36938 China SecondBeijingEnvironmentProject Project Paper East Asia andPacific Region UrbanDevelopmentSector Unit Date: July 25,2006 Team Leader: RajaIyer Country Director: DavidDollar Sector Director: KeshavVarma Project ID: PO42109 Sector(.$: US-UrbanEnvironment,VP-Pollution ControVWasteManagement Lending Instrument: Specific Investment Loan (SIL) Theme(s): Environment;Urban Povertv Targeted Intervention: N Project FinancingData ElLoan 0 Credit ElGrant 0 Guarantee 0 other (Specify) For Loans/Credits/Others: Amount (US$m): $322.49 + $25 GEF grant Proposed Terms: Variable Spread& RateSingle CurrencyLoan (VSCL) Grace period (years): 5 Years to maturity: 20 Commitment fee: 0.75% Front end fee on Bank loan: 1.00% Financing Plan: Source Local I Foreign Total IBRD 00 322.49 322.49 GLOBALENVIRONMENTFACILITY 0.00 25.00 25.00 BENEFICIARIES 231.78 0.00 231.78 OTHER PRIVATECOMMERCIAL 182.50 0.00 182.50 SOURCES Total: 757.28 347.49 1104.77 Borrower: PEOPLE'S REPUBLIC OF CHINA Responsible agency: BEIJINGMUNICIPALGOVERNMENT WorldBank andAsianDevelopmentBank LoanBeijingEnvironmentProjectOffice Address: No. 7, DongbinheRoad, Deshengmen,Xicheng District Beijing, 100011 P.R. China Contact Person: Mr.ChenGuangming, Mme. LuZhi'an Tel: (86-10) 6204 6624 (86-10) 6235 2483 Email: bjpmolu@beic,gov.cn FY 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Annual 4.07 26.30 25.73 19.34 19.52 17.25 31.20 100.00 60.00 47.49 Cumulative 4.07 30.37 56.10 75.44 94.96 108.80 140.00 240.00 300.00 347.49 1 PROJECTPAPER CHINA: SECOND BEIJINGENVIRONMENT PROJECT(Ln. 4566-CHA, GEF TRUST FUNDTF024121) 1. This Project Paper seeks the approval ofthe ExecutiveDirectors to introduce the following changes inthe China Second Beijing Environment Project (Ln.4566-CHA, GEF Trust FundTF024121) and accompanying amendments to the project's legal documents: (a) adding seven new components to the project; (b) canceling $26,512,600 o f loan savings; (c) increasing the disbursement percentage to 75% for civil works o f new components; (d) extendingthe loan closing date to March 31,2009; and (e) reallocation o f loanproceeds consistent with the above. The proposed changes will enable Beijing Municipal Government to utilize most o f the substantial loan savings inthe boiler conversion component o f Part A, Air PollutionControl, and Part B, Wastewater Management, for priority additional activities which will improve water quality in Beijing. The additional components are consistent with the objectives o fthe project. They represent a substantially higherloan allocationto reduce water pollution and will contribute to enhanced water quality inthe sections o f the rivers covered by the additional components. BackgroundandReasonsfor Restructuring 2. Project Background. The projectwas approved on June 20,2000 andbecame effective on May 11,2001, The objective o f the project i s to support visible and sustained alleviation o f air and water pollution in Beijingby helping to: (a) convert scattered coal-fired boilers to natural gas boilers; (b) promote energy conservation in heating systems; (c) construct key wastewater trunk interceptors and associated treatment facilities; and (d) strengthen environmental management institutions inBeijing. 3. The original project comprises four parts: (a) Part A, Air pollution control, through (1) conversion or replacement o f medium-sizedcoal fired boilers to or with gas fired boilers, (2) technical capacity and market development, (3) heating energy conservation, and (4) air quality monitoring and management. (b) PartB,Wastewater management, to improve water quality inthe Liangshui and Qing River Basins through the construction o f secondary wastewater treatment facilities, and collectionnetworks. (c) PartC, Institutional strengthening inthe wastewater sector. (d) Part D,Resettlement, addressing the resettlement and rehabilitation of affected persons in connection with the carrying out o f Part B o f the project. 4. The project i s financed by an IBRD loan o f $349 million and a GEF Grant o f $25 million. The GEF Grant finances goods and consultingservices under Parts A (2) and A (3) o f the project. 5. ImplementationStatus. Theproject is achievingits development objectives and i s beingimplemented in a satisfactory manner, as discussed below. Disbursement as o f end-July 2006, was about $109 million. Procurement has been carried out inaccordance with BankProcurement Guidelines. A procurement post-review inJune 2006 confirmed that procurement under the sampled contracts was carried out ina satisfactory manner. The Environmental Management Plan(EMP) i s beingimplementedsatisfactorily. The Resettlement Action Plan (RAP) implementationhas been completed (see paragraph 11 below). Project accounts are being audited on a timely basis, and there are no outstanding issues relatingto the audits. Audit reports from the project implementing agencies are also beingreceived inthe Bank on a timely basis; these audit reports do not indicate any significant issues. 6. Part A, Air Pollution Control. The loan funded Boiler Conversion component - Part A (1) - suffered long delays becauseo f the start-updifficulties experienced by the new institutions established to manage the component. However, market forces (which the project helped to initiate and strengthen) have provided financing for conversion o f coal burningboilers to cleaner fuels, and about 70% o f the city's boilers have already been converted to cleaner fuels. About 70 million squaremeters of floor areainthe center city area i s still heatedby small and medium coal fired boilers. Their conversion to cleaner fuels has beendelayed by constraints to natural gas supply; however most o f them are expected to be converted to cleaner fuels before the start o f the Beijing Olympics in2008, usingmarket based arrangements, rather than loan funds. As a result, while the project objective of air pollution control throughboiler conversion will be fully achieved, there is a substantial loan saving o f almost $150 million. 7. The GEF Grantfunded components Parts A (2) andA (3) - - also suffered delays similar to the boiler conversion component. However, Grant implementationhas gained momentum inthe last two years, andprogress i s now satisfactory. 8. Implementationo f the air quality management and monitoringcomponent Part A (4) is nearingcompletion andhasproceeded satisfactorily. - - 9. Part B, WastewaterManagement. Implementation o f the wastewater management component i s essentially complete. The Xiaohongmen Wastewater Treatment Plant (WWTP), the last o f the three project WWTPs (and, at 600,000 cubic meters per day, one o f the largestinthe country) was commissioned inlate 2005. However, consistent with the experience o f other China urbanprojects, the appraised cost estimates provedto behigher than the value o f contracts awarded, and there i s a loan saving o f about $50 million. 10. Part C, Institutional Strengtheningin the wastewater sector. The technical assistancestudies financed by the loan are at an advanced stage o f completion and have been effective. Beijing Municipal Government i s finalizing plans to bringwater supply and wastewater activities under a Water Affairs Group, which would strengthen coordination between the two closely linked utilities. Beijing Drainage Company, the implementing agency for Part B, Wastewater Management, o f the project, i s a well run utility, and is able to operate and maintainthe wastewater facilities ina satisfactory manner. 2 11. Part D,Resettlement and Rehabilitation under the wastewater component. All resettlement activities have been completed satisfactorily, as confirmedby the external monitoringreport and by task team reviews o f documents and through site visits. 12. Reasonsfor Restructuring. As indicatedinparagraphs 6 and9, the original project will have loan savings o f about $200million. The success o f the wastewater management components o f the project, focusing on the Liangshui and the Qing River basins, has highlightedthe remainingdeficiencies o f the Beijing river basins: considerable unaddressedpollution and risk o f flooding. Inthe context o f the high priority attached to improvingthe urbanenvironment inBeijing (especially because o f the upcoming Olympics) Beijing Municipal Government (BMG) has proposed and prepared additional components under Part B o f the project to extend wastewater management and rehabilitate the river systems o f Liangshui, Qing, and connected urban rivers, as well as related flood and ground water protection, andwater re-use. The proposed investments will enhance achievement o f the objective o f improving water quality inthe major river basins inBeijing by improving the water quality inthe sections o frivers improvedby the additional components by at least one level. ProposedChanges 13. The proposed additional components include: (a) rehabilitation o f selected sections o f the Liangshui River; (b) rehabilitation o f selected sections o f the Qing River; (c) rehabilitation o f selected sections o f the Beihuan River system; (d) rehabilitationo f selected sections o f the Ba River, the Beixiao River, the Xiaotaihou River, and the Shuidui and the Honglingjin Lake areas in Chaoyang district; (e) rehabilitation o f selected sections o f the Xinfeng River inDaxing district; (f) construction o f wastewater re-use facilities inthe Beijing Economic Development Zone, and the distribution system for re-use water; and (g) protectiono f groundwater through the reconstructiono f the Datun Solid Waste Transfer Station. 14. Other changes include: (a) extension o f the closing date from December 31,2006 to March 31,2009 (see paragraph 19) to enable the new components to be completed; and (b) a higher disbursement percentage o f 75% for the civil works category for the additional components, compared to 40% for the civil works category o f the original components to reduce the pressures on counterpart funding (see paragraph 28). 15. Implementationarrangements. Additional components (a) to (c) will be carried out by the Beijing Water Affairs Bureau; additional component (d) will be carried out by Chaoyang District Water Affairs Bureau; additional component (e) will be carried out by Daxing District Water Affairs Bureau; additional component (f) will be carried out by the Beijing Economic and Technological Investment Development Corporation (BETIDC), a State owned enterprise; and additional component (g) will be carried out by the Beijing SiqingEnvironmentaland Sanitation Group Company Limited (SiqingGroup), a state owned limited liability company. These agencies will be able to implement the their respective components with assistancefrom consultants, andguidance from the existing BeijingProject Management Office, complemented by enhancedsupervisionby Beijing basedmembers o f the Bank task team. 3 16. RevisedProjectCosts andFinancingPlan. Annex 1shows the project cost and financing plan o f the restructured project. 17. FinancialManagement. The FinancialManagement Specialist (FMS) conducted an assessment o f the adequacy o f the financial management system surrounding the new agencies o f the restructured project, as per the guidelines issued by the Financial Management Sector Board on November 3,2005. The FMS concluded that the financial management system o f the restructuredproject, including the proposed additional components, meets minimum Bank financial management requirements, as stipulated inBP/OP 10.02. Inthe FMS' opinion, the restructured project, including the proposed new components, has inplace an adequateproject financial management system that can provide, with reasonable assurance, accurate and timely information on the status o f the project inthe reporting format agreedwith the project and as required by the Bank. 18. Procurement. Procurement arrangements for the additional components and the procurement planfor these components havebeen reviewedby a Procurement Accredited Staff and have been found acceptable. The original procurement plan has been updated, incorporatingthe procurement plans for the additional components. The revised procurement plani s available inthe project files. 19. ImplementationSchedule and ClosingDate. Projectagencieshaveprepared detailed implementation schedules for each o fthe additional components. These have been appraised and found to be demanding; however, given the priority attached by Government to the project, it should be possible to complete the project inabout two years. Accordingly it i s proposed that the loan closing date be extended from the current date of December 31,2006 to March 31,2009. AppraisalSummary 20. The feasibility studies, procurement plans, environmentaland social reports, etc. preparedby the project agencies for the additional components were appraised usingthe same procedures as for the original project. The restructured project would have a positive impact overall, as a result o f the additional reduction inwater pollution. 21. Environmentaland SocialAspects. Theoriginal project is Category A, andthe restructured project will continue to be Category A. The project agencies prepared separate environmental assessments and environmental management plans (EAs and EMPs) for the additional components. These have been appraised and the final versions are consistent with Bank requirements. 22. Special efforts were made duringthe design o f the additional components to minimize land acquisition and resettlement. Six sub-projects require land acquisition and resettlement, and resettlement action plans (RAPS)were prepared by the project agencies for each. These have been appraised and the final versions are consistent with Bank requirements. 23. All EAs/EMPs andRAPs havebeendisclosed as per Bank requirements. 4 24. Policy Exceptions. The restructured project will not require any policy exceptions. Expected Outcomes 25. The development objectives o f the restructured project will remainunchanged from those o f the original project. As discussed earlier, the additional components will contribute to a further improvement o fthe urban environment inBeijing through a further reduction o f water pollution inBeijing. Additional output indicators (length o f interceptors installed, lengths o f river banks rehabilitated, amount o ftreated effluent re- used, and utilization o f transfer station capacity) and outcome indicators (water quality improvements inthe sections o f the rivers rehabilitated) have been established for the new components. These indicators will be monitored on the same basis as the indicators for the original project, Le., through halfyearly progress reports. Risks 26. The major risk for the restructured project i s the capacity o f the implementing agencies o f the additional components to complete the substantial amount o f new work within aperiodo f lessthan three years, especially as these agencies are new to working with the Bank. A further risk is the availability of the significant amount o f counterpart fundingrequiredfor the additional components. 27. The risk o fweak capacity to implementlarge components o f a Bank project for the first time will be mitigatedthrough: (a) intensivetraining programs on Bank procedures; (b) involvement o f the Beijing Project Management Office (which has successfully coordinated implementation o f the current project) inproviding on-going guidance and coordination support to the new implementingagencies; (c) support fiom project management consultants, who are being appointed inselected cases; and (d) guidance from the Beijingbased members o f the task team on an as requiredbasis, and through quarterly supervision missions. Inaddition, inview o fthe upcoming Olympic Games, Beijing Municipal Government (BMG) leaders will take a strong interest in ensuring timely completion o f the new components to highquality standards. 28. The risk o f shortage o f counterpart funds i s mitigatedby the fact that BMG, which i s relatively strong financially, has committedto allocate adequate funds for environmentalimprovements to the city and inparticular, has committed to providing the required counterpart funds for the project. Inaddition, inorder to reduce the burdeno f counterpart funding for the additional components, the disbursement percentage for civil works for the additional components has been set at 75% (compared to 40% for the original components). 5 EstimatedProject Costs Project Cost By Component Local Foreign Total (US$ million) (US$ million) (US$ million) AIR POLLUTIONREDUCTION I 31.02 I 46.12 I 77.14I A. Boiler Conversion 13.77 17.82 31.59 B. Gas Boiler Marketand Technology Development (GEF) 8.94 14.00 22.94 C.Heating Energy Conservation (GEF) 7.15 11.00 18.15 D.AirQuality Monitoringand Decision Support 1.16 3.30 4.46 SEWERAGE 443.23 117.28 560.51 E.LiangshuiRiver Sewers 554.91 F-LiangshuiRiver Wastewater Treatment 111.68 0 G.Qing River Sewers 443.23 0 H.BDC Institutional Development 5.60 5.60 I.Land Acquisition and Resettlement 0 0 ~~ ~~ ~~~ ~ ~ ADDITIONAL COMPONENTS 185.46 180.6 366.06 J BMWAB River Rehabilitation 83.10 81.40 164.50 K.River Rehabilitation inChaoyang District 76.93 62.98 139.91 L.Xinfeng River Rehabilitationo f Daxing District 14.63 16.99 31.6 M.Datun Solid Waste Transfer Station Reconstruction 3.87 9.16 13.03 N.BDAReclaimed Water Plant 6.93 10.07 17.00 Total BaselineCost 659.71 344.00 1003.71 PhysicalContingencies 63.40 63.4 PriceContingencies 34.16 34.16 Total ProjectCosts 757.27 344.00 1101.27 Front-end-fee 3.49 3.49 Total Financing:Rewired 757.27 347.49 1104.76 6 Project Cost By Category Local (US Foreign(US Total (US $million) $million) $million) Goods 60.90 135.72 196.62 Works 403.2 183.88 587.08 Services 16.36 24.40 40.76 Land Acquisition & Resettlement 276.82 0 276.82 Total Project Costs 757.28 344.00 1101.28 I Front-end-fee 3.49 3.49 Total Financing Required I 757.28 1 347.49 1 1104.77I Financing Plan: Source Local Foreign Total BORROWER 343.00 0.00 343.00 IBRD 00 322.49 322.49 GLOBAL ENVIRONMENT 0.00 25.00 25.00 FACILITY BENEFICIARIES 231.78 0.00 231.78 OTHER PRIVATE COMMERCIALSOURCES 182.50 0.00 182.50 Total: 757.28 347.49 1104.77 7