ICRR 13093 Report Number : ICRR13093 IEG ICR Review Independent Evaluation Group 1. Project Data: Date Posted : 10/15/2009 PROJ ID : P047345 Appraisal Actual Project Name : Huai River Pollution US$M ): Project Costs (US$M): 207.5 200.2 Control Project Country : China Loan/ US$M ): Loan /Credit (US$M): 105.5 105.5 Sector Board : WAT US$M): Cofinancing (US$M ): Sector (s): Sewerage (100%) Theme (s): Water resource management (50% - P) Pollution management and environmental health (50% - P) L/C Number : L4597 Board Approval Date : 03/22/2001 Partners involved : Closing Date : 06/30/2005 06/30/2008 Evaluator : Panel Reviewer : Group Manager : Group : George T. K. Pitman John R. Heath Monika Huppi IEGSG 2. Project Objectives and Components: a. Objectives: "The project objective is to support Government efforts to upgrade water quality in the Huai River Basin (one of the most polluted river systems in China ) in particular in the provinces of Anhui and Shandong . This objective was to be achieved through improved collection and treatment of wastewater in a number of municipalities in the two provinces in a sustainable manner." (Project Appraisal Document, p. 2) This statement of objectives is identical to that given in the Loan Agreement . The project was designed to generate : (a) environmental benefits, through improved water quality in the Huai River and its tributaries; (b) health benefits, through reduced risk of exposure to illnesses caused by water borne vectors; and (c) institutional reforms, through increased efficiency in wastewater service provision and reduced burden on public funds for investments and operations and maintenance . The immediate beneficiaries are the current population of about 2.5 million residents and 800,000 residents respectively in the participating municipalities in Anhui Province and Shandong Province . The broader beneficiaries are the downstream riparian populations; they would be expected to outnumber the immediate beneficiaries but it is not clear by how much. b.Were the project objectives/key associated outcome targets revised during implementation? No c. Components (or Key Conditions in the case of DPLs, as appropriate): 127 .1 million; Actual cost, US$ 128. 1. Anhui Province . (Planned cost US$ 127. 128 .7 million ). Wastewater collection and treatment . The project assisted 8 municipalities in implementation of the first phase of the Wastewater Master Plan . Investments included construction of secondary sewers and house connections; interceptors; pumping stations; and pumping and transmission mains . The component also financed the construction of wastewater treatment (WWT) plants in two municipalities. In the six other municipalities similar WWT plants were being constructed with support from German, Spanish, Netherlands and Norwegian bilateral aid and by national programs . Environmental Monitoring . This assisted the strengthening of the Anhui Environmental Monitoring Center by upgrading equipment, equipping supporting municipal laboratories, providing vehicles and improving technical and managerial skills of staff . Technical Assistance and Training . This included technical assistance for institutional development of Anhui wastewater treatment companies (WCs), construction management and in -country and overseas training of staff. 67 .9 million; Actual, US$ 71. 2. Shandong Province . (Planned, US$ 67. 71 .5 million ). Wastewater collection and treatment . The project assisted three municipalities and one country town in constructing secondary sewers and house connections, interceptors, pumping stations, pumping/transmission mains, wastewater treatment plants and a sea outfall . Chengwu Paper Mill . While the wastewater treatment process was modified using internal funds and equity contributions from the Shandong Environmental Protection Bureau, the project provided finance for wastewater treatment and reduction of pollution . Technical Assistance and Training . This included technical assistance for institutional development of Anhui wastewater treatment companies (WCs), construction management and in -country and overseas training of staff. d. Comments on Project Cost, Financing, Borrower Contribution, and Dates: The project took 11 months to become effective. It was restructured in June 2005 after Mid-Term Review to utilize savings of US$21.9 M in the Anhui component and US$11.3 M in the Shandong component that arose from overestimation of costs and substitution of national funds for some contracts . Savings financed additional civil works (collection networks and wastewater treatment plants ) and an increase in the Bank ’s disbursement share to 75% - the latter because of the appreciation of the Yuan that rose from Yuan 8.30 per US$1.00 at appraisal to Yuan 6.86 per US$1.00 at loan closing. The loan disbursed fully but rectification of some defective designs, SARS, floods and the severe winter of 2008 delayed implementation, leading it to close three years behind schedule . 3. Relevance of Objectives & Design: High ). The Huai River Basin is one of China ’s largest and most highly polluted Relevance of Objectives (Rating : High). river basins. Improving water quality in the river basin was one of the directives of the Government ’s ninth 5-year plan (1996-2000). The project was set up to address and mitigate the increasing water pollution problems associated with the rapid industrialization and urbanization of the river basin . At the time the project was designed less than 10% of all wastewater generated was treated, the rest being discharged into water courses . The project supported the three objectives of the government strategy for water pollution control : immediate and substantial reduction of industrial pollution through strict enforcement of discharge standards; the gradual reduction of urban residential pollution that aimed to provide 60% of the country’s urban areas with municipal wastewater treatment plants by 2010; the integration of industrial and residential wastewater treatment where appropriate, and the establishment of financially-viable wastewater utilities. The objectives were relevant to the Bank ’s Country Assistance Strategy throughout the project, and are a priority in the on -going Country Partnership Strategy . Relevance of Design (Rating : Modest ). The project focused on decreasing municipal pollution primarily through the construction of wastewater collection systems and municipal treatment plants . It also supported end-of-pipe treatment of industrial wastewater prior to discharge into public sewers . Selection of the project municipalities was based on two criteria: first, basin-wide modeling studies to determine the most effective places to intervene; and second, willingness of municipalities to participate, particularly in institutional reform . The project’s institutional components strengthened the newly -established wastewater treatment companies, particularly the management of wastewater facilities and reform of company finances to provide a basis for setting tariffs that were adequate for cost-recovery and financial viability . The paper mill was included because of the high mercury pollution from its electrolytic process. The attention to basin-wide water quality monitoring was highly relevant both in terms of expanding the existing monitoring capability as well as improving institutional arrangements for data management and data sharing. There was a significant design shortfall . The Bank did not challenge the provincial government's insistence that the project could be completed in just over 3 years - a lack of realism by the Bank. There were no QAG assessments for this project . Overall, relevance is rated substantial . 4. Achievement of Objectives (Efficacy): Achievements : Infrastructure was successfully built to collect and treat wastewater before discharge to the river . Sustainable organizations to manage the infrastructure were established . Although there was a lower than expected reduction in waterborne pollutants this is likely to improve somewhat as the wastewater treatment facilities created by the project are brought up to full operating capacity . Overall, efficacy is rated substantial . Outputs : In the 12 cities the project provided 79% of the total incremental sewerage capacity and 35% of the incremental wastewater treatment capacity constructed since 2001. In Anhui Province : All 8 cities completed establishment of autonomous single -shareholder state-owned Wastewater Companies that have appropriate regulatory and management procedures as well as independent audit . Staff were fully trained. Total sewer length completed was 541 km versus the 629 km planned, 24 of the 25 pumping stations planned were constructed and wastewater treatment capacity (WWT) installed was 130,000 m3/d compared with the 80,000 m3/d planned at appraisal. In Shandong Province : All 4 cities completed establishment of autonomous single -shareholder state-owned Wastewater Companies that have appropriate regulatory and management procedures as well as independent audit . 363 km of sewers were constructed versus 169 km planned, 6 of the 7 pumping stations planned were built and the target for WWT capacity installed (220,000 m3/d) was fully achieved. In addition 20,000 m3/d WWT capacity was installed at Chengwu Paper Mill as planned at appraisal . Outcomes : The project facilities were designed to benefit 3.3 million people in both Provinces; at completion the number of beneficiaries was estimated at 3.7 million people. The number of downstream beneficiaries is assumed to be large but was not quantified. WWT capacity utilization was satisfactory .There were no clear appraisal targets for the volume of WWT . Instead the ICR set the target at 80% capacity utilization. On this basis the overall utilization of the 8 WWT plants constructed in Anhui was 108% and for the 4 in Shandong it was 95%. The Chengwu paper mill achieved 75% of the target volume. It is clear from the data in the ICR’s Annex 1 that WWT was still growing and it may be some years before full treatment capacity (and targets) are reached. The TTL informed IEG that the one project WWT plant that had been delayed was finally commissioned in September 2009 and was in full operation by November. Collection and WWT by the project reduced pollution load discharged to the rivers but targets had not been achieved by project closure . The TTL said this is expected to improve in the near future as more WWT plants under construction by others are completed and commissioned and the evidence presented in the ICR supports this view. By 2007 the project infrastructure reduced Chemical Oxygen Demand (COD) by 54% of the target value, and Biological Oxygen Demand (BOD) by 45% of the target value: COD In Shandong Province COD was reduced by 24,708 tons/year between 2002 and 2007 (target 34,931 COD: tons/year) and in Anhui Province it was reduced by 31,166 tons/year between 2000 and 2007 (target 67,890 tons/year). BOD: BOD : was reduced by 7,976 tons/year in Shandong (target 40,734 tons/year) and 18,369 tons/year in Anhui (target 17,264 tons/year). River water quality shows improvement, but attribution is difficult . Data on river water quality collected by the Environmental Protection Bureaus shows a general decline in the concentration of COD and BOD after 2005 in 9 of 10 sampling points (ICR, Annex 1B). The benefits attributable to the project from pollution reduction in rivers are hard to isolate; it would be necessary to control for the effects of industrial and urban development, increased regulation, and parallel anti -pollution initiatives. The management and financial viability of the WCs improved with the project . In Shandong all 4 cities generated and collected sufficient wastewater revenues to cover debt servicing and operation and maintenance (O&M) requirements in 2006 and only modest tariff increases are required to maintain this status until 2011; in Anhui 5 of 8 cities achieved the same outcome, but the remaining 3 rely on government subsidies to cover debt-servicing costs because very low household incomes preclude full cost recovery . 5. Efficiency (not applicable to DPLs): In the ICR the economic justification was based on cost -effectiveness and no economic rate of return was calculated. Cost-effectiveness was based on selection of least -cost engineering options. However, the bidding process did not always lead to the selection of the best contractor and the benefit of cost savings was offset by frequent construction delays and the need to re -bid the contracts. Even so, all project components were achieved at lower costs than projected at appraisal, and project savings allowed additional work to be done with the total cost envelop - an extra 15% of WWT capacity (50,000 m3/day) and an increased sewerage coverage of 23%. On this measure the project was efficient . One measure of cost-effectiveness related to outcomes is the investment cost per ton of pollution reduction . If all costs are included and only the tonnage equivalent of COD and BOD is considered, it was expected at appraisal that an investment of US$1,511/ton was needed in Anhui and US$ 994 a ton in Shangdong. Actual costs based on 2007 pollution reduction were US$2,598 and US$2,196 a ton respectively. On this efficiency measure Anhui was 54% efficient and Shangdong 45% efficient in 2007. However, this measure does not take into account the continuos growth of pollution reduction as the system moves towards full capacity utilization that may take several more years (3 to 5). Thus, for example, the reduction of COD in Shandong went from 9,982 ton/year in 2006 to 24,708 ton/year in 2007 and over the same period in Anhui it went from 22,340 tons/year to 33,440 tons/year. Thus it is very likely that the pollution reduction targets will be met in the medium -term and the project will be cost-effective. The ICR notes (para 3.3.5) that "Both Anhui and Shandong Provincial Governments need to take action to enable their WCs to collect wastewater tariffs for self -supply user as this could increase WC revenues by an average of between 15% and 40%." The TTL stated that in Shandong the provincial government has since issued a draft document that, if made law, will allow WCs to enforce collection of fees from self -supply water producers. Efficiency is rated substantial . ERR )/Financial Rate of Return (FRR) a. If available, enter the Economic Rate of Return (ERR) FRR ) at appraisal and the re- re -estimated value at evaluation : Rate Available? Point Value Coverage/Scope* Appraisal No ICR estimate No * Refers to percent of total project cost for which ERR/FRR was calculated. 6. Outcome: Substantial relevance, a substantial rating for efficacy and modest rating for efficiency lead to a moderately satisfactory outcome rating. a. Outcome Rating : Satisfactory 7. Rationale for Risk to Development Outcome Rating: Government provides strong incentives for municipalities to reduce water pollution and cities have a strong interest in sustaining project facilities and improving environmental management . The TTL said that in 2008 the government passed a law that made the re-election of city mayors conditional on their performance in meeting environmental and pollution reduction targets. Government continues to invest in WW infrastructure and to increase water tariffs . Civil engineering works are of high quality . When the TTL was questioned about the rationale for continuing to subsidize 3 cities in Anhui she responded that the issue was not willingness to pay, but ability to pay given the relatively high levels of poverty. Government is likely to reduce the subsidy as incomes increase while at the same time pressuring WCs to contain costs and meet pollution reduction targets . a. Risk to Development Outcome Rating : Negligible to Low 8. Assessment of Bank Performance: Quality at entry . Project design adopted a comprehensive approach to pollution management in a river basin context and project works, particularly the project's wastewater and sewage collection systems, provide connections to WWT plants being implemented by other agencies thus accelerating reduction of pollution . The Bank's emphasis on establishing WCs as autonomous commercial organizations was appropriate and was adopted by the provinces (although to a lesser extent in Anhui ). The Bank was unrealistic in giving into provincial pressure for a three -and-a-quarter-year implementation period rather then the 6-7 years they knew it would take. Supervision . A high quality team was successful in ensuring that implementation proceeded smoothly while making needed adjustments to detailed design and financing . In the period 2006-207 (when the implementation ratings dropped to moderately satisfactory ) the Bank raised concerns about the slow progress of civil works in several cities and this proactive stance accelerated progress . During the last two years of the project full supervision responsibility was successfully transferred to the Bank's Beijing office at -Entry :Satisfactory a. Ensuring Quality -at- b. Quality of Supervision :Satisfactory c. Overall Bank Performance :Satisfactory 9. Assessment of Borrower Performance: Government and Provinces . Both showed strong commitment to project objectives . The TTL informed IEG that provincial governments tend to be too optimistic about how long it takes to plan and construct high quality civil works. In this case they insisted that the project could be completed in 3 years; in practice it took twice as long. Anhui province had difficulty in providing timely counterpart funding and in coordinating all the departments responsible for the project, including land acquisition and resettlement . Complaints about contract procurement required State Council resolution . This source of delay, added to the impact of SARS, flood and the severe winter of 2008, set back implementation by 3 years. In contrast, Shandong Province had few problems and actively promoted tariff increase and implementation of industrial pollution control programs. Implementing Agencies . Generally Shandong government agencies performed better than those in Anhui because of more experienced staff, particularly in management of civil works . And in 2006-2007 poor progress on civil works was of considerable concern to the Bank . WCs in both provinces performed well, meeting reporting and financial criteria . Unlike Shandong, WCs in Anhui do not have full control of revenue collection, a task undertaken independently by the Municipal Finance Bureaus . Even so, amounts collected were passed on to the WCs . a. Government Performance :Satisfactory b. Implementing Agency Performance :Satisfactory c. Overall Borrower Performance :Satisfactory 10. M&E Design, Implementation, & Utilization: Design . Considerable attention was given to designing an effective M&E system and identifying management, institutional, financial and environmental indicators . These became part of the government ’s reporting system. Shandong Province developed a more comprehensive set of indicators, including the performance of WCs, than Anhui Province (whose M&E efforts focused on outputs ). Environmental water quality in the river was only added at the ICR stage--even so, these data had been independently monitored throughout the project by the state ’s environmental bureaus and were readily available . Implementation . The M&E system was successfully utilized to manage the project and measure outputs, outcomes and impacts. Utilization . The M&E data were fully and effectively utilized . Annex 1 of the ICR provides a very clear explanation of how the disparate performance indicators were aggregated to judge project outcomes . a. M&E Quality Rating : Substantial 11. Other Issues (Safeguards, Fiduciary, Unintended Positive and Negative Impacts): Safeguard Policies . The project triggered two: Involuntary Resettlement and Environmental Assessment . According to the PAD 454 people were adversely affected by the project in both provinces because 251 mu of land and 1,525 m2 of house demolition were required. Total compensation was estimated at US$ 3.4 million or 1.5% of total project costs. According to Supervision Reports and the ICR, the project complied with the Bank ’s environmental and resettlement policies as agreed at loan signing . Fiduciary . No issues. All audits were satisfactory. 12. 12. Ratings : ICR IEG Review Reason for Disagreement /Comments Outcome : Satisfactory Satisfactory Risk to Development Negligible to Low Negligible to Low Outcome : Bank Performance : Satisfactory Satisfactory Borrower Performance : Satisfactory Satisfactory Quality of ICR : Satisfactory NOTES: NOTES - When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006. - The "Reason for Disagreement/Comments" column could cross-reference other sections of the ICR Review, as appropriate . 13. Lessons: Water pollution reduction project should be based on integrated river basin plans . This not only ensures that the most strategic pollution hot -spots are tackled first but it also leverages institutional attention and target-setting to higher levels of government and oversight . Lowest -cost procurement of civil works does not always lead to selection of the best contractors . Many of the lower cost contractors do not have sufficient experience to price -in project risks and hiring them may result in significant delays when unforeseen problems occur . This suggests that the post -qualification process and other criteria (as described in the Bank's Procurement Guidelines para 2.49-2.58) may require greater application in China. 14. Assessment Recommended? Yes No Why? Pollution reduction is a hot topic, particularly for China . The assessment could follow up on the pollution reduction shortfall - has it improved? Lessons could be drawn from this operation given the inter -dependence on others' parallel investments that would contribute towards achievement of the project objective . 15. Comments on Quality of ICR: An excellent, comprehensive and candid account of the project . Combining individual performance indicators into a single weighted average (Annex 1) was a useful expedient that could be more widely adopted . There are some modest differences in the reported pollution reduction in Annex 1 and Annex 4 and this may be due to different reporting years and rounding errors . a.Quality of ICR Rating : Satisfactory