China - Rural Water Supply Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 13281 PERFORMANCE AUDIT REPORT CHINA RURAL WATER SUPPLY PROJECT (CREDIT 1578-CHA) JUNE 30, 1994 Operations Evaluation Department 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. CURRENCY EQUIVALENTS Currency Unit: Renminbi (RMB) Yuan (Y) 1.00 = 100 fen ACRONYMS AND ABBREVIATIONS CPHCC Central Patriotic Health Campaign Committee CPO County Project Offices EDI Economic Development Institute ICB International Competitive Bidding IDA International Development Association NPO National Project Office OD Operational Directives OED Operations Evaluation Department OMS Operational Manual Statements OPN Operational Policy Notes PAR Performance Audit Report PCR Project Completion Report PPO Provincial Project Offices SAR Staff Appraisal Report UNDP United Nations Development Programme WHO World Health Organization FISCAL YEAR January I - December 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation June 30, 1994 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on China Rural Water Supply Project (Credit 1578-C HA) Attached is the report entitled "Performance Audit Report on China - Rural Water Supply Project (Credit 1578-CHA)" prepared by the Operations Evaluation Department. The project was the first Bank intervention in the sector in the country and represents the initiation of a coordinated national rural water supply program. In spite of its size (providing water to 7.5 million people) the project made only a small dent in the enormous backlog of safe and reliable water supply in rural areas, and continuation of the program is vital. Due to the very large size of the project the Performance Audit's assessment is based only on sample observations and government reports. The highlights of the project (and the probable foundation of future progress) were the uniquely high level of consumer and community contribution (in cash and kind), and the significant health and economic benefits accruing to the predominantly poor beneficiaries, particularly women. However, shortcomings were evident in the neglect of sanitation and waste disposal issues, less than optimum preparation, and inadequate Bank supervision. The outcome of the project is rated as satisfactory, its sustainability as likely and its institutional development as substantial. Robert Piccioto( by H. Eberh a6pp Attachment 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.  FOR OFFICIAL USE ONLY PERFORMANCE AUDIT REPORT CHINA RURAL WATER SUPPLY PROJECT (Credit 1578-CHA TABLE OF CONTENTS Page No. P R E FA C E ....... ....... ...................................... i BASIC DATA SHEET ......................................... i EVALUATION SUMMARY ..................................... v 1. BACKGROUND ........................................... 1 2. PROJECT AND ITS OBJECTIVES .............................. G eneral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Objectives and Content ..... ....................................... 2 3. IMPLEMENTATION AND OPERATIONS ......................... 3 General ........................................................ 3 A Sample Field Audit ..... ........................................ 4 Overall Project Results and Costs ..... ............................... 6 The Role of the Bank..... ........................................ 8 4. COMPLIANCE WITH COVENANTS ............................ 8 5. CONCLUSIONS ............................................. 10 ANNEX ........................................... ......... 13 1. Comments from the Borrower .................................. 13 This report was prepared by Jozsef Biiky, Principal Evaluation Officer, who audited the project in October 1993. Ms. Helen Watkins provided administrative assistance. 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.  i PERFORMANCE AUDIT REPORT CHINA RURAL WATER SUPPLY PROJECT (CREDIT 1578-CHA) PREFACE 1. This report presents the results of the Performance Audit of the project named above for which an IDA credit of SDR 82.1 million was approved on April 11, 1985. The credit was made to the People's Republic of China and the proceeds were relent, through Subsidiary Loan Agreements, to the People's Governments of Liaoning, Shaanxi, Sichuan, Zhejiang and Beijing (Local Entities) and were further to be relent, through Sub-Loan Agreements, to several Sub-project Entities (the implementing agencies). The respective relending terms were: repayment over twenty-five years including ten years grace and between ten to fifteen years including two to four years grace. 2. The Credit Agreement was signed on May 9, 1985 and the credit became effective on November 13, 1985. The credit was closed on December 31, 1991 (one year behind the original schedule). The credit was fully disbursed. 3. The Performance Audit Report (PAR) was prepared by the Operations Evaluation Department (OED). The Project Completion Report (PCR), prepared by the East Asia Regional Office (Report No. 11251), was forwarded to the Executive Directors for information on October 15, 1992. The audit reviewed the PCR, the Staff Appraisal Report, the legal documents and Bank files and discussed the project with involved Bank staff. An audit mission visited China in October 1993, visited a number of facilities constructed under the project and discussed the project experience with relevant government and implementing agency officials whose contribution to the audit's work is gratefully acknowledged. 4. The largely descriptive PCR lacks detailed information on the project's performance in both the technical and financial areas but identifies the major successes and shortcomings. Due to the very large size and geographical dispersion of the project, the audit's detailed field work was restricted to a "sample province" (Zhejiang) and the results were "extrapolated" based on government reports confirming representativeness of the sample. Notwithstanding these restrictions, the PAR provides additional material regarding the impact on the beneficiaries, the quality of implementation and the sector's current environment. In addition, it highlights the success and shortcomings of the Bank's contribution. The success highlights of the project were the excellent level of consumer contribution and cost recovery and the high levels of health and economic benefits accruing to the predominantly poor population and women. 5. Following standard OED procedures, copies of the PAR were sent to the Borrower and the Cofinancier for comments. Comments received from the Cofinancier are incorporated in this report as Annex 1.  ii PERFORMANCE AUDIT REPORT CHINA RURAL WATER SUPPLY PROJECT (Credit 1578-CHA) BASIC DATA SHEET CREDIT POSITION (Amounts in US$ million) As of January 30, 1994 Credit Original Disbursed Canceled Repaid Outstanding 1578 110.30 104.80 0 0 0 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS 1986 1987 1988 1989 1990 1991 1992 Appraisal Estimate 4.0 24.0 56.0 78.0 80.0 n/a n/a Cumulative as % of Total 5 30 70 98 100 Actual Disbursement 15.3a/ 25.8 38.1 64.4 95.8 103.6 104.6 Cumulative as % of Total 15 25 36 62 92 99 100 Actual as % of Estimate 382 108 68 83 120 130 131 a/ First year disbursement included an initial allocation of SDR 2.1 million to the Special Account. PROJECT DATES Date Date Date Item Planned Revised Actual Identification --- --- 08/83 Pre-appraisal --- --- 02/84 Appraisal Mission --- --- 09/84 Negotiations --- --- 03/85 Board Approval --- 04/11/85 Credit Signature --- --- 05/09/85 Credit Effectiveness --- --- 11/13/85 Project Completion 06/30/90 06/30/91 06/30/91 Credit Closing 12/31/90 12/31/91 12/31/91 iii STAFF INPUT (Staff-Weeks) FY83 FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92 FY93 TOTAL Preappraisal 4.1 52.7 1.4 58.1 Appraisal 40.0 40.0 Negotiations/Post 15.2 15.2 Supervision 6.6 17.7 29.2 20.1 12.4 2.9 6.8 8.5 0.6 104.7 Other 3.9 10.0 13.9 Total 4.1 56.5 73.2 17.7 29.2 20.1 12.4 2.9 6.8 8.5 0.6 232.0 IDA MISSIONS Stage of No. of Speciali- Performance Rating and Type Project Cycle MM/YY Persons Days zation a/ of Problems Identification 08/83 3 21 EG,FA Prep. review 12/83 1 5 EG Pre-appraisal 02/84 3 24 EG,FA Prep. review 07/84 1 3 LO Appraisal 09/84 6 25 EG,FA,LO LG,TR Supervision 05/85 1 7 EG 1, no major problems 09/85 1 17 EG 1, anomalies in construction supervision 06/86 3 13 EG,FA 1, weak Sichuan project offices 01/87 1 18 EG 1, inadequate county engineering staff, slight delays (Mid-term) 04/87 3 24 EG,FA 1, construction supervision engineering and management need strengthening 09/87 2 11 EG,FA 1, cost overruns 03/88 1 4 EG 1, delays in Sichuan and Zhejiang 11/88 2 17 EG 1-2, material delivery delays further delays in Zhejiang 04/89 1 4 FA 1, possible closing extension 09/89 1 3 FA no rating, procurement and delivery delays, closing date extension need for credit reallocation 04/90 3 2 EG,FA 1, no new major problems 09/90 3 8 EG,FA 1-2, insufficient NPO review of sub-project designs 02/91 1 2 FA no rating, non-compliance with design review agreement (Final/PCR) 03/92 3 17 EG,FA,SC a/ EG = Engineer, FA = Financial Analyst, LG = Legal Counsel LO = Loan Officer, SC = Sociologist TR = Training Specialist V PERFORMANCE AUDIT REPORT CHINA RURAL WATER SUPPLY PROJECT (CREDIT 1578-CHA) EVALUATION SUMMARY Background 1. At the time of appraisal (1984), some 5. The physical objective of the project 300 million of China's rural population had was to provide safe and adequate water supply inadequate and/or poor quality water supply. to some 6 million people in five provinces, Rural communities were responsible for the residing in about 4,650 villages. Institutional provision and financing of their own water objectives aimed at developing planning, supply. Only in 1981 was a national agency, implementation and operating capabilities and the Central Patriotic Health Campaign improving cost effectiveness and financing Committee (CPHCC), given the responsibility arrangements. for the development of water supply in rural areas. 6. The approved project, reportedly of "manageable proportion", was of intimidating 2. The early years of the national program size requiring some 3,883 piped water systems were taken up by preparatory work and with 2,184 treatment plants, 95,000 handpumps information dissemination, assisted by UNDP, and 90,000 rain water collection systems. WHO and the German Government, as the communities responsible for the design and 7. The total estimated cost of the project implementation of projects lacked the capacity was US$210.2 million equivalent. IDA funds and experience for extensive water supply were to cover the 40% estimated foreign developments. exchange cost. A uniquely high 39% of the costs was to be contributed by villages and 3. The IDA's supported Rural Water individuals. The World Food Program provided Supply Project was the first major effort in the some US$10.5 million worth of wheat to be country coordinated and managed at the used as part payment for construction labor to national and provincial level (PAR, paras. 1.01- village beneficiaries. A major training and 1.04). staffing program for the various project offices was supported by the German Government. The Project and Its Objectives The on-lending process of the IDA funds with different grace periods between provincial and 4. The project was appraised in August entity repayments was to provide a revolving 1984 and an IDA Credit of SDR 82.1 million fund for further water supply developments at (US$110 million equivalent) was approved by the provincial level (PAR, paras. 2.01-2.09). the Executive Directors on April 11, 1985. The original closing date for the Credit was Implementation December 31, 1990. Actual closing took place on December 31, 1991. The Credit was fully 8. No consolidated implementation records disbursed. are available for the project. In the audit's view, this omission creates a loss of valuable Vi records of experience which should have been 13. Further Bank assistance is both sought incorporated in future projects. Available and needed but any future involvement should reports indicate few serious implementation considerably strengthen technical assistance problems but delays (and probable cost (PAR, paras. 3.04-3.15). overruns) did occur due to procurement problems, particularly ICB, unfamiliarity with 14. Overall the project, with its scope Bank procedures and shortage of skilled staff extended, exceeded the target villages and (PAR, paras. 3.01-3.03). population served by about 25%. Costs, in US$ terms also increased by about 27% but, in local 9. The vast areas covered by the project currency terms, by about 120%. These were limited the field audit to one province, covered by the appreciation of the SDR Zhejiang. Extensive visits to water works of (providing an extra $24.6 million) and by a different scale, discussions with officials further 12% contribution by the communities ranging from National and Provincial Project and individuals. Office down to small water works gave an excellent picture of the project's performance 15. The credit closed on December 31, and benefits in the particular province. 1991 with a one year delay. The last disbursement was made on April 23, 1992. 10. Design, construction quality and operating performance were uniformly 16. Although (again) not systematically satisfactory and cost recovery is excellent. The recorded, the impact of the project was highly clear success of the project produced a beneficial for women and the poor. Women, as noticeable momentum in further sector traditional water collectors, obtained major development, particularly with the successful relief with the provision of water in the house. use of the revolving fund. Women also formed some 35% of the construction labor force and are well 11. The benefits of the project, although not represented on project office and water works recorded systematically, were clearly evident staff. It is estimated that, on average, some when comparing past water sources with the 60% of the population that received new water high quality piped water supplied. New, small, supply were below the poverty threshold enterprises, utilizing the water are numerous, signaling a major impact of the project on the mostly operated by women. Public health poor (PAR, paras. 3.16-3.21). improvements are reported to be dramatic with hepatitis and typhoid incidences reduced by Compliance With Covenants and Directives more than 40%. 17. Few specific covenants were applied to 12. However, shortcomings do exist such as the project. The standard audit covenant was the misguided practice of intermittent supply on complied with. Covenants relating to staffing "economic" grounds and there is still a huge of the Project Offices, the approval of sub- backlog of providing service. A major projects and cost recovery by water entities are omission of the project was not including reported by the PCR to have been "partially sanitation on the grounds that "it is not a complied with". In the audit's view, while the problem". With the greatly increased underlying reasons for the undertaking implied consumption, wastewater disposal does present in these covenants were sound, due to the vast a problem and while the discharges do not size of the project their formulation was seriously aggravate the already chronic water impractical and, as legal requirements, they pollution problem, they certainly does not were unenforceable. The cost recovery improve it. covenant was fully complied with in the Vii Zhejiang province and government officials 20. Considering the nature, size and reported general compliance. complexity of the project, the assessment of risks at appraisal was superficial and the criteria 18. Of the large number of Operational for sector type lending was not met. Manual Statements (OMS) and Operational Policy Notes (OPN) that applied to the project 21. The evident success of the project (as to any project), the Audit focused on a few should not be allowed to hide its shortcomings with particular application. OMS 1.19 - Sector in preparation and the potential risks (which are Lending - specifies requirements for the use of now manifested in the follow on project Cr. this lending instrument. Although the project 2336-CHA) and the problems resulting from was not defined as a Sector Loan, it was clearly procurement issues, unfamiliarity with Bank that in all but name but the country/sector were procedures and inadequate Bank supervision. far from fulfilling the required criteria; OMS 2.25 - Cost Recovery - as highlighted above, 22. The first and second projects are likely cost recovery (at least in certain areas) was to improve water supplies to some 20 million exceptional for a rural water supply project; people still leaving some 280 million in dire OMS 2.28 - Sate of Project Preparation - the need. Continued Bank assistance in this sub- preparation was clearly inadequate for the sector is fully justified but, if carried out, the satisfactory cost estimates; OMS 3.50 - Bank should reassess the resource and Supervision - Bank supervision, particularly in assistance requirements unique to the country the technical areas was judged inadequate by and the sector and act accordingly. These the implementation agencies and the Audit requirements include extensive seminars in (PAR, paras. 4.01-4.02). different disciplines, adjustment of the procurement requirements, upgrading of Conclusions technologies and related manuals, assistance to improving of the sanitation sub-sector, and help 19. The audit rates the project as in developing an effective ex-post evaluation satisfactory, its sustainability as likely and its program (PAR, paras. 5.01-5.04). institutional development as significant. These ratings are based on partial observations and documentation and government reports.  PERFORMANCE AUDIT REPORT CHINA RURAL WATER SUPPLY PROJECT (CREDIT 1578-CHA) 1. BACKGROUND General 1.01 At the time of appraisal (1984) some 300 million of China's 800 million rural population still had inadequate and/or unwholesome water supply. Problems ranged from high fluoride content, excessive salinity, various forms of industrial or agricultural contamination or, simply, severe water scarcity. With rising incomes and standard of living, these people demanded and were willing to pay for improved services. 1.02 China's policy of self-reliance made the rural communities responsible for the local provision and financing of water supply. Only since 1981, following China's endorsement of the United Nations' International Drinking Water and Sanitation Decade, was the development of the water supply sector in rural areas made the responsibility of a national agency, the Central Patriotic Health Campaign Committee (CPHCC). The CPHCC has a membership from a wide range of ministries including, inter alia, the State Planning Commission, the Ministry of Health, Environmental Protection, Finance and Water Conservancy. The membership structure of the committee is repeated through the provincial, county and village levels. 1.03 Although the national rural water supply program was initiated in 1981, the early years of the program consisted, largely, of preparatory and dissemination activities lead by the National Project Office (NPO) of the CPHCC. Technical assistance for this was provided by UNDP, WHO, the German Government and IDA. This assistance was necessary - and highly appropriate at the early stage - as the communities, villages and townships, responsible for planning, design and implementation of water works, lacked the capacity and experience to carry out the work without assistance. 1.04 The IDA supported Rural Water Supply Project, evaluated in this Audit, was the first major effort coordinated, managed and partially financed at the national and provincial level. 2. THE PROJECT AND ITS OBJECTIVES General 2.01 The project evolved from a 1981 water supply and sanitation survey of China, carried out by a joint UNDP/WHO/World Bank team. The survey report identified critical needs in water supply services and, in 1983, the Government requested the Bank to assist in the financing of a rural water supply project. In the same year a Bank mission identified the project and provided guidelines for its preparation. The project was appraised in August 1984 and an IDA credit of US$110 million 2 equivalent was approved by the Executive Directors on April 11, 1985. The original project completion and credit closing were scheduled for June 30, 1990 and December 31, 1990 respectively. Actual completion was June 30, 1991 and the Credit was closed on December 31, 1991; a one year delay. The credit was fully disbursed on April 23, 1992. Objectives and Content 2.02 The Staff Appraisal Report (SAR) defines the basic physical objective of the project as the provision of "safe and adequate water supply to some six million people" who had access only to contaminated, inadequate or distant water sources. The institutional objectives were wide ranging and aimed to " develop national and provincial planning capability in the sector, improve the cost effectiveness of and financial arrangements for projects and ensure smooth project implementation and effective water system operation." Strategic actions to achieve these were to include: (i) improved organizational arrangements; (ii) introduction of economic and affordability considerations in project planning; (iii) upgrading of design and equipment technology and improving construction quality; (iv) introduction of revolving funds; (v) training of skilled manpower and (vi) developing sector plans and strategies. 2.03 In an attempt to restrict the project to "manageable proportions" (SAR quote), five provinces (Beijing, Liaoning, Shaanxi, Sichuan and Zhejiang) with a total rural population of some 213 million were to be covered by the project. Of the total rural population, about 55 million (26%) were considered to have adequate water supply, Zhejiang being the worst with only 16% served adequately. Some 4,650 villages were to be served by 3,900 water systems. In several cases, physical and economy of scale considerations resulted in the design of "regional" systems serving up to 180 villages. The type of systems, depending on available water sources, financial and economic considerations, affordability and local capacities, varied from treated surface water and piped network to boreholes with handpumps or rainwater collection. 2.04 The above quoted "manageable proportions" still resulted in a project of an intimidating size. A total of 3,883 villages were to receive piped water systems served by 2,184 treatment plants. Nearly 95,500 handpumps and 90,000 rain water collection systems were also to be installed. 2.05 The total estimated cost of the project at appraisal was US$210.2 million US$2.0 million of which was to provide initial working capital for a revolving fund for financing future developments. Some 40% of the costs were estimated to be foreign exchange, 96% of which was to be financed from the US$80.0 million IDA credit. The central government was to finance US$1.7 million, the Provinces US$16.2 million, the Counties US$18.3 million and the villages and individuals would contribute US$46.4 and US$35.6 million respectively - a uniquely high beneficiary contribution. 2.06 The IDA credit was to be onlent to the provinces and, subsequently to the sub-project entities at zero interest but service charges would be born by the sub-project entities and the foreign exchange risk by the provinces. The onlending terms to the provinces were 25 years and ten years grace period and from the provinces to the entities, 10-15 years and 2-4 grace period. The difference in the grace periods would provide the means for the provinces of utilizing the repaid amounts as a revolving fund in areas not included in the project. 2.07 Another novel feature of the project was the contribution of free wheat by the World Food Program to the provinces of Liaoning and Shaanxi equivalent to US$4.7 million and US$5.8 3 million for Liaoning and Shaanxi respectively. The wheat was used as part payment to individuals working on the construction of the sub-projects. 2.08 Early in the preparation of the project the limited availability of skilled personnel was identified as a major threat to sound preparation and implementation. To respond to this problem training of staff, at all levels has been made a high priority. A grant of US$1.5 million equivalent was provided by the German Government to support the program. In addition, to ensure satisfactory design and construction standards and to overcome the disadvantages of the past isolation of China in general and its rural areas in particular, a Design and Construction Manual was prepared to provide guidance and standards for the implementing agencies. 2.09 Overall responsibility for project implementation rested with the CPHCC, through its National Project Office. To form a descending chain of command, five Provincial Project Offices (PPO) and twenty five County Project Offices (CPO) were established. At the time of the appraisal 90% of the staff of these offices were in place. The role of these offices were management, coordination, oversight and approval. Execution was to be contracted out to appropriate design and construction agencies. Foreign experts assisted in reviewing plans and designs. 2.10 The SAR makes no reference to specific plans or special provisions for Bank supervision of this very large project. 3. IMPLEMENTATION AND OPERATIONS General 3.01 The Audit could not locate a comprehensive implementation history for the project although the Monitoring Indicators prescribed in the SAR technically should have made the compilation of this possible. The field Audit was advised that implementation records are available in the PPOs (in Chinese) but these have never been consolidated for the project as a whole. Due to the size, geographic and technical diversity of the project such consolidation would, indeed, have been a time consuming job but, if carried out, it would have provided a rich data base for comparative analysis of implementation problems and successes. As it is, the often anecdotal record of issues, problems, solutions and lessons are likely to have been (mostly) lost, together with the opportunity of incorporating them in the now troublesome, ongoing, Rural Water Supply and Sanitation Project (Cr. 2336-CHA). 3.02 Available reports indicate that, on the whole, the implementation of the project faced few serious problems although some areas faced greater difficulties than others. Notable implementation delays occurred mainly as a result of procurement problems, unfamiliarity with Bank procedures - which were insufficiently disseminated - and the persistent shortage of skilled staff at various levels. A repeatedly voiced problem was that while the would be beneficiaries were eager to proceed with the project and collected their (substantial) financial contribution, ICB and other Bank related restrictions significantly delayed the start of the works. 3.03 The PCR highlights other issues which adversely affected efficient implementation, none of which are unique or project specific and they are not repeated here. 4 A Sample Field Audit 3.04 Although the field audit traveled extensively and held discussions with many officials and participants, the shear physical dimensions of the project restricted these visits to one province, Zhejiang, and, therefore, the Audit's direct observations are confined to that area. Government officials noted that the province visited is "above average but not the best". 3.05 The Zhejiang province was listed in the SAR as having the worst rural water supply situation among the project provinces with 84% of its rural population having unsatisfactory supply. This probably explains (at least in part) the outstanding drive and enthusiasm of its officials and communities to improve the service. 3.06 The audit visited facilities - of different scale - constructed under the project (none were visited by Bank missions before) in the province such as the Liushy reservoir and treatment plant serving some 400,000 people in a regional scheme and a small tube well source serving 3,000 customers. In all, 78 water works were constructed in the county under the project, serving 800,000 people. All works were constructed in accordance with a Design Manual prepared for the project. The equipment and the quality of construction, albeit not state-of-the-art, were found satisfactory. Operation and maintenance were excellent and the physical sustainability of the facilities is beyond doubt. Water quality control is good with internal as well as independent external laboratory control at frequent intervals. 3.07 Extensive discussions were held with water works staff, County, Province and National sector officials regarding the operations of the facilities. The management chain of command and reporting procedures are satisfactory with good communications through the levels. There was a noticeable momentum in the continued improvement of water supplies in the province and the revolving fund is being used effectively. 3.08 Each water works is responsible for charging cost based tariffs to its consumers and for billing and collection. Tariffs vary as much as 100% depending on the cost of supply. However, tariff increases are still controlled by the provincial Price Bureau. The entity retains the monies it collects and uses it to cover its operating and maintenance expenditures and debt service (if any). The water works visited by the Audit were making a small profit. The Provincial Audit Bureau audits the accounts within three month of the end of the fiscal year. There are no significant arrears and the prompt payments and the steadily increasing demand appear to confirm that there are no affordability problems. All connections are metered and the meters are read monthly. While public standpipes are still used, the consumers want, and are prepared to pay for house or (at least) individual connections. Loan repayments by the water entities (to the Province) are generally timely as there are not only late payment charges but defaulters are bared from using the revolving fund. 3.09 The "regional schemes" which serve several villages or townships provide bulk supply to these communities and the "internal" distribution is the responsibility of the community. Water losses on the transmission pipelines are satisfactorily low. It was less easy to determine distribution system losses but they were reported not to exceed 20%. A novel feature of dealing with losses is that the ''community" charges its leakage losses back to the consumers on the grounds that "if they are charged, they report all leaks quickly". 5 3.10 The benefits of the project in the areas visited, while not systematically documented, were clearly visible. The condition and quality of the alternative (pre-project) sources of water easily explain the beneficiaries' enthusiasm for the project facilities. While there is no record of the "previous" per capita consumption, there is a "local knowledge" record of the new economic activities associated with readily available, safe water. Small businesses, mostly food related, proliferated in all areas, many operated by women who have been relieved of water carrying. Larger scale commercial and industrial development has also accelerated with the availability of water and new construction was visible everywhere. 3.11 Public health records are kept by a variety of different agencies but they are not readily available. However, it was reported that incidence of hepatitis and typhoid, the two major diseases of the area, declined by more than 40% since the project facilities came on stream although no one was prepared to attribute all of the decline to the new water supplies. It is most likely that intensified health education also has been a contributor. 3.12 While the picture painted above shows a satisfactory and sustainable project (in the province) there are, inevitably, shortcomings. The province still has a huge backlog in the provision of safe and reliable water supply. It will have to catch up in the environment of high inflation, the need for large number of skilled staff and getting closer to state of the art design, equipment and construction standards. Very few of the existing schemes offer 24 hour service. Some of the restrictions are due to limited capacity and fast growing demand, others to misguided "economic" considerations such as "saving electricity". The audit had extensive discussions on the danger of intermittent supplies such as risk of contamination, difficulties in accurate metering etc. Issues such as this highlight the past isolation of many regions of China and that much more technical assistance and exposure to modem technology and utility management practices is necessary if sector development is to proceed in the right direction. The Bank appear to have under estimated this need throughout and there is little sign that there is a better appreciation of this today. 3.13 A major shortcoming of the project as a whole (which is now widely recognized) was the omission of any consideration of sanitation and waste water disposal. The SAR lightly dismisses the issue (para.3.05) with "...wastewater is not expected to be a problem..." It also states (para. 1.02) that excreta and waste water disposal is easily dealt with in rural areas, but this assessment was likely to have been based on pre-project conditions of minimum water use and clearly gave no consideration to future, higher levels, of consumption and increased standard of living. The problem is further complicated by the fragmented responsibility of sanitation issues. Public Health, Environmental and various Construction Bureaus appear to have uncoordinated responsibilities in this area with little visible progress at present. It is, however, widely acknowledged that the full health benefits of safe water are not going to be achieved as long as sanitation is inadequate. 3.14 In the areas visited by the audit, it was difficult to assess the impact of increased waste water discharge to water courses. As mentioned earlier, all surface waters are extensively polluted and additional grey water discharges are unlikely to represent significant environmental degradation but neither do they improve the situation. The provincial authorities indicated that some consideration is being given to bringing water supply and waste disposal under the same authority but no early action is anticipated. Environmental issues are taken seriously and national standards are in force but, with the breakneck speed of development, what is likely, for the time being is that new developments observe pollution control rules and do not aggravate the situation further. "Rehabilitation" will likely have to wait. 6 3.15 The final discussions of the audit with the Provincial Project Office and senior officials of the People's Government of Zhejiang reinforced the impression of a dynamic "local government" which, in its actions, is largely independent from the central government. Strong efforts are being made to accelerate sector developments and the "revolving fund" is a major tool. The province expects to provide water supply service to an additional 2.5 million people through the use of the fund, turning it over, at least, 1.5 times. So far, 33 counties made use of it. The province would welcome further assistance from the Bank, both in financing and in technical assistance. Should this materialize, the Bank would need to strengthen its activities, particularly in technical supervision which was considered inadequate and inconsistent in its effectiveness. Overall Project Results and Costs 3.16 The project's scope underwent significant changes during implementation. It was expanded to meet strong demand, subprojects were redesigned into "regional" schemes serving larger number of villages/townships and providing "economies of scale" benefits and the number of non-piped, point sources were significantly reduced reflecting strong demand for individual connections. Table 3.1 below shows a summary of the planned and actual scope. The expansion of the scope became possible with the SDR strengthening against the US$, effectively providing an additional US$24.6 million IDA funds and by the substantial increase (12%) in consumer contribution. It is estimated by the NPO that on full utilization of the installed supply capacities of all the schemes, a total of 10.4 million people will be served by the facilities constructed under the project. Table 3.1 - Project Results Item Appraisal Actual Incr/Decr % Villages Served 4,650 5,730 +23 Population Served (Million) 5.93 7.43 +25 No. of Piped Schemes 3,144 2,699 -14 No. of Point Sources 758 131 -83 3.17 The total reported cost of the project, in US$ equivalent, exceeded appraisal estimates by about 27%, roughly equaling the increase in scope. In terms of local currency, the actual cost exceeded appraisal estimates by over 120%. Much of this was due to high local inflation reflected in labor and material cost increases as well as in increased standard of services provided (more house connections instead of standpipes). Table 3.2 below shows a summary of estimated and actual costs. 7 Table 3.2 - Project Cost Summary (US$ Million) Components Appraisal Actual Local For. Total Local For. Total Civil Works 38.9 2.2 41.1 80.0 - 80.0 Materials/Equipm. 38.9 59.8 98.7 93.4 62.9 156.3 Training 1.6 1.1 2.7 2.1 0.5 2.6 Land 9.3 - 9.3 11.1 - 11.1 Superv./Management 8.0 0.4 8.4 14.2 3.4 17.6 Subtotal 96.7 63.5 160.2 200.8 66.8 267.6 Physical Cont. 9.6 6.4 16.0 - - - Price Cont. 18.2 13.8 32.0 - - - Working Capital 2.0 - 2.0 - - - TOTAL 126.5 83.7 210.2 200.8 66.8 267.6 3.18 The proportion of contributions to the financing did not change materially, except for the 12% increase in the contribution of "villages and individuals". The IDA contribution remained in the order of 40% but, in dollar terms, increased by nearly 31% due to the strengthening of the SDR. 3.19 The credit was closed on December 31, 1991 and the last disbursement was made on April 23, 1992. The rate of disbursements fell behind appraisal projection in mid-project but caught up rapidly disbursing the "additional dollars" in the year of extension. 3.20 The audit could obtain no hard data on direct benefits from the project to women and the poor but the anecdotal claims could be verified, in small samples, in the areas visited. It is claimed that, by definition, the benefits to women are high since, as traditional water collectors, they have been relieved of the arduous trips to collect water from distant sources. The Beijing Project Office estimated that up to 7.5 million working days are saved per year in the province. Women also form the majority in small businesses started with the availability of water. Women formed up to 35% of the construction labor force and some 23% of the PPO staff are women, many having risen to high positions, particularly in finance and administration. 3.21 Benefits to the poor are on similar lines namely in the wage earning opportunities during construction, the start of small businesses, improved health and consequent better earning capacity. Government reports indicate that the adverse effect of the relatively high cost of water, in some areas, affect only a small proportion. The benefits gained from the project facilities are widely 8 publicized and the strong pressure from the yet unserved communities for improvements - and the willingness to pay for them - seems to demonstrate that the benefits claimed are, indeed, real. The Role of the Bank 3.22 While the IDA contribution to the funding of the project was highly important, equal if not greater role was played by the Bank in assisting in the identification of the sector's problems, in the first place, and helping to draw up plans for their solution. The long isolation of China from the rest of the world left it behind in state of the art practices and policies of the sector. Bank guidance in technology, project management and economic and financial planning considerations were well received in all stages of the project and, although, in the Audit's opinion they were not always adequate, particularly in technical supervision, they made significant contribution to the success of the project. 4. COMPLIANCE WITH COVENANTS AND DIRECTIVES 4.01 Apart from the standard covenants of a typical loan/credit agreement there were few specific covenants applied to the credit and these fell into the following' categories: (a) Standard Audit Covenants (Credit Agreement, Section 4.01 and project Agreement, Section 4.01) - these were complied with. (b) Covenants relating to the staffing of the National and Provincial Project Offices (Credit and Project Agreements, Sections 4.02); the PCR states that these covenants were "partially complied with". Annex 7 of the SAR provides a table with precise numbers of staff recommended for each of the 25 provincial and the National office. The Audit finds it hard to judge the validity of these figures and whether the compliance or otherwise with the precise figures did or did not affect the project implementation. With the possible exception of "clearly inadequate" or "clearly excessive" judgement on staffing (which would have reflected in implementation progress) this covenant could not have had great practical value. (c) Covenant specifying procedures for the approval of sub-projects (Credit Agreement, Schedule 4.); the PCR reports "partial compliance". Monitoring full compliance with this covenant, in view of the planned 3,900 sub-projects, would appear to be nearly impossible and some of the harshest criticism heard by the audit related to the approval process of sub-projects, being a major source of delays. In the audit's view, if the borrower(s) were considered ready for such a "sector" type loan, at the beginning, guidelines with sample reviews (and substantial latitude for judgement) would have been more suitable than a specific covenant. Operations (Legal) notes that the covenant were standard Bank legal requirements and therefore enforceable. The Audit argues the "unrealistic" nature of the covenant, under the circumstances, and could for future reconsideration of such covenants similar projects. 9 (d) Covenant requiring Local Entities to ensure that each water supply system charges adequate tariffs to cover operation and maintenance (excluding depreciation) and debt service (Project Agreement Section 4.03); again the PCR reports "Partial Compliance" as an "estimate". Given that some 2,700 such systems were constructed, monitoring compliance by the Bank could only amount to accepting reports prepared by the PPOs. The Audit was unable to locate consolidated reports relating to compliance with this covenant. There is no doubt that the principle of full cost recovery is strongly supported by both the national and the provincial governments and the Bank requiring such an undertaking was correct. However as a legal covenant it was and is clearly unenforceable. 4.02 As for any project, a very large number of Bank Operational Directives (OD)2 Operational Manual Statements (OMS). Operational Policy Notes (OPN) and Guidelines. were applicable to the preparation, appraisal and implementation of the project. Compliance with certain "administrative", legal, country economic and procedural requirements can be taken for granted as these were required for Board approval and effectiveness. The audit, therefore, focused on a limited number of critical policy requirements which had direct bearing on the project's performance. These are listed below together with the Audit's assessment of the compliance or otherwise with their requirements and the corresponding impact (if any) on the project's outcome. Directive Compliance and Impact OMS 1.19, Annex A, Sector Lending The project was, clearly, a sector lending operation in all but name. Many of the basic criteria for such an operation, as listed in the OMS, were not present. This represented a major risk which, in turn was not sufficiently highlighted. Although the project was, ultimately, successfully implemented, mainly due to the borrower's determination and discipline, much of the delays and problems encountered were due to the country's and the sector's unpreparedness for a sector type operation. OMS 2.25, Cost Recovery While full documentation for the nearly 2,700 water works constructed (each responsible for its own cost recovery) is not available, the sample reviews and reports of the NPO leave little doubt that compliance with this requirement is quite exceptional for a rural water supply project. The beneficial effect of this is expected to be seen in the sustainability of the facilities and in continued expansion of the services. It should be noted that ODs came into existence in the late 1980s and, therefore, have little relevance to the project. 10 OMS 2.28 State of Project Preparation The SAR states that "some 500 subprojects were prepared by the time of appraisal...". These were, apparently, prepared prior to the issue of the Design Manual, the basic instruments for controlling the standards of subprojects. With this level of preparation, it is difficult to find the basis for the project cost estimates and it is reasonable to conclude that this state of preparedness is responsible for some of the cost overruns. OMS 3.50, Supervision The comments received by the audit mission clearly indicated that the borrower considered the Bank's supervision of the project inadequate, particularly in the technical aspects. The audit's review of project documentation, its field experience and statements in the PCR such as "... design reports appeared to conform with standard requirements..." confirm that supervision was not commensurate with the size and complexity of the project)-. 5. CONCLUSIONS 5.01 The audit rates the project as satisfactory, its sustainability as likely and its institutional development as significant. These ratings confirm the ratings based on the reading of the PCR. However, in spite of the extensive discussions and site visits by the field audit, the ratings above are still based mainly on the absence of substantial negative findings rather than on confirmed facts for the project as a whole. 5.02 The risk assessment presented in paragraph 6.05 of the SAR is brief, superficial and, in deeming the risk "acceptable", there must have been a few crossed fingers. The fact that, in the end, the SAR appear to have been correct, does not make the superficial risk assessment satisfactory. The risks, in fact, were enormous. The language problem itself had to present daunting difficulties. The project was a "sector loan" in all but name. It was a first intervention by the Bank and hardly any of the criteria listed in Operational Manual Statement (OMS) 1.19 for sector lending operations were met. There was no country wide "sector agency" and the participating provinces clearly possessed a considerable degree of autonomy as well as vastly different economic, geographic and level of development characteristics. None were familiar with Bank procedures and matters like ICB were an anathema to existing practices. Institutional and individual experience in rural water supply development, management and operations were lacking and the country's long isolation left the "state of the art" well behind world wide practices. Setting staffing targets (a total of 24 for the NPO), organizing a training program (however extensive) and preparing a "how to do" manual seems to have been a poor substitute for the sector development level the Bank would normally require to make a "sector loan". 5.03 Yet, the results, as reported and verified by the audit in a "sample", appear, in retrospect, to justify the Bank's course of action in which the priority was the provision of safe water supply to 11 a very large number of people as quickly as possible. However, the serious difficulties reported in the implementation of the follow on (and virtually identical), second project (Cr. 2336-CHA) seem to indicate that the risks were very real and, perhaps, only a combination of good fortune, the particular dedication of officials and beneficiaries involved in the first project delivered the success and compensated for the inadequacies of preparation. The justified satisfaction in exceeding the targets, completing the project with only one year delay and the apparently high level of benefits accruing should not be allowed to dismiss or disguise the major problems of: a) procurement - the bulk3 procurement of materials (to facilitate ICB) made scheduling and, in many cases, design of subprojects, captive to the procurement process, causing delays and cost increases - b) the insufficient dissemination of Bank practices and requirements (from one particular province, one person attended one seminar) and c) the effect of limited Bank resources allocated to implementation supervision, particularly in the technical areas. 5.04 The lessons of this project are embodied in the conclusions above. Although the first and second projects together would provide satisfactory water supply to nearly 20 million people, they are still meeting only some 6-7% of the need. In view of the uniquely enormous size of the sector, the recommendations of the Audit are that if the Bank is committed to long term assistance to the China rural water supply and sanitation sector - and it should be - it should set about this in a workmanlike manner, allocating appropriate organizational and financial resources. The following are suggested: (a) Project preparation and supervision, conducted from Washington is less than perfect at the best of times. In the case of Chinese rural areas it can only be inadequate, particularly if it lacks continuity and the correct skill mix. Yet the Bank involvement in the sector is likely to continue on a large scale, and the Bank may consider the establishing of a special unit in the field, containing sufficient expertise and multi- country experience to help to: (i) prepare sector development program(s); (ii) identify and develop project packages; (iii) supervise the supervisors of implementation; (iv) assist in institutional advancement and financial and operational management. (b) Design a series of sector development and refreshment seminars, separately for technical, financial and administrative managers and staff. These should be held, in rotation, in different key provinces to ensure better access to participants. These seminars should not, necessarily, be tied to a particular project. Training during project implementation is never an effective process since the participants have to divide their attention (and energy) between implementation duties and training. EDI or similar agency may be the "organizer" and the "leaders" of the field unit proposed above could be the core lecturers. In due course, the full responsibility for continued training should be transferred to the National Project Office. (c) Monitor and assist in the upgrading of the various "manuals" to match technological and local demand advances. "Regional schemes" serving several townships are already reaching levels of sophistication that takes them well beyond the conventional concept of "rural" water supply schemes. Operation's note that supervision, in the first three years was "above the Bank average". The Audit's conclusions, based on discussions in the field, that there proved still inadequate and, for project of this size - of a first country-wide mid operation - special efforts should have been made with a "team based in the resident office with strong technical and language content. 12 (d) Assist in the resolving of the present lack of coordination and attention to sanitation, water pollution and general environmental issues with particular attention to the means of financing developments in these areas. There is ample evidence that if these sub- sectors are allowed to fall too far behind water supply developments, it is almost impossible to catch up and the full health benefits never materialize. (e) Assist in the development of an effective and independent post-evaluation unit/program to ensure that the lessons learned are systematically fed back into the program. The best place for this, with respect to the sector, might be in the Ministry of Public Health but duly separated from the NPO. Efforts and activities in this area should be initiated and executed with due regard to other entities with a stake in evaluation such as the Ministry of Finance, the State Planning Commission and the State Audit Commission. 13 ANNEX 1 World reed Page 1 of 1 Progravs COMMETS FROM THE BORROW Via crietoforo Colombo, 426 - 00145 Rome - Italy gnquirles: Ph: (0039-) 522821 (Switchboard) Z Telewt 626675 WrP X (0039 - 6) 5127400 S(0039 - ) 5133537 OrignatrashinRgtALEn/USORE FROe: Jens Schulthes, Regional manager ODP No of ax* u l * Addressee CCI TO; Mr. Yves Albouy Chief, OEDD3 The World bank/IFC/M.I.G.A. OEDD3 - Room T9079 Washingrton/USA FAX NBR: 001 202 477-4391 FAX NZR: DATE : 6 June 1994 IPAGE 1 or i Tet: China Rural water supply Performance (CH, 15781 - Draft ER Ref your fax of May 31 and the draft PAR China Rural Water Supply Project CREDIT 1578 - CHA. We regret this delayed response. Rural water supply is an important component in several of our WFP assisted projects in China relating to integrated agricultural development and poverty alleviation. Before approval the projects undergo an appraisal with the help of the technical agencies of the U.N. system. In the course of the implementation of these projects in China, there is a periodic technical review and often mid-term evaluations. These projects have been generally well commented upon. We are pleased to note PAR comments on the good implementation of the WR assisted water supply project with its beneficial effects on health and on women and the poor. The PAR recommendation for the need for strengthening technical assistance has been noted. Regards. CD Pw bom Distrbutins Schulthes, Ahuja, ODPJ, Req. T"ANnzTToo...ns... REAfrf F 5/2 CHA Genr. arZ.xNU