Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 53221-CN

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$150 MILLION

TO THE

PEOPLE'S REPUBLIC OF CHINA

FOR A

SECOND LIUZHOU ENVIRONMENT MANAGEMENT PROJECT

February 3, 2011 China and Mongolia Sustainable Development Unit Sustainable Development Department East Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective 21 June, 2010)

Currency Unit = Renminbi Yuan RMB 6.79 = US$1

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

BOD Biological Oxygen Demand

CEA Consolidated Environmental Assessment

CFAA Country Financial Accountability Assessments

CNAO China National Audit Office

COD Chemical Oxygen Demand

CPMO County Project Management Office

CPS Country Partnership Strategy

DA Designated Account

DPS Discharge Permit System

DRC Development and Reform Commission

EA Environmental Assessment

EIA Environmental Impact Assessment

EPB Environmental Protection Bureau

EMP Environmental Management Plan

ESD Environmental Sanitation Division

ESRI Environmental Science Research Institute

FIRR Financial Interest Rate of Return

FLO Foreign Loan Office

FMM Financial Management Manual

FMS Financial Management Specialist

FS Feasibility Study

GDF Gross Domestic Product

GFB Guangxi Zhuang Autonomous Region Finance Bureau

GXAO Guangxi Zhuang Autonomous Region

IBRD International Bank for Reconstruction and Development

ICB International Competitive Bidding

ICDC Investment Construction and Development Company (Limited)

IPC Industrial Pollution Control

LDC Liuzhou Drainage Company

LFB Liuzhou Finance Bureau

LMG Liuzhou Municipal Government

LMWTC Liuzhou Municipal Wastewater Treatment Company, Limited

LZEMP Liuzhou Environment Management Project

MBDs Model Bidding Documents

MOF Ministry Of Finance

MSW Municipal Solid Waste

NCB National Competitive Bidding

NDRC National Development and Reform Commission

NPV Net Present Value

O&M Operation and Maintenance

OLM On Line Monitoring

PAP Project Affected Person

PDO Project Development Objective

PIA Project Implementation Agency

PIU Project Implementation Unit

PMO Project Management Office

RAP Resettlement Action Plan

SA Social Assessment

SASS Shanghai Academy of Social Sciences

SBD Standard Bidding Documents

MEP Ministry of Environmental Protection

SOE Statements Of Expenditures

TA Technical Assistance

UFAD Urban Facilities Administration Division

WA Withdrawal Application

WSO Wastewater and Solid Waste Office

WWTP Wastewater Treatment Plant

Vice President: James W. Adams Country Director: Klaus Rohland

Sector Managers: Ede Jorge Ijjasz-Vasquez Vijay Jagannathan

Task Team Leader: Co-Task Team Leader:

Victor Vergara Sing Cho

CHINA

SECOND LIUZHOU ENVIRONMENT MANAGEMENT PROJECT

CONTENTS Page

I.   STRATEGIC CONTEXT AND RATIONALE ................................................... 1 

A.  Country and Sector Issues .................................................................................... 1 

B.  Rationale for Bank Involvement .......................................................................... 1 

C. Higher Level Objectives to Which The Project Contributes ................................ 2 

II.   PROJECT DESCRIPTION ............................................................................... 3 

A.  Lending Instrument .............................................................................................. 3 

B.  Program Objective and Phases ............................................................................. 3 

C.  Project Development Objective(s) and Key Indicators ........................................ 3 

D.  Project Components ............................................................................................. 3 

E. Lessons Learned and Reflected In the Project Design .......................................... 4 

F.   Alternatives Considered and Reasons for Rejection ............................................ 5 

III.   IMPLEMENTATION ........................................................................................ 5 

A.  Partnership Arrangements (if applicable) ............................................................. 5 

B. Institutional and Implementation Arrangements .................................................. 6 

C.  Project Implementation Agency ........................................................................... 6 

D.  On-Lending Arrangements ................................................................................... 6 

E.  Learning and Knowledge Dissemination ............................................................. 6 

F.  Monitoring and Evaluation of Outcomes/Results ................................................ 7 

G.  Sustainability ........................................................................................................ 7 

H.  Critical Risks and Possible Controversial Aspects ............................................... 7 

IV.  APPRAISAL SUMMARY ............................................................................... 10 

A.  Economic and Financial analyses ....................................................................... 10 

B.  Technical ............................................................................................................ 11 

C.  Fiduciary ............................................................................................................. 12 

D.  Social .................................................................................................................. 12 

E.  Environment ....................................................................................................... 12 

F.  Safeguard Policies .............................................................................................. 13 

G.  Policy Exceptions and Readiness ....................................................................... 13 

Annex 1: Country and Sector Background ................................................................ 15 

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ... 17 

Annex 3: Results Framework and Monitoring .......................................................... 18 

Annex 4: Detailed Project Description ....................................................................... 21 

Annex 5: Project Costs ................................................................................................. 27 

Annex 6: Implementation Arrangements ................................................................... 29 

Annex 7: Financial Management and Disbursement Arrangements ...................... 31 

Annex 8: Procurement ................................................................................................. 40 

Annex 9: Economic and Financial Analysis ............................................................... 43 

Annex 10: Safeguard Policy Issues ............................................................................. 48 

Annex 11: Project Preparation and Supervision ....................................................... 54 

Annex 12: Documents in the Project File ................................................................... 55 

Annex 13: Statement of Loans and Credits ............................................................... 56 

Annex 14: Country at a Glance ................................................................................... 62 

Annex 15: Map .............................................................................................................. 65 

PEOPLE'S REPUBLIC OF CHINA

PROJECT APPRAISAL DOCUMENT

EAST ASIA AND PACIFIC

EASUR

Date: February 3, 2011 Team Leader: Victor Vergara Co-Task Team Leader: Sing Cho

Country Director: Klaus Rohland Sector Director: John Roome Sector Managers: Ede Jorge Ijjasz-Vasquez Vijay Jagannathan

Sectors: Sewerage 86%; Solid Waste Mgt (12%) Sub national Governance 2%; Themes: Access to Urban Services (67%) Municipal Governance (33%)

Project ID: P112626 Environmental screening category: Lending Instrument: Specific Investment Loan Safeguard screening category: Full Assessment

Project Financing Data

[X] Loan [] Credit [ ] Grant [ ] Guarantee

[ ] Other:

For Loans/Credits/Others(US$m): Total Bank financing (US$m.): 150.00 Proposed terms: Single Currency, Variable Spread Loan, 30 years, inclusive of 5.5 years grace period, front end fee of 25 basis point

Financing Plan ( US$ m ) Source Local Foreign Total

Borrower/Recipient 124.27 0.00 124.27 International Bank for Reconstruction and Development

123.00 27.00 150.00

Total: 247.27 27.00 274.27 Borrower: People’s Republic of China; c/o Ministry of Finance, Sanlihe, Beijing, 100820, P.R. China; Tel: 86-10-68551123; Fax: 86-10-68551125 Responsible Agency: Liuzhou Wastewater Treatment Company , Liuzhou Municipal Government No.126-1, Yuejin Road, Liuzhou City, Guangxi, P.R. China 545003 86-772-2827625 LZPMO@vip.lz160.net

Estimated disbursements (Bank FY/US$m)

FY 2012 2013 2014 2015 2016 2017 2018

Annual 10 20 30 30 25 25 10 Cumulative 10 30 60 90 115 140 150 Project implementation period: Start June 17, 2010, End November 31, 2016

Expected effectiveness date: June 15, 2011 Expected closing date: May 31, 2017

Does the project depart from the CAS in content or other significant respects? Ref. PAD I D

[ ]Yes [X] No

Does the project require any exceptions from Bank policies? Ref. PAD IV G Translation Waiver: In April 2007 Bank senior management endorsed “Guidelines for the use of English Translation of Summaries of Environmental Assessment Reports and Resettlement Action Plans in China Projects” which allowed the creation of English language comprehensive summaries of RAP and EA reports for projects that meet certain criteria. On February 12, 2008, the Guidelines were enhanced and endorsed by Bank senior management for a further period of two years until February 2010. In accordance with these guidelines, the applicable English translation waivers were granted at the PCN stage on September 17, 2009. Consequently, the Environmental Impact Assessment (EIA), the associated Environmental Management Plan (EMP), and the Resettlement Action Plan (RAP) for each component were developed in the Chinese language. These have been reviewed by Bank staff that are native Chinese speakers, and found acceptable to the Bank. The Consolidated Environmental Assessment (CEA) Report and the Consolidated RAP have been translated into English, and have been reviewed and approved by the Bank. The English language CEA Report and the Consolidated RAP have been disclosed through the Bank's Infoshop, while the Chinese language EIAs, EMPs, and RAPs have been disclosed in China. Have these been approved by Bank management? Is approval for any policy exception sought from the Board?

[ X ]Yes [] No

[ X ]Yes [ ] No [ ]Yes [ X ] No

Does the project include any critical risks rated “substantial” or “high”? Ref. PAD III H

[ ]Yes [X] No

Does the project meet the Regional criteria for readiness for implementation? Ref. PAD II IV G

[X]Yes [ ] No

Project development objective Ref. PAD II C The project development objective is to establish sustainable wastewater collection and treatment services within the urban area boundaries of Liuzhou, and in the Sanjiang, Rong’an, Rongshui, and Liucheng Counties.

Project description Ref. PAD II D and Annex 4 The project consists of the following three components. Part 1. Wastewater Management (US$265.46 million, of which the IBRD loan is US$143.33 million)

1. Construction and/or equipping of wastewater treatment plants and sewerage systems in Sanjiang, Rong’an, Rongshui, and Liucheng Counties, and in Shatang Town and Guantang District of the Liuzhou.

2. Upgrading and construction of an urban fringe sewerage system for Liuzhou. Part 2. Sludge Management (US$6.90 million, of which the IBRD loan is US$ 4.76 million)

Development of a sludge co-combustion system by adapting the existing rotary kilns of the Liuzhou Yufeng Cement Plant and construction of storage and processing facilities required for the operation of such a system.

Part 3. Institutional Development and Capacity Building (US$ 1.91 million, of which the IBRD loan

is US$ 1.91 million) Provisions of technical assistance for:

(a) Project management, including contract management, financial review and post evaluation; (b) strengthening the operation of existing wastewater facilities, including operation

optimization, and establishment of a management information system for asset management; (c) workshops, study tours and training for human resource development of LMWTC.

Which safeguard policies are triggered, if any? Ref. PAD IV D-F and Annex 10 Environmental Assessment (OP/BP/GP 4.01) Physical Cultural Resources (OP/BP 4.11) Involuntary Resettlement (OP/BP 4.12) Significant, non-standard conditions, if any, for: Board presentation: None Loan Effectiveness Condition:

(a) The Subsidiary Loan Agreement has been signed on behalf of Liuzhou and LMWTC in accordance with Section E of the Schedule to the Project Agreement, including the provision that the Subsidiary Loan Agreement will become effective only after the Legal Agreements have become effective.

Disbursement Condition:

(a) for payments made for works until the Bank shall have received evidence satisfactory to the Bank that the consulting firm to be employed for design review, procurement assistance, construction management and other Project management assistance has been employed under terms and conditions satisfactory to the Bank.

Implementation Covenants:

(a) None

Financial Covenants:

(a) Except as the Bank shall otherwise agree, LMWTC shall undertake to produce for each of its fiscal years after its fiscal year ending on December 31, total revenues equivalent to not less than the sum of its: (i) total operating expenses; and (ii) the amount by which debt service requirements exceed the provision for depreciation.

(b) Except as the Bank shall otherwise agree, LMWTC shall not incur any debt unless a reasonable forecast of the revenues and expenditures of LMWTC shows that the estimated net revenues of LMWTC for each fiscal year during the term of the debt to be incurred shall be at least equal to its estimated debt service requirements of LMWTC in such year on all debt of LMWTC including the debt to be incurred. The provisions of this financial covenant will supersede those of the project agreement entered into by the Bank and Guangxi on August 11, 2005.

(c) LMWTC shall undertake, before October 31 of each of its fiscal years, commencing in 2011 on the basis of forecasts prepared by LMWTC and satisfactory to the Bank, a review with Guangxi and Liuzhou as to whether LMWTC would meet the financial requirements of paragraph (a) above and shall furnish to the Bank the results of such review upon its completion.

(d) LMWTC shall promptly take all necessary measures (including, without limitation, adjustments of the structure or levels of its wastewater charges to cover LMWTC’s operating expenses and depreciation related to LMWTC’s assets) in order to meet the requirements of (a).

(e) LMG shall collect the wastewater charges on behalf of LMWTC as the same become due and promptly transfer the collections to LMWTC.

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I. STRATEGIC CONTEXT AND RATIONALE A. Country and Sector Issues 1. As China’s economy is undergoing a historic transition from a rural base to an urban base, cities and towns now generate over 60% of GDP growth. Over the next 15 years, over half of its population is expected to live in urban areas. For China to achieve its medium term objectives of rapid and sustainable development with poverty reduction, much will depend upon the performance of its cities and towns. China’s environmental program has had notable success in the reduction of industrial air and water pollutant emissions and reversing deforestation, but much more needs to be done to remedy the serious environmental toll that two decades of phenomenal growth took on the urban environment. 2. Guangxi Autonomous Region is one of the 12 provinces in the Western Region of the Country. Despite impressive advances in recent years, income levels in the Western Region are only about a third of those of the coastal region, and there is a high incidence of poverty. Recognizing the growing disparity between the Western and Coastal regions, the Government is placing major emphasis on promoting economic and social development, alleviating poverty, and supporting infrastructure investments in the Western Region. 3. The Guangxi Zhuang Autonomous Region (Guangxi), located in the south of China, is historically one of the poorest areas in the country due in large part to the infertility of the surrounding karst hills and low levels of infrastructure. However, the region has seen substantial growth in the last decade, driven by investments relating to the development of manufacturing centers in neighboring Guangdong Province and growing trade with the ASEAN countries, as well as by the growth of tourism industries in renowned scenic areas such as Guilin in the northeast of Guangxi. 4. The city of Liuzhou, with a population of 1.2 million, is the largest industrial center in Guangxi. By late 2007, the number of companies and factories in Liuzhou city amounted to 2,875, including 9 very large-sized industrial companies. Starting from its Eleventh Five Year Development Plan (2006 – 2010), Liuzhou is developing itself to be a city that is suitable for both living and establishing business by 2010. It aims to increase its gross production output value to RMB120 billion, gross industrial output value to RMB240 billion, industrialization rate to 53%, and urbanization to 50%. 5. One of the most important remaining environmental agendas in Liuzhou city is to ensure wastewater collection and treatment, enabling Liujiang river water quality in Liuzhou city section to be Class III standard or better. While the water quality of Liujiang River within the urban area boundary of Liuzhou Municipality is being greatly improved through LZEMP, the sewerage network is in need of over 140 km of expansion/rehabilitation. Furthermore, there is no sewerage system and wastewater treatment in the four county towns of Sanjiang, Rong’an, Rongshui and Liucheng, which are located upstream of Liuzhou City. These counties have limited financial and technological capabilities, and as a result, their environmental performance has yet to catch up with the national average. B. Rationale for Bank Involvement 6. The ongoing Liuzhou Environment Management Project (LZEMP) is scheduled to close on June 30, 2011. The project will significantly increase wastewater collection and treatment from 15% in 2005 to approximately 70%. The proposed project will deepen the

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partnership with the Bank and increase wastewater collection and treatment capacity to 90% in the greater urban area, as well as introduce wastewater treatment to less developed counties which are expected to reach treatment levels of not less than 50% by 2012. 7 The project would complement three other on-going Bank projects in Guangxi: the Fourth Inland Waterways Project, which upgrades river navigation conditions and generates hydropower in the area; the Nanning Urban Environment Project; and the Guangxi Integrated Forestry Development and Conservation Project, which focuses on forest resources and biodiversity conservation in the region. The proposed project is closely integrated with accelerated investments in the infrastructure projects planned in Liuzhou as part of the Government’s stimulus package in response to the recent global financial crisis. C. Higher Level Objectives to Which The Project Contributes 8 The project addresses one of the key strategic pillars in the Bank’s 2006-2010 Country Partnership Strategy (CPS) for China (Report No. 35435): to manage resource scarcity and environmental challenges by expanding urban wastewater collection and treatment facilities and solid waste management services, and piloting innovative approaches to natural resource management. These objectives are consistent with China’s 11th Five-Year Development Plan (2006-2010) D. China Country Partnership Strategy (CPS) 9. A Progress Report on implementation of the 2006-2010 China CPS was discussed by the Board in January 2008 (Report 46896-CN). Since that time, implementation progress has continued to be strong. The program has been carried out as envisaged, in alignment with the Government’s 11th Five-year Plan objectives. During this CPS period, the Bank has lent US$6.9 billion for 49 projects. Portfolio performance continues to be solid—with a realism index of 100 percent. Eleven of 81 projects under implementation are rated as problem projects. World Bank Group programs have provided global knowledge, best practice and experience to support China’s expanding global engagement and south-south cooperation. Bank Group financing and TA have enhanced the piloting of innovative approaches as well as establishing replicable demonstration models for scaling-up. A number of projects have also addressed the needs of under-served areas and vulnerable groups. A Completion Report on the 2006-2010 CPS is in progress and its lessons will inform the new Strategy. 10. From July 1, 2005 through June 30, 2010, IFC invested US$2.4 billion for its own account in China (of which US$1.4 billion in loans and US$ 1 billion in equity) in over 100 projects in financial markets, manufacturing and infrastructure sectors. In addition, IFC mobilized about 400 million in B-loans from participants during the same period. IFC policy recommendations and advisory services have facilitated the continued transition to markets and strengthened competition and productivity. IFC plans to deliver US$450-500 million of investment in FY11 to support the strategic themes of climate change and balanced rural-urban development, as well as supporting South-South investment. MIGA has been active in supporting both FDI into China and Chinese outward investment. During the CPS period, MIGA has supported 10 projects

3

in China with gross exposure of US$188.52 million. The vast majority of projects supported are in the infrastructure sector (96 percent), with the remaining 4 percent in services and manufacturing. MIGA has cooperated with Sinosure and China Eximbank and other partners in support of Chinese outward investments. MIGA, along with FIAS, also provided TA to the central and provincial government to support both FDI into China and Chinese outward investment. 11. The current CPS was expected to conclude in December 2010, however, the Government has requested that the new CPS be co-terminous with, and aligned, to its 12th Five-year Plan covering 2011-2015 which will be available in Spring 2011. The new CPS will therefore be completed along this timeframe, and will be submitted to the Board for its consideration with the first operation of FY12. The Bank Group is supporting the Government in 12th FYP development, and preliminary consultations on the new Partnership Strategy have been initiated in parallel. Including this operation, for the remainder of FY11, the Bank is working on a US$1.5 billion program of 11 operations, all fully consistent with the CPS objectives, supporting investments in energy efficiency, environmental improvements, rural roads, water conservation, small towns, inland waterways, railway and forestry projects. II. PROJECT DESCRIPTION A. Lending Instrument 12. The lending instrument is a Specific Investment Loan. The loan will be a single currency variable spread loan of $150 million, with a maturity of 30 years, including a 5.5 year grace period, and a front-end fee of 0. 25% basis point.

B. Program Objective and Phases 13. Not applicable C. Project Development Objective(s) and Key Indicators 14. The project development objective is to establish sustainable wastewater collection and treatment services within the urban area boundaries of Liuzhou, and in the Sanjiang, Rong’aqn, Rongshui, and Liucheng Counties. 15. Related key performance indicators to measure the achievement of the PDO are: the percentage of population in the participating urban areas of Liuzhou Municipality served by wastewater collection and treatment services; and the Annual Net Income (after tax) of the wastewater operations of LMWTC. Other outcome indicators are found in Annex 3. D. Project Components 16. This project consists of three components. The total cost is US$274.27 million, including an IBRD loan of US$ 150 million.

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Component 1: Wastewater Management: (US$265.46 million, of which the IBRD loan is $143.33 million). The component will finance:

(a) Construction and/ or equipping of wastewater treatment plants and sewerage

systems in the Sanjiang, Rong’an, Rongshui, and Liucheng Counties, and in the Shatang Town and Guantang District of the Liuzhou.

(b) Upgrading and construction of an urban fringe sewerage system for Liuzhou.

The project will invest in sewerage systems and six wastewater treatment plants, and support operations in the autonomous wastewater treatment company. The component includes: the first ever wastewater treatment plants of Sanjian, Rong’an, Rongshui, and Liucheng counties; two new wastewater treatment in Guangtang District and Shatang town of Liuzhou City; and upgrading and construction of Liuzhou’s urban fringe sewerage system of 156.80 km with four pumping stations among other works, rehabilitating 6.1 km section of Zhu’erxi Brook. All proposed wastewater treatment plants will adopt the activated sludge process.

Component 2: Sludge Management: (US$6.90 million, of which the IBRD loan is $4.76 million). This component will finance the development of a sludge co-combustion system by adapting the existing rotary kilns of the Yufeng Cement Plant and construction of storage and processing facilities required for the operation of such a system. About 300 t/d of dewatered sludge from five WWTPs in Liuzhou urban area will be transported, stored and co-combusted at the cement manufacturer. Three out of four existing rotary kilns in the Yufeng Cement Factory will be modified for the dewatered WWTP sludge co-combustion, and the exhaust gas emission will be monitored regularly to confirm that the existing air pollution control facilities in the cement factory will not violate national air emission standards.

Component 3: Institutional Development and Capacity Building: (US$1.91 million, of which the IBRD loan is $1.91 million). This component includes technical assistance (TA) for: (a) project management services including contract management, financial review and post evaluation; (b) strengthening the operation of existing wastewater facilities including operation optimization, and establishment of MIS/GIS for asset management; and (c) workshops, study tours and training for human resource development of the LMWTC.

E. Lessons Learned and Reflected In the Project Design 17. The project builds on the experience of the on-going LZEMP, lessons from recently completed similar Bank projects in China, and assessments by the Independent Evaluation Group. It has also benefited from recent Bank reports, including: China Urban Development Program: A World Bank Portfolio Review (2007); Stepping Up: Improving the Performance of China's Urban Water Utilities (2007); Town Water Supply and Sanitation: Challenges, Solutions, and Guidelines (2008); Financing Water Supply and Sanitation Investments (2005); Characteristics of Well Performing Public Water Utilities (2006); and Models of Aggregation for Water and Sanitation Provision (2005). In particular, the following lessons were considered during preparation:

a) Institutional Sustainability. Small towns often fall into a ‘management gap’: neither the community-based management models effective in rural areas, nor the utility

5

models that work in larger urban centers can be easily applied. Project design reflects the need to have a single LMWTC linked to county towns through construction and operational agreements.

b) Financial Sustainability. Tariff increases in China follow agreed domestic

procedures and are only in a very limited way, if at all, influenced by Bank projects, even if financial covenants are included. Project design has paid more attention to ensuring a balanced capital expenditure financing strategy relying, where possible, on higher level government grant support.

c) Counterpart Funding. Small towns often face difficulties in raising counterpart

funding to support their proposed investments. As mentioned earlier, project counties have received grants from the stimulus package. Any shortage in counterpart funding will be met by LMWTC.

d) Overdesign. Unreliable baseline information, inadequate sector planning and

optimistic projections of economic development often lead to overdesign of planned infrastructure investments. Project feasibility studies were finalized based on analysis of the current service coverage, standards and realistic projections for future service requirements.

e) Sludge Management. Sludge management is an increasing area of concern in the

design of wastewater management projects. Project design includes gradual piloting to test and calibrate monitoring systems, as well as testing the technical specification of co-combustion. Contingency plans have been developed for proper sludge disposal when co-combustion is not possible.

f) Climate Change and Energy Efficiency. Lessons from the World Bank

Sustainable Development Learning Program have been integrated into the design of specific civil works. The project includes waste heat recovery from the co-combustion of sewage sludge at cement kilns. The Guantang District WWTP, as a designated “Eco-WWTP”, will pilot state of the art variable speed drives for energy efficiency.

F. Alternatives Considered and Reasons for Rejection 18. During project preparation, different treatment plant locations and capacities were evaluated based on wastewater demand and geographic, managerial, and financial factors, as well as the phasing in of treatment capacity. In line with Chinese national guidelines, sewerage systems in newly developing areas of Liuzhou will have separate sewer systems (i.e., with separate storm sewers and sanitary sewers), while already developed areas have a combined sewer system. III. IMPLEMENTATION A. Partnership Arrangements (if applicable)

19. The proposed project is freestanding and does not have other international co-financiers.

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B. Institutional and Implementation Arrangements 20. The same implementation arrangements as in LZEMP will be applied to the Liuzhou components under this project. The Leading Group, which was formed at the municipal level under the LZEMP, will continue to supervise project implementation, provide policy guidance, and ensure cross-departmental coordination for project implementation and operation. The Leading Group is chaired by the Executive Vice Mayor, and consists of representatives from LMWTC, and various departments of Liuzhou Municipal Government (LMG) (Planning Bureau, Finance Bureau, (EPB) Price Bureau). The Project Management Office (PMO) will be responsible for daily supervision and coordination activities as the technical secretariat for the Leading Group. The PMO, led by the Deputy Director of the Development and Reform Commission (DRC), will comprise a financial management officer, a procurement expert, a social and resettlement expert, a project management expert, and assistants. 21. At the county level, the wastewater and solid waste office (WSO) will function as the county project management office (CPMO) to ensure inter-departmental coordination for project implementation and operation. WSOs were created across the province in 2008 to implement wastewater and solid waste management projects. The WSO, led by the Construction Bureau, consists of representatives from the County DRC, the Finance Bureau, the EPB, the Forestry Bureau and the Water Conservation Bureau. C. Project Implementation Agency 22. Liuzhou Municipal Wastewater Treatment Company (LMWTC) will be the implementation agency for the entire project. LMWTC was established in 2004 to implement and operate the LZMEP, and started commercial operation in 2006. All four county towns will be served through extension of LMWTC’s wastewater treatment service. Each of the four counties and LMWTC entered into a construction agreement in 2009, and are drafting an operation agreement for sustainable wastewater service. None of the counties will have a shareholding stake in LMWTC, however funds from the county governments will be provided in the form of a grant. D. On-Lending Arrangements 23. The proposed loan of US$150 million will be made to the People’s Republic of China, which in turn will make the loan proceeds available through Guangxi Zhuang Autonomous Region to the project municipality on the same terms and conditions as the Bank loan to China. These proceeds will be on-lent to LMWTC under utility subsidiary loan agreements with a 30-year maturity, including a 5.5-year grace period. The foreign exchange risk will be borne by LMWTC.

E. Learning and Knowledge Dissemination 24. Lessons from this operation would be shared at conferences organized by the Ministry of Housing and Rural Development. Implementation experiences of Bank projects are regularly shared at occasional conferences led by the National Development and Reform Commission and through the network of World Bank Project Management Offices. In addition innovative aspects of the project, including co-combustion of sludge and riverfront rehabilitation, will be documented and incorporated into learning programs.

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F. Monitoring and Evaluation of Outcomes/Results 25. Outcome indicators for the project are defined in Annex 3. The PMO will consolidate all data at the project level and produce semi-annual reports to monitor progress. Baseline data for results indicators were agreed during project preparation, including clearly specified definitions for all indicators. G. Sustainability 26 The municipal government has previous experience with managing Bank-funded projects, including the LZEMP. The implementing agency for the wastewater management component is LMWTC, which implemented LZEMP and coordinated all components through a streamlined PMO. In 2010, the Ministry of Environment Protection (MEP), awarded the company a “Class A Qualification for Operation of Environmental Protection Facilities”. LMWTC is operating with strong cash flow and the proposed tariff revisions, combined with medium term subsidies from the provincial government, will be adequate to make the wastewater components financially sustainable. H. Critical Risks and Possible Controversial Aspects 27. There are a number of potential risks associated with the project, related to project design, implementation, and management. These risks, as well as associated mitigation measures, are summarized in the table in pages 8 to 9. I. Loan/credit conditions and covenants 28. Board presentation. None 29. Loan Effectiveness Condition.

The Subsidiary Loan Agreement has been signed on behalf of Liuzhou and LMWTC in accordance with Section E of the Schedule to the Project Agreement, including the provision that the Subsidiary Loan Agreement will become effective only after the Legal Agreements have become effective.

30. Disbursement Condition.

For payments made for works until the Bank shall have received evidence satisfactory to the Bank that the consulting firm to be employed for design review, procurement assistance, construction management and other Project management assistance has been employed under terms and conditions satisfactory to the Bank.

31. Implementation Covenants.

None

8

Risk factors

Description of Risk

Ratinga of

Risk

Mitigation Measures

Ratinga of Residual

Risk I. Country and/or Sub-National Level Risks

Macroeconomic framework Despite the current global financial crisis, China’s economy is expected to continue to grow at a comparatively high rate.

Low Monitor Low

Country ownership (incl. political stability)

Country ownership of growth and development policies is very high, as is the ownership of the Bank program, which is approved by the State Council, the country’s cabinet.

Low None Low

Country/sector governance (rule of law, judiciary, civil service, etc.)

There is an overall reputational risk of the Bank in being engaged in China, because of governance concerns.

Moderate Governance enhancing program (CPS Pillar 5) Moderate

Systemic corruption There is an operational risk of corruption in the project.

Moderate Enforcement of Bank policies and procedures. Low

II. Sector Governance, Policies and Institutions Sector Specific Risks (Sector policies and institutions)

Chinese small towns have very weak capacity in terms of financing, planning and operating urban environmental infrastructure. Even in bigger cities, ensuring sustainability of urban environmental infrastructure investments remains a challenge.

Moderate This risk inherent in small town systems is reduced by the project design to have the waste water treatment plants of the four county towns operated directly by LMWTC.

Low

III. Operation-specific Risks Project Design The self-supplied water of the industrial sector is

difficult to manage in counties and in Liuzhou core urban area. Industries with self-supplied water might not meet effluent discharge standards and might not pay wastewater charges.

Moderate The Industrial Pollution control (IPC) program would be enforced throughout the project areas and LMG and LCG have given commitments that the IPC program would be implemented and be monitored.

Low

Technical Design

Sludge co-combustion technology using cement kilns is new in China and may not be implemented in a careful and deliberate manner.

Moderate The proposed process has been reviewed by qualified experts. During the implementation, LZEPB would conduct regular sampling and

Low

9

testing of emissions to ensure compliance, as well the quality of the cement produced from the cement kilns used for co-combustion.

Implementation Capacity And Sustainability

Project Management. The added scope of work with LZEMP II will create a challenge for the PMO, especially during the first year of implementation.

Financial Issues. Under the current tariff regime and collection efficiency, LMWTC will not be able to absorb credit financing. The debt burden from domestic banks is creating an unsustainable financial burden on LMWTC which would limit the ability to absorb additional obligations

Moderate

Substantial

Project Management. The PMO has agreed to increase its staffing to ensure proper coverage of incremental workload. External consultants will support during spikes in implementation activity. Financial Issues. Tariff increases as well as increased operational efficiency will be an integral aspect of project implementation. Full commitment from LMWTC and LMG has been assured. Liuzhou Municipal Finance Bureau has agreed to provide funding to cover the outstanding domestic debt as well as equity during the initial years of project implementation.

Low

Moderate

Financial Management An assessment of the financial management capacity has been conducted and has been found to be acceptable.

Low Continued careful supervision of financial management capacity.

Low

Procurement A procurement capacity assessment has been carried out. The PMO has performed satisfactorily during the implementation of LZEMP. With the increased level of procurement - especially during the first year of implementation -it will be necessary to ensure the PMO has the internal capacity and external support.

Moderate Procurement function in the PMO will be carefully supervised to ensure that the increased volume is addressed through corresponding temporary staffing.

Low

Social And Environmental Safeguards

The project includes relatively new technology for the co-combustion of sludge which requires careful analysis. The project also includes urban expansion which requires careful consideration of social impacts

Moderate RAPs, EAs and EMP have been prepared. Project implementation will be supervised carefully to ensure full compliance with agreed documents and Bank policies.

Low

IV. Overall Risk (including Reputational Risks) Overall Risk The main risk of the project relates to project management challenges in terms of preparing and implementing a multi-

location/ multiple sub-component project. The overall risk is considered moderate after mitigation. Moderate

a Rating of risks on a four-point scale – High, Substantial, Moderate, Low – according to the likelihood of occurrence and magnitude of potential adverse impact.

10

32. Financial Covenants.

(a) Except as the Bank shall otherwise agree, LMWTC shall undertake to produce for each of its fiscal years after its fiscal year ending on December 31, total revenues (from operating and non-operating sources, including subsidies) equivalent to not less than the sum of (i) total operating expenses (including depreciation) and (ii) the amount by which debt service requirement exceeds the provision for depreciation.

(b) Except as the Bank shall otherwise agree, LMWTC shall not incur any debt unless a reasonable forecast of the revenues and expenditures of LMWTC shows that the estimated net revenues of LMWTC for each fiscal year during the term of the debt to be incurred shall be at least equal to the estimated debt service requirements of LMWTC in such year on all debt of LMWTC including the debt to be incurred. The provisions of this financial covenant will supersede those of the project agreement entered into by the Bank and Guangxi on August 11, 2005.

(c) LMWTC shall undertake, before October 31 of each of its fiscal years, commencing in 2011, on the basis of forecasts prepared by LWMTC and satisfactory to the Bank, a review with Guangxi and Liuzhou as to whether LMWTC would meet the financial requirements of paragraph (a) above and shall furnish to the Bank the results of such review upon its completion.

(d) LMWTC shall promptly take all necessary measures (including, without limitation, adjustments of the structure or levels of its wastewater charges to cover LMWTC’s operating expenses and depreciation related to LMWTC’s assets) in order to meet the requirements of (a).

(e) LMG shall collect the wastewater charges on behalf of LMWTC as the same become due and promptly transfer the collections to LMWTC.

IV. APPRAISAL SUMMARY A. Economic and Financial analyses 33. Economic Analysis. Economic analysis carried out for wastewater management was based on the least-cost methodology and quantification of benefits. Also, as a floor for the economic rate of return of the wastewater management component, its financial rate of return was reviewed. In addition, the economic analysis was bench-marked with a comparable project. Results of the analysis indicate that the economic benefits exceed the investment and operation costs of the Project. 34. The least-cost analysis to compare the life cycle cost of different options demonstrated that the proposed wastewater component is based on a sound strategic rationale to achieve overall objectives, and that these objectives would be met in the most cost-effective way. In addition, given current national regulations on the moisture content of sludge to be disposed in landfills, the proposed co-combustion is economically feasible. 35. The quantitative analysis shows that the economic rate of return ranges from 11.2% for Sanjiang to 17.8% for Guantang. For both the sludge management component and the Liuzhou suburban wastewater sewerage sub-project, no FIRRs were prepared since neither is

11

revenue generating. Major assumptions for the analysis include: (i) the wastewater tariff will increase by 30% in years 2013 and 2016; (ii) the cost of operating the drainage component of the Liuzhou city will be supported by LMG in the form of subsidy; (iii) debt service payment for the Zhuexi Creek Urban Rehabilitation component under LZEMP will be supported by the government in the form of subsidy; and (iv) depreciation cost is calculated based on the straight line of 30 years. 36. Financial Analysis of LMWTC. Financial analysis was conducted to assess the financial situation of LMWTC and to indentify the measures to be taken to improve its financial sustainability. LMWTC increased operating revenue from RMB 58 million in 2008 to RMB 84 million in 2009, largely due to an increase in tariff on October 1, 2008, from RMB0.50 per m3 to RMB0.80 per m3. LMWTC could not fully meet its debt service requirement and required a subsidy of RMB 28 million. Financial projections summarized in Annex 9 indicate that LMWTC will need to rely on subsidies for the period from 2011 to 2015. It will not require subsidies from 2016 when the wastewater tariff is expected to be raised to RMB 1.70 per m3. 37. Fiscal Analysis. Each county will be primarily responsible for the counterpart funds and operating subsidy for its own component. However, considering the fiscal capacity of the counties, it has been agreed that the ultimate responsibility will reside with LMWTC and hence with LMG. 38. The counterpart fund requirement will peak at RMB 135 million in 2011 and taper off to RMB 24 million in 2016. The required subsidy will peak at RMB 41 million in 2012, with no subsidy required from 2016. These requirements represent a peak of 3.7% of LMG’s budget revenue in 2011, which is considered affordable. LMG has committed to provide the required counterpart funds to complete the project. B. Technical 39. All investment components have been prepared by a reputable domestic design institute. Project designs are technically sound and are based on good engineering practice. 40. Wastewater Management. Except Guantang sub-project, which is required by domestic regulations to meet Class 1-A Municipal Wastewater Discharge Standards, all county sub-projects are required to meet Class 1-B Discharge Standards. Secondary treatment processes evaluated under this project were the improved oxidation ditch process and the CAST activated sludge process. Based on a comparison of the above processes, the improved oxidation ditch process was selected to the project as it needs simpler equipment, has lower power consumption; good capacity to remove biological nutrients; ability to produce high and stable quality effluent; and efficient treatment. For the Guantang sub-project, a tertiary treatment (chemical coagulant addition followed by sedimentation and filtration) was found to be the least cost solution. 41. Sludge Management. The co-combustion of dewatered sewage sludge at Yufeng Cement Factory was found to be not just a least cost option, but will allow both material and energy recovery in accordance with the re-use and recycle rules of solid waste management. Effective control of pollutant emissions will be incorporated and emission quality will be monitored as part of the operation of the co-combustion facilities at Yufeng Cement Factory.

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C. Fiduciary 42. Financial management. A financial management assessment of the adequacy of the project financial management system was conducted on the basis of guidelines issued by the Financial Management Sector Board on October 15, 2003. The assessment concluded that the project meets minimum Bank financial management requirements (stipulated in BP/OP 10.02). The financial management system established under LZEMP can provide, with reasonable assurance, accurate and timely information on the status of the project in the format agreed with the Bank (see Annex 7). 43. Procurement. Procurement activities for the project will be carried out by LMWTC. The key issues and risks concerning procurement for the project have been identified and the following corrective measures are included in the project: (i) training to the PMO on Bank procurement procedures; and (ii) early procurement support missions by the Bank procurement specialist. The overall project procurement risk is moderate. In addition to the prior review supervision to be carried out from Bank offices, special procurement supervision will be carried out every 12 months for post review/audits. D. Social 44. The population at large in the project area would benefit from the proposed construction of wastewater treatment facilities. A social assessment carried out for each of the proposed components demonstrated that local people are supportive of the project activities. It also contributed to addressing issues identified through improved project design. 45. The key adverse social impacts and social risks of the project are related to land acquisition and structure demolition. In accordance with Bank’s OP4.12 and China’s laws and regulations, RAPs were prepared for different components based on a detailed census of the PAPs, inventory of affected assets, socio-economic surveys and extensive consultations with PAPs. 46. The Bank’s Policy on Indigenous People is not applicable as the project will not affect any minority groups. E. Environment 47. The project was assigned Category A. Individual Environmental Assessments (EAs) were prepared for the six WWTPs, and the sludge management and sewerage components. Based on these EAs, a consolidated EA (CEA) and a stand-alone Environmental Management Plan (EMP) were prepared by experts from a top level EA institute. An executive summary of the CEA and the EMP was also prepared for the Board. 48. The project will bring significant positive impacts to Liuzhou and its surrounding counties by mitigating the pollution load in the Liujiang River (total COD reduction is estimated at 11,315t/year, equivalent to 78%) from untreated wastewater discharge and by co-combusting the sludge generated from the increasing number of WWTPs in the area. Negative project impacts can be readily avoided and mitigated by sound project design, construction management and operation practice. The EMP will be incorporated into bidding documents and civil works contracts to ensure their implementation.

13

49. The chief potential environmental impacts during operation include flue gas emissions from mixed calcinations of sludge. Test burns will be carried out to obtain optimum operational parameters and gain process control experience, so that the full scale operation can meet the relevant standards. Other potentially serious concerns during operation include outflows from WWTPs due to accidents and/or failure of safe sludge. Major impacts during construction lie in dredging. Discussions on environmental issues are detailed in Annex 10. 50. Two rounds of public consultation were conducted during EA preparation. The first round was conducted in October-November 2009 after the project announcement and outlines for EAs were published at a local news paper (Liuzhou Daily) and the official website of Liuzhou Environmental Protection Bureau (EPB) as well as bulletin of affected local communities in Liuzhou and the four counties. The second round was conducted during March 2010 after the full text of the draft CEA and the EMP were disclosed at the official website of Liuzhou EPB and Guangxi Provincial EPB in February–March 2010. The English version CEA, EMP and the EA executive summary were disclosed at the World Bank Infoshop. 51. Public consultations were carried out in both rounds mainly through questionnaire and discussions in Liuzhou and the four counties. These involved the project-affected people and beneficiaries of different age groups, gender, educational backgrounds and occupations, as well as relevant government agencies and experts. Various environmental and socio-economic issues related to the project were consulted. The majority of the public supported the project and viewed it as beneficial for the local environment and quality of life. Public concerns and opinions expressed during the consultation have been addressed in the final EA package and incorporated into the project design and environmental mitigation measures. F. Safeguard Policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [x] [ ] Natural Habitats (OP/BP 4.04) [ ] [ x] Pest Management (OP 4.09) [ ] [x] Physical Cultural Resources (OP/BP 4.11) [x] [ ] Involuntary Resettlement (OP/BP 4.12) [x] [ ] Indigenous Peoples (OP/BP 4.10) [ ] [x] Forests (OP/BP 4.36) [ ] [x] Safety of Dams (OP/BP 4.37) [ ] [x] Projects in Disputed Areas (OP/BP 7.60) [ ] [x] Projects on International Waterways (OP/BP 7.50) [ ] [x] 52. Environmental Assessment (OP. 4.01) See section E above and Annex 10. 53. Physical Cultural Resources (OP4.11) The Liuzhou suburban sewers subproject includes the rehabilitation of Zhutou Pond, and access to the Jianpan Hill sewer. In the centre of Zhutou Pond is a natural stone islet with an ancient calligraphy stone carving which is protected as a city-level cultural relic. Specific protective measures have been included in the EMP based on site visits and guidance from the Liuzhou Bureau for Cultural Relics and Religion. G. Policy Exceptions and Readiness 54. The Project fully complies with Bank policies.

14

55. The Safeguard Policy on Resettlement, OP 4.12 and the Safeguard Policy on Environmental Assessment, OP 4.01, require the Borrower to prepare RAPs and EA reports in a form, manner, and language that are understandable to the displaced persons and local NGOs, which in this case would be Chinese. The Chinese language RAPs and EA reports have been reviewed by the Bank, meet the requirements of OP 4.12 on involuntary resettlement and OP 4.01 on environmental assessment, and have been publicly disclosed. An English language comprehensive summary of the RAPs and an English language comprehensive summary of the EA reports have also been prepared, reviewed and disclosed through the Bank’s InfoShop. 56. In April 2007 Bank senior management endorsed “Guidelines for the use o f English Translation of Summaries of Environmental Assessment Reports and Resettlement Action Plans in China Projects” which allowed the creation of English language comprehensive summaries of RAP and EA reports for projects that meet certain criteria. On February 12, 2008, the Guidelines were enhanced and endorsed by Bank senior management. The Regional Safeguards Secretariat has confirmed that the proposed project meets these criteria. Accordingly, English language comprehensive summaries of the RAPs and EA reports covering all relevant parts of the Chinese-language EA reports and RAPs were created. Chinese-speaking Bank safeguard specialists have reviewed both the English language comprehensive summaries of the RAPs and EA reports and the Chinese language full-length safeguard documentation approved and adopted by the Project, and have confirmed the consistency between the English and Chinese documentation, and compliance of the full set of safeguards documents with Bank policy.

15

Annex 1: Country and Sector Background

CHINA: SECOND LIUZHOU ENVIRONMENT MANAGEMENT PROJECT 1. China is addressing multiple challenges as it deals with rapid economic growth and urbanization, environmental pollution and degradation, developmental gaps between its Western region and more prosperous coastal provinces, and persistent poverty, especially in rural areas and parts of fast-growing cities. 2. As China’s economy is undergoing a historic transition from a rural base to an urban base, its cities and towns now generate over 60% of GDP growth. Over the next 15 years, over half of its population is expected to live in urban areas. For China to achieve its medium term objectives of rapid and sustainable development with poverty reduction, much will depend upon the performance of its cities and towns. China’s environmental program has had notable success in the reduction of industrial air and water pollutant emissions and reversing deforestation, but much more needs to be done to remedy the serious environmental toll that two decades of phenomenal growth took on the urban environment. 3. Despite impressive advances in recent years, income levels in the Western Region are only about a third of those of the coastal region, and there is a high incidence of poverty. Recognizing the growing disparity between the Western and Coastal regions, the Government is placing major emphasis on promoting economic and social development, alleviating poverty, and supporting infrastructure investments in the Western Region. 4. The city of Liuzhou, with a population of 1.2 million, is the largest industrial center in Guangxi Autonomous Region (Guangxi), which is one of the 12 provinces in the Western Region. In 2007, the GDP of Liuzhou Municipality was RMB73.880 billion. Its GDP per capita was 12,866 RMB (US$1,892) and the annual growth rate was 16.5% which was the highest during the period from 1996 to 2007. Starting from the Eleventh Five Year Development Plan (2006 – 2011), Liuzhou is developing itself to be an industrial eco-city as well as a city that is suitable for both living and establishing business. In line with its strong economic development, LMG intends to increase the efficiency of natural resource consumption and enhance its carrying capacity by promoting “environmental protection” and developing a “circular economy”. Guangxi has allocated the responsibility for pollution reduction, assigned by the Central Government, to LMG at various levels and the performance of local government officials will be evaluated by new management systems that include accountability for achieving targets. 5. One of the most important remaining environmental issues in Liuzhou is water pollution. The first waste water treatment plant was commissioned in 2003 and only treated 15% of Liuzhou’s wastewater discharges. Its drainage system was a combination of untreated sewage and rainwater flowing into the Liujiang River which is the main source of drinking and industrial water use. The river flows through the city center and leaves the city with a Class 3 water quality. 6. In November 2005 the World Bank, through LZEMP, supported the first phase of LMG’s comprehensive program to improve the environmental quality of the Liujiang River. LZEMP’s development objectives are to improve water quality in the Liujiang River, through: (i) development of a waste water collection and treatment system in urban districts; and (ii) introduction of policy and regulatory measures to effectively control industrial waste water discharge. The project supported the construction of a comprehensive wastewater system to capture and treat close to 65 % of untreated effluent by 2010, as well as establishing water

16

pollution control in Liuzhou, adopting a more comprehensive industrial waste water pollution control policy and regulatory measures by combining the conventional command-and-control regulation with a market-based demand control approach, and a “third wave” of environmental regulation through public disclosure of the environmental performance of major industrial polluters. 7. While the water quality of Liujiang River within the urban boundary of Liuzhou Municipality is being greatly improved through LZEMP, there is no sewerage system and wastewater treatment plant in the four county towns of Sanjiang, Rong’an, Rongshui and Liucheng, located upstream of Liuzhou Municipality. These counties are constrained by limited financial and technological capabilities, and as a result, their environmental performance has yet to catch up with the national average. LMG has fully recognized these challenges, and has allocated the responsibility for at least 50% COD reduction to each of the four county governments before the end of the Eleventh Five Year Plan. 8. The current domestic solid waste generation in Liuzhou city and Liujiang County is about 1,000 t/d and about 5% of the domestic solid waste is recycled. In addition, the existing municipal wastewater treatment plants (WWTPs) produce about 200 t/d of dewatered sludge with 80% moisture content. Both domestic solid waste and dewatered WWTP sludge are transported to Lichonggou Sanitary Landfill which has been operating since November 2004. At the current solid waste generation rate, the life span of the Lichonggou Sanitary Landfill would be less than 12 years. In order to extend the life span of the existing sanitary landfill, the LMG plans to enhance solid waste recycle rates and introduce co-combustion of dewatered WWTP sludge in a cement plant.

17

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies

CHINA: SECOND LIUZHOU ENVIRONMENT MANAGEMENT

Project Sector Issue Delivery

Date

Latest ISR Ratings

DO IP

Bank Financed China – Chongqing Small Cities Infrastructure Improvement (Cr 47940)

Infrastructure service delivery and rapid urban growth

21-Jun-05 S MS

China – Guangdong/PRD Urban Environment (Cr 47420)

Rationalization of environmental service delivery in the regional plan

8-Jun-04

MS MS

China – Guangxi Integrated Forestry Development and Conservation Project (Cr 48440)

Biodiversity, environmental policies and institutions

14-Dec-06

S S

China – Guangxi Urban Environment Project (Cr 43480)

Water resource management, waterway management, pollution management and environmental health

16-Jun-98

S S

China – Hebei Urban Environment (Cr 45690)

Environmental degradation of water and land resources, safe water supply

27-Jun-00

S S

China – Hunan Urban Development (Cr 47510)

Flood protection, wastewater and air pollution

16-Sep-04

U U

China – Ningbo Water and Environment Management (Cr 47700)

Quality of water and wastewater services, public health protection

17-Mar-05

S S

China – Rural Water IV (Cr 44850) Safe water supply, sanitation and health behaviors in poor rural areas

3-Jun-99 S S

China – Sustainable Coastal Resources Development Project (Cr 43220)

Water resource management 19-May-98 S S

China – Tai Basin Urban Environment (Cr 47480)

Water resources degradation and urban environment improvement

3-Aug-04 S S

Other MDBs and Agencies

Guangxi Nanning Urban Environmental Upgrading (ADB)

Infrastructure Development N/A N/A N/A

Nanning – Langdong WWTP, Phase I (French Government)

Infrastructure Development N/A N/A N/A

Guangxi Water Supply Project (JBIC)

Water supply, Infrastructure Development

N/A N/A N/A

Water and Agricultural Management in Hebei (WAMH) Project (AUSAID)

Water resources management in agriculture

N/A N/A N/A

Henan Wastewater Management and Water Supply Project (ADB)

Wastewater mgt and water supply for public health and urban environment

N/A N/A

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Annex 3: Results Framework and Monitoring

CHINA: SECOND LIUZHOU ENVIRONMENT MANAGEMENT PROJECT

Project development objectives Project outcome indicators Use of project outcome information

To establish sustainable wastewater collection and treatment services within the urban boundaries of Liuzhou City and in four county towns located up stream of Liuzhou City.

Percentage of population in participating urban areas of Liuzhou Municipality served by wastewater collection and treatment services. Annual Net Income (after tax) of wastewater operations of LMWT.

To measure progress towards achievement of the PDO. To recommend planning adjustments for the client regarding future development of environment improvement program.

Intermediate outcomes Intermediate outcome indicators Use of intermediate outcome monitoring

I. Wastewater Management

Increase in urban wastewater collected and treated.

Capacity of the waste treatment plants in operation and volume of wastewater treated. Percentage of urban wastewater treated.

To monitor plant utilization and operational efficiency of LMWTC.

Sustainable financial performance of LMWTC.

Percent of cash flow from wastewater operations covering capital investments and debt obligations relating to wastewater operations

To help local government further maintain pricing and subsidy policies and implementation for sustainable use.

Reduction of industrial wastewater discharge into Liujiang river and sewerage systems.

Enforcement and installation of on-line automatic monitoring stations at major and important industrial discharge points.

Public disclosure and identifying accidents. Better enforcement action.

II. Sludge Management Reduced quantity of sludge to be disposed of at Lichonggou landfill.

Quantity of sludge to be sent for co-combustion.

To assess effectiveness of investment in sludge co-combustion

III. Institutional Development and Capacity Building Improved operational and financial efficiency of project implementing agencies

Number of contracts awarded and implemented as planned. Reduced power consumption per unit of wastewater treated. Staff days of managerial and/or skill development training received.

Fine tuning of TA and Institutional Development program for the project implementing agencies

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Liuzhou Environment Management Project II Monitoring and Evaluation Indicators

Project Outcome Indicator Baseline

2010 CY

2011 CY

2012 CY

2013 CY

2014 CY

2015 CY

2016 Percentage of population in participating urban areas of Liuzhou Municipality served by wastewater collection and treatment services. Liuzhou City Sanjiang County Rong’An County Rongshui County Liucheng County Shatang Town

65% 0% 0% 0% 0% 0%

70% 0% 0% 0% 0% 0%

75% 55% 50% 50% 50% 0%

80% 55% 55% 55% 55% 0%

85% 60% 60% 60% 60% 0%

90% 65% 65% 65% 65% 0%

90% 70% 70% 70% 70% 50%

Annual Net Income (after tax) of wastewater operations of LMWTC (RMB million)

99 117 120 159 166 171 201

Intermediate Outcome Indicator Baseline 2010

CY 2011

CY 2012

CY 2013

CY 2014

CY 2015

CY 2016

Capacity of the waste treatment plants in operation And volume treated (x 1,000 m3/d). Liuzhou City Sanjiang County Rong’An County Rongshui County Liucheng County Shatang Town

300 0 0 0

0 0

325 0 0 0

0 0

350 5.5 15 10

10 0

375 5.5

16.5 11

11 0

400 6

18 12

12 0

425 6.5

19.5 13

13 0

425 7

21 14

14 10

Percentage of urban wastewater treated. Liuzhou City Sanjiang County

65% 0%

70% 0%

75% 50%

80% 55%

85% 60%

86% 63%

87% 65%

20

Rong’An County Rongshui County Liucheng County Shatang Town

0% 0% 0% 0%

0% 0% 0% 0%

50% 50% 50% 0%

55% 55% 55% 0%

60% 60% 60% 0%

63% 63% 63% 0%

65% 65% 65% 50%

Cash flow from wastewater operations covering capital investments and debt obligations relating to wastewater (RMB m)

-45.04 4.04 -7.18 0.45 -14.87 -12.84 7.50

Enforcement and operation of on-line automatic monitoring stations at major industrial discharges.

14 14 14 14 14 14 14

Quantity of sludge (with 80% moisture content) to be sent for co-combustion,( ton/d).

0 0 0 230 240 250 260

Accumulated Number of Contracts Awarded 12 18 25 30 34 38 0 Power consumption in kwh per unit of wastewater treated in Baisha and Longquanshan WWTP, (kwh/m3 of wastewater treated)

0.25 - - - 0.24 0.24 0.24

Accumulated Managerial and/or skill development Training received (Staff-days).

480 800 1,100 1,400 1,700 2,000 2,300

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Annex 4: Detailed Project Description

CHINA: SECOND LIUZHOU ENVIRONMENT MANAGEMENT PROJECT

1. The project consists of three components: (i) wastewater management; (ii) sludge management; and (iii) institutional development and capacity building. The total project cost is US$274.27 million, of which the IBRD loan provides US$150.00 million. Component I. Wastewater Management (US$265.46 million) 2. This component will install wastewater collection and treatment capacity in four upstream county towns (Sanjiang, Rong’An, Rongshui and Liucheng), that currently discharge untreated wastewater into the tributaries of the Liujiang River; construct two new wastewater treatment plants and sewerage systems in Guangtang District and Shatang town of Liuzhou City, and support construction of Liuzhou’s urban fringe sewerage system. I-1. Sanjiang County: Wastewater Collection and Treatment 3. The current drainage system in Sanjiang is a combined system with an extension of about 6.40 km, and diameters between 300 - 800 mm, with 1500 x 2000 mm culverts located mostly in the old district of the town. With a population of 76,000 people in 2008, the town discharges 44,865 m3/day of waste in streams and canals which convey the untreated sewage into Xunjiang River. The current system provides a limited coverage to about 50 percent of the wastewater generated in the service area. 4. The proposed sub-component will expand the existing sewerage system of the town through the installation of about 6.73 Km of sewers with diameters ranging between 300-1000 mm, two sewage lift pump stations, and the construction of a wastewater treatment plant with a capacity of 10,000 m3/day. The proposed treatment facility is designed to receive wastewater from old districts of the town (including both Hexi and Hedong districts) and Baishi administrative center. I-2. Rong’An County: Wastewater Collection and Treatment 5. The current drainage system in Rong’An is a combined system with an extension of about 28.50 km, and diameters between 400 ~ 1000 mm, with 1200 x 2000 mm culverts located mostly in the old district of the town. With a population of 98,800 people in 2008, the town discharges 25,098 m3/day of wastewater in streams and canals which convey the untreated sewage to the Liujiang River. The current system provides limited coverage to about 60 percent of the wastewater generated in the service area. 6. The proposed sub-component will expand the existing sewerage system of the town, through the installation of about 10.66 Km of sewers with diameters ranging between 400-1400 mm, two sewage lift pump stations, and the construction of a wastewater treatment plant with a capacity of 30,000 m3/day. The proposed treatment facility is designed to receive wastewater from old districts of the town (including both Hexi and Hedong districts).

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I-3. Rongshui County: Wastewater Collection and Treatment 7. The current drainage system in Rongshui is a combined system with an extension of about 13.50 km, and diameters between 300~1000 mm, located mostly in the old district of the town. With a population of 76,000 people in 2008, the town discharges 22,575 m3/day of wastewater in streams and canals which convey the untreated sewage to the Rongjiang River. The current system provides a limited coverage to about 50 percent of the wastewater generated in the service area. 8. The proposed sub-component will expand the existing sewerage system through the installation of about 16.00 Km of pipes and box culverts with diameters ranging between 600-1200 mm, and 800 x 800 ~ 1200 x 1000 culvert respectively, two sewage lift pump stations and the construction of a wastewater treatment plant with a capacity of 20,000 m3/day. The proposed treatment facility is designed to receive wastewater from the old districts of the town. I-4. Liucheng County: Wastewater Collection and Treatment 9. The current drainage system in Liucheng is a combined system with an extension of about 14.50 km, and diameters between 300~1000 mm and 2000 x 4000 mm culverts located mostly in the old district of the town. With a population of 47,700 people in 2008, the town discharges 25,753 m3/day of wastewater in streams and canals which convey the untreated sewage to the Liujiang River. The current system provides a limited coverage to about 55 percent of wastewater generated in the service area. 10. The proposed sub-project will expand the existing sewerage system of the town throuogh the installation of about 7.90 Km of pipes with diameters ranging between 400-1200 mm, three sewage lift pump stations, and the construction of a wastewater treatment plant with a capacity of 20,000 m3/day. The proposed treatment facility is designed to receive wastewater from the old districts of the town. I-5. Shatang Town: Wastewater Collection and Treatment 11. The current drainage system in Shatang Town is a combined system with an extension of about 5 km and diameters between 300~1200 mm, located mostly in the old district of the town. With a population of 217,000 in 2008, the town discharges waste water in streams and canals which convey the untreated sewage to the Liujiang River. The current system provides a limited coverage to about 30 percent of the wastewater generated in the service area. 12. The proposed sub-component will expand the existing sewerage system of the town through the installation of about 36.20 Km of sewers with diameters ranging between 300-1200 mm, three sewage lift pump stations and the construction of a wastewater treatment plant with a capacity of 20,000 m3/day. The proposed treatment facility is designed to receive wastewater from the old districts of the town. I-6. Guantang District: Wastewater Collection and Treatment 13. Guantang District is the main construction area of Liudong New District which is a main point in expanding Liuzhou’s urban area. It is located on the east side of Liujiang River in the Sanmengjiang National Park area, including Gutingshan and Yanghe districts, south of the Sanmengjiang Bridge. Since 2006, the first phase of 12 km2 of the Guangtang main

23

construction area has been developed and built as the future administrative, commercial, working, cultural and entertainment center. 14. The current sewerage system operating in Guantang District is a separate system with an extension of about 3240 km and diameters between 300~1800 mm, located mostly in the planned district. With a population of 62,750 people and 27,000 people in Guantang District and 13 villages respectively in 2008, the district discharges 14,000 m3/day of wastewater in streams and canals which convey the untreated sewage to the Liujiang River. The current sewerage system provides a limited coverage to about 80 percent of the wastewater generated in the service area. 15. The proposed sub-component will construct the sewerage system and treatment facilities for the first phase of Guantang main construction area and the 13 villages in its vicinity. The investment will include the installation of about 51.60 Km of sewers with diameters ranging between 300-2000 mm, six sewage lift pump stations, and the construction of a wastewater treatment plant with a capacity of 40,000 m3/day. Wastewater Treatment Standards 16. The proposed wastewater treatments are required to meet effluent quality of at least Class I B level of the Discharge Standards for Municipal Wastewater (GB18918-2002); however, for Guantang the target is Class I A, - in compliance with the contaminant concentrations shown in the table below:

Table 4.1. Highest Allowable Discharge Concentration of Water Pollutants from Sewage

Treatment Plants (daily average) – Unit: mg/l Basic Controlled Indicators Grade I Standard Grade II Standard Grade III

Standard A B

COD 50 60 100 120 (1) BOD5 10 20 30 60 (1) Suspended Solids (SS) 10 20 30 50 Animal and Plant Oil 1 3 5 20 Petroleum 1 3 5 15 Negative Ion Surface Active Agent

0.5 1 2 5

Total Nitrogen (as N) 15 20 - - NH3-N (as N2) 5 (8) 8 (15) 25 (30) - Total P (as P)

Built before Dec 2005

1 1.5 3 5

Built after Jan 1, 2006

0.5 1 3 5

Color (dilution magnitude) 30 30 40 50 pH 6-9 Bacillus Coli (count/l) 1000 10000 10000 - Notes: (1) Removal rate indicators shall be higher than 60% when inlet water COD is higher than 350 mg/l, higher than 50% when BOD is higher than 350 mg/l. (2) Values outside brackets refer to controlled values when the water temperature is >12 °C, those inside refer to controlled values when the water temperature is ≤12 °C

24

Wastewater Treatment Process Selection

17. Adequate characterization of wastewater is of fundamental importance in the design of treatment and disposal processes. The physical, chemical and biological characteristics of wastewater have been estimated as shown in the following table:

Table 4.2: Design Influent Constituent Concentrations (Unit: mg/l)

IndexSubcomponent

COD BOD5 SS TN NH3-N TP

Sanjiang County WWTP 220 120 200 - 25 3 Rong’An County WWTP 220 120 200 - 25 3 Rongshui County WWTP 220 120 200 35.7 25 3 Liucheng County WWTP 220 120 200 35.7 25 3 Shatang Town WWTP 220 120 200 - 25 3 Guantang District WWTP 220 120 200 - 25 3 18. The concentrations used to design the treatment process under this project are low-intermediate concentration values of the range usually observed in wastewater produced in China. One of the reasons for low concentration of wastewater constituents is that septic tanks are still in use.

19. Standards IA and IB applied under this project require high level of removal of carbon pollution, and especially of nitrogen and phosphorous, which can be achieved only through biological treatments that make use of activated sludge processes. The targeted effluent quality, together with the need to tailor the proposed technology the local market conditions, i.e., existing knowledge and available skills, have limited the technical options under the project.

20. All treatment process options considered under the project consist of mechanical and biological treatment, as well as sludge processing. Mechanical treatments are the same for all incoming water and include bar screens and aerated grit chambers. The improved oxidation ditch and the CAST were considered and compared for the biological treatments. I-7. Liuzhou Urban – Suburban Sewerage Systems 21. Wastewater in many urban-suburban areas of Liuzhou City flow into the city drains which were constructed a long time ago. These urban-suburban combined sewer systems, which fail to perform, have led to sewage backflow and flooding during rain events. 22. The proposed sub-component will either rehabilitate or construct 18 combined/separate sewers in the urban-suburban areas of Liuzhou City and will include the installation of about 80 Km of sewers and culverts of various dimensions, three sewage lift pump stations, about 35 Km of drainage and culvert of various dimensions, and about 10 km of river bank upgrading. Component II. Sludge Management (US$6.90 million) 23. This component will assist Liuzhou City in handling and disposing 300 t/day of dewatered sludge (of about 20% dried solids) from municipal WWTPs through co-combustion in cement kilns at Liuzhou Yufeng Cement Factory. The dewatered sludge would be injected into a combustion operation (i.e., cement kiln) in which the temperature is approximately 1,400 degree C. ollutant emissions resulting from the co-combustion are controlled and monitored.

25

Table 4.4. Leachability limit (Pollutants) of Clinker (Cement Product) – Unit: ug/l

Pollutants Leachability limit

Cd <1 Hg <0.05 Pb <10 Cr <10 As <10 Zn <500 Ni <50 Cu <50

24. The first phase of LZEMP has set correct policy framework and effective action plans which have also been endorsed by the LMG on industrial wastewater pollution control. Thus, the second phase of LZEMP will continue the effective IPC work undertaken in the first phase of LZEMP which consists of two separate programs in the project areas: (a) top industrial polluters’ wastewater discharge compliance; and (b) monitoring of automatic on-line monitoring (OLM) of top industrial discharges and wastewater treatment plants by the LEBP and local EPB’s. This component was initially identified as an activity within the technical assistance, but given its importance it was considered as a self standing Non Bank Financed component. 25. Top Industrial Dischargers. Eight enterprises constitute over 90% of total industrial wastewater discharges in Liuzhou urban area, one sugar refinery in Guantang district, and five sugar refineries constitute over 95% of total industrial wastewater discharges in the four counties. The counties have installed automatic on-line monitoring instruments that measure specific pollutants andare directly connected to the EPB Supervision Team. Non-compliance has been and will continue to be disclosed to the public. Liuzhou and county EPBs have committed to mandate the installation of on-line monitoring stations for future and new major industrial dischargers in their respective jurisdictions. The installation of the on-line monitoring systems is financed by the enterprises themselves with additional support from an Environmental Fund. 26. Liuzhou and local EPBs have also implemented a DPS for all wastewater discharges in Liuzhou City and the four counties. 27. On-line monitoring of top industrial wastewater dischargers and the implementation of the DPS are very important complements to the WWTPs in reaching and maintaining the Liujiang river water quality. During the project supervision both LMG and the Bank have agreed that Liuzhou and county EPBs will keep the Bank informed, over the life of the project, their outcomes and outputs of the on-line monitoring of top industrial wastewater dischargers and the implementation of the DPS.

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Component III. Institutional Development and Capacity Building (US$1.91 million)

28. This component includes technical assistance (TA) to: (a) support implementation and post evaluation of the Second LZEMP; (b) conduct energy efficiency audit of existing wastewater treatment plant(s) and implement the recommendations for cost-effective energy improvements of the plant(s); (c) enroll LMWTC staff in management and skill development training; (d) conduct seminars on ecological conservation and industrial development, as well as least cost recycling and disposal of sewage sludge; (e) build GIS for asset management; (f) develop office automation system; and (g) construct and improve financial modeling for LWTC.

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Annex 5: Project Costs

CHINA: SECOND LIUZHOU ENVIRONMENT MANAGEMENT PROJECT

By Sectors Project Cost* World Bank Financing*

US$ m RMB m US$ m % of total

Wastewater 265.4597 1,813.0900 143.3300 0.54

1. Sanjiang Wastewater 10.93 74.63 1.74 0.16

2. Rong'An Wastewater 19.31 131.86 3.35 0.17

3. Rongshui Wastewater 18.30 125.00 1.19 0.07

4. Liucheng Wastewater 16.11 110.05 1.20 0.07

5. Shatang Wastewater 16.49 112.65 11.51 0.70

6. Guatang Wastewater 48.53 331.43 29.80 0.61

7. Liuzhou Urban-Suburban Sewerage 135.79 927.47 94.54 0.70

Sludge Management 6.90 47.12 4.76 0.69

8. Liuzhou Sludge Co-Combustion 6.90 47.12 4.76 0.69

Institutional Development 1.91 13.05 1.91 1.00

9. Project Management 0.93 6.35 0.93 1.00

10. HRD 0.58 3.95 0.58 1.00

11. ID 0.40 2.74 0.40 1.00

Total Project Costs 274.27 1,873.26 150.00 0.55

World Bank Finance Charge 13.91 94.97

* including contingencies

By Expenditure Categories Project Cost* World Bank Financing*

US$ m RMB m US$ m % of total

Bank Financed 162.4452 1,109.5010 150.0000 92%

1. Works** 135.7898 927.4442 123.3445 91%

Sanjiang 1.17 7.97 1.06 91%

Rong'An 1.5524 10.60 1.41 91%

Rongshui 0.00 0.00 0.00 0%

Liucheng 0.00 0.00 0.00 0%

Shatang 8.57 58.50 7.78 91%

Guangtang 25.27 172.57 22.95 91%

Liuzhou Urban-Suburban Sewerage 94.17 643.21 85.54 91%

Liuzhou WWTP Sludge Co-Combustion 5.06 34.59 4.60 91%

2. Equipment & Materials** 10.97 74.93 10.97 100%

Sanjiang 0.62 4.23 0.62 100%

Rong'An 1.85 12.64 1.85 100%

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Rongshui 1.14 7.789 1.14 100%

Liucheng 1.15 7.85 1.15 101%

Shatang 2.25 15.37 2.25 100%

Guangtang 3.96 27.05 3.96 100%

Liuzhou Urban-Suburban Sewerage 0.00 0.00 0.00 0%

Liuzhou WWTP Sludge Co-Combustion 0.00 0.00 0.00 0%

3. Institutional Development** 1.78 12.16 1.78 100%

4. Front-end Fee 0.376 2.56 0.38 100%

5. Interest During Construction*** 13.53 92.41 13.53 100%

Non-Bank Financed 111.82 763.75 0.00 0%

6. Works (NBF) 34.13 233.10 0.00 0%

Sanjiang 5.47 37.39 0.00 0%

Rong'An 7.15 48.82 0.00 0%

Rongshui 6.61 45.16 0.00 0%

Liucheng 6.85 46.77 0.00 0%

Shatang 0.23 1.54 0.00 0%

Guangtang 7.82 53.43 0.00 0%

7. Land Acquisition and Resettlement 10.70 73.08 0.00 0%

8. Other 66.99 457.57 0.00 0%

Total Project Cost 274.27 1,873.26 150.00 55%

World Bank Finance Charge 13.91 94.97

* Including Contingencies

** Including National Taxes (Taxes for Works, Equipment and TA Contracts).

*** Only the Bank interest

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Annex 6: Implementation Arrangements

CHINA: SECOND LIUZHOU ENVIRONMENT MANAGEMENT PROJECT Project Management and Leadership 1. The same implementation arrangements as in the LZEMP will be adopted to the Liuzhou components of this Project. The Leading Group, which was formed at the municipal level under the LZEMP, will continue to supervise project implementation, provide policy guidance, and ensure cross-departmental coordination for project implementation and operation. The Leading Group, chaired by the Executive Vice Mayor, consists of representatives from LMWTC and various departments of LMG (Planning Bureau, Finance Bureau, EPB, Price Bureau). The Project Management Office (PMO) will be responsible for daily supervision and coordination activities as the technical secretariat for the Leading Group. The PMO, led by the Deputy Director of the Development and Reform Commission (DRC), will comprise a financial management officer, a procurement expert, a social and resettlement expert, a project management expert, and assistants.

Diagram 6.1 Implementation Arrangement

PMO of LZEMP

LiuchengConstruction Bureau/WSO

LiuchengCounty

Government

LMWTC

LMG

LiuchengWastewater

Works

Leading Group of LZEMP

LiuzhouWorks

RonganCounty

Government

RongshuiCounty

Government

SanjiangCounty

Government

RonganConstruction Bureau/WSO

RongshuiConstruction Bureau/WSO

SanjiangConstructionBureau/WSO

RonganWastewater

Works

RongshuiWastewater

Works

SanjiangWastewater

Works

PMO of LZEMP

LiuchengConstruction Bureau/WSO

LiuchengCounty

Government

LMWTC

LMG

LiuchengWastewater

Works

Leading Group of LZEMP

LiuzhouWorks

RonganCounty

Government

RongshuiCounty

Government

SanjiangCounty

Government

RonganConstruction Bureau/WSO

RongshuiConstruction Bureau/WSO

SanjiangConstructionBureau/WSO

RonganWastewater

Works

RongshuiWastewater

Works

SanjiangWastewater

Works

30

2. At the county level, the wastewater and solid waste office (WSO) will function as the county project management office (CPMO) to ensure inter-departmental coordination for project implementation and operation. WSOs were created across the province in 2008 to implement wastewater and solid waste projects. The WSO, led by the Construction Bureau, consists of the representatives from the County DRC, the Finance Bureau, the EPB, the Forestry Bureau and the Water Conservation Bureau. Project Implementation Agency 3. LMWTC will be the implementation agency for all eight project components. All new construction of primary, secondary and tertiary sewers (i.e., sewer construction in the four counties, Shatang, Guangtang and the urban-suburban sewerage systems) will be the responsibility of LMWTC. Construction and Operation Agreement 4. All four county towns will be served through extension of LMWTC’s wastewater treatment service. Each of the counties and LMWTC have entered into construction agreements in 2009. In accordance with the agreements, the four county governments will be obliged to, among other things:

(a) Provide counterpart funds; (b) Make a land use rights available to LMWTC; (c) Collect and transfer wastewater tariff to LMWTC’s designated account; and (d) Provide subsidy to LMWTC, if tariff revenues are not sufficient to cover the total cost

of operating the facilities, including debt service payments. 5. LMWTC will:

(a) Build and operate wastewater treatment plants and the trunk sewer connecting pumping stations to the plant;

(b) Operate and maintain the secondary and tertiary sewerage; (c) Make all the financing arrangements, including commercial borrowing for the county

governments if they cannot provide all the counterpart fund from their own sources; and (d) Meet all debt service obligations in case the county governments fail to do so.

6. None of the counties will have a shareholding stake in LMWTC and funds from the county governments will be provided in the form of a grant. Implementation of Financial Arrangements See Annex 7.

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Annex 7: Financial Management and Disbursement Arrangements

CHINA: SECOND LIUZHOU ENVIRONMENT MANAGEMENT PROJECT 1. The Financial Management team has conducted an assessment of the adequacy of the project financial management system for LZEMP II. The assessment, based on guidelines issued by the Financial Management Sector Board on March 1, 2010, has concluded that the project meets the minimum Bank financial management requirements, as stipulated in BP/OP 10.02. In the Financial Management team’s opinion, the project will maintain adequate financial management arrangements acceptable to the Bank, and as part of the overall arrangements that the Borrower has in place for implementing the operation, provide reasonable assurance that the proceeds of the loan will be used for the purposes for which the loan is provided. Financial management risk is defined as the risk that the World Bank loan will not be used for the purposes intended and is a combination of country, sector and project specific risk factors. Taking into account the risk mitigation measures proposed under this project, a “Low” FM risk rating was assigned to this project at the appraisal stage. 2. Funding sources for the project include the Bank loan and counterpart funds. The Bank loan proceeds will flow from the Bank into one designated account (DA) to be set up at and managed by the Guangxi Zhuang Autonomous Region Finance Bureau (GXFB), to the Liuzhou Municipal Finance Bureau (LFB), then to the PIA-Liuzhou Municipal Wastewater Treatment Company (LMWTC), and finally to contractors or suppliers. The Bank loan will be signed between the Bank and the People’s Republic of China through its Ministry of Finance (MOF), and the on-lending agreement for the Bank loan will be signed between MOF and Guangxi through its GXFB and then between GXFB and LFB, and finally between LFB and LMWTC. Counterpart funds constitute governmental appropriations and commercial borrowing. 3. No outstanding audits or audit issues exist with any of the above implementing agencies involved in the proposed project. Country Issues 4. To date, no CFAA has been carried out by the Bank for China. Bank knowledge of the system is however fairly comprehensive, thanks to several studies carried out by the Bank, Government and others.1 Based on the studies and material produced by others, Bank observation of developments in the areas of public expenditures, accounting and auditing, and Bank experience with China projects for the past several years, we noted that substantial achievement in the aforementioned areas has been made and further improvement is expected in the next few years. This is a work in progress and as economic reform program further unfolds, the Government has come to realize the importance of establishing and maintaining an efficient and effective market mechanism to ensure transparency and accountability, and minimize potential for fraud or corruption. 5. Due to the rather unique arrangement of the Government funding (particularly Bank loans/grants) is controlled and monitored by MOF and its extension (i.e., finance bureaus at

1China Report on the Observance of Standards and Codes – Accounting & Auditing (World Bank 2009) Financial Management and Governance Issues in China (ADB 2000) Public Sector Management Issues in China (Christine Wong 2005) Government Budgeting and Accounting Reforms in China (Lou Jiwei 2001) WB China Provincial Public Expenditure Review (Christine Wong 2000) WB 2000 (Country Economic Memorandum) managing Public Expenditures for Better Results

32

provincial, municipal/prefecture and county level). However, project activities are usually carried out by implementing entities of a specific industry or sector due to the level and complexity of expertise involved. While this segregation of duties provides added fiduciary assurance, the above arrangement then usually requires more coordination, as the multi-level management of the funding and implementation mechanism sometimes works to the detriment of smooth project implementation. Summary Project Description 6. The estimated base cost of the proposed project is US$274.37 million. Proposed Bank loan is US$150 million. Please refer to Annex 4 for a detailed project description and to Annex 5 for project costs. Audit Arrangements 7. The Bank requires that project financial statements be audited in accordance with standards acceptable to the Bank. In line with other Bank-financed projects in China, the project will be audited in accordance with International Auditing Standards and the Government Auditing Standards of the People's Republic of China. The Audit Office of Guangxi Zhuang Autonomous Region (GXAO) has been identified as auditors for the project. Annual audit reports will be issued by GXAO and subject to reviews by the China National Audit Office (CNAO). The Bank currently accepts audit reports issued by CNAO or provincial/regional audit bureaus/offices for which CNAO is ultimately responsible. 8. The annual audit report of project financial statements will be due to the Bank within 6 months after the end of each calendar year. This requirement is stipulated in the loan agreement. The responsible agency and timing are summarized in the table below: Audit Reports Submitted by Due date Project financial statements LMWTC June 30 of each calendar year Risk Assessment and Mitigation

9. The following risks with corresponding mitigating measures have been identified during the assessment.

Risk Risk Rating before

Mitigating Measures

Incorporated Risk Mitigating Measures

Risk Rating after Mitigating Measures

Conditions of Negotiations,

Board or Effectiveness

Inherent Risk

Country level

Modest Continuous dialogue with related government entities and technical assistance from the Bank will help the government to improve its public sector financial management. In the short-term, annual audit requirements will reduce the

Modest No

33

risk of project funds not being used for their intended purposes. For those areas where the government system cannot be used, The Bank's specific requirements will be embedded into the project financial management system. Project supervision missions,, using a risk-based approach, will review implementation with regard to all aspects of project financial management to minimize project FM risk

Entity Level Modest An existing project management office (PMO) and the PIA- Liuzhou Municipal Wastewater Treatment Company (LMWTC) for the ongoing LZEMP will be responsible for the management and implementation of this project. Both the PMO and LMWTC have experience of managing Bank financed projects and are familiar with Bank requirements and procedures. In addition, GXFB will also provide necessary guidance to LMWTC on project disbursement and funds management.

Low No

Project Level

Modest The project will be implemented by the existing PMO and PIA of LZEMP. Additionally, GXFB and LFB will review and manage project funds to ensure their appropriate usage of project funds. A Financial Management Manual (FMM), including detailed financial management and disbursement procedures will be prepared to standardize all implementing agencies’ financial work.

Low FMM will be finalized by negotiation.

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Control Risk

Budgeting Modest Procedures regarding budget preparation and execution have been agreed by the Bank and government. The FM team will review their execution during project implementation and help to improve any identified weak areas.

Modest No

Accounting Modest Accounting policies and procedures for the Bank loan are already in place and detailed accounting procedures will be documented in the FMM.

Low No

Internal Control

Modest Proper segregation of duties and internal approval procedures has been set up within the project. These procedures will be documented in the project FMM. The Bank’ task team will review actual practice during project implementation.

Low No

Funds Flow Modest Funds flow arrangement is straight forward. Withdrawal applications will go through the PMO, LFB and GXFB. Procedures for withdrawal applications and funds flow are clearly documented in the FMM. GXFB has been managing designated accounts for various Bank financed projects and has extensive experience in processing withdrawal applications and is familiar with Bank disbursement procedures.

Low No

Financial Reporting

Modest Financial reporting responsibilities are established. The form, content and periodicity of financial reports are well defined by MOF and understood by GXFB and LMWTC.

Low No

35

Auditing Modest The external auditor, the Audit Office of Guangxi Zhuang Autonomous Region (GXAO), has extensive experience with previous Bank projects.

Low No

Overall Modest Low 10. The overall FM risk rating assigned to this project at the appraisal stage is Low, provided the proposed mitigating measures are carried out. The Financial Management team will monitor the effectiveness of the measures and project FM risk during project implementation. Funds Flow and Disbursement Arrangements 11. Four disbursement methods are available for the project: advance, reimbursement, direct payment and special commitment. Supporting documents required for Bank disbursements under different disbursement methods will be documented in the Disbursement Letter issued by the Bank. Applications will be supported by:

For reporting eligible expenditures paid from the Designated Account (DA) and for requesting reimbursement: (a) The list of payments against the contracts, and records evidencing eligible expenditures (e.g., copies of receipts, supplier invoices) for contracts subject to Bank prior review, as specified in the Loan Agreement. (b) Statement of Expenditures (SOEs) in the form detailed in the Disbursement Letter, for all other expenditures/contracts not subject to Bank prior review. For requests for direct payment and special commitment: records evidencing eligible expenditures, e.g., copies of receipts, supplier invoices.

12. One designated account (DA) denominated in US dollar will be established at a commercial bank acceptable to the Bank and managed by GXFB. The ceiling of DA will be documented in the Disbursement Letter issued by the Bank. 13. The Bank loan would be disbursed against eligible expenditures (taxes inclusive) as noted in the following table.

Category

IBRD Loan Amount of the Loan

Allocated (in US$ million)

Percentage of Expenditures to be financed (inclusive of

taxes) 1) Works

123.345

91 %

2) Goods

10.97

100 %

36

14. Retroactive financing will be applied for this project. The date of eligible expenditures and the amount of retroactive financing will be determined according to Bank policy and specified in the loan agreement. 15. GXFB will be directly responsible for the management, maintenance and reconciliation of the DA activities. Supporting documents required for Bank disbursements will be prepared and submitted by LMWTC through the PMO and LFB for verification, before sending to GXFB for further disbursement processing. The flow of funds and withdrawal applications for loan proceeds are as follows:

Flow of WAs Flow of funds

3) Goods, Consultant’s services, non-consultant service and training for part 3 of the project

1.78 100 %

4) Front End Fee and Interest During Construction

0.375 Amount payable pursuant to Section 2.03 of the Loan

Agreement and in accordance with

Section 2.07(b) of the General Conditions

5) Premium for Interest Rate Cap or Interest Rate Collar

0 Amount payable pursuant to Section 2.07(c) of the Loan

Agreement and in accordance with

Section 4.05(c) of the General Conditions

6) Interest During Construction 13.531 Amount payable pursuant to Section 2.04 of the Loan

Agreement and in accordance with Section 2.07 (c) of the

General Conditions Total 150.00

The World Bank

GXFB LFB LMWTC Suppliers and

contractors

PMO

37

Financial Management and Reporting Arrangements Strengths 16. This project will be second time for LFB, PMO and PIU to independently manage a Bank financed project. These agencies have gained some knowledge and practical experience by managing the ongoing LZEMP. Additionally, GXFB has been managing the DA and disbursement work for many World Bank and ADB financed projects. GXFB’s substantial review over disbursement applications will mitigate the fiduciary risk. Weaknesses and action plan 17. The financial management internal controls will be enhanced to make sure that project funds are be used for the 12 intended purposes. A financial management manual has been prepared to uniformly align project financial management procedures and requirements within the project. The FMM will be finalized and distributed to all the relevant finance staff before project commencement. Implementing Agencies 18. See Annex 6 for details. Budgeting 19. In accordance with project implementation plan and construction progress, LMWTC will prepare the annual budget. This budget will be reviewed and approved by Liuzhou Municipal Development and Reform Commission. Based on the approved budget and actual construction progress, LMWTC will receive government appropriations from the municipal and county governments, and raise domestic loans. 20. For budget variances arising during execution, necessary authorization and close monitoring will be conducted by the PMO. Timely and accurate information on variances will be used as the basis for mid-term adjustments. The Financial Management Specialist (FMS) will work with the related entities to improve the budgeting system during project implemenation. Accounting 21. The administration, accounting and reporting of the project will be set up in accordance with Circular #13: “Accounting Regulations for World Bank Financed Projects” issued in January 2000 by MOF. The circular provides in-depth instructions for the accounting treatment of project activities and covers the following:

Chart of account Detailed accounting instructions for each project account Standard set of project financial statements Instructions on the preparation of project financial statements

22. The standard set of project financial statements mentioned above has been agreed between the Bank and MOF. It applies to all Bank projects appraised after July 1, 1998, and includes the following:

38

Balance sheet of the project Statement of sources and uses of funds by project components Statement of implementation of loan agreement Statement of designated account Notes to the financial statements

23. LMWTC will manage, monitor and maintain the project accounting records. It will prepare the project financial statements, which will then be reviewed by the PMO and by GXFB before submission to the Bank for review and comment on a regular basis. 24. Adequate project accounting staff with educational background and work experience commensurate with the work they are expected to perform is one of the factors critical to successful project financial management. Financial staff working for LZEMP will continue to be responsible for accounting and financial management of this project. Based on discussions, observation and review of their educational background and work experience, the task team notes that they are qualified and appropriate to the work assigned. 25. To strengthen financial management capacity and achieve consistent quality of accounting work, a project FMM has been prepared. The FMM provides detailed guidelines on financial management, including internal controls, accounting procedures, fund and asset management, withdrawal application procedures, financial reporting and auditing arrangement and so on. The FMM will be finalized and distributed to all the relevant financial staff before the project commences. 26. LMWTC will use the computerized financial management system User Friend (Yong You, a well-established accounting software package approved by MOF) for this project. The task team will monitor the accounting process, especially during the initial stage, to ensure that complete and accurate financial information will be provided in a timely manner. Financial Reporting 27. The format and content of the project financial statements represent the standard project financial reporting package agreed to between the Bank and MOF, and have been discussed and agreed with all parties concerned. 28. In line with the updated World Bank Operation Manual, the interim un-audited project financial statements should be submitted as part of the progress report no later than 45 days following each calendar semester (the due dates will be August 15 and February 15), in form and substance satisfactory to the Bank. Financial Covenants 29. No specific financial covenants are applicable to the project except for those standard financial covenants, e.g., like project audit and interim financial reports. Supervision Plan 30. The supervision strategy for this project is based on its FM risk rating, which will be evaluated on a regular basis by the Financial Management team, in consultation with thet task team leader.

39

Internal Control and Internal Auditing

31. The related accounting policy, procedures and regulations were issued by MOF and a FMM will be prepared and issued to align the financial management and disbursement requirements among all concerned parties. 32. There is no formal independent internal audit department for the project. However, this will not impact the project’s financial management as management and monitoring from GXFB and the PMO, and annual external audit will serve as the mechanism to ensure that financial management controls are functioning appropriately.

40

Annex 8: Procurement

CHINA: SECOND LIUZHOU ENVIRONMENT MANAGEMENT PROJECT

A. General 1. Procurement for the proposed project would be carried out in accordance with the World Bank’s "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004 and revised in October 2006; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004 and revised in October 2006, and the provisions stipulated in the legal agreements. The various items under different expenditure categories are described below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. 2. Procurement of Works. Works procured under this project would include: construction of 6 wastewater treatment plants in Liuzhou City and its 4 counties; construction of 1 sludge co-combustion facility in Liuzhou City,and construction and improvement of sewage and drainage works in Liuzhou City among others. Procurement will be undertaken using the Bank’s SBD for all ICB and the Chinese Model Bidding Documents, agreed with or satisfactory to the Bank, for all NCB. 3. Procurement of Goods. Goods procured under this project would include equipment for the 6 wastewater treatment plants. Procurement will be undertaken using the Bank’s SBD for all ICB and the Chinese Model Bidding Documents, agreed with or satisfactory to the Bank, for all NCB. Procurement of equipment for the 4 wastewater treatment plants in Sanjiang, Liucheng, Rongshui and Rongan Counties will use retroactive financing. 4. Procurement of non-consulting services. Non-consulting services procured under this project would include survey and data collection for GIS, using the Bank’s SBD. 5. Selection of Consultants includes consultants for construction supervision and contract administration, domestic training for capacity building and institutional strengthening, etc. Short lists of consultants for services estimated to cost less than US$300,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 6. Operating Costs Nil. 7. Others: Nil. 8. Procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, are presented in the project implementation manual in the PMO’s office.

41

B. Assessment of the agency’s capacity to implement procurement 9. Procurement activities will be carried out by Liuzhou Municipal Wastewater Treatment Company (LMWTC). Two procurement agent companies will be employed in assisting procurement processing. 10. An assessment of the capacity of the Implementing Agency to implement procurement actions for the project was carried out by the team’s procurement staff on January 12-14, 2010. The key risk for project procurement is local procurement practice. Corrective measures agreed are: (i) training to the PMO on Bank procurement procedures; (ii) early procurement support missions by the Bank’s procurement specialist. The overall project risk for procurement is moderate. C. Procurement Plan 11. The Borrower, at appraisal, developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team and is available at LWTC’s office in Liuzhou. It will also be available in the project’s database and in the Bank’s external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect actual project implementation needs and improvements in institutional capacity. D. Frequency of Procurement Supervision 12. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended one mission (including special procurement supervision for post review/audits) every 12 months. E. Details of the Procurement Arrangements Involving International Competition 13. Goods, Works, and Non Consulting Services (a) List of contract packages to be procured following ICB and direct contracting:

1 2 3 4 5 6 7 8 9

Ref. No.

Contract

(Description)

Estimated

Cost (million

USD)

Procure

ment Method

P-Q

Domestic

Preference (yes/no)

Review by Bank

(Prior / Post)

Expected Date for

Bid Invitation

Comments

1

Procurement of equipment for Guantang Wastewater Treatment Plant

3.96 ICB No Yes Prior June 2011

2

Procurement of equipment for Shatang Wastewater Treatment Plant

2.25 ICB No yes Prior November

2013

42

(b) ICB contracts estimated to cost above US$5,000,000 for works and US$500, 000 for goods per contract, or the aggregate value of contracts in a package, and all direct contracting will be subject to prior review by the Bank. 14. . Consulting Services (a) List of consulting assignments with short-list of possible international firms.

1 2 3 4 5 6 7

Ref. No.

Description of

Assignment

Estimated

Cost (Million

USD)

Selection Method

Review by Bank (Prior / Post)

Expected Date for

Invitation for

Proposals

Comments

1

Construction Supervision and

Contract Administration

0.86 QCBS Prior September

2010

(b) Consultancy services estimated to cost above US$100,000 for firms and US$20,000 for individual consultants per contract and all single source selection of consultants (either firm or individual) will be subject to prior review by the Bank. (c) Short lists composed entirely of national consultants. Short lists of consultants for services estimated to cost less than US$300,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

Thresholds for Procurement Method Description Thresholds

Civil Works >=US$20,000,000 ICB <US$20,000,000 NCB <US$200,000 Shopping

Goods >=US$1,000,000 ICB <US$1,000,000 NCB <US$100,000 Shopping

Consultancy <=US$200,000 CQS <=US$100,000 SSS

Thresholds for Prior Review

Description Thresholds Civil Works <=US$5,000,000

The first NCB irrespective of cost estimate Goods >=US$500,000

The first NCB irrespective of cost estimate Non-Consulting Service >=US$500,000

The first contract irrespective of cost estimate Consulting Services Firm >=US$100,000; all SSS

Individual >=US$50,000; all SSS

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Annex 9: Economic and Financial Analysis

CHINA: SECOND LIUZHOU ENVIRONMENT MANAGEMENT PROJECT

Financial Analysis 1. Financial analysis was conducted with several objectives: (i) to estimate the financial rate of return of the proposed project investments; (ii) to assess the financial situation of LMWTC and measures ensuring financial sustainability of LMWTC through expansion in revenue base, tariff increases, potential subsides, and appropriate capital structure; (iii) to demonstrate the affordability of wastewater tariffs for low-income households; and (iv) to verify the financial capacity of Liuzhou Municipal Government has sufficient financial resources to meet all counterpart funding and other financial requirements under the Project, including the obligations for the four county towns. A. Project Level Financial Analysis 2. Project level financial rate of returns (FIRRs) were prepared for the wastewater treatment components for 25 years of operation under the assumption that all customers served by the water supply company, whether their wastewater is treated or not, will be the tariff revenue base and that capital expenditures are limited to the project cost proposed under the Project and do not include investments to further increase wastewater treatment capacity in Guantang and the four county towns.

3. The table above summarizes the FIRRs for wastewater treatment components; FIRRs range from 11.2% for Sanjiang to 17.8% for Guantang. These returns are above each project’s weighted average cost of capital in all project components. No FIRRs were prepared for sludge management and the urban-suburban wastewater collection components, since they are not revenue generating investments.

Base Case

Revenue Costs Revenue & Cost

-10% 10% Effect Combined

Guantang 17.8% 16.4% 16.6% 15.2%

Shatang 13.7% 12.4% 12.5% 11.2%

Sanjiang 11.2% 10.1% 10.3% 9.3%

Rongan 15.5% 14.0% 14.2% 12.9%

Rongshui 12.2% 11.0% 11.2% 10.1%

Liucheng 13.3% 12.0% 12.2% 11.0%

Table 9.1. Financial Internal Rates of Return (FIRRs)

Sensitivity Analysis

44

B. Entity Level Financial Analysis 4. Financial Performance. LMWTC increased operating revenue from RMB58 million in 2008 to RMB84 million in 2009 as the wastewater tariff was raised from RMB0.50 per m3 to RMB0.80 per m3 on October 1, 2008. This level of revenue, however, is still not sufficient to fully meet the debt service requirement. LMWTC received a subsidy of RMB 28 million in 2009. LMWTC cannot reach the revenue base which was envisaged at appraisal largely because the migration from self-supplied water users to the water supply company did not take place to the extent expected and because it has not been able to collect tariff revenue from self-supplied users in accordance with the tariff table.

5. Institutional Reform. Supported by technical assistance for institutional development and capacity building, LMWTC has been steadily taking steps toward an autonomous and integrated wastewater operating company during the implementation of LZEMP. Among the institutional reforms envisaged during the appraisal of LZEMP, LMWTC has worked in the following areas: (a) integration of sewer and drainage combined network, and (b) direct remittance of tariff revenue.

(a) Integration of Network Operation. Network assets were transferred to LMWTC in 2007 while actual operation of the network continued to be conducted by the urban facilities administration division (UFAD) under the Construction Bureau. It is understood that LMWTC has outsourced network operation to the UFAD. In order to achieve LMWTC’s effective management of the network facilities, payment for network operation began in 2009 first to LMWTC and then to the UFAD, rather than directly from the Finance Bureau to UFAD. However, the level of integration stopped at this stage and further development is not expected in the network operation of Liuzhou city during the implementation of LZEMP II. At the county town level, however, LMWTC will provide maintenance and operation service for the secondary

2007 2008 2009

Water Volume Served by WSC ('000 m3/day) 290 271 317

Wastewater Tariff (RMB/m3)* 0.5 0.6 0.8

Wastewater Tariff Revenue (RMB million) 52 58 84

from WSC 49 55 81

from Self-supplied Users 2 3 3

Subsidies 15 38 28

Net Income 33 77 71

Cost Recovery Ratio 1.1 1.1 1.0

Debt Service Coverage Ratio 1.2 1.1 1.1* The wastewater tariff was raised from RMB 0.50 to RMB 0.80 on October 1, 2008.

Table 9.2. Financial Performance of LMWTC

45

and tertiary sewer network through a network operation section in each of the four county towns.

(b) Direct remittance of Wastewater Tariff Revenue. Wastewater tariff revenues collected by the water supply company continue to be remitted to the Finance Bureau and then transferred to LMWTC. LMWTC has not established a direct relationship with the water supply company to obtain the customer information necessary to monitor and manage its customer base. During project implementation, LMWTC and LMG will continue to work to achieve direct remittance of wastewater tariff revenue from the water supply company.

6. Financial Projection. Financial projections were made based on a number of assumptions: water volume; LZEMP II project cost, financing arrangements, terms of financing, and capital expenditure outflows; wastewater tariffs; subsidies for operating costs of the drainage system in Liuzhou; subsidy for debt service payment of Zhuexi Creek Urban Rehabilitation component of LZEMP, etc. Details are available in the project files. 7. Summary Result. The projection results indicate that LMWTC will need to rely on the subsidy for the period from 2011 to 2015 to make a full cost recovery. After the wastewater tariff is raised from the current level of RMB 0.80 per m3 to RMB 1.70 per m3 in 2016, it will be able to achieve sustainable operation without relying on subsidy. However, it should be noted that the projections do not include additional investments required for the expansion of treatment plants for all the wastewater components other than Shatang.

8. Financial Covenants. The two financial covenants – a cost recovery ratio (CRR) covenant and a debt service coverage ratio (DSCR) covenant are included under LZEMP. These covenants will also be included under LZEMP II except that the threshold ratios are lowered for the debt service coverage ratio covenant. The covenants require:

(c) CRR Covenant. Total revenue (from operating and non-operating sources, including subsidies) equivalent to not less than the sum of (i) total operating expenses

Table 9.3. Summary of Financial Projections for LMWTC

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020Key Operating AssumptionsPopulation in the Service Area ('000) Liuzhou City

1,497 1,535 1,574 1,615 1,657 1,700 1,763 1,844 1,943 2,066 2,223 Four County Towns 298 312 327 342 359 376 409 445 483 526 572Water Volume Served by WSC ('000 m3/day) Liuzhou City 369 381 392 405 418 431 448 468 492 521 557 Four County Towns 79 81 84 86 89 92 99 107 116 125 135Wastewater Volume Treated ('000 m3/day) Liuzhou City 425 465 480 501 519 532 537 540 540 540 540 Four County Towns 0 0 23 58 80 80 80 80 80 80 80Collection Efficiency Rate for WSC Liuzhou City 88% 88% 88% 88% 88% 88% 88% 88% 88% 88% 88% Four County Towns 80% 80% 80% 80% 80% 80% 80% 80% 80% 80% 80%

Key Financial Indicators (Y million)Total Operating Revenue

130 149 153 228 235 242 326 341 358 492 524Operating Income 31 23 20 58 55 58 111 102 100 227 291Net Income 56 -4 -16 -3 -13 -15 37 30 33 166 236

Required Operating Subsidy (CRR=1.0) 0 30 41 2 8 20 0 0 0 0 0

Key Financial Ratios Cost Recovery Ratio 1.1 1.0 1.0 1.0 1.0 1.0 1.2 1.1 1.1 1.5 1.6Debt Service Ratio 1.6 1.3 1.2 1.2 1.2 1.2 1.4 1.2 1.3 2.0 2.2

Domestic Wastewater Tariff (Y/m3) 0.9 1.0 1.0 1.3 1.3 1.3 1.7 1.7 1.7 2.2 2.2

46

(including depreciation) and (ii) the amount by which debt service requirement exceeds the provision for depreciation; and

(d) DSCR Covenant The LMWTC shall not incur any debt unless a reasonable forecast of its revenues and expenditures of LMWTC shows that the estimated net revenues of LMWTC for each fiscal year during the term of the debt to be incurred shall be at least equal to the estimated debt service requirements of LMWTC in such year on all debt of LMWTC including the debt to be incurred.

C. Affordability of Tariffs 9. Results of the analysis of the affordability of water and wastewater tariffs by low income households (low income households are defined as those in the lowest income quintile) demonstrate that total water and wastewater tariffs represent less than 3% of household income levels in Liuzhou, Sanjiang, Rongan and Rongshui and up to 4.1% in Liucheng, which are within the generally accepted benchmark for affordability of up to 5%. There is also a program which exempts water and wastewater tariffs for households with an income less than RMB2,800 in Liuzhou and all the four counties. D. Municipal Finance Analysis 10. Institutional Arrangement. Each county is required to be responsible for providing the required counterpart funds and any operational subsidy for its own component. However, considering the fiscal capacity of the counties, the financial arrangement place the responsibility for these obligations with LMWTC, and therefore ultimately with Liuzhou Municipal Government (LMG). LMWTC will fulfill the obligations if the counties should fail to meet theirs. The fiscal capacity of LMG has been evaluated for the total financial obligations of all the counterparties.

11. Counterpart Funding Requirements. The funding requirement during the implementation period was estimated after deducting the amount already funded as of the end of 2009 and the wastewater tariff revenue to be expected during the implementation out of the total counterpart fund requirement. The total amount secured from the upper governments was RMB172 million, while wastewater revenues of around RMB40 million are estimated to be generated annually. The required counterpart funding will peak at RMB135 million in 2011 and taper down to RMB24 million in 2016. The required subsidy will peak at RMB 41million in 2012, no subsidy will required tariff 2016 onwards.

12. Fiscal Impact. The fiscal impact of the project was evaluated by looking at the ratio of counterpart funding requirements to the general budget mainly of various LMG revenues. Table below shows that the financial requirement for LMG will peak at 3.7% of its budget income revenue in 2011, which is considered affordable given the financial capacity of LMG.

47

Economic Analysis 13. Cost Effectiveness Analysis. Cost effectiveness analysis has been adopted for the economic evaluation of all project components since benefits for wastewater projects are difficult to quantify, especially those pertaining to public health and the environment. 14. Sludge Management Component. The selected process of sludge management (co-combustion in cement kilns at Liuzhou Yufeng Cement Factory) was compared with the alternative of drying and landfill disposal of dried solids. As shown in the table below, the co-combustion process incurs substantially lower project and operation costs than the dry and landfill method, since the co-combustion process utilizes the existing cement factory effectively for sludge disposal.

15. Wastewater Components. The selection of plant location was not constrained by availability of suitable land. The wastewater treatment process was compared between two alternative processes: the oxidation ditch process and the A2O (anaerobic-aerobic oxidization) process. Both processes have been used widely for treatment plants of the size required in this Project and both processes have comparable capital costs. The oxidation ditch process was chosen as it has lower power consumption in process (around 10% lower for the Sanjiang wastewater treatment plant), and is easier to operate. 16. Wastewater Collection Component. For this component, different piping materials and installation, which meet the technical requirements of the systems, were compared. HDPE pipes and reinforced concrete pipes/culverts were respectively selected for sewerage pipes diameters DN400, and below and above DN400. The selected options are at least 5% lower in cost compared to other than other piping materials, e.g., steel pipes with cement.

Co-combustion Dry&Landfill

Incoming Dewatered Sludge (22% DS) (ton/day) 300 300Outcoming Dewatered Sludge (90% DS) (ton/day) 0 72

Net Present Value (RMB million) Project Cost 38 188 Operation Cost 85 295 Total 124 483

Table 9.5 Comparison of Sludge Disposal Process

2010 2011 2012 2013 2014 2015 2016

General Budget Income (RMB million) 4,036 4,440 4,884 5,372 5,909 6,500 7,150

Counterpart fund requirement* 34 135 85 77 72 40 24 Subsidy - 30 41 2 8 20 -

% of General Budget Income Counterpart Fund 0.9% 3.0% 1.7% 1.4% 1.2% 0.6% 0.3%

Subsidy - 0.7% 0.8% 0.0% 0.1% 0.3% 0.0%

* after deducting the fund already secured and wastewater tariff revenue generated

Table 9.4. Fiscal Impact of LZEMP II on LMG Budget

48

Annex 10: Safeguard Policy Issues

CHINA: SECOND LIUZHOU ENVIRONMENT MANAGEMENT PROJECT A. Environment Safeguard Policy Issues Environmental Benefits

1. Benefits and impacts of the project to the natural and social environment have been identified and assessed, quantitatively to the extent possible, by the EA process. The EA concludes that overall the project will bring significant positive impacts to the natural and socioeconomic environments for Liuzhou and the four participating counties as a result of: building wastewater treatment plants (WWTP) in four county seats; by expanding WWTPs and completing sewer collection in Liuzhou; and especially by eliminating residual pollution from sludge by employing the relatively new technology of co-combustion of WWTP sludge in cement kilns. Any potential negative impacts will be mitigated to acceptable levels if the measures proposed in the EMP are executed effectively. Potential Environmental Impacts and Risks

2. Project components will potentially cause a variety of short-term construction and on-going operational impacts on the environment. However, based on Liuzhou’s successful experience in implementing LZEMP which has very similar activities, no significant or unprecedented adverse impacts are foreseen if the EMP were followed effectively. 3. Construction phase. Project components will generate short-term impacts, such as noise, dust, traffic, soil erosion, worker safety and social and traffic disturbance. These are relatively moderate or insignificant and can be readily minimized by standard measures stipulated by national and local construction site management codes which have been included in the EMP. The PMO will appoint staff responsible for implementation of the EMP. Similarly, contractors will be required to appoint at least one staff per construction site to ensure that work is carried out according to the EMP and the relevant engineering codes. In addition, all mitigation measures in the EMP and the codes of conduct relevant to contractors will be included in the bidding documents and contracts. 4. The characteristic of the dredged material has been sampled and tested according to the procedures and requirements set out in relevant domestic standards and testing methods. The results show that heavy metals and other key pollutants in the sediment are below the limits for hazardous wastes. Sediment from most sections of the streams can be applied for agricultural use or urban landscaping except certain sections, with some high levels of metals but still below the standards, which can only be disposed of at Liuzhou sanitary landfill. The EMP includes a dredging plan detailing dredging methods, sediment transport, and disposal methods for different sections of the streams. 5. Operations phase. Operation of WWTPs and associated pumping stations and sewerage systems will have limited impact on residents and the surrounding environment, e.g., odor from aeration, sedimentation and sludge settling tanks, and noise from pumps. Appropriate mitigation measures (e.g., minimum of 100 meters buffer zone to residential areas) are detailed in the EMP. Potentially serious concerns include residual outflow from the WWTP into surface water bodies and the safe disposal of sludge. Sludge from all four county WWTPs will be disposed of in the respective sanitary landfills being constructed in each county seat.

49

All of four counties landfill (Liucheng, Sanjiang, Rongan and Rongshui) were put in operation in December 2010, and therefore are operational to receive sludge from each WWTP. 6. Sludge generated by WWTPs in Liuzhou city will be transported to the Liuzhou Yufeng cement plant for co-combustion at its three dry-process rotary kilns with pre-calciners. Flue gas emissions from the kiln currently pass through cyclone separator, spray tower, and electrostatic precipitator (ESP) before being discharged into the atmosphere. Studies at one Liuzhou plant and at a Beijing cement plant indicate that the calcination process is able to destroy all major air pollutants typical from sludge burning (SO2, NOx, dioxins, heavy metals, HCl, etc.) due to the high temperature (900-1400ºC), long retention time (about 30 minutes) and alkaline environment inside the kilns, as well as an innovative system design to shorten the retention time at 200-300°C to avoid re-formation of dioxin. The Beijing plant’s air emissions have met national discharge standards for both cement plant and municipal waste incineration. The Beijing cement plant has signed a design service contract with the PMO to implement this sub-project (retrofitting of three existing kilns and additional storage/feeding facilities of sewage sludge) at three existing kilns in Liuzhou Yufeng cement plant. 7. Emissions at Liuzhou Yufeng cement plant have been in compliance with national pollution standards according to on-line monitoring and quarterly on-site testing by the city EPB. Given that the amount of fed-in sludge (at 70-80% water content) will be no more than 5% (by dry weight) of clinker production, much lower than that at the Beijing plant (20 % of sludge pre-dried to 35% water content), emissions are anticipated to be predominantly similar to emissions from normal cement production (PM, SO2 and NOx) and thus able to meet discharge standards. If the process and emissions at the cement plant are carefully controlled, including with a test burn, adverse impacts from mixed calcinations of sludge can be mitigated to an acceptable level. As stated above, the sludge from the WWTP of the four counties (Liucheng, Sanjiang, Rongan and Rongshui) will be disposed in the new landfills. 8. Studies at the Beijing cement plant also included testing on the quality and safety of cement that has mixed sludge in the production process. Heavy metals, a major concern, are found bonded and fixed in the micro structure of cement and their extraction concentrations are well below national standard for drinking water and underground water. Issues of Area of influence 9. The major environmental issue for the project has been the handling of WWTP sludge. Full EA reports had been prepared for each county landfill according to relevant Chinese regulations and were approved in early 2009. Due diligence reviews of the EAs for these landfills was carried out and these reviews confirm that they comply with Bank requirements. The transportation and disposal of sludge in the county sanitary landfills will be monitored during project implementation. Alternative Analysis

10. Various alternatives were identified, evaluated, and compared during the EA process, with the objective of avoiding or minimizing potential adverse environmental and social impacts and to maximize environmental benefits. A “no project” scenario was also considered as an alternative to each component. 11. Alternatives considered for the wastewater treatment included WWTP location and WWTP treatment process including modified Carrousel oxidation ditch and Cyclic Activated Sludge Treatment (CAST) process. For disinfection technology options included liquid

50

chlorine disinfection and UV disinfection which was the preferred option. For sludge disposal options included landfill after de-watering and incineration mixed with cement production. Disposal in sanitary landfills and incineration mixed with cement production were selected for the county WWTP and Liuzhou City WWTP respectively. 12. Alternative analysis for dredging considered several commonly used dredging methods. Due to the relatively small scale, traditional manual dredging method is proposed. Three different types of sewer pipes were also compared. Environmental Management Plan (EMP)

13. A stand-alone EMP was developed covering all three components. The EMP outlines all mitigation and monitoring measures, as well as the institutional arrangement and responsibility of each party (PMO, owners, contractors, supervision engineers, operators, regulating government agencies, etc). The PMO will have responsibility for EMP implementation while responsibility for day-to-day operation of sludge co-combustion will rest primarily with the Liuzhou Yufeng cement plant. 14. The PMO will have at least one staff in charge of EMP implementation, supervision, monitoring and reporting. A training plan has been developed to ensure effective EMP implementation. The environmental monitoring and training plan has been integrated and budgeted into the overall implementation plan, the monitoring and evaluation program, and the training plan of the project. The EMP sets out the reporting requirements for the major parties involved (contractors, supervision engineers, environmental monitoring agencies and the PMO) and the procedures to ensure that appropriate actions are taken in response to the findings and problems. 15. The performance of landfills and the incinerating kilns at the cement plant will be monitored during project implementation. Public Consultation and Information Dissemination 16. Information Dissemination. EAs for the six individual WWTPs were completed and disclosed in late 2008 according to domestic procedure and approved by Liuzhou EPB in early 2009. These individual EAs were disclosed again together with first round for the Consolidated Environmental Assessment (CEA) which provides a comprehensive summary of the individual environmental assessments. Individual EAs for sludge co-combustion and suburban sewerage systems, and dredging were also disclosed with the CEA. The English version CEA, the EMP and the executive summary were posted at the World Bank Infoshop.

EA-related Information Disclosure Document disclosed 1st round 2nd round Location CEA and EMP

3 October 2009

February-March 2010

Liuzhou Daily Website of Liuzhou EPB Bulletin of affected local communities

EA for sludge part & Sewers/dredging

Ibid

Ibid

Ibid

Individual EAs for WWTPs

October 2008 October 2009

Website of Liuzhou EPB

51

17. Public consultation. Two rounds of public consultation were conducted during EA preparation. The first round was in October-November 2009, with about 110 affected people in Liuzhou and four counties surveyed. The second round was during March 2010 after the full text of the draft CEA and the EMP were disclosed locally. In all 120 people were consulted for this round through questionnaires and meetings. Both rounds involved people from different age groups, gender, educational background and occupation. Key government organizations and experts were also consulted. 18. The majority of the people consulted (82 to 91%) supported the project, and more than 80% considered the location of subprojects reasonable. Surface water and air quality were identified as the major environmental issues in the region and some people cautioned that the project might exacerbate these problems if the project was not executed properly. Around 68% of the people surveyed were worried about damage to roads and disturbances to daily life from project construction activities. These concerns have been fully taken into account in the EMP and incorporated in the design of the project. B. Social

19. Project works will have resettlement impacts in both urban area and rural settings in the peri-urban area. Following Chinese law and regulations and World Bank OP 4.12 on Involuntary Resettlement, the Liuzhou Project Office prepared resettlement action plans (RAPs) for each component that will cause involuntary resettlement. An English Language Comprehensive Summary of RAP was also prepared. RAP preparation included project impact inventory surveys, social- economic surveys, and consultations over resettlement and livelihood rehabilitation strategies. 20. The project will occupy 2,872.96mu (191.53 hectares) of land in total of which the waste water treatment plant component will occupy 2,159.94 mu or 143.99 hectares of land (617.15 mu or 41.14 hectares of land permanently and 1,542.79 mu or 102.85 hectares of land temporarily). Pipelines account primarily for the temporarily occupied land, and will occupy 1,481.9 mu (98.79 hectares) of state-owned land and 22.69 mu (1.51 hectares) of collective land. The project will result in 167 m2 of structure demolition. The project will affect 1,177 people in 228 households. 21. The following were the guiding principles for developing the RAPs:

(a) Acquisition of land and other assets, and relocation of people, will be minimized as much as possible;

(b) The original living standards of all affected people should be improved or at least restored to pre-project conditions.

(c) Resettlement plans should be finalized after consultation with the affected people.

(d) Compensation for all affected buildings should be calculated on the basis of the current replacement cost, without consideration of depreciation.

(e) All compensation should be paid before acquisition.

(f) Construction units are responsible for restoring temporarily used land to its productive status after the leasing period.

(g) Special assistance should be provided to vulnerable households identified during the detailed planning and implementation process.

(h) Implementation will be supervised, monitored and evaluated in an effective and timely manner.

52

22. Economic rehabilitation. The village rehabilitation approach was developed in consultation with affected farmer groups based on agreement with affected farmers. The project will follow a rehabilitation strategy based on cash compensation. Land acquisition compensation will include land compensation, resettlement subsidy, and standing crop compensation. Land acquisition comparison will be calculated based on the annual production value according to the Law of Land Administration. In addition to cash compensation, technical training, and job creation for land-loss farmers will be conducted by relevant government agencies. Social Security Scheme will also be available. 23. Rehabilitation of enterprises and institutes. Cash compensation will be provided based on consultation and negotiation with three project affected enterprises with replacement cost as the base. The enterrpsises include an oil mill, a food factory and a sand yard. 24. Consultation and participation. Affected villagers and various government agencies took part in the socio-economic survey, impact census, inventory and formulation of the compensatory and livelihood rehabilitation plan. Project information, relevant government policies and regulations were broadly disseminated through village meetings in the project areas. The project RAP was disclosed locally. A project Resettlement Information Booklet will be developed and distributed to every affected farmer household. 25. Resettlement organization. The PMO will assume the overall responsibility for implementing the resettlement program. The PMO will work with the district and county government offices, on a contract basis, to implement the resettlement programs. These offices will employ competent and experienced staff. Their respective responsibilities and functions are detailed in the RAPs. 26. Grievance redress. A mechanism has been established for grievance redress. Grievances can be filed both orally and in writing. Starting at the village and neighborhood committee level, grievances can be elevated to county/district and city level, if they are not satisfied with the resolution at the lower level. Affected people could also file cases in court if they are not satisfied with the resolution by the project authority. All grievances and their resolution will be recorded. This mechanism has been disclosed to the local population and will be further disseminated through the Resettlement Information Booklet. 27. Monitoring and Evaluation. Both internal and external monitoring efforts are planned for resettlement implementation. The resettlement offices will be responsible for internal monitoring. An experienced team will be appointed as the external institute to undertake the independent monitoring of the resettlement program. The scope of monitoring work, targets, indicators, procedures, methodology and reporting requirements are described in the RAP. 28. Resettlement Cost. The total resettlement cost is RMB73.08 million, equivalent to US$10.7 million. This budget includes compensation for land structures, management and monitoring costs, and contingencies. All resettlement costs will be financed from domestic funds. 29. Due Diligence Study on Guantang. Since 2006, 8,314 mu (554.26hectares) of land has been acquired for domestic projects in Guantang area. A due diligence study was carried out by the client and its social consultant to review the resettlement practices adopted and the policies that will be followed for land acquisition and house demolition for future non Bank-

53

projects. The Bank’s team reviewed the prepared due diligence report during the project preparation. The report concludes that (i) resettlement practices are in line with domestic laws and regulations; (ii) there is no evidence that project affected persons are worse off because of land taking; (iii) there are no known legacy issues; (iv) land acquisition and house demolition polices for future activities will be in line with domestic laws and regulations. Consequently, additional tracer studies are not recommended. The reports have been attached as Annex 1&2 of the English language Comprehensive Summary RAP.

30. Due Diligence of works under implementation: During the project preparation, land acquisition and structure demolition had commenced in Sanjiang, Rong’an and Liucheng. A due diligence assessment of these activities concluded that the resettlement practices are in accordance with Bank policy and Chinese laws. 31. Poverty impacts. Special attention was paid in project design to ensure that poor and vulnerable groups have equal access to the services provided by the project. The social assessment revealed that tariff collection for services provided might accentuate the financial burden on poor population. Liuzhou city and Rongshui County have issued preferential policies for poor people who are covered by the Dibao system which provides financial assistance to the poor for essential services. In addition, the PMO will work with county governments in Sanjiang, Rong’an and Liucheng to assist the poor based on findings of public hearings and it is expected financial assistance will be provided. 32. OP4.10 on Indigenous People. The Sanjiang and the Rongshui subcomponents are in the Sanjiang Dong Ethnic Minority Autonomous County and Rongshui Miao Ethnic Minority Autonomous County respectively, which have large ethnic minority populations. However, these sub-components are located in the urban parts of the county, whereas the ethnic minorities are concentrated in the remote rural areas. The Team’s Social Development Specialist visited the project sites to screen the potential presence of Indigenous People as defined by OP/BP 4.12. Ethnic minority populations are scattered in the project area and live with Han population and there are no boundaries between different ethnic populations in urban areas. In view of this, it is confirmed that the project does not trigger Bank OP4.10 on Indigenous People.

54

Annex 11: Project Preparation and Supervision

CHINA: SECOND LIUZHOU ENVIRONMENT MANAGEMENT PROJECT

Planned Actual PCN review October 13, 2009 October 26, 2009 Initial PID to PIC November 2009 February 4, 2011 Initial ISDS to PIC November 2009 September 16, 2009 Appraisal May 22, 2010 May 21-27, 2010 Negotiations November 2010 December 21-22, 2010 Board/RVP approval March 10, 2011 - Planned date of effectiveness June 2011 - Planned date of mid-term review December 2013 - Planned closing date May 31, 2017 - Bank staff and consultants who worked on the project include: Name Title Unit Victor Vergara Task Team Leader EASIN Sing Cho Urban Specialist, Co-TTL EASCS Jun Zeng Social Specialist EASCS Xin Ren Environmental Specialist EASCS Yiren Feng Geng Yi

Environmental Specialist Financial Management Specialist

EASCS EAPCO

Jianjun Guo Procurement Specialist EASCO Zeng Liu David Sislen*

Procurement Specialist Sector Leader

EASCO LCSSD

Daniel Hoornweg* Lead Urban Specialist FEUUR Oscar Alvarado* Senior Water and Sanitation Specialist SASDU Vellet Fernandes Program Assistant EASIN Xin Chen Program Assistant EACCF Xuemei Guo Program Assistant EACCF Dan Xie Program Assistant EACCF Eddie Ke-Siong Hum Senior Municipal Engineer Consultant, EASIN Masato Sawaki Financial Analyst Consultant, EASIN Lynn Wang Financial Management Specialist Consultant, EAPCO *_/ Peer Reviewers

55

Annex 12: Documents in the Project File

CHINA: SECOND LIUZHOU ENVIRONMENT MANAGEMENT PROJECT 1. Resettlement Monitoring Report 2. Resettlement Action Plan 3. Social Assessment Report 4. Environmental Assessment Summary Report 5. Environmental Management Plan 6. Decision Review Meeting Note 7. PAD Stage Safeguards Review Meeting Minutes 8. Appraisal Stage Project Information Document 9. FM Assessment Report 10. PCN Review Meeting Minutes 11. Concept Stage ISDS 12. Aide Memoires and Management Letter for Preparation, Pre-appraisal and Appraisal

Missions 13. Concept Stage Project Information Document 14. PCN Stage Safeguards Review Meeting Minutes

56

Annex 13: Statement of Loans and Credits

CHINA: SECOND LIUZHOU ENVIRONMENT MANAGEMENT PROJECT

Original Amount in US$ Millions

Difference between

expected and actual

disbursements

Project ID

FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d

P096556 2009 CN-Eco-Farming 120.00 0.00 0.00 0.00 0.00 120.00 0.00 0.00

P101988 2009 CN-Jiangxi Shihutang Navi & Hydropower

100.00 0.00 0.00 0.00 0.00 99.75 0.00 0.00

P096925 2008 CN- Bengbu Integrated Environment Improv

100.00 0.00 0.00 0.00 0.00 99.75 0.00 0.00

P093963 2008 CN-Guiyang Transport 100.00 0.00 0.00 0.00 0.00 94.20 12.78 0.00

P093882 2008 CN-Shandong Flue Gas Desulfurization

50.00 0.00 0.00 0.00 0.00 49.88 8.17 0.00

P092631 2008 CN-Xi'an Sustainable Urban Transport

150.00 0.00 0.00 0.00 0.00 150.00 0.00 0.00

P091949 2008 CN-Gansu Cultural & Natural Heritage

38.40 0.00 0.00 0.00 0.00 38.40 2.24 0.00

P087224 2008 CN-Han River Urban Environment

84.00 0.00 0.00 0.00 0.00 83.79 0.00 0.00

P085376 2008 CN-Migrant Skills Dev. and Employment

50.00 0.00 0.00 0.00 0.00 49.88 0.00 0.00

P084437 2008 CN-Rural Health 50.00 0.00 0.00 0.00 0.00 50.00 0.00 0.00

P084874 2008 CN- Energy Efficiency Financing

200.00 0.00 0.00 0.00 0.00 166.48 -28.83 0.00

P099062 2008 CN-ShiZheng Railway 300.00 0.00 0.00 0.00 0.00 299.25 0.00 0.00

P099112 2008 CN-Anhui Highway Rehab & Improvement

200.00 0.00 0.00 0.00 0.00 199.50 2.33 0.00

P099224 2008 CN-Liaoning Med. Cities (LMC) III

191.00 0.00 0.00 0.00 0.00 190.52 17.50 0.00

P077752 2007 CN-SHANDONG ENVMT 2

147.00 0.00 0.00 0.00 0.00 81.72 -43.62 0.00

P088964 2007 CN-Guangxi Integrated Forestry Dev

100.00 0.00 0.00 0.00 0.00 45.91 -42.25 0.00

P081776 2007 CN-GUANGDONG/PRD2

96.00 0.00 0.00 0.00 0.00 95.61 13.94 0.00

P086515 2007 CN-3rd National Railway

200.00 0.00 0.00 0.00 0.00 82.87 -55.53 0.00

P083322 2007 CN-SICHUAN URBAN DEV

180.00 0.00 0.00 0.00 0.00 150.35 66.35 0.00

P096285 2007 CN-MSE Finance 100.00 0.00 0.00 0.00 0.00 5.00 5.00 0.00

57

P075613 2007 CN-Shaanxi Ankang Road Development

300.00 0.00 0.00 0.00 0.00 250.51 24.62 0.00

P091020 2007 CN-Fujian Highway Sector Investment

320.00 0.00 0.00 0.00 0.00 75.66 -136.13

0.00

P092618 2007 CN-LIAONING MED CITIES INFRAS 2

173.00 0.00 0.00 0.00 0.00 162.57 5.00 0.00

P095315 2007 CN-W. Region Rural Water & Sanitation

25.00 0.00 0.00 0.00 0.00 21.94 -1.17 0.00

P085333 2006 CN-5th Inland Waterways

100.00 0.00 0.00 0.00 0.00 24.83 11.50 0.00

P096158 2006 CN-Renewable Energy II (CRESP II)

86.33 0.00 0.00 0.00 0.00 69.44 45.77 0.00

P093906 2006 CN-3rd Jiangxi Hwy 200.00 0.00 0.00 0.00 0.00 22.22 -71.95 0.00

P099992 2006 CN-Liaoning Medium Cities Infrastructure

218.00 0.00 0.00 0.00 0.00 154.73 0.89 0.00

P086629 2006 CN-Heilongjiang Dairy 100.00 0.00 0.00 0.00 0.00 86.14 45.97 33.64

P085124 2006 CN-Ecnomic Reform Implementation

20.00 0.00 0.00 0.00 0.00 17.11 10.61 0.00

P084742 2006 CN-IAIL III 200.00 0.00 0.00 0.00 0.00 42.93 -14.22 0.00

P075732 2006 CN-SHANGHAI URBAN APL2

180.00 0.00 0.00 0.00 0.00 141.66 60.83 0.00

P081255 2006 CN-Changjiang/Pearl River Watershed Reha

100.00 0.00 0.00 0.00 0.00 89.13 30.79 0.00

P081348 2006 CN-HENAN TOWNS WATER

150.00 0.00 0.00 0.00 0.00 128.80 33.80 0.00

P070519 2006 CN-Fuzhou Nantai Island Peri-Urban Dev

100.00 0.00 0.00 0.00 0.00 94.57 36.24 0.00

P075730 2005 CN-HUNAN URBAN DEV

172.00 0.00 0.00 0.00 0.00 136.39 71.22 0.00

P071094 2005 CN - Poor Rural Communities Development

100.00 0.00 0.00 0.00 0.00 47.78 40.71 0.00

P069862 2005 CN - Agricultural Technology Transfer

100.00 0.00 0.00 0.00 0.00 60.16 40.86 0.00

P068752 2005 CN-Inner Mongolia Highway & Trade Corrid

100.00 0.00 0.00 0.00 0.00 7.73 -17.69 0.00

P057933 2005 CN-TAI BASIN URBAN ENVMT

61.00 0.00 0.00 0.00 0.00 14.84 12.32 0.00

P086505 2005 CN-NINGBO WATER & ENVMT

130.00 0.00 0.00 0.00 0.00 45.77 -10.65 0.00

P081346 2005 CN-LIUZHOU ENVIRONMENT MGMT

100.00 0.00 0.00 0.00 0.00 31.02 -2.04 0.00

P081161 2005 CN-CHONGQING SMALL CITIES

180.00 0.00 0.00 0.00 0.00 88.18 33.50 0.00

58

P066955 2004 CN-ZHEJIANG URBAN ENVMT

133.00 0.00 0.00 0.00 0.00 65.91 49.64 0.00

P065463 2004 CN-Jiangxi Integrated Agric. Modern.

100.00 0.00 0.00 0.00 0.00 25.47 17.39 0.00

P081749 2004 CN-Hubei Shiman Highway

200.00 0.00 0.00 0.00 1.00 0.73 1.73 0.00

P069852 2004 CN-Wuhan Urban Transport

200.00 0.00 0.00 0.00 1.00 17.32 18.32 1.26

P077137 2004 CN-4th Inland Waterways

91.00 0.00 0.00 0.00 0.46 18.61 14.98 14.48

P065035 2004 CN-Gansu & Xinjiang Pastoral Development

66.27 0.00 0.00 0.00 0.00 4.23 1.24 0.00

P075728 2004 CN-GUANGDONG/PRD UR ENVMT

128.00 0.00 0.00 0.00 0.64 67.96 55.00 0.00

P073002 2004 CN-Basic Education in Western Areas

100.00 0.00 0.00 0.00 0.00 16.92 16.92 0.00

P040599 2003 CN-TIANJIN URB DEV II

150.00 0.00 0.00 0.00 0.00 111.71 95.37 15.45

P058847 2003 CN-3rd Xinjiang Hwy Project

150.00 0.00 0.00 0.00 0.00 4.58 4.58 0.00

P068058 2003 CN-Yixing Pumped Storage Project

145.00 0.00 0.00 0.00 0.00 34.52 34.52 0.00

P070191 2003 CN-SHANGHAI URB ENVMT APL1

200.00 0.00 0.00 0.00 0.00 48.28 40.86 0.00

P076714 2003 CN-2nd Anhui Hwy 250.00 0.00 0.00 0.00 0.00 11.16 11.16 0.00

P071147 2002 CN-Tuberculosis Control Project

104.00 0.00 0.00 0.00 0.00 33.31 30.53 0.00

P064729 2002 CN-Sustainable Forestry Development

93.90 0.00 0.00 0.00 0.00 3.80 3.80 0.00

P049436 2000 CN-CHONGQING URBAN ENVMT

200.00 0.00 0.00 0.00 29.50 3.68 33.18 -1.30

P042109 2000 CN-BEIJING ENVIRONMENT II

349.00 0.00 0.00 0.00 28.02 28.76 56.78 -23.03

P051856 1999 CN-Accounting Reform & Development

27.40 5.61 0.00 0.00 0.00 3.84 3.69 3.74

P042299 1999 CN-Tec Coop Credit IV 10.00 35.00 0.00 0.00 5.84 8.02 11.24 1.03

Total: 8,469.30 40.61

0.00

0.00

66.46

4,475.78 709.79

45.27

59

STATEMENT OF IFC’s Held and Disbursed Portfolio

In Millions of US Dollars

Committed Disbursed

IFC IFC

FY Approval

Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.

2002 ASIMCO 0.00 10.00 0.00 0.00 0.00 10.00 0.00 0.00

2006 ASIMCO 0.00 0.00 4.12 0.00 0.00 0.00 3.61 0.00

2005 BCCB 0.00 59.21 0.00 0.00 0.00 59.03 0.00 0.00

2003 BCIB 0.00 0.00 12.04 0.00 0.00 0.00 0.00 0.00

2006 BUFH 8.14 0.00 0.00 0.00 8.14 0.00 0.00 0.00

2005 Babei 0.00 5.00 0.00 0.00 0.00 5.00 0.00 0.00

Babei Necktie 11.00 0.00 0.00 6.00 8.94 0.00 0.00 4.88

1999 Bank of Shanghai 0.00 21.76 0.00 0.00 0.00 21.76 0.00 0.00

2000 Bank of Shanghai 0.00 3.84 0.00 0.00 0.00 3.84 0.00 0.00

2002 Bank of Shanghai 0.00 24.67 0.00 0.00 0.00 24.67 0.00 0.00

2005 BioChina 0.00 3.70 0.00 0.00 0.00 3.13 0.00 0.00

2002 CDH China Fund 0.00 2.02 0.00 0.00 0.00 0.00 0.00 0.00

2005 CDH China II 0.00 17.99 0.00 0.00 0.00 11.38 0.00 0.00

2006 CDH Venture 0.00 20.00 0.00 0.00 0.00 0.51 0.00 0.00

2005 CT Holdings 0.00 0.00 40.00 0.00 0.00 0.00 0.00 0.00

2004 CUNA Mutual 0.00 10.53 0.00 0.00 0.00 0.00 0.00 0.00

2006 Capital Today 0.00 25.00 0.00 0.00 0.00 0.32 0.00 0.00

2005 Changyu Group 0.00 18.07 0.00 0.00 0.00 18.07 0.00 0.00

1998 Chengdu Huarong 3.36 3.20 0.00 3.13 3.36 3.20 0.00 3.13

2004 China Green Ener 20.00 0.00 0.00 0.00 15.00 0.00 0.00 0.00

2004 China Re Life 0.00 0.27 0.00 0.00 0.00 0.27 0.00 0.00

1994 China Walden Mgt 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00

2006 Chinasoft 0.00 0.00 15.00 0.00 0.00 0.00 10.00 0.00

2004 Colony China 0.00 15.31 0.00 0.00 0.00 9.29 0.00 0.00

2004 Colony China GP 0.00 0.84 0.00 0.00 0.00 0.49 0.00 0.00

2006 Conch 81.50 40.93 0.00 0.00 81.50 0.00 0.00 0.00

2006 Dagang NewSpring 25.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2002 Darong 10.00 0.24 0.00 8.00 6.67 0.24 0.00 5.33

2006 Deqingyuan 0.00 2.85 0.00 0.00 0.00 2.85 0.00 0.00

1994 Dynamic Fund 0.00 2.21 0.00 0.00 0.00 2.01 0.00 0.00

2007 Epure 0.00 10.00 0.00 0.00 0.00 0.00 0.00 0.00

2004 Fenglin 17.64 0.00 6.00 13.47 13.64 0.00 6.00 12.53

60

2006 Fenglin HJ MDF 0.23 0.00 0.00 3.27 0.00 0.00 0.00 0.00

2005 Five Star 0.00 0.00 7.00 0.00 0.00 0.00 0.00 0.00

2006 GDIH 50.85 0.00 0.00 0.00 50.85 0.00 0.00 0.00

2003 Great Infotech 0.00 1.73 0.00 0.00 0.00 1.03 0.00 0.00

2006 Hangzhou RCB 0.00 10.85 0.00 0.00 0.00 0.00 0.00 0.00

2005 HiSoft Tech 0.00 4.00 0.00 0.00 0.00 3.00 0.00 0.00

2006 HiSoft Tech 0.00 4.34 0.00 0.00 0.00 1.74 0.00 0.00

2004 IB 0.00 52.18 0.00 0.00 0.00 52.18 0.00 0.00

2004 Jiangxi Chenming 40.00 12.90 0.00 18.76 40.00 12.90 0.00 18.76

2006 Launch Tech 0.00 8.35 0.00 0.00 0.00 8.33 0.00 0.00

2001 Maanshan Carbon 5.25 2.00 0.00 0.00 5.25 2.00 0.00 0.00

2005 Maanshan Carbon 11.00 1.00 0.00 0.00 5.00 1.00 0.00 0.00

2005 Minsheng 15.75 0.00 0.00 0.00 7.00 0.00 0.00 0.00

2006 Minsheng & IB 25.09 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2001 Minsheng Bank 0.00 23.50 0.00 0.00 0.00 23.50 0.00 0.00

2005 Minsheng Bank 0.00 2.80 0.00 0.00 0.00 2.79 0.00 0.00

2001 NCCB 0.00 8.94 0.00 0.00 0.00 8.82 0.00 0.00

1996 Nanjing Kumho 0.00 3.81 0.00 0.00 0.00 3.81 0.00 0.00

2004 Nanjing Kumho 31.38 2.23 0.00 0.00 31.38 2.23 0.00 0.00

2006 Neophotonics 0.00 0.00 10.00 0.00 0.00 0.00 10.00 0.00

2001 New China Life 0.00 5.83 0.00 0.00 0.00 5.83 0.00 0.00

2005 New Hope 0.00 0.00 45.00 0.00 0.00 0.00 0.00 0.00

1995 Newbridge Inv. 0.00 0.22 0.00 0.00 0.00 0.22 0.00 0.00

2005 North Andre 8.00 6.74 0.00 0.00 0.00 4.25 0.00 0.00

2003 PSAM 0.00 2.01 0.00 0.00 0.00 0.00 0.00 0.00

RAK China 13.00 0.00 0.00 0.00 13.00 0.00 0.00 0.00

2006 Renaissance Sec 0.00 0.00 20.04 0.00 0.00 0.00 0.00 0.00

2006 Rongde 0.00 35.00 0.00 0.00 0.00 31.38 0.00 0.00

SAC HK Holding 0.00 1.60 0.00 0.00 0.00 1.00 0.00 0.00

2003 SAIC 12.00 0.00 0.00 0.00 12.00 0.00 0.00 0.00

2006 SBCVC 0.00 20.00 0.00 0.00 0.00 2.00 0.00 0.00

2000 SEAF SSIF 0.00 3.74 0.00 0.00 0.00 3.37 0.00 0.00

SH Keji IT 3.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2004 SHCT 38.18 0.00 0.00 28.64 29.04 0.00 0.00 21.78

2004 SIBFI 0.14 0.07 0.00 0.00 0.00 0.07 0.00 0.00

1998 Shanghai Krupp 19.25 0.00 0.00 36.75 19.25 0.00 0.00 36.75

2006 Shanshui Group 50.00 5.50 2.20 0.00 50.00 5.50 0.00 0.00

1999 Shanxi 12.61 0.00 0.00 0.00 12.61 0.00 0.00 0.00

SinoSpring 0.00 0.00 20.00 0.00 0.00 0.00 0.00 0.00

61

Stora Enso 20.83 0.00 0.00 4.17 11.00 0.00 0.00 0.00

2005 Stora Enso 29.17 0.00 0.00 20.83 0.00 0.00 0.00 0.00

2006 Stora Enso 50.00 0.00 0.00 175.00 0.00 0.00 0.00 0.00

2006 TBK 4.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00

2006 VeriSilicon 0.00 1.00 0.00 0.00 0.00 1.00 0.00 0.00

Wanjie High-Tech 9.89 0.00 0.00 0.00 9.89 0.00 0.00 0.00

2004 Wumart 0.00 1.62 0.00 0.00 0.00 1.62 0.00 0.00

2003 XACB 0.00 17.95 0.00 0.00 0.00 0.64 0.00 0.00

2004 Xinao Gas 25.00 10.00 0.00 0.00 25.00 10.00 0.00 0.00

2006 Zhejiang Glass 50.00 24.96 0.00 18.00 0.00 0.00 0.00 0.00

2003 Zhengye-ADC 10.43 0.00 0.00 4.87 10.43 0.00 0.00 4.87

2002 Zhong Chen 0.00 4.78 0.00 0.00 0.00 4.78 0.00 0.00

2006 Zhongda_Yanjin 21.89 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total portfolio: 733.58

577.30

181.40

340.89

470.95

371.06

29.61

108.03

Approvals Pending Commitment

FY Approval

Company Loan Equity Quasi Partic.

2002 SML 0.00 0.00 0.00 0.00

2004 NCFL 0.00 0.00 0.02 0.00

2007 Xinao CTC 0.04 0.01 0.00 0.14

2004 China Green 0.00 0.00 0.01 0.00

2006 Launch Tech 0.01 0.00 0.00 0.00

2005 MS Shipping 0.00 0.01 0.00 0.00

2003 Peak Pacific 2 0.00 0.01 0.00 0.00

Total pending commitment:

0.05 0.03 0.03 0.14

62

Annex 14: Country at a Glance

East Lo wer-P OVER T Y and SOC IA L A sia & middle-

C hina P acif ic inco me2007Population, mid-year (millions) 1,320.0 1,914 3,437GNI per capita (Atlas method, US$) 2,360 2,180 1,887GNI (Atlas method, US$ billions) 3,120.9 4,174 6,485

A verage annual gro wth, 2001-07

Population (%) 0.6 0.8 1.1Labor force (%) 0.9 1.2 1.5

M o st recent est imate ( latest year available, 2001-07)

Poverty (% of population below national poverty line) .. .. ..Urban population (% of to tal population) 42 43 42Life expectancy at birth (years) 72 71 69Infant mortality (per 1,000 live births) 20 24 41Child malnutrition (% of children under 5) 7 13 25Access to an improved water source (% of population) 88 87 88Literacy (% of population age 15+) .. 91 89Gross primary enro llment (% of school-age population) 111 110 111 M ale 112 111 112 Female 111 109 109

KEY EC ON OM IC R A T IOS and LON G-T ER M T R EN D S

1987 1997 2006 2007

GDP (US$ billions) 268.2 952.7 2,657.9 3,280.1

Gross capital formation/GDP 37.3 37.9 44.4 ..Exports of goods and services/GDP 16.4 21.8 39.9 ..Gross domestic savings/GDP 37.3 42.4 52.3 ..Gross national savings/GDP 37.3 41.8 53.8 ..

Current account balance/GDP 0.0 3.9 9.4 11.5Interest payments/GDP 0.4 0.6 0.1 ..Total debt/GDP 13.2 15.4 12.1 ..Total debt service/exports 8.5 8.5 2.4 ..Present value of debt/GDP .. .. 11.9 ..Present value of debt/exports .. .. 27.7 ..

1987-97 1997-07 2006 2007 2007-11(average annual growth)GDP 10.3 9.5 11.6 11.9 10.4GDP per capita 8.9 8.7 11.0 11.2 9.7Exports of goods and services 10.8 22.7 23.3 22.8 15.8

ST R UC T UR E o f the EC ON OM Y

China

Lower-middle-income group

D evelo pment diamo nd*

Life expectancy

Access to improved water source

GNIpercapita

Grossprimary

enro llment

China

Lower-middle-income group

Eco no mic rat io s*

Trade

Indebtedness

Domesticsavings

Capital formation

63

1987 1997 2006 2007(% of GDP)Agriculture 26.8 18.1 11.7 ..Industry 43.9 47.5 48.1 .. M anufacturing 34.7 33.2 .. ..Services 29.3 34.4 40.2 ..

Household final consumption expenditure 48.7 43.4 33.5 ..General gov't final consumption expenditure 14.0 14.2 14.2 ..Imports of goods and services 16.4 17.3 32.1 ..

1987-97 1997-07 2006 2007(average annual growth)Agriculture 4.4 3.7 5.0 4.0Industry 13.9 10.5 12.5 13.4 M anufacturing 13.1 10.3 .. ..Services 9.4 10.2 12.4 12.2

Household final consumption expenditure 9.8 3.8 -2.5 ..General gov't final consumption expenditure 10.6 9.5 10.9 ..Gross capital formation 12.2 11.5 13.2 14.3Imports of goods and services 13.0 19.1 14.3 18.2

Note: 2007 data are preliminary estimates.

This table was produced from the Development Economics LDB database.

* The diamonds show four key indicators in the country (in bo ld) compared with its income-group average. If data are missing, the diamond will be incomplete.

0

5

10

15

20

02 03 04 05 06 07

GCF GDP

Gro wth o f capital and GD P (%)

0

10

20

30

40

02 03 04 05 06 07

Exports Imports

Gro wth o f expo rts and impo rts (%)

China

P R IC ES and GOVER N M EN T F IN A N C E1987 1997 2006 2007

D o mestic prices(% change)Consumer prices 7.3 2.8 1.5 4.6Implicit GDP deflator 5.1 1.5 3.3 5.2

Go vernment f inance(% of GDP, includes current grants)Current revenue 0.0 11.0 18.3 19.4Current budget balance -16.7 -0.1 3.0 3.0Overall surplus/deficit -22.1 -1.7 -0.7 -0.9

T R A D E1987 1997 2006 2007

(US$ millions)Total exports (fob) 39,437 182,792 969,073 .. Food 4,781 11,075 25,722 .. M ineral fuels, lubricants, and related materials 4,544 6,987 17,776 .. M anufactures 26,206 158,839 916,147 ..Total imports (cif) 43,216 142,370 791,614 .. Food 2,443 4,304 9,997 .. Fuel and energy 539 10,306 89,002 .. Capital goods 14,607 52,774 357,107 ..

Export price index (2000=100) 68 119 107 ..Import price index (2000=100) 84 103 124 ..Terms of trade (2000=100) 81 116 87 ..

0

500,000

1,000,000

1,500,000

01 02 03 04 05 06 07

Exports Imports

Expo rt and impo rt levels (US$ mill.)

-2

0

2

4

6

8

02 03 04 05 06 07

GDP def lator CPI

Inf lat io n (%)

64

B A LA N C E o f P A YM EN T S1987 1997 2006 2007

(US$ millions)Exports o f goods and services 43,868 207,239 1,061,681 ..Imports o f goods and services 43,950 164,416 852,769 ..Resource balance -82 42,823 208,912 ..

Net income -215 -11,004 11,755 ..Net current transfers 224 5,143 29,200 ..

Current account balance -73 36,962 249,867 377,812

Financing items (net) 1,733 -1,105 -2,842 -20,000Changes in net reserves -1,660 -35,857 -247,025 -357,812

M emo :Reserves including gold (US$ millions) 22,439 146,439 1,046,465 1,427,812Conversion rate (DEC, local/US$) 4.5 8.3 8.0 7.6

EXT ER N A L D EB T and R ESOUR C E F LOWS1987 1997 2006 2007

(US$ millions)Total debt outstanding and disbursed 35,340 146,697 322,845 .. IBRD 1,427 8,239 11,415 11,762 IDA 1,330 7,830 9,997 10,151

Total debt service 3,852 18,445 27,877 .. IBRD 208 858 1,443 1,561 IDA 12 81 316 349

Composition of net resource flows Official grants 210 266 363 .. Official creditors 626 4,315 901 .. Private creditors 5,462 8,134 7,500 .. Foreign direct investment (net inflows) 2,314 44,237 78,095 .. Portfo lio equity (net inflows) 0 5,657 42,861 ..

World Bank program Commitments 1,306 2,425 1,154 1,361 Disbursements 702 2,275 1,169 1,208 Principal repayments 97 377 1,144 1,184 Net flows 605 1,898 25 24 Interest payments 124 562 615 727 Net transfers 482 1,335 -590 -703

Note: This table was produced from the Development Economics LDB database. 9/24/08

0

5

10

15

01 02 03 04 05 06 07

C urrent acco unt balance to GD P (%)

G: 173,377

A: 11,415

D: 6,326

B: 9,997

F: 94,118

E: 27,612

A - IBRDB - IDA C - IM F

D - Other mult ilateralE - BilateralF - PrivateG - Short-term

C o mpo sit io n o f 2006 debt (US$ mill.)

65

Annex 15: Map