China - Shanghai Sewerage Project and Liaoning Urban Infrastructure Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 19643 PERFORMANCE AUDIT REPORT PEOPLE'S REPUBLIC OF CHINA SHANGHAI SEWERAGE PROJECT (Loan 2794-CHA/Credit 1779-CHA) LIAONING URBAN INFRASTRUCTURE PROJECT (Credit 2219-CHA) September 7, 1999 Operations Evaluation Department This document has a restricted distribution and may be used by recipients ory i tle performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Currency Equivalents (annual averages) Currency Name: Renminbi Currency Unit: Yuan (Y); Y1.00 - 100 fen September 1986 (Shanghai appraisal) US$1.00 Y3.70 Septemberl989 (Liaoning appraisal) US$1.00 Y5.22 December 1995 (Shanghai completion) US$1.00 Y8.40 March 1997 (Liaoning completion) US$1.00 Y8.30 Abbreviations and Acronyms ICB International competitive bidding ICR Implementation Completion Report LPG Liaoning Provincial Council LUCRPO Liaoning Provincial Project Office LUIP Liaoning Urban Infrastructure Project MOF Ministry of Finance NCB National competitive bidding O&M Operations and maintenance OD Operational Directive OED Operations Evaluation Department OMS Operational Manual Statement SAR Staff Appraisal Report SMG Shanghai Municipal Government SMSC Shanghai Municipal Sewerage Company SMWC Shanghai Municipal Waterworks Company SSC Shanghai Sewerage Company SSP Shanghai Sewerage Project TA Technical Assistance WSS Water supply and sanitation Fiscal Year Government: January 1 - December 31 Director-General, Operations Evaluation : Mr. Robert Picciotto Director, Operations Evaluation Dept. : Ms. Elizabeth McAllister Manager, Sector and Thematic Evaluations Group : Mr. Gregory Ingram Task Manager : Mr. Klas Ringskog and Tauno Skytta FOR OFFICIAL USE ONLY The World Bank Washington, D.C. 20433 U.S.A. Office of the Director-General Operations Evaluation September 7, 1999 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on China Shanghai Sewerage Project (Loan 2794-CIA/Credit 1779-CHA) and Liaoning Urban Infrastructure Project (Credit 2219-CHA) The China Shanghai Sewerage project (Loan 2794-CHA/Credit 1779-CHA) and Liaoning Urban Infrastructure project (Credit 2219-CHA) were approved on April 14, 1987, and July 24, 1991, respectively. The Shanghai project was financed with a Bank loan in the amount of US$45.0 million and an IDA credit in the amount of SDR78.9 million (US$100.0 million equivalent). The loan and the credit were closed on December 31, 1995, fully disbursed, two and a half years behind schedule. The Liaoning project was financed with an IDA credit in the amount of SDR54.2 million (US$77.8 equivalent). The credit was closed on March 31, 1997, nine months behind schedule, and a balance of SDRO.26 million was cancelled. The status of urban infrastructure services in China received little attention until the 1980s, when the government began to recognize both the need for significantly higher investments and the growing importance of funding those investments with local resources. Upgrading local government finance therefore became a priority, and the central government began to promote a "users pay" policy. The government asked the Bank to participate in this process. China looked to the Bank not only for project funding support but also for the transfer of experience gained in other countries in preparing and implementing large-scale urban infrastructure projects. The Shanghai project was the first urban sewerage improvement project in China and the Liaoning project was the first urban infrastructure project. The latter included water supply improvements in three major cities of Liaoning province-Shenyang, Fuxin, and Yingkou-as well as urban traffic improvements in Shenyang. After some initial experience with these projects, the Bank, in cooperation with Chinese officials, drew up a sector strategy in 1994. That strategy focused on cost recovery, water conservation, and environmental protection-areas in which the two projects have made some progress. . The two projects were large and ambitious, but despite their design complexity, both met their objectives. Their institution building efforts were delayed, however, and neither project fully achieved its covenanted financial goals. Still, the projects set in motion a series of institutional and financial reform activities that have, despite some difficulties, continued since project completion. The experience gained with these reforms is a valuable source of lessons for other projects in China and for the ongoing update of the sector strategy. Bank action to approve follow-on projects in Shanghai and Liaoning is highly commendable as it helped complete the task. 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. 2 OED rates the outcome of the Shanghai project as satisfactory, its institutional development impact as modest (upgraded from negligible in the ICR), and sustainability as likely. Bank performance is rated as satisfactory. The outcome of the Liaoning project is rated as satisfactory, its institutional development impact as modest (upgraded from negligible in the ICR), and sustainability as likely. Bank performance is rated as highly satisfactory. In both cases, with the exception noted, these ratings agree with the ICRs. These projects demonstrate the importance of the good match between project objectives and project components for achieving realistic and meaningful results. Ambitious objectives often lead to complex component designs. A well-timed follow-on project would be appropriate in such situation. Over the past ten years, the Bank has supported a large number of water supply and sanitation projects in China. There are indications that this will continue and perhaps expand. Therefore, it would be highly beneficial to carry out a sector-wide impact evaluation to contribute timely feedback to the ongoing sector strategy debate. Attachment 1 Contents Ratings and Responsibilities ............................... ........ iii Preface .................... ......................... ...... iv 1. Introduction and Background .......................... ....... I Conclusion from China: Urban Environmental Service Management: .. 1 Shanghai ................ .................... ....... 2 Liaoning .................................... ......... 2 2. The Projects ................2....... .....................2 Shanghai Sewerage Project .................................. 2 Project Objectives and Components .......................... 2 Relevance of Project Design (quality at entry) ................... 3 Summary of Project Achievements .......................... 3 Liaoning Urban Infrastructure Project ............................ 3 Project Objectives and Components .......................... 3 Relevance of Project Design (quality at entry) ................... 4 Summary of Project Achievements .............................. 4 Sector Strategy .................4..... ...................4 3. Implementation Experience .............4.... ................4 General Implementation Experience............................. 5 Shanghai ...................................... ...... 5 Liaoning ............................................. 6 Institutional Development ..............7..... ................ 7 Shanghai .................................... .......... 7 Liaoning ............. ................................ 8 Financial Management ................................ ...... 8 Shanghai ..................8....... .................... 8 Liaoning ...................9...... ................... 9 O&M Activities ..................... ..................... 10 Environmental Impact in Shanghai ..... ............. ........... 10 Water Resource Development in Liaoning .......................... 11 4. Issues For the Future ................................ ....... 11 Sewer Rehabilitation in Shanghai ...................... ........ 11 Water Supply in Liaoning ................. ................. 11 Institutional Development .................................. 12 Shanghai ............................................ 12 Liaoning ........................................... 12 This report was prepared by Tauno Skytta, Consultant. William Hurlbut edited the report. Helen Watkins provided administrative support. ii 5. Assessment of Performance .................................. 12 Project Ratings .................................... ...... 12 Shanghai ..................................... ....... 12 Liaoning ........................................... 13 Borrower Performance ..................................... 13 Shanghai ............................................ 13 Liaoning ............................................ 13 Covenants and ODs .................... .................. 14 Shanghai ........................................... 14 Liaoning ........................ .................... 14 Bank Performance ........................................ 15 Shanghai ........................ .................... 15 Liaoning ........................ ................... 15 6. Conclusions and Lessons .............................. ....... 15 Generic Lessons ................... ................... 15 Shanghai ..................................... ....... 16 Liaoning ........................ ................... 16 Annexes A. Basic Data Sheet ....................................... ....... 18 B. Urban Environmental Service Management ........................... 23 C. Project Components; Shanghai ................. .................. 25 D. Project Components; Liaoning .............................. ...... 26 E. Comments from the Borrower ..................................... 28 111 Shanghai Project Principal Ratings ICR ICR review Audit Outcome Satisfactory Satisfactory Satisfactory Sustainability Likely Likely Likely Institutional Negligible Moderate Modest Development Borrower Performance Satisfactory Satisfactory Satisfactory Bank Performance Satisfactory Satisfactory Satisfactory Key Staff Responsible Task Manager Division Chief Country Director Appraisal John W. Huang Zafer Ecevit Shahid Javed Burki Midterm (no mid term review) Completion Geoffrey Read Sangsu Choi Yukon Huang Liaoning Project Principal Ratings ICR ICR review Audit Outcome Satisfactory Satisfactory Satisfactory Sustainability Likely Uncertain Likely Institutional Negligible Negligible Modest Development Borrower Performance Satisfactory Unsatisfactory Satisfactory Bank Performance Satisfactory Highly satisfactory Highly Satisfactory Key Staff Responsible Task Manager Division Chief Country Director Appraisal John Huang Zafer Ecevit Shahid Javed Burki Midterm (no mid-term review) Completion Edward Motte Keshav Varma Yukon Huang s V Preface This is a Performance Audit Report (PAR) on two projects in China: the Shanghai Sewerage Project (Ln. 2794 CHA/Cr. 1779-CHA) and the Liaoning Urban Infrastructure Project (Cr. 2219-CHA). For the Shanghai Project, a bank loan in the amount of US$45 million and an IDA credit in the amount of SDR78.9 million (US$100 million equivalent) were approved on April 14, 1987. The loan and the credit were closed on December 31, 1995, fully disbursed, two and a half years behind schedule. For the Liaoning Project, an IDA credit in the amount of SDR54.2 million (US$77.8 million equivalent) was approved on July 24, 1991. The credit was closed on March 31, 1997, nine months behind schedule; a balance of SDRO.26 million was cancelled. The Basic Data Sheets for the two projects are presented in Annex A. The PAR was prepared by the Operations Evaluation Department (OED). The Implementation Completion Reports (ICR) were prepared by the East Asia and Pacific Regional Office on June 28, 1996 (Report No. 15846) and March 31, 1998 (Report No. 17550), respectively. The PAR is based on the ICRs, the President's Reports, the projects' legal documents, and the Staff Appraisal Reports (SARs). In addition, the analysis draws upon the discussions with the borrower, a review of relevant project files and other background material collected during the audit mission in March 1999. The ICRs provide accurate accounts of the achievements of both projects. The PAR builds on this information and elaborates on the projects' institution building, efficiency of operation, and lessons. Copies of the draft PAR were sent to the relevant Government officials, for their views and comments. Comments from the Shanghai Municipal Sewerage Company have been reproduced as Annex E.  1 1. Introduction and Background 1.1 Until the 1980s, the Chinese government concentrated on industrialization and paid little attention to urban infrastructure services. The main urban issues are shortage of housing, traffic congestion, inadequate water supply and sanitation services, as well as air and water pollution. During the 1980s, the government decided that significantly higher investments in urban services were required to remedy past inadequacies and to provide for future growth. Increasingly, urban investments would need to be funded from local resources. Therefore, upgrading local government finance was another priority area of concern. 1.2 Past pricing policies have contributed to inefficient use and inadequate maintenance of most urban services. The government recognizes this deficiency and is promoting a "users pay" policy. The full enforcement of this policy is, however, part of wage reforms that may take some time to complete. The initial sector review revealed that in water supply and sanitation (WSS) management was weak and responsibilities divided. Institutional strengthening through better financial planning and management, tighter regulations to support operations, and more intensive staff training are urgently needed. Sector studies have been conducted by the Bank in cooperation with Chinese officials to address these issues. The most recent study (1994) concludes: Conclusion from China: Urban Environmental Service Management: 1.3 "China now has an urgent need to reorient the provision of urban environmental services toward the market economy. The failure to do so would condemn urban residents to a deteriorating environment and poor quality, but increasingly expensive, services that do not protect them from the growing stream of urban domestic and industrial pollutants. While the imposition of user fees may be politically difficult, city leaders must recognize that the costs will be paid directly or indirectly, and that the current choice to rely on indirect payment leads to excess demand, on the one hand, and an inability to meet needs, on the other. The result in the end is greater pollution and higher total costs for the service provided. The avoidance of adequate user fees also denies city leaders full use of a powerful and efficient tool, collective treatment of pollutants, as they seek the most cost-effective means of sustaining an environment supportive of economic growth."' 1.4 The Bank's role in the urban WSS sector in China has focused on (i) assisting the government in preparing high-priority and cost-effective projects for urban services; (ii) providing project funding, as well as attracting other sources of external financing; (iii) helping to strengthen institutions responsible for preparing, constructing, and operating urban services through technical assistance; (iv) promoting sound financial and cost 1. Source: World Bank Report No. 13073-CHA, December 31, 1994. A brief summary of this report is presented in Annex B. 2 recovery policies for the sector; (v) helping develop sector policies, legislation, and regulations conducive to efficient urban development and operation of urban services; and (vi) promoting environmental protection. China has looked to the Bank for transfer of experience gained in other countries and has maintained a steady dialogue with the Bank on a number of urban environmental projects.2 The Shanghai Sewerage Project (SSP) was the first of these projects in China, followed by the Liaoning Urban Infrastructure Project (LUIP). Thereafter, there have been two more projects in both Shanghai and Liaoning, as well as several others elsewhere in China that are currently under implementation. Shanghai 1.5 Shanghai is one of the largest cities in Asia, with a population of some 12 million (December 1995) and a rapidly growing economy. The SSP was the first phase of a program of works to improve the environment in Shanghai through the interception, treatment, and disposal of about 1.4 million m3/day of wastewater that discharged into the Huangpu River and Suzhou Creek. The project was designed to benefit about 2.6 million people. The background of the project is given in Annex C together with project components. Liaoning 1.6 The Liaoning province has a population of about 36 million (1991) of which some 70 percent are urban. It is China's major industrial base. The LUIP covered three cities: Shenyang (the capital of the province), Yingkou, and Fuxin. The project was important to the Bank's overall strategy of assisting China in the transition from centralized development planning to a market-responsive and efficient system of development through enterprise reforms. The background of the project is presented in Annex D together with project components. 2. The Projects Shanghai Sewerage Project Project Objectives and Components 2.1 The project objectives were to (i) establish appropriate institutional and organizational arrangements for the management of liquid wastes and environmental protection in Shanghai; (ii) establish a self-financing company to deliver and manage urban wastewater services; (iii) strengthen mechanisms to control discharge and improve 2. Such projects most often include major components on water supply and sanitation. 3 water quality in the Huangpu River and its tributaries; and (iv) support the first part of a phased program of works to provide primary wastewater infrastructure services to enable economic growth. The details of the project components are shown in Annex C. Relevance of Project Design (quality at entry) 2.2 The Shanghai project focused on major institutional reforms, and was at the same time scheduled to implement fundamental technical improvements to the sewerage system of the city. This proved to be a monumental job and the project design became rather complex. As a result, project implementation had to overcome significant obstacles, chiefly delays that could have been avoided with more careful project design and using a more gradual approach to project implementation. Summary ofProject Achievements 2.3 The audit agrees with the ICR assessment that the project objectives were largely met: (i) institutional arrangements for wastewater management were in place by project completion; (ii) though delayed, arrangements for charging for wastewater services, for the first time in Shanghai, was a significant step toward achieving a sound financial standing; (iii) the creation of a managed Upper Huangpu Protection Zone, supported by training in discharge monitoring and analysis, began to show a quantifiable improvement on the environmental quality of the waterways; and (iv) the physical program provided essential wastewater services to meet the needs of some 2.5 million urban residents, and the necessary infrastructure3 for enabling urban redevelopment and related economic growth. The issues that need to be addressed in the near future are mostly institutional, such as implementation of cost recovery policy and further strengthening of O&M activities. On the technical side, completion of the existing sewer network rehabilitation is an urgent task. Liaoning Urban Infrastructure Project Project Objectives and Components 2.4 The project objectives were to (i) improve water supply conditions in the three project cities through physical works and strengthening of institutions, regulations, management, and financial and pricing policies; (ii) improve traffic and public transport conditions in Shenyang through a pilot program of selected low-cost physical works and institutional strengthening; and (iii) improve measures for water pollution abatement through technical assistance in wastewater treatment, and strengthening of institutions and enforcement measures for water pollution control. The details of the components are listed in Annex D. 3. The physical components as originally designed (Annex C) were completed. 4 Relevance of Project Design (quality at entry) 2.5 The borrower's high state of project preparation, assisted by bilaterally funded local design institutes and foreign consultants, allowed the construction to proceed with few difficulties upon credit effectiveness.4 The project, however, experienced delays during implementation mainly in carrying out studies and in utilization of technical assistance (TA) activities. Summary ofProject Achievements 2.6 The audit's review and observations confirm that achievement of the project's physical objectives was substantial. The project even exceeded its objectives for the amount of water transmission and distribution mains constructed by nearly 40 percent, and was thus able to increase service beyond the original targets. For the transport components, major improvements in Shenyang's traffic flows were achieved, as traffic speed improved up to 13 km/h. Implementation of traffic corridor improvements also reduced the number of accidents by about 65 percent. However, achievements of the project's institutional and financial objectives were much less than expected, as the borrower did not realize the full benefits of the TA and training. In addition, further development of water conservation measures and completion of operations monitoring are issues that need to be dealt with in the near future. Sector Strategy 2.7 Both projects were designed before the first sector strategy was drawn up in 1994 and therefore chiefly addressed local issues as identified during project preparation. The audit, however, notes that their designs cover the key aspects of the 1994 strategy quite well and that they contributed to advancing the new cost recovery policy and seeking cost-effective means of sustaining a supporting environment for economic growth. Both projects were quite ambitious as well, and their designs therefore became complex. As a result, especially their strategy related aspects were difficult to implement. Better focused assistance to these two first-time borrowers on specific aspects of (i) Bank procurement procedures; (ii) the importance of cost recovery; and (iii) implementation of TA- activities, could have helped in overcoming some of these implementation obstacles. 3. Implementation Experience 3.1 The key entities involved in the implementation of SSP were the Shanghai Municipal Government (SMG); the Shanghai Sewerage Company (SSC); and the Shanghai Municipal Sewerage Company (SMSC). The implementation of LUIP was 4. One additional year of preparation (owing to internal political issues in 1989) was required between project appraisal and board presentation. 5. The transport component was about 16 percent of the total project costs. 5 carried out by the Liaoning Provincial Government (LPG) and the special Liaoning Urban Construction and Renewal Project Office (LUCRPO) established for the purpose. LUCRPO also established sub-offices in the three project cities of Shenyang, Fuxin, and Yingkou, to coordinate the project activities with the respective water companies. This section describes the sequence of implementation events in some detail, and highlights the key achievements and shortcomings, as the case may be, as observed and analyzed during the audit mission. General Implementation Experience Shanghai 3.2 hnplementation of the project was originally planned to take five years, with completion in June 1992. Construction generally proceeded satisfactorily. However, delays arose due to the slow startup by this first-time borrower (unfamiliarity with Bank procurement procedures), unexpectedly difficult ground conditions along sections of the interceptor sewer, lengthy investment project approval procedures by the central government, and technical difficulties on a major outfall tunnel contract (collapsed tunnel lining). In addition, sewer rehabilitation of 6 catchments was added during the construction period. As a result, the project completion date had to be extended by 2.5 years. 3.3 Construction: The quality of construction workmanship was reported to be of a high standard, and the audit mission's field visits confirm this. However, supervision reports highlight the adoption of lower construction standards than recommended in international practice at the time (for instance, with less cover to reinforcement bars in culvert construction). This concern is now being addressed under the follow-on project so as to consistently comply with the current international practice. In this respect, it is worthwhile to highlight the benefit from the bilateral assistance (Australian government), which supported planning, engineering, and institutional analysis inputs that significantly contributed to enabling a new organization to successfully implement a demanding, large-scale infrastructure program. 3.4 Land Acquisition and Resettlement: As major works had to be constructed in congested central areas of the city, land acquisition, resettlement of residents, and relocation of industries became important parts of the project. SSPCC was able to substantially reduce the actual number of resettled persons (down from 15,000, estimated at appraisal, to the actual of 9,200 people), and implemented the resettlement program satisfactorily. In addition, 394 factories were successfully relocated. This reduced impact of resettlement was achieved by careful design and routing of major sewer lines. 3.5 Procurement: International contractors showed some interest to bid for works under the project, but after bid evaluation, most of the civil works were won by local firms. It may be mentioned that in the follow-up environment project in Shanghai (Loan 3711 -CHA) and the second sewerage project, even increasing the ceiling for ICB civil works contracts to $10.0 million does not seem to have encouraged international 6 contractors to participate to any great extent. Of 12 contracts for equipment and materials, only two were awarded to foreign suppliers. 3.6 Sewer Rehabilitation: A comprehensive study was conducted to identify the extent of rehabilitation needs in Shanghai; the study was completed in 1991. Some of the main problems highlighted in the study were damaged pipe joints, pipe corrosion or collapsed pipes, and silting of pipes. Out of about 50 areas investigated in the study, only some six have been implemented so far, thus leaving a large number of areas still to be 6 connected to the new trunk-infrastructure. As a result, the full achievement of the project's environmental benefits is seriously delayed. The findings of the study are, however, now being dealt with through rehabilitation of the secondary and tertiary sewer lines. The results of the study should be fully utilized under the ongoing second project. The audit mission discussed the situation with SMSC and the ways to speed up the progress in sewer rehabilitation, perhaps engaging private firms in these activities. Liaoning 3.7 Overall, the implementation of the project proceeded smoothly. The physical aspects of the project as appraised were completed in 1994, one year ahead of schedule. However, the closing date was extended by nine months to allow for the completion and pilot implementation of a water resource pricing study and a tariff study, and to complete additional works (distribution network) financed from credit savings. In general, this delay, and the poor quality of the studies, affected the institutional capacity building. LUCRPO did not firmly focus on the institutional objectives. 3.8 Water Supply: Overall, achievements of physical objectives in water supply were substantial, in fact the coverage objective was exceeded. This included construction of water transmission and distribution mains, intake works, pumping stations, and water treatment plants in the three cities. Equipment was procured for water supply and pollution control monitoring. Through cost savings, some 108 km of additional water distribution lines were constructed. 3.9 Transport: Achievement of the physical objectives in urban transport was also substantial, including major improvements in Shenyang's traffic flows through the road upgrading component, which included seven corridor separation schemes,7 mostly separating bicycles from motorized traffic with barriers. The audit mission received updated calculations on benefits of this component that confirm the ICR estimates on traffic speed, i.e. an increase of about 17 percent, and the substantial reduction of traffic accidents. The audit mission observed that the traffic control center constructed under the project could be used more effectively for managing rush hour traffic flows through the roughly 70 intersections it covers. 6. Three districts still remain to be inspected. 7. Originally, ten such schemes were to be constructed, but during implementation it was agreed to include three of them in a future program (proposed Liaoning Urban Transport Project, FY99). Funds earmarked for three schemes were utilized to construct five flyovers. 7 3.10 Land Acquisition and Resettlement: LUCRPO and the three city project offices had prepared suitable plans for both the acquisition of land and the resettlement of inhabitants as part of their project preparation activities. Acquisition of land (some 27 hectares in permanent use for pumping stations, etc. and about 600 hectares in temporary use for laying of major transmission mains) was successfully completed early in project implementation. The number of homes to be resettled was small; all were resettled nearby their previous residents and compensated for assessed damages. 3.11 Procurement: Some procurement difficulties resulted from the Bank's English- language tender documents, but close supervision helped in this regard. Also in Liaoning, the ICB threshold seems to have been set too low because no foreign firms ever bid on these contracts. NCB, instead of being truly national, seems to have been carried out at the provincial level only. To improve competition, ways of reducing bidding restrictions should be considered for future projects. Institutional Development Shanghai 3.12 Prior to the project, the responsibility for sewerage services in Shanghai was divided between various units and all O&M activities were funded through governmental budgetary allocations; no direct user charges were levied. During project formulation, the SMG recognized this unsatisfactory situation and established Shanghai Sewerage Company (SSC) in March 1987 as a condition for Board Presentation. SSC's objective was to become a financially autonomous sewerage company to manage waste water from within Shanghai City. However, in 1995 (eight years after being established and when the project was nearing completion), SSC still operated along the lines of a government department, i.e., depending on governmental budgetary allocations for day-to-day O&M. 3.13 The organizational study prepared under the project, although slightly delayed, was available for the preparation of the second project in 1995. As per the recommendations of the study, SMG established the Shanghai Municipal Sewerage Company, Ltd. (SMSC) as a self-accounting, and self-funding state-owned enterprise. SMSC has a rational, pyramidal organization to facilitate operational effectiveness. The audit mission was reported9 that institutional development and training support being provided under the second project are starting to result in SMSC's functioning as an independent and legally autonomous public enterprise having all rights and powers of a company, including being held responsible for its operations, with the exception that SMG still sets tariffs and charges for the service. 3.14 In the future, the financial objective of SMSC would be to (i) preserve the value of its assets and (ii) earn sufficient funds from its operations to meet O&M costs and debt 8. SMSC was formed following the merger of SSC and the Shanghai Sewerage Project Construction Company (SSPCC). 9. Bank supervision reports confirm this information. 8 service, and generate funds for new investments. The audit finds that these objectives are being met and further progress has been made since project completion, especially in the financial management of SMSC (para. 3.18). Liaoning 3.15 As the two major studies were considerably delayed, LPG and the water companies of the project towns were not able to benefit from their results and recommendations by the time of project completion. The audit finds, however, that positive progress has since been made in the following areas of relatively successful improvements: (i) computerized billing systems and leak detection programs were implemented, although only on a pilot basis, especially in Fuxin and Yingkou; (ii) the institutional measures for traffic planning and management systems developed under the project have been integrated into Shenyang's traffic management system; and (iii) the funds listed for water pollution monitoring provided information for the preparation of the follow-on Liaoning Environment Project (Ln 3781-CHA). 3.16 Training, which was to include overseas visits and in-house training for the water supply components, was eventually curtailed as it was realized that suitable international candidates for the specified advisor posts were not available for long-term assignments. Only one short-term advisor was employed by the three water companies, amounting to two weeks each to advise them on the water system leak-detection program. In the transport sector, training was more comprehensive and was carried out in the areas of traffic engineering, planning, enforcement (safety), bus operations and workshop management, as well as bus maintenance, but was also curtailed before project completion. Bank supervision reports noted that the unwillingness of the project offices to implement the TA-components, as designed at appraisal, severely diluted the effectiveness of this component. Financial Management Shanghai 3.17 In parallel with SSC's establishment, direct-user service fees were introduced in December 1986 for industrial and commercial customers, first set at only fen 12/m'. This low and partial tariff was inadequate and therefore, to comply with the financial covenants (para. 3.14), SMG had to contribute through utility tax allocation and governmental budgetary provision. To rectify the situation, a tariff study was carried out (in 1992) to recommend new tariff policies. On this basis, SMG proposed (in 1993) a new tariff structure, including tariffs for domestic customers, together with an action plan for regular tariff increases to ensure better covenant compliance in the future. Even so, it was only in July 1995 that SSC was authorized by SMG to charge domestic customers at fen 14/m3 and to adjust its non-domestic tariffs to fen 34/M3 .1 However, implementation 10. Bank agreed to postpone the compliance date for this covenant to after FY94. 9 of this authorized adjustment was not confirmed until April 1996. Tariffs were further increased in October 1998 to fen 24/m3 for domestic service and to fen 37/M3 for non- domestic service.12 3.18 These tariffs still have not generated revenues that are adequate to fully meet the financial covenant. SMSC provided the audit mission with annual financial reports for FY93 through FY97 that confirm the project's improvements in financial management. The operating revenues increased nearly four times between FY93 and FY97, and the cash balance (a liquidity indicator) increased by about ten times. On this basis, SMSC fully complied with the financial covenant in FY96, but just missed it in FY97. The average incremental cost of wastewater service was estimated at fen 39/M3 at appraisal and is likely somewhat higher now, thus giving a clear indication of the need to continue indirect charges and governmental subsidies to ensure SMSC's financial viability and the sustainability of the physical assets provided under the project, until direct tariff levels are brought into line with the actual costs of the service. 3.19 Technically, SMG/SSC complied with the financial covenants under the project, but not without significant delays and prompting by Bank missions. In practice, however, tariffs were set at levels that required substantial operating subsidies to SSC during the whole implementation period to be in compliance with the financial covenants. SMG's reluctance to set wastewater tariffs at levels that would allow SSC to be self- financing was perhaps mainly triggered by concerns for affordability and community reaction. Nevertheless, the introduction of tariffs for the waste water service, and later, the improved tariff structure were major steps forward on the financial side, and further actions aimed at enhancing SMSC's financial condition required under the second project can be expected to establish it as a financially stronger utility. Liaoning 3.20 The project did not include detailed cost recovery objectives for the three water companies involved. However, as part of the institutional strengthening efforts, financial and water pricing policies were expected to be established. Unfortunately, the studies that were carried out to set the basis for these reforms (the water resource pricing study and the water tariff study), were of poor quality and benefits arising from them were rather minimal. The water companies were also expected to prepare annual financial forecasts (for a rolling eight-year period). The forecasts were produced, but in a mechanistic way. Their application into a real-life situation began, however, only some time after project completion 3.21 The audit mission finds now that some effort is being taken to base the financial management on real financial data in all three project cities. All water companies provided the mission with their financial figures for FYs1996-98. The data show that water tariffs were increased several times during project implementation, and as a result, 11. This is reportedly the first time in China that domestic customers have been charged for wastewater services. 12. It is noted that the domestic customers are being billed through joint-billing with the Shanghai Municipal Waterworks Company (SMWC), with the wastewater charge shown separately. 10 their financial situation has improved. The tariff increase may have also led to conservation measures as annual water consumption has declined, especially in Yingkou and Fuxin, but less so in Shenyang. O&M Activities 3.22 All project entities have maintained sound progress in strengthening their O&M operations after project completion. These are some of the most significant improvements: 3.23 Shanghai: SMSC has taken important steps to make its operations more effective. All major sewer repair works are being contracted out. The workshop that handles mechanical and electrical works is being expanded under the second project, and it operates as a revenue earning unit thus making its operation self-funded. Outsourcing of O&M activities has not yet been considered, but is perhaps one of the ways to further enhance effectiveness. 3.24 Liaoning: O&M data from the three water companies indicate that improvements are being made in both operational effectiveness and water conservation. O&M units of the water companies all carry out revenue earning activities in addition to their regular functions within the day-to-day operations of the water system. Thus, they operate practically as self-funding units. Metering of water connections is being expanded and leak-detection programs are under way and are being followed by necessary rehabilitation of water mains. Environmental Impact in Shanghai 3.25 The project completes the first stage of a major long-term environmental program to clean up the aquatic environment of Suzhou Creek and of Huangpu River, long known to be the most polluted waterways in the Shanghai area, if not in China. Already after a few years since project completion, water quality results show signs of recovery. The audit mission was provided with some indicative water quality data as follows: Dissolved oxygen Chemical oxygen Biological oxygen demand demand Sample points 1992 1994 1997 1992 1994 1997 1992 1994 1997 Beixinjin Bridge 2.23 0.32 1.30 101.4 75.4 68.7 45.4 25.5 19.3 Wuningher Bridge 1.31 0.44 1.44 158.4 84.7 61.7 62.4 31.7 17.2 Zehjianghn Bridge 1.93 0.76 1.59 104.0 78.5 56.9 34.2 21.8 22.0 Outfall Area 8.38 15.0 1.0 Note: Sample points starting from upstream of the Suzhou Creek. 3.26 Except for the dissolved oxygen, the above data shows significant improvements in the water quality of the Suzhou creek between 1992 and 1997; 30 to 50 percent reduction for the chemical oxygen demand and 40 to 50 percent for the biological oxygen demand. The water quality at the outfall area shows no indication of negative impact from the sewage discharge. 11 Water Resource Development in Liaoning 3.27 All three project cities augmented the capacity of their surface water-based supply systems and thus improved the reliability of their distribution systems significantly. In Shenyang the works included a major dam, large diameter twin-transmission main, and a new water treatment plant. Also in Fuxin and Yingkou intake and transmission capacity was increased. This gives the water companies more time now to develop new water sources for a long-term planning horizon. In Shenyang for instance, this includes the development of new groundwater well fields, for which investigations are already under way. In addition, city water companies are carrying out water conservation measures through leak-detection and rehabilitation programs. It is important that these efforts be continued effectively and expanded. 4. Issues for the Future Sewer Rehabilitation in Shanghai 4.1 A new project was approved in 1995 to further expand the sewerage system of Shanghai, namely the Second Shanghai Sewerage Project (Ln. 3987-CHA). This project is addressing the sewer rehabilitation problems identified in a 1991 study (para. 3.6). It is important that the results of ongoing sewer investigations be used in planning these rehabilitation activities. Furthermore, the capacity of the Shanghai Municipal Drainage Monitoring Center should be used to the maximum extent to enhance the operational monitoring of the system. The center can be expected to produce valuable data for managing the system more effectively and programming its rehabilitation needs and priorities. Water Supply in Liaoning 4.2 During the operation of the Liaoning project, standard performance targets were established for the three water companies. However, due to the variations in conditions of the three companies, each company was encouraged to adopt its own set of measures pertaining to their operational performance. In addition to actual water production capacity indicators, the main performance indicators were suggested to cover (i) metering of water service connections (percentage of total number of connections); (ii) unaccounted-for water (percentage of water produced); and (iii) staff index (number of staff per 1,000 service connection). The most recent information, reviewed during the audit mission, indicates that the data collection systems are now in place. The data that are being collected are most valuable for planning future system expansions and operational improvements. 12 Institutional Development Shanghai 4.3 The institutional strengthening of SSC proceeded slowly, and its expected financial sustainability was not fully achieved. Therefore, its successor, SMSC, still today needs to resolve important institutional issues to make its operations financially and technically fully sustainable (paras. 3.17 through 3.19). It is important that Bank supervision of the second project pay careful attention to this area. 4.4 In retrospect, slow progress on institutional reform should have been anticipated due to (i) major emphasis on construction of works; (ii) unfamiliarity of SSC with Bank procedures; (iii) requirement of tough actions by SSC (and later by SMSC) through financial covenants (designed to coincide with the planned completion of the physical components); and (iv) the lack of optimal organizational structure at the outset of the project. Some useful lessons could be learned from a comparison with the Shanghai Municipal Waterworks Company (SMWC), which has been in operation for more than a hundred years. After 1995, SMG has shown firm intention to press on toward making the system financially self-sustaining by approving substantially increased wastewater tariffs. Further tariff adjustments are necessary under the second project to ensure continued development of SMSC's financial capacity. Liaoning 4.5 Even though the project helped to achieve various operational and institutional improvements, the water companies will need to continue these improvement efforts on their financial and operational efficiency in order to generate the funds needed to sustain the quality of service and to meet the growing demand. This makes it imperative that the results of the tariff study be implemented so that the water companies do not have to depend on the municipal and provincial governments for financial subsidy for these needs. The improvements that have continued since project completion in the finance area suggests that the sustainability of project benefits is becoming more certain. 5. Assessment of Performance Projects Ratings Shanghai 5.1 Overall, the ICR rated project outcome as satisfactory and sustainability of benefits as likely; the OED review agreed with these ratings. The ICR rated the achievement of institutional development impact as negligible, which the OED review upgraded to modest because the borrower exhibited good progress by undertaking 13 institutional restructuring and by adopting respective study recommendations. Findings of the audit now confirm that the upgrading was justified Liaoning 5.2 In the ICR, project outcome was rated as satisfactory and the institutional development impact as negligible; the OED review agreed with both ratings. The ICR rated the sustainability as likely which the OED review downgraded to uncertain. The audit's findings now justify that the institutional development impact be upgraded to modest and the sustainability back to likely as the original rating in the ICR Borrower Performance Shanghai 5.3 Borrower performance was generally satisfactory, though with deficiencies in the area of financial management. Management and staff continuity within SSC/SSPCC (and later within SMSC) has certainly contributed to the successful implementation of the physical components of this project. While SSC demonstrated a capacity to operate and maintain the physical assets that were constructed, for reasons discussed above, it partially failed to grow into the self-financing institution envisaged at appraisal. The borrower successfully implemented all the studies identified in the SAR (although with some delay), as well as carried out various in-country and overseas training programs that were identified at appraisal. 5.4 The Huangpu River Basin Study provided the design for the Shanghai Environment Project (Ln. 3711-CHA) and for the formation of the upper Huangpu water protection zone, thus strengthening Shanghai's ability to reduce pollution. The tariff policy and organization and management study provided a basis for the revised tariffs, and contributed to SMG's decision to create SMSC. The training undertaken yielded results as shown by the ability of an initially weak municipal department to manage major construction works and embark on complex institutional upgrading. SMSC's financial sustainability also began to show improvements. Liaoning 5.5 Along with Bank missions, the borrower (represented by LUCRPO) and the three cities spent considerable effort in preparing this project, and they had a close working relationship throughout the entire project cycle. In addition, the LPG established LUCRPO along with four municipal project offices. The offices were adequately staffed, but mostly with engineers who initially possessed insufficient construction and contract management experience and limited skills in institution building aspects of the project. On the basis of feasibility studies, detailed designs and tender documents were readied for tendering during the additional year of preparation between appraisal and board (footnote 4). The borrower's high state of project preparation allowed construction to proceed with few difficulties upon credit effectiveness. 14 5.6 Borrower performance during implementation continued to be satisfactory. Despite the inflationary environment, the project was well executed. All major construction activities planned at appraisal were completed by the end of 1994, about one year ahead of schedule. Resettlement was carried out efficiently as noted above. The establishment of the city project offices outside the water companies was perhaps somewhat of an overkill, as they contributed little to project development and actually affected implementation efficiency and the chance for water companies to gain the necessary project management experience. 5.7 As far as studies and the technical assistance go, the borrower's performance was deficient. None of the three water companies showed the necessary commitment to the completion of these activities. This includes the full implementation of the computerized billing systems, the leak-detection program (both of which were only at a pilot phase at project completion), and the financial forecasting for management, which was not well comprehended by the water companies. LUCRPO did not show adequate leadership in these technical assistance areas. These activities have continued quite favorably, however, after the project and overall, the borrower performance in Liaoning is rated as satisfactory. Covenants and ODs Shanghai 5.8 Compliance with the covenants was maintained by SMG/SSC throughout the project period, although at times reluctantly and with delays, especially with regard to financial covenants. In retrospect, institutional development and financial management could have received greater emphasis during formulation of the project covenants; actions required to take place five years down the line do not always merit serious attention by the executing agencies. No ODs (or OMSs) were violated in the preparation and implementation of the project. Liaoning 5.9 Compliance with covenants was limited. The water companies only partially complied with the covenant to carry out action plans for improved water metering, leak- detection and staffing. The studies of tariffs and water pricing were poorly done, and the financial forecasts were submitted late and were of low quality. Although not specifically covenanted in the credit agreement, the training programs for both water supply and transport came late in the project and fell short of project plans. Resettlement was carried out in accordance with the agreed resettlement action plan. The preparation and implementation of the project were carried out in accordance with relevant ODs (or OMSs). 15 Bank Performance Shanghai 5.10 The Bank enjoyed a close and frank working relationship with the participating government agencies responsible for project execution (SMG, SSC, and SMSC) and staff continuity helped in this regard. Initially, the "skills" of Bank missions were predominantly in "engineering" reflecting the major emphasis during the initial years of the project on designs, tendering, and construction of works. These findings were also confirmed by SMSC's views that the Bank missions and the task managers were always very helpful and provided excellent guidance in the implementation of the project. Overall, the Bank performance is rated as satisfactory. Liaoning 5.11 The approach by the Bank to project preparation and appraisal was satisfactory. The scope was rightly limited to water supply construction and road improvements (in one city) and yet emphasized necessary institution and policy reforms. In the one-year lag between appraisal and board presentation, the Bank reviewed procurement documents such that construction could get underway immediately after effectiveness. 5.12 Throughout the project cycle, there was excellent staff continuity in the Bank missions. Supervision missions emphasized the water supply component since it constituted over 70 percent of the total cost of the project. The lack of covenants regarding studies and TA activities made it difficult for task managers to enforce implementation of these activities. Future projects should link institutional developments with time-bound covenants to ensure the full implementation of the institutional development program in a timely manner. LUCRPO expressed its high regard to the professionalism and dedication of the Bank task managers. The overall Bank performance is rated as highly satisfactory. 6. Conclusions and Lessons 6.1 Both projects largely met their objectives, but with some delayed achievement of institutional goals, particularly in achieving the cost recovery targets. As the audit findings show, project entities have, however, made substantial progress in these areas after project completion. The audit findings also confirm that both projects made a significant contribution toward achieving the key aspects of the 1994 sector strategy. This experience is now valuable when the up-dating of the strategy is under consideration. Generic Lessons 6.2 Both projects demonstrate the importance of a good match between project objectives and respective components for achieving realistic and meaningful results. 16 When the objectives are ambitious, the design of components often becomes complex, as was the case in these two projects. A well-timed follow-on project would be appropriate in such situation. 6.3 Project management offices were established for coordinating and guiding various aspects of project implementation. While this arrangement may be justified, it can also be a limiting factor if the skills and inclinations of the unit's staff is not balanced. For instance, too much engineering can affect the achievement of institutional capacity building objectives of the project. 6.4 Over the past ten years, the Bank has supported a large number of water supply and sanitation projects in China. Updating of the sector strategy indicates that the lending portfolio is likely to increase. The experience from the completed projects should be thoroughly analyzed with a sector-wide impact evaluation to provide timely and comprehensive feedback to the ongoing strategy debate. Shanghai 6.5 The ICR and its review by OED present important lessons: * Institutional development is a slow process that requires careful design suitable to the particular enabling environment. * The programs involving physical works and institutional and financial development require a balanced implementation plan of the whole utility. * Such a plan should be supported through appropriately designed and timed covenants. * The Bank can play a meaningful role in supporting large-scale urban infrastructure, especially through encouraging the borrower to pay adequate attention to institutional and financial reforms. * In order to attract international contractors in similar lending operations in the future, there may be a strong case for large management contracts moving toward program lending. Liaoning 6.6 Similarly, the ICR of this project presents several project-specific lessons confirmed by the OED review: * To ensure the full implementation of the program, project designs must link institutional development to appropriate incentives and action plans early in the project. * Contracts of longer than one year must contain price escalation clauses. * The ICB contract ceiling of US$3.0 million for civil works contracts in China was (in the early 1990s) too low to attract foreign bidders. * Provincial governments require fully experienced staff in both technical and managerial areas and in project supervision to provide the leadership 17 necessary to carry out large-scale investment projects and to effectively assist city project staff. 18 Annex A Basic Data Sheet 1. CINA SHANGHAI SEWERAGE PROJECT (LOAN 27946/CREDIT 1779-CHA) Key Project Data (Amounts in US$ million) Appraisal Actual or Actual as % of estimate current estimate Appraisal estimate Total project costs 356 441 123.9 Loan amount 153 Cumulative Estimated and Actual Disbursements FY88 FY89 FY90 FY91 FY92 FY93 FY94 FY95 FY96 Appraisal estimate 12.0 33.0 71.0 104.0 131.0 145.0 Actual (US$M) 10.26 14.70 29.56 53.63 72.40 98.89 131.26 151.09 153.3b Actual as % of appraisal 75.0 44.5 41.6 51.6 55.3 68.2 90.5 104.2 105.8 Date of final disbursement: Project Dates Original Actual Identification 3/85 6/85 Preparation 1985-86 1985-86 Appraisal 9/86 9/86 Negotiations 2/87 2/87 Board Presentation 4/14/87 4/14/87 Signing 7/14/87 11/23/87 Effectiveness 10/14/87 3/7/88 Project Completion 6/30/92 12/31/95 Closing date 6/30/93 12/31/95 a. Includes the initial disbursement of $9.0 million for the Special Account. b. Due to appreciation of SR, the actual amount in dollars increased substantially. 19 Staff Inputs (staff weeks) Actual Weeks Actual US$000 Through appraisal 161.6 415.6 Supervision 97.9 280.3 Completione 5.0 15.0 Total 264.5 710.9 Annex A Mission Data Performance rating' Date No. of Staff days Specialization (month/year) persons infield represented e Implementation Development Status objectives Through appraisal 9/86 Appraisal through Board 4/87 Approval Board approval through 3/88 effectiveness Supervision 1 4/88 1 2 E 1 1 Supervision 2 11/88 1 5 E Supervision 3 5/90 1 5 E 1 1 Supervision 4 1/91 2 9 EC,F 1 1 Supervision 5 11/91 2 11 E,F 1 1 Supervision 6 5/92 3 20 ME,E,EE 1 Supervision 7 10/92 4 ME,F,EE, 1 1 EC,IN Supervision 8 12/93 5 ME,E,EE,EC, 1 1 RE Supervision 9 7/94 4 ME,E,F,RE,TS 5 45 Supervision 10 2/95 3 10 ME,F,E 5 5 Supervision 11 4-6/96 4 1 EC 1 1 Completion 2/96 3 1 E,F,EE 1 1 c. Estimate. d. E = Sanitary Engineer; EC= Economist; EE= Environmental Specialists; F= FinancialAnalyst, IN=Institutional Specialist; ME = Municipal Engineer; RE = Resettlement; TS = Tunnel Specialist e. Borrower involved in two Bank-supported follow-on investments (Loans 3711 and 3987) both of which supported expanded wastewater infrastructure. Considerable indirect supervision through cost-effective Borrower dialogue as part of project preparation benefited both direct supervision of SP and formulation of follow-on investments. f. I = No significant problems, 2= Moderate problems 20 Other Project Data FoLLoW-ON OPERATIONS Operation Loan no. Amount Board date (US$ million) Shanghai Environment Project 3711 1994 Second Shanghai Sewerage Project 3987 1995 21 Annex A Basic Data Sheet 2. CHINA LIAONING URBAN INFRASTRUCTURE PROJECT (CREDIT 2219-CIIA) Key Project Data (Amounts in US$ million) Appraisal Actual or Actual as % of estimate current estimate Appraisal estimate Total project costs 128.6 108 84.0 Loan amount 77.8 Cumulative Estimated and Actual Disbursements FY92a FY93 FY94 FY95 FY96 FY97 FY98 Appraisal estimate 14.8 37.3 55.2 68.5 77.8 Actual (US$M) 26.6 49.6 65.8 67.5 71.6 73.4 75.9 Actual as % of appraisal 180 133 119 99 92 94 98 Date of final disbursement: July 25, 1997 Project Dates Original Actual Identification 2/88 7/18/88 Preparation 1988-1989 1988-1989 Appraisal 2/25/89 9/89 Post-Appraisal 1/91 Negotiations 10/89 4/6/90 Board Presentation 8/24/89 3/21/91 Signing 12/89 4/25/91 Effectiveness 3/90 7/24/91 Project Completion 12/31/95 Closing date 6/30/96 3/31/97 Staff Inputs (staff weeks) Actual Weeks Actual US$000 Through appraisal 83.0 232.5 Supervision 61. 186.5 Completionb 65.1 197.9 Total 216.7 644.4 a. Includes initial disbursement of $5.2 for Special Account. b. Estimate. 22 Annex A Mission Data Performance rating Date No. of Staff days Specialization Types of (month/year) persons infield representede Implementation Development Problems Status objectives Appraisal through 9/89 Board Approval 3/91 4 21 E,F,EC,IN Board approval 3/91 through 7/91 effectiveness Supervision 1 7/91 Supervision 2 3/97 Supervision 3 11/91 4 10 E,F,IN 1 1 Supervision 4 6/92 2 12 E, 1 Supervision 5 11/92 2 8 E,JN 1 Supervision 6 5/93 3 11 E,IN,F 1 1 Supervision 7 12/93 3 7 E,IN,F 1 Supervision 8 6/94 4 7 E,F,IN,F HS HS Supervision 9 3/96 33 4 E,F,F HS S TA & Studies Completion 3/97 11/97 5/97 1 2 EC Other Project Data FOLLOW-ON OPERATIONS Operation Loan no. Amount Board date (US$ million) Liaoning Environment Project 3781-CHA 77.8 3/21/91 Helen Watkins \\StreetTallcDept Disk2@OED@WORLDBANK\INFRA\SKYTTA\China Audit\Basic Data Sheet Liaoning.doc 8130199 12:03 PM C. E = Sanitary Engineer; EC= Economist; EE = Environmental Specialists; F = FinancialAnalyst, IN=Institutional Specialist; ME= Municipal Engineer; RE = Resettlement; TS = Tunnel Specialist d. Borrower involved in two Bank-supported follow-on investments (Loans 3711 and 3987) both of which supported expanded wastewater infrastructure. Considerable indirect supervision through cost-effective Borrower dialogue as part of project preparation benefited both direct supervision of SP and formulation of follow-on investments. c. I = No significant problems, 2= Moderate problems 23 Annex B: Urban Environmental Service Management-Summary of Sector Strategy, 1994 Nearly 90 percent of the urban population in China is served by water systems. The quality of the water provided generally meets the guidelines for safe water, and 24-hour supply is common. The major problem with these systems is low quality of construction and materials which combined with inadequate maintenance, substantially reduces system life and increases the long-run cost of supply. Although China's raw water resources are below international averages, the total industrial and domestic consumption rivals that of water-abundant countries like Canada, with enterprises consuming two to three times more than international best practices. Furthermore, the real price of water has dropped sharply since 1980; by 1989, inflation had driven the real price to half the 1980 level. By the late 1980s, many cities had overexploited and polluted raw water sources, and the need to tap distant sources drove up the cost of new supplies by over 7 percent per year. Some cities began tariff increases in the late 1980s and recaptured some of the real revenue losses, but on the whole, current water prices remain about half the level needed for self- sustaining water company operations. The estimated 10 million m3/day shortfall in urban water supply can be reduced, and future investment needs constrained, if Chinese cities aggressively use price as a water demand management tool. One study conducted in Shanghai found a price elasticity of -0.38 and an income elasticity of 0.22 on households, both consistent with international findings. Industrial elasticities have not been estimated as quotas rather than price have determined consumption for most firms. However, price increases alone will not end the need for new investment in water supply. The severe water shortages in North China, where 1992 domestic supplies fell below 40 I/day in 18 cities, can be effectively addressed only by a combination of improved pricing and investment in supply. Nearly 40 percent of urban China is unserved by sewers, with wastewater going directly into lakes and rivers and 30 percent will remain unserved in the year 2000 according to estimates. The low sewerage coverage and inadequate sewage treatment destroy ambient water quality. Based on international experience, this problem disproportionately affects the poor, who are less likely to have access to safe water supplies. Chinese cities have little incentive to invest in sewerage and wastewater treatment because they receive little or no income for handling wastewater. Furthermore, perhaps due to untreated wastewater affecting downstream cities more than the producing city, municipal wastewater handling has lagged behind national needs. Given the low quality of urban surface waters, downstream effects, and widespread aquifer pollution, the national government should require the 203 largest cities to provide primary treatment within 10 years to reduce the receiving water quality to below irrigation standards; this would reduce pollution loads by some 30 percent from these cities, which account for 80 percent of total loads. The estimated cost of this wastewater investment program is $490 million per year over the next 10 years, or about three times current levels. The implied 15 percent increase in urban infrastructure programs would be offset by the drop in water supply investments resulting from the new water demand management program. Under the wastewater program, user fees would cover all costs. Sewerage tariffs for households and small enterprises would continue to be levied against 80 percent of water use, with larger enterprises being charged on metered loads. The 24 combined impact of the water and sewerage tariff increases would triple average effective water prices, and would reflect the true price of delivering safe water. It would encourage water saving, postpone investments in new supplies, and promote sewerage systems that are of economical size. Any delay in implementation will force the construction of larger and more costly systems in the future. 25 Annex C: Project Components Shanghai Before the project, the operation and maintenance (O&M) of services in Shanghai was funded through budgetary allocations of Shanghai Municipal Government (SMG). In March 1987, at the start of the project, the Shanghai Sewerage Company (SSC), a financially independent company was established to manage the liquid waste of the city. Direct-user service charges (Y 0. 12/m) for commercial and industrial consumers were introduced for the first time in Shanghai in late 1986. The project's covenants required the implementation of wastewater tariffs so that, after 1992, SSC's revenues would cover its O&M expenses and the larger of either depreciation or total debt service. Project infrastructure was designed to serve about 2.6 million people (estimated to be about half of the population of the urban area in the year 2000). The components were: (a) Construction of a sewerage system comprising 35 kilometers (kin) of intercepting sewers, about 21 km of link sewers, 2 main and 8 smaller pumping stations, a treatment plant and other ancillary works (b) Conducting of four project-related studies (c) Staff training (d) Setting up a self-financing sewerage company, the Shanghai Sewerage Company (SSC) (e) Creating a mechanism to control and improve water quality in the Huangpu River and its tributaries. The Huangpu River is the main source of water supply for Shanghai. The total project cost was estimated at $441 million (Y3,704 million) compared to an appraisal estimate of $356 million (Y1,530 million). The 24 percent increase in project cost since appraisal in dollar terms was mainly due to increases in the costs of materials and labor. The 242 percent project cost increase in yuan terms reflects: (a) the devaluation of local currency; (b) the fact that most expenditures were in local currency, and were increased by the labor and materials cost increases; and (c) the price contingencies allowed at 4.1 percent were underestimated. These increases are considered reasonable under the circumstances. Bank Group financing of a credit of SDR 78.9 million and a loan of $45.0 million amounted to $153.34 million (35 percent of project costs), which was fully disbursed. SMG provided the balance of the counterpart funds in a satisfactory manner. 26 Annex D Liaoning The project resulted from the Hun River Basin Management Study, which was financed by bilateral donors, assisted by UNDP and supervised by Bank staff. This study, carried out between 1987 and 1989, defined the environmental situation of water resources in the central river basin of Liaoning Province and identified schemes to improve water resource management in the area. The study also assessed the feasibility of several schemes to improve water resource management and water utilization. The highest priority schemes were incorporated into the Liaoning project. The study found the most severe water shortages in the cities of Shenyang, Yingkou, and Fuxin. Water demand in all three cities exceeded production capacity, and supply restrictions had been imposed on both industrial and domestic consumption. Within the built-up areas of the cities, which were serviced by the City Water Companies, all residential and commercial users were served. Some industrial users, to meet their total demand for water, were extracting untreated water either from groundwater sources or from nearby water courses to supplement the available commercial water supply. When the Liaoning project was prepared, it was estimated that the water company would produce only about one-half of the demand in 1995, and by the year 2000 only about one-third of the demand would be met. In addition to water capacity problems, the city of Shenyang also had severe transport problems. The number of motor vehicles and non-motorized vehicles (mostly bicycles) was growing rapidly and increasing congestion. Poor traffic management further exacerbated the situation with varying speeds among the different vehicle types, resulting in serious congestion, travel delays and accidents. Bus ridership meanwhile, had leveled off and in some cases even declined because of traffic, which increased bus travel times, congestion caused by bicycle traffic and deteriorating bus service. Traffic separation by motorized and non-motorized vehicles was badly needed, as were improvements in the bus companies' equipment and operations. The components of the project were: (a) Shenyang Water Supply (US$52.7 million): Construction of about 51 km of water transmission pipeline, and 32 km of distribution pipelines; (b) Fuxin Water Supply (US$27.0 million): Construction of intake works, sedimentation basin and pumping station at Naodehai Reservoir, about 74 km of water transmission mains, 2 booster pump station a water treatment plant, and about 14 km of supply pipeline to the city network (c) Yingkou Water Supply (US$18.4 million): Construction of about 57 km of water transmission pipeline, water intake at Daliao River (120,000 m3 per day), pumping station, about 49 km of distribution pipelines and improvements to existing water treatment plants (d) Water Pollution Control (US$1.8 million): Procurement of equipment and instruments for environmental pollution monitoring, and a mobile laboratory and equipment for water quality monitoring work (e) Shenyang Urban Transport (US$20.8 million): Improvement of about 44 km of arterial road corridors, procurement of maintenance and repair equipment for bus and trolley-bus depots and garages, improvement of operation management for bus routing and scheduling, maintenance and financial control, procurement of road maintenance and road safety (line marking and signing) equipment, and implementation of a computerized road maintenance system (f) Project Support Technical Assistance (engineering-related) (US$3.1 million): Advising on project management and construction supervision, and consultants for the preparation of a second-phase project (g) Capacity Building Technical Assistance (institution-related) (US$1.6 million): Experts to 27 provide technical and financial advice to the management of the water supply companies, technical experts to advise the management of public transport companies in Shenyang, technical experts to advise on urban transport management and road safety enforcement, and training for staff of the project offices, staff of the water supply companies, and other staff engaged in water supply, urban transport, traffic control, and environmental protection (h) Policy Development Technical Assistance (institution-related) (US$0.8 million): Studies on water resource and water supply pricing, and effective methods for industrial wastewater treatment including the strengthening of environmental protection laws and regulations. The total project cost was US$108.0 million, versus the appraisal estimate of US$128.6 million. 28 Annex E Comments from the Borrower SHANGHAI MUNICIPAL SEWERAGE COMPANY Add: 152 Tan Jia Qiao Rd, Shanghai, 200070, China Telephone: 0086-21-5652 3132 * Fax: 0086-21-5652 9502 FACSIMILE COVER SHEET AND MESSAGE DATE: August 19,1999 NO. OF PAGES: 3 (including cover sheet) TO: Mr. Gregory Ingram FAX NO: 001-202-477-6391 Title: Manager Telephone: 001-202-477-1234 Dept/Div: Sector and Thematic Evaluations Group Operations Evaluation Department Organization; the World Bank City/Country: 1818 H Street N.W, Washington, D.C. 20433 USA COPIED TO: FAX NO: FROM: Lu Hong DE FAX NO: 0086-21-5652 9502 Title: General Manager Telephone: 0086-21-5652 8732 Organizion:. Shanghai Municipal Sewerage Company City/Country: Shanghai, China SUBJECT: Comments on PAR of the Shanghai Sewerage Project and the Liaoning Urban Infrastructure Project MESSAGE: Thank you for your draft Performance Audit Report of the Shanghai Sewerage Project (Loan 2794-CHAICredit 1779-CHA) and the Liaoning Urban Infrastructure Project (Credit 2219-CHA). We have studied the component of the Shanghai Project in the report and in general we agree with the evaluations made in the report except for a few points. Our comments are attached. They are shown in bold and italic in the original paragraph. Best regards, Lu Hong DE General Manager SMSC 29 Annex E The order of paragraphs is as the original order in the PAR 3. Implementation Experience 3.1 The key entities involved in the implementation of SSP were the Shanghai Municipal Government (SMG); the Shanghai Sewerage Company (SSC); and.the Shanghai Municipal Sewerae Company (SMSC5.. We suggest using the Shanghai Sewerage Project Construction Company (SSPCC) instead of the Shanghai Municipal Sewerage Company (SMSC) because SSC and SSPCC were two separate companies at the time when the first Shanghai Sewerage Project was under implementation. It was at the end of 1995 that SSC and SSPCC were merged into the present SMSC Geaeral Implementation Experience Shanghai 3.2 Implementation of the project was originally planned to take. fve years, with completion in March 1992. Construction generally proceeded satisfctorily. However, delays arose due to the slow startup by this firs-time borrower (unfamiliarity with Bank procurement procedures), unexpectedly difficult ground conditions along sections of the interceptor sewer, lengthy investment project approval procedures by the central government. and technical difficulties on a major outfall tunnel contract (collapsed tunnel lining). Here we suggest adding "In addition, sewer rehabilitation of 6 catchments was added during the consrucion period" As a result, the project completion date had to be extended by 2.5 years. 3.4 Land Acquisition and Resettlement: As major works had to be constructed in congested central areas of the city, land acquisition, resettlement of residents, and relocation of industries became important parts of the project. SMS (Here we suggest changing SMSC with SSPCC.) was able to substantially reduce the actual number of resettled persons (down from 15,000, estimated at appraisal, to the actual of 9,200 people)... 30 Annex E 3.5 Procurement: There was little or no interest shown by international or national/reional contractors to bid for works under the orpject practically all civil works contracts (ICB and NCB) were won by local firms. We suggest re-phrasing the under lined sentence as follows: The international contractors showed interest in bidding for the works under the proje4 incluing civil works, however, they were lack of advantages. especially in civil works. for example their labor cost was muck high, therefore most of the civil works contracts were won by local firms. Then followed by the original sentences. 3.6 Sewer Rehabilitation: A comprehensive study was conducted to identify the extent of rehabilitation needs in Shanghai; the study was completed in 1991. Some of the main problems highlighted in the study were damaged pipe joints, pipe corrosion or collapsed pipes, and silting of pipes. The audit observed that little was done despite the comprehensive findings of the study. Out of about 50 areas investiated in the study. only some six have imlemented so far. thus leaving a large number of areas still to be connected to the new trunk-infrastructure. As a result the full achievement of the proiect's environmental benefits is seriously delayed. We suggest changed the underlined sentences into "The comprehensive findings of the study by Shanghai are being dealt with through rehabilitation of the sewer system with upgraded standard&" Then followed by "The resualt of the study should be fully utilized under the ongoing second project The audit mission discussed the situation with SMSC and the ways to speed up the progress in sewer rehabiltadon perhaps engaging private firm in these acdvities Borrower Performance Shanghai 5.3 Borrower performance was generally satisfactory, though with deficiencies in the area of financial management. Management and staff continuity within SSC (and later within SMSC... We suggest replacing SSC with SSCISSPCC (and later within SMSC)... The above are all our comments on PAR.