China - Shandong Environment Project

Document of The World Bank Report No: 35842-CHA IMPLEMENTATION COMPLETION REPORT (SCL-42370 TF-29395) ON A LOAN IN THE AMOUNT OF US$95 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR THE SHANDONG ENVIRONMENT PROJECT June 29, 2006 Urban Development Sector Unit East Asia and Pacific Region  CURRENCY EQUIVALENTS (Exchange Rate Effective December, 2005) Currency Unit = Renminbi (RMB) or Yuan (Y) Y1.00 = US$ 0.12 US$ 1.00 = Y8.00 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy CHP Combined Heat and Power EA Environmental Assessment EPB Environmental Protection Bureau ICB International Competitive Bidding JMDC Jinan Municipal Drainage Company JMG Jinan Municipal Government JWSC Jinan water Supply Company LIBOR London Interbank Borrowing Rate Mpa Mega Pascals (pressure) MW Megawatt NCB National Competitive Bidding NDRC National Development Reform Commission NO2 Nitrous Oxide PHRD Population and Human Resources Development (Japanese Grant) QCBS Quality and Cost Based Selection RAP Resettlement Action Plan SEPA State Environmental Protection Agency SEPB Shandong Environmental Protection Bureau SMO Sub-loan Management Office SO2 Sulphur Dioxide SP Shandong Province SFB Shandong Finance Bureau SPG Shandong Provincial Government SPPMO Shandong Provincial Project Management Office STW Sewage Treatment Works TSP Total Suspended Particulates UNEP United Nations Environment Program WBHPC Weihai Botong Heat and Power Company Ltd. WWTP Wastewater Treatment Plant XR(B) Xiaoqing River (Basin) XRBSL Xiaoqing River Basin Sub Loans YHSC Yantai Heat Supply Company Ltd. Vice President: Mr. Jeffrey Gutman, Acting EAPVP Country Director: Mr. David Dollar, EACCF Sector Director: Mr. Keshav Varma, EASUR Task Team Leader: Ms. Shenhua Wang, EASUR  CHINA SHANDONG ENVIRONMENT PROJECT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 5 5. Major Factors Affecting Implementation and Outcome 11 6. Sustainability 12 7. Bank and Borrower Performance 13 8. Lessons Learned 15 9. Partner Comments 16 10. Additional Information 16 Annex 1. Key Performance Indicators/Log Frame Matrix 17 Annex 2. Project Costs and Financing 31 Annex 3. Economic Costs and Benefits 34 Annex 4. Bank Inputs 36 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 38 Annex 6. Ratings of Bank and Borrower Performance 39 Annex 7. List of Supporting Documents 40 Annex 8. Land Acquisition and Resettlement 41 Annex 9. Borrower's Implementation Completion Report 42 Map: IBRD 28428  Project ID: P040185 Project Name: SHANDONG ENVIRONMENT PROJECT Team Leader: Shenhua Wang TL Unit: EASUR ICR Type: Core ICR Report Date: June 29, 2006 1. Project Data Name: SHANDONG ENVIRONMENT PROJECT L/C/TF Number: SCL-42370; TF-29395 Country/Department: CHINA Region: East Asia and Pacific Region Sector/subsector: District heating and energy efficiency services (43%); Water supply (30%); General water, sanitation and flood protection sector (18%); General industry and trade sector (5%); Sub-national government administration (4%) Theme: Municipal governance and institution building (P); Pollution management and environmental health (P); Water resource management (P); Environmental policies and institutions (P) KEY DATES Original Revised/Actual PCD: 04/19/1996 Effective: 07/30/1998 Appraisal: 01/18/1997 MTR: 04/17/2002 Approval: 10/28/1997 Closing: 12/31/2003 12/31/2005 Borrower/Implementing Agency: PEOPLE'S REPUBLIC OF CHINA/SHANDONG URB. & RURAL CONST. COM/ENV. PROT. BUREAU-SURC/SEPB Other Partners: STAFF Current At Appraisal Vice President: Jeffrey S. Gutman Jean-Michel Severino Country Director: David Dollar Yukon Huang Sector Manager: Keshav Varma Richard G. Scurfield Team Leader at ICR: Shenhua Wang Geoffrey Read ICR Primary Author: Chandra Godavitarne 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: L Institutional Development Impact: M Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: Yes QAG did not review the project for quality at entry.  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: Background. Rapid growth in the industrial and service sectors in Shandong Province (SP) over the past two decades resulted in serious environmental degradation in urban areas, particularly in the capital city of Jinan, in the coastal cities of Qingdao, Weihai and Yantai, and in Zibo in the Xiaoqing River Basin (XRB). With Shandong's vast coal deposits, thermal power generation, industrial process heating and residential heating, all use coal as their primary energy source. This level of coal use resulted in Shandong having the largest mass emissions of SO2 among China's provinces. Pollution in the Xiaoqing River (XR), posed serious threats to human health, and to economic development. By the mid-90s, Shandong Province (SP) had invested heavily in industrial pollution control, principally in wastewater treatment and air pollution control. At the same time, concerns were growing over the reliability of Jinan's water supply due to over-abstraction of groundwater and its deteriorating water quality. Groundwater was supplemented with supplies from impounding reservoirs and direct abstractions from the Yellow River. The long-term water resources management strategy of the Province was to construct reliable surface water sources, conserve groundwater, and adopt water reuse in industry. Against this background, SP requested Bank assistance for the Shandong Environment Project. The project had the following objectives: (a) strengthen policies, regulations and institutional arrangements for municipal water, wastewater, and district heating, and environmental pollution prevention and control; (b) expand surface water supply to Jinan to prevent further depletion of groundwater aquifers; (c) facilitate sustainable management of investments in pollution control and municipally-provided urban environmental services; and (d) arrange for updating the information data base with respect to water quality and management of the XRB. Assessment of Objectives. The project's objectives were in line with the Bank's Country Assistance Strategy (CAS) which was discussed by the Board in June 1995, and which highlighted environmental protection and reducing infrastructure bottlenecks as two of the five areas of strategic focus. The objectives were consistent with China's Environmental Action Plan (EAP), which provided the basis for joint Government-Bank programs in the environmental sector, and the provincial government's strategy to address serious pollution issues associated with its rapid industrial growth. Specifically, the project objectives were fully consistent with the Provincial Government's XRB Environmental Action Plan (EAP), which addressed the serious pollution issues of the Basin and in the Xiaoqing River, which flows to the environmentally sensitive Bohai Sea. Objectives also focused on the looming water scarcity, development of a reliable surface water source for Jinan to arrest the depletion of groundwater resources, and serious air pollution in two key coastal cities. Lastly, the project focused on policy, regulatory and institutional reforms in the implementing utility companies. Project objectives correctly focused on SP's priority environmental problems and were clear and realistic. The objectives reflect recognition of the priority need for regulatory and institutional reform, relieving Jinan's water scarcity, and preventing, reducing and controlling of air and wastewater pollution. At the same time, the project was challenging due to its spatial distribution, the fact that it covered three sectors in three cities, and it also dealt with reforms in district heating, an area where China had limited experience. 3.2 Revised Objective: n.a. 3.3 Original Components: - 2 -  The project had five components, for a total project cost of US$202 million. (a) Jinan Water Supply Management ($62.6 million). Development of a reliable new surface water source, adequate for about 20 years, from the Yellow River for Jinan, to supply raw water to a newly constructed water treatment plant of 400,000 m3/day capacity, including pumping stations, water transmission and distribution pipelines, and associated engineering works. (b) Jinan Wastewater Management ($36.5 million). Construction of a wastewater collection network comprising about 18 km of trunk sewers, about 17 km of secondary and link sewers, a pumping station, and property connections, to convey wastewater to a newly constructed wastewater treatment plant of 220,000 m3/day capacity. (c) Weihai Municipal District Heating ($42.9 million). Construction of a combined heat and power generation plant of about 24 MWe electricity and 120 MWt heat capacity, 13.7 km heat and 14.2 km hot water distribution networks and facilities, and heat exchange stations, to reduce inefficiencies in coal-fired small boilers and stoves. (d) Yantai Municipal District Heating ($46.1 million). Construction of a heat exchange plant, about 30 km of distribution networks and heat exchange stations for about 500 MWt heating capacity and a peak boiler of about 112 MWt capacity, to reduce inefficiencies in coal-fired small boilers and stoves. (e) Environmental Pollution Prevention and Control ($10.0 million). Creation of a revolving sub-loan facility for environmental improvements in small- and medium-size enterprises located in the XRB, to assist them to comply with environmental regulations of the Basin. (f) Institutional Strengthening and Training ($3.9 million). Technical assistance to support and strengthen provincial, municipal, project and financial management; construction supervision; training in sector and utility operations; and updating of the XRB water quality and management database. Assessment of Project Design. Project design is assessed as satisfactory, as it was closely linked to project objectives, and was highly appropriate to the pressing environmental problems of the Province at the time. It incorporated lessons learned from past urban environmental projects in China and relevant sectors. Lessons included: strong ownership by the Borrower; the use of a river basin approach to environmental management; support for institutional reforms; and the application of cost recovery and demand management through pricing. Project design correctly recognized the need to strengthen the trunk network to distribute the additional water produced under the new scheme, to fully utilize the capacity of the existing wastewater treatment plant, and to minimize the adverse economic and environmental impacts from the continued use of inefficient small boilers and stoves for district heating. Even though SP had participated in 27 Bank-financed investment operations with a good track record, the design recognized the need for institutional strengthening, project management inputs and training for the four sector agencies, three of which were new companies, with no prior experience in implementing Bank-financed projects. 3.4 Revised Components: The Loan Agreement was amended on December 16, 2004 to add the following investments to the water supply and district heating components, to utilize Loan savings of about $17 million: - 3 -  (a) Jinan Water Supply. About 25 km of new trunk water distribution network to extend services to the eastern part of Jinan; (b) Weihai Municipal District Heating. A 130 t/h steam boiler to increase heat/steam production capacity, and a 25 MWe turbine and generator for the project power plant to increase its electricity production capacity to 49 MWe; and (c) Yantai Municipal District Heating. About 20 km of heat supply pipeline in the southern part of the city to increase the consumer connection load to about 680MWt. Assessment of Design. The additional components were consistent with project objectives, represented least-cost solutions, and enhanced the benefits of the three components. 3.5 Quality at Entry: The project's quality at entry was not reviewed by the Bank's Quality Assurance Group. Quality at entry is rated as satisfactory based on the following: (a) component designs addressed SP's most serious environmental issues, and were high priority for SP; (b) consistency with country, Province and Bank strategies; (c) adoption of a river basin approach to environmental management; (d) incorporation of institutional reforms to strengthen policies/regulations, and support for institutional development and corporate financial management; (e) attention given during project preparation to the results of sector studies, lessons learned and the performance of implementing agencies in other projects; (f) implementation of Government and Bank policies on environment and resettlement; and (g) preparation of feasibility studies and related documents to a satisfactory standard. The Xiaoqing River Basin Sub-Loan Facility (XRBSL) was well designed with clear loan criteria and procedures for appraisal, disbursements and cost recovery, including a procedure to certify completion of investments. However, the component did not require SPG to replenish the funds to assure its continuation. The assumptions about demand for project outputs were largely reasonable even though it was possible to sell only about half of all available water due to continued use of groundwater by some industries in the eastern areas of Jinan. Following assurances given at negotiations, expansion of the Jinan water distribution network was to be completed by JWSC by December 2000. However these works were not executed due to scarcity of funds. In hindsight, it could be concluded that this important distribution network should have been included in the project at least as reserve procurement, rather than relying on a dated covenant. The quality of feasibility studies and preliminary designs, prepared by domestic design institutes, was enhanced by the design review advisory services provided by international consultants. By negotiations, detailed designs and draft bidding documents were prepared for about 20% of the total project works. The project triggered the Bank's safeguard policies on environmental assessment and involuntary resettlement, and the project was classified as Category "A". Component-specific EAs and a comprehensive project-wide EA were prepared, including mitigation measures to address negative impacts, and an implementation plan to ensure satisfactory implementation. RAPs were prepared for each component in accordance with Bank requirements. The RAPs included a framework for land acquisition - 4 -  and resettlement, compensation schemes, preferential policies to reduce taxes and levies for the project affected people, and implementation and monitoring arrangements. During negotiations, assurances were obtained from SPG and local municipal governments that the resettlement and rehabilitation of affected persons would be conducted according to Bank guidelines (see 4.1 below). Key performance indicators to monitor achievement of the project's objectives were developed along with baseline conditions, and were available at start-up. The indicators were comprehensive and comprised useful baseline environmental conditions (details in Annexes 1, 1A, 1B, 1C and 1D). The data was regularly updated by the Shandong Environmental Protection Bureau (EPB), as part of the XRB water quality and management database. Risk Assessment Risks identified at appraisal were: wastewater treatment not achieving targets, water supply not reaching targets; quality of implementation inadequate; inefficient cost recovery over project period; counterpart funding insufficient or late; environmental pollution control measures not effectively enforced; and lack of enforcement and development control. Long-term strategic risks identified included: continued decline in water quality of XRB and groundwater quantity and quality; deterioration in the ambient air quality in urban areas, limited capacity of utility companies to expand environmental services because they are not financially viable. The assumptions made in the SAR were reasonable and the risk assessment was largely accurate. Mitigation measures included in the project were: technical assistance and training to strengthen capacity of authorities and utility operators; commitment to water supply network expansion; provision of competent local and international supervision consultants during construction; commitment to tariff increases and financial planning; integration of monitoring and pollution control functions by EPB, etc. These measures proved adequate. One risk that was not anticipated was industry's continued use of self-supply groundwater due to the inability of the provincial and Jinan Municipal Governments to enforce regulations banning self-supply when a piped supply was available. This affected JWSC's finances and its ability to recover costs for the new water supply during the initial years of operation. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: Achievement of objectives is rated satisfactory as shown in Table 4.1. Table 4.1: Outcome/Achievement of Objective Project Objective Rating (a) Strengthen policies, regulations and institutional arrangements for municipal water, Moderately wastewater, and district heating, and environmental pollution prevention and control satisfactory (b) Expand surface water supply to Jinan to prevent further depletion of groundwater Satisfactory aquifers (c) Facilitate sustainable management of investments in pollution control and Satisfactory municipally-provided urban environmental services (d) Arrange for updating the information database with respect to water quality and Satisfactory management of XRB. - 5 -  Objective (a) Achievement of this objective is rated as moderately satisfactory, for the reasons described below. (a) The Jinan Water Supply Company (JWSC). JWSC has operated in accordance with the provisions of its charter as an autonomous utility company, including retaining its tariff revenue to manage its operations and maintenance and debt servicing. In November 2002, JWSC entered into a public private partnership with a private operator, for operation of its Yellow River Water Treatment Plant under a `transfer-operate-transfer' contract. Lack of enforcement by SPG and the Municipality of existing municipal regulations and State Council directives of 2000 and 2004, which ban self supply where a service is available, has encouraged some industries to continue the use of self-supply groundwater. The water resource fee levied by the Water Resources Bureau is marginally lower than JWSC's industrial tariff, so industries do not have an incentive to switch to piped supply. The objective of arresting the depletion of the groundwater aquifer has thus been only partially achieved. (b) The Jinan Municipal Drainage Company (JMDC). Regulations of the newly formed JMDC require all buildings in its service area to connect to the sewer system, and industry to treat its wastewater to specified standards before discharge to the sewer system. SPG has adopted the policy to increase cost recovery in the wastewater sector. The newly formed JMDC owns and operates the wastewater treatment plant (WWTP) in Jinan and the project-financed collection networks; the secondary and tertiary network continue to be owned and maintained by the district sanitation units, with an annual budget from JFB