China - Shanghai Sewerage Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15846 IMPLEMENTATION COMPLETION REPORT CHINA SHANGHAI SEWERAGE PROJECT (CREDIT 1779-CHA/LOAN 2794-CHA) June 28, 1996 Environment and Municipal Development Operations Division China and Mongolia Department East Asia and Pacific Regional Office This document has a restricted distribution and may be used by recipients only in the performnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CtURRENCY EQUIVALENTS Currency Name: RenmLinbi Currency Unit: Yuan (Y) (as at Appraisal Date, September 1986) (as at December 31. 1995) Y 1.00 100 fen Y 1.00 = 00 fen Y 1.(0 $0.27 Y 1.00 = $0.12 $1.0( = Y 3.7 $1.0() = Y 8.4 WEIGHTS AND MEASUJRES I meter (m) = 3.2808 teet (ft) 1 kilometer (kim) = 0.6214 mile (mi) 1 cubic meter (mr') = 35.3147 cubic feet (ft-') I cubic meter (1ns) or ton of water = 284 U S gallons 1 liter(l) , 0 264- US gallons (gal) 1 cubic meter per second (m'/sec) = 35.3 145 cubic feet per second (ft3/sec) FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS BMEA Bureau of Municipal Engineering Administration ERR Economic Rate of Return ICB International Comiipetitive Bidding MDAD = Municipal Drainage Administration Division MEAD = Municipal Engineering Administration Division NCB National Competitive Bidding SAR = Staff Appraisal Report SMG = Shanghai MuLnicipal Government SMSC Shanghai Municipal Sewerage Company SMWC = Shanghlai Municipal Watervorks Company SSC = Shanohai Sewerage Company SSPCC = Shanghai Sewerage Project C onstruction Company  FOR OFFICIAL USE ONLY CONTENTS Preface............................................................................................................................ii Evaluation Summary ........................................................... iii PART 1: PROJECT IMPLEMENTATION ASSESSMENT .................................1 A. Statement/Evaluation of Objectives ............................................................1 B. Achievement of Project Objectives ............................................................2 C. Implementation Record and Major Factors Affecting the Project ...............4 D. Project Sustainability ............................................................8 E. Bank Performance ............................................................9 F. Borrower Performance ............................................................9 G. Assessment of Outcome ........................................................... 10 H. Future Operations ........................................................... 10 T. Key Lessons Learned ............................................................1.1 PART II: STATISTICAL TABLES .......................................................... 12 Table 1: Summary of Assessments ........................................................... 12 Table 2: Related bank loans ........................................................... 13 Table 3: Project Timetable ........................................................... 13 Table 4: Credit/Loan Disbursements: Cumulative Estimated and Actual ..... 14 Table 5: Key Indicators for Project Implementation ...................................... 15 Table 6: Key Indicators for Project Operation ................................................ 16 Table 7: Studies included in Project .......................................................... 16 Table 8a: Project Costs .......................................................... 17 Table 8b: Project Financing ........................................................... 17 Table 9: Economic Costs and Benefits ........................................................... 17 Table 10: Status of Legal Covenants .......................................................... 18 Table 11: Compliance with Operational Manual Statements ......................... 20 Table 12: Bank Resources: Staff Inputs ......................................................... 20 Table 13: Bank Resources: Missions .......................................................... 21 Annex 1: Project Review From The Borrower's Perspective ..................................... 22 Annex 2: Financial Status .......................................................... 27 | his document has a restricted distibution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed wiLhout World Bank authorization.  A  - ii - IMPLEMENTATION COMPLETION REPORT CHINA SHANGHAI SEWERAGE PROJECT (CREDIT 1779-CHA/LOAN 2794-CHA) PREFACE This is the Implementation Completion Report (ICR) for the Shanghai Sewerage Project in China, for which Credit 1779-CHA in the amount of SDR 78.9 million ($100 million equivalent) and Loan 2794-CHA in the amount of $45.0 million equivalent was approved on April 14, 1987, and made effective on March 7, 1988. The loan/credit was closed on December 31, 1995, compared with the original closing date of June 30, 1993. It was fully disbursed, and the last disbursement took place on December 1, 1995. The ICR was prepared by Geoffrey Read, Environment and Municipal Development Division (EA2EM), of the China and Mongolia Department. East Asia and Pacific Region, and Terry Hall (consultant) and was reviewed by Mr. Songsu Choi, Acting Chief, EA2EM, and Mr. Juergen Voegele, Acting Project Advisor. Preparation of this ICR was begun during the Bank's supervision mission in February 1996, in connection with Loan 371 1-CHA (Shanlghlai Environmnent Pro ject). and is also based on materials in the project file. The Borrower contributed to the preparation of the ICR by providing review comments on the dra-ft tCxt, a1n throu-gLlh tilhe SbiubissioI of a detailed Project Completioni Report (Anlex 1).   - 111 - CHINA SHANGHAI SEWERAGE PROJECT (CREDIT 1779-CHA/LOAN 2794-CHA) EVALUATION SUMMARY Introduction and Project Objectives 1. The project objectives were to: (a) establish appropriate institutional and organizational arrangements for the management of liquid wastes and environmental protection in Shanghai; (b) establish a self-financing company to deliver and manage urban wastewater services; (c) strengthen mechanisms to control discharge and improve water quality in the Huangpu River and its tributaries; and (d) support the first part of a phased program of work to provide primary wastewater infrastructure services to enable economic growth. 2. Shanghai is one of the largest cities in Asia, with an urban population in December 1995 of some 12 million, and a rapidly growing economy. The project was the first part of a program of works to improve the environment in Shanghai through the interception, treatment and disposal of about 1.4 million m3/day of wastewater that discharged into the Huangpu River and Suzhou Creek. The project was designed to benefit about 2.6 million people in these areas of the city and comprised intercepting and linking sewers, pump stations, and treatment and discharge facilities. 3. Prior to the project, operation and maintenance of wastewater services in Shanghai were funded through governmnent budgetary allocations through the Bureau of Municipal Engineering Administration (BMEA) of the Shanghai Municipal Government (SMG). In March 1987, the start of the project, the Shanghai Sewerage Company (SSC) was established with the objective of becoming a financially-autonomous sewerage company to manage the liquid waste of the city. Direct-user service charges (Y 0.12/mi3) for commercial and industrial consumers were introduced for the first time in Shanghai in late 1986. The project financial covenants required wastewater tariffs to be implemented so that, after 1992, SSC's revenues at least covered its operating and maintenance expenses and the larger of either depreciation or total debt service. 4. The project's physical objective of providing infrastructure services was realistic and appropriate. It responded to a serious pollution problem in the local water bodies and to Chinese and Bank goals for environmental remediation in urban areas. However, the project's institutional and financial goals, though laudable, were ambitious, and proved attainable only in the longer term. During much of the project period, China's economy and institutional structure continued to rely on central planning principles, without a market  - iv - orientation. In this environment, the introduction of a market orientation in one of the key institutions providing municipal services proved challenging. In time, however, with Shanghai's general adoption of commercial principles, the city administration became more receptive to new approaches. Progress in financial and institutional reform realized rather recently is expected to continue during the follow-on Second Shanghai Sewerage Project (SSPII), supported under Loan 3987-CHA. Implementation Experience and Results 5. The project objectives have been generally met: (a) institutional arrangements for liquid waste management were in place by the end of the project; (b) though delayed and later than planned, putting in place arrangements for charging for wastewater services for the first time in Shanghai was a significant step to achieve financial sustainability; (c) the creation of a managed Upper Huangpu Protection Zone supported by training in discharge monitoring and analysis began to make a quantifiable improvement on the environmental quality of the waterways; and (d) the physical investment program provided, by the end of the project, essential wastewater services to meet the needs of some 2.5 million urban residents, and infrastructure for enabling urban redevelopment and related economic growth. 6. The project was originally planned to be implemented in five years through March 1992. Construction proceeded generally satisfactorily, with high-quality workmanship, although delays arose due to slow startup by a Borrower unfamiliar with Bank procedures (this was the first Bank-supported environment project in China), unexpectedly difficult ground conditions along sections of trunk sewers, lengthy investment project approval procedures by central government, and technical difficulties on a major tunnel outfall contract. The project closing date was extended by a total of 2.5 years for the above reasons. Nevertheless, the project has been commissioned and is already operating at about two thirds of its designed capacity and is effecting significant improvement in the water quality of the Suzhou Creek (29 percent reduction in biochemical oxygen demand is reported). 7. SMG/SSC complied with covenants in the project legal documents, although with some major delays. Project goals for SSC's institutional and financial development into an independent, financially self-sustaining entity were only marginally met. These were probably overoptimistic objectives for this first Bank Group-supported environmental investment in Shanghai. Low wastewater tariffs set by SMG, out of concern for affordability as well as popular reaction, have left SSC with a continuing need for indirect charging arrangements and government subsidies, apparently contrary to the Central Government's policy of "polluter pays." SMG is addressing the financial and institutional weaknesses of SSC under SSPII. 8. The total project cost is estimated at $441 million (Y 3.704 million) compared to the appraisal estimate of $356 million (Y 1,530 million). The 24 percent project cost increase since appraisal in dollar terms was mainly due to unprecedented increases in the costs of  v - materials and labor. The project cost increase in yuan terms of 242 percent reflects: (a) the devaluation of local currency; (b) the fact that most expenditures were in local currency, and increased by the unprecedented labor and materials cost increases; and (c) the price contingencies allowed at 4.1 percent were underestimated. These increases are considered reasonable, under the circumstances. 9. Bank Group financing of a Credit of SDR 78.9 million and a Loan of $45 million amounted to $153.34 million (35 percent of project costs) which was fully disbursed. SMG provided the balance of the counterpart funds in a satisfactory manner. 10. The Bank enjoyed an open and frank working relationship with SMG and SSC, and maintained staffing continuity on the project. The Borrower managed the project with highly-competent staff and maintained staff continuity from preparation through to completion. These facts enabled large-scale physical works to be completed in reasonable time, and supported an open dialogue when the more challenging project initiatives concerning institutional strengthening and implementing wastewater tariffs commenced. 11. With project objectives generally met, the project outcome is satisfactory. Sustainability of project investments is likely in view of a strong institutional capability for operation and maintenance and SMG's renewed commitment to making the sewerage system financially self-sustaining. Wastewater tariffs have been increased substantially, and are expected to be further raised to meet financial covenants under SSPII. With the strong commercial orientation now pervasive in Shanghai, the prospects for SMG's fulfillment of these covenants is quite good. Summary of Findings, Future Operations and Key Lessons Learned 12. The physical works were completed satisfactorily. However, the institutional strengthening and financial autonomy of SSC was only initiated under the project. Reasons for this include the allocation of construction and operational responsibilities for the project under separate companies (SSPCC, the Shanghai Sewerage Project Construction Company, and SSC, respectively). SMG's management emphasis on the construction of works, and due to pressure to complete the more visible physical work, less attention being given to institutional issues, and a late requirement under the project's financial covenants for direct- user domestic charges (five years into the project). 13. In order to address the above deficiencies, SMG arranged that SSC be upgraded to a self-financing public utility company, and major direct-user wastewater tariff enhancements were approved in July 1995. In November 1995, SMG established the Shanghai Municipal Sewerage Company (SMSC), comprising the merged operations of SSC and SSPCC, as a financially-autonomous state-owned enterprise responsible for all aspects of urban wastewater management in Shanghai. This brought together all of the city's sewerage operations under one organization. Putting in place a financially-sustainable urban wastewater utility company was a major step forward, stemming from the project. The outcome of these major institutional and financial changes will be monitored under the recently-approved SSPII project.  - vi - 14. The key lessons learned from the project are: (a) Institutional development is a slow process, depending on an enabling environment; (b) Programs of physical works should be closely-linked with actions for the institutional and financial development of the utility enterprise; (c) The Bank can play a meaningful role in supporting large-scale urban infrastructure, especially through encouraging the Borrower to give attention to institutional and financial matters; (d) The low ICB ceilings of $3.0 million and $270,000 for civil works and equipment contracts, respectively, did not attract international contractors. In future similar lending operations, there may be a strong case for very large management contracts moving toward program lending; (e) High-quality planning and project management yield results on the ground; and (f) Project design should be formulated to ensure that sufficient time is allowed to put in place arrangements to achieve covenants that could be difficult to implement. 15. The formation of SMSC, drawing on the experience gained through the project, will make it one of the largest wastewater companies in the world. This will assist Shanghai in providing essential urban environmental services well into the next century, providing for growth and reducing the current service backlog. The implementation of tariffs, though levied later than expected, will sustain the provision of services and serve as a role model for other major cities in China.  - 1 - IMPLEMENTATION COMPLETION REPORT CHINA SHANGHAI SEWERAGE PROJECT (CREDIT 1779-CHA/LOAN 2794-CHA) PART I: PROJECT IMPLEMENTATION ASSESSMENT A. STATEMENT/EVALUATION OF OBJECTIVES 1. The project objectives were to: (a) establish appropriate institutional and organizational arrangements for the management of liquid wastes and environmental protection in Shanghai; (b) establish a self-financing company to deliver and manage urban wastewater services; (c) strengthen mechanisms to control discharge and improve water quality in the Huangpu River and its tributaries; and (d) support the first part of a phased program of works to provide primary wastewater infrastructure services to enable economic growth. 2. The project was the first part of a comprehensive staged program of works to improve the environment in Shanghai through the interception, treatment, and disposal of wastewater from the main commercial areas of the city; and enhance residential and industrial development along the Suzhou Creek, one of the main waterways within the city. Project infrastructure was designed to serve about 2.6 million people by the year 2000 in these areas of the city (estimated about half of the population of the urban area at that time), and comprised: (a) construction of a sewerage system that includes 35 kilometers (km) of intercepting sewers, about 21 km of link sewers, 2 main and 8 smaller pumping stations, a treatment plant and other ancillary works; (b) conducting of four project-related studies; and (c) staff training. The project was also intended to develop the institutions for providing sewerage services and managing and protecting the environment. This involved setting up a self-financing sewerage company, the Shanghai Sewerage Company (SSC), and creating a mechanism to control and improve water quality in the Huangpu River and its tributaries. The Huangpu River is the main source of water supply for Shanghai. 3. The project's physical objective of providing infrastructure services was realistic and appropriate. It responded to a serious pollution problem in the local water bodies and to Chinese and Bank goals for environmental remediation in urban areas. However, the project's institutional and financial goals, though laudable, were ambitious, and proved attainable only in the longer term. During much of the project period, China's economy and institutional structure continued to rely on central planning principles, without a market orientation. In this environment, the introduction of a market orientation in one of the key  institutions providing municipal services proved challenging. In time, however, with Shanghai's general adoption of commercial principles, the city administration became more receptive to new approaches. Progress in financial and institutional reform realized rather recently is expected to continue during the follow-on Second Shanghai Sewerage Project (SSPII), supported under Loan 3987-CHA. B. ACHIEVEMENT OF PROJECT OBJECTIVES Project Implementation 4. Status of Achievement of Objectives. The project objectives were generally met: (a) institutional arrangements for liquid waste management were in place by the end of the project; (b) though delayed and later than planned, the project's establishment of arrangements to charge for wastewater services for the first time in Shanghai was a significant step to achieve financial sustainability; (c) the creation of a managed Upper Huangpu Protection Zone supported by training in discharge monitoring and analysis began to make a quantifiable improvement on the environmental quality of the waterways; and (d) the physical investment program provided, by the end of the project, essential wastewater services to meet the needs of some 2.5 million urban residents and infrastructure for enabling urban redevelopment and related economic growth. 5. Physical Objective. This project was the first in China supported by the Bank Group to address environmental protection, reflecting the increasing importance attached by Government in recent years to this neglected area. The main objective of this project was the provision of physical works for the interception and treatment of wastewater flows discharging to the Huangpu River and Suzhou Creek, and disposal of the wastewater through deep submarine outfalls to the Changjiang estuary in the vicinity of Zhuyuan (about 10 kmn east of Shanghai City). The facilities, designed for a flow of 1.4 million m3/day, were substantially completed and commissioned in mid-1994 (about two years later than originally scheduled), with the wastewater flow presently reported around 1.0 million m3/day (71 percent of design flow). Apart from the technical difficulty experienced due to the collapse of the southern outfall tunnel (caused by gaseous methane) under the Changjiang estuary, the physical works as originally planned and designed have been successfully completed by the Shanghai Sewerage Project Construction Company (SSPCC). 6. Institutional and Financial Objectives. Prior to the project, Shanghai's Bureau of Municipal Engineering Administration (BMEA) was mainly responsible for sewerage services in Shanghai, with operation and maintenance shared by two divisions, namely the Municipal Drainage Administration Division (MDAD) and the Municipal Engineering Administration Division (MEAD). At that time, all wastewater operation and maintenance services were funded through governmental budgetary allocations; no direct-user charges were levied. During project formulation, the Shanghai Municipal Government (SMG) recognized this unsatisfactory situation, and established SSC in March 1987 as a condition of Board Presentation. As stated by the Government, SSC's objective was to become a  - 3 - financially-autonomous sewerage company to manage the liquid wastes from Shanghai City. 7. The engineering and administrative staffs from MDAD and MEAD provided a base organization for SSC, with financial and accounting staff recruited externally. In tandem with SSC's establishment, direct-user service charges were introduced in December 1986 for industrial and commercial consumers (Y 0.12/m 3). Financial covenants required wastewater tariffs to be implemented so that after 1992, SSC's revenues were to be not less than the sum of: (a) total operating expenses (including depreciation); and (b) the amount by which debt service exceeded depreciation (Project Agreement Clause 3.03). SSC's net revenue was to be at least 1.3 times its maximum debt service requirements. To achieve these objectives, the following actions were taken: (a) tariff policies and proposals were recommended in the Final Tariff Report prepared by consultants under the project in October 1992; and (b) detailed tariff proposals were made by SSC in January 1993, together with a Tariff Action Plan (cleared with the Bank) to ensure covenant compliance. 8. However, SMG did not follow all of the recommendations and related timing of the Tariff Action Plan. Compliance with the financial covenants was maintained by SMG through a combination of very low direct-user charges to commercial and industrial consumers only, utility tax allocations, and governmental budgetary provisions. Only in July 1995 was SSC authorized by SMG to charge domestic consumers and to adjust its tariffs to the following levels: domestic consumers-Y 0.14/mr3 and nondomestic consumers-Y 0.34/m3. Importantly, the domestic consumers would be billed through joint-billing with the Shanghai Municipal Waterworks Company (SMWC), with the wastewater charge shown separately. This is thought to be the first time in China that domestic consumers have been charged for wastewater services. Implementation of this authorized adjustment was not confirmed until April 1996. 9. Institutional change is a slow process, and in 1995 (eight years after being established), SSC still operated very much along the lines of the government department from which it was formed, i.e., depending on governmental budgetary allocations for day- to-day operation and maintenance of its assets. However, in preparation for the Second Shanghai Sewerage Project (SSPII, Loan 3987-CHA), which was approved by the Bank's Board on March 21, 1996, SMG established in December 1995 the Shanghai Municipal Sewerage Company, Ltd. (SMSC) as a self-accounting, self-funding state-owned enterprise. SMSC was formed following the merger of SSC and the Shanghai Sewerage Project Construction Company (SSPCC). Unlike SSC, which had a relatively flat structure of 36 units reporting to a Director's Office, SMSC has a rational, pyramnidal organization to facilitate operational effectiveness, as recommended by an organizational study carried out under the first project. Institutional development and training support being provided under the second project, including financial and management improvements, are expected to allow SMSC to function as an independent and legally-autonomous public enterprise having all the rights and powers of a company, including being held responsible for its  - 4 - operations, with the exception that SMG still sets tariffs and charges. In future, the financial objective of SMSC would be to: (a) preserve the value of its assets; and (b) earn from its wastewater operations funds sufficient to meet operation and maintenance costs and debt service, and generate funds for future investments. 10. In summary, while the financial covenants under the project were technically complied with by SMG/SSC (although with some delays and after prompting by Bank missions), SMG did not abide by what the Bank understood to be the spirit of the agreements reached at appraisal and negotiations.' Given the lack of any previous debt service, SSC's tariffs were intended to eliminate the need for operating subsidies and allow it to cover its operating expenses, pay interest during construction, finance normal capital investments, and accumulate a cash surplus during the project implementation period. However, tariffs were set at levels that necessitated SSC's having to receive substantial operating subsidies during the whole implementation period in order to be in compliance with the financial covenants. Contrary to the Central Government's policy of "polluter pays," SMG has been reluctant to set wastewater tariffs at levels that would allow SSC to be self-financing, citing affordability and community reaction as the chief concerns. Nevertheless, some important actions have been taken recently. The formation of SMSC as a broad-based service utility at the end of the project period was a major step forward in institutional development, and the improved tariff structure was a major step forward on the financial side. Further action aimed at enhancing SMSC's financial condition will be required under SSPII. The first project thus paved the way for the follow-on project. The steps taken to implement comprehensive wastewater tariffs citywide, together with the formation of SMSC have created a financially-strong utility as shown in the financial projections in Annex 2. The projections take account of the expected investments (and consequent revenues) to be financed under SSPII. C. IMPLEMENTATION RECORD AND MAJOR FACTORS AFFECTING THE PROJECT 11. The project was originally planned to be implemented during a five-year period through March 1992. Following appraisal in September 1986 and Board Presentation in April 1987, Project Effectiveness was delayed until March 1988, awaiting the "registration" of SSC as a company. Due to the delayed effectiveness and the initial unfamiliarity of the executing agency, SSPCC, with Bank procurement procedures and requirements, project construction started more slowly than anticipated. Nevertheless, construction proceeded generally satisfactorily, and the quality of construction workmanship was reported to be of a very high standard. 12. The project closing date was extended three times for periods totaling 2.5 years (from June 30, 1993, to December 31, 1995) for the following reasons: SMSC does not agree with these statements. SMG advised that while being in agreement with the financial objectives, the needed increase in direct charges should be phased in over a longer time to respect concern over affordability levels.  (a) difficult ground conditions that were not expected along parts of the trunk conveyor routes; (b) clearance procedures by central government for bidding invitations for equipment and materials, and works to be procured under International Competitive Bidding (ICB) procedures; and (c) technical difficulties experienced on a major contract (Contract 9.1) that entailed the construction of twin 4.2 meter diameter wastewater outfall tunnels, some 1.4 km long under the Changjiang estuary. In late 1992, construction crews in the southern tunnel encountered unexpectedly large pockets of gaseous methane, dispersed randomly in unstable organic silt and lenses of highly-unstable fine sand. This caused the partially-completed tunnel linings to buckle in several places and to subsequently collapse. Meanwhile, the northern tunnel was completed satisfactorily and was commissioned in December 1993. 13. Because of these problems, the project closing date was extended as indicated above: (a) to October 31, 1993, to allow SMG time to make arrangements for SSC to meet its financial covenant under the project; (b) to December 31, 1994, to enable project completion with Bank support; and (c) to December 31, 1995, to ensure completion of a second outfall tunnel to replace that collapsed. It was estimated that all works for the tunnel reconstruction would be completed by December 1995, although it was acknowledged that the program of construction left no room for slippage. By October 31, 1995, some 1,170 meters of the replacement tunnel had been excavated and lined, although progress had been slow due to recurring methane problems and the need for maintenance and replacement of essential parts of the tunneling equipment. By December 31, 1995, the second tunnel was about 86 percent complete. Due to the difficult ground conditions of running sand being encountered, the work was suspended in December 1995. The contractor, with agreement from SSPCC, decided to install air locks in the completed tunnel and behind the tunnel boring machine so that the excavation can be carried out under air pressure; and the tunneling equipment has been refurbished. Tunneling started again in March 1996, and the work is expected to be completed and operational by August 1996. Otherwise, all major infrastructure works in the project have been completed and satisfactorily commissioned, including the completion of link sewer systems in six additional catchment areas to provide improved service delivery to about 1 million residents in these areas. 14. Construction. A consultant team, supported by the Australian International Development Assistance Bureau, was engaged by SMG to assist in preparing the project through appraisal. This team was retained during project implementation to assist SSPCC and the local design bureaus in finalizing key tender documents and procurement procedures. Subsequently, the consultant team assisted SSPCC in project monitoring and reporting and provided specialist inputs (e.g., tunnel expert and control system engineer), as requested by SSPCC. Supervision of the works was undertaken by SSPCC in combination with locally-recruited construction supervisors (e.g., from Tonji University). Construction  - 6 - workmanship was consistently reported to be of a very high standard. It is also noted that comments by visiting Bank missions on construction matters were addressed both competently and expeditiously by SSPCC managing personnel. 15. However, on a number of occasions, missions reported adoption of lower construction standards, with less cover (protection) to reinforcement in culvert construction than recommended in current international practice. The cover did, however, comply with national standards and contract requirements. This concern would be addressed through the follow-on SSPII project, in which concrete protection to steel would be increased to be consistent with current international practice. The project also highlights the benefit from the bilateral assistance provided by the Australian Government, which supported the planning, engineering and institutional analysis inputs that clearly contributed to enabling a new organization to successfully implement a large-scale infrastructure program. It also shows the benefit of continuity of consultants from the planning/design stage through to the construction management/supervision services stage. 16. Land Acquisition and Resettlement. In view of the construction of major works through congested central areas of the city, land acquisition, resettlement of residents, and relocation of industries were very important project activities. At appraisal, it was estimated that 15,144 persons would need to be resettled to make way for project construction. SSPCC was able to substantially reduce the actual number of resettled persons as compared to the appraisal estimate, and about 9,200 people and 394 factories were successfully relocated by SSPCC to accommodate the original project components and the six additional link sewer systems that were implemented under the project. The reduced impact of resettlement was achieved by careful routing of the wastewater conveyors. Bank missions periodically reviewed with SSPCC its procedures and progress for land acquisition and resettlement, and found both satisfactory. 17. Studies. The project included the following studies: (a) Organization, MIS and Tariff Study for SSC; (b) Sewer Rehabilitation Study; and (c) Huangpu River Basin Management Study. These were all completed satisfactorily (by national/international teams), although somewhat later than planned at appraisal. Details of the objectives and impacts of these studies are presented in Table 7. 18. Procurement. After a slow startup due to SSPCC's unfamiliarity with the Bank's procurement procedures, the procurement process was implemented successfully. Works and goods were initially split into 33 contract packages, but ultimately into 48 packages as a result of splitting some of the sewer contracts (in order to expedite progress by employing more contractors), and including some additional link sewer works. While the work was probably accelerated in this way, SSPCC was faced with more difficult contract management and administration of the works (although this was stated by SSPCC not to be any problem). 19. In accordance with the legal agreements, civil works contracts of $3.0 million and above, and goods contracts of $0.27 million and above, were invited under ICB procedures. Cement and reinforcement were procured separately by SSPCC for supply to the  - 7 - contractors. In retrospect, the $3.0 million ICB ceiling for civil works proved quite inappropriate, and international contractors were not attracted to bid for the work. In fact, only two contracts (a length of culvert constructed in tunnel, and a pipe-jacking contract, both awarded during the early days of construction) were awarded to international contractors. All other civil works contracts (ICB and NCB) were won by local firms (with little or no international interest). At one stage, SSPCC proposed (and the Bank agreed) that certain culvert construction originally open to international bids, should be restricted to national bids in view of the lack of international interest in bidding. It may be mentioned that in the follow-up environment projects in Shanghai (Shanghai Environment Project, Loan 3711 -CHA, and the Second Shanghai Sewerage Project, Loan 3987-CHA), increasing the ceiling for ICB civil works contracts to $10.0 million does not seem to have encouraged international contractors to participate to any great extent. Referring to the contracts for equipment and materials, only two contracts out of 12 were awarded to a foreign supplier. 20. Project Costs. The total project cost at appraisal was estimated at $356 million (Y 1,530.5 million), based on the exchange rate of $1.0 = Y 3.7 at that time (September 1986). Subsequently, in 1993, the cost was updated to reflect: (a) unprecedented increases in the basic costs of local materials and labor; and (b) devaluation of local currency in comparison with the US dollar (from Y 3.7 at appraisal to Y 8.4 in December 1995). The latest project cost is estimated at $441 million (Y 3,704.4 million), including the cost of link sewer systems in the six additional catchment areas referred above. In dollar terms, the total project cost has increased by about 24 percent since appraisal. When compared in yuan, costs are 242 percent above the appraisal estimate reflecting: (a) the devaluation of local currency (by 127 percent); (b) expenditures predominantly incurred in local currency (for civil works and to a large extent for materials/equipment contracts); and (c) price contingencies found to be much higher than the figure of 4.1 percent of base cost that was estimated at appraisal. A detailed comparison of the appraisal estimate and the final project cost estimate is presented in Table 8A. Bank Group-financing comprised a Credit of SDR 78.9 million and a Loan of $45 million; these were fully disbursed to an amount of $153.34 million (35 percent of project costs). The comparison of the financing plans is given in Table 8B. When compared in dollar terms, the actual loan/credit total disbursement is some 6 percent above the appraisal figure of $145.0 million due to appreciation of the SDR. Funds were passed on through SMG to SSC through a Subsidiary Loan Agreement. Counterpart funds were provided by SMG in a satisfactory manner, and the financing plan was considered satisfactory. 21. Project Justification. Least-cost solutions were adopted to provide the principal basis for the justification of the project. The primary benefits of the project come from its contribution to improving environmental quality in Shanghai's waterways, particularly Suzhou Creek, through the removal of industrial and domestic wastewater that was formerly discharging to the waterways. A 13 percent economic rate of return (ERR) of the potential net profitability from property value enhancements along Suzhou Creek was estimated at appraisal, assuning a 10 percent discount rate. Water quality in Suzhou Creek, measured in terms of biological oxygen demand, has improved by some 29 percent as a result of commissioning of the project (see data in Table 6). However, the ERR has not  - 8 - been recalculated due to the major urban renewal programns being undertaken by SMG in the Suzhou catchment area (and elsewhere) of the city, thus preventing meaningful update of the ERR calculation on the appraisal basis. 22. There have been significant qualitative benefits, however, including the following: (a) the formation of a major urban services provider, SMSC, which at the end of the project period, was providing (through project-supported investments) wastewater services to about 2.5 million people; (b) the provision of essential and cost-effective urban infrastructure to Shanghai, enabling orderly and environmentally-safe economic growth in a large part of one of China's premier cities; (c) the project completes the first stage of a major long-termn environmental program to clean up the environment and promote sound financial management. Suzhou Creek, long known to be one of the most polluted waterways in China, has already shown an improvement in water quality; and (d) the putting in place of essential services for people in need, enabling the removal of nightsoil systems and the provision of basic wastewater disposal services to householders, in many cases for the first time. Health benefits are not quantifiable but will be significant over the medium term. 23. Regarding financial returns from the project, the average incremental wastewater cost was estimated at Y 0.39/m3 at appraisal, using a 10 percent discount rate (adoption of shadow pricing of inputs increased this figure to Y 0.46/mi3). Comparison with the latest direct wastewater user tariffs, Y 0.14/mi3 for domestic and Y 0.34/m3 for nondomestic consumers, gives a clear indication of the need for continued indirect charges and governmental subsidies to ensure SMSC's financial viability and sustainability of the physical assets provided under the project, until such time as the direct tariff levels are brought into line with actual costs of the service. D. PROJECT SUSTAINABILITY 24. Project sustainability is considered likely. The sustainability of the physical assets created under the project is very closely linked to the operation and maintenance capacity of SMSC and to the budgetary provisions allocated to it by SMG. Institutional capacity is not considered a problem-SMSC has a competent staff with substantial experience in operation and maintenance. On the funding side, achieving financial sustainability of the wastewater system is critical to adequate operation and maintenance of existing facilities and to the system expansion required to support Shanghai's continued growth. The project introduced tariffs that now meet operating and maintenance expenses (excluding depreciation). However, with only marginal tariff increases during 1993-95, but wage and administrative cost increases of about 55 percent and 46 percent a year, respectively, SSC had to rely on government transfers-construction taxes and public utility levies (principally on water supply)-to meet stormwater drainage and debt service costs.  9- Recently, SMG signaled its intention to press on toward making the system financially self- sustaining by approving substantially increased wastewater tariffs in July 1995, which were implemented from March 1996. To meet Shanghai's financial targets for SMSC under SSPII would require further tariff adjustments which, if implemented, would ensure continued development of SMSC's financial capacity. E. BANK PERFORMANCE 25. Throughout the project life, the Bank enjoyed a very close and frank working relationship with the concerned government agencies responsible for the project execution (SMG, SSC and SSPCC). Staff continuity on the Bank's side played an important role in this regard; only two Bank Task Managers (including the current manager) have been involved throughout the life of the project. Initially, the "skills" of mission personnel fielded during the project supervision were predominantly "engineering," reflecting the major emphasis during the initial years of the project, on designs, tendering and construction of works (while assisting SSPCC and SSC in the review of studies, training. and institutional and financial development proposals for SSC). Details of mission resources are provided in Table 13 where it is seen that institutional and financial specialists were included regularly in later Bank mission teams. F. BORROWER PERFORMANCE 26. Borrower performance was generally satisfactory, although deficiencies must be noted in implementation of some project aspects. SMG established SSPCC under the direction of a senior manager for the preparation and implementation of the project. SSPCC was staffed up with a full complement of senior professionals and supporting personnel. This organization was maintained throughout the project and has carried out its duties in a very responsible and professional manner. Management and staff continuity within SSPCC has certainly contributed to the very successful implementation of the physical components of this project (and indeed SSPCC has been entnisted by SMG with construction under SSPII). 27. SSC was established by SMG to be responsible, as a self-financing public utility company, for operation and maintenance of existing wastewater facilities and, ultimately, for the operation and maintenance of the assets created under this project. While SSC demonstrated a capacity to operate and maintain the physical assets that have been created, for various reasons it failed to grow into the self-financing institution envisaged at appraisal. In this respect, the performance of SSC was below that expected at appraisal. The reasons for this include: (a) lack of priority given to institutional development during project formnulation; (b) major emphasis in the project on the construction of works; (c) direct user domestic charges effectively covenanted only from 1993 onward (five years into the project); and (d) allocation of construction and operation responsibilities under separate companies (e.g., SSPCC had no responsibility with respect to the financial covenants pertaining to SSC). 28. Compliance with the covenants was maintained by SMG/SSC throughout the project period, although at times reluctantly and with long delays; details are provided at  - 10- Table 10. In retrospect, institutional development and financial management could have received greater emphasis during formulation of the project covenants-actions required to be taken five years down the line do not always merit serious attention by the executing agencies. 29. The Borrower successfully implemented all the studies identified in the SAR (although with some delay), and the various in-country and overseas training programs that were identified at appraisal were successfully completed. Additional language skills training needs, which were identified toward the end of the project period, were not followed up by the Borrower, despite reminders during Bank missions, principally due to pressure of other commitments. These studies made significant contributions to future initiatives. The Huangpu River Basin Study provided a design for the Shanghai Environment Project and for the formation of the Upper Huangpu Water Protection Zone, strengthening Shanghai's ability to reduce above-standard wastewater discharges. The Tariff Policy and Organization and Management Study provided a basis for the revised tariffs, and contributed to SMG's decision to create SMSC. Finally, the training undertaken yielded results as shown by the ability of a small municipal department to manage major construction works, embark on institutional upgrading, and begin to be financially sustainable. G. ASSESSMENT OF OUTCOME 30. The project outcome is rated satisfactory. Apart from the technical difficulty encountered with the construction of the southern outfall tunnel, the physical objectives of the project were completed very satisfactorily. In fact, SSPCC implemented additional link sewer systems in the further six catchment areas of Guohe, Yiejiazhai, Mudugang, Beixinjing, Wuning, and Guangzhong, improving service delivery for some one million residents in these areas. 31. The institutional strengthening of SSC proceeded slowly and its expected financial sustainability was not achieved. In retrospect, this may not have been anticipated due to: (a) the major emphasis on construction of works; (b) newness, as this was the first Bank- supported environmental project for Shanghai (and China); (c) the requirement of actions by SMG/SSC only from 1993 (five years into the project) by the financial covenants provided in the project agreements (these covenants were designed to coincide with the planned completion of the physical works); and (d) the operation of SSPCC and SSC as two separate entities, which was probably appropriate when the project commenced as activities were quite separate, but not the optimal organizational structure once assets were serving the city on a large scale. SMG has now taken action to amalgamate all activities by SSPCC and SSC into a single agency (see below). H. FUTURE OPERATIONS 32. In November 1995, SMG established the Shanghai Municipal Sewerage Company (SMSC) in order to bring together all the wastewater operations of the city under one organization [this may be compared with the Shanghai Municipal Waterworks Company (SMWC), which has been in operation for more than 100 years]. SMSC is headed by a  - 11 - Construction Company, an Operations Company, a Monitoring Center, and a Training Center. The total staff is around 4,100. The future operation of the project is very much dependent on SSC's and now SMSC's ability to operate and maintain the assets provided. SMG has upgraded SSC to a self-financing public utility company, and in fact, major direct user tariff enhancements were sanctioned from July 1995. The outcome will be monitored during the coming years under SSPII. 1. KEY LESSONS LEARNED 33. The key lessons learned from the Shanghai Sewerage Project are: (a) Institutional development is a slow process, depending on an enabling environment; (b) Programs of physical works should be closely-linked with actions for the institutional and financial development of the utility enterprise; (c) The Bank can play a meaningful role in supporting large-scale urban infrastructure, especially through encouraging the Borrower to give attention to institutional and financial matters; (d) The low ICB ceilings of $3.0 million and $270,000 for civil works and equipment contracts, respectively, did not attract international contractors. In future similar lending operations. there may be a strong case for very large management contracts moving toward program lending; (e) High-quality planning and project management yield results on the ground; and (f) Project design should be formulated to ensure that sufficient time is allowed to put in place arrangements to achieve covenants that could be difficult to implement. 34. The formation of SMSC, drawing on the experience gained through the project, will make it one of the largest wastewater companies in the world. This will assist Shanghai in providing essential urban environmental services well into the next century, providing for growth and reducing the current service backlog. The implementation of tariffs, though levied later than expected, will sustain the provision of services and serve as a role model for other major cities in China.  - 12 - PART II: STATISTICAL TABLES TABLE 1: SUMMARY OF ASSESSMENTS Not Achievement of Objectives Substantial Partial Negligibk Aplicakk Macroeconomic policies X Sector policies X Financial objectives X Institutional development X Physical objectives X Poverty reduction X Gender concerns X Other social objectives X Environmental objectives X Public sector management X Private sector development X Project Sustainability Likely Unlikely Uncertain x Bank Performance Highly Satisfactory Satisfactorv Deficient Identification X Preparation assistance X Appraisal X Supervision X Borrower Performance Highly Satisfactory Satisfactor Deficien Preparation X Implementation X Covenant compliance X /a Assessment of Outcome Highly Highly Satisfactory Satisfactori Unsatisfactory Unsatisfactry x ,'a Marginally satisfactory  - 13 - TABLE 2: RELATED BANK LOANS Year of Loan Title Purpose Approval Status Preceding Operations None Following Operations Shanghai Environment To provide a sustainable environment for 1994 Ongoing Project long-term economic and social Ln 371 1-CHA development in Shanghai. Second Shanghai To provide a safe environmental setting 1995 Approved Sewerage Project for the long-term growth of Shanghai. March 31, 1996 Ln 3987-CHA TABLE 3: PROJECT TIMETABLE Steps in project cycle Date planned Date actual/latest estimate Identification (Executive Project Summary) 03/85 06/85 Preparation 1985-86 1985-86 Appraisal 09/86 09/86 Negotiations 02/87 02/87 Board presentation 04/14/87 04/14/87 Signing 07/14/87 11/23/87 Effectiveness 10/14/87 03/07/88 Project Completion 06/30/92 12/31/95 Loan closing 06/30/93 12/31/95  - 14 TABLE 4: CREDIT/LOAN DISBtlRSEMENTS: CUrMUJLATIVE ESTIMATED AND ACTUAL ($ 000,000) Financial Year Appraisal estimate Actual Actual as % of estimate 1988 /a 12.00 10.26 75.0 1989 33.00 14.70 44.5 1990 71 00 29.56 41.6 1991 104.00 53.63 51.6 1992 131.00 72.40 55.3 1993 145.00 98.89 68.2 1994 - 131.26 90.5 1995 - 151.09 104.2 1996 I- l13. 34/b 105.8 /a Includes the initial disbursement of $9.0 million for the Special Account. /b Due to appreciation of SDR, the actual amount in dollars is increased substantially.  - 15 - TABLE 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION Key implementation indicators in SAR Estimated at appraisal (1986) Actual (1995)La Targets Population million 7.863 9.329 % population with water connection 98.0 98.0 Water connections (1.000) 962.1 1,853.9 Water sold million tons 1,191.0 1,459.0 Volume water sold, l/c/d 423.0 428.0 Population with sewer connection 67% 67% Sewerage connections, '000 658.0 1242.0 Total sewage billed, millioni tons 1,060.0 989.33 Av. tariff/volume hilled, Y.:ton 0.141 0.102 Manaoement Operating expenses/ton of sewage billed 0.07 0.17 Days accounts receivable 30.0 30.0 Number of employees 5,055.0 3,944.0 Employees/1000 sewver connections 7.7 3.2 Financial Ratios Sewerage revenues, Y million 149.35 100.58 Domiiestic tariff/volume billed. Y/ton 0.043 0.02 Nondomestic, Y/ton 0.173 0.156 Average tariff. Y/ton 0.141 0.102 Working ratio 46.3% 52.6% Operating ratio 81.8% 59.1% Rate of return on net fixed assets 1.8% 22.920% Net income/year on equity 0.6% 14% Slianghai Sewerage Project Stage I Total investment, Y million 419.0 221.7 Internal contribution 4.70 % investmilenit finatnced b\ equity 0.0