Document of The World Bank FOR OFFICIAL USE ONLY C:j./ 2C>/ -C^/'+ Report No. 6485-CHA STAFF APPRAISAL REPORT CHINA SHANG,HAI SEWERAGE PROJECT March 20, 1987 Projects Department East Asia and Pacific Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURENCY EQUIVALENT Currency Unit - Yuan (Y) Calendar 1986 March 1987 $ 1.00- Y 3.48 Y 3.71 Y 1.00- $ 0.28 $ 0.27 The staff appraisal report is based on the exchange rate (US$1.00 Y 3.71) prevailing at appraisal in September 1986. FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES ADWF average dry veather flow lped liters per capita per day A$ Australia dollar m meter BOD5 5-day biochemical oxygen demand m3 cubic meter dia diameter m3/day cubic meters per day DO dissolved oxygen mg/l milligram per liter km kilometer sq km square kilometer ABBREVIATIONS USED ADAB Australian Development Assistance Bureau BOF Bureau of Finance of Shanghai BMEA Bureau of Municipal Engineering Administration of Shanghai BSA Bureau of Sanitation Administration of Shanghai BUP Bureau of Urban Planning of Shanghai Cc Construction Commission of Shanghai EC Economic Commission of Shanghai EPA Environmental Protection Agency EPB Environmental Protection Bureau of Shanghai COC Government of the People's Republic of China HiLLG High Level Leadership Group (Shanghai) MDAD Municipal Drainage Administration Division of BMEA MEAD Municipal Engineering Administration Division of BMEA MOF Ministry of Finance MURCEP Ministry of Urban and Rural Construction and Environmental Protection PC Planning Commission of Shanghai SAA State Audit Agency SM Shanghai MuT.icipality SMAB Shanghai Municipality Audit Bureau SMEDI Shanghai Municipal Engineering Design Institute SMR Shanghai Metropolitan Region SMWC Shanghai Municipal Waterworks Company SPC State Planning Commission SSC Shanghai Sewerage Company SSPCC Shanghai Sewerage Project Construction Company STDI Shanghai Tunnel Design Institute .CW 10 FOR OMFCL USE ONLY CHINA SHANGHAI SEWERAGE PROJECT Loan/Credit and Project Summary Borrower: People's Republic of China Beneficiaries: Shanghai Municipality and Shanghai Sewerage Company Amount: IBRD Loan: $45 million IDA Credit: SDR 78.9 million ($100 million equivalent) Terms: IBRD Loan: 20 years inclu4ing 5 years of grace, at standard variable interest rate. IDA Credit: Standard Relending Terms: From the Government to Shanghai Municipality: 20 years including 5 years of grace at 4.5% p.a. interest. From Shanghai Municipality to Shanghai Sewerage Company: 20 years including 5 years of grace at 4.5% p.a. interest. Project The objectives of the project are to improve the Description: environment of Shanghai through building sewerage facilities for the removal arid disposal of wastewater in the city, and to create and develop the institutions for providing sewerage services, managing water resources and protecting the environment. The project consists of the construction of a link and intercepting sewer -ystem to collect and transport wastewater in the project area to the estuary of the Changjiang for disposal, conducting of four studies and training. Project elements consist of a 35 km long trunk intercepting sewer, 32 km of link sewers, two pump stations on the intercepting sewer and eight pump stations on the link sewers, a screening plant and 2.6 km of outfall tunnels. The studies include: (a) a management and organization study to determine organizational and staffing needs for the Shanghai Sewerage Company (SSC); (b) a sewerage tariff study ; (c) a river basin management study of the Huangpu River for the purpose of setting up the institutional framework for water resources allocation and waste discharge control; and (d) a study to examine economic ways of rehabilitating the existing combined sewer system in Shanghai. A comprehensive training program for SSC and Shanghai Sewerage Project Construction Company (SSPCC) staff would also be carried out. The main benefits of the project come from the improvement of the environment in Shanghai, and institutional development in management of liquid wastes and environmental pollution control. Project risks include: (a) possibility of environmental problems at This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. the Changjiang estuary due to stronger than expected effluents entering the system or overestimation of assimilative capacity of the estuary; and (b) failure to reduce point and non-point pollution sources upatream of the city resulting in inability to achieve water quality objectives. Monitors have been built into the project to detect problems early in order that appropriate remedies can be found and carried out. Estimated Costs: Local Foreign Total ----- ($ million) ----- Civil Works 120.7 75.2 195.9 M & E Equipment 9.6 26.7 36.3 Design, supervision, managemment, studies and training 12.5 8.1 20.6 Land acquisition 48.4 10.6 59.0 Base Cost (1987 prices) 191.2 120.6 311.8 Physical contingency 19.1 12.1 31.2 Price contingency 7.9 5.1 13.0 Total Project Cost /a 218.2 137.8 356.0 Interest during construction 0.0 16.6 16.6 Total Financing required 218.2 154.4 372.6 Financing Plan: Local Foreign Total t -*'($ million) - Proposed IBRD loan/IDA credit 7.2 137.8 145.0 38.9 Shanghai Municipal Government 211.0 16.6 227.6 61.1 Total 218.2 154.4 372.6 100.0 Estimated Disbursements: Bank Group FY 1988 1989 1990 1991 1992 1993 - ($ million) --------------- Annual 12 21 38 33 27 14 Cumulative 12 33 71 104 131 145 /a Project-financed goods are exempt from import duties and taxes..CW 10 CHINA SHANGHAI SEWERAGE PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. 1. THE URBAN AND ENVIRONMENTAL SECTORS ..1...................... Urbanization in China ....... ............................ 1 Environmental Situation in Urban Areas ................ .. 1 Sector Organization ..................................... 2 Sectorial Issues and Priorities ...... ................... 2 Past Experience under Previous Operation ... ............. 3 Bank Role in Sector ........ ............................. 3 II. PROJECT BACKGROUND ............... ... 4 Project Genesis ............................ 4 Shanghai Municipality ........................... 4 Water Supply .................................... 5 Domestic and Industrial Wastewater Disposal ............. 5 Status of Existing Sewerage System ............... 6 Present Environmental Situation ................. 7 III. POPULATION, WATER CONSUMPTION AND WASTEWATER FLOW PROJECTIONS 7 Population Growth .......... ............................. 7 Regulations Affecting Water Use and Wastewater Discharge 8 Water Demand ............................................ 8 Wastewater Flow Projections ....... ..................... 9 Sewer Design Criteria ................................... 9 Biological Loads and Toxic Matters .................. .... 10 This report is based on the findings of an appraisal mission consisting of Nessrs. John W. Huang, N. Noda (Engineers), C. Fernandez, P.C. Kapur (Financial Analysts), H.A. Garn (Economist) and M. Durosseau (Environmental Engineer), who visited China in September, 1986. IV. THE PROPOSED PROJECT ....................................... 10 Project Objectives ...................................... 10 Project Conceptual Design ........................ . 11 Project Description ..................................... 11 Rationale for Bank Involvement ...... ................. ... 12 Project Cost Estimates ........ ....................... ... 12 Project Financing Plan ........ ....................... ... 13 Status of Engineering ........ ........................ ... 14 Project Management ...................................... 14 Consultant Services ..................................... 15 Procurement ............................................. 15 Disbursement ............................................ 16 Land Acquisition and Resettlement ....................... 17 Monitoring Criteria ..................................... 17 Environmental Pollution Control ...... ................... 17 V. THE BENEFICIARY .................. 19 The Shanghai Sewerage Company ........... .. .............. 19 Exi5ting Institutional Arrangements ........ .. ........... 19 Organizational Improvements ............ .. ............... 19 Billing and Collection ........ ....... .. ................. 21 Accounting ....................... ....................... 21 Audits ....................... .. ......................... 22 Staff Training and Development ........... .. ............. 22 Insurance ........ 23 Taxation ................................ ............... 23 VI. FINANCE . .................................................... 23 Past and Present Financial Position ........ .. ........... 23 Balance Sheet and Fixed Assets ........... .. ............. 24 Financial Objectives .................. .................. 24 Sewerage Tariffs .................... .................... 25 Future Financial Performance ............ .. .............. 25 Shanghai Municipal Finances ............ .. ............... 27 VII. ECONOMIC, SOCIAL AND ENVIRONMENTAL CONSIDERATIONS .... ...... 28 Project Justification ........ ....... .. .................. 28 Least-Cost Considerations ....................... ..... 28 Project Benefits .................... .................... 29 Average Incremental Cost and Affordability ....... ....... 30 Environmmental Impact ........ ....... .. .................. 31 Project Risks ..................... ...................... 31 VIII. AGREEMENTS REACHED AND RECOMMENDATION ...................... 31 TABLES IN TEXT 4.1 Project Cost Estimate ........ ........................... 13 4.2 Project Financing Plan .................................. 13 4.3 Procurement Arrangements ................................ 16 6.1 Past Expenditures for Sewerage Services ..... ............ 24 6.2 Key Financial Indicaters ................................ 27 ANNEXES ....... 34 1. Flow Diagram of Existing Sewerage System. 34 2. Wastewater Disposal Alternatives .35 3. Water Demand and Sewerage Projections .37 4. Estimate of Wastewater Effluent Requirement at Sewer Outfall 39 5. Proposed Industrial Wastewater Standards for Discharge into Combined Sewer System ....................,.,,. 40 6. Project Components. 41 7. Project Cost Estimate .42 8. Project Cost Estimate by Contracts .46 9. Project Implementation Schedule .47 10. Disbursement Schedule .48 11. Project Management Organization .49 12. Organization of Shanghai Sewerage Company .50 13. Resettlement Plan .51 14. Assumptions for Financial Projections .52 15. Shanghai Sewerage Company - Financial Projections. 57 Table 1: Income Statement Table 2: Sources and Applications of Funds Table 3: Balance Statement Table 4: Financing Plan Table 5: Monitoring Indicators 16. Economic Analysis ..62 17. Tariff Study - Draft Terms of Reference . .70 18. Huangpu River Basin Management Study - Draft Terms of Reference 74 19. Management and Organization Study - Draft Terms of Reference 78 20. Study on Rehabilitation of Existing Sewer System - Draft Terms of Reference .82 21. Proposed Training Program .. 85 22. Selected Documents and Data Available in Project File ..93 MAP IBRD Map 20201 CHINA: Shanghai Sewerage Project -1- I. THE URBAN AND ENVIRONMENTAL SECTORS Urbanization in China 1.01 About 37% of China's roughly one billion population lives in urban areas defined as cities and towns with populations over 5,000. This is comparable to the urbanization level of 35% for other countries at similar income levels. Rapid changes in urbanization have occurred in China in the past, most notably a 7% p.a. growth in 1949-58 and 1978-83, and 10% from 1984 to 1986. These were periods when major shifts in Government policies resulted in large-scale population migration. Within the 26 provinces and the three centrally-controlled provincial-level municipalities of Beijing, Tianjin, and Shanghai, there are 57 cities with populations exceeding one million, 267 cities with 50,000 to one million people, and 7,511 tow'ns. 1.02 While the recently observed rate of urban growth may be somewhat overstated due to a recent definitional change of urban areas and urban population, it is at least seen to be in the 4 to 6% p.a. growth range, which is similar to those in other developing economies experiencing rapid economic growth. These trends are expected to continue in the next several years. The most important contributing factor is the existence of surplus farm workers who migrate to nearby market towns and cities seeking full-time or part-time work, often to supplement family earnings. While China plans to contain urban population growth within specific growth poles (townships and small towns), the viability of these plans is being challenged by a weakening of the traditional mechanisms for migration control, namely government job and housing allocation and food rationing. Rural migrants to cities can acquire food in the free market, and take jobs in the growing private and collective sectors. It is estimated that the urbanization level could reach 50% by the year 2000, and that, contrary to the Government's expectations, a large part of the increased urbanization could occur in the large and medium-sized cities, where job opportunities are better. Environmental Situation in Urban Areas 1.03 Growing population and industrialization in urban areas have caused widespread water pollution, often contaminating sources for drinking water supplies. In most large cities, including Shanghai, the location of the proposed project, local watercourses are heavily polluted with chemical and biological impurities. A national environmental protection law (1979) and a water pollution control law (1984) were enacted with the aim of addressing these pollution issues, but implementation has been slow because high treatment costs threaten the financial viability of the large number of old industrial plants. Current policy is to relocate waste-producing industries away from populated areas, and to require industries to pay pollution charges for effluents exceeding prescribed standards. Funds collected are used to finance pollution abatement facilities. Because of the slow progress in reducing pollution through regulatory measures and the need to dispose of increasing amounts of domestic wastewater, most cities are now confronted with the need to construct sewerage systems with suitable wastewater disposal facilities, including treatment plants, to solve industrial and domestic pollution problems. -2- 1.04 The bucket (night soil) system is still widely used in cities for human waste disposal. With rising standards of living, this system is no longer considered acceptable in crowded urban areas. In large cities, new housing estates are now planned to have flush toilets and sanitary sewerage systems equipped with treatment facilities. Urban upgrading in old city cores usually includes conversion to flush toilets, and as separate sewerage does not exist, individual septic tanks are required by city codes to provide some treatment prior to disposal into storm sewers or local watercourses. Sector Organization 1.05 The MinistiLy of Urban and Rural Construction and Environmental Protection (MURCEP) is the central ageney providing overall guidance to the provinces and the three centrally-controlled municipalities on matters concerning the planning and programming of investments for all works in the cities and towns, including sewerage. It also sets operating rules for carrying out national policies for environmental protection. Each province/municipality is responsible for works in cities and towns under its jurisdiction, executed through various provincial, or municipality bureaus. In larger provinces and the centrally-controlled municipalities, commissions, another administrative level above the bureau, have been created, with each commission supervising several bureaus. Overseeing urban matters are the provincial bureaus of planning, design, capital construction, and municipal finance, which approve urban plans and major projects for cities and towns. The actual work of planning and design of projects is carried out by municipal departments except when the projects are too large, in which case, provincial assistance would be requested. Construction work has normally been carried out by municipal construction bureaus, but is now also being contracted out to construction enterprises. All urban projects are reported to MURCEP. Large projects (exceeding Y 200 million for Shanghai and other special cities) require approval by the State Planning Commission (SPC). Those involving foreign loans require approval by both the SPC and the State Council. 1.06 China now gives great importance to environmental protection. The central Environmental Protection Agency (EPA), while administratively part of MURCEP, reports directly to the State Council. The EPA sets national environmental standards and provides guidance and supervision to provincial/municipality environmental protection bureaus, Sectoral Issues and Priorities 1.07 For the past three decades China has concentrated on industrialization, leaving urban services, especially those required to preserve environmental quality, seriously neglected. Main urban issues are shortage of housing, traffic congestion, inadequate water supply and sanitation facilities, and air and water pollution. Significantly higher investments in urban services are now required to remedy past inadequacies and to provide for future growth. Given the large investment needs and limited available resources, improved investment planning is needed in order to help selection among competing priorities. Increasingly urban investments would need to be funded from local resources, and, therefore, upgrading local government finance is anothe. priority area of concern. -3- Cost recovery is also an issue in the sector, and past pricing policies have contributed to inefficient use and poor maintenance of most urban services. The Government recognizes this deficiency and is promoting a "users pay" policy. The full enforcement of this policy cannot, however, be carried out until the Government undertakes wage reforms, which may take some time to complete. In the area of wastewater disposal, management is weak and responsibilities are divided and often inappropriate. Institutional strengthening through better financial planning and management, tighter regulations to support operations, and more intensive staff training are urgently needed. Sector studies are being conducted by the Bank in cooperation with Chinese officials to address these issues (para. 1.09). Past Experience under Previous Operation 1.08 The Bank Group has thus far been involved in only one project in China's urban and water supply sectors. This was the China Rural Water Supply Project (Credit 1578-CHA, SDR 82.1 million, 1985) to finance equipment and goods for the construction of water supply systems in about 4,650 villages, which previously did not have access to safe drinking water, in four provinces and one municipality. The project also supports training for and development of management and mon'.toring systems in rural water supply. Project implementation is on scheJ.ule, with about 30% of the materials and equipment required for the project already procured. Project officials have shown competence in carrying out the work. The project is scheduled for completion in 1990. Bank Role in Sector 1.09 In addition to the above project, the Bank has carried out significant urban sector work. This includes: (a) the Shanghai Sector Memorandum (Urban), Report No. 4227-CHA, December 1982; (b) a Bank economic report, China -- Long-term Development Issues and Options, Report No. 5206- CHA, May 22, 1985, which includes a chapter on spatial and urban issues; (c) an urban sector survey in Liaoning province in 1985 in cooperation with UNDP and ADAB; and (d) an urban sector study in Zhejiang Province (now in progress) to study urbanization trends, urban development policies, needs for urban services and means for planning and financing such services. The Bank's role in the urban sector in China is meant to: (a) assist the Government to prioritize needs for urban services and prepare cost-effective projects; (b) provide project funding, as well as attract other sources of external financing; (c) help strengthen institutions responsible for preparing, constructing and operating urban services through support for organizational structure and staff training; (d) promote sound financial and cost recovery policies for the sector; (e) help develop sector policies, legislation and regulations conducive to efficient urban development and operation of urban services, and (f) promote environmental protection. In areas of urban planning, finance, and management, China looks to the Bank for transfer of experience gained in other countries. The Government is presently discu.;sing with the Bank the possibility of assistance for a number of potertial urbarn and water supply projects. .4- II. PROJECT BACKGROUND Project Genesis 2.01 At the invitation of the Shanghai Municipal Governinent, a Bank sector mission visited Shanghai in April 1982 to review Shanghai's development priorities. This resulted in the Shanghai Sector Memorandum (para. 1.09) which identified priority areas of investment as: liquid waste management with an emphasis on improving the quality of water in the two major waterways, upgrading of old housing linked with a strategy for new housing construction, and improvement in traffic and public transport. Australian consultants were subsequently engaged under a technical assistance grant from the Australian Development Assistance Bureau (ADAB) to carry out with Chinese counterparts detailed strategic studies in each of these four areas. In August 1984, the Municipality requested the Bank to finance a project to deal with liquid waste management. A preparation mission in January 1985 and a preappraisal mission in May 1985 reviewed project preparation work. Project appraisal was delayed because of various domestic procedural matters, and some additional preparation work needed due to a change in the location of the proposed outfall. These issues were resolved in May 1986. The project, which was appraised in September 1986, involves the construction of an intercepting sewer and link sewers to transport wastewater in the existing combined sewer system of the northern half of the city to the Changjiang (Yangtze River) estuary for disposal. A number of significant institutional development measures are also included. Shanghai Municipality 2.02 Shanghai Municipality (SM) is located in the Changjiang (Yangtze River) delta plain (see IBRD Map 20201). It has aii area of 6,186 sq km, of which 300 sq km (increased recently from 141 sq km) are classified as urban, and referred to here as the Shanghai Metropolitan Region (SMR). SMR is made up of ten central districts collectively referred to as the City, two outlying urban districts (satellite towns), and areas recently annexed from adjacent counties. The remaining territory consists of ten rural counties. SMR is inhabited by about 7 million of the 12.1 million population (1984 statistics) of the municipality. About 6 million of the urban population live in the City. In addition there is a floating population of about one million, comprising mainly of persons who come to Shanghai to conduct business or engage in temporary jobs. SM has 1.2% of the country's population but contributes 10.6% of the country's gross industrial output. Shanghai City is the country's largest and most heavily industrialized urban agglomeration and a seat of higher education and technology. About half of the some 8,000 factories and enterprises of the municipality are located in SMR. Major industries include metallurgy, machinery, shipbuilding, automobile and bicycle manufacturing, chemicals, electronics, textiles, pharmaceuticals and printing, which produce a wide range of high-quality, precision and sophisticated products. China's Seventh Five-Year Plan (1986- 1990) envisages continued expansion of both internal and external trade for Shanghai as well as the strengthening of Shanghai's advanced technology industries. The Central Government has approved the use of increased external assistance and borrowings for Shanghai. Indeed, Shanghai is viewed by Chinese planners as a "window" to the outside world through which various approaches to modernization can be introduced into China. o-5 2.03 SM is aiming to become one of the major economic and trade centers in the Pacific region. To achieve this it would have to resolve the many urban problems mentioned in para. 2.01. Currently its urban development plan includes, in addition to the current project, major investments in housing construction, expansion of its airport, construction of vehicular tunnels and a new bridge across the Huangpu River and a rapid transit system. An amount of Y 1,300 million ($350 million) per year has been budgeted by SM for these works (para. 6.09). Water Supply 2.04 The main watercourse of the municipality is the Huangpu River, a tribuitary of the Changjiang, with an average flow of 340 m3/sec at the City. The river skirts the southern and eastern borders of the City, and is the main recipient of storm and wastewater flows from the City. It also provides water for domestic, industrial and agricultural needs, and serves as a major waterway and harbor for local and international shipping. Numerous tributaries of the Huangpu River and canals linking to it traverse the municipality. The most important of these tributaries is Suzhou Creek (Wusong River), which passes through densely populated and heavily industrialized areas in the heart of the City, and is used extensively for river transport. 2.05 SMR is served by water treatment plants operated by the Shanghai Municipal Waterworks Company (SMWC) using water from the Huangpu River. The water plants have a combined capacity of 3.77 million m3/day, and are currently producing about 3.5 million m3/day (90% of capacity). About 62% of the water is sold to industry and the remainder to households. Another 94 waterworks independently serve the ten rural counties and outlying districts. In addition to water provided by SMWC, about 2.5. million m3/day of river water from the Huangpu River and 0.2 million m3/day of groundwater are drawn directly by industry. Water supplied by the SMWC is kept bacteriologically safe by heavy chlorination, but chemical impurities in the source water from industrial wastewater discharges impose serious health hazards. For this reason S4 is embarking on a project, financed from its own funds, to construct a new water intake at the Huangpu River about 35 km upstream of the City with a 41 km pipeline to provide better quality water to the eight existing water plants. Construction of the project, which is estimated to cost about Y 900 million ($243 million), has already begun and completion is expected in 1988. DorestiL and Industrial Wastewater Disposal 2.06 A schematic flow diagram on domestic and industrial wastewater flows in the City is shown in Annex 1. Soil water (excreta and toilet water) and grey water (kitchen, bath and wash water) are normally disposed of separately from houses. Grey water from all houses is discharged into the City's stormwater drains which now function as combined sewers. For exereta disposal, about half of the 6 million inhabitants of the City still use the bucket system. Night soil from the buckets is emptied at night by the users into communal storage tanks, collected by small vacuum trucks and taken to barges to be transported to neighboring villages for agricultural purposes. The remainiitg 3 million people use flush toilets. Of these, -6- roughly 0.9 million people are connected to separate sanitary sewerage systems which provide biological treatment prior to disposal into the Huarsgpu River or its tributaries. There are eight sewage treatment plants serving mainly newer areas in the urban fringe, Another three are planned or under construction. The remaining 2.1 million people not connected to separate sanitary sewerage systems are required to have their toilet waste discharged into septic tanks with the effluent piped into the City's combined sewers. Septic tank sludge is collected by vacuum trucks operated by the Municipality, and disposed of with the night soil. 2.07 Most factories discharge their wastewaters untreated or partially treated either into the city's combined sewers (about 40%), or directly into the Huangpu River or its tributaries (about 60%). The present industrial waste load discharged from facto.ies in the City is estimated to be equivalent to that from a population of about 8 million on a biological load basis, and about 11 million on a hydraulic load basis. Water pollution control in Shanghai is exercised by the Environmental Protection Bureau 'PB). The EPB requires industries to pay pollution charges on a graduated scale according to the extent their discharged effluents exceed permissible EPB standards. Part of the funds (80%) from these charges are then used to finance pollution abatement facilities. While the standards appear to be appropriately set, the charges are too .ow, and, even so, the EPB often finds it necessary to forgive industries which are already operating at marginal profitability. Thus, despite the soundness of the water pollution control policies, water pollution remains a serious problem. The EPB is aware of these issues, and have proposed measures to correct the situation (para. 4.19). Status of Existing Sewerage System 2.08 The combined sewer system in the City was originally designed as a stormwater system, but is now also accepting household and industrial wastewater (paras. 2.06-2.07). Some parts of the pipe system are old (constructed prior to 1949), but the majority of pipes have been reconstructe(l. In a few districts where the soil is poor, pipes constructed using the pipe jacking method have settled, giving rise to excessive infiltration of groundwater often resulting in damage to road surfaces. The internal surface of many sewers running through industrial districts is often severely corroded by strong effluents discharged by industries, and the sewers are sometimes also heavily clogged with industrial wastes which have to be removed at high cost. As a large part of the system extends in the most crowded parts of the city, future replacement will be both difficult and expensive. A study would be carried out in the proposed project to examine economic ways of rehabilitating the pipe system in order to extend its life. Draft terms of reference for this study are shown in Annex 20. During negotiations assurances were obtained from SM that the study would be conducted on terms of reference and with assistance from consultants acceptable to the Bank/IDA, and that the study would be completed not later than December 31, 1989, and the results of the study would be reviewed with the Bank/IDA. 2.09 The combined sewer system drains to 160 pumping stations, which have now been upgraded to discharge rainfall without the occurrence of flooding more than once a year on average. The pumping stations have been -7. adequately maintained. Currently these pumping stations discharge their contents directly into the Huangpu River or its tributaries. Pump stations which serve areas included in the project will be modified to have the dry weather flow discharge into a proposed interceptor sewer, while storm flows would continue to be discharged into the Huangpu River or its tributaries. 2.10 Two intercepting sewers, the Western and the Southern Interceptors, were constructed in 1971 to relieve water pollution in the City. These are still in good structural condition. However, because of overloading and inadequate outfall design, serious local pollution conditions are found at the discharge points in the Changjiang estuary and Hangzhou Bay. Their operating conditions will improve when overloaded flows are diverted to the proposed intercepting sewer. Measures are already planned to expand the capacity of the Southern Interceptor, which would be used to serve the City areas east and south of the Huangpu River. Plans have also been proposed to reconstruct the outfalls to a more appropriate design. The separate sewerage systems and the eight sewage treatment plants (para. 2.06) serving urban fringe areas are relatively new and are operating satisfactorily. Present Environmental Situation 2.11 The amount of pollution discharged into the Huangpu River now far exceeds thA assimilative (self-purification) capacity of the river syscem, and serious deterioration in water quality has resulted. The bulk of this pollution is from industrial effluents. While efforts have been made by EPB to reduce industrial pollution (para. 2.07), the measures used have not been adequate to produce any noticeable improvement in river water quality. Samples taken from the Huangpu River in the vicinity of the City show that the river turns anaerobic in many stretches for 150 days a year (compared to 33 days a year in 1975). EPB's required standard for Shanghai waterways is a dissolved oxygen content of not less than 4.0 mg/l. Suzhou Creek and many other tributaries of the Huangpu River are black and malodorous during most parts of the year. As these creeks run through densely populated areas of the city, their condition seriously affects the living conditions and well- being of a large number of people. The situation is expected to worsen with planned industrial expansion in Shanghai, and the steady replacement of the bucket system with flush toilets. In addition about 80,000 new housing units a year would be equipped with flush toilets requiring expansion of the sewerage system. These problems would be addressed by the project. III. POPULATION, WATER CONSUMPTION, AND WASTEWATER FLOW PROJECTIONS Population Growth 3.01 Shanghai's natural population growth rate has fallen dramatically from 52.6 per thousand in 1954 to 11.8 per thousand in 1980. With a natural population growth trend expected to be less than 10 per thousand, and with the assumption that control of in-migration by administrative means could continue to be possible, SM has projected virtually no population increase, so that by 1990 its total population would increase to 13 million from 12.1 million in 1984 (para. 2.02), with 7 million living in the SMR. However, -8- with the possible increase of rural-to-urban migration brought about by the recent economic reform (para. 1.02), this projection is generally considered to be too low. Already about half of the one million floating population in Shanghai (para. 2.02) are believed to be living permanently in the city, but are not registered as residents. It would therefore be more reasonable to estimate urban population in Shanghai to grow at a rate of 1.3% p.a. on the 1984 population base, a figure which is still low compared to historical urban growth patterns in China (para. 1.01). This would result in an urban population of 8.5 million in the year 2000, and is considered to be the population consistent with an increase in the work force in line with Shanghai's economic expansion. It is, however, expected that the bulk of any population growth in Shanghai would take place in new City areas. For the old City area, where the proposed project is located, population growth would be relatively low, as the area is severely overcrowded (population density approaching 40,000 persons per sq km), and the Municipality is already taking steps to relieve the crowded conditions there. Any underestimate of population growth in Shanghai is therefore not likely to affect the project design. Details of the population projection in the project area are shown in Annex 3. Regulations Affecting Water Use and Wastewater Discharge 3.02 Growth in water supply demand and sewage flows is expected to continue with the City's projected economic expansion. SM is, however, attempting to deal with the adverse effects of this development. Current legislatior reflects SM's determination to protect public health and the environment, to eliminate pollution, and to make rational use of available resources. Plans to relocate polluting industries away from dense residential areas are also being pursued. The EPB is actively monitoring industrial waste discharges and imposing pollution charges in an effort to reduce pollution (para. 2.07). It also plans to review industrial effluent discharge standards and pollution charges (para. 4.19). The Municipality has imposed sewerage charges on industrial and commercial users commencing in December 1986i which would almost double the cost of water usage (water supply and wastewater disposal) (para. 6.04). Heavy industrial polluters connected to the sewerage systems will also be made to pretreat their effluents (paras. 3.09 and 4.19). Together, these measures are expected to moderate the potential growth in water and sewerage demands of the City. Water Demand 3.03 Detailed projections of water demand in SMR were prepared by SM and reviewed by the mission for different categories of consumers. Domestic, commercial and industrial water consumption from the SMWC system were recorded respectively at 0.55, 0.47 and 1.59 million m3/day in 1983; 0.57, 0.50 and 1.65 million m3/day in 1984; and 0.60, 0.53 and 1.72 million m3/day in 1985. These levels constitute the total domestic and comm6rcial supply and a major part of the industrial water supply of the City, as well as of the industries and some 500,000 people in the two outlying urban districts and recently annexed areas. A few industries extract water from private wells, but as SM has stringent restrictions on groundwater extraction due to ground subsidence problems, the amount from this source is negligible. Several large industries draw water directly from the Huangpu River for their own use. This amounts to about 2.5 million m3/day (about -9- 71% of the amount supplied by SMWC). Wastewater from these industries is discharged directly back into the river. 3.04 Domestic per capita consumption in SMR was estimated to be 91 liters per capita per day (lpcd' in 1985. The low per capita figure refl.ects inadequate internal plumbing, sharing of bathroom facilities, and the common practice of using ablution facilities provided at the work places by industries and enterprises. As personal income improves and with the gradual replacement of the bucket with flush toilets, domestic per capita consumption is projected to increase to 123 lpcd in the year 2000. Commercial and industrial demands from the SMWC system are expected to decrease by 10% each year in 1987 and i988 with sewerage charges introduced in December 1986 (para. 6.04), implying a price elasticity of demand of about -0.2, and to increase thereafter at a rate of 3 to 4% p.a. in response to econoric growth. The volume of water that industries extract directly from the Huangpu River is expected to decrease (in relative terms) to about 51% of the amount supplied by SMWC in the year 2000. Details of water demand projections are shown in Annex 3. 3.05 Using the above assumptions the total water demand to be met by SMWC is projected to be 4.1 million m3/day in the year 2000. Assuming unaccounted-for water at 18%, the total required production capacity would be 5.0 million m3/day, or an expansion of 40% over the present production capacity of 3.5 million m3/day. This demand projection is considered reasonable. Expansion plans have already been formulated by SMWC and include, in addition to the construction of the new intake on the upper Huangpu River (para. 2.05), the construction of additional water treatment plants, and the eventual construction of a water intake on the Changjiang. Wastewater Flow Projections 3.06 Total wastewater flow from SMR is presently estimated to be 6.1 million m3/day (average dry weather flow, ADWF). This is projected to increase to 7.5 million m3/day in the year 2000. The projected wastewater flows (ADWF) were estimated from water demand projections, less 10% for evaporation and other losses, and including groundwater infiltration (estimated from tests to be 5,000 m3/day/km2 in the old combined sewer system and 1,000 m3/day/km2 for new sewers). The wastewater flows are planned to be disposed of through the existing western and southern interctpting sewers (1.2 million m3/day), existing and future separate sewer systems (0.3 million m3/day), the proposed project works (1.4 million m3/day) and a future Stage 2 project (2.0 million m3/day). About 2.6 million m3/day would continue to be discharged directly into the Huangpu River. This would consist mainly of effluents from industries extracting water directly from the Huangpu River, with such effluents expected to meet EPB's standards by the year 2000 with the improved monitoring and control planned. Details are shown in Annex 3. Sewer Design Criteria 3.07 Seasonal and diurnal flow variation factors measured by studies conducted by the municipality are 1.3 and 1.5, respectively, on a citywide basis, and a peak frctor of 1.95 (1.3 x 1.5) has therefore been adopted. The project interceptor sewer will be designed to capture as much of the -10- wastewater from the combined sewers in the project area as is economically feasible and environmentally satisfactory. A comprehensive study was carried out to determine the appropriate intercepting ratio (ratio of capacity of intercepting sewer to the ADWF) to be used ir. the design (a larger ratio would mean the use of a larger sewer with resulting higher costs, but a greater percentage of the wastewater would be intercepted). The study recommended a ratio of 2.5 for the main intercepting sewer, and ratios of 3.0 to 4.0 for link sewers in the Suzhou Creek area. With these design criteria it is estimated that about 98% of the wastewater in the combined sewers of the project service area would be intercepted, with the remaining 2% escaping into the Huangpu River with stormwater flows. Biological Loads and Toxic Matters 3.08 About 80% of the present wastewater pollution load is of industrial origin. While the total pollution load is projected to increase, this percentage is expected to decrease in the future with increased industrial pollution control balanced by higher domestic waste discharges from the gradual elimination of the bucket system. Projected wastewater pollution loads in terms of 5-day biochemical oxygen demand (BOD5) are shown in Annex 3. 3.09 The principal toxic substances appearing in Shanghai wastewater are arsenic, cyanide, phenol, chromium, copper, mercury, nickel, lead, and zinc. Projected amounts of these substances and other pollutants expected in wastewater from the project area are shown in Annex 4. EPB's required water quality standards at the Changjiang estuary for these pollutants are also shown. Under current ambient water quality conditions of the estuary, a reduction in the pollution level in the effluent would be necessary for six pollutants in order to meet water quality standards. This would be done by enforcement of pretreatment for industries discharging these pollutants into the system. The allowable effluent strengths for wastewater discharged by industriers into the combined sewer system in order to permit the achievement of water quality objectives at the Changjiang estuary are shown in Annex 5. Industries whose effluents exceed these standards would be required to pretreat, and this requirement would be enforced through sewer regulations which are to be enacted by December 1987 (para. 4.19). IV. THE PROPOSED PROJECT Project Objectives 4.01 The project will be the first part of a comprehensive two-stage program of works required for improvement of the environment in Shanghai and involves the removal and disposal of wastewater in Shanghai City, which now suffers due to inappropriate wastewater disposal. The project would also set up the appropriate institutional framework, encompassing organizational, financial, technical and legislative matters, for management of liquid wastes and environmental protection. This would involve the establishment of a self-financing sewerage company, and creation of the mechanism to cont'-1 and improve water quality in the Huangpu River and its tributaries. -11- Project Conceptual Design 4.02 The project would aim towards the achievement of specific environmental targets (para. 2.11) in the Huangpu River and its tributaries. Since the proposed project is only the first stage of a two-stage scheme, the final environmental target would only be achieved after the second stage is implemented. The various alternatives studied are presented in Annex 2, and the results form part of the master plan for wastewater management in Shanghai. The plan proposes continued use of the existing combined sewers and pumping stations for wastewater collection, and the construction of new intercepting sewers to transport the collected wastewater to the Changjiang estuary for disposal. In the newer city areas included after the extension of the city limits (para. 2.02), separate sanitary sewer systems with sewage treatment plants would be used. Project Description 4.03 The project consists of: (a) the construction of a sewerage system which includes intercepting and link sewers, two main and eight smaller pumping stations, a treatment plant and other ancillary works; (b) the conducting of four project-related studies; and (c) staff training. The physical works of the project forms an integral system, and is independent of the work in the subsequent second stage, although the systems in the two stages may be linked eventually to facilitate operation. The project would serve the main commercial district of the City where intensive redevelopment is taking place, and the residential and industrial properties along Suzhou Creek. It is designed to serve about half the population of the City (3 million) up to the design year 2000 with a capacity to remove 1.4 million m3/day of wastewater. The project includes construction of a 35 km long trunk intercepting sewer (3m to 4m dia. and twin 4.25m x 3.5m box section), 32 km of link sewers (0.45m to 3m dia.), two pump stations on the intercepting sewer and eight pump stations on the link sewers, a treatment (screening) plant and 2.6 km of outfall tunnels (twin 3.5m dia.). The second stage project, planned to be started in 1991, would provide tr.e remaining work for SM's wastewater disposal. 4.04 Wastewater in the combined sewer system presently discharging into the Huangpu River and Suzhou Creek would be diverted at riverside pump stations through new link sewers into the proposed intercepting sewer, which would run from the western end of the city eastwards, roughly parallel to Suzhou Creek. The intercepting sewer would cross the Huangpu River by a tunnel to a proposed treatment (screening) plant which removes coarse and stringy particles from the wastewater. The wastewater would then flow further eastward for a distance of about 10 km to the Changjiang estuary. Two pumping stations on the interceptor would provide the necessary head to maintain the flow. The discharge point for the wastewater is at Zhuyuan, about 6 km east of the city. Twin deep outfalls of tunnel construction, each 3.5 m in diameter and 1.3 km long, would be used. The wastewater would be released through ten vertical 1 m diameter diffuser pipes located along the last 400 m of each outfall tunnel. The main components of the project are listed in Annex 6. -12- 4.05 The project would also further institutional development through the provision of consultant services to assist in the conducting of project- related studies (paras. 2.08, 4.21, 5.06 and 6.04), and a comprehensive training program (paras. 5.13, 5.14 and 5.15). This assistance would enable SM to: (a) develop an efficient, self-financing sewerage entity, the Shanghai Sewerage Company (SSC); (b) develop and strengthen industrial waste management policies, regulations and practices; (c) establish appropriate sewerage tariff policies to promote water conservation and pollution abatement, as well as to provide a basis for financial viability to the SSC; (d) develop sewer and other operating regulations to support the operations of the SSC; (e) strengthen environmental protection; (f) provide training for sector staff in project preparation and in the management and operation of sewerage services; and (g) set up an organization to be responsible for allocation of the Huangpu River's water resources and control of effluent discharges into the river. Rationale for Bank Involvement 4.06 Environmental pollution control and large-scale sewerage development are new fields in China. The proposed project includes major construction work to relieve serious water pollution conditions in Shanghai. The project would establish a self-financing sewerage company, and develop the institution and measures required to manage the water resources in the city's waterways. It would also provide a model for liquid waste management which can be emulated by other cities in China. Bank experience and technical assistance can provide the necessary expertise to develop the appropriate legal and institutional framework required. The proposed project is large and has complex technical problems requiring external expertise the provision of which the Bank can assist in. Project Cost Estimates 4.07 Project cost estimates are based on engineering designs prepared by SM officials with the assistance of consultants financed by ADAB. The cost estimates are based on prices from recent construction contracts in China, or quotations from foreign manufacturers for imported equipment, updated to February 1987 prices. The project is exempt from import duties. A physical contingency of 10% of the base cost has been added. Local price contingencies assume price increases of 6.5% p.a. until 1990 and 4.5% p.a. thereafter, and foreign price contingencies used are 3.0% p.a. in 1987, 1.0% p.a. from 1988 to 1990 and 3.5% p.a. thereafter. 4.08 The total estimated project cost is $356 million (Y 1,531 million), with a foreign exchange component of $138 million (39%). The total financing required, which includes $16.6 million of interest during construction is $373 million (Y 1,592 million). T-ble 4.1 shows a breakdown of the project costs by major project components. Detailed cost estimates are shown in Annex 7. -13- Table 4.1: PROJECT COST ESTIMATE Local Foreign Total Local Foreign Total --- (Y million) ---- --- ($ million) --- Civil Works 455.1 283.7 738.8 120.7 75.2 195.9 M & E Equipment 36.4 100.7 137.1 9.6 26.7 36.3 Services 47.2 30.4 77.6 12.5 8.1 20.6 Land acquisition 182.7 40.1 222.8 48.4 10.6 59.0 Base Cost (1987 prices) 721.4 454.9 1,176.3 191.2 120.6 311.8 Physical contingency 72.1 45.5 117.6 19.1 12.1 31.2 Price contingency 143.6 93.0 236.6 7.9 5.1 13.0 Total Proiect Cost 937.1 593.4 1,530.5 218.2 137.8 356.0 Interest during construction 0.0 61.5 61.5 0.0 16.6 16.6 Total Financing 937.1 654.9 1,592.0 218.2 154.4 372.6 Required Prolect Financing Plan 4.09 The Bank Group would provide $145 million for the project ($45 million as a Bank loan and SDR 78.9 million ($100 million equivalent) as an IDA Credit), which is equivalent to 41% of the project cost and 39% of the total financing required. This would finance about $138 million of foreign exchange costs and $7 million of the local cost of civil works. SM would provide the remaining funds amounting to Y 970 million ($227.6 million) or 61% of the total financing required. The proposed project financing plan is shown in Table 4.2. Retroactive financing of up to $1 million for foreign consultant services required for detailed design and preparation of contract documents, commencing January 1, 1987 has been included. Table 4.2: PROJECT FINANCING PLAN Local Foreign Total % ($ million) - Financing Proposed IBRD loan/IDA credit 7.2 137.8 145.0 38.9 Shanghai Municipal Government 211.0 16.6 227.6 61.1 Total 218.2 154.4 372.6 100.0 4.10 The loan and the credit would be made to the Government of the People's Republic of China (GOC). The loan would have the standard variable interest rate for a 20-year term including a 5-year grace period. The credit would be for a 50-year period including 10 years grace. The proceeds of the loan and the credit would be onlent to SM at an interest rate of 4.5% -14- for a 20-year period including five years grace according to the standard procedure for China. SM would bear the commitment charges on the Bank loan, as well as the foreign exchange risk. A Project Agreement was concluded between the Bank/IDA and SM. The Project Agreement defined the financial objectives of the SSC, and the financial arrangements for the transfer of assets and debts of the project from SM to SSC upon project completion. These financial arrangements would form the basis of a Transfer and Operation Agreement to be made between SM and SSC. During negotiations assurances were obtained from SM that it would send a copy of the draft Transfer and Operation Agreement to the Bank/IDA for review not later than December 31, 1990, and to have the Agreement concluded not later than December 31, 1991. Approval of the Loan and Development Credit Agreements by the State Council would be conditions of loan and credit effectiveness. Status of Engineering 4.11 The project feasibility study was completed by SM with the assistance of Australian consultants financed by ADAB. Engineering design work is being carried cut by three design institutes, the Shanghai Municipal Engineering Design Institute (SMEDI), the Shanghai Tunnel Design Institute (STDI) and the Design Institute of BMEA, supervised by the Shanghai Sewerage Project Construction Company (para. 4.12) assisted by consultants. All three design institutes are well staffed and have experience in the design of similar works. Their qualifications are satisfactory to the Bank/IDA. Design for all works to be constructed in 1987 have been completed, and tender documents are under preparation. The Zirst tender will be invited by June 1987. Work completed to date includes design and drawings for tunnels and box culverts suitable for international bidding. Preliminary design of other project components has also been completed. Because of the size and complexity of the project, the Bank/IDA has asked SM to continue to engage expert foreign consultants to advise on project engineering and construction. Project Management 4.12 SM is in the process of creating a high level leadership group (HLLG) headed by the Deputy Mayor to direct and coordinate project implementation. Membership of the HLLG would include senior officials from various concerned commissions and bureaus, including the Planning Commission, the Construction Commission, the Economic Commission, the Foreign Economic and Trade Commission, the Urban Planning Commission, the Bureau of Finance, the Bureau of Municipal Engineering Administration and the Environmental Protection Bureau. Day-to-day management of the project will be handled by the Shanghai Sewerage Project Construction Company (SSPCC) which has already been established. The SSPCC will come organizationally under the HLLG. SSPCC's Manager, a senior engineer appointed by BMEA, will be a member of the HLLG. One of the Deputy Managers of the SSPCC will be a senior official from SSC. Total SSPCC's staffing requirement is estimated to be about 1,400 man-years with a peak staff of about 300 persons in 1988 and 1989. SSPCC's organization is shown in Annex 11. Assurances were obtained during negotiations that the staff, functions and responsibilities of the SSPCC would be maintained throughout project implementation in a manner satisfactory to the Bank/IDA. -15- Consultant Services 4.13 Consultant services for project preparation were provided by ADAB to SM under a grant of about A$2 million covering detailed design and preparation of bid documents up to December 1986. After this, engineering consultant services would be financed under the project through retroactive financing for the period from January 1, 1987 to loan/credit effectiveness and directly from the project thereafter (para. 4.11). Consultant services would also be required for project-related studies. Foreign consultant services (excluding those provided by ADAB), estimated at a total cost of $2.4 million, including salary, costs, fees, international travel and subsistence, would be procured in accordance with the Bank's Guidelines for the use of consultants by World Bank borrowers and by the World Bank as executing agency. SM would provide engineering and project management services estimated at about 18,500 local man-months of which about 10% would be for local consultants. During negotiations assurances were obtained from SM that it would engage consultants satisfactory to the Bank/IDA on a continuous basis to advise on detailed design, preparation of contract documents, supervision of project construction and the conducting of project-related studies. Procurement 4.14 All major contracts would be procured through international competitive bidding (ICB) in accordance with the Bank's procurement guidelines. Contracts of less than $3 million (approximately Y 11 million) for smaller civil works and works which are scattered throughout congested parts of the city, aggregating to not more than $30 million (approximately Ylll million), and less than $270,000 (approximately Y 1 million) for equipment aggregating to not more than $5 million (approximately Y 19 million), would be procured through local competitive bidding (LCB). Bid documents for civil works under ICB would adopt procedures which would ensure fair competition for both local and foreign bidders. Procedures now used for civil works contracts under ICB in Bank Group-financed projects in China ensure such fair competition by providing for a schedule of prices for local wage rates and local unit material costs to be specified by the procurement agency and used by both local and foreign bidders, and allow for actual payments to be adjusted or indexed with changes in these prices. The Bank has reviewed the LCB procedures to be followed and considers them to be satisfactory. For bid evaluation purposes under ICB, a 15% margin of preference or an amount equal to customs duties, whichever is lower, would be applied for locally produced equipment and materials. For civil works contracts under ICB, domestic contractors would be given a margin of preference of 7-1/2%. Prior review of procurement documents by the Bank will be required for all civil works contracts estimated to cost more than $6 million (approximately Y 22 million), and for all contracts for goods estimated to cost more than $2 million (approximately Y 7 million). The proposed project contracts are shown in Annex 8. Assistance for procurement would be provided by the Shanghai Corporation for Foreign and Technological Cooperation which comes under the Shanghai Foreign Economic Relations and Trade Commission, the Municipality counterpart of the Central Ministry of Foreign Economic Relations and Trade. Procurement arrangements are shown in Table 4.3. .16- Table 4.3: PROCUREMENT ARRANGEMENTS ($ million) Procurement Method Proiect Element Total ICB LCB Other Cost Civil Works 128.8 18.3 147.1 (39.0) (5.5) (44.5) Materials & 106.8 3.3 110.1 Equipment (94.0) (1.7) (95.7) Technical 25.9 25.9 Assistance (4.8) (4.8) Land and 72.8 72.8 Resettlement Total 235.6 21.6 98.7 355.9 (133.0) (7.2) (4.8) (145.0) Note: Figures in parentheses are the respective amounts (including contingencies) to be financed by the Bank/IDA. Disbursement 4.15 The proposed Bank loan of $45 million and IDA credit of SDR 78.9 million (equivalent to $100 million) would be disbursed over a period of six years as follows: 1. Civil Works $44.5 million 40% of total expenditures 2. Materials and $95.7 million 100% of foreign expenditures Equipment and 100% of local expenditures (ex-factory) and 75% of local expenditures for other items procured locally 3. Technical assistance $ 4.8 million 100% of total expenditures 4.16 A Special Account with an authorized allocation of US dollar equivalent of SDR 7.5 million, based on four months average disbursement, would be established to facilitate disbursements for the above expenditures. Replenishment would be made on a quarterly basis or whenever the Special Account is drawn to 50% of its initial deposit value. Disbursements for overseas training, contracts of civil works, goods and services valued at less than $200,000 would be made on the basis of statement of expenditures (SOE) to be certified by the SSPCC. Docwuments supporting the SOEs would be retained by the SSPCC and made available for inspection by Bank/IDA supervision missions. All other disbursements will be made against fully documented expenditures. The disbursement schedule (Annex 10) is based on -17- and agrees with the standard disbursement schedule for China. Project completion is estimated to be December 31, 1992, and the loan/credit closing date would be June 30, 1993. Land Acquisition and Resettlement 4.17 A comprehensive survey was carried out by SM on land required for the project. The survey identified the land to be acquired for pump stations and treatment plant, the land required for street widening to accommodate the large sewers, and the land to be rented during construction. The survey also identified the houses that have to be demolished and the people to be resettled. Demolition of existing housing hac been kept to a minimum through a prudent choice of sewer routes. SM has land acquisition regulations (No. 119 of October 20, 1980) which outline the procedures and compensations required. Current policy requires the project to construct not less than three square meters of housing space for every square meter demolished. In addition relocated persons are paid moving expenses. Those compensations are included in the project cost estimates. Housing for displaced persons would be purchased from housing enterprises or constructed under the project. The latter is necessary because of present housing shortages. It is estimated that a period of about 15 months would be required to provide housing for resettlement. SM anticipates no difficulty in carrying out the resettlement program, as SSPCC has a team responsible for land acquisition and resettlement, and preparation work in this area is now well advanced. The various steps to be undertaken for resettlement are outlined in Annex 13. Housing of about 60,000 square meters for about 5,000 persons to be resettled in the first year of project implementation would be purchased, and the required number of housing units has been assured by SM. The resettlement schedule prepared by SM (Annex 9) is satisfactory to the Bank. During negotiations assurances were obtained from SM that it would carry out resettlement of persons affected by the project in a manner and according to a schedule vhich is satisfactory to the Bank/IDA. An understanding on the various steps to be taken for resettlement was reached during negotiations. Monitoring Criteria 4.18 The proposed project implementation schedule is shown in Annex 9. Financial monitoring indicators are in Table 5 of Annex 15. Reports on project implementation progress and on SSC's operations would be prepared by the SSPCC and sent to the Bank/IDA quarterly commencing September 1, 1987. A project completion report reviewing the planned objectives and the achievements of the project, including costs and benefits derived and performance and contribution of all parties associated with the project execution and system operation, would be prepared by SM and submitted to the Bank/IDA within six months following the closing date of the Loan/Credit. Environmental Pollution Control 4.19 Shanghai is taking various physical measures to reduce water pollution in the city. The EPB is also formulating new pollution control regulations with more stringent industrial effluent standards to be enacted during 1987. These regulations would specify the standards for industrial effluents discharged into natural water bodies (e.g. Huangpu River and -18- Changjiang). Pollution charges on effluents exceeding the prescribed standards are already being collected by EPB. Sewer regulations also to be enacted in 1987 would prescribe pretreatment requirements for industrial effluents for discharge into separate sewers and the combined sewers in the service areas included in the project. These regulations would include mandatory threshold levels for toxic and non-biodegradable pollutants, and a framework for effluent strength charges for biodegradable matter. The drafts of both regulations were reviewed during appraisal. Industrial sewerage charges based on volume as well as effluent strength would be studied in the proposed tariff study (para. 6.04). To help industries install appropriate pretreatment facilities, SM would arrange financing of construction costs through local banks, provide funds collected from pollution charges and explore bilateral sources for imported equipment. SM is already implementing tax exemption measures which deduct from taxable income the capital and interest for expenditures incurred by industries to construct pretreatment facilities. During negotiations assurances were obtained from SM that the new pollution control regulations and the sewer regulations would both be enacted not later than December 31, 1988. An understanding was obtained that SM would arrange suitable sources of financing for industries to construct pretreatment facilities, and continue with tax exemption measures and such measures which are acceptable to the Bank/IDA. 4.20 It is envisaged that monitoring of the quality of industrial effluents within SSC's system would initially be carried out with the assistance of EPB staff who are familiar with the work. New equipment for environmental quality monitoring, estimated to cost about $750,000, is included in the project. EPB would continue to be responsible for monitoring of environmental quality in water bodies within the municipality and of industrial effluents outside of SSC's system. 4.21 Because of the presence of other point and non-point pollution discharges into the Huangpu River both upstream and downstream of the city, the project alone will not completely solve the environmental problems of the river. SM will therefore set up an organization with responsibilities to allocate water resources and to control waste discharges in the Huangpu River in order to preserve the quality of the water. A river basin management study of the Huangpu River is included in the project to set up the institutional framework for this organization and to develop a model to allocate and manage the Huangpu River's water resources, optimize water use and ensure the environmental integrity of the river. Th.e proposed terms of reference of the study are in Annex 18. Assurances were obtained from SM during negotiations that the proposed study would be completed not later than December 31, 1988, under terms of reference and with the assistance of consultants satisfactory to the Bank/IDA, and the results of the study would be reviewed with the Bank/IDA. -19- V. THE BENEFICIARY The Shanghai Sewerage Company 5.01 The Shanghai Sewerage Company (SSC), the project beneficiary, will be established as a self-accounting and self-funding enterprise responsible for sewerage in the SMR. SSC will maintain and operate existing as well as new facilities to be constructed under the proposed project. Existing Institutional Arrangements 5.02 Urban matters in Shanghai Municipality (SM) are overseen by the Planning Commission (PC), the Economic Commission (EC) and the Capital Commission (CC), each of which supervises several bureaus. ThLe bureaus carry out planning, design, capital construction and operation of all major projects. The PC, the EC and the Bureau of Finance (BOF) approve all physical and financial plans and budgets for submission to the People's Standing Committee of SM and to the State Council in Beijing. Sewerage works are the responsibility of the Bureau of Urban Planning (BUP) under the Urban Planning Commission for planning; and the Bureau of Municipal Engineering Administration (BMEA) for design, construction, operation and maintenance. BMEA is also responsible for urban road works. Given BMEA's increasing workload, design and construction work is now also being contracted out to other bureaus or enterprises. The Environmental Protection Bureau of Shanghai (EPB), while organizationally under the Urban Planning Commission, receives guidance directly from the EPA. EPB is responsible for monitoring environmental quality and pollutant discharges, and compliance with environmental standards within SM. It has the power to impose charges and fines on polluters. The Bureau of Sanitation Administration (BSA) handles night soil collection and its disposal. The SMWC (para. 2.05) provides piped water supply in the SMR. 5.03 BMEA has the main responsibility for sewerage services in Shanghai. It is headed by a Director General, and has inhouse staff facilities to design and construct municipal works as well as conduct research and training in this area. Operation and maintenance of the system is shared by two divisions: (a) the Municipal Drainage Administration Division (MDAD) responsible for sewage pumping stations and sewage treatment plants; and (b) the Municipal Engineering Administration Division (MEAD) responsible for sanitary and combined sewers. MEAD is also responsible for maintenance of urban roads and bridges. Physical planning, design and construction of sewerage works are carried out by a municipal engineering design office, a municipal engineering development company and two construction companies, all under BMEA. No user charges are presently levied and sewerage operations are totally dependent on municipal funds. Organizational Improvements 5.04 The current division of responsibilities is not considered adequate for effective management of the vastly expanded system now proposed. The absence of a cost recovery system in the past has also been placing a heavy burden on the municipal finances, resulting in slow and tardy expansion of the services and consequent deterioration of the environment. SM has now recognized the need for consolidating the sewerage -20- services under one entity and making that entity financially viable by introducing in stages sewerage charges on industrial, commercial and domestic users. Several forms of organization for such an entity were considered, including a joint organization for water supply and sewerage. The latter arrangement, which would have been feasible in smaller cities, was not favored because it would have entailed major organizational changes and would have made the enterprise too unwieldy. SM decided, with the Bank's agreement, that the SSC would be established under BMEA to take over responsibility for all sewerage services including planning, operation, maintenance, staffing, accounting, financial management and training, etc., with a mandate to charge for its services in order to make it self- supporting. 5.05 SSC's charter, which was reviewed and agreed by the Bank/IDA, has been approved by SM and signed. An application to Shanghai Administration for Industry and Commerce for registration of SSC as a public enterprise in Shanghai has already been made, and the procedures for this are expected to be completed by July 1987. Registration of SSC is a condition of loan/credit effectiveness. In practice this is a formality since the staff now operating the sewerage system are de facto employees of the future SSC; 5.06 MDAD and its staff would form the base organization for SSC. SSC would also take over HEAD staff responsible for sewer maintenance work. As of May 1986, MDAD had 2,365 employees comprising 135 engineers, 133 technicians, 207 administrative personnel, 113 Akilled workers, 1,495 semi- skilled workers and 202 unskilled laborers. MEAD employs about 7,000 people, including about 220 engineers. MEAD staff is assigned to general maintenance work on sewers, drains, roads and bridges. Those working exclusively on sewerage duties are not clearly identified, but it is estimated that SSC would take over about 2,000 of MEAD's employees. Both MDAD and MEAD are weak in the accounting and financial fields. SSC would recruit experienced staff to strengthen the handling of its accounting and financial activities. The development of SSC into a strong organization capable of coping with the challenging tasks of managing the expanded system and achieving the required financial goals would, however, need substantial work in the following areas: (a) improving the organization structure; (b) determining staffing needs and recruiting staff; (c) defining job responsibilities for various levels of staff; (d) developing appropriate management, financial and accounting systems; (e) establishing appropriate tariffs; and (f) training staff. Tentative organizational proposals (Annex 12) made by the SM project preparation team and ADAB-funded consultants recommend that SSC be governed by a Board with a General Manager as the chief executive officer, and seven divisional managers for operation and maintenance; materials management.; planning and design; technical and scientific services; human services and training; finance and accounting and administration and legal services. An internal auditor reporting directly to the General Manager was also proposed. The total staff strength is estimated at 3,350. Since these proposals need to be reviewed and refined, a management and organization study is proposed to be carried out by a Chinese team assisted by consultants. The study will review SSC's -21- organizational structure, functions and staffing needs, and develop management information systems for planning, firz.zial management and control. Draft terms of reference of the study are in Annex 19. During negotiations assurances were obtained that SM would complete not later than December 31, 1988 a management and organization study for SSC under terms of reference and with the assistance of consultants acceptable to the Bank Group, and would give the Bank Group the opportunity to comment on the recommendations of the study before their implementation. Lilling and Collection 5.07 Billing for sewerage services started in 1987 after the introduction of tariffs for industrial and commercial consumers in December 1986 (para. 6.04). BMEA had initially proposed that the billing and collection work would be entrusted to SMWC with appropriate fees. SMWC has an excellent record for billing and collection -- with recoveries from non- domestic consumers made through bank account transfers, the level of receivables is insignificant and there are no bad debts. Billing and collection of sewerage charges by SMWC would avoid unnecessary duplication of work. However SY.WC does not wish to take on the additional work, given the constraint that its billing is done manually. SM therefore decided that SSC should handle its own billing and collection, with consumer water supply meter readings provided by SMWC. Collections for industrial consumers would be made through bank account transfers. The joint billing for water supply and sewerage services, including the setting up of a central billing agency, would be reviewed under a proposed tariff study (para. 6.04). Accounting 5.08 The accounts of MDAD and MEAD are maintained on a cash basis and reflect expenditures incurred against budget allocations made by SM. Little distinction is made between capital expenditures (replacements of plant) and operating costs, and for most items they are merged with expenditures on other activities of BMEA. 5.09 SSC will be a self-accounting entity under the leadership of BMEA. National accounting regulations applicable to public enterprises, as prescribed by the Ministry of Finance (MOF), will be adopted by SSC supplemented by management information systems and reporting procedures recommended by the consultants (para. 5.06). SSC's accounts will be. maintained on an accrual basis using a double entry s"stem. The public enterprise accounting system requires the preparation of an income ' statement, balance sheet, cash flow and other supplementary statements on a monthly and annual basis. This system is acceptable to the Bank Group. 5.10 Project accounts wi]l be maintained by the SSPCC (para. 4.12) in accordance with the Government State Construction Unit Accounting System This system sets out detailed accounting definitions for capital works, cash control, receivables, payables, and specific rules for capitalizing and expensing of various items. It also identifies a number of basic monthly and annual reporting formats including funds flow statements and balance sheets. The construction accounting system is comprehensive, and is adequate for the proposed project. -22- Audits 5.11 The Foreign Investment Audit Bureau of the State Audit Administration (SM) will be responsible for auditing the accounts of SSC and of project expenditures. Actual audits will be conducted by the Shanghai Municipality Audit Bureau (SMAB), a subordinate organization of SAM. These arrangements are zatisfactory to the Bank Group. At negotiations, assurances were obtained from SM that it would cause SSC to furnish SSC's annual financial statements, certified by SMAB or an independent auditor acceptable to the Bank Group, to the Bank/IDA within six months of the end of each financial year. Assurances were also obtained that the accounts of the SSPCC, and the Special Account, duly audited by SMAB or by an independent auditor, would similarly be submitted to the Bank/IDA within six months of the end of each financial year. 5.12 Officers of SSC and of SSPCC would conduct internal audits of their respective organizations. The SSPCC's internal auditor would report to the SSPCC's Manager and SSC's to the General Manager. Staff Training and Development 5.13 Training of staff employed in the operation and maintenance of sewerage services is currently conducted in a fragmented and uncoordinated way by BMEA's training institute and the Municipal Engineering Research Institute. EPB and BUP also provide some training. 5.14 The project includes a comprehensive training program for SSPCC and SSC formulated by BMEA with the assistance of the ADAB-financed consultants. For SSPCC this program envisages training of managers, engineers, computer operators and programmers and accountants. Three management trainees and two engineers would receive training overseas for periods of one to three months. Training courses for eight management trainees, 60 computer operators/programmers and 60 financial staff will be arranged in China. In addition, a foreign training expert will be engaged for a three-month period who, with the assistance of Chinese engineers trained overseas, will conduct intensive training courses for engineers in Shangha.i. The training program of SSC staff includes: (a) training of four Chinese trainers overseas for a total period of six months; (b) hiring of three foreign specialists - one each for technical, management and finance - to advise on training courses in Shanghai for a total period of 4-1/2 months; (c) management development program for ten senior managers and 15 managers at other levels for a total of 45 trainee-months; (d) attendance of 62 fresh recruits in 4-year professional and 3-year technical courses in Chinese educational institutions; (e) mechanical operator training courses for 200 employees for a total of 200 trainee-months; (f) intensive short courses for 136 technicians, administrative and accounting staff; and (g) procurement of training equipment. 5.15 The training programs for SSPCC and SSC are estimated to cost $0.2 million and $1.5 million respectively and are planned to be completed over four years. Training and laboratory equipment amounting to about $0.6 million would also be required. Details are shown in Annex 21. The management and organization study (para. 5.06) would review these proposals and, if necessary, prepare supplemental training proposals for SSC and SSPCC -23- staff. At negotiations assurances were obtained from SM that the training would be implemented by SSPCC and SSC after consultation and under a schedule agreed with the Bank/IDA, and completed not later than December 31, 1990. Insurance 5.16 Like other Government bureaus, BMEA's sewerage facilities are self-insured. This has been justified because there have not been serious incidents involving loss or destruction of sewerage property. However, in view of the large investments now planned, SSC will take insurance with appropriate coverage on its assets to be underwritten by the People's Insurance Company. Taxation 5.17 Under the current regulations, enterprises pay income tax at 55% of their taxable income. In addition an adjustment tax is levied. The latter tax varies for various enterprises with a maximum rate of about 35% of the taxable income. SM, with approval from the Central Government, has decided to exempt SSC from payment of these taxes. SSC would, however, be required to pay a sales tax at the rate of 3% of its operating revenues. To help SSC in its initial years of operation, the Central Government and SM have decided to give SSC a tax holiday on sales tax for 1987 (para. 6.05). VI. FINANCES Past and Present Financial Position 6.01 Drainage and sewerage services are presently provided and financed out of SM's budget. No user charges were levied before December 1986, accounting was kept on a cash basis, no financial statements were produced and the responsibility for sewerage services was divided between MDAD and MEAD. These factors make it difficult to compile accurate financial information for services to be taken over by SSC. For these reasons, the financial information shown in Table 6.1 should be taken as approximate. Financial data show that operating expenses increased 36% during the last two years (1984-86). A major factor in the increase was the end-1984 increase in salaries, partly paid in 1985. Although the sewerage network requires considerable improvetaents, capital expenditures during the last two years averaged only about 0.3% of fixed assets. However, repair and maintenance expenses (excluding labor) are high, reaching almost 2% of fixed assets. This is due to the age of the fixed assets and the inclusion of replacements of some assets in these expenses. -24- Table 6.1: PAST EXPENDITURES FOR SEWERAGE SERVICES (Million Yuan) 1983 1984 1985 1986 --------- Actual -------- Estimated Operating Expenses Salaries and Wages 3.61 4.08 7.01 6.77 Power 5.46 5.43 6.12 6.13 Repairs and Maintenance 8.07 8.74 11.67 11.00 Materials 1.41 1.17 2.49 2.50 Administration 0.40 0.47 0.59 0.57 Total Operating Expend. 18.95 19.89 27.88 26.97 Capital Expenditures 6.50 2.35 2.30 2.00 Balance Sheet and Fixed Assets 6.02 SSPCC has prepared an estimated Balance Sheet for sewerage services (Annex 14). For this purpose MDAD estimated the replacement value of fixed assets as of end-1983, based on the records maintained by it and MEAD. SSPCC also computed the cumulative depreciation of the fixed assets. The identified sewerage network of 1,050 km (0.15 m per person) seems to be underestimated. However, any unreported pipelines have probably exceeded their useful lives and being fully depreciated would not affect the financial projections. By end-1985 fixed assets were 96% of the total assets of Y 652 million ($176 million). The accumulated depreciation, Y 394 million, is equivalent to 60% of the value of the fixed assets. The average depreciation rate is 2.5%. Fixed assets would increase 3.3 times and net fixed assets would be 6.5 times larger upon project completion. For the appraisal projections, the estimated replacement value of fixed assets is satisfactory. However, SSC would require detailed records of the fixed assets taken over from MDAD and MEAD, their location, value, useful lives and depreciation. Assurances were obtained from SM during negotiations that not later than December 31, 1988, SSC would complete and incorporate in its books an inventory and valuation of its fixed assets. Financial Objectives 6.03 Sewerage services are part of the general expenditures of the city. During project preparation SM decided to establish the SSC, which would be a self-supporcing, autonomous company. Sewerage tariffs were introduced in December 1986 for industrial and commercial consumers, and would be introduced in 1989 for domestic consumers (para. 6.04). These tariffs are now collected by BMEA, but would be collected by SSC once it is established (para. 5.05). Given the lack of any previous debt service, these tariffs would eliminate the need for operating subsidies and allow SSC to cover its operating expenses, pay interest during construction, finance normal capital investments and accumulate a cash surplus during the project implementation period (1987-1992). In 1993, when the project comes into operation, an increase in the average tariff would be required (para. 6.04). To maintain a satisfactory financial position, assurances were obtained -25- during negotiations that not later than 1993 SSC's revenues should be at least sufficient to cover its operating and maintenance expenses (including staff bonuses and welfare expenses) and the larger of either depreciation or total debt service (total interest and principal expenses). To protect SSC's capacity to pay debt service, assurances were obtained during negotiations that no additional debt would be undertaken by SSC without Bank Group agreement, unless a reasonable forecast shows that SSC would have a debt service coverage of at least 1.3. Sewerage Tariffs 6.04 Although almost half of the City population still use the bucket system, grey water from most houses is discharged into the sewerage system (para. 2.06). To support and finance SSC, SM has approved the introduction of sewerage charges for both grey water and raw sewage. A sewerage charge of Y 0.12 ($0.03) per m3 has been implemented on December 1, 1986 for industrial and commercial consumers who contribute almost 80% of the City's wastewater flov. The charges would be based on 90% of the water sold by SMWC. SMWC is a.ready collecting a water charge of YO.12 per m3. A sewerage tariff study would be conducted under the project by SSC with the support of consultants to determine sewerage4 charges for SSC to achieve its financial objectives (para. 6.03) with due e.onsideration given to consumer affordability, in particular with regard to domestic sewerage charges of YO.03/m3 expected to be implemented in 1989, and tariff increases required after the proposed project comes into operation in 1993 (financial projections show that an increase in the average tariff from YO.098/m3 to YO.132/m3 would be required). The study would look into alternative methods of charging (surcharges on water tariffs, taxes, land use fees, etc.), and charges to provide incentives to reduce pollution (effluent strength and pollution load charges). Assurances were obtained during negotiations that (a) sewerage charges agreed with the Bank/IDA would continue to be implemented for commercial and industrial consumers; (b) a sewerage tariff study would be completed not later than December 31, 1988, under terms of reference and with the assistance of consultants satisfactory to the Bank/IDA; and (c) the recommendations of the study would be discussed with the Bank/IDA and implemented not later than June 30, 1989. Future Financial Performance 6.05 BMEA will build the project works and, upon completion, will transfer them to SSC. For continuity, the financial projections (Annex 15) include project financing and investment. After project completion SSC would also assume the debt service in local currency on the equivalent amount of Bank loan and IDA credit. SSC repayment conditions to SM are 20 years, including five years grace, at 4.5% p.a. interest, which is in line with interest rates for similar projects in China. SSC will pay the interest during construction on the equivalent in local currency of the Bank/IDA disbursements. SSC will be exempted from income and adjustment taxes, and would receive a tax holiday for one year on its sales tax (para. 5.17) to enable it to cover debt service and expand sewerage services. These tax exemptions were confirmed during negotiations. 6.06 * The critical variables for SSC's financial viability are water consumption, increase in operating efficiency, and capital and operating -26- expenditures of the project. The water sold by SMWC, the basis for sewerage charges, is expected to increase, on the average, by some 3% to 4% p.a. from population and industrialization growth, higher incomes, better housing, and increased use of flush toilets. However, the introduction of sewerage charges in 1987 for industrial and commercial consumers is expected to lower water consumption by about 20% between 1987 and 1988. Domestic sewerage charges (estimated at Y 0.03 per m3) in 1989 and further increases in 1993 will increase SSC's financial viability. In addition SSC's operating efficiency and cost control efforts are expected to increase with staff training under the project. The ongoing program for renewal and expansion of housing in Shanghai would increase the number of sewer connections to the system. This, together with limitations on staff increase, would reduce the number of staff per thousand sewer connections from 10.0 in 1986 to 7.7 in 1993. The possibility to install sewer connections which take both grey and soil water as a result of the project will increase the population with flush toilets from 51% to 65% in the same period. Operating expenses would, however, be increased by 43% between 1991 and 1993 with commissioning of the project. 6.07 SSC's financial projections are presented in Annex 15 and summarized in Table 6.2. Assumptions for these projections are in Annex 14. Under the proposed financial covenant (para. 6.03), SSC's financial performance would be satisfactory. SSC's revenues would increase from Y 85 million to Y 138 million between 1987 and 1993. This would involve a tariff increase of about 35% in 1993, which just about maintains in real terms the initial tariffs of about Y 0.12 per m3 for commercial and industrial consumers and about Y 0.03 per m3 for domestic consumers. These sewerage charges are easily affordable (para. 7.10). SSC's financing plan (Annex 15, Table 4) shows that the project represents 92% of total investments, and that cash would accumulate during this period. It includes: (a) onlending of the Bank/IDA proceeds, 36.5%; (b) SM's equity contributions 56.5%; (c) other loans (Stage 2 Project), 2.1%; and (d) internal cash contributions, 4.9%. -27- Table 6.2: KEY FINANCIAL INDICATORS 1987 1989 1991 1993 1994 Domestic Sewage billed (Mln m3) 204.4 208.2 226.8 247.0 259.1 Comm. & Ind. Sewage billed (Mln m3) 704.2 666.1 722.3 770.5 800.6 Total Sewage billed (Mln m3) 908.7 874.3 949.1 1017.5 1059.7 Domestic Tariff (Y/m3) 0.000 0.030 0.030 0.040 0.043 Comm. & Ind. Tariff (Y/m3) 0.120 0.120 0.120 0.161 0.173 Average Tariff (Y/m3) 0.093 0.099 0.098 0.132 0.141 Operating Revenues (Mln Y) 84.51 88.59 96.43 137.70 154.23 Operating Expenses (Mln Y) 30.48 39.45 45.19 63.79 71.34 Net Income (Mln Y) 37.65 35.30 39.67 -0.47 8.3C Operating Ratio 55.4% 63.2% 64.1% 86.1% 81.8% Rate of Return on Net Fixed Assets 15.9% 15.7% 19.2% 1.2% 1.8% Debt Service Ratio 1.14 1.30 Total Debt to Equity 11.2% 22.7% 37.4% 57.6% 74.5% 6.08 The most critical year for SSC's financial performance is 1993, when the project comes into operation and debt payments begin. Even then, SSC's financial performance would be satisfactorily and comparable to other similar utilities. In 1993, SSC's operating ratio would be 86%, which is satisfactory but higher than the 64% averaged during 1987-92. After project completion the fixed asset base would be substantially increased, tripling the amount allowed for depreciation. This reduces SSC's rate of return on net fixed assets from an average of 10% during project construction to about 2%, which is low, but comparable to other sewerage utilities. By 1993, SSC's debt equity ratio would be 75%, and SSC would be able to finance internally about 15% of the cost of the second stage sewerage project. After SSC is established and is operating satisfactorily, plans should immediately be made to efficiently deploy the forecast surplus cash available. These plans could include the use of the funds to rehabilitate and expand the sewerage network and pump stations, or finance part of the project expenditures. As in other countries, SSC may also establish a revolving fund to finance and promote the installation of flush toilet facilities and sewer connections. Shanghai Municipal Finances 6.09 SM has considerable revenues, amounting to Y 17,500 million in 1986. However, only 23.2% (Y 4,060 million) is retained by the Municipality. The remaining funds are remitted to the Central Government. After covering its administration and recurrent expenditures (Y 2,500 million), SM has been budgeting about Y 1,300 million ($350 million) per year for capital investments. Future investments would be higher due to the planned construction of the subway, bridges, urban transport and housing. The project investments will be financed by the IBRD loan and IDA credit, and SM's contributions. The latter are forecast at Y 1,062 million, and -28- peak in 1989 at Y 289 million, representing 22% of SM's budgeted investments in that year. VII. ECONOMIC, SOCIAL AND ENVIRONMENTAL CONSIDERATIONS Project Justification 7.01 Waterways in Shanghai are already extremely polluted (para. 2.11), and pollution loads are expected to increase further with projected growth in industrial output and personal incomes. It is estimated that, if adequate pollution abatement measures are not carried out urgently, by 1990 dissolved oxygen (a measure of river water quality) will be reduced to zero over a length of 28 km of the Huangpu River at Shanghai during low river flows occurring about 10% of the time (Annex 2). Pollution will be especially severe in Suzhou Creek, a major tributary of the Huangpu River, where dissolved oxygen levels are already reduced to zero along its entire length through the City area (20 km) for a large part of the year. Such conditions would pose serious hardship on Shanghai's residents, and the proposed project is required to alleviate these conditions. The project, the first of two stages, has been determined to be the least-cost approach for improving the water quality of the Huangpu River and its tributaries to achieve in part the specific water quality goals mentioned in para. 2.10. It will address in particular the very serious water pollution problems in Suzhou Creek. Because of the difficulty in quantifying benefits in sewerage projects, the premise that the project is the least-cost approach will be used to provide the principal basis for the Justification of the project. Least-Cost Considerations 7.02 A two-step process was used to arrive at the least-cost solution for the project. The first step involves obtaining the least-cost method of wastewater disposal among potential alternatives using different processes to achieve water quality objectives. The alternatives considered included: (a) an intercepting sewer with the outfall in the Changjiang estuary; (b) large treatment facilities with effluents discharging into the Huangpu River; (c) full on-site treatment of industrial and domestic wastewater; (d) full on-site treatment of industrial wastewater and minimum treatment of domestic wastewater using septic tanks for households currently on the night-soil system; and (e) a non-construction alternative involving reduction of industrial wastewater by relocating a sufficiently large number of polluting industries outside of Shanghai. It was concluded that Alternative (a), for the construction of an intercepting sewer, was by far the lowest-cost alternative (about half as -29- costly as the next best alternative), and it was adopted for the project (Annex 16). 7.03 The second step involves the optimum selection of design configuration for the chosen intercepting sewer solution. Major design considerations included the choice of outfall location, sewer routing (including considerations of space availability and traffic interruption), and appropriate construction methods. During the course of the work, the site for the best location for the sewer outfall (from cost and hydraulic dispersion points of view) was ruled out on the grounds that its outfall would interfere with shipping and related facilities. A second acceptable site was therefore adopted. Capital costs were minimized by using less- costly construction methods whenever possible (e.g. c&s1verts in lieu of tunnels). Land acquisition and demolition of existing structures were kept to a m:f.nimum by prudent choice of sewer routings. Prolect Benefits 7.04 The primary benefits of the project come from its contribution to improving environmental quality in Shanghai's waterways, in particular Suzhou Creek, through the removal of industrial and domestic wastewater which is currently discharged, largely untreated, directly into the waterways, and the potential additional economic values such improvement creates. 7.05 The project will also have substantial longer-term benefits by establishing an efficient institutional framework for managing liquid wastes in Shanghai. It will establish a financially self-supporting sewerage company, SSC (para. 5.01), provide staff training (para. 5.13), and strengthen SM's capability to monitor and control environmental pollution with the promulgation of tighter regulations for water pollution control and sewerage operations (para. 4.19). Appropriate sewerage tariffs for SSC to meet its financial objectives and to provide incentives for pollution abatement would also be determined and implemented under the project (para. 6.04). An organization responsible for management of the Huangpu River water resources, to include allocation and setting effluent discharge standards, would also be set up (para. 4.21). In addition the project would provide an effective model for liquid waste management which can be emulated in other Chinese cities. 7.06 An attempt has been made to estimate an economic rate of return to the proposed investment, but there are major difficulties in arriving at satisfactory proxies for benefits, and some benefits (e.g. to health) are only very partially captured in the quantification. Moreover, the full realization of certain benefits depends upon a series of governmental choices that would have to be made in the context of administered prices and the absence of market signals regarding changing input and output prices. 7.07 Improvement in water quality in the presently highly polluted Suzhou Creek has the potential to result in substantial, but difficult to quantify, increases in property values in the vicinity of the Creek. The magnitude of these increases, a measure of project benefit, is a function of both the size of the affected area and the degree to which the environmental improvement causes higher production (or utility) from more economic land -30- use. Order-of-magnitude estimates of these potential benefits, based upon current survey data of net profitability from property (annual income less annual costs) in various Shanghai districts, show a present value of about Y1,200 million, using conservative assumptions on the size of the improved areas and after taking into account development costs to achieve improved land use. As indicated above, the realization of these benefits will depend largely on whether or not SM chooses to facilitate redevelopment in the environmentally-improved area. Additional benefits, conservatively estimated to be about Y 200-300 million in present value, can also accrue from increased vegetable production on land currently affected by polluted water, reduction of treatment costs for use of water drawn directly from water courses, and water supply savings from use of more water drawn directly from Suzhou Creek and the Huangpu River due to the improved quality. Annex 16 gives additional information about the above estimates. 7.08 The sum total of all the various proxy benefits described above is about Y1,400 million at a discount rate of 10%, compared with an estimated present value of the project capital and operating costs of about Y 1,100 million. The economic rate of return (ERR) estimated using the above cost and benefit streams is on the order of 13%. Average Incremental Cost and Affordability 7.09 The average incremental cost of the project is estimated to be Y 0.39/m3 at a discount rate of 10%. This value becomes Y 0.46/m3 after shadow pricing of inputs (Annex 16). The currently proposed sewerage tariff of Y 0.12/m3 (para. 6.04) on industrial and commercial users is below the average incremental cost of the project. However, as the project has substantial external benefits from environmental improvement (para 7.05), direct users of the system, who are not the only beneficiaries, need not be required to cover total project costs. The proposed tariff study (para. 6.04) will address, among other things, the issue of how the project's average incremental costs would be reflected in the sewerage charges. 7.10 Incomes in Shanghai have risen substantially in real terms in recent years. On average, per capita real income rose by 12.3% between 1984 and 1985. Survey data on household incomes in 1983 and 1984 are available, and these were extrapolated to obtain 1986 data. At sewerage charges equal to the average incremental cost, it is found that household expenditures for sewerage would represent only about 1.0% of household income at the 25th percentile of income distribution. At che charge of Y 0.03/m3, suggested to be levied in 1989, expected expenditure would be less than one-tenth of one percent of the income at the 25th percentile (Annex 16). Thus the project is clearly affordable to low-income households. 7.11 It is difficult to establish a precise estimate of the share of the project which serves households in poverty in the Shanghai context. The income distribution as reported in household surveys is very flat with little income differential between deciles. Moreover, neighborhoods tend not to be differentiated according to income. One possibly relevant indicator of service to the poor is that the project area contains about 1.5 million of the City's 2.7 million people who are on the nightsoil system, lacking indoor plumbing. Because domestic wastes may be fully discharged into the sewer once the project is implemented, the project will encourage -31- households lacking indoor plumbing to improve their dwellings and improve sanitary conditions. Environmental Impact 7.12 The project will improve the environment in the City of Shanghai through the removal of wastewater discharges into its waterways. There will, however, be an adverse impact to city residents during construction in loss of time and inconvenience from traffic congestion and disruption due to the extent of the construction works to be carried out in overcrowded city areas, but careful construction management will minimize this impact. To examine if there could be any adverse environmental effect from the discharge of the intercepted wastewater into the Changjiang estuary, extensive model studies have been carried out by two research institutes in China. The results show quite conclusively that the quality of the river water, after recei-ving the discharged wastewater, would reach ambient conditions within about one km from the discharge point (para. 4 of Annex 2). Because the river channel is almost 10 km wide at this location, and the outfall point is about 1-1/2 km from the river bank, no adverse environmental effects on beach activities and fishlife are expected. Project Risks 7.13 There is a remote possibility that environmental quality in the Changjiang estuary could be worse than is now predicted as a result of the project. This could result from unforeseen strong effluents entering the system or from an actual lower assimilative capacity in the Changjiang than is now expected. Monitors have, however, been built into the project to ensure that abnormal sewage effluents would be detected early and remedies found. Furthermore, model studies on the assimilative capacity of the estuary have shown a large margin of safety in the capacity of the Changjiang to assimilate the proposed wastewater discharges. Thus the likelihood of environmental. problems occurring at the Changjiang is small. Should this happen, it would still be possible to supplement the minimal treatment currently planned by additional treatment prior to discharge to the Changjiang. 7.14 It is also possible that the water quality objectives (and hence the benefits associated with environmental improvement) in Suzhou Creek and the Huangpu will not be reached even though major sources of pollution in the City are intercepted. This can arise from increased point and non-point pollution upstream of the project area. This risk is reduced by the strong interest of SM to improve environmental quality, and the measures taken to manage the water resources of the Huangpu River (para. 4.21). VIII. AGREEMENTS REACHED AND RECOMMENDATIONS 8.01 At negotiations assurances were obtained from SM on the following: (a) a study to examine economic ways to rehabilitate the existing pipe system would be conducted on terms of reference and with assistance from consultants acceptable to the Bank/IDA, and that -32- the study would be completed not later than December 31, 1989, and the results reviewed with the Bank/IDA (para. 2.08); (b) SM would send a copy of the draft Transfer and Operations Agreement to the Bank/IDA for review by December 31, 1990, and to have the agreement concluded with SSC not later than December 31, 1991 (para. 4.10); (c) the staff, functions and responsibilities of the SSPCC would be maintained throughout project implementation in a manner satisfactory to the Bank/IDA (para. 4.12); (d) consultants satisfactory to the Bank/IDA would be engaged on a continuous basis to advise on detailed design, preparation of contract documents, supervision of project construction and conducting of project-related studies (para. 4.13); (e) resettlement of persons affected by the project would be carried out in a manner and according to a schedule satisfactory to the Bank/IDA (para. 4.17'; (f) new pollution control regulations and sewer regulations would be enacted not later than December 31, 1988 (para. 4.19); (g) a river basin management study for the Huangpu River basin would be conducted under terms of reference and with the assistance of consultants satisfactory to the Bank/IDA, and completed not later than December 31, 1988, and the results reviewed with the Ba-k/IDA (para. 4.21); (h) a management and organization study for SSC would be conducted on terms of reference and with the assistance of consultants acceptable to the Bank/IDA, and completed not later than December 31, 1988, and that comments of the Bank/IDA would be sought prior to implementation of the study's recommendations (para. 5.06); (i) annual financial statements of the SSC, certified by SMAB or an independent auditor acceptable to the Bank Group, would be furnished to the Bank/IDA within six months of the end of each financial year, and the accounts of the SSPCC and the Special Account, duly audited by SMAB or by such independent auditor, would be submitted to the Bank/IDA within six months of the end of each financial year (para. 5.11); (j) the proposed training program would be implemented by SSPCC and SSC after consultation and according to a schedule agreed with the Bank/IDA and completed not later than December 31, 1990 (para. 5.15); (k) SSC would complete and incorporate in its books an inventory and valuation of its fixed assets not later than December 31, 1988 (para. 6.02); -33- (1) not later than January 1, 1993, SSC's revenues should be at least sufficient to cover its operating and maintenance expenses and the larger of either depreciation or total debt service, and that no additional debt would be undertaken by SSC without Bank/IDA agreement, unless a reasonable forecast shows that SSC would bave a debt service coverage of at least 1.3 (para. 6.03); (m) sewerage charges agreed with the Bank/IDA would continue to be implemented for commercial and industrial consumers, and that a sowerage tariff study, under terms of reference and with the assistance of consultants satisfactory to the Bank/IDA would be completed not later than December 31, 1988, and the recommendations of the Atudy discussed with the Bank/IDA and implemented not later than June 30, 1989 (para. 6.04); 8.02 Understandings were reached and recorded in the minutes of negotiations on the following: (a) The various steps to be taken for resettlement were agreed (para. 4.17); (b) SM would arrange suitable sources of financing for industries to construct pretreatment facilities (para. 4.19); (c) SSC would be exempted from income and adjustment taxes, and SSC would also receive a tax holiday on its sales tax in its initial year of operation (para. 6.05). 8.03 Conditions of loan and credit effectiveness are: (a) Borrower's State Council approval of the Loan and Development Credit Agreements (para. 4.09). (b) registration of the Shanghai Sewerage Company, SSC (para. 5.05). 8.04 With the above assurances and understandings the project is suitable for a Bank loan of US$45 million at standard variable interest rate for a 20-year term including a 5-year grace period, and an IDA credit of SDR 78.9 million (US$100 million) on standard IDA terms. The Borrower would be the People's Republic of China. - 34 - Annex 1 CHIII SHAW.-MI SEWNSACE PROJECT FloW Diagram of Existing Sewrage System Domestic ,Indust rial Waste Waste 6.0 , 8.7 Bucekt Plush System: Tollet 3.0 1 0 Sicreta Grey Grey Water WtrIsto 3.0~~~~~~~~~~~~~~~~~~~~~~~~~~o -solSe r S Efflue ! 21 21 09 09 | Land | |Ce*ud 40%O | Dissposal s | rs Chban.jiag Eu.|H pu River and -" Hanghou Say Tributaries Note: Numbers in boxes refer to population or populotion equivalent In millions contributing to the vaste. - 35 - Annex 2 page 1 of 2 CHINA SHANGHAI SEWERAGE PROJECT Wastewater Disposal Alternatives 1. Alternatives studied for collecting wastewater from houses and factories included: (a) using the existing combined sewer system with a new intercepting sewer, and (b) constructing a new separate sanitary sewer system. The cost of a new separate sanitary sewerage system, however, far outweigh.ad the benefit from the slightly better environmental quality that could be achieved with the combined sewers. In addition, the crowded conditions of the city areas would pose serious construction problems. Continuing use of the combined sewers for wastewater collection was therefore adopted, 2. For final disposal of the collected wastewater the following alternatives were studied: a. The use of a single sewage treatment plant located at the eastern edge of the City, with secondary treatment and effluent discharging into the Huangpu River. b. The use of multiple (3) treatment plants located in the northern, southern and eastern edges of the City Proper with secondary treatment and effluents discharging into the Huangpu River or its tributaries. c. The use of a smaller treatment plant for areas in the southern part of the City, and construction of an intorcepting sewer to transport wastewater from the remaining City areas to the Changjiang estuary for disposal. d. Transporting all wastewater from the City Proper via a large intercepting sewer to the Changjiang estuary for disposal. Four feasible outfall locations (Gaoqiao, Shi Dong Kou, Bai Long Gang and Zhuyuan) have been studied. 3. Alternative (d) was found to be the least-cost alternative. The most favorable location of the outfall for this alternative from a hydraulic dispersion point of view was for discharge of the wastewater into the South Channel of the South Branch of the Changjiang estuary at Gaoqiao. The river estuary is about 40 km wide at this point and is divided into three flow channels, the North Branch and the South Branch which is further subdivided into the North and South Channels. The South Channel itself is about 6 km in width, and is an important local as well as international shipping route. Further investigations revealed serious objections to the use of the Gaoqiao location by the Harbor Control Department of the Ministry of Transport, because of the necessity to locate the outfall diffusers in the main navigation channel to avoid polluting the shoreline (the navigation channel is only about 1 km from the shoreline). It was contended that delay or damage to busy shipping using the navigation channel could occur both during the construction period and when repair and maintenance work have to be carried out. The location at Zhuyuan, about 4 km downstream of Gaoqiao, - 36 - Annex 2 page 2 of 2 which was subsequently studied, ranked second for hydraulic dispersion, but would allow the navigation channel to be avoided by the outfall altogether. Although the construction cost in using the outfall at this location would be about $20 million more than at Gaoqiao, the potential cost of delay and damage to shipping by locating the outfall at Gaoqiao was estimated to be much higher. Locating the outfall at Zhuyuan was therefore selected. 4. An important aspect studied was the environmental impact of discharging partially treated wastewater into the Changjiang estuary (only preliminary treatment by screening was proposed). A higher degree of treatment would not have made the alternative as economically viable. Because of the earlier inclination towards the Gaoqiao location, physical model tests were conducted for this location at the Nanjing Hydraulic Academy and the Changjiang Scientific Hydraulic Research Institute to study the diffusion characteristics of the river and pollutant concentration profiles. Dye tests were also carried out to trace potential travel paths of pollutants in order to determine any adverse effects on downstream users of the river. The tests showed quite conclusively that with properly designed diffusers the mixing capability of the river at Gaoqiao was such that the quality of the water after receiving the wastewater discharge would almost reach the ambient river water quality level within 0.5 km of the discharge point in any direction. Model tests were not reconducted at the Zhuyuan location, but because of the similarity in river characteristics between this location and Gaoqiao, quite reliable conclusions could be inferred using data from the Gaoqiao tests. These conclusions indicated that because of the shallower river bed, the mixed fluids (wastewater and river water) would take longer (0.75 km instead of 0.5 km) to reach ambient quality. This condition is considered to be acceptable since any undesirable zone would be limited to an area of about 1.5 sq km in the middle of the river and any impact on fishlife or shore activities would be minimal. 5. A computer model (the AUTOSS steady-state model adapted for use with an IBM PC-XT computer) was used to predict water quality conditions in the Huangpu River with no action taken and under the reduced pollution loads with the implementation of the alternatives considered. The pollution load discharged into the Huangpu River at present from the City alone is around 450 t/day in terms of biochemical oxygen demand (BOD), and is expected to grow to 770 t/day in 1990. In addition, pollution loads (point and non-point) are also being discharged into the river upstream and downstream of the City. The model study showed that the assimilative (self- purification) capacity of the river is about 100 t/day. It also showed that if nothing is done to relieve pollution, the present situation would rapidly deteriorate, and by 1990 dissolved oxygen (DO), a measure of river water quality, would be reduced to zero over a length of 28 km for an average of 10% of the time at low river flows, compared to a DO level of 0.44 mg/l over a length of 4 km. The study also showed that, with secondary treatment of all wastewater from the City, the DO level would be raised to a minimum level of 3.0 mg/l during low flow (EPB's target is 4.0 mg/l), with additional pollution control measures upstream of the City. This is because the treatment plant effluent that is discharged into the Huangpu River would still contain about 200 of the source pollution. With the removal of the City wastewater by an intercepting rewer to Changjiang for disposal, the minimum DO level can be raised to 4.5 mg/l during low flow. WVAIM 9ENUS01D 950 (MM t) - WATER DEIWD AD E UE_E PSUCT 195 1985 13 19o3 193 1990 161 193 1963 9s"4 1S5 15 197 189 189w M0 Pbplet teen _aangnt Nerop. qlm.40 7000 70 71 7977 M1 797 7514 789 77 73 79855 0 3174 3M0 BOW 9 5 Pptetlen Sramth 1.85 1.3S 1.8. 1.85 1.95 1.35 1.8 1*.9 1.85 1.85 1.3 1.85 1.8 1.5s 1.3o A) WAtER liWLY OEAS _AE Demo - iLiolN TM- PR WAR 1e~~~~~~~~~~~~9 gm ee gR Xas go we m V4 m m 81 80e B
Группа Всемирного банка · Staff Appraisal Report
China - Shanghai Sewerage Project
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