China - Huai River Pollution Control Project

Document of The World Bank Report No: 21013-CHA PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF US$105.5 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A HUAI RIVER POLLUTION CONTROL PROJECT February 28, 2001 Urban Development Sector Unit East Asia and Pacific Region  CURRENCY EQUIVALENTS (Exchange Rate Effective October 31, 2000) Currency Unit = Yuan (Y) Y 1.0 = US$0.12 US$1.0 = Y8.30 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS AC Advisory Consultants MOF Ministry of Finance AEMC Anhui Environmental Monitoring Center MWR Ministry of Water Resources BOD Biochemical Oxygen Demand NCB National Competitive Bidding CAS Country Assistance Strategy NPV Net Present Value CNAO China National Audit Office OED Operations Evaluation Department COD Chemical Oxygen Demand PAP Project Affected Person EA Environmental Assessment PCD Project Concept Document EMP Environmental Monitoring Plan PIP Project Implementation Plan EPB Environment Protection Bureau PIU Project Implementation Unit ERR Economic Rate of Return PMO Project Management Office GPN General Procurement Notice PPP Project Procurement Plan FRR Financial Rate of Return PSR Project Supervision Report HRB Huai River Basin RAP Resettlement Action Plan HRBC Huai River Basin Commission SBD Standard Bidding Documents ICB International Competitive Bidding SEPA State Environmental Protection Agency ICR Implementation Completion Report SS Suspended Solids LG Leading Group TPH Total Petroleum Hydrocarbons LIBOR London Interbank Offered Rate WC Wastewater Company MBD Model Bidding Documents WTP Wastewater Treatment Plant Vice President: Mr. Jemal-ud-din Kassum, EAPVP Country Manager/Director: Mr. Yukon Huang, EACCF Sector Manager/Director: Mr. Keshav Varma, EASUR Task Team Leader/Task Manager: Mr. Edouard Motte, EASUR  CHINA HIUAI RIVER POLLUTION CONTROL PROJECT CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 2 3. Sector issues to be addressed by the project and strategic choices 2 C. Project Description Summary 1. Project components 3 2. Key policy and institutional reforms supported by the project 4 3. Benefits and target population 4 4. Institutional and implementation arrangements 4 D. Project Rationale 1. Project alternatives considered and reasons for rejection 5 2. Major related projects financed by the Bank and other development agencies 6 3. Lessons learned and reflected in proposed project design 6 4. Indications of borrower commitment and ownership 7 5. Value added of Bank support in this project 7 E. Summary Project Analysis 1. Economic 7 2. Financial 8 3. Technical 9 4. Institutional 9 5. Environmental 10 6. Social 11 7. Safeguard Policies 12 F. Sustainability and Risks 1. Sustainability 12 2. Critical risks 13 3. Possible controversial aspects 14  G. Main Conditions 1. Effectiveness Condition 14 2. Other 14 H. Readiness for Implementation 15 I. Compliance with Bank Policies 16 Annexes Annex 1: Project Design Summary 17 Annex 2: Detailed Project Description 21 Annex 3: Estimated Project Costs 23 Annex 4: Cost Effectiveness Analysis Summary 25 Annex 5: Financial Summary 31 Annex 6: Procurement and Disbursement Arrangements 39 Annex 7: Project Processing Schedule 48 Annex 8: Documents in the Project File 49 Annex 9: Statement of Loans and Credits 52 Annex 10: Country at a Glance 57 Annex 11: Environmental Assessment and Resettlement 59 MAP(S) IBRD 31224 Huai River Basin  CHINA Huai River Pollution Control Project Project Appraisal Document East Asia and Pacific Region EASUR Date: February 28, 2001 Team Leader: Edouard Henri Motte Country Manager/Director: Yukon Huang Sector Manager/Director: Keshav Varma Project ID: P047345 Sector(s): US - Urban Environment Lending Instrument: Specific Investment Loan (SIL) Theme(s): Environment Poverty Targeted Intervention: N Project Financing Data [X] Loan [ ] Credit [ Grant [ ] Guarantee []Other: For Loans/Credits/Others: Amount (US$m): 105.50 Proposed Terms: Variable Spread & Rate Single Currency Loan (VSCL) Grace period (years): 5 Years to maturity: 20 Commitment fee: 0.75% Front end fee on Bank loan: 1.00% Financing Plan: Source Local Foreign Total BORROWER 107.90 13.49 121.39 IBRD 0.00 105.50 105.50 Total: 107.90 118.99 226.89 Borrower: THE PEOPLE'S REPUBLIC OF CHINA Responsible agency: ANHUI AND SHANDONG PROVINCIAL GOVERNMENTS a) ANHUI PROVINCIAL GOVERNMENT (Anhui Provincial Finance Bureau, Anhui Project Management Office) Address: 238 Funan West Road, Hefei 230061, Anhui Province Contact Person: Ms. Liu Hua, Deputy Director, World Bank Loan Division Tel: 86-551-5100160 Fax: 86-551 510-0162 Email: afbwbd@mail.hf.ah.cn; pmo<hfshzhy(mail.hf.ah.cn> b) SHANDONG PROVINCIAL GOVERNMENT (Shandong Provincial Construction Commission, Shandong Project Management Office), and the Chengwu Paper Mill. Address: 3 Jida Road, Jinan, 250002, Shandong Province Contact Person: Mr. Song Wenxu, Division Chief, Debt and Finance Management Division, Shandong Finance Bureau; Tel: 86-531-2951900; Fax: 86-531-2920-753 1; Email: sdfd@publicjn.sd.cn; sppmo@in-public.sd.eninfo.net Estimated disbu rsements ( Bank FY/U$$M): FY 2001 2002 2003 2004 2005 2006 Annual 0.00 15.00 30.00 30.00 25.00 5.50 Cumulative 0.00 15.00 45.00 75.00 100.00 105.50 Project implementation period: 2001--2004 Expected effectiveness date: 07/31/2001 Expected closing date: 06/30/2005  A. Project Development Objective 1. Project development objective: (see Annex 1) 1. Project development objective and key performance indicators: The project will support Govermment efforts to upgrade water quality in the Huai River Basin (one of the most polluted river systems in China), in particular in the provinces of Anhui and Shandong. This objective would be achieved through improved collection and treatment of wastewater in a number of municipalities in the two provinces in a sustainable manner. 2. Key performance indicators: (see Annex 1) Progress in meeting the development objective would be measured in terms of: (a) treatment of wastewater in the project-financed (and other) wastewater treatment plants up to capacity; and (b) institutional development and financial viability of newly established wastewater treatment companies. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 16321-CHA Date of latest CAS discussion: 05/28/98 CAS Memorandum of April 22, 1999 and Country Program Matrix (FY99-0 1). Improving the environment, and in particular water quality in the major river basins, is one of the major focal points of the Bank's strategy in China. Within this overall strategy, the project would contribute to upgrading water quality in the Huai River Basin (HRB), especially in Anhui and Shandong Provinces. 2. Main sector issues and Government strategy: Wastewater treatment facilities and institutional mechanisms for monitoring and control of water pollution have lagged significantly behind the major increases in urban water supply to domestic consumers, and the rapid growth in industries during the last two decades. These have led to a substantial increase in the discharge of untreated wastewater into water courses, thereby causing a major decline in the quality of surface and ground water in the entire country. For example, in 1997 only four billion m3 of urban wastewater were treated, out of a total supply of 45 billion m3. Key features of the Government's strategy for water pollution control are: (a) the immediate substantial reduction of industrial pollution through strict enforcement of discharge standards; (b) the gradual reduction of urban residential pollution, with about 60% of the country's urban residential wastewater being treated in municipal wastewater treatment plants by 2010; and (c) the integration of industrial and residential wastewater treatment where appropriate, and the establishment of financially viable wastewater utilities. 3. Sector issues to be addressed by the project and strategic choices: Covering about 190,000 km2 and carrying a population of over 150 million, the Huai River Basin is one of China's largest and highly polluted river basins. Its various industries employ the Basin's water resources in multiple ways. (See Annex 4 for more details on HRB). Improving water quality in HRB is one of the directives of the Govermment's Ninth Five Year Plan. - 2 -  Reducing Municipal Pollution. The Government and the Bank agreed to focus the project in the provinces of Anhui and Shandong, as non-Bank programs support pollution control initiatives in Jiangsu and Henan, the other two provinces in the Huai Basin. In order to complement the on-going efforts to control industrial pollution, the project would focus on decreasing municipal pollution, mainly through construction of wastewater collection systems and municipal treatment plants. The project would also support end-of-pipe treatment of industrial wastewater prior to discharge into public sewers. Participating municipalities and industrial enterprises would be selected based on their initiative and commitment to pollution control in a sustainable manner. Institutional and Financial Reforms. The project would address the key issue of institutional arrangements for municipal wastewater services. Embryo wastewater companies (WCs) were already established under Company Law in the participating municipalities during project preparation. These WCs have responsibility for the construction and management of wastewater facilities. The September 1999 Government Decree 1192 provides the basis for setting tariffs that are adequate for cost recovery and financial viability. The project would address the important issue of institutional strengthening for the nascent WCs during project implementation. Water Quality Monitoring. Upgrading the Basin-wide water quality monitoring system is another important sectoral issue. A short study carried out during project preparation recommends several actions: (a) improvement in the distribution of monitoring stations within the Basin; (b) agreement in the selection of common variables for analysis and in improved management of laboratories; (c) the establishment of a monitoring database; and (d) institutional arrangements for database management and data-sharing. Provincial and national agencies involved in the Basin's water quality issues recognize the need for a substantial overhaul of the systems and procedures; the complexity of the task is compounded by the need for institutional reforms which are now under consideration. During Negotiations the Government proposed a workshop to discuss the report of the study with all stakeholders, and indicated that it would thereafter consider action on further improvements to water quality monitoring, including through grant technical assistance from donor support, twinning arrangements with other intemational river basin agencies, etc. C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): Indicative ank- of Component Sector Costs % of financing Bank- mm) . Total .U.$M. - financing Anhui component Urban 139.55 61.5 70.55 66.9 Environment Shandong component Urban 67.91 29.9 33.90 32.1 Environment Total Project Costs 207.46 91.4 104.45 99.0 Interest during construction 18.38 8.1 0.00 0.0 Front-end fee 1.05 0.5 1.05 1.0 Total Financing Required 226.89 100.0 105.50 100.0 Note: Final digits may not add due to rounding. -3 -  2. Key policy and institutional reforms supported by the project: The project would support the achievement of the following key policy and institutional reforms: (a) reduction of pollution levels (especially from domestic sources) in the HRB; and (b) development of commercially viable WCs that operate under company law. 3. Benefits and target population: Benefits. The project would generate benefits as follows: (a) environmental benefits, through improved water quality in the Huai River and its tributaries; (b) health benefits through reduced risk of exposure to illnesses caused by water bome vectors; and (c) institutional reforms, through increased efficiency in wastewater service provision and reduced burden on public funds for investments and operations and maintenance. Target Population. The immediate beneficiaries would be the current population of about 2.5 million residents and 800,000 residents respectively in the participating municipalities in Anhui Province and Shandong Province. The downstream riparian populations, who are the broader beneficiaries, would be much larger but cannot be estimated precisely. 4. Institutional and implementation arrangements: Implementing Arrangements. Leading Groups (LG), headed by Vice Govemors, and comprising senior officials from the relevant provincial bureaus, have been established to take overall responsibility for project implementation in each province. The Anhui Finance Bureau and the Shandong Construction Commission, which will be responsible for managing the respective components, have established and staffed provincial Project Management Offices (PMOs) to guide the execution of the sub-components by the respective municipalities. A Project Implementation Unit (PIU) has been established in each municipality to implement the project under the guidance of the municipal Construction Commission and the Finance Bureau, as well as the provincial PMO. The PIUs are comprised largely of staff of the municipal WCs. The WCs would operate and maintain the facilities upon completion of construction. The Chengwu Paper Mill in Shandong Province would establish a special unit to execute the IBRD-funded component, and would report to the Shandong PMO. On-lending Arrangements. The Ministry of Finance (MOF) would on-lend the proceeds of the Bank loan to Anhui and Shandong provinces, which in turn would enter into on-lending agreements with the participating municipalities. The municipalities would finally on-lend to the respective WCs/Chengwu Paper Mill. The final on-lending arrangement with the WCs would be on the same terms and conditions as the Bank loan; however, Shandong province would charge a mark-up, which would be higher for the Chengwu Paper Mill. Each beneficiary agency would carry the foreign exchange risk. Procurement and Construction Supervision Arrangements. The two PMOs have contracted with reputed Chinese tendering companies to carry out procurement under both ICB and NCB procedures on behalf of the implementing agencies. Eligible civil works contracts awarded from January 2001 until loan effectiveness, up to a limit of $2.9 million from the loan in the case of Anhui Province, and $2.5 million in the case of Shandong Province (as well as eligible training activities during this period), will be financed retroactively from the loan. National supervision institutes would carry out construction supervision in each province, under the overall guidance of intemational firms of advisory consultants (ACs). - 4 -  Financial Management. The two PMOs will have overall responsibility for the financial management of the respective components, while the PIUs will be responsible for their respective sub-components. Traditional disbursement methods would be used as opposed to the PMR-based disbursement systems. The Finance Bureaus of both provinces are familiar with Bank disbursement procedures. The administration, accounting, and financial reporting of the project will be in accordance with Government regulations acceptable to the Bank. Adequate internal controls have been built into the management system for all major areas of project operation. Project financial and accounting staff will receive relevant training in financial management at Project Launch. Auditing Arrangements. As with other Bank-financed projects in China, the Foreign Investment Audit Bureau of the China National Audit Office (CNAO), established in 1983 under the name of State Audit Administration, would have overall responsibility for auditing project accounts, with the respective Provincial Audit Departments carrying out the audits. Audited financial statements of the WCs, the Chengwu Paper Mill, and the PMOs, as well as the audit reports of the provincial Special Accounts and the Statements of Expenditure would be submitted to the Bank within six months after the end of the financial year. Assurances were obtained at Negotiations that audit reports of the implementing agencies would include an opinion on whether the agencies were in compliance with the respective financial covenants, and whether they had taken out adequate insurance on goods and works financed from loan proceeds. No outstanding audits or audit issues exist with any of the executing agencies involved in the project. Monitoring, Reporting and Evaluation Arrangements. The provincial PMOs would monitor and report on implementation progress of the Anhui and Shandong components through semi-annual progress reports based on information compiled from the municipalities. In addition, the PMOs would furnish annual compliance reports on the status of the environment, land acquisition and resettlement, institutional development, and various financial. matters. The two PMOs would furnish first progress reports by January 31, 2002. Within six months of closing of each component, the PMOs would furnish an implementation completion report to the Bank, reviewing project achievements against objectives, including costs incurred and benefits derived, as well as the performance and contribution of all parties associated with project execution. Both headquarters and resident mission staff would jointly supervise project implementation twice a year. A mid-term review will be undertaken jointly with the Government in early 2003 to evaluate the project's achievements and identify any corrective measures necessary. D. Project Rationale 1. Project alternatives considered and reasons for rejection: The following altemative project ideas were considered before settling on the current project concept and scope: (a) A program to support a comprehensive basin-wide pollution control construction program of treatment facilities for industrial and municipal pollution sources and institutional reforms, through two to three projects over five years - This program was considered too ambitious and was dropped in favor of a more focused Bank intervention. (b) A pilot project to support industrial pollution abatement in 20 priority polluting enterprises in Anhui Province - The project was abandoned as only one of the 20 enterprises was creditworthy. (c) A project to support municipal wastewater facilities and end-of-pipe industrial treatment in the provinces of Anhui, Jiangsu, and Shandong - As Jiangsu Province obtained financing from other sources, the current project emerged from this proposal. - 5 -  2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Latest Supervision Sector Issue Project J (Bank (PSR)aRatings :_____________________________ ___________________ (Bank-financed prqjects only) Implementation Development Bank-financed Progress (IP) Objective (DO) Urban environment: water, wastewater, China: Yunnan Urban S S sanitation, solid waste, industrial Environment Project (Ln. pollution. 4055/Cr. 2892) Declining water quality in rivers, China: Guangxi Urban S S industrial pollution, low capacity for Environment Project (Ln. environmental monitoring, solid waste. 4348/Cr. 3097) Polluted rivers, industrial water and air China: Shandong Environment U S pollution, monitoring water quality, low Project (Ln. 4237) capacity for operation of facilities. Industrial pollution, contaminated China: Southern Jiangsu S S water resources, degradation of urban Environmental Protection environment. Project (Ln. 3582) Inadequate monitoring capacity and China: Environmental S S weak ecological research. Technical Assistance Project (Cr. 2522) Provision and management of basic China: Fourth Rural Water S S services to low income communities. Supply and Sanitation Project (Ln. 4485/Cr. 3233) Other development agencies A similar spectrum of issues including The Asian Development Bank deteriorated surface and ground water has been financing a number of sources, environmental degradation, low urban and environmental capacity of operating agencies. projects, and is expanding its Typically, less attention has been given support. Bilateral donors, e.g., to institutional and financial matters, Germany, Spain, Norway, have compared to construction of facilities. financed wastewater treatment plants. IPIDO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: Experience with urban wastewater systems. The Operations Evaluation Department (OED) review of Bank financed urban (water and) sanitation projects has shown generally good achievement of physical targets, but less success in sustaining the financial viability of municipal service providers. Preliminary indications from an on-going OED review of the Bank's China water supply and wastewater program appear to confirm these findings. Earlier sector work in China ("Urban Enviromnental Service Management", Report No. 13073-CHA) also supports these findings, noting the need for greater reliance on user charges, which are presently levied at levels that do not sustain assets or institutions. - 6 -  Experience with pollution control in river basins. Experience with pollution control projects in river basins, e.g., in Brazil (Guarapiranga/Sao Paulo, Parana, and Minas Gerais, as well as in an upcoming project in Paraiba du Sul River Basin) have shown the importance of adequate monitoring and data bases, as well as the need to link the data to investment planning with regard to wastewater treatment. Impact on the Huai River Pollution Control Project. The project has benefited from these lessons by taking up-front actions on institutional matters and tariffs. The municipalities have already established WCs under company law, appointed their core management teams and approved tariffs to achieve full cost recovery. Agreements reached at appraisal regarding tariff principles, as well as tariff increases required during the project in each municipality, were confirmed at Negotiations, and will be monitored during implementation. Technical assistance under the project will support the development of the WCs as financially viable operations. 4. Indications of borrower commitment and ownership: There is a strong commitment to the project at all levels of government, as improving water quality in the Huai River is one of the directives under the Government's Ninth Five Year Plan. The provincial LGs have been involved in all important project-related policy issues, and have taken up-front action on institutional reforms and sustainability (see above). They have made arrangements to ensure counterpart financing, appointed local design institutes to complete detailed designs, and contracted leading Chinese institutions for ICB and NCB procurements. Both provinces intend to proceed with advance procurement prior to loan effectiveness. Government has indicated that it will upgrade water quality monitoring in the Huai River Basin through its own resources. 5. Value added of Bank support in this project: Bank involvement in the project will provide further impetus to institutional and financial reforn in the urban wastewater sector in China. Bank assistance during the identification and design phase enabled the provinces to select technically sound least cost sub-projects in the municipalities, to prepare detailed financial plans (including the securing of counterpart funds from a variety of sources), and to insure financial sustainability through adequate tariffs. Through the use of implementation covenants (see Section G), the Bank will enable the municipalities to take an integrated approach to sanitation, i.e., to maintain drains and combined sewers, to regularly desludge septic tanks, and to enforce industrial discharge regulations, in addition to service provision through separate sewers and treatment plants. Bank involvement will also heighten the focus on construction quality. The Bank intends to support Government efforts to strengthen water quality monitoring in the HRB by assisting in finding appropriate bilateral grant technical assistance, and to link Huai River Basin Commission (HRBC) with agencies of developed countries engaged in similar tasks. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): 0 Cost benefit NPV=US$ million; ERR = % (see Annex 4) * Cost effectiveness 0 Other (specify) Cost effectiveness NPV=US$ million; ERR = % (see Annex 4) The main benefits of the project lie in its contribution to the overall improvement of water quality in HRB and in local environmental improvements in the project municipalities. In the case of the former, the impact cannot be quantitatively assessed in the absence of reliable monitoring data. However, a significant part of the planned pollution reduction would not materialize in a "without project" situation, as the project -7 -  investments will result in the treatment of 20% of the planned volume of 3.7 million m3/day of wastewater in the two provinces by 2010. Technical assistance under the project will benefit participating municipalities and provinces by enabling WCs to provide more efficient and sustainable wastewater services to urban residents. A variety of benefits are expected in the project municipalities, including: protection of downstream water resources due to reduced bacteriological pollution; improved agricultural yields, since the receiving rivers' waters are used for irrigation; and increased property values, by improving the quality of water flowing through the urban centers. Benefits of this nature are difficult to translate into monetary values, hence the economic viability of the project has been determined through cost-effectiveness, in particular through detailed least-cost analyses of the project components, rather than cost-benefit considerations. 2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4) Financing plan. The World Bank loan of $105.5 million will provide 46.5% of the total financing required. Local bonds and domestic bank loans contribute 4.8% and 6.0% respectively. Intemal cash generation and grant equity contributions from the state and municipal governments contribute 43% of financing. Depending on the local situation, the mix of funding varies in individual WCs, e.g., the loan financing varies from 42% to 64%. Cost recovery and affordability. Wastewater tariffs are covenanted to be set at levels which: (a) enable revenues to cover operating and maintenance costs, the greater of depreciation or debt service, and changes in working capital requirements; and (b) in addition, will cover the portion of project costs not covered by loans and other contributions. Financial projections for the period up to 2008 indicate that in 9 of 11 WCs, current average wastewater tariffs will need to be, at most, doubled during the project period. In the remaining two WCs, tariffs have to be increased to about four times the current levels. Individual WCs and the corresponding municipalities have confirmed their agreement to raise the tariffs to these levels. As wastewater tariffs are charged to all water users, irrespective of whether or not they are connected to a sewer, the underlying concept of incremental revenues in FRR computation is not applicable. Affordability analysis carried out indicates that the required tariffs would be affordable. The percentage of income spent on water supply charges and wastewater charges (combined) by households in the lowest 20% income group in year 2005 would be around 1% of disposable income, i.e., well below the normally accepted threshold of 4% to 5%. Chengwu Paper Mill. A financial assessment of the project pollution control investments for the Chengwu Paper Mill was carried out on the basis of the financial soundness (as measured by minimum thresholds for debt service coverage ratio, current ratio, quick ratio, and debt-equity ratio) of its operations, as the project investments will not directly generate additional revenues. The company is forecast to be able to maintain a minimum debt service coverage ratio of 1.2 during the projection period. Fiscal Impact: An analysis of municipal finances (see Annex 5) reveals that requirements for project counterpart funds in the municipalities of both provinces are affordable. Project contributions during the life of the project as a percentage of municipal revenues averages a maximum of 0.9% in the Anhui province municipalities, with the corresponding figure in Shandong being 3%. Counterpart fund requirements as a percentage of municipal investment capacities range from a low of 2% to 19%. The earmarked special fund being established in each municipality for project counterpart funds would assure timely availability of counterpart funds. -8-  3. Technical: Physical works under the project cover the first phase of a sewerage master plan in each municipality and comprise wastewater collection systems (both interceptor and sanitary sewers), and wastewater treatment facilities (screening, grit removal, extended aeration using oxidation ditch, disposal of processed sludge in municipal sanitary landfills). These investments were determined based on: (a) feasibility studies for each municipality, prepared by high quality national design institutes, after analysis of various technical options for numbers, sizes, and locations of treatment plants, type of treatment, etc., to determine least cost solutions; and (b) reviews of feasibility studies by international consultants. The project design is technically sound and draws on best sanitary engineering practice, and applies criteria for low cost technology and simplified operations. Project cost. Annex 3 shows the estimated project costs by component and category. The Anhui component and the Shandong component constitute 68%, and 32% respectively of the base cost of $174.6 million. The total project cost, including contingencies, is $207.5 million, while the total financing required is $226.9 million. Cost estimates, based on similar works undertaken in recent years, and which include contingencies computed per Bank norms, are considered satisfactory. Details of project costing are available in project files. 4. Institutional: 4.1 Executing agencies: LGs and PMOs established by Anhui Province and Shandong Province, the Executing Agencies for the two components (see Section C.4), are capable of providing direction to, and taking overall responsibility for, the project activities in the respective provinces. At Negotiations, the provinces confirmed that the PMOs will have the requisite number of appropriately qualified staff in place. The PIUs, already established in each municipality/implementing unit, are fully staffed with qualified personnel. Adequate technical assistance is included in the project for construction supervision and institutional development. The project also includes sufficient allocation for development of provincial, municipal, and WC staff through training in-country and overseas study tours. 4.2 Project management: The functions and staffing of the two provincial PMOs responsible for project management have been reviewed and they are capable of overall project management, including providing guidance to the PIUs in the respective provinces. The Shandong PMO is currently managing the on-going Shandong Environmental Project (Ln. 4237-CHA). 4.3 Procurement issues: Project procurement arrangements are summarized in Section C4. The procurement assessment carried out during project preparation (see Annex 6 for a summary) confirms that procurement arrangements are adequate to carry out project procurement per current Bank Procurement Guidelines. The PMOs and PIUs are capable of undertaking advanced procurement in accordance with Bank Guidelines. 4.4 Financial management issues: The Task Team has assessed that the project: (a) will satisfy the Bank's financial management requirements; and (b) will have in place an adequate financial management system that can provide accurate and timely information on the status of the project in reporting formats agreed with the Bank. The report on the assessment of the adequacy of the project's financial management system is available in the project files. -9-  5. Environmental: Environmental Category: B (Partial Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. Complete environmental assessments have been prepared by provincial and municipal staff, reviewed by Bank staff, and meet all criteria and guidelines outlined in OP/BP/GP 4.01. Copies of the EAs have been placed in the Bank's Public Information Center. Please also see Annex 1 1 for more details on the Environmental Assessment (EAs), and the Resettlement Action Plans (RAPs). During the course of preparing the EA and the EMP: (a) environmental benefits were assessed through modeling; (b) temporary environmental concerns associated with construction were assessed and appropriate mitigating actions were developed; and (c) environmental issues relating to the operation of the treatment systems were examined and addressed. The EAs highlight the importance of: (a) ensuring that sludge is disposed of safely; (b) ensuring that treated effluent discharge meets quality standards; and (c) municipalities enforcing existing regulations requiring industry to comply with wastewater discharges into sewers. 5.2 What are the main features of the EMP and are they adequate? Under the EMP, an environmental protection management system will be established with the purpose of implementing existing laws and regulations in each of the municipalities, with the contractor and the WCs being responsible for carrying out environmental management and monitoring activities during construction and during plant operations respectively. Information gathered will be made available to the municipal and the provincial Environmental Protection Bureaus (EPBs), as well as to the public. An Annual Safeguard Compliance Report will sununarize the previous year's environmental and social indicator data. The EMP is assessed to be appropriate for the project. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: 8/24/2000 and 9/05/2000 The EAs were received during August 2000, reviewed and found to be satisfactory, and sent to Infoshop on September 5, 2000. The EAs have also been approved by the State Environmental Protection Agency (SEPA) in September 2000. 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? During the twelve months leading up to the delivery of the provincial consolidated EAs and RAPs, many meetings took place with city PIUs, utility companies, city EPBs, and other affected city organizations to discuss the proposed project and the preparation of the sub-component environmental assessment reports. These meetings took place monthly at a minimum and resulted in full collaboration of local officials and community representatives, leading to the full support of the project and the EA process. In addition, the TORs for the EAs, the draft EAs, and the final EAs were made available publicly in each of the project municipalities. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? Besides regular environmental reviews to be carried out during supervision missions, the Annual Safeguard Compliance Report (see Section 5.2) will provide a year by year snapshot of progress on the environmental - 10-  front. Project monitoring indicators (available in project files) will systematically measure the environmental impact of the project. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. The principal social issue is resettlement and the temporary/permanent acquisition of productive parcels of land. Avoiding resettlement and minimizing impact on cropland where possible were key objectives during project design; as a result, resettlement impacts are not large and project affected people (PAP) are scattered throughout the project areas. Compensation for PAP will be in accordance with OD 4.30. Annex 11 provides the number of PAPs in each province, and the resettlement budgets required. A detailed implementation schedule for the resettlement program has been drawn up and would involve the PMOs and the municipal governments. The specific compensation and relocation-related activities, which need to be completed before construction can commence, have been clearly listed in the RAPs, which are available in project files. The RAPs have been reviewed and are considered acceptable. 6.2 Participatory Approach: How are key stakeholders participating in the project? The provincial and municipal governments are the key players in project preparation and implementation. Section 5.4 above and 6.3 below describe the consultations with stakeholders, including PAPs. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? A number of meetings took place between project proponents and representatives of local communities to solicit views and concerns. In the absence of local NGOs in China, the interests of most communities are represented by elected and appointed representatives. The entire process of resettlement planning has been participatory. Censuses and socio-economic surveys were conducted with the full participation of the affected persons. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? The PMOs have direct responsibility for ensuring that the project development objectives are achieved. The affordability analysis confirms that even the poorest strata of society in the project municipalities can benefit from the project. Section 6.5 below describes the monitoring arrangements being put in place. 6.5 How will the project monitor performance in terms of social development outcomes? An internal and external monitoring system has been set up. The internal monitoring report will be submitted to the Bank twice a year and the external monitoring report will be prepared by the independent monitoring unit once a year. RAP implementation will also be monitored by regular visits of experts from the Beijing Office, and during full supervision missions. The Annual Safeguard Compliance Report will highlight issues as they arise both to provincial and municipal authorities, as well as to Bank management, for appropriate action. - 11 -  7. Safeguard Policies: 7.1 Do any of the following safeguard policies apply to the proect? :olicy I A; p pl: : L:LL002 SA; :tiV:00iS LLL'S iLiL.<ft:0022L00 ic abl ity Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) * Yes 0 No Natural habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes * No Forestry (OP 4.36, GP 4.36) 0 Yes 0 No Pest Management (OP 4.09) 0 Yes * No Cultural Property (OPN 11.03) 0 Yes 0 No Indigenous Peoples (OD 4.20) 0 Yes * No Involuntary Resettlement (OD 4.30) 0 Yes 0 No Safety of Dams (OP 4.37, BP 4.37) 0 Yes * No Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) 0 Yes * No Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60) 0 Yes 0 No 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. Compliance will be monitored during supervision and through the Annual Safeguard Compliance Report. F. Sustainability and Risks 1. Sustainability: The pollution reduction, institutional, and financial benefits of the project are expected to be sustainable because of the overall commitment at all levels of Government to pollution control in river basins, and in particular in the HRB, as well as: (a) the actions already taken to establish WCs under company law; (b) enactment of tariff regulation 1192 to ensure financial viability; (c) financial covenants under the project to ensure adequacy of tariffs; (d) provision of technical assistance for institutional development and construction management; and (e) staff training. - 12 -  2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Risk Risk Rating Risk Mitigation Measure From Outputs to Objective Efficient operation and maintenance of M Institutional development and training support sewerage networks and treatment plans. for staff of WCs in operations and maintenance. Use of performance indicators to measure capacity utilization of treatment plants, and staff training. Availability of adequate funding for M Financial covenants require WCs to annually operations and maintenance. review adequacy of tariffs to meet O&M costs and depreciation/debt service. Use of perfonmance indicators to measure financial well being of WCs. M Strong senior level interest at the levels of Extensive discussions with the PMOs on the the provinces, municipalities, and WCs in Terms of Reference of the institutional the outputs of the institutional development consultants. Signing of development consultants, and in consultants' contract made a condition of implementation of agreed proposals. disbursement for civil works. Use of performance indicators to measure impact of institutional development. From Components to Outputs Implementation of the Project M Strong ownership of the PIP, and in particular Implementation Plan (PIP) by the the PPP, by the provinces, municipalities, and provinces and the municipalities, with the WCs. Use of performance indicators to particular reference to the Project measure physical, institutional, and financial Procurement Plan (PPP), outputs and outcomes of the project. Use of counterpart funding, and construction financial covenant to ensure timely availability management. of required counterpart funding. Technical assistance support for construction management is a condition for disbursement for civil works. Overall Risk Rating M Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) - 13 -  3. Possible Controversial Aspects: The on-going Shandong Environment Project is currently rated "unsatisfactory" on implementation progress because of issues relating to land acquisition and resettlement in the water supply and wastewater components in Jinan Municipality. The Shandong PMO is working with the Bank's Shandong Environment Project Task Team to resolve the pending issues of adequate compensation to the PAPs. It is felt that these issues are best addressed under the Shandong Environment Project and that a formal linkage with the proposed Huai River Project would not be appropriate. Land acquisition and resettlement had already taken place for six government and/or bilateral funded wastewater treatment plants that were under construction in six participating municipalities in Anhui Province during the review and approval of the Project Concept Document (PCD). Although these treatment plants are not part of the project, the task team reviewed the related land acquisition and resettlement issues with the relevant agencies, and is of the view that these were carried out in accordance with Chinese regulations and practices. The review further revealed no outstanding resetflement issues. G. Main Loan Conditions 1. Effectiveness Condition lI Execution of at least six (of eight) subsidiary loan agreements (SLAs) satisfactory to the Bank between the project municipalities and their wastewater companies in Anhui Province, and three (of five) SLAs in Shandong Province. 2. Other [classify according to covenant types used in the Legal Agreements.] Disbursement conditions. Signing of contracts by the two provinces with consultants for institutional development and construction management would be a condition for disbursement under the civil works category. Execution of SLAs would be a condition for disbursement for the WCs and the Chengwu Paper Mill for the civil works and goods categories. Implementation covenants. Assurances were obtained at Negotiations from the Anhui and the Shandong provincial governments that they would: (a) implement the Institutional Development Plan agreed with the Bank; (b) carry out or cause to be carried out, the resettlement of persons affected by the project according to the RAPs in a manner satisfactory to the Bank; (c) cause the PIUs to carry out the mitigation plans specified in the EA in a manner satisfactory to the Bank; (d) maintain the PMOs and PIUs throughout implementation with adequate qualified staff, assisted by qualified staff from Construction Supervision Companies; and (e) cause the municipalities to prepare, and fumish to the Bank for review through the provincial PMOs, annual plans from 2002 for, and reports on: (i) improved maintenance of drainage and combined sewerage; (ii) regular desludging of septic tanks; and (iii) enforcement of regulations regarding the quality of industrial wastewater discharged into public sewers. - 14 -  Financial covenants. At Negotiations assurances were obtained from the Provincial Governments that they would: (a) open Special Account (SA) in commercial banks on terrms acceptable to the Bank, maintain records of expenditures with respect to withdrawals from SA and ensure that these records are audited by independent auditors, and furnish to the Bank the audited records (including an opinion on the statement of expenditure and the operation of the Special Accounts) within six months of the closing of the fiscal year; (b) ensure that the municipal authorities regularly deposit municipal government contributions into a municipal deposit account for the project, based on regularly updated funding forecasts; (c) cause municipalities to (i) prepare (and furnish to the Bank) an annual assessment by September 30 each year regarding the adequacy of wastewater tariffs to ensure that revenues cover operating and maintenance costs, the greater of depreciation or debt service, and changes in working capital requirements; and (ii) effect the required changes to tariffs in a timely fashion; (d) cause the accounts of each WC and the Chengwu Paper Mill to be audited by independent auditors, acceptable to the Bank, and furnish to the Bank the audited statements along with relevant reports within six months of the closing of the fiscal year; (e) cause the wastewater company to take such measures as deemed necessary to ensure that by December 31, 2001 the accounts receivable resulting from its provision of wastewater services to customers does not exceed an amount equal to three months of related billings, and take steps to gradually reduce accounts receivable to 1.75 months by 2005; and (f) cause the Chengwu Paper Mill to achieve or exceed (i) a current ratio of 2, (ii) a quick ratio of 0.8, and (iii) a debt service coverage of 1.2; and not undertake any additional debt during the life of the loan unless a financial forecast demonstrates that a debt service coverage ratio of 1.5 will be maintained. Reporting and monitoring. At Negotiations assurances were obtained from the Anhui and the Shandong Provincial Governments that they would: (a) furnish to the Bank consolidated provincial reports every six months as per agreed formats, within thirty days after the end of each half year; (b) furnish by March 31 each year an Annual Safeguard Compliance Report on the status of compliance with EAs and RAPs; and (c) carry out jointly with the Bank a mid term review of the project by March 31, 2003, and implement agreed recommendations. H. Readiness for Implementation 1 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. LI 1. b) Not applicable. 3 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. 1 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. L 4. The following items are lacking and are discussed under loan conditions (Section G): - 15 -  I. Compliance with Bank Policies E 1. This project complies with all applicable Bank policies. C 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. ikEdouard Henri Motte Keshav Va Team Leader Cranager Country Manager -16-  Annex 1: Project Design Summary CHINA: Huai River Pollution Control Project Key Performance Hierarchy of Objectives Indicators Monitoring & Evaluation Critical Assumptions Sector-related CAS Goal: Sector Indicators: Sectorl country reports: (from Goal to Bank Mission) Improve water quality in Required policy framework Reports of SEPA, river Control of non-point major river basins in China. in place; well functioning basin commissions, and pollution, introduction of institutions for basin other relevant environment-friendly management, pollution ministries/agencies, as well technology in industries, control, and monitoring; and as Provincial Statistical enforcement of water essential infrastructure is in Yearbooks. pollution control legislation place. in China. Project Development Outcome / Impact Project reports: (from Objective to Goal) Objective: Indicators: Upgrading water quality in Treatment of domestic and Capacity utilization of Parallel environmental Huai River Basin in the industrial pollution in the treatment plants, and water activities in the Basin, with provinces of Anhui and waste water treatment quality data in Huai Basin similar objectives, are Shandong. plants of the project cities in the two provinces successfully implemented. up to installed capacity. published by SEPA, HRBC and Provincial EPBs. Areas for improvement will be identified and measures to achieve them will be proposed. Establishment of well Appropriate staffing, staff Semi-annual progress Policy support at the performing and sustainable training, and successful reports on institutional and national level, and at the wastewater agencies in the institutional development. financial indicators, and level of the two provinces, two provinces. Achievement of major annual reports of for the development of project financial covenants. wastewater companies. waste water companies as Appropriate remedial public service organizations actions, if any are required, operating on sound will be identified and commercial principles. agreed. - 17-  Key PdiM ai" Hierrcly oi Objicfr j .~ctr tMni:toring & Evjuwation ICritical AsumptionSL Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: In both Anhui and Shandong: (a) Enhanced wastewater Timely completion of Periodic reports from Efficient operation and collection systems. physical works as per Construction Management required maintenance of agreed volumes, and at the Consultants, and sewerage networks and (b) Construction of requisite level of quality. semi-annual progress treatment plants. treatment plants. reports from each province. Availability of adequate funding for operations and maintenance. (c) Institutional Development of necessary Appropriate remedial Strong senior level interest development and training. regulatory, institutional, actions, if any are required, and support at the levels of financial, and operating will be identified and the provinces, policies, systems, and agreed. municipalities, and waste procedures. Provision of on Periodic reports from water companies in the the job, on-site, and off site Institutional Development outputs of the Institutional training (including overseas Consultants, and Development Consultants, study tours) as per plan. semi-annual progress and timely implementation reports from each province. of the agreed proposals. Appropriate remedial actions, if any are required, will be identified and agreed. - 18-  Key PeRformance Hierarchy of Objectives Indicators Monitoring & Evaluation Critical Assumptions Project Components I Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) Anhui component: $152.08 million. Bank supervision missions Implementation of the PIP Municipal wastewater and Project Supervision by the municipalities and facilities: Reports (PSRs), the province, with particular 170 km of secondary sewers semi-annual progress reference to the PPP; 453 km of interceptors reports from the provinces, counterpart funding; and 10 km of pumping mains and other implementing good construction 27 pumping stations agencies, project mid-term management. 2 treatment plants review, and Implementation (total 80,000 m3/d). Completion Report (ICR). Technical assistance support for construction management and institutional development, and training. Shandong component: $74.81 million. Bank supervision missions Implementation of the PIP Municipal wastewater and PSRs, semi-annual by the municipalities and facilities: progress reports from the the province, with particular 29 km of secondary sewers provinces, and other reference to the PPP; 109 km of interceptors implementing agencies, counterpart funding; and 31 km of pumping mains project mid-term review, good construction 7 pumping stations and ICR. management. 3 treatment plants (total 220,000 m3/d). Industrial wastewater treatment plant at Chengwu Paper Mill (20,000m3/d). Technical assistance support for construction management and institutional development, and training. -19 -  Performance Indicators 1 . The framework of project performance indicators - comprising output indicators and impact indicators - was discussed with the two provinces at appraisal, and the draft baseline and milestone indicators from Shandong Province were reviewed at Negotiations. The framework and the basis for determining baseline and milestone indicators were again reviewed with Anhui Province at Negotiations. Both provinces will furnish the final draft of the baseline and annual milestones during the project (as well as five years after the end of the project) on the agreed framework for Bank review, prior to annexing them to the supplemental letter which will be signed at the same time as the signing of the legal agreements. 2. Weights. Based on the investment amounts in the two provinces, and their relative importance, Anhui Province will have a weight of 67% and Shandong Province, 33%. Within each province, relative weights have been assigned for the participating municipal WCs and the Chengwu Paper Mill. The eight municipal WCs have been assigned equal weights of 12.5% within the Anhui component. In the case of Shandong Province, the three municipal WCs, the Juxian WC, and the Chengwu Paper Mill have each been assigned equal weights of 20%. 3. Indicators for WCs. Performance of the municipal WCs will be evaluated against three broad indicators: physical, with five sub-indicators; institutional, with three sub-indicators; and financial, with three sub-indicators. Physical indicators will have a weight of 60%, while institutional and financial indicators will each have a weight of 20%. The sub-indicators in each category, and their respective weights are as follows: (a) Physical Indicators - lengths of (i) combined sewers, (ii) sanitary sewers, and (iii) interceptors; treatment capacity; and volume of wastewater treated. Each of these five sub-indicators will have equal weights of 20%, within the weight for physical indicators. The first four are output indicators, whilst the fifth is an impact indicator. (b) Institutional Indicators - number of staff; staff training; and impact of institutional development. Within the weight for institutional indicators, the first two will have a weight of 25% each, while the third will have a weight of 50%. The first two are output indicators, whilst the third is an impact indicator. (c) Financial Indicators - net income; debt service coverage; and accounts receivable. All three are impact indicators. Within the weight for financial indicators, net income will have a weight of 50%, whilst the other two have weights of 25% each. 4. Chengwu Paper Mill. Performance of Chengwu Paper Mill will be measured by physical indicators (with sub-indicators of treatmnent capacity, treated output, and output quality) andfinancial indicators (quick ratio, current ratio, and debt service coverage ratio), each having a weight of 50%. All sub-indicators, except treatment capacity, are impact indicators. The physical sub-indicators will have weights of 20%, 40%, and 40%, within the overall weight for physical indicators, while the corresponding percentages for the financial sub-indicators will be 25%, 25%, and 50%. 5. Assessment of performance. Guidelines for scoring performance against forecasts have been agreed with the two provinces, and are included in the Minutes of Negotiations. A score of 80 or higher out of 100 would constitute satisfactory performance. - 20 -  Annex 2: Detailed Project Description CHINA: Huai River Pollution Control Project 1. The Huai River Basin lies in the center of China, between the Yangtze and the Yellow Rivers. The Basin is divided into two major systems: the Huai River System (190,000 km2) originating in the west, which is about 1,000 km long with 120 tributaries, flows east and east-south through Hongze Lake and discharges into the Yangtze River. The Yi-Shu-Si River System (80,000 km2) originates in the north, flows southwest and discharges into the Yellow Sea. The Grand Canal connects the Huai and Yi-Shu-Si systems as well as the Yangtze and Yellow rivers. Annex 4 contains a description of the Huai River Basin, an economic overview of Anhui and Shandong provinces, the criteria for city selection, and the basis for determining the investment program. By Component: Project Component 1 - US$152.08 million Anhui Province 2. Wastewater Investments. This component supports investments in wastewater systems in eight municipalities: Bengbu, Bozhou, Fuyang, Guoyang, Huaibei, Huainan, Luan, and Suzhou. These investments support the implementation of the first phase of the wastewater Master Plan in each municipality. Investments include: construction of secondary sewers and house connections; interceptors; pumping stations; and pumping/transmission mains. The component will also finance the constraction of wastewater treatment plants (oxidation ditch, with effluent quality of biological oxygen demand {BOD} and suspended solids below 30 milligrams per liter) in the municipalities of Guoyang and Luan. Wastewater treatment plants are already under construction in the remaining six municipalities (Bengbu, 100,000 m3/d; Bozhou, 80,000 m31d; Fuyang, 100,000 m3/d; Huaibei, 80,000 m3/d; Huainan, 100,000 m3/d; and Suzhou, 80,000 m3/d) supported by German, Spanish, Netherlands, and Norwegian bi-lateral agencies and/or by national programs. Completion of these works is planned for 2001 and 2002. Table below summarizes the wastewater investments supported by this component. Summary of Anhui Province Wastewater Investments Municipality Secondary Interceptors Pumping Pumping Treatment Sewers Mains Stations Plant KMs KMs KMs m3/day Bengbu 28.5 70.4 1.5 5 Bozhou 10.0 58.3 - 4 - Fuyang 10.0 81.7 3.0 4 - Guoyang 35.0 36.1 - 1 40,000 Huaibei 28.5 70.4 - 5 - Huainan 39.0 48.6 2.6 4 - Luan 5.0 28.3 2.4 3 40,000 Suzhou 22.0 47.6 0.5 3 - 3. Anhui monitoring center. This component will support strengthening the capacity of the Anhui Environmental Monitoring Center (AEMC), which is the reference laboratory for environmental monitoring within the province, by: (a) upgrading equipment in AEMC and municipal laboratories; (b) providing vehicles for field sampling; and (c) improving technical and managerial skills of staff. -21 -  4. Technical assistance and training. The Anhui component includes technical assistance for institutional development of the Anhui WCs and for construction management, and supports in-country and selected overseas training of staff of the WCs and other relevant project agencies. Project Component 2 - US$74.81 million Shandong Province 5. Wastewater investments. This component supports investments in wastewater systems in three municipalities: Feicheng, Heze, and Rizhao; in addition, it supports investments in Juxian in Rizhao municipality. Investments include: construction of secondary sewers and house connections; interceptors; pumping stations; pumping/transmission mains; and wastewater treatment plants (oxidation ditch, with effluent quality of BOD and suspended solids below 30 milligrams per liter). Table below summarizes the wastewater investments in Shandong under this component. Summary of Shandong Province Wastewater Investments Municipality Secondary Interceptors Pumping Pumping Treatment Sewers Mains Stations Plant KMs KMs KMs m3/day Feicheng 4.5 - 19.5 - 40,000 Heze 21.6 54.6 - 4 80,000 Rizhao 2.0 39.5 11.6 3 100,000 Juxian 1.0 15.0 - - - 6. Chengwu Paper Mill. The Shandong component would support separation of wastewater generated by the mill. The black liquor treatment section (capacity of 1,200 m3/d) would comprise evaporation, incineration, and soda ash recovery. The condensate from evaporation, combined with wastewater from the bleaching and paper processes, would be treated in an activated sludge section (capacity 20,000 m3/d) with nutrient addition. Generated sludge would be deposited in the Mill's own sanitary landfill. The project does not include any modification to existing manufacturing processes. The loan would finance $5 million equivalent of equipment and services, out of a total sub-project cost of $10.9 million equivalent. Civil works and other related costs would be financed by intemal funds and equity contribution from the Shandong EPB. 7. Technical assistance and training. The Shandong technical assistance and training component is similar to the Anhui component (see paragraph 4 above). - 22 -  Annex 3: Estimated Project Costs CHINA: Huai River Pollution Control Project Project Component Local Foreign Total (USS millic n) Anhui Component Sanitary sewers, interceptors 45.94 38.63 84.57 Pumping stations (including office and stores) 5.47 7.50 12.97 Wastewater treatment plants 6.68 7.56 14.24 Operational equipment and vehicles 0.51 1.52 2.03 Anhui environmental monitoring center 0.20 0.49 0.69 Services. training and study tours 2.64 1.97 4.61 Anhui Component Sub-Total 61.44 57.67 119.11 Shandon_ Component Sanitarv sewers. interceptors 9.51 7.91 17.42 Pumping stations 2.19 2.49 4.68 Wastewater treatment niants (incl. offices & stores) 12.48 17.40 29.88 Operational equipment and vehicles 0.21 0.62 0.83 Services, training and study tours 1.82 0.90 2.72 Shandong Component Sub-Total 26.21 29.32 55.53 Total Baseline Costs 87.65 86.99 174.64 Physical Contingencies 10.07 10.17 20.24 Price Contingencies 6.50 6.08 12.58 Total Project Costs a). b) 104.22 103.24 207.46 Interest during construction 3.68 14.70 18.38 Front-end-fee (.0 1.05 1.05 Total Financing Required 107.90 1,18.99 226.89 a) Includes land acquisition of US$ 3.4 million equivalent b) Includes taxes and duties of US$ 25.0 million equivalent c) Final digits may not add due to rounding. Project Cost by Categories Category Local I Foreign Total (US$ million) Works 85.10 69.00 154.10 Goods 10.11 30.96 41.07 Services. training and study tours 5.45 3.28 8.73 Land acquisition and resettlement 3.56 0.00 3.56 Total Project Costs 104.22 103.24 207.46 Interest during construction 3.68 14.71) 18.38 Front-end-fee 0.0 1.05 1.05 Total Financing Required 107.90 118.99 226.89 - 23 -  Project Cost by Categories - Anhui component Category Local Foreign Total 0 (US$ million) Works 64.20 51.19 115.39 Goods 3.30 13.87 17.17 Services, training and study tours 3.05 2.35 5.40 Land acquisition and resettlement 1.59 0.00 1.59 Total Project Costs 72.14 67.41 139.55 Interest during construction 1.90 9.92 11.82 Front-end-fee 0.00 0.71 0.71 Total Financing Required 74.04 78.04 152.08 Project Cost by Categories - Shandong component Category Local Foreign Total (US$ million) Works 20.90 17.81 38.71 Goods 6.81 17.09 23.90 Services, training and study tours 2.40 0.93 3.33 Land acquisition and resettlement 1.97 0.00 1.97 Total Project Costs 32.08 35.83 67.91 Interest during construction 1.78 4.78 6.56 Front-end-fee 0.00 0.34 0.34 Total Financing Required 33.86 40.95 74.81 - 24 -  Annex 4: Cost Effectiveness Analysis Summary CHINA: Huai River Pollution Control Project A. Economic Analysis 1. The River Basin. The Huai River Basin lies across four provinces in the center of China: Henan, Anhui, Shandong and Jiangsu, covering an area of 270,000 km2 between the Yangtze and Yellow Rivers and the Yellow Sea. These four provinces have a combined population of about 315 million, of which approximately 45% are estimated to live in the Huai River catchment. The economic and environmental impacts of water pollution in the Huai River Basin area are acute. Growing urban population and industrialization are causing widespread pollution, and environmental problems have become a central issue in urban centers in the basin as the benefits of the recent economic expansion have been accompanied by serious environmental degradation. In 1996, the river water was classified as Class V or worse in 46% of the river water quality monitoring sections. Pollution in the Basin is mainly due to organic matter and is attributed to untreated industrial and municipal wastewater discharge, and non-point agricultural sources. The Basin rivers are the source of water supply for several million people. Urban redevelopment, fueled by increased wealth and industrialization, has increased water demand substantially, which calls for increased protection of available water. 2. The 1994 pollution incident in the Huai River Basin caused power station malfunctions, destruction of fishery resources, and widespread agricultural and industrial damages. Urban water sources were also affected, resulting in significant shortages for the residents of the downstream cities. Direct economic damages were estimated at over one billion yuan. This prompted the initiation of a major initiative, led by the State Council, for the clean up of the river. The national goal calls for construction of wastewater collection and secondary treatment facilities for major cities within the Basin. 3. Significant efforts, including the closure of a large ntimber of polluting industries, were made. However, the achievement of targets set by the State Council is delayed, with provision of municipal wastewater control facilities in particular lagging far behind the program. A number of cities have completed or are currently building wastewater treatment facilities with international assistance and domestic funding (Table 1). Table 1: Huai River Basin - Municipal Wastewater Treatment Plants Planned Municipal Wastewater Status of Municipal WTP in Huai Basin Tret 't Plants in Huai Basin athe end-1999 1997 2000 Under Recently Province construction started Capacity Number Number Capacity Number Number (m3/day) (m3/day) Henan 0 27 1.350.000 9 0 960 000 Anhui 0 18 1.256.000 7 4 860.000 Shandong 0 14 760.000 7 2 610.000 Jangsu 0 14 390.000 6 3 310.000 Total 0 73 3.756.000 29 9 2.740.000 Source: SEPA unpublished material. 4. Focus of the project. The proposed project has been designed as part of the efforts to meet water pollution control targets in the Huai Basin. By supplementing ongoing efforts, it will significantly contribute towards achieving the overall pollution targets for the Basin. The project is concerned with assisting larger cities in two of the four provinces - Shandong and Anhui. The combined area of the two - 25 -  provinces within the Huai catchment represents 42% of the total Basin area. In total eight and four urban centers will be assisted through the project in Anhui and Shandong respectively, and one industrial enterprise, the Chengwu Paper Mill in Shandong. Table 2: Area of Project Provinces and Project Area Province Area in Huai River Province Province Area Total Catchment (km) (km2) Anhui 139.427 66,940 ShandonI 156J700 53.088 Total 1 296.127 120.028 Source: Provincial Yearbook Table 3: Total and Project Population in the Provinces Province Total Population Population in Huai Basin (million in 1998) (million in 1998) Total Urban Total Urban Anhui 61.3 11.2 34.7 4.6 Shandong 87.8 13.0 32.3 3.1 Total 149.1 23.6 66.9 7.7 Source: Provincial Yearbook and PMO data 5. Anhui Province extends over the center of the Huai River Basin. The length of the main stream of the Huai River in the province is 420 km and the length of the tributaries is 1,580 km. River pollution is mainly organic, with sections in urban reaches being more polluted than the rural sections, and the tributaries being more seriously polluted than the main stream. 6. Anhui is an inland province in eastern China with a population of around 61.5 million, 19% of which is classified as "non-agricultural". (All data are from the Provincial Statistical Yearbook, 1998, unless otherwise stated). Overall population growth in the province has been around 1.1% per annum in the 90s, while urban population growth has increased fairly rapidly (at around 3.7% per annum), indicating the extent of migration to the cities. There are 22 cities in the province, of which only the capital Hefei has more than one million urban inhabitants (Hefei municipality has a population of 4.3 million.) Provincial GDP in 1998 was RMB 280 billion of which 26% was in the primary, 45% in the secondary, and 29% in the tertiary sectors. Real growth rates in the primary, secondary, and tertiary sectors have averaged 4%, 15%, and 12% respectively over the last 13 years. As the industrial and service sectors are expected to continue to grow rapidly, urbanization and pressure on urban services are also expected to grow. Urban disposable incomes have increased by about 17% (rural incomes by 13%) to reach per capita values of RMB 4,770 in the urban areas and RMB 1,863 in the rural areas. Average household size is 3.83, with 1.85 wage eamers per household. Anhui is ranked fourteenth for GDP, but seventh for population nationally. Per capita GDP is therefore lower than in other provinces in the top half of the output league. It is in the top eight provinces in terms of the gross output value of fanning, forestry and fisheries. The major products of the province are: machine made paper and paperboards, detergents, edible vegetable oil, canned food, alcoholic beverages, Chinese medicines, refrigerators, washing machines, coal, pig iron, steel, cement, timber, sulfuric acid and chemical fertilizers. 7. Shandong Province includes most of the Yi-Shu-Si System of the Huai River Basin, which is hydrologically connected to the Huai River via the Grand Canal but flows directly to the Yellow Sea. Pollution is mainly organic with sections in urban areas being more polluted than rural reaches. - 26 -  8. Shandong is a coastal province in eastern China, in the northern part of the Huai River Basin, with a 1998 population of around 88.7 million, 26% of which is classified as non-agricultural. Jinan is the Provincial capital, with a population in the whole prefecture of 5.5 million. Population growth in the province has been around 1.1 %, while urban population has increased at around 8.5% per annum, indicating the extent of migration to the cities. Provincial GDP in 1998 was RMB 720 billion, of which 17% was in the primary, 48% in the secondary, and 35% in the tertiary sector. Real growth rates in the primary, secondary, and tertiary sectors have averaged 5%, 16%, and 13% respectively over the last 13 years. Incomes have reached per capita values of RMB 5,380 in urban areas and RMB 2,453 in rural areas. Average household size is 3.14, with 1.98 wage earners per household. Shandong is one of China's economic powerhouses, with the third highest GDP after Guangdong and Jiangsu Provinces. It is also one of the most populous provinces. It is China's major producer of machine made paper and paperboard, and the largest producer of salt, vegetable oil, alcoholic beverages, cement, soda ash, caustic soda and tires. Other major products of Shandong include cigarettes, crude oil, electricity, pig iron, steel and steel products, plate glass, sulfuric acid, coal, chemical fertilizers acid, and electric motors. 9. Criteria for selection of cities. The project cities in the two provinces were selected based on several criteria, as follows: (i) the proposed investment scheme must be approved within the Ninth Five Year Plan (1996-2000) and must follow national and provincial environmental protection policies and regulations; (ii) a city master plan must be available; (iii) the city must show keen interest in participating in the project and the project must represent a priority investment within the city environmental and capital development plan; (iv) financially, the selected city must be in good standing and local counterpart funding must be allocated; (v) in case industrial components are proposed, the city must be willing to guarantee the industrial borrower; and (vi) the city must subscribe to the principle of cost recovery and institutional reforms, including agreeing to tariff increases and forming wastewater companies. Among the cities complying with these conditions, those that had already initiated construction of treatment works, but experienced a shortage of funds to develop/complete the network were given preference, so that the benefits of treatrnent (and of existing investments) could be maxirnized within the shortest possible time. 10. Selected data for the project cities is presented in the two following tables. Table 4: Anhui - Current and Projected Population in Project Area, Water Demand and Generated Wastewater City 1999 2010 Population Water Generated Population Water Generated in Project Demand Wastewater in Project Demand Wastewater Area Lm/Ld) (m/d) Area (m3/d) (m3/d) Huaibei 250.000 90.000 75.000 360.000 150.000 120,000 Ben2bu 550.000 230.000 150.000 655.000 335.000 236.000 Huainan 390.000 190.000 120.000 42Q000 225.000 158.000 Fuyang 430.000 90.0000 0 6000 605.000 210,000 150,000 Bozhou 240.000 50.000 35.000 315.000 110.000 78.000 Suzhou 275.000 97.000 68.000 3 170.000 120,000 Luan 225000 122.000 80.000 400.000 22500 160,000 Guovane 110.000 55,000 33.000 155.000 95.000 66,000 Total 2,470.000 924,000 621.000 3.307.000 1,520,000 1,088.000 Source: Feasibility Study Report. - 27 -  Table 5: Shandong - Current and Projected Project Population, Water Demand and Generated Wastewater 1999 2010 City Water Generated Water Generated Population Demand Wastewater Population Demand Wastewater (m /d) (m3 /dl (m3 /d) (mildL Feichen2 130.000 62.300 38.200 211.000 104.500 76.200 Heze 300.000 125.000 86.000 410.000 174.000 128.000 Rizhao 280.000 108.000 87.000 365.000 199.000 159.000 Ju County 100.000 60.0 47,000 *200.000 106,000 67.000 Total 810.000 355.300 258.200 1.186.000 583.500 430.200 Source: Feasibility Study Report (* is 2020 data). B. Project Justification and Benefits I1. The main project objective is to contribute to the improvement of water quality in the entire Huai River Basin. This is to be achieved through: (i) provision of physical infrastructure; and (ii) establishment of efficient wastewater agencies (by developing autonomous entities, building capacity, improved cost-recovery, and improved management of the wastewater systems throughout the urban centers). This objective is in line with the China CAS, which aims at reducing environmental degradation, particularly in urban centers, and with the sector objective of providing new institutional models for the efficient organization of urban environmental services. 12. The physical investments consist of wastewater collection and disposal systems (in all twelve project locations) through rehabilitation and expansion of existing schemes; and additional treatment of sewage discharged to the rivers (in five cities, two of which in Anhui). These investments are the first steps towards long term clean up of the Huai Basin and the project will play a role in reaching the target of Total Quality Control in the Huai River Basin in the two provinces. However, the project will not be able in the short term to significantly improve the river water quality and reach the targeted standards by itself and substantial continuous effort is required to reduce both point and non-point source pollution. Overall, the project will contribute to about 20% of the entire clean-up program (621,000 m3/day of the 3.7 million m3/day planned to be treated as per Table 1 above). Table 6 shows the pollution (expressed in BOD and COD) that can be eliminated from the recipient rivers as a result of the project. 13. There is also a rapidly growing problem with water availability in the river basin and the reduction of bacteriological pollution will preserve the quality of surface water, which is being utilized downstream of the project cities. Improvements in water quality will also lead to an improvement in agricultural yields, since the receiving rivers' waters are used for irrigation. 14. Benefits from the wastewater schemes are mainly environmental and of a public nature, and it is difficult to translate them into monetary values, in part because of the difficulties in obtaining reliable data in the project areas. In a project of this nature, where the proposed interventions represent only a part of the very substantial investments required to reduce pollution of the river, it would not be appropriate to claim environmental and health benefits in isolation from the other interventions. The population that is targeted to benefit from the project is much larger than the residents of the cities and it involves a variety of downstream residents and economic activities. An economic analysis of the overall pollution reduction plan for the Huai River has not been undertaken, among other reasons because of the lack of reliable pollution monitoring data. - 28 -  Table 6: Water Pollution to be Controlled by the Project Total Pollution Generated in Total Pollution Reduced Province the City (in 2010) by the Project and Associated Investements BOD ton/day COD ton/day BOD ton/day COD ton/day Huaibei 23.0 43.0 14.4 24.0 Bengbu 60.0 113.0 18.0 30.0 Huainan 32.0 59.0 18.0 30.0 Fuvaniz 30.0 56.0 18.0 30.0 Bozhou 15.0 29.0 14.4 24.0 Suzhou 24.0 45.0 14.4 24.0 Luan 32.0 60.0 7.2 12.0 Guovan2 13.0 25.0 7.2 12.0 Total . 229.0 430.0 111.6 186.0 Shandoniz Feicheng 15.0 34.0 6.8 13.2 Heze 23.0 64.0 7.7 15.3 Rizhao 78.0 156.0 26.0 52.0 Ju Countv 75.0 41.0 6.8 15.2 Total 191.0 295.0 47.3 95.7 Source: Feasibility Study Report. 15. The feasibility report has attempted to quantify some of the expected benefits, such as amenity values, increase of property value in the urban centers where wastewater will be removed from the center of cities, increased agricultural yields for the downstream users, health benefits, etc. However, the quantification of these benefits requires broad assumptions and consistent data, neither of which can be provided for the project cities with a sufficient level of confidence. Based on the above considerations, the economic viability of the project has been determined through cost-effectiveness considerations, in particular through detailed least-cost analyses of the project components. 16. Least-cost solutions. A least cost analysis was undertaken for all project components and least-cost solutions were selected among the alternative technologies available for all project components. In particular, the criteria considered in the evaluation and selection of alternatives took into account: (i) the sewerage system interception ratio, pipe materials and pipeline construction, number of pump stations and pressure mains; (ii) number of wastewater treatment plants and their site selection; (iii) wastewater flows and capacity of the treatment plants, the quality of wastewater to be treated and the degree of, and options for, treatment; (iv) the use of septic tanks; (v) treated effluent standards, and (vi) sludge disposal considerations. Feasible technical options have then been compared based on their capital and operational costs, the amount of pollution that can be removed, and the alternative water quality outcomes. Solutions chosen are based on the present value of the investment for the maximum environmental benefit that can be obtained, as well as other criteria, such as ease of operation and maintenance, and need to reduce uncertainty on wastewater flows. In general, it is recognized that basin-wide water quality modeling efforts are needed to provide better predictive tools to assess the impacts and cost-effectiveness of the proposed interventions. Details of the analysis for each project component are available in the project files. 17. In addition to the benefits to be derived from the physical infrastructure components of the project, there will be benefits from the 'software' components, as follows: - 29 -  (a) The establishment of independent enterprises and the introduction of wastewater tariffs on the basis of the cost recovery principle will contribute to improvement and sustainability of services in the project cities. (b) The Anhui Monitoring Center sub-component will improve laboratory skills and capabilities, and collect and disseminate information on river water quality. (c) The septic tanks program, which will help determine and assess the number and condition of the existing septic tanks and initiate a program of regular emptying, cleaning, and monitoring, will contribute to pollution reduction in the urban sections of rivers and open channels. This program is quite innovative for China and, if successful, could be used as a model to be followed by other cities and provinces in the country. (d) Additionally, worldwide experience in other river basins demonstrates that, when similar approaches were taken, indirect incentives were immediately created for industries to accelerate the construction and improve the operation of their own pre-treatment systems so as to be able to connect to and use the public networks. This is also expected to happen in the Huai Basin. 18. Chengwu Mill. This component aims at abatement of an important industrial point source pollution affecting the Xuzhai section of the Dingyu River (which is an irrigation drainage canal), where the mill currently discharges. On completion of the project, the mill's wastewater effluent will reach the required Chinese discharge standards and the water quality will be significantly improved, as about 90% of the pollution (or 2,400 t/y of COD) will be eliminated through the project. The considerations made for estimating the economic benefits of the quality of the effluents can also be made for this component of the project. Summary of benefits and costs: Main Assumptions: Cost-effectiveness indicators: - 30 -  Annex 5: Financial Summary CHINA: Huai River Pollution Control Project Project Financing Plan 1. The overall Project financing plan is shown below; detailed information is available in the project file. Huai River Pollution Control Project Financing Plan Cost Domestic Foreign Total Domestic Foreign Total US $ million RMB million % Engineering Estimate 104.22 103.24 207.46 865.0 856.9 1.721.9 91.4% Front End Fee 1.05 1.05 - 8.7 8.7 0.5% Interest during Construction 3.68 14.70 18.38 30.6 122.0 152.6 8.1% Total 107.90 118.99 226.89 895.6 987.6 1.883.3 100% Financing Intemal Cash Generation 22.84 13.491 36.331 189.6 ] 112.0 1 301.6 16.0% Grant Equity Contribution _ Equity Contribution 1.93 - 1.93 16.0 - 16.0 0.8% State Grant 17.90 17.90 148.6 148.6 7.9% Urban Maint. Constr. Tax 34.86 34.86 289.4 4 15.4% Sewerage Construction Fee 5.70 5.70 47.3 - 47.3 2.5% Subtotal 60.39 - 60.391 501.3 1 - 501.3 .26.% Loan World Bank Loan - 105.50 105.50 - 875.7 875.7 46.5% Local Bond 10.94 - 10.94 90.8 90.8 4.8% Domestic Bank Loan 13.73 - 13.73 114.0 114.0 6.1% Subtotal 24.67 105.50 130.17 204.8 875.7 1.080.5 57.4% Total 107.90 118.99 226.89 895.6 987.6 1.883.3 100% 2. Project costs include construction cost, the front end fee associated with the Bank loan, and interest during construction. Sources of finance comprise the Bank loan; in the case of municipal wastewater investments - domestic loans, local bonds, municipal contributions from various sources, state grants and subsidies, sewerage construction fee, and internal cash generation; and for the Chengwu Paper Mill, a domestic loan, contributions from the local government and internal cash generation. Overall debt financing covers 57 % of project cost; internal cash generation and customer contributions, 19 %; and municipal finance and grants, the remaining 24 %. Although differences exist in the financing arrangements for each municipality, the overall structure appears reasonable, with a good balance between the three major sources of finance: customer contributions, including wastewater charges; grant and equity contribution; and debt. -31 -  Municipal Finances 3. On average, only 15% of the total project funds (or 28% of the local counterpart funds) will be provided through municipal taxes. This is relatively lower than for other recent projects of a similar nature in China. An analysis of local municipal finances is summarized in the table below. Detailed data for each project city are available in the project files. Municipal Contributions By Province 2001 2002 2003 2004 Project Period Anhui Contribution as % of Revenues 0.6% 0.9% 0.8% 0.3% 0.5% Contribution as % of Investment Capacity 5.4% 8.6% 6.9% 3.0% 4.9% Shandong Contribution as % of Revenues 0.7% 3.1% 3.0% 0.2% 1.7% Contribution as % of Investment Capacity 4.0% 19.8% 17.6% 1.1% 10.5% Source: Municipal Finance Bureaus and Mission data. 4. This analysis indicates that the project components are affordable in all cities. The amount required for project contributions are low in all cities compared to their municipal revenues (reaching a maximum of 3% in a municipality in Shandong). When the counterpart funding requirement is compared to the municipal capacity to mobilize capital investments in urban projects, the incidence of project costs varies substantially across cities, from as low as 2% in Bengbu (in Anhui Province) to a high of 19% over the project period in Feicheng (in Shandong Province). This variation is to be expected, considering the large variation in counterpart funding requirements across cities, and that there are different sources of funds earmarked for capital investment in the different cities. In general, a large share of these funds (about 75%) is derived from the urban maintenance construction tax, a reliable and well established source of funds for investment in Chinese cities. 5. To secure the timely availability of project counterpart funds, a special fund would be created and administered by the Municipal Finance Bureau (MFB) to collect the earmarked project counterpart funds. At the beginning of each year, the WC would submit to the MFB projections of contributions required from the municipality as counterpart funds. The MFB would then allocate the correct source of funds for collecting these revenues and in turn collect the funds. Loan Conditions for WCs 6. Table below indicates the terms and conditions of the loans to the WCs. The Bank loan agreement would be with the People's Republic of China, with relevant portions of the loan passed on to the two provinces, which in turn would enter into on-lending agreements with each of the municipalities. The municipalities would then on-lend the loan proceeds to the respective WCs. The final on-lending agreement to the WC would be on the same terms and conditions as the World Bank loan with the provision that a - 32 -  commitmnent fee equal to the Bank rate would be paid to the Ministry of Finance, even if the Bank waives this fee. Shandong Province would charge the WCs, through its Provincial Finance Bureau, an additional on-lending rate of 0.2% to 0.4%. Each WC would carry the foreign exchange risk. The WCs would also conclude loan agreernents with the respective domestic lenders. An effectiveness condition requires that at least six of the eight subsidiary loan agreements (SLAs) are executed in Anhui Province, and at least three of five in Shandong Province before the loan is declared effective. Executing the SLA would be a condition of disbursement for the individual WCs and the Chengwu Paper Mill. Te s and Cl)nditi ns of L ans Front Interest Commitment Maturity Grace Period End Fee Rate Fee Years Years World Bank Loan 1% 6.70% 0.75% 20 5 Natonal Bond 2.55% 10 4 Local Bank Anhui Province Bozhou 6.00% 10 4 Fuvana 6.21% 8 3 Guovang 6.21% 10 4 Luan 6.50% 10 4 Suzhou 6.21% _ 7 6 Shandong Provin ce Feichen_ 8.40% 8 3 Heze ______ J 6.21% _ = 8_ 3 Rizhao 7.00% 8 3 Chengwu Paper 6.21% 5 2 Tariffs 7. Overall wastewater tariff policy in the two provinces is aimed at initially assisting in the funding of major sewerage investment programs, and thereafter achieving financial sustainability of the WCs. This is achieved by provincial regulations that specify for the construction period a tariff level for wastewater operations (set at about 50% of the water tariff) with a doubling of the tariff once the installations have been put into service. The objective of financial sustainability was reinforced country wide in September 1999 with the joint promulgation of Circular 1192 by the SDPC, MOC, and SEPA; this circular envisages that WCs would become financially viable institutions through the implementation of wastewater tariffs covering the cost of operations and maintenance, and depreciation. 8. Wastewater fees have been assessed and collected from the following dates: Anhui Province - Bengbu, May 99; Bozhou, March 00; Fuyang, January 98; Guoyang, July 00; Huaibei, June 98; Huainan, March 99; Luan, June 00; Suzhou, May 99; and in Shandong Province - Feicheng, July 00; Heze, June 00; Rizhao, April 99. Through this early assessment and collection of wastewater fees, funds for financing the project were accumulated and experience gained in assessing, billing, and collecting the wastewater charges, in particular from water self-extractors. 9. Existing tariff policy has been appropriately covenanted, and agreement was reached at Negotiations that the provinces would ensure that the municipalities would set wastewater tariffs at levels - 33 -  which: (i) result in revenues covering operating and maintenance costs, the greater of depreciation or debt service, and changes in working capital requirements; and (ii) during the construction period of the proposed project, meet that part of the project financing requirements not covered through loans and any other contributions. 10. The table below summarizes the initial tariffs (note that for simplicity, after 2000 the table shows tariffs only in years where there is a tariff change), the tariff levels the municipalities agreed to implement over the construction period to 2004, and the increases required thereafter to meet the financial covenant. Wastewater Tariffs Tariff Schedule in RMB/m3 Agreed Tariff Levels up to year 2004 - end of Construction Period ANHUI Year Average Wastewater 2000 2001 2002 2003 2004 2005 2006 2007 2008 [ariff Ben2bu 0.35 _ 0.69 0.73 Bozhou 0.31 0.34 = 1.02 1.14 1.36 1.59 Luan 0.35 Huaibei 0.35 0.70 0.77 Suzhou 0.35 = = 0.52 0.86 Fuyang 0.33 0.43 0.64 1.16 1.36 1.37 Guovane 0.35 _ 0.47 1.25 1. 56 Huainan 0.34 _ 0.37 0.79 SHANDONG Feichene 0.21 0.40 0.57 0.74 Heze 0.38 = = = = = = = 0.71 Rizhao 0.25 _ 0.37 0.66 0.74 11. A periodic and comprehensive assessment of future tariff levels would ensure the continuing financial sustainability of each WC. The assessment would examine all technical, operational and financial aspects for containing cost, achieving operational efficiency, and ensuring timely collection of wastewater bills. Agreement was obtained at Negotiations that the WCs would, by October 1 of each year: (i) prepare an assessment of technical, operational, and financial procedures geared at cost containment, increasing operating efficiency, and timely bill collection; (ii) review whether the existing tariffs would be sufficient to meet the tariff covenant in the following year; (iii) outline a program of required tariff actions for review by the municipal and provincial authorities; (iv) complete the implementation of the findings of the operating efficiency review under (ii) above by January 1 of the following year; and (v) subsequent to the review under (iii) above, implement the future tariffs from January 1 of the following year. Affordability Analysis 12. A detailed analysis has been conducted to assess the affordability of the suggested wastewater tariff increases over and beyond the project period. Data collected for average consumption level, incomes, and affordability have been compared with similar projects in China and with recent analysis performed nationwide for MOC. The table below presents summary information for the two provinces and for two - 34 -  income groups, those with average income and those in the lowest 20% of the income distribution. Detailed city by city data are available in the project files. Prices are assumed to be increasing over time, while income levels have been kept constant (at 1999 level). As urban income levels have increased substantially in recent years in China, this provides an additional level of conservatism in the assumptions. It should be further noted that official data on income tend to underestimate real income levels. 13. The results show that the percentage of household income which will be spent on water and wastewater in 2005, the end of the project period, will be around 2% in Anhui and 1% in Shandong (this is due to lower tariffs for domestic consumers in Shandong). Although this represents an increase from current levels (about 0.6% of income for the urban resident and 0.84% for the very poor was spent on water according to Anhui household surveys in 1997), it remains well below what is considered affordable in China and according to intemational practice. Projections with water consumption increasing twofold by the year 2005 (keeping other variables constant) indicate that the percentage of income spent on water and wastewater would increase to 2.5% on average. Affordability would start becoming an issue only if consumption were to increase three fold. Affordability Of Wastewater Tariffs Anhui Province Shandong Province Water tariff in 2005 (Y/m3) 0.92 0.81 Waste Water tariff in 2005 (Y/m3) 0.82 0.27 Average household Disposable income (yuan/month) 1.413 1,746 Persons per households 3.2 3.4 Water use (m3/month/household) 14.0 15.4 Water use (lncd) 143.8 149.0 Water cost (yuan/month) 13.0 12.3 Wastewater cost (yuan/month) 11.6 4.1 Water and wastewater as a share of 1.75% 0.98% income Low income household Disposable income (yuan/month) 1.003 1.422 Persons per households 3.4 3.8 Water use (m3/month/household) 7.4 12.1 Water use (1Icd) 72.4 104.3 Water cost (yuan/month) 6.6 9.7 Wastewater cost (yuan/month) 5.9 3.2 Water and wastewater as a share of 1.28% 0.94% income Notes: 1999 Income levels and 2005 water and wastewater prices Data from the Cities and Consultant Reports 14. It should be further noted that the majority of the urban centers in China have started anticipating problems arising from tariff increases on their poorest residents. Mechanisms in the National Guidelines for Water (and similar Guidelines being developed for wastewater) provide for additional grants for citizens - 35 -  on welfare, and special exemptions or cash rebates for the very poor. Similar provisions are expected to be applied over time in the project cities. Collection Arrangements 15. The water supply company bills and collects the wastewater charge against a fee ranging from 1 to 3% of collected wastewater revenues, with temporary fees of 4% and 10% in two cases. The Water Resources Management Unit (part of the Municipal Construction Commission), the Municipal Engineering Management Department, or occasionally the water supply company, collects the wastewater charge of customers with their own water sources. The differences in the source of water and billing arrangements greatly impact the collection results. 16. Accounts receivable for wastewater revenues for water supply customers come to about two months of related charges; however, they average to about five months of related charges for customers that provide their own water. Agreement was reached at Negotiations that the provinces will ensure that the WCs would take steps to improve collection so that accounts receivable will not exceed three months of sale in 2001. 17. Wastewater tariff receipts are and will continue to be deposited into a separate account with the municipal finance bureau. At present salaries, wages, and office expenses are covered from this account, with payments made by the WC under advances from this account. The municipal finance bureau will control wastewater tariff receipts for some more time through direct deposit by the collecting agencies into the special project account of the wastewater company. However with increased operational responsibility, the WC would be given more autonomy and eventually have tariff receipts deposited directly into an account controlled by them. The feasibility of such a change would be assessed at the mid-term review. Financial Projections of WCs and Financial Rate of Return 18. Financial projections up to year 2008 were prepared for each of the WCs and are available on file. The financial projections indicate that the agreed tariffs up to 2004 are adequate to meet the revenue covenant, i.e., operating revenues to be adequate to meet operations and maintenance expenses, the greater of depreciation or debt service coverage, and changes in working capital. However, the tariffs may require to be carefully reviewed for the outer years, especially in the case of the Shandong WCs, and in Suzhou, Luan, and Huaibei in Anhui. Special efforts also need to be made to meet the accounts receivable covenant of 90 days. A detailed review of financial viability of the WCs would need to be carried out at the time of the mid-term review. 19. Given the nature of the project investments, i.e., wastewater treatment plants are not financed under the project in six Anhui municipalities, and revenues in all cases are based purely on water consumption and not linked to wastewater service, computations of financial rates of return (FRRs) are not meaningful. FRRs vary significantly, being highest in the six Anhui municipalities where wastewater treatment plants are being built outside the project. However, it is not intended to increase tariffs further to improve FRRs, as the WCs then would be left with large cash surpluses. - 36 -  Chengwu Paper Mill 20. Financing plan. The table below shows the financing plan for the Chengwu Paper Mill. The proceeds from the World Bank loan would carry an interest rate of 8.79%, a commitment charge of 0.75%, and a front end fee of 1%, which would be financed under the loan. The maturity would be 8 years, including three years of grace. The Chengwu Paper Mill would carry the foreign exchange risk. The domestic loan from the Industrial and Commercial Bank of China (ICBC) would be at an interest rate of 6.2%, and have a maturity of 5 years including two years of grace. Chengwu Papermill - Financing Plan _Million RMB __% Project cost 86,440 95% Interest and other charges 4,194 5% during construction Total 90,634 100% Internally generated funds 24,719 27% Equity contribution 16,000 18% WB loan 41,915 46% Domestic Loan 8,000 9% Total 90,634 100% 21. Past financial performance. The company's profitability increased significantly over the last three years by the more or less doubling of its income before taxes in each year since 1997. Although sales increased in 2000 by about 60%, profitability dropped by about 15%, because of the closure of the wheat straw processing facility due to serious pollution concerns, and the procurement of pulp from outside. The company therefore decided to invest in pollution control equipment in order to continue to use wheat straw for pulping. The company has so far financed its operation and expansions partly through internally generated funds, and partly through short term and long-term debt. 22. Future financial performance. The company's future financial performance depends to a large extent on exogenous factors like the price of pulp. Management will have to concentrate on updating its marketing strategy in order to be prepared for significant fluctuations in the pulp market. Likewise management should review its operating efficiency, as the paper market in China could be exposed to considerable competitive pressures. Financial projections, prepared based on conservative assumptions, are available in the project file. 23. In order to ensure financial viability of the Chengwu Paper Mill, agreement was reached at Negotiations that Shandong Province would ensure that the Chengwu Paper Mill: (i) achieves a quick ratio of 0.8; (ii) maintains a current ratio of 2; (iii) maintains a debt service coverage of 1.2; and (iv) does not incur any debt, unless a forecast indicates that it will achieve over the life of the loan a debt service coverage of at least 1.5. By October 1 each year Chengwu Paper Mill would review and prepare an appropriate Action Plan of technical, operational, and financial actions to enable it to continue to meet its financial covenants in the upcoming year. A copy of the Action Plan would be furnished to the municipal and provincial authorities for their review, and thereafter to the Bank. - 37 -  24. The Chengwu Paper Mill would also: (a) repay RMB 19.9 million of short term debt in 2001; and (b) repay short term advances from employees and shareholders in the amount of RMB 20.2 million in 2002 and of RMB 2 million in 2003. Further, the Mill would also repay: (a) RMB 19.9 million of short term debt in 2001; and (b) short term advances from employees and shareholders in the amount of RMB20.2 million in 2002 and of RMB2 million in 2003. - 38 -  Annex 6: Procurement and Disbursement Arrangements CHINA: Huai River Pollution Control Project Procurement Procurement Capacity Assessment 1. A procurement capacity assessment of the implementing agencies was carried out during the preparation phase of the project, and the Procurement Capacity Assessment Report of November 2000 is on file. The Report's findings and recommendations are summarized below. 2. The NCB procedures for works in Anhui and Shandong provinces have some deviations in the internal procurement procedures, such as bracketing and a merit point system used in pre-qualification and bid evaluation. The provincial governments and municipal PIUs are fully committed to strictly comply with Bank procurement procedures for Bank-financed contracts. In case there are any discrepancies between local procedures and Bank requirements, Bank policies and guidelines will prevail. Anhui and Shandong Provinces shall pay particular attention to ensuring that the following procedures are followed: (a) all invitations to pre-qualify or to bid shall be advertised in a newspaper of national circulation in China; (b) such advertisement shall be made in sufficient time for prospective bidders to obtain pre-qualification or bidding documents and prepare and submit their responses; and in any event, a minimum of 30 days shall be given to bidders between the date of advertisement in such newspaper and the deadline for submission of bids, and the advertisement and bidding documents shall specify the deadline for such submission; (c) qualification requirements of bidders and the method of evaluating qualifications shall be specified in detail in the pre-qualification documents or bidding documents, and all bidders shall be qualified to bid if they meet the requirements as specified in the pre-qualification and bidding documents; (d) no additional restriction shall be imposed on bidders from other provinces or municipalities; (e) all bidders shall be required to provide securities in an amount sufficient to protect the project municipalities and provinces in case of breach of contract or bidding rules by the contractor or bidder, and the bidding documents shall specify the required forms and amounts of such securities; (f) the time for opening of all bids shall be the same as the deadline for receipt of such bids; (g) all bids shall be opened in public; bidders shall not be required to be present at the bid opening but shall be afforded an opportunity to be present (either in person or through their representatives) at the time of bid opening; (h) no bid may be rejected solely on the basis that the bid price falls outside any standard contract estimate, or margin or bracket of average bids established by the project municipalities and provinces; and (i) contracts shall be awarded to the lowest evaluated responsive bidder, that is to the bidder who meets the appropriate standards of capability and resources and whose bid has been determined (i) to be substantially responsive to the bidding documents, and (ii) to offer the lowest evaluated cost. The winning bidder shall not be required, as a condition of award, to undertake responsibilities for work not stipulated in the bidding documents or otherwise to modify the bid as originally submitted. - 39 -  Procurement Methods 3. All works and goods for project components financed under the proposed loan would be procured in accordance with World Bank Guidelines for Procurement under IBRD Loans and IDA Credits dated January 1995, and revised January and August 1996, September 1997, and January 1999 (the Guidelines). Consultants would be engaged in accordance with the World Bank Guidelines for Selection and Employment of Consultants by the World Bank Borrowers, dated January 1997, revised September 1997 and January 1999. 4. Bidding documents, bid evaluation formns, and pre-qualification documents for civil works to be used in the project for international competitive bidding (ICB) and national competitive bidding (NCB) would be based on the Model Bidding Documents (MBD) agreed between the World Bank and the Government. The Bank Standard Bidding Documents (SBD) would be used for all procurement categories for which a corresponding MBD has not been prepared, approved, and agreed. Table A provides summary information agreed with the Anhui PMO, the Shandong PMO, and the implementing municipalities on the project elements, their estimated costs, and the methods of procurement for elements financed by the IBRD loan as well as by other sources. 5. The General Procurement Notices (GPN) for Anhui and Shandong components were published in the UN Development Business, No. 537 and No. 543 dated June 30 and September 30, 2000, respectively. Contracts for goods with estimated value equal or greater than US$200,000 equivalent and invitation of contractors to pre-qualify for civil works contracts with estimated value equal or greater than US$7 million equivalent would be advertised as Specific Procurement Notices in UN Development Business or well known technical magazines and at least one newspaper of national circulation in China. Those contractors who have expressed interest in bidding in response to the GPN would also be notified. The GPN would be updated annually for all outstanding procurement. Procurement Arrangements 6. The Anhui and Shandong PMOs would manage all procurement for Anhui and Shandong components on behalf of implementing agencies. For processing international bidding and international shopping, the Anhui PMO has contracted the International Tendering Company of China Machinery Import and Export Corporation, and the International Tendering Company of China National Machinery and Equipment Import and Export Corporation. The Shandong PMO contracted the joint venture of Shandong Machinery and Equipment Tendering Center with the Intemational Tendering Company of China Technology Import and Export Corporation. The tendering companies are experienced and competent procurement agents, familiar with Bank ICB procedures, and their selection has been approved by the Ministry of Finance. 7. For processing national bidding and national shopping, the Anhui and the Shandong PMOs have contracted the Tendering Company of Anhui Provincial Construction Commission and the Shandong Construction Engineering Center respectively. While the latter has had some exposure to Bank procurement procedures through previous projects, the Anhui Tendering Company has no experienced staff with knowledge of Bank procurement regulations. To facilitate preparation of procurement planning and bidding documents, the Anhui PMO has arranged for training of involved staff in the Tendering Company. 8. Civil Works ($154.1 million, of which $61.3 million IBRD-financed) would be divided into 37 Bank-financed contract packages with an average size of about US$4.0 million. Works contracts costing less than $7 million equivalent may be procured through NCB. Wherever feasible, works contracts have - 40 -  been grouped into packages costing $7 million equivalent or more. Two major civil works packages (US$15.0 million) would be procured using ICB procedures, while the remaining 35 packages would be procured using NCB procedures. Interested foreign bidders would be allowed to bid for NCB contracts. To ensure satisfactory quality of concrete pipes to be installed in sewers, it was agreed that pipe suppliers within the civil works contract would be pre-qualified. Other works include construction of sewerage systems using PVC pipes, six medium-size wastewater treatment plants, and minor pumping stations for which pre-qualification would not be required. The larger part of civil works involves laying of sewers in streets of eleven cities. To mitigate the environmental impact during construction, and to reduce disturbance to traffic, works in each city have been divided into several smaller contracts to be implemented in sequence. 9. Goods ($41.1 million, of which $38.0 million IBRD-financed) would be divided into 33 contracts. ICB procedures will be used for procurement of pumps, PVC pipes, specialized trucks, other equipment and vehicles (US$39.33 million) grouped in contract packages with estimated value equal to or greater than US$200,000 equivalent. Domestic manufacturers competing under ICB procedures would be eligible for a margin of preference in the comparison of bids of 15% for goods, or the prevailing customs duties, whichever is lower. Vacuum trucks, laboratory equipment and various vehicles estimated to cost less than US$200,000 equivalent, would be procured through NCB procedures, up to an aggregate amount of US$1.15 million. Other items, such as office and laboratory equipment and computers, estimated to cost less than US$50,000 equivalent per procurement package, with an aggregate amount not exceeding US$0.39 million equivalent, would be procured through intemational and national shopping procedures. Intemational shopping would solicit quotations on the basis of written invitation specifying the quantity, quality, and detailed description of goods and other stated requirements, from at least three qualified suppliers from at least two different countries. National shopping would solicit quotations from at least three suppliers in China. All shopping procedures would be carried out in accordance with Articles 3.5 and 3.6 of the Guidelines. 10. Services ($8.7 million, of which $5.2 million IBRD-financed). Consulting services required by the Anhui and the Shandong components for construction management, institutional strengthening, and training (US$4.4 million) would be provided by consulting firms selected on the basis of the quality-cost method. Services required for construction supervision (US$3.24 million) and for monitoring environmental plans, resettlement action plans and performance of wastewater treatment plants (US$0.34 million) would be provided by national specialized institutes selected by each municipality in accordance with Chinese national regulations, and would be financed locally. Selection of individual consultants for some monitoring activities ($0.05 million) and of firms for training ($0.75 million) would be carried out mostly on the basis of Consultants Qualification (CQ), least-cost (LC) and fixed budget (SFB) methods. Besides the general information in the annually updated GPN, consulting services with estimated value or greater than US$100,000 would be advertised as Specific Procurement Notice in the UN Development Business and in national newspapers of wide circulation in China. A copy of respective advertisement would be provided to those who expressed interest in response to GPN. Standard Request for Proposals (RFP-July 1997, revised in April 1998 and July 1999) would be used in selecting consulting services. 11. Not-Bank financed. (US$11.35 million) This includes the contracts for provision of electrical connections between the implementing agencies and the local power companies, and civil works contracts for the Chengwu Paper Mill, and compensation for land and resettlement. Procurement Contract Packaging 12. Table Al indicates numbers and total values of proposed contracts for civil works, goods and - 41 -  services separately for each project component. Procurement arrangements for consultants are shown in table A2. Prior Review Threshold 13. Thresholds for Bank prior reviews are as follows: (a) ICB civil works contracts valued at more than $7.0 million equivalent; (b) NCB civil works contracts valued at more than $5.0 million equivalent; (c) goods contracts valued at more than $200,000 equivalent; (d) consulting firms contracts valued at more than $100,000 equivalent; (e) individual consultant contracts valued at more than $ 50,000 equivalent; and (f) the first two NCB contracts for civil works and goods in each of the Anhui and the Shandong components. With respect to consulting contracts with values above the threshold, the Bank review would include the shortlist, the proposed RFP, technical and financial evaluations, and the result of negotiations. For contracts below the threshold, the Bank would be notified of the technical evaluation prior to opening the financial proposal. All consulting terms of reference for Bank-financed services would be subject to prior review, regardless of the value of the contract. The thresholds for Bank reviews are summarized in table "B". Contracts under these thresholds would be subject to post review. 14. Advance contracting and retroactive financing. Retroactive financing of up to $5.4 million equivalent would be applied for expenditures made after January 1, 2001 for advanced contracting of eight civil works contracts of estimated value of RMB61 million (USS7.4 milion) and RMB31 milion (US$3.7 million) respectively in the Anhui and the Shandong project components. Contracts identified under such retroactive financing are in Bengbu (A/BB/C 1), Fuyang (AIFY/C 1), Bozhou (A/BZ/C3), Luan (A/LU/C2), Feicheng (S/F/Cl), Rizhao (S/RIC3, S/RIC4), and Chengwu (S/C/GI). Bidding would be carried out in accordance with Article 1.9 of the Procurement Guidelines. - 42 -  Procurement methods (Table A) Table A: Pro*ect Costs by Procurement Arrangements a) (In USS million equivalent) Expenditure Category Procurement Method Total ICB NCB Other N.B.F. Cost 1. Civil Works 15.00 134.89 0.0 4.21 154.10 (9.80) (51.50) 0.0 (0.0) (6130) 2. Goods 39.53 1.15 0.39 0.0 41.07 (36.76) (1.00) (0.24) (0.0) (38.00 3. Services 0.0 0.0 5.15 3.58 73 0.0 0.0 (5.15) (0.0) (5.15) 4.Land acquisition 0.0 0.0 0.0 3.56 3.56 0.0 0.0 0.0 (0.0) f0.0) TOTAL 54.5 136.04 5.54 11.35 _207.6 (46.56) 1 (52,50) (5.392 (0.01LI (104Q45L a) Figures are total costs including contingencies 1/ Figures in parenthesis are amounts to be financed by the Bank loan 2/ Goods under "Other" will be procured through international or national shopping 3/ Services under "Other" will be procured in accordance with the World Bank Guidelines for Selection and Employment of Consultants 4/ N.B.F.= Not-Bank Financed; this includes land acquisition, resettlement, power connections, local supervision of construction and environmental monitoring. - 43 -  Table Al: Summary of Contract Packaging a) Contract Packages Number Value Value of RMB US$ Packages million million A Civil Works Civil works-Anhui component a) Supply and installation of sewer pipes, construction of 25 826.40 99.57 pumping stations b) Supply equipment & construct treatment plant (including 2 124.46 15.00 office) _ c) Anhui monitoring centers (N.B.F.) 2 0.72 0.09 d! Power connection (N.B.F.) 8 6.17 0.74 Civil works Anhui sub-total 37 957.74 115.39 Civil works-Shandong component a) Supply and installation of sewer pipes, construction of 7 197.64 23.81 Dumping stations b) Construction of treatment plants (including offices) 3 95.55 11.51 c) Construction of treatment plant (Chengwu Paper Mill - 1 19.90 2.40 N.B.F.) d) Power connection (N.B.F.) 4 .8.2 0.99 Civil works Shandong sub-total 15 321.2S9 38.71 Civil works total 52 1279.03 154.10 B Goods Goods-Anhui component a) SuPYlv of PVC sewer pipes (central procurement) 3 53.70 6.47 b) Supply and installation of pumps and associated equipment 3 64.74 7.80 c) Supply office equipment, furniture, laboratory equipment 17 13.70 1.65 land vehicles = d) SuDD1Y vehicles (ietters and AMC - central procurement! 1 7.38 0.89 e) Anhui monitoring center (laboratory equipment) 1 2.991 0.36 Goods Anhui sub-total 25 142.51 17.17 Goods-Shandong component a) Supply and installation of pumps and associated equipment 1 21.17 2.55 (central procurement) b) Supply and installation of treatment plant equipment 4 169.07 20.36 c) Supply office equipment and furniture 2 0.74 0.09 d) SupplY vehicles (central orocurement) 1 7.47 0.90 Goods Shandong sub-total 8 198.45 23.90 Goods total 33 340.961 41.07 -44 -  Contract Packages Number Value Value of RMB US$ Packages million million C Services _ Services-Anhui component a) Institutional support and training (central procurement) n/a 29.46 3.55 b) Local supervision of construction and monitoring (N.B.F.) n/a 15.36 1.85 Services Anhui sub-total 46 44.82 5.40 Services-Shandong component a) Institutional strengthening and training (central n/a 13.28 1.60 procurement_ b) Local supervision of construction and monitoring (N.B.F.) n/a 14.35 1.73 Services Shandong sub-total 16 27.63 3.33 Services total 62 72.45 8.73 D Land Acquisition a) Anhui land acquisition and resettlement n/a 13.20 1.59 b) Shandong land acquisition and resettlement n/a 16.35 1.97 Land acquisition total 29.5c 3. Total Procurement of the Project 147 1721.99 207.46 a) Figures are total costs including contingencies Table A2: Consultants Selection Arran2ements (In US$ million equivalent) Expend. Selec tonMethod _ _ Total Category QCBS QBS SFB LCS CQ Other N.B.F. Cost Total Firms 4.35 0.0 0.0 0.0 0.75 0.0 3.58 8.68 Firmns _ _ _ _ _ _ Total 0.0 0.0 0.1 0.1 0.00 0.03 0.0 0.05 Individuals Grand 4.35 0.0 0.1 0.1 0.75 0.03 3.58 8.73 1TO TA L __ _ _ __ _ ____ _ _ _ _ _ _ _ _ _ _ _ _ _ _ QCBS = Quality-Cost based selection; QBS = Quality based selection; SFB Fixed budget selection LCS = Least-cost selection; CQ = Selection based on consultants qualification; Other = Selection of individual Consultants; N.B.F. = Not Bank-financed include local construction supervision and various monitoring activities. -45 -  Prior review thresholds (Table B) Expenditure Category Contract Value Threshold Procurement Contracts Subject to Prior (US$) Method Review a) (US$ million) Civil works $ 7 mnillion and above ICB 2 contracts ($15.0 million) Below $ 5 million NCB 7 contracts ($34.5 million) above $5 million, and first two contracts in each province with contract value under $ 5 million. Goods $ 0.2 million and above ICB 15 contracts ($39.3million) $ 50,000-$200,000 NCB c) First two contracts ($0.30 million) Less than 50,000 International and National Shopping Services b) Firms: $ 0.1 million and more QCBS d) 2 contracts ($4.4 million) Individuals $ 0.05 million Single selection None and above (N.B.F.) Total value of contracts subject to prior review $107.7 million (55% of Bank-financed contracts) a) Contracts under these thresholds would be subject to post review. b) All consulting terms of reference for Bank-financed services would be subject to prior review regardless of the value of the contract. c) Shandong province is not proposing NCB procedures for goods. d) Prior review includes the short list the proposed RFP, technical and financial evaluations and the result of negotiations. For contracts below the threshold the Bank would be notified of the technical evaluation prior to opening the financial proposal. Overall Procurement Risk Assessment: Average Frequency of procurement supervision mission proposed: One at project launch and then once every six months for two years. In addition, to identify problems and to take corrective actions, the Bank would review the annual procurement report to be submitted by PMOs. - 46 -  Disbursement Allocation of loan proceeds (Table C) Expenditures Category Amount Disbursement Percentages In US$ million Civil works Part A of the Project 50.30 Average 44% Part B of the Project 11.00 Averaze 28% Goods and vehicles 100% of foreign expenditures, Part A of the Project 16.70 100% of local expenditures (ex- Part B of the Project 21.30 factory costs), and 65% of local expenditures for other items procured locally Services 100% Part A of the Project 3.55 Part B of the Project 1.60 Front-end-fee 1.05 TOTAL 105.50 _ (Parts A, B are project components A (Anhui), and B (Shandong) Use of statements of expenditures (SOEs): Explenditure Contracts less than US$ Civil Works 7.000.000 Goods 200.000 Services 100,000 for firms 50.000 for individual consultants Special account: Name of Special Account Amount of Initial Allocation US$ million Anhui Special Account 5.00 Shandong Special Account 3.00 Table D: Loan Disbursement World Bank Financial Year (Annually in US$ million) Bank Loan 2001 2002 2003 2004 2005 2006 Total Annually 0.0 15.00 30.00 30.00 25.00 5.50 105.50 Cumulative 0.0 15.00 45.00 75.00 100.00 105.50 105.50 - 47 -  Annex 7: Project Processing Schedule CHINA: Huai River Pollution Control Project Pro ~ct ~hedule Planned .Actual Time taken to prepare the project (months) 16 20 First Bank mission (identification) 02/10/99 02/10/99 Appraisal mission departure 10/20/2000 10/24/2000 Negotiations 01/29/2001 01/30/2001 Planned Date of Effectiveness 07/31/2001 Prepared by: PMOs of Anhui and Shandong Provinces, with the active involvement of the participating municipal governments, WCs, and the Chengwu Paper Mill. Preparation assistance: A Japanese PHRD Grant (TF025508) of $697,000. Bank staff who worked on the project included: Name Spe i_lity Edouard Motte Task Team Leader, Senior Sanitary Engineer Margaret Png Senior Legal Counsel Raja Iyer Lead Management Specialist Elisabetta Capannelli Senior Sector Economist Jack Fritz Senior Environmental Engineer Chaohua Zhang Social Sector Specialist Inneke Herawati Program Assistant Jaroslav Kozel Consultant Sanitary Engineer Johann Renkevitz Consultant Financial Analyst Chau-Ching (Tony) Shen Financial Management Specialist Chongwu Sun Environmental Specialist Chaogang Wang Social Development Specialist Liu Zhentu Procurement Specialist Youlan Zou Resettlement Specialist Xiaofeng Li Team Assistant -48 -  Annex 8: Documents in the Project File* CHINA: Huai River Pollution Control Project A. Project Implementation Plan * Including electronic files Name of the Document Date of the Prepared by Document Anhui Province - Consolidated Project January Anhui Implementation Plan (PIP) 2001 Department of Construction Anhui Province - Project Procurement Plan November Anhui PMO (PPP) 2000 Anhui Province business licences (in Chinese) January 2001 Anhui WCs / and Model Charter for WC Anhui PMO Anhui Province Institutional Development January 2001 Anhui WCs, Plans - WCs, PMO Anhui PMO Shandong Province - Draft Consolidated PIP December Shandong PMO 2000 Shandong Province - Draft PPP December Shandong PMO 2000 Shandong Province - Performance Indicators January 2001 Shandong WCs, (draft) Chengwu Paper Mill, PMO Shandong Province - Business Licences (in December Shandong WCs, Chinese) and Charters of WCs, Chengwu 2000 Chengwu Paper Paper Mill Mill Shandong Province - Institutional Development September - Shandong WCs, Plans of WCs, Chengwu Paper Mill, PMO December Chengwu Paper 2000 Mill, PMO Shandong Province - Maintenance Program of December Shandong WCs, combined sewer system and Septic Tanks 2000 PMO Management Implementation Plan - 49 -  B. Bank Staff Assessments 1. Background Note on Huai River Basin and Project Design 2. Background Technical Note on Detailed Project Description 3. Institutional Development Plans 4. Wastewater Tariff Policies 5. Background Note on Estimated Project Costs 6. Background Note on Procurement and Disbursement 7. Background Note on Financial Summary and Financial Projections 8. Financial Management System Assessment 9. Environmental Management and Monitoring Plans 10. Bank Mission Aides Memoire - Pre-appraisal: April and July 2000 for Anhui and Shandong, respectively - Appraisal: October - November 2000. 11. Procurement Capacity Assessment Report (August 2000). 12. Outline Annual Safeguard Compliance Report C. Other C. Government and Consultants Reports Name of the Document Date of the Prepared by Document Water Pollution Control program and March 28, Leading Group for Ninth Five Year Plan (1996-2000) for the 1996 Huai River Basin Huai River Basin Consolidated Environmental Assessment, August 2000 PMO and Mott Anhui component a) MacDonald/ERM Consolidated Resettlement Action Plan, November PMO and Mott Anhui component a) 2000 MacDonald/ERM Consolidated Environmental Assessment, August 2000 PMO and Mott Shandong component a) MacDonald/ERM Consolidated Resettlement Action Plan, November PMO and Mott Shandong component a) 2000 MacDonald/ERM - 50 -  Huai River Water Pollution Control July 2000 Mott MacDonald and Project Environmental Final Project Report: Research Management Project Summary Appendix A, Anhui, Review of Feasibility Studies Appendix B, Shandong Appendix T 1, Sewerage Design Appendix T2, Treatment Process Design Appendix T3, Cost Estimates Appendix T4A, Anhui Financial and Economic Analysis Appendix T4B, Shandong Financial and Economic Analysis Huai River Water Pollution Control May-July Nippon Jogesuido Project 2000 Sekkei (NJS) Assignment Report - Procurement Huai River Basin, Pacific Consultants Water Pollution Control Project - Final August 1999 Intemational Report: and Danish Hydraulic Water Quality Management Model Institute Huai River Basin, December Danish Hydraulic Water Quality Monitoring System Study 2000 Institute (DHI) - Water Final report and Environment a) Hard copies available in Infoshop. *Including electronic files - 51 -  Annex 9: Statement of Loans and Credits CHINA: Huai River Pollution Control Project Jan-2001 Difference between expected and actual Original Amount in USS Millions disbursements Project ID FY Purpose IBRO IDA GEF Cancel. Undisb. Orig Frm Rev'd P058844 2000 3RD HENAN PROV HWY 150.00 0.00 0.00 0.00 150.00 0.00 0.00 P045910 2000 CH-HEBEI URBAN ENVIRONMENT 150.00 0.00 0.00 0.00 150.00 0.00 0.00 P056424 2000 TONGBAI PUMPED STORA 320.00 0 00 0.00 0.00 320.00 2.00 0.00 P042109 2000 CH-BEIJING ENVIRONMENT II 349.00 0.00 25.00 0.00 373.34 20.94 0.00 P058843 2000 GUANGXI HWY Project 200.00 0.00 0.00 0.00 200.00 13.00 0.00 P049436 2000 CN-CHONGQING URBAN ENVIRONMENT 200.00 0.00 0.00 0.00 200.00 0.00 0.00 P045264 2000 SMALLHLDR CATTLE DEV 93.50 0.00 0.00 0.00 91.10 19.10 0.00 P064730 2000 Yangtze Dike StrengtheningProject 210.00 0.00 0.00 0.00 198.90 -11.10 0.00 P056216 1999 LOESS PLATEAU II 100.00 50.00 0.00 0.00 128.39 35.39 0.00 P046051 1999 CN-HIGHER EDUC. REFORM 20.00 50.00 0.00 0.00 54.73 27.01 0.00 P049665 1999 ANNING VALLEY AG.DEV 90.00 30.00 0.00 0.00 85.48 5.13 0.00 P050036 1999 ANHUI PROVINCIAL HWY 200.00 0.00 0.00 0.00 154.00 19.90 0.00 P051705 1999 FUJIAN II HWY 200.00 0.00 0.00 0.00 182.28 41.78 0.00 P046829 1999 RENEWABLE ENERGY DEVELOPMENT 100.00 0.00 35.00 0.00 100.00 0.00 0.00 P046564 1999 WESTERN POVERTY RED 80.0o 100.00 0.00 0.00 134.29 17.08 0.00 P051856 1999 ACCNTG REFORM & DEV 27.40 5.60 0.00 0.00 27.38 17.63 0.00 P051888 1999 GUANZHONG IRRIGATION 80.D0 20.00 0.00 0.00 87.23 23.96 0.00 P057352 1999 CN-RURAL WATER SUPPLY IV 16.00 30.00 0.00 0.00 43.03 7.27 0.00 P042299 1999 TEC COOP CREDIT IV 10.00 35.00 0.00 0.00 40.94 -2.27 0.00 P041890 1999 LIAONING URBTRANSP 150.00 0.00 0.00 0.00 124.37 41.87 0.00 P003653 1999 CONTAINERTRANSPORT 71.00 0.00 0.00 0.00 67.15 62.45 0.00 P036953 1999 CN-HEALTH IX 10.00 50.00 0.00 0.00 54.42 5.93 0.00 P041268 1999 NAT.HWY4-HUBEI/HUNAN 350.00 0.00 0.00 0.00 302.99 31.99 0.00 P060270 1999 ENTERPRISE REFORM LN 0.00 5.00 0.00 0.00 4.86 5.34 0.00 P043933 1999 CH-SICHUAN URBAN ENVIRONMENT 150.00 2.00 0.00 0.00 152.02 11.10 0.00 P063123 1999 YANGTZE FLOOD EMERGY 40.00 40.00 0.00 0.00 18.47 13.39 9.39 P058308 1999 CN-PENSION REFORM PJT 0.00 5.00 0.00 0.00 4.74 4.00 0.00 P045788 1998 TRI-PROVINCIAL HWY 230.00 0.00 0.00 0.00 154.21 55.91 0.00 P003619 1998 2ND INLAND WATERWAYS 123.00 0.00 0.00 0.00 109.84 52.84 0.00 P036949 1998 NAT.HWY 3-HUBEI 250.00 0.00 0.00 0.00 176.90 26.90 0.00 P046952 1998 FOREST. DEV. POOR AR 100.00 100.00 0.00 0.00 163.47 7.99 49.24 P036414 1998 CH-GUANGXI URBAN ENVIRONMENT 72.00 20.00 0.00 0.00 84.70 26.26 0.00 P035698 1998 HUNAN POWER DEVELOP. 300.00 0.00 0.00 0.00 300.00 127.50 0.00 P046563 1998 TARIM BASIN II 90.00 60.00 0.00 0.00 112.78 43.70 0.00 P003614 1998 GUANGZ. CITY CRT.TRP 200.00 0.00 0.00 0.00 142.92 96.66 0.00 P056491 1998 CH-HEBEI EARTHQUAKE REHABILITATION 0.00 28.40 0.00 0.00 0.13 -1.17 0.00 P003591 1998 STATE FARMS COMMERCI 150.00 0.00 0.00 80.91 8.45 25.29 -0.20 P003539 1998 SUST COAST RES DEV 100.00 0.00 0.00 0.00 74.36 16.88 0.00 P003566 1998 CN-BASIC HEALTH (HLTH8) 0.00 85.00 0.00 0.00 64.88 15.46 0.00 P040185 1998 CH-SHANDONG ENVIRONMENT 95.00 0.00 0.00 0.00 58.84 35.14 0.00 P037859 1998 EGY CONSERVATION PRO 0.00 0.00 22.00 0.00 13.88 17.17 0.00 P049700 1998 IAIL-2 300.00 0.00 0.00 0.00 187.55 37.13 0.00 P003606 1998 ENERGY CONSERVATION 63.00 0.00 22.00 0.00 58.99 9.39 0.00 P051736 1998 E. CHINAVJIANGSU PWR 250.00 0.00 0.00 0.00 206.45 191.91 105.56 P035693 1997 FUEL EFFICIENT IND. 0.00 0.00 32.80 0.00 12.46 32.71 0.00 P003643 1997 XINJIANG HWY II 300.00 0.00 0.00 60.00 116.07 136.07 0.00 P034081 1997 XIAOLANGDI MULTI. 11 430.00 0.00 0.00 0.00 160.28 150.71 0.00 P003650 1997 TUOKETUO POWERIINNER 400.00 0.00 0.00 102.50 226.44 290.54 89.07 P003654 1997 HUNAN/GUANG HWY2-NH2 400.00 0.00 0.00 0.00 210.89 110.89 0.00 P038988 1997 HEILONGJIANG ADP 120.00 0.00 0.00 0.00 54.63 28.53 0.00 P036952 1997 CN-BASIC ED. iV 0.00 85.00 0.00 0.00 8.60 -6.02 0.00 P003590 1997 QINBAMTS. POVTY RED 30.00 150.00 0.00 0.00 104.53 72.30 0.00 P003637 1997 CH-NATIONAL RURAL WATER III 0.00 70.00 0.00 0.00 49.91 29.69 23.01 P003635 1997 CN-VOC. ED. REFORM PROJ 10.00 20.00 0.00 0.DO 3.50 1.64 0.00 - 52 -  Difference between expected Original Amount in US$ Millions and actual disbursements' Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd P044485 1997 SHANGHAI WAIGAOQIAO 400.00 0.00 0.00 0.00 356.74 92.44 0.00 P036405 1997 WANJIAZHAI WATER TRA 400.00 0.00 0.00 75.00 136.03 79.03 0.00 P040513 1996 2ND HENAN PROV HWY 210.00 0.00 0.00 0.00 129.66 92.66 0.00 P003507 1996 ERTAN HYDRO II 400.00 0.00 0.00 0.00 7.89 13.53 0.00 P034619 1996 CN-LABOR MARKET DEV. 10.00 20.00 0.00 0.00 15.92 18.12 0.00 P036950 1996 CN-BASIC ED. POOR III 0.00 100.00 0.00 0.00 0.93 8.76 0.00 P003569 1996 SHANGHAI-ZHEJIANG HI 260.00 0.00 0.00 53.34 26.78 80.12 5.12 P003638 1996 SEEDS SECTOR COMMER. 80.00 20.00 0.00 9.40 36.95 28.89 0.00 P0035B9 1996 CN-DISEASE PREVENTION (HLTH7) 0.00 100.00 0.00 0.00 26.41 36.79 0.00 P003594 1996 GANSU HEXI CORRIDOR 60.00 90.00 0.00 0.00 102.66 45.46 0.00 P003599 1996 CH-YUNNAN ENVIRONMENT PROJECT 125.00 25.00 0.00 0.00 122.03 72.28 2.54 P003602 1996 CH-HUBEI URBAN ENVIRONMENT 125.00 25.00 0.00 28.32 74.49 97.77 17.23 P003652 1996 2ND SHAANXI PROV HWY 210.00 0.00 0.00 0.00 66.62 56.62 0.00 P003649 1996 SHANXI POVERTYALLEV o.00 100.00 0.00 0.00 18.39 10.61 0.00 P003648 1996 CH-SHANGHAI SEWERAGE PROJECT II 250.00 0.00 0.00 0.00 114.82 102.72 0.00 P003646 1996 CN-CHONGQING IND POL CT 170.00 0.00 0.00 153.99 14.71 154.70 25.70 P003563 1996 ANIMAL FEED 150.00 0.00 0.00 95.00 37.32 132.32 82.32 P037156 1995 CN-IODINE DEFICIENCY DISORDERS CONTROL 7.00 20.00 0.00 7.00 0.31 9.98 2.98 P003612 1995 XINJIANG HIGHWAY I 150.00 0.00 0.00 0.00 0.79 0.79 0.00 P003603 1995 CH-ENTERPRISE HOUSING & SOC SEC REF 275.00 75.00 0.00 20.00 129.58 148.28 25.26 P003600 1995 TECHNOLOGY DEVELOPME 200.00 0.00 0.00 3.02 67.26 58.18 0.00 P003598 1995 CH-LIAONING ENVIRONMENT PROJECT 110.00 0.00 0.00 0.00 34.47 34.17 0.00 P003596 1995 YANGTZE BASIN WATER 100.00 110.00 0.00 0.00 6.65 5.19 0.00 P0035s5 1995 SHENYANG IND. REFORM 175.00 0.00 0.00 0.00 54.32 49.32 0.00 P003571 1995 RAILWAYS VII 400.00 0.00 0.00 29.00 221.69 200.69 84.78 P003493 1995 INLAND WATERWAYS 210.00 0.00 0.00 15.00 7.86 22.86 2.46 P003402 1995 NATURE RESERVE MGMT 0.00 0.00 0.00 0.00 1.76 2.71 0.00 P003634 1995 CN-MATERNAL CHILD HEALT(HLTH6) 0.00 90.00 0.00 0.0o 8.38 11.55 0.00 P003647 1995 ECONOMIC LAW REFORM 0.00 10.00 0.00 0.00 4.88 5.65 0.00 P003636 1995 CN-BASIC EDUC IN POOR& MINORITY AREAII 0.00 100.00 0.00 0.00 0.48 2.56 0.00 P003639 1995 SOUTHWEST POV. REDUC 47.50 200.00 0.00 0.00 46.79 58.98 0.00 P003642 1995 ZHEJIANG POWER DEVT 400.00 0.00 0.00 0.00 87.48 49.93 0.00 P036947 1995 SICHUANTRANSMISSION 270.00 0.00 0.00 65.00 46.33 111.33 43.18 P036041 1995 FISCAL & TAX REF. & 25.00 25.00 0.00 0.00 19.75 22.25 8.31 P003593 1994 SONGLIAO PLAIN ADP 0.00 205.00 0.00 0.00 10.73 5.21 0.00 P003557 1994 FOREST RESOURCE DEV 0.00 200.00 18.40 0.00 12.93 16.75 -28.72 P003586 1994 CH-SHANGHAI ENVIRONMENT PROJECT 160.00 0.00 0.00 0.00 47.75 47.75 7.65 P003644 1994 XIAOLANGDI RESETTLEMENT 0.00 110.00 0.00 0.00 17.47 14.93 0.00 P003404 1994 SICHUAN GAS DEV. CON 0.00 0.00 10.00 o.0o 0.29 1.05 0.00 P003562 1994 XIAOLANGDI MULTIPURPOSE 460.00 0.00 0.00 0.00 0.22 0.22 0.00 P003502 1994 CN-RURAL HEALTH MANPOWER (HLTH4) 0.00 110.00 0.00 0.00 4.73 3.99 0.00 P003540 1994 LOESS PLATEAU 0.00 150.00 0.00 0.00 10.71 -5.24 0.00 P003626 1994 FUJIAN PROV HIGHWAY 140.00 0.00 0.00 0.00 32.10 32.10 22.60 P003641 1994 YANGZHOU THERMAL POW 350.00 0.00 0.00 o.0o 34.00 34.00 0.00 P003609 1994 SICHUAN GAS DEV & CONSERVATION 255.00 0.00 10.00 0.00 63.66 56.16 0.00 P003622 1994 SHANGHAIMTPII 150.00 0.00 0.00 0.00 3.89 3.89 0.00 P003595 1994 RED SOILS II DEVELOP 0.00 150.00 0.00 0.00 21.00 16.35 8.66 P003623 1993 FINANCIAL SECTOR T.A o.0o 60.00 0.00 0.00 19.44 13.97 12.61 P003473 1993 CH-ZHEJIANG MULTICITIES DEVELOPMENT 0.00 110.00 0.00 0.00 10.32 10.26 5.21 P003627 1993 GRAIN DISTRIBUTION P 325.00 165.00 0.00 0.00 144.73 145.53 60.53 P003632 1993 CN-ENVIRONMENT TECH ASS 0.00 50.00 0.00 0.00 7.51 8.29 7.97 P003559 1993 AGRIC.SUPPORTSERVI 0.00 115.00 0.00 0.00 4.08 -1.64 0.00 P003592 1993 REF. INSrL.& PREINV 0.00 50.00 0.00 0.00 5.41 5.98 0.00 P003597 1993 TAIHU BASIN FLOOD CO 100.00 100.00 0.00 0.00 4.79 0.44 -2.00 P003580 1993 CHINA-SO. JIANGSU ENVMT PROTECTION PROJ 250.00 0.00 0.00 0.00 9.75 9.ss 0.00 - 53 -  Difference between expected Original Amount in US$ Millions and actual disbursements Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Revd P003570 1993 RAILWAYVI 420.00 0.00 0.00 2.82 35.90 38.72 12.23 P003616 1993 TIANHUANGPING HYDRO 300.00 0.00 0.00 0.00 49.38 44.38 0.00 P003624 1992 CN-INFECTIOUS DISEASES IHLTH5) 0.00 129.60 0.00 0.00 15.31 11.71 11.67 P003568 1992 CH-TIANJIN URBAN DEV& ENVMT 0.00 100.00 0.00 0.00 4.65 1.97 2.15 Total: 15489.40 3955.60 175.20 800.30 8912.85 4478.47 696.53 -54 -  CHINA STATEMENT OF IFC's Held and Disbursed Portfolio Jan-2001 In Millions US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1999/00 Bank of Shanghai 0.00 3.84 0.00 0.00 0.00 3.84 0.00 0.00 1996 Beijing Hormel 3.57 0.50 0.00 3.30 3.57 0.50 0.00 3.30 1998/00 CIG Holdings PLC 0.00 3.00 0.00 0.00 0.00 0.00 0.00 0.00 1996 Caltex Ocean 21.00 0.00 0.00 45.00 21.00 0.00 0.00 45.00 1998 Chengdu Chemical 0.00 3.20 0.00 0.00 0.00 0.00 0.00 0.00 1998 Chengxin-IBCA 0.00 0.36 0.00 0.00 0.00 0.36 0.00 0.00 1987/92/94 China Bicycles 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1994 China Walden JV 0.00 3.86 0.00 0.00 0.00 3.86 0.00 0.00 1994 China Walden Mgt 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 1994 Dalian Glass 0.00 2.40 0.00 0.00 0.00 2.40 0.00 0.00 1999 Dujiangyan 25.59 0.00 0.00 30.00 0.00 0.00 0.00 0.00 1995 Dupont Suzhou 18.69 4.15 0.00 31.20 18.69 4.15 0.00 31.20 1994 Dynamic Fund 0.00 10.23 0.00 0.00 0.00 8.57 0.00 0.00 2000 Elkem Carbon 6.30 0.00 0.00 6.00 0.00 0.00 0.00 0.00 1999 Hansom 0.00 16.10 0.00 0.00 0.00 16.10 0.00 0.00 1996 Jingyang 40.00 0.00 0.00 92.31 40.00 0.00 0.00 92.31 1998 Leshan Scana 6.10 1.35 0.00 0.00 4.50 1.35 0.00 0.00 1996 Nanjing Kumho 9.74 3.81 0.00 27.68 9.74 3.81 0.00 27.68 1995 Newbridge Inv. 0.00 2.13 0.00 0.00 0.00 2.13 0.00 0.00 1997 Ningbo 0.00 2.00 0.00 0.00 0.00 2.00 0.00 0.00 1997 Orient Finance 13.33 0.00 0.00 16.67 13.33 0.00 0.00 16.67 1997/00 PTP Holdings 0.00 0.03 0.00 0.00 0.00 0.03 0.00 0.00 1997 PTP Hubei 12.63 0.00 0.00 25.38 12.63 0.00 0.00 25.38 1996 Pacific Ports 0.00 3.64 0.00 0.00 0.00 3.64 0.00 0.00 1998 Rabobank SlFC 1.80 0,00 0.00 1.80 1.80 0.00 0.00 1.80 1998 Shanghai Krupp 30.00 0.00 0.00 68.80 0.00 0.00 0.00 0.00 1999 Shanxi 19.00 0.00 0.00 0.00 8.30 0.00 0.00 0.00 1993 Shenzhen PCCP 3.76 0.99 0.00 0.00 3.76 0.99 0.00 0.00 1995 Suzhou PVC 18.33 2.48 0.00 18.50 18.33 2.48 0.00 18.50 1998 WIT 5.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1996 Weihai Weidongri 3.20 0.00 0.00 0.00 3.20 0.00 0.00 0.00 1993 Yantai Cement 10.39 1.95 0.00 5.54 10.39 1.95 0.00 5.54 1998 Zhen Jing 0.00 2.00 0.00 0.00 0.00 2.00 0.00 0.00 Total Portfolio: 248.43 68.03 0.00 372.18 169.24 60.17 0.00 267.38 - 55 -  Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic 1998 PTP Hubei BLINC 0.00 0.00 0.00 1500.00 2000 SBCF I 0.00 0.00 15000.00 0.00 2000 SBLAV 0.00 0.00 15000.00 0.00 2000 SIGC 0.00 0.00 6000.00 0.00 2000 Shizuishan Carbn 0.00 0.00 1700.00 0.00 2000 Wan Jie Hospital 15000.00 0.00 0.00 0.00 2000 CIG Zhapu 6000.00 5000.00 0.00 0.00 2000 CIMIC Tile 15000.00 5000.00 0.00 15000.00 1998 Chengdu Chemical 7400.00 0.00 0.00 8600.00 1997 Chinefarge 12800.00 0.00 0.00 20000.00 2000 Jinfeng 9000.00 0.00 0.00 7300.00 1998 Orient Fin A Inc 3333.33 0.00 0.00 0.00 Total Pending Commitment: 68533.33 10000.00 37700.00 52400.00 - 56 -  Annex 10: Country at a Glance CHINA: Huai River Pollution Control Project East Lower- POVERTY and SOCIAL Asia & middlh China Pacific Incoma Development diamond' 1999 Population, mid-year (mfilionsJ 1,253.6 1,837 2,094 Life expectancy GNP per capita (Atlas method, UlS$) 780 1,000 1,200 GNP (Atlas method. USS bllhions) 977.8 1,833 2,513 Average annual growth, 1993-99 Population (%) 1.0 1.2 1.1 Labor force (%) 1.0 1.3 1.2 GNP Gross per primary Most tecant estimate (latest year available, 1993-99) capita enrollment Poverty (% of population below national povetty lite) 5 Urban population (% of toa Ipopulation) 31 34 43 Life expectancy at birth (years) 70 69 69 Itnfant mortality (per 1,000 live bi.ths) 31 35 33 Child malnutrition (% of children under 5) 16 22 15 Access to safe water Access to Improved water source (1 of population) 83 84 86 Illiteracy (% ofpopulation age 15+) 17 IS 16 Gross primary enrollment (% of schoolegs population) 123 119 114 China Mate 123 121 114 Lower-middle-income group Female 123 121 116 KEY ECONOMIC RATIOS end LONG-TERM TRENDS 1979 1989 1998 11998 Economic ratios' GOP (US$ billions) 175.6 342.3 938.3 996.3 Gross domestic investmentGDP 36.5 36.0 38.8 38.3 Trade Exports of goods and services/GDP 6.4 12.7 21.9 22.1 Gross domestic savingslGDP 35.3 35.3 43.2 41.2 Gross national savings/GDP 35.5 35.4 41.9 39.9 Current account balanoelGDP .1.4 -0.9 3.1 1.6 Domestic Ivsmn Interest payments/GDP 0.0 0.7 0.6 0.6 s t i c + Investment Total debt/GOP 1.2 13.1 16.5 12.8 Savings \ Total debt service/exports 0.4 9.6 8.5 5.8 Present value of debt/GDP .. . 14.4 . Present value of debt/exports -. 63.3 Indebtedness 1979-89 1989-99 1998 1999 1999-03 (average annual growth) GOP 10.3 10.5 7.8 7,1 7.2 China GNP per capita 8.9 9.0 6.7 6.3 6.2 Lower-middle-income rou Expotts of goods and services 19.6 14.0 7.3 13.9 10.5 STRUCTURE of the ECONOMY 1979 1989 1998 1999 Growth of Investment and GDP (%) (% of GDP) Agriculture 31.2 25.0 18.6 17.3 30 r Industry 47.4 43.0 49.3 49.7 20 Manufacturing 40.2 34.5 37.6 37.8 1_ Services 21.4 32.0 32.1 32.9 Private consumption 49.5 52.7 44.7 45.8 94 95 96 97 s8 99 General government consumption 15.2 12.0 12.1 12.9 -GDI ' GDP Imports of goods and services 7.5 13.5 17.5 '19. 1979-89 1989-99 1998 1999 Growth of exports and Imports (%) (average annual growth) Agriculture 6.0 4.4 3.5 2.8 30 Industry 11.3 14.2 8.9 8.1 Manufacturing 10.5 13.6 8.7 7.7 20 Services 14.0 9.0 8.3 7.5 / Private consumption 10.1 8.7 6.2 8.3 General government consumption 9.9 9.8 8.4 7.9 Gross domestic investment 11.0 12.0 7.6 3.8 94 95 De 97 95 99 Imports of goods and services 20.4 12.2 3.0 20.7 Exports Imports Gross national product 10.5 10.2 7.8 7.3 Note: 1999 data are preliminary estimates. The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. - 57 -  China PRICES and GOVERNMENT FINANCE 1979 1989 1998 1999 Inflation [%) Domestic prices 30 (% chanige) 3 Consumer prices .. 18.0 -0.8 -1.4 20 Implicit GDP deflator 3.9 8.8 -2.4 -2.2 1C Government finance O (% of GDP, includes current grants) 94 95 98 97 98 09 Current revenue .. 19.3 13.0 14.2 10 Current budget balance .. 2.8 1.4 1.2 - GOP deflator -CPI Overall surplus/defcit -3.4 -0.9 -1.2 -2.1 TRADE 1979 1989 1998 1999 Export and import levels (USS mill.) (US$ n7rillons) Total exports (fob) 13,658 52,551 183,529 194,931 200,000 . Food .. 6,145 10,619 10,459 Fuel .. 4,321 5,181 4,646 10,00oo Manufactures .. 37,460 163,157 175,003 .__ Total imports (ci) .. 59,140 140,166 165,718 Food .. 4,192 3,793 3,618 6,o _ Fuel and energy .. 1,650 6,773 8,912 Capital goods .. 18,207 56,768 69,469 0 93 94 9s 90 97 ss 99 Export price index (1995=100) 25 38 88 81 Import price index (1995=100) 24 38 89 84 *Exports *Imports Terms of trade (1995=100) 104 100 99 97 BALANCE of PAYMENTS 1979 1989 1998 1999 Current account balance to GDP 1%) (US$tS millbons) Exportsofgoodsandservices 15,046 57,101 207,586 218,711 4 Imports of goods and services 17,842 60,655 165,899 189,799 Resource balance -2.796 -3,554 41,687 28,912 Net income -319 229 -16,645 -17,973 Vista Net current transfers 626 381 4,278 4,943 Current account balance -2,489 -2,944 29,321 15,882 Financing items (net) 2,489 2,386 -23,073 -7,377 Changes in net reserves 0 558 -6,248 -8,505 -2 memo: Reserves including gold (USS millions) .. ,, 149,811 158,337 Conversion rate (DEC, locaNUSS) 2.3 4.9 8.3 8.2 EXTERNAL DEBT and RESOURCE FLOWS 1979 1989 1998 1999 (US$ millions) Composition of 1999 debt (US$ mill.) Total debt outstanding and disbursed 2,183 44,932 154,603 127,639 IBRD 0 2,330 9,644 10,639 IDA 0 2,296 8,693 8,907 G: 4 A: 10,639 Totaldebtservice 61 5,650 18,186 13,204 _ :8,907 IBRD 0 223 941 1,161 IDA 0 14 97 118 _275 Composition of net resource flows Offcial grants -30 143 91 201 E: 24,238 Official creditors 199 2,277 2,288 3,913 F: 79,578 Private creditors 1,580 3,801 1,642 -2,945 Foreign direct investment 57 2,613 41,118 38,752 Portfolio equity 0 -180 -3,927 -9,836 World Bank program A - IBRD E - Bilateral Commitments 0 1,760 2,636 2,311 B-IDA D - Other mult9lateral F - Prvate Disbursements 0 1,111 2,086 1,780 C- IMF G - Short-taer Prncipal repayments 0 62 434 558 Net flows 0 1,049 1,632 1,222 Interest payments 0 175 604 720 Net transfers 0 874 1,028 502 Development Economics 8130100 - 58 -  Additional Annex 11 Environmental Assessment and Resettlement Background I. Natural characteristics of the Huai River Basin, as well as contamination from municipalities, industry, and agricultural runoff have combined to produce serious environmental degradation to the point where much of the basin's waterways are well above the Class V category, basically unsuitable for most uses. The contributing natural characteristics are seasonal low flows and low river gradients which cause benthic-accumulated organic pollution during the dry months. The Basin has some 4200 control structures on 191 tributaries. In addition, some 70 percent of precipitation occurs during the summer months, which forces regional water managers to close the gates for much of the year to store water for irrigation. 2. The Basin is heavily populated with approximately 150 million, and contains several medium sized urban areas, 150 major industrial plants including some 3000 small paper mills, tanneries and breweries. In 1994, a major pollution event occurred where stored polluted water was released into the basin's waterways causing the shut down of many water supply systems. Since that time, real time monitoring has been stepped up, with SEPA establishing some 160 national stations. 3. The Government of China has conmmitted itself to enforce water pollution control legislation, including carrying out a program of shutting down small, inefficient industrial plants, and providing capital for construction of treatment plants. By the end of 1996, some 3000 small plants had been closed, and by end-2000 all industrial enterprises in the Basin will have to comply with environmental regulations for effluents. With regard to municipal wastewater, over 70 new municipal treatment plants have been authorized and partially funded through a large capital program managed by the Ministry of Construction. The complementary role of the Bank is to finance collection networks and treatment plants in 11 municipalities located in Anhui and Shandong Provinces. Brief project description 4. The project consists of sub-components in Anhui and Shandong provinces including twelve municipal wastewater collection/treatment schemes, a pulp and paper mill pollution control project, and an institution strengthening program (environmental monitoring center for Anhui Environmental Protection Bureau). Status of environmental assessments and resettlement action plans 5. Two EAs, one for Anhui, and the other for Shandong, have been completed and found to be satisfactory. The Coal Design Institute, which has a Class A licence, prepared the EA for Anhui. The Shandong Provincial Scientific Research Institute of Environmental Protection prepared the EA for Shandong. Intemational Advisory Consultants assisted in this process through a process of review and comment. Provincial RAPs have been completed and found to conform to Bank requirements. Salient environmental issues 6. The most important issues which the EAs addressed are: - 59 -  (a) Sludge Disposal-The EA documents indicate that sludges coming from the treatment plants will be deposited in local landfills or used as a soil amendment. Written agreements to this affect have already been signed by the parties. (b) Discharge Water Quality - Each of the treatment plants must meet the current national standards - BOD, 30 mg/L; COD, 60 mg/L; and SS, 30 mg/L. It is fully expected that the proposed oxidation ditches are able to meet these goals when operated properly. (c) Industrial Discharges - Since this project will not deal directly with industrial discharges, enterprises must be encouraged to pre-treat prior to discharging directly into the municipal sewer system and comply with existing sewer standards for BOD, COD, SS, grease, heavy metals, phenols, toxins, etc. (see GB 8978-88-Integrated Wastewater Discharge Standards). Table A: Environmental Impacts and Mitigating Actions Assessed environmental impact Proposed mitigating actions A. During Construction A. During Construction Temporary disruption to communities Compensation and sound day to day management Dust and spoils control Water spraying for dust control Noise Construction traffic Re-routing large vehicles B. During Plant Operations B. Durin Plant Oeration Noise Mufflers on power systems Odors Good plant operation Unexpected industrial effluents Monitoring of plant influents Sludge management Safe disposal at landfills or farms Monitoring and institutional capacities 7. An environmental protection management system will be established under the project with the purpose of implementing existing laws and regulations in each of the municipalities. Responsibility to carry out environmental management and monitoring activities rest with the contractor during construction and with the treatment plant operator during plant operations. Informnation gathered will be made available to local and provincial EPBs and to the public if requested. The salient document in this process will be the Annual Safeguard Compliance Report which will summarize the previous years environmental and social indicator data. These key indicators of perfornance include, but are not limited to, the following: (a) Annually, basic annual operating summary, which includes such information as flows bypassed and for what period, energy use, sludge amount and disposal, general safety procedures and safety track record. (b) Annually, influent wastewater quality: wastewater flows, BOD, COD, SS, phosphorus, nitrogen and a suite of heavy metals and total petroleum hydrocarbons (TPH). (c) Annually, sludge quality and disposal: basic heavy metals and other toxics, efficacy and safety of on-going sludge disposal (if landfilled, various landfill indicators , if used as soil amendment, then tests for heavy metals in soil and produce) (d) Annually, groundwater quality of underlying acquifer from two-three wells, E-coli and TPH (e) Quarterly, discharge quality from the treatment plants: wastewater flows, BOD, COD, SS, phosphorus and nitrogen. (f) Quarterly, air pollutants: S02, particulate, CO, and noise at the plant's boundaries. - 60 -  (g) Quarterly, impact of municipal wastewater on recipient. At an appropriate distance downstream (actual location, to be determined, would be acceptable to the Bank) BOD, COD, SS, phosphorus, nitrogen, dissolved oxygen and E-coli count. Public participation and information disclosure 8. During the 12-month project preparation period leading up to provincial consolidated EAs and RAPs, many meetings took place with city PIUs, utility companies, city EPBs and other affected city organizations to discuss the proposed projects and preparation of the sub-component environmental assessment reports. These meetings have occurred monthly at a minimum and have resulted in full collaboration with local officials and full support of the project and the EA process. It is estimated that in total 30-40 meetings have been held with the public and over 50 meetings have been held with local governnent officials during the development of the projects, in both provinces. As an example, the tables below outline the basic participation and disclosure process as applied to Luan in Anhui Province. Each of the other project cities in both provinces were subject to identical procedures. Table B: Public Consultation - Luan Substance By who & with When Where Bank's whom Requirements Interview during EA team (CRAES); April 24-25, Qingshuihe OD 4.30 and site investigation PMO; PAP 1999 Juligou Villages OP 4.01 representative (proposed WWTP site) Draft EA TOR EA team; PMO; PAP June 15,1999 Meeting room of representatives; Lu'an deputy of people's Construction congress Commission EA TOR As above August Qingshuihe & OP 4.01 30,1999 Juligou Villages Consultation during ToR Stage Distribution of As above October 18, Ditto questionnaires with 1999 main points of the proposed project & key environmental issues Draft EA report As above Jan 24, 2000 Meeting room of Lu'an Construction Commission - 61 -  Table C: Information Disclosure - Luan Document Date Location Bank's Requirements Copies of EA TOR August 30, 1999 Qingshuihe & Juligou OP 4.01 Villages OD 4.30 BP 17.5 Copies of questionnaires September 28-30, As above with main points of 1999 proposed project and key envirotunental issues copies of draft EA report Jan 27-28, 2000 As above Final EA report March 28, 2000 Luan PMO Notification of June 26, 2000 Local newspaper availability of EA & RAP "Luan Evening reports News" Land acquisition and resettlement Anhui Province 9. Avoiding resettlement and minimizing impact on cropland where possible was a key objective during project design. As a result, resettlement impacts are not large and project affected people (PAP) are scattered throughout the project areas. Some 376 are affected by resettlement, which is relatively small compared to the population of the project areas. Most pipes will be laid under the urban roads and there are 27 pumping stations that require the acquisition of small parcels of land. WWTPs will require the acquisition of larger parcels of land; however, they will be located in the less densely populated suburban areas thus minimizing the number of people affected by resettlement. The largest resettlement impact of the sub-project areas in is Guoyang where 141 people are affected. The project impact is summarized below. 10. Acquisition of land and compensation for resettlement will be paid in a rate much higher than the terms set forth in the national and local regulations. Compensation for all affected structures would be paid at the replacement cost. The total resettlement budget of Y12.24 million include the basic cost, administration fee, design fee, monitoring cost and a contingency which is 10% of the basic cost. The land compensation rates and the annual budget plan for each city are showed in the following table. - 62 -  Table D: Impact on Land, Homes and People in Anhui Province Sub-Projects Land House Demolition People City Acquisition (sq.m) Affected (mu Huaibei Sewer network and 5 pumping 6.3 0 31 stations Bengbu Sewer network and 3 pumping 9.2 653 28 ____________ stations Huainan Sewer network and 4 pumping 14.4 0 7 stations Fuyang Sewer network and 4 pumping 2.3 622 21 _____________ stations Bozhou Sewer networks and 4 pumping 8.2 0 17 stations Suzhou Sewer networks and 3 pumping 0 0 0 stations Luan Sewer networks, 3 pumping 89.4 130 131 _________ stations and 1 WWTP Guoyang Sewer networks, 1 pumping 95.5 0 141 station and 1 WWTP Total 225.2 1405 376 Table E: Land and Resettlement Compensation in Anhui Province City Land Compensation (Y/mu) Annual Budget Plan (Y) Total Cost Cultivated Non- 2000 2001 2002 2003 (Y) Cultivated Huaibei 80,000- 340,170 129,195 187,920 657,285 Bengbu 32,800- 132,199 344,978 193,024 670,272 68,000 Huainan 40,000 15,000-150,000 1,633,860 70,644 262,044 1,966,548 Fuyang 80,000-100,000 498,671 498,671 Bozhou 40,000 ,_ 206059 206059 Suzhou* _ Luan 50,000- 50,000 5,085,231 194,370 115,884 5,395,485 54 000IIIIII Guoyang 25,000 20,000-22,000 2,845,781 ___ 2,845,781 Total 8,063,211 3,218,108 1508,747 1449,964 12,240031 * Pumping stations in Suzhou will be constructed on the free land owed by the State. No structures and no people will be affected. 11. Compensation for land acquisition would be paid to the collectives, which will be responsible for redistributing land among the affected farmers. Part of compensation for resettlement would be paid to the affected families who would find their own options for livelihood restoration. Affected houses and enterprises would be provided with alternative plots of land for relocation. All affected labor would be re-employed in the same enterprises after reconstruction. A detailed implementation schedule for the resettlement program has been drawn up. The specific compensation and relocation-related activities, which need to be completed before construction can commence on a given sub-project, have been clearly - 63 -  listed in the Resettlement Action Plan (RAP). The entire process of resettlement planning has been participatory. Census and socioeconomic surveys were conducted with the full participation of affected persons. The disclosure of the RAP has been announced on the local newspaper in each city as shown in Tables B and C. 12. The municipal governments were fully involved in the process of RAP preparation. Implementation would involve the Project Management Offices from the project entities and the local governments. Internal and external monitoring system has been set up. The internal monitoring report will be submitted to the Bank twice a year and the external monitoring report will be prepared by the independent monitoring unit once a year. Shandong Province 13. In Shandong Province the number of people affected are 1055. Primarily, there will be seven pumping stations that require the acquisition of small parcels of land but the wastewater treatment plants require somewhat larger parcels, but they are located in primarily rural areas thereby minimizing the number of people affected. The largest resettlement impact will be in Rizhao where 435 people will lose access to land on a permanent basis. The table below outlines project impacts on local residents: Table F: Impact on Land, Homes and People in Shandong Province City Sub-project Land-acquisition, House demolition, People affected _______________ ~~~~mu m2_ _ _ _ _ _ _ _ Heze Sewer network, 356 798 141 pumping station, WWTP Feicheng Sewer network, 94 264 146 pumping station, WWTP Rizhao Sewer network, 414 90 690 pumping station, WWTP Ju Xian Sewer network 26 120 78 14. As in Anhui, in Shandong three types of compensation are considered, temporary land use, permanent land use and for the taking of houses. Compensation varies widely depending whether permanent, cultivated, the type of crop and other considerations. A comprehensive schedule of rates has been established and the reader should refer to the RAPs for complete details. The total budget for resettlement in Shandong Province is RMB 16,342,400 which includes base costs or actual compensation as well as various administrative, monitoring and contingency costs. - 64 -  MAP SECTION   I ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~IBRD 31224 CHINA G$NAN ~~~~~~~~~~~~~HUAI RIVER POLLUTION CONTROL PROJECT v PFzoJEOr AREAS <~~~~ s-u Ati IYQJ~~~~~~~~~~~~~~~~~~~~4P4 ~~~~~RIVER RAIN BOUNDARZY U4-Lti CANALS '-RIVERS/STREAMS & PROV NCE CAPITALS --PROVINCE BOUNDARIRS MA~~~~~~~~~~~~~~~~~~~~~~~OG SI~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~E HENAN G-'d~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ERM4 34--~~~~~~~~~~TCMERBE