China - Guangxi Urban Environment Project

Document of The World Bank Report No.: 16622-CHA STAFF APPRAISAL REPORT CHINA GUANGXI URBAN ENVIRONMENT PROJECT May 15, 1998 Urban Development Sector Unit East Asia and Pacific Regional Office  Staff Appraisal Report China Guangxi Urban Environment Project dated May 15, 1998 CORRIGENDUM Page Para. Text in Error Correct 10 3.1 (d) in poor neighborhoods in existing urban neighborhoods 25 5.6 authorized allocation of $4.5 million. authorized allocation of $5 million. 25 5.6 (b) consultant contracts less than (b) individual consultant contracts $50,000 less than $50,000 and consulting firm contracts less than $100,000  CURRENCY EQUIVALENTS (as of May 1998) Currency = Renminbi Currency Unit = Yuan (Y) Y 1.00 = 100 fen $1.00 = Y 8.3 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES 1 hectare (ha) = 2.4711 acres (ac) 1 cubic meter (m3) = I ton of water = 284 US gallons 1 mega liter (ML) = 1000 m3 PRINCIPAL ABBREVIATIONS AND ACRONYMS USED BOD Biological Oxygen Demand (A measure of water pollution) CAS Country Assistance Strategy CIF Cost, Insurance, Freight COD Chemical Oxygen Demand (A measure of water pollution) EA Environmental Assessment EPB Environmental Protection Bureau ICB International Competitive Bidding GAR Guangxi Zhuang Autonomous Region (equivalent to Province) GM Guilin Municipality GOC Government of the People's Republic of China GP Guilin Prefecture GUEPO Guangxi Urban Environment Project Office LIBOR London Interbank Offered Rate MOC Ministry of Construction MOF Ministry of Finance NCB National Competitive Bidding NEPA National Environmental Protection Agency NM Nanning Municipality O&M Operation and Maintenance PMO Project Management Office PV Present Value (Discounted at 12% a year unless otherwise stated) RAP Resettlement Action Plan STP Sewage Treatment Plant = WWTP TOR Terms of Reference TSP Total Suspended Particulates TVE Town and village enterprise WWTP Wastewater Treatment Plant = STP Vice President Jean-Michel Severino, EAP Country Director Yukon Huang, EACCF Sector Manager Keshav Varma, EASUR Task Manager Songsu Choi, Senior Urban Economist, EASUR  TABLE OF CONTENTS LOAN, CREDIT AND PROJECT SUMMARY Wii 1. SECTOR BACKGROUND: URBAN ENVIRONMENTAL MANAGEMENT ... 1 A. Environmental Issues in China ................................ 1 B. Environmental Management System in China ....................... 2 C. Bank Group Strategies and Experiences .......................... 4 2. DEVELOPMENT AND ENVIRONMENT OF GUANGXI: STATUS AND ISSUES . . 6 A. Economic and Urban Development ............................. 6 B. Environmental Issues ..................................... 7 C. Nanning and Guilin ....................................... 7 D. Bank Group Involvement in Guangxi ........................... 9 3. PROJECT DESCREPTION ..................................... 10 A. Project Objectives ....................................... 10 B. Project Components ..................................... 10 C. Major Targets and Monitoring Indicators ....................... 11 D. Project Cost and Financing . ................................ 12 E. Project Preparation Status ................................ . 14 4. BENEFICIARIES AND FNANCES ................ ............. . 15 A. Local Governments ..................................... 15 B. Sewerage Finances and Organizations ......... .................. 16 C. Small Area Improvement ................................... 19 D. Managing the Lijiang .................................... 20 E. Industrial Pollution Control . ................................ 21 F. Sugar Refineries Pollution Abatement ......... .................. 22 5. PROJECT IMPLEMENTATION ARRANGEMENTS ....... .. ........... 24 A. Organizations and Plans ........... ........................ 24 B. On-Lending and Disbursement ......... ...................... 25 C. Procurement Arrangements ........... ...................... 26 D. Resettlement and Land Acquisition ....... ..................... 28 E. Accounting and Auditing . .................................. 29 F. Monitoring and Supervision ................................. 30 This Staff Appraisal Report is based on the findings and agreements of the appraisal mission that visited Guangxi in June 1997 and during follow-up discussions in Guangxi. The Bank's project team included: Songsu Choi (Senior Urban Economist, Task Manager), Edouard Motte (Senior Municipal Engineer, Co-Task Manager), Alain Bertaud (Principal Urban Planner), Roger Heath (Principal Chemical Engineer), Kyung Wook Hur (Financial Analyst), Mary Judd (Anthropologist), Wei-jen Leow (Project Analyst), Douglas Olson (Irrigation Engineer), Margaret Png (Counsel), Chongwu Sun (Project Officer), Dawn Vermilya (Financial Analyst), Yanxiang Wang (Environmental Consultant), and Youlan Zou (Resettlment Specialist). Peer reviewers were Carl Bartone and Jack Fritz (Environmental Engineers) and Julie Viloria (Community Development Specialist). Country Director is Yukon Huang and Sector Manager is Keshav Varma.  6. BENEFITS, RISKS, AND ALTERNATIVES ......................... 31 A. Environmental Impacts .................................... 31 B. Analysis of Benefits and Alternatives ........................... 32 C. Poverty and Social Considerations ............................. 35 D. Risks and Sustainability ................................... 36 7. AGREEMENTS AND RECOMMENDATION . ........................ 38 Tables in Text Table 2.1 Guangxi's Economic Growth ............................... 6 Table 3.1 Project Financing Plan ................................... 12 Table 3.2 Estimated Costs ...................................... 13 Table 4.1 Summary of Local Finances ............................... 15 Table 5.1 Implementation Agencies ................................. 23 Table 5.2 Disbursement Arrangements ............................... 25 Table 5.3 Procurement Arrangements ............................... 26 ANNEXES Annex 1: Sewerage and Drainage Management in Nanning ................. 40 Annex 2: Sewerage and Solid Waste Management in Guilin ................. 53 Annex 3: Institution Development and Financial Plans for Sewerage ............ 67 Annex 4 Industrial Pollution Control Action Plans ....................... 86 Annex 5: Sugar Refinery Pollution Control ............................ 91 Annex 6: Regulation of Lijiang .................................. 97 Annex 7: Small Area Improvement ................................ 108 Annex 8: Resettlement Action Plan Summary ......................... 119 Annex 9: Environmental Assessment Summary ........................ 125 Annex 10: Monitoring Indicators ................................. 143 Annex 11: Estimated Project Cost Details ............................ 150 Annex 12: Projected Disbursement Schedule .......................... 156 Annex 13: Procurement Packages and Schedules ........................ 157 Annex 14: Supervision Plan ..................................... 160 Annex 15: Documents and Data in the Project File ....................... 163  - iii - China Guangxi Urban Environment Project Loan, Credit and Project Summary Borrower: The People's Republic of China Beneficiary: Guangxi Zhuang Autonomous Region, Nanning Municipality, Guilin Municipality and Guilin Prefecture Project Cost: $175 million Loan: $72 million LIBOR-based US dollar single currency loan, with standard rates and fees, with a maturity of 20 years including 5 years' grace Credit: SDR 14.9 million ($20 million equivalent) On standard terms with 35 years' maturity Onlending Terms: Loan: From China through Guangxi Region to the Nanning and Guilin Municipalities and Guilin Prefecture: in US dollars at the Bank's standard interest rate for LIBOR-based US dollar single currency loans, for a maturity of 20 years including 5 years' grace Guangxi Region to Sugar Refineries for pollution abatement subprojects: in US dollars, for a maturity of 7 years including 2 years' grace, at the Bank's standard rate for LIBOR-based US dollar single currency loans plus 1.5% per annum. Credit: From China through Guangxi Region to Nanning and Guilin Municipalities and Guilin Prefecture: in SDR currencies for a maturity of 17 years including 5 years' grace, at standard IDA charges. Economic Rates of About 21 % in direct benefits Return Project Code CN-PE-36414 Maps IBRD Nos. 29651, 28799, 28800  1 1. SECTOR BACKGROUND: URBAN ENVIRONMENTAL MANAGEMENT A. Environmental Issues in China 1.1 China's environmental protection system has developed along with the economic reform and opening. Active environmental protection measures started to be instituted in the late 1970s to reverse the environmental degradation resulting from earlier industrial promotions, and over the past 20 years, a broad set of laws and control instruments and an extensive administrative network have been developed. China has also become an active partner in international efforts to control pollution, becoming one of the first countries to develop their Agenda 21 program after the Rio conference. In the meanwhile, China's industrial production has grown explosively, more than quadrupling in the last decade and accounting for about three quarters of total GDP growth during the period. It has brought along an accelerated growth of urban incomes and population. China's urban population is estimated to be over 400 million now and is projected to double within the next two decades. 1.2 Environmental pressures have increased greatly, along with, but not as fast as the industrial growth thanks to the active environmental protection and the cleaner technologies financed by the massive industrial investments. For example, total suspended particulate (TSP) concentrations have been markedly reduced in many cities, discharges of toxic metals in wastewater have fallen substantially, and pollution discharges per unit value of industrial output have declined significantly due to reuse and other water-saving techniques. Overall, however, these improvements could not outrun the fast growth in industrial production and municipal wastes. Ambient concentrations of various pollutants remain at unhealthy levels in many cities. Sulfur dioxide (SO2) emissions have remain high due to heavy dependence on low-quality coal burning and the increasing automobiles. Water pollution continues to grow and is among the most serious enviromnental issues especially in the cities. At least some sections of rivers in 54 of 58 cities recently surveyed failed to meet even the lowest acceptable standard (quality Class V), leaving few economic uses except as sewers; and the percentage of urban aquifers deemed polluted has risen from 20 percent in 1983 to over 45 percent today. Solid waste has also grown rapidly, and only some 25 percent of the municipal solid waste and nightsoil are disposed of to national standards. The remainder is dumped without proper control. 1.3 The cost of this pollution is high. Epidemiological studies estimate that TSP in urban China is responsible for over 150,000 premature deaths a year in Chinese cities, and have shown a close relationship between outdoor sulfur dioxide concentrations and mortality. Health costs of water pollution are more difficult to measure, but the direct economic costs alone are substantial. Cities have been forced to move their water intakes to increasingly distant and more expensive raw water sources, farmers have had to switch from irrigation with surface water to pumping groundwater, many surface water bodies can no longer be used for recreation and fisheries. The nature and consequences of the pollution have been documented in three Bank sector studies: China: Efficiency and Environmental Impact of Coal Use (Report No. 8915-CHA, March 1991), China: Environmental Strategy Paper (Report No. 9669-CHA, April 1992) and China: Urban Environmental Service Management (Report No. 13073-CHA, December 1994).  2 B. Environmental Management System in China 1.4 China's Environmental policies, standards, monitoring and regulations are in the purview of the National Environmental Protection Agency (NEPA), as the secretariat of Environmental Protection Committees of the National People's Congress and the State Council. The Ministry of Construction (MOC) has similar responsibilities for public facilities for water supply and wastewater and solid waste management, and Ministry of Water Resources for natural water bodies. Industry ministries also maintain environmental units which, in cooperation with the NEPA system, establish sector-specific pollution control strategies and technologies. But these ministries do not have implementation authority, which is held by their corresponding administrative units of local governments. 1.5 Though constitutionally a unitary state, China has a strongly decentralized system of governance. The Government of China (GOC) sets broad policies and standards but lets local governments to implement the policies and set detailed regulations unless preempted by national ones. Often GOC encourages local governments to experiment with various standards and ways to achieve basic objectives with a view to establish national best practices and norms based on local experiences. This decentralized governance is reinforced by the decentralized public finance system, where local governments collect most of the public revenues, remit a major part of the value added tax, but allocate the major part of revenues on their own. Local governments also tend to be well-staffed, as their broad authority over the local economy makes them attractive employers. The main level of autonomous governance is the municipality which often oversees affairs of surrounding rural counties. Some municipalities report directly to GOC. In rural areas, Prefectures manage a group of county governments under substantially stronger supervision of the provincial government. 1.6 NEPA oversees the work of its local counterpart, Environmental Protection Bureaus (EPB) at different levels of government. Provincial EPBs have the authority to set local environmental standards in the absence of preemptive national standards, or to impose more stringent standards than those required by the national government, approve plans of lower-level EPBs, and may play a direct role in implementation. However, the municipal, urban district and county EPBs bear the main burden of enforcement for both national and provincial regulations. The budgets, personnel appointments, and work plans of each level EPB derive from the government of that level. To aid quality control, environmental performance must be reported to the next higher level EPB, which also sets testing protocols and other performance criteria. 1.7 Chinese environmental regulation focuses on three instruments: environmental assessment before approval of new investment projects; the "Three Simultaneous" licensing strategy that requires integration of pollution control in project design, inclusion of the abatement measures in the investment, and proper operation of the abatement equipment; and a pollution levies charged against waste discharges that have concentrations of pollutants above permitted levels. More recently, governments have been authorized to levy a small fee on wastewater discharges within standards. The pollution levies finance operation of the environmental protection system. Local EPBs retain a part of the revenue to cover their own operating costs, and provide the remaining funds to finance eligible pollution abatement investments by enterprises, now mainly in the form of concessional loans. NEPA recognizes problems with the pollution levy system, including: the level of charges considerably below the marginal cost of effluent treatment, which encourages enterprises to pay the fee rather than operate or invest in  3 treatment facilities or cleaner production technologies; and charging fees on the basis of concentration of individual discharges rather than an area-wide basis. 1.8 More serious are the constraints to regulatory enforcement and levy collection due to conflicts inherent in China's economic transition and the governance structure. Local governments have strong vested interest in preserving employment and competitiveness of enterprises in their localities, but also the responsibility for environmental regulation and assess pollution levies, which often hurt the short-term economic interests. Balancing of these interests result in great variances in regulatory enforcement and levy revenues across localities. In general the larger and wealthier of Chinese cities tend to have better records in these regards, reflecting their constituents' reaction to heavy environmental costs of earlier industrial development and higher demand for cleaner environment. On the other hand, pollution by enterprises operating on the periphery of cities, mainly the township and village enterprises (TVEs), tend to be subject to much less control than the neighboring municipalities. As a group their growth has been extremely fast, presenting a major task for industrial pollution control for the nation as a whole. NEPA has an active program of research and experimentation underway to identify new approaches to overcome these and other regulatory problems, moving toward instruments based on catchments and market mechanisms. 1.9 Urban environmental services, which include collection and treatment of waste water and solid waste, fall under the purview of the Construction Commissions of localities, under the regulatory guidance and standards established by the Ministry of Construction. As discussed above, local governments have the resources and autonomy to set their own priorities and implement them. The Construction Commissions are typically among the most powerful and best funded of the municipal administrative bodies, having under them bureaus or companies directly providing key urban services. Until recently, they have focused their resources mainly to water supply, roads, and economic investment over environmental services. Satisfactory attainment in these areas as well as rapidly growing problems with waste water and solid waste have led to re-evaluation of the priorities, and many cities have started investing considerable resources to deal with the latter. However, wastewater treatment levels are very low, with only 4.5 percent of municipal flows treated in 1992. The Ministry of Construction estimates, further, that two thirds of the municipal sewage treatment plants either do not operate, or operate far below capacity, due mainly to lack of funds. 1.10 Developing a secure funding system is a critical step for provision of environmental services. The established practice of charging for water supply and fiscal charges earmarked for roads have been important ingredients in the achievements in those areas. A sector study, China: Urban Environmental Service Management, identified the failure to charge adequately for environmental services as a major policy issue. Users have traditionally paid for solid waste and nightsoil, although the revenues often fall short of the increasing cost of collection and treatment. For sewerage, user charges have been introduced only recently, and their levels and scope are usually far below operating needs, not to mention capital costs which often have been financed with the general revenues. However, as the general public finance revenues are likely to remain constrained, it would be essential that users pay a much larger share of the cost if not full. User fees would also provide incentives for savings of water use and discharges, but the institutional separation of water supply and sewerage in Chinese cities presents difficulties in financial and economic management of these essentially linked services.  4 1.11 Another major related issue is the appropriateness of standards of infrastructure and environmental services and facilities. Most municipalities of China apply a narrow set of design norms prescribed by MOC in building public infrastructure facilities and in allowing developers to build new properties or "modernize" existing areas through redevelopment. As these standards tend to be high relative to long-term affordability and investments often have the first call on available resources, the results are limited scope of services, suboptimal performance due to the lack of complementary facilities and operation and maintenance (O&M). These problems are most pronounced in newer types of services such as sewerage. In general, however, facilities planning needs to focus mainly on performance rather than physical norms. C. Bank Group Strategies and Experiences 1.12 The Country Assistance Strategy (CAS) for China discussed at the Bank Group Board in February 1997 identifies four areas for the Bank Group to focus on: macroeconomic and structural reforms, removal of infrastructure bottlenecks, human development including poverty alleviation and health, and environmental protection. Urban environmental issues are recognized as important challenges relevant to the latter three focus areas. The Bank Group has supported urban environmental improvement in over twenty Chinese cities through ten projects. These projects and the sector work have focused mainly on waste water management, identified as a main issue by the Environmental Strategy Paper, but also provided considerable support for solid waste management and industrial pollution control. These operations have demonstrated the value of the Bank's project analysis in planning complex environmental programs, particularly at the time systems of urban environmental management are being newly defined in China. Combined with strong implementation capacity of the borrowers, they yielded fast and substantial benefits on the ground. 1.13 Most of the earlier projects have directed the Bank Group assistance in large cities of the northeastern and eastern coastal provinces, in view of the environmental and developmental needs of the established industrial centers, and also their demonstration effects. Environmental pressures remain high in those areas and cooperation will continue. However, the Bank has started shifting its attention toward inland and poorer areas with two recent environmental projects in Hubei (1995) and Yunnan (1996). Further, these project and a few other projects recently appraised or under preparation have also started involving small urban areas, in another shift from the focus on large cities. This shift of geographical focus is likely to call for stronger attention to appropriate standards and equity implications of the urban environmental services. 1.14 The review of Bank Group experience worldwide in urban services improvement emphasize the need for strong institutions and finances in order to sustain the benefits of intervention by enabling adequate operation, maintenance and continued investments. The urban environmental projects and sector work in China have also focused on adequate pricing of sewerage services and establishment of autonomous sewerage companies, and have attained considerable successes, which are having considerable demonstration effects to the rest of China. The Bank Group's worldwide experience in this and related sectors also has shown the importance of appropriate standards and strategic framework in choice and design of investments, and the value of broad river basin-wide approaches in managing water resources and waste water. Urban environmental projects in China have drawn upon urban comprehensive environmental plans or provided support for their preparation, often incorporating issues of the river basins. However, integrated river basin management has not featured in these projects partly due to the  5 projects' focus on few municipalities and due to institutional complexities. Integrated management is being introduced under a few recent water resource projects in China. 1.15 Most of the urban environmental projects in China have also supported revolving funds for industrial pollution. A recent review of Bank experience (Industry and Environment: Patterns in World Bank Lending) emphasizes the need for political commitment, clear standards and regulations, incentives to comply, and institutional capability to monitor and enforce standards. When industrial pollution abatement subloans are involved, the following conditions increase likelihood of success: a profitable and growing industrial sector, flexibility in choice of technology, availability of funds at close-to-market terms, and targeting on sources that can yield significant improvement in the ambient environment. In China, the Bank Group is supporting an Environmental Technical Assistance Project (1992) to assist NEPA in its efforts to find more efficient regulatory methods, improve staff capabilities, and bolster environmental monitoring.  6 2. DEVELOPMENT AND ENVIRONMENT OF GUANGXI: STATUS AND ISSUES A. Economic and Urban Development 2.1 Guangxi Zhuang Autonomous Region is one of the poorest areas in China. Of its total population of about 45 million, close to half consists of Zhuang and other ethnic minorities, and some 8 million residents are officially classified as the poor (earning less than Yuan 500 a year per capita). Its poverty has long been attributed to the picturesque but infertile karst (limestone formation) hills that predominate the northern part of the Region, low levels of education and infrastructure. Another important factor appears to have been the restrictions imposed on it as the frontier in the conflict with Viet Nam, which prevented the Region from taking part in China's economic opening. The Region is otherwise strategically located on the coast between Guangdong and Viet Nam. Beside the strategic location, the Region's other economic assets include abundant water resources, semi-tropical climate favorable for farming, a fair amount of farmland and mineral resources. 2.2 Since the "opening" of the Region in 1990, its economy has grown at rates consistently and significantly above the national average (see Table 1). As a result, its per capita income, the lowest among thirty province-level subdivisions of China as late as 1989, surpassed ten others' by 1994. The Region's economic growth has been led by the industrial sector, particularly in food processing, building materials, and transportation equipment manufacturing. On-going heavy investments in power and transportation infrastructure lay the basis for economic development taking Table 2.1 advantage of the Region's endowments, while adding a Guangxi's Economic Growth significant component of the recent growth. 1990 1995 Growth 2.3 Along with the growth of industries and the %/yr income gap between urban and rural areas, urban population GDP per capita growth has accelerated to well above 5 % a year, and rural (Yuan, 1995 prices) population has started declining in absolute number. While All China 2910 4835 10% the speed of industrialization and urbanization is high, it is Guangxi 1662 3535 16% important to note, their levels are still relatively low. More Guangxi GDP by Sector than half of the Region's population lives within boundaries of cities and towns, but the majority of them are still Primary 45% 26% 6% classified as agricultural. Only three cities have urban Secondary 30% 44% 25% populations over half a million: Nanning, the capital, with about a million urban residents in 1995; Liuzhou, the industrial center, with 900,000; and Guilin, the tourism center, with 500,000. Their average annual per capita income was slightly above Y 5000, compared with about Y 1,100 for rural residents.  7 B. Environmental Issues 2.4 Similarly, compared with older industrial areas of China, Guangxi's environmental problems are smaller in magnitude or intensity overall, but are growing much faster. Serious problems that do exist tend to be localized and unique. At the same time, the levels of environmental services and protection are also lower, due to weak financial and technical capacity. Unless upgraded quickly, the environmental management capacity is likely to be overwhelmed by growing environmental pressures in the near future. 2.5 Industrial pollution provides a case in point. In most parts of China, industrial pollution discharge per output declined in the recent past thanks to newer and cleaner plants, more waste treatment, and stronger regulation. In Guangxi, however, industrial pollution per output value has changed little and is now the highest in the country. This may be explained by the level and structure of the industrial development. Structurally, the most important industrial sector in Guangxi in terms of composition and growth is food processing that generate heavy pollution load per output. Of particular economic and environmental importance are sugar refineries which produce a tenth of the Region's industrial output, a quarter of total industrial wastewater and 75 % of industrial wastewater pollution load. On the other hand, at the current level of production, the aggregate pollution load is still relatively low and has not been given as much policy attention as the expansion of production. For example, the Region's Environmental Protection Bureau (EPB) was given status equivalent to EPBs of most other provinces only in 1995, and the capacity for environmental monitoring, regulatory enforcement, technical support appears to be weak. 2.6 Though the aggregate pollution load is still moderate, fast growing cities and towns are beginning to experience problems similar to or worse than those in China's older industrial centers. The worst example is Liuzhou, the Region's industrial center with a GIOV of around RMB 17 billion, some four times higher than that of Nanning. The city's heavy industrial output, which more than doubled in three years between 1990 and 1993, exacerbated the already severe industrial pollution, especially air quality. For example, the frequency of acid rain is about 95 % and acidity often approaches pH value of 3. The air quality standard for S02 is exceeded for almost 60 % of the time compared to only around 2 % for Nanning and Guilin. A major program to reduce air and water pollution in Liuzhou started in 1996, with a bilateral financing of $100 million. Extending the environmental improvement program of the Region, the Government requested a Bank Group support for environmental improvement mainly in the two other major cities of the Region, Nanning and Guilin. C. Nanning and Guilin 2.7 Nanning, the Regional capital and the largest city, is growing fast on the strength of upgraded regional rail and highway networks and external investments. The city's major economic base consists of small and medium-size industries, but the service sector is growing the mostly rapidly, by over 20% a year. The city's air pollution has stabilized and is modest compared with other Chinese cities, and an adequate solid waste management system has been built recently. On the other hand, the city lacks modern sewerage system, relying on a small and poorly maintained network of combined sewers and septic tanks. Improved control and pretreatment of industrial wastewater have slowed its growth, but its volume and pollution load remain significant and domestic sewage is increasing rapidly. As a result, main urban streams  8 act as virtual sewers and their quality continues to deteriorate. Pollution of Yongjiang (Yong River), into which the urban streams discharge, increases markedly as the river flows through the city, turning from moderate to significant degrees (Chinese water quality Class III to Class IV). 2.8 The water pollution has become a serious issue not only for the environment itself but also for social and economic development. A city water intake located on the River in the middle reach of Yongjiang cannot operate to capacity due to pollution from time to time, and would have to be shut down completely if the pollution continues to increase. The pollution of urban streams, particularly the visible pollution of the Chaoyang Stream and Nanhu Lake in the commercial and residential center of the city, presents serious problems for public health and for development of the area as commercial centers. The Nanning Municipality (NM) therefore has decided to implement a major program to improve the wastewater management system. It has secured a bilateral funding for a sewage treatment plant (STP) of 160 ML/day capacity, but a much larger investment is required for building the sewer networks and at least one more STP. 2.9 While newly built urban areas have secondary and tertiary sewers, there are many neighborhoods in both Nanning and Guilin that do not. Many that lack sewerage also tend to lack adequate drainage, footpaths, garbage collection points, public toilets, housing, etc. - in short poor physical environment. Generally in cities of China poor quality of housing and neighborhood environment is the major element and the best indicator of poverty. While many poor areas are being redeveloped, wholesale new developments are unlikely to meet the fast increasing need for improved services in the near future, particularly as the cities grow mainly by incorporating semi-rural fringes and low-income inunigrants from rural areas. In Nanning and Guilin, immigrant population without permanent urban registration has surged in the last five years and is estimated to account for over 25% of the urban population. Reflecting the Region's strong emphasis on poverty alleviation, municipal governments in Guangxi, unlike their counterpart elsewhere, have been accommodating or at least tolerant of the temporary residents, and have provided some basic urban services including garbage collection and schooling to large informal settlements. In Nanning there is a large squatter settlement, but in general, most of the poor live scattered throughout the city's residential areas with inadequate facilities. 2.10 In Guilin, the main concern has always been the quality of the Lijiang (Li River), a top scenic treasure of China and the city's economic lifeline. Some 20% of the city's GDP is estimated to originate from tourism. Due to the importance of the River to the country and the city, Guilin Municipality (GM) has one of the earliest and best urban environmental management system in China, though there still exists considerable gaps to fill. GM has successfully carried out industrial pollution controls, forcing and helping heavy industrial polluters to reduce their discharges, relocate, or close. It has been operating an effective solid waste management including a landfill, an extensive separate sewer network covering over 70% of the developed urban core, and three secondary STPs. As a result, the Lijiang water is maintained at a good quality (Class II) most of the time. The major remaining tasks include: developing a new landfill to replace the one that is filling up; extending the sewer network to cover the unserved areas; and expanding one of the existing STPs; and cleaning up some urban waterways. These would substantially improve Lijiang tributaries flowing through the city. It is also necessary to provide sewerage systems in outlying suburbs, partly to deal with discharges of industries relocating from the city.  9 2.11 Quantity of water in the Lijiang is another significant issue. The flow of water during the dry season, between October and April, the water flow in the River is so low to seriously constrain normal plying of scenic cruises, assimilation of wastewater discharges, and water supply to the city. During the rainy season, the city and rural areas along the River are subjected to substantial flood damages. To better regulate the Lijiang flow, GM and the Guangxi Region have been preparing a comprehensive set of water works programs. A part of the proposed programs completed so far, a large reservoir and considerable embankments, falls far short of effective regulation of the flows. Along with physical reasons, the fluctuation of the Lijiang flow appears to be due partly to the increase water use by the increased population and economic activities in the valley. Although considerable water conservation activities have been undertaken, the existence of three different jurisdictions impedes effective water resource management, indicating a need for a more integrated institutional framework. D. Bank Group Involvement in Guangxi 2.12 Guangxi has been one of the beneficiaries in a number of projected supported by the Bank Group: the Yangtan Hydroelectric Project (1986), National Health Project (1991*), Rural Water Supply and Sanitation Project (1993), National Environmental Technical Assistance Project (1992), Inland Waterways Project (1995), and Southwest Poverty Reduction Project (1995). The proposed Guangxi Urban Environment Project would be the first Bank project in which Guangxi would be the sole beneficiary. GOC also proposed for the Bank financing a Baise Multipurpose Dam project, which would be located in Guangxi and would regulate the flow variation of Yongjiang (also known as Youjiang) which flows through Nanning. 2.13 The proposed project would address two of the four CAS focuses: environmental protection and human development that includes poverty alleviation and health. Guangxi's urban environmental issues are broadly similar to the pattern seen throughout China, and the project would help address them with an array of instruments similar to those adopted in the Bank Group's other urban environmental projects. The Bank Group's assistance in evaluating and planning complex investments, that has added significant value to other similar projects, has proven even more significant in preparation of the proposed project. Nanning and Guilin, medium-sized and medium-income with a substantial tertiary sector, represent a class of cities different from hosts of earlier urban projects supported by the Bank Group, that were either very large or predominantly industrial. 2.14 The project would contribute to poverty alleviation by helping a poor western region, being the second environmental project in such a region after the Yunnan Environment Project (FY96), and targeting the urban poor for the first time. Nanning and Guilin have a large presence of temporary population and neighborhoods with poor environmental quality, whose conditions are unlikely to be improved soon through traditional development schemes, and accommodating government policy toward them. The Southwest Poverty Reduction Project is supporting housing development in Nanning mainly to help accommodate the migrant population. The Bank Group has supported many housing and area upgrading operations in most parts of the world, but not in China. Simple investments focusing on basic needs and strong beneficiary participation have proven highly cost-effective in other countries. The proposed project would pilot such an approach for application in urban China.  10 3. PROJECT DESCRIPTION A. Project Objectives 3.1 The project would help improve the environment of Nanning and Guilin, in support of sustainable economic growth and poverty alleviation in the Region. Specific objectives of the project are: (a) To improve the quality of major water bodies -- in particular Chaoyang stream and Yongjiang in Nanning and Lijiang and its tributaries in Guilin; (b) To regulate the flow of the Lijiang; (c) To improve institutional and financial capacity for environmental protection, environmental services and water resource management; (d) To pilot a participatory approach to environmental improvement in poor neighborhoods; and (e) To implement pilot schemes for contol of sugar refinery pollution. B. Project Components 3.2 The project would consist of: physical investments to correct high priority environmental deficiencies, mainly to improve quality of surface and ground water; regulatory actions to reduce industrial pollution; and measures to strengthen technical and financial capacity of environmental protection, waste water management, and water resource management institutions. The components are outlined below, described in more detail in Annexes 1 through 6, and their implementation and financial arrangements are discussed in Chapter 4 and 5: (a) Sewerage and Drainage in Nanning: cleaning up the Chaoyang stream and building interceptors; building and improving main and secondary sewers and drains of about 70 km total length; building associated pumping stations; building a primary sewage treatment plant (STP) to treat sewage collected by the new sewers, with an estimated capacity of about 180 ML/day; improving equipment and information systems for nightsoil management; carrying out an action plan of regulatory enforcement for industries to comply with surface water discharge standards (total cost $80 million). (b) Sewerage and Solid Waste Management in Guiin: building about 30 km of primary and secondary sewers in built up areas of the city and Xicheng, an industrial suburb; building pumping stations to convey the sewage to existing STPs; expanding an existing secondary STP by 25 ML/day; building a primary STP of up to 40 ML/day capacity in Xicheng, and oxidation ponds in suburban towns of Yangshuo, Xingping and Baisha; cleaning up and intercepting sewage from three lakes in the city; building a sanitary solid waste landfill of 500 ton/day  11 capacity and a transfer station; and augmenting the fleet of solid waste trucks; carrying out an action plan to reduce industrial pollution in the city (total cost $46 million). (c) Small Area Improvement: building or improving tertiary sewers, drains, solid waste dumps, public toilets, and footpaths in up to 30 selected small areas with poor environmental quality in Nanning and Guilin. Residents will play the major role in selecting, implementing, and financing the improvements (total cost about $ 9.2 million). (d) Lijiang Flow Regulation: lining and extending a 26 km canal conveying water from an existing Wulixia Reservoir to the Lijiang, installing a hydro-power generator of 0.8 MW capacity; plantation on about 2000 ha in the reservoir catchment and along the Lijiang; and building or repairing about 28 km sections of embankment along the Lijiang (total cost $22 million). (e) Sugar Refinery Pollution Abatement: a subloan facility ($2 million) to finance installations by financially sound refineries to minimize and treat highly polluting stillage from sugar-based alcohol production processes. (f) Institutional Development: technical assistance, training, and equipment to improve environmental monitoring and enforcement by EPBs of the Region, NM, GM, and GP; develop technical, financial, and management capabilities of sewerage and drainage management institutions in Nanning and Guilin; help develop an institution and techniques for managing the use and protection of the Lijiang; and help the implementing agencies carry out the project efficiently (total cost about $ 6.9 million). C. Major Targets and Monitoring Indicators 3.3 Project components described in para 3.2 above aim at specific project objectives listed in para 3.1: components 3.2 (a), (b) and (e) to achieve the primary project objective, 3.1 (a); components 3.2 (c) for objective (c); and components (f) for objective (b). Major targets and monitoring indicators for the components are described below. The progress and success of the project and individual components will be evaluated against these and secondary monitoring indicators, listed in Annex 10. (a) Sewerage and Drainage in Nanning: Quality of water in Chaoyang stream, currently polluted over 10 times the Class V limit, to be improved to Class V by year 2002; water quality of Yongjiang mid-point between the city boundaries, now between Classes III and IV, improved to Class III from 2002. (b) Sewerage and Solid Waste Management in Guilin: The percentage of pollution in Lijiang measured at various locations and times exceeding Class II standards to be reduced to near zero by year 2003; water quality of Taohuajiang, a Lijiang tributary flowing through Guilin city, improved from Class IV-V to Class III-IV.  12 (c) Small Area Improvement: the number of beneficiaries, especially those with incomes below urban average (about 100,000 and 70,000, respectively, over the project period). (d) Lijiang Flow Regulation: Average dry season water flow of Lijiang at the northern border of GM, now about 30 m3 per second, to be increased to at least 35 m3/sec by 2003. (e) Sugar Refinery Pollution Abatement: Total amount of annual COD reduction, about 10,000 tons over the project period. (f) Institutional Development: Increased frequency and coverage of compliance monitoring by EPBs; increased scope of autonomous operations by the sewerage companies and the Lijiang commission, measured by percentage of operating and capital expenditures independently financed and managed; and total and unit (per sewage volume) expenditures for operating and maintaining the sewerage systems. D. Project Cost and Financing 3.4 Estimated costs are summarized by group of components and by jurisdiction in Table 3.2; Annex 11 shows detailed cost estimates by component and type of input. The project will cost about $175 million in total in current prices, including $6.5 million in interest during construction. The Bank Group loan and credit will finance about 52.5% of the cost, in total as well as in each of the jurisdictions. Local governments will be responsible for most of the counterpart financing and repayment of the loan and credit. For small area upgrading, the area residents will contribute on average about 40% of the cost, and for the sugar refinery pollution abatement subprojects the beneficiary refineries would finance an average of 60% of cost and pay back the subloans. The financing arrangements, summarized in Table 3. 1, are discussed in more detail in Chapter 4. Table 3.1: Project Financing Plan ($ million) Source Local Foreign Total Guangxi Regional Government 10.6 0.0 10.6 Nanning Municipal Government 29.6 1.4 31.0 Guilin Municipal Government 28.8 1.0 29.8 Guilin Prefecture Government 4.9 0.0 4.9 Sugar Refineries 2.1 0.9 3.0 Residents, Small Areas 3.7 0.0 3.7 IBRD 0.0 72.0 72.0 IDA 0.0 20.0 20.0 Total 79.7 95.3 175.0  13 Table 3.2 Summary of Estimated Costs ------ Y Million ------ ------ $ Million----- Local Foreign Total Local Foreign Total A. Nanning Wastewater & Nightsoil Management Sewerage 185 180 365 22.2 21.7 43.9 Sewage Treatment Plant 43 114 157 5.2 13.7 18.9 Nightsoil Management 5 6 11 0.6 0.7 1.3 Subtotal 233 300 533 28.0 36.1 64.1 B. Guilin Wastewater and Solid Waste Management Sewerage 73 103 176 8.8 12.4 21.2 Sewage Treatment Plants 28 42 70 3.4 5.0 8.4 Solid Waste Management 42 24 66 5.1 2.9 8.0 Subtotal 143 169 312 17.3 20.3 37.6 C. Small Area Improvement Nanning 19 19 38 2.3 2.2 4.5 Guilin 12 11 23 1.4 1.4 2.8 Subtotal 31 30 61 3.7 3.6 7.3 D. Lijiang Water Regulation Water Supplement 11 24 35 1.4 2.9 4.3 Embankment 41 9 50 5.0 1.1 6.1 Plantation 25 38 63 3.0 4.6 7.6 Subtotal 77 71 148 9.4 8.6 18.0 E. Sugar Refinery Pollution Control 8 25 33 1.0 3.1 4.1 F. Technical Assistance & Training Nanning Sewerage Company & EPB 6 12 18 0.7 1.4 2.1 Guilin Sewerage Company & EPB 2 13 15 0.3 1.5 1.8 Lijiang Committee & Water Management 2 5 7 0.2 0.5 0.7 Regional EPB strengthening 1 4 5 0.2 0.5 0.7 Subtotal 11 36 47 1.4 4.0 5.4 Total Base Cost, 1997 Prices 503 629 1132 60.8 76.7 136.5 (includes design, supervision & management) Physical Contingency 97 68 165 11.7 8.1 19.8 Price Contingency 134 93 227 7.2 5.0 12.2 Total Cost in current price 734 790 1524 79.7 88.8 168.5 Interest during Construction 0 58 58 0.0 6.5 6.5 Total financinz reauired 734 848 1582 79.7 95.3 175.0  14 E. Project Preparation Status 3.5 The project, initially proposed for Bank Group financing in 1994 and identified in October 1995, underwent a major strategic and technical reformulation during preparation based on economic and technical evaluation discussed in Chapter 6. Most of the feasibility studies and design work for urban sanitation components have been carried out by design institutes recruited from outside the Region. They have been assisted by an Australian consultant team financed by a grant from the Australian Agency for International Development. Feasibility studies and design of Lijiang flow regulation components have been carried out by the Regional Design Institute with the help of a Canadian consultant mobilized by the Canada International Development Agency, Inc. (CIDA, Inc.) This team has also carried out studies for environmental master plans of Nanning and Guilin cities. 3.6 Detailed or preliminary design is complete or near completion for most of the physical construction components, and bidding documents have been drafted for four major components. Major exceptions include the following: (a) Small area improvement program: draft designs have been prepared through community consultations for two of the small areas selected to be improved first. Four to six areas will be selected for detailed preparation and implementation of improvements each year. Annual programs, criteria and procedures for selection and implementation of the subprojects have been agreed upon. They would be subject to further modification on the basis of implementation experience and in consultation between the municipalities and the Bank Group. (b) Optimal capacities of the Jiangnan STP in Nanning, established by the feasibility review in the range of 150 ML - 250 ML a day, would be finalized during the design phase during 1999-2000 on the basis of updated projection of sewage flows. Similarly, the capacity of the proposed Xicheng STP, now estimated to be about 25 ML/day, would be finalized during the design that would be carried out in 1999-2000.  15 4. Beneficiaries and Finances A. Local Governments 4.1 The project involves four local jurisdictions: Guangxi Autonomous Region (GAR), Nanning Municipality (NM), Guilin Municipality (GM), and Guilin Prefecture (GP). The latter three are formally subordinate to GAR, but have a large degree of autonomy in financing and managing most governmental functions within their jurisdictions. Guilin Municipality and Prefecture are two independent neighboring jurisdictions of the same level, with both government headquarters seated in Guilin city. GM includes two semi-autonomous suburban counties of Yanshuo and Lingui which will be primarily responsible for several small sewerage works and small area improvement schemes. Administrative units under these jurisdictions are responsible for implementing all of the project components, as listed in Table 5.1 in the next Chapter. 4.2 Local government finances in China are subject to considerable ambiguities and uncertainties, due to unclear boundaries of public finance and due to significant on-going transition in the revenue system. Revenues and expenditures over which local governments have varying degrees of control are accounted for under three different categories: "normal" budget, "extra-budgetary" accounts, and "off-budget" accounts. The first two categories include revenues from statutory taxes and levies, and their allocations are subject to approval by higher levels of government. Expenditures are usually a better gauge of resources available as some of the revenues are shared among levels of government. Net transfers are positive for GAR and GP, negative for NM and GM. The third, off-budgetary resources consist of non-tax revenues such as net income remitted from municipally controlled enterprises, including public utilities, and user charges collected by administrative departments. Their allocation is subject to little control by higher levels of government. Table 4.1 Summary of Local Finances Local Government GAR NM GM GP -------------- Yuan million ------------ Budgetary Expenditures 1991 N/A 291 264 411 Off-Budget " N/A 130 196 N/A Budgetary Expenditures 1995 3205* 645 565 803 Off-Budget " " N/A 695 315 279 Infrastructure Investments, 1995 N/A 307 162* 67 30% of Project Counterpart Financing Requirement in 1995 Prices 43 75 49 12 * Note: 1994 figures 4.3 Most categories of revenues and expenditures in the three local jurisdictions under GAR have shown increases in real terms between 1991 and 1995. In general, however,  16 revenues net of transfers suffered a decline in real terms since the 1994 tax reform although it is reported that they started to increase above inflation recently. Further, off-budget revenues of GM declined in absolute terms in 1993, when major tourism enterprises, which belonged to GM and contributed the largest part of off-budget resources of GM until then, were taken over by the central government and hence their incomes excluded from the GM's direct control. These enterprises, however, still make some contribution to investment in tourism-related infrastructure. Even without this, GM enjoys a high fiscal resources per capita, compared with Nanning with twice the population. Table 4.1 shows the expenditures of the local governments in 1991 and 1995, as well as an estimate of investments in urban and environmental infrastructure in 1995. 4.4 Table 3.2 lists the estimated counterpart financing requirements on the part of local governments, net of financing by beneficiaries of sugar pollution control and small area improvement components. The estimated GAR counterpart fiancing includes a contribution of Y 90 million to subsidize the Nanning sewerage investments. The last line in Table 4.1 lists estimated peak annual counterpart financing burden on local governments (defined as 30% of local financing needs that are not met by users and beneficiaries) converted to 1995 prices for easier comparison with the 1995 total expenditures and infrastructure investments by local government. The comparisons indicate that these are significant but easily affordable share of normal infrastructure investments in each locality, even without any real term increases in their general revenues and expenditures. B. Sewerage Finances and Organizations 4.5 In Nanning and Guilin, environmental services of drainage, sewerage, solid waste and nightsoil are managed by municipal government bureaus while water supply is managed by municipally owned companies. Most of these traditional environmental services are financially self-sufficient or incur negligible deficits at present. A major emerging issue is the financing and management of sewerage services, which are relatively new and expensive. (Refer to Annex 3 for current and future water and sewerage charges in the two cities.) Current status and plans to develop financial and institutional capacities to ensure adequate and sustainable sewerage services are discussed below. Although existing conditions differ significantly between Nanning and Guilin, plans for wastewater management in both cities call for institutional autonomy and accountability, and the recurrent financial base relying mainly on charges according to the "polluter pays" principle of China's environmental protection system. Nanning 4.6 Currently Nanning has little sewerage system, mixed in with the storm water drainage managed by the Municipal Drainage Division. The system is expanding rapidly, however, as a part of an on-going new development in the Landong area and the planned upgrading of existing urban areas particularly around Chaoyangxi. These major undertakings are planned and managed by special-purpose agencies, Landong Area Development Office and Chaoyangxi Improvement Office, reporting directly to the mayor. Most of the sewerage and drainage construction financed under the project would be managed by the latter. Effective operation of the sewerage facilities would require a permanent institution with a far greater technical capacity than currently exists in the city and an adequate and sustainable financial base.  17 4.7 NM has started implementing an institutional development program (refer to Annex 3), which has been reviewed by the Bank Group. During the pre-operational phase in 1998 and 1999, basic systems and procedures for technical and financial management would be designed, and staff would be recruited and trained. Also, a framework of a permanent institution would be designed, specifying its mandates, reveneue base, and organizational structure. The current plan envisages incorporating an autonomous sewerage company in 1999. The company will take over all drainage and sewerage facilities, as they are completed, for operation on the basis of agreements or contracts clearly defining performance targets and other responsibilities on the one hand and associated financial bases and other resources and authorities on the other. The institutional development program would continue to evolve, defining details for later stages of systems development and training activities that would continue after the establishment of the company. An action plan defining the charter and structure of a sewerage company and plans for its continued development is expected to be completed by the middle of 1999. Assurances were obtained during negotiations that NM would implement an institutional development program, satisfactory to the Bank Group and revised from time to time, to develop an effective sewerage management institution, including a program of technical assistance and training with assistance of competent consultants which shall start by the end of 1998. 4.8 Current expenditures for sewerage and drainage operations in Nanning, less than Y 5 million a year, are financed with budgetary allocations from the urban maintenance and construction tax (UMCT) revenues. A major part of the new investments are financed through the lease of improved land, the UMCT, GAR subsidy, and loans including $5 million bilaterial loan for the Landong STP and the Bank Group loan for the project. However, broader and more sustainable financing of investments and particularly the future operations would require recurrent charges. NM introduced a sewerage charge for non-residential users in 1996 and recently increased it to Y 0.18 per in3 of water use. At the same time, NM also introduced the charge on residential users, among the first in China, at Y 0.13/m3. These steps fulfill the commitment made during appraisal as a condition of disbursement. 4.9 Most of the revenues from these charges, expected to be over Y 30 million a year, would be allocated by NM to on-going investments for now. Once the sewerage company starts to take over facilities for operation, commensurate portions of the revenue base would be assigned to the company to allow adequate operation and associated debt service. The revenues would include, in addition to the sewerage charge collections, payment by NM for operation of drainage facilities. It is projected that sewerage charges about twice the current level would be required to finance full operation and debt service, starting from about 2003. (Refer to Annex 3 for financial projections). Assurances were obtained during negotiations that GAR will cause the sewerage charges and drainage payments in Nanning to be adjusted from time to time to generate sufficient revenues to meet expenditures necessary for adequate operation, maintenance and debt service for sewerage and drainage facilities. Guilin 4.10 GM has built up a relatively extensive sewerage system over the last two decades and plans a continued expansion, in view of the importance of tourism to the city. Sewerage operations and maintenance are currently managed by the Drainage Division of GM, which has developed a substantial staff and technical capacity. GM has decided to transfer its functions and staff to a Guilin Sewerage Company (GSC) to be established in 1998 in order to enable  18 clearer accounting of performance and long-run costs, and more flexible deployment of staff and financial resources. The Company would be wholly owned by GM and governed by a board of directors appointed by GM. Still, it would be essential that clear performance contract is established as mentioned in paragraph 4.7 above. Planning and construction of major facilities, including those under the project, will remain for the time being the responsibility of the Municipal Construction Bureau. Upon completion, the facilities will be turned over to the Company for operation. The Company would also be responsible for operation of the sewerage facilities in Xicheng District in Lingui County, which is under GM, to be built under the project by the Xicheng District Management Office. 4.11 Assurances were obtained during negotiations that GM will carry out an institutional development program satisfactory to the Bank Group, including starting a program of technical assistance and training with assistance of competent consultants, and incorporation of an autonomous Sewerage Company with charter and revenue base satisfactory to the Bank Group by the end of 1998. The institutional development program, reviewed by the Bank Group, emphasizes the development of an accounting and financial management system required for autonomous operation rather than the current dependence on municipal allocations. The technical assistance and training programs, particularly the consultant services, will be coordinated with those of Nanning. 4.12 An adequate financial base is the key to the sustainable sewerage operations and to the autonomy and accountability of GSC. In the past the construction and operation of sewerage facilities were financed by budgetary allocations of municipal revenues and tourim development funds and considerable subsidies by the national and regional governments. Subsidies, however, have become scarce and GM has started to borrow for sewerage investments to supplement its own resources, adding recurrent expenditure requirements for debt service. Operating expenditures, already substantial Y 10 million in 1996, are expected to more than double in five years not only due to the new facilities to be built but also increased utilization of existing facilities. 4.13 Recognizing these needs, GM in 1996 increased the sewerage tariff to non- residential users by about 100% to Y 0.1 per m3 of water use. In December 1997, the residential tariff was increased similarly to Y 0.1/m3 and non-residential tariff was increased further to Y 0.15/m3. Revenues from these higher tariffs are projected to fall short of operating expenses starting from the middle of 1999. By the time investment works under the project are completed, adequate operations and maintenance of the entire sewerage system plus servicing of loans taken under the project are likely to require sewerage tariffs about three times the current levels. In Xicheng, a newly developing industrial suburb of Guilin, the sewerage system to be built under the project is expected to require considerably higher charges, about Y 0.37/r3 in today's prices, as it would have a high unit cost due to the relatively small size of the system and it lacks a base of paid-up assets. 4.14 Assurances were obtained during negotiations that GAR will cause the sewerage charges in Guilin to be adjusted from time to time to generate sufficient revenues, combined with payments for drainage services, to cover adequate operation and maintenance of the sewerage and drainage facilities as well as debt service obligations  19 incurred from July 1, 1998. As a first step, agreement was reached during negotiations that, as a condition of disbursement of the Bank Group loan and credit for Guilin's sewerage works, the sewerage charges would be raised to not less than Y 0.18 per cubic meter of water use averaged over all water use; and that construction of a sewage treatment plant in Xicheng would not proceed before January 1, 2000 or before steps are taken to collect charges sufficient to cover operation, maintenance, and debt service for it after it is completed C. Small Area Improvement 4.15 The project will pilot a participatory and low-cost approach to urban neighborhood upgrading, which is necessary but little practised in Chinese cities. Extensive new developments and wholesale redevelopment of existing built-up areas have transformed most Chinese cities over the last two decades and would remain the main means for urban development in the foresseable future. However, relying solely on these expensive methods would leave a large part of the rapidly growing needs for urban infrastructure improvement unmet, especially for the poor. Under many circumstances upgrading the existing physical assets is an efficient means to improve the living environment, for the rich as well as poor, but often the only means for the poor. 4.16 Quality of housing and physical environment is the major element and the best indicator of real income for most urban population in China. Salaries vary little among urban residents, but are supplemented with widely varying levels of in-kind benefits whose main component is housing provided at nominal rents. For example, senior staff of a prosperous work unit would live in modern apartments with implicit rental value almost equal to cash salary, while others would have to find housing with poor facilities, either rented on their own at high market rents or given by employers or owner-occupied. Migrants from rural areas comprise the poorest group in urban China. They represent about 20% of Nanning and Guilin populations and their number is growing fast. Such areas are found in former rural villages in the newly incorporated urban peripheries, old neighborhoods in partly redeveloped urban centers, and a few shanty towns in Nanning, although those are rare in cities of China. 4.17 The project would support low-cost improvement of neighborhood facilities such as drainage, sewerage, latrines, access roads, and garbage collection in selected Nanning and Guilin neighborhoods. The main selection criteria would be visible defects in these facilities, little prospect of redevelopment in the near future, and the residents' commitment. Fourteen such areas in Nanning and Guilin have been identified during project preparation (two are described in Annex 7); additional areas would be identified during project implementation. 4.18 Beneficiary participation is the key to small area improvement, both in preparation and financing. Area residents, organized by neighborhood committees, will identify the type and scope of improvements according to their priority and affordability, prepare, partly finance and implement them. While many Chinese neighborhoods have long practiced self-help maintenance and minor repairs, the scope of upgrading under the project  20 would require substantially higher levels of organizational and engineering efforts. Consultants will be retained for facilitating participatory process, evaluating technical options, designing and managing the detailed engineering works. District governments, traditionally responsible for neighborhood-level infrastructure, will play the main coordinating role, providing managerial and financial assistance on behalf of the municipal government on the basis of agreements with neighborhood committees. 4.19 Beneficiaries' contribution of substantial part of the costs is another essential requirement for feasible and sustainable upgrading. It imposes the necessary budget constraint on the beneficiary-driven investment, and makes it affordable to municipalities which focus on large scale trunk infrastructure works and hence have been able to devote little resources on small scale improvements. One should note that most new and re- development projects are commercially financed and, though more expensive than upgrading, place little financial and management burden on municipalities and often contribute to municipal revenues. While small scale upgrading would also benefit from loan financing, experience of upgrading projects in other countries has shown that it is frequently impractical to recover the cost through small installments from beneficiaries after implementation. It would be better, therefore, to secure the beneficiary contribution to the extent possible at the time of implementation. 4.20 Beneficiaries of small area improvement would contribute the required labor either in kind or in money, and IDA would finance materials, equipment, and technical services in engineering, management and social works. IDA financing will be subject to a maximum of 70% of total cost or $100 per resident, whichever is less. In most cases these limits are not likely to apply, and IDA credit is estimated to finance 50-70% of the total cost. The beneficiaries will finance 30-50%. Municipal and District governments will finance the remainder, and will take responsibility for repayment of the credit. Assurances were obtained during negotiations that small area improvement subprojects would be selected and implemented according to criteria, procedures, and schedules satisfactory to the Bank Group, as described above. D. Managing the Lijiang 4.21 An important objective of the project is to augment the water flow in the Lijiang during the dry season. Beyond the physical measures to better store and release water, financed under the project, sustaining the benefit would require broad improvements in the way water resources are managed in the Lijiang basin. Increased population and economic activities in the basin generated higher demand for water, and the lack of effective control of the water use is a major factor contributing to the critical fluctuation of the water level of the Lijiang. The necessary coordination of distribution and monitoring of water flow is made difficult due to the existence of two local jurisdictions at the same level, Guilin Prefecture and Municipality, as well as the Regional Water and Power Bureau which controls the largest water works in the area, Qingshitan reservoir, with different sets of interests.  21 4.22 In order to improve the coordination among these authorities, the Regional Government decided to establish a high-level Commission representing the interested parties and headed by a Vice Governor. The Commission is expected to help facilitate consultation and joint planning and implementation of certain activities such as preparation of water registry and monitoring. Progress in integrating the separate operations would depend most critically on resolution of inherent jurisdictional conflict. The project will support technical assistance and training to improve efficiency of water releases and distribution which would be useful regardless of organizational framework, while supporting activities toward developing an integrated management of the Lijiang. Assurances were obtained during negotiations that GAR would establish a Commission to coordinate water resources management in the Lijiang basin by June 30, 1999 with composition and terms of reference satisfactory to the Bank Group to improve and progressively integrate the management of the water use and discharge in the basin. 4.23 A related issue is the lack of effective pricing of water as a scarce resource. This makes it difficult to control demand for water, and also makes many projects that are economically beneficial to be financially not feasible. Control of water use and discharges has improved significantly in recent years especially in urban areas, partly with large increases in water and wastewater charges. However, pricing and control of agricultural water use appear to be difficult as elsewhere, and the institutional action plan discussed above will include actions to rationalize raw water pricing. In order to induce upstream water authorities to better control their water distribution and to ensure financial viability of the hydraulic investments under the project, GM has agreed to pay GP for augmentation of Lijiang flow as it enters the city during the dry season, as measured by an agreed method. This will take place after Wulixia works are completed, in about 2002. Agreeemtns were reached during negotiations on the principles for setting the payment by benefiaries including GM (Refer to Annex 6). The payment, combined with revenues from additional power generation, should allow the Wulixia management office to recover at least the operating costs, debt service, and a reasonable return on their investments. E. Industrial Pollution Control 4.24 In most cities of China, point sources, mostly industrial plants, account for a major share of water pollution discharges. In Nanning, for example, about 50 industries located in the Chaoyang stream catchment were responsible for about two thirds of COD load in the stream; and of this over 80% was generated by 10 largest polluters. In Guilin, thanks to the stringent pollution control and industrial relocation programs implemented over several years, industries are less of a concern but still contribute a significant part of water pollution. At least as important as the sewerage investments, therefore, are actions to reduce the industrial pollution discharges. NM and GM have committed to addressing the issue with enforcement and support for significant industrial polluters to reduce or pretreat their discharges either to meet the surface water discharge standards, or to the quality suitable for adequate treatment by the waste water treatment plants, including the two to be built in Nanning. In the latter case, special sewerage user charges would be paid. Assurances will be obtained during negotiations that NM and GM would carry out action plans satisfactory to the Bank Group to reduce industrial pollution discharges to major  22 urban waterways. Time bound action plans would be provided by negotiations, listing target quality standards for discharges and deadlines by each significant industrial polluter. 4.25 Strong enforcement of environmental regulations requires effective compliance monitoring, a major responsibility of EPBs. Generally in China, EPBs depend excessively on self-reporting and stationary monitoring, with weak results. In Guangxi, the Regional and local EPBs suffer from a serious lack of manpower and equipment required for effective monitoring, particularly mobile monitoring. In order to improve monitoring and enforcement, the project would provide support for all participating jurisdictions to upgrade their environmental monitoring through improved analytical equipment and mobility for inspections, and through training programs for management and skills upgrading. F. Sugar Refineries Pollution Abatement 4.26 Guangxi is the most important sugar producing and refining area in China. Sugar refineries generate about 10% of Guangxi's total industrial output, but 75% of total industrial water pollution. They were found by a recent study to be competitive with those in other major producer countries though the average size is smaller. There are more than 100 sugar refineries in Guangxi, most of them small and medium size enterprises. Such enterprises in China as a group have been competitive and profitable with little support from formal financing system. Though they have received relatively strong support in Guangxi due to their importance, the priority in financial allocation has been given to major technical renovations, leaving little to support pollution control in existing plants. However, GAR has stopped issuing licenses for new refineries, and expansion is allowed only for those meeting discharge standards. Many refineries have adopted various low-cost, locally available technologies to reduce the pollution discharges. While there are a few successful examples, their applicability or effectiveness has been limited. Internationally, several proven technologies are available for efficient treatment, reuse, or minimization of waste water. 4.27 The project will allocate $2 million for a few subloans to finance costs of such technologies and equipment, subject to a maximum of 50% of subproject total cost or $2 million, whichever is lower, for any individual sub-project. Subloans are expected to range between $0.7 - 1.0 million, and finance about 40% of the total cost. Its maturity will be 7 years including 2 years' grace and the interest rate will be 1.5 % above the LIBOR- based standard single currency US dollar loan rate. Technically, the subprojects would be required to, among others, enable cost-effective reduction of pollution discharges and compliance with environmental regulations, and be consistent with the Region's environmental priorities. Financially, borrowing refineries should have been profitable at least two out of past three years, be projected to generate internal cash flow not less than 1.4 times the projected annual debt requirement during the term of the subloan, and pledge collateral at least 1.2 times the subloan value. 4.28 The subloans will be managed by a Unit under GUEPO, with full-time staff seconded from the Sugar Corporation and the Regional EPB. The subloan decisions will be  23 made by these staff as well as representatives of the Regional Finance Bureau, Planning and Economic Commissions. Financial transactions and supervision will be carried out by the Region's Finance Bureau system. The Unit and the other representatives of the Region will appraise subproject proposals, prepared by the borrowers, based on technical appraisal by a technical institute appointed by the Board, and financial appraisal by a commercial bank. The Bank Group will review all subproject proposals recommended by the Unit. Assurances were be obtained during negotiations that GAR will establish the Guangxi Sugar Pollution Control Project Unit with staffing, funding, and terms of reference satisfactory to the Bank Group; and cause it to make and manage sugar refinery pollution abatement subloans with assistance of competent consultants on terms and conditions and according to criteria and procedures satisfactory to the Bank Group.  24 5. Project Implementation Arrangements A. Organizations and Plans 5.1 Local administrative bureaus have been managing the preparation of individual components under their normal line responsibilities, and would continue to oversee their implementation. Local governments and their administrative units responsible for various components are listed in Table 5.1 below. Table 5.1 Implementation Responsibility by Component Borrower/ Jurisdiction Comwonent Implementine Unit Guan,nxi Autonomous Region Sugar Refinery Pollution Abatement Sugar Pollution Control Project Unit Water Resource Management Lijiang Commission Technical Assistance and Training The above units, and Environmental Protection Bureau Nannine Municivalitv Chaoyang Stream Clean Up and Interceptors Chaoyang Stream Improvement Project Office Jiangnan Sewers and STP Municipal Construction Bureau Sewerage expansion and rehabilitation Municipal Construction Bureau Nightsoil management improvement Environmental Sanitation Department Small Area Improvement Neighborhood Committees in association with District Governments Technical Assistance and Training The Sewerage Entity, Environmental Protection Bureau Guilin Municinalitv City sewers and STP GM Construction Bureau Landfill and Transfer Fleet GM Environmental Sanitation Bureau Small area improvement Neighborhood Committes, in association with District and Township Governments Technical Assistance and Training The Sewerage Company and EPB Xicheng Sewers and STP Xicheng District Management Office/GM Construction Bureau Yangshuo, Xingping and Baisha Yangshuo County Construction Bureau Aeration Ponds Lijiang Embankment Works GM Water & Power Bureau Lijiang Reforestation GM Forestry Department Guilin Prefecture Wulixia Water Works Water & Power Bureau Wulixia Erosion Protection and Plantation Forestry Department Technical Assistance and Trainine EPB. Water & Power Bureau  25 5.2 To coordinate implementation by these units, each local government has established a Project Management Office (PMO) which include staff drawn from EPB, Finance Bureau, and Construction Bureau. They report to a vice mayor of NM, vice secretary general of GM, and Administrator of GP, respectively. Guangxi Regional Government has similarly established a Guangxi Urban Environment Project Office (GUEPO) headed by a vice director of Regional EPB, reporting to a Vice Governor. It would be supported by GAR Finance Bureau and Planning Commission. Experiences in other Bank-supported projects suggest that activities within each local government would be well coordinated, provided that the PMO includes senior personnel experienced in financial and construction management of similar major projects. Assurances were be obtained during negotiations that the beneficiary local governments will maintain project leading groups and project management offices with staffing and terms of reference satisfactory to the Bank Group. 5.3 Implementation Plans have been prepared for individual components, and consolidated by jurisdiction and for the entire project and are placed in the project file. The plans specify: detailed costs, financing, preparation, procurement, implementation and supervision arrangements, monitoring indicators, project scheduling, and procurement packaging. B. On-Lending and Disbursement 5.4 Assurances were be obtained during negotiations that: GOC will on-lend the loan proceeds to GAR for a maturity of 20 years including 5 years' grace, and on-lend the credit proceeds to GAR for a maturity of 17 years including 5 years' grace, at the same interest rates and charges as received from the Bank Group; and GAR will on-lend the loan and credit proceeds, other than those required for the components implemented by itself, to NM, GM, and GP for implementation of respective parts of the project on the same terms as received from GOC. 5.5 A proposed schedule of disbursement is shown in Table 5.2. Approximately 52.5% of costs incurred by each jurisdiction would be financed with the loan and credit. For the purpose of bid evaluation and payment, each of the contracts to design, build and equip pumping stations and sewage treatment plants would be divided into two packages, one for design and construction and another for equipment supply and installation. Disbursement for the former will be made under the works category, and the latter under the goods category. 5.6 A Special Account will be established and maintained in US dollars by the Guangxi Regional Finance Bureau on terms and conditions satisfactory to the Bank Group. The Account will have an authorized allocation of $4.5 million, approximately equal to average projected disbursements over four months. Replenishment application would be submitted monthly or when the balance falls below 50% of the authorized allocation, whichever comes first. Disbursements will be made on the basis of Statement of Expenditures (SOE) for (a) training, (b) consultant contracts less than $50,000, (c) contracts for goods valued at less than $200,000 each, and (d) contracts for works valued at less than $2 million. Full documentation will be needed for disbursement for others. GUEPO will retain the documents supporting the SOE and make them available to Bank Group missions for inspection.  26 Table 5.2 Disbursement Arrangements Lateorv DLisbursement rercentage Goods 100% of C.I.F. cost of imported goods; 100% of ex-factory cost of domestically produced goods; 75% of costs of other goods procured for small area improvement; 70% of costs of other goods Subloans 100% of sugar pollution control subloans Technical Services 100% of expenditures net of taxes and Training Civil Works** 53% for Nanning Municipality (component 3.2 (a)) 50% for Guilin Municipality (component 3.2 (b) and Guilin part of 3.2 (d)) 45% for Guilin Prefecture ** Ratios for civil works are set so that the loan and credit finance 52.5% of total cost by jurisdiction. 5.7 Schedules. The project is scheduled to be completed by June 30, 2004 and the loan and credit accounts to close by December 31, 2004. The schedule of projected disbursement, based on the standard disbursement profile of urban sanitation projects in China, is shown in Annex 12. 5.8 Retroactive fmancing up to $7 million equivalent will be provided for eligible expenditures made after December 31, 1997 for consultants services and training, civil works for construction of sewers at Chaoyang in Nanning and Qintan in Guilin, and construction of landfill in Guilin, and procurement of equipment for project management offices. C. Procurement Arrangements 5.9 Goods. The project is estimated to require equipment and materials costing about $43 million in total, including equipment procured as part of four turnkey contracts to design, build and equip three sewage treatment plants and a small power generating station. About $30 million worth of the goods, or about 75 % of the total, will be procured through international competitive bidding (ICB). National competitive bidding (NCB) will be employed to procure goods more than $100,000 but not exceeding $200,000 per package, up to an aggregate amount of $6.9 million. These include standard construction materials, such as small-diameter sewer pipes, used for small area improvement, and plant seedlings used in Wulixia and Lijiang soil conservation components. Small quantities of tools and materials mainly for the small area improvement and office equipment used for project management and studies, less than $100,000 per contract and up to an aggregate amount of $2.5 million, will be procured through comparison of price quotations from at least three qualified suppliers. Specialized equipment and process licenses for sugar pollution control financed under the subloans will be procured by the beneficiary refineries through international competitive bidding except those costing less than $1 million, which may be procured through shopping procedures. Other items, goods and works not financed by the Bank, will be procured by acceptable commercial practices.  27 5.10 Civil Works for the project will be commissioned mostly through about 40 contracts between $50,000 and $8 million, procured through NCB. Potential bidders for major interceptors, pumping stations, STPs and tunnelling work, requiring special skills or equipment, will be prequalified. Some works will be bid under the supply and install contracts through ICB. Contractors for small works of plantation and sewer rehabilitation costing less than $50,000 equivalent per contract and up to $2.0 million in aggregate, may be chosen through comparison of price quotations from at least three qualified contractors. Electrical main connections and installations associated to these works will be made by local power companies through direct contracting, and will not be financed by the Bank Group. Civil works for small area improvement will be carried out by beneficiaries with their own labor and at times supplemented by contract labor hired through direct contracting. Neither will be financed by the Bank Group, other than technical services discussed below. Table 5.3: Procurement Arrangements ($ million, including contingencies) Procurement Method Category ICB NCB Otheea NF0' Total Civil Works 21.0 78.8 2.0 3.5 105.3 (10.9) (39.2) (1.0) (0.0) (51.1) Goods & Materials 28.6 6.9 2.5 38.0 (27.5) (5.7) (2.1) (35.3) Sugar Industry Pollution Control 1.3 1.0 2.7 5.0 (1.3) (0.7) (0.0) (2.0) Consultancy & Training 3.6 3.6 (3.6) (3.6) Land Acquisition & Resettlement 8.5 8.5 (0.0) (0.0) Project Management Services 0.0 8.0 8.0 (0.0) (0.0) (0.0) Total 50.9 85.7 9.1 22.7 168.5 (39.7) (44.9) (7.4) (0.0) (92.0) Note:Figures in parentheses are amounts to be financed by the Bank. a/ Other procurement methods include limited international bidding, shopping, consultant services (recruited in accordance with Bank guidelines) and training. b/ NBF = Not Bank financed 5.11 Consultancy and Training. The project would involve consultancy and training, estimated to cost about $4.0 million. A major part of the studies and training would be carried out under three consultant packages and associated training for institutional development for sewerage, environmental protection, and water resource management. Others include small consultant studies on Guilin solid waste transfer system and Nanning nightsoil management database system development costing between $100,000 and $200,000. The rest would be a  28 large number of small consultant services, each less than $50,000, to help supervise implementation of major works and to help neighborhoods prepare and implement small area improvement component. Most consultants would be selected competitively on the basis of quality and cost. Small contracts for systems design and advisory services for sewerage and environmental protection institutions would be selected on the basis of quality. Services to facilitate participation and help prepare and manage small area improvement programs would be procured as service delivery contracts, for which non-governmental organizations would be eligible to compete. All consultant contracts would be listed in general procurement notices in the Development Business (UNDB) and the expression of interest for the three largest contracts would be invited through advertisement in UNDB and national newspapers. The terms of reference for the establishment of the Lijiang Commission will be finalized before negotiations. 5.12 Procedures and Management. The procurement plan for the project is summarized in Table 5.3 and contract packages are listed in Annex 13. Procurement under the project will follow the "Guidelines: Procurement under IBRD Loans and IDA Credits" dated January 1995 as revised in January and August of 1996, and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated January 1997 and revised in September 1997. Model Bidding Documents agreed between GOC and the Bank Group will be used for all contracts. The Bank Group's prior review procedures will apply to all ICB packages, civil works packages with estimated value over $2 million, consultant firm contracts over $100,000 and individual consultant contracts over $50,000. These are expected to cover about 80% of all procurement value under the project. Bank Group missions will carry out ex post review of a selection of others. Under ICB for goods, domestic suppliers will be given a margin of preference equal to 15% of CIF price or applicable customs duties and taxes, whichever is less. For turnkey contracts mentioned above the same domestic preference will be applied to the equipment which will be priced separately. No preference will be applied to works. Foreign bidders will be allowed to participate in NCB. D. Resettlement and Land Acquisition 5.13 Facilities to be built under the project would occupy some 110 ha (or 102 ha) of land permanently, and require resettlement of 926 people. About 27 ha required mainly for a solid waste landfill and some for sewage treatment plants in Guilin has been owned by the local government for some years. Of the remaining land to be acquired for the project, the major part consists of 70 ha of an abandoned brick yard in Nanning to be used for a new sewage treatment plant. Components to be designed during the project implementation, the small area improvement sugar refinery pollution control subprojects would be carried out within the premises of the neighborhoods and borrowing refineries and therefore involve not land acquisition or resettlement. 5.14 The only resettlement in the project is required for sewering the densely built-up center of Nanning along the Chaoyang stream. The originally proposed design for the component was radically altered during project preparation mainly as it would have required resettling over 5,000 people. The design adopted for the project requires clearing of 5 ha, demolition and replacement of 13,000 m2 of buildings and resettlement of 926 persons. They will be resettled in larger housing units in an apartment complex being built near the area, and given moving compensation. Thirty households identified as vulnerable people on account of their low income, ill health, and old age will be given special additional support to ensure they  29 maintain their income and access to necessary services. Resettlement Action Plan (RAP) has been prepared for the Chaoyang stream area in full consultation with the affected people. The RAP specify responsible organizations at various levels and procedures to inform and assist the affected people in a timely manner during implementation, including grievance procedures, and monitoring and reporting arrangements. The project authority retained an independent institute for monitoring and evaluation, who also participated in preparation of the RAP. Assurances were obtained during negotiations that NM will carry out the resettlement and rehabilitation of affected persons according to a plan (the RAP) satisfactory to the Bank Group and report their progress included in the project progress reports. E. Accounting and Auditing 5.15 Local government departments keep their recurrent accounts according to the state standard accounting system for administrative units, and for investment projects, follow the state construction accounting system. Municipal sewerage companies to be established during the project period will follow the standard enterprise accounting system. These standards, revised in 1994, was found to conform to internationally accepted accounting principles. Ministry of Finance and local finance bureaus have provided extensive training in the use of the standard accounting systems and continue to provide guidance and assistance for their use. Implementing units of the project components will be responsible to keep their respective detailed construction accounts and the project office of each jurisdiction will maintain consolidated project accounts. GUEPO will maintain consolidated accounts for the entire project. 5.16 Local Audit Bureaus, under the guidance of the State Audit Administration (SAA), have carried out auditing of most projects the Bank Group financed. The arrangement has been found satisfactory. The Guangxi Regional Audit Bureau will provide the necessary audit services for the project under the same arrangements. Assurances were obtained during negotiations that GAR will submit to the Bank Group annual audit reports on the following within six months after the end of each fiscal year starting from fiscal year 1999: (a) the Special Account; (b) the statements of expenditures; (c) the project accounts consolidated and maintained by GUEPO and Nanning and Guilin PMOs; and (d) the financial statements of Nanning and Guilin sewerage entities, including the statements of flow of funds and the compliance with the financial covenants. F. Monitoring and Supervision 5.17 Assurances were obtained during negotiations that GUEPO will submit quarterly progress reports according to a format satisfactory to the Bank Group by the end of January, April, July, and October of each year, starting from October 1998. The report submitted in April will serve as annual progress reports, including summary of implementation in the past year and reports on the complete set of monitoring indicators. The report submitted in October will  30 include implementation plans for the coming year. GUEPO will provide an implementation completion report within six months of project closing. 5.18 A supervision plan is shown in Annex 14. The first three years of supervision will require relatively large efforts, about 18 staff weeks, focusing on different areas. In FY 1999, the focus would be on helping to develop implementation and monitoring arrangements, procurement of early investment components and consultancy contracts, and detailed preparation of procuring pumping stations and other components to be implemented initially. A Launch Workshop will be held in about November 1998. Another major assistance focus during FY 1999 and 2000 would be the institutional development of the Sewerage Companies. In FY 2000, large engineering input would be required to review the actual sewage flows and projected future flows to Jiangnan and Xicheng STPs. A mid-term review will be held in late 2001 for strategic assessment of project implementation and prospects. In later years, the supervision would require about 15 staff-weeks per year.  31 6. BENEFITS, RISKS, AND ALTERNATIVES A. Environmental Impacts 6.1 The project is rated environmental category A in view of its large environmental impacts. While the project components would bring major environmental improvements, they would give rise to some environmental risks. In accordance with a GOC regulation governing externally assisted project, which is consistent with the Bank's Operational Directive, comprehensive Environmental Impact Assessment studies (EA) have been carried out by a qualified national institution covering all project components except the programs of small area improvement and sewer repairs, whose details will be determined during the project period. The full documents have been placed in the project files and are summarized in Annex 15. The EA has been approved by NEPA and reviewed by the Bank Group. A resettlement action plan has been prepared separately and summarized in Section 5.D and Annex 8. 6.2 The most important environmental risk is to the quality of Yong River water at the new discharge point of waste water collected from Nanning urban areas. Currently some of the waste water is absorbed to the ground, and the rest is discharged into the River at several dispersed locations and assimilated by the River. Compared with this current situation, better collection of waste water into a single discharge point would significantly raise the level of pollution at the new discharge point. A quantitative model was built to analyze the impact of the new sewerage system on the water quality of Yong River. The results indicate that: the water quality upstream of the new discharge point would improve from the current Class III and IV to Class II and III; discharge of untreated sewage at the new location would push the water quality immediately downstream from the current Class IV to Class V in a near future; and tertiary treatment of most of the urban sewage would be required to upgrade the water quality at the location to Class III. Based on evaluation of alternative levels of treatment, the project includes fmancing for a treatment plant that would prevent the newly collected wastewater from worsening the water quality at the discharge point and would provide a basis for future expansion. 6.3 Another potential environment risk is associated with the sludge that needs to be dredged from the Chaoyang stream bed. The characteristics of the sludge has been analyzed, and a safe disposal site, in addition to the existing landfill, has been secured. Other significant potential adverse environmental impacts of the project as a whole are temporary increases in noise, dust, and traffic disruption during construction. Measures to control these to a minimum have been specified and will be implemented during the project. The project addresses some of the most pressing environmental issues well recognized and given high priority by the local governments. Environmental master plan studies and a study of Lijiang basin water resource issues carried out during project preparation (placed in the Project Files) have confirmed these priorities and also establish strategic frameworks to deal with overall environmental issues in the long term.  32 B. Analysis of Benefits and Alternatives 6.4 The project is entirely devoted to environmental improvements, particularly to the control of water pollution, which in turn would improve health, ecology, aesthetics, water supply, recreation. Different components of the project aim at different combinations of the multi-dimensional benefits. By and large these benefits are difficult to evaluate quantitatively due to the involved data and value judgments. Partly for this reason the basic issue of the whether the intended benefits are worth the cost is addressed only at a general level, using approximate benefit-cost measures to illuminate the local governments' priorities. Economic analysis was focused on clarifying the nature of the benefits expected of each component and its elements, and identifying options to obtain the benefits in terms of the counterfactual and scope as well as technological alternatives. For some benefits such as an increase in raw water availability, quantitative cost-benefit analysis was necessary and feasible. In other cases, benefits could be compared only by orders of magnitude. The analysis was based on the discount rate of 12% and the conversion factor of one for most inputs, according to the Bank's review of market prices of urban factors. In many other cases, other analytical criteria and procedures were decisive in guiding the evaluation of options. These analyses led to significant reformulation of the project during preparation. Major benefits and alternatives considered for large components are discussed below. 6.5 Sewerage works in Nanning, which account for a major portion of project investment, can be classified into three groups in terms of their impacts: (i) improving drainage of sewage and storm water in the city areas housing about 70% of the urban population; (ii) conveying it to a location downstream for discharge into Yongjiang, and (iii) treating the sewage at that location. The main benefit from the first group of sewerage works, as well as nightsoil management and small area improvements, would be a reduction in water-borne diseases. While recognizing the limitations, an attempt was made for a rough valuation in view of the importance of this type of benefits. Various public health reports indicate that the incidence of such diseases in Nanning is around a third higher than national average, whereas the rate in Guilin is almost a third less. Given that other conditions are similar, the difference in morbidity rate can be attributable largely to the levels of sewerage services, better than most in Guilin and worse than most in Nanning. Inferring from a World Development Report (1993) estimate for China as a whole, the burden of diarrhea and hepatitis in Nanning is estimated to be about Y 90 million a year. Assuming that the sewerage improvement could bridge 80% of the gap between the two cities by 2003 and the value increases with income and population by about 12% a year for the first 10 years and 8% afterwards, the present value (PV) of the benefit discounted by 12% over 30 years would be about Y 590 million. Taking into account other illnesses, reported in a small survey taken during project preparation, the PV of benefits can be estimated at about Y 1280 million. On the other hand, PV of relevant investments under the project and complementary investments and O&M is estimated to be about Y 490 million, indicating a benefit-cost ratio in the neighborhood of about 2. (The estimation is discussed in more detail in Annex 1.) 6.6 Improved sewerage would also reduce bad odor and sight which are acute in the commercial center of the city along the Chaoyang Stream, and improve the land value of the area, were there an active property market. Current land value of some 100 ha of directly affected commercial and residential plots in the city center is imputed to be about Y 3 billion. This indicates that the value of the ambient improvement could be more important than health benefits for this particular area. A major issue for the project was evaluating the original  33 proposal that focused on this ambient benefit in the city center. The original proposal to improve the lower 3 km of Chaoyang stream would have cost about Y 400 million, compared with Y 150 million allocated to the same section under the finally agreed option. The additional investment would have allowed realigning and expanding the stream course to add flood retention capacity and recreational space. The additional flood management capacity, however, would be worth less than Y 15 million, PV of additional capital and operating costs of extra pumping capacity. The odor would be reduced under either option, and it was doubtful if the other proposed improvements such as additional recreational space would pay for themselves through land value increments of nearby plots, especially considering that most of the extra cost would have been incurred in the form of about 20 ha more land cleared than now planned. On the other hand, these expenditures would have left little resources for providing sewers in other areas of the city, foregoing the major part of the health benefit discussed above. 6.7 The second group of works, to convey intercepted sewage across the Yongjiang, would protect the quality of water for a city water intake located on the downstream of the discharge point of Chaoyang and Erkeng streams. It is projected that the water quality deterioration, if allowed to continue at the present rate, would make it necessary to relocate the intake in about six years, at an estimated cost of about Y 120 million. This savings, discounted by 12% a year, would be equivalent to a PV of about Y 60 million. This alone would justify the investment and operating costs for this element, whose PV is about Y 48 million. 6.8 A trade-off within the fiscal limitation was the main consideration in determining the level and volume of treatment of the collected sewage. The current water quality of Yongjiang at the point of discharge from the proposed STP is rated Class IV during the dry season. A water quality model indicated that the quality would be upgraded to Class III only if a major part of urban waste water is collected and treated to the tertiary level. A major economic benefit of improving from Class IV to Class III would be to allow intake of drinking water, which is not relevant in this case, and improve fisheries and recreation, whose values are hard to quantify but unlikely to exceed even the operating cost of such a STP, over Y 10 million per year. Given the constraints of fiscal resources and likely affordability limit on sewerage charges, a higher level and larger capacity of treatment would mean less sewage collection for the next decade or more. This would defeat the purpose of sewerage improvement. The treatment level and capacity therefore have been determined so as to maximize sewage collection and treat it at the primary level. This would leave the quality of water at the discharge point equal or better than the current one in most important pollutants. Further, the STP will provide a substantial base for expansion and upgrading in the future when they would be affordable. 6.9 Environment and Tourism. Broad environmental qualities beyond health concerns are given more attention in considering sewerage in Guilin, due mainly to the importance of tourism. About 8 million domestic tourists and 350,000 foreign tourists visit Guilin annually, attracted mainly by the cruise on the Lijiang downstream of Guilin city. It is estimated that close to 20% of GDP in Guilin area is generated directly from tourism industry, and including activities directly supporting the industry and its employees, about 30% GDP, or Y 2.5 billion a year. A recent survey on tourists' satisfaction with eight environmental aspects found high levels of dissatisfaction with the level of water in Lijiang (though the survey was in April, after the driest season) and cleanliness of city streets and Taohuajiang, a Lijiang tributary and main city stream. The importance of Lijiang water level is corroborated by the fact that the number of foreign tourists drops to half during the three driest months, January to March. The  34 emphases on the latter two urban elements are consistent with the fact that tourists spend considerable time in the city itself, and indicates the importance of urban environment to tourism as much as Lijiang itself. In the survey the tourists also stated that they would stay about 50% longer on average, if the environmental problems they perceive are solved. While this would imply a contingent valuation of over a billion yuan a year in terms of additional GDP, various constraints on both demand and supply sides would limit the extent this will be realized. Further, unless one can define "satisfactory environmental improvements", it is not possible to allocate the potential benefit to different types of improvements, and then to specific investments which contribute partly to these improvements. Therefore, economic analysis of proposed components with primary objective of improving various aspects of the Lijiang has relied on alternative evaluations, using the benefits related to tourism only as a reference. 6.10 Sewerage and Solid Waste Management in Guilin. Improved environmental health would be the major concrete benefit of the investments for solid waste landfill and city sewers in Guilin, at a cost per beneficiary (about Y 650 per capita) similar to that in Nanning. Due to the higher level of environmental health in Guilin, the marginal benefits would be lower, but would be supplemented by tourism-related benefits. During project preparation, the main focus of the sewerage components in Guilin has shifted from the latter to the former, not due to revaluation of relative importance of the two objectives, but mainly based on assessment of least cost options and the time horizon. Whereas the original proposal focused on expansion of sewage treatment (secondary level), it was determined that the existing capacity of two STPs in the southern part of the city would not be fully utilized for the next several years. Higher priority for the immediate future would be to increase their utilization, expand sewerage collection, and expand a north-western STP which is operating over capacity. These measures would have a significant impact in reducing pollution in Taohuajiang, whose water quality is currently rated between Class IV and V. 6.11 For a proposed STP in Xicheng, a newly developing industrial suburb of Guilin, the proposed timing was delayed and scope was reduced based on the economic analysis that showed that its population and wastewater generation is likely to grow more slowly than earlier projected, and that capital and operating cost of a secondary sewage treatment would exceed the affordability of the area residents and the area governrnent. Both factors imply a high risk of idling the facilities if built as originally proposed. The original proposal also called for building trunk and secondary sewers for new developments. However, this was replaced by support for sewers in the old existing area within Xicheng, given that the new developments are essentially commercial and speculative and call for short-term commercial financing. Another group of proposed sewerage investments in another newly development area north of Guilin city was rejected for almost the same reasons as above. 6.12 Water Works. The Wulixia water works would add about 7 m3/second of water to Lijiang during the dry season. The highest economic use of the water would be the supply for urban uses, probably higher than the more emphasized benefit of helping the Lijiang cruise. In fact, water supply of the city and towns along the river is seriously constrained during the dry season, requiring occasional rationing. A major portion of the additional water would be used for urban water supply. Its value during the dry season may be assessed at least Y 0.5/m3, in view of the valuation of about Y 1-2/m3 in dry northern provinces. The process of diverting, storing, and releasing the water also provides flows for electricity generation. In Guilin area, marginal price of electricity, bought from thermal power plants, is Y 0.4/kwh. Including  35 environmental costs of thermal generation, the economic value of the hydropower would be around Y 0.5/kwh. The PV of these economic benefits (minus operating costs and discounted at 12% a year) is estimated to be about Y 205 million, 7 times the investment cost. This extraordinary high rate of return can be attributed largely to the utilization of the existing Wulixia reservoir and associated facilities. Although the reservoir was built for irrigation purpose, a large part of the water finds little economic use during the dry season due to the conversion of much of the farmland to more profitable alternative crops and orchards. 6.13 The original proposal for the project included other, much larger water works to supplement the Lijiang flow. The largest part of the original proposal was a group of water works in a river basin west of Lijiang (Huangsha and Xunjiang), partly to transfer water to Taohuajiang and Lijiang. These would have been largely new water structures, and their costs could be justified only if and when the value of water in terms of tourism or water supply is increased over twice the level indicated above, which could be the case in a medium-term future. Another part of the original proposal was to transfer water from Xiaorongjiang, a Lijiang tributary, to a large existing reservoir that is underutilized. These water works were evaluated to be economically justified strongly, with a benefit-cost ratio of about two. However, they could not be included in the project as the Regional authority that manages the reservoir could not reach agreement with Guilin Municipality, on the latter's payment for the additional water. 6.14 Benefits of repairing and building embankments along the Lijiang were evaluated on the basis of the record of loss of crop land, roads, and plants to the floods of 1992 and 1993, which are considered typical, recurrent floods. The losses were estimated to have cost about Y 18 million. Over 20 years, these losses would amount to a PV of about Y 66 million, compared with Y 48 million, the PV of the cost of embankments and their maintenance. While an important motivation was aesthetic value for tourism, it is difficult to make a direct link. Therefore, the above analysis was used as criteria for the selection of embankment sections to be financed under the project. Details of this and the water works components discussed above, including economic evaluation, are available in the feasibility report (see Annex 15: Documents and Data in Project Files). C. Poverty and Social Considerations 6.15 The project as a whole is expected to have strong poverty alleviation effects due to four features: its location in Guangxi, its focus on environmental sanitation, its boost to tourism; and more directly, small area improvement component. As in other areas, Guangxi's major cities have been, and will continue to be, the engines of the Region's rapid economic growth, as discussed in Chapter 2. Visible improvements to the physical environment are expected to provide a significant help in attracting business investment and tourism to Nanning and Guilin. Urban economic growth lead to poverty alleviation not only by propagation of economic growth through linkages across sectors and areas, but more directly by rural-to-urban migration providing outlets for the pressure of population and poverty in the countryside. This effect has been stronger in major cities of Guangxi compared with other regions of the country, as their growth has been particularly fast and they have been much more open and accommodating to rural migrants. Migration added nearly 4% a year to the population of Nanning and Guilin since 1990, an unusually high rate in China.  36 6.16 It has been shown worldwide that the poor, while obtaining more income and job opportunities in fast growing cities, suffer disproportionately from poor environmental health. Focusing on improvements in environmental sanitation, the large part of project benefits are expected to accrue to the poor. Another significant part of the intended project benefit, aid to tourism, would also favor the poor as tourism industry employs a large number of unskilled workers. It is noteworthy that this pattern of benefit incidence for the poor coincides with that for women and for minorities. A gender impact study conducted for the project has found that women are more exposed to environmental sanitation and heavily represented in the tourism industry. Ethnic minorities, who constitute a near majority in Guangxi, are represented more among the new and poor residents of the cities than among long-term residents of the cities. 6.17 The project targets poverty more directly through the small area improvement component, although the criteria for selecting beneficiary areas do not explicitly emphasize residents' income levels. Rather, the selection criteria and financing parameters consist of conditions of physical environment and the participation of the residents. Main reasons for doing so are discussed in Chapter 4: limited validity of cash earnings as a measure of real income, and the desire to support low-cost, in-situ improvement as an efficient alternative to wholesale new development, regardless of the residents' income levels. Nevertheless, sample household surveys in the areas identified so far show that most of the area residents (over 70%) work in informal or small business sectors, and their average income per capita, about Y 230 per month, is only about half of the city averages including imputed value of in-kind benefits. D. Risks and Sustainability 6.18 Compared with similar projects in China, the project is expected to have above- average risk of implementation and sustainability. While similar Bank-financed projects have a satisfactory implementation record as a whole, they have commonly incurred costs and delays mainly during the start-up stage, due to initial difficulties in using Bank Group's procedures especially for procurement and difficulties of coordination among agencies and jurisdictions. These difficulties could be more serious for this project, partly due to the project complexity and partly due to the relative lack of institutional and technical capacity and experience. Various steps have been taken during project preparation to reduce the risks: exchange visits between project officials in Guangxi and those in other cities of China implementing similar projects; training in procedures by the Ministry of Finance and the Bank Resident Mission; retaining of an experienced procurement agency; and turn-key packaging of more complex works and equipment. An Australian grant has been committed to provide limited assistance in implementation of physical investments and institutional development components during the start-up phase. Nevertheless, the difficulties are expected to remain, and it would be important to maintain competent project management offices at various levels, competent supervision engineers and other consultants are retained, and the project progress is monitored systematically. 6.19 Financial and Institutional Risks. Counterpart financing has grown increasingly problematic for projects in China in recent years due to the fiscal transition and stabilization. In view of this, careful analysis has been carried out and appropriate financing sources arranged secured to ensure adequate financing the project. (Refer to Sections 4.A and 4.B). A more important issue is securing an adequate financial resources for continuing operation of the newly added sewerage assets. Tariff increases implemented already by NM and GM as well as further increases being proposed provide a better-than-average assurance on this count. However, the  37 covenant on financial self-sufficiency of sewerage operations would have to be monitored carefully especially during the later part of project period. Also, particularly in Nanning, it would be essential that an adequate institution is developed to manage the vastly increased sewerage facilities. A major focus of the supervision and technical assistance would therefore be on the formulation of an institutional development plan and its implementation. 6.20 Regulatory Risks. The main project benefit of water quality improvement would be limited in extent and in duration without regulation of point source pollution discharges. Therefore commitments of NM and GM will be obtained to the pollution control action plans as an integral part of the project, and the Regional sugar pollution control plan would be an essential element of subproject appraisal. Risks with implementation of these plans appear much less than those with environmental protection programs associated with other similar projects for two reasons: the pollution control plans are much more specific, and the record of at least one city, GM, is much better than most other localities in China. 6.21 Economic Risks. Sewerage services, and also to a large extent, industrial pollution control are expensive and therefore the demand for them have to be supported by considerable levels of income. To a large measure, the investment in the sewerage and other sanitation services and the industrial pollution action plans are predicated on the strong prospect of continued and fast economic growths in both cities, and tourism in the case of Guilin. If for any reason the city economies slow down or deteriorate, it would be difficult to keep up the services and pollution regulation. However, relatively little risk of economic downturn is foreseen for the medium term. 6.22 Small Area Improvements would differ considerably from existing practices in Chinese municipalities, requiring higher levels of beneficiary participation and less reliance on formal engineering standards. Risks are an unavoidable, and almost integral, element of the required innovations and experimentation. Hence monitoring and managing the risks and benefits would be an essential aspect of the component implementation. Subcomponents will be prepared and implemented as an experiment, starting with several schemes to be carried out in the first year or two, monitoring and evaluating the implementation and results, and modifying and expanding them based on experience. 6.23 Water Works for Lijiang, though a small and least risky part of the originally proposed scheme, still present some remaining risks that need to be recognized and managed. Given that water works in general have taken long to complete, these relatively small works (costing Y 30 million) have been given high levels of efforts for studies and design, and will be given more time and management resources for implementation. Even after the works are completed as planned, there is a high probability (about 30%) that they would fall short of the target of adding 7 m3/sec to Lijiang during the dry season, for natural and managerial reasons. Fortunately, however, the components would remain viable even with serious shortfall, as seen above in para 6.13. Improvement in overall management of water resources in the Lijiang basin would be an essential element to ensure sustainability, but the project will pursue a limited objective in this area, as discussed in Section 4.D.  38 7. Agreements and Recommendation 7.1 Assurances were obtained during negotiations that GOC will on-lend the loan proceeds to GAR for a maturity of 20 years including 5 years' grace and the credit proceeds for a maturity of 17 years including 5 years' grace, both at the same interest rate and financial charges as received from the Bank Group (para 5.3). 7.2 The following assurances were be obtained from GAR during negotiations: (a) the sewerage charges in Nanning and Guilin to be adjusted from time to time to allow generation of operating revenues sufficient to cover at least adequate operation, maintenance, and debt service (para 4.9 and para 4.14); (b) NM will carry out an institutional development program for effective management of sewerage services, revised from time to time and satisfactory to the Bank Group, with assistance of competent consultants (4.7); (c) GM will establish an autonomous Sewerage Company with charter and revenue base satisfactory to the Bank Group by December 31, 1998 and will cause the Company to carry out an institutional development program satisfactory to the Bank Group with assistance of competent consultants (4.11); (d) NM and GM will carry out small area improvements selected and implemented according to criteria, procedures, and schedules satisfactory to the Bank Group (4.20); (e) GAR will establish a Commission by June 30, 1999 with composition and terms of reference satisfactory to the Bank Group and cause it to carry out actions to improve and progressively integrate the management of the water use and discharge in the Lijiang basin (4.22); (f) NM and GM will carry out plans of action, satisfactory to the Bank Group, to reduce industrial pollution discharges to major urban waterways (4.24); (g) GAR will maintain a Guangxi Sugar Pollution Control Project Unit with staffing, funding, and terms of reference satisfactory to the Bank Group; and cause it to make and manage sugar refinery pollution abatement subloans with assistance of competent consultants on terms and conditions satisfactory to the Bank Group, and according to criteria and procedures satisfactory to the Bank Group (4.28); (h) GAR will maintain GUEPO, and cause NM, GM, and GP to maintain respective PMOs with staffing and terms of reference satisfactory to the Bank Group (5.2);  39 (i) GAR will on-lend the loan and credit proceeds, other than those required for the components implemented by itself, to NM, GM, and GP for implementation of respective parts of the project on the same terms as received from GOC (5.3); (j) NM will carry out the resettlement and rehabilitation of project affected persons according to a resettlement action plan satisfactory to the Bank Group and report their progress included in the quarterly project progress reports (5.14); (k) GAR will submit to the Bank Group, within six months after the end of each fiscal year starting from fiscal year 1998, annual audit reports by an independent auditor of: the Special Account; the statements of expenditures; the project accounts consolidated and maintained by GUEPO and Nanning and Guilin PMOs; the financial statements of Nanning and Guilin sewerage companies, including in particular the statements of flow of funds and the compliance with the financial covenants (5.16); and (1) GUEPO will submit quarterly progress reports according to a format satisfactory to the Bank Group by the end of January, April, July, and October each year, starting from January 31, 1998 (5.17). 7.3 Agreements will be reached during negotiations that, as a condition of disbursement for civil works for Guilin sewerage and drainage components (3.2(b)), GAR will cause GM to increase the sewerage tariffs to not less than 0.18/m3 on average. 7.4 With the above assurances, the proposed project would be suitable for an IBRD loan of $72 million equivalent for a period of 20 years, including five years grace, at the Bank's LIBOR-based single currency loans, and an IDA credit of SDR 14.9 million ($20 million equivalent) at standard terms with 35 years' maturity, to the People's Republic of China.  Annex 1 40 Page 1 of 13 Sewerage and Drainage in Nanning Status of Water Resources, Drainage and Sewerage Systems 1. Nanning city, with an urban population of about a million, is situated on the northern and southern banks of the Yongjiang (Yongjiang River), which originates from Yunnan province, about 500 km to the west, and joins the Pearl River. The River, as it traverses the city in a southeasterly course, is about 300 meters wide and has an annual average flow of 1,300 m3/sec. The flow rate varies widely, with annual average dry season flow of about 250 m3/sec and the 20-year flood flow of about 15,000 m3/sec. As most of the city area elevation is below the 20 year flood level (78 m above sea), protection levees have been built over the years to protect against this level. A major upstream dam (Baise Dam) now being planned would provide an additional measure of flood protection. The Yongjiang is the primary source of the municipal water supply, drawn from six points along the River. Close to 20% of the total water used in the city is also supplied from more than 132 industrial and private wells. 2. The urbanized areas of the city are drained by six tributaries of the Yongjiang. Chaoyang stream serves the largest catchment area that includes the main city area north of the River, housing about 30% of population and the central business district. Before meeting the Yongjiang, it joins the Erkeng stream which drains the neighboring industrial and residential areas north. Areas south of the river (Jiangnan area) are relatively more recent and industrial, and drained mainly by a small Tingzi stream and Shuitang. Major new developments are currently on-going in the area east of the current city center (Langdong), served by the Nanhu Lake and Zhupai stream. These are all relatively small streams with catchment areas between 3 and 15 square km. A considerable portion of the water of the catchments is diverted to agricultural use, reducing the flow in the urban streams. Their water levels are often lower than the Yongjiang and the flood protection levees at the Yongjiang also impedes their flow. 3. Nanning's sewerage and drainage system has been constructed area by area. The system consists mostly of large diameter pipes or large size culverts and drains, with a total length of some 380 km covering 58 km2 of the total urban area of 81 km2. In many districts even the most basic form of a sewer network has not been put in and the secondary sewers, primarily the responsibility of developers, has not met minimum requirements either. 4. There is almost no separation between storm and sewage flows and the municipal policy has been to construct drains that can contain as much floodwater as possible. As a result, the sewers are generally too large to handle sewage flows during dry weather. Sections of the network have a low self-cleaning capacity, causing sheet flooding and water back-ups to occur regularly during the monsoons. Further, most of these combined drains suffer from inadequate maintenance and repair, and are clogged by silt and debris. A recent study of the city's sewer network conducted by the BMEDRI (Beijing Municipal  Annex 1 41 Page 2 of 13 Engineering Design Institute) revealed that at least half of the network is badly kept up and leaks are frequent. Sewers and drains on roads that are over 20 m wide are maintained by the Municipal Engineering Management Administration, and smaller ones by the five administrative Districts. 5. All drains courses are designed to send effluent to the nearest water body. Nanning has 16 flood pumping stations, 12 of which are located at river mouths for lifting flows into the main river. There are no wastewater treatment facilities anywhere in the city for its domestic sewage except septic tanks, although some industries have on-site pretreatment facilities for their effluent. 6. Treatment of domestic sewage depends entirely on the septic tank system. Consultants have estimated that there are some 36,000 septic tanks in the city, virtually one for every building in the city. The responsible government agency for nightsoil management is the Environmental Sanitation Management Department (ESMD). Its small fleet of ten tanker trucks serves the approximately 170 public toilets in the inner city, each with a three compartment septic tank. When called upon, they will also service septic tanks belonging to other buildings. During periodic cleaning, waste sludge is emptied from the tank and sent to a composting facility where it is mixed with municipal solid waste. The plant produces compost (which is used by farmers) and non-compostable residue (which is landfilled). Major Issues and Actions 7. Due to a virtual lack of sanitary sewerage system, the urban tributaries of the Yongjiang receive most of the waste water discharges. As a result, water quality in three of the streams -- the Erkeng, Chaoyang and Tingzi -- that drain the most densely populated areas of the city into the Yongjiang is little different from raw sewage, as shown in Table 1 below. As a result, the water quality of the Yongjiang deteriorates seriously as it flows through the city. Water samples from the Yongjiang show that along the river's upper reaches, it satisfies water quality Class II (National Environmental Standard for Surface Water, GB3838-88), suitable for drinking water source. As it passes through the city, however, the quality worsens to Class III, quality marginally acceptable for drinking water source, and even to Class IV at certain areas during the dry season. Table 1. Typical Qualities of Yongjiang and tributaries Yongjiang Yongjiang Xinxu Erk-eng Chaovang Tingzi (upstream) (downstream) tributary tributary tributary tributarv BOD (mg/i) 0.53 1.87 12.5 74 116.6 292 flow (m3/s) - - 1.22 4.77 1.63 1.81 Class II III >V >V >V > V 8. The case for immediate action to address these problems is the need to preserve the urban water sources. Although the considerable flowrate of the Yongjiang is sufficient to keep the water quality from deteriorating beyond Class III level overall, the quality deteriorates below this level at some localized areas during the dry season. This affects the  Annex 1 42 Page 3 of 13 largest water intake of the city which is located downstream of the point where the Chaoyang and Erkeng are discharged into the River. At present this causes occasional stopping of water intake and high treatment costs at other times. However, it is projected that continuation of the current trend of deterioration would force the relocation of the intake at a high cost. Also the groundwater sources, shown to be generally good quality so far, are threatened by sewage seeping from the deficient sewer lines, under-maintained septic tanks, and solid waste. 9. Another set of major problems are flooding and stagnant water. Some of the problems are localized ones due to the incomplete and ineffective drainage system in a large part of the urban areas. To a significant extent, however, the urban streams themselves are rendered stagnant, due to the low flowrate which is further impeded by the flood protection levees along the Yongjiang and the stream water level which is lower than that of the Yongjiang. 10. These problems are particularly significant with the Chaoyang stream and its catchment area. The area is home to some third of the total urban population of Nanning and the daytime population is larger as the area hosts a large part of the city's civil and industrial activities, which are growing fast. The heavily polluted water of Chaoyang, often stagnant, along with the built-up sludge, gives off persistent stench in the city center, contributes the biggest organic load to the Yongjiang, and its overflow during heavy floods results in serious epidemic outbreak. These factors make the Chaoyang stream an environmental problem of the highest priority. Another major source of pollution is the Tingzi tributary. Although small, the Tingzi stream has the highest concentration of pollutants. 11. Industry is the largest contributor to water pollution. About 50 industrial plants located along the Chaoyang stream are responsible for about two thirds of the stream's COD load in the tributary. The high pollution load of the Tingzi stream is mostly due to industries. Due to rapid industrial development, the water quality of Tingzi, Chaoyang, and Erkeng tributaries is expected to deteriorate even further. In the past, enforcement and governmental commitment to keep the industries in check have been weak. But under this project, the authorities have now committed to implementing an action plan (see Annex 4) that imposes strict effluent guidelines for the polluting industries. 12. Going beyond arresting further deterioration of the situation, the municipal government has started to take major initiatives for improvement. It has recently established an effective solid waste management system including a sanitary landfill. The Guangxi Urban Environment Project would constitute the major part of the program to improve sewerage: extension and repair of the sewerage and drainage network, especially along the Chaoyang stream, clean-up of the lower reaches of the stream, establishment of a primary sewage treatment plant, improvement of the nightsoil management system whose service will be required for some time until fully separate sewerage system is in place. The small area improvement program will extend the program to the tertiary level for focused areas where the environmental deficiencies are particularly serious.  Annex 1 43 Page 4 of 13 13. The northeastern part of Nanning drains into the Zhupai creek and the Nanhu lake. Being a more recent urban development, it has been provided with relatively good drains which channel both storm water and waste water. But to protect both the lake and the creek from further domestic and industrial sewage, Nanning Municipality (NM) plans to build an interceptor that cuts across all the main drains and diverts dry weather flows to a sewage treatment at Langdong (a secondary treatment plant with an initial capacity of 160,000 m3/day, funded under a bilateral loan). These works, separate from the Guangxi Urban Environment Project, form an additional element of the municipality's ambitious program to improve the environmental quality of the city. 14. The municipal government has commissioned Beijing Municipal Engineering Design and Research Institute (BMEDRI) to establish a Sewerage and Drainage Master Plan (1995) and conduct feasibility studies of the above programs, focused on Chaoyang stream. In addition, it obtained assistance from Canada and Australia for further refinement of the feasibility studies and additional studies toward environmental master plan. The Project 15. The Nanning sewerage and drainage components of the project aims at improving the quality and drainage of water in Nanning city, by resolving the urgent and high priority deficiencies as well as establishing the basis for long-term improvement. The individual components are described below: (a) Clean-Up and Sewering of Lower 3.1 km of the Chaoyang stream (Total cost $14.9 million): Interceptor sewers will be built along each bank of the last 3.1 km section of the Chaoyang stream to collect wastewater that will otherwise be discharged directly into the stream. Twin interceptors would be slightly more costly to build than a single larger one, but would be easier to maintain. These interceptors merge into a concrete culvert which is joined by another interceptor (400 meters long) from Erkeng. To serve the entire Chaoyang catchment area, the interceptors will have a diameter of 1500 mm and be made of pre-cast concrete and rubber joints. Allowances were given for the fact that the interceptors will be ready for use before the city makes a full transition to separate storm and sewerage networks. An estimated 180,000 m3 of sludge on the stream bed, which is analyzed to be heavily laden with the nitrogen and phosphorus, will be dredged and will be disposed at a safe location. Retaining walls of the stream banks will be built, repaired or modified for better flood and erosion management. (b) Sewage and Storm Water Pumping Stations at Dakengkou (Total cost $5.5 million). A sewage pumping station to pump the sewage from the Chaoyang and Erkeng stream interceptors into the conveyor system crossing the Yongjiang. The initial pumping capacity is 240,000 m3/d with for future expansion to 480,000 m3/day to cater for the Erkeng stream and Xixiangtang. A separate pumping station of 12 m3/s capacity to pump out the Chaoyang or reverse to pump the Yongjiang  Annex 1 44 Page 5 of 13 water to replenish the Chaoyang. The sewage and storm water pumping stations may be combined on one site if possible. (c) A Conveyor Sewer (Total cost $ 8.5 million) carrying the sewage from the Chaoyang interceptor to the new Jiangnan treatment plant. River crossing will be by a twin pipe siphon designed for expansion into a three pipe system handling 480,000 m3/day of flow if required in the future. The wastewater is then carried by a 3.9 km trunk sewer of a culvert design (dimensions 2.4 x 2.0 m) to reach Jiangnan. This sewer will pick up wastewater for the Tingzi and Shuitang stream catchment areas including that from the Nahong channel and the industries. (d) A primarv wastewater treatment plant at Jiangnan (Total cost $24.1 million) to treat sewage from the Chaoyang, Erkeng, Tingzi and Nahong basins. The initial capacity is expected to be 180,000 m3/day of wastewater, that may be adjusted during final design in 1998-99 according to detailed flow measurements and estimation. The site and structural design will make provisions for future expansion to as much as 960,000 m3/day capacity after year 2015, sufficient to cater to most of the city's wastewater except that to be sent to the Langdong STP being built now. The location of the plant is selected such that local industries can be conveniently served and so that the treated effluent will have minimum impact on the city's water supply. Some of the industrial wastewater pretreated to a certain standard but below the standard for direct discharge into surface water would be allowed to be connected to the city sewerage system. (e) Sewer Rehabilitation. Extension and Maintenance (Total cost $ 21 million). Construction and rehabilitation of sanitary sewers and storm drains in various areas of the city, including construction of about 37 km of new sewers, separation of existing combined sewers into sanitary or storm sewers taking into account flood volume and self-cleaning ability. These works will be packaged in phases that can be evaluated, designed, and implemented as annual programs focusing on specific geographical areas. Works complementing the components listed above and in areas of insufficient coverage will be given priority. The sewer maintenance tools will cost about $2 million. (f) Improved Nightsoil Management (Total cost $ 1.6 million). Under this subcomponent, 16 tanker trucks, and other vehicles and equipment will be acquired to increase the improve the septic tank service quality; including increased cleaning frequency of septic tanks and extended service coverage. Computers, office equipment and work space will also be acquired and information management systems established to improve the Environmental Sanitation Department's management capability. (g) Institutional Strengthening (Total cost $ 2.5 million). Technical assistance, training and equipment procurement to (i) increase the capacity of the Municipal EPB as well as city project management ($ 0.8 million), and (ii) establish the  Annex 1 45 Page 6 of 13 technical capacity and institutions for sewerage management ($1.7 million). A particularly important activity for the EPB is the water quality monitoring of the Yongjiang during the phased construction of the Jiangnan treatment plant. Implementation Arrangements 16. A detailed cost breakdown is shown in Tables 2 and 3. The financing of investments and operations are discussed in Annex 3. 17. The Chaoyang stream interceptors and the sewage pumping station at Dakengkou will be the first items to be implemented. Institutional support will also begin in mid 1998 to help set up the sewerage company. A schedule for the preparation of bidding documents, bid review and construction is detailed in the implementation plans presented in Tables 4 and 5. 18. Implementing Agencies. The main parties involved in the overall implementation are: Chaovang Stream Improvement Office, directly under the mayor, has been responsible for planning of drainage and sewerage components described above and will also manage their implementation in coordination with the Municipal construction bureau. The facilities, after they are built, will be turned over to a new independent sewerage organization, expected to be established by 1999. Environmental Sanitation Department will manage the nightsoil component; Environmental Protection Bureau will manage its own institutional development component and assist in planning of industrial sewer connections to the new sewerage system and monitoring of water quality; Nanning Guangxi Urban Environment Project Management Office (PMO) will oversee the overall project implementation. It will take part in the bidding and contracting procedures, works supervision, consultancy and training management; allocate investment budgets and coordinate disbursement ; monitor progress and compile progress reports to the municipal government and the Bank through the Regional PMO. The Consultants CMlPS & F from Australia are providing implementation assistance. Tianjin Construction Engineering Tendering Company (TCTC) has been retained as procurement agent for works.  Annex 1 46 Page 7 of 13 Table 1. Detailed Cost for Nanning Sewerage Management and Nightsoil Management (Y million) does not include interest during construction Item Civil Goods Land A T.A. B Base DSM c Physical Total Cost Price Total Cost Works Cost Cont. 97 prices Cont. current prices Nanning Sewerage Management Chaoyang stream Interceptors 30.24 0.00 26.68 0.00 56.92 3.70 6.06 66.68 4.07 70.75 Chaoyang embankment & hamessing 43.00 0.00 0.00 0.00 43.00 2.80 6.87 52.66 5.53 58.19 Cross river siphon 28.67 0.00 0.00 0.00 28.67 1.86 4.58 35.11 7.90 43.01 Dakengkou sewage pumping station 7.1 13.70 0.00 0.00 20.80 1.35 3.32 25.47 2.01 27.49 Flood pumping station 5.00 10.00 0.00 0.00 15.00 0.98 2.40 18.37 1.93 20.30 Southern trunk sewers 24.04 0.00 0. 0.00 24.04 1.56 3.84 29.44 5.65 35.10 Jiangnan Wastewater Treatment Plant 63.00 72.00 12.00 0.00 147.00 9.56 2348 180.04 46.63 226.67 Sewer Extension and Rehabilitation 128.50 0.00 0.00 0.00 128.50 8.35 20.53 157.38 40.76 198.14 Reconnections to Sanitary Sewers 8.30 0.00 0.00 0.00 8.30 0.54 1.33 10.17 2.63 12.80 Sewerage Maintenance Tools 0.00 12.14 0.00 0.00 12.14 0.79 1.94 14.87 3.85 18.72 Power Connection to Grid 3.00 2.20 0.00 0.00 5.20 0.34 0.83 6.37 1.65 8.02 Sub-total 489.57 31.82 75.18 596.57 122.62 719.19 Nightsoil trucks & management 2.65 5.30 2.25 0.00 10.20 0.96 1.67 12.83 1.35 14.18 system Institutional Strengthening Sewerage Company 0.00 4.00 0.00 7.54 11.54 0.10 1.75 13.39 1.41 14.79 City Project Management 0.00 0.00 0.00 1.68 1.68 0.05 0.26 1.99 0.21 2.20 Nanning Municipal EPB 0.00 3.20 0.00 0.63 3.83 0.10 0.59 4.52 0.47 4.99 Sub-total 17.05 0.25 2.60 19.90 2.09 21.98 Total 516.82 33.03 79.45 629.30 126.05 755.35 Notes: A includes resettlement cost B Technical Assistance and Consultancy c Design, Supervision and Management  Annex 1 47 Page 8 of 13 Table 3. Detailed Cost for Nanning Sewerage Management and Nightsoil Management ($ million) does not include interest during construction Item Civil Goods Land A T.A. B Base DSM C Physical Total Cost Price Total Cost Works Cost Cont. 97 prices Cont. current prices Nanning Sewerage Management Chaoyang stream Interceptors 3.64 0.00 3.21 0.00 6.86 0.45 0.73 8.03 0.25 8.28 Chaoyang embankment & harnessing 5.18 0.00 0.00 0.00 5.18 0.34 0.83 6.35 0.33 6.68 Cross river siphon 3.45 0.00 0.00 0.00 3.45 0.22 0.55 4.23 0.41 4.64 Dakengkou sewage pumping station 0.86 1.65 0.00 0.00 2.51 0.16 0.40 3.07 0.13 3.20 Flood pumping station 0.60 1.20 0.00 0.00 1.81 0.12 0.29 2.21 0.12 2.33 Southern trunk sewers 2.90 0.00 0.00 0.00 2.90 0.19 0.46 3.55 0.30 3.85 Jiangnan Wastewater Treatment Plant 7.59 8.67 1.45 0.00 17.71 1.15 2.83 21.69 2.36 24.06 Sewer Extension and Rehabilitation 15.48 0.00 0.00 0.00 15.48 1.01 2.47 18.96 2.07 21.03 Reconnections to Sanitary Sewers 1.00 0.00 0.00 0.00 1.00 0.07 0.16 1.22 0.13 1.36 Sewerage Maintenance Tools 0.00 1.46 0.00 0.00 1.46 0.10 0.23 1.79 0.20 1.99 Power Connection to Grid 0.36 0.27 0.00 0.00 0.63 0.04 0.10 0.77 0.08 0.85 Sub-total 58.98 3.83 9.06 71.88 6.38 78.25 Nightsoil trucks & management 0.32 0.64 0.27 0.00 1.23 0.12 0.20 1.55 0.08 1.63 system Institutional Strengthening Sewerage Company 0.00 0.48 0.00 0.91 1.39 0.01 0.21 1.61 0.08 1.70 City Project Management 0.00 0.00 0.00 0.20 0.20 0.01 0.03 0.24 0.01 0.25 Nanning Municipal EPB 0.00 0.39 0.00 0.08 0.46 0.01 0.07 0.54 0.03 0.57 Sub-total 2.05 0.03 0.31 2.40 0.12 2.52 Total 62.27 3.98 9.57 75.82 6.58 82.40 Notes: A includes resettlement cost B Technical Assistance and Consultancy c Design, Supervision and Management  Annex 1 48 Page 9 of 13 Table 4. Schedule of Project Preparation 0sto~1es ............ ..........m. . kg Pni* tTm. t S t $ m $~~~~~~~~~L n. -L20eiilj$ -D; ve Complete preparation of bid documents Aug-97 Oct-97 Dec-97 Mar-98 Nov-98 Call for bids Sep-97 Nov-97 Jan-97 May-98 Mar-99 Make bid recommendation to WB Nov-97 Jan-98 Mar-98 Aug-98 Jun-99 Begin construction / implementation Dec-97 Apr-98 Jul-98 May-99 Aug-99 Commission plant / equipment Jan-99 Dec-98 Nov-99 Feb-00 May-02 Complete preparation of bid documents Dec-98 Dec-99 Aug-98 Aug-98 Call for bids Apr-99 Apr-00 Dec-98 Sep-98 Make bid recommendation to WB Jul-99 Jul-00 Feb-99 Oct-98 Begin construction / implementation Sep-99 Sep-00 Mar-99 Nov-98 Commission plant / equipment Jan-02 Oct-01 Aug-03 Jun-99 Table 5. Schedule of Construction Construction 1997 1998 1999 2000 2001 2002 2003 1 2 3 4 1 2 3 4 1 21 31 4 1 2 3 4 1 21 31 4 1 21 31 4 1 |21 31 4 Chaoyang Stream Interceptors Sewage Pumps Crossriver Siphon South Main Trunk Jiangnan Sewage Treatment Plant River Bed Hamessing ... ..... Flood Pumps Resettlement Sewer & Drain Extension / Rehabilitation Institutional Support - Sewerage Company Improvements to Nightsoil Management  Annex 1 49 Page 10 of 13 Economic Justification 19. The project elements can be classified into three main groups in terms of their impacts: (1) improving drainage of sewage and storm water from the built-up area of the city; (2) conveying it to a location downstream of the city for discharge into Yongjiang; and (3) treating the sewage at that location. The first group of components, improving drainage of contaminated standing water, would help control the incidence of water born diseases that could be assessed by inference from related studies. Other small components in Nanning, improving nightsoil management and small area facilities, also serve the same purposes. The improvements would give better sewerage and drainage for about 70% of the city's residents. 20. Estimated investment cost of these components are about Y 560 million in 1997 prices. Additional investment of about Y 100 million would be required to complement and complete the improvements, by expanding and repairing tertiary sewers and household connections. Cost of operating these facilities is projected to increase along with facilities, to about Y 8 million a year in 2003, after which it would increase more slowly by about 3% a year in real terms. The pumps would have to be replaced in about 7 years. Discounted by 12% a year over 30 years, these costs have a present value of Y 490 million. 21. While it is generally reported that incidence of water-borne diseases is very high in Nanning, specific estimates vary widely. Various public health reports estimate the incidence to be higher than national average by up to 70%, most estimating around 35% above. This compares with estimates for Guilin, which puts the incidence about 30% below average. Since there is little apparent difference in hygienic practices of the population and the water supply, the difference could be attributed mostly to the state of sewerage, better than average in Guilin and worse that average in Nanning. It was not possible to obtain a systematic epidemiological study providing further necessary information such as duration of illnesses, specific channels of infection, comprehensive costs, etc. One can, however, infer from the above incidence estimates some orders of magnitude of benefits as follows. 22. The World Development Report 1993 shows that diarrheal diseases and hepatitis were responsible for about 4.1 % of health burden in China, or about 6.5 disability-adjusted life years (DALYs) per 1000 person-years. Assume that the above-mentioned broad incidence estimates apply these particular disease groups: incidence of these diseases is 35% higher in Nanning than the national average and 25% lower in Guilin. Assume that on completion of the project, 80% of the gap would be bridged. In Nanning, in view of the average personal income of about Y 6200 (including in-kind benefits), the production loss and medical cost associated with a DALY would be at least Y 10,000. The growth of total incomes in the area, taking into account population increase, has been over 20% a year recently. For the purpose of benefit estimation, it was assumed to increase by 12% a year for the first 10 years and 8% a year afterwards. Under these assumptions, present value of reduced burden from diarrhea and hepatitis alone over the next 30 years would be about Y 550 million. Studies also attribute other illnesses that occur frequently in Nanning, such as  Annex 1 50 Page ll of 13 cholera and respiratory membrane infections, to poor drainage. Including these, the PV of total health benefit could be in the order of Y 1000 million. 23. A survey of 144 households in areas near Chaoyang stream conducted during project preparation found about 8% of residents complaining of various gastro-intestinal and respiratory afflictions attributed to contaminated standing water and the stream. This information may be used draw a crude inference on broader health impact besides diarrhea and hepatitis reviewed above. Assume that: half of the complaints are indeed due to wastewater; half again of this would be reduced by the improved sewerage; and each incidence cost an average of Y 15 a day in lost production and medical cost. These lead to an estimated present value of Y 1275 million. 24. Orders of magnitude indicated by the above inference appear comparable to a recent estimate that puts the net annual economic loss due to the lack of sewerage in India between 2% to 5% of urban GDP ("India's Environment: Taking Stock of Plans, Programs, and Priorities," 1996). This would be equivalent to about Y 150 and Y 375 million a year in Nanning. As sanitary condition in Nanning is superior to an average Indian city, improved sanitation would have a smaller marginal impact. Only a fifth of this, however, would still yield a present value estimate of between Y 600 and Y 1000 million. 25. In summary, the benefit-cost ratio of the sewer and septic tank improvements would be between 1.2 and 2.6. This estimate captures major apparent benefits, but does not take into account other benefits that are even harder to estimate. For one, removing the strong smell of the Chaoyang water from the center of the city would obviously have beneficial effects. In theory, these and other benefits would be captured by increases in land value. There are about 100 ha of commercial and residential plots in the immediate vicinity of Chaoyang stream and affected by the smell. Total estimated value of these plots, about Y 3 billion, indicates that land value increments due mainly to aesthetic reasons could be considerable. 26. A concrete benefit of evacuating the collected sewage downstream is saving a water intake, 100,000 m3 capacity, located on Yongjiang downstream of the current discharge point of Chaoyang and Erkeng streams. It is projected that the intake would have to be closed by about 2002 if pollution continues to increase as at present. A replacement intake is estimated to cost about Y 110 million, which would be equivalent to the present value of Y 56 million. On the other hand, the present value of investment and operating costs attributable to this sewage conveyance is estimated be about Y 48 million, justified by the avoidance of the water intake closure alone. 27. The capacity and level of treatment of the collected sewage have been determined mainly as a constrained optimization problem - to maximize the water quality in the Yongjiang within the resources available. The main trade-off is between having a small amount of wastewater collected and treated to a high degree, or to maximize the volume to collect and treat moderately, as discussed in this Annex and in Chapter 6, Sections A and B.  Annex 1 51 Page 12 of 13 Performance Indicators 28. Primary Indicators. The Chaoyang stream and Yongjiang will be regularly inspected for improvements in water quality and is the main target of performance monitoring. The prevailing water quality standards, i.e. the National Standards for Surface Water GB 3838-88, provides the most direct measure of the project's impact. Since water pollution is more acute in the dry season, water quality surveys should be conducted during the months of November to April. Supplementary measurements (namely BOD, nitrogen, suspended solids and total phosphorus levels) should also be monitored to track intermediate progressions in water quality not observable under the classification system. 29. Secondary indicators. These indicators provide more specific indications of environmental quality such as BOD or phosphorus levels. Other secondary indicators attempt to show the utilization of sanitation facilities. An example of this is the operating rate for treatment plants, interceptors or solid waste and nightsoil management facilities. Sewer discharge qualities are also instructive since they would reflect the effectiveness of these facilities. 30. Monitoring Locations. Various criteria are used in the selection of monitoring locations so as to fully reveal the Project's impact. Firstly, sections of the Yongjiang river systems that suffer from more severe pollution should be closely monitored. On this basis, the following locations should give representative results: (a) the urban stretches of the Chaoyang stream, (b) the confluence of the Chaoyang stream and Yongjiang at Dakengkou, The quality of the Chaoyang stream should eventually improve from its current sewage state to a Class V rating. The Yongjiang should consistently be maintained at Class III rating after year 2002. 31. Secondly, locations are also selected based on physical changes to the environment as a result of the Project. Two critical sites are: (a) downstream of the discharge from the new Jiangnan Wastewater Treatment Plant (this plant discharges into the Yongjiang), (b) the intake area of the Lingtie Water Filtration Plant, located at the downstream of the Yongjiang's urban stretch. This plant is one of the main suppliers of treated water to Nanning. 32. Nightsoil. This component aims to increase the frequency of septic tank maintenance and expand the service network to cover new units. The volume of nightsoil and the number of new customers served would be appropriate impact indicators.  Annex 1 52 Page 13 of 13 Table 7. Monitoring Indicators for Sewerage Components Calendar Year Indicator Type Units '96 '97 '98 '99 '00 '01 '02 '03 '04 P/S Base Yongjiang A . water classification P - III - IV III-IV III-IV III-IV III-IV III-IV III III III . maxtotalnitrogen S mg/l 1.5 1.5 1.5 1.3 1.2 1.1 1 1 1 Chaoyang streama . water classification P - sewage sewage > V > V > V V V V V . maxBOD5 S mg/I >20 >20 >10 >10 >10 10 10 10 10 Sewer Connections c . numberofconnectionsto P no. 0 0 0 2000 3000 5000 7000 8500 10,000 sanitary sewers Leingthofsewerscleaned S km/year NA NA NA 130 140 140 150 150 160 and repaired every year Effectiveness of Chaoyang Stream Collection S '000 m3/ 0 0 0 70 75 100 120 140 165 . dry weather flow pumped day to south side Jiangnan STP S '000 m3/ 0 0 0 0 0 0 80 160 210 volume sewage treated day Notes: P / S: primary / secondary A average of readings during the dry season (representative of each month from November to April) from the following three locations along the Yongjiang: (a) at Dakengkou, (b) upstream of Lingtie Filtration Plant, (c) downstream of Jiangnan STP. B average of readings during the dry season (representative of each month from November to April) from the following two locations along the Chaoyang stream: (a) at Middle School #7 (near Dakengkou), (b) at Middle School #13 C including sanitary sewers upstream of Middle School #13 Table 8. Main Indicators for Nightsoil Management Calendar Year Indicator Type Units '96 '97 '98 '99 '00 '01 '02 '03 '04 P/S Base . collection rate P tons/day 70 70 70 75 85 90 95 100 100 average service frequency of septic P years / tank tanks (including remote areas) emptied 2.5 2.5 2.0 1.5 1.5 1.0 1.0 0.8 0.8 . additional septic tanks serviced compared to 1996 (atminimum P number of 0 50 50 100 200 300 300 320 350 once a year) septic tanks Table 9. Representative Indicators for monitoring Sewage Treatment Plants (mg/l) Indicator Targets for year 2002 max BOD5 max COD max SS Jiangnan STP effluent 30 100 70  Annex 2 53 Page 1 of 15 Sewerage and Solid Waste Management in Guilin Background I . Guilin is one of south-central China's most important tourist destinations because of the Lijiang, a scenic river which meanders its way through the city and onward to a unique limestone landscape. The economy is growing rapidly because of tourist revenue and the successful agricultural sector. The river is important to the city's thriving tourist trade as well as for irrigation and municipal water supply. The scarcity of water is gradually becoming evident and is especially acute during the dry season (80 percent of the annual rainfall occurs in the 6 months between March and August). Therefore, while its economic prospects are bright, Guilin also faces some very serious environmental challenges in the near future. Description of Problem 2. The principal receiving water body is the Lijiang which currently meets Class II standards. But persistent discharge of sewage is threatening to degrade existing water quality. Furthermore the Lijiang's water level has been decreasing steadily over the years, which also lessens its dilution capacity. Naturally, this condition is even more severe during the dry season when dilution capacity falls even lower. Tributaries and major lakes in Guilin city are already in the Class III category during the dry periods. Two of the most seriously polluted tributaries are the Xiaodongjiang and the Taohuajiang, flowing through the eastern and western parts of the city respectively. 3. This combination of conditions is also adverse to the tourist industry, and results in losses of revenue. The low water level during the dry season impedes cruise boats from navigating the Lijiang freely and the tourist business suffers a corresponding decline during the dry season. Some negative comments on the general environmental situation around Guilin is already circulating within tourism circles. 4. The second problem associated with the period of low flow is water supply. This is perhaps more serious a problem than poor sewage and waste management. Guilin depends solely on the Lijiang for its water supply. Fortunately, unlike Nanning most of it is taken from upstream of most sewer and treatment plant outfalls. In terms of access to safe drinking water, it is vulnerable mostly to pollution from tributaries coming from further upstream (such as the Taohuajiang). The Lijiang Replenishment Component is developed to deal with this problem and is discussed at length in Annex 6. This is a long term plan to deal with water scarcity and sustain the city's growth and development. 5. With a population of approximately 500,000, Guilin is currently producing about 0.8 kg per day of solid waste per capita and the rate is increasing every year by 7.5 - 10 %.  Annex 2 54 Page 2 of 15 This will result in a solid waste stream of 1200 tons per day by the year 2010. Current disposal practices are insufficient in protecting Guilin's environment. Uncontrolled disposal of solid waste leads to contaminated groundwater, contributing to the Lijiang's deterioration. Solid waste management in Guilin is under the jurisdiction of the Environmental Sanitation Management Bureau (ESM1B) whose responsibilities include street cleaning, solid waste collection, nightsoil management, the provision and maintenance of public toilets as well as transport and disposal of wastes in an environmentally acceptable manner. 6. Solid waste management is therefore another emerging crisis. Currently, the only disposal point is the city's Pingshan Composting Plant. This plant receives all of Guilin's solid wastes, currently some 500 tons/day, and produces approximately 200 tons/day of "compost" used by local farmers. The balance of the waste remains on site with the facility rapidly filling up. Estimates of its remaining life differ but it is thought to be less than one year if the site is not better managed. As it is, there is already an excessive stockpile of waste (roughly 10,000 m3) at the plant and the absence of refuse manipulation or aeration has turned the facility into a virtual dumpsite. Conditions are potentially damaging to the environment, not to mention the effect on ground and surface water. Main Causes of Pollution 7. The pollution of Guilin's watercourses are attributed to low flow conditions, inefficient use of sewage treatment capacity, industrial pollution and uncontrolled solid waste disposal. The rainfall pattern for Guilin is characterized by short periods of high rainfall followed by many months of relatively dry periods during which the water quality suffers significantly. Water levels in the Lijiang has also deteriorated steadily over the years due to overuse and inadequate water management. In addition, only one fourth of the city's wastewater treatment capacity is in use because of inadequate sewering. 8. Inadequate sewering has also caused pollution to the Three Lakes of Guilin: the Gui, Sha and Rong lakes located near central Guilin. The shores of these lakes are lined with many hotels and recreational locations and is part of the reason for Guilin's popularity as a tourist destination. Due to the uncontrolled discharge of sewage and other wastewater into the lakes, however, the water quality has begun to deteriorate to Class V. 9. The four catchment areas of Guilin - namely, the Northern; Eastern; Qintan; and Zhongnan, are served by four sewage treatment plants (STPs). In terms of capacity utilization, the smallest plant is being overloaded (the Northwestern plant, which operates at 5000 m3/d compared to its design rate of 3500 m3/d), while the Eastern plant because of limited sewer connections is operating at only half its 40,000 m3/d design capacity. The Southern (35,000 m3/d) and No. 4 (100,000 m3/d) plants serve both the Qintan and Zhongnan districts and are located at the same site. The No. 4 plant has recently been commissioned while the Southern plant is temporarily shutdown for maintenance. Flows to these plants are only about one fourth of design capacity.  55 Annex 2 Page 3 of 15 10. Therefore, even though there seems to be sufficient treatment capacity for the city as a whole, water quality continues to suffer because of insufficient sewers and conveyance systems to efficiently utilize this capacity. Much of the wastewater in these catchments end up in the natural watercourse. There are combined sewers in the center of the city but mostly, the city does have separate storm and sanitary sewers. It is clear that the greatest current need is to provide additional sewers and larger mains so that flows to the treatment plants can be increased. After in-depth study, the Guilin City Environmental Master Plan (1997) has recommended that it is more efficient to increase the treatment capacity in the north instead of transferring sewage to the eastern and southern sewage treatment plants (see Project Design and Least Cost Alternative). The Guangxi Environment Project is a key instrument of the Master Plan's management strategy. Table 1. Wastewater Treatment Plants in Guilin Name of Catchment Area Sewers Treatment Plant Capacity Area (sq km) (kin) Eastern 12 11 40,000 m3/day, activated sludge Northcentral 3 6 5,000 m3/day activated sludge Qintan 16 9 none Zhongnan 14 11 35,000 m3/day, activated sludge (Southern Plant) 100,000 m3/day, oxidation ditch (No. 4 Plant) Note: Field inspection of the four treatment plants have found them to be in good shape but operating well below capacity except the Northcentral plant. Total capability is approximately 179,000 m3/day but are operated at approximately 70,000 m3/day. Although influent organic strength to the plants is somewhat low, in the range of 40 to 150 mg/l of BOD, the effluent is only 10 mg/l or less. l1. Lingui county is located just outside Guilin city, comprising of urban and industrial developments and equipped with only primary sewers. Lingui is another cause of pollution problems in Guilin and its impact comes from the Xicheng district. This rapidly developing district is drained primarily by the Luoqing River (a separate river basin from the Lijiang). The eastern part of Xicheng however still drains into the Qintan area. There is only a main trunk sewer in place but no sewer connections or treatment plants nearby. The inadequate sewerage facilities therefore ultimately impacts the Lijiang. 12. The Northeastern and the Qintan catchment areas are also a focus of this project because they presently lack the means to treat locally generated wastewater. Although these are not the most heavily populated parts of the city, there are already plans for future development and wastewater loads are anticipated to be high. At the present moment, there is not even a trunk sewer system in the Northeast while Qintan has a dependent sewerage system linked to Zhongnan. The nearest sewage treatment plants that they can be linked to are the Northcentral plant (for the Northeastern catchment) and the Southern and No. 4 plants (for the Qintan catchment).  Annex 2 Page 4 of 15 Component Objectives 13. Given the underutilization of treatment facilities, one of the most cost effective means of improving Guilin's water quality is to increase the number of connections to trunk sewers, where they exist, and to expand the network with secondary sewers to cope with major polluting sources such as the industries and the densely populated city center. The objective will be to raise the water quality of the Lijiang to meet Class II throughout the year and for the Taohuajiang tributary to meet Class IV. 14. Given their location in the city center and their potential contribution towards tourism, the three lakes of Rong, Sha and Gui are also to be cleaned up. Interceptors and sewers will be built to maintain the lakes at least Class III quality. 15. To provide the necessary institutional capacity for continuous improvement, there will also be technical assistance to strengthen policies, regulations and enforcement capability. This includes pollution monitoring and wastewater management. 16. The Project's objective for solid waste management is to provide a feasible long term solution for Guilin. The ESMB has plans to improve the Pingshan Composting Plant to process an additional 100 tons/day over the present 500 tons/day. Of this, 300 tons/day will become compost and remaining waste will be transshipped to a new landfill at Chongkou. To cope with a future generation rate exceeding 600 tons/day, ESMB plans to have new transfer stations and more transfer vehicles. Under this Project, support will be given to build the new landfill, one transfer station and the acquisition of some new trucks. Description of Component Elements 17. The project will introduce new wastewater collection and treatment facilities, solid waste management facilities as well as a technical assistance package. The total cost including contingencies is Y 421.7 million (or $ 47.4 million). The entire project area includes the main districts of Guilin city - such as Qintan, Northern and Northeastern, as well as the outlying Xicheng district of Lingui county. Three aeration ponds will also be constructed at Yangshuo, Xingping and Baisha. 18. The various subcomponents are: (a) for the Qintan catchment area, a main sewer interceptor (about 6 km). secondary sewers (about 6 km) and a pumping station (160,000 m3/day) will be built. The intercepted wastewater will be sent to the existing Southern and/or No. 4 sewage treatment plants. The pumping station will be located at Mantoushan. (Total cost $9.0 million)  Annex 2 56 Page 5 of 15 (b) for the Northeastern catchment area. primary and secondary sewers (about I 1 km in total) as well as a pumping station (30.000 m3/day) will be built. The wastewater will be intercepted mainly from urban developments along a new 3.5 km access road in the Northeast and then sent to the existing Northcentral sewage treatment plant via a new pumping station at Qingfeng. The Northcentral treatment plant will be expanded to handle this additional load (see c). The cost includes construction of the access road. (Total cost $ 8.9 million) (c) for the Northcentral catchment area, the existing sewage treatment plant will be expanded to handle 30.000 m3/day of wastewater. The present operating capacity is 5000 m3/day and the additional capacity will cater for the future demands of its own catchment as well as the Northeastern catchment area. (Total cost $ 5.2 million) (d) cleaning and sewering of the Rong. Gui and Sha Lakes in the city centre. An interceptor and 2 km of sewers will be built to collect the wastewater that is currently being discharged directly into the lakes. The wastewater will be lifted via pressure mains to join the existing Zhongnan sewer lines and eventually to the Southern and/or No. 4 plants. An estimated 180,000 m3 of sludge will be dredged up from the lakes as part of the cleanup. (Total cost $ 4.3 million) (e) in Xicheng town, a new primary sewage treatment plant and 3 km of sewers will be built. The treatment capacity required is expected to be about 20,000 m3/day but may be as high as 40,000 m3/day depending on future demand. Scheduled to begin implementation only in the year 2000, this sewage treatment plant is intended for the eastern part of Xicheng. Sewers funded under the project will serve only the urban districts. Industries will be expected to pretreat their effluent and to pay for any sewer extension and connection expenses required to discharge into the main sewer. This is in accordance with NEPA regulations for industrial discharge. On this basis, a primary treatment plant has been found adequate for the near future (see para 22). (Total cost $ 5.3 million) (f) sewer maintenance equipment. Special equipment and materials will be procured for cleaning and maintenance of the city's sewers. (Total cost $ 2.0 million)  Annex 2 57 Page 6 of 15 (g) three aeration ponds in a neighbouring county. These facilities will meet the growing wastewater handling needs for the three towns of Yangshuo, Xingping and Baisha in Yangshuo county. (Total cost $ 0.84 million) (h) Institutional Strengthening. Support will be given to establish an autonomous Sewerage Company and to improve the monitoring capabilities of the Municipal EPB, including analytical equipment for Lingui and Yangshuo county EPBs. Details of the development program for the Sewerage Company is found in Annex 3 and a list of equipment and training programs for EPB strengthening is found in Annex 4. (Total cost $ 1.8 million) (h) the solid waste management components total about Y 85 million (or $ 9.7 million) including contingencies. The major element is a sanitary landfill at Chongkou, 20 km west of the city centre. The 43 hectare site will ultimately accommodate 3 million mr of solid waste. The project will support the first stage of development which creates 2 million m3 of capacity; (Total cost $ 6.3 million) (i) additionally, there will be a solid waste transfer station. 17 sets of 20 rn3 compactors, 9 garbage disposal trucks of 5 ton capacity each and 4 nightsoil trucks. The transfer station will be located five miles west of the city center. (Total cost $3.4 million) 19. Detailed cost information is shown in Tables 2 and 3.  Annex 2 Page 7 of 15 58 Table 2. Detailed Cost for Guilin Sewerage and Solid Waste Management (Y million) does not include interest during construction Item Civil Goods Land A T.A. B Base DSM c Physical Total Cost Price Total Cost Works Cost Cont. 97 prices Cont. current prices Qintan trunk sewers 45.00 3.00 0.00 0.00 48.00 2.88 5.09 55.97 4.42 60.39 Qintan secondary sewers 1.50 0.00 0.00 0.00 1.50 0.09 0.24 1.83 0.35 2.18 Mantoushan pump station 3.72 7.70 0.00 0.00 11.42 0.69 1.82 13.92 1.10 15.02 Northcentral STP expansion 23.40 7.00 2.60 0.00 33.00 1.98 5.25 40.23 5.31 45.54 Northern area secondary sewers 10.00 0.00 0.05 0.00 10.05 0.60 1.60 12.25 1.29 13.54 Northeastern Interceptors & Road 40.00 0.00 0.00 0.00 40.00 2.40 6.36 48.76 9.36 58.12 Qingfeng Pump Station 4.00 1.80 0.45 0.00 6.25 0.38 0.99 7.62 1.01 8.62 Lake Cleanup, Sewering and 26.50 0.60 0.00 0.00 27.10 1.63 4.31 33.03 6.34 39.38 Replenishment Xicheng STP 17.00 12.00 4.00 0.00 33.00 1.98 5.25 40.23 7.72 47.95 Yangshuo Aeration Pond 1.95 0.20 0.04 0.00 2.19 0.13 0.35 2.67 0.21 2.88 Xingping Aeration Pond 0.30 0.05 0.18 0.00 0.53 0.03 0.08 0.65 0.05 0.70 Baisha Aeration Pond 1.88 0.05 0.83 0.00 2.76 0.17 0.44 3.36 0.35 3.72 Sewer Upgrading and Repair 7.00 0.00 0.00 0.00 7.00 0.42 1.11 8.53 1.13 9.66 Power connection to electrical grid 3.00 2.00 0.00 0.00 5.00 0.30 0.80 6.10 0.80 6.90 Sewerage maintenance tools 0.00 4.00 0.00 0.00 4.00 0.24 0.64 4.88 0.39 5.26 Institutional Strengthening Guilin Municipality EPB, including 0.00 2.72 0.00 0.55 3.27 0.10 0.51 3.88 0.63 4.50 Yangshuo and Lingui Sewerage Operation and Institution 0.00 3.74 0.00 4.63 8.37 0.10 1.27 9.74 1.29 11.03 Sub-total 243.44 14.11 36.09 293.64 41.75 335.38 Chongkou landfill 20.00 19.00 2.40 0.00 41.40 2.48 6.58 50.47 5.30 55.77 Solid waste transfer system 4.00 15.00 2.00 0.00 21.00 1.26 3.34 25.60 4.92 30.51 Sub-total 62.40 3.74 9.92 76.07 10.21 86.28 Total 305.84 17.85 46.01 369.70 51.96 421.66 Notes: A includes resettlement cost B Technical Assistance and Consultancy c Design, Supervision and Management  Annex 2 59 Page 8 of 15 Table 3. Detailed Cost for Guilin Sewerage and Solid Waste Management ($ million) does not include interest during construction Item Civil Goods Land A T.A.B Base DSM c Physical Total Cost Price Total Cost Works Cost Cont. 97 prices Cont. current prices Qintan trunk sewers 5.42 0.36 0.00 0.00 5.78 0.35 0.61 6.74 0.28 7.02 Qintan secondary sewers 0.18 0.00 0.00 0.00 0.18 0.01 0.03 0.22 0.02 0.24 Mantoushan pump station 0.45 0.93 0.00 0.00 1.38 0.08 0.22 1.68 0.07 1.75 Northcentral STP expansion 2.82 0.84 0.31 0.00 3.98 0.24 0.63 4.85 0.31 5.15 Northern area secondary sewers 1.20 0.00 0.01 0.00 1.21 0.07 0.19 1.48 0.08 1.55 Northeastem Interceptors & Road 4.82 0.00 0.00 0.00 4.82 0.29 0.77 5.87 0.50 6.37 Qingfeng Pump Station 0.48 0.22 0.05 0.00 0.75 0.05 0.12 0.92 0.06 0.98 Lake Cleanup, Sewering and 3.19 0.07 0.00 0.00 3.27 0.20 0.52 3.98 0.34 4.32 Replenishment Xicheng STP 2.05 1.45 0.48 0.00 3.98 0.24 0.63 4.85 0.41 5.26 Yangshuo Aeration Pond 0.23 0.02 0.00 0.00 0.26 0.02 0.04 0.32 0.01 0.33 Xingping Aeration Pond 0.04 0.01 0.02 0.00 0.06 0.00 0.01 0.08 0.00 0.08 Baisha Aeration Pond 0.23 0.01 0.10 0.00 0.33 0.02 0.05 0.41 0.02 0.43 Sewer Upgrading and Repair 0.84 0.00 0.00 0.00 0.84 0.05 0.13 1.03 0.06 1.09 Power connection to electrical grid 0.36 0.24 0.00 0.00 0.60 0.04 0.10 0.73 0.05 0.78 Sewerage maintenance tools 0.00 0.48 0.00 0.00 0.48 0.03 0.08 0.59 0.02 0.61 Institutional Strengthening Guilin Municipality EPB, including 0.00 0.33 0.00 0.07 0.39 0.01 0.06 0.47 0.03 0.50 Yangshuo and Lingui Sewerage Operation and Institution 0.00 0.45 0.00 0.56 1.01 0.01 0.15 1.17 0.07 1.25 Sub-total 29.33 1.70 4.35 35.38 2.33 37.71 Chongkou landfill 2.41 2.29 0.29 0.00 4.99 0.30 0.79 6.08 0.32 6.40 Solid waste transfer system 0.48 1.81 0.24 0.00 2.53 0.15 0.40 3.08 0.26 3.35 Sub-total 7.52 0.45 1.20 9.16 0.58 9.74 Total 36.85 2.15 5.54 44.54 2.91 47.46 Notes: A includes resettlement cost B Technical Assistance and Consultancy c Design, Supervision and Management  Annex 2 60 Page 9 of 15 Project Design and Least Cost Alternative 20. North and Northeastern Catchment Areas. To meet the future wastewater treatment needs of these areas two options are available. The first is to convey the wastewaters to the Southern and/or Eastern treatment plants, where surplus treatment capacity exists, or secondly, to expand the existing Northcentral treatment plant. Due to the great distance of conveyance required by the first option, the expansion of the existing sewage treatment plant has been found more efficient. A careful study showed that, given the available land, the existing plant (currently operating at 5000 m3/day) can be expanded up to a maximum of 30,000 m3/day. Based on projected wastewater loads, this capacity will be sufficient to cater for both the Northcentral as well as the Northeastern catchment areas up to the year 2010. 21. During the study, there were also attempts to consider the adjacent Balijie catchment area (under Guilin Prefecture). To serve this other catchment area however would require more land for the plant expansion than is currently available. The project cost would be prohibitively high, involving either a new plant in the Northeast or a long conveying line to divert sewage to the existing Eastern plant. It was decided instead to support Balijie's development by commissioning a Sewerage Master Plan Study for the area. 22. Xicheng. Consultants for Lingui county had initially suggested constructing a secondary treatment plant at Xicheng town but the investment and operating cost would have been far above the users' affordability. Based on the understanding that pre-treatment will be done by industries as per NEPA requirements, primary treatment capability has been found sufficient. This project, including treatment plant and secondary sewers in urban Lingui county, will only be executed at or around FY 2000. It was agreed during pre- appraisal that Lingui county and Guilin city would decide on whether to consider additional industrial and urban waste loads by the time of the Project's mid-point review. 23. Chongkou Landfill. A careful assessment of the Pingshan Composting Plant revealed that, even with proper engineering, the life of the site can only be extended by a maximum of two years. Given that this is the city's only sanitary disposal site and that its holding capacity is already depleting rapidly, there are few long-term options except to build a new sanitary landfill. 24. The proposed 43 ha Chongkou landfill site is located about 20 km from Guilin's city center. This area is characterized by low hills and is basically low productive land marginally used by local farmers. The Shanghai Municipal Design Institute (SMEDI) has carried out a full feasibility study and a separate geological and hydrogeological study was carried out by the Guangxi Geological Institute. Based on this work, as well as a thorough review of other potential locations, the site near Chongkou village was found to be the most suitable.  Annex 2 61 PagelOofl5 25. In addition, public participation and notification work has already been done with compensation provided to farmers who had been using the land. The site will be developed in two phases, with World Bank financing provided only for stage one, constituting 375 mu and will accommodate approximately two million m3 of solid waste. The second phase will accommodate approximately three million m3. Taken together, the site will provide for Guilin's solid waste disposal needs for approximately 20 years. 26. The basic design being proposed by SMEDI is similar to that used in other landfill projects in China. This design utilizes a clay liner 0.7 to 1.0 m thick, leachate collection using plastic pipes with holes, gas venting, a series of dams placed around the periphery to contain both leachate and structurally support the fill, leachate collection pond and leachate recirculation. Recirculation is accomplished via the use of five tanker trucks that will spread the leachate throughout the landfill. Recirculation of leachate has proven to provide enhanced and more rapid waste stabilization and considered state-of-the-art technology. The same basic scheme has been proposed for the Yunnan Environment Project. 27. Solid Waste Transfer Station and Trucks. The current neighborhood collection service, though highly labor intensive, is still fairly efficient . Handcarts and tricycle carts are used in the actual pick up and the waste is then consolidated in 15 local transfer stations around the city. Five ton trucks then transport the waste directly from the transfer stations to the Pingshan Composting Plant. 28. However, the increasing volume of solid waste being handled each day demands that the existing collection system be improved. More transfer trucks are required since the considerable distance between transfer stations and the final disposal site (20 km from city center) cannot be efficiently managed by handcarts and tricycles. Studies have determined that the most cost effective expansion plan would be a medium size transfer station (300 tons/day capacity) and a larger fleet of transport vehicles. Implementation Schedule 29. The Qintan sewers, Mantoushan pumping station and the Chongkou landfill will be the first to be implemented. The institutional support program will also begin by mid 1998 to assist in the setting up of a Guilin Sewerage Company. A detailed implementation plan, including a schedule for the preparation of bidding documents and bid review is presented in Tables 4 and 5. 30. Implementation Agencies. The overall coordination of the Project would be assumed by the Guangxi Urban Environment Project Management Office (GUEPO). Municipal and district level project offices are also established to delegate responsibility for individual components. The Regional office will monitor the progress of components being implemented and submit regular progress reports to the Bank and Regional government. 31. The main parties involved in the overall implementation are:  Annex 2 62 Page 11 of 15 (a) the Sewerage and Drainage Engineering Office under the Public Utilities and Management Bureau of the Municipal goverment will be the main implementing agency of the sewerage components. This office is currently responsible for the operation and management of the existing four sewerage treatment plants and other sewerage facilities. A newly created Guilin Municipality Sewerage Company (GSC), expected to be established by the end of 1998, will take over the sewerage investments when they are completed. (b) Guilin Guangxi Urban Environment Project Management Office (PMO) will oversee the overall project implementation. It will take part in the bidding and contracting procedures, works supervision, consulItancy and training management; allocate investment budgets and coordinate disbursement; monitor progress and compile progress reports to the municipal government and the Bank through the Regional PMO. (c) The Environmental Protection Bureau will manage its own institutional development component. (d) The Guilin Environmental Sanitation Bureau will be implement the solid waste components. (e) Tianjin Construction Engineering Tendering Company (TCTC) has been retained as procurement agent for works. (f) the technical designer for the sewerage and wastewater treatment facilities is the Central and Southern China Municipal Engineering Design & Research Institute (CSCMEDRI). The design of the Chongkou landfill and the transfer facilities are undertaken by the Shanghai Municipal Engineering Design Institute (SMEDI). Technical designers will be required to provide technical specifications and bill of quantity to the bidding agent.  Annex 2 63 Page 12 of 15 Table 4. Schedule of Project Preparation -Qtntane04-X TrtAR;A#;-Mntesd y Y l-Qrntan -Matoushya No n Northern ThreLakeg Sewer seent Complete preparation of bid documents Oct-97 Feb-99 Oct-97 Jun-98 May-98 Aug-98 Call for bids Dec-97 Apr-99 Dec-97 Aug-98 Jul-98 Oct-98 Make bid recommendation to WB Mar-98 Jun-99 Apr-98 Nov-98 Sep-98 Dec-98 Begin construction Jul-98 Jun-00 Jul-98 Jan-99 Jan-99 Feb-99 Commission plant / equipment Sep-99 Mar-01 Oct-99 Oct-00 Aug-99 Apr-00 Complete preparation of bid documents Mar-99 Oct-98 May-99 Mar-98 Dec-98 Mar-98 Call for bids May-99 Dec-98 Aug-99 May-98 Feb-99 May-98 Make bid recommendation to WB Aug-99 Feb-99 Nov-99 Jun-98 Apr-99 Jun-98 Begin construction Jan-00 Sep-99 Mar-00 Sep-98 Jun-99 Aug-98 Commission plant / equipment Aug-01 Aug-00 Jan-02 Jui-99 Nov-02 Dec-99 Table S. Schedule of Construction Construction 1997 1998 1 999 2000 2001 2002 2003 1| 21 31 4 11 21 31 4 1| 21 31 4 11 21 31 4 1| 21 31 4 1| 21 3 4 1 2 31 4 Qintan trunk sewers .. ..... . Mantoushan pump stations Qintan secondary sewers ........ ... Northern treatment plant . .... .... ..... Northern secondary sewers Northeastern secondary sewers Qingfeng Pump Station Xicheng treatment plant Three Lakes cleanup Aeration Ponds Institutional Support - Sewerage Company ... . .. . . Chongkou landfill Transfer trucks  Annex 2 64 Page 13 of 15 Monitoring Indicators 32. Primary Indicators. The primary project objective is to improve the water quality of the Lijiang and its tributaries in Guilin. The prevailing standards for water quality, ie the National Standards for Surface Water GB 3838-88, provides the most direct measure of the project's impact. Since water pollution is more acute in the dry season, water quality surveys should be conducted during the months of November to April. Supplementary measurements (namely BOD, nitrogen, suspended solids and total phosphorus levels) should also be monitored to track intermediate progressions in water quality not observable under the classification system. 33. Secondary indicators. These indicators provide more specific indications of environmental quality such as BOD or phosphorus levels. Other secondary indicators attempt to show the utilization of sanitation facilities. An example of this is the operating rate for treatment plants, interceptors and solid waste management facilities. Sewer discharge qualities are also instructive since they would reflect the effectiveness of these facilities. 34. Monitoring Locations. Various criteria are used in the selection of monitoring locations so as to fully reveal the Project's impact. Firstly, sections of the Lijiang river systems that suffer from more severe pollution should be closely monitored. On this basis, the following locations should give representative results (a) the urban stretches of the Lijiang, (b) the Taohuajiang tributary and the Rong, Sha and Gui lakes. The Lijiang will maintain a Class II rating throughout the year, including the dry season. The Taohuangjiang tributary will also eventually be upgraded to Class IV.  Annex 2 65 Page 14 of 15 Table 6. Main Indicators for Guilin Sewerage Calendar Year Indicator Type Units '96 '97 '98 '99 '00 '01 '02 '03 '04 P/S Base Lijiang . compliance with Class IIA P % 50 50 50 60 70 80 90 90 95 . maxtotal nitrogen S mg/l 0.75 0.75 0.75 0.7 0.65 0.6 0.55 0.55 0.5 . maxBOD5 S mg/I 3.5 3.5 3.5 3.4 3.3 3.2 3.1 3.1 3 Taohluajiang B . water classification P - V V V V V IV-V IV IV IV Rong, Sha and Gui Lakes . water classification P - III-IV III-IV III-IV III-IV III III III III III Northeentral STP S '000 mi3/ 5 5 5 5 5. 20 25 28 30 volume treated day Totalwastewatertreated P '000rM3/ 80 80 80 100 130 145 150 165 180 in Guilin (dry weather flow) day Xicheng STP S '000 3/ 0 0 0 0 0 0 20 30 40 volume treated day Notes: P / S: primary / secondary A defined as the percentage of observations whereby the river does not meet Class II standards. Observations are to be made along the entire urban stretch ofthe Lijiang and at regular intervals throughout the year, including the dry season (November to April). Locations are: Dou Ji Shan, Longmen and Mo Pan Shan (refer Guiln Environmental Master Plan, SM International, March 1997). average of readings during the dry season (representative of the months of November to April). 35. The indicators in Table 7 help to rate the performance of the new and expanded sewage treatment plants under the Project. These may be used for internal monitoring to ensure efficient operation and are not required for reporting. Table 7. Representative Indicators for Monitoring of Sewage Treatment Plants (mg/l) Indicator Targets for year 2002 max BOD5 max COD max SS Northcentral STP effluent 60 110 100 Xicheng STP effluent 30 120 30 Note: SS is suspended solids 36. The running and design of the new Chongkou landfill is critical given that consolidation of solid waste, unless properly managed, can itself become a source of ground and surface water contamination. One important area to monitor is the site's treatment and discharge of recycled leachate. The ultimate leachate discharge must be checked for its percentage of solids and BOD level. Monitoring sites for underground and surface water locations will be determined during project appraisal.  Annex 2 66 Page 15 of 15 Table 8. Main Indicators for Solid Waste Management Calendar Year Indicator Type Units '96 '02 '03 '04 P/S Base Choiigkou Landfil (tlownstream of site) . Ground Water - pH P pH - 6.5-8.5 6.5-8.5 6.5-8.5 . Ground Water - max P mg/I - 25 25 25 total suspended solids . SurfaceWater- pH P pH - 6.8-7.5 6.R-7.5 6.8-7.5 . Surface Water - max P mg/l - 20 20 20 total suspended solids 37. The indicators in Table 9 help to rate the performance of the Chongkou landfill. These may be used for internal monitoring to ensure efficient operation and are not required for reporting. Table 9. Representative Indicators for Monitoring of Chongkou Landfill Indicator Targets Circulated Leachate Quality -pH 6.2 - 7.5 - BOD5 (mg/I) < 10, 000 Bioearth -Pb (mg/kg) < 35.2 -Hg (mg/kg) < 0.11 -As (mg/kg) <25 - Cd (mg/kg) < 0.3 Air - H2 S (mg/r3) <0.02 - NH2 (mg/m3) <0.02  Annex 3 67 Page 1 of 19 Sewerage in Nanning and Guilin: Institutional Development and Financial Plans Part A. Institutional Development Plan 1. Introduction. Large planned increases in sewerage facilities in Nanning requires development of a competent organization to operate and maintain the facilities from a weak current capacity. In Guilin, the municipal government decided that a new institutional structure and stronger financial and management systems are required to manage the already extensive and growing sewerage service. Activities to develop these new institutions will be an essential part of the project and supported under it. 2. The municipal governments have prepared initial plans for the institutional development, discussed them with the Bank, and have started implementing them. These plans are evolving documents. The current versions (available in the Project Files) lay out certain specific steps for 1997 and 1998, outline tentative plans for the future activities, and direct.ons for preparation of more detailed plans through internal deliberations and consultant assistance. Consultants have been assisting the municipal government in elaboration of the plans, and terms of reference for future efforts. The Annex summarizes the initial plans, focusing on the essential elements of the institutional development goals, priorities by city and period, and overall directions for institutional development as well as for later refinement of the plans. 3. The institutional development plans consist of the following common elements, though emphases differ between the two cities as discussed next: a) Legal requirements for incorporation including drafting of the statutes, company registration, appointment of the board, and valuation of assets; b) Design of an organizational structure; c) Appointment of management team and staffing plan; d) Establishment of financial accounting and management systems and management information systems; e) Development of operational policies and procedures; f) Preparation and approval of financial projections, plans, and budgets; g) Definition of technical assistance and training programs. 4. Priorities for Guilin. Before more detailed discussion of some of the above elements, it is important to note major differences in background and in institutional  Annex 3 68 Page 2 of 19 development requirements in the two cities. In the case of Guilin, sewerage operations have received serious attention and investment since the late 1 970s due to the importance of water quality to tourism. As a result, the Drainage Division has accumulated considerable experience and capacity in sewerage management over two decades of sewerage operation. Given these capacities as well as the large scale of operations and finance, Guilin Municipality has decided to incorporate an autonomous Sewerage Company as an independent legal entity and transfer assets, functions, and staff of the current Drainage Division along with the full claim on sewerage tariff revenues. 5. Development of a new accounting system and corporate financial planning and management skills, which were irrelevant to a government division, would be the major focus of institutional development activities in Guilin. Clear definition of corporate structure and accountability would be another requirement that would benefit from high level external advice and the senior managers' observation of other systems. Initial steps for these areas of institutional development would take place alongside incorporation steps and continue on after incorporation. Development of technical skills and operational procedures would be in the nature of making the current practices more systematic and incremental improvements especially in operational diagnoses and routine maintenance. The technical systems development efforts would be scheduled after the basic structures are put in place. 6. Priorities for Nanning. Currently Nanning has little separate sewerage system, rnixed in with the substantial storm water drainage system managed, mainly on emergency basis, by the Municipal Drainage Division. The system is expanding rapidly, however, as a part of an on-going new development in the Langdong area and the planned upgrading of existing urban areas particularly around Chaoyang Stream., planned and managed by special-purpose agencies, Langdong Area Development Office and Chaoyang Stream Improvement Office, reporting directly to the mayor. Most of the sewerage and drainage construction financed under the project would be managed by the latter. These special offices, however, are not suitable for sustained operation and maintenance of the sewerage facilities. Therefore Nanning Municipality decided to establish a permanent institution, probably in the form of an independent Drainage and Sewerage Company similar to Guilin's. The institutional form is, however, subject to further review. 7. As the existing technical and managerial capacity is far inadequate for the assets that the institution would take over, development of basic operating procedures and systems presents the most pressing task. Although all areas of institutional development have to be attended to, the most urgent tasks would be recruitment and training of the core staff, and development of basic technical skills and operational procedures. These would be the focus of technical assistance and training during the pre-operational phase of 1998 and 1999. Also during this phase, Nanning would have time to design an appropriate institutional framework, develop a detailed program of staffing, systems development and training, which will replace the current draft plan for the subsequent periods. The Company would be formally incorporated after basic systems are developed, core staff is in place, and a more detailed institutional development plan for subsequent periods is prepared. The current target is for the Company to start operations by the end of 1999. Current target dates for  69 Annex 3 Page 3 of 19 selected institutional development steps are shown in Table A3. 1. Table A3.1 Schedule of Selected Institutional Development Activities Activity Guilin Nanning Appointment of Core Management Team For institutional development Jul 97 Jul 97 planning and incorporation Operational Policies and Standards Draft Operational Policy Statement Oct 98 Sep 99 Incorporation Legal Incorporation and Dec 98 Dec 99 Registrations Main Technical Assistance Program Determine Scope Jun 98 Jun 98 Finalize Tenns of Reference, Letter Sep 98 Sep 97 of Invitation Mobilize Consultants Jan 99 Jan 99 Submit Draft Phase I Reports Jul 99 Jul 99 Training, Pre-Operating Phase Aug 98 - Jun 99 Aug 98 - Dec 99 Training, Subsequent Phases after Jul 99 after Jan 00 8. Institutional Framework. A status as a legally independent company rather than a government division would confer the following advantages: