China - Shanghai Urban Environment Program Project

Documentof The World Bank FOROFFICIAL USEONLY ReportNo: 29775-CHA PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDLOAN IN THEAMOUNT OF US$180MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FORA SHANGHAIURBANENVIRONMENTPROJECT INSUPPORTOFTHESECONDPHASEOFTHE SHANGHAIURBANENVIRONMENTPROGRAM June 8,2005 UrbanDevelopment Sector Unit China Country Unit EastAsia andPacific Region This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosedwithout World Bankauthorization.  CURRENCYEQUIVALENTS (ExchangeRateEffectiveJune 1,2005) CurrencyUnit = Yuan (Y) Y 1.00 = US$0.12 US$l.OO = Y8.27 FISCALYEAR January 1 - December31 ABBWVIATIONS AND ACRONYMS APL Adaptable ProgramLoan CAS Country Assistance Strategy CEAM ShanghaiChengtouEnvironmentalAsset ManagementCo. Ltd. CEIDC ShanghaiChengtouEnvironment IndustryDevelopment CompanyLimited CQS Consultant Quality Selection DFV District Financing Vehicle DRA DesignReview andAdvisory Services EA Environmental Assessment EAF Environmental Assessment Framework EMP Environmental ManagementPlan FMS Financial ManagementSystem GDP Gross Domestic Product ICB International Competitive Bidding LED LocalEconomic Development MOF MinistryofFinance MR Metropolitan Region NCB National Competitive Bidding NDRC National DevelopmentandReformCommission PIU Project ImplementingUnit PMO Project ManagementOffice PPP Private-Public Partnership RAP ResettlementAction Plan RPF ResettlementPlanFramework SCAESAB ShanghaiCity Appearance &Environmental SanitationAdministration Bureau SCC ShanghaiConstruction andTransportationCommission SAFE StateAdministration ofForeignExchange SEPA StateEnvironmental ProtectionAdministration SEPB ShanghaiEnvironmentalProtectionBureau SFB ShanghaiFinanceBureau SHUEP ShanghaiUrbanEnvironment Project SHDRC ShanghaiDevelopmentandReformCommission SMG ShanghaiMunicipalGovernment SMSC ShanghaiMunicipalSewerageCompanyLimited SMWSC ShanghaiMunicipalWaterworks South CompanyLimited SOE StatementofExpenditure SSPl ShanghaiSewerageProject SSP2 SecondShanghaiSewerageProject SSPCC ShanghaiSewerageProject Construction Company  FOROFFICLALUSEONLY STP SludgeTreatment Plan SWA ShanghaiWater Authority SWAOD ShanghaiWater Assets Operations andDevelopment CompanyLimited SWEC ShanghaiWater andEnvironment ConstructionCompanyLimited TFYP TenthFive-YearPlan UDIC ShanghaiUrbanDevelopment andInvestmentCorporationLimited WTP Water Treatment Plant WWTP Wastewater TreatmentPlant Vice President: Jemal-ud-din Kassum, EAPVP CountryManagerhlirector: DavidDollar, EACCF Sector Director: Keshav Varma, EASUR Task Team Leader: Mats Andersson, EASUR This document has a restricteddistributionand may be usedby recipients onlyin the performance of their official duties. I t s contents may not be otherwise disclosed I , lwithout World Bank authorization.   CHINA SHANGHAIURBANENVIRONMENTPROJECT. 2 APLPHASE CONTENTS Page A. STRqTEGICCONTEXT AND RATIONALE ................................................................. 1 1. Country and sector issues .................................................................................................... 1 2. Rationale for Bankinvolvement ......................................................................................... 2 3. Higherlevelobjectives to whichthe project contributes .................................................... 2 B . PROJECT DESCfiIPTION ................................................................................................. 3 1. Lendinginstrument ............................................................................................................. 3 2. Program objective andPhases ............................................................................................ 3 3. Project development objective and key indicators .............................................................. 5 4. Project components ............................................................................................................. 6 5. Lessonslearned and reflected inthe project design............................................................ 6 6. Alternatives considered and reasonsfor rejection .............................................................. 7 C. IMPLE~ENTATION .......................................................................................................... 8 1. Partnership arrangements .................................................................................................... 8 2 . Institutionaland implementation arrangements .................................................................. 8 3 . Monitoringandevaluation of outcomeslresults., 9 4. Sustainabillty .. ................................................................ ....................................................................................................................... 9 5. Criticalrisks andpossible controversial aspects............................................................... 10 6. Loadcredit conditions and covenants ............................................................................... 11 D APPRAISAL SUMMARY . ................................................................................................. 12 1. Economic and financial analyses ...................................................................................... 12 2. Technical ........................................................................................................................... 13 3. Fiduciary ........................................................................................................................... 13 4 . Social................................................................................................................................. 13 5. Environment., .................................................................................................................... 14 6. Safeguard policies ............................................................................................................. 14 7. Policy Exceptions and Readiness ...................................................................................... 16  Annex 1:Country and Sector or ProgramBackground ......................................................... 17 Annex 2: Major RelatedProjectsFinancedby the Bank andlor other Agencies .................26 Annex 3: Results Framework and Monitoring ......................................................................... 28 Annex 4: DetailedProjectDescription ...................................................................................... 35 Annex 5: Project Costs ................................................................................................................ 39 Annex 6: ImplementationArrangements ................................................................................. 40 Annex 7: FinancialManagementand Disbursement Arrangements ..................................... 45 Annex 8: Procurement Arrangements ...................................................................................... 50 Annex 9: Economic and FinancialAnalysis .............................................................................. 61 Annex 10: District FinancingVehicle @FV) ............................................................................ 77 Annex 11:SafeguardPolicy Issues ............................................................................................ 98 Annex 12: Project Preparationand Supervision .................................................................... 108 Annex 13: Documentsinthe Project File ................................................................................ 110 Annex 14: Statement of Loans and Credits ............................................................................ 111 Annex 15: Country at a Glance ................................................................................................ 115 Annex 16: Maps ......................................................................................................................... 117  CHINA SHANGHAI URBANE ~ O ~ E PROJECT-APL PHASE2 N T PROJECTAPPRAISAL DOCUMENT EastAsia andPacific Region EASUR Date: June 8,2005 TeamLeader: MatsAndersson Country Director: David Dollar Sectors: Water supply (20%), Sewerage Sector Director: Keshav Varma (50%), Solidwaste management(lo%), Sub- Project ID: PO75732 nationalgovernmentadministration(20%) Lending Instrument: Adaptable ProgramLoan Themes: Other urbandevelopment (P), (APL) Pollution managementand environmental health(P), Environmentalpolicies and institutions (P) Environmentalscreeningcategory: A Safeguardscreeningcategory: S2 Source Local Foreign Total BorrowerlRecipient 209.00 45.00 254.00 IBRD 88.00 92.00 180.00 Total (incl. $10 millionofInterestduringconstruction) 297.00 137.00 434.00 FY 06 07 08 09 10 11 Annual 10 20 40 50 30 30 Cumulative 10 30 70 120 150 180  Does the project depart from the CAS incontent or other significant respect? No Ref.PADA.3 Does the project require any exceptions fromBankpolicies?Ref. PAD D.7 No Have these been approved by Bank management? I s approval for any policy exception sought from the Board? Does the project include any critical risk rated "substantial" or "high"? No Ref. PAD C.5 Does the project meet the Regional criteria for readinessfor implementation? Yes Ref.PADD.7 Project development objective: Ref PAD B.2, TechnicalAnnex 3 The objective of the project i s to expand Shanghai's environmental managementagendainthe metropolitan area through support for a selectedset of priority investments, enhancementof financial architecture for urban environmental infrastructure, andpolicy andinstitutionalreform initiatives. Project description: Ref. PAD B.3.a, TechnicalAnnex 4 The project comprises five components: 1. Water Supply Management component, to improvethe water service coverage andquality in parts of QingpuDistrict for apopulation of about 200,000 residentsby expanding the distributionnetwork. 2. Wastewater Management component, to managethe wastewater inthe NorthWest areaof Shanghai, by renewingandrerouting a trunk sewer interceptor andby implementinga phased program to dispose of sludge from two large wastewater treatment plants inan environmentally sustainablemanner. 3. SolidWaste Managementcomponent, to improvethe city's sanitary standardsby closingand rehabilitating two solid waste sites on prime land, andby introducingnew management tools. 4, District FinancingVehicle (DFV) component, to support environmental infrastructure improvements in suburban districts by establishing anew municipalfinancial management instrument. 5, InstitutionalStrengthening andTraining (IST) component, to support a range of strategic studies inthe areas of water supply, wastewater, and solid waste management, andcapacity- buildingactivities by relatedimplementing agencies(most ISTitems areincludedin 1-4above). Which safeguardpolicies are triggered, if any?Re$ PAD D.6, TechnicalAnnex 10 0 Environmental Assessment 0 InvoluntaryResettlement  Significant, non-standard conditions, if any, for: Re$ PAD C.7 3oard presentation: None 1.Loan effectiveness conditions: (i) Executionof subsidiary loan agreementsbetween ShanghaiMunicipalGovernment and SMSC, SMWSC,CEAM andCEIDC, satisfactory to the Bank. :ovenants applicable to project implementation: 1, Disbursement conditions (i) Signing of contractsby SMSC and SMWSC respectively with consultancy firms for construction managementservices (condition of disbursementof the respective civil works category). ;. Implementationcovenants ByDecember 31,2006 SWA will together with QingpuDistrict prepare a Wastewater Management Plan acceptable to the Bankfor the Xujing service areain QingpuDistrict. B y December 31,2006 SMG will take all measuresto adopt municipal wastewater tariff guidelines for all suburbandistrictslcounty of Shanghai. Each Project Company shall prepare, inaccordance with terms of reference acceptableto the Bank, andfurnish to the Bank by September 30,2008, an operation and maintenance (including financing) plan for the facilities constructedor to be constructedand other assets purchasedor purchasedincarryingout their respective partsof the Project, SMWSC and SMSC, startingin2005, shall produce total revenuesequivalent to not less than the sumo f (i) its total operating expenses (including for maintenance) before depreciation; (ii) debt service requirements; (iii)increasesinworking capital other than cash; and(iv) ten percent (10%) of its averagecapital expenditures over a rollingthree-year period. SMWSC andSMSC, starting in2005, shall review yearly, on the basis of forecasts, whether it would meet the total revenue requirements andif any review shows that it would not meet the requirements, shall take all necessarymeasures in order to meet such requirements. SMWSC and SMSC shall not incur any debt unless a reasonableforecast of its revenues andexpenditures shows that its estimatednet revenues for each fiscal year duringthe term of the debt to beincurredshall be at least 1.3 times its estimateddebt service requirements in such year on all of its debt includingthe debt to be incurred. Through written contract with the Beneficiary, CEAMshall ensure that the Beneficiary producesfor each fiscal year, commencing 24 months after the date of commissioning of its Sub-project, total revenues equivalent to not less than the sum o f (a) its total operating expenses (including for maintenance and a provisionfor depreciation); and (b) the amount by which the debt service requirements exceeds the provision for depreciation,  (viii) Through written contract with the Beneficiary, CEAM shallensure that the Beneficiary reviews yearly, on the basis of forecasts, whether it would meet the total revenue requirements and if any review shows that it would not meet the requirements, the Beneficiary shall take all necessarymeasuresinorder to meet such requirements  A. STRATEGICCONTEXTANDRATIONALE 1. Countryandsector issues Key Development Zssues and GovernmentStrategy The Shanghai Municipal Government (SMG) seeks to develop Shanghai as a sustainable, globally competitive municipality and an international economic, financing, trade and shipping center at the heart of the Yangtze RiverDeltaeconomic region. This will be achieved by continuingto enhance the economic, financial, trade and manufacturing status of the municipality. This objective supports the strategy of the national government to achieve balanced (equitable) and sustainable growth, averaging 7% p.a. duringthe 1la Five-Year plan period (2006 - 2010). Shanghai's move towards multi-source financing of its infrastructure i s also consistent with China's infrastructure sector andfinancial market reforms, The continuing fast rate of growth of Shanghai-inboth economic anddemographic terms - results inincreased environmental pressures. This creates challenges for mitigatingpollution, and for ensuring the security and sustainable managementof the water supply, wastewater, and solid waste sectors inthe municipality's core city and suburban areas.' Inparticular, the current impact of development inthe suburbson the metropolitan environment, andthe expectedlarge population increase inthe suburbs by 2020 illustrate the urgency of continuedenvironmental infrastructure investments andimprovedenvironmental managementmetropolitan-wide. The responsibility for environmental management inthe core city and suburbs i s divided between SMG andthe districtlcounty governments, respectively. The municipal government has pursued an aggressive environmental clean-up andpollution prevention programinthe core city since the 1980s. Inrecent years, the districtlcounty governments have also made progressinthe provisionof environmental infrastructure and services within their individualjurisdictions. With the growing spreadof development from the core city to the suburbs, SMGis committedto develop a coordinated metropolitan-wide approach to environmental improvements and infrastructure, and to play a leadrole inthe implementation of that approach. SMG believes that this would: achieve animprovedbalanceof urban service levels andenvironmental protection across the municipality; provide districts with an opportunity to benefit from andmake use of municipal levelcapacity (including financial) and experience; andto benefit from economies of scale that would be realizedif core city infrastructure i s expanded to suburban areas. Environmental sustainability i s considered a prerequisite for Shanghai's economic growth and for the continued livability of the municipality. Shanghai i s placingparticular emphasis on two aspects of environmental sustainability -security of environmental services andmanagement, and improvements inthe quality of environmental service delivery. SMG continues to promote a sound environmental asset management strategy which places priority on maximizingand securing the use of existing infrastructure assets. As aresult, many 1 Shanghaihas 18districtsandone county (ChongmingIsland), eachwith close to one millionresidents. Six districtsare fully within the corecity; twelve districts andthe county are either partly or fully outsidethe core city. The municipalareais 6,300 km2,of which about 10% (662 km') is the core city. Shanghai's currentpopulationis about 18 million (incl. 5 million migrants). SMGis encouragingrelocationfrom the core city to suburbanareas. Shanghaihastoday avibrant secondary housing market. 1  of the components inthis project would rehabilitate andexpandthe use of existingwater supply, wastewater and solid waste assets, ensuring that these remain viable and secure for the future development of the municipality. Moreover, as part of the city's development vision, the Shanghaiauthorities have recognized the needto improve urbanenvironmental conditions to enrich the living conditions for its citizens, and foster the investment climate and sustainablegrowth. Key policy decisions have already been taken, including: applying the "polluter pays" principle; redefining the role of the state from a service provider of environmental services to that of aregulator, with an increasing role for the private sector; andincreasingthe financial self-reliance of urban environmental servicesfor operations andcapital investment. SMG i s also embarking on innovations inenvironmental infrastructure finance by broadening its options and accessingcapital markets, while increasing financial transparency. Inconjunction with Adaptable ProgramLoan 1(APL1) implementation, SMG's asset managementcompany for the waterlwastewater sector has applied to the national government for an enterprise bondissue during2005. This bondwouldbe afirst inChinainthe urbanenvironmental sector. SMGalso intends to continue its application of Private-Public Partnerships(PPP) inthe sector, buildingon its PPPexperience duringAPL1, Le., the long-term concessioncontracts enteredinto for a wastewater treatment plant (WWTP) and a landfillrespectively (both being financed by the Bank) and a build-operate-transfer (BOT) contract for a relatedWWTP. APL2, through a District FinancingVehicle (DFV) instrument, will advance the environmental and service improvements in suburban districts, applying a new andinnovative inter-governmental mechanism inChina. The DFV will add value to districtslcounty level governments by mobilizingeffectivefinancing andprovidingproject management support, andby being a conduit between districtslutility companies andthe municipal government and the Bank. 2, Rationale for Bankinvolvement The project i s the secondphase of the APL, which was approvedinJune 2003. The required triggers for the program to move to APL2 (included inAnnex 3) have been satisfiedina timely and satisfactory manner. The Bank's primaryrole inthe project i s three-fold. First,the Bank will provide Shanghai the benefit of its extensive global and China experience by continuing to support sector reforms, includingthe development of regulatory frameworks and institutional approachesthat will expand the strategic focus of environmental managementinShanghai beyond the central districts. Second, the Bank will continue to support the evolution of enhanced instruments for municipalinfrastructure finance through: (a) an enterprise bondissue; (b) implementation of a financing development vehicle for municipal-levelsupport of district government infrastructure development; and (c) initiatives for further public -private (social) sector partnerships. Third, the Bank will continue to provide financial support for Shanghai's environmental investment program. Since the early 1980s, the Bank has had a long and productive collaboration with Shanghaiinimprovingthe city's urban environment infrastructure, most recently through the ongoing implementation of the APL1. 3. Higher level objectives to which the project contributes This project supports the Government's objectives of sustainabledevelopment and improvements inlivability during the transition from a rural to an urban economy, and the 2  provisionof environmental infrastructure to ensure the sustainability of the rapid industrialization and urbanization processes. It supports government's strategy to achieve balanced (equitable) and sustainablegrowth. The project will support two of the three Country Assistance Strategy (CAS) themes: (i) to facilitate an environmentally sustainable development process; and (ii)to help improvethe businessenvironment andfacilitate the transition to a market economy. Given Shanghai's current stage of economic development andinstitutional capacity, the project has the potential to serve as an example for urban managementpolicies across the country and the region. The project is consistent with the Bank's urban strategy of improvedlivability andthe water sector strategy of sustainable and affordable provision of sanitation services. B. PROJECTDESCRIPTION 1. Lendinginstrument This is the secondphaseof an Adaptable ProgramLoan (APL). Itis avariable spreadUnited StatesDollar loan. 2. Programobjective and Phases The overall program is the first adaptable program loan to China, and has the objective of improving environmental conditions inShanghaiby progressive development and implementation of integrated, metropolitan-wide environmental managementmeasures. Through this APL, Shanghaii s pursuinginnovative ways of providing services to Shanghai's about 18 million residents, andto extend such services to its less affluent districts outside the core city, inparticular for water supply, wastewater, and solid waste management. The economic competitiveness and longer-term growth of Shanghai are threatenedby the presenceof environmental deficiencies, a legacy of the area's past and due to recent rapid growth, particularly interms of sub-standard water quality, incomplete wastewater collection and treatment, andinadequatedisposal practices for municipal solidwaste. While substantial investments have beenmade, the sewerage andgarbagedisposal systems inthe core city are incomplete. To addressthese problems, includingenvironmental `nuisance' conditions experiencedby localresidents and businessowners, Shanghaii s pursuinga strategy through implementation of this APL. Phase 1focused on environmental underpinnings, policy development andcapacity building (APL1); Phase2 on deepening of the environmental agenda; andPhase 3 on the consolidation of the achievements. Due to the continued rapideconomic and population growth, increasedenvironmental pressuresare resultingindeteriorating water quality, Inthe core city, the current environmental conditions arecharacterizedby stagnant andpolluted surface water bodies with domestic waste entering canals and streams, foul odors inwaterways insome areas (although drastically improvedoverall duringthe last ten years), etc. The environment insuburban districts i s characterized by indiscriminate dumpingpractices, stagnant and seriously pollutedsurface water bodies, etc. Inthese areas (inthe core city as well as outer districts) landvalues are depresseddue to such nuisance conditions. Following upgrading of the infrastructure and urban services, the investment environment i s expected to further improve, Shanghaiwill benefit correspondingly from increaseddevelopment revenues (land leases) and tax revenue. 3  The program i s expected to result inthe elimination of the keyenvironmental deficiencies within the municipalityby haltingthe deterioration of the raw water quality, improvingthe sewage collection andtreatment coverage, reducingcurrent unsanitary disposal practices of solid waste, andenhancing policy andinstitutional incentives for long-term cost-effectiveness and operational and financial sustainability of the responsible entities inthe sectors on metropolitan- wide scale. While the investments inthis infrastructure are madeto last for some twenty or more years, they are to a large extent financed by short- to mediumterm loans from localbanks. Inaddition, suburban districts tend to obtain less favorable terms than SMG due to higher credit risk. The APL program will therefore also address the financing of urbaninfrastructure andrelatedurban services, by supporting SMG inits pursuitof accessingthe domestic capital markets through enterprise bondissues, and establishing afinancing vehicle supporting suburbandistrict governments, Through an increasingly "multi-source financing" approach SMG will be able to improve its cost-effectiveness of strategic environmental investments. APL1. The objectives of the ongoing APLl are to put inplace underpinnings andenabling conditions for SMGto pursue an integrated, metropolitan-wide approachto environmental management, The loan is financing seweragenetworks, wastewater treatment plants, a landfill, and upgrading of services inunderservedhistoric areas inthe city. Extensive construction i s ongoing, with about US$20million (10%) of the loan disbursed by early 2005. Moreover, good progressi s beingmade on infrastructure finance and on private-public partnerships (PPP): a proposal for an enterprise bondissue relatedto the program hasbeen submitted to the national government for approval; a District Financing Vehicle (DFV) has been designedby an existing SMGinvestment company; andoperation andmaintenance contracts for alandfill anda wastewater treatment plant, bothfunded by the APL program, have been signed with private sector firms. Status of Triggers for APL2 The three mandatory triggers for proceeding to APL2 have been met, as per review by a Bankcommittee independent of the task team. These triggers are: (a) SMGhasprepared a solidwaste managementmasterplancontaining policy oncharges; (b) ShanghaiWater Assets OperationsandDevelopmentCo.Ltd. (SWAOD) has prepared an investment plan andformulated a preliminarybonddesign andSMG has submitted it to central government for approval; and (c) SMGhas preparedan administrative framework and draft implementing regulations for social participation inwaterlwastewater andlor solid waste management. In addition, two of three non-mandatory triggers have been met, i.e., SMGhas completed an interimreport of a study for an UpperHuangpu Catchment Management Plan, andthat SMG has completed design of a DFV, A trigger related to pilot urban upgrading hasnot yet been met due to implementation completion delay, mainly due to delayed approval process of a local conservation plan. Pilot completion is expectedby 2006. Details are includedinAnnex 3. Objectives of APL2. APL2 will support implementation of programs that respondto SMG's continuing work on its environmental managementagendathrough further investments and policylinstitutionalreform initiatives, with the suburban districts increasing their participation in this agendaby takingmeasuresto improve water quality, sanitation andsolid waste management. These investments meet short-term needs as identifiedinShanghai's strategic 4  plans, as well as longer-term sustainability and investment effectiveness. InAPL2, SMG proposesto maintainthe program's focus on the water supply, wastewater and solid waste sectors where significant investment needs still exist, especially as Shanghai has been selectedas host of the World Expo 2010. APL2 will further enhanceShanghai's environmental institutional andpolicy agendato: (a) further refine its water supply, wastewater andsolid waste sector strategies; (b) expand the municipalgovernment's environmental managementinterventions to the greater metropolitan area, where the economic andurbanpopulation growth i s most rapid, and the environmental protection and service levels are lagging; (c) implement the first stage of infrastructure finance initiatives started inAPLl (Le., bondfinance, DFV, andcontinued PPP); and (d) deepenother reform initiatives supportedby the APL1, including heritage protection and air quality. SWAOD will prepare an infrastructure financingplaninthe water supply and wastewater sectors for ShanghaiMunicipality that estimates five year projected urban infrastructure capital expenditure requirements andcompares this with forecasted levels and sources of finance in order to identify the main financing gaps, as well as the additional policy measuresrequired to facilitate cost effective financing (including through greater access to municipal andcommercial credit markets and private capital) of the continuedinfrastructure development in Shanghai. Shanghai Chengtou Environmental Asset Management Co. Ltd.(CEAM) will prepare a financing planfor Shanghai's suburban districts that estimates five year projected sewerage and wastewater facilities capital expenditure requirements. APL3. Respondingto the needs of this growingmetropolis, it is anticipatedthat APL3 will include further development of a sustainablefinancial system for urban environment services, continued strategic investments inthe water and solid waste sectors, further selective renewal of wastewater infrastructure, and some expansion of approachesto upgrading urbanenvironment services inpoorer, underservedareas. Some financing under APL2 i s includedfor studies on related subjects. Shanghaimay also wish to expandthe partnership with the Bank inAPL3 to air quality improvements, given the increasedsupply of natural gas to its metropolitan area. 3. Project development objective and key indicators The objective of the project i s to expand Shanghai's environmental management agenda inthe metropolitan area through support for a selectedset of priority investments, enhancementof financial architecture for urban environmental infrastructure, andpolicy andinstitutionalreform initiatives. Key indicators are: activities associatedwith environmental improvements inboth the core city andthe greater metropolitan area, enhancementof municipal water, wastewater and solid waste sector strategies, expansion of infrastructure finance options, and implementation of selectedpriority investments. The triggers for APL2 (see Annex 3) were assessedby the Bank team, andreviewedby a separatecommittee external to the team. This committee confirmedthat five of the six triggers for APL2 were met, including allthree mandatory triggers and two of the non-mandatory triggers (at least one of the non-mandatory triggers i s required to be met), and that Shanghai thereby i s incompliance with necessarytriggers for the Bank to proceed with Phase 2 of this APL. The trigger relatedto implementation of an urban upgradingcomponent is not yet being 5  met due to delay in approval of a relatedlocal conservation plan. Completionof this component i s expected in 2006. No related activities are included inthe scope of the APL2. The triggers for APL3 (see Annex 3) were also reviewed with SMG andwere slightly adjusted, basedon current circumstances andthe refined focus of the APL2 project. Specifically, trigger No. 2 pertaining to urban upgrading was replaced by a trigger relatedto water supply, consistent with the refinement of APL2; and trigger No. 5 relatedto sludge management was reworded for clarity, For further details, see Annex 3. 4. Project components The project comprises four investment components and an institutionaldevelopment and capacity buildingcomponent:' 0 Water Supply Management component, to improve water service coverage andquality in partsof QingpuDistrict for apopulation of about 200,000 residents by expanding the distribution network. 0 Wastewater Management component, to managethe wastewater inthe North West area of Shanghai, by renewing and rerouting a trunk sewer interceptor andby implementing a phasedprogram to dispose of sludge from two large wastewater treatment plants inan environmentally sustainablemanner. 0 Solid Waste Management component, to improvethe city's sanitary standardsby closing andrehabilitating two solid waste sites on prime land, andby introducingnew managementtools. 0 District Financing Vehicle (DFV) component, to support environmental infrastructure improvements insuburban districts by establishing a new municipal financial management instrument. 0 InstitutionalStrengthening andTraining (IST) component, to support a range of strategic studies inthe areas of water supply, wastewater, and solid waste management, and capacity-building activities by relatedimplementingagencies (most IST items are included inthe previous components above). 5, Lessonslearned and reflected inthe project design Strength of a Program Approach. Experience has shown that achieving significant impact ina major urban area inChinarequires consistency of approach, careful planning, and time for the maturation of essential and often challenging policy reforms and initiatives. The APL continues to be an appropriate instrument to enable Shanghai to progressinphasedsteps towards meeting its current environmental management goals. The ability of the city leaders to set out clear program goals, to begin phaseddelivery through APL1, and to clearly anticipate the next phase, demonstratesthe strength of this programapproach. L Inparallel,various carbonfinanceprojectsmaybedeveloped, inparticularfor landfillgas andwastewater sludge drying. Itis assumedthat relatedinvestments, as required, would be non-Bank financed, 6  The policy initiatives andfinancial architecture ambitions of the APL program are complex, and were envisaged to be implemented inphases. The triggers were designed with Shanghai to reflect this approach. The solid progressmadeby SMGandthe concerned project agencies in meetingthe triggers in a timely manner demonstratesthe validity and strength of the approach, and provides a clear lessonandjustification for moving to APL2. Sustained Commitment to Partnership. SustainedBank involvementwith Shanghai Municipality, and Bank support to key infrastructure sectors essentialfor economic growth, has enabled the Bank to: (a) make a meaningful impact and a significant contribution to meetingcity needs; (b) take policy discussionsto the next level of complexity; and (c) strengthenthe ShanghailWorld Bank partnership, which has now spannedsome one and a half decades. This sustainedandconsistent participation inone of China's major cities, and an important driver of China's economic success, has enabledthe policy dialogue to grow andthe program to expand. This lessonwould bebuiltonandexpandedinAPL2. Borrower Ownership and Quality of Preparation, The Chinaurbanloanportfolio is the largest andmost successful inthe Bank. OED and QAG assessments have confirmed satisfactory project preparation, implementation, outcomes andproject management. Key features of this success have been shown to be Borrower ownership, appropriateness and efficiency of programdesign, andfinancial arrangements to sustain sector operations and maintenance. This project will continue to incorporate these lessons, with sustainability as a project objective. Bank involvement will also facilitate continued wastewater utility reform. Costs havebeen found to be overestimatedon earlier andcurrent Bank-supported urban projects inChina. Adoptingconventional costestimating methods (which arepartly basedon"norms" rather than on market prices) has resulted inoverestimation of project costs. International and localconsultants have conducted an independentreview of cost estimatesto ensure that the costs reported inthe final feasibility studies of this project are as close to market rates as possible. 6. Alternativesconsideredand reasonsfor rejection The APL Letter of Development andthe related Shanghai Development Plan underpinningthis programmatic loan set out the city's development strategy, andenvisaged environmental infrastructure investments. These havebeenreviewedandconsideredbothrational andrequired for prudently managedcity development. Comprehensive analysis of alternatives was conducted for each proposedproject component. For each component, the "with" and "without" project options were also considered. Details are available inthe project files, and are summarizedin the economic analysis inAnnex 9. Regarding the DFV component, see Annex 10. Water Supply Management, The raw water quality inQingpudistrict adjacentto Shanghaihas deteriorated to such anextent that it was found that the incremental cost of supply from the large existing Changqiao water treatment plant was less than the alternative of complex andrisky treatment enhancement of the degradedraw water available to Qingpu. Wastewater and SludgeManagement. A comprehensive sludge managementstrategy considered a wide range of options, focusing on the financial andenvironmental implicationsof alternatedisposal and sludge usage strategies, including ranges of treatment (digestion, 7  dewatering, drying, composting, andincineration). Usage and disposal includedlandscaping, public open space, agricultural lands, andlandfill. Concerns over heavy metalcontent, institutional responsibilities for the sector, marketability andpublic acceptance of stabilized wastewater sludge, andthe urgency for disposal of the very large volumes of sludge generatedby Shanghai, concludedthat a combination of treatment and disposal strategies was optimal, with stabilization through digestion being the cornerstone. MunicipalSolidWasteManagement. The environmental andsocialbenefits of ignoringor rationally closingthe two existing waste sites reflect clear advantagesto supporting a technically and environmentally soundcapping andremediation program for these sites. Alternative methods for the closures were also considered. DistrictFinancingVehicle Investments. The choice of theseinvestments hasbeenbasedon identification of service deficits (such as the lack of wastewater treatment or sanitary landfill facilities) andthen consideration of alternative approachesto waste collection, treatment and disposal, to achieve the required standards. Inaddition, any DFVfinancingwould be required to be consistent, with andcontribute to, overall long term plans to meet service deficits. InstitutionalDevelopmentand CapacityBuilding. The focus of theseitems is to support and consolidate implementation. Principalconsideration was given to "with" or "without" these inputs,inparticular considering risks of quality management, andthe opportunity to continue to innovate through improvedplanning and service delivery. The outcome represents a reasonable balance, Air PollutionManagement. Air pollutionmanagementissueshavebeenrecognized as emerging issues, The studies ongoing under APLl will clarify the extent of support appropriate for potential inclusioninAPL3. Pollutionfrom motor vehicles i s becoming a particular concern, andinterest remains for possible useof CompressedNatural Gas (CNG) for buses. C. I ~ L E ~ ~ A T I O N 1. Partnershiparrangements The project i s free-standing, and does not have any other co-financiers. However, as for APL1, Shanghaii s seeking parallel grant financing for some technical assistance activities, andDesign Review and Advisory (DRA) services relatedto preparation of Phase3 of the APL program. 2. Institutionalandimplementationarrangements An APL LeadingGroup (APLLG)hasbeen established, chairedby aVice Mayor of Shanghai (the Deputy SecretaryGeneral of Shanghai i s the Deputy Chief) to provide policy guidance, coordinate important issuesanditems, and to monitor progress inpursuingthe overall urban environment improvement strategy. The members of the APL LGare the directors of Shanghai Development andReformCommission (SHDRC), Shanghai Construction andTransportation Commission (SCC), ShanghaiFinance Bureau (SFB), and ShanghaiWater Authority (SWA). Under the leading group, an APL Project Management Office (APLPMO) i s responsible for daily coordination, managementand supervision. The APL PMOi s headedby the SHDRC, and comprises representativesof SCC, SFB, SWA and other bureaus and agencies involvedinthe APLprogram. The APL PMOhasbeenstrengthened with the mix of staff skills adjusted to reflectthe needsof the respective implementation phase of the program. 8  Agencies responsible for implementing individual components are: 0 Water Supply Management component: The ShanghaiMunicipal Waterworks South Company Ltd., under guidance from ShanghaiWater Authority. 0 Wastewater Management component: The ShanghaiMunicipal SewerageCompany Ltd., under guidance from ShanghaiWater Authority. 0 Solid Waste Management component: The ShanghaiChengtou Environment Industry Development Company Limited, under guidancefrom Shanghai City Appearance and Environmental Sanitation Adrmnistration Bureau. 0 District Financing Vehicle @FV) component: The Shanghai Chengtou Environmental Asset Management Company Limited, and districtlcounty utility companies. 0 Institutional StrengtheningandTraining (IST) component: The respective implementing agency responsible for individualIST items. Project staff has been nominated ineachof the implementing agencies. They are responsible for preparation of detailed designs andbiddingdocuments, procurement, construction supervision andmanagement, andoverall implementation monitoring andmanagement. This staff will work closely with the APL PMO. Further details are includedinAnnex 6. 3. Monitoringandevaluation of outcomeslresults Annex 3 lists the main outcome indicators for the project, as well as the principalresults indicators for each component. The APL PMO and the respective Project ImplementingUnit (Pm)willregularlycollect thedatarequiredfor monitoringandevaluationofoutcomeslresults. SMGandthe APLPMOwill review the results onthe basis of periodic progressreports, and take appropriate corrective action where needed. 4. Sustainability Shanghai municipalleadershave a clear and statedvision of the importantplace that their city has incontributing to China's economic growth and social development, The programmatic approach of the project design stresses SMG's commitment to this longterm and strategic approachto economic development. Recognizing the important place that infrastructure has in underpinning localeconomic development (LED),andthereby enabling and supporting the national economy, the proposedproject concentrateson improving the delivery of essential urban services, giving particular attention to environmental improvements. This strategic approach gains support and traction from the community, by improvingthe daily living conditions at local level, and from key sectors of the economy where these factors are vital to encourageleading edge creativity and investment. The project, through investinginkey urban services, will further consolidate and strengthenthe urban livability andcompetitiveness of the municipality, Bank financing would support about 43% of component costs. The commitment of Shanghai and the concernedutilities to finance the remaining60% represents a significant commitment 9  and, basedon the Bank's analysis of Shanghai's financial capacity, underpins the project sustainability. The importance of the municipalityto China's economy also emphasizesthe level of policy support that couldbe provided if neededto undertakethe innovations includedinthis APLZ phase of the program. APL2 investmentsinthe core city are mainly incremental improvements and enhancements to existing systems, the latter representing important previous sector investments by the government. SMGhas a firm andestablishedtradition of soundfinancial andfiscal management. Through corporatization of urban utilities, and also selectively adopting PPPmanagementand delivery mechanisms, government policy has been aimed at achieving full cost recovery for urban services, The operational aspects of the agreedcost recovery policies are includedas financial covenants of the project, consistent with Bank policy. Bank experience inShanghaihas found that the government aims to meet two core objectives in makingadjustments to tariffs andcharges: achieving financial targetsandviability on the one hand, while ensuring social equity and stability on the other. To do this, the city considers a basket of urban services, includingtransport andenergy, andthe overall cost of living for all income groups, while undertaking extensive public consultation. Adjustments are implemented after consideration of inter-sectoral impacts. The sustainability of the sector investments proposed inAPL2 wouldbe enabledthrough these carefully managedbut well tested mechanisms. 5. Critical risks and possiblecontroversialaspects Risksfor the investment componentsinclude: (a) delays inimplementation of the DFV component sub-projects due to newly formed implementation arrangements; (b) lack of satisfactory asset managementprocedures establishedby district andcounty governments for DFVinvestments; and(c) slow implementationof the solidwaste sectorreforms duringthe sector reorganization inShanghai. Appropriate risk mitigationmeasures have beenbuilt into the project design and in supervision arrangements. These are summarized below. Potential reputational risks include deviations from the Resettlement Action Plan(RAP) and Resettlement PlanFramework (RPF). These risks would be managedthrough close supervision of fiduciary and safeguardaspects through effective use of Bank staff basedinBeijing. RiskRating Risks RiskMitigationMeasures with Mitigation Project level governanceissues I Close supervision of fiduciary and M safeguardissues ~ Implementation of the DFV Development of sound operating M I S component through new entity procedures for CEAM. (CEAM) Provision of institutional development 10  I technicalassistance&training to CEAM. I Progressmonitoringand support through regular supervision missions. Satisfactory institutionaland Covenant requiringowners of the assets M I S financial arrangementsfor operating to prepareand adopt an operation and and maintaining assetsby district maintenanceplan (including financing) andcounty governments, acceptable to the Bank. Progressmonitoring and support through regular supervision missions. Resistanceto implementation of Active support of continued masterplan M user charges andrelated market- refinement andrelatedproposals. basedinstruments inthe solid waste sector while it i s beingreorganized. Delays inachieving triggers for Active APLl andAPL2 support and M proceeding to APL3 supervision. 6. Loadcreditconditions andcovenants a. Loan effectiveness conditions: (0 Executionof subsidiary loan agreementsbetween ShanghaiMunicipal Government and ShanghaiMunicipal Sewerage Co, Ltd. (SMSC), ShanghaiMunicipal Waterworks South Co. Ltd. (SMWSC), ShanghaiChengtouEnvironmentalAsset Management Co. Ltd. (CEAM), and Shanghai ChengtouEnvironmentIndustry Development Co. Ltd. (CEIDC), satisfactory to the Bank. Covenants applicable to project implementation: b, Disbursementconditions (0 Signing of contracts by SMSC and SMWSC respectively with consultancy firms for construction managementservices (condition of disbursement of the respectivecivil works category). c. Implementation covenants (0 B y December 31,2006 SWA will, together with QingpuDistrict, prepare a Wastewater Management Planacceptableto the Bankfor the Xujing service areain QingpuDistrict. (ii) ByDecember31,2006 SMGwilltakeallmeasurestoadoptmunicipalwastewater tariff guidelines for all suburbandistrictslcounty of Shanghai. (iii) EachProjectCompanyshall,bySeptember30,2008, furnishtotheBankan acceptableoperation and maintenance plan (including financing) for the assets constructed under their responsibility. 11  SMWSC and SMSC, startingin2005, shallproduce total revenuesequivalent to not less than the sumo f (i) its total operating expenses (including for maintenance) before depreciation; (ii) debt service requirements; (iii) increases inworking capital other thancash; and (iv) ten percent (10%) of its averagecapital expenditures over a rolling three-year period. SMWSC and SMSC, startingin2005, shall review yearly, onthe basis of forecasts, whether it would meet the total revenuerequirements andif any review shows that it would not meet the requirements, shall take all necessarymeasuresinorder to meet such requirements. SMWSC and SMSC shall not incur any debt unless a reasonableforecast of its revenuesandexpenditures shows that its estimatednet revenuesfor eachfiscal year duringthe term of the debt to beincurredshall be at least 1.3 times its estimateddebt service requirements in such year on all of its debt includingthe debt to be incurred. Through written contract with the Beneficiary, CEAM shall ensure that the Beneficiary produces for eachfiscal year, commencing 24 months after the date of commissioning of its Sub-project, total revenues equivalent to not lessthan the sum o f (a) its total operating expenses(including for maintenance anda provisionfor depreciation); and (b) the amount by which the debt service requirements exceedsthe provisionfor depreciation. Through written contract with the Beneficiary, CEAM shall ensure that the Beneficiary reviews yearly, on the basis of forecasts, whether it would meet the total revenue requirements and if any review shows that it wouldnot meet the requirements, the Beneficiaryshall take all necessarymeasuresinorder to meet such requirements. D. APPRAISAL SUMMARY 1. Economicandfinancial analyses Economic Analysis. The economic evaluation of the specific investment components of the APL2 was mainly conductedusingcost effectiveness analysis. The analysis focused onthe nature of the overall sector strategy and framework andthe fit of the specific APL2 investments into that strategy ina logical and cost effective manner. For individual project components, alternatives were examined, includingdifferent technical design options, locations, and scale economies, to ensure that the best alternative was chosento achieve component objectives. On a selective and complementary basis, economic rates of returns were also calculated (basedon a cost-benefit approach). Overall, the APL's specific project components were evaluated usinga two pronged approach: (a) economic evaluation of the specific project components financed directly through on-lending arrangementsvia the Shanghai Finance Bureau; and (b) economic evaluation of the District Financing Vehicle (DFV) as a conduit for anticipated individualproject components inthe outer districts. The first part assesses options (costs, benefits, etc.) on a component by component basis, whereas the secondpart assessesDFV as a conduit for an anticipated portfolio of smaller 12  sub-projects inthe outer districts of Shanghai. Affordability analysis has also been conductedto ensurethat the project related user charges will be affordable by low-income consumers. FinancialAnalysis. An overview of the budgetary municipalfinances of Shanghai was carried out. Financial analysis for water supply and wastewater managementcomponents andthe corresponding implementingagencies, shows that SMSC and ShriwSC will have the ability to provide the necessarycounterpart funds for project implementation, andwill be able to service the debt (both the Bank loan and other debt from localbanks, etc.) that will be incurredto implementthe project, For details on the economic andfinancial analysis of the project, see Annex 9; for the DFV component, see Annex 10. 2. Technical The proposed components were studied anddesignedby highquality Shanghaidesign institutes and reviewedby international consultants, Project designs are technically sound, representthe least cost alternative, and are basedon good engineering practice. Analysis of conceptual and design alternatives has beenconducted, as described inAnnex 9 and 10. The detailed project description i s includedas Annex 4, 3. Fiduciary The financial management assessment concluded that the project meets minimumBank financial managementrequirements. The project will have inplace before loan effectiveness, an adequate project financial managementsystem (including an updated APL financial managementmanual) that can provide, with reasonableassurance, accurate andtimely information on the status of the project inthe reporting formats agreedfor the project and as requiredby the Bank. The Financial Management System assessment i s inthe project files. For further details, see Annex 7. The procurement capacity assessment concluded that existingcapacity meets minimumBank requirements. Procurement capacity will be enhancedinsome implementing agencies, building onthe capacity inthe most experiencedagencies involved. For International Competitive Bidding(ICB) andNationalCompetitive Bidding(NCB) contracts, the PIUs have selected experienced international tendering companies inShanghai, who are familiar with the Bank's competitive biddingprocess. The Procurement Capacity Assessment is inthe project files, Annex 8 provides further details on procurement. 4. Social Significant social benefits will accrue from the project, includingimprovedenvironment and water quality for Shanghai's residents, with related health benefits. Negative social impacts will arise primarily from involuntaryresettlement. However, special care hasbeen taken to minimize resettlement to the extent possible duringproject design. Resettlement that i s required will be implemented inaccordance with the approved Resettlement PlanFramework (RPF) and Resettlement Action Plans (RAPs). Affordability. Water andwastewatercharges are together estimated to be less than 2% of the threshold poverty income level inShanghai and are considered affordable. Inaddition, Shanghai has long experience of implementingChina's minimumliving standardallowance system. The RPFsandthe RAPsare available inthe project files, See Annex 11for more details on social aspects. 13  5. Environment All project investments will bringabout positive environmental impacts. The provisionof this environmental infrastructure i s necessary to address current needs for water supply and wastewater collection andtreatment, and to mitigate current problems, with respectto the solid waste component. Potential construction phaseimpacts are relativelyminor andmanageableto mitigate, Details of mitigationmeasures, the monitoringrequired to ensure that mitigation measuresare effectively implemented, and the responsibilities for these activities are describedinthe Environmental Assessments (EAs) andthe Environmental Management Plan(EMP). Potential operational phaseimpacts are also relativelyminor and many of the concerns have been addressedinthe course of the design of the facilities. The EAs, EAFs andthe EMP are available inthe project files. See Annex 11for more details on social andenvironmental issues. 6. Safeguard policies Safeguard PoliciesTriggeredby the Project Yes No Environmental Assessment (OPIBPIGP 4.0 1) [XI 11 NaturalHabitats (OPIBP 4.04) 11 [XI PestManagement (OP 4.09) 11 [XI CulturalProperty (OPN 11.03, being revised as OP 4.11) [I [XI Involuntary Resettlement (OPIBP 4.12) [XI [ I Indigenous Peoples (OD 4.20, beingrevised as OP 4.10) [I [XI Forests (OPIBP 4.36) [I [XI Safety of Dams (OPIBP4.37) [I [XI Projects inDisputed Areas (OPIBPIGP7.60)* 11 [XI Projects on InternationalWaterways (OPIBPIGP7.50) [I [XI a. What i s the safeguardscreeningcategory of the project? (SlyS2, S3, SF) S2 b. What is the environmental screening category of the project?(A, B, C, FI) A c. If applicable, what are the key safeguardpolicy issuesraisedby the project? Environment andInvoluntaryResettlement. See Annex 11for details. d. Ifapplicable, what are the mainresults of any safeguardpolicyrelatedstudies, andhow have they been incorporatedinto the project? Socio-economic surveys identify that 4 households (which are either very poor or have disabled family members) will be affected by the project. Besides compensation and other assistancethey are entitled to, these poor persons will be given special assistance, including an additional monthly allowance, and special assistanceinresettlement. * By supporting theproposedproject, the Bank does not intend toprejudice thefinal d e t e ~ i n a ~ofi otheparties' claims on the ~ disputed areas 14  One locally-financedproject, HuminWWTP, has beenidentifiedas a linkage as defined in OP4.12. The NationalCenter for ResettlementResearchwas commissioned to review the resettlement policies applied to this project. The review finds that: (a) the project will affect 65 rural persons; (b) these persons' income will not be significantly affected, since their income generatedfrom agriculture only accountsfor a very small portion of their total income; (c) resettlement policies employedfor this project comply with national laws andregulations; (d) there is no difference inland andhousingcompensationbetween Bankpolicy and localpolicy, since Shanghai has adopted market-basedland andhousing valuation for determining compensation rates; and (e) this case does not involve illegalbuildingsandfloating population, where local policy still differs from Bank policy. The review concludes that the resettlement under the locally financed HuminWWTP comply with Bank policy. e. What i s the borrower's capacity to implement the safeguardpolicies recommendations, and, if the capacity i s insufficient, how will this capacity be brought to the required level? The APL PMOfor Shanghai APLl and APL2 will coordinate implementation of the EAs, EMP, andRAPwith PIUs set up for eachcomponent (corresponding functions for the DFV component will be the responsibility of CEAM). The PIUswill be responsible for implementation of the EMP, andfor resettlement planning andimplementationof subprojects undertheir components, They will establish resettlement offices with appropriate number of staff. To further strengthen the APL PMO's capacity for supervision of EMPandRAPimplementation, the APL PMO has: (a) assignedspecific staff to be incharge of resettlement andenvironment respectively; and (b) engagedexternal monitoring agencies for semi-annual monitoringof EMPandRAP implementation, These specialists will also offer hands-on training to other PMO andPIUstaff who are working on these subjects. f.What type of consultations hasbeenconductedrelatedto safeguardissues? Howdidthese consultations influence project design? Details of the proposed project were widely introduced through the local media. A website was established, and many comments were received. Questionnaires were distributed for the sample survey duringthe preparation of the EAs andRAPs. Meetings were heldwith primary and secondary stakeholders, and their comments andrecommendations were includedinproject designs. Consultation was also carried out with civil society organizations, neighborhoodvillage committees, andenterprises. Spot interviews were conducted of individuals and groups of project affected people regarding resettlement compensation. Social assessmentstudy was carried out related to the NorthWest drainage area (western trunk) component. g. When were the safeguard studies made available at the Infoshop? The draft RAPs,RPFs, EAs, EAFs, EA Summary andEMPwere made available inthe InfoShop onFebruary 8,2005. Finalversions were made available onMarch 8,2005. h.When andwhere were safeguardstudiesmadeavailable inthe cooperating country? The EA documents, indraft andfinal form, havebeen disclosed inlocal public libraries, the office of the EA team, the APL PMO, and on internet websites of Shanghai EPB. Access to 15  these documents was announcedto the public onFebruary 14,2005 and on April 20,2005 ina major local newspaper. Summary project background, major EA findings, andmitigation measureswhere appropriate, were also distributed duringthe public consultation to project affected people to provide basic informationabout the project andits possible adverseimpacts. All RAPs (includingConsolidatedRAPand subproject RAPs)were disclosed inthe APLPMO Office as of February 14,2005, andcopies of the Consolidated RAP andrelevant subproject RAPswere made available to the public inthe resettlement office of eachPIU. The public disclosure was announced through a localnewspaperonFebruary 14,2005 andon April 20, 2005. Resettlement offices will also distribute posters andbooklets which summarize resettlement policies and entitlements inthe project affected areas before commencement of implementation of RAPs. 7. Policy ExceptionsandReadiness a. Does the project require any exceptions from Bank policies? If so, what are they andhow are theyjustified? Noexceptions are required. b, Havethese been approved by Bankmanagement? Not applicable. c. I s approval for any policy exception sought from the Board? No. d, Does the projectmeet the Regional criteria for readinessfor implementation? Ifnot, inwhat way(s)? Readiness Criteria: 1. Fiduciary (financial managementandprocurement) arrangementsinplace-Yes 2. Project staff and consultants mobilized-Yes. The APL PMOandPIUs are already inplace, andtheir staff will be augmentedon an as neededbasis. Signing of the main construction managementassistanceconsultant contracts i s a conditionfor loan disbursement. 3. Counterpart funds budgetedlreleased-Yes. Shanghai Municipal Government has approved the budget for the APL PMOoperating costs for 2005, and implementingagencies have budgeted counterpart funds for project implementation in2005. 4. Tender documentsfor first year procurement have beenprepared. Yes. TORSfor the consultant selection referredto in2 above have also been reviewedand agreed. 5. Disclosure requirements met - Yes. 6. Results assessment arrangementscompleted: monitoring andevaluation (M&E)institutional obligations spelled out; M&Ecapacity inplace; indicators specified; baseline data collected-Yes. 7. Co-financing agreementssigned-Not applicable. 8. Land acquisition plans ready Yes. - 16  Annex 1:CountryandSector or ProgramBackground CHINA: CN-ShanghaiUrbanEnvironmentAPL Phase2 Background Shanghai Municipality (one of four municipalities inChina reporting directly to China's NationalGovernment) lies at the heart of a major metropolitan region at the mouth of the Yangtze River ineastern China. The Municipality, which comprisesthe core city andnine suburban districtslcounties, has an estimated total population in2005 of about 18 million, approximately 1.5 % of China's population. Shanghai i s one of the most economically productive areas of China, producing more than 5% of the nation's GDP. Shanghai's economy andmunicipal revenueshave grown at a rapidpaceover the past decade: revenues grew at 9% in 2004, ranking Shanghai's per capita GDPof about RMB40,000 (US$4,800), the secondhighest inChina, after Shenzhen. Shanghai's Vision The statedvision of the leaders of the ShanghaiMunicipalGovernment (SMG) i s to develop Shanghai as one of the world's leading global city regions. SMG's goal i s for Shanghai to become a sustainable, globally competitive municipality and a leading international financial, economic, trade and shippingcenter at the heart of the Yangtze RiverDelta economic region, able to compete globally with the most competitive metropolitan regions inthe world. Globally CompetitiveCities Studies carried out inShanghaiunder APLl have compared Shanghai's development with that of other key metropolitan regions inthe world, includingTokyo, London, New York, Seoul and the Pearl RiverDeltaregion of Guangdong. These studies have shown that while Shanghai Metropolitan Region (Shanghai MR)i s recognized as an urban leader inChina andthe East Asia region, Shanghaihas a considerable way to go to reachproductivity levels found intruly globally competitive metropolitan regions inAsia, Europe andNorth America. For example, while the Shanghaiproductivity (by area) i s double that of Beijing, it is still only 50% that of the New York MR (inPPPterms), 61% of the Seoul MR, and 33% of the Tokyo MR. It i s clear from this analysis that agglomerationbenefits are not yet beingfully realized inthe Shanghai MR. To achieve their vision for Shanghai's transformation into a globally competitivecity, the senior leaders of SMGknow that they must promote efficient integratedmetropolitandevelopment in Shanghai. Appropriately structured metropolitan regions can realize significant economic development gains. Several mechanisms through which this can occur include: (a) promoting economies of scaleinfinancing, production, distribution, andprovision of urbanservices; (b) developing local supply chain networks andindustrialclusters that support and promote innovation andcompetitiveness; (c) promotingurbanization patterns determinedby consumption and production inputs; (d) developing economic regionalization through production and consumption linkages between the core metropolis andlocal smaller cities and towns; and (e) achieving globalization benefits through developing global supply chains of products, services, information andknowledge. Metropolitanregions that realize agglomeration benefits while 17  minimizing associatedexternalities are generally the most productive and economically efficient forms of urban development. The Challenges of Metropolitan Development inShanghai Shanghai's leaders face significant challenges inpromotingthis type of efficient metropolitan development. These include: the legacy of Shanghai's historical development mode, which concentrated development inthe core city, not consistent with the promotion of metropolitan efficiency; the extreme rapidity of economic development inShanghai andeasternChina as a whole inthe last twenty years, which requires continuous, swift andflexible responsesfrom SMG as circumstances change; and, the environmental and social pressurescreatedby this rapid changeina densely populated urban area. Of China's metropolitanregions (MR), Shanghaiis the most highly centralized, Le., the core city holds a very highproportion of the total metropolitan population. The world's more productive M R s have evolved spatially at lower densities, with population and productiondistributed outside of the metropolitan core area, and with strong linkages between the core andsuburban production andconsumption markets. Recognizing this, SMGhas promoted de-concentration of population andenterprises from the core city, developing the district towns andencouraging industrial relocation to these outlying areas. The pace of Shanghai's development since the early 1990shas been unprecedented:the dynamic drive of the urban economy has resulted, duringthe past 5 years, inthe core city population growing by 40%, and the suburban areas outside the core growing by 160%. Despite the strong growth inthe suburban areas, the income gap between the richer andpoorer residentsof the MR remains large. Annual per capita disposable income levels of households living inthe core city reachedRMl3 13,250 ($1,596) in2002 while that of ruralsuburbanresidents reachedonly RMB 6,212 ($748). Shanghai's fast anduneven growth has presenteda major urban management challenge to SMG, which must continue to innovate and seek ways of increasing efficiency in order to ensure that the provision of serviceskeeps up with the extremely rapidgrowth, andis focused in such a way that it helps to equalize the level of urban services for all its residents, and ameliorates the income gaps andbroadensthe social service coverage, so as to ensuresocial stability and provide a solid framework for continued growth. Planning for such a dynamic situation i s a significant challenge. For example, the Urban Development Master Planfor Shanghai Municipality to the Year 2020, which was approved by State Council in2000, defined a metropolitan growth strategy inwhich the eight districts and one county outside of Shanghai's Outer RingRoad(Le., Chongming, Nanhui, Fengxian, Jinshan, Minhang, Songjiang, Qingpu, Jiading, andBaoshan) would develop their district administrative towns as distinct sub-centers. However, actual urban growth inrecent years has not occurred in the pattern predicted in this plan, but rather inthe form of less structured clusters anddistinct corridors betweenthese clusters andthe core city, Therefore, much of the intent of the Master Plan has already been supersededinsuburban areas, SMG i s therefore inthe processof updating it, andmakingthe necessary adjustments to each sector master plan. The environmental and social pressurescausedby Shanghai's rapidchange are significant. In particular, duringthis periodof fast growth inShanghai's outer districts, its comparatively 18  undeveloped urban andregional transportation network have causedcongestion and environmental costs that limit metropolitan productivityandcompetitiveness. Poor service connections between the rapidlyproliferatingtownship, district, municipal, and state-level industrial parks, which are located across the metropolitan region, have reduced the positive impact that this diversification inindustrial location could have afforded Shanghai. Underinvestment inservicing the core city periphery and suburban areas has resulted in scarcity of accessible, serviced land which has driven up landcosts inthe core and limited locational choices for firms. Despite Shanghai being one of China's wealthiest regions, the population includes vulnerable groups, especially inthe rapidly developing suburban areas. Groups of particular concern are the aging population, those left unemployed after the restructuring of state-ownedenterprises (Le., laid-off andlow-skilledworkers), and migrants andcasuallaborers who often have insecure socioleconomic status. The latter group includes landlessrural residentswho have traded their rural land use rights for one-time compensation, and migrant workers from poorer provinces of China, SMG recognizes that due to the increasingcosts of urban services, gaps insocial welfare coverage, andthe impacts of environmental deterioration, improvingthe well beingof these groups i s important. (Project impacts on vulnerable groups are addressedinAnnex 9 Economic andFinancial Analysis, andinAnnex 11SafeguardPolicy Issues). Shanghai'sDevelopmentResponseandStrategy for GlobalSuccess To enrich the livingconditions of its citizens andfoster investment climate and sustainable growth, SMG recognizes the vital role of implementinga rigorous strategy for improvingurban environmental conditions. The ShanghaiUrbanEnvironmentProject APL aims to support SMG to: (a) implement the urban environment goal of its development strategy, facilitating the steps for underpinning continued economic growth to take place inanenvironmentally and institutionally sustainablemanner; (b) provide major long-term environmental benefits to its citizens and to the ecology of ShanghaiMunicipality; and (c) further develop innovativeurban managementpolicies, institutionalreforms and an innovativefinancial architecture that are neededto support the environmental goals, andthat can serve as models for local government andenvironmental reform throughout China. The basic strategy supportedby the APL Program, continued through the current transition from APLl to APL2, is toprogresswithdevelopingnewfinancingmechanismsfor infrastructure financing, to support the further institutionaldevelopment of the environmental service sectors in Shanghai, andto support the construction andimplementation of a package of infrastructure works to address Shanghai's key environmental deficits set out below. All these activities are aimed at continuing the Bank's collaboration with Shanghai insustaininga solidbasis for future economic growth. With respectto metropolitan management, andbuildingonthe activities of APL1, a strategic study wouldbe undertaken by SMG under APL2 to investigate strategiesfor Shanghai's MetropolitanDevelopment. The proposedcontent of this study include strategiesfor regional growth management; water resourcesmanagement; solid waste management; andregionalurban environmental service delivery, addressinglocal and inter-jurisdictionalapproaches, 19  environmental benchmarking, andopportunities to integrate economic development and environmental initiatives. Environmental Trends, Sector Strategies and Planned Responses The APL Program supports SMG's development of the key urban service sectors (water resources, wastewater, solid waste, air andurban livability) as describedbelow. Water Resourcesand Water Supply Sector The water resources and water supply sectors in Shanghai have undergone significant change and strengthening inthe last twenty years. The main water intake for the city is located at Daqiao inSongjiang District, on the upper HuangpuRiver, approximately 40 kmfrom the core city. Shanghairelocated its main water supply intake inthe mid-1990s to this locationdue to deteriorating water quality at the originalintake on the Huangpu River closer to the core city. In 2003, two thirds of the city's total water supply (some 7 million m3lday) came from this water intake, with another 1.3 million m3lday abstractedfrom the Yangtze River, and smallindividual supplies. Huangpu River i s a major waterway rechargedfrom the Tai Lake Basin. Rapiddevelopment in adjacent areas inJiangsu andZhejiang Provinces andinShanghai's suburban areas, as well as eutrophication inTai Lake, has causeda deterioration inthe HuangpuRiver water quality, with monitoringrecords over the last three years indicatingthat pollution loads for the Huangpu upper catchment and the Tai Basinhave continuedto rise. Despite significant regulatory efforts by SMGsince the mid-1980s to protect the Daqiao water source, the ShanghaiWater Authority (SWA) has foundthat Shanghai's mainDaqiao intake on the Huangpu River does not always meet optimal raw water intake quality standards, and that at times the water delivered by the municipal water treatment plants servedby Daqiao will not be up to the standards. Water resourcespolicy for Shanghai has for many years recognized that the abstractions from the Huangpu have reachedthe maximumpractical level andthat all new supplies will needto be from the Yangtze River. This important conclusion has beenverified by detailed modeling conducted under the Upper HuangpuCatchment Management Study inAPLl. Accordingly, while the Huangpu will remain an important source for the foreseeable future, it will become relatively less important than it is today. Its total contributionto overall water supply for the core city i s expectedto reduce from the presentlevel of 80% to significantly below 50%, within the overarching concept of conjunctive use of both water sources. An integratedwater supply networkservesthe core city areawithin the Outer RingRoad. However, this i s not the case in Shanghai's suburban area. Some 175 enterprises provide drinkingwater to 5.6 millionresidents insuburbanShanghaithrough numerous small sources of supply. These small intakes, accounting for over 30% of all drinkingwater supplied inthe municipality, are abstractedfrom surface and groundwater of rapidly deteriorating quality, Rationalization of this system and expansion of the higher quality municipal system from the core city to the outer suburbs are key priorities. The overarching objective of Shanghai's Water Supply Master Plani s to provide a more centralized but flexible water supply system andto eliminate the smaller water supply facilities 20  of uncertain quality. Principalfeatures of the Master Plan include: (a) concentration of the water supplyoncentralized intakes from the Yangtze andHuangpuRivers, and strengthening the protection of water resources; (b) provisionof proper treatment, at least for water abstracted from the Huangpu, andrehabilitation of wastewater treatment plants andnetworks; (c) providing drinkingwater quality to meetthe UrbanWater Supply Standardsissuedby theMinistry of Construction by 2010; and (d) rationalization of the managementsystem andunificationof urbanlsuburban supplies, reducing the overall number of water supply facilities. Specific targets for 2010 include the rehabilitation of 1,320 kmof water distributionmains, a reduction in leakage rates, construction of 6 new Water Treatment Plants andexpansion of the existing WTPs inthe suburbanareas, andclosure of 171small facilities. By2020, water supply wouldbe concentrated in48 facilities. The Bank's support for this sector beganinthe mid 1990s with the implementation of the ShanghaiEnvironmentProject, which financed the relocation of the mainwater supply intake to Daqiao. Support has continuedthrough a series of projects, includingthe APL Program. Investments inAPL2 focus on expansion of the core city water supply network to the suburbs, The physical investments inAPL2 will be supportedby amajor strategic studyto be conducted by the ShanghaiWater Authority (SWA). This Water Supply Strategy Update, will address strategic water intake anddistribution options. It includes a Current Asset Rehabilitation Study, design of a Water Conservation Program, and will continue SWA's internal institutional development as Shanghai's regulatory body for the water sector. It is expected that further significant strategic investments inthe sector will follow. ~astewaterSector Wastewater generatedby the rapidurban growth inShanghai duringthe 1980sand 1990scaused significant pollution problems, following which a comprehensive management strategy and supportive investment program was developed for the municipality. A series of large investments were made by SMG, many of them supported by the World Bank. The Wastewater Master Plan, designed to provide a strategy for the sector to 2020, was approved by the Shanghai MunicipalGovernment in2002. Buildingonthe investments inthe past, the strategycalls for the interception of wastewaterfrom the central city with conveyance to either Zhuyuan or Bailonggang for disposal to the Yangtze estuary, initially after only preliminary treatment, but with levels of treatment increasing progressively over time3. Becausefuture growth in Shanghai i s expected to be primarily inthe suburban areas outside the outer ringroad, the strategy calls for greater investment inwastewater treatment inthe outer districts, a goal which is being supported by SMG through the new district financing vehicle to be implemented under APL2, by the Shanghai Chengtou Environmental Asset Management Company (CEAM). The next step indeveloping Shanghai's wastewater sector strategy has been the preparationof a wastewater sludge management strategy, with a relateddisposal and investment program. The strategy, updatedduringthe preparation of APL2, aims at a balanced and sustainable approachto Shanghai is under increasingpressurefrom higher levels of government to provide secondarytreatmentevenfor wastewater dischargedto the Yangtze River andEstuary. 21  sludge disposal for the long-term. Landfilling i s to be continued inthe short-term, but i s expected to be phased out inthe longer term as other landapplications andreuse of sludge become predominant. Shanghai currently has three large Wastewater Treatment Plants (WWTP)inoperation (Zhuyuan, Bailonggangand Shidongkou), one large WWTP due to commenceconstruction at Zhuyuan (Zhuyuan 11),and several smaller WWTPs inthe urban area. These plants currently produce significant volumes of sludgefrom a total wastewaterflow of some 4.5 million cubic meters per day. SMGproposesto undertake a phasedprogram to dispose of the sludge in an environmentally sustainable manner. Recognizing its positionas a leader inthis sector inChina, SMG's sludgemanagementplan proposes a system that is progressive, and that i s much more environmentally sustainablethan the practices of other large cities inChina. SMG's medium-term strategy, to be supported under APL2, includes the construction of sludge treatment plants (STPs) utilizing sludge digestion, leading to disposal at suitable sanitarylandfills, or, if the quality of the sludge permits, drying and landdisposal. The STPs are plannedto be self-sustaining from an energy perspective, and will fully utilizethe generatedbiogas for operation of the system, including some heat drying of sludge. Becauseof the innovative nature of this sludge treatment strategy, Shanghai is considering to work with the World Bank to develop abiogas utilization carbon finance project at the first two STPs at Bailonggang andZhuyuan under the Kyoto Protocol's Clean Development Mechanism(CDM) mechanism. Despite the rapidprogress made in wastewater and sludge managementinthe core city, this sector remains problematic inthe suburbanareas becauseof the lack of local investment in pollution control facilities, includingWWTPs. Concern hasbeen expressedby SWA and SMG inconnection with water pollutioninsuburbanShanghaifrom: (a) non-point agricultural run-off of fertilizers, pesticides and animal wastes; (b) untreateddomestic andindustrialwastewater dischargesfrom rapidly urbanizing villages and towns inthe suburban areas, andrun-off from relatedindustrialparks; and (c) destruction, by suburbansprawl, of riparianzones that previously filtered surfacerun-off into water courses. Further significant investments are required inthese areas to meet current needs andto preparefor future development. Investments under the Bank's long-term partnership with Shanghaiinthis sector began in the early 199Os, with the implementation of the Shanghai SewerageProject. These have continued through a series of projects, including the APL Program. APLl includes the construction of a large wastewater treatment plant at Zhuyuan with a private sector concession arrangement. Investments inAPL2 focus onrehabilitation of the Western Trunk Sewer andthe initiationof investments in Shanghai's sludge treatment program. Solid WusteSector Shanghai's solid waste strategyi s set out inthe Shanghai SolidWaste Disposal and Development Plan of February 2002 andthe Shanghai SolidWaste Disposal andDevelopment Implementation Proposal of December 2004. The overarching development objectives for the Shanghai solid waste sector are to: (a) change the role of SMG from being a service provider to beinga service regulator andfacilitator, by transferring responsibility for supplyingcollection, 22  transportation, treatment and disposal services to district level governments and social capital participation (private) organizations; (b) recover the cost of providingmunicipal solid waste managementservices from user charges leviedon all waste generators; (c) maintainwaste quantities at the 2002 level by implementing a Reduction Recycling andRecovery Strategy supported by source separationof waste, andintroduction of appropriate market based instruments; and (d) introduce more environmentally friendly andcost effective solid waste managementsystems inthe city proper andits surrounding districts in step with other infrastructure developments a The solid waste sector in Shanghaiis currently inthe middle of the implementation of these significant institutionalchanges. Progresshas beenmadein a number of areas, including, for example, that Shanghai City Appearance & Environmental Sanitation Administration Bureau (SCAESAB) has as of July 2004 become aregulatory, coordination, andenforcement agency, with district governments responsible for providingall services. Also, user charges have been introduced for commercial and industrialusers, and are expectedto be introducedfor households in2006. Municipal solid waste management, disposing some 10,000 tons per day from the core city, presents a challenge. A growing environmental issue inthe suburbanareas i s the need to improve solid waste managementservices to handle the rapidly expanding volume of domestic, construction andindustrial solid wastes. There are reportedly over 200 unlicensed waste dump sites in Shanghai's core city periphery and suburban areas, leaching into surface and groundwater sources, consuming andpollutingland, air andwater resources. These small, unregulatedwaste sites hold almost one-third of the M R ' s total solid waste. SMGplans to implement aphasedprogram to close andrehabilitate all these sites, with an appropriate reorganization of the solid waste sector, such that open dump sites are not usedinthe future. Rehabilitation of the first two demonstration sites i s included inAPL2. Investments under the APLProgram beganinAPLl with the construction of one of Asia's largest sanitary landfills, Laogang Phase IV, which startedoperation inFebruary 2005 under a private sector concession agreement. Investments inAPL2 focus on demonstrating good practice for open dump site closure andinstitutionalsupport for SCAESAB during sector restructuring. Under APL2, SCAESAB will undertake a SolidWaste Composition Study and a Comparative Study on the Impact of Various Treatment Technologies to guide investment planning for the sector. It is expected that by APL3, further significant investments in Shanghai's solid waste sector would be required. Air While air quality standards are largely beingmet insuburban Shanghai, suburban growth pressures, and SMG's strong commitment to reducing densities inthe core area i s leading to a significant andrapidincreaseinvehicular ownership, This i s aggravatedby a lag in development of commuter rail andregional bus services to the suburban areas. The widespread use of automobiles exacerbateslocal air pollutionproblems andhas ledto SMGassessingways to develop an air quality management strategy and framework for the metropolitanarea, These assessments and the development of strategies to respondto air pollutionimpacts inShanghai are ongoing, financed under the APL Program. 23  Urban Livability The areas within and adjacent to the core city of Shanghai are characterized by extremely high densities, overcrowding, poor housing without basic services, anda lack of infrastructure to meet current demands. To improve livability, SMGis regenerating these older neighborhoods through infrastructure upgrading, revisionof landuse, andemployment generation, particularly inthe districts of Hongkou, Huangpu, and Yangpu, which contain large lower-income industrial communities of the former state-ownedenterprises. These areas have a population of around 3 million, or about 17%of the total population of Shanghai. Inaddition, Xuhui District inthe core city i s initiating an upgrading of areas with significant cultural heritage values, Goodprogressi s beingmade on a pilot upgrading program under APLl inHongkouDistrict. Further development of SMG's plans for urban upgrading will be implemented by SMGinconjunction with, but not includedin, the APL2 project. Iti s anticipated that further investments inthis area would be includedinAPL3. In~rastructureFinance The rapidincrease inurbanization in Shanghaihas escalatedthe scale of environmental infrastructure investment requirements, inboththe core city and the surrounding districts, At the same time, inShanghai as elsewhere inChina, the responsibility for urban infrastructure investment financing and service provisioni s devolved almost entirely to the respective municipal and district governments. Inthe longterm, Shanghai intends to replace some current borrowingfrom domestic banks and government subsidies with market basedfinancing of urban infrastructure projects. The needto move toward multi-source sustainable financing for Shanghai's infrastructure, inconjunction with China's infrastructure sector andfinancial market reforms, has been recognized and articulated by SMG as part of advancing its metropolitan managementmodel. Development of the environmental finance sector has been a major focus of Shanghai andthe Bank's collaboration under the APL Program. The most significant achievement to date inthis area i s the establishment of aDistrict Financing Vehicle (DFV), as a metropolitan management instrument, through the Shanghai ChengtouEnvironmentalAsset Management Company (CEAM, a subsidiary of the Shanghai UDIC). CEAMi s responsible for SMG's support of environmental investments inthe suburbanareas. To attract financingina sustainableand cost effective manner for environmental infrastructure in suburbandistricts, SMGrecognizes that it i s important to not merely assist district governments' access to credit, but to do so in a manner that increasesthe efficiency of these local investments andreinforces the financial sector reforms inthe rest of the economy. Thus CEAM, inits allocation of APL2 loan funds to districtlcounty government investment projects, will follow suitably modifiedproceduresof the World Bank and simultaneously promote accepted"good practices" ininfrastructure finance. The project would thereby reach far more local authorities and smaller investment projects than it would be efficient for SMG andthe World Bank to try to support directly. Inaddition to arrangelongtermfinancingfor urbanenvironmental infrastructureprojects of district authorities, CEAM will also: performproject appraisal from both technical, financial, 24  economic, environmental and social perspective; arrangeblending of loan funds with capital grants provided by SMG for highpriority projects; overseelocal project preparation and construction; provide technical assistanceinsectorutility financial management; andmonitor the repayment of service fees andcapital repayment from the district utilities with service and financing agreementswith it. SMG recognizes that inthe longterm CEAM is likely a transitional metropolitan management instrument to prepare the way for ultimately self sustaining municipalcredit systemsthat can tap domestic and international capital markets for financing of urban infrastructure projects. Inthe medium term, CEAMwill explore potential for obtaining capital commitments from strategic investors which would help further align its operations with good practices inprivatemunicipal lending. Inthe longterm, depending on the direction inwhich CEAM evolves, the potential for creating a pooledfinancing schemethrough issuanceof bonds on the capital market, with credit enhancement as appropriate, will be explored. Inadditionto implementingtheDFVthrough CEAM, APL2 continues to support activities (started duringAPLl), for issuanceof enterprise bonds inthe sector. An application hasbeen submitted by SMG to the national government for issuanceof an enterprise bondby Shanghai's waterlwastewater asset managementcompany (SWAOD). Onwardsto APL3 APL2 marksthe midpointinthe Bank's collaboration with Shanghaiunder the APL Program, and inmany cases, a transitional point inthe development of environmental sectoral reforms in Shanghai. As such, the componentschosen for this project buildon the solid foundation of investments and sector strengthening activities supported by APLl. Moreover, they are designed to provide a basis for further deepeningof the environmental managementagenda inShanghai duringAPL3. 25  Annex 2: Major Related Projects Financed by the Bank andlor other Agencies CHINA: CN-Shanghai UrbanEnvironmentAPL Phase2 Latest Supervision Rating Sector Issue Project OfBank-financed projects Implementation Development Progress (IP) Objective (DO) BankFinanced Urbanenvironment, pollution ShanghaiAPLl S S managementand (Ln.4705) environmental health, access (0611712003) to urban services for the poor, environmental policies and institutions Urbanenvironment, air and SecondBeijing Urban S water pollution, and waste Environment (Ln.4561), management (6/20/2000) Urbanenvironment, including Hebei UrbanEnvironment S wastewater, solid waste, and (Ln.4569),(05110/2000) industrialpollutioncontrol Access to urban services for Tianjin Urban HS the poor, environmental Development and health, water resource Environment (Cr. 2387) management, municipal (0512211992)and (ICR institution building, No. 22217)(0612012001) wastewater, solid waste, industrialpollution Water resourcemanagement, TaiBasinUrban S S pollution management and Environment Project environmental health, other (Ln,4748) (08103104) urban development, infrastructure services for private sector development Wastewater managementin a Huai RiverPollution S S river basin. Control (Ln.4597),(0312212001) 26  Urbanenvironment, Yunnan Environment S S includingwastewater and Project (Ln.4055), solid waste (0612511996) Urban environment, SichuanUrban includingwastewater and Environment Project solid waste (Ln.4496),(06/17/1999~ Urban environment, Chongqing Urban includingwater supply, Environment Project wastewater, solid waste (Ln. 4561),(0611512000) Wastewater, flood protection, Hunan Urban air pollution control, urban Development Project redevelopment (Ln.4751), (09116/2004) Access to urban services for SecondTianjin Urban S S the poor, environmental Development and health, water resource Environment Project management, municipal (Ln.4695)(05120103) governance and institution building,wastewater, solid waste, industrialpollution Other Development Agencies Water supply, municipal 1 Japanese Bank for Implementation performance industrial wastewater International Cooperation reported satisfactory. Assistance treatment, air pollution focused on investment. management(several projects) Urbanservices, environment, Asian Development Bank Performance reported satisfactory. water resources (several projects) IF"0 Ratings: HS(Highly Satisfactory), S (Satisfactory), U(Unsatisfactory), HU(HighlyUnsatisfactory) 27  co N I I .  CI U id sE rr 0 @ c U C c a 2 c & a a 8 c 2E : ;i c U g % C i .r ff 7 0 0  * 6 3 E 0 m P  3 8 I 0 8 2 N 3 I. N d 3 d 2 0 8 2 0 r-4 0 0 0 0  I  APL2 would beconsideredby the Bank whenfour of the six triggers shownbelow havebeenmet. Triggers 1,2, and3 mustbe amongthe 4 triggersfulfilled. Activities proposedfor implementation under APL2, which are relatedto any outstandingtriggers, would not be excludedfromfundingunder APL2, but would be takenup as andwhen the trigger condition is met. 1. SMGhasapprovedaSolidWasteDisposalMasterPlancovering all urbanandsuburban districts andChongmingCounty of Shanghai.The Master Plan containsthe servicecharge policy, including adoptionof market-orientedcharges on users, fees for treatment, disposal anddischarge, waste volume reduction measures, andrecovery andreuseapproaches. 2. (a) SWAOD has: (i) preparedandadopteda five-year capital investmentplan which includes acapital financing plan, adebt managementplan andarevenueadjustmentplan; and(ii) formulated the preliminary designof long-termbonds to finance environmentalinfrastructure; and (b) SMGhas: (i) reviewed saidpreliminary designand submittedit to the central government for approval; and(ii) completedatime-bound actionplan for Phase2 in preparationfor bond issuance. 3. SMG haspreparedan administrativeframework anddraft implementing regulationsfor social participation (Le,, various forms of ownership) inwastewater treatment andlor solid waste management. 4. SMGhas: (a) initiated astudy, including water quality modeling, for the purposeof developing anUpper HuangpuCatchmentManagementPlan; and(b) provided an interim report of such study which includesdraft revisedregulations of agricultural wastewater pollutioncontrol inthe Upper HuangpuCatchment area. 5. SMGhas piloted inHongkouDistrict, approaches for urban servicesupgradingfor poorer and underservedareas, which incorporatethe principle of maintainingcommunity life and minimizingclearing andpermanentrelocation of the residentsof suchareas. 6. SMGhas: (a) completedthe design for aDistrictFinancing Vehicle for environmental services inits suburbandistricts, together with the institutional andfinancial arrangements necessary for the functioning of suchVehicle; and (b) inaccordancewith applicable national laws andregulations, submittedsuchdesignto the relevant agencies of the central government for approval. 33  Triggers for APL3 APL3 would be consideredby the Bank when four of the six triggers shown below havebeen met. Inaddition, triggers 1,2 and 3 must be amongthe 4 triggers fulfilled. Activities proposedfor implementation under APL3, which are related to any outstanding trigger, would not be excluded from funding under APL3, but would be taken up as and when the trigger condition i s met. 1. (a) SMGhas adopted a sustainablefinancing planfor the environmental infrastructure investments plannedunder APL3 andsuch financing plan would provide that: about 50% of the local costs wouldbe financed from the proceeds of longterminfrastructure bonds, or long term loans from local banks, or from the District FinancingVehicle; and (b) each public utility which i s a beneficiary of such financing hastaken steps to ensure that the rates of fees, tariffs or chargesfor services are adequateto cover the redemption andor repayment of such financing. 2, At least 50,000 people inunderservedareas of QingpuDistrict have benefitedfrom improvedwater supply servicesthrough APL2. 3, (a) Solidwaste services covering at least 25% of the total volume of solid waste inthe urban areas of Shanghai Municipality are managedby corporate entities; and (b) SMG has adoptedan administrative framework andimplementingregulations for the execution of service or managementor concessioncontracts for solid waste services. 4. The institutional capacity and resourcesof the Shanghai Water Authority have been increasedto enable it to carry out its responsibility for: (a) the planningand investment strategies for urban environment servicesrelatedto water, wastewater and drainage acrossthe entire municipal area; and (b) the preparation andimplementation of the Upper Huangpu Catchment Management Plan. 5. Environmentally acceptable and sustainable sludge management practices are being implemented through: (a) the signing of contracts for sludge management facilities at the Zhuyuan complex andBailonggang; and (b) acceptablearrangementsimplemented at the major (over 50,000 m31d) wastewater treatment plants inShanghai. 6, SMG has prepared a time boundaction planfor improving air quality inShanghai. 34  Annex 4: Detailed Project Description CHINA: CN-Shanghai UrbanEnvironment APL Phase 2 The development objective of the Shanghai UrbanEnvironment APL Phase11(APL2) Project i s to expand Shanghai's environmental management agenda in the metropolitan area through support for a selectedset of priority investments, enhancement of financial architecture for urban environmental infrastructure, andpolicy and institutionalreform initiatives. APL2 investments arising out of the policies beingpursuedby SMG inits development program can be dividedinto four mainthemes. These buildon the thematic areas of the APLl project, 1, Water ResourcesProtectionandDevelopment To support the policythat useof surface and groundwater resourcesshouldbebalanced with their sustainable supply across all of ShanghaiMunicipality, duringAPLl, SMGcommenced preparation of a metropolitan-wide Water ResourcesConservation andManagement Strategy, and an Upper HuangpuRiver Catchment Management Plan. Of particular emphasis inthese plansis Shanghai's objective that water across all of Shanghai should be available for required domestic, municipal, industrial and agricultural uses at quality appropriate for intended use. Thus, particular attention is paidinthe APL2 project to implementation of high priority projects under these plans, which include works to: (a) extend the water service coverage andquality inpartsof QingpuDistrict for a populationof about 200,000 residents by expanding the distributionnetwork; (b) improve the management of wastewater in the north-west area of Shanghai; (c) implement the first stage of Shanghai's sludge management program; and (d) support environmental infrastructure improvements insuburbandistricts. These works have been divided into two maincomponents as follows. Water Supply ~ a ~ a g e m ecomponent US$54million (Base Cost) n t - The works to be carried out under this component will provide an initial contributionto Shanghai's objective of improving the long-term security and quality of water supply services across the municipality. The component would increase coverage of reliable, highquality water supplies from a water treatment plantinthe core city to some rapidly urbanizing suburbanareas of the municipality, which currently rely on low quality local service. This component would comprise a service area extensionby the Shanghai Municipal Waterworks South (Shinan) Co. Ltd. (SMWSC), one of four water companies inthe core city, currently serving a population of some 3 millionpeople. Sub-projects under the component include: Expansionof the SMWSC service area to improve water service coverage and quality for a population of about 200,000 inthe Xujing area of QingpuDistrict, which i s ina suburban area west of the core urban area. Underthe agreedproposal, SMWSC will be responsible for the design and construction of the mainwater distribution system, anda series of small-scale design-build procurement contracts will be usedfor the construction of the delivery systems andconnections. SMWSC will be responsible for the operation of the entire system. Activities associatedwith this sub-project include 35  the preparationof a Wastewater Management Action Planto comprehensively address this service area's wastewater management; 0 Technical assistancefor Network Model Augmentation andOn-line Simulation, and a Network Rehabilitation (Maintenance) Technology Study, conductedunder the guidance of the ShanghaiWater Authority; and, 0 Technical assistanceto SMWSC for construction management and supervision. Wastewater~ a ~ a g e m ecomponent US$271m~lion n t - This component would support Shanghai's on-going wastewatermanagementprogram with investment inthe renewal andrerouting of a major trunk sewer interceptor inthe city (a new trunk sewer andclosing of anexisting one), andbyimplementing the first stage of Shanghai's Sludge Management Plan for MetropolitanShanghai, with phasedinvestments intwo major sludge handlingfacilities. The component will be implemented by the ShanghaiMunicipal Sewerage Company (SMSC). Sub-projects under this component include: 0 Reroutingof the Western Trunk Sewer andsafe closure of the existing trunk sewer serving the north-west areaof Shanghai, leading to the existingShidongkouWWTP, which has a capacity of 400,000 m31d. This component optimizes the use of Shanghai's existing trunk sewer assets by potentiallyredirecting some catchment area flows currently beingtransferred to Shidongkou into the existingShanghai Sewerage Project (SSP1) systemleading to Zhuyuan WWTP, and allowingfor future increases inurbanization inShanghai's rapidly growingnorth-west industrialcorridor. The component will be supportedby on-going optimization of the Shanghai Sewerage Master plan inthe north-west area, as it undergoesrapidchange inthe next five years. 0 Implementation of a phasedprogram of sludge treatment anddisposal for the existing Bailonggang WWTP (capacity 1.2 million m31d) andZhuyuanIandIIWWTPs (capacity 2.2 millionm31d). The sludge treatment facilities would include digestion of all sludge andfirst phase drying of a portion of the sludge, to assess the feasibility and economics of drying sludge and the market for the eventual product. Digestedsludge that would not be dried inthe first phaseplant would be landfilled. The final design of the plants will be optimizedaccording to the following principles: (a) implementation of a balancedsludge disposal strategy inthe medium-term, includinglandfillingand landdisposal; (b) energy balance at each of the plants duringthe first phase, requiring no input of external thermal energy for drying of sludge; and (c) continued testing of the sludge from all plants for at least six months. SMSC plans to engage experienced international consultants to further refine the design of bothplants duringthe preliminary design phase. SMSC will procure the two sludge plants usingdesign- build-operate (DBO) contracts which will include operation for two years. Technical assistancefor training of operators of these advancedtreatment systemsi s included. 0 Consideration of possible continued development of aproposed carbon finance project at the two sludge plants, with the intention of establishing a carbon emission reduction 36  purchase agreementbetween the World Bank and SMSC for the purchase of carbon emission reductions generatedat the two sludgeplants. Technical assistancefor the following studies inthe sector: Strategic Current Asset Rehabilitation Study, Support of Water ResourceProtection Program Design, Core City Waste Management Strengthening, Study on Social Participation inWastewater Sector Financing, and Study on Management Options Regarding Storm Water. 0 Technical assistanceto SMSC for construction managementand supervision. 2. Solid Waste Management Improvements US$7 million - To support SMG's objective that solid waste from householdsandthe growing volume of solid waste from food servicesi s collected, transferred, treated and dsposed of inways that protect public health and atmospheric, terrestrial and aquatic environments across metropolitan Shanghai, APL2 will buildon the major investment inAPLl inthis sector (the construction of the Laogang PhaseIV landfill) by supporting several smaller, butnonetheless critical, investments inthe rehabilitation of existing waste dump sites inShanghai. SMG estimatesthat there are currently more than two hundred existing informal open dumps within the municipality, many of which are inthe core urban area. Shanghai plans to implement a phasedapproachto rehabilitate these sites, commencing with two of the most critical ones within the core city area. The component will comprise the following sub-projects: 0 Insituclosure of the Gucun andMinhangwaste sites locatedinthe core city of Shanghai, includingthe implementation of a program of site assessment, monitoring andrehabilitation of the sites, which will possibly be usedas green space. The component will assist Shanghai indeveloping a bestpractice methodology for dump closure andrehabilitation, which will be replicated elsewhere inthe municipality. 0 Implementation of a Management InformationSystem (MIS) to assistthe institutional development of SCAESAB inits new role as sector regulator, and to support sector planning and management at the municipal as well as the district government level. 0 A multi-year analysis of the domestic waste composition inShanghai, to assistinthe development of a comprehensive demand managementstrategy for the sector. 0 Technical assistancefor a Comparative Study on the Impact of Various Treatment Technologies. 0 Technical assistanceto CEIDC for construction management and supervision. 3. Urban Environmental Infrastructure Services Financing US$63 milZion - As articulatedinAPLl, innovations inurbanenvironmental infrastructure services financing under the APL program would be underpinnedby SMG's policy to principally obtain debt financing from private sources (rather than the municipal budget) for capital investment in 37  water, wastewater and solid waste infrastructure, andthat these be financed from beneficiary charges, supplemented by borrowers' general net assets, with only limitedand explicit commitment of municipalfiscal revenues, or direct or contingent government guarantees. The component includes the following sub-projects: 0 Continuedtechnical assistancefor SMG's ongoing preparation of a wastewater infrastructure enterprise bondwith long maturity ($150 million; 15 years) on domestic capital markets, preparedto international practices. Preparation of the bondhas commenced under APLl andthe design and application has been submitted to the national government for approval. Subject to national government approval, the bond would be issuedby ShanghaiWater Assets Operations andDevelopment Company Ltd. (SWAOD), andlistedonthe ShanghaiStockExchange. SWAOD is a subsidiary of Shanghai UDIC and SMG's asset managementcompany for the waterlwastewater sector inthe core city. This assistancewould be non-Bank financed. The implementation and capitalization of a District FinancingVehicle (DFV) that will provide the mechanismfor SMGto provide management support and long-term financing of capital investments inenvironmental infrastructure insuburban districts. The DFV has already been incorporated as the Shanghai Chengtou Environmental Asset Management Co. Ltd. (CEAM) under Shanghai UDIC and will use Bank funds as a sourceof capital at start up. This component includes capacity buildingfor CEAM's institutionaldevelopment, and studies on Shanghai's relatedinfrastructure finance development. The anticipated first set of sub-projects to be financed by CEAM under this component, for which detailed preparations are to be finalized, include the Chongming Sanitary Landfill, and the Chenqiao Wastewater Treatment Plant inChongming County, the HuaxinWastewater Collection System inQingpu District, and the JinshanDistrict SolidWaste Transfer and Collection System. These sub-projects will provide a significant contributionto Shanghai's objective of improving the wastewater and solid waste management inthe suburban districts. Further investments in districtlcounty sub-projects may be addedduringproject implementation, subject to agreementwith the Bank andto funds beingmade available under this APL2 component. 4. InstitutionalStrengtheningandTraining(IST) -US$`0.7million Most IST items are includedinthe respective components above for which various implementing agencies are taking responsibility. The following items are noted as a separate IST component: A Comprehensive Study of Shanghai's Metropolitan(Regional) Development, inthe fields of water, wastewater, and solid waste services for the long term, including financingmechanisms for the suburbandistricts, aimed at proposing strategiesfor metropolitan infrastructure development andmanagement, regionalservice delivery of environmental infrastructure, and infrastructure finance development for the metropolitan area; a GlobalMegacity Infrastructure Performance Comparison Study; and Other Urban Development Studies. 38  Annex 5: Project Costs CHINA: CN-Shanghai UrbanEnvironment APL Phase2 The estimated cost of the project i s US$434.24 million, includingphysical andprice contingencies, taxes and duties. Cost estimates are basedon feasibility studies with unit prices at December 2004. Physical contingencies are estimated at 5% for civil works and 2% for equipment. Price escalationi s basedonprojectednational andinternational inflation rates, Summary cost estimates are infollowing tables. Project Cost by Component LocalCost Foreign Total (US$ mill) (US$ mill) (US$M) Shanghai Water Supply Component (Shinan) 39.40 14.83 54.23 Shanghai Wastewater Component 188.35 83.12 271.47 SolidWaste Management Component 4.75 2.37 7.12 District FinancingVehicle Component 45.06 17.48 62.54 Institutional Strengthening andTraining 0.37 0.36 0.73 Total Baseline Cost 277.93 118.16 396.09 Physical andPriceContingency 19.12 8.13 27.25 Total Project Cost 297.05 126.29 423.34 Interest duringconstruction 0.00 10.00 10.00 Front EndFee 0.00 0.90 0.90 TOTAL APL2 297.05 137.19 434.24 Project Cost By Activity Local Foreign Total U S $million U S $million U S $million 1.Investment Costs A. CivilWorks 114.47 70.70 185.17 B. Equipment &Materials 43.18 43.17 86.35 C. Service Contracts 3.15 2.42 5.57 D,LandAcquisition andResettlement 101.44 0.00 101.44 E.ConstructionManagement &Supervision 7.34 1.87 9.21 F.Engineering andManagement 8.35 0.0 8.35 Total Baseline Cost 277.93 118.16 396.09 Physical andPriceContingencies 19.12 8.13 27.25 Total Project Costs' 297.05 126.29 423.34 Interest duringconstruction 0.0 10.00 10.00 Front-end Fee 0.0 0.90 0.90 Total Financing Required 297.05 137.19 434.24 'Identifiable taxes and duties are US$30.0 million, and the total project cost, net of taxes, is US$404.24 million, Therefore, the share of project cost net of taxes is 93%. 39  Annex 6: ImplementationArrangements CHINA: CN-ShanghaiUrbanEnvironmentAPL Phase2 An APL Project Leading Group chairedby aVice Mayor of SMG (Deputy SecretaryGeneral of SMGi s Deputy Chief), provides policy guidance, coordinates important issues, and monitors progressinpursuingthe overall urban environment improvement strategy, The members of the LeadingGroup are the directors of ShanghaiDevelopment andReform Commission (SHDRC), Shanghai Construction andTransportation Commission (SCC), ShanghaiFinance Bureau (SFB), ShanghaiWater Authority (SWA), etc. Under the leading group, an APL Project Management Office (APLPMO) i s responsible for daily coordination, managementand supervision. The APL PMOis headedby the SHDRC, andcomposedof representativesof SCC, SFB, SWA andother bureaus andimplementingagencies involvedin the APL program. The APL PMO would be strengthenedduringAPL2, as necessary, with staff mix adjustedto reflect the needsof the respective implementation phaseof the project. The implementing agencies would establish budget, and staff their own sub-project PIUs or project offices. ImplementingAgencies TheShanghaiMun~cipalWaterworksSouthCo.Ltd. (SMWSC)would implement the water supply extension to QingpuDistrict. TheShanghai Municipal Sewerage Co.Ltd. (SMSC)would implementthe two wastewater sub-components: the North West Drainage Area (West Trunk) Wastewater Network Rehabilitation, andthe Sludge Treatment Facilities at Bailonggang and Zhuyuan WWTPs. TheShanghai ChengtouEnviron~entZndust~Development Co. Ltd. (CEIDC), a subsidiary of ShanghaiChengtou (UDIC), would implement the core city urban solid waste management sub-components, Le. closingof the Gucun andMinhangsolid waste sites. They would also managethe procurement of equipment for a multi-year Domestic Waste Survey Program and an MIS for ShanghaiSolidWaste Management; SCAESAB would be responsible for the overall implementation of this survey andthe MIS. Responsibility for implementingthe District Financing Vehicle (DFV)i s assignedto Shanghai ChengtouEnviron~entalAsset Management Co.Ltd. (CEAM), a subsidiaryof ShanghaiChengtou (UDIC). Sub-projects under DFV would be implemented by the respective project wastewater and solid waste companies or entities with support from CEAM, and under supervision of their respectful district governments. The currently known sub-projects are ChongmingWastewater; Chongming SolidWaste (Landfill); Qingpu Huaxin Sewerage; andJinshan Solid Waste Collection System. Each implementing agency would be responsible for Institutional Strengthening andTraining activities, including management capacity building, relatedto their investments and organization. As indicated inthe PADfor APL1, issuanceof a long-term bondi s being pursuedby SWAOD, a subsidiary of UDIC, as part of their responsibilityfor mobilizing 40  financing for water and wastewater investments,includingcounterpart financing for the waterlwastewater componentsof APL. Internationaltendering company(ies) will beretained as procurement agents for all aspectsof civil, electrical and mechanical works requiringinternational competitive bidding(ICB) procedures. Construction managementservices are expectedto be providedby international firms usinginternational andnational supervision teams. These institutional arrangements are basedon the following institutionalreformprinciples established by Shanghai: (a) The main functions of Municipal, District andCounty government entities are to establish, regulate, monitor andenforce compliance with regulations and standards. They play importantroles inplanning, research, anddevelopment coordination. The district and county governments were recently given a wider mandate andresponsibility to plan, implement andprovide services within their jurisdictions, for example, as of July 1,2004 regarding collectionand disposal of solid waste. (b) Utility companies for water supply, wastewater, and (insome cases) solid waste are the service providers, operating as managerially and financially autonomous companies, responsible for borrowing andrepaying debt, andrendering services according to requirements stipulated by government entities. (c) Project implementing agencies (usually utility companies) would contract specialized institutes andlor companiesfor detailed designs andbasic construction supervision, They would also be responsible for dealing with private (social) sector participation infinancing andlor operation of sub-projects. FinancialManagement An assessment of project financial management,includingrelevant revenue-earning implementing agencies, was carried out at project appraisal. Normal disbursement procedures would be usedinaccordance with the agreement between the Bank andthe Ministry of Finance (MOF). Disbursement by sub-project would be applied for the DFV component, applying 100%ratio to all eligible expenditures up to a maximumamount per sub-project, Adequate andexperienced accounting staff will be important for successful project financial management. A special account, managedby the Shanghai Finance Bureau (SFB), would be openedina bank acceptableto the Bank. Securedcounterpart funds would ensure smooth project implementation. A FinancialManual would be distributed by SFB to all financial staff before loan effectiveness. ProcurementManagement Special provisions inthe Chinese public procurement regulations specify that World Bank financed procurement i s exempt from the requirement to observe Chinese biddingregulations. IndividualPIUswould appoint experienced and adequately qualifiedstaff to carry out procurement activities, with support from tendering companies (appointed as procurement agents), inparticular for ICB procurement processes. APL PMO (or its designatedagency) would assist and advise PIUson procurement management, as required. 41  IMPLEMENTATIONARRANGEMENTSBY PROJECTSUB-COMPONENT ImplementingAgency 1. WATER SUPPLY MANAGEMENT 1.1 Extensionof Network to QingpuDistrict SMWSC 1.2 ConstructionmanagementandIST SMWSC 2. WASTEWATER MANAGEMENT 2.1 Western trunk sewer and systemstrengthening SMSC 2.2 Metropolitanlevel sludge disposal management SMSC 2.3 ConstructionmanagementandIST SMSC 3. SOLIDWASTEMANAGEMENT 3.1 Closing of Gucun andMinhang sites CEIDC 3.2 M I S SCAESAB (goods procurementto beimplementedby CEIDC) 3.3 Investigation of domestic waste generation SCAESAB (goods procurementto be implementedby CEIDC) 3.4 Constructionmanagement andIST CEIDC AND SCAESAB 4. DFV DISTRICTFINANCINGVEHICLE - CEAM 4.1 ChengquaoWastewater Management CEAM 4.2 Huaxin Sewerage System CEAM 4.5 ChongmingSolid Waste Disposal(Landfill) CEAM 4.6 JinshanSolidWaste Collection andTransport CEAM 4.7 Other sub-projects (subject to later preparation) CEAM 4.8 IST CEAM 5. INSTITUTIONALSTRENGTHENINGAND TRAINING (IST) Special Studies, Training, ContinuedAPLl activities, etc. VARIOUS AGENCIESIPIUs 42   Y  Annex 7: FinancialManagementand DisbursementArrangements CHINA: CN-ShanghaiUrbanEnvironment APL Phase2 SUMMARY The Bank's FinancialManagement Specialist conducted an assessment of the adequacy of the project financial managementsystemfor Shanghai APL 2. The assessment concludedthat the project meetsminimumBank financial managementrequirements. The project will have inplace an adequateproject financial managementsystem that can provide, with reasonableassurance, accurate andtimely information on the status of the project in the reportingformat agreedwith project entities, and as required by the Bank. No outstanding audits or audit issuesexist with any of the implementingentities involved inthe proposedproject. The project will be financed by the Bank loan andcounterpart funds. The Bank loan will be signed betweenthe Bank andthe People's Republic of China through its Ministry of Finance (MOF). On-lending agreements will be enteredinto between MOFand SMG through the Shanghai Finance Bureau (SFB), and then between SFB and various project implementingentities (PIUS). Counterpart funds will be mostly from commercial debt. AUDIT ARRANGEMENTS The Bank requires that project financial statementsbe audited in accordance with standards acceptableto the Bank, Inline with other Bank financed projects inChina, the project will be audited inaccordancewith International AuditingStandards andthe Government AuditingStandardsof the People's Republic of China. The Shanghai MunicipalAudit Office has beenidentified as auditors for the project. Annual audit reports will be issuedin the name of Shanghai Municipal Audit Office. The annual audit report of project consolidatedfinancial statements will be due from SFB to the Bank within 6 months after the end of eachcalendar year. Inaddition, annual audit reports on the financial positionandoperatingresults of the following implementing entities, inbothEnglishandChinese, will be due to the Bank within six months after the endof each calendar year: Shanghai Chengtou Environment Corporation; Shanghai ChengtouEnvironmentAsset Management Company; Shanghai Municipal SewerageCompany; and Shanghai South (Shinan) Water Supply Company. The financial statementsfor these entities are not fiduciary requirements, butrather to assess the sustainability of project investments. FINANCIALMANAGEMENTANDREPORTINGARRANGEMENTS Implementing Entity. The APL Project Management Office (APLPMO) under the leading group of the ShanghaiMunicipal Government i s responsible for the daily coordination, managementand supervision of the project. Shanghai South Water Supply Company will implement the water management component; ShanghaiMunicipal SewerageCompany will implement the wastewater managementcomponent; Shanghai ChengtouEnvironment IndustryDevelopment Co. Ltd. will implement the solid waste 45  management component; and ShanghaiChengtouEnvironmental Asset Management Co. Ltd.will implement the district finance vehicle component, The organizationchart is as follows: APL PMO Shanghai Shanghai Shanghai Shanghai South Sewerage Co. Municipal Environment Chengtou Chengtou Water Environmental Supply co. Ltd. IndustryDev. Co. AssetMgmt. Ltd. Ltd. Co. Ltd. Management Management Management Component Component Component FundsFlow. Fundingfor the project includes Bank loan andcounterpart funds. The chart below shows the flow of Bankfunds through the Special Account. Counterpart funds will bemostlycommercial debt and follow appropriate domestic procedures of funds flow. The World SA managed Implementing Suppliersand Bank by SFB entities + contractors AccountingOrganization and Staffing. Adequate project accounting staff with educational background and work experience commensuratewith the work they are expected to perform i s one of the factors critical to successfulimplementationof project financial management. SFB will provide a well-designed andfocused training program inproject financial managementto all financialandaccounting staff prior to loan effectiveness. The program will cover: Bank financial managementpolicy and disbursement procedures; fund, asset, andcontract management; format andcontent of project financial statements; and audit requirements. To strengthenthe financial management capacity and achieve consistent quality of accounting, SFB will prepare a project financial managementmanual (Manual), with detailed guidelines on financial management, internal controls, accounting procedures, fund andasset management, andwithdrawal application procedures. A draft of the 46  Manual has beenprepared andreviewedby the Bank. A final version of the Manual will be distributed to all relevant financial staff before loan effectiveness, but i s not a condition of effectiveness. AccountingProcedures. The administration, accounting andreportingof the project will be set up inaccordance with MOF Circular #13: "Accounting Regulations for World Bank FinancedProjects", January 13,2000. The circular provides in-depth instructions on accounting treatment of project activities andcovers chart of account; detailed accounting instructions for eachproject account; standard set of project financial statements; and instructions on the preparation of project financial statements. A standardset of project financial statements has been agreedto between the Bank and MOF, and applies to all Bankprojects appraisedafter July 1, 1998andincludes the following: balance sheet; statement of sources and uses of funds; statement of implementation of loan agreement; and statement of special account. Each PIUwill manage, monitor and maintainthe respective project accounting records, Original supporting documents for project activities will be retained by the originating PIU, Each PIUwill prepareits own project financial statements, which will then be submitted to SFB. SFB will approve thesefinancial statements, prepare consolidated project financial statements, andfurnish them to the Bank on a regular basis. Reporting and Monitoringof FinancialStatements. The following un-audited project consolidated financial statementswill be furnished to the Bank as part of the Financial MonitoringReport (FIvlR) on a semi-annual basis (prior to August 15 andFebruary 15): balance sheet; summary of sources anduses of funds by project component; statement of implementation of loan agreement; and statement of special account. Internal Audit. There is no formal independent internal audit envisaged for this project. However, this will not have an impact onthe project's financial management, as the line authorities' managementandmonitoring and annual external audits will serve as the mechanismto ensure that financial managementcontrols are functioning appropriately. Information System. The computerized software "Langchao" and "Boke", bothwell establishedaccounting software packages approved by MOF, will be usedby PIUs. The task team will monitor processing of accounting work closely, especially inthe initial stage, to ensure that complete and accuratefinancial informationi s provided ina timely manner. DISBURSEMENT ARRANGEMENTS Inlinewith the agreementbetween the Bank andMOF, the project will usetraditional disbursementtechniques and will not usereport-based disbursements, Disbursement methods, such as replenishment, reimbursement, direct payment and special commitment, will be available for this project. Bank loan proceeds would be disbursed against eligible expenditures as follows: (i) civil works -70% of expenditures for the water supply component, and 38% of expenditures 47  for other components; (ii) -for the water supply component 100%of foreign and Goods local expenditures, andfor other components 100%of foreign expenditures, 100%of localexpenditures (ex-factory) and 75% of other items procuredlocally; and (iii) Consulting services andTraining- 100%of expenditures. For the District Financing Vehicle (DFV)component, Bank loan proceeds would be disbursed against eligible expenditures of Civil Works, Goods and Services at loo%, within an agreedamount per sub-project . Regarding disbursement for the DFVcomponent, invoices from foreign suppliers and contractors to CEAMwould be eligible as basis for disbursement of the Bank loanunder the name of CEAM. Invoices from domestic suppliers andcontractors would be expected to be issued to the respective project (utility) company, Retroactive Financing Expenditures made after December 1,2004for civil works, goods and consultants' services andtrainingwouldbe eligiblefor retroactive financing upto $18 million, corresponding to 10%of the Bankloan. Retroactive financing is anticipatedto primarilybe usedfor contracts underthe water supply managementandthe DFVproject components, as indicated inthe ProcurementPlan(see Annex 8). Use of Statement of Expenditures (SOEs) Some of the proceedsof the Loan may be disbursed on the basis of SOEs as indicated below. Expenditures exceeding these limits will be made in accordance with respective procurement guidelines andprovisions inthe Loan Agreement against submission of full documentation and signed contracts. Expenditure Category Contracts lessthanUS$ Equivalent Civil works 10,000,000 Goods 500,000 Consulting firms 300,000 Individual consultants 100.000 Special Account (SA) A Special Account (SA) will be establishedinSFB for the APL2 project. The authorized allocation of the SA would be US$ 19million, with an authorized allocation of US$ 15 million untilthe aggregate amount of withdrawals from the Loan Account plus any outstanding special commitments would be equal to or exceedUS$60 million. SFB will beresponsible for management, monitoring, maintenance, andreconciliationof - - - SA activities. The implementingentities will submit all supporting documents required for Bank disbursementsto SFB for final verification andconsolidation before submission to the Bank for disbursement processing, The flow of informationwill be as follows: Contractors Implementing Approval World or suppliers entities bySFB Bank 48  FINANCIAL MANAGEMENT PLAN ACTION Action Responsible person CompletionDate 1Fnancial staff hiredandinplace at allPIUsand APLPMOandallPIUs By effectiveness APLPMO 2. Financialmanagement training to all relevant By effectiveness moiect staff. 3. Financialmanagement manual finalized and APLPMOandallPIUs IIBy effectiveness issuedto related financial staff. SWERVISION PLAN A detailed financial supervision planfor the project will beincludedas partof the China Audit Strategy document which is currently beingprepared, andwill take into consideration the size of project and the risks identified. 49  Annex 8: ProcurementArrangements CHINA: CN-ShanghaiUrbanEnvironmentAPL Phase2 ProcurementPlan,June 2,2005 A. General Procurement for the proposed project would be carried out in accordancewith the World Bank's "Guidelines: Procurement under IBRDLoans andIDA Credits," dated May 2004; and "Guidelines: Selection andEmployment of Consultants byWorld Bank Borrowers," dated May 2004, and the provisions stipulated inthe Legal Agreement. The various items under different expenditure categories are describedingeneral below. For eachcontract to be financed by the Loan, the different procurement methods or consultant selection methods, the needfor pre-qualification, estimated costs, prior review requirements, andtime frame havebeen agreedbetween the Borrower andthe Bank in the Procurement Plan. The Procurement Plan hasbeen preparedby the Shanghai MunicipalGovernment through its APL PMOand the respective implementingagencies, andwill be updated at least annually, or as required, to reflect actual project implementation needs and improvements ininstitutionalcapacity. The full Procurement Plan i s available inthe Project File. Procurementof Works. Works procuredunder this project would include: expansion of water supply distributionsystemsinouter districts, includingpipelines, with works for pumpingstations andrelatedcontrolsystems; trunk wastewater conveyors andcollection systems, with works for relatedpumpingstations and controls; works for two major wastewater sludge treatment plants; closure andremediation of two open waste dumps; urbanenvironmental investments (mainly wastewater collectionandtreatment systems; municipal solid waste managementcollection and landfill disposal systems) through the District Financing Vehicle (DFV). Procurement will be done usingChinese Model BiddingDocuments (MBD), andBank's StandardBiddingDocuments (SBD) when an appropriate MBDi s unavailable, or other documentation agreedwith or satisfactory to the Bank. Small contracts of $100,000 equivalent or less couldbe procured through local shopping. Procurementof Goods, Goods procuredunder this project would includegoods and equipment related to water supply distribution; wastewater collection and treatment plants; and solid waste managementsystems. Procurement will be done usingChinese Model BiddingDocuments (MBDs)for ICB andthe Bank's StandardBidding Documents (SBD), when an appropriate MBDi s not available or other documentation agreed with or satisfactory to the Bank. Small contracts of $100,000 equivalent or less could be procured through local shopping methods. CombinedWorks andGoodsProcurement:CivilWorks andEquipmentSupply, Installationand Commission. To enhanceimplementation efficiency, some large contracts may includeboth works and goods, including sludge treatment plants and pump 50  stations, Either standardbiddingdocuments or modifiedbiddingdocuments for Civil Works or for Supply andInstallation of Plant andEquipment will be usedfor these contracts, subject to the agreementof the Bank on a case by case basis. Design-Build- Operation (DBO) andtwo stage biddingare options notedinthe Procurement Plan. Selection of Consultants. Consulting services will include design review, design, construction management, businessmanagement, utility andinvestment relatedstudies, water supply, wastewater andsolid waste planning studies, andoperational support in these sectors. Short lists of consultants for services estimatedto cost $300,000 equivalent or less per contract may be composedentirely of nationalconsultants in accordance with the provisions of paragraph2.7 of the Consultant Guidelines. Operating Costs. Operating costs will not be financed through the project. Other, The procurement proceduresand SBDs to be usedfor each procurement method, as well as model contracts for works and goods, are reflectedinthe Shanghai Urban Environment Project (SHUEP) APL2 Project ImplementationPlan. B. Assessmentof the agency's capacity to implement procurement Procurement activities will be carried out by the APL Project Management Office (PMO) under SHDRC, andthe several agencies describedbelow: I Component Project Implementing Units/Project Agencies I Shanghaiwastewater management ShanghaiMunicipal SewerageCo. Ltd.(SMSC) Urban water supply works andpipelines ShanghaiMunicipalWaterworks South Co. Ltd. (SMWSC) Shanghaiurbansolid waste management ShanghaiChengtouEnvironmentIndustry Development Co, Ltd, (CEIDC), and Shanghai City Appearance & EnvironmentalSanitation Bureau (SCAESAB) UrbanDistrict Financing Vehicle (DFV) ShanghaiChengtouEnvironmentalAsset Management Co. Ltd. (CEAM) Technical assistance IndividualPIUs Overallcoordination APLPMOsupportedbyShanghaiWater & Environment Construction Co. Ltd. (SWEC) These agencies are adequately staffed as described inthe Procurement Assessment Report. The procurement functions and staffing i s set out inthat Report. An assessmentof the capacity of the implementingagenciesto implementprocurement actions for the project hasbeen carried out by the Bank. The assessmentreviewedthe 51  organizational structure for implementingthe project andthe interaction between the project staff responsible for procurement. The key issues andrisks concerning procurement for implementation of the project have beenidentifiedandinclude consistencyof biddocuments. Agreed corrective measures are improvedtraining. The project overall was ranked low risk. C. Procurement Plan The Borrower developed a procurement planfor the project which provides the basis for the procurement methods. This plan was agreedbetween SMG andthe Bank inmid December 2004, and revised inMarch 2005; it i s available at the APL PMO, andinthe project files. It i s also available inthe Bank's external website. The Procurement Plan will be updated inagreement with the Bank's Project Team annually or as requiredto reflect the project implementationneeds andchangesininstitutionalcapacity. Table A: Threr Contracts Subject to Prior Review (US$) 1.Works ICB All Less than $10 NCB None million Less than $100,000 Shopping None 2. Goods Above $500,000 ICB All ~ Less than $500,000 NCB None Less than $100,000 Shopping None 3. Services Above $200,000 QBS/QCBS All (Firms) $200,000 or less CQS TORs only Individual Other: Section V of All TORs, & the Guidelines contracts above II $100,000 Inaddition, the first contract to beprocuredbyeach agency for eachtype of procurement method, would, regardlessof contract value, be subject to prior review. 52  Short lists composedentirely of national consultunts. Short lists of consultants for services estimated to cost less than $300,000equivalent per contract may be composed entirely of national consultants inaccordancewith the provisions of paragraph 2.7 of the Consultant Guidelines. D. FrequencyofProcurement Supervision Inadditionto the priorreview supervision to becarried out from Bank offices, the capacity assessment of implementing agencies (the APL PMO and the project agencies) recommends supervision missions annually, or more frequently if considered necessary, 53  z z z z z  z z z z z z z z z z > > 3 z z z z z z z z z z z z = I m m m m m m m m m m y y g y y y y p y y m m 0 0  2g rr a m K m z z z z z z z z z z z z z z m m 0m $ 2 z ul Q C  1 z z z z z z z z z z z z z z z z z z z z z L  z z z z L L L L L L L m m m m z z z z    Annex 9: Economic and FinancialAnalysis CHINA: CN-ShanghaiUrbanEnvironmentAPL Phase2 APL2 continues to promote the objectives of the overall APL framework: to improve Shanghai's urbanenvironment, with special emphasison improvingthe environment in the suburban areas andhelping to improve Shanghai's access to (long term) infrastructure finance. APL2 continues APLl's emphasison the wastewater and solid waste sectors, but also broadens its scope to include somecomponents inwater supply management, buildingon prior engagementby the Bankinthat sector, e.g., the ShanghaiEnvironment Project (SEP). Inaddition, it includes a specific component the DistrictFinancing Vehicle to address district level infrastructure financing needs inthe wastewater and solid waste sector. Infulfilling these objectives, APL2 provides financial support andtechnical assistanceto Shanghai Municipal Government (SMG) in implementing several key elements of Shanghai's development program, as submitted to the BankinFebruary 2002. Inthis context, the specific APL2 project components are beingevaluated from an economic and financial perspective usingatwo pronged approach: Economic and financial evaluation of the specific project components financed directly through on-lending arrangements via the ShanghaiFinance Bureau. Economic and financial evaluation of the District Financing Vehicle (DFV) as a conduit for individualproject components inthe outer districts of Shanghai. This two prongedapproachis necessaryas the emphasisof the economic evaluation for the first part i s on assessing options (costs, benefits, etc.) on a project component by project component basis (as detailed inthis annex), whereas for the secondpart, in additionto the DW sub-projects, an overall economic appraisal is conducted at the level of the DFV as an intermediary agent. This Annex focuses on the first aspects, with the details of the financial andeconomic evaluation of the DFVbeingprovidedinAnnex 10. I.ECONOMICANALYSIS Given the inherent difficulty inquantifyingprecisely andmeaningfullythe benefits in environmental projects, particularly those relating to public heath andenvironmental improvements, the evaluation of the individual project components inAPL2 hasbeen guided, inprinciple, by cost-effectiveness analysis. This approachi s fully consistent with current practice for the majority of urbanenvironmental projects, especially in the water supply, wastewater, and solid waste sector^.^ Given the focus of APL2 on these three sub-sectors, the objective of the economic analysis was to demonstratethat the specific APL2 investments fit into the overall sector strategiesina strategic, logical, andcost effective manner. A review of the Bank's current practices in ChinalEAP shows that most projects in the urban environmental area are appraisedusing cost effectiveness. 61  A. ECONOMIC EVALUATION PROJECTCOMPONENTS OF 1.Wastewater Sector Western Trunk Sewer Component Objectives. The primary objective of this project component i s to addresswastewater treatment inthe Shidongkou area, promptedinparticular by the need to rehabilitate the western trunk sewer, supporting Shanghai's broader strategic objective of moving towards secondary treatment of wastewater. Inaccordancewith the original Shanghai Wastewater Master Plan, the western trunk sewer i s currently the mainwastewater conveyor inthe Shidongkou catchment area, which i s one of six mainareas inthe Shanghai SewerageSystem. The Western Trunk sewer receives partof the combined wastewater from Putuo, Jingan, Changning, Zhabei andHuangpudistricts west of Suzhou Creek, and municipalwastewater from Taopu, Nanxiang andBao Steel areas (key municipalindustrial zones). Total estimated catchment is about 900,000 m3/day, and projected to increaseto 1.2 million m3lday at the endof the project planningperiod. Wastewater from these areas i s conveyed through the western trunk sewer to Shidongkou and discharged nearthe shore of the Yangtze River. The Shidongkou WWTP with a capacity of 400,000 m3/day, together with the smaller WWTPs inWusong and Sitang (40,000 m3lday and20,000 m3/day), will absorb the key partof the wastewater flow. The Western Trunk Sewer is 24.4 kmlong andwas built inthe early 1970sfor the purpose of improvingthe water quality of Suzhou Creek, This trunk sewer has been in operation for about 30 years and i s invery poor state of repair. The objective of the component is to optimize the use of Shanghai's existing trunk sewer assets by potentially redirecting some of the catchment areaflow currently beingtransferred to Shidongkou into the existing SSPl system leading to the Zhuyuan WWTP, while allowing for future increasesinShanghai's rapidly growingnorth-west development conidor. For further details on the state of the wastewater sector see Annex 1. Altematives. Indeciding on how to addressthe issue of wastewater treatment inthe catchment area of the Shidongkou WWTP, a number of alternatives have been considered. First,the alternative of not doing the project was rejectedbasedon the risks associated with operating the western trunk sewer inan un-repaired state. Serious problems include infiltrationrates of as much as 20% in some locations, as well as the existence of sediments inmuch of the sewer due to low velocities. The second alternative is the construction of a new sewer. This alternative entails the closing of the existingsewer and replacing it with a new one, and disposing some flow through the SSPl systemto the Zhuyuan WWTP, with the remaining flows treated at the WWTPs of Wusong and Sitang, as well as the Shidongkou WWTP. The estimatedcost of this alternative would be about R1M13 1.2 billion (including the safe closure of the existing sewer), of which 50% would be for landacquisition, The thirdwas to consider the full diversion of all flows into the SSPl system, but it was considered too risky interms of potential capacity constraints in light of the anticipated increaseinutilization of the SSPl systemby its core area. The forth alternative considered was full rehabilitationof the current sewer system, at a total cost of RMB 1.4 billion. Given that the second alternative appears most economical, after appropriate costing andinclusionof all relevant factors, the diversion of some current flows into the SSPl system is considered 62  at this stage as the least cost solution for the disposals of part of the wastewater inthe Shidongkou catchment area. For all detailed cost assumptions andconsideration of alternatives, see DRA reports and feasibility studies inproject files. Benefits. Inaddition to the benefit of addressingthe problemof the aging existing western trunk sewer with its concomitant risks (i.e., structural safety, etc.), additional benefits of the chosen alternative include effective use of the releasedcapacity at Shidongkou wastewater treatment plant for the anticipated increasein wastewater flows from Baoshan and Jiading districts, both of which haveprojected increaseinpopulation inthe medium-term. Givenincreasedpopulation, andconsequently wastewater flows, andinlight of the objective of minimizing the dischargeof (treated) wastewater upstream of Shanghai's long term strategic water intake inthe Yangtze River, the partial diversion of flows from the center of the city further downstream would be advantageousto the extent possible. Finally, an expressedgoal of the ShanghaiWastewater Master Plan (in line with global best practice) i s to maximize the capacities andutilizationof existing wastewater assets. Hence, includingsome wastewater flows from the Shidongkou catchment areas inthe existing SSPl systemwould contribute to this goal as wouldbe the freeing up of capacity for the treatment of the projectedincrease of flows from the Baoshan andJiading districts at the Shidongkou WWTP. Finally, expandedcapacity for the safe disposal of sewage flows carries with it all the normal economic health benefits that are common to all sewage and wastewatertreatment programs. SludgeDisposalManagement Objectives. Shanghai has 3 large wastewatertreatment plants (WWTPs) currently in operation, i.e., Zhuyuan, Bailonggang and Shidangkou, several smaller plants inthe urban area, and one large plant due to commence construction at Zhuyuan (Zhuyuan II). These produce significant volumes of sludgefrom atotal wastewater flow of some4.5 million m3lday. As part of its longterm environmental managementplans, SMGi s committedto undertake a phasedprogram to dispose of the sludge in an environmentally optimal manner. This includes the construction of sludge treatment plants utilizing sludge digestion leading to disposal at suitable sanitary landfills, or if quality permits, drying andlanddisposal. The component objective i s to help meet these goals by upgradingthe sludge treatment and disposal processes at the major wastewater treatment plants. Specifically, this component comprises the construction of a sludge treatment plant anddisposal facility with a capacity for sludge from a plant of 1.2million m3lday of wastewater at the Bailonggang WWTP, and a similar facility at the Zhuyuan 1&2 WWTP with 2.2 millionm3lday. Alternatives considered. An economic least cost analysis has beencarried out to determine the most efficient option for sludge treatment and disposal (based on incremental unit cost values). All capital and operating costs were includedinthe analysis, andthe time span of the analysis was 50 years. The following options were compared: digested and treated sludge usedfor landscaping, digested sludge and disposal inlandfills, incineration, andlandfilling of sludge. Incremental unitcosts were estimated to be least costs for the first option (RMB 950 AIC per ton sludge), Le., usingtreated and digested sludgefor landscapingpurposes, as long as all the energy needs can be met from 63  the gas generatedinthe process (but not under other circumstances). If additional energy would need to be used(beyond the gas generatednaturally andlocally), then all three options are broadly equivalent. It was therefore recommendedthat an option to digest andtreat sludge upto the point of self-generatedenergy at the facility wouldbe adopted. 2. Water Supply Sector Extension of Network to QingpuDistrict Objectives. The objective of this project component is to help advancethe water sector reform agenda as laid out inthe Water Supply Master Plan. The overarching objective of this Master Planis to provide amorecentralized butflexible water supply systemandto eliminate smaller water supply facilities of uncertain quality. Specific objectives include: concentrating the water supply incentralized intakes from the Yangtze andthe Huangpu rivers, advancing the concept of conjunctive use of raw water abstraction from both; strengthening the protection of raw water resources; providingadvancedtreatment, at least for raw water abstractedfrom the Huangpu; rehabilitation of water treatment plants and networks; andrationalization of the management system andunification of urbadsuburban supplies, thereby reducing the overall number of water supply facilities. Inthat context, SMGaims to extendpartsof its water supplynetwork. As partof APL2, the SMWSC (inShinan) service area will be expandedto improve water service coverage andquality for a population of about 200,000 inpartsof Shanghai's peri-urban area west of the core urban area, inQingpuDistrict, where water services anddelivered water quality are currently at risk. SMWSC will beresponsible for the design and construction of the mainwater distribution system. A series of small-scale civil works contracts will be used as an innovative Output-Based Procurement (OBP) approachfor the construction of small delivery systemconnections. SMWSC will be responsible for the operation of the entire system. For further details on the sector objectives see Annex 1. Alternatives Considered. A number of alternatives were considered. The alternative of not doing the project was rejected as it would imply that that the Qingpu district would continue to be supplied by water, through two localWTPs, abstracting water from a local creek. As the raw water quality inQingpu district adjacent to Shanghaihas deteriorated to such an extent it was found that the incremental cost of supply from the large Changqiao plant (part of SMWSC) was less than the alternative of complex andrisky treatment enhancement of the degradedraw water available to Qingpu, Connecting Qingputo the large Changqiaoplant will also enablecapture of the scaleeconomies by supporting the Master Plan's objective of centralizing the water supply system and eliminating smaller water treatment plants. The choice therefore narrowed down to finding the most cost-effective solution of connecting Qingpudistrict to the SMWSC network and extending the coverage area. Various technical design options and scenarios were compared, and a least cost solution amounting to RMB 422.6 million has been adopted. For details on design alternatives (e.g., land acquisition, technical specifications, etc.) see DRA reports and feasibility studies inthe project files. Iti s also noteworthy that the Qingpu extension will be valid ina number of strategic scenarios relatedto the longer term locationof the mainwater supply intake in Shanghai. 64  CarbonFinancefor SludgeTreatmentOption' Digestion and heat drying of sludge is a progressiveand environmentally superior technology for which Shanghai is considering to access carbon finance, Shanghai's investment in the Bailonggang and Zhuyuan Sludge Treatment Plants (STP) exerts global environmental benefits in the form of reducedmethaneemissionsto the atmosphere. Methane is apowerful greenhouse gas with a global warming potential 21 times that of carbon dioxide. Under the Clean Development Mechanism of the Kyoto Protocol, Shanghai can generate "Certified Emission Reductions (CERs)" for its greenhouse gas reducing activity and sell these credits to the World Bank's Carbon Finance Businessand other buyersof carbon credits. STP Sludge Methane Methane Emission Carbon treated produced produced Reduction revenues (tonslday) (m3ld) iw (t CO2elyear) (US$/year) Bailonggang 210 31,500 22.5 170,000 600,000 Zhuyuan 310 46,500 33.0 250,000 875,000 Assumptions for the calculations are as follows: (i) matter (volatile suspended solids, VSS) in organic sludgeis 50%; (ii) 35 degC for 20 days digester destroys 50% of VSS; (iii) gas yield is 900m3 at digester per ton of VSS destroyed, two thirds of which are methane; (iv) weight of methaneis 161(22.41~1000)tlm3 =0.000714 tlm3; (v) Globalwarming potential of methaneis 21tons C02 equivalent per ton of methane; and (vi) sale price of emission reduction US$3.50 It C02equivalent. The digesterspeeds up the processof anaerobic decomposition. However, inabsoluteterms, the digester does not producemore methaneout of a given amount of organic material than a landfill, given that the organic material prevails much longer ina landfill than ina digester. Usingthe biogas production of the digester for calculating the emission reduction thus does not overstate absoluteemission avoidance. 65  Benefits. The benefits of the project are numerous. As mentioned above, the connection of Qingpu to the SMWSC network would support the overall Master Planby helping to eliminate smaller WTPs (improving overall scale economies and improving the longer term reliability of water quality by reducing water abstraction from smaller creeks). In addition, providingimprovedwater service coverageandquality to Qingpu district (a lower income area than the core city) with a target population of 200,000 will support the overall objective of SMGto improve water coverage andquality inthe entire metropolitan area. There are also significant health benefits that are normally associated with improvedwater quality, such as reduction of water-related diseases andillnesses (especially diarrhea and gastroenteritis) leadingto areduction inhealth related expenditures (private andpublic) and increaseinthe productivity of the affected population that come with the extension of the network to this district. 3. Solid Waste Sector Objectives. To support SMG's objective that solid waste from households and the growing volume from food services i s collected, transferred, treated and disposedof in ways that protect the public health and atmospheric, terrestrial and aquatic environments across metropolitan Shanghai, APL2 will buildon the major investment inAPLl inthis sector (the construction of the Laogang PhaseIV landfill), by supporting some smaller butnonethelesscriticalinvestments inthe rehabilitation of two existingdump sitesin Shanghai, the enhancement of a solid waste sector Management InformationSystem (MIS), and implementation of a multi-year waste composition study, The component will comprise insituclosure of the Gucun andMinhangWaste Dumpslocatedinthe core city of Shanghai, including the implementation of a program of site assessment, monitoring andrehabilitation of the sites, which will be used as green space. This component will assist Shanghaiindeveloping abest practice methodology for dump closure andrehabilitation, which can be replicatedelsewhere inthe municipality. There are an estimated 200 similar open sites inthe Shanghai metropolitan area. Alternatives Considered. The feasibility studies for the closure of the Gucun and Minhang dumps identifieda number of alternatives. The alternative of not doingthe project was rejected becauseof the continuedenvironmental pollution costs (leachate, odor, flying ash, etc.) and safety concerns (landfill gas explosion, etc.). The question therefore becomes one of deciding whether to remove the solid waste from its current location or whether to close the open site inan environmentally sustainable manner. For Gucun, three specific options were considered; first, closure (with nursery stock base creation) for a total cost of 13 RMBmillion; second, closing the open dump and installinga brick makingfacility at RMB 184million; and third, removing and transporting the solid waste to the Laogang site at a total cost of RMB 92 million. Though a pure closure of the open dump without nursery stock base creation i s strictly speakingthe least cost solution, the pure closure option with nursery stock creation has been adoptedas the solution, as there exists potential revenue creation through the sale of plants and trees. Whereas pure closure has the social andenvironmental benefits of the closure, creating a nursery stock baseprovides additional potentialeconomic benefit 66  through revenue generation. For Minhang, three options were also considered (a) pure closure and creation of nursery stock base [RMB 26ml; (b removal and shipment to Laogang [RMB 300-400 m]; and (c) utilization [RMB200 m] As inthe case of the Gucun closure, the creation of a nursery stock basei s recommended. The rationale, again, i s the potentialfor revenuegeneration through the sale of trees andplants. For further details, see feasibility studies inthe project files. Benefits. The benefits of the proposedsolutions are inline with similar closings of open waste sites inother countries as they present opportunities for landredevelopment and reuse, and allow for a safe and sustainabletreatment of the environmental hazards contained insuch sites. Intheir current state, the two open dumps poseenvironmental and safety hazards. Onthe environmental side leachateand odor pollution, flying ash andother matter posethreatsto water and atmosphere. Temporary protection measures that have been introduced over the years are not sufficient and do not meet the necessary standards of Shanghai's Master Plan. Table 1:Overview of Solid Waste ODtions TOM cost7. Components Alternatives Comments (Million RMB) Not doing the project 1 Rejected B. Tariff Setting ProcessandAffordability Analysis Tari~Setting Process. The ShanghaiPrice Bureau(SPB) i s responsible for the regulation of prices inaccordance with the Shanghai PriceLaw (1997). There are currently three pricing systemsinoperation in Shanghai: (a) full government pricing, where the government fixes the price; (b) partial government pricing-where the government fixes a base price and fluctuations are allowed within aprescribed band, or the government fixes a ceilingprice; and (c) free market prices. The Shanghai PriceLaw defines the categories of items that will have prices fixed or regulatedby SMG: these are items havingmajor economic or social impact; rare commodities having a strategic 7 Costfor site assessment and monitoringare not includedinthese overall costs 67  significance; goodshewices of monopoly providers; important utility prices; andpublic benefit facilities (education, health, parks, etc.). Stategovernment issuesperiodic guidelines and advice to subordinate price bureausoncriteria andlor procedures to follow inthe pricingprocess. Suchguidelines exist for most mainutility prices. Pricelaws at lower levels of government mustconformto the StatePricingLaw. Water and wastewater fall under category (a) as they are consideredto be important utilities. Formally, for there to be a change intariffs, the utilities needto make a written application to SMG for a priceincrease. This application must include information on the following issues: (a) why a price increaseis needed; (b) by how much the priceneeds to be increased; (c) the likely impact on customers; (d) three years of operating cost and output data, together with any other detailed informationrequired by SPB; and (e) an independent audit report of the companies' financial position. SPB then considers the price application onbehalf of SMG, anddecides whether the application has sufficient merit to go to the stage of a public hearing. Public hearings unite company representatives,consumer representatives, economic andlegalexperts, and representativesof the People's Congress and Consultative Committee. A decision i s reachedwhich i s submitted to SMG, with the ultimate decision residingwith the Mayor (although no price increases approved by a public hearing have been overturned as of yet). The next tariff increasefor water i s expectedto occur in2006. Table2: Overviewof CurrentWater and WastewaterTariffs Evolutionof the water andthe wastewatertariff (RMBlm3) 1996 1997 1998 1999 2000 2001 2002 2003 2004 Water 0.48 0.68 0.68 0.88 0.88 0.88 1.03 1.03 1.03 Wastew. 0.12 0.12 0.24 0.45 0.70 0.70 0.70 0.70 0.90 Breakdownof the water tariff amongdifferent typesof users 1999101 since 2002 Domestic 0.88 1.03 Industrial 1.10 1.30 Hotel 1.10 1.50 Special ___ 2.00 A~ordabili~ Analysis. The water supply service i s 2417, covering some 97% of the urban area, with similar service independent of local area. To understandthe impact of the current tariff levels on the urbanpoor, an analysis was conducted comparingthe average monthly expenditure of domestic consumers (inthe lowest income bracket) for water supply andwastewater services with their monthly income, andprojected tariff and income increasesto 2020. The current tariffs for water for domestic consumers i s RMB 1.031m3 andfor wastewater RMB 0.9 1m3. Tariff projections are consistent with the financial projections and project covenants for cost recovery. Under these assumptions, combined water and wastewater monthly expenditures do not exceed about 2% of the monthly incomes of low households, and are therefore judged affordable for low income 68  consumers inShanghai. For further details, see the following section on financial analysis. 11.FINANCIALANALYSIS The framework for this financial analysisreflects the institutionalresponsibilities within SMGfor construction, asset managementandoperations & maintenance. Financial analysis of the selectedschemes and the implementing agencies was conducted to evaluate capacity for raising counterpart financing. The financial forecasts access the longterm financial sustainability of the project, the implementingagencies, andthe guarantors for each of the components. Finally, current andforecast levels of cost recovery in Shanghai are analyzed andcompared with other cities inChina. A. Institutional Setup for the Water and Wastewater SectorsinShanghai The Chinese system for water and sanitation services and water resource management involves multiple institutions. Changes at the municipallevel in Shanghairelate to more general reforms in China, wherein the state i s moving from a role of direct provider to the role of an organizer andregulator, andthe service delivery function to the responsibility of public or private corporations operating under amore competitive framework. Accordingly, investments inwater supply and sewerageinfrastructure are managedand operatedby specialized state owned enterprisesoperating as utility companies within the overall structure of municipal administration, as briefly described below. Since the reorganization of the water and wastewater sector by the Shanghai Municipal Government in2000, there are four8water supply and distributioncompanies (WSCs) that supply drinkingwater to people living inthe core urban area of Shanghai, Three' of them buy their raw water from the ShanghaiRaw Water Supply Company. Minhang draws raw water directly from the HuangpuRiver. The ShanghaiMunicipal Sewerage Company, which itself i s organizedwith three operating companies, Le., North, Centre and South, retains responsibility for provision of wastewater services throughout the core city of Shanghai. Inthe suburbandistricts of SMG, the districts directly operatethe water supply and sanitation services. The 4 WSCs andthe SMSC are responsible for managing and operating the system, under the overall supervision of the ShanghaiWater Authority (SWA). The assets andshares of the water and seweragecompanies are consolidated onthe balance sheet of the Shanghai Water Assets Operation andDevelopment Co. Ltd. (SWAOD), an entity of SMGthat is responsible for raisingfunds for the investment programs of the WSCs, and shoulders part of the associateddebt service burden (not however the World Bank loan). Tariff setting andmonitoring, inline with guidelines issuedby the national government, are supervised by the PriceBureau, and indirectly by the ShanghaiDevelopment andReformCommission (SHDRC), Shanghai Construction SouthWSC, Minhang WSC, PudongVivendi WSC and Shibei WSC MinhangWSC pumps raw water directly from the Huangpuriver 69  andManagement Commission (SCC), andthe ShanghaiFinanceBureau(SFB); SFB approves capital investment policy inline with the national regulatory framework. Considering the limited recovery by SWAOD from user charges, the main source of cash flow for SWAOD for repaying loans is currently from the sale of assets to the private sector (as inthe case of Pudong, and as expected soon, Shibei), Private sector participationinthe sector includes the internationally bidout concessionfor Pudong Water Company, aBOT wastewater treatment facility at Zhuyuan I, a concessionfor Zhuyuan 11,and other BOTSthat are inthe processof beingtendered. Duringthe appraisal of APL2, the accountsof eachimplementing agency directly involvedinthe project, Le., Shinan WSC and SMSC, were assessedby the project consultants andreviewedby the Bank. These individual utility companies operate as managerially and financially autonomous companies, responsible for borrowingandrepayingtheir share of the World Bank loan under the APL, and are expectedto render services sustainably according to requirements stipulated by SMG. Their performance obligations, including debt service, is backstopped inthe case of the core city by SMG, andinthe case of suburbandistricts, by the respective district governments. Detailed financial reports of the companies are available inthe project file; a summary is attachedinthe tables below. B. FinancialAnalysisofProject ImplementingAgencies Project consultants have examinedthe financial sustainability andaffordability of financing the proposedproject components in Shanghai and surrounding districts by: (a) analyzing the situation of the existing water and wastewater treatment infrastructure; (b) estimating the costs of refurbishment andor the costs of financingnew construction; (c) projectingthe costs of operation andmaintenanceof such infrastructure; and (d) including an analysis of the affordability of different financing options for the citizens of Shanghai. Details of this analysis andthe underlying assumptions are available inproject files. The financial situation of the companies andforecast results (interms of projectedtariff requirements to meet financial covenantsunder the APL), are summarized inthe tables andparagraphsbelow. rable 1:HistoricalFinancials" for Decem er 31.2004 All Amounts inMillionYuan Shinan WSC Total Costs: 486 Total Revenue: 605 0 Salary & wages: 57 Domestic: 149 0 Materiallfuellelectr: 302 NonDomestic: 347 0 Admin: 120 Municipalgovt. budget: 0 0 Interest: 7 New connection charges: 109 Depreciation: nab Total Liabilities andNet Worth: 4031 Total Assets: 4031 Debt Equity Ratio: 1.2 70  Total Cost: 1047 Gross Revenues: 936 Salary & wages: 61 Domestic: 129 0 MateriaVfuellelect: 233 NonDomestic: 611 Admin, SalesTax etc: 24 StormWater Subsidy (SMG):84 Interest: 46 Others: 112 Other, incl. depreciation: 684 Total Liabilities andNet Worth: 7088 Total Assets(inc1. accimulatedloss): 7088 1 Debt Equity * Unaudited Ratio: 2.34 financial data providedby the companies. South(Shinan)Water Supply Company The South (Shinan) Water Supply Company would implement the water supply network extension and the improvements inthe Xujingarea of Qingpu district. This company currently serves over one million householdsinfive districts of Shanghaicore city, mostly inthe old and densely populated areas of Puxi, covering a service area of 180Km2. The service areaof the company will expand to absorb some suburbandistricts which comprise rapidly growing areas of urban Shanghai. Demand for new water connections, as well as pipedwater delivery, i s expectedto continue to expand inthe future. The company owns two water treatment plants- Nanshi (900,000 tld) andChangqiao (1,600,000 tld). The annual revenue of the company is currently RMB 605 million, of which revenue from water charges constitutes RMB 496 million, with a daily production of about 1.7 million m3lday. With income from new connection fees, the company earns anet marginand had a positivecash flow during last year. This source of revenue (RMB109million in2004) couldbe expected to decrease as network expansion stabilizes. The tariff charged for water i s currentlyRMB 1,03/m3 (water only) for domestic consumers, andRlMB 1.30 lm3 for non-domestic consumers. As per the current projections, it is estimated that atariff increaseof 20% will needto be effected in2007, andanother25% in2010, to maintain full cost recovery andcomply with the financial covenants under the loan. Itwill be necessaryover time to increasetariffs to ensure continued fullcostrecovery, inaccordance with the nationalguideline" onwater andwastewater tariffs. Inthe short term the company is expectedto continue to rely onrevenuesandprofits from its construction activity (by installingnew pipes andconnections). ShanghaiMunicipalSewerageCompany SMSC was createdin 1995 to provide wastewater services to the core city of Shanghai. The suburban districts operate their facilities directly under the supervision of SWA. SMSC does however allocate some funds to the districts for maintenanceof secondary andtertiary sewers, drawing on the proceeds of the 5% Public Utility Tax that i s paidto it by SMG. Any maintenancecosts inexcess of these funds paidby SMSC are met from the districts' own loThe 1999 StateCouncilcircular "Regulation onManagementof Pricingof UrbanWater Supply" states that municipalities should beresponsiblefor approving water tariffs and that water tariffs, should cover all operationsand maintenance, depreciation, and interest expenses, and allow for 8-10% returnon the net value of fixed assets. 71  resources. SMSC pays a small administrative fee (currently at the level of RMB 35lmillion m3) to the water supply companiesfor billingand collecting wastewater tariffs on its behalf. Under APL2, SMSC will implement the Western Trunk sewer investment andthe sludge treatment facilities at Bailonggang andZhuyuan W W T p s at a total cost of RMB 2.4 billion. This is a significantproportionof the total assets of the company, which stoodat about RMB 6.7 billion in 2004. SMSC's total annualrevenues are currentlyRMB 936 million (of which wastewater user charges alone comprisesRMB739 million). While the situation inrespectof the other two companies i s positive, the portionof SMSC related to ShinanWater company i s currently operating at a deficit, leading to anet overall operating loss for SMSC of RMB 111 million in 2004. However, on adding back depreciation charges, there i s a net cash surplus for the year, thereby allowingSMSC to cover its operating costs; andinfact, as the balance sheet of SMSC for 2004 indicates, the company i s quite cashrich due to accumulated depreciation charges. Due to the large projects being implemented, it i s estimated that inthe absence of other sources of revenue or subsidies, tariff increasesof 2535% will be required in2007 to meet the debt service and operating ratio covenants of APL loan. Shanghai Chengtou Corporation (UDIC) B y law, SMG, like all localandmunicipalgovernments inChina, cannot borrow directly from banks and needs an intermediary. UDIC was established in 1992 as an investment and stock holdingcorporation to raise funds on behalf of SMG. This company implements projects in infrastructure sectors, including sewerage, road, water and landscaping, inthe core urban areaof Shanghai. Duringthe last decade, ShanghaiUDIC andits wholly ownedsubsidiaries raisedover RMB 130billion for over 40 largeinfrastructure projects, includingkey bridges, roadandrail infrastructure, andprominent buildingsandreal estate development in Shanghai. As of December 31,2002, Shanghai UDIC hada registeredcapital of RMB 12billion, andtotal assets of RMB 110billion (of this, RlMB 14.7 billion comprised water and sanitation assets), Under APL2, a subsidiary of Shanghai UDIC would implementthe core city urban solid waste components, includingthe closing of two solid waste sites, which at a total cost of RME3 71 million i s about 0.05% of the existing assets of the parent company. ShanghaiWater Assets Operationsand DevelopmentCompany (SWAOI)) SWAOD was createdin 2000 as a wholly owned subsidiary of UDIC, specifically in charge of the water and wastewater sectors in Shanghai under the overall supervision of ShanghaiWater Authority (SWA). SWAOD owns all the assets of the water and seweragecompanies in Shanghai (currently valued at about RMB 21 billion), This includes 100% of three public sector water distribution companies, 50% of the Pudong Veoliajoint venture water company, 100% of the sewerage company (SMSC), and42% of the raw water extraction company. It i s responsible for raisingfunds to finance the projects of these companies. Most of the counterpart financing for the projects under APL2 is beingraisedby SWAOD as part of its responsibilityfor financing water and wastewater investments. The APL2 portion of about RMB 3 billion, is a smallproportion of the total assets of SWAOD. 72  The proceeds of asset sales (such as 50% sale of PudongWater Company in2002) and borrowingsinthe national andinternational markets have augmentedfinancing of the water and wastewater sector inShanghai. SMGi s currently formulating a longterm strategy andevaluating its options to increasethe level of cost recovery from user charges, and thereby reducing dependenceon budgetary finances for funding long term capital requirements for water and wastewater assets. C.RevenueandTariffRequirements The difference betweenthe operational andmaintenanceexpenditure needed, andrevenues from user charges reflects the extent to which tariff payments by users are sufficient to cover operational and maintenanceof the infrastructure. If `other operational income' is includedas part of user charge cost recovery, currently the cost recovery levels from tariffs stand at quite respectablelevels, Le., for Shinan 125%, for Minhang 185% andfor SMSC 78%. However, it i s not possible to clearly isolate depreciation and debt service inrespectof existing assets (due to asset consolidation on SWAOD's balance sheet). Inrespectof the proposedproject, however, the assets anddebt service will beon the companies' balance sheet. The increaseinrevenue requirements to meet the financial covenants (of covering O&M, the higher of debt service or depreciation, and 10%of capital investment), andthe extent of tariff increaseneeded, have been estimated. The results are summarized in table 2 below. Key assumptionsfor these forecasts and the detailedcash flow projections, along with key sensitivity analyses, are inthe project files, Further, if UDIClSWAOD takes some of the debt service burden (as has beenthe case inthe past), the requirement for tariff increase would be further reduced. Water Tariff - 1999(H) 2004 (I)(H) 2006 (P) 2005 2007 (P) 2010(P) 0.88 1.03 1.03 1.03 1.24 Y1.55 domestic Wastewater 0.45 0.7 0.9 0.9 1.13 1.24 tariff - domestic Avg. Water 1.1 1.3 1.3 1.3 1.56 1.95 tariff non - domestic Average 0.45 1.2 1.2 1.2 1.62 1.78 Wastewater - nondomestic Note: H Historical; P -Projection - With a majority of the counterpart financing for the projects under APL2 coming from capital subsidies, the respective utility tariffs will have to be increasedto finance the investments, andensureongoing full cost recovery of services and the sustainability of the operations. The frequency profile of these tariff adjustments is expected to be in accordance with the policy of integrated utility charges, implementedto date by the Shanghai authorities, Le., each year one of the sector utility charges i s increased from 73  amongelectricity, gas, transport, water, etc. An affordability analysis was conducted basedonestimates of population andincome growth inline with present trends. This analysis concludes that even with the above tariff increases, at no point will the householdexpenditure on water and sanitation utility services for the lowest income population exceed 2% of the monthly householdincome, which i s well within the affordability norms usually applied insuch situations. A comparison of Shanghai's tariffs with other cities in China i s given below. D.FiscalSustainabilityofBorrowingsbyDistrict Governments andShanghaiMunicipality Key data from published statistics of SMG are included inTable 4 below. Fiscalrevenue i s a growingproportionof the overall GDP, Le., the government continues to play an important role inthe economy. The bulk of revenuesof the local government i s from indirect taxes such as sales tax (34%), value addedtax (19%), andprofit from municipal enterprises(8-9%). Only 8% i s by way of national budget transfers. Inaddition, the sale of leaseholdland, andrevenuesfrom utility chargesaddto government revenue. Against this is anexpenditure commitment bothfor operatingexpenditures such as education and health (18%), administration andcity maintenance (8%), price subsidies (14%), as well as debt service payments (22%) inrespect of the substantial capital expenditures inrecent years. Currently, there i s a limited fiscal deficit (around 3.3% of GDP), normally covered by income from municipal enterprisesor investment corporations, It seems unlikely that the situation will be vastly different inShanghai over the coming few years becauseof the continuing infrastructure financing requirements. The capital investment expenditures of SMG are currently funded mainly from the banking system (domestic commercial banks) or by the privatesector (extra-budgetary revenues). As per the 10thFive Year Plan(2002-2005), fixed investment is projectedto be RMB 200 billion (US$24.2 million) per annum, of which 5540% i s via public utilities. The biggest part will be funded by public budgetary finance andthrough UDIC, andits subsidiaries such as SWAOD, which are in charge of finance mobilization on behalf of the government". However, pressureson municipal and local budgets are likely to be higher inthe coming years due to increasing requirements from other government mandatessuch as social welfare, health, education etc. A significant portion ~~ l1 Local GovernmentUnitsare not allowed to borrow. They rely on investment companieslike UDIC to finance public infrastructure, with the obligations backedby an implicit guaranteeof the government. 74  i s however expected to be funded through contribution of the private sector, BOTS,or concessions. User chargescontinue to finance a limited partof the infrastructure requirements. Inrecent years there have beenregular tariff increasesand SMGis committedto maintainingthis path over the coming years (from the databelow, currently about 10%of the yearly capital expenditure on water and wastewater infrastructure i s financed by tariffs). The suburban district government financials are inthe project files. Since this forms the basis of the District Financing Vehicle's (DFV) own financing operations, it will be monitoredclosely by DFV, andcanbe expectedto develop further over the courseof DFVsupportedoperationsinthe suburbanShanghai. Further details onthe DFVare available in Annex 10. Despite the considerable investment ininfrastructure inrecent years inShanghai, the quality of water supply as well as wastewater treatment remains inadequate, especially in view of SMG's targets for the World Expo in 2010. Accordmgly, Shanghaii s committed to continue investment inurban water and sanitation infrastructure. Given the above challenges, for the future financing of the urban water andwastewater sector, Shanghai I Table4 :ShanghaiMunicipalGovernment :Key Statistics SMG I 2003 Amounts inBillionYuan I2002 1 2000 As % of GDP 3.3% 2.9% 2.6% Water &Wastewater Public Investment 22.0 Water andWastewater Revenues 2.5 75  will need to increasethe levelof borrowing from commercial sources on the credit market. Such commercial debt financing of the sector will allow spreading the increase of user fees over time, allowingsome smoothening out inthe rise of user charges12. With improvedfinancial autonomy and viability, and greater proportion of revenuesgenerated from users of infrastructure rather than from the generalbudget, as well as increased transparency infinancial reporting, the water and wastewaterenterprisescould be expected to rapidly expandtheir access to the credit markets. However, as these enterprises enjoy de facto guaranteesof the local governments, their debt i s considered as an extension of the municipaldebt burden. The financing strategythrough borrowings would become more effective with increasedefficiency inthe municipal credit market. The Shanghai authorities recognize that their overall estimatedexpenditure requirements on urban environmental infrastructure needto be compared with forecast levels and sources of finance, inorder to identify the mainfinancing gaps, as well as the additional policy interventions neededto facilitate corresponding effective financing. l2Although higher user charges having to bepaid later to cover costs, this couldbe expectedto be mitigated byrisinghouseholdincomes. 76  Annex 10: DistrictFinancingVehicle @FV) CHINA: CN-ShanghaiUrbanEnvironmentAPL Phase2 Shanghaihas aspirations of becoming a regional and global hub hostinga range of knowledge intensive industries, and for this it needs to attain a higher standardof metropolitan management than other cities. Metropolitanarea wide approachesto planning infrastructure andenvironmental managementneedto occur inparallel with the current rapidgrowth, rather than later when it will be much more costly to retrofit with already densely developed settlements. Inthis regard Shanghai's outer suburban districts will needto rapidly expand andimprovetheir water supply, wastewater and solidwaste managementservices inorder to accommodatepopulation growth, environmental quality, and amenity standards afforded to its residents. These districtslcounty governments, which constitute a secondtier local government under the municipal government, face significant challenges inpreparing and managing projects andinaccessingaffordable funds with appropriate tenor to meettheir urbanenvironmental infrastructure needs. To address these needs, a new district financing vehicle @FV) has been set upby the ShanghaiMunicipal Government (SMG) as an innovative demand driven management andfinancinginstrument to enhanceinvestment efficiency andfinancing of environmental infrastructure by Shanghai's suburbanlocal governments. This will be implemented by Shanghai ChengtouEnvironmental Asset Management Co. Ltd. (CEAM). At start up, CEAM will useWorld Bankloan funds under APL2 as its primary source of financing. The first set of sub-projects in suburban districts beingfinancedby CEAM under this component includes a wastewater treatment plant, a sewerage collection system, a landfill, and a solid waste collection andtransfer system. The corresponding district project (utility) companies are anticipated insome cases to be majority owned by UDIC, providinga congruenceof interests betweenCEAM andthe initial district companies, both owned by UDIC. On an ongoing basis, CEAMwill promote the fundamental financial, economic, operational andenvironmental sustainability of these investments while meeting technical and administrative requirements. Within a metropolitan wide managementcontext, CEAMwill facilitate faster demand driven preparation andprocessingof international financing for such district sub-projects, while also acting as the focus of innovativefinancingengineering techniques. It will be SMG's institutional anchor for attracting private sector financing to meet the outer districts infrastructure requirements, Through its operations, CEAM will encourage increasedattention by suburban districts to improvedlocalprocessesfor preparation and managementof infrastructure, ultimately leading to more efficient delivery of services in the greater metropolitan area of Shanghai. Inthe medium term, after experience and a track recordi s established, the CEAM will attempt to attract other investors to the district utility companies, and to seek approval to issue enterprise bonds and securitization of district assets on the domestic capital markets. While a cautious approach i s beingtaken by Shanghaiat this stage, it is expected that if successful, this initiativecan be replicated inmany other cities andmunicipalities acrossChina. 77  This annex describesindetail the objectives of this component, the strategic context and sector issues, andthe choices available to SMG to address theseissues. The corporate structure, implementingarrangements, andproposed operational approach of CEAMi s described, as i s a general description of the current financial market for urban infrastructure financinginShanghai. A summary of CEAM's businessplan and its products and programs within this context, as well as an exposition of possible evolution paths for CEAM i s also included. This i s inturn linked to SMG's objectives with respect to the APL programand to the underlying financial market reform inChina. Finally, the anticipated use of the loan funds under this APL2 component and a summary of the financial and economic analysis of the corresponding anticipated investments i s described. Moredetails are available inthe project files. After gaining experience duringAPL2 with the current product structure andbusiness model, CEAM may at a future stage aspire to become an entity with a more direct role in the capital market, andor apply for issuanceof enterprise bonds backedby its assets. This approach is intendedto reachmore localauthorities and smaller investment projects than it would be efficient for SMG andthe World Bank to try to support directly, Development Objective of the DFV Component SMGthrough a subsidiary of its investment armShanghai ChengtouLtd. (UDIC)'3,has set up aDistrictFinancing Vehicle @FV) as a special purposeentity to serve as anew financing andmanagementinstrument for development of wastewater and solid waste systems, and other urban environmental infrastructure inthe suburban districts of Shanghai, This subsidiary is ShanghaiChengtouEnvironmentalAsset Management Co (CEAM), APL2 would include support for CEAM management as well as related sub-project preparation and supervision. This component of about $65 million intotal investments ($30 million of Bank loan) will enable CEAM, on behalf of and authorized by suburban district utilitycompanies, andguaranteedby district government entities, to procure and arrange construction andfinancing for urbaninfrastructure with the following specific objectives: EnvironmentalImprovements. To strengthen suburban district governments capacity andinterest to invest inenvironmental infrastructure and service improvements, initially with or without these investments beingable to attract substantial commercial or privatefinancing. Management Support. To lendcomprehensive support and guidance to district governments inaddressingtheir needs, including securing necessarysupport from relevant agencies at municipal level andcommercial banks, andincreasing the effectiveness of participating district entities intheir identification, planning, delivery, and cost recovery of the local infrastructure l3UrbanDevelopmentInvestmentCorporation(UDIC)is one of SMG's majorinvestmentcorporationswhich arrange financingonbehalfof SMGfor municipalinfrastructure, since inChinamunicipal govemmentsthemselvesare not allowedto incur bank debt. 18  o FinancialEngineering, Improvingthe provisionof basic localservices, by increasing the availability of management support and financing for infrastructure investments by applying a new, and for Chinainnovative inter-governmental mechanismwithin amunicipality. Froma project management standpoint, CEAM will add value as an intermediary between districts' utility companies and SMG, the World Bank, andother institutional investors, carryingout delegatedfunctions of project identificationand appraisal, operating incompliance with SMG's andthe Bank's environmental and other guidelines, Inthe longterm, dependingonthe direction inwhich CEAMdevelops, andthe experience gained from the first portfolio of projects, the future role of this entity could evolve in one of several ways. Besides acting to arrange effective financing for infrastructure projects inthe districts with the support of this World Bankloan, the CEAM intends inthe mediudong term to pursue lower cost of capital approaches, e.g. through enterprise bondissuesor through pooling of obligations for eventual securitization through syndicated loans, and act as a conduit for attracting strategic investors to infrastructure projects inthe suburban districts. At this stage, to avoidlegal andregulatory hurdles, Shanghaiprefers to start with a straightforward andflexible model of CEAM as an armof the municipal government. It i s anticipated that full development of CEAM will occur in stages towards a long-term vision of supporting social (private sector) participationindistrict levelinfrastructure. A cautious approachis beingtaken, with most of the sub-project investments being almost fully prepared before APL2 approval. After demonstratingthe success of this initiative, itmay provide a new modelfor replicationinother metropolitan areas inChina. Strategic Context, Sector Issuesand Needfor Intervention SMG seeks to enhancethe economic, financial, trade andmanufacturing status of Shanghai14,to render it a sustainable, globally competitive municipality and an international economic, trade and shippingcenter at the heart of the Yangtze River Delta economic region, The environmental issues are now particularly pressingin areas outside the urbancore as it is in these areas, which effectively already has about 50% of the population, where boththe economic andurban population growth is most rapid15, andthe environmental protection and service levels are lagging. There i s significant under-investment inurbanenvironmental infrastructure inthese districts due to lack of resources, limitedproject managementcapacity, and a multitude of investment needs. In Shanghai as elsewhereinChina, the responsibilityfor urban infrastructure investment financing and service provision i s devolved almost entirely to the respective municipal and district governments rather than relyingonnational government transfers. In l4 Shanghaihas a municipal areaof 6,300km2and a population of about 18million. Iti s divided into 18 districts and one county, eachwith about one million residents. Six of these cover about 10% (662 km2)as the core city; 11districts andthe county are suburbanlocalgovernments. SMGencouragesrelocationfromthe core city to suburbanareas. l5ThepopulationofShanghaiisprojectedtoincreasetoover22millionbyyear 2020, Essentially100%ofthis increase is expectedto be inthe suburbandistricts surroundingthe core city. 79  addition, within the municipalityeach districtlcounty government enjoys significant independencefor their investment decisions and mobilization of resources. Shanghai's future ability to contain the environmental degradation inthe outer districts will dependon effectively managing andfinancing environmental investments on a metropolitan scale. Project implementation by suburbandistrict entities presents a managementchallenge. These local governmentsface greater hurdles in accessinglow cost capital and attracting private investor interest for developing and financingtheir expansion. Accordingly, inline with the objectives of the APL program, SMG now wishes to expand its urban environmental managementinterventions through APL2 to achieve results inthe less affluent suburban areas. The underlyingfeature of the urban infrastructure financial market inChina is that while there i s demand for finance, and a streamof potential projects requiring finance, the under-developedbanking and localfinancial markets put constraints on the amount of longterm capital that can be made available to the sector. The few financial products available to finance these long term investments, the absence of a moderncredit rating system, and the limited experience of credit enhancement, especially insmaller local governments, also make it difficult to putinplace well designed security packages. Accordingly, the SMG has assessedthat the cost of arranging financing and subsequently monitoring andenforcing debt contracts with district companies, from institutional investors including ChinaDevelopment Bank and the World Bank, or even directly from ShanghaiFinance Bureau, i s highenough to make it worthwhile to arrange financing with the support of a specialized municipallevel agent such as CEAM. CEAM will through its operations form a useful bridgebetween the rapidly growing demandfor capital from the suburban districts of Shanghai, andfinanciers such as the World Bank and domestic banks as well as local andinternational investors, who have an appetite for financinginfrastructure assets inChina, buthave neither the staff nor the budgetary resources to performthe preparation and monitoringfunction that i s needed, and would be comforted by the financial backing that CEAM brings as a subsidiary of UDIC. Further, inorder to attract financing ina sustainable andcost effective manner, SMG recognizesthat it is important to not merely assist district governments' access to credit, but to do so ina manner that increasesthe efficiency of localinvestments. Inthe mediumto longterm, the intentioni s for CEAM to act as a focal point for innovationin project finance and for attracting private investors into the suburban environmental infrastructure sector of Shanghai. Strategy for Intervention and Vision of Success Inaccordancewith the above, SMGhasincorporated CEAM, a special purpose subsidiary of UDIC, licensed under enterprise law. A. Immediate Rationale CEAMi s supportedby SMG and has good relations with its various agencies. Iti s well capitalized at start. Riskprotection measures are inplace as documented inthe 80  Operations Manual(see project files) to ensure longterm sustainability. CEAM's relationship with the World Bank and other institutionalinvestors hasfacilitated greater familiarity with international project, safeguard, procurement, and disbursement procedures. CEAMi s also puttinginplace partnerships with other international finance companies andconsultants that can provide further technical advice. Long term relationships of UDIC with eachof the district borrowers make themmore comfortable to deal with CEAMrather than directly approachinvestorsllenders. CEAM will have the ability to offer a combination of financial andintellectual capital to the district project (utility) companiesinits role as financial andmanagementadvisor and investor. CEAM will administer some grants from SMGfor urbaninfrastructure as per criteria defined by SMG. Through its market knowledge as well as SMGILTI)IC support, it will have the ability to attract good district infrastructure proposals, notjust the difficult-to- finance ones. CEAM's project management, accounting, treasury, credit, financial structuring, and economics team, as well as the safeguardsmonitoringcapacity, has been developed with a number of new hires. According to its human resourcedevelopment plan the supervisory team will be further strengthenedinterms of experience in infrastructure finance as well as capacity to promote technical best practices for investment planning, project management, construction, and operations. B. Long term vision Inthe longterm, sincemunicipalandcentral budget allocations, andother sourcesof public finance such as Bank and other multilateralfinancing, are necessarily limited, Shanghai i s also looking to supplement current financing strategies16with greater market basedfinancing of urbaninfrastructure projects across the metropolitan region, including by accessingthe privatecapital market andraisinglow cost pooledfinancing to meet its infrastructure financing requirements. Inthe future it i s possible that through infrastructure bondofferings involving securitization of pooledassets, currently illiquid assets will be converted by CEAMinto more liquidsecurities for investors, offering improvedrisk sharing, which investors financingthe underlyingdistrict asset alone could not have achieved. Consequently, some costs to a district borrower would be lower if CEAM would arrange such financing. After gainingexperience duringAPL2 with the current product structure andbusiness model, CEAMmay at a future stage aspire to become an entity with a more direct role inthe capital market, andor apply for issuance of enterprise bonds backedby its assets. This approach i s intendedinthe future to reach more local authorities and smaller investment projects than it would be efficient for SMG andthe World Bank to try to support directly. Inits businessplan, CEAMhas articulated that inthe future itwill act as the focus of SMG's efforts to attract greater privateinvestment into the environmental sector. The current financial market constraints as well as an incomplete legal framework, transitional accounting systems, and limited institutional capability for implementation, Infrastructureinthe core city is largely financed by domestic bankborrowings;to some extent private capital 81  are stumblingblocks to inducingeffective public private partnerships (PPP) inChina's water sector. As PPPprojects often require specialized skills on the part of public officials inrespectof their design, construction, operation andfinancing, CEAMintends to enhance its knowledge and skills to better manage such PPPprojects. This should ultimately help to attract greater privateinvestment into the environmental sector inthe suburban districts of Shanghai andeventually the greater Yangtze Deltaregion. Performance Indicators and Criteria for Success The performance criteria for CEAM under APL2 have been agreedupon as follows: Objective1: EnvironmentalImprovements: The indicator for this objective is "increased district capital investment inenvironmental infrastructure, demonstrating at least 10%growth per annum inreal terms" as well as a qualitative indicator that shows "change ininfrastructure investment andmanagementpractices, includingfinancial projections and cost recovery indicators". Objective2: ~anagementSupport: The indicator for this objective i s "an institution that i s properly staffed andequipped, havingestablished policies and procedures andhaving made two or more loans to participating project proponents for district infrastructure projects inthe suburbandistricts of Shanghai". Objective3: Financial Engineering. The indicator for this objective is "to demonstrate through a good repayment recordof participating sub-projects, that municipallending involves acceptablecredit andbusinessrisks andthat therefore it i s financially sound for banks and other financial institutionalandprivate sector investors to increase municipal lendingfrom their own resources, subject to normal market considerations". Alternatives Considered The feasibility studies for CEAM identified a number of alternatives. Setting up CEAM as a full fledged financial intermediary doing direct on-lending business was rejected becausethe regulatory approvals for such financial intermediation would be infeasible to obtain at this stage of the capital market development inChina. The alternative of not doing the component was rejectedbecause of the existence of healthy demand and pipeline of worthwhile projects awaiting suitable financing inthe surrounding districts of Shanghai. The alternative of SFB on-lending directly to districts was rejectedby SMG due to transaction costs andrisks. The alternative of usingan established bank or intermediary such as China Development Bank was rejectedbecause since the focus is to effectively wholesale the project preparation and financingprocess among less experienced district levelbeneficiaries, while setting up good asset management and financingpractices within the districts. A large domestic bank such as China Development Bank (CDB) would not be ina position to take on such a comprehensive hands on project approach. An analysis of CEAM's businessplan, indicates that the normalcost of alternate financing for suchprojects inthe market from sources such as CDB (currently at a 82  minimumof about close to 6%basedonthe minimumlendingrate set byCBRC), is such as to allow sufficient margin(after proper inclusion of credit risks) for CEAMto remain viable, and obtain sufficient deal flow to allow a self-sustaining operations. CEAM's financial businessplanincorporating financial, tax and legal assumptions applicable to the proposed structure, and approved by relevant agencies of SMG, are includedin project files. A summary i s providedbelow, CorporateStructureandImplementationArrangements The Boardof Directors of CEAM i s designatedby ShanghaiMunicipality andby UDIC. The President, Vice President andthe Boardof Directors have been appointed andthe company has been capitalized with an equity of RMB 20 million, of which 90% i s owned by UDIC and 10%by CEIDC. All debt raisedby CEAM includingborrowings under APL2 are guaranteedby the owners inthe proportion of their shareholdmg. CEAM will be responsible for the implementatio~coordinationof the APL2 DFV investment component, includingrelatedinstitutional andcapacity buildingactivities, S I 3 will pass on the Bank funds for the DFV component to CEAMthrough a subsidiary loan agreement similar to the other APL2 components, implemented by a municipal water company, the municipal sewerage company, andCEIDC. The model service agreementbetween CEAM and district utility companies (which insome cases may be initially majority ownedbyUDIC, the parent company of CEAM) i s enclosed inthe project file. The disbursement approachi s includedinthe Operations Manual of CEAM. The following graph illustrates key features of the CEAM @FV) design and operations. CapitalizationandSourcesof Funds CEAM will initially be capitalizedthrough an equity investment of RMB 20 million by ShanghaiUDIC with a Bankloan of $30 million allocated for CEAM. It will have an annual budget andreview of actual performance. CEAM will aidinthe financingof district environmental infrastructure as follows: (a) provide proceeds from APL loans from the World Bank; (2) facilitate other long-term and low cost funds; and (3) selectively provide grant funds, which will be managedon the basis of practices and proceduresthat conformto requirements of SMG. Longterm, CEAM will raise localcurrency resourcesfrom banks andcould also consider asset backed securitization or issuanceof enterprisebonds on the domestic bondmarket to fund its investment insuburbanenvironmental projects. As the asset andprofitability requirements for issuingenterprise bonds are quite high, this would only be considered after the project portfolio has reached a sustainablelevel of revenue generation. It is also expectedthat CEAM will be responsible for managing SMGgrant funds that havebeen earmarkedfor encouraging investment insewerage systems andwastewater treatment in its suburban areas. 83  - District Financing Vehicle (DFV) Shanghai Chengtou I SMG grants through CEAMto DistrictslCounties (SHDRCchair) (UDIC subsidiaries) 45% of sub-project costsfiom SFB to C E M ; (WBfunds) ProjectManagement Finance ("integrator") Commercial Banks, Other Lenders, CooperationAgreement andlor ProcurementAgreement Investors RepaymentAgreement Arranged Guarantees 0-99% UDIC equity inUtility Companies. ?g:25%funding of m i @co. sub- woject I I 1 DistrictslCounty Utility Companies (Asset Owners) D1 D2 D3 D 4 D5 D6 D7 C8 30% ownfunding of sub-projects SMG ShanghaiMunicipal Government SHDRC ShanghaiDevelopment andReform Commission SFB ShanghaiFinance Bureau UDIC ShanghaiUrbanDevelopment andInvestment Corporation Limited CEAM ShanghaiChengtou Environmental Asset Management Co. Ltd. SWAOD ShanghaiWater Assets Operations andDevelopment Company Limited CEIDC Shanghai Chengtou Environment IndustryDevelopment Co. Ltd. 84  OperationsApproach CEAMacts as an intermediary betweenfinal usersinDistrictsandthe SMG andthe WorldBank and ensures that all projects inwhich it invests meet corresponding requirements. It will assume the management tasks andreporting obligations that would otherwise be incurredby District borrowers inthe absence of DFV's intermediary function. CEAM will coordinate and supervisethe APL2 DFV component on behalf of SMG and assumethe repayment obligation of the Bank loan to SFB; and duringproject implementation, the Bank will focus on monitoringCEAM, its implementation of sub- projects, and its supervision of the district utility companies. CEAMinits allocation of APL2loanfunds to districtlcounty government projects will follow suitably modifiedproceduresof the World Bank and promote accepted"good practices" ininfrastructure managementandfinance. To ensurecost effective and sustainable operations, the CEAM support to individualdistricts will require certain preconditions to be met. The districts where projects are beingfinanced must have stable sources of revenue. The guidelines of CEAM, as laidout inits Operations Manual17, include puttinginplace prudent borrowingceilings for the project (utility) companies basedon their profitability and capacity for debt repayment. Additional securitylcollateral will be required, such as commercial property and guaranteesfrom district government entities andor commercial banks, to backstop the financing. The details of the legal, financial andtax structure of CEAM have been finalized and corresponding approval have beenreceived from the various agenciesof the SMG, Project preparationwill be undertaken by the respective district utility incollaboration with CEAM. CEAMwill perform project appraisal from both financial andeconomic perspective, arrange blending of Bank loan funds with capital grants providedby SMG for highpriority projects, oversee local project preparation andconstruction, provide technical assistancein sector utility financial management, and monitor the repayment of service fees and capital repayment from the district utilities under its service and financing agreements. Inaddition to arranging the supply of credit, CEAM will promote good managementpractices by applying a set of "Guiding Principles" (included inits Operations Manual) inits support of districts, adding value interms of, environmental protection, cost-effectiveness, andconstruction quality. For example, promote updating of sector masterplans andensure that project proposals fit within these; address sewerage systems and wastewater treatment as an overall system; explore economies of scale; and seek least-cost solutions. Itwould inparticular support andpursue sector development items with its clients such as corporatization of utility services; annual financial projections by these companies; andtransition planto full cost recovery of service delivery; and inaddition, upgrading municipal financial management generally, and l7 OperationsManual(OM)ofCEAMwasreviewedwiththeBankatappraisal.TheOMdatedMay22,2005(as The amendedon June 2,2005) was approvedby the Bankandadoptedby the Boardof CEAM. This will guide CEAM's practices andprocedureson establishmentandinitial operation; anddescribeskey activitiesineachstage of the CEAM's projectcycle, andwhat CEAM andProjectProponentswill do at each stage. It covers operationtargets, operationprocedures,CEAM's pricing of financial productsand services, andinstitutional andfinancial management includingflow of funds and aHumanResourceDevelopmentPlan. Inthe CEAMprojectcycle the social and environmentat aspectsare consideredthroughimplementationof the socialandenvironmentalpolicy frameworks, includedas annexesinthe OperationsManual. 85  ensuring that critical investment projects get implemented even when full financial cost recovery i s not feasible. The urban environmental infrastructure financing under the APL program would be underpinnedby SMG's policy to principally obtain debt financing from private sources rather than the municipal budget for capital investment inwater, wastewater and solid waste infrastructure, andbe financed from user charges, supplementedby borrowers' general net assets, with only limitedandexplicit commitment of municipalfiscal revenues, or direct or contingent government guarantees. Inthe mediumterm, CEAM will explore potentialfor obtaining capital commitment from strategic investor(s) which would help further align its operations with good practices inprivatemunicipal lending. SMG recognizes that longterm CEAMi s a transitional management. Inthe long term, depending on the direction inwhich CEAM evolves, the potential for creating a pooled financing scheme through issue of bonds on the capital market with credit enhancement, as appropriate, will be explored. While CEAM financing will work out as cost effective and attractive to the districts, these authorities will continue to access funds from the most competitive sources available to them, As DFVis anew institution, the Bankreviewed at the time of APL2 appraisal an institutionaldevelopment plan and suggestedadditional studies that couldbe undertaken, This plan andthe list of studies andtraining recommendedby the Bank, including preliminarycost estimates, are available inthe Project files. Management and Organizational Structure CEAM's articles of association andoperations manualdetails the governance structure of CEAM. An advisory council advises on sectoral policies andprograms, andcomprises representativesfrom various agencies of the SMG. The investment decisions of CEAM will be madeby a permanent Investment Committee appointed by the Boardof Directors, which comprise the executive managementof CEAM andrepresentatives of UDIC. The Advisory Committee will include a few representativesfrom the private sector. CEAM currently has eleven permanent staff, with engineers responsible for managing the environmental infrastructure projects, with specialized staff for implementation of its social andenvironmental safeguards, Initially CEAM will also rely on some staff secondedby other UDIC subsidiaries and some functions may be contracted to Chengtou Environment Co. and others. An organization chart andstaffingplan, andatraining programfor CEAM is inthe HumanResourceDevelopment Plan which includes skill mix for project management, technical expertise, financial and credit expertise, etc. The HumanResources Development (HRD)Plani s being supplementedby the conducting of several stuhes funded by APL2 to assist inthe initial stages of operations, including: (a) design of an appropriate district utility finance monitoring framework to effectively follow the utilities debt management capacity andthe financial strengths of the utilities; (b) examine the needfor sector reorganization of the urbanservices andidentify most appropriate organizational structures inthe water, wastewater and solid waste sectors; and (c) 86  identification of the level of tariff sufficiency andrecommend approaches to self financing of the utilities. These are listed indetail inthe project files. The Bank has revieweda training programproposed for the district clients and recommended that a specific training program be formulated for selective civil servants of the districts, includes: (i)informationon CEAM procedures, including procurement; (ii) microeconomics of utilities: price setting, accounting, depreciation policies, etc.; and (iii) managementandoperationalmaintenanceprocedures(casestudies). project CEAM would maintain regularcontact with ShanghaiFinance Bureau(SFB) to follow the districts' fiscal capacities as the financial health of these local governments would determine whether or not CEAM would successfully reach its long term objectives, MarketAnalysisand CurrentFinancingTerms InChina, the bulkof municipallendingfor infrastructurefinance comesfrom the domestic development andcommercial banks. The majority of these loans carry 3 year terms or less; some extendto 5 years, andoccasionally they extend to up to 15 years. Suburban districts wouldbe restricted mostly to the short end of this range, mostly with 3-8 years maturity (most such loans are 5 years). Local governments cannot repay short tenor loans from infrastructure project revenues. As boththe borrower and the lender know, the loans will have to be rolledover into new short term loans upon maturity. Ina fragile banking system, burdenedwith nonperforming loans, the reliance of local infrastructure financingon the continuing ability to roll over short term bank borrowing places the system at risk-bothto future market conditions andfuture bankingreform. Although market conditions fluctuate, typically the cost of borrowinginthe present day market conditions i s about 5 6 % including the cost of funds and guarantees. While the maximumtenor is about 12- 15years, as mentioned above, suburbandistricts aremostly restrictedto loans with 3-8 years maturity. Incontrast, the cost of funds to CEAM from APL2 i s about LIBOR plus0.5 - 1%; and after adding a CEAMone time agency fee charge of 1.5% of the loan amount, commitment charges, andguaranteefees, the total cost to the borrower of these foreign currency funds from CEAM, while at variable rate, i s at maximum about 3- 4% at present. CEAM intends to factor in the credit risk of the a underlyingproject when deciding the tenor of the financing, so on the basis of security offered andproject fundamentals, the tenor could vary from 14-20years. This reduction inthe cost of debt will bringdownthe userchargesthat needto beleviedbythe district to cover costs, thereby allowing more urban environment projects inthe districts to access financing than would otherwise be possible inthe absence of CEAM. If requested, the CEAM will arrangefor the balance of the project debt financing in addition to its own financing, on which an arranger's fee will apply. Tariffs and user charges inShanghai for environmental services are being gradually adjusted upwards, takinginto account social andpoliticalconcerns. CEAM operations would help suburbandistricts gain experience inaddressing the complexity of relationships andcashflows relatedto full cost recovery of the urban services, andthe 87  needfor partial reliance on general district revenues. Complete information on local budgets, balance sheets, debt service obligations, andintergovernmental fiscal flows i s complex, hence credit rating agencies at this current point inChina would be vastly constrained inthe types of analysis they can carry out or the usefulnessof that analysis for determining credit risk. CEAMwill monitor localborrowers' financial and other conditions to maintainstrong repayment rates, inthe absence of special mechanisms such as offset or intercept arrangements. Enhancedregulations onpublic disclosure requirements, accounting standards, independent audits of financial statements and credit rating systems and agencies would likely be inplace a few years from now. This would facilitate preparation for possible future bondissuanceby CEAM. BusinessPlan, ProductsandPrograms;FinancialAnalysisof CEAM's Operations The business model of CEAM requires the company to assist district utilities'* in preparation of development projects, procure and finance part of the assets, oversee construction, collect repayments through a combination of levieduser charges and general obligation access to municipal revenues, and assume credit risk.Regulatory approvals from StateAdministrationof ForeignExchange (SAFE) andother authorities for the identifiedproject structure have been obtained. The financial projections by CEAM along with detailed list of assumptions are available inthe project file. As CEAM's netrevenuesmustbelargeenoughto service theWorld Bank loan, pay the CEAM operating costs, and either replace or ideally replace and augment capital, the agency service fee mustbe highenough to produce enough income and create a reservefor anticipated or potential defaults. As per the businessplan of CEAM, the major intended source of revenue for the company i s a proposed 1.5% agent service fee that will be charged by CEAM on all financing routedthrough the company. The only businesstax that will apply under this structure i s a 5% service tax on these revenues. Salaries'' and other staff costs account for most expenses, constituting over 70% of CEAM's total expensesover a 5 year period. CEAM staff numbers are expected to increase as the size of its project portfolio andrevenues increase through time. CEAM's proposedbusinessplanandfinancial projections includeaprojected estimate of the deal flow for the next few years. The project portfolio that i s beingconsidered for financing includes not only the 4 sub-projects to be financed under APL2, but also additional loans from other international and domestic financial institutions. A review of the current sub-project pipeline (already including an estimated capital investment of over RMB 2,730 million over 18 potential projects) and sensitivity analysis of the financial projections of CEAMconfirmed that currently the number of potential transactionsappears large enough to provide the basis for a self-sustaining structure of CEAM inthe longterm, although inthe first few years there will be a certain amount of subsidization of its operations by the parent company UDIC. As per the projections of l8ThesedistrictutilitieswillbeprojectcompaniesthatmayinsomecasesbemajorityownedbyUDIC,theparent company of CEAM, which would bear concessionmandates from district govemments including assignedrights to collect user chargesetc. l9 The current staff of 11 will increase to14 inlate 2005 andto 21 by 2007. 88  CEAM, by the endof 5 years the APL2 loan i s projected to be only 12% of the total withdrawals under offshore loans inthe CEAM portfolio. CEAM revenues inthe first two years include a subsidy from UDIC for project marketing andto preparebankable environmental projects. CEAMwill requirefrom the districts a certain amount of transparency. Although the districts will continue to be able to borrow for their fundingrequirements from bank borrowings under the mandatedinterest rateregime, it i s expectedthat the deal flow will continue to be available to CEAM. The lower cost of funds through international loans, possibly sometimes blendedwith grant financing, will make it economically more attractive, Once there is a track record, CEAMcouldeventually have a broadinstitutional mandateto finance district suburban investments andbroaden the sources of financing, including issuingits own development bonds, attracting direct privateinvestment into the district water and wastewater sector, and selling off mature water distributionsystems to privatesector investors with proceedsrecycledinnew investments. With the impetus to the markets for financing municipalinfrastructure, an action planfor unbundling the various functions of CEAMcould also be conceived, leaving CEAMto mainly determine that projects comply with program rules, and determine how on-lending mechanics for any public funds would work, Linkto proposedfuture WorldBankLendingProgram; CriticalMilestones APL 2 will be usedto launch the CEAM, which will serve as anoperational agent of SMG and the World Bank for APL projects andprovide coordination with municipal authorities. Through this periodCEAMwould buildcapacity interms of financing expertise of its personnel which will apply to both the supply and demand sides of the process, helpingCEAMprovideeffective support and financing to local governments. Subsequentcomponents under APL3 could be usedto consolidate the operations of the CEAMbothto provide additional resourcesto district projects, andto support CEAMin raising its own private capital includingif feasible by floating an enterprise bond. With this early start CEAMmay inthe future occupy amarket nicheas anefficient provider to local governments of abundle of financial services and technical assistance that is indemand, ina market environment. The net result of such activity if successful wouldbe that its financing structure would enable access to capital markets by CEAM without support of a district or provincial government guarantee, perhapsbuttressedin the initial stages by such structures as partialcredit guaranteesfrom international agencies. Municipalenterprise bonds that finance capital programs of this nature without a state government guaranteecouldtherefore be a logical step at such a stage. Mechanisms for ensuring predictability of revenue flows, promotedby CEAM operations (describedearlier under the promotionof goodpractices by CEAM), as well as more transparent procurement processes andimproving contestability of capital costs, would also contribute to this process of increasing investor confidence inthe environmental sector inChina. 89  Risks to Longterm Sustainability and Mitigations Currently there i s lack of aclear, transparent and stableregulatory framework for debt financing of municipal andurbanprojects by commercial lenders. However it is likely that a macro economic framework enabling long tenor funds to flow into urban financing will be put inplace over the next few years, given the ongoing pace of financial sector reforminChina, At that time the underlyingfinancial environment inChina couldbe expected to sufficiently evolve to also allow the development of an appropriate policy, regulatory and institutional framework governing municipalborrowing, including as appropriate the enactmentof a municipalfinance law that explicitly defines allowable borrowers, purposes of borrowing, an integrated system of fixed income instruments, allowable investors inmunicipaldebt andthe prudential limits of municipal borrowing. Over the coming years CEAM will needto addresscertain key areas to ensure its sustainability and of the investments made: Cofinancing and syndicationarrangements. CEAM will needto ensure that explicit links with the banking andcapital markets inChinaareputinplace to avoidgetting divorcedfrom underlying events andtriggers inthe market. Inthis context, besides its own financing commitments to sub-projects the CEAMwould attempt to obtain co- financing commitments from commercial banks. This collaborative approach should promote effective sharing of risk andhelp to prevent CEAMfrom becoming merely an isolated and specialized channel for World Bank and SMGfunds, On an ongoing basis CEAM's operations will continue to needadjustment andmonitoring to ensure orderly progresstowards either evolution into a market oriented supplier of credit, capable of mobilizingprivatesector savings, or through its operations smoothing the way for private participation inthe municipalcredit market, inline with the evolving financial market reforms in China. Service Charges. There i s a minimumlevelof profitability to provide adequate incentive for CEAM to properly monitor the contracts entered into with district companies, and the potential terminationlliquidation of the project assets inthe event of non-payment (or at least the inefficiency of disruptingthe operations of the urban infrastructure that has been financed), would needto be of sufficient extent as to be a credible deterrent. Inthis regard the proposedone time agency fee of 1.5% of loan amount may needto be revised- albeit remaining inline with market conditions, as the CEAMoperations become established. Asset Diversification. It i s also importantthat the CEAMhas as diversifieda range of borrowers as it possibly can within the market that it operates in, so that the risk of default by one sub-project i s more than offset by the margins from lending to other, more creditworthy sub-project companies. CEAMinits longterm operations would carefully monitor the adequatediversificationof assets. Revenues through User Charges. Currently since there i s no domestic wastewater or solid waste charge to residents inall districts funded under this component, the 90  assumption in CEAM's projections i s that the suburbandistricts will apply the same tariff rates of the municipal services within their districts as is applicable for the core city, whenever the facilities are built or completed; andthat they will also adjust the tariff upwards in tandem with the adjustmentsof the municipal tariff. Fiscal Capacity of the Districts. Detailedfinancial assessment of the initial districts, includingan analysis of the impact of identified subprojects on the finances of the districts and their utilities, and a framework for continued monitoring, will be prepared under a study covering all the potential districts that can be financed by CEAM. This study would incorporate outputs from previous work that ranks the districts inorder of attractivenessinterms of economic andfinancial indicators such as GDPlcapita, growth, employment, investment climate type indicators. Eventually when there i s enough historical data to develop benchmarks, these indicators would be usedto compare the districts to a common standard. Initially it will be usedmainly to assess the attractiveness of district projects. Technical and Economic Good Practices Implementation. CEAM will pursue with the districts steps to set up corporate entities (incases where they do not already exist) to provide district, wastewater and solid waste disposal services. CEAMhas incentive to monitor the implementation of economically sensible projects to prevent the risk of non- repayment. Intended Use Plan:Initial investments under this component The first set of sub-projects beingfinanced by CEAMi s under finalization andincludes a wastewater treatment plant and a seweragecollection system in suburban districts, as well as a landfill and a solid waste collection andtransfer system. These sub-projects will provide a significant contributionto Shanghai's objective of improving the wastewater and solid waste managementinthe suburbandistricts. These projects, brief details of which are given below, have been approved by Shanghai municipality and are inlinewith its masterplan. 91  Estimated Bank Sub-project Total Cost Loan (RMB mill) (US$ mill) Chengqiao(Chongming) WWTP (Phasel) 225 12.0 Populationserved 310,000 Design capacity 25,000 tld ChongmingLandfill(Phasel) 118 5.2 Populationserved 635,400 Design capacity 300-500 tld Huaxin(Qingpu) WW CollectionSystem 151 8.5 Populationserved 63,000 Design capacity 15,000 tld JinshanSolidWaste Transfer andCollection(Phase 1) 54 3.7 Populationserved611,500 Design capacity 770tld APL2 InstitutionalStrengthening andTraining 5 0.6 Total initialsub-project pipeline 553 30.0 The ChongmingSanitary Landfill i s PhaseIof athree stage integrated waste disposal strategy for this islandCounty - thelowest income area of Shanghai - with a long term goal to achieve environmentally safe disposal of all the residential waste producedinChongming county, This will includerecycling of materials at the sourceltransfer station, composting of organics, andthe recovery of energy from landfill gas. There is also a planfor miningthe landfill inthe future to remove organics and upgrade them usingcomposting, expanding the life of the landfill. Long term waste reduction will be achievedby recycling and composting, with residues being landfilled. No incineration is planned. The Chenqiao Wastewater Treatment Plant inChongmingCounty is designedto fit with an islandwide wastewater masterplan, as well as SMG's metropolitan development plans. This has identifiedChenqiao as one of 11suburban settlements that are to be the focus of development inthe municipality. The proposedsub-project will include trunk sewers and liftingstations, a wastewater treatment plant, and corresponding land acquisition. It will serve the Chengqiao New City andMiaozhen Town, the most active development areas on the island. The proposedsub-project inHuaxinTown i s the first phase of an integrated 15000 m3lday Wastewater Treatment Plant and Collection System inQingpu district to serve the town seat and surrounding villages inthis busy suburban Qingpu development corridor, The project i s the collection system while the WWT plant will be financed by aBOT arrangement.Itwill meet about 5 3 0 % of the total demandfor  treatment of wastewater flows in this district of about one million populations. The flow i s currently discharging to the environment untreatedor at best through the use of septic tanks, This will capitalize on earlier investments inthe trunk sewer networks for this district andi s inline with SMG's masterplanfor the municipality. e The Jinshan solid waste transfer andcollectioninvestment will facilitate the management of domestic solid waste from across the Jinshan District to feed a facility that will process 77% of the waste generatedby the domestic andindustrial sectorsin the district. This project i s urgently neededto accommodatethe District's solid waste collection program and will replace the current system of waste managementinthis industrializeddistrict, where at presenteach town has many unofficial disposal sites beingused. This cause air, landand water pollution throughout the district. The sub- project consists of upgrading andexpanding the collection andtransfer system includingtrucks, transfer station, and containers. The sub-project does not include the plannedbuildingof disposal facilities, which will be separately self-financed by the district. Technical assistancewould be includedfor CEAMand the respective participating districts, includingfor studies onRegional Delivery of Environmental Services and Metropolitan-wideInfrastructure Development andManagement Strategies. Details of these studies and training programs are includedinthe project files. 93  Financial and Economic Analysis of IndividualInvestments The Project AppraisalReports of the anticipated initial portfolio of districtlcounty sub- projects are to a great extent preparedfor implementation and have been reviewedas generally satisfactory from a technical, economic andfinancial viewpoint. Detailed preparations are to be finalized. Fulldetails of reviews andthe pre-feasibility and feasibility reports, as providedby UDIC andthe districts, are available inthe project file. The table below shows the results of the financial and economic analyses. Chengqiao Humin Chongming Total WWTP WWTP RSW Strengthening & landfill Collection Design 310,000 63,000 635,400 611,501 1,336,900 Population I Project 77 km2; 47.64 100%total 100% CoverageRate; (7% of km2; (7% area 1041 total area % of total total 1041 of total krn2 586km2 district/ county 675 km2) Design 25,000 m3 15,000 300-500 700tonl Capacity I day m31 day tonlday day CapitalCosts 225 151 118million 54 5.0 million 553 (RMB; and million million mi11ion million US$) ($14.3 ($0.6 million) ($27.2 ($18.2 million) ($6.5 ($66.8 million) million) million) million) Financed 67.5 45.3 35.4 million 16.2 165 b Y W W million million million million Equity CEAM loan 99.2 70.3 43 million 30.6 5.0 million 247 (component million million ($5.2 million ($0.6 million) million under APL2) ($12 ($8.5 million) ($3.7 ($30.0 million) million) million) million) Other loansI 58.3 35.4 39.6 million 1.2 141 funds million million million million Base Case: -205.1 -133.0 -39.2 86.2 -291.1 Slow increase million million million million million in ~ t a r i f f s : RMB RMB RMB RMB DCF @ 10% discount rate FIRR(%) 0.7% -2.5% 6.2% 21.6% 4.2% Inc revenuefor 140% 300% 26% 10%m NA 52% 94  The above analysis assumes that the WWT tariff averagedacross all users will rise slowly from an average of RMl3 1.241m3 in2007 to RMB 2.61m3 by 2028. The WWT plants are assumedto operate for 30 years andthe S W Mfacilities for 20 years, The InternalRate of Returns (IRRs) are basedon total project costs, andtherefore indicate project viability before application of financing plan. The revenues are basedon tariffs and user charges, andexcluding necessary government subsidies, which will be provided separately. However, it is assumedthat any project that generates a 10%FIRRon total project capital costs and borrows at 6% from bankswill generatean attractive real financial return on project equity. Onthe basis of the financial analysisconducted for all the CEAMprojects combined under the basecase (with slow increaseintariffs), there i s a positiveproject cash flow of a total RMB 557.5 million at a 0% discount rate. Three out of the four sub-projects appear to generate a positivecashflow and would not require continuous government subsidiesto meet their year to year obligations. With the exception of Jinshan, the returns are low and hence at slowly increasing user charges andrevenues assumedby the project proponents, these projects may not attract privateinvestment unless government subsidies are providedto attract such investors. The Huaxinproject would require substantial and continuous subsidies inlight of the continuous negative cash flow, to generatecash breakeven over the projection period. A form of breakeven analysis was conductedto indicate increaseinthe revenuesneeded to meet normalproject returnexpectations. Some of these increasedrevenues could come from anumber of sources including government subsidies, higher user charges, or commercial sale of by-products, or by achieving higher efficiencies than those projected. The magnitude of the required total increaseof revenues for the WW plants ranges from 140% to 300% over the period (average about 36% per annum) and are higher if the IRR benchmark i s set at 15%. Theseresults are largely basedon the fact that for the Chengqiao plant, which involves a small WWT plant where revenues are generated, the associatedcollection system i s being built to serve a larger population and WWT plant in the future. Inthe case of Huaxin the CEAMfinancing i s only for a collection system while the WWT plant i s separately funded; and while 78% of total project capital costs i s accountedfor by the collectionsystem, only 50% of the operating costs andrevenues from the WWT will be assignedto this. Further, the small size of the plant generate limited economies of scale inits operation contributingto the poor financial results, While all benefits are not quantified applyingconversion factors for translation into economic analyses2' raises the overall ElRR to 5.1%. Although below the 10% threshold, this is afairly reasonableFlRRfor urban environment projects, giventhat even with slow increasesthrough time inWWT tariffs, user fees andutility often fail to fully capture the Standardconversion factor of 0.93 is applied to nontraded local costs at the beginning of the projection period which increasesto 0.97 as ChindShanghai becomemore integrated into the global economy. Capital costs are translatedfrom financial market to economic values by applying a factor of 0.9 to take into account conditions applicable to the project. Fulllist of detailed assumptionsare available inthe economic analysisinproject file. 95  benefits of better quality water and an improvedenvironment. Project viability needs to take into account the broader economic, social andenvironmental benefits generatedby the projects under CEAM. The positive externalities of WWT and SWMprojects that will likely never be capturedinthe user fees andthe revenuesof the respective utility, include such factors as improvedagricultural, fisheries and industrial productionbecause of cleaner water, reduced soil contamination andpollution, leading to lower land preparation costs and higher property values, reduced operating costs for water utilities becauseof cleaner water intake, tourism andrecreationbenefits, benefits to public health, includingfewer days lost andhigher productivity, better service delivery to poorer clients due to extended coverage to newer neighborhoods, etc. However, without highquality information that identifies andmeasuresmonetary values on these impacts, measuring the effect of these positive externalities wouldbe a major challenge. As aproxy for this analysis the approachtaken was to explore in a preliminaryway the changes inthe economy, society and the environment from these projects andhow these changes might affect the overall economic viability of the CEAM projects. The detailed analysis i s available in the project file. Insummary, as a result of combiningthe three sources of project benefits, includingproductivity andproductionimpacts, health impacts, and reductions inwork days lost becauseof illness, the ERR increasedsignificantly to 13.9% from the level of 5.1% when the benefits were basedonly onutility revenues. This exceeds the discount rate threshold applied for the ShanghaiAPL as a whole andthereby these sub-projects of the DFV (CEAM) component are deemedsuitable for inclusion in the project. As each of the projects involve very small proportionof financing from user charges, most of the recovery of capital investment would come from public financing i.e. local government revenues, CEAM would ensurethat duringfinalization of the concession andrepayment arrangements, which the sources of revenue and debt repayment are clearly identified and unambiguous - whether by tariffs, subsidies, or other sources - buttressedwhen necessaryby credit enhancements, and incorporated into the terms of the service agreement. Each service agreement should provide for meeting gaps inthe capacity of localimplementing agencies for project implementation and effective service delivery, if and as necessary. Finally, an affordability analysis was carried out basedon the tariffsluser charges projected underthe base case. As per this analysis (details of which are available inthe project file), for the averagehousehold the utility charges account for a modest and generally stable percentage of disposable income and consumption under the basecase tariff increase assumptions, and would be approximately about 2% of income throughout the projection period. Evenfor the poorest households, i.e, which are at 25% of the average income or consumption, the percentages would not exceed4-5% of the income. 96  Rolesand ResponsibilitiesMatrix Role CEAM Project Company District Shanghai 1 (wholly ownedand Government Municipal guaranteedby Government UDIC) (via SHDRC) ProjectInitiationPhase: Developer(obtain X X Initiate Project approvalsfrom SMG) ProjectDevelopment: X Developer (obtain X PrepareProject approvalsfrom documentsincl. EA, SMG) RAP, Feasibility Studies Financial Close Financier and Concessionaire Project Construction: Procurement Paymentto suppliers X I X I Project construction X Project Operation: X Project Operation Operator (debt servicing from user charges, backstoppedby district government) UserCharges X X Repayment Repaymentto the Bank Security 97  Annex 11:SafeguardPolicy Issues CHINA: CN-ShanghaiUrbanEnvironmentAPL Phase2 The project will result insignificant environmental and social benefits for the residentsof Shanghai municipality, including: improvedenvironment and water quality for the residents, related health benefits, etc. Negative environmental and social impacts, particularlyduringimplementation of the project, will be avoided or mitigatedas described inthe project EAs,Em,EAF, RAPSandRPF, and as summarized inthis annex. ENVIRONMENT The secondphase of the Adaptable Program Loan (APL2) for the ShanghaiUrban EnvironmentProject will support physical investment components inwater supply, wastewater management, solid waste management andenvironmental improvement components in several suburban districts through a District FinancingVehicle (DFV). EnvironmentalImpact Assessment (EA) for each of the components have beenprepared by localEA team and approved by ShanghaiMunicipal Environmental Protection Bureau (EPB) inMarch2005, under the authorization of the State Environmental Protection Administration (SEPA). BasedonindividualEA reports, consolidatedEnvironmental Assessment (EA) reports havebeenpreparedfor the water supply, wastewater management and solidwaste management sectors. An Operations Manualwith SafeguardProceduresfor the DFV, including an EA Framework, has beenprepared, covering methodology for environmental assessment, general assessment of specific key environmental issues, impact mitigationmeasures andenvironmental management planning, as well as policies, procedures andtechnical capability for safeguard preparation, review andclearance processfor investments. An Environmental Management Plan (EMP)has beenpreparedbasedon several rounds of consultations with the project implementing agencies. An EA Summary for the whole APL2 project was also prepared. The individual component EAshave beenpreparedincompliance with applicable Chinese regulations and standards, as well as safeguardpolicies of the World Bank. The EAreports include detaileddescriptions, assessment or planningfor, inter alia,project background and legal framework, project engineering analysis, baseline environmental conditions for natural and social environments, analysis of alternatives, environmental benefits and adverseimpacts of project construction and operation, mitigation measures for adverseimpacts, public consultation andEA disclosure to the public, and environmental managementplanning, The six volume final Englishversion EA documents (three consolidated sector EAs, EA Framework for DFV,EMFandEA Summary) were reviewedby the Bank, These EA documents meet all Bank safeguardrequirements, including satisfactory responseand revisions inaccordance with the comments from Bank's safeguardreview meeting and safeguard reviewers, as well as from the Bank's task team. 98  Project affected people, as well as localNGOs were consulted during EA TOR stage and again during draft EA report stage, Concernsover impacts of project activities were addressedin the EAs and opinions for mitigationplanning andenvironmental management were incorporated. TheseEA documents, indraft andfinal forms, have been disclosed inlocal public communities, the office of the EA team, offices of implementingagencies, the APL PMO, andthe websites of ShanghaiEPB onthe internet. The project information and access to these documents were announcedto the public through a major localnewspaper on February 14, and again on April 20,2005. Summary project background, major EA findings, andmitigationmeasureswhere appropriate, were distributed by the project duringthe public consultation to the directly affected people to provide basic information about the project and about potential adverse impacts. Analysis of Alternatives As an effective methodto avoidor minimizepotential adverseenvironmental impacts, various alternative project designs and sites were identified, evaluated andcomparedby the EA team, inclose consultation with project engineers andproject owners. Alternatives for pumpingstation sites, routes for wastewaterinception pipes and conveyors, sludge disposal methods, and alternative solid waste dump site closure plans were evaluated. Environmental and social considerations have been given inthe analysis of different alternatives and those with the least adverseenvironmental and socio- economic impacts were incorporated inthe project. EnvironmentalBenefits, ImpactsRisks, and MitigationMeasures EnvironmentalBenefits. Project investments will bringabout positiveimpacts to the environment and the standardof living, by strengthening andimproving the city's environmental infrastructure, providing improved water quality, reducing environmental dischargesdue to the lack, poor or insufficient pollution control facilities, and remediating contaminated sites. More specifically, the environmental and social benefits of the project will include: (a) extended distributionnetworkinthe water supply component; (b) reducedI minimizedraw sewage leakinginto the ground inthe North West areaof Shanghai, through renewingand reroutinga trunk sewer interceptor inthe wastewater management component; (c) control potential secondary contamination by wastewater sludge and ensure wastewater treatment plant operations inan environmentally sustainablemanner, by implementinga phasedprogramto dispose of sludge from two large wastewater treatment plants; (d) improvedcity sanitary standards by closing, remediating and rehabilitating two solid waste dump sites, and by introducing new managementtools inthe solid waste management component; (e) improved environmental quality in the city's suburban districts through a series of environmental andpollution controlinfrastructure investments, by establishing a new municipal financial managementinstrument inthe DFVcomponent, which would not only support APL2 implementationbut also future similar initiatives through various Bank andnon- Banksourcesof financing; and(f) strengthenedenvironmental managementcapacity of the implementing agencies, through a range of strategic studies andcapacity-building activities as InstitutionalStrengthening andTraining (IST) items, including 99  environmental managementand safeguardcapacity of DFVinthe preparation of projects inShanghai's outer districts. Constructionphase. The project will potentially cause some short-term impacts during construction, e.g., dust, noise, traffic congestion, spoiled materials, temporary occupation of landanddamage to trees and greens, andimpacts from construction camp activities, As some of the components will be inthe urbanbuilt-up areas, unavoidable night-time construction and traffic congestion may be of particular concern. A series of mitigation measureshave beenplanned to reducethe impacts to acceptable levels, includingwater spray on construction sites on dry and windy days, use of low noise construction machines andcontrolling construction schedulesto avoid sensitive times, temporary traffic planning, disposal of spoiled materials, compensation for temporary land occupation, replanting damagedtrees and greens, and environmental management system for the construction camps. Night-time construction will be avoidedto the extent possible. When it cannot be avoided completely due to construction needs, a series of measureswill be taken andthe affected people will be notified inadvance andconsulted regarding any concerns and inputfor noise control. A detailed contractor management plan has been developed. All mitigation measuresrelatedto contractors will be included inthe biddocuments andcontracts, so that they will beapartof the contractual obligations. Mandatory trainingwill beprovidedto all contractors andconstruction supervision companies on environmental policies and standards, mitigationmeasure implementation, chance finds for culturalrelics, and site environmental supervision and reporting. Regular environmental supervision of all project sites will be providedby construction supervision companies as well as environmental staff of project implementing agencies. Compliance monitoring will be providedperiodically throughout the construction phaseby independent monitoring entities to determine compliance status andprovide abasis for further mitigationif any non-compliance i s found. Operationalphase. Potentialnegativeenvironmental impacts duringthe operational phaseinclude noise from pumpingstations, malodor from sludge handling and disposal, andpotential impacts to the soil and groundwater from land applications sludge. As mitigation, the safety distance will be ensuredinall pumpingstations so that noise and odor will meet the standards at site borders. Wastewater treatment plant sludge will be digestedfor stabilization. Further tests will be conducted duringoperation to re-confirm the current testing results, which show low heavy metalcontents, and hence the sludge i s safe for landdisposal. As backup, the sludge will be disposed of ina dedicatedcell of an existing sanitary landfill, with technical design criteriaequivalent to those of industrial waste landfills, should the additional testing show heavy metalcontents exceedingthe agricultural application standards. Regular compliance monitoringwill be provided duringthe operationphaseto ensure that the applicable standards at andnear project sites will be met, EnvironmentalManagementPlan(EMP) Details of mitigation measures, locations, time frames, estimated costs and the responsible agencies for their implementation and supervision are provided inthe EMP. The EMP covers such areas as surface andgroundwater management, air quality control, 100  noise management, nighttime construction management, traffic management, construction site waste, removal of soil by layer and separatestockpiling, covering piles to limit wind erosion, construction of runoff channels and water storage, contractor management, guidelines for chance finds, andcontinued public consultation. Project agencies and the APL PMO have actively participatedinthe preparationof the EMP, and the final EMPrepresentscommitments by them. An organization structure hasbeenestablishedidentifyingthe institutions to beinvolved inenvironmental management,mitigationmeasureimplementation, andenvironmental supervision and monitoring, etc. Organizations with a role inproject environmental management include the PMO, project implementingagencieslproject owners, environmental impact assessment team, construction supervision companies, contractors, environmental monitoring agencies, as well as the regulatory agency (SEPB). The EMP defines the specific responsibilities of each of these organizations inproject construction and operation, as well as the relationships among them regarding the environmental management for the project. The EMPincludes a detailed description of the staffinginthe organizations involved in the environmental managementof the project. Inparticular, the EMP specifies the number and responsibilities of environmental staff inthe APL PMOandproject implementingagencieslproject owners. The EMP also outlines environmental staffing requirements for contractors and construction supervision companies, as well as their responsibilities duringproject construction. Recognizing that contractor management i s one of the most effective approachesfor environmental performance duringconstruction, the EMP includes a detailed program for contractor management, includingenvironmental protection management, construction camp and occupational health management, safety management, and social management, The EMPspecifies detailed mitigation measurerequirements as a bill of quantities, and will be includedinthe biddocumentsfor contractors, to ensurethat the bidders will be fully aware of the environmental requirements, andrespondproperlyintheir bids. A routine supervision programis includedinthe EMP, which will beconductedby both the environmental staff of the implementing agencieslproject owners, as well as environmental staff of the construction supervision companies andcontractors. The supervision will ensure that mitigationmeasures be implemented as required by the EMP, and confirm good environmental performance of the contractors. Any impacts exceeding predictions of the EAs will be identified andcorrected, and further mitigation actions will be considered as appropriate to address any identifiedconcerns. The EMP includes a detailed environmental monitoring programfor boththe construction andoperations phases. This programcovers water, air, noise, sewage, and receivingenvironment, with specifics on parameters, frequencies, time, responsible agencies, and estimated costs. The monitoringprogramalso specifies the reporting and responseproceduresto ensurethat appropriate actions will be taken inresponse to the findings of the monitoringreports. 101  Inorder to implement the EMPeffectively, trainingprogramswill beprovided. A mandatory trainingwill beprovidedto all contractors andconstruction supervision companies who are to work onthe project. Management andtechnical staff from these companies will go through training on environmental regulations and standards, findings of the EAs andrequirements of EMP, technical requirements of the mitigationmeasures, continued public consultation, proceduresfor chancefinds of culturalrelics, on-site monitoringtechniques, andreporting proceduresandrequirements. Environmentalstaff from the PMO andproject implementing agencies andproject owners will also be trained, focusing on environmental managementandpolicylstandardenforcement. While the trainingprogram will primarily be classroom lectures and seminars, it will also include site visits and study tours. A budget andanimplementation schedulearepartof the EMP. The costs of mitigating construction impacts are included inthe costs of facilities. The project implementing agencies will engage local consultants for environmental monitoring (air quality, water quality, noise, worker health, site safetylhygiene andtraining). Since the negative environmental impacts duringconstruction are manageable, no special legal covenants are defined, except for the standardconditionality of implementingthe EMP. DFV. AnEnvironmental AssessmentFramework (EAF)hasbeendevelopedfor this component. An environmental assessment office i s establishedinCEAM (the responsible entity for the DFV) and an EnvironmentalAssessment Specialist Consultant has beencommissioned to assist inenvironmental planning andimplementation and relatedcapacity building. EAsfor subprojects under the DFV component would be approved by DFV without prior Bank review. CEAMhas demonstrated adequate capacity to review environmental policies andensure their consistency with Bank environmental assessment policy. Such delegation and appropriate remedies incase CEAM's approval of EAs are found to be not incompliance with Bank policy, are providedinthe legal agreementsfor the project. SOCIAL Studies. Inaccordancewith local laws andBank requirements, the following documents were preparedby SMG, with assistancefrom their national andinternational consultants: (a) a ConsolidatedRAPand subproject RAPS,covering all subprojects with resettlement impacts; (b) a ResettlementPolicy Frameworktailoredfor the DFV component, for subprojects which may require land acquisition, but may not be clearly identifiedby project appraisal; and (c) a Social Assessment report relatedto the Western Trunk component, These documents are all available inthe project files. Risks relatedto Social Safeguards. Among social safeguardpolicies, only OP4.12: InvoluntaryResettlement i s triggered due to unavoidable land acquisition. 102  LandAcquisitionandResettlement. Everyeffort hasbeenmadeduringproject preparation to avoid or minimizelandacquisition. The subprojects which require unavoidable landtaking are shown inthe table below. I N I Components I Subprojects I Remarks 1 1.1 Constructionof LinkongPumping RAP No. 1 Station 2 1.2 Constructionof HuaxiangPumping RAP No. 1 Station 3 1.3 Constructionof Xujing-Huaxin RAPNo. 1 L 4 I I Water Netwnrk ..----- --..-.-- . I 2.WASTEWATERMANAGEMENT 2.1 Upgradingof WesternTrunk Sewer RAPNo. 2 5 2.2 Sludgefacility at Bailonggang No landacquisition W W P 6 2.3 Sludgefacility at ZhuvuanWWTP Nolandacauisition According to socio-economic surveys undertaken for the above RAPS,the total number of project affected people (PAPS)is 1695, which includes 437 personswho will lose their collectivelyowned rural land, 1131persons who are to be relocateddue to demolition of their houses, and 107 employees whose enterprisesor shops will be affected, 20 persons will be affectedby shop demolishing. 451.85 muof landwill be permanently taken by the project, including90.71 muagricultural land, 268.45 munon-agricultural rural land, and 92.68 mustate-owned land. Temporary land takingwill affect 929.65 muof non- agricultural landfrom three months upto one year. 40,176 m2of housing will be demolished due to permanent land acquisition, which will displace 282 households (1131 persons). Additionally, 62 enterprises and 6 shops will be affected, involving 127 persons. The table below summarizes the major impacts of landacquisition and resettlement. 103  Itemporaryworkers) I As requiredby OP4.12: InvoluntaryResettlement, subproject RAPshavebeendeveloped for the respective subprojects that involve landacquisition, with compensation and rehabilitation assistance. A ConsolidatedRAPhas also been developed, summarizing key issues and actions describedinthe sub-project RAPs. Resettlement Policies. The following key considerations and activities were part of the design of the project and preparation of the RAPs: Optkization ofproject design, with due regardto protecting agricultural land andminimizing the extent of land acquisition and resettlement. Socio-economic surveys to inventorybaseline conditions, especially those of PAPs. Entitlements to all PAPs, including those who lack householdregistration or other documents, such as business documents and legaldocuments, to ensure all PAPswill be better off or at least maintaintheir livelihoods. Determiningcompensation for land, houses or other properties at replacement cost, andprovidingthe option of compensation either incashor inkind. Consultation with PAPSon arrangementsfor compensation andassistance. Special attention for vulnerable groups, especially inrelocation and looking for newjobs. Requestingrehabilitation assistance for severely affected PAPsto enable them to maintain their income and living standards. 104  (h) Establishingmechanismsto address complaints and grievances of PAPs, including discussions, negotiations, arbitration, and legal proceedings. (i) Establishing arrangementsfor supervision andmonitoring, to ensure compliance with OP4.12 during implementation. RehabilitationAssistancefor Affected Farmers. As mentioned above, a total of 437 rural persons will be affected due to landacquisition, of which 143 rural laborors need to be providedwith rehabilitation assistancebecauseof permanent loss of their farmland. However, the socio-economic surveys undertakenfor the RAPsfound that about 85% of the income of these ruralpopulations generate from non-agricultural activities, such as working for industrialor service sectors, Meanwhile, only about 1% of agricultural land of the affected villages will be affected, and most of the villagers' agricultural landwill remainafter landacquisition. Accordingto the socio-economic survey, the impact of the landtaken on the income of each affectedhouseholdi s less than 10percent of their total income. Employees of Affected EnterpriseslShops. 107 workers (including 22 temporary workers) in62 enterprisesand 20 (temporary workers) in6 shops will be affected due to land acquisition. Since these enterprisesand shops will not be closed -they will remain inthe same areas or move to other areas, all regular workers will keeptheirjobs andthus keep their income. Most of the temporary workers will lose their currentjobs and their livelihoodsmightbe affected, However, since these workers only have a short-term contract and they havebeen informedof such change at least three months before land acquisition, they will not have difficulties to findanewjob inthejob market which is very active in Shanghai. The PMO andthe PrUs will also provide them guidance injob- seeking andjob information duringthe land acquisition. Vulnerable Groups. The socio-economic surveys identify that four project affected households are either very poor or have disabled family members. Besides compensation and other assistancethey are entitledto, these personswill be given special assistance, includingan additional monthly allowance, and special assistance inresettlement. The PMOandthe PrUswill also assistthem andother low-income PAPsinjoining the city's social insurancesystem. Consultationand Participation. PAPshave beeninformedabout the resettlement impacts of the project and associatedresettlement policies through several rounds of formal meetings and socio-economic surveys duringthe preparation of the RAPs. Additional consultations were also conducted duringpreparation of feasibility studies for the project. Comments andrecommendations received from the consultations have been incorporated as appropriate inthe feasibility studies andRAPs. Public Disclosure. All RAPs (including Consolidated RAP and Subproject RAPs)were disclosed inthe PMO Office on February 14,2005. One copy of ConsolidatedRAP and relevant Subproject RAPs were made available to the public inthe resettlement office of eachPKJ. The public disclosure was announced through local newspaper on February 14,2005 and again on April 20,2005. An Englishtranslation of the ConsolidatedRAPi s postedinthe InfoShop, Resettlement offices will also distribute posters andbooklets 105  which summarize resettlement policies andentitlements inthe project affected areas before commencement of the implementation of the RAPS. OrganizationalArrangementsandCapacityBuilding. The APLPMOfor Shanghai APLl andAPL2 will coordinate the implementation of the RAPSwith the PrUsfor each component (the corresponding functions for the DFV component are the responsibility of CEAM). The PIUswill be responsiblefor resettlement planningandimplementation of the subprojects under their respective components. They will establish resettlement offices with appropriate number of staff. To further strengthenthe APL PMO's capacity for supervision of RAPimplementation, the APL PMO has: (a) commissioned an experienced resettlement specialist to assistthe APL PMO insupervising the implementation of RAPSduringthe first two years; and (b) assignedstaff incharge of resettlement. This specialist will also offer hands-on trainingto other PMO andPlIJstaff who are working on resettlement. DFV. A Resettlement PolicyFramework (RPF) hasbeendevelopedfor this component. A resettlement office is establishedinCEAM (the responsible entity for the DFV)anda Resettlement Specialist Consultant has beencommissioned to assist inresettlement planningandimplementation andrelatedcapacity building. RAPSfor subprojectsunder the DFV component would be approved by DFV without prior Bankreview. CEAMhas demonstratedadequatecapacity to review resettlement policies andensure their consistency with Bankresettlement policy. Such delegation and appropriate remediesin case CEAM's approval of RAPSare foundto be not incompliance with Bankpolicy, are providedinthe legal agreementsfor the project. Monitoring. PIUswill beresponsible for internal monitoringandwill providesemi- annual monitoringreports to the APLPMO and the Bank. An independent consultant has beencommissioned by the PMOfor external monitoringandevaluation. Itwill submit asemi-annual report to the PMOandthe Bank on progressof the implementation of RAPSand suggestionsfor solving any problems. Oncompletion of the implementation of eachRAP, the external monitor will conduct a post evaluation and submit areport to the PMOandthe Bank. Supervisionof RAPImplementation. Implementation of the RAPSwill be supervised every six months by the APL PMO and the Bank. ResettlementBudgetandImplementationSchedule. The costs of resettlement are estimatedto be RMB 839 million ($101 million), which are includedinthe project costs. Resettlement work will be undertaken at least three months before commencement of construction of the respective subproject or contract package. Construction will not start untillandacquisition is completed. Followinglocalpractice, the datesof the socio- economic survey andregistration of affected properties will serve as the cut-off dates to be eligible for compensation. Linkages.One localproject, HuaxinWWTP, hasbeenidentifiedas a linkage as defined inOP4.12. The NationalCenter for Resettlement Researchwas commissioned to review the resettlementpolicies applied to this project. The review found that: (a) the project 106  will affect 65 ruralpersons; (b)their income will not be significantly affected since their income generatedfrom agriculture i s a very small portionof their total income; (c) the resettlement polices employed for this project comply with national laws andregulations; (d) there is nodifference inlandandhousing compensation betweenBank policy and local policy, since Shanghai has widely adoptedmarket-basedlandand housing valuation for determining compensationrates; (e) this case does not involve illegal buildings and floating population, where local policy still differs from Bank policy. The review concluded that the resettlementcomplies with Bank policy. Affordabilityof Water andWastewater Tariffs. The social assessment conductedfor the project found that combined water and wastewater charges duringthe project period are estimated to be less than 3% of income at the poverty level (an acceptable level i s normally considered 3-5% of the income of the poor). Inaddition, Shanghai i s known for effective application of China's MinimumLiving StandardAllowance system, which i s basedon a locally definedpoverty level. Inview of this, affordability of water and wastewater tariffs for the poor is not considered an issue. Gender. Women were well representedinsocio-economic surveys andinconsultation meetings. Special attention will be paidto the reemployment of women affected by land acquisition andresettlement, 107  Annex 12: ProjectPreparationandSupervision CHINA: CN-ShanghaiUrbanEnvironmentAPL Phase2 Planned Actual PCNreview 04128104 04128104 InitialPID to PIC 05110104 05110104 Initial ISDS to PIC 05110104 05110104 Appraisal 02121105 02122105 Negotiations 04125105 05130105 RVP approval 06115105 06/09/05 Confirmed Bank Approval 06130105 06130105 Planneddate of effectiveness 09130105 I Planneddate of mid-termreview 09130108 Plannedclosing date 03131111 Key institutionsresponsiblefor preparationof the project ShanghaiMunicipal Government(SMG), throughthe ShanghaiDevelopmentand ReformCommission(SHDRC), the ShanghaiFinanceBureau(SFB), the Shanghai ConstructionandManagementCommission(SCC), the ShanghaiWater Authority (SWA), ShanghaiCity Appearance & EnvironmentalSanitationAdministration Bureau (SCAESAB), andsubsidiariesof ShanghaiChengtouCorporation: ShanghaiChengtou EnvironmentalAsset ManagementCo. Ltd,(CEAM), andShanghai Chengtou EnvironmentIndustry DevelopmentCo. Ltd. (CEIDC). The APL ProjectManagementOffice (APLPMO) operatesunderthe direction of the SMGProjectLeadingGroup. SMGwas assisted byDesignReview andAdvisory (DRA)consultantsfundedby the Governmentof France; solid waste managementandbondfinancing consultants funded by the US Trade DevelopmentAgency (TDA); andurbanizationandinfrastructure consultantsfor the DFV component fundedby CIDA Inc, Canada. The Bankbenefited from consultantsfundedby trust funds from Denmark, Italyand Singapore, Someloan funds from the ongoingAPLl project were also usedby SMG. 108  Bankstaff andconsultantswho worked onthe projectincluded: Supriya Sen InfrastructureFinance Specialist SASIS George Taylor Environmental Specialist Consultant Shenhua Wang Sr. Private Sector Develoument Suecialist EASUR Y Mara Warwick Environmental Engineer EASUR Dawei Yang Procurement Specialist EACCF LiuZhentu Sr. Procurement Specialist EACCF Zhang Zhun Institutional Specialist Consultant IInfrastructureFinance Finance Specialists WBlIFC Team 109  Annex 13: Documentsinthe Project File CHINA: CN-Shanghai UrbanEnvironmentAPL Phase2 1. Shanghai Water SectorMasterPlan 2, Shanghai Wastewater Sector Master Plan 3. Shanghai SolidWaste Disposal andDevelopment Plan (Master Plan) 4. Shanghai SolidWaste Disposal andDevelopment PlanlImplementationProposal 5. SWAOD Five-year Capital Investment Plan (incl. capital financingplan, debt managementplan, and a revenue adjustment plan) 6. SWAOD BondApplication (design of environmental infrastructure bond) 7. SWAOD Action Plan for Phase 2 of preparation for bondissuance. 8. AdministrativeRegulation on Shanghai's Public Utility Concessionary Operation (draft) 9. Feasibility Studiesfor ProposedInvestments 10. Environmental ImpactAssessment Documentation 11, Resettlement Action PlanDocumentation 12. Project Appraisal Reports 13. Environmental & Social SafeguardFrameworks (APLEA & RAPFrameworks) 14. Social assessment for NorthWest Drainage Area (Western Trunk) 15. Procurement Capacity Assessment 16. FinancialManagement Assessment 17. Terms of Referencefor Construction Management and Supervision Services 18. Project Concept Note April 2004 19, Aide MemoireOctober 2003 20, Aide MemoireMarch, 2004 21. Aide Memoire September, 2004 22. Aide Memoire December, 2004 23. Aide Memoire March, 2005 Documents on File related to the DFV and C E A M 24. Certificate of Incorporation and Articles of Association of CEAM 25. Application of the Framework of DFV Platformfor Shanghai's Districts (Counties) Environmental Projects, March 2,2005 (to NDRCfrom SHDRC) 26. DFV Framework 27. DFVOperations Manual 28. Sub Project Appraisal Reports 29. Environmental & Social SafeguardFrameworks (DFVEA & RAPFrameworks) 30, Human ResourceDevelopment Plan 31. Financial Projections andBusiness Planof CEAM (including market analysis) 32, Organizational Structure of CEAM 33. FinancialandEconomic Analysis of Project Portfolio 34. Income andTariff Projections 35. Time BoundPerformance Indicators 36. Model Agreements (between CEAM andProjectNtility Companies) 110  Annex 14: Statementof Loansand Credits CHINA: CN-ShanghaiUrbanEnvironmentAPL Phase2 Differencebetween expectedandactual OriginalAmountinUS$Millions disbursements ProjectID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm.Rev'd PO57933 2005 CN-TaiBasinUrbanEnvironment 61.30 0.00 0.00 0.00 0,OO 61.30 0.00 0.00 PO73002 2004 CN-Basic EducationinWesternAreas 100.00 0.00 0.00 0.00 0.00 99.34 -0.66 0.00 PO66955 2004 CN-ZHEJIANGURBANENVMT 133.00 0.00 0.00 0.00 0.00 133.00 0.00 0.00 PO65035 2004 CN-Gansu& Xinjiang Pastoral 66.27 0.00 0.00 0.00 0.00 64.41 7.08 0.00 Development PO69852 2004 CN-WuhanUrbanTransport 200.00 0.00 0.00 0.00 0.00 198.00 109.48 0.00 PO81749 2004 CN-HubeiShimanHighway 200.00 0.00 0.00 0.00 0.00 200,00 0.00 0.00 PO77615 2004 CN-GEF-Gansu& Xinjiang Pastoral 0.00 0.00 0.00 10.50 0.00 10.50 1.38 0.00 Development PO77137 2004 CN-4" InlandWaterways 91.00 0.00 0.00 0.00 0.00 91.00 0.58 0.00 PO75602 2004 CN-2ndNationalRailways(Zhe-Gan 200.00 0.00 0.00 0.00 0.00 200.00 0.00 0.00 Line) PO75728 2004 CN-GUANGDONGIPRDLJRB ENV 128.00 0.00 0.00 0.00 0.00 128.00 0.00 0.00 PO65463 2004 CN Jiangxi IntegratedAgric. Modern. - 100.00 0.00 0.00 0.00 0.00 99.00 4.73 0.00 PO67337 2003 CN-2ndGEFEnergyConservation 0.00 0.00 0.00 26.00 0.00 14.60 19.42 0.00 PO68058 2003 CN-YixingPumpedStorageProject 145.00 0.00 0.00 0.00 0.00 132.52 -2.80 0.00 PO76714 2003 CN-2ndAnhui Hwy 250.00 0.00 0.00 0.00 0.00 247.50 25.08 0.00 PO40599 2003 CN-TIANJIN URBDEV I1 150.00 0.00 0.00 0.00 0.00 143.82 5.33 0.00 PO58847 2003 CN-3rdXinjiang Hwy Project 150.00 0.00 0.00 0.00 0.00 92.81 10.72 0.00 PO70441 2003 CN-HubeiXiaoganXiangfanHwy 250.00 0.00 0.00 0.00 0.00 135.32 -19.68 0.00 PO70191 2003 CN-SHANGHAI URBENVMT APLl 200.00 0.00 0.00 0.00 0.00 184.92 7.50 0.00 PO60029 2002 CN-Sustain.ForestryDevelopment 0.00 0.00 0.00 16.00 0.00 14.11 5.00 0.00 PO58846 2002 CN-NatlRailwayProject 160.00 0.00 0.00 0.00 0.00 31.60 8.26 0.00 PO71147 2002 CN-TuberculosisControlProject 104.00 0.00 0.00 0.00 0.00 81.22 -22.78 0.00 Po70459 2002 CN-InnerMongoliaHwyProject 100.00 0.00 0.00 0.00 0.00 85.63 11.30 0.00 PO68049 2002 CN-HubeiHydropowerDevinPoor 105.00 0.00 0.00 0.00 0.00 79.99 17.32 0.00 Areas PO64729 2002 CN-SustainableForestryDev. Project 93.90 0.00 0.00 0.00 0.00 76.07 13.24 0.00 PO56199 2001 CN-3rdInlandWaterways 100.00 0.00 0.00 0.00 0.00 71.59 7.26 0.00 PO51859 2001 CN-LIAORIVER BASIN 100.00 0.00 0.00 0.00 0.00 59.98 28.23 0.00 Po47345 2001 CN-HuaiRiver PollutionControl 105.50 0.00 0.00 0.00 0.00 81.08 -24.42 0.00 PO56516 2001 CN- WATER CONSERVATION 74.00 0.00 0.00 0.00 0.00 32.85 8.95 0.00 PO56596 2001 CN-ShijiazhuangUrbanTransport 100.00 0.00 0.00 0.00 0.00 85.41 60.04 0.00 PO58845 2001 Jiangxi I1Hwy 200.00 0.00 0.00 0.00 54.77 60.62 10.72 0.00 PO45915 2001 CN-UrumqiUrbanTransport 100.00 0.00 0.00 0.00 0.00 46.16 46.16 0.00 PO49436 2000 CN-CHONGQINGURBANENVMT 200.00 0.00 0.00 0.00 3.70 146.15 76.65 0.00 PO58843 2000 GuangxiHighway 200.00 0.00 0.00 0.00 0.00 87.29 45.79 0.00 PO42109 2000 CN-BEUINGENVIRONMENT I1 349.00 0.00 0.00 25.00 0.00 276.92 193.74 0.00 PO45910 2000 CN-HEBEIURBANENVIRONMENT 150.00 0.00 0.00 0.00 0.00 113.96 53.46 0.00 PO58844 2000 3rdHenanProvHwy 150.00 0.00 0.00 0.00 0.00 43.61 23.94 0.00 PO64924 2000 CN-GEF-BEUINGENVMTI1 0.00 0.00 0.00 25.00 0.00 23.32 20.76 6.17 PO64730 2000 CN YangtzeDikeStrengthening - 210.00 0.00 0.00 0.00 0.00 102.82 102.82 0.00 111  PO45264 2000 CN-SMALLHLDRCATTLEDEV 93.50 0.00 0.00 0.00 0.00 9.13 4.75 0.00 PO56424 2000 CN-TONGBAIPUMPEDSTORA 320.00 0.00 0.00 0.00 100.00 141.62 115.99 0.00 PO58308 1999 CN-PENSIONREFORMPJT 0.00 5.00 0.00 0.00 0.00 1.17 1.17 0.00 PO43933 1999 CN-SICHUANURBANENVMT 150.00 2.00 0.00 0.00 0.00 84.94 85.43 29.36 PO57352 1999 CN-RURALWATER I V 16.00 30.00 0.00 0.00 0.00 18.39 15.43 11.40 PO03653 1999 CN-Container Transport 71.00 0.00 0.00 0.00 18.61 3.01 21.62 0.93 PO41268 1999 CN-NatHwy4/Hubei-Hunan 350.00 0.00 0.00 0.00 0.00 50.33 41.17 0.00 PO38121 1999 CN-GEF-RENEWABLEENERGY 0.00 0.00 0.00 35.00 0.00 21.87 30.28 11.80 DEVELOPMENT PO60270 1999 CN-ENTERPRISEREFORMLN 0.00 5.00 0.00 0.00 0.00 2.25 3.75 3.53 PO36953 1999 CN-HEALTHIX 10.00 50.00 0.00 0.00 0.00 32.94 24.07 0.90 PO41890 1999 CN-LiaoningUrbanTransport 150.00 0.00 0.00 0.00 0.00 23.52 23.52 0.00 PO42299 1999 TEC COOPCREDITIV 10.00 35.00 0.00 0.00 0.00 34.23 -12.39 0.00 PO51705 1999 FujianIIHighway 200.00 0.00 0.00 0.00 0.00 43.45 43.45 0.00 PO50036 1999 Anhui ProvincialHwy 200.00 0.00 0.00 0.00 9.60 20.23 29.83 0.00 PO49665 1999 CN-ANNINGVALLEY AG.DEV 90.00 30.00 0.00 0.00 0.00 15.79 11.95 0.00 PO46564 1999 CN - Gansu& InnerMongoliaPoverty 60.00 100.00 0.00 0.00 13.30 30.71 27.54 -9.97 Red, PO46829 1999 CN-RENEWABLEENERGY 100.00 0.00 0.00 0.00 0.00 12.87 99.87 10.00 DEVELOPMENT PO46051 1999 CN-HIGHER EDUC. REFORM 20.00 50.00 0.00 0.00 0.00 5.69 7.31 0.00 PO51856 1999 CN-ACCOUNTINGREFORM& 27.40 5.60 0.00 0.00 0.00 17.60 17.51 0.00 DEVELOPMENT PO51888 1999 CN - GUANZHONGIRRIGATION 80.00 20.00 0.00 0.00 0.00 21.84 19.07 0.00 PO56216 1999 CN- LOESSPLATEAUI1 100.00 50.00 0.00 0.00 0.00 15.89 18.02 -2.47 PO36414 1998 CN-GUANGXIURBANENVMT 72.00 20.00 0.00 0.00 10.19 58.34 66.60 32.52 PO03619 1998 CN-2ndInlandWaterways 123.00 0.00 0.00 0.00 37.00 15.35 52.35 2.66 PO46563 1998 CN - TARIM BASINI1 90.00 60.00 0.00 0.00 2.67 2.55 5.85 0.00 PO35698 1998 HUNANPOWER DEVELOP. 300.00 0.00 0.00 0.00 145.00 21.52 166.52 -9.25 PO03614 1998 CN-GuangzhouCityTransport 200.00 0.00 0.00 0.00 20.00 100.31 120.31 100.31 PO03606 1998 ENERGY CONSERVATION 63.00 0.00 0.00 22.00 0.00 31.67 19.17 0.00 PO45788 1998 Tri-Provincial Hwy 230.00 0.00 0.00 0.00 0.00 15.58 15.58 0.00 PO51736 1998 CN-E.CHINNJIANGSUPWR 250.00 0.00 0.00 0.00 86.00 40.55 126.55 16.12 PO49700 1998 CN- IAIL-2 300.00 0.00 0.00 0.00 0.00 1.65 1.65 1.05 PO37859 1998CN-GEFEnergyConservation 0.00 0.00 0.00 22.00 0.00 0.71 22.06 0.00 PO03539 1998CN-SustainableCoastal ResourcesDev. 100.00 0.00 0.00 0.00 2.06 43.92 45.98 -0.40 PO46952 1998CN- FOREST.DEV, POOR AR 100.00 100.00 0.00 0.00 0.00 21.97 -77.09 10.80 PO40185 1998CN-SHANDONGENV~ONMENT 95.00 0.00 0.00 0.00 1.40 20.07 21.47 11.30 PO03566 1998CN-BASIC HEALTH(HLTH8) 0.00 85.00 0.00 0.00 0.00 34.44 24.52 0.00 PO36949 1998CN-NatHwy3-Hubei 250.00 0.00 0.00 0.00 0.00 21.15 21.15 0.00 PO03590 1997CN-QinbaMountainsPovertyReduct. 30.00 150.00 0.00 0.00 0.00 3.20 6.55 -0.07 PO03637 1997CN-NATLRURALWATER 3 0.00 70.00 0.00 0.00 0.00 0.56 3.77 3.35 Po36405 1997 CN WANJIAZHAI WATERTRA - 400.00 0.00 0.00 0.00 75.00 13.07 88.07 1.09 PO03650 1997 TUOKETUOPOWWINNER 400.00 0.00 0.00 0.00 102.50 29.55 132.05 29.55 PO44485 1997 SHANGHAI WAIGAOQIAO 400.00 0.00 0.00 0.00 0.00 70.81 48.91 52.02 PO40513 1996 2ndHenanProv Hwy 210.00 0.00 0.00 0.00 19.00 12.88 31.88 24.88 PO03594 1996 CN - GANSUHEX1CORRIDOR 60.00 90.00 0.00 0.00 0.00 71.13 60.31 0.00 PO03599 1996 CN-YUNNANENVMT 125.00 25.00 0.00 0.00 19.48 35.68 56.92 18.43 PO34618 1996 CN-LABORMARKETDEV. 10.00 20.00 0.00 0.00 0.00 5.56 7.61 0.00 PO03602 1996 CN-HUBEIURBANENVIRONMENT 125.00 25.00 0.00 0.00 47.32 17.07 66.43 5.44 112  PO03639 1995 CN-SOUTHWESTPOVERTY 47.50 200.00 0.00 0.00 0.01 1.21 25.36 25.36 REDUCTIONPROJECT PO03571 1995 CN-7thRailways 400.00 0.00 0.00 0.00 119.00 10.28 129.28 10.28 PO03603 1995 CN-ENTHOUSING& SSR 275.00 75.00 0.00 0.00 57.46 38.00 93.38 9.70 PO03596 1995 CN-YangtzeBasinWater Resources 100.00 110.00 0.00 0.00 1.92 0.21 4.60 4.60 Project PO03540 1994 CN-LOESS PLATEAU 0.00 150.00 0.00 0.00 0.00 0.93 0.27 0.00 PO03632 1993 CN-ENVIRONMENTTECHASS 0.00 50.00 0.00 0.00 0.00 0.86 1.44 1.12 Total 11,829.37 1,612.60 0.00 181.50 945.99 5,184.67 2,873.50 412.51 CHINA STATEMENT OFIFC's HeldandDisbursedPortfolio InMillions of USDollars committed Disbursed IFC LFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2002 ASIMCO 0.00 10.00 0.00 0.00 0.00 10.00 0.00 0.00 2003 Anjia 0.00 2.00 0.00 0.00 0.00 2.00 0.00 0.00 2004 Antai 40.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2003 BCIB 0.00 0.00 11.60 0.00 0.00 0.00 0.00 0.00 1999lOOf02 Bankof Shanghai 0.00 24.67 0.00 0.00 0.00 24.67 0.00 0.00 2002 CDHChinaFund 0.00 14.96 0.00 0.00 0.00 3.97 0.00 0.00 2003 CSMC 0.00 12.00 0.00 0.00 0.00 9.60 0.00 0.00 2004 CUNA Mutual 0.00 12.00 0.00 0.00 0.00 1.47 0.00 0.00 1998 ChengduHuarong 5.61 3.20 0.00 6.25 5.61 3.20 0.00 6.25 1998 Chengxin-IBCA 0.00 0.25 0.00 0.00 0.00 0.25 0.00 0.00 1992 ChinaBicycles 4.50 0.00 0.00 0.00 4.50 0.00 0.00 0.00 2004 ChinaGreenEner 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 china I1 28.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 ChinaReLife 0.00 15.41 0.00 0.00 0.00 15.41 0.00 0.00 1994 ChinaWaldenMgt 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 2004 Colony Capital 0.00 17.31 0.00 0.00 0.00 0.00 0.00 0.00 2004 Colony China 0.00 0.96 0.00 0.00 0.00 0.00 0.00 0.00 2002 Darong 10.00 1so 0.00 8.00 0.00 0.00 0.00 0.00 1995 DupontSuzhou 6.23 0.00 0.00 0.00 6.23 0.00 0.00 0.00 1994 Dynamic Fund 0.00 7.91 0.00 0.00 0.00 6.25 0.00 0.00 2004 Fenglin 19.00 6.00 0.00 18.00 0.00 0.00 0.00 0.00 2003 Great Infotech 0.00 3.50 0.00 0.00 0.00 2.80 0.00 0.00 2002 HuarongAMC 9.00 2.5 1 0.00 0.00 9.00 0.01 0.00 0.00 2004 TB 0.00 52.18 0.00 0.00 0.00 52.18 0.00 0.00 2002 IEC 20.00 0.00 0.00 0.00 0.00 0.00 0,oo 0.00 2004 Jiangxi Chenming 0.00 12.90 0.00 0.00 0.00 0.00 0.00 0.00 1998 LeshanScana 3.61 1.35 0.00 0.00 3.61 1.35 0.00 0.00 2001 MaanshanCarbon 8.25 2.00 0.00 0.00 8.25 2.00 0.00 0.00 2001 MinshengBank 0.00 23.50 0.00 0.00 0.00 23.50 0.00 0.00 2001 NCCB 0.00 26.58 0.00 0.00 0.00 26.46 0.00 0.00 113  1996104 Nanjing Kudo 34.00 2.23 0.00 0.00 0.00 0.00 0.00 0.00 2001 New China Life 0.00 30.70 0.00 0.00 0.00 23.32 0.00 0.00 1995 Newbridge Inv. 0.00 1.95 0.00 0.00 0.00 1.95 0.00 0.00 1997 OrientFinance 5.71 0.00 0.00 7.14 5.71 0.00 0.00 7.14 2003 PSAM 0.00 1.93 0.00 0.00 0.00 0.00 0.00 0.00 1997100 FTPHoldings 0.00 0.03 0.00 0.00 0.00 0.03 0.00 0.00 2001 Peak Pacific 0.00 0.00 25.00 0.00 0.00 0.00 0.00 0.00 2003 SAIC 12.00 0.00 0.00 0.00 5.oo 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 26.25 0.00 0.00 57.74 26.25 0.00 0.00 57.74 ShanghaiMidway 0.00 16.02 0.00 0.00 0.00 16.02 0.00 0.00 1999 Shanxi 15.36 0.00 0.00 0.00 12.81 0.00 0.00 0.00 1993 ShenzhenPCCP 3.76 0.00 0.00 0.00 3.76 0.00 0.00 0.00 2002 Sino Gold 0.00 4.00 0.00 0.00 0.00 4.00 0.00 0.00 2001 Sino-Forest 21.67 0.00 0.00 0.00 16.67 0.00 0.00 0.00 1995 SuzhouPVC 0.00 2.48 0.00 0.00 0.00 2.48 0.00 0.00 2000 Wanjie Hospital 13.64 0.00 0.00 0.00 13.64 0.00 0.00 0.00 1996 Weihai Weidongri 0.71 0.00 0.00 0.00 0.71 0.00 0.00 0.00 2004 w u m 0.00 6.48 0.00 0.00 0.00 6.48 0.00 0.00 2003 XACB 0.00 19.94 0.00 0.00 0.00 0.00 0.00 0.00 2004 Xinao Gas 25.00 10.00 0.00 0.00 0.00 10.00 0.00 0.00 1993 Yantai Cement 4.73 0.00 0.00 0.00 4,73 0.00 0.00 0.00 2003 Zhengye-ADC 15.00 0.00 0.00 7.00 6.14 0.00 0.00 2.86 2002 Zhonr!Chen 0.00 5.00 0.00 0.00 0.00 0.00 0.00 0.00 I Totalportfolio: 352.03 358.04 36.60 104.13 132.62 250.43 0.00 73.99 ApprovalsPendingCommitment FY Approval Company b a n Equity Quasi Partic. 2002 ASIMCO 0.00 0.00 0.01 0.00 2004 Antai 0.00 0.00 0.00 0.04 2004 CCB-MS NPL 0.00 0.00 0.00 0.00 2003 Cellon 0.00 0.01 0.00 0.00 2004 ChenmingLWC 0.06 0.00 0.00 0.16 2004 ChinaGreen 0.00 0.00 0.01 0.00 2002 HuarongAMC 0.02 0.00 0.00 0.00 2002 IEC 0.00 0.00 0.01 0.00 2002 WIT 0.00 0.00 0.00 0.00 2004 NCFL 0.00 0.02 0.00 0.00 2003 Peak Pacific 2 0.00 0.01 0.00 0.00 2004 SIBFI 0.00 0.00 0.00 0.00 2002 SML 0.00 0.00 0.00 0.00 2002 SinoMining 0.01 0.00 0.00 0.01 2002 ZhongChen 0.00 0.00 0.00 0.03 Total pendingcommitment: 0.09 0.04 0.03 0.24 114  Annex 15: Countryat a Glance CHINA: CN-ShanghaiUrbanEnvironmentAPL Phase2 POVERTY and SOCIAL Asia & middle- Chlna Pacific income Development diamond' 2002 Population,mid-par (millions) tz810 1,838 2,4n GNIpercapita(Atlas method, US.$) Lfeexpectancy 950 950 l,mO GNI(Atlas method,US$billions) 12191 1,740 3,352 Average annual growth, 1998-02 Laborforce(%) Population (%) 09 08 10 12 12 10 GNI Gross Most recent estimate (latest year available, 1998-02) Percapita i enrollmentprimary ~ l Poverty(%ofpopulationbelownaf~nalpovertyline) 5 urbanpopulation(%of totalpopulation) 38 38 49 Lifeexpectancyat birth(pars) 71 69 89 Infantmortality(per1OoOlivebirths) 30 33 30 Childmalnutritbn (%of chi/dfen under5) a 'b n Accessto improvedwatersource Accessto an improvedwatersource(9-60fpopulation) 75 76 81 Illiteracy(%of populationage is+ 14 13 13 Grosspnmaryenrollment (%ofschool-agepopulation) 108 108 in -China Male 105 a 5 m -Lowr-m/ddle-incomegroup Female 108 108 m lgE2lgQ2 2o01 Growth of Investment and GDP (%) @of GDP) Agriculture 333 218 158 14.5 2o hdustty 450 439 501 517 " Manufactunng 373 331 342 44.5 lo Services 217 343 341 337 = - 0 Pnvateconsumption 507 492 457 425 GeneralgovernmentCOnSUmptiOn 14.5 t31 $34 U.5 lmports of goods andservices 7 3 8 0 231 265 -GO1 -GDP 1g8242 1992*02 2o02 Growth of exports and Imports (%) (averageannualgroWh) Agriculture 46 3 7 28 2.9 40 Industry 118 113 8 4 99 30 Manufactunng 112 a 4 9 0 81 20 Services 117 84 84 7 3 m - - Privateconsumption 114 81 28 19 0 Generalgovernmentconsumption 99 84 x15 7 0 .m Grossdomesticinvestment 9.5 97 0 9 14.9 lmports ofgoodsandservlces 97 P 8 x18 27.5 -Exprts -Inports 115  PRICES and GOVERNMENT FINANCE 1982 1992 2001 2002 I~ Domestlc prices n f ~ a t l o(K) n I (%change) Consumerprices 6.O 8.4 0.7 -0.8 hnpliiit GDP deflator -02 7.9 12 -2.6 Qovernment flnance (%of GDP, includescurrentQrants) Current revenue 229 14.7 l7.1 l7.9 Currentbudget balance 2.0 11 0.0 Overallsurplusldefict -0.3 -10 -4.7 -3.0 TRADE 1982 1992 2001 2002 (US$millions) Export end Import levels (US$ mill.) Totalexqorts (fob) 22,321 84,940 266,% 325,565 Food 2,908 8909 P,780 14,623 Fuel 5,314 4,693 8*420 8,372 300.000 Manufactures 2271 67,936 239802 297,085 Totalimports(cif) 8285 80,585 243,613 295203 200,000 Food 4201 3,146 4,980 5237 Fuelandenergy 183 3,570 l7495 8285 100,WO I Capitalgoods 3204 3 u 2 137,040 U7,030 0 Ewortpriceindex(W95=00) 41 85 83 78 9s 97 sa ss 00 01 M lmport priceindex (W95=t30) 71 95 91 86 !@Exports alnports Terms of trade (W95=1DO) 58 89 91 90 BALANCE of PAYMENTS 1982 1992 2001 2002 (US$ millions) Current account balance to GDP (X) Exqortsof goods andServices 24,906 94,196 299,409 365,395 Importsof goods andsenrices 20,555 86#752 27l.325 326,OB 5 T Resourcebalance 4,350 7,446 26,084 37,363 Net income 376 249 -19,l74 -14945 Net current transfers 486 1% 8,492 2,984 Currentaccountbalance 5 2 2 8,850 7,401 35,422 Financingitems (net) -995 -13,952 30,046 40,085 Changesinnet reserves -4pn 2,lo2 -47,447 -75,507 1 se 97 9s 99 00 01 02I Memo: Reserves includinggold(US$mil/ions) 24842 220,051 297,721 Conversionrate(DEC,locaVUS$) 2A 5.9 8.3 8.3 EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US$ millions) :ompo8ltion of 2002 debt (US$ mlll. Tolaldeb1outstandinganddlsbursed 8,358 72428 l70,llo 85,676 18RD 0 3,752 11,550 2,051 - IDA 1 4287 8854 8,729 A: 12,051 Total debt service 2,25 8g18 24297 23,688 IBRD 0 460 1,550 1631 IDA 0 30 0 1 l75 Compositionofnet resourceflows Officialgrants 47 327 240 Officialcreditors 657 234343 2,156 -839 Privatecreddors -a2 6949 -4.00 -U,593 Foreigndirect investment 430 1106 44241 49,308 Portfolio equity 0 1243 3,OB 2266 WorldBankprogram F 62,103 Commitments 330 1865 782 563 4 -- ~l8RO E Bilaterel ~ Disbursements 1 1331 1791 1733 1 -IDA D Other rndtilaerel F Private ~ Principalrepayments 0 197 904 107 :-IMF G Shrt-tern 116  IBRD 31659R5 CHINA SHANGHAI URBAN ENVIRONMENT PROJECT (APL 2) M O N G O L I A L J I L I N O G N O LIAONING APL 2 PROPOSED PROJECT COMPONENTS: M DEM. PEOPLE'S N E I REP. OF KOREA BEIJING Beijing U URBAN UPGRADING S SEWERAGE COLLECTION TIANJIN HEBEI REP. OF KOREA WASTEWATER TREATMENT PLANT (WWTP) SHANXI SW SOLID WASTE COLLECTION SHANDONG Ye l l o w QINGHAI NINGXIA S e a W WATER SUPPLY NETWORK EXTENSION PROPOSED WASTEWATER INTERCEPTOR SYSTEM GANSU JIANGSU Area SHAANXI HENAN of map ANHUI F FUTURE WATER SUPPLY INTAKE AND RESERVOIR DRAINAGE CATCHMENT SERVED SHANGHAI SHI HUBEI SICHUAN E a s t OUTFALLS SOLID WASTE LANDFILL (SWL) ZHEJIANG C h i n a XIZANG CHONGQING JIANGXI S e a HUNAN QINGPU WATER SERVICE AREA LANDFILL CLOSURE GUIZHOU FUJIAN TAIWAN YUNNAN GUANGDONG 121