China - Zhejiang Urban Environment Project

Documentof The World Bank ReportNo: 26359-CHA FOR OFFICIAL USEONLY PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDLOAN INTHEAMOUNT OFUS$133 MILLION TO THE PEOPLE'SREPUBLICOF CHINA FOR ZHEJIANG URBANENVIRONMENT PROJECT December 18.2003 Urban DevelopmentSector Unit China Country Unit EastAsia and PacificRegion This document has a restricteddistribution andmay be usedby recipientsonly inthe performanceof their officialduties. Its contentsmav not otherwisebe disclosedwithout World Bankauthorization.  CURRENCYEQUIVALENTS (ExchangeRateEffective July 31, 2003) Currency Unit = RenminbiYuan (RMB Y) Y 1 = US$0.12 US$1 = Y 8.28 FISCAL YEAR January 1 -- December 31 ABBREVIATIONS AND ACRONYMS AIC Average IncrementalCost NGO Non-governmentalorganization AIEC Average IncrementalEconomicCost NMG Ningbo MunicipalGovernment AIFC Average IncrementalFinancial Cost NSCL Ningbo Sewage Company Limited CAAB City Appearance Administration Bureau NTWC Ningbo MunicipalTap Water General Company CACDCC CichengAncient County Developmentand NUIDO Ningbo Urban InfrastructureDevelopmentOffice Construction Co., Ltd. CIF Cost, Insurance,Freight PIP Project ImplementationPlan CITC China InternationalTenderingCompany PIU ProjectImplementationUnit CMP Catchment Management Plan PMO Project Management Office DLIDC Dongqian Lake Investmentand Development Company PRC People'sRepublic of China DLMC Dongqian Lake Management Commission PV PresentValue DRA Design Review Advisory QBS Quality-BasedSelection EA Environmental Assessment QCBS Quality and Cost-BasedSelection EAP Environmental Action Plan RAP Resettlement Action Plan EMP Environmental Management Programs SBD StandardBiddingDocuments EOCC Economic Opportunity Cost of Capital SMG ShaoxingMunicipalGovernment EPB Environmental Pollution Bureau SPMO ShaoxingProject ManagementOffice FMS Financial Management System SWM Solid Waste Management FRR Financial Rate of Return TA Technical Assistance GDP Gross DomesticProduct TOR Terms of Reference GPN GeneralProcurement Notice UCMF Urban ConstructionMaintenance Funds HMG Hangzhou Municipal Government UFMD Urban Facilities Management Division HPCMO Historic PrecinctConservation ManagementOffice UMB Urban Management Bureau (Shaoxing) HSWC Hangzhou Solid Waste Company, Ltd. UNDB United Nations DevelopmentBusiness IA Implementing Agencies WACC Weighted Average Cost of Capital ICB International Competitive Bidding WWTP Wastewater Treatment Plant IPCAP Industrial Pollution Control Action Plan ZFB Zhejiang- Finance Bureau - JBIC JapaneseBank for International Cooperation ZHPCMC Zhejiang Provincial ConstructionManagement Commission MBD Model Bidding Documents ZMCDP Zhejiang Multicities DevelopmentProject MEAAB Municipal Engineeringand AppearanceAdministration ZPCB Zhejiang Provincial ConstructionBureau Bureau MFB Municipal Finance Bureau ZPG Zhejiang ProvincialGovernment MOF Ministry of Finance ZUDPO Zhejiang Urban DevelopmentProject Office NCB National Competitive Bidding ZUEP Zhejiang Urban Environment Project NERC Ningbo EconomicResearchCenter Vice President: Jemal-ud-dinKassum CountryManagermirector: Yukon Huang Sector ManagerDirector: Keshav Varma Task TeamLeader/Task Manager: WiebeMoes  FOROFFICIAL USEONLY CHINA ZHEJIANGURBANENVIRONMENT PROJECT CONTENTS A. ProjectDevelopment Objective Page 1. Project development objective 3 2. Key performance indicators 3 B. Strategic Context 1, Sector-related Country Assistance Strategy (CAS) goal supported by the project 3 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 5 C. Project Description Summary 1, Project components 5 2. Key policy and institutionalreforms supported by the project 6 3. Benefits and target population 8 4. Institutional and implementation arrangements 10 D.Project Rationale 1. Project alternatives considered and reasons for rejection 11 2. Major related projects financed by the Bank and/or other development agencies 12 3. Lessons learned and reflected in the project design 13 4. Indications of borrower commitment and ownership 14 5. Value added of Bank support in this project 14 E.Summary ProjectAnalysis 1. Economic 15 2. Financial 17 3. Technical 18 4. Institutional 21 5. Environmental 22 6. Social 24 7. Safeguard Policies 25 F.Sustainability and Risks 1. Sustainability 25 2. Critical risks 26 This document hasa restricted distribution andmay be usedby recipients only in the performance of their official duties. I t s contents may not be otherwise disclosed [without World Bank authorization,  3. Possible controversial aspects 27 G. Main Conditions 1. Effectiveness Condition 28 2. Other 28 H. Readinessfor Implementation 30 I.CompliancewithBankPolicies 30 Annexes Annex 1: Project Design Summary 31 Annex 2: DetailedProject Description 34 Annex 3: EstimatedProject Costs 45 Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 49 Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary 61 Annex 6: (A) Procurement Arrangements 74 (B) Financial Management and DisbursementArrangements 83 Annex 7: Project Processing Schedule 89 Annex 8: Documents in the Project File 90 Annex 9: Statement of Loans and Credits 91 Annex 10: Country at a Glance 95 Annex 11: Safeguard Issues 97 Annex 12: Heritage Conservation and Tourism inHistoric City-center Upgrading 113 MAP(S) CN32898 CN32901  CHINA Zhejiang Urban Environment Project Project Appraisal Document East Asia and Pacific Region EASUR Date: December 18,2003 Team Leader: Wiebe Moes Sector Managermirector: Keshav Varma Sector(s): Sewerage (35%), Roads and highways (25%), Country ManagerDirector: Yukon Huang Other social services (25%), Solid waste management Project ID: PO66955 (1O%), Water supply (5%) Lending Instrument: Specific Investment Loan (SIL) Theme(s): Municipal govemance andinstitution building (P), Pollution management and environmental health (P), Access to urbanservices for the poor (P), Infrastructure services for private sector development (S), Other urban development (S) [XI Loan [ J Credit [ J Grant [ J Guarantee [ ]Other: For LoanslCreditslOthers: Loan Currency: United States Dollar Amount (US$m): 133 Borrower Rationale for Choice of Loan Terms Available on File: Yes Proposed Terms (IBRD): Variable-Spread Loan (VSL) Grace period (years): 5 Years to maturity: 20 Commitmentfee: 0.75% Front end fee (FEF) on Bank loan: 1.00% Pavment for FEF: Capitalize from LoanProceeds BORROWER 201.32 0.00 201.32 IBRD 13.78 119.22 133.00 Total: 215.10 119.22 334.32  Borrower: PEOPLE'SREPUBLIC OF CHINA Responsible agency: ZHEJIANG PROVINCIAL GOVERNMENT Zhejiang Urban DevelopmentProjectOffice (ZUDPO) Address: F9, 138 Tianrnushan Road, Hangzhou,Zhejiang, PRC Contact Person: Mr.Zhou Weiqun, Director Tel: 0571 87053002 Fax: 0571 88390232 Email: zudpo@mail.hz.zj.cn OtherAgency(ies): Ningbo PMO Address: F25, 208 SouthJiefang Road, Ningbo, Zhejiang, PRC 315010 Contact Person: Mr.Zhu Guoping, Director Tel: 0574 87191087 Fax: 0574 87197348 Email: qianqib@mail.nbptt.zj.cn ShaoxingPMO Address: 248 West RenrninRoad, Shaoxing, Zhejiang,PRC 312000 Contact Person: Mr.Wang Xiaojun, Director Tel: 0575 5129105 Fax: 0575 5143812 Email: sxcjj@mail.sxptt.zj.cn HangzhouPMO Address: 252 Tiyuchng Road, Hangzhou,Zhejiang, PRC 310003 Contact Person: Mr.ChenWei Tel: 0571 85172754 Fax: 0571 85102638 Email: h m b @163.com Istimated Disbursements ( Bank FY/US$m): Project implementation period: 2003 - 2010 Expected effectiveness date: 07/15/2004 Expected closing date: 06/30/2010 sP+L Form R," M. blam - 2 -  A. Project Development Objective 1. Project development objective: (see Annex 1) The objective o f the Zhejiang UrbanEnvironment Project (ZUEP) is to enhance the efficiency and equity o f waste management inNingbo and Hangzhoumunicipalities and the redevelopment o f the historic inner city inShaoxing and Cicheng, andthereby facilitatingthe sustainable development ofthese cities and establishing a model for conservation o f cultural heritage inother Chinese cities. The project will support measures to increase the utilization o f waste treatment facilities, increase sewerage services inunderserved areas including the fast-growing suburban areas and satellite towns inNingbo; and to improve waste management institutions and finances through implementation o f utilityreform measures. Redevelopment o f the historic inner-city and conservation o f built heritage in Shaoxing andCicheng is a top priority o f the municipal governments and the project will contribute to improving the quality o f life o f their citizens, sustain their cultural and historic nature through tourism development, upgrade their housing stock and safeguard environmental conditions. 2. Key performance indicators: (see Annex 1) Key performance indicators would include quantified targets for reduced water pollution from the urban areas into rivers, reduced water pollution from the industrial sector, expanded safe solid waste disposal, improved living conditions ininner cities, reduced level o f subsidies for investments inurban environmental infrastructure, enhanced cultural heritage conservation, enhanced tourism development, and improved awareness, management and control inurbanplanningand environmental protection. B. Strategic Context 1.Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: R2002-0218 (IFC/R2002-0224) Date of latest CAS discussion: Dec. 19, 2002 The project will support two main CAS themes o f "facilitating rural-urban transition and sustainable development" and three specific goals under it: strengthening environmental protection, improvingnatural resource management, and improving urbanmanagement and public service provision. 2. Main sector issues and Government strategy: The Zhejiang project cities, like so many other cities inChma, have undergone rapid growth and transformation over the last two decades, economically and physically. As rapid urban economic growth is expected to continue well into the future, the pressure for further expansion o f infrastructure would continue. The government has taken a more forceful position for environmentalprotection, economic revitalizationo f the old city centers and heritage conservation, which helped direct extensive resources devoted to environmental services such as waste collection and disposal and housingrenovation through inner-city renewal. This effort brings to the fore the issue o f efficiency in infrastructure investment andutilization. The government recognizes that technical, institutional, and financial capacities need to be strengthenedto improve the efficiency and sustainability o f infrastructure. To that end, it has beenpromoting corporatization, full-cost recovery, and limited private participation ininfrastructure.  Chinese cities have undergone breathtaking growth and transformation over the last two decades, economically and physically. Radical decentralization o f fiscal and administrative authority inthe early 1980sunleashed sustainedheavy investments going into infrastructure andhousing, which had deteriorated badly duringthe preceding two decades but now can be considered at least adequate for most cities o f China. As rapid urban economic growth is expected to continue well into the future, the pressure for further expansion o f infrastructure would also continue. On the other hand, the singular focus on expansion is yielding to broader and more qualitative issues o f sustainability, efficiency, and equity. Rapid industrial and urban growth is also increasing the concern over environmental sustainability. The government has taken a more forceful position regarding environmental protection since the late 1980s, compared with many other matters largely delegated to local govemments. This helped direct extensive resources devoted to environmental protection and industrial renovation, andas a result, the growth o f industrial pollution has slowed and, inmany large cities, has been reversed. Nevertheless, water pollution remains serious and is growing, due mainly to increasing wastewater from domestic and semi-rural sources. The government has made the clean-up o f the Hangzhou Bay, on which all three project cities are located, a priority program; embarked on a program to increase water conservation andmandated all municipalities in the country to treat 50% o f wastewater, and the larger ones to treat 70%, by 2010. While much remains to be done, especially for environmental protection, the extensive urban reconstruction over the last two decades has reduced most glaringinfrastructure deficiencies while increasing the resource requirements to operate and maintain the enlarged stock o f infrastructure. At the same time, the on-going reduction o f the state sector is constraining the fiscal and quasi-fiscal resources. This brings to the fore the issue o f efficiency ininfrastructure investment and utilization. An example o f inefficiency includes idle wastewater treatment plants due to overdesign or lack o f operating funds. The government recognizes that technical, institutional, and financial capacities need to be strengthenedto improve the efficiency and sustainability o f infrastructure. To that end, it has beenpromoting corporatization, full-cost recovery, and limitedprivate participation ininfrastructure. While the on-going downsizing o f government is spurring these structural transitions, it is weakening the regulatory and planning capacities that need to be strengthened for healthy market-based infrastructure provision. The effective development o f the urban areas requires the appropriate conservation and reuse o f the historic urban centers. These form the focus o f social and cultural environments for their regions. The Government i s determined not to sacrifice the protection o f its cultural heritage inthe push for rapid urbanization, high density development, and expanding population. Ithas beengradually realizedthat historic conservation and cultural activities contribute to economic development by maintaining the distinctive character o f the communities andtheir environment. The preservation o f cultural heritage is, however, facing many challenges and China has expressed its keen interest to learn from other countries that have faced this inthe past. Inthe context o f emerging and highly competitive tourism markets, the sustainability and growth o f the historic areas, and the adequate return on investments made by both the public and the private sectors, requires adequate institutional capacities to make carefully planned approaches to growth and change. Sustainable growth requires the identification o f potential and beneficial use inthe context o f the values and significance of the historic environments, and the support o f the communities inthe conservation and development o f their historic environments. The project aims at assisting the governments to improve their urban environments through appropriate conservation o f the historic inner-cities inShaoxing and Cicheng and develop a clear strategy for the development o f tourism to promote long-term sustainability and economic growth (see Annex 12). - 4 -  3. Sector issues to be addressed by the project and strategic choices: The overall objective o f the project would be to support the Zhejiang government's efforts to improve the competitive advantage o f its main cities through improved urban environmental conditions, thus improving the quality o f urban life within the municipality and the sustainability o f its infrastructure. This long-term development program would comprise a blend o f policy, institutional and investment initiatives. The program would support a stronger market orientation for municipal service pricing, and institutions delivering those services would be strengthened, as would the Environmental Protection Bureaus in its regulatory function o f monitoring water quality. The project builds on the main tenets o f the Bank's urban strategy -- liveability, good govemance, bankability and competitiveness -- and extends the idea of sustainable development. By focusing on client concerns about environmental improvement and heritage conservation, the project addresses two interlocking issues--environmental quality and competitiveness--both seen as central to improving quality o f life and earning a decent livelihood in the province. Sector reforms embedded in the project also have the effect o f improving city financial practices and institutions, and demonstrating the imperatives o f market pricing and cost recovery for environmental services. The borrowers are keenly aware that the municipalities must achieve a coherence o f effort in its regulations, service delivery and financial practices ifthey are to staycompetitive inthe domestic andglobalmarketsandresponsive to its citizens. The proposed redevelopment o f the historic city-centers in Cicheng and Shaoxing requires a strategic approach and enhanced community participation. Drawing on cultural heritage increases the impact and effectiveness o f development efforts, by incorporating the traditions, values, skills and knowledge o f local communities, and enhances the quality o f life for residents. The project will enhance the awareness o f dealing with urban poverty since many o f those living in the historic centers are older people with modest incomes. Unavoidable resettlement with this type o f projects will deal with equity, social impact and economic implications. Such an approach not only provides the much needed infrastructure improvements but also enhances the potential for investments intourism, which is a rapidly growing sector inChina. C. Project Description Summary 1. Project components (see Annex 2 for a detailed description andAnnex 3 for a detailed cost breakdown): The project inthe three municipalities o f Ningbo, Shaoxing and Hangzhou consists o f a mixture o f environmental infrastructure services, urban redevelopment and cultural heritage conservation components, along with associated technical assistance. - 5 -  e Ningbo (a) South Jiangdong Sewerage and Treatment Plant 44.17 13.2 26.28 19.8 (b) Zhenhai Sewerage and Treatment Plant 25.08 7.5 13.70 10.3 (c) Cicheng Infrastructure Development 3 1.64 9.5 8.53 6.4 (d) Dongqian Lake Development 40.48 12.1 18.89 14.2 Shaoxing Historic City-Center 121.91 36.5 47.88 36.0 Hangzhou Landfill Expansion 33.29 10.0 7.87 5.9 Services, training and Implementation Support 36.42 10.9 8.52 6.4 Front-end fee 1.33 0.4 1.33 1.o Total FinancingRequired 334.32 100.0 133.00 100.0 2. Key policy and institutionalreformssupported by the project: UtilityReform. While Zhejiang has beenone ofChina's leading provinces inimplementingreforms inthe industrial and commercial sectors, it has made less progress inreforming its public utility services, particularly wastewater and solidwaste management. Untilearly 2003, wastewater inNingbo and solid waste management inHangzhou were still being managed within a pre-reform structure by government departments rather than by autonomous utility companies. Consequently, the reform o f these services is a keypolicy component o fthe proposed project. The project is serving as a catalyst for such reforms by establishing financially autonomous utilitycompanies that can efficiently and effectively manage and operate the assets placedunder their ownership. Consistent with this objective, existing cost recovery systemsare beingrestructured so that each utility company implements its own tariffs at levels sufficient to ensure financial autonomy and sustainability. Significant progress has already been achieved toward the key reform objectives o f the project. In November 2002, the Ningbo Sewage Company Limited (NSCL) was legally established to assume ownership and operating responsibility for all wastewater treatment plants, all pump stations, the sanitary sewer system, andthe combined sanitary/stormwater system within the Ningbo urban area. By March 2003, the transfer o f all fixed assets within the core urban districts o f the city that are due to be the responsibility o f the company was completed. Municipal staff from those departments previously responsible for the wastewater system have been reassigned to the new NSCL. The wastewater surcharge on the water bill, which was introduced in 1999 and set at YO.lO/m3 for all customers, was replaced in July 2003 by a utility company tariff set at an average level o f Y0.49/m3. This new tariff is being billed and collected by the Ningbo Municipal Tap Water General Company (NTWC) and then remitted directly to NSCL, rather than to the Municipal Finance Bureau (MFB) as had been the case. InHangzhou, the municipal govemmenthas begun implementationof a programfor the reformo fthe solid waste management sector inthe city. InSeptember 2002, the Hangzhou Solid Waste Treatment Company - 6 -  Limited (HSWC) was established to assume responsibility for landfill disposal and treatment. This includes the existing Tianziling Landfill and the new ZUEP funded landfillto be constructed immediately adjacent and o n top o f the existing facility. The existing landfillwas transferred to the company inApril 2003 together with a reassignment o f the staffresponsible for their management and operation. Inorder to ensure that HSWC is financially sustainable, the city has agreed to reform the company's charges structure. The existing landfill tipping fee, which is presently Y15/t, will be increased to Y49/t in2004, which should be sufficient to achieve full recovery o f its operating expenses, including depreciation. Initially, this new higher tipping fee will incorporate a subsidy component that is funded by the municipal and district governments. However, as retail solid waste charges are progressively increased, this subsidy will decline andeventually be eliminated. Although significant progress has been made inestablishing a sector reform framework inboth Ningbo and Hangzhou, much remains to be achieved interms o f its implementation. The new companies arejust becoming operational and are still transitioning from government units to autonomous utility companies. To date, management focus has been on company establishment and the transfer o f assets, staff and revenues. Most o f the planning, management and financial systems requiredby the companies have yet to be fully developed and implemented. A priority task will be to formalize the staff transfers from the municipal governments to the NSCL and HSWC. The project will actively support the design and implementation o f these systems and tasks, particularly through the Package A TA for Institutional, Financial and Operational Strengthening. While these reforms are being implemented at the company level, there is also a need to implement corresponding reforms within the municipal departments responsible for the supervision and regulation o f the sectors. With the separation of operating functions from the municipal government, new regulatory structures and mechanisms need to be established so that government can protect the interests o f consumers, interms o f service provision and charges, while at the same time ensuring the financial and managerial autonomy o f the new utilitycompanies. The project will assist inthis regardthrough the Package A TA component. Cultural Heritage Protection. The government has indicated its determination not to sacrifice the protection o f China's cultural heritage during its pushfor rapidurbanization and to reconcile the needs o f preservation and development. The proposed project will assist this policy o f recognizing cultural heritage ininner-city redevelopment as an asset to enhance economic development and increase development impact and quality o f urban life by incorporating traditions, values andknowledge o f local communities. By examining the linkages between heritage resource management and tourism, the project cities will be enabled to support conservation goals by attracting investment and providing on-going revenues to promote long-term sustainability (see Annex 12). - 7 -  3. Benefitsand target population: The construction o f the Hangzhou LandfillNo. 2 will have a positive impact on the environment, as it will provide a technically, environmentally and financially sound, long term, municipal solid waste (MSW) disposal facility for Hangzhou. This in turn will allow M S W collection and removal rates to continue increasing, the service area to expand and hence ensure further improvements in urban environmental sanitation and in the exploitation o f economic development opportunities. The supply o f adequate M S W collection and disposal systems is a minimum need to allow the city to grow and develop economically in the future. Inaddition, tourism is a major economic activity in Hangzhou and the maintenance o f a clean city will foster its image as a tourist destination. The proposed modern leachate treatment processes (LTP), replacing the existing inadequate LTP, will treat leachate to the required standard for discharge o f effluent to the municipal sewer. The increased generation o f landfill gases from the new landfill will be used to generate power, increasing the financial and economic benefits o f the project. The impacts o f the proposed project are all beneficial because they preserve and sustain the positive benefits o f the successful operation o f the existing landfill operation at Tianziling. The impacts o f the proposed project to redevelop and restore the historic city center o f Shaoxing are many and varied, with broader implications to modernize the city and buildbridges to connect with and preserve the heritage o f Shaoxing's historical past. The main economic impact o f the proposed investment in renovation and conservation o f the Old City's cultural heritage will be felt by the tourism sector and the multiplier effect it will have throughout the whole local economy. The direct beneficiary will be the Shaoxing Cultural Tourism Investment and Development Corporation, which will be the custodian and management enterprise responsible for historic sites on behalf o f SMG. The other beneficiaries will be the hotels, restaurants, shops and other commercial outlets, transport and telecommunications agencies providing services to the tourism industry. Indeed, the sector will account for a rising proportion o f GDP and will be an important source o f future direct and indirect employment opportunities. The proposed improvement and upgrading of traditional houses in the five historic precincts will significantly enhance property and rental values inthe project area. The results o f the socioeconomic survey demonstrate the high to medium priority which respondents attach to improvements in their housing conditions, living environment, key urban services and measures which will enhance the status o f Shaoxing, especially the conservation o f the historic city center. Therefore, it i s expected that the improvements will generate an increase in property and rental values in the immediate project area and potentially in adjacent neighborhoods. This was confirmed in discussions with the Shaoxing Construction Bureau and Shaoxing Land Resources Bureau. The proposed project in Shaoxing forms part o f the overall strategy to redevelop and modernize the city center, while restoring and conserving the cultural heritage o f the Old City itself. This medium to long-term development program will have a beneficial environmental impact in a number o f areas: (a) environmental landscaping and public parks - these will improve the general appearance o f the Old City and complement many o fthe other development initiatives take by SMGto enhance the image of Shaoxing as a modern city which welcomes tourists; (b) reduced pollution inthe rivers and canals o f the Old City - the dredging and lining o f the canals, coupled with the proposed flushing and reduced direct wastewater discharges from the five historic precincts, will improve water quality and enhance the overall ambience o f the city center; (c) reduced air pollution - more provision o f open spaces and green areas, plus more effective control o f city traffic in and around the Old City, will lead to an improvement in local air quality; and (d) renovation and upgrading o f historic buildings and traditional residential houses - the restoration and improvements to many ancient buildings will preserve the old cultural heart o f the city and reverse the dilapidation and disrepair inthe historic areas. - a -  The impacts o f the proposed project to improve the environmental infrastructure o f Ningbo involve a series o f component projects. One o f the main objectives for developing and improving sewerage and wastewater treatment services inNingbo is to safeguard and improve general standards o f public health. The proposed four sewerage sub-components will contribute to health improvements through the reduction inmany o f the physical vectors which can transmit waterborne and water-related diseases (e.g. septic tanks, night soil facilities, other basic sanitation facilities, vermin and rodents, unsanitary canals and waterways, etc.), but parallel initiatives will be needed in public health education and improvements to personal hygiene to ensure that all the potential healthbenefits are realized. The provision and extension o f sewerage and wastewater treatment facilities in Ningbo will enhance property values inthe four project areas. The projects should generate significant cost savings through the replacement o f septic tanks and night soil facilities, which are old and outdated but still important modes o f sanitation in the four project areas. The environmental pollution from these basic forms o f sanitation will also be eliminated or significantly reduced. Effective environmental protection and pollution reduction is a municipal priority in Ningbo. In this context, one o f the central objectives is the rehabilitation and clean-up o f many o f the principal waterways and water bodies in the City and the districts: (a) Zhenhai - Yong River, minor tributaries and water courses, and the inshore waters o f Hangzhou Bay itself; (b) Jiangdong - Yuyao and Fenghua Rivers, Yong River, and minor tributaries and water courses; (c) Cicheng - canals and waterways inthe Old Town, C i River, and minor tributaries and water courses; and (d) Dongqian Lake - the lake itself, and minor tributaries and water courses. The aim o f the proposed road around Dongqian Lake is to improve transport communications for local residents and facilitate access to the natural countryside and beauty spots within the catchment area o f the lake as part o f the programme to support tourism development. Similarly, the proposed road improvements in Cicheng will improve local mobility and enhance the City's appearance and flow of tourists in and through the City. The overall project will directly benefit about one million people through improved wastewater and solid waste services, better environmental conditions through improved water quality inrivers, lakes and city canals, and improved housing inthe inner-cities for some and relocation to new housing elsewhere for others. Indirectly, many more people will benefit from improved environmental and living conditions. While the project does not target special groups, the enhanced basic urban services and inner-city renewal will particularly benefit the lower-income underservedareas and the older people still livinginthe old city-centers. The tourism sector is inits infancy inChina but the growth i s expected to increase exponentially over the next decade as one o f the world's major tourist destination with focus o n cultural heritage sites and scenic beauty. The project cities have both andtheir proximity to Shanghai constitute significant potential to develop tourism as a major contribution to economic growth. Preserving heritage resources and developing a strong tourism industryrely heavily on the presence o f sound attitudes among the population. Buildinga constituency for tourism by providing inclusion through participation o f the local communities is therefore essential part o f the project. - 9 -  4. Institutionaland implementationarrangements: The ZhejiangProvincialConstructionBureau(ZPCB) is responsiblefor the overallcoordinationof the project. The ZhejiangUrbanDevelopmentProjectOffice(ZUDPO), whichhas beenestablishedwithin the ZCB, will directlyimplementthis coordination function. ZPCB andZUDPO will report to, andby guidedby, the Project LeadingGroup (PLG) whichconsists ofheads ofrelevantcommissions andbureaus. The PLGandZUDPO already exist, havingbeenoriginallyestablishedfor the successfully implemented Bank-financedZhejiangMulticities DevelopmentProject(ZMCDP)that was completedin2001. Therefore, appropriate functions, staffingandhave already beenarrangedand are inplace. Eachof the three projectcities has establisheda projectmanagementoffice to oversee the implementation o f its components. InNingbo, this will be the existingNingboUrbanInfrastructure DevelopmentOffice (NUIDO), whichwas establishedfor ZMCDP, while newPMOShavebeencreatedinShaoxingand Hangzhou. Thesenew officeshave accessedstafffromthe previous PMOSresponsiblefor ZMCDPto ensure continuityof experiencewith Bankprocedures. The companiesthat will operate the projectassets uponcompletionwill holddirect implementation responsibilityfor each component. The Ningbo SewageCompanyLtd. (NSCL), whichwas establishedin November2002, will implementall wastewatercomponentsinNingbo(Jiangdong, Cicheng, Zhenhaiand DongqianLake). NUIDOwill implementthe non-wastewatercomponentsinCichengonbehalfof the CichengAncientCounty DevelopmentandConstructionCo. Ltd. The newlyestablishedDongqianLake InvestmentandDevelopmentCompany(DLIDC) will beresponsiblefor the implementationofthe non-wastewaterworks withinthe DongqianLake projectcomponent. The HangzhouSolidWaste CompanyLtd. (HSWC), whichwas establishedinSeptember2002, will implementthe Hangzhoucomponent. Experiencedstafffrom the existingMunicipalEngineeringand Appearance AdministrationBureau(MEAAB), whichis presentlyresponsiblefor providingsolidwaste servicesinthe city, will be transferredinto HSWC. Additionally, the HangzhouPMO, whichhas been establishedspecificallyfor the project, will be transferredintothe HSWC. As notedabove, the Shaoxingproject componentswill be executedby the ShaoxingProjectManagement Office (SPMO), whichwas establishedinApril 2002 within the MunicipalConstructionBureau. SPMO will closely coordinatewith the HistoricPrecinctsConservationManagementOffice (HPCMO), an agency of the municipalgovernmentthat is responsible for the implementationandmanagementof heritage conservationandhousingredevelopmentinthe historic city center. - 1 0 -  Zhejiang Provincial ProjectLeading c I + I n I Ningbo PMO ShaoxingPMO Tianziling Upgrading 5 Landfill Roads, sewers, bridges, historic precincts DLIDC Wastewater in Roads and South Jiangdong, sewerage in Zhenhai, DongqianLake conveyancefrom Cicheng and Dongqian Lake D. Project Rationale 1. Project alternatives considered and reasons for rejection: The ZUEP is a hlfillment o f earlier agreements with the provincial government to complement the ongoing water supply and urban development started under ZMCDP with a follow-up project focussed on improving environmental services inselected urban areas o f Zhejiang province. Inearly 2000, the Zhejiang Government and project cities started identifying the size and scope o f the proposed project and pre-feasibility studies were prepared. Since then, the selection of project cities andthe scope o f work changed frequently because the cities had access to alternative financing sources which could proceed more rapidly. At the end of 2001 the provincial government presented a final project proposal which was accepted by the Bank despite the lack of customary preliminary studies for the many o f the new components. Subsequently, international consultants were selected and started their assignment inMarch 2002. The Ningbo sewerage and sewage treatment component andthe Hangzhou solid waste management component, representing some 50% o f the total project costs, are consistent with the initial objective for ZUEP on basic urban environmental services. Having already satisfied the immediate need for upgrading and expanding basic urban services, the inner-city rehabilitation and heritage preservation components in -11 -  Shaoxing and Cicheng reflect the increasing need for cities to improve the livingconditions for its inhabitants andto revitalize the city-centers to facilitate economic growth and enhance competitiveness, while preserving its cultural heritage. The Cicheng and Dongqian lake components also address the need for upgrading o f infrastructure in suburban and smaller towns while similarly addressing the needs for sustainable economic growth through the development o f their most important assets such as cultural heritage and recreational opportunities. The project presents opportunities for the Bank to be involved in more integrated urban development with heritage conservation as an integral part, rather than more narrowly defined interventions inspecific sub-sectors. 2. Major relatedprojectsfinanced by the Bankand/or other developmentagencies (completed, ongoing and planned). This is the second urbandevelopment project inZhejiang province with the same municipalities. The first project focussed mainly on provision o f water supply infrastructure inHangzhou and Ningbo, inner-city roadreconstruction inNingbo and development o f a new industrial zone in Shaoxing. The project was rated satisfactory for some components andhighly satisfactory for others. The proposed project builds on these investments by focussing on muchneeded environmental infrastructure, inner-city redevelopment and heritage conservation with associated tourism aspects. Other multilateral and bilateral agencies have been and plan to be involved infuture infrastructure development inthe project cities inadditionto major local investments indirectly or directly related to the proposed project. These include expansion o f wastewater collection and sewage treatment inall three cities, housing renovation and redevelopment o f the city-centers in Shaoxing and Cicheng, andheritage conservation and tourism development in Shaoxing and Dongqian lake. UNESCO has expressed interest in participating inthe cultural heritage aspects o f the project. Latest Supervision Sector Issue Project (PSR) Ratings 1Bank-financedprojectsonly) Implementation Development Bank-financed Progress (IP) Objective (DO) Water supply, industrial (completed) Zhejiang Multicities S S Development Project Wastewater and solid waste, industrial HubeiUrban Environment S S pollution control, water pollution Project Water supply, wastewater, industrial Hebei Urban Environment S S pollution control Project Air pollution, wastewater Beijing UrbanEnvironment 2 S S Xher development agencies Asian Development Bank Japanese Bank for International Shaoxing wastewater treatment Cooperation (JBIC) (Highly Unsatis - 1 2 -  3. Lessonslearnedand reflectedin the project design: Experience from a full range o f projects financed by the Bank inthe urban sector points to the importance o f borrower ownership, highquality, appropriateness and efficiency o f design o f capital investments, financing and institutional arrangements for proper maintenance and operation. The project will incorporate these lessons as it makes efficiency and sustainability as a main project objective, and its components are based on the priorities outlined inthe cities' officialurban and environmental master plans. Furthermore, Bank involvement would facilitate utilityreform, financial sustainability o f basic urban services and, where possible, private sector participation. Furthermore, the Bank can contribute its wealth o f experience with heritage conservation inurban redevelopment from both within China and outside. The design and phasing o f the financial and institutionalreforms for the Ningbo wastewater component have been based on the Bank's experience with similar recent projects in China. The Bank's approach has been to support State policies for the wastewater sector, which promote the corporatization o f sector assets and operations. Corporatization i s intended to improve efficiencies inthe sector as well as to better facilitate adequate and timely tariff increases by establishing a more transparent and commercially oriented basis for cost recovery. However, in some cases, the achievement o f these goals has been limited because corporatization has initially been extended only to those facilities being constructed under the Bank-funded project. As a result, existing assets have continued to be operatedunder a pre-reform arrangement by bureaus o f the municipal government, at least over the project implementation period. This then has meant that cost recovery and tariff setting have not been fully brought within the new corporatized framework for the sector. Based on the Bank's experience, the reformplan developed for Ningbo has been specifically extended to the entire wastewater sector inthe city. Furthermore, the basic elements o f this plan have already been implementedduringproject preparation. The Ningbo Sewerage Company Limitedwas established duringproject preparation and has already assumed ownership anddirect operating responsibility for all existing wastewater assets. The wastewater tariff was re-established as a utility company tariff and, since March 2003, all collections have been remitted directly to the Company. Therefore, the structures needed to facilitate timely and adequate tariff increases have already been put into place. The project design relied mainly on lessons from the recent similar Bank operations inChina, and a few recent Bank studies, mainly on pollution control management and wastewater treatment performance in China. A key lesson from these i s the tendency to over-design treatment plants, inadequate investments in collection systems resulting inunderutilization o f the installed treatment capacity, and insufficient technical and financial capacity to operate and maintain the facilities properly. The project preparationteam has carefully reviewed the appropriate capacity and standards for the case o f the proposed South Jiangdong WWTP as well as the adequacy o fthe collection systems. The current drive for secondary treatment in China will substantially increase the volume o f sludge, which will require additional methods and facilities for treatment and disposal. While water quality improvement is the main objective for building environmental infrastructure, this objective can only be achieved infull when pollution sources, often outside the immediate project area, are being dealt with. This is particularly true for pollution control o f industries upstream o f the project areas, and the project includes action plans to address these problems. The current institutional arrangements for the implementation o f the Dongqian Lake development, Cicheng town revitalization and Shaoxing inner-city renovation are based on construction implementation units with unclear responsibilities for operation and maintenance o f the facilities. Older urban projects inChina have demonstrated the risks o f such an approach for long-term sustainability and assurances are sought on adequate representation o f operating agencieshtilities within these project development units during design and construction implementation. - 13-  4. Indications of borrower commitment and ownership: All three cities participated inthe recently completed Zhejiang Multicities Development Project (ZMCDP) with excellent performances interms o ftimeliness ofproject preparation and procurement, efficient financial management, effective construction supervision, adequate and timely provision o f counterpart funds, andabove all highly qualified staff with managementguidance. The government has already spent considerable resources indeveloping overall urban master plans, infrastructure sectoral plans, conservation plans for the preservation o fthe considerable cultural heritage. Inaddition, the government is providing considerable amount o f counterpart funds for preparatory activities by local agencies, design institutes as well as facilities for the international consultants. The government has establishedwell staffed project management offices inall three cities prior to the preparation activities with appropriate accommodations andresources. Furthermore, the city governments have already spent considerable funds inthe sub-sectors addressed by the proposed project, including a pilot project for urban upgrading o f roads, housing and essential urbanservices. ZMCDP complied fully with the institutionalreform agenda covenantedinthe legal agreements, and the water sector agencies have attained adequate financial sustainability. The commitment o f the Shaoxing and Ningbo municipal government to cultural heritage conservation was demonstrated beyond a doubt under ZMCDP andboth have participated actively innational and international activities organized by the Bank over the years. The government inShaoxing is keenly aware o f the national importance o f its cultural heritage and the need for preservation, while Ningbo recognizes the considerable potential for tourism development through careful development o f its cultural and recreational assets. 5. Value added of Banksupport in this project: The proposed project is a mixture o f expanding basic urban infrastructure services, includingneededutility reform which have been successfully achieved inmany similar projects inChina, and integrated urban renewal o f old city-centers with a strong cultural heritage conservation component. The scope o f large scale inner city redevelopment in Shaoxing and Cicheng is quite ambitious interms o f innovations attemptedbut isjustified since both Shaoxing and Ningbo municipal governments have demonstrated will and competence to carry out innovations ininfrastructure and environmental sectors. Under the recently completed Zhejiang Multicities Development Project (1993-200 1) they have successfully implementeda broad variety of difficult infrastructure components at highquality and pace. Bank involvement has substantially enhanced the environmental impact o f the project by identifying complementary measures to ensure that the environmental objectives, particularly water quality improvement incanals rivers and lakes, will be achieved. These measures are supported by the project through technical assistance but the implementationwill be fundedby the responsible governments and their agencies and consist of: (a) catchment management planfor Dongqian Lake in Ningbo; @) wastewater treatment plant sludge management planinNingbo; (c) additional secondary and tertiary sewerage inShaoxing andNingbo; and (d) industrial pollution control inNingbo. Inaddition, detailed water quality modelling studies o f Dongqian Lake demonstrated that the proposed dredging o f the lake, which would have significant negative environmental impact, would hardly improve the water quality inthe lake and the proposal was replaced by a catchment management plan dealing amongst others with non-point pollution from agriculture (see Chapter E Summary Project Analysis). - Cultural heritage preservation i s gradually becoming an integral part o f city development activity. China - 14-  has indicated that it wants to leam from other countries and intemational institutions such as UNESCO. The Bank has built up considerable expertise inthis area, inChina and worldwide, and has contributed, through various projects inNingbo, Lijiang, Chongqing, Shenyang, etc., to raising awareness about the importance o f urban heritage conservation, makingintemational expertise and experience available to local experts inthis field, stressing the importance o f economic sustainability o f historic sites, andproviding seed funding for conservation when it was most urgently needed. Assisting with integrated historic city/town redevelopment and conservation is an important next step in safeguarding China's unprecedented cultural treasures while promoting economic development and environmental enhancement. Tourism development is largely a municipal function through the established Tourism Bureaus. They are promoting many projects, ranging from golf courses to attracting investments but does so largely in isolation from other major agencies. The Bureaus often lack a cohesive tourism plan that states an overall tourism vision and sets out priorities, with the danger that some developments may be inconsistent with cultural heritage theme on which future tourism to the area depends. The project will assist the project cities o f Shaoxing andNingbo to develop all inclusive tourist development strategies, assist with human resource development within Tourism Bureaus as well as inthe tourist service communities, and provide technical assistance for skills development an awareness-building about the service industry andheritage resource management. As part o f the ZUEP preparation, broadsocial assessmentswere carriedout for all the project components to assess the affected communities' attitudes towards and participation inproject design and implementation, opportunities for voluntary resettlement and participation intourism development. A more detailed follow-up survey was carried out in Shaoxing's Jishan historic precinct, proposed as a pilot project for integrated urbanupgrading. While supporting the project objectives and proposals, the respondents lacked adequate information to fully understand the implications o f the project while expressing the desire for more participation inthe economic activities associated with tourism development. Sufficient number o f residents have expressed a desire to move to newer and better accommodation outside the historic city centers which would enable the authorities to carry out most o f the resettlement ina voluntarily manner. Technical assistance has been included inthe project design to further community consultation and participation (see Chapter E - Summary Project Analysis and Annex 2). E. Summary Project Analysis (Detailed assessmentsare inthe project file, see Annex 8) 1. Economic(see Annex 4): 0Costbenefit NPV=US$ million; ERR = % (see Annex 4) 0 Costeffectiveness 0 Other (specify) Project Benefits. The project will generate a range o f important benefits. The new landfill to be constructed inHangzhou will be the primarymeans for the disposal o f municipal solid waste inthe city. As such, the project beneficiaries constitute 70% 80% o f the municipality's urban population. InNingbo, the - four wastewater components o f the project (Jiangdongnan, Zhenhai, Cicheng, Dongqian Lake) will increase the volume o fwastewater treated inthe city by 66%, from 290,000 m3/dto 480,000 m3/d. The project will also increase the utilization o f existing treatment capacity through an expansion o f the sewer network. The population directly benefiting from these service improvements is estimated to be about 600,000 in2008, whenthe project assets are fully operational, and will then increase to over 800,000 by 2020. The non-wastewater improvements inthe Cicheng and Dongqian Lake areas o f Ningbo will benefit existing and future residents o f these communities as well as tourists visiting these areas. InShaoxing, the project will upgrade housing and provide improved infrastructure (wastewater, water, electricity, gas, telephone) - 15-  services to the five historic precincts o f the old city and thereby directly benefit the 20,000 residents o f this area. The project will also provide the restoration o f historic and protected buildings, rehabilitation o f canals, roadwidening, new bridges and parks inthe historic city. These improvements will benefit all residents o f Shaoxing as well as the tourists who will visit this culturally and historic significant area. Economic Analvses. Many o f the project benefits, particularly those relating to environmental and public health improvements could not be quantified. For this reason, the choice for priority interventions for the project has been guided by cost effectiveness analysis. Based on this approach, alternative project designs were identified andevaluated in order to identify the least cost solution for incorporation into the project. InHangzhou, the project design is based onthe least cost solutionofconstructing a new sanitary landfill adjacent to and partially overlying the existing Tianziling Landfill. This conclusion was reached after a review o f the various disposal systems available (landfilling, incineration, composting, recycling) and an analysis o f nine alternative sites for the landfill. InNingbo, least cost analyses were undertakento support the selection o fthe preferredsecondary treatment processes for the Zhenhai and Jiangdongnan wastewater treatment plants. On the basis o f this analysis, as well as due to its favorable operating record and applicability to China, the oxidation ditch has been selected as the preferred alternative for Zhenhai. For Jiangdongnan, the sequencing batch reactor (SBR) process is estimated to be least cost solution although it enjoys only a slight cost advantage over extended aeration activated sludge (A20).However, relative to the A20 process, there are comparatively few existing SBR applications inChina and the SBR process i s typically supplied as a proprietary process. In contrast, because the A20 process i s much more common in China, local maintenance and equipment replacement is much easier. For these reasons, the A20 process has been selected as the preferred alternative despite its slightlyhigher cost. Two options for the treatment o f wastewater generated inNingbo's Cicheng town have been assessed: centralized treatment at the new Jiangdongnan WWTP; and, decentralized treatment by constructing a small WWTP in Cicheng. The centralized option is estimated to be 10% less costly than decentralized treatment. On this basis, centralized treatment has been selected as the preferred option. An analysis was thenundertakento determine the optimal diameter o fthe 12.7kmpipeline that will transfer o fwastewater to Jiangdongnan. Over the shorter-term planninghorizon, either a 500 mmor 600 mmwould be the least cost. However, over the longer-term, a 700 mmdiameter pipeline is the least cost. Basedo n these findings, the 600 mmdiameter is considered to be preferable because it represents a reasonable compromise solution for both the shorter and longer planninghorizons. Wastewater collected from the Dongqian Lake area o f Ningbo will also be transferred to the Jiangdongnan WWTP, through a new 12.5 kmpipeline constructed under the project. As was the case for Cicheng, in order to determine the optimal diameter, two planning horizons have been considered. Over the shorter term, inwhich the average flow is 20,000 m3/d, the costs o f the 700 mm and 800 mm diameter options are essentially the same. Over the longer term, inwhich the average flow is 70,000 m3/d, both the 1100mm and 1200 diameter pipelines are the least cost solutions. Based on these results, the 900 mm diameter represents a good compromise solution and, therefore, appears to be the optimal solution. However, the optimal diameter is highlydependent on the rate at which flows increase as the Dongqian Lake area is developed. Therefore, a more detailed analysis o f wastewater flows will be undertaken during preliminary anddetailed design inorder to finalize the diameter. - 16-  2. Financial(see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4) Financial Viabilitv. The FRR for the Hangzhou Solid Waste component is calculated as 1.3%, which is slightly below the weighted average cost o f capital, which is estimated to be 3.3%. Therefore, the project does not achieve full cost recovery over its entire life. However, the project does fully recover all operating costs and about 85% o f capital costs. The average incremental financial cost (AIFC), which is calculated on the basis o f ZUEP funded landfill, is estimated to be Y49/t. Given that the present value o f average tariffover this same period is estimated to be Y45/t, the financial subsidy is the difference; Y4/t. This subsidyis provided inthe form o f equity contributions by the municipality toward the cost o f fixed assets, including the ZUEP funded landfill. For the project wastewater components inNingbo, the FRR has not been calculated because the concept o f incremental revenues is not fully applicable. Since all wastewater generators pay the charge regardless o f whether they are connected to the public sewer, the major wastewater expansion provided under the project cannot be directly linked to an incremental revenue stream. However, the AIFC has been estimated to assess the cost effectiveness and subsidyrequirements o f the components. The AIFCs for the Zhenhai, Jiangdongnan, Cicheng and Dongqian Lake components are Y1.99/m3, Y0.84/m3, Y0.86/m3 and Y1.27/m3 respectively. The significant variations inthe AIFC reflect significant differences inthe boththe capital and operating cost structures between the four components. The overall AIFC for the four components is Yl.O3/m3. Since the average tariff, which is Y1.53/m3 o f wastewater treated over the 2003 - 2017 forecast period, is actually higher than the overall AIFC o f Yl.O3/m3, the net subsidy over this periodis zero. However, while the overall net subsidy is zero, subsidies are provided inform o f municipal and district government contributions toward the capital cost o f ZUEP. The average tariff exceeds the AIFC because o f the anticipated need to implement significant tariff increases in2010 and 2011 to cover the capital and operating costs o fplannedwastewater expansions. Financial Reforms. A major component o f the project is the development and implementation o f a comprehensive financial reform program within Hangzhou solid waste and Ningbo wastewater sectors. Duringproject preparation, both sectors have been corporatized with municipalcompanies being established to own andoperate all major assets, including those to be constructed under the project. These new companies are financially autonomous inthat they have control over their respective revenue streams through the application o f utility company tariffs that have replaced the municipal charges previously applied. Furthermore, increases inthe new tariffs are being implemented inorder to ensure the financial sustainability o f the new companies. InHangzhou, the landfill tipping fee will be increased from Y15/t to Y49/t in2004, which should be sufficient to achieve full cost recovery. InNingbo, the average wastewater tariff was increased from YO.lO/m3 to an average o f Y0.49/m3 as o f October 2003. Over the period to 2010, additional tariff increases totaling just over 80% will be required, bringingthe average tariff to Y0.79/m3. An analysis o f the impact o f the increases insolid waste and wastewater tariff increases on low-income domestic consumers indicates that these tariffs are affordable. For a low-income household inNingbo, the proportion o f income required to pay for water and wastewater i s projectedto increase only very slightly from 1.6% in 2003 to 1.7% by 2010, well below the generally accepted upper limit o f 5%. InHangzhou, the existing solid waste transport and disposal charge represents only 0.2% o f household income for the low-income group. Ifthe municipal subsidy component o f the tipping fee is eliminated by the end o f 2006, retail charges will need to be increased substantially. Under this scenario, the proportion o f income will peakat about 0.9% o f income for this group, still well withinthe limits o f affordability. - 17-  Proiect Companv Financial Proiections. Financialprojections have been prepared for the three project companies, Hangzhou Solid Waste Management Treatment Company Ltd. (HSWC), Ningbo Municipal Sewage Company Ltd. (NSCL), andthe Dongqian Lake Investment and Development Company Ltd. (DLIDC). Based on the agreed financial reform program, the HSWC tippingfee will be set at Y49h in 2004, which should be sufficient to fully recover operating expenses, including depreciation. The company i s also expected to be able to contribute toward counterpart funding o f the new ZUEP landfill. The NSCL i s projectedto generate cash operating surpluses as it implements annual tariff increases beginning in2004. These surpluses will be usedto fund about 16% o f the capital cost o f the project, which will, therefore, reduce the required counterpart contributions from the municipal and district governments inNingbo. With full operations o f the project assets and debt service commencing in2007 and2008 respectively, net income and cash generation will decline but remain well within acceptable levels. For the DLIDC, financial projections are based on a conservative scenario regarding future increases inthe price o f land. Even on the basis o f this conservative scenario, the projections indicate that DLIDC should be financially viable and sustainable over the 2003 - 2015 forecast period. The company should be able to generate the fundingneededto implement its overall development program, which includes the ZUEP component, and repay all associated debt. Fiscal Impact: An analysis ofthe availability o f counterpart funds has beenundertaken by reviewing revenues and expenditure ineach o f the project cities. Counterpart contributions are to be provided by the municipal governments inall three project cities as well as the Zhenhai District Government inNingbo. Based on conservative assumptions regarding future revenue growth, the analysis indicates that the project components are affordable in all three cities. The project will be relatively more onerous inthe case o f Zhenhai District, though still well within affordability. Requirements for project counterpart funds from the three municipal governments andZhenhai District as a proportion o ftotal revenues varies between 0.1% inHangzhou (0.4% inthe peak year), 0.4% inNingbo (0.9% inthe peak year), 0.9% inZhenhai District (2.5% inthe peak year), and 2.5% in Shaoxing (6.3% inthe peak year). When considering only revenues that can be allocated for funding capital expenditures, the incidence o f the project counterpart funds varies between 0.2% on average inHangzhou (1.O% inthe peak year, 2004), 2.0% inNingbo (4.1% inthe peak year, 2004), 5.9% inZhenhai District (15.6% inthe peak year, 2004), and4.2% inShaoxing (10.0% inthe peak year, 2004). 3. Technical: Development context o f the urban upmading. works. The urban upgrading proposals in Cicheng and Dongqian Lake have been presented ina larger and long-term strategic context whereby past developments and future investments, including those outside the scope o f the Bank-funded project, are clearly outlined. An implementation plan covering a period o f 10-12 years outlines the upgrading o f the old town of Cicheng, a new resettlement area (60 ha.) for residents that will leave the old town, as well as the development o f a new satellite town to provide growth for the town. A loan from the State Development Bank in the amount o f some $150 million has been concluded recently to finance the above activities. Similarly, the development plans for Dongqian Lake have been further detailed, based on the concept plan prepared by an international development consultant and financially underpinned by a viable business and market plan(see Annex 5). Donmian Lake Catchment Management Plan Detailedmodeling studies concluded that the proposed dredgingo f the Lake would constitute a major project cost, having significant environmental implications - 18-  butlimitedbenefits interms ofwater quality improvement. As a result, the Ningbo municipal government agreed to forego the lake dredging and await the beneficial impact o f the wastewater interception works and implementation o f the lake catchment management plan on the water quality inthe lake. Water quality inDongqianLakeis declining as a consequence ofinputsofarange ofpollutants from a number of sources. The pollution source o f most immediate concern is domestic wastewater, the majority o f which will be either diverted out o f the lake by means o f the ZUEP project interventions. However, for the water quality inthe lake is to be sustained at acceptable levels, a integrated Catchment Management Plan (CMP) has been prepared, involving both physical interventions and policy instruments to control potentially polluting activities inthe catchment. The CMP will involve: (a) quantification o f the hydrological and pollution load inputs to the lake through monitoring and other appropriate studies; (b) on-going control o f dispersed domestic wastewater sources through collection andor treatment and control o f overflowshpillages; (c) relocation o f industry outside the lake catchment into an industrial estate; (d) physical interventions and policy instruments on agriculture (inparticular confined animal rearing) within the catchment; (e) controls on aquaculture and management o frecreational use o f the lake; (f) implementation o f erosion control programs in agriculture and o f forestry reclamation programs to prevent lake sedimentation; (g) introduction o f policy instruments to prevent or control the use o f polluting substances (e.g fertilizers, detergents andpesticides) inthe catchment; and (h) educational and information management programs. The total costs o f the CMP has been estimated at some $90 million and will be funded and implemented by the Dongqian Lake Investment and Development Company Ltd. (DLIDC). Technical assistance with the preparation activities and plan implementationhas been included intechnical assistance Package C for the project (see Annex 2). Centralized Wastewater Treatment Ningbo. Detailed technical and financial studies demonstrated that centralized treatment at Ningbo o f the wastewater from Cicheng town and Dongqian Lake is more efficient and effective than localized treatment. Therefore the capacity o f the wastewater treatment plant in Jiangdongnan inNingbo has been augmented to 160,000 m3/d to accommodate these flows. The newly established Ningbo Wastewater Treatment Company will be responsible for the operation andmaintenance o f the sewer networks inCicheng andDongqian Lake as well as the wastewater conveyance systems and will charge the residents inthese places the same tariff that applies to Ningbo city proper. Ningbo Sludge Management Plan Inaddition to the ZUEP wastewater treatment interventions, the city o f Ningbo has planned for a substantial program o f investment inwastewater treatment to meet the requirements o f central Government inparticular inrespect o f increasing wastewater treatment coverage rates. A consequence o f this program will be the generation o f rapidly increasing quantities o f wastewater treatment sludge, which will require safe and efficient disposal. An outline Sludge Management Plan (SMP) has been developed covering all wastewater treatment sludge generated by treatment plants inthe municipality area. The SMP involves monitoring o f wastewater composition and o f sludge production at the various wastewater treatment plantsinthe Ningbo municipality area to quantify progressive future sludge loads, evaluation and development o f costs o f other potential options inorder to formulate a longer term sludge disposal program, and evaluation and development as appropriate o f potential options for the beneficial use o f wastewater treatment sludge to reduce disposal costs and conserve disposal resources. Technical assistance Package C includes assistance with the further development and subsequent implementation o f the SMP. As an immediate term strategic action Ningbo will develop with their own funds a new sanitary landfill at Lupuvillage inYinzhou district which will be completedby 2006, intime for the new wastewater treatment plants come into operation. Comulementary Sewerage Works inNingbo. A detailed planfor the construction o f secondary sewer networks (not Bank funded) inSouth Jiangdong district o f Ningbo was developed to complement the Bank-funded trunk sewer infrastructure and consist o f some 55 km o f pipelines with diameters varying -19-  from 300 - 1000 mm. The 6-year program (2003-2008) will cost Y120 million andwill be financed by the Ningbo municipal government from their regular annual development budget. Similarly, complementary secondary sewerage will be provided inthe Dongqian Lake development zone but no details are available as yet. For both sewer programs, essential to achieve the project's objectives, a Resettlement Policy Framework was agreed upon. Industrial Pollution Control inNingbo. Industrial wastewater accounts for a substantial proportion o f the overall quantities o f wastewater withinNingbo, andthe ZUEP wastewater components will allow for interception and treatment only o f industrial wastewater generated within the catchments o f the proposed wastewater treatment plants. A substantial portion o f industrial wastewater will continue to be discharged to watercourses. Unless there is effective control o f the pollutionloads from these industries, the full benefits o f ZUEP will not be realized. As part o f the ZUEP preparation an effective Industrial Pollution Control Action Plan (IPCAP) has been prepared with the objectives to increase the effectiveness o f control o f industrial pollution, both interms o f protection o f water quality inreceiving watercourses and to ensure sustainability o f sewerage system and wastewater treatment investments. There is evidence that water consumption per unit o f output by some industry inZhejiangis very high andthe introduction o f water conservation measures and cleaner production techniques inexisting industryis therefore paramount. Technical assistance Package C has been included inthe project to assist with the implementationo f the IPCAP and will involve: (a) effective procedures for the licensing andcontrol o f industrial wastewater discharges to the sewerage systems owned and operated by the Ningbo Wastewater Company to enable the company to protect its sewerage andwastewater treatment assets andensure compliance with discharge standards; (b) efficient industrial wastewater monitoring systems by the Wastewater Company and by Ningbo EPB to ensure effective monitoring without duplication o f effort; (c) by Ningbo EPB the preparation o f time-bound action plans to control pollution from discharge o f industrial wastewater directly to critical watercourses inorder to meet future water quality objectives for these watercourses; and (d) an implementationprogram for water conservation inindustryto be phased to achieve targeted reductions in water consumption by industry per unit o f output (25% by 2007 and 50% by 2010). This would be achieved by a combination o f the introduction o f water auditing programs inindustry and strengthening o f the Water Conservation Office interms o f more realistic setting o f water quotas and their effective monitoring and enforcement. The costs for the implementation o f these measures will be bome by the Ningbo Wastewater Company and respective industries. Water Oualitv o f the Canals in Shaoxing. A major objective o f the Shaoxing project is to enhance the water quality inthe canals inthe old city to improve the environmental conditions for residents and make them attractive for tourism purposes. The project will assist inthe rehabilitation o f the canals and provide improved facilities for better and more regular flushing o f the canals with water from the moat that surrounds the old city. However, the water quality inthe canals can only improve with these measures if simultaneously the water quality inthe moat is enhanced through expanded collection o f wastewater discharges inthe southem part o f the city and interconnecting the moat with the small rivers that have better water quality. The Shaoxing municipal government has agreed to implement the necessary works duringthe project period with funding from their regular development budget. The Project Office also agreed to improve o n the accuracy o f the water quality model during final design preparation inorder to optimize the pumping and sluice gate arrangements and minimize the operational costs. Retroactive Financing o f Prioritv Works. The following project components have been identified as urgent and require prompt executionprior to loan effectiveness: (a) existing landfill inHangzhou requires urgent expansion since its current capacity will be depleted by end 2003; (b) some o f the main sewers inNingbo city need to be combined with urgent (non-Bank funded) road construction; (c) the pilot projects inJishan historic precinct inShaoxing and one quarter of Cicheng town needto start early inorder to be able to - 20 -  apply the lessons leamed timely inthe upgrading o f the other areas; and (d) some o f the technical assistance needs to start early to assist with the implementation o f the retroactive financed activities and prepare the design andtender documents for priority components. Thereto, it has been agreed to allow retroactive financing o f up to $10.0 million for the above works and may be applied to expenditures made after September 1,2003 for the procurement o f works, goods and services, consistent with the Procurement Guidelines. A detailed procurement and implementation planhas been prepared. 4. Institutional: 4.1 Executing agencies: The Hangzhou component will be executed by the newly established Hangzhou Solid Waste Company (HSWC), which has been staffed from the existing municipal sanitation agency as well as the Hangzhou P M O created for this project. However, these agencies do not bring previous experience in implementing Bank-funded projects and will require strengthening, preferably from staff that participated inthe previous Bank-funded Zhejiang Multicities Development Project (ZMCDP), as well as training. The close proximity to the experienced ZUDPO will assist offsetting some o f the experience deficiencies. The wastewater components in Ningbo (Jiangdongnan, Cicheng, Zhenhai and Dongqian Lake) will be executed by the newly established Ningbo Sewerage Company Ltd. (NSCL). The non-wastewater components in Cicheng will be executed directly by Ningbo Municipality through the Ningbo PMO. Dongqian Lake Investment Development Company (DLIDC) will be responsible for the execution o f the non-wastewater works within the Dongqian Lake project component. Both NSCL and D L I D C are new to implementing Bank-funded projects and will require substantial assistance from the PMO, which is very familiar with Bank projects through its experience inimplementing ZMCDP. The Shaoxing components will be executed by the Shaoxina Municipal Construction Bureau through its newly established Shaoxing Project Management Office (SPMO), which has been established specifically for the Bank project and is under the direct supervision o f the municipal Construction Bureau. Although having considerable construction experience, SPMO is basically new to implementation o f Bank funded projects and its specific procurement, financial management and reporting requirements. Similarly, the Historic Precincts Conservation Management Office, which has been incorporated into SPMO, is responsible for the implementation and management o f the heritage conservation and housing redevelopment inthe historic city-center also needs strengthening andtraining for the project. 4.2 Project management: The overall project will be coordinated by the Provincial Urban and Rural Construction Commission, supported by its Project Management Office (ZUDPO). ZUDPO has already been established for the earlier Bank-funded Zhejiang Multicities Development Project (ZMCDP) and has gained considerable experience with Bank-funded projects. However, quite a number o f experienced key staff have left and it would be appropriate to obtain assurances for strengthening the Office. InNingbo the existing Ningbo Urban Infrastructure Development Office (NUIDO) will manage the project as the P M O andhas demonstrated its ability to do so efficiently. N e w project management offices have been established in Shaoxing and Hangzhou but should draw upon staff from the previous PMOSfor the ZMCDP to ensure continuity o f experience with Bank procedures. However, further strengthening andtraining has been incorporated inthe project design to ensure successful implementation. The implementing agencies will retain the services of: (a) local design institutes to assist with the remaining -21 -  design work duringproject implementation; (b) intemational and local consultants to assist with design review, construction implementation management and quality assurance; (c) local supervision companies to assist with the day-to-day construction implementation; and (d) tendering companies for assistance with I C B procurement. Inaddition, independent agencies will be retained for the monitoring o f the resettlement implementation and the environmental mitigation activities. 4.3 Procurement issues: Intemational civil works contractors are unlikely to be interestedinthe contracts under the project given the competitiveness of the local construction industry, the routine technical nature o f most o f the works, and the small size of the individual contracts, none likely to be over $15 million. NCB may therefore be appropriate for all civil works contracts. The comprehensive Project ImplementationReports include detailed procurement and implementation plans for all the six works components. Details o f the procurement capacity assessment for the project are discussed inAnnex 6 (A). 4.4 Financialmanagement issues: Financial management systems and issues are discussed inAnnex 6 (B). N o special issues have been identified. 5. Environmental: Environmental Category: A (FullAssessment) 5.1 Summarize the steps undertaken for environmental assessment andEMPpreparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. An extensive environmental assessment (EA) has beencarried out for ZUEP. Duringits preparation and evaluation Chinese national procedures and those required by the Bank Group were diligently followed. Comprehensive EA documents comprising an Environmental Assessment Report andan Executive Summary have been prepared, incorporating Bank comments, reviewed and found satisfactory. An EnvironmentalManagement Plan (EMP) is an integralpart o f the EA. A detailed annex covering environmental assessment and impact, together with mitigation measures, has been prepared (Annex 11). This summarizes the findings o f the environmental assessmenton the various components and reflects the preparation and appraisal mission findings. Potential Impacts. The environmental impact o f the project i s on balance substantially positive and the benefits greatly outweigh the negative impacts. The Hangzhou solid waste component will provide a long term sustainable waste disposal resource for the city and allow it to increase wastes management service coverage. The landfill site is designed and will be operated to intemational standards o f sanitary landfill. The Ningbo components will greatly increase wastewater collection and treatment rates within the municipality area and will substantially improve water quality both inthe main river reaches inthe urban areas and particularly inthe urban watercourses. InShaoxing the infrastructure upgrading component allows the modernization o f the city while at the same time conserving its important heritage and, together with the canal rehabilitationworks, will significantly improve water quality inthe urbancanals. The principal potential impacts during construction include excavation, spoil disposal, noise and disruption o f urban services. Operational phase impacts o f wastewater treatment include the needto dispose safely o f the increasing quantities o f wastewater treatment plant sludge and poor water quality inthe mixing zones o f treated wastewater outfalls. The principal landfill impacts are the generation o f leachate and landfill gas. Mitigation Measures. The EA specified the appropriate mitigation measures, environmental monitoring plans, institutional arrangements and training and equipment requirements together with cost estimates for -22 -  implementation o f the mitigation measures and monitoring plans. Major mitigation measures for the landfill component include provision o f an impermeable site liner and leachate treatment and expanded use o f the existing landfill gas collection and utilization scheme. The long-term requirements for sludge disposal have been addressed through the preparation o f a specific sludge management planfor the Ningbo Municipality area as a whole. Inthe immediate term it is envisaged that disposal will be primarilyby environmentally secure landfill. Outfall discharges will be equipped with carefully designed diffuser systems to maximize dispersion. Construction phase impacts will be minimizedthrough controls on working practices and operational impacts through careful siting o f facilities with appropriate buffer zones andcontrols on noise. Public Consultation and Feedback. Local people were consulted duringthe EA preparation. The approaches used for public consultation were: consultation meetings with local government representatives and questionnaire analysis o f public opinion supplemented by interviews. Consultations were carried out at various stages inaccordance with the requirements o f OP 4.01. Details o f these activities with dates, participants, public notifications and locations are provided intabular form inAnnex 11. Information Disclosure. The final EA Report and Executive Summary were submitted to the Bank inJuly 2003, as were final Resettlement Action Plans (RAPS). Both reports were reviewed and found to be satisfactory. Draft copies o f the reports were submitted to the Bank Group Information Center starting March 2003 and subsequently updated (Annex 8). Notice o f availability o f these reports was publicized in the project cities before appraisal (Appraisal completion date: August 23, 2003). Details o f documents, disclosure dates and locations are provided intabular form inAnnex 11. 5.2 What are the main features o f the EMP and are they adequate? Details inAnnex 11. Specific comprehensive action plans were prepared for Ningbo Sludge Management and Dongqian Lake Catchment Management. 5.3 For Category A andB projects, timeline and status o f EA: Date o f receipt o f final draft: July 2003 5.4 H o w have stakeholders been consulted at the stage o f (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms o f consultation that were used andwhich groups were consulted? Consultation was undertaken inthree ways: bulletins to the press, public opinion questionnaires and surveys. The questionnaires and surveys covered residents and community committees andthe meetings with the public andpublic officials show that the project is well receivedby the public. Details inAnnex 11. 5.5 What mechanisms have been established to monitor and evaluate the impact o f the project on the environment? D o the indicators reflect the objectives andresults o f the EMP? Project environmental monitoring indicators have been identified and discussed indetail inthe EA/EMP (see also Annex 1). These cover both targeted improvements inenvironmental management infi-astructure operations, such as increasing collection and treatment rates for urban wastewater and compliance with treated wastewater discharge standards, and additionally improvements inambient environmental quality. Inadditionthere are investments (inequipment andtraining) includedinproject financing to ensure appropriate attention to environmental issues. The project specifically includes strengthening o f a number o f institutions inthe water and environmental services sectors inthe project cities. See also Annex 11. - 23 -  6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. The proposed urbanupgrading and conservation works inthe historic centers o f Shaoxing and Cicheng and the villages along DongqianLake will directly affect a substantial number o f residents and businesses. Key social outcomes o f the project relate to: (a) improvement o f livingconditions o f residents inthe often cramped and poorly served historic city-centers o f Shaoxing and Cicheng, through housing renovation and area upgrading; (b) better environmental conditions through in-house (e.g. toilet, bathroom, kitchen) improvements andupgrading o f the outside environment through cleaning the canals, paving the road, new parks and community facilities; (c) maximizing voluntary resettlement through consultation and selection o f residents that seek to leave the historic areas; (d) participationo f the communities intourism development intheir areas to maximizethe economic benefits to the localresidents. 6.2 Participatory Approach: H o w are key stakeholders participating inthe project? The participatory approach for the resettlement aspects o f the project, particularly those associated with inner-city redevelopment have been dealt with inthe RAP preparation and the separate social assessment surveys. Tourism development by its nature require consultation and participation o f the local communities, businesses and civil society institutions at large. The development o f the tourism strategies in Shaoxing and Ningbo and the preparation o f tourist master plans will be carried ina participatory approach. 6.3 H o w does the project involve consultations or collaboration with NGOs or other civil society organizations? While the RAP and EA procedures already secure substantial consultation processes concerning the mechanisms o f temporary and permanent resettlement o f large number o f displaced persons, additional social surveys indicated the needfor enhanced communication and participationto achieve the best social and economic outcome for the project. These surveys added a different dimension o f community consultation on social and economic aspects which are not directly related to resettlement but deal with community development after renovation o f the historic areas and how the residents can benefit from participation intourism development. The design o f the project has included substantial technical assistance (see Annex 2) to help the project agencies to better achieve these outcomes. 6.4 What institutional arrangements have beenprovided to ensure the project achieves its social development outcomes? The institutions that assisted the project agencies with the social assessment surveys will continue to be involvedinfurther project preparation and implementationto develop more detailed processes for community consultation and participation as well as monitoring indicators to evaluate the social development outcomes 6.5 H o w will the project monitor performance interms o f social development outcomes? Independent institutes will be retained to monitor and evaluate the implementationo f the RAPSas well as achievements o f community involvement inthe development o f the newly upgraded communities and participation inthe economic development, inparticular tourism. - 24 -  7. Safeguard Policies: 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. Project activities are primarily inurban areas, except for the Dongqian Lake Development subcomponent. However the lake is not considered to be a "natural habitat" as defined inOP4.04 and there are no existing or proposedprotected areas inthe project area. The Dongqian Lake subcomponent substantially reduces the overall pollutionand nutrient loads to the lake through point source control; the remaining loads to the lake arise principally from non-point sources such as runoff from agricultural areas and erosion from deforested areas. The Catchment Management Plan will identify and implement policy andphysical interventions to sustain water quality consistent with the lake's primary ecological functions. A ResettlementPolicy Framework has been formulatedand agreeduponfor linkage activities that are important for achieving the major objectives o f the project. The project agencies agreed that resettlement aspects related to non-Bank funded activities in:(a) urbanupgrading inGucheng district inShaoxing municipality outside the project areas; (b) housing renovation inCicheng town inJiangbei district o f Ningbo municipality; (c) implementation o f the proposed landfill inLupuvillage, needed for the disposal o f wastewater treatment plant sludge; and (d) complementary secondary sewerage by the Borrower inNingbo city (Jiangdongnan) and Dongqian Lake will comply with relevant Bank guidelines. Thereto, the Borrower has provided a Resettlement Policy Framework document for these non-Bank funded activities. Indue time, Ningbo and Shaoxing will submit the design documentation and EA and RAPreport to the Bank for review and no objection. Compliance with the Environmental Assessment, Environmental Management Programs, Resettlement Action Plans, and Resettlement Policy Framework will be monitored by independent institutions that will be hiredunder the project management F. Sustainability and Risks 1. Sustainability: The proposedproject will contribute to the sustainability o f the project cities' overall development by helping to improve collection and safe disposal o f sewage and solid waste, improve water quality inrivers, lake and canals, improve living conditions within the historic city-centers, conserve important cultural - 25 -  heritage sites, andincrease economic development through enhanced tourism development. Institutionalreform and cost recovery have now become established government policy inChina to improve efficiency and sustainability inthe provision o f basic urban services. The proposed project contributes to this policy by strengthening technical, institutional and financial capacities and capabilities through corporatization o f municipal utilityagencies, financial self-sufficiency and autonomy, training and technical assistance. Cultural heritage conservation and associated tourism development are recognized as a powerfd tool for sustainable economic development and social well-being while maintaining the need for modernization to buildcompetitive cities. The proposedproject contributes to this urbanizationprocess byproviding the needed expertise for conservation, tourism development and urbanplanning as well as financing the supporting infrastructure while securing the sustainability o f operation and maintenance through institution building. Enhanced community consultation andparticipation inthe urbanupgrading process andtourism development will enable substantial resettlement under the project to be largely voluntary and create more economically sustainable communities 2. Critical Risks (reflecting the failure o f critical assumptions found inthe fourth column o f Annex 1): Some o f the critical risks identified below are generic for this type o f urban project while others are project specific. The implementationo f a number o f non-Bank financed activities, such as the Dongqian Lake Catchment Management Plan, Cicheng Housing Renovation andConservation Plan, Industrial Pollution Control Action Plan, and complementary secondary sewerage inNingbo city and Dongqian Lake are are essential for achieving the major objectives o f the project. Overall, the project risk i s rated modest because the project cities have demonstrated inthe past strong commitment to Bank-funded projects and their objectives as well as adequate project management capabilities. - 26 -  Risk Risk Ratina Risk Mitiaation Measure From Outputs to Objective Ningbo W W C may not be able to develop M Upfront legal reform, establishment o f financial and institutional capacity and companies andtariff increase. Covenanting the capabilities to operate and maintain the extent andpace o f utilityreform during sewerage systems andwastewater implementation and adequate future tariff treatment plants increases. Provision o f technical assistance with utility management. Inadequate flows to the WWTPs M Implementation plan for complementary jeopardizing the effectiveness and secondary and tertiary sewer network with efficiency o f the treatment processes. secured local funding. House connection program. Unable to control pollution sources S Implementation plans for control o f agribusiness outside the scope o f the project inDonqian Lake area, industrialpollution jeopardizing the water quality upstream o fNingbo city (IPCAP), and improvements expected from the project :omplementary sewerage in Shaoxing city. Municipal governments and utility M Ensure realistic financing program from both companies unable to provide timely and municipal budgets and surplus utilityrevenues. adequate counterpart funds for the project Tourism development falls behind M Establish effective tourism institutions and expectations, jeopardizing the economic implementation plan for tourism strategy. growth to sustain the improvements inthe historic town centers From Components to Outputs Sewers and treatment works may not be M Ensure quality o f design, efficient procurement built soundly or within time andbudget andadequate constructionsupervision Untimely land acquisition andresettlemenl S Ensure adequate community consultation and may delay project implementation timely compensation, early planningand progress effective implementation, condition for contract award Annual or bi-annual tariff increases for S Annual financial projections for the companies Hangzhou solid waste and Ningbo andtariff increases covenanted inthe legal wastewater companies agreements Overall Risk Rating M Risk Rating - H (High Risk), S (Substantial Ris , M (Modest Risk), F Negligible or Low Risk) 3. PossibleControversialAspects: None - 27 -  G. Main Loan Conditions 1. EffectivenessCondition The Project Municipalities and their respective Project Company or Project Companies, as the case may be, have each entered into a Subsidiary Loan Agreement satisfactory to the Bank inaccordance with the provisions o f the Project Agreement. 2. Other [classify according to covenant types used in the Legal Agreements.] Conditionof Disbursements Zhejiangshall enter into a contract or contracts with consulting firm or firms, acceptable to the Bank for the provision o f design review and construction management o f the Project andfor the provision of technical assistance ininstitutional and financial strengthening. ImplementationCovenants Ningbo shall carry out the Complementary Sewer Connection Plan dated April 2003 for the construction o f secondary sewer networks to complement the trunk sewer infrastructure being financed under this Project and complete construction o f secondary sewer networks by December 31,2008. Ningbo shall: (i) byno later thanJune 30,2004, hrnishto the Bank for review and comments, a time-bound action plan for the management (including construction o f a new landfill inLupuvillage) o f sludge generated by all wastewater treatment plants inNingbo, prepared inaccordance withterms o f reference acceptable to the Bank; and (ii) thereafter, implement said plan (including completion o f the said landfill by June 30,2006 taking into account the Bank's comments thereon. Ningbo shall carry out the Industrial Pollution Control Action Plan, dated M a r c h 2003, prepared by Ningbo PMOina manner satisfactory to the Bank and not modify or amend the Industrial Pollution Control Action Plan without the prior concurrence o f the Bank. Ningbo shall carry out, or caused to be carried out, the Dongqian Lake Catchment Management Plan dated March 2003, for management and control o f activities that potentially pollute the water inDongqian Lake. Ningbo to: (a) by no later than June 30, 2004, hrnishto the Bank for review and comments, a time-bound action plan for the housing upgrading and conservation o f old Cicheng town prepared inaccordance with terms o f reference acceptable to the Bank; and (b) thereafter, implement said plan taking into account the Bank's comments thereon. Shaoxing to: (a) by no later than June 30,2004, hrnish to the Bank for review and comments, Shaoxing shall cause a time-bound action plan for the improvement o f water quality o f its canals (including expanded collection o f wastewater discharges inthe southern part o f the city and inter-connecting the moat with small rivers with better water quality), prepared inaccordance with terms o f reference acceptable to the Bank; and (b) thereafter, implement said plan takinginto account the Bank's comments thereon. FinancialCovenants NMGandHMGwill raise wastewater and solid waste tippingfees annually or bi-annually to a level sufficient to cover operating, maintenance, depreciation costs o f all sector assets as per financial covenants - 28 -  inthe Project Agreement. Before September 30 ineach o f its fiscal years, each o f Ningbo SC andHangzhou SWC shall, on the basis o f forecasts prepared by each o f them and satisfactory to the Bank, review whether it would meet the revenue covenant requirements inrespect o f such year andthe next following fiscal year and shall furnish to the Bank the results o f such review upon its completion. Each respective project company shall undertake to furnish to the Bank, to Zhejiang and to its respective Project Municipality, as soon as available, but inany case not later than six (6) months after the end o f each such year certified copies o f said financial statements and accounts for such year as so audited; the report o f such audit by said auditors insuch scope and detail as the Bank, Zhejiang or the respective Project Municipality shall have reasonably requested; and all such other information concerning said records, accounts and financial statements, as well as the audit thereof, as the Bank, Zhejiang or the respective Project Municipality shall reasonably request. Zhejiang will furnish to the Bank as soon as available, but inany case not later than six months after the end o f each such year (or such other period agreedto by the Bank), (A) certified copies o f the financial statements referred to inparagraph (a) o f this Section, for such year (or such other period agreed to by the Bank), as so audited, and (B) an opinion on such statements by said auditors, inscope and detail satisfactory to the Bank; Zhejiang will prepare and furnish annual financial monitoring reports, inform and substance satisfactory to the Bank, which set forth sources anduses o f funds for the Project, both cumulatively and for the period covered by each said report, showing separately funds provided under the Loan, and explain variances between the actual and planneduses o f such funds. The first such financial management report shall be furnished to the Bank not later than 45 days after the end o f the first calendar semester after the Effective Date. Project Management Covenants Maintain a Project Leading Group, chaired by the Secretary General o f Zhejiang Provincial Government andconsisting o f line departments o fprovincial governments, such as Zhejiang Provincial Development and Planning Commission, ZPFB, Zhejiang Provincial Audit Bureau, Zhejiang Provincial Environment Protection Bureau, Zhejiang Provincial Price Bureau. Maintain a Provincial Project Management Office (ZUDPO) with sufficient authority, staffing, facilities, and budget to carry out, coordinate, or supervise all project activities, including the procurement, financial management, resettlement, environmental impact mitigation, and progress reporting. Maintain Subproject Offices ineach o f the project cities and Implementing Agencies for each project component with sufficient staffing, facilities, and budget to carry out, coordinate, or supervise all activities for the component implementation, including the procurement, financial management, resettlement, environmental impact mitigation, and progress reporting. ZUDPO will provide the Bank with implementation quarterly progress reports, ina format satisfactory to the Bank, within 3 weeks after the period under review, starting fi-om January 21,2004 untilthe project completion. ZUDPO will submit to the Bank a project implementation completion report no later than six months after - 29 -  the closing o f the loan account. Resettlementand EnvironmentProtectionCovenants Zhejiang shall, and shall cause the Project Municipalities and their Respective Project Companies to: (a) implement policies and procedures adequate to enable them to monitor and evaluate, inaccordance with guidelines acceptable to the Bank, the implementation o f the Environmental Management Plan, the Resettlement Action Plans, and the achievement o f the objectives o f said Plans, including the engagement o f experienced and qualified independent monitoring agencies acceptable to the Bank; (b) include the results o f such monitoring and evaluation activities inannual reports by independent monitoringagencies, together with any revisions proposed to be introduced into such Plans inorder to achieve their respective objectives; and (c) introduce such revisions into such Plans as shall have been agreed with. H. Readiness for Implementation 1. a) The engineering design documents for the first year's activities are complete and ready for the start o f project implementation. 0 1.b)Notapplicable. iXi 2. The procurement documents for the first year's activities are complete andready for the start o f project implementation. Ixi3. The Project ImplementationPlanhas beenappraised andfound to berealistic and ofsatisfactory quality. 04. Thefollowingitemsarelackingandarediscussedunderloanconditions (Section G): I. Compliance with Bank Policies 1. This project complies with all applicable Bank policies. 0 2. ThefollowingexceptionstoBankpolicies arerecommendedforapproval. Theprojectcomplies with all other applicable Bank policies. wjjef&boes Team Leader Country ManagedDirector - 30 -  Annex 1: Project Design Summary CHINA: Zhejiang Urban Environment Project Sector indicators: Sector/ country reports: (from Goal to Bank Mission) Strengthen environmental urban water quality indicators national and local statistics o f continued economic growth xotection and natural water pollution and urbanization 'esource management mprove urban management growth o f urban economics statistical reports and reform o f financial and mdpublic service provision and coverage o f infrastructure occasional sector reviews enterprise systems Voject Development Outcome I impact Project reports: (from Objective to Goal) lbjective: indicators: mprove sustainability, :fficiency and equity o f urban levelopment inNingbo, jhaoxing and Hangzhou hrough: 0 Improved coverage and area, population, and volume operational and monitoring Industrialpollution discharge effects o f sewerage o f sewerage in urban and reports o f wastewater i s controlled and sewer services suburban locations; water companies connections made quality at canals, rivers, lakes Environmental monitoring and Hangzhou Bay; duration reports and extent of flooding 0 Improved efficiency and :ost recovery user charges, operating and financial political will to reform sustainability o f basic revenue collection, autonomy reports o f utility companies, utilities, performance utility services a f utilities, financial reports by municipal incentive system, effective performance, asset quality regulators sector regulation 0 Improved collection and volume o f garbage collected, operational and financial efficient collection fiom all disposal o f solid waste gas recovery volumes and reports SWM companies, residential and industrial revenues, general appearance environmental monitoring areas irban areas reports 0 Renovation and :ea1 estate market operational reports from quality o f renovation, real upgrading o f historic levelopment, property values housing agencies, reports and estate marketing strategies housing areas statistics from taxation bureaus 0 Historic area upgrading iuality o f conservation annual reports Cultural experience and skills o f and cultural heritage neasures Heritage Bureaus contractors conservation 0 Tourism development lumber o f tourists, Tourist Bureau statistics Preparation and implementation o f tourism strategy - 31 -  Output from each Output Indicators: Component: Collection and disposal o f Area coverage o f sewer progress reports, wastewater tertiary sewer systems are wastewater systems, number ofpeople companies' operation reports built, residences and connected, volume delivered businesses connected at treatment plants Wastewater treated 160,000 m3ld South WWTP operation reports adequate wastewater volumes Jiangdong WWTP, 30,000 to sustain biological processes, m3ld Zhenhai WWTP adequate funding for operation Effluent reuse inurban volumes o f effluent taken WWTP operation reports marketing by wastewater landscape maintenance from WWTP companies Pollution reduction in canals, water quality classification EPB monitoring reports household connection plan lakes and rivers implemented, industries connected to sewer network. treatment plants operating effectively [mproved utility management level o f user charges, annual financial reports strengthening regulatory mdfinances collection performance, wastewater companies regime, pace o f institutional efficiency operations reform, human resource development [ncreasedtourism statistics from tourism bureau, annual reports tourism expanded and improved economic development bureaus and taxation tourist facilities, establishment growth departments o f a responsive tourist service industry Vingbo Sludge Management Quantities o f sludge Wwtp operation reports Adequate wastewater treated; Plan satisfactorily treated and adequate operating budget for disposed o f sludgedisposal Dongqianhu Catchment Lake water quality improved EPB reports Policy instrumentsand Management Plan and sustained controls implemented ?reject Components / Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) Vingbo South Jiandong sewerage and $44.2 million progress reports quality construction and :reatment plant installation Ehenhai sewerage and $25.1 million progress reports quality construction and uastewater treatment plant installation Zicheng Infrastructure $3 1.6 million progress reports simultaneous renovation o f Redevelopment houses and relocation o f enterprises Dongqian Lake Development $40.5 million progress reports timely integration with other (NBF) development activities Shaoxinq gousing renovation $76.9 million progress reports consultation & participation community, timely resettlement, 3eritage conservation $10 million progress reports quality and skills o f contractors, effectiveness o f supervision Jnderground infrastructure $10million progress reports Coordination different utilitier - 32 -  Canal rehabilitation and flood $10 million progress reports quality o f construction and control installation Roads, bridges andparks $15 million progressreports quality construction, community participation Hannzhou Solid waste disposal $33.3 million progressreports quality construction toe dam and liner placement Technical assistance $8.6 million progressand consultant knowledgeable consultants, reports adequate budgets, qualified counterparts ZUEP Monitoring Indicators Monitoring Indicator 2003 2004 2005 2006 2007 2008 2009 2010 Tariff Increase Ningbo wastewater (average Yim3) 0.45 0.45 0.45 0.59 0.59 0.59 0.79 0.79 Hangzhou Solid Waste (tipping fee Yit) 15 49 83 105 105 105 105 105 New secondary sewers - length (km) Sewerage- Jiangdongnan(Ningbo) 11.4 7.4 7.7 13.6 9.9 5.3 Wastewater treatment in Ningbo city - South JiangdongWWTP (m3idx 1000) 100 100 100 100 150 150 310 360 -- sewage treatment coverage(%) Zhenhai WWTP (m3id x 1000) 44 44 44 44 44 44 74 74 27 28 28 27 38 37 72 80 Shaoxing Upgrading ---- housing renovatiodresettlement (%) 10 50 20 10 10 water quality canals (Class) V IV IV sewerageltreatment coverage (%) 50 70 72 74 76 79 82 85 sewage treatment capacity (m3id x 1000) 300 550 550 550 600 600 600 600 -CichengUpgrading housing renovatiodresettlement (%) 15 45 30 10 -- sewerage coverage(%) 30 50 80 90 90 90 sewage treatment capacity (m3/d x 1000) 10 10 10 Dongqian Lake Redevelopment - Lake water quality (Class) IV IV IV IV IV IV IV 111 -- sewerage coverage (YO) 50 55 60 65 70 sewage treatment capacity (m3/dx 1000) 20 20 20 20 Note: any tariff adjustments are subject to national andmunicipal laws andregulations - 33 -  Annex 2: Detailed Project Description CHINA: Zhejiang Urban Environment Project By Component: Project Component 1 US$44.17 million - Sewerage and SewageTreatment in SouthJiangdongDistrictof Ningbo Municipality Sewerage and wastewater treatment: Constructiono f seweragetrunk infrastructure inSouthJiangdong (43 kmpipes and4 lift pumpingstations) ofNingbomunicipality,includinga wastewater treatment plant (secondarytreatment) with capacity of 160,000 m3/danddischargingto the nearby Yongjiangriver. The wastewater flows from Cicheng town andDongqianLake area sewerage systemswill be connectedto the treatment plantinSouthJiangdongthroughpumpingstations andpressuremainswith a lengthof 12.7km and 12.5 kmrespectively. Component Description Capacity/size Function Sewersystem Constructionofnew PVC andreinforced PVC sewers, DN300 to DN400, 19.2 km IITo convey wastewater producedinthe 1 concrete (RC) sewersfrom DN300 to RC sewers, DN.500to DN2200,23.4 !a southemcatchment(current pop. DN2200to strengthenexisting sewerage River crossings, 0.6km Approx. 335,000) ofNingbo city to the network,intercept sewage flows currently Total lengthof all pipelines, 43.2 km JiangdongnanWWTP. dischargedto river andconnect systemto the proposedJiangdongnanWWTP. Sewagelift Constructionoftwo new lift sewage pumping Ningzhong PS (refurbish) 540 Us (peak) Pumping stations andrefurbishmentoftwo existing lit? Wudongzha PS (refurbish) 790 lis (peak) andconveyto theproposedWWTP Stations stations. WangchunPS (new) 530 Us (peak) Qioubi PS (new) 330 Us (peak) Jiangdongnan Constructionof anactivatedsludgetreatment Average daily flow 160,000 m3id Wastewater plantwith biologicalandchemically assisted area, andfrom Yinzian, Dongqian Treatment Plant Phosphorusremoval. Includesinlet pumping, Lake, andCicheng finescreens, grit removal,anaerobicand aerobic tanks, final settlementtanks and sludge dewatering. Vehicles -to be 3 vehicles for stafftransport Truck (4.5 t), sludgetransport, 8 Nos Providetransport for company staffand locatedat new 13 vehicles for operational uses Excavator(1.5 t), for sludge, 2 Nos improve efficiency ofwastewater WWTP Truck (1.5 t), sewer maintenance,2 Nos company operations. Truck (5 t), flat bedfor generaluse 1No Minibus 1No, Coach 1No, Car 1No Project Component 2 US$25.08 million - Sewerage and Sewage Treatment inZhenhai district of NingboMunicipality Constructionof sewerage trunk infrastructureinZhenhai district (44 kmof pipes and 6 liftpumping stations) ofNingbomunicipality, includinga wastewater treatment plant (secondary treatment) with an initial capacity of 30,000 m3/d, dischargingto the sea. - 34 -  c Component Description Capacity/size Function Sewersystem in IIConstmctionofnew PVC andreinforcedconcrete IIPVC sewers,DN300 to DN400, 24.1km II To conveywastewater produced Chengguan (RC) sewers from DN300to DN1400to strengthen RC sewers, DN500 to DN1400,20.0 km intheChkngguancatchkt of catchment of existingseweragenetwork,intercept sewageflows Crossings,0.1km Zhenhai (current pop.Approx. Zhenhai currently dischargedto river andconnect systemto Total length of all oioelines. 44.2 km - 100.000) to theurouosed the proposedZhenhai HouhaitangWWTP. S I 2heha;Houhaitan`g WWTP. Sewagelift Constructionof five new lift sewagepumping DongmenPS (refurbish), 170I/s (peak) 11To lift sewage into the hunk PumpingStations stationsandrefurbishmentofone existinglift station LinjiangPS (new), 125 lis (peak)- sewersto theproposedWWTP inChengguan WeihailuPS (new), 610 I/s (peak) catchment of HongyuanPS (new), 75 lis (peak) Zhenhai HaitianPS (new), 75 Vs (peak) Zhenhai Average daily flow 30,000 m3/d To treat the wastewater from the Houhaitang treatment plant with biological and chemically Chengguanurbandistrict of Wastewater assistednutrient removal.Includesinlet pumping, Zhenhai. Treatment Plant screens, grit removal,anoxic tank anaerobic tank, oxidation ditch, final settlementtanks, sludge dewateringandshort sea outfall. Project Component 3 US$31.64 million - Infrastructure UpgradinginCichengTown inJiangbeiDistrict of NingboMunicipality The proposed infrastructure improvements under ZUEP, which are complementary to a larger redevelopment and conservation o f this historic town, consist o f rehabilitation and expansion of the traditional road infrastructure (total 12.5 km) with associated underground infrastructure, sewage collection, pumpingmain and treatment facilities (10,000 m3/d), modest ringroad andbridges along the historic moat around the town (5 km), dredging of the moat (110,000 m3), embankment repairs and flood control structures. Component Description Capacity/size Trunk and Main and secondary sewers laidinroads inthe old PVC sewers, DN300 to DN400, 10.0km To improvewater quality in secondary sewers. town to provide a separateseweragesystem, RC sewers, DN500 to DNXOO, 2.2 km the moats andwatercourseso interceptingsewagecurrently enteringwatercourses Total lengthof all pipelines, 12.2 k m the oldcity. from the old city, and conveysewageto atransfer pumping station. Sewagetransfer Constructnew sewagepumping station adjacentto CichengPS (new, Phase l), 189 Ws (peak) pumpingstation oldtown andtransmissionpipelineto headof RC pipe, D N 600, 12.7km Cichengto Jiangdongnan and pumpingmain gravity trunk sewer inJiangdongnanWWTP WWTP for treatment (assuming catchment. "centralized" treatmentoption is adopted). RoadImprovement Upgraderoads inthe oldtown inaccordancewith Urban roads: Total length of 13.3km, with works the Masterplan. Work to includere-surfacingwith widths varying between6 and I O m. X RC vehicles to specific areasof stonepaving, removalof illegal structures bridgeswith spansfrom 6 to 12m. the old town. obstructingtraffic flow andnew bridges over new Ring road: Total lengthof5 km, with width of7 Resurfacingwith stone canals. m. 4 RCbridgeswith spansfrom 15mto 25 m. pavingto makeroads morein Providering roadandassociated bridgesaroundthe Note: Roads widths include lanesfor motor keepingwith historic oldtown adjacentto moat. vehicles and cvcles and footuaths. character ofold city - 35 -  Project Component 4 US$40.48 million - Road and Sewerage Infrastructure Dongqian Lake in Ningbo Municipality The project is assisting the rapid development inthe area through clean-up of the lake through additional sewerage and treatment infrastructure to intercept the numerous discharges of wastewater to the lake (some 50 km o f pipes, 8 pumpingstations, pumpingmain (12.5 km) to Jiangdongnan WWTP inNingbo). In addition, the project will improve access to the lake by expanding and rehabilitation of the road system along a part of its shores (33 km) Description Capacity/size Function Trunk sewersto intercept sewagedischarges PVC sewers, DN300 to DN400 - 25.4km. To preventwastewater currently enteringthe lake. Sewagepumpingmains GRP sewers, DN300 to DN500 5.6 km- enteringthe lake. Improve associatedwith networkpumping stations. RC sewers, DN300 to DN900 - 22.0 km water quality inthe lake. Steel sewers, DN700 1.5km. - Total lengthof all sewers 54.5 km. - Eight sewagepumpingstations transferringflows No 2 PS (new -temporary) 10 lis To pump collectedsewage aroundDongqianLake. No 3 PS (new phase 1) - 100 l/s aroundthe laketo Pumping No4 PS (new -phase 1) 20 lis Stationfor pumpingto No 5 PS (new phase 1) 40 lis JiangdongnanWWTP No 7 PS (new temporav) -- 70 l/s No 8 PS (new - phase 1) 100l/s Pumping station sizedfor approx 70,000 m3/d in Average daily flow 22,500 m3id in2010 To transfer wastewater from pumping mainto 2020. Average daily flow of 70,000 m3/d in2020 the townsandvillages JiangdongnanWWT GRP Pumpingmain of9 0 0 " dia, length 12.5 aroundDongqianLake to km. JiangdongnanWWTP for treatment vehicles for DLIDC staff transport r- Truck (1.5 t), for sewer maintenance 1No Providetransportfor Truck for maintenance Minibus 1No company staff andimprove Coach 1No efficiency ofmaintenance Car 1No gangs. Roadconstruction Widening andsurfacing ofexistinggravelroads New 6mwide road 15.3km Improvedaccessto andconstructionofnew surfacedroads aroundthe Widening andsurfacing 18.1km perimeter oflaketo increase perimeter ofthe lake. No of culverts 48 potentialfor tourism develowment. Project Component 5 US$121.91 million - Housing Renovation, Heritage Conservation & Infrastructure Upgrading in Shaoxing Historic City Center Housing Renovation and Heritage Conservation in thefive historic precincts of the Old Town: improve livingconditions for residents living inold Mingand Qingdynasty housing throughrepairs, upgrading kitchen and sanitary facilities; improve appearance o f more recent structures to fit within the historic setting (some 1.2 million m 2 floor space); restoration andsome rebuilding o f historic and protected structures (57,000 m2) to prevent further structural deterioration and improve amenity o f the historic sites for residents and tourists. Underground infrastructure: provision of tertiary and secondary sewers inthe small streets o f the historic precincts (18 km) to intercept numerous discharges into the canals and improve the aquatic environment; water supply and gas pipelines (34 km) to improve public health and provide a cleaner energy source over frequently usedcharcoal. The collected wastewater will be discharged into the city-wide sewer network and subsequently treated at the recently completed sewage treatment plant. - 36 -  Canal Rehabilitation and Flood Control: Rehabilitation of the comprehensive canal system inthe historic city-center (17 canals) including dredging, widening, embankment repair and reinstatement o f an old canal (350 m) to improve water quality through enhanced water circulation and benefit navigation o f tour boats; rehabilitation and expansion o f the river training works. including pumping stations (12,000 m3/d) and `flow control gates (4 new, 10 repair) to increase canal flushing. Roads, bridges andparh: repair and widening of existing roads to improve access for emergency services (24,000 m2); re-paving o f roads with more appropriate stone slabs to enhance appearance (32,500 m2); new bridges over the new canal section (4); new parks at relocated factory sites to provide recreation for residents and tourists (100,000 m2); and car parking for tourists (30,000 m2) to improve access to the historic sites and precincts. Component Description Capacitylsize Function Restorationof Restorationandrebuilding ofprotected Protectedstructures- 50.275 m2 Preventionoffiutherstructural Historic/ structures within the historic old city. deterioration;improveamenity of Protected conservation areasfor residentsand Structures tourists. Improvement RenovationofMing andQinghousing Renovatebuildings -582,200 m2 Provideimprovedlivingconditions for ofhistoric and includingmodemkitchen andsanitary Demolish buildings -269,900 m2 residents;restorehistoric appearanceto modem facilities. Modificationofmoremodem Modify modembuildings -248,200 m2 conservationarea; encouragetourism. buildings in buildings to improveappearance Providekitchens &bathrooms -97,100 conservation m2 areas Seweragesystem Constructionof new seweragepipelinesto 17.8 kmofDN200 and DN300 pipes Preventdomestic sewageenteringthe create a separatesystem andconnectedto canals.Improve water quality and local municipalseweragesystemandexisting environment WWTP. Provisionof Providepipedwater andgas distribution Water - 34.4 kmof DN25 and DN200 Improve sanitationand environment improvedgas systemsto the conservationareas. pipes throughprovision ofpipedcleanwater andwater supply Gas - 34.4kmof DN25 andDN200 andreducerelianceon charcoal. pipes Modificationof Increasingdepthof 17canals through Dredging 100,000 m3 Clearing ofthe seriously silted canal urbancanals dredging. Widening andnew stonerevetment Excavate 35,000 m3 sections. Benefitsfor navigation. 1for 5 canals. Restorationof 35Om of Stonerevetment 11,500m3 Completecircuit of canalsfor tour boats. GuanxiangRiver (canal) Possiblewater quality benefit River pumping I Svstemofuumu stations andgatesusedto New 12,000 m 3 h pump station. Increasedcanalflushing to one change - - stations and pumpwater from the city moatto "flush" the I . I Replace sevenpumpsinthree existing per day inorder to improvewater qualit) control gates urbancanals to improve water quality. stations, each4,000 m3h. inurbancanalsfor amenitypurposes. Construct onenew PS andflow control gates, Provide4 new flow control gatesand andrehabilitate3 existing PS andassociated repaidreplace I O others. gates Roads,bridges, Re-pavingofexistingroadswith traditional Re-paving-32,550 m2 Improve appearanceofhistoric car parksand stone paving, repair ofexistingroads, Roadrepair-24,010 m2 conservation area. Provideaccess across public spaces constructionofnew bridgesover new canal New bridges-4No new canal. Providecontrolledparking 1andcreationofspacesfor landscapedparks Car parks- 29,250 m2 for tourists. Providemorelandscaped and car parking. Landscapedareas andparks- 98,140 m2 areas - 37 -  Project Component 6 US$33.29 million - Expansionof TianzilingLandfillin HangzhouCity The Hangzhou project components relate to the provision o f a new landfill and associated facilities, adjacent to and partially overlying the existing Tianziling landfill site located near the village o f Qinglongwu, some 18 kmnorth-west o f the center o f Hangzhou city. Expansion o f the existing landfill with 22 million m3 capacity will enable the city to dispose o f its garbage safely during the next 25 years, including a leachate treatment plant (1500 m3/d), and provision o f additional equipment and vehicles for operation o f the landfill. Facilities for landfill gas recovery and electricity production will be provided under a public-private partnershipthat currently is engaged with the existing landfill. The individual works proposed inthis component project are summarized below. Component 1 Description Capacity/size Function Landfill site, Constructionof 22 million cubic meter 22 millioncubic meter capacity landfill. Provision of safe andenvironmentally capacitysolid waste landfill. Includescivil Leachate storagereservoirinold quarry acceptable solid waste disposalfor period works for containment of solid waste, 150,000 m3 leachatestorage. inexcessof24years for the city of collection andtransfer of leachate andgas Hangzhou. generatedby the landfill, leachate storage, accessroads and surfacewater control. Leachate Constructionof leachatetreatment plant Leachatetreatmentplant, 1,500 m3/d For leachatetreatmentto achieve national Treatment Plant (LTP). Outfall to municipalsewerage standardfor discharge of industrialeffluent system. to public sewer. Solidwaste Provision of28 new vehicles andmobile Compactors(various types), 3 No For staffbusinesstransportandfor landfill transport and landfill compactingplant including Bulldozers(various types), 5 No handling andcompaction. compactingplant bulldozers,excavatorsandtrucks Excavatoriloaders, 4No Large dumper trucks, 7 No Sewagevacuumtanker, 1No Truck mountedconcretemixer, 1No Truck mountedcrane (50 tonne),] No Breakdowntruck, 1No, Minibus, 1No Project Component 7 US$8.52 million - TechnicalAssistance with InstitutionaVFinancialUtilityReform,DesignReview and Construction Management,IndustrialPollution Control, Tourism Developmentand HeritageConservation. PackageA - InstitutionalStrengthening, FinancialReform& MIS/GIS Systems (US$2.37million) The objective o f the technical assistance is to give support and advice so that appropriate institutional, managerial, financial and operational arrangements are put inplace to ensure operational effectiveness, efficiency o f management and the financial sustainability o f the newly formed Hangzhou Solid Waste and Ningbo Wastewater companies. (a) Institutional and Managerial. The objectives o f this part o f the consultancy are to assist the companies to improve their business performance through the introduction o f appropriate institutional and management improvements. Specifically these include: (i) the development o f business strategy, business plans, together with the planning processes and information systems to support these; (ii) establishing standards o f service, setting andmonitoring o f - 38 -  performance targets, and establishing a framework for a performance contract with the supervising municipal government organization. Such a contract to allow for genuine autonomy o f management within the scope of agreed plans andtargets; (iii) reviewing the Company organization and developing manpower plans and humanresources policies appropriate to autonomous enterprise companies; and (iv) undertakingrelatedmanagerial training. (b) Financial Strengthening. The objectives o f this part of the consultancy are to strengthen the financial management o f the companies by: (i) supporting the acquisition and initial operation o f computerized accounting and financial information and reporting systems (or where these already exist to review their capability and make appropriate enhancements); (ii) providing financial management reporting guidelines; (iii) the review and revision o f water supply charges and billing and income collection systems to achieve full operating cost recovery; and (iv) conducting related financial training. (c) Operational Enhancement. The objectives o f this part o f the consultancy are to strengthen the operational management o f the companies by: (i) identifyingand implementing agreed operational cost saving initiatives; (ii)introduction o f advanced operational methods and equipment where relevant and cost effective to do so, including relatedoperations training; and (iii)improvements to service quality and reliability through the use o f operational standards and procedures linked to defined service standards and targets. PackageB DesignReviewAdvisory and ConstructionManagement (US$3.77 million) - Objective o f Technical Assistance (TA) Package B i s to provide design review advisory, construction management, and quality assurance duringproject implementation. The International Consultant team (Consultant) are required to engage National Consultants to assist the Consultant inmeeting the objectives o f this TA. (a) Desien Review Advisow. The objective o f this portion o f the Technical Assistance (TA) is to assist the staff of ZPMO, the municipal project offices, implementation agencies (utility companies) and the design institutes to ensure that bid documents for the project are developed with sufficient level o f quality to meet Bank standards. (b) Construction Management. The objective o f this portion o f the TA is to assist the staff of ZPMO, MPMOs and IAs in developing and implementing a construction management program based on sound engineering practice. (c) Oualitv Assurance. The objective of this portion o f the TA is to assist the staff o f ZPMO, the IAs, andthe construction supervision companies employed by the project component offices in developing and implementing a quality assurance program. The quality assurance program mustensure that all construction meets the quality requirements identifiedinthe contract documents signed by the Contractor and the implementing agency. PackageC IndustrialPollutionControl(US$0.89 million) - Industrial wastewater accounts for a substantial proportion o f the overall quantities o f wastewater within the project areas, and the wastewater components under ZUEP will allow for interception and treatment - 39 -  only o f industrial wastewater generated within the catchments o f the proposed wastewater treatment plants. The majority o f industrial wastewater will continue to be discharged to watercourses. Unless there is effective control o f the pollution loads from these industries, the full benefits o f ZUEP will not be realized. For this reason an effective time-bound action plan for the control o f pollution from industry inNingbo has been prepared. The objectives o f the plan are to increase the effectiveness o f control o f industrial pollution, both in terms o f protection o f water quality in receiving watercourses and to ensure sustainability o f sewerage system and wastewater treatment investments. There i s also evidence that water consumption per unit of output by some industry in Zhejiang is very high by comparison with experience elsewhere. A further important objective i s the introduction o f water conservation measures and cleaner production techniques in existing industry. This would have the benefits o f resource conservation, improving process efficiency and reducing the discharge o f pollutants. The reduction in pollutant discharges will extend the effective operating lifetime o f sewerage and wastewater treatment plant assets and provide added protection to water quality in the receiving waters. Therefore, the following technical assistance components have beenidentified: (a) Licensing. Recommendations for improvements to the existing licensing systems have been proposed by the preliminary IPCAP study and generic licensing documentation has been prepared to assist the new WWCs including proposals for sampling and flow measurement or estimation. It i s now necessary, therefore, for the wastewater companies to develop an effective licensing andpermitting system for all discharges o f industrial wastewater to their sewerage systems, as allowed for by the regulations controlling discharges to sewers and a database o f all industrial wastewater discharges for each area, with each discharge being subject to limits interms ofmaximumdischarge quantityandrate and ofwastewater composition. (b) Industrial Wastewater Monitoring. The wastewater companies clearly need to take responsibility for discharges to sewer and to develop a monitoring and control program to safeguard the operation o f their sewerage and wastewater treatment assets. The monitoring program should target typical parameters such as CODCr, BOD5 suspended solids and ammoniacal nitrogen (ionized and unionized ammonia nitrogen) and certain other parameters characteristic o f specific discharges such as metals, and other toxic compounds and insome instances the measurement o f wastewater flows. The principal objective o f this component o f the IPCAP is therefore to initiate an industrial discharge-monitoring program that will promote effective industrial pollution control withinthe Ningbo Municipality. Inparticular this will address the transfer o f responsibility for industrial discharges to sewer to the W W C whilst seeking to avoid duplication o f effort and to minimize cost. (c) Industrial Pollution Control InCritical Catchments. The ZUEP project will provide substantial enhancement o f wastewater treatment capacity inthe Ningbo municipality area, which will achieve significant reductions inpollutionloads discharged to the water environment. However, there will remain very substantial discharges o f industrial wastewater to watercourses within the municipality area, and unless these are effectively controlled the benefits o f the major investments by the municipalities will not be fully realized. Moreover, some o f the industrial wastewater discharges are to watercourses used for urban water supply andtherefore threaten the quality o fwater insupply. The objective o f this component ofthe IPCAP is to assist the Ningbo EPB to develop an effective time-bound action plan to permit sustained achievement o f water quality objectives incritical catchments and thereby to safeguardkey beneficial water uses. (d) Water Conservation and Cleaner Production. Industrial wastewater accounts for a major - 40 -  proportion o f overall wastewater flows inNingbo city, and the generally low pollutant concentrations inmany industrial wastewater discharges indicates that water use i s very inefficient. Preliminary studies identifiedthat o f the industrial water consumption, around 28.5% originated from water supply companies with an equivalent amount being abstracted direct from rivers for cooling purposes. Comparison o f water consumption figures, from enterprises audited inNingbo, with benchmark data and observed values o f nonproductive water consumption, indicates that potential water savings o f 30 to 90% o f current usage are possible and it is concluded that overall potential savings o f at least 50% are achievable. The objective for water conservation and cleaner production is the development o f a time-bound program for water conservation within enterprises inthe Ningbo Municipality with the objective o f achieving a 50% reduction inwater consumption by the year 2010. (e) Sludge Management PlanNingbo. Ningbo is embarking o n a major program o f wastewater treatment in addition to that included inthe project but there were no comprehensive plans for disposal o f wastewater treatment sludge. As part of the ZUEP preparation an outline Sludge Management Plan has beenprepared covering the long term disposal needs o f all wastewater treatment sludge from Ningbo. The first stage o f this plan was completed during project preparation and the completion o f the planwill be supported inthe technical assistance program. (0 Catchment ManaPement Plan Donqian Lake. The Dongqianhu component was initially dominated by engineering projects the benefits o f which were not demonstrated quantitatively anddidnot contribute adequately to the longterm sustainable management o fthe lake. As part o f ZUEP preparation a outline Catchment Management Plan for the lake was prepared and identified a range o f policy instruments to sustain lake water quality. The technical assistance will support the responsible agencies will the further development o fthe catchment management plan. Package D Tourism Developmentand CommunityParticipation(US$0.75 million) - The tourism industry in Ningbo and Shaoxing is in its very early stages o f development. The Strategic Plan that was recently developed for some "early actions" indicates the potential o f the tourism industry to be expanded significantly. The challenge Ningbo and Shaoxing face is to manage the direction o f tourism growth in a wise manner from this early point inits development, to avoid the problems that have occurred in so many new tourism destinations where careful planning was lacking. The tourism industry is at a critical moment in its evolution and the Municipalities have the opportunity to maximize tourism's economic benefits through a Master Plan that will set the tourism industry on a clear and productive path over the next 15 years. Tourism Development. The objectives o f the TA include assistance with the development of: (a) Master Planning Both cities have their Tenth Five Year Plan for Tourism but the plan lacks a vision and a set o f - actions and investments for the next ten to fifteen years that are agreed upon by Shaoxing's public and private sectors involved in tourism There is no overall strong central Plan guiding the decisions made in each o f the cities and there is a need to establish a stronger central authority over tourism development in the areas; (b) Information Collection - Successful ' tourism destinations are those that have accurate knowledge about their tourism markets and expenditures. Both cities have inaccurate tourism visitation statistics and it is difficult to calculate real growth in real tourism (and not recreation) each year as well as to evaluate the success o f marketing efforts or to make corrections in the approach to marketing and product development. Internationally applied method o f collecting tourism arrivals statistics will be -41 -  introduced; (c) Training - Many of the people who were interviewed during the project preparation expressed a need for training that will help them to make their cities more competitive inthe international, global tourism market. The lessons o f other tourism destinations in the world show that the more highly trained the managers, the more successful the tourism industry; (d) Private Sector Participation - Experience elsewhere have shown clearly that the most successful tourism industries are those where there i s a strong and positive relationship between government and the private sector. Some tour operator companies from the private sector have expressed their desire to work more closely with government to develop tourism. Currently, they are largely separate from government and there is only limited cooperation and the TA will ensure that the private sector is given a regular opportunity to work with govemment and to provide its advice and input to decision-making; (e) Zoningfor Tourism One o f the - problems faced by the tourism industry around the world is conflicting land uses. There is a need for tourism zoning that ensures that "tourism zones" are identified in areas where there i s strong potential, or where there are excellent resources for tourism. A key output o f the TA will be a Tourism Zoning map that i s agreed upon by government, and that protects those areas most suited to tourism from the establishment o f conflicting land uses; (f) Product Development - "Product" means the attractions (i.e., historical, cultural, nature-based, man-made) and infrastructure base that are required by tourists (Le., hotels, gas stations, transportation, arts and crafts, etc.). At present, there are some improvements that need to be made to local product to make Ningbo and Shaoxing a more attractive tourism destination, and to provide increased opportunities for tourists to spend money and, hence, to stimulate economic development. The TA will identify those priority components o f the local tourism product that need to be developed or improved to make the city more competitive; (g) Market Research and Marketing The most successful - tourism destinations are those who study their markets, understand them, plan their product for them, and market to them effectively. The TA will develop a data base on the various types o f markets with greatest potential to come to Ningbo and Shaoxing, and will establish a Marketing Plan to attract these markets. Community Particbation. Another objective o f this TA is to determhe the means by which stakeholders within the various communities affected can participate inandbenefit from the employmentleconomic development opportunities that are projectedto occur as a result o f the project, particularly inthe tourism industryinShaoxing. Assistance include: (a) identification o fkey stakeholders, andassessment o ftheir interests, capacities, conflicts and likely levels o f suppodparticipation inprojected outcomes o f project implementation; (b) identification o f socioeconomic development activities, issues and needs, and their relationships to preservation andtourism goals; (c) identification o f economic developmentlincome generating activities for the project area communities that can contribute positively to conservation and tourism goals, and assessment o f possible means by which to support such development; (d) identification o f the current involvement o f the population intourism and opportunities for community-based initiatives in the tourism sector; and (e) assessment o fcurrent levels o fparticipationo f communities indecision-making relatedto the project, and existing structures for participation. PackageE HeritageConservationand Urban Upgrading (US$0.77million) - Space Planning & Resettlement Planning. Buildingon the findings o f the Jishan Social Survey, the needs o f occupants who stay or move out (residential and other) will be assessedon a 100%interview basis through the agency responsible for resettlement, housing allocation and property rental. The needs o f the, as-yet unknown, purchasers or tenants who will move into the upgraded buildingstock will determined by a form o f market survey. Clustering o f retained premises andvacated premises will needto be identified in order to devise new accommodation plans which provide increased space per occupant, allow for the expressed needs o f residents and particularly to satisfy functional needs such as maintenance o f access and provision o f bathrooms andkitchens. The responsible agency for this work would be the resettlementlproperty allocation department. The disciplines requiredfor this work are: estate manager; - 42 -  estate surveyor/property officer; social worker from an NGO; market researcher; and an interiors architect. Monitoring and Post-evaluation. This is a wide-ranging task aimed at assessing the performance o f historic conservation and upgrading using Jishan precinct as a pilot. Monitoring and evaluation indicators have been drafted (Interim Report Table 13.2). They need to be refined and formally adopted by SMG. They should cover comprehensively the full range o f impacts and implications arising from the works inJishan precinct including: impacts from resettlement andoccupation o f upgraded premises by existing and new occupants; improvement instandard o f living and inservices; property andrental values andthe take-up o f upgraded property; the physical quality o f buildings, landscaping and public spaces; population, employment, tourism and the economy; investment by property owners on maintenance and improvements; community participation; and sustainability o f institutions; etc. Another aspect is the degree o f success in applying the conservation principles and guidelines manual. The task requires: establishment o f a framework for monitoring; recording o f information or assessmentsby relevant disciplines; analysis and interpretation o f findings; and feedback to improve planning and implementation inthe other precincts and inGucheng ingeneral. The responsible agency for this work would be the HPCMO. The disciplines requiredare: resettlement specialist; conservation architect inquality control; economist/property market specialist. Training inManagement & Maintenance o f Renewedproperty. This task is about training and skills development for the management andmaintenance o f upgradedproperty inthe conservation precincts. The Task would be the responsibility o f HPCMO in conjunction with the resettlemendproperty allocation department. The discipline involved is estate management and the organization o f maintenance. This task involves comprehensive training across the spectrum o f conservation management approaches and techniques, covering: familiarization with conservation charters; exposure to international practice to widen experience, extend the imagination and vision of what is possible; knowledge o f good conservation practice; conservation inthe context o furbanplanning; design, materials technology and buildingservices for conservation, buildingcomponent by component usingthe already drafted Conservation Principles and Guidelines (by DRA consultants); refinement and publication o f the manual; andmaintenance techniques, and funding mechanisms andconditions. This task would be effected through participatory training workshops inShaoxing and an international study visit, together with application to sub-packages E.1 and E.2 specifically. The responsible agency would be HPCMO in conjunction with SPMO. .The disciplines involved would be conservation architect, buildingmaterials specialist, property market specialist, estate manager, estate surveyor/property officer, resettlement specialist, and recreatiodtourism planner. Exdanatorv Plans and Public Information. Through the formulation o f detailed plans for the conservation precincts, the idea would be to produce more detailed plans o f an explanatory nature to better communicate with the public, concerned professionals and to feed back into the updating process for the Shaoxing Urban Master Plan. The responsibility would rest with the SPMO andthe City Planning and Design Research Institute (within the ConstructionBureau). A highlevel planner from the government side would be needed to act as a catalyst for changes inthe planpreparation andpublication process. The planner would need to work closely with a publicity specialist. Social Assessment inHistoric Precincts. A social survey inJishanprecinct has already been completed and provides a model for further surveys inthe other four precincts. A TOR for this work i s covered elsewhere. TrainindStudv Tours. Inaddition to participatory workshops conducted in Shaoxing, there would be a domestic study tour, an overseas study tour, and funding o f some junior professionals to attend a short course inheritage conservation. The domestic study tour would be for the purpose of the top level management (suggested four persons) inthe SPMO and HPCMO to visit, observe and gain from the experience and processes of an advanced or completed World Bank supported cultural conservation project - 43 -  inChina. The overseas studytour wouldbe to three canal towns inHolland (e.g. Leiden, Delft, Utrecht and Amersfoort) for one week, with a two day stay in Singapore on the return leg. Holland is a lowland country with similar physiography to Shaoxing and laced with historic canals; these towns have inner city canal environs at a similar scale to Shaoxing; many of the canals are narrow like in Shaoxing; there is a long and successful track record o f cultural heritage conservation ina canal environment; andthese areas have a great attraction to townspeople, local and foreign tourists alike; and in Singapore to see efforts at conservation ina Chinese environment, en route back from the visit to Holland. - 44 -  Annex 3: Estimated Project Costs CHINA: Zhejiang Urban Environment Project Ningbo (1) South-Jiangdong sewerage and wastewater treatment 19.61 18.55 38.16 (2) Zhenhai sewerage and wastewater treatment 11.94 9.65 21.59 (3) Cicheng Infrastructure Development 21.49 6.29 27.78 (4) Dongqian Lake Infrastructure Development 21.50 13.87 35.37 Shaoxinn (5) Historic City-center Development and Conservation 70.82 35.56 106.38 Hannzhou (6) TianzilingLandfill Expansion 18.41 11.50 29.86 (7) Services, Training & Implementation Support 26.70 5.90 33.61 Total Baseline Cost 190.48 101.33 292.75 Physical Contingencies 15.24 7.32 22.63 Price Contingencies 9.38 9.24 18.68 Total Proiect Costs1 215.10 117.89 Front-endfee Total Financing Required 4 334.32 Goods 6.70 22.33 29.03 Works 106.52 88.86 195.38 Land Acquisition and Resettlement 72.16 0.00 72.16 Services, Training & Implementation Support 29.73 6.69 36.42 I Total Proiect Cost; I 215.10 I 117.89 I 332.99 Front-end fee 1.33 1.33 Total Financing Required 215.10 119.22 334.32 1 Identifiable taxes and duties are US$13.26m and the total project cost, net oftaxes, is US$321.6m. Therefore, the project cost sharing ratio is 41.43% of total project costnet of taxes. Initial cost estimates for the Zhejiang UrbanEnvironment Project have beenprepared by the local design - 45 -  institute on the basis o f a mixture o f government price books, the institute's own experience and cost data obtained from local construction units and project offices for similar types o f work recently undertaken in Shaoxing, Hangzhou andNingbo municipalities. The intemational consultant for design review and advisory (DRA)has carried out anindependent check ofthese estimates, usingthe following approaches: 0 For treatment plant, pumping stations and flow control gates costing models were used developed by the DRAonprevious WB projects inChina and calibrated for Zhejiang. 0 For the geomembrane liner in Hangzhou the rates were based on supply costs for CIF Shanghai and added a reasonable allowance for laying inChina. 0 For vehicles and compaction plant (8% o f total base cost for Hangzhou) quotations from reputable suppliers with offices in Shanghai were obtained. 0 For pipelines unitrate cost models were updated using typical pipe supply and laying costs obtained from recent contracts inthe Ningbo area. 0 For specialized work types, such as buildingrenovation, the DRA has usedunitrates based on the actual costs incurred for similar work undertaken ina number o f streets inthe Gucheng area o f Shaoxing during the preparation phase. 0 For general civil works items such as road construction rates were based on out-tum cost data from intemational cost consultant firms, who are extensively involvedinthe property and industrial construction sector inthe Shanghai area and adjacent provinces. A further check onthe project's cost estimates was done with cost data from recent Bank-fundedurban environment projects inHebei and Hubei provinces. Cost and related design data were obtained from both Hubei (sewerage - out-tum costs) and Hebei (Tangshan and HandanW W T P -bid costs). These costs were then compared with the costs predicted by the cost models for this project usingthe same design details. To enable the two sets o f cost data to be compared the costs were adjusted usingfactors to compensate for capacity differences betweenthe different schemes and location variations incosts found between different provinces in the PRC arising out o f differences ineconomic development andavailability o f primary construction materials. As a result is was found that the treatment plant cost estimates were close to actual bidsreceived inHebei while the sewerage cost were adjusted downwards with an average 5% based on out-tum costs inHubei. In conclusion, the above described process for cost estimation resulted inan overall cost reduction o f some 20% compared to the original cost estimates preparedby the local design institutes. Although this is somewhat less than the cost savings occurring on many o f the urban projects inChina (20-30%), the cost estimates for the project appear appropriate, considering also that the previous Bank-funded project inZhejiang didnot incur substantial cost savings. - 46 -  Annex 3: Estimated Project Costs CHINA: Zhejiang Urban Environment Project (US$million) - - -- ---- - 2006 Project Cost By Component - - LC Total - LC ------ Total LC Total LC FX Total Hangzhou 1. Tianziling Landfill Expansion 9.2 1.8 11.0 6.5 4.5 10.9 1.4 2.0 3.4 1.o 2.0 3.0 Shaoxing 2. Cultural Heritage,Housing & InfrastructureUpgrading 5.7 0.0 5.7 18.2 4.8 23.C 16.7 8.5 25.2 16.2 8.0 24.2 Ningbo 3. JiangdongnanSewerage & Treatment 2.4 0.0 2.4 3.0 1.9 4.8 3.9 3.3 7.2 4.9 5.5 10.5 4. Zhenhai Sewerage& Treatment 0.7 0.0 0.7 3.3 1.1 4.4 1.8 1.7 3.5 2.3 1.8 4.1 5. Cicheng InfrastructureUpgrading 0.0 0.0 0.0 8.8 0.7 9.5 5.9 1.3 7.2 4.3 1.7 6.0 6. DongqianLake Infrastructure Upgrading 1.2 0.0 1.2 5.4 2.8 8.2 5.9 3.8 9.7 6.0 4.0 10.0 7. Services, Training & ImplementationSupport 6.1 0.2 6.3 8.6 1.7 10.3 7.6 1.9 9.5 3.4 1.1 4.5 Total Baseline Cost 25.2 2.0 27.3 53.6 17.5 71.1 43.0 22.1 65.5 38.2 24.2 62.3 PhysicalContingencies 2.0 0.2 2.2 4.3 I.4 5.; 3.4 1.8 5.2 3.1 1.9 5.C Price Contingencies ------------ 0.1 -- - 0.0 0.2 1.O 0.7 1.i 2.0 1.E 3.8 2.9 2.8 5.7 Total Project Cost --- --- 27.4 2.2 29.6 - 58.9 19.6 78.5 48.4 26.; 74.6 44.1 28.9 -- -- - 73.c Interestduring constmction --- --- ----- 0.0 0.0 0.0 - 0.0 0.2 0.; 0.0 0.6 0.8 - 0.0 1.5 1.5 Front-end fee --- --- 0.0 0.0 0.0 - 0.0 0.3 0.: 0.0 0.: 0.3 0.0 0.3 0.3 Total Financing Required ---- 27.4 2.3 29.6 58.9 20.2 79.1 48.4 27.: --75.8 44.1 30.8 74.9 -- 2007 I 2008 2009 -- - T* Project Cost By Component LC FpT Total LC FX Total -FX Total LC ---- Hangzhou 1. Tianziling Landfill Expansion 0.4 0.7 1.1 0.0 0.0 O.( 0.0 0.0 0.C 18.4 11.0 29.4 Shaoxing 2. Cultural Heritage,Housing & InfrastructureUpgrading 10.5 7.8 18.3 3.5 2.6 6.1 0.0 0.0 0.C 70.8 31.8 102.f Ningho 3. JiangdongnanSewerage & Treatment 4.2 4.6 8.8 1.3 1.3 2.: 0.0 0.0 0.C 19.6 16.6 36.: 4. ZhenhaiSewerage& Treatment 2.2 2.5 4.7 1.8 1.6 3.1 0.0 0.0 O.( 11.9 8.7 20.t 5. Cicheng InfrastructureUpgrading 1.6 1.2 2.8 0.9 0.7 1.t 0.0 0.0 O S 21.5 5.6 27.1 6. DongqianLake Infrastructure Upgrading 2.3 1.5 3.8 0.7 0.5 1.: 0.0 0.0 O.( 21.5 12.7 34.: 7. Services, Training & Implementation Suppolt 1.0 0.2 1.1 0.1 0.0 0.' 0.0 0.0 0.C 26.7 5.1 31.1 Total Baseline Cost 22.- 18.: 40.6 8.: 6.8 15.( 0.0 0.r 0.C 190.: 91.: 282J PhysicalContingencies 1.1 1.: 3.3 0.' 0.5 1.: 0.0 O.( O S 15.; 7.: PriceContingencies -- 2.. 2.: 5.0 1.: 1.2 2.: 0.0 O.(- - O S- 9.L 9.: Total Project Cost --26.. 22.t 48.9 IO.( 8.5 18.: 0.0 O.( ---0.C 215.1 108s Interestduring construction -- -- 0.1 2.: 2.3 O.( 2.6 2.t 0.0 2.8 -- 2.1 O.(- 9.1 0.1 0.: 0.3 O.( 0.0 O.( 0.0 0.1 --- O.( O.( 1.: Total FinancingRequired --26.: 25.: 51.5 lo.( 11.1 21.: 0.0 2.d --- 2.L 215.1 119.; 334.3 LC: Local currency cost FX:Foreignexchangecost - 47 -  Annex 3: EstimatedProjectCosts CHINA: Zhejiang Urban EnvironmentProject (Y million) ---- -- --- 2003 2005 2006 Project Cost By Component LC - - FX Total LC Total LC Fpz LC - FX Total Hangzhou 1. Tianziling Landfill Expansion 76.0 15.1 91.1 52.5 36.5 89.0 10.9 16.2 27.1 8.2 15.6 23.9 Shaoxing 2. Cultural Heritage,Housing & InfrastructureUpgrading 47.4 0.c 47.4 147.7 39.3 187.0 133.8 68.6 202.4 130.0 64.0 194.1 Ningbo 3. JiangdongnanSewerage& Treatment 19.6 0.0 19.6 24.0 15.4 39.4 31.2 26.4 57.6 39.4 44.4 83.7 4. Zhenhai Sewerage& Treatment 5.4 0.0 5.4 26.6 8.8 35.4 14.2 13.6 27.8 18.1 14.5 32.6 5. CichengInfrastructureUpgrading 0.0 0.0 0.0 71.4 5.7 77.1 47.2 10.7 57.9 34.3 13.7 48.1 6. DongqianLake InfrastructureUpgrading 9.9 0.0 9.9 44.0 22.7 66.7 47.4 30.5 77.8 48.2 32.2 80.4 7. Services,Training & Implementation Support 50,l 1.8 51.9 69.7 13.9 83.6 61.0 15.0 76.0 27.2 9.1 36.3 Total BaselineCost 208.4 16.9 225.3 436.0 142.2 578.3 345.5 181.0 526.6 305.5 193.5 499.0 PhysicalContingencies 16.7 1.4 18.0 34.9 11.4 46.3 27.6 14.5 42.1 24.4 15.5 39.9 PriceContingencies ------- --- 1.1 0.2 1.3 7.9 5.7 13.7 16.0 14.9 30.9 23.2 22.4 45.5 Total Project Cost ------- 226.1 18.5 244.6 478.9 159.4 638.2 389.2 353.1 231.3 - 584.4 Interestduring construction ------- --- 0.0 0.1 0.1 0.0 1.9 1.9 0.0 0.0 12.3 12.3 Front-endfee ------- --- 0.0 0.0 0.0 0.0 2.7 2.7 0.0 0.0 2.7 2.7 Total FinancingRequired 226.1- 18.6 244.8 478.9 164.0 642.8 389.2 353.1 246.3 599.4 ---- -- ---- 2007 Total ProjectCost By Component ---- - LC FX Total LC Total LC Total LC - FX Total Hangzhou 1, Tianziling Landfill Expansion 2.9 5.7 8.6 0.1 0.1 0.2 0.0 0.0 0.0 150.6 89.2 239.8 Shaoxing 2. Cultural Heritage, Housing & InfrastructureUpgrading 84.2 62.3 146.5 27.9 20.9 48.9 0.0 0.0 0.0 571.1 255.1 826.2 Ningbo 3. JiangdongnanSewerage& Treatment 33.8 36.8 70.6 10.0 10.3 20.4 0.0 0.0 0.0 158.1 133.2 291.3 4. Zhenhai Sewerage&Treatment 17.8 19.9 37.6 14.2 13.0 27.1 0.0 0.0 0.0 96.2 69.8 166.0 5. CichengInfrastructureUpgrading 12.8 9.6 22.4 7.5 5.6 13.1 0.0 0.0 0.0 173.3 45.3 218.6 6. DongqianLake InfrastructureUpgrading 18.2 12.3 30.5 5.6 4.1 9.7 0.0 0.0 0.0 173.3 101.8 275.0 7. Services,Training & Implementation Support 7.7 1.3 9.1 0.8 0.2 1.0 0.0 0.0 0.0 216.6 41.3 257.9 Total BaselineCost 177.4 147.9 325.3 66.1 54.2 120.3 0.0 0.0 0.0 1,539.1 735.7 1,274.7 PhysicalContingencies 14.2 11.8 26.0 5.3 4.3 9.6 0.0 0.0 0.0 123.1 58.9 182.0 PriceContingencies ------------ 18.6 21.6 40.1 8.6 9.3 17.9 0.0 0.0 0.0 75.4 74.1 149.5 Total Project Cost ----------- 210.2 181.3 391.4 80.1 67.8 147.9 0.0 0.0 0.0 1,737.5 868.7 !,606.2 Interestduring construction ------------ 0.0 18.5 18.5 0.0 21.0 21.0 0.0 18.8 18.8 0.0 78.8 78.8 Front-end fee ------------ 0.0 2.7 2.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 10.7 10.7 Total FinancingRequired 210.2 202.4 412.5 80.1 88.8 168.8 0.0 18.8 18.8 1,737.5 958.2 1,695.7 LC: Localcurrencycost FX: Foreignexchangecost - 48 -  Annex 4: Cost EffectivenessAnalysis Summary CHINA: Zhejiang Urban Environment Project Zhejiang and ProjectCities 1. Zheiianrr Province. Zhejiang Province i s one ofthe most important easterncoastalprovinces in China and is an integral component o f the Yangtze Economic Zone, which includes over 200 millionpeople inneighboring ShanghaiMunicipality, andtheprovinces ofJiangsuandAnhui.Theregionforms one ofthe largest concentrations o f international trade and commerce inthe Asia-Pacific region. Zhejiang covers an area of 102,000 km2 (1% o f the national total) and has a populationo f about 45 million (3.5% o f national total), o f which 22% is urban and 78% rural. Since 1985, the population growthhas averaged 0.7% per year, with an average urban growthrate of 3.2% per year, which has risen to about 4.5% per year inthe late 1990s. The rural growth rate was 0.2% per year, indicating a clear trend inrural-urbanmigration. 2. Based on its strategic location and favorable climate, Zhejianghas developed a strong industrial sector, flourishing internationaltrade and a prosperous agricultural base. Provincial gross domestic product (GDP) has increased over seven-fold incurrent prices over the last decade from Y90 billion (US$18.8 billion, at Y4.78/US$1.00) in 1990, to Y353 billion (US$42.2 billion, at Y8.35/US$1.00) in 1995, and Y675 billion (USSS1.5 billion, at Y8.28/$1.00) in2001. By 2001, Zhejiang's economy was the fourth largest nationally. Real economic growth averaged7.6% between 1985 and 1990, 19.1% from 1990 to 1995, and 11% from 1995 to 2001. Economic growth i s beingdrivenprimarily by the industrial sector (48% of GDP) and the tertiary sectors (29%). Inthis context, the rapid expansion of export-oriented development zones has beena major stimulus to the provincial economy. Total foreign trade has increased significantly, registeringUS$32.8 billion in2001, compared with US$27.9 billion in2000 and US$18.3 billion in 1999. Exports account for 70% of foreign trade, o f which manufactured goods account for 90%. 3. Over the last 15 years, Zhejiang's per capita GDP has increased nearly 13-fold in current prices, from Y1,063 (US$362) in 1985, to Y2,122 (US$443) in 1990, Y8,087 (US$970) in 1995 and Y13,461 (US$1,625) in2000. GDP growth has beensubstantially above the national average; 20% above in 1985, nearly 70% above in 1995 and almost double the national average in2000. Average per capita disposable income in 2000 was Y9,279 (US$1,120) inurban areas and Y5,325 (US$645) inrural areas. 4. The remarkable economic growth of the last 10 15 years and the resultingstructural - transformation has resulted inrapidurbanization, rising real incomes, a sustained construction boom and increasing pressure on basic infrastructure and public services. Inthe environmental context, this has resultedinsignificant deficiencies inthe managementof wastewater and solid waste, which the project i s designedto address. 5. Hangzhou. Located on the northernbank o f the Qiantang River at the apex o f Hangzhou Bay, Hangzhou is the capital andlargest city inZhejiang. The total municipal population is 6.2 million, o f which 3.7 millionreside inthe eight urban districts with the remainingpopulation located inthree county-level cities and two counties. Hangzhou accounts for about 23% of Zhejiang's total GDP, with the city's economy beingfocused on secondary (51% o f GDP) and tertiary (41% o f GDP) industries.In manufacturing, Hangzhou is famous for silk and satin textiles, and has also developed significant production capacity inelectronics, telecommunications, machinery and transport equipment.Hangzhouis also a major national tourist destination with many ancient sites and scenic landscapes, includingthe internationally famous West Lake. In2000, domestic tourist visits to the city totaled 23 million while - 49 -  international visits were just over 700,000. The value added by the tourist sector was estimated to be Y8.5 billion inthis same year. Over the past decade, Hangzhou's per capita GDP has increased more than seven-fold in current prices, from Y3,310 (US$690) in 1990 to Y25,070 (US$3,030) in2001. 6. Ningbo. Ningbo is the second largest city inZhejiang Province, bordering Hangzhou Bay andthe East China Sea about 170 km east o f Hangzhou and 108 km from Shaoxing. Ningbo's total population is 5.4 million, o f which about 1.2 millionreside inthe five districts comprising the core city area. There are also three county-level cities andthree counties within the municipality. Ningbo accounts for 20% o f the total provincial GDP and growth inreal GDP averaged 17% between 1990 and 2000 period. Secondary industry accounts for 56% o f GDP, followedbytertiary industrywith 36%, and primary industry with 8%. Industrial development has been the main engine of growth, especially intextiles, machinery, petrochemicals, paper, power, electronics and metallurgy. Foreign trade has also been a major factor in Ningbo's development, with the continuing development o f major port facilities at Beilun, Zhenhai and Ningbo itself. GDP per capita inNingbo increased almost nine-fold incurrent prices between 1990 and 2001, from Y2,845 (US$595) in 1990 to Y24,200 (US$2,920) in2001. 7. Shaoxing. Shaoxing is an important industrial city with an extremely rich cultural heritage, located on Hangzhou Bay about 67 kmto the southeast o f Hangzhou. The total population o f the municipality i s 4.3 million, the fourth largest inthe province, with about 500,000 inthe core urban district o f Yuecheng and the rest inthe five surrounding counties. Shaoxing accounts for 13% o f provincial GDP. Inreal terms, GDP growth has averaged about 12%per year since 1985, and 8% to 9% over the last three years. Between 1990 and 2001, Shaoxing's per capita GDP has increased more than nine-fold incurrent prices, from Y2,OOO (US$420) in 1990 to Y19,OOO (US$2,290) in2001. Secondary industry (manufacturing and construction) accounts for 61% o f GDP, followed by tertiary industry (service sectors) with 29%, and primary industry with 10%. Industrial development has been main driver o f economic growth, especially in textiles and clothing, plus machinery and chemical products. However, over the past decade, tourism has played an increasingly important role inthe city's economy. Expenditures by tourists in Shaoxing were estimated to be Y6.3 billion in2001 and the number o f domestic visitors increased by almost 130% between 1990 and 2000, from 3.2 million to 7.3 million. The old city area, which incorporates the five conservation precincts to be restored andupgraded under ZUEP, has a history dating back 2,500 years. The city also attracts tourists because o f its historical connections to the modem era. Shaoxing i s the hometown o f many well-known Chinese historical figures, such as the late Premier Chou Enlai, authors and scholars LuXun and Cai Peiyuan, and revolutionaries Xu Xilin and QiuJin. B. ProjectBenefits andBeneficiaries 8. The physical infrastructure components o f the project include improvements inwastewater collection andtreatment infour areas o fNingbo, road improvements inCicheng town and Dongqian Lake (Ningbo), the provision o f a new sanitary landfill inHangzhou, and housing renovation, heritage conservation and infrastructure upgrading in Shaoxing. The investments inwastewater are primarily expansions o f existing sewer network, insome cases to new catchment areas, and additional treatment o f waste that is presently discharged untreated to watercourses. The new landfillinHangzhou will be constructed adjacent to and eventually on top o f part o f the existing Tianziling Landfill, which is at the end o f its operating life. The road upgrading in Cicheng is part o f a larger redevelopment and conservation project for this historic town. The road improvements inDongqian Lake constitute part o f the basic infrastructure for this newly developing residential and commercial zone o fNingbo. The housing renovation and cultural heritage to be undertaken inShaoxing will improve housing conditions for residents o f the historic five precincts o f the old town and restore historic and protected bui1dings;which is of national importance. The project will also provide modem underground infrastructure to the five precincts, - 50 -  including sewers, water supply, gas, electricity, and telephone. 9. Where possible, economic benefits were quantified for each project component. Incases where this was not possible, a qualitative assessment o f the projects benefits has beenundertaken. Of those benefits that could be quantified, those relating to tourism are the most significant, particularly inHangzhou and Shaoxing. A summary o f these benefits by project component is given below for each project city. 10. Hanrrzhou. The new landfill to be constructed under the project will be the primary means for the sanitary disposal o f municipal solid waste inHangzhou. As such, the project beneficiaries constitute 70% - 80% o f the population inthe urban districts o f the municipality. The main project benefits are: improvements inpublic health; environmental quality and quality o f life; the generation o f energy from landfillgas; andthe provision o f the basic environmental infrastructure necessary for the continued development o f tourism inthe city. 11. Under the "without project" scenario, the resulting lack o f adequate solid waste disposal would have a direct and potentially significant adverse impact on Hangzhou's status as a major tourist destination inChina, both for domestic and international visitors. Tourism presently accounts for 6% o fHangzhou's GDP and much o f this i s focused on the natural and cultural amenities inandaround the West Lake area o f the city. Evenifthe impact ontourism under the "without project" is very limited, it wouldbe significant relative to the total size o f the project. For example, the loss intourism benefits would exceed the total present value (PV) o f the capital and operating cost o f the project if the reduction inexisting value added from tourism exceeds only 0.75%. 12. Ninrrbo. The four wastewater components o f the project (Jiangdongnan, Zhenhai, Cicheng, Dongqian Lake) will increase the volume o f wastewater treated inNingbo from 290,000 m3/d to 450,000 m3/d. The project will also increase the utilization o f existing treatment capacity through an expansion o f the sewer network. The population directly benefiting from these service improvements i s estimated to be about 600,000 in2008, when the project assets are fully operational, and will then increase to over 800,000 by 2020. The non-wastewater improvements inCicheng and DongqianLake will benefit existing and future residents o f these communities as well as tourists visiting these areas. The project will improve public health, quality o f life, environmental quality, flood control, transportation within and around Cicheng and DongqianLake andprotect and enhance tourism inall o f the project areas, but particularly inCicheng and Dongqian Lake. 13. As a proxy o fthe quality o f life and environmental benefits accruing to households from the project wastewater improvements, the willingness to pay for these improvements has been estimated. Over the economic life o f the project, the PV o f this willingness to pay is estimated to be Y49 1 million, equivalent to 70% o f the project capital cost. Public healthbenefits are estimated to be a further Y97million, although a portion o f this benefit may have been captured within willingness to pay. Both the wastewater and other project infrastructure improvements will support the development o f tourism inthe Dongqian Lake area and enhance and expand tourism inCicheng Town. The P V o f these tourism benefits is estimated to be Y287 million over the project life, equivalent to almost 60% o f the project capital cost. 14. Shaoxing. The project will upgrade housing and provide improved infrastructure (wastewater, water, electricity, gas, telephone) services to the five historic precincts o f the old city and thereby directly benefit the 20,000 residents o f this area. The project will also provide the restoration o f historic and protectedbuildings, rehabilitation o f canals, road widening, new bridges and parks inthe historic city. These improvements will benefit all residents o f Shaoxing as well as the tourists who will visit this culturally and historic significant area. - 51 -  15. Of those project benefits that can be quantified, tourism is the most significant. Tourism presently accounts for about 6% o f Shaoxing's GDP and the main attractions for visitors to the city are located within the historic precincts to be restored andupgraded under the project. As part o fproject preparation, a tourism and cultural heritage strategy was developed for Shaoxing, which includes projections o f tourist visits over the 2002 - 2015 period. These projections have been prepared under a "with project" scenario and estimate that visits will increase at an average annual rate o f 3.5% to 2005, 5% from 2006 to 2010 and 5.5% from 2011to 2015. Domestic tourists will continue to account for over 90% o f visits over this period. The length o f stay is also projected to increase from the current average o f 1.2 days to 2.2 days by 2015. Under the "without project" scenario, the projectedgrowth intourist visits is lower; 3% over the entire period to 2015. Furthermore, under this scenario, a lower increase inthe average length o f stay i s projected; from 1.2 to 1.5 days. The difference intourist expenditures between the two scenarios is the incremental benefit o f the project. The P V o f these expenditures over the project life is Y829 million, which exceeds project capital and operating costs, which are estimated to be Y675 million. C. EconomicAnalysis 16. Methodolom. Although some o f the project benefits have been quantified and are discussed below, manyofthe benefits, particularly those relatingto environmental andpublic healthimprovements could not be quantified. For this reason, the choice for priority interventions for the project has beenguided by cost effectiveness analysis. Additionally, average incremental costs (AIC) inboth economic and financial terms have been calculated and compared to average tariffs, inconstant terms, to evaluate the subsidy element o f the project components (Table 1). Incremental costs and output are calculated from the difference between a "with project" scenario and the "without project" scenario. The economic costs for the components are determined by making adjustments to the component's financial costs. All taxes and duties were excluded from the calculation. Price contingencies, interest during construction and net working capital increases are also excluded. 17. Cost Effectiveness Analvsis. Alternative project designs were identified and evaluated inorder to identify the least cost solution for incorporation into the project. The findings o f these analyses are presented below and summarized inTables 1and 2. Table 1: Summary o f Least Cost Analysis for Wastewater Treatment Options PV Costs AIEC Selected (Y million) (Yim3) Option A. Zhenhai WWTP ExtendedAeration Activated Sludge (A20) 71 1s o Treatment Process Sequencing Batch Reactor (SBR) 71 1.49 Oxidation Ditch 69 1.45 X B. Jiangdongnan ExtendedAeration Activated Sludge (A20) 216 0.85 X WWTP Treatment Sequencing Batch Reactor (SBR) 203 0.80 Process Oxidation Ditch 233 0.92 C. Cicheng- Centralized at Jiangdongnan 31 1.66 X Centralized vs. Decentralized - WWTP inCicheng 35 1.85 Decentralized - 52 -  18. HangzhouLandfill. The project design i s based on the least cost solution o f constructing a new sanitary landfill adjacent to andpartially overlying the existing TianzilingLandfill. Landfilling o f waste was selectedbecause it i s significantly less costly than alternative disposal systems such as incineration. Furthermore, incineration does not completely replace the need for adequate landfill capacity because o f the requirement for ash disposal. Composting and recycling can be usedto reduce waste, but again these alternatives do not eliminate the requirement for landfilling. Additionally, composting has a very mixed record o f success inChina due to the lack o f adequate markets for composted materials and technical problems inoperating large scale composting facilities. 19. Nine alternative sites for the new landfillwere identified and assessed. Ofthe nine sites, only two warranted a detailed evaluation; adjacent to the existing Tianziling Landfill and at Jinling Mount, near Shima village. The Tianziling site was determined to be the preferred. Itpossesses a greater capacity, has fewer environmental constraints, i s closer to Hangzhou and, because it i s adjacent to the existing landfill, has a less complicated approval process. Furthermore, by combining the two landfills onthe same site, cost savings can be realizedbecause some o f the existing infrastructure, such as the power plant, the accessroad, and buildings,can be usedfor the new landfill. The ability to use this existinginfrastructure, combinedwith the larger capacity available at Tianziling, means that the capital cost m3 o f waste i s about 20% lower than that estimated for JinlingMount. The estimated capital cost i s Y13.Ym3 for Tianziling and Y16.8/m3 for Jinling Mount. Additionally, unit operating costs at Tianzilingshould also be lower. Staffing efficiencies can be achieved because some o f the same staff can be usedboththe new landfilland for post closure management o f the old landfill. The cost o f transporting waste to Tianziling will also be lower because it is closer to Hangzhou. Therefore, o f the two alternatives, Tianziling i s the least cost solution. 20. Ningbo -Zhenhai Wastewater Treatment. A least cost analysis was undertaken to support the selection o fthe preferred secondary treatment process. The alternatives considered were extended aeration activated sludge (A20), sequencing batch reactor (SBR) and oxidation ditch ( Table 1). Boththe A 2 0 and oxidation ditch systems are common inChina and generally have good operating records. Relative to the oxidation ditch, the A 2 0 process has a higher capital cost, includingequipment replacement over the life o f the system, but has lower operating costs. The SBR system i s less common, requires higher automation and, therefore, may be less suited to application inChina. However, it does possess a number o f advantages including shock load resistance, highcapacity and flexible operations, and requires less landthaneither the A 2 0 or oxidation ditch. Although the difference is only very marginal, the least cost solution was determined to be the oxidation ditch. Onthis basis, as well as due to its favorable operating record and applicability to China, the oxidation ditch has been selected as the preferred alternative. 21. Ningbo - Jiangdongnan Wastewater Treatment. The least cost analysis was usedto support the selection o f the preferred secondary treatment process among three alternatives; A20, SBR and oxidation ditch. Ofthe three alternatives, the SBR is estimated to have the lowest life cycle cost; Y0.80/m3 compared to YO.8Ym3 for A20 and Y0.92/m3 for the oxidation ditch ( Table 1). However, the difference is not significant with the estimatedcost o f the A 2 0 process beingonly 6% higher. Furthermore, as noted above, there are comparatively few existing SBR - 53 -  applications inChina andthere i s concern with repairing SBR decanters inChina. Additionally, the SBR process i s typically suppliedas a proprietary process. Incontrast, because the A 2 0 process i s much more common inChina, difhsers are now manufacturedinChina and maintenance and equipment replacement i s much easier. For these reasons, the A20 process i s selected as the preferred alternative even though its estimated cost i s slighter higher than that for the SBRprocess. 22. Ningbo -Cicheng Centralizedvs. Decentralized Treatment. Two options for the treatment o f wastewater generated inCicheng town: (i) centralizedtreatment at the new Jiangdongnan WWTP; or, (ii) decentralizedtreatment by constructing a small WWTP inCicheng. Under the centralized option, the capital and operating cost o f wastewater treatment would be lower but there would be additional costs associated with the construction and operation o f the 12.7 km pipeline between Cicheng and Jiangdongnan. The centralized option was determinedto be least cost solution. The life cycle unit cost o f this option i s estimatedto be Y1.66/m3 compared to Y1.85/m3 for decentralizedtreatment (Table 1).Onthis basis, centralizedtreatment hasbeen selected as the preferred option. 23. Ningbo - Cicheng Pipeline Diameter Optimization. The life cycle cost o f a range o f pumpingmain diameters has been estimated to determine the least cost pipe diameter. Two different planning horizons have been incorporated into the analysis; the shorter-term horizon in which the average flow i s 10,000 m3/d, and the longer-term inwhich the average flow i s 20,000 m3/d (Table 2). Over the shorter-term, the costs of the 500 mmand 600 mm diameter options are essentially the same at Y14.6 millionand Y15.0 millionrespectively. Over the longer-term, the 700 mmdiameter is least cost although the 600 mmand 800 mmoptions are only about 10% more costly. Based on these findings, the 600 mmi s the recommended diameter because it represents a reasonable compromise solution for boththe shorter and longer planninghorizons. However, the final selection o f pipe diameter will be made duringdetailed design after adequate considerationo f all relevant technical issues. These include the risk o f sediment deposition and septicity ina larger diameter pipeline over the shorter term due to low peak velocities and long retention times. 24. Ningbo -DongqianLake Pipeline Diameter Optimization. The life cycle cost o f a range o f pumpingmain diameters has beenestimatedto determine the least cost pipe diameter for the 12.5 kmpipeline that will convey sewage fromthe DongqianLake areato the JiangdongnanWWTP. Two different planning horizons have been incorporatedinto the analysis; the shorter-term horizon inwhich the average flow i s 20,000 m3/d, and the longer-term inwhich the average flow i s 70,000 m3/d (Table 2). For the shorter-term, the costs o f the 700 mm and 800 mm diameter options are essentially the same at Y14.8 million and Y14.9 millionrespectively. Over the longer-term, the 1100 mm and 1200 diameter pipelines represent the least cost solutions. Based on these results, the 900 mmdiameter represents a good compromise solution between the results for the shorter and longer terms. However, this depends on the ultimate flow generated and the period over which this ultimate flow i s achieved. Ifflows increase relatively rapidly toward an ultimate flow o f 70,000 m3/d, then it may be preferable to initially construct a 700 mmdiameter pipeline and then construct a second 700 mmpipeline inthe hture. However, if flows increase at a relatively slower rate or do not ultimately reach 70,000 m3/d, the single 900 mmoption i s - 54 -  consideredto b e preferable. This issue will b e reviewed ingreater detail duringpreliminary and detailed design inorder to finalize the selection. Table 2: Summary o f Least Cost Analysis for Wastewater Transfer Pipeline Diameter PV Costs (Y million) Recommended Shorter Term Flows" Longer Term Flows2' Option A. Cicheng 300 mm 43.5 n.a. 400 mm 17.5 64.2 500 mm 14.6 29.6 600 mm 15.0 21.1 X 700 mm 16.1 19.1 800 mm n.a. 21.1 B. Dongqian Lake 600 mm 16.4 n.a. 700 mm 14.8 n.a. 800 mm 14.9 58.4 900 mm 17.6 41.4 X 1000 mm 23.1 34.1 1100 mm n.a. 31.5 1200mm n.a. 31.8 *'Cicheng: I'Cicheng: 10,000 m3/d;DongqianLake:20,000 m3/d. 20,000 m3/d;DongqianLake: 70,000 m3/d. 25. Shaoxing - Cultural Heritage, Housing and Infrastructure Umzrading. Consistent with a least cost approach to achieving the development objectives, the project design is based on investments that are the most cost effective. The main development objectives for this component are to preserve the heritage o f Shaoxing's historical past and to ensure that a socially and economically viable community i s maintained and enhanced inthose areas to be upgraded under the project. Therefore, the most cost effective investments are those likely to have the greatest impact inpromoting economic growth and sustainability within the project communities. This depends on makingthe communities viable and attractive places to reside, work and to visit. Consequently, the project interventions are targeted specifically at achieving these goals. 26. Shaoxing - Housing Uunrades. As an historic area, most o f the existing housing stock is old and increasingly unattractive inits present form and condition for modem residential use. With the recent reform o f China's housing sector, a very wide range o f more modem housing altematives now exist outside the old city. Therefore, ifleft unchecked, the residentpopulation inthe old city is likely to progressively decline, which would serve to gradually undermine the social and economic viability o f these communities. Consequently, the largest sub-component of project works inShaoxing, almost $92 million or 75% o f the - 55-  total, will upgrade about 1.2 millionm2 o f the existing housing stock while at the same time retaining its historic and cultural value. This will include increasing average floorspace by combining two or more existing small units into a single larger residence. It will also provide modem kitchen and sanitary facilities within existing housingand convert some housing into commercial uses. The housing improvements will also upgrade buildingexteriors using historically appropriate methods, thereby enhancing the residential appeal o f the communities, as well as maintaining and strengthening their tourism potential. Some existing modem buildingsinthe old city will need to be demolished inorder to restore the historic appearance o f the area on which tourism depends. However, wherever possible, this will be minimizedinfavor o f the lower cost altemative o f modifying buildingexteriors. 27. Shaoxinn - Restoration o f Historic Buildinas.The second largest sub-component inShaoxing i s the restoration and rebuilding o f designated historical buildings inthe old city. The total floorspace o f buildingsto be restoredis estimated to be 57,000 m2 at a total cost o f almost $15 million, equivalent to 12% o f the total cost o f the Shaoxing component. Most o f these buildings are considered o f being o f national importance interms o f their heritage value and draw large numbers o f tourists to the city. Therefore, ifallowed to deteriorate, the resulting adverse impact on tourism would be significant. This would not only undermine the core economic base o f the old city butwould have a wider impact on the entire municipality. 28. Shaoxina - Improved Utilities Services. Complementing the housing upgrades and building restorations, this sub-component will provide improved utility services to residents and visitors, including sewerage, water, gas, power, and telecommunications. The total cost o f this sub-component is estimated to bejust over $4 million, equivalent to 3% o f the total Shaoxing component. The sewerage improvements, which constitute almost 40% of the cost o f this sub-component, will provide for the replacement o f the existing combined collection system with a fully separated system. These works adopt the least cost solution o f connecting the new separated system to the existing municipal sewer system so that the wastewater generated inthe old city can be treated at an existingtreatment facility. 29. Shaoxina - Improvements to Urban Canals, Roads. Bridges Car Parks & Public Spaces. This total cost o f this sub-component is estimated to be $11million, equivalent to 9% o f the Shaoxing component. The urbancanal improvements will improve water quality inthe canals and enable navigation by tour boats. Although the capital cost of canal improvements is relatively low, the operating costs o fthe pumpsneededto flush the canals are potentially significant. Therefore, the focus o f the least cost analysis was on optimizing pumpingarrangements. This involved modeling flushing volumes under different pump capacities, pumpingtimes, and gate designs. Based on this analysis, a preliminary design was developed that reduced the cost o f pumpingby 45%, to Y6,OOO per day from the Y11,OOO per day originally estimated on the basis o f initial designs. 30. Shaoxina -Justification for Government Intervention. Government financing o f most o f the project cost is justified for two major reasons. First, approximately 70% o f the housing inthe old city, and virtually all o f the historic buildings, are owned and managed by the municipal government. Therefore, as owner o f these properties, it is appropriate that the municipal government bear the cost o f upgrading. Second, the upgrading o f both public and private properties creates significant extemalities because the benefits extend well beyond the level o f individual households and businesses. These include the cultural value o f appropriately restored and upgraded buildings, the public health benefits o f improved water and sanitation facilities, and the significant economic activity generated by tourists attracted to the old city. Much o f these benefits cannot be intemalized although a portion o f the tourist benefits accruing to businesses located inthe restored areas will be captured through increasedrents for commercial properties. Additionally, 45% o f the cost o f interior upgrading o f privately owned houses i s to be borne by individual - 56 -  homeowners to reflect the direct benefits they accrue from this work. However, these internalized benefits will be small relative to the total cost o f the project. 31. Average IncrementalEconomicCost (AIEC). The AIECs for the Hangzhou solidwaste and Ningbo wastewater project components are calculated as the PV o f the sum o f capital and operational and maintenance costs (evaluated at economic prices) divided by the PV o f the quantity o f output. For each component, the AIEC was calculated on the basis o f the economic life o f the project. For the Hangzhou S W M component, this is the 28 year period from 2003 to 2030, which includes a two year landfillclosure and site remediation phase. For the wastewater components inNingbo, the economic life o f the project is the 39 year period from 2003 to 2038. The economic opportunity cost o f capital (EOCC), assumed to be 12%, was used to discount incremental costs and volumes inorder to calculate the AIEC. Table 3: Summary o f Economic and Financial Analysis AIEC AIFC FRR e!) Tariff" I WACC 2008 2010 Ave. e?) Hangzhou Solid Waste flit) 68 49 1.3 45 52 45 3.3 Ningbo Wastewater (Y/m3) A - Zhenhai 3.56 1.99 n.a. n.a. n.a. n.a. 2.8 B Jiangdongnan - 1.34 0.84 n.a. n.a. n.a. n.a. 2.6 C- Cicheng 2.02 0.86 n.a. n.a. n.a. n.a. 2.8 D- DongqianLake 2.90 1.27 n.a. n.a. n.a. n.a. 2.8 Total - Ningbo 1.81 1.03 n.a. 1.54 2.09 1.53 2.7 Tariffs expressed on aPV basis discountedat WACC. For the wastewater components, the average tariff is calculated as the realizedrevenuedividedby volume of wastewater treated inorder to provide abasis for comparison ofAIEC andAIFC. Average wastewatertariffcalculated onthe basis of projectedtariffs over the 2003 -2017 period. Average solid waste tariffcalculated on the basis ofprojectedtariffs over the 2003 -2010 period. 32. Hanmhou Solid Waste. The difference between the AIEC andthe average tariffrepresents a mix of economic and financial subsidies. The AIEC is calculated to be Y68/t, which exceeds the present value o f the projected average tariff over the project life, which i s Y45/t. The difference, Y23/t, represents an economic subsidy. This subsidy is attributable to two mainfactors. First,it incorporates a financial subsidy, estimated to b e Y4/t, which reflects equity contributions by the municipality towardthe cost o f fixed assets, including the ZUEP f h d e d landfill. Second, an economic subsidy arises from the pricing distortions that exist inthe markets for capital and operating inputs consumed inthe construction and operations o f the solid waste management system. 33. NingboWastewater. The AIECs for the Zhenhai, Jiangdongnan, Cicheng andDongqianLake components are Y3.5611113, Y1.341m3, Y2.021m3 and Y2.90Im3, expressed on the basis o f wastewater treated. The overall AIEC for the four components is Y1.8llm3. The significant variations inthe AIEC reflect significant differences inthe both the capital and operating cost structures between the four components. Although the cost structures o f the various components differ, a uniform wastewater tariff is - 57 -  applied inall areas served by the NSCL. The present value o f the average wastewater tariff, expressed in terms o f wastewater treated, is projected to be Y1.54/m3 in2008, Y2.09/m3 in2010. Over the entire 2003 -2017forecastperiod,theaveragetariffisprojectedtobeY1.53/m3 ofwastewatertreated. The difference between this average tariff and the overall AIEC, which is Y0.28/m3, represents an economic subsidy. Most of this subsidyis attributable to the pricing distortions that exist inthe markets for capital and operating inputs consumed inthe construction and operations of the wastewater system. A significant portion o f this subsidy is due to the subsidized cost o f project financing provided through loans that carry interest rates below the opportunity cost o f capital as well as government equity contributions. 34. Sensitivitv Analysis. An analysis was conducted for project items that have an impact,on the project's economic viability and for which there is considerable uncertainty. Table 4 summarizes the results o f the sensitivity analysis on the economic parameters. For all project components, the AIECs are most sensitive to variations incapital costs. Table 4. Results of Sensitivity Analysis Key Variable Change Wastewater Zhenhai Jiangdongnan Cicheng Dongqian Lake AIEC AIFC AIEC AIFC AIEC AIFC AIEC AIFC Base Case 3.56 1.99 1.34 0.84 2.02 0.86 2.90 1.27 Capital Cost +lo% 3.83 2.10 1.43 0.88 2.21 0.92 3.16 1.37 O&M Costs +lo% 3.64 2.08 1.39 0.89 2.04 0.88 2.94 1.31 Combination 3.92 2.19 1.48 0.92 2.23 0.94 3.19 1.40 Key Variable Change Solid Waste Hangzhou FIRR AIEC AIFC Base Case 1.3 68 49 1. Capital Cost +lo% 0.2 72 52 2. O&M Costs +lo% -0.3 70 52 3. Combination of (1 + 2) -1.4 74 54 D. FinancialAnalysis 35. Methodolow. Inorder to determine the financial viability o f the solid waste management project component inHangzhou, the financial rate o f return (FRR) i s calculated. The FRR is defined as the discount rate, or rate of return, which equalizes the present value (PV) o f incremental project costs to the P V o f incremental revenues. The Project component is considered to be financially viable ifthe FRR is equal to, or greater than, the actual cost o f project funding which is referredto as the weighted average cost o f capital (WACC). Inthe case o f the Ningbo wastewater project components, the city employs a polluter-pay approach to the application o fwastewater charges inthat all wastewater generators pay the charge regardless o f whether they are connected to the public sewer. Consequently, while the wastewater - 58 -  system expansions providedunder the project will significantly increase the proportion o f the population receiving service, the proportion o f the population paying the charge will remain unchanged. As a result, increases inrevenues will be limited to that resulting from tariff increases and population growth. For this reason, the concept o f incremental revenues underlying FRR is not fully applicable and, therefore, FRR is not calculated for the wastewater project components. 36. An analysis o fthe cost effectiveness and subsidyrequirements ofboththe solidwaste and wastewater project components has been undertaken. The average incremental financial cost (AIFC), which i s an approximation o f the long runmarginal cost, i s calculated. The AIFC i s defined as the P V o f capital and operation costs at financial prices divided by the P V of the quantity o f wastewater treated and paid for ineach year over the life ofthe system. The PV is calculatedbydiscounting all cash flows at the WACC. Inorder to identify those factors posingthe greatest riskto the financial viability ofthe Project, ananalysis o f the sensitivity o f FRR and AIFC to adverse changes in selected key variables is also undertaken. 37. Maior Assumutions. The period o f analysis is the economic life o f each project component, which i s the same as that employed inthe economic analysis. The FRR i s calculated on a pre-tax basis. All revenues and costs are expressed on an incremental basis inconstant 2003 prices. Capital costs are baseline costs plus physical contingencies. Inaddition, an allowance for the replacement o f mechanical and electrical components over the economic life o f the project is made. Incremental revenues over the 2003 - 2018 are projected o n the basis o f the average tariff requirements determined for each project company. Beyond 2017, user fees are assumed to remain at 2018 levels. As shown inTable 3, the W A C C is calculated separately for each project component and varies between 2.6% and 3.3% depending on the precise financial structure o f each component. 38. Hangzhou Solid Waste. The FRR is calculated as 1.3%, which is slightly below the WACC, which i s estimated to be 3.3% (Table 3). Therefore, the project does not achieve full cost recovery over its entire life. However, the project does fully recover all operating costs and about 85% o f capital costs. The AIFC, which is calculated on the basis o f ZUEP fundedlandfill, is estimated to be Y49lt. Given that the present value o f average tariff over this same period is estimated to be Y45/t, the financial subsidy i s the difference; Y41t. This subsidy is provided inthe form o f equity contributions by the municipality toward the cost o f fvted assets, including the ZUEP funded landfill. 39. NinPbo Wastewater. The AIFCs for the Zhenhai, Jiangdongnan, Cicheng and Dongqian Lake components are Y1.991m3, YO.84lm3, YO.86lm3 andY1.27lm3, expressed on the basis o f wastewater treated. The overall AIFC for the four components i s Yl.O3/m3. As was the case for the AIECs, the significant variations inthe AIFCs reflect significant differences inthe both the capital andoperating cost structures between the four components. The AIFC for the Zhenhai project component i s the highest because district's location well outside the core city area o fNingbo, a relatively small-scale treatment plant needs to be constructed for the district. Although wastewater from the Dongqian Lake area will be pumped for centralized treatment at Jiangdongnan, the cost o f constructing and operating the pipeline increases its AIFC. The Jiangdongnan AIFC is lower because o f the economies o f scale o f constructing and operating a relatively large centralized treatment plant. 40. A comparison o fthe AIFC with the average tariff will indicate the presence o f any financial subsidies. Since the average tariff, which i s Y1.53lm3 o f wastewater treated over the 2003 -2017 forecast period, is actually higher than the overall AIFC o f Y1.031m3, the net subsidy over this period is zero. However, while the overall net subsidy is zero, subsidies are provided inform o f municipal and district government contributions toward the capital cost o f ZUEP. The average tariff exceeds the AIFC because o f the anticipated need to implement significant tariff increases in2010 and 2011. These increases will be - 59 -  needed to cover the capital and incremental operating costs associated with a major wastewater expansion project planned to be implemented over the 2008 2012 period. - 41. Sensitivitv Analvsis. An analysis was conducted for project items that have an impact on the project's financial viability and for which there is considerable uncertainty. Table 4 summarizes the results. Inthe case ofthe Hangzhousolidwaste component, the FIRRis most sensitive to variations inrevenue. The AIFC for this component is equally sensitive to changes incapital and operating costs. For the wastewater components inCicheng and Dongqian Lake, the AIFC is most sensitive to changes in capital costs. Inthe case o f the Zhenhai and Jiangdongnan wastewater components, the sensitivity o f the AIFC to changes incapital and operating costs is essentially the same. Summaryofbenefitsand costs: MainAssumptions: Cost-effectivenessindicators: - 60 -  Annex 5: Financial Summary CHINA: Zhejiang Urban Environment Project A. Municipal Finances 1. An analysis o f the availability o f counterpart funds was undertaken by reviewing revenues and expenditure in each o f the project cities. Table 1presents a summary o f this analysis. Detailed tables for revenues and expenditures are available inthe project file. The data analyzed refer to what is referred to in Chinese government accounting as on-budget and off-budget funds. On-budget and off-budgetary funds include revenues from statutory taxes and levies. Their allocations are subject to approval by higher level o f governments. Off-budget are non-tax revenues such as net income remitted from municipally controlled enterprises, and some types o f user charges collected by administrative departments. There is less control by higher level o f government on these revenues sources. Inall three project municipalities, some o fthe off-budget funds are actually transferredto on-budget revenues and are generally allocated for the purpose o f capital investments. One o f the most important off-budget sources o f funds for the three cities that is partially allocated to the on-budget capital investment fund is the proceeds o f long-term leases o f municipal land. 2. The primary source o f funding for counterpart funding inthe three project cities is the urban construction maintenance funds (UCMF) o f the municipal governments. Therefore, the capital investment capacity o f each municipality, and particularly the ability o f each city to provide the necessary counterpart funding, is assessedon the basis o f the UCMF. Inthe case of the Ningbo wastewater component, a portion of the counterpart funds will also be contributed by the Zhenhai District Government from its UCMF and from the internally generated revenues o f the Ningbo Municipal Sewage Company Limited (NSCL). For the DongqianLake component inNingbo, the project implementingagency, the DongqianLake Investment and Development Company Ltd. (DLIDC), will provide the full amount o f the counterpart contribution. 3. The analysis o f historical trends indicates very large increases inrevenues and expenditures in recent years inthe project cities. This is a reflection o f the strong economic growth inthe cities and throughout Zhejiang Province over the past decade. For example, between 1999 and 2002, total municipal revenues increased at an average rate o f 25% inHangzhou, 21% inNingbo and 14%in Shaoxing. Total revenues generated by Zhenhai District also increased by similar rates; about 15% per year over this same period. Inthe case o fNingbo, Zhenhai District and Shaoxing, the revenues allocated to the U C M F increasedeven more rapidly than total revenues. Over the 1998 - 2002 period, revenues allocated to the U C M F increased at annual average rate o f 33% inNingbo, 17% inZhenhai and 51% in Shaoxing. The increase inHangzhou averaged 10% per year between 1998 and 2002, lower than the increase intotal municipal revenues, but still very significant. These very high growth rates in capital funding are a reflection o f the focus o f the cities inmakingthe infrastructure investments needed to improve living standards and provide the basis for sustainable economic growth. 4. Financial projections have beenprepared to assess the capacity o f the three project municipalities and Zhenhai District to provide the necessary counterpart funding for ZUEP. Relative to actual growth rates over the recent past, the projections are based on more conservative assumptions, both for total revenues as well as that portion allocated to the UCMF. Over the 2003 - 2008 period, UCMF funding i s projected to increase at an average annual rate o f 10% inHangzhou, 3% inNingbo and 6% in Shaoxing. Fundingallocations to the UCMF inZhenhai District are actuallyprojected to decline by a total o f 20% over this period because o f an expected reduction inthe sale o f long-term leases o f district controlled land. -61 -  Table 1:MunicipalFinances (Y million currentprices) - 2003 2004 2005 2006 2007 2008 2009 Total HangzhouMunicipalGovernment Municipal Revenue 13,090 14,280 15,652 L 7,046 18,625 20,349 22,233 121,274 CapitalInvestmentCapacity 6,063 6,561 7,191 7,83 1 8,557 9,349 10,214 55,765 ProjectContributions 43 64 20 0 0 0 0 126 Projectas % ofRevenues 0.3% 0.4% 0.1% 0.0% 0.0% 0.0% 0.0% 0.1% Projectas % of CapitalBudget 0.7% 1.O% 0.3% 0.0% 0.0% 0.0% 0.0% 0.2% NingboMunicipalGovernment MunicipalRevenue 4,954 5,270 5,617 5,999 6,419 6,880 7,388 42,527 CapitalInvestmentCapacity 1,070 1,100 1,134 1,171 1,249 1,332 1,422 8,477 ProjectContributions 23 45 42 34 27 0 2 173 Projectas % ofRevenues 0.5% 0.9% 0.7% 0.6% 0.4% 0.0% 0.0% 0.4% Projectas % ofCapitalBudget 2.2% 4.1% 3.7% 2.9% 2.2% 0.0% 0.1% 2.0% ZhenhaiDistrictGovernment District Revenue 740 820 886 964 1,045 1,132 1,227 6,814 CapitalInvestmentCapacity 124 131 138 150 163 177 192 1,074 ProjectContributions 7 20 2 1 23 11 0 63 Projectas % ofRevenues 0.9% 2.5% 0.2% 0.1% 2.2% 1.0% 0.0% 0.9% Projectas % ofCapitalBudget 5.5% 15.6% 1.2% 0.4% 13.9% 6.1% 0.0% 5.9% ShaoxingMunicipalGovernment Municipal Revenue 2,352 2,618 2,912 3,240 3,604 4,008 4,459 23,192 CapitalInvestmentCapacity 1,534 1,653 1,734 1,843 2,050 2,281 2,537 13,632 ProjectContributions- Total 67 166 144 120 66 5 9 575 Projectas % ofRevenues 2.8% 6.3% 4.9% 3.7% 1.8% 0.1% 0.2% 2.5% Projectas %ofCapitalBudget 4.3% 10.0% 8.3% 6.5% 3.2% 0.2% 0.3% 4.2% 5. Based on the conservative assumptions regarding future revenue growth, the analysis indicates that theproject components are affordable inall three cities. The project will berelatively greater impact inthe case o f Zhenhai District, though still affordable. Requirements for project counterpart funds from the three municipal govemments and Zhenhai District as a proportion o f total revenues vanes between 0.1% in Hangzhou (0.4% inthe peak year), 0.4% inNingbo (0.9Y0 inthe peak year), 0.9% inZhenhai District (2.5% inthe peak year), and 2.5% in Shaoxing (6.3% inthe peak year). When considering only revenues that can be allocated to the UCMF, which is an approximation o f financial capacity to contribute to the project, the incidence o f the project counterpart funds varies between 0.2% on average inHangzhou (1.O% inthe peak year, 2004), 2.0% inNingbo (4.1% inthe peak year, 2004), 5.9% inZhenhai District(15.6% in the peak year, 2007), and 4.2% in Shaoxing (10.0% inthe peak year, 2004). - 62 -  6. While the impact o f counterpart funding on the capital budgets is within the range considered to be affordable, there is some uncertainty regarding actual revenues available to fund these budgets over the project implementationperiod. This uncertainty arises because the UCMFs are relatively dependent on less certain off-budget sources o f funds. An important source o f funds for the UCMFs inall three municipalities and Zhenhai District is the proceeds o f long-term leases o f municipal land, an off-budget item. For example, in2002, land lease revenues are estimated to have comprised 35%, 38% and 52% o f total allocations to the UCMFs in Shaoxing, Zhenhai District and Ningbo respectively. Annual revenues from land leases could vary significantly from year to year inresponse to changes inthe overall rate o f economic growth and inthe demand for land. Projected revenue from land leases are based on the very conservative assumption o f little or no growth over the project implementationperiod. Infact, for Ningbo, annual revenues are assumed lower over the 2003 -2008 period than in2002 in order to reflect expected trends. 7. To evaluate the sensitivity o fproject affordability to the risk o f counterpart funds shortages, a worst-case scenario for the project was also projected. Under this worst-case scenario, revenue from land leases is assumed to be only half that projected under the base case scenario. This scenario would reflect a major decline inthe real estate markets o f the cities. However, even under this extreme scenario, the project remains affordable. Project contributions as proportion o f the capital budget would be 2.2% inNingbo (4.5% inthe peak year, 2004), 6.9% inZhenhai (18.5% inthe peak year, 2004) and 5.1% in Shaoxing (12.0% inthe peak year, 2004). Although affordable, Zhenhai would need to carefully manage its capital budget, particularly inthe 2004 peak year, inorder to ensure the ZUEP counterpart funds are made available ina timely manner. The impact o f this scenario i s assessed for Ningbo, Zhenhai District and Shaoxing. This scenario is not applied to Hangzhoubecause even if land lease revenues were zero, the project would remain affordable. B. Project CompanyFinancialProjections and InstitutionalArrangements 8. Financial projections have been prepared for each o f the project companies on an annual basis over the 2003 - 2015 period. These projections are based on the requirement o f each company to comply with the agreedupon financial covenants regarding cost recovery, debt service coverage, and internally generated contributions toward capital investments. Summary financial projections for each company are giveninTables 5 - 7. Detailedfmancial projections are included inthe project file. - 63 -  NingboMunicipalSewageCompanyLtd. 9. InstitutionalSet-up. Untillate 2002, the wastewater sector was managedunder a pre-reform structure with government departments being responsible for all capital, operating and maintenance functions. The major sector assets, including the sewer mains, pumping stations, and wastewater treatment plant were under the management o f the Urban Facilities Management Division (UFMD), which reported to the city government through the Urban Management Bureau (UMB). Local sewers were under the management of the district governments. Capital and operating costs were fundedby municipal government budgetary allocations, a portion o f which was derived from by a surcharge o n the water bill. However, in2002, the city began implementing a major reform of the sector to bringit into compliance with national policies. InNovember 2002, the Ningbo Municipal Sewage Company Limited(NSCL) was legally established to own and operate all major wastewater infrastructure inthe city. The NSCL is owned by two government companies, the Ningbo Municipal Tap Water General Company (NTWC 55%) and - Ningbo Construction and Shareholder Company (45%). The majority ownership o f the NSCL by the N T W C has proven to be an effective arrangement that could serve as a model for other Chinese cities. NSCL's senior management team has come from the NTWC, which has given it an immediate competence inpublic utilitymanagement. This shareholding arrangement has also meant that agreements for combined billing and collectiono fthe water andwastewater tariffs, which are critical to the financial autonomy ofthe NSCL, have been quickly concluded and implemented. 10. Withinits geographic jurisdiction, the NSCL owns andoperates all wastewater treatment plants (WWTP), all pump stations, the sanitary sewer system, and the combined sanitaryhtormwater system. The company is not responsible for the separate stormwater system, which will remain with the municipal government. All fixed assets within the core urbandistricts o f the city that are due to be the responsibility o f the NSCL have been transferred. All staff responsible for the operation and maintenance o f these fixed assets have been reassigned to the company. 11. ReformFramework The design andphasing o fthe financial and institutional reforms for the Ningbo wastewater component have beenbased on the Bank's experience with similar recent projects in China. The Bank's approach has been to support State policies for the wastewater sector, which promote the corporatization o f sector assets andoperations. Corporatization is intendedto improve efficiencies in the sector as well as to better facilitate adequate andtimely tariffincreases by establishing a more transparent and commercially oriented basis for cost recovery. However, insome cases, the achievement o f these goals has been limited because corporatization has initially been extended only to those facilities being constructed under the Bank-fbnded project. As a result, existing assets have continued to be operated under a pre-reform arrangement by bureaus o f the municipal government, at least over the project implementation period. This then has meant that cost recovery andtariff setting have not been fully brought within the new corporatized framework for the sector. Infact, inmost cases where these pre-reform arrangements for existing assets have beenmaintained, there is no direct financial or legal relationship between the wastewater tariff and the new wastewater company. The tariff continues to be a fee applied under the legal authority o f the municipal government rather thanthe wastewater company. As such, all tariff collections have continued to be remitted to the municipal government with the wastewater company then being dependent on municipal budgetary allocations, which are not necessarily relatedto the amounts actually collected. This disconnect between the tariff and the wastewater company, and the resulting lack o f financial autonomy, have been important factors that have limitedthe effectiveness o f the overall reform program inthese Bank-funded projects. 12. Based on the Bank's experience, the reformplan developed for Ningbo has been specifically extended to the entire wastewater sector inthe city. Furthermore, the basic elements o f this plan have - 64 -  already been implemented during project preparation. As noted earlier, the NSCL was establishedduring project preparation and has already assumed ownership and direct operating responsibility for all existing wastewater assets. The wastewater tariff was re-established as a utility company tariff and, since March 2003, all collections have beenremitted directly to NSCL. Therefore, the structures needed to facilitate timely and adequate tariff increases have already beenput into place. A major increase inthe tariff, which should be sufficient to meet the company's needs untilat least the end o f 2005, has been approved by the municipal govemment and is now awaiting final concurrence from the provincial government. The existing arrangement under which the billing and collection o f the wastewater tariff is undertaken by the Ningbo Tap Water General Company (NWTC) will be maintained. Since the introduction o f the wastewater tariff in1999, NWTChas undertakenthis function andcollectionperformance has beenvery good, averaging more than 90%. The financial projections conservatively assume that collection performance declines significantly inresponse to the tariff increase. However, the new tariffis projected to be sufficient to meet NSCL's financial needs even under such a worst-case scenario. 13. Withthe basic reform framework havingbeenputinto place, the focus o fthe programwill now shift to the implementationo f those detailed program elements needed for NSCL to complete its transition from govemment unitto autonomous utilitycompany. To date, management's focus has been on company establishment andthe transfer o f assets, staff and revenues. As a result, most o f the planning, management and financial systems requiredby the company have yet to be fully developed and implemented. A priority task over the coming year will be to formalize the staff transfers from the municipal government to NSCL. Although NSCL i s responsible for these staff, which includes personnel management and payment o f wages, salaries andbenefits, they still retain their status as government employees. The municipal government is presently developing procedures for the transfer or termination o f benefits for staff transferred from govemment to all companies under its control. Once developed, these procedures will be appliedto NSCL and the legal transfer o f staff can be completed. These procedures are expected to be in place by early 2004. 14. TariffRequirements. A wastewater surcharge onthe water billwas introducedinJuly 1999 and set at YO.10/m3 for all customers. InM a y 2003, this municipal surcharge was eliminated and replaced with a wastewater tariff appliedby the NSCL. As such, the tariff is billed and collectedtogether with the water bill andremitted directly to the NSCL rather than to the Municipal Finance Bureau, as was the case with the surcharge. InAugust 2003, the municipal government approved a major increase intariff levels that will bringthe average tariff to about Y0.49/m3 (Table 2). Under this new structure, tariff levels vary by customer group ranging from Y0.25/m3 to Yl.OO/m3 for special uses. These new tariffs will be implementedby October 2003 after final concurrence from the provincial govemment. Over the period to 2010, additional tariff increases totaling just over 60% will be required, bringingthe average tariffto Y0.79/m3. These increases are presently proposed to be implemented intwo years; 2006 and 2009. The 2006 increase is part o f a plannedrestructuring o f water and wastewater tariffs inwhich increasing block tariff structures for both services are to be introduced. The increase in2009 is largely relatedtQthe commencement o f full operations o f the ZUEP assets together with debt service on the project loan. - 65 -  Table 2: Ningbo Existing and Projected Wastewater Tariffs - (Y/m3water consumed, current terms) Customer Group Actual Approved I Projected Jan 2003 Dec 2003 2004 2005 2006 2007 2008 2009 201C Domestic 0.10 0.25 0.25 0.25 0.30 0.30 0.30 0.41 0.41 Institutional 0.10 0.40 0.40 0.40 0.48 0.48 0.48 0.65 0.65 Commercial 0.10 0.60 0.60 0.60 0.72 0.72 0.72 0.97 0.97 Industrial 0.10 0.60 0.60 0.60 0.72 0.72 0.72 0.97 0.97 Special Uses 0.10 1.00 1.00 1.00 1.20 1.20 1.20 1.62 1.62 Average 0.10 0.49 0.49 0.49 0.59 0.59 0.59 0.79 0.79 % Increase" 0% 0% 20% 0% 0% 35% 0% l' Refers to % increase inweighted average tariff. 15. Financial Performance. By implementing the required increases intariffs in2006 and 2009, together with improvements incollection performance, the NSCL will generate cash surpluses, a portion o f which can be contributed toward the capital cost o f ZUEP (Table 5). Over the 2004 - 2008 project implementation period, internally generated revenues are estimated to be able to fund 16% o f the cost o f the Ningbo wastewater component. With full operations o f the project assets and debt service commencing in 2009, net income is projected to decline but remain well within acceptable levels. Hangzhou Solid Waste Management Treatment Company Ltd. 16. Institutional Set-up. Untilthe reforms implementedinlate 2002 and early 2003, solid waste management services were provided directly by government bureaus at the municipal and district levels o f government. The municipal government's City Appearance Administration Bureau (CAAB) managed the landfill while the district sanitation bureaus operate the transfer stations and vehicles transporting waste to the landfill. Consistent with nationalpolicy, the city has now begun to separate S W M operating functions from direct government involvement through corporatization o f the sector services. InSeptember 2002, the municipal government established the Hangzhou Solid Waste Management Treatment Company Limited (HSWC). The company is wholly owned by the Hangzhou Municipal Investment Holding Company Ltd., which intum is owned by the municipal government. The HSWC has assumed responsibility for landfill disposal and treatment, which includes the existing Tianziling Landfill and the new ZUEP funded landfillto be constructed immediately adjacent and on top o f the existing facility. The existing landfillwas transferred to the company inApril 2003 together with a reassignment o f the staffresponsible for their management and operation. 17. Reform Framework Over the next 1- 2 years, the HSWC will focus on completing the core elements o f its transition to a fully operational utility company. The former municipal government unit comprising the HSWC will be fully integrated into the management and operating structures o f the new company. The management and financial systems required for the effective and efficient operation o f the company need to be developed and implemented. The legal transfer o f staff that have been reassigned to the company will be completed once the municipal government has finalized procedures that will apply to all municipal employees. 18. Tariff Requirements. The company revenues are derived from a tipping fee that is applied to waste delivered to the existing Tianziling landfill by the district sanitation bureaus and other waste - 66 -  generators. The current tipping fee tipping fee, which is presently Y15/t, will needto be increasedto Y49/t in2004 and Y51/t in2005 (Table 3) so that HSWC can achieve full cost recovery. Based onthe financial projections, the next increase will be required when principal repayments on the Bank loan begin in2009. The projected tipping fee requiredin2009 is Y63/t. These fee requirements will be reviewed and c o n f i i e d every year through the preparation o f annual financial projections for HSWC, which will be required under the Project Agreement. Inorder to moderate the shorter-term impact o f the fee increase in 2004 on retail charges, the tippingfee will incorporate a subsidy component that is funded by the municipal and district governments. As retail solid waste charges are progressively increased, the subsidy component inthetippingfee willdecline andeventually beeliminated. 19. FinancialPerformance. Basedonthe agreed fee reformprogram, HSWC will begin in2004 to fully recover its operating expenses, including depreciation, from its landfilltippingfee. With the increase inthe tippingfee in2004, the company will beHSWCwill initiallyrecover the cost ofits services from a mix of customer charges and the municipal subsidy for the domestic group. However, with increases inits charges over the 2004 -2006 period, this subsidywill be phased out so that by 2007, the company will fully recover its costs from customer charges. The company is also expectedto be able to contribute toward the counterpart funding requirements o f the new ZUEP landfill. Most o f this will be derived from a portion o f the Y60 million initial equity contribution made by the municipal government into the company. However, intemally generated revenues should also be sufficient to provide a small contribution. Taken together, the company's total contribution to counterpart funding is expected to be equivalent to almost 25% o f the total cost o f the landfill (Table 6). Table 3: Hangzhou ProjectedLandfillTippingFees - (Y/t, current terms) Charge Actual1 Projected 2003 2004 2005 2006 2007 2008 2009 2010 TippingFee (Y/t) 15 49 51 51 51 51 63 63 DongqianLake Investmentand DevelopmentCompanyLtd. 20. InstitutionalSet-up. The objective ofthe NingboMunicipal Government (NMG) is to develop the area around Dongqian Lake into a major residential and commercial area and as a tourism site with both local andnational appeal. The area around Dongqian Lake has beenplacedunder the administrative jurisdiction o f the Dongqian Lake Management Commission (DLMC), which has the equivalent status o f a county level government andreports direct to the NMG. D L M C established the Dongqian Lake Investment and Development Company Ltd.(DLIDC)inNovember 2001 to directly implement the development, including the non-wastewater components under ZUEP. DLIDC has been given the rights to the sale o f development land around the lake inreturn for undertaking its broader development role for improving the lake and surrounding area. D L I D C is responsible only for the provision o f site services and then will sell the serviced lots to developers. 21. The Dongqian Lake development is a key component o f the development plan for Ningbo. As a result, the NMG is strongly committed to the success of the development. The NMG commitment is particularly important because it can significantly influence the success o f the project through its control over the overall supply o f land available for development inNingbo Municipality. - 67 -  22. Business & MarketPlans. The ZUEP component inDongqianLake is a very small part ofthe overall development project for the area to be implementedby DLIDC. Over the 2003 -2008 period, it is planned that the company will develop 660 hectares o f land. Of this total, 55% will be for residential with the remainder being for commercial, institutional, parks and recreation, and industrial uses. The total cost o f the planned investments by DLIDC indeveloping this land is Y4.5 billion, o f which the ZUEP works represent only about 7%. ZUEP will provide portions o f the basic road and wastewater infrastructure needed for the overall development. As a result, the success o f ZUEP component inDongqian Lake depends on the success o f the overall development. Consequently, the overall development has been carefully assessedinorder to properly appraise the viability o f the ZUEP component. A detailed market analysis was prepared inFebruary 2003 by the Ningbo Economic Research Center (NERC). The NERC assessmentwas then reviewed and assessedby the DRA consultant as well as the Bankmission and discussed with DLIDC management. 23. There appears to be sufficient demand for the residential developments plannedfor DongqianLake. There is considerable unmet residential demand inNingbo, most o f which is by existingNingbo residents seeking to upgrade to larger andbetter quality residential dwellings. A secondary factor is population growth caused by in-migration to Ningbo from other areas o f Zhejiang and China. Over the 2003 -2007 period, the Dongqian Lake development would provide only about 18% o f the total projected supply o f residential floorspace inNingbo. 24. Over the 2003 - 2007 period, DLIDC plans to develop and sell 325 hectares o f land for commercial uses. These planned developments are primarily intended to serve the residents o f Dongqian Lake. Since there should be adequate demandfor the plannedresidential developments, the sales projections for commercial landgeared toward meeting the needs o f local residents appear to be realistic. However, there are also a number o f developments plannedthat are targeted partially or largely toward residents outside Dongqian Lake. This includes a major conference center and hotel, recreational facilities and a range o f tourist facilities. The largestis the conference center and hotel, which would occupy 71 hectares o f land. Although DLIDC recently signed a memorandum ofunderstanding with a developer for the hotel, the viability o f this type o f development is more uncertain because its primary market would be non-residents o f Dongqian Lake. The ability o f the development to attract non-residents has not been established. Therefore, inorder to provide a more conservative basis for the assessment o f the overall development, the conference center and hotel were excluded from the D L I D C financial projections. 25. The proposed initial sale prices for the developed land are consistent with current market prices and household affordability inthe Ningbo area. The estimated average prices for developed residential and commercial land in2003 are Y15.9 million and Y18.1 million per hectare respectively. However, as potential buyers see the development takes shape, buyer confidence inthe development is anticipated to increase, which then increases demand and, therefore, prices. Based on actual experience withsimilar developments inNingbo and Zhejiang, NERC estimates that prices should more than double by 2005. However, in order to provide a more conservative basis for the financial assessment o f the project and DLIDC, this increase has assumed to be only 33%. Thereafter, prices are assumed to increase only at the local rate o f inflation. 26. FinancialPerformance. Financialprojections have been prepared for DLIDC onthe basedon a conservative scenario regarding future increases inthe price o f land (Table 7). Even on the basis o f this conservative scenario, the projections indicate that D L I D C should be financially viable and sustainable over the 2003 - 2015 forecast period. The company should be able to generate the funding needed to implement its overall development program, which includes the ZUEP component, andrepay all associated - 68 -  debt. C. AffordabilityAnalysis 27. An affordability analysis has been undertaken inorder to ensure that domestic customers, particularly those inthe lower income group, can afford the new wastewater tariffs inNingbo and solid waste charges inHangzhou. Two representative household groups are considered inthe affordability analysis: (i) the average income group; and, (ii) low-income group, which is defined as the average o f the the group earning the lowest 10% o fincome distribution. InbothNingbo and Hangzhou, incomes are conservatively projected to increase at annual real rate o f 4% over the 2003 - 2010 period, which is significantly below that actually achieved over the past decade. The results o f this analysis are shown in Table 4 and indicate that the tariffs are anticipated to be affordable over the entire 2003 -2010 period. 28. For Ningbo, affordability is assessedby comparing incomes to the total cost o f wastewater and water supply. The water tariff is assumed to increase at the same rate as the wastewater tariff over the 2004 - 2010 period. Since current water tariffs are closer to full cost recovery levels than that for wastewater, this assumption may overestimate future increases inthe cost o f water. However, this is intended to provide a very conservative basis for the affordability analysis. Onthis basis, the combined cost o f water andwastewater for an average income household is projected to increase from 1.O% in2004 and remain at this level to at least 2010. For a low-income household, the proportion o f income required to pay for water and wastewater is projectedto increase slightly from 1.6% in2004 to 1.7% by 2010. For both household groups, this combined cost is well within the generally accepted guideline that the cost o f water supply and sanitation should not exceed 5% o f household income. 29. For Hangzhou, the domestic retail tariffs that are requiredto cover the cost o f waste transport and disposal are used as the basis for assessing affordability. Presently, the proportion o f income required to pay this charge is very low, only 0.2% for the low-income group and 0.1% for the average income group. However, as the municipal subsidy incorporated into the tipping fee is phased out, retail charges, including those for domestic customers, will need to be increased. For example, ifthe subsidy were phased out by the end o f2006, retail charges would needto be significantly increasedover this period, which increases the proportion o f income requiredto pay the charge. Under this scenario, the peak year would be 2006, in which the average and low-income groups would be requiredto allocate 0.4% and 0.9% o f income respectively to the solid waste charge. Beyond2006, the impact o f the charge on households inboth groups would gradually decline because income growth is expected to continue to be relatively strong, while the need for further increases in solid waste charges i s limited. However, even duringthe peak year, the charges are considered to be affordable. - 69 -  Table 4: AffordabilityAnalysis for DomesticConsumers Project Component UtilityBillas aYOofHouseholdIncome Jan 2003 Jun 2003 2004 2006 2008 2010 NingboWastewater Low Income: Water 1.1% 1.5% 1.5% 1.5% 1.6% 1.8% Wastewater 0.1% 0.3% 0.3% 0.3% 0.3% 0.4% Total 1.2% 1.8% 1.8% 1.7% 1.9% 2.2% Average Income: Water 0.7% 1.0% 0.9% 0.9% 0.9% 1.0% Wastewater 0.1% 0.2% 0.2% 0.2% 0.2% 0.2% Total 0.8% 1.1% 1.1% 1.0% 1.1% 1.2% HangzhouSolidWaste Low Income 0.2% 0.2% 0.3% 0.9% 0.8% 0.7% Average Income 0.1% 0.1% 0.1% 0.4% 0.3% 0.3% - 70 -  Table 5: Ningbo Municipal Sewage Company Ltd. Summary FinancialProjections - (Y million, current terms) Projected 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 ncome Statements Operating Revenue 34 87 91 111 120 125 169 182 222 238 293 310 318 Oueratine Expenses 35 37 38 40 42 84 91 98 102 136 146 155 160 - 1 Depreciation 25 25 26 26 26 26 49 73 73 73 99 124 125 Operating Income (25) 27 45 51 15 28 12 47 28 49 31 32 Operating Subsidies 25 -25 Net Interest Expense 10 9 8 8 14 11 7 Income Tax 0 8 9 15 17 5 6 1 13 7 11 7 8 Net Income 0 17 18 30 34 10 13 2 26 14 23 13 17 ources & Applications of Funds Sources Intemal Cash 25 42 44 56 61 36 72 83 107 95 136 149 149 Long-Term Debt 4 39 77 120 100 71 36 57 82 53 - 30 86 Equity Contributions 34 83 67 54 60 30 71 170 190 125 - 17 38 Total 63 164 188 230 221 137 179 310 379 273 136 195 273 Applications Capital Investments 52 142 179 219 173 133 185 233 278 185 7 73 198 Working Capital Increase 5 7 (1) 0 (1) 2 8 4 1 14 22 9 2 Interest 10 9 8 8 14 11 7 Debt Repayment 27 27 64 77 77 77 77 Total 57 149 178 219 171 135 229 272 351 283 120 170 284 Cash Changes 7 15 10 11 49 2 (50) 37 28 (10) 16 25 (11) Ending Cash Balance 4 15 20 25 67 59 7 40 60 37 54 78 63 alance Sheets Assets Current Assets 10 29 33 39 79 75 32 69 90 84 123 156 143 Net Fixed Assets 441 421 401 381 360 339 1,139 1,073 1,006 940 1,786 1,668 1,550 Work in Progress 50 190 368 588 763 900 237 468 748 938 - 67 262 Total 501 640 803 1,007 1,202 1,315 1,408 1,610 1,844 1,962 1,909 1,892 1,956 Liabilities and Equity Current Liabilities 1 1 1 1 2 30 31 68 82 84 85 85 35 Long Term Debt 4 44 120 240 340 384 394 386 391 367 290 243 302 Equity 496 595 681 765 860 900 984 1,155 1,372 1,510 1,533 1,563 1,618 Total 501 640 803 1,007 1,202 1,315 1,408 1,610 1,844 1,962 1,909 1,892 1,956 inancial Covenants Cost Recovery" 0.6 1.4 1.4 1.7 1.8 1.1 1.2 1.1 1.2 1.0 1.2 1.1 1.1 Debt Service Ratio 8.2 12.3 9.9 9.1 7.5 3.7 1.9 2 1 1.3 1.0 1.5 1.7 1.7 Operatingrevenuesdividedby the total o f operatingand maintenanceexpenses plus the greater of depreciationor debt service. - 71 -  Table 6: HangzhouSolidWaste ManagementTreatment Company Ltd. Summary FinancialProjections - (Ymillion, current terms) Projected 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 ncome Statements Operating Revenue 9 23 34 36 38 41 39 42 43 45 47 48 50 Operating Expenses 12 11 21 22 24 25 24 25 26 27 29 30 32 Depreciation 6 8 8 8 8 8 13 13 13 13 14 15 15 Operating Income (9) 3 4 6 7 7 2 ,5 4 4 4 3 3 Net Interest Expense 2 2 2 2 1 1 1 1 Income Tax 1 1 2 2 2 0 1 1 1 1 1 1 Net Income (9) 2 3 4 4 4 0 2 1 2 2 1 1 ources & Applicationsof Funds Sources IntemalCash (3) 10 11 12 13 14 15 16 16 17 17 17 18 Long Term Borrowing 1 31 18 18 7 - Equity Injection 85 80 20 7 - Total 82 121 50 37 20 14 15 16 16 17 17 17 18 Applications FixedAsset Investment 138 114 45 34 11 0 4 4 4 5 35 5 6 Working Capital Increase 3 3 4 2 (1) (1) 0 0 (0) (1) 0 0 0 Interest 0 0 1 1 2 2 2 2 2 1 1 1 1 Debt Repayment 5 5 5 5 5 5 5 Total 142 117 51 37 12 1 11 11 11 10 42 12 12 Cash Changes (59) 4 (1) 0 8 12 4 5 5 6 (25) 5 6 Ending Cash Balance 1 4 3 4 11 24 27 32 37 43 18 24 29 lalance Sheets Assets Current Assets 4 11 15 17 25 37 40 45 51 56 32 38 44 Net FixedAssets 114 205 197 189 181 173 273 261 269 260 251 271 262 Work in Progress 18 33 79 114 127 127 18 22 4 5 35 5 6 Total 136 249 292 320 332 336 331 328 325 321 318 314 311 Liabilities and Equity Current Liabilities 0 0 1 1 2 7 7 7 7 7 7 7 7 Long Term Debt 1 31 50 68 75 70 65 60 55 50 45 40 35 Equity 135 217 241 251 256 259 260 262 263 265 266 267 269 Total 136 249 292 320 332 336 331 328 325 321 318 314 311 `inancialCovenants Cost Recovery" 0.4 1.0 1.0 1.1 1.2 1.2 1.1 1.1 1.1 1.1 1.1 1.1 1.1 Debt Service Ratio NA 26.2 11.1 8.2 7.1 7.4 2.2 2.4 2.5 2.6 2.7 2.8 2.9 Total revenues dividedby the total of operatingand maintenanceexpenses plus the greater of depreciationor debt service. - 72 -  Table 7: Dongqian Lake Investment & DevelopmentCompany Ltd. Summary FinancialProjections - (Y million, current terms) Projected 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 ncome Statements Operating Revenue 264 1,210 1,547 1,868 1,920 1,791 1,841 1,892 1,945 2,000 424 436 449 LandPurchase Costs 108 467 536 645 663 624 641 659 678 697 154 158 163 Operating Expenses 18 56 91 118 129 137 144 151 159 167 112 118 124 Depreciation 13 53 98 139 182 197 212 228 244 261 266 272 Operating Income 137 674 866 1,006 988 848 858 869 880 892 (102) (106) (110) Net Interest Expense 56 44 86 61 38 20 7 1 1 1 Income Tax 45 222 286 314 312 251 263 274 284 292 - Net Income 92 451 580 637 633 511 534 557 576 593 (103) (107) (111) ources & Applications of Funds Sources Intemal Cash 92 464 634 791 816 779 793 807 825 844 158 160 162 Long Term Borrowing 81 424 627 529 522 2 - EquityInjection 200 200 - Total 372 1,088 1,260 1,320 1,338 781 793 807 825 844 158 160 162 Applications Fixed Asset Investment 303 923 1,009 950 964 345 356 366 376 387 131 135 139 Working Capital Increase 75 237 196 34 (59) (103) (61) (52) 41 9 (246) 2 2 Interest 2 17 46 72 89 86 61 38 20 7 1 1 1 Debt Repayment 217 217 425 425 425 208 208 6 6 6 Dividend 346 296 - Total 380 1,177 1,251 1,274 1,211 753 782 777 991 907 (107) 144 148 Cash Changes (8) (89) 9 46 127 27 10 30 (166) (63) 266 16 14 EndingCash Balance 92 4 13 59 186 213 224 254 87 24 290 306 320 alance Sheets Assets Current Assets 167 315 520 601 668 593 543 553 395 341 361 380 396 Net Fixed Assets 292 1,179 2,136 2,962 3,790 3,937 4,081 4,219 4,352 4,478 4,343 4,206 Work in Progress 306 940 1,055 966 1,010 345 356 366 377 387 131 135 139 Total 472 1,547 2,755 3,703 4,641 4,728 4,837 5,001 4,991 5,080 4,971 4,858 4,741 Liabilities and Equity Current Liabilities 217 217 425 425 425 240 208 6 6 6 6 Long Term Debt 81 504 914 1,225 1,323 899 474 266 59 53 47 41 35 Equity 392 1,043 1,624 2,260 2,893 3,404 3,937 4,494 4,725 5,021 4,918 4,811 4,700 Total 472 1,547 2,755 3,703 4,641 4,728 4,837 5,001 4,991 5,080 4,971 4,858 4,741 inancialCovenants Cost Recovery" 2.7 3.9 4.5 4.2 5.1 3.3 3.2 3.4 4.5 4.8 3.5 1.1 1.1 Debt Service Ratio 39.7 28.1 13.8 2.7 2.7 1.5 1.6 1.7 3.6 3.9 21.9 22.6 23.3 Revenues divided by the total o f operating and maintenanceexpenses plus the greater of depreciation or debt service. - 73 -  Annex 6(A): Procurement Arrangements CHINA: Zhejiang Urban Environment Project Procurement Summary of the Assessment of Agencies' ProcurementCapacity The Provincial Project Management Office (ZUDPO) under the Zhejiang Provincial Construction Management Commission (ZHPCMC) will be responsible for coordinating procurement for the Bank-financed activities inthis project. ZUDPO has successfully managed the Zhejiang Multiple City Development Project which was completed in2001 (Credit No.2475). Hangzhou PMO has chosen China Far East Intemational Trading Corporation as their procurement agent for all Intemational Competitive Bidding(ICB) o f goods andShaoxing and Ningbo PMOShave selected the Joint Venhre of China Instrument Intemational Tendering Company andZhejiang Intemational Tech & Equipment Tending Co., Ltdfor the same services. All ITCs have adequate experience with Bank and other donor funded procurement. The assessment found that the designated implementing agencies (Us) are capable o f managing all procurement activities satisfactorily under the guidance o f ZUDPO and assistance from the ITCs. Some staff members inthe ZUDPO and Ningbo P M O were involved inthe previous Bank-financedZhejiang Multiple City Development Project and are familiar with the Bank's procurement procedures. Areas that need strengthening, such as procurement training, bidding document preparation, have been identified and an action planhas been agreed upon. The action plan includes training, recruitment o f experienced staff for PMOS,preparation and dissemination o f a project procurement manual, among other things. The assessment identified some deviations inthe local or municipal regulations which are not acceptable to the World Bank Procurement Guidelines, inaddition to those identified inthe OPR o f China (see Procurement Capacity Assessment Report). All the inconsistencies will be incorporated inthe Procurement Schedule to the legal agreement. Provisions will be incorporated into the Procurement Schedule o f the LoanAgreement to c o n f i i exemptions for Bank financed procurement from the provincial/municipal regulations and the Biddingand Tendering Law o f China incase o f discrepancies. ProcurementArrangements Procurement Plan. Procurement plans for each o f the three project cities have been prepared and are included inthe Project ImplementationPlan (PIP) for each city. The procurement packagingplan has been prepared taking into consideration the specialties o f the project (Shaoxing) and prospective capabilities o f the contractors and suppliers at home andabroad, as well as capabilities o f the employers' project management (see Table C). Procurement procedures. The following Bank guidelines will govern all Bank-financedprocurement under the project: For goods and worb. Procurement under IBRDLoans and IDA Credits (dated January 1995 and revised inJanuary and August 1996, September 1997 andJanuary 1999). The biddingdocuments will clearly specify qualification requirements, for post-qualification o f bidders. - 74 -  For the selection of consultants. Selection and Employment o f Consultants by World Bank Borrowers (dated January 1997 and revised September 1997, January 1999 and May 2002). Format o f the Documentation. The following formats will apply: Evaluation reports. The Bank's Standard BidEvaluation Form, Procurement o f Goods or Works (dated April 1996, translated into Chinese by MOFMay 1997), and Sample Formof EvaluationReport for Selection o f Consultants (dated October 1999). Model Bidding Documents. The Bank-approved Chinese Model BiddingDocuments (MBD) (dated May 1997, prepared by MOF based on the Bank's Standard BiddingDocuments (SBDs) will be adopted for all I C B and N C B activities for goods and works. All new revisions to the Bank SBD since 1997 will be incorporated into the existing MBDs. The World Bank SBD will be used when applicable MBD is not available. Also as indicated inthe OPR o f China, the harmonized StandardBiddingDocuments will be used inthis project when available. Domestic Preference. For goods contracts, qualified domestic bidders will be eligible for a preference equal to 15 percent o f the cost, insurance and freight (CIF) price, or the sum of the customs duties and import tax payable by a nonexempt importer, whichever is less. For works, there will be no preference for domestic contractors as China's GDP has exceeded the Bank determined threshold. Advertisement. The General Procurement Notice (GPN) was published inthe UnitedNations Development Business (UNDB), Issue No.599 o f 31 January 2003, and will be updated every year untilall major I C B procurement activities and major consultant assignments have been completed. Specific Procurement Notices (SPNs) for all ICB and N C B procurement activities will be published inat least one newspaper with a national circulation. Inaddition, the SPNs for Goods contracts estimated to cost more than $500,000 will be publishedinthe UNDB, allowing at least 45 days for bidpreparation. Similarly, invitations for expressions o f interest for consulting contracts expected to cost more than $100,000 equivalent will be advertised inthe UNDB at least fourteen days before the preparation o f the short list. All other contracts for selection o f consulting firms will be advertised ina national newspaper. Procurement methods (Table A) A total of $223 milliono fworks and goods is expectedto be financed under the project, usingthe following procedures: Works: NCB. About $183.5 million o f works for construction o f interceptor and sewage collection pipelines, pumpingstations, wastewater treatment plants, roads, heritage protection, river rehabilitation, municipal infrastructure, and landfill, estimated to cost between $1 million and $15 million per contract will be procured usingN C B procedures. Those contracts would not be of interest to foreign contractors. Goods: ICB. About $30.5 millionworth of equipment, including four packages worth between $2 million and $6 million, will be procured usingI C B procedures, for four wastewater treatment plants and twentypump stations inNingbo; HDPEmembrane and landfill equipment in - 75 -  Hangzhou. This represents about 100%o f total procurement o f goods. (Installation included). NCB. Equipment andmaterials estimated to cost between $100,000 and$500,000 per contract will be procuredusingN C B procedures, up to an aggregate o f $0.5 million. Those contracts would not be o f interest to foreign suppliers. Shopping. Other minor items which are readily available off-the-shelf and estimated to cost less than $100,000 per contract, with an aggregate amount not exceeding $400,000, will be procured following national shopping procedures as stated inArticles 3.5 and 3.6 o f the guidelines. National shopping will also be on the basis o f a comparison o f at least three quotations andmay be used where the desired goods are ordinarily available from more than one source, at competitive prices. Consulting Services and Training. The value o f all consulting services to be procured i s estimated to be about $34.3 million, including design, supervision, andmanagement expenses, most o f which will not be financed by the Bank. Consultant services and training estimated to cost about $9.0 millionwill be financed by the Bank except for taxes and duties, estimated at some 3% o f the total project costs. Two contracts for about $7.1 millionintotal will be procuredunder Quality and Cost-Based Selection (QCBS) procedures. Three contracts for review o f institutional options for industrial pollution control management, tourism development, and heritage conservation, estimated to cost about $0.8 million each, will be procured through Quality Based Selection (QBS). Retroactive financing. Retroactive financing o f up to $10.0 millionmay be applied to expenditures made after September 1,2003 for the procurement o f works and goods, consistent with the Procurement Guidelines. The following project components require prompt execution prior to loan effectiveness: (a) existing landfill inHangzhourequires urgent expansion as proposed under the project since its current capacity will be depleted by end 2003; (b) some o f the main sewers inNingbo city need to be combined with urgent (non-Bank funded) road construction; (c) the pilot projects inJishan historic precinct in Shaoxing and one quarter o f Cicheng town need to start early inorder to be able to apply the lessons leamed timely inthe upgrading o f the other areas; and (d) some o f the technical assistance needs to start early to assist with the implementation o f the retroactive financed activities and prepare the design and tender documents for priority components (see also Table C). - 76 -  Table A: Project Costs by ProcurementArrangements (US$ million equivalent) Figures inparentheses are the amounts to be financed by the Bank Loan. All costs include contingencies. 2,Includes civil works and goods to be procured through national shopping, consulting services, services o f contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units. - 77 -  Table A I : Consultant Selection Arrangements (optional) (US$ million equivalent) ' \Including contingencies Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed Figures in parentheses are the amounts to be financed by the Bank Loan. -78 -  Prior review thresholds (Table B) Table B: Thresholds for Procurement Methods and Prior Review' 1, Works Equal or Above 100 and N C B All contract above $5 Less than 10,000 million ($134M) Less than 100 I Small Works I 2. Goods Equal to or Above 500 I C B 1 All contracts ($23.8M) Less than 500 but equal to NCB (none) or above 100 below 100 N S (none) 3. Services Equal to or above 100 QCBS or QBS All contracts ($8.55 (firms) million) Less tan 100 (firm) CQ (none) Individual Other (none) 4. Miscellaneous 5. Miscellaneous 6. Miscellaneous I I Total value of contracts subject to prior review: $167 million Overall Procurement Risk Assessment: Average Frequencyof procurementsupervisionmissions proposed: One every 6 months (includes special procurement supervision for post-review/audits) - 79 -  Table C. Contract Packaging(Base costs) Contract Packages NingboWastewater(NWW) CivilWork Contracts SJWWK.1 Sewers Hingjiang Road(incl. 1P.S.)' 31.37 NCB NSCL SJWW/C.2 Sewers West Beltway, Bayiun & Lantianroads (incl. 1P.S.)' 40.97 NCB NSCL SJWW/C.3 Sewers SouthBeltway (incl. 1P.S.) --- 40.79 NCB NSCL SJWW/C.4 Sewers Yinfeng, ChangcunandQiwen roads (incl. 1P.S.) - 21.46 NCB NSCL SJWW/C.S - Wastewater Treatment Plant inJiangdongnan 67.17 NCB NSCL ZHWWK.1- Sewers ZhenningRoad' 9.83 NCB NSCL ZHWWK.2- Sewers Suidaolu, Daximen andLingjiang roads (incl. 1P.S.) 23.67 NCB NSCL ZHWWK.3 - Sewers Anhailu andWeihai roads (incl. 2 P.S.) 34.05 NCB NSCL ZHWWK.4 - Sewers Binhai Expressway (incl. 2 P.S.) 23.31 NCB NSCL 26.12 NCB NSCL ZHWW/C.S Wastewater Treatment Plant & Sea Outfall inZhenhai - 27.81 NCB NSCL DLWW/Cl Transport Pipeline& P.S. to SJWWTP 15.64 NCB NSCL CCWW/Cl Transport Pipeline& P.S. to SJWWTP -- Mechanical& Electrical"Supply and Installation" Contracts 3JWWIM.l - PumpingStationEquipmentfor first batchPumpingStations 8.07 ICB NSCL :SJWW,ZHWW, DLWW, CCWW) SJWWIM.2- PumpingStationEquipmentfor secondbatchPumping 8.08 ICB NSCL Stations (SJWW,ZHWW, DLWW, CCWW) 50.42 ICB NSCL SJWWIM.3 SJWWTP Equipment - 23.81 ICB NSCL ZHWWIM.l- ZHWWTP Equipment YBWW/E.l - Power Supply to Pumping Stations (19) and Wastewater ?.? NBF NSCL rreatmentPlants (2) inJiangdongnan, Zhenhai, Cicheng & DongqianLake DongqianLakeDevelopment CivilWork Contracts DLRD/C.l Lake RoadSectionA (incl. trunk sewers & 2 PSs) 66.03 NCB DLIDC DLRD/C.2 27.33 NCB DLIDC -- -- Lake RoadSection B (incl. trunk sewers & 3 PSs)` DLRD/C.3 Lake Road SectionC (incl. trunk sewers & 3 PSs) 74.41 NCB DLIDC DLRDK.4 Secondary Sewers inDongqianNew Town 27.51 NCB DLIDC CichengTown InfrastructureDevelopment Civil Work Contracts CCRD/C.l UpgradingJiefangRoad(incl. sewers) 6.12 NCB NBPMO CCRD/C.2 Upgrading3 roads inN.E. o f old city (incl. sewers) 21.36 NCB NBPMO CCRDK.3 Ringroad 22.60 NCB NBPMO CCRDIC.4 ---- Upgrading 10roads inN.W. and South of oldcity (incl. 43.05 NCB NBPMO sewers) - 80 -  ContractPackages (cont'd) Contract Procurement Implementing Y million type Agency ShaoxingHistoric City-center Upgradingand Conservation CivilWorks SXCWC.1- Repair ofNationaland Provincial Level Cultural Relics in Luxunlu, Xixiaohe & Baziqiao Precincts 36.94 NCB SXPMO SXCWC.2 - Repair o fMunicipal Level Cultural Relics and Typical Local Style Housing inJishan Precinct. 10.01 NCB SXPMO SXCWC.3- Repair o fMunicipal LevelCultural Relics and Typical Local Style Housing in Yuezicheng, Luxunlu, Xiaohe and Baziqiao Precincts 42.37 NCB SXPMO SXHWC.4 Housing Renovation Yuezicheng Precinct, North & East 64.54 NCB SXPMO 3XHWC.5 Housing Renovation Yuezicheng Precinct, West 62.71 NCB SXPMO SXHWC.6 --- Housing Renovation Luxunlu Precinct 31.80 NCB SXPMO SXHWC.7 - Housing RenovationXixiaohe Precinct 94.20 NCB SXPMO SXHWC.8 Housing Renovation Jishan Precinct, part A' 86.38 N C B SXPMO SXHWC.9 34.64 NCB SXPMO SXHWC.10 Housing Renovation Baziqiao Precinct --- Housing Renovation Jishan Precinct, part B* 67.32 NCB SXPMO SXRDK.11 RoadImprovement, Landscaping and Underground - Infrastructure in Yuezicheng Precinct. 19.08 NCB SXPMO SXRD/C.12- RoadImprovement, Landscaping and Underground Infrastructure in Jishan Precinct. 15.51 NCB SXPMO SXRDK.13 - Canal Improvements & Water Regulation Structures 28.04 NCB SXPMO HangzhouLandfillExpansion CivilWork Contracts HZSWK.1 Landfill Preparatory Works 30.09 NBF HSWC HZSWK.2 Leachate Treatment Plant 11.48 NBF HSWC HZSWK.3 Balancing Tank, Dam and Grouting 18.38 NBF HSWC HZSWK.4 Landscaping ---- 4.00 NBF HSWC Mechanical& Electrical"Supply and Installation"Contracts HZSWM.1 Landfill Machinery, Transport Vehicles & - Monitoring Equipment 37.86 ICB HSWC HZSWM.2 -Landfill Liner* 42.48 ICB HSWC HZSWE.1 - Power Supply ?.? NBF HSWC Contracts selected for funding under retroactive financing arrangements -81 -  Technical Assistance Person-months Contract Valve National International US$million PackageA - Institutional, Financial & OperationalStrengthening 125 2.37 PackageB Design Review andConstructionManagement - 320 76 I 3.77 Advisory 52 61 13 0.89 PackageC - Industrial Pollution Control Management 0.75 Package D- Tourism Developmentand CommunityParticipation 44 17 0.77 Package E Heritage Conservationin UrbanUpgrading - I\ Thresholds generally differ by country andproject. Consult "Assessmento fAgency's Capacityto Implement Procurement"and contact the RegionalProcurement Adviser for guidance. -82 -  Annex 6(B): Financial Management and Disbursement Arrangements CHINA: Zhejiang Urban Environment Project FinancialManapement 1. Summaryofthe FinancialManagementAssessment 1. The task team has conducted an assessment o f the adequacy o f the project financial management system o f the Zhejiang UrbanEnvironment Project. The assessment, based on guidelines issued by the Financial Management Sector Board on June 30,2001, has concluded that the project meets minimum Bank financial management requirements, as stipulated inBP/OP 10.02. Inthe team's opinion, the project will have inplace an adequate project financial management system that can provide, with reasonable assurance, accurate and timely information on the status o f the project inthe reporting format agreed with the project and as requiredby the Bank. 2. Fundingsources for the project include Bank loan and counterpart funds. The Bank loan proceeds will flow from the Bankinto the project special account to be set up at andmanaged by the Zhejiang Provincial finance bureaus (ZPFB), to project implementing agencies (or project companies), and finally to contractors or suppliers. The Bank loan will be signed between the Bank and the People's Republic o f China through its Ministryo f Finance (MOF), and on-lending arrangement for the Bank loans will be signedbetween PRC through its MOF andZhejiang Provincial Government through ZPFB. Andthen further on-lending agreements will be signedbetween provincial government and Hangzhou, Ningbo and Shaoxing municipal governments through ZPFB and respective municipal financial bureau (MFB) and finally ended between each municipal government through MFBs and implementing agencies. Interms o f disbursement technique, the project will be disbursing based o n the traditional disbursement techniques and will not be usingPMR-based disbursements, inaccordance with the agreement betweenthe Bank and MOF. The counterpart hnds to be contributed directly to the project will come from three sources: appropriations by the municipalities through their respective municipal or district finance bureaus; loans from domestic commercial banks and contributions by some o f the project companies from the upfront tariff increase. Financial Management Organization. 3. There is a leading group to provide policy guidance, chaired by L o u Xiaodong, the secretary-general o f Zhejiang Provincial Government and consisting o f the line departments o f provincial governments, such as Zhejiang Provincial Development and Planning Commission, ZPFB, Zhejiang Provincial Audit Bureau, Zhejiang Provincial Environment ProtectionBureau, Zhejiang Provincial Price Bureau. Under the leading group, the provincial PMO, ZUDPO has been established within ZPCB to directly implement overall coordination and supervision functions. For components implementation, municipal PMOSand companies that will implement each project components have been established, including Hangzhou Solid Waste Company Ltd. (HSWC), Ningbo Wastewater Company Ltd. (NWWC) and Dongqian Lake Investment and Development Company (DLIDC). The organization chart i s as follows: - 83 -  Government Group , ZUDPO I I Ningbo Shaoxing Municipal Municipal 4. Inaddition, the ForeignFundDivisionofZPFB will play a major role inthe project implementation, including overall monitoring, fmancing arrangement, financial management, etc. ZPFB will also be responsible for maintaining, monitoring and reconciling special account to be established for the project, and reviewing, verifying and approving withdrawal applications prepared by the project implementing agencies before submittingby ZPFB to the Bank for disbursement processing. The Division has had prior experience with Bank projects and is familiar with Bank disbursement procedures. In addition, the Bank's prior experience with ZPFB interms o f Special Account management and disbursement processing indicates that ZPFB has met and complied with the Bank's relevant policies or procedures. For smooth and successful project implementation, close cooperation and coordination between ZPFB and PMOSand PIUs are extremely critical. 5. Fundingfor the project includes Bank loan and counterpart funds. One special account will be set up and managed by the Zhejiang Provincial Finance Bureaus. On-lend agreements will be signedbetween MOF and ZPFB, betweenZPFB andproject implementing agencies (project companies). The counterpart funds to be contributed directly to the projectwill come from three sources: appropriations bythe municipalities through their respective municipal or district finance bureaus; loans from domestic commercial banks and contributions by some o f the project companies from the upfront tariff increase. Staffing 6. Adequate project accounting staff with educational background and work experience commensurate with the work they are expected to perform is one o f the factors critical to successful implementationo f project financial management. Based on discussions, observation and review o f educational background andwork experience o f the staff identified for financial and accounting positions in implementing entities (both "project" and "entity"), the task team note that the staff are qualified and - 84 -  appropriate to the work they are expected to assume. To strengthen financial management capacity and achieve consistent quality o f accounting work, the task team has suggestedthat a project financial management manual (Manual) be prepared. The manual will provide detailed guidelines on financial management, internal controls, accounting procedures, fund and asset management andwithdrawal application procedures. The draft manual has been completed by ZUDPO and the task team recommends that the finalized copy made available to all relevant project staff before project effectiveness. 7. As most implementingentities are new to the Bank's projects, a well-designed and focused training program inproject financial management should be provided prior to project effectiveness by PMO and ZPFB to all financial and accounting staff to ensure a good understanding andknowledge o f Bank's financial management policy and disbursement procedures, fundassetlcontract management, format and content o f project financial statements and audit requirement. Accounting; and Policy Procedures 8. The administration, accounting and reporting o f the project will be set up inaccordance with the following regulations/circulars issuedby MOF: Inline with other Bankfinanced projects inChina, the projectwill usethe "Temporary Regulations on Financial and Accounting Management for Projects Financed by the World Bank" (Circular #127 issued in 1993) by MOF as a basis for bookkeeping andpreparation o f project financial statements andmanagement reports. Accrual accounting and double entry bookkeeping will be adopted by the project. Circular #12: "Regulation for the Submission o f Withdrawal Applications'' issued inDecember 1996 by MOF - includes detailed procedures for preparing and submittingwithdrawal applications and retention o f supporting documentation. Circular #13: "Accounting Regulations for World Bank Financed Projects" issued inJanuary 2000 byMOF. The circular provides in-depth instructions o f accounting treatment o fproject activities and covers the following: 0 Chart o f account 0 Detailed accounting instructions for each project account 0 Standard set o fproject financial statements 0 Instructions on the preparation o f project financial statements The standard set o fproject financial statements mentioned above has been agreed to betweenthe Bank and MOF and applies to all Bank projects appraised after July 1, 1998 and includes the following: 0 Balance sheet 0 Statement o f source and use o f fund 0 Statement of implementation o f crediaoan agreement 0 Statement o f special account Both circular #127 and #13 are simplified versions o f the Accounting Standards for State-owned, Infrastructure Oriented Projects (the "Standards"), taking into consideration o f unique characteristics o f - 85 -  Bank projects. The Standards are modeled after the principles o f Intemational Accounting Standards and provides detailed guidelines to accounting for activities o f Bank financed projects. 10. Each o f the implementing entities will be managing, monitoring andmaintaining respective project accounting records. Original supporting documents for project activities will be retained by originating implementing entities. Inaddition, each implementing entities will prepare financial statements, which will then be reviewed, approved and consolidated by ZUDPO before sending by ZUDPO to the Bank for review and comment on a regular basis. The intemal audit department o f each implementing agencies will assume intemal audit responsibilities. The task team will evaluate work performed by such intemal auditors and determine degree o f reliance inrespect o f project implementation and Bank supervision mission. Reporting and Monitoring andFormat o f Financial Statements 11. Each implementing entity will prepare its own project financial statements, which will then be consolidated by ZUDPO. The project consolidated financial statements and financial statements o f each implementing entities will be sent by ZUDPO to the Bank for reviews and comment on a regular basis. The format and content o f the following project financial statements represents the standard project financial reporting package agreed to between the Bank and MOF, and have been discussed and agreed with all parties concerned. Inline with the newly issuedFinancial Monitoring Report (FMR) guidelines, the project consolidated financial statements will be submitted as part o f FMR to the Bank on a semi-annual basis (prior to August 15 and February 15 o f the following year), and include the following four statements: 0 Balance Sheet; 0 Summary o f Sources and Uses o f Fundsby Project Component; 0 Statement o f Implementationo f Loan Agreement; and 0 Statement o f Special Account 2. Audit Arrangements 12. Intemal Audit. The intemal audit department o f each implementing agencies will assume intemal audit responsibilities. The task team will evaluate work performed by such intemal auditors and determine degree o f reliance inrespect o f project implementation and Bank supervision mission. External Audit. The Bank requires that project financial statements be audited inaccordance with standards acceptable to the Bank. Inline with other Bank financed projects inChina, the project will be audited inaccordance with the Government Auditing Standards o f the People's Republic o f China (1997 edition). The Zhejiang Provincial Audit Office has been identified as auditors for the project. Annual audit reports will be issued inthe name ofZhejiang Provincial Audit Office. 13. The annual audit reports o f project consolidated financial statements will be due to the Bank within 6 months o f the end o f each calendar year. Inaddition, once operations commence, annual audit reports on financial position and operating results o f the following implementing entities will be due to the Bank within 6 months of the end o f each calendar year: 0 Hangzhou Solid Waste Company Ltd. (HSWC) 0 Ningbo Wastewater company Ltd. (NWWC) 0 Dongqian Lake Investment and Development Company (DLIDC) - a6 -  3. DisbursementArrangements 14. The project will be disbursing on the traditional disbursement techniques andwill not be using PMR-based disbursements, inaccordance with the agreement between the Bank and MOF. Bank loan proceeds would be disbursed against eligible expenditures as follows: (i) civil works -40% o f expenditures (may be increased to 50% duringappraisal), (ii) equipment - 100% o f foreign expenditures, 100% o f local expenditures (ex-factory) and 75% of other items procured locally, (iii) Consulting service and training - 91% o f expenditures, and (iv) TA or training-lOO% o f expenditures. 15. Disbursement methods, such as replenishment, direct payment and special commitment, are available for the project. The SOE limitswill be set up in line with procurement post-review threshold, as follows: (i)all contract for goods estimated to cost the equivalent o f $ 500,000 or less; (ii) contract for all civil works estimated to cost the equivalent o f $ 5,000,000 or less (iii)consultant contract estimated to cost $ 300,000 (firm)/$50,000 (individual) or less; (iv) All training activities. Allocation of loan proceeds (Table C) 16. The proposed loan o f US$133.0 million would be disbursed over a period o f about seven years, up to the closing date o f June 30,2010. The allocation o f loan proceeds according to expenditure category is listed inTable C. Table C: Allocation of Loan Proceeds Expenditure Category IAmount in US$million I Financing Percentage Civil Works 89.48 40% (expected to increase to 50% at project appraisal Goods 23.79 100%o f foreign expenditures, 100% o f local expenditures (ex-factory cost) and 75% o f local expenditures for other items procured locally Consultant Services and Training 7.79 91% ~ Unallocated 10.61 Total Project Costs with Bank 131.67 Financing Front-end fee 1.33 Total 133.00 Use of statements of expenditures (SOEs): 17. Withdrawals for the loan account will be made on the basis o f SOEs for the following expenditures: Works contracts o f less than $5,000,000 Goods contracts o f less than $500,000 Consulting firm contract o f less than $300,000 Individualconsultant contracts o f less than $50,000 All training activities - 87 -  Special account: 18. Authorization, allocation and operation of the specialaccount. One special accounts (SA) will be established inZPFB. The authorized allocation of SA is proposedto not exceed USD 7 million. Fromthe SA, the Bank fimds would be disbursed to the special account set up at ZPFB, and then to project implementing entities and/or supplier and contractors. However, the authorized allocation will be limitedto US$5 millionequivalent untilthe aggregate withdrawals and outstanding Special Commitments will be equal to or exceed US$33 million equivalent. 19. Zhejiang Provincial Finance Bureaus will be directly responsible for the management, monitoring, maintenance andreconciliationo f the SA activities o f the project. Supporting documents required for Bank disbursements will be prepared and submitted by respective project implementing entities through each implementing entities to related municipal finance bureau then to ZUDPO and finally to ZPFB for final verification and consolidation before sending by ZPFB to the Bank for further disbursement processing. Action plan 20. The following proposed time-bound actions that have no major impact on project preparation or Boardpresentation, but should be adequately addressed by the project: Action Responsibleperson CompletionDate 1. Financial management IIZPFBiZUDPOiBank task team IIBefore effectiveness training to all relevant project staff 2. Financial management manual ZUDPO Before effectiveness finalized and issued 21. As there is quite a few implementing agencies involved inthe project, supervision coverage for each mission is expected to be limited and therefore rotational basis should be adopted. Furthermore, to maximize effectiveness and efficiency, procurement and FMDisbursement specialists shouldjointly participate insupervision missions for procurement and SOEs reviews. 22. For the initial implementation stage, more supervision missions (such as twice a year) should be carried out to have better coverage andensure that procurement guidelines are followed and expenditures incurred are eligible and well supported. More detailed reviews at the initial implementation phase can also help ensure that financial management system is properly set up and financial statements are prepared in line with stipulated format and content. - 88 -  Annex 7: Project Processing Schedule CHINA: Zhejiang Urban Environment Project INegotiations I 0711512003 I I Planned Date of Effectiveness 03115/2004 Prepared by: Zhejiang UrbanDevelopment Project Office incooperation with the Project Management Offices o f Hangzhou, Ningbo and Shaoxing municipalities and under the guidance o f the Zhejiang Construction Commission and Provincial Government. Preparation assistance: Mott MacDonald International Ltd, Blackstone Corporation, China Nonferrous Engineering and Research Institute (ENFI), Hohai University Social Development Institute, Beijing Huaihai Engineering - Management Consulting Co. Ltd., North China EngineeringDesign Institute. IBank Name staff who worked on the project included: Speciality Moes, Wiebe Engineer, Task Team Leader Manila, Socorro Program Assistant O'Heam, Dan Financial Analyst'Economist Taylor, George Environmental Specialist Hankey, Donald Urban PlannedCultural Heritage Specialist Zhang, Zhun Institutional Specialist Liu,Zhentu Procurement Specialist Liu,Zhefu Safeguard Specialist Hanrahan, David Peer reviewer: Environment Duer, Kreszentia Peer reviewer: Cultural Heritage McPhail, Alex Peer reviewer: FinanciaUEconomics WangPeishen Environmental Specialist Zhang Fang Financial Management Specialist Margaret Png/Hoi-Chan Nguyen Legal Counsel - 89 -  Annex 8: Documentsin the Project File* CHINA:Zhejiang Urban EnvironmentProject A. Project Implementation Plan Project Feasibility Study by Mott MacDonald, July 2003 Project Implementation Plan, July 2003 Environmental Assessment Report, June 2003 Resettlement Action Plan and Resettlement Policy Framework, May 2003 Feasibility reports and design and tender documentation for individual components, July 2003 Terms of References for Design Review Advisory and Construction Management, Institutional/Financial UtilityReform, IndustrialPollutionControlManagement,Tourism Development and Community Participation, Heritage Conservation and Environmental Management. Catchment Management Planfor Donqian Lake inNingbo IndustrialPollution Control Action Planfor Ningbo Municipality B. Bank Staff Assessments FMS Assessment, August 2003 Procurement Capacity Assessment, July 2003 Financial Analysis of Project UtilityCompanies, Economic Analysis o f the Project Component, Mission Aide Memoires, Implementation Completionreport, Zhejiang Multicities Development Project C. Other *Including electronic files - 90 -  Annex 9: Statement of Loans and Credits CHINA: Zhejiang Urban Environment Project 16-Am-2003 Diffelence between expected and actual Original Amount in US$ Millions disbursements' Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd PO68058 2003 CN-Yixing Pumped Storage Project 145.00 0.00 0.00 0.00 145.00 0.00 0.00 PO70441 2003 CN-Hubei Xiaogan Xiangfan Hwy 250.00 0.00 0.00 0.00 247.50 22.83 0.00 PO58847 2003 CN-3rd Xinjiang Hwy Project 150.00 0.00 0.00 0.00 141.50 6.50 0.00 PO60029 2002 Sustainable Forestry Dev(Natura1Forest) 0.00 0.00 16.00 0.00 16.57 0.30 0.00 PO64729 2002 SUSTAINABLE FORESTRY DEVELOPMENTPRO 93.90 0.00 0.00 0.00 88.46 -2.30 0.00 PO58846 2002 CN-Natl Railway Project 160.00 0.00 0.00 0.00 65.33 -7.17 0.00 PO70459 2002 CN-Inner Mongolia Hwy Project 100.00 0.00 0.00 0.00 95.50 0.50 0.00 PO68049 2002 CN-Hubei Hydropower Dev in Poor Areas 105.00 0.00 0.00 0.00 105.00 8.50 0.00 PO71147 2002 CN-Tuberculosis Control Project 104.00 0.00 0.00 0.00 95.33 -8.67 0.00 PO58845 2001 Jiangxi II Hwy 200.00 0.00 0.00 0.00 161.23 -1.77 0.00 PO51859 2001 CN-LIAO RIVER BASIN 100.00 0.00 0.00 0.00 83.15 14.23 0.00 PO56199 2001 CN-3rd Inland Waterways 100.00 0.00 0.00 0.00 93.34 2.84 0.00 PO45915 2001 CN-Urumqi Urban Transport 100.00 0.00 0.00 0.00 65.26 31.16 0.00 PO56596 2001 CN-Shijiazhuang Urban Transport 100.00 0.00 0.00 0.00 92.28 41.68 0.00 PO56516 2001 WATER CONSERVATION 74.00 0.00 0.00 0.00 50.59 3.14 0.00 PO47345 2001 CN-HUAI RIVER POLLUTIONCONTROL 105.50 0.00 0.00 0.00 98.31 -7.19 0.00 PO56424 2000 TONGBAI PUMPED STORA 320.00 0.00 0.00 0.00 301.06 75.46 0.00 PO49436 2000 CN-CHONGQING URBAN ENVMT 200.00 0.00 0.00 0.00 179.86 37.26 0.00 PO42109 2000 CN-BEIJING ENVIRONMENTII 349.00 0.00 25.00 0.00 312.22 142.08 0.00 PO45264 2000 SMALLHLDR CATTLE DEV 93.50 0.00 0.00 0.00 32.43 17.48 0.00 PO45910 2000 CN-HEBEI URBAN ENVIRONMENT 150.00 0.00 0.00 0.00 135.81 36.56 0.00 P058844 2000 3rd Henan Prov Hwy 150.00 0.00 0.00 0.00 105.29 32.29 0.00 PO64730 2000 Yangtze Dike Strengthening Project 210.00 0.00 0.00 0.00 140.48 79.48 0.00 PO58843 2000 Guangxi Highway 200.00 0.00 0.00 0.00 137.17 44.67 0.00 PO64924 2000 CH-GEF-BEIJING ENVMT II 0.00 0.00 25.00 0.00 24.19 13.76 0.00 PO42299 1999 TEC COOP CREDIT IV 10.00 35.00 0.00 0.00 37.39 -7.35 0.00 PO41890 1999 CN-Liaoning Urban Transport 150.00 0.00 0.00 0.00 56.61 45.41 0.00 PO36953 1999 CN-HEALTH IX 10.00 50.00 0.00 0.00 40.86 16.62 0.00 PO38121 1999 CN-GEF-RENEWABLE ENERGY DEVELOPMENT 0.00 0.00 35.00 0.00 26.93 19.72 2.46 PO43933 1999 CN-SICHUAN URBAN ENVMT 150.00 2.00 0.00 0.00 97.50 55.12 12.17 P046829 1999 RENEWABLE ENERGY DEVELOPMENT 100.00 0.00 0.00 0.00 12.87 99.87 0.00 PO41268 1999 CN-Nat Hwy4iHubei-Hunan 350.00 0.00 0.00 0.00 107.40 39.65 0.00 PO46564 1999 Gansu &Inner Mongolia Poverty Reduction 60.00 100.00 0.00 0.00 79.01 35.76 -8.01 PO46051 1999 CN-HIGHER EDUC. REFORM 20.00 50.00 0.00 0.00 27.96 27.70 0.00 P049665 1999 ANNING VALLEY AG.DEV 90.00 30.00 0.00 0.00 34.04 7.65 0.00 PO03653 1999 CN-Container Transport 71.00 0.00 0.00 18.61 3.89 22.35 0.00 PO51856 1999 ACCOUNTING REFORM & DEVELOPMENT 27.40 5.60 0.00 0.00 20.83 20.53 0.00 PO60270 1999 CN-ENTERPRISE REFORM LN 0.00 5.00 0.00 0.00 2.75 4.44 2.93 PO51888 1999 GUANZHONG IRRIGATION 80.00 20.00 0.00 0.00 54.25 32.55 0.00 PO51705 1999 Fujian I1Highway 200.00 0.00 0.00 0.00 94.56 77.06 0.00 PO50036 1999 Anhui Provincial Hwy 200.00 0.00 0.00 0.00 70.08 28.58 0.00 PO56216 1999 LOESS PLATEAU II 100.00 50.00 0.00 0.00 60.60 48.82 0.00 P058308 1999 CN-PENSION REFORM PJT 0.00 5.00 0.00 0.00 1.89 2.04 0.00 P057352 1999 CN-RURAL WATER IV 16.00 30.00 0.00 0.00 27.99 15.95 1.08 PO37859 1998 CN-GEF Energy Conservation 0.00 0.00 22.00 0.00 4.11 21.97 0.00 P049700 1998 IAIL-2 300.00 0.00 0.00 0.00 16.67 6.59 0.00 P046952 1998 FOREST. DEV. POOR AR 100.00 100.00 0.00 0.00 54.11 -52.96 9.39 PO40185 1998 CN-SHANDONG ENVIRONMENT 95.00 0.00 0.00 1.40 28.29 25.29 0.00 PO51736 1998 E. CHINNJIANGSU PWR 250.00 0.00 0.00 86.00 62.95 148.95 4.36 PO46563 1998 TARIM BASIN II 90.00 60.00 0.00 2.67 45.26 39.17 0.00 PO03619 1998 CN-2nd Inland Waterways 123.00 0.00 0.00 0.00 69.06 61.06 0.00 PO35698 1998 HUNAN POWER DEVELOP. 300.00 0.00 0.00 145.00 84.76 211.76 9.16 PO03614 1998 CN-Guangzhou City Transport 200.00 0.00 0.00 0.00 129.54 128.46 0.00 - 91 -  Difference between expected and actual Original Amount in US$ Millions disbursements' Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd PO03566 1998 CN-BASIC HEALTH(HLTHB) 0.00 85.00 0.00 0.00 36.28 21.88 0.00 PO03606 1998 ENERGY CONSERVATION 63.00 0.00 22.00 0.00 42.34 15.01 0.00 PO03539 1998 SUSTAINABLE COASTAL RESOURCES DEV. 100.00 0.00 0.00 2.31 50.84 40.65 4.27 PO45788 1998 Tri-Provincial Hwy 230.00 0.00 0.00 0.00 48.00 29.20 0.00 PO36949 1998 CN-Nat Hwy3-Hubei 250.00 0.00 0.00 0.00 33.00 10.50 0.00 PO36414 1998 CN-GUANGXI URBAN ENVMT 72.00 20.00 0.00 0.00 76.87 58.92 8.47 P003590 1997 QINBA MOUNTAINSPOVERTY REDUCTION 30.00 150.00 0.00 0.00 47.61 51.05 0.00 PO03643 1997 CN-2nd Xinjiang Hwy 300.00 0.00 0.00 60.00 9.78 69.78 9.78 PO03637 1997 CN-NAT'L RURAL WATER 3 0.00 70.00 0.00 0.00 3.84 6.43 6.26 PO44485 1997 SHANGHAI WAIGAOQIAO 400.00 0.00 0.00 0.00 122.29 79.59 19.34 PO36405 1997 WANJIAZHAI WATER TRA 400.00 0.00 0.00 75.00 49.86 124.86 24.86 PO35693 1997 FUEL EFFICIENTIND. 0.00 0.00 32.80 0.00 8.79 32.81 0.00 PO38988 1997 HEILONGJIANGADP 120.00 0.00 0.00 0.00 13.08 13.08 0.00 PO34081 1997 XIAOLANGDI MULTI. II 430.00 0.00 0.00 78.53 0.28 118.73 7.88 PO03654 1997 Nat Hwy2iHunan-Guangdong 400.00 0.00 0.00 0.00 71.59 71.59 0.00 PO03650 1997 TUOKETUO POWERANNER 400.00 0.00 0.00 102.50 41.31 129.86 -3.43 PO03599 1996 CN-YUNNAN ENVMT 125.00 25.00 0.00 19.48 53.28 72.17 -4.56 PO40513 1996 2nd Henan Prov Hwy 210.00 0.00 0.00 0.00 42.88 42.88 12.88 PO03602 1996 CN-HUBEI URBAN ENVIRONMENT 125.00 25.00 0.00 28.32 44.54 74.90 7.90 PO03649 1996 SHANXI POVERTYALLEV 0.00 100.00 0.00 0.00 2.12 11.40 0.00 PO03648 1996 CN-SHANGHAI SEWERAGE II 250.00 0.00 0.00 0.00 60.16 60.16 -0.70 PO34618 1996 CN-LABOR MARKET DEV. 10.00 20.00 0.00 0.00 5.54 7.77 0.00 PO03646 1996 CN-CHONGQINGIND POL CT 170.00 0.00 0.00 164.82 1.31 166.13 1.31 PO03589 1996 CN-DISEASEPREVENTION (HLTH7) 0.00 100.00 0.00 0.00 13.07 22.68 0.00 PO03594 1996 OANSU HEXI CORRIDOR 60.00 90.00 0.00 0.00 78.39 57.14 0.00 PO03638 1996 SEEDS SECTOR COMMER. 80.00 20.00 0.00 16.00 5.20 22.25 -0.57 PO03571 1995 CN-7th Railways 400.00 0.00 0.00 119.00 50.25 169.25 40.28 PO03585 1995 SHENYANG IND. REFORM 175.00 0.00 0.00 0.00 33.02 33.02 0.00 PO36947 1995 CN-Sichuan Power Transmission Project 270.00 0.00 0.00 95.00 11.79 106.79 6.59 PO03647 1995 China Economic Law Reform -LEGEA 0.00 10.00 0.00 0.00 3.40 3.92 0.00 PO03642 1995 CN-ZHEJIANG POWER DEVT 400.00 0.00 0.00 0.00 34.79 40.29 0.00 PO03598 1995 CN-LIAONING ENVIRONMENT 110.00 0.00 0.00 8.50 0.30 8.80 8.80 PO03603 1995 CN-ENTHOUSING a SSR 275.00 75.00 0.00 50.36 59.67 108.34 7.31 PO03404 1994 SICHUAN GAS DEV. CON 0.00 0.00 10.00 0.00 0.02 0.78 0.00 PO03644 1994 XIAOLANGDI RESETTLEMENT 0.00 110.00 0.00 0.00 0.04 -1.85 -1.95 PO03626 1994 Fujian Prov Highway 140.00 0.00 0.00 18.11 6.65 24.76 24.74 PO03609 1994 SICHUAN GAS DEV 8 CONSERVATION 255.00 0.00 10.00 37.67 9.11 46.78 0.00 PO03595 1994 RED SOILS IIAREA DEVELOPMENT PROJECT 0.00 150.00 0.00 0.00 4.95 0.10 -1.73 PO03473 1993 CN-ZHEJIANG MULTlClTlES DEVELOPMENT 0.00 110.00 0.00 0.00 0.14 0.30 -2.02 PO03592 1993 REF. 1NST'L.B PREINV 0.00 50.00 0.00 0.00 2.07 2.48 2.48 Total: 12902.30 1752.60 197.80 1129.27 5543.44 3721.53 211.72 - 92 -  CHINA STATEMENT OF IFC's HeldandDisbursedPortfolio Jun30 2002 - InMillions USDollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1997 Orient Finance 9.52 0.00 0.00 11.90 9.52 0.00 0.00 11.90 1997100 PTP Holdings 0.00 0.03 0.00 0.00 0.00 0.03 0.00 0.00 1997 PTP Hubei 11.72 0.00 0.00 23.29 11.72 0.00 0.00 23.29 1996 Pacific Ports 0.00 2.54 0.00 0.00 0.00 2.54 0.00 0.00 2001 Peak Pacific 0.00 0.00 25.00 0.00 0.00 0.00 0.00 0.00 1998 Rabobank SHFC 0.90 0.00 0.00 0.90 0.90 0.00 0.00 0.90 2000 SSIF 0.00 6.00 0.00 0.00 0.00 0.45 0.00 0.00 1998 Shanghai Krupp 30.00 0.00 0.00 68.80 19.74 0.00 0.00 45.26 1999 Shanxi 17.87 0.00 0.00 0.00 15.32 0.00 0.00 0.00 1993 ShenzhenPCCP 3.76 0.99 0.00 0.00 3.76 0.99 0.00 0.00 2001 Sino-Forest 25.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00 1995 SuzhouPVC 0.00 2.48 0.00 0.00 0.00 2.48 0.00 0.00 1998 WIT 5.00 0.00 0.00 5.00 0.00 0.00 0.00 0.00 2000 Wanjie Hospital 15.00 0.00 0.00 0.00 15.00 0.00 0.00 0.00 1996 Weihai Weidongri 1.92 0.00 0.00 0.00 1.92 0.00 0.00 0.00 1993 Yantai Cement 11.13 1.95 0.00 0.00 11.13 1.95 0.00 0.00 1998 Zhen Jing 0.00 2.00 0.00 0.00 0.00 2.00 0.00 0.00 2002 Advantage 0.00 0.25 0.00 0.00 0.00 0.00 0.00 0.00 1999100102 Bank of Shanghai 0.00 24.67 0.00 0.00 0.00 24.67 0.00 0.00 1996 Beijing Home1 2.50 0.50 0.00 1.65 2.50 0.50 0.00 1.65 1998/00 CIG HoldingsPLC 0.00 3.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 CPEF 0.00 20.00 0.00 0.00 0.00 0.00 0.00 0.00 1996 Caltex Ocean 18.53 0.00 0.00 28.64 18.53 0.00 0.00 28.64 1998 ChengduHuarong 7.40 3.20 0.00 8.60 3.70 3.20 0.00 4.30 1998 Chengxin-IBCA 0.00 0.36 0.00 0.00 0.00 0.36 0.00 0.00 1987192194 China Bicycles 0.00 0.00 0.00 0.00 0.00 0.00 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 China Walden Ven 0.00 0.2 1 0.00 0.00 0.00 0.2 1 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 16.11 0.00 0.00 18.89 1995 Dupont Suzhou 12.46 4.15 0.00 10.40 12.46 4.15 0.00 10.40 1994 Dynamic Fund 0.00 9.75 0.00 0.00 0.00 8.09 0.00 0.00 1999 Hansom 0.00 16.10 0.00 0.00 0.00 16.10 0.00 0.00 2002 HuarongAMC 31.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 IEC 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1996 Jingyang 32.50 0.00 0.00 69.23 32.50 0.00 0.00 69.23 1998 LeshanScana 6.10 1.35 0.00 0.00 4.50 1.35 0.00 0.00 2001 MaanshanCarbon 9.00 2.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 NCCB 0.00 26.58 0.00 0.00 0.00 26.46 0.00 0.00 1996 Nanjing Kumho 6.82 3.81 0.00 19.38 6.82 3.81 0.00 19.38 2001 New China Life 0.00 30.70 0.00 0.00 0.00 23.32 0.00 0.00 1995 Newbridge Inv. 0.00 1.95 0.00 0.00 0.00 1.95 0.00 0.00 Total Portfolio: 304.22 166.98 25.00 277.79 206.13 127.02 0.00 233.84 - 93 -  Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic 2002 Darong 10.00 0.00 1.50 8.00 2002 NaradaBattery 6.60 0.00 0.00 0.00 2002 Zhong Chen 25.00 0.00 0.00 32.00 2002 ASIMCO 0.00 13.50 1.50 0.00 2002 Sino Mining 5.00 0.00 0.00 5.00 2002 Shuang Deng 12.50 0.00 2.80 0.00 2002 KHIT 0.00 0.00 3.00 0.00 2002 SML 0.00 0.00 6.00 0.00 1996 Jingyang 4.00 0.00 0.00 0.00 1998 PTPHubeiBLINC 0.00 0.00 0.00 1.50 2000 CIG Zhapu 6.00 5.00 0.00 0.00 2000 Meijing 9.00 0.00 0.00 7.30 2000 CIMIC Tile 15.00 5.00 0.00 15.00 2001 Daning Coal 0.00 0.00 2.00 15.00 2001 AACI 0.00 0.00 2.00 0.00 2001 Minsheng 0.00 23.50 0.00 0.00 2002 HuarongAMC 15.00 0.00 3.00 0.00 2002 IEC 0.00 5.00 0.00 0.00 Total PendingCommitment: 108.10 52.00 21.80 83.80 -94-  Annex I O : Country at a Glance CHINA: Zhejiang Urban Environment Project East Lower- POVERTY and SOCIAL Asia i3 middle- China Pacific income Developmentdiamond* 2001 Population, mid-year (millions) 1,271.9 1,826 2,164 GNI per capita (Atlas method, U F) 890 Life expectancy 900 1,240 GNI (Atlas method, US$ billions) 1,129.3 1,649 2,677 Average annual growth, 1995-01 Population I%) 0.9 1.1 1.o Labor force (%) 1.o 1.3 1.2 Most recent estimate (latest year available, 1995-01) Poverty (% ofpopulation below nationalp0~ei-f~line) 5 Urban population (% of total population) 38 37 46 Life expectancy at birth (years) 71 69 69 Infant mortality (per 1,000live births) 32 36 33 Child malnutrition (% ofchildren under 5) 10 12 11 Access to improved water source Access to an improved water source I%ofpopulation) 75 74 80 I Illiteracy (% ofpopulation aqe 15+) 15 14 15 - 1 Gross pnmary enrollment (% of school-aqe population) 107 107 107 tChina Male 106 106 107 - Lower-middle-income qroup 1 Female 109 108 107 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1981 1991 2000 2001 Economic ratios* GDP (US$ billions) 228 3 402.6 1,077.5 1,150.1 Gross domestic InvestmenffGDP 32 5 34.8 38.1 37.9 Exports of goods and services/GDP 8.6 19.4 25.9 25.8 Trade Gross domestic savings/GDP 32.9 38.1 38.8 40.3 - Gross national savingslGDP 32 8 38.5 38.0 39.4 Current account baiancelGDP 0 4 3.8 1.9 1.5 interest payments/GDP 0 2 0.7 0.6 0.6 Investment Total debffGDP 2 5 15.0 13.9 14.8 Total debt serviceiexports 6 9 10.1 7.4 6.8 Present value of debtlGDP 12.5 11.7 1 Presentvalue of debffexports 46.0 43.5 Indebtedness 1981-91 1991-01 2000 2001 2001-05 I (average annual growih) GDP 100 9 7 8.0 7.3 6.9 GDP per capita 8.4 8.6 7.1 6.6 6.1 Lower-middle-income group I ~ Exports of goods and services 12.1 8.3 30.6 5.0 7.7 STRUCTURE of the ECONOMY 1981 199.1 2000 2001 Growth of investment and GDP (X) (% of GDP) I Agriculture 31.8 24.5 15.9 15.2 20 ..T I Industry 464 421 Manufacturing 385 327 Services 21 8 334 33.2 33 6 Private consumption % 97 98 99 00 01 General government consumption 145 13 1 131 137 - imports of goods and services 8 2 161 23 2 234 a GDI ' I O I G D P 1981-91 1991-01 2000 I (average annual growth) Growth of exports and imports (Oh) Agriculture 5.2 4.0 2.4 2.8 40 T 1I Industry 11.4 12.6 9.6 8.7 Manufacturing 11.1 11.6 9.1 9.0 Services 12.6 8.7 7.8 7.4 Q&%/ 97 98 99 00 01 I Private consumption 8.3 8.6 8.7 6.2 General government consumption 9.9 8.5 12.2 Gross domestic investment 10.4 10.3 4.2 12.8 'A w -'Exports +Imports ImDortsof aoods and services 9.6 6.4 24.5 10.8 Note: 2001 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 - 95 -  China PRICES and GOVERNMENT FINANCE 1981 1991 2000 2001 Domestic prices (% change) Consumer prices 25.7 3.4 0.4 0.7 implicit GDP deflator 2.3 6.7 0.9 0.0 Government finance (% of GDP, includes current grants) Current revenue 24.2 16.9 15.3 17.2 Current budget balance .. 2.3 0.6 1.o - Overall surplusldeficit 0.8 -1.1 -3.6 -3.2 GDP deflator *CPI I TRADE I 1981 1991 2000 2001 (US$ millions) Export and import levels (US$ mill.) Total exports (fob) 22,007 71,843 249,210 266,155 300.000 T Food 2,924 7,226 12,282 12,780 Fuel 5,228 4,754 7,851 8,420 Manufactures 11,759 55,698 223,752 239,800 200 000 Total imports (cifl 22,015 63,791 225,097 243,610 Food 3,622 2,799 4,758 4,980 100000 Fuel and energy 83 2,113 20,637 17,490 I Capital goods 5,866 19,601 91,934 107,040 0 Export price index (1995=100) 16 51 67 65 95 96 97 98 99 00 Import price index (1995=100) 13 49 75 73 0 Exports W Imports O1 Terms of trade (1995=100) 118 103 90 90 BALANCE of PAYMENTS 1981 1991 2000 2001 (US$ millions) Current account balance to GDP (Oh) Exports of goods and services 24,410 78,909 279,561 299,410 Imports of goods and services 23,426 65,339 250,688 271,324 'T Resource balance 984 13,570 28,873 28,086 Net income -124 840 -14,666 -19,173 Net current transfers .. 830 6,311 8,492 Current account balance 860 15,240 20,519 17,405 Financing items (net) -4,149 -9,971 29,920 Changes in net reserves .... -11,091 -10,548 -47,325 I 95 96 97 98 99 w 01 Memo: Reserves including gold (US$ millions) .. 48,154 171,753 219,970 Conversion rate (DEC,/ocal/US$) 2.1 5.4 8.3 8.3 EXTERNAL DEBT and RESOURCE FLOWS 1981 1991 2000 2001 (US$ millions) Composition of 2001 debt (US$ mill.) Total debt outstanding and disbursed 5,798 60,259 149,800 170,000 iBRD 0 3,494 11,118 11,479 IDA 0 3,672 8,771 8,550 G: 17,682 A 11,479 Total debt service 1,744 8,305 21,728 20,900 IBRD 0 357 1,291 1,716 IDA 0 23 131 164 Composition of net resource flows Omcialgrants 19 406 147 Official creditors 506 2,044 1,927 Private creditors 89 2,493 -2,302 Foreign direct investment 0 4,366 42,096 47,052 Portfolio equity 0 565 7,814 2,404 World Bank program Commitments 196 2,622 1,536 1,230 A IBRD -- ~ E Bilateral ~ Disbursements 0 1,280 1,907 1,947 B D Other multilateral F Private ~ Principal repayments 0 131 644 999 C IMF -- IDA G Short-term Net flows 0 1,149 1,263 948 Interestpayments 0 250 778 801 Nettransfers 0 899 485 67 -96 -  Additional Annex 11:Safeguard Issues CHINA: Zhejiang Urban Environment Project A. Summaryof EnvironmentalImpacts andEnvironmentManagementPlans Background 1. The Zhejiang Environmental Protection Research Institute carried out the Environmental Assessment (EA) o f the proposed Zhejiang UrbanEnvironment Project (ZUEP)`in accordance with Chinese national and Bank procedures, with support from independent intemational consulting specialists. Various drafts were reviewed and discussed in detail during project preparation. The draft EA documents were submitted to the Bank in January 2003 and reviewed by the Bank during a mission in March 2003. The final EA Report, Environmental Action Plan (EAP) and Executive Summary (ES) were submitted to the Bank in March 2003 and found to be satisfactory. The EA Report was sent to the Bank's Information Center in March 2003. During the EA work local people were consulted, and their opinions have been reflected inthe project design and environmental mitigation measures as appropriate. 2. The policy and administrative requirements for environmental assessment o f development projects inChina were followed duringpreparation and evaluation ofthe EA, as well as the Bank's policy. Major laws and regulations applied to the EA are as follows: (a) Environmental protection L a w o f the People's Republic o f China; (b) Atmospheric Pollution Control Law; (c) Environmental Noise Control Law; (d) Water Pollution Control Law; (e) Cultural Heritage Protection Law; (f) Notice o f Strengthening the EA Management Work o f Construction Projects financed by htemational Financial Organizations; and (g) Technical Guidelines for EnvironmentalImpact Assessment. BriefProjectDescription 3. The Zhejiang UrbanEnvironment Project includes the following components for which EAs have been completed: 0 Hanazhou. Extension o f a major landfill disposal site inHangzhou 0 Ningbo. Wastewater treatment and associated sewerage inNingbo andZhenhai; sewerage and roads inDongqian Lake; and infrastructure upgrading inCicheng 0 Shaoxing. Urban infrastructure upgrading, conservation o f historic buildingsand rehabilitation o f urban watercourses in Shaoxing Central to the project are capacity- and institution-building measures, urban information systems development, training and environmental quality monitoring and control. - 97 -  BaselineEnvironmentalDescription 4. Natural Environment. Zhejiang Province (population 45 million) is the third smallest province o f China with an area o f 101,800 km2. It i s located on the East cost o f China and is bounded by Shanghai and Jiangsu Province to the north, the East China Sea to the east, FujianProvince to the south and Jiangxi and Anhui Provinces to the west. The greater part o f Zhejiang Province lies to the south o f Hangzhou Bay and is largely mountainous. Ithas a rocky and deeply indented coast, dotted with more than 18,000 islands, forming numerous natural harbors. The north-western section o f the province lies within the fertile Yangtze River Delta, with its labyrinth o f rivers and canals; its coastal lowlands are protectedby dikes. 5. Hangzhou (population 3.7 million) the provincial capital command an important geographical location stands on the north bank o f the Qiantang estuary at the apex o f Hangzhou Bay and is the southern terminus o f the Grand Canal. The city is one o f the key historical, cultural and scenic centers o f China with a history stretching back more than 2200 years. It stands on the shore o f the famous Xi Hu (West Lake), which adds to the reputation o f the city as a major tourist destination for both domestic and foreign visitors. 6. The port city o f Ningbo (population 1.25million), located 170km east o f Hangzhou, is the second city o fZhejiang andhas for many years been an important trade and industrial center. Shaoxing (population 0.9 million), located 67 kmsouth east o f Hangzhou, is also an industrial city but has a remarkable cultural heritage, with a history dating back more than 2500 years. The Old City has many buildings and sites o f historical interest. 7. Zhejiang has a humid subtropical climate, controlledchiefly by monsoon airflows, modifiedby local influences. Considerable differences exist between the coast and the hinterland, between the lowlands and the highlands, and between the north and the south, particularly inwinter. Hangzhou has an average January temperature o f 4" C, while that o f Wenzhou on the coast is about 8" C. Summers are hot throughout the province, with average July temperatures inthe order o f 28" C. Annual rainfall throughout the province is more than 1000mm,with the hilly interior havingmore precipitationthan the coast, which i s frequently visited by typhoons, particularly during late summer and early autumn. 8. Socioeconomic Situation. Zhejiang is one o f the most prosperous provinces o f China, with a per capita GDP o f US$1625 in2000. Its agriculture is among the most diversified o f the provinces o f China, with less thanhalfits farm output byvalue coming from food or cash crops. Because o fthe hilly topography, only about one-fifth o f the land surface i s arable and about 80% o f this i s irrigated. Zhejiang i s among the leading provinces infarm productivity inthe tea industry and insericulture. 9. Most o f the wealth o f Zhejiang derives from light industry, which inpart reflects the historic role of the province as a commercial and handicraft center and a significant textile producer since the 1890s. The province has become a major exporter with a number o f specialized export centers for light industrial products and handicrafts. Hangzhou has become a major industrial city since 1949 and produces a wide range o f industrial and consumer goods, including machinery, textiles, agricultural implements, chemicals, radios, and televisions. Ningbo is also a major industrial center and its designation as one o f China's "open" cities has stimulated foreign investment and technology transfer. Shaoxing is also an important industrial city specializing intextiles and wine production. - 98 -  10. Zhejiang is served by an extensive highquality highway network centered on Hangzhou and linking all major towns inthe province. Heavy freight is often movedby rail, especially for longer distances, and Hangzhou is linked by rail to many o f the major cities o f China. Although the rivers play an important role inthe province's transport, with about halfofthe total freightvolume traveling onthese inlandwaterways, coastal shipping accounts for only a small percentage o f the total freight volume. There are three intemational airports (at Hangzhou, Ningbo and Wenzhou) allowing air transport to Hong Kong. 11. Water Oualitv. Zhejiang has substantialrainfall andtherefore generally adequate water resources. River flows are also substantial and water quality inthe mainstreams inthe province is generally good. However, water quality in some sections o f these rivers inthe urban areas o f the province is poor because o f the generally low collection and particularly treatment rates for municipal wastewater inthe major cities. Pollution is particularly severe inthe tributaries and urban watercourses within these cities. 12. Inthe case ofNingbo as a whole the wastewater treatment rate is very low, only approximately 10%. There i s only one functioning wastewater treatment plant inNingbo at Jiangdongbei, with a capacity o f 100,000 m3/d but operating at only 50% o f design capacity. The city is required by Central Government to increase the wastewater treatment rate to at least 60% by 2010. There is no wastewater treatment ineither Zhenhai, or Cicheng and as a consequence there is serious pollutiono f urban watercourses inthese areas. Inthe case o f DongqianLake there is discharge o f untreated municipal wastewater to the lake, which is also polluted by other sources, particularly small scale rural agriculture. 13. There have been major investments inwastewater collection and treatment inShaoxing, but inthe historic inner city collection rates are low and there i s no wastewater collection inthe historic conservation areas, which are served by nightsoil collection systems. Substantial volumes o f wastewater are therefore discharged to the canals inthe old city, which is causing serious deterioration inwater quality inthese canals. Water quality inthe canals is controlledto a degree by flushingusing water pumped from the moat surrounding the old city, but it frequently fails to meet even Category V o f the environmental quality standards inpart as a consequence o f declining water quality inthe moat. 14. Wastes Management. Wastes management for the major cities inthe province involves a combination o f landfill and incineration. Disposal o f wastes from Hangzhou is mainly at a major landfill site ina valley at Tianziling, some 20 km from the city center, with wastes from two adjacent counties being incinerated. This site is operated to a high standard, but leachate collection is incomplete. Landfill gas is collected from the site andusedfor electricity generation for export to the local electricity grid. This i s undertaken via an arrangement with an intemational private sector wastes management contractor. Most importantly the site is nearing completion and a replacement site is urgently required to sustain wastes management operations for the city. EnvironmentalBenefits 15. The extension o f the Tianziling landfill serving Hangzhou will provide the city with a highquality and environmentally secure long term disposal resource for municipal solid wastes operated to intemational standardso f sanitary landfill. This will enable the city to continue to increase the waste collection service area andthereby ensure further improvements inurban environmental sanitation. The secure landfill site liner will effectively eliminate leachate pollution o f groundwater and the expansion o f the gas collection and utilization systems will substantially reduce greenhouse gas emissions from the landfill. - 99 -  16. The wastewater treatment and associated sewerage system investments inthe Ningbo municipality area will substantially increase the wastewater treatment rate inthe area and will alleviate the pollution o f urban watercourses and o f the major rivers. Inaddition they will improve standards o f public health through the reduction o f many o f the physical vectors that contribute to the transmission o f waterborne and water-related diseases. The associated improvements inthe living environment inthe areas covered by the project investments is expected to have a positive impact on property values inthese areas. Moreover the removal or replacement o f outdated septic tank and night soil facilities will bothreduce the pollutionfiom these facilities and substantially reduce sanitation system operating costs. 17. Inthe caseofthe DongqianLake component the wastewater collectionandtreatment proposals will very substantially reduce the pollution loadto the lake from municipal wastewater, which is among the principal pollution sources. A comprehensive Catchment Management Plan has been prepared during project preparation with the objectives o f management and control o f other pollution sources and to develop policy instruments to restrict and control polluting activities within the lake catchment on a sustainable basis. 18. The urbanreconstruction and conservation o f historic buildingsin Shaoxing will assist in modernizing the city while at the same time preserving the heritage o f the city's history. The provision o f piped sewerage systems inthe historic conservation areas and the rehabilitation o f urban watercourses in the city through a combination o f dredging and improved pumpingto enhance flushingrates will improve both flow characteristics and water quality inthe canals. At the same time optimization o f pumping arrangements will reduce the present highoperating costs for canal flushing. PotentialEnvironmentalImpactsand Their MitigationMeasures 19. The project as a whole is substantially positive in environmental terms, with the benefits greatly outweighing the negative impacts. Nevertheless some negative impacts have been identifiedinthe EA process for all components, and these require mitigation measures. The principal impacts and their appropriate mitigation measures are described below. 20. Sludge Production. Treatment of wastewater at the treatment plants proposed will generate substantial quantities o f sludge. The aggregate quantity o f sludge produced at the treatment plants at Jiangdongnan andZhenhai WWTPs will be inthe order o f 100tons o f dewatered sludge cake per day. The Ningbo Municipal Government has other extensive plans to enhance levels o f wastewater treatment, which will hrther increase quantities o f sludge requiring disposal, andhas therefore produceda comprehensive Sludge Management Plan covering the entire Municipality area. Inthe immediate term disposal will need at least inpart to be by landfill, and environmentally secure landfill facilities will be provided. 21. Landfill Impacts. The principal impacts associated with landfill will be the generation o f leachate and landfill gas. Pollution o f groundwater will be minimized by the installation o f an impermeable membrane liner, and extensive leachate treatment facilities are being provided withinthe project to allow the disposal o f treated leachate to the municipal sewerage system. Inaddition it is proposed to use (and extend as necessary) the landfill gas collection and power generation facilities at the existing landfill to serve the new landfill. 22. Zhenhai Outfall Imuact. There will be a water quality impact inthe immediate vicinity o f the marine outfall discharging treated wastewater from Zhenhai and marine environmental quality standards will not be met within the associated mixingzone. The area o f this zone will be minimizedby the use o f an - 100 -  efficient diffuser system on the outfall pipeline designed on the basis o f detailed mathematical dispersion modelling. 23. Construction Spoil. Substantial quantities o f spoil will be generated as a result o f excavation for pipeline installation, dredging o f canals inShaoxing and Cicheng and for the construction o f wastewater treatment plants. Most o f the material will be re-usedon site, and spoil disposal plans have been prepared for each project component where excess spoil will be generated. It is expected that most spoil will be beneficially used inother local construction activities and therefore spoil disposal will not be problematic. Where it is necessary to dispose o f dredged material, it will be monitored for contamination inorder to determine suitable disposal options. 24. Pipeline and Road Impacts on Sensitive Areas. Impacts on sensitive areas will be minimized by route realignment or by protection. Where the routes o f pipelines cross agricultural land, the fertility o f land will be protected by the careful separate storage and stockpiling o f topsoil and subsoil for subsequent replacement. 25. Other Construction Imuacts. Other impacts o f construction include noise from construction machinery, generation of dust and disruption of local traffic. These will be minimized by appropriate restrictions on working hours and operational procedures o f the contractors concerned. 26. Other Operational Impacts. The other significant potential impacts o f the operation o f wastewater treatment plants andpumpingstations are noise and, inthe case o f wastewater treatment plants, odor. These will be minimized by the siting o f the plants and by the provision o f buffer zones and landscaping. Where there are sensitive noise receptors close to the facilities, the noise emissions will be minimized by appropriate acoustic insulation o f machinery. 27. There will also be traffic impacts associated with the delivery o f waste for disposal at the Tianziling landfill and with the transport of dewatered wastewater treatment sludge for off-site landfill disposal. These will be minimizedby restrictions on the times o f day allowed for these activities; inthe case o f the existing landfill at Tianziling such restrictions are already inplace. PublicConsultationand InformationDisclosure 28. The following approaches were adopted for public consultation: (a) meetings with city Project Management Offices (PMOS), utilitycompanies, municipal EPBs, and other affected city departments; and (b) surveys to gauge the public perception o fthe positive and negative impacts o f each ofthe proposed schemes. All schemes proposed were well received by the public. 29. The public participation exercise was undertaken inthree forms: bulletins inthe press, public opinion questionnaires and surveys o f the public. The phasing o f the public participation exercise i s shown inthe followingtable. - 101-  Public ParticipationPhasingand Goals inthe project Cities Round Round separation Major participation goals 1st round Environmental Identifystakeholder groups; secure proponent commitment (screening ) screening to public participation program; agree on extent and mode o f participation 2nd round Shortly after Identify stakeholders; disclose relevant project environmental screening, information,; determine stakeholder concerns and include before the EA TOR them in the TOR. finalized 3rd round After EA report (draft) Disclose information on study methods and findings; agree i s prepared on proposed mitigation measures with stakeholders; let stakeholders determine whether their concerns are adequately addressed 0 Bulletinsinthe press: Bulletins were published inthe localpress inthe project cities containing the general pollution situation inthe basin rivers and the objectives o f the project investments 0 The Willingnessto Pay Surveys; These surveys were carried out at an early stage o fthe project preparation to assess the overall acceptability o f the project to the people o f the project cities inthe lightofincreased tariffs. 0 Public OpinionQuestionnaire: Opinion pollswere carried out inthe districts affected bythe project inthe various cities. The questionnaire obtained written individual opinions o f the project. 0 Surveyof the Public: The survey invited individuals, government agencies, community organizations, corporations and villages ,whose opinions were considered and inquiries answered. 30. The EA and ES were made public locally inthe project cities; this availability was advertised through the local press. Following submission to the Bank the documents were sent to the Bank's Public Information Center. Details pertaining to the public consultations and information disclosure for each o f the project cities are provided inthe following tables. - 102-  HangzhouTianziling Landfill Public Consultation Substance Bywhom andwithwhom When I Where I Bank'srequirement Interview during field social WangHuizhen 0611996 231-B Tivuchane lOD 4.30 andOP 4.01 economicsurvey andfirst public LiuBaohua IIRd., Hangzhou meetings YuJiyu, etc. 7people ' - 1 RAP outline consultation People of ShitangTown 08/2002 - ShitangTown 07/2003 12/14/1999 ZhongbeiHotel, OP4.0: consultation ZhengWei Liang Hangzhou duringTOR stage (their Gao Jianzhong, etc. work done before OP requirement) Jia Zhijiu Hangzhou during TOR stage (their I XuHong, etc. work donebefore OP 14people requirement) Distributionofquestionnairesand People of ShitangTown; I 12/06/2002 ShitangTown key EA and messages in People ofBanshG Town bullet point format Distribution ofproject information People of ShitangTown; anddraft EA andRAP in second People ofBanshanTown BanshanTown Consultationprior to public meetings Final EA People of Shitang; 0712003 ShitangTown, People ofBanshanTown FinalRAP I People of ShitangTown; 0712003 ShitangTown, People ofBanshanTown InformationDisclosure Document Dateof Disclosure Location I Bank'sRequirement Copiesof EA andTOR andRAP II1211999 II ZhongbeiHotel, Hangzhou lOP 4.01; OD 4.30; outline BP 17.50 .Questionnairesandkey EA and RAP 03/05/2003 HangzhouDaily messages Draft EA andRAP reports 03/22/2000 ZhongbeiHotel, Hangzhou FinalEA and RAPreports 0712003 252 TiyuchangRd., Hangzhou Notice for availabilitv of EA and 0112003 Shitane Town. BanshanTown RAPreportsat PMdandCDC Resettlementinformationbooklet 1 08/01/2003 1WWW.cnlandfill.com - 103-  NingboJiangdongnan Wastewater PublicConsultation Substance Bywhom andwith whom When Where Bank'srequirement Interview during fieldsocial 'eople with PMO, agenciesfor 0412002 Linjia Village in OD 4.30 and OP 4.01 economicsurvey andthe first ,esettlement,housingandland Zhonggongmiao Town nublic meetings RAP outline consultation ProjectOffice Draft EA TOR consultation The location for WWTP in OP4.0:consultationduring YinzhouDistrict TOR stage(their work done before OPrequirement) EA TOR consultation litto 0612002 - 0812002 Downtown work donebeforeOP requirement) Distributionofquestionnairesand 0412002 - The location for WWTP in II key EA andRAPmessagesin EA: Peoplefor the reports 0212003 bullet point format preparation RAP: People with PMO, agenciesfor resettlement, housingandlandadminis- 0512002 - tration andaffectedpeople 0912002 areas Distribution ofprojectinformatioi NingboDaily, readingroom in OP4.01: anddraft EA andRAP insecond Bao Yugang Library & Consultationprior to public meetings website:www.nbepb.cnnb.net finalization ofdraftreport Ningbo Daily, readingroom in the Bao Yugang Library and esettlement, housingandland Linjia Village in idministrationandaffectedpeople ZhonggongmiaoTown Final EA Uudatedtimelv FinalRAP PMO esettlement, housingandland InformationDisclosure Document Date ofDisclosure Location Bank Requirement Copies ofEA andTOR andRAP II0412002 II PMO IIOP 4.01; OD 4.30; outline BP 17.50 Questionnairesandkey EA andRAP EA:04/2002 - 0212003 The location for WWTP in YinzhouDistrict and messages Ningbo Downtown RAP: 0512002 0912002 - Offices of PMO, agencies for resettlement,housingand land administrationandaffectedareas. Draft EA and RAPreports EA: 03/11/2003 NingboDaily, readingroom in the Bao Yugang Library and website: www.nbeph.cnnb.net RAP: 1012002 NingboDaily, readingroominthe Bao Yugang Library andcitv PMO I FinalEA andRAP reports 107/2003 PMO Notice for availability of EA and I0312003 1I PMO RAP reportsat PMO andCDC Resettlementinformation booklet 0412003 Offices ofPMO, agencies for resettlement,housingand landadministrationand affectedareas - 104-  NingboZhenhaiWastewater Public Consultation Substance By whom and with w horn When Where Bank's requirement Interview during fieldsocial Peoplsuith PMO, agencies for ressnlsment, 0412002 Zhenhai District OD 4.30 and OP 4.01 economic survey andfirst public housingand landadministrationand affected meetings people RAP outline consultation PMO andaffectedpeople 0412002 PMO Draft EA TOR consultation People for thereportpreparation 0412002 The location for WWTP in OP4.0: consultation Zhenhai during TOR stage(their District work donebefore OP requirement) EA TOR consultation People for the reportpreparation 0612002 - The location for WWTP in OP4.01: consultation 0812002 Zhenhai andNingbo during TOR stage Downtown Distributionofquestionnairesand EA: People for the reportpreparation 3412002- The location for WWTP in key EA andRAPmessages in 3212003 ZhenhaiDistrict and bulletpoint format Ningbo Downtown PMO, agenciesfor RAP: PMO andagenciesfor resettlementand 3512002 resettlement,housingand ~ housingadministration 3912002 landadministrationand affectedareas Distribution ofproject informatior EA:People for the reportpreparationandPMO 1112003 Ningbo Daily, reading OP4.01: and draft EA andRAP insecond room inthe Bao Yugang Consultationprior to public meetings Library & website: finalization ofdraft report www.nbepb.cnnb.net RAP:People with PMO, agencies for 1012002 Ningbo Daily, Bao resettlement,housingandlandadministration Yugang Library & and affectedpeople ZhenhaiDistrict Final EA People for the reportpreparation Updated Updatedtimely timely Final RAP PMO, agencies for resettlement, housingand 0312003 PMO landadministrationandaffectedpeople InformationDisclosure Location Bank Requirement PMO OP 4.01; OD 4.30; outline BP 17.50 The location for WWTP inZhenhaiDistrict andNingbo messages Downtown RAP: 0512002 - 0912002 Offices ofPMO, agencies for resettlement,housingand landadministrationandaffectedareas Draft EA and RAPreports EA: 0311112003 Ningbo Daily, readingroom inthe Bao Yugang Library & website: www.nbepb.cnnb.net RAP: 1012002 Ningbo Daily, readingroom inthe Bao Yugang Library& I city PMO Final EA and RAPreports I07 2003 PMO Notice for availabilit) of EA and I RAP,03 2003 PMO RAPreportsat PMOandCDC Resettlementinfomationbooklet 0412003 Offces ofPMO, agenciesfor resettlement, housingand landadministration andaffectedareas - 105-  Ningbo-CichengUrbanDevelopment PublicConsultation Substance Bywhom andwithwhom When Where Bank'srequirement ~~ Interview during fieldsocial II People with PMO, agenciesfor 0412002 CichengTown lD4.30 andOP4.01 economic survey andfirst public resettlement,housingandland meetings administrationandaffected I r--r-- nennle RAP outline consultation PhlO and affsctedpeopls 0412002 PMO Draft EA TOR consultation II People for the report 0412002 The location for the sub-project in lP4.0: consultationduring preparation CichengTown 'OR stage(their work done iefore OP requirement) EA TOR consultation Peoplefor thereport 0612002 - CichengTown, Jiangbei District OP4.01: consultationduring preparation 0812002 andNingboDown- TOR stage (theirwork done town beforeOPrequirement) Distribution ofquestionnairesand EA:People for the report 0412002 - CichengTown, key EA andRAPmessages in preparationand peoplewith 0212003 JiangbeiDistrict andNingbo bullet point format CichengTown Government Downtown RAP:PMO andagenciesfor 0512002 - Offices ofPMO, agenciesfor resettlement,andhousing 0912002 resettlement,housing and land administrationand affected administrationandaffectedare= people. Distribution ofprojectinformatior EA:Peoplefor the report 0311112003 NingboDaily, readingroom inthe lP4.01: anddraft EA andRAP insecond preparationandPMO Bao YugangLibrary & website: Zonsultationprior to public meetings www.nbepb.cnnb.net inalization ofdraftreport RAP: Peoplewith PMO, 1012002 NingboDaily, readingroom inthe agenciesfor resettlement, Bao Yugang Library & Cicheng housingand land Town office I administrationand affected people Final EA I Peoplefor thereport Updated Updatedtimely preparation timely FinalRAP II Peoplewith PMO, agencies for 0312003 PMO resettlement,housingand land administrationand affected people InformationDisclosure Document DateofDisclosure Location Bank'sRequirement CopiesofEA and TOR andRAP II0412002 PMO 4.01; OD 4.30; outline I OP 17.50 Questionnairesandkey EA and RAP EA: 0412002 - 0212003 BP CichengTown, Jiangbei District andNingbo messages Downtown RAP: 0512002 -0912002 Offices ofPMO, agencies for resettlement,housing andlandadministrationandaffectedareas Draft EA andRAP reports EA:0311112003 Ningbo Daily, readingroom inthe Bao Yugang Library, CichengTown & website: www.nbepb.cnnb.net RAP: 1012002 Ningbo Daily, readingroom inthe Bao Yugang I Library, Cicheng Town Office andcity PMO Final EX and R.4P repons 072003 PMO Sotice for availabilitv of EX and IIRAP. 03 2003 PMO RAP reportsat PMOandCDC I Resettlement informationbooklet 0412003 OfficesofPMO, agencies for resettlement,housing and landadministrationand affectedareas -106-  Ningbo-DongqianhuWastewater and Roads PublicConsultation By whom and with whom Bank requirement ~ Substance Interview during field social People with PMO, agenciesfor ID4.30 andOP4.01 economic survey andfirst public resettlement,housingandland meetinm administration. affectedueoule I RAP outline consultation AffectedpeopleandPMO 0412002 PMO Draft EA TOR consultation Peoplefor the report preparation 04/2002 IIThe location for the sub-proiect lP4.0: consultationduring inDongqianLakeTown- OR staee (their work doni efore OP requirement) " \ EA TOR consultation People for the report preparation 0612002 - DongqianLakeTown, Yinzhou OP4.01: consultation 08/2002 District andNingbo Downtown during TOR stage Distribution of questionnairesand EA: People for the report 0412002 - DongqianLake Town, Yinzhou key EA andRAPmessagesin preparation 0212003 District andNingbo Downtown bullet point format Offices ofPMO, agencies for RAP: PMO andagencies for OS12002- resettlement,housingand land resettlement,housing, andland 0912002 administration,affectedareas administration,affectedpeople Distribution ofproject information EA: People for the report 0311112003 Ningbo Daily, readingroom in lP4.01: anddraft EA andRAP in second preparationandPMO the Bao Yugang Library, Town :onsultationprior to public meetings office andwebsite: nalization ofdraft report www.nbepb.cnnb.net RAP: PMO, agencies for : 1012002 Ningbo Daily, readingroom in resettlement,housingand land the Bao Yugang Library and DongqianLakeTown Office Final EA Peoplefor the reportpreparation Updated Updatedtimely FinalRAP People with PMO, agenciesfor 0312003 resettlement,housingandland administration, affectedpeople InformationDisclosure Document Date of Disclosure Location Bank Requirement CopiesofEA andTOR andRAP II0412002 PMO IIOP 4.01: OD 4.30: oufline Questionnairesandkey EA andRAP EA:0412002 - 02/2003 DongqianLake Town, YinzhouDistrict andNingbo IIBP 17.50 messages DoGfown RAP: OS/2002 - 0912002 Offices ofPMO, agenciesfor resettlement,housingand landadministrationandaffectedareas Draft EA andRAP reports EA: 0311112003 NinaboDaily, readingroom inthe Bao Yuaang Libriry, DongqianLake Town office andwebsite: www.nbepb.cnnb.net RAP: 10/2002 NingboDaily, readingroom inthe Bao Yugang Library, DongqianLake Town office andPMO PMO PMO Offices ofPMO, agencies for resettlement,housingand landadministrationandaffectedareas -107-  ShaoxingUrbanUpgrading Public Consultation Substance By whom andwith whom I When 1 Where Bank's requirement Ieconomic s w e i and first oublic Iunits. ueoulewith ConstruciionBureau. I I I I meetings PMO iniresettlement agencies RAP outline consultation IIPMO, affectedpeopleandresettlement I 0412002 ICityPMO experts Draft EA TOR consultation PMO, affectedpeopleandresettlement 1212002 City PMO OP4.0: consultationduring TOR experts andenvironmental stage (theirwork donebefore OP administrators requirement) EA TOR consultation PMO, agencies for resettle- 0112002 City PMO OP4.01: consultationduring mentandhousingand TOR stage(their work done affectedpeople beforeOPrequirement) Distribution ofquestionnairesand PMO, agencies for resettle- 03/2002 - PMO, resettlement keyEA andRAPmessagesin ment andhousing affectedpeople and 1012002 andhousing bullet point format consultants administration Distribution ofproject information PMO, agencies for resettle- 1112002 PMO OP4.01: anddraft EA andRAP insecond ment andhousing, affectedpeopleand Consultationprior to finalization public meetings I consultants lof draft report experts andenvironmentexperts Final RAP PMO, officesfor resettlement, housing 0412003 PMO administration, affectedpeople and resettlementexperts. InformationDisclosure Document Date of Disclosure Location Bank's Requirement Copies of EA andTOR andRAP II0312002 IICityPMO IIOP 4.01; OD 4.30; outline BP 17.50 Questionnairesandkey EA andRAP 0412002 - 1012002 PMO, agenciesfor resettlementandhousing messages administration Draft EA and RAP reports 1112002 City PMO Final EA andRAP reports EA: 0712003 City PMO, andwebsite: m.zjep,gov.cn RAP: 0712003 City PMO, library andarchives Notice for availability of EA and 0412003 ShaoxingDaily RAPreportsat PMO and CDC Resettlement informationbooklet 0412003 PMO, agenciesfor resettlementandhousing administration - 108-  B. LandAcquisition and Resettlement Introduction 31. This part o f the Annex reviews adverse impacts related to land acquisition and house demolition for the environment project, and the arrangements proposed inthe Resettlement Action Plan (RAP) to mitigate them. Consistent with World Bank Operational Policy 4.12 on Involuntary Resettlement, the objectives o f resettlement planning for the project have been to avoid or minimize adverse impacts, andto ensure that incomes and living standards are improved (or at least restored) for all persons adversely affected by the project. Special care has been taken inresettlement planning to ensure that rehabilitation measures are sufficient inparticular areas where the labor-to-land ratio is comparatively low. LandAcquisition andResettlement-RelatedImpacts 32. Based on project designs to date, the project will be undertaken in3 cities inZhejiang Province, consisting o f 6 components; one inHangzhou city, another one inShaoxing city and other 4 inNingbo city. The project will require the permanent acquisition o f 1,424.14 mu ( 95 hectares) o f land. This includes 456 mu( 30 hectares) o f cultivated land owned by collectives, and 17 mu ( 1hectares) o f state-own land. Of the collective cultivatedland to be acquired, yearly contracted farm land is usedby private farmers. A total o f 466 households with 1,6 10 individuals will be affected by land acquisition. An additional 65 mu ( 4 hectares) o f collective land and 254 mu ( 17 hectares ) o f state-own land will be used temporarily during the construction period. Structural demolition o fprivate residential housing is expected to total 73,977 square meters, with 705 households ( 2221 individuals) affected. There are 63 enterprises and 15 units with 3,840 employees to be affected by structure demolition. 33. Particularly, the Shaoxing municipal government encourages some o fresidential citizens to move out o f Yue District as to improve people's living condition funded by local finance resources and reduce the pressure o f highdensity o f population inthe area. Based on social development master plan, it assumed that a total o f 8,485 families with 26,488 persons would be voluntary to move out o f the area within 2 decades. Itwas investigated there would be 2,357 families with 7,034 volunteers duringthe Bank project period. The Bank considers that the voluntary resettlement is linked to the Bank financed project and will be supervised timely as the Bankrequirement. Consequently, the Bank policy associated to involuntary resettlement will apply to the linkedmaster plan. 34. Relatively minor design changes are likely to continue untilimplementation. Typically, final designs result inmarginal decreases inlandacquisition and structural demolition, as well as changes in proportion among categories o f affected land and structures. Legal and PolicyFramework 35. The legal basis for landacquisition and resettlement planningincludes national, Zhejiang provincial laws andregulations. Relevant national laws or regulations include the Land Administration Law (1999). InChina, all land officially designated as all cultivated rural land i s owned by village collectives. As a result, there are two types o f land acquisition for this project. One i s to acquire collectively owned rural land, with compensation and other forms o f assistance provided to the collectives losing the land permanently. The other type o f land acquisition is to use collective landtemporarily. In this case, the acquiring agency or unit mustprovide adequate compensation by the periods o f agricultural - 109-  production seasons and the cost o f recovering the agricultural land. When collectively owned farmland is acquired, the future landuser pays compensation for land, loss o f crops and attached properties, and a resettlement subsidy for the rehabilitation o f affected persons. According to the landregulation o f Zhejiang Province andinvolved local municipal regulations, the landcompensation will be varied by locations o f the land. The compensation rates were evaluated by local land administrative units and agreed by villages. Young crop compensation and compensation for affected structures or other fixed assets are paid directly to individuals. The land compensation and resettlement subsidy is to be paid directly to the village-based collectives losing the land. This compensation is to be used for production development, nonfarm employment, income-generating activities or cash for the affected people. With village members inprior approval and district resettlement office inprior approval further, it can also be used for improvingcommunity facilities or services. By law, separate accounts on resettlement compensation are to be kept at each affected village, with financial reports provided annually to the next higher level o f government. CompensationStandards 36. The project office ineach city consults and negotiates the compensation with each district involved. The actual compensation rates will be based on replacement cost for various categories o f affected assets. For the landcompensation, it will be based on the highest average annual output value per mu among the same land inthe affected districts. Ineach case, however, compensationrates meet or exceed legal requirements, and meet or exceed replacement cost valuation. (for detailed information regarding compensation rates for structures and land, please see the 6 relevant RAPS). Inmany cases, local authorities may increase compensation rates for acquired land and demolished structures inresponse to local variations inproperty valuation or to meet other local contingencies. Inall cases, however, compensation will meet or exceed standards established inthe RAP. The project also will affect public infrastructure. Compensation based on replacement value will be paid to the relevant government agencies or local governments to restore the affected infrastructure and services. Rehabilitation Arrangements 37. The proposed environment projects will be undertaken in3 municipalities inZhejiang province. The ruralpopulation densities are comparatively highat average population with 0.4 muo f farm land. Resettlement planning has includedreview o f impacts on incomes which is based on village impact analysis. Hangzhou and Ningbo are well developed cities inChina, inwhich collective and private enterprises play an important role inlocally economic development. Most o f employees are local farmers and labors from other provinces. Farmers do not rely on agricultural income. The agricultural income rages 5- 10% o f entire family income. Infact, villages have to request farmers to use the landfor agricultural production yearly and pay the cost o f water supply and power supply as to carry out state policies and strategies. However, the land acquisitionwould not affect farmers significantly. The PMO and villages guaranteed that vulnerable group o f people inthe affected villages will not be involvedinland redistribution ifthere are the cases. Villagers will decide to use the land compensation. InstitutionalArrangements 38. InChina, the project office has no authority to acquire landthrough regulatorymeans, or to directly implement any resettlement-related measures. Land acquisition authority, and resettlement-related responsibilities, lie instead with the municipal districts involved. Under such circumstances, close coordinationbetween the project office and the relevant land administration bureaus is essential to effective resettlement. Buildingonpast Bank experience withBank financed environment projects in - 110-  Zhejiang province, the P M O and each municipalities have established a "provincial leading group" and "municipal leading group" to address any issues that may arise during implementation. The P M O also has established an intemal land acquisition and resettlement division to work with municipal district-level authorities on routine matters. Village Participation and PublicDisclosure 39. Potentially affected villages were consulted duringbothproject design and preparation o f the RAP. Additional formal and informal consultations were undertaken by municipal level and district-level land administration officials, andvillage-based communities. The consultation process was initiated well duringthe project design andthe RAP preparation. Consultations withpotentially affectedpersons occurred during the process o f conducting impact surveys, which began inMarch 2002. Affected persons were involved inidentifying project-related impacts andinmeasuring potential losses o f land, structures and other assets. The consultation process will continue throughout implementation inconjunction with resettlement monitoring activities. 40. Informationregarding the project andthe resettlement program has been publicly disclosed as required by Bank policy. The draft RAP is available for public review at the provincial library and relevantly municipal libraries, with notificationpublishedinthe local newspapers o n XXX, 2003. Additionally, the draft RAP was placed inthe Bank Information shop on XXX ,2003. Inaddition to formal RAP disclosure, separate campaigns have been, or will be, undertaken to ensure that affected persons are informed about resettlement aspects o f direct relevance to them. This information, published inbooklets for distribution to households or inposters for village andenterprise display, includes the projected timetable, compensation standards, rehabilitationmeasures, and information regarding whom to contact and procedures to be followed for those with complaints. ResettlementCost andImplementation Schedule 4 1. The cost o f landacquisition and implementing resettlement measures is budgeted at some Yuan 613 million (about US$75 million), including payment o f associated fees, monitoring costs and contingency allowances. Estimated resettlement costs are included inthe project budget. Monitoringof ResettlementImplementation 42. Resettlement implementationwill be subject to external project monitoring, to be conducted by two teams that are to function independently o f the project. Extemal reports will be submitted to the P M O and the Bank twice a year. The reports will review whether implementationis incompliance withRAP terms and will evaluate the effectiveness of resettlement measures inimproving or restoring incomes and living standards, including voluntary resettlement implementationinShaoxing municipality. - 111 -  Details of Resettlement Cost (RMBY) Items Hangzhou Shaoxing I Ningbo Sub-total Land acquisition II 32,661,600 II 01 38,324,300 II 70,985,900 Itotal Note: Resettlementmanagement fees range from 3% to 4% of resettlementbudget, depending on the resettlement work, training budget 1%, resettlement planning2% ,independent monitoring 1.5%. The contingencyis 10% of resettlement budget. -112-  Additional Annex 12: Heritage Conservation, EnvironmentalImprovement and Tourism Development in Urban Upgrading CHINA: Zhejiang Urban Environment Project Development Objectives 1. The Zhejiang Urban Environment Project would support the municipalities o f Shaoxing and Ningbo (Cicheng town and Dongqian Lake) in implementing the first phase o f a long-term urban heritage conservation and environmental improvement program to recover from past environmental degradation o f its water and land resources, to enable adjustment o f land use and standards o f accommodation in historic areas, to provide upgraded urban services, access, traffic and pedestrian movement,. The project also seeks to ensure the sustainability o f the urban environments to suit the new tourism and commercial markets in the context ofthe cities' emerging roles intheir regions. 2. Progress toward this objective would be measured interms of: (a) enhanced quality o f life through housing renovation and population de-densification, (b) reduction o f pollution from the urban sector through selective high-impact environmental improvements, (c) expansion o f capacity for urban management and municipal service provision in historic areas; (d) increase in tourism; and (e) enhanced community participation and employment inthe tourism sector. Strategic Context 3. There are three major issues facing the Municipalities concerned inupgrading the historic urban environments: (a) understanding market demands and opportunities for appropriate reuse and upgrading o f historic environments; (b) structural and detailed levels o f urban planning withm the municipalities in relation to emerging markets for land use; (c) achieving sustainability through realistic tariffs and pricing mechanisms 4. The effective development o f the urban areas requires the appropriate conservation andreuse o f the historic urban centers. These form the focus o f social and cultural environments for their regions. In the context o f emerging and highly competitive tourism markets, the sustainability and growth o f the historic areas, and the adequate retum on investments made by both the public and the private sectors, requires adequate institutional capacities to make carefully planned approaches to growth and change. Sustainable growth requires the identification o f potential and beneficial use in the context o f the values and significance o f the historic environments, and the support o f the communities in the conservation and development o f their historic environments. Rationale for Bank Involvement 5. The Zhejiang Urban Environment Project (ZUEP) has incorporated heritage conservation in the proposed urbanupgrading work in Shaoxing city and Cicheng town o f Ningbo municipality because it was recognized early on that the urban and built heritage is an asset for economic growth and development and that cultural heritage conservation contributes to the goals o f city livability and competitiveness. - 113-  6. The proposed conservation o f Shaoxing and Cicheng's traditional urban fabric, its neighborhoods and streetscapes, will preserve urban areas built on a human scale and mixed use activities that effectively support daily life. Conservation o f historically significant buildings and monuments will preserve areas o f architectural beauty, evidence o f past achievements, and cultural traditions, which in tum can create community identity, civic pride and energy for development. Conserving and upgrading traditional public areas such as central squares and marketplaces will preserve convivial spaces and helps maintain positive patterns o f interaction and communal activity. In addition, protecting historic natural settings in urban areas will preserve park and recreation space, assets that are in short supply. 7. Economic growth in the ShanghaUZhejiang region has changed and intensified the nature o f competition among cities. As diversity becomes more rare, cities with a unique sense o f place and living culture are more highly prized. Historic conservation and cultural activities as proposed under the project will maintain the distinctive character o f communities in Shaoxing and Cicheng and provide them with an additional means o f attracting high-value investments. In addition, conservation and cultural activities will enhance the potential for investments intourism. Historic sites, cultural entertainment and local crafts will draw tourists and provide residents with the opportunity to participate in one o f the fastest growing sectors inChina. 8. Over the last two decades, the project cities inZhejiang province have experienced unprecedented economic growth and expanding populations. The infrastructure upgrading required by this growth has generated much redevelopment in city centers, raised standards o f living, and set the stage for continued development by improvingtransportation, housing, communications, and services. However, the continuous pressure for high density urbanization and the pace o f this development, has also resulted in the loss their ancient urban heritage. There is a recent and growing awareness on the part of the municipal governments, that urban heritage is an asset for development, job creation and civic pride and they are now actively seeking assistance on incorporating heritage concerns into urban planning. Moreover, the increasing education, affluence and leisure time that the citizens are enjoying is allowing them to reflect on their physical, social, cultural and spiritual world. There i s a growing interest in places which retain historic associations, which tell o f past cultures and achievements and which put in perspective the values o f today's world. UrbanUpgradingand ConservationNeeds 9. Infrastructure such as roads, drainage and power lines in the historic project cities inevitably will need upgrading if it is to continue to offer efficient and safe environments for residents. A few elements o f the proposed infrastructure upgrading work were given special attention inthe context o f historic areas. In order to avoid the unnecessary destruction o f urban heritage it was essential that infrastructure planning be carried out under a multi-sectoral approach at an early stage to improve project effectiveness. Urban services upgrading under the proposed project will use materials and techniques that are compatible with traditional streetscapes, and reduce the impact on the historic environments. Inventive design solutions for the installation o f street lighting, telephone lines and water and drainage services will make upgrading compatible with historic streetscapes. Equally, for historic buildings, the new serviced environments need to be designed using appropriate materials, technology and workmanship to minimize impact on the historic fabric and to permit future maintenance that does not damage the value and significance o f the historic fabric. - 114 -  10. China has extensive heritage protection laws at the state, provincial and municipal levels. While these laws are well formulated and address a broad range o f issues, conservation professionals often lack sufficient staff and authority to effectively implement these laws. At the local level, pressure from property developers, inconsistencies between urban master plans, construction programs and municipal district projects make effective coordination a major priority. To address this issue in relation to the proposed project, multi-sectoral committees were established consisting o f department heads with responsibilities in historic areas (public utility, infrastructure, planning etc.) in order to coordinate the decisions that would affect the city's cultural heritage. 11. As experience and capacity building efforts take hold in Zhejiang province, local officials and planners have recognized that the challenges o f heritage conservation can be addressed through sensitive planning for conservation and development. Conservation master plans have been developed as essential planningtools andwere the fundamental document on which all proposals for development inhistoric areas have been based. Donor and local funds have beenused to support technical assistance teams working with representatives o f the construction and cultural relics bureaus, to develop upgrading and conservation activities inhistoric neighborhoods identified by the cities' master plans. 12. Cultural landscapes and parks are often major visual elements in historic towns. In addition to communicating the values and aesthetics o f the past, parks and gardens will provide urbanresidents with, often rare, opportunities for recreation, contemplation, and the enjoyment o f nature. Authentic conservation and restoration o f historic buildings is the key to maintaining their historic values and significance. Authentic restoration will be based on written, photographic or other archived documentation; original construction techniques and materials, to the greatest extent possible will be used. N e w work will be reversible as far as possible inorder to allow for the use o f future technology or research fmdings. 13, The introduction o f financial and economic sustainability into urban heritage Conservation activities is essential for the proposed interventions to be viable. The proposed project advocates that public heritage sites add to their often inadequate government allocations for operation and maintenance by pursuing activities that generate revenue. To counteract the perceptionthat heritage conservation is simply a drain on government budgets, the project also aims to increase officials understanding and ability to calculate the in-direct revenues created by these heritage sites through the numbers o f tourist visits and spending on hotels, local transport services, cafes and restaurants. Ifthese revenues are taken into account, many o f Shaoxing and Cicheng's monuments, which are expensive to maintain, will be shown to be good investments. As inmany countries, the skills for understanding markets and their mechanisms has yet to be developed and is the subject o f future TA programs. 14. The conservation o f historic areas or buildings that are not protected as cultural monuments requires their adaptation for active modem use in economically viable roles such as housing, commercial space or cultural venues. Finding appropriate new uses for historic buildings that provide an adequate income stream for operation and maintenance requires detailed planning and analysis. For this reason the proposed project will support capacity building in estimating the costs o f repairing and upgrading old structures; identifylng the markets for alternative uses; determining the future costs o f operation and maintenance; and calculating the financial retums that can be expected from these projects. 15. Because redeveloping traditional areas for active will require large investments, the proposed project is supporting capacity building for municipal governments to negotiate equitable development arrangements with the private sector. Inthese partnerships, local government often takes responsibility for - 115-  urban services upgrading. The private sector develops the site under conservation oriented controls that regulate the extent, design, methods and materials for customizing historic buildings and mandate operation and maintenance practices. 16. The conservation work undertaken by urban upgrading projects can. through building awareness, raise the public's appreciation o f their city's heritage. Several municipal leaders have found that public interest and scrutiny greatly expands the city's ability to protect cultural property from such threats as unauthorized demolition and development. Therefore, public participation has been solicited through extensive consultation and social assessment surveys. These actions to encourage people's involvement in developing effective solutions to the trade-offs between conservation and development. Historic City-center of Shaoxing 17. Shaoxing has a 2,400 year old history and is a birthplace o f the Chinese nation, which through the ages has played a key role as a regional political, economic and cultural center. In 490 B.C. it was the capital o f the Yue kingdom, later it was the temporary capital o f the Southern Song Dynasty and in 1130 A.D. was made the alternate capital o f Southern Song Dynasty. The city is renowned for its cultural and physical setting. Wangxizi was a well-known calligrapher and several sites inthe city contain reminders o f his life. Shaoxing was also the home o fthe famous writer, LuXun, inhis early years. His writings include many references to customs and characteristics o f the city. Thirty-three rivers once flowed through the city, crossed by 229 stone bridges. Over the years many have disappeared and now 17 rivers and 78 stone bridges remain. Yet there is still a unique pattern o f streets and rivers referred to locally as "one river with one street", "one river with two streets" and "one river with no street", the latter denoting houses built directly on to the riverbanks. 18. Like many cities o f modern China it is subject to great increase in its urban population and requirement for employment. It has suffered from degradation arising from a lack o f effective detailed physical, social and economic planning and from demographic and economic changes. The old City o f Gucheng's environment had been losing its natural and historic qualities and potential to benefit from its assets. 19. The project seeks to provide options and good practice for project management, design, protection, rehabilitation, area conservation planning andarchitecture, buildingand landscape detailing, urban services and access infrastructure upgrading, and sustainable use o f the built assets o f the historic Old City o f Gucheng in Shaoxing. The City has completed comprehensive planning studies o f the five historic precincts and has set out proposals for urban infrastructure and services, transportation and land use, housing and resettlement, and the Conservation and reuse o f the natural and built environments. Project Scope 20. The project will assist with improvement o f the urban infrastructure and architecture o f historic Shaoxing with the following works and services: Housing Renovation and Restoration o f Historic Sites. This component will assist with improving the living conditions for residents living in old Ming and Qing dynasty housing through repairs, upgrading kitchen and sanitary facilities; improve appearance o f more recent structures to fit within the historic setting (some 1.2 million m2 floor space); restoration and some rebuilding of historic and protected structures (57,000 m2) to prevent further structural deterioration and improve amenity o f the historic sites for residents andtourists. Street- and landscaping. Repair and widening o f existing roads to improve access for emergency services (24,000 m2);re-paving o f roads with more appropriate stone slabs to enhance appearance - 116-  (32,500 m2); new bridges over the new canal section (4); new parks at relocated factory sites to provide recreation for residents andtourists (100,000 m2); and car parking for tourists (30,000 m2) to improve access to the historic sites andprecincts. Underground services. Provision o f tertiary and secondary sewers in the small streets o f the historic precincts (18 km) to intercept numerous discharges into the canals and improve the aquatic environment; water supply and gas pipelines (34 km) to improve public health and provide a cleaner energy source over frequently used charcoal. The collected wastewater will discharged into the city-wide sewer network and subsequently treated at the recently completed sewage treatment plant. Renovation o f Canals and Waterways. Controlling and improvingthe rivers inside the ancient city (dredging, widening, opening up), making new waterways, and building new wharf, including 135,000m3 o f earthworks 25,200m3 o f revetments, 4 new bridges, 22 ancient stone bridges strengthened, and repaired, a new water pump station with a capacity o f 1,901,000m3 Id and 4 steel sluice gates across rivers will be added. These works are discussed inthe Annex on the water engineering. Community Participation. There is also a need for the community to participate in the conservation and planning process to a greater extent and this is hard to achieve when works are undertaken rapidly. It is therefore important that conservation areas are monitored inthe future and the planning policies are to be accompanied by adequate reasoning and analysis so that a sense o f "ownership" and "belonging" are possible at community level. Tourism Develoument. The technical assistance provided during the project preparation helped considerably to provide baseline data for understanding tourism trends and potential pricing structures and economic benefits. The Municipality will strengthen its ability to assist or to give guidance on the planning o f appropriate conversion of historic and existing property for contemporary and sustainable use. Specific technical assistance has been included inthe project to further develop the tourism potentials as well as optimizing the benefits o f tourism development for the local communities. Human Resource Develoument. There remains a need for additional training and development o f good professional practice in the whole process o f planning, surveys o f value and significance, assessment o f condition and potential for upgrading o f existing properties, and understanding market and pricing trends. These are taken into account in devising appropriate technical assistance. CichengTown 21. Cicheng is an ancient town located to the north-west o f Ningbo and situated in a flat lowland surrounded by picturesque agricultural fields and wooded hills. Town is defined by a circular moat, with a man-made lake at the north end, and is comprised o f a densely built, pedestrian-scale urban environment that was first established some 2500 years ago during the Han Dynasty. Although most o f the old city canals have been filled in, the town has maintained its ancient urban form and scale. Most o f the ancient buildings have been lost but there are a few important buildingsthat remain. The school building inthe center o f the village is a particularly important structure, given its age and design, the extraordinary numbers o f scholars from the school who passed the "national emperor's exams" over the centuries. 22. Comprehensive conservation and urban master plans have been prepared by Tongji University, - 117-  covering proposals for the various land use, infrastructure, access, movement and conservation requirements o f the town itself and underpin the proposed project activities as well as the complementary works financed by the town itself. There are several conservation projects already underway: re-building o f the ancient government county hall for use as a conference/function center with retail and accommodation to create a new highprofile landmark for the town; and renovation o f the ancient Kungtemple and school. The proposed phasing o f the improvement program for the entire town (2.16 km2) will be done in three stages over a period o f 11-12 years: i.e. the northeast sector by 2005, the northwest sector by 2008, and the southern sector will take 5-6 years. The first stage o f 0.5 km2 is focused on the northeast whereby many historic buildings such as school, county administration, temple and lake will be completed by 2005. Reducing population density is as one important aspect to improve living conditions within the old town. A 60 ha resettlement area will be constructed at Xing Liang, with 480,000 m 2 building space, to be completed by 2005. Appropriate allocations for the financing o f the non-Bank financed activities have been secured. Project Scope 23. The proposed project support with upgrading o f basic infrastructure and services is an essential element to complement the town's conservation efforts, enhance vehicles access and safety, and improve water quality inthe town canals and moat. The project scope include: Road and bridge improvements. Upgrade o f major roads with a total length o f some 13 km, including resurfacing with stone paving, removal o f illegal structures obstructing traffic flow. Eightnew reinforcedconcrete bridges with a span from 6-12m. Undermound services. Prior to the road rehabilitation new water, sewer and gas pipes will be laid together with new power, telephone and tv cables. Wastewater treatment and disposal. The wastewater collected from the town will be pumped (190 Vs) via a pipeline (600 mm, 13 km) to the Jiangdongnan treatment plant in Ningbo, which will be constructed under the proposed project. Ring-road A modest 7 m. wide ring-road around the town along the moat should enable proper access to all parts o f the historic town while many town-center areas will be pedestrianized. Tourism development, communitv participation and human resource development. See Shaoxing above. -118-  Dongqian Lake 24. Donqian Lake, located some 15 km southeast o f Ningbo, is a natural scenic area inthe eastern part o f the province with numerous historic and cultural sites. The 20 km2 fresh water lake has traditionally been a mixed-use area, comprised o f a variety o f recreational uses, some middle-income housing, fishing activities, and small scale tourism. The municipal government recently embarked on a comprehensive development program to establish it as a major tourism resort, including such components as: upscale residential subdivisions, several hotels, a Buddhist Retreat, spas; "Houseboat Hotel", zoo, botanical garden, golf clubs, horseback riding stables, etc.. With the development of Donqian Lake as a major upscale, mass market resort, and Cicheng Village as a smaller-scale, traditional village, a very good "tourism axis" will arise in Ningbo, comprising a solid "critical mass" o f accommodations, support services and tourism products for the visitor. Given the rapidly growing domestic and regional markets, there should be a good opportunity to attract visitors for overnight stays, especially when the proposed bridge across Hangzhou Bay is developed, allowing quick access from Shanghai. 25. The Dongqian Lake scenic area has a total population o f 20,000, including 18 villages (of which 15 are close to the lake), Fuquanshan tea plantation residents, and army personnel and families. The population is planned to increase from around 40,000 to 50,000 inthe short-term, and 99,500 long-term - comprising 93,500 for Dongqian new town, and 6,000 in seven villages with population ranging from 500 to 2,000. Of the current population two-thirds are being encouraged to move (about 20,000)and resettlement housing has or is being built, particularly in conjunction with the development o f the new town. 26. Over the next five year period, it is planned that some 660 hectares o f land will be developed o f which 55% will be for residential with the remainder being for commercial, institutional, parks and recreation, and industrial uses. The total cost o f the planned investments is more than $500 million. A detailed market analysis showed that there appears to be sufficient demand for the residential developments planned for Dongqian Lake. There is considerable unmet residential demand inNingbo, most o f which i s by existingNingbo residents seeking to upgrade larger andbetter quality residential dwellings. 27. However, the water quality in the lake has deteriorated over time due to soil erosion from the surrounding hills, wastewater discharge from the various towns and villages around the lake, and agricultural pollution. Initial plans to dredge the lake have been abandoned because o f demonstrated limited contribution to water quality improvement as well as the substantial environmental impact o f dredging material disposal. Instead, interception o f wastewater discharges to the lake and comprehensive catchment management measures will substantially reduce the pollution load to the lake. The implementation o f the Catchment Management Plan will enable management and control o f other pollution sources and to develop policy instruments will be developed to restrict and control polluting activities within the lake catchment on a sustainable basis. Project Scope 28. The proposed project assists the rapid tourism development in the area through improving the access to the lake's shores by improving and expanding the road network, providing sewerage and treatment infrastructure to intercept the numerous discharges o f wastewater to the lake thereby improving water quality in the lake, better watershed management through a Catchment Management Plan. The project scope include: Wastewater interception. Construction o f interceptor sewers along the lake shores (54.5 km with - 119-  diameters 300-700mm), includingeight lift pumpingstations (10-100 l/s). Lake-sideroaddevelopment. Constructionof some 15 km of new lakeside roads with an average width of 6 m andresurfacingandwidening of some 18 kmof existinggravelroads. Wastewatertreatment and disposal. The wastewater collectedfrom the existingtown andvillages as well as the proposednew developmentswill be pumped (22,500 m3/d) via a pipeline(900 mm, 13 km) to the Jiangdongnan treatment plant in Ningbo, which will be constructed under the proposedproject Tourismdevelopment. communitvparticipationandhumanresource development. See Shaoxing above. - 120-  MAP SECTION