The World Bank China-Qinghai Xining Water Environment Management Project (P133116) REPORT NO.: RES30900 DOCUMENT OF THE WORLD BANK RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF CHINA-QINGHAI XINING WATER ENVIRONMENT MANAGEMENT PROJECT APPROVED ON SEPTEMBER 25, 2014 TO PEOPLE'S REPUBLIC OF CHINA WATER EAST ASIA AND PACIFIC Regional Vice President: Victoria Kwakwa Country Director: Martin Raiser Regional Director: Benoit Bosquet Practice Manager/Manager: Sudipto Sarkar Task Team Leader(s): Liping Jiang The World Bank China-Qinghai Xining Water Environment Management Project (P133116) I. BASIC DATA Product Information Project ID Financing Instrument P133116 Investment Project Financing Original EA Category Current EA Category Full Assessment (A) Full Assessment (A) Approval Date Current Closing Date 25-Sep-2014 31-Dec-2019 Organizations Borrower Responsible Agency PEOPLE'S REPUBLIC OF CHINA Xining Municipal Government Project Development Objective (PDO) Original PDO The Project Development Objective is to reduce water pollution and pilot potential sustainable reuse of wastewater in Xining Municipality. Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-84230 25-Sep-2014 28-Nov-2014 16-Feb-2015 31-Dec-2019 150.00 102.14 47.86 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No I. SUMMARY OF PROJECT STATUS AND PROPOSED CHANGES The World Bank China-Qinghai Xining Water Environment Management Project (P133116) A. Project Status: Background. 1. An IBRD loan of US$ 150 million for the China: Qinghai Xining Water Environment Management Project (the Project) was approved by the World Bank’s Board on September 25, 2014 and the loan agreement became effective on February 16, 2015. The Project currently has a closing date of December 31, 2019. The Project development objective is to reduce water pollution and pilot potential sustainable reuse of wastewater in Xining Municipality. The Project comprises five components: (a) Construction of Storm-water and Wastewater Collection Systems; (b) Comprehensive Storm-water Management and River-Bank Environment Restoration; (c) Integrated Gully and Canal Improvement; (d) Wastewater Reuse; and (e) Project Management and Capacity Building. The total project cost was estimated at RMB 1,414.2 million including the total IBRD financing of US$150 million. Implementation Status and Achievement to Date. 2. Progress on implementation: As of October 31, 2019, the total completed investment for the Project amounted to RMB 950 million, which is 67% of the revised total project cost. For the World Bank loan, the total amount disbursed was US$ 102.14 million, which is about 68% of the total loan amount. All 22 contracts have been procured out of which about 68% of the total contract value has been completed. The remaining activities refer to components A and D as described below. 3. Progress towards achieving PDO: The progress towards achieving the five PDO indicators is as follows where three indicators have already been met: (i) direct project beneficiaries in number has reached 358,000, which is 112% of the end target value; (ii) the volume of BOD pollution load removed by treatment has reached 944 tons/year, which is 130% of the end target value; (iii) the volume of COD pollution load removed by treatment has reached 2,013 tons/year, which is 114% of the end target; (iv) the reduction of TSS flowing into the river has reached 930 tons/year, which is 94% of the end target; and (v) the volume of treated wastewater reused is 85,000 tons/year, which is only 10% of the end target (see component D below). The implementation status of the five project components is as follows: Component A: Construction of Storm-water and Wastewater Collection Systems – the volume of rainwater and wastewater collected by the Bank-financed new treatment system is 28.92 million m3/day, which is 97% of the end target value. However, under this component, the construction of the six bridges as planned was delayed due to the upgrading of the bridge standards in line with the updated Xining Municipal Government’s 13th five-year plan (2016- 2020). Among the six bridges, two bridges will need to be installed with pipelines to transport the treated wastewater to the reuse sites across the river. The delayed construction of the two bridges with pipelines is the main reason for the slow progress of the Component D (see the status of Component D below). Construction of all six bridges started in July 2019. According to the construction plan, only 30-35% of the contract values will be completed respectively by December 31, 2019. An Action Plan to complete the remaining activities has been prepared by the PMO and agreed with the Bank. Component B: Comprehensive Storm-water Management and River Bank Environment Restoration – all works have been completed. The decrease in the volume of storm runoff is 390,000 m3/year, which represents 100% of the end target value. The World Bank China-Qinghai Xining Water Environment Management Project (P133116) Component C: Integrated Gully and Canal Improvement – Works on the gully and canal improvements and on the environmental facilities have been fully completed. This has allowed 100% of the target to be met. Component D: Wastewater Reuse – this component has not made substantial progress for the related PDO indicator. As the above mentioned, the volume of treated wastewater reused is 85,000 tons/year, which is only 10% of the end target 868,000 tons/year. The reason for the slow progress is that the wastewater treated by wastewater treatment plant will need to be transported to the reuse sites across the river through the pipelines to be installed along the two bridges based on the designed flow capacity of the treated wastewater to be transported, but the construction of the two bridges as planned under the Component A was delayed. Considering that the bridges and pipelines to transport the treated wastewater will be completed and operated by April 30, 2021, the proposed new closing date of the Project is June 30, 2021. Three studies associated with the wastewater reuse and integrated water management have also been delayed and the new closing date will allow these studies to be completed. These studies are important and expected to provide: (a) scientific basis for the government to issue new policies on wastewater reuse; (b) proposed adjustments on wastewater treatment standards based on the impact of wastewater reuse on the soil and plants, and (c) proposed countermeasures based on the impact of wastewater reuse on the local water-logging improvements, respectively. Component E: Project Management and Capacity Building – the number of PMO staff trained for capacity building is 358 person-days, which already exceeds the end target value of 158 person-days. Through capacity building activities, the capacity of project management and implementation has been further strengthened. 4. Currently, the progress towards achievement of PDO and the overall implementation progress are rated as “Moderately Unsatisfactory” because of the delays in implementation of components A and D. 5. Regarding the implementation of safeguards policies, procurement, financial management and legal covenants, there have been no significant issues. Project audits have been conducted routinely and have not found any substantial irregularities (the main issue identified by the latest auditing report was the delayed extension of the Letter of Guarantee for a few contracts, the municipal PMO has taken immediate follow-up actions and extended the period of the guarantees). Proposed Changes and Reasons: 6. Proposed changes: The changes requested by the Ministry of Finance in its letter sent to the Bank on September 5, 2019 are that: (i) The project closing date be extended by 18 months, from the current December 31, 2019 to June 30, 2021; and (ii) The disbursement categories be revised with reallocation between categories, and the disbursement rate of loan proceeds under Civil Works Category be increased from 88% to 100% (retroactively from July 15, 2015). 7. Reasons for Project Extension: To address local needs from infrastructure improvements, the government decided to upgrade the technical standards for the six bridges about two years after the start of this Project in line with the government’s updated 13th five-year plan (2016-2020), requiring the redesign and upgrading of the six bridges under this Project. The six bridges are: Binghe West Road bridge, Jin Yi Inner Road bridge, Jin Yi Outer Road bridge, Weier Road bridge and Weisi Road bridge, and Liujiagou Road bridge. Two of these bridges (Jin Yi Inner Road bridge and Jin Yi Outer Road bridge) will also carry the treated wastewater to the reuse sites as explained above. In response to the changes in standards, the project bridges have been redesigned, and subsequently approved by Provincial Housing and Construction Department in March 2019. This has delayed the schedule and the bridges are The World Bank China-Qinghai Xining Water Environment Management Project (P133116) now expected to be completed by April 30, 2021 (the new designs were approved, all biddings were completed, and construction started in July 2019). 8. In addition, “piloting potential sustainable reuse of wastewater in Xining Municipality” is one key part of the PDO given the water scarcity issues in Xining. The Project will achieve its PDO only when Components A and D are fully completed. This will require that the wastewater be transferred from the No. 5 wastewater treatment plant located on the east bank of the Beichuan River to those areas on the west bank where the water will be reused for landscaping and irrigation. Transfer of the treated wastewater for reuse will require pipelines to be installed along the two bridges planned under the Component A (Jin Yi Inner Road bridge and Jin Yi Outer Road bridge). The three studies planned under Component D will provide strong justifications for the wastewater reuse in Xining City, which are the important value added for the Bank engagement in the Project. As above mentioned, once the bridges and studies are completed the treated wastewater could be transferred to the water reuse sites by April 30, 2021, which is two months ahead of the proposed new closing date of the Project. 9. Reasons for Reallocation between Disbursement Categories: To address the request from MOF, it’s proposed that the category (1) for civil works, categories (2) and (3) for goods, consultant’s services, non-consulting services, training and workshops be reallocated with their respective disbursed amount, and a new category (4) be created and allocated with the undisbursed amount for all project activities under categories (1), (2) and (3). The reasons are: (i) disbursement category (1), (2) and (3) will need to be maintained because there have been disbursed amounts in these categories; (ii) based on the updated procurement plan, most of the remaining loan amount (about 97.5% out of US$62.86 million of the total undisbursed amount which includes the undisbursed amount shown in the datasheet of this RP plus US$15 million disbursed to the designated account as advance, but has not been claimed by Client yet) will be used to finance construction of civil works (i.e. the six bridges), only a small amount (about 2.5%) will be used to finance consulting services, training and workshops, and no bank loan will be used to finance goods and non- consulting services. 10. Reasons for Increase of Disbursement Rate: The Project has resulted in loan savings due to competitive bidding process, depreciation of RMB to US dollar, and government financing of some project activities through its own funds. Specifically, (i) Savings from the competitive bidding from procurement, which has noticeably reduced the contracts’ costs for project activities. The competitive bidding process has reduced the costs by 10-15% against estimates mentioned in the Project Appraisal Document. (ii) Appreciation of US Dollar against RMB resulting in more funds available in local currency from the loan proceeds. At project appraisal, the RMB/US$ exchange rate was at 6.1. Since the effectiveness of the loan, the US dollar has appreciated against the Yuan, resulting in the weighted average exchange rate of 6.5 at the Mid Term Review. (iii) Storm-water and wastewater collection pipelines at Xichuan River area were removed from the scope of the Project – the Component A originally included the construction of 16 km of storm-water and wastewater collection pipelines (the cost for the construction was estimated about US$9.56 million at the mid-term review). However, this Project activity has now been financed by the government own funds as a part of the new government priorities and plans under the updated 13th Five-Year Plan, which is to be completed by the end of 2019. Therefore, removal of this investment out of the project will not affect achieving the Project Development Objectives. As estimated, US$7.17 million of retroactive payment will be made with the increased disbursement rate starting from July 15, 2015. Qinghai is a lagging province in China and its public expenditures are mainly financed by the transfer The World Bank China-Qinghai Xining Water Environment Management Project (P133116) payments from the Central Government. As such, the province has requested to make a full use of these savings from loan proceeds for the existing activities by increasing the disbursement rate of civil works. With these changes in the disbursement categories, the IBRD loan is expected to be 100% disbursed. 11. Rationale for the Proposed Restructuring: With the proposed new closing date, remaining works will be completed which raises the expectations that the project development objective and the associated target indicators will be met, although with some delays. This creates a justification to extend the project closing date, especially since 3 out of the 5 PDO indicators have already been met as mentioned above. This will be the first closing date extension for the Project and the Government has taken actions recently to ensure effective implementation, including: (i) appointment of a full-time Deputy Director for the PMO to closely follow-up on day to day activities; (ii) allocation of counterpart funds required for the upcoming expenditures; (iii) Operations and Maintenance plans for assets created under the Project have been prepared and submitted to the Bank; and (iv) consultants are in place to follow up on the Monitoring and Evaluation (M&E) aspects of the Project and a M&E report has been completed. The PMO has prepared a time-bound action plan for the remaining activities which is acceptable to the Bank. Based on the team’s review of the action plan carried out in November 2019, the construction of all six bridges, the completion of the wastewater conveyance lines on the bridges, and the preparation of the wastewater studies will be fully completed by April 30, 2021, two months prior to the proposed new closing date. 12. Risk Assessment: With resolving of the above four major issues by the municipal government, there have been no significant risks to complete the remaining project activities. The delay in the Project was mainly due to the change in the technical standards for bridge construction and the authorities have come up with an Action Plan to complete the remaining activities that is acceptable to the Bank. The Xining municipal PMO has completed two other projects with the World Bank that were satisfactory and has experience in following Bank procedures; and no issues are anticipated to bring the planned activities to a closure by the proposed new closing date. II. DETAILED CHANGES LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications IBRD-84230 31-Dec-2019 30-Jun-2021 30-Oct-2021 REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Current Current Actuals + Proposed Disbursement % Ln/Cr/TF Expenditure Allocation Committed Allocation (Type Total) Category The World Bank China-Qinghai Xining Water Environment Management Project (P133116) Current Proposed IBRD- CW Pt.A.1(a) 23,850,000.00 22,304,779.79 22,304,779.79 88.00 88 84230-001 and D.1 Currency: CW Pt.A.1(b),B USD 119,422,000.00 63,837,674.43 63,837,674.43 88.00 88 and C GD,CS,non- CS,TR&Worksho 4,120,000.00 602,117.70 602,117.70 100.00 100.00 p A.1(b),B,C GD,CS,non- CS,TR&Worksho 2,233,000.00 17,711.48 17,711.48 100.00 100.00 p Pt.D.2 &E CW Pt.A.1(a) and D.1; CW Pt.A.1(b),B and C; GD,CS,non- CS,TR&Worksho 0.00 0.00 62,862,716.60 100 p A.1(b),B,C; and GD,CS,non- CS,TR&Worksho p Pt.D.2 &E Total 149,625,000.00 86,762,283.40 149,625,000.00