China - Ningbo Water and Environment Project

Document of The World Bank FOR OFFICIAL USEONLY Report No: 31446-CHA PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN INTHEAMOUNT OFUS$130MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR THE NINGBO WATER AND ENVIRONMENT PROJECT February 16,2005 Urban Development Sector Unit East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective January 14,2005) Currency Unit = Renminbi Yuan (RMB Y) RMBY 1 = US$0.12 US$l.OO = RMB Y8.27 NINGBO FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS AIEC Average IncrementalEconomic Cost BOD Biochemical Oxygen Demand CMSC Cixi Municipal Sewage Company EIA Environmental Impact Assessment EMP Environmental Management Plan EPB Environmental Protection Bureau EU European Union FIS Financial Information Systems FMS Financial Management Specialist GDP Gross Domestic Product GOC Government of China IDC Interest DuringConstruction ICB Internationa1Competitive Bidding MBD Model BiddingDocument M O F Ministry of Finance MDPC MunicipalDevelopment Planning Commission NCB National Competitive Bidding NMFB Ningbo Municipal Finance Bureau NWEP Ningbo Water and Environment Project NWSC Ningbo Water Supply Company PMD Price Management Division PMO Project Management Office PMU Project Management Unit RAP Resettlement Action Plan SA Special Account SEPA Chinese State Environmental Protection Agency SOE Statement of Expense UFW Unaccountedfor Water UMB Urban Management Bureau WTP Water Treatment Plant WTW Water Treatment Works WWTP Waste Water Treatment Plant Vice President: Mr.Jemal-ud-din Kassum Country Director: Mr.DavidDollar Sector Director: Mr.Keshav Varma Task Team Leader: Mr.GregBrowder  CHINA FOR OFFICIAL USEONLY NingboWater andEnvironmentProject CONTENTS Page A. STRATEGICCONTEXT AND RATIONALE .................................................................. 1 1. Country and sector issues.................................................................................................... 1 2. Rationale for Bank involvement ......................................................................................... 2 3. Higher level objectives to which the Project contributes .................................................... 2 B. PROJECTDESCRIPTION ................................................................................................. 3 1. Lending instrument ............................................................................................................. 3 2. Program objective and Phases: Not Applicable .................................................................. 3 3. Project development objective and key indicators.............................................................. 3 4. Project components ............................................................................................................. 3 5. Lessons learned and reflected inthe Project design............................................................ 4 6. Alternatives considered and reasons for rejection............................................................... 5 C IMPLEMENTATION . ........................................................................................................... 5 1. Partnership arrangements ................................................................................................... 5 2. Institutional and implementation arrangements .................................................................. 6 3. Monitoring and evaluation of outcomes/results .................................................................. 6 4. Sustainability....................................................................................................................... 7 5. Critical risks and possible controversial aspects................................................................. 7 6. Loadcredit conditions and covenants ................................................................................. 8 D APPRAISALSUMMARY . .................................................................................................... 9 1. Economic and financial analyses ........................................................................................ 9 2. Technical........................................................................................................................... 11 3. Fiduciary............................................................................................................................ 12 4. Social................................................................................................................................. 12 5. Environment...................................................................................................................... 13 6. Safeguard policies ............................................................................................................. 14 7. Policy Exceptions and Readiness...................................................................................... 15 This document has a restricted distribution and may be usedby recipients O ~ inY the performance of their official duties I t s contents may not be otherwise disclosed . jwithout W o r l d Bank authorization . ------A  Annex 1:Sector and ProgramBackground .............................................................................. 16 Annex 2: Major RelatedProjects Financedby the Bank and/or other Agencies .................22 Annex 3: ResultsFramework and Monitoring ......................................................................... 23 Annex 4: Detailed Project Description ...................................................................................... 25 Annex 5: Project Costs................................................................................................................ 29 Annex 6: Implementation Arrangements ................................................................................. 30 Annex 7: FinancialManagement and DisbursementArrangements ..................................... 32 Annex 8: Procurement Arrangements ...................................................................................... 37 Annex 9: Economic and FinancialAnalysis .............................................................................. 43 Annex 10: SafeguardPolicy Issues ............................................................................................ 55 Annex 11:Project Preparation and Supervision ...................................................................... 63 Annex 12: Documentsinthe Project File .................................................................................. 64 Annex 13: Statementof Loans and Credits .............................................................................. 65 Annex 14: Country at a Glance .................................................................................................. 70 Map: IBRD33554and IBRD33702  CHINA NINGBO WATER AND ENVIRONMENTPROJECT PROJECTAPPRAISAL DOCUMENT EAST ASIA AND PACIFIC EASUR Date: February 16, 2005 Team Leader: GregJ. Browder Country Director: DavidDollar Sectors:Water supply (50%); Sewerage (50%) Sector Director: Keshav Varma Themes: Pollution managementand environmentalhealth(P); Water resource management(S); Municipal governance and institution building (S) Project ID: PO86505 Environmental screeningcategory: Full Assessment Lending Instrument: Specific InvestmentLoan [XI Loan [ ] Credit [ ] Grant [ ] Guarantee [ 3 Other: For Loans/Credits/Others: Total Bank financing (US$m.): 130.0 Proposedterms: Single Currency, Variable Spread Loan, 20 years inclusive of 5 years grace, front-end fee of 1% subiect to 50 basisPoint waiver, and commitment fee of 0.75%. BORROWFR I 3Y.U I Y1.U I 1ju.u Total: I 184.4 I 107.1 1 291.5 Borrower: PEOPLE'S REPUBLIC OF CHINA ResponsibleAgency: Ningbo Municipal DevelopmentPlanning Commission ContactPeople: 1.Ms.Xu Xu, Vice Director, World BankProject ManagementOffice 1509/R, 15thFloor, Tianning Tower, 138 West Zhongshan Road, Post Code 315000, Ningbo China Tel: 86-574-8728-0409;Fax: 86-574-8728-0430;E-M: xx@nbdPc.g;ov.cn 2. Mr.LiZhibo, Deputy Division Chief, Divisionof ForeignCapital Utilization, Ningbo Municipal DevelopmentPlanningCommission 91 North JiefangSt., PostCode: 315000, Ningbo China Tel: 086-574-8718-6862,Mobile Tel: 13185927686; Fax: 086-574-8736-7370  Does the Project depart from the CAS in content or other significant respects? [ ]Yes Ref. PAD A.3 [ X I N O Does the Project require any exceptions from Bank policies? Ref. PAD 0.7 [ ]Yes [XINO Does the Project include any critical risks rated "substantial" or "high"? Ref. PAD C.5 [ x ]Yes [ ] No Does the Project meet the Regional criteria for readiness for implementation? Ref. PAD D.7 [x ]Yes [ ] No Project development objective Ref. PAD B.2, TechnicalAnnex 3 The Project will facilitate the expansion of water and wastewater services inNingbo City and Cixi City respectively in an economically efficient and environmentally sustainable manner, thereby protecting public health, improving the environment, and supporting economic growth. Project description: Ref. PAD B.3.a, TechnicalAnnex 4 Component 1:Ninnbo City Water Supply (US$157.9 million): The component includes: i)raw water supply line; ii)water treatment plant; and iii)treated water transmission mains. Component 2: Cixi City Wastewater (US$128.4 million): The component includes: i)two wastewater treatment plants; and ii)associated collection system main and link sewers. Component 3: Institutional Development (US$4.5 million): Technical assistance to improve water planning, utility regulation, operational performance, and design review and construction management support. Which safeguard policies are triggered, if any? Ref. PAD 0.6, TechnicalAnnex 10 9 EnvironmentalAssessment 9 Involuntary Resettlement 9 Damsafety 9 CulturalProperty Significant, Non-Standard Conditions: Ref. PAD C.7 Boardpresentation:None  Loadcredit effectiveness: 1.Execution of subsidiary loan agreements satisfactory to the Bank between: (i)Ningbo Finance Bureau and Ningbo Water Supply Company; (ii) Ningbo Finance Bureau and Cixi City Finance Bureau; and (iii) Cixi City Finance Bureau and Cixi Municipal Sewerage Company. Covenants applicable to Project implementation: Financial Covenants: 1.NWSC RevenueCovenant: NWSC shall generate each year, after covering total operating expenses (excluding depreciation) and debt service requirements, funds from internal sources equivalent to not less than 20% of the annual average of the capital expenditures incurred, or expected to be incurred, for that year, the previous year, and the next following year. 2. CMSC Revenue Covenant: CMSC shall generate for each year, total revenues equivalent to not less than the sum of: (i)its total operating expenses (excluding depreciation); and (ii) debt service requirements. 3. Debt Service Ratio Covenant: CMSC and NWSC shall not incur any debt, unless a reasonable forecast of the revenues and expenditures shows that the estimated net revenues for each fiscal year, during the term of the debt to be incurred, shall be at least 1.3 times the estimated debt service requirements on all debt, including the debt to be incurred. 4. Debt-to-Asset Ratio Covenant: CMSC and NWSC shall not incur any debt, if after the incurrence of such debt the ratio of debt to assets shall be greater than 0.7 to 1. Dated Covenants: 5. To ensure compliance with the revenue and debt service covenants, the Ningbo Municipal Government will ensure tariff adjustments for NWSC and CMSC no later than July 1,2006 and September 1, 2008. 6. The Ningbo Municipal Government will prepare aNingbo City Zntegrated Water Supply Plan by December 31,2006, under terms of reference acceptable to the Bank, and talung into consideration the Bank's view on saidPlan. 7.The Ningbo Water Supply Company shall prepare a Strategic Five Year Business Plan by December 31, 2007 under terms of reference acceptable to the Bank and taking into consideration the Bank's view on said Plan. 8. The Ningbo Municipal Government will ensure that the Ningbo Water Resources Bureau prepares, under terms of reference acceptable to the Bank: i)an Emergency Preparation Plan for the Zhougongzhai and Jiaokou dams by December 31,2006; and ii)semi-annual reports for the Bank, under terms of reference acceptable to the Bank, on construction progress and post- commission surveillance for the Zhougongzhai dam.   A. STRATEGIC CONTEXT AND RATIONALE 1. Country and sector issues Approximately 95% of the urban population in China i s served by a municipal water supply system, and 68% have access to improved sanitation. Seasonal water shortages, however, affect more than 400 o f China's 669 cities, and around 110cities are facing serious shortages requiring severe water use restrictions. Water shortages cause an average of US$36 billion in economic loss per year in China. The lack of adequate wastewater collection and treatment infrastructure results in severe water pollution, with an estimated 88% of rivers and 70% of coastal seas classified as moderately to highly polluted. The lothFive Year Plan (2001-2005) called for increasingthe percentage of urban wastewater treated from 15% to 45%, and all cities with populations greater than 5 million should have treatment coverage of over 60%. The Government has also mandated new policy directions, including integrated water resource management, commercialization of the water and wastewater sector, setting tariffs at full cost-recovery levels, and attracting private investment. Although the ambitious targets of the lothFive Year Plan will probably not be met, the more affluent coastal cities, such as Ningbo Municipality, are taking the lead in constructing new infrastructure and experimenting with policy reforms. Ningbo Municipality i s located approximately 150 k m s south of Shanghai on the edge of Hangzhou Bay. Ningbo i s the primary deep-water port for the Yangzte Deltaregion, andhas a thriving industrial sector focused on the export of manufacturedgoods. Although part of Zhejiang Province, the Municipality i s a separate economic planning unit and i s not administratively controlled by the provincial government. The primary city inthe Municipality i s "Ningbo City" which extends over six urban districts and covers one quarter of the Municipality. The Municipality also includes three rural counties, and two city-level counties, one of which i s called "Cixi City." The Project finances investments in Ningbo City and Cixi City. A key element inNingbo's economic success has been the development of a vibrant private sector. Ningbo's entrepreneurial trading heritage, and the relative absence of large state-owned enterprises, has given local businesses an opportunity to take advantage of their favorable location on international shippinglanes and close proximity to the economically vibrant Yangtze Delta. The Municipal Government's policy i s to foster private sector investment, promote education and science, and provide high-quality infrastructure for the region. Investments in water infrastructure, however, have lagged behind rapid economic development. Ningbo i s addressing water issues through a regional approach, with the establishment of a multi-sector "Water and Environment Leading Group," chaired by the Executive Municipal Vice Mayor and headed b y the MunicipalDevelopment Planning Commission. The Leading Group i s facilitating investments and management systems which cut across administrative boundaries to resolve Ningbo's serious water and wastewater problems, including those inNingbo and Cixi Cities. Ningbo City i s facing a two dimensional water crisis common to many Chinese cities: frequent shortages andpoor water quality. Water supply deficiencies pose a drag on economic growth and endanger public health. The core urban area of Ningbo City i s served by the Ningbo Water 1  Supply Company (NWSC), and around 30 small companies provide water to towns located within Ningbo City. The companies draw water primarily from highly polluted local rivers and use outdated treatment technology, rendering the quality of piped water questionable. Due to the lack of storage reservoirs and a reliance on local rivers, Ningbo City often experiences water shortages duringthe dry season. The City's rapid economic expansion has increased demand on the order of 5-10% per year, and in spite of an aggressive water conservation program, the duration and intensity of droughts have been increasing. The Ningbo Municipal Government has started implementation of an ambitious program to develop highquality water supplies, transfer the water to Ningbo City, and upgrade water treatment and distribution infrastructure. NWSC i s a well established company serving the core urban area, but there i s scope for improving its operational and financial performance. The NWSC service area will be expanded to include all 2.5 million residents of Ningbo City, incorporating the surrounding town water supply systems, and thereby obtaining economies of scale and professional management. Cixi City, located north of Ningbo City on the shore of Hangzhou Bay, has a population of around one million people and a dynamic economy. Currently, only 10% o f the wastewater in Cixi i s treated, and the lack of an adequate wastewater management system i s inhibitingpotential investors, increasing pollution to HangzhouBay, and creating public health concerns. Cixi City plans to provide coverage to all urban areas and industries by 2010. A new company, the Cixi Municipal Sewage Company (CMSC) was established inmid-2004 to be responsible for all wastewater collection andtreatment facilities. The CMSC management i s facing the dual challenge of starting up a new company and managing a large capital works program. 2. Rationale for Bank involvement The World Bank has been a close partner inNingbo's water sector over the past decade. The Zhejiang Multi-Cities Development Project (Ln.24750 closed 12/31/01) financed critical water supply infrastructure for Ningbo City, and the Zhejiang Urban Environment Project (Ln47240, FY04) i s financing a significant portion of Ningbo City's wastewater program. The Ningbo Water and Environment Project (NWEP) will finance additional investments for water supply in Ningbo City, and will support the first comprehensive wastewater management system outside of Ningbo City in neighboring Cixi City. With its strong economy, Ningbo has many financing options. The decision to seek World Bank financing i s motivated primarily by the desire of municipal authorities to employ international methodologies, standards, and techniques to improve water and wastewater planning, construction, and service. In addition to the physical infrastructure, NWEP will finance technical assistance activities in water supply strategic planning, utility price and regulatory reforms, and operational improvements for both NWSC and CMSC. 3. Higher level objectives to which the Project contributes The proposed Ningbo Water andEnvironment Project will address two key themes from the China Country Assistance Strategy: (i) accelerating the transition to a market economy through improving public sector management and delivery of services; and (ii) facilitating an environmentally sustainable development process, through better management of water 2  resources. Two strategic issues for the Bank's urban development program in China are incorporated into the Project design: > A focus on urban waterplanning and resource management,where problems are reaching a crisis level inmany cities, including Ningbo. The Project will be the first major Bank- financed urban water supply operation since the mid-1990s. P A concentrationonregionalintegration,by providing water andwastewater infrastructure, and management systems that transcend administrative boundaries. Recent World Bank analytical work has highlighted the importance of addressing the pressing needs of urban water and wastewater management. Three key reports are: (i) China Water Resources Strategy (2002); (ii) China: Air, Land, and Water (2001); and (iii) Agenda for China: Water Sector Strategy for North China (2002), all of which point to the development importance of Bank engagement inthe water sector. B. PROJECTDESCRIPTION 1. Lendinginstrument The lending instrument i s a Specific Investment Loan. The Loan will be a single currency, variable spread loan, with a maturity o f 20 years inclusive of five years grace, front-end fee of 1% subject to 50 basis point waiver, and commitment fee of 0.75%. 2. [IfApplicable]Programobjectiveand Phases:Not Applicable 3. Projectdevelopmentobjectiveand key indicators The Project will facilitate the expansion and quality of water and wastewater services inNingbo City and Cixi City in an economically efficient and environmentally sustainable manner, thereby protecting public health, improving the environment, and supporting economic growth. The key indicators are: 9 Increase inthe percentage of water suppliedfrom highquality andreliable water sources and treatment plants inNingbo City from 10% to 75%; and 9 Increaseinthe percentage of wastewater collected andtreated inCixi City from 10%to 65%. 4. Projectcomponents Component 1: Ningbo Water Supply (US$157.9 million; IBRD-US$67.3 million): The component includes: (i) raw water supply line consisting of an intake tower inJiaokou reservoir and a 9.6 kmtunnel; (ii) 500,000 m3/d Maojiaping water treatment plant; and (iii) water treated transmission pipes, including a new 47 kmring main around Ningbo City, and 29 k m s of transmission pipes from Maojiaping water treatment plant to the new ring main. The component i s a significant part of Ningbo's overall plan to service the entire city, improve water quality b y accessing new water sources and upgrade water treatment, and enhance distribution system 3  reliability and flexibility. The ringmain will be the first of its kindinChina and will be one of the major technical innovations under the Project. Component 2: Cixi Wastewater (US$128.4 million; IBRD-US$57.9 million): The component includes: (i) two wastewater treatment plants, one located in the north of Cixi (100,000 m3/d) and one in the east (50,000 m3/d); and (ii) associated collection system mains and link sewers (230 km of pipe and 58 pumpstations). The component will provide comprehensive wastewater services for all urban areas in Cixi City, and help protect Hangzhou Bay. Component 3: InstitutionalDevelopment (US$4.5 million; IBRD-US$4.1 million): Technical assistance will be provided to improve water planning, utility price and service regulation, and enhance NWSC and CMSC operational andbusinessmanagement capacities. Design review and construction management technical assistance will also be provided to ensure smooth implementation of the infrastructure works. 5. Lessons learned and reflected inthe Project design Coastal cities in China, and particularly Ningbo City, are growing at a rapidpace which makes planning for utility services such as water and wastewater very challenging. Past experience in China has shown that demand i s typically over-estimated, mainly due to lack o f sophisticated planning techniques and inadequate consideration of price elasticity o f demand. Original water demand estimates prepared by NWSC domestic consultants were not realistic. NWSC changed domestic consultants and prepared revised and reduced estimates, which were verified by independent international consultants. The short-term forecasts up to 2010 are acceptable to the Bank for project planning purposes. Long-term demand forecasts up to 2040, however, shouldbe adjusted over time to reflect changing conditions and the capital investment programs should be modified accordingly. The Project will therefore assist Ningbo City with its long-term water supply planning, and prepare the basis for the next five year capital investment program from 2010-2015. Both Cixi and Ningbo City are embarking on simultaneous large capital investment programs in water supply and wastewater. Water users receive a consolidated water and wastewater bill (although the two services are separated in the bill), and thus will experience a significant increase in overall water costs. Tariff increases inNingbo, as throughout China, generally take considerable time to process, and lack of timely approval can increase company financial risk. The Project design takes this into account by requiring tariff increases in 2006 and 2008, and including a technical assistance component to upgrade the analytical tools and procedures used to determine appropriate tariff adjustments. Advanced technologies for water and wastewater treatment are often used in China without considering the financial or operational implications. Carbon-activated-filtration was originally proposed for the Maojiaoping water treatment plant, but was subsequently dropped when water quality tests showed that it was not necessary. Tertiary treatment consisting of chemical coagulation and filtration was originally proposedfor the Cixi wastewater treatment plant (WWTP), but was subsequently replacedwith an engineered wetland which will reduce operating cost and complexity. 4  6. Alternatives consideredand reasonsfor rejection A comprehensive analysis was undertaken for the optimal location of the treatment plants. Three alternatives were considered for the Maojiaoping site, and the site with the lowest cost and least resettlement issues was selected. For the Cixi WWTP, consideration was given according to having one, two, or three new plants. An engineering-economic analysis indicated that two new plants provided the optimal balance of capital and operating costs. Different alternatives for the layout of the Ningbo City water distribution system were examined. Since the city i s essentially divided into three areas by rivers, consideration was given to maintaining the three essentially independent distribution systems and upgrading the three associated water treatment plants. This alternative was rejectedin favor of a ring main and two large treatment plants. The ring main-two plant option provides more flexibility and reliability, and the two new treatment plants are located outside of the core urban area in locations more suitable for receiving new raw water supplies. The long-term plan is to decommission the existing water treatment plants in the city, and release the land for higher value uses. There are approximately 30 towns surroundingthe core urban area inNingbo City. Currently, these towns have their own water supply systems which rely on low quality local surface water sources and rudimentary treatment plants. One alternative would be to upgrade the existing town water systems and supply highquality raw water. This alternative was rejectedin favor of extending the NWSC service area to all towns. The NWSC option was chosen because it would ensure highquality water supplies for all city residents, lower costs due to NWSC's economies of scale, and help equalize water supply tariffs throughout the city. Private sector participation for both the Ningbo and Cixi components were considered. Given the urgency of the water supply situation inNingbo City, the Government requested NWSC to construct the new facilities, although there i s some consideration of inviting strategic investors to support NWSC inthe future. NWSC i s developing a separate water supply systemfor a large industrial estate and i s actively seeking private investors to support the project. The Bank task team discussed the option of a management contract for the Cixi plants, but the Cixi government prefers the recently established CMSC to be responsible for all aspects of wastewater management. C. IMPLEMENTATION 1. Partnershiparrangements (ifapplicable) The Project i s free-standing and does not have any other international co-financiers. Ningbo Municipality, however, i s seeking a Global Environment Facility (GEF) grant to support wetland conservation in Cixi City. The potential GEF funded activities are closely associated with the NWEPcomponent in Cixi. 5  2. Institutional and implementation arrangements The Ningbo MunicipalDevelopment Planning Commission (MDPC) is the executing agency for the Project. The Project Management Office (PMO) i s located under MDPC and is fully mobilized with sufficient and adequately qualified staff. The PMO i s the Bank's primary liaison inthe implementation of the Project, andtakes responsibility for project monitoring and reporting. There will be one special account locatedin and managed b y the Ningbo Municipal Finance Bureau. The PMO will authorize reimbursements to the two implementing entities, NWSC and CMSC. Policy direction for the Project will be provided by the Water and Environment Leading Group. The Leading Group i s headed by the Executive Vice Mayor of the Municipality and i s composed of Directors from the MDRC, Environmental Protection Bureau, Water Resources Bureau, Construction Bureau, andFinance Bureau. The Leading Group's mandate i s to provide policy direction and planning support for integratedwater and environmental management throughout the Municipality. NWSC i s the implementing organization for Component 1.The company was legally established in 1982, butcan trace its operating history back to 1926 with the city's original water supply. The NWSC has created a Project Management Unit (PMU) under the direction of an Assistant Chief Engineer. The PMUi s staffed with qualified procurement, financial management, environmental, and resettlement staff. NWSC i s experienced in managing large capital investment projects, and i s also familiar with Bank procedures, as the company received financing under the Zhejiang Multi-Cities Development Project. CMSC i s the implementing organization for Component 2. The company was legally established inmid-2004. Staff andexisting assets were transferred from the Cixi DrainageDepartment to the CMSC shortly afterwards. Since the NWEP represents essentially all of CMSC's capital investment program, there i s no distinct project management unit; rather the project i s under the direct supervision of the CMSC General Manager, with the relevant departments providing procurement, financial management, environmental, and resettlement support. The CMSC has limitedexperience inmanaging large capital projects and is not familiar with Bank procedures. These constraints will be addressedthrough project financed technical assistance programs for Project and company management. Component 3 i s aimed at a variety of government agencies and the two companies, NWSC and CMSC. The PMO will responsible for general implementation of the component, but most activity will take place at the company or agency level. Government agencies involved in the component include the Cixi and Ningbo price bureaus, construction commissions, and the Water and Environment Leading Group. 3. Monitoring and evaluation of outcomes/results Annex 3 lists the main outcome indicators for the Project, as well as the principle results indicators for each component. The PMO, NWSC, and CMSC will regularly collect the data 6  required for monitoring and evaluation of outcomes/results. The Water and Environment Leading Group will review results on the basis of progress reports, andtake corrective action when needed. 4. Sustainability Ningbo Municipality i s committed to the success of the Project as the future economic development of Ningbo City and Cixi City partly depends on successful Project implementation. The degree of importance attached to the Project i s reflected inthe active participation of high- level government officials in the Leading Group. The PMO has been established as a permanent government agency, and thus i s able to attract qualified individuals who are offered.job security and promotion potential. NWSC and CMSC have invested significant amounts of their own funds inProject preparationand have prepared highquality feasibility studies, environmental assessments, and resettlement action plans. Financial sustainability of the companies i s the key to Project success. Ningbo City and Cixi City have demonstrated their commitment to ensuring adequate revenues for the companies by significantly increasing tariffs in 2004. Legal covenants for increasing tariffs in2006 and 2008 have also been agreed upon by the Municipal Government. Both NWSC and CMSC have well qualified technical staff that can ensure efficient operation of the facilities. 5. Critical risks and possiblecontroversialaspects The Project design assumes that the rapid economic development inNingbo will continue for at least another decade. An unexpected economic slow down could significantly alter projected water (and wastewater) demand, reduce expected company revenue, and result in underutilized infrastructure. This systemic risk i s partly mitigated by the phasing of infrastructure investments, to the extent possible, to respond to changes. Providing adequate water and wastewater services i s a necessary, but not sufficient condition, for sustaining economic growth. Annex 10 (Safeguards) and Sections D.4, D.5,and D.6 below discuss the due diligence activities taken by the Bank task team to ensure that there are no major reputational risks, and the measures which will be taken duringimplementationto ensure compliance with the Bank's safeguard policies. Risks associated more directly with the Project are summarized as follows: Risks RiskMitigation Measures RiskRating with Mitigation' ToProject Development Objectives Inadequate tariff increases P Covenants requiringtariff increases Modest jeopardize NWSC and CMSC in2006 and 2008 financial sustainability P Technical assistance program to improve efficiency and efficacy of tariff adjustments Probability that an outcome will not be achieved: High > 75%; Substantial > 50%; Modest > 25%; Low e 25% 7  To Project Components 1.NWSC expands too quickly and P Technical assistanceprogramto Modest does not plan appropriately. develop a Strategic Business Plan based on sound water supply planning 2A. CMSC unable to efficiently P Technical assistanceprogramto Modest manage project and comply with provide project management support Bank procedures. 2B. CMSC does not develop into P Providebusiness management Significant commercially-oriented public technical assistance utility. > Ensure adequate revenues Overall Risk Rating Modest 6. Loadcredit conditions and covenants Conditions for Effectiveness: 1.Execution of subsidiary loan agreements satisfactory to the Bank between: (i) Finance Ningbo Bureau and Ningbo Water Supply Company; (ii) Ningbo Finance Bureau and Cixi City Finance Bureau; and (iii) Cixi City Finance Bureau and Cixi Municipal Sewerage Company. Kev ImDlementation Covenants: Financial Covenants: 1.NWSC Revenue Covenant: NWSC shall generate for each year, after covering total operating expenses (excluding depreciation) and debt service requirements, funds from internal sources equivalent to not less than 20% of the annual average of the capital expenditures incurred, or expected to be incurred, for that year, the previous year, and the next following year. 2. CMSC Revenue Covenant: CMSC shall generate for each year, total revenues equivalent to not less than the sum o f (i) its total operating expenses (excluding depreciation); and (ii)debt service requirements. 3 . Debt Service Ratio Covenant: CMSC and NWSC shall not incur any debt, unless a reasonable forecast of the revenues and expenditures shows that the estimated net revenues for each fiscal year, duringthe term of the debt to be incurred, shall be at least 1.3 times the estimated debt service requirements on all debt, including the debt to be incurred. 4. Debt-to-Asset Ratio Covenant: CMSC and NWSC shall not incur any debt, if after the incurrence of such debt the ratio of debt to assets shall be greater than 0.7 to 1.The objective of this covenant i s limit the companies from incurring large amounts of short-debt (less than one year, but usually rolled over) which i s not captured in the debt service ratio. 8  Dated Covenants: 5. To ensure compliance with the revenue and debt service covenants, the Ningbo Municipal Government will ensure tariff adjustments for NWSC and CMSC no later than July 1,2006 and September 1,2008. 6. The Ningbo Municipal Government will prepare aNingbo City Integrated Water Supply Plan by December 31,2006, under terms of reference acceptable to the Bank, and taking into consideration the Bank's view on said Plan. 7.The Ningbo Water Supply Company shall prepare a Strategic Five Year Business Plan by December 31,2007 under terms of reference acceptable to the Bank and taking into consideration the Bank's view on said Plan. 8. The Ningbo Municipal Government will ensure that the Ningbo Water Resources Bureau prepares, under terms of reference acceptable to the Bank: i)an Emergency Preparation Plan for the Zhougongzhai and Jiaokou dams by December 31,2006; and ii)semi-annual reports for the, Bank, under terms of reference acceptable to the Bank, on construction progress and post- commission surveillance for the Zhougongzhai dam. D. APPRAISAL SUMMARY 1. Economicandfinancialanalyses Projected Tariffs: Financial projections have been prepared for NWSC and CMSC on an annual basis over the 2004 - 2015 period. A price elasticity of demand of -25% was used in Ningbo and all categories in Cixi except for industries. The industrial base in Cixi i s modernand has generally already adopted water saving technologies and thus no price impact on demand i s expected. The projections are based on the requirement of each company to comply with the proposed project financial covenants. The projectedtariff requirements are summarized below: ProjectedTariff Requirements 1MB/m3water consumed. current terms) Weighted Average Tariff Existing Projected 2004 Jan. 2006 IJan. 2008 IJan. 2010 Ningbo I I Water Supply 1.42 1.88 2.16 2.16 Wastewater 0.49 0.59 0.59 0.79 Total 1.91 2.47 2.75 2.95 Increase in Water Tariff 32% 15% 0% Cixi Water Supply 2.06 2.37 2.72 2.72 WastewaterTariff 0.37 0.86 1.43 1.69 Total 2.43 3.23 4.15 3.41 Increase inWastewater Tariff 132% 66% 18% NWSC Financial Analysis: As of January 2004 the average water supply tariff was increased by 17% to 1.42 RMB/m3. This represents a 17% increase relative to the previous tariff, which had been implementedin August 1999. Ningbo appears to have had difficulty implementing regular and timely tariff increases, which suggests a need for improvements inunderlying regulatory mechanisms. The recent tariff increases had been under review by the Municipal Government for at least 30 months. Duringthis period, NWSC incurrednet losses andneeded to rely heavily on 9  relatively short-term commercial bank loans to finance much needed capital works. The project will provide technical assistance to those agencies within the Ningbo Municipal Government responsible for price and service regulation for strengthening these mechanisms. Projections preparedfor NWSC indicate that ongoing and plannedcapital investments will place a significant financial burden on the company over the next decade. Actual and plannedcapital expenditures over the 10 year period from 2002 to 2011 are estimated as RMB 4.1 billion, of which 70% i s concentrated in the 2004 - 2008 period. Over this five year period, the company's proposed NWEP component accounts for just under half of total planned investment. Assuming that NWSC can successfully implement the required tariff increases, the company i s projectedto be able to operate on a financially sustainable basis, but due to its very large capital investment program, cash flow and debt service will need to be carefully managed. Net income i s projected to be positive in all years enabling the company to comply with the project revenue covenant, with the possible exception of 2006. A comprehensive sensitivity analysis was undertaken to assess the impact of potential changes in the key variables. Of the single variable events, a one year delay intariff increases, has the greatest impact. A delay in tariff increases, and a 5% reduction in water demand i s projected to result cash shortfalls of about RMB 140million and RMB 200 million in 2006 and 2008 respectively. While this might also be addressedthrough debt deferments and new borrowings, repaying this additional debt could require up to 10years. CMSC Financial Analysis: UntilApril 2004, the city government applied wastewater charges only to commercial and special use groups. However, as of M a y 2004, new wastewater tariffs were introduced that apply to all customer groups. The average wastewater tariff in Cixi i s now RMB 0.37/m3 comparedto RMB 0.49/m3inthe Ningbo urban core. CMSC, incontrast to NWSC, will depend heavily on equity contributions to fund its capital investment program. Cixi City will contribute approximately 350 million RMB to CMSC, about one-third of the total project cost. An analysis o f the fiscal impact indicates that the project counterpart contributions to be allocated b y the Cixi Government are well within its financial capacity. The financial projections prepared for CMSC indicate that very significant tariff increases will be required to enable it to operate on a financially viable basis. The average tariff will need to be increased by about 130% as o f 2006, and then by a further 66%, to RMB 1.43/m3,by the beginning of 2008. The increase in 2008 i s designed to fully recover NWEP operating and maintenance costs and to meet debt service on the NWEPproject loans. Additional, but smaller increases are projected to be required in 2010 and 2012, of 18% and 15% respectively, which would bring the average tariff to just under RMB 2/m3.Even with these very large tariff increases, debt service will place a considerable strain on CMSC, particularly over the 2010 - 2014 period. Assuming that the requiredtariff increases are successfully implemented beginning in2006, the company shouldbe able to comply with the cost recovery covenant inall years. However, the projections indicate that CMSC might experience some difficulty inmeeting the debt service covenant inthose years inwhich debt service is greatest. Changes in key variables have been assessedinterms of their potential impact on the financial position of CMSC. A one year delay inimplementing the required tariff increases would have the greatest adverse impact on the company. A delay inthe implementation of the first two 10  increases now planned for the beginning of 2006 and 2008 could constrain CMSC's capacity to provide its share of project counterpart funding. The estimated shortfall i s about RMB 20 million, which could be addressedthrough an increase inthe city government's contribution. The city government has agreed to meet all counterpart requirements not met by CMSC. Ability to Pay. An affordability analysis has been undertaken and two representative household groups were considered: (i) the average income group; and, (ii) low-income group, which i s the defined as the household earningthe average of the lowest 10thpercentile of income distribution. The proposed tariff increases are affordable for both groups, with the watedwastewater bills accounting for less than 1% of the average family income and 1.5% of the low income households. For the very poorest households, the municipal government extends low income protection under which a minimumincome of RMB 280 -RMB 320 per person, depending on the number of persons in the household, i s guaranteed. This amount includes a provision for lifeline utility services. With increases inboth water and wastewater tariffs in 2004, an additional direct subsidy amount has been provided to all households qualifying for the social assistance. InNingbo, the entire increase in water and wastewater tariffs i s refundedon the first 10m3of water consumed. InCixi, the increase i s refunded for all water consumed by qualifying low income households. NWSC Economic Analysis: A benefit-cost analysis was undertaken for the Ningbo water supply component which yielded an economic internal rate of return of 15.6%. Three benefits were incorporatedinto the analysis: i)value of the incremental supply of water; ii)improved water quality; and iii)reduction inbottled water usage. A least cost engineering-economic analysis was undertaken for the Cixi wastewater component. Details are provided in Annex 10. 2. Technical The technical viability of both the Ningbo water component and Cixi wastewater component has been confirmed by the Bank task team. Independent international consultants have also reviewed the respective feasibility studies and provided design advice. For the Ningbo component, the Maojiaping plant uses proven and appropriate treatment technology, The ring main i s an innovative measure to increase water service reliability and flexibility, and will be the first of its kind in China. An important issue in design o f the treatment plant and ring main i s the accuracy of the water demand forecasts. Inthe short-term, Ningbo City has considerable flexibility in the pace at which it downgrades and decommissions existing plants in the city center which rely on low quality raw water from local rivers. If the 2010 water demand i s lower than forecast, the existing plants inthe City center can be decommissioned or downgradedmore quickly; alternatively, if demand i s higher than anticipated, the plants can be kept in service longer. The ring main i s designed with a 40 year design horizon and conservative long-term forecasts were used to ensure adequate capacity. Hydraulic modeling was undertaken to confirm ring main size and distribution system layout. A number of technical issues were reviewed for the Cixi wastewater component. Cixi City, like Ningbo City, i s growing rapidly and there i s considerable uncertainty in the wastewater forecasts, and thus a phased approach i s taken for the development of the wastewater treatment plants. The collection system pipes are conservatively designed for the long-term flows. The 11  long conveyance distance and retention time inthe collection system makes septicity a potential concern, and appropriate measures will be taken to reduce this risk.The wastewater will be treated to Class I A standards for discharge into the large Cixi canal network. In order to meet this stringent standard, tertiary treatment is necessary, and an engineered wetland has been chosen as the preferred form of tertiary treatment. Water quality modeling was undertaken to determine the preferred location of discharge points, and the water quality impacts on the canal network. 3. Fiduciary The financial management assessmentconcludedthat the Project meets minimumBank financial management requirements, as stipulated in OPBP 10.2. The Project will have in place an adequate financial management systemthat can provide, with reasonable assurance, accurate and timely information on the status of the Project in the reporting format agreed with the Bank. An assessmentof the procurementcapacity of the implementing agencies has been carried out in accordance with standard Bank procedures. The key procurement risk under the Project i s the lack of CMSC experience with World Bank procedures. The corrective measures which have been agreed are: i)the Project will include a designreview and management consultancy to assist both CMSC and NWSC; and ii)an experienced design institute and tendering company will be recruited for Project preparation and procurement assistance. The overall project risk for procurement i s averape. 4. Social A resettlement action plan (RAP) meeting the World Bank's OPBP 4.12 has been prepared for the Ningbo Water Supply and Cixi Wastewater components. The resettlement impacts are relatively small given the scope of the Project with 60 ha of permanent land acquisition affecting 519 people; and 371 ha of temporary land acquisition affecting around 5,000 people, primarily for the laying of undergroundpipes along roads. The detailed socio-economic survey indicates the project will not affect any minority ethnic groups. A resettlement policy framework has also beenprepared in the event there are minor unanticipatedadditional resettlement activities. The task team conducted a due diligence review of past Zhougongzhai resettlement activities and has determined that those activities were conducted largely in accordance with Bank policies and standards. A survey of towns was undertaken to assess the demand for expanding NWSC service. The overwhelming majority of towns strongly support the concept of NWSC service, although some towns would like to operate their own water system and purchase bulk treated water while others would like to transfer ownership and operation responsibility to NWSC. Currently, the Yinzhou government, Ningbo Municipal Government, and NWSC are in discussion on how best to provide NWSC service to the towns. 12  5. Environment The Project i s classified as a "Category A" project, and a full Environmental Impact Assessment has been prepared. The Project as a whole will have significant net positive impact as it will improve the water supply, reduce water pollution, and promote the sustainable development of Ningbo Municipality. The environmental issues associated with each component are discussed below. Ningbo Water Supply Component: There are two reservoirs on the Zhangzi River which supply water for the Project: Jiaokou reservoir andthe Zhougongzhai reservoir which i s located 8 k m s upstream of Jiaokou and i s currently under construction. The raw water intake for the Maojiaping water treatment plant will be located at Jiaokou reservoir. The Zhangxi River flows into the western Yinzhou plain and i s a medium-sized tributary to the Fenghua River-one of the largest rivers in Ningbo Municipality. The analysis conducted duringproject preparation indicates that a significant percentage of the annual inflow into Jiaokou reservoir will be diverted to Ningbo City. The water balance calculations indicate that this will not have an adverse impact on other water users such as irrigation, animal husbandry, village water supplies, etc. The reason for the lack of impacts i s the additional storage provided by the upstream Zhougongzhai reservoir. Duringthe critical dry season months of April-May, the JiaokodZhougongzhai reservoir system will release sufficient water to meet downstream demands, while still satisfying the demand from Ningbo City. Wet season flows, however, will be reduced and the altering of the hydrological cycle may adversely impact the eco-system along a 20 kilometer stretch, although there are no identified rare species or important commercial fisheries in Zhangzi River. A comprehensive environmental flows assessment will be undertaken duringproject implementation to determine minimumflow requirements and adjust reservoir operations appropriately. In addition, there will be close monitoring of impacts during operations, and a process will be established for addressing any complaints. Cixi Wastewater Component: Two alternative treated effluent disposal options for the Cixi wastewater treatment plants were analyzed duringproject preparation - disposal to Hangzhou Bay, and disposal to the Cixi canal network. Due to the shallow depth o f Hangzhou Bay off the coast of Cixi and the large tidal fluctuations, disposal through an outfall i s technically complex and prohibitively expensive. Since water i s scarce in Cixi and the treated effluent can be considered a resource, the preferred alternative i s to discharge to the Cixi canal network and reuse the water for irrigation. The Environmental Impact Assessment (EIA) indicates that this proposal i s acceptable as the canal network has a large storage capacity and the wastewater will be treated to the highest national standards. The wastewater will be treated to Class 1A standards, which i s essentially tertiary treatment with nutrient removal, for discharge into the large Cixi canal network. Tertiary treatment will be provided through an engineered wetland. The sludge from the treatment plants will be mechanically dewatered and disposed of innearby municipal landfills. The capacity and quality of the landfill sites i s confirmed inthe EIA.A sludge monitoring program i s outlined in the Environmental Management Plan (EMP), and CMSC will consider options for beneficially reusingthe treated sludge. 13  6. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [XI [I Natural Habitats (OPLBP 4.04) [I [XI Pest Management (OP 4.09) [I [XI CulturalProperty (OPN 11.03, being revised as OP 4.11) [XI [I Involuntary Resettlement (OP/BP 4.12) [XI [I Indigenous Peoples (OD 4.20, being revised as OP 4.10) [I [XI Forests (OP/BP 4.36) [I [XI Safety of Dams (OPLBP 4.37) [XI [I Projects in DisputedAreas (OP/BP/GP 7.60)* [I [XI Projects on International Waterways (OP/BP/GP 7.50) [I [XI Inaddition to the Environmental Assessment andInvoluntary Resettlementpolicies discussed in the preceding sections, two other Safeguardpolicies are triggered: Dam Safety: The DamSafety SafeguardPolicy (OP4.36) i s triggered by the Project because the Project relies directly on water provided by Jiaokou and Zhougongzhai reservoirs. Inaddition, three other dams also provide water for Ningbo City. The task team has reviewedthe safety of the four existing dams, andprogresson the construction of the Zhougongzhai, and has found them satisfactory. EmergencyPreparationPlansfor Zhougongzhai andJiaokou dams will be preparedduring project implementation. The Banktask team will also review anddocument for the Project files the construction progress, commissioning, and the first filling of Zhougongzhai dam. Cultural Property: Surveys indicate that project activities would not affect any above ground artifacts with archeological, paleontological, historical, religious, or unique natural values as definedunder OPN 11.03.Most of the construction activity will involve excavation work and thus all contractswill include standardclauses which follow Chinese law andregulations regarding chance finds during construction. One important cultural relic i s Tashan Weir, which i s located downstream of Jiaokou reserrvoir on the Zhangxi River. Built in 833 AD, it i s now an old cultural site undernational preservation. The diversion of water from the Zhangxi River i s not expectedto have an impact on the structural integrity nor functioning of the Tashan Weir. Ningbo Municipality i s a repeat borrower for the Bank with a high capacity to implement safeguards policies. The ongoing Zhejiang UrbanEnvironmental Project includes four components inNingbo City. Ningbo has developed a good understanding andexperience in implementing World Bank safeguardpolicies. Specific measuresto address safeguard issues of this Project during implementation are: Environmental Management Plan (EMP): The EMP specifies the appropriate environmental management and supervision mechanisms, mitigation measures, environmental monitoring * By supporting theproposed project, the Bank does not intend to prejudice thefinal determination of theparties' claims on the disputed areas 14  plans, training plans and budget allocation necessary to implement the mitigation measures and to strengthen the borrower's capacity. There will be an environmental officer inthe PMO to supervise the implementation of the EMP, and both NWSC and CWSC will have environmental officers responsible for their components. The PMO, CMSC, and NWSC have sufficient capacity and funds to implement the EMP. ResettlementAction Plan: A resettlement action plan (RAP) has been preparedfor the Ningbo and the Cixi components, which meet the World Bank's OPBP 4.12. The PMO will establish a resettlement office, staffed with specialists from NWSC and CMSC, to manage and supervise resettlement. The capacity of the implementing agencies and the PMO i s considered adequate. EA Disclosure and Consultation: A detailedPublic Consultation Plan inaccordance with Bank's policies, was prepared for each of the two components. Consultations were conducted intwo rounds for the Ningbo component duringMarch to October 2004, and inthree rounds for Cixi component from January to September 2004. EIA reports were disclosed in local libraries on September and October 2004 with notices posted inlocal newspapers. The draft EIA reports were also disclosedin the Infoshop in August 2004, the updated EIA inNovember 2004, and the final EIA in January 2005. RAP Disclosure and Consultation: DuringProject preparation, consultation has taken place through resettlement surveys, and meetings with government officials and project-affected people. These consultations influencedthe design of the RAP. An information handbook which outlines the Project, and the resettlement policies and procedures, was preparedfor all project- affected people. In addition, "land acquisition and buildingdemolition" announcements have been provided to all affected parties. The full RAP was disclosed inNingbo and Cixi libraries and government websites in October 2004. The draft RAP was disclosed inthe World Bank Infoshop in August 2004, and the final RAP was submitted inNovember 2004. 7. Policy ExceptionsandReadiness N o exceptions are required from Bank policies. The Project meets all key regional readiness criteria. The Bank has authorized the use of retroactive financing of US$12 million, which i s below 10% of total project loan. Disbursements inFY06 are expected to be between US$lO-$15 million. 15  Annex 1:Sector and ProgramBackground CHINA: Ningbo Water and Environment Project Approximately 95% of the urban population in China i s served by a municipal water supply system, and 68% have access to improved sanitation. Seasonal water shortages, however, affect more than 400 of China's 672 cities and around 160 cities are forced to impose water use restrictions. The lack of adequate wastewater collection and treatment infrastructure results in severe water pollution, with an estimated 88% of rivers and 70% of coastal seas classified as moderately to highly polluted. The lothFive Year Plan (2001-2005) calls for increasing the percentage of urban wastewater treated from 15% to 45%, and all cities with populations greater than 5 million should have treatment coverage of over 60%. The Government has also mandatednew policy directions, including integratedwater resource management, commercialization of the water and wastewater sector, setting tariffs at full cost-recovery levels, and attracting private investment. The more affluent coastal cities, such as Ningbo Municipality, are taking the lead in constructing new infrastructure and experimenting with policy reforms. Ningbo Municipality i s located on the East China Sea, approximately 150 k m s south of Shanghai on the southern edge o f HangzhouBay. Ningbo Municipality i s part of Zhejiang Province, but i s classified as a "sub-provincial municipality" which means it i s a separate economic planning unit and i s not administratively controlled by the provincial government. The Municipality belongs to the economically dynamic Yangtze Economic Zone, which covers Shanghai Municipality, Zhejiang, Jiangsu, and Anhui provinces, and includes over 200 million people. With its excellent deep water harbor, Ningbo boasts the second busiest port in China and has a thriving industrial sector focused on the export of manufactured goods. The development and integration of Ningbo with the larger Shanghai megalopolis will be accelerated with the completion of a 36 kmbridge spanningHangzhou Bay, which i s currently under construction and will halve the travel time from the port of Ningbo to Shanghai. The Municipality has approximately 6 million residents, including an estimated 1.2 million migrants, and covers 9,365 km2.There are six urban districts inNingbo which together are termed "Ningbo City," with a total population of 2.4 million people and a land area o f 2,486 km2.In addition, there are two city-level counties, Cixi andYuyao, andthree rural counties. The 2002 per-capita median disposable income of urban residents was RMB 12,970 (US$1,562), whereas rural residents reached only half that level. Resolvingthe Water CrisisinNingbo City Ningbo, like many cities throughout China, i s facing a two dimensional water crisis:frequent shortages and poor water quality. Although situated ina temperate climate, water supply development inNingbo has laggedbehind its rapid economic growth. Water companies draw water primarily from highly polluted local surface water sources and use outdatedtreatment technology, rendering the piped water of questionable quality. Water supply deficiencies pose a drag on economic growth and endanger public health, while hindering Ningbo's aspiration to become a world-class port city. 16  Ningbo, in contrast to most Chinese cities, has taken the initiative to address water issues through a regional approach with the establishment of a multi-sector "Water and Environment Leading Group,'' chairedby the Executive Municipal Vice Mayor and headed by the Municipal Planning Commission. The Leading Group has a dynamic Secretariat, and i s facilitating infrastructure investments and management systems which cut across administrative boundaries to resolve Ningbo's serious water and wastewater problems. A cornerstone of Leading Group's program i s to provide reliable, highquality drinking water to all City residents through the government-ownedNingbo Water Supply Company (NWSC). The Company currently serves 1.26 million people inthe core urban area with a total treatment capacity of 820,000 m3/d. The remaining 1.3 million people obtain water from 29 small town water supply systems with an estimated treatment capacity of 610,000 m3/d, or are self-supplied. Most large industries independently draw water from local surface water sources, and the total estimated self-supply capacity i s 460,000 m3/d. The Municipal Government has directed the NWSC to incorporate the small town systems, supply water to all industries, and dramatically improve service quality. To meet these targets, the Water Conservancy Bureau has recently finished construction of one medium-sized reservoir (Baixi-168 mcm of storage, supplying 500,000 m3/dof raw drinkingwater) and will complete the Zhougonzhai reservoir (111mcm of storage, supplying 250,000 m3/dof raw drinking water). These reservoirs will provide high quality raw water supplies, and NWSC i s investing in associated conveyance lines, two new water treatment plants, the first regional water distribution ring main in China, and an expanded distribution system. The following paragraphs provide more detailed information on the current situation and future expansion plans. Current Situation: Ningbo Water Supply Company (NWSC) currently has five water treatment works (WTW) supplying a population of about 1,200,000. The supply covers the three `old districts' of Haishu, Jiangdong and Jiangbei, together with parts of Zhenhai and Beilun. Name of WTW I Design Capacity I Raw Water Source (class o f raw water)I (Ml/d) Jiangdong 350 Nan Tang River via Beidu PS (I-II), Hengshan Reservoir (1-11) Nanjiao 200 I Tingxia Reservoir via Xiaozhen PS (II- 111) Meilin 100 YaojiangRiver (111-IV) Cicheng 20 Yingxiong Reservoir (11-111) Beilun 150 Hengshan Reservoir (I-11), Baixi Reservoir (1-11) Total 820 For the current NWSC area, demand for treated water has been rising steadily for the last four years reflecting the regions rapideconomic development: 17  Year Average daily supply Peakdaily supply Rate of increase of (MU (MU average daily supply ("/.I 2000 543 621 2001 571 630 5 2002 631 712 11 2003 735 861 16 At present each WTW is operating at or above design capacity. The 2002/3 year on year rates of increase (average and peak) were 16% and 21% respectively, and the peak factor in the years 2000 to 2003 varied between 10 and 17% (2003 was 17%). Currently water quality does not consistently meet Chinese drinking water standards.The first objective of Component 1i s to improve the quality andreliability of water service within the existing NWSC service. The secondobjective of Component 1is to expandNWSC's service area into the suburban districts of Yinzhou, Zhenhai, andBeilun and to improve water quality and supply reliability. Most parts of Yinzhou District are suppliedby 24 town water supply systems with a capacity of 265,000 m3/d.Inaddition there are 14town water supply systems in Zhenhai andBeilinDistricts with a capacity of 70,000 m3/d.These town water systems rely on highly polluted surface water sources, rudimentary and often poorly performing water treatment plants, and distribution systems with high levels of leakage.Most of the development inNingbo City i s taking place inthe suburban districts, andprovision of an adequate water supply i s critical to sustainingeconomic development. Ningbo City 2020 Water Supply Master Plan: Ningbo City has prepareda Water Supply Master Plan up to the year 2020. Although the five year investment program (2005-2010) andthe proposedProject investment, are sound given the urgency of the situation, the current plan does not use sophisticatedwater supply planning techniques, and inparticular does not explicitly deal with uncertainty or maximizing flexibility. During project preparation, a more detailedwater demandforecast was generatedto help size the ringmainto meet the forecast 2040 demand and confirm near-term needs up to 2008. During implementation of NWEP, however, Ningbo City will revise its Plan using state-of-the-art planning techniques. The objective of the current Master Plan i s to extend the supply area of NWSC to cover all six districts of Ningbo and apply a single tariff structure. According to `Ningbo UrbanOverall Planning 2001-2020' the supply population i s forecast to increase from 2.5 million in2005 to 2.8 million in2010 and 3.3 million 2010. Average (and maximum) daily gross water demandis forecast to increase from l,185Ml/d (1,350MUd) in2005 to 1,14lMl/d (1,64OMl/d) in2010 and l,794Ml/d (2,01OMl/d) in 2020. These estimatestake into account water conservation efforts which are currently underway inNingbo City. 18  UrbanArea Per CatitaWater DemandIndexes: -%ofTotal 2005 -% 2010 of Total -%ofTotal 2020 Industrial 179 38% 191 38% 186 36% Resident 132 28% 139 28% 146 28% Commercial 163 34% 174 35% 186 36% 474 100% 504 100% 518 100% The Master Plan aims to provide high quality potable water for the whole area by 2012. The objective in the short term is to consistently meet national standards, with a long term aimof meetingEUstandards.There is also a program to reduce unaccountedfor water from the present level (about 21%) to 15% by 2020. Inaddition, it i s proposedto provide separate industrial water supplies, with dedicated water treatment plants drawing from local surface water sources (Class 111-V) and distribution system, to supply new key industrial sites. These would be funded separatelyfrom NWSC, but managedby NWSC through a managementcontract. The details of how the industrial water supply systems will be financed andmanagedare still uncertain. Other industrial consumers within the NWSC area will be suppliedby the NWSC and self supply will be prohibited. Inorder to providethe high quality supply proposedfor the NWSC system, it is proposedto use raw water from six reservoirs (Class 1-11) only, and no local rivers. These are Hengshan, Baixi, Jiaokou with Zhougongzhai (under construction), andTingxia with Qinchun (proposed) reservoirs. Use of groundwater has beenruledout because its exploitation is strictly controlled. NWSC Diversion Routes and Capacities: (I( IO m3/d) 2010 Total: 2020 Total Xiaozheng (Tiangxia): 250 Qingcun (Tingxia)-500 BeiduIntake: 250 BeiduIntake to Industrial-Subtract250 HengshanDiversion: 250 Total: 2,075 Jiaokou-250 Baixi-600 Zhougongzhai (2008)-250 Total: 1,825 To achieve these objectives by 2020, it i s proposedto construct six new WTWs (three for potable water, three for industrialwater) andclose three existing NWSC works. Two existing potable water works will be downrated in capacity to improve the quality of the water supplied (one of which will be closed by 2020). It i s proposed to phase out the existing town water treatment plants. An extensive programme of complementary raw andtreated water conveyor and distribution pipework construction, extension andrehabilitation is planned. 19  IndustrialWTWs Yaojiang (Dagongye) 500(new) 500 500 Yindong 200 (new) 200 Beidu 150(new) 300 (>) Total new demand 500 850 ~~~~ 1,000 < and>refer to downrating or uprating the WTWs Financial Challenges: The City faces financial challenges on two fronts. First, the large capital investments and corresponding increases in operating costs and debt service will significantly increase revenue needs for both NWSC and the Ningbo Sewage Company Limited, which i s a subsidiary of NWSC. Under the Zhejiang Urban Environment Project, Ningbo will construct two new wastewater treatment plants and associated trunk sewers which will serve approximately half of the City. The necessary steep increases in water and sewage tariffs-which are collected inone bill-will be politically challenging. Second, the NWSC relies heavily on short-term debt from commercial banks, much of which i s periodically rolled over on the request of the municipal government. As the Chinese banking system reforms in the coming years, easy access to bank credit may become more difficult, thus increasing financial risk.The Project proposes to adopt a more comprehensive and sophisticated price and service regulatory regime through a technical assistanceprogram under the Project to ensure tariffs are raised in a timely manner to ensure financial sustainability of the water and wastewater companies inNingbo City. Facilitating Economic Development and Protecting Hangzhou Bay in Cixi The suburban counties surrounding the Ninbgo City are experiencing rapidpopulation and economic growth due to their relatively low cost o f business and abundance o f under-developed land. Cixi City, located north of Ningbo City and bordering on Hangzhou Bay, i s an affluent and rapidly developing area, covering 1154 sq. kmwith a coastal line of 78.5 km and a population of 1.O million. The total urbadtownpopulation in2005 is around720,000 and i s expected to grow to around 1.3 million by 2020. The average urban per capita income i s RMB 10,500 (US$ 1,265), making its residents among the most affluent in China. 20  The driving force behind this growth i s the development of industrial estates along the Cixi coast. The close proximity to the Ningbo harbor and the Shanghai market, and the starting point for the Ningbo-Shanghaibridge, make Cixi an ideal location for foreign anddomestic investors. There are approximately 200 foreign-invest enterprises inCixi, with estimated annual revenues of US$500 million. The Cixi Economic Development Zone, which i s located along the coast line, i s planned as a comprehensive development area with industry, science, businessservices, and housing. The first phase of the Zone covers 500 ha and i s close to completion. Planning i s now under way to expand the area by another 2000 ha, and interest from investors appears to be strong. Careful planning and large investments inwater supply and water pollution control are necessary to support Cixi's rapid economic development. Cixi i s located on a flat coastal plain and the scope for constructing reservoirs i s very limited. Cixi i s addressing this constraint through two measures: i)importing large quantities of water from the Caoerjiang basin inEastern Zhejiang; and ii)constructing a network of canals in Cixi to collect run-off for agricultural and landscape uses. Proper treatment and disposal of wastewater are essential to attract new industries and maintain the ecological balance. Fortunately, most of the industries in Cixi are modern and profitable enterprises which are able to afford proper industrial pre-treatment. Disposal of treated wastewater poses a major challenge in Cixi because of the shallow shoreline along Hangzhou Bay. The shoreline in Cixi i s constantly expanding due to the natural accumulation of sediment, creating reclaimed land at a rate of approximately 100 meters per year in some places. This natural phenomenon creates opportunities for land development, but also places constraints on disposal of effluent into the Bay. The shallow Bay, combined with large diurnal tides, makes an outfall impractical and thus the treated effluent will be disposed into the canal network. Drainage services inCixi have historically been provided by the Drainage Department, which i s an agency under the Construction Commission. The Department provides drainage services in Cixi City, and operates one wastewater treatment plant (20,000 m3/, day to be expanded to 45,000 m3in 2006). A new company, the Cixi Municipal Sewage Company (CMSC) was established in mid-2004 to be responsible for all wastewater collection and treatment facilities in Cixi City. The CMSC management i s facing the dual challenge of starting up a new company and managing a large capital works program. To mitigate this risk, the Project will provide significant technical assistance, including design review, business management and operations support. CMSC also faces significant financial risk under the Project. Like Ningbo City, Cixi i s also investing simultaneously in water supply and wastewater infrastructure, implying a significant increase in combined tariffs-which are collected by the Cixi Water Company with the drainage revenue being directly transferred to CMSC. Wastewater infrastructure in Cixi i s also relatively expensive due to the low-density of development and the long distances needed for conveyance. 21  Annex 2: Major Related Projects Financed by the Bank and/or other Agencies CHINA: Ningbo Water and Environment Project Latest Supervision (PSR) Sector Issue Project Rating (Bank-financed rojects only) Implementation Development Progress (IP) Objective BankFinanced Municipal governance and Zhejiang Urban Environment s s institutional building, pollution Project (Ln.47240) (1/29/04) management and environmental health, access to urban services and housing, infrastructure services for private sector development, other urban development Urban environment, pollution Shanghai UrbanEnvironment S S management and environmental Project (Ln.47050) (6/17/03) health, access to urban services for the poor, environmental policies and institutions Water resource management, Tai Basin UrbanEnvironment S s pollution management and Project (Ln.47480) (8/03/04) environmental health, other urban development, infrastructure services for private sector development Urban environment, air and water Second Beijing Urban S pollution, waste management Environment (Ln. 4561), (6/20/00) Access to urban services for the Second Tianjin Urban S poor, environmental health, water Development and Environment resource management, municipal Project (Ln.46950) (05/20/03) governance and institution building, wastewater, solid waste, industrial pollution Other DevelopmentAgencies Water supply, municipal and Japanese Bank for Implementation performance industrial wastewater treatment, air International Cooperation reported satisfactory. Assistance pollution management (several focused primarily on investment. projects) Urban services, environment, water Asian Development Bank Performance reported resources (several projects) satisfactory. 22  Annex 3: Results Framework and Monitoring CHINA: Ningbo Water and Environment Project Results Framework PDO ome Ind Use of Outcome Information Facilitate the expansion and Increase in percentage of domestic Recommend adjustments in improvement of water and water supply from high quality and planning, future investments andor wastewater services inNingbo City reliable water sources inNingbo operations for Ningbo water supply and Cixi City City. and Cixi sewerage. Increase percentage of wastewater treated inCixi City R to Use of ResultsMonitoring Component Ningbo City Water Supply Water Treatment Plants and Ring Track the progress of physical works Provide reliable, high quality water Main Completed and NWSC operational performance to all municipal water users in Ningbo City. CixiCity Wastewater Wastewater Treatment Plants meet Track the progress of physical works Ensure comprehensive wastewater Effluent Discharge Standards and CMSC performance. management services and zero discharge to Hangzhou Bay InstitutionalDevelopment Ningbo Water Supply Plan and Assist Ningbo Municipality in Improve water supply planning and NWSC Strategic Business Plan making necessary adjustments to public utility regulation. ensure efficient water supply capital NWSC and CMSC meet loan planning and utility regulation. financial covenants 23  ?I P 8 P 2 x P 2 P 2  Annex 4: DetailedProjectDescription CHINA: NingboWater andEnvironmentProject The Project development objective i s to facilitate the expansion of water and wastewater services in Ningbo City and Cixi City inan economically efficient and environmentally sustainable manner, and thereby protect public health, improve the environment, and sustain the area's rapid economic growth. The key indicators are: (i) increase in percentage of domestic water supply from high quality and reliable water sources in Ningbo City; and (ii) increases inpercentage of municipal and industrial wastewater treated in Cixi City. Project duration i s estimated at five years, starting in March2005, although some activities will start inlate 2004 with retroactive financing. The three project components are described below. Component1:NingboWater Supply The World Bank loan will finance the following activities under Component 1: l . A Raw Water Intake andTunnel: The existing Jiaokou reservoir, in conjunction with the new upstream Zhougongzhai reservoir (currently under construction - completion by 2007), will be used as the raw water source. A new water intake tower will be provided on the left bank of Jiaokou reservoir about 1kmupstream of the dam. The intake tower will feed into a 9580 meter long tunnel which discharges into the Maojiaping water treatment plant. The route i s dividedinto four tunnel sections, with three short, intervening steel pipe sections where the tunnel line crosses valleys. The tunnel i s designed on the basis of a flow of 6.13m3/s, with an excavated bore of 3.6m. It i s concrete lined, with an internal diameter of 2.8m. The steel pipe sections are 2.5m in diameter. l.B Maoiiaping;WTW: The capacity is 500,000m3/d. The site is locatedon a hillside, plantedin an orchard, and considerable earthworks will be required to level the site for construction. Both Zhougonghai and Jiaokou reservoirs are Class 1-11sources, with no organic pollution and low silt contents. Process parameters are based on previous experience of the designers and should be generally acceptable. Bench-scale water tests were carried out on the raw water to optimize the detailed process design. Water will flow by gravity from the reservoir intake works, via the tunnel, to the inlet works unless the reservoir level i s less than 55m, in which case five raw water dutyhtandby pumps provided will be used. A conventional treatment process will be usedwith a horizontal flow settling tank, sand filtration, and chlorine disinfection. Space will be reserved for advanced treatment consisting of activated carbon filtration. Thickened sludge will be dosed with alum and PAM, before being dried infilter presses.Dry sludge will be recycled as backfill material, or for brick manufacture. A 1kmlong 6 m wide access road from the existing road to the plant i s specified. 1,C Transmission Convevance Main: A single main with a diameter of 2.6 meters will convey the treated water by gravity (approximately 7.9 k m s ) to a bifurcation point, where two slightly smaller mains follow different alignments to the ring main. The bifurcation will provide water to different parts of Yinzhou district in the most cost-effective manner. The total length of each main after the bifurcation point i s approximately 11kms, with a diameter of 2 meters for the first 25  4 (3.5) kms, and then reducing to 1.8 meters. The pipes will be buried to a depth of approximately 2m, and will follow existing roads. l.DTransmission RingMain: The total lengthis about 47 kmand will consist of 2 mand 1.8 m diameter steel pipeline with a cover of about 2m. The ring main will significantly improve water supply reliability and flexibility. The current network in Ningbo i s divided into approximately three zones (although there are some interconnections) and the ringmain will link all three zones together. The new water treatment plants (Maojiaoping and Dongqianhu) are located in the south of the City and the ring main will allow easy transmission from both plants to the north. "Distribution pipe spokes" coming off the ring main which will serve the suburban districts. The ring main i s sized for the estimated 2040 demand, based on extensive hydraulic modeling and spatial water demand forecasts. the ring main size. The choice of either steel pipe or PCCP (pre- stressedconcrete cylinder pipe) will be finalized during appraisal. The ring main will be buried and run along the existing ringroad. The water pressure inthe ring main will be supplied by gravity from the Maojiaping WTP. Distribution systems: NWSC has already carried out significant rehabilitation and renovation of older pipes within the current supply area. However, with the addition of the town systems, this task will continue to require the allocation of resources from NWSC. The potential for drinking water contamination inthis project evidently comes more from the distribution system (and customers own pipes and fittings) than from the treated water as it leaves the various WTWs. The highinvestmentingood quality water sources and moderntreatment techniques makes water quality management within the distribution system more necessary. NWSC has a long- term program to rehabilitate the distribution system (redundant with long-term). Component 2: Cixi WastewaterManagement: Current Situation: Cixi City i s composed of the central city with around 300,000 inhabitants, seven small cities with populations ranging from 25,000 to 100,000, and ten towns with around 25,000 or less residents. In addition, there are areas of recently developed and rapidly expanding industrial estates along the coastline. Only 10% of the wastewater generated inCixi City currently receives wastewater treatment, which i s provided by the Jiaochangshan central city wastewater treatment plant. The WWTP collects wastewater from an area o f around l o b 2 , comprising only one third of the central city area. The current capacity o f the WWTP i s 20,000 m3/d, but there are plans to expand the plant to 45,000 m3/d by 2010. Municipal sewerage from the central city and each town i s discharged directly into the river and canal network, with the result that most of the canals and main river networks are polluted to class V standards or worse. Inadditionto causing environmental problems, the lack of comprehensive wastewater management i s inhibitingeconomic development as industries are reluctant to move into estates without proper environmental management. The project will finance the following components, which are essentially the entire five year investment program for the Cixi Municipal Sewerage Company (CMSC). Wastewater Treatment Plants: The CMSC service area i s divided into three zones, each of which will have a wastewater treatment plant: (i) existing Jiaochangshan WWTP in the central city (45,000 m3/d);ii)the NWEP-financedNorthern WWTP which will have a Phase 1capacity of 26  100,000 m3/d;and iii)the NWEP-financed Eastern WWTP which will have a Phase 1capacity of 50,000 m3/d.The WWTPs will discharge into the inland canal network, and thus require a high level of treatment to minimize eutrophication and other water quality problems as the canals have a relatively low assimilative capacity. Dischargeinto Hangzhou Bay through an outfall i s not an economically viable option given the large tidal variation and shallow water along the Cixi coastline. The WWTPs are designed to meet Class 1A discharge standards, which are essentially 10 mg/lBOD and SS, with removal of nutrientsto 15 mg/l total-nitrogen and 0.5 mg/l of phosphorus. The proposed treatment process i s a modified reverse A20process, with tertiary treatment. Inthe reserve A20process, the anoxic stage i s placed ahead of the anerobic stage, to remove nitrates first and achieve the anaerobic conditions necessary to remove phosphorous in the second stage. The project will fund a technical assistanceprogram for CMSC to buildupits operational capacity to tackle the operationally complex A process. Tertiary treatment will be through an engineered wetland. The preliminary design for the engineered wetland will be finalized after loan effectiveness. Sludge from the treatment plants will be dewatered through gravity thickening followed by centrifuges. A total 67,000 m3 of sludge, with a moisture content of 78%, will be generated per year from the two plants. The sludge will be transported to nearby municipal landfill sites in trucks with air-tight tanks. The sludge from the Northern plant will be disposed in the Cixi West landfill, and the sludge from the Eastern plant will be disposed in the Eastern landfill. The Western landfill was expanded and upgraded in2002, and currently has 10 empty cells which will use impermeable liners and leachate treatment systems. Cixi City plans to upgrade the Eastern landfill in2005 and utilize impermeable liners and leachate treatment systems for the four remaining cells. Upgrading o f the Eastern landfill i s included in the EMP.The Western landfill i s forecast to reach full capacity around 2012, and Eastern landfill will reach capacity in 2015. Since the two landfills will be full after only 5-7 years of wastewater treatment plant operation, the EMPcalls for the Cixi Municipal Sewerage Company to develop a sludge management plan to consider alternative long-term options for sludge management. Monitoring of sludge quality i s also included in the EMPto ensure that the sludge can be safely disposed in a municipal landfill. Trunk Sewers: There are two trunk systems inCixi: the 77 kmcentral-western trunk system conveys wastewater to the Northern WWTP. The 30 kmeastern trunk system conveys water to the EasternWWTP.Trunk diameters range from 400-1800 111111, laying depths of 2.5-7.0 with meters. There are 15 pump stations intotal for both trunk systems; PCCPi s usedfor all force mains. Appropriate remedial measures for septicity have been incorporatedinto the design. Secondary Sewers: CWSC will service approximately 15 distinct areas, composed of towns or industrial estates. Each town or city i s responsible for constructing its own collection system. Existing developments use a combined storm-water and wastewater collection system, which will be maintained. According to Cixi City regulations, new developments must have separated wastewater and stormwater collection systems. The project will finance approximately 133 k m s of secondary trunk sewers which go from the town to the trunk mains (with 42 small pump- stations). 27  Component3: InstitutionalDevelopmentand CapacityBuilding The component consists of the following packages: PackageA: Design Review and Advisory Servicesfor NWSC and CMSC: To assist with three major tasks: (i)ensure preparation of ICB bid documents meet Bank standards, efficiency, and economy of works; (ii) develop and implement a construction management program basedon soundengineering practice; and (iii) adequate health, safety and quality assurance install procedures. Package B: NWSC Central Control and Monitoring Technical Assistance: Provide advice to NWSC: (i) to enhance the functionality of the existing monitoring and control systems, including the most recent upgrading of the systems carried out between mid2004 and mid 2005; and (ii) in carrying out a study on a pilot area of the distribution system to learn how to best optimize the whole distributionsystem. Package C: Utility Price and Regulatory Technical Assistance: To strengthen the capacities of the Price ManagementDivision (PMD) within the Ningbo Development Planning Commission, the State Asset Management Commission, and the Urban Management Bureau (UMB), to carry price and service regulationin the entire water sector, including water, wastewater, raw water, etc. Phase 1would focus on the regulatory framework at the municipal level, including counties and Ningbo City, while Phase 2 would concentrate primarily on specific water tariff adjustments inNingbo City. Package D: TechnicalAssistance to Develop Water Supply Strategic Plans: It will include assistance to revise the Ningbo City IntegratedWater Supply Plan through an open and participatory process, involving all stakeholders, while encompassing least-cost analysis of short- and-long term planning options, and satisfying utility and regulatory policy goals. A second component would support the preparation of the NWSC Strategic Plan, which would include the following elements: (i) resource plan, based upon the Ningbo City Water Resources Plan; (ii) capital plan to optimize and detail the capital investment needs over the short term, and identify medium and long term capital investment needs; (iii) financial plan, to integrate with the capital plan, analyze and identify financing sources, and assess tariff impacts; (iv) town andindustrial water supply plan, to enable NWSC to best provide service; (v) management plan, which considers decision-making processes, administrative procedures, accounting systems, and management information systems; and (vi) human resources plan. Package E: CMSC TechnicalAssistance: will consist of four main activities: (i) institutional strengthening, focusing on organizational structure, human resource management and planning, businessplanning, and improving the company's capacity to meet its regulatory obligations; (ii) financial management systems, including accounting, billing andcollection systems, financial planning, determination of tariff requirements, and developing a modern financial information system; (iii)wastewater treatment plant operations including wastewater and sludge process operations; operational safety; and overall plant management; and (iv) industrial pollution control, including discharge permitting program and procedures; industrialwastewater monitoring; data management; and formal procedures for regulatory control. 28  Annex 5: Project Costs CHINA: Ningbo Water and Environment Project The total estimated cost of the project i s US$291.5 million, including physical andprice contingencies, taxes, duties, front-end fee, and interest duringconstruction. The base costs inthe Feasibility Study were adjusted to reflect actual experience with civil works contracts under Bank-financedurban projects. Physical contingencies are estimated at 7.5% and price contingencies at 5%. The summary cost table i s presented below. I Description Component 1: Ningbo Water Supply Raw Water Intake and Tunnel 90.8 10.9 45.4 Maojiaping Water Treatment Works 281.2 33.9 176.1 Water Transmission Main 242.7 29.2 121.4 Water Transmission Ring Main 431.3 52.0 215.7 Overhead/Engineering Services 109.4 13.2 0.0 Resettlement 90.4 10.9 0.0 IDC and Commitment Fee 64.9 7.8 0.0 Sub-total._-------..---- 1310.7 157.9 558.5 - - - 1 - - - - - - - - - - - - - - - 1 Component 2: Cixi Wastewater Northern Wastewater Treatment Works 128.7 15.5 80.5 9.7 Mid Trunk Sewer System 148.2 17.9 77.0 9.2 Western Trunk Sewer System 153.1 18.4 79.5 9.E Eastern Wastewater Treatment Works 91.3 11.0 56.3 6.e Eastern Trunk Sewer System 126.2 15.2 66.0 8.C City and Town Link Sewer System 239.3 28.8 121.3 14.E Overhead 81.6 9.8 0.0 0.c Resettlement 46.6 5.6 0.0 0.c IDC and Commitment Fee 50.9 6.1 0.0 0.c Sub-total. 1065.9 128.4 480.6 57.s - 1 1 - 1 1 1 1 1 1 1 1 1 1 - - - - 1 1 -1111111..1111 I---- Component 3: Institutional Development Design Review Construction Supervision 12.5 1.5 11.3 NWSC Central Control System TA 4.2 0.5 3.8 Price and Service Regulatory TA 4.2 0.5 3.8 Strategic Water Planning 6.6 0.8 6.0 Cixi Sewage Company TA 8.3 1.o 7.6 General Training 1.66 0.20 1.7 Sub-total. 37.4 4.5 34.1 _--- --------..----I 5.40 0.65 5.40 Total Cos 2419.3 291.5 1078.7 29  Annex 6: ImplementationArrangements CHINA: NingboWater andEnvironmentProject There are a variety of government agencies and companies involved in the implementation of NWEP: NWSC and CMSC are the two main implementing entities, while the government agencies will play an oversight and coordination role. GovernmentAgencies: Water and Environment Leading Group: Ningbo Government recently established a Leading Group to deal with the complex regional water supply and water quality issues confronting the Municipality. The Leading Group i s headed by an Executive Vice Mayor and i s composed of Directors from the Municipal Development Planning Commission (MDPC), Environmental Protection Bureau, Water Resources Bureau, Construction Bureau, and Finance Bureau. The Leading Group's mandate i s to provide policy direction and planning support for integrated water and environmental management throughout the Municipality. The Leading Group i s supported by an active Office. Both the Leading Group and its Office were actively involved in NWEPpreparationand will play a guidingrole inimplementation. The Leading Group will also be the lead agency for the Ningbo City IntegratedWater Supply Plan in Component 3. NWEP Project Management OfSlce(PMO): The PMO i s locatedunder MDPC, and i s composed of a qualified project manager, an experienced chief engineer, and a procurement specialist seconded from NWSC, a project accountant, an environmental specialist, a resettlement unit, and a translator. The PMO has been established as a permanent government agency, and thus i s able to attract qualified individuals who are offeredjob security and promotion potential. The PMO will be responsible for overall project coordination and implementation and will be the primary liaison with the Bank (project monitoring and reporting. Because the various technical assistance assignments in Component 3 cut across NWSC and CMSC, as well as various government agencies, the PMO will be responsible for contracting some consultants. Such consultants will work directly with the companies and government agencies, but under the general supervision of the PMO. MDPC Foreign Capital Utilization Department: The department serves as a liaison with international development agencies. It will be an important bridge between the PMO andFinance Bureau, and the Bank duringproject implementation. Ningbo StateAsset Management Commission, Price Bureau, and Urban Management Bureau: The Asset Management Commission i s the primary management supervising body for the NWSC. The Price Bureau i s the leadeconomic regulatory agency, and the Urban Management Bureaui s the lead service regulatory agency for NWSC andother public utilities inNingbo. All three bodies will be involved in the "Utility Price and Service Regulatory Study" under Component 3. 30  PublicUtilities: Ningbo Water Supply Company (NWSC): NWSC has been operating for decades and i s experienced in implementing large capital projects. The NWSC has created a Project Management Unit (PMU) under the direction of an Assistant Chief Engineer. The PMU i s staffed with dedicated procurement, financial management, environmental, and resettlement staff. Under Component 3, the NWSC will receive technical assistance support for design review and advisory services, business management, and the development of an NWSC Strategic BusinessPlan. The NWSC will also receive technical assistancefor the development of the state- of-the-art central control system. Cixi Municipal Sewerage Company (CMSC): CMSC was legally established inmid-2004, and staff and existing assets have been transferred from the Cixi Drainage Department to CMSC. Since the NWEP represents essentially all of CMSC's capital investment program, the project will be under the direct supervision of the CMSC General Manager, with the relevant departments providing procurement, financial management, environmental, and resettlement support. Under Component 3, CMSC will receive technical assistance support for design review and advisory services and business management. CMSC will also receive technical assistance for the operations of the new wastewater treatment plants financed under the project. / 31  Annex 7: FinancialManagementand DisbursementArrangements CHINA: NingboWater and EnvironmentProject The Financial Management Specialist (FMS) has conducted an assessment of the adequacy of the project financial management system of the Project. The assessment, based on guidelines issued by the Financial Management Sector Board on October 15, 2003, concluded that the project meets minimumBank financial management requirements, as stipulated inBP/OP 10.02. Inthe FMS's opinion, the project will have inplace an adequateproject financial management system that can provide, with reasonable assurance, accurate and timely information on the status of the project, in the reporting format agreed with the project and as required by the Bank. Fundingsources for the project include the Bank loan andcounterpart funds. The Bank loan proceeds will flow from the Bank into the project special account, to be set up at and managed by the Ningbo Municipal Finance Bureau (NMFB). There are two implementing entities: the Ningbo Water Supply Company (NWSC) and the Cixi Municipal Sewerage Company (CMSC). The NWEPPMO, established inthe Ningbo Municipal Planning Commission, will provide overall coordination and oversight for the project. The PMO will authorize the Ningbo Finance Bureau to reimburse NWSC and CMSC for eligible expenditures. For consultant contracts which are managed by the PMO, there are two general payment options: (i) the NMFB pays consultants for the Bank share and the PMO pays counterpart share; (ii) PMO will pay consultants directly and then request NMFB reimbursement for the Bank share. The costs will be allocated as appropriate to the respective companies. The Bank loan will be signed with the People's Republic of China, through the Ministry of Finance (MOF), which will then enter into an on-lending agreement with Ningbo Municipality. The NMFB will have subsidiary loan agreements with NWSC and Cixi City Government. The Cixi Finance Bureau will then have an on-lending agreement with the CMSC. The project will use traditional disbursement techniques, and will not be usingPMR-based disbursements, in accordance with the agreement between the Bank and MOF. Counterpart funds for NWSC and CMSC will come from commercial banks and internal funds. Audit Arrangement The Bank project financial statements to be audited in accordance with standards acceptable to the Bank, In line with other Bank financed projects in China, the project will be auditedin accordance with International Auditing Standards and the Government Auditing Standards of the People's Republic of China (1997 edition). The Ningbo Municipal Audit Office has been identified as auditors for the project. Annual audit reports will be issuedinthe name of the Ningbo Municipal Audit Office. The annual audit report of project consolidated financial statements will be due to the Bank within six months of the end of each calendar year. The consolidated project financial statements will be submittedthrough the PMO. Inaddition, annual audit reports on the financial position and the operating results of the NWSC and CMSC, inboth Englishand Chinese, will be due to the Bank within six months of the end of each calendar year. The financial statements for 32  these entities are not Bank fiduciary requirements, but rather for sustainability purposes. The requirements for these audits will not be included inSchedule 3 of the Project Agreement. Disbursement Arrangement 6. Inline with the agreement between the Bank andMOF, the project will use traditional disbursement techniques and will not use PMR-based disbursement. Allocation of LoanProceeds: 7. Proceeds of the Loan will be disbursed against expenditure categories as shown in the table below. IBRD Loan Amount Financing US$Millions Percentage Ningbo Component Works 49.18 50% 100%-Foreign; Goods 0.53 75% Loca Combined 17.60 65% Services 2.30 91% General Training 0.10 100% Total 69.71 Cixi Component Works 38.75 50% 100%-Foreign; Goods 0.55 75% Loca Combined 18.65 65% Services 1.59 91% General Training 0.10 100% Total 59.64 Financing Cost Front- end Fee 0.65 100% Total Loan Amount 130.00 Note: 1. For Goods, the Bank finances 100%of foreign expenditures; 100%of local exy (ex-factorycost); and 75% of local expenditures for other items procured locally. 2. "Combined" refers to contracts for both supply of goods and works. 33  Use of Statement of Expenditures(SOEs) 8. Some of the proceeds of the loan may be disbursed on the basis of SOEs as indicated in the table below. ContractsLess than US$Equivalent ~~~Expenditure Category Civil Works and Combined Contracts $5,000,000 Goods $500,000 Consulting Firms $300,000 Individual Consultants $50,000 9. Expenditures exceeding the above limits will be made in accordance with respective procurement guidelines and signed contracts. SpecialAccount (SA) 10. One special account (SA) will be established in the NMFB. The authorized allocation will be US$S.O million, with an initial deposit amount of US$5.5 until a cumulative disbursement of US$35 million i s reached. Bank funds would be disbursed from the SA set up at the Finance Bureau to the project implementing entities and/or supplier and contractors. 11, N h E B will be directly responsible for the management, monitoring, maintenance, and reconciliation of the SA activities of the project. Supporting documents required for Bank disbursements will be prepared and submitted by respective project implementing entities to NMFB for final verification and consolidation before submission to the Bank. The flow of the withdrawal application i s as follows: CMSC and Approvedby Approved World u NWSC t Municipal 4byNMFB--b I P M O I I 1 - Bank FinancialManagement and ReportingArrangements 12. ImplementingEntity. A PMO has been established under the Ningbo Municipal Planning Commission. NWSC will be the implementing entity for the water supply component, and CMSC will be the implementing entity for the wastewater component. The institutional development component includes contracts which support both companies, as well the municipal government, and thus will be managed by the PMO, however the costs will be allocated to the respective companies. 13. FundsFlow. Funds flow for Bank loan will follow the Bank and MOFrequirements, as follows: 34  (3 Contractor Consultant The above diagram assumes that the NMFB will make payments directly to consultants who have signed contracts with the PMO. Another alternative i s for the PMO to make payments to the consultant directly and then request reimbursement from NMFB for eligible expenditures. The preferred option will be determined duringimplementation. Accounting Organization and Staffing. Adequate project accounting staff, with educational background and work experience commensurate with their work i s one o f the factors critical to successful implementation of project financial management. Based on discussions, observation and review of educational background and work experience of staff identified for financial and accounting positions in implementing entities (both "project" and "entity"), the F M S noted that staff are qualified and appropriate for their work. To strengthen financial management capacity and achieve consistent quality o f accounting work, a project financial management manual (the Manual) will be prepared. The ,Manualwill provide detailed guidelines on financial management, internal controls, accounting procedures, fund and asset management and withdrawal application procedures. The final version of the Manual will be finalized and distributedto all the financial staff before loan effectiveness. Accounting Procedures. The administration, accounting, and reporting of the project will be set up in accordance with Circular #13: "Accounting Regulations for World Bank Financed Projects" issuedinJanuary 2000 by MOF. The circular provides in-depth instructions of accounting treatment of project activities and covers the following: chart o f account, detailed accounting instructions for each project account, standardset o f project financial statements, and instructions on the preparation of project financial statements. The standard set of project financial statements mentioned above has been agreed to between the Bank and MOF and applies to all Bank projects appraised after July 1, 1998 and includes the 35  following: Balance sheet, Statement of source and use of fund, Statement of implementation of loan agreement, and Statement of special account. Each of the implementing entities will be managing, monitoring, and maintaining the respective project accounting records. Original supporting documents for project activities will be retained by originating implementing entities. In addition, each implementing entity will prepare financial statements, which will be submittedto the municipal PMO for review and approval. The MunicipalPMO will furnishthe consolidated project financial statements to the Bank on a regular basis. InternalAudit. There is no formal independent InternalAudit department for the project. However, this will not impact the project's financial management as PMO management and monitoring, and yearly external audits, will ensure that financial management controls are functioning appropriately. InformationSystem. The water supply company i s usingan accounting software called "Xinzhongda" to process their transactions. After reviewing the software, it may be possible to integrate the project activities into their current accounting software system. Since this software i s a well-known accounting software in Zhejiang province, the newly established sewerage company will also use this accounting software. The Bank will review the adequacy of their financial accounting and reporting systemprior to project effectiveness. FinancialManagementActionPlan. The following proposedtime-bound actions were agreed with the PMO: Acition Responsibleperson CompletionDate 1.Financial management NMFB Before effectiveness training to all relevant project staff 2. Financial management NMFBandMunicipal Before effectiveness manual finalized and PMO issued to relatedfinancial SupervisionPlan. A detailedsupervision planfor this project will be included as part of the China Audit Strategy document, which i s currently inprocess. This document will take into consideration the size of the project and the risks identified. 36  Annex 8: ProcurementArrangements CHINA: NingboWater andEnvironmentProject A. General Procurement would be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRDLoans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Loan Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed b y the Loan, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame have been agreed between the Borrower and the Bank, andi s part of the Procurement Plan. The Procurement Plan for the project was prepared by Ningbo Municipal PMO, and will be updated at least annually or as required, to reflect the actual project implementation needs, and improvements in institutional capacity. Procurementof Works: Works procuredunderthis project wouldinclude: raw water intake facilities, raw water tunnels, water treatment plant, water supply pipelines, wastewater collection pipelines, wastewater pump stations, wastewater treatment plants, etc. Procurement will be done usingthe Chinese Model BiddingDocuments (MBDs);andBank Standard BiddingDocuments (SBD) would be usedwhen an appropriate MBD i s not available. Goods:Goods procured under this project would include laboratory instruments, maintenance tools, and vehicles. Procurement will be done usingthe Chinese Model BiddingDocuments (MBDs)for ICB. For contracts with estimated value below US$lOO,OOO, shopping procedures may apply* CombinedWorks andGoodsProcurement: CivilWorks andEquipmentSupply, Installationand Commissioning:To enhance implementationefficiency, some large contracts have been packged to include both works and goods, including the Maojiaping Water Treatment Plant, the two wastewater treatment plants inCixi, and the pump stations. Either standard biddingdocuments or modified biddingdocuments for Civil Works, or for Supply and Installation of Plant and Equipment, will be used for preparing the biddingdocuments for these contracts, subject to the agreement of the Bank on a case by case basis. Selectionof Consultants: Consulting services will include design review and construction management, business management, utility regulatory study, water planning study, and water and wastewater operational support. All consulting services will be provided by consulting firms. Short lists of consultants for services estimated to cost less than $300,000 equivalent per contract may be composed entirely of national consultants, in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. B. Assessmentof the agency'scapacityto implementprocurement Procurement activities for Component 1will be carried out by the NWSC, where CMSC will be responsible for Component 2. Procurement for Component 3 will be carried out primarily by the 37  Ningbo PMO in collaboration with CMSC and NWSC. The PMO will provide overall coordination and instruction for all procurement activities. The PMO has designated a well qualified Chief Engineerto be responsible for overall management of project procurement. NWSC has established a dedicated Project Management Unit (PMU), which is headedby an NWSC assistantchief engineer andhas four full-time staff. NWSC has experience with World Bank procurement procedures under the Zhejiang Multi- Cities Project which closed in 2001. CMSC's Technical Department, under the direct supervision of the Managing Director, will be responsible for implementation of the project. Five staff from the technical department will be working on project-relatedprocurement issues. CMSC i s a new organization and has limited procurement experience. For ICB procurement, a qualified international tendering company China Minemetal International Tendering Company, to be confirmed has been recruited as procurement agent. This tendering company will also be the procurement agent for NCB procurement of the Cixi Wastewater Component. An assessmentof the capacity of the ImplementingAgency to implement procurement actions for the project was carried out by the Bank project procurement specialists in September 2004. The ProcurementAssessment is contained inthe Project Files. The key procurementriskunder the project i s CMSC' lack of experience with World Bank procedures. Corrective measures which have been agreed are:(i) the project will include a design review and management consultancy to assist both CMSC and NWSC; and (ii) an experienced design institute and tendering company will be recruitedfor project preparation and procurement assistance. The overall project risk for procurement i s average. C. Procurement Plan At appraisal, the Borrower, ,developed a procurement plan for project implementation. This plan has been agreed between the Borrower and the Bank inDecember 2004 and i s available at the Ningbo Municipal PMO and through the World Bank Internet Site. The ProcurementPlan will be updated annually, in agreement with the Bank to reflect actual project implementation needs, and improvements in institutional capacity. The ProcurementPlan i s provided inTable B below. D.Advance Contracting and Retroactive Financing Retroactive financing would be applied for expenditures incurred after September 1,2004 for civil works and employment of consulting firms. Advance contracting will be in accordance with Bank and project guidelines. Proposed advance contracting and retroacting financing are summarized in the Table B below. The estimated expenditures are around US$20 million, with a conservative estimate of US$12 million inretroactive financing required, which i s below the threshold of 10% of the total loan amount (US$13 million) under inWorld Bank Operational Policy 12.10. The Ningbo Municipal Government has been made aware that payments made in expectation of retroactive financing are at the Borrower's risk, and do not commit the Bank to making a loan for the project or the financing of such payments. 38  E. Frequency ofProcurement Supervision Inaddition to the prior review supervision to be carriedout by the Bank, the capacity assessment recommends procurement supervision missions every six months to carry out post reviews of procurement actions. Table A: Thresholds for Procurement Methods and Prior Review Less than $500,000 Less than $100,000 NS None 3. Services Above $100,000 QCBS All (Firms) Less than $100,000 CQ None Individual Other Above $50,000 2005 NBWS/C3 Jun. 2005 to 20.0 Dec.2005 NBWS/C4 Aug. 2005 to Feb. 7.0 2006 CX/C2&3 Jan. 2005 to Sep. 80.0 2005 Package A-TA Jun. 2005 to Dec. 3.0 2008 I Total I I RMB~ 170million ( ~ $ million equivalent) 2 0 I 39  TL fm f 5 f 0 um z z m Y 0 d Y B E c Bk 88% * $ $vi F 3 2 2s smz  I m m m m p;' s2 s2 p;' 0 Y p;' 3 p;' 3 3 m 9 P 3 0 W 0 8 8 6 i 8 E N 8 0 0 z m - gB $ 3 $ v1 B L d B Y Ym a E z a a E a 9 9 w .-0 E .-002 9E Y Y 'e82 s s2 Y sYv1 E I B2 N s m P U V u X u  Table C-3 Consultancy Assignments with Selection Method and Time Schedule supervision months B NWSC Central QCBS Prior Aug. 20,2005 24 months Control SystemTA C Priceand Service QCBS Prior Feb. 28,2007 17 months Regulatory D Strategic Water QCBS Prior Aug. 20,2005 24 months Planning E Cixi Sewage QCBS Prior Jun. 10,2006 21 months Company TA 42  Annex 9: Economicand Financial Analysis CHINA: Ningbo Water and Environment Project A. Financial Analysis Project Level Analysis: Ningbo Wuter Supply Component.The after-tax financial internal rate of return (FRR) is calculated as 8.7%, which indicates that the project component i s financially viable, as it exceeds the 3.0% weighted average cost of capital. This i s equivalent to an NPV of RMB 901 million over the project component's estimated 35 year economic life. Cixi Wastewater Component. Wastewater tariffs are presently applied to all properties receiving a water bill regardless of whether they are connected to the public sewer system. Consequently, while the wastewater system expansion will significantly increase the proportionof the population receiving service, the increase inthe revenue base will be much more limited. For this reason, the concept of incremental revenue underlyingFRR is not fully applicable and, therefore, an FRR was not calculatedfor this component. The average incremental financial cost (AIFC) of the component i s estimated at RMB 2.33/m3. This i s higher than the projected average tariff needed to meet the financial requirements of the project wastewater company, estimated to be Y1.65/m3, indicating the presence of financial subsidies. This subsidy i s inthe form of contributions from Cixi City Government toward the capital cost of project component. The AIFC i s also higher than those estimated for the Ningbo wastewater components of the recent Zhejiang UrbanEnvironment Project (Zhenhai: Y1.99/m3,Dongqian Lake: Y1.27/m3,Cicheng: Y0.86/m3, Jiangdongnan: Y0.84/m3). However, while those project components largely involved an expansion of existing facilities, entirely new treatment facilities and collection systems are beingconstructedinCixi. Entity Level Analysis: Financial projections have been prepared for the NWSC and CMSC on an annual basis over the 2004 - 2015 period. These projections are based on the requirement of each company to comply with the proposedproject financial covenants on cost recovery and debt service coverage, as well as the need for internally generated contributions toward project counterpart funding. The key financial covenant for each company relating to cost recovery. NWSC i s to generate annual operatingrevenues that are sufficient to cover total operating expenses, any loss on non- operating activities, increases in working capital other than cash, debt service requirements, and 20% of the annual average of its capital expenditures incurred (excluding developers' contributions), or expected to be incurred, for the current year, the previous year, and the following year. CMSC i s to generate annual operating revenues that are sufficient to cover total operating expenses, any loss on non-operatingactivities, increases inworking capital other than cash, and debt service requirements. Inbothcases, the ratioof operatingrevenues to costs is expressed as the cost recovery ratio, which, therefore, must be at least 1.O in each year. Inaddition, a debt service coverage ratio and asset debt equity ratio covenant will also be applied under which the companies' ability to incur additional debt will be conditional on their maintaining these ratios at a minimumof 1.3 and maximum of 0.7 respectively. 43  Ningbo Water Supply Company: NWSC i s a stateowned enterprise that was established inits present legal form in 1982, but can trace its operating history back to 1926 with the establishment of the city's original piped water system. Presently, the company provides piped water supplies to a population of approximately 1.3 million through 295,000 customer connections inthe three core urban districts (Haishu, Jiangdong, Jiangbei), the newer urban districts of Zhenhai and Beilun, and part of the urban core of Yinzhou District. With very rapid economic andpopulation growth in and around Ningbo over the past decade, NWSC has struggledto meet the resulting growth inwater demand. Over the past five years, water sales have increased by 44%, from an average of 417,000 m3/d in 1999 tojust under 600,000 m3/d in 2003. This has placed considerable strain on the productive capacity of the company's supply, treatment and distribution systems. By 2003, peak day production actually exceeded its design treatment capacity of 820,000 m3/d. In order to meet this increasingdemand, as well as to expand its service coverage innewly urbanizing areas around the city core and improve water quality, NWSC has embarked on a major capital works program. Capital expenditures between2001 and 2003 totaled RMB 630 million and are projected to be about RMB 3.2 billion over the 2004 - 2008 period. Key operating and financial indicators are given inTable 1,as well as inTable 6. Table 1, Key Operating& Financial Indicators for Ningbo Water Supply Company Indicator Value Year Operating: Average daily water sales (m3) 588,000 2003 Ratio of domestic to non-domesticwater sales 28:72 2003 Non-revenuewater 20% - 25% 2001 - 2004 Staff 990 2004 Staff per thousandwater connections 3.4 2004 Financial: Collection performance(% billings collected) 98% 2004 Customerreceivables (days worth of billings) 19 2003 Current ratio 0.4 2001 - 2003 Total debt (Y million) 577 Oct 2004 Short-termdebt (Y million) 252 Oct 2004 Return on equity - 2.8% 2003 Sector Funding& Cost Recovery.Operation andmaintenancecosts are internally fundedby NWSC through the application of tariffs to all customers. Capital expenditures have been financed by a mix of loans, internally generated revenues, and allocations from the Ningbo Municipal Government (NMG),primarily from the proceeds of the Water Plant Construction Fee (WCF), which hadbeen applied as a surcharge on the water bill up to the end of 2003. As of January 2004, the WCF was incorporated into the water tariff. Inaddition, developers are responsible for funding distribution systems within their developments. These systems are generally constructedby the developers and, upon completion, are transferred to NWSC. Water Tariffs.As of January 2004, the average water tariff, including the WCF, was increased by 17% relative to the previous tariffs, which hadbeen implemented inAugust 1999. This brought the average tariff to Y1.42/m3 from Yl.21/m3in 2003. Ningbo appears to have had difficulty implementingregular and timely tariff increases, which suggests a need for improvements inunderlying regulatory mechanisms. The recent tariff increases hadbeen under review by the NMGfor at least 30 months. Duringthis period, NWSC incurred net losses and 44  needed to rely heavily on relatively short-term commercial bank loans to finance much needed capital works. The project will incorporate technical assistance to those agencies within NMG responsible for price and service regulation for strengthening these mechanisms. Recent Financial Performance. NWSC reported annual net losses over the past three years (Table 6). The net loss doubled between 2001 and 2002 primarilybecause tariffs remained unchangedwhile there were significant increases ina number of operating expense items. Between 2001 and 2003, net operating revenue increased by 22%, due entirely to increased sales, while operating expenses increased by 51%. The disproportionate increase in operating expenses was due to a number of factors including: (i) real increases in average salary and wage levels; (ii)large increases incompany contributions to government mandatedsocial insurance and staff welfare funds; (iii)major upgrades to the company's information technology systems that were deemed to be administration expense, rather than capital investment; and, (iv) higher unitexpenditures onchemicals and other operatinginputsneeded to meet peak demands. The company's net losses over the past three years were partly offset by the transfer of the entire proceeds of the WCF from NMGto NWSC. As a municipal transfer, the WCF i s not recognized as operating revenue but rather as an equity infusionby NMGinto NWSC. As such, it i s not included inthe calculation of net income. The proceeds of the WCF are have ranged from about RMB 26 millionin2001 to RMB 32 million in2003, almost double the net loss in2001and about equal to the 2003 loss. Financial Projections & Tariff Requirements. Projections preparedfor NWSC indicate that ongoing and plannedcapital investments will place a significant financial burden on the company over the next decade (Table 6). Actual and plannedcapital expenditures over the 10 year period from 2002 to 2011are estimated as RMB 4.1 billion, of which 70% i s concentrated inthe 2004 -2008 period. Over this five year period, the company's proposedNWEP component accounts for just under half of total planned investment. Almost 75% of the cost of its overall investment program i s to be funded from internally generated revenues and debt. To provide the revenue for the funding of these investments, it i s estimated that tariffs will need to be increased by 52% over the next five years (Table 2). This would include a 32% increase at the beginning of 2006, from an average of RMB 1.42/m3 to RMB 1.88/m3,and a 15% increase at the beginning of 2008, which would bring the average tariff to RMB 2.16/m3. NMG i s now working toward the approval of the required 2006 increase. Over the remainder of the forecast period, which extends to 2016, the requirement for additional tariff adjustments i s projected to be limited to those needed to offset normal inflationary increases inoperating and maintenance expenses. Customer Group Actual Projected 2004 2006 2008 Residential 1.19 1.60 1.85 Institutional 1.39 1.90 2.20 Commercial 1.44 1.95 2.25 Industrial 1.44 1.95 2.25 Special Uses 1.78 2.40 2.75 Weighted Average 1.42 1.88 2.16 % Increase" 32% 15% 45  Assumingthat NWSC can successfully implement the requiredtariff increases, the company is projected to be able to operate on a financially sustainable basis, but due to its very large capital investment program, cash flow and debt service will needto be carefully managed. Net income i s projected to be positive in all years enabling the company to comply with the project covenant relating to cost recovery, with the possible exception of 2006. In2006, the cost recovery ratio i s estimatedto be slightly below the minimumrequiredlevel of 1.O. Over the remainder of the forecast period, this ratio i s anticipatedto gradually improve, from 1.1in2007 to 1.8 by 2015. Virtually all of the cash generated from this net income will be needed to fund capital works and service debt on these works. Total debt outstanding i s projected to increase rapidly, from RMB 387 million at the end of 2003 to a highof RMB 1.9 billion by the end of 2007. Between 2004 and 2011, annual debt service i s projected to increase from RMB 36 million to RMB 352 million. The impact of debt service on the company will be greatest over the 2008 - 2012 period, when annual debt service i s estimated to average RMB 335 million. Although the company i s projected to be able to service this debt, the debt service coverage ratio may decline below 1.3, the minimumlevel needed to achieve full compliance with the project financial covenants. This ratio i s projectedto be 1.2 between 2007 and 2011, with the exception of 2008 improve rapidly to levels well above 1.3 as annual debt service declines. The debt - asset ratio inwhich the ratio is projectedto be 1.1. However, beginningin2012, this ratio is expected to should remain well below 0.7 in all years, peaking at 0.4 over the 2006 - 2008 period. Sensitivity Analysis. A comprehensive sensitivity analysis has been undertaken to assess the impact of potential changes in the key variables underlying the base case financial projections. These include: (i) a one year delay in the implementation of the tariff increases, from the beginning of 2006 and 2008 to the beginning of 2007 and 2009; (ii) a 5% reduction inwater sales; (iii)a combination of a 5% reduction in water sales and one year delay intariff increases; and, (iv) a two percentage point increase inthe cost of all NWSC debt as of 2008. All of these events would have a significant adverse impact on the cash flow position of NWSC. Of the single variable events, scenario (i), a one year delay intariff increases, has the greatest impact. This would leave the company with a large cash shortfalls in2006 and 2008, of about RMB 90 million and RMB 140millionrespectively. Inorder to cover this shortfall while maintaining its capital investment program, the company would have to defer repayments of existing short-term debt as well as taking out new short-term loans. Scenario (iii), which combines scenarios (i) and (ii)sprojectedtoresultcashshortfallsofaboutRMB140millionandRMB200millionin i 2006 and 2008 respectively. While this might also be addressed through debt deferments and new borrowings, repaying this additional debt could require up to 10 years. This would incur substantial interest charges, estimated to be almost RMB 140million, at current interest rates. Cixi Municipal Sewage Company Limited: Company Overview. Cixi i s a rapidly urbanizing county level city within Ningbo Municipality that i s well outside the coverage area of the Ningbo Municipal Sewage Company, which serves Ningbo's urban core and two adjacent districts. InCixi, urban wastewater treatment has been limited to a relatively small system serving the Cixi urban core. This system has been directly managed and operated by agencies of the city government. Additionally, a new wastewater collection network has recently been constructedto serve the new Hangzhou Bay Development Zone. Wastewater collected here will be treated at the Northern WWTP to be constructedunder NWEP. InApril 2004, the city government established CMSC to assume responsibility for the implementation, ownership and operation of the NWEPfunded wastewater component in Cixi as well as those existing systems in the Cixi urban core and Hangzhou Bay. Within its service area, CMSC will take ownership and operating responsibility for all trunk sewers, the separate 46  sanitary sewer network, as well as all combined sewers that are presently under the ownership of the city government. Sector Funding & Cost Recovery. Sector fundinghas largely reliedon government budgetary transfers but as a result of recent reforms, user fees are beginning to contribute a much larger share of these fundingrequirements. Up untilApril 2004, the city government applied wastewater charges only to the commercial and special use groups. The charge was included on the water bill, collectedby Cixi Water Supply Company (CWSC) and then remitted to the Cixi Finance Bureau. However, as of May 2004, new wastewater tariffs were introduced that apply to all customer groups (Table 3). The average tariff i s now estimated to be RMB 0.37/m3compared to RMB 0.49/m3in the Ningbo urban core. As was previously the case, these tariffs are billed and collected by CWSC. However, consistent with state policy for the reform of the wastewater sector, the wastewater tariff revenues are now being directly remitted by CWSC to CMSC. Financial Projections & Tariff Requirements. The financial projections prepared for CMSC indicate that very significant tariff increases will be required to enable it to operate on a financially viable and sustainable basis (Table 3). Despite the recent application of tariffs to all customer groups, tariff levels remain low relative to the operational costs of the existing wastewater system, andparticularly the new NWEP wastewater system. The average tariff will need to be increased by about 130% as of 2006, from RMB 0.37/m3 to RMB 0.86/m3, and then by a further 66%, to RMB 1.43/m3,by the beginning of 2008. The 2006 increase i s required to fully recover the operating costs of the existing Jiaochangshan WWTP and sewer network, to cover a portion of the initial operating costs of the new NWEP system, and to provide a limited contribution toward NWEP counterpart fundingneeds. The increase in 2008 i s designed to fully recover NWEPoperating and maintenance costs and to meet debt service on the NWEPproject loans. Additional, but smaller increases are projected to be required in 2010 and 2012, of 18% and 15% respectively, which would bringthe average tariff tojust under RMB 2/m3. Table 3, Cixi Wastewater - Existing & Projected Wastewater Tariffs ~ B / mwa r consumed, current te 3 s) Actual Pro ted 2004 Residential 0.15 %--++E- Institutional 0.25 1.os l.20 Commercial 0.85 3.90 4.50 Industrial 0.25 0.70 1.90 2.20 SpecialUses 1.15 2.60 4.25 4.90 5.65 Weighted Average 0.37 0.86 1.69 1.95 % Increase'' 132% 66% 18% 15% ''Refers to % increase inweighted average tariff. Even with these very large tariff increases, debt service will place a considerable strain on CMSC, particularly over the 2010 - 2014 period (Table 7). Beginningin2008, principal repayment begins on the domestic bank loan used to finance about 10% of the cost of the company's NWEPcomponent. In2010, repayments on the proceeds of the Bank loan onlent to CMSC begin. Annual debt service i s projected to peak in 2014 at Y86 million, but then drop by over RMB 20 millionbeginning in2015, as total debt levels decline. Assumingthat the required tariffincreases are successfully implementedbeginning in2006, the company shouldbe able to comply with the cost recovery covenant in all years. This ratio i s projected to range between 1.O 47  and 1.3 and average'1.2 over the 2006 - 2015 period. The company should also be able to comply with the debt - asset covenant, which i s projected to peak at 0.5 in2008 and 2009, but remain well below the covenant maximum of 0.7. However, the projections do indicate that CMSC might experience some difficulty inmeeting the debt service covenant inthose years in which debt service i s greatest. The debt service ratio i s projectedto be slightly below 1.3, the minimumlevelneededfor full compliance, inanumber of years over the forecast period. The ratio i s projected to be as low as 1.0, in 2006, and then again in2011, the first full year of principalrepayment on the proceeds of the Bank loan. However, over the entire 2006 - 2015 period, the ratio i s projectedto average 1.4, above the covenant minimum. Sensitivity Analysis. Changes inkey variables have been assessedinterms of their potential impact on the financial position of CMSC. These include: (i) a one year delay in the implementation of the tariff increases now plannedfor the beginning of 2006, 2008,2010 and 2012; (ii) a 5% reduction inwater sales, and therefore wastewater flows, in 2007 - 2010 and 10% lower beginning in 2011; (iii) a combination of reducedwater sales and one year delay in tariff increases; and, (iv) a two percentage point increase in the cost of CMSC debt as of 2008. A one year delay inimplementing the required tariff increases would have the greatest adverse impact on the company. A delay in the implementation of the first two increases now planned for the beginning of 2006 and 2008 could constrain CMSC's capacity to provide its share of project counterpart funding.The estimated shortfall i s about RMB 20 million, which could be addressed through an increase in the city government's contribution. The city government has agreed to meet all counterpart requirementsnot met by CMSC. A delay intariff increases now plannedfor 2010 and 2012 would leave the company with a temporary cash shortfall of about RMB 30 -RMB 35 million. This could be addressed through borrowing or a modest delay inplannedcapital investments over this period. If scenarios (i) and (ii) combined,thelonger-termimpactismoresignificantthanunderscenario(i) The are alone. shortfall arising in 2008 would be relatively similar to that under scenario (i) and could be addressed through an increase in government contributions toward counterpart funding. However, a larger shortfall, of at least RMB 100millionwould arise in.2012and 2013. It i s less likely that this shortfall couldbe couldbe covered through borrowing. With the lower wastewater flows under scenario (ii), a delay in the expansion of the company's treatment plants, which i s now planned to begin in2011could reduce, but not eliminate the shortfall. Instead, either larger tariff increases would have to be implemented, increased contributions by government for capital investments over this period, or a combination of the two would probably be required. B.Ability and Willingnessto Pay Ability to Pay. An affordability analysis has been undertakenin order to ensure that domestic customers, particularly those in the lower income group, can afford the water tariffs in Ningbo and wastewater tariffs in Cixi. Two representative household groups are considered inthe affordability analysis: (i) the average income group; and, (ii) low-income group, which i s the defined as the household earning the average of the lowest 10thpercentile of income distribution. InNingbo, the low income householdearns an estimatedY605/person/year, while inCixi the incomeis slightly higher. InbothNingbo and Cixi, incomes are conservatively projectedto increase at an annual realrate of 2% for the average income household and 1%for the low-income household over the 2004 - 2010 period, well below that actually achieved over the past decade. Affordability i s assessed by comparing incomes to the total cost of water supply, wastewater and other municipal charges included on the water bill. The results of this 48  analysis are shown in Table 4 and indicate that the tariffs are anticipated to be affordable over the entire 2004 - 2010 period. Table 4, Affordability Analysis for Domestic Consumers UtilityBill as a% of HouseholdIncome 2004 2006 2008 2010 Vingbo Low Income: Water 0.7% 0.8% 0.9% 0.8% Wastewater 0.1,% 0.2% 0.1% 0.2%I Other Fees & Charges 0.1% 0.1% 0.1% 0.1% Total Average Income: Water 0.3% 0.4% 0.4% 0.4% Wastewater 0.1% 0.1% 0.1% 0.1% OtherFees & Charges Total 3xi Low Income: Water 1.0% 1.2% 1.2% 1.2% Wastewater 0.1% 0.2% 0.3% 0.3% Other Fees & Charges 0.1% 0.1% 0.1% 0.1% Total 1.2% 1.5% 1.5% 1.6% Average Income: Water 0.5% 0.6% 0.6% 0.6% Wastewater 0.0% 0.1% 0.1% 0.1% Other Fees & Charges 0.1% 0.1% 0.1% 0.1% 'Total 0.6% 0.7% 0.7% 0.8% For the very poorest households, the municipal government extends low income protection under which a minimumincome of RMB 280 -RMB 320 per person, depending on the number of persons in the household, i s guaranteed. This amount includes a provision for lifeline utility services. With increases inboth water and wastewater tariffs in 2004, an additional direct subsidy amount has beenprovided to all households qualifying for the social assistance. In Ningbo, the entire increase inwater and wastewater tariffs i s refunded on the first 10m3of water consumed. InCixi, the increase i s refundedfor all water consumed by qualifying low income households. Willingness to Pay.Willingness to pay for water and wastewater services i s relatively highin both Ningbo and Cix. A willingness to pay survey undertaken duringproject preparation found that 88% of households responding inNingbo were willing to pay 10% - 30% more for water, provided the existing quantity and quality of supply i s maintained. A further 3% were willing to pay 30% - 50% more. In Cixi, the survey assessed combined willingness to pay for water and wastewater, which i s billed together and i s typically regarded by consumers as single charge. Almost 92% of respondents were willing to pay 10% - 30% more, if existing services are maintainedor improved. An additional 5% were willing to pay 30% - 50% more. 49  C. FiscalImpactand Sustainability An analysis of the fiscal impact of the Cixi wastewater component indicates that the project counterpart contributions to be allocated by the Cixi City Government are projected to be well within its financial capacity to provide these contributions. The Cixi City Government will allocate RMB 370 million to the component, equivalent to 67% of total counterpart funding requirements and 32% of the total cost of the component. The ability of the city to provide this fundingwas assessedby reviewing municipal revenues and expenditures relative to project counterpart funding requirements (Table 5). The data analyzedrefer to what i s referred to in Chinese government accounting as on-budget and extra-budget funds. On-budget funds include revenues from statutory taxes and levies, such as the urban construction maintenancefund. Their allocations are subject to approval by higher levels of government. Extra-budgetary funds are derived from non-tax off-budget revenues such as some types of user charges collected by administrative departments. There i s less control by higher levels of government on these revenue sources. The most important off-budget source of funds for Cixi i s the proceeds from long-term leases of municipal land, a significant portion of which i s allocated to the public infrastructure construction. As a result of strong economic growth, there have been very large increases inmunicipal revenue and expenditures inCixi inrecent years. Between 2000 and 2003, total municipal revenue increased byjust under 200%, while municipalrevenue allocated to urban construction increased by about 470%. This extremely large increase in capital fundingreflects the strong commitment of the Cixi City Government to accelerate urban infrastructure construction to improve people's living standards and provide the enabling environment for sustainable economic growth. Relative to these actual rates of growth, the financial projections prepared to assess the capacity of Cixi City to provide the necessary counterpart funding for its project component are based on much more conservative assumptions. Over the 2005 - 2009 project implementation period, both municipal revenue and capital investment capacity are assumed to increase at an average annualrate of 12.5%. This i s less than one-third the actual average growth inrevenue, and less than one-sixth the actual growth incapital investment capacity, between 2000 and 2003. TahlP_S,Cixi Municipal Finance (RMB million - current prices) 2005 2006 2007 2008 2009 MunicipalRevenue 9,615 10,817 12,168 13,695 15,407 Capital Investment Capacity 2,054 2,311 2,601 2,918 3,283 Project Contributions 90 90 130 60 0 Project as % of Revenues 0.9% 0.8% 1.1% 0.4% 0.0% Project as % of Capital Budget 4.4% 3.9% 5.0% 2.1% 0.0% Based on the very conservative assumptions regarding future revenue growth, the analysis counterpart funds from Cixi City Government as a proportion of its total revenue i s only 0.4 - indicates that the project component i s affordable by Cixi City. Requirements for project 1.1%. When considering only revenues that can be allocatedto the infrastructure investment, which i s an approximation of financial capacity to contribute to the project, counterpart contributions as a proportion of the capital budget averages 3.8% (5.0% inthe peak year, 2007), well within the range considered to be affordable. 50  While the impact of counterpart fundingon the capital budget i s within the range considered to be affordable, there i s uncertainty regarding actual revenues available to fund these budgets over the project implementation period. This uncertainty arises becauseover 90% of the city's capital investment capacity i s projected to be generated from long-term leases of municipal land. The annual revenues from land leasescould vary significantly from year to year inresponse to changes in government policy, the overall rate of economic growth, and the demand for land. These factors have been considered in the base case analysis. For example, only half of the quantity of suburban land plannedfor development i s included inprojected capital investment capacity because the progress of development and leasing of these lands mightpotentially be affected by government policy controlling the conversion of farmland into urban land uses. However, a significant proportion of the landto be developed in Cixi i s exempt from this policy because it i s being created from infilling along the coast and, therefore, does not involve farmland. Furthermore, the supply of land available for leasing i s projected on the conservative side. It i s based on the average area of land leased over the last seven years, and there i s a four year lagbefore any newly developedlandi s assumedto be leased out. However, both the demand and price of coastal land are increasing dramatically, due inlarge part to the construction of the Ningbo - Shanghai cross-bay expressway bridge in Cixi, which has not been taken into account in the projections. Therefore, the projectedrevenues from land leases are based on very conservative assumptions over the project implementation period. To evaluate the sensitivity of project affordability to reducedrevenues from land leases, a worst- case scenario for the project was also projected. Under this worst-case scenario, the city's capital investment capacity (mainly from the revenue from land leases) i s assumed to be only half that projectedunder the base case scenario, which inturn was based on leasing only half the land actually plannedby the Cixi Government. This scenario would reflect a major decline indemand for land in Cixi, which i s not likely to occur. However, even under this extreme scenario, the project remains affordable. Project contributions as a proportion of the capital budget would be 7.7% (10.0% in the peak year, 2007). Although this i s still affordable, Cixi would need to more carefully manage its capital budget in order to ensure the counterpart funds are made available in a timely manner. D.EconomicAnalysis For the Ningbo water supply component, benefit-cost analysis has been employed. For the Cixi wastewater component, its benefits are substantial but cannot be adequately quantified. For this reason, the choice for priority interventions for this component has been guided by cost effectiveness and least cost analyses. NingboWater Supply Component BenefitCostAnalysis. Basedon very conservativeestimates of project benefits, the economic internal rate of return (ERR)i s calculated as 15.6%, which indicates the project component i s economically viable as it exceeds the 12%economic cost of capital. This i s equivalent to an economic net present value of RMB 236 million over the project component's estimated 35 year useful life. Three types of benefits have been incorporatedinto the analysis. First,the incremental supply of water to be provided by the project component has been valued at the average water tariff, which i s taken as a proxy for willingness to pay. Second, in addition to providingadditional supply capacity, the project will improve water quality, as well as a secure supply. A survey undertakenduringproject preparationfound that over 90% of households would be willing to pay more for water if the existing quantity and quality of supply are at least maintained. This incremental willingness to pay has been estimated and incorporated into the 51  analysis as a project benefit. Third, with improved water quality, households are projected to slightly reduce their per capita consumption of bottledwater, which i s muchmore expensive than piped water. Basedon usage patterns, it i s estimated that per capita consumption of bottled water will decline by 5%. The savings resulting from this reducedconsumption has been incorporated into the analysis as a project benefit. The calculated ERR represents a lower bound estimate of the economic viability of the project component. Due to rapid economic and population growth, the existing water supply system i s now operating inexcess of its design capacity on peak days. Inthe absence of the project, supply shortages would worsen considerably, which has the potential to significantly constrain economic growth. The critical role that the project plays in enabling continued growth of the Ningbo economy has not been fully incorporated into the benefit cost analysis. The share of the city's GDP generated from secondary industry, which depends on a reliable and adequate supply of water, i s over RMB 90 billion, and i s growing by more than 10% per year. The annualized cost of the project component over its useful life i s equivalent to less than 0.04% of the annual value of secondary industry. Therefore, if water supply shortages reduce growth even slightly, for example by only half of one percentage point, the value of this lost growth would be more than 10 times the cost of the project component. Cixi Wastewater Component Least Cost Analysis. The project design incorporates the least cost option of two wastewater collection and treatment systems; one serving north and central Cixi, and the other serving eastern Cixi. A least cost analysis was undertakenin which three main wastewater system configurations were assessed: (i) the two system configuration; (ii)single centralized system a serving the north, east and central areas; and (iii) three separate facilities, with three treatment plants locatedinthe north, east and northeast. The two system configuration was found to be the least cost; about 5% lower than the single system, and 3% - 5% lower than the three system configuration. The selection of the treatment process has also been based on least cost analysis. Two alternative process options were considered: (i) anaerobic, anoxic, aerobic with biological denitrification and phosphorus removal (A20); and (ii) anoxic, aerobic with chemical phosphorus removal (A0 with chemical phosphorus removal). The average incremental economic cost (AIEC) for the A 2 0 process i s estimatedto be RMB 0.41/m3,compared to RMB 0.48/m3for the A0 process. On this basis, the least cost alternative, A20, has been selected and incorporated into the project design. Cost EffectivenessAnalysis.The marginal cost of pollutant removal provides an indication of the relative cost effectiveness of the Cixi wastewater component. Based on the treatment facilities alone, the AIEC per ton of COD removed i s RMB 3,820. This i s comparable to other recent Bank funded projects even though the Cixi component includes the construction of entirely new treatment plants while most other projects involve expanding existing facilities, which i s generally less costly. For example, the AIEC per ton of COD removed for the two wastewater components of the Tai Basin UrbanEnvironment Project (Ln. 4748-CHA, 2005) that involve only WWTP expansion i s estimated at RMB 2,510 and RMB 3,875. Based on the entire cost of the Cixi component, the AIEC per ton of COD removed i s estimated at RMB 13,020 per ton of COD removed. This i s highbecause, in addition to the new treatment plants, complete collection systems also need to be constructedunder this project component. As a result, the capital cost of the collection system i s particularly significant, representing 75% of the total cost of the component. 52  Table 6, Ningbo Water Supply Company - Summary Financial Projections (RMB million - current prices) ActualEstimated I P r o j e c t e d 2002 20031 2004 2006 2008 2010 2012 2014 Income Statements Operating Revenue 191.5 223.5 291.8 514.8 692.0 722.2 754.8 788.1 Operating Expenses 141.5 179.5 173.7 223.8 254.8 286.5 335.2 370.1 Depreciation 79.8 81.0 93.0 164.6 230.1 251.7 279.4 293.4 Operating Income (29.8) (37.0) 25.2 126.4 207.1 184.1 140.2 124.5 Operating Subsidies 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net Non-OperatingExpenses (16.7) (17.0) (17.5) (18.6) (19.5) (20.5) (21.7) (22.9) Interest& Other FinancialExpenses 19.3 11.1 11.1 41.5 83.8 54.0 39.9 16.1 IncomeTax 0.0 0.0 0.0 34.0 47.1 49.7 40.2 43.3 Net Income (32.4) (31.1) 31.6 69.5 95.7 100.9 81.7 88.0 CashFlow Statements Sources Internal Cash 66.7 61.0 135.6 275.7 409.6 406.6 401.0 397.5 Debt 200.2 332.5 219.1 527.5 20.0 127.0 0.0 0.0 Equity Contributions 81.3 203.8 194.0 93.9 45.9 48.5 51.2 54.1 Other 1.9 0.2 0.0 0.0 0.0 0.0 0.0 0.0 Total 350.0 597.4 548.8 897.0 475.6 582.1 452.2 451.7 Applications Capital Investments 155.9 436.1 480.0 737.4 65.5 273.1 96.0 189.4 Working Capital Increase (Decrease) (92.4) (35.2) 6.5 35.9 39.3 (11.0) 13.2 (4.1) Interest 22.3 16.2 27.6 73.7 83.8 57.7 39.9 16.1 Debt Repayment 341.7 183.8 10.0 90.4 266.2 283.4 280.1 154.6 Other 0.0 0.0 11.9 11.3 10.5 13.1 13.9 14.6 Total 427.5 600.8 536.0 948.7 465.2 616.2 443.0 370.7 CashChanges (77.5) (3.4) 12.8 (51.6) 10.3 (34.1) 9.2 81.0 Ending Cash Balance 44.4 41.0 53.8 23.3 35.5 31.0 43.0 158.4 Balance Sheets Assets Current Assets 192.9 157.0 111.8 125.3 124.3 140.5 147.4 271.4 Net Fixed Assets 919.4 896.3 1,119.6 2,689.3 3,727.2 3,407.4 3,428.1 3,177.0 Work inProgress 181.1 569.2 819.5 824.5 0.0 185.9 0.0 0.0 Other Assets 134.6 397.4 409.4 436.0 456.5 481.5 508.8 537.7 Total 1,428.0 2,020.0 2,460.2 4,075.1 4,308.0 4,215.3 4,084.3 3,986.1 Liabilities and Equity CurrentLiabilities 422.3 495.8 234.1 455.4 590.5 558.3 295.2 109.0 Long TermDebt 52.2 219.6 424.3 1,244.5 1,080.7 721.6 561.2 367.8 Equity 953.5 1,304.6 1,801.8 2,375.1 2,636.8 2,935.5 3,227.9 3,509.3 Total 1,428.0 2,020.0 2,460.2 4,075.1 4,308.0 4,215.3 4,084.3 3,986.1 Financial Covenants Cost Recovery 1.4 1.1 1.0 0.9 1.1 1.2 1.2 1.4 Debt ServiceRatio 0.8 2.0 3.3 1.4 1.1 1.2 1.3 2.2 Debt Asset Ratio 0.2 0.2 0.2 0.4 0.4 0.3 0.2 0.1 ~ 53  Table 7, Cixi Municipal Sewage Company Limited Summary Financial Projections - (RMB million - current prices) Actual/Estimated I P r o j e c t e d 2002 20031 2004 2006 2008 2010 2012 2014 IncomeStatements OperatingRevenue 0.0 0.0 5.0 26.5 112.8 142.1 180.3 216.2 OperatingExpenses 0.0 0.0 4.1 17.9 27.4 47.1 59.4 71.1 Depreciation 0.0 0.0 2.8 8.3 8.3 46.8 47.9 49.1 OperatingIncome 0.0 0.0 (1.9) 0.2 77.1 48.1 72.9 96.0 OperatingSubsidies 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net Non-OperatingExpenses 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Interest& Other Financial Expenses 0.0 0.0 0.0 0.0 4.7 19.3 16.5 14.4 IncomeTax 0.0 0.0 0.0 0.1 23.9 9.5 18.6 26.9 Net Income 0.0 0.0 (1.9) 0.1 48.5 19.3 37.8 54.7 CashFlow Statements Sources Internal Cash 0.0 0.0 0.9 8.5 61.5 85.4 102.2 118.2 Debt 0.0 0.0 0.0 174.3 136.2 10.0 6.0 35.0 Equity Contributions 0.0 0.0 0.0 138.3 44.2 5.0 0.0 0.0 Total 0.0 0.0 0.9 321.1 242.0 100.4 108.2 153.2 Applications Capital Investments 0.0 0.0 0.0 304.0 202.7 15.0 59.2 59.2 Working Capital Increase(Decrease) 0.0 0.0 (0.1) 0.9 4.1 1.3 2.3 1.9 Interest 0.0 0.0 0.0 8.6 18.2 19.6 16.5 14.4 Debt Repayment 0.0 0.0 0.0 0.0 15.4 34.1 57.5 71.7 Total 0.0 0.0 (0.1) 313.5 240.4 70.0 135.5 147.2 Cash Changes 0.0 0.0 1.o 7.6 1.6 30.4. (27.3) 6.0 EndingCash Balance 0.0 5.0 6.0 22.7 28.5 73.0 12.4 27.5 BalanceSheets Assets Curient Assets 0.0 5.0 6.6 50.9 55.8 86.5 33.2 51.7 Net FixedAssets 0.0 193.3 190.5 173.5 156.9 1,173.2 1,109.6 1,042.6 Work in Progress 0.0 0.0 0.0 482.3 1,016.1 15.3 103.4 191.8 Other Assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total 0.0 198.3 197.1 706.6 1,228.8 1,275.0 1,246.2 1,286.1 Liabilities andEquity Current Liabilities 0.0 0.0 0.7 27.0 37.0 55.2 66.3 62.8 Long Term Debt 0.0 0.0 0.0 266.5 556.2 513.2 414.2 354.4 Equity 0.0 198.3 196.4 413.2 635.7 706.6 765.6 868.9 Total 0.0 198.3 197.1 706.6 1,228.8 1,275.0 1,246.2 1,286.1 FinancialCovenants Cost Recovery NA NA 1.3 1.o 1.3 1.3 1.2 1.2 Debt ServiceRatio NA NA NA 1.o 1.7 1.2 1.2 1.2 Debt - Asset Ratio NA 0.0 0.0 0.4 0.5 0.4 0.4 0.3 54  Annex 10: Safeguard Policy Issues CHINA: Ningbo Water and Environment Project The project i s classified as a Category A project and the following safeguard policies are triggered: (i)environmental assessment; (ii) safety; (iii) heritage; and (iv) dam cultural resettlement. Ningbo Municipality i s a repeat borrower, with experience of a completed project (Zhejiang Multi-Cities Project), and the ongoing Zhejiang Urban Environmental Project which includes four components inNingbo City. The Ningbo authorities have developed a good understanding and experience in implementing World Bank safeguard policies. EnvironmentalAssessment (OP4.01) The project as a whole will have a significant net positive impact, as it will improve water supply quality inNingbo City and ambient water quality inCixi City, and promote sustainable development of Ningbo Municipality. The China Academy of Environmental Sciencemingbo Environmental Science Institute prepared the EIA for the Ningbo Water Supply component, and the BeijingNovel Environmental ProtectionCo. Ltd. prepared the EIA for the Cixi Wastewater component. Both EIAs have been approved by the State Environmental Protection Agency (SEPA).An international consulting firm, SOGREAH, prepared a consolidatedProject EIA and EMPaccording to the Bank's operational policies, andbased on the Chinese EIAs.A comprehensive EIA was also carried out by Ningbo Municipality before the commencement of the Zhougongzhai reservoir project in2001, andthis was approvedby SEPA and reviewed by the Bank task team during project preparation. The summaryresults from the Zhougongzhai reservoir were also incorporatedinto the Project EIA.The Project EIA report addressed relevant environmental issues and developed necessary mitigation measures in the EMP.Key environmental issues follows. Ningbo Water Supply Component Impacts on Zhangxi River Downstream of Jiaokou Reservoir: There are two reservoirs on the Zhangzi River which supply water for the project--Jiaokou reservoir, and the Zhougongzhai reservoir which i s located eight k m s upstream of Jiaokou, and i s currently under construction. The raw water intake for the Maojiaping water treatment plant will be located at Jiaokou reservoir. The Zhangxi River flows into the western Yinzhou plain and i s a secondary tributary to the Fenghua River, via the larger Yingjiang River. The combined storage capacity of the two reservoirs i s approximately 240 million cubic meters, and the median annual inflow into Jiaokou reservoir i s estimated at 280 million cubic meters. Analysis duringproject preparation indicates that, when fully utilized, around half of the annual average inflow into Jiaokou reservoir will be diverted to Ningbo City. The water balance calculations indicate that this will not have an adverse impact on other water users such as irrigation, animal husbandry, village water supplies,etc. The reason for the lack of impacts i s the additional storage provided by Zhougongzhai reservoir. Duringthe critical dry season months of April-May, Jiaokou reservoir will release sufficient water to meet downstream demands, while still satisfying the demand from Ningbo City. The rapid conversion of land from agricultural to 55  urban, and industrialuse, i s expected to reduce the irrigation demand over the next ten to twenty years, although the conservative water balance calculations assumed that the amount of agricultural land would remain unchanged, and would be used for highwater consuming rice cultivation. The annual hydrograph of the Zhangxi River will be modified due to the Zhougongzhai reservoir and the diversion of water to Ningbo City, with reduced wet seasonflows, and moderately reduced dry season flows. The estimated flow variations on an average year before the diversion are 3.9 m3/s (January)-20 m3/s (August), whereas after the diversion, the flow range i s estimated to be within the range of 3-5 m3/s throughout the year. Duringa drought year (P=90%), the low flow in January i s only 0.4 m3/s, whereas after the diversion a minimumflow of 0.8 m3/s will be maintained under all conditions. While the reduction in high seasonflows i s likely to have some impact on the river benthic fauna and fishery communities, the actual impact i s difficult to predict in advance. An analysis of the Zhangxi River shows that it does not have any identified rare species or important commercial fisheries, although there may be an impact on some sedentary fishes which are usedby local residents, such as the snakehead fish. The EIA concludes that the planned flow releases from the Jiaokou reservoir, after the diversion, can meet the water and ecological demands without causing significant environmental impact. The analysis presented inthe EIA is appropriate at this stage of the planning process. However, environmental flow assessmenti s a complex issue, and thus a more comprehensive study will be conducted during implementation and prior to the start of water diversions to further optimize the operation of Jiaokou reservoir. Inparticular, it might be useful to have occasional larger flows to preserve an element of natural variability. Although no adverse impacts are expected from the water diversion, Ningbo will establish a monitoring and "Grievance Redress System" to identify and rectify any unexpected impacts. The Redress System will include notifyinglocal authorities, posting signs along the river, and other appropriate notification methods, as well as establishing a system for recording, investigating, and where necessary, rectifying any adverse impacts. The Environmental Flow Assessment and Grievance Redress System are included in the EMP. NingboCity Wastewater; Ningbo City has recently prepared a Wastewater Master Plan, the first phase of which includes US$140million of wastewater infrastructure i s being financed by the World Bank under the existing Zhejiang Urban Environment Project. The Ningbo Water Supply component of the proposed Project would not result in large additional increases in percapita water use; rather it would provide Ningbo City water users with higher quality water, and more reliable service. Therefore, the incremental impact of the Project on wastewater generation i s expected to be moderate, and the investments planned under the Zhejiang Urban Environment Project are sufficient to meet current wastewater needs inNingbo. Cixi City Wastewater Component Wastewater Treatment:Both the Northern andEasternwastewater treatment plants are designed to meet discharge standard Class lA, with limits of 10mg/l BOD and SS, and removal of nutrients to 15 mg/ltotal-nitrogen and0.5 mg/l of phosphorus. The proposed treatment 56  process i s a modifiedN O (anaerobic followed by aerobic) with tertiary treatment. Two options were considered for the tertiary treatment process: i)engineered wetland; and ii)conventional filtration. Since the land in the vicinity of the plants i s recently reclaimed coastal land with no development and i s owned by the Cixi City government, there are no land acquisition costs or resettlement issues. The engineered wetland was therefore chosen as the preferred alternative because it helps to create an ecological habitat, and provides robust treatment with considerable buffering capacity. EffluentDisposal:Two alternative treated effluent disposal options for the Cixi wastewater treatment plants were analyzed duringproject preparation: (i) disposal to Hangzhou Bay, and (ii) disposal to the Cixi canal network. Key factors influencing the selection include: the shalloy depth of Hangzhou Bay off the coast of Cixi; the large tidal fluctuations; and the potential for re- use of the treated effluent in water-scarce Cixi. The preferred alternative i s to discharge to the Cixi canal network, and to reuse this effluent for agricultural and landscape irrigation. Water quality modeling was conducted for both the canal network and the marine near-shore areas. Various scenarios were simulated, and the modeling results confirmed that the project will significantly improve the water quality of the overall Cixi canal network. There will be a moderate deterioration of water quality inthe vicinity of the wastewater treatment plant discharge points, but the overall water quality i s considered acceptable by SEPA.Modeling was also conducted for different treatment plant discharge location options. A multi-point discharge option was selected for the northern wastewater treatment plant to minimize water quality impacts. For the eastern wastewater treatment plant, a site on the Shitangheng river between two canal-sea sluice gates, was chosen as the optimal discharge location. The feasibility of including an additional discharge point(s) for the eastern plant will be considered during the operations stage, and i s included in the EMP. Duringfloodperiods, the canal-sea gates inthe vicinity of the two treatment plants will be opened to release flood waters to Hangzhou Bay. Floodwaters will be mixed with treated effluent and thus the impact of these occasional releases on near-shore areas was modeled under different scenarios. The scenarios considered various tidal regimes, and flood season and dry season flows. The modeling indicated that the mixing zone during discharge periods i s within 2 k m s from the shoreline, and the resulting water quality would be in compliance with the national ocean function zone requirements. The task team noted that there i s still potential for minor adverse impacts along the shoreline, which supports considerable fishing and aquaculture activities. This impact might be reducedif the mixing and retention of the treated wastewater in . the canals were improved, and short-circuiting to the sea gates avoided. The EMP includes a program to evaluate various options during the operational phase. SludgeManagement: Sludge from the treatment plants will be dewatered through gravity thickening, followed by centrifuges. A total of 67,000 m3 sludge, with a moisture content of 78%, will be generated per year from the two plants. The sludge will be transported to nearby municipal landfill sites intrucks with air-tight tanks. The sludge from the northern plant will be disposed of in the Cixi West landfill, and the sludge from the eastern plant will be disposed of in the eastem landfill. The western landfill was expanded and upgraded in 2002, and currently has 10 empty cells, which will use impermeable liners and leachate treatment systems. Cixi City 57  plans to upgrade the eastern landfill in 2005, and utilize impermeable liners and leachate treatment systems for the four remaining cells. Upgrading the eastern landfill i s included inthe EMP.The western landfillis forecast to reach full capacity around 2012, andthe eastern landfill will reach capacity in 2015. Since the two landfills will be full after only five to seven years of wastewater treatment plant operation, the EMFcalls for the Cixi Municipal Sewerage Company to develop a sludge management plan to consider alternative long-term options for sludge management. Monitoring of sludge quality i s also included in the EMPto ensure that the sludge can be safely disposed of in a municipal landfill. IndustrialPollution Control: Control of industrial discharges to both the canal and sewerage systems by the Cixi City Environmental Protection Bureau appears to be effective and a high level of compliance i s reported. Industries account for approximately half of the wastewater discharges in Cixi, and a rapid pace of industrial growth i s planned for Cixi City over the next decade. It i s expected, however, that the new industries will take the form of modern and more efficient plants with relatively reduced levels of pollution, and more efficient use of resources in general. EnvironmentalTechnical Assistance; Cixi will use the Bank loan for technical assistance in the following areas: wastewater treatment plant operations; sludge management; industrial pollution control (for both CMSC and the EPB), canal water quality management; and building business management capacity in CMSC. Cixi Coastline Development: The high suspended solids concentrationin Hangzhou Bay, combined with the hydrological and tidal currents, results insediment accretion along the northern Ningbo coastline, with accretion rates of the order of 50-100 meters per year. According to Cixi City's Plan for IntegratedBeach Development (1997-2010), approximately 130 km2of land will be enclosed by sea-dikes from 2000-2010. The reclaimed land will be carefully planned and developedwith agricultural and aquaculture areas, industrial estates, coastal tourism, and wetland conservation zones. The area outside of the sea dike i s called the "beach- area" and the width of the beach area varies depending on the tide but can extend hundreds of meters at low tide. The areas inside and outside of the sea dike have rich benthos resources and vegetation, and provides an excellent habitat for migratory and indigenous water birds.In addition, there i s considerable aquaculture in the near shore area &e., just outside the sea dikes) including snails, crabs, and fish. In contrast to most situations, wetland areas are being created in Cixi due to the sediment accretion along the coastline. Cixi Government understands the importance of the coastal habitat and intends to conserve significant wetland areas and promote eco-tourism. A conceptual design for the wetland conservation program has already been developed, and Cixi Government intends to apply for GEFfunds underthe World BanWGEFEast Asia Seas PollutionReductionProgram (scheduled for FY06) to undertake more sophisticated eco-system planning. Dam Safety (OP4.37) There are two dams whose reservoirs supply water to the Maojiaping water treatment plant, and thus are directly associated with the NWEP: (i) dam which was commissioned in 1975 Jiaokou 58  (stone-masonary dam, 67 meters high and407 meters long, and 120million m3 storage); and ii) Zhonggongzhai which started construction in 2003, and will be completed in2006 (concrete arch dam, 126 meters high, 240 meters long, and 112 million m3 storage). There are an additional three dams which will supply water to the ringmain to be constructed under this project: (i) Baixi Dam completed in 2001 (rock-fill dam, 124meters high and 398 meters long, 168 million m3 storage); (ii) Hengshan Dam, completed in 1995 (rock-fill dam, 70 meters high, 123 meters long, and 111million m3 storage); and iii)Tingxia Dam, completed in 1985 (concrete gravity dam, 76 meters high, 317 meters long, and 150million m3 storage). An independent dam safety expert contracted by the World Bank reviewed the safety of the four existing dams and progress on the construction of the Zhougongzhai, and has found them to be satisfactory. The Zhejiang Provincial Bureau of Water Resources also conducts periodic Dam Safety Panel reviews of all major dams inthe province. Because of the direct connection with the Project, Emergency Preparation Plans for Zhougongzhai and Jiaokou dams, acceptable to Bank, will be prepared and implemented. The Bank will review and document constructionprogress, commissioning, and the first filling of Zhougongzhai dam, usinga qualified dam safety expert. CulturalProperty(OPN11.03) Surveys indicate that project activities would not affect any above ground artifacts with archeological, paleontological, historical, religious, or unique natural values as defined under OPN 11.03. However, most of the construction activity will involve excavation work, and thus all contracts will include standard clauses which follow Chinese law and regulations regarding chance finds during construction. On important cultural relic i s Tashan Weir, which i s located downstream of Jiaokou dam on the Zhangxi River. Built in the year 833, it i s now an old cultural site under national preservation. It i s 134.4 meters long, 10 meters high, and 4.8 meters wide. I t s surface i s made of stones, and its body made of wood and stones. Tashan Weir remains intact and i s functioning to prevent salt water, store fresh water, channel water into the fields, and sluice water elsewhere. The diversion of water from the Zhangxi River i s not expected to have an impact on either the structural integrity or the functioning of the Tashan Weir. The weir was reinforced in 1995, and the Bank team confirmed that the weir appears to be in good structural condition. The cultural property safeguard i s triggered inthis instance as a recognition of the cultural importance of the Tashan Weir, andnot becauseof any expected negative impacts caused by the project. Resettlement A resettlement action plan (RAP) meeting the World Bank's OP/BP 4.12 has been preparedfor the Ningbo Water Supply and Cixi Wastewater components. Detailed surveys for all known resettlement and land acquisition have been completed. Inthe event there are additional resettlement needs, a resettlement policy framework has been prepared. The surveys indicate that resettlement impacts are relatively small given the scope of the project. The following table summarizes the impacts. 59  Summaryof Resettlementlmpacfs Permanent LandAcquisition: (h 60.3 Collective 16.2 State-Owned 44.1 Temporary Land Occupation(hz 371.O Collective 228.8 State-Owned 142.1 Building Demolition(m2) 3519 Rural Houses 916 Collective-Owned 350 State-Owned 1632 EnterpriseOwned 620 PopulationAffected (person) 5549 Permanent Land Acquisition 519 Temporary Land Occupation 5030 The most significant impact is the temporary use of landduringconstruction of the water supply pipes inNingbo and the sewerage pipes in Cixi. The major permanent acquisition of land i s for the Maojiaping water treatment plant. The detailed social-economic survey indicated there are no minority ethnic groups affectedb y land acquisition and house demolition. NWSC and CMSC will be responsible for fundingresettlement activities incoordination with local government officials. The PMO will establish a resettlement office, staffed with specialists from NWSC and CMSC, to manage and supervise resettlement. Resettlement funds will be channeled through the PMO-resettlement office directly to households and villages, thus reducing opportunities for delay or unauthorizedcommissions. Affected farmers (inparticular affected women and surplus rural labor) will be encouraged to participate inthe land restoration through broad consultation. Village committees will play an important role in monitoring resettlement and land acquisition activities. An independent monitoring institute will supervise resettlement activities twice a year as required by the Bank. Duringpreparation, attention was paid to the completedresettlement activities at the Zhougongzhai multipurpose reservoir, which i s being constructedunder Ningbo' s municipal waster resources development plan. The reservoir, although not included in NWEP, will indirectly supply water to Jiaokou reservoir. Approximately, 967 households with 2381people were relocated from a poor, mountainous area to a developed area in Yinzhou District. It was determined that Bank OP 4.12 didnot apply to the resettlement, because it was completed in May 2003, approximately one year before the Bank's identification mission for NWEP and the reservoir i s being constructed, under the muncipality's water resources master plan to serve multiple purposes, including hydropower, flood control, and water storage. Nevertheless, the World Bank team carried out due diligence on the completed resettlement activities and prepared a comprehensive report on the subject. The report concluded that all significant adverse impacts have been mitigated in a manner consistent with the World Bank resettlement policy objectives and to the satisfaction of the displacedpersons. The due diligence report i s contained inthe project files. 60  EnvironmentalManagement Plan The EMP specifies the appropriate environmental management and supervision mechanisms, mitigation measures, environmental monitoring plans, training plans andbudget allocation necessary to implement the mitigation measures and strengthen the Borrower's capacity. There will be an environmental officer in the PMO to supervise the implementation of the EMP, and both NWSC and CWSC will have environmental officers responsible for their components. The PMO, CMSC, and NWSC have sufficient capacity and funds to implement the EMP. Key environmental construction management issues include spoil reuse andor proper planning of spoil disposal sites re-vegetation; usinglow noise equipmentltechniques; restrictions on working hours, and temporary sound barriers for sensitive sites; timely reclamatiodre-vegetation of temporarily occupied land; use of coffer-dam and slope protection measures; and proper operational procedures of the contractors concerned for construction. Consultation and Disclosure The key project stakeholders are the Ningbo and Cixi City governments, NingboWater Supply Company, Cixi Municipal Sewage Company, and local people who may lose land and livelihoods, villagers and communities that may be impacted because of the construction and operation of the project. EA Disclosure and Consultation:For each of the two components, a detailed Public Consultation Plan has been prepared which outlines the overall consultation and information disclosure plan duringEA preparation in accordance with Bank's policies. Consultations were conducted intwo rounds for the Water Supply Component from Marchto October 2004 and in three rounds for Cixi Wastewater Component from January to September 2004. More than 400 people were consulted, including project affected people and communities, local government agencies andexperts, and the relevant information and documents were provided during the consultations. EIA reports were disclosed in local libraries in September 3 and October 15,2004 with notice announced via local newspapers. The draft EIA reports were also disclosed in the Infoshop on August 5, inNovember 2004, and January 2005. The EA Summary was sent to the World Bank Board of Executive Directions inJanuary, 2005. RAPDisclosureand Consultation: Duringproject preparationconsultation has taken place through resettlement surveys and meetings with government officials and project-affected people. These consultations influenced the design of the RAP. An information handbook was prepared for all project-affectedpeople, outlining the project, resettlement policies and procedures. Inaddition, "land acquisition and buildingdemolition" announcements have been provided to all affected parties. The full RAP was disclosed inNingbo and Cixi libraries and government websites in October 2004. The draft RAPwas disclosedinthe World Bank Infoshop on August 5 and the updated RAP was submitted in November, 2004. Town Survey: Incorporation of the towns surrounding the core urban area inNingbo City i s one of the main objectives of the overall Ningbo City Water Supply Master Plan. Most parts of 61  Yinzhou District are supplied by 24 town water supply systems with a capacity of 265,000 m3/d. Inaddition there are 14town water supply systemsinZhenhai andBeilinDistricts with a capacity of 70,000 m3/d.Western Yinzhou District i s facing the most critical water supply problems and seven towns are scheduledfor rapidincorporation into NWSC. Surveys of these towns were undertaken to assess the demandfor NWSC service, andthe terms and conditions under which the towns would like to be incorporated. The survey includedconsultations with town and district officials, town water companies, and water users. The total population inthe seven towns i s 232,000. Of the six towns, four have severe water quality problems, while the other three have acceptable water supplies.All seven towns have high levels of unaccountedfor water (UFW), with an average of 40% UFW. Water tariffs are somewhat lower than NWSC, with a weighted average of around 1.2 Y/m3 while the NWSC tariffs are 1.4Y/m3. Six of the seven towns would like to associatewith NWSC as follows: P Two towns would like to transfer all assets, debts, ownership andmanagementfunctions to > NWSC; One town would like transfer managementresponsibility to NWSC but retain ownership of > assets; Three towns would like to purchasestreatedwater from NWSC and maintain ownership and > operation of the distribution system; and All six towns expressedan interest to protect the employment rights of the town water supply company staff. Although all six towns strongly support the NWEP, views diverge on how best to incorporate into NWSC. It should be noted that the primary unit of government for the towns i s the Yinzhou District Government, and the towns are considered a "branch" of the district government. The Yinzhou District government i s thus the primary decision maker for the towns. Currently, the Yinzhou District government, Ningbo MunicipalGovernment, and NWSC are discussing how best to provide NWSC service to Yinzhou. The Project will provide technical assistance support to NWSC to assist inprovidingservice under appropriate terms to the out-lying towns. 62  Annex 11:Project Preparation and Supervision CHINA: Ningbo Water and Environment Project Planned Acutal PCNreview June 2004 July 2004 Initial PID to InfoShop August 2004 August 2004 Initial ISDS to InfoShop August 2004 August 2004 Appraisal December 2004 December 2004 Negotiations March2005 January 2005 BoardlRVP approval May 2005 March2005 Planneddate of effectiveness August 2005 Planneddate of mid-term review July 2007 Plannedclosing date December 2010 Key institutions responsiblefor preparation of the project: Ningbo Municipal Development Planning Commission Contact Person: Ms.Xuxu, Vice Director, World Bank Project Management Office 1509/R, 15thFloor, Tianning Tower, 138 West Zhongshan Road, Post Code 315000,Ningbo China Tel: 86-574-8728-0409; Fax: 86-574-8728-0430; E-M: xx@nbdpc.aov.cn Contact Person2: Mr.LiZhibo, Deputy DivisionChief, Division of Foreign Capital Utilization, Ningbo Municipal Development Planning Commission 91 NorthJiefang St., Post Code: 315000, Ningbo China Tel: 086-574-8718-6862, Mobile Tel: 13185927686; Fax: 086-574-8736-7370 Bank staff and consultants who worked on the project included: Name Title Unit Greg Browder Task Team Leader, Senior Engineer EASUR GuLixin Senior MunicipalEngineer EASUR John Smithson Civil Engineer Consultant GeorgeTaylor Environmental Engineer Consultant DanO'Hearn Financial Analyst Consultant Younhui Fan Financial Analyst Consultant LiuMing Environmental Engineer Consultant Zhang Zezhen DamSafety Engineer Consultant DanGibson Senior Social Specialist EASSD Zhefu Liu Social Specialist EASSD PeishenWang Environmental Specialist EASEN Zhentu Liu Senior Procurement Specialist EAPCO DavidI Senior Financial Specialist EAPCO Margaret Png Senior Counsel LEGEA Anne Harrison Program Assistant EASUR 63  Annex 12: Documentsinthe ProjectFile CHINA: NingboWater andEnvironmentProject 1. "Ningbo Water Treatment, Transmission,andWater SupplyRingMainProject Feasibility Study," November 2004. Preparedby ShanghaiMunicipalEngineering Design andResearchInstitute andZhejiangInstituteof Water Conservancy and Hydroelectric Power. 2. "Cixi Urban Sewage TreatmentStage 1Project," November2004. Preparedby Shanghai MunicipalEngineeringDesignInstituteandSouth China Instituteof Environmental Sciences. 3. "Ningbo Water andEnvironmentProject-DesignReview Advisory Report," January 2005. Preparedby SOGREAH andSCE. 4. "Overview of Ningbo UrbanWater Supply DevelopmentPlan," April 2004. Preparedby Ningbo Water Supply Company. 5. "Ningbo Water andEnvironmentProject-ConsolidatedEnvironmentalImpact Assessment Report andManagementPlan," November 2004. Preparedby Sogreah and SCE. 6. "Ningbo Water Supply Component EnvironmentalImpact AssessmentReport," November 2004. Preparedby China Academy of EnvironmentalScience andNingbo Environmental Science Institute. 7. "Cixi Sewerage Component EnvironmentalImpactAssessment Report," November 2004. Preparedby BeijingNovel EnvironmentalProtectionCo. Ltd. 8. "Resettlement Action Plan and Summary Report" August 2004. Ningbo Water and EnvironmentProjectManagementOffice. 9. "Report on ZhougongzhaiResettlement," December2004. Preparedby World Bank Ningbo Task Team (Attachedto SafeguardClearance Memo). 64  Annex 13: Statementof Loansand Credits CHINA: NingboWater andEnvironmentProject Differencebetween expectedandactual OriginalAmount inUS$ Millions disbursements ~ _ _ _ ~ Project ID FY Purpose IBRD IDA SF GEF Cancel Undisb Ong Frm Rev'd ___~ ~ PO57933 2005 CN-Tai Basin UrbanEnvironment 61.30 0.00 0.00 0.00 0.00 61.30 0.00 0.00 PO73002 2004 CN-BasicEducationinWestern Areas 100.00 0.00 0.00 0.00 0.00 99.34 -0.66 0.00 PO66955 2004 CN-ZHEJIANG URBANENVMT 133.00 0.00 0.00 0.00 0.00 133.00 0.00 0.00 PO65035 2004 CN-Gansu & Xinjiang Pastoral 66.27 0.00 0.00 0.00 0.00 64.41 7.08 0.00 Development PO69852 2004 CN-WuhanUrbanTransport 200.00 0.00 0.00 0.00 0.00 198.00 109.48 0.00 PO81749 2004 CN-Hubei ShimanHighway 200.00 0.00 0.00 0.00 0.00 200.00 0.00 0.00 PO77615 2004 CN-GEF-Gansu& Xinjiang Pastoral 0.00 0.00 0.00 10.50 0.00 10.50 1.38 0.00 Develop PO77137 2004 CN-4thInlandWaterways 91.00 0.00 0.00 0.00 0.00 91.00 0.58 0.00 PO75602 2004 CN-2ndNationalRailways(Zhe-Gan 200.00 0.00 0.00 0.00 0.00 200.00 0.00 0.00 Line) PO75728 2004 CN-GUANGDONWPRDUR ENVMT 128.00 0.00 0.00 0.00 0.00 128.00 0.00 0.00 PO65463 2004 CN - Jiangxi IntegratedAgric. Modem. 100.00 0.00 0.00 0.00 0.00 99.00 4.73 0.00 PO67337 2003 CN-2ndGEFEnergyConservation 0.00 0.00 0.00 26.00 0.00 14.60 19.42 0.00 PO68058 2003 CN-Yixing PumpedStorage Project 145.00 0.00 0.00 0.00 0.00 132.52 -2.80 0.00 PO76714 2003 CN-2ndAnhui Hwy 250.00 0.00 0.00 0.00 0.00 247.50 25.08 0.00 PO40599 2003 CN-TIANJIN URB DEV I1 150.00 0.00 0.00 0.00 0.00 143.82 5.33 0.00 PO58847 2003 CN-3rdXinjiangHwy Project 150.00 0.00 0.00 0.00 0.00 99.33 17.25 0.00 PO70441 2003 CN-HubeiXiaogan Xiangfan Hwy 250.00 0.00 0.00 0.00 0.00 135.32 -19.68 0.00 PO70191 2003 CN-SHANGHAIURB ENVMT APLl 200.00 0.00 0.00 0.00 0.00 184.92 7.50 0.00 PO60029 2002 CN-Sustain.ForestryDev(Natura1 0.00 0.00 0.00 16.00 0.00 14.11 5.00 0.00 Forest) PO58846 2002 CN-NatlRailway Project 160.00 0.00 0.00 0.00 0.00 31.60 8.26 0.00 PO71147 2002 CN-Tuberculosis Control Project 104.00 0.00 0.00 0.00 0.00 81.22 -22.78 0.00 PO70459 2002 CN-InnerMongolia Hwy Project 100.00 0.00 0.00 0.00 0.00 85.63 11.30 0.00 PO68049 2002 CN-HubeiHydropower Dev inPoor 105.00 0.00 0.00 0.00 0.00 84.02 21.35 0.00 Areas PO64729 2002 CN-SUSTAINABLEFORESTRYDEV. 93.90 0.00 0.00 0.00 0.00 76.07 13.24 0.00 PROJECT PO56199 2001 CN-3rd InlandWaterways 100.00 0.00 0.00 0.00 0.00 71.59 7.26 0.00 PO51859 2001 CN-LIAO RIVER BASIN 100.00 0.00 0.00 0.00 0.00 59.98 28.23 0.00 PO47345 2001 CN-HUAI RIVER POLLUTION 105.50 0.00 0.00 0.00 0.00 81.08 -24.42 0.00 CONTROL PO56516 2001 CN -WATER CONSERVATION 74.00 0.00 0.00 0.00 0.00 32.85 8.95 0.00 PO56596 2001 CN-ShijiazhuangUrban Transport 100.00 0.00 0.00 0.00 0.00 85.41 60.04 0.00 PO58845 2001 Jiangxi I1Hwy 200.00 0.00 0.00 0.00 54.77 60.62 10.72 0.00 PO45915 2001 CN-Urumqi UrbanTransport 100.00 0.00 0.00 0.00 0.00 46.16 46.16 0.00 PO49436 2000 CN-CHONGQINGURBANENVMT 200.00 0.00 0.00 0.00 3.70 146.15 76.65 0.00 PO58843 2000 Guangxi Highway 200.00 0.00 0.00 0.00 0.00 87.29 45.79 0.00 PO42109 2000 CN-BEUING ENVIRONMENT I1 349.00 0.00 0.00 25.00 0.00 276.92 193.74 0.00 PO45910 2000 CN-HEBEIURBAN ENVIRONMENT 150.00 0.00 0.00 0.00 0.00 113.96 53.46 0.00 PO58844 2000 3rd HenanProv Hwy 150.00 0.00 0.00 0.00 0.00 43.61 23.94 0.00 65  PO64924 2000 CN-GEF-BEUINGENVMT I1 0.00 0.00 0.00 25.00 0.00 23.32 20.76 6.17 PO64730 2000 CN - Yangtze Dike Strengthening 210.00 0.00 0.00 0.00 0.00 102.82 102.82 0.00 Project PO45264 2000 CN-SMALLHLDR CATTLE DEV 93.50 0.00 0.00 0.00 0.00 9.13 4.75 0.00 PO56424 2000 CN-TONGBAI PUMPEDSTORA 320.00 0.00 0.00 0.00 100.00 141.62 115.99 0.00 PO58308 1999 CN-PENSION REFORMPJT 0.00 5.00 0.00 0.00 0.00 1.17 1.17 0.00 PO43933 1999 CN-SICHUANURBAN ENVMT 150.00 2.00 0.00 0.00 0.00 84.94 85.43 29.36 PO57352 1999 CN-RURAL WATER lV 16.00 30.00 0.00 0.00 0.00 18.39 15.43 11.40 PO03653 1999 CN-Container Transport 71.00 0.00 0.00 0.00 18.61 3.01 21.62 0.93 PO41268 1999 CN-Nat HwyWHubei-Hunan 350.00 0.00 0.00 0.00 0.00 50.33 41.17 0.00 PO38121 1999 CN-GEF-RENEWABLE ENERGY 0.00 0.00 0.00 35.00 0.00 21.87 30.28 11.80 DEVELOPMENT PO60270 1999 CN-ENTERPRISEREFORM LN 0.00 5.OO 0.00 0.00 0.00 2.25 3.75 3.53 PO36953 1999 CN-HEALTH IX 10.00 50.00 0.00 0.00 0.00 32.94 24.07 0.90 PO41890 1999 CN-Liaoning UrbanTransport 150.00 0.00 0.00 0.00 0.00 23.52 23.52 0.00 PO42299 1999 TEC COOP CREDIT IV 10.00 35.00 0.00 0.00 0.00 34.23 -12.39 0.00 PO51705 1999 Fujian I1Highway 200.00 0.00 0.00 0.00 0.00 43.45 43.45 0.00 PO50036 1999 Anhui Provincial Hwy 200.00 0.00 0.00 0.00 9.60 20.23 29.83 0.00 PO49665 1999 CN-ANNING VALLEY AG.DEV 90.00 30.00 0.00 0.00 0.00 15.79 11.95 0.00 PO46564 1999 CN - Gansu & InnerMongolia Poverty 60.00 100.00 0.00 0.00 13.30 30.71 27.54 -9.97 Red. PO46829 1999 RENEWABLEENERGY 100.00 0.00 0.00 0.00 0.00 12.87 99.87 10.00 DEVELOPMENT PO46051 1999 CN-HIGHER EDUC. REFORM 20.00 50.00 0.00 0.00 0.00 5.69 7.31 0.00 PO51856 1999 ACCOUNTING REFORM & 27.40 5.60 0.00 0.00 0.00 17.60 17.51 0.00 DEVELOPMENT PO51888 1999 CN - GUANZHONG IRRIGATION 80.00 20.00 0.00 0.00 0.00 21.84 19.07 0.00 PO56216 1999 CN - LOESS PLATEAU I1 100.00 50.00 0.00 0.00 0.00 15.89 18.02 -2.47 PO36414 1998 CN-GUANGXIURBAN ENVMT 72.00 20.00 0.00 0.00 10.19 58.34 66.60 32.52 PO03619 1998 CN-2ndInlandWaterways 123.00 0.00 0.00 0.00 37.00 15.35 52.35 2.66 PO46563 1998 CN - TARIM BASIN I1 90.00 60.00 0.00 0.00 2.67 7.14 10.44 0.00 PO35698 1998 HUNANPOWER DEVELOP. 300.00 0.00 0.00 0.00 145.00 21.52 166.52 -9.25 PO03614 1998 CN-GuangzhouCity Transport 200.00 0.00 0.00 0.00 20.00 100.31 120.31 100.31 PO03606 1998 ENERGY CONSERVATION 63.00 0.00 0.00 22.00 0.00 31.67 19.17 0.00 PO45788 1998 Tri-Provincial Hwy 230.00 0.00 0.00 0.00 0.00 15.58 15.58 0.00 PO51736 1998 E. CHINNJIANGSU PWR 250.00 0.00 0.00 0.00 86.00 40.55 126.55 16.12 PO49700 1998 CN- IAIL-2 300.00 0.00 0.00 0.00 0.00 1.65 1.65 1.05 PO37859 1998 CN-GEFEnergy Conservation 0.00 0.00 0.00 22.00 0.00 0.71 22.06 0.00 PO03539 1998 CN SUSTAINABLE COASTAL 100.00 0.00 0.00 0.00 2.06 43.92 45.98 -0.40 ~ RESOURCES DEV. PO46952 1998 CN - FOREST.DEV. POOR AR 100.00 100.00 0.00 0.00 0.00 21.97 -77.09 10.80 PO40185 1998 CN-SHANDONG ENVIRONMENT 95.00 0.00 0.00 0.00 1.40 20.07 21.47 11.30 PO03566 1998 CN-BASIC HEALTH (HLTH8) 0.00 85.00 0.00 0.00 0.00 34.44 24.52 0.00 PO36949 1998 CN-Nat Hwy3-Hubei 250.00 0.00 0.00 0.00 0.00 21.15 21.15 0.00 PO03590 1997 CN - QINBA MOUNTAINS POVERTY 30.00 150.00 0.00 0.00 0.00 3.20 6.55 -0.07 REDUCTION PO03637 1997 CN-NAT'L RURAL WATER 3 0.00 70.00 0.00 0.00 0.00 0.56 3.77 3.35 PO36405 1997 CN - WANJIAZHAI WATER TRA 400.00 0.00 0.00 0.00 75.00 13.07 88.07 1.09 PO03650 1997 TUOKETUO POWEWINNER 400.00 0.00 0.00 0.00 102.50 29.55 132.05 29.55 PO44485 1997 SHANGHAIWAIGAOQIAO 400.00 0.00 0.00 0.00 0.00 70.81 48.91 52.02 PO40513 1996 2nd HenanProv Hwy 210.00 0.00 0.00 0.00 19.00 12.88 31.88 24.88 66  PO03594 1996 CN - GANSU HEX1CORRIDOR 60.00 90.00 0.00 0.00 0.00 71.13 60.31 0.00 PO03599 1996 CN-YUNNAN ENVMT 125.00 25.00 0.00 0.00 19.48 35.68 56.92 18.43 PO34618 1996 CN-LABOR MARKET DEV. 10.00 20.00 0.00 0.00 0.00 5.56 7.67 0.00 PO03602 1996 CN-HUBEIURBANENVIRONMENT 125.00 25.00 0.00 0.00 41.32 17.07 66.43 5.44 PO03639 1995 CN-SOUTHWEST POVERTY 47.50 200.00 0.00 0.00 0.01 1.21 25.36 25.36 REDUCTION PROJECT PO03571 1995 CN-7th Railways 400.00 0.00 0.00 0.00 119.00 10.28 129.28 10.28 PO03603 1995 CN-ENT HOUSING& SSR 275.00 75.00 0.00 0.00 57.46 38.00 93.38 9.70 PO03596 1995 CN-YangtzeBasinWater Resources 100.00 110.00 0.00 0.00 1.92 0.21 4.60 4.60 Project PO03540 1994 CN-LOESSPLATEAU 0.00 150.00 0.00 0.00 0.00 0.93 0.27 0.00 PO03632 1993 CN-ENVIRONMENT TECH ASS 0.00 50.00 0.00 0.00 0.00 0.86 1.44 1.12 Total: 11,829.37 1,612.60 0.00 181.50 945.99 5,199.81 2,888.65 412.51 CHINA STATEMENT OF IFC's Held and Disbursed Portfolio InMillions of U S Dollars ~~ ~ ~ Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic 2002 ASIMCO 0.00 10.00 0.00 0.00 0.00 10.00 0.00 0.00 2003 Anjia 0.00 2.00 0.00 0.00 0.00 2.00 0.00 0.00 2004 Antai 40.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2003 BCIB 0.00 0.00 11.60 0.00 0.00 0.00 0.00 0.00 1999/00/02 Bank of Shanghai 0.00 24.67 0.00 0.00 0.00 24.67 0.00 0.00 2002 CDH China Fund 0.00 14.96 0.00 0.00 0.00 3.97 0.00 0.00 2003 CSMC 0.00 12.00 0.00 0.00 0.00 9.60 0.00 0.00 2004 CUNA Mutual 0.00 12.00 0.00 0.00 0.00 1.41 0.00 0.00 1998 ChengduHuarong 5.61 3.20 0.00 6.25 5.61 3.20 0.00 6.25 1998 Chengxin-IBCA 0.00 0.25 0.00 0.00 0.00 0.25 0.00 0.00 1992 China Bicycles 4.50 0.00 0.00 0.00 4.50 0.00 0.00 0.00 2004 China GreenEner 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 China I1 28.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 ChinaRe Life 0.00 15.41 0.00 0.00 0.00 15.41 0.00 0.00 1994 China WaldenMgt 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 2004 Colony Capital 0.00 17.31 0.00 0.00 0.00 0.00 0.00 0.00 2004 Colony China 0.00 0.96 0.00 0.00 0.00 0.00 0.00 0.00 2002 Darong 10.00 1.50 0.00 8.00 0.00 0.00 0.00 0.00 1995 Dupont Suzhou 6.23 0.00 0.00 0.00 6.23 0.00 0.00 0.00 1994 Dynamic Fund 0.00 7.91 0.00 0.00 0.00 6.25 0.00 0.00 2004 Fenglin 19.00 6.00 0.00 18.00 0.00 0.00 0.00 0.00 2003 Great Infotech 0.00 3.50 0.00 0.00 0.00 2.80 0.00 0.00 2002 HuarongAMC 9.00 2.51 0.00 0.00 9.00 0.01 0.00 0.00 2004 IB 0.00 52.18 0.00 0.00 0.00 52.18 0.00 0.00 2002 IEC 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 67  2004 Jiangxi Chenming 0.00 12.90 0.00 0.00 0.00 0.00 0.00 0.00 1998 Leshan Scana 3.61 1.35 0.00 0.00 3.61 1.35 0.00 0.00 2001 MaanshanCarbon 8.25 2.00 0.00 0.00 8.25 2.00 0.00 0.00 2001 Minsheng Bank 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 1996104 Nanjing Kumho 34.00 2.23 0.00 0.00 0.00 0.00 0.00 0.00 2001 New China Life 0.00 30.70 0.00 0.00 0.00 23.32 0.00 0.00 1995 Newbridge Inv. 0.00 1.95 0.00 0.00 0.00 1.95 0.00 0.00 1997 Orient Finance 5.71 0.00 0.00 7.14 5.71 0.00 0.00 7.14 2003 PSAM 0.00 1.93 0.00 0.00 0.00 0.00 0.00 0.00 1997100 FTF' Holdings 0.00 0.03 0.00 0.00 0.00 0.03 0.00 0.00 2001 Peak Pacific 0.00 0.00 25.00 0.00 0.00 0.00 0.00 0.00 2003 SAIC 12.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00 2004 SBTS 0.00 0.08 0.00 0.00 0.00 0.00 0.00 0.00 2000 SSIF 0.00 4.50 0.00 0.00 0.00 1.02 0.00 0.00 1998 ShanghaiKrupp 26.25 0.00 0.00 57.74 26.25 0.00 0.00 51.14 ShanghaiMidway 0.00 16.02 0.00 0.00 0.00 16.02 0.00 0.00 1999 Shanxi 15.36 0.00 0.00 0.00 12.81 0.00 0.00 0.00 1993 Shenzhen PCCP 3.76 0.00 0.00 0.00 3.76 0.00 0.00 0.00 2002 Sino Gold 0.00 4.00 0.00 0.00 0.00 4.00 0.00 0.00 2001 Sino-Forest 21.67 0.00 0.00 0.00 16.67 0.00 0.00 0.00 1995 SuzhouPVC 0.00 2.48 0.00 0.00 0.00 2.48 0.00 0.00 2000 Wanjie Hospital 13.64 0.00 0.00 0.00 13.64 0.00 0.00 0.00 1996 Weihai Weidongri 0.71 0.00 0.00 0.00 0.71 0.00 0.00 0.00 2004 Wumart 0.00 6.48 0.00 0.00 0.00 6.48 0.00 0.00 2003 XACB 0.00 19.94 0.00 0.00 0.00 0.00 0.00 0.00 2004 Xinao Gas 25.00 10.00 0.00 0.00 0.00 10.00 0.00 0.00 1993 Yantai Cement 4.73 0.00 0.00 0.00 4.73 0.00 0.00 0.00 2003 Zhengye-ADC 15.00 0.00 0.00 7.00 6.14 0.00 0.00 2.86 2002 Zhong Chen 0.00 5.00 0.00 0.00 0.00 0.00 0.00 0.00 Total portfolio: 352.03 358.04 36.60 104.13 132.62 250.43 0.00 73.99 ApprovalsPendingCommitment FY Approval Company Loan Equity Quasi Partic. 2002 ASIMCO 0.00 0.00 0.01 0.00 2004 Antai 0.00 0.00 0.00 0.04 2004 CCB-MS NPL 0.00 0.00 0.00 0.00 2003 Cellon 0.00 0.01 0.00 0.00 2004 Chenming LWC 0.06 0.00 0.00 0.16 2004 ChinaGreen 0.00 0.00 0.01 0.00 2002 HuarongAMC 0.02 0.00 0.00 0.00 2002 IEC 0.00 0.00 0.01 0.00 2002 KHIT 0.00 0.00 0.00 0.00 2004 NCFL 0.00 0.02 0.00 0.00 2003 Peak Pacific 2 0.00 0.01 0.00 0.00 2004 SIBFI 0.00 0.00 0.00 0.00 2002 SML 0.00 0.00 0.00 0.00 68  2002 Sino Mining 0.01 0.00 0.00 0.01 2002 ZhongChen 0.00 0.00 0.00 0.03 Total pendingcommitment: 0.09 0.04 0.03 0.24 69  Annex 14: Countryat a Glance CHINA: NingboWater andEnvironmentProject East Lower- POVERTY and SOCIAL Asia & mlddie- Chlna Pacific Income I Development diamond' 2002 Population,mid-year(millions) 12810 1,838 2,411 Lifeexpectancy GNIper capita (Atlas mefhod, US$) 950 950 1,390 I 7 GNI (Atlas method, US$billions) 1219 1 1,740 3,352 Average annual growth, 1996-02 ~ Population(4 0 8 10 1.0 Laborforce (%) 0 9 12 12 GNI Gross M ost recent estimate (latest year available, 1996-02) per primary capita nrollment Poverty (77ofpopulation belownationalpovertyline) 5 Urbanpopulation (%oftotalpopulation) 38 38 49 Lifeeqectancyat birth (years) 71 89 69 Infant mortality (per lrOOOlivebirths) 30 33 30 Childmalnutrition (% of childrenunder5) 10 15 n 1 Access to improvedwatersource Access to an improvedwatersource (%ofpopulation) 75 76 81 Illiteracy(%ofpopulationage E+) 14 t3 t3 Gross primaryenrollment (%of school-age population) 108 106 111 -*-b'ee China Male 105 105 111 Lowr-middle-income group Female 108 106 110 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1992 2001 2002 Economic ratios' GDP (US$ billions) 2215 4546 1,1371 1232.7 Gross domestic investmentlGDP 332 362 38 5 41.0 Evorts of goods andsewices/GDP 8 9 8 5 25 5 29.5 Trade Gross domestic savmgslGDP 348 377 40 9 44.0 Gross national savingsiGDP 351 380 40 0 43.8 T Current account balanceiGDP 2 4 l.9 15 2.9 Domestic InterestpaymentsIGDP 0 2 06 0 5 0.5 savings 3 Investment Total debtiGDP 3 8 159 146 P.6 Total debt sewicelevorts 8 0 8 6 7 7 6.1 Presentvalue of debtlGDP 141 Presentvalue of debtieqorts 518 Indebtedness 1982-92 1992-02 2001 2002 2002-06 (averageannualgrowth) GDP 9 7 9 0 7 5 8.0 75 as--- China GDP Dercaoita 8 1 80 8 7 7 2 6.6 Lowr-middle-income group STRUCTURE of the ECONOMY 1962 1992 2001 2002 (ao f GDP) Agriculture 33.3 218 15.8 14.5 Industry 45.0 43.9 50.1 51.7 Manufacturing 37.3 33.1 34.2 44.5 Sewices 21.7 34.3 34.1 33.7 Privateconsumption 50.7 49.2 45.7 42.5 97 98 99 00 01 02 Generalgovernment consumption 14.5 t3.1 x3.4 t3.5 Imports of goods and sewices 7.3 18.0 23.1 26.5 4*--.-GDI -O-GDP 1982-92 1992-02 2001 2002 (averageannualgrowth) Growth o f exports and imports ( O h ) Agriculture 4.6 3.7 2.8 2.9 T lndustty 11.6 113 8.4 9.9 30 Manufacturing 112 10.4 9.0 8.1 20 IlOl Services 11.7 8.4 8.4 7.3 10 Private consumption 11.4 8.1 2.8 1.9 0 Generalgovernment consumption 9.9 8.4 10.5 7.0 97 98 99 00 01 Gross domestic investment 9.5 9.7 t3.9 14.9 Imports of goods and sewices 9.7 E.8 10.8 27.5 --*\ -ExDorIs -1morls 70  China ~ PRICES and GOVERNMENT FINANCE 1982 1992 2001 2002 Domestic prlces Inflation ( O h ) h (%change) Consumer prices 6 0 6.4 0.7 -0.8 implicit GDP deflator -02 7.9 12 -2.6 Government flnance (%of GDP,includes current grants) Current revenue 22 9 14.7 7.1 7.9 Current budget balance 2.0 1.1 0.0 Overall sumlusideficit -0 3 .l.O -4.7 -3.0 TRADE 1982 1992 2001 2002 (US$ millions) Export and import levels (US$ mill.) Totaleports (fob) 22,321 84,940 266,155 325,565 Food 2,908 8,309 P,780 14,623 400,000 T Fuel 5,314 4,693 8,420 8,372 Manufactures P271 67,936 239,802 297,085 Total imports (cif) 8,285 80,585 243,613 295203 Food 4201 3,146 4,980 5,237 Fuelandenergy 183 3,570 7,495 19285 I Capital goods 3204 3t3Q 137,040 137,030 Ekport price index(1995=7.70) 41 85 83 78 96 97 98 99 00 01 Import price index(W95=110) 71 95 91 86 aExports Imports Terms of trade (895=W0) 58 89 91 90 O2 BALANCE of P A Y M E N T S 1982 1992 2001 2002 (US$ mlilions) Current account balance t o GDP (%) Eports of goods andservices 24,908 94,198 299,409 365,395 Imports of goods and services 20,555 86,752 271,325 328,013 ' T Resource balance 4,350 7446 28,084 37,383 Net income 376 249 -8,774 -14,945 Net current transfers 486 1.155 8,492 P,984 Current account balance 5228 8,850 7,401 35,422 Financing items (net) -995 -D,952 30,046 40,085 Changes in net reserves - 4 2 7 2,132 -47,447 -75,507 1 96 97 98 99 00 01 02 1 Memo: Reserves includinggold (US$ millions) 24,842 220,051 297,721 Conversion rate (DEC,local/US$) 2.4 5.9 8.3 8.3 EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US$ millions) 1 Composition of 2002 debt (US$ mill. Total debt outstanding and disbursed 8,358 72,428 70,lD 155,678 IB RD 0 3,752 11,550 P,051 IDA 1 4287 8,654 8,729 I A. 12,051 Total debt service 2,285 8,618 24297 23,688 IBRD 0 460 1,550 1,831 IDA 0 30 151 7 5 Composition of net resourceflows Official grants 47 327 240 Official creditors 657 2,343 2,156 -839 Private creditors -P2 8,949 -4,07 -13,593 Foreign direct investment 430 11156 44241 49,308 Portfolio equity 0 1243 3,015 2286 World Bank program I F 62,103 Commitments 330 1,865 782 563 1 A . l8RD E - Bilateral Disbursements 1 1,331 1,791 1,733 B -IDA D. Other mltilateral F. Private Principal repayments 0 8 7 904 1,E7 C - I M F G. Short-terr 71   MAP SECTION