Document of The World Bank Report No: 54554-CN RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF HUNAN URBAN DEVELOPMENT PROJECT PROJECT LOAN LOAN NUMBER 4751-CHA TO THE PEOPLE'S REPUBLIC OF CHINA May 18, 2010 China and Mongolia Sustainable Development Unit Sustainable Development Department East Asia and Pacific Region ABBREVIATIONS AND ACRONYMS CMDC Changsha Municipal Drainage Company CZT Changsha-Zhuzhou-Xiangtan CZT EIO Changsha-Zhuzhou-Xiangtan Economic Integration Office HPMO Hunan Project Management Office HPO RES Hunan Provincial Office of the Leading and Coordination Commission for the Construction of CZT "Resource-Saving and Environment-friendly Society" Reform and Experimental Zone HUDP Hunan Urban Development Project PAD Project Appraisal Document PC Project Component PDO Project Development Objective PIU Project Implementing Unit TA Technical Assistance TTDC Zhaoshan Tourism and Trade Development Co. UDIC Urban Development Investment Company XMCC Xiang Mei Clean Coal Shareholding Limited Co. ZCCC Zhuxi Clean Coal Company WWTP Wastewater Treatment Plant Regional Vice President: James Adams Country Director: Klaus Rohland Sector Managers: Ede Jorge Ijjasz-Vasquez; Vijay Jagannathan Task Team Leader: Sudipto Sarkar CHINA HUNAN URBAN DEVELOPMENT PROJECT P075730 CONTENTS Page A SUMMARY.................................................................................................................. B PROJECT STATUS ..................................................................................................... C PROPOSED CHANGES .............................................................................................. D APPRAISAL SUMMARY............................................................................................ ANNEX RESULTS FRAMEWORK AND MONITORING ............................................. ANNEX PROJECT COST................................................................................................ ANNEX REALLOCATION OF PROCEEDS ................................................................ Restructuring Restructuring Type: CD Approval 1. Basic Information Project ID & Name P075730: CN-HUNAN URBAN DEV Country China Task Team Leader Sudipto Sarkar Sector Manager/Director Ede Jorge Ijjasz-Vasquez Country Director Klaus Rohland Original Board Approval Date 09/16/2004 Original Closing Date: 12/31/2010 Current Closing Date 12/31/2010 Proposed Closing Date [if applicable] 10/31/2012 EA Category A-Full Assessment Revised EA Category A-Full Assessment EA Completion Date 07/15/2003 Revised EA Completion Date 2. Revised Financing Plan (US$ million). The total project cost increased from US$386.17 million to US$488.40 million taking into account the Bank financed and non-Bank financed portions of the project. The Bank loan remains unchanged at US$172 million, and the additional costs will be paid by the counterparts. Source Original Revised BORR 214.17 316.40 IBRD 172.00 172.00 Total 386.17 488.40 3. Borrower Organization Department Location Hunan Provincial Office Reform and Planning Department China 4. Implementing Agency Organization Department Location Hunan Provincial Office Reform and Planning China Department 5. Disbursement Estimates (US$m) Actual amount disbursed as of 04/16/2010 63.61 Fiscal Year Annual Cumulative 2010 71.00 2011 48.00 119.00 2012 42.00 161.00 2013 11.00 172.00 Total 172.00 6. Policy Exceptions and Safeguard Policies Does the restructured project require any exceptions to Bank policies? N Does the restructured project trigger any new safeguard policies? If yes, please select N from the checklist below and update ISDS accordingly before submitting the package. 7a. Project Development Objectives/Outcomes Original/Current Project Development Objectives/Outcomes The objective of the project is to foster greater integration in the Changsha-Zhuzhou-Xiangtan (CZT) Region of Hunan Province through support for a carefully selected set of priority investments to address specific regional needs in a sustainable manner. 7b. Revised Project Development Objectives/Outcomes [if applicable] The PDO remains unchanged. HUNAN URBAN DEVELOPMENT PROJECT RESTRUCTURING PAPER SUMMARY 1. The Ministry of Finance and Hunan Government have proposed changes to the project to take into account the current implementation needs and adjustments that are necessary due to implementation delays explained below. The main changes are (a) deletion of project components that are no longer relevant; (b) reallocation of loan savings from deleted components; (c) adjustment of disbursement percentages; (d) extension of closing date; and (e) revision of monitoring indicators and results framework to reflect the restructured components. The procurement plan and implementation schedule have also been revised to accommodate the changes. PROJECT STATUS 2. The project was approved by the Board on September 16, 2004, and the legal documents were signed on October 1, 2004. However, the project did not become effective until August 16, 2005. The project has been under implementation for over four years, and is currently behind schedule. As of May 18, 2010, about US$63.6 million of the Bank loan of US$172 million (37 percent) had been disbursed. 3. Progress on Component 1 (PC1) (the Xiang River Corridor component to heighten and widen river embankment for flood protection) has been behind the original schedule. As of March 31, 2010, 39 km of river embankment had been strengthened (64 percent completed) and only about 7 km of road on top of the embankment has been completed (9 percent completed). Component 2 (PC2) (Changsha Wastewater Component to build the Changshanyuan Wastewater Treatment Plant (WWTP)) was fully completed and the WWTP has been operating at its full capacity since early 2009. The 1,000,000 t/a coal washing system under PC3 (Zhuzhou Clean Coal Component) was fully completed and rest of the works under this component has been suspended as the coal company that was implementing the project ­ Zhuxi Clean Coal Company ­ is no longer in operation, and a new company has taken over. Additional details are provided below. Work on PC6 (Zhaoshan Scenic Area Component to restore and renovate historic sites and construct tourist service infrastructures) did not start and details are provided below. 4. Project implementation delays stem from two main factors: · Delays in Resettlement: PC1 involves construction of dykes, and a road on top of the constructed dykes. For this, land had to be acquired and the people living on that land had to be resettled. Early in implementation, the pace of resettlement was slow, thus, hampering construction of the dykes and the related road. The resettlement was slow as discussions with affected population took longer than expected. However, recently the Hunan authorities have emphasized completing resettlement, and significant progress has 1 been made. As of end of March 2010, resettlement and land acquisition for 64.35 km out of the 71 km of road construction has been completed. · Inadequate Counterpart Funding has also been a factor for implementation delays. However, since the Mid-Term Review of January 2009, the Hunan provincial government, including the Project Management Office, and the three municipal Governments of Changsha, Zhuzhou, and Xiangtan, have made adequate counterpart funding available to complete resettlement and construction activities. A higher level of counterpart funds were required mainly because of higher resettlement costs. These municipal governments have also sent recent letters to the Bank in April 2010 confirming their support for the project and that counterpart funds would be provided. 5. Although there were delays, project implementation has significantly improved since the Mid-Term Review. Hunan authorities have been pro-active in addressing the issues of resettlement and counterpart funding, allowing the pace of implementation to accelerate. PROPOSED CHANGES Project's Development Objectives · The PDO remains unchanged. Results/Indicators · While the PDO remains unchanged, some of the indicators have changed to reflect the current status of the project and the exclusion of some components (see Annex 1). Components · Component 2 (PC2). The Changsha Municipal Drainage Company (CMDC) has proposed to increase the capacity of the Changshanyuan Wastewater Treatment Plant (WWTP) by 40,000 t/day, i.e., to 160,000t/d. This will include construction of the Chao- Zheng-Yuan pumping station and the installation of odor removal equipment. The WWTP, completed in January 2009 and commissioned in March 2009, is already working at full capacity. The Municipality plans to further improve the urban environment by expanding wastewater treatment to additional catchment areas. The WWTP's effluent quality is meeting national standards and the increase in capacity has been approved by the provincial Development and Reform Committee and the Environmental Protection Bureau. · Component 3 (PC3). The Hunan Provincial Government has decided not to proceed with this component and has made plans to allocate the unused loan proceeds to other components. The original implementing agency, the Zhuxi Clean Coal Company (ZCCC), was restructured after declaring bankruptcy on December 31, 2008. Its operations have been taken over by a new company called the Xiang Mei Clean Coal Shareholding Limited Co. (XMCC). XMCC began operations on October 19, 200, and 2 the assets created under the project have been transferred to XMCC. Out of the US$7.76 million originally allocated for this component, US$4.32 million have been disbursed for the purchase of the coal washing equipment which is being used by XMCC. It has been agreed that XMCC will take over the repayment responsibility of the sub-loan under PC3. There are no outstanding contracts for implementation under this component. Cancellation of this component will not affect the project objective as the component was not large (4.5 percent of the loan was planned to be used by this component) and since the work planned in PC1 ­ the core activity of the project ­ remains unchanged. · Component 6 (PC6): This component would be cancelled, and the proposed Bank loan allocation of US$3.18 million will be utilized by other components. During the Mid- Term Review, the Bank and the Hunan Government agreed to cancel this component with Zhaoshan Tourism and Trade Development Co. (TTDC) due to the unavailability of adequate counterpart funding. Further, the provincial government plans to revise its master plan in the Zhaoshan scenic area and it is not clear at this time if the proposed investments will remain relevant under the revised master plan upon its completion. Cancellation of this component will not affect the project objective as the component was not large (1.8 percent of the loan was planned to be used by this component), and since the work planned in PC1 ­ the core activity of the project ­ remains unchanged. · TA Component: Minor revisions in the TA Component are necessary because some institutional strengthening activities have already taken place under domestic programs. Under the revised TA program, the following will be cancelled: TA01.2 (Institutional strengthening and training for all PIUs) - TA01.2-A: 2 overseas study tour groups. - TA01.2-C: 60 person-trip domestic training. - TA01.2-D: 2 seminars. TA06.3 (Institutional strengthening and training for HPMO) - TA06.3B: 1 domestic study tour group. - TA06.3C: 20 person-trip domestic training. Two TA - TA06.4: Collection and processing of data needed for the Chang-Zhu-Tan Management Information System (MIS). These three urban areas are being developed within the province, and there is a need to input data in a MIS regarding the urban development. Through this TA, a consultant who will enter relevant data in the MIS would be hired. - TA07: Technical Assistance to Changsha Urban Development Investment Company (UDIC) on project management, capacity building, training, and developing long-term training plan. The Changsha UDIC has expanded to a larger group and the existing institutional and managerial capacities need to be strengthened. Safeguards · The proposed restructuring will not result in any changes regarding safeguards. The current safeguard arrangements would be applicable for the rest of the duration of the project. 3 Institutional Arrangements · The institutional arrangements will remain unchanged. However the name of the Provincial PMO has changed from Changsha-Zhuzhou-Xiangtan Economic Integration Office (CZT EIO) to Hunan Provincial Office of the Leading and Coordination Commission for the Construction of CZT "Resource-Saving and Environment-friendly Society" Reform and Experimental Zone (HPO RES). This will be reflected in the amendments to the legal documents. Financing Plan · The cost of the Bank financed project components has decreased from US$263.25 million to US$227.89 million. However, the Bank financing remains unchanged at US$172 million as the percentage financing has increased. The cost of the non-Bank financed components have increased from US$122.92 million to US$260.51 million, mainly due to increases in land acquisition and resettlement costs (see Annex 2). Disbursement Arrangements · Table 1 below demonstrates how the disbursement percentages will increase for the different components to fully utilize the loan. The higher Bank financing percentages would off-set some of the additional costs the municipalities have incurred for the non- Bank financed components. Table 1: Revised Disbursement Percentage Ratios PC1 PC1 PC1 PC1 PC2 Changsha Xiangtan Zhaoshan Zhuzhou CMDC Existing ratios 75% 92% 90% 90% 75% Ratios after 85% 100% 100% 100% 100% this increase Reallocations · Annex 3 summarizes the reallocation of loan proceeds for each municipality taking into account the cancellation of components PC3 and PC6. In principle, the original loan amount allocated to each municipality remains unchanged, except for the TA component. Savings from the TA component are reallocated among all municipalities. Procurement · An updated procurement plan including new procurement contracts, updated cost estimates and time schedules consistent with the proposed new loan closing date, has been submitted to the Bank. The updated procurement plan is acceptable to the Bank. Closing Date 4 · As mentioned above, there was an implementation delay during the initial phase of the project. Hunan Province, in particular, has two climatic factors that impact construction: (a) local procedures mandate that construction be suspended during the wet season (May- July); and (b) construction is also suspended during the winter months (December- February) due to the cold weather. Another factor to be considered is that dykes need one year to resettle before construction on the road above them can begin. All dyke construction should be completed by March 31, 2011, and as a result there would be some sections where road construction cannot start before March 2012. Considering this and the time taken to complete the road construction, it was agreed between the Bank and the Hunan Province that October 31, 2012, would be the new loan closing date. Implementation Schedule · Based on the restructuring plan and the proposed extension, a revised implementation plan has been submitted by Hunan PMO. It includes, for each contract, the latest cost estimate, start/finish dates, Bank financing estimate, counter-part financing estimate and disbursement ratios. The revised implementation schedule is acceptable to the Bank. APPRAISAL SUMMARY 6. There are no changes in the economic and financial analyses, technical, social, environment, or exceptions to Bank Policy from the original Appraisal Summary of the PAD. 7. The following risks have been identified that might affect the achievement of the project development objectives or outcome targets. Table 2 below summarizes these risks and mitigation measures. Table 2: Revised Risk Table Risks Risk Rating Risk Mitigation Measures A detailed resettlement progress table has been prepared, which is Resettlement being closely monitored by the PPMO and the Bank. The risk is Low delay relatively low given that counterpart funding is now in place for resettlement for the limited resettlement to be done. A detailed contract management plan has been prepared by Hunan PMO. This plan is being regularly monitored by the PMO and the Bank. For the proposed loan closing date of October 31, 2012, to be Implementation met, the key date would be the completion of all dykes by March 31, Substantial 2011. This is a firm milestone that will be monitored by the PMO. If delay the dykes are not completed by this deadline the Bank may not be able to finance the roads on top of the dyke given that the road contracts should be completed before October 31, 2012. 5 Since the Mid-Term Review, the counterpart funds for various sub- projects have been available through loans from the State Development Bank, bonds, and the municipal budgets which have greatly helped to Counterpart accelerate implementation. The municipalities have also confirmed Low recently that counterpart funds would be made available for the funding project. Attention still needs to be paid to ensure that funds are made available in a timely manner beyond 2011; this will be verified during regular supervision missions. 6 ANNEX 1: Results Framework and Monitoring CHINA: Hunan Urban Development Project Project Development Objective (PDO): Meetings held by Provincial Leading Group for Economic Integration on Project progress Revised Project Development Objective: No changes D=Dropped Responsibilit Data Source/ C=Continue Cumulative Target Values** Frequency for Data Methodology Core PDO Level Results N= New Unit of Collection Baseline Indicators* R=Revised Measure 2010 2011 2012 Indicator One: Meetings held by Original plan meetings - 2 2 - Provincial Leading Group per year Semi-annual CZT EIO for Economic Integration PPMO PPR Reports on Project progress meetings Revised plan 2 2 2 per year - INTERMEDIATE RESULTS Intermediate Result: Corridor - Length of embankment strengthened to required standard Revised Intermediate Result : No changes Intermediate Result Original 0 721 - - indicator plan km Semi-annual CZT EIO PPMO Revised PPR Reports 0 55 61.4 61.4 plan km 1 The embankment to be strengthened is for 61.4 km; and the length of road to be constructed on top of the dyke is 72 km 7 Intermediate Result : Corridor ­ Length of scenic road constructed (cumulative km) Revised Intermediate Result : No changes Intermediate Result Original 0 72 - - indicator plan km Semi-annual CZT EIO PPMO Revised PPR Reports 12 34 72 plan km Intermediate Result : Changsha Wastewater ­ Construction of sewer network Revised Intermediate Result: No changes Intermediate Result Original 0 44 - - indicator plan km Semi-annual CZT EIO PPMO Revised PPR Reports 43.84 43.84 43.84 plan km Intermediate Result : Changsha Wastewater - % of sewage treatment in Changsha Revised Intermediate Result: No changes Intermediate Result Original % 44% - - indicator plan 0 Semi-annual CZT EIO PPMO Revised PPR Reports % 44% 58% 58% plan Intermediate Result : Institutional Strengthening and Implementation Assistance Project Management (cumulative awarded contracts) Revised Intermediate Result: No changes Intermediate Result Original # of 48 - - indicator plan contracts 0 Semi-annual CZT EIO PPMO Revised # of PPR Reports 53 58 58 plan contracts Intermediate Result: Institutional Strengthening and Implementation Assistance CMDC Institutional Strengthening (Recommendations, Approvals and Implementation/Operation) 8 Revised Intermediate Result : No changes Intermediate Result Original approved 5 I/O2 - - indicator plan # of I/O 0 Semi-annual CZT EIO PPMO Revised approved PPR Reports 5 I/O 5 I/O 5I/O plan # of I/O Intermediate Result: Institutional Strengthening and Implementation Assistance HPO RES Project Management (Recommendations, Approvals and Implementation/Operation) Revised Intermediate Result: No changes Intermediate Result Original approved 5 I/O - - indicator plan # of I/O 0 Semi-annual CZT EIO PPMO Revised approved PPR Reports 5 I/O 5 I/O 5I/O plan # of I/O *Please indicate whether the indicator is a Core Sector Indicator (see further http://coreindicators) **Target values should be entered for the years data will be available, not necessarily annually 2 I/O=Implementation/Operation 9 ANNEX 2: Project Cost CHINA: Hunan Urban Development Project Items Investments (US$ Bank Financing Million) (US$ million) Planned Revised Planned Revised PC1 ­ Civil works Changsha UDIC 47.9 51.5 32.38 32.38 Xiangtan UDIC 27.08 30.23 18.68 21.26 Zhizhou UDIC 62.31 59.78 43.19 46.97 Zhaoshan TTDC 15.93 13.81 10.98 11.98 Sub-total PC1 Civil works 153.22 154.87 105.23 112.59 PC1- Goods Changsha UDIC 0.84 0.92 0.84 0.92 Xiangtan UDIC 0.59 0.65 0.59 0.65 Zhizhou UDIC 0.87 0.95 0.87 0.95 Zhaoshan TTDC 0.45 0.49 0.45 0.49 Sub-total PC1 Goods 2.75 3.02 2.75 3.02 Total PC1 155.97 157.89 107.98 115.61 PC2 ­ Civil works (incl expansion) 63.66 40.01 26.97 26.97 PC2 ­ Goods (incl expansion) 19.46 19.87 19.30 19.30 Total PC2 83.12 59.88 46.27 46.27 PC3 Component 10.1 4.38 7.78 4.38 PC6 Component 6.65 0 3.18 0 TA Services TA01.1 2.83 2.18 2.57 2.18 TA01.2 1.73 0.57 1.57 0.57 TA02 0.67 0.61 0.61 0.61 TA03 0.33 0.25 0.3 0.25 TA04 0.17 0.00 0.15 0.00 TA06 0.82 1.00 0.75 1.00 New TA for Changsha UDIC - 0.27 - 0.27 Sub-total TA services 6.55 4.88 5.95 4.88 PROJECT COST OF BANK FINANCED COMPONENTS 262.39 227.03 171.14 171.14 Front-end fee 0.86 0.86 0.86 0.86 TOTAL FOR BANK-FINANCED COMPONENTS 263.25 227.89 172.00 172.00 10 Non Bank Financed Components Investments (US$ million) Items Plan Revised 1. Land acquisition and resettlement 71.00 200.32 2. Miscellaneous 39.73 48.38 Design and procurement agents 14.20 17.29 Construction supervision 6.90 8.40 Monitoring EMP 0.23 0.28 Monitoring RAP 0.16 0.19 Auditing PIUs 0.18 0.22 Soil conservation & water protection 3.94 4.80 WWTP impact monitoring 0.02 0.03 Utility and power connections 1.60 1.95 Interest during construction 12.50 15.22 3. Corridor - Shaoyanggang to Xiang Gang 9.70 11.81 4. Zhuzhou Clean Coal - civil works 2.49 0.00 Sub-total for Non-Bank financed 122.92 260.51 Total Project Cost Investments (US$ million) Plan Revised Bank financed and non-Bank financed components (no front end fee) 385.31 487.54 Bank financed and non-Bank financed components (with front end fee) 386.17 488.40 11 ANNEX 3: Reallocation of Proceeds CHINA: Hunan Urban Development Project Allocation % of Financing Categories (Expressed in US$) Current Revised Current Revised (1) Works under Part A of the Project to be implemented by: (a) CUDIC 32,380,000 32,380,000 68 85 (b) XUDIC 18,680,000 21,260,000 69 100 (c) ZUDIC 43,190,000 46,971,280 69 100 (d) ZTTDC 10,980,000 11,980,000 69 100 (2) Works under Parts B and D of the Project to be implemented by: (a) CMDC 26,970,000 26,970,000 42 100 (b) ZTTDC 3,180,000 0 48 - (3) Goods under Parts A, B and C of the Project to be implemented by: (a) CUDICs 2,750,000 3,018,657 100 100 (b) CMDC 19,300,000 19,300,000 100 100 (c) HXMCC 7,760,000 4,376,624 100 100 (4) Consultants' services, training and goods required to carry out: (a) Parts E.1 and New E.4 (by the Project Companies and HPO RES respectively) 4,890,000 4,088,875 91 100 (b) Part E.2(a) (by HWRB) 610,000 550,000 91 100 (c) Part E.3 (by CMDC) 300,000 244,564 91 100 (d) Old Part E.4 (by HEPB) 150,000 0 91 - (5) Fee Amount due under Section 2.04 of the Loan 860,000 860,000 100 Agreement Total 172,000,000 172,000,000 - - 12