China - Hai Basin Integrated Water and Environment Management Project

OFFICIAL USE ONLY GEF/R2004-0004/1 March 30, 2004 Streamlined Procedure For meeting of Board: Thursday, April 15, 2004 FROM: Vice President and Corporate Secretary China: Hai Basin Integrated Water and Environment Management Project Global Environment Facility Grant Project Appraisal Document Attached is the Project Appraisal Document regarding a proposed grant from the Global Environment Facility Trust Fund to the People's Republic of China for a Hai Basin Integrated Water and Environment Management Project. (GEF/R2004-0004). This project will be taken up at a meeting of the Executive Directors on Thursday, April 15, 2004 under the Streamlined Procedure. Distribution: Executive Directors and Alternates President Bank Group Senior Management Vice Presidents, Bank, IFC and MIGA Directors and Department Heads, Bank, IFC and MIGA This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank Group authorization.  Document of The World Bank FOROFFICIAL USE ONLY ReportNo: 26636 PROJECT APPRAISAL DOCUMENT ONA PROPOSED GRANT FROM THE GLOBAL ENVIRONMENTFACILITY (GEF) INTHE AMOUNT OF US17 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR THE HA1BASININTEGRATEDWATER AND ENVIRONMENT MANAGEMENT PROJECT MARCH 19,2004 Rural Development and Natural ResourcesUnit East Asia and Pacific Region This documenthas a restricteddistributionandmay be usedby recipientsonly inthe performanceoftheir official duties. Its contentsmav not otherwise be disclosedwithout World Bank authorization.  CURRENCY EQUIVALENTS (ExchangeRateEffectiveMarch 2004) Currency Unit = RenminbiYuan (RMBY) RMBY1 = USS0.12 US$1 = RMB Y 8.28 FISCALYEAR January 1 -- December31 ABBREVIATIONSAND ACRONYMS BCC Basin Coordinating Committee MOF Ministryo f Finance CAS Country Assistance Strategy MWR Ministryof Water Resources CDD Community Driven Development NPS Non Point Source CPMO Central Project ManagementOffice O&M Operation & Maintenance CWRAS China Country Water Resources Assistance PCU Project Coordination Unit Strategy PEMSEA Partnerships for the Environmental Protection EA Environmental Assessment and Management o f Asian Seas EMP Environmental Management Plan PIP Project Implementation Plan EPB Environmental Protection Bureau PMO Project ManagementOffice ET Evapotranspiration RBC River Basin Commissions ESSF Environmental Social SafeguardsFramework RS Remote Sensing FECO Foreign Economic Cooperation Office SA Social Assessment FY Financial Year S A P Strategic Action Plan GEF Global Environment Facility SEPA State Environmental Protection GIS Geographic InformationSystem Administration GPA Global Programme o f Action SNWT South North Water Transfer HBC Hai Basin Commission SOA State Oceanic Administration IWEM Integrated Water and Environment Management ss Strategic Studies IWEMP Integrated Water and Environment Management TUDEPZ Tianjin Urban Development and Environment Planning Project KM Knowledge Management TVE Township and Village Enterprises MEPL Marine Environmental Protection Law WCP Water Conservation Project MIS Monitoring Information System WRB Water Resources Bureau M O A MinistryofAgriculture WUA Water User Association MOC Ministryof Construction WWTP Waste Water Treatment Plant YSLME Yellow Sea Large Marine Ecosystem Vice President: Jemal-ud-dinKassum, EAPVP Country Director: YukonHuang,EACCF Sector Director: Mark D.Wilson, EASRD Task TeamLeadedTask Manager: DouglasOlson, EASRD  FOROFFICIAL USEONLY CHINA HA1BASININTEGRATEDWATER AND ENVIRONMENTMANAGEMENTPROJECT 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 4 3. Sector issues to be addressedby the project and strategic choices 8 C. Project Description Summary 1. Project components 9 2. Key policy and institutional reforms supported by the project 13 3. Benefits and target population 14 4. Institutional and implementation arrangements 15 D.Project Rationale 1. Project alternatives considered and reasons for rejection 16 2. Major relatedprojects financed by the Bank andor other development agencies 16 3. Lessons learned and reflectedinthe project design 17 4. Indications of borrower andrecipient commitment and ownership 19 5. Value added o f Bank and Global support inthis project 19 E. Summary Project Analysis 1. Economic 20 2. Financial 20 3. Technical 20 4. Institutional 21 5. Environmental 23 6. Social 25 7. SafeguardPolicies 27 This document has a restricted distributionand may be used by recipients only in Iwithout World Bank authorization. the performance of their official duties. I t s contents may not be otherwise disclosed  F. Sustainability and Risks 1. Sustainability 28 2. Critical risks 29 3. Possible controversial aspects 29 G. Main Grant Conditions 1. Effectiveness Condition 30 2. Other 30 H. Readinessfor Implementation 34 I.CompliancewithBankPolicies 34 Annexes Annex 1: Project Design Summary 35 Annex 2: Detailed Project Description 41 Annex 3: EstimatedProject Costs 54 Annex 4: IncrementalCost Analysis 58 Annex 5: Financial Summary 66 Annex 6: (A) Procurement Arrangements 71 (B) Financial Management andDisbursement Arrangements 77 Annex 7: Project Processing Schedule 85 Annex 8: Documents inthe Project File 86 Annex 9: Statement o f Loans and Credits 87 Annex 10: Country at a Glance 91 Annex 11: STAP Roster Technical Review 93 Annex 12: Implementation Chart for Project Components 100 Annex 13: Social Assessment 101 MAP(S) Project Map: IBRD 32710  CHINA Hai Basin IntegratedWater and EnvironmentManagement Project ProjectAppraisalDocument East Asia and Pacific Region EASRD Date: March 19,2004 Team Leader: Douglas C. Olson Sector Managermirector: Mark D.Wilson Sector(s): General water, sanitation and flood protection Country Managermirector: Yukon Huang sector (50%), Irrigation and drainage (50%) Project ID: PO75035 Theme(s): Water resource management (P), Focal Area: I International Waters - Environmental policies and institutions (P), Pollution [ ] Loan [ ] Credit [XI Grant [ ]Guarantee [ ]Other: Responsibleagency: MOF, MWR, SEPA, BEIJING& TIANJIN MUNICIPALITIES & HEBEIPRO Ministryof Water Resources State EnvironmentalProtection Agency Municipalities of Beijingand Tianjin Province of Hebei Contact Person: Mr.LiuBin- M W R and Ms.LiPei -SEPA Address: Ministry of Water Resources, Baiguang Road, Beijing, China Tel: (8610) 6320-2127 - MWR; (8610) 6615-3366 - SEPA Fax: (8610) 6320-2027 - MWR; (8610) 6615-1932 - SEPA FCS FAD Form Rev March 2000  A. Project Development Objective 1. Project development objective: (see Annex 1) The overall objective i s to catalyze an integrated approach to water resource management and pollution control in the Hai Basin in order to improve the Bohai Sea environment. Specifically, the Project will (i) improve integrated water and environment planning and management in the Hai Basin, (ii)support institutional aspects related to effective local, municipal/provincial, and basin-wide water and environment planning and management, (iii)enhance capacity building in water and environment knowledge management and implementation, and (iv) reduce wastewater discharges from small cities along the rim o f the Bohai Sea. The Project is intended to demonstrate new technologies and management approaches, with the lessons learned appliedthroughout the HaiBasin and other basinsboarding the Bohai andYellow Seas. The Project will also serve as a complement and link to, water and environmental management issues for two on-going World Bank-financed operations in the Hai Basin: Second Tianjin Urban Development and Environment Project (TUDEP2 - FY03) and the Water Conservation Project (WCP - FYO1). 2. Key performance indicators: (see Annex 1) Keyperformance indicators are: 1. Establishment o f a functioning inter-agency committee at the county level, resulting in improved cooperation and integration o f Water ResourceManagement (WRM) and pollution control activities with support from upper levels (prefectures, provinces, Hai Basin Commission (HBC), Zhangweinan, Minis@ o f Water Resources (MWR), and State Environmental Protection Administration (SEPA)); 11. Achieve the adoption of improved WRM and pollution control approaches at the county level by institutions implementing Integrated Water and Environment Management (IWEM), including evapotranspiration (ET) management and knowledge management (ISM), water rights and well permit administration, and discharge control, with support from upper levels (prefectures, provinces, ... HBC, Zhangweinan, MWR and SEPA); 111. Implementation o f improved small city wastewater management approaches in Tianjin coastal counties, including collection, industrial pre-treatment, wastewater treatment, and wastewater reuse; iv. Reduce discharge pollutionloadby 10%inpilot counties and coastal counties; V. Reduce groundwater overdraft for irrigation purposed by 10% inpilot counties; vi. Reduction of pollution loading to Bohai Sea from at least one Tianjin small city by 10,000 tons of COD and 500 tons o f NH4 annually; and vii. Disposal of 2.2 million cubic meters o f contaminated sediment from the Dagu canal in an environmentally safe manner, and achieve a one time reduction o f 10,000 tons o f oil, 2,000 tons o f zinc, and 5,000 tons o f total nitrogen. B. Strategic Context 1.Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 25141 Date of latest CAS discussion: December 19, 2002 The proposed Project is consistent with the Bank's Country Assistance Strategy (CAS) for China. The sector related goal is the sustainable development and management o f water and other natural resources. The Strategy includes environmental protection objectives, strengthening o f institutions and tools for improved environmental management, and financing o f environment-related investments that will produce rapid benefits. The proposed Project will contribute towards these objectives and actions by promoting a  more integrated approach to water resourcemanagement inthe Hai Basin, providing technical and financial assistance for wastewater management in small cities and canal clean up (financed by TUDEP2), and funding pre-investment studies for innovative projects including pollution prevention and wastewater treatment and reuseldisposal. The proposed Project was mentioned in the CAS as a project to support environmentally sustainable development, and specifically in the area o f improving water resources management. la. Global Operational strategy/Program objective addressed by the project: The proposed Project falls under the GEF International Waters Focal Area, and specifically under Operational Program Number 10: Contaminant-Based Program. The Project has direct relevance for the Global Programme o f Action (GPA) for the Protection o f the Marine Environment from Land-based Activities. The Project directly responds to the needs o f the GPA by seeking to reduce pollutant loadings to the Bohai Sea through integrated water and environment management. The Bohai Sea is a semi-enclosed sea with globally important ecological resources that provide significant fishery benefits to China, North and South Korea, and Japan. The GEF Operational Program objective o f the Project is to improve'water resourcesmanagement and reduce land-based sources o f pollutionto the coastal and marine environment o f the Bohai Sea. Furthermore the Project will also consider the need for environmental flows inrivers, flood plains, wetlands, and into coastal and estuary waters. The integrated framework proposed by the Project will allow better understanding of important surface-subsurface and water quantity-quality interactions, and facilitate important new management approaches. Consistent with Par. 10.5 for OP 10, the Project will "play a catalytic role in demonstrating ways to overcome barriers to the adoption o f best practices limitingcontamination o f international waters." OP 10 is also the only International Waters program which does not require the Project to be tied to a multi-country collaborative effort. The global benefits are the improvements of the Bohai Sea coastal and marine environment, and the demonstration-dissemination-replication nation-wide and region-wide of compliance with the GPA. Close cooperation with on-going GEF-financed efforts, such as the Yellow Sea Large Marine Ecosystem (YSLME) Project and the Partnerships for the Environmental Protection and Management of Asian Seas (PEMSEA) / Bohai Sea Project, will be maintained during Project implementation. During Project preparation, linkages have already been established between the Project management offices and periodic interactions will take place during implementation. The long-term objective o f the former Project is ecosystem-based,by supporting environmentally-sustainable management and use of the Yellow Sea. The proposed Project will contribute to YSLME Project's long-term objective and to PEMSEA's objective to control land-based sources o f pollution o f the Bohai Sea and to establish inter-jurisdictional coordinatingmechanisms to address environmental issuesinthe Bohai Sea. The Project also supports the objectives o f the Convention on Biodiversity, insofar as one o f the components focuses on environmental needs for water (see Annex 2). This will include specific studies on requirements for reduced pollution and increased flows to the Bohai Sea in order to enhance marine ecology, and other studies to determine minimum ecological flows for water courses and wetlands in the Hai Basin. In the Hai Basin (as elsewhere) the poor are the first and most seriously affected by the deteriorating environment. This can lead to social instability, which i s a global concem. Water pollution negatively affects water sources for domestic and irrigation purposes impacting on health and livelihoods. Untreated wastewater i s used for irrigation when other water sources are not available. Water table drawdown affects the poor directly because their wells are normally shallow and dry up sooner. The need to drill deeper wells, install more powerful pumps and consume more electricity i s a continuous burden on poor farmers, - 3 -  many of which end up without irrigation water which has a major effect on their livelihood, and forces them to use often polluted surface water for domestic and irrigation purposes. The Project will support integrated water and environment management in rural and peri-urban areas and will involve farmers to participate inthe definition o f viable alternatives to improve the water resource conditions and use pattems. Community Driven Development (CDD) will be piloted in one of the demonstration projects to build in more participation and ownership. The Project is also consistent with the Bank's 2001 Environment Strategy, its 1993 Water Resources Management Policy and its 2003 Water Resources Sector Strategy. The Environment Strategy emphasizes the need to improve the quality o f growth, reduce environmental health risks, improve the institutional framework for environmental management, and protect regional and global commons--all key elements of the proposed Project. The Water Resource Policy stresses the importance o f managing water in a comprehensive and integrated manner, which is one o f the primary objectives o f the Project. The Water Resources Sector Strategy emphasizes the importance dedicating more effort to integrated water resources management actions in water rights administration, discharge control, water conservation, pricing, institutional strengthening combined with infrastructure investments and poverty alleviation. The Project will support the management part o f this equation linked to major ongoing infrastructure investment programs. Finally, the proposed Hai Basin Project also is in line with the World Bank's China Country Water Resources Assistance Strategy (CWRAS), which is an outgrowth o f the Water Resources Sector Strategy. The CWRAS addresses the important issues and provided a good foundation for future Bank assistanceto China in water resources management issues. One of the important messages in the CWRAS is that integrated water resources management is both a top down and a bottom up set o f activities. It i s not possible to achieve integrated water resources management only by establishing laws, policies, regulations standards, and water allocations from the top down. Implementationneeds to be bottom up. InChina that means that the counties (and the townships, villages, and individual water users) need to be directly involved in planning and implementing integrated water resources management actions, including water rights and well permit administration, and enforcement, discharge control, industrial restructuring, "real" water savings measures, wastewater treatment, treated effluent reuse, etc. The Project addresses many o f the important issues discussed in the CWRAS including a strong emphasis on top-down bottom-up water resources management. 2. Main sector issues and Government strategy: Degradation of the Bohai Sea The Bohai Sea, located in the northwest corner o f the Yellow Sea, is one o f the world's ecologically important, and stressed, bodies o f water. The fishery resources are important to China, Japan, and North and South Korea. More than 40 rivers discharge into the Bohai Sea, of which the Yellow (Huang), Hai, and Liao rivers are the most significant. From an ecological perspective, the Bohai Sea is a large, shallow embayment o f the Yellow Sea. The Yellow Sea, in turn, is a shallow continental sea o f the northwest Pacific Ocean. These relationships are important becauseo f the physical and biological links between these systems. In particular, fish and shellfish stocks in the Yellow Sea are dependent on the Bohai Sea as a reproduction and nursery area. The open water environment in the Bohai Sea supports diverse marine life including invertebrates, fishes, marine mammals and birds. In the past, a major source o f larvae and juveniles for the East China Seas came from the Bohai Sea, but this function has steadily diminished. Therefore, the ecological condition o f - 4 -  the Bohai Sea is critically important for maintaining fishery stocks and biodiversity in northwest Pacific Ocean fisheries. It is generally accepted that over-fishing, pollution, reduction o f freshwater inflows and habitat loss have combined to reduce these ecosystemfunctions. The Bohai Sea has historically been an important fishing area due to its location adjacent to major population centers, and its role as a seasonal spawning and nursery ground for the larger and more productive Yellow Sea fishery. The history o f Bohai Sea fisheries is one o f boom andbust scenarios, with the major impact being the introduction of motorized fishing vessels in the 1960s, and new types of fishing gear such as fine-mesh nets for prawns that also caught all kinds ofjuvenile and larval fish. In 1988, prawn trawling was banned, and has beenreplaced now by thousands o f kilometers o f drift and set gill nets, which also have a negative impact on juvenile and larval fish. A major paradox o f the Bohai Sea fishery is that despite its damaged condition, it is still attracting increasing numbers of fishermen due to lack of alternative employment inthe region for many people. Today, the Bohai Sea is very heavily fished, with almost 90,000 registered fishing vessels inthe provinces/municipalities surrounding the Sea. Incontrast to the decline in the natural aquatic systems, aquaculture has grown rapidly, and the Bohai Sea and northem Yellow Sea now account for almost two-thirds o f the PRC's total production. The major species cultivated are prawns, oysters, clams, mussels, cockles, abalone, and seaweed. Pollution, both from external sources and self-production, as well as diseases are increasingly affecting aquaculture production, and the threat o f human disease and toxic contaminants are putting pressure on the government and the industry to clean uppollutionproblems. The Bohai Sea is subject to heavy land-based pollution from domestic, industrial, agricultural, and livestock sources. The Bohai Sea is subject to one-third o f the wastewater and half o f the pollutant loading discharged into seas bordering China. This amounts to 3 billion m' o f wastewater and 700,000 tons o f pollutants per year. The areas where pollutant concentrations exceed the national standards in the Bohai Sea, mainly for inorganic nitrogen and phosphorous, has been expanding and in 1997 it covered 43,000 km2,accounting for half o f the total sea area. The most seriously affected areas include the estuaries and coastal shallows. Pollution has led to mass mortalities o f aquaculture species and contributes to an increasing frequency o f harmful algal blooms, commonly known as "red tides." In 1989 a "red tide" covering 1,300 km2 formed in the Bohai Sea off the coast of Hebei; an even more massive "red tide" extending over 3,000 km2appearedinthe Liaodung Gulfo f the Bohai Sea in 1998. Water Pollution Surface and groundwater quality in China has been seriously degraded due to lack o f effective pollution control, combined with rising population and industrial operations. Sixty-eight percent o f the total river length in the north China plains is classified as polluted (Le., unsuitable as raw water sources for drinking water), and large amounts o f the groundwater resource is also polluted. Hai River is one o f the most polluted river systems with more than 80% o f the river reaches classified as polluted. Much o f this is at or above Class V (worst pollution category). Hai River discharges into the Bohai Sea and i s a major contributor to its pollution loadings. The Chinese Government is beginning to address the serious water pollution problem inthe Bohai Sea and the Hai Basin, both o f which have been identified as priority areas in the 9th National Five Year Plan (1995-2000). The State Environmental Protection Administration (SEPA) has prepared the "Bohai Blue Sea Action Plan" and the "Water Pollution Prevention Program o f Hai River Basin." Both plans include components of pollution control. The Govemment's efforts to control pollution has been focused on large - 5 -  municipal and industrial sources, with the major cities of Beijing, Tianjin, and Shijiazhuang having embarked on large-scale wastewater treatment plant construction programs. Despite considerable reduction o f pollution generated from these large point sources, water quality has continued to decline. This trend suggests that many other sources are contributing to water pollution. Reducing pollution from secondary cities and towns and suburban industries is essential to improving water quality in the Hai Basin and the environment o f the Bohai Sea. Although information on the impact on water quality from these areas is limited, it is estimated that -together with surrounding rural areas -they account for more than half of the total pollution generated in the Hai Basin. However, pollution from these peri-urban and rural areas is largely uncontrolled. Almost none of the secondary cities and towns have wastewater treatment facilities. Township and Village Enterprises (TVE) and other small industries located in and around these cities and towns have very little pollutioncontrol infrastructure. In2001, SEPA formulated the 10thFiveYear PlanofWater Pollution Prevention andTreatment inthe Hai Basin, briefly named the Hai River Plan. The Hai River Plan is based on a Program o f Water Pollution Prevention in the Hai Basin, approved by the State Council in March 1999. In this plan, the programmed water quality goals o f some river reaches were revised, a control target index of gross amount o f pollutant for 2005, COD and NH3-Nwere added, and some necessary water pollution treatment items were supplemented.The Hai RiverPlan identifiedthat the key needs are to substantially reduce the gross amount o f pollutant discharge in Hai Basin, to guarantee drinkingwater source areas reach standards, to address cross-provincial water quality disputes, and to establish a control system for the gross amount o f NH3-N pollutant. Water Scarcity and Groundwater Mining Water resources in China are unevenly distributed. While water resources are quite abundant in the south, water availability inthe north is very limited.Inthe Hai Basin, water availability is only 305 m3per capita which is about 14% o f the national average and about 4% of the World average. A 2001 study sponsored by the World Bank, "Agenda for Water Sector Strategy for North China" estimates current economic losses from water shortages of approximately US$7.3 billion per year in the three major river basins in North China: the Hai, Huai, and Huang (Yellow River). Total abstraction o f groundwater in the Hai Basin i s estimated to be around 26 bcmper year, which is approximately 9 bcmmore than the sustainable yield. The Government has started to take measures to address water scarcity problems, including improving irrigation efficiency, increasing the price o f piped water to encourage conservation and improve the finances o f public water utilities, and encouraging wastewater reuse. One o f the most ambitious measures i s the proposed "South-North Water Transfer Project" (SNWT Project). This Project, when completed, will transfer 20 bcm o f water from the Yangtze River system to North China, including the Hai Basin, at an estimated cost o f around US$ 10-15 billion. China's leadership, in particular former Premier Zhu Rongji, has made a point o f emphasizing the need to combine the construction o f the SNWT Project with redoubled efforts on water management and water use efficiency, pollution clean-up and prevention, and appropriate (i.e,, higher) pricing. The official slogan emerging from the high-level study session in October 2000, where it was decided to go ahead with the Eastern and Central Routes o f the SNWT Project is "first save water, then transfer water; first treat pollution, then move water; first protect the environment, thenuse water." In order to safeguard sustainable development of the social economy in the capital city o f Beijing and surrounding areas, the Capital Water Resources and Sustainable Utilization Plan for 2001-2005 for the - 6 -  Early Part o f 21st Century, was approved by the State Council. The water consumption in Beijing has exceeded bearing capacity o f the water resources and the ecological system due to rapid population and economic growth and the high speed of urbanization. Therefore, inview of the water ecological system, the planemphasized the needfor coordinated attention to population, resources, and the environment. The Plan aims to achieve a general balance o f water resources supply and demand in terms o f the water supply systems and the configuration o f water resources in local region, in order to guarantee sustainable development o f the social economy in Beijing and surrounding areas. The Plan will include integrated policies such as water conservation, water recycling, utilization of rainfall and flood waters, conjunctive use o f surface water and groundwater, water resources protection, and adjustments inwater pricing. Water and EnvironmentalManagement Institutions The complex and interrelated nature o f water pollution, water scarcity, groundwater overdraft, and flooding in the Hai Basin calls for an integrated approach to water and environmental management. An integrated approach will lead to better understanding o f important surfacelsubsurface and water quality interactions, and facilitate new management techniques. However, integrated water and environmental management techniques are problematic because of difficulties in inter-jurisdictional and inter-administrative cooperation along several dimensions. Water and environment management involves many central-level ministries and agencies: Ministry o f Water Resources (MWR), SEPA, Ministry o f Construction (MOC), Ministry o f Agriculture (MOA), and others. MWR has the primary responsibility for overall management o f the nation's water resources, and SEPA has overall responsibility for pollution control. There are considerable overlapping jurisdiction problems between these agencies and with other ministries and agencies concerning urban water supply, water pollution control, groundwater management, and irrigated agriculture. Much o f this problem has its foundation in Chinese law that applies to water resources (Water Law) and pollution control (Water Pollution and Prevention Control Law --WPPC) in which mandates are not clear, with overlapping responsibilities, and poorly defined planning linkages between the two ministries. Laws are traditionally drafted to give ministries power, not to share power. The new Water Law passed in October 2002 has partially clarified the division o f responsibilities between MWR and SEPA. The Project will provide a powerful demonstration effect and an incentive to break through these horizontal institutional barriers. The management role of central ministries is further limited by the increasing powers of provinces following the decentralization process. According to the official government structure, local and provincial agencies have vertical technical interaction with central ministries. However, the local and provincial agencies report and depend on provincial and lower-level governments, especially in relation to administration o f laws and most importantly for funding. Well-meaning principles (such as water allocation at the basin level or polluter-pays-principle) are often in conflict with the economic interests o f the provinces and lower-level governments which have limited legal obligation to downstream jurisdictions under current Chinese laws. Administrative bodies -- whose financial viability depends on provincial budgets -- empowered by laws to enforce regulations at the local level are often under pressureto act inthe interest of local governments to the detriment of sound overall water or environmental resource management. This has implications not only at the planning level, but also in critical areas such as pollution enforcement. The Project will provide a powerful demonstration effect and an incentive to break through these vertical institutional barriers. China also has a number o f River Basin Commissions (RBCs) for its major river basins. The RBCs are part o f the MWR and, while they have been established for many years, are unrepresentative of basin stakeholders, have no separate governing board or corporate status, and have a major focus on basin - 7 -  planning, hydraulic infrastructure construction and operation and flood control. It is difficult for the RBCs to enforce provisions of basin plans on other sector ministries and provincial governments, and the functions they perform overlap with activities undertaken at the provincial and local level. In principle, RBCs prepare basin development and operating plans in full consultation with the provinces, sectoral ministries, and other stakeholders. Inpractice, there are few formal consultation mechanisms, and the main directives affecting RBC activities are received vertically from MWR. A further factor is that SEPA has no institutionaUoperationa1presence at the basin level. 3. Sector issuesto be addressed by the project and strategic choices: Land-Based Sources of Pollution to Bohai Sea: An important Project focus will be on water pollution from coastal small cities in Tianjin Municipality for two reasons. First, the large urban areas in the Hai Basin such as Beijing, Tianjin, and Shijiazhuang are already investing in large wastewater treatment plants (WWTP); yet more than half o f the population and pollutant loading comes from outside the large urban areas. Second, since Tianjin borders on the Bohai Sea, interventions to reduce wastewater flows should have an immediate beneficial localized impact on water quality in the Sea. The GEF grant will finance technical assistance to address complex water pollution control problems in the Tianjian coastal area, including industrial pollution control, remediation o f contaminated canals that flow into the Bohai Sea, and small city wastewater management institutional and financial issues. The Grant will also be used to pilot an output-based financing mechanism for wastewater management inthe coastal areas. These activities will be carried out in close coordination with the World Bank's FY03 TUDEPZ, which provides financing for the rehabilitation o f the Dagu canal and small city wastewater investments. Left on their own, the secondary cities and towns in the Hai Basin are unlikely to invest in comprehensive wastewater management systems for several reasons. One is that the financial constraints facing secondary cities and towns, and rural areas are severe. The fiscal position o f many small city govemments is weak and many have heavy debt burdens. Another reason is that the massive national effort to control water pollution i s mainly focused on point industrial sources and large urban areas (with populations over 500,000 inhabitants). Since national and provincial resources are major sources of financing for water sector projects, the gap in planning seriously limits the development o f comprehensive wastewater management in secondarycities towns. China is beginning to recognize the importance o f peri-urban and rural non-point sources o f pollution, especially animal wastes. SEPA is currently developing comprehensive regulations on this subject and part o f the output o f the Project will be in defining the types and relative impacts o f non-point sources in the Tianjin area as a basis for developing county policies on Non-Point Source (NPS) management. Water and Environmental Management: The Project will finance the formulation and implementationo f "Integrated Water and Environmental Management Plans" (IWEMP) in Tianjin Municipality and 10 counties throughout the Hai Basin. Pre-investment studies for priority infrastructure will also be undertaken, with future financing coming from either local or intemational sources, including a possible World Bank-financed follow-up project. The plans will consider both water quantity and quality issues, with special emphasis on controlling pollution, treating wastewater, controlling groundwater overdraft, and wastewater reuse. Although the area covered under the Project is only a small percentage o f the Hai Basin (less than lo%), it i s expected that the plans will serve as powerful examples for other counties and municipalities. The strategic choice was made to focus water resource planning based on administrative boundaries at the county level rather than strict hydrological boundaries because existingjurisdictions have the political authority and control the implementing agencies. Moreover, both Tianjin and the selected counties in Hebei and Beijing are involved in on-going Bank operations (TUDEP2 and WCP) that are - 8 -  already dealing, in a limited capacity, with some water resource management issues. However, in recognition o f the importance of carrying out water and environment planning and implementation within hydrologic boundaries, the Project will select one key subbasin (ZhangWeiNan) which will cover several counties for development and initial implementationo f an IWEM Strategic Action Plan (SAP). The Project will facilitate the development of new institutional arrangements for integrated water and environmental management at the local, municipal, and basin level, and also provide policy support at the various levels. At the local and municipal level, municipal and county coordinating mechanisms with multiple agency participation for water and environmental management and organized by the local governments will be established to coordinate all water resource related activities within the respective jurisdiction. For the key subbasin (Zhangweinan) institutional cross-county arrangements for integrated water and environment management will be explored. At the Basin level, new institutional arrangements for basin-wide policy, planning, and management will be investigated and, hopefully, lead to the establishment o f a high-level, multi-sectoral coordinating committee. During Project implementation a high-level Project coordinating committee and high-level steering committees ledby MWR and SEPA will provide the institutional and coordinating support for basin wide IWEM. The mandate, functions, and authority o f the existing Hai Basin Commission (HBC) in relation to a possible Basin Coordinating Committee will also be examined. The Project will also help the HBC improve its Knowledge Management (KM)program, which includes activities such as measurement,monitoring, modeling, databases, planning, and information dissemination related to water and environmental management. C. Project Description Summary 1. Projectcomponents (see Annex 2 for a detailed description andAnnex 3 for a detailed cost breakdown): The Project will support the development of top-down and bottom-up mechanisms for integrated water and environment management in the Hai Basin, based to the extent possible on existing institutional mechanisms. The Project will also promote development of new coordination approaches at all levels that will adopt practical and pragmatic methods to overcome current institutional bamers to integrated water and environment management. The key aspect is that the Project needs to have maximum incorporation o f horizontal and vertical integration. Horizontal integration includes cross-sectoral cooperation and coordination o f actions between water resources and environmental protection ministrieshureaus, as well as others including agriculture and construction ministrieshureaus. Vertical integration includes direct linking and constant interaction between the Central and Hai Basin component activities and the smaller jurisdictions o f Zhangweinan subbasin, Tianjin municipality, and Beijingmebei counties components. The Project will be implemented intwo phases (see Annex 12). The two phasedapproach will permit a process o f good planning followed by specific actions to affect real change. Paralleldemonstration projects will test and demonstrate high priority actions that are clearly needed throughout the basin. The Project includes four components: Component 1: IntegratedWater and EnvironmentManagement IWEM(US$14.70 million) - This component will finance consultant services, training, goods and small works. The IWEM will be dividedinto 3 subcomponents: (a) Strategic Studies at the central and Hai Basin levels; (b) integrated water and environment management planning; and (c) demonstration projects. All three o f these subcomponents are very closely interrelated. The strategic studies will support and provide guidance to IWEMPs and to the demonstration projects. The demonstration projects will provide important practical input into the IWEMPs. There will be constant interaction between these subcomponents to ensure that they are all working together in an integratedmanner. - 9 -  Subcomponent 1A Strategic Studies (US$2.15 million) - - The eight strategic studies focus on four primary areas of concem at the Hai Basin level: policy, legal and institutional issues; environmental needs for water including the Bohai-Hai linkages; water quantity management; and pollution management. The eight strategic studies are: - prepared under Central MWWSEPA Project Management Offices (PMOS) - (a) Policy and Legal Framework and Institutional Arrangement; (b) Bohai Sea Linkage; - prepared under Hai Basin PMO - (c) Countermeasures for the Protection and Measurement o f the Water Ecological System; (d) Water Savings and High Efficiency Water Utilization; (e) Administration o f Water Rights and Well Permits, and Sustainable Groundwater Exploitation; (9 Wastewater Reuse; (g) Water Pollution Planning and Management; and prepared under Beijing PMO (h) Rationalization of Beijing Water Resources. These will provide both the substantive - - framework for the entire Project as well as guidance for the IWEMPs. The time frame for the strategic studies allows both for horizontal linkages between the studies and with the IWEMP planning process. Subcomponent 1B Integrated Water and Environment Management Planning - - IWEMP (US$9.19 million) The IWEMP subcomponent is the core of the Project. It will provide an example of the methods and benefits o f this approach to China and to the receiving environment o f the Bohai Sea. The subcomponent will provide the context within law, policy, institutional arrangements, and operational practices, for the development o f practical approaches to IWEM at the basin, sub-basin, and county levels. The IWEM planning process for selected counties in Beijing and Hebei, and for Tianjin municipality will utilize the outputs o f the strategic studies as a basis for developing specific IWEMPs for their respectivejurisdictions. The demonstration projects (see below) will provide examples of how, in practice, specific aspects of the IWEMPs can be implemented. This subcomponent will be carried out in 2 phases, the first phase will take about 2 years and will involve the preparation o f the plans and the secondphase will take about 3 years and will include initial implementation of the IWEMPs. The main purposes of the subcomponent will be to improve the capacity o f local governments and water and environment management entities to carry out IWEM, andto achieve specific andsustainableimprovements inwater and environmental outcomes. The subcomponent will support the formulation of an IWEM Strategic Action Plan (SAP) for the selected subbasin (Zhangweinan) prepared and implemented under the Zhangweinan PMO. The primary focus o f the Zhangweinan SAP will be on water pollution, but water quantity aspects will also play an important role insofar as quality and quantity management intersect invirtually all aspects o f pollution management. The subcomponent will also support the preparation of IWEMPs in 5 counties in Beijing prepared and implementedunder the Beijing PMO, in 5 counties in Hebei prepared and implemented under the Hebei PMO and in all o f Tianjin prepared and implemented under the Tianjin PMO. These plans will: (a) evaluate present surface and groundwater conditions in terms o f both quantity and quality; (b) establish target objectives for improvements in water quantity and quality management including the definition of monitoring indicators and monitoring and evaluation requirements for tracking improvements; (c) prepare detailed plans for reaching targets using a 10 and 15 year horizon; and (d) define a set o f initial actions to be implemented during the second phase of the Project. In the second phase o f the Project, the subcomponentwill support implementationo f actions definedin the first phase which will include activities such as preparation o f feasibility studies and designs, training an capacity building, and implementation o f small civil works in activities which could include installation o f measuring devices and monitoring stations, onfarm irrigation system improvements, land leveling, changes in agriculture practices, groundwater recharge, wells, wastewater collection and treatment, and environmental restoration. The subcomponent will facilitate the establishment o f institutional coordinating mechanisms for IWEM in the - 1 0 -  Beijingand Hebeipilot counties and inTianjin. The intention is to help to improve, develop, and implement a set o f policies, and legal, administrative and institutional instruments at the county and municipal level. A basin-wide IWEM SAP will be prepared under the Hai Basin PMO for the entire Hai Basin during the second phase o f Project implementation after the strategic studies and the county and municipal IWEMPs have been prepared, and based on lessons leamed from them, with focus on capacity building and basin integrated management, on the basis o f the natural characteristics o f the basin, the existing Bohai Action Plan, and the 10th Five Year Plan o f Water Resources Protection and Water Pollution Prevention in Hai Basin. Subcomponent I C Demonstration Projects (US$3.36 million) - This subcomponent will finance demonstration projects preparedand implementedunderthe Beijing, Hebei and Zhangweinan PMOSthat will serve as experimental units to carry out the IWEMPs. The demonstration projects will be carried out in selected counties will address: (i) effective control of wastewater discharge, (ii)pollutioncontrol combined with environmental improvements, (iii) water saving and (iv) effective l'real'' management o f water rights and well permits. These are all critical areas common to all Hai Basin counties and they will provide powerful examples on how to address these complicated issues in an effective manner at the county level. As these demonstration projects progress, they will provide guidance to the counties and municipality for how to address these issues in the IWEMPs. The demonstration projects will include an initial design phase which will take about 1 year. Annual action plans will be developed for each demonstration project basedon the concept o f refiningand improving the demonstration projects based on the previous year's experience. Component 2: KnowledgeManagement KM(UB5.85) - This component will finance consultant services, training and goods and will be implementedunder the Hai Basin PMO. The KM component will have 2 subcomponents: (a) KM Development; and (b) Remote Sensingand Evapotranspiration (ET) management systems. These subcomponents are very interrelated and need to be prepared and implemented in a coordinated manner. KM is the technical basis through which the Project will be implementedand all KMactivities at all levels are grouped together inthis component. Further, to ensure that this remains a needs-driven and not technology-dmen component, significant attention will be given to the managementof the component. Subcomponent 2A Knowledge Management KM (US$4.25 million) - - This subcomponent will provide a service function for all users and clients within the Project and will provide hardware and software tools to help Project participants to address their specific issues. The subcomponent will improve data management, common information system platforms, standardized data transfer and security protocols, decision-support requirements, data acquisition including remote sensing, and purpose-specific systems such as water use and pollution discharge permitting and tracking. A key initial activity i s a GIS-based approach for integrating the two different water function zone systems to allow MWR and SEPA data systems to communicate and to managewater and the water environment in an holistic manner. KM activities are essential for improving basin-wide water quality monitoring and modeling systems, water ecological environment monitoring systems for river reaches and other water bodies in the Basin, including a coastal water quality model; basin-wide network o f flow monitoring stations coupled with a simulation model for real-time reservoir management and water allocation; regional groundwater models; GIS mapping; satellite imagery for improvedresources management, etc. Inaddition, KMactivities will strongly support the KMneeds of Project pilot counties in Beijingand Hebei, Tianjin municipality and Zhangweinan subbasin. This will include hardware, soflware and training aspects - 11 -  concentrating on GIS systems, data sharing and management, monitoring, modeling, remote sensing and water and environment planning. The development of the KM system will depend on the close collaboration between the MWR and SEPA, as well as other units at all levels related to the use and conservation of water resources in the Hai Basin. The systemwill taken into consideration both differences with present managementmethods of the various units and the practical needs for sharedKM.DuringProject preparation, this collaborationproceededwell resulting in a significant breakthrough in MWWSEPA cooperation, which has been poor in the past. The Kh4subcomponent will bejointly managedby MWRand SEPA through the Project KMGroup inorder to ensure integration. Subcomponent 2B Establishment of Remote Sensing (RS) Evapotranspiration (ET) Management - System (US$1.60 million) This subcomponent will support improvements in the conservation of water resources and the water environment, in order to achieve a rational water balance and its sustainablemanagement, basedon a focus on ET management. ET management i s the principal innovative international cutting edge approach being introduced under the Project. The key to sustainable water quantity management in the Hai Basin is to reduce present amounts o f ET to sustainable levels (Le., reducing ET throughout the basin in order to eliminate groundwater overdraft and provide more surface water for ecological purposes including enhancing outflow to the Bohai Sea), and then, in the future, to manage ET within the basin to remain at these sustainable amounts. Many o f the Project activities needto be solidly based on the ET management concepts including: (i) high-efficiency water utilization and "real" water savings, (ii) administration o f water rights and well permits, and (iii) water quantity management within the IWEMPs in Tianjin and in the Beijing and Hebei counties. Utilizing remote sensing techniques, the sub-component will evaluate basin wide existing ET and existing ET for all o f the counties within the Hai Basin. Then the amount that basin-wide ET would need to be reduced in order to achieve sustainableuse will be determined and a target ET reduction will be assigned to each Project county involved in IWEM. The sub-component will then support remote sensing and GIS techniques to develop county level ET reduction plans that will become an integral part o f water quantity management within the IWEMPs. The "real" water savings demonstration project will develop practicalapproaches at the county level for remote sensingbasedET management. Component3: TianjinCoastalWastewater Management(UW4.13 million)* The component will be implemented under the Tianjin PMO and will assist Tianjin address critical water pollution control issues in the coastal area by supporting two activities under the World Bank-financed Second Tianjin Urban Development and Environment Project (TUDEP2): i)wastewater infrastructure to about two small cities inthe coastal districts of Tianjin; and ii)renovation o f the Dagu Canal system. The total cost for the first activity is estimated at US$43.10 million, with Hangu as the priority small city, and the second city will be identified during project implementation. Under the GEF project, Small City Wastewater Management Studies will cover institutional, financial, and technical studies for wastewater management programs in Hangu, and the second small city. The Project will also fund a Small Cities Financial Support Program to help the two small cities meet their financial obligations. Instead o f providingconstruction subsidies, the basic concept is to provide output-based aide duringthe early years o f wastewater treatment plant operation. In order to receive these subsidies, however, the small cities must demonstrate they have: i)a well-performing wastewater treatment plant, ii)a comprehensive collection system network; and iii)an industrial pollutionpre-treatment program within the network collection area. *) Togetherwith the associatedparallel financingthroughthe TUDEP2 the costof this componenttotals about USS102.38 million. - 1 2 -  The Dagu Canal Technical Assistance activity will assist the TUDEP2 on technical aspects related to the renovation o f the 83 km-long Dagu Canal system. The Canal has served as the main wastewater canal for Tianjin City for four decades, is filled with contaminated sediment, and discharges directly into the Bohai Sea. The total cost for the Dagu Canal renovation is estimated at US$55.15 million, which will be financed under the TUDEP2. The key technical issues are how to safely treat and dispose the large quantity of contaminated sediment. The Dagu Catchment Industrial Pollution Control program will support an industrial pollution control and pre-treatment study, and improve monitoring and enforcement of discharges into Dagu canal. Control o f industrial pollution is essential for the successful renovation of Dagu canal, and the proper operation o f municipal collection and treatment systems. Component4: ProjectManagement,MonitoringandEvaluation, and Training(US$8.64 million) This component will finance consultant services, training and goods. Hai Basin Project management will support coordinated and integrated actions by the MinistriesIBureaus o f environmental protection and water resources at the various levels. All Project Management Offices (PMOs) will have Joint Expert Groups to assist the PMOs in coordination, review, supervision and in some cases execution o f technical activities under the Project. The Central PMOs will be supported by an international expert panel with broad experience in water quality and quantity management, water and environment planning and knowledge management. The PMOs will also arrange international and domestic study tours and intemational and domestic training on a variety o f topics related to IWEM, river basin management, knowledge management, "real" water savings and ET management, pollution control, water rights and well permits, wastewater treatment, wastewater canal clean up, wastewater reuse, ecological restoration, etc. The Project will also support PMO operations, monitoring and evaluation and other Project management aspects mainly through counterpart funding. Yo of Yo of 1. IntegratedWater and Environment 1 14.70 44.1 0.00 Management 2. KnowledgeManagement 5.85 17.6 0.00 0.0 2.32 13.6 3. Tianjin Coastal Wastewater Management 4.13 12.4 0.00 0.0 3.74 22.0 4. Project Management, Monitoring and 8.64 25.9 0.00 0.0 3.83 22.5 Evaluation, and Training Total Project Costs I 33.32 100.0 0.00 0.0 17.00 100.0 Front-endfee 0.0 0.00 0.0 0.00 0.0 Total FinancingRequired 100.0 0.00 0.0 17.00 100.0 Note: 1. Inthis table, component costs include contingencies. 2. An additional cost of US$98.25 million for the Tianjin Coastal Wastewater Management component i s included in TUDEP2. 2. Key policyandinstitutionalreformssupportedby the project: The following reforms will be promoted under the Project: i.Establishment of Institutional CoordinatingMechanisms in Tianjin, Zhangweinan, and the selected Pilot Counties: Water coordinating committees or other institutional coordinating mechanisms will be established to coordinate all water resource related activities within the respective jurisdiction. This is necessary because water quality i s usually regulated by the Environment Protection Bureaus (EPBs); the Water Resources Bureaus (WRBs) typically manage water allocations and flood control; and there are weak linkages between the public water and - 1 3 -  wastewater utilities, and the environmental and water resource bureaus. In a situation of extreme water scarcity, extensive water pollution, and unsustainable groundwater mining, a coordinating body with jurisdiction over the various bureaustagencies i s required to achieve the necessary integrated management of the resource. 11. Establishment of a High-Level Hai Basin Coordinating Mechanisms: The same problems that exist at the county and municipal level also exist at the basin level. New institutional arrangements for basin-wide policy, planning, and management will be explored and, hopefully, lead to the establishment o f a high-level, multi-sectoral coordinating committee for the Hai Basin. The mandate, functions, and authority of the existing HBC in relation to the Basin Coordinating Committee (BCC) will also examined. 111. Policies for Controlling Groundwater Mining: Groundwater overdraft i s a ... huge problem in the Hai Basin, yet the administrative and regulatory structures for groundwater management are mostly ill-defined and poorly implemented. The Project will help improve the legal, policy, and regulatory framework for actions such as: defining aquifers and safe yields, creating groundwater management plans, permittingwells, licensing drillers, groundwater pollution control, etc. iv. Policies for Water Pollution Control: Improving water quality throughout China, and particularly in the Bohai Sea, will require more than just treating wastewater from large urban areas and industries. It will also require dealing with domestic and industrial wastes from towns and villages, and rural pollution such as livestock and agricultural run-off. The Project will help establish a broad water quality management framework for these issues and begin to address rural and small cityltown pollution on a pilot basis. Inaddition, the Project will explore different financing and cost recovery options for investments inwater pollutioncontrol insmall cities and rural areas. 3. Benefitsand target population: One set o f benefits revolves around improved public health, healthier ecosystems, and environmental aesthetics. Public health benefits stem from reduced use o f untreated wastewater for irrigation, which endangers both the irrigators and the people who consume vegetables and other sensitive crops. Public health benefits will also accrue from reduced contamination o f mariculture and capture fisheries, such as prawns, oysters, clams, mussels, cockles, abalone, and seaweedcultivated inthe Bohai Sea. Pollution, both from external sources and self-production, as well as diseases are increasingly affecting mariculture production, and the threat o f human disease and toxic contaminants are serious problems. The clean-up o f polluted sewage canals will also improve environmental aesthetics, including odors, and raise property values alongside canals. Economic benefits will also be generated from improved productivity of mariculture, and better management o f water resources. Groundwater overdraft and pollution is threatening the sustainable use o f aquifers which are valuable water storage reservoirs. Control o f groundwater overdraft will lower pumping costs and preserve water for the future, thereby avoiding a "tragedy of the commons", with its well-documented economic inefficiencies. Control o f groundwater pollution will also preserve valuable water storage reservoirs for drinking water purposes, where the alternative o f building new storage reservoirs or conveying water from large distances is generally prohibitively expensive for local use. Used o f reclaimed wastewater will create valuable new water supplies for irrigation and non-potable municipal and industrial use. Better water allocation more closely related to the economic value of water, including managed reallocation o f water away from agriculture (without necessarily reducing agricultural yields) and towards high value municipal and industrial uses. Finally, economic benefits at the farm level enhance social stability which is o f great importance inthe Chinese system. - 1 4 -  The China-GEF Hai Basin Integrated Water and Environment Project will significantly promote IWEM with the long-term objective to make sustainable the use of water resources in the basin, where the water crisis has become increasingly severe. Inachieving its objective, the Project will also exert great influences on local socioeconomic development and people's livelihood. Development and implementation o f the IWEMPs will include participation o f water users through water user associations and other mechanisms. The water rights and well permits Demonstration Project will also introduce CDD concepts to ensure maximum ownership by the water users and the community in addressing and implementing the difficult choices necessaryto achieve sustainable use o f water resources. The Hai Basin covers the Beijingmunicipality, Tianjin municipality and Hebei province and parts of other provinces in and around the North China Plain. People living in this area have seriously suffered from water shortage and water pollution - especially those in the rural areas outside Beijing and Tianjin who account for the majority o f the population under the Project in the provinces. Control o f water use and pollution in the basin, supported by the Project will lead to improvement inpeople's living conditions and rehabilitation o f their production sustainability. The Project will also require changes in their water use behavior that further lead to multiple interaction between their economic activities and water and environment management. As the Project beneficiary, therefore, local people's understanding, participation, and collaborationwill be pursued to ensure Project success. A social assessment was conducted for the Project to ensure that the different needs and aspirations of the Project beneficiaries and impacted people were taken into account. In terms o f promoting IWEM, the participation o f women and men in Project activities as well as benefit sharing is pursued. The Project also encourages the organization o f Water User Associations (WUAs), in which women and men farmers participate and are empowered. Female members in the WUAs` leadership are encouraged. The enabling environment for gender equality in the Project area is good (e.g., existing legal and regulatory framework that promotes equality; adaption o f international conventions and commitments; an extended network of individuals, universities and research institutes, and NGOs that promote gender equality). 4. Institutionalandimplementation arrangements: The implementation arrangementswill buildupon the existing management structures for the TUDEP2 and the Water Conservation Project (WCP). The following agencies will have involvement in Project implementation. 0 Ministry o f Water Resources (MWR) 0 State EnvironmentalProtection Agency (SEPA) a Ministry of Construction (MOC) 0 State Oceanic Administration (SOA) 0 MinistryofAgriculture (MOA) 0 Ministry of Finance (MOF) 0 BeijingMunicipality 0 Tianjin Municipality a Hebei Province 0 Hai Basin Commission (HBC) (under the MWR) A Project Coordinating Committee ledby MOF and with participation from MWR, SEPA, Beijing, Hebei and Tianjin will be responsible for coordinating the smooth implementation o f the Project. High-level Steering Committees headed by Vice Ministers and Project Management Offices in MWR and SEPA will be responsible for implementing their parts o f the Project in coordination with each other, and with the - 15-  Project provinces/municipalities, counties and sub-basin. Leading groups and Project Management Offices will be responsible for their parts o f the Project in Tianjin, Beijing, Hebei, Hai Basin Commission, ZhangWeiNan and in each o f the Beijingand Hebei pilot counties, all in coordination with each other, and with the central level PMOS. D. Project Rationale 1. Project alternatives consideredand reasons for rejection: A project that would only support those aspects of water and environment management under the responsibility o f MWR and the provincial and county water bureaus was considered. This alternative would be much easier to implement than the proposed Project because it would not require coordination between different government entities, but would not be able to support the Project objective of promoting integrated water and environment managementwhich requires the involvement o f MWRand SEPA andthe respective provincial and county water resources and environmental protection bureaus, as well as participation from MOF, MOA, MOC, and others and their correspondent provincial and county level entities. In particular, the Project would not be able to include the water environment which i s under the jurisdiction o f SEPA andfor which MWR does not have responsibility. A project that would only involve the county and municipal levels and not address Hai Basin or Central level water and environmental management issues was considered. This alternative would also be easier to implement and would address many bottom-up issues, but was rejected because it would not support basin and central level policy, strategy, and institutional issues that are essential for integrated water and environmental management. The development of a complete Hai Basin IWEMP was considered as an additional Project activity, but was rejected, because insufficient institutional mechanisms presently exist to effectively develop and implement such a plan. With the successful implementation of the Project, a second phase could be prepared and implementedthat would include a Hai Basin IWEMP. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoingand planned). Latest Supervision Sector Issue Project (PSR) Ratings (Bank-finance projects only) Implementation Development Bank-financed Progress (IP) Objective (DO) Wastewater treatment, sewage system BeijingEnvironment Project 2 S S development, drainage company strengthening Water supply, wastewater treatment, HebeiUrbanEnvironment S S institutional strengthening Project Wastewater treatment, sewage system Huai River Basin Pollution S S development, institutional strengthening Control Project Wastewater treatment, institutional Liao River Basin Project S S strengthening Irrigated agriculture system Water Conservation Project S S improvements and water conservation, self-financing irrigation and drainage - 1 6 -  districts and groundwater management Irrigated agriculture system Tarim Basin Project 2 improvements and water conservation, self-financing irrigation and drainage districts and river basin management Wastewater treatment, sewage system ShandongEnvironmentProject development, institutional strengthening Irrigated agriculture system Yangtze Basin Water Resource: improvements and water conservation, Project self-financing irrigation and drainage districts and river basin management Wastewater treatment, sewage system Guangxi Urban Environment development, river basinmanagement Project Irrigated agriculture system IrrigatedAgriculture improvements and water conservation, Intensification Project 2 andself-financing irrigation and drainage districts Coastal zone planning andmanagement Sustainable Coastal Resources improvements, marine aquaculture Development Project Other development agencies ADB "Transjurisdictional Transjurisdictional water pollution EnvironmentalManagement Project" River basin management Yellow RiverLaw Project I lPlD0 Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), t (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: The Bank has assisted in financing 17 water resources and irrigation projects inChina and numerous water supply and sanitation projects over the last 15 years. Generally, these projects have been implemented efficiently, and time and cost overruns have not been excessive despite periods o f sharp price escalation. In recent years the Bank has been supporting institutional aspects o f water and environmental management: (a) at the Basin level inthe Yangtze Basin Water ResourcesProject, the Tarim Basin I1Project, the Guanxi Urban Environment Project and the Liao Basin Environment Project; and (b) at the system level through self-financing irrigation and drainage districts and water supply and sanitation corporations in numerous projects. Key lessons from previous Bank-financed water resourcesprojects in China are that: i.detailed organizational and staff arrangements should be formulated and agreed before implementation; ii.counterpartfundingshouldbecommittedbeforeimplementation,includingthedirectparticipation ... of the Provincial PlanningCommissions and Finance Bureaus; 111. projects should include institutional development support for the strengthening o f provincial and localbureaus; iv. water and environmental management needs to have both bottom-up and top-down aspects; bottom-up activities need to have strong involvement by existing political/administrative entities (townships, counties, prefectures, municipalities, provinces) including their respective technical/administrative bureaus (water, environmental protection, agriculture, construction, etc.) because these are the entities with direct line responsibility for management; top-down activities - 17-  should be concentrated at the river-basin level and should establish the enabling policy and strategic environment for cross-sectoral and cross-administrative boundary coordination; v. participation of water users inwater resourcesmanagement especially inthe lower-level bottom-up aspects is crucial; and vi. data and knowledge management activities are critical to water and environment management and needto be widely sharedand compatible. Experience with institutional development Project indicates that strong government support i s necessaryfor its success, and that specialized TA during early implementation i s important to help promote, teach, and establish institutional reforms before full implementation begins. The 1993 World Bank Policy Paper on Water Resources Management and Chinese Government policy are compatible and emphasize the following principles: (a) water resources should be managed and developed in a comprehensive integrated manner and consider cross-sectoral issues with the goal of ensuring the sustainability o f the water environment for multiple uses as an integral part o f the country's economic development process; (b) water resources planning and management should be carried out considering the interrelationships between water, land and human resources with the objective o f enhancing economic growth and development in an environmentally sustainable manner; (c) water is an economic resource and therefore should be managed in an economically efficient manner; (d) the river basin should be the basic unit for planning and managing water resources; (e) water users should participate directly in water resources management and development; and (9 water use should be efficient and environmentally sustainable. Cooperation between SEPA and MWR has been difficult to achieve in previous Bank supported projects. To achieve good cooperation, projects should be implemented in the high priority areas with strong emphasis for cooperation by high Chinese government leadership; SEPA and MWR should agree up front to supporting cooperation at all levels of government within a project and mechanisms should be included in projects to ensure this cooperation; and to the extent possible laws should clearly define the responsibilities o f the different agencies. The Hai Basin and the Bohai Sea are identified as critical high-priority areas for improved water and environment management in the last two five-year plans and the priority has been elevated even higher in consideration o f the 2008 Olympics to be held in Beijing. SEPA and MWR have been directed by the highest levels o f the Chinese Government to cooperate inIWEMinthe Hai Basin. DuringProject preparation, Leading Groups, PMOS,and Joint Expert Groups were established that required and have resulted in close cooperation between SEPA and MWR and between their counterparts at lower levels. The October 2002 Chinese Water Law has brought more clarity to the role o f MWR and SEPA inwater and environment management. - 1 8 -  4. Indicationsof borrower and recipientcommitmentand ownership: The Chinese government, at all levels, i s committed to improving the ecological health of its coastal waters and better management of its water resources. An important policy milestone was reached in July, 2000 when the representatives from the State Oceanic Administration (SOA) and the coastal provinceslmunicipalities signed the "Bohai Declaration" which outlines the principles and objectives for saving the Bohai, and commits their agencies to specific actions to achieve these goals. In 1999 the Marine Environmental Protection Law (MEPL) was amended to better protect and improve the marine environment, conserve marine resources, abate pollution, and ensure sustainable coastal and marine development. O fparticular importance for the proposed Project is Article 3 o f the MEPL which calls "total quantity control" o f pollutants basedon the measured carrying capacity o f the coastal waters. SEPA is held responsible for the prevention andcontrol o f land-basedpollutionthat impacts the marine environment, and in 1999 introduced the "Blue Sea Action Program." The State Council has also ratified the "Blue Sea Action Program" which presents a suggested investment program o f around US$7.2 billion for reducing land-based sources o f marine pollution. State Council Circular 37 [2000] promotes the concept o f integrated water resources management, water pollution control, and water conservation. Finally, both the 9th [1995-20001 and 10th [2000-20051 National Five Year Plans agreed by multiple ministries stress the needfor integrated water and environmental management, with the HaiBasin identifiedas highpriority. Government commitment to improve water management inthe Hai Basin and the Bohai Sea environment is also demonstrated by the on-going investments in wastewater collection and treatment in the large cities (Beijing and Tianjin) and agricultural water conservation infrastructure, such as the Bank-financed Water Conservation Project (WCP). For secondary towns in Tianjin, the townslcounties must finance the wastewater treatment works either through loans or self-financing covering all investmentcosts. MWR, SEPA, Tianjin Municipality, Beijing Municipality and Hebei Province all participated in the preparation o f the GEF Concept Note and GEF PDF-B Grant request and the two preparation missions o f the Project, and strongly support the Project, having utilized to a great extent their own human and financial resources to undertaken Project preparation activities. MOF, MWR, SEPA Tianjin, Beijing and Hebei have made commitments to provide counterpart financing during Project implementation. The catalyzing effect of this Project is enormous and there is strong awareness by all o f the entities involved in Project preparation that the Project is key to carrying out integrated water and environment management in China. The incremental cost analysis (Annex 4) shows that billions o f dollars will be expended in near future to try to solve these huge water quantity and water quality problems innorthern China. The Project will contribute greatly to enhancing the benefits of these investments. 5. Value addedof Bank and Globalsupport in this project: The Bank is helping the Chinese Government to develop and implement an integrated cross-sectoral approach to water and environment management. The Project will address an important missing link in efforts to improve water and environment management in the Hai Basin and the Bohai Sea environment. Other GEF and Chinese initiatives are addressing the marine and coastal issues (PEMSEA and the Yellow Sea MarineEcosystem Project). Large Chinese cities, such as Beijingand Tianjin, often with partial World Bank financing, are beginning to construct wastewater treatment systems to reduce land-based sources of pollution into the Bohai Sea. The proposed Project will complement these efforts by financing IWEM activities at the county and municipal level in rural and peri-urban areas (see Annex 2 for more detail). More than half o f the pollutant loading into the Bohai Sea comes from secondary cities andtowns and rural areas. The general approach taken will be to develop an IWEM framework, which deals with water scarcity, groundwater mining, and water pollution. Management improvements will take place fi-om the bottom-up with pilot counties, at the middle administrative levels through Tianjin, and from the top-down - 19-  at the basin and national levels. The Project builds upon, fills in the gaps, and links two Bank-financed projects, the WCP and TUDEP2, and fits into the overall framework for improving the Bohai Sea environment. It will also help provide the management framework for integrated water resources management in the Hai Basin, which i s indispensable for a long-term, sustainable approach to rescuing the Bohai Sea. Reducing pollution into the Bohai Sea is best done within an integrated water resources framework. Although government policy calls for an integrated framework, inter-jurisdictional and inter-administrative cooperation often proves difficult in practice, and the Project will provide an incentive and approach to break through institutional barriers and provide a powefil demonstration effect. The Bank is helping to provide international expertise to provide Chinese counterparts with a broad range of management experiences and instruments to draw upon. E. Summary Project Analysis (Detailed assessmentsare intheproject file, see Annex 8) 1. Economic (see Annex 4): 0 Costbenefit NPV=US$ million; ERR= % (see Annex 4) 0 Costeffectiveness 0 IncrementalCost 0Other(specify) Per GEF requirements, a project-specific analysis on GEF incremental costs has been prepared and included as Annex 4. IWEMPs, which will be prepared during the first phase o f Project implementation will carry out costbenefit analyses o f alternatives in order to determine the best plans from an economic standpoint. Social and environmental aspects will also be considered in selecting the activities for the IWEMPs. 2. Financial(see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4) Financial analyses will be carried out as a part o f the preparation o f IWEMPs. These will evaluate the financial feasibility o f different options. IWEMPs will also include financing plans that indicate the schedule and sources o f financing for implementingthe actions defined in the IWEMPs. The Project will provide only limitedfinancing for IWEMP implementation during the secondphase. Government and other resourceswill be requiredto implement these plans, and the Project counties and Tianjin have committed to work to line up these financing needs. The use of higher water charges in both irrigated agriculture and water supply and sanitation will also be an important sources o f financing and financial sustainability. These aspects will be defined during the preparation o f the IWEMPs. Fiscal Impact: 3. Technical: The Project will introduce a new practical approach to water savings in irrigated agriculture using remote sensing and ET management rather than only focusing on imgation systems efficiency improvements, which has been the approach in China in the past. Improving irrigation system efficiencies does not necessarily save water and in fact can often increase the amount o f consumptive use (ET) o f irrigated agriculture by eliminating leakages which were returning to the surface or groundwater systems and utilizing that water for more crop production. "Real" water savings focuses on reduction in ET which can - 20 -  be accomplished through a combination of irrigation technology, agriculture and management measures. The objective is to reduce the ET at the county level to target levels and then maximize the production and value o f production per unit of ET. There is a wide range o f water productivities (YieldET) for each crop type depending on irrigation, agriculture and management practices. The Project will assist the counties in evaluating the rangeo f water productivities inthe county for each crop type and to develop a planthat will assist the farmers in moving from lower to higher water productivity practices, always keeping the target ET for the county as the goal. Remote sensing combined with landuse information andcrop yields can be usedto carry out this analysis for eachparceldown to sizes of 30 by 30 m. The Project will provide strong technical support to the counties form the Hai Basin Commission and the Project KM Group to learn and implement this innovative practicalapproach. River reach files and coding systems will be developed in a platform where both MWR and SEPA and the lower level water resourcesand environmental protectionbureaus will be able to share data and utilize it in their water function zones and water environment function zones, respectively. This will greatly improve the ability o f both entities to carry out their water and environment management functions. This will be an important break through in information sharing. Comprehensive wastewater management involves the collection, treatment, and safe disposal o f domestic and industrial wastewater. Coastal cities in Tianjin are under intense pressure to adhere to national policy and construct wastewater treatment plants, but they are facing a number o f constraints. First, the combined drainage and wastewater networks are underdeveloped, and much o f the wastewater is not collected. Second, many industries do not have pre-treatment and directly discharge toxic and hazardous wastewater, which degrades the collection network and disrupts treatment plants. Finally, most small cities do not have access to capital to investment in treatment plants and must enter into build-own-operate (BOT) contracts with companies, resulting in dramatic tariff increases. The Project will address all three issues by funding institutional and financial studies, technical assistance, and piloting a financing mechanism that provides incentives for small cities to develop comprehensive wastewater managementprograms. The Dagu canal system inTianjin s filled with approximately 2.2 million cubic meters of sediment,most of it contaminated according to Chinese environmental standards. Dredging, dewatering, treatment, and safe disposal o f the contaminated sediment is a complex and highly technical task. The Dagu canal cleanup i s one o f the largest and most ambitious sediment remediation project undertaken in China, and the experiences gained under the Project will be useful for addressing the hundredso f similar canals throughout the country. The Project will finance intemational technical assistance to help local engineers address complex technical and environmental issues. 4. Institutional: During Project preparation and implementation, development and strengthening o f institutional mechanisms for coordination and integration o f activities, carried out by different bureaus (water, environmental protection, agriculture, construction, etc.) at the municipal and county levels, and by different ministries and provinces at the Hai Basin level, will be a key element. At the municipal and county levels establishing coordinating mechanisms i s considered to be feasible with the strong support from the governments. At the Central level the Project Coordination Committee chaired by MOF will play an important role in the coordination and integration of activities both at the central and Hai Basin levels. Establishment o f a high-level Hai Basin Committee with representation from the various ministries and provinces/municipalities will require high-level government commitment, and may not be feasible during the Project implementationperiod. Project management mechanisms including the Coordination Committee -21 -  and the Steering committees established in MWR and SEPA should provide adequate institutional management support during Project implementation. One o f the Strategic Studies will address institutional mechanisms at the Hai Basin level and make recommendations adopting new mechanisms that will ensure the adequate participation o f the different ministries and provinces. The existing river basin commissions are essentially departments o f the Ministry o f Water Resources and lack the authority to coordinate and integrate water and environment management activities in the basins, and for this reason new institutional mechanisms are needed. 4.1 Executing agencies: The executing agencieswill be MWR and SEPA at the central level, and Beijingand Tianjin Municipalities and HebeiProvince at the provincial level. 4.2 Project management: A Project Coordinating Committee ledby MOF and with participation from MWR, SEPA, Beijing, Hebei and Tianjin will be responsible for coordinating the smooth implementation o f the Project. High-level Steering Committees headed by Vice Ministers and Project Management Offices in MWR and SEPA will be responsible for implementing their parts of the Project in coordination with each other, and with the Project provinces/municipalities, counties and sub-basin. Leading groups and Project Management Offices will be responsible for their parts of the Project in Tianjin, Beijing, Hebei, Hai Basin Commission, Zhangweinan and in each o f the Beijing and Hebei pilot counties, all in coordination with each other, and with the central level PMOs. All PMOs will have Joint Expert Groups to assist the PMOs incoordination, review, supervision and in some cases execution o f technical activities under the Project. The Central PMOs will be supported by an international expert panel with broad experience in water quality and quantity management, water and environment planning and knowledge management. These project management arrangements are considered to be adequate. 4.3 Procurement issues: Procurement under the Project is expected to be straightforward, as most o f the procurement activities will involve hiringconsultants; arrangements for training, seminars and study tours; and purchase o f computer, office, and monitoring equipment. There will also be some small works that are yet to be defined. They will be defined during their first and second year o f the Project when the demonstration projects and IWEMPs will be planned. These works will be in activities such as installation of measuring devices and monitoring stations, onfarm irrigation system improvements, land leveling, changes in agriculture practices, groundwater recharge, wells, wastewater collection and treatment, and environmental restoration. Civil works procurement activities relative to the Tianjin Coastal Wastewater Management component will be carried out under TUDEP2. A procurement capacity assessment and action plan and a first year procurement plan have been prepared. The Procurement capacity assessment concludes that there is significant capacity available in the PMOs because o f work on other Bank projects including particularly the WCP and TUDEP2. Some procurement training will be required. The MIS developed and functioning under the WCP will be adapted and utilized for the present Project. 4.4 Financialmanagement issues: Financial Management under the Project is expected to be straightforward. A Financial Management Assessment Report has been prepared. The Financial Management Assessment Report concludes that there is significant capacity available in the PMOs because o f work on other Bank projects including particularly the WCP and TUDEP2. Some financial management training will be required. The MIS developed and functioning underthe WCP will be adapted and utilized for the present Project. - 22 -  5. Environmental: Environmental Category: C (Not Required) 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. Specific actions to be included in the demonstration projects and IWEMPs will be defined during the first and second year o f Project implementation. It is not possible at this time to specifically determine these actions, but their overall purpose will be to improve water and environment management in the counties where they will be implemented. The TORs for the IWEMPs and the demonstration projects will require that alternatives are evaluated in terms o f economic, environmental, and social considerations with extensive stakeholder participation. These activities will include some small civil works for actions such as installation of measuring devices and monitoring stations, onfarm irrigation system improvements, land leveling, changes in agriculture practices, groundwater recharge, wells, wastewater collection and treatment, and environmental restoration. These actions will be very small with probable negligible environmental impact, normally costing less than $50,000 per action. Eventhough these activities are not likely to lead to significant negative environmental issues, an EA and an EMP, that addresses steps that will be taken to ensure that adequateenvironmental protection and mitigation measures are taken during the design and implementation o f these works, has been prepared and will apply. Resettlement and land acquisition i s also not anticipated under the Project. However, in case such resettlement or land acquisition would occur during Project implementation, the RPF that has been prepared would apply. During the initial phase of Project implementation, IWEMPs for about 10 counties, the Tianjin Municipality, and a key subbasin (Zhangweinan) will be prepared and demonstration projects will be designed in detail. The TORs for these IWEMPs and demonstration projects that were prepared during Project preparation include requirements for consultation and participation. These activities will include consultation with stakeholders through surveys and working sessions to ensure their adequate involvement and input. Implementation of the IWEMPs and demonstration projects will require significant participation, which will be defined in the IWEMPs and design o f the demonstration projects. The IWEMPs will be designed to take into account all the different water uses and the entire range o f threats to water quality including point and diffuse pollution sources. IWEM and demonstration projects will include involvement by existing politicaliadministrative entities (townships, counties, prefectures, municipalities, provinces, ministries) including their respective technical/administrative bureaus (water, environmental protection, agriculture, construction, etc.), the entities with direct line responsibility for management. Participation o f water users and polluters inwater resourcesmanagement is also important. 5.2 What are the main features o f the EMP and are they adequate? A brief EMP was prepared. It summarizes how the Project will improve IWEM in the Hai Basin. The EMP also addresses how small civil works will be implemented inorder to ensure environmental protection and mitigation o f possible negative impacts. In general these impacts are considered to be small or nonexistent. Because the Project is in fact a project to improve environmental management in the Hai Basin, the entire PIP for the Project could be considered to be an overall EMP. The IWEMPs that will be prepared during the initial phase o f Project implementation will be similar to EMPs for water resources management for the counties, for Tianjin Municipality, and for the Zhangweinan subbasin. The EMP for the TUDEP2 will cover activities related to the Tianjin Coastal Wastewater Management component. 5.3 For Category A and B projects, timeline and status o f EA: Date o f receipt o f final draft: 11/15/2003 - 23 -  5.4 How have stakeholdersbeen consulted at the stage of (a) environmental screening and (b) draR EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? During the preparation of the EA water users and other stakeholders were consulted through a survey carried out in the pilot and demonstration counties. TORS for the preparation o f IWEMPs and demonstration projects are being prepared during Project preparation. These TORSinclude requirements for consultation and participation o f water users and other stakeholders to ensure that relevant viewpoints are taken into account during the preparation o f these activities during Project implementation. As a part o f the social assessment process, during Project preparation a detailed consultation process was undertakenin two o f the Project pilot counties that are representative o f typical plain area and mountain area counties. This consultation involved identification of water resources, water environment, agriculture and income aspects. A specific problems analysis of water and environment conditions was undertaken in these counties and potential solutions were discussedwith stakeholders. This consultation and problems analysis i s illustrative o f what will be done in each IWEMP county during the initial stages o f IWEMP preparation. 5.5 What mechanisms have been establishedto monitor and evaluate the impact o f the project on the environment? Do the indicators reflect the objectives and results o f the EMP? The overall objective of the Project is to catalyze an integrated approach to water resource management and pollution control in the Hai Basin. The extent to which the Project will achieve actual reductions in pollution and reductions inwater consumption are dependentupon the details and time o f the IWEMPs and demonstration projects that will be prepared and designed during the first years o f Project implementation. Each IWEMP and demonstration project will include a monitoring and evaluation component that will specifically address the implementationand effectiveness o f the IWEMPs and demonstration projects. The monitoring and evaluation plans for these activities will be prepared during the first phase o f Project implementation and will identify monitoring sites, parameters and targets. IWEMPs and demonstration projects will include baseline surveyslinventories o f surface and groundwater quantity and quality conditions, uses and trends and establish specific objectives, timelines and indicators for IWEMP and demonstration project implementation both during the life of the Hai Basin Project and beyond. The PIP for the Project will includes a monitoring and evaluation plan which will monitor overall Project implementation inaccordance with the PIP. DuringProject preparation and specifically at the time of the appraisal mission, a special SEPMMWR team was set up and given the responsibility to come up with preliminary estimates on the amounts o f pollution loading and groundwater overexploitationpresently occurring ineach of the 10 IWEMP counties, in the 3 demonstration counties in the Zhangweinan subbasin, and in the 3 counties in Tianjin that were selected on a preliminary basis for second-phase implementation o f the Tianjin IWEMP. The team carried out consultations with each o f the counties and preliminary estimates were made based on existing data. From this analysis, total existing annual COD loading, NH4 loading and groundwater overexploitation for all of these counties are estimated to be about 164,000 tons, 19,000 tons and 420,000,000 m3,respectively. On a very preliminary basis it i s estimated that about 60% o f these pollution loadings actually make it into rivers and eventually discharge into the Bohai Sea; much o f the pollution accumulates behind checks, in reservoirs and in river sediments, and the discharge to the Bohai Sea occurs mainly as a result of extraordinary flooding events that wash the pollution to the Sea. The Project objectives are to put in place the mechanisms necessary to eliminate groundwater overexploitation and substantially reduce pollution loading, over an approximate 10-year timeframe. Achieving these reductions will require much more investment and effort outside the Project but within its framework. Actual reductions, directly attributable - 24 -  to Project actions and during the 5-year Project implementation period were preliminarily estimated by the SEPAIMWR team and by the Project counties to average about lo%, in terms o f both pollution loading and groundwater overexploitation. These preliminary estimates will be refined and revisedduring Project implementation as describedbelow. The first phase o f the IWEMPs and Demonstration Projects, including the baseline surveys will refine and detail these estimates, indicators and reduction objectives. The baseline surveys will be camed in the first year o f project implementation. For water quantity, the baseline survey will include evaluation o f existing data on groundwater levels and extraction. A water balance analysis will be carried out that will include estimates o f recharge, extraction, and overexploitation based on the data. The total groundwater overexploitation for each county will be revised based on this analysis. For water quality, the baseline survey will include evaluation o f existing data on water quality, discharge to rivers, lakes, canals, and groundwater. Additional data will be collected where data gaps exist. The total pollution loading for selectedparameters will be revised based on this analysis for each county. The IWEMPs will be prepared during the first and second years of Project implementation and will include year-by-year estimated reductions in ground water exploitation and pollution loadings for their implementation periods. Implementation o f the IWEMPs will begin inthe third year and the year-by-year reductions determined in the plans will be usedas milestones duringthe secondphase ofProject implementation. Inaddition, pollutioninto the Bohai seawill bereducedby activities under the Tianjin Coastal Component, For each small city, starting with Hangu, these are estimated to result in annual reductions in pollution loadings into the Bohai Sea o f 10,000 tons o f COD and 500 tons o f NH4. The Dagu canal has about 2.2 million cubic meters o f contaminated sediment. The pollution reduction will come from removing the contaminated sediment from the canal, and disposing of it in an environmentally safe, contained landfill site. According to preliminary sampling, oil and zinc are the two major pollutants o f concern in the Dagu sediments. Based on pollutant concentrations in the sediment, there will be an estimated one-time reduction o f approximately 5,000 tons o f nitrogen (as total N), 10,000 tons o f oil and grease, and 2,000 tons o f zinc from the Dagu canal cleanup. The Dagu canal estimates are the amount o f pollution presently stored in canal sediments that would eventually be washed into the Bohai Sea if the canal were not cleaned up. Present discharge o f wastewater to the Bohai Sea through the Dagu Canal, estimated at 61,000 tons o f COD and 9,400 tons of NH4 annually, will be eliminated due to other actions being taken by the Tianjin government, outside the purview o f this Project. These estimates for pollution reductions for both Hangu and the Dagu canal were based on feasibility studies carried out for these Tianjin Coastal Component activities. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. As mentioned earlier, water and environmental management requires the involvement of existing politicalladministrative entities and their respective technicaliadministrative bureaus, since these are the entities with direct line responsibility for management. Participation o f water users and polluters in water resources management is also important. Information management and sharing are also needed aspects o f water and environment management. During the initial phase o f Project implementation IWEMPs for 10 counties (in Hebei and Beijing), the Tianjin Municipality and a key subbasin (Zhangweinan) and demonstration projects in Hebei, Beijing and Zhangweinan will be prepared. This will include consultation with water users, polluters and other stakeholders. These activities will take place through surveys and working sessions to ensure their adequate involvement and input. Implementation o f the IWEMPs and demonstration projects will also require significant participation, which will be defined in the IWEMPs and demonstration projects designs. - 25 -  The preparation of a Social Assessment (SA) assistedthe proposed Project to set up its social development and poverty alleviation objectives and incorporate them into the Project strategic objectives as a whole, that is, equitable allocation o f water to industrial and agricultural uses in the urban and rural areas, and satisfaction o f the needs for water quantity and quality by groups o f people in various social strata with different economic incomes; as well as sustainable development o f integrated water management systems in terms o f legal, institutional, and local capacity building. Through the SA exercise, the Project i s able to directly address the stakeholders and their needs and roles in Project activities, especially the primary stakeholder, local farmers, in their varied productive situations; and to grasp the complex social diversities and different gender roles inthe Project context. Participation of the Project beneficiaries and participatory capacity building o f poor people will be important aspects in the Hai Basin Project. With detailed case studies and surveys in the typical project areas, studies as a part o f the social assessment have helped to understand how the socio-economic, political, and institutional contexts influence the Project outcomes, and to detecting potential social risks or adverse impact the Project may bringabout to local society. 6.2 Participatory Approach: How are key stakeholders participating inthe project? Preparation o f IWEMPs, demonstration projects, KM systems and strategic studies will include consultation o f stakeholders to ensure that relevant viewpoints are taken into consideration. The IWEMPs and demonstration projects will include a significant amount o f capacity building for farmers. The ET management, "real" water savings and groundwater management aspects will include comparisons o f irrigatiodagriculturelonfarm management practices by different farmers, and those with better practices will be heldup as examples to those with poor practices. There will also be a considerable amount o f awareness raising o f farmers and other water users in regard to the sharing o f limited water resources and the need to use them ina sustainablemanner interms o f both quantity and quality. 6.3 How does the project involve consultations or collaborationwith NGOs or other civil society organizations? Farmers associations and cooperatives, as well as business and social groups will be consulted as a part o f IWEMP preparation during the first phase o f Project implementation. Mechanisms for their participation during IWEMP implementationwill be defined inthe IWEMPs. To the extent possible farmer Water User Associations (WUAs) will be established to facilitate preparation and implementation o f the irrigated agriculture aspects o f IWEMPs. 6.4 What institutional arrangementshave beenprovided to ensure the project achieves its social development outcomes? The institutional mechanisms that will be designed and implemented at the county and municipal level will include mechanisms for ensuring the involvement o f water users and other stakeholders in water and environment management activities. The demonstration project on water rights and well permits will include a pilot CDD component in order to introduce CDD concepts to ensure maximum ownership by the water users and the community in addressing and implementingthe difficult choices necessary to achieve sustainable use of water resources. To the extent possible WUAs will be established to enhance farmer participation. - 26 -  6.5 How will the project monitor performance interms o f social development outcomes? The PIP will include a monitoring and evaluation plan which will include mechanisms for monitoring and measuring the performance o f the Project in terms o f social development outcomes. 7. Safeguard Policies: 7.2 Describe provisions made by the project to ensure compliance with applicable safeguardpolicies. Although the Project has been determinedto be a Category C, because the small civil works will have very limited environmental impacts, an Environmental Assessment (EA), Environmental Management Plan (EMP), and Resettlement Policy Framework (RPF) has been prepared, in order to ensure that any such impacts would be avoided, minimized, or mitigated. No resettlement and land acquisition is anticipated under the Project. However, in case such resettlement would occur duringProject implementation, the RPF would apply. The Project will further provide technical assistance for activities related to the TUDEP2, such as Dagu Canal rehabilitation and Small Cities wastewater management. The Small Cities Financial Incentives Program under Component 3 (Tianjin Coastal Wastewater Management), will provide output based (i.e., operational) financial support to about two small cities associated with TUDEP2, with Hangu selected as the priority city and a second city to be identified during implementation. The TUDEP2 will finance the construction o f wastewater collection and treatment facilities for the small cities, and the civil works for the Dagu Canal rehabilitation. The TUDEP2 was approved by the World Bank Board in FY03 and the loan will become effective in early 2004. Since the TUDEP2 finances civil works for Dagu Canal and the small city wastewater projects, social and environmental issues will be covered under the EA, the EMP, and the RPF o f TUDEP2. Moreover, the World Bank TUDEP2 task team i s integrated into the World Bank's GEF Hai Basin Task Team, ensuring close coordination between the two projects. No significant resettlement issues are anticipated for either the Daguor small city wastewater projects. While no cultural properties to be affected by Project activities have been identified, an appropriate clause will be included inall works contracts regarding the procedures to be followed in the event of chance finds o f culturally significant sites during Project activities. - 27 -  F. Sustainability and Risks 1. Sustainability: Counties and municipalities participating in the Project will establish institutional mechanisms to coordinate across sectors to prepare and implement IWEMPs. Implementation o f the IWEMPs will continue after Project completion and the IWEMPs will include financing plans for their implementation. Successful preparation and initial implementation o f IWEMPs under the Project with sound institutional mechanisms will be a powerful incentive for sustainability and also for replicability in other counties and municipalities inthe basin and throughout China. Successful implementationo f KM systems including data sharing mechanisms and particularly the coding and river reach file systems under the Project will be adopted by MWR and SEPA and utilized throughout the basin and elsewhere in China. Having Government budgeting for Project activities including KM and ET management through counterpart funding will help to ensuretheir sustainable funding after Project completion. Investments in wastewater infrastructure for small cities under the Project will be financed through a combination of self-financing, IBRDloans, and GEF grants (the terms and conditions of the GEF grant will be determined). Financial management and operational development plans are a condition for financing and will be monitored during Project implementation. The Chinese government has provided assurances about the priority nature of this Project and their commitment to ensure adequate government support including financial resources for sustainability after the Project is completed o f the successful Project actions. la. Replicability: The Project is designed to be highly replicable. The development of demonstration projects and IWEMPs at the county level provides an excellent opportunity for replicability because first the water and environment issues in most o f the Hai Basin counties are very similar to the Project pilot counties and second the governmental set up in all Chinese counties is highly uniform. Successful demonstration projects and IWEMPs will therefore be very replicable. The Chinese government has provided assurances that they will take full advantage o f successful results o f the Project and promote broad replication. The Project will include a good deal o f interaction between the Project pilot counties in the form o f study tours and workshops to the different Project counties so that they can leam from each other. Once successful experiences have been achieved other counties form the Hai Basin and from elsewhere in China will be invited to visit and to leam. At the Basin level the experiences learned will be highly replicable to other China basins (such as the Liao) with similar water scarcity and water pollution issues. In addition the practical integrated water and environment approaches implemented in the Project address problems o f water scarcity and pollution that are common in many parts o f the world. Therefore the potential for replicability is very large. - 28 -  2. Critical Risks (reflecting the failure o f critical assumptions found in the fourth column o f Annex 1): Risk Risk Ratina 1 Risk Mitiaation Measure From Outputs to Objective Bottom-up water resourcesmanagement M The Chinese Government is committedto at the county andmunicipal level will not strongly support replication of successful be replicable and won't contribute to IWEMP. IWEMat the basin level. An improvedpolicy environment at the S The Project is designedto plan and implement central level will not contribute to Project activities at grass roots level in improved IWEM andplanning. accordance with policies and improvedpolicies. Improvements inKMandET M The KMand ET management subcomponents management will not contribute to better have been designedto provide direct service to IWEM. IWEMat the county, municipal and sub-basin levels. Wastewater Treatment Plants will not M Project will include technical assistanceto operate as planned. ensure that adequate financial andoperational aspects are addressedduringthe planningphase. From Components to Outputs Counterpart funding will not be adequate M Assuranceswere providedprior to negotiations and not available on time. that counterpart funding will be adequate and available on time. County and municipal governments don't S Assuranceswere provided prior to negotiations support IWEMPs andtheir that support for the Project and new implementation, as well as new coordinating mechanisms, from all levels o f institutional coordinatingmechanisms. local Governments, will be provided. Hai Basin Commission does not exercise S Assurances were providedprior to negotiations strong ownership inKMdesignand that the Hai Basin Commissionwill provide improvements and does not provide strong support to Project activities andexercises necessary support to other components. strong ownership inKMdesign. Politicalwill is inadequate to support S Initial steps inthe Tianjin small cities and the program o f Integrated Wastewater Dagu Canalrehabilitation support that are Management Measures. undertakenunderthe TUDEP2 will demonstrate commitment. Project management is not adequateand S Assurances were provided prior to negotiations there is no cooperation betweenthe that the cooperation between agencies will be various agencies. strong; Project preparation was camed out with various agenciesandjoint management, working, and implementation groups were established. Overall Risk Rating S Risk Rating - H (High Risk), S (Substantial Ris , M (Modest Risk), N(Negligib1e or Low Risk) 3. PossibleControversialAspects: None. - 29 -  G. Main Conditions 1. EffectivenessCondition (1) Standard Covenants. 2. Other [classify according to covenant types used in the LegalAgreements.] LegalCovenants (1) StandardCovenants. (2) Project Management Organizations. Maintain throughout the period o f Project implementation organizations with composition and staffing acceptable to the Bank, including: (a) Central Level: the Project Coordinating Group led by MOF, and the Project Steering Committees and PMOs in MWR and SEPA; (b) River Basin Level: the Project Leading Group and the PMO in Hai Basin Commission, the Project Leading Group led by SEPA and Joint PMO for Zhangweinan sub-basin; (c) Provincial Level: a Project Coordination Group led by the Finance Bureau, Joint PMO o f WRB and EPB and Joint Expert Group in Hebei Province and Beijing Municipality respectively; a Project Coordination Group led by the Finance Bureau, PMO in Tianjin Construction Commission and Joint PMO o f WRB and EPB in Tianjin; and (d) County Level: a Project Coordination Group led by the Finance Bureau, the Joint PMO o f WRB, EPB and Agriculture Bureau and Joint Expert Group in Counties namely Chengan, Guantao, Feixiang, Linzhang and Shexian respectively in Hebei Province; a Project Coordination Group led by the Finance Bureau, Joint PMO o f WRB, EPB and Agriculture Bureau in Counties or Districts namely Tongzhou, Daxing, Fangshan, Miyun and Pinggu respectively in Beijing Municipality; a Project Coordination Group led by the Finance Bureau, Joint PMO of WRB and EPB in Counties namely Hangu, Baodi and Ninghe respectively in Tianjin Municipality; a Project Coordination Group led by the Finance Bureau, PMO in Lucheng County of Shanxi Province, in Xinxiang County o f Henan Province; and in Dezhou City o f ShandongProvince. ( 3 ) Cooperation between Water Department and Environment Department. MWR, SEPA, Beijing and Tianjin municipal governments and Hebei provincial government, under coordinationo f MOF, shall ensure, through the institutional cooperative mechanisms established under the Project, the close cooperation between water department and environment department at central level, river basin level, provincial level and county level for Project management and implementation, especially during the process o f integrated water and environment management planning and implementation. The mechanisms and management structure developed and tested under this Project shall be promoted gradually through MWR and SEPA in the non-Project areas o f Hai Basin during Project implementation and after Project completion. MWFUSEPA PMO shall prepared and issue an official document satisfactory to the Bank on "Institutional Cooperative Mechanisms" to the PMOs at all levels for project management and implementation no later than June 30, 2004; and the "Institutional Cooperative Mechanisms" shall be reviewed and improved jointly by Water Resources Department o f MWR and Pollution Control Department o f SEPA once a year satisfactory to the Bank throughout the project implementation period. Prior to October 31, 2005, the PMOs will review how well the cooperation is proceeding andmake special arrangementsfor ensuringthat any deficiencies are remedied. (4) Joint Expert Groups. Maintain throughout the period of Project implementation, the Joint Expert Groups at central, river basin, provincial and county levels for providing technical assistance to the PMOs at various levels as above-mentioned, with composition and staffing acceptable to the Bank. The Joint -30 -  Expert Group at all levels except for the county level shall carry out internal supervision missions at the field level twice a year and prepare an independent technical report from the Semi-Annual Progress Report prepared by PMO, which shall include review and evaluation o f the effectiveness o f project managementI coordination 1 integration activities. The independent technical report shall be submitted to the related Project CoordinationILeading Groups, MWWSEPA PMOs, MWR and SEPA Steering Committees and the Bank for review upon arrival o f the Bank Supervision Mission. (5) Meetings. The following meetings shall be heldtwice a year after the Bank supervision mission on the key issues and problems identifiedand related to project management and implementation throughout the project implementation period. Minutes for each o f the meetings shall be prepared for necessary follow-up actions and submitted to the related Project CoordinatiodLeading Groups, M W R and SEPA Steering Committees and the Bank for review: (a) Meetings o f the MWR and SEPA Steering committees; (b) a Joint Meeting o f the MWR and SEPA Central PMOs with participation of the responsible Deputy Directors o f Water Resources Department o f MWR and Pollution Control Department o f SEPA; (c) Meetings held respectively by Project Coordination I Leading Group o f Hai Basin Commission, Zhangweinan Sub-basin, BeijingMunicipality, Tianjin Municipality and Hebei Province. (6) Zhangweinan Coordinator. The Project Coordination Group at Zhangweinan Sub-basin shall appoint an experienced Coordinator. The Coordinator should start to work on behalf o f the Project Coordination Group before June 30, 2004. This Coordinator shall be contracted andpaid equally by SEPA and MWR under project financing, and work together with the Zhangweinan Sub-basin PMO and the Joint Expert Group in Dezhou City o f Shandong Province at least one week per month throughout the project implementation period, and the monthly report should be prepared by the Coordinator and submitted to Zhangweinan Sub-basin Project Coordination Group, SEPAIMWR PMO, and SEPAIMWR Steering Committees for review and comments; (7) Project Workshops. The Central PMOs o f MWR and o f SEPA, under the leadership o f Steering Committees o f MWR and o f SEPA and coordination o f the Project Coordination Group led by MOF in cooperation with all the PMOs at various levels, shall take primary responsibility for maximum incorporation of horizontal and vertical integration into the Project activities by maintaining constant communications and organizing four workshops a year throughout the period of Project implementation. Horizontal integration includes cross-sectoral cooperation and coordination o f actions between water resources and environmental protection ministrieshureaus, as well as others including agriculture and construction ministrieshureaus. Vertical integration includes direct linking and constant interaction between the Central and Hai Basin component activities and the Zhangweinan sub-basin, Tianjin municipality and BeijingiHebeicounties components. (8) Group, consisting o f both professional staff and individual consultants , shall be established officially Sustainability of Remote Sensing-Based ET Technology Application. A RS-ET Working within the Hai Basin Water and Information Network Center o f the Hai Basin Commission to be responsible for application o f RS-based ET Management technology in Hai Basin before June 30, 2004. The Ministry o f Water Resources and Hai Basin Commission shall approve the necessary staff quota for transferring at least three professional staff into the Water and Information Network Center with qualification and TOR acceptable to the Bank by December 31, 2007. The Hai Basin Commission shall provide sufficient funds for O&M o f Remote Sensing-Based ET Technology Application after project completion. -31 -  (9) Sustainable Use of Groundwater Resources. For the two demonstration projects in Chengan and Guantao Counties of Hebei Provinces, and the one demonstration project inDaxing, Pinggu and Miyun Counties o f Beijing Municipality, the zero-balance o f groundwater use shall be reached in the project areas prior to completion o f the Project in 2009, which shall provide good examples for the other groundwater overdraft areas in Hebei Province and Beijing Municipality to reach the objective o f sustainable use o f groundwater by 2020. (10) Annual Plans. Annual Project implementationplans shall be preparedand submitted to the Bank by January 31st o f each year during Project implementation. The plan shall be prepared by the PMOs of Hai Basin Commission, Zhangweinan Sub-basin, Hebei, Beijing and Tianjin respectively and consolidated by MWR and SEPA PMOs at Central level. Inaddition to the annual plans prepared for the entire Project, specific annual plans should be prepared in detail for the five demonstration projects (2 for Zhangweinan Sub-basin, 1 for Beijing and 2 for Hebei) that shall be rsubmittedto the Bank by January 31st o f each year. (11) Management InformationSystem. Maintainthroughout the period of Project implementationthe MIS installed and operated within all the PMOs to facilitate Project management and implementation, and monitoring and evaluation. The MIS software and hardware installation at all PMOs as well as the first MIS training shall be completed and the MIS should be put into normal operation to facilitate project management and implementation and M&E no later than September 30,2004. (12) Project Progress Report. The semi-annual Project progress report including analysis of project status shall be prepared attached with the MIS tables by the PMOs o f Hai Basin Commission, Zhangweinan Sub-basin, Hebei, Beijing and Tianjin respectively and consolidated by MWR and SEPA PMOs at Central level, and submittedto the Bank supervision mission for review. (13) Training and Study Tours. Domestic and overseas training and study tours shall be carried out under their respective part of the Project in accordance with the related Chapter o f PIP for training and study tours. An individual plan including objectives, study contents, name list, invitation letter, and finalized itinerary for each overseas study tour shall be submittedto the Bank for its review and approval together with the Project's annual work plan. (14) Monitoring and Evaluation. Monitor and evaluate Project implementation on an ongoing basis facilitated by MIS, in accordancewith the key indicators inAnnex 1 and in Chapter 5 and Annex 8 o f PIP. The M&E report shall be prepared annually including baseline survey in 2004 by the PMOs o f Hai Basin Commission, Zhangweinan Sub-basin, Hebei, Beijingand Tianjin respectively and consolidated by MWR and SEPA PMOs at Central level. In addition, a thematic M&E report shall be prepared in detail for each o f the demonstration projects. The annual M&E reports and thematic M&E reports, which incorporate the collected data and criteria, and analyzed and evaluated results o f Project implementation, shall be completed by June 30 o f the next year and submittedto the Bank for review. (15) Water User Association (WUA) Development.Inorder for the W A Sto participate inthe whole planning and implementation process o f the integrated water and environment planning and management, during the first three years of Project implementation from 2004 to 2006, at least one pilot WUA shall be planned and established in selectedtownships o f the project counties, namely Chengan, Guantao, Feixiang, Linzhang and Shexian respectively in Hebei Province, in each township o f the project counties, namely Tongzhou, Daxin, Fangshan, Miyunand Pinggu respectively in Beijing Municipality, and ineach township o f Baodi County and Ninghe County respectively in Tianjin Municipality. An annual WUA extension plan should be prepared and implementedin each o f the above-mentioned counties starting in2007 to the end o f - 32 -  the Project. (16) Community Driven Development (CDD). Guantao and Chengan county governments of Hebei province shall strongly support the bottom-up approach to the demonstration programs for effective management o f water-rights and well permits by providing counterpart funding and making institutional arrangements for community driven development in the demonstration pilot sites o f the two counties. BeijingandTianjinmunicipal and Hebeiprovincial governments, learning from the demonstration program, shall promote CDD approach to all the other irrigated agricultural areas o f all the Project counties or districts inBeijing, Tianjin and Hebei. (17) Counterpart Funding. MWR, SEPA, Beijing, and Tianjin municipal Governments and Hebei provincial government shall ensure availability o f the counterpart funding in a timelymannerduringProject implementation as planned inthe Project COSTAB attachedto PIP during the Project implementingperiod. (18) Environmental Monitoring Plan. MWR, SEPA, Beijing and Tianjin municipalities and Hebei province shall: (a) ensure that all activities under its respective part o f the Project shall conform to environmental standards and guidelines satisfactory to the Bank, including the environmental regulations and guidelines issued by the SEPA o f PRC and said Project province or municipality Environmental Protection Bureau; and (b) to that end, implement the part o f the Environmental Monitoring Plan applicable to its respective part o f the Project, ina manner satisfactory to the Bank; (19) Replicabilityof ProjectApproaches. MWR, SEPA, Beijingand Tianjin municipal governments and Hebei provincial government shall replicate the following approaches and concepts developed and implemented under the Project into other areas o f Hai Basin during Project implementation and after Project completion: (a) integrated bottom-up and top-down approach for water and environment management planning supported by KM; (b) concept of ET management for sustainable planning and use o f water resources; (c) concept o f real water savings (reduction o f ET) for irrigated agricultural water savings in resources water shortage areas; (d) application o f RS-based ET technology in River Basin Planning and Management; (e) application o f RS-based ET Technology in Irrigated Agricultural Water Savings; (f) integrated planning for both water quality and quantity control; (g) approaches for non-point source pollution control; (h) ET based groundwater management with linkage between withdraw permits and groundwater availability; (i)Monitoring and Evaluation o f activities; and ('j)application o f MIS in Project managementand implementation. (20) Stakeholder Involvement. MWR, SEPA, Beijing and Tianjin municipal governments and Hebei provincial government shall organize and mobilize the stakeholder involvement in the whole process o f the integrated bottom-up and top-down water and environment management planning and implementation through various workshops, training, public consultation, WUAs and CDD approaches during Project implementation. (21) Cooperationwith other Programs. MOF, SEPA and MWR shall strengthencooperation between this Project and PEMSEA Bohai Sea Management Project administered by State Oceanic Administration, Yellow Sea Large Marine Ecosystem by UNDP, and have meetings and exchanging results and views with the PMO for PEMSEA Bohai Sea Management Project and Yellow Sea Large Marine Ecosystem Project as well as with ongoing SEPA and MWR related programs such as the Bohai Blue Sea Action Plan, the Water Pollution Prevention Program for the Hai Basin andthe South North Transfer Programs. - 33 -  (22) Data and InformationManagement. To assist inthe management, sharing and dissemination o f water and environment related data and information as needed to effectively implement the Project, each Project entity (Hai Basin Commission, Zhangweinan, Tianjin, Beijing, Hebei, and all project counties) will set up, not later than June 30, 2004, knowledge management groups with membership and terms o f reference agreed with the Bank. (23) Tianjin Small Cities FinancialIncentivesProgram. Tianjin shall prepare a manual (Small City Incentive Program Manual), acceptable to the Bank, goveming the implementation o f the program, including but not limited to: i)eligibility requirements; ii)disbursements amounts and mechanisms; iii) performance verification procedures; and iv) auditing arrangements. H. Readiness for Implementation 1. a) The engineering design documents for the first year's activities are complete and ready for the start ofproject implementation. 1.b) Not applicable. iXi 2. The procurement documents for the first year's activities are complete andready for the start of project implementation. iXi 3. The Project Implementation Planhas been appraised and found to be realistic and o fsatisfactory quality. Ci 4. The following items are lackingand are discussed under loan conditions (Section G): I. Compliance with Bank Policies 1. This project complies with all applicable Bank policies. 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. c*o* -_ DouglasC. Olson Marir D.Wilson Team Leader Sector ManagerlDirector Country ManagedDimctor - 34 -  Annex 1: Project Design Summary CHINA: Hai Basin Integrated Water and Environment Management Project ve Sector-related CAS Goal: from Goal to Bank Mission) Sustainable development and Sustainable management will nanagement o f water and ,educepoverty ither natural resources 5EF Operational Program: 4chieve environmentally zontinued national iustainable management and :ommitment to the regional ise o f the Yellow Sea Large irogram; i4arine Ecosystem (including COD Loading 164,000 Support o f national agencies; he Bohai Sea) and its tonsiyear; NH4 Loading 3road stakeholder watershed 19,000 tondyear) iarticipation; Disposal o f 2.2 million mprovements inwater and cubic meters o f mvironmental planning and contaminated sediment in nanagement will result in Dagu Canal in an sustainable management of environmentally safe Mater resources manner Reduced pollution loading to Bohai Sea from at least one Tianjin small city by 10,000 tons o f COD and 500 tons o fNH4 annually Development o f replicable practical approaches to reducing pollution to the Bohai Sea that can be used throughout the Hai Basin and in other Chinese basins 5lobal Objective: [fromObjective to Goal) mprove integrated water and Zontinued national mvironmental management Zommitment to the regional nterms o fwater quantity and xogram; water quality in the Hai Basin Support o f national agencies; mdreduce land-based sources Broad stakeholder )fpollutionto the coastal and ?articipation; narine environment o f the Improvements inwater and 3ohai Sea :nvironmental planning and nanagement will result in sustainable management o f water resources -35 -  Output from each Component: 1. IntegratedWater and Environment Management (IWEM) 0 IWEMPs for 10 counties IIWEMPs prepared and 0 Semi-annual reports on 0 Bottom-up water resources and the Tianjin initial implementation physical and financial management at the county, Municipality started by 0313112007 progress subbasin and municipal 0 Improved institutional Institutional coordination 0 Annual monitoring and level will be replicable and - 36 -  coordinatingmechanisms mechanisms for IWEM evaluationreports contribute to IWEM at the for IWEM established and functional BanWGEF supervision basinlevel by 1213112004. missionreports An improvedpolicy 0 Strategic studies: Strategic studies prepared environment at the central 1. Policy and legal andpreliminary findings level will contributeto framework and integratedinto IWEMPsby improvedIWEMand institutional 1213112006 planning arrangements; 2. Bohai Sea Linkage; 3. Countermeasuresfor the Protectionand Measurementof the Water EcologicalSystem 4. Water Savings 5. Water Rights and Well Permits, and Sustainable Groundwater exploitation; 6. Wastewater Reuse 7. Water Pollution and planning 8. Beijing Water ResourcesRationalizatior Zhangweinan SAP prepared 0 SAP for Hai Basinand and initial implementation for ZhangWeiNan has started by 1213112006, subbasin Hai Basin SAP preparedby 1213112008 Demonstrationprojects prepared, implementation 0 DemonstrationProjects: begun, and findings 1. RealWater Savings integratedinto IWEMPsby 2. Managementof Water 12/31/2006 Rights and Well Permits 3. Control of Wastewater Discharge 4. Pollution Control and Water Environmental Policies, mechanismsand Improvements instruments are defined and 0 Policies, mechanisms, implemented and instruments supportingIWEM ,.KnowledgeManagement 0 IntegratedWater IntegratedWater Resource- Semi-annual reportson Improvementsin KMand Resource-Water Quality Water Quality Information physical and financial ET managementwill Information Management Management System progress contribute to improved System created, tested, Annual monitoring and IWEM implemented, and evaluationreports 0 Application Systems for functional by 1213112006 BanWGEF supervision the former Application System missionreports developed, established, and 0 ET ManagementSystem functional by 1213112007 ET Management System - 37 -  established, tested, and 0 Mechanisms for the functional by 12131/2006 continuationof above Mechanisms for making systems after the Projects permanent KMand ET finalization systems established, tested, and functional by 12131/2008 1.Tianjin Coastal Wastewater danagement 0 TA for the renovation Technical assistance Semi-annual reports on Wastewater Treatment and remediation o f the provided, and the first physical and financial Plants will operate as Dagu Canal stretch o f Dagu Canal up to progress planned Jugezhuang Pump Station i s Annual monitoring and successfully rehabilitated by evaluation reports 12/31/2008 BanWGEF supervision 0 Dagu Catchment Industrial Pollution Control mission reports Industrial Pollution study for Dagucanal Control catchment completed, implementation o f action plan underway, and preliminary study results integrated into Tianjin Municipal IWEMPby 1213112006 0 Comprehensive Comprehensive wastewater Wastewater Management management studies for two Study small cities completed, prepared, and implementation o f recommendations started by 12/31/2005 0 Small Cities Financial Small city financial Incentives incentives mechanisms tested and functioning for at least one small city by 12/31/2007 1. Project Management, donitoring and Evaluation, md Training 0 Joint Expert Groups Expert Groups including Semi-annual reports on An improvedpolicy International Expert Panel physical and financial environment at the central functional by 9/30/2004 progress level will contribute to 0 Conduct Training, Training, Workshops, and Annual monitoring and improved IWEM Workshops and Study Study Tours are included in evaluation reports Project management setup Tours annual training plans and BanWGEF supervision can guide water and carried out inaccordance mission reports environmental planning and with these plans management in the Basin 0 Monitoring and Project-wide Monitoring Evaluation, specifically of and Evaluation (M&E) IWEMPs and system inplace by - 38 -  DemonstrationProjects 1213112004 Management Information System(MIS) operational by 913Ol2004 Jroject Components I iputs: (budget for each roject reports: 'rom Components to jub-components: omponent) htputs) I.IntegratedWater and Support formulation of Semi-annual reportson Counterpartfunding will be hvironment Management County IntegratedWater physical andfinancial adequateand on time IWEM) and EnvironmentalPlans progress County and municipal (IWEMPs) Annual monitoring and governments strongly Support preparationof evaluationreports support IWEMPs and their pre-investmentstudies and implementationas well as implementationof some new institutional plannedactions coordinating mechanisms Support establishment of institutional coordinating mechanisms for IWEM Support formulation of SAP for ZhangWeiNansubbasin Support formulation of SAP for Tianjin Municipality rota1budget:US$14.70 iillion) !.KnowledgeManagement Support strategic planning Semi-annualreports on Hai Basin Commissionwill and technical investigations physical andfinancial exercise strong ownership in at the basinlevel through progress knowledgemanagement improveddata collections, Annual monitoring and designand improvements GIS, river reach data evaluationreports andprovide necessary systems, river basinmodels, support to other components ET management and other KMapplications Support formulation of County IWEMPs through improveddata collections, GIs, river reach data systems, models, ET management, and other KM applications rota1budget: US$5.85 killion) ;.Tianjin Coastal Wastewater Support establishment of Semi-annual reports on Political will exists to danagement institutional coordinating physical andfinancial support programof mechanisms for IWEM progress IntegratedWastewater (ConstructionCommission, Annual monitoring and ManagementMeasures EnvironmentalProtection evaluationreports Bureau, Water Bureau) Support formulation of a Municipal IWEMP - 39 -  ~ -. Support preparation of pre-investment studies and implementation o f some planned actions Support the rehabilitation of the Dagu Canal Support small city wastewater management rota1budget: US4.13 and S$98.25 million associated xrallel financing through UDEP2) .. Project Management and Support the development of Semi-annual reports on Project management at all 'raining policy, legal and physical and financial levels will be adequate and administrative mechanisms progress involve good cooperation and instruments for Annual monitoring and between the,various improving IWEM evaluation reports agencies Support Project Management, Monitoring and Evaluation Provide Training rota1budget: US8.64 iillion) -40-  Annex 2: DetailedProject Description CHINA: Hai Basin IntegratedWater and Environment Management Project The Project has the goal o f achieving real improvements and important progress in Integrated Water and Environment Management (IWEM) in the Hai Basin, and achieving real reductions in pollution to the Bo Hai Sea. In addition the Project has the objective o f contributing to the reversal of existing trends in deteriorating water quality and worsening overexploitation o f surface and groundwater resources. The Project will be implemented in two phases (see Annex 12). The two phased approach will permit (i) a process o f good planning, followed by (ii) specific actions to affect real change. Parallel demonstration projects will test and demonstrate high priority actions that are clearly needed throughout the basin. The key aspect o f the GEF Hai Basin Project is that it will have maximum incorporation of horizontal and vertical integration. Horizontal integration includes cross-sectoral cooperation and coordination o f actions between water resources and environmental protection ministrieshureaus, as well as others including agriculture and construction ministrieshureaus. Vertical integration includes direct linking and constant interaction between the Central and Hai Basin component activities and the ZhangWeiNan subbasin, Tainjin municipality, and Beijing/Hebei counties components. The Project (estimated total cost: US$33.32 million) will be divided into 4 interrelated components: (a) Integrated Water and Environment Management; (b) Knowledge Management; (c) Tianjin Coastal Wastewater Management; and (d) Project Management, Monitoring and Evaluation, and Training. Main products will include: (i) Seven strategic study reports (two reports at national level, five reports at Hai Basin level); (ii)Integrated Water and Environment Management Plans (IWEMP) for five key counties in Beijing, five key counties in Hebei Province, and Tianjin Municipality; (iii) Strategic Action Plans (SAP) on IWEM for the Hai Basin and the ZhangWeiNan sub-Basin; (iv) Four demonstration projects; (v) A Knowledge Management (KM) system based on sharing between water conservancy institutions and environmental protection institutions and a Evapotranspiration (ET) management system based on satellite Remote Sensing technologies; and (vi) The promotion and technical support of wastewater treatment in small citiesltowns inthe coastal areas o f Tianjin municipality, and technical support for the clean up o f the Dagu Wastewater Canal in cooperation with the Tianjin Urban Environment Development Project (TUDEP2) Project. By Component: Project Component 1:Integrated Water and Environment Management US$14.70 million - The IWEMis divided into 3 subcomponents: (a) Strategic Studies (SS) at the central and Hai Basin levels; (b) Integrated Water and Environment Management (IWEM); and (c) Demonstration Projects. As can be seen in Figure 1, all three o f these subcomponents are very closely interrelated. The SS will support and provide guidance to IWEM planning and to the demonstration projects. The demonstration projects will provide important practical input into the IWEMplanning. There will be constant interaction between these subcomponents to ensure integration. There will also be an important link, with continuous feedback and information updating, to the Knowledge Management (KM)component of the Project. Subcomponent 1A Strategic Studies (SS) - Policy and Legal Framework and Institutional Arrangement (SS 1): The evolution o f the legal and policy environment in China has been very rapid, however it still tends to reflect a command and control, top-down approach to social, economic, and environmental development. In the water sector, this has created severe institutional problems due to ambiguities in the law, and lack of effective coordination mechanisms. For water resource management and water pollution control, the legal, policy and institutional -41 -  framework has created particularly serious coordination problems with the result that there is duplication and competition between the Ministry o f Water Resources (MWR) and the State Environmental Protection Administration (SEPA) in many areas o f water management. These problems are reflected down to the local level. In particular, the fact that river basin organizations are part o f MWR, and that SEPA has no presence at the basin level, makes IWEM especially difficult. The SS will examine the legal, policy and institutional framework within the context o f the Hai Basin with the purpose o f identifying barriers that can be overcome by practical measures that will achieve a level of coordination between the two ministries to allow and support IWEM both at the basin and local levels. The study will further elaborate upon how institutions must respond and possibly modify themselves through stronger cooperation - and in certain cases integration - in order to meet the challenges driven forward by technical, economic, and financial innovations inthe field o fbothwater resource management and water pollutioncontrol. There i s a desire on the part o f MWR and SEPA to achieve the practical benefits of improved institutional coordination, but without sacrificing the authorities provided to each ministry in the Water Law and the Water Pollution Prevention and Control Law, and their respective Implementing Rules. This study will provide the context within law and policy for practical approaches to operational coordination between the two ministries, and the GEF Project as a whole will catalyze the entire integrationprocess. Bohai SeaLinkage (SS 2): The main objective i s to provide the linkage between environmental condition o f the Bohai Sea and of Bohai Bay which receives the runoff from the Hai Basin. The main issues to be researched are: (i) identify and assess regulations and laws on environmental quality o f the Bohai Sea to that have implications for land-based actions that may be included in the Hai Basin SAP; (ii) to assess pollutant load reductions and water volume increases from the Hai Basin that will have meaningful consequences for the Bohai Sea and Bohai Bay; (iii) to recommend spatial and temporal pollutant control actions that will maximize beneficial effects on the Bohai Sea; and (iv) to provide guidance to the development o f the Hai Basin SAP that will reflect the actions that will be requiredto maximize ecological benefits in the receiving marine environment. The SS will also create the linkages with other institutions andprograms inthe Bohai Sea such as the Bohai Sea EnvironmentalManagement Project that is sponsored under the PEMSEA program of the GEF, and the UnitedNations Programme of Action for Protection o f the Marine Environment from Land-Based Activities. The objective is to maximize the benefit o f these studies for the purpose o f the SAP, and to provide input into ongoing research and management programs focusing on the marine environment. Countermeasures for the Protection and Measurement of the Water Ecological System (SS 3): The natural aquatic environment, including wetlands, has been all but destroyed inthe Hai Basin due to the high levels o f pollution and reduction o f flow volumes in all rivers that has dried out most wetlands. An integral part o f the IWEMP process is to factor into the planning process the minimum flows, the scheduling o f these flow, and water quality requirements that are needed to maintain the environmental functions o f important wetlands. The study will capture the existing information base for important wetlands and river courses in the basin and, including coastal wetlands as a basis for making decisions on priorities for the balance o f the study. In addition to technical and financial considerations, socio-economic implications will also be assessed. Important outputs will be to: (i)assess the nature o f ecological functions in order to develop priorities for follow-up actions, (ii)examine the technical options and feasibility for ecological maintenance and their costs, and (iii) determine minimumflows and their scheduling to maintain ecological functions. A conservation planwill be proposed for inclusion inthe Hai Basin IWEMP and implementation plans will be developed for several key areas. The study o f coastal wetlands will be a key linkage to the Bohai Sea insofar as water volume enhancement targets have not been established for the Bohai Sea under any o f the national or international Bohai Sea programs. Therefore, as a first approximation, flow required to maintain coastal wetlands will provide guidance to drafters o f the basin IWEMP on flow adjustment requirements that will also have beneficial effects on Bohai Bay. - 42 -  GEF IWEM Project KEY ISSUES -b IWEM PLANNING * DEM0NSTRATIONS STRATEGIC STUDIES (SS) IWEM IMPLEMENTATlON Key Issues in Achieving IWEM *I in the Hai River Basin Laws, policies, institutions IWEM PLANS Hai River Basin BeijingWater Resources Tianjin Rationalization(SS 8) Zhangweinan Sub-basin Beijing Key Counties Hebei Key Counties c Strategic Action Plans Efficient Water Utilization Water Savings and Efficient Water Use (SS4) f Water Rights,Well Permits, and DEMONSTRATION SustainableGroundwater PROJECTS Exploitation(SS5) Focusingon key Wastewater Reuse (SS6) implementationissues on all strategic aspects for Pollution Control effective IWEM. Water Pollution Planning (SS7) 1 i " f X > k $ j K P I rr+:.;trtt3;im Real water savings Water rights,well permits Pollution control Figure 1. Project IWEM logic and linkages. The clusters of strategic studies are noted. Water Savings and High EfJiciency Water Utilization in the Hai Basin (SS 4): The aim i s to change the water balance in the Hai Basin into a water balance that supports a sustainable river-aquifer system. - 43 -  Present amounts o f ET in the basin far exceed this sustainable balance resulting in groundwater overdraft and inadequate environmental flows. Thus the overall goal is to reduce ET to levels that will achieve a sustainable water balance. With the objective o f achieving this water balance an target ET annual quota amount will be assigned to each county in the basin. This SS will help the counties in achieving their ET reductions. The likely attainable ET reductions for each land use class will be assessed. Some limitedfield experiments will be carried out, to verify the expected results, before they will be applied in the Demonstration Projects and IWEMPs. The Project will also inventory Chinese and international success stories in reducing ET. Groundwater table declinations will also be investigated. Groundwater and ET are coupled through percolation processes and groundwater extractions. Analytical relationships between rainfall, groundwater irrigation, and ET will be worked out to better understandat which threshold levels o f irrigation, ET will actually start to diminish. At the same time, the impact on crop yield will be paid attention to, because the Project aims to enhancerather to negatively impact farmers incomes. Administration of Water Rights and Well Permits, and Sustainable Groundwater Exploitation in the Hai Basin (SS 5): This study will analyze the reasons why existing water rights and well permit systems have not been effective in controlling the use o f water to sustainable levels and how this has resulted in groundwater overdraft. The study will evaluate laws, regulations and processes and make recommendations on how the can be directly linkedto the control and managemento f water resource use to sustainable levels. This will include a detailed analysis of measuring and monitoring requirements. The study will also analyze how to improve the knowledge base of the groundwater system of the Hai Basin. Relevant data is scattered among various institutes. The aim is therefore to describe the groundwater behavior o f the entire Hai Basin using as much as possible field and satellite data that becomes available during the execution of the Project. A good understandingof the exchangeprocessesbetween the saturated and unsaturated zone is of importance to make groundwater use quantitative. Currently, the extractions are only marginally known, because there is no control on the volume individual farmers pump out from the aquifers. The Project intends to compute the Net Groundwater Use from a novel combination of precipitation and ET data. Net Groundwater Use is basically the sink from the groundwater system, which together with the fluctuations o f the hydraulic head will yield to first order assessments o f lateral groundwater movements across the basin (i.e., simple GIS basedgroundwater model). The Hai Basin Wastewater Reuse (SS 6): The main objectives are to provide recommendations on wastewater treatment (in order to increase suitability for various uses) and prepare strategic level wastewater reuse plans in 8 cities (Beijing, Tianjin, Shijiazhuang, Baoding, Tangshang, Datong, Xinxiang and Dezhou city). Specific attention will be paid to: (i) investigate current water pollution sources; (ii) demand and supply aspects o f renovated water; (iii) analysis o f plans for seweragetreatment; (iv) sewerage water renovation and use; and (v) analysis o f the benefits o f sewerage renovation and utilization including mechanisms for encouraging wastewater reuse. In addition the Project will promote wastewater utilization technologies and experiencesacross the Hai Basin beyondthe 8 specified cities. Water Pollution Planning and Management (SS 7): One o f the significant failures o f the 8th and 9th Five Year Plans has been the inability to reduce pollution levels in most rivers in China, particularly ambient water quality. During this 10 year period inthe Hai Basin, the water quality has been declining to the point where most o f the surface water i s now Class V+ (worst water quality without any functional use). This failure is due to a variety o f reasons, including the planning framework, lack o f investment, inadequate management tools, and by the poor coordination between MWR and SEPA in both planning and operations. The recent announcement o f the intention to implementthe Eastern Route o f the South to North Water transfer scheme, which will flow through the lower and most polluted part o f the Hai Basin, has direct implications for both ministries because failure will compromise this enormous investment. This study will examine the reasons for past failures and, using this as a basis for taking corrective actions, to - 44 -  develop a detailed, realistic, and implementable plan for basin-wide pollution control. In addition to institutional coordination issues, the study will develop pollution load reduction targets through a total load control process that has not yet been widely adopted in China. The study will evaluate the types of management tools that are required to more effectively manage the day-to-day operations o f pollution control such as discharge permittingand tracking systems. A review and evaluation o f wider application o f policy instruments for water pollution control will made, including economic instruments such as permit trading. Problems o f enforcement o f discharge regulations is a major problem in China for political and economic reasons, and will be examined to determine what measures can be implemented to ensure compliance o f industry to their permitteddischarge, andto ensure accountability o f local EPBs inenforcing the law. As an integrated part o f the pollution control study, reviews and discussions of options will be made on how pollution control and cleaner production could be further enhanced within the framework of an industrial adjustment policy for the Hai Basin. The output o f these activities will be a basin-wide action plan for pollution control, with realistic targets, development and application o f management tools, assessment o f economic options and incentives, capacity development, linkages to industrial adjustment programs, and operational issues involving coordination between the two ministries. More particularly, plans will be developed for key areas and for protection of the Bohai Sea. Rationalization of Beijing Water Resources (SS 8): Beijing Municipality has the most critical water overexploitationproblem inthe Hai Basin. This strategic study will review and analyze existing and future water use (municipal, industrial, agricultural, environmental) and develop a plan to limit water usage to available amounts and control water quality taking into account the South-North water Transfer Project and future development and growth needs. The study will utilize Project approaches including ET management, KMmanagement, water rights administration, discharge administration, as well as economic and environmental considerations to develop an optimizedrationalized planfor water utilization inBeijing. Subcomponent 1B Integrated Water and Environment Management Planning (IWEMP) - IWEMPs are one o f the primary vehicles for achieving real on-ground change inthis Project. As such they are principal clients for the results o f the Basin wide SS, KM, remote sensing o f ET, and demonstration sub-projects (see Figure 1). The Plans will address the endemic problems o f water use exceeding sustainable levels o f groundwater and surface water supply, as well as improving the water quality situation where much of the surface water exceeds level 5 (the worst) quality standard. Interactions between water quality and quantity will also be addressedso that the optimal integrated Plan is produced. The primary objectives of these Plans is to improve the capacity of management entities to carry out IWEMandto achieve specific and sustainableimprovements inwater and environmental outcomes. IWEMPs will be developed in a two Phase approach during this Project. Phase one, during the first two years, will involve Plan preparation. The second Phase will involve initial IWEMP implementation during years 3-5 (Annex 12). IWEMPs will be developed in five counties in both Beijing and five counties in Hebei Province, and an overall IWEMP is to be developed for the Tianjin Municipality which will include four, more detailed County/District level Plans. The Tianjin component will also include special studies dealing with water quantity, water quality, rural and urban non-point source pollution, aquatic ecology, agriculturalreuse and groundwater management. Strategic Action Plans (SAP) will be prepared for the Hai Basin andZhangweinan sub-basin. The scope of SAPs is less comprehensive than the IWEMP, and focuses more on specific issues. For example, the Zhangweinan SAP will focus primarily on water pollution control. The Hai Basin SAP will be formulated near the end of the Project, consolidate the lessons leamed under the Project, and provide guidance for the next steps in Hai Basin water and environment management. All IWEMPs and SAPs will provide a plan o f - 45 -  action which will guide government investment well beyond the five year term of the Project and into the next 10-15 years. The Plans will: (i)identify actions aiming to balance water consumption as measuredby ET; (ii) reduce to water pollution to levels more consistent with the assimilative capacity of river function zones; (iii) to improve institutional arrangements by integrating management responsibilities horizontally (between agencies at the same level o f government) as well as vertically (between the different levels of government and stakeholders); and (iv) to establish improved water management arrangementslocally, including Water User Associations water permits, and volumetric basedwater pricing. Inthe second phase of the Project, initial priority actions defined in the first phase will be implemented, which will include activities such as preparation o f feasibility studies and designs, training an capacity building,and implementationo f small civil works inactivities which could include installation ofmeasuring devices and monitoring stations, onfarm irrigation system improvements, land leveling, changes in agriculture practices, groundwater recharge, wells, wastewater collection and treatment, and environmental restoration. The subcomponent will facilitate the establishment of institutional coordinating mechanisms for IWEM in the Beijingand Hebei pilot counties and in Tianjin. The intention is to help to improve, develop, and implement a set o f policies, and legal, administrative and institutional instruments at the county and municipal level. The PMOs, joint expert groups and leading groups at the different levels will provide the foundation for these coordinating mechanisms. Subcomponent 1C Demonstration Projects - The demonstration projects will play a very important role in evaluating and testing practical measures to implement different aspects o f integrated water and environment management at the county level. Because the demonstration projects will need to have considerable learning by doing, they need to be flexible and adjustments need to be made as they are implemented. All demonstration projects will have the full involvement o f local officials and experts and will contain outreach components to ensure that lessons learned are made available to other counties. After in-depth coordination efforts between CPMO and basin-level provincial (municipal) PMOs, four main topics for demonstration projects, in different areas o f the Bohai Basin, were selected: 0 The "Rea1"Water Savings demonstration project for irrigating agriculture, will be carried out inDaxing County, Tongzhou District, and Pinggu District o f Beijing. These counties are also included in the WCP, so there i s already considerable knowledge in "real" water savings approaches. This Demonstration Project will be based on the bottom-up approach, where farmer user groups will be involved in achieving ET reductions @e., "real" water savings). The Project i s planned to be action driven and aims at reducing the comprehensive ET in the counties selected for water savings by 10% between 2003 to 2008. This approach can only become successful if farmers agree to cooperate. Farmers have not applied "real" water savings on a large scale (partially because the practical guidelines are absent), so substantial attention will be givento make the water users aware that water is a limited resource, and that their help is unavoidable to improve their local water resources sustainability as well as the basin wide situation. The work will largely rely on the development o f software tools that will help water policy makers at various levels understandwhat "real" water savings means and where in the counties the reductions of ET can potentially be achieved. The operational aspects o f reducing irrigation water will be assisted by the application o f quotas. Sound and robust calculation procedures that quantify the allowable groundwater irrigation amounts in relation to ET quota will be developed and tested. A farmers-training-farmers program will be launched. - 46 -  0 The demonstration projects of "Effective Management of Water Rights and Well Permits" at county level, which targets the World Bank Water Saving & Irrigation Project Zones in Cheng-an County and Guantao County, both in Hebei Province. This Demonstration Project aims at reducing groundwater use through a legal system o f laws, permits, and water rights. It is an effort to boost the concepts of sustainability and to prevent the groundwater table from falling at a pace o f over 1 m/yr in the Southern part o f the Hebei Province. The overall objective is to get pilot areas where it has been feasible to stop the groundwater table declination. The regulations on water right management is based upon the general concept o f local sustainability, i.e., the groundwater extractions should be inbalance with the replenishment. Such an approach can be worked out exploring the Net Ground Water use data that will be provided by the Strategic Study on groundwater. Both Cheng-an and Guantao are typical in that they have serious shortage o f surface and groundwater, while heavily relying on use o f both shallow and deep ground water for domestic and irrigation purposes for more than a dozen years. The DemonstrationProject will use a CDD approach, based on the fact that people depend on groundwater for agricultural and industrial production as well as for domestic purposes. Water shortage seriously constrains their economic development. To achieve the overall Project objectives, it is obvious that there won't be a sustainable use o f the water resources unless the users want to do so; and there won't be sustainable socio-economic development unless its beneficiaries participate in the development process with a sense of ownership. The CDD approach is adopted for purpose to promote local participation and ownership. 0 The county-level demonstration projects on "Effective Control of Wastewater Discharge" into the two major tributaries of the upper Zhangweinan Canal; locations are Lucheng City in the upper Zhang River, Shangxi Province, and the Xinxiang City in the upper Wei River, Henan Province. The demonstration project will include improvements o f capacity o f local and basin managers to control waste discharges and the implementation o f control measures such as a total load approach to pollution management. The range o f management tools required will be determinedduring an initial phase and implemented thereafter. The demonstration project will also focus on waste discharge control and protection o f water sources in two different locations: one in Xinxiang County, and one in Lucheng City being two o f the most polluted upstream parts o f the Sub-basin. Control o f upstream pollution and protection o f water sourceswill be a key element inthe demonstration project. The "Pollution Control and Water Environmental Improvements" demonstration project is selectedin parts o f the Zhangweixin River in the Dezhou City, Shangdong Province, which i s an important part of the lower ZhagnWeiNan Canal. The Project will be focusing on pollution control for enhancing water environment and will take place in Dezhou City in the downstream part o f the sub-basin. It has, as a major objective, the restoration o f surface water environmental conditions through a program o f control o f sources, improved management o f groundwater, implementing improved treatment processes, application o f a range o f management tools such as integrated management of sluice gates, permitting systems, etc., while developing a greening landscaping along the Dezhou Section o f the South Canal. The Project will be closely linked to an overall plan for improving the water environment and ecological restoration along the Wei River and Wei and South Canal from Xinxiang County to Dezhou City now being shapedby authorities inthe Hai Basin. - 47 -  Project Component 2: Knowledge Management US$5.85 million - The KM component will have 2 subcomponents: (a) KM Development; and (b) Remote Sensing and Evapotranspiration (ET) management systems. These subcomponents are interrelated and will be prepared and implemented ina coordinated manner. Subcomponent2A Knowledge Management (KM) - KMwill play a key role and will provide tools, information, technical support, and linkages to IWEMand planning at all levels (central Hai Basin, ZhangWeiNan Subbasin, Tianjin Municipality, Beijingand Hebei counties). The four primary goals o f this Hai Basin KM component will be to: (1) develop a truly integrated Basin-level water resources-water quality information management system; (2) develop integrated application systems at the Basin and local levels; (3) provide direct support for ET-based water management, and (4) develop an integrated water management system that will continue to be sustained after this Project i s over. Both H B C M W R and SEPA have developed significant basic information management systems that will form the foundation for the integrated water management systems in the Hai Basin. Both organizations have implemented some vertical integration mechanisms, working at provincial and other levels to collect and manage water data. A very important development is that both organizations have enthusiastically embraced the concept o f joining together to provide horizontal integration o f water quantity and water quality management. The development o f this working relationship between these two organizations is an extremely important development for the GEF Project. Without this working relationship, the integration of water resources management and pollution control/water environment management would be almost impossible to achieve inthe Hai Basin. An agreement has been reached to freely share data as well as share inthe development ofintegrated databasesand applications. The component design provides for nine major tasks: (i) management; (ii) Assessment and Project Status Requirements Analysis; (iii) Implementation Plan and System Design; (iv) Data and Software Standards Development; (v) Additional Data Collection, primarily for support o f ET; (vi) Basin-Wide Fundamental Platform; (vii) Applications for Water Resources and Water Environment Management; (viii) System Maintenance andOperation; and (ix) Staff Training. Subcomponent2B Remote Sensing and Evapotranspiration (ET)Data Systems - ET management is the principal innovative international cutting edge approach being introducedunder the Hai Basin Project. The key to sustainable water quantity management inthe Hai Basin i s to reduce present amounts o f ET to sustainable levels (Le., reducing ET throughout the basin in order to eliminate groundwater overdraft and provide more surface water for ecological purposes including enhancing outflow to the Bo Hai Sea), and then, in the future, to manage ET within the basin to remain at these sustainable amounts. Many of the Project activities need to be solidly based on the ET management concepts including: high-efficiency water utilizationand real water savings, administrationo f water rights and well permits and water quantity management within the integrated water and environment management plans in Tianjin and inthe BeijingandHebeicounties. The Project will introduce a new practical approach to water savings in irrigated agriculture usingremote sensing and ET management rather than only focusing on irrigation systems efficiency improvements, -48-  which has been the approach in China in the past. Improving irrigation system efficiencies does not necessarily save water and in fact can often increase the amount o f consumptive use (ET) o f irrigated agriculture by eliminating leakages which were returning to the surface or groundwater systems and utilizing that water for more crop production. "Real" water savings focuses on reduction inET which can be accomplished through a combination o f irrigation technology, agriculture and managementmeasures. The innovative aspect is that spatially distributed ET information based on satellite remote sensing data will be usedfor strategic planning of ET at the basin level, as well as for the "real" water savings at county level. The only feasible way to increase basin outflow and reduce groundwater overexploitation is the reduction o f the comprehensive ET. Although this is a simple hydrological fact, it is not straightforward to implement a large scale ET reduction program. One o f the largest problems in ET management is the determination o f the ET value. Although there are several field scale measurementtechniques, none of these techniques provides insight inthe spatial distribution o f ET across vast areas. The work plan foresees the generation of a continuous time series of ET data between 2003 to 2008. The data will have a 1000 m resolution for the basin wide studies and has a 30 m resolution for the demonstration projects in the various counties. To facilitate the ET reduction process and allocate areas that are potentially suitable for reducing ET, remote sensing maps o f ET will be combined with digital maps o f land use and cropping patterns. Furthermore, this Project will provide technical assistance on quantifying the ET quota and implementing these quota through a water rights and well permits program that will be designed through the execution o f Strategic Studies and Demonstration Projects. The objective i s to reduce the ET at the county level to target levels and then maximize the production and value o f production per unit o f ET. There is a wide range o f water productivities (Yield/ET) for each crop type depending on irrigation, agriculture and management practices. The Project will assist the counties in evaluating the range o f water productivities inthe county for each crop type and to develop a plan that will assist the farmers in moving from lower to higher water productivity practices, always keeping the target ET for the county as the goal. Remote sensing combined with land use information and crop yields can be usedto carry out this analysis for eachparcel down to sizes o f 30 by 30 m. The Project will provide strong technical support to the counties form the Hai Basin Commission and the Project Kh4 Group to learn and implement this innovative practical approach. It is recognized that an early stage involvement o f several authorities and stakeholders is a prerequisite to successful implementation o f an ET driven water resources managementplan. Project Component 3: Tianjin Coastal Wastewater Management* US$4.13 million - The component will focus exclusively on the Tianjin coastal area for two reasons. First, wastewater management for small cities and industries along the coastal area will directly address GEF Operational Program #10 by demonstrating ways to reduce land based-sources o f marine pollution, in this case to the Bohai Sea. Second, the component will leverage GEF funds by supporting infrastructure investments financed under the TUDEP2. The TUDEP2 plans to provide financial support to about two small city waste projects in the coastal area, with an estimated cost o f around US$43.1 million. Hangu has been selected as the priority city, and a second small city will be identified during project implementation. TUDEP2 is also financing the renovation of the Dagu Canal, with an estimated cost o f around USS55.15 million. The proposed GEF-financed project will support the following TUDEP2-relatedactivities: *)Togetherwith the associatedparallel financingthroughthe TUDEP2 the cost ofthis componenttotals about US$102.38 million. - 49 -  Small City Wastewater Management Studies: The project will finance comprehensive wastewater management studies in Hangu, and at least one other small city. The studies will cover institutional, financial, and technical issues, and look at appropriate private sector options for improving efficiency, lowering costs, and raising capital. Small Cities Financial Support: Controlling water pollution from small cities is a major challenge in China due to their limited technical and financial resources. Pollution from small cities accounts for approximately half o f the pollution generatedinTianjin municipality, and only one small city inTianjin treats its wastewater. The GEF grant will provide financial support to Hangu, and one other small city project financed under TUDEP2. Instead o f providing construction subsidies, however, the basic concept is to provide output based aide to small cities during the early years o f operation. The exact nature o f the financial support will be presented in an "Operational Manual" which will be developed during the first year of project implementation. The output basedaide could potentially take the form o f payments based on tons o f pollution treated @e., a unit cost o f a ton o f COD) or partial payments for a private sector management contract. If successful, the output based subsidy model could be expanded to cover other small cities in Tianjin, or other provinces/municipalities inthe Hai Basin and elsewhere inChina. Dagu Canal Technical Assistance: The Dagu canal system is filled with approximately 2.2 million cubic meters of sediment, most o f it contaminated according to Chinese environmental standards. Dredging, dewatering, treatment, and safe disposal of the contaminated sediment is a complex and highly technical task. The Dagu canal cleanup is the largest and most ambitious sediment remediation project undertaken in China, and the experiences gained under the Project will be useful for addressing the hundreds o f similar canals throughout the country. Dagu Catchment Industrial Pollution Control: Although most of the collected municipal wastewater will go to treatment plants inthe future, there are still many industries that discharge directly into Dagu Canal (or into municipal systems) without adequate treatment. The GEF program will find an industrial pollution control and pre-treatment study, and improve monitoring and enforcement o f discharges into Dagu canal. Control o f industrial pollution is essential for the successful renovation o f Dagu canal, and the proper operation o f municipal collection and treatment systems. Component- Wide Activities: There are many issues which span all four activities above, and require a component wide approach. International and domestic program advisors will guide the implementation o f the activities and ensure coordinated and best practice approaches are taken, so that the component can fulfill its GEF objective o f serving as a demonstration model for integrated wastewater management. Seminars, workshops, and reports for small cities throughout the Hai Basin and along the rim of the Bohai Sea, will be organized. High priority pollution testing equipment and computedsoftware will be procured for district construction and environmental bureaus, and the municipal EPB. Project Component 4: Project Management, Monitoring and Evaluation, and Training US$8.64 million - Hai Basin Project management will support coordinated and integrated actions by the Ministries/Bureaus o f environmental protection and water resources at the various levels. Central Project Management Offices (CPMOs) have been established in MWR and SEPA which will be supported by a Joint Expert Group o f water, environment and other national experts to assist the PMOSin coordination, review, supervision and in some cases execution of technical activities under the Project. The central Joint Expert Group will be key to Project success, because the will work to ensure the technical vertical and horizontal integration of Project activities. The CPMOs will also be supported by international experts with broad experience in - 50 -  water quality and quantity management, water and environment planning and knowledge management. These experts will provide guidance and make detailed recommendations intechnical aspects of the Project and will visit China 2 to 4 times a year for periods of 2 to 6 weeks each time to provide periodic guidance and assistance. This approach will ensure Chinese ownership of actions because the international experts will not be directly responsible for Project activities but instead for providing assistance and on-the-job training in technical aspects related to the Project. The CPMOs will also be responsible for arranging internationaland domestic study tours and international and domestic training on a variety o f topics related to IWEM, river basin management, knowledge management, "real" water savings and ET management, pollution control, water rights and well permits, wastewater treatment, wastewater canal clean up, wastewater reuse, ecological restoration, etc. The Project will also support CPMO operations, monitoring and evaluation and other Project management aspects mainly through counterpart funding. The Project will support Project management, joint expert groups and training and the other Project areas including Tianjin, Beijing, Hebei, Hai Basin Commission, ZhangWeiNan and in each o f the Beijing, Hebei and ZhangWeiNan pilot counties. Domestic training will be an important aspect o f the Project which will include quarterly workshops held in different Project counties and areas to learn from each other, interchange ideas andreceive guidance from experts. Project monitoring and evaluation will be carried out by Project PMOS. Annual monitoring and evaluation reports will be prepared that detail the Project implementation progress o f activities and finances for each subcomponent and the performance indicators. This will be tracked inthe Project MIS system. Inaddition each IWEMP and demonstration project will include a monitoring and evaluation component that will specifically address the implementation and effectiveness o f the IWEMPs and demonstration projects. The monitoring and evaluation plans for these activities will be prepared during the first phase o f Project implementation. IWEMPs and demonstration projects will include baseline surveyshnventories o f surface and groundwater quantity and quality conditions, uses and trends and establish specific objectives, timelines and indicators for IWEMP and demonstration Project implementation both during the life o f the Hai Basin Project andbeyond. Monitoring and evaluation o f Component 3: Tianjin coastal Wastewater Management will include both activities financed with the GEF Grant and counterpart hding and with TUDEP2. Monitoring and evaluation reports for Component 3 will review progress and effectiveness, andmake recommendations for improved implementation o f the entire component. During Project preparation and specifically at the time of the appraisal mission, a special SEPNMWR team was set up and given the responsibility to come up with preliminary estimates on the amounts o f pollution loading and groundwater overexploitationpresently occurring in each o f the 10 IWEMP counties, in the 3 demonstration counties in the Zhangweinan subbasin, and in the 3 counties in Tianjin that were selected on a preliminary basis for second-phaseimplementationo f the Tianjin IWEMP. The team carried out consultations with each o f the counties and preliminary estimates were made based on existing data. From this analysis, total existing annual COD loading, NH4 loading, and groundwater overexploitation for all o f these counties are estimated to be about 164,000 tons, 19,000 tons and 420,000,000 m3,respectively. A breakdown for each of counties is provided inthe following table. On a very preliminary basis it i s estimated that about 60% o f these pollution loadings actually make it into rivers and eventually discharge into the Bohai Sea; much o f the pollution accumulates behind checks, in reservoirs and in river sediments, and the discharge to the Bo Hai Sea occurs mainly as a result o f extraordinary flooding events that wash the pollution to the Sea. The Project objectives are to put in place the mechanisms necessary to eliminate groundwater overexploitation and substantially reduce pollution - 51 -  Provinces/Municipalit Counties COD Loading NH4 Loading Groundwater ies inTons inTons Overexploitation inmillionm' Beijing I 1 Mivun I 4290 I 310 I 14.0 I Note (1): Hanguestimates are also included inthe Tianjin Coastal Component The first phase of the IWEMPs and DemonstrationProjects, including the baseline surveys will refine and detail these estimates, indicators and reduction objectives. The baseline surveys will be carried in the first year of project implementation. For water quantity, the baseline survey will include evaluation o f existing data on groundwater levels and extraction. A water balance analysis will be carried out that will include estimates of recharge, extraction, and overexploitation based on the data. The total groundwater overexploitation for each county will be revised based on this analysis. For water quality, the baseline survey will include evaluation of existing data on water quality, discharge to rivers, lakes, canals, and groundwater. Additional data will be collected where data gaps exist. The total pollution loading for selected parameters will be revised based on this analysis for each county. The IWEMPs will be prepared during the first and second years o f Project implementation and will include year-by-year estimated reductions in ground water exploitation and pollution loadings for their implementation periods. Implementationo f the IWEMPs will begin in the third year and the year-by-year reductions determined in the plans will be used as milestones during the secondphase o f Project implementation. - 52 -  Inaddition, pollution into the Bohai seawillbe reducedby activities underthe TianjinCoastal Component. For each small city, starting with Hangu, these are estimated to result in annual reductions in pollution loadings into the Bohai Sea o f 10,000 tons o f COD and 500 tons of NH4. The Dagu canal has about 2.2 million cubic meter o f contaminated sediment. The pollution reduction will come from removing the contaminated sediment from the canal, and disposing o f it in an environmentally safe, contained landfill site. According to preliminary sampling, oil and zinc are the two major pollutants o f concern in the Dagu sediments. Based on pollutant concentrations inthe sediment, there will be an estimated one-time reduction o f approximately 5,000 tons o f nitrogen (as total N), 10,000 tons o f oil and grease, and 2,000 tons of zinc from the Dagu canal cleanup. The Dagu canal estimates are the amount o f pollution presently stored in canal sediments that would eventually be washed into the Bohai Sea ifthe canal were not cleanedup. These estimates will be refined during implementation as more sampling is undertaken and more sophisticated estimation methodologies are used. Present discharge of wastewater to the Bohai Sea through the Dagu Canal, estimated at 61,000 tons o f COD and 9,400 tons o f NH4 annually, will be eliminated due to other actions being taken by the Tianjin government, outside the purview of this Project. These estimates for pollution reductions for both Hangu and the Dagu canal were based on feasibility studies carried out for these Tianjin Coastal Component activities. - 53 -  Annex 3: Estimated Project Costs CHINA: Hai Basin Integrated Water and Environment Management Project A. Integrated Water andEnvironmentManagement 9,157.6 4,759.2 13,916.8 1. Strategic Studies 1,287.0 858.0 2,145.0 2. Integrated Water and Environment MgmtPlanning 5,654.8 2,946.0 8,600.8 3. DemonstrationProjects 2,215.8 955.2 3,171.0 B.Knowledge Management 3,410.7 2,443.3 5,854.0 1. KMDevelopment 2,66 1.7 1,588.3 4,250.0 2. Remote Sensing and ET Data Systems 749.0 855.0 1,604.0 C. Tianjin Coastal Wastewater Management 2,547.8 1,577.7 4,125.5 1. Small Cities Wastewater Management Studies 180.3 220.2 400.5 2. DaguCanal Technical Assistance 80.0 720.0 800.0 3. DaguCatchment IndustrialPollution Control 242.5 107.5 350.0 4. Small Cities Financial Support 2,045.0 530.0 2,575.0 D. ProjectManagement, Monitoring& Evaluation, and Training 4,532.8 4,096.2 8,629.0 1. Project Management Support 1,007.2 878.9 1,886.1 2. International Expert Panel 73.6 662.4 736.0 3. WUA Establishment 192.2 117.8 3 10.0 4. Training 1,326.3 1,708.4 3,034.7 5. PMO Operation, Management, and M&E 1,933.5 728.7 2,662.2 Total BaselineCost 19,648.9 12,876.4 32,525.3 Physical Contingencies 218.8 76.8 295.6 Price Contingencies 458.5 38.2 496.7 Total ProiectCosts1 20,326.2 12,991.4 33,317.6 Total FinancingRequired 20,326.2 12,991.4 33,317.6 - 54 -  usTotal000 $' A. Goods 2,943.9 2,036.0 4,979.9 B. Works 3,137.6 784.4 3,922.0 C. Consultant Services 8,462.8 7,621.1 16,083.9 D. Training and Study Tours 1,363.3 1,741.4 3,104.7 E. Project Management Expenses 1,741.3 193.5 1,934.8 F. Financial Incentives 2,000.0 500.0 2,500.0 Total Baseline Cost 19,648.9 12,876.4 32,525.3 PhysicalContingencies 218.8 76.8 295.6 Price Contingencies 458.5 38.2 496.7 Total Project Costs '1 20,326.2 1 12,991.4 33,317.6 Total Financing Required I 20.326.2 I 12.991.4 33.317.6 li An additional cost of US$98.25 million for the Tianjin Coastal Wastewater Managementcomponent is includedinTUDEP2. - 55 -  Project cost has been estimated basedon information obtained inJuly 2003 and updated in December 2003. Project cost was derived from technical discussions to reflect the up-to-date project designs. Project base cost is expressed in end 2003 prices and the exchange rate used to convert base cost and physical contingencies i s 8.26 yuan to US$1. The total project implementation period i s expected to be 5 years. In addition, some project activities under retroactive financing are expected to be implemented in 2004. Total project cost includes bothphysical and price contingencies. - 56 -  Physical contingencies are assumed at 5% o f the project base cost for civil works and selectedgoods. Price contingencies for costs incurred in foreign exchange are estimated based on an annual international price index o f -0.4 percent for 2004, 1.5 percent for 2005, 0.7 percent for 2006, 0.7 percent for 2007, 1.1 percent for 2008 and 1.0 percent for 2009. Price contingencies for costs incurred in RMB are based on an annual domestic price index of 2.0 percent for 2004, 3.0 percent for 2005, 3.5 percent for 2006, and 3.6 percent for 2007-2009. An additional cost of USS98.25 million for the Tianjin Coastal Wastewater Management component is included in TUDEP2. - 57 -  Annex 4: IncrementalCost Analysis CHINA: Hai Basin Integrated Water and Environment Management Project Overview The overall objective o f the GEF alternative is to catalyze a more integrated approach to water resource management and pollution control in the Hai Basin in order to improve the Bohai Sea environment. Specifically, the Project would: Improve integrated water and environment planning and managementinthe Hai Basin; Support institutional aspects related to effective local, municipal/provincial, and basin-wide water and environment planning and management; and support reduction of wastewater discharges from small cities along the rim o f the Bohai Sea. Specific Project components, all interrelated include: (i) Integrated Water and Environment Management (IWEM); (ii) Knowledge Management (KM); (iii) Tianjin Coastal Wastewater Management; and (iv) Project Management, Monitoring and Evaluation, and Training. The GEF Altemative intends to achieve these outputs at a total incremental cost o f US$131.57 million and focuses on high-priority issues for the Chinese government and intemational environment protection. BroadDevelopmentGoals The Hai Basin, home to over 117 million people and accounting for 15 percent of China's GDP, is spread over four provinces and the municipalities of Beijing and Tianjin. The area that would be covered by the Project is one o f the country's most important river basins and one o f the most important industrial and agricultural regions o f China. Water has played a pivotal role in the development o f the Basin, and sustainable development is heavily dependent on water resource management. Like many other areas in China, the Hai Basin i s facing serious water-related problems, including water pollution, water scarcity, and flooding. Over-exploitation o f groundwater, estimated by some to be 9 Billion cubic meters annually, and overuse o f surface water resulting in inadequate environmental flows, along with increasing groundwater and surface water pollution, are contributing to the decline and deterioration o f water resources and damage to freshwater and in coastal environments in the Hai Basin. Present water use patterns in the Hai Basin are not sustainable and continued rapid economic growth is jeopardized. The Basin discharges into the Bohai Sea and is a major contributor to pollutant loadings. The sea is an important eco-system and fishery resource, reflecting its role as a seasonal spawning and nursery ground for the larger and more productive Yellow Sea. However, heavy land-based pollution from urban, industrial, agricultural, and other sources in the Hai Basin, combined with over-fishing, reduction o f freshwater inflows, and habitat loss, threatens the fishery and has steadily diminished many o f the Bohai Sea's eco-system functions. The Chinese Govemment is committed to corrective action. China's 9th Five Year Plan (1995-2000) includedprovisions for improving water resourcemanagement in the Hai Basin and restoring the Bohai Sea - notably pollution control measures. Other measures include greater efficiency in water use, water diversions from the Yellow River to the Hai Basin, and improved flood control measures. While these initiatives are vital, they address problems of immediate concern and insufficiently provide for longer-term challenges. The south north transfer o f water from the Yangtze River to northern China includingthe Hai Basin is a more long-term solution, but would still be inadequate to meet demands without major improvements inwater resourcesmanagement. - 58 -  Baseline Scenario This scenario comprises previously agreed plans and initiatives of the Chinese Government to address water related problems at national and local levels. It reflects the likely situation concerning the Hai Basin and Bohai Sea in the absence o f GEF support. There are various national programs and more detailed investment programs, generally formulated by sector management agencies and local governments, to implementthe national plans. It has to be taken into account that these national plans are highlyambitious and are sometimes not fully realized. The related activities are often carried through to the next planning period and tend to be large scale investments, leaving out the medium to small scale investment level. Another important issue is the institutional fragmentation o f water resource management as it involves amongst others, the following agencies: the Ministry o f Water Resources (MWR), the State Environment Protection Administration (SEPA), the Ministry o f Construction (MOC) and the Ministry o f Agriculture (MOA). Each agency has its own planning process, frequently leading to overlapping and/or inconsistent plans and programs. NationalPlans 9th National Five Year Plan (1995-2000): China's environmental improvement priorities were defined as: three rivers (Huai, Hai, and Liao), three lakes (Tai, Cao, and Dianchi Lake), two air quality issues (SO2 and acidrain), one municipality (Beijing), and one marine area (Bohai Sea). (Planned Investment: US$ 22.2 billion) 10th National Five Year Plan (2000-2005): Emphasizes the need for sustainablemanagement and use o f water resources, especially intensifying agricultural water-saving and wastewater reuse efforts. (Planned Investment: US$ 30.5 billion) China Trans-Century Green Program: Emphasizes construction o f urban environmental infrastructure. The Program has three phases, spanning 15 years. Formulated through joint efforts o f SEPA, The State Development Reform Commission (SDRC), and the State Economic and Trade Commission, it i s an umbrella program for all pollution control initiatives in China, including water pollution control o f the Hai Basin. (Planned Investment: component o fNational Five Year Plan) The South-North Water Transfer Project (SNWT Project): This proposed Project would address the serious water scarcity problems inNorth China, including the Hai Basin. The intention i s to transfer 20 bcmwater from the Yangtze River system to North China. (Planned Investment: US$lO-15 billion) Bohai Blue Sea Action Plan: The plan seeks to influence urban development, the economic structure, and the adoption o f clean production technologies. Highpriority i s given to the control and prevention o f land-basedpollution. The intention is to invest innew and improve existing sewage treatment plants, recycling and reuse o f waste, and the adoption o f various "clean" technologies. (Planned Investment: USS7.2 billion) Water Pollution Prevention Program of Hai Basin: The Program endeavors to ensure that all industries abide by national discharge standards and improve water quality. (Planned Investment: US$5.3 billion for water pollutioncontrol) Hai Basin Comprehensive Management Plan: The Plan incorporates flood control, water resource management, and soil and water conservation. (Planned Investment: US$1.5billion) - 59 -  0 National Irrigated Agriculture Water-Saving Program: The Program endeavors to rehabilitate irrigation systems and improve irrigation technologies in 300 counties, identified as demonstration sites. (Planned Investment:US$5.2 billion) BeijingMunicipality 0 Plan for Sustainable Use of Water Resources in the Capital in the 21st Century (2001-2005): It focuses on the development and protection o f water resources. By 2005, Beijing Municipality plans to achieve water savings o f 790 million cbm, reuse of 645 million cbm o f treated wastewater, supply o f 150 cbm of water from rain and flood sources, achieve groundwater balance inthe city, andensure that the water quality o f the city suburbs reachesnational standards. (Planned Investment: US$3 billion) TianjinMunicipality Hai Basin Tianjin Municipality Wastewater Treatment Project: The Project will complete the Municipality's 1958 Sewerage and Drainage Master Plan, which designates six drainage zones, a WWTP ineach zone, and separate sanitary and storm sewers. (Planned Investment:US$274 million) HebeiProvince The Hebei Provincial Government has outlined an ambitious environment protection plan for the province up to the year 2010 to be implemented in three phases. The plan i s consistent with national environmental plans including the Trans-century Green Engineering Plan and the Hai River Pollution Control andPrevention Plan, which are mentioned above. (Planned Investment: TBD) RelatedProjectsfinancedby the World Bank andthe Asian DevelopmentBank Water Conservation Project 2nd Tianjin Urban Environment Project 2nd BeijingUrbanEnvironment Project FYOlHebeiUrbanEnvironment Project Agenda for Water Sector Strategy for North China Tianjin Wastewater Treatment and Water Resources Protection Project Coastal Resource Conservation and Environment Management Project for the Bohai Sea The cumulative effect of the Government's initiatives outlined above will be considerable, particularly with regards to reduction o f pollution o f water resources inthe Hai Basin. COD loadings from major sources in the Hai Basin are estimated to be reduced by 17 and 25 percent in 2010 and 2020, respectively, compared with the 2000 levels. However, reductions in loads will not be sufficient to improve water quality to the extent needed for public health, environmental needs, and restoration o f the marine environment of the Bohai Sea. GlobalEnvironmentalObjectives Success in managing the Hai Basin and restoring and protecting the environment o f the Bohai Sea i s o f global importance, becausethe trans-boundary effects o f water pollution are severe. The Bohai Sea and the Yellow Sea are a single large marine ecosystem and interdependent fishery. Approximately 600 million people live in the basins that drain into the Yellow Sea. Many depend on it as a source o f livelihood. Damage to the Bohai Sea's function as a nursery area for fish and shellfish stocks damages the resource wealth of the Yellow Sea. The implications are even more widespread, for pollution o f the Bohai Sea ultimately affects the East China Sea. The Bohai Sea, the Yellow Sea, and the East China Sea are connected, forming a continuous circulation system. - 60 -  The deterioration o fthe water resourcesinthe Hai Basin is severely impacting the quality of life ofmillions o f people in a river basin with major population, industrial production and agriculture production. Water pollution and water scarcity impact on agricultural production and human and environmental health. Deterioration o f the environment is also hamperingpoverty reduction, the most seriously impacted are often the most vulnerable. 1997 2000 2010 2020 ~ ~~ ~~ ~ UrbanIndustry 2,289 2,213 1,435 1,225 Urbanmunicipal 401 488 656 713 Rural industry 1,623 1,607 1,266 858 Livestock 643 663 130 848 Rural municipal 239 254 276 292 Total COD 5,195 5,225 4,361 3,935 BaselineScenario: 1000tonslyear (Agenda Water Sector Strategy for NorthChina, April 2, 2001) The GEF Alternative Project will assist China to significantly improve its water resource management practices. From a global perspective, this improvement would result inthe following benefits: e It would help improvingthe Bohai Sea environment, contributing thereby to maintaining fishery stocks and biodiversity o f the Yellow Sea and the East China Sea more generally; e Poverty reduction enhances social stability which, if not addressed, has national and potential internationalimplications; e An integrated approach to water resources management in the Hai Basin would provide a model for wider application inChina; e Success inChina would encourageother developing countries to draw upon the lessonslearned. GEFAlternative The proposed GEF Program for the Hai Basin and Bohai Sea will encourage a more comprehensive integrated water resource management approach than outlined under the baseline scenario. This will help give direction to and ensure that various plans of the agencies involved in the Hai Basin are coordinated and properly integrated. The central focus of the GEF alternative would be the support o f the formulation of Integrated Water Resource Management Plans (IWEMPs) in pilot counties and at the sub-basin and basin levels. Attempts to improve water resources management in China have been very top down, with strong laws, policies, regulations and large investments, but with insufficient bottom up implementation at the grass roots level. The purpose of the IWEMPs is to address integrated planning and to implement practical bottom up actions that translate top down initiatives into bottom up results. The IWEMPs will include water user participation and local government ownership in the development of plans that address: (i) qualitymanagementaspects,concentrating onpointandnon-pointsourcesofpollutionthrough water the implementation o f discharge controls, industrial restructuring to clean industries, wastewater treatment in small cities, industrial wastewater treatment, and agricultural and livestock production related pollution controls, (ii)reuse o f treated wastewater, (iii) improvements in water use efficiencies that result in "real" -61 -  water savings by reducing non-recoverable losses particularly evapotranspiration (ET), (iv) implementation of effective water rights and well permits systems, (v) increasing water pricing combined with volumetric measurement, (vi) conjunctive use o f surface run-off and groundwater, and (vii) ecological restoration. The IWEMPs would also, where appropriate, provide revisions to laws, regulations, standards, and other factors related to water quality and water quantity management at basin and local levels. In addition, DemonstrationProjects would be implementedinselectedcounties to deepen experience inkey complicated areas including: (i) "real" water savings, (ii)administration o f water rights and well permits, (iii) pollution control, and (iv) ecological restoration. Strategic Studies at the basin level would address important basin policies, programs and approaches in order to ensure adequate governmental support to the lower levels to implement to plan and implement the IWEMPs and demonstration projects. Lessons learned from the pilot counties and demonstration areas would be shared with other counties throughout the Hai Basin and elsewhere in China. An integrated approach would furthermore lead to a better understandingo f important surfacelsubsurface andwater quality interactions, and facilitate new management techniques. Without GEF support, integrated water resource management at the county level is unlikely to be achieved because o f the already mentioned difficulties in inter-jurisdictional and inter-administrative cooperation and inadequate programs to implement government policies at the grass roots level. Each agency has its own programs with generally ineffective bottom up implementation and inadequatecoordinationbecauseo f lack o f adequate vertical and horizontal integration o f activities. Water resource management involves many agencies. While the MWR has the primary responsibility for overall management o f the nation's water resources, and SEPA has overall responsibility for pollution control. There are considerable overlapping jurisdiction problems between these agencies and with other ministries and agencies concerning urban water supply, water pollution control, groundwater management, and irrigated agriculture. MWR's and SEPA's management role is further limited by the increasing powers o f provinces following the decentralization process. The GEF Program would provide a powerful demonstration effect and an incentive to break through institutional barriers. The GEF alternative has already resulted in a breakthrough during Project preparation whereby Project related cooperative mechanisms have been established between MWR and SEPA. The Project would include an integrated program to improve basin-wide measurement,monitoring, modeling. and data sharing that will greatly enhance water resourcesmanagement. River reach files with a common coding systemwill be developed and implemented that will allow for the sharing of information that will satisfy both SEPA and MWR needs, as well as the lower-level needs at the county level. Applications will also be developed that support the needs o f integrated water resources management for the different entities. These activities under the Project are referred to as Knowledge Management (KM). KMimprovements are neededbecause an adequate system o f data collection and analysis is critical to integrated water resources management. Monitoring is another serious problem inthe Hai Basin. Without effective monitoring and enforcement, it is impossible to have an adequatesystemo fwater rights administrationor volumetric pricing. This is the first GEF initiative of this kind. A further global benefit, therefore, is the important demonstration effect of solving problems related to water resources through adopting a comprehensive integrated management approach for a globally important river basin. The Project would help to provide the management framework for integrated water resources management, which i s indispensable for a long-term sustainable approach to water use in the Hai Basin and to reducing pollution into the Bohai Sea. Although government policy calls for an integrated framework, experience has shown that inter-jurisdictional, and inter-administrative cooperation often proves difficult. The GEF grant would provide an incentive to break through institutional barriers and intendsto provide a powerful demonstration effect. The Project would help to provide international expertise to provide Chinese counterparts with a - 62 -  broadrange o f management experiences and instrumentsto draw upon. The rationale for GEF involvement is that, without support, the Government tends to focus on measures that are visible and with immediate effect, thus geared towards investment in infrastructure rather than management activities and research (see baseline scenario). The Government and research institutes have limited practical experience in designing integrated water resources management instruments resulting in sustainable use o f water resources and environmental protectiodrestoration. The international expertise that accompanies GEF Projects would provide Chinese authorities with a broad range o f management experiencesand instruments to draw from. In addition to the global benefits described above, the Project would also generate significant supplementary benefits for China. The IWEMPs formulated under the Program will enable government agencies at various levels to better manage and use water resources in the Hai Basin. The improved knowledge management system, including ET management, for the Hai Basin will help government agencies to formulate efficient and sustainable water resources policies and ensure effective enforcement o f water pollutionregulations and laws. These benefits are not in the baseline scenario because of inadequacy o f financing and institutional capacity limitations. ET management using remote sensing is a principal innovative intemational cutting edge approach being introduced under the Hai Basin Project. The key to sustainable water quantity management inthe Hai Basin is to reduce present amounts o f ET to sustainable levels, and the Project provides a practical feasible approach for achieving this objective. Eventually reducing ET to sustainable levels will result in stabilization o f groundwater systems and the long-term provision o f water for environmental purposes including delivery of fresh water to the Bohai Sea. The wastewater management for small cities and industries along the coastal area (component 3) will directly address GEF's Operational Program # 10 by demonstrating ways to reduce land based-sources of marine pollution, inthis case to the Bohai Sea. China presently pays very little attention to small cities and suburban industrial pollution, concentrating almost exclusively on pollution control in large urban areas. The Project would attempt to leverage GEF funds by supporting infrastructure investments in small cities and suburban areas financed under the World Bank-financed TianjinUrban Environment and Development Project (TUDEP2). In addition this component will support cleanup o f the Dagu Canal system which has served as the main wastewater canal for Tianjin City for four decades and which discharges directly into the Bohai Sea. China has many of these large sewerage discharge canals that needto be renovated and the Project will provide a demonstration on technically and environmentally sound approaches for this. Success o f this component will provide powerful demonstrations o f how to begin to address these huge and presently largely un-addressedpollutionproblems. Although the scope of the proposed GEF Program is small compared to the enormity o f reducing pollution o f the Bohai Sea, it will provide important demonstration effects. It will support technical assistance to control pollution from secondary cities, and suburban and rural areas, which account for more than half the pollution loadings entering the Bohai Sea. The global benefit, therefore, will be laying the groundwork for substantial reduction o f pollution o f the Bohai Sea and an improved marine environment. This, inturn, will contribute to sustainable management o f the Bohai Sea and maintaining fish stocks and the biodiversity o f the Yellow Sea andEast China Sea. Related GEF Projects The proposed GEF Project builds upon, fills ingaps, andcomplements other related initiatives inthe region that are supported by GEF. By contributing to improvement o f the Bohai Sea environment, the Program addresses an important missing link in the China/GEF relationship. China is a participating state in two - 63 -  GEF/UNDP Projects for improvement o f the Bohai Sea environment: "Building Partnerships for the Environmental Protection and Management o f Asian Seas" (PEMSEA); and "Reducing Environmental Stress in the Yellow Sea Large Marine Ecosystem" (YSLME). The proposed GEF alternative also complements initiatives supported by other international agencies. Some o f these projects are listed above. The PEMSEA Project is designed to assist the East Asia Sea Regionto collectively protect andmanage the coastal and marine environment through intergovernmental and inter-sectoral partnerships. It involves ten countries in Asia, including China. A key element i s to facilitate development o f institutional capacity, management strategies and action plans to deal with land-based pollution. The Bohai Sea is identified as a sub-regional sea under stress and a pollution "hot spot". A demonstration site has been established to reduce waste discharges and to address environmental problems common to adjacent provinces and municipalities. The proposed GEF Program for the Hai Basin and Bohai Sea complements the PEMSEA Project intwo important ways: Itwill contribute to PEMSEA's objective to control land-based sources ofpollution o fthe Bohai Sea; It will complement PEMSEA's efforts to establish inter-jurisdiction coordinating mechanisms to address environmental issues in the Bohai Sea by promoting integrated water resource management in the Hai Basin. The YSLME Project i s a regional effort involving China and the Republic o f Korea to formulate and implement a regional Strategic Action Program (SAP). The Democratic People's Republic o f Korea has also been invited to participate in the Project, although it has so far declined formal involvement. The long-term objective of the Project i s ecosystem-based, by supporting environmentally-sustainable management and use o f the Yellow Sea. As mentioned earlier, the Bohai Sea is critical to maintaining the fish stocks andbiodiversity o fthe Yellow Sea. The Hai, Liao, and Yellow Rivers have important effects on salinity in the western Yellow Sea. Therefore, the SAP must involve the Bohai Sea and the Hai Basin. The proposed GEF alternative will contribute to YSLME Project's long-term objective and support the formulation and implementation o f the SAP. IncrementalCosts As discussed in the Baseline Scenario section above, the Government o f China has plans or is in the process o f implementingbillions o f dollars in investments that will result inimprovements inwater quantity and water quality conditions in the Hai Basin with consequent improvements to the Bohai Sea. These investments will not appreciably contribute to the Project objectives o f moving towards integrated water resources management inthe Hai Basin and small city and suburban wastewater treatment. For the purpose o f this incremental cost analysis it was decided to only include in the Baseline Scenario those investments related to the closely-linked TUDEP2 and Water Conservation Project (WCP), that would contribute to the Project objective of integrated water and environment management. In this regard, using data from TUDEP2 and WCP, the total cost o fthe Baseline Scenario is US206.95 million, including Government o f China expenditures o f US$118.72 million and IBRD financing o f US$88.23 million. (Note: The Baseline Scenario included all o f WCP and only the Water Reuse and Institutional Development components of TUDEP2). For the GEF Alternative, the total cost is U S 1 31.57 million, includingUS$73.72 million from the Chinese government (US57.40 million under TUDEP2 and US$16.32 million direct), US$40.85 million o f IBRD loans under TUDEP2, and the GEF grant o f US$17 million. (Note: The Dagu Canal Rehabilitation and Suburban Sewerage components o f TUDEP2 were included in the GEF Alternative because their successful implementation is dependent upon the GEF Project.) All o f these funds would be incremental to the baseline scenario. Table 2 shows the incremental cost distribution according to Project component. - 64 -  Table 2: Incremental Cost Matrix Component cost US$ Millior Domestic Environmental Benefit Global Environmental Benefit Category i. Integrated 3aseline 187.8! (i) Water conservation in irrigation Some improvement of Bohai Sea Water and agriculture and reduction in surface and marine and coastal environment invironment groundwateroveruse. and protection of fish stocks and vlanagement biodbersity. IWEM) Nith GEF 202.1! (i) Demonstrationeffect of adopting Demonstration effect of adopting 4iternative integrated water management measures integrated water and environment to control water pollution and deal with management measures to control water shortage and other related water pollution and deal with problems; (ii) Reduction of marine water shortages. Further pollution caused by land-based sources, improvement of Bohai Sea especially pollution from secondary marine and coastal environment towns and their associated industries (iii) and greater protection of fish Improvement of public health because of stocks and biodiversity. better water quality and pollution reduction; (iv) Improvementof the environment of the Hai Basin; (v) Protection of fish stocks and biodiversity (vi) Enhanced habitat& species protection. ncrement 14.7( ?.Knowledge 3aseline 3.8: Improved Knowledge Managementin vlanagement Water Conservation and Pollution Control. Nith GEF 10.3: Improved IntegratedKnowledge Demonstration effect of adopting 4lternative Management System for the Hai Basin integrated water management and improvements in the conservation oi measures to control water water resourcesand the water pollution and deal with water environment. shortage and other related oroblems. ncrement 5.8! 3.Nastewater Small Cities 3aseline 0.01 Nith GEF Reduction of marine and coastal rreatment 102.31 Improvement of the water quality of the 4lternative Hai Basin and improvement of public pollution caused by land-based support health because of better water quality sources, especially pollution from and pollution reduction. secondary towns and their associated industries. ncrement 102.31 1. Project 3aseline 15.21 Improved Public Sector capacity for vlanagement water conservation and pollution control. and Training Nith GEF 21.41 Increased public sector capacity for 4lternative Integrated Water and Environmental Management and improved institutional arrangement for integratedwater resource planning and management. ncrement 8.64 rOTAL 3aseline 206.95 Nith GEF Alternative 338.52 ncrement 131.57 - 65 -  Financing Year Retroactive Year 1 Year 2 Year 3 Year 4 Year 5 Retroactive Financing Year Year 1 Year 2 Year 3 Year 4 Year 5 ITotalFinancing 291.96 230.01 214.10 345.12 279.87 255.37 I Financing GEF 155.43 122.45 113.98 183.74 149.00 135.9 5 Government 136.53 107.56 100.12 161.39 130.87 119.42 MWR 136.53 107.56 100.12 161.39 130.87 119.42 SEPA ProvinciallMunicipal Prefecture CountylDistrict Total Project Financing 291.96 230.01 214.10 345.12 279.87 255.37 - 66 -  Table Annex 5-2: FinancingPlanof SEPA II IMPLEMENTATIONPERIOD(in US%'000) Retroactive Financing Year Year 1 Year 2 Year 3 Year 4 Year 5 Total Financing 291.96 230.01 214.10 345.12 279.87 255.37 Financing GEF 155.52 122.53 114.05 183.84 149.08 136.03 Government 136.44 107.48 100.05 161.28 130.79 119.34 MWR SEPA 136.44 107.48 100.05 161.28 130.79 119.34 ProvinciallMunicipal Prefecture CountylDistrict Total Project Financing 291.96 230.01 214.10 345.12 279.87 255.37 Retroactive FinancingYear Year 1 Year 2 Year 3 Year 4 Year 5 Required Project Costs Investment Costs 932.68 2,652.88 1,888.07 ,441.67 911.63 868.17 Recurrent Costs 22.12 22.12 21.59 21.59 21.59 21.59 Total Project Costs 954.80 2,675.00 1,909.66 ,463.26 933.22 889.76 Total Financing 954.80 2.675.00 1.909.66 1.463.26 933.22 889.76 Financing GEF 370.90 1,039.13 741.82 568.41 362.51 345.63 Government 583.90 1,635.87 1,167.84 894.85 570.70 544.13 MWR 413.06 1,157.25 826.15 633.03 403.73 384.93 SEPA 170.84 478.62 341.69 261.81 166.98 159.20 ProvinciallMunicipal Prefecture CountylDistrict Total Project Financing 954.80 2,675.00 1,909.66 1,463.26 933.22 889.76 - 67 -  Table Annex 5-4: FinancingPlan of Zhangweinan $1 Financing Year Retroactive Year 1 Year 2 Year 3 Year 4 Year 5 Total Financing Required Project Costs Investment Costs 294.13 486.80 1,126.31 1,322.33 854.32 447.56 Recurrent Costs 13.60 33.60 34.70 34.70 32.70 28.70 Total Project Costs 307.73 520.40 1,161.01 1,357.03 887.02 476.26 Total Financing 307.73 520.40 1,161.01 1,357.03 887.02 476.26 Financing GEF 127.42 215.49 480.73 561.89 367.28 197.20 Government 180.31 304.92 680.28 795.13 5 19.74 279.06 MWR 22.59 38.20 85.21 99.60 65.11 34.96 SEPA 45.17 76.39 170.44 199.21 130.21 69.91 ProvinciallMunicipal Prefecture 41.20 69.67 155.42 181.66 118.74 63.76 CountylDistrict 71.36 120.67 269.21 314.66 205.68 110.43 Total Project Financing 307.73 520.40 1,161.01 1.357.03 887.02 476.26 Retroactive Financing Year Year 1 Year 2 Year 3 Year 4 Year 5 Total Financing 382.42 765.24 646.93 509.80 498.62 360.28 Financing GEF 223.65 447.54 378.35 298.15 291.61 210.71 Government 158.77 317.70 268.58 211.65 207.01 149.58 MWR SEPA ProvinciallMunicipal 158.77 3 17.70 268.58 211.65 207.01 149.58 Prefecture CountylDistrict Total Project Financing 382.42 765.24 646.93 509.80 498.62 360.28 - 68 -  Table Annex 5-6: Financing Planof Tianjin Coastal I I IMPLEMENTATION PERIOD(inUS%'000) Financing Year Retroactive Year 1 Year 2 Year 3 Year 4 Year 5 Required Project Costs Investment Costs 468.62 499.88 1,079.87 1,029.88 879.75 697.00 Recurrent Costs 14.00 14.00 14.00 14.00 11.50 Total Project Costs 482.62 513.88 1,093.87 1,043.88 891.25 697.00 Total Financing 482.62 513.88 1,093.87 1,043.88 891.25 697.00 Financing GEF 424.12 451.58 961.27 917.33 783.20 612.50 Government 58.51 62.30 132.61 126.55 108.05 84.50 MWR SEPA ProvinciallMunicipal 46.56 49.58 105.53 100.71 85.99 67.25 Prefecture CountylDistrict 11.95 12.72 27.07 25.84 22.06 17.25 Total Project Financing 482.62 513.88 1,093.87 1,043.88 891.25 697.00 Table Annex 5-7: Financing Plan of Beijing Retroactive Financing Year Year 1 Year 2 Year 3 Year 4 Year 5 Total Financing Required Project Costs Investment Costs 535.33 1,032.50 840.04 824.01 638.71 297.72 Recurrent Costs 85.00 85.00 72.25 72.25 77.25 80.25 Total Project Costs 620.33 1,117.50 912.29 896.26 715.96 377.97 Total Financing 620.33 1,117.50 912.29 896.26 715.96 377.97 Financing GEF 260.68 469.61 383.37 376.64 300.87 158.83 Government 359.65 647.89 528.92 519.62 415.09 219.14 MWR SEPA ProvinciallMunicipal 359.65 647.89 528.92 519.62 415.09 219.14 Prefecture CountylDistrict Total Project Financing 620.33 1.117.50 912.29 896.26 715.96 377.97 - 69 -  Table Annex 5-8: FinancingPlanofHebeiII IMPLEMENTATIONPERIOD(in US$' 000) Retroactive Financing Year Year 1 Year 2 Year 3 Year 4 Year 5 Total Financing Required Project Costs Investment Costs 395.59 653.83 859.56 813.56 652.67 480.3 1 Recurrent Costs 29.40 29.40 27.30 27.30 27.30 27.30 Total Project Costs 424.99 683.23 886.86 840.86 679.97 507.61 Total Financing 424.99 683.23 886.86 840.86 679.97 507.61 -1nancing -. GEF 205.97 331.13 429.82 407.52 329.55 246.01 Government 219.02 352.10 457.04 433.34 350.42 261.60 MWR SEPA ProvinciallMunicipal 38.03 61.13 79.35 75.24 60.83 45.42 Prefecture 25.77 41.43 53.78 50.99 41.25 30.78 CountylDistrict 155.22 249.54 323.91 307.11 248.34 185.40 I Total Project Financing 424.99 683.23 886.86 840.86 679.97 507.61 Financing plan is based on total Project cost by year including contingencies. The GEF grant h d o f US$17 million would cover about 51.O% of the total financing requirement for the Project. The remaining US$16.32 million or 49.0% o f the total Project cost will be financed by counterpart funds from govemment sources at central (23.9%), provincial/municipal (14.5%), prefecture (2.6%) and county/district (8.0%) levels. Required counterpart fund for Tianjin Coastal Wastewater Management component will be provided by Tianjin municipal government. GEF grant fund will finance eligible cost under all expenditure categories except those for Project monitoring and evaluation, Project operating and management fee and other expenditures under non-GEF-financing arrangement which will be financed entirely by counterpart funds. During project implementation, the PMOS may propose and the Bank will consider non-GEF-financing (in kind) o f other project costs. Additional financing o f US$98.25 million for the Tianjin Coastal Wastewater Management component is included in TUDEP2, this includes US$40.85 million IBRD and US$57.40 million from the Chinese government. - 70 -  Annex 6(A): Procurement Arrangements CHINA: Hai Basin Integrated Water and Environment Management Project Procurement The Bank's Guidelines. "Guidelines: Procurement under IBRD Loans and IDA Credits" (January 1995, revisedJanuary, August 1996, September 1997 and January 1999, Guidelines)and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" (January 1997 revised September 1997, January 1999 and May 2002, Consultant Guidelines) will be followed for all Bank-financed procurement. Bank-approved Chinese Model BiddingDocuments (MBD) and the Standard Bid Evaluation Form will be revised to ensure consistency with changes that have been incorporated into the Bank's SBDs. The Bank's SBDs will be used where no relevant model document exists. EachPMO will manageits own procurement. In addition, the Central PMO will establish a procurement team with the following responsibilities (i) providing overall procurement related guidance and supervision to other PMOs, (ii) o f international hiring consultant services and technical assistance for the Project, (iii) coordinating Project-wide research and study plans, and (iv) organizing training for managerial personnel, overseas training and study tours. The detailed procurement management and arrangementhave been finalized at project appraisal and included in respective Project implementationplan. Summary of Procurement Capacity Assessment of the Implementation Agencies: The implementation agencieswill be the government line ministries of MOF, MWR and SEPA at the central level, Governments of Beijing and Tianjin Municipalities and Hebei Province at the provincial level, Hai Basin Commission (HBC) and Zhangweinan sub-basin Administration Bureau (ZWNA) at river basidsub-basin level and 13 county governments at county level. The governments have established 22 project offices under the Project. The implementation agencies in MWR, SEPA, Beijing, Tianjin and Hebei have experience in other projects financed by Bank, GEF or ADB, while implementation agencies in HBC, ZWNA and 3 counties inShanxi, Henanand Shandonghave less experience inBank financed procurement. Most PMOs' capacity in selection of consultants are weak, particularly the new agencies in HBC, ZWNA and 3 counties in Shanxi, Henan and Shandong. The training workshop on Bank procurement for consultant services, goods and works were conducted in August, November and December 2003 by the Bank procurement specialists in the World Bank Office in Beijing during project preparation and more training, study tours and workshops will be conducted at the project launch and during the implementation stage. Implementation agencies have hired experienced consultants and experts by the central PMO, for advice and preparing o f the procurement plans and drafting TORS. A procurement management manual has been drafted by the central PMO and distributed to other PMOs. Six provincial/river basin PMOs also drafted their detailed procurement manual based on the procurement manual drafted by the central PMO. The eligibility and conflict o f interest issues for hiringconsultants will be closely monitored during implementation. An action plan to fiuther strengthen procurement management capacity was prepared and discussed during the pre-appraisal mission. Special attention was paid to new agencies. PMOs in HBC and ZWNA should recruit staff or hire consultants or experts experienced in the Bank financed procurement, or send staff to work with experienced PMOs for hands-on training. NCB mandatory provisions have beenincludedinboth Grant Agreement and Project Agreement which waive the differences betweenthe Bank Guidelinesand the Law on Tendering and Bidding o f the People's Republic o f China and other central local procurement regulations. The waivers will also require for mandatory use for NCB procurement o f the Chinese Model Bidding Documents, NCB Guidelines issued and revised by MOF. Procurement risk of not following Bank's guidelines are low in central PMOs, average in Beijing, Hebei and Tianjin, but high in HBC and ZWBA. The general risk is average for the Project as a whole. - 71 -  Procurement methods (Table A) Procurement Arrangements.A detailed procurement plan for the first 18 months has been discussedand finalized in accordance with the Project's two-phase implementation plan. A set o f procurement packages for the first 18 months implementation have been prepared by the central PMO and reviewed by the Bank at Project appraisal. Bidding documents for these procurements are under preparation. Procurement plans for other implementation years have been discussed and will be submitted for the Bank's review and approval on an annual basis. The anticipated procurement profile is shown inAnnex 6 Table A. Works. A total of about US$4.49 million worth of works would be required. These works would be scattered over 13 Project counties in six provinces/municipalities and carried out over a period o f five years. (i) National CompetitiveBidding (NCB).NCB procedures could be used for contracts estimated to cost less than US$15 million each. However, an aggregate of only about US0.64 million worth o f works contracts procured under NCB procedures is planned under the Project. These contracts would basically include the works for implementation o f strategic action plan in the second phase o f the Project under Zhangweinan. Paragraphs 3.3 and 3.4 o f the Bank's Procurement Guidelines will apply. (ii) Small Works. The Project will finance about US$3.20 million worth of minor works, costing less than US$lOO,OOO equivalent per contract and consisting o f small-sized works related to demonstration projects under Zhangweinan (US$1.29 million) and in Hebei (USS0.37 million), integrated water and environment management planning in key counties o f Tianjin IWEM(USS0.18 million), Beijing (US$0.57 million) and Hebei (US$0.79 million). These works would be suitable for lump-sum and fixed-price contracts awarded on the basis of quotations obtained from at least three qualified domestic contractors inresponse to a written invitation. (iii) Non-GEF Financing (NGF). About US$0.65 million worth of works would be non-GEF financed. These works are related to implementation o f strategic action plan inthe second phase o f the Project underZhangweinan. Goods. A total of USS5.11 million worth of goods would be procured for the Project. To the extent practical, contracts for goods would be grouped into bidpackages estimated to cost US$lOO,OOO equivalent or more to attract competition. International Competitive Bidding (ICB). Although not anticipated, any contract for goods costing US$500,000 equivalent or more would be awarded through ICB procedures. A margino f preference equal to 15 percent o f the CIF or CIP price o f imported goods or the actual customs duties and taxes, whichever is lower, would be allowed to qualified domestically manufactured goods under ICB procedures. National Competitive Bidding. NCB procedures would be used for procurement of goods costing US$lOO,OOO equivalent or more per contract with an aggregated amount o f US$1.12 million. These goods are related to purchase o f computer and software (US$0.21 million) for KM development in Hai Basin and office equipment (USS0.9 1million) for integrated water and environment management planning under Tianjin IWEM. - 72 -  (iii) Shopping. Other goods, worth US$2.90 million equivalent, would be procured using shopping procedures with contracts under US$lOO,OOO equivalent each. These goods would include office equipment for MWR and SEPA PMOs (US$O.O9 million), Hai Basin (US$0.28 million), Zhangweinan (US$O.10 million), Tianjin IWEM (US$O. 11 million), Tianjin Coastal (USS0.03 million), and Hebei (US$O.14 million); water measurement devices for Tianjin IWEM (US$0.02 million), Beijing (US$O.O 1 million) and Hebei (US$0.03 million); ET related data collection and equipment (US$O.11 million) and KM platform development software (US$0.30 million) for Hai Basin; capacity buildingand monitoring equipment (US$0.25 million) for Zhangweinan; equipment required to cany out integrated water and environment management planning in key counties for Beijing (US$0.63 million) and Hebei (USS0.51 million); waste water equipment and software (US$O.lO million) and sampling and analysis (US$0.20 million) for Tianjin Coastal; two passenger vehicles (US$0.09 million) for MWR and SEPA PMOs. They will be procuredin small batches from local markets and suppliers.All shopping contracts will require at least three price quotations. (iv) Non-GEF Financing. About US$1.09 million worth of goods would be non-GEF financed including a server, software and miscellaneous data collection for Hai Basin (US$0.77 million), passenger vehicles to be procured for Zhangweinan (USS0.04 million), Beijing (US$0.20 million), and Hebei (US$0.08 million). Consultant Services. A total of US$16.25 million worth of consultant services equivalent to about 42.1 percent o f total Project cost, would be provided. The majority o f consultants would be selected under QCBS (US$6.02 million). Consultants to provide technical assistance for Tianjin Coastal (USS0.75 million) would be hired through QBS procedures. Consultants for numerous other assignments, very small under USS100,000 each, would be hired through CQ procedures (US$5.40 million). The Project's demonstration activities require analysis o f satellite imagery using a specialized computer-based algorithm to determine spatially defined and time-sequenced actual ET estimates for the entire Hai Basin and a selected subbasin using low-resolution images and for specified counties, one municipality within the Hai Basin usinghigh-resolution images. Waterwatch, a Netherlands-based private company, has developed and i s the intellectual owner o f the SEBAL that i s required for this assignment. Therefore, consultant services through Waterwatch for RS based ET processing system and production o f ET data include training inthe use o f unique complex software for estimating ET from satellite imagery will be provided through single source selection procedures (US$0.46 million). This is justified that in accordance with section 3.8 o f the consultant guidelines, the single source selection of Waterwatch is an exceptional case in the overall interest o f the client and the project and in accordance with 3.9 (d), Waterwatch is the only firm qualified and with the experience for this assignment. A number o f consultants are expected to be individuals (USS3.05 million). The individual consultants would be selected through comparison of at least three candidates. All consulting assignments over US$200,000 would be advertised in Development Business o f the United Nations and "dgmarket" in addition to a national newspaper which will be required for all contracts above US$lOO,OOO procured through QCBS/QBS procedures. Short list o f only national consultants is eligible for the contract less than USS300,OOO. About USS0.58 million worth consultant services will be non-GEF financed under Hai Basin. Training and Study Tours. Various training programs and study tour activities have been discussed for the Project. Training and study tours would be reimbursedbased on programs agreedwith the Bank. About US$1.35 million was budgeted for overseas training and study tours and about US$1.30 million was budgeted for domestic training and study tours. - 73 -  Miscellaneous. About US$4.36 million worth o f miscellaneous costs are required for the Project. These costs include Project monitoring and evaluation (US$0.32 million), Project management and operation for PMOS(US$1.29 million), KM system operation and maintenance for Hai Basin (US$0.25 million), and small cities financial incentives (US$2.50 million) for Tianjin Coastal. Table A: Project Costs by Procurement Arrangements (US$ million equivalent) 5. Financial Incentives 31 0.00 0.00 2.50 0.00 2.50 (0.00) (0.00) (2.50) (0.00) (2.50) 6. Project Management 0.00 0.00 0.00 1.86 1.86 Expenses 41 (0.00) (0.00) (0.00) (0.00) (0.00) Total 0.00 1.76 26.93 4.63 33.32 (0.00) (1.44) (15.56) (0.00) (17.00) ''Including civil works and goods to be procuredthrough shopping, consultingservices, services of contractedstaff of the project managementoffice, training, technical assistance services. 31 For small cities under Tianjin Coastal Wastewater Management component. 41 Including incrementaloperatingcosts relatedto Projectmonitoring and evaluation, Projectmanagement and operation, KMsystem operationand maintenancefor Hai Basin. - 74 -  Table A I: Consultant Selection Arrangements (optional) (US$ million equivalent) A. Firms I\Including contingencies Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines) and Single source selection. N.B.F. = Not Bank-financed Figures in parentheses are the amounts to be financed by the Bank Grant. The Bank's prior review would include: (i) All works contractsequal to or greater than US$500,000; (ii) All Goods contractsequal to or greater thanUS$200,000; (iii) All contractsfor consultant services in excess of USS200,OOO for firms andUS$50,000 for individuals; (iv) All contracts for consultant services through single source selection; (v) The first contract procuredthrough eachprocurementmethods of NCB (for works and goods), Shopping, Small Works, QCBS, QBS, CQ andIndividualConsultantfrom eachPMOS. All overseastraining andstudy tour planswill be includedinproject annualworkplan to bereviewedby the Bank. A prior review ratio of about 20 percent (one inevery five contracts) is expected. All other contracts would be subject to ex-post review by the Bank's supervision missions with a sampling ratio of one in five contracts. The post review requirements will be revisitedregularly basedon the performance of the PMOS. Annex 6 Table B indicatesthe thresholdsfor prior review. - 75 -  Table B: iresholds for Procurement Methods and Prior Review' Expenditure Category 1 '* contracts = or > 500 Works =or >lo0 2. Goods each PMO and all contracts = or > 200 for firms The first contract for each PMO and all = or >lo0 QBS contracts 0.75 = or > 200 for 3. Consultant Services firms The first contract for <loo CQ eachPMO 0.32 The first contract for each PMO and all I NIA Individual contracts = or > 50 for 0.33 NIA I Single Source II individuals AHcontracts 0.46 Total value of contracts subject to prior review: 6.98 Overall Procurement Risk Assessment: Average Frequencyof procurementsupervisionmissionsproposed: One at Project launch, then one every six months (includes special procurement supervision for post-review/audits) - 76 -  Annex 6(B): Financial Management and Disbursement Arrangements CHINA: Hai Basin Integrated Water and Environment Management Project FinancialManagement 1. Summary ofthe FinancialManagementAssessment The task team has conducted an assessmento f the adequacy of the project financial management system of the GEF-Hai Basin Integrated Water and Environment Management Project. The assessment, based on guidelines issued by the Financial Management Sector Board on June 30, 2001, has concluded that the Project meets minimum Bank financial management requirements, as stipulated in BP/OP 10.02. In the team's opinion, the Project will have in place an adequate project financial management system that can provide, with reasonable assurance, accurate and timely information on the status o f the Project in the reporting format agreedwith the Project andas requiredby the Bank. The following risks with corresponding mitigating measures have been identified during assessment processes: /Risk Risk Rating Mitigating Measures I. risk Inherent Moderate 2 Ministries and 6 provinces involved inthe Project; close monitoring by the task team, MWR (Ministryo f Water Resources), SEPA (State Environmental Protection Bureau) and related government authorities is extremely important and critical to successful imdementation 111.Control risk I I a. Implementingentity High Since 2 Ministries involved inthe Project, the coordinationat all levels is essentialto the implementationo f the Project. b. Fundflows Moderate Periodic supervision mission, annual audit and a feedback channel for implementingagencies to report ~ when funds are not received on a timely basis c. Staffing Moderate Adequate and qualified Project staff inposition prior to effectiveness; periodic check by task team on Project staffinn Dlan or issues d. Accounting policies and Low Accounting policies and procedures are already inplace procedures e. Internal audit Moderate Although some agencies' have their own internal audit - - divisions, more supervisions from task team, MWR and f.Externalaudit 1SEPA will be reauired. The external auditors, the China National Audit Office and its local offices have extensive audit experience with Bank Proiects g. Reportingand Format o f financial statements and frequency o f monitoring Low submission have beenclearly definedby the Bank and MOF h.Information system Moderate More intensive checking by the task team at the early implementation stage to ensure correct setup, followed upbyregular supervision missions - 77 -  In order to facilitate financial management work, the task team has recommended that a Project Financial Management Manual (Manual) be prepared. The role and responsibility o f the financial/accounting staff at each level, as well as operational procedures, such as withdrawal applications and preparation o f financial statements, shouldbe clearly defined and recorded inthe Manual. A draft manual has beenprepared by the PMOSand submitted to the Bank. After reviewing the manual, the Bank task team recommended that some modifications should be made, such as the disbursement procedures and the practical accounting regulation shouldbe included inthe Manual to make the Manual more useful and practical. Though most of financial staff possessedthe experiences in the Bank's projects, some o f the financial or accounting staff identifiedfor the Project nonetheless lack direct experience in Bank projects. To ensure that staff recruited for the Project will have good understanding of Bank's policy and requirements, it has been W h e r agreed that a well-designed and focused training program will be provided by PMO prior to effectiveness to all staff concerned. The training programwill includebut not limited to the following: 0 Bank's procurement and disbursement procedures 0 Project financial management manual 0 Project financial statements 0 Project audit arrangement Considering the complexity o f the Project and the volume o f the grant, the Project has been recommended and agreed by the related agencies that the administration, accounting and reporting of the Project will be set up in accordance with the following circular issued by MOF, although this i s GEF grant and MOF has issued accounting regulation for TF projects. Circular #13: "Accounting Regulations for World Bank Financed Projects" issued in January 2000 by MOF. The circular provides in-depth instructions of accounting treatment o f Project activities and covers the following: ---- Chart o f account Detailedaccounting instructions for each Project account Standard set o f Project financial statements Instructions on the preparation of Project financial statements The standard set o f Project financial statements mentioned above has been agreed to between the Bank and MOF and applies to all Bank projects appraised after July 1, 1998 and includes the following: -- Balance sheet - Statemento f source and use o f fund Statement of implementation o f credit'loadgrant agreement - Statement of special account Each Project province/municipal (Hebei, Beijing and Tianjin) will prepare its own consolidated Project financial statements. Hai Basin Commission and Zhangweinan will prepare their own Project financial statements respectively and submit their financial statements to the central PMO consisting o f staff from MWR and SEPA, the central PMO will prepare consolidated financial statements based on the financial statements prepared by MWR, SEPA, Hai Basin Commission and Zhangweinan separately. - 78 -  The format and content o f the following Project financial statements represent the standard project reporting package agreed to between the Bank and MOF, and have been discussed and agreed with all parties concerned. The Project consolidated financial statements will be submittedas part of the Financial Monitoring Report to the Bank for review and comment on a semi-annual basis (prior to August 15 and February 15 o f the subsequentyear) and include the following four statements: 0 Balance Sheet; 0 Summary o f Sources and Uses o f Fundsby Project Component; 0 Statement of Implementationo f Grant Agreement; and 0 Statement o f Special Account The following proposed time-bound actions that have no major impact on Project preparation or Board presentation, but should be adequately addressedby the Project: Action Responsibility Target Date 1. Draft FinancialManagement MWR and SEPA By the end of October, 2003 Manual for Bank's review and comment 2. Finalize and issue the Financial MWR and SEPA Prior to negotiations Management Manual to concerned staff 3. Provide training to financial or World Bank, MWR and Prior to negotiations accounting staff SEPA 2. Audit Arrangements The Bank requires that Project financial statements be audited in accordance with standards acceptable to the Bank. In line with Bank financed projects in China, the Project will be audited inaccordancewith the Government Auditing Standards of the People's Republic o f China (the 1997 edition). The Foreign Funds Application Audit Department o f the China National Audit Office (CNAO) andprovincial audit bureaus in each participating provinces have been identified as auditors for the Project. For the portions directly implementedby the participatingprovinces (Beijing, Tianjin and Hebei), the audit reports will be issued by respective provincial audit bureaus; For the portion executed by the central level (MOWR and SEPA), the audit report will be issued by CNAO. The Bank currently accepts audit reports issued by CNAO or provincial audit bureaus for which CNAO is ultimately responsible. Four Audit reports on annual Project financial statements will be due to the Bank within 6 months o f the end o f each calendar year. Details are includedinthe table below. I ComDonent 1 Submitted bv /Duedate I SEPA, MWR, Hai Basin Central PMO June 30 Commission and Zhangweinan Beijing Beijing PMO June 30 Tianjin TianjinPMO June 30 Hebei HebeiPMO June 30 - 79 -  3. DisbursementArrangements Disbursement Arrangement. Disbursement arrangements for the Project are summarized below in Table C "Allocation o f Loan Proceeds." Disbursement for works would be at 50% of total expenditures. Disbursement for goods would be at 100% o f foreign expenditures, 100% of local expenditures (ex-factory cost) and 75% o f expenditures for other goods procured locally. Standard Disbursement Percentage(91%) for technical assistance and consultant services for China would be used for international consultants. Disbursementfor domestic consultants would be at 41% of eligible expenses. Disbursement for overseas training and study tours would be at 70% and disbursementfor domestic training and study tours would be at 50%. The financial incentive funds would be disbursed from the GEF Grant proceeds 100% o f the amount o f small city sub-grants disbursed. Retroactive Financing. The Bank's requirements for retroactive financing have been discussed with all PPMOs during Project preparation. The following project activities, costing about US$1.44 million with an estimated GEF financing o f about US0.96 million (about 6 percent of the proposed GEF amount), have been requested by the PPMOs and agreed by the Bank for retroactive financing by GEF Grant funds: (i) procurement of office equipment, (ii) of consultant services, (iii) hiring domestic training and study tours, (iv) MIS development and (v) technical assistance for Tianjin Coastal Wastewater Management sub-project. These Project activities covering all eight PPMOs are expected to start after December 8, 2003. Allocation of grant proceeds (Table C) - 80 -  Table C: Allocation of Grant Proceeds for the Project (Aggregated) Expenditure Category Amount in US$'000 FinancingPercentage ;A.Works 1,920.24 50% o f expenditures 'B.Goods 3,368.99 100% o f foreign expenditures, 100% o f local expenditures (ex-factory cost) and 75% for other items procured locally C. Consultant Services 7,613.42 91% o f expenditures for intemational consultants, 41YOo f expenditures for domestic consultants 'D.Training and Study Tours , 1,597.35 70% o f expenditures for overseas training and study ,tours and 50% o f expenditures for domestic training Table C1: Allocation of Grant Proceeds for MWR I Expenditure Category I Amountin USS'OOO I FinancingPercentage A. Works 0.00 50% o f expenditures B. Goods 67.40 100% o f foreign expenditures, 100% o f local expenditures (ex-factory cost) and 75% for other items procured locally C. Consultant Services 614.40 91% o f expenditures for intemational consultants, 41% o f expenditures for domestic consultants D. Training and Study Tours 178.75 70% o f expenditures for overseas training and study tours and 50% o f expenditures for domestic training and study tours E. Financial Incentives 0.00 100% o f the amount o f the Small City Sub-grants disbursed Total 860.55 Table C2: Allocation o f Grant Proceeds for SEPA tours and 50% o f expenditures for domestic training I Total 861.05 -81 -  Table C3: Allocation o f Grant Proceeds for H a i Basin Expenditure Category I AmountinUS$'OOO I FinancingPercentage A. Works 0.00 50% o f expenditures B. Goods 610.29 100% o f foreign expenditures, 100% o f local expenditures (ex-factory cost) and 75% for other items procured locally C. Consultant Services 2,498.86 91% o f expenditures for intemational consultants, 41% o f expenditures for domestic consultants D. Training and Study Tours 319.25 70% o f expenditures for overseas training and study tours and 50% o f expenditures for domestic training and study tours E. Financial Incentives 0.00 100% o f the amount o fthe Small City Sub-grants disbursed Total 3,428.40 Expenditure Category I AmountinUS$'000 I Financing Percentage 1 I A. Works 966.26 50% o f expenditures B. Goods 259.45 100% o f foreign expenditures, 100% o f local expenditures (ex-factory cost) and 75% for other items procured locally C. Consultant Services 425.49 91% o f expenditures for intemational consultants, 41% o f expenditures for domestic consultants D. Training and Study Tours 298.80 70% o f expenditures for overseas training and study tours and 50% o f expenditures for domestic training and study tours E. Financial Incentives 0.00 100% o f the amount o f the Small City Sub-grants disbursed Total 1,950.00 Table C5: Allocation o f Grant Proceeds for Tianjin IWEM 41% o f expenditures for domestic consultants ID.Training and Study Tours I 168.50 70% o f expenditures for overseas training and study /tours and 50% o f expenditures for domestic training E.FinancialIncentives 0.00 1100% o f the amount o f the Small City Sub-grants Total 1,850.00 - 82 -  Table C6: Allocation o f Grant Proceeds for Tianjin Coastal 1 I I Expenditure Category AmountinUSS'000 Financing Percentage A. Works 0.00 (50%of expenditures B. Goods 360.00 1100%of foreignexpenditures, 100%of local expenditures (ex-factory cost) and 75% for other 1 - items procuredlocally C. Consultant Services 1,224.75 91% of expenditures for internationalconsultants, 41% of expenditures for domestic consultants D. Training and Study Tours 65.25 70% of expenditures for overseas training andstudy tours and 50% of expenditures for domestic training and study tours E. Financial Incentives 0.00 100%o fthe amount ofthe Small City Sub-grants disbursed Total 4.150.00 Table C7: Allocation o f Grant Proceeds for Beijing Expenditure Category 1 AmountinUSS'000 I Financing Percentage I i A. Works 284.61 50% of expenditures B. Goods 483.82 100%of foreign expenditures, 100% of local expenditures (ex-factory cost) and 75% for other items procuredlocally C. Consultant Services 1,027.17 91% of expenditures for internationalconsultants, 41% of expenditures for domestic consultants D. Training and Study Tours 154.40 70% of expenditures for overseas training and study tours and 50% of expenditures for domestic training and study tours E. Financial Incentives 0.00 100%of the amount of the Small City Sub-grants disbursed Total 1.950.00 Table C8: Allocation o f Grant Proceeds for Hebei I ExpenditureCategory Amountin USS'OOO I IA. Works II Financing Percentage /B. 578.36 150% of exDenditures 507.07 100%of foreign expenditures, 100%of local Goods expenditures (ex-factory cost) and 75% for other items procuredlocally C. Consultant Services 630.92 91% of expendituresfor international consultants, 41% of expenditures for domestic consultants D. Training and Study Tours 233.65 70% of expenditures for overseas training and study tours and 50% of expenditures for domestic training and study tours E. Financial Incentives 0.00 100%of the amount ofthe Small City Sub-grants disbursed Total 1,950.00 - a3 -  Use of statements of expenditures(SOEs): SOEs will be used for disbursements against: (i) contracts for works under US$500,000; (ii) contracts for goods under US$200,000; (iii) training and study tour expenses; (iv) contracts for consultant services underUS$200,000 for firms andunderUS$50,000 for individuals. Supporting documents for SOEs will be retained by respective PMOSand made available for review by Bank's supervision missions. In the case o f contracts for goods, works and consultant services above these thresholds, disbursements would be made against full documentation o f the contracts and other supporting documents. Special account: To facilitate disbursement, one Special Account (SA) each in U S dollars to be operated by Ministry o f Finance (MOF), Bureau o f Finances (BOFs) in Tianjin municipality, Beijing municipality and Hebei province will be established in banks with terms and conditions acceptable to the Bank. MOF will be responsible for the management, monitoring, maintenance and reconciliation o f the special account activities o f MWR, SEPA, Hai Basin and Zhangweinan. BOFs will be responsible for their respective SA activities o f the Project. The authorized allocation o f special account is proposed not to exceed US0.45 million, US$0.40 million, USSO.12 million, US$O.12 million equivalent for MOF, Tianjin, Beijing and Hebei respectively. Applications for replenishment, supported by appropriate documentation, will be submitted monthly or when the amounts withdrawn equal 50% of the authorized allocation, whichever comes first. The Project is expectedto be completed by December 31,2009 and closed on June 30,2010. - 84 -  Annex 7: Project Processing Schedule CHINA: Hai Basin IntegratedWater and Environment Management Project Negotiations 0211612004 0211712004 Planned Date of Effectiveness 0711512004 Prepared by: Ministry of Finance (MOF), State Environmental Protection Administration (SEPA), Ministry of Water Resources (MWR), BeijingMunicipality, Tianjin Municipality, HebeiProvince Preparation assistance: GEF Grant Bank staff who worked on the oroiect included: . . Name Speciality Braedt, Oliver Natural ResourceManagementSpecialist Broadfield, Robin Sr. Regional Coordinator Browder, Greg Sr. Water Resources Specialist Dong, Yi Financial ManagementSpecialist Jiang, Liping Sr. IrrigationEngineer Lin,Zong-Cheng SocialDevelopment Specialist Nguyen, Hoi-Chan Sr. Counsel Nygard, Jostein Sr. Environmental Specialist O'Leary, Robert Sr. FinanceOfficer Olson, Douglas Task Team Leader, Principal Water ResourcesEngineer Png, Margaret Sr. Counsel Reyes, Arlene ProgramAssistant Sun, Chongwu Sr. Environmental Specialist Yang, Dawei ProcurementSpecialist Zhou, Weiguo OperationsOfficer - a5 -  Annex 8: Documents in the Project File* CHINA: Hai Basin Integrated Water and Environment Management Project A. Project ImplementationPlan 1.Environmental Assessment 2. Environmental Management Plan 3. Resettlement Policy Framework B. Bank Staff Assessments 1. Procurement Capacity Assessment Report 2. Financial Management Assessment Report C. Other 1. Global Environmental facility (GEF) Executive Summary 2. Global Environmental facility (GEF) Project Brief *Includingelectronic files - 86 -  Annex 9: Statement of Loans and Credits CHINA: Hai BasinIntegratedWater and Environment Management Project 16-Mar-2004 Difference between expected and actual Original Amount in US$ Millions disbursements' Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd PO65463 2004 CN - JiangxiIntegratedAgric. Modern 100.00 0.00 0.00 0.00 100.00 1.50 0.00 PO65035 2004 CN-Gansu8 Xinjiang Pastoral Development 66.27 0.00 0.00 0.00 65.61 4.53 0.00 P066955 2004 CN-ZhejiangUrban Envmt 133.00 0.00 0.00 0.00 133.00 0.00 0.00 PO73002 2004 CN-Basic Education in Western Areas 100.00 0.00 0.00 0.00 100.00 0.00 0.00 PO77615 2004 CN-GEF-Gansua Xinjiang Pastoral Develop 0.00 0.00 10.50 0.00 10.50 0.80 0.00 PO67337 2003 CN-2ndGEF Energy Conservation 0.00 0.00 26.00 0.00 14.60 16.57 0.00 P040599 2003 CN-TIANJIN URB DEV II 150.00 0.00 0.00 0.00 148.50 -1.50 0.00 P058847 2003 CN-3rd Xinjiang Hwy Project 150.00 0.00 0.00 0.00 106.13 9.47 0.00 P068058 2003 CN-YixingPumpedStorage Project 145.00 0.00 0.00 0.00 140.95 2.13 0.00 PO76714 2003 CN-AnhuiHwy 2 250.00 0.00 0.00 0.00 250.00 15.33 0.00 PO70441 2003 CN-HubeiXiaogan Xiangfan Hwy 250.00 0.00 0.00 0.00 156.78 -20.56 0.00 PO70191 2003 CN-SHANGHAIURB ENVMTAPLI 200.00 0.00 0.00 0.00 198.00 -2.00 0.00 PO64729 2002 CN-SUSTAINABLEFORESTRYDEV PROJECT 93.90 0.00 0.00 0.00 76.07 1.58 0.00 PO58846 2002 CN-Natl RailwayProject 160.00 0.00 0.00 0.00 37.04 0.37 0.00 PO71147 2002 CN-TuberculosisControl Project 104.00 0.00 0.00 0.00 92.67 -11.33 0.00 PO60029 2002 CN-Sustain ForestryDev(Natura1Forest) 0.00 0.00 16.00 0.00 14.11 3.00 0.00 PO70459 2002 CN-InnerMongoliaHwy Project 100.00 0.00 0.00 0.00 88.82 6.49 0.00 PO68049 2002 CN-Hubei HydropowerDev in PoorAreas 105.00 0.00 0.00 0.00 87.68 12.84 0.00 PO58845 2001 Jiangxi II Hwy 200.00 0.00 0.00 0.00 133.42 8.75 0.00 PO56199 2001 CN-3rd InlandWaterways 100.00 0.00 0.00 0.00 80.46 5.96 0.00 PO56516 2001 CN .WATER CONSERVATION 74.00 0.00 0.00 0.00 40.44 9.01 0.00 PO56596 2001 CN-ShijiazhuangUrbanTransport 100.00 0.00 0.00 0.00 85.41 52.47 0.00 PO47345 2001 CN-HUAIRIVERPOLLUTIONCONTROL 105.50 0.00 0.00 0.00 89.85 -15.65 0.00 PO51859 2001 CN-LIAO RIVER BASIN 100.00 0.00 0.00 0.00 74.72 32.02 0.00 PO45915 2001 CN-Urumqi UrbanTransport 100.00 0.00 0.00 0.00 52.54 47.34 0.00 PO45910 200c CN-HEBEIURBANENVIRONMENT 150.00 0.00 0.00 0.00 119.36 46.36 0.00 PO49436 2000 CN-CHONGQINGURBANENVMT 200.00 0.00 0.00 3.70 156.40 64.06 0.00 PO56424 2000 TONGBAI PUMPEDSTOW 320.00 0.00 0.00 100.00 155.85 96.19 0.00 PO45264 2000 CN-SMALLHLDRCATTLE DEV 93.50 0.00 0.00 0.00 12.84 6.87 0.00 PO42109 2000 CN-BEIJINGENVIRONMENTII 349.00 0.00 25.00 0.00 286.54 160.67 0.00 PO58844 2000 3rd HenanProv Hwy 150.00 0.00 0.00 0.00 61.19 26.86 0.00 PO58843 2000 GuangxiHighway 200.00 0.00 0.00 0.00 102.57 46.57 0.00 PO64924 zoo0 CH-GEF-BEIJINGENVMT II 0.00 0.00 25.00 0.00 25.87 18.84 2.86 PO64730 2000 CN .Yangtze Dike StrengtheningProject 210.00 0.00 0.00 0.00 111.52 95.52 0.00 PO50036 1999 Anhui ProvincialHwy 200.00 0.00 0.00 9.60 34.96 34.16 0.00 PO51705 1999 Fujian II Highway 200.00 0.00 0.00 0.00 65.73 63.07 0.00 PO51856 1999 ACCOUNTING REFORM a DEVELOPMENT 27.40 5.60 0.00 0.00 17.89 17.84 0.00 PO41268 1999 CN-Nat Hwy4/Hubei-Hunan 350.00 0.00 0.00 0.00 59.72 37.72 0.00 PO57352 1999 CN-RURAL WATER IV 16.00 30.00 0.00 0.00 21.81 15.87 8.72 P058308 1999 CN-PENSIONREFORMPJT 0.00 5.00 0.00 0.00 1.77 1.75 0.00 PO56216 1999 CN - LOESSPLATEAU II 100.00 50.00 0.00 0.00 24.54 26.67 0.00 PO60270 1999 CN-ENTERPRISEREFORMLN 0.00 5.00 0.00 0.00 2.71 4.29 4.07 PO38121 1999 CN-GEF-RENEWABLEENERGYDEVELOPMENT 0.00 0.00 35.00 0.00 28.91 27.18 7.95 PO51888 1999 CN - GUANZHONGIRRIGATION 80.00 20.00 0.00 0.00 32.26 25.50 0.00 PO49665 1999 CN-ANNINGVALLEY AG DEV 90.00 30.00 0.00 0.00 19.19 10.38 0.00 PO46051 1999 CN-HIGHER EDUC REFORM 20.00 50.00 0.00 0.00 5.70 7.31 0.00 PO43933 1999 CN-SICHUANURBAN ENVMT 150.00 2.00 0.00 0.00 91.74 78.60 24.15 P042299 1999 TEC COOP CREDITIV 10.00 35.00 0.00 0.00 36.03 -11.40 0.00 PO41690 1999 CN-LiaoningUrbanTransport 150.00 0.00 0.00 0.00 36.96 36.96 0.00 PO36953 1999 CN-HEALTHIX 10.00 50.00 0.00 0.00 36.85 22.30 0.00 PO03653 1999 CN-ContainerTransport 71.00 0.00 0.00 18.61 3.62 22.20 0.79 PO46829 1999 RENEWABLEENERGY DEVELOPMENT 100.00 0.00 0.00 0.00 12.87 99.87 8.23 PO46564 1999 CN .GansuaInner MongoliaPovertyRed 60.00 100.00 0.00 13.30 44.87 34.07 -6.75 - 87 -  Differencebetween expected and actual Original Amount in US$ Millions disbursements" Project ID FY Purpose iBRD iDA GEF Cancel. Undisb. Orig Frm Rev'd PO03614 1998 CN-GuangzhouCity Transport 200.00 0.00 0.00 20.00 100.31 120.31 100.31 P003606 1998 ENERGY CONSERVATION 63.00 0.00 22.00 0.00 35.87 18.81 0.00 P035698 1998 HUNAN POWER DEVELOP 300.00 0.00 0.00 145.00 31.45 173.45 -18.46 P049700 1998 CN. IAlL-2 300.00 0.00 0.00 0.00 3.97 3.97 0.66 P037859 1998 CN-GEF Energy Conservation 0.00 0.00 22.00 0.00 0.71 22.06 0.00 PO03619 1998 CN-2nd InlandWatetways 123.00 0.00 0.00 37.00 19.18 54.54 6.46 PO40185 1998 CN-SHANDONGENVIRONMENT 95.00 0.00 0.00 1.40 20.07 21.47 1.58 PO03566 1998 CN-BASICHEALTH(HLTH8) 0.00 85.00 0.00 0.00 38.40 23.65 0.00 PO46563 1998 CN - TARIM BASIN II 90.00 60.00 0.00 2.67 14.78 16.88 0.00 PO45788 1998 Tri-Provincial Hwy 230.00 0.00 0.00 0.00 19.18 16.12 0.00 PO03539 1998 CN .SUSTAINABLE COASTAL RESOURCESDE 100.00 0.00 0.00 2.06 46.65 45.38 35.83 PO51736 1998 E CHINNJIANGSU PWR 250.00 0.00 0.00 86.00 50.31 136.31 13.22 P046952 1998 CN -FOREST DEV POORAR 100.00 100.00 0.00 0.00 29.62 -71.61 9.25 P036949 1998 CN-Nat Hwy3-Hubei 250.00 0.00 0.00 0.00 21.15 21.15 0.00 PO36414 1998 CN-GUANGXIURBANENVMT 72.00 20.00 0.00 0.00 71.56 66.02 25.79 PO03637 1997 CN-NAT'L RURALWATER 3 0.00 70.00 0.00 0.00 0.56 3.77 3.35 PO03590 1997 CN - QINBA MOUNTAINSPOVERTY REDUCTIO 30.00 150.00 0.00 0.00 13.16 16.34 -0.95 P035693 1997 FUELEFFICIENTIND 0.00 0.00 32.80 0.00 6.81 32.81 0.00 PO03654 1997 Nat HwyZ/Hunan-Guangdong 400.00 0.00 0.00 0.00 48.52 48.52 20.68 P003650 1997 TUOKETUOPOWEWINNER 400.00 0.00 0.00 102.50 37.37 139.87 27.63 ?038988 1997 CN .HEILONGJIANGADP 120.00 0.00 0.00 0.00 7.72 7.72 4.54 P044485 1997 SHANGHAIWAIGAOQIAO 400.00 0.00 0.00 0.00 84.49 56.03 44.04 P036405 1997 CN - WANJlAZHAl WATER TRA 400.00 0.00 0.00 75.00 22.58 97.58 10.00 P003602 1996 CN-HUBEIURBANENVIRONMENT 125.00 25.00 0.00 28.32 39.72 70.08 32.41 PO03599 1996 CN-YUNNANENVMT 125.00 25.00 0.00 19.48 35.68 56.92 7.10 PO40513 1996 2nd Henan Prov Hwy 210.00 0.00 0.00 19.00 16.69 35.69 23.69 P003594 1996 CN - GANSUHEXI CORRIDOR 60.00 90.00 0.00 0.00 73.92 58.83 0.00 P003589 1996 CN-DISEASEPREVENTION(HLTH7) 0.00 100.00 0.00 0.00 1.97 10.99 0.00 PO34618 1996 CN-LABORMARKET DEV 10.00 20.00 0.00 0.00 5.66 7.75 0.00 PO03648 1996 CN-SHANGHAISEWERAGEII 250.00 0.00 0.00 0.00 39.94 39.94 4.81 PO03571 1995 CN-7th Railways 400.00 0.00 0.00 119.00 10.28 129.28 20.28 P003639 1995 CN-SOUTHWESTPOVERTYREDUCTIONPROJE 47.50 200.00 0.00 0.01 1.21 25.36 25.36 PO03647 1995 China Economic Law Reform-LEGEA 0.00 10.00 0.00 0.00 0.50 0.83 0.00 PO03603 1995 CN-ENTHOUSING& SSR 275.00 75.00 0.00 57.46 38.52 93.86 2.17 PO03596 1995 CN-Yangtze Basin Water Resources Proiect 100.00 110.00 0.00 1.92 0.34 4.75 4.75 PO03540 1994 CN-LOESSPLATEAU 0.00 150.00 0.00 0.00 1.12 0.50 0.00 PO03632 1993 CN-ENVIRONMENTTECH ASS 0.00 50.00 0.00 0.00 1.11 1.73 1.41 Total: 11719.07 1722.60 214.30 862.02 4978.64 2923.07 455.95 - 88 -  CHINA STATEMENT OF IFC's Heldand DisbursedPortfolio Feb 29 - 2004 InMillions US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 2001 Peak Pacific 0.00 0.00 25.00 0.00 0.00 0.00 0.00 0.00 2003 SAIC 12.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 SBTS 0.00 0.08 0.00 0.00 0.00 0.00 0.00 0.00 2000 SSIF 0.00 4.50 0.00 0.00 0.00 1.02 0.00 0.00 1998 Shanghai Krupp 27.50 0.00 0.00 61.43 27.50 0.00 0.00 61.43 1999 Shanghai Midway 0.00 16.02 0.00 0.00 0.00 16.02 0.00 0.00 1993 Shanxi 15.36 0.00 0.00 0.00 12.81 0.00 0.00 0.00 2002 ShenzhenPCCP 3.76 0.00 0.00 0.00 3.76 0.00 0.00 0.00 2001 Sin0 Gold 0.00 4.00 0.00 0.00 0.00 4.00 0.00 0.00 1995 Sino-Forest 23.33 0.00 0.00 0.00 18.33 0.00 0.00 0.00 2000 Suzhou PVC 0.00 2.48 0.00 0.00 0.00 2.48 0.00 0.00 1996 Wanjie Hospital 13.64 0.00 0.00 0.00 13.64 0.00 0.00 0.00 2004 Weihai Weidongri 1.06 0.00 0.00 0.00 1.06 0.00 0.00 0.00 2003 Wumart 0.00 6.48 0.00 0.00 0.00 6.48 0.00 0.00 1993 XACB 0.00 19.93 0.00 0.00 0.00 0.00 0.00 0.00 2003 Yantai Cement 4.73 0.00 0.00 0.00 4.73 0.00 0.00 0.00 2002 Zhengye-ADC 15.00 0.00 0.00 7.00 2.00 0.00 0.00 0.00 2003 ASIMCO 0.00 10.00 0.00 0.00 0.00 0.00 0.00 0.00 2003 Anjia 0.00 2.00 0.00 0.00 0.00 0.00 0.00 0.00 1999lOOlO2 BCIB 0.00 0.00 11.60 0.00 0.00 0.00 0.00 0.00 2002 Bank of Shanghai 0.00 24.67 0.00 0.00 0.00 24.67 0.00 0.00 2003 CDH China Fund 0.00 15.17 0.00 0.00 0.00 2.09 0.00 0.00 2004 CSMC 0.00 12.00 0.00 0.00 0.00 7.20 0.00 0.00 1998 CUNA Mutual 0.00 12.00 0.00 0.00 0.00 0.00 0.00 0.00 1998 ChengduHuarong 6.28 3.20 0.00 7.04 6.28 3.20 0.00 7.04 1992 Chengxin-IBCA 0.00 0.36 0.00 0.00 0.00 0.36 0.00 0.00 2004 China Bicycles 4.50 0.00 0.00 0.00 4.50 0.00 0.00 0.00 1994 China Re Life 0.00 15.41 0.00 0.00 0.00 15.29 0.00 0.00 1995 China Walden Mgt 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 1994 Dupont Suzhou 7.79 0.00 0.00 0.00 7.79 0.00 0.00 0.00 2003 DynamicFund 0.00 8.05 0.00 0.00 0.00 6.40 0.00 0.00 1999 Great Infotech 0.00 3.50 0.00 0.00 0.00 2.10 0.00 0.00 2002 Hansom 0.00 0.08 0.00 0.00 0.00 0.08 0.00 0.00 2004 HuarongAMC 9.00 3.00 0.00 0.00 9.00 0.49 0.00 0.00 2002 JB 0.00 52.18 0.00 0.00 0.00 0.19 0.00 0.00 1998 IEC 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2001 LeshanScana 5.21 1.35 0.00 0.00 3.61 1.35 0.00 0.00 2001 Maanshan Carbon 9.00 2.00 0.00 0.00 9.00 2.00 0.00 0.00 2001 MinshengBank 0.00 23.50 0.00 0.00 0.00 23.50 0.00 0.00 1996 NCCB 0.00 26.58 0.00 0.00 0.00 26.46 0.00 0.00 2001 NanjingKumho 0.00 3.81 0.00 0.00 0.00 3.81 0.00 0.00 1995 New China Life 0.00 30.70 0.00 0.00 0.00 23.32 0.00 0.00 1997 NewbridgeInv. 0.00 1.95 0.00 0.00 0.00 1.95 0.00 0.00 Orient Finance 6.67 0.00 0.00 8.33 6.67 0.00 0.00 8.33 Total Portfolio: 184.83 306.97 36.60 83.80 130.68 174.50 0.00 76.80 -89 -  Auurovals Pending Commitment FY Approval Company Loan Equity Quasi Partic 2002 ASIMCO 0.00 0.01 0.00 0.00 2004 CCB-MS NPL 0.00 0.00 0.00 0.00 2003 Cellon 0.00 0.00 0.01 0.00 2002 Darong 0.01 0.00 0.00 0.01 2002 HuarongAMC 0.02 0.00 0.00 0.00 2002 IEC 0.00 0.01 0.00 0.00 2002 KHIT 0.00 0.00 0.00 0.00 2004 NCFL 0.00 0.00 0.02 0.00 2004 Nanjing Kumho Ex 0.03 0.00 0.01 0.00 2003 Peak Pacific 2 0.00 0.00 0.01 0.00 2004 SIBFI 0.00 0.00 0.00 0.00 2002 SML 0.00 0.00 0.00 0.00 2002 Sino Mining 0.01 0.00 0.00 0.01 2004 Vetroamedo 0.01 0.00 0.00 0.00 2002 Zhong Chen 0.03 0.00 0.00 0.03 Total PendingCommitment: 0.10 0.01 0.05 0.05 -90 -  Annex 10: Country at a Glance CHINA: Hai Basin Integrated Water and Environment Management Project East Lower- POVERTY and SOCIAL Asia B middle- China Pacific income Developmentdiamond' 2002 Population,mid-year (millions) 1,281.0 1,838 2,411 Life expectancy GNI per capita (Atlasmethod, US$) 950 950 1,390 GNI (Atlas method, US$ billions) 1,219.1 1,740 3,352 ' Average annualgrowth, 1996-02 T I Population (%) 0.8 1.o 1.o Laborforce (%) 0.9 1.2 1.2 GNI Gross primary Most recent estimate (latest year available, 1996-02) capita nrollment Poverty (% of populationbelownationalpovertyline) 5 Urban population(% of totalpopulation) 38 38 49 i Life expectancyat birth (years) 71 69 69 1 Infant mortality(per 1,000livebirths) 30 33 30 Child malnutrition (% of children under5) 10 15 11 Access to improvedwater source Accessto an improvedwater source (% of population) 75 76 81 1 Illiteracy (% of populationage 15+) 14 13 13 - Gross primaryenrollment (% of school-agepopulationl 106 106 111 China Male 105 105 111 ___ Lower-middle-incomegroup Female 108 106 110 KEY ECONOMIC RATIOS and LONG-TERMTRENDS I982 1992 2001 2002 Economicratios' GDP (US$ billions) 221.5 454.6 1,167.1 1,232.7 Gross domesticinvestmenffGDP 33.2 36.2 38.5 41.0 Exportsof goods and serviceslGDP 8.9 19.5 25.5 29.5 Trade Gross domesticsavingslGDP 34.0 37.7 40.9 44.0 Gross nationalsavingslGDP 35.1 38.0 40.0 43.8 T CurrentaccountbalancelGDP 2.4 1.9 1.5 2.9 Domestic c. InterestpaymentslGDP 0.2 0.6 0.5 0.5 savings Investment Total debUGDP 3.8 15.9 14.6 12.6 Total debt serviceiexports 8.0 8.6 7.7 6.1 1 Presentvalue of debffGDP 14.1 Presentvalue of debffexports 51.8 Indebtedness 1982-92 1992-02 2001 2002 2002-06 (average annualgrowth) - GDP 9.7 9.0 7.5 8.0 7.5 Chtna GDP percaDita 8.1 8.0 6.7 7.2 6.6 Lower-mtddle-incomegroup STRUCTURE of the ECONOMY (% of GDP) Agriculture 33.3 21.8 1 I Industry 45.0 43.9 Manufacturing 37.3 33.1 34.2 44.5 Services 21.7 34.3 34.1 33.7 Privateconsumption 50.7 49.2 45.7 42.5 " a, 98 99 00 o, i* Generalgovernment consumption 14.5 13.1 13.4 13.5 Importsof goods and services 7.3 18.0 23.1 26.5 -GDI *GDP 1982-92 1992-02 2001 2002 (average annualgrowth) Agriculture 4.6 3.7 2.8 2.9 Industry 11.6 11.3 8.4 9.9 Manufacturing 11.2 10.4 9.0 8.1 Services 11.7 8.4 8.4 7.3 Privateconsumption 11.4 8.1 2.8 1.9 Generalgovernment consumption 9.9 8.4 10.5 7.0 Gross domesticinvestment 9.5 9.7 13.9 1 27.5 14.9 ---Exports Importsof goods and services 9.7 12.8 10.8 ' -O-lmports I -91 -  China PRICES and GOVERNMENT FINANCE 1982 1992 2001 2002 Domesticprices Inflation (%) I (% change) 10 T Consumer prices 6.0 6.4 0.7 -0.8 Implicit GDP deflator -0.2 7.9 1.2 -2.6 Government finance (% of GDP, includes current grants) Current revenue 22.9 14.7 17.1 17.9 Current budget balance 1.I 0.0 -1.o 2.0 Overall surplus/deficit -0.3 -4.7 -3.0 -GDP deflator +CPI I ~1 TRADE 1982 1992 2001 2002 (US$ millions) Export and Import levels (US$ mlll.) Total exports (fob) 22,321 84,940 266,155 325,565 Food 2,908 8,309 12,780 14,623 Fuel 5,314 4,693 8,420 8,372 300,000 Manufactures 12,271 67,936 239,802 297,085 Total imports (cif) 19,285 80,585 243,610 295,203 200,000 Food 4,201 3,146 4,980 5,237 Fuel and energy 183 3,570 17,495 19,285 100,000 Capital goods 3,204 31,312 107,040 137,030 Export price index (1995=100) 41 85 83 78 96 97 98 99 00 01 Import price index (1995=100) 71 95 91 86 Exports Imports Terms of trade (1995=100) 58 89 91 90 BALANCEof PAYMENTS 1982 1992 2001 2002 (US$ millions) Current account balance to GDP (%) Exports of goods and services 24,906 94,198 299,409 365,395 Imports of goods and services 5 T 20,555 86,752 271,325 328,013 Resource balance 4,350 7,446 28,084 37,383 Net income 376 249 -19,174 -14,945 Net current transfers 486 1,155 8,492 12.984 Current account balance 5,212 8,850 17,401 35,422 Financing items (net) -995 .10.952 30,046 40,085 Changes in net reserves -4,217 2,102 -47,447 -75,507 1 96 97 98 99 00 01 02 Memo: Reserves including gold (US$ millions) 24,842 220,051 297,721 Conversion rate (DEC, local/US$J 2.4 5.9 8.3 8.3 EXTERNAL DEBT and RESOURCEFLOWS 1982 1992 2001 2002 (US$millions) Composition of 2002 debt (US$ mlll.) Total debt outstanding and disbursed 8,358 72,428 170,110 155,678 IBRD 0 3,752 11,550 12,051 IDA 1 4,287 8,654 8,729 A 12,051 Total debt service 2,125 8,618 24,297 23,688 IBRD 0 460 1,550 1,631 IDA 0 30 151 175 Composition of net resourceflows Official grants 47 327 240 Official creditors 657 2,343 2,156 -839 Private creditors -122 8,949 -4,017 -13,593 Foreign direct investment 430 11,156 44,241 49,308 Portfolio equity 0 1,243 3,015 2,286 F 62.103 World Bank program Commitments 330 1,865 782 563 4 . IBRD E Bilateral Disbursements 1 1,331 1,791 1,733 3 . IDA D Other multilateral - F Private -- Principal repayments 0 197 904 1,157 2 . IMF G -Short-term Net flows 1 1,134 887 576 Interest payments 0 293 797 649 Net transfers 1 841 90 -73 ueveiopmenr tconomics BIZYIU3 - 92 -  Additional Annex 11: STAP Roster Technical Review CHINA: Hai Basin Integrated Water and Environment Management Project HA1BASININTEGRATEDWATER AND ENVIRONMENTMANAGEMENTPROJECT World BanMGEF: International Waters, OP 10 Project: Contaminant-Based Program STAPRoster Expert Review undertaken by D r Gunilla Bjorklund Marmow. IdA SE-752 44 Uppsala, SWEDEN .................................... Overallimpression The Hai River is one o f the most significant rivers discharging into the Bohai Sea, China, inthe north east part o f the Yellow Sea. The river basin area i s about 265 000 km2 and includes the counties o f Beijing, Tianjin, almost all o f Heibei, parts of Nei Mongol in the north, o f Shanxi in the west, and o f Henan and Shandong in the south and southeast. The Bohai Sea i s a reproductionand nursery area for parts o f the fish and shellfish stocks of the Yellow Sea. The population of the area is more than 117 million with a density o f 500 - 1000 peoplehi2 and several mega cities but also several secondary cities. The region is one o f the countries most important industrial and agricultural regions accounting for 15 percent o f China's GDP. Over-exploitation of surface and groundwater inthe semiarid-subhumid area has resulted in that the annual water availability per capita is only 305 m3 and that the total groundwater abstraction per year in the Hai Basin i s around 26 billion m3, approximately 9 billion m3 more than the sustainable yield. As only parts o f the mega cities today have any wastewater treatment, 68 percent of the rivers innorth China are polluted. In the Hai River system more than 80 percent o f the surface water and 50 percent o f the ground water is classified as polluted and unsuitable as raw resources for drinkingwater. Both the reduction o f freshwater inflows and the increasing pollution from the discharging Hai river system has a detrimentaleffect on the fish stocks and biodiversity o f the East China Seas as well as the ecosystem functions of the Bohai Seas. And the attempts to address these issues have been hampered by a lack of coordination between the different agencies involved. The GEF Hai Basin Integrated Water and Environment Management Project aims at addressing the current threats by (i)improving integrated water and environmental planning and management inthe Hai Basin, (ii) supporting institutional aspects related to effective local, municipal/provincial, and basin-wide water and environment planning and management, (iii) addressingthe issue o f declining amount o f available water by "real" water saving, and (iv) reducing wastewater discharges from small cities along the rim o f the Bohai Sea. The project will enhance capacity building in water and environment knowledge management and implementation, including by demonstrate new technologies and management approaches. The project intends thus to contribute to the objectives under OP 10 and "play a catalytic role in demonstrating ways to overcome barriers to the adoption o fbest practices limitingcontamination o f internationalwaters". The overall impression of the project is very good. It clearly demonstrates the need to build an integrated management framework to water management inthe area. Cooperation between agencies with responsibility for different aspects o f water use having an impact on water quantity and on water quality and on the - 93 -  environment is absolutely necessary to achieve any sustainable results. The project is clearly demonstrating ways to overcome existinginstitutional barriers by addressingbothhorizontal cross-sectoral integrationand vertical bottom-up and top-down integration. The approach to decreasing accessible water quantity is innovative but is most o f all providing means to address these problems more sustainably. As the secondary towns, having no wastewater treatment, are the main contributors to pollution o f surface and groundwater, the prioritisation o f pollution control by wastewater treatment is a logical first step, a step that will needto be followed by addressing other sources of pollution such as agriculture. This would be initiated within the framework o f the different demonstration projects, which also will serve to develop capacity at the implementing agenciesto deal with the problems at differentlevels. 1. Scientific and technical soundness of the project The project brief is describing the approach to work with Integrated Water and Environment Management, IWEM, including developing and implementing policies, and legal, administrative and institutional instruments at different levels. It i s further describing measures to within such a framework achieve water quantity management, water savings inirrigated agriculture, by developing Evapotranspiration management systems including high-efficient water utilisation and different techniques for water savings, and administration o f water rights and permits. These techniques are new and innovative for the region and are based in a qualified scientific and technical knowledge. The wastewater management technique i s not described in detail but such methodologies are well tried and needed. Wastewater treatment techniques are also used inWorld Bank supported projects inthe region. 1.1 Sufficient information and knowledge to carry out theproject Information and knowledge to carry out the project has to sufficient extent been secured by including relevant institutions in the area inthe preparation for the project and in that the project buildsupon, fills in the gaps and links to two World Bank-financed project inthe region. 1.2 Appropriateness of approach to collect relevant information on sections of society and economy and on different aspects of the environment, water management and ecosystems The available information presented is to a very large extent collected by local experts, through local institutions or through the World Bank projects, which would secure best possible access to such information. A Social Assessment o f the project has been undertaken by a local consultant. 1.3 Sectoral changes needed to achieve thegoals of theproject The project brief clearly identify the need to identify the stakeholders and their behaviour and roles in relation to the project as crucial for project success. It further following the Social Assessment recommends the piloting o f the community-driven development approach to achieve a win-win situation on the integrated water and environment management including natural resources management and local socio-economic growth and will thereby secure necessarystakeholder participation. 1.4 The issue of inter-comparability of data The data collected through the Ministry for Water Resources, MWR, and through the State Environmental Protection Administration, SEPA, are not always compatible or comparable. As they are both key agencies in water management for the region and will be implementing parts of the project this could be a critical issue. The Knowledge Management subcomponent o f the program i s requiringclose collaboration between - 94 -  the two agencies, including on data management, common information system platforms, standardiseddata transfer and security protocols etc. The development of the component during project preparation resulted according to the project brief in a significant breakthrough in MWWSEPA cooperation. The river reach files and coding systems i s going to be developed into a platform where the two agencies will be able to share data and utilise it in their water fknction and water environment function zones, which should ensure inter-comparability . 1.5 The interlinkages between water-related environmental issues and root causes behind the different environmentalproblems The different environmental problems in the region are, as is described in the Overall Impression, mainly water related but with an adverse effect not only on the Bohai Sea and the East China Sea and its biodiversity and ecosystem and their functioning but also on the living conditions for the people and the economic system. The degradation o f the Bohai Sea is resulting from Land-based Sources o f Pollution, by non-treated or insufficiently treated wastewater mainly from secondary or small cities, and by agriculture, discharging through the Hai River,which is heavily polluted. The decreasing amount o f freshwater reaching the Bohai Sea is partly a result o f over-extraction o f surface and groundwater, mainly for irrigated agriculture. These issues are to be addressed by the project, where in particularly measures to address the decreasing water quantity (by evapotranspiration management) will address the root causes, while pollution control by wastewater treatment can be seen as a remedy. 1.6 Tools and methodologyfor TDA and SAP in theproject The project is not identifying any Transboundary Diagnostic Analysis, TDA, for the project as that is not required for projects that are not developed ina transboundary cooperation but which are addressing causes to environmental degradation in a transboundary sea, here the Bohai Sea. Strategic Action Plans are going to be developed in different areas but not with the same focus as for this project. This makes it difficult to see whether some aspects o f relevance to the project will be missinginthe SAPS. 1.7 Technologiesadapted and their relation to the regional socio-economicprofire Itis assumedthat the projectwill contribute to the local socioeconomic development andpeople's livelihood including by possibilities to use reclaimed wastewater as new water supplies for irrigation and non-potable municipal and industrial use. Further, evapotranspiration ET, management will contribute to better and more efficient water use in irrigated agriculture, an important economic sector inthe area. 1.8 Doproposed technologiespose environmental threats? As the proposed technologies will result in an increased amount of water available in the area, by application o f ET management, not only the socio-economic sectorsbut also the environment should benefit from that. However, if measures to address pollution in the region, such as wastewater treatment, are only applied in the most downstream parts, the resulting consequences for the environment in upstream areas might still be less advantage then anticipated. Such issues needto be addressedinthe IntegratedWater and Environment Management framework as need the necessity of not exceed the ecological carrying capacity for the region. - 95 -  1.9 Technological innovations applied to support theproject The methodology for evapotranspiration, ET, managementthat is to be applied for the region is innovative and well suited for an agriculture region where applied methodologies for large scale water saving have failed. For it to be successful a participatory approach needs to be applied, where the individual farmers as well as the sectoral organisations are informed and involved. There is thus a need for a strong component o f capacity buildingand knowledge management. 1.10 Institutional arrangements including their scientific capacity The project will according to the documentation ensure for Joint Expert Groups at central, river basin, provincial and county levels for providing technical assistance to the Project Management Offices at the different levels. A majority o f these experts will be regional experts with only few international experts. 1.11 Are the choices of demonstration sites representativeand appropriate? The demonstration sites have been chosen to address issues o f effective control o f wastewater discharge, pollution control combined with environmental improvements, "real" water savings (application o f ET management), and effective management o f water rights and well permits. As these issues are crucial for project implementation the choice o f demonstration sites to be able to demonstrate such techniques are essential. 1.12 Problems overlooked The project documentation and plan is addressingthe problematic and water and environment issues of the area within an Integrated Water and Environment Management framework, including water quality as well as water quantity aspects and their linkages to socio-economic aspects and factors, all important for the scientific base o f the project. There are some referencesto Monitoring and Evaluation, M&E, of the project andthe project documentation is including a presentation ofKey Performance Indicatorsthat mightbe used in such a process. There is, however, no plan for the Monitoring and Evaluation process. Such a process needsto be initiated early on inthe project process and an M&E planneeds to be incorporated inthe project documentation, including inthe Project Brief. 1.13 Issues of conflict No issues o f conflict between different types of water use or between different water users have been identified in the documentation. The earlier lack of cooperation between the Ministry for Water Resources, MWR, and the State Environmental ProtectionAdministration, SEPA, had it not changed into cooperation during the project preparation, could have resultedin a conflict between water use sectors. An assessment o f different risk and presentation o f different mitigation measures to meet these risks is presented in the documentation. Some o f those risks, should they not be addressed, might o f course develop into a conflict and it is essentialthat proper mitigationmeasures are taken. 2. The global environmental benefits of the project and its contribution to the IW focal area goals. - 96 -  2.1 Does theproject address issues that will result in global environmental benefits? The project, although the project area, the Hai River Basin, i s situated within one country, China, will contribute to global benefits in an International Waters area, the Bohai Sea, where the Hai River is discharging, and further the East China Sea. The project should result in improvement of the Bohai Sea environment and protection of the fish stocks and biodiversity o f the Yellow Sea and the East China Sea by reduction o f marine pollution causedby landbased sources, including secondary towns and their industries. Application o f ET management should have an effect on the total water budget o f the region including on the International Waters where Hai River is discharging. 2.2 Are any negative environmental effects anticipated? No negative environmental effects are anticipated should the project activities be undertaken within the Integrated Water and Environment Management framework, identifiedrisks be mitigated and any emerging new riskbe addressedby the cooperating institutional structure to implementthe project. 2.3 Will theproject be able to strategically meet the incremental costs of a) Assisting the country to better understand the environmental concern of the Bohai Sea and subsequently the Yellow Sea and the East ChinaSea? In cooperating with local stakeholders, including with farmers on the ET management andwith municipal stakeholders on wastewater treatment and reuse, awareness, training and capacity building should be important issues. The documentation does not clearly describe how this critical aspect will be addressed although it clearly demonstrates the needto involve all groups. b) Building the capacity of existing institutions? Many o f the different institutions were involved in the project preparations and would, based on the experiences from that be aware o f what is needed from them. All the different Project Management Offices would have Joint Expert Groups to assist the PMOs in various steps to implementactivities. The PMOs are responsible for differentaspects o f international and domestic training. The project documentation does not, however, specify how such training should be organised and how the different PMOs themselves should be trained in order to ensure compatibility not only in data and methodology but also in the approach to problem-solving. c) Implement measures that addressthepriority transbounday concerns? Meeting incremental costs to address priority transboundary concerns might be an issue in applying the integrated approach to Water and Environment Management for the Hai River Basin as such an approach should also include addressing issues o f the Hai River discharging into the Bohai Sea. In doing this, contacts for information exchange and, where appropriate, cooperation should be made with other relevant projects in the region, including the two GEFKJNDP-projects for improvement o f the Bohai Sea environment. The project documentation is referringto such exchange as beingrelevant. 3. The project's replicabilityand regionalcontext The project approach, to within an Integrated Water and Environment Management system apply measures to improve water quality and quantity and thus the discharging water into the International Water o f Bohai, Yellow Sea and subsequently East China Sea, development o f relevant demonstration sub-projects, and - 97 -  application o f innovative technology would make it highly replicable inparticularly for areas with the same climatic and socio-economic conditions as the HaiBasin. 3.1 Scopefor replication of approaches in other international water bodies The demonstration projects and the Integrated Water and Environment Management structure have been developed to be possible to replicate in other counties in the river basin and are thus seen as highly replicable. The Chinese government has ensured a broad replication should the project be successful. Particular parts, such as the ET management technology, would be applicable also to other river basins, should the physical and socio-economic conditions be favourable. 3.2 The regional scope of theproject The project intends to be implemented in a densely populated, water scarce and highly water polluted river basin inChina discharing into the InternationalWaters o f Bohai and the Yellow Sea LME, which makes the region very relevant for this type o fproject. 3.3 The innovativenessof theproject The project is introducing a new and innovative approach to water savings, which focuses on reduction in evapotranspiration through a combination o f irrigation technology, agriculture and management, building on water productivities for different crops etc. Although the methodology is site and crop specific in its application the system as such can be applied to other areas and i s very interesting. 4. Linkages to other focal areas, programmes, action plans etc. 4.1 Linkages to other GEFfocal areas The project falls under the GEF IW Focal Area, specifically under the OP 10: Contaminant-Based Programme but it is also contributing to the objectives under the Biodiversity focal area 2 "Coastal, Marine and Freshwater ecosystems" as the intention is that it will include specific studies on requirements for reduced pollution and increased flows to the Bohai Sea whereby it should enhance marine ecology. It will further determine minimumecological flows for watercoursesand wetlands inthe HaiBasin. 4.2 Relevant conventions/programs consideredand taken into account Objectives under the Biodiversity convention will be supported. The project will also respond to what is stated in the Global Programme o f Action to Protect the Marine Environment from Land-based sources o f Pollution by seeking to reduce pollution o f water discharging into the Bohai Sea by the different activities under the project. 4.3 Consistencybetweenproposed activities and existing National Plans The project documentation is identifying existing plans such as the 10th National Five Year Plan (2000-2005), Bohai Blue Sea Action Plan, Hai Basin Comprehensive Management Plan, etc. municipality plans etc. and their emphasis on the needfor water-saving, reduction and prevention o f pollution etc. It thus seems to be good consistency between proposed activities and existingplans. - 98 -  5. Degreeof involvementof stakeholders inthe project The project has, according to the project documentation, been designed to involve stakeholders. Detailed case studies and surveys in typical project areas have shown the necessity to involve stakeholders in the preparation o f the different steps o f the project implementation. The demonstration project on water rights and well permit will include components to ensure maximum ownership by water users, and mechanisms for farmers' participation during the implementation o f the integrated agriculture aspects o f Integrated Water and Environment Management, IWEM, plans will according to the project brief be ensured. Detailed plans for such participation will need to be worked out and spelledout in the IWEMplans. 5.1 Will national and regional institutions be able to contribute to the achievement of the project objectives? Farmers associations and cooperatives as well as business and social groups will according to the documentation be consulted as part of the IWEM preparation. At project policy level the documentation describes the need to examine possible new institutional arrangements for basin-wide policy, planning and management for establishing a high-level, multi-sectoral coordinating committee. Otherwise the implementation arrangements will build on existing institutional structure, which to a large extent has been involved inthe project preparation, thereby enhancing cooperating abilities. Insuch cooperative efforts they would be able to contribute towards the project objectives. 5.2 Capacity building As part o fthe project the Joint Expert Group that will support the CentralProjectManagement Offices will provide assistance and training and the project shall according to the documentation include quarterly workshops in different areas to exchange experiences. The documentation does not provide information about capacity building of different stakeholders such as water users and farmers. Such capacity is essential and would need to be ensuredto secure project sustainability. 6. Conclusions The project is a very well designed and developed project with a strong governmental ownership and commitment by the Chinese government. The project approach, to develop an IWEMframework and within that develop and implement measures to deal with water scarcity (by applying new and innovative methodologies), groundwater miningandpollution, i s scientifically and regionally appropriate and viable. A strong national and regional institutional arrangement is inplace and as project preparations has resulted in increased cooperation efforts it is likely that this arrangements will provide a good bases for project implementation. To achieve long-term sustainability the project also intends to include participation of different water users, although the project is not providing any information on how it intend to enhance the capacity among different water users for them to contribute towards successful project implementationand sustainability. Furthermore, a detailed plan for Monitoring and Evaluation, that needs to be initiated early inthe project, has not been provided. With these two aspects remediated, Iwould strongly recommend the project for approval by the GEF Council, and am convinced that implementation o f this project would lead to beneficialresults for the region and the global environment. Uppsala 22 August 2003 Gunilla Bjiivklund - 99 -  AdditionalAnnex 12: Implementation Chart for Project Components CHINA: Hai Basin Integrated Water and Environment Management Project w! H -100-  Additional Annex 13: Social Assesment CHINA: Hai Basin integrated Water and Environment Management Project The China-GEF Hai Basin Integrated Water and Environment Project will cover the whole basin or a total 318,000 square km, includingBeijing, the national capital, Tianjin municipality, Hebei and several parts o f five other provinces, with a population of 117 million people, about 9 percent of the Chinese population. For more than a dozen years, over-exploitation o f the surface water and overdraft o f groundwater for domestic, industrial and agriculture uses inthe densely populated basin has resulted in a severe water crisis with water resources shortage and environmental pollution. This situation has seriously affected people's lives and health, and constrained local socio-economic productivity development. This Project will support promotion o f integrated water and environment management in the Hai Basin, with the long-term objective to realize a more rational distribution o f water resources, increase water use efficiency and rehabilitate environmental quality and ecological systems. To counter the deteriorated situation water resources in the Hai Basin, strict control o f water use and pollution would lead to improvement o f the people's living conditions and rehabilitation o f their production sustainability. At the same time there is a need for major changes in their water use behavior that firher lead to multiple interactions between their economic activities and the water control management. As the Project beneficiaries, the local people's understanding, participation and collaboration will be an important aspect o f Project success. A social assessment (SA) was recommended and undertaken in the Project preparation to address the Project impact on behavioral change among the local population under integrated water and environment management, to detect any potential social risks and possible social costs that the Project may bring about on local society, and to promote community participation and empowerment in the programs o f ground water management and water right management in the Demonstration Projects. According to the Project contents and the socio-economic characteristics of the Hai Basin, the SA was particularly focused on the rural areas outside Beijing and Tianjin municipalities where about 80-90 percent o f the Project population intherelatedprovinces livewhile lacking effective measuresto protect themselves from water shortageand pollution. Such focus o f the SA made it more pointed and meaningful in steering the Project design. The SA was commissioned to a qualified sociologist from the China Agricultural University as SA. In accordance with the Bank requirements, including methods and contents o f social analysis (Social Analysis Sourcebook), the SA consultant prepared a work guideline and first did a desk review, collecting and analyzing the secondary data and information o f the Basin socio-economic background, water related crisis and current anti-crisis activities, legal and policy environment, as well as the potential Project stakeholders at various levels and their interests in comparison with the proposed Project concept. Based on this initial review, the SA fieldwork was designed and conducted through exemplary qualitative data gathering using the participatory approach and quantitative data collection with appropriate sampling methods. As the culminating activities o f the SA, stakeholders workshops were carried out at village, township, county and municipality levels for validating, verifying and communicating the SA concerns and results. A SA report was completed and attached to the draft Project ImplementationPlan (PIP). The Project areas were exemplified with two typical counties inHebei Province, Cheng-an and Shexian, for the SA field surveys and case studies, where water was extremely short and severely polluted, which has affected local economic production. Moreover, in terms o f the topographic features and groundwater quality, these places were also demarcated into some plain and mountainous areas with different irrigation schemes, and some brackish and fresh groundwater zones facing different water usability constraints. -101 -  These represented the multiple characteristics of the Project coverage and reflected the complex socio-economic diversities in the Hai Basin for the SA to analyze. Table 1 (below) summarizes the basic conditions of water resources and quality and the related socio-economic situations in the Project areas in Hebei Province. Table 1 Basic M ter Conditions and Socio-Economic Si iations inHebei's Five Key Counti 3 Plain area(Cheng-an, Guantao, - - Mountainous area (Shexian County) Linzhang and Feixiang Counties) Water resources Very little or almost no surface water, Highproportionofsurfacewater, Surface water "all rivers driedup, and all water mainly used for irrigation; polluted". More conservancy engineering works (middle - small scales mainly). Underground water Deficient inshallow layer o f freshwater More water resourceinvolume, with low quality; freshwater, unevendistribution, with Large area o f shallow brackish water, difficulties. requiring the use of deep layer freshwater for drinkingand irrigation; Severe deficiency due to long term over exploitation. Industryand Low percentageof industrialuse, more Highuse degree, with large proportion agriculture use than 85% by agriculture. and concentrateddistribution o f industry use. Fluorine and Iodint There are highfluorine concentrate areas - Better water quality, lack o f iodine in with different degrees. some areas Water Area pollution by chemical fertilisers and environment pesticides exists extensively and can be Agricultural quite serious, esp. nitrogen and pollution phosphorousto shallow underground freshwater (mainly inthe plain areas); Causedsecondary salinization o f arable land soil (dain areal Industriallliving Very limited wastewater treatment for pollution industrial and domestic wastewater, more severe in mountainarea (Shexian County). Crossboundary More serious than mountain areas. Enteringsurfacewater deteriorated pollution in quality, the pollution concentration increased. Agriculture Wheat and corn as the maincrops; Wheat and corn as the main crops; More cotton and vegetable production more fruit production; compared with the mountainous area; More structure adjustment was made More difficult to adjust cropping pattern with more water and soil conservation due to market factors. and converting cultivation to forestry. Farmers' Pig rearing is the principal animal Small sized and scatteredanimal Ron-landincome husbandry production; rearing; sources Ruralindustry More out-migration as wage labour, More TVEs o f construction material rtructure construction, trade, etc. and mining. more local wage labours. -102-  Each o f the items andthe related fmdings inthe table were detailed and elaborated inthe SA analyseso f the sampling cases. Inthe plain area, most agricultural and industrial water uses, as well as the domestic water uses, relied on groundwater; while in the mountainous area, irrigation districts were served mostly with the surface water. Different water resources resulted in differentiation o f community livelihoods but all water resources were significantly polluted. In the plain area, the groundwater was drawn from the shallow layer inthe freshwater zone andfrom the deep layer inthe shallow brackish water zone (brackish water inthis zone is generally not suitable for drinking or irrigation). With overdraft, however, the freshwater in the shallow layer became almost exhausted while the deep groundwater has very limited recharge resulting in very rapid drawdown. Local people, from county leaders to farmers, were well aware o f the water problems, and they were even panicking about their deteriorating situation, andhence very keen to change. Beilangpu village in Cheng-an county, for example, had 100 wells irrigating its 450 ha o f farmland. The wells were deployed muchmore densely (about one per 2 ha of land) thanthey were supposedto be (about one per 7 ha) becauseo f competition in irrigation without unifiedmanagement and cooperation. As a result, in most cases no more water could be drawn from one well if two neighboring wells being pumped simultaneously. Still worse, farmers might have to enlarge the wells andbuy bigger pumpsmore frequently (almost every year in the worst cases) due to rapid water table lowering (in some cases by about 2 meters annually and it was presently as deep as 42 meter in the fresh shallow layer zone) They also had to take more andmore time andpay for more and more electricity to irrigate the same land. Farmers said, with this tendency, it would not take too long that all the 100wells might have to be abandonedbecausethe expense installing deeper wells and larger pumps was too high. Farmers hence wanted to save water in order to stabilize their livelihoods and secure their future. Infact, they had some ideas to do so, such as usingpipe irrigation, cultivating dry crops, and organizing themselves under a unified irrigation management systems for better cooperation. They practiced some o f the ideas, such that they cultivated 4000 muo f cotton taking about 60 percent of the village land. Yet this was not good enough for either water saving or increasing their incomes, and they wanted to do more. So when they heard o f this proposed Project, they were very enthusiastic andparticipatedenergetically inthe discussions. The SA found that there were some other local projects going on for natural resource rehabilitation, such as the programs of Returning Unarable Farmlandto Forestry, Integrated Watershed Management, etc. But for most o f the Projects as well as the local development planning in general, decisions were usually made top-down and communities and farmers had not much say but merely collected-funds and provided labor inputs. Evenvillage leadersrarely hadvoices inProject choices and decision-making processes. As a result, the rehabilitation measures were limited. The World Bank supported Water Conservation Project was also implementing in some o f these areas with significant bottom-up aspects. WCP pays great attention to institutional management reform as one o f its three major measures for "real" water saving (the other two measure are improvement of irrigation systems and improved agricultural techniques), by encouraging farmers' participation in local irrigation management through organizing Water User Associations (WAS).The WUA as an effective participatory means was hence also introduced and adopted inthis Hai Basin Project design, based on the rich experience from WCP and other Bank aided rural development projects nationwide. With a systematical review o f the rehabilitation effectiveness on the basis o f local community and farmer consultation, the SA synthesized some potentialrehabilitation measures as shown in the table below, incomparison with other ongoing development programs. - 103 -  Local Rehabilitation N asures Synthetic Analysis Identifiedmeasures I WBWCP GEF Proiect Local environment awareness Establish coordination and * * management mechanism among the relevant agencies Formulate and implement Formulate plans for integrated plans for integrated management o f water resource and management o f water environment resource and environment Scheme o f integrated * management o f surface water Scheme of well irrigation management with quota o f * well amount and water volume Improve or establish and operate monitoring system for underground o f underground water exdoration Prevention o f agric. Pollution I Management o f water use right and Formulate necessary local * admission o f diggingwell * regulations and water rights svstems Raise relevant agencies' Capacity buildingo f water resource abilities o f administrative and environment management midance and technical service Improve the techniques and Engineering work for polluted wate equipment of enterprises to re-collection andre-use save water and treat Dollution Improve engineering works o f Undergroundpipe Works and devices to prevent 1 irrigation systems project, drip irrigation leakage Establish or improve irrigation Water Users' Organise WUAs management system Associations Adjust croppingpattern and Agronomic measures Water saving techniques Convert unarable adopt water saving techniques (plastic film, returning farmland to straw to filed, etc.) forestry Convert cultivation to ~~ Integrated forestry, prevention of erosion watershed management Note: * mark means that activities would be included inthis area. - 104 -  To undertake these rehabilitation measures, the SA stressed a bottom-up approach to the Project design and implementation. For the Project objectives, it was obvious that there would not be a sustainable use o f the water resources unless the users wanted to do so; and there would not be a sustainable socio-economic development unless its beneficiaries participated inthe development processwith a sense o f ownership. For this purpose, the SA recommended the pilotingofthe community-drivendevelopment (CDD) approach as a good way to achieve a win-win situation o f both natural resource management and local socio-economic growth inthe Project context. The primary objective of the CDD approach to be adopted would be to enhance the capacities of communities (especially the poor) to implement development programs of their own choice while improving their access to social and productive services, resources and infrastructure. Through household interviews, focus group meetings and stakeholder workshops on various levels, both the Project and local people confirmed to each other the significant roles o f community participationand empowerment inimprovement o f the local situation. The SA actually dida pre-survey and information dissemination for some CDD pilots under the Project's demonstration project o f water resources management and water rightmanagement; and particularly highlighted the commitment and capacity building o f community participation in these programs at current stage, especially for those poor and vulnerable groups. Following the SA survey and analysis, the Project will prepare and plan for the CDD adaptation to the demonstration pilot sites in the following aspects: Understanding o f the objectives o f the CDD exercise in the Project context (links to intended social and economic development outcomes and impacts o f the Project), the needs and meanings of incorporation o f CDD into the demonstration projects, from both the perspectives of local communities and the Project desigdmanagement; Investigation o f the pilot's situations o f water crisis, local socio-economic conditions, natural resources, demographic information, social diversity and gender, important contingencies, and legal, regulatory and policy environment; identification o f stakeholders and analysis o f their behavior and roles inrelation with the ProjecKDD activities; Institutional capacity assurance and capacity building for the CDD approach (from the village to county levels); creation o f enabling environment for stakeholder participation (with different gender roles); technical training framework on community level; Community mobilization and involvement through PRA (participatory rural appraisal), including community members in all social strata and especially those in the poor and vulnerable groups; farmers' commitment and capacity building (including training programs and leaning by doing), participation mechanism establishment; Communityivillage (or ina township scope ifpreferred) development plan- its contents and drawing proceduresbasedon the PRA outcomes; combination o fwater resourcemanagement with community socio-economic development action plan - to be made with a bottom-up approach involving and ensuring communities themselves in all aspects of the development activities' design, financing, management, implementation, monitoring and evaluation; CDD budget estimation, implementationtactic framework and timetable; CDD participatory monitoring and evaluation mechanism; clear accountability (to local people/farmers and authorities) and aligned incentives through transparent and flexible processes; and CDD outcomes expected. - 105-  Inthe SA exercise, CDD was thus determined to be an effective means to either achieve Project goals or avoid/minimize potential social and cultural risks, though there still is a good deal o f work necessary to prepare and implement a successful CDD demonstration pilot in its adaptation to a Chinese society where there was no previous experience of this kind. More trainings in this regard was proposed as well. Moreover, because o f the SA was a reiterative process during the Project life cycle, it also set forth the monitoring and evaluation indicators for future assessment o f the CDD participatory nature in particular andthe Project achievements ingeneral. On the whole, as an integrated method to incorporate participation and social analysis into Project design and implementation work, the SA helped to ensure the Project social development objectives were well set and the proposed means to achieve them were appropriate, in light that this Project proved to be eagerly expected and strongly supported by local communities and farmers as its primary beneficiaies. As an integral part o f its overall strategic objectives, this Project was set to demonstrate a win-win achievement o f both sustainable use of water resources through the integrated water and environment management, and sustainedcommunity livelihooddevelopment via local institutional andparticipatory capacity building. -106 -