China - Liaoning Environment Project

Document of The World Bank Report No: 28833-CHA IMPLEMENTATION COMPLETION REPORT (TF-21374 CPL-37810) ON A LOAN IN THE AMOUNT OF US$110 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A LIAONING ENVIRONMENT PROJECT June 22, 2004 Urban Development Sector Unit East Asia and Pacific Region  CURRENCY EQUIVALENTS (Exchange Rate Effective December 31, 2003) Currency Unit = Yuan (Y) Y 1.00 = US$ 0.12 US$ 1 = Y 8.3 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS AIDAB - Australian International Development Assistance Bureau Angang - Anshan Iron and Steel Company Bengang - Benxi Iron and Steel Company CAS - Country Assistance Strategy EIA - Environmental Impact Assessment EPB - Environmental Protection Bureau ERR - Economic Rate of Return GOC - Government of China ICB - International Competitive Bidding ICR - Implementation Completion Report JGF - Japan Grant Facility LEP - Liaoning Environment Project LEPB - Liaoning Environmental Protection Bureau LP - Liaoning Province LPG - Liaoning Provincial Government LRBP - Liao River Basin Project LUCRPO - Liaoning Urban Construction and Renewal Project Office NCB - National Competitive Bidding PMO - Project Management Office RAP - Resettlement Action Plan SAR - Staff Appraisal Report SEPA - State Environmental Protection Agency tpd - tons per day UNDP - United Nations Development Programme WWTP - Wastewater Treatment Plant Vice President: Mr. Jemal-ud-din Kassum Country Director: Mr. Yukon Huang, EACIF Sector Director: Mr. Keshav Varma, EASUR Task Team Leader: Mr. Raja Iyer, EASUR  PEOPLE'S REPUBLIC OF CHINA LIAONING ENVIRONMENT PROJECT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 2 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 6 5. Major Factors Affecting Implementation and Outcome 10 6. Sustainability 12 7. Bank and Borrower Performance 13 8. Lessons Learned 16 9. Partner Comments 17 10. Additional Information 19 Annex 1. Key Performance Indicators/Log Frame Matrix 20 Annex 2. Project Costs and Financing 21 Annex 3. Economic Costs and Benefits 24 Annex 4. Bank Inputs 26 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 29 Annex 6. Ratings of Bank and Borrower Performance 30 Annex 7. List of Supporting Documents 31 Annex 8. Borrower's Contribution to the ICR 32  Project ID: P003598 Project Name: LIAONING ENVIRONMENT PROJECT Team Leader: Raja Iyer TL Unit: EASUR ICR Type: Core ICR Report Date: June 22, 2004 1. Project Data Name: LIAONING ENVIRONMENT PROJECT L/C/TF Number: TF-21374; CPL-37810 Country/Department: CHINA Region: East Asia and Pacific Region Sector/subsector: General water, sanitation and flood protection sector (69%); Mining and other extractive (16%); District heating and energy efficiency services (7%); Sub-national government administration (7%); Other social services (1%) Theme: Water resource management (P); Environmental policies and institutions (P); Pollution management and environmental health (P); Access to urban services for the poor (P); Climate change (S) KEY DATES Original Revised/Actual PCD: 03/20/1990 Effective: 01/20/1995 Appraisal: 09/25/1993 MTR: Approval: 07/26/1994 Closing: 06/30/2001 12/31/2003 Borrower/Implementing Agency: People's Republic of China/Liaoning Province (LP) and the Municipalities of Anshan; People's Republic of China/Benxi; People's Republic of China/Dalian; People's Republic of China/Fushun; People's Republic of China/Jinxi and Jinzhou Other Partners: None STAFF Current At Appraisal Vice President: Jemal-ud-din Kassum Gautam Kaji Country Director: Yukon Huang Nicholas Hope Sector Manager: Keshav Varma Katherine Sierra Team Leader at ICR: Raja Iyer Geoffrey Read ICR Primary Author: Herbert Boehm  2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: L Institutional Development Impact: SU Bank Performance: HS Borrower Performance: S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: Yes 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The objectives of the Liaoning Environment Project (LEP) were to: (a) protect the main water resources in Liaoning Province including the Hun-Taizi River Basin to allow their sustained economic and safe use for drinking, industrial, and agricultural purposes; (b) strengthen pricing policies and institutional arrangements for environment protection, water pollution control, wastewater and municipal solid waste management; and (c) institute measures for air pollution control and cultural heritage asset management. Assessment of Objectives The overall objective of supporting urban environmental improvements in Liaoning was appropriate. Liaoning Province (Liaoning) in north-eastern China faced growing stress on its limited water resources from industrial, agricultural and domestic use. This was particularly true in the Hun-Taizi Basin that supports about 15 million people and is the location of major industries of national significance. Liaoning also suffered from serious air pollution, especially in the city of Benxi, a center of iron, steel and cement production. Waste management in many Liaoning cities did not meet accepted standards, prompting serious concerns about its effects on groundwater. Project objectives were established based on the results of studies carried out by Liaoning with the assistance of the Australian International Development Assistance Bureau (AIDAB), UNDP, and the World Bank, which developed long-term plans and identified priority investments for a period of about 15 years. The Liaoning Urban Infrastructure Project (Cr. 2219-CHA) represented the first phase support for this plan, while LEP was the second phase. The objectives of LEP tied in seamlessly with Liaoning's long-term economic and environmental plans, built on the Liaoning Urban Infrastructure Project, and addressed the highest priority needs of Liaoning. While pollution affected virtually the entire province, the project focused on the highest priority areas determined as a result of a series of studies by environmental experts, and after developing long-term plans and priority investments for the province. The selected project area included the five cities of Anshan, Benxi, Dalian, Fushun and Jinzhou, with a combined population of over - 2 -  eight million. From the outset, it was understood that this project could not resolve all environmental problems in the five cities, but that it would be part of a development program for Liaoning Province to improve environmental conditions and management over the long term. The objectives were fully consistent with the policies and economic development plans of the Government of China (GOC), as well as the Bank's 1993 Country Assistance Strategy (CAS), which highlighted the need to support economic reform while assisting environmentally responsive infrastructure modernization. The objectives clearly and realistically stated that the project could only make an important contribution towards solving some of the most urgent environmental problems in the five project cities. In particular, the project set cautious policy and institutional improvement goals, promising only to "strengthen" pricing policies and institutional arrangements, thus recognizing the inherent difficulties in making dramatic changes in these areas. The project's complexity stemmed from the fact that Liaoning's priority environmental problems were multifaceted, covering a range of sectors (water, wastewater, solid waste management, air pollution) and cities. 3.2 Revised Objective: The original objectives remained valid throughout the project implementation period, and no revision was necessary. 3.3 Original Components: The project was to provide physical works and technical assistance for institutional development in water supply, wastewater treatment, air pollution control, waste management, water conservation and process improvements, and environmental rehabilitation and reconstruction. A summary description of the components follows. Wastewater Management in Anshan and Fushun ($92.8 million), comprising sewers, pump stations, wastewater treatment, and effluent reuse facilities. Wastewater and Air Quality Management in Benxi ($112.1 million), comprising sewers, pump stations, and primary wastewater treatment facilities; an air quality management program, including equipment and facilities to reduce emissions from two blast furnaces and three coke ovens, and increase their energy efficiency; and district heating to serve some 20,000 households over an area of some 300 hectares. Wastewater, Municipal Solid Waste and Water Conservation Management in Dalian ($78.7 million), comprising investments in sewers, secondary wastewater treatment (new plant and existing plant upgrading) and effluent reuse facilities; a pilot water conservation and clean technology program; and solid waste management investments comprising modernization of the municipal collection, transfer and transportation systems (1,200 tons per day-tpd), upgrading of the existing disposal facility to sanitary landfill standards (capacity of 2,550 tpd of municipal and industrial solid waste, construction debris and sludge), and providing for future landfill gas utilization. Water Supply System Enhancement and Protection in Jinzhou ($38.7), comprising groundwater development and trunk supply, treatment plant upgrading and distribution system - 3 -  strengthening, supported by a major pollution reduction and water conservation program at the nearby Jincheng Paper Mill. Environmental Rehabilitation and Reconstruction ($2.2 million), comprising the recording, rehabilitation, conservation, protection, restoration and presentation of prioritized cultural heritage assets, including the Liaoning Great Wall at Jiumenkou, archeological sites at Niuheliang and Jieshi Gong, and the Shenyang Provincial Museum. Liaoning Environmental Fund ($4.0 million) to provide short-term finance of high environmental impact investments of in-plant clean technology process change, supporting the core investments in air and wastewater management. Institutional Strengthening through Technical Assistance and Training ($9.6 million), for supporting and strengthening environmental, financial and utility management and performance monitoring, training, feasibility studies, and future project preparation. Assessment of Project Design As discussed earlier, LEP represents the second phase of a long-term program to address environmental issues in Liaoning. Anshan, Fushun, Benxi, Dalian and Jinzhou suffered the most from environmental degradation and their inclusion in LEP was well founded. Liaoning's capital city of Shenyang, another worthwhile candidate, decided not to participate in the project as it had identified other sources of finance for its environmental programs. The physical components were well designed and remained valid during the project implementation period; however, several components had to undergo modifications for a number of valid reasons. For example, national wastewater treatment regulations were upgraded, capacity levels were re-assessed, and technical modifications became necessary; such design modifications are considered normal and do not lower the quality of the original design. However, the design of the institutional development and policy strengthening components could have been more realistic, as pricing and institutional issues in the wastewater sector were very much in their infancy in China. Another weakness of project design was overestimation of costs, which is a problem affecting virtually all urban projects in China. 3.4 Revised Components: All eleven project components remained intact over the implementation period. However, as described below, some changes were made, which enhanced project benefits and facilitated attainment of project objectives. Fushun Wastewater. The original primary treatment of the Sanbaotun wastewater treatment facility in Fushun was upgraded to secondary treatment in accordance with revised State Environmental Protection Agency (SEPA) requirements. As a result, the original pilot plant for testing secondary treatment technology was abandoned. Furthermore, in order to avoid resettling 188 households, the interceptor sewer was rerouted and extended by 1.3 km. Benxi Wastewater. As in the case of Fushun, the original primary treatment process for the - 4 -  Linjiawaizi wastewater treatment facility was also upgraded to secondary treatment. In addition, the plant's design capacity was reduced from the original appraisal capacity of 300,000 m3/d to 225,000 m3/d, based on a recomputation of the quantity of wastewater to be treated. Benxi Air Quality Management. Substantial changes were made in the air quality improvement works originally proposed for the Benxi Iron and Steel Company (Bengang) when the company replaced, using its own funds, the obsolete blast furnaces Nos.1 & 2 and coke ovens Nos. 1 & 4 with new facilities which fully met applicable air quality standards. In 2002, the Bank accepted a request to finance the installation of equipment to reduce dust emission from the electric furnaces. Dalian Wastewater. The capacity of the Chunliu wastewater treatment plant was increased from 60,000 to 80,000 m3/d by improving the activated sludge treatment process. A change to a state-of-the-art biofilter at the Malan wastewater treatment facility substantially reduced the footprint of the plant and had a positive impact on the surrounding neighborhood. Dalian Municipal Solid Waste Management. The scope of this component was substantially reduced as the original plans to develop a transfer capability from the city center to the landfill site was dropped. Jincheng Paper Mill Pollution Management. The small sub-component for white water recovery and fuelwood production was deferred to the follow-on Liao River Basin Project. 3.5 Quality at Entry: Quality at entry was satisfactory. Preparation and support for this project was fully consistent with Government priorities and the Bank's CAS. The project was complex, but was well prepared by national and international consultants, under the leadership of the Liaoning Urban Construction and Renewal Project Office (LUCRPO). In particular the quality at entry of the water supply and wastewater components was highly satisfactory. The significant changes to the Benxi air quality component could not have been anticipated. However, the changes to the Dalian solid waste component could perhaps have been avoided through a better dialogue during project preparation about alternative approaches. Nevertheless, the relatively small number of changes overall during implementation reflects favorably on the quality of project preparation. In order to monitor project impact, indicators for the monitoring and evaluation of project progress were developed, together with an extensive list of key financial and operating indicators. At the start of implementation, institutional arrangements were in place and about 20 percent of the bid documentation was prepared. The three main packages for the institutional development and training component were fully prepared, and consultant assignments were readied before loan approval. Cost estimates were high across the board, in spite of the efforts of the design review consultants; as discussed in more detail later, this is a generic problem in China urban projects. The project's objectives responded directly to the Bank's safeguard policies as it attempted to mitigate the adverse impact of industrial water and air pollution. The project was rated category "A" in terms of the World Bank's Operational Directives on Environmental Impact Assessment - 5 -  (EIA). A comprehensive EIA was prepared, reviewed by the Bank and approved by SEPA. Prior to Negotiations, the Liaoning Provincial Government (LPG) submitted and updated an acceptable land acquisition and resettlement plan, under which 273 households would be relocated and 1,036 farmers would be shifted to nonagricultural employment. Quality at entry was also helped by the experience gained from the successful implementation of the preceding project, the Liaoning Urban Infrastructure Project. The four key lessons from the first urban project in Liaoning--need for early implementation of institutional development programs; inclusion of price escalation clauses in contracts greater then one year; raising the ICB contract ceiling; and strengthening project management of the provincial government--were fully incorporated into the design of LEP. Risk Assessment The staff appraisal report identified a number of risks which potentially could jeopardize the project's outcome, including: (a) weak management and sustainability; (b) commercial uncertainties; (c) reluctance of governments to implement and maintain adequate tariffs; (d) possible failures to make the necessary follow-on investments beyond the project's scope; and (e) inefficiencies in operating the individual components. In hindsight, the project assessed most risks realistically, and made adequate provisions to mitigate against these risks. The rapidly growing Chinese economy eliminated virtually all commercial risks from the project, although during project implementation there were periods of downturn affecting the heavy industry in Liaoning and consequently the industry-based components in the project, e.g., Benxi air pollution. Project financial covenants were not adequate to overcome the reluctance of the project municipalities and the provincial government to increase wastewater tariffs to the required levels. Technological changes in the steel industry affecting the project and the adoption of more stringent environmental regulations requiring secondary wastewater treatment could not reasonably be anticipated and addressed. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The overall objectives of the project were achieved in a satisfactory manner, in particular the water and air protection objectives. The achieved outcome substantially improved environmental conditions in Liaoning. Official statistics show that over four million people have benefited from the environmental improvements of the project in terms of air quality, cleaner water and proper wastewater removal. Especially the poorer segment of the population benefited from the collection and treatment of sewage in the project cities. The project contributed, as promised, to the protection of Liaoning's water resources, including the Hun-Taizi River Basin. In Jinzhou, the water treatment plant has been operating satisfactorily since 2001, and residents have a 24-hour supply. In Anshan, Fushun, and Dalian, the wastewater collection and treatment facilities are operational, and have contributed to marked reductions in river pollution; similarly, the wastewater facility in Benxi, commissioned in early 2004, is expected to be operationally successful. Project investments in the Jincheng Paper Mill have improved the - 6 -  local water bodies and the underground aquifer. The pilot water conservation interventions in Dalian, and the reuse of treated wastewater in Dalian and in Anshan, contributed to conserving Liaoning's scarce water resources. The solid waste component in Dalian contributed to improved sanitation in the city. Even though reduced in scope, the Benxi air quality component nevertheless made a significant contribution to the dramatic improvement in air quality in Benxi. The small cultural heritage component also fully met its objectives by raising the level of awareness for conservation of Liaoning's heritage. Most of the contemplated institutional arrangements for environmental protection, water pollution control, wastewater and municipal solid waste management have been set up successfully under the project. The companies and agencies responsible for operating the facilities erected under the project are fully aware of the future managerial and technical requirements, including the need for systematic maintenance and equipment replacement. All environmental concerns raised in the project's Environmental Impact Assessment (see SAR Annex 8, Table 4) were adequately addressed during project implementation. This included the resettlement of 313 households, or 40 more than anticipated in the 1994 resettlement action plan. All families received appropriate compensation. While there is a clear appreciation of the importance of cost recovery pricing at the provincial level, demonstrated through the issue of decrees, the municipalities have not so far approved wastewater tariffs required to meet financial covenants in full. Follow-up action is required during implementation of the follow-on project (Liao River Basin Project, LRBP, Loan 4617-CHA) to confirm the financial viability of some of the wastewater companies established under the project. Further details of component outputs for achieving the three project objectives are provided in section 4.2 below. Additional information is given in Annex 1, which provides the latest estimates on the project's performance indicators. 4.2 Outputs by components: Project output was satisfactory; see paragraphs below for details of output by component. Construction and installation quality was, by and large, satisfactory as this was carefully supervised and monitored by the municipal project management offices (PMOs) and LUCRPO, with the assistance of Chinese and international consultants. The Anshan Wastewater component's output is rated satisfactory, with the percentage of wastewater treated exceeding the 37 percent indicated in the SAR. The intended output of 220,000 m3/d of treated effluent is being provided for reuse in the Anshan Iron and Steel Company (Angang). The quality of treated wastewater is consistent with Class II discharge standard (the Chinese Environmental Standards for Surface Water comprise five use classifications, with Class I being the highest and Class V the lowest). The output of the Fushun Wastewater component is rated highly satisfactory. The wastewater - 7 -  treatment plant not only meets the design capacity of 250,000 m3/d, but uses an upgraded secondary treatment process to meet current SEPA standards (and exceeds SAR expectations). The plant serves an area of 68 km2 with a population of 643,000 south of the Hun river. The sludge is co-disposed with municipal wastes. These investments will result in a one-class improvement in the quality of the Hun river downstream. The output of the Benxi Wastewater component, although reduced from 300,000 to 225,000 m3 per day, is rated satisfactory. The treatment process for the Linjiawaizi wastewater treatment plant was also upgraded as in Fushun. The component will serve an area of 70 km2 with a total population of over 700,000. When fully commissioned in 2004, the new treatment process is expected to have a significant positive effect on the Taizi River, which is highly toxic and contaminated with heavy metals. The output of the Dalian Wastewater component is rated highly satisfactory with the increase in treatment capacity to 200,000 m3/d through the refurbishment of the Chunliu plant (increased from 60,000 to 80,000 m3/d) and the construction of the Malan plant (120,000 m3/d). The facility at Chunliu serves an area of 50 km2 with 250,000 people; that at Malan, an area of 48 km2 with 300,000 people. Tertiary treatment of treated wastewater recovery provides 40,000 m3/d for industrial reuse. Sludge from both plants is properly disposed at the Maoyinji landfill. The component also included a successful pilot water conservation initiative comprising reduction of unaccounted-for-water, retrofitting existing water supply facilities, and source control and recycling. All works under this component are functioning at or above expected levels. The environmental improvements in this coastal city have been dramatic, providing excellent quality of living conditions for its population. The output of the Jinzhou Water Supply component is rated highly satisfactory. The component provides an additional 100,000 m3/d drinking water for about 670,000 people in the formerly water-scarce city of Jinzhou; the service level in the city has increased from three hours a day to 24 hours a day. The output of the Dalian Solid Waste component is rated satisfactory. Although the scope of solid waste handling and disposal was substantially changed and the Bank's funding reduced to the procurement of some landfill equipment, the design change benefited from the Bank's dialogue and refocus on the management of the landfill. This led to a significant increase in the effective service life of the landfill and a remarkable improvement in sanitary conditions in the city of Dalian. The output of the Jincheng Paper Mill Pollution Management component is rated satisfactory despite the fact that a small part of the component, i.e., white water recovery and fuelwood production, was delayed and moved to the follow-on project (Liao River Basin Project; LRBP). The major part of the project, i.e., the red liquor treatment works, was completed in 2001 and has led to a 70 percent reduction of pollutant discharge into the Daling River. The output of the Benxi Air Quality Management and District Heating component is rated as satisfactory, even though the component as defined in the Staff Appraisal Report (SAR) was - 8 -  significantly down-sized and modified. The district heating part has provided domestic and public area heating supply for a 1.1 m2 million serving area. Air quality improvement works for Bengang were substantially revised and reduced during project implementation, as the company replaced some of its obsolete blast furnaces and coke ovens with new equipment (using own funds), thus eliminating the need for some of the Bank financed pollution control equipment envisaged in the SAR. Bank financing was used for installation of automatic charging car facilities with emission controls for Bengang Coke Oven No. 2, and the output is satisfactory. Dust emission control equipment installed at the electric furnaces under an additional sub-component contributed to a further improvement in air quality. The output of the Environmental Rehabilitation and Reconstruction component is rated satisfactory. Although quite small in size, the component had a significant impact by raising general awareness and management of cultural heritage in Liaoning. The performance of the Liaoning Environment Fund is rated satisfactory with reservation. The Fund's allocation from the loan was increased from $4 million to $6 million due to greater demand, and the Fund made 36 sub-loans. These sub-loans, with only one exception, have led to considerable environmental improvements in air quality and wastewater discharges. However, about 25 percent of the sub-loans are serviced by the municipal Environmental Protection Bureaus (EPBs), as the borrowing enterprises are in a weak financial position. The main underlying problem was that the institutional arrangements to identify, appraise, monitor and administer sub-projects, which were established during the implementation of LEP, were not fully effective. The outputs of the three technical assistance packages under the Institutional Strengthening component were satisfactory overall, although the results were mixed. The effectiveness of the financial management services and training package (Package A) was limited, as consultants completed their work before the wastewater utilities began functioning as independent entities. The technical management services and training package (Package B) was especially effective in assisting LUCRPO on procurement matters and construction management support, including quality assurance, as well as liaison between the LUCRPO and the Bank. The environmental quality management, monitoring and control package (Package C) was effective and achieved its capacity building objectives. 4.3 Net Present Value/Economic rate of return: An overall economic rate of return for the project was not calculated at appraisal; economic rates of return were only calculated for those components where appropriate data for preparing economic benefit streams could be gathered, e.g., Jinzhou water supply, Jincheng Paper Mill. Least cost approaches were used for the wastewater components in Benxi, Dalian, and Fushun, as well as the Dalian solid waste component. For the Anshan wastewater component an economic rate of return could be calculated since there is a market for recycled wastewater because of the water shortages in the city. Table 1 in Annex 3 compares the economic rates of return at appraisal and current estimates. The - 9 -  economic rate of return for the Jinzhou water supply component is estimated at 9 percent, compared to the 12 percent at appraisal, due to higher-than-appraised capital costs and lower water revenues. The actual water tariff has exceeded the appraisal estimate and the company has been profitable since 1998. However, due to the economic slowdown in the late 90s, it has taken longer than expected at appraisal for water production to reach full operating level. The economic rate of return for the red liquor scheme at the Jincheng Paper Mill is estimated to be 16 percent, almost double the SAR estimate of 9 percent, as the net income from the scheme has almost doubled. As discussed in Annex 3, appropriate least cost solutions were used in the case of the other components. 4.4 Financial rate of return: A financial rate of return was not prepared at appraisal. Essential financial aspects of the utilities and enterprises operating under this project are discussed in the Sustainability Section. 4.5 Institutional development impact: The project had a substantial impact on institutional development in the five project cities and to a certain degree in Liaoning overall. LUCRPO, the provincial project office, improved on its existing capacity (developed during the earlier Bank project) to prepare and implement Bank projects. The municipal level project offices in Anshan, Benxi, Dalian, Fushun, and Jinzhou also gained valuable experience in implementing a Bank urban environmental project. Under the project, five new public utilities were created: wastewater utilities in Anshan, Benxi, Dalian and Fushun; and a district heating enterprise in Benxi. The Anshan wastewater company was later incorporated into the Angang steel plant operation as the steel plant reuses the entire treated effluent of the wastewater company. The Benxi District Heating Company was merged into the larger Benxi General Heating Company. Both of these mergers made organizational and economic sense and were approved by the Bank. The establishment of autonomous wastewater utilities in Benxi, Dalian, and Fushun, operating on commercial principles, will have significant impact in the overall development of the sector. As discussed earlier, these wastewater companies are in their infancy, and their development would need to be monitored during the implementation of LRBP. Considering its small size (less than $2 million), the environmental rehabilitation and reconstruction component had an exceedingly positive impact on Liaoning as it supported four initiatives for museums and site conservation. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: Global Economic Slowdown. The general economic slowdown in China during most of the early phase of the project and especially during the financial and economic crisis in Southeast Asia in - 10 -  1997/1998 had an overall dilatory effect on Liaoning. Virtually all project cities encountered some problems in providing counterpart funds for LEP. The situation was exacerbated because the Bank financed only 20 percent of civil works. The steel plant in Benxi encountered severe financial problems just at the time when the main contracting phase of the Benxi Air Quality component was poised to be carried out, and consequently the component was delayed. During this period, the company determined that it would be technically and financially more desirable to replace two of its obsolete blast furnaces and two of its coke ovens. Flood. Severe flooding in the summer of 1996 caused major damage to a large area of Liaoning. The component worst affected was the Fushun wastewater component, where the Hun River penetrated the excavation site of the downstream section of the interceptor causing construction delays and a loss of about $400,000. 5.2 Factors generally subject to government control: Impact of New Regulations. SEPA's 1997 Integrated Wastewater Discharge Standard required the wastewater treatment process in Benxi and Fushun to be upgraded from a primary to a secondary treatment process. The required modifications had a beneficial environmental effect and enhanced achievement of project objectives; however, they also caused implementation delays and affected component costs. Counterpart Funding. The global economic slowdown, cited above as one of the external factors, severely affected Liaoning's industry-based economy in the late 90s, and presented LPG with difficult choices of priority and affected counterpart funding. This led to considerable delays in construction activities and resulted in the Bank downgrading the project to "unsatisfactory" in 1998. Procurement Processing. In addition to the procurement procedures agreed at appraisal, the State government required that all ICB contracts for imported plant and equipment should be approved by the State Mechanical & Electrical Import Review Office in Beijing prior to their submission to the Bank for review and issue of No Objection. As noted by Liaoning, this additional layer of review led to significant delays in project implementation. 5.3 Factors generally subject to implementing agency control: Low Contract Pricing. Consistent with the experience of almost all Bank-funded urban projects in China during the last ten years, LEP contract bid prices, on average, came in about 60 percent below appraised estimates. Some of the contributing factors were: (a) use of standard Bank physical and price contingency factors, even though the "base" costs provided by the design institutes already incorporated physical contingencies (5 percent) and price contingencies (8 percent); (b) the incentives for the design institutes to overestimate costs, as their fees were based on a percentage of estimated capital costs; (c) the margin built in to the cost estimates to allow for late payments to contractors; (d) inaccurate schedules of rates provided by the Provincial Construction Commission; (e) recent contract prices not being factored into the schedule of rates; and (f) low bidding by contractors with the express intention of recouping some of the shortfall - 11 -  through increases in measured quantities and variation orders. LUCRPO and some municipal implementing agencies have expressed concern that exceptionally low bids may jeopardize the contractor's cash flow and performance, and lead to defaults and delays. (See Annex 8, Borrower Contribution to the ICR.). The Bank needs to provide better guidance on handling such issues, as and when they arise. Construction quality. By and large, construction quality was satisfactory. In a few cases, however, it was below expected standards, e..g, civil works for the Fushun wastewater treatment plant, where the work was done in great haste to complete it before the onset of winter, and avoid a five month delay. In general, construction periods specified in bid documents tended to be exceedingly tight, affecting construction quality. Lack of quality in workmanship and materials was occasionally observed in non-Bank financed contracts. It appears that in such cases project agencies relaxed design standards and construction supervision, resulting in poor concrete work, use of corroding materials, lack of corrosion protection, and poor quality of doors and electrical fittings. These shortcomings are, however, not expected to have a substantial impact on either future maintenance and replacement requirements or long-term sustainability. 5.4 Costs and financing: Project costs at completion amounted to $221.8 million, compared to the appraised amount of $350.8 million, representing a 37 percent savings from the original estimate. As indicated in Section 3.4, the scope of work for the Dalian solid waste management component and the Benxi air quality component was reduced drastically; this resulted in only 27.1 and 19.3 percent, respectively, of the appraised expenditures for these components being incurred. The higher expenditures in the case of the Benxi and Fushun wastewater components were due to the higher level of treatment. (See Annex 2 for details of cost comparisons.) Project output overall exceeded appraisal expectations. This remarkable achievement - lower costs than estimated with higher output than expected - clearly sets LEP apart from most urban infrastructure projects. Liaoning Provincial Government, the five municipal governments, and the project enterprises (primarily the Benxi Iron and Steel Company and the Angang steel complex) contributed about 56 percent of project costs, and IBRD financed the remaining 44 percent. The SAR envisaged that 69 percent would be financed from counterpart funds and 31 percent by IBRD. Of the Bank Loan of $110 million, $8.8 million in accumulated loan savings was cancelled at the Borrower's request. 6. Sustainability 6.1 Rationale for sustainability rating: Sustainability is rated likely with some reservations. Despite the economic difficulties in the second half of the nineties, all levels of government - - 12 -  State, provincial and municipal - maintained their strong commitment to reverse the serious environmental deterioration of air and water quality in Liaoning by providing the necessary policy as well as financial support to LEP. In light of the current heightened awareness of environmental issues in Liaoning, the institutions supported by LEP, as well as the facilities constructed under LEP, would most likely continue to receive government and public support. At the time of Loan closing, all components of the project had been completed and were operational; the Benxi wastewater treatment plant is operational since early 2004. Institutional arrangements are in place for on-going operations and maintenance. A number of components, e.g., the Benxi air quality and district heating components, the Jinzhou water supply, the Anshan wastewater, and the Jincheng paper mill, are operating under existing agencies. Autonomous companies were established for the wastewater operations in Benxi, Dalian and Fushun; the Dalian wastewater system has already been in operation for three years, while the Fushun system has been in operation for over a year. As discussed in Section 4.1, there is strong government commitment at the provincial level to the objective of financial sustainability of water and wastewater utilities. The Jinzhou water utility is already financially viable. The project wastewater companies would meet LEP financial covenants when the municipalities implement wastewater tariffs as provided under the recent provincial decree. Liaoning authorities, in particular the Liaoning Finance Bureau, indicate that the municipal governments would make the necessary wastewater tariff revisions in the near future. The Bank is well placed to monitor progress on a continuing basis, in view of its on-going dialogue with Liaoning in the context of the follow-on Liao River Basin Project. The Jincheng paper mill and the Anshan wastewater components can be considered fully sustainable in an institutional, operational and financial sense, as they are part of large existing organizations. The Benxi district heating component also needs to increase collection fee rates to be financially viable. It is expected to do so in 2004. 6.2 Transition arrangement to regular operations: See 6.1 above for the institutional arrangements for regular operation. Several components have been under operation for a number of years and are functioning effectively. It is anticipated that this will be the case with the recently completed components as well, i.e., Fushun and Benxi wastewater components. Liaoning credits Bank-funded training programs for enabling a successful transition to regular operation. (See Annex 8.) 7. Bank and Borrower Performance Bank 7.1 Lending: The Bank's performance during the identification, preparation, and appraisal of LEP is rated as highly satisfactory. Identification. LEP identification was based on a logical and systematic approach to address Liaoning's high priority needs in the most polluted cities of the province. As indicated earlier in Section 3.1, the project emanated from a 1986 survey, which identified the major urban environmental problems in Liaoning, and subsequently led to the development of long-term - 13 -  infrastructure plans for a period of 15 years. LEP represents the second phase of implementing these plans, following the Liaoning Urban Infrastructure Project, which constituted the first phase. The project was initially proposed to the Bank during the appraisal of the Liaoning Infrastructure Project in August/September 1989. The project was fully consistent with the Bank's 1993 CAS. Preparation. The Bank preparation team comprised experts who had prepared and implemented the Liaoning Urban Infrastructure Project, and were thus well versed in Liaoning's environmental issues and requirements. LEP preparation benefited greatly from having LUCRPO, which was established prior to the first urban project, as a focal agency in Liaoning. Grant funds from the Japanese PHRD Fund, Norway, Australia, Canada, UNDP, and the Bank enabled a high quality project to be prepared with assistance from international and Chinese experts. The State and Liaoning governments, as well as the Bank, persuaded the municipal government of Fushun to participate in LEP, even though it was initially reluctant to do so because of the financial commitments required for counterpart funds, and subsequently for debt servicing. In contrast, a carefully prepared component for the capital city of Shenyang was dropped from the project as the city was able to obtain financing from other sources. Appraisal. A strong and well-balanced Bank team, comprised of experts in key fields, appraised LEP and the resultant project emerged closely along the lines of the Final Executive Project Summary. Implementing agencies' capacities were assessed accurately, and an appropriate set of institutional development and technical assistance packages was included in the project. The risk assessment was accurate, and appropriate mitigtion measures were included. In particular, the authorities' reluctance to implement the required wastewater tariffs was recognized. Several Bank reviewers also sounded a note of warning in this regard. The Bank team appraised the draft EIA and the provincial resettlement action plan (RAP). The final EIA and the final provincial and municipal level RAPs were provided at negotiations. At negotiations, Government confirmed the scope of the appraised project and the details of the components, but proposed that the loan amount be reduced from $150 million to $110 million. The Bank agreed to this request, and as a result the disbursement ratio for civil works was reduced to only 20 percent, a level which caused some problems during implementation. 7.2 Supervision: The supervision performance of the Bank is rated highly satisfactory, in particular because the team that identified, appraised and negotiated the project carried out project supervision effectively and consistently for over seven years. This team also supervised the Liaoning Urban Infrastructure Project until its closing in March 1997, and oversaw the preparation of the Liao River Basin Project. The team leadership was handed over to another HQ staff in a seamless manner for the final two years of the project. With LUCRPO in charge of all three projects, there was frequent contact and coordination between the Bank and Liaoning. The schedule of formal supervision missions does not fully reflect the Bank's support for LEP, as many issues were concurrently addressed during various missions to Liaoning. The task teams prepared good quality reports, although some reports were not always be filed in a timely manner because of the pressures of preparation and appraisal of the new Liaoning project. - 14 -  Safeguards. The supervision team monitored the Borrower's compliance with safeguards, in particular land acquisition and resettlement. Supervision confirmed that project agencies were addressing these matters in accordance with the agreed resettlement programs. Municipal EPBs monitored implementation of the Environmental Management Plan during construction and will continue to monitor environmental parameters on a regular basis during operations of the completed assets. LUCRPO's 2003 report on land acquisition and resettlement indicated that the livelihood of about 313 resettled households and about 3,300 workers of relocated enterprises improved, and that the affected persons were satisfied with the resettlement arrangements. (The 1994 Land Acquisition and Resettlement Plan had predicted that 273 households would have to be resettled and that about 3,400 workers would have alternative work locations because enterprises had to be relocated.) 7.3 Overall Bank performance: The Bank's overall performance is rated highly satisfactory due the inputs of a highly motivated and skilled task team, comprising sanitary engineers, environmental experts, financial analysts, and cultural heritage specialists during a period of over 15 years from project identification to project closing. Liaoning has also rated the Bank's contribution to be highly satisfactory (see Annex 8). Borrower 7.4 Preparation: The Borrower's performance during the preparation phase of the project is rated satisfactory. The preparatory phase progressed very well because of LUCRPO, which provided the link between State Government, Liaoning, municipal governments and other agencies. State, Liaoning, and municipal governments compensated for their limited knowledge of large-scale wastewater operations and air pollution abatement measures by making effective use of the work of international and Chinese experts on the various technical, economic, environmental, financial and social aspects. As a result, the project was well prepared and consequently moved smoothly into the implementation phase. 7.5 Government implementation performance: Government's implementation performance was satisfactory. LEP was a complex project, involving five municipalities, different levels of government (State, provincial, municipal) and agencies, e.g., SEPA and provincial and municipal EPBs, and dealt with water and air pollution as well as heritage conservation. Government did a creditable job of ensuring that there was good coordination between these various actors, facilitating effective project implementation. The extensions required to complete the project were reasonable, given the complexity of the project and the economic downswings (which affected the availability of counterpart funds). Government, especially Liaoning, also made a commendable effort at putting in place institutional and financial arrangements for sustained wastewater management, based on commercially and institutionally independent wastewater companies with the right to levy adequate tariffs and charges as well as effective billing and collection systems. However, these efforts started only in the later stages of the project, and more work is required to ensure that the institutional and tariff reforms are implemented at municipal and wastewater company levels. 7.6 Implementing Agency: The performance of the principal implementing agency, LUCRPO, is rated highly satisfactory, in - 15 -  particular for its ability to coordinate the implementation of a multitude of project components in different sectors with municipal and other agencies. LUCRPO, using inputs from the municipal-level project units, and with the assistance of consultants, provided excellent quarterly progress reports over the entire implementation period. These reports regularly described the project's progress in terms of the key physical and financial indicators established during appraisal. The Bank's supervision missions routinely confirmed the accuracy of these reports. LUCRPO, however, did not provide information on the monitoring indicators for the operation phase of the project. This issue will be followed up during the supervision of LRBP. In July 2003, LUCRPO submitted a "Completion Report of Resettlement Action for the Liaoning Project" which was reviewed by the Bank's resettlement unit in Beijing and found to be satisfactory. Annual audit reports were furnished in a timely manner. The participating project municipalities also maintained project offices with competent staff in adequate numbers to facilitate implementation. All project units interacted well with the technical, institutional, and environmental consultants. Implementing agencies did their best to overcome delays caused by the lack of timely availability of counterpart funds. The failure to fully achieve institutional and financial reforms is considered to be the responsibility of Liaoning and the municipal governments, and not of the implementing agencies. 7.7 Overall Borrower performance: The Borrower's overall performance is rated satisfactory. The central and provincial governments, as well as the five municipalities, exhibited strong commitment to the project throughout its preparation and implementation phases. All agencies performed well in implementing the physical aspects of the project components. In spite of the extension of the closing date by two and a half years, the Borrower would have deserved a "highly satisfactory" rating had there been greater progress in implementing agreed institutional and financial reforms in the wastewater sector. 8. Lessons Learned Five important lessons emerged from the preparation and implementation of LEP, as discussed below. Lessons (a)-(d) have general applicability. Lesson (e) aims primarily at follow-on projects in Liaoning. (a) Disbursement ratio of 20 percent for the civil works category, agreed during negotiations, was too low. At one level, project agencies had difficulty coming up with 80 percent in counterpart funds. At another level, project agencies felt that the low disbursement percentage was not sufficiently attractive to overcome their reluctance in working with Bank procurement guidelines, with which they were not familiar. The former delayed project implementation, and the latter sometimes resulted in poor quality construction. In future projects, disbursement percentages should not drop to unworkable levels, say, below 40 percent. Further, if there is a need to reduce the loan amount, it would be better to reduce the scope of the project by dropping a component or sub-component, instead of reducing disbursement percentages. (b) Cost estimation needs to be improved, as on average contract prices were only about 60 - 16 -  percent of appraisal estimates. This issue is not specific to LEP, but is generic to China urban projects. A study should be carried out to analyze methods used by Chinese design institutes to estimate costs, and in consultation with the Ministry of Construction, develop revised methodologies to ensure that in the estimation of project costs (a) physical and price contingency factors are not applied twice, and (b) the schedule of rates is based on current market prices, rather than on norms. In addition, the practice of excessively low bids, and attempting to recoup some of the costs through variation orders, should be reviewed with a view to disqualifying such bids, as permitted under Bank guidelines. (c) Institutional Development assistance would not have the intended benefit, if it is provided before the agencies have the capacity to absorb it, as was the case with the institutional development package for wastewater companies (under Package A). Annex 8 (Borrower contribution) confirms that training for financial management took place prematurely. In addition, the issue of on-going training in wastewater operations, after Loan closing, needs to be addressed. With dozens of large wastewater treatment plants (financed under Bank, other donor, and Chinese national and provincial funding) coming on stream in China, the Bank should engage in a dialogue with Chinese authorities regarding the establishment of a specialized facility for training in wastewater operations. (d) Successful implementation of financial covenants for cost recovery requires on-going dialogue with provincial and municipal governments throughout the project cycle, and should not be left to the later stages of project implementation. (e) The Liaoning Environmental Fund was only partially successful, even though the loan allocation was increased from $4 million to $6 million. A sound organizational structure to identify, appraise, monitor and administer sub-projects was not established, resulting in the municipal EPBs having to repay the sub-loans on behalf of defaulting enterprises in some 25 percent of the cases. The procedures for administering the fund have been strengthened in the follow-on Liao River Basin Project, which has a $10 million allocation. Liaoning has obtained additional funds from the European Union for such activities. A comprehensive review of the operation of such funds should be carried out at the end of LRBP, including the limits on the size of individual sub-loans, as the LEP ceiling amount of $300,000 per sub-loan appears too low. 9. Partner Comments (a) Borrower/implementing agency: LUCPRO on behalf of the Borrower has submitted its own excellent and comprehensive Implementation Completion Report which is given in Annex 8. After review of the Bank's final draft ICR, the Borrower wrote on June 21, 2004: "Thank you for sending us the final draft of the Implementation Completion Report (ICR) of the Liaoning Environment Project (LEP). We have reviewed the draft report and are pleased to see that it incorporates the comments that we had provided on the earlier draft. We find the final draft ICR to be a comprehensive and balanced assessment of the implementation of LEP. We concur with the main ratings in terms of implementation and sustainability. We - 17 -  appreciate the positive assessment made of LUCRPO. This gives us confidence and encouragement to continue our work on the current and, we hope, future Bank projects." (b) Cofinanciers: n.a. (c) Other partners (NGOs/private sector): n.a. 10. Additional Information Detailed financial records by project component have been prepared for all entities supported by the project. These records provide information about production and sales volumes, operating expenses and revenues, net income, average tariffs, and operational and financial ratios for the year 2001. This information is available in the project files. - 18 -  Annex 1. Key Performance Indicators/Log Frame Matrix Outcome / Impact Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate a) Protection of wellfield and Enhance drinking water quality in Jinzhou: Indicator: Water supply available per h/d 24 /d 24 h/d % of city population reached: 100 percent 100 percent b) Reduction of total pollution load in Exceeded SAR estimate through advanced provincial surface water: technology in wastewater treatment. Exact Indicator: % reduction of pollutants 35 percent in 2001 figures not yet available. c) Improve Dalian municipal solid waste management: Indicator: % landfill new usage service 100 percent 100 percent d) Improve air quality in Benxi: Component was substantially changed from Air quality objectives of SAR exceeded by Indicator: % reduction of SO2 and TSP SAR. replacement of blast furnaces and coke ovens; small Bank component had positive contributory impact. e) Improve air pollution and create coal savings in Benxi District Heating: Indicator: Tons of particulates removed Particulates 25,500 t/a Not available SO2 discharge 8,500 t/a 3,162 t/a Coal savings Not given 98,332 t/a Boiler slag discharge reduced Not given 38.124 t/a Dust removal Not given 1,145 t/a f) Pollution reduction and resource recovery through Environment Fund: Indicator: Number of effective sub-projects 14 totaling $4.0 million 32 totaling $6.3 million g) Improve Jinzhou Paper Mill pollution: Indicator: Reduction in groundwater usage 40,000 m3/d To be determined Reduction of pollution load 2 million p.a. To be determined COD removal Not estimated 50,348 t/a SS removal Not estimated 55,749 t/a Reduced wastewater discharge Not estimated 5,040,000 m3/a h) Support training, feasibility studies, and future investment project preparation: Indicator: % Achievement of Action Plan 100 percent Broadly met with some changes in scope. i) Improve municipal, environmental and utility Partial compliance; tariff increases need to management and finances: be monitored. Indicator: % Financial performance criteria Compliance with all financial covenants. - 19 -  Output Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate Jinzhou Water Supply: Water Production (million m3/a): 121 102 Water Sales (million m3/a): 108 71 Average Tariff (RMB/m3): 1.63 1.73 Anshan Wastewater: Wastewater Volume (million m3/a): 80 56 Wastewater Collected (million m3/a 80 56 Sewer Connections (number): 1560 n.a. Average Tariff (RMB/m3): 1.49 0.70 Benxi Wastewater: Wastewater Volume (million m3/a): 82 80 Wastewater Collected (million m3/a 82 60 Sewer Connections (number): 1445 approx. 1970 Average Tariff (RMB/m3): 0.91 0.35 Dalian Wastewater: Wastewater Volume (million m3/a): 66 80 Wastewater Collected (million m3/a 66 80 Sewer Connections (number): 2,890 7,600 Average Tariff (RMB/m3): 1.95 0.25 Fushun Wastewater: Wastewater Volume (million m3/a): 91 336 Wastewater Collected (million m3/a) 91 122 Sewer Connections (number): 605 n.a. Average Tariff (RMB/m3): 0.88 0.42 Benxi District Heating: Heating Area ('000 m2): 1,000 1,100 Coverage (in percent): 100 100 Average Tariff (RMB/m2): 40.40 24.00 Dalian Solid Waste Waste to Landfill ('000 m3): 790 860 Billable Waste ('000 m3): 603 860 Average Tariff (RMB/m3): 51.5 10.00 1End of project - 20 -  Annex 2. Project Costs and Financing Project Cost by Component (in US$ million equivalent) Appraisal Actual/Latest Percentage of Estimate Estimate Appraisal Component US$ million US$ million Water Supply Jinzhou 18.10 20.50 113 Water Conservation Dalian 1.60 2.30 144 Wastewater Treatment Anshan 33.70 22.80 68 Benxi 28.10 34.40 122 Dalian 44.50 41.90 94 Fushun 35.70 49.60 139 Jinzhou (Jincheng Paper Mill) 13.90 12.90 93 Solid Waste Management Dalian 13.30 3.60 27 Air Quality Management Benxi 36.30 7.00 19 District Central Heating Benxi 18.40 12.50 68 Environmental Fund 4.00 6.30 158 Environmental Rehabilitation & Reconstruction 1.70 1.70 100 Institutional Development and Training 7.40 6.30 85 Total Baseline Cost 256.70 221.80 Physical Contingencies 35.00 Price Contingencies 46.40 Total Project Costs 338.10 221.80 Interest during construction 12.70 Total Financing Required 350.80 221.80 Note: An additional amount of $7.5 million was expected to be expended prior to Loan Closing bringing the total actual project cost to $229.3 million. - 21 -  Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent) 1 Procurement Method Expenditure Category ICB NCB 2 N.B.F. Total Cost Other 1. Works 51.50 69.10 0.00 19.70 140.30 (10.30) (13.80) (0.00) (0.00) (24.10) 2. Goods 103.00 2.00 0.60 28.80 134.40 (68.80) (0.90) (0.40) (0.00) (70.10) 3. Services 0.00 0.00 5.10 35.00 40.10 (0.00) (0.00) (4.10) (0.00) (4.10) 4. Environmental Fund 0.00 0.00 4.00 0.00 4.00 (0.00) (0.00) (4.00) (0.00) (4.00) 5. Land Acquisition 0.00 0.00 0.00 9.70 9.70 (0.00) (0.00) (0.00) (0.00) (0.00) 6. Institutional 0.00 0.00 9.60 0.00 9.60 Development and Training (0.00) (0.00) (7.70) (0.00) (7.70) Total 154.50 71.10 19.30 93.20 338.10 (79.10) (14.70) (16.20) (0.00) (110.00) Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent) 1 Procurement Method Expenditure Category ICB NCB 2 N.B.F. Total Cost Other 1. Works 6.80 33.90 0.00 52.40 93.10 (1.40) (1.90) (0.00) (0.00) (3.30) 2. Goods 87.80 0.20 3.40 3.90 95.30 (85.40) () (0.00) (0.00) (85.40) 3. Services 0.00 0.00 2.60 14.00 16.60 (0.00) (0.00) (0.00) (0.00) (0.00) 4. Environmental Fund 0.00 0.00 6.30 6.30 (0.00) (0.00) (6.10) () (6.10) 5. Land Acquisition 0.00 0.00 0.00 11.70 11.70 (0.00) (0.00) (0.00) (0.00) (0.00) 6. Institutional 0.00 0.00 6.30 0.00 6.30 Development and Training (0.00) (0.00) (6.30) (0.00) (6.30) Total 94.60 34.10 18.60 82.00 229.30 (86.80) (1.90) (12.40) (0.00) (101.10) 1/Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies. 2/Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units. - 22 -  Project Financing Plan (Appraisal Estimate/Latest Estimate) (US$ million equivalent) Appraisal Estimate Actual/Latest Estimate Local Foreign Total % Local Foreign Total % Liaoning Provincial Government, Municipal Governments, and 159.1 81.7 240.8 68.6 97.8 30.3 128.1 55.9 Enterprises IBRD 110.0 110.0 31.4 101.2 101.2 44.1 Total Financing 159.1 191.7 350.8 100.0 97.8 131.5 229.3 100.0 - 23 -  Annex 3. Economic Costs and Benefits An overall economic rate of return for the whole project was not calculated at appraisal. Individual economic rates of return were only calculated for those components where appropriate data for preparing economic benefit streams could be gathered. For several of the components, however, particularly for wastewater treatment, information was not readily available and therefore the economic benefits were not quantified. The economic analysis for the waste treatment plants in Fushun and Benxi contained in the project uses the "least-cost" approach of alternative treatment strategies. This analysis was sound and its review as part of this report does not warrant any modifications as virtually all physical, technical and environmental parameters remained unchanged. A least-cost approach was also used for the Anshan wastewater component. However, an economic rate of return for the water resale could be calculated since the plant's entire production of treated water, amounting to 220,000 m /d, is sold to the Angang steel plant. As construction 3 costs for this component came in at only 66 percent of the appraisal costs and operating costs are assumed to be approximately the same as appraised, the recalculated economic rate of return increases to 30 percent from the 23 percent appraisal estimate. These high returns stem from the fact that only the secondary and tertiary treatment is included in the calculation since the primary treatment would have taken place in any case. Both wastewater plants in Dalian were determined as least-cost alternatives. For the Chunliu and the Malan wastewater plants, some measurable economic benefits are also derived from the sale of treated water. Since actual investment costs amounted to only 90 percent of the appraisal estimates (RMB 345 versus 387 million), and all other parameters can be assumed to be close to the values at appraisal, the ICR economic benefit would exceed the SAR estimate. Because Chunliu is a plant expansion, it has the added advantage of substantial sunken costs, allowing it to operate at net incremental treatment costs per ton of wastewater below that of Chunliu. At appraisal, the Jinzhou water supply component showed a 12 percent economic rate of return for an incremental production of 100,000 m /d. Due to higher than appraised capital costs (RMB 3 170 versus RMB 158 million, respectively) and lower water revenues (RMB 71.32 versus RMB 108.00 million, respectively), the net economic rate of return is now estimated at approximately 9 percent. The actual water tariff slightly exceeded the appraisal estimate (RMB 1.73 versus RMB 1.63 per m ) and the company has been profitable since 1998. However, it has taken longer than 3 expected at appraisal for water production to reach full operating levels. No economic rate of return analysis was prepared for the Dalian solid waste component. The landfill site, which was already in use at appraisal, was reassessed and found to be the least costly and least environmentally vulnerable of all studied alternatives. The initially proposed scheme using 5-ton trucks in combination with a permanent three-level transfer station was replaced by a transport scheme using a fleet of 8-ton trucks that was determined to be economically superior to the transfer station scheme. In addition, the useful life of the landfill was substantially extended, which reconfirmed the economic value of the landfill selection decision. - 24 -  The SAR estimated the white-water recovery at the Jincheng Paper Mill to have an economic rate of return of 37 percent. No recalculation was done for the ICR since this part of the project was deferred to the Liao River Basin Project. The red liquor extraction and binder production scheme was estimated to have a 9 percent economic rate of return. The economic benefit for the red liquor extraction would primarily come from binder sales, water savings and from cost avoidance from not having to treat the effluent. As net income of the operation is now expected to be almost double appraised assumptions, the economic return for the red liquor scheme is estimated at about 16 percent. The Borrower has stated that the World Bank investment allowed the Jincheng Paper Mill to avoid suspension of its operation or closure as the company was able to adhere to the stricter current environmental regulations. The Borrower thus credits the project with preventing an otherwise certain economic downturn of the local economy which depends heavily on the paper mill. For the Benxi Air Quality component, the appraisal mainly used a least-cost justification. No economic rate of return was presented for the component as a whole. However, a 6 percent rate was calculated for the refitting of blast furnaces No.1 and No.2. As indicated earlier, the company decided to replace these obsolete furnaces without Bank assistance. Since the rest of the component was also substantially redesigned, with the Bank financing low-level dust emission measures from the electric furnaces, a direct comparison of the original design with the revised scope would not be meaningful. For the district heating sub-component also no economic benefit analysis was prepared at appraisal because central heating costs were entirely borne by building owners and were not passed on to the renters. Table 1. Comparative Economic Rate of Return: SAR Estimates vs. ICR/Actual Estimates Component SAR Estimate ICR/Actual Estimate Anshan Wastewater 23% 30% Jinzhou Wastewater 12% 9% Jincheng Paper Mill Red Liquor 9% 16% White Liquor 37% Deferred Air Pollution Refitting 2 Blast Furnaces 6% Blast Furnaces replaced - 25 -  Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, 1 FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective Appraisal/Negotiation Appraisal: 14 SANITARY ENGINEERS November 1993 (2); STEEL INDUSTRY SPECIALIST (1); PROG- RAM ASSISTANT (1); CULTURAL HERITAGE SPECIALIST (1); WATER CONSERVATION SPE- CIALISTS (2); COST CON- SULTANT (1); FINANCIAL ANALYST (1); STEEL INDUSTRY ECONO- MIST (1); SOLID WASTE SPECIALIST (1); ENVI- RONMENTAL ENGINEER (1); INSTITUTIONAL SPECIALIST (1) Negotiations 7 ENGINEERS (2); LAWYER (1); DISBURSEMENT OFFICER (1); ECONOMIST (1); ENVIRONMENT SPECIALIST (1); FINANCIAL ANALYST (1) Supervision 10/14/1994 4 TASK MANAGER (1); S S FINANCIAL ANALYST (1); WASTE MGMT ENGINEER (1); SOLID WASTE SPECIALIST (1) 05/10/1995 1 ENGINEER (1) 04/29/1996 3 PLANNER, CULTURAL SPEC S S (1); FINANCIAL ANALYST (1); ENGINEER (ENVIRONMENT) (1) 07/31/1997 4 ENGINEER (1); ENVIRON- MENTAL ENGINEER (1); FINANCIAL SPECIALIST (1); CULTURAL HERITAGE SPECIALIST (1) 01/30/1998 3 SOLID WASTE & SANI. EN S U (1); CULTURAL HERITAGE SPEC (1); FINANCIAL - 26 -  ANALYST (1) 03/31/1998 4 ENGINEER (1); FINANCIAL ANALYST (1); INDUSTRIAL ENVIRONMENTALIST (1); INSTITUTIONAL EXPERT (1) 07/28/1998 4 URBAN ECONOMIST (1); S U FINANCIAL SPECIALIST (1); ENVIRONMENTAL ENGINEER (1); PROJECT ASSISTANT (1) 02/13/1999 2 ENVIRONMENTAL ENGINEER (1); FINANCIAL 07/23/1999 4 ANALYST (1) URBAN ECONOMIST (1); ENVIRONMENTAL SPECIALIST (1); FINANCIAL SPECIALIST (1); TEAM ASSISTANT 04/04/2000 3 MUNICIPAL ENG, TTL (1); S S ENGINEER (1); FINANCIAL SPECIALIST (1) 06/21/2001 3 ENGINEER (1); WATER CONSERVATION SPECIALIST (1); FINANCIAL ANALYST (1) 01/23/2002 5 TEAM LEADER (1); S S ENGINEER (1); SOCIAL SCIENTIST (1); SR. URBAN PLANNER (1); FINANCIAL ANALYST (1) ICR September 2003 4 INSTITUTIONAL S SPECIALIST & TEAM LEADER (1); ENGINEER (1); FINANCIAL ANALYST (1); RESETTLEMENT SPECIALIST (1) Note: Missions without specific performance ratings were generally carried out in conjunction with other project work. Identification and preparation work was carried out in conjunction with the supervision of the then ongoing Liaoning Urban Infrastructure Project. - 27 -  (b) Staff: Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ ('000) Appraisal/Negotiation 45.5 207.3 Supervision 45.5 584.7 ICR 23.0 53.0 Total 309.2 1,281.4 Regional direct to full costs mark-up is 25% for fiscal years prior to FY00. - 28 -  Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating Macro policies H SU M N NA Sector Policies H SU M N NA Physical H SU M N NA Financial H SU M N NA Institutional Development H SU M N NA Environmental H SU M N NA Social Poverty Reduction H SU M N NA Gender H SU M N NA Other (Please specify) H SU M N NA Private sector development H SU M N NA Public sector management H SU M N NA Other (Please specify) H SU M N NA - 29 -  Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.1 Bank performance Rating Lending HS S U HU Supervision HS S U HU Overall HS S U HU 6.2 Borrower performance Rating Preparation HS S U HU Government implementation performance HS S U HU Implementation agency performance HS S U HU Overall HS S U HU - 30 -  Annex 7. List of Supporting Documents 1. Staff Appraisal Report: Liaoning Environment Project, dated July 7, 1994, Report No.: 12708-CHA 2. Borrower's Implementation Completion Report, dated December 2003 3. Quarterly Progress Reports by Liaoning Urban Construction and Renewal Office 4. Liaoning Environment Fund Assessment Report, dated March 1998 5. ICR Aide-Memoire, dated October 30, 2003 6. Revised Implementation Completion Note on Land Acquisition and Resettlement, dated September 2003. - 31 -  Additional Annex 8. Borrower's Contribution to the ICR BORROWER'S IMPLEMENTATION COMPLETION REPORT LIAONING ENVIRONMENT PROJECT