China - Hubei Urban Environmental Project

Document of The World Bank Report No. 14879-CHA STAFF APPRAISAL REPORT CHINA HUBEI URBAN ENVIRONMENTAL PROJECT NOVEMBER 15, 1995 Environmental and Municipal Development Division China and Mongolia Department East Asia and Pacific Regional Office  CURRENCY EQUIVALENTS (as of November 1, 1995) Currency = Renminbi Currency Unit = Yuan (Y) Y 1.00 = 100 fen Y 1.00 = $0.12 $1.00 = Y8.4 FISCAL YEAR January I - December 31 WEIGHTS AND MEASURES i millimeter (mm) = 0.0394 inch (in) I centimeter (cm) = 0.3937 inch (in) I meter (m) = 3.2808 feet (ft) 1 kilometer (km) = 0.6214 mile (mi) I square meter (mi2) = 10.7639 square feet (ft2) 1 square kilometer(km2) = 0.3861 square mile (mi ) I cubic meter(m 3) = 35.3147cubicfeet(ft ) cubic meter (mi3) or ton of water = 284 US gallons 1 hectare (ha) = 2.4711 acres (ac) I liter (1) = 0.2642 US gallon (gal) liter per capita per day (1/c/d) = 0.2642 US gallon per capita-day cubic meter per second (m3/sec) = 35.3145 cubic feet per second  PRINCIPAL ABBREVIATIONS AND ACRONYMS USED AUSAID - Australian Agency for International Development CAS - Country Assistance Strategy CIDA - Canadian International Development Agency CNIITC - China National Instruments International Tendering Company EA - Environmental Assessment EPB - Environmental Protection Bureau HEMC - Hubei Environmental Monitoring Center HEPB - Hubei Environmental Protection Bureau HEPC - Hubei Environmental Protection Committee HEPCF - Hubei Environmental Pollution Control Fund HFTIB - Hubei Finance Bureau TIMDC - Huangshi Municipal Drainage Company HP - Hubei Province HPG - Hubei Provincial Government HPPC - Hubei Provincial Planning Commission HUEPO - Hubei Urban Environmental Project Office ICB - International Competitive Bidding MFMD - Municipal Facilities Management Division NCB - National Competitive Bidding NEPA - National Environmental Protection Agency OED - Operations Evaluation Department PCBC - People's Construction Bank of China PHRD - Policy & Human Resources Development QA - Quality Assurance RAP - Resettlement Action Plan SAA - State Audit Administration SOE - Statement of Expenditure TVE - Township and Village Enterprise UCB - Urban Construction Bureau UNDP - United Nations Development Programme WEMC - Wuhan Environmental Monitoring Center WHO - World Health Organization WMWE - Wuban Municipal Wastewater Enterprise XMSC - Xiangfan Municipal Sewerage Company   CHINA HUBEI URBAN ENVIRONMENTAL PROJECT LOAN/CREDIT AND PROJECT SUMMARY Borrower: The People's Republic of China. Implementing Agency: Hubei Urban Environmental Project Office. Beneficiaries: Hubei Province; Yichang, Huangshi, Xiangfan, and Wuhan Municipalities; the wastewater companies of Huangshi, Xiangfan, and Wuhan Municipalities; industrial enterprises. Poverty: Not applicable. Amount: Loan: $125 million equivalent. Credit: SDR 16.8 million ($25 million equivalent). Terms: Loan: 20 years including 5 years grace, at the Bank's standard variable interest rate for currency pool loans. Credit: Standard, with 35 years' maturity including 10 years of grace. Commitment Fee: Loan: 0.75 percent on undisbursed loan balances, beginning 60 days after signing, less any waiver. Credit: 0.50 percent on undisbursed credit balances, beginning 60 days after signing, less any waiver. Onlending Terms: From the Government of China to Hubei Province and from Hubei Province to the Municipalities: Loan: 20 years including 5 years grace at the Bank's standard variable interest rate, and commitment charge of 0.75 percent. Credit: 20 years including 5 years grace at the Association's standard terms. From the muricipalities to the wastewater companies: 15 years including five years grace at the Bank's standard variable interest rate, and a commitment charge of 0.75 percent.  From Hubei Province to the industrial enterprises: up to 12 years including up to 3 years of grace at the Bank's standard variable interest rate plus a spread of no less than 1.5 percent per year, and a commitment charge of 0.75 percent. Financing Plan: See Table 3.2. Net Present Value: The solid waste and wastewater handling and treatment investments in the project were determined through least-cost analysis. Staff Appraisal Report: 1 4879-CHA. Maps: IBRD Nos. 27175 and 27250. Project ID Number: CN-PE-3602  CONTENTS 1. URBAN ENVIRONMENTAL MANAGEMENT ...........................................1 A. Urban Environmental Conditions ...........................................1 B. Regulation Of Point Sources ...........................................3 C. Collective Waste Handling And Treatment ...........................................4 D. Bank Group Sector Strategy ...........................................5 2. THE PROJECT AREA ...........................................8 A. Existing Environmental Conditions ..........................................X8 B. Regulatory Strategies ...........................................9 C. Institutional Strategies ...........................................1.1 D. Investment Strategies .......................................... 12 E. Project Formulation .......................................... 14 3. THlE PROPOSED PROJECT .......................................... 15 A. Project Objectives .......................................... 15 B. Project Description .......................................... 15 C. Project Cost Estimates .......................................... 16 D. Financing Plan .......................................... 19 E. Procurement .......................................... 20 F. Disbursement .......................................... 23 G. Land Acquisition And Resettlement .......................................... 24 H. Environmental Impact Assessment .......................................... 25 I. Project Monitoring, Reporting And Supervision .......................................... 26 This report is based on the findings of an appraisal mission that visited China in June 1995. Project team members included Mr. George Plant (Senior Operations Officer and Task Manager), Mr. Lee Travers (Economist and Co-Task Manager), Mr. Roger Heath (Principal Industrial Engineer), Mr. Jack Fritz (Environmental Engineer), Miss Sun Chongwu (Operations Officer, RMC, Beijing), Mr. Terry Hall (Sanitary Engineering Consultant), Mr. Patrick McCarthy (Financial Consultant), Mr. David Jackson (Solid Waste Consultant) and Prof. Wang Yangxiang (Industrial Consultant). Assistance was also provided by Miss Chen Tianshu (Interpreter). Peer reviewers for the project were Mr. Wiebe Moes (SA3EI); Mr. Bernard Baratz (EMTEN); and Ms. Selina Shum (EC3IV). The managing division is EA2EM. The Division Chief is Ms. Katherine Sierra and the Department Director is Mr. Nicholas C. Hope.  - fit- 4. PROJECT MANAGEMENT AND IMPLEMENTATION .......................................... 31 A. Project Management ........................................................ 31 B. Implementation Responsibilities ........................................................ 32 C. Status Of Engineering ........................................................ 36 5. FINANCE ........................................................ 37 A. Financial Management ........................................................ 37 B. Accounting ........................................................ 37 C. Audits ........................................................ 38 D. Provincial Finance ........................................................ 38 E. Municipal Finance ........................................................ 39 F. Wastewater Agencies ........................................................ 39 G. Wastes Management ........................................................ 43 H. Industrial And Environmental Pollution Control Subprojects .......................... 44 6. ECONOMIC, SOCIAL AND ENVIRONMENTAL CONSIDERATIONS ................. 45 A. Project Justification ........................................................ 45 B. Economic Analysis ........................................................ 45 C. Environmental Impact ........................................................ 49 D. Affordability And Poverty Assessment ........................................................ 50 E. Project Risks ........................................................ 50 7. AGREEMENTS REACHED AND RECOMMENDATION ........................................ 53 ANNEXES Annex 1: Background To Hubei Province And Project Cities ......................................... 57 Annex 2: Detailed Project Description ........................................................ 61 Annex 3: Detailed Project Cost Estimates ........................................................ 81 Annex 4: Schedule Of Contract Packages ....................................................... 91 Annex 5: Schedule Of Disbursements ........................................................ 94 Annex 6: Land Acquisition And Resettlement ........................................................ 95 Annex 7: Enviromnental Assessment Summary ........................................................ 105 Annex 8: Project Implementation Schedule ........................................................ 128 Annex 9: Supervision Plan ........................................................ 129 Annex 10: Hubei Province Organization ........................................................ 130 Annex 11: Environmental Improvement Action Plan .................................. 132 Annex 12: Hubei Environmental Pollution Control Fund . ............................. 136 Annex 13: Municipal Finances ................................................... 142 Annex 14: Economic, Social And Environmental Considerations . ....................... 156 Annex 15: Selected Documents And Data Available In The Project File . ................. 174  - iii - Tables in Text Table 3.1: SUMMARY COST ESTIMATES ................................................................. 18 Table 3.2: FINANCING PLAN ................................................................. 19 Table 3.3: PROCUREMENT ARRANGEMENTS ................................................................. 21 Table 3.4: INSTITUTIONAL PERFORMANCE INDICATORS .................................................... 26 Table 3.5: DEVELOPMENT OBJECTIVE INDICATORS ........................................................... 26 Table 4.1: IMPLEMENTING AGENCIES ................................................................. 32 Table 5.1: WASTEWATER AVERAGE TARIFFS ................................................................. 40 Table 5.2: KEY WASTEWATER FINANCIAL AND OPERATING INDICATORS ......................... 42 FIGURES IN TEXT Figure 1.1: URBAN TSP AND SO2 LEVELS ................................................................. 2 MAPs IBRD 27175 Hubei Urban Environmental Project (I) IBRD 27250 Hubei Urban Environmental Project (II)   - 1 - 1. URBAN ENVIRONMENTAL MANAGEMENT, A. URBAN ENVIRONMENTAL CONDITIONS 1.1 The mid-1970s loss to pollution of a major urban raw water supply source near Beijing first drew China's attention to the damage pollution could cause. Over the ensuing 20 years China has developed an environmental protection system employing a broad set of control instruments administered through environmental protection bureaus now found in all cities and virtually all rural counties. This experience led China to develop a national environmental action plan to coordinate domestic environmental improvement efforts. China has also been a responsive partner in international efforts to control pollution and was one of the first countries to develop their Agenda 21 program after the Rio conference. 1.2 Despite their activism, the Chinese have had mixed success in implementing environmental policy over the past two decades. Some aspects of the record are quite good-total suspended particulate (TSP) concentrations have been markedly reduced in cities in both north and south China (see Figure 1.1) and state-owned enterprise discharges of toxic metals in wastewater have also fallen substantially. However, even with reductions in TSPs, ambient concentrations remain above international and Chinese guidelines in many cities and sulfur dioxide (SO2) emissions have not been effectively constrained (see Figure 1.1). Water pollution continues to grow. The percentage of urban aquifers deemed polluted has risen from 20 percent in 1983 to 45 percent today. In the most recently published water quality survey, at least some sections of rivers in 54 of 58 reporting cities failed to meet even the lowest acceptable standard, leaving few economic uses-except as waste sinks. 1.3 The human cost of these pollutants is high. Over 400 million Chinese live in cities, a number expected to jump to some 800 million by 2010. Annual premature deaths in urban China due to TSP are currently estimated at over 150,000. Other epidemiological work has shown a very strong relationship between outdoor SO2 concentrations and mortality in northern Chinese cities. The health costs of water pollution are more difficult to measure. But water pollution has forced cities to move to increasingly distant and more expensive raw water sources, farmers have had to switch For a detailed discussion please see "China: Environmental Strategy Paper" (Report No. 9669-CHA, April 1992); and "China: Urban Environmental Service Managements' (Report No. 13073-CHA, December 1994).  - 2 - from irrigation with surface water to pumping groundwater, and fisheries have been damaged. Figure 1.1: URBAN TSP AND SO2 LEVELS, NORTHERN AND SOUTHERN CHINA, 1981-92 TSP Levels: Northern and Southern China, 1981-92 mglm3 1.2 0.8 0.6 0.4 0.2 _ 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 - North -19F- South - WHO Guideline SO2 Levels: Northern and Southern China, 1981-92 mgnm3 0.14 0.112 0.10 0.08 0.06 0.04 0.02 0.00 I I I I I I I I 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 + North -1- South WHO Guidelines 1.4 The reasons for the growing pollution are not difficult to identify. A coal-based fuel system firing a large stock of inefficient boilers and power plants contributes to air quality problems, as does widespread dependence on coal stoves for household cooking and heating. With urban growth and rising personal incomes have come rapid increases in the volurne of municipal wastewater flows-they grew from 7 billion m annually in 1984 to 13 billion m3 in 1992. Those came with the growth of in-house water  - 3 - connections and of washing machines and flush toilets. Industrial wastewater discharges in urban areas declined over that same period, as reuse and other water-saving techniques increased water use efficiency. Solid waste generation has also grown rapidly, and only some 25 percent of the municipal solid waste and nightsoil are disposed of to national standards. The remainder is dumped at uncovered dumping sites without leachate or gas control facilities. 1.5 The nature of the discharges affecting the urban environment dictate a mix of regulatory and investment responses by different levels of government. These have been discussed in two Bank sector studies, the first analyzing overall environmental circumstances and policy (China: Environmental Strategy Paper, Report No. 9669-CHA, April 1992) and the second that specific to the urban sector (China: Urban Environmental Service Management, Report No. 13073-CHA, December 1994). As described in those reports, municipal governments must seek an efficient mix of point source control through regulation and collective treatment of wastes. B. REGULATION OF POINT SOURCES 1.6 The regulation of point source pollution falls to the National Environmental Protection Agency (NEPA), as the secretariat of the State Council Environmental Protection Committee. NEPA drafts national regulations and other aspects of environmental policy for consideration by the State Council and National People's Congress. NEPA has the power to interpret national environmental regulations and standards, including those governing the operations of the local environmental protection bureaus (EPBs) that work at provincial and municipal level. However, NEPA lacks implementation authority, a power left to local governments and the EPBs under them. 1.7 Provincial governments are authorized to set local environmental standards in the absence of preemptive national standards, or to impose more stringent standards than those required by the national govermnent. Provincial EPBs coordinate these local policies and, in contrast to NEPA, may play a direct role in implementation. However, the municipal, urban district and county EPBs bear the main burden of enforcement for both national and provincial regulations. The budgets, personnel appointments, and work plans of each level EPB derive from the government of that level. To aid quality control, environmental performance must be reported to the next higher administrative level EPB, which also sets testing protocols and other performance criteria. 1.8 China's regulatory approach has focused on three instruments: environmental assessment before approval of new projects; the "three simultaneous" licensing strategy that requires integration of pollution control in project design, inclusion of the abatement measures in the actual investment, and proper operation of the abatement equipment; and a pollution levy fee chargeable against waste streams that have concentrations of' pollutants above permitted levels. More recently, goverrunents have been authorized to levy a small charge on wastewater discharges within standards.  1.9 The pollution levy fees fund operation of the environmental protection system. Local EPBs retain approximately 20 percent of the fees to cover operating costs, while earmarking the remaining funds to finance pollution abatement in eligible enterprises. The handling of the earmarked funds has shifted over time from being granted directly back to the enterprise paying the fee to lending the funds on concessional terms for eligible pollution control investments. 1.10 NEPA now recognizes two problems with the pollution levy fee system. First, fees are typically set considerably below the marginal cost of effluent treatment, which encourages enterprises to pay the fee rather than operate or invest in treatment facilities or cleaner production technologies. Second, by setting fees on a concentration basis, the surface water receiving discharges could fail to meet standards even though all enterprises in a watershed individually meet standards. Conversely, if assimilative capacity is high and enterprises few, the concentration standard could force compliance costs far above the damage done by the discharge. 1.11 Two more regulatory issues originate in structural features of the economy. The first arises from the fact that local governments usually own the major enterprises within their boundaries, leading to pressures to relax regulation or fee collection in the interest of employment and profits. The second is that the enterprises operating on the periphery of cities may have a large impact on municipal environmental quality, yet fall outside municipal control. This latter problem is particularly acute with the small-scale tovnship and village enterprises (TVEs). Individual TVE enforcement costs are high relative to output, yet in the aggregate TVE pollution has a large impact on the downstream environment. 1.12 NEPA has a large research and experimentation program underway to icLentify new approaches to overcome these and other regulatory problems. Among the initiatives is the use of catchment specific mass-based pollution permits to replace the concentration-based fees. More generally, NEPA seeks effective market based pollution control mechanisms to complement the national shift to a market-based econormy and avoid many of the problems of enterprise-specific regulation. The Bank supports NEPA's program through the Environmental Technical Assistance Project (Cr. 2522) and investment projects such as this proposed loan. C. COLLECTIVE WASTE HANDLING AND TREATMENT 1.13 Urban environmental services, which include wastewater collection and treatment systems and solid waste collection and treatment, fall under the purview of the Construction Commissions found in every Chinese city. Overall regulatory guidance and standard setting is provided by the Ministry of Construction and the provincial Construction Bureaus. The Ministry and Bureaus set national and provincial policy for urban and regional planning, infrastructure development planning, and facility operating standards. They also specify financial accounting procedures and goals. Based on those policies and standards, the municipal commissions provide or regulate providers of the  - 5 - actual service. The municipal commissions are typically among the largest and most powerful of the municipal administrative bodies, having under them bureaus or companies directly providing key urban services. 1.14 Chinese cities are characterized by a good correspondence between expenditure responsibility and control over revenue. This sets them apart from cities in many developing countries, which have been characterized by inadequate funding to meet mandated services. Chinese cities also tend to have well-staffed administrations, with their broad control over the local economy making them an attractive employer. These advantages have helped China achieve piped water supply to nearly 90 percent of all urban residents, but has not automatically led to high levels of service in every field. The low level of adequate solid waste disposal was cited earlier and local watercourses continue to serve as both drains and sewers for nearly 40 percent of the area of Chinese cities. Wastewater treatment levels are very low, with only 4.5 percent of municipal flows treated in 1992. Cities have given priority to water supply, roads, and enterprise investment over environmental services. Yet rapidly growing problems with raw water quality are forcing recognition across cities that wastes need to be adequately handled. 1.15 The major policy problem identified in China: Urban Environmental Service Management was the failure to charge, or charge adequately, for environmental services. Although cities have long charged for water delivery, residential wastewater charges are virtually unknown, while enterprise charges have been rare, and where collected tar below operating needs. Solid waste collection fees are more often charged, but those services still require substantial subsidies. An important consequence of this failure to charge adequate user fees is that service investment programs have failed to meet goals due to lack of finance. The Ministry of Construction estimates that two thirds of the municipal wastewater treatment plants either do not operate, or operate far below capacity, due to lack of funds. And, when users do not have to pay they have no incentive to reduce waste volumes. This creates the need for larger service systems when they are provided. D. BANK GROUP SECTOR STRATEGY 1.16 The Bank Group highlighted enhancing environmental protection and alleviating infrastructure bottlenecks as two of the four areas of concentration under the China Country Assistance Strategy (CAS) presented to the Board in June 1995. The Bank Group's close collaboration with the Chinese government covers both the regulatory and service provision aspects of urban environtnental management. The China. Environmental Strategy Paper sector study led to the Environmental Technical Assistance Project noted earlier, which assists NEPA in its efforts to find more efficient regulatory methods, improve staff capabilities, and bolster environmental monitoring. That project complements Bank-administered but Japanese Government-financed technical assistance to NEPA covering (a) the environmental impact assessment process; (b) waste minimization and pollution control in rural industries; (c) hazardous/toxic waste management; (d) economic/financial mechanisms for environmental management; and  - 6 - (e) environmental information management systems. The Global Environmental Facility has supported studies and projects on the reduction of greenhouse gas emissions, the loss of biodiversity in China,and reduced pollution in internatina water. The Montreal Protocol Fund has supported a large program focused on reducing production of and ozone-depleting substances. Finally, Beijing Municipality has joined with four other Asian cities as members of the Metropolitan Environmental Improvement Progran financed by UNDP and the World Bank. 1.17 In addition to national regulatory assistance, the Bank Group is currently involved in five urban environmental projects in eight cities, which incorporate policy, financing and organizational strategies for improved environmental regulation and service delivery at the provincial and municipal levels. Another four ongoing investment projects involving 12 cities include related issues such as municipal water supply and sanitation. The initial round of projects focused on China's largest cities-Shanghai, Beijing, and Tianjin-and those located primarily in the wealthier northeast and coastal provinces. Environmental pressures remain very high in those areas and cooperation will continue, as with the recently appraised Second Shanghai Sewerage Project and the Shandong Environment Project now being prepared. However, the proposed Hubei Urban Environmental Project marks a shift in geographic focus, moving toward inland and poorer areas. Hubei, a medium income province, is located in central China, while projects now being prepared in the very poor Yunnan and Guangxi provinces will further test the feasibility of policy and institutional solutions. 1.18 A review of ongoing Bank Group projects in the sector in China and elsewhere presents relevant lessons in pollution control and the provision and management of urban environmental services. 1.19 The Bank experience in pollution control includes the projects in China, as well as in Mexico, Brazil, India, Indonesia and the Russian Federation. A recent review of Bank experience (Industry and Environment: Patterns in World Bank Lending) emphasizes the need for political commitment, clear standards and regulations, incentives to comply, and institutional capability to monitor and enforce standards. When industrial pollution abatement subloans are involved, the following conditions increase likelihood of success: a profitable and growing industrial sector, flexibility in choice of technology, availability of funds at close-to-market terms, and targeting on sources that can yield significant improvement in the ambient environment. The pollution abatement component draws on these lessons and those in the two recent environmental sector studies. The latter stress issues of political commitment, appropriate standards and incentives, and institutional monitoring and enforcement capabilities. This project addresses those issues through an environmental improvement action plan to strengthen the provincial and municipal EPBs in Hubei to maximize project impact beyond the directly benefiting municipalities. 1.20 Bankwide municipal management sector work (Urban Service Delivery: Finding the Right Incentives) emphasizes the need to properly assign functional responsibilities and link revenue to expenditures. In China's case, environmental services are  - 7 - appropriately provided at the municipal level, where a high percentage of government revenue is also captured. China: Urban Environmental Service Management concludes that the major failing in environmental services has been dependence on municipal budget transfers to fund services, while greater reliance on user charges would be affordable, induce resource conservation, and create a more dependable income stream. For that reason, increasing tariffs has been a major focal point of the policy dialogue in this project. This responds, too, to a major finding in the OED review of Bank water and sanitation projects (Water Supply and Sanitation Projects: The Bank Experience 1967- 1989), wherein physical performance was generally good, but sustaining financial viability and overall sectoral development was less successful. Adequate sector revenues have been so crucial to successful operation of these investments that the Bank now sees the needed tariff structures as the major sign of municipal commitment and therefore asks for initial adjustments to be made during project processing. The proposed project follows this model. 1.21 This project thus responds to Bank experience and CAS objectives, first through an improved regulatory environment, reduction of current pollution loads, and protection of critical water and land resources, and second through commercialization of operating agencies, improved tariff policy, and modem operating techniques. The Bank's strategy flows from and supports China's Environmental Action Plan and Agenda 21, which provide the basis for joint Government and Bank action in the environmental sector, especially in regard to the urban environment. Finally, the provincial focus recognizes the effective decentralization of regulatory and investment authority in China, and draws on local political power and commitment to induce wider use of the solutions demonstrated under the project.  - 8 - 2. THE PROJECT AREA A. EXISTING ENVIRONMENTAL CONDITIONS 2.1 Hubei Province, located in the mid-Yangtze River basin, supports a population of 55 million in an area roughly one third the size of France. Some 15 million people live in Hubei's 31 cities, which are concentrated along the Han and Yangtze Rivers. Wuhan, the provincial capital and China's fifth largest city with 3.9 million people, sits at the confluence of the Han and Yangtze. The river systems have contributed to low transport costs and good market access, which in turn have fostered 40 years of industrial and commercial development at the national average pace. Hubei now ranks fourteenth amnong the 30 provinces in per capita national income. 2.2 Hubei's industrial structure, based on steel, nonferrous metals, pulp and paper, cement, and fertilizer and other chemicals, is one that demands relatively high investment to control pollution. However, much of the plant and equipment predates China's and Hubei's concern with environmental impacts. As a result, industrial air and water pollution abatement faces an estimated investment backlog of several billion yuan to bring plants into full compliance with existing discharge standards. Complicating the compliance problem, many highly polluting plants are sited in heavily populated areas, the result of a now discarded strategy to minimize infrastructure investment by colocating industry with worker housing and social services. Polluting enterprises now pay some Y 120 million ($14.3 million) annually in pollution levy fees. These fees, recycled as earmarked pollution control investments, fall far short of the pollution abatement financing requirements. 2.3 Municipal environmental services have also lagged. Sanitary landfills began replacing uncontrolled dumping only in the last four years. By the early 1 990s, sewerage systems captured only half of urban Hubei's wastewater (and only 7.2 percent c,f total urban flows were treated, most of those at source by urban industries). The large average annual flows in the Han (1,230 m3/sec) and Yangtze (23,800 m3/sec) provide excellent dilution of urban and agricultural wastewater, but groundwater, lakes and smaller rivers have not fared so well in the face of untreated industrial and domestic waste effluent totaling about 2.7 billion m3/year. Industrial discharges currently account for about 58 percent of the total, although in line with national experience this proportion is declining as water use quotas and recycling requirements hold industrial effluent volumes steady. Also mirroring national experience, domestic waste discharges are increasing as rapidly as 15 percent annually. Many urban lakes and rivers have become little more than wastewater conveyors and sinks, with ambient water quality consistently below the  Chinese standard for human contact. Air pollution in several cities ranks among the worst in China. 2.4 The Central Government and Hubei Province have requested World Bank and bilateral assistance to address these problems. Hubei Province identified four cities which it considered were in urgent need of urban environmental service investments. Three of these cities-Wuhan, Huangshi, and Yichang-are on the Yangtze River; the fourth-Xiangfan-is on the Han River (see Annex 1). Major air polluters in an additional two cities, Ezhou and Jingmen, were identified as creating particularly serious damage. These six cities account for 60 percent of Hubei's urban population and 73 percent of the urban wastewater, 72 percent of TSP, and 82 percent of urban solid waste loads in the province. Hubei Province and its cities know the major sources of pollution, track their impact on the ambient environment, and have developed plans to ameliorate their damage. Annual, five-year, and, for industry, 10-year abatement and investment plans have been developed that incorporate regulatory, institutional, and investment responses B. REGULATORY STRATEGIES 2.5 Hubei Province and the Hubei Provincial Environmental Protection Bureau (HEPB) have developed an Environmental Improvement Action Plan (see Annex 11) that relies on: * regulatory instruments * financial disincentives * positive financial incentives * research and training 2.6 The main regulatory instruments are those of environmental assessment, licensing, and fees for excess discharges described earlier. The province has, in addition, decided to move from concentration-based to mass-based discharge control, as a means of better matching discharges to assimilative capacity. Successful implementation of the mass-based discharge program has been established as a key indicator of regulatory innovation. The time-based implementation plan will be matched by a research program to track effectiveness of this new approach. 2.7 Financial disincentives are based on the pollution fee levied on excess discharges. The action plan takes collection rates of the levy fee as a key measure of regulatory efficiency. Current collections amount to about 40 percent of estimated obligations, a seemingly low rate, but in line with national experience. The province proposes to increase the collection rate by 50 percent over tive years. Success on both counts depends on the commitment of provincial and city political leaders, who must back the EPBs in their attempts to control pollution.  - 10- 2.8 While levy fee payment acts as a disincentive to polluters, availability of earmarked pollution abatement funds can be structured to provide a positive incentive for cleaner production. Hubei has joined other provinces in shifting the earmarked pollution levy fees from a grant to loan system. The loan funds remain under the control of the municipal and county EPBs, with as yet few attempts to improve procedures under which enterprises gain use of the funds or have that use evaluated. In many cases, the funds automatically flow back to the paying enterprise, which prevents their systematic application to the most serious pollution problems. The provincial EPB now seeks provincial government support for shifting a portion of the pollution levy fees to a Hubei Environmental Pollution Control Fund (HEPCF). The Fund would experiment with improved targeting and evaluation procedures while targeting loans to the previously neglected small-scale enterprise sector. They also seek project participation in this Fund through a $5 million loan, which would parallel efforts under Bank-supported projects in other provinces. 2.9 To further strengthen enterprise financial incentives for meeting mandated pollution control goals, the province sought to include a line of credit for industrial pollution control within the proposed project. With a proposed $45 million allocation, the line of credit would provide a fund three times the size of the annual pollution levy fee collections. Eligibility for the line of credit was restricted in the first instance to the 117 most polluting industrial enterprises in Hubei, which are responsible for over 60 percent of Hubei's industrial pollution. These enterprises were then evaluated on the toxicity of their pollutants and the population within the catchment affected by the pollution. The top-ranked firms were then subject to a simple economic screening that eliminated (a) all enterprises that had a negative net worth and were losing money and (b) any enterprise whose abatement strategy depended on production of a commodity line in which the enterprise had no prior experience. With priority based on their environmental impact, remaining firms were then eligible for more thorough technical, financial, and economic appraisal, which, if satisfactory, would give them access to the line of credit. The line of credit would be limited to financing goods and equipment. Line-of-credit terms would include a substantial positive real interest rate, but a longer repayment period than normally available in Chinese commercial loans. The longer repayment period would be key to feasible financing plans and speed earlier resolution of some major pollution problems. 2.10 Enterprises whose profit levels will not support the major pollution control investments many of them need present a particular challenge for the provincial and municipal governments. The province annually identifies those polluters for whom regulatory sanctions and earmarked or other loan funds alone will not induce compliance, then must decide whether to shut them down or identify sources of capital to finance process change or end-of-pipe treatment. This important aspect of the Action Plan poses some of the greatest difficulties, as it is intimately linked with overall state-owned enterprise reform. With enterprises now bearing many of the social security obligations that will be borne or managed by the state after the transition, plant closing woulcd leave workers with neither the security of their jobs nor the protection of labor insurance  - II - programs. The annual provincial program recognizes that solutions may be beyond municipal resources and therefore takes the lead in developing solutions to exemplary problems. 2.11 Research and training complement the above efforts. The planned research on mass-based discharge license effectiveness has been noted earlier. Other topics for analysis include the contribution of rural enterprise to provincial pollution loads (as a first step to improving regulation of that sector) and low cost interventions for pollution control in the small-scale paper and chemical industries. The training program would help EPB staff at the provincial and municipal level gain the skills needed to improve their work. The project includes a technical assistance component designed to support Hubei's implementation of the Action Plan. The technical assistance package would provide funds for the research program and to allow an expanded training program, especially in areas where the HEPB could take advantage of foreign experience and expertise. During negotiations, assurances were obtained that the Hubei Provincial Government (HPG) would (a) carry out the agreed Environmental Improvement Action Plan, including annual improvements in pollution levy fee collection efficiency, meeting the discharge permit implementation timetable; completing the agreed research program; and implementing the staff training program; and (b) report to the Bank, not later than June 30 at each year, on progress in meeting Plan goals and additional actions to be taken to implement the Plan.. Technical assistance for this effort will be provided through the proposed loan/credit [para. 3.3(d)]. C. INSTITUTIONAL STRATEGIES 2.12 Efficient and sustainable delivery of municipal environmental services depends on the establishment of appropriate institutions to manage those services. Current practice in Hubei cities, as in most of China, relies on city owned, but financially autonomous, enterprises to run water systems, while city government bureaus relying on normal budgetary transfers manage wastewater collection and treatment and solid waste collection and disposal. Those organizational choices match traditional financial goals, which sought self-sufficiency for water companies but considered wastewater and solid waste disposal to be welfare services. 2.13 The traditional organization and practices in wastewater and solid waste make it very difficult for Hubei's cities to charge the tariffs needed if polluters are to pay the full cost of abatement services and funds for service expansion are to be found. The managing bureaus do not depreciate fixed assets, so cannot identify the true cost of service provision. Nor do their accounting practices provide managers with the financial tools needed for efficient management. An important element of the proposed project would be the establishment, in three project cities, of financially autonomous wastewater agencies, organized under enterprise accounting rules, able to charge tariffs adequate to cover operating and maintenance costs and the greater of debt service or depreciation. Environmental sanitation bureaus, which handle solid wastes, face a more difficult challenge in efficiently identifying and billing household users. For these bureaus, cost  - 12 - accounting techniques would be introduced that permit them to identify the cost of operations, and they would be expected to charge those full costs to the commercial and industrial users of their services. 2.14 The proposed institutional innovations under this project move provision of these important environmental services much closer to an enterprise model than the current government bureau model. After the changes have been implemented, for the first time municipal managers will be able to know the cost of the different components of service provision and therefore be in a position to decide whether further innovations, such as contracting with independent operators for some or all of the services would promise further efficiency gains. The details of the institutional goals and structures are elaborated in Chapter 4. 2.15 The project provides wide-ranging technical assistance to the new operating agencies. One technical assistance package (Package A) would help the implementing agencies introduce new accounting systems and management information systems. A second element of that package would build on the accounting outputs to design tariff structures to meet the new financial goals. A second package (Package B) would focus on physical operation of the new and existing services. This would range from system operator training to investment planning for system expansion (see para. 3.3). D. INVESTMENT STRATEGIES 2.16 The policy and institutional initiatives must be accompanied by investment in environmental services if environmental quality gains are to be had. Each of the participating cities has ambitious long run sector investment programs and each is seriously constrained by intersectoral competition for current revenues. The following discussion lays out the background to actions in each sector. The actual investment choices are described in the next chapter and in Annex 2. 2.17 Wastewater Management. The water quality problems of Hubei's cities arise from untreated, mainly industrial, wastewater discharging to lakes, rivers and streams, sometimes close to the cities' water supply intakes. While between 80 and 90 percent of Hubei's urban population are served by septic tanks, which capture most solids and provide some treatment, where sewerage systems are absent, the liquid fraction discharges to the nearest natural drainage. When wastewater flows do enter sewerage systems, these are typically combined systems that also handle stormwater. Three cities would benefit from wastewater investments under the project. Only two of the cities- Huangshi and Wuhan-now have treatment plants for municipal sewerage. The Huangshi plant, which treats 70 percent industrial waste and 30 percent domestic waste, operates at about 70 percent of capacity and treats less than 20 percent of total flows. The recently commissioned Wuhan plant, which serves part of one city district, has operated sporadically due to lack of operating funds. 2.18 The financial problems underlying treatment plant operation will be addressed through the policy and institutional development activities already described. Collection  - 13 - system expansion will rely on conventional sewers, as lower cost alternatives are not available in these densely populated areas. Substantial investments are needed simply to divert wastewater from the rivers and lakes within the built-up areas and this will be the focus of investments under the proposed project. With sewers in place, treatment becomes possible, but high investment costs prevent treatment goals to be fully realized at this stage. The treatment strategy under the project is to provide primary treatment where discharges continue to lakes and preliminary treatment for discharges to the Han or Yangtze, with their high assimilative capacity. During negotiations, assurances were obtained from HPG that it would cause Huangshi, Wuhan and Xiangfan Municipalities, by December 31, 1996, to develop and thereafter implement a time-bound Action Plan acceptable to the Bank for the connection to their municipal sewerage system of all wastewater discharge from buildings and septic tanks located within 100 meters of said systein. 2.19 Solid Waste and Nightsoil Management. Few municipal landfills in Hubei meet accepted national or international standards. In 1991, only 5 percent of municipal wastes were deemed to have been safely disposed of. The remainder went to dumps providing no protection from leachate contamination for underlying aquifers or local surface waters, nor any collection and flaring of landfill gas. Solid waste leachate and the migration of polluted surface waters share blame for the high levels of urban aquifer contamination in Hubei. The landfill gas contributes to global warming, but the lack of collection systems also poses the hazard of uncontrolled burning in the dumps. On the positive side, Chinese, and Hubei's, cities do a good job of collecting solid waste. Although unsightly and malodorous collection points are a major source of citizen environmental complaint, frequent garbage collection succeeds in minimizing potential health hazards from this source. Engineering analysis of collection and transfer activities suggests that economies can be had from reduced handling and transport in large compression vehicles rather than the common practice of using smaller, open trucks. The proposed project helps four cities construct landfills meeting national and international standards. Technical assistance under the project will help them implement accounting systems that for the first time allow them to track costs by system component. This, in turn, will allow them to evaluate alternative strategies for waste collection, using the experience with the new vehicle types purchased under the project. 2.20 Environmental sanitation bureaus also take responsibility for municipal nightsoil handling. In the four project cities, some 30 percent of the urban population have access only to dry latrines or public toilets. Those, and the septic tanks that collect the solids from private flush toilets, must be pumped at regular intervals. Until the early 1980s. suburban farms had a high demand for nightsoil and many rural collectives removed urban nightsoil at no cost to the city. More recently, broad availability of chemical fertilizer has led to diminishing nightsoil use in rural communities and increased nightsoil handling costs to cities. Cities now deliver the nightsoil to rural dumping stations, where good practice relies on fermentation to kill parasites, bacteria and viruses before use in agriculture and aquaculture. However, current dumping station designs have not met sanitation targets. The proposed project would support existing city programs to replace  - 14 - public dry latrines with flush latrines and pilot improved septic tank and dumping station designs. E. PROJECT FORMULATION 2.21 Recognizing the pressures on Hubei's urban environment, the Central Government has approached the World Bank for support in funding a long-term investment program in environmental protection in the province. At the same time, HPG recognizes environmental protection as a prerequisite for long-term economic growth and gives investments in environmental protection high priority. During project preparation it was found that most municipal planning was done only up to the year 2000. Given that some of the proposed project investments would not be completed until about 2002, planning under this project used growth projections to the year 2010 in siting and sizing investments. 2.22 HPG directed the Hubei Urban Environment Project Office (HUEPO-see para. 4.1), to coordinate the preparation, and subsequently monitor the execution, of the proposed project. HUEPO has retained foreign and local consultants and local design institutes to help prepare the project. The collaboration of foreign consultants in preparation work for the proposed wastewater and water quality monitoring components was financed by the Australian Agency for International Development (AUSAID) and the Canadian International Development Agency (CIDA). The Japanese Policy and Human Resources Development (PHRD) fund supported preparation of the solid waste and industrial pollution control components. The proposed wastes management component preparation was assisted through the United Nations Development Programme (UNDP) funded Regional Water Supply and Sanitation Group-East Asia Program.  - 15- 3. THE PROPOSED PROJECT A. PROJECT OBJECTIVES 3.1 The project is part of a phased development program designed to improve environmental conditions and management in Hubei Province. Specific objectives of this project are to: (a) put in place institutions and policies able to sustain progress on the provincial plan for environmental improvement; (b) improve wastewater collection and treatment in three cities, thus maintaining or raising surface water quality to levels suitable for municipal supply, agricultural, or other purposes; (c) improve wastes management in four cities, thus protecting water and land quality; and (d) identify the highest-impact industrial air and water polluters and significantly reduce their pollution. B. PROJECT DESCRIPTION 3.2 The project would support policy and institutional innovation, and provide physical works for wastewater handling, air pollution control, and solid waste management. A detailed description of proposed investments is given in Annex 2. A summary description of the various project components is given below. The indicated costs include physical and price contingencies. (a) Wastewater Management in Huangshi, Wuhan and Xiangfan, comprising sewer systems, pump stations, and wastewater treatment facilities. $184.5 million (b) Municipal Wastes Management in Huangshi, Wuhan, Xiangftn and Yichang, comprising sanitary landfill development, waste transfer facilities, vehicles and equipment. $37.1 million (c) Industrial Pollution Control. A line of credit to assist selected large-scale industrial enterprises to carry out works for pollution abatement in order to comply with environmental regulations. $130.5 million (d) Hubei Environmental Pollution Control Fund. A revolving fund, to finance high environmental impact investments in small-scale industry, supporting the core prograrn in air and wastewater management. $5.0 million  - 16- (e) Water Quality Monitoring and Management in Hubei and Wuhan Environmental Monitoring Centers, comprising water quality monitoring technology, data management equipment, and institutional development. $2.9 million (f) Institutional Strengthening through Technical Assistance and Training for supporting and strengthening project management, HEPB and city EPBs, financial and municipal utility operations and management, wastewater and solid waste management, water quality monitoring, feasibility studies, training and future project preparation. $10.2 million TOTAL ESTIMATED PROJECT COST $370.2 million 3.3 Institutional development and policy strengthening components [para. 3.2(f)] would enhance policies and operational experience in environmental protection and wastewater, municipal solid waste, and nightsoil management. Support to these initiatives has been grouped into four technical assistance packages-Package A (financial), Package B (technical), Package C (environmental strengthening) and Package D (other, including future project preparation), and would comprise: (a) training of staff of wastewater and sanitation entities in financial management and accounting systems, including unit cost accounting, management information systems, and pricing policies (Package A); (b) strengthening overall provincial management and financial practices in Hubei Province through the introduction of capital budgeting techniques, analysis of investment alternatives and performance monitoring (Package A); (c) strengthening project management and sector institutions through technical assistance and training for efficient project implementation (Package B); (d) assisting in implementing an Environmental Improvement Action Plan for strengthening EPB staffs and for the enforcement of pollution regulations (Package C); and (e) providing technical assistance for future project preparation (Package D). C. PROJECT COST ESTIMATES 3.4 The estimated cost of the project, including contingencies and local duties and taxes, is Y 3,344.7 million ($370.2 million). The foreign exchange component is Y 952.3 million ($104.7 million), or about 28 percent of project costs. Local customs duties and taxes are estimated at Y 110.8 million ($11.65 million). The total financing required, which includes $15.0 million of interest during construction, is $385.2 million (Y 3,481.2  - 17- million). A summary of cost estimates is given in Table 3.1 below. Detailed cost estimates are provided in Annex 3. 3.5 Base cost estimates are based on preliminary engineering designs, and reflect price levels expected to prevail in December 1995, based on current inflation rates. The unit prices were derived from the following sources: (a) quotations obtained from manufacturers and suppliers; (b) prices of goods and works from recent contracts; and (c) construction costs published by the central and Hubei Governments, all adjusted for inflation. Physical contingencies of 15 percent have been applied to base costs for most components, except for vehicles and mechanical equipment of the wastes management component, where 10 percent has been adopted to reflect higher confidence in the estimated costs of this component. Construction Management and Services costs of 2.5 percent of the civil works and materials and equipment costs of the wastewater cormponent, and 1.25 percent of the civil works of the wastes management component, have been included in the project cost estimates. Project management and engineering overhead costs of 12 percent are also included. 3.6 Price contingencies have been applied to expenditures at projected global foreign and local inflation rates. In view of the large variation between foreign and local price contingency projections, the $/Yuan exchange rate has been assumed to vary in order to maintain purchasing power parity. The inflation rate projections used are as follows: Parameter 1996 1997 1998 1999 2000 2001 2002 Foreign 2.6 2.6 2.6 2.6 2.6 2.6 2.6 Local 10.6 8.5 7.0 6.5 6.2 6.2 6.2  - 18- Table 3.1: SUMMARY COST ESTIMATES % % Total (Y Million) (S Million) Foreign Base Local Foreign Total Local Foreign Total Exchange Costs Huangshi Wastes Mgmt 28.5 4.5 33.0 3.4 0.5 3.9 14 1 WastewaterMgmt 68.0 16.1 84.1 8.1 1.9 10.0 19 3 Subtotal 96.4 20.7 117.1 11.5 2.5 13.9 18 4 Wuhan Wastes Mgmt 114.8 16.4 131.3 13.7 2.0 15.6 13 5 WastewaterMgmt 623.5 271.0 894.6 74.2 32.3 106.5 30 32 Subtotal 738.8 287.5 1,025.8 87.9 34.2 122.1 28 36 Xiangfan Wastes Mgmt 36.3 4.0 40.4 4.3 0.5 4.8 10 I Wastewater Mgmt 270.3 70.5 340.8 32.2 8.4 40.6 21 12 Subtotal 306.7 74.5 381.2 36.5 8.9 45.4 20 14 Yichang Wastes Mgmt 56.6 9.1 65.7 6.7 1.1 7.8 14 2 Subtotal 56.6 9.1 65.7 6.7 1.1 7.8 14 2 Technical Asst & Trg 15.2 54.9 70.1 1.8 6.5 8.3 78 2 Industrial Pollution Control La 799.2 339.3 1,138.5 95.1 40.4 135.5 30 40 Water Quality Monitoring Hubei Monitoring Center 8.9 5.1 14.0 1.1 0.6 1.7 37 - Wuhan Monitoring Center 5.3 1.4 6.7 0.6 0.2 0.8 21 - Subtotal 14.2 6.5 20.7 1.7 0.8 2.5 32 1 Total BASELINE COSTS Lb 2-026.6 22251 2819.1 24I1 241 356i 2a 0Q0 Physical Contingencies 143.9 59.1 203.0 17.0 7 0 24.1 29 7 PriceContingencies 221.9 100.7 322.6 7.2 3.3 10.5 31 3 Total PROJECT COSTS 2392.4 25232 3344:7 265 10Q42 372 21 110 lntcrest during construetionL& 0.0 136.5 136.5 0.0 15.0 15.0 Total FINANCING REQUIRED 23924 1J088 3481. 265 11[97 3852 la The sums include allocations for both the line of credit and HEPCF. Lb Includes cost of land (S20.0 million, or Y 170.4 million). L Interest during construction is based on onlending rates for projected disbursements of loan/credit proceeds, and payment of commitment charges.  - 19 - D. FINANCING PLAN 3.7 The financing plan for the project is shown in Table 3.2. Table 3.2: PROJECT FINANCING PLAN ($ million) Source Local Foreign Total Percentage Hubei Government, Municipal 134.7 15.0 149.7 38.9 Governments and Enterprises Industrial enterprises 85.5 0.0 85.5 22.2 IBRD/IDA 45.3 104.7 150.0 38.9 Total Financing Required a 2655 119.7 38 2 I00. /a Includes interest during construction (IDC) of $15.0 million. 3.8 The IBRD loan and IDA credit would be made to the People's Republic of China. The IBRD loan of $125 million equivalent would be for a 20-year tenn, including a five year grace period on standard Bank terms. The IDA credit of SDR 16.8 million ($25 million equivalent) would be for a 35-year term, including a 10-year grace period on standard Association terms. The proceeds of the loan and credit would be made available to HP on the following terms and conditions satisfactory to the Bank/IDA: the loan at the Bank's standard variable interest rate, for a 20-year period including a five-year grace period, and a commitment charge of 0.75 percent per year, and the credit at the Association's standard service charge for a 20-year period, including a five-year grace period, and a commitment charge of 0.50 percent per year. Hubei Province would bear the foreign exchange risk. HP would make industrial pollution control subloans available to industrial enterprises at a rate equal to the Bank's standard variable interest rate plus a spread of not less than 1.5 percent per year, with the enterprises bearing a commitment charge of 0.75 percent and the foreign exchange risk; the grace period would be up to 3 years, and the maturity up to 12 years. HP would allocate part of the proceeds to the municipalities on the same terms as received from China. The municipalities would onlend the proceeds of the loan/credit allocated to them to the wastewater entities for 15 years, including a five year grace period, at a rate equal to the Bank's standard variable interest rate, with the entities bearing the commitment charges and the foreign exchange risk. Assurances to this effect were obtained at negotiations. 3.9 Execution of subsidiary loan agreements between the participating muunicipalities and their wastewater entities, satisfactory to the Bank/lIDA, is a condition of effectiveness. A separate Project Agreement, including operational, financial and monitoring covenants, would be executed between HP and IBRD/IDA.  - 20 - 3.10 About $5.0 million equivalent of loan/credit proceeds would be onlent by HP from a revolving credit facility (the Hubei Environmental Pollution Control Fund- HEPCF) to participating enterprises for eligible small scale pollution control subprojects. Assurances were obtained during negotiations that (a) HP, through the HEPCF, would onlend to participating enterprises at a rate equal to the Bank's standard variable interest rate plus a spread of not less than 1.5 percent per year, with the enterprises bearing a commitment charge of 0.75percent and the foreign exchange risk. The maturity would be for three to five years, including a one to two year period of grace. Subloan repayments would be recycledfor additional pollution control subprojects to the extent not needed to repay China; and (b) HP would, through HEPB allocate to HEPCF a total of about Y 45.0 million of pollution levy fees over the three fiscal years commencing 1996, annually depositing with HEPCF at least Y 1S million by June 30 of each such year. E. PROCUREMENT 3.11 Procurement procedures and arrangements satisfactory to the Bank/IDA would be agreed upon with HPG. All procurement activities will be organized through the International Tendering Company of China National Instruments Import and Export Corporation (CNIITC), which has been contracted by HUEPO (para. 4.1) to carry out the work. CNIITC is an experienced and competent procurement agent which is familiar with, and has had recent and relevant experience in international competitive bidding (ICB) work on Bank/IDA-financed projects. The tender documents to be used in the project would be based on the standard bid documents prepared by the Ministry of Finance and approved by the World Bank Group. All civil works contracts would be grouped whenever practical into bid packages estimated to cost the equivalent of $10 million or more each, and contracts for goods shall be grouped into packages estimated to cost the equivalent of $200,000 or more each, to attract maximum international competition. Prequalification of bidders would be undertaken for all civil works contracts with an estimated value over $6.0 million equivalent each. Annex 4 lists the Schedule of Contract Packages and the method of procurement, and Table 3.3 summarizes the procurement categories and the expected procurement methods. The contract packages and the method of procurement have been agreed with HUEPO. 3.12 Civil Works. Excluding the industrial and environmental pollution control components, there is a total of about $1 14.6 million of civil works of which about $44.2 million (39 percent) would be procured using ICB procedures. Qualified domestic contractors under ICB will be eligible for a 7.5 percent preference in bid evaluation, in accordance with the Bank's Procurement Guidelines-January 1995. ICB procedures would be used for all civil works contracts of estimated value of $10.0 million or more (i.e., three contracts). All remaining civil works are too small, scattered or scheduled too far apart to be packaged to be of interest to foreign firms. Of the remaining works, about $69.5 million would be awarded through national competitive bidding (NCB) procedures, acceptable to the Bank/IDA. The NCB procedures recently promulgated by the Government have been reviewed and approved by the World Bank Group. Interested  - 21 - foreign bidders would be allowed to bid for NCB contracts. The Water Quality Monitoring component works would not be Bank financed. Table 3.3: PROCUREMENT ARRANGEMENTS ($ million, including contingencies) Procurement Methods Project Component ICB NCB OtherLa NBFLb Total Civil Works 44.2 69.5 0.0 0.9 114.6 (18.0) (28.2) (0.0) (0.0) (46.2) Equipment & Materials 55.2 1.0 1.6 3.8 61.6 (41.6) (0.8) (0.4) (0.0) (42.8) Industrial Pollution Control 0.0 0.0 135.5 0.0 135.5 (0.0) (0.0) (50.0) (0.0) (50.0) Other Land Acquisition 0.0 0.0 0.0 20.0 20.0 (0.0) (0.0) (0.0) (0-0) (0.0) Institutional Development & 0.0 0.0 10.2 0.0 10.2 Training (0.0) (0.0) (8.0) (0.0) (8.0) Construction Management Services 0.0 0.0 3.9 0.0 3.9 (0.0) (0.0) (3.0) (0.0) (3.0) Supervision & Project Management 0.0 0.0 0.0 24.4 24.4 (0.0) (0.0) (0.0) (0.0) (0.0) Total 2i99. 695 1512 491 3702 La Other procurement methods include those under the line of credit through an agent bank, intemational and national shopping, consultant services (recruited in accordance with the Bank's Guidelines) and training. lb NBF = Not Bank/IDA-financed. /c The Industrial Pollution Control Component would be disbursed through (a) a line-of- credit and (b) subloans of HP's revolving credit facility. Note: Figures in parenthesis are amounts to be financed by IBRD/IDA.  - 22 - 3.13 Equipment and Materials. Excluding the industrial and environmental pollution control components, there is a total of about $61.6 million of equipment and materials in the project, of which about $55.2 million (90 percent) would be procured using ICB procedures. Qualified domestic bidders will be eligible for a preference in bid evaluation of 15 percent or customs duties and import tax payable by a non exempt importer, whichever is less. All equipment and materials with individual contract values of $200,000 or more equivalent would be procured using ICB procedures. 3.14 Equipment and materials with individual contract values less than $200,000 equivalent would be awarded using NCB procedures acceptable to the Bank, up to an aggregate amount of $1.0 million. Contracts costing less than $50,000 equivalent up to an aggregate amount of $1.65 million, would be procured through international or national shopping procedures with at least three price quotations. 3.15 Industrial Pollution Control Component. Under the line-of-credit subcomponent, the People's Construction Bank of China (PCBC), Hubei Branch, would review the contract packages and the methods of procurement. The procedures for procurement would be the same as those for Bank Group-financed PCBC projects which the Bank has reviewed and found satisfactory. Individual contracts with an estimated value of $5 million or more would be procured under ICB. Contracts below $5 million and not less than $200,000 would be awarded through International Shopping, after evaluation and comparison of quotations solicited from at least three qualified suppliers from at least three countries. Contracts below $200,000 would be awarded through National Shopping, after evaluation and comparison of quotations solicited from at least three qualified suppliers. These contracts would be subject to post-review by the Bank Group, and PCBC would maintain all relevant documents in its records for this purpose. 3.16 Environmental Pollution Control Component. Under the HEPCF subcomponent, in which no loan will exceed $500,000, contracts for equipment and materials financed through HEPCF subloans would be awarded after solicitation and evaluation through international or national shopping procedures of at least three written price quotations from eligible suppliers. This is consistent with procedures that the Bank Group has reviewed and found satisfactory. 3.17 Technical Assistance and Training. All consultants to be retained under the project would be recruited in accordance with the World Bank's "Guidelines for the Use of Consultants by World Bank Borrowers and by The World Bank as Executing Agency- August, 1981". National consultants and counterpart staff would be engaged or assigned by the concerned agencies of Hubei Province. Consultants have already been retained for project preparation and design (para. 2.22). At negotiations, HP provided a copy of a signed contract, acceptable to the Bank/IDA, with a consultant firmn for Package B (construction management and supervision of the works to be constructed under the project, and sector institutional strengthening). HPG anticipates signing a contract with a consulting firm for Package A (financial) by loan effectiveness. The Terms of Reference for these consultancy services are in the Project File (Annex 15).  - 23 - 3.18 Review of Bid Documents and Contracts. All civil works packages in excess of $2 million (about 14 contracts, 84 percent of the works), and all equipment and materials contracts of $1 million or more (about eight contracts, 83 percent of the equipment and materials), would be subject to the Bank/IDA's normal prior review, including prequalification, notice of invitation to bid, bid documents, bid evaluation and contracts. The threshold for prior review of contracts for consultants would be $100,000 equivalent for firms and $50,000 for individual contracts. For contracts below the threshold, prior review will apply to terms of reference, single source selection, assignments of a critical nature, and any amendments that would raise contract value above the prior review threshold. Other contracts would also be subject to selective post-award review. 3.19 Prequalification. The Standard Prequalification Document for the People's Republic of China, issued by the Ministry of Finance and approved by the World Bank Group, would be used for preparing the invitation document. HUEPO and CNIITC hold copies of this document (together with standard bidding documents for ICB and NCB works and goods invitations). F. DISBURSEMENT 3.20 The proposed IBRD Loan of $125 million and IDA Credit of $25 million equivalent would be disbursed over a period of about six and a half years, consistent with the Bank's latest urban sector disbursement profile for China. Disbursements would be as indicated below. Amount Category ($ million) Percent of expenditures Civil works (a) For solid waste management in 0.8 40 percent of expenditures Xiangfan (b) Other 40.4 40 percent of expenditures Goods 100 percent of foreign expenditures, (a) IPC 45.0 100 percent of local expenditures (ex- (b) HEPCF 5.0 factory) and 75 percent of local (c) Other 42.8 expenditures for other items procured locally Consultant services and training 11.0 100 percent of expenditures Unallocated 5.0 iTota 150  - 24 - 3.21 To expedite disbursements, a Special Account with an authorized allocation of $8.0 million, representing about four months' average disbursements, would be established. It would be replenished monthly or whenever the Special Account is drawn down to 50 percent of its initial value, whichever occurs first. Disbursements would be made against statements of expenditure (SOEs), certified by HUEPO, for: (a) contracts for (i) civil works valued at less than $2 million; and (ii) equipment and materials costing less than $1 million equivalent; (b) contracts for consulting services costing less than $100,000 equivalent for firrns and $50,000 equivalent for individuals; and (c) training. Documents supporting the SOEs would be retained by HUEPO and made available for inspection during the course of Bank/IDA supervision missions and external auditors. All other disbursements will be made against fully documented expenditures. A Schedule of Disbursements is given in Annex 5. To facilitate efficient and prompt startup of the project, continued progress on final design begun during project preparation, and contruction of access roads and other preparatory works needed to avoid delays, retroactive financing of up to SDR 7.0 million ($10.5 million equivalent, seven percent of the value of the loan and credit) would be provided for expenditures incurred after September 1, 1995, covering initial civil works and goods contracts, and consulting services. The project is expected to be completed by June 30, 2001, and, therefore, the Loan/Credit Closing Date would be June 30, 2002. 3.22 The (a) execution of afinancial agency agreement with a bank, satisfactory to the Bank/lIDA, for the Jinancial, economic and technical appraisal of suibprojects under the Industrial Pollution Control Line-of-Credit subcomponent (paras. 4.10-4.11); and (b) approval, by the Bank, of an operational manual governing HEPCF subloan processing and approvals, and the execution of an acceptable financial agency agreement between HEPCF and a bank for HEPCF subloan processing (para. 4.12) would be conditions of disbursement for the loan/credit proceeds allocated to the respective Industrical and Environmental Pollution Control components. Completion to the satisfaction of the Bank/lIDA, of a feasibility study, detailed designs, environmental assessment (EA), anid a land acquisition and resettlement plan for a proposed landfill in Xiangfan (para. 4.18) would be a condition of disbursement for the Xiangfan Solid Vaste component. G. LAND ACQUISITION AND RESETTLEMENT 3.23 Several project components would require the acquisition of land and resettlement of current users. These include the municipal components in Yichang, Xiangfan, Huangshi, and Wuhan, and four of the six preidentified applicants for the industrial pollution control line of credit (para. 4.11). Resettlement impacts include the permanent relocation of 39 farnilies, the temporary relocation of 137 families, and new employment for some 996 people. Permanent relocation is spread across four communities and all households will resettle within their original administrative village boundaries. The temporary relocation will all occur in Xiangfan Municipality and is estimated to last less than a month. It is needed to protect householders while a wastewater conveyor trench is dug adjacent to their houses and the contractor repairs any damage resulting from the  - 25 - trencling. The employment impact will be spread across several communities. In most cases, displaced workers will be given new jobs in their current company, or on land or in companies owned by the collective of which they are currently members. In other cases, the collective or project unit will take responsibility for placing the affected worker in suitable outside employment or, if the worker so desires, provide financing for self- employment. For both housing and employment resettlement, the project agencies have allocated funds and taken other measures to ensure that resettler's standards of living are maintained or improved. A Resettlement Action Plan (RAP), acceptable to the Bank/IDA has been received. A summary of the RAP is presented in Annex 6. 3.24 All project cities have experienced, specialized teams responsible for resettlement administration and the first round of consultation with affected communities has been completed. The implementation of the RAP will be monitored by the municipal and provincial project offices in addition to the monitoring obligations assumed by municipal governments for all involuntary resettlement within their boundaries. To provide additional protection to resettler interests, technical assistance funds in Package B (para. 3.3) will be used to finance periodic independent evaluation of the resettlement work. If not incorporated in the approved RAP, candidates for subloans will be analyzed for possible resettlement. Where resettlement would occur, a separate RAP, acceptable to the Bank/IDA, will be a prerequisite for the subloan approval. Once site selection is contirmede for the Xiangfan landfill, a RAP will be prepared for that site. Any change in project design will also be analyzed for possible resettlement impact and, if such impacts exist, the RAP would be amended, in a manner acceptable to the Bank/IDA, as necessary to reflect such changes. During negotiations, assurances were obtainedfrom HPG that it would carry ouit or cause to be carried out resettlement ofpersons affected by the project in a manner and according to the Resettlement Action Plan satisfactory to the Bank/IDA. H. ENVIRONMENTAL IMPACT ASSESSMENT 3.25 The proposed project would have a positive environmental impact. It is a Category A project according to the Operational Directive classification, principally on account of the four proposed landfills. In accordance with Chinese regulations, an EA was prepared that covered all project components. The EA was reviewed by HEPB and the World Bank Group and found to be satisfactory; it is summarized in Annex 7. While the project would remove substantial pollution loads, some possible side effects have been identified and mitigative measures developed during the EA process. In particular, appropriate arrangements have been made for the beneficial use, wherever possible, of construction spoil, and for the use in agriculture of sludge from wastewater treatment. Similarly, the siting of wastewater treatment plants minimizes impact upon residential areas and the discharges are to watercourses where the residual pollution load may be assimilated without significant detriment to local water quality. Candidates for subloans or any change in project scope will be analyzed for possible environmental impact. Where the possibility of adverse impact is identified, an EA will be prepared that meets Chinese requirements and is satisfactory to the Bank/IDA. During negotiations, assurances were obtainedfrom HPG that it would carry out or cause to be carried out, in  - 26 - a manner satisfactory to the Bank/IDA, the mitigation plans specified in the Environmental Impact Assessment. 1. PROJECT MONITORING, REPORTING AND SUPERVISION 3.26 The proposed project implementation schedule is shown in Annex 8. Operational and financial monitoring indicators for the agencies are given in the Finance section (Chapter 5), and the assumptions to the financial projections are provided in Annex 13. The format and content of project progress reports and project impact monitoring indicators and methodology were discussed and confirmed during negotiations. 3.27 Project impact would be monitored with respect to the objectives, for which the key indicators are summarized below. The expected level of the performnance indicators is based on timely implementation of the project components summarized in para. 3.2 and detailed in Annex 2. Table 3.4: INSTITUTIONAL PERFORMANCE INDICATORS 1995 1996 1997 1998 1999 2000 EPB % collection pollution 40 45 50 55 60 65 levy fees Industries covered by 300 500 800 1,000 1,200 1,500 discharge permits Wastewater Companies Tariffs - 0.18 2 avg. cost of 2 avg. cost of 2 avg. cost of 2 avg. cost of m3 treated m3 treated m3 treated m3 treated Operating ratio - <1 <I <1 <1 <1 Solid Waste Operations Commercial & industrial - - 2 avg. cost of 2 avg. cost of 2 avg. cost of 2 avg. cost of tariffs (from July 1, collections & collections & collections & collections & 1997) treatment treatment treatment treatment  - 27 - Table 3.5: DEVELOPMENT OBJECTIVE INDICATORS 1994 1998 1999 2000 2001 2005 baseline Water Quality L/ Wuhan East Lake water quality IV IV IV IV III III Huangshi Cihu Lake water quality - <V <V <V V IV IV southern shore Xiangfan Qilile River water quality <V V V IV IV III Xiaoqinghe water quality <-V V V IV IV III Ezhou Xingang River water quality IV IV IV 111 III 11 Solid Waste (% disposed to sanitary landfill or equiv.) Wuhan 17%