The World Bank Liuzhou Environment Management Project Phase II (P112626) REPORT NO.: RES29281 DOCUMENT OF THE WORLD BANK RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF LIUZHOU ENVIRONMENT MANAGEMENT PROJECT PHASE II APPROVED ON MARCH 10, 2011 TO THE PEOPLE'S REPUBLIC OF CHINA WATER EAST ASIA AND PACIFIC Regional Vice President: Victoria Kwakwa Country Director: Bert Hofman Senior Global Practice Director: Guang Zhe Chen Practice Manager/Manager: Sudipto Sarkar Task Team Leader: Gang Qin The World Bank Liuzhou Environment Management Project Phase II (P112626) I. BASIC DATA Product Information Project ID Financing Instrument P112626 Investment Project Financing Original EA Category Current EA Category Full Assessment (A) Full Assessment (A) Approval Date Current Closing Date 10-Mar-2011 30-Nov-2017 Organizations Borrower Responsible Agency The People's Republic of China LIUZHOU PMO Project Development Objective (PDO) Original PDO To establish sustainable wastewater collection and treatment services within the urban area boundaries of Liuzhou City and in four county towns located upstream of Liuzhou City. Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-80050 10-Mar-2011 25-May-2011 23-Aug-2011 30-Nov-2017 150.00 127.16 22.84 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No II. SUMMARY OF PROJECT STATUS AND PROPOSED CHANGES The World Bank Liuzhou Environment Management Project Phase II (P112626) 1. Background: This IBRD US$150 million loan project has the development objective to “establish sustainable wastewater collection and treatment services within the urban-area boundaries of Liuzhou, and in the Sanjiang, Rong’an, Rongshui, and Liucheng Counties.” The project supports the construction of municipal wastewater treatment plants (WWTPs), sludge co-combustion facilities, as well as sewer and drainage networks in urban Liuzhou and the Sanjiang, Rong’an, Rongshui, and Liucheng Counties. The project was approved on March 10, 2011, and became effective on August 23, 2011 – with an original closing date of May 31, 2017. The total cost of this project is US$274.27 million, of which US$124.27 million comes from counterpart funding, and is provided by the Liuzhou Municipal Government. The project has three components: (1) Wastewater Management (US$265.46 million, of which the World Bank loan is US$143.33 million); (2) Sludge Management (US$6.90 million, of which the World Bank loan is US$4.76 million); and (3) Institutional Development and Capacity Building (US$ 1.91 million, of which the World Bank loan is US$1.91 million). 2. Status of Implementation: The project implementation has been broadly satisfactory since the effective start date. As of this writing, the project has disbursed US$127.16 million (85% of the total loan amount), leaving an undisbursed balance of US$22.84 million.  Component 1: Four WWTPs located in the counties had already been constructed before the project became effective. Construction of Shatang and Guantang WWTPs have also been completed. And, construction of Baisha WWTP Phase II and Longquanshan WWTP Phase III are currently underway, and expected to be completed by November 2017. All of the contracts for river rehabilitation and construction of sewer networks under this component have been awarded, and most of them have already been completed. However, there remain a few high-value contracts for the rehabilitation of Zhu’er Creek and construction of sewers underneath Xidi Road and other roads (in total, valued at US$20 million) that will not be able to be fully completed by the current project closing date of November 30, 2017.  Component 2: The installation of sludge co-combustion facilities has been completed, and they were put into operation in 2013. These facilities dispose sludge generated from the WWTPs operated by LMWTC in urban Liuzhou.  Component 3: an international project management consultant was hired in late 2011, providing day-to-day project management service to LMWTC. A management information system was also established for asset management and office automation. Various training and study tours were conducted to enhance the operational capacity of LMWTC. 3. In 2013, during the Mid-term review process, as a result of loan savings from competitive bidding, and additional US$37.5 million was available to the project (i.e. 25% of the total project loan amount). With these funds, the Bank and Borrower agreed to include in the project scope the construction of two additional WWTPs (Baisha phase II and Longquanshan Phase III). These additional WWTPs are intended to help meet the increasing wastewater treatment demand, as a result of continued rapid urbanization in the city. In order to allow sufficient time to construct these newly added WWTPs, the Bank also approved a project restructuring in December 2014. At that time, the project closing date was extended by six months, to November 30, 2017. 4. In November 2016, reforms in the water sector were initiated by Liuzhou Municipal Government, establishing the Liuzhou Water Affairs Investment Company (LWAIC) by grouping LMWTC and Liuzhou Veolia Water Affairs Co., ltd (a joint venture formed by Liuzhou Water Supply Company (51%) and Veolia Water (49%)). The legal identity of LMWTC and the institutional arrangement of the project were not changed. 5. These reforms will be beneficial for the water sector of Liuzhou City in the long run, as it will increase the overall efficiency of the water supply, sewerage collection, and treatment in the city. However, at the short-term, the reforms have influenced staffing at the LMWTC, and have caused implementation delays on a few high-value works contracts. The World Bank Liuzhou Environment Management Project Phase II (P112626) As a result of these delays, LMWTC will not be able to complete some of the on-going contracts by the current project closing date of November 30, 2017 (in particular the rehabilitation of Zhu’er Creek). This could leave an undisbursed balance of US$13 million or 8.7% of total IBRD loan. 6. With support of the World Bank team, LMWTC has undertaken a series of actions to overcome staffing issues and to expedite the project implementation. Since the April 2017 mission, LMWTC has been implementing a time-bound action plan to expedite the conclusion of pending activities towards project completion – including coordinating with various government institutions to approve a high-value variation order for the on-going river rehabilitating contract (which was approved in July 2017). Despite the Moderately Satisfactory rating for implementation progress in the June 2017 ISR, the team considers that at the present moment, in particular after the action plan was put in place, the overall implementation progress has improved considerably, and there are no longer any issues hindering completion of the pending contracts. 7. Proposed Changes. In order to make up for the recent implementation delays, to allow for the completion of the on- going contracts, and in order to fully utilize the Bank loan, the Ministry of Finance sent a letter to the Bank on September 19, 2017, requesting the following: (1) that the project closing date be extended by six months to May 31, 2018; and (2) that the loan proceeds be reallocated among disbursements categories. 8. Under this restructuring, US$2.9 million will be reallocated to the category of “interest during construction”, so as to meet the increased demand for funds under this category. Consequently, the loan proceeds allocated to the category of “civil works” and “goods” will be reduced by US$1.5 million and US$1.4 million, respectively. It is assessed that this reallocation will not affect the overall funding and completion of the on-going contracts. Moreover, counterpart funds for present contracts are sufficiently secured. 9. Given the current implementation pace, the LMWTC will be able to complete the remaining works by May 31, 2018, and fully utilize the US$150 million Word Bank loan. 10. The project development objective remains relevant and achievable. The PDO and intermediate indicators have already been largely attained, and they are on track to be fully achieved by the proposed extended closing date. 11. Finally, it should be noted that, although project implementation is currently for the most part on track, there remains a moderate risk that LMWTC may experience further staffing changes that could affect project implementation. The team will closely monitor this situation over the remaining period of project implementation and take corrective actions as needed. 12. The implementation of Bank’s safeguards policies has been satisfactory. No major environment and social safeguards issues have arisen. Implementation of the financial management has also been satisfactory. However, the procurement implementation was rated Moderately Satisfactory in the June 2017 ISR; this due to the issue of the high-value variation order not having been addressed by that time. However, this issue was subsequently addressed in July 2017, and this will be reflected in the ISR to be processed after project restructuring. 13. The proposed restructuring fully complies with OP/BP 10.00, as: (a) the project is not subject to suspension of disbursements; and (b) the Borrower does not have any outstanding audit reports, nor there are any audit reports that are not satisfactory to the Bank. The World Bank Liuzhou Environment Management Project Phase II (P112626) III. DETAILED CHANGES LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications IBRD-80050 Effective 31-May-2017 30-Nov-2017 31-May-2018 30-Sep-2018 REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Current Current Actuals + Proposed Disbursement % Ln/Cr/TF Expenditure Allocation Committed Allocation (Type Total) Category Current Proposed IBRD- Civil Works 116,218,850.00 99,764,092.37 114,718,850.00 100.00 100.00 80050-001 Currency: USD Goods 29,081,150.00 13,393,990.86 27,681,150.00 100.00 100.00 GDs,CS,non-CS services, train 1,780,000.00 1,079,812.67 1,780,000.00 100.00 100.00 PT3 Interest during 2,545,000.00 2,545,000.00 5,445,000.00 construction Total 149,625,000.00 116,782,895.90 149,625,000.00