The World Bank China: Bayannaoer Water & Env. Comprehensive Management Project (P115695) REPORT NO.: RES29909 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF CHINA: BAYANNAOER WATER & ENV. COMPREHENSIVE MANAGEMENT PROJECT APPROVED ON MAY 24, 2011 TO THE PEOPLE'S REPUBLIC OF CHINA WATER GLOBAL PRACTICE EAST ASIA AND PACIFIC REGION Regional Vice President: Victoria Kwakwa Country Director: Bert Hofman Senior Global Practice Director: Guang Zhe Chen Practice Manager/Manager: Sudipto Sarkar Task Team Leader: Shunong Hu The World Bank China: Bayannaoer Water & Env. Comprehensive Management Project (P115695) ABBREVIATIONS AND ACRONYMS BWAG: Bayannaoer Water Affairs Group Company Ltd. MOF: Ministry of Finance MVR: Mechanical Vapor Recompression PDO: Project Development Objectives RO: Reverse Osmosis TTS: Tertiary Treatment Stage (chemical-physical treatment in WWTP for recycling purpose) WRP: Water Reclamation Plant WWTP: Wastewater Treatment Plant The World Bank China: Bayannaoer Water & Env. Comprehensive Management Project (P115695) Note to Task Teams: The following sections are system generated and can only be edited online in the Portal. BASIC DATA Product Information Project ID Financing Instrument P115695 Investment Project Financing Original EA Category Current EA Category Full Assessment (A) Full Assessment (A) Approval Date Current Closing Date 24-May-2011 31-Dec-2017 Organizations Borrower Responsible Agency PEOPLE'S REPUBLIC OF CHINA Bayannaoer Water Affairs Group Project Development Objective (PDO) Original PDO To support Bayannaoer: (a) to better utilize water resources to develop higher income activities for local residents without compromising the water use for irrigation, which would adversely affect the rural poor; and (b) improve the water environment of Wuliangsuhai Lake by reducing water pollution entering such lake. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-80470 24-May-2011 29-Jul-2011 27-Oct-2011 31-Dec-2017 80.00 50.54 29.46 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank China: Bayannaoer Water & Env. Comprehensive Management Project (P115695) Note to Task Teams: End of system generated content, document is editable from here. I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING 1. Background: Bayannaoer is a poor municipality in the Inner Mongolia Region with an economy heavily dependent on agriculture. It is rich in natural resources, especially in minerals, coal and non-ferrous metals, with potentials for industrial development. With rapid industrial development being seen in neighboring regions, Bayannaoer started developing local industries, mainly food processing, and planned further industrialization using its rich mineral resources, as well as coal and copper from Mongolia. Five industrial development estates, i.e. Wulateqianqi, Ganqimaodu, Wulatehouqi, Hangjin and Wuyuan were selected for further development. Water resources posed a challenge to industrial development. Surface water from Yellow River (at 4.6 billion m3 annual allocation) constituted 96 percent of fresh water availability for the region. However, this allocation is strictly restricted to agriculture use only. Groundwater resources are limited and are restricted for non-industrial uses. Generally, agricultural drainage (in the amount of about 4.2 million m3 per year in average) has been collected at Wuliangsuhai Lake and returned to the Yellow River. The region has the potential to reuse the return from agricultural drainage as there is no legal requirement for the region to return such water back to the Yellow River. As such, reclamation of agriculture drainage and recycled industrial wastewater was considered as the most viable option to support the region’s industrial development plan. The project was designed to reclaim a total of 155,000 m3/day (including 115,000 m3/d from the agriculture drainage and 40,000 m3/d recycled water from the wastewater treatment plants in Wulateqianqi and Ganqimaodu Industrial Development Estate) to meet the projected industrial water demand at the five industrial estates. This reclaimed water would cover about 90 percent of projected demand by industries. Reclamation of agriculture drainage would also reduce the pollution load entering Wuliangsuhai Lake. 2. In addition to reclamation plant for irrigation drainage, the project also aims to: i) build three industrial wastewater treatment plants with a total capacity of 80,000 m3/d in the three industrial development estates to remove the pollutants at source and recycle it to supplement the industrial water supply; and ii) construct the wetlands at the inlet of Wuliangsuhai Lake and canalize the lake to further remove the pollutants. 3. The industrial development in Bayannaoer slowed down quite sharply two years after project approval, which resulted in much fewer industrial growth compared to projections at appraisal. In addition, existing industries reduced and in some instances suspended their production. With less water consumption and tighter environmental requirements, i.e. zero industrial wastewater discharge from the industries, the wastewater discharged from three industrial estates also dropped from estimated 80,000 m3/d down to an annual average discharge of some 5,200 m3/d1. 4. In Mid-2015, the project underwent a Level 2 restructuring to reduce the project scope to accommodate the reduced industrial development. The restructuring included cancellation of two reclaimed water treatment plants and related facilities and pipelines from Component 1 of the Project. Other elements of the restructuring of 2015 included: (i) an increase of IBRD disbursement percentage from 50% to 90% for Works expenditures category (i.e. 1 This 5,200 m3/d is an annual average with day to day fluctuation varies from some 2,000 m3/d to 8,000 m3/d. The World Bank China: Bayannaoer Water & Env. Comprehansive Management Project (P115695) increase from US$ 54.5 million to US$ 64.5 million, thus reducing the amount of counterpart financing); (ii) a reallocation of loan proceeds from the Disbursement Category of Goods to Works (i.e. reduced by US$ 10 million); and (iii) a revision to the Result Frameworks to reflect associated changes. This level 2 restructuring was approved on June 1, 2015. 5. The table below reflects the difference between projected and actual in 2016: Wastewater Component Water Reclamation Component Actual Water Supplied in 2016 At Appraisal Actual total At Appraisal Actual Reclaimed Installed & Designed Wastewater RO Recycled from from Location WWTP & Output Water at Treatment Discharge WRP Capacity Total surface ground- TTS Capacity Appraisal Capacity in 2016 under water water Project (nr) (m3/d) (m3/d) (nr) (m3/d) (m3/d) (m3/d) (m3/d) (m3/d) (m3/d) 1 Wulatehouqi 1 (new) 20,000 1,200 35,000 10,000 35,000 4,880 0 4,880 (new) 1 Ganqimaodu 1 (new) 30,000 2,000 40,000 10,000 60,000 3,757 3,757 0 (new) Wulateqianqi 1 (new) 30,000 2,000 - - 3,000 20,000 7,296 4,304 2,992 1 1 Hanjinhouqi (20,000) n/a 20,000 n/a 20,000 n/a n/a n/a (existing) (new) 1 1 Wuyuan (20,000) n/a 20,000 n/a 20,000 n/a n/a n/a (existing) (new) Total 3 80,000 5,200 4 115,000 23,000 155,000 15,933 8,061 7,872 Project 1. Only Ganqimaodu and Wulateqianqi have tertiary treatment stage (TTS) in the WWTP for water recycles. Note: 2. RO of 3,000 m3/d in Wulateqianqi is installed in WWTP. 3. Hanjinhouqi and Wuyuan were dropped from the Project after MTR and current data are not available. 6. As shown in the table above, as of 2016, the industrial water consumption in three industrial development estates stood at 15,933 m3/d on average or 5.82 million m3 in total, of which 8,061 m3/d or 2.94 million m3 were provided from the surface water (supplied from BWAG through the project funded facilities with mixed irrigation drainage, brackish groundwater, and rainwater from a small reservoir) and 7,872 m3/d or 2.87 million m3 in total from the groundwater (including groundwater from those owned by BWAG). With the project-funded Reverse Osmosis (ROs) in Water Reclamation Plants (WRPs) being put into operation early in 2018, all the groundwater abstraction for industrial use would be replaced by surface water. 7. Status of Implementation: Currently the progress towards achievement of PDO is rated moderately unsatisfactory (MU) and overall implementation progress is also rated as MU. All other ratings associated with financial management, procurement, M&E, counterpart financing, and safeguard policies have been satisfactory. An Action Plan has been agreed to, aiming at: i) improving the project implementation; ii) completing the low-flow solution to mitigate the environmental risks, e.g. obtaining domestic approvals and starting the procurement process; and iii) completing the model study on the project attribution to the environment improvement of Wuliangsuhai Lake. Timely compliance of these actions could lead to an upgrade of the implementation progress rating. However, the PDO rating (which is linked to water conservation) may not change as the project efficiency is compromised since the infrastructure supported under the project is not being fully utilized with the demand for wastewater treatment being much lower compared to estimates at appraisal. However, the extension of the closing The World Bank China: Bayannaoer Water & Env. Comprehansive Management Project (P115695) date of the project will allow proper treatment of the wastewater that is currently not being treated, creating an environmental risk associated with the project. 8. In terms of disbursements, currently US$50.54 million or 63.17% of the loan has been disbursed. It is expected that another US$8.5 million will be disbursed by December 31, 2017, resulting in total disbursement of 68.3% of the loan amount. The detailed progress of project components is provided below: (a) Component 1, Reclaimed Water Supply. The major works and installation of equipment have been completed. These include the construction of two water reclamation plants, 64 km transmission main, and distribution networks. Two reverse osmosis (RO) units financed by the project are in final stages of installation and test run is expected before end of December 2017. (b) Component 2, Wastewater Management. All eight civil works contracts with a total contract value of US$33.44 million for the construction of three wastewater treatment plants and 27.8 km of wastewater collection pipes, including three non-Bank financed activities for the plant’s associated facilities, have been completed and handed over to the BWAG. (c) Component 3, Constructed Wetlands. The bulk of this component is linked to four civil works contracts, two for lake channelization and two for constructed wetlands, of total amount of US$ 25.89 million. This component also includes a small goods contract in support of non-point source pollution control pilot, which have been completed. (d) Component 4, Technical Assistance. Consulting services for project management, with the contract value of US$1.55 million are proceeding as planned. This component supported seven study tours - three international ones and four domestic ones - in addition to training sessions, totaling 898 person-days trained. 9. Rationale for Restructuring: The proposed restructuring, as requested by MOF on October 19, 2017, entails five actions: (i) revision of the PDO to align the project objectives with the reality of industrial development slowdown in the project area due to the downturn in macroeconomic conditions; (ii) addition of an RO/MVR in Wulateqianqi WWTP to allow the WWTP funded under the project to operate and alleviate environmental risks associated with wastewater that is currently temporarily stored in an emergency pond; (iii) to increase the Bank-financed percentage of expenditures for Works to ease the financial burdens of BWAG; (iv) partial cancellation of IBRD loan that is no longer needed as a result of loan savings due to the downsized RO units in WRPs and competitive biddings; and (v) extension of the project closing date by 12 months from December 31, 2017 to December 31, 2018 to accommodate the time needed for the installation of RO/MVR in Wulateqianqi WWTP. 10. Revision to PDO: The significant changes in the project scope and the broader macro-economic conditions necessitate change to the original PDO. The request is to drop the following two aspects of the PDO: (i) “to develop higher income activities for local residents”; and (ii) “…which would adversely affect the rural poor…”. Development of alternative water resources through treatment and recycling was meant to facilitate industrial growth and support higher income activities. This is no longer possible due to the downturn of the industrial sector in the project area. The development of alternative water resources did not attract additional industry and thereby did not result in higher income activities. Current water demand from industry is only 13.85 percent of projected demand at appraisal. The revised PDO is to support Bayannaoer: (a) to better utilize water resources without compromising the water use for irrigation; and (b) to improve the water environment of Wuliangsuhai Lake by reducing water pollution entering such lake.” Furthermore, the project M&E did not include indicators to measure the part of the PDO related to creating higher income activities. Therefore, the proposal to drop the first part of PDO without having to change the M&E is appropriate. The World Bank China: Bayannaoer Water & Env. Comprehansive Management Project (P115695) 11. At the appraisal stage, industrial growth was fueled by reliance on limited groundwater that is also used by rural poor. The project was designed to provide alternative measures to meet projected industrial water demands without impacting groundwater use by rural poor. The combination of low industrial growth and new regulations allocating fresh groundwater use strictly for consumption by rural poor made the part of the PDO related to “… which adversely affect the rural poor” disconnected to the project activities. The second part of the changes in the PDO is also appropriate. There may be, however, an issue on quality at entry given the mismatch between the PDO and the project activity. This will be reviewed more at the ICR stage of the project. 12. The key indicators of the M&E that were aiming to track the key aspects of the PDO, i.e. “to better utilize the water resources” and “improve the water environment of Wuliangsuhai Lake by reducing water pollution entering such lake”, are framed around tracking: i) the reduction in groundwater use over the total water consumption for industry; and ii) reduction of pollutants from WWTPs, wetlands, and lake channelization by measuring the concentration of pollutants at the lake outlet. Therefore, proposed changes to PDO do not necessitate changes to the M&E. 13. Addition of an RO/MVR in Wulateqianqi WWTP: As described in previous paragraphs, the downturn of industrial sector in the project area led to sharp reduction in industrial water demand and consequently to reduced wastewater discharge from the industries. The small amount of industrial wastewater produced in three industrial estates could not meet the minimum requirement to operate the wastewater treatment facilities built under the Project. In Wulatehouqi and Ganqimaodu, modifications are being made to the treatment process to handle such small amount of wastewater as there are WRPs to receive the treated effluence. This option is impossible at Wulateqianqi due to the absence of WRP. As a result, the small amount of industrial wastewater is stored temporarily in an emergency pond. The emergency pond poses a significant environmental hazard. A low flow solution to install a Reverse Osmosis (RO) unit with Mechanical Vapor Recompression (MVR) is proposed to treat the wastewater effluent at Wulateqianqi and to treat water currently being discharged to the emergency pond (i.e. hereinafter the low flow solution). The low flow solution is proposed to be installed in Wulateqianqi WWTP that has been completed under the project. The feasibility study of the low-flow solution had been completed and approved by local DRC in January 2017. The proposed measure is critical to treat the wastewater discharged from the industries and address the environmental concerns associated with the emergency pond. The low flow solution will also provide 3,000 m3/d of recycled water. 14. Adjustment to disbursement ratio to ease the financial burdens of BWAG. The BWAG requested, via MOF, to use the loan funds to build the RO unit with MVR in Wulateqianqi. The costs of installing such unit in the existing WWTP in Wulateqianqi Industrial Estate is estimated at US$7.5 million. Currently the project can only finance 90 percent of the expenditure associated with works category. In order to expedite the completion of the low flow solution, the request proposed to change the percentage of IBRD loan contribution to 100 percent to avoid delays in local approval for financing. 15. Partial cancellation of loan. The project has a saving of US$ 15.42 million. The saving is mainly associated with changes to the project scope, e.g. downsized RO units in Wulatehouqi and Ganqimaodu WRPs and competitive bidding, during implementation. The low flow solution requires US$ 7.5 million. The remaining US$ 7.92 million are proposed to be cancelled. The current restructuring acknowledges the change in the loan amount and proposes to reflect this in the adjusted loan agreement. To reflect such changes, the disbursement table is also revised based on the latest estimates and commitments under all signed contracts, as detailed in Section IV, Detailed Changes. 16. Extension of the project closing date. To accommodate the procurement and installation of the low-flow solution, the client proposed to extend the loan closing date by one year from December 31, 2017 to December 31, The World Bank China: Bayannaoer Water & Env. Comprehansive Management Project (P115695) 2018. The team had reviewed the implementation schedule and concludes that the extension is reasonable. The bidding process of the proposed for the low flow solution is expected to start in late December 2017 with the aim to complete installation and commissioning before December 2018. 17. In sum, these proposed changes in scope and implementation timeline will enable the project to incorporate interventions to address the current untreated industrial effluent and significantly contribute to treat the toxic wastewater sitting in the retention pond, which if left untreated could result in an environmental concern. Moreover, the treated wastewater will increase amount of water available for reuse by industries, thus saving groundwater abstraction. As such, the proposed changes are critical to improve the potential of the project to achieve its development objectives, particularly by (i) reducing the wastewater discharged into Wuliangsuhai Lake (second part of the PDO) and (ii) promoting groundwater abstraction savings (i.e. related to the first part of the PDO). 18. The proposed changes in project scope will not trigger any additional safeguard policies, nor will it impose any additional environmental or social safeguard risks as it will be built within the existing WWTP under the Project. For this new proposal of low-flow solution, the existing Environmental Management Plan (EMP) will be further revised and shared with the Bank before end of December 2017. On the social safeguards side, as the RO units for low-flow solution will be installed within the WWTP built under the project, there is no additional land acquisition or any affected persons involved. 19. The proposed restructuring fully complies with OP/BP 10.00, as (a) the project is not subject to suspension of disbursements, and (b) the Borrower performance is Satisfactory, there are no outstanding audit reports nor there are any audit reports that are not satisfactory to the Bank. II. DESCRIPTION OF PROPOSED CHANGES 20. An official request for the amendment of Legal Agreement for Bayannaoer Water and Environment Comprehensive Management Project has been received by the Bank from the Ministry of Finance, the People’s Republic of China, on October 19, 2017 as described below: (a) To revise the objective in the Schedule 1 of the Loan Agreement to read as “the objectives of the project are to support Bayannaoer: (a) to better utilize water resources without compromising the water use for irrigation; and (b) to improve the water environment of Wuliangsuhai Lake by reducing water pollution entering such lake.”; (b) to use portion of the saved loan proceeds of US$7,500,000 to build the low flow system (i.e. RO and MVR) to deal with low flow of wastewater discharged from the industries in the Wulateqianqi Industrial Estate; (c) to increase the Bank-financed percentage of expenditures for Works from 90% to 100%; (d) to cancel US$7,920,000 from loan proceeds; and (e) to extend the Loan Closing Date from December 31, 2017 to December 31, 2018. 21. Due to the upcoming closing date, the legal document included in the restructuring package has two parts: A) the first part - which addresses the amendments to reflect changes in the PDO, project description and disbursement table - will come into effect once the letter has been countersigned by the Borrower’s representative; and B) the second part - which addresses the closing date extension - comes into effect upon dispatch of the legal document after the document is signed by the Bank representative. Since countersignature of the legal document is not necessary for the extension of closing date to be The World Bank China: Bayannaoer Water & Env. Comprehansive Management Project (P115695) effective, this approach will help ensure that the loan extension will be completed prior to the current loan closing date, i.e. December 31, 2017. III. SUMMARY OF CHANGES Changed Not Changed Change in Project's Development Objectives ✔ Change in Components and Cost ✔ Change in Loan Closing Date(s) ✔ Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ Change in Disbursement Estimates ✔ Change in Implementation Schedule ✔ Change in Implementing Agency ✔ Change in DDO Status ✔ Change in Results Framework ✔ Change in Disbursements Arrangements ✔ Change in Overall Risk Rating ✔ Change in Safeguard Policies Triggered ✔ Change of EA category ✔ Change in Legal Covenants ✔ Change in Institutional Arrangements ✔ Change in Financial Management ✔ Change in Procurement ✔ Other Change(s) ✔ Change in Economic and Financial Analysis ✔ Change in Technical Analysis ✔ Change in Social Analysis ✔ Change in Environmental Analysis ✔ The World Bank China: Bayannaoer Water & Env. Comprehansive Management Project (P115695) IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_PDO_TABLE PROJECT DEVELOPMENT OBJECTIVE Current PDO To support Bayannaoer: (a) to better utilize water resources to develop higher income activities for local residents without compromising the water use for irrigation, which would adversely affect the rural poor; and (b) improve the water environment of Wuliangsuhai Lake by reducing water pollution entering such lake. Proposed New PDO To support Bayannaoer: (a) to better utilize water resources without compromising the water use for irrigation; and (b) to improve the water environment of Wuliangsuhai Lake by reducing water pollution entering such lake. OPS_DETAILEDCHANGES_COMPONENTS_TABLE COMPONENTS Current Current Proposed Proposed Cost Action Component Name Component Name Cost (US$M) (US$M) Reclaimed Water Supply 52.30 Revised Reclaimed Water Supply 37.34 Wastewater Management 40.30 Revised Wastewater Management 48.32 Constructed Wetlands, Non- Constructed Wetlands, Non- point Control Pilot & point Control Pilot & Canalization 31.30 Revised 33.71 Canalization of Wuliangsuhai of Wuliangsuhai Lake Lake Technical Assistance 3.10 Revised Technical Assistance 2.58 TOTAL 127.00 121.95 OPS_DETAILEDCHANGES_LOANCLOSING_TABLE LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications IBRD-80470 Effective 31-Dec-2017 31-Dec-2018 30-Apr-2019 OPS_DETAILEDCHANGES_CANCELLATIONS_TABLE The World Bank China: Bayannaoer Water & Env. Comprehansive Management Project (P115695) CANCELLATIONS Value Reason Current Cancellation New Ln/Cr/Tf Status Currency Date of for Amount Amount Amount Cancellation Cancellation LOAN IBRD- Disburs RESTRUCTUR USD 80,000,000.00 7,920,000.00 19-Oct-2017 72,080,000.00 80470-001 ing ING, COST SAVINGS OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed IBRD-80470-001 | Currency: USD iLap Category Sequence No: 1 Current Expenditure Category: Works 64,500,000.00 44,466,596.97 56,230,000.00 90.00 100 iLap Category Sequence No: 2 Current Expenditure Category: Goods 12,300,000.00 0.00 14,000,000.00 100.00 100.00 iLap Category Sequence No: 3 Current Expenditure Category: Consultant Services 1,900,000.00 769,036.65 1,300,000.00 100.00 100.00 iLap Category Sequence No: 4 Current Expenditure Category: Training, Workshops & Study Tours 1,100,000.00 0.00 350,000.00 100.00 100.00 Total 79,800,000.00 45,235,633.62 71,880,000.00 OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE DISBURSEMENT ESTIMATES Change in Disbursement Estimates Yes The World Bank China: Bayannaoer Water & Env. Comprehansive Management Project (P115695) Year Current Proposed 2011 0.00 0.00 2012 2,000,000.00 200,000.00 2013 10,000,000.00 10,150,000.00 2014 15,000,000.00 13,428,000.00 2015 15,000,000.00 5,340,000.00 2016 10,000,000.00 17,890,000.00 2017 20,000,000.00 3,528,000.00 2018 8,000,000.00 14,044,000.00 2019 0.00 7,500,000.00 Note to Task Teams: End of system generated content, document is editable from here.