Document of The World Bank FOROFFICIAL USEONLY ReportNo: 36171-CN PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN INTHEAMOUNT OFUS$96.0MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A SECOND GUANGDONG PEARL RIVER DELTAURBANENVIRONMENT PROJECT January29,2007 UrbanDevelopment Sector Unit China Country Unit East Asia and Pacific Region 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 Bankauthorization. CURRENCY EQUIVALENTS Exchange Rate Effective: December 2006 Currency Unit = RenminbiYuan (RMB Y) Y1.00 = US$0.12 US$l.OO = Y8.00 FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS APL Adaptable Program Loan BOT BuildOperate andTransfer DI Design Institute EA Environmental Assessment EMP EnvironmentalManagement Plan EPB EnvironmentalProtection Bureau FFB Foshan Finance Bureau FPMO Foshan Project Management Office FWGC Foshan Water Group Company GDP Gross Domestic Product GDFB Guangdong Provincial Finance Bureau GDPMO Guangdong Project Management Office GEF Global Environment Facility GOC Government o f China GP Guangdong Province GPG Guangdong Provincial Government IBRD International Bankfor Reconstructionand Development ICB International Competitive Bidding JFB Jiangmen Finance Bureau JPMO Jiangmen Project Management Office JBWC Jiangmen Biyuan Wastewater Treatment Company LIBOR London Interbank Borrowing Rate MFB Municipal Finance Bureau MOF MinistryofFinance NCB NationalCompetitive Bidding OED Operations EvaluationDepartment PRC People's Republic o f China PIU Project Implementing Units PMO Project Management Office PPP Public Private Partnership PRD PearlRiver Delta PRD 1 FirstGuangdong PearlRiver DeltaUrbanEnvironment Project (Guangzhou) PRD 2 Second Guangdong Pearl River Delta Urban Environment Project (Foshan and Jiangmen) QAG Quality Assurance Group RP Resettlement Plan SEPA State Environmental ProtectionAgency WTC Wastewater Treatment Company WWTP Wastewater Treatment Plant XWTC XinzhiyuanWastewater Treatment Company Vice President: James W. Adams, EAPVP Country ManagedDirector: DavidDollar, EACCF Sector Manager: Keshav Varma, EASUR Task Team Leader: Tom Zearley, EASUR FOROFFICIAL USE ONLY CHINA SECONDGUANGDONGPEARLRIVERDELTA URBANENVIRONMENTPROJECT CONTENTS Page A STRATEGIC CONTEXT AND RATIONALE . ................................................................. 1 1. Country and sector issues.................................................................................................... 1 2. Rationale for Bank involvement ......................................................................................... 3 3 . Higher level objectives to which the project contributes .................................................... 4 B . PROJECTDESCRIPTION ................................................................................................. 4 1. Lendinginstrument ............................................................................................................. 4 2. Project development objective and key indicators .............................................................. 4 3. Project components ............................................................................................................. 5 4 . Lessonslearned and reflected inthe project design ............................................................ 6 5 . Alternatives considered and reasons for rejection .............................................................. 6 C IMPLEMENTATION . .......................................................................................................... 7 1 . Partnership arrangements (ifapplicable) ............................................................................ 7 2. Institutionaland implementation arrangements.................................................................. 8 3. Monitoring and evaluation of outcomeshesults.................................................................. 9 4 . Sustainability....................................................................................................................... . . . 9 5. Criticalrisks andpossible controversial aspects ............................................................... 10 6 . Loadcredit conditions and covenants............................................................................... 11 D APPRAISAL SUMMARY . ................................................................................................. 11 1. Financial and economic analyses...................................................................................... 11 2. Technical........................................................................................................................... 13 3 . Fiduciary ........................................................................................................................... 14 4 . Social................................................................................................................................. 14 5. Environment ...................................................................................................................... 15 6 . Safeguardpolicies ............................................................................................................. 16 7. Policy Exceptions and Readiness ...................................................................................... 16 This document has a restricted distribution and may be used by recipients only in the performance of their official duties.Its contents may not be otherwise disclosed without World Bank authorization. ANNEX 1:COUNTRYAND SECTOROR PROGRAMBACKGROUND ........................ 17 ANNEX 2: MAJORRELATEDPROJECTSFINANCEDBYTHE BANKAND/OR OTHERAGENCIES .................................................................................................................. 22 ANNEX 3: RESULTSFRAMEWORKAND MONITORING .............................................. 23 ANNEX 4: DETAILEDPROJECTDESCRIPTION .............................................................. 26 ANNEX 5: PROJECTCOSTS .................................................................................................. 29 ANNEX 6: IMPLEMENTATIONARRANGEMENTS ......................................................... 31 ANNEX 7: FINANCIAL MANAGEMENTAND DISBURSEMENTARRANGEMENTS34 ANNEX 9: ECONOMICAND FINANCIALANALYSIS ..................................................... 47 ANNEX 11:PROJECTPREPARATIONAND SUPERVISION .......................................... 76 ANNEX 12: DOCUMENTSINTHE PROJECTFILE .......................................................... 77 ANNEX 13: STATEMENTOFLOANSAND CREDITS ...................................................... 78 ANNEX 14: COUNTRYAT A GLANCE ................................................................................ 83 MapSection: IBRD34922 and IBRD34923 CHINA CN-SECOND GUANGDONG PEARL RIVER DELTAURBANENVIRONMENT PROJECT PROJECT APPRAISAL DOCUMENT EASTASIA AND PACIFIC EASUR Date: January 29,2007 Team Leader: Thomas L.Zearley Country Director: DavidR. Dollar Sectors: Sewerage(66%);Flood protection Sector ManagedDirector: Keshav Varma (34%) Themes: Other urbandevelopment (P);Pollution management and environmental health (P) Project ID: PO81776 Environmental screeningcategory: Full Assessment LendingInstrument: Specific Investment Loan [XILoan [ ]Credit [ ]Grant [ ]Guarantee [ ]Other: For Loans/Credits/Others: Total Bank financing (US$m.): 96.00 Proposedterms: The Loan will be a single currency, variable spreadloan (VSL), with amaturity of 20 years inclusive o f five years grace, front-end fee of 1% subject to 75 basis point waiver, and commitment fee of 0.75%. The loanamount i s US$96.0 million. Source Locql Foreign I . 'Total L:' L. BORROWER 89.06 2.84 91.90 INTERNATIONAL BANK FOR 75.21 20.79 96.00 RECONSTRUCTIONAND DEVELOPMENT Total: 164.27 23.63 187.90 Borrower: People's Republic Of China Responsible Agency: Guangdong World Bank Financed Projects Management Office, Department of Finance Level 11,26 Cangbian Road Guangzhou Guangdong China 510030 Tel: 86-20-83 17-0063 Fax: 86-20-8333-0007 hehuanzp@gdwb0,gov.cn Does the project depart from the CAS incontent or other significant respects? Ref: PADA.3 [ No Does the project require any exceptions from Bank policies? Re$ PAD D.7 [ ]Yes [XINO Have these been approved by Bank management? _ _ - I s approval for any policy exception sought from the Board? [[ ]Yes [XINO ]Yes IN0 Does the project include any critical risks rated "substantial" or "high"? Re$ PAD C.5 [XIYes [ ] N o Does the project meet the Regional criteria for readiness for implementation? -Ref:- -PAD -- 7. -- --- D. [XIYes [ ]No Project development objective Re$ PAD B.2, TechnicalAnnex 3 The development objective is to reduce water pollution inthe Pearl River system originating from Foshan and Jiangmen municipalities through a package o f key initiatives, including wastewater treatment and sludge disposal, water quality monitoring, sediment removal from waterways, and flood protection and river embankment improvements. Project descriptionRe$ PAD B.3.a, TechnicalAnnex 4 Foshan Components: (a) Wastewater Management. Expansion o f Zhen'an wastewater treatment plant (Phase 111)by 50,00Om3/d; construction o f interceptors, secondary sewers, and pumpingstations; and consultant services for development o f GIs-based wastewater network map, and enhancement o f wastewater management capacities. (b) Sludge Treatment and Disposal. Construction ofa 400 tons/day capacity centralizedsludge treatment and disposal facility at Nanzhuang to treat sludge from five wastewater treatment plants inFoshan; consultant services for design review o f facilities, and equipment and other goods for the operation o f the facility. (c) Flood Protection and Embankment Rehabilitation. Improvements to FengjiangRiver north embankment and adjacent areas. (d) River Water Quality Improvement. Foshan Waterway and FoshanCreek sediment dredging, treatment and disposal; construction supervision services; construction o f four automatic water quality monitoring stations; and consultant services for development o f a water environment management information system and improvement o f the Foshan urban management information database. (e) Institutional Strengtheningand Training. Technical assistance for (i) management project services including contract management, utilitymanagement and tariff setting, and monitoring safeguards implementation; (ii) study o f environmental costs for GDP growth and "green" economic planning; and (iii) and studytours. training Jianmen Components: (f)Wastewater Management. Expansion o fWen Cheng Sha wastewater treatment plant by 150,000 m3/day; construction o f interceptors, secondary sewers, pumpingstations; and improvements inthe water quality monitoring system. (8) Institutional Strengthening andTraining. Technical assistance to enhance operational and business management capacities o fthe new Jiangmen Biyuan Wastewater Company. Which safeguard policies are triggered, if any? Re$ PAD D.6, TechnicalAnnex 10 Environmental Assessment and Involuntary Resettlement Significant, non-standard conditions, if any, for: Re$ PAD C.7 Board presentation: None Loadcredit effectiveness: None Covenants applicable to project implementation: Disbursement Conditions: (a) Signing o f subsidiary loan agreements for on-lending o f Loanproceeds, acceptable to IBRD between each o f FWGC and JBWC andtheir respective municipalities. (b) Signing o f a contract byFWGC with a consulting firm for reviewing the engineering design o fthe sludge treatment and disposal facilities, as a condition o f disbursement for the civil works category. Implementation Covenants: (a) Signingo f contracts by Foshan PMO and Jiangmen BiyuanWTC with consulting firms for institutional, financial strengthening andtraining by December 31, 2007. (b) Maintaining the Foshan and Jiangmen PMOSand local government PIUs throughout implementation with qualified and adequate staff. (c) On-lending Bank loan proceeds to revenue-earning companies on terms and conditions satisfactory to the Bank. (d) Twelve months prior to commissioningo fthe centralizedsludge treatment facility to be constructed at Nanzhuang, FWGC will hrnish the Bank with an analysis o f the least cost solution for disposal o f treated sludge from the facility and take the Bank's comments into account when deciding on the treated sludge disposal site. Financial Covenants: (a) Foshan and Jiangmen wastewater companies will generate total revenues sufficient to cover total operating expenses, increase inworking capital (other than cash) and the amount by which debt service exceeds the provision o f depreciation, and will achieve a debt service coverage ratio o f at least 1.2 times infiscal years 2008 and 2009, and at least 1.3 times in fiscal year 2010 and beyond. (b)Foshan andJiangmen wastewater companies will prepare, before September 1,2007, andin each o f the following fiscal years, financial forecasts satisfactory to the Bank, (i) review to whether it would meet the covenanted requirements set forth above insuch year and the following fiscal year, and (ii)to furnishthe results o f such review to the Bank; ifany such review should show that the entities would not meet the requirements set out above, the entities would take all measures, including adjustments to the structure o f tariffs and charges, inorder to meet the requirements. A. STRATEGICCONTEXT AND RATIONALE 1. Country andsector issues 1. Background. The Pearl River Delta (PRD) region inChina's southern Guangdong Province i s one o fthe most complex urbansystems inAsia; it holds over 40 millionpeople in25 municipalities, 3 counties and 450 towns inGuangdong Province and the two special administrative regions o f HongKong and Macau. The PRD has ranked at or near the top nationwide ineconomic growth inrecent years (averaging nearly 14%per annum duringthe 2000-2005), mostly due to large inflows o fdirect foreign investment initially inlow value-added manufacturing, andmore recently inhigher value-added manufacturing and, ina few cities, in services. 2. The Delta is also complex geographically. There are three branches o fthe Pearl River which join at the city o f Guangzhou, the political, economic and cultural hub o f the PRD. The Pearl River i s China's third longest river, and is second only to the Yangtze interms o f annual average flow. The Pearl River discharges into the South China Sea through eight principal tributaries. The close proximity o f these tributaries, the flat terrain o f the delta, the very large number o f canals and streams interconnectingtributaries, and tidal flows and surges makes an accurate hydrological definition o f "sub-basins" within the PRD very difficult. 3. The higheconomic growth inthe PRD has come at a very heavy environmental cost. Investment inenvironmental protectionhas not kept pace with the rapid economic advances, which is evident inthe serious deterioration inriver water quality duringthe period. Today manystretches o fthe Pearl River, especially inthe vicinity ofGuangzhou, Shenzhen, Dongguan, Foshan andJiangmen are worse than the lowest national water quality standard (Class V), and therefore unfit as a drinking water source. 4. Domestic and industrial wastewater discharges, urban storm water run-off, and non-point source pollution from agricultural run-off, are the mainpollution sources within the PRD. Generally, collected domestic wastewater is discharged to the river systems without treatment, except inthe larger municipalities such as Guangzhou, Shenzhen, Foshan, Jiangmen, and Zhuhai, where only a portion o fthe wastewater i s treated. Industrial wastewater i s requiredto be treated on site by the polluting industry before discharginginto the municipal collection networks or into the Pearl River system. But, local governments' capacity to monitor and control such pollution varies considerably across PRD cities. Environmentally safe disposal o f sludge from wastewater treatment plants i s only just beginning inthe PRD region, andwill present a growing challenge, as PRD cities continue to expand wastewater capacity. This deteriorating situation poses a serious threat to river water quality generally, and drinkingwater sources inparticular, including the drinkingwater supply to HongKong. The government response has been to move drinking water intakes upstream to avoid contaminated supplies. This approach i s not sustainable. 5. GuangdongProvincialWater PollutionClean-upPlan. In2002, Guangdong Provincial Government announced a major planto clean-up the PRD rivers. This i s an eight- year campaign which will invest more thanUS$5 billion inthe construction o f wastewater 1 treatment systems incities andtowns inthe PRD region. The provincial plansets out ambitious phased targets to meet water quality and other standards, through important actions relatedto: (a) industrial pollution control; (b) domestic wastewater treatment; (c) agricultural and livestock pollution control; and (d) integrated rehabilitationo f rivers, creeks, solid waste treatment, and ecosystem development and protection. The Provincial Governor also signed agreements with all city mayors on the increased level o f wastewater treatment coverage and other targets that the cities will achieve by 2010. However, most cities andtowns still plan,build and operate their own urbanutility system separately, with economies o f scale and other potential benefits not being sufficiently realized. The Guangdong Provincial Government and municipalities recognize that regional planningapproaches present opportunities for inter-municipal cooperation, jointly-managed facilities, reduced costs, and economies o f scale for provision o f environmental infrastructure, but they have not yet solved the institutional challenges inherent in this approach. 6. WorldBankSupportfor PRDReforms. The World Bankis supporting elements o f this PRD Clean-up Planthrough a program o f investments and policy reforms. Approved in 2004, the first GuangdongPRD urbanenvironment project (PRD 1) focused on financing wastewater treatment facilities and other investments inthe provincial capital o f Guangzhou, which i s the biggest single source o fpollution (34% o f organic pollution load). Inaddition, the project, with GEF grant financing, supports numerous innovations and policy reforms including three pilots on inter-municipal cooperation inthe planning and operating o f shared wastewater facilities (two pilots inGuangzhou and one inFoshan), improvements inwater quality monitoring and information dissemination, and encouragement o fpublic-private partnerships (PPP) inutility services. The project is also funding a study to update the PRD Clean-up Plan to help optimize the number and size o f wastewater treatment facilities to be built. This i s urgently needed, as the original plan did not give adequate emphasis to regional planning considerations, economies o f scale and least-cost strategies. Inaddition, the issue o fhow to establish better coordination among various agencies for water issues inthe PRD region remains a challenge and will be reviewed inrevising the Plan. This updatingwork, now underway, is scheduled for completion by mid-2007. These broader sector reforms will be deepened and extended through the implementation o f the second GuangdongPRD urbanenvironment project (PRD 2), with the inclusion o f the two additional PRD cities o fFoshan and Jiangmen. 7. Sector ConditionsinFoshanandJiangmen. Foshanmunicipality is locatedinsouth- central Guangdong, adjacent to Guangzhou city. Ithas a population o f 5.6 million, and has a longhistory as a cultural and industrial center insouth China. Its economic growth has been particularly impressive recently, with GDP expanding 19%in2005. Foshan's political leadership plans to improve environmental conditions inthe city as soon as possible. Currently, about 50% o f the wastewater inFoshan i s treated, and the lack o f adequate wastewater collection and treatment systems i s increasingpollution to the Pearl River system and creatingpublic health concerns. The highly-polluted waters runningthrough the city, especially inthe Fengjiang River, are smelly and foul, discouraging investments inupgrading along river banks. Foshan has created an integratedmunicipal company for managing drinking water and wastewater services, and wishes to introduce this entity to international management techniques. Inaddition, the Municipality has to tackle the growing problem o f treating and disposing o f sludge, and gradually raise wastewater tariffs to cover the full costs o fproviding services. It also plans to 2 strengthen its industrial pollution control efforts through improved water monitoring and training o f environmental protection personnel. 8. Jiangmen municipality i s locatedjust west o f Foshan. Ithas a population o f 4.1 million, with about 1.5 millionpeople livinginits urbanareas. Though more than 60% o fthe municipality's population engages inagricultural activities, Jiangmen has been successful in developing its manufacturing and industrial base and its overall economy grew by more than 11% in2005. Jiangmen ranked highinthe Bank's recent survey o f investment climate competitiveness o f Chinese cities, inpart, because o f its attractive environmental conditions. But,continuous efforts will be neededto protect the environment, especiallywater quality inthe rivers and streams throughout the municipality. At present, about 22% o f the wastewater in Jiangmen's town center is collected andtreated, and a corporate wastewater company was just established to manage services. Inaddition, as inthe case o f Foshan, tariffs need to continuously increase to cover the full costs o fproviding wastewater services. Jiangmen also plans to improve its capacity to control and monitor industrial pollution discharges into local rivers. 9. Expert studies estimate that the municipalities o f Foshan and Jiangmen are contributing 9% and 6%) respectively, o fthe pollution flowing into the Pearl River system. Together, the PRD 1 and PRD 2 project cities contribute about half o f total pollution flowing into the PRD Rivers. 2. Rationale for Bank involvement 10. Duringpreparationandinitialimplementationo fthe PRD 1project, the Bankestablished a strong partnership with GuangdongProvince and a number o f PRD cities inthe fields o f water pollution, wastewater management, hazardous waste management and water quality monitoring. While Guangzhou city i s the mainbeneficiary o fthe PRD 1 project, other municipalities including Shenzhen, Foshan and Jiangmen havejoined indiscussions and innovationsunder the project such as the updating o f the PRD Clean-up Plan and the piloting o f inter-municipal cooperation inenvironmental facilities. It was earlier intendedthat Shenzhen would be the beneficiary o f the second Bank-funded urbanenvironment project inthe PRD region. However, Shenzhen needs more time to build internal consensus on its wastewater management plan and its proposed project. Because of their eagerness to modernize and share internationalbest practice, Foshan and Jiangmen emerged as participating cities for the PRD 2 project. Thus, the PRD 2 project provides an opportunity for the Bank to partner with the progressive cities o f Foshan and Jiangmen to demonstrate ways to effectively prepare and implement comprehensive programs to address water pollution challenges ina sustainable manner. Beyond PRD 2, there may be possibilities for the Bank to collaborate, through new projects, with other cities inthe PRD on water pollution issues, and to explore the development o f a "river basin management" approach for the entire PRD region. 11. With their strong economies, bothFoshan and Jiangmen have other financing options. The decision to request World Bank financing i s motivated primarilyby the desire o f municipal authorities to employ methodologies, standards, and techniques to improve wastewater planning, construction and management. Inaddition, these authorities have sought the Bank's advice on emerging environmental concerns like sludge management and river dredging and sediment 3 disposal. Also, inaddition to the physical infrastructure, Foshanand Jiangmen will finance technical assistance activities inwastewater planning, utilitypricing and regulatory reforms, industrial pollution control and operational improvements for wastewater management. 3. Higher level objectives to which the project contributes 12. The project supports two prominent themes inthe new Country Partnership Strategy: (a) managing resource scarcity and environmental challenges especially related to water pollution reduction and conservation, and (b) promoting balanced urbanization and improving the quality o f urbanlife. It also supports the government's 1lth Five Year Plan (2006-2010) which sets out a "people-centered" strategy, aiming to achieve "harmonious society" that balances economic growth with distributional and ecological concerns. At the national level, the PRD river network is one o fthe nine most seriously polluted water bodies that the Chinese government has identified as the top priorities to address duringthe 11th FiveYear Plan (the 3 rivers, 3 lakes, 3 deltas, and 1bay plan). At the regional level, the PRD area has been identified as possibly the biggestpollution hot spot inEast Asia, with major impacts spillingover into the South China Sea. Satellite photography has shown that, within the PRD, Guangzhou is the most concentrated pollution source area, with Foshan and Jiangmen as prominent secondary source areas. By addressing the largest pollution sources inone o f the national and regional pollution hotspots, the PRD series o fprojects represents an important step inassisting China tackle one o fthe most serious environmental challenges facing the country. B. PROJECTDESCRIPTION 1. Lendinginstrument 13. The lending instrument i s a Specific Investment Loan. The Loan will be a single currency, variable spread loan, with a maturity o f 20 years inclusive o f five years grace, front- end fee o f 1% subject to 75 basis point waiver, and commitment fee o f 0.75%. The loan amount i s US$96.0 million. 2. Project development objective and key indicators 14. The development objective is to reduce water pollution inthe Pearl River system originating from Foshan and Jiangmen municipalities through a package o f key initiatives, including wastewater treatment and sludge disposal, water quality monitoring, sediment removal from waterways, and flood protection and river embankment improvements. Key outcome indicators include: (a) reductions indomestic source pollution entering the Pearl River system from Foshan and Jiangmen; (b) improved effectiveness inoperations, management and finances o fwastewater utility services; (c) improved river water quality at monitoring stations inFoshan and Jiangmen; and (d) increases inproperty values inthe areasupgradedunder the project. 4 3. Project components 15. Foshan Components: (a) Wastewater Management. Expansion o f Zhen'an wastewater treatment plant (Phase 111) by 5OY000m3/d;construction o finterceptors, secondary sewers, and pumpingstations; andconsultant services for developmento fGIS-based wastewater network map, and enhancement o f wastewater management capacities. (b) Sludge Treatment and Disposal. Construction o f a 400 tons/day capacity centralized sludge treatment and disposal facility at Nanzhuangto treat sludge from five wastewater treatment plantsinFoshan; consultant services for design review o f facilities, and equipment and other goods for the operation o f the facility. (c) Flood Protection and Embankment Rehabilitation. Improvements to Fengjiang Rivernorth embankment and adjacent areas. (d) River Water Quality Improvement. Foshan Waterway and Foshan Creek sediment dredging, treatment and disposal; construction supervision services; construction o f four automatic water quality monitoring stations; and consultant services for development o f a water environment management information system and improvement o f the Foshan urbanmanagement information database. (e) Institutional Strengthening and Training. Technical assistance for (i) project management services including contract management, utilitymanagement and tariff setting, and monitoring safeguards implementation; (ii) studyo f environmental costs for GDP growth and "green" economic planning; and (iii) training and study tours. 16. Jiangmen Components: (f) Wastewater Management. Expansiono f Wen Cheng Sha wastewater treatment plantby 150,000 m3/day; construction o finterceptors, secondary sewers, pumping stations; and improvements inthe water quality monitoring system. (g) Institutional Strengthening and Training. Technical assistance to enhance operational andbusiness management capacities o f the new Jiangmen Biyuan Wastewater Company. 17. The total project cost (for both cities) including physical and price contingencies, i s estimated at Y1,462.9 million (US$l87.9 million). Corresponding city-wide total costs for Foshan and Jiangmen components are estimated at Y1,156.6 million and Y306.4 million, respectively. 18. IndustrialPollution Control. Inparallel with the Bank-financed components, the two cities will implement complementaryprograms to monitor and control industrial wastewater discharges, as described below. Duringproject implementation, the Bank will monitor progress inimplementationoftheseprograms. 19. Foshan. The goal o f the program i s to improve industrycompliance with discharge standards from an estimated 89% o f registered companies at present to 95% by 2010, and to minimize the periods and severity o f non-compliance episodes. The program includes: relocation o f polluting industries to industrial parks with centralized wastewater treatment 5 facilities, and improvedmonitoring o f industrial enterprises wastewater discharges through automatic on-line analytical equipment and video monitoring o fthe operations o f treatment facilities. A number o f industries will be relocated so that they no longer discharge wastewater to the Foshan Waterway. Seven large enterprises are planned for relocation in2006, and a further 13 large enterprises during2006-2010. 20. Jiangmen. The goal o f the program i s to attain industrial compliance rates o fmore than 95% o f registered companies and to further reduce total pollution discharges. The program includes: adoption o f discharge standards higherthan national standards, ensuring that enterprise wastewater treatment facilities are adequate, increasinglevels ofmonitoring through sampling andthe extending existing system o fon-line monitoringboththrough automatic analysis and video monitoring o ftreatment plant operation. Jiangmen plansto enhance its monitoring capability through other activities to be supported by the project. 4. Lessonslearned and reflected inthe project design 21. Since its first loan in 1985, the Bankhas committed about US$5 billion under 31 projects for water supply andwastewater inChina. A 2002 Operations Evaluation Department (OED) assessment o f the Bank's involvement inthe sector in China, and the performance o f the Bank and the clients were found to be satisfactory. The key lessons learned andrecommendations were: a) least-cost analysis o f future Bank-financed projects should always include improved incentives and support for water demand management; b) tariffs infuture Bank-financedprojects shouldbe set bythe level o faverage incremental costs, which signal future costs; c) recent policy o f conditioning future Bank financing on the establishment o f autonomous wastewater companies be continued; and d) the next generation o fBank sector projects should include private sector participation where there i s political support infavor o f such participation. 22. In2005, the Quality Assurance Group (QAG)carriedout areview ofthe "quality at entry" o fthe PRD 1 project. The overall QAG rating was satisfactory, with compliments given to the pilot initiatives on inter-municipal cooperation and private sector participation. The Bank team was encouraged to focus more attention duringPRD 1implementationon the "evolution o f the institutional framework for the Pearl Riverbasinmanagement, evenifthe process itself will inevitably be long-term." 23. All o fthe above lessons andrecommendations havebeentaken into account indesigning and preparing the project. 5. Alternatives considered and reasons for rejection 24. The project i s part o f the larger program o f improving water quality inthe PRD region (as outlined insection A.l), supported by the Bank through the PRD 1 and PRD 2 projects. The approach adopted inboth projects is to first address the most serious pollution hot spots o f national and regional significance inthe PRD region, followed by the less significant ones. This 6 strategy is generally most efficient, and underpins the Bank's overall approach inthe PRD region. Inthat context, a number o f strategic options and issues were considered duringproject preparation, including: Programmatic Approach. Given the strategic, medium-termnature o fthe Bank's engagement inthe PRD region across a number o f cities, the utilization o f a programmatic lending instrument (e.g., Adaptable Program Loan, APL) was considered. However, during PRD 1preparation, there was not enough support for the use o f an APL from the central government, as the government had not gained sufficient confidence inthe process (beyond the initial application in Shanghai). It was therefore decided to pursue the strategic and programmatic project objectives through a series o f investment lending operations (i.e. PRD 1,PRD 2, and, potentially a PRD 3 project) currently inthe pipeline. Sector Master Plans. The current PRD regionalmaster plan calls for the constructiono f a large number o f wastewater treatment plants inmany PRD cities. The option o f delaying the PRD 2 project to wait for the outcome o fthe PRD wastewater master plan updating (as supported by a GEF grant under PRD 1) was considered, so as to take advantage o f the potential consolidation o f treatment plants. However, this option was rejected as it would have denied the opportunity for the Bankto deepen its involvement at a criticaljuncture when key decisions inrelation to the master planare being finalized. Moreover, all project components are fully consistent with current local master plans, updated inthe context o f PRD 2 preparation, with each investment appropriate even ifthe PRD master planrevisions would call for further consolidation o f treatment plants. OptimizedProject Components. Duringproject preparation each project component was reviewed inlight o f potential project design alternatives-evaluated on a number o f technical and economic considerations. For example, for the wastewater treatment plants, alternative locations and treatment processes were considered, with the most cost effective solutions adopted. Similarly for the sludge and river dredging component alternative treatment and disposal options; for the river rehabilitation component, landacquisition and resettlement costs were minimized. For a fuller review o f the specific alternatives considered, see technical section D.2 and the economic analysis inAnnex 9. C. IMPLEMENTATION 1. Partnershiparrangements(ifapplicable) 25. The project i s free-standing and does not have any other international co-financiers. Foshanmunicipality, however, i s a direct beneficiary o fpart o f a US$10million GEF grant approved under the PRD 1project that, among other things, supports the pilotingo f inter- municipal cooperation inthe provision o f environmental infrastructure. One o f the three pilots selected for this GEF support involves the planning, constructing and operating o f a shared wastewater collection network for the Zhen'an wastewater treatment plant inFoshan which will be expanded under PRD 2. Given the innovative nature o fthis initiative, its progress will be followed closely during PRD 2 implementation, and the lessons learnedwill be shared with other municipalities inthe PRD region and elsewhere inChina. 7 2. Institutionalandimplementationarrangements 26. The GuangdongProvincial Government Office for World Bank Projects (GDPMO), established within the Guangdong Finance Bureau (GDFB), will be responsible for overall project coordination. Its responsibilities include: (a) project-wide quality assurance; (b) progress reporting to GPG and the Bank; and (c) inter-agency coordination and procurement support. At the city-level, both Foshan and Jiangmen have set up leading groups, headed by a Vice Mayor, to guide project preparation and implementation. Below the leading group, Foshan municipality has set up a Project Management Office (FPMO), which i s under the Foshan Environmental ProtectionBureau, to oversee implementation o f its components. Similarly, Jiangmen municipality has formed a PMO inthe Municipal Engineering and Public Utilities Bureau to coordinate implementationo f its components. 27. The sector agencies inboth Foshan and Jiangmen will implement their respective components. Inaccordance with domestic practice, implementing agencies will engage experienced design institutes for investigations and detailed design, and experienced domestic supervisioncompanies for construction supervision services for their works. Additionally, one tendering company will be engaged to assist agencies with national and international biddingfor works, goods and services. 28. Foshan PMO will coordinate project preparation and implementation. Three project implementation agencieshnits (PIUs) are responsible for the preparation and implementation o f the five project components. The implementation agency for the Zhen'an wastewater management and the Sludge Treatment and Disposal components is the FoshanWater Group Company (FWGC). The Xinzhiyuan Wastewater Treatment Company (XWTC), a subsidiary o f FWGC,will be responsible for operating and maintainingthe Zhen'an wastewater treatment plant, anddevelopment o fthe GIs-based wastewater network map. The implementation agency for the FloodProtectionand Embankment Rehabilitation component is the FoshanWater Resources Construction Management Center under Foshan Water Resource Bureau, which i s a parto fFoshanMunicipal Government. The implementation agency for the FoshanRiver Quality Improvement component and the Institutional Strengthening and Training component is the Foshan Environmental Protection Bureau (FEPB), which is also a part o f the Foshan Municipal Government. 29. DuringPRD 2 preparation, Jiangmen Municipality formed the BiyuanWastewater Treatment Company (JBWC), with a business license and charter. All o f Wen Cheng Sha's existing wastewater assets, except the old tertiary sewer network, will be transferred to JBWC, which will also own the assets constructed under the project. JBWC will manage the construction o f the Wen Cheng Sha wastewater treatment plant (WWTP) and effluent water quality monitoring stations, and implement the capacity enhancement for training and financial management. 30. On-lendingArrangements. The loan o fUS$96.0millionwill bemadeto the People's Republic of China (PRC) at the Bank's standard interest rate for LIBOR-based US dollar single currency loans. The loan will be for 20 years, including a five-year grace period. PRC will on- 8 lend to GuangdongProvince (GP), on the same terms and conditions. GP will on-lend part o f the loan proceeds (US$72.0 million) to Foshan municipality and another part (US$24.0 million) to Jiangmen municipality, on the same terms and conditions. Foshanwill further on-lend part o f its loan proceeds to the FWGC. Jiangmen will on-lend its entire loan proceeds to JBWC. On- lending to FWGC and JBWC will take place on the same terms and conditions as the Bank loan. 3. Monitoring and evaluation of outcomes/results 31. Annex 3 lists the main outcome indicators for the Project, as well as the principle results indictors for each component. The PMOSwill regularly collect the data required for monitoring and evaluation o f outcomes/results. GDPMO and the leadinggroups at the city level will review results on the basis o f progress reports, andtake corrective actions when needed. 4. Sustainability 32. GuangdongProvincehas shown its commitment to address water pollution issues through the announcement in2002 o f the ambitious PRD Clean-up Plan, reinforced with signed agreements betweenthe Provincial Governor and all city mayors on the increased level o f wastewater treatment coverage and other targets that cities should achieve by 2008. The Province wants the entire PRD region to develop as a model for environmental protection in China. 33. The FoshanWater Supply Company has been restructured as the FWGC, combining responsibility for water and wastewater operations. Inaddition to operating services inFoshan, ithas recentlybidand won at least seven BOT contracts for wastewater treatment plants inother districts o f Foshan city. XWTC has been set-up as a separate subsidiary o f the FWGC for operating wastewater treatment assets inFoshan's main urbanarea (Chancheng District). Wastewater tariffs have been adjusted to a current average o f about Y0.60/m3, with plans to increase the average tariffto Y0.80/m3 in2007. 34. Foshan has demonstrated its stronginterest inthe project by setting up a well-staffed PMO, and by supporting an autonomous company responsible for managingwater supply and wastewater services inthe city. Similarly, Jiangmen has assigned experienced staff to its new PMO, and formally established a new company for wastewater services in2006. Jiangmen's wastewater tariffs havebeen adjusted to a current average o fY0.71/m3, with further increases planned for the future. Both cities have spent considerable budget on project preparation, and have worked closely with international and local consultants to ensure that the investments are well prepared. Inaddition, Foshan and Jiangmen have provided assurances that necessary counterpart funds will be available, and that wastewater tariffs will be raised over time to reach the goal o ffull cost recovery. 9 5. Criticalrisks and possible controversial aspects RiskRating R i s k s RiskMitigationMeasures With Mitigation Sources o fwater S pollution outside o f Jiangmen to implement vigorous action project scope are not programs to reduce pollution from all sources effectively controlled. including industryand agriculture. Lack o f sound Provide support for strengthening regulatory regulatory framework frameworks and contract documents for M and model contracts for private participationwith funding from GEF private participation in grant under PRD 1project. wastewater sector could result insub-optimal development o f sector in participating cities Autonomy o f Provide business management technical wastewater companies assistance and monitor financial and M inFoshan and Jiangmen management performance o fnew companies are not achieved, or duringimplementationto ensure compliance delayed . with loan covenants. Proposed PRD reform Provide support to reforms through intensive agenda, especially supervision and dialogue under PRD 1 and 2 M related to wastewater projects, including updating o f PRD master planning and inter- plan. municipal cooperation not fully successful. Municipal finances, Commitment o f GDFB to monitor local including debt service government indebtedness and keep local debt M risks. at sustainable levels. Dredging o f Fenjiang ICareful studies o f options for rehabilitating M river will release river were completed duringproject contaminants into water preparation(including undertaking no bodies down stream and dredging), and selected solution will have - - worsens environmental Ileast negative environmental impacts and will I impact o f project. be monitored closely during implementation. Overall risk rating M 10 6. Loadcredit conditions and covenants Disbursement Conditions: (a) Signing o f subsidiary loan agreements for on-lending o f Loanproceeds, acceptable to IBRDbetweeneach o fFWGCandJBWC andtheir respective municipalities. (b) Signingo f a contract byFWGCwith a consultingfirm for reviewing the engineering design o f the sludge treatment and disposal facilities, as a condition o f disbursement for the civil works category. Implementation Covenants: Signing o f contracts by Foshan PMO and Jiangmen BiyuanWTC with consulting firms for institutional, financial strengthening and training by December 31,2007. Maintaining the Foshan and Jiangmen PMOSand local government PIUs throughout implementation with qualified and adequate staff. On-lending Bank loan proceeds to revenue-earning companies on terms and conditions satisfactory to the Bank. Twelve months prior to commissioning o fthe centralized sludge treatment facility to be constructed at Nanzhuang, FWGC will furnish the Bank with an analysis o f the least cost solution for disposal of treated sludge from the facility and take the Bank's comments into account when deciding on the treated sludge disposal site. Financial Covenants: (a) Foshanand Jiangmen wastewater companies will generate total revenues sufficient to cover total operating expenses, increase inworking capital (other than cash) and the amount by which debt service exceeds the provision o f depreciation, and will achieve a debt service coverage ratio o f at least 1.2times infiscal years 2008 and 2009, and at least 1.3 times in fiscal year 2010 and beyond. (b) Foshanand Jiangmen wastewater companies will prepare, before September 1,2007, and in each o f the following fiscal years, financial forecasts satisfactory to the Bank, (i) review to whether it would meet the covenanted requirements set forth above insuch year and the following fiscal year, and (ii) to furnish the results o f such review to the Bank; ifany such review should show that the entities would not meet the requirements set out above, the entities would take all measures, including adjustments to the structure o f tariffs and charges, inorder to meet the requirements. D. APPRAISAL SUMMARY 1. Financialand economic analyses 35. Financial.Analysis. Detailed financial projections were developed to estimate the level o f tariffs requiredto ensure financial sustainability o f the wastewater companies inFoshan and Jiangmen and the level o f cost recovery inthe sector; to demonstrate that the required tariff increases are affordable to poor households; andto show that Foshan and Jiangmen municipalities have sufficient financial resources to contribute counterpart funds, service debt obligations, and operate and maintain the assets created under the project. The summary results are as follows with details provided inAnnex 9: 11 (a) Tariffprojections. The financial projections indicate that tariffs need to increase significantly inbothproject cities. InFoshan, the projections show that tariffs need to be increased to Y1.48 /m3 by 2010 and to Y2.081 m3 in2016. InJiangmen, tariffs need to rise to Y1.41/m3 in2010 and Y1.70/m3 by 2016. At these tariff levels the wastewater companies-responsible for implementingthe wastewater and sludge components-would be financially sustainable and meet the Bank's financial covenant included inthe project agreement. Inaddition, bothmunicipalities would be able to recover costs related to operating and maintaining the wastewater collection network. At present, tariff levels in Foshan and Jiangmen are Y0.60/ m3 andY 0.71/m3 respectively. This compares to tariffs o f Y0.701 m3 inGuangzhou, Y1.04/m3 inShenzhen, andYO.901 m3 inBeijing and Shanghai. Actual Projections WastewaterTariff(Yh3 watersupply) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Foshan 0.60 1.23 1.48 1.48 1.48 1.96 2.00 2.02 0.20 2.06 2.08 Jiangmen 0.71 0.85 1.02 1.22 1.41 1.55 1.70 1.70 1.70 1.70 1.70 (b) Tariffaflordability. Eveniftariffs are increased bythe indicatedamounts, poor households would still be able to afford paying for water and wastewater services: affordability projections indicate that as a percentage o f total householdincome, the total water and wastewater bill does not exceed 2.9% (Foshan) and 2.7% (Jiangmen) for consumers inthe lowest income brackets. This ratio i s well below the generally accepted "affordability benchmark" o fpayingup to 5% o ftotal household income for water and wastewater services. (c) Municipal Finance. The municipal finance analysis shows that bothmunicipalities have sufficient financial resources to be able to afford the project, inlight o f very strong economic performance and associated increase inmunicipal revenues. Specifically, it is estimated that project costs will reach a maximum o f4% (Foshan) and 6% (Jiangmen) o f total municipal revenues; as a % o f infrastructure expenditures, counterpart fundingrequirements will reach a maximumo f 5% (Foshan) and 20% (Jiangmen); debt service and operation and maintenance expenditures do not exceed 2% (Foshan) and 11% (Jiangmen) o f total infrastructure expenditure. 36. Economic Analysis. All project components were evaluated based on a least-cost analysis. The rationale for adopting a cost effectiveness methodology is that for wastewater projects benefits are difficult to quantify ina reasonably reliable manner, especially those pertainingto public health and the environment. Inwastewater projects inChina, and indeed in most Bank projects inthe sector, cost effectiveness i s the preferred and most often applied methodology. As a result, calculation o f economic internal rates o f return (EIRRs) was not attempted. For each project component, a number o f alternatives were considered, including technical design options, and location alternatives, and evaluated on the basis o f technical, environmental, and economic criteria to identify the least cost solution for each project investment. 12 2. Technical 37. The technical viability o f the Foshan and Jiangmen components has been confirmed by the Bank team. Independent international consultants have also reviewed the respective feasibility studies and provided detailed advice. All selected components represent the least-cost and affordable solutions, andavoid creating excess capacity. Realistic population, water demand and wastewater generation projections were adopted to promote conservation o f water and avoid over-design. Project costs were estimated usingunit rates from recent contracts inother Bank projects andmarket rates. It i s anticipated that bidprices will be close to cost estimates, and the amount o f likely loan savings will be minimized. 38. For the Foshan components, a number o f technical issues were reviewed. The sludge treatment and disposal option was selected based on an evaluation o f alternative sludge drying methods, degree o f dryingto facilitate transportation, and disposal methods and locations. The approach adopted includes sludge transportation from several treatment plants to a centralized facility inNanzhuangdistrict, drying sludge to about 40% water content, and disposal inan engineered landfill about 80 km away inGaoming district. Since there i s still the option that the treated sludge could be disposed o f at anunused quarry site closer to the Nanzhuang treatment facility, which could substantially lower disposal costs, FWGChas agreed to furnishthe Bank with an analysis o fthe least cost solution for disposal o ftreated sludge from the facility andtake the Bank's comments into account when deciding on the final sludge disposal site. Also, since a performancebased contract i s proposed, the project will include a review o f design proposals in bidsby an independent consultant expert. 39. The river water quality improvement option was designed byreviewing: dredging methods, sediment quality, sediment dryingtechniques, and related transportation and disposal costs. The alternative chosen involves dredging and pumpingsediment to a dewatering and dryingplant near the Foshan river, dryingsediment to 40% water content, anddisposal at an unused stone quarry about 20 km away. Thejloodprotection and embankment rehabilitation option was prepared by following local planningrequirements o f a 50-year flood return. Original designs were adjusted duringpreparationto optimize size o f interceptor pipes for handlingstorm drainage and to reduce resettlement costs by scalingback onroadwidth andopen space. 40. For Jiangmen's component, wastewater generation projections are uncertain, thus a phased approach is taken for the development o f the wastewater system. A treatment plant capacity of about 200,000 m3/day at Wen Cheng Sha may be needed to expandwastewater treatment to 70% coverage by 2010; the proposed expansion by 150,000 m3/day will meet 2010 requirements. Expansion o fthe collection network i s also required to meet the target collection rate, but is not included inthe project. Counterpart funding constraints have prevented inclusion o fthe additional collection networks at this time. Jiangmen will undertake these investments, with other resources, inthe future. 13 3. Fiduciary 41, The financial management assessmenthas concludedthat the project would meet the Bank's financial management requirements, as stipulated inBP/OP 10.02. The project will have inplace an adequateproject financial management systemthat wouldprovide, withreasonable assurance, accurate and timely information on the status o f the project inthe reporting format agreed with the Ministry o f Finance (MOF) and the Bank. For further details on financial management, see Annex 7. 42. The procurement capacity assessment has concluded that all the PIUs are new to World Bank procurement requirements and that certain corrective measure will be necessary, including the provision o f special training for procurement drawing upon experiences from the on-going PRD 1project. For further details on procurement, see Annex 8. The Procurement Capacity Assessment i s available inthe Project File. 43. The FPMO and JPMO will select a Chinese firm, as the procurement agent for both ICB andNCB procurement. The selected company will be anexperienced and competent procurement agent, familiar with the Bank's procurement procedures. 4. Social 44. Social impacts o f the project are modest. InJiangmen, expansion o f the Wen Cheng Sha wastewater treatment plant requires only a transfer o funoccupied and un-utilized state-owned right-of-way land. As there will be no land acquisition, structural demolition, or other resettlement-related impacts, no Resettlement Report (RP) i s required. InFoshan, land is required for construction of: a wastewater treatment plant, facilities for dredging and sediment drying and disposal, and for sewer construction. An RP that meets Bankpolicies has been prepared for the Foshan components. The Chinese version o fthe RP i s accessible to the public via internet followingposting on the Bank's China website. Inaddition, the corresponding EnglishRP Summarytranslation is posted at the Bank's Infoshop. Withmeasures for minimizing resettlement by considering alternative options inthe project feasibility study, the project inFoshan i s to acquire 188 muo f land, including 158 muo f state-owned land, and 30 mu o f collective land. Land acquisition will affect 10households, 41 enterprises and 18 shops, with 1,980 affectedpeople intotal. Another 494 muo f landwill be acquired temporarily during project implementation. Screening within the urbanproject areas indicated that no minority nationality communities would be affected by the project. 45. An experienced entity, Hohai University, conducted the socioeconomic survey andthe RP preparation for Foshan. The RP cover: (a) a socioeconomic survey o fthe project areas to analyze the project impacts, understand the socioeconomic background as the basis for resettlement planning, and consultations with the affected entities and people for their feedback to the resettlement planning; (b) a detailed inventory o fvarious categories o f impacts anda census o f affected people; (c) resettlement policies, compensation rates, resettlement schemes andbudget; and (d) resettlement management arrangements. 14 46. The Foshan PMO has designed internal and external monitoringmechanisms for RP implementation. Internal monitoring will be conducted through the project management, which will focus on physicalprogress. At the same time, an external monitor, HohaiUniversity, will be engaged to carry out external monitoring every six months. Apart from physical progress, it will monitor and evaluate livelihood restoration efforts for the affectedhouseholds and restorationo f the affected enterprises and shops. The RP describes monitoringpurposes, responsibilities, indicators, methodology, procedures and reporting requirements. 5. Environment 47. The project is classified as Category A under OP 4.01. Environment Assessments (EAs) have been conducted for each components which demonstrate that once implemented, the project will bringsignificant positiveimpacts to the project cities natural environment and communities, contribute to water quality improvement inthe Pearl River system, as well as benefits in navigation capacity improvement, flood control, recovery o f aquatic ecosystem, land value appreciation and the overall livability o fthe project cities. The EA has not identified serious adverse environmental impacts which cannot be effectively mitigatedto acceptable levels. 48. The EA documentationincludes a city-wide consolidated EA (based on individual component EAs) and EA Summary and Environmental Management Plans (EMPs) for Foshan which has four investment components under this project, and a full EAreport and EMP for Jiangmen which has only one investment component. These EA documents have been prepared following the relevant national procedures, guidelines and standards as well as the applicable Bank's safeguard policies. The EAs cover the project description, legal and policy framework, baseline conditions, positive and negativepotential environmental impacts, mitigation measures (both at construction and operational stages), analysis o f alternatives, environment management plans, public consultation and information disclosure. Major findings o f these EAs and EMPs are presented inAnnex 10. 49. EnvironmentalBenefits: The proposed project will bringabout significant positive impacts and benefits to the environment and communities inthe two project cities and Pearl River Delta region, including: reduced direct wastewater discharges; improved water quality to the designated specific river water quality standards (from worse than Category V to designated Category V for Foshan waterways and from Category V to Category IV for Jiangmen and Tian Sha rivers inJiangmen); increased navigation capacity inFoshanWaterway (from 200 tons to 300 tons); improved environmental aesthetics; improved flood control capacity (to 50-year floods); appreciation o f land values, community and economic developments; and enhanced livable cities, their economic competitiveness and standardo f living for residents. 50. ImpactsandMitigationMeasures: The project would also causemostly short-term adverse environmental impacts during construction and operationphases. The primary adverse impacts include noise during dredging and other construction activities, odor from dredging and sludge handling/disposal, impacts on water quality when sediment i s disturbed duringdredging, andlandacquisition and resettlement. The EMPs specify appropriate mitigation measures, supervision and monitoringplans, institutional arrangements, personnel training, and associated cost estimates. Major mitigationmeasures include control o f construction practices, sediment 15 andsludgetransportation and disposal, contractual requirements, selection ofthe least impact alternatives, environmental monitoring and supervision. 51. Public Consultation: Duringthe project EA, there were two rounds ofpublic consultation ineach of the cities, involvingpublic opinion questionnaires among directly affected people, supplementedbymeetingswith key stakeholders. Issues and concerns raised have been incorporated into the project EAs and EMPs as appropriate. 52. InformationDisclosure: Informationabout EAs has been disclosed through local newspapers and radio inthe project cities twice. Draft final EA documents havebeenplaced in local neighborhood committees ofthe affected communities andposted on the internet, as well as at the Bank's Infoshop. 6. Safeguard policies Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OP/BP/GP 4.01) [XI [I NaturalHabitats (OP/BP 4.04) [I [XI Pest Management (OP 4.09) [I [XI Cultural Property (OPN 11.03, beingrevisedas OP 4.11) [I [XI InvoluntaryResettlement (OP/BP 4.12) [XI [I Indigenous Peoples(OP/BP 4.10)* [I [XI Forests(OP/BP 4.36) [I [XI Safety of Dams (OP/BP 4.37) [I [XI Projects inDisputed Areas (OP/BP/GP 7.60)** [I [XI Projects on International Waterways (OP/BP/GP 7.50) [I [XI 7. Policy Exceptions and Readiness 53. No exceptions are required from Bank policies. The Project meets all key regional readiness criteria. ' I n the context of China, IndigenousPeoples refers to minority nationalities. **By supporting theproposedproject, the Bank does not intend toprejudice thefinal determination of theparties' claims on the disputed areas 16 Annex 1: CountryandSector or ProgramBackground CHINA: SECONDPEARLRIVERDELTAURBANENVIRONMENTPROJECT Sector BackgroundandKey Issues 1. The Pearl River Delta (PRD) region' inChina's southern Guangdong Province i s one o f the most complex urbansystems inAsia; it holds over 40 million people in25 municipalities, 3 counties and 450 towns in Guangdong and the two special administrative regions o f Hong Kong andMacau. The PRDhas ranked at or near the top nationwide ineconomic growth inrecent years (averaging nearly 14% per annum duringthe 2000-2005), mostly due to large inflows o f direct foreign investment initially inlow value-added manufacturing, and more recently inhigher value-added manufacturing and, in a few cities, in services. Mucho f the growth has been poweredby large inflows o f low-cost migrant workers from peripheral areas inGuangdong and from poor provinces. Manyparts o f the PRD are largely devoted to export processing. 2. The Delta is also complex geographically. There are three branches o f the Pearl River whichjoin at the city o f Guangzhou, the political, economic and cultural hub o f the PRD. The Pearl River i s China's third longest river, and i s second only to the Yangtze interms o f annual average flow. The Pearl River discharges into the South China Sea through eight principal tributaries. The close proximity o fthese tributaries, the flat terrain o fthe delta, the very large number o f canals and streams interconnecting tributaries, and tidal flows and surges makes an accurate hydrological definition of "sub-basins" within the PRD very difficult. 3. The higheconomic growth inthe PRD has come at a very heavy environmental cost. Investment inenvironmental protectionhas not kept pace with the rapid economic advances, which i s evident inthe serious deterioration inriver water quality duringthe period. Today many stretches o fthe Pearl River, especially inthe vicinity o f Guangzhou, are at the lowest national quality standard (Class V), and therefore unfit as a drinkingwater source. 4. Domestic and industrial wastewater discharges, urbanstorm water run-off, and non-point source pollution from agricultural run-off, are the main pollution sources withinthe PRD. Generally, collected domestic wastewater is discharged to the river systems without treatment, except inthe larger municipalities such as Guangzhou, Shenzhen, Foshan, Jiangmen, and Zhuhai, where only a portion o f the wastewater is treated. Industrial wastewater is to be treated on site by the polluting industrybefore discharging into the municipal collection networks or into the PRD Rivers. But, local governments' capacity to monitor and control such pollution varies considerably across PRD cities, and recent studies indicate that industrial pollution remains a serious problem inthe PRD region. Environmentally safe disposal o f sludge from wastewater treatment plants i s only just beginning inthe PRD, with the first plant recently constructed to serve Guangzhou city. Treatment o f sludge from the expanding wastewater treatment plant capacity now being installed will present a growing challenge to PRD cities. This deteriorating situation poses a serious threat to drinkingwater sources, including the drinkingwater supply to 1 The geological concept of the Pearl River Delta region consists of whole or parts of seven cities in Guangdong Province, namely Guangzhou, Shenzhen, Zhuhai, Foshan, Jiangmen, Zhongshan and Dongguan, together with the special administrative regions o f Hong Kong and Macau. 17 HongKong. It also renders the river system unsuitable for irrigation, aquaculture, andpotential recreational uses. The government response has been to move drinkingwater intakes upstream to avoid contaminated supplies. This approach i s not sustainable. 5. At present, nearlyevery PRDcity andtownplans, builds and operates its ownurban utilitysystem and economies o f scale and other potential benefits are notbeingrealized. But, Guangdongprovincial government and municipalities are startingto recognize that regional planning approaches present opportunities for inter-municipal cooperation, jointly-managed facilities, reduced costs, and economies o f scale for provision o f environmental infrastructure. They have not yet, however, solved the institutional challenges inherent inthis approach. 6. Experience with private sector participation ininfrastructure service provision is relatively new inChina, but has started to take place inthe larger cities. InGuangdongProvince, there are numerous examples o fprivate sector involvement inwater supply production, sanitary landfill management, and wastewater treatment inGuangzhou, Shenzhen and Foshan, among other cities. But, these transactions are generally takingplace without benefit o f a sound local regulatory framework or standard contract documents that balance needs o f public and private participants. Strategic Plan for ReducingWater Pollution inthe PearlRiver Delta System 7. In2002, GuangdongProvince, throughits Provincial Environmental ProtectionBureau, announced a strategic plan to reduce water pollution inthe PRD river network. The plan, called the PRD Clean-up Plan, set out ambitious phased targets to meet water quality and other standards, as follows: Targets 2005 2010 River reaches satisfactory water quality 75% 80% Industrial wastewater treated to standard 85% 90% Larger cities: domestic wastewater treated to standard 60% 70% Other PRD cities: domestic wastewater treated to standard 50% 60% Investment for environmental protection, as a percentage o f local GDP 2.5% 3.0% 8. These targets are to be achieved by taking the following actions: (a) industrialpollution control: monitoring and controlling discharges from 179 key polluting industries, including relocationo f the worst pollutingindustries; (b) domestic wastewater treatment: construction o f 162 wastewater treatment plants to treat about 12.2 million m3/day; (c) agricultural and livestockpollutioncontrol:banning and relocating o fpoultry industries from water supply catchments o fthe PRD,and enforcement o fprovincial and national pollutioncontrol following SEPA guidelines; and (d) river rehabilitation, comprising integrated rehabilitation of key rivers, urbancreeks, domestic solid waste treatment, and ecosystem development andprotection. Implementationo f the planis estimated to cost Y44 billion (or US$5.3 billion), which is mainly for the wastewater treatment andriver rehabilitation investments. 9. The Provincial Governor also signed agreements with all PRD city mayors on the increased level o f wastewater treatment coverage and other targets that cities will achieve by 18 2010. The Province wants the entire PRD region to be built into a model region in environmental protectioninChina. WorldBankSupportfor PRDReforms 10. The World Bank i s providing support for this planby financing wastewater treatment facilities and other investments inthe provincial capital of Guangzhou, which i s the biggest single source o fpollution (34% o f organic pollution load), through the first PRD urban environment (PRD 1) project, approved in2004. Under this project, numerous innovations and reforms are being pursued, with GEF grant support, including three pilot subprojects on inter- municipal cooperation inthe planning and operatingo f shared wastewater facilities (two pilots in Guangzhou and one inFoshan), improvements inwater quality monitoring and information dissemination, and encouragement ofpublic-private partnerships (PPP) inutility services. The project i s also funding a study to update the PRD Clean-up Plan to help optimize the number and size o fwastewater treatment facilities to bebuilt. This i s urgently needed, as the original plandidnot give adequate emphasis to regionalplanning considerations, economies o fscale and least-cost strategies. Inaddition, the issue o fhow to establish better coordination among various agencies for water issues inthe PRD regionwill be reviewed inrevising the Plan. This work, now underway, is scheduled for completionbymid-2007. 11. As a longer-term goal, the World Bank is also encouragingthe establishment o f institutional arrangements and a policy framework to coordinate, facilitate, and implement planning, development, management and conservation o f water-related resources o fthe PRD river basin. Recommendations on how to take a river basinmanagement approach to the PRD system will be included inthe study to update the PRD Clean-up Plan. 12. Numerous PRD cities, including Foshanand Jiangmen, have recently started to engage private sector companies inthe fundingand operations o f wastewater services. However, problems have already begunto emerge, as these arrangements have been structured without the benefit o f sound regulatory frameworks and good contracting documents. GuangdongProvincial and local government officials haverequested Bank assistance inaddressing these issues, and GEF grant funds under the PRD 1project will beused to help strengthen the regulatory environments and contracting documents, andto provide training to senior political andtechnical leaders inexposing them to international good practice. Conditions and Key IssuesinFoshanandJiangmen 13. Foshan is located insouth-central GuangdongProvince, adjacent to Guangzhoucity. The municipality covers a total area o f 3,848 km2 with a total population o f 5.6 million (including registered and floating residents). Ithas a longhistory as a cultural and industrial center insouth China. Its economic growth has been particularly impressive recently, with GDP expanding 19% in2005. Among all PRD cities, Foshan ranks third (behind Guangzhouand Shenzhen) in terms of total economic output. Major industries include textiles, electronics, home appliances, ceramics, plastic, and aluminum alloy and stainless steel products. Foshanproduces 15% o f the global output o f cameras and 40% o f all microwave ovens sold inthe world. 19 Foshan's political leadership wants urgently to improve environmental conditions inthe city. Currently, about 50% o f the wastewater inFoshan i s treated, and the lack o f adequate wastewater collection and treatment systems i s increasingpollution to PRD Rivers (including downstream cities like Guangzhou) and creatingpublic health concerns. The highly-polluted waters running through the city, especially inthe Fenjiang River, are smelly and foul, discouraging investments inupgrading alongriver banks. Foshanmunicipality hasrecentlycreated an autonomous entity for managingboth drinkingwater andwastewater services, and would like to introduce this entity to international management techniques. The municipality also must tackle the growing problem o ftreating and disposing o f sludge, and gradually raising wastewater tariffs to cover the full costs o fprovidingwastewater services. 14. Foshan's EPB has a program for industrial wastewater pollution control, which includes the relocation o fpolluting industries to industrial parks with centralized wastewater treatment facilities, and improved monitoring o f industrial wastewater discharges through automatic on- line analytical equipment and video monitoring o f the operations o fthe treatment facilities. The goals o f these measures, and others, are to improve industry compliance with discharge standards from an estimated 89% o f registered companies at present to 95% by 2010, andto minimize the periods and severity o f non-compliance episodes. As part o fthe plan for cleaning up o f the Foshan waterway, a number o f industries will be relocated so that they no longer discharge wastewater to the waterway. Foshan wants to further strengthen this program, andhas requested the Bank's support under PRD 2 for this purpose. 15. Jiangmen municipality i s located west o f Foshan, about 100km away from Guangzhou byroad. Beingadjacent to HongKongandMacao, itboasts a developed landand water transportation networks. Jiangmen i s considered the gateway o f communications o f the Xijiang River and the coastal land o fwest Guangdong. Ithas a total area o f 9,541 km2 and a population o f 4.1 million, including 1,812 km2 and 1.5 millionpeople living inurban areas. While more than 60% o fthe population engages inagricultural activities, Jiangmen has been successful in attracting a variety o fheavy and light manufacturingindustries including home appliances, cameras, motorcycles, home appliances, chemical fiber, and glass products. 16. Jiangmen's economy has started to grow rapidly inrecent years (about 11 % GDP increase in2004). Jiangmen also ranked highinthe Bank'srecent survey o f investment climate competitiveness o f Chinese cities, inpart because o f its attractive environmental conditions. But, continuous efforts will be needed to protect the environment, especially water quality inthe rivers and streams throughout the municipality. At present, about 22% o f the wastewater in Jiangmen's urban center i s collected and treated, and an autonomous utility company was just recently established to manage services. Inaddition, wastewater tariffs need to continuously increase to cover the full cost o fproviding services. 17. Jiangmen EPB's program for industrial pollution control includes elements designed to ensure that local discharge standards are higher than national standards, enterprise wastewater treatment facilities are adequate, and monitoring levels and testing procedures are high. Present compliance rate by companies i s estimated at 95% o fregistered companies. JEPB's goals are to attain a still higher compliance rate and to further reduce total pollution discharges. Jiangmen 20 has prepared a planto achieve these goals, andwould like the Bank to support the planunder the PRD 2 project. 18. Expert studies estimate that the municipalities of Foshan and Jiangmen are contributing 9% and 6%, respectively, of the pollution flowing into the PRD river network. 21 Annex 2: Major RelatedProjectsFinancedby the Bankand/or other Agencies CHINA: SECOND PEARL RIVERDELTA URBANENVIRONMENT PROJECT I I I LatestSupervision(PSR) Rating Project (Bank-financedprojectsonly) Implementation Development Progress (IP) Objective Sewerage and solid waste Guangdong PearlRiver Delta S S management for Guangzhou; water Urban Environment Project quality monitoring, inter-municipal (Ln.4742, GEF TF053359), cooperationinenvironmental services (06/08/2004) Sewerage, sanitation, solid waste Liuzhou Environment S S management, and industrialpollution Management Project (Ln.478 l), control for Luizhou city (05/25/2005) Wastewater treatment, lake Tai BasinUrbanEnvironment S S rehabilitation, canal network Management (Ln.4 7480), rehabilitation. (08/03/2004) Urbanenvironment, including HebeiUrbanEnvironment S S wastewater, solid waste, and industrial (Ln.4569), (05/10/2000) pollution control Access to urban services for the poor, Tianjin Urban Development and S HS environmental health, water resource Environment (Cr. 2387) management, municipalgovernance (05/22/1992) and (ICR No. and institution building, wastewater, 22217), (06/20/2001) solid waste, industrial pollution Wastewater management ina river Huai RiverPollutionControl S S basin: upgrade water quality inthe (Ln.4597), (03/22/2001) Huai River, improved collection and treatment o f wastewater in selected municipalities o f two provinces. Sewerage, water supply, sub-national Sichuan Urban Environment S S government administration, solid Project (Ln.4496Kr.325 l), waste management (06/17/1999) Sewerage, solid waste management, Chongqing UrbanEnvironment S S water supply, sub-national government Project (Ln.4561) (6/15/2000) administration Other DevelopmentAgencies Water supply, municipal and industrial Japanese Bank for International Implementation performance reported wastewater treatment, air pollution Cooperation satisfactory. Assistance focused management (several projects) mainly on investment. Urban services, environment, water Asian Development Bank Performance reported satisfactory. resources (several projects) 22 Annex 3: ResultsFrameworkandMonitoring CHINA: SECOND PEARLRIVERDELTAURBANENVIRONMENTPROJECT ResultsFramework I Outcome Indicators Use of Outcome Information To reduce water pollution inthe PRD river I.Evidenceofreductionsindomesticsourcepollution To verify achievement o f the PDO network originating from Foshan and entering the PRD river network from Foshan and and associated outcomes o fthe Jiangmen municipalities through a package o f Jiangmen municipalities (via technical and social project. key initiatives, includingwastewater audits). treatment and sludge disposal management, 2. Evidence o f improvement inthe effectiveness in contaminated sediment removal from operations, management and finances o f wastewater waterways, and river bank clean-up and utility services assistedunderthe project. restoration. 3. Evidence o f improved river water quality at measurement stations inFoshan and Jiangmen municipalities. 4. Evidence o f increases in property values inthe areas upgraded under the project. IntermediateResults (outputs) Output Indicatorsfor EachComponent Use of ResultsMonitoring One per Component FoshanComponents: Wastewater, Sludge and River Bank Improvements: To verify the delivery of expected Wastewater treatment and collection Evidence o f satisfactory completion o f work, as project outputs. system capacity augmented. planned Sludge treatment capacity and disposal Increase inpercentage of wastewater collected and facilities constructed. treated before discharge. 0 Strengthened flood protection and Increase inratio o f actual wastewater tariff to improvedenvironmental conditions recommended cost recovery tariff. along Fenjiang River. Increase inproperty values in project areas. 0 Financial management introduced and Increased monitoring o fpollutant discharges into management capacity strengthened local rivers and sewerage networks. JiangmenComponents: Wastewater and River Bank Improvements: 0 Wastewater treatment and collection 0 Evidence o f satisfactory completion o f work, as system capacity augmented. planned 0 Improved water quality and 0 Increase inpercentageo f wastewater collected and environmental conditions o f Tian Sha treated before discharge. River. Increase in ratio o f actual wastewater tariff to 0 Financial management introduced and recommended cost recovery tariff. management capacity strengthened 0 Increase inproperty values in project areas. InstitutionalStrengthening& Training InstitutionalStrengthening& Training Institutional development o f operating Evidence o f satisfactory completion o f IST agencies; program, as planned 0 Project management Evidence o f proactive and effective management o f emerging problems, and timely and honest reporting o f progress and concerns by project managers. 23 Arrangements for monitoringofkeyperformance indicators Targe lralues Data ( illectionand Rep ting Outcome Baseline MTR ICR Frequencyand Data Responsibility Indicators (2005) Reports Collection for Data Instruments Collection 1. Reductionsin 2005 Some Evidenceof Environmental EPBand EPBand pollution discharge evidenceof measurable monitoring WWTPS WWTPS dischargesentering levels of reductions in reductions in reports monitoring 0 PMOs the PRDriver COD, BOD, monitored monitored 0Financial networks Consulting networkfrom Nitrogenand discharge dischargeof reports User sample firm(s), hired Foshanand Phosphorus, levelsafter levelsof key Usersample survey by PMOs Jiangmen from EA WWTPs indicators surveyreports, reports municipalities(as reports. begin (COD, BOD, as required Financial measuredby key operations. NandP). (MTR & ICR reporting. pollution stages) Dataon land monitoring Project use right indicators). progress transfer Reduction: Reduction: reports values from Foshan COD 8,175 COD 1,500 COD 2,500 Supervision municipal UY t/y (18.3%) t/y (30%) Land NH4-N 1,643 NH-4-N 80 NH4-N 1,095 missionreports Administrati t/y (14.9%) t/y (27.9%) 0Evaluation missionreports on Bureaus Jiangmen COD 16,425 COD 14,235 (MTR andICR stages) UY t/y (86%) NH4-N 1,643 NH4-N 1,095 VY tly (66%) 2. Evidenceof No evidence Evidenceof Evidenceof improvement in of some considerable the effectivenessin improvement. improvement. improvement. operations, management and finances of wastewaterutility servicesassisted under theproject. 3. Compliancerate Foshan: Foshan: for key indicators COD 37 mg/l COD 40 mg/l (COD, BOD, N BOD 6.3 BOD 10.0 andP) with river mg/l mg/l qualitystandards at NH4-N4.22 NH4-N2.0 measurement mg/l mg/l stations in Foshan TP 0.37 mg/l TP 0.4 mg/l andJiangmen. Jiangmen: Jiangmen: COD 35 mg/l COD 30 mg/l BOD 9.5 BOD 6.0 midl mg/l NH4-N 1.8 NH4-N 1.5 ng/l midl TP 0.29 mg/l TP 0.30 mg/l 4. Increases in 2005 baseline hedotal Properties landuserightsfor iata (in Zvidenceof adjacentto 24 residential, I Foshanand Isome Irivers experience industrial reports). riverside greater value properties adjacent properties increase than to project areas. values after average for WWTPs Foshan and begin Jiangmen ResultsIndicatorsfor Baseline MTR ICR Each Component 0 FoshanComponents: Evidence o f satisfactory N o yet Partial Full completion o f works, as started completion; completion, planned. work as planned satisfactory Increased percentage o f 50% 75% 80% wastewater collected and treated before discharge. Increase inratio o f actual 28% 65% 80% wastewater tariff to recommended cost recovery tariff. Jiangmen Components: Evidence o f satisfactory Not yet Partial Full completion o f works, as started completion; completion, planned. work as planned satisfactory Increasedpercentage o f wastewater collected and 22% 60% 70% treated before discharge. Increase in ratio o f actual 35% 65% 80% wastewater tariff to recommended cost recovery tariff. [nstitutional Strengthening& Training Evidence o f satisfactory Not yet Partial Fulland sompletion o f started completion; satisfactory somponent, as planned. work completion, satisfactory as planned Evidence o f proactive m d effective Not yet Satisfactory Satisfactory nanagement o f emerging started MTRrating ICR rating xoblems, and timely and ionest reporting o f xogress and concerns by x-oject managers. 25 Annex 4: DetailedProjectDescription CHINA: SECOND PEARLRIVERDELTAURBANENVIRONMENTPROJECT FoshanComponents 1. The rapid development o f Foshan that i s taking place along stretches o f the Fengjiang River, called the Foshan Waterway, has contributed to serious deterioration o f water quality. The program to reverse the conditions started before 2000, when industrial pollution discharges were monitored, and wastewater treatment capacity enhancement was started. These programs failed to improve conditions and a more aggressive policy to control pollution discharges was commenced in2000, to improve water quality inthe Foshan Waterway under its program called the Foshan Waterway Comprehensive RemediationPlan. 2. The goal o fthe Foshan Municipality is to improve water quality inFoshanWaterway to Class V by 2010, by focusing on the urban environment inFoshan's core urban area (Chancheng district). The strategy includes: (a) closing o f small polluting industries (e.g., electroplating shops, etc.), relocation from Chancheng district o f larger polluting industries, especially tanneries and ceramics industries, to special industrial parks with common wastewater treatment facilities, (b) intercepting pollution discharges along river banks, (c) dredging o f river bed sediment, (d) treatment o f all wastewater inthe Chancheng district, and (e) pumpingcleaner water to improve flow and assimilation capacity o fthe river, to counter the low flow velocities (0.3 m/sec) inthe dry season. 3. Municipal wastewater treatment capacity i s being expanded rapidly. Current planning provides for: three plants for the core city area, with a total capacity o f 450,000 m3/d. Exisiting treatment capacity includes 200,000 m3/d for the western areas, 100,000 m3/d for southern areas o f Chancheng, and 50,000 m3/d for the Nanhai district. 4. Implementationo f the planto pump cleaner water from Dongqing River into the Foshan waterway has commenced with the first o f three pumpingstations (18 cumecs), under construction. Interception o f wastewater discharges along the south bankhas been completed. Intensive monitoring o f industrial pollution discharges is taking place, and about 95 percent o f registered industries are reported to have established pretreatment facilities. 5. The proposed investments to expand wastewater treatment at Zhen'an to full secondary treatment standard, the FoshanWaterway river sediment dredging to coincide with the removal o f the largest polluting industries, and interception o f wastewater discharges from, and rehabilitation of, the north bank o f the Fengjiang River are consistent with the above strategy and ongoing program to facilitate achievement o fthe Class V water quality inthe Foshan Waterway. Pollution concentrations (COD) o f about 100mg/lindry season, and about 50 mg/linwet season, are expected to reduce by about 20 mg/l after completion o fthe three project components. Component details are provided below. 6. Zhen 'an WastewaterManagement (Phase III).Constructiono f 50,000 m3/d capacity WWTP, to add to the Phase Icapacity o f 100,00Orn3/d) completed in 1995 and Phase I1o f 100,000 m3/d completedin2005, and expected to be inoperation shortly. The area covered 26 would be 9.6 ha. The component also includes: sewer collection network improvements, trunk and force mains, new pump stations, development o f GIs-based wastewater network map for the Chancheng District and capacity enhancement for the wastewater supply company, including management improvements and project management. 7. Foshan Sludge Treatment and Disposal Center. Sludge dryingfacility to handle sludge from the wastewater treatment plants, with a first phase capacity o f 400 t/day, with an ultimate capacity o f 800 t/d. Sludge will be treated and dried at Nanzhuang treatment plant site, and transported to an engineered landfill about 80 km away inGaoming district. The feasibility o f using an alternative, disposal site located at an unused quarry closer to the Nanzhuan treatment plant, will be studied, and the least-cost option will be adopted. Consultancy services for the design and review o fthis facility will be included. 8. Foshan Flood Protection and EmbankmentRehabilitation. The component will include wastewater interception, improved flood control embankments and improvement o f amenities along the northbank o f the Fenjiangriver. It comprises about 6.67 kmo f embankment improvement inthe river section from Locun to Dali, about 3.8 kmroadwidening (13m to 25 m), wastewater interception, landscaping and forestation. 9. Foshan River Water Quality Improvement. The component includes dredging about 35 kmo fthe river to remove about 1.O meter deptho fsediment from FoshanWaterway, startingat Shakou Gate to Shawei Bridge and the Foshan Creek. The dewatered sediment will be disposed ina sanitary landfillto beconstructed underthe project. The component also includes construction o f4 automatic online water quality monitoring stations, emergency response plan, and improvement o fthe urbanmanagement information databaseand development o f a water environment management information system. 10. Institutional Strengthening and Training. Technical assistance for: (a) project management services including contract management and monitoring o f safeguard implementation; (b) study o f environmental costs for GDP growth and "green" economic planning; and (c) training, capacity buildingand studytours. JiangmenComponent 11. The component will cover Jiangmen's core urbandistricts o f Pengjiang and Jianghai with a population o f about 600,000 people. The estimated wastewater generated inthe two districts i s about 300,000 m3/day, compared with the available treatment capacity o f 90,000 m3/day, including 40,000 m3/day at Fengle, and 50,000 m3/day at Wen Cheng Sha. The treatment capacity o f another core urbandistrict (Xinhui)is 40,000 m3/d, but i s operated under a BOT arrangement, and therefore not covered under the project. 12. More than200,000 m3/day o f untreated domestic and industrial wastewater enters Jiangmen and Tian Sha Rivers causing serious pollution, and a water quality worse than Class V. These rivers are the main tributaries of XijiangRiver, which is the main drinkingwater resource for many western PRD municipalities. Water quality inthe Jiangmen and Tian Sha Rivers is generally Class V insummer (dry season) and Class IV duringother seasons. The two river stretches north of the confluence are the worst polluted sections of the rivers (worse than Class 27 V). Expansionofthe Wen Cheng ShaWTP and relatednetworks will increase collection and treatment of wastewater generated inthis drainage area, andwill help achieve the city's target of 70 percent treatment coverage by 2010, and improve water quality inthe two rivers. 13. Concurrent with expanded wastewater treatment, the water quality monitoring capacity will be enhancedthrough: installationo friver quality automatic on linemonitoring equipment, setting up a center for data processing, and procurement of a mobile laboratory to allow quick response to accidental harmful discharges and suspected malfunctioning o f on line monitoring equipment and enterprise treatment facilities. 14. Jiangmen 's investment component comprises: (a) extension o f the existing Wen Cheng Sha WWTP by 150,000 m3/day (to bringthe capacity to 200,000 m3/day), and Jiangzui Pumping station, constructiono f 22 km o f interceptors, and three pumpingstations; (b) reconstructiono f an existing storm drainage pumpingstation; and (c) purchase of equipment and software to improve water quality monitoring. 15. Jiangmen 's Institutional Strengthening and Training includes support for capacity enhancement inoperational, financial and management systems for the new BiyuanWastewater Treatment Company. 28 Annex 5: ProjectCosts CHINA: SECONDPEARLRIVERDELTAURBANENVIRONMENTPROJECT ProjectCostEstimates The total project cost, includingphysical and price contingencies, taxes, and duties, i s estimated at Y1,462.9 million (US$187.9 million). The corresponding estimated total costs by city are: Foshan, Y1,156.6 million, and Jiangmen, Y306.4 million. PRD 2 ProjectComponent Cost Summary Project Cost ProjectCost Bank Loan Counterpart Component (RMBY M) (US$ M) (US$M) Fund (US$ M) Foshan 1.Wastewater Management 243.47 31.71 10.55 21.16 2. SludgeTreatment and Disposal 146.98 19.02 10.69 8.33 3. RiverWater Quality Improvement 230.16 29.68 20.07 9.61 4. Flood Protection and Embankment Rehabilitation 500.02 63.71 26.05 37.65 5. InstitutionalStrengtheningand Training 35.92 4.64 4.64 0.00 Subtotalfor FoshanComponent 1156.55 148.75 72.00 76.75 Jiangmen 1.Wastewater Management 300.28 38.35 23.32 15.03 2. Institutional Strengtheningand Training 6.11 0.80 0.68 0.12 Subtotalfor Jiangmen Component 306.39 39.15 24.00 15.15 Total: 1462.94 187.90 96.00 91-90 Inthe computation oftotal estimatedcosts, the following assumptionshavebeenmade: 2006 2007 2008 2009 2010 2011 29 Dollar: Yuan exchange rates: Projected RMB vs. US Dollar ExchangeRate 2006 2007 2008 2009 2010 2011 8.00 7.90 7.80 7.70 7.60 7.50 Physical contingencies: 8 % for all activities Landacquisition and implementation costs: Basedon local design institute's estimation. 30 Annex 6: ImplementationArrangements CHINA: SECONDPEARLRIVER DELTA URBANENVIRONMENTPROJECT ProvincialLevel 1. The GuangdongProvincial Government Office for World Bank Projects (GDPMO), established within the Guangdong Provincial Finance Bureau (GDFB), will be responsible for overall project coordination. Its responsibilities include: (a) project-wide quality assurance; (b) project reporting to GPG and the Bank; (c) inter-agency coordination and procurement support; and (d) training and technical assistance facilitation. GDPMO is also responsible for the coordination o f PRD 1implementation. City Level 2. The participating cities have also established and staffed project management offices (PMOs). The responsibilities o f the PMOs at the city level are to guide the preparation and execution o f the project components within their jurisdictions. They will receive functional guidance and support from GDPMO. The skill mix o f the PMOs will be adjusted as necessary to reflect the needs o f the various phases o fproject implementation. 3. Foshan. A Leading Group, headedby aVice Mayor, withrepresentatives Foshan Development and Reform Commission, Foshan Municipal Engineering Bureau, Foshan Finance Bureau, and Foshan Environmental Protection Bureau, has been formed to guide formulation and give policy direction for the preparation and implementation o f the Foshan component. 4. The Foshan Environmental Protection Bureau has been designated as the municipal agency responsible for managingproject implementation, which has constitutedthe Foshan Project Management Office (FPMO). Three PIUs are responsible for the preparation and implementation o fthe four project components. 5. The Foshan Water Group Company Ltd. (FWGC) i s the implementing agency for the Zhen'an WWTP and the Sludge Treatment and Disposal component. FWGC is a company with a business license, with a legal personwith powers to borrow and repay loans. FWGC also been designated to (a) borrow (andrepay) World Bank loan proceeds; (b) enter into a subsidiary loan agreement with the Municipal Government; and (c) raise the necessary counterpart funds. It is a condition o f disbursement o fthe Loan that the Subsidiary LoanAgreements will havebeen authorized or ratified. 6. FWGC i s an independent legal entity, with the responsibility at present to own and manage the assets o f all water supply and part o f the wastewater facilities inthe Chancheng District. FWGC has been operatingthe whole water supply facilities including the treatment plants, pumpingstations, trunk and branch water pipes, consumer's services andtariff collection. For wastewater, the Xinzhiyuan Wastewater Treatment Company (XWTC), a subsidiary of FWGC operates the WWTPs andpart o fthe trunk sewers and pumpingstations, while the 31 remaining sewer networks and pumpingstations are operated by Chancheng District Municipal Engineering, Gardening and Environmental Sanitation Bureau. 7. XWTC will be responsible for the operation o fthe WWTP. XWTC operates 3 WWTPs inthe Chancheng District and will also operate through BOT contracts, five WWTPs outside the Chancheng District (four under construction and one completed). 8. The Foshan Environmental Protection Bureau andthe Foshan Water Resources Construction Management Center (under Foshan Water Resource Bureau) will implement and maintain the Foshan River Water Quality Improvement component andthe Flood Protection and Embankment Rehabilitation component, respectively. Both agencies are part o f the Foshan Municipal Government, which will provide funds for project implementation. 9. Jiangmen. A LeadingGroup, headedby aVice Mayor, with representatives o fJiangmen Development and Reform Commission, Jiangmen Municipal EngineeringBureau, Jiangmen Finance Bureau, and Jiangmen Environmental Protection Bureau, has been formed to guide formulation and give policy direction for the preparation and implementation o f the Jiangmen component. 10. Jiangmen Municipal Engineeringand Public Utilities Bureauhave been designated as the Jiangmen Project Management Office (JPMO) and Jiangmen Finance Bureau is the coordinating office o f the Jiangmen Project Leading Group. 11, An autonomous enterprise - the Jiangmen BiyuanWastewater Treatment Company (JBWC) with a charter and a business license was formed recently with responsibilities for implementationo f the works and operation o f the wastewater facilities including WWTPs, interceptors and pumpingstations. The existing collection network will continue to be owned and operated bythe Jiangmen Municipal Engineering Facility Management Department. JBWC will be responsible for implementingthe project component inJiangmen. 12. JBWC will (a) borrow (and repay) World Bank loan proceeds; (b) enter into a subsidiary loan agreement with the Municipal Government; and (c) raise the necessary counterpart funds. It i s a condition o f disbursement o f the Loan that the Subsidiary Loan Agreements will have been authorized or ratified. 13. More detailed information on the above companies i s available inProject Files. 14. DetailedDesign. Bothcities will engage local design institutesto undertake detailed design preparation. Other agencies will be engaged to carry out detailed topographic and geotechnical investigations. Unit costs based on recent contract prices and market rates would be adopted, to avoid over estimation o f costs, and accumulation o f loan savings. 15. DesignReview. An independent expert firmor individualwillbe engaged to evaluate designs inbids for the Foshan Sludge Disposal Center. The objective i s to evaluate the least cost design from among the bids that would propose alternative sludge dryingprocesses. 32 16. ConstructionSupervision. Foshanwill engage an expert firmto provide construction supervision services for the River Water Quality Improvement component, which involves the environmentally sensitive river bed sediment dredging operation. Other agencies inFoshan and Jiangmen will engage local supervision companies to provide construction supervision services. 17. ProjectManagement. Foshanwill engage anexpert consulting firm to provide project management services to all implementing agencies to conduct design reviews and to monitor EMPimplementation. 33 Annex 7: FinancialManagementandDisbursementArrangements CHINA: SECONDPEARLRIVERDELTAURBANENVIRONMENTPROJECT 1. The Financial Management Specialist (FMS) has conducted an assessment o f the adequacy o f the project financial management system o fthe Second Guangdong Pearl River Delta Urban Environment Project (PRD 2). The assessment, based on guidelines issued by the Financial Management Sector Boardon November 3,2005, has concluded that the project meets minimumBankfinancial management requirements, as stipulated inBP/OP 10.02. Inthe FMS's opinion, the project will have inplace an adequate project financial management system that can provide, with reasonable assurance, accurate and timely information on the status o fthe project inthe reporting format agreed withthe project and as requiredbythe Bank. 2. Fundingsources for the project include Bank loan and counterpart funds. The Bank loan proceeds will flow from the Bank to the project Designated Account (DA) to be established at and managedbythe GuangdongProvincial FinanceBureau(GDFB). The Bank's loan will be directly delivered to PIU by GDFB from the DA according to municipal finance bureaus' (MFB) payment request once the disbursement documents are reviewed and approvedby MFBs, but the payments to contractors must be approved by MFBs. Interms o f disbursement technique, the GDFBhas decided to use report-based disbursement method inthe project. Counterpart funds comprise contributions from municipal governments, self-financing from the water supply and wastewater treatment companies, and domestic borrowing. Audit Arrangement 3. The Bank requires that project financial statements be audited in accordance with standards acceptable to the Bank. Inline with other Bank financed projects inChina, the project will be audited inaccordance with ISAand the Government Auditing Standards o fthe People's Republic o f China. The GuangdongProvincial Audit Office has been identified as auditors for the project. Annual audit report will be issued inthe name o f Provincial Audit Office. 4. The annual audit reports o fprovincial project consolidated financial statements will be due to the Bank within 6 months o fthe end o f each calendar year. This requirement i s stipulated inthe loanagreements. The responsible entity and timingare summarized asbelow: Component Submittedby Due date I Consolidated project financial Guangdong June 30 statements IPPMO DisbursementArrangement 5. The GDFB has decided to use Report-based disbursement mechanism. The following four disbursement methods will be used: 1) Reimbursement; 2) Advance; 3) Direct Payment; and 4) Special Commitment. The applications for withdrawal will be supported by un-audited semi- annual financial reports, and no supporting documents (invoices, etc.) will be required unless they are requested by the Bank. The format o f the financial reports has been agreed betweenthe Bank and the Borrower. 34 Allocation of Loan Proceeds 6. Proceeds o f the Loan would be disbursed against expenditure categories as shownbelow. Category Amount of the Loan Percentage of Expenditures Allocated to be financed (expressed in USD) A. Foshan's RespectivePart of the Project: (1) Goods and civil 10,700,000 87% works under Part A. 2 ofthe Project (2) Goods under other 5,120,000 100% Foshan's Respective Part of the Project (3) Civil works under other 45,010,000 80% Foshan's Respective Part of the Project except Part A. 1 of the project (4) Civil works under 6,530,000 55% other Part A. 1 of the Project (5) Consultant's services 4,640,000 100% and training B. Jiangmen's Respective Part of the Project: (1) Goods 9,260,000 100% (2) Civil Works 14,060,000 60% (3) Consultant's services 680,000 100% and training C. Front-end Fee 0 Amount payable pursuant to Section 2.04 of this Agreement in TOTAL AMOUNT (us$) * Taxes are included for the consultant services which i s financed at 100% 35 DesignatedAccount @A) 7. One segregatedDesignated Account (DA) to which only the Bank funds canbe deposited will be established inGDFB, andmaintainedina commercialbank acceptable to the Bank. The currency o f DA i s U S Dollar. The ceilingo f DA will be variable and determined on the basis o f the financial forecast for the next one year providedbythe semi-annual financialreports, and subject to approved by the Bank. The use o f the advances will bereportedthrough the semi- annual financial reports. The semi-annual financial reports would provide the informationon the uses o f previous advances and the project financial forecast for next two reportingperiods (it means next one year as semi-annual FMRs are accepted). The applications for reportingonthe uses o f advances must be submitted together with financial reports on semi-annual basis. However, the applications for requestingadvances can be submittedtogether with semi-annual financial reports or submitted separately inmultipletimes duringthe halfyear period as longas the cumulative amount o f requested advances does not exceed the agreed forecast providedinthe semi-annual financial reports. 8. The GDFB will be directly responsible for the management, monitoring, maintenance and reconciliationof the DA activities of the project. Project's semi-annual financial reporting package requiredfor Bank disbursements will beprepared and submittedbyrespective PIUs through MFBs, to provincial PMO for final verification and consolidationbefore sendingto the Bank for further disbursement processing. The flow o f the withdrawal application is as follows: FinancialManagementandReportingArrangements 9. ImplementingEntity. A ProvincialProjectManagement Office (GOPMO), located withinprovincial finance bureau, hasbeen established. InJiangmen, a PMO hasbeen established and 10 full-timeand part-time persons have been working onproject preparation and will continue to beinvolved duringproject implementation. The Jiangmen Wastewater Treatment Company (JBWC), i s the PIU, which will implement the Wen Cheng Sha component. InFoshan, aPMOlocated inthemunicipal environmental protectionbureauhasbeen established. The PMO i s under the leadership o f the Leading Group headedby the Vice Mayor. Foshanwill have three PIUs, (Le., the Foshan Water Group Company, the Foshan Water Resources ConstructionManagement Center under Foshan Water Resources Bureau and Foshan Environmental ProtectionBureau). The organizationchart i s as follows: 36 Provincial PMO 0 0 FoshanPMO Jiangmen PMO 10. FundsFlow. Flow ofIBRDfundswould follow theroutefrom theWorld Bankto DesignatedAccount set up inthe GDFB. The GDFB will delegate the responsibility o freview o f disbursement documents to the two MFBs, the funds will bepaidimmediately by GDFB according to the MFBs' payment request once the disbursement documents are reviewed and approved by MFBs. As an alternative, GDFB will concentrate its roles on training, monitoring and post review. The funds will be delivered to PIU directly but the payments to contractors mustbeapproved byMFB. The funds flow is as follows: 1. The 2. DA 3. PIUS WorldBank managedby + GPFB The funds flow of counterpart funds will follow the domestic procedures depending onthe source o f funding. 11. Adequate project accounting staff with educational background and work experience commensurate with the work they are expected to perform is one o fthe factors critical to successful implementationo f project financial management. Based on discussions, observation andreviewo f educational background andwork experience ofthe staffidentified for financial and accounting positions inthe provincial and city PMOS,the Bank team noted that most o f financial staff recruited should be able to meet the Bank's minimumrequirements. However, all o f the financial staffs inPIUs are new to the Bank project although most o f them have previous construction sector related experiences. Financial management training will be providedby provincial PMO before loan effectiveness. 12. To strengthen financial management capacity and achieve consistent quality o f accounting work, the Bank team has suggestedthat a project financial management manual (the Manual) beprepared. The Manual will provide detailed guidelines on financial management, internal controls, accounting procedures, fund and asset management and withdrawal application procedures. 37 13. A financial management manual (the Manual), preparedby the provincial PMO for PRD 1project, provides a good basis for the proposed PRD 2 project. However, the Manual shouldbe revised to tailor to the specific situations o f the PRD 2 project and some innovative actions with respect to simplification o f disbursement category and FMRsbased disbursement will be included inthe Manual. The first draft o f the Manual hasbeen reviewedby the Bank during appraisal and comments have beenprovided for their further modifications. The final draft i s requiredto be submittedto the Bankbythe endFebruary 2007. The Manualwill befinalized anddistributed to all the financial staffbefore project effectiveness. 14. Accounting Procedures. The administration, accounting andreporting of the project will be set up inaccordance with the Circular #13: "Accounting Regulations for World Bank Financed Projects" issued inJanuary 2000 by MOF. The circular provides detailed instructions o f accounting treatment o fproject activities and covers the following: Chart o f account Detailed accounting instructions for eachproject account 0 Standard set o fproject financial statements 0 Instructions on the preparation o fproject financial statements 15. The project financial reportingpackage, includingdetail format and content ofproject financial statementshas been agreed betweenthe Bank and MOF. Such a project financial reporting package will serve both for periodic financial reporting and as supporting documentation for disbursemento f Bank funds. Inorder to meet the disbursement requirements, some minor changes have beenmade to the standardized format o f project financial reporting package. As the project will utilize report-based disbursement method, the un-audited semi- annual financial reportingpackage should be submitted to the Bank within 45 days after the end o f each semi-annual period which i s inaccordance with the disbursement requirement. This project financial reportingpackage includes the following: 0 Balance Sheet 0 Summary of Sources and Uses ofFundsbyProjectComponent 0 Uses o f Loans by Project Category Designated Account (DA) Activity Statement 0 Expenditures for Contracts subject to Prior Review 0 Expenditures for Contracts not subject to Prior Review The Bankhas discussed and agreed with the GPFB on the format and contents o f financial reporting package. 16. Each o f the PIU will manage, monitor and maintainrespective project accounting records. Original supportingdocuments for project activities will be retained by originating PIUS. Inaddition, each PIU will prepare financial statements, which will bereviewed, approved and consolidated by municipal finance bureaus and then by provincial PMO before sending to the Bank for review and comment on a regular basis. 38 17. InternalAudit. There is no formal independent internal audit department for theproject. However, this will not impact the project's financial management as PMO management and monitoring, Bank supervision visits, and yearly external audits will serve as the mechanism to ensure that financial management controls are hnctioning appropriately. 18, InformationSystem. There is no uniformaccounting software beingusedbythe PIUs although some PIUs involved are usingaccounting software for their current activities. Iti s uncertain at this stage ifthey can integrate the project activities into their current system. The FMS will review the adequacy of their financial accounting andreporting system prior to project effectiveness. 19. FinancialManagementAction Plan. The following time-bound actions areproposed: Acition Responsibleperson CompletionDate I training 1. Financialmanagement ProvincialPMO Before effectiveness to all relevant project staffs. 2. Financialmanagement ProvincialPMO Before effectiveness manual finalized and issued to related financial 20. SupervisionPlan. A detailed supervision planfor this project will beincludedas part of the ChinaAudit Strategy document. This document will take into consideration ofthe size and FMriskratingofthis project. 39 Annex 8: ProcurementArrangements CHINA: SECOND PEARLRIVERDELTAURBANENVIRONMENTPROJECT A. General 1. Procurement for the proposed project would be carried out inaccordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated inthe Legal Agreement. The various items under different expenditure categories are described ingeneral below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for pre- qualification, estimated costs, prior review requirements, and time frame have been agreed betweenthe Borrower and the Bank inthe Procurement Plan. The Procurement Planwill be updated at least annually or as required to reflect the actual project implementation needs and improvements ininstitutional capacity. 2. ProcurementofWorks. Works procuredunder this project would include: embankments, interceptors, roads, pump stations, sludge treatment plants, wastewater treatment plant, sewage collection pipelines, and river course dredging and landfill for dredged sediment. The procurement will be done usingthe Bank's Standard BiddingDocuments (SBD) for all ICB and Chinese Model BiddingDocuments (MBD) agreed with the Bank for all NCB. Performance-based procurementmay apply to the constructiono f the sludge treatment plant, and D B O to the landfill for dredged sediment. 3. Procurementof Goods. Goods procuredunder thisprojectwould include: equipment for wastewater treatment plants, hardware for urban information data base and water environment management information system, and water quality monitoring equipment. The procurement will be done usingthe Bank's Standard BiddingDocuments (SBD) for all ICB and Chinese Model BiddingDocuments (MBD) agreed with the Bank for all NCB. 4. Procurementof non-consultingservices. Non-consulting services would include topographic survey and data collection, and data verification. The World Bank Sample Bidding Document-Procurement o fNon-consultant Service will beused. 5. Selectionof Consultants. Consultants willbe selected to provide consulting services on project management, construction supervision, design and review, institutional strengthening, urban information data base, environmental management information system, study on Environmental Cost for GDP Growth and GreenEconomic Planning for Foshan. Short lists o f consultants for services estimated to cost less than $300,000 equivalent per contract may be composed entirely o f national consultants inaccordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines. 6. The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, are presented inthe Procurement Manual and Procurement Plan. 40 B. Assessment of the agency's capacity to implement procurement 7. Procurement activities will be carried out by: Project Component PIU Foshan: North Bank Rehabilitation Foshan Water Resource Construction o f FenjiangRiver Administration Center Foshan: Sludge Treatment Center FoshanWater Group Co. Ltd. Foshan: Zhen'an Wastewater Foshan Water Group Co. Ltd. Treatment Svstem World Bank Financed Foshan Pearl River Comprehensive Rehabilitation Project Office, FoshanEnvironmental ProtectionBureau Foshan Planning Bureau World Bank Financed Foshan Pearl River Comprehensive Rehabilitation Project Office, FoshanEnvironmental Protection Bureau Foshan Consulting Services World Bank Financed Foshan Pearl River Comprehensive Rehabilitation Project Office, FoshanEnvironmental Protection Bureau Jiangmen Sewage Treatment System Jiangmen BiyuanWastewater Treatment Company Limited Jiangmen Consulting Services I IJiangmen BiyuanWastewater Treatment Comuanv Limited 8. Inthe above PIUs, at the time o fappraisal, specific staffhavebeen designated to be responsible for procurement activities: PIU Responsible Staff Foshan Water Resource Mr.KuangYuanhua Construction Administration Center Foshan Water Group Co. Ltd. MsZhang Xiaoshuang World Bank FinancedFoshan Mr.LiangGuohui Pearl River Comprehensive Rehabilitation Project Office, Foshan Environmental ProtectionBureau Foshan Planning Bureau Mr.ChenNaxin Jiangmen BiyuanWastewater Mr.WuJianzhong Treatment ComDanv Limited Jiangmen BiyuanWastewater Mr.WuJianzhong Treatment Comuanv Limited 41 9. An assessmento fthe capacity o fthe ImplementingAgency to implement procurement actions for the project has been carried out by the Bank's Procurement Specialist on April 28, 2006. The assessmentreviewed the organizational structure for implementing the project and the staffing as well as the arrangements for recruiting procurement agent. 10. The key issues and risks concerningprocurement for implementation o f the project have been identified. The corrective measures which have been agreed are special training for procurement, learning experience from the on-going PRD 1project, and recruitment o f an experienced procurement agent. 11. The overall project risk for procurement is average. C. ProcurementPlan 12. The Borrower has developed a procurementplanfor project implementationwhich provides the basis for the procurement methods, contract estimates, etc. This planhas been agreed between the Borrower and the Bank Project Team inprinciple on April 28,2006 and was updated at negotiations inDecember 2006. This plani s now available at GuangdongProvincial PMO. Itwill also be available inthe project's database and inthe Bank's externalwebsite. The Procurement Planwill be updated inagreement with the Project Team annually or as required to reflect the actual project implementationneeds and improvements ininstitutional capacity. D. FrequencyofProcurementSupervision 13. Inadditionto prior reviews, the Bank's capacity assessmentofthe implementing agencies has recommended at least one supervisionmission per year to carry out post reviews o f procurement actions. 42 'C 8 8 a 'C a zaa m u u cp 2 z u Z v, d- N 7 cl 00 Y Y 2 2 ? ? +n 'C 8 a a Q L) Z I;, Z xrg 00 c? M M 2 ru 0 r u " o r l ? m s +0 g a, m D a, 3 '$ 2a k a"0 Bo 42& 2 r) m P o! 3 A m r'! \D 30 3 I; I; 0 E Y (d a (d ru 0 3 4 r? 5 4 3 3 3 3 m3 sn L4 4 c, 2. Consulting Services (ii)Listofconsultingassignments Foshan C InsultingServic S FS-A Project Consulting $1.OO million QCBS Management Service FS-B Training Consulting $0.62 million QCBS Service C Foshan Consulting $1.25 million QCBS Waterway Service Environmental Management Information System D Environmental Consulting $0.37 million QCBS Cost for GDP Service Growth and Green Economic Planningin Foshan FSGISI FoshanGIS Systemdesign and Consulting US $0.6 QCBS c1.1 Design and procurement/development Service million Software of software FSWCI Training TBD us$0.09 T1.2 million FSWCI Construction Supervision of dredging Consulting US $0.5 QCBS c1.1 Supervision of process and measurement Service million FoshanWater of quantities ofdredging Course and landfill Dredging JM-A Institution Consulting $0.45 million QCBS Strengthening Service JM-B Training $0.23 million SOE (a) Consultancy services estimatedto cost above U S $100,000 per contract for firms and U S $50,000 per contract for individuals and single source selection of consultants(firms) will be subject to prior review by the Bank. (b) Short lists composedentirelyofnational consultants: Short lists ofconsultantsfor services estimatedto cost less than U S $300,000 equivalent per contract maybe composedentirely of national consultantsinaccordancewith provisions ofparagraph2.7 of the Consultant Guidelines. (c) During the implementation, quality-based selection, selection basedon consultants' qualifications and individual consultantsmay beused. (d) Direct contracting is amethodthat would be available under conditions acceptableto the World Bank. 46 Annex 9: Economic and Financial Analysis CHINA: SECOND PEARL RIVERDELTAURBANENVIRONMENTPROJECT A. FinancialAnalysis 1. Financial analysis was conducted (i) estimate tariff levels required to ensure financial to sustainability o f the implementing project companies; (ii) to show that the projectedtariffs can recover the costs o f collecting, treating, and disposing wastewater; (iii) to demonstrate that the required tariff increases are affordable for poor households; and (iv) to show that Foshan and Jiangmen municipalities have sufficient financial resources to meet all counterpart and debt service payments under the Bank project-either for those components where they carry direct debt repayment responsibility (i.e. the river quality improvement and flood protection and embankment rehabilitation components inFoshan) or indirectly (incase the implementing companies would not be able to meet the obligations under the project). An analysis o f the debt capacity o f each municipality was also conducted. I. Foshan 2. Institutional context. The wastewater management and sludge treatment components will beimplementedby FoshanWater GroupCompany (FWGC). FWGC is an independent state-owned enterprise which owns and manages the assets o f all water supply and part o f the wastewater facilities inthe Chancheng District, Foshan's core urban area. Its wastewater facilities are managed by a legally-independent subsidiary,Xinzhiyuan Wastewater Treatment Company Ltd. (XWTC), established in2002. FWGC, through its Water Supply Company, operates at present all water supply facilities including treatment plants, pumpingstations, trunk andsecondary water pipes. But for wastewater, XTWC operates only wastewater treatment plants. The remaining sewer network andpumpingstations are runby Chancheng District Municipal Engineering, Gardening and Environmental Sanitation Bureau. X W T C currently operates three treatment plants-Zhen'an, Dongpo, and Shagang-with a total capacity o f 400,000 m3/ day. Until2011,inaccordance with Chancheng's master plan, wastewater treatment capacity will be expanded to reach a total o f 650,000 m3/ day, including through the extension o f the Zhen'an WTP, financed by the Bank project. 3. Existing wastewater tariffs. Foshan has been increasing wastewater tariffs steadily in recent years-in line with central and provincial government policy o f raising the cost recovery level inthe sector. Tariffs increased from an average o f Y0.301 m3 in2002 to Y0.601m3 in 2006, with a further increase to Y 0.80/ m3 planned for 2007. However, Foshan's current tariff level i s well below the estimated level o f cost recovery inthe sector, although it is comparable with tariffs inother large and developed cities inChina: a recent Bankstudyanalyzed a representative sample o f 128 cities and estimates that the average wastewater tariff i s Y0.64/m3 in2005 incities ofcomparable size andlevel ofper capita income as Foshan. However, a number o f these cities have already managed to increase tariffs to levels higher than those achieved inFoshan, such as Beijing and Shanghai-where tariffs are Y0.90/m3 each-and Shenzhen which has the highest reported tariff o fYl.O4/m3. For comparison, the average tariff inGuangzhou, the provincial capital, is currently YOa7O/m3. 47 Foshan Wastewater Tariffs (Y/m3) I2003 2004 2005 2006 Domestic I,0.45 0.45 0.55 0.55 Allother 0.55 0.55 0.65 0.65 Average 0.5 0.5 0.6 0.6 4. Tariff collectionm Yhanism. Wastewater tariffs are collected by th Foshan Water Supply Company and passed on to the Municipal FinanceBureau for use inthe wastewater sector. Untilthe end o f 2005, the Finance Bureaupassed all revenues generated from wastewater tariffs back to FWGC2. However, at the beginning o f 2006, Foshanreorganized the way the Finance Bureau shares revenue with FWGC: Foshan Finance Bureau and the FWGC entered into a "concession"-type contract by which the Finance Bureau agreed to pay FGWC a fixed unit rate per m3 o f wastewater treated-currently set at Y0.97/m3 o f wastewater treated. This compares to the wastewater tariff, currently set at an average of 0.60/m3 o f water consumed. The understanding between the Finance Bureau and FWGC i s that the "concession rate" i s sufficient to cover all costs directly relatedto operating, maintaining, and servicing the debt o fwastewater treatment plants. The costs related to operating and maintaining the network and sludge treatment expenditures are not included inthe "concession" contract. 5 . Financialsustainability and cost recovery tarvfs. Given that wastewater payments are structured inthe way described above, two sets of financial projections were prepared covering the period o f 2006-2016: the first set o fprojections was developed from the perspective o f FWGC to understand whether its wastewater business is financially sustainable based on the "concession" payment it receives; the second set, developed from the perspective o fthe Municipal Finance Bureau, estimates the tariff level necessary to recover all costs inthe wastewater sector: "concession" payments to the wastewater treatment company, collection network operation and maintenance costs, and sludge treatment expenditures. Summary results for both sets o f financial projections are presented below, with all detailed assumptions and the financials models included inthe project files. 6. Financial sustainabiliFFoshan wastewater company. Detailed financial projections were prepared for the wastewater part o f FWGC's business to demonstrate that it receives sufficient revenue through the "concession" payments to meet the Bank's financial covenants included inthe project agreement, namely: (i) that its total revenues must the sum o f its total operating expenses (incl. for maintenance), increases inworking capital (other than cash), and the amount bywhich debt service requirements exceeds depreciation; and (ii) the debt that service coverage ratio i s at least 1.2 times in2008 and 2009, and 1.3 times in2010 and beyond. The result of the financial projections show that FWGC's wastewater business i s sufficient to cover all treatment related expenditures-rendering business viable from a financial point o f view. The overall financial healtho f FWGC was also analyzed, based on audited accounts, which shows that FWGC, the treatment company's parent, has been operating profitably in recent years, providing additional assurances interms o f financial sustainability for this project component. FWGC's net income in2005 was Y15 million and its ratio o f long-termdebt to equity is equal to about one. Note also that there i s no reported self-supplied water inChancheng district. 48 Base year Constructionand start-up Years offull operation 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 BOT Rate(Y/m3wastewatertreated) 0.97 0.95 0.96 0.97 0.98 0.99 1.00 1.01 1.02 1.03 1.04 WastewaterTreatmentCompany Net operating revenue (Y mill.) 124 151 184 186 188 206 208 210 212 214 217 Net income (Y mill.) 16 27 43 43 43 45 47 49 51 52 54 Financial covenants: Costrecovery ratio 1.34 1.31 1.47 1.48 1.46 1.43 1.47 1.49 1.51 1.53 1.55 Debt service coverage ratio 1.20 1.40 1.66 1.65 1.62 1.62 1.71 1.76 1.83 1.89 1.96 7. Projected cost recovery tar$$ To project the tariff level necessary to cover all costs relatedto collecting, treating, and disposing wastewater, financial projections reflecting the perspective o fthe Foshan Finance Bureau were developed. The key assumptions include the following: the revenue stream is derived from water consumed times the wastewater tariffs charged; the expenditure side includes the "concession" payments, the costs o f operating and maintainingthe collection network, and the costs o f operating and maintainingthe new sludge treatment facility. The results o fthe projections indicate that tariffs will need to increase significantly to recover all costs related to wastewater collection, treatment, and disposal in Foshan. Tariffs are projected to need to increase to Y1.96/m3 by 2010, and again to Y2.08/m3 by 2016. Note that the model includes projected sludge treatment expenditures, estimated at a unit rate o f YO.2Ym3 wastewater treated. When FWGC takes on the operation o fthe sludge treatment facility, this amount would need to be added to the current "concession" payments to ensure continued financial sustainability o f the implementing company. The projections are lower bound estimates, as collection network related debt service payments and capital expenditures for future network expansions are not included. Baseyear Constructionand start-up Years of full operation 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Wastewater Tariff (Y/m3water supply) 0.60 1.23 1.48 1.48 1.48 1.96 2.00 2.02 2.04 2.06 2.08 Water supply billed (1000 &/day) 661 681 702 716 730 730 730 730 730 730 730 Wastewatertreated (1000 &/day) 360 450 540 540 540 585 585 585 585 585 585 IFmanceBureau revenuesand expenditures I I I Revenueffom wastewatertariff charges (Y mill.) 93 197 243 248 253 337 343 347 350 354 351 Expenditures (Y mill.) II I 161 1I 197 239 242 245 II 333 338 342 347 352 356 BOT paymentsfor wastewater treatment 130 159 194 196 198 219 221 223 226 228 Network O&M exuenses I 30 I 38 45 46 47 I 21i 57 58 60 61 62 8. To monitor Foshan's evolution towards cost recovery, the Finance Bureau will prepare, annually, financial projections for the full costs o f the wastewater sector inChancheng District. Incaserevenues from wastewater tariffs fall short ofallwastewater related expenditures, the Finance Bureau assuredthe Bank that such shortfalls would be funded from its local financial revenue which i s planned as a whole. For full income statement, cash flow statement, and balance sheet, see the end of this annex. 49 9. Tariff affordability. An affordability analysis was conducted which demonstrates that the projected tariff increases will remain affordable for residents inChancheng district, even under conservative planning assumptions, i.e., disposable income was projectedto grow at a lower rate than recent trends. Specifically, the affordability analysis demonstrates that the combined water and wastewater bill does not exceed 3% o fhousehold income for consumers inthe lowest income bracket (lowest deciles) which lies fully within the parameters o fthe generally accepted `affordability benchmark' o f a maximum o f 5% o fhousehold income paid for water and wastewater services. Furthermore, additional protection i s provided inthat very low income groups, those with annual per capita disposable income o f less than about Y2,000, are exempt from paying for water and wastewater services. Projections 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Domestic Water & Wastewater Tariff (y/m3) Wastewater 0.6 1.1 1.4 1.4 1.4 1.8 1.8 1.9 1.9 1.9 1.9 Water 1.1 1.1 1.1 1.3 1.3 1.3 1.5 1.5 1.5 1.7 1.7 Low Income-Water & Wastewater Bill (Y / householdyear)' Wastewater 59 72 72 148 178 178 178 237 241 244 246 Water 122 122 170 170 170 201 201 201 232 232 232 Total 181 195 243 318 348 379 379 438 473 416 478 Low Income--Water & Wastewater Billas % Household Disposable Income3 Wastewater 0.6% 0.6% 0.6% 1.2% 1.3% 1.3% 1.2% 1.5% 1.5% 1.4% 1.3% Water 1.1% 1.1% 1.4% 1.4% 1.3% 1.4% 1.4% 1.3% 1.4% 1.3% 1.3% Total 1.7Yo 1.1% 2.0% 2.5% 2.6% 2.7% 2.6% 2.8% 2.9% 2.7% 2.6% 10. Municipalfinances. Foshan has experienced strong economic growth inrecent years, averaging about 20% ineach o f the last three years. As a result, municipal revenues have increased significantly, rising from a total o fY4 billion in2003 to Y7.3 billion in2005. Infrastructure capital expenditures have also increased, inlight o f a number o f large urban infrastructure constructionprojects. Inthis context, a municipal finance analysis was conducted. Overall, the analysis demonstrates that Foshan Municipality can easily meet the obligations under the World Bank project, namely: (i) service all o f the World Bank debt-for the project components where it carries debt repayment responsibility directly or in case the wastewater company would not meet its debt service obligations, (ii) contribute necessary counterpart funds; and (iii)maintain and operate the assets created under the project-again, either where it carries direct payment responsibility or incase the wastewater company cannot meet its obligations. Note that the municipal financial analysis inthis section applies to the core city o f Foshan (and not the entire municipality). 11. Actual 2003-2006municipal revenues (on and off budget, including net transfers) and infrastructure expenditures were analyzed and projected to 2012 based on conservative planning assumptions: for example, municipal revenues and infrastructure expenditures were projected at lower than historical growth rates, i.e. actual municipal revenues growth averaged 30% over the last three years, but revenues were only projected to grow at only 10%duringthe projection period. Inaddition, it was assumed that all counterpart funds would be fully met bythe 50 municipality's general budget, although most o f the counterpart funds will, infact, be provided through commercial debts and self raised funds. Project WB Foshan Nanhai FWGC GEF Costs Loan Loan Budge! Budget Loan Self-Raisec Funds River Dredging and Management 237 215 24 NorthRiver Rehabilitation 456 197 260 Zhen`an WWTP 129 40 88 1 Zhen'an WW Collection System 148 50 20 61 18 Centralized SludgeTreatment 131 87 , 41 4 Total 1,100 589 285 20 61 129 4 18 12. Based on these conservative assumptions, the financial analysis shows that total project costs constitute at most 4% o f total municipal revenues; as a % o f total infrastructure expenditures, total counterpart fund requirements do not exceed 5% and debt service and operations and maintenance expenditures reach a maximum o f 4%. The Bank financed project is therefore assessedto be affordable for Foshan.' Furthermore, even iftariff levels would not increase as projected above, the impact o f delayed tariff increases would only constitute a small fraction o f Foshan's general revenues, not affecting the fundamental conclusion that the Bank finance project i s easily affordable for Foshan: were tariffs to increase at only halfthe rate indicated by cost recovery requirements, the average annual impact would be less than 1% o f total municipal revenues. Actual Projections 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total Revenue 4,159 5,948 7,354 8,089 8,898 9,788 10,767 11,844 13,028 14,331 Total ProjectCost As % of Total Revenues 4% 4% 2% 1% Total InfrastructureExpenditure 674 2,190 2,974 3,271 3,598 3,958 4,354 4,790 5,269 5,796 ofwhich is for capital investments 221 1,620 2,580 2,838 3,122 3,434 3,111 4,155 4,570 5,021 ofwhich is for operations and maintenance 453 570 394 433 476 524 517 635 699 710 Project Cost as % of Total InfrastructureExpenditure! ProjectCost (%) 9.8% 10.0% 5.6% 2.3% CounterpartFunds(%) 4.5% 4.6% 2.6% 1.1% DebtService Payments(%) 0.2% 0.6% 1.0% 1.6% 1.4% 1.8% Operations & Maintenance(%) 2.3% 2.1% 1.9% Debt/ GDP' 1.1% 2.8% 2.4% Debt/ Total Revenue' 41.3% 91.4% 77.3% I/exisfing on-budgef municipal deb! only 13. Municipal debt. A preliminary municipal debt analysis (again o fthe core city o f Foshan Municipality) was also conducted usingdata provided by Foshan Finance Bureau. The Finance Bureauwas only able to provide data on debt directly taken on by the finance bureauas off- budget debt (from municipally owned enterprises, other contingent liabilities) is not systematicallytracked. The municipal debt analysis suggeststhat on-budget debt as a % o f GDP has reached a maximum o f 3% inrecent years. However, debt at a % o f total municipal revenues Counterpart funding estimates as per project appraisal (June 2006). Note that for one project component, Zhen'an collection network, Nanhai is responsible for providing part o fthe counterpart funds. For Nanhai, total counterpart fund requirements are less than 1%p.a. as a % o f total municipal revenues-indicating that the district would be able to meet its share o f counterpart fundingresponsibility. Core city only 51 i s muchhigher and equaled 77% in2005. Foshan Finance Bureau indicated that the highlevel o f debt in2005 was a direct result o f significant urban infrastructure expenditures inrecent years, such as through the construction o f large ringroadproject. 11. Jiangmen 14. Institutional context. There are currently three wastewater treatment plants inoperation inJiangmen's core urban area: Wen Cheng Shawith 50,000 m3/ day capacity and Fenglewith 40,000 m3/ day, bothlocated inJianghai and Pengjiang districts; an additional treatment plant i s located inXinhui district with 40,000 m3/year capacity, operated under a B O T scheme. Jiangmen's Wastewater Management Department has traditionally been incharge o f operating the Wen Cheng Sha and Fengle WWTPs. The Municipal EngineeringFacility Maintenance Department has been responsible for operating and maintainingthe collection network. Jiangmen's Wastewater Management and MunicipalEngineeringFacility Maintenance Department are bothnon-enterprise institution, directly under the control o f Jiangmen Municipal Government. Relative to Foshan, Jiangmen's wastewater sector i s somewhat less developed, in that i s only now beginningto corporatize its wastewater sector, something Foshandid earlier. 15. With the constructionofthe Wen Cheng Sha extension-adding 150,000 m3/ day to the current treatment capacity and financed under the Bank project-the institutional set-up o f Jiangmen's wastewater sector i s being reformed. InApril 2006, the Biyuan Wastewater Treatment Company (JBWC) was created as an autonomous state-owned enterprise, with its own independent legal person, a business license, and company charter. Jiangmen Municipal Government i s currently inthe process o f transferring all o f Wen Cheng Sha's existing assets to JBWC, with the assets created under the Bank funded extension project also to be owned, after project completion, by the company. Jiangmen plans to transfer the assets o f Fengle WWTP to JBWC inthe medium term which would create one integrated corporate entity responsible for treating all wastewater currently collected by Jianghai and Pengjiang WWTPs. The maintenance andmanagement o fthe existing collection network will continue to remainthe responsibility o f the Municipal Engineering Facility Management Department. 16. Existing wastewater tariffs. Jiangmen municipality has steadily increased wastewater tariffs-in line with central and provincial government policy o fincreasingthe cost recovery level inthe sector. Tariffswere raisedmost recently inApril 2006 to an average o f Y0.71/m3. Prior tariff increases saw a gradual increase from Y 0.24/m3 in2003 to Y0.61/m3 in2005. Like Foshan, Jiangmen's current wastewater tariff levels are comparable with the tariff levels inother cities inChina of similar size and per capital income, though it i s below the level o f those cities that have raisedtariffs most aggressively (Shenzhen), and below tariffs inBeijing and Shanghai. However, like all other cities inChina, Jiangmen needs to continue to increase tariffs significantly over the medium term, to ensure financial sustainability o f its wastewater company and to movetoward cost recovery inthe sector. Jiangmen Wastewater Tariffs (Y/ m3) 2003 2004 2005 2006 Domestic Industrial Commercial 0.3 1.0 1.1 1.2 Average 0.24 0.52 0.61 0.71 52 17. Financial sustainabilitSF-Jiangmenwastewater company. JBWC is a newly established company and no audited financial statements are available. Detailed financial projections were therefore prepared to project wastewater tariff levels that would ensure financial sustainability o f JBWC. A number o f key assumptions were made, including the following: JBWC was assumed to own and operate all existing assets o f Wen Chan Shan and Fengle treatment plants, as well as the assets created under the Bank financed project. The collection network continues to be owned and operated by the Municipality. Interms o f financing, it was assumed that all debt o f the new project-World Bankdebt as well as counterpart funds raised through a commercial bank loan-are on the balance sheet o f JBWC which also carries the responsibility for servicing the debt. Liabilities o fthe existing wastewater treatment assets, however, were assumed to be carried by Jiangmen Municipality, with the assets transferred to JBWC inform o f a grant1equity contribution. 18. Interms ofwastewater revenue, tariffs are currently collectedbythe Water Supply Company and passed on to the Jiangmen Finance Bureau, which inturn uses the resources for the wastewater sector. The Water Supply Company receives a small service fee for collecting wastewater tariff. The Finance Bureau, at present, passeswastewater revenues collected via wastewater tariff to JBWC according to its operational needs. Tariff collection rate i s reported to be high, approaching 100%. There i s some self-supplied water, about 15% o f total water produced, but little i s discharged into the wastewater network. All detailed assumptions, as well as the financial projections, are contained inthe project files. 19. Projected cost recovery tarijJ The financial projections show that significant additional tariff increases are required to ensure financial sustainability o f JBWC. It i s estimated that average tariffs needto increase to Y1.411m3 by the time o f Bank financed project begins operations in2010, and to Y1.701m3 by 2016-reflecting average annual increase o f 20% and lo%, respectively. At these tariff levels, JBWC will meet the financial covenants included inthe project agreement, namely: (i) its total revenues must the sum o f its total operating expenses that (incl. for maintenance), increases inworking capital (other than cash), and the amount by which debt service requirements exceeds depreciation; and (ii) that the debt service coverage ratio i s at least 1.2 times in2008 and 2009, and 1.3 times in2010 and beyond. Iftariffs would not increase sufficiently to meet these financial covenants, the Bank sought assurance from Jiangmen that the municipality will provide subsidies from its local financial revenue which is planned as a whole. Duringproject implementation, the financial projections will berefined, through the institutional strengthening and training component on financial management, which will serve as the basis for monitoring compliance with the financial covenants. 20. Inthe projections, the costs o foperatingandmaintainingthe collection network were not included, as the institutional responsibility rests with the Jiangmen Wastewater Management and Municipal Engineering Facility Maintenance Department. Ifthe collection network costs were to be included, then tariffs would need to increase by an additional 10percentage points each year, as shown inthe table below. These estimates, however, remain lower bound estimates, as the costs o f servicing debts o f the existing wastewater assets (for bothtreatment and network) as well as capital costs o f future network expansion are not taken into account. To monitor the evolution toward full costs recovery, including network related expenditures, the FinanceBureau will prepare, annually, financial projections for the full costs o fthe wastewater sector in Jiangmen's core urban area. 53 Water supplybilled(1000m /day) I/ Wastewater Tariffadiustedfor Finance Bureau expenditureson nehvork operation and maintenance 21. Tariffaffordability. An analysis o f the affordability o f projected wastewater tariffwas undertaken. The analysis demonstrates that the projected wastewater tariffs will remain affordable for poor households inJiangmen, even based on conservative planning assumptions, i.e. disposable income i s assumed to grow at a lower rate than recent trends. The impact of continued increases inboth water andwastewater tariffs on households inthe lowest income bracket (lowest deciles) i s estimated to not exceed 2.7%, at a maximum which i s fully within the parameters o fthe international `affordability benchmark' o f 5% o fhousehold income paid for water and wastewater services. Furthermore, additional protection is provided inthat very low income groups, those with annual per capita disposable income o f less than about Y 2,000, are exempt from paying for water and wastewater services. Projections 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Domestic Water & Wastewater Tariff (y/m3) Wastewater 0.8 0.8 0.9 1.1 1.3 1.4 1.6 1.6 1.6 1.6 1.6 Water 1.2 1.2 1.4 1.4 1.4 1.6 1.6 1.6 1.8 1.8 1.8 Low Income--Water& WastewaterBill (Y perhousehold year)2 Wastewater 92 95 114 137 158 174 191 191 191 191 191 Water 172 172 201 201 201 230 230 230 259 259 259 Total 264 268 316 338 359 404 421 421 450 450 450 Low Income-Water & WastewaterBill as % HouseholdDisposableIncome' Wastewater 0.8% 0.8% 0.9% 1.0% 1.1% 1.2% 1.2% 1.2% 1.1% 1.1% 1.0% Water 1.5% 1.4% 1.5% 1.5% 1.4% 1.5% 1.5% 1.4% 1.5% 1.5% 1.4% Total 2.2% 2.2% 2.4% 2.5% 2.5% 2.1% 2.1% 2.6% 2.7% 2.5% 2.4% 22. Municipalflnances. Like Foshan, Jiangmen has experienced rapid economic growth in recent years, with total municipal revenues significantly increased, up from Y1.9 billion in2003 to Y2.5 billion in2005. Infrastructureexpenditures have also grown over the same period. Duringproject preparation, Jiangmen demonstrated prudent financial management, as two For full income statement, cash flow statement andbalance sheet, see the end of this annex. 54 project components initially identified for World Bank financing were curtailed inlight o f availability o f counterpart funding considerations. Overall, the municipal finance analysis suggests that Jiangmen has sufficient financial resources to meet all obligations under the Bank project. Note that the municipal financial analysis inthis section applies to the core city o f Jiangmen (and not the entire municipality). 23. Actual municipal revenues (on, offbudget, and net transfers) and infrastructure expenditures during2003-2005 were analyzed andprojected to 2012 based on conservative assumptions: for example, revenues were projectedto grow at 5% (as compared with recent average increases o f 15%); infrastructure expenditures were also projected to grow more slowly than inprevious years. Inaddition, it was assumed that counterpart funds would be fully provided directly from the municipal revenue resources, although Jiangmen i s planningto raise counterpart funds through a commercial bank loan. 24. The results o fthe projections indicate total projects costs constitute a maximumo f 6% o f total municipal revenues; inits peak years, 2007 and 2008, project counterpart fundrequirements are 20% o f total infrastructure expenditures; and debt service payments and operation and maintenance expenditures do not exceed 20% o f total infrastructure expenditures. These estimates suggest that Jiangmen has sufficient financial resources to undertake the proposed project. Furthermore, even ifwastewater tariffs increases would be delayed significantly, this would not change fundamentally the conclusion about the affordability o f this project component. Assuming that wastewater tariffs would increase at only halfthe rateprojected, the budgetary impact would be less than 1%o f Jiangmen's total municipal revenues. Actual Projected 2003 2004 2005 2006 2007 2008 2009 2010 2011 201; TotalRevenue 1,985 2,173 2,436 2,544 2,612 2,805 2,945 3,093 3,241 3,410 Total Project CostAs %of Total Revenues 5% 6% 1% Total Infrastructure Expenditure 220 255 661 619 300 300 315 331 347 365 ofwhich is for capital investments 178 211 616 574 255 255 268 281 295 310 of which is for operationsandmaintenance 42 44 44 45 45 45 47 50 52 55 Project Cost as % of Total Infrastructure Expenditures ProjectCost (%) 41.4% 51.8% 9.9% CounterpartFunds (%) 16.2% 20.2% 3.8% Debt Service Payments (%) 1.7% 4.4% 5.2% 8.7% 8.3% 11.3% Operations & Maintenance(%) 9.4% 8.9% 8.5% Debt/ GDP' 6.0% 4.8% 3.7% DebtiRevenue' 53.5% 43.2% 37.1% 25. Municipal debt. A preliminarymunicipal debt analysis (again o f the core city o f Jiangmen Municipality) was also prepared. As mentioned inthe section on Foshan, there are significant data limitations with respect to off-budget debtlcontingent liabilities at the sub- national level in China. Data provided by Jiangmen Finance Bureauindicates that on-budget debt as a percent o f GDP has reached a maximumo f 6% inrecent years. However, interms o f on-budget debt as a percent o f total revenues, this ratio was around 37% in2005. Core city only 55 B. Economic Analysis 26. Methodologtt-cost effectiveness. The methodology for the economic evaluation o f all project components i s "cost effectiveness". The rationale for adopting a cost effectiveness methodology is that for wastewater/ sanitation projects benefits are difficult to quantify ina reasonably reliable manner, especially those pertainingto public health and the environment. In wastewater/ sanitation projects inChina, and indeed inmost Bank projects inthe sector, cost effectiveness i s the preferred and most often applied methodology. The key objective o f a least- cost analysis i s to demonstrate that the proposed investments have a sound strategic rationale in terms o f overall project objectives, and that these objectives are met inthe most cost-effective way. For each component, technical design alternatives, location options, etc. were evaluated on the basis o f technical, environmental, and economic criteria to identify the most cost effective solution. 27. The feasibility studies reported some initial values on selected economic benefits. However, the project team judged that the estimates are not adequately supported by data to produce robust estimates o f economic rate o f returns (EIRRs). As indicated inthe paragraph above, not to calculate the EIRRsis the norm for wastewater/ sanitationprojects. Consequently, the full evaluation o fproject alternatives is a more meaningful guide for investment decisions. I. Foshan 28. Project objectivesand benefits. Foshan Waterway i s located inthe central area o f Chancheng District, which is the most urbanized district o f Foshan Municipality. It i s the receiving water body o f the domestic and industrial wastewater o f Chancheng and Nanhai districts. The rapid economic development o f the city that took place along stretches o f this waterway has contributed to serious deterioration o f water quality; currently water quality o f the Foshan Waterway i s classified as worse than Class V. 29. The objective o f the Bank supported projects i s to support Foshan's comprehensive program to improve water quality inthe Foshan Waterway to Class V by 2010. The program includes a number o f complementary initiatives, such as the closure and relocation o f polluting industries, strengthened control o f non-point solution, pumpingo f cleaner water into the waterway, interception o fpollution discharges along river banks, compliance with national wastewater discharge standards, and construction o f new wastewater treatment plants. The Bank funded investments fit under the umbrella o f this overall program, with the following specific objectives: Increased wastewater treatment. The expansion o fZhen'an wastewater treatment plant by 50,00Om3/d, construction o f interceptors, secondary sewers, and pumping stations will lead to an increase inwastewater treatment rate inZhen'an and Nanhai districts, up from a current treatment rate o f 55 %to 65 %. Improved sludge treatment and disposal. With significant additional wastewater treatment capacity added over the medium term, sludge disposal at existing solid waste landfills becomes increasinglydifficult. The constructiono f a centralized sludge treatment facility and 56 appropriate disposal arrangements will provide a secure long-term solution for sludge generated incentral Foshan. Improved water quality by removing sediment. The objective o f this component i s to remove and dispose o fthe accumulated hazardous sediment inand increasingthe navigability o f Foshan Waterway. It i s an integral element o f the overall water improvement plan, as without it, the benefits o fthe other project components would be undermined (Le. sediment would be a continued source o fpollution). Improvedfloodprotection and rehabilitated embankment. The primary objective of this component i s to reduce losses o f future flood damage byupgrading flood projection standards to meet Chinese Government regulations; a secondary objective i s to intercept wastewater along and rehabilitate the river embankment. 30. The project will lead to a number of environmental, social, economic, and public health benefits. Present heavy pollution o f the Foshan Waterway has seriously affected the normal uses of the water, resulting ina degraded living environment along the river (water turns black indry season, the water smells, etc.) ina densely populated area. The feasibility studies identified a number of specific benefits: inconjunction with complementary investments madeby Foshan, the interception, diversion, andtreatment, o f sewage will improve the environmental conditions inthe core urban area; wastewater sludge willbe safely disposedinanenvironmentally sound manner; total pollutant load inthe river will reduce; pollutant load contribution to the Pearl River further downstream will also reduce, lowering downstream treatment costs for drinkingwater supply. A cleaner urbanenvironment will promote further urbandevelopment and increase property values, particularly along the rehabilitated stretches on Foshan Waterway. The dredging o f the river will lead to increased navigability for larger vessels and improve river water quality; flood projectionwill significantly reduce the incidence o f floods, and its associated economic losses; riverbank rehabilitation and road improvement will reduce traffic congestion. And finally, reduced medical expenditures and improve health o fresidents through lower incidence o fwater borne diseases are expected outcomes o fthe program. The specific benefits, as reported inthe studies are as follows: Increasedproperty values. The property and landvalues are reported to increase by about Y600 million. This is likely to be a lower bound estimate, as only the stretches o fthe rehabilitated and dredged segments o f the river are valued. Improved trafic conditions. Road expansion (part o f the FenjiangRiver Bank improvement) will improve the central urban traffic conditions, estimated to lead to an economic benefit of Y1.2million/ year. Flood resistance benefit. Improvingthe river bank (to resist floods at a `once a 50 years' likelihood), will reduce economic flood losses, valued at an average Y20 million/ year (note that the most recent flood inthe area took place in2005). Increased navigability. The dredging o fthe river will increase its navigability (overall traffic capacity will rise by 50%), leading to an estimated to annual economic gain of Y1.5 million. 57 0 Improved health benejt. Reduction o f income loss as a result o f lower disease incidence i s estimated to lead to a gain o f about Y 7 million/ year. Reduced medical cost. Medical care cost for the diseases caused by water borne i s estimated to lead to a benefit o fY1.8 million Yuan. Zhen'an WTP and Collection System 31. Options considered; alternative selected. A number o f alternatives were considered. The alternative of not doing the project was rejected as wastewater from the central urban area would continue to be discharged, without treatment, to Foshan waterway. Increased wastewater treatment i s an integral part o f the comprehensive program to improve water quality inFoshan. Alternative locations were rejected as the extension o f Zhen'an WWTP was anticipatedinthe original design for Zhen'an; as a result, land is readily available. The alternative o fhigher capacity (e.g. extension by 100,000 m3/ day instead o f 50,000) was rejected as the planed extensioni s sufficient to meet wastewater flows over the planningperiod. Two options were considered for transferring wastewater to Zhen'an wastewater treatment plant: option one based on pressure pipe; option two based on gravity flows. Although the gravity flow system produces annual energy costs savings o fY738,000/ year, these savings are not sufficient to outweigh the higher investments costs o fY17 million over the life cycle o f the projected (NPV o f Y116 million for the pressure pipe option, compared to N P V o fY127 million for gravity flow option). Interms ofalternative treatment processes, three options were considered improved A2/0,blast aeration oxidation technology, and UNITANK. As shown inthe table below, improved A2/0 process is the most cost effective solution. Treatment Process Comparison Blast Areation AA2io Oxidation UNITANK InvestmentCost 55,105,300 57,138,700 58,745,500 O&M Cost 8,587,500 9,122,500 8,772,300 NPV' 126,939,OS 1 133,447,684 132,125,089 AIC* 0.74 0.78 0.77 I/over20yearswith10%discountrate 2/ Averageincrementalcosts (AIC):NPV divided by total discountedthroughput 32. Interms o feconomies o fscale for wastewater treatment plants, the current master plan calls for a large number o f new wastewater treatment plantsto be constructed. Cost estimates conducted duringproject preparation suggest that further consolidation o f the number o f treatment plants could lead to significant operating costs savings. As inother cities inChina, wastewater master planning i s basedpredominantly on administrative districts, not drainage catchments, which often leads to cost ineffective solutions. This issue is being addressed through the ongoing broader review o f the wastewater master planfor the entire PRD region (as supported by the GEF funded component under the PRD 1project). However, independent o f these economies o f scale considerations, the capacity expansion at Zhen'an i s still a cost effective solution given that it is an expansion o f an already existing treatment plant. 58 Sludge TreatmentCenter andDisposal 33. Options considered; alternative selected. The alternative o f not doing the project was rejected as the sludge produced i s toxic and not suitable for agriculture. With the planned increase inwastewater treatment capacity (up from 600,000 in2006 to 1.3 millionby 2020), the need for appropriate sludge handling will increase significantly. Interms o f location alternatives, two principal options were considered: individual treatment at each existing WWTP vs. one consolidated site at the plannedNanzhuangWWTP, with the second alternative selected on the grounds o f lower unit costs inthe presence o f scale economies. Nazhuang WWTP was identified as the appropriate site as land i s readily available, including for further expansion (from 400 t/d to 800 t/d). Three specific options were considered: option 1 sludge would be ) treated by thermal drying after mechanical dewatering, subsequently disposed at a landfill (at Gaoming); option 2, sludge would be treated bythermal dryingafter mechanical dewatering, with dried sludge incinerated andthe fly bottom ash disposed ina landfill; option 3, sludge would be treated by thermophilic anaerobic digestion, subsequently treated bythermal drying and disposed ina landfill. Currently, Goaming landfill i s identified as the only available option for sludge disposal. However, Foshan municipality i s investigating an alternative landfill option (with closer proximity 80km vs. 30km for an alternative) which could lead to additional cost savings. The table below provides the full cost comparison for the currently fully evaluated options, with option 1identified as the most cost effective solution. Given that the full feasibility o fthe quarrywith closer proximity still needs to be investigatedand potential government approval needs to be obtained, it was agreed that one year before the completion o fthe Nanzhuangtreatment facility andan analysis o f the least cost option for the sludge disposal would be furnished to the Bank for comments before a final site decision i s made. Sludge Treatment and Disposal Comparison Option 1 Option 2 Option 3 Capacity- (totdday) - . 400 400 400 Investment Cost-(Y) 170,990,000 350,560,000 220,830,000 O&M Costs (Y) 46,620,000 32,710,000 43,560,000 NPV' (Y) 560,962,575 624,176,536 585,205,919 AIC~ (Y/ton) 410 457 428 I/over20yearswith10%discountrate 21Average incrementalcosts (AIC) calculated as NPV divided by total discountedthroughp FoshanRiver Quality Improvement 34. Options considered; alternative selected. The alternative o f not doing the project was rejected because sediment contains hazardous heavy metals. Also, ifnot removed, the sediment will underminethe objectives o fthe overall environmental clean-up program. The removal o f existing sediment will not lead to renewed accumulation o f new hazardous sediment due to Foshan's an intensive program for reducingpollution (and sediment) discharges from industry. Alternative technical solutions, including through capping o ftoxic sediment to avoid dispersion andthe transfer o fwater to flush the river were rejectedbecause o ftechnical uncertainties. In terms o f sediment dredging and transportation methods, three principal alternatives were considered: cutting and pumpingsediment to drying site; cutting and transporting sediment by barge to dryingsite; and on barge dewatering, water disposal back to river, and transport by barge to drying site. The option o f dredging and pumpingto a drying site was selected inlight o f 59 Y13 million cost savings relative to the next alternative (barge transport). Interms o falternative dryinglocations, three options were considered: GuichengPower Plant, PingzhouWWTP,and GuangmingPower Plant, with the last option selected inlight o fY10million cost savings. In terms o f alternative dryingprocesses, the drying process relying on residual heat emitted from the power plant i s the most cost effective solution relative to the alternative o f natural drying in light o fY1millioncost savings. Interms o ffinal disposal, anunusedquarry at Xiaotang in Zoumaying i s selected as the least cost disposal option, due to its physical proximity, resultingin lower transportation costs relative to any considered alternative (e.g. Chenchun or Yigan quarry). River Dredging Comparison' ~~ Option 1 Option 2 Step1Removal 69,84 1,400 55,217,600 Step 2 DryingLocation 36,386,900 25,800,400 Step 3 DryingProcess 5,568,300 4,673,400 Step 3 Disposal/Landfilling 28,923,500 Grey shade selected option Step 1: opt. 1:barque transport; opt.2pipe transport Step 2: opt. 2: Pingzhou WWTP; opt. 2 Guangrningpowerplant Step 3: opt. 1:natural drying, opt. 2: drying with redsidual heat PP Step 4: opt. 2: disposal in Xiaotang Quarry (nearestpossible site) Flood Projection and Embankment Rehabilitation 35. Options considered; alternative selected. A number o f alternatives were considered. The alternative o f not doing the project was rejected due to the need to improve flood projection to meet government regulatory requirements. Government regulations inChina stipulate a protection against 50-year floods for core urban areas, but the present design inChancheng district only reflects a 20-year flood protection standard. Among alternative technical design options, the most significant cost impact are related to land acquisition and resettlement costs (about 30% o f total project cost); the adopted design solution i s the one with the least costs related to land and resettlement expenditures, with a number o f alternativelandacquisition and resettlement options investigated leadingto a reduction o f total land acquisition costs o f about Y100million. Overall, the component costs are Y300 million(without landacquisition and resettlement) and Y450 million including all costs-compared with 25% more under alternative land/ resettlement options. With flood control to 50 year return flood any likely damage from fbture floods is virtually eliminated. River Rehabilitation/ FloodProtection6 Option 1 Option 2 Total InvestmentCosts 455,778,800 557,950,430 of which land aquistiod resettlement 152,756,000 310,222,000 11. Jiangmen 36. Objectivesand benefits. Like Foshan, Jiangmen's economic development has been rapid inrecent years, with growth averaging around 10%. However, Jiangmen's environmental infrastructure development has not kept pace: at present, only 32% o f sewage i s intercepted and NPV calculations not applicable as the project is implementedover a short time period, it is a one time operation, i.e. it only has investment, but no operations and maintenance costs 60 treated inthe core city. The discharge o fthe untreated wastewater causes serious pollution inthe receivingwater bodies, with water quality o fTian Sha River and Jiangmen River classified as class V and IV respectively (inthe dry season even worse). 37. The objective o fthe Bank project is to support Jiangmen's comprehensive program to improve water quality inTian Sha River andJiangmen River. The project specifically supports the objective o fincreasingwastewater treatment rate to the city's target o f70% by2010, thereby improving the water quality inthe worst polluted stretches o f the rivers to class IV or better. The specific investment components include (i) extension o fWen Cheng Sha WWTP by 150,000 the m3/day; (ii) construction o f 22 kminterceptors, network collection networks, and three the pumpingstations; (iii) reconstruction o f a current drainage pumpingstations inthe urban area. 38. The project will leadto a number o f environmental, social, economic, andpublic health benefits, similar to those identified inFoshan. Interms o f environmental impact, the project will directly leadto a reduction inwater pollution inJiangmen and Tian Sha Rivers. Given that the project focuses on improving the core city area, cleaner water will improve living standards and quality o f life inthe city center (e.g. removal o fblack and smelly water in core urban areas). It will also leadto anappreciation o fproperty and landvalues along Tian Sha and Jiangmen Rivers. Further downstream, improved water quality i s expected to lower water supply treatment costs o f Xijiang River, which is the main drinkingwater resource for many western PRD municipalities. Finally, public health expenditures can be expected to decrease inlight o f lower incidence o f water bourn diseases. The feasibility studies and DRA consultants didnot report estimates o f economic values associated with these benefits. 39. Options considered; alternative selected. A number o f alternatives were considered. The alternative o f not doing the project was rejected, as additional treatment capacity i s needed to improve water quality. Among alternative locations, at the existing Wen Cheng Shan facility additional dedicated landi s readily available as land was acquired and reserved for future expansion when the first phase o f Wen Cheng Sha was completed prior to 2001. As a result, there i s only minimal landacquisition under the project (less than 0.1% compared with 1525% oftotal project costs for other wastewater projects inChina). The alternative o fhigher treatment capacity was rejected, as nearly all future wastewater generated inthe core urbanarea can treated at the projected capacity. Phasing the expansion was also considered, but rejectedbecause it would not have achieved the water quality objective inthe short term. Interms o f treatment processes, improvedA2/0 was adopted as the most cost effective given treatment standard objectives, as per cost comparison inthe table blow. Cost Comparison o fTreatment Options NO MI0 AA2IO InvestmentCost 307,960,000 3 13,640,000 315,520,000 O&M Cost 33,080,000 29,080,000 28,630,000 NPV' 531,519,597 506,265,342 504,552,420 AIC' In4 n 99 n 9x I/over20yearswith10%discountrate 21 Average incremental costs (AIC): NF'V aividedby total discountedthroughput 40. Interms ofeconomies o fscale for wastewater treatment plants, atotal o fnine wastewater treatment plantsare provided for inthe master plan. The update o fthe master planduringproject preparationresulted inthe consolidation o ftwo plantslocated close to each other. Just like in 61 Foshan, the ongoing broader PRD wastewater plan review process, supported under the GEF fimded component o f the PRDl project, i s expected to result in additional consolidation o f treatment plants.Under any scenario, however, the expansion o f Wen Cheng Sha WWTP as supported under the project i s a cost effective solution, inlight o f the fact that landi s already acquired and wastewater treated at that location. 62 Annex 10: SafeguardPolicyIssues CHINA: SECOND PEARLRIVERDELTAURBANENVIRONMENTPROJECT SOCIAL ASPECTS A. Introduction 1. The Second Pearl River Delta UrbanEnvironment Project includes civil works intwo cities, FoshanandJiangmen, inGuangdongProvince. The civil works will cause landacquisition andresettlement-related impacts inFoshan, and aresettlement plan (RP) consistent with requirements in OP 4.12, Involuntary Resettlement, has beenprepared. InJiangmen, there will be no land acquisition, structural demolition, or other resettlement-related impacts, so no Resettlement Report (RP) i s required. 2. The National Research Center on Resettlement (NRCR) o f Hohai University, which has experience inresettlement planning and monitoring for manyWorld Bank projects, conducted the socioeconomic survey and RP preparation for Foshan. The draft RP was completed in November 2005, and a final draft RP (inChinese) with a corresponding English RP Summary Translation was submitted to the Bank inApril 2006. The final RP was disclosed inMarch 2006, with a similar announcement to the public inlocal media. The Chinese version o f the RP also is accessible to the public via internet following posting on the Bank's China website. 3. The RP includes: (a) results o f socioeconomic survey and consultations with affected persons; (b) a census o f affected persons and detailed inventory o f various categories o f affected assets; (c) resettlement policies, entitlements, compensation rates, and budget; (d) resettlement implementation, management and monitoring arrangements; and (e) grievance procedures. B.ResettlementImpacts 4. The Foshan city component includes four subprojects with civil works for wastewater management, sludge treatment and disposal, flood protection and river embankment rehabilitation and river dredging and sediment disposal. 5. Duringproject design, measures were takento minimize landacquisition andother resettlement impacts. The final project design requires acquisition o f 188 mu(12.5 hectares) o f land, including 157mu(10.5 hectares) o fstate-owned land, and 31mu(two hectares) o f collectively-owned land. The project will require relocation o f 10 households, and also affects 41 enterprises and 18 shops. Inall, 1,980 persons will be affected. Duringconstruction, an additional 494 mu(33 hectares) o f state-owned land will be used temporarily, with compensation, and subsequently returnedto owners. Detailed physical impacts are shownin Table 10-1. C. ResettlementPolicies/StrategiesandCompensationRates 63 6. RP policies and entitlements are based on national, provincial and municipal regulations, as well as requirements inOP 4.12. The followingkey considerations and activities were conducted inthe designo f the project and preparation o fthe RP: Table 10-1. Affected Structures, Fixed Assets and Pouulation Item Unit Foshan A. Resettlement Al. Householdsto berelocated HH 10 A2. Populationto berelocated People 38 A3. Structuresto be demolished m2 105,442 Housing m2 1,845 Enterprises m2 103,597 inwhich, Shop m2 705 B. Land to be acquired mu 188 B1. Collective-ownedland mu 31 B3. State-ownedland mu 157 C.Land to be Leased mu 494 C1.State-ownedland mu 494 Minimizingthe extent o f landacquisition andresettlement, through optimizing project design. Surveying socioeconomic baseline conditions, and identifying all displacedpersons (DPs) inhouseholds, enterprises and shops. Entitlingall DPs, includingthose who lack householdregistration, business licenses or other legal documentation, to compensation or other forms o f resettlement assistance so that their incomes and living standards can be improved or at least restored. a Determining compensation for land, structures, and other fixed assets at replacement cost, and providing for the option o f compensation either incash or kind. a Consulting DPs on arrangements for compensation and assistance. Establishingmechanisms to address complaints and grievances from the DPs,including discussions, negotiations, arbitration, and legal proceedings. a Arranging supervision and monitoring to ensure RP compliance andto address other issues that may arise duringimplementation. 7. Land compensation has been calculated inaccordance with Chinese law andmeets the Bank's replacement cost criteria. Compensation for collectively-owned land amounts to Y65,OOO (US$ 8,125) per mu, or US$121,875 per hectare. Inconsultations, the collectives owning the landhave accepted this rate o f compensation as reasonable. Compensation for structures is determined for various categories at replacement cost with reference to market prices for comparable structures. Compensation for other fixed assets and transitional support to meet relocation costs also are defined indetail inthe RP. Compensation for temporary land use duringconstructionhas beenintegratedinto the budget for civil works. Table 10-2 lists the main compensation rates. 64 Table 10-2. Main CompensationRates Items Unit Rates (RMB) A. Land acquisition AI. Collective-ownedLand Mu 65,000'0 A2. Industrial Use Land Mu 200,670 A3. Other State-ownedLand Mu 75,000 B. Housingfor HH BI.Steel-cement m2 2,000-2,400 B2. Cement-brick m2 1,900-2,300 B3. Brick-wood m' 1,800-2,200 C. Structures for Enterprisedshop (not including land) CI. Steel-cement m2 750 C2. Cement-brick m2 600 C3. Brick-wood m2 350-500 D. Transitional support for relocation Dl, Residentialhouses Household 600-800 D2. for Industrial/commercialHouses a. Area 150 m2 enterprisehhop 1,000 b. Area 50