are incorporated where appropriate. Xinao has developed a good safety and compliance record since first operating a natural gas distribution company in Langfang in 1993. Xinao's growth occurred mainly since 1999 and many of its distribution companies do not have an extensive compliance history. IFC's technical consultant found that while the company's practices are generally satisfactory, improvements can be made in Xinao's operational safety practices and its training programs need to be expanded and upgraded. The company has indicated to IFC that it is addressing training needs and is also working with various organizations regarding development of training programs. Xinao has had no serious incidents related to its gas distribution operations, and has retrained its staff in response to several vehicle safety incidents. Xinao has a call center and a country-wide emergency telephone number that customers can call to report problems. IFC's consultant found that the company has emergency response plans in place. - Environmental and Social Management System for Current and Future Operations IFC's appraisal found generally effective implementation of corporate and operation-specific environmental, social, and safety programs and substantial compliance with applicable regulations. There appears room for improvement at both levels to ensure that corporate goals are realized consistently in practice. At the corporate level, the company would benefit from empowering a senior officer with management responsibility over all operating units to ensure the uniform formulation and implementation of environmental, social, and safety policies and procedures within all operating units. To the extent that the company has sought ISO 9001 certification and implemented systems of quality management, it has committed itself to continuous improvement in meeting international standards of performance. This could be enhanced by a further commitment to developing and implementing a formal Environmental Management System (EMS) and to obtaining ISO 14001 accreditation for environmental management and OHSAS 18001 for health and safety. IFC will request that Xinao will designate a member of senior management with the requisite authority and responsibility and implement an EMS in conjunction with IFC's investment. - Impacts of right-of-way alignment and land acquisition Land for Xinao's facilities is acquired through leases and easements negotiated directly from the government, which owns all land. Xinao develops the city gas distribution plan in conjunction with each city, identifies the land, then leases it from the city. If necessary, Xinao's local engineering and construction managers would alter the layout of pipelines to avoid sensitive areas and minimize disruption of neighborhoods. Most pipelines are constructed along roads and other rights-of-way. Xinao has experienced only a few incidents related to its land acquisition, usually related to site restoration after construction. In such cases, it has been able to resolve disagreements with the local government. The company has also experienced issues related to delinquent payments for pre-Xinao activities, but has been successful in resolving these situations as well. - Indemnification in Acquisitions Prior to Xinao’s entry, the cities’ gas distribution companies may have used a variety of gas acquisition and delivery processes, some of which may have resulted in environmental liabilities. Potential environmental liabilities are identified during Xinao’s appraisal of each new project, and Xinao excludes all facilities inappropriate for piped natural gas distribution and which may be environmentally impaired. Xinao's agreements with local governments indemnify it from environmental liabilities for past operations. - Employee Retrenchment Due to its expansion plans for each city, Xinao is able to absorb most or all of the city gas distribution company’s existing staff. Some reductions do occur and staff remain with the original gas operator. - Social Responsibility and Community Development Programs Xinao engages in community development and community outreach programs at both the corporate and company operating unit levels, including gas safety and education activities and response to local events such as flood relief in Bengbu in 2003 (Bengbu Xinao agreed not to raise LPG prices and contributed funds for flood relief ). IFC has suggested that Xinao incorporate these activities within a formal and proactive corporate social responsibility (CSR) program.

This ERS contains the full environmental and social documentation prepared for the project.

Accordingly, IFC concludes that the proposed project will meet the applicable World Bank/IFC environment and social policies and the environmental, health and safety guidelines upon successful implementation of the agreed measures.

IFC will evaluate the project's compliance with the applicable environmental and social requirements during the lifetime of the project by reviewing the annual monitoring reports (AMRs) prepared for the project covering the status of implementation of any measures agreed with Xinao. Periodic site supervision visits will also be conducted.