China - Henan Towns Water Supply and Sanitation Project

Documentof The WorldBank FOROFFICIALUSEONLY ReportNo: 33668-CN PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDLOAN INTHEAMOUNT OFUS$150MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A HENANTOWNSWATER SUPPLYAND SANITATIONPROJECT May 30,2006 UrbanDevelopmentSectorUnit EastAsia Pacific Region This document has a restricted distribution and may be used by recipients only in the perforinnance of their official duties. Its contents may not otherwise be disclosedwithout World Bankauthorization.  CURRENCY EQUIVALENTS (Exchange Rate EffectiveMay 1,2006) Currency Unit = Renminbi(RMB) or Yuan cy) Yl.00 = US$0.125 US$l.OO = Y8.008 FISCALYEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank PPMO ProvincialProject Management Office CAS Country Assistance Strategy PSP Private Sector Participation CQS Consultant Quality Selection QC3S Quality andCost basedSelection C Y Calendar Year RAP Resettlement Action Plan DBO DesignBuildOperate RMB Renminbi, Chinese currency EA EnvironmentalAssessment SA Special Account EMP Environmental Management Plan SOE Statement o fExpenditures EPB Environmental ProtectionBureau TA Technical Assistance ERR Economic Rate o fReturn TOR Terms o fReference FB Finance Bureau WACC Weighted Average Cost o f Capital FM FinancialManagement ws Water Supply FMS FinancialManagement Specialist wsc Water SupplyCompany FRR FinancialRate o fReturn WTP Willingness to pay FY FinancialYear WUC Water UtilityCompany GDP Gross Domestic Product wwc Wastewater Company HPEPD HenanProvincialEnvironmental WWT Wastewater Treatment ProtectionDepartment HPFD HenanProvincialFinancialDepartment I C 3 International Competitive Bidding IBRD InternationalBankfor Reconstruction andDevelopment IDA InternationalDevelopment Association MLA MinimumLivingAllowance MOF MinistryofFinance MWR MinistryofWater Resources NCB National Competitive Bidding PMO Project Management Office Acting Vice President: Jeffkey S. Gutman, EAPVP CountryManagermirector: DavidR. Dollar, EACCF Sector Director: Keshav Varma, EASUR Task Team Leader: TakuyaKamata, EASURI Songsu Choi, SASE1  CHINA HENANTOWNSWATER SUPPLY AND SANITATIONPROJECT CONTENTS Page A. STRATEGIC CONTEXT AND RATIONALE ................................................................. 1 1. Country and sector issues .................................................................................................... 1 2. Rationale for Bank involvement ......................................................................................... 1 3. Higher levelobjectives to which the project contributes.................................................... 2 B . PROJECTDESCRIPTION ................................................................................................. 2 1. Lendinginstrument ............................................................................................................. 2 2. Program objective andPhases :Not Applicable ................................................................. 2 3. Project development objective andkeyindicators .............................................................. 2 4. Project components ............................................................................................................. 3 5 ............................................................ 3 6.. Lessonslearned andreflectedinthe project design Alternatives considered andreasonsfor rejection .............................................................. 4 C. IMPLEMENTATION .......................................................................................................... 5 1. Partnership arrangements(ifapplicable) ............................................................................ 5 2. Institutionalandimplementation arrangements.. ................................................................ 5 3. Monitoringandevaluation o f outcomeslresults .................................................................. 5 4. Sustainability....................................................................................................................... . . . 6 5. Criticalrisks andpossible controversial aspects. ................................................................ 6 6. Loadcredit conditions andcovenants .. ................................................................................. 7 D APPRAISAL SUMMARY . ................................................................................................... 7 1 Economic andfinancialanalyses . ........................................................................................ 7 2. Technical ............................................................................................................................. 9 3. Fiduciary ........................................................................................................................... 10 4. Social ................................................................................................................................. 10 5. Environment ...................................................................................................................... 11 6. Safeguard policies ............................................................................................................. 12 7. Policy Exceptions andReadiness ...................................................................................... 12 Annex 1: CountryandSector or ProgramBackground ......................................................... 13 Annex 2: MajorRelatedProjectsFinancedby theBankandlor other Agencies .................19   Annex 3: Results Framework and Monitoring ........................................................................ 20 Annex 4: Detailed Project Description ...................................................................................... 22 Annex 5: Project Costs............................................................................................................... 26 Annex 6: ImplementationArrangements ................................................................................. 29 Annex 7: FinancialManagement and Disbursement Arrangements ..................................... 36 Annex 8: Procurement ................................................................................................................ 41 Annex 9: Economic and Financial Analysis ............................................................................. 54 Annex 10: Safeguard Policy Issues ............................................................................................ 66 Annex 11: Project Preparation and Supervision ..................................................................... 76 Annex 12: Documents in the Project File ................................................................................. 77 Annex 13: Statement of Loans and Credits .............................................................................. 79 Annex 14: Country at a Glance ................................................................................................. 83 Map: IBRD34329   CHINA HENANTOWNS WATER SUPPLYAND SANITATIONPROJECT PROJECTAPPRAISAL DOCUMENT EASTASIA AND PACIFIC EASUR Date: November 12,2005 Team Leader: Takuya KamataI SongsuChoi CountryDirector: DavidR.Dollar Sectors: Water supply(50%); Sub-national Sector Director: Keshav Varma governmentadministration(30%); Sanitation (20%) Themes: Access to urbanservices andhousing (P); Municipal governanceandinstitution building (P); Environmentalpolicies and institutions (P) 3 Project ID: PO81348 Environmentalscreeningcategory: B .Project Financing Data ", " [XILoan [ ]Credit [ ]Grant [ ]Guarantee [ ]Other: For LoanslCreditdOthers: Total Bank financing (US$m.): 150.00 Proposedterms: A singlecurrency, variable spreadloan, with amaturity of20 years, includinga 5-year graceperiod, front-end fee of 1%subjectto 75 basispoint waiver, andcommitment fee of 0.25% Borrower: People's Republic ofChina Responsible Agency: The HenanProvincial FinanceDepartment's Foreign LoanFinanced ProjectManagementOffice Address: 25 JingsanRoad, Zhengzhou, Henan ContactPerson: Mr. MaXinguang, Director Tel: 0086-371-65808018, Fax: 0086-371-65710590, E-mail:yangl901@,sohu.com; cv371 a,126.com   Estimateddisbursements(Bank FY/US$m) 'Y 2007 2008 2009 2010 2011 2012 2013 h u a l 7.5 30.0 30.0 30.0 30.0 15.0 7.5 hmulative 7.5 37.5 67.5 97.5 127.5 142.5 150.0 Re$ PAD D.7 Havethese been approvedby Bankmanagement? Is approval for any policy exception sought fkom the Board? [ ]Yes [XINO Does the project include any criticalrisks rated "substantial" or "high"? Re$ PAD CS [x]Yes [ ] N o Doesthe projectmeet the Regional criteria for readiness for implementation? Re$ PAD D.7 [x]Yes [ ]No Project development objective Re$ PAD B.2, TechnicalAnnex 3 The project objective is to help create or expandwater supplyandwastewater management services andimprovethe planning, regulatory, and operational capacity o f sector institutions, thereby helpingimprove livingconditions andthe economic growth o fparticipatingcounty towns with relatively low incomes. Project description Re$ PAD B.3.a, TechnicalAnnex 4 Component I: Water Supply (US$203.95 million, o fwhich the IBRD loanis US$114.99 million): (a) water productionfacilities, o f about 790,000 m3lday capacity, in34 counties in 12 municipalities; and(b) over 2,400 kmo fwater distributionnetworks, includinguser connections andinstallation ofmeters. ComponentI.;Wustewuter~anagement(US$44.01million, of which the IBRDloanis US$26.78million): (a) over 440 kmofwastewater collectionpipes in11counties under six municipalities; and(b) wastewater treatment facilities of about 105,000 m3lday capacity infour counties under three municipalities. ComponentIII:TechnicalAssistance (US$7.86 million): Technical assistancefor (a) institutional development including (i) regional planningfor county town development, (ii) sector water regulations, and(iii)projectmanagement andutilitystafftraining; and(b) detailed engineering design anddesign review, as necessary. Which safeguard policies are triggered, ifany? Re$ PAD D.6, TechnicalAnnex 10 > > Environmental Assessment' InvoluntaryResettlement P SafetyofDams   r Significant, non-standard conditions, if any, for: Re$ PAD C.7 Boardpresentation: None Loaneffectiveness: Signing o f eight subsidiary loan agreements, satisfactory to IBRD, betweenproject counties and their countywater utilitycompanies. A secondeffectiveness condition-- "provision o ffinancial managementtrainingto all the relevant staffresponsible for implementation, which i s satisfactory to IBRD"-- willbe deleted from the legaldocuments ifthe Bankreceives from Henanbefore signingo f legaldocuments, evidence that such traininghasbeencompleted. Im~~ementationCovenant: 1)FiveNCBprocurement contractsfor civil works andengineering, andDBOwillbesubject to IBRDreviewprior to completion ofbiddocumentsinthe first year andtwo o feachin subsequentyears; 2) Performanceimprovement actionplansfor the low-performing companies as listedinSection D.1.willbesubmittedto the BankbyDecember 31,2006; and 3) Baofengcounty and Queshancounty will carry out the remedial works inaccordancewith the plans set forth inthe Verification o fDamInspection andAssessments, andimplement operational andmonitoringprocedures, satisfactory to HenanandIBRD. Financial Covenant: Eachwater utilitycompany shall produce total revenuesequivalent to not less thanthe sum o fits: total operating expenses; the amount bywhich debt service requirements exceedthe provisionfor depreciations; andthe amount o f capital expenditures required bythe water utilitycompany to implementits respective parts o fthe project as indicated inAnnex 5. Financial Management Covenant: HenanProvince will provide lBRDwith auditedproject account statementswithin six months o fthe end o f eachcalendar year, duringproject implementation. Disbursement Covenant: Expenditures under each subproject will be eligible for loan financing only ifthere is a signed subsidiary loanagreementbetween the project county andits water utilitvcomoanvliesanda legal oDinion confirmingthe arzreement.   A. STRATEGIC CONTEXTAND RATIONALE 1. Countryandsector issues Industrialandurbandevelopment o frural areas hasbeenkey to China's remarkable economic growth. As a result, the number o ftowns increasedfrom about 3,000 in 1980to about 20,000 in 2003, andabout 400 towns have growninto full-fledged cities. Ingeneral, a "town" is the official designationinChina for smaller urbanareas with fewer than 120,000 residents; they are semi-rural and serve as the frontline o fnon-farm employment for the rural population, which representsalmost 60%o ftotal employment. They are also crucialto economic and social services for the ruralpopulation. While towns have ledthe industrialurban growth, the pacehas slowed recently, constrained by limitedeconomies o f scale, lack o furbanservices, and inadequate humanresources. Giventhe importance o ftowns ineconomic growth andpublic welfare, especially for the ruralpopulation, the government hasmadetheir development a top priority. Henanis the most populous province inChina, with about 97 million inhabitants. Itcovers the central plainfed bythe Yellow andHuaiRiversandi s akey agricultural region, historically considered the core o fthe nation. While agriculture now contributes only about 20% o f its GDP, the provinceis still largely rural, with an urbanpopulationo f only 23% comparedwith 42% for the country as a whole. The province i s relativelypoor: per capita income--RMB 6,4364s about 75% o fthe national average, andthe lowest quartile o f China's per capita distribution. The provincial government hasmade accelerating the paceo furbanization a pivotal development strategy, a crucialpart o fwhich is developing its major towns. However, the water supplyinHenan towns is inadequate andpolluted. Eveninthe major towns, coverage is below 50%, compared with over 90% for Chinesecities andtowns as a whole. One reasonis the overall water scarcity inHenan andthe pollution o f shallow groundwater resources. This insufficient supply o fcleanwater limitsthe towns' capacity to absorb additional population from neighboring rural areas andaccommodateincreasedeconomic activities. To expand the supply will require substantial financial resources that are beyond the current ability o fthe small water utilities, Manyo fthe water utilitycompanies inHenan are earninglittle beyond the financial break-even point, while they are fairly well operated. The unaccounted-for water in project towns is 17%-60%, andthe number o femployees per 1,000 connections ranges fiom 7 to 55. 2. Rationalefor Bankinvolvement A majorpart ofBankassistancefor China's urbandevelopment andenvironment hasbeen support for the rapidbuild-upo fwastewater management capacity inlarge cities, which hasbeen a keynational priority. Morerecently, however, the Bankhasbeenworking with the central government to increasesupport to smaller urbanareas, so they canmeet basic needs. The project intends to help a largenumber o f small urbanareas develop basic urbanservices required both for anacceptablequality of life and for growth. Itwill also be an important opportunity for the Bankto develop andrefineoperational mechanisms that involvealargenumberoflocal governments andutility companies. -1-  While most ofthe engineering skills neededfor project preparation andimplementation are available locally, Bankinvolvement will increasethe efficiencyo fplannedinvestments significantlybyrefiningthe investment scope andtechnologies. The Bank's long-term financing, combinedwith enhancedinvestment plans andcapacity improvement programs, also will reduce the risks relatedto loans from localfinancial institutions to small utilities. 3. Higher level objectivestowhich theprojectcontributes Byaddressingakeydeficiency inwater supply services, theprojectwill improve living conditions for the towns' residentsandthose innearbyrural areas, most o fwhom are poor. This will enhancethe capacity ofthe towns to attract andserve additional residents andbusinesses, which inturnwill increasejob opportunities. Further, the model established duringproject preparation andimplementation, as well as the capacity buildingincludedinthe project, will help Henan extend similar improvements to other small towns andhelp other provinces as well. The project is inline with one o fthe five strategic pillars inthe ChinaCountryPartnership Strategy (CPS, FY 2006-2010, Report No. 35435): managing resource scarcity andbetter environmental management.Inaddition, it supportsthe acceleration ofurbanization and improvement o f growth andwelfare inthe rural andsemi-urban areas, which is one o fthe policy directions of China's 1lthFive-Year Plan(2006-2010). B. PROJECTDESCRIPTION 1. Lendinginstrument The lendinginstrument is a Specific Investment Loanbecausethe proposedproject consistso f clearlyidentified and appraisedphysicalandinstitutionaldevelopment components. Itwill be a single currency, variable spreadloan, with a maturityo f20 years, including a five-year grace period, a front-end fee of 1%subject to a 75 basis-point waiver, andcommitment fee of 0.25%. 2. ProgramobjectiveandPhases :NotApplicable 3. Projectdevelopmentobjectiveand keyindicators The project objective is to help create or expand water supply andwastewater management services and improve the planning, regulatory, andoperational capacity o fsector institutions, therebyhelpingimprove livingconditions andthe economic growthofparticipatingcounty towns with relativelylow incomes. Keyoutcome indicators for the project towns include: (a) the number o fpeople with access to improvedwater supply; (b) the number o fpeoplewith access to improvedwastewater management services; (c) populationgrowth; and (d) aggregatenet profit after taxes ofthe water utilitycompanies. SeeAnnex 3 for moredetails. - 2 -  4. Project components The project will help createor expandurbanwater supply systems in38 projecttowns andcreate four complete andsix partialwastewatermanagementsystemsin 11towns. The projecttowns were selectedon the basis of: (a) current limited access to improvedwater and sanitation services; (b) ability to provideneededcounterpart funding; and (c) willingness to form and staff a county project office. The selectedtowns are all county seats -the county administrative center and inmost cases the largest town of the county or county-level cities. The project counties report to 12prefectural municipalities, which supervise andsupport counties onbehalfo fthe provincial government. While the towns are located throughout the province, all except those in Nanyangmunicipality arewithin a three-five hour drive from Zhengzhou, the provincial capital. Average per capita income inthe counties falls below the national average, and 13 o fthe project counties are either nationallyor provinciallydesignated as "poor." Component 1: Wuter Supply (US$203.95 million, o fwhich the IBRDloanis US$114.99 million): (a) water productionfacilities, of about 790,000 m3ldaycapacity, in34 counties in 12 municipalities; and (b) over 2,400 kmo fwater distributionnetworks, includinguser connections andinstallationo fmeters. Component11:WustewuterManagement (uS$44.01 million, o fwhich the IBRDloanis US$26.78 million): (a) over 440 kmo fwastewater collectionpipes in11counties under six municipalities; and (b) wastewater treatment facilities o f about 105,000 m3ldaycapacity infour counties under three municipalities. ComponentIII;TechnicalAssistance (US$7.86 million): Technical assistance for (a) institutional development including (i) regionalplanningfor countytown development, (ii) sector water regulations, and (iii) project managementandutility stafftraining; and(b) detailed engineering design anddesign review, as necessary. 5. Lessons learned and reflected inthe project design Theprojectdesignincorporates recent lessons from similar Bankprojects inChinaandrelevant ex-post operation evaluations. Three lessonsconsideredduringpreparation were: (a) a tendency to develop excessivecapacity for water and sewerage treatment facilities; (b) a critical need for pricingreformto ensure financially sustainablewater and sanitation services; (c) a strong need for provincial-levelproject managementcapacity. Experience inChina's water and sanitation projects demonstratesthat manylocalgovernments forecast unrealistically highdemand for water and seweragetreatment, anddesign andbuild excessivecapacity. Inaddition, cost estimates used at the design stage tend to be significantly higherthanactualbidprices. Thus, financialresourcesare allocated inefficiently, utility operations are not financially sustainable, andIBRDloans are underutilized during implementation. As a result o f specific guidelines for forecasting methodologies, particularly with respectto populationprojections andlarge-volume industrialwater consumption, project cost estimates havebeenreducedby 30% compared to those at the pre-feasibility design stage. Another lessonfrom previous andon-going operations is that a strong commitment byutility companies andregulatory authorities to carry out tariffreforms i s crucialto ensure financially  sustainable water and sanitation services. Followingthe national government decreemandating municipalities to implementfull-cost pricing for water utility services, many project counties have already increased tariffs which has enabledthe utilities to break even financially. The project's social assessment also demonstratedthat over 70% o fresidents inthe project areas who are not now connected to improvedwater supply andwastewater systemswere quite willing to pay for connections; these residents include the low-income population. Strong project management at the provincial and county level i s essentialfor successfulproject implementation. This is particularlytrue inthe proposedproject, where, given the large number o ftowns involved, an innovative modelwill beneededto scaleupprojectpreparation and implementation. The project design addresses this issuebyprovidingtechnical assistance (TA) to the Provincial Project Management Office (PPMO) through trainingworkshops and settingup an expert group to offer guidance duringproject preparation and implementation. 6. Alternatives consideredand reasons for rejection Alternatives considered are strategic andtechnical. They include: Physical investment in wastewater ~anagement.In2004, Henan introduced apolicy that required at least one wastewater treatment plant to bebuilt ineach county by 2007. However, a recent Bank study of China's wastewater treatment plantshas shown that capacity often far exceeds that o fthe collectionnetwork, and the levelo ftreatment is not cost-effective relative to the quality ofthe incomingwastewater andthe receiving water bodies. Further, many plants become inoperative due to the limited financial andtechnical resourceso fthe local governments andutilities. Thus, the project includes: (a) wastewater systems with aminimumtreatment capacity, compatible bothwith demand andavailable financial resources; (b) conveyance networks for 11towns; and (c) project-financed user connections. Investment needs in wastewater managementwere assessedbasedon specific environmental needs, financial, technical andmanagerial capacities o fthe towns, as well as a decision bythe Province to regulate pollutiondischarges from industries.For example, the technological choice to develop an oxidation ditch or sequencedbatchreactor was made after the professional skills available in the selectedtowns were considered. Private sector~artic~ation. Private sector participation(PSP) will be an important way to further expandthewater supplyandwastewater managementservicesinChina, especially in small urban areas. There hasbeenconsiderable discussionbetween the project towns and potentialinvestors. Nevertheless, few arrangementshave beenconfirmed, mainlybecause o fthe lack o f effective regulations and guidelines; thus, the project will not only support utilities being privatized, but also help develop a regulatory framework andrelevant capacity building, which is aprerequisite for PSP. The institutionaldevelopment component provides for these activities. - 4 -  C. I~PLEMENTATION 1. Partnershiparrangements(ifapplicable) The proposedProject is free-standinganddoes not have other international co-financiers. 2. Institutionalandimplementationarrangements The on-lending andfinancial supervision, construction supervision, coordination o fprocurement, andmonitoringwillbeprovidedbythe government inthe normalchain ofcommandas described below: The proposedloan of US$l50millionwill bemadeto the People's Republic o f China, which in turnwillmakethe loanproceedsavailable to HenanProvince onthe sameterms andconditions as the Bank loanto China. Proceedsfor Components IandI1will be on-lent to water utility companies (WUCs) through counties under subsidiary loan agreementswith a 20-year maturity includingfive year graceperiod, while Component I11will be implemented bythe HenanPPMO. Itwas agreedthat the WUCs will beresponsible for the foreign exchangerisk. The WUCs are the implementing agenciesresponsible for Components Iand11,includingproject design, implementation, monitoringandreporting, andwill procure the civil work contracts for the water supply andwastewater systems. Most o fthem have qualified technical staff. The project will be supervised andsupportedbycounty govenunents (e.g., representativesfrom the regulatory bureaus), alongwith WUC staff. Municipalgovernments will review the quality o fplanningandconstruction as necessary, as well as disbursement applications; theywill thensubmit these to the ProvincialProject Management Office (PPMO). The HenanPPMO, located inthe ProvincialFinance Department, will coordinate the project: in particular, it will have the primaryresponsibility for processing disbursement, managing the Special Account, andsupervising procurement and audits. Itwill bethe implementingagency for Component 111,incoordination with the relevant provincial departments, inparticular, the Construction Department, the Development andReformCommission, the Water Resource Department, andthe Environmental ProtectionDepartment. An expert group was establishedandhasworked withthe PPMOon feasibility studies and project design, andwill continue to provide guidance duringimplementation. The Project Steering Committee, chaired by a Henanvice governor, will offer overall policy guidance and support. 3. Monitoringand evaluation of outcomeslresults HenanPPMOwill consolidate the data at the project levelandproduce semi-annual reports to monitor progress. Baseline data for results' indicators are available andno capacity constraints are foreseen. - 5 -  4. Sustainability Participatinglocal govenunents as well as the WUCs have shown strong ownership o f the project andhave establishedPMOSto prepare andimplement it. Inaddition, the Provincial govement has demonstratedcommitment to quality assurancebymobilizing grant funds for feasibility studies. Most project towns have already introduced full cost-recovery tariffs for their systems and all haveprovided letters o fcommitment to raisetariffs further, according to full cost-recovery principles, oncethe new systems are commissioned. 5. Critical risksand possiblecontroversial aspects Risks RiskMitigationMeasures - I RiskRating with Mitigation Toproject development WSML objective Inadequate financial and technical resources o f fullcost-recovery tariffs and commitment to revisingthem fiuther, as needed. Training staff under TA, Weak project preparationand implementation Technical and managerial weaknesses To component results Uncertainty o f water demand focusing onindustrial water use and Threat to ground and surface water quality due to discharge o f increased volume of untreated wastewater. Water will be unaffordable to the poor andsome industries once private wells are closed. Lack o f counterpart funding Overallriskrating - 6 -  6. Loanlcreditconditionsand covenants Loan Eflectiveness: Signing o f eight subsidiary loan agreements, satisfactory to IBRD, betweenproject counties and their county water utilitycompanies. A secondeffectiveness condition-- "provision offinancial managementtrainingto allthe relevant staffresponsible for implementation, which is satisfactory to IBRD" -- will be deleted fiom the legal documents ifthe Bankreceives fiom Henanbefore signing oflegal documents, evidence that such traininghasbeen completed. ~ ~ p l e ~ e n t a tCovenant: i o n 1)FiveNCBprocurement contracts for civilworks andengineering, andDBOwillbesubject to IBRDreviewpriorto completion of biddocumentsinthe first year andtwo ofeachin subsequentyears; 2) Performance improvement actionplansfor the low-performingcompanies as listedinSection I).1.willbesubmittedtotheBankbyDecember31,2006; and 3) Baofengcounty andQueshancounty will carry out the remedial works inaccordancewith the plans set forth inthe Verification of DamInspection andAssessments, andimplement operational andmonitoringprocedures, satisfactory to HenanandIBRD. Financial Covenant: Eachwater utilitycompany shall produce total revenues equivalent to not lessthan the sum of its: total operating expenses; the amount bywhich debt service requirements exceedthe provisionfor depreciations; andthe amount o fcapital expenditures required bythe water utility company to implement its respective partso fthe project as indicated inAnnex 5. Financial Management Covenant: HenanProvincewill provide IBRDwith audited project account statementswithin six months o fthe end o feachcalendar year, duringproject implementation. Disbursement Covenant: Expenditures under each subproject willbe eligible for loan financing only ifthere i s a signed subsidiary loan agreementbetweenthe project county andits water utilitycompanylies anda legalopinionconfirmingthe agreement. D. APPRAISAL SUMMARY 1. Economic andfinancial analyses EconomicAnalysis Economic benefits o fthe water supply investmentswill vary among towns, depending on residents' willingness to pay (WTP) for improvedwater supply, public healthexternalities, and economic costs. The financial rate ofreturn(FRR) associatedwith cost-recovery tariff levels sets the lower-bound economic rate o freturn(ERR) for eachwater supplycomponent. Ina representative sample of towns, the consumer surplus for residential customers was estimated in order to provide amore complete picture o fthe economic benefits fiom an improvedwater supply. - 7 -  The mainresults o fthe analysis are: (a) on average, residents are willing to pay for animproved water supply at a levelwell abovethe water tariffs projected for eachtown; (b) residential consumers with private water systems are expectedto gradually switchto the improvedsystem, even inthe poorest towns; (c) the relative contribution o fconsumer surplus to the project's overall economic benefits is noticeablyhigh, with ERRSo fwater supplyinvestments averaging above 25%, rangingfrom 19.8%-33.6% under different scenarios; (d) significant consumer surplus will contribute to the project's overall economic benefits inthe poorest towns. Financial Rate of Return The FRRwas reviewed for the water supply andwastewater components for eachtown. Preliminary analysesdemonstratethat the project i s financially viable: FRRsfor water supply components are mostly above lo%, rangingfiom 9.6%-17.8%, andthose for wastewater components are above 5%, rangingfrom 5.1%- 6.1%. Sensitivityanalyses, as presentedinthe table below, indicatethat evenwith impacts from various factors (eg, cost over-runs, inefficient operations and lower than expectedrevenues), the project willbe financiallyjustified. FRRandSensitivityAnalyses Tariffs Most o fthe participatingcounties have already introduced fdlcost-recovery tariffs for the water supply systems andall have committed to revisingtariffs according to such principles once the new systemsare commissioned. Average water supply tariffs areexpected to increasefrom RMB1.3/m3to RMB1.61m3for residential users. A majorityofthe countieshave already introducedwastewater charges through WUCs, typically RMB0.4-0.651 m3,which will contribute to counterpart funds for the wastewater components. At present, average urban households spend 0.5% o ftheir annual income onwater tariffs, andthose with low-incomes spendupto 1.25%. Whentariffs for water supplyandwastewater increaseas planned, the combined amount will rise to 3% - 5% o f averagehouseholdincome. For details onwillingness to pay andaffordability, see the Social Assessment inAnnex 9. WSCs'Fin~ncialPerformance TheWSCs' current financialperformancewill only partlypredict future performance sincethe proposed investments will increasethe productionvolume several times over. Still, water supply companies are generally performingwell enough to break even, primarilybecausethey have introduced fill cost-recovery tariffs. Also, their reasonably strong billingandcollection performance contributes to sound liquidity.None have any significant long-term debt: the typical ratio o flong-term debt to total debt and equityi s 0.1%-10%. Sevenlow-performingWSCs (Jiaxian, Xiayi, Xinyie, Queshan, Xincai, XixianandMengzhou) listeda net loss o fover RMl3 0.5 million in2004; these WSCs will submit actionplansto improvethe performance to the BankbyDecember 31,2006. - 8 -  The WSCs' financialperformance is expectedto improve after project implementation. A typical WSC's annual revenues will increasefromthe current RM.B 1-3 million to RMB 15-20 million. The working ratio (excluding depreciation) isprojectedto remainsound at 35%-45 %. WSCs will generatepositivenet profit margins(before taxes) from 20%-30% within one or two years after the new water supply systems are commissioned. Also, WSCs willbe able to maintain sound current ratios above 1.5-3.0. Their capital structure will be appropriately leveraged: the ratio o f long-term debt to total debt andequity will start from 50%-60%inthe first year o f operation, andrapidly consolidate to around 35%-45% insix years. Fiscal Capacity of County Governments An analysis o feachparticipating county's fiscal capacity was carried out, basedonits debt profile (total outstanding debt over total revenue) andoverall economic strength (per capita GDP). The table below summarizesthe findings: counties withhighper capita GDP anda low levelo f debt have a relativelystrong fiscal capacity to undertake substantial investments (Group I);thosewithlow GDP andlowdebtwill needgradualtariffincreasesandmightrequire subsidies to ensure long-term viability (Group 11); counties that have bothhighGDP andhigh debtwill needto increasetariffs inatimelymannerto minimizeliabilities(Group 111);poor and highlyindebtedcountiesmayaccumulate fimds byphasedinvestment plans andhigher contributions from WUCs or mightneed subsidies (Group IV). Financingplans o fthis project for the last group are fully discussedandfound satisfactory. However, some counties inthis last group, for which county govementsplanto make counterpart contributions, mightrequire subsidies when necessary. FiscalCapacityofthe ParticipatingTowns High GDPper,capita Low GDPper capita Group Icounties (Baofeng, Huangchuan, Group IIcounties (Xixian, Xiayi, Suiping, Xiangcheng, Xinye, Kaifeng, Xincai, Suixian, Zhengyang, Fengqiu, Mengjin, Xiping, Shan, Xinxiang and Yiyang, Queshan, Lankao, Yuanyang, Yima) can afford substantial investments. Sheqi, andXichuan) will need gradual tariff increases to ensure long-term Tongxu, Weishi, Dengzhou and Minggan) Shenqiu, Luoshan, Zhecheng, will needto maximize WUC contributions Songxian, Qixian and Xiangcheng) byincreasingtariffs intimely manner. willneedto accumulate funds before starting investment or mightbe 2. Technical The components represent cost-effective and affordable technical solutions, andavoid creating excessproductive capacity. The technical evaluation covered the following areas: Vater sources: These were assessedfor quality, reliability andproductioncosts. Inabout 80% o f the towns, the source i s groundwater from shallow, mediumanddeep aquifers, which is - 9 -  preferred, given quality and cost considerations,Deepor shallow infiltration galleries were also evaluated as alternative supply sources. Wastewatertreatment:The least-costoptions consideredincluded individualor communal septic tanks, improvedanaerobic filters, primary treatment systems, packagedtreatment plants, stabilization ponds, and centralized or shared treatmentplants. For towns where no or few sewers have been constructed, it was decided to start with separatesewers for storm water and sewage, which is the long-term solution adoptedfor Chinesecities. User connections have been includedinthe projectto ensurethat wastewater plantsreceive sewage flows andobsolete septic tanks are disposed o fwhere sewer lines arebuilt. Water DemandProjections and Excess Capacity: See SectionB.5. Cost Estimates:Unitcostswere estimated for major work items basedon the market price o f materials andconstruction methodology. 3. Fiduciary A. FinancialManagement An. assessment o fthe project's financial managementsystem concluded that it meetsminimum Bankrequirements, as stipulated inBPlOP 10.02. Itwillbeableto provide, withreasonable assurance, accurateandtimely information on the status o fthe implementationinthe reporting format agreedupon, as required bythe Bank. See Annex 7 for details. B.Procurement An assessment ofthe implementingagencies' procurement capacity was conducted and concluded that the overall risk o fthe procurementprocess i s average, Agencies at all levels have allocated adequateresources, includingexperienced staff, to implement the project. The agencies are familiar with Bankprocurement procedures, either through previous andongoing Bank- financed projects or training providedby the Bank.An action planto further strengthenthe agencies' procurement capacity hasbeen agreedupon. To addressChina's Tendering and BiddingLaw's deviations from the Bank Guidelines, waivers for Bank-financed NCB procurement are incorporated into the project's LegalAgreements. See Annex 8 for details. 4. Social A consolidated resettlement actionplan(RAP) was prepared for all 38 towns anddistributed locally to keep the public informed. Resettlement impacts will berelatively small: total land acquisition for all project towns willbe 1,208 mu, with an averageo f27 muper sub-component. All acquired landwill befarmlandlocated inthetowns' suburbs. Inaddition, anextensive rehabilitation program was preparedfor the people affected by landacquisition. The county governmentsrecently named one staff eachto be incharge o fresettlement. Monitoring systems were establishedat all provincial, municipal andcounty levels. A comprehensiveSocial Assessmentwas conductedthat focused onconsumer willingness to pay andaffordabilityofthe increasedwater tariffs. The socio-economic assessmento fvarious stakeholdersat the town and county levels demonstratedthat expected tariffincreaseswillbe moderate andresidentswill have no difficulty payingthe water andwastewater charges. An - 10-  overwhelmingmajority of residentssupportedthe proposedproject to improve access to reliable and safe water. The SA also recommendedthat additional carebetaken to ensurethat the resettlement-related transition will be gradual for the ruralhouseholdswhose landwill beused for the new water plants. Low-incomehouseholdswill benefit from a preferential policy o f receiving2-3 tons o fwater free of charge whenthe towns expand andthey have to connect to the town water supply. Provincialguidelines require a conversion from well-supplied water to the connected water supply during2007 to 2010, three years after the system i s completed. The detailed socio-economic surveyindicates the project will not affect indigenous peoples within the definition o f the Bank's policy. Thus, the Bank's Policy on Indigenous Peoplesdoes not apply* 5. Environment The project is classified as a "Category B" and a consolidated environmental impact assessment (EA) for all project towns was preparedanddisclosed to the public inOctober 2005. The project will have a significant positive impact as it will improve the quality o fwater and wastewater treatment, reducewater pollution andpromote the sustainable development ofthe project towns. Most water supplysystems inthe projectwill rely on deep groundwater resources andas consumers switchto the pipedwater supply, the extraction o fpollutedshallow water will besignificantlyreduced. Inaddition, wastewaterwillbecollected from urbanresidencesandbe treated to remove pollutants, thereby improvingthe quality ofthe receiving surfacewaters. Potential negative impacts duringconstruction will be relatively minor and easily mitigated. Details of mitigation measuresandmonitoring requirements areprovidedinthe EA andthe Environmental Management Plan(EMP). The PPMO will beresponsible for keeping track o f andreporting onthemonitoringofall implementation entities. Possiblenegativeimpacts during the operational phasewill also berelativelyminor andmany o fthe concerns were addressedin the facilities' design. See Annex 10 for more details on environmental issues. The EA report for eachcounty, the consolidatedEA andthe EMP are available inthe project files. Safety of Dams The proposedProject will not involve constructing new dams or rehabilitatingothers. However, four water supply schemes underthe Project will draw water from reservoirs with existingdams: reservoirs inLushan County, QueshanCounty, MingganCounty, andBaofeng County. These reservoirs are usedmainly for irrigation, flood control andwater supply; eachhas a unitthat managesdaily operations andmaintenance.The project's proposedwater intake systems, water channels andpipeswill neither affect the reservoirs' operations nor the dam structures. Accordingto OPiBP 4.37, anindependentspecialist reviewedthe safety o f the four dams. The LushanandMingganreservoirswere rehabilitatedin2005 andfoundto besatisfactory, in compliance with national regulations and IBRDrequirements. Rehabilitationo fthe reservoirs in QueshanandBaofeng i s scheduledto be completed by 2007, which will ensuretheir safety, whenwork underthe projectbegins. Damsafetywillbemonitoredeveryyear, according to the Rules ofDamSafety. These aspects are reflected inEMP. -11-  6. Safeguard policies Safeguard PoliciesTriggered by the Project Yes N O EnvironmentalAssessment (OPIBPIGP 4.01) [XI [I NaturalHabitats (OPIBP 4.04) Pest Management(OP 4.09) Cultural Property (OPN 11.03, beingrevisedas OP 4.11) InvoluntaryResettlement (OPIBP 4.12) IndigenousPeoples(OD 4.20, beingrevisedas OP 4.10)' Forests(OPIBP 4.36) Safetyo fDams (OPIBP 4.37) ProjectsinDisputedAreas ,(OPIBP/GP 7.60)2 ProjectsonInternationalWaterways (OPIBPIGP 7.50) 7. Policy Exceptions andReadiness No exceptions are requiredfrom Bank policies. The project meets all keyreadinesscriteria, 'Including ethnic minorities Bysupportingthe proposed project, the Bankdoes not intendto prejudice the finaldetermination ofthe parties' c l a i m onthe disputed areas - 12-  Annex 1: Country and Sector or ProgramBackground CHINA: HENANTOWNSWATER SUPPLY AND SANITATION PROJECT Urbanization and small towns Towns represent a major share o fChina's growingurbansystem andare crucial to the country's socio-economic development. The category of"town" or "small town" (zhen or xiaochengzhen) refers to a semi-urbansettlement, larger andmore urbanthana village but smaller than a large city (shi). Inthe Chinese official definition, a statutory town (iimhizhen) i s an administrative jurisdiction at the same level as a township (xiang); bothare part o f a county andcontain one or more `4c0mm0n" towns, as well as manyvillages. Duringthe 1960sand 1970s, towns grew slowly-although faster than cities-under policies and programs designed to decentralize the population andindustries, which were neither efficient nor sustainable. However, recent economic reforms have fueled their rapidgrowth. Thousandsof villages grew into officially designatedtowns, which increasedfrom fewer than 3,000 in 1980to over 20,000 today, inadditionto 30,000 that are truly "small" or "townships." While all towns are sometimes called "small," almost 500 havepopulations o fover 100,000 and about 400 have grownto hll-fledged cities inthe last two decades. Their development over the past 25 years hasbeenclosely linkedto broader national urbanization trends andthe country's rapid andfar-reaching economic transformation. While changing statistical conventions andadministrative designations ofcities andtowns have made it difficult to precisely define the country's urbanization trends, the consensusis that Chinais now slightlyover 40%urbanizedandtheproportionofurbanareas to the total hasdoubled over the last 25 years. This is broadly consistent with changesinthe country's economic structure, where secondaryandtertiary sectors now account for over 85% o f GDP, up from about 65%inthe early 1980s. Therural industries' andtowns' rapidgrowthcanbeattributed at least partlyto opportunities left unexploited by urbaneconomies previously basedon over-regulated andoverprotected state- owned enterprises. Township andvillage enterprises insuburbanandperi-urban areas faced fewer constraints to formation, operation, andhenceemployment generation. Thus, the most rapidnon-farm employment growth inthe first halfofthe 1990s occurred intowns on the urban periphery andinsmaller cities. One constraint to the growth of towns i s environmental degradation. Manyhave few water resourcesas well as severepollution. Wastewater discharges from semi-urban areas in metropolitan regions are already close to or even exceedthose from cities, seriously polluting surfaceand shallow groundwater. Inresponse, the Government introduceda nationalpolicy mandating at least one wastewater treatment plantbebuilt insmall towns by2007. The new policy also includes integrated water resource management, commercialization ofthe water and wastewater sectors, tariffs at full cost-recovery levels, andprivate investment. Project towns The 38 project towns are in 12municipalities: Jiaozuo, Kaifeng, Luoyang, Nanyang, Pingdingshan, Sanmenxia, Shangqiu, Xinxiang, Xinyang, Xuchang, Zhoukou andZhumadiari, - 1 3 -   i0,698 3,632 4,757 5,684 4, i22 NP 3,056 I"2 2,637 S,tMO 7 3,779 NP 5,365 NP S,Z80 N/A N0% 3,146 NP ~ ~ 6 9NP~ 3,195 5,446 2,687 2,664 MP 5,859 4,46 1 2,884 PP NiA PP 4,46 i %!A  Current status of Henan 's water resources HenanProvince i s located incentral China, covering the large andmoderately fertile plain betweenthe Yellow andHuaiRivers, with aneast-to-west distance o f 580 kmanda south-to- northdistance o f 550 km. Its total landareais 167,000 km2andconsists o f 18 prefecture-level cities (municipalities), 89 county-level cities and2,130 towns. The populationin2003 was 96.7 million, o fwhich, 77.2 million (79.8% o fthe total) were inagriculture. Henanhas aserious water shortage. Total averagewater resourcesareestimated about40.5 billion m3 a year. According to 2003 population andagricultural landuse statistics, annualper capita water resourceswere 420 m3, and farm land375m3, which i s only a fiftho fthe national average. Henan's northern andeasternareas, where most economic activities are basedon agriculture, have even less. While manyofficial statistics show over 90% ofthe populationinHenan's towns draw their water supply from taps, the 2003 census found the figure to be only 45%, and insome areas, the numberwas below 20%. An estimated90% ofenterprisesdependonprivatewells for their water andmanyruraltowns draw their water from small, oldwells, alarge number ofwhich are contaminated. Private wells account for 50% o fthe total supply, andwater qualitytends to be poor. There are growing concernsthat groundwater isbeingover-exploited. Since the late 1980s, groundwater levels throughout Henanhave continually dropped, due to increased exploitation. Thepercentageofwater inaquifers that are lessthan4m deep decreasedfrom 82.8% in1974to 32.3% in2002, while that o f aquifers 4-8m deep increasedfrom 16.3% to 50.4%. Earlierstudiesdemonstratedthat groundwaterhasbeenincreasingly pollutedandsmallseasonal rivers inurbanareas are more contaminated andusedas sewage canals. Water quality intowns i s worse or equally bad as inbigcities, due to their industrialstructure andlack o f governance and enforcement o f environmental lawslregulations. With the development o findustryand agriculture, andincreasing urbanization, more wastewater hasbeen discharged without proper treatment, while frequent use ofpesticides and fertilizers, andrandompiles o f solidwaste have causedsecondarypollutionof surfacewater. The major industries inmanyHenantowns are paper andpulp, chemicals andfoodprocessing, all o fwhich are highlypolluting. Water utility companiesand sector issues The towns' water supplysystemsare usuallysmall andsimple. The averagenumber of householdsservedis 10,000, but ranges from 5,000 to 19,000. Water productionis inthe range o f2,800m3/day-43,400m3/day,with an averageo f 8,300 m3/day.Most water utilitycompanies (WUCs) managetheir operations moderatelywell. Average unaccounted-for water is 38%, but the number rises to 60%-70% insome systems. EachW C ' s performance indicators are presentedinTables 1-3 below. Most WUCs' annualrevenuesare RMB2-3 million. The working ratio, at 0.75-0.90, i s sound. Most report only marginalnet profits or losses-oflessthan 5% o ftotal revenue-mainly becausemanycounties grantedthem tariffincreasesinrecent years, basedon fill cost-recovery - 16-  - 17-  I I I I - I S -  Annex 2: Major RelatedProjectsFinancedbythe Bankandlor other Agencies CHINA: HENANTOWNS WATER SUPPLYAND SANITATION PROJECT Latest ISRRatings Project Sector Issue Development I Implementati China Liuzhou Environment - Wastewater treatment, solid waste Management (CT47810) management S S China Poor RuralCommunities - Livelihood security, andrural poor Development (Cr 73100) participation S S China -Chongqing Small Cities Infrastructure service delivery, and lnfrastructure Improvement (Cr 47940) rapidurbangrowth S S China Smallholder Cattle Development - Henan cattle productivity, marketing (Cr 45300) linkages, and farmer incomes S S China Water Conservation (Cr 45890) - 1Irrigation, water resource management and farmer incomes I HS I HS China HaiBasinIntegratedWater and - Water resource management and Environment management (GEF) pollutioncontrol S s China HebeiUrbanEnvironment(Cr - Environmentaldegradation o fwater 45690) and landresources, safe water supply S s China RuralWater IV (Cr 44850) - Safe water supply, sanitationand healthbehaviors inpoor rural areas I S I S China -Tai BasinurbanEnvironment Water resources degradation andurban (CT47480) environment improvement S 3 China - GuangdonglPRD Urban Environment (CT47420) Rationalizationo fenvironmental S S china GEF GUngdonflRD Urban service delivery inthe regional plan Environment (CTF533 59) M S S China -HunanUrbanDevelopment (Cr Floodprotection, wastewater and ajr 47510) pollution S M S China Ningbo Water and Environment - Quality of water andwastewater Management (CT47700) - services, public healthprotection I S I S Other MDBs and Agencies West HenanAgricultural Development Horticulture andlivestock industry of Project (ADB) low-income households Henan Wastewater Managementand Wastewater rngtand water supply for Water Supply Project (ADB) public healthandurban environment Private Sector Water Supply Project in China (ADB) Safe water supply to urbanresidents Water andAgricultural Managementin Water resources management in Hebei(WAMH) Project (AUSIUD) agriculture - 19-  Annex 3: ResultsFrameworkandMonitoring CHINA: HENANTOWNS WATER SUPPLY ANI) SANITATION PROJECT FrameworkofResults PDO OutcomeIndicators In The project objective i s to support the Improvedquality andreliabilityo fwater Tomeasureprogresstowardsthe PDO urban transition and improve living supply andwastewatercollection in with regardto improved servicesfor the conditions inmajor towns by helping participatingtowns. target population andpoor households expand water and wastewater services (HH) inparticipatingtowns. and improve the sector's regulatory, managerial, and operational capacities. Evidence of improved operational efficiency To recommend planningadjustmentsfor andfinancial viability ofparticipating local govemments andWUCs regarding WUCS. future investments andor operations for water and sewerage systems. Aggregatepopulation growth o f participatingtowns. ResultsIndicatorsfor EachComponent Use of ResultsMonitoring ComponentOne: Water Supply ComponentOne: Water Supply ComponentOne: o Expansionof water production o Number ofpeoplewith accessto To verify the delivery o fproject capacity and connections improvedwater supply outputs; track progressofphysical o Meter installation/ replacement works andPPMO's operational o Expansionofwater distribution performance; ensure effective delivery networks innew service areas to the underservedpopulation. ComponentTwo: Wastewater ComponentTwo: WastewaterMgt ComponentTwo: Management o Expansionofsewagecollection o Numberofpeopleinprojecttowns To track the progressofphysical works systems withaccess to wastewatermanagement anddelivery ofexpectedproject o Constructionofwastewater services outputs; ensure effective delivery to the treatment facilities underservedpopulation. ComponentThree: Capacity Building ComponentThree: Capacity Building ComponentThree: o InstitutionalDevelopment o Netprofits after taxes ofparticipating To help Henanprovincemake necessary o RegulatoryDevelopment and wscs. adjustmentsto ensure utilitiesare UtilityManagement managedandoperatedefticiently, plan o Projectmanagement capital expenses for water supply, and regulate utilitieseffectively. - 20 -   Annex 4: DetailedProjectDescription CHINA: HENANTOWNS WATER SUPPLYAND SANITATION PROJECT The projectwill support sustainablewater andwastewater investments in38 towns under 12 Henanmunicipalities; 13 ofthe towns are classified as poor counties. To assureinvestments and institutions are sustainable, the project includes technical assistance(TA) to improve capacity for implementingprojects, managing utilities andperformingregulatoryactivities. Water Supply: (Total Cost: US$203.95 million) The component will improvewater supply in38 towns under 12municipalitiesby increasing water productioncapacity, rehabilitating andexpanding distribution networks, as well as installingor replacingmeters andconnections inareas relyingonprivatewater supplies. The component will construct: (1) 396 wells that will tap aquifers at different depths (fiom 70 meters-400 meters), depending onthe geographical locationandwater quality; (2) water intakes andwater treatment plants, usingsurfacewater fiomrivers to produce 130,000 m3 eachday; (3) associatedground storage facilities andpumpingstations, 205 kmo fraw transmission pipelines, and2,468 kmoftransmissionmains anddistribution networks. Itwill also install: (1) water connections and200,000 meters so as to serve usersthrough the extended distributionfacilities; and(2) pressure andflow measurement equipment, communications facilities, laboratory and maintenance equipment andmaterials to rehabilitate existing assets. Details for eachcity are providedinthe table below. Water sources are predominantly groundwater aquifers already tappedby existingmediumand deep wells that can increasetheir safe yields reliably. As groundwater is generally o f good quality, simple treatment will involve chlorination. Inseveral towns where groundwater cannot be economically developed, surfacewater sources will beused: these includeone river andsix reservoirs whose quality is reasonableandwhich have no substantial pollutionproblems. Treatment will involveconventional sedimentation andfiltrationwith chlorination. The quality o fthe treatedwater will conformto national drinkingwater standards. The supply willbe continuous (on a 24-hour basis) and service coverage i s expected to increase fi-om an averageo f 40%-50% to 80% by 2010. WastewaterManagement(Total Cost: US$44.01million) This component includes wastewater treatment o f 105,000 m3ldayinthe towns ofBaofeng, Mengjin, Songxian, and Yuanyang, underthree municipalities. Collectionnetworks of440 km will beconstructed inthe four towns andinsevenothers (Huangchuan, Luoshan, Runan, Suiping, Suixian, Tongxu andXinye). Sewer connections will be funded inareas where the present systemo f septic tanks will bereplacedby sanitary systems. Henanplansto providewastewater managementintowns inanincremental manner andwill follow country guidelines to use separate sewer systems for sewage andrainwater. A few larger towns will beprovidedconveyance systems andto a lesser extent, treatment facilities. Others will continue usingindividualbuildingor areaseptic tanks. - 22 -  Primarytreatment will involve screening, grit removalandmechanicaldecantation, andtreated effluent will meet dischargewater quality standards. Sludgewill be disposedo f inexisting landfills along with municipalsolidwaste. Sanitary sewer networks, sized for future extension, will beprovidedto ensure that most ofthe wastewater generated will be conveyed to the treatment facilities andthat the self- cleaning velocity i s met evenunder initial low levels o f service, Where sewers are providedwithout any kindoftreatment, wastewaterwillberemoved from thepopulatedareas onaninterimbasisto other basic facilities, such as communal septic tanks or stabilization ponds. Wastewater treatment facilities will be constructed later, after the project is completed. Table 4-1: Summary of Project Sub-Component byTowns KaifengMunicipality 1 Weishi 7,000 35,000 27,120 65.38 2 Tongxu 8,000 35,000 17,680 75.25 3 Lankao 5,000 30,000 28,670 78.07 4 Kaifeng 18,000 10,000 5 1.45 5 Qixian 25,000 25,100 63.77 LuoyangMunicipality 6 Mengjin 5,000 20,000 10,670 51.70 7 Yiyang 10,000 25,000 23,700 49.16 ~ 8 Songxian 7,000 30,000 15,240 68.90 PingdingshanMunicipality 9 Baofeng 8,000 15,000 16,385 77.19 10 Jiaxian 10,000 20,000 17,100 40.43 11 Lushan 30,000 20,500 72.06 XinxiangMuniciaplity 12 Xinxiang 40,000 6,000 54.57 13 Yuanyang 20,000 30,000 19,460 47.31 14 Fengqiu 25,000 16,100 33.72 XuchangMunicipality 15 Xiangcheng 20,000 20,000 24,100 65.25 SanmenxiaMunicipality 16 Shanxian 80,000 20,000 21,240 40.49 17 Yima 13,000 22,550 40.71 ShangqiuMunicipality 18 Suixian 5,000 20,000 12,620 31.65 19 Xiayi 5,000 30,000 24,100 59.38 20 Zhecheng 6,000 17,100 67.93 NanyangMunicipality 21 Dengzhou 25,000 30,000 26,530 88.77 22 Xinye 12,000 20,000 24,100 66.45 23 Sheqi 7,000 20,000 13,900 52.16 24 Xichuan 5.500 25,000 20,300 45.67 - 23 -  Current Number of Estimated # County DesignedWS Add. WS Water Capacity (&/day) Supply DNw) scocm) (&/day) wT projectcost (RMBm) (&/day) Connection Zhumadian Municipality 25 Queshan 4,600 15,000 20,640 55.13 43.1 26 Xincai 5,000 20,000 18,100 56.58 44.4 27 Xiping 10,000 20,000 23,200 40.54 50.1 28 Zhengyang 5,000 15,000 15,500 61.54 48.1 29 Suiping 6,000 30,000 24,100 67.94 25.87 82.7 30 Runan 5,000 30,000 17,240 67.96 36.76 81.9 Zhoukou Municipality 31 Shenqiu 8,000 20,000 25,300 68.84 55.9 32 Xiangcheng 6,000 24,100 73.00 35.4 Xinyang Municipality 35 Luoshan DN:DistributionnetworkI TechnicalAssistance (TotalCost:US$7.86million) Project investments will be completed with TA on: (a) institutionaldevelopment; (b) detailed engineering design anddesign review; and (c) localoperation andmaintenance training (a) InstitutionalDevelopment(US$3.20 million) Project investments will becomplementedwith TA to: (i) regionalplanningfor small improve town development; (ii) strengthenregulatory capacity to support the commercialization o futility companies andprivatesector participationinthe water sector; and (iii) project support implementation. TA willbe implementedthrougha combination o f studies, overseastours, and domestic training. Detailedterms o freference are providedinthe Project File. The component includes the following sub-components: (i)RegionalPlanningforSmallTownDevelopment(US$700,000), TAwillsupportthe socio-economic development andurbanization of small towns by strengthening planning capacity at bothprovincialandcounty levels through: (1) strategic planningmodels for county town development insome demonstration counties; (2) studytours abroadto provide high-levelofficials with first-hand experience o fbest-practice regionalplanningand(3) domestic trainingto disseminate lessons from the study tour and facilitate transfer o f knowledge fromthe demonstration counties to others. TA will be conduced under the guidance ofthe Steering Committee. - 24 -  (ii)WaterSectorRegulation(US$700,000). TAwillhelpHenaninitseffortto:(1)improve institutionalcapacity to performregulatory functions at the provincialand county levels; and (2) establish aregulatory framework for the WUCs' commercialization andprivatesector participation(PSP). The following activities will be conducted to meet these objectives: (1) assessinginstitutionalcapacity for regulatingthe sector andcreating anaction planto address keyregulatoryneeds; (2) designing acommercialization strategy for WUCs to improve sector efficiency; (3) producing a roadmapto attract PSP andoffer regulatory advice on selectedPPP transactions; (4) conducting a studytour abroad to provide high-level officials with first-handexperienceofbest-practiceregulations; and(5) offering domestic trainingto familiarize county officials andWUCs withkeyregulatorydevelopments. TA will be implementedunderthe Steering Committee. (iii)ProjectManagement(US$1.14 million). TAwillstrengthenthePPMO's and .implementing agencies' managementcapabilities in:(1) technical issues; (2) monitoringand evaluation; and(3) procurement andcontract supervision. The component will bemanaged at the provincial level; however, the experts group will also help the WUCs implement the project inan adequate andtimely manner. (iv) Utility Staff Training (US$660,000). TA will support the training o f all water and wastewater utility staffresponsible for work o foperation andmaintenance (including board members, treatment plant attendants, equipment repairmen, andpumpingstation foremen), byproviding specific engineeringandtechnical training for operationandmaintenance ofthe newsystemsbuiltunderthe project. Itis expectedthat 3,000 willparticipate. The PPMOhad carried out a "Training Needs Assessment" between appraisal andnegotiations. The report has defineda set o fproposals for the project implementationperiod, includingthe strengthening of training institutes andtrainingprograms, andit will list associatedcosts. (b) DetailedEngineeringDesign and DesignReview (US$4.66 million) This TA component will support, asnecessary, design andreview for engineering work o fwater supply, wastewater treatment plants, distributionnetworks, sewer networks andhousehold connection. Giventhe largenumber o fproject town andtheir limitedexperience inexpanding water supplyandwastewater systems, the component will assist individual utility companies to design engineeringworks financed under the project andreview technical soundness. This component will not only bringbothinternational andlocal expertise during engineering design process, but also ensure that the design is well adaptedfor local environments anddemands. -25-  Annex 5: ProjectCosts CHINA: HENANTOWNS WATER SUPPLY AND SANITATION PROJECT Project Total Cost ByComponent andlor Activities Local Foreign Total US$ million US$ million US$million Component I,Water Supply: ---- Rehabilitation 126.75 77.20 203.95 Production 54.27 29.22 83.49 DistributionNetworksand End-userConnection 68.29 45.53 113.82 of ExistingWells and Networks 1.51 1.01 2.52 Power Supply 2.68 I.44 4.12 Component II,Wastewater Management: 27.07 16.95 44.01 -Treatment -- Sewer Supply 8.48 6.94 15.42 Networksand UserConnections 18.45 9.93 28.38 Power 0.14 0.08 0.22 Component 111, TechnicalAssistance: -- TechnicalAssistance 5.12 2.74 7.86 for InstitutionalStrengthening 1.16 2.04 3.20 Designand Design Review 3.96 0.70 4.66 LandAcquisition and Resefflement 30.56 0.00 30.56 ProjectOverheads 13.80 2.44 16.24 Total Project Costl: 203.31 99.32 302.62 InterestduringConstruction: 29.38 29.38 CommitmentFee: 3.32 3.32 Front-endFee: 0.38 0.38 Total Financing Required:, 203.31 132.40 335.70 1. Identifiable taxes andduties are US$m10.61, andthe total project cost, net oftaxes, is US$m292.48. Therefore, the share o f project cost net oftaxes is 51.3%. Table 5-1: Project Costs bv Financing Expenditure ByComponentandlor Activities IBRD Financing Local Financing Total US$million US$ million US$ million ComponentI,Water Supply: - Production 114.99 88.96 203.95 --- Rehabilitation 38.64 44.85 83.49 DistributionNetworksand End-userConnection 74.69 39.12 113.82 of ExistingWells and Networks 1.66 0.87 2.52 Power Supply 0.00 4.12 4.12 Component11, WastewaterManagement: 26.78 17.23 44.01 -- Sewer -Treatment 8.15 7.26 15.42 Networksand UserConnections 18.62 9.75 28.38 PowerSupply 0.00 0.22 0.22 Component111, TechnicalAssistance: --TechnicalAssistancefor 7.86 0.00 7.86 InstitutionalStrengthening 3.20 0.00 3.20 Designand Design Review 4.66 0.00 4.66 LandAcquisition and Resefflement 0.00 30.56 30.56 ProjectOverheads 0.00 16.24 16.24 Total Project Cost1: 149.63 153.00 302.62 InterestduringConstruction: 29.38 29.38 CommitmentFee: 3.32 3.32 Front-end Fee: 0.38 0.38 Total Financing Required: 150.00 185.70 335.70 1Identifiabletaxes and duties are US$m10.61, andthe total project cost, net oftaxes, is US$m292.48. Therefore, the share of project cost net oftaxes is 51.3%. - 26 -  Table5-2: FundingArrangements for Water SuDplv andSewerageNetwork(RMB'OOO1 Local County funding World Bank Commercial StateBonds County wsc Bank KaifengMunicipality 1 Weishi 60,056 34,100 (57%) 0 (0%) 0 (0%) 12,836 (21%) 13,120 (22%) 2 Tongxu 80,987 46,347 (57%) 7,300 (9%) 0 (0%) 27,000 (33%) 340 (0%) 3 Lankao 51,668 30,000 (58%) 0 (0%) 0 (0%) 21,668 (42%) 0 (0%) 4 Kaifeng 26,996 16,095 (60%) 0 (0%) 0 (0%) 10,901 (40%) 0 (0%) 5 Qixian 58,899 32,895 (56%) 0 (0%) 0 (0%) 26,004 (44%) 0 (0%) LuoyangMunicipality 6 Mengjin 48,471 26,366 (54%) 5,000 (10%) 0 (0%) 10,000 (21%) 7,105 (15%) 7 Yiyang 57,894 32,017 (55%) 7,000 (12%) 0 (0%) 14,500 (25%) 4,026 (7%) 8 Songxian 49,726 27,932 (56%) 0 (0%) 0 (0%) 21,794 (44%) 0 (0%) PingdingshanMunicip. 9 Baofeng 45,335 24,000 (53%) 11,000 (24%) 0 (0%) 10,000 (22%) 335 (1%) 10 Jiaxian 35,071 20,000 (57%) 0 (0%) 7,500 (21%) 5,000 (14%) 2,571 (7%) 11 Lushan 57,689 32,000 (55%) 0 (0%) 0 (0%) 0 (0%) 25,689 (45%) XinxiangMunicipality 12 Xinxiang 46,000 26,000 (57%) 8,000 (17%) 0 (0%) 7,000 (15%) 5,000 (11%) 13 Yuanyang 57,018 27,360 (48%) 14,540 (26%) 2,500 (4%) 3,000 (5%) 9,618 (17%) 14 Fengqiu 54,949 29,193 (53%) 5,000 (9%) 8,500 (15%) 5,000 (9%) 7,256 (13%) Xuchang Municipality 15 Xiangcheng 54,829 30,462 (56%) 10,000 (18%) 0 (0%) 0 (0%) 14,367 (26%) Sanmenxia Municip. 16 Shanxian 49,504 28,000 (57%) 0 (0%) 20,000 (40%) 0 (0%) 1,504 (3%) 17 Yima 41,263 24,000 (58%) 0 (0%) 0 (0%) 12,281 (30%) 4,982 (12%) Shangqiu Municipality 18 Suixian 69,308 36,840 (53%) 10,000 (14%) 0 (0%) 9,000 (13%) 13,468 (19%) 19 Xiayi 58,755 32,000 (54%) 0 (0%) 6,000 (10%) 0 (0%) 20,755 (35%) 20 Zhecheng 48,350 22,000 (46%) 10,000 (21%) 7,500 (16%) 0 (0%) 8,850 (18%) NanyangMunicipality 21 Dengzhou 83,725 45,735 (55%) 18,000 (21%) 0 (0%) 8,000 (10%) 11,990 (14%) 22 Xinye 71,832 40,787 (57%) 8,000 (11%) 0 (0%) 16,000 (22%) 7,045 (10%) 23 Sheqi 53,227 28,855 (54%) 13,000 (24%) 0 (0%) 11,372 (21%) 0 (0%) 24 Xichuan 47,328 27,000 (57%) 10,000 (21%) 0 (0%) 6,000 (13%) 4,328 (9%) Zhumadian Municip. 25 Queshan 35,027 27,360 (78%) 0 (0%) 6,000 (17%) 6,000 (17%) 3,027 (9%) 26 Xincai 41,602 24,000 (58%) 4,000 (10%) 7,000 (17%) 6,000 (14%) 602 (1%) 27 Xiping 50,348 27,479 (55%) 0 (0%) 0 (0%) 10,000 (20%) 12,869 (26%) 28 Zhengyang 44,275 24,000 (54%) 6,000 (14%) 9,500 (21%) 7,000 (16%) 2,225 (5%) 29 Suiping 85,680 49,497 (58%) 7,150 (8%) 0 (0%) 27,033 (32%) 2,000 (2%) 30 Runan 75,150 30,000 (40%) 10,000 (13%) 0 (0%) 35,150 (47%) 0 (0%) Zhoukou Municipality 31 Shenqiu 53,606 28,000 (52%) 0 (0%) 10,000 (19%) 8,000 (15%) 7,606 (14%) 32 Xiangcheng 65,340 30,000 (46%) 0 (0%) 15,000 (23%) 0 (0%) 20,340 (31%) Xinyang Municipality 33 Minggan 43,527 24,193 (56%) 5,000 (11%) 0 (0%) 11,000 (25%) 3,334 (8%) 34 Xixian 38,428 22,000 (57%) 10,428 (27%) 0 (0%) 6,000 (16%) 0 (0%) 35 Luoshan 75,348 48,000 (64%) 18,000 (24%) 0 (OYO) 8,000 (11%) 1,348 (2%) 36 Yangshan 96,132 49,660 (52%) 0 (0%) 0 (0%) 43,435 (45%) 3,037 (3%) 37 Huangchuan 62,886 35,562 (57%) 0 (0%) 17,500 (28%) 9,824 (16%) 0 (0%) Jiaozhou Municipality 38 Mengzhou 66,201 35,000 (53%) 31,201 (47%) 0 (0%) 0 (0%) 0 (0%) Total funding iiiit bi;lion 0 218 billion 2*142 billion !*?75 (55%) (11%) 0.117 (5%) billion 0*415 (19%) (10%) ..27 -  Table 5-3: Funding arrangements Wastewater Treatment Plants CRMB'000) Local County funding World Bank Commercial State Bonds County WWC Bank LuoyangMunicipality 6 Mengjin 50,939 24,800 (49%) 0 (0%) 0 (0%) 16,139 (32%) .10,000 (20%) 8 Songxian 77,844 42,535 (55%) 14,000 (18%) 0 (0%) 12,000 (15%) 9,309 (12%) Pingdingshan Municip. 9 Baofeng 57,947 30,342 (52%) 6,205 (11%) 21,400 (37%) 0 (0%) 0 (0%) Xinxiang Municipality 13 Yuanyang 57,000 28,500 (50%) 0 (0%) 10,000 (18%) 18,500 (32%) 0 (O%] Totalfunding 243,730 126,177 (52%) 20,205 (8%) 31,400 (13%) 46,639 (19%) 19,309 (8%) - 28 -  Annex 6: ImplementationArrangements CHINA: HENANTOWNS WATER SUPPLYAND SANITATIONPROJECT Eachphase o fproject implementation (e.g., the on-lending andfinancial supervision, construction supervision, coordination o fprocurement andmonitoring) will beprovidedby the government inthe normal chain o f command. The organizational structure o fthe implementing agenciesis as follows: Chart 1:OrganizationalStructureofProiectImplementationApencies Table 6-1describesthe responsibilities andimplementation arrangementsat eachlevel. - 29 -  I I I 0 rc, I  I 4 I 8 .I M I I 8  Provincial Project Management Office(PPMO) ThePPMOconsists o fprofessional stafffrom the ProvincialFinanceDepartment as well as technical experts. At present, thePPMOhas four full-time staffthat include a: - DeputyDirector, supervisingoverall project management, withexperienceof - working on Bank-andADB-financed projects since 1989; Division Chief, supervising financial management andauditingaspects, with - experience o fworking on Bank- andADB-financed projects since 1987; Project Officer, supervising engineering andprocurement aspects, with experience o fworking onBank-andADB-financed projects since 1989, specializing inICB andNCBprocurement; - ProjectOfficer, supervising safeguards. To enhancePPMO capacity, an expert group was establishedwithin the organization that includes representatives from Frenchconsulting firms (BRL), the HenanEngineeringConsulting Company, andoften highlevelprofessionals o fHenanProvince. The group hasbeenworking with the PPMOon feasibility studies andproject design andwill continue to provide guidance duringimplementation. The localexpertsfromHenaninclude three experts onwater supply and wastewater operations from authorities o fZhengzhou city; two experts on water resource and construction from HenanProvincialDepartments, andaprofessional on finance andaccounting; andanacademiaon socio-economics andarchitecture. Water UtilityCompanies (WUCs) ThecountyWUCs were converted from government bureausto independent public institutions or publicly-owned share companies, followingprovince-wide efforts to convert theminto corporations inthe last few years. Each WUC is a state-owned enterprise, a privately-owned enterprise, or a limited company. The list o fWUCs andthe year they were establishedis providedinTable 6-2. Chart 2 presentsthe WUCs' organizational andmanagerial structure. As part o fimprovingthe WUCs' operational capacity, eachwill recruit an averageo f seven administrative personnel, six technicians and 30 productionpersonnel. Trainingwill beprovided inmanaging construction, productionandcommercial operations. NewlyestablishedWUCs such as inKaifeng, Xinxiang, Yuanyang, andHuangchuan, which have no existing systems, have startedpreparatory works withinthe county government offices with anaverage of30 staff, includingfinancial andtechnical experts. They haveparticipated fully inpreparingthe project, which included feasibility studies andproject designs; they will function as independent companieswhile the project i s implemented. - 32 -  Table 6-2: Listof WUCs KaifengMunicipality 1 Weishi WeishiCounty Water Supply Company March20,2003 SOE 2 Tongxu TongxuCounty Water SupplyCompany September 1,2004 SOE(Collective) 3 Lankao LankaoCounty Water Supply Company March 15,2004 SOE 4 Kaifeng KaifengCounty Water SupplyCompany October 8,2005 SOE 5 Qixian Qi County Water Supply Company October 23,2000 SOE LuoyangMunicipality 6 Mengjin Mengjin CountyWater SupplyCompany April 8,2003 SOE 7 Yiyang YiyangCounty Water Supply Company March5,2003 SOE 8 Songxian SongCounty Water Supply Company December 24,2004 SOE Pingdingshan Municipality 9 Baofeng BaofengCounty Water SupplyCompany May 13,2004 SOE BaofengCountyWater Water TreatmentPlant September20,2004 SOE 10 Jiaxian Jia CountyWater SupplyCompany April 7, 1999 SOE(Collective) 11 Lushan Luwei Water Works Company July4,2005 POE** XinxiangMunicipality 12 Xinxiang XinxiangCounty ChenyuanWater Works Limited Liability Company April 20,2005 YuanyangWater SupplyCompany 13 Yuanyang YuanyangWastewaterTreatmentLimited July 2,2003 LC Company November 10,2005 LC 14 Fengqiu FengqiuWater Supply Company June 9,2004 SOE XuchangMunicipality 15 Xiangcheng XiangchengWater SupplyCompany February25,2004 SOE SanmenxiaMunicipality 16 Shanxian ShanCounty Water SuppIyCompany April 14,2004 SOE 17 Yima Yima City Water SupplyCompany November3,2003 LC Shanqiu Municipality 18 Suixian SuiCountyWater SupplyCompany March 15,2005 SOE 19 Xiayi Xiayi CountyWater SupplyCompany October30,2003 SOE 20 Zhecheng ZhuchengWater SupplyCompany June 7,2005 SOE NanyangMunicipality 21 Dengzhou DengzhouWater SupplyCompany March31,2003 SOE 22 Xinye Yinye CountyWater SupplyCompany September 16,2005 SOE 23 Sheqi 3heqi County Water SupplyCompany April 20,2005 SOE 24 Xichuan YichuanCountyWater SupplyCompany May3,2003 SOE Zhumadian Municipality 25 Queshan QueshanCountyWater SupplyCompany March25,2005 LC - 33 -  County Nameof Company Established Type of Company 26 Xincai Xincai CountyWater SupplyCompany August 20,2003 SOE 27 Xiping Xiping CountyWater SupplyCompany July28,2003 SOE 28 Zhengyang ZhengyangCounty SanyuanWater Supply Company March 11,2003 LC 29 Suiping SuipingCountyWater SupplyCompany March16,1999 SOE 30 Runan RunanCountyWater SupplyLiability Company March30,2004 LC ZhoukouMunicipality 31 Shenqiu ShenqiuCountyWater SupplyCompany April 29,2004 POE 32 Xiangcheng Xiangcheng Jiahao BiologicWater Works Liability Company June 10,2005 LC XinyangMunicipality Minggan,Pingqiao PingqiaoDistrictMingxiangHuaiquanWater 33 District Supply Liability Company December 15,2003 LC 34 Xixian Xi CountyWater SupplyCompany March2,2005 SOE 35 Luoshan LuoshanCountyWater SupplyLimitedLiability Company June 2,2004 LC 36 Yangshan XinyangCity Water SupplyLiability Company May20,2002 LC 37 Huangchuan HuangchuanCountyHuailiWastewaterTreatment Co., Ltd December 17,2005 LC JiaozhouMunicipality 38 Mengzhou - IMengzhouCity Water SupplyCompany _ _ August 17,2005 SOE I - - - - I *Type of company: - **: SOE State-ownedEnterprise; POE: Private-ownedEnterprise; LC: LimitedCompany 100%foreign companyowned Chart 2: OrpanizationalandManavement Structureof WUCs C Z c J Manager I I I ProjectImplementationSchedule Table 6-3 provides aproject implementation schedule for eachtown, grouped into four phases. - 34 -   Annex 7: FinancialManagementandDisbursementArrangements CHINA: HENANTOWNSWATER SUPPLYAND SANITATIONPROJECT The FinancialManagement Specialist (FMS) assessedthe adequacyo fthe financial management system o f the HenanTowns Water Supply and Sanitation Project. The assessment, basedon guidelines issuedbythe Financial Management Sector Boardon October 15,2003, concluded that the projectmeets minimumBankrequirements, as stipulated inBPlOP 10.02. It determined that the project has anadequatefinancial management systemthat canprovide, with reasonable assurance, accurate andtimelyinformation on the status o fthe project inthe reporting format agreedupon (under the project) and as requiredbythe Bank. The project's funding sourcesinclude the Bankloan and counterpart funds. Loanproceeds will flow from the Bankinto the project special account (SA) to be establishedat, andmanagedby, the HenanProvincialFinance Department(HPFD), andthen to the municipal andcounty financial bureaus. Fromthere, funds willbetransferred to the Water Supply Companies (WSCs) or Wastewater Companies (WWCs). The on-lending agreement will be signed bythe Ministryo f Finance (MOF), Provincial Finance Department, municipalfinance bureaus, county finance bureaus andthe WSCslWWCs. Amounts willbe listedinUS dollars andthe WSCslwwCs will bear the exchangerate risks.Counterpart funds will be contributed fiom the county, statebonds, self-financing from the WSCslWWCs inthe form o f shares, andlor commercial loans. Audit Arrangement The Bankrequires that project financial statementsbe audited according to standardsit considers acceptable. Inline with other Bank-financed projects inChina, the project willbe audited according to ISA andGovernment Auditing Standards o fthe People'sRepublic o f China (1997 edition). The HenanProvincialAudit Office hasbeenidentifiedas the project auditor. Annual audit reports will be issuedinthe name o fthe HenanProvincialAudit Office. The annual audit report o fthe project's consolidated financial statementswill be due at the Bank within six months of the endofeachcalendar year, as stipulated inthe loanagreements. The responsible entity andtiming are summarized as below: Component Submittedby Duedate Consolidatedproject financial ProvincialPMO June 30 statements DisbursementArrangement The project will use traditional disbursement techniques; itwillnot useFMR-based disbursements, according to an agreementbetween the Bank andMinistry o f Finance (MOF). - 36 -  Allocation of Loan Proceeds Loanproceedswill bedisbursedagainst expenditure categories as shown inthe table below and there would beretroactive financingupto US$4.5 million. * It is a round-up figure, the exact amount is $375,000.00 Use of Statement of Expenditures (SOEs) Someproceedsmay be disbursed onthe basis of SOEs, indicated inthe table below. ExpenditureCategory ContractsLessthanUS$Equivalent (1) CivilWorks US$ 5,000,000 (a) individuals US$50,000 (b) firms us$100,000 Expenditures exceeding the above limits will bemade according to procurement guidelines and signed contracts. Special Account (SA) One special account (SA) will be establishedinthe HenanProvincialFinanceDepartment (HPFD). The authorized allocation ofthe SAwillbedeterminedbetweenthe Bankand Borrowers duringnegotiations. HPFDwillberesponsible for the management, monitoring, maintenance andreconciliationof the SA. Supportingdocuments required for Bank disbursementswill beprepared and submitted bythe W S C s ~ Cthrough county finance bureaus, municipalfinance bureaus, andHPFDfor s final verificationandconsolidation before they are sent to the Bank for disbursement. The flow o f the withdrawal application i s as follows: - 3 7 -  W S C ~ C S County finance Municipal Provincial World bureaus * financebureaus -b Finance + Bank Department FinancialManagementandReportingArrangements Implementingentity. ThePPMOhasfiveprofessional stafffromthe HenanProvincialFinance Departmentas well as technical experts. Municipal government offices will coordinate WSClwwCs' activities within the municipalities andcities where inter-county coordination i s critical. County govement offices will also supervise implementation bythe WSClwwCs. In most cases, the W S C s ~ C inthe county towns are independent public institutions. The s organizational chart is as follows: Government County Government WSC and Flow of funds. The flow ofBRDfunds will follow the usualroute from the World Bankto the SA inHenanProvincialFinanceDepartment, then to the municipalandcountyFBs. Fromthere, fundswill betransferred to the WSCs andWWCs. The flow is as follows: SA The World managedby Municipal CountyFBs wscsI Bank HPFD FBs --b --b wwcs L - 3 8 -  able to meet the Bank's minimumrequirements, but someneedto improvetheir technical capacities. Thus, financial managementtrainingshouldbeprovidedbythe provincial PMO before project effectiveness, since all the financial staffare newto the World Bankproject. To strengthen their financial management capacity and ensurethat work i s o f a consistent quality, the task team suggestedthat aproject financial managementmanual (the Manual) be prepared; itwill provide guidelines on financialmanagement, internal controls, accounting procedures, fund and asset management andwithdrawal applicationprocedures. The first draft o fthe Manualpreparedbythe provincialPMOwas submitted to the Bank,whose comments were, inturn, providedto the PPMOfor their incorporation. The Manualwillbe finalized and distributed to all financial staffbefore project effectiveness. Accountingprocedures. Theadministration, accounting andreportingo fthe projectwillbe established according to Circular #13: "Accounting Regulations for World BankFinanced Projects" issued inJanuary 2000 bythe MOF. The circular covers the following: 0 Chart o f account 0 Detailedaccountinginstructions for eachproject account 0 Standardset ofproject financialstatements 0 Instructions for preparingfinancial statements The standard set o fproject financial statementsmentioned abovehasbeen agreeduponbythe BankandMOF, applies to allBankprojects appraisedafter July 1, 1998andincludesthe following: 0 Balance sheet 0 Statemento f source anduse o f fundsbyproject components 0 Statemento fimplementation o f loan agreement 0 Statemento f special account 0 Notes to financial statements All W S C s ~ C will manage, monitor andmaintainprojectaccountingrecords andretain s original supporting documents for project activities. Also, eachwill prepare financial statements, which will thenbereviewed, approved andconsolidatedbymunicipalPMOSand finallybythe provincialPMO, before bringsent to the Bank for reviewandcomment ona regular basis. Internalaudit. There is no formal independent internalaudit unit for most o fthe WSCsNvwCs. Where this function was structured withinthe companies, the internalaudit units are either not sufficiently staffed or do not directly report to the general managers. However, this will not affect the project's financial management becausePMOmanagement andmonitoring, Bank.supervision visits, andyearly external audits will ensurethat financial management controls are functioning properly. - 39 -  Information system. Only three WSCs are usingthe accounting software named "Kingdee" to process accounting transactions, Thus, project activities will be accounted for manually. However, the financial reporting will be generatedusingExcel. Financial management action plan. The following time-bound actions areproposed: Action Responsibleperson Completion Date 1.Financialmanagement Provincial PMO I Before effectiveness training to relevant project I (condition for effectiveness)* staff 2. Financial management Provincial PMO Before effectiveness manual finalized and issued (not a condition for to relevant financial staff effectiveness) * The effectiveness condition-- "provisiono f financial management training to allthe relevant staffresponsible for implementation, which is satisfactory to IBRD" -- will be deleted fromthe legal documents ifthe Bank receives from Henanbefore signingo flegaldocuments, evidence that such training has been completed. Supervision plan. A detailed supervisionplanwill beincludedas part o fthe ChinaAudit Strategy document; it will consider the size andFMriskrating ofthis project. - 40 -  Annex 8: Procurement CHINA: HENANTOWNS WATER SUPPLYAND SANITATIONPROJECT General Procurement for the project will be carried out according to the World Bank's "Guidelines: Procurement under IBRDLoans andIDA Credits," May 2004; "Guidelines: Selection and Employmento fConsultants by World BankBorrowers," May 2004, andprovisionsinthe Legal Agreements. Various items underdifferent expenditure categories are described below. For each contract financed bythe Loan, the procurementlconsultant selection methods, the needfor pre- qualification, estimated costs, prior reviewrequirements, andtime fi-ameshavebeenagreedupon bythe Borrower andBankintheProcurement.Plan.The Planwill beupdatedat leastannuallyor as requiredto reflect actual implementationneeds as well as improvements ininstitutional capacity. Procurementofworks. About $245 millionofcivil andelectro-mechanical works willbe procuredto construct water supplyplants anddistribution systems, wastewater collection systems andtreatment plants. Contractswill berelatively small (each less than US$lOmillion) andscatteredover manysmall towns, where foreigncontractors or majornationalcontractors are not likely to be interested. Thus, contractswill beprocured on anNCBbasis and ICB contracts for works are not expected. Two types o fcontracts will be used: (a) C+E: Civilworks plus equipment supply, installationandcommissioning; and @) DBO: Detailedengineering design pluscivilworks, equipment supply, installation andcommissioning, as well as operation and maintenance o f the plants for 1-3 years. ThePPMOwill prepare project-specific samplebidding documents for the two, basedon Bank-approved Chinese Model BiddingDocuments for NCB Procurement ofWorks. Contracts above US$200,000 will be awarded on anNCB basis. For those belowUS$2 million, procurement maybe advertised ina provincialnewspaper only. Those under US$200,000 will be awardedby comparing o f at least three quotes, for which the PPMOwill prepareproject-specific sampleprocurement documents for usebythe countieslcities involved. Procurementof goods. Sincethe equipmentfor the water supplyandwastewater treatment plants will beprocured alongwith the civilworks, separateprocurement o f goods isnot expected. However, inorder to provide flexibility for possible adjustments o fthe procurement planduringimplementation, the LegalAgreements willprovide: (a) contracts for goods, estimated to cost US$500,000 or more, to be awardedon an ICB basis; (b) contracts for goods estimatedto cost US$lOO,OOO-US$5OO,OOO, to be awardedon anNCB basis; and(c) other contracts for goods that cost $100,000 or less, to be awarded onthe basis o fcomparing at least three quotes (the PPMOwill prepareproject-specific sample shopping procurement documents). NCB procurement for goods maybe advertised ina provincialnewspaper only, ifcontracts are underUS$300,000. Selectionof consultants. About US$7.2 millionofconsulting serviceswill berequiredto develop policies, buildcapacity, produce engineering designs and supervise construction, project management, etc. Contracts for consulting services, eachestimated at US$lOO,OOO or more, will be awarded following the procedureso f Quality andCost Based Selection (QCBS). For services -41 -  estimated to be less thanUS$lOO,OOO, contractswill be awardedfollowing the procedures o f Selection Basedon Consultants' Qualifications (CQS), accordingto the Bank's Consultant Guidelines. Procedures of Selection o fIndividualConsultantswill be followed for assignments that meet the requirements of paragraph 5.1 & 5.3 o fthe Consultant Guidelines. Short lists o f consultants for services estimatedat underUS$300,000 per contract maybe composed entirely of national consultants, according to the provisions o fparagraph2.7 o fthe Consultant Guidelines. For some services, government-owned universities or researchinstitutionsmaybe hiredbecauseo ftheir unique andexceptional roles inthe sector; their participationwill follow the requirements o fparagraph 1.11(b) and(c) o f the Consultant Guidelines. Trainingworkshops,seminars andstudy tours. About US$600,000 willberequired for training workshops, seminars and study tours. With the Bank's agreement onthe terms o f reference, planningof activities andbudgets, disbursementswill bemade against reasonable actual costs. Assessment ofthe agency's capacityto implementprocurement The PPMOwas establishedwithinHenanProvincialFinance Department andhas five qualified full-time staff. Under the PPMO's guidance, most o fthe Bank-financedprocurement will be carried out by selectedtendering companies. An assessment o fthe capacity o fthe Implementing Agencies to carry out Procurementwas made inJuly2005 andupdated inSeptember2005. The assessmentreviewedthe organizational structure and hctions, staffingplan, adequacyo f support andcontrol systems, legal andregulatory fiamework, etc. The overall project risk for procurement i s average. Actions agreeduponto addressthe weaknessesidentifiedbythe assessment include: (a) the PPMOwill overseeandguide the procurementprocess; (b) procurement trainingworkshops will be providedto PMO staff at various levels; (c) the PPMOwill prepare anddisseminate project- specific procurement documents; and (d) to addressthe differences betweenBank Guidelines andthe Tendering andBiddingLaw o fChina, waivers for Bank-financed NCBprocurement shall be includedinthe LegalAgreements o fthe project, according to recommendations inthe Bank's Operational Procurement Review o f China (February 17,2003), which was further standardizedbythe Bank (see Attachment 1o fthis Annex). ProcurementPlan A procurementplanfor implementationprovides thebasis for the methods to be adopted. This planwas agreeduponbythe PPMOandBank, andis available at the PPMO:27 Jing SanRoad, Zhengzhou City, HenanProvince, China, Post Code 450008. The planis included inthe Project File andwill also be available inthe Bank's external website. The planwill be updatedin agreementwith the Bank annually or as required, to reflectproject implementationneeds and improvements ininstitutional capacity. - 42 -  Frequency of Procurement Supervision Besides the prior review supervision to becarried out from the Bank's offices, the capacity assessment o fthe ImplementingAgency recommendeda launch workshop andone supervision missionto visit the field to makea post-review o fprocurement every six to eight months. At least 25% o fpost-review contracts should be sampledandreviewed. Details of the Procurement Arrangements ProcurementMethods I Thresholds I PriorReview Thresholds I Goods ICB (not XJS$500,000 1) All contractsfor expected) goods above 1 US$500,000 I NCB I us$loo,ooo-us$5oo,ooo 2) All contractsfor works aboveUS$5 1 million 3) FirstfiveNCB contracts for works in the first year Works ICB(not XJS$15 million 4) FirstfiveNCB expected) I contractsfor goods in the first year NCB US$200,000- US$15 million 5) Firsttwo NCB contractsfor works in eachsubsequent year 6) Firsttwo NCB Shopping ~us$200,000 contractsfor goodsin eachsubsequentyear Consulting QCBS 2us$loo,ooo US$lOO,OOO for fmand services US$50,000 for individuals CQS <us$100,000 IC Assignments meeting the requirements o fPara. 5.1 and 5.3 o fthe Consultant Guidelines - 43 -  :i \ o \ c o 2o 2cc W 0 0 2 \o 0 0 2 \ o \ c 0 W o c 8 I n w N. v) c a N N ~ d 3- c $ sec `L 4:is s I d Q d `i` I u u Y Yu Y u P N   -1 3 I $/ \o d I 3  8 b "! d v, 0 0 "! 3 3 m 0Y d QI 2 3 3rz I c3  u m z I 00 d I  E s- 8 S s P c I ch c d kE I P E I "I  f i b fi 0 0 0 0 0 0 Y Y Y 3 3 3 n d 3 I I  2 $35 4 sm c Qi L u 1 e E  2 I I  Attachment 1: NCBWaiversfor China Procedures to be followed for National Competitive Bidding(NCB) shall bethose set forth inthe Law on Tendering andBiddingof the People'sRepublic o f Chinapromulgated by Order No. 21 o fthe Presidentof the People's Republic o f China onAugust 30, 1999,withthe following clarificationsrequired for compliance with the Guidelines: 1) All invitations to pre-qualify or bidshallbeadvertisedinanewspaperofnational circulation inthe Borrower's country, except for civilworks contracts that are estimated to cost less thanUS$2million each andfor goods contractsthat are estimated to cost less thanUS$300,000 each, whichmaybeadvertisedinaprovincialdailynewspaper. Such advertisements shall bemade insufficient time for prospectivebidders to obtain prequalificationor biddingdocuments andprepare and submit their responses.A minimumofthirty(30) days shallbegivento biddersbetweenthe date ofthe newspaper advertisement andthe deadline for submission o fbids; the advertisement andbidding documents shall specify the deadline for such submission. 2) Qualificationrequirements o fbidders andthe methodo fevaluating the qualification o f each shall be specified indetail inthe biddingdocuments. 3) All bidders that meet the qualificationcriteria set out inthe pre-qualificationdocument shall be allowedto bidand there shall beno limit onthe number o fpre-qualifiedbidders. 4) All bidders shall berequiredto provide security inanamount sufficient to protect the Recipient andHenanProvince incase o fbreach o fcontract bythe contractor, the bidding documents shall specify the required form and amount o f such security. 5) The time for opening all bids shall be the same as the deadline for receivingthe bids. 6) All bids shall be openedinpublic; all bidders shall be offered an opportunity to be present (either inperson or through their representatives) at the time o fbidopening, but bidders shall not berequiredto bepresent. 7) N o bidmayberejected solely on the basis that the bidprice falls outside any standard contract estimate, marginor bracket o f averagebids establishedbythe Recipientor Henan. 8) Eachcontract shall beawarded to the lowest evaluated responsive bidder, that is, the bidderwho meetsthe appropriate standardso fcapabilityandresourcesandwhose bid hasbeen determined: (a) to substantially respondto the biddingdocuments; and(b) to offer the lowest evaluated cost. The winningbidshall not berequired, as a conditiono f award, to undertakeresponsibilities for work not stipulated inthe biddingdocuments or otherwise modify the bidas originally submitted. 9) Eachcontract financed withthe Loanproceeds shall state that suppliers andcontractors shall permitthe Bank, at its request, to inspect their accounts andrecords on their performance (with respectto the contract) andto have these audited bythose appointed bythe Bank. 10) Re-biddingshouldnotbe allowedsolely becausethe number ofbids is lessthanthree (3). - 53 -  Annex 9: EconomicandFinancialAnalysis CHINA: HENANTOWNS WATER SUPPLYAND SANITATIONPROJECT EconomicAnalysis(WaterSupply Component) Theproject will benefit anestimated4.5 millionpeople in38 county towns (13 ofwhich are nationallyor provincially designatedas poor counties). The economic benefits o f each component will vary from county to county, dependingonresidents' willingness-to-pay (WTP) for improvedwater, public health externalities, andeconomic costs. The useo f a financial covenant requiringcost-recovery water tariffs sets a base ERR for the water supply components. Since the standardconversion factor for China is 1.O, major equipment andmaterialinputs are acquired through ICB, andno major domestic inputhas aneconomic price above its financial price, the FRRassociatedwith cost-recovery tariff levels sets the lower-bound ERRfor each water supply component. Consumer surplus hasbeen estimated inthree sample counties for a more complete picture o fthe economic benefits from animprovedwater supply. The actualERRi s expected to behigher in all counties since the consumer surplus analysis does not reflect the positivepublic health externalities. Selection ofcounties.The consumersurplus analysiswas conductedfor three counties that represent arange o f GDP per capita: Yiyang (low-income), Suixian (middle-income) andWeishi (high-income), Table 1presentsbackground informationon the three. Table 1: CountiesSelectedfor Economic Analvsis Per Capita Population(000) Range(" County Annual GDP Water Resources RMB 2004 2010 RMB3,700 -5,400 Note: (1) 2003 data. Willingness-to-pay(WTP) for improvedwater. Inallthree counties, the connectionrate is relativelylow, andmost residents rely on aprivatewater supply. The WTP i s the key variable determiningthe rate of substitution from privately-supplied water to animprovedwater supply. However, no market informationi s available to estimate the WTP for improvedwater for those with aprivate supply. Lackingsuchinformation, the estimated price o fself-provision represents a goodproxy o fmaximumWTP for improvedwater. To estimate the cost o f self-supplied water, the following elements were considered: 0 Water resourcefees. Self-supplied residents pay a water resourcecharge, which varies from county to county and ranges from RMBO.09 -RMl3O. l/m3. - 54 -  0 The cost ofbottledwater. Contaminated surfacewater and shallow groundwater make self-supplied water unsafefor drinkingandcooking. While the health costs o fdrinking contaminated water cannot be estimateddue to limited data, consumption o fbottled water for drinkingis usedas aproxy for the cost o fun-safe water. Conservative estimates havebeenmade for consumption o fbottledwater. Results indicate that the cost o funsafe water i s sufficientlyhighto trigger substitution to animprovedwater supply. 0 The opportunity cost o ftime, The timerequiredto obtainwater from aparticular source i s a major determinant o f demandfor improvedwater. It depends, first, onthe level of household income; the higher the income, the higher the opportunity cost o f pursuits that do not yield monetary income, such as gathering water. The cost o ftime i s also affected bythe type ofwater source; the timeneededto gatherunimproved water is generally higher for residents relyingon surface water than for those usingshallow groundwater sources. Conservative assumptions havebeenmade for water gathering time: only 7.5 and4 minutesperroundtrip are assumedfor surface sourcesandwell-water, respectively. Nevertheless, results indicate that the opportunity cost o f gathering water from unimproved sourceswilljustify consumersswitching to animprovedwater supply (see Table 2). Table 2: Labor cost of fetching water from privatewells Annual per capita income (RMB) 3,378 4,329 Averagehousehold size 4.0 3.1 4.4 Laborersper household 2.8 2.2 3.O Annual householdincome (RMB) 13,510 11,854 19,047 Assumedhours ofwork peryear 9,141 7,391 10,007 Average income per hour (RMB) 1.5 1.6 1.9 Daily water gatheringtime (h) 0.6 0.3 0.4 Cost of time r n / m 3 ) 4.6 2.7 3.2 Plannedwater tariff (2008) 1.95 1.9 2.0 Source: HenanWater Supply(and Sewerage) Project Social ImpactAssessment, Statistical Yearbook. Themainresults ofthe WTP analysis are: (a) self-suppliedconsumers are expectedto gradually switch to an improvedwater supply, as their WTP is, on average, significantly above the future levelo fwater tariffs; and (b) gradual substitution to an improved supplyi s expectedto occur even innationally designatedpoor counties. Economic rate of return (ERR).Whenconsumer surplus from animprovedwater supply is accountedfor inthe overall economic benefits o fthe project components, the ERRSincrease noticeably across all counties. As shown inTable 3, the ERRSfor the three water supply investments are all above 25%, rangingfrom 19.8%-33.6% under different scenarios. A comparisonbetweenthe FRRandERRinthe three project counties (see Table 3 below) highlights the significant contributionof consumer surplus to the overall economic benefits in the poorest counties. The consumer surplus for the resident populationi s estimatedbasedon a - 55 -  constant elasticitydemand for improvedwater. Changesinconsumer surplus are calculated for a 20-year periodon a cumulative basis inorder to properlycomparethe effect o fthe project against the 'no project' scenario. Sensitivity analysis.Various sensitivity analyseswere conductedunderdifferent scenarios. Results show robust economicjustificationfor the project under the following scenarios: Scenario I: for animproved supplyis 20% lower thaninthe basecase scenario. WTP e Scenario 11:Per capita consumption levels inthe first year o foperation are 10%lower thaninthebasecasescenario. Scenario 111: ScenariosIandI1combined. The ERRfor the three selectedcounties andresults ofthe sensitivity analysis are presentedin Table 3. A detailed assessment of economic benefits is includedinthe project file. Table3: EconomicRateofReturn(%I FRR(lower-bound ERR) 5.9 9.6 14.2 ERR(Base case scenario) 25.8 25.0 33.6 SensitivityAnalysis Scenario I:20% reductioninWTP 22.2 22.4 29.7 Scenario 11: 10%reduction inconsumption 22.6 22.1 30.8 Scenario 111:Scenario Iand11combined 21.0 I 19.8 I 28.3 8a- Financial Analysis of Water Supply andWastewater Components Financialrates o freturn (FRR) have been reviewedfor the water supplyandwastewater viable: FRRs for water components are mostly above lo%, rangingfrom 9.6%-17.8%, andthose components for eachcounty. Preliminaryanalysis demonstrates that the project is financially for wastewater componentsare above 5%, rangingfrom 5.1%- 6.1%. Analyses were also made to test the sensitivity of the FRRsto the adverse effect o f changes inkeyparameters, which include reduced revenues, increasedcapital costs andincreasedO&M costs. The results presentedinTable 4 indicate that the proposed investments inwater supply andwastewater systems are financiallyrobust. InTable 10, all the FRRs for eachcounty are provided. - 56 -  Table4: FRRandSensitivityAnalyses Revenues: - 10% 7.7% - 14.9% Capitalcosts: + 10% 8.5% 16.2% O&M cost: + 10% 9.0% 16.9% -- 4.5% - 5.4% Tariffs Water Tariffs. Most counties have already increasedtariffs to levels that allow WUCs to financially break-even: residential tariffs are RMB0.9-RMB2.41 m3,with a medianvalue o f RMB1.21m3.The tariffrange andmedianvalue byuser group are presented inTable 5. Table5: CurrentWater TariffslRMB/m31 Allproject counties confirmedtheirplansto raisetariffs further inletters ofcommitment, once the new systems are commissioned. The future tariffs are expected to cover the weighted average cost o fcapital (WACC) and the capital expenditures associatedwithnew investments. The WUCs' new capital structure will reflect the financing arrangementsofthe sub-projects -a combination o f WUCs' internal cashgeneration, counties' budget contributions as equity, and subsidiary loans from the World Bank.through the counties, as well as state bonds and commercialbank loans inmost cases (see Annex 5 on fundingarrangements). Basedon these plans, residential tariffs will riseby an average o f 33% over existinglevels. Other customer groups will face increasesof27% (industrial) to 48% (special commercial). The mediantariffvalue will increasefrom RMB1.2 to RMB1.6m3for residential, from RMB1.5 to RMB1.9/m3for institutional, fromRMB1.6 to RMB2.l/m3for industries, from RMB1.7 to RMB2.4/m3 for commercial, andfrom RMB2.1 to RMB3.l/m3for special commercial. The tariff rangeandmedianvalue o ffiture increasedtariffs byuser group arepresented inTable 6. - 5 7 -  Table6: PlannedWater Tariffs for Future(RMB/m3) All tariffincreaseswill occurwithinthenexttwo years: 14counties will raisetariffs in2006,7 counties in2007 and 14counties in2008. Yima hasrecently raisedtariffs, bringingits rates significantly above the medianvalue for all counties (see Table 15). Yima plansto raise tariffs further, in2010. The tariffscheduleis summarized inTable 7. Residential tariffs andthe years the increases take effect for eachcounty are reported inTable 11, County-by-county tariff informationbyuser group is available inthe project file. Table 7 :TariffImdementationSchedule Note: Yirna has recently increased water tariffs and another raise is planned for 2010. Wastewater Tariffs. Elevencounties have sewer collection andWWT plants as project component^.^ All counties have already introduced wastewater chargesthroughwater utility companiesto contribute to the wastewater components. Wastewater charges are set at the provincial level; basedonprovincial guidelines, they are to be set at R1MB0.65/m3for residential users, RM130.8/m3for institutional, industrialandcommercialusers andRMBl.0/m3for special commercial users. Fiveout o f 11counties have already raisedwastewater charges. Inthe other counties, the provincial-levelwastewater charges will be introduced in2006. As a result, current wastewater tariffs are within a similar range inall the project counties. The current wastewater charges are presentedinTable 8. Table8: CurrentWastewater Tariffs (RMB/m? The following counties are included inthe analysis o fwastewater charges: Baofeng, Huangchuan, Luoshan,, Mengjin, Runan, Songxian, Suiping, Suixian, Tongxu, Yuanyang, andXinye. - 58 -  Category Tariff range Mediantariff I 0.4 -0.65 0.5 -0.8 0.5 -0.8 Nine out of 11counties are planningto increasewastewater chargesover the next two years, pendingprovincial approval. These tariffs are listedinTable 9. Table 9: PlannedWastewater Tariffs for the Future(RMB/m31 0.8 -1.29 Table 10: Water and Wastewater Tariffs for ResidentialandFRRBaseinProiect Town (RMB/In31 County FRR ResidentialTariff ' base case Yead') Current Planned WaterSupply KaifengMunicipality 1 Weishi 14.11% 1*o 1.4 2007 2 Tongxu 10.96% 1.0 1.4 2006 3 Lankao 15.10% 1.1 1.5 2008 4 Kaifeng 12.84% 0.98 1.2 2006 5 Qixian 9.90% 1.2 1.5 2006 LuoyangMunicipality 6 Mengjin 16.39% 1.85 2.0 2006 7 Yiyang 9.62% 0.9 1.6 2006 8 Songxian 12.10% 1.05 1.55 2008 PingdingshanMunicipality 9 Baofeng 14.49% 1.2 1.4 2008 10 Jiaxian 14.09% 0.93 1.56 2007 11 Lushan 14.70% I.o 2.0 2006 XinxiangMunicipality 12 XinxiangCity 13.76% 1.3 1.8 2008 13 Yuanyang 12.57% 1.25 1.75 2006 14 Fengqiu 14.58% 1.2 1.5 2006 Xuchang Municipality 15 Xiangcheng(Xuchang) 13.52% 1.o 1.3 2006 SanmenxiaMunici ality 16 Shanxiant R 12.63% 2.4 2.7 2007 17 Yima 14.73% 2.4 3.2 2010 ShangqiuMunicipality 18 Suixian 10.17% 1.21 1.8 2008 19 Xiayi 14.40% 1.2 1.7 2007 20 Zhecheng 12.66% 1.1 1.4 2006 - 59 -  Note: (1) NP =Poor county at national level; PP=poor county at the provincial level. (2) Year o f implementation o f the planned tariffincrease. (3) Shanxian charges residential customers an increasing block Tariff (IBT), where the unit tariff varies with level of consumption based on the following block structure: Firstblock: 1.7 RMBlm3 [0-121 m3, Secondblock 2.5 RMBIm3 [12 -181m3 Thirdblock 2.5 RMBIm3 above 19 m3. The average tariff is estimated assuming average water consumption o f 71 Vdaylperson. Projected financial performance of WUCs Financial projections o fparticipatingWUCs were prepared to determine their viability after the project i s completed. Some examples are discussedbelow (see Table 11andTable 12 for details). - 60 -  TongxuCountyWater SupplyCompany.Revenueswill increaseduringthe first four years of operation and stabilize at RMB22 millionannually. The operating margin(before interest and taxes) is 50%, andthe working ratio remains sound at 45%. Net profitbefore taxeswill be above RMB3 millionthe first year, with anetprofit at 25% ofrevenue. The total asset value will increaseto over RMB90 million. Since 33% ofthe funds for the investments are equity contributions from localgovernments, the levelo f equity is adequate from the start ofimplementation. The debtlequityratio (ratio o flongterm debt to total debt and equity) evolves positively duringthe period from a satisfactory levelof 60% at the start, to 30%, 10years later. The projections show a highnet inflow, o f over RMB6 million annually, fiom year six onwards. The debt service coverage ratio is above 3 andthe company will thus easily cover its debt obligations. The current ratio is projected to be over 1.5 throughout the period, and accounts receivable are less than 15 days of total annual revenues. The company is not expectedto face liquidityproblems over this time. YuanyangCountyWastewaterCompany.Revenueswill increaseduringthe first four years of operation andstabilize at RMB9 million annually. The operatingmargin(before interest and taxes) is 60%, andthe working ratio remains sound at 35%. Net profits before taxes will be over RMB2millionfiomthe secondyear onwards, withnetprofitsbeforetaxesof25%. The total asset value will increaseto over RMB55 million. As 50% ofthe funds for the investments are equity contributions from statebonds and local government contributions, the levelo f equityis adequatefkom the start o fimplementation. The debtlequity ratio evolves positivelyduringthe period fiom a satisfactory levelo f 50% at the start, to 30% 10years later. Theprojections show ahighnet inflow o fover RMB2.5 millionannually fiom the first year o f operation. The debt service coverageratio, at its lowest, is 1.3, which shows the company can safely meet its obligations. The current ratio is projected to be over 1.5 throughout the projection period, andaccountsreceivable are lessthan 15 days o ftotal annual revenues. The project i s expectedto improve the liquidityo fthe company over the time period. -61 -  I ... ... . .. , - .- .I.. ... P f .__ 4 N I I g g o g o o -Fc1.- m m N m w w - 3 0 - 32 2 2 -3-oanoov1 I? 2 -\o - 3 - 0 3 0 0 - c anw an m  .... .... i ..-..- ...... . . _. ............. I ... 0 0 0 m + 0 P3 3 I rcr \D I 3 I  Fiscal Capacity Analysis A fiscal capacity analysis was madefor the participating counties to assessthe healthiness o fthe borrowinglocal governments' fiscal position, i.e. the fiscal anddebt repayment capacity. The analysis focuses ontwo important areas o fmunicipalitycreditworthiness: economic strength and existing debt burden. GDP per capitawas usedto measure economic strength and outstanding explicit debt over revenuewas usedfor the debt burden (not total debt, since data oncontingent liabilities are not available). The analysis shows that most o fthe 38 counties are poor andtheir average GDP per capita i s about RMB5,000, which i s muchlower thannationallevel o f RMB8,OOO. The debt analysis indicates that although the counties' levelo findebtednessis somewhat high, it is still manageable.The averageratio ofoutstanding explicit direct debt over total revenue is 80%, which ishigher than the international standardo f 70% for the ratio o ftotal debt (including both explicit debt andcontingent liabilities) over revenue. The analysis also suggests significant variations among individualborrowingcounties for both indicators. Based on the above analysis, a framework for fiscal capacity analysis was developed that provides a clear profile for the borrowing counties andwill help guide a range o f fiscal actions to help counties o f different fiscal capacities. Cut-off points. The framework is shown inthe matrix below, with two cut-off points: RMB5,OOO RMB for GDP per capita and SO% for debt over total revenue. Counties with GDP per capita above RMB5,OOO are considered as havingrelatively strong economies andthose havingdebt over revenue ratios o f less than 80% are considered to have a reasonablelevelo f debtwhencomparedto theirpeer borrowing counties. Bothcut-offpoints were chosenbasedon median points o fper capita income andindebtednesso fthe 37 borrowingcounties. County Groups and FiscalAction Recommendations. Table 13 summarizes the fiscal capacity o fparticipatingcounties. Those with highGDP per capita and a low level o f debt have relatively strong fiscal capacity to undertake substantial investments (Group I). Counties with low GDP per capita and a low levelo fdebtwill needgradual tariff increases andsubsidies to ensure long-term viability (Group II).Counties that havebothhighGDPper capita anda high levelof debt needto increasetariffs ina timely mannerto minimize liabilities (Group III), Finally, poor andhighlyindebtedcounties will needbudget fundaccumulation byphased investments andhighercontributions &om W C s or subsidies, ifnecessary(Group IV). Some counties inGroup IVYwhose governments intendto make counterpart contributions, might require subsidies. - 64 -  Table 13: FiscalCaDacitvAnalvsisMatrix SuipGg, Xiangcheng, Xinye, Kaifeng, Xincai, Suixian, Zhengyang, Fengqiu, Mengjin, Xiping, Shan, Xinxiang and Yiyang, Queshan, Lankao, Yuanyang, Yima) can afford substantial investments. Sheqi, andXichuan) will need gradual tariff increases to ensure long-term Tongxu, Weishi, DengzhouandMinggan) Shenqiu, Luoshan, Zhecheng, willneedto maximizeWUC contributions Songxian, QixianandXiangcheng) byincreasingtariffs intimely manner. willneedto accumulate funds before starting investment or mightbe subsidized. GroupIV countiesandtheir fundingarrangements. Furtheranalysis o fthe finding arrangementswas made for counties inthe lower right comer o fthe matrix, due to their dire fiscal conditions. As Table 14demonstrates, four out o f eight counties-Luoshan, Qixian, RunanandSongxian-are expectedto provide counterpart finds through their budgets. The expectedbudgetwas compared with the revenue "available" @e,, total revenue minus salary expenditures). Table 14: Ratio ofBudgetawSuuport to AvailableRevenue "Available" revenuein Ratio of Budgetary Budgetary County County budgetary 2004 support contribution totalrevenue salary - supportto expenditure "availab1e ratio over revenue" three years Luoshan 800 15,942 5yo 2% QiXian 2,600 13,220 20% 7% Runan 3,515 15,302 23% 8% Shenqiu 800 -1,368 - Songxian 3,379 18,018 19% 6% For Luoshan, proposed budget support will be 2% of"available" revenue over the three-year period (assumingrevenuesremainconstant duringthat time); the figures are 6%, 7%, and 8% for Songxian, QixianandRunan, respectively. While the fiscal pressureto produce counterpart funds for Luoshanseems manageable, it maynot betrue for the others. Shenqiu County's revenueswere not highenough to cover salariesin2004 andit is unlikely the countywill be able to provide counterpart funds. The above analysis suggeststhat some Group I V counties need plansto improve their fiscal capacity andaccumulate budget funds before anyinvestment actions beginor mightneedto seek subsidieswhennecessary. - 65 -  Annex 10: SafeguardPolicyIssues CHINA: HENANTOWNSWATER SUPPLY AND SANITATIONPROJECT SummaryofEnvironmentalImpactsandEnvironmentManagementPlans Background China's Instituteof Water ResourcesandHydropower Research, with support fiom international consulting specialists, conducted the EnvironmentalAssessment (EA) for the proposedproject according to China's national requirements as well as Bankpolicies andprocedures. The TORS anddraft EAswere discussedindetail duringproject preparation withthe Bank.EAshavebeen completed for each component andcover, inter alia, baseline environmental conditions (water resources andquality, air quality) andsocio-economic conditions. They also describe alternatives considered while feasibility studies for eachcomponent were prepared. The draft English-version EAreport, together with two sample project component EAreports- one for water supply andone for wastewater treatment-were submitted to the Bank inmid- October 2005 andreviewedby the Bank before andduringappraisal and found satisfactory. . While the EAwas beingprepared, localresidentswere consulted at least twice; their opinions are reflected inthe project design and environmental mitigationmeasures. Public announcements were made about the project andthe EA on localradio andtelevision stations, as well as in newspapers andon the internet. These notices informedthe public o fthe locations (generally the county government) where the EA andRAP couldbereviewedand commented on, as well as contact telephone numbers. Posterssummarizing the EA andRAPwere displayed incommunity centers andpublic meetingswere held. The EAwas disseminated inthe project counties and municipalities from Januaryto August 2005. The documents were sent to the Bank's Infoshop in Washington andBeijinginOctober 2005. Details o fpublic consultations andinformation on eachcomponent are available inthe project files. Sub-EAs were cleared either bythe HenanProvincialEnvironmentalProtection Department (HPEPD) or localEPBsat the endofOctober 2005. The consolidated final EAreport was reviewed bythe HPEPDinDecember, 2005 and a formal clearancedocument was obtained in December 2005. EnvironmentalBenefits Establishing and improvingthe water supplyinHenan's mediumand small cities andcounty towns is neededfor the area's economic and social development. Project investments will have long-lasting positivehealth andenvironmental effects andimprovethe infrastructure; e.g., through the wastewater component, domestic effluent will be collected from urbanresidents and treatedto remove pollutants (CODc,, BODS,NH3-N,andTP), which will improvethe quality o f the surfacewaters into which it i s discharged. - 66 -  PotentialEnvironmentalImpactslIiisksandMitigationMeasures Constructionphase.Someproject componentscouldhave short-term impacts, such as dust, noise, traffic, soil erosion, worker safety andpublic health issues. However, these problems are relativelyminor andvarious measureshave beenplannedto reducethemto acceptable levels; these measuresandthe monitoringneededto ensureeffective implementation are described in the EA andEMP. The PPMO will beresponsible for tracking andreportingthe monitoring o f all project implementingagencies. Also, to ensure the measuresare effective, independent consultants will be hiredto monitor them, as described inthe EMP. Operationsphase. Itisexpectedthe quality ofthe localwater supplyanddrinkingwater willbe improved. However, environmental issues, such as lower groundwater levels inWeishi County andchlorine leakage from water treatment plants, needto be addressed. Detailsofmitigation measures, their location, time fiame andthe agenciesresponsible were described inthe EMP; e.g., the document covers areas suchas managing surface andgroundwater, controlling quality, managing noise, handlingconstruction site waste, removing soilbylayers and separate stockpiling, coveringpilesto limitwinderosion, constructing runoffchannels andwater storage units, andorientingroads andpaths. EnvironmentalManagementPlan(EMP) A unitwillbecreatedinthe PPMOto managethe EMPandwillbe staffedwith at least one professional. PPMOstaffwill be trained inproducingand applying environmental regulations, creating mitigationmeasures, holdingpublic consultations, monitoringthe environment, arrangingfor training ofrelevant officials, andproducingprogressreports. An environmental specialist from the supervisory consultant team will ensure that construction i s done inan environmentally soundmanner. Names Responsibilities RemarkslStaffing HenanPMO Coordinating the EMP One or two environmental specialists Municipality andcounty Conducting and managing One or two environmental specialists government environmentalprotection measures Monitoringthe environment in Contracts will be signedbetween Environmentalmonitoring bothperiods project implementing agencies and departmentslconsultants environmentalmonitoring departmentslconsultants at city/county levels Supervisionandreporting, The Bankwill supervise theproject's environmental aspectstwice a year. Semi-annual progress reports from the PPMOwill include a sectionlchapter onthe EMP. Duringproject implementationandbeginningin2007, anannualreport ontheEMPwillbe hrnished to the BankbyMarch31o f eachyear, along with any revisions proposed to the EMP to achieve its objectives. - 67 -  Names Resnonsibilities HenanProvincialEnvironmental 1. Supervisethe adoptionofenvironmentallaws/regulations ProtectionDepartment andoverallmanagement. 2. Coordinate environmentalmanagementamongvarious departments. 3. Providefinal environmentalacceptance o fconstruction project. Municipal EPBs andcountyEPBs 1 Assist theprovincialdepartment inits supervisiontasks. 2. Approvethe environmentalmonitoringreport. Trainingrequirements. To ensurethe abovemeasureslplansare adopted, staffwillbetrained inidentifylng environmentalimpactsandensuringtimelyresponsesto accidents.Thetraining will cover areas such as lawslregulationslstandards,project-related environmental science and environmental management. Fundingarrangementsandimplementationschedule. The costs associatedwithmitigating the effects o fconstruction are included inthe cost estimates o fproject components, which are notedinthe EMP. Also, monitoringofair andwater quality, noise, worker health, and site safetyhygiene will be conducted by localenvironmental monitoringunits or consultants, and financed from counterpart funds Monitoring. The EMP listsenvironmental performance indicators suchas air andwater quality, noise levels, conditions o fconstruction sites and camps, as well as details onwhere andwhen they willbemonitored, andthe agenciesresponsible for reviewingthem. Henan's PMOwill be responsible for reportingon the monitoringo fmitigationmeasuresbythe agencies listedbelow. Name Responsibilities Henan PMoand ci~'coun~governments Developamonitoringframework, manage the monitoring andenvironmentduring construction Environmentalmanagement staffof Conductandmanageenvironmentalprotectionmeasures projectimplementingagencies duringconstruction Environmentalmonitoringconsultants Conductin-depthenvironmentalmonitoring during engagedbycity/county agencies constructionandoperations as commissionedbythe PMO andcity/countygovernments PublicConsultationsandInformationDissemination Publicconsultations. Manyconsultative meetings were heldduringthe preparationperiodwith city andcounty PMOS,utilitycompanies andothers to discussthe proposedprojects andEAs. Also, two rounds of public consultations for the project-affected populations were heldduring the EA: the first meetings were from 2002-2004, andthe second from January to June 2005. Consultations included meetings withlocalresidents, communities, andgovernment representatives. Also, questionnaires to detennine public opinionwere distributed andanalyzed. Most o fthe public received informationabout the project's significance andexpectedbenefits, andare awareofits positiveeffects onthe national, regionalandlocaleconomylenvironment. - 68 -  As a result o fmeetings, itwas found the project has strong public support. The public understandsthat the construction phasewill produce noise, dust andtraffic, andlandwill needto be acquired. Most residents expect the project to becompleted quickly andwelcome the fact that benefits will berealizedinthe near future. However, some expressedconcern about the quality of construction andwater resources, for which the EMP offeredfurther explanation about the project activities andstandards to be adopted. Informationdissemination.At the municipab'county level, public announcements about the project andthe EA were made from January to August 2005 on localradio andtelevision, andin newspapers. They explained where the EA andRAPSmaybe inspected anddiscussed(generally at the PMOineach citykounty). They also providedcontact telephone numbers for obtaining additional information. Posterssummarizing the EA andRAPSwere displayed intown centers andat public meetings. At the provinciallevel, anannouncementwas posted at www.hncz.g;ov.cn bythe HenanPMOinOctober 2005 about the proposedproject and availability o fdocuments describing the environmental safeguards. DamSafety Theproject does not include activities to construct new dams or rehabilitate existingones. However, reservoirs inLushanCounty, QueshanCounty, MingganCounty, andBaofeng County providewater resourcesto the four project towns. According to the World Bank's OPIBP4.37 on dam safety, anindependent dam specialist, a former director and senior researchero fthe Water andHydropower ResearchInstitute o fthe Ministry o f Water Resources(MWR), assessedthe safety status o fthe dams. ProjectCounty Name DamHeight Storage Capacity Types Baofengcounty Longxingsi 40 m 25.22 millionm Homogeneous Reservoir earth filled dam Queshan county Boshan Reservoir 48.1 m 620 millionm Sand and gravel shells with inclined clay core Lushan county Zhaopingtai 35.5 m 713 million m3 Sand andgravel Reservoir shells with inclined clay core ' Minggan county Hongshizui 26 m 48.48 millionm Homogeneous (Pingqiao District) Reservoir earth filled dam Thereviewconcludedthat the Zhaopingtai andHongshizuireservoirs inLushanandMinggan counties are safe, since remedial works were completed in2005. The LongxingsiandBoshan reservoirs inBaofeng andQueshancounties will be satisfactory when the plannedrenovations are carried out in2006-2007. However, before this work begins andis completed, pondlevels mustbecontrolled; they will alsoneedto beinspectedafter the flood season. Also, strict operational rules mustbeprepared andadopted to ensure the dams can operate safely before and duringany flooding. - 69 -  While a comprehensive dam safety assessment is to be conducted every six-ten years, complying withthe Rules for DamSafety Assessment devisedbythe MWRin2000, the reviewmade additionalrecommendations. These include: A dispatchingprogram for eachreservoir shouldbepreparedbythe reservoir management entities alongwith local authorities before each annual flood season; Dam safety monitoringprograms should be strengthenedandthe dams should be inspectedat least once a year; e Data from the monitoring shouldbe compiledyearly and analyzedjointly by the reservoir management entities and local authorities; remedial work proposedin the analyses shouldbe carried out. Basedon these recommendations, HenanProvince will arrange for anindependentdam specialist to inspect all four dams eachyear, before the second supervision mission(after the projectbecomes effective). The inspection report should beprovidedto the Bank's supervision team through the Henan PMO. The TOR for the specialist should be satisfactory to the Bank. These recommendations are reflected inthe EMP. InvoluntaryResettlement ProjectImpacts.The 38 water supply schemes(including theplantsandwater resource facilities) require that 1,005 muo f landbe acquired, averaging 27 muper scheme. The five wastewater treatment schemes need206 muo f land, or an averageo f41 mufor each. All areas involve f m l a n d inthe suburbso fthe countytowns. The water distributionsystem and sewage networkwill occupy landtemporarily duringconstruction, for which farmers will bepaid compensation. Details about landneededfor the water supplylwastewater treatment schemes are inTable 10-1. Table 10-1: AnticipatedLandAcauisition Kaifeng Municipality 1 Weishi 18.9 4 22.9 2 Tongxu 18.9 3 21.9 3 Lankao 30 4 34 4 Kaifeng 0 0 0 1 I 5 Oixian 30 2 32 LuoyangMunicipality 6 Mengjin 45 71 7 Yiyang 32 24 0.: 41 73.3 8 Songxian 22.3 0 22.3 Pingdingshan Municipality 9 Baofeng 17.6 2 37.8 57.4 10 Jiaxian 18.3 1.5 19.8 - 70 -  2 46 77.I 54 24 ft 2.6 33,t 3 33 3 37.2 7x 1 72 12 2 4 t2 3 15 15.1 15.t 2 24 3 2B*6 t .G 21>7 2 32 f 26.5 2 32.6 3 22.8 8.8 52.8 27A 23 ff 30 4f.S 31.8 - 71 -  project livingstandards, income-earning capacity andproductionlevels. Lack o f legalrights to the assetslost will not prevent them from receivingcompensation; 3. Providingrehabilitation measuresdue to landacquisition such as: (a) beingallotted agricultural landof equalproductive capacity; (b) being compensatedfor land acquisitionandresettlement subsidies (for farmers); and(c) beinggiven other forms o f assistance; 4. Providingreplacement landthat is as close as possible to the landthat was taken; 5. Consultingwith the people affectedwhen designing plans for acquiring land and other assets andprovidingcompensatorymeasures; 6. Providingfinancial andphysical resourcesfor resettlement andrehabilitation, when needed; 7. Ensuring effective andtimelydesign, planning, consultation andimplementation o f the resettlement planthrough specific institutional arrangements; and 8. Carryingout effective andtimely supervision, monitoringandevaluation ofthe implementation. Legalframework. Chinese lawslregulations, alongwith the Bank's Operational Policy 4,12, govern the Resettlement Plan. At the national level, these include the State LandLaw andits Implementation Regulations; at the provincial level, HenanProvince Implementation Strategies for the `Land Law o f the People's Rqublic o fChina'; and at the prefecture level, regulationsldecrees relatingto landacquisition andresettlement as issuedbymunicipal governments, Institutionalarrangements. Responsibility for implementingthe Resettlement Plani s as follows: 1. The Provincial PMO has overallresponsibilityfor enforcingthe Plan. Each county government is responsible for the day-to-day activities initsjurisdiction andwill ensure that the public participates inadopting the Plan. 2. Funds for implementing the Planwill be incorporated into the project budget and providedby local governments, which will consult with the affected villagers. Participation and disclosure. Various stakeholderstook a strong role inpreparingthe Resettlement Plan. The consolidatedPlanwas simplified into a Resettlement Pamphlet and distributedineachvillage affected; inturn, villagers will help design andimplement the Plan. Further,town andvillage governmentswill informallhouseholds oftheir entitlements and rehabilitation choices. Complaints and grievances. Issuesthat arisewithrespect to the project, such as the area selected, landcompensation andrehabilitation measures, will behandled as follows: 1, Inthe fust stage, complaints andgrievanceswillbepresentedtovillage, township andcounty governments. Ifindividualsarenot satisfied withthe localauthorities' decisions, they maypresent their cases to the ProvincialPMO. 2. Ifthey arenotsatisfiedwiththeProvincialPMO's decisions, theircasesmaybe submittedto the People's Court. 3. Themechanismfor complaints andgrievances will bemadeknownto all those affectedbefore resettlement begins. - 72 -  Implementationschedule. Landacquisitionwillbegininearly2006. Compensationandother rehabilitationentitlements (cash or in-kind)will becompletedbefore the scheduled startup date o fworks at the project sites. Monitoringandsupervision. The project covers 38 towns, with limitedlandacquisition in each. Close monitoring bylocalauthorities is vital. Further trainingon implementingthe Resettlement Planwill beprovidedat project launch. A Semi-Annual ProgressTable andthe Semi-Annual InternalMonitoringReport are described inthe ResettlementPlan. Estimatedcosts. Resettlementcostswill be-212.42 million, 8% o ftotal project costs. They will cover: 1. Landacquisition, ground attachment, andhousedemolition(RMB41.97 million) 2. Reconstructiono froads for installingpipes (R.MB105.66 million) 3. Design, training, monitoring andmanagement fees (RMB10.77 million) 4. Taxes and fees (RMB47.72 million) 5. Contingencies (RMB6.30 million) IndigenousPeoples4 Fouro fthe 38 projectcounties inHenanincludeHuiethnic minoritieswho live inthe countryside (see below). However, none live inthe project-affected towns. Yuanvang 15.000 3.3 Tongxu 23,000 4.6 I Lankao 1 30.000 I 5.5 I Social Assessment Willingness-to-payW P ) water tariff. An extensive social assessment ofstakeholders inthe county towns focused on WTP for improvedwater. It found that most residents supportedthe projectbecause: 1. Most drinkingwater comes fkom shallow groundwater and is contaminated. 2. At present, areliable andsufficient water supply, throughtap connections, covers fewer than45% o fhouseholds. Table 10-3shows the level o f support for the project andWTP water tariffs for three types of stakeholders: Including ethnic minorities - 73 -  I Stakeholders* Water Supply System Wastewater Treatment System Support Not Object Support NotCare Object Care 1, Urbanresidents 72.82% 21.89% 5.29% 76.0% 18.1% 5.3% 2. Migrants fromrural areas 67.81% 27.31% 4.88% 63.7% 29.1% 7.2% 3. Rural residents affectedbyland 37.59% 55.30% 7.11% 68.2% 22.7% 9.1% acquisition Affordabilityof water tariffs. An analysis of affordabilitywas made for urbanresidents, in general, andlow-income urbanresidents, inparticular. Onaverage, the combined water supply andwastewater tariff i s now 0.5% o fincome for three towns (see below). Withthe planned increaseinbothtariffs, the combined amount will be 3%-5% o f average householdincome, Table 10-4: Affordabilitv to Pav Water Tariff For low-income urbanhouseholds (4.47% o fthe urbanpopulationinthe project areas, which is slightlybelow the 4.81% inHenanProvince), local governments provide monthlyminimum livingallowances (MLAs). The lowest monthlyMLAis W 8 0perpersoninYuanyangCounty andthe highest isRMl3150inPingdingshanCity. For low-incomehouseholds, the Henan Provincial Government waives tariffs for 3 tons o fwater a month, which basicallyremoves the monthly water tariff for one personper household. With an average household size o f3.66 individuals, byremovingone person's tariff, the monthly amount for urbanlow-income householdis reducedto a moderate level, as shownbelow inthe Table 10-5. - 74 -  Category Annual Average Annual Average Payment for Percentageo f Water Income (RMBlcapita) Water Tariff(RMB/capita) Tariffto Income 1.Urbanpoor 1,500.00 18.75 1.25% 2. Urbanpoor in 1,800.00 18.75 1.04% Pingdingshan (150 x 12) 3. Urbanpoor in 960.00 18.75 1.95% Impacton the poor. Ten counties defined as 4 4 p ~byrthe national government andthree by ~ " theprovinceareincludedamongthe 38 project towns. The urbanpopulationofthe 38 county towns i s 4,052,600, o fwhich 174,300 (4.3%) are considered poor and supportedbymonthly MLAs.A qualitativeanalysis oftheproject's effects demonstratesthat poorhouseholds' living standardswill be improved significantly byhavingbetter access to improvedwater quality. Gender. Traditionally, womencarry water from handpumps.Duringthe field survey, most women andchildren were enthusiastic about the benefits fi-omthe expandedwater supply and saidthey were willing to paythe water tariff. Manywomen saidthe groundwater qualitywas poor andsickened their families, particularlychildren. Thus, they considered itworthwhile to pay the water tariff, insteado fmedical bills. Also, they saidpipedwater would save time and labor. - 75 -  Annex 11:ProjectPreparationandSupervision CHINA: HENANTOWNSWATER SUPPLY AND SANITATIONPROJECT Planned Actual PCNreview 11/03/2004 InitialPID to PIC 1112012004 09/27/2005 InitialISDS to PIC 1211812004 09/27/2005 Appraisal 11/02/2005 11/02/2005 Negotiations 04/03/2006 0511612006 BoardRVP approval 05/25/2006 Planned date o f effectiveness 12/15/2006 Planned date o fmid-termreview 0511012009 Planned closingdate 0613012013 Key institutions responsible for preparation o fthe project: HenanProvincialGovernment HenanEngineering Consulting Company BRL Bankstaff andconsultantswho workedontheprojectincluded: Name Title Unit Takuya Kamata Senior FinancialAnalyst / CurrentTTL EASUR Songsu Choi LeadUrbanEconomist / Former TTL SASE1 Margaret Png Senior Counsel LEGEA Shunong Hu Water Engineer 46 HaiyanWang Disbursement Officer LOAGl Xiaoping Li Senior Procurement Specialist EAPCO YiDong FinancialManagement Specialist 66 IvanVelev Corporate Strategy Officer SFRSI Takao Ikegami Senior Sanitary Engineer ECSIE Mei Wang Senior Economist OPCIL Chongwu Sun Senior Environment Specialist EASEN Youlan zou Senior Social Development Specialist EASSD ElisaMuzzini Junior Professional Associate EASIN Xiaofeng Li Senior ProgramAssistant EACCF Vellet Fernandes ProgramAssistant EASUR EdouardHenriMotte Consultant EASUR Yoonhee Kim Consultant 66 KnudBitschLauritzen Consultant LL Bum-Ho Lee Consultant 66 - 76 -  Annex 12: Documentsinthe ProjectFile CHINA: HENANTOWNSWATER SUPPLYAND SANITATIONPROJECT 1. "Integrated FeasibilityStudyReportfor Water SupplyProjectofHenanMiddleand Small Citywith the World Bank Loan", October2005. Preparedby HenanEngineering Consulting Company(HECC), October2005 2. "Environment ImpactAssessment ReportAndEnvironmentManagementPlanFor the Water supply andwater drainageproject insmalltowns ofHenanProvince", October 2005. PreparedbyChinaInstituteofWater ResourcesandHydropower Research 3, "Report FormofEnvironmentalImpactofWorld Bank-FundedTongxu CountyWater SupplyProject", September2005. PreparedbytheNational EnvironmentalProtection Agency. 4. "Report FormonEnvironmentalTmpact ofthe ConstructionProject - Wastewater Treatment Planto fMengjinCounty Seat", May2005. Preparedbythe National EnvironmentalProtectionAgency, 5. "The Report on the SocialEvaluationof the Water Supply & DrainageProject inthe MediumandSmall Cities ofHenanProvince", May2005. Preparedbythe Socialand Resettlement Institute ofNCWU. 6. "Resettlement PlanningReport ofHenanTowns Water (Supply andDrainage) Projectthe Peoples' Republic of China", October2005. Preparedbythe Foreign-LoanProject ManagementOffice ofHenanProvince. 7. "The Reportonthe SocialEvaluation ofthe Water Supply & DrainageProject inthe MediumandSmall Cities ofHenanProvince", May2005. Preparedbythe Socialand Resettlement InstituteofNCWU. 8. FinancialStatements SummaryofWater Utility Companiesof38 towns in2003 and 2004, November2005, Preparedbythe WUCs. 9. "Financial Projectionsof Water UtilityCompanies: Tongxu Water SupplyCompaJlies andYuangyangWastewaterCompanies", November2005, Preparedbythe ProjectTask Team. 10. FinancialRate ofReturnCalculationTable, November2005, Preparedbythe Project Task Team 11.Currentandrevisedtariffplandataandletters ofcommitment fiom counties, November 2005, Submittedbythe W C s , 12.FinancingPlanData, November, 2005, Preparedbythe HECC. - 77 -  13, Monitoring IndicatorsBaseline andTarget Values, November 2005, Preparedbythe Project Task Team 14. DetailedImplementation arrangement,November 2005, Preparedbythe Project Task Team 15. Analysis ofandTerms of Referencefor low-performingWSCs andW C s , November 2005, Preparedbythe Project Task Team 16. Memorandumon landissues, November 2005, Preparedby EASUR 17. Charters andLicenses of Water UtilityCompanies, December 2005, Submittedbythe wucs 18. TrainingNeeds Assessment for UtilityStdf, December 2005, Submittedby the Henan ProvincialProject Management Office - 78 -  Annex 13: StatementofLoansandCredits CHINA: HENANTOWNSWATER SUPPLYAND SANITATION PROJECT Differencebetween expeatedandactual Original Amount inUS$Millions disbursements ProjectID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm.Rev'd PO65463 2004 CN - JiangxiIntegratedAgric.Modem. 100.00 0.00 0.00 0.00 0.00 100.00 1S O 0.00 PO65035 2004 CN-Gansu& Xinjiang Pastoral 66.27 0.00 0.00 0.00 0.00 65.61 4.53 0.00 Development PO66955 2004 CN-ZhejiangUrbanEnvmt 133.00 0.00 0.00 0.00 0.00 133.00 0.00 0.00 PO73002 2004 CN-Basic EducationinWestern Areas 100.00 0.00 0.00 0.00 0.00 100.00 0.00 0.00 PO77615 2004 CN-GEF-Gansu & Xinjiang Pastoral 0.00 0.00 0.00 10.50 0.00 10.50 0.80 0.00 Develop PO67337 2003 CN-2nd GEF EnergyConservation 0.00 0.00 0.00 26.00 0.00 14.60 16.57 0.00 PO40599 2003 CN-TIANJIN URB DEV I1 150.00 0.00 0.00 0.00 0.00 148.50 -1SO 0.00 PO58847 2003 CN9rd Xinjiang HwyProject 150.00 0.00 0.00 0.00 0.00 106.13 9.47 0.00 PO68058 2003 CN-Yixing PumpedStorageProject 145.00 0.00 0.00 0.00 0.00 140.95 2.13 0.00 PO76714 2003 CN-Anhui Hwy2 250.00 0.00 0.00 0.00 0.00 250.00 15.33 0.00 PO70441 2003 CN-HubeiXiaogan Xiangfan Hwy 250.00 0.00 0.00 0.00 0.00 156.78 -20.56 0.00 PO70191 2003 CN-SHANGHAI URB ENVMTAPLl 200.00 0.00 0.00 0.00 0.00 198.00 -2.00 0.00 PO64729 2002 CN-SUSTAINABLE FORESTRYDEV. 93.90 0.00 0.00 0.00 0.00 76.07 1.58 0.00 PROJECT PO58846 2002 CN-Natl RailwayProject 160.00 0.00 0.00 0.00 0.00 37.04 0.37 0.00 PO71147 2002 CN-Tuberculosis ControlProject 104.00 0.00 0.00 0.00 0.00 92.67 -11.33 0.00 PO60029 2002 CN-Sustain. ForestryDevvatural 0.00 0.00 0.00 16.00 0.00 14.11 3.00 0.00 Forest) PO70459 2002 CN-Inner Mongolia HwyProject 100.00 0.00 0.00 0.00 0.00 88.82 6.49 0.00 PO68049 2002 CN-Hubei HydropowerDevinPoor 105.00 0.00 0.00 0.00 0.00 87.68 12.84 0.00 Areas PO58845 2001 Jiangxi I1Hwy 200.00 0.00 0.00 0.00 0.00 133.42 8.75 0.00 PO56199 2001 CN-3rd InlandWaterways 100.00 0.00 0.00 0.00 0.00 80.46 5.96 0.00 PO56516 2001 CN - WATER CONSERVATION 74.00 0.00 0.00 0.00 0.00 41.14 9.71 0.00 PO56596 2001 CN-ShijiazhuangUrbanTransport 100.00 0.00 0.00 0.00 0.00 85.41 52.47 0.00 PO47345 2001 CN-HUAI RIVER POLLUTION 105.50 0.00 0.00 0.00 0.00 89.85 -15.65 0.00 CONTROL PO51859 2001 CN-LIAO RIVER BASIN 100.00 0.00 0.00 0.00 0.00 74.72 32.02 0.00 PO45915 2001 CN-Urumqi UrbanTransport, 100.00 0.00 0.00 0.00 0.00 52.54 47.34 0.00 PO45910 2000 CN-HEBEI URBAN ENVIRONMENT 150.00 0.00 0.00 0.00 0.00 119.36 46.36 0.00 PO49436 2000 CN-CHONGQINGURBANENVMT 200.00 0.00 0.00 0.00 3.70 157.50 65.17 0.00 PO56424 2000 TONGBAI PUMPEDSTORA 320.00 0.00 0.00 0.00 100.00 155.85 96.19 0.00 PO45264 2000 CN-SMALLHLDR CATTLE DEV 93.50 0.00 0.00 0.00 0.00 12.84 6.87 0.00 PO42109 2000 CN-BEUING ENVIRONMENTI1 349.00 0.00 0.00 25.00 0.00 286.54 180.67 0.00 PO58844 2000 3rd HenanProvHwy 150.00 0.00 0.00 0.00 0.00 61.19 26.86 0.00 PO58843 2000 Guangxi Highway 200.00 0.00 0.00 0.00 0.00 102.57 46.57 0.00 PO64924 2000 CH-GEF-BEUINGENVMT I1 0.00 0.00 0.00 25.00 0.00 25.93 18.84 2.86 PO64730 2000 CN Yangtze Dike Strengthening - 210.00 0.00 0.00 0.00 0.00 111.52 95.52 0.00 Project PO50036 1999 Anhui ProvincialHwy 200.00 0.00 0.00 0.00 9.60 34.96 34.16 0.00 - 79 -  PO51705 1999 Fujian I1Highway 200.00 0.00 0.00 0.00 0.00 65.73 63.07 0.00 PO51856 1999 ACCOUNTING REFORMt 27.40 5.60 0.00 0.00 0.00 17.89 17.84 0.00 DEVELOPMENT PO41268 1999 CN-Nat Hwy4/Hubei-Hunan 350.00 0.00 0.00 0.00 0.00 59.72 37.72 0.00 PO57352 1999 CN-RURAL WATER IV 16.00 30.00 0.00 0.00 0.00 21.81 15.87 8.72 PO58308 1999 CN-PENSION REFORMPJT 0.00 5.00 0.00 0.00 0.00 1*77 1.75 0.00 PO56216 1999 CN LOESS PLATEAUI1 - 100.00 50.00 0.00 0.00 0.00 24.54 26.67 0.00 PO60270 1999 CN-ENTERPRISEREFORMLN 0.00 5.00 0.00 0.00 0.00 2.71 4.29 4.07 PO38121 1999 CN-GEF-RENEWABLE ENERGY 0.00 0.00 0.00 35.00 0.00 28.91 27.18 7.95 DEVELOPMENT PO51888 1999 CN GUANZHONG IRRIGATION - 80.00 20.00 0.00 0.00 0.00 32.26 25.50 0.00 PO49665 1999 CN-ANNING VALLEY AG.DEV 90.00 30.00 0.00 0.00 0.00 19.19 10.38 0.00 PO46051 1999 CN-HIGHER EDUC. REFORM 20.00 50.00 0.00 0.00 0.00 5.70 7.31 0.00 PO43933 1999 CN-SICHUAN URBANENVMT 150.00 2.00 0.00 0.00 0.00 91.74 78.60 24.15 PO42299 1999 TEC COOP CREDIT IV 10.00 35.00 0.00 0.00 0.00 36.03 -11.40 0.00 PO41890 1999 CN-Liaoning UrbanTransport 150.00 0.00 0.00 0.00 0.00 36.96 36.96 0.00 PO36953 1999 CN-HEALTH I X 10.00 50.00 0.00 0.00 0.00 36.85 22.30 0.00 PO03653 1999 CN-Container Transport 71.00 0.00 0.00 0.00 18.61 3.62 22.20 0.79 PO46829 1999 RENEWABLE ENERGY 100.00 0.00 0.00 0.00 0.00 12.87 99.87 8.23 DEVELOPMENT PO46564 1999 CN - Gansu &InnerMongoliaPoverty 60.00 100.00 0.00 0.00 13.30 44.87 34.07 -6.75 Red. PO03614 1998 CN-GuangzhouCity Transport 200.00 0.00 0.00 0.00 20.00 100.31 120.31 100.31 PO03606 1998 ENERGYCONSERVATION 63.00 0.00 0.00 22.00 0.00 35.87 18.81 0.00 PO35698 1998 HUNANPOWERDEVELOP. 300.00 0.00 0.00 0.00 145.00 31.45 173.45 -18.46 PO49700 1998 CN- MIL-2 300.00 0.00 0.00 0.00 0.00 3.97 3.97 0.66 PO37859 1998 CN-GEF EnergyConservation 0.00 0.00 0.00 22.00 0.00 0.71 22.06 0.00 PO03619 1998 CN-2nd InlandWaterways 123.00 0.00 0.00 0.00 37.00 19.18 54.54 6.46 PO40185 1998 CN-SHANDONG ENVIRONMENT 95.00 0.00 0.00 0.00 1.40 20.07 21.47 1.58 PO03566 1998 CN-BASIC HEALTH(HLTHS) 0.00 85.00 0.00 0.00 0.00 38.40 23.65 0.00 PO46563 1998 CN TARIM BASIN 11 - 90.00 60.00 0.00 0.00 2.67 14.78 16.88 0.00 PO45788 1998 Tri-Provincial Hwy 230.00 0.00 0.00 0.00 0.00 19.18 16.12 0.00 PO03539 1998 CN SUSTAINABLECOASTAL - 100.00 0.00 0.00 0.00 2.06 47.54 46.27 36.72 RESOURCESDEV. PO51736 1998 E. CHNNJIANGSUPWR 250.00 0.00 0.00 0.00 86.00 50.31 136.31 13.22 PO46952 1998 CN FOREST.DEV. POORAR - 100.00 100.00 0.00 0.00 0.00 29.62 -71.61 9.25 PO36949 1998 CN-Nat Hwy3-Hubei 250.00 0.00 0.00 0.00 0.00 21.15 21.15 0.00 PO36414 1998 CN-GUANGXI URBANENVMT 72.00 20.00 0.00 0.00 0.00 71.56 66.02 25.79 PO03637 1997 CN-NATL RURALWATER 3 0.00 70,00 0.00 0.00 0.00 0.56 3.77 3.35 PO03590 1997 CN QINBA MOUNTAINS - 30.00 150.00 0.00 0.00 0.00 13.16 16.34 -0.95 POVERTY REDUCTION PO35693 1997 FUELEFFICIENT IND. 0.00 0.00 0.00 32.80 0.00 6.83 32.81 0.00 PO03654 1997 Nat Hwy2/Hunan-Guangdong 400.00 0.00 0.00 0.00 0.00 48.52 48.52 20.68 PO03650 1997 TUOKETUO POWEWINNER 400.00 0.00 0.00 0.00 102.50 37.37 139.87 27.63 PO38988 1997 CN HEILONGJIANG ADP - 120.00 0.00 0.00 0.00 0.00 7.72 7.72 4.54 PO44485 1997 SHANGHAI WAIGAOQIAO 400.00 0.00 0.00 0.00 0.00 84.49 56.03 44.04 PO36405 1997 CN WANJIAZHAI WATER TRA - 400.00 0.00 0.00 0.00 75.00 22.58 97.58 10.00 PO03602 1996 CN-HUBEI URBANENVIRONMENT 125.00 25.00 0.00 0.00 28.32 39.72 70.08 32.41 PO03599 1996 CN-YUNNAN ENVMT 125.00 25.00 0.00 0.00 19.48 35.68 56.92 7.10 PO40513 1996 2nd HenanProv Hwy 210.00 0.00 0.00 0.00 19.00 16.69 35.69 23.69 - 80 -  PO03594 1996 CN GANSU HEX1CORRIDOR - 60.00 90.00 0.00 0.00 0.00 73.92 58.83 0.00 PO03589 1996 CN-DISEASE PREVENTION(HLTH7) 0.00 100.00 0.00 0.00 0.00 1.97 10.99 0.00 PO34618 1996 CN-LABOR MARKET DEV. 10.00 20.00 0.00 0.00 0.00 5.66 7.75 0.00 PO03648 1996 CN-SHANGHAI SEWERAGEI1 250.00 0.00 0.00 0.00 0.00 39.94 39.94 4.81 PO03571 1995 CN-7th Railways 400.00 0.00 0.00 0.00 119.00 10.28 129.28 20.28 PO03639 1995 CN-SOUTHWEST POVERTY 47.50 200.00 0.00 0.00 0.01 1.21 25.36 25.36 REDUCTIONPROJECT PO03647 1995 ChinaEconomicLawReform-LEGEA 0.00 10.00 0.00 0.00 0.00 0.50 0.83 0.00 PO03603 1995 CN-ENT HOUSING& SSR 275.00 75.00 0.00 0.00 57.46 38.52 93.86 2.17 PO03596 1995 CN-Yangtze BasinWater Resources 100.00 110.00 0.00 0.00 1.92 0.34 4.75 4.75 Project PO03540 1994 CN-LOESS PLATEAU 0.00 150.00 0.00 0.00 0.00 1.12 0.50 0.00 PO03632 1993 CN-ENVIRONMENT TECH ASS 0.00 50.00 0.00 0.00 0.00 1.11 1.73 1.41 Total: 11,719.07 1,722.60 0.00 214.30 862.03 4,981.42 2,925.76 456.82 CHINA STATEMENT OF IFC's HeldandDisbursedPortfolio InMillions ofUSDollars ~~ ~ ~~ ~~ Committed Disbursed IFC IFC FYApproval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2001 Peak Pacific 0.00 0.00 25.00 0.00 0.00 0.00 0.00 0.00 0 RabobankS H k 0.45 0.00 0.00 0.45 0.45 0.00 0.00 0.45 2000 SSIF 0.00 6.00 0.00 0.00 0.00 0.89 0.00 0.00 1998 Shanghai Krupp 28.92 0.00 0.00 65.63 28.92 0.00 0.00 65.63 1999 Shanghai Midway 0.00 16.02 0.00 0.00 0.00 16.02 0.00 0.00 1999 Shanxi 16.75 0.00 0.00 0.00 14.20 0.00 0.00 0.00 1993 ShenzhenPCCP 3.76 0.00 0.00 0.00 3.76 0.00 0.00 0.00 Sino Gold 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 2001 Sino-Forest 25.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00 1995197 Suzhou PVC 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998 WIT 5.00 0.00 0.00 0.00 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 1.03 0.00 0.00 0.00 1.03 0.00 0.00 0.00 2003 XACB 0.00 19.93 0.00 0.00 0.00 0.00 0.00 0.00 1993 Yantai Cement 6.33 1.95 0.00 0.00 6.33 1.95 0.00 0.00 0 Zhen Jing 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2003 Zhengye-ADC 15.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00 2002103 Advantage 0.00 0.50 0.00 0.00 0.00 0.50 0.00 0.00 2003 BCIB 0.00 0.00 11.60 0.00 0.00 0.00 0.00 0.00 1999/00/02 Bankof Shanghai 0.00 24.67 0.00 0.00 0.00 24.67 0.00 0.00 2002 CDHChinaFund 0.00 16.36 0.00 0.00 0.00 2.38 0.00 0.00 1998100 CIG Holdings PLC 0.00 3.00 0.00 0.00 0.00 3.00 0.00 0.00 2003 CSMC 0.00 12.00 0.00 0.00 0.00 7.20 0.00 0.00 - 81 -  1998 ChengduHuarong 6.73 3.20 0.00 7.82 6.73 3.20 0.00 7.82 1998 Chengxin-IBCA 0.00 0.36 0.00 0.00 0.00 0.36 0.00 0.00 1987192194 ChinaBicycles 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1994 China WaldenMgt 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 1994 China WaldenVen 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1994 DalianGlass 0.00 2.40 0.00 0.00 0.00 2.40 0.00 0.00 1995 Dupont Suzhou 9.35 4.15 0.00 0.00 9.35 4.15 0.00 0.00 1994 Dynamic Fund 0.00 8.76 0.00 0.00 0.00 7.10 0.00 0.00 2003 Great Infotech 0.00 3.50 0.00 0.00 0.00 2.10 0.00 0.00 1999 Hansom 0.00 0.08 0.00 0.00 0.00 0.08 0.00 0.00 2002 HuarongAMC 23.74 3.00 0.00 0.00 14.74 0.01 0.00 0.00 2002 IEC 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998 LeshanScana 5.36 1.35 0.00 0.00 3.76 1.35 0.00 0.00 2001 MaanshanCarbon 9.00 2.00 0.00 0.00 9.00 2.00 0.00 0.00 2001 MinshengBank 0.00 23.50 0.00 0.00 0.00 23.50 0.00 0.00 2001 NCCB 0.00 26.58 0.00 0.00 0.00 26.46 0.00 0.00 1996 NanjingKumho 3.89 3.81 0.00 11.07 3.89 3.81 0.00 11.07 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 1997198 Orient Finance 0.00 0.00 0.00 0.00 0.00 0,oo 0.00 0.00 2003 PSAM 0.00 1.93 0.00 0.00 0.00 0.00 0.00 0.00 1997100 PTP Holdings - 0.00 0.03 0.00 0.00 0.00 0.03 0.00 0.00 Totalportflio: 195.31 217.74 36.64 84.97 139.16 158.44 0.00 84.97 ~~ Approvals PendingCommitment FYApproval Company Loan Equity Quasi Partic. 2002 ASIMCO 0.00 0.00 0.01 0.00 2003 Anjia 0.00 0.01 0.00 0.00 2004 CCB-MS NPL 0.03 0.00 0.00 0.00 2004 CUNA RCCI 0.00 0.01 0.00 0.00 2003 Cellon 0.00 0.01 0.00 0.00 2002 Darong 0.01 0.00 0.00 0.01 2002 HuarongAMC 0.02 0.00 0.00 0.00 2002 IEC 0.00 0.00 0.01 0.00 2002 W I T 0.00 0.00 0.00 0.00 2003 Peak Pacific2 0.00 0.01 0.00 0.00 2003 SAIC 0.01 0.00 0.00 0.00 2002 SML 0.00 0.00 0.00 0.00 2002 SinoMining 0.01 0.00 0.00 0.01 2002 ZhongChen 0.03 0.00 0.00 0.03 Totalpendingcommittment: 0.11 0.04 0.02 0.05 - a2 -  Annex 14: Country at a Glance CHINA: HENANTOWNS WATER SUPPLY AND SANITATIONPROJECT East Lower- POVERTY and SOCIAL Asia & middie- China Paciflc income Development diamond` 2002 Population,midyear(millions) 12810 1838 2pn Lifeexpectancy GNIpercapita(Atlas method, US$) 950 950 1,390 GNI(Mas method,US$billions) 1219.1 $740 3,352 Average annual growth, 1996-02 Population(%) 0.8 10 10 Laborforce (%) 0.9 l2 l2 Gross Most recent estimate (latest year available, 1896-02) primary capita enroIimant Poverty(%ofpopulationbelownationalpover?y/ine) 5 U b n population (%of tota/po~lation) 38 38 49 Ldeexpectancyat birth(pars) 71 69 69 hfantmortality(pr 10L)L)livebirths) 30 33 30 Childmalnutrition(%ofchi!dmnunder5) x) 15 n Accessto improvedwatersource Accessto animprovedwater source (%ofpopulation) 75 76 81 Illiteracy(%ofpopulationage %+) 14 t3 t3 Grossptimaryanmllment (%of s c ~ o / ~ ~ ~ ~ l a t i o XI6) n 106 m -China Male 105 105 in -- -Lo~r-m~d/e-incomegroup Female x)8 x)6 lx) KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1892 2001 2002 GDP (us%billions) 1 Economlc ratios' ratios' 221.5 454.6 1167.1 1232.7 Economlc Gross domesticinvestmentlGDP 332 362 38.5 41.0 worts of goodsandservkaslGDP 89 8.5 25.5 29.5 Trade GmssdomesticsavingslGDP 34.8 37.7 40.9 44.O Gross nationalsavingslGDP 35.1 38.0 40.0 438 CurrentaccountbalancelGDP 2.4 19 15 29 Domestic hterestpapentslGDP 0 2 0.6 0.5 05 savings 4 investment TotaldebtlGDP 3.8 15.9 14.6 P.6 Totaldebt servicelexports 8.0 8.6 7.7 6.1 1 I Presentvalue of debWGDP 14.1 Presentvalueof debtlaxports 528 Indebtedness 1982-92 1982-02 2001 ~ 2002 2002-06 (averageannualgrorulh) GDP 9.7 9.0 7.5 8.0 75 -China GDP percapita 8.1 8.0 6.7 7 2 6.6 lgg22001 Zoo2 ' Growth of investment and GDP (%) (%of GDP) Agriculture 338 218 - hdustry 450 439 Manufactunng 373 331 342 445 SeNICeS 217 343 341 337 I - Privateconsumption 50.7 492 45.7 425 97 98 9s 00 01 02 Generalgovernmentconsumption 14.5 13.1 13.4 135 i hpOrtSOf goodsandServices 7.3 18.0 23.1 265 -GDI -GDP 1982-92 1992-02 2001 (averageannualgrorulh) Agricuture 4.6 37 2.8 hdustry 11.6 11.3 8.4 ~anufacturing 112 a4 9a Services 11.7 8.4 89 Privateconsumption n.4 81 2.8 GeneralgovernmentCOflSUmPtiOn 9.9 8.4 n.5 Gross domestic investment 9.5 9.7 t3.9 hports of goodsandservices 9.7 P.8 a.8 - 83 -  PRICES and GOVERNMENT FINANCE 1982 1902 2001 2002 Domestic prices lntlatlon (X) (%CmnbW 10T Consumerprices 6.0 6.4 0.7 -0.6 hpliiit GOP defiator -02 7.9 t2 -2.6 Government finance (%ofGDP,includescurrentgrants) Current revenue 22.9 14.7 l7.1 l7.9 Currentbudgetbalance 2.0 11 0.0 -GDPdellator Overallsutplusldeficit -03 -10 -4.7 -3.0 i -CPI TRADE 1982 1992 2001 2002 (US$ mi//ions) ~ rand Import levels (US0 mill.) t Totaleqorts (fob) 22321 84,940 266,m 325,565 Food 2,908 8W9 P,780 14,623 Fuel 5314 4,693 8,420 8372 Manufactures P271 67,936 239,802 297,085 Total imports(cif) 19285 80,585 243,60 295203 Food 4201 3,146 4,980 5237 Fueland energy 183 3,570 7,495 19285 Capitalgoods 3204 3132 x)7p40 f37,030 Eqort priceindex(S95=ZW) 41 85 83 78 hporlpricelndex(995cZW) 71 95 91 86 Terms of trade (SS-xlo) 58 69 91 90 BALANCE of P A Y M E N T S 1982 1992 2001 2002 (US$ mi//ions) !Current account balance to GDP (%) , Eqorts of goodsandservices 24,900 94,196 299,409 365,395 hports of goodsandservices 20.555 86,752 271,325 326,013 Resourcebalance 4,350 7,446 28,084 37,383 Net income 376 249 -8,T74 -14,945 Net currenttransfers 486 1W 8,492 P.984 Currentaccountbalance 5 2 2 8850 7,401 35,422 Financingitems(net) -995 -a952 30m 40,085 Changes innet reserves -42l7 2 - a -47,447 -75507 9e 97 98 89 00 01 02 Memo: Reserves includinggold(US$ mi//ions) 24842 220,051 297,721 Conversion rate(DEC, iocaVUS$) 2.4 5.9 8.3 8.3 EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US$ miUions) :omposltlon of 2002 debt (US0 mill. Totaldebtoutstandinganddisbursed 8,358 72628 l70.110 65,678 IBRD 0 3,752 1 W P,O51 IDA 1 4267 8,654 8,729 A. 12.051 Totaldebt service 2,25 8,6B 24297 23,688 BRO 0 460 1550 1,631 IDA 0 30 151 175 Compositionof net resourceflows OfficialQrants 47 327 240 Officialcreditors 657 2,343 2,156 -839 Privatecrediiors -p2 8949 -4,OO -13593 Foreigndirect investment 430 11156 44241 49,308 Portfolioequity 0 1243 3,015 2,266 F 62,x)3 World Bankprogram Commitments 330 1865 782 583 4 E Bilaterd - Disbursements 1 1331 I791 1,733 3-- IBRD IDA D OIW mtltilaterd F. Private - Principalrepayments 0 8 7 904 1,157 >-IMF G Short-terr - - 84 -  MAP SECTION   IBRD 34329 I I 111