China - Fourth Inlands Waterways Project

Document of The World Bank FOR OFFICIAL USE ONLY ReportNo: 27984-CHA PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDLOAN INTHE AMOUNT OFUS$91MILLION TO THE PEOPLE'SREPUBLIC OF CHINA FOR A FOURTHINLANDWATERWAYS PROJECT March 1, 2004 TransportSector Unit EastAsia andPacificRegion This documenthas arestricteddistribution andmaybeusedby recipientsonly inthe performanceoftheir official duties. Its contents may not otherwisebe disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective January 1,2004) Currency Unit = RMB (Yuan) RMB1.OO = US$O.l2 US$l.OO = RMB 8.28 FISCAL. YEAR January 1 -- December 31 ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy CFAA Country Financial Administration Assessment CNAO China NationalAudit Office DSP Dam Safety Panel EAP Environmental Action Plan EIA Environmental Impact Assessment GDWB Guangdong Waterways Bureau GXWCDC Guangxi Xijiang Waterways Construction & Development Co. GXCD Guangxi Communications Department ICB International Competitive Bidding IWT Inland Waterway Transport IWW Inland Waterway kWh Kilo-watt-hour M O C Ministryo fCommunications MOF MinistryofFinance MBD Model BiddingDocuments MW Mega-watt PFB Provincial Finance Bureau PIP Project Implementation Plan PMO Project Management Office RAP Resettlement Action Plan SOE State-owned enterprise TA Technical assistance TOR Terms o f reference WTO World Trade Organization Vice President: Jemal-ud-din-Kassum, EAPVP Country Managermirector: YukonHuang,EACCF Sector ManagedDirector: Jitendra Bajpai, EASTR Task Team Leader/Task Manager: GrahamSmith, EASTR  FOROF'FICLALUSEONLY CHINA FOURTHINLANDWATERWAYS PROJECT CONTENTS A. Project Development Objective Page 1, Project development objective 3 2. Key performance indicators 3 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supportedby the project 3 2. Main sector issues and Government strategy 4 3. Sector issues to be addressed by the project and strategic choices 6 C. Project Description Summary 1. Project components 9 2. Key policy and institutional reforms supportedby the project 10 3. Benefits and target population 11 4. Institutional and implementation arrangements 11 D.Project Rationale 1. Project alternatives consideredandreasons for rejection 12 2. Major relatedprojects financed by the Bank and/or other development agencies 13 3. Lessons learned andi-eflected inthe project design 14 4. Indications of borrower commitment and ownership 14 5. Value added o f Bank support inthis project 14 E. Summary Project Analysis 1. Economic 15 2. Financial 16 3. Technical 17 4. Institutional 19 5. Environmental 20 6. Social 21 7. Safeguard Policies 23 F. Sustainability andRisks 1. Sustainability 24 Thisdocumenthas a restricteddistributionand may be used by recipients only in the performance of their official duties. I t s contents may not be otherwise disclosed without World Bank authorization.  2. Criticalrisks 24 3. Possible controversial aspects 25 G. Main LoanConditions 1. Effectiveness Condition 25 2. Other 25 H. Readinessfor Implementation 26 I.CompliancewithBankPolicies 21 Annexes Annex 1: Project Design Summary 28 Annex 2: Detailed Project Description 31 Annex 3: Estimated Project Costs 34 Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 36 Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary 40 Annex 6: (A) Procurement Arrangements 44 (B)FinancialManagement andDisbursementArrangements 57 Annex 7: Project ProcessingSchedule 63 Annex 8: Documents inthe Project File 64 Annex 9: Statement ofLoans and Credits 65 Annex 10: Country at a Glance 69 Annex 11:Environmental Assessment andAction Plan Summary 71 Annex 12: Summary of ResettlementAction Plans 81 Annex 13: Social Assessment andPoverty Alleviation Impact Assessment 85 MAP(S) IBRD32887 FourthInlandWaterways Project IBRD32888 FourthInlandWaterways Project, GuangxiProvince, NajiNavigationalComplex, Channel Improvements IBRD32889 FourthInlandWaterways Project, Guangdong Province, XiniuNavigationalComplex, Beijiang Channel Improvements IBRD32890 FourthInlandWaterways Project, GuangdongProvince, Lao-Long-Hu Channel Improvements andBridge Replacement  CHINA FourthInland Waterways Project Project Appraisal Document EastAsia and Pacific Region EASTR Date: March 1,2004 Team Leader: Graham Smith Sector Managermirector: Jitendra N.Bajpai Sector(s): Ports, waterways and shipping (58%), Country ManagedDirector: Yukon Huang Renewableenergy (42%) Project ID: PO77137 Theme(s): Infrastructure services for private sector Lending Instrument: Specific Investment Loan (SIL) development (PI, Water ~"-ce management (PI, Rural services and infrastructure (S), Public expenditure, financial management andprocurement (S) Project Financing Data BORROWER 151.30 I 18.10 I 169.40 [BRD 0.00 91.00 91.00 Total: 151.30 109.10 260.40 Borrower: PEOPLE'S REPUBLIC Responsible agency: GUANGXIZHUANGAUTONOMOUS REGION & GUANGDONG PROVINCE Guangxi Communications Dept. project executedby Guangxi Xijiang Waterways Construction and Dev. Co. Ltd Address: 67 XinminRoad, Nanning, Guangxi 530012, P.R. China Contact Person: Mr.Li, Shangyan Tel: 86-771-211-5065/86-771-262-0575 Fax: 86-771-261-4441186-771-280-5550 Email: wzbgs@public.nn.gx.cn Other Agency(ies): Guangdong Communications Dept.; project executedby Guangdong Provincial Waterways Bureau Address: 195 Yanjiang Zhong Road, Guangzhou 510120, PR. China Contact Person: Mr.Chen, Zichao Tel: 86-20-8330-5766 Fax: 86-20-8332-3084 Email: wbwblpo@pub.guangzhou.gd.cn MinistryofCommunications Address: 11JianguomenneiAve, Beijing100736,P.R. China Contact Person: Ms.Xia Hong Tel: 86-10-6529-3158 Fax: 86-10-6529-3156 Email: xiahong@,moc.gov.cn  - 2 -  A. Project Development Objective 1. Project development objective: (see Annex 1) The Project's main objective i s to improve access for poor regions o f southern China by upgrading navigationconditions on the region's major east-west river and other waterways feeding traffic into the Pearl River Delta region. A secondary objective i s to harness water flow in two o fthese rivers to generate environmentally cleanelectricity to helpmeet growing energy demandinthe provinces of Guangdong and Guangxi. (Note: Guangxiis anAutonomous Region; the use o f the term `province' inthis document is for convenience only.) 2. Key performance indicators: (see Annex 1) The most meaningful indicator ofimprovedaccess will be loweredtransport costs for goods carried on the Project waterways. Another indicator will be the average size o f vessels usingthe Project waterways, as the loweredtransport costs will be made possible by investments in infrastructure that allow larger vessels to navigate safely year-round. For the agencies managing the waterways, monitoring vessel size i s far simpler thanmonitoring transport tariffs, which are privately negotiated between the cargo owners and vessel operators and not reported to any government agencies. Thus average vessel size will be the basic indicator. Increased traffic volumes will show that the market has responded to the lower transport costs and improvement inrelated services. The waterway transport's market share inthese corridors (vis-A-vis road andrail transport) will show that waterway transport has made a comeback and has made itselfrelatively more attractive. Efficiency inconstruction o f electric generating capacity will be measured by the cost per kW capacity installed and the cost per kWh delivered, compared with generating units of similar size elsewhere inChina. Efficiency inoperation and maintenance o f the power houses will be measured by the hours per year when the turbines are available for use (at times when electricity is demanded and the water level inthe reservoir permits operation). B. Strategic Context 1.Sector-related Country Assistance Strategy (CAS) goal supported bythe project: (see Annex 1) Documentnumber: 25141 Date of latest CAS discussion: December 19, 2002 The 2002 CAS stresses that the Bank's operational strategy i s to support China inmakingtwo historic transitions --from a rural, agricultural society to anurban, industrialized society, and from a centrally-plannedeconomy to a more globally integratedmarket-based economy. To this end its main goals are to: a) improve the business environment and help accelerate China's transition to a market economy; b) address the needs ofthe poorer and disadvantaged people and regions; and c) facilitate a more environmentally sustainable development process. - 3 -  The project aims to provide infrastructure services needed to support private sector development andruralnon-farm income generation, especially inpoorer regions andinenvironmentally benign ways. 2. Main sector issues and Government strategy: The rapidgrowth o f the Chinese economy has overloaded its transport network, which i s struggling to keep pace. Invarying degrees the infrastructureo f all transport modes has been modernized and upgraded, but the tonnages to be moved have grown so fast and so broadly that inplaces there have beenlongtime lags beforenew capacity couldbeputinto operation. The expansion o f cities has especially strained urbantransport systems designed for far smaller populations. The introduction of higher-capacity and higher-quality transport services -notably long-distance trucking-has also laggedbehinddemand. Private road transport operations are growing rapidly but state-owned enterprises still have a substantial market share. Bottlenecks in infrastructure have beenthe mainfocus o f investments inall modes: roads, railways, waterways, and especiallyurban transport. A sectorwide issue i s how to ensure transparency inthe awarding o f contracts (competitive bidding) and ensuring compliance with their price and quality provisions (supervision). Bottlenecks inservices remain serious. Because o f the under-development o f China's services sector, the long inland distances, and the railway's concentration on its traditional bulkcargoes, it was estimated in 1999that China's logistics costs (transportation, warehousing and distribution) were highat 18 % o f GDP, comparedto 9.5 % inthe USA inthe mid-1990s. Moreover, whereas indeveloped economies transport accounts for 25% o f the total logistics cost, inChina itwas closer to half. Over the past five years bigimprovementshave beenmade inthe transportationinfrastructure and services inthe coastal provinces, but the inland provinces are still lagging. Private sector participation inthe growth o f China's highway systemi s advanced interms o f both development models andprivate capital flows. The private sector has contributed nearly 10% o f China's total commitment to new construction since the inception o f economic reform inthe early 1980s --highcompared to most countries. However, the degree o f risktransfer from the public sector has been limitedand obstacles to increased flows o f funds are found inthe legal and regulatory framework for private participation ininfrastructure. Transport's role inpromotion of trade: China's exports are crucial to the success of its economy. However, internal transport costs are high, so that coastal provinces enjoy a considerable advantage incompetitionwith inland provinces. Part of the problem for the inland provinces i s distance; part is inefficiency or inappropriatepricing. Intermodal logistic chains are weak. Ifthe inlandprovinces are to share inthe export boom --either directly or as supplierso f inputs to manufacturers near the coast--, special efforts are requiredto improve their access to seaports and to overcome resistance to cooperation across institutional boundaries. China's membership o f WTO requires opening up o f transport services to foreign participation. This may be good news for exporters butbadnews for Chinese transport firms. - 4 -  Issues related to roads: The Government faces many strategic choices: how to balance the population's desire for greater personal mobility (car ownership) with protecting the environment and especially air quality; how to balance spending on expressways with lower class roads; how to share costs betweennational andprovincial governments; how to finance highways -whether bytolls or through a user charge added to fuel; how to attract private finance andmanagement skills into road construction and maintenance; and how to make all roads safer. It also faces the question: how far should it intervene to promote efficient service-oriented trucking companies in the private sector, and bywhat means? Government spending has beenconcentrated heavily on the expressways making up the nationaltrunk highway network, raising questions whether spending more onupgradingand maintaining existing roads might have done more to improve access inpoor regions. The legal framework for private participation ininfrastructure needs attention. Railway issues: After careful deliberationand analysis of internationalexperience, the Government has adopted strategic goals for the national railway system, aiming to make it more responsive to the market. It i s gradually spinningoff non-transport activities as independent companies. Incertain regions it has set up passenger services as profit centers separate from freight. It plans to legally separatetransport operations from government oversight, but it remains to be decidedhow and when. Secondary strategic goals also needto be decided upon: how far to enable competition among companies offering rail transport services (private or otherwise); how far to allow pricingflexibility so that prices canreflect costs more closely, service by service, and carriers and customers can enter into contracts covering not only price but also service quality; andhow to deal responsiblywith surplus labor, as information technology eliminates the need for manyjobs. Inland waterway issues: More than many countries, nature has blessed China with large navigable rivers linking many o f its major concentrations o f population, especially inthe center and south where rainfall i s high. Some rivers carry passengers; all carry large volumes o f bulk cargoes, especially coal, construction materials such as sand and gravel, timber, and mineral ores. Many o f these cargoes are hauled from rural areas (mines, quarries and forests) to urban areas for processing. These mines, quarries and forests are often important sources o f employment inpoor rural areas. However, on the rivers' upper reaches limitedwater depth prevents safe year-round access by vessels over 100tons. Many o f the costs o f operating vessels vary far less than their carrying capacity, so larger vessels and sets o f barges pushed by a single power unit can offer substantially lower costs per ton carried. At relatively modest cost the navigation channels on these riverscanbe deepened sufficiently to enable much larger vessels to reach far upstreambut thenmayrequireperiodic maintenance. Separating the power unitfrom the barges allows the former to be kept inrevenue-earning operation while the barges await loading and unloading. Inlandwaterway transport (IWT) offers the added advantage that it has less impact on the environment thanrail or road transport. Accordingly, to ease the pressure o f demand for new roads and improved railways, the Government has recently stepped up investment inwaterways to deepennavigationchannels andupgrade navigational aids, at the same time as it has undertaken public works to control floods. - 5 -  Government strategy The Government is tackling all the above issues with varying degrees o f success. Construction goes well everywhere. The Government has decided inprinciple to introduce a fuel surcharge to fundroads buthasnot yet passedlegislation to implement it, apparently due to the complexity o f the issue and opposition from vested interests. Muchremains to be done to make the roads safer, especially on driver educationand enforcement. A window of opportunity may be closing to take tough action to restrain private car use, as one new car-manufacturingjoint venture after another i s announced. On urbantransport the more innovative cities are buildingundergrounds (metros) or busways; some are improvingtraffic management and taking steps to make streets safer for cyclists and pedestrians. Many are catering to private cars to excess, without addressing the longer-term sustainability o f car-basedcity land-use plans andthe urgent need for an orderly parlung regime (space, charges and enforcement) and other measures to manage demand. The Ministryo fRailways, havingannounced its general intentionto undertake 'three separations', needs to set a timetable to implement them and address its surplus labor issue. The Ministry of Communications (MOC) i s drafting laws to govern inland waterways (the infrastructure) and inlandwater transport (the services), to bringmore consistency inrelevant public policies from province to province and to codify good practice. On export competitiveness the Government is eager to improve access for inlandprovinces and i s seeking ways to lower their transport costs and strengthen the logistics services linkingthemwith external markets. 3. Sector issuesto be addressed bythe projectand strategic choices: The market for inland waterway transport: China's geography andthe location ofpopulation are exceptionally favorable to IWT anduntil the 1960'swaterway transport accounted for 70-90 percent o f China's inlandtransport market. Buttoday it accounts for only 5-10 percent o f China's inland transport market. A study financed underthe current Second InlandWaterways Project found that inland water transportationo f low-value commodities such as coal had a distinct cost advantage over other modes for distances less than 400 kmbut lost out to road interms o f flexibility. InJiangsu province, whose waterways allow vessels o fup to 400-500ton capacity and where bargehow combinations are beginning to be used, the average inlandwater transport tariff i s about 1.1 US cent per ton-km, and this could be reduced by 20-30% if more vessel owners were to take full advantage and trade up to larger vessels and bargehow combinations. The situation i s comparable to other countries that use inlandwater transportation extensively. Efficient river transport on the Mississippi or the Rhine, for example, can offer rates o f 0.5-1.O US cent per ton-km for consignments o f 500-2,000 tons, which can rarely be equaled by rail (typically 1-3 US cents per ton-km for consignments o f 100-1,000 tons), while trucks usually cost 6-10 cents per ton-km (for consignments o f 5-20 tons). Whether a cargo owner prefers river transportation to rail or road, however, depends on the specifics o f his demand. His choice i s driven by not only the line-haul price but also the size and frequency o f consignment, its volume and regularity, the need for speedy or predictable delivery, care inloading andunloading, andcontrol against pilferage. Transport inlarge river vessels will be attractive to customers with large volumes o f undifferentiatedcargo o f low value, needingto be hauled over regular routes inlarge consignments, from origins and to destinations near a riverbank. - 6 -  As the Chinese economymatures and shifts toward manufacturingo fhigh-value intermediate and finished products, the primary sector and constructionwill decline inrelative importance, shrinkingthe market for IWT. This transition will be felt first inthe coastal provinces. However, IWTmay continue to thrive inland for bulkcargoes, oversize loads or dangerous cargo and even inthe coastalprovinces itmayprosper where the roador railaltemative is not readily available, such as a river delta. A niche market may also develop for containers where the service by road or rail i s deficient. Taken together, it i s likely that the demand for transport on China's major rivers will remain substantial for at least the next couple of decades. Coordinatingmultipleuses of rivers: Rivers are usefulnot only for transport but also for urban water supply, farm irrigation, and generation o f electricity. Inmuch o f China rainfall i s highly seasonal, so river flows need to be regulatedand the risk o f flooding has to be managed. Dams built for flood protection, electricity generation and irrigation impose a need for ship locks and integrated management o f water releasesthroughout the year. Managing the rivers for these multiple uses andreconciling conflicting demands is not easy and merits Bank support. Promotionof independentpower producers: In2003 the Chinese government launcheda major restructuring o f the power sector, ending the provincial monopolies o f integrated generation, transmission and distribution companies by spinningoff generation. For many years already hydro dams have sold their power to the integratedmonopolies from a weak position, being paid only enough to cover their identifiable costs o f production. Inthe new, competitive structure, they will gain innegotiating power and financial autonomy, as they acquire the rightto deliver power directly to major customers at privately negotiatedprices; and all generators, hydro or thermal, become legally independent o f the distribution companies, so the hydro producers will no longer be selling to their competitors. Peak hour pricingwill also be introduced. Most hydro plants focus on peak production becausethey lack sufficient water inthe dry season for daylong generation, so this will give them an opportunity to increase their revenue substantially. In compensation, the 'family-style' cooperation with their buyers which has prevailedhitherto will be replaced by more contractual, arms-length commercial relationships, and risks will have to be evaluated more formally andallocated appropriately. The proposedproject involves two such independent power producers, one ineach province. Technical assistanceto be provided under the project will help these entities prepare for life inthe new competitive power market. SteeringIWT operatorstowardlarger vessels: Entrepreneurs contemplating investing in barges and tows want to be assuredo f a steady demand from cargo owners and o funiform and assurednavigating conditions on the routes sought by the cargo owners. Since the Government has devolved the operation o f river fleets to the private sector, the means available to it to encourage new enterprises to enter the IWTmarket are limitedto: (i) providing the infrastructure, (ii)pricing it appropriately, (iii) licensing operators for safety, and (iv) providing transitional assistance inpromoting the market betweencargo owners and vessel operators and ensuring the dissemination o f market information (logistics centerdinland container terminals). - 7 -  In2001the Governmentpromulgatedrules on(a) standardsfor vessels and(b)management of old and over-age vessels. However, barring many of the existing vessels on the grounds that they are old and perhaps unsafe will not ensure that new larger vessels are put into use. A large number o fvessels operating onChina's waterways are small barges or self-powered boats owned by individuals andoperatedby the owner andhis family, living onboard. They lack the financing to trade up to larger vessels. Upgrading of the fleet will require a shift from small family-based ownership to larger corporate ownership, a willingness to invest innewer technology, and access to financing. Public policy instruments to promote the use of larger vessels have beenthe subject o f a study carried out for Jiangsu province under the Bank-supported Second InlandWaterway Project. The study documented that the market responseinJiangsu has beengood, butrecommendedthe provincial government to consider taking certain measuresto speedup the transition. These range from the creation o f a special fundto finance the construction o f standardized vessels, differential charges for use of channels andlocks to discourage the continuing use o f small vessels, restrictingthe use of locks for small vessels, prohibiting the use o f non-standard vessels and crafts with a capacity o f less than 60 tons inClass 5 waterways over a phasedperiod, and administrative measuresto deny the registration o f new vessels that are non-standard. These conclusions are options that Guangxiand Guangdong may consider, should the two provincial governments deem it necessary to introduce measures to speedup the transition to larger vessels. However, for the time being, Guangxiand Guangdong do not intendto intervene, as inbothprovinces the market has and can be expected to continue to respondwell, as i s shown by the fact that o f the nearly 1,500 vessels over 300 ton capacity operating inGuangxi, two-thirds were built inthe last five years. Cost recovery for waterway infrastructure: The national government expects provinces to recover some but not all public expenditures on waterway infrastructure through charges to IWT users. Most provinces with large waterway systems levy an annual fees on vessels to cover channel maintenance and charges for the use o f shiplocks. They aim to generate enoughrevenue from these fees to cover operation andmaintenance. The remaining finance has to come from power sales revenues, or where (as inJiangsu) the shiplocks are not combined with power plants, from general revenues available to the province, with some funding also from the nationalbudget. Those provinces which have borrowed from the World Bank also aim to cover their debt service on the Bank loan, which typically i s about 40% o f the capital cost. This results ina level of cost recovery for waterway investment and maintenance that is one o f the highest inthe world. Governments inthe EUandNorthAmerica do not seek substantial cost recovery from inland waterways, because o f their environmental benefits. This policy on cost recovery for inlandwaterway infrastructure strikes anappropriate balance between subsidy and financial autonomy, but there remains room for improvement, such as in modifyingthe structure andlevel o f fees to give stronger incentives for efficient use o f the infrastructure and to make the grounds for subsidy more transparent. - 8 -  Technical assistance to be providedunder the project, while directly serving the implementing agencies, may also provide pointers for the national government and other provincial governments to pursue these questions o f how to modernize the management o f inland waterways transport, how to encourage restructuring o f the fleet, and what pricing and cost recovery policies to adopt for waterways infrastructure. C. Project DescriptionSummary 1. Projectcomponents(see Annex 2 for adetaileddescriptionandAnnex 3 for adetailedcostbreakdown): A. Guangxi: to allow navigation byvessels o f up to 500 ton capacity on the You (Right) River betweenthe cities o f Baise andNanning(357 km) and generate electricity, through civil works and associated investments (Map 32888). 1) Constructiono fthe NajiNavigation Complex about 38 kmdownstreamfrom Baise. It will consist o f a 20m-high damto regulate river depth, including a shiplock whichwill assure a minimum2.5m o f water above its entrance sill, and a power plant o f 57 MW capacity; access roads to the Complex on bothbanks with a total lengtho f about 9 km, a bridge across the river, bank protection, and two substations to link the power plant to the Baise grid; 2) Purchase o f turbines and other equipment for the above powerhouse, and o f lock gates; 3) Construction o f dikes and dredgingo f shoals between Baise and Nanning and upgrading o f navigational aids; and 4) Resettlement o f about 320 residents (farmers and others) living inthe intendedreservoir zone and along the alignment o f the approach roads. B. Guangdong: to improve navigationconditions and generate electricity through civil works and associated investments on three waterways (Maps 32889 and 32890). 1) Channel improvements andregulationworks on the Lao-Long-Hu Waterway (about 16 km),an east-west waterway inthe Pearl River Deltanetwork servingmainly traffic between the rural southwest o f Guangdong and the special enterprise zones around Shenzhen, as well as Hong Kong, to allow vessels o f up to 1,000 ton capacity to operate safely year-round; 2) Replacement o f two bridgesover the Lao-Long-Hu Waterway, which are too low for the intended larger ships; 3) Channelimprovements onthe middle reaches o f the Bei (North) River between Shaoguan andQingyuan (about 180km)to allow vessels o fup to 300 ton capacity to ply safely year-round; 4) Construction o fthe XiniuNavigation Complex onthe LianRiver, a tributary o fthe North River. It will consist o f a 10.5m-high dam to regulate river depth, including a shiplock to assure a minimum2.5m water depthabove its sill, and a power plant o f 10 MW capacity, two substations to link the Complex to the power grid serving the city o f Yingde, and minor channel improvements on about 13 km; 5) Purchase o f turbines and other equipment for the powerhouse, and o f lock gates; and 6) Compensationto about 500 farmers for land to be flooded by the intended Xiniu reservoir. - 9 -  C. Institutional strengthening and technical assistance (TA). To strengthen the technical and management skills o fpersonnel o f the two project entities, consulting services, overseas training and study tours will be provided. The TA program i s designed to meet the specific needs o f each entity. InGuangxi, the project entity was established as a commercial enterprise to develop andmanage navigational complexes. A relatively new company, its need i s for assistance and policy support infinance, planningand corporate management. Guangdong's project entity, on the other hand, i s a line department o f the provincial government and its current objective is to acquire skills and competency inthe tools andtechniques o f administration. Topics covered by the program include: (i) financing, development andmanagement o f integratedwater basin the resources, (ii) power plant operation and maintenance, (iii) sales strategy and pricing, (iv) power shiplock operation and management, (v) procurement and contract management, (vi) development and implementation of computer-based information systems to facilitate administrative control and coordination, (vii) implementation o f Internet-based systems to give waterway users information on river flow, tide and draft conditions inrealtime, and (viii) environmentalprotection. GuangxiNajiDam(Navigation Complex) 75.76 29.1 43.13 47.4 GuangxiYouRivertraining works 13.56 5.2 0.00 0.0 Guangxi study tours & technical assistance 14.49 5.6 1.42 1.6 Guangxl:resettlement 22.31 8.6 0.00 0.0 Guangdongimprovementofthe Lao-Long-Hu Waterway 23.21 8.9 10.34 11.4 GuangdongregulationofNorthRiverMiddleReaches 17.29 6.6 10.19 11.2 GuangdongXiniu Dam (NavigationComplex) 31.31 12.0 21.59 23.7 Guangdong study tours & technical assistance 16.69 6.4 3.05 3.4 Guangdongresettlement 8.28 3.2 0.00 0.0 0.4 Front-endfee 1 0.91 I 0.3 1 0.91 I 1.o Total FinancingRequired I 260.43 I 100.0 1 91.00 I 100.0 The Bank loanwill be split between Guangxi ($45 million) and Guangdong ($46 million); the loan will cover 35 percent of the total financing required. The national government will contribute the equivalent o f $74million(28 percent o f the total) as an equity contribution from the national budget. Eachprovince will contribute $29 million (1Ipercent each) from the provincial budgets. GXWCDC will contribute $12 million fiom its own retained earnings (5 percent o f the total) and Guangxi will complete the financing with a domestic loan or loans equivalent to about $25 million (10 percent of the total). The national government will on-lend the Bankloan to the provinces on the same terms, including passing on the exchange risk. 2. Key policy and institutionalreformssupportedby the project: The project will seek to promote reforms inthe following areas: a) Buildingcapacity inthe public agencies responsible for inlandwaterways; - 10-  b) Regulation and facilitation of inlandwater transport; c) Strengthening o f independent power producers as part o f the on-going restructuring of the power sector; and d) Encouraging integratedwater resource management. 3. Benefitsandtarget population: The project is expected to benefit users o fthe transport corridor from Yunnan andGuizhou Provinces through Guangxi to Guangzhou, who will be able to take direct advantage o f the water transport on the river from Baise to the Pearl River Delta area. They will include many inhabitants o f poor rural areas, as these areas are commonly the source o f many o f the cargoes carried on the river. The average income per head inthe Baise prefecture (rural western Guangxi) is about $500, and inthe LianRiver valley and the Xiniu area (the hilly northernpart o f Guangdong) it is about $400, well below the average for each province. Yunnan and Guizhou are also well below the national average inincome per head. Other inhabitants o f the corridor will also benefit indirectly from the reduced congestion onthe competing rail route and from the creation of new industries attracted by the transport improvements. 4. Institutionalandimplementationarrangements: ExecutingAgencies. The implementingagencies of the project are the Guangxi Xijiang Waterway Construction 2% Development Co. (GXWCDC) for the project components inGuangxi and the Guangdong Waterway Bureau (GDWB) for the components inGuangdong: GXWCDC is an independent legal entity established andwholly owned by Guangxi for the purpose of developing and managing the region's network o f inlandwaterways and currently manages and operates the hydro-electric damshavigation complexes at Guipingand Guigang, down river from the Project works. GDWB i s a line department o f the Guangdong Provincial government with direct responsibility for the province's inlandwaterways and reports to the Guangdong Communications Department. Each implementing agency has set up a project management office (PMO) which has a full-time team o f technical staff with prior experience inimplementing a World Bank project. The Guangxi PMO bringstogether staff from GXDC and GXWCDC, many o f whom worked on the Bank-supported first InlandWaterways Project (IWWl), completed in 2001, which financed the Guigangdam and shiplock. The Guangdong PMO has managed successfully its component of the on-going Second InlandWaterway Project (IWW2). Funds Flow. The proceeds ofthe Bank loanwill flow fiom the Bankto the provincial finance bureaus (PFB) where the special accounts will be set up, to the project implementing agencies (or project company), and finally to contractors or suppliers. The loan will be with the People's Republic of China through its Ministry o f Finance (MOF), and on-lending agreements will be signed between MOF and the governments o f Guangxi and Guangdong through their PFBs, and between eachPFB and the implementing agencies --supervised, inthe case o f Guangxi, by the regional Communications Department. The loan will be disbursed usingtraditional techniques and not based onproject management reports, inaccordance with a general agreement between the Bank andMOF. -11 -  Project Management Activities Project Implementation Plan. Each Project Office has prepared a project implementationplan for their respective component(s), which the Bank has reviewed. Procurement. An institutional assessment conducted before appraisal shows that adequate skills are available to manage the procurementoperations (Annex 6A). A procurement plan has beendeveloped as part o f the Project ImplementationPlan. Financial management. Responsibilities for all financial management activities were likewise confirmed before appraisal. A financial management specialist has reviewed the current set-up and found it adequate to manage project funds (Annex 6B). A financial management manual has been developed by each Client. Environment. Each Province has submitted an Environmental Impact Assessment (EM) and an Environmental Action Plan (EAP), which the Bankhas reviewed and found satisfactory. Responsibilitiesfor all environmental management activities are includedinthe Plans. Resettlement. Each Province has prepared a Resettlement Action Plan (RAP), which sets out responsibilities for implementing resettlement. They have beenreviewedand found satisfactory by the Bank. D. Project Rationale 1. Projectalternativesconsideredandreasons for rejection: Project scope. Guangxi appraised three alternative locations for the Naji dam, the option o f locating the shiplock adjoining the northor south bank, and alternative reservoir elevations. Geological considerations determined the choice o f the dam site. After considering its initial designs, Guangxi devised flood protection embankments that cut back the number o f people whose landwould be inundatedfrom over 1,000 to fewer than 200. Guangdong likewise compared three alternative locations for its dam as well as three alternative design elevations for the reservoir, and three options regarding the turbines: four small, three medium-size or two large. It chose the locationwhich offered the best geology, and the reservoir level and turbine configuration which offered the lowest cost per kW o f power capacity. Project size. The size o f each Province's component was driven mainlyby the financial capacity o f each province to cover the local cost from its own resources and to service the Bank loan. Riverbank cargo loading facilities: Considerationwas given to including new or improved river ports inthe project, but was not pursued. Existingloading facilities along the You River from Baise to Naming inGuangxi have a total designed cargo handling capacity o f about 6 million tons, while the actual total tonnage handled in2002 was 5.05 milliontons. InGuangdong, ports on the middle reaches o f the NorthRiver have a design capacity o f 4.2 million tons; those served by the Lao-Long-Hu waterway have a capacity o f 5.4 milliontons, while on the upper reaches above the Xiniu dam there are facilities that can handle some 1.3 million tons. Inaddition, along the riverbanks are numerous jetties belonging to cargo owners used mainly for loading and -12-  unloading bulk cargo. Many are rudimentary and inadequate for the plannedtraffic volumes, and will be submerged bythe new reservoirs. The municipalgovernments and mainuser state-owned enterprises plan to replace them with new improved quays. These facilities are not under the jurisdiction of the waterway bureaus and their sponsors do not seek Bank funding. The government's intention i s to develop the larger and better-located river ports into distributing ports to complement the major hub ports o f Hong Kong, Guangzhou and Shenzhen. Additional berths capable of handling vessels exceeding 1,000 tons capacity are already inplace. Cargo carried on the inlandwaterways will flow from feeder ports into distributingports and insome cases on to hub ports. The government's planand strategy for inland water port development i s adequate for the foreseeable future. A re-assessment of the development plan sometime in2010 may be necesssary when the results o f the improvements o f the project waterways become evident. 2. Major relatedprojectsfinancedby the Bankand/or other development agencies(completed, ongoingandplanned). Latest Supervision Sector Issue Project (PSR) Ratings (Bank-fkncel projects only) Implementation Development Bank-financed Progress (IP) Objective(DO) Removetransport bottlenecks by IWWl (completed) S S improving IWT facilities. Remove transport bottlenecks by IWW2 (on-going) S S improving IWT facilities. Construct power-generating facilities as IWWl (completed) & S S part of integrated ddpowerhousel IWW3 (on-going) shiplock complex Develop intermodal transportation Container Transport S S serving inlandprovinces (on-going) Modernize river vessel fleets & PHRD TA inassociationwith S S ownership IWW2 andIWW3 ProcurementusingICB GuangxiProv. Highways and S S manyothers (on-going) Waste water treatment for several cities Pearl RiverDelta Environment inPearlRiverDelta area (appraised early 2004) Xher development agencies Improve access to rural southwestern ADB: GuangxiRoadsDev'tI1 areas through construction o f (Naming-Bake Expressway) high-standardhighway '/DO Ratings: HS (Highly Satisfactory),S (Satisfactory), U (Unsatisfactory),I- (Highly Unsatis -13-  3. Lessonslearnedandreflectedinthe project design: As repeat borrowers, the implementingagencies for the proposedproject have drawn usefid lessons from the experiences o f the one completed inland waterway transport project financed by the BankinChina (the GuigangdaminGuangxi andthe Dayuandudam inHunan), andthe two on-going projects: IWW2 inGuangdong and Jiangsu and IWW3 inHunan (Zhuzhou dam) --see Map 32887. The project agencies have learned international good practice on procurement, cost estimation, and preparationo f environmentalassessments and resettlement plans inaccordance with Bankrequirements, includingwide consultationwith stakeholders. Joint ventures of international and Chinese consultants have advised on techniques for efficient collecting o f data on fleets and ports, as a basis for monitoring the achievement o f project objectives. Consultants have also assessedthe potential impact o f fleet restructuringon employment ininland water transport, and developed programs for improved navigational aids and management information systems. The proposedproject will enable Guangxi and Guangdong to take these institution-building measuresto the next logical stage. 4. Indicationsof borrower commitment andownership: Long before the identification mission, starting inthe early 1990s the two provincial waterway bureaus undertook a considerable amount o f analytical and designwork for their respective components with help from local consultants. The Naji Dam inGuangxi i s plannedas part o f a 'ladder' o f as many as ten dams onthe whole lengtho f the You River and the Yu Rwer into which it flows; three others exist, one (Baise) is underconstruction and five more are planned(Map 32888). The Xiniu Dam inGuangdong likewise i s one 'rung' ina ladder o f twelve onthe Lian River, the other eleven having already beenbuiltbetween 1958 and 1975 (Map 32889). The PMOShave beenreceptive to suggestions from the Bank staff and consultants on ways to enhance the project design. 5. Value added of Banksupportinthis project: Since bothprovinces are prior subborrowers from the Bank for major infrastructure, they know what the Bank offers. They appreciate the savings that have accrued to themby virtue o f the Bank's international competitive biddingprocedures. Even ifalmost all works contracts go to Chinese f m s , the Bank procedures are recognizedas imposing demanding standards o f transparency and the bidders respondaccordingly. It i s also recognizedthat Bank-imposed contract supervision ensures a highstandard o f compliance with the conditions o f contract. The riskofpolitical interference is minimized. The Bankis also seenas adding value inits probing of project altematives to ensure adoption o f the most cost-effective option, and inthe window it opens on international experience regarding complex project management and matters o f public policy. On the negative side the Bank's safeguards are seen as onerous and adding not much value relative to compliance with Chinese laws on environmental and social impacts and resettlement. The above applies to all infrastructure. Why waterways? Untilthe mid-1990s China had spent muchon railways and highways but little on waterways; they remainedtechnically outdated. The -14-  Bank's support for waterways put the spotlight on them and encouraged the Government to invest inthem. The institutionalarrangementfor implementingthe inlandwaterway projects inGuangxi and Hunanand manage the waterways thereafter --proposed by the Bank-- has been innovative for China: legally independent state-owned enterprises, which for part o f their budgethave to rely on revenue streams collected from users. These special-purpose firms have worked well so far, butthey are still young andwill benefit from firther institutionaladvice andguidance as they consolidate their roles. The waterways' navigation function is vulnerable to the riskthat priority may be given to use o f the river flow for other purposes, inimicalto the stability sought for navigation. Inits recent water resources assistance strategy for China the Bank encouragesthe national andprovincial governments to adopt integratedwater resource planning approaches. This project would contribute a working example. For the Naji and Xiniu dams the Bank has encouraged the PMOS to strengthen mechanisms to coordinate water releases from the dams immediately upstream or downstream and resolve possible conflicts (see Section E3.5). E. Summary Project Analysis (Detailedassessments are inthe projectfile, see Annex 8) 1. Economic(see Annex 4): Cost benefit NPV=USSl61million; ERR=22 % (see Annex 4) 0 Costeffectiveness 0 Other(specify) (i) highoveralleconomicreturnontheProjectisduemainlytotheLao-Long-HuWaterway The which, by providinga short-cut for a very large volume o f traffic --about 8 million tons per year-- i s expected to yieldvery highbenefits. The improvements to channel depth on the North River are also expected to yield large benefits becausea relatively modest investment will serve a large volume of traffic. (ii) twodamsrelyfortheireconomicreturnmainlyontheproductionofelectricityinmarkets The where additionalcapacity is neededto keep pace withbriskly growing demand. InGuangxi the demand for electricity inthe Baise region i s expected to remain strong. When the Naji dam starts generating, local supply will meet only 15% o f the demand, including Naji's contribution o f 4%. Inother words, Naji will supply about 29% o f electricity generated for use inthe Bake region. (Power generated by the Baise Damwill not be fed into the local grid butwill be transmittedat highvoltage to larger centers of consumption.) Likewisein Guangdong, local supply will meet less than a quarter o f power demand inthe Yingde region; the Xiniudam will cover only 3% oftotal demand and contribute 12%o flocal supply. (These estimates are for 2008.) Each distribution company will have to cover the shortfall by importing power from outside its region. Considering the transmission losses involved, local suppliers will enjoy a substantial cost advantage. (iii) economicvalueoftheiroutputisequivalenttothecostofinstallingandoperatinga The thermal planto f the same capacity. Since the dams will be usedprimarily for peak-hour generation, the comparable thermal technology would most likely be a gas turbine plant. The cost o f electricity generated by such a plant i s estimatedat about 6.5 U S cents per kwh. A t that price the value o f electricity will make up the lion's share o f benefits from the Naji dam, -15-  giving a satisfactory ERo fabout 18%. Xiniu dam, havinga far smaller, run-of-river generating capacity, will depend more evenly on electricity andnavigation benefits, with a best-estimate ER o f about 14%. (iv)Since achievement o f the intendedincrease invessel size is outside the direct control ofthe Government, it remains subject to some uncertainty. Ifthis goal is met, the ER o f all components i s acceptable, but ifnot, the ER on the Xiniu Damwill be marginal; GDWB would then be advised to take action to encourage a faster shift to larger vessels. (The value o f green-house gas emissions avoided by relying on hydro power rather than thermal has not been estimated, but will add to the economic return.) (v) Inthe case o fthe Naji dam, the `Do Nothing' alternative entails growing congestiononthe competing railway lines, which we have not attempted to value. It i s also hard to predict the railway's competitive response to the Project, especially since reform o f the railway i s planned butuncertainas to its scope andtiming. However, the expected ERis robust enoughto realistic risk inthe main variables, to give a highprobability o f a satisfactory value. 2. Financial (see Annex 4 and Annex 5): NPV=US$-43 million;FRR= 1.X % (see Annex 4) Based on their past and current performance, expected revenue from electricity sales and other sources o f income, supplemented by budget allocations, both GXWCDC and GDWB are expected to be able to service the proposedloan, as well as meet operating costs and existing debt service. The financial performance o f GXWCDC andGDWBhas been satisfactory. Revenue from operations supplemented by budget appropriations has been able to meet operating costs and loan repayments. Inthe case o f GXWCDC, net cash surplus declined from RMB 19.0 million in2000 to RMB 3.2 million in2002 due to service on the Bank's IWWl loan. GDWB, whose repayment o f principal on the Bank's IWW2 loan does not start until2004, has a net cash surplus that has improved steadily fiom RMB -10.5 million to RMB +21.5 million during the same period. The Guangxi regional government will not have to contribute to the servicing o f its debt to IBRD for IWWl andIWW4 becauseGXWCDC's cash flow from power sales from its existing dams will suffice. GDWB incontrast may face minor deficits duringthe IWW4 constructionperiod but the deficit relative to the total revenue for each year will be small (less than 2%). The yearly deficit will be made good with budget allocations from GuangdongProvince and should not affect day-to-day operations. The province's contribution to project costs is small relative to its total budget. In2009, the first year inwhich principal repayments will come due, Guangdongprovince will have to allocate about 13 percent o f its total revenue to the servicing o f its debt to IBRDfor IWW2 and IWW4. After 2009, the share will be smaller. Thus, on the basis o f the flow o f finds analysis, the project is financially viable. Cost recovery policies: The waterway companies are revenue-earning but are not expected to cover all their recurrent costs from electricity sales, supplemented by waterway user fees. As noted above, 50 percent o f the project's capital cost will be coveredby grants from the national - 16-  and provincial budgets. The financial performance and debt service record o f provinces which have borrowed from the Bankhave been generally good. Contingencies: After an inflationary periodinthe first half o f the `90s when many projects suffered cost over-runs, more recently several projects have yielded large savings relative to feasibility study cost estimates. The front-end fee and commitment fee had nonetheless to be paid on amounts that were subsequently canceled. The Chinese govemment has argued for smaller contingency margins than those normally advocated by the Bank Inresponse the Bank has recommendedthat consultants preparing the project revise unit prices downward to reflect recent biddingexperience. Thisportfolio-wide issue is now the subject of dialoguebetweenthe two parties. Inthe inland waterways projects thus far, bidprices for civil works have tended to come inbelow the estimated costs, while those for equipment have beeninthe regionoftheir cost estimates. As an interimmeasurepending a general resolution, the present document uses the cost estimates from the preliminary engineering and provides for price escalation o f 4 percent over the construction period 2004-9 and 8 percent physical contingencies. Fiscal Impact: See above 3. Technical: 3.1 Naji Dam geological and foundation issues Among the three sites evaluated for the Naji dam as part o f the feasibility study, the middlesite was found to be the most suitable on grounds of topography, geophysical conditions and hydrology. It was model tested ina hydraulic laboratory. However, the geology consultants pointed to unsatisfactory, possiblyunsafe, geological foundation conditions for the dam and powerhouse at the selected location, thus suggesting additional investigations. Followingthe Bank's comments, a series o f additional geological investigationswere undertakenby different geology consultants. The interim evaluations of the last investigations showed more favorable conditions than the earlier ones. To overcome the issue o f different interpretations, the Bank and GXWCDC agreed that both geology consultants, supportedbythe geology expert member of the Naji Dam Safety Panel, would together analyze all findings, andmake recommendations for the design o f the foundations for the different parts o f the complex. The main conclusions from these investigations were as follows: Inthe event ofseismic activity there wouldbenodanger ofsand-soil liquefactioninthe reservoir area, including the area o f the dam structure. Analysis o f the material inthe area o f the shiplock and the powerhouse shows that the possibility o f a side-shear slide between the adjoining structures is small. Extensive grouting under and around the permanent structures and temporary cofferdams will be necessaryto prevent water seapage. Placingboththe powerhouse andthe shiplock on the river's right bank will allow bothto be brought into operation one to one-and-a-half years before completion of the left-bank overflow gates, a substantial economic advantage. Existingsmall coal mines withinthe reservoir areawill not affect the storage and safe operation o f the Naji reservoir. - 17-  The preliminary design o fthe shiplock, powerhouse, dam and reservoir was essentially complete at appraisal, andpreparationof the detaileddesign and biddingdocuments began shortly thereafter. That stage entailedsome fiuther investigation into how much grouting will be needed around the dam's foundations. Any extra cost that may result i s expected to be well within the contingency provided inthe cost estimates. 3.2 The Lao-Long-Hu Waterway regulation works The critical location on the Waterway is the area where a major excavation i s foreseen to reduce curvature at a bend, near a point where another channel enterdleaves the Waterway. To verify the soundness o fthe design, the consultant prepared a largenumber o fmathematicalmodel tests, supplemented by a hydraulic model o f this key stretch. GDWB's consultants presented anenvironmentally satisfactory solution to the disposalofthe 1.2 million m3 o f material to be dredged from the Waterway (Annex 11). Future maintenance o f the protective embankments will require careful supervision, since the southem bank will be maintainedby GDWB while the northembank will be maintainedby the Guangdong Water Conservancy. To the north is a populated area which already has embankments for flood protection, whereas areas to the south are as yet largely unpopulated and not protected. Regular sideslope maintenance will be critical with the appearing on the Waterway o f large vessels (of 1,000 ton capacity). GDWB has assuredthe appraisal team that the Water Conservancy will maintain the northernbank appropriately. A covenant in the Project Agreement commits Guangdong to ensuring that this is carried through (Schedule 2,para. 9). Two bridges spanning the waterway will be demolished by the provincial govenunent prior to opening o f the Waterway. These bridges provide only a 3.5m vertical clearance at highwater, too low to allow the foreseen large vessels to pass. They will be replaced by bridgesprovidingthe needed clearance. A covenant in the Project Agreement commits Guangdong to ensuring that this is done by June 30, 2007 (Schedule 2,para. 10). 3.3 Regulation of the Middle Reaches of the North River (Bei Jiang) Consultants conducted extensive investigations andtests to verify the hydraulic soundness o f the proposedgroins designed to direct water flow into the central navigation channel. They are satisfactory to serve as the basis for detailed engineering, launched after the appraisal. 3.4 Xiniu Dam geological and foundation issues As with the Naji dam, among the three sites evaluated for the Xiniudam as part o fthe feasibility study, the middlesite was found to be the most suitable ongrounds oftopography, geophysical conditions andhydrology, and was model tested ina hydraulic laboratory. The preliminary designo f the shiplock, powerhouse, dam andreservoir were essentially complete at the time o f appraisal. However, inlight o f the presence o f limestone caves inthe vicinity o f the dam axis, additional investigations o f the substrata were then conducted. These were completed -18-  to the Bank's satisfaction before loan negotiations and allowed work to proceed on the detailed design o f the foundation works. The detaileddesign is being prepared by the Transportation Planning Survey and DesignInstitute o f Hunan, a more experienced consulting company thanthose who prepared the feasibility study. GDWBhas appointeda XiniuDam Safety Panelto assist andadvise it andits consultants on geological and construction issues (as requiredby the Bank's Operational Policy 4.37). 3.5 Coordination of water releaseswith other dams Exchange o f information with other agencies will be important inboth the construction and operationphases o f the two Project dams. This will apply especially to the Naji damvis-a-vis the much larger Baise dam 60 kmupstream, now under construction and due to start operatingby 2005. (Between 1998 and 2000 the Bankworked onpreparing a loan for the Baise dam, but the Government withdrew its request when the Bankended IDA lendingto China and tightened its IBRDloanterms. The Bank'sassessment ofthe damwas generally favorable as far as it went.) Fromthe time the dams start operating, day-by-day consultations and coordination will be needed regarding the release o f water from each dam to achieve stable navigating conditions. The Baise Dam is managed by the Youjiang Water and Power Corporation, a company set up for this purpose by the province. It operatesunder the guidance of a 'project leading group' headed by the provincial govemor and made up o f representatives o f provincial agencies with an interest inthe dam, including the Communications Department. Two other dams inthe vicinity o f Baise city --Chengbihe and Dongsun-- also will release water into the Right River above Naji. (Please refer to Maps; IBRD32888 "Surface Profile of SteppedDamsDevelopment inYujiang Valley" attached to this document.) As a condition of the Subloan Agreement between Guangxi and GXWCDC, GXWCDCwill, by December 2007, enter into an agreement with the entities responsiblefor these three dams: Guangxi Youjiang Water Conservancy Development Co.Ltd, Baise Chengbihe Reservoir Administration Bureau, and Baise Electric Power Co.Ltd, in accordance with a letter of intent signed among theparties in October 2003,for exchange of information on the safety of the dams and the coordination of water releasesfrom the three upstream dams, to ensure the achievement of thepurposes, and the safety, of the Naji dam (Project Agreement, Annex to Schedule 2, para. 16). 4. Institutional: 4.1 Executingagencies: See SectionC4. 4.2 Projectmanagement: Noproblem is foreseen within the two existing PMOS. They will benefit from periodic reviewso f project progress by the two dam safety panels. 4.3 Procurement issues: Procurement will be undertaken inaccordance with Bank's procurement guidelines. Contract - 19-  packaging and the method of procurement for each contract i s to be found inAnnex 6A. An assessmentbased on the revisedinstructionfor assessment o f an executing agency's capacity to implement procurement issuedby OPCPR inJuly 2003 was carried out before appraisal. The assessmentconcluded that the PMOShave accumulated sufficient experience on the Bank's procurement guidelines and would be able to manage procurementunder the project satisfactorily. 4.4 Financialmanagement issues: The financial management arrangements are summarized above inSectionC4, and details are given inAnnex 6B. Our assessment, basedon guidelines issuedby the Financial Management Sector BoardinJune 2001, has concludedthat the project meets minimumBank financial management requirements. Inthe team's opinion, the project will have inplace an adequate project financial management systemthat can provide, with reasonable assurance, accurate and timely information on the status o f the project inthe reporting format agreed with the project and as required by the Bank. 5. Environmental: Environmental Category: A (FullAssessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation anddisclosure) and the significant issues and their treatment emerging from this analysis. The environmental assessment was entrustedto independent institutes ineach province. Drafts of their Environmental Impact Assessment reports (EIAs) and Environmental Action Plans (EAPs) were reviewed by the Bank. Public consultationwas conducted twice: oncejust after completion o f the draft TOR o f the EIA and the other after completion o f the draft EIA. The final EIAs and EAPshavebeen submittedto the Bank for review, found satisfactory and disclosedat InfoShop. This project will cause environmentalimpacts similar to those that have beenexperienced under the previous inland waterway projects. The potential major environmental issues during construction are water pollutioncontrol, waste material dumping, protection o f residential areas, andprotection o f ecological environment. Those impacts will be mitigated to the levels that satisfy national and local environmental standards, providedthat mitigation measures described in the EAPs are appropriately implemented. The following are the mainmitigation measures for each sub-component. Naji Navigation Complex: 0 The dadshiplock will be builtwithin a cofferdam format. Generationo f suspendedsolids will be carefully controlledthrough the use o f silt curtains and settling ponds. 0 To address interference with migratory fishpatterns, the Project Office will establish fish conservation centers. The provincial governments are now considering establishing fish conservation centers, the purpose o f which mightinclude the rehabilitation o f biodiversity in the reservoir. 0 Onthe recommendation o fthe relevant authority, the project will excavate 1,000 square meters o f Poluo Relics to protect some pre-historic artefacts found inan area that will be flooded by the reservoir. Lao-Long-Hu Waterway regulation: 0 Dredged materials will be disposed o f inthe former navigational channel (replaced bythe - 20 -  new Sanjiaowei Bend) and several upland sites. At the latter, dredged materials will be hydraulically pumped from barges to the disposal sites, the effluent o f which will be carefully regulatedto control suspendedsolids. North River regulation: 0 Duringdredgingworks, silt curtains willbe usedto protect water quality. Dredged materials will be dumped at designated dumping areas withinthe river. 0 No blasting will be conducted and regulation work will avoid fishreproduction seasons. XiniuNavigation Complex: 0 The ddshiplock will be builtwithin a cofferdam format. Generation o f suspendedsolids will be carefully controlledthrough the use of silt curtains and settling ponds. 0 A wastewater treatment facility will be installedto treat the wastewater from the construction camp inorder to protect the water intake for Xiniu Town. 0 Dredgedmaterial, to the extent suitable, will be used either as part o f the dam foundation or as part o f three new river regulation spurs. Unsuitable material will be dumped at designated dumping areas inthe river. 5.2 What are the main features of the EMP and are they adequate? The environmentalaction plans include mitigationmeasures, environmentalmonitoring plans, and institutional arrangements for supervisionand monitoring. Implementationo f the EAPs will be made a legal obligation o f each contractor through the contract documents. 5.3 For Category A andB projects, timeline and status of EA: Date ofreceipt of final draft: July 2003 5.4 How have stakeholders beenconsultedat the stage of (a) environmentalscreeningand (b) draft EA reportonthe environmentalimpacts andproposedenvironmentmanagementplan? Describemechanisms of consultationthat were usedandwhich groups were consulted? Extensive public consultations were conducted with a broad representation o f people duringthe preparationo f all the TORSand the draft EIAs, including public meetings, interviews, and mail questionnaires. Face-to-face interviews were conductedwith people who are illiterate. The stakeholders comprise farmers o f the areas to be inundated, village people, schoolteachers, local government officials, and local politicians. 5.5 What mechanismshave beenestablishedto monitor and evaluate the impact of the project on the environment? Do the indicatorsreflect the objectivesandresults of the EMP? The EAPs define the environmental indicators and issues to bemonitored, monitoringmethods and frequencies. They also define institutional arrangements to conduct the environmental supervision and monitoring. The results will be reported to the Bank inquarterly project progress reports, and annually inindependent annual reports. The annual monitoring reports will be fumished to the Bank during construction and the first three years o f operation following the completion o f construction. 6. Social: 6.1 Summarizekey social issues relevant to the project objectives, and specify the project'ssocial developmentoutcomes. -21 -  Eachprovince commissioned a social assessment study and a study to evaluate the poverty reduction impacts o f the project. They indicated that it i s expected to promote social and economic development inthese areas through improving the navigation conditions and adding to the electricity supply. The studies also revealed concems o f the affectedpopulation and proposed measures to address these concerns. These were incorporated into the project design. The adverse impact o f the project i s related to land acquisition andrelocation o fpeople. Both project offices engaged experienced consultants to work with the local governments to carry out the resettlement planning. The planningactivities includedsocioeconomic surveys, a detailed inventory o f impacts, a census o f the affected population, and consultations with each affected farmer group to designtheir rehabilitationmeasures. The Resettlement Action Plans were prepared on the basis o f this field work inline with relevant Chinese laws, regulations and the World Bank Operational Policy 4.12 on Involuntary Resettlement. The social assessments included a screening exercise for, and consultations with, affectedethnic minority groups. This assessment was carried out by independent institutes inboth directly and indirectly affected areas. While no ethnic minority communities were identified inthe project areas inGuangdong, theGuangxiComponent willimpactalargepopulationofZhuangethnicity. The Cross-cultural Research Center o f Zhongshan University carried out field and analytical work on the affectedZhuang population for compliance with World Bank Operational Directive 4.20 on Indigenous People. They included further research o f academic data and historical records, focus group discussions, and interviews with local leaders and farmers. This assessmentindicated a highlevel ofintegrationofthe Zhuang ethnic group into the Hanpopulation andthis is reflected inall aspects oftheir social, political, economic andculturallife. The socialassessment concluded that the Zhuang population affected under the project did not fall under the Bank's definition o f indigenous people and therefore the policy would not apply to this project. The project preparationteam also looked at the gender aspects o f the project, particularly inthe context o f project impacts, mitigationmeasures and ethnic minority groups. These were designed into the terms o f reference o f the social assessment andresettlement planning exercises. The questionaires had specific gender-related questions. The social assessmentsconducted focus group discussions with women and interviewedwomen members o f the affected communities. These aimed at creating spaces and opportunities for women to express their opinions and concems about the project and participate inthe project planning process. Duringthe project designprocess, screening ofcultural relics was also conductedfor possible impacts inbothprovinces. Bothprovinces had the provincial cultural relics institutes conduct these surveys. Bothinstitutes produced survey reports. Some cultural sites were identified and requiredmeasureshave been proposedand designed (see 5.1 above). The relevant policy requirements, screening process, field surveys and findings as well as designed measuresare documented inthe project environmental assessment reports. 6.2 ParticipatoryApproach How are key stakeholders participatinginthe project? The project has followed a participatory approach inresettlement planning. Primary stakeholders were identified through the social assessment exercises. Project information was disseminated - 22 -  among local governments andthe affected communities through public postings, radios and village meetings. The project offices triedto post inventory, census and compensation information inall villages for feedback. The resettlement planningteams worked together with each farmer group to develop their own livelihoodrehabilitationmeasures. Resettlement information booklets are being developed and distributedto every household for implementation. Thisparticipatory approach is designedto continue duringthe implementation of the project. 6.3 How does the projectinvolve consultations or collaborationwith NGOs or other civil society organizations? The Cross-culture Research Center and Guangzhou Social Science Academy carried out the social assessment andpoverty reduction impact assessment for both Guangxi and Guangdong components o f the project. Guangxi Land Resources Survey Institute, Guangzhou Social Science Academy and East China Power Design Institute were also engaged to carry out the resettlement planning for the project. All the village committees inthe affected areas took part inthe resettlement planning process. 6.4 What institutional arrangementshave beenprovidedto ensure the projectachieves its social developmentoutcomes? Both provinces have established an institutional structure to implementthe resettlement program. The structure includes resettlement offices at the provincial, county, and township offices, the design institutes, and the independent monitor. These offices will be staffed with competent and experienced staff and equipped with all necessaryequipment. An internal management and monitoring system is already designed and documented inthe draft resettlement actionplans. 6.5 How will the projectmonitorperformance interms of socialdevelopment outcomes? Guangxi and Guangdong have each hired an external institution experienced inresettlement planning andimplementationto carry out the independent monitoring of the resettlement program implementation. 7. Safeguard Policies: 7.2 Describeprovisionsmade by the projectto ensure compliancewith applicablesafeguardpolicies. See Sections 5 and 6 above. - 23 -  F. Sustainability and Risks 1. Sustainability: The potential response o f the market to the availability o f improvedwater transport infrastructure will depend on many factors, most o fthem beyondthe control o fthe project implementing agencies. Inthe Bank-financed first InlandWaterways Project, completed in2001, the average size o f vessels passing through the Guigang lock increased 17%inthe first year o f operation and a further44% the following year. Inlightofthe experience, bothGuangxi and Guangdong do not propose to intervene inthe market to stimulate the transition to larger vessels. However, both PMOSwill monitor traffic volumes against the forecasts, so that they can modify this decision and consider intervening ifthe traffic fails to meet their expectations. As noted inthe preceding section, the Xiniu Dami s the case where this would be most critical to achieving a satisfactory returnon investment. There i s little doubt that the electricity generated by the two proposed dams will be purchased by the local power distribution companies. Today generating capacity i s short; inthe future the low marginal cost o f hydro-electricity will make it attractive. The national government is seeking ways to reduce acid rain, puttinghydro-electricity ina strong position. Furthermore, the peak season for electricity demand (air conditioning) coincides with the peak rains; the dnest months (late autumn) fortunately are also months o f low power demand inthe South. GDWB has reachedprovisional agreement with the power purchaser on the purchase price o f power to be generatedinXiniu. Power pricingi s included inthe technical assistanceto assist GXWCDC in negotiating the sale o f power generated inNaji. 2. CriticalRisks (reflectingthe failure of critical assumptionsfound inthe fourth column of Annex 1): Risk Rating Risk Mitigation Measure Businesses are not attracted to Project M Provinces would develop anddisseminateIWT corridors despite improvedIWT. marketingstrategy. Shipoperators fail to investinlarge S Provincial governments do not at this stage wish vessels. to intervene, but ifmarket responseproved disappointing,they would decide on an action plan of incentives andpromulgateit, monitor response, then ifwarranted, modify measures or disseminationcampaign. Revenuepotentialfrompower sales is M Technicalassistance onpowerpricingis to be impairedby delayedimplementationof includedinproject. power sectorrestructuring. Droughtsare more frequent or severe than M Coordinationamongagenciesmanagingdams inrecentpast, restrictingriver use & on differentreachesof same river will be power generation. strengthened. From Componentsto Outputs Qualified DamSafety Panel, adequacy of M DamSafetyPanelconsistingofexpertsin engineering designs, qualified contractors, various fields has reviewedoutcome of andquality of supervisionand satisfactory investigationsandpreliminary designs. RAP implementationof RAPnot inplace. satisfactoryto the Bank is inplace. - 24 -  Effective coordination mechanismfor GXWCDC has signed a letter o f intentwith the water releasebetween Baise andNaji entities responsible for three upstream dams, dams not inplace. committing to coordination provisions acceptableto the Bank. Overall Risk Rating M 3. Possible ControversialAspects: None. G. Main Loan Conditions 1. EffectivenessConditions 1.1 Receipt of legalopinions from the national government on the LoanAgreement and from Guangxiand Guangdong on the Project Agreement. 1.2 Signing of the subsidiary loanagreementbetweenGuangxi and GXWCDC, inaccordancewith the relevant provisions set out inthe Project Agreement's Schedule 2 andits annex. 2. Other [classify according to covenant types used in the LegalAgreements.] Agreement reachedwith the Government 2.1 The Borrower will on-lend the proceedsof the loan to Guangxi ($45 million) and Guangdong ($46 million) on the same terms andconditions as the Bank loan, including the foreign exchangerisk; and Guangxi will on-lend its subloan to GXWCDC on the same terms and conditions as the Bankloan plus a fee (for Guangxi) of 1% of the subsidiary loan amount. Agreements reachedwith Guangxiand Guangdong 2.2 Financialperformance targets: GXWCDC is to maintain a debt service ratio o f not less than 1.2 and an operating ratio o fnot less than 73%; and for both GXWCDC and GDWB other performance targets are set out inAnnex 1. 2.3 Flow o f funds: Authorized allocation for the two special accounts: each starts at $2 million, raised to $3 million once disbursementsfrom the corresponding part o f the loan exceed$10 million. 2.4 i s allowed up to $9 million in aggregateon expendituresmade after September 1, 2003. 2.5 Guangxi and Guangdong are to carry out their respective training prom-amsinaccordancewith an annualtraining planacceptableto the Bank. 2.6 Guangxi and Guangdong are to carry out their respective environmental action plans and resettlement actionsplans, furnishto the Bankany proposedrevisions to these plans, and carry out those revisions to which the Bank agrees. - 25 -  2.7 Guangxi and Guangdong are to monitor the implementation o ftheir EAPs and RAE'Sand submit monitoring reports to the Bank twice a year, by February 15 and August 15 o f each year, starting February 15, 2005. 2.8 Dam safety: GXWCDC is to continue to employ a panel o f dam safety experts for the Naji Damto review the adequacy o f its design and construction procedures, prepare an acceptable plan for (i) construction supervision and quality assurance, (ii) instrumentation, (iii)operation and maintenance, and (iv) emergency preparedness acceptable to the Bank, andcarry out periodic safety inspections ofthe Dam after its completion. 2.9 GDWB is to continue to employ a panel o f dam safety experts for the XiniuDamto review the adequacy o f its design and construction procedures, prepare an emergency preparedness planacceptable to the Bank, and carry out periodic safety inspections o f the Damafter its completion. 2.10 Progress reporting andMid-project review: Each PMO is to submit a semi-annual progress report on project implementation by February 15 and August 15 o f each year, starting with February 2005 and until the project is completed. Each PMO is also to submit a mid-project implementation progress report by November 15,2006, to be reviewedwith the Bank by March 15,2007. 2.11 Coordination with other entities for proiect implementation: GXWCDC is to submit by December 31, 2007 an agreement on coordination o f water releases with dams upstream, consistent with the Letter of Intent signed on October 22, 2003 (prior to negotiations). 2.12 Guangdong Province is to take all actions required to (a) cause demolition andreplacement ofthe two low bridges onthe Lao-Long-Hu Waterway by June 30,2007; and (b) maintain at all times the embankment protection on the northembank o fthe Lao-Long-Hu Waterway to acceptable standards. H. Readinessfor Implementation 0 1.a) Theengineeringdesigndocuments forthefirstyear's activitiesarecomplete andreadyforthestart o fproject implementation. 0 1.b)Notapplicable. [? 2. The procurement documents for the first year's activities arecomplete andready for the start of project implementation. 3. The Project Implementation Planhas been appraised and found to be realistic and of satisfactory quality. 04.Thefollowingitemsarelackingandarediscussedunderloanconditions(SectionG): The preliminary detailed engineering designs were reviewedby the Bank during appraisal (August 2003) andfound to be essentially complete. Guangdonglaunched detailedengineering immediately thereafter, whereas inGuangxiselection o f the consultants was completed only inDecember 2003. Guangdong is expected to complete full engineering drawings and design documents by April 2004 and Guangxia month or so later. The launch o fproject implementation is being timed such that the main civil works contracts can begin in October-November 2004 duringthe dry season (late September to April). Procurement documents for the first year's activities will be fmalized upon completion o f the detailed designs, to be ready for the start of - 26 -  project implementation inaccordancewith this timetable. Terms of reference for the technical assistance, training and studies were finalized at appraisal and the first such contracts can be awarded soon as the loan becomes effective, expectedby July 2004. The two Project Implementation Plans have beenappraised and found to be realistic andof satisfactory quality. I. Compliance with Bank Policies IXI 1. This project complies with all applicable Bankpolicies. 02. ThefollowingexceptionstoBankpoliciesarerecommendedforapproval. Theprojectcomplieswith all other applicable Bank policies. None. Gr;aham smith Jitendra N.Bajpai YukonHuang Team Leader Sector ManagedDirector - 27 -  Annex I:Project Design Summary CHINA: Fourth InlandWaterways Project Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) [mprove accessibility for poor Zontribution o fpoor regions Yational income statistics Transport improvement xovinces, especially :o GDP; income per head in stimulates economic Pegarding export opportunitie 2eneficiary provinces development and thus helps alleviate poverty. Reduce greenhouse gas Mix o f renewable and fossil Energy statistical reports Air quality will not be :missions and pollution by Fuel sources for power overwhelmed by growth in shiftingenergy mix away ;eneration. other polluting sources (e.g. Som fossil fuels. automobiles). 'roject Development 3utcome / Impact 'roject reports: (from Objective to Goal) 3bjective: ndicators: Improve waterway access for ronnage moving by waterway rransport statistical yearbook Lowered tariffs on I W T will ioor regions in Guangdong, md IWT's share of market in attract traffic in significant 3uangxi and neighboring otal inland transport market. volumes (new and diverted xovinces (Guizhou & from other transport modes). 'r'unnan) iaise efficiency o fwaterway 3reater use o f large vessels 'roject monitoring of river Fleet owners will invest in ransport (vessels) md barge+pusher leet composition. larger vessels for use on :ombinations Project waterways. (a) MOC's policy guidelines for vessel modemizationare followed and have their intended effect; (b) ship owners have access to financing for larger vessels; & (c) loading facilities for larger vessels are improved as planned. ,ewer tariffs chargedby IWT ,ewer cargo tariffs. 'eriodic sampling by PMOS Competitive market, no :arriers Iftariffs paid. collusion or govt intervention to discourage rate competition. Railway is not subsidized, nor does railway pursue aggressive competitive response to protect its market. 3enerate power to supplement :ost per kW o f capacity: Gnal construction cost Hydro-electricity has lowest ,ourcesavailable to remote (aji: $1,300 per kW isolating cost of power marginal cost (near zero); reas Ciniu: $2,650 per kW louse) local demand will exceed assigning 213 o f dams' cost to local supply lower generation) - 28 -  - Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: Year-round safe, stable Minimumwater depth PMO to monitor routinely. Frequency and severity o f navigating conditions on eack available throughout defined droughts remainmuch as in waterway section. waterway in dry season. the past. Ship locks allow rapid and Passage through lock innot Waterway bureaux to conduct Traffic volumes 'withproject' orderly transit at all times. more than minutes(one way) sample surveys. will grow at pace that implies for 95% o f vessels in any waiting times will begin to month. build after 10-15 years use. Power generating facilities arr output: Financial statements will Frequency and severity o f properly operating Naji: 253 G W y r Issess: (a) expected output; droughts remain much as in Xiniu: 45 G W y r [b) actual output; (c) output the past. Sale price: > RMB0.4kWh $old;and (d) revenue. Turbine availability: > 4,500 Production reports hoursiyear (Le. 50% o f time) Project Components I Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) Project waterways are Budgets (incl. contingencies): Yavigation charts Survey and updated Jpgraded to: navigation charts are You River: Class 111-1,000 You River: $15.2 m completed. Navigable limits are marked and waterway :ons category is reclassified. Lao-Long-Hu: Class 111 Lao-Long-Hu: $25.5 m .1,000 tons 3ei (North) River: Class V Bei (North) River: $17.2 m ,300 tons Lian River: Class VI -100 ons Two project shiplocks are Naji Nav. Complex: $84.8 m Monitoring report for Lock operators are skilled, :ompleted and operating ihiplocks operate locks efficiently and :fficiently, and power Xiniu Nav. Complex: $34.9 m fairly ('first come first ;enerating facilities are served'). iroperly functioning and Locks are maintained naintained properly. Staff trained to ensure lock cycle time of not more than 9C minutes (both ways). 'roduction report for power No faulty construction, no ;tations major flooding during construction, no earthquakes. Design and maintenance of turbines are as expected. Price o f electricity from competing sources stays high. Availability o f turbines output: 90% - 29 -  CapacityBuilding Guangxi: $16.2 Guangdong: $20.0 LandAcquisition $34.3 Interest, Front-endFee $10.8 Project Performance Indicators Attainment o f Project Performance Indicators 2003 2006 Obiectives Baseline Improve market access Waterway traffic (000 tons): inremoteinlandareas (i) Baise-Nanning 814 928 2,043 2,180 (ii) Shaoguan-Qingyuan 4,900 6,250 6,860 7,180 (iii)Lao-Long-Hu Waterway 1,200 2,000 8,600 9,300 Lower transport costs Average barge size (dwt) through use of larger (i) Baise-Nanning 97 101 141 152 vessels (ii)Shaoguan-Qingyuan 150 150 200 300 (iii)Lao-Long-Hu Waterway 80 80 300 500 Efficient generationof Power plant output at power to supplement (i) Naji 194Gwh 253 Gwh supply inremote areas (ii)Xiniu 42 Gwh 45 Gwh Vessel transit time Transit time through lock through lock incl. waiting time (minutes) (both ways) (i) Naji 90 90 (ii)Xituu 90 90 Project Implementation Monitors FY 2004 FY2005 FY 2006 FY 2007 FY 2008 7 FY2009 GX GD GX GD GX GD GX GD GX GD %ofcivil works 0 0 52 30 83 50 98 60 100 100 100 100 completed % of equipment (by 0 0 0 10 51 70 98 90 100 100 100 100 value) contracted % oftraining 6 10 26 25 66 50 96 75 100 100 100 100 (person-months) completed I completed % of resettlement 100 20 00 50 .oo 80 100 90 100 100 100 100 -30-  Annex 2: Detailed Project Description CHINA: Fourth Inland Waterways Project The project involves the integrated development o f water resources to regulate water flows of rivers for flood control, improvement o f inland navigation and generation o f power inthe poorer areas o f the Guangxi Zhuang Autonomous Region and Guangdong Province. In Guangxi, the project consists o f a dam, shiplock and hydro-electric power plant at Naji on the upperreaches ofthe You(Right) River and improvement ofthe navigational channel between Baise andNanning. InGuangdong, the project comprises improvementsto the navigation channels on the 15.5 kmlong Lao-Long-Hu Waterway and the middlereaches o f the Bei (North) River betweenthe cities o f Shaoguan and Qingyuan, a distance o f about 184 km, and a dam, power station and shiplock at Xiniu on the Lian River. On completion, the developments at Naji will generate some 250 GWho f power per year and enable 500-ton capacity vessels andbarge-pusher combinations to navigate all the way from Baise to Nanning, a distance of 357 km; the developments inGuangdong will enable 1,000-ton capacity vessels and barge-pusher combinations to use the Lao-Long-Hu Waterway, shortening their travel by an average of 70 km, 300-ton capacity vessels will be able to ply the middlereaches of the NorthRiver, andcities inthe north ofthe province will be supplied with about 45 GWhper year o f electric power. The hamessing o f the waters at Xiniu will also openup the LianRiver to navigation o f 100-ton capacity vessels on 181kmo f its main stream (out o f 275 km). The specifics o f the developments are as follows. Costs indicated for each component and sub-component include contingencies. By Component: Project Component 1 US$148.10million - Guangxi A. NajiDamand Shiplock (US$84.8 million) Al. Constructionof shiplock, dam, power station, and construction or installation (as appropriate) o f auxilliav facilities (US$43.1 million): The power station and the shiplock will be near the right bank o f the river. The shiplock will be a Class I11inaccordance with the Chinese lock classification and capable o f accommodating vessels up to 1,000 ton capacity with an effective chamber o f 190 x 12 x 3.5m. The dam will provide a weighted average head o f 11.9m (design head 10.5m). The power station will have an installedcapacity o f 57 MW with a mean annual generation o f 253 GWh(net o f internal losses). The power plant will be connected to the gridfor Bake Prefecture by a 110-kV transformer for the sub-station at Honglingpo, a 110-kV line, and a 220-kV transformer at Shapo. A2. Construction o f access roads and bridge (US$3.7 million): The access roads are about 9 kmlong; the bridge at the dam site connects bothriver banks. - 31 -  A3. Reservoir banks protection (US$2.5 million) The reservoir bank protectionmainly includes the embankment and bank protection engineering, to ensure that farmlands and village settlements will not be inundated and that the slope will be stable. The areas for the embankment will be 65.5 ha., and the total lengtho f slope protection will be 11.7km. A.4 Purchase o fturbines, shiplock gates and other equipment (US$33.3 million) AS Site management complex (US$2.2 million) B. ChannelImprovement on You River betweenBake andNanningincluding installationof auxiliary facilities (US$15.2 million): The channel ofthe YouRiver betweenBaise andNanning, a distance o f 357 km, currently has a depth o f 1.0-1.2m. The channel will be improved to a depth o f 1.8m with dimensions o f 330 x 50 x 1.8m downstream of Sanjiangkouand 330 x 30 x 1.8mupstreamo f Sanjiangkou. Within the reservoir, a double-line channel o f 330 x 50 x 2.lmwill be provided. C. Institutional Strengthening, Consultant Services and Training (US$16.2 million) Capacity buildingwill be providedto Guangxi CommunicationsDepartment, including the Project Management Office and GDWCDCthrough technical assistance, training and study tours. Studies will be carried out on (a) the financing, management and operation o f integratedwaterways and power generation resources, and (b) the development and installation o f a comprehenbsive management information and control system. D. Resettlement and LandAcquisition (US$25.0 million) E. Interest during construction (US$6.4 million) and front-end fee (US$ 0.45 million). Project Component2 US$112.40million - Guangdong A. Lao-Long-Hu Waterway (US$25.5 million) A1. Channel Improvement on Lao-Long-Hu Waterway including construction or installation (as appropriate) o f auxiliary facilities (US$17.6 million). This comprises the deepening and widening o fthe 15.5-km longwaterway to 4m and 50mrespectively from the current depth of 1.2-2.0m and width of 20-30m; construction o f a diversion channel at itsjunction with the Lao-lao-xi Waterway at Xiezhousha to shorten the channel andbank protection at the Longquanhai and Babao stretches. The deepening o fthe channel requires the removal by dredging of some 1.2 million cubic meters o f sediment and the blasting and removal o f the Xianglushi reefand seventeen other rocky spots. The widening o f the channel necessitatesthe replacement o f the dikes at the entrance o f the waterway into the Yingzhou River. The improvements will upgrade the channel from Class 6 to Class 3. - 32 -  A2. Replacement o f Two Bridges over Lao-Long-Hu Waterway (US$7.9 million). The two bridges at Lianyao and Longma will be replaced with new 1,18 lmand 1,483m long bridges with a height clearance of 10mabove the channel's normal water level. B. Middle Reacheso fNorthRiver(US$17.2 million) B1. Channel ImprovementonNorthRiverbetween Shaoguanand Qingyuan including installation of auxiliary facilities (US$17.2 million) About 184 kmo f the channel between Shaoguanand Qingyuan will be improved to accommodate 300-ton capacity vessels. Improvements will consist o f dredging mostly coarse sand and small cobble, with placement of the dredged materials inoff-channel areas or as part o f river-flow regulation spurs. About 1.2 million cubic metres of material will be dredged. C. XiniuNavigation Complex (US$34.0 million) C1. Constructiono f a shiplock, dam, power station, access road, and auxilliary facilities (US$22.3 million); A dam 10.5mhighto regulate water depthto 2Sm, a shiplock and apower plant o f 10MW will be built, including 2 substations to connect to the power gridat Yingde, as well as reservoir embankment protection. C2. Purchase o f turbines, lock gates and other equipment for the navigation complex (US$l 1.7 million) D. Upgrading ofNavigationalAids (US$O.9 million) E. Institutional Strengthening, Consultant Services and Training (US$18.7 million) Capacity buildingwill be provided to Guangdong Communications Department, including the Provincial Waterways Bureau and the Project Management Office, through technical assistance, training and study tours. Studies will be carried out for (a) development and implementation o f a waterway electronic mapping system, and (b) development and implementation o f a shiplock management system. F. Acquisition o f Service Vessels, Service Vehicles and Surveying andMonitoring Equipment (% million) 1.3 G. Land Acquisition (US$ 9.3 million) H. Interestduringconstruction (US$3.5 million) andfront-end fee (US$ 0.46 million). - 33 -  Annex 3: Estimated Project Costs CHINA Fourth Inland Waterways Project Suangxi 4. Construction o fNaji dam, power station and shiplock 19.51 19.00 38.51 B. Construction of access roads 3.33 0 3.33 2. Bankprotection (dam and reservoir) 2.23 0 2.33 3, Turbines, lock gates and other equipment 6.74 23.02 29.76 3. Channel improvement, Baise-Nanning 13.56 1.42 13.56 q. Institution strengthening, consultants services, training 13.07 1.42 14.49 3. Resettlement and land acquisition 22.3 1 0 22.31 3, Site management complex 1.92 0 1.92 Total Baseline Cost (Guangxi) 82.67 43.44 126.11 PhysicalContingencies 6.61 3.48 10.08 Price Contingencies 3.3 1.74 5.05 Total Project Costs' (Guangxi) 92.58 48.66 141.24 Interestduring construction 6.37 0 6.37 Front-endfee 0.00 0.45 0.45 Total Financing Required (Guangxi) 98.95 49.11 148.06 hangdong 1.ChannelImprovement-Lao-Long-HuWaterway 7.86 7.85 15.71 3 . Replacement of 2 bridges 3.51 3.51 7.02 :. Channel Improvement, NorthRiverMiddle Reaches 7.66 7.67 15.33 I. ofXiniudam,powerstation,shiplockandaccess Construction 9.96 9.95 19.91 oad <.Turbines, lock gates and other equipment 1.04 9.41 10.45 :. Upgrading navigationalaids 0.08 0.71 0.79 3. Computer hardware for electronic mapping, shiplock management 0.14 1.26 1.40 andMIS 1.Servicevessels, service vehicles, survey, monitoring andancillary 0.12 1.08 1.20 equipment 5.01 11.68 16.69 I.Institutionalstrengthening,consultantservices,training .Land acquisition 8.28 0 8.2 Total Baseline Cost (Guangdong) 43.66 53.12 96.78 PhysicalContingencies 3.49 4.25 7.74 Price Contingencies 1.75 2.12 3.87 Total Project Costs (Guangdong) 48.90 59.49 108.39 Interestduring construction 3.51 0 3.51 Front-endfee 0 0.46 0.46 Total Financing Required (Guangdong) 52.41 59.95 112.36 - 34 -  Civil Works 77.89 53.74 131.63 Goods 9.09 39.75 48.84 Services 20.02 12.35 32.37 Training 0.22 2.31 2.53 Resettlgrnent 34.26 0.00 34.26 Total Project Costs' 141.48 108.15 249.63 Interestduring construction 9.88 0 9.88 Front-endfee 0.91 0.91 Total Financing Required 151.36 109.06 260.42 I Identifiable taxes andduties are about SlOm andthe total project cost, net of taxes, is US$250m. Thus the Bank loan will finance 36% of total project cost net of taxes. - 35 -  Annex 4: Cost BenefitAnalysis Summary CHINA Fourth Inland Waterways Project US$ million [For projects with benefits that are measured in monetary terms] I Benefits: 300 costs: 139 Net Benefits: 161 -43 IRR: 22 2 Economic benefits from all components are valued at opportunity costs to society at large. Two o f the four project components will generate no revenue and so their financial benefits are zero. For the others, the two powerplantishiplock complexes, financial benefits count only revenues eamed assuming conservative tariffs throughout the evalutionperiod. For the financial evaluation and fiscal impact see Annex 5. I Ifthedifference betweenthe presentvalue offinancialandeconomic flows is large andcannot beexplainedby taxes and subsidies, a brief explanation o f the difference is warranted, e.g. "The value o f financial benefits is less than that o f economic benefits because o f controls on electricity tariffs." SummaryofBenefitsand Costs: 1. Naji Damand Shiplock The mainbenefit from the dams will be the electricity produced. The economic value o f the incremental power to be generated by the project is estimated by reference to the next cheapest alternative source, which would be a gas turbine generator --taking into account that the project dams will generatemostlypeak-hour power. The gas turbine altemative i s provisionally estimated at RMB 0.54 (6.5 U S cents) per kWh, being the sum o f the variable production cost (mostly fuel) o f RMB 0.40 per kWh and a capacity charge o f about RMB 600 per kW per year, corresponding to a capital cost o f about US$350 per kW. The second (invalue) major quantifiedbenefit is the reduction intransport costs for existing flows o f traffic on the river. This reductioni s expected to follow from (a) improved operating conditions for existing vessels, allowing them to operate hlly loadedyear-round instead o f partly loaded or immobilized during dry months, and (b) a shift to larger vessels, whose unit cost o f carriage is far less. We assume, based on observations at Guigang Dam ineastern Guangxi (First Inland Waterway Project) and Jiangsu (on-going Second Inland Waterway Project) that within five years the mix of vessels will have charged markedly, lowering the unit cost to less than two thirdsof its present level. - 36 -  The thirdcategory o f benefits i s the consumer or producer surplus associated with traffic diverted from road or rail, together with generated traffic: the difference betweenthe With project and Without project traffic. The present waterway cannot handle more than about 0.9 milliontons per year, whereas the improvedwaterway will be able to handle about 5.3 million tons per year. (Theoretically the Naji shiplock could handle more, but congestion is likelyto discourage more than this amount.) We lack information on traffic flows between specific origin-destination pairs that today move by road or rail and are potentially divertible, and lack data on the costs, times and other factors which determine the cargo owners choice o f mode. Thus, the estimates o f both these two traffic categories rely on a considerable degree of conjecture. We have measuredthe benefit to diverted and generated traffic by the reference to savings to the base traffic, applying the "rule o f half'. Measuredon this basis, such traffic is not critical to the economic or financial viability o f any component; more detailed data collection or analysis would not materially affect the goho go evaluation. According to the feasibility study, traffic i s expected to grow, inthe "with project" case, rapidly duringthe 5-6 years after the project is completed, leadingto a doubling of tonnage between2006 and 2009, and a tripling from 2006 to 2012. Thereafter growth i s expected to ease off to a rate matching the growth o f constructioninthe regional GDP, that is, 7% inthe second five years and declining to 4% inthe second decade. Much o f the bulkcargo i s for construction purposes. Coal i s the other maincomponent, and coal consumption i s expected to grow at a similar rate. The Bank considers these growth rates reasonable and consistent with its broader macro-economic forecasts. The unit savings per ton carriedby river are estimated based on today's tariffs for trips from the main loading points on the You River, such as Baise city and Pingguo (site o f a large aluminum smelter) to the Pearl River Delta. The lowering o f these tariffs as cargo shifts to larger vessels reflects synthesized estimates o f the operating costs o f the larger vessels, based on experience on the lower Xi (West) River betweenNaming and Guangzhou. The tariffs are expected to drop from an average o f $11per ton to an average o f $7.25. Our best estimate o f the economic rate o f return (ER), assuming the above economic value for electricity (6.5 cents) and the expected shift toward larger vessels, is 18%. Our analysis shows that an acceptable ER will still be achieved ifthe shift to bigger vessels occurs as expected and the average value o f electricity i s no higher than the present average tariff, that i s 4.0 cents. Ifthe shift to biggervessels does not materialize at all, the project would need an average value o f power o f about 5.3 cents to achieve an ER o f 12%. 2. Lao-LonnHu Waterwav The mainbenefit o fthe widening and deepening o fthe Lao-Long-Hu Waterway i s that traffic originating inthe southwestern parts o f Guangdong province will be able to reach Hong Kong, Shenzhen and other special industrial zones on the east side o f the Pearl River Delta muchmore easily. Today such traffic moves either on larger vessels which have to go down the river to the sea, along the coast off Macauand come back up the eastern waterways, or on small vessels - 37 -  which go upriver, through some shiplocks open to vessels no larger than 100 ton capacity, and across and down. The Lao-Long-Hu offers bothlarge and small vessels a safe and direct short-cut that will allow the scale economies of large vessels without the longer distance and dangers o f crossing open water. (These dangers are substantial duringthe summer monsoon season.) The short cut reduces the distance by about 70 km. The average tariff i s expected to fall by about $1.80 per ton. Traffic growth is expected to match the growth o f the industrial and construction parts o f regional GDP insoutheastern Guangdong, that is, at 8-9% peryear over the next decade. The feasibility study expects about 8 million tons per year to be diverted through the short-cut inthe year it opens. About two-fifths o f this traffic will be incontainers. At this rate the volume usingthe improved waterway will grow by about 50% to some 13 million tons by 2015, after which growth will slow gradually to 3-4% by the second decadeafter opening. The Bank considers these forecasts reasonable. The ERunder these assumptions will be about 50%, so highthat it would still be acceptable if only 2 milliontons instead o f 8 millionwere diverted to the Lao-Long-Hu and no growth occurred. (The same result would occur ifonly 4 milliontons diverted with no growth and a unit saving o f $0.90, that is, halfthe best estimate.) The Lao-Long-Hu's capacity will be sufficient to carry this traffic without significant congestion duringthe 25-year evaluationperiod. 3. Improvement of Middle Reaches o f NorthRiver The mainbenefit will be reduced transport costs for base traffic (existing traffic and growth that i s independent o f the river transport costs). The typical haul i s over about 150 km. As the average vessel size grows from a capacity o f about 120 tons to about 300 tons, the average tariff i s expected to decline from $3.60 per ton to $2.50 within five years o f the project's completion, a decline o f about 30%. Without the project traffic is expected to grow at no more than about 3% per year for the foreseeable future, whereas with the project it is expected to grow vigorously duringthe first 6-8 years, doubling from about 5 million tons to nearly 10milliontons. Thereafter, further growth will be constrained by limits on the channel's capacity (estimated at about 11million tons). As traffic reachesthis level, inthe second decade after the channel improvements are made, the Feilaixia dam's shiplock will also begin to see growing congestion andwaiting. However, as larger vessels and vessels with standard dimensions come to haul a larger part o f the traffic, they will make more efficient use ofthe shiplock's capacity, so that the shiplock will not impose a significant additional constraint on traffic. Inthe 'without project' case, traffic is not expected to reach levels that would strain the channel's capacit) inthe foreseeable future. - 38 -  The ER i s expected to be ample (about 24%), provided that the vessel owners respondto the opportunity and invest inlarger vessels. Evenifthey do not at all, the ERwill still be satisfactory (15%). Some four-fifths o f the benefits are expected to accrue to the base traffic, so'uncertainty as to the extent o f generated traffic is not critical. 4. XiniuDamandShiulock The economic evaluation of the XiniuDam i s similar to that o f the Naji Dam, except inso far as Xiniu's power production --constrained bythe smaller volume ofwater andlower head- will be only a sixth o f Naji's. IWT savings will provide about 55% o f total benefits and the generation o f electricity about 45%, assuming the same parameters for power pricing for Xiniu as for Naji. The ERunder these assumptions will be about 13%. The navigation benefits are basedon the assumption that the shift invessel size will bringa saving o f about $1.20 per ton. The present constraints on total tonnage handledare the size o f the largest vessel that canply up-river o f Xiniu town. It i s expected that the tonnage moving through the shiplock will rise at an average o f 4% per year without the project. With the project tonnage will grow strongly duringthe first six years, after which it too will be deterredby congestion on the North River Middle Reaches and growing waiting times at Feilaixia. It i s expected to level off at around 3.5 milliontons some time between2015 and 2020, that is, about a decade after completion of the Xiniu dam. Xiniuhas the lowest ERs ofthe four components becauseits power generating capacity will be small andriver traffic volume i s also the smallest. Ifthe shift to larger vessels failed to materialize, the returnwould be only about 7%. GDWBwould then be advised to make vigorous efforts to stimulate the shift to larger vessels. Ifthe shift to larger vessels materializespromptly and operation and maintenance costs of the complex are kept low (about 2% o f the construction cost after the first five years), then the breakeven power price i s about 5.5 U S cents per kWh. Main Assumptions: see above Sensitivity analysis/ Switching values of critical items: see above - 39 -  Annex 5: Financial Summary CHINA Fourth Inland Waterways Project The FinancialObjectiveof the ProjectEntities 1. The main financial objective o f the two project entities is to generate sufficient funds to cover operating andnon-operating expenses and maintenance and to repay project loans. The rationale for development is the provision o f competitive services and greater efficiency inthe use o f the inland waterways, not the financial return measured by the investment's financial internal rate o f retum (FIRR) or its net present value (NPV). The project comprises developments located inremote areas inGuangxiand Guangdong. The project will provide not only short-term benefit to the project areas (goods and services purchased and employment inthe process o f construction) but also long-term benefits --a cheap transport means for low-value cargoes, power andwater supplies, water and soil conservation, imgation, tax contributions, etc.-- to those poor rural communities. To this end, the investment is financially justifiable if cash inflow (revenue from power sales, budget appropriations and other sources o f income) is able to meet cash outflow (operating cost andloan repayment). PastandPresentFinancialPerformance 2. The past and present financial performance o f the two project entities has been satisfactory. 3. GXWCDC is a wholly owned company o fthe Guangxi Communications Department (GXCD). The company currently owns and operates the Guipingnavigation complex (domestic funded, completed in 1990,) and the Guigang navigation complex (Bank-financed under the first InlandWaterways Project, completed in2000). The company is financially sound andreceives only construction grants from the Government. There is no subsidy for operation. The company meets all its financial obligations through internally generated funds. Due to loan repayments, inthe three years 2000-02 the net surplus o f GXWCDC progressively declined. However, the company inthe past had accumulated a large cash reserve andadequateprovisions hadbeen set aside for depreciation. These willhelp to tide the company over the difficult perioduntilthe situation improves around 2005. (Table 2.2, Sources and Applications o f Funds, the project file). Despite its low net cash surplus, both the working ratio (operating efficiency o f the company) andthe debt service coverage ratio (cash flow available to meet annual payments on debt) were inthe comfortable range of 22.3 percent and 1.1, respectively, in2002. The current ratio (ability to pay short-term debt) has been maintained at a level o f 1.6 or above since the company was formed in 1999, although the debuequity ratio (financial leverage- the use o f borrowed money to enhance the retum on owner's equity) last year exceeded 50 for the first time. The details (Table 2.1. the project file), are summarized as follows: GXWCDC: ConsolidatedIncome Statement(RMBmillion) Ratios: Working (%) 11 17 22 Self financinge?) 9 8 26 Debtservice coverage 1.9 1.2 1.1 - 4 0 -  4. GDWB hasonly one outstandingloan,which was obtainedfrom the Bankunderthe SecondInland Waterway Project in 1998. Repaymentofthe loanwill commence in2004. GDWB is a government entity inthe Guangdongprovince. In2000 and2001, the changes ofthe exogenousparameters(the implementation o fthe new budget systemandthe new tariffs) caused financial deficits ininlandwaterway operation. With strong support from the government, GDWB quickly revitalizedfrom the financial deficits through internal reforms by dissolving many unprofitable operating units. In2002, its total revenue exceededthe total expendtures, the net surplus was RMB21.5 million (or 6.7% o fthe total revenue). The detailed financial operation (2000-2002) is found inTable 1.1of the project file andis hghlightedas follows: GDWB: ConsolidatedIncomeStatement(RMB million) I 2000 I 2001 I 2002 I I Total oDerating revenue I 211.2 I 322.1 I I 183.1 I I Operating costs, taxes and expenses I 193.6 230.7 I 300.6 ] Net cash surplus I -10.5 II -19.5 I 21.5 Ratios: Working (%) I 106 I 109 I 93 I.I Self financing (%) -24 -13 12 Debt service coverage -- -- -- Future Financial Performance 5. BothNaji andXiniu are inremote areas where about 75 percent and65 percent, respectively, of the electricity consumedis generatedfrom the outside. The shortage o f electricity inthe project areas will provide a strong demand for the power producedby the two navigational complexes. 6. The proposedNaji navigation complex is scheduledto be put into trial operation in2008 and into full operation in2009. The company does not expect any cash shortageover the life o f the project (Table 2.3, the project file). 7. The proposedXiniunavigationcomplex is also scheduledto beput into the trial operation in2008 and into full operation in2009. Total revenue will be able to cover total operating costs, including depreciation, but it will not be able to cover loanrepayments (estimated at RMB 6.7 million per year), which will commence in2009 andwill be met by GDWB, which will pay both principal andinterest. Such payments are within the financial capacity o f GDWB, as the sum of the principal and interest payments for the two Bank's loans at RMB 95 million in2009 constitutes only about 13.2 percent o f total revenue o f GDWB for that year (RMB 723 million). The financial riskinthe investment is minimalso far as the availability of funds for loan repayments is concerned. 8. GDWBmay face minor deficits duringthe constructionperiod(2004-2008) due to loanrepayments for the current Bank loan and capital expenditure for construction duringthis period. The total deficit amount, comparedto the total revenue, is relatively small (less than2 percent o f total revenue inany given year). The deficits are not expectedto affect the day-to-day operation o f GDWB until2010. -41 -  Return on Investment 9. For the financial projection, the price o fpower andthe shiplock fee for the two proposed navigation complexes are calculated on the basis o f current power sale prices and shplock charges in each locality. Because o f the current rigidprice control, a conservative forecast is assumed (an increase o f 1.9 percent per year), which is lower thanthe estimated long-term domestic CPI growth rate o f 2.8% p.a. -that is, we assume tariffs will decline inreal terms. Although reforms inthe power sector are likely to take effect by 2008, which will probably result inan increase inthe forecasted revenue due to the application o f peak hour pricing, for financial prudence a conservative approach with regard to the pricing o f power sales has been taken here. The assumed cost o f financing at 5.1%, beingthe weighted average cost o f funds, may also be considered conservative, since current Bank loans carry a rate o f around 1.6%. Power Sales Prices and Shiplock Charges Power I Shiplockfee I Xiniu I 0.40 0.30 / Naii I 0.35 I 0.40 / 1 I /-1: Only appliesto the ships goingdownstream. 10. Onthe basis of the assumptions used(Table 1.4 and Table 2.4, the project file), the FIRR andNPV o f the investments inthe navigational complexes are projected to be 1.8 percent and RMB-354 million, respectively. FIRRandNetPresent Value I xlniu 1 Naji I Total FIRR(in %) I -6.6 I 3.4 I 1.8 I NPValue (RMBm@5.1%) I -214 I -152 I -354 I 11. The above financial outcome shouldbe considered inthe context o fthe following: (a) N o power delivery network Neither of the proposed navigation complexes has its own power delivery network. The power mustbe sold to the local power company, which uses its power delivery network to reach endusers. (b) Low power prices and shiplock fee. Boththe powerprice andthe shiplock fee are currently strictly regulatedby the government. Any change inpower prices or shiplock fees may require approval from various government agencies, which is a very time-consuming process. For the proposed two navigation complexes, given (i) the small scale o fpower generation, (ii) delivery no network, and (iii) locations inthe remote poor areas o f the two provinces, GXWCDC and GDWBhave limited leverage when negotiating the sale o fpower. However, it is physically feasible that one or the other could install transmission lines to major industrial consumers, allowing for price competition with the gridcompany and substantially strengthening their bargaining position. (c) Minimal subsidy Duringthe construction period, M O C and the local governments may provide some grants, mixedwith the loans, to GXWCDCandGDWB. After the completion o f the project, M O C will not provide any funds to meet operating costs, particularly inthe case o f GXWCDC. - 42 -  (d) Low profit margin. The inlandwaterways have always hadlow operating surpluses becauseof (i) pricecontrol,and(ii)chargesonthenavigationchannel. Incontrasttohighways,it rigid no is not technically feasible to collect channel fees from ships, other than at shiplocks. The FIRR o f an inlandwaterway project, consequently, i s invariably low. Financial Risks 12. This is the Bank's second loan for both Guangdong and Guangxi. Guangxidelivered the last project, which is similar to this one, on time andwith about 10percent cost savings. For Guangdong, the on-going inland waterway project has been progressing smoothly. With the experiences learned from the previous projects and a good construction record, the chance o f a lengthy delay and a large cost overrun inthe proposed project i s relatively modest. Financial Performance Indicators 13. To ensure that the project entities will have sufficient liquidity,assuranceshave been obtained that beginning in2005, GDWB andGXWCDC will prepare annually a rolling five-year financial plan, which willbe discussed with the Bank specifically with regards to the projectedtotal revenue and the projected total expenditures. 14. For financial monitoring, the operating ratio, self-financing ratio and debt service coverage ratio will be used. Duringproject supervision, these indicators will be closely monitoredby the Bank. A variance o f less than 15 percent from agreed financial forecasts will be acceptable. GXWCDCis required by covenant to maintain an operating ratio of 73% and a debt sewice ratio of at least 1.2. Inthe event that the targets are not achieved, GDWB and GXWCDC will be required to improve their financial performance by increasing tariffs or reducing costs or capital expenditures. - 43 -  Annex 6(A): Procurement Arrangements CHINA Fourth Inland Waterways Project Procurement ProcurementAssessments 1. The Bank assessedthe procurement capacity o f the Guangdong Project Management Office inApril, 2003, and o f the GuangxiPMO inJune and July, 2003. The Project Capacity Assessment Report for each component i s inthe project files. The following summarizes their fmdings. Guangxi Component 2. Guangxi Xijiang Waterway Construction and Development Company (GXWCDC), a legally independent body wholly owned by the Guangxi government, will be the executing agency for the Guangxi component. Guangxi Communications Department (GXCD) has established a Project Management Office to manage the component overall. Construction o f the Naji Navigation Complex will be managed by a Project Cons!mction Office established within GXWCDC. The PMO staff are drawn from staff o f GXCD and GXWCDC and include individuals who were involved incarrying out the first InlandWaterways Project (IWWI). The overall performance on IWW1was acceptable. Actions None. Applicable laws stipulate that Applicable to the Agency procurement law. intemational financial institution requirements shall prevail when there are inconsistencies. (iii)Acceptability o f Rules and Deviations o f intemal NCB Ieviations o f intemal N C B procedures Procedures o f NCB procedures from Bank NCB vi11be waived in favor o f World Bank procedures. irocedures inthe procurement schedule o the Project Agreement. (iv) Intemal procedures and PMO andNaji Construction Intemalprocurement procedures and manuals Office are new organizations and manuals need to be formalized. The as such procedures and manuals procurement procedures generated for have yet to be drafted. IWWl may beusedas a basis. (b) ProcurementCycle Management (i)Procurement Planning PMOhas developed contingency PMO is to follow Bank procedures for plans which include the construction supervision services and financing o f construction equipment. supervision services and equipment. (ii)Preparation o f Bidding Procurement activities have not None. Documents yet started. The PMO staff also were utilized for IWW1. - 44 -  Bank's new SBD for ICB MOF shall prepare and issue a change procurement shall be used. list to be included inthe bidding documents. (iii)Management o f Bidding The price o f bidding documents PMO to ensure that bid document Process from Advertisement to Bi for the Bank financed contracts pricing shall cover only printing costs. Opening o f IWWl were to cover only the cost o f printing, but it was found that higher price was charged. (iv-vi) BidEvaluation, Contract Acceptable. None. Award, Preparation, and Signing of the Contract (vii) Contract Management Large cost overruns were None. experienced on non-Bank financed contracts o f IWWl due to poor design preparation. Bank-financed contracts were managedsuccessfully. (viii) General Handling o f Acceptable None. Procurement Cycle (c) Organizationand Functions (i)Organizations ofProcurement Acceptable None. Lnit and Allocation of Functions (ii)InternalSlanualsand PMO and Naji Construction Internal procurement procedures and Instructions Office are new organizations and manuals need to be formalized. The as such procedures and manuals procurement procedures generated for have vet to be drafted. IWWl mav be used as a basis. (d) Support and Control Systems (i)Procurement Oversight and Acceptable None. Auditing (ii) Technicaland Internal The Mechanic and Electrical OPR recommends Min.Commerce to Administrative Controls Products ImportExport Dept in perform post reviews rather than prior MinistryofCommerce is reviews. responsible for monitoring o f ICB urocurement of eaubment. (iii)CodeofProfessionalBehavio Acceptable. None. and Ethics [iv) Special Anti-Corruption Acceptable None. [nitiatives [e)Record Keeping Acceutable None. [f)Staffing Acceptable. All procurement staffwill be trained in the uudated Bank SBD and rmidelines. [g) GeneralProcurement Acceptable None. Environment :h) Private Sector Viewpoint Autonomy of SOE's and the None. consulting industIy is progressing. -45-  GuangdongComponent 3. Guangdong Provincial Waterways Bureau (GDWB) will be the executing agency for the project. GDWB's existingProject Management Office (namely "World Bank Project Loan Office, GDWB") i s responsible for implementingthe current Second InlandWaterways project and will be responsible for executing IWW4. The PMO's overall performance on IWW2 has been acceptable. Procurement Capacity Element Assessment Actions (a) LegalAspects and Procurement Practices (i) CorporateStatus Legal Acceptable. None (ii) andRegulations Laws Lack of consolidated national Applicable laws stipulate that Applicable to the Agency procurement law. international financial institution requirements shall prevail when there are inconsistencies. (iii) Acceptability o f Rules and Deviations o f internalNCB :1) Deviations o f internalNCB Procedures o fNCB procedures from Bank NCB xocedures will be waived in favor o f procedures. World Bank procedures inthe xocurement schedule to the Project 9greement. (2) Postreviews shall be held. (3) Training shall be provided on the Bank's procurement guidelines. (iv) Internal procedures and Acceptable. None. manuals (b) Procurement Cycle Management (i) Procurement Planning Training o f PMO staff during Training will continue under IWW4. IWW2 was found to be useful. Selection of local design Bank will not finance the preliminary institutes for the preliminary and and detailed engineering services. detail engineering didnot follow Bank procedures. (ii) Preparation of Bidding Procurementactivities have not None. Documents yet started. PMO performance on IWW2 has been acceptable. Bank's new SBD for ICB MoFinance shall issue a change list to procurement shall be used. be included inthe biddingdocuments. (iii)Management o f Bidding Acceptable None. Process from Advertisement to Bid Opening (iv-vi) BidEvaluation, Contract 4cceptable None. Award, Preparation, and Signing of the Contract (vii) Contract Management Acceptable None. (viii) General Handling o f 4cceptable None. Procurement Cycle -46 -  (c) Organization and Functions (i) Organizations o f Procurement Acceptable None. UnitandAllocation ofFunctions (ii)InternalManualsand Acceptable None. Instructions (d) Support and Control Systems (i)Procurement Oversight and Acceptable None. (ii) Intemal Technical and E-procurement method is not in Bank guidelines should be applied. Administrative Controls line with Bank guidelines. (iii) ofProfessionalBehavior Acceptable. Code None. andEthics (iv) Special Anti-Comption Acceptable None. Initiatives (e) Record Keeping Acceptable None. (0Staffing PMO staff are acceptable. Staff All procurement staff will be trained in inthe design institutionslack the updated Bank SBD and guidelines. experience in Bank-financed 1procurement. (g) General Procurement I Acceptable 1None Environment (h)Private Sector Viewpoint Autonomy o f SOE's and the None consulting industry is progressing. ProcurementArrangements 4. Procurement will be carried out as shown inTables A, B, C and D. Procurement o f works and goods fmanced by the Bankloan will follow the World Bank's "Guidelines: Procurement under IBRDLoans and IDA Credits" ( January 1995,revised January and August 1996, September 1997 and January 1999)and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" (January 1997, revised September 1997, January 1999 and May 2002) will be applicable for the selection ofconsultants. The Bank-approvedChinese Model Bidding Documents (MBD) will be adopted for ICB andNCB activities for goods and works. All new revisions to the Bank standard biddingdocuments since 1997 will be incorporatedinto the existing MBDs. The World Bank standard biddingdocuments will be used when an applicable MBDis not available. Also, as indicatedinthe Bank's 2003 overall procurement review of China, the harmonizedStandard BiddingDocuments may be used inthis project when available. Selection o f consultants will use the Standard Request for Proposals-Selection o f Consultants (July 1997,revisedApril 1998, July 1999 and March 2002). 5. Works (US$ 131.62 m, including contingencies). Civil works costing US$15 million and above per contract will be procuredthrough international competitive bidding(ICB). Four contracts, one inGuangxi and three inGuangdong, with an estimated aggregate value o f US$95.23 million, will be awarded under this procedure (see Tables C1 and C2). Pre-qualificationo f bidderswill be requiredand invitations for pre-qualification will be advertised inUNDevelopmentBusiness, DevelopmentGateway andat least two newspapers ofnational circulation inChina. Contracts with an estimated value o f less than US$15million, of which there - 47 -  are three (two inGuangdong and one inGuangxi --see Tables C1 and C2) with an estimated aggregate value o f US$7.46 m, will be awarded following national competitive procedures (NCB), subject to modification inaccordancewith standardprovisions applied by the Bank for NCB inChina (see below). Constructionofthe two bridges at Lianyao and Longma in Guangdong estimated at $7.86 mwill be undertaken by the local government. The access road and bridge,channel improvement works and the site management complex inGuangxi amounting to a total contract value o f US$21.07mwill be financed locally andtheir procurement will follow localprocurement procedures. 3. Equipment(US$48.85 mincluding contingencies). Thirteen contracts with an aggregate value o f US$42.63 mwill be awarded following ICBprocedure (Tables B1and B2). Specific procurement notices will be published through the same channels as cited inthe previous paragraph; a general procurementnotice was already publishedinJuly 2003. Three contracts, each o f less than $500,000, will be awarded through NCB. The aggregate value o f NCB contracts i s estimated at $1.18 m. Other items or groups o f items o f small pieces o f equipment readily available off the shelf estimated to cost less than $100,000 per contract may be procured following national shopping procedure on the basis of a comparison o f price quotations solicited from at least three suppliers. The aggregatevalue o f items to be procured through national shoppingprocedure is estimated at US$0.56 m. 4. Consultants (US$34.92 mincluding contingencies). All consultant services financed bythe Bank will be procured according to the Bank's guidelines on the selection and employment o f consultants and on terms and conditions acceptable to the Bank. The Standard Request for Proposals will be used. Consultant services that are estimated to cost less than $100,000 per contract, may, with the Bank's prior agreement, be procured by Consultants' Qualifications (CQ) accordingto paras 3.1 and 3.7 o f the guidelines. Bank financing o f consultant services will amount to US$4.47 million. Details of staff training, technical assistance and outline terms of references for stud.ies are found inthe project file. 5. ProcurementScheduling. The mainmilestoneevents for procurement are shown inTables B3 and B 4 below. A more detailed Gantt chart prepared by the PMO forms part o f each Project ImplementationPlan and i s available inthe project file. -48-  Procurement methods (Table A) Table A: Project Costs by Procurement Arrangements (US$ million equivalent) (45.05) (3.60) (0.00) (0.00) (48.65) 2. Goods 42.63 1.18 0.56 4.48 48.85 (35.63) (0.86) (0.48) (0.00) (3 6.97) 3. Services 0.00 0.00 5.91 29.01 34.92 (0.00) (0.00) (4.47) (0.00) (4.47) 4. Resettlement 0.00 0.00 0.00 34.26 34.26 (0.00) (0.00) (0.00) (0.00) (0.00) 5. Interest during 0.00 0.00 0.00 9.88 9.88 /construction I I I I I I (0.00) (0.00) (0.00) (0.00) (0.00) 6. Front-end fee 0.00 0.00 0.91 0.00 0.91 (0.00) (0.00) (0.91) (0.00) (0.91) Total 137.86 8.64 7.38 106.56 260.44 (80.68) (4.46) (5.86) (0.00) (91.00) -49-  Table AI: ConsultantSelection Arrangements (optional) (US$ million equivalent) '' Includingcontingencies Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed Figures in parentheses are the amounts to be financed by the Bank Loan. - 50 -  Prior reviewthresholds (Table B) 5, Prior review procedures will be applied on: (a) civil works contracts with an estimated value of US$ 5 million or more; (b) contracts for the supply of equipment expected to cost US$ 0.5 millionor more; (c) consultant contracts with a value o f US$ 0.3 million or more for firms and US$ 50,000 or more for individuals. The first contract inGuangxi andthe first contract inGuangdongprocured through each procurement method o f NCB, NS, QCBS and CQ will also require Bank's prior review. Prior review will be applicable in99% of the total contract value of works and 99% o f the aggregate contract value o f goods financed by the Bank. 6. Contracts below the above limits will be subject to post review by the Bank, ina sampling ratio o f 1to 5. 7. The threshold ceiling for short-listing o f national consultants for each of Guangxi and Guangdong shall be US$300,000 Table B: Thresholds for Procurement Methods and Prior Review' 2. Goods 500 ICB, NCB 17 contracts(44.0) 3. Services(firms) 300 QCBS, CQ 5 contracts (5.2) (individuals) 100 CQ 1contract (0.2) Total value of contracts subject to prior review: 150.9 Overall Procurement Risk Assessment: Average Frequencyof procurementsupervision missionsproposed: Oneevery 6 months (includes special procurement supervisionfor post-reviewlaudits) - 51 -  Table B1:Procurement Packaging Guangxi -- No. Contract Procure- Estimated Bank ment Contract Financing Method Value (US$ m) ICiviIworks 20.11 W1 /Constructiono fNajiNavigation Complex comprising 1 I C B 43.14 19.00 dam, power house,-shiplock, & dam &ea bankprotection W2 Bank protection works for reservoir area NCB 2.49 1.11 W3 IChannel imurovement works including navigational aids I NBF 15.19 W4 Access roads NBF 3.73 W5 Site management complex (including drainage) NBF 2.15 Equipmentand installation 33.34 23.02 G1 Power station equipment (including turbines, generators I C B 16.64 13.36 and control systems) G2 Monitoring system (incl. installation) for power station, ICB 1.66 1.33 dam and shiplock G3 Shiplock hoist I C B 1.25 1.oo G4 Metal structures for dam andpower station ICB 2.95 2.37 G5 Hoists for dam and power station I C B 1.46 1.17 G6 Power transmission line works ICB 1.32 1.05 G7 Transformers for power station, shiplock anddam ICB 0.74 0.59 G8 Electricalequipment for power station, shiplock and dam ICB 1.98 1.59 G9 Cranes NCB 0.62 0.36 310 Miscellaneous equipment (tools, instruments, office N S 0.25 0.20 equipment, etc.) 311Metal structures for shiplock NBF 0.75 312Temporary power lines NBF 0.38 313Auxiliaryequipment for power station and dam NBF 2.93 314Auxiliary equipment for shiplock NBF 0.42 ConsultantServices 16.22 1.42 T1 Management o fintegratedwater resources, etc. QCBS 0.80 0.20 T2 /Managementinformationsystem 1 QCBS 0.67 0.18 T3 ITraining I co 1.04 1.04 7.65 0.94 T6 /Projectmanagement cost 5.12 lother 24.99 01 Landacquisition NBF 14.50 02 Resettlement compensation NBF 10.49 TotalCost (incl. contingencies) 141.25 44.55 1 Costs include 12% contingencies - 52 -  Table B2: Procurement Packaging -- Guangdong __ No. Contract Procure- Estimated Bank ment contract financing Method value (US$m) (US$ m) 3vil Works 64.93 28.53 _. w1 JonstructionofXiniudam, shiplock andpowerhouse,and ICB 18.52 9.26 - ransmission lines - w 2 >ao-Long-Hu channelregulation works ICB 17.60 8.80 w 3 qorth Riverrermlation works I ICB I 15.97 1 7.99 - w 4 kcess road and site managementcomulex I NCB 1 3.77 1 1.89 - w 5 rerminals and maintenancestations onNorthRiver NCB 1.20 0.60 - W6 teplacement o f Lianyao andLongmabridges NBF 7.86 ~ ~~ 2quipment 15.50 13.95 G1 Yectronic and mechanical equipment for Xiniu ICB 8.37 7.53 qavigation Complex G2 rurbines, metal structures, operation machinery and other ICB 3.34 3.00 lncillary equipment for XiniuNavigationComplex G3 jervice vessels ICB 1.03 0.93 - G4 d1S hardware ICB 1.01 0.9 1 - G5 qavigational aids ICB 0.88 0.80 - G6 lardware for electronic map NCB 0.34 0.30 G7 lardware for shiulock management svstem NCB 0.22 0.20 G8 ;urvev, monitoringand ancillary equiument 1 NS 1 0.31 I 0.28 2onsultant Services 18.70 3.05 T1 :onstruction suuervision over all civil works OCBS 1.18 1.06 - T2 Ievelopment o f Waterway Electronic Mapping System QCBS 0.45 0.40 - T3 hpervision over equipment for Xiniucomponent QCBS 0.22 0.20 - T4 Ievelonment o f shidock managementsvstem OCBS 0.11 0.10 T5 :onsultant service for Xiniucomuonent I CO I 0.17 I 0.15 1 - T6 herseas training CQ 1.27 1.14 - T7 Iomestic training NBF 0.22 - T8 Iesignand engineering NBF 6.42 T9 'roject Management and other fees NBF 8.66 Ither 1 - 01 .and acquisition NBF 9.27 1 - Total Cost (incl. contingencies) 108.39 45.54 nclu e 12% contingencies - 53 -  Table B3: ProcurementSchedule -- Guangxi No. Descriptionof contract Contract Comple- signing tion method G10 Miscellaneous equipment 0.25 Ask price to three 0812012004 0612012007 (for tools, instruments, potential suppliers: - office equipment, etc.) 04 w1 Construction o f Naji 0613012004 0913012004 1212012008 Navigation Complex (dam, power house, ship lock & dam area bank protection) G2 Monitoring system for 0810112004 1113012004 0411512008 dam, power station and - shiplock G8 Electrical equipment for 0612012005 10/20/2005 1212012006 dam, power station and shiplock ;E; - G3 Shiplock hoist j 04 20 2005 0612012005 10 20 2005 12'20 2006 ~ G1 Power station equipment 1 07 30 2004 1013012004 01/2012005 02/01 2007 (incl. turbines, generators (1st unit ) and control systems) ';'c"B" ~ - G9 Cranes 1211512004 0211512005 0612012005 0312012006 ~ G4 Metal structures for dam 0311012005 0511012005 0912012005 0812012006 andpower house G5 Hoists for dam and power 1.46 ICB 1211512004 0211512005 0612012005 0312012006 - house w 2 Reservoir area protection 2.49 NCB 1211012004 0312012005 0713Ol2005 1212012008 - works G7 Transformers for dam, 0.74 ICB 0711012005 0911Ol2005 0111Ol2006 0612012007 - Powemlant & shidock G6 Power transmission line 1.32 ICB 0311Ol2006 0511012006 07/10/2006 0612012007 - works T 1 Management o f integrated 0.80 QCBS - water resources etc. T 2 Management information 0.67 QCBS - system T 3 Overseas training 1.04 co - 54 -  Table B4: Procurement Schedule Guangdong -- - 55 -  Proceduresfor NationalCompetitive Bidding The procedures to be followed for National Competitive Biddingunder Part C.1o f this Section shall be those set forth inthe Law on Tendering and Biddingo f the People's Republic o f Chma promulgated by Order No. 21 o f the President o f the People's Republic o f China on August 30, 1999, with the following clarifications required for compliance with the Guidelines: (i)Allinvitationstoprequalifyortobidshallbeadvertisedinanewspaperofnationalcirculationin China and such advertisement shall be made insufficient time for prospective bidders to obtain prequalification or bidding documents and prepare and submit their responses. Inany event, a minimumo fthirty (30) days shallbe givento biddersbetweenthe date o fadvertisement insuch newspaper and the deadline for submission o f bids, and the advertisement andbiddingdocuments shall specify the deadline for such submission. (ii)Qualificationrequirementsofbiddersandthemethodofevaluatingthequalificationofeachbidder shall be specified indetail inthe biddingdocuments. (iii) biddersshallberequiredtoprovidesecurityinanamountsufficienttoprotecttheBorrower,in All case o f breach o f contract by the contractor, and the biddingdocuments shall specify the required form and amount o f such security. (iv) The time for opening o fall bidsshall be the same as the deadline for receipt o f suchbids. (v) All bids shall be openedinpublic; all bidders shall be affordedan opportunity to bepresent (either inperson or through their representatives) at the time o fbidopening, butbidders shall not be required to be present at the bidopening. (vi) Nobidmay be rejected solely on the basis that the bidprice falls outside any standard contract estimate, or margin or bracket o f average bids established by the Borrower. (vii) Eachcontract shall be awarded to the lowest evaluated responsive bidder, that is, the bidder who meets the appropriate standards o f capability andresources and whose bidhas been determined (A) to be substantially responsive to the bidding documents and (B) to offer the lowest evaluated cost. The winning bidder shall not be required, as a condition o f award, to undertake responsibilities for work not stipulated inthe bidding documents or otherwise to modify the bidas originally submitted. (viii)Eachcontract financed with the proceeds o fthe Loan shall provide that the suppliers and contractors shall permit the Bank, at its request, to inspect their accounts andrecords relating to the performance o f the contract and to have said accounts and records audited by auditors appointed by the Bank. "Thresholds generally differ by country and project. Consult "Assessment o f Agency's Capacity to Implement Procurement" and contact the RegionalProcurement Adviser for guidance. - 56 -  Annex 6(B): Financial Managementand DisbursementArrangements CHINA: Fourth inlandWaterways Project Financial Management 1. Summary ofthe FinancialManagement Assessment The project team conducted an assessment o f the adequacy of the project financial management system. It concluded that the project meets minimumBank financial management requirements, as stipulated inBPiOP 10.02. Inthe team's opinion, the project will have inplace an adequateproject financial management system that canprovide, with reasonable assurance, accurate and timely information on the status o f the project inthe reporting format agreedwith the project and as requiredby the Bank. The loan will be disbursed usingtraditional disbursement techniques and not based on project management reports, inaccordance with the agreement betweenthe Bank and MOF. No outstanding audits or audit issues exist with any o f the implementing agencies involvedin the proposedproject. The task team however will continue to be attentive to financial management matters and audit covenants duringproject supervisions. Country Issues. To date, no country financial administration assessment (CFAA) has been performed for China, though dialogue with the Government o f China inrespect o f the CFAA exercise is currently underway. The plannedapproach to CFAA i s to buildon the Asian Development Bank's study o f Financial Management and Governance Issues inChina in2000, and analyze areas that have changed rapidly inthe past few years or that deserve further scrutiny and over time cover all major areas usually assessed as part o f a full CFAA exercise. Currently, for reference purpose, the Bank relies on study work conductedby the Asian Development Bank. Nevertheless, basedon observations o f developments inthe areas o f public expenditures, accounting and auditing, and Bank experience with China projects for the past few years, we note that substantial achievement has beenmade inthe above areas and further improvement i s expected inthe next few years. As the economic reformprogram further unfolds, the Government of China has come to realize the importance o f establishing and maintaining an efficient and effective market mechanism to ensure transparency and accountability, and minimizepotential fraud or corruption. Due to a rather unique arrangement by the Government o f China, the funding o f Bank-supportedprojects --and inparticular the Bank loans-- i s controlled and monitored by MOF and its extension, i.e. finance bureaus at provincial, municipal/prefecture and county level. However, project activities are usually carried out by implementing agencies o f a specific industryor sector. The above arrangement then usually requires more and closer coordination on the project, as the multi-level management o f the funding and implementation mechanismsometimes works to the detriment o f smooth project implementation. - 57 -  Strengths and Weaknesses. (i) Strengths: The proposed project is the second Bankproject to be implementedinboth Guangxi and Guangdong. Project personnel identified to fill financial or accountingpositions have relevant adequatework experience and educational background. Inaddition, the project management offices (PMOs) for the proposedproject have accumulated extensive experience from the prior projects (Le. (first) InlandWaterways for Guangxi and IWW2 for Guangdong) and also will benefit from the rich experience the Guangxi and Guangdong Finance Bureaus have hadwith other Bank projects. The prior records indicate that bothPMOs and provincial/regional Finance Bureaus have been found satisfactory inrespect o f project financial management and withdrawal applications. fii) Weaknesses: The two members of the Guangdong PMO staff identified to assume financial and accounting work for the project hadrelevant academic background and work experience, but they hadnot received training on Bank-financed projects. They missedthe launch workshop for the Second InlandWaterways project, becausethey were not hireduntil implementationof the project hadbegan and initial expenditures were incurred. Therefore, training inproject financial management and disbursement was provided by Guangdong Finance Bureau and the PMO after the present project was appraised. Inaddition, one more staff member was hired to strengthen the team. The Bank will provide guidance as and when needed throughout project implementation. ImplementingEntities. The implementingagenciesofthe project are the GuangxiXijiang Waterway Construction & Development Co. (GXWCDC) for project components inthe Guangxi Zhuang Autonomous Region and Guangdong Waterway Bureau (GDWB) for project components inGuangdong Province. GXWCDC i s an independent legal entity established andwholly owned by Guangxi for the purpose o f developing and managing the region's network o f inland waterways and currently manages andoperates the navigation complexes at Guipingand Guigang. GDWB i s a line department o f the GuangdongProvincial government with direct responsibility for the province's inland waterway andreports to the Guangdong Communications Department. Eachexecuting agency has set up a PMO to managepreparationand implementationo f the project. Eachhas a full-time team o f technical staff with prior experience inimplementing a World Bankproject. The GuangxiPMO brings together many staff who worked on IWW1, completed in2001. The Guangdong PMO has managed successfully its component o f the on-going Second Project. The ForeignFunds Divisiono fthe finance bureaus inthe Projectprovinces will also play a major role inproject implementation, including overall monitoring, financing arrangements, procurement, financial management, etc. The provincial finance bureaus will also be responsible for maintaining, monitoring and reconcilingthe special accounts to be established for the project, and reviewing, verifying, consolidating and approving withdrawal applications prepared by the respective PMOs before submittingthem to the Bank for disbursement processing. EachForeign Funds Division has hadprior experience with Bank projects and i s familiar with Bank disbursement procedures. Consequently, for smooth and successful project implementation, close cooperationand coordination betweenfinance bureaus and PMOs i s important. - 58 -  FundsFlow. (0Bankfunds: Bank loanproceeds ingeneral will flow from the Bankto the provincialfmance bureaus (PFB) where the special accounts will be set up, project implementing agencies, and finally to contractors or suppliers. The Bank loan will be signed with the People's Republic of Chinathrough its Ministry ofFinance (MOF), and on-lending agreements will be signed between MOF and the Government o f Guangxi and Guangdong through their respective PFBs, and between the PFBs and the implementing agencies. (io Counterpartfunds: The counterpart funds for Guangxi regionwill come from a local commercial bank loan and self-financing besides appropriations by the Ministry o f Communications (MOC) and Guangxi Communications Department (GXCD). For Guangdong province counterpart funds will come from appropriations by MOC and Guangdong Communications Department (GDCD). The counterpart funds will be contributed by MOC andGXCD and GDCD directly to the project. Staffing.Adequate project accounting staff with educationalbackground andwork experience commensurate with the work they are expected to perform i s one o f the factors critical to successful implementationo f project financial management. For the financial/ accounting staff already identified for the project, the Bank task team notes that, based on discussions, observationand review o f educational background and work experience, they are qualified and appropriate for the positions and work they are expected to perform. To strengthen financial management capacity and achieve consistent quality o f accounting work, at the Bank'srequest each PMO prepared a project financial management manual. It provides detailed guidelines on financial management, internal controls, accounting procedures, fundand asset management and withdrawal application procedures. Finalized versions o f these manuals acceptable to the Bank were received inFebruary 2004. AccountingPolicies andProcedures. The administration, accounting andreporting o fthe project will be set up inaccordancewith the following regulations/circulars issued by MOF: a. Inline with other Bank-financedprojects inChina, the Project will use the "Temporary Regulations on Financial and Accounting Management for Projects Financedbythe World Bank" (Circular #127 issued in 1993) by MOF as a basis for bookkeeping and preparation of project financial statements and management reports. Accrual accounting and double entry bookkeeping will be adopted by the Project. b. Circular #12: "Regulation for the Submission o fWithdrawal Applications" issued in December 1996 by MOF - includes detailedprocedures for preparing and submitting withdrawal applications and retentiono f supporting documentation. C. Circular #13: "Accounting Regulations for World Bank Financed Projects" issued in January 2000 by MOF. The circular provides in-depth instructions on the accounting treatment o fproject activities and covers the following: 0 Chart o f accounts 0 Detailed accounting instructions for each project account 0 Standard set o fproject financial statements 0 Instructions on the preparation o fproject financial statements - 59 -  Both circular #127 and #13 are simplified versions o f the Accounting Standards for State-owned, Infrastructure Oriented Projects (the "Standards"), taking into consideration the uniquecharacteristics ofBankprojects. The Standardsaremodeledafter the principles of InternationalAccounting Standards andprovide detailed guidelines to accounting for activities o f Bank-financed projects. Each PMO will manage, monitor and maintain accounting records on the project components for which it is responsible. They will retain original supporting documents for project activities. Inaddition, they will prepare project financial statements and submit them to the Bank for review and comments on a regular basis. InternalAudit. The intemal department under GXWCDC will performinternal audits for the Guangxi component. The task team will evaluate work performedby such internal auditors and determine the degree o f reliance o f their work inrespect o f project implementation and Bank supervision missions. As for Guangdong, an internal audit department exists but they have no audit arrangement for Bankprojects, so the PMO and the finance bureau will carry out regular supervision. Reportingand Monitoringand Formatof FinancialStatements. The format and content o f the following project financial statements constitutes the standard project reporting package agreedto between the Bank and MOF, andhave been discussed and agreed with all parties concemed. Inline with the newly issued Financial Monitoring Report (FMR) guidelines, the unauditedproject consolidated financial statements will be submitted as part o f FMRto the Bank ona semi-annual basis (prior to August 15 andFebruary 15 o fthe following year), and include the following four statements: 0 Balance Sheet; Summary o f Sources and Uses o f Funds by Project Component; 0 Statement o f Implementationo f LoanAgreement; and 0 Statement o f Special Account But upon operation, the following unaudited financial statements from GuangxiXijiang Waterway Construction and Development Co. will be requiredto be submitted on a semi-annual basis: Balance Sheet Income Statement 0 Statement o f Cash Flow InformationSystems. A computerizedfinancialmanagement system is inplace inboth PMOS,and a widely accepted accounting software, Yongyou, which has beenused in previous Bank projects (First and Second Inland Waterway Projects) and proved to be adequate for their financiaUaccounting work and will continue to be used inthe proposed Fourth Project, as well to keep track o f project activities. Yongyou is a mature financial software widely used inChina's business community, and i s considered appropriate for the - 60 -  financial and accountingwork o f the project. However, the task team will closely monitor accounting work to ensure proper recording andreporting. Supervision Plan. For the initial implementationstage, more frequent supervisionmissions (such as twice a year) should be carried out to have better coverage and ensure that project accounts are properly set up, procurement guildelines are followed, and expenditures incurred are eligible and well supported. More detailed reviews at the initial implementationphase can also help ensure that the financial management system i s functioning as intendedand financial statements are prepared inline with stipulated format and content. The mission frequency can then be subsequently reduced from the mid-point to the normal level (once a year). Furthermore, to maximize effectiveness and efficiency, procurementand FMDisbursement specialists shouldjointly participate insupervision missions for procurement and SOEs ex post reviews. 2. Audit Arrangements The Bankrequires that project financial statements be audited inaccordance with standards acceptable to the Bank. Inline with other Bank-financed projects inChina, the project will be audited inaccordance with the Government Auditing Standards o f the People's Republic of China (1997 edition). The Guangxi Zhuang Autonomous RegionAudit Bureau and Guangdong Provincial Audit Bureau have been identified as the auditors for the Project. Annual audit reports will be issued inthe name o fprovincialhegional audit bureaus and subject to reviews by the China NationalAudit Office (CNAO). The Bank currently accepts audit reports issued by CNAO or provinciaVregiona1 audit bureaus for which CNAO is ultimately responsible. Audit reports on annualproject financial statementsof eachproject provinces will be due to the Bank within 6 months of the end of each calendar year. 3. DisbursementArrangements (a) The Bank loanwill be disbursedagainst (i) 50 percent o f the expenditures for civil works; (ii) percentoftheforeignexpendituresfordirectlyimportedequipmentandmaterials 100 quoted on a CIF basis; (iii) 100percent o f expenditures ex-factory for locallymanufactured goods; (iv) 75 percent of other local expenditures; and (v) 91percent o f the expenditures for consulting services, and 100percent for study tours and training. (b) The estimated annual disbursement schedule is shown inthe Project Financing Data on page 2 and detailed inthe PIPS(available inthe project file). It i s based on the project implementation schedule and i s inline with Bank experience o fpumped storage power projects. Disbursements are expected to be completed in6 years from 2004 to 2009. The project is expected to completed by July 31,2009 and the loan closing date is January 31, 2010. (c) Retroactive financing inan aggregate amount o f US$9 million would be provided for anticipated expenditures (construction equipment, consulting services and training) incurred after September 1, 2003 and before signing o f the loan. (d) Guangxi and Guangdong will eachhave a special account. The authorized allocation for - 61 -  each account will start at $2 millionandwill be raised to $3 million,once disbursements from the correspondingpart ofthe loanexceed $10 million. Allocation of loan proceeds (Table C) Table C: Allocation of Loan Proceeds Expenditure Category I Amount in US$millionI Financing Percentage /PartA. Guanexi I I I ICivil works 18.08 50 Goods 20.69 100(foreign) / 100 (local ex-factory) / 75 (other local) Consultants services 0.44 91 Training 0.84 100 Part B. Guangdong 0.00 Civil works 25.66 50 Goods 12.54 100(foreign) / 100 (local ex-factory) / 75 (other local) Consultant services 1.72 91 Training 1.02 100 Unallocated 9.10 Total Project Costs with Bank 90.09 Financing Interest during construction 0.00 I Front-endfeeI 0.91 I I Total 91.OO - 62 -  Annex 7: Project Processing Schedule CHINA: Fourth Inland Waterways Project ITime taken to prepare the project (months) I I 16 I /FirstBank mission (identification) I I 03/01/2002 I Appraisal mission departure 0910112003 08/25/2003 Negotiations 12/08/2003 1211112003 Planned Date of Effectiveness 07/01/2004 Prepared by: Guangxi Communications Department andGuangdong Waterways Bureau Preparation assistance: See Annex 8. Bank staff who worked on the project included: I Name Speciality Graham Smith Lead Transport Economist John Scales Senior Transport Specialist Robin Carmthers Lead Transport Economist Naoya Tsukamoto Senior Environmental Specialist Chaohua Zhang Senior Social Sector Specialist Kekchoo Chung Senior Port and Waterway Specialist, Consultant Toshiro Tsutsumi Senior Ports Engineer Richard Scheiner Senior Civil Engineer, Consultant Hongyun Liu Senior Power Engineer, Consultant Scott MacKnight Environmental Specialist, Consultant Han-KangYen Research Analyst XinChen Program Assistant Dawei Young Procurement Specialist KarinNordlander Lead Counsel Robert O'Leary Senior Finance Officer (Loan administration) - 63 -  Annex 8: Documents in the Project File* CHINA: Fourth Inland Waterways Project A. Project Implementation Plan 1. GuangxiCommunicationsDepartment: "GuangxiYoujiang Waterway DevelopmentProject:Naji Navigation Complex ProjectImplementationProgram", August 2003 2. Guangdong Provincial Waterway Bureau: "ProposedFourthInlandWaterways Project, Guangdong Component, ProjectImplementationPlan(RevisedVersion)", September 2003 B. Bank Staff Assessments 1. EconomicEvaluation of ProjectComponents(EXCEL tables) 2. FinancialEvaluation of ProjectComponents. C. Other 1. NajiNavigation Complex; EngineeringFeasibility Study, June 2002 2. NajiNavigation Complex: Economic EvaluationReport, August 20023. 3. Naji Navigation Project: Report o f Dam Safety Review Panel Meeting No.l,24 February, 2003 4. Channel RegulationEngineeringinLao-Long-Hu Waterway and Channel Regulation Engineeringfor North River (Shaoguan to Qingyuan Section) 5. BriefReport on the Feasibility Study of the Lao-Long-Hu Waterway Regulation Works, 26 August 2002 6. Feasibility Research Report on Channel Regulationof Middle Reaches o fNorthRiver (Shaoguan-Qingyuan), August 2002 7. BriefReport on the Feasibility Study o f XiniuNavigation Complex, 16 August, 2002 8. Guangdong Provincial Waterways Bureau: "A Survey Report on Throughput and Facilities o f the Project-Related Ports", May 2003 *Including electronic files - 64 -  Annex 9: Statement of Loans and Credits CHINA: Fourth Inland Waterways Project 03-Feb-2004 Differencebetweenexpected and actual OriginalAmount in US$ Millions disbursements" Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd PO65463 2004 CN Jiangxi IntegratedAgric. Modern 100.00 0.00 0.00 0.00 100.00 0.75 0.00 ~ P065035 2004 CN-Gansu8 XinjiangPastoral Development 66.27 0.00 0.00 0.00 65.61 3.88 0.00 PO66955 2004 CN-ZhejiangUrbanEnvmt 133.00 0.00 0.00 0.00 133.00 0.00 0.00 PO73002 2004 CN-Basic Educationin Western Areas 100.00 0.00 0.00 0.00 100.00 0.00 0.00 PO77615 2004 CN-GEF-Gansu8 Xinjiang PastoralDevelop 0.00 0.00 10.50 0.00 10.50 0.70 0.00 PO67337 2003 CN-2nd GEF EnergyConservation 0.00 0.00 26.00 0.00 15.00 15.98 0.00 PO40599 2003 CN-TIANJINURB DEV II 150.00 0.00 0.00 0.00 150.00 0.00 0.00 PO56847 2003 CN-3rd Xinjiang Hwy Project 150.00 0.00 0.00 0.00 106.13 6.55 0.00 PO68058 2003 CN-Yixing PumpedStorage Project 145.00 0.00 0.00 0.00 140.95 1.47 0.00 PO76714 2003 CN-Anhui Hwy 2 250.00 0.00 0.00 0.00 250.00 13.42 0.00 PO70441 2003 CN-Hubei Xiaogan XiangfanHwy 250.00 0.00 0.00 0.00 178.66 -3.01 0.00 PO70191 2003 CN-SHANGHAIURB ENVMTAPLI 200.00 0.00 0.00 0.00 200.00 0.00 0.00 PO64729 2002 CN-SUSTAINABLEFORESTRYDEV. PROJECT 93.90 0.00 0.00 0.00 80.48 3.65 0.00 PO58846 2002 CN-Natl RailwayProject 160.00 0.00 0.00 0.00 37.23 -2.35 0.00 PO71147 2002 CN-TuberculosisControl Project 104.00 0.00 0.00 0.00 92.67 -11.33 0.00 PO60029 2002 CN-Sustain.ForestryDev(Natura1Forest) 0.00 0.00 16.00 0.00 17.68 2.60 0.00 PO70459 2002 CN-InnerMongoliaHwy Project 100.00 0.00 0.00 0.00 88.82 5.15 0.00 PO68049 2002 CN-HubeiHydropowerDev in PoorAreas 105.00 0.00 0.00 0.00 87.89 10.72 0.00 PO58845 2001 Jiangxi iI Hwy 200.00 0.00 0.00 0.00 133.42 5.08 0.00 PO56199 2001 CN-3rd InlandWatelways 100.00 0.00 0.00 0.00 84.12 7.62 0.00 PO56516 2001 CN -WATER CONSERVATION 74.00 0.00 0.00 0.00 41.42 8.46 0.00 PO56596 2001 CN-ShljiazhuangUrbanTransport 100.00 0.00 0.00 0.00 88.58 53.81 0.00 PO47345 2001 CN-HUAI RIVERPOLLUTIONCONTROL 105.50 0.00 0.00 0.00 90.68 -14.82 0.00 PO51859 2001 CN-LIAO RIVERBASIN '100.00 0.00 0.00 0.00 80.23 35.23 0.00 PO45915 2001 CN-UrumqiUrbanTransport 100.00 0.00 0.00 0.00 52.54 46.04 0.00 PO45910 2000 CN-HEBEIURBANENVIRONMENT 150.00 0.00 0.00 0.00 123.53 48.03 0.00 PO49436 2000 CN-CHONGQINGURBANENVMT 200.00 0.00 0.00 3.70 161.67 64.70 0.00 PO56424 2000 TONGBAI PUMPEDSTORA 320.00 0.00 0.00 100.00 164.64 97.81 0.00 PO45264 2000 CN-SMALLHLDRCATLE DEV 93.50 0.00 0.00 0.00 14.62 8.34 0.00 PO42109 2000 CN-BEIJINGENVIRONMENTII 349.00 0.00 25.00 0.00 294.22 183.70 0.00 PO58844 2000 3rd HenanProv Hwy 150.00 0.00 0.00 0.00 67.17 29.51 0.00 PO58843 2000 GuangxiHighway 200.00 0.00 0.00 0.00 105.76 46.76 0.00 PO64924 2000 CH-GEF-BEIJINGENVMT II 0.00 0.00 25.00 0.00 26.26 18.43 2.20 PO64730 2000 CN YangtzeDike Strengthening Project - 210,oo 0.00 0.00 0.00 114.03 94.03 0.00 P050036 1999 Anhui ProvincialHwy 200.00 0.00 0.00 9.60 43.79 40.39 0.00 PO51705 1999 Fujian IIHighway 200.00 0.00 0.00 0.00 65.86 62.53 0.00 PO51856 1999 ACCOUNTINGREFORM& DEVELOPMENT 27.40 5.60 0.00 0.00 19.24 19.16 0.00 PO41268 1999 CN-NatHwy4iHubei-Hunan 350.00 0.00 0.00 0.00 59.72 34.72 0.00 PO57352 1999 CN-RURALWATER IV 16.00 30.00 0.00 0.00 21.84 15.42 7.68 PO58308 1999 CN-PENSIONREFORMPJT 0.00 5.00 0.00 0.00 1.77 1.75 0.00 PO56216 1999 CN - LOESS PLATEAUII 100.00 50.00 0.00 0.00 29.24 31.38 0.00 PO60270 1999 CN-ENTERPRISEREFORMLN 0.00 5.00 0.00 0.00 2.71 4.29 4.07 PO38121 1999 CN-GEF-RENEWABLEENERGYDEVELOPMEN1 0.00 0.00 35.00 0.00 28.58 26.50 7.57 PO51888 1999 CN - GUANZHONGIRRIGATION 80.00 20.00 0.00 0.00 38.11 30.52 0.00 PO49665 1999 CN-ANNINGVALLEYAG.DEV 90.00 30.00 0.00 0.00 213 3 11.52 0.00 PO46051 1999 CN-HIGHEREDUC. REFORM 20.00 50.00 0.00 0.00 5.70 7.31 0.00 PO43933 1999 CN-SICHUANURBAN ENVMT 150.00 2.00 0.00 0.00 93.14 77.33 23.93 PO42299 I999 TEC COOPCREDIT IV 10.00 35.00 0.00 0.00 36.14 -10.18 0.00 PO41890 1999 CN-Liaoning UrbanTransport 150.00 0.00 0.00 0.00 36.96 36.96 0.00 P036953 1999 CN-HEALTHIX 10,oo 50.00 0.00 0.00 37.49 22.26 0.00 PO03653 1999 CN-ContainerTransport 71.00 0.00 0.00 18.61 3.62 22.19 0.66 PO46829 1999 RENEWABLE ENERGYDEVELOPMENT 100.00 0.00 0.00 0.00 12.87 99.87 6.07 PO46564 1999 CN - Gansu 8 InnerMongoliaPovertyRed. 60.00 100.00 0.00 13.30 49.81 38.19 -3.54 - 65 -  Differencebetween expected and actual OriginalAmount in US$ Millions disbursements' Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd PO03614 1998 CN-Guangzhou CityTransport 200,oo 0.00 0.00 20.00 100.31 120.31 100.31 PO03606 1998 ENERGY CONSERVATION 63.00 0.00 22.00 0.00 36.22 18.22 0.00 PO35698 1998 HUNAN POWER DEVELOP. 300.00 0.00 0.00 145.00 31.45 172.70 -22.46 PO49700 1998 CN- IAlL-2 300.00 0.00 0.00 0.00 4.52 4.52 0.60 PO37859 1998 CN-GEF EnergyConsewation 0.00 0.00 22.00 0.00 0.44 22.06 0.00 PO03619 1998 CN-2nd Inland Waterways 123.00 0.00 0.00 17.00 39.18 54.12 4.29 PO40185 1998 CN-SHANDONGENVIRONMENT 95.00 0.00 0.00 1.40 20.07 21.47 -0.79 PO03566 1998 CN-BASIC HEALTH(HLTH8) 0.00 85.00 0.00 0.00 39.66 23.29 0.00 PO46563 1998 CN - TARiM BASiN II 90.00 60.00 0.00 2.67 14.78 16.58 0.00 P045788 1998 Tri-Provinciai Hwy 230.00 0.00 0.00 0.00 19.81 15.98 0.00 PO03539 1998 CN -SUSTAINABLE COASTAL RESOURCESDE 100.00 0.00 0.00 2.06 47.54 45.44 33.72 PO51736 1998 E. CHINNJIANGSU PWR 250.00 0.00 0.00 86.00 51.14 137.14 11.55 PO46952 1998 CN FOREST. DEV. POOR AR 100.00 100.00 0.00 0.00 40.02 -61.48 17.91 ~ PO36949 1998 CN-Nat Hwy3-Hubei 250.00 0.00 0.00 0.00 21.15 21.15 0.00 PO36414 1998 CN-GUANGXI URBAN ENVMT 72.00 20.00 0.00 0.00 71.56 65.25 23.72 PO03637 1997 CN-NAT'L RURALWATER 3 0.00 70.00 0.00 0.00 0.00 3.20 2.78 PO03590 1997 CN QINBA MOUNTAINS POVERTYREDUCTIO 30.00 150.00 0.00 0.00 13.16 16.34 -3.28 ~ PO35693 1997 FUEL EFFICIENT iND, 0.00 0.00 32.80 0.00 7.62 32.81 0.00 PO03654 1997 Nat Hwy2/Hunan-Guangdong 400.00 0.00 0.00 0.00 48.52 48.52 16.70 PO03650 1997 TUOKETUO POWEWINNER 400.00 0.00 0.00 102.50 37.37 139.87 25.18 PO38988 1997 CN - HEiLONGJlANGADP 120.00 0.00 0.00 0.00 7.85 7.85 3.84 PO44485 1997 SHANGHAIWAiGAOQIAO 400.00 0.00 0.00 0.00 85.11 55.33 39.65 PO36405 1997 CN - WANJlAZHAi WATER TRA 400.00 0.00 0.00 75.00 22.58 97.58 5.00 PO03602 1996 CN-HUBEI URBAN ENVIRONMENT 125.00 25.00 0.00 28.32 39.72 70.08 29.74 PO03599 1996 CN-YUNNANENVMT 125.00 25.00 0.00 19.48 40.68 61.92 8.06 PO40513 1996 2nd Henan Prov Hwy 210.00 0.00 0.00 19.00 16.69 35.69 22.69 PO03594 1996 CN - GANSU HEXI CORRIDOR 60.00 90.00 0.00 0.00 73.92 58.83 0.00 PO03589 1996 CN-DISEASE PREVENTiON(HLTH7) 0.00 100.00 0.00 0.00 3.08 12.18 0.00 PO34618 1996 CN-LABOR MARKET DEV. 10.00 20.00 0.00 0.00 5.60 7.77 0.00 PO03648 1996 CN-SHANGHAISEWERAGE II 250.00 0.00 0.00 0.00 39.94 39.94 -0.19 PO03571 1995 CNJth Railways 400.00 0.00 0.00 119.00 13.10 132.10 23.10 PO03639 1995 CN-SOUTHWEST POVERTY REDUCTIONPROJE 47.50 200.00 0.00 0.01 1.21 25.36 25.36 PO03647 1995 China Economic Law Reform -LEGEA 0.00 10.00 0.00 0.00 0.61 0.93 0.00 PO03603 1995 CN-ENTHOUSING8 SSR 275.00 75.00 0.00 57.46 38.95 94.26 1.23 PO03596 1995 CN-Yangtze Basin Water Resources Project 100.00 110.00 0.00 1.92 0.34 4.75 4.75 PO03540 1994 CN-LOESS PLATEAU 0.00 150.00 0.00 0.00 1.12 0.50 0.00 PO03632 1993 CN-ENVIRONMENTTECH ASS 0.00 50.00 0.00 0.00 1.11 1.73 1.41 Total: 11719.07 1722.60 214.30 842.02 5141.55 2977.32 423.52 - 66 -  CHINA STATEMENT OF IFC's HeldandDisbursedPortfolio June 30,2003 InMillionsUS Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 2001 Peak Pacific 0.00 0.00 25.00 0.00 0.00 0.00 0.00 0.00 1998 Rabobank SHFC 0.45 0.00 0.00 0.45 0.45 0.00 0.00 0.45 2000 SSIF 0.00 6.00 0.00 0.00 0.00 0.89 0.00 0.00 1998 Shanghai Krupp 28.92 0.00 0.00 65.63 28.92 0.00 0.00 65.63 1999 Shanghai Midway 0.00 16.02 0.00 0.00 0.00 16.02 0.00 0.00 1999 Shanxi 16.75 0.00 0.00 0.00 14.20 0.00 0.00 0.00 1993 ShenzhenPCCP 3.76 0.00 0.00 0.00 3.76 0.00 0.00 0.00 Sin0 Gold 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 Sino-Forest 25.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00 2001 suzhouPVC 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1995197 WIT 5.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998 Wanjie Hospital 15.00 0.00 0.00 0.00 15.00 0.00 0.00 0.00 2000 WeihaiWeidongri 1.03 0.00 0.00 0.00 1.03 0.00 0.00 0.00 1996 XACB 0.00 19.93 0.00 0.00 0.00 0.00 0.00 0.00 2003 Yantai Cement 6.33 1.95 0.00 0.00 6.33 1.95 0.00 0.00 1993 Zhen Jing 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0 Zhengye-ADC 15.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00 2003 Advantage 0.00 0.50 0.00 0.00 0.00 0.50 0.00 0.00 2002103 BCIB 0.00 0.00 11.60 0.00 0.00 0.00 0.00 0.00 2003 Bank of Shanghai 0.00 24.67 0.00 0.00 0.00 24.67 0.00 0.00 1999100102 CDH China Fund 0.00 16.36 0.00 0.00 0.00 2.38 0.00 0.00 2002 CIG HoldingsPLC 0.00 3.00 0.00 0.00 0.00 3.00 0.00 0.00 1998100 CSMC 0.00 12.00 0.00 0.00 0.00 7.20 0.00 0.00 2003 ChengduHuarong 6.73 3.20 0.00 7.82 6.73 3.20 0.00 7.82 1998 Chengxin-IBCA 0.00 0.36 0.00 0.00 0.00 0.36 0.00 0.00 1998 China Bicycles 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1987192194 China Walden Mgt 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 1994 ChinaWalden Ven 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1994 Dalian Glass 0.00 2.40 0.00 0.00 0.00 2.40 0.00 0.00 1994 Dupont Suzhou 9.35 4.15 0.00 0.00 9.35 4.15 0.00 0.00 1995 Dynamic Fund 0.00 8.76 0.00 0.00 0.00 7.10 0.00 0.00 1994 Great Infotech 0.00 3.50 0.00 0.00 0.00 2.10 0.00 0.00 2003 Hansom 0.00 0.08 0.00 0.00 0.00 0.08 0.00 0.00 1999 HuarongAMC 23.74 3.00 0.00 0.00 14.74 0.01 0.00 0.00 2002 IEC 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 LeshanScana 5.36 1.35 0.00 0.00 3.76 1.35 0.00 0.00 1998 MaanshanCarbon 9.00 2.00 0.00 0.00 9.00 2.00 0.00 0.00 2001 MinshengBank 0.00 23.50 0.00 0.00 0.00 23.50 0.00 0.00 2001 NCCB 0.00 26.58 0.00 0.00 0.00 26.46 0.00 0.00 2001 Nanjing Kumho 3.89 3.81 0.00 11.07 3.89 3.81 0.00 11.07 1996 New ChinaLife 0.00 30.70 0.00 0.00 0.00 23.32 0.00 0.00 2001 Newbridge Inv. 0.00 1.95 0.00 0.00 0.00 1.95 0.00 0.00 1995 OrientFinance 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1997198 PSAM 0.00 1.93 0.00 0.00 0.00 0.00 0.00 0.00 2003 Total Portfolio: 195.31 217.74 36.60 84.97 139.16 158.44 0.00 84.97 - 67 -  Approvals Pending Commitment FYApproval Company Loan Equity Quasi Partic 2002 ASIMCO 0.00 0.01 0.00 0.00 2003 Anjia 0.00 0.00 0.01 0.00 2004 CCB-MS NF'L 0.03 0.00 0.00 0.00 2004 CUNA RCCI 0.00 0.00 0.01 0.00 2003 Cellon 0.00 0.00 0.01 0.00 2002 Darong 0.01 0.00 0.00 0.01 2002 HuarongAMC 0.02 0.00 0.00 0.00 2002 IEC 0.00 0.01 0.00 0.00 2002 KHIT 0.00 0.00 0.00 0.00 2003 Peak Pacific 2 0.00 0.00 0.01 0.00 2003 SAIC 0.01 0.00 0.00 0.00 2002 S M L 0.00 0.00 0.00 0.00 2002 Sino Mining 0.01 0.00 0.00 0.01 2002 Zhong Chen 0.03 0.00 0.00 0.03 Total PendingCommitment: 0.10 0.02 0.05 0.05 - 68 -  Annex IO: Country at a Glance CHINA: Fourth Inland Waterways Project East Lower- POVERTYand SOCIAL Asia B middle- China Pacific income Developmentdiamond' 2002 Population,mid-year (millions) 1,281.0 1,838 2,411 Life expectancy GNi per capita (Atlas method, US$) 950 950 1,390 GNI (Atlas method, US$ billions) 1,219.1 1,740 T 3,352 Average annual growth, 1996-02 Population I%) 0.8 1.o 1.o Laborforce (%J 0.9 1.2 1.2 GNi Gross per primary Most recent estimate (latest year available, 1996-02) capita nrollment Poverty(% ofpopulation below nationalpovertyline] 5 Urban population (% of totalpopulation) 38 38 49 Lifeexpectancyat birth (years) 71 69 69 I Infantmortality (per 1,000 live births) 30 33 30 Child malnutrition (% of children under 5) 10 15 11 Access to improvedwater source Access to an improvedwater source (% ofpopulation) 75 76 81 Illiteracy(% ofpopulation age 15+) 14 13 13 Gross primary enrollment (%ofschool-agepopulation) 106 106 111 China Male 105 105 111 Lower-middle-incomegroup ~ Female 108 106 110 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1992 2001 2002 Economic ratios' GDP (US$ billions) 221.5 454.6 1,167.1 1,232.7 Gross domestic investmenVGDP 33.2 36.2 38.5 41.0 Trade Exportsof goods and services/GDP 8.9 19.5 25.5 29.5 Gross domestic savingsiGDP 34.8 37.7 40.9 44.0 Gross national savings/GDP 35.1 38.0 40.0 43.8 T Currentaccount balancelGDP 2.4 1.9 1.5 2.9 Jomestic Interestpayments/GDP 0.2 0.6 0.5 0.5 investment savings Total debVGDP 3.8 15.9 14.6 12.6 Total debt service/exports 8.0 8.6 7.7 6.1 Presentvalue of debtfGDP 14.1 Presentvalue of debtfexports .. 51.8 indebtedness 1982-92 1992-02 2001 2002 2002-06 (average annualgrowth) -China GDP 9.7 9.0 7.5 8.0 7.5 __ GDP per capita 8.1 8.0 6.7 7.2 6.6 Lower-middle-income group STRUCTUREof the ECONOMY 1982 1992 2001 2002 1 Growth of investment and GDP (%) (?Aof GDP) L Agriculture 33.3 21.8 15.8 14.5 20 Industry 45.0 43.9 50.1 51.7 '5 Manufacturing 37.3 33.1 34.2 44.5 " Services 21.7 34.3 34.1 33.7 0 Privateconsumption 50.7 49.2 45.7 42.5 97 98 99 00 01 02 Generalgovernmentconsumption 14.5 13.1 13.4 13.5 Importsof goods and services -GDI -GDP 1982-92 1992-02 2o01 2o02 (average annualgrowth) Growth of exports and imports (Oh) Agriculture 4.6 3.7 2.8 2.9 40 Industry 11.6 11.3 8.4 9.9 30 Manufacturing 11.2 10.4 9.0 8.1 20 Services jf.7 8.4 8.4 7.3 10 Privateconsumption 11.4 8.1 2.8 1.9 Generalgovernmentconsumption 9.9 8.4 10.5 7.0 -10 Gross domestic investment 9.5 9.7 13.9 14.9 "--Exports 'D'lmports Imports of goods and services I 9.7 12.8 10.8 27.5 - 69 -  China PRICESand GOVERNMENT FINANCE 1982 1992 2001 2002 Domesticprices (% change) Consumer prices 6.0 6.4 0.7 -0.8 Implicit GDP deflator -0.2 7.9 1.2 -2.6 Government finance (% of GDP, includes current grants) Current revenue 22.9 14.7 17.1 17.9 Current budget balance .. 2.0 1.1 0.0 j -GDPdeflator -0-CPI I OverallSurDlusldeficlt -0.3 -1.0 -4.7 -3.0 TRADE 1982 1992 2001 2002 (US$ millions) Export and import levels (US$ mill.) Total exports (fob) 22,321 84,940 266,155 325,565 Food 2,908 8,309 12,780 14,623 400'000T Fuel 5,314 4,693 8,420 8,372 `300,000 Manufactures 12,271 67,936 239,802 297,085 Total imports (cif) 19,285 80,585 243,610 295,203 200 000 Food 4,201 3,146 4,980 5,237 100 000 Fueland energy 183 3,570 17,495 19,285 Capital goods 3,204 31,312 107,040 137,030 0 Export price index (1995=100) 41 85 83 78 Importprice index (1995=100) 71 95 91 86 Terms of trade (1995=100) 58 89 91 90 BALANCE of PAYMENTS 1982 1992 2001 2002 (US$ millions) Current account balanceto GDP (%) I Exportsof goods and services 24,906 94,198 299,409 365,395 Importsof goods and services 20,555 86,752 271,325 328,013 Resourcebalance 4,350 7,446 28,084 37,383 Net incnme 376 249 -19,174 -14,945 Net current transfers 486 1,155 8,492 12,984 Current account balance 5,212 8,850 17,401 35,422 Financingitems (net) -995 -10,952 30,046 40,085 Changes in net reserves -4,217 2,102 -47,447 -75,507 Memo: Reservesincludinggold (US$ millions) .. 24,842 220,051 297,721 Conversionrate (DEC, local/US$) 2.4 5.9 8.3 8.3 EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US$ millions) Composition of 2002 debt (US$ mill.) Total debt outstandingand disbursed 8,358 72,428 170,110 155,678 IBRD 0 3,752 11,550 12,051 IDA 1 4,287 8,654 8,729 A: 12,051 Total debt service 2,125 8,618 24,297 23,688 IBRD 0 460 1,550 1,631 IDA 0 30 151 175 Compositionof net resourceflows Officialgrants 47 327 240 Officialcreditors 657 2,343 2,156 -839 Privatecreditors -122 8,949 -4,017 -13,593 Foreigndirect investment 430 11,156 44,241 49,308 Porffolioequity 0 1.243 3,015 2,286 F:62,103 World Bank program Commitments 330 1,865 782 563 A IBRD - E Bilateral - Disbursements 1 1,331 1,791 1,733 B IDA - D Other multilateral - F Private - Principalrepayments 0 197 904 1,157 C IMF - G- Short-term Netflows 1 1,134 887 576 Interestpayments 0 293 797 649 Net transfers 1 841 90 -73 - 70 -  Additional Annex I 1 EnvironmentalAssessment and Action Plan Summary CHINA Fourth InlandWaterways Project A. Background 1. This project consists ofthe NajiNavigationComplex inGuangxi Zhuang Autonomous Region and three components inGuangdong Province: Lao-Long-Hu Waterway Improvement, North River Channel Improvements (dredginghegulation) and XiniuNavigation Complex. The respective InlandWaterways Bureaux retainedindependent consultants to prepare the Environmental Assessment documentation(EIA, EAP and Summary EA). The task team reviewed the Terms o f Reference for the EA and the first, second and thirddraft versions o f the EIAand EAP documents. A summary ofthe consultants andthe status ofEAsis providedinthe following table: Components EA consultants FinalEL4andEAP submission NajiNavigation Complex EnvironmentalProtectionResearchInstitute of June 11,2003 GuangxiZhuang AutonomousRegion Lao-Long-Hu Waterway Scientific ResearchInstitute o f the PearlRiver May 18,2003 Improvement Water ResourceProtection NorthRiverChannel SouthChina Institute of EnvironmentalSciences May 18,2003 Jinprovements XiniuNavigationComdex South ChinaInstituteof EnvironmentalSciences Mav 18.2003 2. Duringthe EA work, the local people inthe project areas were intensively consulted, and their opinions are reflectedinthe project design. For example, after consultations, project design was adapted to upgrade the level o f wastewater treatment at the construction camp, to avoid blasting a shoal at a fishprotection zone, to move the location o f a new bridge, and to plant trees along the reservoir. 3. The nationalpolicy and administrativerequirements for environmental assessmento f development projects inChina were satisfied duringpreparationand evaluation o f the EA, as was the Bank's OP 4.01 onEnvironmentalAssessment. The followingmajor environmental laws apply to the proposedProject: (a) EnvironmentalProtection Law o f the Peoples' Republic o f China (PRC); (b) Water Pollution Control Law o f PRC; (c) Water and Soil ConservationLaw o f PRC; (d) Atmospheric Pollution Control Law ofPRC; (e) EnvironmentalNoise Control Law o f PRC; (f) Cultural Relics Protection Law o f PRC; and (g) Circular on Strengthening Environmental Impact Assessment Management for Construction Projects Financed by International Financial Organizations. -71 -  B. BriefProjectDescription 4. NajiNavigationComplexwill be located inthe northwest part o f Guangxi on the You (Right)River, about 316 kmupstream ofNanning and about 40 kmdownstreamfrom Baise City. Itwill be the fourth often dams that arebeingdeveloped within the YouNu River Master Plan. The Complex is to include: (1) constructiono f a shiplock for 1,000 ton capacity vessels; (2) construction o f a 196mwide x 19.55m highspillway and power house (57 MW capacity); (3) construction o f a 409m access bridge and 8.7 kmo f access roads, and (4) dredging/ regulation to address 9 shoals near Baise City and 135 shoals betweenNaji andNanning. The resultant headpond will inundate 791ha o f land. The project site lies within two fault basins, the Baise Basin and Tianyang Basin, between the Guangxi and Yunnan mountainmasses. 5. Lao-Long-Hu Waterway Improvementprovides for navigationalimprovementsto an existing 15.5 kmchannel, locatedinthe lower reach o f the Xi (West) Rver near Jiangmen City at the western side o f the Pearl River Delta. It forms part of the Pearl River Delta Master Plan, which was also partially addressedwithin China 2nd Inland Waterways Project. It will facilitate movement o f 1,000-ton capacity vessels from Guangxi, Guizhou, and Yunnan to Hong Kong or Macao. The sediments are mostly fine silts and clays. 6. Bei(North) River ChannelImprovementprovides for navigationalimprovementsto five sections (75 km) of the River between ShaoguanCity and Qingyuan City. It will enable 300-ton capacity vessels to navigate the 184-kmsection during all seasons. The riverbed inthe upstream consists o f sands, pebbles and some bedrock, inthe middle stream o f sand and pebbles, and inthe lower stream o f sands mixedwith small pebbles. 7. XiniuNavigationComplexwillbe locatedinthe northwest ofGuangdongProvince onthe LianRiver,the largest branchofthe NorthRwer. Theproject site is located3.5 kmupriverof Xiniu Town andabout 20 kmfrom the confluence with the NorthRiver. The complex will be constructed between two sandbars inthe middle o f the river. It is the last and the most downstreamof 12 steps that have been developed along the Lian River. Itincludes (I) shiplock for 100-toncapacity vessels; (2) construction o f a dam (10.5m height) andpowerhouse (10 MW capacity); and (3) dredging o f 1.6 kmandregulation of 13 km o f the LianRiver. Construction o f the complex will inundate 95 ha o f land. C. Baseline EnvironmentDescription 8. Climatic Conditions. All the components are locatedinthe sub-tropical monsoonzone. The rainy season is from May to October ingeneral, and average rainfall i s from 1,100 mmto 2,500 mm. The average annual temperature is from 20 C to 22.7 C. 9. Social Situations. (1) Naji Navigation Complex: Baise City has a population o f 332,000. The major industry is agriculture (rice, sugar, vegetables, and fruits). Bake Port mostly handles coal with bauxite and sand as lesser products with shipment to Nanning and thence to Guangdong, Hong Kong and Macao. Annual average net income o f a farmer living inTianyan County i s 2,519 RMB. (2) Lao-Long-Hu Waterway: Jiangmen City has a population o f 420,000 - 72 -  with an average per capita income of4,43 1RMB for farmers and 9,525 RMB for non-farm workers. (3) NorthRiver Regulation: The population o f Shaoguan City and Qingyuan City are 3.1 and 3.9 millionrespectively, and average per capita income i s 3,300 RMB. (4) Xiniu Navigation Complex: The populationo f XiniuTown and surroundingvillages i s about 20,000 with an average per capita income of2,500 to 3,120 RMB. The major industryis agriculture. 10. EcologicalEnvironment (a) NajiNavigationComplex. GuangxiZhuang Autonomous Regionhas several natural protectedareas; e.g., inthe upper tributaries o f the RightRiver are two water resources protection areas, Chengbihe and Baidonhe, and one nature protection area, Dawangling. The EIA predicts no impacts, as they are significant distances from the project site. The 343 ha area to be inundated is 62% cultivated land, 19.8% gardenplot, 9.5% residential and commercial areas, 4.8% water area and 3.9% forest. Site investigationsby local academic experts identifiedno protected areas or critical natural habitats, a result confirmed with localauthorities. The EIA findings on protectednaturalareas were checked with "A Directory of Asian Wetlands" (International Union for Conservation o fNature andNatural Resources) and "A Biodiversity Review o f China" (World Wildlife Federation). (b) Lao-Long-HuWaterway Improvement. This chain ofthree waterways is locatedina relatively undevelopedarea near Jiangmen City. Site investigationwas conducted along the project site (16 km intotal), quarries, and dumping sites. The EIA report identifies no protected area or critical natural habitats within the impact area o f the project site, which was confirmed with localauthorities. (c) NorthRiver ChannelImprovement. The EIA report identifies the Yebei andHuaNanHu Nature Conservation Areas, but both are more than 100 kmaway from the projects sites. The project designprovides that no civil works will be conducted within or near upstreamo f the three "no-fishing" areas inQingyuan City. Site investigation involving local academic experts identified no critical habitats o f fauna and flora andthe results were confirmedwith localauthorities. (d) Xiniu NavigationComplex. The vegetation aroundthe project site is farmland and bamboo bush. The 95 ha area to be inundated i s mostly within the existingflood plainand i s 90% bushand 6% bamboo. The EIA report identifies no protected areas or critical naturalhabitats near the project site. This findingwas confirmed with localauthorities. 11. Water Quality. The proposedprojects sites are remote from large populatedareas or major industrial sources o f pollution. According to the monitoringdata duringpast several years, all the project sites ingeneral comply with Class I1or 111water quality standards; water quality at the Xiniu Navigation Complex i s as good as Class I.There is a drinking-water intake at Xiniu Town. 12. Sediment Quality. Though the proposed projects sites are remote from populated areas or major industrial sources o f pollution, elevated concentrations o f arsenic and cadmium were noted for the NajiNavigation Complex inGuangxi, which i s common inthis region and regarded as o f - 73 -  natural origin. According to the nationalregulation, the materials cannot be placed on agricultural land, but will be disposed inoff-channel sites. Sediments inother areas are acceptable for disposal on land as fillmaterials. 13. Existing Noise and Air Quality. The noise levels at villages around NajiNavigation Complex andXiniuNavigation Complex have almost reachedthe maximum allowed under the national standardbecause of existing commercial activities. Noise mitigation measures and monitoring to address this situation will be implemented. Air quality measurements are within appropriate national standards. 14. Cultural Relics. Archeological authorities conducted investigations usingbothdocument reviewsandsite inspections. At Naji, Poluo Relics, a pre-historic ruin, was identified within the inundation area, where pottery pieces with rope-figures, stoneware, and bone tools are found. According to national and regional laws, the relics will be excavated and preserved by the Autonomous Region Cultural Administration Department. At Lao-Long-Hu, four sunken ships from the Tang Dynasty were found withinthe Waterway, but not inthe actual project areas. The provincial antiquities bureauconcluded that the proposed project would not impact the sunken ships due to distance. D.PotentialEnvironmental Impacts and Their MitigationMeasures D-1.NajiNavigation Complex 15. Analyses of Alternatives. Four alternatives for the location o f the complex, and three alternatives for the water level of the reservoir as well as the no-project alternative were analyzed. The EIA rejectedthe "no-project" alternative due to the need for navigation improvements. The EIA concludedthat the proposedlocation is the most appropriate from an engineering and environmentalviewpoint because it requires the least amount o f civil works. The middle water level was selected to provide the best navigational depth for 1,000-ton capacity vessels, while also minimizing disruption to resettlement and existing ecology. 16. Construction Phase. The potential major environmental issues during construction are (a) water pollutiondue to increased suspendedsolids, (b) waste material dumping, (c) protection of residential areas, (d) protection o f aquatic ecosystem, and (e) protection o f the cultural relics. Proposed mitigation measures include: (a) The main source o f water pollution i s discharge o f accumulated water from the foundation excavation. Settling ponds will be constructedto control the concentration o f suspended solids inthe discharges within the national standardof 70 mg/L. (b) Disposalsites for surplus excavatedmaterials were carefully selected among several low-lying areas, with little ecological value or for agricultural production. Dredgedmaterial will be dumped inthe river, primarily for use inriverregulation. While concentrations o f some trace metals are elevated, this i s due to natural geology and not anthropogenic contamination. - 74 -  (c) Residential areas and a school near the project site or along transportationroads were identified as environmentally sensitive areas. Noise and dust control measureswill include spraying water or limitingconstruction schedules. (d) The EIA report does not identify significant impacts to the biodiversity ofthe aquatic ecosystem becausethere are many tributaries o f similar environment, including the composition of fauna and flora. Inaddition, the provincial government is considering enhancing the proposed fish conservation center to include rehabilitation o f biodiversity in the proposedreservoir. (e) According to national and regional laws, the project will excavate 1,000 sq.m. of Poluo Relics site to protect pre-historic items. 17. OperationPhase. The potential major environmental issue during operationi s eutrophication o f the reservoir. The EIA predicts water quality will be controlled withm Class I11 level, provided that public wastewater treatment facilities, now inplanning, will be constructed as scheduled. The report recommends a good ecological balance be achieved, by stocking the proposed reservoir with a variety of fish species. D-2.Lao-Long-HuWaterwayImprovement 18. Analysis of Alternatives. Three alternatives for routes, two alternatives for changes to the channel alignment, two alternative sources for quarries, and the '(no-project" alternative were analyzed. The selected route and alignment provide the best benefits interms o f bothengineering and environment. The selected channel alignment also provided for the best curvature providing for the minimumof excavationand therefore environmental impacts. Bothquarries satisfy the needs o f the project and the one with the poorer existingvegetation was selected. 19. Construction Phase. The identified major environmental issues duringconstruction are: (a) water pollution, (b) waste material dumping, (c) nearby residential area, and (d) the aquatic ecological environment. Proposed mitigation measures are as follows: (a) The major source o f suspended solids/turbidity will be the clamshell dredging andupland disposal. Multi-cell sedimentation ponds will be constructed for each dumpingsite, with a discharge control of 70 mg/L for suspended solids. Waste material dumpingsites were selected inconsultation with local governments. They are a combination o f an unused river channel and borrow pits from earlier town construction. Dredged materialswill be hydraulically pumpedto each dumping site. (b) Sediments proposedfor dredging are relatively uncontaminateddue to the limited industrializationor urbanization o f the general waterway area. (c) A large portiono f the proposedexcavation (channel bendre-alignment) will be conducted "inthe dry" to significantly reduce impacts to the aquatic environment. - 75 -  (d) Noise and dust prevention measuresrelatedto bridge re-constructionnear a residential area, will include limiting the construction schedule andspraying water. (e) Blasting and regulation work will avoid fish reproduction seasons. All disturbed vegetation will be rehabilitatedincluding the quarry anddumping sites. 20. Operationphase. The project will rehabilitate the existingwaterway and enable it to be usedby larger ships. While a higher volume o ftraffic is expected, there will be a decrease inthe chance o f accidents causing oil spills. The risks associatedwith the project works are considered to be minor, and no major environmental issues are identified for the operatingphase. D-3.NorthRiver ChannelImprovements 21. Analysis of Alternatives. Five sections o fthe river will be dredged and regulated. For sections A, B, and E, there are options interms o f engineering specification o f regulation. Combining these options, three alternatives were developed. The three alternatives and the "no-project" alternative were analyzed. The recommended altemative minimizes the extent o f construction o f spurs and groins, reduces the need for blasting o f shoals to none and minimizes the amount of dredging. The EIAreport concludes the recommended alternative is the best from boththe environmental and engineering viewpoints. 22. Construction Phase. The potential major environmental issues duringconstruction are: (a) water pollution due to increased suspendedsolidshrbidity, particularly inwater protection and "no fishing" areas; (b) dumping o f dredged materials and (c) protectiono f fish andother aquatic organisms. Because there are no terrestrial aspects o f this component, no major impacts to terrestrial vegetation are expected. N o residential areas were identifiedwithin the project impact zone. Proposedmitigation measures are: (a) Duringdredging, silt curtains will be deployed to contain waters with elevated concentrations of suspendedsolids/turbidity. The dredged materials will be dumped by pump-style equipment to minimize dispersion. (b) Sediments proposed for dredgingare relatively uncontaminatedas mucho fthe material is mediumto coarse sand andfine to mediumcobble. (c) Dredgedmaterials will be dumped at designated dumpingareas either indeep off-channel areas or betweenriver regulation groins. (d) No blastingwill be conducted andregulationwork will avoid fishreproduction seasons. The project will cooperate with the fishery authority to release fry to the river. - 76 -  23, Operation Phase. The project will rehabilitate the existing waterway and enable it to be used by larger ships. While there will be higher volume o f traffic, there will be a decrease inthe chance o f accidents causing oil spills. The risks associatedwith the project are considered to be minor, and no major environmental issues are identified for the operating phase. D-4.Xiniu Navigation Complex 24. Analyses of Alternatives. As this i s the last o f 12 dams/shiplocks modifyingthe Lian River, final site alternatives were limited. Three alternatives for the location and the "no-project" alternative were analyzed. The EIA concluded that the proposedlocation is good for the engineering and the environmental becauseit requires the least amount o f civil works. The reservoir water levelwas determined at the minimumto ensure year-round navigation for 100-ton capacity vessels to the next step up the river. 25. Construction Phase. The potentialmajor environmental issues duringconstruction are: (a) water pollution due to increased suspendedsolids, particularly with respect to the drinkingwater intake at Xiniu Town, (b) waste material dumping, (c) protection o f residential areas, and (d) protection o f the ecological environment. Proposed mitigation measures are: (a) Duringconstruction o f the cofferdams and excavation o f the facility foundation, the project will coordinate with Xiniu Town water utility to protect the quality o f water at the intake. Settling ponds will be constructed to control the concentrationo f suspended solids inthe discharges within the national standard o f 70 mg/L. (b) Soil androck from construction o fthe complex will be reused at the constructionsite. Material dredged from the river will be dumped into the river to augment river regulation. N o waste material dumping sites will be established outside o f the construction area. (c) The transportationroutes for the quarriedrock were surveyed and one school was identified as an environmentally sensitive site. Noise and dust preventionmeasures will be taken. (d) With respect to the ecological environment, the EIA report does not predict significant impacts for aquatic fauna and flora because o f the small size o f the complex and that this is the last and the most downstream step o f 12 that regulatethe flow o f the Lian River. To rehabilitate fishresources, the Waterway Bureauproposes to introduce a variety o f fish species. Inaddition, all disturbedvegetation will be rehabilitated. 26. Operation Phase. N o major environmental issues are identified. Oil leakage from the vessels duringnormal operation will be monitored by the Communications Department. An action program and placement o f necessary responseequipment for accidents will be prepared. 27. LessonsLearned from the Previous Project. The GuigangNavigation Complex in Guangxi was part o f the (first) InlandWaterways Project; the Hutiaomen and L-S-R Waterway Improvementswere part o f the Second InlandWaterways Project, now nearing completion. This FourthProject benefited from bothCommunications Departments' having completedEA - 77 -  documentation for Bank-financed projects. The understanding of Bank requirements was much improved, as reflectedinmore complete EIA and EAP documents. The role o f public consultation duringthe pre-constructionphase was also increased through additional meetings and a better use o f consultation methods. Public comments were utilized inchanges to the project design. 28. Cumulative and Indirect Impacts (1) Naji Navigation Complex will (as notedabove) be the fourth o ften dams proposedunder the Y o f l u River Master Development Plan. The major cumulative impacts o f these developments are interference with fish migration, alteration o f riverbanks, increasedwater pollution from shipping, and change inriver hydraulics. The EIA concludes that good protection works o f the riverbanks, installation and good management o f wastewater-collection tanks in ships andgood treatment o fwastewaters at land-based facilities will be able to control the pollution. Further, the changes inriver hydraulics were modeled and the channel designed to address issues o f siltation. The EIA report predicts limitedinduced environmental impacts associated with the expansion o f port and terminal facilities, as their design will address impacts relatedto landuse and highways. Produced electricity will be primarilyused for industrial development inBake City and adjacent towns. The production o f hydroelectric power will reduce the demand for burningo f coal to generate electricity, thereby reducing greenhouse gas emissions. (2) Lao-Long-Hu Waterway Improvement. The Pearl River Delta is one o f three major areas within China that have a significant potential for transportationimprovement through the use o f inlandwaterways. The Delta is beingdeveloped within a Master Plan with improvements to three major north-south and three major east-west waterways. The Second InlandWaterway Project is enhancing two o f the other waterways. The major cumulative impacts o f these developments are alterationo f riverbanks, increasedwater pollutionfrom shippingand changes inwaterway hydraulics. The EIA concludes that good protection works o f the riverbanks, installation and good management o f wastewater-collection tanks inships and good treatment o f wastewaters at land-based facilities will be able to control the pollution. Further, the changes inwaterway hydraulics were modeled and the channel designed to address issues o f siltation. The EIA report predicts limitedinduced environmental impacts associatedwith the expansion o f loading and unloading facilities located on other or adjacent waterways, as their design will address impacts relatedto landuse and highways. Industrial development o f the Tan River valley is and will occur irrespective o f the waterway project. There will be a beneficial induced impact as shippingtraffic to Hong Kong will be able to use a shorter and more protectedwaterway than the current South China Sea route outside the Delta. (3) North River Waterway Improvement. The EIA report analyses cumulative impacts related to the existing three dams/shiplocks and their reservoirs and earlier modifications to the lower section o f the River. The major issue will be water pollution causedby suspended sediments and its secondary impact to aquatic ecology. The impact will be short-term based on occurrence only duringconstruction and will be controlled through timing o f constructionandthe use o f silt curtains. There are no readily identifiable induced impacts relatedto this sub-component. - 78 -  (4) Xiniu Navigation Complex. From 1959 to1974, 11water resources dams were constructed on the LianRiver with provision of shiplocks to enhance river navigation. The major deleterious cumulative impact has been the interference to migratory fish species. However, as the proposed component will be the last on the Lian River, additional cumulative impacts are not expected. Local communities have beentaking various measuresto recover fishresources, including stocking o f headponds. The component i s part o f a larger economic development and poverty-reduction effort inthe northeastem part of the Province. The proposedimprovement o f river transportationwill enhance such resource industries as coal, cement, metallic substances, construction materials and local agriculturalproducts, as well as improve irrigation capacity and contribute to agricultural productivity. E.Environmental Monitoring 32. Monitoringwill be carried out to verify predicted impacts, identify unexpected environmental problems at an early stage and implemenuadjustmitigation measures, as appropriate. For example, the concentrationo f suspendedsolids inthe effluent from sedimentationponds will be monitored at least twice per week, with the rate o f discharge adjusted to comply with the national standard. Monitoring will cover bothpollution-related and ecological environment issues. Monitoringwill be conducted by independent monitoring institutions to be selected through a biddingprocess. The results o f monitoring will be reported both quarterly and annually to the Bank and to relevant local authorities. F. Institutional Arrangements and Training 33. The Department of Communications inboth Guangxi and Guangdong will assign staff to be responsible for the implementation o f environmental protection. An organization will be or has already been established to implement the project. For example, the GuangxiXijiang Waterway Constructionand Development Co. Ltd.i s responsible for the NajiNavigation Complex. The implementing organizations will have a department incharge of environmental protection and full-time or part-time staff will be assigned. At local levels, supervision groups will be set up for each contract. One o f the members o f each group will be assigned for environmental supervision. Rules onreportingo f findings andrecording ofactions will be established to facilitate effective supervision. 34. Local environmental authorities continue to work on the project. They and their field offices will independently oversee the compliance issues. The project will provide the results o f the environmentalmonitoring to them. 35. Implementationo f the EAP will be a part of the contract betweenthe Communication Departments and contractors. Eachcontractor will be required to assign one or more staff members to the project for environment protection activities. 36. To enhance environmentalprotection knowledge and skill, staff incharge o f environmental protection will receive training. The training program i s proposedto include lectures by experts, - 79 -  site visits to similar projects and national and intemational training. A training budget o f US$ 398,000 has been allocated. G. Public ConsultationandInformationDisclosure 37. PublicConsultationand Feedback. Duringpreparationo f the TOR and the EIA, people within the project areas were intensivelyconsulted. Apart from the resettlement-related issues, the public showed a wide range o f concems from water quality at drinkingwater intakes to noise impacts to schools. Their opinions have beenreflectedinthe final project design and mitigation measures: e.g., upgrading the level o f wastewater treatment at the construction camp, avoiding shoal blasting within a fishprotectionzone, locationo f a new bridge, and planting o f trees within the reservoir catchment area. 38. A two-stage public consultation was carried out according to the World Bank's guideline: (a) shortly after environmental screening and before the terms o f reference for the EA were finalized; and (b) after the draft EA report was prepared. The consultationswere conducted through meetings and surveys, with questionnaires at towns and villages near the project sites. The number ofpeople consultedat the last stage is estimated as 3,681including individual citizens, organizations o f concerned villagers, and village committees. A summary o f consultation activities appears inthe table below. I Consultationof DisclosureofE Mand Components 1 Consultation I 1 ' ofTOR EIA EAPRe~orts NajiNavigation Complex April 2002 July 2002 August 30,2003 XiniuNavigationComplex June 2002 August 2002 August 30,2003 NorthRiverRegulation June 2002 August 2002 August 30,2003 Lao-Long-Hu Regulation June 2002 August 2002 August 30,2003 39. InformationDisclosure. The fourth and final versions o f EL4 report and EAP were submittedto the Bank inJune 2003. The EA and EAP documents were disclosed at the World Bank's InfoShop and locally at Communications Dept.offices inrelevant cities within the project areas, public libraries and project offices, as announced by advertisement inlocal andprovincial newspapers. 40. Conclusions. This project will cause environmentalimpacts similar to those that have been experienced inprevious inlandwaterway projects. Those impacts will be mitigatedto the levels that satisfy national and local environmental standards, provided that mitigationmeasures described inthe EAPs are appropriately implemented. - 80 -  AdditionalAnnex 12 Summaryof ResettlementAction Plans (RAP) CHINA: Fourth InlandWaterways Project Background 1. The project components require land acquisition and relocation o f households. GXCD and GDWB hiredexperienced consultants to work with localgovernments and completedthe resettlement planning. East China Survey and Design Institute inZhejiang Province and the First Mapping Institute o f Guangxi conducted the inventory, census, and socioeconomic survey for Naji Dam inGuangxiduringDecember 2002 - March 2003. Guangzhou Social Science Academy carried out the same planning activities for Xiniu Damand BeijingNavigation Channel during October 2001 - May 2002. The consultants worked with the affectedvillages and developed specific rehabilitation schemes for each affected farmer group. At the same time, the Cross-cultural Research Center of Zhongshan University and Guangzhou Social Science Academy carried out social assessments for bothcomponents. Field surveys confirmed that the channel regulation components inbothGuangxi and Guangdongwould not require any land acquisition or house relocation. On the basis of the above field work, the following resettlement action plans were prepared, a) Resettlement Action Plan for Naji Navigation Complex (Guangxi Component) b) Resettlement Action Planfor Lao-Long-Hu Channel Improvement Scheme c) Resettlement Action Plan for XiniuNavigation Complex d) Summary Resettlement Action Plan for GuangdongComponent 2. The RAPSwere prepared inaccordance with the LandAdministration Law o fthe People's Republic o f China, the ImplementationRegulations o f the LandLaw inGuangdong and Guangxi Provinces and World Bank OperationalPolicy4.12 on Involuntary Resettlement. The objective o f the resettlement programs i s to ensure the restoration and improvement o f the livelihoods o f the adversely affectedpeople. ProjectImpacts 3. Much consideration has gone into the resettlement planning inminimizing the adverse impacts. Different altemativeshave beencomparedas to the alignment o f the regulatedchannels and protective measures for farmlandinthe inundation areas. These are detailedinthe RAPS. 4 The project will require the acquisitionof land, relocationo f houses andtombs, and cutting down o f trees. The project also will have an impact on some infrastructure, such as roads and power and communication lines. The project will require the acquisition o f 14,852 muo f land, ofwhich cultivated landis 5,358 mu, 36% ofthe total, andnon-used land6,020 mu, about -81 -  40%. Most o f the lands to be lost are low-yielding river bank lands that are subject to annual flooding. The affected farmers all have their regular productive plots outside the inundation areas. The impact o f the landloss i s relatively small. 5 The total number o f people affectedthrough land acquisition i s 15,690 in3,769 households. The project also will require the demolition of 9,522 sq.m. o f housing, including 6,990 sq.m. o f residentialhousing, which requires the relocation o f 166 people in32 households. The impacts are summarized as follows: Summary Impacts Strategy for Livelihood Restoration Principles. The following were the guidingprinciples for developing the RAPS: The affectedpeople should improve or at least restore their original living standards. Anyone who loses his or her house should get new free plots for new house construction inhisor her current village. Resettlement plans, sites o f new houses, standards andbuildingareas should be determined after consultation with the affected people. For all affectedbuildings, compensation should be calculated on the basis o f the current replacement cost without considerationo f depreciation. The salvageable materials from the houses to be demolished belong to the owners o f the houses. The affected farmers will determine their own livelihood rehabilitationmeasures. The project office and local governments will assistthem indeveloping these measures. Redistribution o fremaining farmland among the farmers i s the fimdamental measure for livelihood development and must be carried out for all seriously affected villages. Cashpayment to individual householdi s only allowed inthe case o f minor impact and only with the endorsement of the villager councils. Lack o f title would not bar affected people from resettlement entitlements. - a2 -  7. Relocation of households. Only the Naji DaminGuangxi requires the relocationo f houses. This involves 14 farmer households and 18 urbanhouseholds. The rural houses are plannedto be built intheir existing villages. The villages will provide new residentialplots, and the specific house sites will be finalized through consultationwith the affectedhouseholds. The farmers will buildtheir own houses with cash compensation at replacement costs. Resettlement is scheduled to be completedbefore civil works starts. For the urbanhouseholds, two options were made available to the affectedhouseholds for compensation, i.e. cash payment and replacement housing at existing site with a temporary residence support. The affected households all chose the latter option. A detailed unit rate analysis was conducted for the replacement cost of the different types o f affectedbuildings 8. Rehabilitation of infrastructure and business. The infrastructureaffected is mainly power, telecommunications, water conservancy and transportationfacilities, as well as roads. For these facilities, compensationbased on the reconstructioncost will be paidto the government departments who are responsible for these facilities. The government departments will be in charge o f the reconstruction. Some business will be affectedthrough either loss o f some attached structures such as walls or temporary stop o f operations duringthe constructionperiod. None requires relocation. They will be compensated incash. 9. Livelihood restoration. Consultations were carried out inall affected farmer groups over their rehabilitation strategies and measures. The affectedvillages have tentatively agreed on their village approach as well as specific measures for rehabilitation. Farmers losing agricultural land will follow a rehabilitation strategy combining land-for-land measuresand a cashpayment option. Redistribution o f the remaining village land i s the primary measure among those affected. This measure is planned for all seriously affected villages. Ifland loss i s marginal and farmers prefer cash compensation to going through the process o f landredistribution, cash compensation will be provided as an option. Inthe seriously affected villages, the project office, local governments and the farmers worked together and formulated a rehabilitation strategy. They identified areas o f need and developed measures for each o f these villages. These measures include development o f cash crops, on-farm works, reinforcing extension services, farmer training, agro-processing and reclamationo f barren mountain. These are detailed inthe RAPS. Implementation Schedule 10. The RAP implementationwill be aligned with civil works construction. New house constructionwill occur inaccordance with the civil works schedule. Resettlers mustbe given at least four months to buildtheir new houses before the demolition o f the old houses. Before new house construction, a notice will be provided three months inadvance to allow for resettlement site selection, planning,and development. Civil works will start after landacquisition i s completed; landredistribution will be done duringwinter. All affected infrastructure will be reconstructed before inundation. - 83 -  Resettlement/Land CompensationOrganization 11. BothGXCD and GDWB are inoverall charge o f implementingresettlement and land compensation. A resettlement institutional structure has beenestablished ineachprovince and this includes resettlementhompensation offices atprovincial, municipal, county, township and village level. These offices will employ competent and experienced staff. Their respective responsibilities and functions are detailed inthe RAPS. Monitoring and Evaluation 12. Both internal and external monitoring is planned for resettlement implementation. The resettlement offices inGXCD and GDWB will be responsible for the internal monitoring. External institutes will be appointedto undertake the independent monitoring o f the resettlement programs. The monitoring scope, targets, indicators, procedures, methodology and reporting requirements are described inthe RAP. Resettlement and Land Compensation Cost 13. The total resettlement cost is RMB284 million, equivalentto US$34.3 million, including $25.0 million for Guangxi and $9.3 million for Guangdong. This budget includes the compensationfund for land, houses andattached structures, infi-astructure and trees, various relocation allowances, business loss duringtransition, costs o f environmental and cultural property protection measures, reservoir clearance costs, special allowance for vulnerable groups, management and monitoring costs, contingencies and taxes. All resettlement costs will be financed by domestic funding. - 84 -  AdditionalAnnex 13 SocialAssessment and PovertyAlleviationImpactAssessment CHINA Fourth InlandWaterways Project 1. GXCD and GDWB engaged the Cross-CulturalResearchCenter o f Zhongshan University and the GuangzhouSocial Science Academy to conduct social assessment and assessmentof the project impacts on poverty reduction. Both institutes organized expert teams, consisting of sociologists, anthropologists and economists as well as ethnic minority experts for the Guangxi Component. Bothteams prepared working plans and developed guidelines for conducting group meetings, interviews and questionnaires. Training was providedto the teams before field work started. The assessmentwas conducted duringSeptember 2002 inGuangxi and April-July 2002 inGuangdong. Social Assessment 2. The social assessment exercises aimedto (i) the broad socioeconomic environmental identify and social development issues inthe project areas; (ii) stakeholders and solicit their identify perceptions, concerns, and recommendations for the project; (iii) facilitate community participationandmobilization inproject planning activities; (iv) assess the social impacts o f the project andpropose measuresto address these impacts inline with World Bank policies; and (v) identifyany ethnic minority communities inthe project areas, assessproject impacts on them, and propose necessarymitigation measures. 3, The social assessment included research o f statistics and historical records, meetings with relevant departments inprovincial, county, township governments, interviews o fkey government officials and surveys inthe sampled villages. The sample (six villages inGuangxiand 11villages inGuangdong) was determinedonthe review ofthe project data, government statistics and relevant academic researches. Both consultants employed participatory rural appraisal methodologies for their work inthe sampled villages. They include focus group discussions, interviews of key informants (leaders, elders, school teachers ) and questionnaire surveys. During group discussions and village meetings, the assessment teams also employed community mapping, resource diagramming, preference ranking, problem trees, seasonal calendars, and daily activity charts. Separate groups were organized for women, ethnic minority groups and fishing communities, as well people engaged inwaterway transport. 4. The following are key findings. a) The project areas vary insocio-economic development. The Guangdong components spread out intwo areas north o f the Pearl Delta (XiniuandNorthRiver schemes) and west o f it (Lao-Long-Hu scheme). The former is largely a mountainous area, with agriculture as the dominant industryand limitednon-farm sector development. It is among the least developed areas o f the province. The latter i s inthe plain areas, a hometownfor overseas Chinese. Overseas investment has boostedits non-farm development inthe past two decades. Its agriculture is relatively developed, engaging more inaquaculture and agro-processing. The Guangxi component i s inthe Baise Prefecture, one o f the poorest areas o f the province. It has rich natural resources, with agricultural as its main industry. - 85 -  Waterways offer a cheaper means o f communications but generally require improvement in the local areas. The project is expected to improve access to markets, employment opportunities and investment conditions. This project, with improved communication conditions, is expected to facilitate economic development inthe local area and reduce income disparity inthe provinces. The project will affect large groups o f communities. These include people engagedin fishing, people living on boats, andthose engagedinwaterway transport, who are all expected to benefit from the project, as well as people who will lose assets to the project, such as land and houses. Consultations with these different groups indicate that they mostly believe the project will benefit them and promote local development. They have also expressed concerns about adverse impacts andproposedmitigationmeasures. Major adverse impacts are relatedto landacquisition and house demolition. Most concerns are about information dissemination, transparency inresettlement planningprocess, full and timely delivery ofcompensation fund, inadequate compensation rates anduseof compensation funds. The recommendations o f the social assessmentteams have been adopted inthe resettlement plans. Most o f the project-affected people inGuangxi belong to the Zhuang ethnic group, the largest officially recognizedminority group inChina. They are the majority inthe project areas, about 77% of the total population inBaise Prefecture. The social assessment reviewed social, economic, cultural and institutional aspects o f the Zhuang people inthe project areas (history, language, traditions, festivities, religious beliefs, marriages, economic activities, resources sharing, education, politicalrepresentation and opportunities to development etc.) as well as interactions betweenZhuang and Hanpeople. The social assessment concludedthat there is a clear self-identification among Zhuang people, and they have maintained distinct features inlanguage, culture and social customs. However, centuries of co-existence have ledto a significant level o f sharingandmutual influencing betweenHanandZhuang groups. There are hardly any differences between them inresources sharing, livelihood activities, institutions andpoliticalrepresentation. The social assessment concluded that the measures developedinthe resettlement program are ethnically and culturally appropriate and there i s no need for a free-standing ethnic minority people's development plan. There are no ethnic minority communities inthe project areas in Guangdong Component. The social assessment reveals that women shoulder a large share o f the family responsibilities. Inaddition to the farm work they share with their husbands, they have to do the family chores and take care o f the animals as well as gardening. Those whose husbands work away from the villages undertake a much heavier workload. Inmost cases, women are not active invillage affairs, largely due to the heavy workload. Women enjoy equal status inthe family because o f their crucial role. Local women are expecting to benefit from the project by reducing fn-ewoodcollection withpower generation, shortening - 86 -  traveling time to markets, replacing hand-pump irrigation with improved irrigation system with the project and better marketing o f farm products. Assessment of Project Impact on Poverty Reduction 5. The impact assessments were conducted on the basis o f the social assessments with some additional fieldwork. They adopted the same approach andmethodology for the social assessment, with the objective for a better understanding o f (i) the natural environment and social and economic development of the local areas; (ii) poverty status, reasons for the poverty, the government strategy and measuresto reduce poverty; and (iii) perceptions o f localpeople o f the project's impact. The team analyzed the collectedinformation andthe key findings are as follows, The project covers some o f the poorest areas o f GuangdongProvince and Guangxi Region. The Guangdongcomponents will have impacts insix of the sixteen poverty counties ofthe province, particularly the Xiniu andNorth River schemes, where the average GDP ranges between 20-30% of that o f the province. Baise and Tianyang counties of the Guangxi Component are bothprovince-designated poverty counties. There are many reasons for the poverty situation. They include poor natural conditions (mountainous area, little arable land or poor quality o f farmland), frequent natural disasters such as floods, few opportunities for non-farm development, weak agriculture extension and support system, little investment ininfrastructure development, a poor and inefficient transport system, and lack o f information and access to markets. Bothprovincial governments have developed long-term poverty reduction strategies with clear objectives andplans. The poverty counties and townships have all developed poverty reduction plans, following a multi-sectoral approach. The proposedproject fits inthis general strategy. The project i s expected to improve the transport systeminthe project areas, facilitate transfer o f local resources, promote tourism and improve local accessto markets and information. The majorityo fthe localpopulation support the project andbelieve it will help facilitate local economic development. They believe it will improve the local transport system, help reduce the cost of electricity and irrigation, generatejob opportunities, andpromote tourism development, as well as improve health and educationservices inthe long term. - 87 -  - 88 -  MAP SECTION