China - Yunnan Environment Project

Document of The World Bank Report No: 32364-CHA IMPLEMENTATION COMPLETION REPORT (IDA-28920 SCL-40550) ON A LOAN AND CREDIT IN THE AMOUNT OF US$125 MILLION AND SDR 17.4 MILLION (US$25 MILLION EQUIVALENT) TO THE PEOPLE'S REPUBLIC OF CHINA FOR A YUNNAN ENVIRONMENT PROJECT June 28, 2005 Urban Sector Development Unit East Asia and Pacific Region  CURRENCY EQUIVALENTS (Exchange Rate Effective December 31, 2004) Currency Unit = Renminbi Yuan (RMB Y) Y 1.00 = US$ 0.12 US$ 1 = Y 8.3 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS BTO Back-to-Office Report CAS Country Assistance Strategy DEAP Dianchi Environmental Action Plan EA Environmental Assessment EPCSL Environmental Pollution Control Subloans Facility GOC Government of China ICR Implementation Completion Report KDC Kunming Drainage Company MOF Ministry of Finance ODA Overseas Development Administration (UK) PAP Project Affected Persons PSR Project Status Report QAG Quality Assurance Group RAP Resettlement Action Plan SAR Staff Appraisal Report STW Sewage Treatment Works TA Technical Assistance TM (TTL) Task Manager (Task Team Leader) WTP Water Treatment Plant YEPO Yunnan Environment Project Office Vice President: Mr. Jemal-ud-din Kassum, EAPVP Country Director: Mr. David Dollar, EACCF Sector Director: Mr. Keshav Varma, EASUR Task Team Leader: Ms. Shenhua Wang, EASUR  CHINA YUNNAN ENVIRONMENT PROJECT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 6 5. Major Factors Affecting Implementation and Outcome 12 6. Sustainability 13 7. Bank and Borrower Performance 14 8. Lessons Learned 17 9. Partner Comments 18 10. Additional Information 19 Annex 1. Key Performance Indicators/Log Frame Matrix 20 Annex 2. Project Costs and Financing 21 Annex 3. Economic Costs and Benefits 23 Annex 4. Bank Inputs 25 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 27 Annex 6. Ratings of Bank and Borrower Performance 28 Annex 7. List of Supporting Documents 29 Annex 8. Experiences in Land Acquisition and Resettlement 30 Annex 9. Summary of Borrower's Project Evaluation 31  Project ID: P003599 Project Name: YUNNAN ENVIRONMENT PROJECT Team Leader: Shenhua Wang TL Unit: EASUR ICR Type: Core ICR Report Date: June 28, 2005 1. Project Data Name: YUNNAN ENVIRONMENT PROJECT L/C/TF Number: IDA-28920; SCL-40550 Country/Department: CHINA Region: East Asia and Pacific Region Sector/subsector: General water, sanitation and flood protection sector (81%); Petrochemicals and fertilizers (11%); Sub-national government administration (8%) Theme: Pollution management and environmental health (P); Water resource management (P); Environmental policies and institutions (P); Municipal governance and institution building (P); Other urban development (P) KEY DATES Original Revised/Actual PCD: 12/16/1994 Effective: 03/12/1997 Appraisal: 03/20/1996 MTR: 10/19/1999 Approval: 06/25/1996 Closing: 12/31/2002 12/31/2004 Borrower/Implementing Agency: People's Republic of China/Yunnan Province Other Partners: STAFF Current At Appraisal Vice President: Mr. Jemal-ud-din Kassum Mr. Russell Cheetham Country Director: Mr. David R. Dollar Mr. Nicholas Hope Sector Director: Mr. Keshav Varma Ms. Katherine Sierra Team Leader at ICR: Ms. Shenhua Wang Mr. Geoffrey Read ICR Primary Author: Mr. Herbert Boehm 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: L Institutional Development Impact: M Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: Yes QAG did not review this project for quality at entry.  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: Background. Rapid urbanization, industrialization and income growth in the 1980s and 1990s exerted great pressure on urban environmental services in Yunnan Province. Pollution loads in urban centers had destroyed potable water sources, reduced agricultural yields, and ended recreational use of a number of lakes. The worst conditions were found in Kunming, the capital city of Yunnan, and the adjacent Lake Dianchi. The environmental situation was also quite severe in the cities of Gejiu and Qujing. The State and Provincial Governments therefore set up a phased development program for the Province to improve environmental conditions on a sustainable basis. The major aim of the Yunnan Environment Project was thus to assist the Borrower in carrying out the first phase of this program. The project's objectives were to: (a) strengthen policies, regulations and institutional arrangements for pollution control, and municipal water, wastewater, solid waste and nightsoil management; (b) support the improvement of the lakes environment in Gejiu and Kunming in order to allow the waters to be used for potable supply, industry or agriculture as appropriate; (c) facilitate complementary sustainable investments in pollution control and municipally provided urban environmental services; and (d) introduce a comprehensive approach to planning, prioritization, and financing of urban environmental infrastructure investments. Assessment of Objectives. The Project objectives firmly reflected China's and Yunnan Province's desire and commitment to improving the environment. The Bank's China Country Assistance Strategy, discussed by the Board in June 1995, also considered environmental protection as one of four major areas of focus. The project objectives correctly embraced not only the needed physical infrastructure improvements, but to a large degree the regulatory, institutional and management improvements of urban entities entrusted with implementing environmental policies and programs, since environmental services in China are fittingly provided at the municipal level. This dual aim was particularly appropriate because in the past, Bank-supported projects achieved good physical progress but were somewhat less successful in terms of overall sector development and financial viability. Focusing on institutional and sustainability aspects, the project objectives pointedly addressed these past deficiencies. The objectives fully supported China's Environmental Action Plan and the so-called Agenda 21; the latter provided the basis for joint Government and Bank programs in the environmental sector, particularly in urban areas. Furthermore, the objectives took into account the most critical environmental problems affecting Yunnan Province after its rapid economic growth from development in industry and the service sector in the 1980's and early 90's. Urban services, especially water supply, wastewater and solid waste removal became increasingly deficient. The investments proposed under the project also firmly supported the Dianchi Environment Action Plan and similar plans for Qujing and Gejiu. These plans called for the immediate and comprehensive reversal of environmental degradation in the most environmentally challenged cities in the Province. The design thus was consistent with these objectives. The project objectives refrained from promising complete clean-up of the environment through this project. Rather, the project explicitly intended to be the first part of a phased development program that realistically, comprehensively and cautiously aimed at supporting necessary improvements to permit the - 2 -  eventual reversal of the environmental decline in the Province. 3.2 Revised Objective: Although the project was restructured in the fall of 2002 to include three new components, but the original objectives did not require revision. 3.3 Original Components: The project had five components comprising a mix of policy and investment initiatives, as outlined below. Component 1: Lake Dianchi Basin Water Quality Recovery (US$199.6 million). Investments supported the Dianchi Environmental Action Plan (DEAP), and included control of point and non-point pollution in the Dianchi Lake Basin through improved catchment management, wastewater and stormwater collection, treatment and disposal, improved collection, transport and disposal of municipal solid waste and night soil, remediation of polluting practices causing lake eutrophication, and measures to strengthen Dianchi Lake basin management, and improvements to basin water resource allocation. Component 2: Industrial Pollution Control (US$34.1 million). Investments were provided to abate industrial pollution from enterprises identified in the DEAP as most threatening to basin resources. The clean-up was to focus on two fertilizer plants, found to be the top-ranked industrial polluters of Lake Dianchi, and support was also provided to abate pollution from smaller polluting enterprises through an Environmental Pollution Control Subloans Facility. Component 3: Provincial Urban Environmental Services (US$48.6 million). Investments were in catchment management, wastewater and stormwater collection and treatment systems to protect Gejiu Lake and the Nanpanjiang River, as well as selected investments in water supply extension and improved solid waste collection in Qujing. Component 4: Environmental and Water Quality Monitoring (US$6.2 million). This component was to provide support for upgrading and modernizing environmental management and water quality information and monitoring systems. Component 5: Institutional Development, Training and Construction Supervision (US$19.1 million). This provided technical assistance (TA) to strengthen provincial, municipal, project and financial management, construction supervision, training in utility operations, updating city environmental action plans and feasibility studies, and to prepare future operations. Assessment of Project Design Overall, project design, conceived as the first of a multi-stage approach, was appropriate, albeit quite ambitious considering that virtually none of the large number of project entities had adequate experience in implementing large and complex projects, particularly in the areas of wastewater treatment and solid waste management, and had almost no prior experience in executing projects under international financing. Nevertheless, to assist in the recovery of the Lake Dianchi Basin, the Gejiu Lake and the Nanpanjiang River, the principal focus of the Yunnan Environment Project, a multifaceted and comprehensive approach was necessary. Thus, the broad spectrum of the project design encompassed the major sources of pollution, i.e., industry, household wastewater and solid waste, and non-point pollution. In addition, it correctly targeted improvements in the regulatory, institutional, and financial framework needed to effectively implement the project and to ensure long-term safeguards and financial and economic sustainability of the improvements achieved under the project. - 3 -  While the project's policy and regulatory improvements were aimed at the whole Province, the majority of the physical investments (about 80% of total costs) were limited to the capital city of Kunming, and to the cities of Qujing and Gejiu. Clearly, the project's main focus in terms of investment was put on stemming the further environmental decline of Dianchi Lake, Gejiu Lake and their associated river systems. The project focus was entirely consistent with the Province's environmental policies and fully supported the State Government's official "Three Rivers Three Lakes Program" which comprises the Huaihe, Haihe and Liaohe Rivers and Taihu, Chaohu and Dianchi Lakes. The second project objective specifically names both water bodies. Interestingly, Qujing, the fastest growing city in Yunnan, was not explicitly named in the project objectives. Similarly, the small towns sanitation component and the rural sanitation component could have received more prominent mentioning in the objectives as they expand the mainly urban focus of the project and also address non-point pollution, a major source of lake and river pollution. In hindsight, the question can be raised whether in light of the institutional constraints, the design of this first phase of the development program to improve the environmental conditions of Yunnan Province should have been scaled back to a proportion which would have been less demanding and more achievable within the original project implementation period. 3.4 Revised Components: The mid-term review exercise in October 1999 found that (a) substantial savings from the Industrial Pollution Control Component would be realized because the Kunming Chemical Fertilizer Factory was completed without Bank financing; (b) the proposed second phase of Kunyang Phosphate Fertilizer Factory, which had no direct impact on the water quality of Lake Dianchi, would be delayed beyond the expected project implementation period; and (c) a number of savings accumulated due to reserved procurement on contracts that had to be expedited in the run-up to the 1999 World Horticultural Exposition and because of lower than expected contract prices. In light of these savings, it was agreed to add three new components consistent with the project objectives: (1) solid waste management for Shilin Autonomous County to primarily benefit the popular attraction of the Stone Forest area; (2) wastewater treatment and collection for the city of Mengzi; and (3) wastewater treatment and collection for the city of Xuanwei. These new investments received the same rigorous review and evaluation as the original components, including technical and economic feasibility, environmental impact assessment and resettlement analysis. It was further agreed to extend technical assistance support to these components to ensure timely implementation. 3.5 Quality at Entry: Quality at entry of the project was not assessed by the Bank's Quality Assurance Group (QAG). The ICR rates quality at entry as moderately satisfactory because the project's assumptions concerning the project agencies' capacity to implement the project turned out to be too optimistic. In contrast, the project's consistency with the Bank's CAS as well as with government's environmental priorities and action plans weigh on the positive side of the ICR rating. Also the comprehensive design and approach to tackle the intricate solutions to initiate the recovery of a large lake basin, such as Dianchi Lake, also fall on the positive side of the rating. Environmental degradation of large water bodies is exceedingly complex and requires finding optimal and economically feasible approaches as to how to achieve a reversal of long-term deterioration. While the main culprits, such as industrial effluents, untreated urban wastewater and solid waste, can normally be identified, other sources, such as agricultural non-point pollution, and small township and village pollution are more difficult to identify and correct. The project did an innovative job in striking a balance between the large urban centers and the rural areas. Because of the project's complexity and size, not all investment proposals were prepared by the design - 4 -  institutes as thoroughly as desired. In Kunming, for example, an updated sewerage master plan was not available until late into project execution. A number of technical feasibility studies lacked essential information, such as geotechnical data needed for tunneling and pipe-jacking. Moreover, the institutional assessment of project offices and implementation agencies was overly optimistic as at project start-up, most of them were neither fully staffed nor trained with many lacking basic familiarity with Bank procurement guidelines. This resulted in severe implementation delays, amounting to over one year at the time of the mid-term review, and ultimately contributed to the need to extend the Loan/Credit by two years. Risk Assessment Almost eight pages in the Staff Appraisal Report (SAR) were devoted to systematically and realistically analyzing the project's potential risks and proposing mitigation measures. The risks identified were: (a) municipal counterpart funding jeopardizing project financing; (b) delays in transforming utilities, particularly wastewater treatment entities, to autonomous enterprises; (c) financial uncertainties of the companies borrowing funds under the industrial pollution component; (d) potential operational failures by enterprises under the industrial pollution component to properly operate their pollution abatement investments; (e) resistance by the respective authorities to timely implement tariff adjustments for water and wastewater to ensure financial viability of the utilities under the project; (f) reluctance by industry and the authorities to constrain pollutants at source possibly offsetting gains achieved through the project; and (g) potential pollution from other sources outside the project cities, such as nonpoint source pollutants from agriculture. The risks identified were comprehensive but lacked precision and prioritization. It may have been desirable to weight the risks by the likely probability as to the extent they could jeopardize the outcome of the project. Furthermore, the main factor which caused substantial implementation problems remained unidentified, namely the weak capacity building efforts of the project entities to carry out procurement under the Bank's guidelines. In contrast, the precipitous steel price increases beginning in Fall 2002 could have hardly been anticipated at the time of project appraisal. Compliance with Safeguard Policies The project's compliance with safeguard policies was exemplary. While the project's main focus was to significantly improve the water quality in the most populated areas in Yunnan, especially that of Lake Dianchi and Gejiu Lake, potential adverse effects of the planned interventions required the classification of the project as a "Category A" in accordance with the World Bank's Directive on Environmental Assessment (EA). Consequently, a comprehensive EA was prepared, reviewed by the Bank and approved by the Borrower. The recommendations of the EA were fully complied with during project implementation. In particular land acquisition and resettlement, relatively modest for the project size, were strictly handled according to the detailed resettlement action plan (RAP). Socio-economic surveys of project affected persons (PAPs) belonging to minority groups, defined in the RAPs, were carried out satisfactorily. (For more details on land acquisition and resettlement see Annex 8). In 1997, a four-member team of the Southwest Jiatong University made an initial field assessment, and in particular, gathered relevant opinions of PAPs. The group reported that land acquisition and resettlement proceeded in accordance with the official Land Acquisition and Resettlement Plan. In 1999, the QAG reviewed the project's supervision and found that safeguard policies were followed. Several of QAG's recommendations concerning resettlement, compensation and impact on PAPs were followed, and the September 2000 supervision mission confirmed that results were satisfactory. When three new components were added during the mid-term review, complete EAs and RAPs were - 5 -  prepared. The impact of the new components on minority populations was also taken into account. After incorporating comments by the Bank, the documents were deemed sound. The Kunming urban sewer network component was finalized only in 2001, quite late during project implementation. Detailed design preparation started after the Kunming municipal government had prepared the sewer master plan for the Kunming's central areas in May 2001. It was envisaged that the construction would cause considerable traffic problems and inconveniences to business and residents. The Bank therefore insisted on the development of a social impact assessment in addition to the normal environmental impact assessment and a RAP. Social design institutes in Kunming were subsequently asked to closely monitor possible adverse effects from this massive in-city construction program. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The project is expected to achieve its main original development objectives over the long-term. The ICR ratings for the specific objectives (see Section 3.1) are given in Table 4.1. Table 4.1: Outcome/Achievement Ratings of Objectives Project Objective Rating (1) Strengthen policies, regulations and institutional arrangements for pollution Satisfactory control, and municipal water, wastewater, solid waste and night soil management (2) Support the improvement of the lakes environment in Gejiu and Kunming Highly satisfactory (3) Facilitate complementary sustainable investments in pollution control and Satisfactory municipally-provided urban environmental services (4) Introduce a comprehensive approach to planning, prioritization, Satisfactory management, and financing of urban environmental infrastructure investments. As specified in the first objective, Yunnan Province and the project cities have strengthened regulations and institutions to improve water, wastewater and solid waste management. The project put the need for autonomous and financially self-reliant utility companies firmly in the foreground, with the Bank highlighting, on an on-going basis, that sustainability can only be achieved if the enterprises are allowed to take complete responsibility for the management and financial well-being of their operations. The newly created wastewater utilities and solid waste management enterprises have only recently been put into operation, and while self-reliance has not yet been achieved, the process (which will require political support) towards reaching these goals has been put into place. As stipulated in the second objective, significant environmental benefits have accrued to the Dianchi Lake Basin and other water bodies in the project areas as a result of successful wastewater interception and treatment, and the disposal of solid waste in the sanitary landfills constructed under the project. While the degradation of water quality in Lake Dianchi appears to have been arrested, the longer term goal for reversal to the point where lake water would again be a source for potable water (with only a minimum of - 6 -  treatment) has not yet been achieved. Since most of the wastewater and solid waste investments have only recently been put into operation, and further actions are needed to control industrial pollution, a dramatic turnaround of such a large water body as Dianchi Lake would be quite unrealistic. The results achieved in the much smaller Lake Gejiu, however, are impressive. The third objective was met in a satisfactory manner. Investments in water supply, wastewater and solid waste management exceeded SAR expectations. Moreover, at mid-term three additional components were added, further supporting environmental improvements in Yunnan. Although the industrial pollution investments were implemented largely without Bank funding, the results fully met the project objectives. The rating of this project objective could have been even higher if doubts about long-term viability and sustainability of the newly created wastewater and solid waste utilities could have been put to rest. Benefiting from the institutional requirement of the project, all the water and wastewater entities within the project scope have been reformed from municipal departments to companies with self-accounting and financial responsibilities. Significant progress has been achieved on tariff adjustments. The municipal governments have plans and policies in place for the above-mentioned water and wastewater companies to fully cover costs, capital expenditures and debt service within the next three years. Among the solid waste management entities, only Kunming Domestic Solid Waste Transportation and Disposal Center remains a municipal department. All others have been reformed to utility companies. Full cost recovery, including capital expenditures and debt service, will be achieved later than for the water/wastewater companies. The government has readied a five-year plan to achieve full cost recovery for them. The achievements with regard to the fourth objective are satisfactory. On the positive and more general side, the development of a longer term plan for improving the environment of Yunnan Province and the greater degree of understanding of the underlying issues and future requirements on the part of key provincial government agencies are noteworthy. In particular, the Provincial Planning Commission can be singled out as an agency with comprehensive vision equipped with the needed tools for solid planning and the capacity to propose priority interventions. Also, the project utilities substantially improved their planning and financial forecasting capabilities during the project. On the negative side, however, at the level of individual agencies and jurisdictions, institutional strengthening in terms of procurement planning, priority assessment, and construction and operational management was rather weak in the early stages of implementation and therefore was rated unsatisfactory during this period. The proposed technical assistance program under the Loan/Credit provided a considerable amount of training and hands-on demonstration, but failed to an extent to provide the support required to overcome the initial management and institutional constraints of the newly created entities. Nevertheless, through the project, all the project entities have substantially increased their management capacities. In view of the continued enterprise reform process in China, these project entities will be monitored with the aim of improving their management performance even after the external (international and domestic) experts have withdrawn. 4.2 Outputs by components: Overall project outputs were satisfactory. As described earlier, the project design was appropriate and location-specific to fulfill the quite broadly defined objectives. Construction quality in general was satisfactory, with systematic monitoring and vigilant follow-up by consultants. During field visits, supervision missions also carefully observed and commented on construction quality. The ratings of the main component outputs are given in Table 4.2 and explained thereafter. - 7 -  Table 4.2: Component Ratings Component Rating (a) Lake Dianchi Basin Water Quality Satisfactory (b) Industrial Pollution Control Satisfactory (c) Provincial Urban Environmental Services Highly satisfactory (d) Environmental and Water Quality Monitoring Satisfactory (e) Institutional Development, Training and Construction Supervision Marginally satisfactory (f) Added Components Satisfactory (a) Lake Dianchi Basin Water Quality Recovery In Kunming, two landfills in Hongshuitang and Baishuitang with a daily capacity of 1,500 tons including collection and transportation, and transfer stations were built. The landfills, which include leachate and gas collection and treatment, have successfully resolved the solid waste management problems of Kunming city and thereby prevented untreated run-off and the illegal dumping of solid waste into Lake Dianchi. In order to lengthen the service life of the landfills, recycling policies and waste minimization strategies have been introduced and efforts to improve their effectiveness are underway. Completed in 2003, the water supply project in Kunming enables the city to provide 100% coverage of potable water to all residents. The project comprised the construction of a new water treatment plant (WTP) at Beijiaochang with a daily capacity of 100,000 m3, the expansion of the existing WTP No.1 by 70,000 m3 per day, and the laying of a 16.5 km raw water pipeline from the Songhuaba reservoir to the Beijiaochang WTP. With about 40% of total project costs, the Kunming wastewater subcomponent was by far the largest investment. It included the construction of upgraded and expanded facilities at Sewage Treatment Works No. 1 to boost daily treatment capacity by 55,000 m3, and improved the facilities at Plant No. 4b and Plant No. 5. The subcomponent also included the construction of 24 km of sewers, force mains and pump stations. The recently completed works will provide Kunming with wastewater collection and treatment with a total capacity of over 500,000 m3 per day, sufficient to handle approximately 95% of the city's total wastewater. Effluents fully meet national standards. The project consequently was able to remove one of the main sources of pollution of Dianchi Lake and the Panlong River. Under the small towns wastewater subcomponent, the project included wastewater treatment plants in the towns of Chenggong and Jinning with a capacity of 15,000 m3 per day each, together with associated trunk and sewer pipelines. This resulted in an annual 5.5 m3 million reduction of effluents for each city. The actual effluents, which now meet 100% of the national standards, had a drastic effect on the adjoining waters of Lake Dianchi. The rural sanitation subcomponent introduced pioneering work in ten villages on a pilot basis to demonstrate the benefits of properly treating wastewater, refuse and agricultural waste products. It also assisted in demonstrating environmentally sound techniques in composting, farmland terracing and the use of renewable energy. The project has been very successful in expounding the benefits of reducing pollution of Lake Dianchi and the Songhuaba catchments. It is encouraging to see that the communities themselves have continued to invest in some of these areas after project completion. However, it is too early to predict the project's replicability over the long term. This is one area which ought to be pursued in a possible - 8 -  follow-on project. (b) Industrial Pollution Control In order to meet the Government's May 1, 1999 deadline to reduce industrial discharges into Lake Dianchi, the Kunming Chemical Fertilizer Plant was compelled to implement the proposed investment using its own funds. Although taken out of the project, the investment fully achieved the originally planned reduction in discharges of phosphorus to Lake Dianchi. The second fertilizer factory under the project, the Kunyang Phosphate Fertilizer Plant, successfully constructed an in-house industrial wastewater plant, but dropped, due to lack of counterpart funds, the intended second phase which was targeted at production-enhancing technologies. The second phase was supposed to be a process upgrading proposal that in any case would not have had an impact on the water quality of Lake Dianchi. The Environmental Pollution Control Subloans Facility (EPCSL), which was originally designed as a revolving fund, provided funding for pollution control projects to seven small industrial enterprises throughout Yunnan. The interest rate for subproject lending, fixed at the same level throughout the project, became uncompetitive with alternative sources of locally available funding. In the end, the facility proved to be largely ineffective, non-revolving and financially troubled. Overall, it did little to contribute to environmental improvements within Yunnan. Under this component two additional companies, the Yunfeng Paper Mill and the Kunming Steel General Company, formerly two major polluters in the Dianchi Basin area, agreed to carry out their pollution abatement action plans. As originally planned, funding for the necessary investments came from other than Bank sources. The effective treatment of their discharges before they enter the Tanglangchuan River has made a significant environmental difference to the Dianchi Basin. (c) Provincial Urban Environmental Services Under this component investments were aimed at solid waste management, water supply, wastewater collection and treatment. The results of this component greatly exceeded original expectations. In Gejiu, the project successfully initiated and established wastewater treatment, with a daily treatment capacity of 25,000 m3, meeting national effluent standards. The sub-component further added sewers, force mains and pumping stations, created eight settlement ponds, and built a 4.9 km service tunnel for storm and wastewater. The wastewater treatment had a remarkable impact on the water quality of Lake Gejiu since completion of the subcomponent in 2002 to the extent where bird and aquatic life has returned to the lake. The tunnel has significantly reduced flood conditions in the city, sparing its residents the frequent flood damage of the past and preventing other attendant hardship. The project has thus markedly contributed to a better quality of life of its residents. In Qujing, the city's first sanitary solid waste landfill was constructed with a daily capacity of 370 tons replacing the aging existing, and now closed, landfill. A new water treatment facility was also built in Qujing. Ancillary facilities included a 40 km raw water pipeline, a 9.3 km service tunnel and a distribution pipeline of over 11 km. With its daily capacity of 60,000 m3, the city can now provide 100% coverage to its residents. An 80,000 m3 per day wastewater treatment facility was built in the vicinity of the confluence of the Baishi and Xiaoxiang Rivers. Related investments comprised sewers, force mains extending over 8.3 km and ancillary equipment. The treatment process currently does not meet the secondary treatment standards stipulated by the State, as this was not required at appraisal. Upgrading of the plant is, however, contemplated. Even now this wastewater sub-component has significantly reduced pollution of the local river systems. - 9 -  (d) Environmental and Water Quality Monitoring Under this relatively small component, the Kunming Environment Monitoring Center received a newly equipped laboratory building which substantially improved its analytical and field monitoring capacity. Also, the Yunnan Environmental Monitoring Center (together with environmental monitoring stations for Qujing Municipality, Qujing City, Honghe Prefecture, and Gejiu City) was upgraded and its management strengthened. The component appreciably improved the environmental information system and thus had quite a positive impact on the analytical capacity of the participating institutes. It also helped to raise public awareness of environmental issues in the three participating prefectures in Yunnan. (e) Institutional Development, Training, and Construction Supervision This component originally comprised nine composite packages for the benefit of the executing agencies basically to carry out their responsibilities under the project. It also included support for provincial and city sector agencies, master planning, future project preparation and other programs to be defined during implementation. However, only $7 million (about half of the original funding) was actually expended. The lack of adequate training, development and management, at least in the early project phase, plagued most of the implementing agencies to the extent that Bank supervisions rated this component "unsatisfactory." Because the project did not receive the level of technical assistance and training support at the very beginning of the project (as designed at appraisal), the question arises as to whether this component was the main cause for the slow progress of the project in the early phases. At the same time, this component did have some remarkable successes strengthening construction supervision, engineering design review, procurement management, quality control, and progress monitoring. In addition, all training activities directed at the project implementing agencies were carried out as originally designed, albeit with considerable delays. Training activities were also extended to the agencies in charge of the three additional mid-term review components. The Borrower indicated that this component substantially improved its capacity to efficiently execute and monitor projects. (f) Additional Components Three investments were added after the mid-term review: (a) Shilin solid waste management; (b) wastewater collection and treatment in Mengzi; and (c) wastewater collection and treatment in Xuanwei. Under the Shilin solid waste management subcomponent, a solid waste collection system and disposal site were provided for the county-level town of Shilin and the renowned Stone Forest area. The associated landfill was established with a daily capacity of 80 tons. With this system a welcome solution has been created in this tourist mecca to handle all of the area's refuse in an environmentally friendly manner. In Mengzi, a wastewater treatment facility with a daily capacity of 20,000 m3 was built together with sewer pipelines extending over 5 km. Effluents fully meet national requirements. The facility drastically reduced the pollution load for the Lijiang River and the Changqiaohai Lake. A similar project was implemented for Xuanwei city. The treatment capacity, however, is somewhat larger with a daily capacity of 30,000 m3 and the ancillary sewer distribution and force mains measuring almost 30 km. The treated wastewater, which fully meets national standards, has a positive effect on the Dong River and the upper reaches of the Pearl River system. - 10 -  4.3 Net Present Value/Economic rate of return: The economic analysis to be employed for this project was subject to intensive discussion within the Bank. An overall economic internal rate of return for the project was not calculated at the time of project appraisal because it was felt that future benefits from certain sub-projects, such as solid waste management and wastewater collection and treatment programs, were difficult to quantify. In particular, the project impact on health, amenity, and commodity production uses could not be expressed in precise monetary terms. Consequently, for the proposed investments in Gejiu and Qujing, alternative design options were evaluated on the basis of the least-cost analysis method. The three additional sub-components in Shilin, Mengzi and Xuanwei, proposed during the mid-term review, were also examined using least-cost analysis. For investments impacting on the water quality of Lake Dianchi, the appraisal compared the proposed investments with a "do nothing" scenario, which in the long-run would require increased treatment of the water or increasingly foregoing the use of lake water and replacing it with water from sources at greater distances. As Lake Dianchi supplies about 50% of Kunming's water, the damage of the "do nothing" option would become increasingly more expensive. Such a damage analysis makes sense when all options are still available, but does not make sense after an investment option has been implemented. Alternatively, the prevention of pollution damage to Lake Dianchi could be assessed through the assessment of such benefits as increased health conditions, higher fishing yields, and augmented touristic activities. However, quantifications of such benefits lack a reasonable degree of confidence and therefore have been omitted here. In addition, for health impact assessments, time series data over a finite period of time are required but are not available. For the water supply investments in Kunming, the appraisal compared the average economic incremental benefits of the new supply with the willingness by the consumers to pay for this supply. As both resultant values came approximately to the same result, it was presumed that the net present value of the investments would most likely be positive. For a more precise quantification the staff appraisal report would have needed more evidence on the shape of the demand curve which did not exist at the time. Because of the lack of willingness-to-pay survey data to develop such a demand curve, the ICR is also unable to reconstruct the appraisal analysis. Anecdotal evidence obtained by supervision missions indicate that the residents of the project cities would not oppose full cost recovery water rates by the utilities as long as water quality is maintained and the utilities are operated efficiently. Solid waste landfill options were compared at appraisal with incineration alternatives, the latter of which all proved to be economically much less attractive. At the time of the ICR, this conclusion has clearly not changed for the four solid waste management projects under the project. The appraisal selected the individual design options again on the basis of least-cost analysis. The same method was used for the new solid waste component in Shilin. For the two chemical fertilizer plants under the industrial pollution control component, the appraisal team estimated an economic rate of return of 24% based of the fact that the annual discharge of phosphorus into Lake Dianchi would decline from 93 tons to two tons per year. As stated, one of the plants dropped out of the project, but implemented the work on its own, and for the other, only the wastewater treatment was completed. The overall reduction of phosphorus discharge into Lake Dianchi was achieved nonetheless, and it can be presumed that their investments turned out to be quite attractive. No economic analysis was presented in the SAR for the relatively small environmental subloan facility (EPCSL). 4.4 Financial rate of return: Financial rates of return were not estimated at appraisal. The SAR did provide useful information about the public utilities in existence and provided financial reviews and projection summaries of all major - 11 -  project agencies. In particular, it discussed in detail tariffs required to ensure that the entities would comply with the Loan/Credit covenants and provide long-term viability. 4.5 Institutional development impact: Overall, the institutional development impact from the project has been modest. At the beginning of the project, Yunnan Provincial Government had designated 13 agencies to implement the various components of the project; the three new components raised this number to a total of 16. While the water supply companies in Kunming and Qujing had been established previously, the wastewater companies were converted from within municipal departments to self-accounting and self-funding enterprises to implement the wastewater components of the project. However, at the end of project implementation, some of the project enterprises continued to have limited autonomy, particularly with respect to financial performance. In Qujing and Xuanwei, wastewater revenues are not channeled directly to the companies, but through the respective municipal departments. A follow-up project to the Yunnan Environment Project would carefully monitor developments in these critical areas. Yunnan Province struggled throughout most of implementation to build up management capacity of the participating agencies, particularly insofar as procurement processing, construction supervision, adequate staffing and training were concerned. Lack of institutional strengthening, especially in the newly established wastewater companies, extended over a period of six years. Concerns were especially raised regarding the Qujing drainage and solid waste management agencies. Similarly, weaknesses in procurement processing delayed a number of components and it took extraordinary efforts by Yunnan Environment Project Office (YEPO), in conjunction with their consultants, to provide the necessary training. Sewage treatment plants under the small towns component received needed special training from other cities through collaborative arrangements for transfer of knowledge. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: Global economic slowdown in the late 1990s, and especially the financial and economic crisis in Southeast Asia in 1997/1998, had an overall negative effect on many provinces in China. However, because of the World Horticultural Exposition, which took place in Kunming during the summer months of 1999, the State and provincial governments provided extensive strategic and financial support to the project to complete the bulk of the needed municipal infrastructure. These efforts primarily benefited the Kunming solid waste landfills, the wastewater plant, the water supply project and the Kunming Chemical Fertilizer Factory. On the negative side, due to the extensive construction for the World Horticultural Exposition, the city proper became highly occupied by infrastructures and buildings, the sewer system within the city proper had to be redesigned for cost-effective implementation. In addition, a number of the civil works projects were badly hit by the precipitous increase in steel prices beginning from Fall 2002. This development caused a marked slow down in implementation of the Kunming sewer component. A severe flood in the summer of 1996 caused major damage to the Gejiu wastewater component prompting substantial design changes. These modifications had the beneficial effect of protecting the city and in particular the sewer system against future flooding; this major redesign resulted in a significant, but in the end worthwhile, delay in completing this component. 5.2 Factors generally subject to government control: Counterpart funding caused delays in the beginning of the project because the approval and delegation process was too cumbersome. Funding problems resurfaced again after 2002, halting work on the - 12 -  wastewater treatment plan in Qujing, and delaying progress on the Kunming sewer component. Project progress during the first few years bogged down to a large degree by institutional weaknesses until the Provincial Government strengthened the project management framework around the time of the mid-term review in October 1999. 5.3 Factors generally subject to implementing agency control: The project's restructuring in December 2002, initially proposed during the mid-term review, became necessary as a consequence of the slow project start-up which led to several components (e.g., the raw water pipeline within the Kunming water supply component and the Kunming Chemical Fertilizer Plant) seeking other than Bank financing. The first Loan/Credit extension was needed for the most part because the urban and suburban sewerage systems in Kunming could not be completed within the original implementation period which ended December 31, 2002. The main causes for the delays were concerns about sewer alignments; major design revisions of the Kunming urban sewer component; the combined system for sewage and for storm water proposed under the new Master Plan; and inadequate site surveys. The later added sewerage subcomponents for Mengzi and Xuanwei could also not be completed before the end of 2002. The second Loan/Credit extension from December 31, 2003 to December 31, 2004 was required on account of continued difficulties in the Kunming urban sewer component, where the laying of sewer pipes (using novel pipe-jacking technology in highly congested and trafficked areas) exceeded expected time lines. Unexpected ground conditions and some contractor problems, which eventually were resolved satisfactorily, exacerbated the problem. Better site surveys and planning, and improved coordination and management could have lessened these problems. Given the lack of any experience with pipe-jacking in Kunming, the final result was highly satisfactory and a credit to the client who decided to professionalize the bidding process by including institutes from other provinces with relevant pipe-jacking experience. 5.4 Costs and financing: Actual project costs totaled $234 million, representing savings of about 27% over the SAR estimate of $320 million. The Government provided 55% of the total project costs, and the Bank Group financed 45%. Originally, the Bank was expected to finance about 47% share of the project costs. After the restructuring about $19 million of the Loan was cancelled and, since after Loan closing about $25 million remained undisbursed, this amount was cancelled as well. The IDA Credit was fully disbursed. As a result, of the $150 million Bank funding, only about $106 million were utilized. The main reason for the loan savings were overestimation on the costs of most procurement contracts and elimination of several components from the project. 6. Sustainability 6.1 Rationale for sustainability rating: Sustainability is rated likely with some reservations. Based on eight years of dialogue with the authorities on the sustainability for the provision of urban services, the results are mixed: tariff adjustments have not been fully adequate, but government willingness and support towards successful provision of urban services were strengthened. Concerning tariff adjustments, most utility companies do not generate sufficient funds to fully meet their operating costs, debt service and depreciation reserves. The lack of sustained financial viability of these companies remains a matter of concern. The utilities are well aware that cost recovery is important, but the periodic tariff revisions sought continue to be subject to approval by government authorities at a higher level as water and - 13 -  wastewater utilities are still not independently run entities. The authorities, especially at the planning and finance bureau level, repeatedly expressed their commitment to the principles of full cost recovery through adequate tariff adjustments, but also asked for patience as rate increases can only be achieved gradually. In particular, they point out that such increases are especially difficult to achieve when the facilities, such as wastewater plants and solid waste landfills, are still under construction and have not commenced operation. At the same time, the municipal governments fully understand the importance of the provision of urban services and environmental protection. For all the urban services subprojects, governmental authorities hold strong commitments, and have given policy and financial support. The governments' short-term subsidies will meet the subprojects' operations and debt service obligations and mitigate social constraints in several cities/counties resulting from very rapid increase of price indices in a short period. The governments' actions also take into account opinions expressed in public hearings. In the past, solid waste and wastewater treatment services, where available, were provided at no cost by the municipal authorities. Kunming introduced a solid waste charge in 1995, Shilin in 2002, and Qujing in 2003. These charges are still insufficient to cover operating costs, but should be interpreted as a good start towards achieving financial viability over time. In order to have a solid basis for future deliberations and decisions, a Cost Analysis and Action Plan for solid waste disposal services was prepared for Kunming, Shilin and Qujing. As the State and Provincial Governments pursue their efforts to convert municipal utilities to full-fledged autonomous enterprises, they will gradually cede the responsibility for tariff adjustments to the utilities. The extensive attention given to construction and equipment quality during construction, as well as to the careful planning for the transition from construction to operation (see section 6.2 below) should keep operational costs and maintenance/replacement of the assets within reasonable limits. 6.2 Transition arrangement to regular operations: In 2004, YEPO conducted a workshop on operational and management requirements and provided briefing and sample materials to the companies. The plans prepared by the utilities represent a solid base for the long-term operation and management of the entities. Several of the project utilities have recently contemplated private sector participation and external management contractors. 7. Bank and Borrower Performance Bank 7.1 Lending: The Bank's performance in the lending phase, encompassing project identification, preparation and appraisal, is rated satisfactory. It took exactly two years from the first identification mission (July 1994) to Board approval (in June 1996), a very short time compared to most other lending operations in China at that time. The skill mix and resources used for the preparation and supervision of the project are given in Annex 4. As set out in Section 3.1 aboe, project identification and preparation built on the findings and recommendations of the Dianchi Environmental Action Plan, and similar plans developed for Gejiu and Qujing. The first identification mission selected most of the components included in the final project, with the exception of a cultural heritage improvement component and a number of additional project cities which were later dropped. Likewise, the principal policy initiatives to be covered under the project were identified at that point and refined thereafter. One could, however, argue that the project objectives were too broadly defined, when the core project goal was the clean up of Lake Dianchi and the related water bodies. However, the proposed processing schedule, the overall project cost, and the Bank share thereof was precisely adhered to. - 14 -  As the project was, for the most part, prepared by outside consultants with the assistance of Yunnan officials, the Borrower's role was probably more passive than it should have been. The outcome of the project unmistakably proved that Yunnan and the project cities did not have sufficient time internally to adequately prepare for project implementation. The appraisal mission produced a comprehensive, high quality SAR. Nevertheless, the economic analysis received some criticism from within the Bank. This ICR evaluation, however, finds the analysis thoughtful and honest, attempted to provide quantification for the economic justification of the various components only where meaningful data was available. The legal covenants were considered as overly harsh by the Borrower, particularly those stipulating the prompt creation of autonomous enterprises for wastewater and solid waste operations, and the introduction of full cost recovery through utility services even before respective plants were commissioned. While these conditions were normal Bank practice in infrastructure projects at that time, the Borrower felt that on the basis of their firm commitment to full self-reliance by the enterprises, a more gradual and thus more politically palatable approach would have avoided the project to be rated unsatisfactory in terms of financial performance. The appraisal team overestimated the initial capacity of the provincial and three main city coordinating offices, as well as the implementing agencies, to implement the project efficiently and in a timely manner. The significant start-up problems are evidence of the Bank's optimistic valuation. The technical assistance packages, especially those including international experts, were essential as the coordinating offices and the implementation agencies were ill-equipped to handle procurement management without such expert advice. Procurement training was included in the packages, but was not utilized from the outset as expected. As stated earlier, the appraisal estimates substantially overestimated contract prices, even though unit prices were derived from quotations from suppliers and manufacturers as well as from published construction costs obtained from government sources. Virtually all bid prices came in substantially lower due to competitive pressures and the expectation by some bidders to get adjustments through variation orders and price adjustments. At negotiations, the Bank imposed stringent and probably unrealistic conditions on the Borrower, in particular with regard to conversion of the wastewater sections within the municipal departments to autonomous agencies as Loan/Credit effectiveness conditions. In reality, the stipulated actions could not have been accomplished within the given time and therefore were done only on paper. Nevertheless, the wastewater companies gained considerable operational experience as the project progressed. 7.2 Supervision: The supervision performance of the Bank is rated satisfactory, despite resource constraints to carry out missions with the needed frequency, intensity and capacity complement. Considering unsatisfactory ratings for procurement, financial compliance and institutional development, missions were often too short and understaffed, often with only one or two staff. Supervision missions could have been more frequent and intensified, particularly during the first couple of years when it became evident that project schedules were slipping and the institutional capacity of the agencies was not commensurate with project demands. The Borrower complained about having to deal with four task managers (TMs) with different approaches; however, for the bulk of the time only two Bank staff managed the project. Assistance, advice and compliance monitoring by the two principal TMs was exemplary as they highlighted issues honestly, consistently and vigilantly. Their reviews of compliance with safeguard policies and their project ratings - 15 -  were consistent and realistic. The project benefitted greatly from moving the procurement review function for this project from Washington to the Bank's Beijing Office. Task team produced detailed and informative BTO-reports, highlighting problems and proposing recommended actions. Safeguards, including EAs and RAPs, were monitored and followed up by all supervision teams. Ratings were realistc. 7.3 Overall Bank performance: The Bank's overall performance is rated satisfactory, as both the lending and supervision phases benefitted from skilled, experienced and highly motivated task teams comprising, inter alia, engineers, environmental and resettlement experts, financial analysts, and economists working over a period of ten years from project identification to Loan/Credit closure. The Borrower also rated the Bank's performance as satisfactory. Borrower 7.4 Preparation: Borrower's performance during preparation was satisfactory, although it could have been more actively involved. The Borrower asserts in its own evaluation of the project that staff in the project coordination offices, as well as in the implementation units, were insufficiently trained to actively assist in project preparation and implementation and thus had to fight an uphill battle from project start-up to cope with project procedures, management, bid document preparation, construction supervision, cost control and institutional development. They further felt that in the appraisal exercise and the preparation of the SAR they were only able to play a passive role, especially in the development of the procurement programs. Once they fully understood the documents and procedures, they were compelled to seek revisions, resulting in delays in bid documentation, and the project overall. These are indeed good observations; however, project agencies, many of whom had been recently established, did an admirable job of providing an enormous amount of technical, organizational, financial, environmental data and analysis during project preparation. Considering that they had neither prior experience with international organizations nor with highly complex environmental projects, all involved project agencies need to be commended for their efforts under very difficult circumstances. 7.5 Government implementation performance: Government's implementation performance was satisfactory. All provincial and municipal authorities remained firmly committed to the project throughout the project period, both in terms of leadership and financial support. In the early stages of project implementation, they focused to a large extent on construction activities. Their dedication to ensure that the project would have no unreasonably adverse impact on the environment, minority groups and persons who needed to be resettled, is commendable. Provision of Provincial counterpart funding was initially delayed by one year because of an overly lengthy approval process and less than expected revenues. Because the Government failed to establish a strong project management team at the beginning of the project, institutional weaknesses plagued the project for an extended period of time, especially in procurement management and financial performance of project entities. Implementation was also less successful concerning Government compliance with financial Loan/Credit covenants. The Borrower was to convert the three major implementation agencies in Kunming, Gejiu and Qujing from entities within municipal government departments to autonomous enterprises. However, the start of this conversion process, including valuation and transfer of assets, was delayed by more than one year and took several years to complete. Tariff adjustments for utility services as described earlier, were - 16 -  also delayed. Despite these difficulties, the overall achievement of institution building under the project has been impressive. 7.6 Implementing Agency: The performance of the coordinating offices and the implementing agencies was overall satisfactory. Institutional weaknesses hampered the project throughout the implementation period, mainly because: (a) neither the provincial and the municipal project coordination offices, nor the implementing agencies had prior experience with international organizations and their particular project monitoring and procurement rules; (b) 16 implementation agencies had to be coordinated; and (c) the roles of the Yunnan Environment Project Office (YEPO), the other municipal project offices (Kunming Environment Project Office, Gejiu Environment Project Office and Qujing Environment Project Office), and the implementing agencies was not clearly defined from the outset and never fully understood by the parties. Responsibilities vis-