China - Liao River Basin Project

Document of The World Bank Report No: 21860 PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF USS100 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FORA LIAO RIVER BASIN PROJECT May 21, 2001 Urban Development Sector Unit East Asia and Pacific Region  CURRENCY EQUIVALENTS (Exchange R.ate Effective May 1, 2001) Currency Unit = Yuan (Y) Y 1.00 = US$0.12 USSLOO = Y8.3 FISCAL YEAR January 1 -- Decernber 31 ABBREVIATIONS AND ACRONYMS AIC Average Incremental Cost LFD Liaoning Provincial Finance Department CAS Country Assistance Strategy LIEP Liaoning Integrated Environment Program CITC China International Tendering I.P Liaoning Province Company LPG Liaoning Provincial Government CNAO China National Audit Office LRB Liao River Basin COD Chemical Oxygen Demand LRBP Liao River Basin Project DRA Design Review & Advisory LUCRPO Liaoning Urban Construction & Renewal Project (Consultancy) Office EA Environmental Assessment MOC Ministry of Construction EMP Environmental Management Plan MOF Ministry of Finance EPB Environmental Protection Bureau i NCB National Competitive Bidding ERSF Environment Revolving Subloan NGO Nongovernmental Organization Facility OED Operations Evaluation Department ES Environment Subloans PAP Project-Affected Persons EU European Union PDMC Panjin Municipal Drainage Management Company FMS Financial Management System PMO Project Management Office GPN General Procurement Notice PRC People's Republic of China ICB International Competitive Bidding RAP Resettlement Action Plan IPCAP Industrial Pollution Control Action SDPC State Development and Planning Commission Plan SEPA State Environmental Protection Agency IST Institutional Strengthening & Training SOE Statement of Expenditures JDMC Jinzhou Drainage Management TOR Terms of Reference Company UMIS Urban Management Information System JPMC Jincheng Paper Making Company WTP Willingness to Pay LCC Liaoning Provincial Construction YDC Yingkou Drainage Company Commission YPMC Yingkou Paper Making Company LCHB Liaoning Cultural Heritage Bureau LEP Liaoning Environment Project LEPB Liaoning Environmental Protection Bureau Vice President: Mr. Jemal-ud-din Kassurn, EAPVP Country Director: Mr. Yukon Huang, EACCF Sector Director: Mr. Keshav Varma, EASUR Task Team Leader: Mr. Geoffrey Read, EASUR  CHINA LIAO RIVER BASIN PROJECT CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 3 C. Project Description Summary 1. Project components 6 2. Key policy and institutional reforms supported by the project 7 3. Benefits and target population 7 4. Institutional and implementation arrangements 8 D. Project Rationale 1. Project alternatives considered and reasons for rejection 9 2. Major related projects financed by the Bank and other development agencies 10 3. Lessons learned and reflected in proposed project design 12 4. Indications of borrower commitment and ownership 13 5. Value added of Bank support in this project 13 E. Summary Project Analysis 1. Economic 13 2. Financial 14 3. Technical 15 4. Institutional 15 5. Environmental 16 6. Social 18 7. Safeguard Policies 20 F. Sustainability and Risks 1. Sustainability 20 2. Critical risks 20 3. Possible controversial aspects 21  G. Main Loan Conditions 1. Effectiveness Condition 21 2. OtherDisbursement condition; Implelentation & Financial covenants 21 H. Readiness for Implementation 23 I. Compliance with Bank Policies 23 Annexes Annex 1: Project Design Summary 24 Annex 2: Detailed Project Description 26 Annex 3: Estimated Project Costs 32 Annex 4: Cost-Effectiveness Analysis Summary 38 Annex 5: Financial Summary 52 Annex 6: Procurement and Disbursement Arrangements 57 Annex 7: Project Processing Schedule 72 Annex 8: Documents in the Project File 73 Annex 9: Statement of Loans and Credits 75 Annex 10: Country at a Glance 79 Annex 11: Project Implementation Schedule 80 Annex 12: Environmental Assessment and Mitigation Measures Summary 84 Annex 13: Resettlement 96 Annex 14: Project Financial Management Review 99 MAP(S) IBRD 31284  CHINA Liao River Basin Project Project Appraisal Document East Asia and Pacific Region EASUR Date: May 21, 2001 Team Leader: Geoffrey Read Country Manager/Director: Yukon Huang Sector Manager/Director: Keshav Varma Project ID: P051859 Sector(s): US - Urban Environment Lending Instrument: Specific Investment Loan (SIL) Theme(s): Urban Poverty Targeted Intervention: N Program Financing Data [X] Loan [ ] Credit [ ] Grant I ] Guarantee [ ] Other: For LoanslCredits/Others: Amount (US$m): 100.0 Proposed Terms (IBRD): Variable Spread & Rate Single Currency Loan (VSCL) Grace period (years): 5 Years to maturity: 20 Commitment fee: 0.75% Front end fee on Bank loan: 1.00% Financing Plan (US$m): Source Local Foreign Total BORROWER 0.00 0.00 0.00 IBRD 34.00 66.00 100.00 LOCAL GOVTS. (PROV., DISTRICT, CITY) OF BORROWING 84.80 18.80 103.60 COUNTRY Total: 118.80 84.80 203.60 Borrower: PEOPLE'S REPUBLIC OF CHINA Responsible agency: LIAONING PROVINCE, AND THE RESPECTIVE 3 PROJECT CITIES Liaoning Provincial Govemment Address: Liaoning Urban Construction and Renewal Project Office (LUCRPO) 19 Caita Street, Shenyang, China 110015 Contact Person: Mr. Zhao Xin Liang, Vice Govemor, Liaoning Provincial Govemrnent Tel: (024) 2384-2898 Fax: (024) 2392-2290 Email: Lucrpoa@pub.sy.lnpta.net,cn Estimated disbursements ( Bank FY/US$m): FY 2002 2003 2004 2005 2006 2007 2008 Annual 7.60 31.30 27.60 20.90 9.60 1.70 1.30 Cumulative 7.60 38.90 66.50 87.40 97.00 98.70 100.00 Project implementation period: December 2001 - December 2006 Expected effectiveness date: 11/01/2001 Expected closing date: 12/31/2007 ,CS PAn F . 2Ow  A. Project Development Objective 1. Project development objective: (see Annex 1) The development objective of the proposed Liao River Basin Project (LRBP) is to assist the environmental recovery of the Liao River Basin (LRB) in Liaoning Province (LP) and to enhance water quality management decision-making on the basis of an integrated river basin management approach. The objective would be pursued through (a) provision of facilities for collection and treatment of wastewater; (b) establishment of competent municipal utilities capable of managing these facilities; (c) upgrading basin-wide water quality management and monitoring capabilities; and (d) technical assistance and training. The project represents the first stage of LP's efforts toward meeting its objective with World Bank support. The main investments would be in (a) two cities and one paper-making company in the lower reaches of LRB; and (b) one city and one paper-making company in an adjacent river basin close to the Bohai Sea. The second stage is expected to commence in about a year's time and would focus on Shenyang City, situated on the Hun River, a tributary of the Liao River. Shenyang would use the intervening time to refine its wastewater treatment processes and designs, to develop further its urban upgrading proposals, and arrange financing. The project water quality objective, taken from the Liao River Basin Plan adopted by the Provincial Government, is to reduce pollution in the LRB in order to bring quality up to at least a minimum of Class V (agricultural water supply or general amenity use) water quality throughout the basin by 2010. The parameter used for tracking water quality is COD (chemical oxygen demand), a standard measure that synthesizes the scale and impacts of the major industrial and domestic pollutants. The water quality objective would be achieved through a combination of measures, including: (a) regulation and reduction of pollution from industries; (b) priority wastewater treatment works in all cities in the river basin; (c) improved collection and disposal of sludge from wastewater treatment plants; (d) protection of water used for agriculture and aquaculture; (e) measures to improve water quality in the Bohai Sea; and (f) other initiatives that may include reduction of overall per capita water demand, the adoption of water conservation measures and public outreach programs. This project supports many of these measures and is one of a number of activities in the Basin aimed at achieving water quality improvement, in the context of overall improved water resource management. 2. Key performance indicators: (see Annex 1) The development objectives of the project would be monitored through key perfomiance indicators in terms of: (a) improvements in water quality in the LRB; and (b) efficiency of the new urban utilities in providing wastewater treatrnent and disposal services. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: R98-107 Date of latest CAS discussion: 05128/98 CAS Memorandum of April 22, 1999 and Country Program Matrix (FY99-0 1) Improving the environment, and in particular water quality in the major river basins, is one of the major focal points of the Bank's strategy in China. Within this overall strategy, the project would contribute to upgrading water quality in the LRB and help reduce the incidence of red tides in the Bohai Sea. - 2 -  Specifically, the project would assist in the development of an integrated river basin management approach to water quality planning and decision-making and provision of wastewater treatment facilities, and in meeting urban environmental infrastructure needs. It will strengthen and, where necessary, establish new institutions. Strategic planning of river basin management has also been identified as a key part of the ongoing long-term European Union (EU)-funded Liaoning Integrated Environment Program (LIEP) in which a Water Resources Management component is focusing on the Liao River Basin in Liaoning Province. The proposed investments arose from the analysis of a prioritized list of interventions and investment projects identified through the EU-funded program. 2. Main sector issues and Government strategy: The principal sector issue is the rapid deterioration in both surface and groundwater quality that has occurred throughout China. This has occurred as a result of: (a) an inadequate framework for water resources management; (b) ineffective regulatory control; (c) rapid and uncontrolled growth in the industrial and agricultural production sectors, coupled with increased urbanization; and (c) financial weakness of municipal providers of environmental services. Demands for water for industry, agriculture and domestic use have been steadily increasing, and this has imposed increasing pressure on water resources, in particular in the areas of limited resources in the north of China. At the same time, quantities of wastewater have increased rapidly as have the associated pollution loads. Less than 10 percent of wastewater flows are treated and comply with discharge standards, largely a result of ineffective enforcement of environmental regulations. The discharge of these increasing quantities of inadequately treated wastewater to rivers with limited dilution and assimilative capacity has resulted in severe water quality problems in many river systems in China. In the latter half of the 1990s, the focus of river basin management in China changed from the traditional hydraulic approach to that of attaching a greater importance to environmental protection. Pollution control as part of water resources management is listed as one of the top priorities in China's tenth Five-Year Environmental Protection Plan. Among the most significant features is the attention paid by the highest levels of central government to the severe environmental degradation in China's major river and lake basins and the formulation of the priority "Three Rivers, Three Lakes" environmental program within the overall national environmental strategy, of which the Liao River is one of the targeted rivers. Fundamnental components of the overall strategy for addressing this continuing degradation include the integration of municipal and industrial wastewater treatment, where appropriate, and the establishment of efficient wastewater utilities with sound cost recovery, both to ensure sustained facilities operations and to contribute to capital investment. 3. Sector issues to be addressed by the project and strategic choices: The "Three Rivers, Three Lakes" program encompasses six separate environmental protection programs coordinated by the State Environmental Protection Agency (SEPA); it was conceived in response to a national outcry over a major pollution incident in the Huai River in 1994. The Liao River was confirmed in 1996 as one of the three river basins to be included in the program. The LRB is located in northeastern China and lies within the two provinces of Jilin and Liaoning and the autonomous region of Inner Mongolia. It comprises two separate rivers, the Liao and the Daliao, the latter basin being located entirely within LP. -3-  The LRB as a whole is a water-scarce region, with total resources on a per capita basis of only 20 percent of the national average. The water resources of the LRB are already heavily developed with a number of dams on the upper tributaries (within LP) and major abstraction of the groundwater resources, which underlie the central, more urbanized part of the Basin. Much of the water is abstracted for agricultural use in the fertile areas of the plain adjacent to the cities but the basin, particularly within LP, is also a major center of industry in northern China and subject to high industrial and urban demands for water. The problems of water shortage are made significantly worse by the high discharges of urban domestic and particularly industrial wastewater. As a consequence, a large part of the river system in the Basin within the Province fails to comply with even the lowest defined (Class V) water quality standard. The poor quality of water at this level makes it unacceptable for domestic or agricultural use and causes severe degradation of the natural ecosystems. The close physical interconnections between the rivers and the groundwater in the central basin result in the pollution impacting the available groundwater, to the extent that some wellfields are being abandoned. The negative impact of this pollution is felt also in the Bohai Sea, into which the Liao Basin rivers ultimately discharge, and which is an important fisheries and aquaculture resource. There are reports of a significant decline in the fishing industry in the Bohai Sea, likely linked to the pollution load. In spite of limited water resources in LRB and the increasing impact of pollution on the availability of resources, initial water demand projections used in project formulation for basin cities showed ambitious increases in use for domestic and industrial purposes. Those projected levels of water consumption in the basin are likely to be unsustainable, and a major basin-wide demand management and water conservation program will be necessary, in addition to the efforts to reduce pollution and the damage that it is causing to the available resources. Water Resource Management in the Basin. There are a number of activities under way in the Basin to address the overall water resource management issues. The issue of integrated river basin management has been under discussion by Bank and Provincial officials for several years but progress has been slow. A significant institutional step has been the bringing of groundwater management under the authority of the Department of Water Conservancy, who have responsibility for surface water. An Aquifer Study is planned to help better understand the relationship between surface and groundwater and to begin to address the effects of pollution at this interface. Currently the EU is supporting a Water Resources Management component as part of the four-year technical assistance under LIEP. This work will develop a Basin Planning Strategy, outlining an integrated water resources and pollution control plan for the Liao River within the Province. Preparation of this current project has been coordinated closely with the EU team (based in the Liaoning Environmental Protection Bureau). The LIEP, which is presently in the first half of its work plan, will address water use and demand management in the Basin as well as review proposals for expansion of the water supply system, and this work will inform the development of the wastewater systems in the Basin. At the same time, it is understood that Liaoning is one of the provinces selected as a pilot under a national water conservation program, supported by the UK Government Department for Intemational Development (DflD) which is due to commence shortly. Management of water demand, across all sectors (agriculture, industry and domestic), is essential for the long-term development of LP and will impact the scale and costs of the ultimate wastewater system. In the short to medium term, the scale of wastewater infrastructure required is not sensitive to water usage, since it is primarily dealing with a backlog or deficiency in the current system. Nevertheless, preparation of the project has specifically addressed water use and wastewater projections in the project cities. Current projections are significantly lower than those first offered because they now take into account more realistic estimates of industrial water use following industry reform and restructuring. In Shenyang, where overall demand projects are still high, the Water Company has made considerable progress in introducing realistic -4 -  tariffs and in reducing unaccounted-for-water but the heavy use of "self-supply" by industry from groundwater is still a concern. The water resource fee currently charged is very low and-offers little incentive to economize. This is one of the issues being addressed in the EU work. Wastewater Systems. Liaoning Province comprises 14 municipalities, 8 of which are within LRB. Of these, only two municipalities currently have functioning wastewater treatment plants, and two further plants are under construction as part of the Liaoning Environment Project (LEP, Ln. 3781-CHA). The existing Liao River Basin Plan defines water quality objectives for all river reaches within the basin in LP, and proposes an ambitious program of reduction of COD loads from all eight municipalities, the aggregate reduction by 2010 being 77 percent. The project would support priority wastewater treatment investments in Panjin and Yingkou, providing the maximum environmental benefit (in terms of improvement in water quality in the basin, evaluated on an integrated river basin management approach) for a given level of expenditure. The project would also support priority wastewater treatment investments in Jinzhou located in the Xiaoling River Basin to reduce pollution loads entering the Bohai Sea. Many municipalities in LRB rely on groundwater for urban water supply. Water supply aquifers are under threat from overexploitation and also from pollution as a result of inadequately controlled disposal of municipal and industrial solid wastes. The Liaoning Provincial Government (LPG) recognizes that additional funding will be necessary in order to finance a range of investments to complement those included in the proposed project. These would include investments in solid waste management and/or sludge treatment or disposal facilities, and further urban upgrading. LPG expects to commence preparation of, and seek funding for, these investment programs after launch of the LRBP and the expectd follow-up investments in basin clean-up focusing on Shenyang. The establishment of wastewater companies is a relatively recent innovation in China, and in LP. Experience with them is limited and mixed. The project would provide technical assistance to LRB municipalities to determine appropriate tariff levels and user charges. In order to ensure sustainable and sound wastewater management practice in cities, a central government decree issued in September 1999 stipulated that financially autonomous wastewater enterprises shall be established, and that wastewater tariffs shall be charged and collected to cover operation and maintenance of sewerage networks and wastewater treatment plants. This decree, therefore, envisages full cost recovery in principle, although this might be achieved only over time, commensurate with a progressive and sustained program of tariff adjustments. Project investments are designed to assist in meeting the objectives of improvement of water quality in LRB to Class V standard, and protection of water resources. In the first stage, these objectives would be achieved through treating all municipal wastewater in LRB, and treating all industrial discharges at source. The immediate planned investments under the proposed project would concentrate on two cities in two river catchments within LRB: Daliao River-Yingkou and Liao/Shuangtaizi River-Panjin. In addition, pollution prevention measures for Jinzhou City and the Jincheng Paper-Making Company on the Xiaoling and Daling Rivers, respectively, would reduce the pollution load to the Bohai Sea. Industrial Pollution Control. Without a significant effort to control industrial wastewater pollution, expected environmental benefits from municipal investments would be marginal. LPG has agreed to address this issue by: (a) implementing an Industrial Pollution Control Action Plan (IPCAP); and (b) providing environment subloans to small- and medium-size industries to carry out environmentally focused subprojects, upgrading in-plant processes, with support from the project. The operating regulations of this subloan facility, which is similar to the revolving fund facility currently being operated under the ongoing - 5 -  LEP, are included in the Project File (see Annex 8). The IPCAP would reduce pollution loads discharged from the key polluting sectors: fertilizer, pulp and paper, food, chemicals, steel and mining, by means of a program of investments in wastewater treatment and clean technology, covering process improvements and materials substitution. In the case of pulp/paper production, the IPCAP would adopt a sector-wide approach based on restructuring and rationalization to ensure affordability of pollution control and sustainability for the sector. The initial phase of the IPCAP would involve local investments at 133 large polluting enterprises in the fertilizer, chemicals, paper and steel sectors. Implementation of the IPCAP would be funded from govemment and industry sources. Integration with Region-wide Water Resource Management. The establishment of water pollution control as a fundamental and integral component of water resources management is ranked as one of the highest priorities in the National Tenth Five-Year Environmental Protection Plan. However, Liaoning currently lacks analytical tools and management support systems to integrate the water quality and quantity data from various sources to pennit an integrated basin approach to water quality planning and decision-making. The project would support the development of a modem geographic information-based urban management information system (UMIS) for the government and for utilities to project demand for infrastructure and services, assess their impact on the environment, and monitor trends. This would complement the current EU-supported technical assistance initiative to develop a water resources management strategy for the LRB in Liaoning. C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): Indicative Bank- % of Component Sector Costs % of financing Bank- (US$M) Total (US$M) financing Panjin Wastewater Interception & Pollution Control 39.50 19.4 14.80 14.8 Treatment / Waste Management Yingkou Industry Wastewater Pollution Control 17.00 8.3 13.50 13.5 Treatment / Waste Management Yingkou Wastewater Interception & Pollution Control 46.30 22.7 21.40 21.4 Treatment / Waste Management Jincheng Industry Wastewater Pollution Control 14.00 6.9 10.10 10.1 Treatment / Waste Management Jinzhou Wastewater Interception & Pollution Control 32.80 16.1 15.60 15.6 Treatment / Waste Management Urban Management Information Urban 6.50 3.2 5.70 5.7 System Management Environmental Quality Monitoring Other 5.60 2.8 4.90 4.9 Environment -6 -  Environment Subprojects Urban 20.00 9.8 9.90 9.9 Environment Institutional Strengthening and Training Institutional 3.10 1.5 3.10 3.1 Development Total Project Costs 184.80 90.8 99.00 99.0 Interest during construction 17.80 8.7 0.00 0.0 Front-end fee 1.00 0.5 1.00 1.0 Total Financing Required 203.60 100.0 100.00 100.0 2. Key policy and institutional reforms supported by the project: The policy and institutional reforms would concentrate on: (a) integrated river management; (b) utility enterprise operational and financial efficiency improvements; (c) resource mobilization and cost recovery measures; (d) underpinning of long-term financial and economic sustainability; and (e) industrial pollution control reduction through a focused time-bound action plan with respect to pollution, principally from fertilizer, pulp/paper, food/beverage and mining. The institutional strengthening and training (IST) component would enhance policies and operational experience in environmental protection and water, and wastewater management, and emphasize sustainability of services over the economic life of the utilities' assets. Support for these initiatives has been grouped into a number of main composite packages for the various executing agencies, covering institutional development, financial management improvement, construction supervision and training. The component would also support provincial and sector city agencies, a public outreach program, an aquifer study, future project preparation and other programs of assistance to be defined. 3. Benefits and target population: Benefits: The project would help the Liaoning Provincial Govemment (LPG) to put in place the policies, institutions, and infrastructure to sustain environmental quality and improve urban services. The proposed project would generate benefits in terms of improvements in environmental quality, health, municipal services and institutional capacity: * Environmental Benefits: improved ambient water quality in rivers currently highly polluted; * Health Benefits: reduced incidence of water pollution-related diseases as a result of improved sewer systems and reduced surface and groundwater pollution near water intakes; * Improved Municipal Services: expanded coverage of wastewater collection, treatment and disposal for the urban populations of Jinzhou, Panj in and Yingkou; * Institutional Reforms: strengthened financial and management autonomy would enable utilities to sustain and expand the provision of essential services for a growing population. Support for institutional development would ensure the long-term sustainability of the organizations and of the physical investments. Target Population: The project targets the urban populations of the principal polluting cities and their industries in the Liao River Basin within Liaoning Province, specifically Jinzhou, Panjin and Yingkou. The urban population in these cities is expected to reach 1.7 million by 2010, an increase of about 13.3 percent over the current level of 1.5 million. Liaoning is a coastal province in the northeastern part of China and is a key link between China's northeast economic zone and the Bohai Sea Rim economnic zone. It is also a communications hub, connecting the - 7 -  Eurasian rail-bridge into Russia with China's northeast, and for the conduct of foreign trade. LP covers an area of 145,900 square kilometers (km2), with a population of 41 million. It is rich in natural resources with more than 100 varieties of minerals, including oil and gas. These resources have been exploited with little regard up to the present on any environmental impact. The water resources within LP have, as a result, been badly depleted and polluted by the heavy industries that have been established to take advantage of the proximity of their required raw materials. One of the worst affected areas is the Liao River Basin, covering 42,000 km2, which is now considered one of the most environmentally polluted in China. In 1995, the gross annual output of LRB was Y305 billion, representing about 60 percent of LP's total output. LRB is also a major grain producer, with about 2 million hectares (ha) of land, or 29 percent of the total basin area, under cultivation. Irrigation for paddy rice is the principal user of surface water within LP accounting for up to 70 percent of the total water used. Archaeological discoveries have shown that LP has been occupied by humans for over 5,000 years and is rich in cultural relics. 4. Institutional and implementation arrangements: At the provincial and municipal levels, leading groups have been established to give policy direction to the environmental recovery of the LRB. The provincial leading group is headed by the Vice-Govemor of the province, and municipal leading groups are headed by mayors or vice mayors. The leading groups have established project management offices to coordinate the implementation of their policy decisions. At the provincial level there are (a) the project office of the EU-funded LIEP under the Liaoning Environmental Protection Bureau (LEPB); and (b) the Liaoning Urban Construction and Renewal Project Office (LUCRPO) under the Liaoning Provincial Construction Commission. In order to expedite the preparation of the proposed Liao River Basin Project (LRBP) LPG has brought together LIEP, LUCRPO and the Provincial Water Conservation Department within the offices of LEPB. Each municipality has set up a project management office, either within the municipal government structure or within its designated implementing agency. The municipal wastewater components of Jinzhou, Panjin and Yingkou would be implemented by the cities' recently created financially autonomous wastewater companies. The environmental water quality monitoring component would be implemented by LEPB through provincial and municipal monitoring stations. The urban management information system (IMS) component would be managed by the Liaoning Provincial Construction Commission (LCC), in affiliation with LEPB. The Environment Subprojects (ES) component would be managed jointly by LEPB and the Liaoning Finance Bureau (LFB). LUCRPO would be responsible for coordinating the Institutional Strengthening and Training (IST) component. The China International Tendering Company (CITC) and the Shenyang Tendering Center has been retained as procurement agents for all aspects of civil and electrical and mechanical works requiring bidding through international competitive bidding (ICB) procedures. Institutional and financial strengthening and construction supervision services would be provided by international firms using joint international/national supervision teams. Onlending Arrangements: The proposed loan of $100 million would be made to the People's Republic of China. The loan would be for 20 years, including 5 years of grace, at the Bank's standard interest rate for LIBOR-based US dollar single currency loans. The proceeds of the loan would be onlent to LP on the same terms and conditions as the Bank loan to China, including passing on the front-end fee and a commitment charge of 0.75 percent a year. LP would onlend part of the proceeds of the Bank loan to the municipalities of Jinzhou, Panjin and Yingkou on the same terms and conditions as it received from China. The municipalities would onlend proceeds of the Bank loan to their wastewater companies for 15 years - 8 -  including 5 years of grace, at an interest rate not less than the Bank's rate to China plus the municipalities' portion of the front-end fee and a commitment charge of 0.75 percent a year. This onlending rate is considered appropriate, considering that the companies are new and inexperienced; these arrangements are also consistent with other Bank Group-supported sector projects. Jinzhou and Yingkou Municipalities would onlend Bank loan proceeds to their respective paper-making companies at not less than the Bank rate to China plus a spread of 1.5 percent a year, and a commitment charge of 0.75 percent a year. The maturity of the loans would be up to 10 years including up to 4 years of grace. Liaoning would use part of the loan proceeds to onlend to small and medium-size industries at an interest rate not less than the Bank rate to China; this rate is considered appropriate for environment investments which have high social or public good benefits. The maturity of the subloans would be for 3 to 5 years, including a I to 2-year period of grace. Repayments of subloans would be deposited into Liaoning's existing Enviromnental Revolving Subloan Facility (ERSF) for future onlending for subprojects. Financial Management: An assessment of project financial management including an assessment of the relevant revenue-earning implementing agencies was carried out during appraisal, to ensure that the Bank's minimum financial management requirements as stipulated in OP/BP 10.02 are met. Traditional disbursement techniques would be used in accordance with an agreement reached between the Bank and the Ministry of Finance (MOF). To facilitate disbursements, a Special Account would be opened with an authorized allocation of $8.0 million, equivalent to the estimated average expenditures to be financed by the Bank over about a four-month period. The account would be opened in US dollars in a bank acceptable to the Bank and be managed by the Liaoning Finance Department (LFD). Auditing Arrangements: As with other Bank Group-financed projects in China, the Foreign Investment Audit Bureau of the China National Audit Office (CNAO), established in 1983 under the name of State Audit Administration, would have overall responsibility for auditing the accounts of the project. The actual auditing work would be conducted by the Liaoning Provincial Audit Department under CNAO's supervision. The Bank currently accepts audits performed under the responsibility of CNAO. Audits of the project accounts and the financial statements of implementing agencies and audits of the Special Account and statements of expenditures (SOEs) would be submitted to the Bank within six months after the end of the financial year. During appraisal, LPG confirmed that the audit reports of the implementing agencies would include opinions on whether the agencies were in compliance with their respective financial covenants, and whether these agencies had taken out adequate insurance on goods and works financed from loan proceeds. Monitoring and Evaluation Arrangements: The project would be supervised through Bank missions scheduled for twice a year. Headquarters and country office staff would cooperate in this activity. During implementation, project performance, including the achievement of project outputs and progress toward the attainment of development objectives, would be monitored through the use of semiannual progress reports prepared by the LUCRPO. The first such monitoring report would be submitted by January 31, 2002, and the last by July 31, 2007. A mid-term review would be undertaken jointly with LPG in 2004 to evaluate the project's achievements and identify any corrective measures necessary. An implementation completion report, reviewing the planned objectives and the achievements of the project, including costs and benefits derived, and performance and contribution of all parties associated with project execution, would be prepared by LUCRPO and submitted to the Bank within six months of the loan closing date. -9-  D. Project Rationale 1. Project alternatives considered and reasons for rejection: A management plan has been prepared for each administrative area in LRB, initially at a municipal level and combined into a provincial plan formning the basis of the "Liao River Basin Water Pollution Prevention under the "Ninth Five-Year Plan" and Planning for the Year 2010". This was approved by the State Council in 1999 and forms the basis of the current and ongoing work of the authorities in the basin. The four stated principles that underlie the planning are: sustainable development; water resource protection; total load control of pollutants; and priority to major polluting sources. The focus of the plan, however, is specifically directed at the reduction of COD loads by means of the control of urban and industrial wastewater discharges. The details of the load reductions required in the plan were determined by distributing the overall load reduction required between the basin municipalities. These allocated load reductions were then further distributed by the municipalities between specific industries and urban wastewater discharges to generate a list of projects for implementation under the plan. Water quality objectives for river catchments within LRB have been specified, as have program targets covering the period 2000-10. The linkages between the load reductions and the water quality objectives have been modeled, and the pollutant load reductions calculated using simple linear techniques. In view of the limited dilution available in LRB, it will be necessary in the future for wastewater treatment to include also the removal of ammonia. Moreover, the plan considers only point source loads of a single pollutant, whereas other pollutants may be significant, as also may be discharges from sources not as yet considered, such as agricultural runoff, air pollution fall-out and wastewater discharges from small-scale industry. Considering the seriousness of the water resource pollution, and the outcome of the modeling, it was considered optional for this stage to concentrate on the highest impact municipal systems, adopting a "worst first" approach (see Annex 12, which sets out the detailed impacts); further, to meet China's project and loan processing goals, MOF advised that it would be optimal to implement the basin plan in stages, the first of which would have World Bank support, focusing on 3 cities, Jinzhou, Panjin and Yingkou. A follow-on stage which would be important for LRB clean-up is planned by Liaoning focusing on Shenyang. The plan at this time considers quality in the surface waters of LRB. However, many cities and towns rely upon groundwater for urban supply, and, therefore, protection of groundwater quality is critical. A basin plan should therefore also consider the need for groundwater protection, including the possible need to improve standards of disposal of municipal solid wastes and the control of hazardous wastes from industry. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Latest Supervision Sector Issue ] Project (PSR) Ratings ___________________________________ __________________________ _ 0(Bank-financed projects only) Implementation Development Bank-financed Progress (IP) Objective (DO) Urban Environment: Water, Yunnan Environment Project S S wastewater, sanitation, solid waste, (Ln 4055/Cr 2892-CHA) industrial pollution - 10-  Urban Environment: Water, Guangxi Urban Environment S S wastewater, sanitation, solid waste, Project (Ln 4348/Cr industrial pollution 3097-CHA) Urban Environment: Wastewater & Second Shanghai Sewerage HS HS tariff reform policy Project (Ln 3987-CHA) Urban Environment: Water, Shandong Environment Project S S wastewater, district heating, industrial (Ln 4237-CHA) pollution Urban Environment: Water, Shanghai Environment Project HS HS wastewater, solid waste, pollution (Ln 371 1-CHA) mitigation Urban Environment: Water, Sichuan Urban Environment S S wastewater, sanitation, solid waste, Project (Ln 4496/Cr industrial pollution 3251-CHA) Urban Environment: Water, Chongqing Urban Environment S S wastewater, solid waste Project (Ln 4561-CHIA) Urban Environment: Water, Hebei Urban Environment S S wastewater, industrial pollution Project (Ln 4569-CHA) Urban Environment: Industrial Chongqing Industrial Pollution S S pollution management and control Control & Reform Project (Ln 4045-CHA) Urban Environment: Water, Liaoning Environment Project S S wastewater, solid waste, industrial (Ln 378 1-CHA) pollution, environmental rehabilitation and reconstruction, Environment Revolving Subloans River Basin Pollution Control: Huai River Pollution Control Wastewater, industrial pollution in two Project (Ln 4597-CHA) provinces Other development agencies The Asian Development Bank (ADB) Reported to have been generally has supported a range of investment successful investment programs in the urban sector of China, programs. Expansion of ADB mainly supporting urban environmental support to the urban sector is services, in provinces that do not under way. overlap with World Bank-supported programs. Bilateral support from a number of These investments have sources, including KfW and the generally been successfully Governments of Austria, Australia, implemented, though attention Finland and Denmark, has financed has not been paid to equipment for urban water supply, institutional and financial wastewater and industrial waste matters. Finance has been treatment plants. available mainly to support equipment sourced (restrictively) from the lending country. -i  The Department for International Performance has been reported Development--DFID (of the United to be satisfactory. Kingdom) has focused support on institutional and financial development needs of urban utilities, and on broad aspects of environmental management. The Government of Japan remains a Performance is reported to be major source of international finance satisfactory. Financial policies for equipment for urban water supply, and conditionality are not wastewater and industrial waste developed, however. treatmnent plants. IP/D0 Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: Greater Reliance on User Charges. A major finding from the Operations and Evaluation Department (OED) review of Bank water and sanitation projects has been a generally good achievement of physical targets but less success in sustaining the financial viability of municipal service providers. Preliminary indications from an ongoing OED review of the Banks China water supply and wastewater program appear to confirm these findings. Recent sector work on China ("Urban Environmental Service Management," Report No. 13073-CHA) notes the need for greater reliance on user charges, which are presently levied at unsustainable levels. Hence, tariff reforms will be a centerpiece of the policy dialogue with the LRB municipalities, and adjustments of tariff levels are an integral part of the project design. Timing of Tariff Increases. Previous urban environment projects in China have frequently encountered difficulties implementing agreed tariff increases in a timely manner, sometimes delaying project implementation by six months or more. Tariff increases often represent politically difficult decisions for local governments, but are critical for the sustainability of the project. To avoid such delays after loan effectiveness, and to ensure that changes meet the approval of all relevant authorities, this project design requires that tariff adjustments be implemented during the preparation stage, as early as project appraisal. These tariff adjustments were implemented prior to appraisal. Experience with Pollution Control in River Basins. Experience with pollution control projects in river basins, e.g., in Brazil (Guarapiranga/Sao Paulo, Parana, and Minas Gerais, as well as in an upcoming project in Paraiba du Sul River Basin) has shown the importance of adequate monitoring and databases, as well as the need to link the data to investment planning with regard to wastewater treatment. The project includes an environmental water quality monitoring component to adequately monitor river water quality. Further, the urban management information systems component would address the issue of linking the data to urban investment planning with regard to wastewater treatment and environmnental management. Support for Institutional Management. The establishment of financially autonomous utility enterprises to develop and manage urban services is a long-standing Chinese practice, and avoids many of the management difficulties of publicly owned utilities in other countries. However, wastewater collection and treatment have only recently been given the same autonomy, generally by absorbing the existing drainage bureaus and construction management units already active in the sector into separate enterprises. The prior experience of these bureaus will undoubtedly allow a smoother transition, but high levels of technical assistance will be needed to strengthen the new enterprises' financial, managerial, and technical capacities. Tariffs, charges, and reallocation of existing taxes and urban construction charges would help ensure - 12 -  adequate funds for operation and management. The establishment of financially autonomous utilities prior to project implementation has provided additional time for management and operational issues to be clarified. During project formulation and preparation, detailed analyses of institutional strengthening and training (IST) needs were undertaken; this led to the design of a comprehensive IST component to be included in the project that would assist the project utilities address the challenges described above. 4. Indications of borrower commitment and ownership: The high-level commitment to the project is evidenced by the inclusion of the Liao River within the priority "Three Rivers, Three Lakes" program. Provincial and municipal commitment to the project is demonstrated by the formation of dedicated project offices and the identification of candidate projects within an overall plan framework and commitments in writing to implement the long-terrn Liao River Basin clean-up program. Liaoning has substantial experience in implementing Bank-financed projects. 5. Value added of Bank support in this project: The Bank brings considerable international experience in terms of assisting in policy formulation and investment program design. Bank assistance will also draw upon our growing experience in addressing regional environmental issues through ongoing projects in Liaoning and in other priority environmental improvemnent projects in China, including the cleanup of Dianchi Lake (as part of the Yunnan Environment Project) and the Huai River Basin, both included in the priority "Three Rivers, Three Lakes" prograrn. Bank assistance in the project design phase has enabled the basin municipalities to formulate and evaluate a more programmatic approach to the provision of urban environmental services and to introduce the principles of integrated river basin management into planning of water resource and pollution management strategies. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): O Cost benefit NPV-US$ million; ERR = % (see Annex 4) X Cost effectiveness O Other (specify) The project will provide economic benefits to the Liao River Basin area by improving the quality of surface and groundwater and thus protecting a range of activities which rely on the water in the Basin. LUCRPO has made estimates of the economic benefits of the project and its components, based on identification of avoided costs, productivity improvements and health benefits. These estimates suggest considerable benefits but the uncertainties in the estimates are such that an ERR for the project cannot be estimated with confidence. The pollution loads are large in relation to flows in the basin and are degrading existing water sources. Consequently, reductions in pollution will have benefits in terms of postponing new water supply investments. Estimates have been made of the marginal costs of new water supply but it is not yet possible to define a relationship between pollution reduction and delay in water supply expansion and so the economic value of the pollution reduction cannot be valued on this basis. (The impacts of price increases and other demand management measures have been included in the design of individual schemes but these measures do not avoid the need for large scale wastewater treatment to protect existing resources.) The investmnents are therefore evaluated on a cost-effectiveness basis, using an average incremental cost (AIC) approach, and compared with each other and with comparable figures for other schemes in China. - 13-  The key parameter for water quality in the Liao is COD which can be both a measure of loads of pollution (as tons of COD) and a measure of ambient quality (as concentration in the river). In the. long term, achievement of the water quality goals will be measured by reductions in COD concentrations (since this is basis of formal classification) but since very large reductions in COD loads are required to achieve this, pollution management efforts at this stage are focused on load reduction. Cost effectiveness of COD pollution load reduction (either by prevention or by treatment) is therefore the key parameter in comparing approaches and individual projects. There are various industrial interventions that could achieve COD reduction at relatively low cost and the AIC for COD removal is one of the criteria for support of any industrial interventions. However, industrial pollution load reduction alone would not be sufficient to achieve the target quality improvements and it certainly could not be implemented in a reasonable period so that municipal treatment is also required. The estimated AICs for the municipal schemes proposed are comparable with each other and with figures from other schemes, indicating that they are consistent with good practice. Results from an affordability and willingness to pay study analysis for urban environmental services show generally low elasticity for different levels of tariffs and household income, indicating the need for a concerted campaign of awareness raising and education about water use and wastewater treatment. The proposed tariffs appear affordable to the population, on the basis of these analyses. 2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4) The base cost estimates of the project reflect preliminary engineering designs and price levels prevailing in March 2001. The unit prices were derived from the following sources: (a) quotations obtained from manufacturers and suppliers; (b) prices of goods and works from recent contracts; and (c) construction costs according to prices published by the Central and Liaoning governments, all adjusted for inflation. Physical contingencies have been applied to civil works base costs at the rate of 15 percent, and to other costs at the rate of 10 percent. Construction supervision services costs, estimated at 2.5 percent of the civil works and I percent of the materials and equipment costs of the wastewater component have been included in the project cost estimates. Project management and engineering overhead costs of 10 percent are also included. Price contingencies have been applied to expenditures at projected global foreign and local inflation rates, as follows: local: 2 percent in 2001 and 3 percent thereafter; foreign: 3.6 percent in 2001, 3.7 percent in 2002, 2.6 percent in 2003 and 2.2 percent thereafter. The dollar/yuan exchange rate has been assumed to vary in order to maintain purchasing power parity. The financial objectives set by LPG for its wastewater utility companies are to achieve at least full cost recovery on their operations. The tariff adjustments necessary to meet these financial objectives were executed prior to appraisal. Financial projections have been completed for each utility company indicating the levels of tariffs required annually to meet the stated objectives. However, in practice, wastewater companies' tariffs are adjusted only every two or three years, taking into account the tariff requirements of other utilities, e.g., water, power, gas and telephone. It is possible, therefore, that in the intervening years between tariff adjustments, the agencies may not be able to meet their annual targets. In such eventualities, the agencies' operating revenues would need to be supplemented from the general revenues of the parent municipality in order to remain financially viable. Paper-Making Companies. Financial assessments of the industrial wastewater treatment investments proposed for the Jincheng Paper-Making Company (JPMC) and Yingkou Paper-Making Company (YPMC) were carried out on the basis of the financial soundness (as measured by minimum thresholds for debt service coverage ratio, current ratio and quick ratio) of their operations. The companies are forecast to be able to maintain adequate current and quick ratios and a minimum debt service coverage ratio of 1.4 - 14 -  during the projection period. Copies of the financial projections of JPMC and YPMC are included in the Project File (Annex 8). Fiscal Impact: Liaoning Province's on- and off-budget receipts and expenditures in 2000 both totaled about Y73 billion ($8.8 billion equivalent). Jinzhou, Panjin and Yingkou's on- and off-budget receipts and expenditures in 2000 totaled about Y2.4 billion, YI.7 billion and Y2.4 billion, respectively. Provincial receipts and expenditures are projected to grow at about 3 percent per year in current terms; municipal receipts and expenditures are projected to grow at about 5.5 percent per year in current terms. LP expects to pass on about 74 percent of the Bank loan proceeds to the municipalities and their subborrowers. Should the cities and their subborrowers be unable to fulfill their obligations, LP would have no difficulty in covering debt service through its own resources as the debt services represented by the project is small compared to total provincial receipts. LP would provide all funding not met by (a) the proceeds of the Bank loan; (b) municipal contributions; and (c) funds generated intemally by the implementing agencies. LFD has independently assessed the municipalities' ability to generate their required counterpart funds from assured sources and found these satisfactory. 3. Technical: The proposed physical investments were designed by first-class Chinese design institutes, taking into account the latest Ministry of Construction (MOC) design standards. The engineering designs and bid documents were reviewed by intemational consultants and found to be satisfactory. The technologies involved are proven and within the capability of Chinese contractors and manufacturers if successful in winning bids. 4. Institutional: 4.1 Executing agencies: The self-funding, self-accounting state-owned wastewater companies of Jinzhou, Panjin and Yingkou were established during project preparation; this represents a major step in utility reform, consistent with stated national policy. The staff of these companies were transfered from the existing municipal engineering administration departments responsible for sewerage and drainage services. Therefore, while the wastewater companies would start with operational experience, they as yet lack a "corporate" culture. They would therefore benefit from technical assistance to be provided under the project to help them improve, as necessary, their business planning, financial management and operational skills, again stressing the positive steps taken and planned in utility reform and underpinning tangible moves to market pricing. 4.2 -Project management: LUCRPO, working closely with LEPB, LIEP other interested agencies and its Design Review and Advisory (DRA) consultants, has arranged for project preparation work to be completed to the satisfaction of LPG and the Bank. LUCRPO will be strengthened and the personnel mix adjusted to reflect the needs of the implementation and construction phases of the project. Each city has formed, budgeted and staffed a project management office (PMO), which has been involved throughout project formulation and preparation. It is expected that these PMOs, with support from LUCRPO, would significantly enhance project launch and subsequent implementation. 4.3 Procurement issues: The Procurement Capacity Assessment (see Project File, Annex 8) found no concerns of substance. - 15-  Attention would be given to procurement matters listed in its Action Plan during project supervision, building on the experience of Liaoning as an existing borrower from the World Bank Group. 4.4 Financial management issues: The task team conducted a financial management assessment of the adequacy of the financial management arrangements of the Liao River Basin Project (the project). The information presented in Annex 14, more fully describes the financial management arrangements for financial management. The Liaoning Urban Construction and Renewal Project Office (LUCRPO) has overall responsibility for the preparation, training and implementation of the Project. The Project implementation will be undertaken at the municipal level. The Project will use "Accounting Sandards for State-owned, Infrastructure-oriented Projects" during the initial construction stage and switch to "Accounting Standards for Industrial Enterprises" afterwards. In terms of disbursements, the Project will be producing project financial management reports in line with the format and content agreed to between the Bank and the Government. In addition, traditional disbursement techniques will be used as opposed to the PMR-based disbursement. In line with other Bank-funded projects in China, the Project will be audited in accordance with Government Auditing Standards of the People's Republic of China. The Foreign Investment Audit Bureau of the China National Audit Office (CNAO) will have the overall responsibility for auditing the project accounts and the required entity financial statements. Liaoning Provincial Audit Bureau has been identified as the auditors for the Project. Auditors' reports will be submitted to the Bank within six months after the end of each reporting year, with separate opinions on the statement of expenditures and on the special account. There is no noncompliance with audit covenants for existing Bank-financed projects in Liaoning, though the auditors raised a few issues relating to Jinzhou Water Supply Company which is not a project implementing agency for the Project (section 8 of Annex 14). There is clearly a risk that tariffs collected by the water supply companies may not be fully turned over to the wastewater companies, who are ultimately responsible for the repayment of the Bank loan. This risk could be mitigated if ring-fenced controls are established to safeguard the interests of the wastewater companies. Please refer to section 8 of Annex 14 for further discussion. 5. Environmental: Environmental Category: A (Full Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. The Liao River Basin is one of the three priority river basins in China for water quality improvement. The general lack of water resources in the basin means that an integrated approach to water quality planning wilf be necessary rather than the previous application of uniformn concentration based standards regardless of the receiving environment. An environmental assessment (EA) has been carried out for LRBP. During its preparation and evaluation, national procedures, including those indicated in the "Circular on Strengthening Environmental Impact Assessment Management for Construction Projects Financed by Intemational Financial Organizations (June 1993)" as well as those required by the Bank Group, were diligently followed. The Comprehensive EA documents such as Environmental Assessment Report and Executive Summary were prepared, incorporating Bank conmments. The Environmental Management Plan (EMP) is an integral part of the EA. A detailed annex covering environmental assessment and impact has been prepared (Annex 12), summarizing the findings of the Chinese EAs on the various components. - 16-  Potential Impacts. The environmental impact of the project, is on balance, substantially positive and the benefits greatly outweigh the adverse impacts. The city wastewater treatment components substantially reduce the pollution loads to the rivers in the Liao River Basin and make a significant contribution towards achieving the desired water quality objectives for these rivers. Mitigation Measures. The EA specified the appropriate mitigation measures, environmental monitoring plans, institutional arrangements and training and equipment requirements, together with cost estimates for implementation of the mitigation measures. Major mitigation measures include controls on construction practices, careful siting of facilities with appropriate buffer zones and controls on noise. Public Consultation and Feedback. During the 12 months leading up to the delivery of the provincial consolidated EAs and RAPs, many meetings took place with LUCRPO, city PMOs, utility companies, city EPBs, and other affected city organizations to discuss the proposed project and the preparation of the subcomponent environmental assessment reports. These meetings took place monthly at a minimum and resulted in the full collaboration of local officials and community representatives leading to the full support of the project and the EA process. In addition, the Terms of Reference (TOR) for the EAs, the draft EAs and the final EAs were made available publicly in each of the project municipalities. Information Disclosure. The EA was reviewed during January 2001, and found to be satisfactory, and sent to the Infoshop on January 25, 2001. The EA was approved by the Provincial authorities in late 2000, and approved by the State Environmental Protection Agency (SEPA) in March 2001. 5.2 What are the main features of the EMP and are they adequate? Under the EMP, an environmental protection management system has been established for the purpose of implementing existing laws and regulations in each of the municipalities, with contractors and the utility companies being responsible for carrying out environmental management and monitoring activities during construction and during plant operations respectively. Information gathered will be made available to LEPB and the municipal EPBs, as well as to the public. An Annual Safeguard Compliance Report will summarize the previous year's environmental and social indicator data. The EMP is assessed to be appropriate for the project. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: December 2000 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? Consultation was carried out in three ways: bulletins to the press, public opinion questionnaires and surveys. LUCRPO published detailed environment and project infornation in the following newspapers: Jinzhou Evening, Panjin Daily and Yingkou Daily. Surveys were undertaken of the public, the project-affected people; willingness-to-pay surveys wee also conducted. Further, a public opinion survey was carried out in the project cities, seeking stakeholders' opinions, and sirnultaneously informing them about the project, its benefits and implications. (See Annex 12 which also contains details of the public consultations). 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? Besides regular environmental reviews to be carried out during supervision missions, the Annual Safeguard Compliance Report (see Section 5.2) will provide a year-by-year snapshot of progress on the environmental - 17 -  front. Project monitoring indicators (see Annex 1) will systematically measure the environmental impact of the project. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. The project is expected to have a significant positive social impact, once the project-financed clean-up of the water and land resources in the Liao River Basin has been completed. Adverse social impacts of the project are largely related to land acquisition and structure demolition required for implementation. The project would require the acquisition of 18.7 hectares of land for the construction of the wastewater treatment plants, affecting about 175 people. The construction and rehabilitation of the interceptors would result in the temporary lease of a large amount of land, including the removal of both residential and commercial structures. About 1,375 people would be affected through removal of residential structures. A total of 154 shops, vendors and government institutions would be affected, of which 110 are street vendors. Altogether about 418 employees would be affected through relocation or temporary cessation of their commercial operations. There are no land acquisition requirements or resettlement for the two paper-making companies. With assistance from the project consultants, the city project offices carried out resettlement planning. Planning activities included a census of affected people, an inventory of affected assets, a sample socioeconomic survey in the directly affected areas and extensive consultations with the affected groups on the resettlement strategy. As a result, a multiprong resettlement strategy has been developed for the affected population. For farmers who lose farmland to the wastewater treatment plants, the livelihood rehabilitation strategy is land- and agriculture-based. All affected farmers would be allocated farmland within the village, and land compensation funds would be paid to the village and used collectively in the villages for agriculture and sideline development. For people losing houses, two options are planned, i.e., cash compensation and replacement housing. Urban residents could choose to find and buy their own replacement housing with the cash compensation. For those who do not want to find and buy their own replacement housing, the project would provide ownership of a replacement housing unit in government-built apartments. For relocating rural residents, the project would provide compensation at replacement cost with no depreciation, and any salvageable materials would belong to the affected residents. They would receive alternative housing plots within their villages to build replacement housing. Most of the shops, vendors and institutions would be affected temporarily during the construction of the interceptors and would resume business after the construction. Compensation would be paid for business loss and the employees' salary during the construction period. A few government agencies and shops would require relocation and new sites have been planned for them. The project would also impact some public infrastructure. Compensation at replacement cost would be paid to the relevant government agencies to restore the affected infrastructure and services. On the basis of these, a Resettlement Action Plan (RAP) was prepared for each of the three project cities in line with local laws and World Bank OD 4.30 on Involuntary Resettlement. The RAPs contain the details of (a) the census, (b) inventory, (c) the socioeconomic survey, (d) the legal framework and resettlement principles, (e) organization, (f) grievance mechanism, (g) implementation schedule, (h) budget and (i) monitoring arrangements. - 18-  The proposed investments in Panjin City would affect some ethnic minority households as defined by the government. A survey to identify ethnic minority groups found that, of the 1,354 relocating population in the city, 208 people belong to officially defined ethnic minority groups, including 83 Manchurian, 121 Korean and 4 Mongolian persons. The survey and interviews found that all the affected persons were urban residents, scattered throughout the project area, and the project would not have specific impact on ethnic minority communities. Project information was disseminated among them during the consultation sessions. Their feedback has been incorporated into the RAPs and the consultation session concluded that the resettlement and rehabilitation measures planned under the RAPs, would be adequate to address and mitigate any project impact on such ethnic minority groups. Environment subloans would be made available under the project. The specific investment subprojects would be selected during the course of implementation, drawn from the existing candidate list. A resettlement policy framework has been developed for application in the event an environment subproject necessitates loss of land or assets. 6.2 Participatory Approach: How are key stakeholders participating in the project? The major beneficiaries would be the majority of the population of the cities of Jinzhou, Panjin and Yingkou, who would enjoy a cleaner environment through wastewater collection, treatment and disposal. The implementing agencies would also benefit through the IST incorporated into the project. The cities would benefit, overall, through benefits emanating from improved city management, and from the implementation of cost-effective tariffs and charges for these services. All the affected households and communities have been identified through the census and inventory. Project information was provided to the affected population through newspapers, posters and public meetings. Focus group discussions and key informant interviews have been extensively conducted with local government officials and the affected communities to (a) further disseminate project information, (b) collect people's concems and suggestions, and (c) consult the affected people over the resettlement and rehabilitation strategy. Information dissemination and consultation are designed to continue into implementation. A resettlement information booklet would be distributed to the affected people prior to resettlement implementation. Both internal and independent monitoring of the resettlement program would be conducted regularly during project implementation. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? A number of meetings took place between project proponents and representatives of local communities to solicit views and concerns. In the absence of local nongovernmental organizations (NGOs) in China, the interests of most communities are represented by both elected and appointed representatives. The entire process of resettlement planning has been participatory. Census and socioeconomic surveys were conducted with the full participation of the affected persons. The National Resettlement Research Center has been contracted as the independent monitor for the implementation of the resettlement program. Annex 12 contains details of public consultations. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? Financially autonomous consumer/beneficiary-oriented entities have been formed that would, in line with current China policy, be responsible for project implementation and urban service delivery. This would - 19-  enable a strong customer orientation, since consumers would be in direct contact with the service provider due to the regular payment of tariffs. Resettlement offices have been set up to implement the resettlement programs. The institutional arrangements are detailed in the RAP. 6.5 How will the project monitor performance in tenns of social development outcomes? Wastewater services improvement and river water quality would be regularly monitored, and reported through the project progress reporting arrangements. A public outreach program to be undertaken through the EU-funded Liaoning Integrated Environment Program (LIEP) has been designed. The outreach program will conduct annual surveys to monitor performance in terms of social impacts. The project also includes investments for water quality monitoring. See Annex 12. 7. Safeguard Policies: 7.1 Do any of the following safeguard policies apply to the project? [ : ff jif : Sti;00 0Pok#.iffu::ia;j:A : t00X000TiT i0000::: i; :j O olicability t i Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) * Yes 0 No Satural habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes 0 No Forestry (OP 4.36, GP 4.3a W 0 Yes 0 No Pes Maaeet O409) 0Yes 0No |Cultural Proert P 11.03) = Yes *9 No Indigenous Peoples (OD 4.20 * Yes O No Involuntary Resettlement (OD 4.30) * Yes O No |Safety of Dams (OP 4.37, BP 437)jLj 0X Yes *D No |Projects in International Waters (OP 7.50, BP 7.50_GP 750 O Yes * No Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60) 0 Yes * No 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. Compliance would be monitored during routine supervision and the Annual Safeguard Compliance Report would provide full details annually. F. Sustainability and Risks 1. Sustainability: The project is expected to be sustainable in three respects: (a) financially; (b) institutionally; and (c) in achieving its development objectives. Tariff reforms would enhance the financial viability of the municipal service providers. Institutionally, the creation of financially autonomous wastewater companies and continued technical assistance for the participating institutions would strengthen utility management and water quality monitoring capacity. Finally, the project addresses an issue of high priority to -both the local and the national government: vital self-interest in achieving environmental conditions necessary for sustained economic growth, which are a strong motivation to continue implementing the long-term water resource strategy. - 20 -  2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Risk _ Risk Rating Risk Mitigation Measure From Outputs to Objective Complementary pollution reduction in M Monitoring and resource management industry and agriculture delayed information system that clearly tracks sources of pollution and nonattainment of quality targets Pollution abatement action plan incorporated into the project From Components to Outputs Autonomy of wastewater organizations M Companies created before appraisal Financial sustainability of wastewater M Tariffs established, implemented and services covenanted; financial performance to be core activity of project supervision Overall Risk Rating M Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) 3. Possible Controversial Aspects: Public reaction to wastewater tariff increases to maintain the financial viability of the wastewater companies. G. Main Loan Conditions 1. Effectiveness Condition * Execution of subsidiary loan agreements between the project municipalities (Jinzhou, Panjin and Yingkou) and their wastewater companies, satisfactory to the Bank. 2. Other [classify according to covenant types used in the Legal Agreements.] Disbursement condition: * The signing of contracts with consultant firms for (a) institutional and financial technical assistance, and (b) construction supervision services and quality control, as a condition of disbursement of the civil works category; * The adoption of an Operational Manual acceptable to the Bank for environmental subloans as a condition of disbursement of this category; and * The execution of subsidiary loan agreements between Jinzhou and Yingkou and their paper-making companies, satisfactory to the Bank, as a condition of disbursement of the goods subcategories for Jincheng -21 -  and Yingkou. Implementation covenants: At negotiations, assurances were obtained from Liaoning Province (LP) that it would: * carry out, or cause to be carried out, the resettlement of persons affected by the project in a manner and according to the Resettlement Action Plan (RAP) satisfactory to the Bank; * cause the Jincheng Paper-making Company to demolish, by December 31, 2006, its mercury electrolysis facility and clean up the demolition site in a manner satisfactory to the Bank; * cause the project agencies to carry out, in a manner satisfactory to the Bank, the findings of the Environmental Assessment (EA) and related implementation program; * maintain the Liaoning Urban Construction and Renewal Project Office (LUCRPO) and the city project management offices (PMOs), and urban management information system (UMIS) centers throughout implementation, with functions and responsibilities satisfactory to the Bank, and with competent staff in adequate numbers for the duration of the project; * carry out, or cause to be carried out, the time-bound Industrial Pollution Control Action Plan (IPCAP) for the Liao River Basin in accordance with a schedule acceptable to the Bank and discuss and agree any revisions with the Bank; and * arrange for each project city to fumish to the Bank, by December 31, 2001, a time-bound investment program, acceptable to the Bank, to strengthen its wastewater collection systems, and begin implementation of said program by July 31, 2002, taking into account the Bank's comments thereon. Financial covenants: At negotiations, assurances were obtained from LP that it would: * make subloans to small and medium-size industries on terms and conditions satisfactory to the Bank, and use the repayments of such subloans to finance additional subloans through its Environment Revolving Subloan Facility (ERSF); * cause Jinzhou, Panjin and Yingkou to onlend part of the loan proceeds to their respective wastewater companies, on terms and conditions satisfactory to the Bank; * cause Jinzhou and Yingkou to onlend part of the loan proceeds to their respective paper-making companies, on terms and conditions satisfactory to the Bank; * cause financial management to be carried out in accordance with the guidelines set out in the Financial Management System (FMS) Manual, and arrange for the following annual audits to be submitted to the Bank within six months after the end of the financial year, commencing with fiscal year 2002: (a) audit of the project accounts maintained by the Liaoning Urban Construction and Renewal Project Office (LUCRPO), Liaoning Provincial Construction Commission (LCC), Liaoning Environmental Protection Bureau, (LEPB), Urban Management Information System (UMIS); (b) audit of the Special Account; (c) audit of statements of expenditures (SOEs); (d) audits of the financial statements of the wastewater companies of Jinzhou, Panjin and Yingkou; and (e) audits of the financial statements of Jincheng Paper-making Company (JPMC) and Yingkou Paper-making Company (YPMC); * commencing with fiscal year 2001, cause the wastewater companies of Jinzhou, Panjin and Yingkou to (a) produce revenues from their respective wastewater operations sufficient to cover operations and maintenance costs (including depreciation), and the amount by which debt service requirements exceed the provision for depreciation; and (b) incur no additional debt without the Bank's agreement, unless a reasonable forecast shows that the entity would have a debt service coverage of at least 1.3 times; and * cause the wastewater companies of Jinzhou, Panjin and Yingkou to prepare, before September 30, 2002, and in each of the following fiscal years, forecasts satisfactory to the Bank, (a) to review whether they would meet - 22 -  the covenanted requirements set forth above in such year and the following fiscal year, and (b) to furnish the results of such reviews to the Bank; if any such reviews would show that the entity would not meet the requirements set out above, the entity would take all necessary measures, including adjustments to the structure of its tariffs and charges, in order to meet the requirements; and * commencing with fiscal year 2001, cause Jincheng Paper-making Company and Yingkou Paper-making Company to (a) maintain a quick ratio of 0.8; (b) maintain a current ratio of 1.5; and (c) incur no additional debt without the Bank's agreement, unless a reasonable forecast shows that the entity would have a debt service coverage of at least 1.4 times. Reporting and Monitoring: At negotiations, assurances were obtained from LP that it would: * cause each implementing agency to prepare semiannual project progress reports; and LUCRPO to send a consolidated report to the Bank by January 31 and July 31 of each year, beginning on January 31, 2002; and * carry out with the Bank a mid-term review of the project by December 31, 2004, and implement, or cause to be implemented, agreed recommendations. H. Readiness for Implementation 3 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. Ii 1. b) Not applicable. 1 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. [ 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. 0 4. The following items are lacking and are discussed under loan conditions (Section G): 1. Compliance with Bank Policies C 1. This project complies with all applicable Bank policies. Dl 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. ffreyRead v airna ukon Huang Team Leader Sector Manager/Director Country ManagerlDirector - 23 -  Annex 1: Project Design Summary CHINA: Liao River Basin Project _ A414~~~<S]Sia"5qu itno lo fi n Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) Safeguard the environment and Ambient environmental EPB statistics for environmental public health through alleviation conditions in LRB improved quality of urban environmental infrastructure constraints Environment-related health Bureau of Public Health problems reduced Urban environmental Statistics of the Construction infrastructure supply meets Commission demand Project Development Outcome / Impact Project reports: (from Objective to Goal) Objective: Indicators: Protect quality of LRB and its Reduction of pollution load from Statistics of LEPB Parallel efforts to manage tributaries to ensure water urban sector industrial wastewater pollution supplies are protected are successfully implemented Improvement of financial Audited financial statements, Funds availability to finance viability of city wastewater annual financial projections sewer network extensions companies Timely authority to adjust tariffs to maintain viability Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: Market-oriented pricing and Ratio of actual tariff to Wastewater company statistics; Government maintains tariffs at financial management introduced recommended cost recovery tariff project supervision mission cost recovery levels in participating municipal increased wastewater companies in the LRB Infrastructure capacity for Volume increased for wastewater Liaoning and company statistics Connections made to wastewater wastewater increased collected and safely disposed and periodic reports networks Cost-effective wastewater Small and medium industries Statistics of Liaoning EPB. Pilot experience disseminated pollution abatement measures adopt clean technology, and IPCAP is implemented in and adopted throughout undertaken in industry implement end-of-pipe treatment accordance with scope and timing Liaonings industry sector; agreed effective regulation Water quality monitoring and Long-term water quality Liaoning EPB; draft and final Long-term strategy is being management capacity monitoring strategy developed strategy documents implemented. strengthened and staff trained in water quality monitoring - 24 -  Project Components I Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) Wastewater management Achievement of planned Project Progress Reports, Wastewater companies are objectives (see Annex 3) supervision missions, data of established and sustained companies and EPB Environmental quality Water and air quality to comply Project Progress Reports, Laboratory staff resource levels monitoring with Chinese Drinking Water and supervision missions, data of increased or sustained, laboratory Air Quality Standards companies and EPB operating budgets increased/ sustained as required, training in Increase in level of monitoring-- Laboratory records for industrial use of equipment provided number of sampling points, wastewater and environmental number of samples analyzed, quality analysis number of parameters monitored Urban management information Development of operational Project Progress Reports, Sharing of data by interested systems systems, improved base mapping supervision missions agencies, avoidance of duplication Environment subprojects Subloans made to approved small Project Progress Reports, data of Reduction of polluting discharges and medium-sized industries industries, LEPB and LFD Institutional strengthening and Improvements in organizational, Project Progress Reports, Government commitment to training managerial and financial supervision missions financing "intangibles" capability; numbers of management and staff trained in system operations, financial management and business planning General Achievement vs. Target reviewed Benchmarking to be undertaken, through Progress Reports and agreed at the Project Launch Workshop (PLW) - 25 -  Project Monitoring Indicators CHINA: Liao River Basin Project The effectiveness of the project in meeting its Development Objectives would be assessed through the regular monitoring, recording and reporting of key performance indicators. Monitoring indicators were discussed and agreed with LUCRPO and are given in the table below. The baseline and targets would be reviewed and updated during the Project Launch Workshop. Indicator 2001 2005 2007 2010 1. Water quality in Hun, Taizi, Liao and Daliao rivers - 50 70 90 meets Class V standards for COD (% of time) 2. Aggregate quantity of wastewater treated at project N/A 30 60 80 city wastewater treatment plants (% of system flow) 3. Industrial wastewater meeting river discharge 50 70 75 80 standards (% of total flow) 4. Industrial water use per unit of output (m3/Y10,000) 120 100 80 60 Indicator Baseline at Intermediate Achievement and Project Start Achievement Date and Date Liaoning Provincial Government Draft Plan Approved June 2002 approval of the River Basin Plan 2001 (Y/m3) 2003 (Y/m3) 2005 (Y/m3) Wastewater tariffs implemented to Panjin: 0.34 Panjin: 0.49 Panjin: 0.72 meet financial projections Yingkou: 0.25 Yingkou: 0.46 Yingkou: .77 Jinzhou: 0.29 Jinzhou: 49 Jinzhou: 0.85 Completion of wastewater interception Zero 3 (December 2006) and treatment plants Class V river water quality achieved No Yes (December in Daliao and Liao 2006) Paper-making companies 2004: 50% of December 2006: financial 80% covenanted targets financial targets - 26 -  Annex 2: Detailed Project Description CHINA: Liao River Basin Project Background The Province, Water Resources and Pollution. The Liaoning Province overlooks the Bohai and Yellow Sea in the south, and faces the Korean Peninsula and the Yalu River to the southeast. Liaoning is a communications hub, connecting with the Eurasian rail bridge into Russia, and a vital industrial and commercial link for foreign trade. Liaoning Province has a total area of 145,000 square kilometers, a population of 41 million, and comprises of 14 cities, 17 county-level towns and 17 counties. Shenyang is the provincial capital. Liaoning is rich in mineral resources including iron, boron, magnesite, diamond, jade and solvent-grade limestone, and oil and gas reserves. The exploitation of these abundant resources has taken place at a rapid pace, with serious impacts on the environment. Water resources within the province have been both badly depleted and polluted by the heavy industries. The Liao River Basin has now been recognized as one of the most environmentally degraded within China, and the State Council has included this basin in its "Three Rivers and Three Lakes" environmental clean-up initiative. The Liao River Basin covers an area of 42,000 square kilometers, of which 27,000 square kilometers form the Hun-Taizi-Daliao Rivers catchment, and the remaining 15,000 square kilometer form the Liao river catchment. In 1995, the gross annual output of the Liao River Basin totaled Y305 million ($36.1 million), representing about 60 percent of the total provincial output, with heavy industries contributing more than half the output. The remainder is from over 900 large and medium state enterprises located in the basin. The Liao River plain is very fertile, and has been a major grain producer for many years. Two million hectares (29 percent of the basin area) within the Liao catchment are under cultivation, and the 1995 agricultural output was about Y20 million. Despite Liaoning Province being a water-scarce region, per capita consumption is typically between 100 liters per capita per day (lpcd) and 300 Ipcd, and increasing. Outdated production processes have resulted in high water utilization in industries. Raw water for both municipal and industrial supply is obtained from impounding reservoirs located within the upper catchment of the Liao River basin or from groundwater abstraction. Irrigation for paddy rice is the principal user of surface water between May and September, accounting for 70 percent of water use. Only 6 percent of surface water achieve the national standards for drinking water. Recorded primary pollutant indices include COD, ammonia, potassium permanganate, copper and cyanide. The Taizi River near the city of Benxi is the most polluted. It is evident that at least 216,000 hectares of paddy rice is currently irrigated with surface water that exceeds Category V classification prescribed for irrigation. Pollution is worsened by wastewater discharged by Tieling and Panjin further downstream. The major sources of pollution are wastewater discharges from Fushun and Shenyang. Below Shenyang, water quality exceeds Category V classification. Above Yingkou, the water quality within the Daliao River is generally poor as a result of upstream discharges, but is made worse by municipal wastewater from Yingkou and industrial wastewater form the Yingkou Paper Factory. The Liao River Basin flow statistics indicate wastewater discharges exceeding 10,000 cubic meter per day, with major industrial discharges exceeding 3 tons of COD per day. Within Liaoning Province, Chemical Oxygen Demand (COD) has been identified as the key pollutant indicator. - 27 -  Pollution Control Strategy. The key objectives of the 2010 Program for Prevention and Cure of Liaohe River Valley Water Pollution are: (a) protection of sources of domestic water supply, (b) regulation of pollutants discharged by industry, (c) protection of the sources used for agriculture and aquaculture, and (d) construction of wastewater treatment facilities designed to reduce the critical pollutant loads. The Plan details the allowable COD discharges into the surface water between the years 2000 and 2010, as indicated below. Location Allowable Maximum COD Discha ge (tons/year) 2000 2005 2010 Whole Liao River Valley 271,200 208,800 193,200 West Liao River 31,700 29,000 10,300 East Laio River 34,900 25,400 16,800 Within Liaoning Province 207,000 169,600 166,100 The Ninth Plan identifies a number of quality control targets that should be attained by the years 2000, 2005 and 2010, together with a series of policy objectives. These policy initiatives include: (a) introduction of regulations to control pollution, based on total load control rather than concentration, (b) pollution load allocation based on low river flow conditions, (c) economic pricing of water and tariff reform, (e) protection of water resources, (f) closure or reform of inefficient industries, and (g) improved monitoring. The Liao River Basin Environmental Improvement Program, financed under a comprehensive technical assistance package from the European Union, has prepared the Basin planning framework for pollution control, water resource management and priority investments required to reduce pollution from both municipal and industrial wastewater in the next 20 years. Thirty critical and high-priority projects for wastewater treatment have been identified for implementation in the next 20 years, and include Shenyang, Yingkou, Panjin, Tieling, Liaoyang, Qingyuan, Changfu, Haicheng, Xinbin, Kalyuan, Anshan and Xinmin, in that order. At present there are only three operational wastewater treatment plants within the Liao River Basin. These are: 400,000 m3/day and 100,000 m3/day plants in Shenyang, and a 220,000 m3/day plant at Anshan serving Angang Steel Manufacturing Plant. A third plant of 200,000 m3/day for Shenyang, and other wastewater treatment plants are under construction for Fushun and Benxi. Pollution control regulations require treatment of wastewater at source, and a number of state-owned industries have constructed treatment facilities, while some industries have been closed. In the short to medium term, the primary wastewater treatmnent objective focuses on the removal of COD throughout the river basin, with no consideration given to ammonia removal. In the long term, facilities may be required to provide for flexible nitrogen removal with a view to moving toward greater compliance with Class V River Water Quality Requirements. The requirements for wastewater treatment have been based upon the Class V Water Quality Objective for COD under river flow conditions consistent with 75 percentile flow in April, on the assumption that water quality will generally not be expected to meet Class V requirements during the winter months (January to March) or when river flows are less than the design condition. Based on the above, a COD standard of 100 mg/l has been adopted for municipal wastewater discharges. An Industrial Pollution Control Action Plan will be implemented by the Provincial Govemment, as a complementary activity in parallel with the implementation of the LRBP. - 28 -  Liao River Basin Project (LRBP) Investments Summary project costs are provided in the table below. A detailed description of project components follows. Y million/a $ million/a %of total 1. Panjin Water Interception and Treatment 323.3 39.5 21 2. Yingkou Paper Mill Industrial Wastewater Treatment (red liquor 138.4 17.0 9 treatment and evaporation) 3. Yingkou Wastewater Interception and Treatment 378.6 46.3 25 4. Jincheng Paper Mill Wastewater Treatment (change of electrolysis 114.2 14.0 8 process to prevent mercury pollution} 5. Jinzhou Wastewater Interception and Treatment 267.3 32.8 16 6. Urban Management Information System for the three cities 53.0 6.5 4 7. Environmental Water Quality Monitoring 45.7 5.6 3 8. Environment Revolving Fund 166.0 20.0 11 9. Institutional Strengthening, Construction Supervision and Training 25.6 3.1 3 Total Project Cost (March 2001 prices) 1,512.1 184.8 100 L/ May be errors due to rounding. By Component: Project Component I - US$39.50 million Panjin Wastewater Interception and Treatment (Y323.3 million). Existing Conditions. Panjin is located in the southwest of Liaoning Province, inland from the Bohai Sea. The Shuangtaizi River divides the city into two districts--the Shuangtaizi district north of the river and the Xinglongtai district south of the river. The proposal in the project relates to the Xinglongtai District, which has a wastewater collection system that serves about 70 percent of the 200,000 urban population. Septic tanks are widely used. It is reported that by 2005, wastewater produced by the four major industries (petrochemical, asphalt, chemical and thermal industries) equal to about 26,640 m3/d will be treated at source and discharged to the Panxie Ditch. The city has no treatment facility. All wastewater is discharged to the Panxie Ditch, which conveys wastewater to the Shuangtaizi River. The masterplan indicates development of wastewater treatment for the Xinglongtai district in the first phase, with Shuangtaizi scheduled for the next phase. Component Description. LRBP investments would serve the Xinglongtai district south of the Shuangtaizi River, and would include: construction of 10.1 km of interceptor sewers comprising 3.0 km of 2.8m x 2.Om and 2.4m x 2.Om reinforced concrete box culvert, and 7.1 km of reinforced concrete pipeline DN 1200 and DN1400; two new pumping stations (5,951 m3/hr and 6,757 m3/hr); modification of 13 existing pumping stations; a 100,000 m3/day wastewater treatrnent plant located west of Panjin; sanitary landfill for sludge disposal, and provision of equipment necessary for operations. (A section of the box culvert, estimated to cost Y20.0 million, is currently under construction, financed with funds from the Panjin Municipality.) Project Component 2 - US$17.00 million Yingkou Industry Wastewater Treatment (Y138.4 million) Existing Conditions. The Yingkou Paper-making Company produces 100,000 tons/d of sulfite pulp from reed as part of the paper and paperboard production. The pulping process is highly polluting, carrying - 29 -  some 80 percent of the mills' discharge of pollutants to the Daliao River, with the rest coming from paper manufacture. Wastewater is discharged to the Daliao River upstream of Yingkou City, and accounts for two third of the pollutant load in this stretch of the Daliao River. Improvement in the river water quality at Yingkou can be achieved only if wastewater from both the paper mill and the city are treated. There is the additional concem regarding the potential effect on drinking water sources, and pollutants entering the Bohai Sea. The mill proposes to undertake modifications to its process to treat white liquid and red liquor, and improve efficiency in water use, to comply with the Liao River Basin pollutant reduction requirements. White liquid treatment, through coagulation and filtration for recovery of fiber and talc, would be carried out with the assistance of Austrian funding and technology. Component Description. The LRBP would finance the treatment of concentrated process liquor from pulping operations (red liquor) comprising: wastewater treatment, recycling and process modifications, which includes as by-products the recovery of process raw materials and production of lignosulfonate binder material, primarily for zinc manufacture. Project Component 3 - US$ 46.30 million Yingkou Wastewater Collection, Interception and Treatment (Y378.6 million) Existing Conditions. The city of Yingkou (current population of 463,000) is located in the south of Liaoning Province, near the estuary of the Daliao River with the Bohai Sea. The wastewater collection system is a combined sewerage system, and comprises open sewers. There is no wastewater treatment facility, and municipal wastewater is discharged from a series of outfalls into the Daliao River. The existing sewerage system covers about 60 percent of the central urban area, which is divided into the southwest and northeast catchments by the Renzaosi Flood Ditch. High levels of nutrient pollutants entering the Bohai Sea originating upstream of Yingkou are thought to be responsible for the increasing incidence of red tides that have had considerable impact on fish yields. The two dominant industries within Yingkou--the Yingkou Paper Mill and the Power Development Company--together produce a large proportion of the municipal pollutant load discharged to the Daliao River. Untreated wastewater from the Yingkou Paper Mill produces a COD loading equivalent to a population of 1.25 million. The development of Yingkou wastewater collection and treatment facilities over the next 20 years is planned to occur in two phases. This includes interception and treatment of wastewater (100,000 m3/day capacity) from the southern and western areas of the city up to 2010 in the first phase. The second phase (2010 to 2020) includes the expansion of this plant to 150,000 m3/day, a new interceptor, and a 100,000 m3/day wastewater treatment plant to serve the northern and eastem districts of the city above the Renzaosi Flood Ditch. It is also anticipated that the plants would be upgraded for nitrification by 2020. Component Description. LBRP investments would serve the southern and western drainage catchments of Yingkou. They would include: construction of 12.8 km of interceptor sewer, upgrading of five existing pumping stations, construction of three new pumping stations, upgrading of the sewer network, construction of a wastewater treatment plant of 100,000 m3/day capacity at Xipaotai, located west of the city, sanitary landfill for sludge disposal, and equipment necessary for operations. Project Component 4 - US$14.00 million Jincheng Industry Wastewater Treatment (Y1 14.2 million) Existing Conditions. The chlorine-alkali plant, with an annual capacity of 8,500 tons of chlorine and 10,000 tons of caustic soda, consumes some 700 grams of mercury per ton of caustic soda produced, resulting in a loss of about 600-700 kg of mercury per year. It is estimated that the wastewater discharge from the plant contains about 65 to 130 kg of mercury, discharged directly into the Daliao River. The - 30 -  mercury level in the wastewater varies from 0.1 mg/i to 2.0 mg/I, representing 5 to 10 times pernitted discharge levels. This wastewater discharge has serious impacts on the Dalinghe river water quality, the water resources for Jinzhou, and marine life in the Bohai Sea, which also receives flows from the Hun, Taizu, Daliao, Liao, Xiaoling and Dalinghe Rivers. It poses a health hazard to humans through mercury accumulation in the food chain. As the Daliao River feeds the groundwater aquifer providing water to Jinzhou, there is a risk of direct impact on the health of the population of the city. Component Description. LRBP investments would finance the replacement of the mercury cell process for production of chlorine. The component includes the construction of a new chlorine production facility based on modem ion membrane cell technology, and remedial measures to recover mercury in the plant and in the surrounding grounds. Disbursement of funds for construction of the new plant will be subject to production of an action plan for demolition of the mercury electrolysis facility and the satisfactory completion of the remedial measures for cleaning up waste mercury. Project Component 5 - US$32.80 million Jinzhou Wastewater Interception and Treatment (Y267.3 million) Existing Conditions. The city of Jinzhou (current population about 600,000) is located along the banks of the Xiaoling River near the coastline of the Bohai Sea. Xiaoling River is the only river outside the Liao River Basin. It is contiguous with the Liao River Basin, is highly industrialized, and the municipal and industrial wastewater have a significant impact on drinking water sources, and on the Bohai Sea. At present, there are no wastewater treatment facilities, and untreated domestic and industrial wastewater from industrial complexes, located within the central urban area, is discharged to the public sewerage system, and ultimately to the Xiaoling River. The north bank of the Xiaoling River has II outfalls, and south bank has 5 outfalls. Current industrial discharges to the public sewer system include: Power Plant No. 1: 10,000 m3/day; Power Plant No. 2: 10,000 m3/day; Brewery: 3,000 m3/day; and Oil Refinery: 20,000 m3/day. Industries are expected to install on-site treatment, and discharge their effluents directly to the Xiaoling River. Future plans for wastewater collection and treatrnent includes a first phase (up to 2010) to serve the districts north of the Xiaoling River. Component Description. LRBP investments would include interception and treatment of wastewater from the districts north of the Xiaoling River, in this initial phase. The interceptor would be sized to receive wastewater flows from the southem districts in the next phase. Works and equipment to be financed include: 10 km of reinforced concrete pipe and triple-cell box culvert interceptors along the north bank of the Xiaoling River, a wastewater treatment pant of 100,000 m3/day capacity, located at Dishuihi, initially to serve the northem part of the city, sanitary landfill for sludge disposal, central control equipment, and vehicles and equipment necessary for operations. Project Component 6 - US$6.50 million Urban Management Information System (Y53.0 million) The component would (a) support updating urban mapping in the project cities, and (b) strengthen the urban management information center by developing a GIS-based engineering management system for infrastructure planning, especially water and wastewater, preparing a provincial urban information system to facilitate policy and strategy formulation and implementation, formulating and implementing a strategy for cities and the province to provide urban and environmental information on the Intemet for public access. Four provincial cities would take part in this broad urban management component, namely Jinzhou, Panjin, Shenyang and Yingkou. - 31 -  Project Component 7 - US$5.60 million Environmental Quality Monitoring (Y45.7 million) The Government provides environmental monitoring services to all levels of govermment, with technological support, supervision and service, in environmental management. Over the years, environmental stations in the Province have undertaken environmental tasks in environmental quality, industrial pollution source, abrupt pollution accidents, and arbitration over pollution disputes. With the start of the Pollution Control Program of the Liao River Basin, the tasks of environmental monitoring have become heavier than before, and expanding and strengthening the environmental monitoring has become a priority. The project would support the Liaoning Environmental Protection Bureau to expand and strengthen environmental water quality monitoring and limited air quality monitoring through provision of equipment to improve provincial and city monitoring stations. Project Component 8 - US$20.00 million Environment Subloans (Y166.0 million) The component would comprise the provision of short-term subloans for focused, high environmental-impact investments in in-plant clean technology process change, supporting core investments in air and wastewater management. Subloans repaid would be used to make additional subloans through Liaoning's existing Environment Revolving Subloan Facility (ERSF). Project Component 9 - US$3.10 million Institutional Strengthening and Training (Y25.6 million) The component would provide support to the recently formed wastewater companies to strengthen their financial, institutional, operational and management capacities in the areas of (a) corporate strategy and business planning; (b) financial management; (c) tariff setting, billing and collection; (d) operational skills; and (e) informnation and data management. These areas are identified as critical for the wastewater companies to become autonomous and ensure sustainability of investments. The component would also support provincial and municipal govermment agencies to strengthen their (a) financial management capacities, including the operation of the ERSF; and (b) management of infrastructure projects, through technical assistance, training and study tours. The project would also finance (a) construction supervision and quality control of the wastewater companies' components; (b) an aquifer study; and (c) feasibility studies for future project preparation. - 32 -  Annex 3: Estimated Project Costs CHINA: Liao River Basin Project CHINA LIAO RIVER BASIN PROJECT % % Total Expenditure Accounts Project Cost Summary (Local) (US$) Foreign Base Local Foreign Total Local Foreign Total Exchange Costs I. Investment Costs A. Civil Works 339.2 145.4 484.6 40.9 17.5 58.4 30 37 B. Equipment & Materials 284.8 153.2 438.0 34.3 18.5 52.8 35 34 C. Land Acquisition & Resettlement 54.8 - 54.8 6.6 - 6.6 - 4 D. Technical Assistance & Training 8.4 31.8 40.2 1.0 3.8 4.8 79 3 E. Construction Supervision Services & Quality Control 7.9 12.3 20.2 0.9 1.5 2.4 61 2 F. Engineering & Management 91.3 - 91.3 11.0 - 11.0 - 7 G. Environmental Pollution Control 33.2 132.8 166.0 4.0 16.0 20.0 80 13 Total BASELINE COSTS 819.6 475.5 1,295.1 98.7 57.3 156.0 37 100 Physical Contingencies 92.3 40.1 132.4 11.1 4.8 16.0 30 10 Price Contingencies 58.7 25.8 84.6 8.9 3.9 12.8 31 8 Total PROJECTCOSTS 970.6 541.5 1,512.1 118.7 66.0 184.8 36 118 - 33 -  TaLL-.P~3Vajl irFb epfrn&Tmirat DCat 2DO 2XP 20D 200 2I 310B TS 2D1 Z1X2 2O Z04 2M5 2M6 Tdc ACNIOVO\ RWU)1D1 1O Xflt\as TenraFt - 120 1a0 18.0 90 60 6)0 - 143 184 227 11.7 ao 752 RW MTcRT pSoepErs - 1.8 35 26 Q9 - s.8 - 21 4.3 33 1.1 - 109 11W.03 uoqbxradRdPUnd EftRTp 25 123 172 14.7 25 - 49.0 28 14.6 21.0 16 32 - 602 RW\ 1.y lzf ifD3 - - - 15 1.5 - 30 - - - 1.9 20 - 3.8 OMM klEptr 2ao0 - - - - 20 0 - 20 SU*WCki9iMbl 225 2&0 3S7 358 138 60 14Q8 228 310 4a7 465 1.0 ao 170.1 BEWOt&NWa RMhQ101 E ErtrVAe AEb TTrtrtrt - 10.0 150 2D.0 50 - 500 - 114 17.6 242 62 - 594 WPV2 (SQipToxfrW-ts - - - 18 02 - 20 - - - 20 02 - 22 RW1 03 E4rEft b b rii:i hct4 sr Tai - - 13 0.1 - - 1.4 - - 15 Q2 - - 1.6 R a4 - - - 28 03 - a1 - - - 34 04 - a8 aftw4p.eia&is - 100 163 24.7 55 -565 - 114 19.1 297 68 - 67.0 oitactm3mt& Sapn 0Q1 03 03 04 03 02 1.6 01 04 04 05 04 Q2 1.9 DLa-dAcmn&Rsrft 222 11.1 11.1 - - - 444 24.7 126 130 - - - 5Q3 &adilyGoild Qvi VUbt 06 07 09 09 03 02 35 0.6 0.7 1.0 1.1 Q4 02 4.1 &vmrfft&wd3vds - 02 03 0.5 01 - 1.1 - 02 0.4 Q6 Q1 - 13 &1dtyCr 06 08 12 14 05 02 4.6 0.6 10 14 1.7 06 02 54 FEEeiy &MNE3%pTut GAVVlt6 22 26 a6 3.7 1.4 06 14.1 25 ao 42 45 1.7 (8 16.6 Eqxmat&Ml3EJs - 1.0 1.6 25 06 - 5.7 - 1.1 1.9 ao 07 - 67 Caukrisa3m3 00 00 00 00 00 0O 02 0.0 00 00 0O 00 00 02 La-dAal&lTErt 22 1.1 1.1 - - - 44 25 13 13 - - - 50 sjtds Kjm* Ubet"m 45 47 63 62 20 06 243 50 54 74 7.5 24 Q8 285 Tda 49.8 5ao 709 636 221 69 2722 532 617 85A1 859 252 92 333 aim2Yru kityV\Tn ICois MM 2X 2XB 2M4 2M5 2M Tci 2MI 2KR 2am 2004 200 2B -Tc ACWIY\bl OaAWits RxfiL4tacfn - 26 - - - - 26 - 3.1 - - - - a1 BE Erat&N ZQ1 11 E trFoR L4.rPfak nieiTaJtJAqt&Tai-g - 43D 4.8 - - - 478 - 49.0 56 - - - 54.6 'YRQ1f2 Fbd L4Er qrdnEaiT01 iTiToT As&Targ - 46.1 51 - - - 512 - 525 6D - - - 585 M4Ql0O3VVabrPbnWnEqVTel - 7.5 08 8- 3 8.5 1.0 - 95 SJ3lcWEqmer