Documentof The WorldBank FOROFFICIAL USEONLY ReportNo: 27172-CHA PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDLOAN INTHEAMOUNT OFUS61.3 MILLION TO THE PEOPLE'S REPUBLICOF CHINA FOR TAIBASINURBAN ENVIRONMENTPROJECT June 29,2004 UrbanDevelopment Sector Unit China Country Unit East Asia and Pacifc Region IIThisdocumenthascontentsmay arestricted distributionandmaybe usedbyrecipients only inthe performance oftheir official duties. Its not otherwise be disclosed withoutWorld Bankauthorization. CURRENCY EQUIVALENTS (Exchange Rate Effective April 1,2004) CunencyUnit = Yuan0 Y 1.00 = US$O.12 US$l.OO = Y 8.28 FISCAL YEAR January 1 -- December 31 ABBREVIATIONS AND ACRONYMS AIEC Average Incremental EconomicCost CP Clean Production DFMD Drainage Facilities ManagementDivision(Suzhou) EA Environmental Assessment EMP Environmental ManagementPlan GPN GeneralProcurementNotice HWTC HuishanWaterTreatmentCompanyLimited ICB International Competitive Bidding JPFB JiangsuProvincial FinanceBureau MOF Ministry of Finance NCB NationalCompetitive Bidding PIP Project ImplementationPlan PLG Project Leading Group RAP ResettlementAction Plan RPF ResettlementPolicy Framework SBR Single Batch Reactor SQCC SuzhouQingyuanConstructionCompany Limited SWAB SuzhouWater Affairs Bureau SWIDC SuzhouWater andInvestmentDevelopment Company Limited TBA Tai BasinAuthority TBUEPO TaiBasinUrbanEnvironment Project Office TP Total Phosphorus UNDB UnitedNations DevelopmentBusiness WAMC Wuzhong Asset ManagementandAdministration Company Limited WDC Wuxi DrainageCompany WETDZ Wuzhong Economic andTechnical Development Zone Company WWTP Wastewater Treatment Plant XWTC Xishan Wastewater Treatment Company Limited Vice President: Jemal-ud-din Kassum CountryManagerDirector: Yukon Huang Sector ManagerDirector: Keshav Varma Task TeamLeadermask Manager: Stuart Whitehead FOROFFICIAL USEONLY CHINA TAI BASINURBANENVIRONMENTPROJECT CONTENTS A. ProjectDevelopment Objective Page 1. Project developmentobjective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy(CAS) goal supportedby the project 2 2. Mainsector issues and Government strategy 2 3. Sector issues to be addressedby the project and strategic choices 5 C. Project Description Summary 1, Project components 7 2. Keypolicy andinstitutional reforms supportedbythe project 8 3. Benefits andtarget population 9 4. Institutionalandimplementation arrangements 10 D.ProjectRationale 1. Project alternatives consideredandreasons for rejection 11 2. Majorrelatedprojects financed by the Bank andor other development agencies 12 3. Lessonslearned andreflected inthe project design 12 4. Indications ofborrower commitment andownership 13 5. Value addedo f Bank support inthis project 13 E. Summary Project Analysis 1. Economic 14 2. Financial 15 3. Technical 17 4. Institutional 18 5. Environmental 20 6. Social 22 7. Safeguard Policies 24 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. I t s contents may not be otherwise disclosed /withoutWorld Bank authorization. F. Sustainability andRisks 1. Sustainability 24 2. Criticalrisks 25 3. Possible controversial aspects 25 G. Main Conditions 1, Effectiveness Condition 26 2. Other 26 H. Readinessfor Implementation 28 I.CompliancewithBankPolicies 28 Annexes h e x 1: Project Design Summary 29 Annex 2: DetailedProject Description 32 Annex 3: EstimatedProject Costs 41 h e x 4: Economic Analysis 42 Annex 5: Financial Summary for Revenue-EarningProject Entities, or Financial Summary 50 Annex 6: (A) Procurement Arrangements 65 (B) FinancialManagementandDisbursementArrangements 79 Annex 7: ProjectProcessingSchedule 89 Annex 8: Documentsinthe Project File 90 h e x 9: Statementof Loans and Credits 91 h e x 10: Country at a Glance 95 Annex 11: Social andEnvironmental Analysis 97 MAW4 CHN 32768 CHN 32769 CHWA TAI BASINURBAN ENVIRONMENTPROJECT ProjectAppraisalDocument EastAsia andPacific Region EASUR ._.- - Date: June 29,2004 Team Leader: Stuart Whitehead SectorManagerlDirector: KeshavVarma Sector(s): Sewerage(85%), Floodprotection(15%) CountryManagerlDkector: YukonHuang Theme(s): Water resourcemanagement(P), Pollution Project ID: PO57933 management andenvironmentalhealth (P), Environmental Lending Instrument: Specific InvestmentLoan(SIL) - policiesandinstitutions(P), Otherurbandevelopment(S) [XI Loan [ ] Credit [ 1Grant [ ]Guarantee ]Other: For LoanslCreditslothers: LoanCurrency: UnitedStatesDollar Amount (US6m): $61.3 BorrowerRationalefor Choiceof LoanTerms Available on File:IxIYes ProposedTerms (IBRD): Variable-Spread Loan (VSL) Commitmentfee: 0.75% Front endfee (FEF) on Bank loan: 1.OO% Paymentfor FEF: CaDitalizefromLoanProceeds tBRD - 0.37 60.93 61.30 Total: 96.85 81.86 178.71 Project hplementatlon period: 5 years Expectedeffectivenessdate: 11/15/2004 Expected closing date: 12/31/2009 A. Project DevelopmentObjective 1. Projectdevelopmentobjective: (see Annex 1) The Government's objective for the proposedTai Basin UrbanEnvironment Project (TBUEP) is to improve the quality of life of the rapidly increasingurbanpopulation and enhance economic competitiveness inWuxi and Suzhou, keymunicipalities inthe Tai Basinandthe Yangtze RiverDelta economic region, by alleviating degradationo fwater resources andimprovingthe quality of the urban environment. To meetthis objective, the project is designedto increase the captureandtreatmentof wastewaterincore cities andthe rapidly hdustrializing suburbandistricts through physical investments andinstitutionaland financial reforms that will enhance the viability andsustainability of wastewater systems, particularly in these rapidly developing districts. The project will support rehabilitation andwater quality improvement in severalurbananddistrict canal andriver systems through physical investmentsandimproved water management. Inaddition, the project will supportlakeshorerehabilitation aroundWuli Lake as a new development andamenity area for Wuxi City. Finally, the project will seek to strengthenwater resource protection inthe Tai Basinthrough improvedandintegratedplanning, water quality monitoringand environmental management. The project designthereforereflects the core elements ofthe Bank'sUrban Strategy-livability, good governance, competitivenessandbankability. 2. Key performance indicators: (see Annex 1) For the wastewatercomponents, keyperformance indicators (summarizedinAnnex 1) will include specific targets for: reducingthe proportionofuntreated wastewaterdischargesinWuxi and Suzhou' Municipalities; cost-effective and autonomousoperation of wastewater treatment systemsandcapacity utilization for wastewater treatment plants under the project; andcost recovery bywastewater enterprises to ensure sustainability. Monitoring datawill also berecordedinperiodic progressreports on measures underJiangsu's CleanerProduction (CP) Programto reducepollutingdischargesbyindustries discharging into project financed wastewater systems. For the lakeshore, riverrehabilitation andwater quality improvement components, key performance indicators will includetargets relatingto improvedwater quality at key locations inthe rivernetwork, improvedlakeshoreconditions at Wuli Lake andfor enhanced water circulationinthe canal network. B. Strategic Context 1.Sector-relatedCountryAssistanceStrategy (CAS) goalsupportedbythe project: (see Annex 1) Document number: Report No. 25141 Dateof latestCAS discussion: December 19,2002 The project will support severalkey CAS themes, including: improving water resourcesmanagement; ensuringenvironmentally sustainableurbandevelopment; andexpandinglivelihood opportunities duringthe rural-urban transition, including for surplus rural labor. The project will support the Bank's UrbanSector Strategywhich emphasizes improvedlivabilityandeconomic competitiveness, as well as the Bank's Water Sector Strategywhich promotes sustainable wastewater and water resourcesmanagement. 2. Main sector issues and Government strategy: TheLake Tai Bashforms an integralpart o f the YangtzeRiver Deltaeconomic region, which is China's most important industrial base andone of the most heavily populated areas o f China. In2000, over half of the Basin's residentslivedincities andperi-urban towns, andurbanization continues to increase. Driven byhighlevels of foreign direct investment, total gross domestic product (GDP) inthe Basinhas been growingat over 10percentperyear on averageandpresently stands at Renminbi (RMB) 1trillion- approximately 11percent of the national total. In 1999, Suzhou(RMB 136billion) andWuxi (RMB 114 billion) together accounted for almostthree quartersof the GDP. The Tai Basin is also one of China's most important water resources. Lake Tai and its dense network of rivers and canals provide water supply for the majority ofthe Basin's 36.3 millionresidentsincludingthose who live in the large andgrowingurbaneconomies of Wuxi and SuzhouinJiangsuProvince. Lake Tai is also the source o fwell over halfofthe domestic water supply for ShanghaiMunicipality, , Despite the region's dependence on the water resourceso fthe Basinfor water supply, the provisiono f environmental infrastructure and services, including the collection andtreatment o fwastewater, has failed to keep pacewith the rapidly growingeconomy of the region. Increasingflows o funtreateddomestic, industrial and agriculturalwastewater intothe Basin's rivers andlakes have put the region's water resources under severeenvironmental pressure. The consequences o fcontinued rapidgrowth and urbanization have become increasingly apparent. Government reports indicate that the water quality inover 85 percento fthe mainwater bodies inthe Basin is Class N or worse (unsuitable for domestic supply) and deteriorating. The canals withinSuzhou and Wuxicities are reportedly worse thanClassV, the lowest classification accordingto Chinesewater quality standards. Water quality inthe upper HuangpuRiver, which is fedby Lake Tai and is the main source of drinkingwater for the Shanghaimetropolis, hasbecomeincreasingly pollutedover the lastfive years andis now only marginally acceptableas a drinkingwater source. Urbanenvironmental conditions as poor as these have significant negative impact on citizens'health andthe livability andeconomic prospectsofurban areas. Recognition o fthe needfor urgentaction to protect the health andeconomic well-being o fcommunities relyingonthis increasingly pollutedlake andrivernetwork ledthe State Council to establishthe Lake Tai BasinWater ResourceProtection LeadingGroup in 1996 anda pollutioncontrol programwith the goal of resolving the region's water pollutionproblems by2010. The first stage of the programwas conductedunder the NinthFive-Year Plan (1996 -2000). The National NinthFive-Year PlanandLong-TermProgramonWater PollutionPrevention andControlto theYear 2010 for the Taihu Lake Basinwas issuedby the State Council onJanuary 6,1998 andfocused almost entirely on industrial and domestic pollutionpoint source control. Itlisted 54 domestic wastewater treatmentplantsplanned to be builtinthe Tai Basinprior to the year 2000. Industrial PollutionControl Action Planswere also developedand some progresswas made to bringkey polluting enterprises (particularly incore city areas) into compliance with environmental regulations. However, the success of the NinthFive-Yearplanwas limitedfor several reasons. First, vast numbersof enterprises, particularly inthe heavily industrializingdistricts andcounties surrounding the core cities within the Basin, were generally not brought intocompliance with the targets duringthe planperiod. In addition, progresswas slow onthe collectionandtreatment o f domestic sewage; only 29 o fthe proposed54 domestic treatment plantswere completed or partially finished bythe end o f 2000. The Government attributedthe lack of implementation success to the scarcity o flocal government fimds for investment inthe wastewatersector, andto poor enforcement of environmental regulations at enterprises. Followingthe NinthFive-YearPlan, which concluded in2000, the Government has continued to identify improvement o fwater quality inthe lake andriver system o fthe Tai Basinas a nationalpriority and municipalities are aimingto collect andtreat 50 percent o f wastewater in smaller cities and 70 percentin - 3 - larger cities by 2010. However, the Government's strategywas modifiedsomewhatinthe TenthFive-Year Action Plan for Lake Tai PollutionControl (2001-2005). Whilst this plancontinues to emphasize collection andtreatment ofpoint source pollution, it also seeks to enhance the results o f pollutioncontrol activities by increasing circulation inthe Basin's rivers andlakes throughwater transfersfrom the Yangtze River. Insummary,this planunderwhichthe current project is proposed, placespriority on: (a) improving wastewater management, particularlycollection andtreatmento f domestic sewage; (b) improving water quality byreducing Total Phosphorus(TP) dischargesinto heavily pollutedwater bodies suchas MeiliangandWuli Lakes inWuxiMunicipality andbytransferring higherquality water from the Yangtze Riverto increasecirculation andimprove water quality inthe lake andcanal system; and(c) strengthening local capacity for water environment monitoring andmanagement. The Tai BasinAuthority (TBA)is planningandconstructing infrastructure to facilitate these transfers, including gatesandpumping systems. Pilot transfer activities havebeenundertakenbyTBA duringthe last few years to determine the viability o fthe key transfer schemes, such as that through the WangYu River. Inresponseto the NinthandTenthFive-Year Plans, inZhejiangProvince, wastewater captureand treatment capacity has beensubstantially increasedandadditional facilities andnetworks are under construction and planned (e.g. inJiaxin City, which lies on a major tributary of Shanghai's Huangpu River). JiangsuandZhejiang Provinceshavealso introducedbanson the productionandsale of phosphorous-baseddetergentsinthe Basin, which were estimatedto contribute upto 15 percent of TP in the lakesandrivers andJiangsuis enhancingits water qualitymonitoring capability. Shanghai Municipality andits districts continue to make substantialinvestmentsinwastewaternetworks and facilities, manywithBanksupport, and Shanghaihas shown leadershipinradically restructuring the institutional framework to improve planning, financing anddelivery ofwater andwastewater services. Whilst considerable strategy work for environmental improvement inthe Basinlyingwithin Jiangsu Province has already beencompletedby TBA andprovincial agencies, less progress has beenachievedin translating these strategies intowell coordinated, operational plans for the mainimplementers within the Basin's municipal anddistrict governments. InWuxiandSuzhoufor example, selectedkeypollutingindustrialenterprises arebeingmoreclosely monitored usingautomatic equipment, thoughthis remains a relatively small proportiono ftotal existing industries. For some industrial sectors (e.g. dyeing), discharge standards are being tightened to reduce the overall pollution contribution of large enterprisesinthat sector. However, many importantpollution Sources such as non-point sourcepollution from agriculture, animal husbandry facilities and the vast numbersofsmall-scaleindustries,haveyetto beeffectively addressedbythe national or local environmental regulatory authorities. Inthe domestic wastewatersectorinChina, responsibilityfor urbanwater andwastewaterservicesis generally divided betweenmunicipal governmentswithjurisdiction over core city areas, anddistrict governments,responsiblefor towns. Manydistrict govemments inthe Tai Basin area have recently been upgradedfrom county level governmentsto expandtheir role inproviding urbanpublic infrastructure and utilityservicesinurbanizingtowns andindustrial development zones. Respondingto nationalpriority plans andprovincial strategies, locally-funded programs are underway at the municipal level, albeit slowly, andwith limited coordination, to rehabilitate andexpand wastewatersystems inthe core city areas o f Changzhou, Wuxi and Suzhou. The rapidlydeveloping districts surrounding these cities are also now scrambling to collect andtreat increasing wastewater flows, particularly inareas where industries continue to concentrate. m ekey limitation o fthe municipalities' anddistricts' responseto the nationalplanninginitiativesinthe - 4 - Tai Basinh@beenthe fragmented approachto localplanning andmanagementof environmental intiastructure inthe Basin. A lack ofeffective inter-jurisdictional coordination inservice planningand delivery, as well as relatively weak regulatory oversight andenvironmentalmonitoring/enforcement capacity, has limitedthe effectiveness of implementation. For example, inthe wastewatersector, district governmentsinthe Basinare actively developing independentwastewaterfacilities under new wastewater agencies, rather thanconsolidating new service areasunderexisting, more experiencedmunicipal wastewater companies. Sewernetworks, where they exist, are ofteninadequateto fully capture wastewater flows even for the relatively smalldistrict treatmentplants inplace. Inthe areao fwater transfers, planninghas beenhamperedby a lack o flocal consensus on the location o f gates and other infrastructure. n e Government recognizesthe needto buildthe capacity o f agenciesresponsible.for wastewater management by strengtheningthe planning,management and financing capabilities of these agencies to improve the efficiency andsustainability of the substantialinvestment required. Inparticular, gov-ent policies aimto strengthenthe market orientationo fwastewater service by promotingestablishmentof autonomousandfinancially viable wastewater enterprisesandlimitedprivate sector participation, including through partnerships withprivate sector operators. Consistentwiththese objectives for overall environmental sector reform, some municipalities inthe Basin are reforming organizational structuresto consolidatethe water resources(including transfers and other hydraulic controlmeasures), water supply andwastewater sectors undera single Water Affairs Bureau, These reforms generally transfer ownership of wastewater networks andfacilities to an assetmanagement company andpromote outsourcing o foperations andmaintenancefor these systems to experienced operators. While these arepositive developments, whichbringthe promise of better coordination ofthe water andwastewater sectors inthe future, they generally do not yet extend to district governments. Moreover, without reformo f funding arrangements, wastewatercompanies, particularly at the district level, will be unable to operateinthe market oriented andfinancially sustainablemanner sought bygovernment policies. Indeed, achieving financial viability andsustainability has been a considerablechallenge for the small district wastewater systems inthe Tai Basinbecause, first the lack o f economies ofscale andthe relatively highproportionofindustrial wastewater, result inrelativelyhighunitinvestment andoperating costs, Second, district governments do not have sufficient authority to establishtariff levels or levy separate wastewater fees reflecting their higher cost base. Third, district wastewater companies lack any legal claim over wastewater fees leviedbymunicipal governments on consumers inthe districts andthere is presently no agreedmechanism inplace to returnmunicipal wastewater fee revenues to district wastewater companiesto meetdebt serviceobligations andoperating expenses. 3. Sector issuesto be addressed bythe project and strategic choices: The project will meet a strategic needfor expandedandmore sustainablecoverageo f environmental planningandprotection systems inone of China's mostrapidly industrializingandurbanizingareas where bothphysical andinstitutional infrastructure for wastewater managementi s inadequate. A start will be made underthe project on four key sector issues: (a) the lack o f environmental infrastructure existingin key areas inthe Tai Basin, (b) the poor water quality inthe urbananddistrict canals andriver system; (c) the lack of financial andinstitutionalsustainability of existing wastewater service delivery arrangementsin the Basin; and (d) the weak anduncoordinated planningand environmental management inmajor urban centers. The project's contributionto these sector issues is as follows. - 5 - First, the project will supportphysical investmentsto reducethe presenthighlevel ofuntreateddischarges of domestic andindustrialwastewater flows. Second, the project willhelp protectwater quality inWuli Lake (one o f Lake Tai's most heavily pollutedperimeter lakes locatedinWuxi Municipality) from heavy inflows of pollutedwastewater andflooding, andwill supportrehabilitation of canals inthe centralcity o f Suzhou. Third, the project will supportinstitutional andfinancial reforms that will provide amore viable, market-oriented basis for managing andoperatingwastewater systems particularly at the district level. Fourth, bothWuxi and Suzhouare undertakingwastewater masterplanning exercisesinvolvingthe rapidly growing districts as well as core cities, Three strategic choices have beenmadeduringthe design of this project. First, emphasishas beenplaced onworking not only withmunicipal governments, but also with governmentsinthe districts, where a significant portion o fthe total urbanpopulation ofthe Basinlives, andwhere most new industrial development andurbanization istakingplace. Existingexperience indistrict andtown sewerage systems is mixed. Typically, the staff o f agencies that becomeresponsiblefor these systemsrequire extensive and lengthycapacity building. Moreover, as notedabove, unitoperating costscanberelatively highfor small wastewater systems especially as inmany cases, investmentsare often almost entirely debt financed. The needfor efficient models for the management ofdistrict level wastewatersystems inrapidly urbanizing districts is widespread inChina andis recognizedas a priority inthe Government's strategy for sanitation sector development. Second, a strategic choice hasbeenmadeto supportthe Government's strategy ofcomplementingpollution control with water transfersinorder to improve water quality inthe Basin's river andcanal network as articulated inthe Tenth Five-Year Plan. In200112002, the Tai Basin Authority conducted severalpilot water transfers from the Yangtze River through the WangYuRiver to Lake Tai. These pilots showedthat water transfers canhave a major impact on improving the water quality inLake Tai andcan speedup circulationinthe lake andriver network Analysis o fthis pilotprogram indicates that all neighboring areas including Suzhou, Wuxi and Shanghaibenefit from these transfers. However, to realize the benefits o f these transfers, severalstructural andnon-structural measuresare requiredto reducepollutionentering the system, This project will support the Government's pollutionControYtransfer strategy throughphysical investmentsinpollution control andhydraulic works inWuxi and Suzhou. Inaddition, the locally-financed wastewater masterplanning inWuxi and Suzhou Municipalities shouldenhance stakeholderinvolvement andclarify sectorobjectives andinterventions for improvedwater quality management. Third, inrecognition of the rapidandcontinuing development inthe Tai Basin, astrategic choicehasbeen madeto support investmentsthat tackle existing industrial wastewater, as well as domestic discharges, and provide for future growth. The marketfor private sector fitlancing is not considered to be sufficiently mature at this time to fully provide these services, andtherefore local govemment andBank intervention is warranted. The JiangsuProvincial Government andthe municipal anddistrict government counterpartsin this project are currently working towards developing prudent ways to encourageprivate participation in this sector. The project will support these efforts to reformthe wastewater sector inthis heavily industrializedarea of JiangsuProvince by providing assistance inthe development o f strategiesfor private sector involvement, andinproviding opportunities to pilot certain strategiessuch as combination of areas under single wastewatersystems andoutsourcing for operation andmaintenance. - 6 - C. ProjectDescriptionSummary 1. Projectcomponents (see Annex 2 for adetaileddescriptionandAnnex 3 for adetailedcostbreakdown): A. Wuxi Municivalitv WuliLake Sub-project ($35.0 million): These non-Bank financedactivities dealwiththe most-heavily pollutedperimeter lake -Wuli Lake, and include: (a) pollutioncontrol facilities (10 sluice gates, 1 shiplock); (b) lake-bank restoration(19.4 km); and (c) pilot researchinecological restoration. Wastewater TreatmentPlants (WWT.P) and Networks ($68.5 million): The componentwill include: (a) the first phaseofthe Chengbei-HuishanWWTP inHuishanDistrict with acapacity of 50,000 m3lday of primaryand25,000 m3ldayofsecondarytreatment, as well as 58 lanof sewers serving Changanand youqiao industrialarea; (b) expansionof DongtingWWTP inXishanDistrict (from 20,000 to 50,000 m3lday capacity) and40 kmof sewers; (c) anewWWTP (25,000 m3lday capacity) and 130kmof sewers including three lifting stationsto develop the full skeletono fthe sewer network anduser connections servingM e n , HouqiaoandYangjiantqwnships andthe proposedWuxiEastIndustrialPark, all within XishanDistrict. UrbanArea CanalNetworkRehabilitation($19.7 million): The componentwould include: control gates on Xujiang andShangtangRivers to enhance flood protection andprevent the intrusiono fpollutedwater from the GrandCanal into Suzhou's urbancanal system; andto prevent the loss o f clean water diverted throughXitangh River from the WangYuRiver. This scheme is alsopartofthe overall floodprotection planfor SuzhouCity area. The componentincludes one sluice gatelshiplock onthe XujiangRiverandone sluice gatelshiplock onthe ShangtangRiver withbankheighteningworks. The component would also finance sediment dredging for 65 kmto restoretransit and absorptive floodcapacities o f canals inthe urban areao f Suzhou. Wastewater TreatmentPlants and Networks ($49.4million): The componentwill include: (a) a second phaseof the FuxinWWTP (100,000 m3lday capacity) serving the south andwest areas of Suzhou City; (b) a secondphaseof theLoujiangWWTP (80,000 m3lday capacity) servingthe northandeast areas of Suzhou City; and(c) the first phase of a WWTP (25,000 m3lday capacity) and72 kmof associatedsewers sewingWuzhong Economic DevelopmentZone inWuzhongDistrict. C. ImvlementationManapement andSectorDevelovment Assistance ($1.9 million): This component will include: (a) technical assistancefor capacity buildingfor wastewaterutilitiesmanagementand financing; (b) training inproject management; (c) technical assistance for engineering design and construction supervision; and (d) locally-financed preparatiodupdatingo fwastewater masterplansfor Wuxi and Suzhou Municipalities. - 7 - 0.0 Wuxi Wastewater TreatmentPlantslnetworks - 68.49 38.3 28.44 46.4 Suzhou Wastewater TreatmentPlantslnetworks 49.42 27.7 22.50 36.7 Suzhou Central UrbanArea Canal NetworkRehabilitation -- 7.29 4.1 3.88 6.3 Suzhou- PollutedWater Control Schemes(on Xujiang and 12.38 6.9 4.12 6.7 ShangtangRivers) Technical Assistance (TA) andCapacity Building 1.75 2.9 Other Other I Other Total Project Costs 174.46 97.6 60.69 99.0 Interest duringconstruction 3.64 2.0 0.00 0.0 Front-end fee 0.61 0.3 0.61 1.o TotalFinancingRequired I 178.71 I 100.0 I 61.30 I 100.0 2. Keypolicyandinstitutionalreformssupportedbythe project. As partofoverall institutional reforms Within municipalgovernmentsinthe Lake TaiBasin, anew institutional model for public utilities is emerging. The objectives ofthis model are to: (a) consolidate strategicplanningandoversight of water-related functions; and(b) separate asset ownership fromthe operation o f assets as ameans to openupnew iinancing opportunities for utilityservices andto improve the efficiency o futilitymanagement. Basedonthis model, SuzhouMunicipality has consolidated its water andwastewater functions under a Water Affairs Bureau. Inaddition, in2002 it establishedthe SuzhouWater Investment and Development Company Limited(SWIDC) for the purposeso fholding all sector assetsthrough subsidiary companies. fie Suzhou QingyuanConstruction Company (SQCC) is one such subsidiary and is responsible for wastewater sector assets incentral SuzhouCity area including those developed under the project. By2006, the Drainage Facilities Management Division(DFMI))will be corporatized also as a subsidiaryunder SWIDC to manageandoversee operation andmaintenanceofall wastewater systems inSuzhou's central districts. Similarly, Wuxi Municipality has recently establisheda Public UtilitiesManagement Group and anasset managementcompanyto overseeandsupervise operating companiesfor water supply, wastewater andtown gas inits central urban districts. However, as indicated above, these institutional reform initiatives at the municipal level havenot yet been extendedto the rapidly urbanizingdistricts outside the central city areas. Inthese districts, plans for new wastewatersystems have typically involved establishmento fseparate wastewater systems andinstitutions for eachtownship, therebyincreasing institutionalfragmentation andmakingcoordinated planningmore difficult, as well as increasingthe cost of deliveringwastewater service. The projecttherefore seeksto beginconsolidationof managementarrangementsfor wastewatersystems at the district level. Byalso outsourcingoperationsandmaintenance, the project will overcome the lack ofin-house experiencefor managingwastewater systems inthese districts. - 8 - Moreover, these institutional reforms will not be fully effective without supportingreforms to the funding arrangementsfor wastewater operations. Althoughexisting wastewater fees appliedinSuzhouandWuxi are amongst the highest inChina, they are applied underthe legalauthority of the municipal governments, not the wastewater companies. As such, the fees are remisedto the finance bureauo f eachmunicipal government, or to the district governmentinthe case of Wuzhong, with sector fundingthen beingprovided throughbudgetary allocations. A substantialshare of the proceedsis generallyretainedby municipalities for other purposes and the allocationto the wastewateragencies is often insufficient for adequate maintenance of the assets inoperation. Of even greater concern, inHuishanandXishan Districts inWuxi, no systematic arrangementsare inplace for the returno fwastewaterrevenuesto enable the districts to finance operation of existingsystems andto undertakemuchneededexpansions. These existingfunding arrangementsare basedontraditional institutional structures, inwhich governmentbureaus directly providedall wastewater services. However, with asset ownership andmanagementfunctions now being separatedthroughthe corporathation model, these new companiesneedtheir own sources of operating revenue. The project would therefore seek to assist SuzhouandWuxi to make the municipal anddistrict institutional reforms fully operational. As a first step, the project will assist inimplementing, at boththe municipal and district levels, the recently approvedstate guidelinesby corporatizing wastewaterutilities to enhance prospectso f tapping private sources of capital for future investments, possibly throughpublic/private partnerships, To further improve the cost effectivenesso fwastewater operations, proposedinvestmentsin severaltownships inXishanDistrict inWuxiMunicipalityhave been combined into substantially more economical engineering confrgurations. For example, Xishan District is mergingall wastewater systems withinthe district startingwiththe existing wastewatersystemat Dongtingwiththe proposednew system to Serve townships at M e n , Houqiao andYangjian, as well as the WuxiEastIndustrialEstate. In addition, the SQCC that presentlymanageswastewateroperations inSuzhouCity is to be contractedto manageimplementation of the wastewater systeminadjacentWuzhong District. Fundingarrangementsfor wastewaterserviceproviders are alsoto bereformedunder the project. The legalbasis for wastewater revenuesis to be changedfrom a municipal wastewater fee to awastewater utilitytariffthat is legally due to theresponsiblewastewatercompanies. This will allow revenuesto be transferred directly to wastewater companiesbythe water supply companies that presently act as collection agent for wastewaterfees. To implement this reform, Wuxi andSuzhouMunicipalities will formulate an actionplanearly duringproject implementation for transferring all wastewaterrevenuesback to the districts to finance wastewater operationsandfor counterpart funding o f investments underthe project, Ap-reement was reached at nepotiations on the timetable for these initiatives. 3. Benefitsand target population: Consistentwith the Bank's UrbanStrategy, the project is designed to enhancethe livability, govemanceo f core public services, competitiveness andbankability o ftwo majorurbancenters that are facing continued rapid growth. The project would directly benefit aboutfive millionpeople presently living and working inWuxi and SuzhouMunicipalities, as well as substantialdownstream communities, including Shan-. These benefitswould includereducedhealthrisks andimprovedproductivityandlivelihood prospects, including for rural-urban migrants. Expansion of wastewater service inrapidly industrializingdistricts under the project willhelpestablish a - 9 - viable model for managing smallwastewatersystems andwill reducepollution o fthe region's critical water resourcesandsupply, andthereby helpensure the environmentalsustainability of continued economic growth andthe Government's policy for urbantransition. The canal rehabilitationprogram inSuzhouwillhelp reduceflooding andfurther enhance the quality of life for residents andthe tourism potential of this historic city. Similarly, the locally-financed Wuli Lake rehabilitationprogramwill help reducethe frequencyandseverity of flooding inWuxi City and, at the same time, open up anew area for developmentinWuxi City with substantialamenity value for commercial, residential andrecreationaluses. Finally, wastewater masterplanninginWuxiandSuzhouMunicipalities would contribute to the goals soughtbythe ongoingmunicipal reforms inthe water/wastewater sector, including consolidation o f strategic planningandoversight of water-relatedfunctions to achievemore cost effective options for the very substantial future investmentthat will be required inthe wastewater sector inthe Basin, 4. Institutionaland implementation arrangements: The Tai BasinUrban Environment Project Office (TBUEPO), whichhas beenestablishedwithinthe JiangsuProvincial FinanceBureau, hastakenthe leadincoordinating the work ofthe intemational consultant team for review of project proposalsandwill beresponsible for overall coordination o f project implementation. TBUEPO willexercisethis coordination functionproactively to avoidthe difficulties experiencedbyJiangsuProvincial Environment Bureau duringimplementation of the recently completed Southem JiangsuEnvironment Protection Project. A timetable for recruiting experienced staffin procurement andproject financial management, environmental, andresettlementaspectshas beenagreed. TBUEPO will report to the provincial Project LeadingGroup (PLG) which consists o f heads ofrelevant provincialcommissions andbureaus. SuzhouandWuxi Municipalities have eachestablisheda PLG anda PMO alsounder the respective Municipal Finance Bureau, andProject Implementation Units(PIUs) for individual components, InWuxiMunicipality, thelocally-financed WuliLakeRehabilitationcomponentwillbeimplementedby the Wuxi Water ConservancyBureau, which gained satisfactory experienceimplementinga component of the Tai BasinFloodControl Project, andhas already implemented dredging works, relocationof fishponds and water transfer works inthe lake. The HuishanWater Treatment Company Limited (HWTC) establishedinMarch2003, will beresponsible for implementing the Huishanwastewater component and, followingconstruction, will outsource operations andmaintenancefunctions to anexperiencedoperator. Similar arrangementsare proposedfor the DongtingandM e nwastewater systems, which are being mergedunder the new Xishan Wastewater Treatment Company Limited (XWTC). ~n Suzhou, the SQCC will be directly responsible for implementation o fthe canalrehabilitationcomponent includingthe control gates onthe ShangtangandXujiangRivers, andthe dredging programas well as for the implementation of the expansionto the FuxinandLoujiangwastewatertreatment plants. The (corporatized) DFMDwill be responsible for operations and maintenance ofthe wastewater treatment plantsfollowing construction. The Wuzhong Asset Management andAdministration Company Limited (WAMC), set upunderthe Wuzhong Economic andTechnical Development Zone Company (WETDZ), willberesponsiblefor implementingandmanagingtheproposedwastewatersystemintheWuzhong industrial zone area. However, WETDZ is arrangingto contract SQCC to manage implementationand -10- will outsourcenetworks andfacilities to an experiencedoperator, following construction. Confirmation was obtainedat nepotiations on these arrangements and that the DFMD will be comoratized bv December 31.2006. as a subsidiary under SWDC to manage and oversee operation and maintenance of all wastewatersvstems in Suzhou'scentral urban districts. Confirmation was also obtained at negotiations on satisfactory arranaementsfor imtdementation suaDort for wastewater treatmentcomoanies. D. ProjectRationale 1. Project alternatives consideredandreasonsfor rejection: The originalproject designfocused on improvingwater quality inLake Tai. However, this narrow focus onthe lake didnot adequatelyrecognizethe impact ofthe highly pollutedcanal andrivernetwork throughout the Basin on the quality of life andeconomicprospectso fthe residentso f the area. Ifeconomic growth inthe regioni s to be sustained, andquality of life improved for all residents, improvedwastewater planningandmanagementincludingadditional investmentandincreasedinstitutionalcapacity inthe wastewater sector is urgentlyneededinthe rapidly urbanizingandindustrializingdistricts surrounding the major cities, including inareas that do not drain directly intoLake Tai. Therefore, the project design has beenadjustedto focus on improvingthe localenvironment inthe core urbancenters andthe rapidly urbanizingdistricts inthe large conurbations ofWuxi andSuzhou. This project focus reflects much o fthe work alreadybeingledbythe Government, andthe local authorities intheTaiBasin. As indicatedabove, programstoimproveurbanenvironmentalconditions, including wastewater management inparticular, are underway inmanyparts o f the Basin, including inShanghai Municipality, ZhejiangProvince andinChangzhou,WwCi andSuzhouMunicipalities withinJiangsu Province. The Bankproject will complement andbuildon these existing efforts. Moreover, the original project design hinged onimplementation o fcontrol structures onthe westernbankof the WangYu Riverto protect water transfers from pollution inthe river catchment. Inthe absence o f expandedinfrastructure and environmental monitoring to addresspollutioninthe river catchmentat source, local governmentshave become concernedover possiblenegative environmental impacts ofthe control structureson nearbycommunities. The investmentsunder the project, particularlyinXishan District, seek to address this issue by reducing untreatedwastewaterdischargesthat presently flow into the WangYu River andwill thereby also have a positive impact onLake Tai water quality. - 11 - 2. Majorrelated projectsfinancedby the Bankandlorotherdevelopment agencies(completed, ongoingandplanned). Latest Si stvision Sector Issue Project ( P W 1tings (Bank-flnancec irojectsonly) Implementatlon Development Bank-financed Progress(IP) ObJectlve(DO) UrbanEnvironment including YunnanEnvironment Project , S S wastewatermanagementandLake basinpollutioncontrol including industrial pollutionandnon-point sourcepollution control UrbanEnvironmentincluding GuangxiUrbanEnvironment S S wastewater andwater resources Project management UrbanEnvironmentincluding SecondShanghaiSewerage S S wastewater Project UrbanEnvironmentincluding ShanghaiEnvironment Project S HS wastewater UrbanEnvironmentincluding SichuanUrbanEnvironment S S wastewater Project UrbanEnvironmentincluding Chongqing UrbanEnvironment S S wastewater Project UrbanEnvironmentincluding HebeiUrbanEnvironment S S wastewater Project UrbanEnvironment including LiaoningEnvironment Project S S wastewater Toxichazardous waste Industrial SouthernJiangsu pollutionanddomestic wastewater Environmental Protection Project Toxichazardous wastes U U IndustrialPollutionControl U U Domestic wastewater HS HS Other developmentagencies PlDO Ratings: HS (Highly Satisfactory), S (Satisfactory),U (Unsatisfactory), t (Highly Unsati ICtOry) 3. Lessonslearnedandreflectedinthe projectdesign: Chinahas the largestportfolio inthe Bankandits quality is amongst the best performing. A recent OED assessment, China: Review of theBank's assistanceto the Urban Water Supply and WastewaterSector, Report No, 24979 ratedthe outcome of Bank's assistance as having beenmoderately satisfactory, its sustainability as likely, butits institutional impact as modest. meICRfor theSouthernJiangsuEnvironmentProtectionProjectnotedconsiderabledifficultieswiththe sustainabilityofindustrial pollution controlandtoxic andhazardouswaste components, which represented over 80 percentofinvestments under the project andwere ratedunsatisfactory. By contrast, the report - 1 2 - ratedthe wastewater componentas highly satisfactoryhaving beenwell designedandimplementedbelow appraisedcost andfully meeting the water quality objectivesas set out ineach city's long-term water qualitymaster plan. However, theproject failedintwo ways, a) to achievefullcostrecovery for wastewater investments; andb) to convert the wastewatercompaniesintofully autonomous entities in accordancewiththe 1994 company law, thus perpetuatingtheir dependence on the municipalpublic utility bureaus andfinance bureaus. Key lessons learned frompastprojects,which will have beenreflected in project designinclude the needfor: (a) strong client ownership; (b) improved coordination at the provincial level; (b) greater focus onutilityreform to implement the Government's policies towarddevelopmentof autonomous, commercially oriented utilities, with tariffs adequate to ensure financial sustainability and emure satisfactory operationandmaintenanceo f assets created; and (d) encouragingprivate sector participation, where there is political support for it. The project design hasalso beenshapedbyrecent experiencethat hashighlighted a tendency for local investment plans that make inadequateprovisionfor collection networks resulting inunderutilization o fthe treatment plantsthat are often over-designed. Investmentsinnetworks have beenincreasedto fully capture wastewater flows to support existing, as well as proposednewwastewatertreatment plants, whichhave beenreviewedandscaleddown, where appropriate, to reflect morerealistic wastewater flows. The turnkey coneacts for wastewatertreatmentplants inSuzhoushould ensure that plants operate at peak efficiency andlowest operating costwhenhandedover following commissioning andinitialoperation. The institutionaldesign ofthe project for asset managementlooks to outsourcing operation and maintenanceactivities to experiencedoperatorsratherthanrelying solely on strengtheningin-house capacity, whichhas had mixedresults elsewhere. Reforms infunding arrangementsaddress major impediments to sustainability andexpansiono fwastewater service indistricts. 4. Indicationsof borrower commitment and ownership: Project componentsare basedon the priorities outlined inthe cities' urbanandenvironmental masterplans andthe extensiveongoingprograms oflocally funded wastewaterinvestments, includingfor rehabilitation of city sewer networks inbothWuxi and Suzhou. The NationalDevelopment andReformCommission (NDRC) identifiedthe project as a key priority for Bank support. Assurances were obtained at negotiationsthat an action Dlan would be FAmished to theBank bv June 30, 2005 for imnlementation of the locally-financed Wuxi Sewer Network Rehabilitation Promam. Project implementationarrangementsare beingfinalized provincialandmunicipal project management ofices are inplace, andchartersfor allexecuting wastewater companies have beenrevised to meet the requirementsfor project implementation. Municipalities have retainedprocurement agents andhave set an implementationschedule that calls for advance contracting andretroactive financing for some components. Aspects o fthe HuishanandDongtingwastewater components inWuxi andthe Canal Rehabilitation program inSuzhou, for which retroactive financinghas been requested,are already underway. Most importantly, municipal governments have committed to reformfunding arrangementsto ensurefinancial autonomy andviability o fwastewater investments, particularly inrapidly developing districts. 5. Value addedof Banksupport inthis project: The value of Bankassistance interms o f effective investment outcomesis already known to the client, who successfullyimplementedthe wastewater investmentsunder the Southem JiangsuEnvironmentalProtection Project. To buildonthis satisfactory experience, Bankinvolvement during project preparation has highlightedpractical opportunities to modernize managementarrangements for district wastewater utilities and improve the cost effectiveness andfinancial sustainability o f wastewater systems andto help strengthen -13- institutionalarrangementsfor sector coordination. The project, therefore, seeks to address apriority inthe Government's strategy for wastewater sector managementby helping to shape viable approaches for smallerdistrictltownshipwastewater systemsthat generallyhaverelatively higherunitcostsandmore difficulty inmobilizingexperiencedoperatingstaffto ensure efficient andeconomical operationand maintenance o f networks andtreatmentfacilities. Inparticular, morecosteffective andviableconfigurationsrequiringfewer separatewastewatertreatment plants andinstitutionshavebeendevelopedfor district wastewatersystems. Inaddition, the proposed expansiono f sewer networks, both for existing, as well as for proposednew treatment facilities under the project, will minimize the risko funderutilization ofthese assets inthe project area, which is a growing problem for many existing wastewater systems inChina. Use o ftumkey contractsincludingdetailed design, construction, equipment supply/installation, commissioning andinitialoperation for wastewater treatmentplantsin Suzhou, should ensure these plants operate at peakperformance andat lowest operating cost when handed over to the responsiblewastewater company, thereby reducingwastewater feeltariff increasesneeded. Outsourcing of implementation management andoperation andmaintenancefunctions to experiencedoperators should enable the new wastewater companiesbeing establishedto avoidlengthy and costly implementation delays due to inexperience, andto set clear performance accountabilities for the efficient andreliable operation andmaintenanceof wastewater systems. Dialoguethrough project preparationhas also encouragedmunicipalities to initiate reform o f funding arrangementsnoted above to make the ongoing municipal institutional reforms fully effective. Water quality modelingduringproject preparationhas helpedtarget project investments inwastewater systems inthe areaof some o fthe most heavily polluted rivers. Expandedtesting o fwastewatertreatment plantsludgefor hazardousmaterial, is asignificant enhancementofenvironmental safeguardsinlightof the proportiono f industrialwastewater being treated. Inaddition, the locally-financedwastewater masterplansinWuxi and Suzhouwill provide abasisto strengthencoordination betweenjurisdictions in strategyandactionplanningfor improvedwater quality managementinthese rapidly developing areas. E. Summary ProjectAnalysis (Detailed assessments are inthe project file, see Annex 8) 1. Economic(see Annex 4): 0Costbenefit NPV=US$million; ERR= % (see Annex 4) 0Costeffectiveness 0Other(specify) The project will improve the quality o fthe urbanenvironment through improvedwastewater andwater quality managementinthe key municipalities o f Wuxi and Suzhou andmore widely inthe Tai Basinwhich will facilitate sustainableurbaneconomic growth andsocial development. The locally-financed Wuli Lake rehabilitation programwill help reducethe frequency andseverity o f floodinginWuxi City andwill open upa substantialnewareafor development with significant amenity value for commercial, residentialand recreationaluse. Similarly, the canalrehabilitation programin SuzhouCity will reduce the fiequency and severity o fflooding andwill further enhance the quality o f life for residents andthe tourismpotential ofthis historic city. Expansion o fwastewater treatment capacity inSuzhou City will benefit most o fthe city's population. Expansion of wastewater service inrapidly industrializing districts inWuxi andSuzhouwill helpto reducepollutionof the region's critical water resources. Byexpanding sewer networks, the project willhelputilizewastewatertreatment capacity, includingatexistingplantsthereby increasingthe productivity ofwastewater investments. Itwill also helpreduce healthrisks andenhancelivelihood prospects andproductivity inthese rapidly growing areas andfor downstream communities. The project support8 Critical institutional andfrnancial reforms that will provide a more viable and - 14- sustainablebasis for wastewaterinvestments,particularly inthose small systems servingthe rapidly developing outlying districts. The locally-financed wastewater masterplanningto be undertakenby Wuxi andSuzhouMunicipalitieswould, for the fmt time, incorporaterapidly-growingperi-urbandistricts in actionplans that addressthe growing pollution of water resourcesina strategic area inthe basin. Economic Analyses. Manyo fthe project benefits, particularly those relating to environmental andpublic healthimprovements, couldnot bereliably quantified. For this reason, the choice o fpriority wastewater investments under the projecthas beenguidedby cost effectivenessanalysis. Basedon this approach, alternative project designs were identifiedandevaluated inorder to determinethe least cost solutions. InHuishan,the optionofchannellingwastewaterto anexisting wastewatertreatmentplantinthe Wuxi City systemwas consideredwas rejecteddue to limitedexpansioncapacity. InXishan, separate wastewatersystems were initially proposedfor eachof the seven townships and anindustrial development area. However, a comparison of investmentandlong-runoperating costs indicatedthat one or two wastewatertreatment plantscouldserve these areas more efficiently andeconomically, resultinginlower operating andoverhead costs. Combining the Xishan systemsandthe Dongting systemwouldfurther reducecosts. For the Wuzhong system, the optiono f conveying wastewater for treatment innearby Suzhou City was considered, butrejectedinlightof the characteristicso f the mainly industrial areabeing served andthe desire to integrate future wastewatersystems inthe district undera single wastewatercompany. The sequential SBR was selectedas the most economical treatment processfor the relatively small m p sproposedinthe three districts. The overall, locally-financed WuliLake rehabilitation program includes dredgingandwater diversion, as well as control gates, embankmentwork andpilot ecological restoration. Two options were consideredto divertwaterto Wuli LakeandWuxiCity's canals from either Gong Lake,where the WangYuRiverenters Lake Tai, or from Meiliang Lake, which is more polluted, but significantly less so than Wuli Lake. Water quality modeling simulations indicated that divertingwater from GongLake could improvethe water quality inWuli Laketo ahigher degreethanfromMeiliangLake. However, the other optionwas favored byJiangsuProvince andthe TBA as away to also draw water infrom Lake Tai, thereby also improving water guality inMeiliangLake. Moreover, Wuli Lake is intendedto serve only as a tourism water body anddivertingwater from MeiliangLakecanmeetthis requirement. 2. Financial(see Annex 4 andAnnex 5): NPV=US$ million; FRR= % (see Annex 4) Financial projections over the 2004-2015 periodhave beenprepared for the four project wastewater companies, SQCC, WAMC, HWTC, andXWTC for the merged Dongting andM e nwastewater system. These projections are basedonthe requirement o f eachcompany to comply with the agreedupon furancial covenantsregarding costrecovery, debt service coverage, as well as the needfor intemally generatedcontributions towardproject counterpart funding. The kev financial covenant reauires that each project comvanv generates annual overatino revenues that are sufficient to cover all oDeratinP emenses, including - - devreciation. anv loss on non-onerating activities. vlus the amount. if anv. bv which debt service exceeds devreciation. This ratio o f operating revenues to costs is expressedas the costrecovery ratio, which, therefore, mustbe at least 1.O ineach year. In addition. a debt service coverageratio covenant will also be avvlied under which the comvanies'abilitv to incur additional debt will be conditional on them maintaining this ratio at not less than 1.3, Tosafeauard good Drosnects for financial viabilitv. agreement was reached that the Bank will be advised and Piven an ovnortunitv to comment on any additional borrowing bv wastewater companies. -15- The mainsource of revenue for project wastewatercompaniesis the existing municipal wastewater fees, which at RMB 1.15/m3 inSuzhouand RMEl 1.10/m3 inWuxi, are amongstthe highest inChina. With conversion o fthis fee to awastewaterutilitytariff, all revenues generatedfiom the tariffswill be directly transferred to the project companies. This will give the companies their own source o f operating revenue andprovides the basisonwhich they canestablishthemselves as financially viable andsustainable enterprises consistent withtheir independentlegal status under g o v m e n t policy. However, the companieswill alsoneedto carefully managetheir operations, as well as their capital investment programs, so as to achievethe greatestpossible efficiency inthe use of these revenues. This is particularlyimportant for the three small district wastewater companiesbecause opportunities to achieve low cost operations through economies of scale are limited. This challengehas beenaddressedthrough a number ofmeasures incorporated into the project designs. Project investments are basedon the leastcost solutions over the opqating life o f eachwastewater component. Additionally, the operating scope of eachcompany has been maximizedto the extentpresentlyachievableinorderto minimizemanagementandother overheadcosts. Operating efficiencies will be further enhanced through the outsourcingo f operations andmaintenanceto experiencedwastewater operators. IfmoderatetariffincreasesareimplementedeverythreetofouryearsinSuzhou, tariffrevenuesshouldbe sufficient to enable SQCC to filly recover the cost o f its operations, as well as to make contributions toward capital investments, includinga portiono fproject counterpartfundingrequirements. The tariff would needto be increasedby a modest 15 percent in2006, to RMB 1.32/m3, andthenby a further 18 percent to RMB 1.561m3 by 2009, whenthe project facilities are fully operational andprincipalrepayment requiredto cover generalinflationary increasesinoperating costs. Overthe 2004-2007 period, the on the Bank loanbegins. After 2009, the needfor further increases is anticipated to be limitedto that company will generate an operating surplusthat shouldbe sufficient to fund almost 40 percent o fproject counterpartfunding. The cost recovery ratio is projectedto exceedthe covenantminimumo f 1.O inall years andaverage 1.3 over the 2005 -2015 period. The debt service coverageratio is also projectedto be satisfactory, remainingwell above the 1.3 minimuminall years. prior to the commencemento foperationsofthe project-funded facilities in2008, the wastewater company inHuishanwouldnothaveanyoperatingassetswhilethe companiesinXishanandWuzhongwouldhave only limitedassets inoperation. Therefore, a large share o f the revenue generatedfrom the wastewater tariffs over this periodcan be allocated to counterpart fimding. InHuishan, tariffrevenues should be sufficient to cover 45 percentofcounterpart fundingrequirements. InXishan, the company will be operatingthe existing Dongting WWTP, but this will require only about 50 percent o frevenue over the 2004 -2008 period, with the remaining50percent allocatedto cover almost 20 percent o f counterpart fundingrequirements. Wuzhong isprojectedto be able to generatejustunder40 percent ofrequired counterpartfunds from the tariff. Revenuegeneration inWuzhong is basedon projectedincreasesin Suzhou's municipaltariff, referred to above. For HuishanandXishan, the projections are basedon anticipated increasesinthe municipaltariffapplied throughout Wuxi. Tariff increaseso f 15 percent in 2006 and20 percentin2009 are envisaged. Withthe newwastewatersystems beginning operation in2008 2009,revenueswould thenbeused - primarily to coverthe operatingcostsanddebt service obligations o fthe four project companies. Given that wastewater tariffsinbothSuzhou andWuxi are set ona municipality-wide basis, andtherefore largely reflect lower unit cost structures inthe central urbanareas, the projections indicate that these tariffs will be insufficient to fullyrecover the costs o fthe district companies beginningin2008. Inorder to cover this anticipated shortfall, eachdistrict company will apply a surcharge on industrialwaste generators. The existingmunicipal fee is set at the same levelfor all customers, but since the cost o ftreating industrial -16- wastewater is generally higherthanthat for other groups, the surchargewill reallocate charges so that they better reflectthe actual cost of providing wastewater services to the different customer groups. In2008, the projected requirement for the surchargeis RMB 0.501m3 inHuishan,RMB0.80/m3 inXishan, and RMB0.65/m3 inWuzhong. Onthis basis, allthree companiesshouldcomplywiththe costrecoveryratio ineachyear over theforecast period. InHuishan, thecostrecoveryratioisprojectedto average 1.3 over the first eight years of system operations, 2008 - 2015. InXishan, where the project facilities are expected to enter operation in2009, the costrecovery ratio over the 2009-2015 averages 1.2. For Wuzhong, the average cost recoveryratio is 1.2 over the 2008 -2015 period. The debt service coverageratio is projected to alsomeet the covenant requirement inmostyears, butinthe case ofHuishanandXishan, may fall slightly below 1.3 inone or two yearsjust after the project facilities enter operation. However, the companiesshould have sufficient cashreservesfrom previous years that will ensure that they canmeettheir debtservice obligations. FiscalImpact: An analysis ofthe availabilityof counterpartfunds was undertakenbyreviewingrevenuesandexpenditures intheproject cities anddistricts. Althoughrevenuesfromthe wastewatertariffwillbeusedtomeeta portiono f counterpart funding for the projectwastewater components, contributions are also requiredfrom the capital budgets of the municipal anddistrict governments. Forthe non-wastewater components, all counterpart funding is providedfrom the capital budgetso fthe municipal governments inSuzhouand Wuxi. Basedonconservativeassumptionsregardingfuture revenuegrowth, the analysis indicatesthat the project components are consideredto be affordable to the municipal anddistrict governments. Requirementsfor project counterparth d s from the two municipal governments andthree districts as a proportionof total revenuesvary between0.2 percenton average inSuzhou (0.5 percent inthe peakyear), 0.2 percent inWwi (0.5 percentinthe peakyear), 0.4 percent inWuzhong (0.8 percent inthe peakyear), 0.5 percentinHuishan(1.1 percent inthe peak year), and 1.9 percent inXishan (3.7 percent inthe peak year), Whenconsidering only revenuesthat canbe allocatedto the infrastructure investment, which is an approximation o f financial capacity to contribute to the project, counterpart contributions as a proportion of the capital budget varies between 0.6 percenton average in Suzhou (1.5 percent inthe peakyear), 0.4 percentinWuxi (1.2 percent inthe peak year), 1S percent inWuzhong (2.9 percent inthe peakyear), and 1.9 percentinHuishan(3.8 percent inthe peak year), and5.5 percent inXishan (11.3 percent inthe peak Year). 3. Technical: The choice o fthe treatment process for the proposedwastewatertreatment plants hastaken into account the highproportionof incoming industrialwastewater (50 to 70 percent o f total flow) andthe potential fluctuations inthis influent quality. For district wastewatertreatment plants, the borrowers' selectionof SBR is the most appropriate andcost-effective choice. Inthe case o fthe largerSuzhouWWTPs, additional samplingdatawill determine the most appropriate system, andthe borrower has agreed to proceedthrough a tumkey bid. Underthis type o f contract, bidders would be askedto make technical proposals through a two-stage approach, Le. by includingthe design as part o f their services. - 17- While treatment facilities havebeendesignedto accommodatesome fluctuations inthe quality andquantity o finfluent, this uncertainty is to beminimizedthrough capacity buildingandinstitutional strengthening. National law requires industrial enterprises treat their effluent to a preliminarylevel suchthat the effluent quality meets prescribed standards (equivalentto domestic strength wastewater) for releaseintothe public sewers. Under the project, wastewaterutilities will take responsibility for protecting their own assets by directly monitoringthe incoming effluent at its entryto the sewer network, andbypolicing the acceptability o fusers' discharges. The charters of the wastewatercompanies inthis project include provisions that allow them to seek interventionandultimately to refuseindustrial sewage from non-conforming industries. Agreement was reachedat negotiationson measuresto be taken to ensure effectivemonitoringand enforcement arrangementsand to record activitiesin ueriodicproiect promess reuorts. 4. Institutional: 4.1 Executingagencies: InWuxiMunicipality, the locally-financed WuliLakeRehabilitationcomponentwillbeimplementedby the Wwi Water ConservancyBureau, which has considerableexperience implementingthe type of works involved. Wastewater components inHuishanwill be implementedby the HWTC, which was establishedinMarch 2003 and will require technical assistance for institutionalstrengthening. The Dongtingwastewatersystem andthe Anzhen wastewatersystemwill beimplementedbythe XWTC, establishedinJanuary2004, which will require technical assistancefor institutional strengtheningfor project implementation andto effectively merge wastewater operations andmaintenancethroughout Xishan District. InSuzhou, the SQCC, anautonomousagencyunderthe Water AfTairsBureauwill beresponsiblefor the implementation of all componentsinSuzhouCity canal rehabilitation componentincluding the control - gates on the ShangtangandXujiangRivers, canaldredging andthe expansiono fthe FuxinandLoujiang WWTPs, following completion o fthe firstphase construction o fthese plantsthat is also under its implementation. SQCC has good experienceincarrying out similar programs despiteits limited number o f staff andusually delegatestechnical responsibilities to qualified autonomousunits through adequate biddinghelectionprocess. The Wuzhong wastewatersystemwill be the responsibility o f the WAMC establishedinOctober 2003, anew wastewater company establishedunderthe WETDZ. Arrangements are beingmadeto contract implementation managemento fthe Wuzhong wastewater systemto SQCC and, following construction, operationandmaintenanceo fnetworks andfacilities will be outsourcedto an experiencedoperator. 4.2 Project management: The overallproject will be coordinatedbythe ProvincialFinance Bureau, through the TBUEPO. Additional staffingneedshavebeenidentifiedto ensure effective project managementby TBUEPO, and assuranceswere obtained at negotiationson a satisfactow timetable for recruitmentof additional staff for the TBUEPO with exaeriencesatisfactow to the Bank NewPMOshavebeenestablishedto coordinateimplementation ofcomponentsinWuxiandSuzhou Municipalities, respectively. These PMOs are under the respective MunicipalFinance Bureaus to ensure close coordination withTBUEPO at the provincial level. Close coordinationwas also establishedbythese municipal PMOs and their respectiveimplementingagencies duringproject preparation. However, additional staffkgneeds inmunicipal PMOs for procurement managementandproject financial management, inparticular, havebeen identified. Assuranceswere received dun" negotiationson a - 18- satisfactom timetable-forthe recruitment of experiencedstaft TBUEPO will retaininternational andlocalconsultantsto assistwithdesignreview andengineering supervision, as well as outsourcing o f operationandmaintenanceof wastewater facilities andnetworks, institutionalstrengthening for utilities managementandoverall quality assurance. TBUEP will also organize foreign study tours for PMO staff inproject management. Implementingagencies will retak (a) localdesigninstitutesto assist with remaining design work; @) local supervision companiesto assist inconstruction supervision; and (c) local tender companies for assistance withinternationalcompetitive bidding(ICB) procurement. Independentagencieswill alsoberetainedfor independentmonitoring of resettlementaction plans andenvironmentalmanagementplans andmitigation activities. 4.3 Procurement issues: The responsibilities of procurementmanagementare definedinthe final ProcurementManual,which has beenpreparedby TBUEPO. A procurementassessmentwas undertakenbythe Bank to determinethe capabilities of all the implementationunits andPMOSfor this project. Further details are givenin&mex 6. The riskofproblems was assessedas average. Most implementation unitshave designatedspecific departmentswith adequate staff to be responsiblefor procurement. Also, additional training programs will beprovidedbyTBUEPO to ensure that allresponsible staff are fully conversantwith the Bank'sguidelines andprocedures. Except for thetwo turnkey contractsfor wastewatertreatmentplants inSuzhou, all contractswill be procuredundernational competitive bidding (NCB) proceduresbecauseof the nature and relatively small size of these contracts; very few are likelyto be over $7 million. Retroactive financing estimatedat $5 millionwill beprovidedto finance some civil works inthe sewer networks at Huishanand Dongting as well as advisory services for designo fturnkey contractsfor FWrinandLoujiangWWTPs in Suzhou. . 4.4 Financial managementissues: The assessment, basedon guidelines issuedbythe Financial Management Sector Boardon June 30,2001, hasconcludedthat theproject will meetthe Bankfinancial managementrequirements,as stipulated inBP/OP 10.02, subject to addressingthe action planinAnnex 6@). Fundingsources for the project include Bankloanandcounterpartfunds. The Bankloanproceedswill flow from the Bank into the project SpecialAccount to bemanagedbythe JiangsuProvincial Finance Bureau, to project implementingagencies(or project companies), andfinally to contractors or suppliers. The Bank loanwill be signed betweenthe Bank andthe People's Republic o f China through its Ministry of Finance (MOF), and Subsidiary LoanAgreements will be signedbetween MOF andJPFB andthen betweenJPFB and SuzhouandWuxi govemments through Suzhou andWuxiFinance Bureaus, respectively, andfinallybetween SuzhouandWuxi Finance Bureausandimplementing agencies. In accordance withthe agreementbetweenthe BankandMOF, disbursementswill be basedonthe traditional reimbursementarrangementsandwill notuseprojeet managementreport (PMR)-based disbursements. Counterpartfunds will beprovidedby appropriation from provincialandmunicipal govemments, including from wastewaterfees andtariff revenues, andsome localcommercial debt. No outstandingauditsor audit issues exist with any of the implementingagenciesinvolvedinthe proposed project, The companycharters for all wastewater enterprises have beenrevised to alignthe company's mandate withfunctions andresponsibilities undertheprojectandinline withChineseutilityenterpriseaccounting - 1 9 - regulations, staffingschedules andjob descriptionsandexperience/qualificationsrequirementsfor Project Accountants andtraining requirements. Trainingneedshave beenidentified for staff inimplementingagencies inthe use o fthe Financial Management Manual,that has beenpreparedbyJiangsuProvincialFinanceBureaufor the project. Moreover, implementationmanagementarrangementsinXWTC andWAMC, which are newly established, are being f m e d up and staffing will not be requireduntillate 2004. Agreement was reached at negotiations that imvlementinpapencies will comvletestaffingappointmentsand training, as well as anv remaining actions for organizational arrangements,accountina and financial manaaement and reporting svstems. as a condition ofBank disbursementon respective components. 5. Environmental: Environmental Category: A (FullAssessment) 5.1 Summarize the steps undertakenfor environmentalassessment and EMP preparation (including consultation anddisclosure) andthe significant issues andtheir treatment emerging from this analysis. HohaiUniversity carried out the consolidatedEnvironmentalAssessment (EA) of the proposedTBUEP in accordancewith China'snational policies andBankprocedures, withsupport from an independent international consulting environmental specialist. The terms ofreferencesandvarious draftversionswere reviewed anddiscussedindetail duringproject preparation. The draft Englishversion o fEA documents were submitted to the Bankinlate September 2003 andreviewed bythe Bankduringthe appraisalmission andrevisedaccordingly. The finalEAreport, EA Summary andEnvironmentalManagementPlan(Em) were submittedto the Bank inDecember2003 andfollowing additional clarification andanalysis in February2004, were found to be satisfactory. The FinalEAdocumentation, as supplemented, was sentto the Bank'sInfoshop inWashington andinBeijinginMarch2004. Duringthe EA preparation, localpeople were consultedat leasttwice, andtheir opinions havebeenreflected inthe project design andenvironmental mitigationmeasures, as appropriate. Project investmentswill have positive environmental impacts intenns of improving water quality inthe Tai Basin. Domestic andindustrial wastewaterswill be collected andtreated at six WWTPs to remove pollutants. For year 2010, the expectedreduction o fpollutant discharges to surface waters from the six WWTPs are 122tonnes/day (tpd) ofchemical oxygen demand(COD)Cr, 62 tpdo f biological oxygen demand(BOD)S/day, 6 tpdof NH3-N,80tpdofsuspendedsolids (SS), and0.6 tpdofTP. These reductions will improve the quality o f the receiving surfacewaters inSuzhouandWuxi anddownstream areas. The canal network rehabilitation investmentsinSuzhouunder this project -including dredging and construction o fsluice gates andshiplocks will improve the water quality andreduce the riskof flooding in - this city. The locally-financed Wuli Lakerestoration activities, also under this project, will improve the water quality andaquatic life inthe Lake, andcreate a public greenbelt for tourism andrecreation. Minor adverse impacts duringconstruction andoperation o fparticular investments are expected, butwill bemitigated. The adverseimpacts will bemostly inthe form o fnoise, odor (stink gas), particulate matter (PM)emissions, sedimentandsludgedischarges, andtraffic congestion. Noise emissionsfromWWTP havebeenassessedat the boundary line ofWWTPs, and found to be inexcess o f standardsonly inthe case of the FuxinWWTP (both day andnighttimes), HuishanWWTP (only at nighttime), and Loujiang W P s (only at nighttime). However, adverse impacts onreceptors -which are 200 mto 500maway from these WWTPs -are not expected. Regardingtransportation o f sedimentsdredged fiom the Suzhou Canalsto the disposal site, alternatives were evaluatedconsidering such factors as noise andtraffic impacts. Mitigatory measures for noise emissionswill include no construction at night, use o fequipment withlownoise, useofvehicles with noise control, andsettingupofconstruction barriers. Inaddition, cargo shipswill not be allowed at any time andpleasureboatswill not be allowed at nightsinthe - 20 - ShangtangandXujiangnetworks inSuzhou; shipnoisewill be limitedto 55 &A, silencers will be installed on ships for noise suppression, siren duration andfrequencieswill beminimized; anduse o f sirens will not bepermittedinresidential areas. Odor emissions fiom the sedimentationand SBR tanks o fWWTPs will beminimizedbyproper operation through adjustment of the air flow rateo fthe blower to bringwastewater to aerobic state, andthrough timelysludge dewatering, handlingofsludge cakes indewateringrooms, use ofsealedtrucks for transporting the sludge to the disposalsite, sprinklingtemporary sludge storage areas withbleach, and plantingtrees aroundthe aerationtanksandWWTP. To mitigate PMemissions, vehicles will be covered, their speedwill be limitedto 40 km/h, andtheir wheels will be cleanedofmud. Sediments from Suzhou Canalshavebeentestedfor hazardousmaterials and, inalmost all cases, found to be withinstandardsprescribedbyapplicable Chineseregulations, withmost indicators low or undetectable. Inaccordancewith theregulations, these willbedisposedat asite at Sanjiaozuithat iszonedas greenarea inSuzhou'smasterplan.Furthertestingforhazardousmaterials istobeundertakenofsedimentsinthe Xiaomiduqiao River sectionprior to dredging to determine ifother disposalarrangementsare needed, for example at purpose builtcells at the municipal landfill. Sludge from WWTPs will be testedfor hazardous characteristics under applicable Chineser e g u l a t i o n s / s t . Any sludgefound to behazardouswillbe disposedat a hazardouswastelandiill. Ifthe sludge is foundto benon-hazardous,itwill be disposedat a separate cell that is designedandoperatedincompliance with ChineseGovernment regulations, ina sanitary landfdl. Prior to receiving the sludge, the hazardous andor sanitarylandfillswill be certified as designedandoperatedincompliancewith applicable govemment regulationsrelatingto disposal of wastewater treatment plant sludge. Transportation o fthe WWTP sludgewill be conducted by leak proof trucks. Confirmation of theseawanaementswas received at neaotiations. Public consultations haverevealedconsiderablesupport for this project. However, concernswere also expressedabout the potential unpleasantodors from WWTPs, andgreaternoise and dust levels, as well as traffic. Some suggestedshorterconstruction periods to reduce adverseimpacts duringthe construction period. The shiplock at the ShangtangRiver was re-sited further away from the historic Hangshang Temple. Agriculturaluse o fthe WWTP sludgewas viewed not feasible by affected people for the Wuzhong andDongthgWWTPs. These concernshave beenincorporated intothe project design andinthe EMP. TWOsuggestionsare madeat the conclusion ofthe EAReport. The first oneregarding implementation of the locally-financed Wuli Lake ecological restoration sub-component as a pilot activity (instead of an activity for full-scale implementation) is reflected inthe project design. The secondrelatesto the implementation of industrial pollutionprevention measures(inparticular, waterrecycle and reuse at industrialfacilities) as a means to reducecosts associatedwithwastewater treatment and sludge management. Aweement was reached at negotiations that industries discharoing into vroiect-financed ~ Pwill be included in theJianasu CPvropram and that ueriodic vroiect vropress reuorts will s reuort on uollutionprevention audits and implementation of recommended measures bv firms discharpinginto vroiect-financed wastewatersvstems. Confirmation was also received at negotiations that periodic vroiect vrogress rel;lortswill reuort on imvlementation of all activities reauired under the X P . 5.2 What are the mainfeatures of the EMP andare they adequate? For each sub-component, the Environmental Management andMonitoringPlan identifies the mediato be monitored, the location of the monitoring site, the parameters to be'monitored, andthe frequency o f -21 - monitoring. A training programfor managementandtechnical personnelofWWTPs, as well as for the Wuli Lakerestoration andSuzhousewer network rehabilitationhasbeenidentified. Bank's commentson the EMP were providedon October 12,2003, to strengthendeficiencieswith respectto the Bank requirements (OP 4.01). The EMPwas amendedaccordingly andfinalizedinFebruary2004. 5.3 For Category A and Bprojects, timeline and status o fEA: Date o freceipt o f finaldraft: Bankreceived the fvst drafiofEAinEnglishinlate September2003 duringthepreappraisalmission. Bank's comments wereprovidedonOctober 12,2003. The EAwas finalized with all clarifications and analysisinFebruary2004. 5.4 How have stakeholdersbeenconsultedat the stage o f (a) environmental screeningand(b) draflEA report on the environmental impacts andproposedenvironment managementplan? Describe mechanisms of consultation that were usedandwhich groups were consulted? Consultationswiththe potentially affectedpeople were conductedbythe EA team intwo stages. First stagepublic consultationswere heldprior andduringpreparation of the EA Report (period between October 2002 and August 2003). At this stage, the EA team heldmeetingswiththe potentially affected people to discussthe EA TOR, including informationaboutthe project componentsandactivities involved, potential environmental impacts, mitigatorymeasures, andthe implementation schedule. Informal discussionsandon-site visits were held, andquestionnaireswere distributed to understandthe public attitudesandneeds aboutthe project's environmental aspects. The interviewees were from differentsexes, age groups, culture levels, andfamily structures. Second stagepublic consultationswere conductedinJuly 2003 bythe EAteam after completion of the draft EAReport to disseminatethe conclusions ofthe EAReport anddisclose the mitigatory measuresto the potentially affected people. This provided anopportunity to address the concernsthat hadbeenraised bythe affectedpeopleregardingthe project. Consultative meetingswere heldregarding the Anzhen WWTP (inNianyuVillage), DongtingWWTP (inWangsongbang), Wuzhong WWTP (YinxiVillage), and WuliLakerestoration (inD a hTown, DongjiangTown, JingchengandXuelangTowns). Inaddition, on-the-spot interviewswere heldandquestionnaireswere usedto receive feedback. InAugust 2003, the Project was publicized bythe EA team inHohaiUniversity's website (httu://www.hhu.edu.cn), anda 24-hour telephonehotline was opened. 5.5 What mechanismshave beenestablishedto monitor andevaluate the impact o f the project on the environment? Do the indicators reflect the objectives and results o fthe EMP? As partofthe EMP,monitoringprograms havebeendraftedfor eachprojectcomponenthub-component. Monitoringarrangements andreportingprocedureshave been strengthenedinthe Final EAreport, as supplemented, inFebruary 2004. The indicators regarding "improved urbanwater quality environment" specified in h e x 1 of the project appraisal document (PAD)reflect objectives o fthe EMP. 6. Social: 6.1 Summarizekey social issues relevant to the project objectives, and specify the project's social developmentoutcomes. The key adverse social impacts o fthe project are largelyrelatedto landacquisition anddemolition o f structuresfor different components o f the project. In accordancewith local laws, regulations andthe World BankOP 4.12 on Involuntary Resettlement, two ResettlementAction Plans (RAPS)have been - 22 - preparedfor the various components, includingwastewatertreatment plants, seweragenetworks, canal dredging, flood control facilities, sluice gates andembankmento fWuli lake inSuzhouandWuxi . Municipalities, respectively. The two RAPs are eachbasedon a detailed census of the affected people, inventory ofaffected assets, socioeconomic surveys andextensiveconsultationswith the project affected people. The various components of the project will require a total o f904.7 muof land, demolitionof 53,967 m2 of houses, andrelocation of 16 enterprises. These would affect 536 people due to landacquisition and774 people in 176householdsdue to housedemolition. Cashcompensationor replacementhousing will be offered to those who will lose their residence. Enterpriseswill be offered analternative site and compensatedfor property loss. Forpersonswhose employment will be affected temporarily, cash compensationwill bepaid for their income losses. The RAPs detail the census, inventory, project resettlementpolicy, compensationrates andbudget, compensationandrehabilitation programs, institutional andmonitoringarrangements. A retroactive reviewwas undertakenfor relatedresettlementactivities whichhave alreadybeencompleted. The retroactive review provideddetailed information ofthe numberof affected people andthe status of livelihoodrehabilitation. A ResettlementPolicy Framework hasbeenpreparedinaccordancewith local laws, regulations andWorld BankOP4.12 onInvoluntaryResettlementfor the linkedsewer networks rehabilitation inSuzhou. Details are available inAnnex 1l-B. Noindigenousethnic minority communitieshavebeenidentifiedlivinginthe project areas, 6.2 Participatory Approach: How are key stakeholdersparticipatinginthe project? The project componentswere preparedinaparticipatory manner. The project entity, with its team of international andnational consultants, have organizedvarious consultative meetings withrepresentativesof the provincialandmunicipal governments to apprisethem o f the environmental anddevelopmentissues. These have facilitated participatory consultations, garneringstakeholder support for the project concept, andeducatingthese stakeholdersontheir roles andresponsibilities inprojectexecution. Local consultants carried out social surveys ofpotential beneficiaries andusers o fproject services. The participatory approachfor the resettlementaspects o fthe project has beendealt withinthe RAP, following ChineseandBankprocedures andguidelines closely. Consultationswill continue withcommunities inthe areas directly affectedbyproject works. All affected householdsandcommunities inthe project areas have beenidentified through socio-economic andinventory surveys. Project information, includingresettlementpolicies, hasbeenprovidedto the affectedpopulations throughvarious channels. They have beenextensively consultedandhave participated inthe preparation of the resettlementandrehabilitationprogram. 6.3 How does the project involve consultationsor collaboration withNGOs or other civil society organizations? Local government officials andcommunity organizations inthe areas affected have beenconsultedand haveparticipatedinthe resettlementprogram preparation. Households directly impactedby works have been surveyed Neighborhood meetings havebeenorganized to solicit their views andconcerns, as well as -23- kalizingthe resettlementprogram. 6.4 What institutional arrangementshavebeenprovided to ensure the project achieves its social development outcomes? Internal andexternal monitoring will be undertakenthroughout project implementation. Detailed institutional arrangementsare includedinRAPS.The institutions that assistedthe project agencies with the social assessment surveyswill continueto be involvedinfurther projectpreparationand implementationto develop more detailedprocessesfor community consultation and participation, as well as monitoring indicators to evaluatethe socialdevelopmentoutcomes. 6.5 How will the project monitor performance interms of social development outcomes? Internal andexternal monitoring of resettlementimplementationwill be carried out periodically as set forth inthe RAPs. 7. Safeguard Policies: 7.1 Are-any ofthe following safeguardpolicies triggered by the project? Policy Triggered I I Proiectsin DisputedAreas (OP 7.60, BP 7.60, GP 7.60)* 0Yes 0No I 7.2 Describe provisions madeby the project to ensure compliance with applicable safeguardpolicies. An EA,EMP andRAPs havebeenpreparedby the TBUEPOinconjunction with Wuxi and Suzhou Municipalities. FinalEA, EMPandRAPShave beenreviewedto ensure that they fully reflect the Bank's comments andcomply with Bankpolicies andguidelines. F. Sustainabilityand Risks 1. Sustainability: The project would contribute to the sustainability of continued strongeconomic growthby improving wastewatermanagementand environmental conditions inareas o fWuxi and Suzhouthat are experiencing rapidurban and industrial growth; and by assistingongoing efforts to stem continued deterioration of critical water resources inthe Tai Basin. The project wouId strengthenthe sustainability o fwastewater services through improvementsinthe managementand financing ofresponsiblewastewater utility enterprises. - 24 - 2. Critical Risks (reflecting the failure of critical assumptions found inthe fourth column of Annex 1): Some projectrisks relating to institutional arrangements for strengtheningwastewatermanagementare generic, but are morepronouncedat the district level, where sector managementexperienceis less mature andkeyreforms are being implementedinassociationwiththe project. Sectordevelopmentthrough (locally-financed) wastewater masterplansis important to achieving the project's longer-term objectives. However, achieving the level o finter-jurisdictional coordination andc o n s e m requiredfor this will be challenging. Even so, overall project risk is assessedas modestbecauseof the strong commitment by the leadershipinSuzhou andWuxiMunicipalities andparticipating districts and because overall project coordination hasbeenplacedunder the FinanceBureauto avoid the unsatisfactory experiencedunder the SouthernJiangsu Environmental ProtectionProject. Risk Rlsk Rating Risk MitigationMeasure 'FromOutputsto Objective Failure to construction collector sewers N Projectwill finance fullwastewater systems Low commitment to Inter-jurisdictional S Inclusion of locally-financed wastewatermaster coordination inwastewaterplanningand plans that would include rapidly-growing management districts as well as core city areas. Viability andsustainability of wastewater M Assessment duringpreparation of most cost enterprises effective engineering configurations and institutional approaches, reform of funding arrangementsduringimplementation and Limits on debt financing, outsourcing O&M functions andcapacity buildingunderproject. Little improvement in circulation and M Locally financed activities including water quality inWuli Lake andWuxiCity rehabilitation o f sewers inWuxi City as well as canals non-Bank financed construction of gates and embankmentwork, etc., to reducepollutionrive] water discharges to Lake, andongoing implementation o flocally-financed water transfer scheme from MeiliangLake. From Componentsto Outputs Satisfactoryengineeringdesigns M Designreview TA during implementation. Linkedresettlementon local1y-funded M RPF for locally fundedworks consistent with Suzhousewer network upgrading program Bank guidelines OverallRlsk Rating M Risk Rating H (High Risk), S (SubstantialRis , M (Modest Risk), I :Negligibleor Low Risk) - 3. Possible Controversial Aspects: NIA - 25 - G. Main Loan Conditions 1. EffectivenessCondition Subsidiary LoanAgreements that are satisfactoryto the Bankto be signed betweenthe SQCC, HWTC and WAMC with the respectivemunicipaYdistrict govemments. 2. Other [classifyaccordingto covenanttypes usedin the LegalAgreements.] Disbursement Conditions: Staffing appointments andtraining for WAMC under the WETDZ and inXWTC, the new company mergingthe XishanEconomic andTechnicalZone Companyandthe XishanWastewatertreatment Company Limited, that are satisfactoryto the Bank, unless completed priorto Loansigning. Action Plan Technical Jiangsuto appoint qualified consultants for construction managementby December 31,2004. WuxiMunicipalityto submitto the BankbyJune 30,2005 atime-bound action planfor implementationof the Wuli Lake Restoration Component. Wuxi Municipalityto submit to the BankbyJune 30,2005 atime-bound action planfor rehabilitation of the sewer network inWuxi City. Jiangsuto fumish to the BankbyMarch31,2005 a time-bound actionplanfor updating/preparation o f wastewater masterplansinWuxi and Suzhou. Financial Wuxi Finance Bureauto submit anactionplanto the Bankby June 30,2005 for transferring municipal wastewater revenuesfrom the municipalwastewater fee to HWTC andXWTC. ByDecember31,2006, WuxiMunicipality andSuzhouMunicipality, respectively, to authorizeproject wastewater companiesto levy andcollect utilitycompany wastewater tariffs to replace existing municipal wastewater fees within their respective serviceareas. Starting withfiscal year 2005, eachproject wastewater company to generate operatingrevenues sufficient to cover O&M costs, the excess of debt service over depreciation andany excess ofnon-operating costs over non-operating revenues. Starting inFiscal Year 2005, project wastewatercompanies will be requiredto: 0 generate annualoperating revenuesthat are sufficient to cover all operating expenses, including depreciation, any loss onnon-operating activities, plus the amount, ifany, bywhich debt service exceedsdepreciation; and 0 maintain a debt service coverage ratiounderwhichthe excess o f operating revenuesover costs is not less than 1.3 times the cost of debt service; andthe Bankwill be advised andgivenanopportunity to comment on any additional borrowingby wastewatercompanies. -26- Starting September 2004, all participating wastewater enterprises will preparefinancialprojections annuallyfor submission to the Bankprior to September 30eachyear, to confirmoperating revenues projected for the following fiscal year are sufficient to coverprojected O&M, depreciation andthe excess of debt serviceover depreciationandimplementsuchchangesto achievethis outcome. Jiangsuto furnish Audit Reports to the Bankonproject accounts andonproject wastewater enterprises within six months following the close ofthe fiscal year to which theyrelate. Institutional Suzhou Municipality to corporathe the DFMDbyJanuary2006, as a subsidiaryunder SWIDC, to manage andoversee O&M of all wastewater systems inSuzhou's centralurbandistricts. Jiangsuto furnish to the Bankby December 31,2005 a time-bound action planfor merger inownership, managementandoperation of wastewater operationsthroughout XishanDistrict, WuxiMunicipality by December 31,2006. ProjectManagement Jiangsuto maintain a PLG, chaired by the Vice Governor or SecretaryGeneral of Jiangsu Provincial Government andconsis!hg of line departmentssuchas Provincial Development andReform Commission, ProvincialConstruction Bureau, Provincial Environment Protection Bureau, Provincial Finance Bureau, provincial Water ResourcesBureau, and Provincial Price Bureau. Jiangsu to maintain a PMO under the ProvincialFinance Bureau with sufficient authority, staffing, facilities, and budget to cany out, coordinate, or supervise all project activities, including the procurement, financial management, resettlement, environmental impact mitigation, andprogressreporting. Jiangsuto recruit experiencedstaff inprocurement, project financial management, environmental andresettlement aspectsunder a timetable agreed withthe Bank. WuxiMunicipality andSuzhouMunicipality to eachmaintaina Sub-ProjectManagement Office underthe respectiveMunicipal FinanceBureau, anda Project Implementing Unitfor eachproject component with sufficient staffing, facilities, andbudget to carry out, coordinate, or superviseall activities for the component implementation,includingthe procurement, financial management, resettlement,environmental impact mitigation, andprogressreporting. TBUEPO willprovide the Bankwith implementation quarterly progressreports the Bank within three weeks after the period underreview, startingfrom June 30,2004 untilproject - - ina format satisfactory to completion. TBUEPO will submit to the Bank a Project ICRno later than six months after the closing ofthe loan account. ResettlementandEnvironmentProtection Jiangsushall cause the Project Municipalities andtheir RespectiveProject Companies to: (a) maintain policies andprocedures adequateto enablethemto monitor and evaluate, inaccordancewith guidelines acceptable to the Bank, the implementationo fthe EMP,the RAPSandResettlement Policy Frameworks, - 27 - andthe achievement of theobjectivesof saidPlans, including the engagementofexperiencedandqualified independentmonitoringagencies acceptable to the Bank;(b) include theresults ofsuchmonitoringand evaluation activities inannualreportsby independentmonitoring agencies, together with any revisions proposedto beintroduced into suchPlans inorder to achievetheir respectiveobjectives; and(c) introduce suchrevisions intosuchPlansas shallhavebeenagreedwith. Inparticular, activities under the EMPto be recordedinperiodic projectprogressreportssubmittedto the Bank, includingtesting o fWWTP sludge for hazardousmaterials, disposalarrangements, auditsunderJiangsuProvincialCleanProduction Programfor industries discharging intoproject wastewatersystems andthe resultso frecommendedmeasures. Jiangsuto furnish the BankbyJanuary 1eachyear commencingin2005 with aninventory o f enterprises dischargingtoproject-financed wastewatersystems, indicating theirparticipation inJiangsu's CP Program, a summaryo fthe results of the technical audit on inventoried enterprises, andthe impact o fimplementation of the pollutionprevention planfor them. Wastewatercompaniesto directly monitor incoming effluent from industries, andto prohibit industries from discharging effluent intoprojectwastewatersystemsthat is overstrengthandnot incompliancewith govemment dischargestandards, as necessary. Jiangsuto furnish to the Bankacertification ofcompliancewithnational regulations for the construction andoperation o f disposalsites for sludgefiom project-financed wastewatersystems. H. Readinessfor Implementation IxI1.a) The engineeringdesigndocumentsfor thefirstyear's activities arecompleteandreadyfor thestart of project implementation. 1. b) Not applicable. IxI2. Theprocurementdocumentsfor thefirstyear's activities are completeandready for the startof project implementation. 3. The Project Implementation Planhas beenappraisedandfound to berealistic andof satisfactory 04. Thefollowingitemsarelackingandarediscussedunderloanconditions (SectionG): quality. 1. Compliancewith Bank Policies 1. This project complies withall applicable Bankpolicies. 2. The following exceptionsto Bankpolicies are recommendedfor approval. The project complies with all other applicable Bankpolicies. YukonHuang Team Leader CountryManagedDirector - 28 - Annex 1: ProjectDesignSummary CHINA TAI BASINURBANENVIRONMENTPROJECT Sector-relatedCAS Goal: Sector Indicators: Sector/ countryreports: from Goalto Bank Mission) 3nvironmentally sustainableGrowthof urbaneconomies Statisticalreports and htinuednational lrbandevelopment. andlivelihoodopportunities occasionalsectorreviews. conomic growthand egionalcompetitiveness inproved wastewater Water quality indicators National and local statistics ncreasedcoverageof nanagementinTai Basin of water pollution. vastewater service and eform of wastewater utility interprises. JrojectDevelopment OutcomeI impact ProJectreports: from Objectiveto Goal) 3bjective: Indicators: Facilitate sustainableurban :conomic growththrough: [ncreasedcollection and Reduction inproportion o f Monitoringreports o f Sewer connections made reatment of domestic and untreatedwastewater in wastewater companies, indindustrialdischarge industrialwastewater; urbanandrapidly growing environmental protection ctandardsenforced suburbanproject areas. bureaus (EPBs), etc. Restoredurbanwater Cleanerurbanwater Annualenvironmental Zleanup andrestoration of :nvironmenC environmentand improved reportsandtourism irbancanals and lakes, (an( livability inthe two major statisticsby municipalities water diversion through urban andtourism centers. andprovince. mgineering gates). [mproved sustainabilityo f Soundenterprise capital Operating andfinancial Political will to reform wastewater service. structurewithmanageable reports ofwastewater wastewaterutility debt, experienced& cost companies. Reports by management andfinancing effective operations, external auditors and arrangementsandto financial autonomy and municipal regulators. coordinate wastewater adequate cost recovery as planning. well as satisfactory level o f capacity utilizationat Sound financing Plans that project financed WWTPs. limitdebtto prudentlevels. Enhancedcapacity for Updatingpreparationof The delivery of wastewater Updated wastewater masta wastewater wastewatermasterplans masterplans. plans cover rapidly covering city andrapidly urbanizinghndustrializing growing areas inWuxi and areas inWuxi and Suzhou, Suzhou. - 29 - Key Performance Indicators CriticalAssumptions butputfrom each Output indicators: lroject reports: rom Outputs to Objective) :omponent: :eduction inproportionof i)Areacovered,households Iperationalreportsby r w T p s are built or ntreatedwastewater in connectedandwastewater vastewater companies and rpandedinmunicipal and rban andrapidly growing flows collected andtreated nonitoringreports by istrict areas. Sewer uburban district areas. meetingthe government !PBs. :tworks are built and objectives; and :sidenceslbusinesses ii)qualityofdischargefrom " w e d . WWTPs meeting standards I mprovedurbanwater Improved ambient water hbient water quality [rbancanals and lakes are nvironment. quality inmainmonitoring nonitoring datareportedby leanedup andrestored indicators; andii)flood !PB andwater authority, roughenvironmentaland frequency fromonce every tatistic o f city tourism ngineeringmeasuresand 50 years to once every 100 ncomepublished by dequatemaintenance years incity canals. ourismbureau, andcivil iereafler. ~ffairsauthority, data o f loodingproperty loss. hhancedinstitutional i)Time-bound