Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 3 1446-CHA

PROJECT APPRAISAL DOCUMENT

O N A

PROPOSED L O A N

IN THE AMOUNT OF US$130 MILL ION

TO THE

PEOPLE’S REPUBLIC OF CHINA

FOR THE

NINGBO WATER AND ENVIRONMENT PROJECT

February 16,2005

Urban Development Sector Unit 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. I t s contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS (Exchange Rate Effective January 14,2005)

RMBY 1 = US$0.12 Currency Unit = Renminbi Yuan (RMB Y)

US$l.OO = RMB Y8.27

AIEC B O D CMSC EIA EMP EPB EU FIS FMS GDP GOC I D C I C B MBD M O F M D P C N C B NMFB NWEP NWSC PMD PMO PMU RAP SA SEPA SOE UFW UMB WTP WTW WWTP

NINGBO FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS Average Incremental Economic Cost Biochemical Oxygen Demand C ix i Municipal Sewage Company Environmental Impact Assessment Environmental Management Plan Environmental Protection Bureau European Union Financial Information Systems Financial Management Specialist Gross Domestic Product Government of China Interest During Construction In tern at i on a1 Competitive Bidding Model Bidding Document Ministry o f Finance Municipal Development Planning Commission National Competitive Bidding Ningbo Municipal Finance Bureau Ningbo Water and Environment Project Ningbo Water Supply Company Price Management Division Project Management Office Project Management Unit Resettlement Action Plan Special Account Chinese State Environmental Protection Agency Statement o f Expense Unaccounted for Water Urban Management Bureau Water Treatment Plant Water Treatment Works Waste Water Treatment Plant

Vice President: Mr. Jemal-ud-din Kassum

Sector Director: Mr. Keshav Varma Mr. Greg Browder

Country Director: Mr. David Dollar

Task Team Leader:

FOR OFFICIAL USE ONLY CHINA

Ningbo Water and Environment Project

CONTENTS

Page

A . STRATEGIC CONTEXT AND RATIONALE .................................................................. 1

1 . 2 . 3 .

Country and sector issues .................................................................................................... 1

Rationale for Bank involvement ......................................................................................... 2

Higher level objectives to which the Project contributes .................................................... 2

B . PROJECT DESCRIPTION ................................................................................................. 3 Lending instrument ............................................................................................................. 3

Program objective and Phases: Not Applicable .................................................................. 3

Project components ............................................................................................................. 3

Lessons learned and reflected in the Project design ............................................................ 4

1 . 2 . 3 . 4 . 5 . 6 .

Project development objective and key indicators .............................................................. 3

Alternatives considered and reasons for rejection ............................................................... 5

C . IMPLEMENTATION ........................................................................................................... 5 Partnership arrangements ................................................................................................... 5 1 .

2 . Institutional and implementation arrangements .................................................................. 6

3. Monitoring and evaluation o f outcomes/results .................................................................. 6 4 . Sustainability ....................................................................................................................... 7

5 . 6 .

Critical r isks and possible controversial aspects ................................................................. 7

Loadcredit conditions and covenants ................................................................................. 8

D . APPRAISAL SUMMARY .................................................................................................... 9 1 . Economic and financial analyses ........................................................................................ 9 2 . Technical ........................................................................................................................... 11

3 . Fiduciary ............................................................................................................................ 12

4 . Social ................................................................................................................................. 12

5 . Environment ...................................................................................................................... 13

6 . Safeguard policies ............................................................................................................. 14

7 . Policy Exceptions and Readiness ...................................................................................... 15

Th is document has a restr icted d is t r ibut ion and may be used by recipients O ~ Y in the performance o f the i r of f ic ia l duties . I t s contents may n o t be otherwise disclosed jwi thout W o r l d Bank author izat ion . ------A

Annex 1: Sector and Program Background .............................................................................. 16

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ................. 22

Annex 3: Results Framework and Monitoring ......................................................................... 23

Annex 4: Detailed Project Description ...................................................................................... 25

Annex 5: Project Costs ................................................................................................................ 29

Annex 6: Implementation Arrangements ................................................................................. 30

Annex 7: Financial Management and Disbursement Arrangements ..................................... 32

Annex 8: Procurement Arrangements ...................................................................................... 37

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

Annex 10: Safeguard Policy Issues ............................................................................................ 55

Annex 11: Project Preparation and Supervision ...................................................................... 63

Annex 12: Documents in the Project F i le .................................................................................. 64

Annex 13: Statement of Loans and Credits .............................................................................. 65

Annex 14: Country at a Glance .................................................................................................. 70

Map: IBRD 33554 and IBRD 33702

CHINA

NINGBO WATER AND ENVIRONMENT PROJECT

PROJECT APPRAISAL DOCUMENT

EAST ASIA AND PACIFIC

EASUR Date: February 16, 2005 Country Director: David Dollar Sector Director: Keshav Varma

Team Leader: Greg J. Browder Sectors: Water supply (50%); Sewerage (50%) Themes: Pollution management and environmental health (P); Water resource management (S); Municipal governance and institution building (S) Environmental screening category: Full Assessment

Project ID: PO86505

Lending Instrument: Specific Investment Loan

[XI Loan [ ] Credit [ ] Grant [ ] Guarantee [ 3 Other:

For Loans/Credits/Others: Total Bank financing (US$m.): 130.0 Proposed terms: Single Currency, Variable Spread Loan, 20 years inclusive of 5 years grace, front-end fee of 1% subiect to 50 basis Point waiver, and commitment fee of 0.75%.

BORROWFR I 3Y.U I Y1.U I 1ju.u

Total: I 184.4 I 107.1 1 291.5

Borrower: PEOPLE’S REPUBLIC OF CHINA

Responsible Agency: Ningbo Municipal Development Planning Commission Contact People: 1. Ms. Xu Xu, Vice Director, World Bank Project Management Office 1509/R, 15th Floor, Tianning Tower, 138 West Zhongshan Road, Post Code 3 15000, Ningbo China Tel: 86-574-8728-0409; Fax: 86-574-8728-0430; E-M: xx@nbdPc.g;ov.cn

2. Mr. Li Zhibo, Deputy Division Chief, Division of Foreign Capital Utilization, Ningbo Municipal Development Planning Commission 91 North Jiefang St., Post Code: 315000, Ningbo China Tel: 086-574-87 18-6862, Mobile Tel: 13 185927686; Fax: 086-574-8736-7370

Does the Project depart f rom the CAS in content or other significant respects?

Does the Project require any exceptions f rom Bank policies? Ref. PAD 0 . 7 Does the Project include any critical r i sks rated “substantial” or “high”? Ref. PAD C.5 Does the Project meet the Regional criteria for readiness for implementation? Ref. PAD D. 7 Project development objective Ref. PAD B.2, Technical Annex 3

[ ]Yes Ref. PAD A.3 [ X I N O

[ ]Yes [XINO

[ x ]Yes [ ] N o

[ x ]Yes [ ] N o

The Project w i l l facilitate the expansion o f water and wastewater services in Ningbo City and C ix i City respectively in an economically efficient and environmentally sustainable manner, thereby protecting public health, improving the environment, and supporting economic growth.

Project description: Ref. PAD B.3.a, Technical Annex 4

Component 1: Ninnbo City Water Supply (US$157.9 million): The component includes: i) raw water supply line; ii) water treatment plant; and iii) treated water transmission mains.

Component 2: C ix i City Wastewater (US$128.4 million): The component includes: i) two wastewater treatment plants; and ii) associated collection system main and link sewers.

Component 3: Institutional Development (US$4.5 million): Technical assistance to improve water planning, utility regulation, operational performance, and design review and construction management support.

Which safeguard policies are triggered, i f any? Ref. PAD 0.6, Technical Annex 10 9 Environmental Assessment 9 Involuntary Resettlement 9 Damsafety 9 Cultural Property

Significant, Non-Standard Conditions: Ref. PAD C.7 Board presentation: None

Loadcredit effectiveness:

1. Execution o f subsidiary loan agreements satisfactory to the Bank between: (i) Ningbo Finance Bureau and Ningbo Water Supply Company; (ii) Ningbo Finance Bureau and Cixi Ci ty Finance Bureau; and (iii) Cix i City Finance Bureau and C ix i Municipal Sewerage Company.

Covenants applicable to Project implementation:

Financial Covenants:

1. N W S C Revenue Covenant: NWSC shall generate each year, after covering total operating expenses (excluding depreciation) and debt service requirements, funds from internal sources equivalent to not less than 20% o f the annual average o f the capital expenditures incurred, or expected to be incurred, for that year, the previous year, and the next fol lowing year.

2. CMSC Revenue Covenant: CMSC shall generate for each year, total revenues equivalent to not less than the sum of: (i) i t s total operating expenses (excluding depreciation); and (ii) debt service requirements.

3. Debt Service Ratio Covenant: CMSC and NWSC shall not incur any debt, unless a reasonable forecast o f the revenues and expenditures shows that the estimated net revenues for each fiscal year, during the term o f the debt to be incurred, shall be at least 1.3 times the estimated debt service requirements on al l debt, including the debt to be incurred.

4. Debt-to-Asset Ratio Covenant: CMSC and NWSC shall not incur any debt, if after the incurrence o f such debt the ratio o f debt to assets shall be greater than 0.7 to 1.

Dated Covenants:

5. To ensure compliance with the revenue and debt service covenants, the Ningbo Municipal Government w i l l ensure tariff adjustments for NWSC and CMSC no later than July 1,2006 and September 1, 2008. 6. The Ningbo Municipal Government w i l l prepare a Ningbo City Zntegrated Water Supply Plan by December 31,2006, under terms o f reference acceptable to the Bank, and talung into consideration the Bank’s view on said Plan.

7. The Ningbo Water Supply Company shall prepare a Strategic Five Year Business Plan by December 3 1, 2007 under terms o f reference acceptable to the Bank and taking into consideration the Bank’s view on said Plan.

8. The Ningbo Municipal Government w i l l ensure that the Ningbo Water Resources Bureau prepares, under terms o f reference acceptable to the Bank: i) an Emergency Preparation Plan for the Zhougongzhai and Jiaokou dams b y December 3 1,2006; and ii) semi-annual reports for the Bank, under terms o f reference acceptable to the Bank, on construction progress and post- commission surveillance for the Zhougongzhai dam.

A. STRATEGIC CONTEXT AND RATIONALE 1. Country and sector issues

Approximately 95% o f the urban population in China i s served b y a municipal water supply system, and 68% have access to improved sanitation. Seasonal water shortages, however, affect more than 400 o f China’s 669 cities, and around 110 cities are facing serious shortages requiring severe water use restrictions. Water shortages cause an average o f US$36 bi l l ion in economic loss per year in China. The lack o f adequate wastewater collection and treatment infrastructure results in severe water pollution, with an estimated 88% of rivers and 70% o f coastal seas classified as moderately to highly polluted. The loth Five Year Plan (2001-2005) called for increasing the percentage o f urban wastewater treated from 15% to 45%, and all cities with populations greater than 5 mi l l ion should have treatment coverage o f over 60%. The Government has also mandated new pol icy directions, including integrated water resource management, commercialization o f the water and wastewater sector, setting tariffs at full cost-recovery levels, and attracting private investment. Although the ambitious targets o f the loth Five Year Plan w i l l probably not be met, the more affluent coastal cities, such as Ningbo Municipality, are taking the lead in constructing new infrastructure and experimenting with pol icy reforms.

Ningbo Municipality i s located approximately 150 k m s south o f Shanghai on the edge of Hangzhou Bay. Ningbo i s the primary deep-water port for the Yangzte Delta region, and has a thriving industrial sector focused on the export o f manufactured goods. Although part o f Zhejiang Province, the Municipality i s a separate economic planning unit and i s not administratively controlled b y the provincial government. The primary city in the Municipality i s “Ningbo City” which extends over six urban districts and covers one quarter o f the Municipality. The Municipality also includes three rural counties, and two city-level counties, one o f which i s called “Cixi City.” The Project finances investments in Ningbo City and Cix i City.

A key element in Ningbo’s economic success has been the development o f a vibrant private sector. Ningbo’ s entrepreneurial trading heritage, and the relative absence o f large state-owned enterprises, has given local businesses an opportunity to take advantage o f their favorable location on international shipping lanes and close proximity to the economically vibrant Yangtze Delta. The Municipal Government’s policy i s to foster private sector investment, promote education and science, and provide high-quality infrastructure for the region. Investments in water infrastructure, however, have lagged behind rapid economic development.

Ningbo i s addressing water issues through a regional approach, with the establishment o f a multi-sector “Water and Environment Leading Group,” chaired by the Executive Municipal Vice Mayor and headed b y the Municipal Development Planning Commission. The Leading Group i s facilitating investments and management systems which cut across administrative boundaries to resolve Ningbo’s serious water and wastewater problems, including those in Ningbo and Cix i Cities.

Ningbo City i s facing a two dimensional water crisis common to many Chinese cities: frequent shortages and poor water quality. Water supply deficiencies pose a drag on economic growth and endanger public health. The core urban area o f Ningbo City i s served by the Ningbo Water

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Supply Company (NWSC), and around 30 small companies provide water to towns located within Ningbo City. The companies draw water primarily from highly polluted local rivers and use outdated treatment technology, rendering the quality o f piped water questionable. Due to the lack of storage reservoirs and a reliance on local rivers, Ningbo City often experiences water shortages during the dry season. The City’s rapid economic expansion has increased demand on the order o f 5-10% per year, and in spite o f an aggressive water conservation program, the duration and intensity o f droughts have been increasing. The Ningbo Municipal Government has started implementation o f an ambitious program to develop high quality water supplies, transfer the water to Ningbo City, and upgrade water treatment and distribution infrastructure. NWSC i s a well established company serving the core urban area, but there i s scope for improving i t s operational and financial performance. The NWSC service area w i l l be expanded to include all 2.5 mi l l ion residents o f Ningbo City, incorporating the surrounding town water supply systems, and thereby obtaining economies o f scale and professional management.

C ix i City, located north o f Ningbo City on the shore o f Hangzhou Bay, has a population o f around one mi l l ion people and a dynamic economy. Currently, only 10% o f the wastewater in Cix i i s treated, and the lack o f an adequate wastewater management system i s inhibiting potential investors, increasing pollution to Hangzhou Bay, and creating public health concerns. C ix i Ci ty plans to provide coverage to all urban areas and industries by 2010. A new company, the C ix i Municipal Sewage Company (CMSC) was established in mid-2004 to be responsible for all wastewater collection and treatment facilities. The CMSC management i s facing the dual challenge o f starting up a new company and managing a large capital works program.

2. Rationale for Bank involvement

The World Bank has been a close partner in Ningbo’s water sector over the past decade. The Zhejiang Multi-Cities Development Project (Ln. 24750 closed 12/31/01) financed critical water supply infrastructure for Ningbo City, and the Zhejiang Urban Environment Project (Ln 47240, FY04) i s financing a significant portion o f Ningbo City’s wastewater program. The Ningbo Water and Environment Project (NWEP) w i l l finance additional investments for water supply in Ningbo City, and w i l l support the first comprehensive wastewater management system outside o f Ningbo City in neighboring C ix i City.

With i t s strong economy, Ningbo has many financing options. The decision to seek Wor ld Bank financing i s motivated primarily b y the desire o f municipal authorities to employ international methodologies, standards, and techniques to improve water and wastewater planning, construction, and service. In addition to the physical infrastructure, NWEP w i l l finance technical assistance activities in water supply strategic planning, utility price and regulatory reforms, and operational improvements for both NWSC and CMSC.

3. Higher level objectives to which the Project contributes

The proposed Ningbo Water and Environment Project w i l l address two key themes from the China Country Assistance Strategy: (i) accelerating the transition to a market economy through improving public sector management and delivery o f services; and (ii) facilitating an environmentally sustainable development process, through better management o f water

2

resources. T w o strategic issues for the Bank’s urban development program in China are incorporated into the Project design:

> A focus on urban water planning and resource management, where problems are reaching a crisis level in many cities, including Ningbo. The Project w i l l be the first major Bank- financed urban water supply operation since the mid-1990s.

P A concentration on regional integration, b y providing water and wastewater infrastructure, and management systems that transcend administrative boundaries.

Recent Wor ld Bank analytical work has highlighted the importance o f addressing the pressing needs o f urban water and wastewater management. Three key reports are: (i) China Water Resources Strategy (2002); (ii) China: Air, Land, and Water (2001); and (iii) China: Agenda for Water Sector Strategy for North China (2002), all o f which point to the development importance of Bank engagement in the water sector.

B. PROJECT DESCRIPTION 1. Lending instrument

The lending instrument i s a Specific Investment Loan. The Loan w i l l be a single currency, variable spread loan, with a maturity o f 20 years inclusive o f five years grace, front-end fee of 1% subject to 50 basis point waiver, and commitment fee o f 0.75%.

2. [If Applicable] Program objective and Phases: Not Applicable

3. Project development objective and key indicators

The Project w i l l facilitate the expansion and quality o f water and wastewater services in Ningbo City and C ix i City in an economically efficient and environmentally sustainable manner, thereby protecting public health, improving the environment, and supporting economic growth. The key indicators are:

9 Increase in the percentage o f water supplied f rom high quality and reliable water sources and treatment plants in Ningbo City f rom 10% to 75%; and

9 Increase in the percentage o f wastewater collected and treated in Cixi City f rom 10% to 65%.

4. Project components

Component 1: Ningbo Water Supply (US$157.9 mil l ion; IBRD-US$67.3 million): The component includes: (i) raw water supply l ine consisting o f an intake tower in Jiaokou reservoir and a 9.6 km tunnel; (ii) 500,000 m3/d Maojiaping water treatment plant; and (iii) treated water transmission pipes, including a new 47 km ring main around Ningbo City, and 29 k m s o f transmission pipes from Maojiaping water treatment plant to the new ring main. The component i s a significant part of Ningbo’s overall plan to service the entire city, improve water quality b y accessing new water sources and upgrade water treatment, and enhance distribution system

3

reliability and flexibility. The ring main w i l l be the first o f i t s kind in China and w i l l be one of the major technical innovations under the Project.

Component 2: C i x i Wastewater (US$128.4 million; IBRD-US$57.9 million): The component includes: (i) two wastewater treatment plants, one located in the north o f C i x i (100,000 m3/d) and one in the east (50,000 m3/d); and (ii) associated collection system mains and link sewers (230 km o f pipe and 58 pump stations). The component w i l l provide comprehensive wastewater services for al l urban areas in C ix i City, and help protect Hangzhou Bay.

Component 3: Institutional Development (US$4.5 million; IBRD-US$4.1 million): Technical assistance w i l l be provided to improve water planning, ut i l i ty price and service regulation, and enhance NWSC and CMSC operational and business management capacities. Design review and construction management technical assistance w i l l also be provided to ensure smooth implementation o f the infrastructure works.

5. Lessons learned and reflected in the Project design

Coastal cities in China, and particularly Ningbo City, are growing at a rapid pace which makes planning for utility services such as water and wastewater very challenging. Past experience in China has shown that demand i s typically over-estimated, mainly due to lack o f sophisticated planning techniques and inadequate consideration o f price elasticity o f demand. Original water demand estimates prepared b y NWSC domestic consultants were not realistic. NWSC changed domestic consultants and prepared revised and reduced estimates, which were verified by independent international consultants. The short-term forecasts up to 2010 are acceptable to the Bank for project planning purposes. Long-term demand forecasts up to 2040, however, should be adjusted over time to reflect changing conditions and the capital investment programs should be modified accordingly. The Project w i l l therefore assist Ningbo City wi th i t s long-term water supply planning, and prepare the basis for the next five year capital investment program from 2010-201 5.

Both C ix i and Ningbo City are embarking on simultaneous large capital investment programs in water supply and wastewater. Water users receive a consolidated water and wastewater bill (although the two services are separated in the bill), and thus w i l l experience a significant increase in overall water costs. Tariff increases in Ningbo, as throughout China, generally take considerable time to process, and lack o f timely approval can increase company financial risk. The Project design takes this into account by requiring tariff increases in 2006 and 2008, and including a technical assistance component to upgrade the analytical tools and procedures used to determine appropriate tariff adjustments.

Advanced technologies for water and wastewater treatment are often used in China without considering the financial or operational implications. Carbon-activated-filtration was originally proposed for the Maojiaoping water treatment plant, but was subsequently dropped when water quality tests showed that i t was not necessary. Tertiary treatment consisting o f chemical coagulation and filtration was originally proposed for the C i x i wastewater treatment plant (WWTP), but was subsequently replaced with an engineered wetland which wil l reduce operating cost and complexity.

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6. Alternatives considered and reasons for rejection

A comprehensive analysis was undertaken for the optimal location o f the treatment plants. Three alternatives were considered for the Maojiaoping site, and the site wi th the lowest cost and least resettlement issues was selected. For the C ix i WWTP, consideration was given according to having one, two, or three new plants. An engineering-economic analysis indicated that two new plants provided the optimal balance o f capital and operating costs.

Different alternatives for the layout o f the Ningbo City water distribution system were examined. Since the city i s essentially divided into three areas by rivers, consideration was given to maintaining the three essentially independent distribution systems and upgrading the three associated water treatment plants. This alternative was rejected in favor o f a ring main and two large treatment plants. The ring main-two plant option provides more flexibility and reliability, and the two new treatment plants are located outside o f the core urban area in locations more suitable for receiving new raw water supplies. The long-term plan i s to decommission the existing water treatment plants in the city, and release the land for higher value uses.

There are approximately 30 towns surrounding the core urban area in Ningbo City. Currently, these towns have their own water supply systems which rely on l ow quality local surface water sources and rudimentary treatment plants. One alternative would be to upgrade the existing town water systems and supply high quality raw water. This alternative was rejected in favor o f extending the NWSC service area to all towns. The NWSC option was chosen because i t would ensure high quality water supplies for all ci ty residents, lower costs due to NWSC’s economies of scale, and help equalize water supply tariffs throughout the city.

Private sector participation for both the Ningbo and C ix i components were considered. Given the urgency o f the water supply situation in Ningbo City, the Government requested N W S C to construct the new facilities, although there i s some consideration o f inviting strategic investors to support N W S C in the future. NWSC i s developing a separate water supply system for a large industrial estate and i s actively seeking private investors to support the project. The Bank task team discussed the option o f a management contract for the C ix i plants, but the C ix i government prefers the recently established CMSC to be responsible for al l aspects o f wastewater management.

C. IMPLEMENTATION 1. Partnership arrangements (if applicable)

The Project i s free-standing and does not have any other international co-financiers. Ningbo Municipality, however, i s seeking a Global Environment Facility (GEF) grant to support wetland conservation in Cix i City. The potential GEF funded activities are closely associated with the NWEP component in Cixi.

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2. Institutional and implementation arrangements

The Ningbo Municipal Development Planning Commission (MDPC) i s the executing agency for the Project. The Project Management Office (PMO) i s located under M D P C and i s ful ly mobilized wi th sufficient and adequately qualified staff. The PMO i s the Bank’s primary liaison in the implementation o f the Project, and takes responsibility for project monitoring and reporting. There w i l l be one special account located in and managed b y the Ningbo Municipal Finance Bureau. The P M O w i l l authorize reimbursements to the two implementing entities, NWSC and CMSC.

Policy direction for the Project w i l l be provided b y the Water and Environment Leading Group. The Leading Group i s headed by the Executive Vice Mayor o f the Municipality and i s composed o f Directors f rom the MDRC, Environmental Protection Bureau, Water Resources Bureau, Construction Bureau, and Finance Bureau. The Leading Group’s mandate i s to provide policy direction and planning support for integrated water and environmental management throughout the Municipality.

NWSC i s the implementing organization for Component 1. The company was legally established in 1982, but can trace i t s operating history back to 1926 with the city’s original water supply. The NWSC has created a Project Management Unit (PMU) under the direction of an Assistant Chief Engineer. The PMU i s staffed wi th qualified procurement, financial management, environmental, and resettlement staff. NWSC i s experienced in managing large capital investment projects, and i s also familiar wi th Bank procedures, as the company received financing under the Zhejiang Multi-Cities Development Project.

CMSC i s the implementing organization for Component 2. The company was legally established in mid-2004. Staff and existing assets were transferred from the C ix i Drainage Department to the CMSC shortly afterwards. Since the NWEP represents essentially al l o f CMSC’s capital investment program, there i s no distinct project management unit; rather the project i s under the direct supervision o f the CMSC General Manager, with the relevant departments providing procurement, financial management, environmental, and resettlement support. The CMSC has limited experience in managing large capital projects and i s not familiar wi th Bank procedures. These constraints w i l l be addressed through project financed technical assistance programs for Project and company management.

Component 3 i s aimed at a variety o f government agencies and the two companies, N W S C and CMSC. The P M O w i l l responsible for general implementation o f the component, but most activity w i l l take place at the company or agency level. Government agencies involved in the component include the C ix i and Ningbo price bureaus, construction commissions, and the Water and Environment Leading Group.

3. Monitoring and evaluation of outcomes/results

Annex 3 l i s t s the main outcome indicators for the Project, as wel l as the principle results indicators for each component. The PMO, NWSC, and CMSC w i l l regularly collect the data

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required for monitoring and evaluation o f outcomes/results. The Water and Environment Leading Group wil l review results on the basis o f progress reports, and take corrective action when needed.

Risks

To Project Development Objectives Inadequate tariff increases jeopardize NWSC and CMSC financial sustainability

4. Sustainability

Risk Mitigation Measures Risk Rating with

Mitigation'

P Covenants requiring tariff increases Modest in 2006 and 2008 P Technical assistance program to improve efficiency and efficacy o f tariff adjustments

Ningbo Municipal i ty i s committed to the success o f the Project as the future economic development o f Ningbo City and C ix i City partly depends on successful Project implementation. The degree o f importance attached to the Project i s reflected in the active participation o f high- level government officials in the Leading Group. The P M O has been established as a permanent government agency, and thus i s able to attract qualified individuals who are offered.job security and promotion potential. NWSC and CMSC have invested significant amounts o f their own funds in Project preparation and have prepared high quality feasibility studies, environmental assessments, and resettlement action plans.

Financial sustainability o f the companies i s the key to Project success. Ningbo City and C ix i City have demonstrated their commitment to ensuring adequate revenues for the companies by significantly increasing tariffs in 2004. Legal covenants for increasing tariffs in 2006 and 2008 have also been agreed upon b y the Municipal Government. Both N W S C and CMSC have well qualified technical staff that can ensure efficient operation o f the facilities.

5. Critical risks and possible controversial aspects

The Project design assumes that the rapid economic development in Ningbo w i l l continue for at least another decade. An unexpected economic slow down could significantly alter projected water (and wastewater) demand, reduce expected company revenue, and result in underutilized infrastructure. This systemic risk i s partly mitigated by the phasing o f infrastructure investments, to the extent possible, to respond to changes. Providing adequate water and wastewater services i s a necessary, but not sufficient condition, for sustaining economic growth.

Annex 10 (Safeguards) and Sections D.4, D.5, and D.6 below discuss the due diligence activities taken b y the Bank task team to ensure that there are no major reputational r isks, and the measures which w i l l be taken during implementation to ensure compliance with the Bank's safeguard policies. Risks associated more directly wi th the Project are summarized as follows:

Probability that an outcome wi l l not be achieved: High > 75%; Substantial > 50%; Modest > 25%; Low e 25%

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To Project Components 1. N W S C expands too quickly and does not plan appropriately.

2A. CMSC unable to efficiently manage project and comply with Bank procedures. 2B. CMSC does not develop into commercially-oriented public utility. Overall Risk Rating

6. Loadcredit conditions and covenants

P Technical assistance program to Modest develop a Strategic Business Plan based on sound water supply planning P Technical assistance program to Modest provide project management support

P Provide business management Significant technical assistance > Ensure adequate revenues

Modest

Conditions for Effectiveness:

1. Execution o f subsidiary loan agreements satisfactory to the Bank between: (i) Ningbo Finance Bureau and Ningbo Water Supply Company; (ii) Ningbo Finance Bureau and C ix i City Finance Bureau; and (iii) Cix i City Finance Bureau and C ix i Municipal Sewerage Company.

Kev ImDlementation Covenants:

Financial Covenants:

1. NWSC Revenue Covenant: NWSC shall generate for each year, after covering total operating expenses (excluding depreciation) and debt service requirements, funds f rom internal sources equivalent to not less than 20% of the annual average o f the capital expenditures incurred, or expected to be incurred, for that year, the previous year, and the next fol lowing year.

2. CMSC Revenue Covenant: CMSC shall generate for each year, total revenues equivalent to not less than the sum o f (i) i t s total operating expenses (excluding depreciation); and (ii) debt service requirements.

3 . Debt Service Ratio Covenant: CMSC and N W S C shall not incur any debt, unless a reasonable forecast o f the revenues and expenditures shows that the estimated net revenues for each fiscal year, during the term o f the debt to be incurred, shall be at least 1.3 times the estimated debt service requirements on al l debt, including the debt to be incurred.

4. Debt-to-Asset Ratio Covenant: CMSC and N W S C shall not incur any debt, if after the incurrence o f such debt the ratio of debt to assets shall be greater than 0.7 to 1. The objective of this covenant i s limit the companies f rom incurring large amounts o f short-debt (less than one year, but usually rolled over) which i s not captured in the debt service ratio.

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Dated Covenants:

5. T o ensure compliance with the revenue and debt service covenants, the Ningbo Municipal Government w i l l ensure tariff adjustments for NWSC and CMSC no later than July 1, 2006 and September 1,2008.

6. The Ningbo Municipal Government w i l l prepare a Ningbo City Integrated Water Supply Plan by December 3 1,2006, under terms o f reference acceptable to the Bank, and taking into consideration the Bank’s view on said Plan.

7. The Ningbo Water Supply Company shall prepare a Strategic Five Year Business Plan by December 3 1,2007 under terms o f reference acceptable to the Bank and taking into consideration the Bank’s view on said Plan.

8. The Ningbo Municipal Government w i l l ensure that the Ningbo Water Resources Bureau prepares, under terms o f reference acceptable to the Bank: i) an Emergency Preparation Plan for the Zhougongzhai and Jiaokou dams b y December 3 1,2006; and ii) semi-annual reports for the, Bank, under terms o f reference acceptable to the Bank, on construction progress and post- commission surveillance for the Zhougongzhai dam.

Existing 2004

D. APPRAISAL SUMMARY 1. Economic and financial analyses

Projected Jan. 2006 I Jan. 2008 I Jan. 2010

I I

Projected Tariffs: Financial projections have been prepared for N W S C and CMSC on an annual basis over the 2004 - 2015 period. A price elasticity o f demand o f -25% was used in Ningbo and all categories in C ix i except for industries. The industrial base in C ix i i s modern and has generally already adopted water saving technologies and thus no price impact on demand i s expected. The projections are based on the requirement o f each company to comply wi th the proposed project financial covenants. The projected tariff requirements are summarized below:

1.42 0.49 1.91

2.06 0.37 2.43

Projected Tariff Requirements Weighted Average Tariff

1.88 2.16 2.16 0.59 0.59 0.79 2.47 2.75 2.95 32% 15% 0%

2.37 2.72 2.72 0.86 1.43 1.69 3.23 4.15 3.41 132% 66% 18%

Ningbo Water Supply Wastewater Total Increase in Water Tariff Cixi Water Supply Wastewater Tariff Total Increase in Wastewater Tariff

1MB/m3 water consumed. current terms)

NWSC Financial Analysis: As o f January 2004 the average water supply tari f f was increased b y 17% to 1.42 RMB/m3. This represents a 17% increase relative to the previous tariff, which had been implemented in August 1999. Ningbo appears to have had dif f iculty implementing regular and timely tariff increases, which suggests a need for improvements in underlying regulatory mechanisms. The recent tariff increases had been under review by the Municipal Government for at least 30 months. During this period, N W S C incurred net losses and needed to rely heavily on

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relatively short-term commercial bank loans to finance much needed capital works. The project w i l l provide technical assistance to those agencies within the Ningbo Municipal Government responsible for price and service regulation for strengthening these mechanisms.

Projections prepared for NWSC indicate that ongoing and planned capital investments w i l l place a significant financial burden on the company over the next decade. Actual and planned capital expenditures over the 10 year period from 2002 to 2011 are estimated as RMB 4.1 billion, o f which 70% i s concentrated in the 2004 - 2008 period. Over this five year period, the company’s proposed NWEP component accounts for just under half o f total planned investment. Assuming that NWSC can successfully implement the required tariff increases, the company i s projected to be able to operate on a financially sustainable basis, but due to i t s very large capital investment program, cash f low and debt service w i l l need to be carefully managed. Net income i s projected to be positive in al l years enabling the company to comply with the project revenue covenant, with the possible exception o f 2006.

A comprehensive sensitivity analysis was undertaken to assess the impact o f potential changes in the key variables. Of the single variable events, a one year delay in tari f f increases, has the greatest impact. A delay in tariff increases, and a 5% reduction in water demand i s projected to result cash shortfalls of about RMB 140 mi l l ion and RMB 200 mi l l ion in 2006 and 2008 respectively. Whi le this might also be addressed through debt deferments and new borrowings, repaying this additional debt could require up to 10 years.

CMSC Financial Analysis: Until April 2004, the city government applied wastewater charges only to commercial and special use groups. However, as o f M a y 2004, new wastewater tariffs were introduced that apply to al l customer groups. The average wastewater tariff in C ix i i s now RMB 0.37/m3 compared to RMB 0.49/m3 in the Ningbo urban core. CMSC, in contrast to NWSC, w i l l depend heavily on equity contributions to fund i t s capital investment program. C ix i City w i l l contribute approximately 350 mi l l ion RMB to CMSC, about one-third o f the total project cost. An analysis o f the fiscal impact indicates that the project counterpart contributions to be allocated b y the C ix i Government are well within i t s financial capacity.

The financial projections prepared for CMSC indicate that very significant tariff increases w i l l be required to enable i t to operate on a financially viable basis. The average tariff w i l l need to be increased by about 130% as o f 2006, and then by a further 66%, to RMB 1.43/m3, by the beginning o f 2008. The increase in 2008 i s designed to fully recover NWEP operating and maintenance costs and to meet debt service on the NWEP project loans. Additional, but smaller increases are projected to be required in 2010 and 2012, o f 18% and 15% respectively, which would bring the average tariff to just under RMB 2/m3. Even with these very large tariff increases, debt service w i l l place a considerable strain on CMSC, particularly over the 2010 - 20 14 period. Assuming that the required tariff increases are successfully implemented beginning in 2006, the company should be able to comply wi th the cost recovery covenant in al l years. However, the projections indicate that CMSC might experience some dif f iculty in meeting the debt service covenant in those years in which debt service i s greatest.

Changes in key variables have been assessed in terms o f their potential impact on the financial position o f CMSC. A one year delay in implementing the required tariff increases would have the greatest adverse impact on the company. A delay in the implementation o f the first two

10

increases now planned for the beginning o f 2006 and 2008 could constrain CMSC’s capacity to provide i t s share o f project counterpart funding. The estimated shortfall i s about RMB 20 million, which could be addressed through an increase in the city government’s contribution. The city government has agreed to meet al l counterpart requirements not met b y CMSC.

Ability to Pay. An affordability analysis has been undertaken and two representative household groups were considered: (i) the average income group; and, (ii) the low-income group, which i s defined as the household earning the average o f the lowest 10th percentile o f income distribution. The proposed tariff increases are affordable for both groups, with the watedwastewater bills accounting for less than 1% o f the average family income and 1.5% o f the low income households. For the very poorest households, the municipal government extends low income protection under which a minimum income o f RMB 280 - RMB 320 per person, depending on the number o f persons in the household, i s guaranteed. This amount includes a provision for lifeline ut i l i ty services. With increases in both water and wastewater tariffs in 2004, an additional direct subsidy amount has been provided to all households qualifying for the social assistance. In Ningbo, the entire increase in water and wastewater tariffs i s refunded on the first 10 m3 o f water consumed. In Cixi, the increase i s refunded for al l water consumed b y qualifying l ow income households.

NWSC Economic Analysis: A benefit-cost analysis was undertaken for the Ningbo water supply component which yielded an economic internal rate o f return o f 15.6%. Three benefits were incorporated into the analysis: i) value o f the incremental supply o f water; ii) improved water quality; and iii) reduction in bottled water usage. A least cost engineering-economic analysis was undertaken for the C ix i wastewater component. Details are provided in Annex 10.

2. Technical

The technical viability o f both the Ningbo water component and C ix i wastewater component has been confirmed b y the Bank task team. Independent international consultants have also reviewed the respective feasibility studies and provided design advice.

For the Ningbo component, the Maojiaping plant uses proven and appropriate treatment technology, The ring main i s an innovative measure to increase water service reliability and flexibility, and w i l l be the f i rs t o f i t s kind in China. An important issue in design o f the treatment plant and ring main i s the accuracy o f the water demand forecasts. In the short-term, Ningbo City has considerable flexibility in the pace at which i t downgrades and decommissions existing plants in the city center which rely on low quality raw water f rom local rivers. I f the 2010 water demand i s lower than forecast, the existing plants in the City center can be decommissioned or downgraded more quickly; alternatively, i f demand i s higher than anticipated, the plants can be kept in service longer. The ring main i s designed wi th a 40 year design horizon and conservative long-term forecasts were used to ensure adequate capacity. Hydraulic modeling was undertaken to confirm ring main size and distribution system layout.

A number of technical issues were reviewed for the C i x i wastewater component. C i x i City, l ike Ningbo City, i s growing rapidly and there i s considerable uncertainty in the wastewater forecasts, and thus a phased approach i s taken for the development o f the wastewater treatment plants. The collection system pipes are conservatively designed for the long-term flows. The

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long conveyance distance and retention time in the collection system makes septicity a potential concern, and appropriate measures w i l l be taken to reduce this risk. The wastewater w i l l be treated to Class I A standards for discharge into the large Cix i canal network. In order to meet this stringent standard, tertiary treatment i s necessary, and an engineered wetland has been chosen as the preferred form o f tertiary treatment. Water quality modeling was undertaken to determine the preferred location o f discharge points, and the water quality impacts on the canal network.

3. Fiduciary

The financial management assessment concluded that the Project meets minimum Bank financial management requirements, as stipulated in OPBP 10.2. The Project w i l l have in place an adequate financial management system that can provide, with reasonable assurance, accurate and timely information on the status o f the Project in the reporting format agreed with the Bank.

An assessment o f the procurement capacity o f the implementing agencies has been carried out in accordance with standard Bank procedures. The key procurement risk under the Project i s the lack o f CMSC experience with Wor ld Bank procedures. The corrective measures which have been agreed are: i) the Project w i l l include a design review and management consultancy to assist both CMSC and NWSC; and ii) an experienced design institute and tendering company w i l l be recruited for Project preparation and procurement assistance. The overall project risk for procurement i s averape.

4. Social

A resettlement action plan (RAP) meeting the Wor ld Bank’s OPBP 4.12 has been prepared for the Ningbo Water Supply and C ix i Wastewater components. The resettlement impacts are relatively small given the scope o f the Project wi th 60 ha o f permanent land acquisition affecting 519 people; and 371 ha o f temporary land acquisition affecting around 5,000 people, primarily for the laying of underground pipes along roads. The detailed socio-economic survey indicates the project w i l l not affect any minority ethnic groups. A resettlement pol icy framework has also been prepared in the event there are minor unanticipated additional resettlement activities. The task team conducted a due diligence review o f past Zhougongzhai resettlement activities and has determined that those activities were conducted largely in accordance with Bank policies and standards.

A survey of towns was undertaken to assess the demand for expanding N W S C service. The overwhelming majority o f towns strongly support the concept o f N W S C service, although some towns would l ike to operate their own water system and purchase bulk treated water while others would l ike to transfer ownership and operation responsibility to NWSC. Currently, the Yinzhou government, Ningbo Municipal Government, and N W S C are in discussion on how best to provide NWSC service to the towns.

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5. Environment

The Project i s classified as a “Category A” project, and a full Environmental Impact Assessment has been prepared. The Project as a whole w i l l have significant net positive impact as i t w i l l improve the water supply, reduce water pollution, and promote the sustainable development o f Ningbo Municipality. The environmental issues associated with each component are discussed below.

Ningbo Water Supply Component: There are two reservoirs on the Zhangzi River which supply water for the Project: Jiaokou reservoir and the Zhougongzhai reservoir which i s located 8 k m s upstream of Jiaokou and i s currently under construction. The raw water intake for the Maojiaping water treatment plant w i l l be located at Jiaokou reservoir. The Zhangxi River flows into the western Yinzhou plain and i s a medium-sized tributary to the Fenghua River-one o f the largest rivers in Ningbo Municipality. The analysis conducted during project preparation indicates that a significant percentage of the annual inf low into Jiaokou reservoir w i l l be diverted to Ningbo City. The water balance calculations indicate that this w i l l not have an adverse impact on other water users such as irrigation, animal husbandry, village water supplies, etc. The reason for the lack o f impacts i s the additional storage provided by the upstream Zhougongzhai reservoir. During the critical dry season months o f April-May, the JiaokodZhougongzhai reservoir system w i l l release sufficient water to meet downstream demands, while s t i l l satisfying the demand f rom Ningbo City. Wet season flows, however, w i l l be reduced and the altering o f the hydrological cycle may adversely impact the eco-system along a 20 kilometer stretch, although there are no identified rare species or important commercial fisheries in Zhangzi River. A comprehensive environmental flows assessment w i l l be undertaken during project implementation to determine minimum f low requirements and adjust reservoir operations appropriately. In addition, there w i l l be close monitoring o f impacts during operations, and a process w i l l be established for addressing any complaints.

Cixi Wastewater Component: Two alternative treated effluent disposal options for the C ix i wastewater treatment plants were analyzed during project preparation - disposal to Hangzhou Bay, and disposal to the C ix i canal network. Due to the shallow depth o f Hangzhou Bay of f the coast of C ix i and the large tidal fluctuations, disposal through an outfall i s technically complex and prohibitively expensive. Since water i s scarce in C ix i and the treated effluent can be considered a resource, the preferred alternative i s to discharge to the C i x i canal network and reuse the water for irrigation. The Environmental Impact Assessment (EIA) indicates that this proposal i s acceptable as the canal network has a large storage capacity and the wastewater w i l l be treated to the highest national standards.

The wastewater w i l l be treated to Class 1A standards, which i s essentially tertiary treatment wi th nutrient removal, for discharge into the large C ix i canal network. Tertiary treatment w i l l be provided through an engineered wetland. The sludge f rom the treatment plants w i l l be mechanically dewatered and disposed o f in nearby municipal landfills. The capacity and quality of the landfill sites i s confirmed in the EIA. A sludge monitoring program i s outlined in the Environmental Management Plan (EMP), and CMSC w i l l consider options for beneficially reusing the treated sludge.

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6. Safeguard policies

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [ X I [ I Natural Habitats (OPLBP 4.04) [ I [ X I

Pest Management (OP 4.09) [ I [ X I Cultural Property (OPN 11.03, being revised as OP 4.11) [I Involuntary Resettlement (OP/BP 4.12) [ X I [I Indigenous Peoples (OD 4.20, being revised as OP 4.10) [X I

Forests (OP/BP 4.36) [I [XI Safety of Dams (OPLBP 4.37) [X I [I

Projects on International Waterways (OP/BP/GP 7.50) [I [XI

[ X I

[I

Projects in Disputed Areas (OP/BP/GP 7.60)* [I [XI

In addition to the Environmental Assessment and Involuntary Resettlement policies discussed in the preceding sections, two other Safeguard policies are triggered:

Dam Safety: The Dam Safety Safeguard Policy (OP4.36) i s triggered by the Project because the Project relies directly on water provided by Jiaokou and Zhougongzhai reservoirs. In addition, three other dams also provide water for Ningbo City. The task team has reviewed the safety of the four existing dams, and progress on the construction of the Zhougongzhai, and has found them satisfactory. Emergency Preparation Plans for Zhougongzhai and Jiaokou dams wi l l be prepared during project implementation. The Bank task team wi l l also review and document for the Project f i les the construction progress, commissioning, and the first f i l l ing of Zhougongzhai dam.

Cultural Property: Surveys indicate that project activities would not affect any above ground artifacts with archeological, paleontological, historical, religious, or unique natural values as defined under OPN 11.03. Most of the construction activity wi l l involve excavation work and thus all contracts wi l l include standard clauses which follow Chinese law and regulations regarding chance finds during construction. One important cultural relic i s Tashan Weir, which i s located downstream of Jiaokou reserrvoir on the Zhangxi River. Built in 833 AD, i t i s now an old cultural site under national preservation. The diversion of water from the Zhangxi River i s not expected to have an impact on the structural integrity nor functioning of the Tashan Weir.

Ningbo Municipality i s a repeat borrower for the Bank with a high capacity to implement safeguards policies. The ongoing Zhejiang Urban Environmental Project includes four components in Ningbo City. Ningbo has developed a good understanding and experience in implementing World Bank safeguard policies. Specific measures to address safeguard issues of this Project during implementation are:

Environmental Management Plan (EMP): The EMP specifies the appropriate environmental management and supervision mechanisms, mitigation measures, environmental monitoring

* By supporting the proposed project, the Bank does not intend to prejudice thefinal determination of the parties' claims on the disputed areas

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plans, training plans and budget allocation necessary to implement the mitigation measures and to strengthen the borrower’s capacity. There w i l l be an environmental officer in the PMO to supervise the implementation o f the EMP, and both NWSC and CWSC w i l l have environmental officers responsible for their components. The PMO, CMSC, and N W S C have sufficient capacity and funds to implement the EMP.

Resettlement Action Plan: A resettlement action plan (RAP) has been prepared for the Ningbo and the C ix i components, which meet the World Bank’s OPBP 4.12. The PMO w i l l establish a resettlement office, staffed with specialists from NWSC and CMSC, to manage and supervise resettlement. The capacity o f the implementing agencies and the PMO i s considered adequate.

EA Disclosure and Consultation: A detailed Public Consultation Plan in accordance with Bank’s policies, was prepared for each of the two components. Consultations were conducted in two rounds for the Ningbo component during March to October 2004, and in three rounds for C ix i component f rom January to September 2004. EIA reports were disclosed in local libraries on September and October 2004 with notices posted in local newspapers. The draft EIA reports were also disclosed in the Infoshop in August 2004, the updated EIA in November 2004, and the final EIA in January 2005.

RAP Disclosure and Consultation: During Project preparation, consultation has taken place through resettlement surveys, and meetings with government officials and project-affected people. These consultations influenced the design o f the RAP. An information handbook which outlines the Project, and the resettlement policies and procedures, was prepared for all project- affected people. In addition, “land acquisition and building demolition” announcements have been provided to al l affected parties. The full RAP was disclosed in Ningbo and C ix i libraries and government websites in October 2004. The draft RAP was disclosed in the Wor ld Bank Infoshop in August 2004, and the final RAP was submitted in November 2004.

7. Policy Exceptions and Readiness

N o exceptions are required from Bank policies. The Project meets al l key regional readiness criteria. The Bank has authorized the use o f retroactive financing o f US$12 mil l ion, which i s below 10% o f total project loan. Disbursements in FY06 are expected to be between US$lO-$15 million.

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Annex 1: Sector and Program Background CHINA: Ningbo Water and Environment Project

Approximately 95% o f the urban population in China i s served b y a municipal water supply system, and 68% have access to improved sanitation. Seasonal water shortages, however, affect more than 400 o f China’s 672 cities and around 160 cities are forced to impose water use restrictions. The lack o f adequate wastewater collection and treatment infrastructure results in severe water pollution, wi th an estimated 88% o f rivers and 70% of coastal seas classified as moderately to highly polluted. The loth Five Year Plan (2001-2005) calls for increasing the percentage o f urban wastewater treated from 15% to 45%, and al l cities with populations greater than 5 mi l l ion should have treatment coverage o f over 60%. The Government has also mandated new pol icy directions, including integrated water resource management, commercialization o f the water and wastewater sector, setting tariffs at full cost-recovery levels, and attracting private investment. The more affluent coastal cities, such as Ningbo Municipality, are taking the lead in constructing new infrastructure and experimenting wi th policy reforms.

Ningbo Municipality i s located on the East China Sea, approximately 150 k m s south o f Shanghai on the southern edge o f Hangzhou Bay. Ningbo Municipality i s part o f Zhejiang Province, but i s classified as a “sub-provincial municipality” which means i t i s a separate economic planning unit and i s not administratively controlled b y the provincial government. The Municipality belongs to the economically dynamic Yangtze Economic Zone, which covers Shanghai Municipality, Zhejiang, Jiangsu, and Anhui provinces, and includes over 200 mi l l ion people. With i t s excellent deep water harbor, Ningbo boasts the second busiest port in China and has a thriving industrial sector focused on the export o f manufactured goods. The development and integration o f Ningbo with the larger Shanghai megalopolis w i l l be accelerated with the completion o f a 36 km bridge spanning Hangzhou Bay, which i s currently under construction and w i l l halve the travel time from the port of Ningbo to Shanghai.

The Municipality has approximately 6 mi l l ion residents, including an estimated 1.2 mi l l ion migrants, and covers 9,365 km2. There are six urban districts in Ningbo which together are termed “Ningbo City,” wi th a total population o f 2.4 mi l l ion people and a land area o f 2,486 km2. In addition, there are two city-level counties, C ix i and Yuyao, and three rural counties. The 2002 per-capita median disposable income o f urban residents was RMB 12,970 (US$1,562), whereas rural residents reached only half that level.

Resolving the Water Crisis in Ningbo City

Ningbo, l ike many cities throughout China, i s facing a two dimensional water crisis: frequent shortages and poor water quality. Although situated in a temperate climate, water supply development in Ningbo has lagged behind i t s rapid economic growth. Water companies draw water primarily from highly polluted local surface water sources and use outdated treatment technology, rendering the piped water o f questionable quality. Water supply deficiencies pose a drag on economic growth and endanger public health, while hindering Ningbo’ s aspiration to become a world-class port city.

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Ningbo, in contrast to most Chinese cities, has taken the initiative to address water issues through a regional approach with the establishment o f a multi-sector “Water and Environment Leading Group,’’ chaired b y the Executive Municipal Vice Mayor and headed by the Municipal Planning Commission. The Leading Group has a dynamic Secretariat, and i s facilitating infrastructure investments and management systems which cut across administrative boundaries to resolve Ningbo’s serious water and wastewater problems.

Jiangdong

A cornerstone o f Leading Group’s program i s to provide reliable, high quality drinking water to all City residents through the government-owned Ningbo Water Supply Company (NWSC). The Company currently serves 1.26 mi l l ion people in the core urban area with a total treatment capacity o f 820,000 m3/d. The remaining 1.3 mi l l ion people obtain water f rom 29 small town water supply systems with an estimated treatment capacity o f 610,000 m3/d, or are self-supplied. Most large industries independently draw water f rom local surface water sources, and the total estimated self-supply capacity i s 460,000 m3/d. The Municipal Government has directed the NWSC to incorporate the small town systems, supply water to all industries, and dramatically improve service quality. T o meet these targets, the Water Conservancy Bureau has recently finished construction o f one medium-sized reservoir (Baixi-168 m c m o f storage, supplying 500,000 m3/d o f raw drinking water) and w i l l complete the Zhougonzhai reservoir (1 11 m c m o f storage, supplying 250,000 m3/d o f raw drinking water). These reservoirs w i l l provide high quality raw water supplies, and NWSC i s investing in associated conveyance lines, two new water treatment plants, the first regional water distribution ring main in China, and an expanded distribution system. The following paragraphs provide more detailed information on the current situation and future expansion plans.

(Ml/d) 350 Nan Tang River v ia Beidu PS (I-II),

Current Situation: Ningbo Water Supply Company (NWSC) currently has f ive water treatment works (WTW) supplying a population o f about 1,200,000. The supply covers the three ‘old districts’ o f Haishu, Jiangdong and Jiangbei, together with parts o f Zhenhai and Beilun.

Nanjiao

Name o f WTW I Design Capacity I Raw Water Source (class o f raw water) I

Hengshan Reservoir (1-11) Tingxia Reservoir v ia Xiaozhen PS (II- 200

Mei l in 100 Cicheng 20 Beilun 150

Y aojiang River (111-IV) Yingxiong Reservoir (11-111) Hengshan Reservoir (I-11),

I 111)

Total Baix i Reservoir (1-11)

820

For the current NWSC area, demand for treated water has been rising steadily for the last four years reflecting the regions rapid economic development:

17

Year Average daily supply Peak daily supply (MU (MU

2000 543 62 1 200 1 57 1 630 2002 63 1 712 2003 735 86 1

At present each WTW i s operating at or above design capacity. The 2002/3 year on year rates of increase (average and peak) were 16% and 21% respectively, and the peak factor in the years 2000 to 2003 varied between 10 and 17% (2003 was 17%). Currently water quality does not consistently meet Chinese drinking water standards. The first objective of Component 1 i s to improve the quality and reliability of water service within the existing NWSC service.

Rate of increase of average daily supply (”/.I

5 11 16

The second objective of Component 1 i s to expand NWSC’s service area into the suburban districts of Yinzhou, Zhenhai, and Beilun and to improve water quality and supply reliability. Most parts of Yinzhou District are supplied by 24 town water supply systems with a capacity of 265,000 m3/d. In addition there are 14 town water supply systems in Zhenhai and Beilin Districts with a capacity of 70,000 m3/d. These town water systems rely on highly polluted surface water sources, rudimentary and often poorly performing water treatment plants, and distribution systems with high levels of leakage. Most of the development in Ningbo City i s taking place in the suburban districts, and provision of an adequate water supply i s critical to sustaining economic development.

Ningbo City 2020 Water Supply Master Plan: Ningbo City has prepared a Water Supply Master Plan up to the year 2020. Although the five year investment program (2005-2010) and the proposed Project investment, are sound given the urgency of the situation, the current plan does not use sophisticated water supply planning techniques, and in particular does not explicitly deal with uncertainty or maximizing flexibility. During project preparation, a more detailed water demand forecast was generated to help size the ring main to meet the forecast 2040 demand and confirm near-term needs up to 2008. During implementation of NWEP, however, Ningbo City wil l revise i t s Plan using state-of-the-art planning techniques.

The objective of the current Master Plan i s to extend the supply area of NWSC to cover a l l six districts of Ningbo and apply a single tariff structure. According to ‘Ningbo Urban Overall Planning 2001-2020’ the supply population i s forecast to increase from 2.5 mill ion in 2005 to 2.8 million in 2010 and 3.3 million 2010. Average (and maximum) daily gross water demand i s forecast to increase from l,185Ml/d (1,350MUd) in 2005 to 1,14lMl/d (1,64OMl/d) in 2010 and l,794Ml/d (2,01OMl/d) in 2020. These estimates take into account water conservation efforts which are currently underway in Ningbo City.

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Urban Area Per Catita Water Demand Indexes: - 2005 % of Total - 2010 % of Total - 2020 % of Total

Industrial 179 38% 19 1 38% 186 36% Resident 132 28% 139 28% 146 28% Commercial 163 34% 174 35% 186 36%

474 100% 5 04 100% 518 100%

The Master Plan aims to provide high quality potable water for the whole area by 2012. The objective in the short term i s to consistently meet national standards, with a long term aim of meeting EU standards. There i s also a program to reduce unaccounted for water from the present level (about 21%) to 15% by 2020. In addition, i t i s proposed to provide separate industrial water supplies, with dedicated water treatment plants drawing from local surface water sources (Class 111-V) and distribution system, to supply new key industrial sites. These would be funded separately from NWSC, but managed by NWSC through a management contract. The details of how the industrial water supply systems wil l be financed and managed are s t i l l uncertain. Other industrial consumers within the NWSC area wi l l be supplied by the NWSC and self supply wi l l be prohibited.

In order to provide the high quality supply proposed for the NWSC system, i t i s proposed to use raw water from six reservoirs (Class 1-11) only, and no local rivers. These are Hengshan, Baixi, Jiaokou with Zhougongzhai (under construction), and Tingxia with Qinchun (proposed) reservoirs. Use of groundwater has been ruled out because i t s exploitation i s strictly controlled.

NWSC Diversion Routes and Capacities: (I( 2010 Total: Xiaozheng (Tiangxia): 250 Beidu Intake: 250 Hengshan Diversion: 250 Jiaokou-250 Baixi-600 Zhougongzhai (2008)-250 Total: 1,825

IO m3/d) 2020 Total Qingcun (Tingxia)-500 Beidu Intake to Industrial-Subtract 250 Total: 2,075

To achieve these objectives by 2020, i t i s proposed to construct six new WTWs (three for potable water, three for industrial water) and close three existing NWSC works. Two existing potable water works wi l l be downrated in capacity to improve the quality of the water supplied (one of which wil l be closed by 2020). I t i s proposed to phase out the existing town water treatment plants. An extensive programme of complementary raw and treated water conveyor and distribution pipework construction, extension and rehabilitation i s planned.

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Industrial WTWs Yaojiang (Dagongye)

Beidu Yindong

< and > refer to downrating or uprating the WTWs

500(new) 500 500 200 (new) 200 150 (new) 300 (>)

~~~~

Financial Challenges: The City faces financial challenges on two fronts. First, the large capital investments and corresponding increases in operating costs and debt service w i l l significantly increase revenue needs for both N W S C and the Ningbo Sewage Company Limited, which i s a subsidiary o f NWSC. Under the Zhejiang Urban Environment Project, Ningbo w i l l construct two new wastewater treatment plants and associated trunk sewers which w i l l serve approximately half o f the City. The necessary steep increases in water and sewage tariffs-which are collected in one bill-will be politically challenging. Second, the NWSC relies heavily on short-term debt from commercial banks, much o f which i s periodically rolled over on the request o f the municipal government. As the Chinese banking system reforms in the coming years, easy access to bank credit may become more difficult, thus increasing financial risk. The Project proposes to adopt a more comprehensive and sophisticated price and service regulatory regime through a technical assistance program under the Project to ensure tariffs are raised in a timely manner to ensure financial sustainability o f the water and wastewater companies in Ningbo City.

Total new demand

Facilitating Economic Development and Protecting Hangzhou Bay in Cixi

500 850 1,000

The suburban counties surrounding the Ninbgo City are experiencing rapid population and economic growth due to their relatively l ow cost o f business and abundance o f under-developed land. C ix i City, located north o f Ningbo Ci ty and bordering on Hangzhou Bay, i s an affluent and rapidly developing area, covering 1154 sq. km with a coastal l ine o f 78.5 km and a population of 1 .O million. The total urbadtown population in 2005 i s around 720,000 and i s expected to grow to around 1.3 mil l ion by 2020. The average urban per capita income i s RMB 10,500 (US$ 1,265), making i t s residents among the most affluent in China.

20

The driving force behind this growth i s the development o f industrial estates along the C ix i coast. The close proximity to the Ningbo harbor and the Shanghai market, and the starting point for the Ningbo-Shanghai bridge, make Cix i an ideal location for foreign and domestic investors. There are approximately 200 foreign-invest enterprises in Cixi, with estimated annual revenues of US$500 mil l ion. The C ix i Economic Development Zone, which i s located along the coast line, i s planned as a comprehensive development area with industry, science, business services, and housing. The f i rst phase o f the Zone covers 500 ha and i s close to completion. Planning i s now under way to expand the area b y another 2000 ha, and interest f rom investors appears to be strong .

Careful planning and large investments in water supply and water pollution control are necessary to support Cixi’s rapid economic development. Cix i i s located on a flat coastal plain and the scope for constructing reservoirs i s very limited. Cix i i s addressing this constraint through two measures: i) importing large quantities o f water f rom the Caoerjiang basin in Eastern Zhejiang; and ii) constructing a network o f canals in C ix i to collect run-off for agricultural and landscape uses. Proper treatment and disposal of wastewater are essential to attract new industries and maintain the ecological balance. Fortunately, most o f the industries in C ix i are modern and profitable enterprises which are able to afford proper industrial pre-treatment. Disposal o f treated wastewater poses a major challenge in C ix i because o f the shallow shoreline along Hangzhou Bay. The shoreline in C ix i i s constantly expanding due to the natural accumulation o f sediment, creating reclaimed land at a rate o f approximately 100 meters per year in some places. This natural phenomenon creates opportunities for land development, but also places constraints on disposal o f effluent into the Bay. The shallow Bay, combined with large diurnal tides, makes an outfall impractical and thus the treated effluent w i l l be disposed into the canal network.

Drainage services in C ix i have historically been provided by the Drainage Department, which i s an agency under the Construction Commission. The Department provides drainage services in Cix i City, and operates one wastewater treatment plant (20,000 m3/, day to be expanded to 45,000 m3 in 2006). A new company, the C ix i Municipal Sewage Company (CMSC) was established in mid-2004 to be responsible for all wastewater collection and treatment facilities in Cixi City. The CMSC management i s facing the dual challenge o f starting up a new company and managing a large capital works program. To mitigate this risk, the Project w i l l provide significant technical assistance, including design review, business management and operations support.

CMSC also faces significant financial r i s k under the Project. L i ke Ningbo City, C ix i i s also investing simultaneously in water supply and wastewater infrastructure, implying a significant increase in combined tariffs-which are collected by the C ix i Water Company wi th the drainage revenue being directly transferred to CMSC. Wastewater infrastructure in Cixi i s also relatively expensive due to the low-density o f development and the long distances needed for conveyance.

21

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies CHINA: Ningbo Water and Environment Project

Sector Issue

Bank Financed

Municipal governance and institutional building, pollution management and environmental health, access to urban services and housing, infrastructure services for private sector development, other urban development

Urban environment, pollution management and environmental health, access to urban services for the poor, environmental policies and institutions

Water resource management, pollution management and environmental health, other urban development, infrastructure services for private sector development

Urban environment, air and water pollution, waste management

Access to urban services for the poor, environmental health, water resource management, municipal governance and institution building, wastewater, solid waste, industrial pollution

Other Development Agencies

Water supply, municipal and industrial wastewater treatment, air pollution management (several projects)

Urban services, environment, water resources (several projects)

Project

Zhejiang Urban Environment Project (Ln. 47240) (1/29/04)

Shanghai Urban Environment Project (Ln. 47050) (6/17/03)

Tai Basin Urban Environment Project (Ln. 47480) (8/03/04)

Second Beijing Urban Environment (Ln. 4561), (6/20/00)

Second Tianjin Urban Development and Environment Project (Ln. 46950) (05/20/03)

Japanese Bank for International Cooperation

Asian Development Bank

Latest Supervision (PSR) Rating

(Bank-financed Implementation

Progress (IP)

s

S

S

rojects only) Development

Objective

s

S

s

S

S

Implementation performance reported satisfactory. Assistance focused primarily on investment.

Performance reported satisfactory.

22

Annex 3: Results Framework and Monitoring

C H I N A : Ningbo Water and Environment Project

Results Framework

PDO Facilitate the expansion and improvement o f water and wastewater services in Ningbo City and C ix i City

Ningbo City Water Supply Provide reliable, high quality water to all municipal water users in Ningbo City.

Cixi City Wastewater Ensure comprehensive wastewater management services and zero discharge to Hangzhou Bay Institutional Development Improve water supply planning and public utility regulation.

ome Ind Increase in percentage o f domestic water supply from high quality and reliable water sources in Ningbo City.

Increase percentage o f wastewater treated in Cix i City R to

Component Water Treatment Plants and Ring Main Completed

Wastewater Treatment Plants meet Effluent Discharge Standards

Ningbo Water Supply Plan and NWSC Strategic Business Plan

NWSC and CMSC meet loan financial covenants

Use of Outcome Information Recommend adjustments in planning, future investments andor operations for Ningbo water supply and Cix i sewerage.

Use o f Results Monitoring

Track the progress o f physical works and NWSC operational performance

Track the progress o f physical works and CMSC performance.

Assist Ningbo Municipality in making necessary adjustments to ensure efficient water supply capital planning and utility regulation.

23

x

? I

P 8

P 2

P 2

P 2

Annex 4: Detailed Project Description CHINA: Ningbo Water and Environment Project

The Project development objective i s to facilitate the expansion o f water and wastewater services in Ningbo City and C ix i City in an economically efficient and environmentally sustainable manner, and thereby protect public health, improve the environment, and sustain the area’s rapid economic growth. The key indicators are: (i) increase in percentage o f domestic water supply from high quality and reliable water sources in Ningbo City; and (ii) increases in percentage of municipal and industrial wastewater treated in C ix i City. Project duration i s estimated at five years, starting in March 2005, although some activities w i l l start in late 2004 with retroactive financing. The three project components are described below.

Component 1: Ningbo Water Supply

The Wor ld Bank loan w i l l finance the following activities under Component 1:

l . A Raw Water Intake and Tunnel: The existing Jiaokou reservoir, in conjunction wi th the new upstream Zhougongzhai reservoir (currently under construction - completion b y 2007), w i l l be used as the raw water source. A new water intake tower w i l l be provided on the left bank of Jiaokou reservoir about 1 km upstream of the dam. The intake tower w i l l feed into a 9580 meter long tunnel which discharges into the Maojiaping water treatment plant. The route i s divided into four tunnel sections, with three short, intervening steel pipe sections where the tunnel line crosses valleys. The tunnel i s designed on the basis o f a f low o f 6.13m3/s, wi th an excavated bore of 3.6m. I t i s concrete lined, with an internal diameter o f 2.8m. The steel pipe sections are 2.5m in diameter.

l.B Maoiiaping; WTW: The capacity i s 500,000m3/d. The site i s located on a hillside, planted in an orchard, and considerable earthworks w i l l be required to level the site for construction. Both Zhougonghai and Jiaokou reservoirs are Class 1-11 sources, wi th no organic pollution and low s i l t contents. Process parameters are based on previous experience o f the designers and should be generally acceptable. Bench-scale water tests were carried out on the raw water to optimize the detailed process design. Water w i l l f low by gravity f rom the reservoir intake works, via the tunnel, to the inlet works unless the reservoir level i s less than 55m, in which case f ive raw water dutyhtandby pumps provided w i l l be used. A conventional treatment process w i l l be used with a horizontal f low settling tank, sand filtration, and chlorine disinfection. Space w i l l be reserved for advanced treatment consisting o f activated carbon filtration. Thickened sludge w i l l be dosed with alum and PAM, before being dried in filter presses. Dry sludge w i l l be recycled as backfi l l material, or for brick manufacture. A 1 km long 6 m wide access road f rom the existing road to the plant i s specified.

1 ,C Transmission Convevance Main: A single main wi th a diameter o f 2.6 meters wi l l convey the treated water b y gravity (approximately 7.9 k m s ) to a bifurcation point, where two slightly smaller mains follow different alignments to the ring main. The bifurcation w i l l provide water to different parts o f Yinzhou district in the most cost-effective manner. The total length o f each main after the bifurcation point i s approximately 11 k m s , wi th a diameter of 2 meters for the first

25

4 (3.5) kms, and then reducing to 1.8 meters. The pipes w i l l be buried to a depth o f approximately 2m, and w i l l fol low existing roads.

l.D Transmission Ring Main: The total length i s about 47 km and w i l l consist o f 2 m and 1.8 m diameter steel pipeline wi th a cover o f about 2m. The ring main w i l l significantly improve water supply reliability and flexibility. The current network in Ningbo i s divided into approximately three zones (although there are some interconnections) and the ring main w i l l link al l three zones together. The new water treatment plants (Maojiaoping and Dongqianhu) are located in the south o f the City and the ring main w i l l allow easy transmission from both plants to the north. “Distribution pipe spokes” coming o f f the ring main which w i l l serve the suburban districts. The ring main i s sized for the estimated 2040 demand, based on extensive hydraulic modeling and spatial water demand forecasts. the ring main size. The choice o f either steel pipe or PCCP (pre- stressed concrete cylinder pipe) w i l l be finalized during appraisal. The ring main w i l l be buried and run along the existing ring road. The water pressure in the ring main w i l l be supplied b y gravity from the Maojiaping WTP.

Distribution systems: N W S C has already carried out significant rehabilitation and renovation o f older pipes within the current supply area. However, with the addition o f the town systems, this task w i l l continue to require the allocation o f resources from NWSC. The potential for drinking water contamination in this project evidently comes more from the distribution system (and customers own pipes and fittings) than from the treated water as i t leaves the various WTWs. The high investment in good quality water sources and modern treatment techniques makes water quality management within the distribution system more necessary. N W S C has a long- term program to rehabilitate the distribution system (redundant wi th long-term).

Component 2: Cixi Wastewater Management:

Current Situation: Cix i City i s composed o f the central ci ty wi th around 300,000 inhabitants, seven small cities wi th populations ranging from 25,000 to 100,000, and ten towns wi th around 25,000 or less residents. In addition, there are areas o f recently developed and rapidly expanding industrial estates along the coastline. Only 10% o f the wastewater generated in Cixi City currently receives wastewater treatment, which i s provided by the Jiaochangshan central ci ty wastewater treatment plant. The WWTP collects wastewater f rom an area o f around l o b 2 , comprising only one third o f the central ci ty area. The current capacity o f the WWTP i s 20,000 m3/d, but there are plans to expand the plant to 45,000 m3/d b y 2010. Municipal sewerage from the central city and each town i s discharged directly into the river and canal network, with the result that most o f the canals and main river networks are polluted to class V standards or worse. In addition to causing environmental problems, the lack o f comprehensive wastewater management i s inhibiting economic development as industries are reluctant to move into estates without proper environmental management. The project w i l l finance the fol lowing components, which are essentially the entire five year investment program for the Cixi Municipal Sewerage Company (CMSC).

Wastewater Treatment Plants: The CMSC service area i s divided into three zones, each o f which w i l l have a wastewater treatment plant: (i) existing Jiaochangshan WWTP in the central ci ty (45,000 m3/d); ii) the NWEP-financed Northern WWTP which w i l l have a Phase 1 capacity of

26

100,000 m3/d; and iii) the NWEP-financed Eastern WWTP which w i l l have a Phase 1 capacity o f 50,000 m3/d. The WWTPs w i l l discharge into the inland canal network, and thus require a high level o f treatment to minimize eutrophication and other water quality problems as the canals have a relatively l ow assimilative capacity. Discharge into Hangzhou Bay through an outfall i s not an economically viable option given the large tidal variation and shallow water along the Cix i coastline. The WWTPs are designed to meet Class 1A discharge standards, which are essentially 10 mg/l B O D and SS, with removal o f nutrients to 15 mg/l total-nitrogen and 0.5 mg/l o f phosphorus.

The proposed treatment process i s a modified reverse A20 process, wi th tertiary treatment. In the reserve A20 process, the anoxic stage i s placed ahead o f the anerobic stage, to remove nitrates first and achieve the anaerobic conditions necessary to remove phosphorous in the second stage. The project w i l l fund a technical assistance program for CMSC to build up its operational capacity to tackle the operationally complex A process. Tertiary treatment w i l l be through an engineered wetland. The preliminary design for the engineered wetland wil l be finalized after loan effectiveness.

Sludge from the treatment plants w i l l be dewatered through gravity thickening followed b y centrifuges. A total 67,000 m3 o f sludge, with a moisture content o f 78%, w i l l be generated per year f rom the two plants. The sludge w i l l be transported to nearby municipal landfi l l sites in trucks with air-tight tanks. The sludge from the Northern plant w i l l be disposed in the C ix i West landfill, and the sludge f rom the Eastern plant w i l l be disposed in the Eastern landfill. The Western landfi l l was expanded and upgraded in 2002, and currently has 10 empty cells which w i l l use impermeable liners and leachate treatment systems. C ix i Ci ty plans to upgrade the Eastern landfi l l in 2005 and utilize impermeable liners and leachate treatment systems for the four remaining cells. Upgrading o f the Eastern landfi l l i s included in the EMP. The Western landfi l l i s forecast to reach full capacity around 2012, and Eastern landfill w i l l reach capacity in 2015. Since the two landfills w i l l be full after only 5-7 years o f wastewater treatment plant operation, the EMP calls for the C ix i Municipal Sewerage Company to develop a sludge management plan to consider alternative long-term options for sludge management. Monitoring of sludge quality i s also included in the EMP to ensure that the sludge can be safely disposed in a municipal landfill.

Trunk Sewers: There are two trunk systems in Cixi: the 77 km central-western trunk system conveys wastewater to the Northern WWTP. The 30 km eastern trunk system conveys water to the Eastern WWTP. Trunk diameters range f rom 400-1800 111111, wi th laying depths o f 2.5-7.0 meters. There are 15 pump stations in total for both trunk systems; PCCP i s used for all force mains. Appropriate remedial measures for septicity have been incorporated into the design.

Secondary Sewers: CWSC w i l l service approximately 15 distinct areas, composed o f towns or industrial estates. Each town or city i s responsible for constructing i t s own collection system. Existing developments use a combined storm-water and wastewater collection system, which w i l l be maintained. According to C ix i City regulations, new developments must have separated wastewater and stormwater collection systems. The project w i l l finance approximately 133 k m s of secondary trunk sewers which go from the town to the trunk mains (with 42 small pump- stations).

27

Component 3: Institutional Development and Capacity Building

The component consists of the following packages:

Package A: Design Review and Advisory Services for NWSC and CMSC: To assist wi th three major tasks: (i) ensure preparation o f I C B bid documents meet Bank standards, efficiency, and economy o f works; (ii) develop and implement a construction management program based on sound engineering practice; and (iii) install adequate health, safety and quality assurance procedures.

Package B: NWSC Central Control and Monitoring Technical Assistance: Provide advice to NWSC: (i) to enhance the functionality o f the existing monitoring and control systems, including the most recent upgrading o f the systems carried out between mid 2004 and mid 2005; and (ii) in carrying out a study on a pi lot area o f the distribution system to learn how to best optimize the whole distribution system.

Package C: Utility Price and Regulatory Technical Assistance: To strengthen the capacities o f the Price Management Division (PMD) within the Ningbo Development Planning Commission, the State Asset Management Commission, and the Urban Management Bureau (UMB), to carry price and service regulation in the entire water sector, including water, wastewater, raw water, etc. Phase 1 would focus on the regulatory framework at the municipal level, including counties and Ningbo City, while Phase 2 would concentrate primarily on specific water tari f f adjustments in Ningbo City.

Package D : Technical Assistance to Develop Water Supply Strategic Plans: I t w i l l include assistance to revise the Ningbo City Integrated Water Supply Plan through an open and participatory process, involving all stakeholders, while encompassing least-cost analysis o f short- and-long term planning options, and satisfying ut i l i ty and regulatory pol icy goals. A second component would support the preparation o f the N W S C Strategic Plan, which would include the following elements: (i) resource plan, based upon the Ningbo City Water Resources Plan; (ii) capital plan to optimize and detail the capital investment needs over the short term, and identify medium and long term capital investment needs; (iii) financial plan, to integrate wi th the capital plan, analyze and identify financing sources, and assess tariff impacts; (iv) town and industrial water supply plan, to enable NWSC to best provide service; (v) management plan, which considers decision-making processes, administrative procedures, accounting systems, and management information systems; and (vi) human resources plan.

Package E: CMSC Technical Assistance: w i l l consist o f four main activities: (i) institutional strengthening, focusing on organizational structure, human resource management and planning, business planning, and improving the company’s capacity to meet i t s regulatory obligations; (ii) financial management systems, including accounting, billing and collection systems, financial planning, determination o f tariff requirements, and developing a modern financial information system; (iii) wastewater treatment plant operations including wastewater and sludge process operations; operational safety; and overall plant management; and (iv) industrial pollution control, including discharge permitting program and procedures; industrial wastewater monitoring; data management; and formal procedures for regulatory control.

28

Annex 5: Project Costs CHINA: Ningbo Water and Environment Project

Component 1: Ningbo Water Supply Raw Water Intake and Tunnel Maojiaping Water Treatment Works Water Transmission Main Water Transmission Ring Main Overhead/Engineering Services Resettlement IDC and Commitment Fee

Component 2: Cixi Wastewater Northern Wastewater Treatment Works Mid Trunk Sewer System Western Trunk Sewer System Eastern Wastewater Treatment Works Eastern Trunk Sewer System City and Town Link Sewer System Overhead Resettlement IDC and Commitment Fee

Component 3: Institutional Development Design Review Construction Supervision NWSC Central Control System TA Price and Service Regulatory TA Strategic Water Planning Cixi Sewage Company TA General Training

Sub-total. - - - 1 - - - - - - - - - - - - - - - 1

Sub-to tal. - 1 1 - 1 1 1 1 1 1 1 1 1 1 - - - - 1 1

Sub- total.

The total estimated cost of the project i s US$291.5 million, including physical and price contingencies, taxes, duties, front-end fee, and interest during construction. The base costs in the Feasibility Study were adjusted to reflect actual experience with c iv i l works contracts under Bank-financed urban projects. Physical contingencies are estimated at 7.5% and price contingencies at 5%. The summary cost table i s presented below.

90.8 10.9 281.2 33.9 242.7 29.2 431.3 52.0 109.4 13.2 90.4 10.9 64.9 7.8

1310.7 157.9 _-------..----

Description I 45.4

176.1 121.4 215.7

0.0 0.0 0.0

558.5

128.7 15.5 148.2 17.9 153.1 18.4 91.3 11.0

126.2 15.2 239.3 28.8

81.6 9.8 46.6 5.6 50.9 6.1

1065.9 128.4 -1111111..1111

Total Cos

80.5 9.7 77.0 9.2 79.5 9.E 56.3 6.e 66.0 8.C

121.3 14.E 0.0 0.c 0.0 0.c 0.0 0.c

480.6 57.s I----

12.5 1.5 4.2 0.5 4.2 0.5 6.6 0.8 8.3 1 .o

1.66 0.20 37.4 4.5

--------..----I

5.40 0.65

2419.3 291.5

11.3 3.8 3.8 6.0 7.6 1.7

34.1 5.40

1078.7

_---

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Annex 6: Implementation Arrangements

CHINA: Ningbo Water and Environment Project

There are a variety o f government agencies and companies involved in the implementation o f NWEP: N W S C and CMSC are the two main implementing entities, while the government agencies wi l l play an oversight and coordination role.

Government Agencies:

Water and Environment Leading Group: Ningbo Government recently established a Leading Group to deal with the complex regional water supply and water quality issues confronting the Municipality. The Leading Group i s headed b y an Executive Vice Mayor and i s composed o f Directors f rom the Municipal Development Planning Commission (MDPC), Environmental Protection Bureau, Water Resources Bureau, Construction Bureau, and Finance Bureau. The Leading Group’s mandate i s to provide policy direction and planning support for integrated water and environmental management throughout the Municipality. The Leading Group i s supported by an active Office. Both the Leading Group and i t s Office were actively involved in NWEP preparation and w i l l play a guiding role in implementation. The Leading Group w i l l also be the lead agency for the Ningbo City Integrated Water Supply Plan in Component 3.

NWEP Project Management OfSlce (PMO): The P M O i s located under MDPC, and i s composed o f a qualified project manager, an experienced chief engineer, and a procurement specialist seconded f rom NWSC, a project accountant, an environmental specialist, a resettlement unit, and a translator. The PMO has been established as a permanent government agency, and thus i s able to attract qualified individuals who are offered job security and promotion potential. The P M O w i l l be responsible for overall project coordination and implementation and w i l l be the primary liaison with the Bank (project monitoring and reporting. Because the various technical assistance assignments in Component 3 cut across N W S C and CMSC, as wel l as various government agencies, the P M O w i l l be responsible for contracting some consultants. Such consultants w i l l work directly with the companies and government agencies, but under the general supervision o f the PMO.

MDPC Foreign Capital Utilization Department: The department serves as a liaison with international development agencies. I t w i l l be an important bridge between the PMO and Finance Bureau, and the Bank during project implementation.

Ningbo State Asset Management Commission, Price Bureau, and Urban Management Bureau: The Asset Management Commission i s the primary management supervising body for the NWSC. The Price Bureau i s the lead economic regulatory agency, and the Urban Management Bureau i s the lead service regulatory agency for N W S C and other public utilities in Ningbo. All three bodies w i l l be involved in the “Utility Price and Service Regulatory Study” under Component 3.

30

Public Utilities:

Ningbo Water Supply Company (NWSC): NWSC has been operating for decades and i s experienced in implementing large capital projects. The NWSC has created a Project Management Unit (PMU) under the direction of an Assistant Chief Engineer. The PMU i s staffed wi th dedicated procurement, financial management, environmental, and resettlement staff. Under Component 3, the NWSC w i l l receive technical assistance support for design review and advisory services, business management, and the development o f an N W S C Strategic Business Plan. The NWSC w i l l also receive technical assistance for the development o f the state- of-the-art central control system.

Cixi Municipal Sewerage Company (CMSC): CMSC was legally established in mid-2004, and staff and existing assets have been transferred from the C ix i Drainage Department to CMSC. Since the NWEP represents essentially all of CMSC’s capital investment program, the project w i l l be under the direct supervision o f the CMSC General Manager, wi th the relevant departments providing procurement, financial management, environmental, and resettlement support. Under Component 3, CMSC w i l l receive technical assistance support for design review and advisory services and business management. CMSC w i l l also receive technical assistance for the operations o f the new wastewater treatment plants financed under the project.

/

31

Annex 7: Financial Management and Disbursement Arrangements CHINA: Ningbo Water and Environment Project

The Financial Management Specialist (FMS) has conducted an assessment o f the adequacy o f the project financial management system o f the Project. The assessment, based on guidelines issued by the Financial Management Sector Board on October 15, 2003, concluded that the project meets minimum Bank financial management requirements, as stipulated in BP/OP 10.02. In the FMS’s opinion, the project w i l l have in place an adequate project financial management system that can provide, wi th reasonable assurance, accurate and timely information on the status o f the project, in the reporting format agreed with the project and as required by the Bank.

Funding sources for the project include the Bank loan and counterpart funds. The Bank loan proceeds w i l l f low from the Bank into the project special account, to be set up at and managed b y the Ningbo Municipal Finance Bureau (NMFB). There are two implementing entities: the Ningbo Water Supply Company (NWSC) and the Cix i Municipal Sewerage Company (CMSC). The NWEP PMO, established in the Ningbo Municipal Planning Commission, w i l l provide overall coordination and oversight for the project. The PMO w i l l authorize the Ningbo Finance Bureau to reimburse N W S C and CMSC for eligible expenditures. For consultant contracts which are managed b y the PMO, there are two general payment options: (i) the NMFB pays consultants for the Bank share and the P M O pays counterpart share; (ii) PMO w i l l pay consultants directly and then request NMFB reimbursement for the Bank share. The costs wi l l be allocated as appropriate to the respective companies.

The Bank loan w i l l be signed with the People’s Republic o f China, through the Ministry o f Finance (MOF), which w i l l then enter into an on-lending agreement wi th Ningbo Municipality. The NMFB w i l l have subsidiary loan agreements with NWSC and C ix i City Government. The C ix i Finance Bureau w i l l then have an on-lending agreement wi th the CMSC. The project wi l l use traditional disbursement techniques, and w i l l not be using PMR-based disbursements, in accordance with the agreement between the Bank and MOF. Counterpart funds for NWSC and CMSC w i l l come from commercial banks and internal funds.

Audit Arrangement

The Bank project financial statements to be audited in accordance with standards acceptable to the Bank, In line with other Bank financed projects in China, the project w i l l be audited in accordance with International Auditing Standards and the Government Auditing Standards o f the People’s Republic o f China (1997 edition). The Ningbo Municipal Audit Off ice has been identified as auditors for the project. Annual audit reports w i l l be issued in the name o f the Ningbo Municipal Audit Office.

The annual audit report o f project consolidated financial statements wi l l be due to the Bank within six months o f the end o f each calendar year. The consolidated project financial statements w i l l be submitted through the PMO. In addition, annual audit reports on the financial position and the operating results o f the N W S C and CMSC, in both English and Chinese, w i l l be due to the Bank within six months o f the end o f each calendar year. The financial statements for

32

these entities are not Bank fiduciary requirements, but rather for sustainability purposes. The requirements for these audits w i l l not be included in Schedule 3 o f the Project Agreement.

IBRD Loan Amount Financing US$Millions Percentage

Ningbo Component Works 49.18 50%

1 00%-Foreign; Goods 0.53 75% Loca Combined 17.60 65% Services 2.30 91% General Training 0.10 100% Total 69.71

Disbursement Arrangement

38.75 50% 100%-Foreign;

0.55 75% Loca 18.65 65%

1.59 91% 0.1 0 100%

59.64

6. disbursement techniques and w i l l not use PMR-based disbursement.

In l ine with the agreement between the Bank and MOF, the project w i l l use traditional

Allocation of Loan Proceeds:

7 . table below.

Proceeds o f the Loan w i l l be disbursed against expenditure categories as shown in the

Cixi Component Works

Goods Combined Services General Training Total

Financing Cost Front- end Fee 0.65 100%

Total Loan Amount 130.00

Note: 1. For Goods, the Bank finances 100% of foreign expenditures; 100% of local exy (ex-factory cost); and 75% of local expenditures for other items procured locally. 2. "Combined" refers to contracts for both supply of goods and works.

33

Use of Statement of Expenditures (SOEs)

~~~

Expenditure Category Civ i l Works and Combined Contracts Goods $500,000 Consulting Firms $300,000 Individual Consultants $50,000

Contracts Less than US$ Equivalent $5,000,000

8. the table below.

Some o f the proceeds o f the loan may be disbursed on the basis o f SOEs as indicated in

CMSC and Approved by Approved NWSC t Municipal 4 byNMFB --b

World Bank

9. procurement guidelines and signed contracts.

Expenditures exceeding the above l i m i t s w i l l be made in accordance wi th respective

Special Account (SA)

10. w i l l be US$S.O million, wi th an initial deposit amount o f US$5.5 until a cumulative disbursement o f US$35 mi l l ion i s reached. Bank funds would be disbursed f rom the SA set up at the Finance Bureau to the project implementing entities and/or supplier and contractors.

One special account (SA) w i l l be established in the NMFB. The authorized allocation

11, reconciliation o f the SA activities o f the project. Supporting documents required for Bank disbursements w i l l be prepared and submitted b y respective project implementing entities to NMFB for final verification and consolidation before submission to the Bank. The f low o f the withdrawal application i s as follows:

N h E B w i l l be directly responsible for the management, monitoring, maintenance, and

I P M O I I 1 - u Financial Management and Reporting Arrangements

12. Implementing Entity. A PMO has been established under the Ningbo Municipal Planning Commission. NWSC w i l l be the implementing entity for the water supply component, and CMSC w i l l be the implementing entity for the wastewater component. The institutional development component includes contracts which support both companies, as wel l the municipal government, and thus w i l l be managed by the PMO, however the costs w i l l be allocated to the respective companies.

13. follows:

Funds Flow. Funds f low for Bank loan w i l l fo l low the Bank and MOF requirements, as

34

Contractor (3

Consultant

The above diagram assumes that the NMFB wi l l make payments directly to consultants who have signed contracts wi th the PMO. Another alternative i s for the P M O to make payments to the consultant directly and then request reimbursement f rom NMFB for eligible expenditures. The preferred option w i l l be determined during implementation.

Accounting Organization and Staffing. Adequate project accounting staff, wi th educational background and work experience commensurate with their work i s one o f the factors critical to successful implementation o f project financial management. Based on discussions, observation and review o f educational background and work experience o f staff identified for financial and accounting positions in implementing entities (both “project” and “entity”), the F M S noted that staff are qualified and appropriate for their work.

To strengthen financial management capacity and achieve consistent quality o f accounting work, a project financial management manual (the Manual) w i l l be prepared. The ,Manual w i l l provide detailed guidelines on financial management, internal controls, accounting procedures, fund and asset management and withdrawal application procedures. The final version of the Manual w i l l be finalized and distributed to al l the financial staff before loan effectiveness.

Accounting Procedures. The administration, accounting, and reporting o f the project w i l l be set up in accordance with Circular #13: “Accounting Regulations for Wor ld Bank Financed Projects” issued in January 2000 b y MOF. The circular provides in-depth instructions o f accounting treatment o f project activities and covers the following: chart o f account, detailed accounting instructions for each project account, standard set o f project financial statements, and instructions on the preparation of project financial statements.

The standard set of project financial statements mentioned above has been agreed to between the Bank and MOF and applies to al l Bank projects appraised after July 1, 1998 and includes the

35

following: Balance sheet, Statement o f source and use o f fund, Statement o f implementation o f loan agreement, and Statement of special account.

Acition 1. Financial management training to all relevant

Each o f the implementing entities w i l l be managing, monitoring, and maintaining the respective project accounting records. Original supporting documents for project activities w i l l be retained by originating implementing entities. In addition, each implementing entity w i l l prepare financial statements, which w i l l be submitted to the municipal P M O for review and approval. The Municipal PMO w i l l furnish the consolidated project financial statements to the Bank on a regular basis.

Responsible person Completion Date NMFB Before effectiveness

Internal Audit. There i s no formal independent Internal Audit department for the project. However, this wi l l not impact the project’s financial management as P M O management and monitoring, and yearly external audits, w i l l ensure that financial management controls are functioning appropriately.

project staff 2. Financial management manual finalized and issued to related financial

Information System. The water supply company i s using an accounting software called “Xinzhongda” to process their transactions. After reviewing the software, i t may be possible to integrate the project activities into their current accounting software system. Since this software i s a well-known accounting software in Zhejiang province, the newly established sewerage company w i l l also use this accounting software. The Bank w i l l review the adequacy o f their financial accounting and reporting system prior to project effectiveness.

NMFB and Municipal Before effectiveness P M O

Financial Management Action Plan. The fol lowing proposed time-bound actions were agreed with the PMO:

Supervision Plan. A detailed supervision plan for this project w i l l be included as part of the China Audit Strategy document, which i s currently in process. This document w i l l take into consideration the size o f the project and the r isks identified.

36

Annex 8: Procurement Arrangements

CHINA: Ningbo Water and Environment Project

A. General

Procurement would be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated M a y 2004; and "Guidelines: Selection and Employment of Consultants b y World Bank Borrowers" dated M a y 2004, and the provisions stipulated in the Loan Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed b y the Loan, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame have been agreed between the Borrower and the Bank, and i s part of the Procurement Plan. The Procurement Plan for the project was prepared by Ningbo Municipal PMO, and w i l l be updated at least annually or as required, to reflect the actual project implementation needs, and improvements in institutional capacity.

Procurement of Works: Works procured under this project would include: raw water intake facilities, raw water tunnels, water treatment plant, water supply pipelines, wastewater collection pipelines, wastewater pump stations, wastewater treatment plants, etc. Procurement w i l l be done using the Chinese Model Bidding Documents (MBDs); and Bank Standard Bidding Documents (SBD) would be used when an appropriate MBD i s not available.

Goods: Goods procured under this project would include laboratory instruments, maintenance tools, and vehicles. Procurement w i l l be done using the Chinese Model Bidding Documents (MBDs) for ICB. For contracts wi th estimated value below US$lOO,OOO, shopping procedures may apply *

Combined Works and Goods Procurement: Civil Works and Equipment Supply, Installation and Commissioning: T o enhance implementation efficiency, some large contracts have been packged to include both works and goods, including the Maojiaping Water Treatment Plant, the two wastewater treatment plants in Cixi, and the pump stations. Either standard bidding documents or modified bidding documents for C iv i l Works, or for Supply and Installation o f Plant and Equipment, w i l l be used for preparing the bidding documents for these contracts, subject to the agreement o f the Bank on a case by case basis.

Selection of Consultants: Consulting services wil l include design review and construction management, business management, ut i l i ty regulatory study, water planning study, and water and wastewater operational support. All consulting services w i l l be provided by consulting f i rms . Short l i s t s of consultants for services estimated to cost less than $300,000 equivalent per contract may be composed entirely of national consultants, in accordance w i th the provisions o f paragraph 2.7 o f the Consultant Guidelines.

B. Assessment of the agency's capacity to implement procurement

Procurement activities for Component 1 w i l l be carried out by the NWSC, where CMSC w i l l be responsible for Component 2. Procurement for Component 3 w i l l be carried out primarily b y the

37

Ningbo PMO in collaboration wi th CMSC and NWSC. The P M O w i l l provide overall coordination and instruction for al l procurement activities.

The P M O has designated a well qualified Chief Engineer to be responsible for overall management o f project procurement. NWSC has established a dedicated Project Management Unit (PMU), which i s headed by an NWSC assistant chief engineer and has four full-time staff. NWSC has experience with World Bank procurement procedures under the Zhejiang Mul t i - Cities Project which closed in 2001. CMSC’s Technical Department, under the direct supervision o f the Managing Director, w i l l be responsible for implementation o f the project. Five staff from the technical department w i l l be working on project-related procurement issues. CMSC i s a new organization and has limited procurement experience.

For I C B procurement, a qualified international tendering company China Minemetal International Tendering Company, to be confirmed has been recruited as procurement agent. This tendering company w i l l also be the procurement agent for NCB procurement o f the C ix i Wastewater Component.

An assessment o f the capacity o f the Implementing Agency to implement procurement actions for the project was carried out b y the Bank project procurement specialists in September 2004. The Procurement Assessment i s contained in the Project Files. The key procurement risk under the project i s CMSC’ lack o f experience with Wor ld Bank procedures. Corrective measures which have been agreed are:(i) the project w i l l include a design review and management consultancy to assist both CMSC and NWSC; and (ii) an experienced design institute and tendering company w i l l be recruited for project preparation and procurement assistance. The overall project risk for procurement i s average.

C. Procurement Plan

At appraisal, the Borrower, , developed a procurement plan for project implementation. This plan has been agreed between the Borrower and the Bank in December 2004 and i s available at the Ningbo Municipal PMO and through the World Bank Internet Site. The Procurement Plan w i l l be updated annually, in agreement with the Bank to reflect actual project implementation needs, and improvements in institutional capacity. The Procurement Plan i s provided in Table B below.

D. Advance Contracting and Retroactive Financing

Retroactive financing would be applied for expenditures incurred after September 1,2004 for c iv i l works and employment o f consulting f i rms. Advance contracting w i l l be in accordance with Bank and project guidelines. Proposed advance contracting and retroacting financing are summarized in the Table B below. The estimated expenditures are around US$20 million, with a conservative estimate o f US$12 mi l l ion in retroactive financing required, which i s below the threshold o f 10% o f the total loan amount (US$13 mil l ion) under in Wor ld Bank Operational Policy 12.10. The Ningbo Municipal Government has been made aware that payments made in expectation of retroactive financing are at the Borrower’s risk, and do not commit the Bank to making a loan for the project or the financing o f such payments.

38

E. Frequency o f Procurement Supervision

3. Services

In addition to the prior review supervision to be carried out b y the Bank, the capacity assessment recommends procurement supervision missions every six months to carry out post reviews of procurement actions.

Less than $100,000 N S None Above $100,000 QCBS All

(Firms)

Table A: Thresholds for Procurement Methods and Prior Review

Less than $500,000

Individual Other Above $50,000

Less than $100,000

NBWS/C3

CQ

2005 Jun. 2005 to 20.0

None

NBWS/C4 Dec.2005 Aug. 2005 to Feb. 7.0

CX/C2&3

Package A-TA

Total

2006 Jan. 2005 to Sep. 80.0 2005 Jun. 2005 to Dec. 3.0 2008

RMB 170 million

I I I ( ~ ~ $ 2 0 million equivalent) I

39

Y E

c B 8 8%

k B

T f f 5

m m u z 0 z

L

* vi $ $

2 2 3 s

f m Y

F s m z

0 d

I m p;'

6 8

3 3

m p;' P E N

m m p;' p;'

9 Y

8 8 W m

0 0

0 3 3 i

8 s 2 0

s 2 0

z

m

-

$ Y m

a E w 8 'e 2

s Y v1 E

v1

3 L B z a 9

g $ B Y

E B d

a a 9 9 E E

0 0 0 .- Y .- Y

2 2 Y

s s

I

N s u B 2 U V

m

X u P

Table C-3 Consultancy Assignments with Selection Method and Time Schedule

B

C

D

E

supervision months NWSC Central QCBS Prior Aug. 20,2005 24 months Control System TA

Price and Service QCBS Prior Feb. 28,2007 17 months Regulatory

Strategic Water QCBS Prior Aug. 20,2005 24 months Planning

Cixi Sewage QCBS Prior Jun. 10,2006 21 months Company TA

42

Annex 9: Economic and Financial Analysis

CHINA: Ningbo Water and Environment Project

A. Financial Analysis

Project Level Analysis:

Ningbo Wuter Supply Component. The after-tax financial internal rate o f return (FRR) i s calculated as 8.7%, which indicates that the project component i s financially viable, as i t exceeds the 3.0% weighted average cost o f capital. This i s equivalent to an NPV of RMB 901 mil l ion over the project component’s estimated 35 year economic l ife.

Cixi Wastewater Component. Wastewater tariffs are presently applied to a l l properties receiving a water bill regardless o f whether they are connected to the public sewer system. Consequently, while the wastewater system expansion w i l l significantly increase the proportion o f the population receiving service, the increase in the revenue base w i l l be much more limited. For this reason, the concept o f incremental revenue underlying FRR i s not fully applicable and, therefore, an FRR was not calculated for this component. The average incremental financial cost (AIFC) o f the component i s estimated at RMB 2.33/m3. This i s higher than the projected average tariff needed to meet the financial requirements o f the project wastewater company, estimated to be Y 1 .65/m3, indicating the presence o f financial subsidies. This subsidy i s in the form o f contributions from Cix i City Government toward the capital cost o f project component. The AIFC i s also higher than those estimated for the Ningbo wastewater components o f the recent Zhejiang Urban Environment Project (Zhenhai: Y 1 .99/m3, Dongqian Lake: Y 1 .27/m3, Cicheng: Y0.86/m3, Jiangdongnan: Y0.84/m3). However, while those project components largely involved an expansion o f existing facilities, entirely new treatment facilities and collection systems are being constructed in Cixi.

Entity Level Analysis:

Financial projections have been prepared for the NWSC and CMSC on an annual basis over the 2004 - 2015 period. These projections are based on the requirement o f each company to comply with the proposed project financial covenants on cost recovery and debt service coverage, as well as the need for internally generated contributions toward project counterpart funding. The key financial covenant for each company relating to cost recovery. N W S C i s to generate annual operating revenues that are sufficient to cover total operating expenses, any loss on non- operating activities, increases in working capital other than cash, debt service requirements, and 20% of the annual average o f its capital expenditures incurred (excluding developers’ contributions), or expected to be incurred, for the current year, the previous year, and the following year. CMSC i s to generate annual operating revenues that are sufficient to cover total operating expenses, any loss on non-operating activities, increases in working capital other than cash, and debt service requirements.

In both cases, the ratio o f operating revenues to costs i s expressed as the cost recovery ratio, which, therefore, must be at least 1 .O in each year. In addition, a debt service coverage ratio and asset debt equity ratio covenant w i l l also be applied under which the companies’ ability to incur additional debt w i l l be conditional on their maintaining these ratios at a minimum o f 1.3 and maximum of 0.7 respectively.

43

Ningbo Water Supply Company:

NWSC i s a stateowned enterprise that was established in i t s present legal form in 1982, but can trace i t s operating history back to 1926 with the establishment o f the city’s original piped water system. Presently, the company provides piped water supplies to a population o f approximately 1.3 mi l l ion through 295,000 customer connections in the three core urban districts (Haishu, Jiangdong, Jiangbei), the newer urban districts o f Zhenhai and Beilun, and part o f the urban core o f Yinzhou District. With very rapid economic and population growth in and around Ningbo over the past decade, NWSC has struggled to meet the resulting growth in water demand. Over the past f ive years, water sales have increased by 44%, from an average o f 417,000 m3/d in 1999 to just under 600,000 m3/d in 2003. This has placed considerable strain on the productive capacity o f the company’s supply, treatment and distribution systems. By 2003, peak day production actually exceeded i t s design treatment capacity o f 820,000 m3/d. In order to meet this increasing demand, as well as to expand i t s service coverage in newly urbanizing areas around the city core and improve water quality, NWSC has embarked on a major capital works program. Capital expenditures between 2001 and 2003 totaled RMB 630 mi l l ion and are projected to be about RMB 3.2 bi l l ion over the 2004 - 2008 period. Key operating and financial indicators are given in Table 1, as well as in Table 6.

Table 1, Key Operating & Financial Indicators for Ningbo Water Supply Company

Indicator Value Year Operating:

Average daily water sales (m3) 588,000 2003 Ratio of domestic to non-domestic water sales 28:72 2003

Staff 990 2004 Staff per thousand water connections 3.4 2004

Collection performance (% billings collected) 98% 2004 Customer receivables (days worth of billings) 19 2003

Total debt (Y million) 577 Oct 2004 Short-term debt (Y million) 252 Oct 2004 Return on equity - 2.8% 2003

Non-revenue water 20% - 25% 2001 - 2004

Financial:

Current ratio 0.4 2001 - 2003

Sector Funding & Cost Recovery. Operation and maintenance costs are internally funded b y NWSC through the application o f tar i f fs to al l customers. Capital expenditures have been financed by a m i x o f loans, internally generated revenues, and allocations from the Ningbo Municipal Government (NMG), primarily from the proceeds o f the Water Plant Construction Fee (WCF), which had been applied as a surcharge on the water bill up to the end o f 2003. As o f January 2004, the WCF was incorporated into the water tariff. In addition, developers are responsible for funding distribution systems within their developments. These systems are generally constructed b y the developers and, upon completion, are transferred to NWSC.

Water Tariffs. As o f January 2004, the average water tariff, including the WCF, was increased by 17% relative to the previous tariffs, which had been implemented in August 1999. This brought the average tariff to Y 1 .42/m3 from Y l .21/m3 in 2003. Ningbo appears to have had difficulty implementing regular and timely tariff increases, which suggests a need for improvements in underlying regulatory mechanisms. The recent tariff increases had been under review by the NMG for at least 30 months. During this period, NWSC incurred net losses and

44

needed to rely heavily on relatively short-term commercial bank loans to finance much needed capital works. The project w i l l incorporate technical assistance to those agencies within NMG responsible for price and service regulation for strengthening these mechanisms.

Customer Group

Residential Institutional Commercial Industrial Special Uses Weighted Average % Increase”

Recent Financial Performance. NWSC reported annual net losses over the past three years (Table 6). The net loss doubled between 2001 and 2002 primarily because tariffs remained unchanged while there were significant increases in a number o f operating expense items. Between 2001 and 2003, net operating revenue increased by 22%, due entirely to increased sales, while operating expenses increased by 5 1 %. The disproportionate increase in operating expenses was due to a number o f factors including: (i) real increases in average salary and wage levels; (ii) large increases in company contributions to government mandated social insurance and staff welfare funds; (iii) major upgrades to the company’s information technology systems that were deemed to be administration expense, rather than capital investment; and, (iv) higher unit expenditures on chemicals and other operating inputs needed to meet peak demands.

Actual Projected 2004 2006 2008 1.19 1.60 1.85 1.39 1.90 2.20 1.44 1.95 2.25 1.44 1.95 2.25 1.78 2.40 2.75 1.42 1.88 2.16

32% 15%

The company’s net losses over the past three years were partly offset by the transfer o f the entire proceeds o f the WCF from NMG to NWSC. As a municipal transfer, the WCF i s not recognized as operating revenue but rather as an equity infusion by NMG into NWSC. As such, i t i s not included in the calculation o f net income. The proceeds o f the WCF are have ranged from about RMB 26 mi l l ion in 2001 to RMB 32 mil l ion in 2003, almost double the net loss in 2001 and about equal to the 2003 loss.

Financial Projections & Tari f f Requirements. Projections prepared for N W S C indicate that ongoing and planned capital investments w i l l place a significant financial burden on the company over the next decade (Table 6). Actual and planned capital expenditures over the 10 year period from 2002 to 201 1 are estimated as RMB 4.1 billion, o f which 70% i s concentrated in the 2004 - 2008 period. Over this five year period, the company’s proposed NWEP component accounts for just under half o f total planned investment. Almost 75% of the cost o f i t s overall investment program i s to be funded from internally generated revenues and debt. To provide the revenue for the funding o f these investments, i t i s estimated that tar i f fs w i l l need to be increased by 52% over the next five years (Table 2). This would include a 32% increase at the beginning o f 2006, from an average o f RMB 1.42/m3 to RMB 1.88/m3, and a 15% increase at the beginning o f 2008, which would bring the average tariff to RMB 2.16/m3. NMG i s now working toward the approval o f the required 2006 increase. Over the remainder o f the forecast period, which extends to 2016, the requirement for additional tariff adjustments i s projected to be l imited to those needed to offset normal inflationary increases in operating and maintenance expenses.

45

Assuming that NWSC can successfully implement the required tariff increases, the company i s projected to be able to operate on a financially sustainable basis, but due to i t s very large capital investment program, cash flow and debt service w i l l need to be carefully managed. Net income i s projected to be positive in all years enabling the company to comply wi th the project covenant relating to cost recovery, with the possible exception o f 2006. In 2006, the cost recovery ratio i s estimated to be slightly below the minimum required level o f 1 .O. Over the remainder o f the forecast period, this ratio i s anticipated to gradually improve, from 1.1 in 2007 to 1.8 by 2015. Virtually al l o f the cash generated from this net income w i l l be needed to fund capital works and service debt on these works. Total debt outstanding i s projected to increase rapidly, from RMB 387 mi l l ion at the end o f 2003 to a high o f RMB 1.9 bi l l ion by the end o f 2007. Between 2004 and 201 1, annual debt service i s projected to increase from RMB 36 mi l l ion to RMB 352 mill ion. The impact o f debt service on the company w i l l be greatest over the 2008 - 2012 period, when annual debt service i s estimated to average RMB 335 mill ion. Although the company i s projected to be able to service this debt, the debt service coverage ratio may decline below 1.3, the minimum level needed to achieve full compliance wi th the project financial covenants. This ratio i s projected to be 1.2 between 2007 and 201 1, wi th the exception of 2008 in which the ratio i s projected to be 1.1. However, beginning in 2012, this ratio i s expected to improve rapidly to levels well above 1.3 as annual debt service declines. The debt - asset ratio should remain well below 0.7 in all years, peaking at 0.4 over the 2006 - 2008 period.

Sensitivity Analysis. A comprehensive sensitivity analysis has been undertaken to assess the impact o f potential changes in the key variables underlying the base case financial projections. These include: (i) a one year delay in the implementation o f the tariff increases, from the beginning o f 2006 and 2008 to the beginning o f 2007 and 2009; (ii) a 5% reduction in water sales; (iii) a combination o f a 5% reduction in water sales and one year delay in tariff increases; and, (iv) a two percentage point increase in the cost o f all NWSC debt as o f 2008. All o f these events would have a significant adverse impact on the cash f low position of NWSC. Of the single variable events, scenario (i), a one year delay in tariff increases, has the greatest impact. This would leave the company wi th a large cash shortfalls in 2006 and 2008, o f about RMB 90 mil l ion and RMB 140 mi l l ion respectively. In order to cover this shortfall while maintaining i t s capital investment program, the company would have to defer repayments o f existing short-term debt as well as taking out new short-term loans. Scenario (iii), which combines scenarios (i) and (ii) i s projected to result cash shortfalls o f about RMB 140 mi l l ion and RMB 200 mil l ion in 2006 and 2008 respectively. While this might also be addressed through debt deferments and new borrowings, repaying this additional debt could require up to 10 years. This would incur substantial interest charges, estimated to be almost RMB 140 million, at current interest rates.

Cixi Municipal Sewage Company Limited:

Company Overview. Cix i i s a rapidly urbanizing county level ci ty within Ningbo Municipality that i s well outside the coverage area o f the Ningbo Municipal Sewage Company, which serves Ningbo’s urban core and two adjacent districts. In Cixi, urban wastewater treatment has been limited to a relatively small system serving the C ix i urban core. T h i s system has been directly managed and operated by agencies o f the city government. Additionally, a new wastewater collection network has recently been constructed to serve the new Hangzhou Bay Development Zone. Wastewater collected here w i l l be treated at the Northern WWTP to be constructed under NWEP. In April 2004, the city government established CMSC to assume responsibility for the implementation, ownership and operation o f the NWEP funded wastewater component in Cixi as well as those existing systems in the C ix i urban core and Hangzhou Bay. Within i t s service area, CMSC w i l l take ownership and operating responsibility for a l l trunk sewers, the separate

46

sanitary sewer network, as well as all combined sewers that are presently under the ownership o f the city government.

1 .os 3.90 1.90 4.90 1.69 18%

Sector Funding & Cost Recovery. Sector funding has largely relied on government budgetary transfers but as a result o f recent reforms, user fees are beginning to contribute a much larger share o f these funding requirements. Up until April 2004, the city government applied wastewater charges only to the commercial and special use groups. The charge was included on the water bill, collected by C ix i Water Supply Company (CWSC) and then remitted to the C ix i Finance Bureau. However, as o f May 2004, new wastewater tariffs were introduced that apply to all customer groups (Table 3). The average tariff i s now estimated to be RMB 0.37/m3 compared to RMB 0.49/m3 in the Ningbo urban core. As was previously the case, these tariffs are bil led and collected by CWSC. However, consistent with state policy for the reform o f the wastewater sector, the wastewater tariff revenues are now being directly remitted by CWSC to CMSC.

l .20 4.50 2.20 5.65 1.95 15%

Financial Projections & Tariff Requirements. The financial projections prepared for CMSC indicate that very significant tariff increases w i l l be required to enable i t to operate on a financially viable and sustainable basis (Table 3). Despite the recent application o f tar i f fs to al l customer groups, tariff levels remain low relative to the operational costs of the existing wastewater system, and particularly the new NWEP wastewater system. The average tariff w i l l need to be increased by about 130% as of 2006, f rom RMB 0.37/m3 to RMB 0.86/m3, and then by a further 66%, to RMB 1.43/m3, by the beginning o f 2008. The 2006 increase i s required to fully recover the operating costs o f the existing Jiaochangshan WWTP and sewer network, to cover a portion o f the init ial operating costs o f the new NWEP system, and to provide a l imited contribution toward NWEP counterpart funding needs. The increase in 2008 i s designed to ful ly recover NWEP operating and maintenance costs and to meet debt service on the NWEP project loans. Additional, but smaller increases are projected to be required in 2010 and 2012, o f 18% and 15% respectively, which would bring the average tariff to just under RMB 2/m3.

Table 3, Cixi Wastewater - Existing & Projected Wastewater Tariffs

Residential Institutional Commercial Industrial Special Uses Weighted Average % Increase’’

~ B / m 3 wa Actual 2004 0.15 0.25 0.85 0.25 1.15 0.37

r consumed, current te Pro

0.70 2.60 4.25 0.86 132% 66%

s) ted

%--++E-

’’ Refers to % increase in weighted average tariff.

Even with these very large tariff increases, debt service w i l l place a considerable strain on CMSC, particularly over the 2010 - 2014 period (Table 7). Beginning in 2008, principal repayment begins on the domestic bank loan used to finance about 10% o f the cost o f the company’s NWEP component. In 2010, repayments on the proceeds o f the Bank loan onlent to CMSC begin. Annual debt service i s projected to peak in 2014 at Y86 mill ion, but then drop by over RMB 20 mi l l ion beginning in 2015, as total debt levels decline. Assuming that the required tariff increases are successfully implemented beginning in 2006, the company should be able to comply with the cost recovery covenant in al l years. This ratio i s projected to range between 1 .O

47

and 1.3 and average’ 1.2 over the 2006 - 2015 period. The company should also be able to comply wi th the debt - asset covenant, which i s projected to peak at 0.5 in 2008 and 2009, but remain well below the covenant maximum of 0.7. However, the projections do indicate that CMSC might experience some difficulty in meeting the debt service covenant in those years in which debt service i s greatest. The debt service ratio i s projected to be slightly below 1.3, the minimum level needed for full compliance, in a number o f years over the forecast period. The ratio i s projected to be as low as 1.0, in 2006, and then again in 2011, the first full year o f principal repayment on the proceeds o f the Bank loan. However, over the entire 2006 - 2015 period, the ratio i s projected to average 1.4, above the covenant minimum.

Sensitivity Analysis. Changes in key variables have been assessed in terms o f their potential impact on the financial position o f CMSC. These include: (i) a one year delay in the implementation o f the tariff increases now planned for the beginning o f 2006, 2008,2010 and 2012; (ii) a 5% reduction in water sales, and therefore wastewater flows, in 2007 - 2010 and 10% lower beginning in 201 1; (iii) a combination o f reduced water sales and one year delay in tariff increases; and, (iv) a two percentage point increase in the cost o f CMSC debt as o f 2008. A one year delay in implementing the required tariff increases would have the greatest adverse impact on the company. A delay in the implementation o f the f i rs t two increases now planned for the beginning o f 2006 and 2008 could constrain CMSC’s capacity to provide i t s share o f project counterpart funding. The estimated shortfall i s about RMB 20 mill ion, which could be addressed through an increase in the city government’s contribution. The city government has agreed to meet all counterpart requirements not met by CMSC.

A delay in tariff increases now planned for 2010 and 2012 would leave the company wi th a temporary cash shortfall o f about RMB 30 - RMB 35 mill ion. T h i s could be addressed through borrowing or a modest delay in planned capital investments over this period. If scenarios (i) and (ii) are combined, the longer-term impact i s more significant than under scenario (i) alone. The shortfall arising in 2008 would be relatively similar to that under scenario (i) and could be addressed through an increase in government contributions toward counterpart funding. However, a larger shortfall, o f at least RMB 100 mi l l ion would arise in.2012 and 2013. I t i s less l ikely that this shortfall could be could be covered through borrowing. With the lower wastewater flows under scenario (ii), a delay in the expansion o f the company’s treatment plants, which i s now planned to begin in 201 1 could reduce, but not eliminate the shortfall. Instead, either larger tariff increases would have to be implemented, increased contributions by government for capital investments over this period, or a combination o f the two would probably be required.

B. Ability and Willingness to Pay

Ability to Pay. An affordability analysis has been undertaken in order to ensure that domestic customers, particularly those in the lower income group, can afford the water tariffs in Ningbo and wastewater tariffs in Cixi. Two representative household groups are considered in the affordability analysis: (i) the average income group; and, (ii) the low-income group, which i s defined as the household earning the average o f the lowest 10th percentile o f income distribution. In Ningbo, the low income household earns an estimated Y605/person/year, while in C ix i the income i s slightly higher. In both Ningbo and Cixi, incomes are conservatively projected to increase at an annual real rate o f 2% for the average income household and 1% for the low-income household over the 2004 - 2010 period, well below that actually achieved over the past decade. Affordability i s assessed by comparing incomes to the total cost of water supply, wastewater and other municipal charges included on the water bill. The results o f this

48

analysis are shown in Table 4 and indicate that the tariffs are anticipated to be affordable over the entire 2004 - 2010 period.

Table 4, Affordability Analysis for Domestic Consumers

Utility Bil l as a % o f Household Income 2004 2006 2008 2010

Vingbo

Low Income: Water Wastewater Other Fees & Charges Total

Average Income: Water Wastewater Other Fees & Charges Total

3x i

Low Income: Water Wastewater Other Fees & Charges Total

Average Income: Water Wastewater Other Fees & Charges

'Total

I 0.7% 0.8% 0.9% 0.8% 0.1,% 0.2% 0.1% 0.2% 0.1% 0.1% 0.1% 0.1%

0.3% 0.4% 0.4% 0.4% 0.1% 0.1% 0.1% 0.1%

1.0% 1.2% 1.2% 1.2% 0.1% 0.2% 0.3% 0.3% 0.1% 0.1% 0.1% 0.1% 1.2% 1.5% 1.5% 1.6%

0.5% 0.6% 0.6% 0.6% 0.0% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.6% 0.7% 0.7% 0.8%

For the very poorest households, the municipal government extends low income protection under which a minimum income o f RMB 280 - RMB 320 per person, depending on the number of persons in the household, i s guaranteed. This amount includes a provision for lifeline uti l i ty services. With increases in both water and wastewater tariffs in 2004, an additional direct subsidy amount has been provided to al l households qualifying for the social assistance. In Ningbo, the entire increase in water and wastewater tariffs i s refunded on the first 10 m3 of water consumed. In Cixi, the increase i s refunded for a l l water consumed by qualifying low income households.

Willingness to Pay. Willingness to pay for water and wastewater services i s relatively high in both Ningbo and Cix. A willingness to pay survey undertaken during project preparation found that 88% o f households responding in Ningbo were wil l ing to pay 10% - 30% more for water, provided the existing quantity and quality o f supply i s maintained. A further 3% were wil l ing to pay 30% - 50% more. In Cixi, the survey assessed combined willingness to pay for water and wastewater, which i s bil led together and i s typically regarded by consumers as single charge. Almost 92% o f respondents were wil l ing to pay 10% - 30% more, if existing services are maintained or improved. An additional 5% were wil l ing to pay 30% - 50% more.

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C. Fiscal Impact and Sustainability

An analysis of the fiscal impact o f the C ix i wastewater component indicates that the project counterpart contributions to be allocated by the C ix i City Government are projected to be well within i t s financial capacity to provide these contributions. The C ix i City Government w i l l allocate RMB 370 mil l ion to the component, equivalent to 67% o f total counterpart funding requirements and 32% of the total cost o f the component. The ability o f the city to provide this funding was assessed by reviewing municipal revenues and expenditures relative to project counterpart funding requirements (Table 5). The data analyzed refer to what i s referred to in Chinese government accounting as on-budget and extra-budget funds. On-budget funds include revenues f rom statutory taxes and levies, such as the urban construction maintenance fund. Their allocations are subject to approval by higher levels o f government. Extra-budgetary funds are derived f rom non-tax off-budget revenues such as some types o f user charges collected b y administrative departments. There i s less control by higher levels o f government on these revenue sources. The most important off-budget source o f funds for C ix i i s the proceeds from long-term leases o f municipal land, a significant portion o f which i s allocated to the public infrastructure construction.

As a result o f strong economic growth, there have been very large increases in municipal revenue and expenditures in Cix i in recent years. Between 2000 and 2003, total municipal revenue increased by just under 200%, while municipal revenue allocated to urban construction increased b y about 470%. This extremely large increase in capital funding reflects the strong commitment o f the C ix i City Government to accelerate urban infrastructure construction to improve people’s l iv ing standards and provide the enabling environment for sustainable economic growth. Relative to these actual rates o f growth, the financial projections prepared to assess the capacity o f C ix i City to provide the necessary counterpart funding for i t s project component are based on much more conservative assumptions. Over the 2005 - 2009 project implementation period, both municipal revenue and capital investment capacity are assumed to increase at an average annual rate o f 12.5%. This i s less than one-third the actual average growth in revenue, and less than one-sixth the actual growth in capital investment capacity, between 2000 and 2003.

TahlP_S,Cixi Municipal Finance (RMB million - current prices)

2005 2006 2007 2008 2009

Municipal Revenue 9,615 10,817 12,168 13,695 15,407 Capital Investment Capacity 2,054 2,311 2,601 2,918 3,283 Project Contributions 90 90 130 60 0 Project as % of Revenues 0.9% 0.8% 1.1% 0.4% 0.0% Project as % of Capital Budget 4.4% 3.9% 5.0% 2.1% 0.0%

Based on the very conservative assumptions regarding future revenue growth, the analysis indicates that the project component i s affordable by C i x i City. Requirements for project counterpart funds from C ix i City Government as a proportion o f i t s total revenue i s only 0.4 - 1.1 %. When considering only revenues that can be allocated to the infrastructure investment, which i s an approximation o f financial capacity to contribute to the project, counterpart contributions as a proportion o f the capital budget averages 3.8% (5.0% in the peak year, 2007), well within the range considered to be affordable.

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While the impact o f counterpart funding on the capital budget i s within the range considered to be affordable, there i s uncertainty regarding actual revenues available to fund these budgets over the project implementation period. This uncertainty arises because over 90% o f the city’s capital investment capacity i s projected to be generated from long-term leases o f municipal land. The annual revenues from land leases could vary significantly from year to year in response to changes in government policy, the overall rate o f economic growth, and the demand for land. These factors have been considered in the base case analysis. For example, only half o f the quantity o f suburban land planned for development i s included in projected capital investment capacity because the progress o f development and leasing o f these lands might potentially be affected by government policy controlling the conversion o f farmland into urban land uses. However, a significant proportion o f the land to be developed in C ix i i s exempt from this policy because i t i s being created from infilling along the coast and, therefore, does not involve farmland. Furthermore, the supply of land available for leasing i s projected on the conservative side. I t i s based on the average area o f land leased over the last seven years, and there i s a four year lag before any newly developed land i s assumed to be leased out. However, both the demand and price o f coastal land are increasing dramatically, due in large part to the construction o f the Ningbo - Shanghai cross-bay expressway bridge in Cixi, which has not been taken into account in the projections. Therefore, the projected revenues f rom land leases are based on very conservative assumptions over the project implementation period.

To evaluate the sensitivity o f project affordability to reduced revenues f rom land leases, a worst- case scenario for the project was also projected. Under this worst-case scenario, the city’s capital investment capacity (mainly from the revenue from land leases) i s assumed to be only half that projected under the base case scenario, which in turn was based on leasing only half the land actually planned by the C ix i Government. T h i s scenario would reflect a major decline in demand for land in Cixi, which i s not l ikely to occur. However, even under this extreme scenario, the project remains affordable. Project contributions as a proportion o f the capital budget would be 7.7% (10.0% in the peak year, 2007). Although this i s s t i l l affordable, C i x i would need to more carefully manage i t s capital budget in order to ensure the counterpart funds are made available in a timely manner.

D. Economic Analysis

For the Ningbo water supply component, benefit-cost analysis has been employed. For the C ix i wastewater component, i t s benefits are substantial but cannot be adequately quantified. For this reason, the choice for priority interventions for this component has been guided by cost effectiveness and least cost analyses.

Ningbo Water Supply Component

Benefit Cost Analysis. Based on very conservative estimates o f project benefits, the economic internal rate o f return (ERR) i s calculated as 15.6%, which indicates the project component i s economically viable as i t exceeds the 12% economic cost o f capital. This i s equivalent to an economic net present value o f RMB 236 mi l l ion over the project component’s estimated 35 year useful l i fe. Three types o f benefits have been incorporated into the analysis. First, the incremental supply o f water to be provided b y the project component has been valued at the average water tariff, which i s taken as a proxy for willingness to pay. Second, in addition to providing additional supply capacity, the project w i l l improve water quality, as well as a secure supply. A survey undertaken during project preparation found that over 90% o f households would be wil l ing to pay more for water if the existing quantity and quality o f supply are at least maintained. This incremental willingness to pay has been estimated and incorporated into the

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analysis as a project benefit. Third, with improved water quality, households are projected to slightly reduce their per capita consumption o f bottled water, which i s much more expensive than piped water. Based on usage patterns, i t i s estimated that per capita consumption o f bottled water w i l l decline by 5%. The savings resulting from this reduced consumption has been incorporated into the analysis as a project benefit.

The calculated ERR represents a lower bound estimate o f the economic viabil ity o f the project component. Due to rapid economic and population growth, the existing water supply system i s now operating in excess o f its design capacity on peak days. In the absence o f the project, supply shortages would worsen considerably, which has the potential to significantly constrain economic growth. The critical role that the project plays in enabling continued growth o f the Ningbo economy has not been ful ly incorporated into the benefit cost analysis. The share o f the city’s GDP generated from secondary industry, which depends on a reliable and adequate supply of water, i s over RMB 90 billion, and i s growing by more than 10% per year. The annualized cost o f the project component over i t s useful l i fe i s equivalent to less than 0.04% o f the annual value o f secondary industry. Therefore, i f water supply shortages reduce growth even slightly, for example b y only half o f one percentage point, the value o f this lost growth would be more than 10 times the cost o f the project component.

Cixi Wastewater Component

Least Cost Analysis. The project design incorporates the least cost option o f two wastewater collection and treatment systems; one serving north and central Cixi, and the other serving eastern Cixi. A least cost analysis was undertaken in which three main wastewater system configurations were assessed: (i) the two system configuration; (ii) a single centralized system serving the north, east and central areas; and (iii) three separate facilities, wi th three treatment plants located in the north, east and northeast. The two system configuration was found to be the least cost; about 5% lower than the single system, and 3% - 5% lower than the three system configuration. The selection o f the treatment process has also been based on least cost analysis. Two alternative process options were considered: (i) anaerobic, anoxic, aerobic with biological denitrification and phosphorus removal (A20); and (ii) anoxic, aerobic w i th chemical phosphorus removal (A0 with chemical phosphorus removal). The average incremental economic cost (AIEC) for the A 2 0 process i s estimated to be RMB 0.41/m3, compared to RMB 0.48/m3 for the A 0 process. On this basis, the least cost alternative, A20, has been selected and incorporated into the project design.

Cost Effectiveness Analysis. The marginal cost o f pollutant removal provides an indication o f the relative cost effectiveness o f the C ix i wastewater component. Based on the treatment facilities alone, the AIEC per ton o f COD removed i s RMB 3,820. This i s comparable to other recent Bank funded projects even though the C ix i component includes the construction o f entirely new treatment plants while most other projects involve expanding existing facilities, which i s generally less costly. For example, the AIEC per ton o f COD removed for the two wastewater components o f the Tai Basin Urban Environment Project (Ln. 4748-CHA, 2005) that involve only WWTP expansion i s estimated at RMB 2,510 and RMB 3,875. Based on the entire cost o f the C ix i component, the AIEC per ton o f COD removed i s estimated at RMB 13,020 per ton o f COD removed. This i s high because, in addition to the new treatment plants, complete collection systems also need to be constructed under this project component. As a result, the capital cost o f the collection system i s particularly significant, representing 75% o f the total cost o f the component.

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Table 6, Ningbo Water Supply Company - Summary Financial Projections (RMB million - current prices)

ActualEstimated I P r o j e c t e d 2002 20031 2004 2006 2008 2010 2012 2014

Income Statements

Operating Revenue 191.5 223.5 291.8 514.8 692.0 722.2 754.8 788.1 Operating Expenses 141.5 179.5 173.7 223.8 254.8 286.5 335.2 370.1 Depreciation 79.8 81.0 93.0 164.6 230.1 251.7 279.4 293.4 Operating Income (29.8) (37.0) 25.2 126.4 207.1 184.1 140.2 124.5

Net Non-Operating Expenses (16.7) (17.0) (17.5) (18.6) (19.5) (20.5) (21.7) (22.9) Interest & Other Financial Expenses 19.3 11.1 11.1 41.5 83.8 54.0 39.9 16.1

Operating Subsidies 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Income Tax Net Income

Cash Flow Statements

Sources Internal Cash Debt Equity Contributions

0.0 0.0 0.0 34.0 47.1 49.7 40.2 43.3 (32.4) (31.1) 31.6 69.5 95.7 100.9 81.7 88.0

66.7 61.0 135.6 275.7 409.6 406.6 401.0 397.5 200.2 332.5 219.1 527.5 20.0 127.0 0.0 0.0

81.3 203.8 194.0 93.9 45.9 48.5 51.2 54.1 Other 1.9 0.2 0.0 0.0 0.0 0.0 0.0 0.0 Total 350.0 597.4 548.8 897.0 475.6 582.1 452.2 451.7

Applications Capital Investments 155.9 436.1 480.0 737.4 65.5 273.1 96.0 189.4 Working Capital Increase (Decrease) (92.4) (35.2) 6.5 35.9 39.3 (11.0) 13.2 (4.1) Interest 22.3 16.2 27.6 73.7 83.8 57.7 39.9 16.1 Debt Repayment 341.7 183.8 10.0 90.4 266.2 283.4 280.1 154.6 Other Total

Cash Changes Ending Cash Balance

Balance Sheets

Assets Current Assets Net Fixed Assets Work in Progress Other Assets Total

0.0 0.0 11.9 11.3 10.5 13.1 13.9 14.6 427.5 600.8 536.0 948.7 465.2 616.2 443.0 370.7

(77.5) (3.4) 12.8 (51.6) 10.3 (34.1) 9.2 81.0 44.4 41.0 53.8 23.3 35.5 31.0 43.0 158.4

192.9 157.0 111.8 125.3 124.3 140.5 147.4 271.4 919.4 896.3 1,119.6 2,689.3 3,727.2 3,407.4 3,428.1 3,177.0 181.1 569.2 819.5 824.5 0.0 185.9 0.0 0.0 134.6 397.4 409.4 436.0 456.5 481.5 508.8 537.7

1,428.0 2,020.0 2,460.2 4,075.1 4,308.0 4,215.3 4,084.3 3,986.1

Liabilities and Equity Current Liabilities 422.3 495.8 234.1 455.4 590.5 558.3 295.2 109.0 Long Term Debt 52.2 219.6 424.3 1,244.5 1,080.7 721.6 561.2 367.8 Equity 953.5 1,304.6 1,801.8 2,375.1 2,636.8 2,935.5 3,227.9 3,509.3 Total 1,428.0 2,020.0 2,460.2 4,075.1 4,308.0 4,215.3 4,084.3 3,986.1

Financial Covenants

Cost Recovery 1.4 1.1 1.0 0.9 1.1 1.2 1.2 1.4 Debt Service Ratio 0.8 2.0 3.3 1.4 1.1 1.2 1.3 2.2 Debt ~ Asset Ratio 0.2 0.2 0.2 0.4 0.4 0.3 0.2 0.1

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Table 7, C ix i Municipal Sewage Company Limited - Summary Financial Projections (RMB million - current prices)

Actual/Estimated I P r o j e c t e d 2002 20031 2004 2006 2008 2010 2012 2014

Income Statements

Operating Revenue Operating Expenses Depreciation Operating Income Operating Subsidies Net Non-Operating Expenses Interest & Other Financial Expenses Income Tax Net Income

Cash Flow Statements

Sources Internal Cash Debt Equity Contributions Total

Applications Capital Investments Working Capital Increase (Decrease) Interest Debt Repayment Total

Cash Changes Ending Cash Balance

Balance Sheets

Assets Curient Assets Net Fixed Assets Work in Progress Other Assets Total

Liabilities and Equity Current Liabilities Long Term Debt Equity Total

Financial Covenants

Cost Recovery Debt Service Ratio Debt - Asset Ratio

0.0 0.0 5.0 26.5 112.8 142.1 180.3 216.2 0.0 0.0 4.1 17.9 27.4 47.1 59.4 71.1 0.0 0.0 2.8 8.3 8.3 46.8 47.9 49.1 0.0 0.0 (1.9) 0.2 77.1 48.1 72.9 96.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 4.7 19.3 16.5 14.4 0.0 0.0 0.0 0.1 23.9 9.5 18.6 26.9 0.0 0.0 (1.9) 0.1 48.5 19.3 37.8 54.7

0.0 0.0 0.9 8.5 61.5 85.4 102.2 118.2 10.0 6.0 35.0 0.0 0.0 0.0 174.3 136.2

0.0 0.0 0.0 138.3 44.2 5.0 0.0 0.0 0.0 0.0 0.9 321.1 242.0 100.4 108.2 153.2

0.0 0.0 0.0 304.0 202.7 15.0 59.2 59.2 0.0 0.0 (0.1) 0.9 4.1 1.3 2.3 1.9 0.0 0.0 0.0 8.6 18.2 19.6 16.5 14.4 0.0 0.0 0.0 0.0 15.4 34.1 57.5 71.7 0.0 0.0 (0.1) 313.5 240.4 70.0 135.5 147.2

0.0 0.0 1 .o 7.6 1.6 30.4. (27.3) 6.0 0.0 5.0 6.0 22.7 28.5 73.0 12.4 27.5

0.0 5.0 6.6 50.9 55.8 86.5 33.2 51.7 0.0 193.3 190.5 173.5 156.9 1,173.2 1,109.6 1,042.6 0.0 0.0 0.0 482.3 1,016.1 15.3 103.4 191.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 198.3 197.1 706.6 1,228.8 1,275.0 1,246.2 1,286.1

0.0 0.0 0.7 27.0 37.0 55.2 66.3 62.8 0.0 0.0 0.0 266.5 556.2 513.2 414.2 354.4 0.0 198.3 196.4 413.2 635.7 706.6 765.6 868.9 0.0 198.3 197.1 706.6 1,228.8 1,275.0 1,246.2 1,286.1

N A N A 1.3 1 .o 1.3 1.3 1.2 1.2 N A NA N A 1 .o 1.7 1.2 1.2 1.2 N A 0.0 0.0 0.4 0.5 0.4 0.4 0.3

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Annex 10: Safeguard Policy Issues CHINA: Ningbo Water and Environment Project

The project i s classified as a Category A project and the fol lowing safeguard policies are triggered: (i) environmental assessment; (ii) dam safety; (iii) cultural heritage; and (iv) resettlement. Ningbo Municipality i s a repeat borrower, with experience of a completed project (Zhejiang Multi-Cities Project), and the ongoing Zhejiang Urban Environmental Project which includes four components in Ningbo City. The Ningbo authorities have developed a good understanding and experience in implementing World Bank safeguard policies.

Environmental Assessment (OP4.01)

The project as a whole w i l l have a significant net positive impact, as it w i l l improve water supply quality in Ningbo City and ambient water quality in C ix i City, and promote sustainable development o f Ningbo Municipality. The China Academy o f Environmental Sciencemingbo Environmental Science Institute prepared the EIA for the Ningbo Water Supply component, and the Beij ing Novel Environmental Protection Co. Ltd. prepared the EIA for the C ix i Wastewater component. Both EIAs have been approved by the State Environmental Protection Agency (SEPA). An international consulting firm, SOGREAH, prepared a consolidated Project EIA and EMP according to the Bank’s operational policies, and based on the Chinese EIAs. A comprehensive EIA was also carried out by Ningbo Municipality before the commencement o f the Zhougongzhai reservoir project in 2001, and this was approved b y SEPA and reviewed b y the Bank task team during project preparation. The summary results f rom the Zhougongzhai reservoir were also incorporated into the Project EIA. The Project EIA report addressed relevant environmental issues and developed necessary mitigation measures in the EMP. Key environmental issues follows.

Ningbo Water Supply Component

Impacts on Zhangxi River Downstream of Jiaokou Reservoir: There are two reservoirs on the Zhangzi River which supply water for the project--Jiaokou reservoir, and the Zhougongzhai reservoir which i s located eight k m s upstream o f Jiaokou, and i s currently under construction. The raw water intake for the Maojiaping water treatment plant w i l l be located at Jiaokou reservoir. The Zhangxi River flows into the western Yinzhou plain and i s a secondary tributary to the Fenghua River, via the larger Yingjiang River. The combined storage capacity o f the two reservoirs i s approximately 240 mi l l ion cubic meters, and the median annual inf low into Jiaokou reservoir i s estimated at 280 mi l l ion cubic meters.

Analysis during project preparation indicates that, when fully utilized, around half o f the annual average inf low into Jiaokou reservoir w i l l be diverted to Ningbo City. The water balance calculations indicate that this w i l l not have an adverse impact on other water users such as irrigation, animal husbandry, village water supplies, etc. The reason for the lack of impacts i s the additional storage provided by Zhougongzhai reservoir. During the critical dry season months of April-May, Jiaokou reservoir w i l l release sufficient water to meet downstream demands, while s t i l l satisfying the demand from Ningbo City. The rapid conversion o f land from agricultural to

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urban, and industrial use, i s expected to reduce the irrigation demand over the next ten to twenty years, although the conservative water balance calculations assumed that the amount o f agricultural land would remain unchanged, and would be used for high water consuming rice cultivation.

The annual hydrograph o f the Zhangxi River w i l l be modified due to the Zhougongzhai reservoir and the diversion o f water to Ningbo City, with reduced wet season flows, and moderately reduced dry season flows. The estimated f low variations on an average year before the diversion are 3.9 m3/s (January)-20 m3/s (August), whereas after the diversion, the f low range i s estimated to be within the range o f 3-5 m3/s throughout the year. During a drought year (P=90%), the low f low in January i s only 0.4 m3/s, whereas after the diversion a minimum flow o f 0.8 m3/s w i l l be maintained under all conditions.

While the reduction in high season flows i s l ikely to have some impact on the r iver benthic fauna and fishery communities, the actual impact i s difficult to predict in advance. An analysis of the Zhangxi River shows that i t does not have any identified rare species or important commercial fisheries, although there may be an impact on some sedentary fishes which are used by local residents, such as the snakehead fish. The EIA concludes that the planned f low releases from the Jiaokou reservoir, after the diversion, can meet the water and ecological demands without causing significant environmental impact .

The analysis presented in the EIA i s appropriate at this stage o f the planning process. However, environmental f low assessment i s a complex issue, and thus a more comprehensive study w i l l be conducted during implementation and prior to the start of water diversions to further optimize the operation o f Jiaokou reservoir. In particular, i t might be useful to have occasional larger flows to preserve an element of natural variability. Although no adverse impacts are expected from the water diversion, Ningbo w i l l establish a monitoring and “Grievance Redress System” to identify and rectify any unexpected impacts. The Redress System w i l l include noti fying local authorities, posting signs along the river, and other appropriate notification methods, as well as establishing a system for recording, investigating, and where necessary, rectifying any adverse impacts. The Environmental F low Assessment and Grievance Redress System are included in the EMP.

Ningbo City Wastewater; Ningbo City has recently prepared a Wastewater Master Plan, the first phase o f which includes US$140 mi l l ion o f wastewater infrastructure i s being financed b y the World Bank under the existing Zhejiang Urban Environment Project. The Ningbo Water Supply component of the proposed Project would not result in large additional increases in percapita water use; rather i t would provide Ningbo Ci ty water users wi th higher quality water, and more reliable service. Therefore, the incremental impact o f the Project on wastewater generation i s expected to be moderate, and the investments planned under the Zhejiang Urban Environment Project are sufficient to meet current wastewater needs in Ningbo.

Cixi City Wastewater Component

Wastewater Treatment: Both the Northern and Eastern wastewater treatment plants are designed to meet discharge standard Class lA , with l i m i t s of 10 mg/l BOD and SS, and removal of nutrients to 15 mg/l total-nitrogen and 0.5 mg/l o f phosphorus. The proposed treatment

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process i s a modif ied N O (anaerobic followed by aerobic) with tertiary treatment. T w o options were considered for the tertiary treatment process: i) engineered wetland; and ii) conventional filtration. Since the land in the vicinity o f the plants i s recently reclaimed coastal land with no development and i s owned b y the C ix i City government, there are no land acquisition costs or resettlement issues. The engineered wetland was therefore chosen as the preferred alternative because i t helps to create an ecological habitat, and provides robust treatment wi th considerable buffering capacity.

Effluent Disposal: Two alternative treated effluent disposal options for the C i x i wastewater treatment plants were analyzed during project preparation: (i) disposal to Hangzhou Bay, and (ii) disposal to the C i x i canal network. Key factors influencing the selection include: the shalloy depth of Hangzhou Bay off the coast o f Cixi; the large tidal fluctuations; and the potential for re- use o f the treated effluent in water-scarce Cixi. The preferred alternative i s to discharge to the Cix i canal network, and to reuse this effluent for agricultural and landscape irrigation.

Water quality modeling was conducted for both the canal network and the marine near-shore areas. Various scenarios were simulated, and the modeling results confirmed that the project w i l l significantly improve the water quality of the overall C i x i canal network. There w i l l be a moderate deterioration o f water quality in the vicinity of the wastewater treatment plant discharge points, but the overall water quality i s considered acceptable by SEPA. Modeling was also conducted for different treatment plant discharge location options. A multi-point discharge option was selected for the northern wastewater treatment plant to minimize water quality impacts. For the eastern wastewater treatment plant, a site on the Shitangheng r iver between two canal-sea sluice gates, was chosen as the optimal discharge location. The feasibility o f including an additional discharge point(s) for the eastern plant w i l l be considered during the operations stage, and i s included in the EMP.

During flood periods, the canal-sea gates in the vicinity o f the two treatment plants w i l l be opened to release f lood waters to Hangzhou Bay. Flood waters w i l l be mixed wi th treated effluent and thus the impact o f these occasional releases on near-shore areas was modeled under different scenarios. The scenarios considered various tidal regimes, and f lood season and dry season flows. The modeling indicated that the mixing zone during discharge periods i s within 2 k m s from the shoreline, and the resulting water quality would be in compliance wi th the national ocean function zone requirements. The task team noted that there i s s t i l l potential for minor adverse impacts along the shoreline, which supports considerable fishing and aquaculture activities. This impact might be reduced if the mixing and retention o f the treated wastewater in the canals were improved, and short-circuiting to the sea gates avoided. The EMP includes a program to evaluate various options during the operational phase.

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Sludge Management: Sludge from the treatment plants w i l l be dewatered through gravity thickening, followed b y centrifuges. A total o f 67,000 m3 sludge, wi th a moisture content o f 78%, w i l l be generated per year from the two plants. The sludge w i l l be transported to nearby municipal landfill sites in trucks wi th air-tight tanks. The sludge f rom the northern plant w i l l be disposed o f in the C ix i West landfill, and the sludge from the eastern plant wi l l be disposed o f in the eastem landfill. The western landfi l l was expanded and upgraded in 2002, and currently has 10 empty cells, which w i l l use impermeable liners and leachate treatment systems. C i x i City

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plans to upgrade the eastern landfill in 2005, and utilize impermeable liners and leachate treatment systems for the four remaining cells. Upgrading the eastern landfi l l i s included in the EMP. The western landfi l l i s forecast to reach full capacity around 2012, and the eastern landfi l l w i l l reach capacity in 2015. Since the two landfills w i l l be full after only f ive to seven years o f wastewater treatment plant operation, the EMF calls for the C ix i Municipal Sewerage Company to develop a sludge management plan to consider alternative long-term options for sludge management. Monitoring o f sludge quality i s also included in the EMP to ensure that the sludge can be safely disposed o f in a municipal landfill.

Industrial Pollution Control: Control of industrial discharges to both the canal and sewerage systems b y the C i x i City Environmental Protection Bureau appears to be effective and a high level of compliance i s reported. Industries account for approximately half o f the wastewater discharges in Cixi , and a rapid pace o f industrial growth i s planned for C ix i Ci ty over the next decade. I t i s expected, however, that the new industries w i l l take the form of modern and more efficient plants wi th relatively reduced levels o f pollution, and more efficient use o f resources in general.

Environmental Technical Assistance; Cix i w i l l use the Bank loan for technical assistance in the following areas: wastewater treatment plant operations; sludge management; industrial pollution control (for both CMSC and the EPB), canal water quality management; and building business management capacity in CMSC.

Cixi Coastline Development: The high suspended solids concentration in Hangzhou Bay, combined with the hydrological and tidal currents, results in sediment accretion along the northern Ningbo coastline, with accretion rates o f the order o f 50-100 meters per year. According to Cix i City’s Plan for Integrated Beach Development (1997-2010), approximately 130 km2 o f land w i l l be enclosed b y sea-dikes from 2000-2010. The reclaimed land w i l l be carefully planned and developed wi th agricultural and aquaculture areas, industrial estates, coastal tourism, and wetland conservation zones. The area outside o f the sea dike i s called the “beach- area” and the width o f the beach area varies depending on the tide but can extend hundreds o f meters at l ow tide. The areas inside and outside of the sea dike have r ich benthos resources and vegetation, and provides an excellent habitat for migratory and indigenous water birds. In addition, there i s considerable aquaculture in the near shore area &e., just outside the sea dikes) including snails, crabs, and fish. In contrast to most situations, wetland areas are being created in Cix i due to the sediment accretion along the coastline.

Cix i Government understands the importance o f the coastal habitat and intends to conserve significant wetland areas and promote eco-tourism. A conceptual design for the wetland conservation program has already been developed, and C ix i Government intends to apply for GEF funds under the Wor ld BanWGEF East Asia Seas Pollution Reduction Program (scheduled for FY06) to undertake more sophisticated eco-system planning.

Dam Safety (OP4.37)

There are two dams whose reservoirs supply water to the Maojiaping water treatment plant, and thus are directly associated with the NWEP: (i) Jiaokou dam which was commissioned in 1975

58

(stone-masonary dam, 67 meters high and 407 meters long, and 120 mi l l ion m3 storage); and ii) Zhonggongzhai which started construction in 2003, and w i l l be completed in 2006 (concrete arch dam, 126 meters high, 240 meters long, and 112 mi l l ion m3 storage). There are an additional three dams which w i l l supply water to the ring main to be constructed under this project: (i) Baix i D a m completed in 2001 (rock-fill dam, 124 meters high and 398 meters long, 168 mi l l ion m3 storage); (ii) Hengshan Dam, completed in 1995 (rock-fill dam, 70 meters high, 123 meters long, and 11 1 mi l l ion m3 storage); and iii) Tingxia Dam, completed in 1985 (concrete gravity dam, 76 meters high, 317 meters long, and 150 mi l l ion m3 storage). An independent dam safety expert contracted b y the World Bank reviewed the safety o f the four existing dams and progress on the construction o f the Zhougongzhai, and has found them to be satisfactory. The Zhejiang Provincial Bureau of Water Resources also conducts periodic D a m Safety Panel reviews o f al l major dams in the province. Because o f the direct connection with the Project, Emergency Preparation Plans for Zhougongzhai and Jiaokou dams, acceptable to Bank, w i l l be prepared and implemented. The Bank w i l l review and document construction progress, commissioning, and the first filling o f Zhougongzhai dam, using a qualified dam safety expert.

Cultural Property (OPN 11.03)

Surveys indicate that project activities would not affect any above ground artifacts wi th archeological, paleontological, historical, religious, or unique natural values as defined under OPN 11.03. However, most o f the construction activity w i l l involve excavation work, and thus al l contracts w i l l include standard clauses which fol low Chinese law and regulations regarding chance finds during construction.

On important cultural relic i s Tashan Weir, which i s located downstream o f Jiaokou dam on the Zhangxi River. Built in the year 833, i t i s now an o ld cultural site under national preservation. I t i s 134.4 meters long, 10 meters high, and 4.8 meters wide. I t s surface i s made o f stones, and i t s body made o f wood and stones. Tashan Weir remains intact and i s functioning to prevent salt water, store fresh water, channel water into the fields, and sluice water elsewhere. The diversion o f water from the Zhangxi River i s not expected to have an impact on either the structural integrity or the functioning of the Tashan Weir. The weir was reinforced in 1995, and the Bank team confirmed that the weir appears to be in good structural condition. The cultural property safeguard i s triggered in this instance as a recognition o f the cultural importance o f the Tashan Weir, and not because o f any expected negative impacts caused b y the project.

Resettlement

A resettlement action plan (RAP) meeting the Wor ld Bank’s OP/BP 4.12 has been prepared for the Ningbo Water Supply and C ix i Wastewater components. Detailed surveys for all known resettlement and land acquisition have been completed. In the event there are additional resettlement needs, a resettlement pol icy framework has been prepared. The surveys indicate that resettlement impacts are relatively small given the scope o f the project. The fol lowing table summarizes the impacts.

59

Summary of Resettlement lmpacfs

Permanent Land Acquisition: (h 60.3 Collective 16.2 State-Owned 44.1

371 .O Collective 228.8 State-Owned 142.1

Building Demolition (m2) 351 9 Rural Houses 91 6 Collective-Owned 350 State-Owned 1632 Enterprise Owned 620

Temporary Land Occupation (hz

Population Affected (person) 5549 Permanent Land Acquisition 51 9 Temporary Land Occupation 5030

The most significant impact i s the temporary use o f land during construction o f the water supply pipes in Ningbo and the sewerage pipes in Cixi. The major permanent acquisition o f land i s for the Maojiaping water treatment plant. The detailed social-economic survey indicated there are no minority ethnic groups affected b y land acquisition and house demolition.

NWSC and CMSC w i l l be responsible for funding resettlement activities in coordination with local government officials. The P M O w i l l establish a resettlement office, staffed with specialists from NWSC and CMSC, to manage and supervise resettlement. Resettlement funds w i l l be channeled through the PMO-resettlement office directly to households and villages, thus reducing opportunities for delay or unauthorized commissions. Affected farmers (in particular affected women and surplus rural labor) w i l l be encouraged to participate in the land restoration through broad consultation. Village committees w i l l play an important role in monitoring resettlement and land acquisition activities. An independent monitoring institute w i l l supervise resettlement activities twice a year as required by the Bank.

During preparation, attention was paid to the completed resettlement activities at the Zhougongzhai multipurpose reservoir, which i s being constructed under Ningbo’ s municipal waster resources development plan. The reservoir, although not included in NWEP, w i l l indirectly supply water to Jiaokou reservoir. Approximately, 967 households with 2 3 8 1 people were relocated from a poor, mountainous area to a developed area in Yinzhou District. I t was determined that Bank OP 4.12 did not apply to the resettlement, because i t was completed in May 2003, approximately one year before the Bank’s identification mission for NWEP and the reservoir i s being constructed, under the muncipality’s water resources master plan to serve multiple purposes, including hydropower, f lood control, and water storage. Nevertheless, the World Bank team carried out due diligence on the completed resettlement activities and prepared a comprehensive report on the subject. The report concluded that al l significant adverse impacts have been mitigated in a manner consistent wi th the Wor ld Bank resettlement pol icy objectives and to the satisfaction o f the displaced persons. The due diligence report i s contained in the project files.

60

Environmental Management Plan

The EMP specifies the appropriate environmental management and supervision mechanisms, mitigation measures, environmental monitoring plans, training plans and budget allocation necessary to implement the mitigation measures and strengthen the Borrower’s capacity. There w i l l be an environmental officer in the P M O to supervise the implementation o f the EMP, and both NWSC and CWSC w i l l have environmental officers responsible for their components. The PMO, CMSC, and NWSC have sufficient capacity and funds to implement the EMP.

Key environmental construction management issues include spoil reuse andor proper planning of spoil disposal sites re-vegetation; using low noise equipmentltechniques; restrictions on working hours, and temporary sound barriers for sensitive sites; timely reclamatiodre-vegetation of temporarily occupied land; use o f coffer-dam and slope protection measures; and proper operational procedures o f the contractors concerned for construction.

Consultation and Disclosure

The key project stakeholders are the Ningbo and C ix i City governments, Ningbo Water Supply Company, C ix i Municipal Sewage Company, and local people who may lose land and livelihoods, villagers and communities that may be impacted because o f the construction and operation o f the project.

EA Disclosure and Consultation: For each o f the two components, a detailed Public Consultation Plan has been prepared which outlines the overall consultation and information disclosure plan during EA preparation in accordance with Bank’s policies. Consultations were conducted in two rounds for the Water Supply Component f rom March to October 2004 and in three rounds for C ix i Wastewater Component f rom January to September 2004. More than 400 people were consulted, including project affected people and communities, local government agencies and experts, and the relevant information and documents were provided during the consultations. EIA reports were disclosed in local libraries in September 3 and October 15,2004 with notice announced via local newspapers. The draft EIA reports were also disclosed in the Infoshop on August 5, in November 2004, and January 2005. The EA Summary was sent to the World Bank Board o f Executive Directions in January, 2005.

RAP Disclosure and Consultation: During project preparation consultation has taken place through resettlement surveys and meetings with government officials and project-affected people. These consultations influenced the design o f the RAP. An information handbook was prepared for all project-affected people, outlining the project, resettlement policies and procedures. In addition, “land acquisition and building demolition” announcements have been provided to all affected parties. The full RAP was disclosed in Ningbo and C ix i libraries and government websites in October 2004. The draft RAP was disclosed in the World Bank Infoshop on August 5 and the updated RAP was submitted in November, 2004.

Town Survey: Incorporation o f the towns surrounding the core urban area in Ningbo City i s one o f the main objectives o f the overall Ningbo City Water Supply Master Plan. Most parts o f

61

Yinzhou Distr ict are supplied by 24 town water supply systems with a capacity o f 265,000 m3/d. In addition there are 14 town water supply systems in Zhenhai and Beilin Distr icts with a capacity of 70,000 m3/d. Western Yinzhou District i s facing the most critical water supply problems and seven towns are scheduled for rapid incorporation into NWSC. Surveys of these towns were undertaken to assess the demand for NWSC service, and the terms and conditions under which the towns would l ike to be incorporated. The survey included consultations with town and district officials, town water companies, and water users.

The total population in the seven towns i s 232,000. Of the six towns, four have severe water quality problems, while the other three have acceptable water supplies. A l l seven towns have high levels of unaccounted for water (UFW), with an average of 40% UFW. Water tar i f fs are somewhat lower than NWSC, with a weighted average of around 1.2 Y/m3 while the NWSC tariffs are 1.4 Y/m3. Six of the seven towns would l ike to associate with NWSC as follows:

P Two towns would l ike to transfer al l assets, debts, ownership and management functions to NWSC;

> One town would l ike transfer management responsibility to NWSC but retain ownership of assets ;

> Three towns would l ike to purchases treated water from NWSC and maintain ownership and operation of the distribution system; and

> All six towns expressed an interest to protect the employment rights of the town water supply company staff.

Although a l l six towns strongly support the NWEP, views diverge on how best to incorporate into NWSC. I t should be noted that the primary unit of government for the towns i s the Yinzhou District Government, and the towns are considered a “branch” of the district government. The Yinzhou Dis t r ic t government i s thus the primary decision maker for the towns. Currently, the Yinzhou Dis t r ic t government, Ningbo Municipal Government, and NWSC are discussing how best to provide NWSC service to Yinzhou. The Project wi l l provide technical assistance support to NWSC to assist in providing service under appropriate terms to the out-lying towns.

62

Annex 11: Project Preparation and Supervision CHINA: Ningbo Water and Environment Project

Planned Acutal PCN review June 2004 July 2004 Initial PID to InfoShop August 2004 August 2004 Initial ISDS to InfoShop August 2004 August 2004 Appraisal December 2004 December 2004 Negotiations March 2005 January 2005 BoardlRVP approval May 2005 March 2005 Planned date of effectiveness Planned date of mid-term review Planned closing date

August 2005 July 2007

December 20 10

Key institutions responsible for preparation of the project: Ningbo Municipal Development Planning Commission Contact Person: Ms. Xuxu, Vice Director, World Bank Project Management Office 1509/R, 15th Floor, Tianning Tower, 138 West Zhongshan Road, Post Code 3 15000, Ningbo China Tel: 86-574-8728-0409; Fax: 86-574-8728-0430; E-M: xx@nbdpc.aov.cn

Contact Person 2: Mr. Li Zhibo, Deputy Division Chief, Division of Foreign Capital Utilization, Ningbo Municipal Development Planning Commission 91 North Jiefang St., Post Code: 315000, Ningbo China Tel: 086-574-87 18-6862, Mobile Tel: 13 185927686; Fax: 086-574-8736-7370

Bank staff and consultants who worked on the project included: Name Title Unit Greg Browder Task Team Leader, Senior Engineer EASUR Gu Lix in Senior Municipal Engineer EASUR John Smithson Civi l Engineer Consultant George Taylor Environmental Engineer Consultant Dan O’Hearn Financial Analyst Consultant Younhui Fan Financial Analyst Consultant Liu Ming Environmental Engineer Consultant Zhang Zezhen Dam Safety Engineer Consultant Dan Gibson Senior Social Specialist EASSD Zhefu Liu Social Specialist EASSD Peishen Wang Environmental Specialist EASEN Zhentu Liu Senior Procurement Specialist EAPCO David I Senior Financial Specialist EAPCO Margaret Png Senior Counsel LEGEA Anne Harrison Program Assist ant EASUR

63

Annex 12: Documents in the Project File CHINA: Ningbo Water and Environment Project

1. “Ningbo Water Treatment, Transmission, and Water Supply Ring Main Project Feasibility Study,” November 2004. Prepared by Shanghai Municipal Engineering Design and Research Institute and Zhejiang Institute of Water Conservancy and Hydroelectric Power.

2. “Cixi Urban Sewage Treatment Stage 1 Project,” November 2004. Prepared by Shanghai Municipal Engineering Design Institute and South China Institute of Environmental Sciences.

3. “Ningbo Water and Environment Project-Design Review Advisory Report,” January 2005. Prepared by SOGREAH and SCE.

4. “Overview of Ningbo Urban Water Supply Development Plan,” April 2004. Prepared by Ningbo Water Supply Company.

5. “Ningbo Water and Environment Project-Consolidated Environmental Impact Assessment Report and Management Plan,” November 2004. Prepared by Sogreah and SCE.

6. “Ningbo Water Supply Component Environmental Impact Assessment Report,” November 2004. Prepared by China Academy of Environmental Science and Ningbo Environmental Science Institute.

7. “Cixi Sewerage Component Environmental Impact Assessment Report,” November 2004. Prepared by Beijing Novel Environmental Protection Co. Ltd.

8. “Resettlement Action Plan and Summary Report” August 2004. Ningbo Water and Environment Project Management Office.

9. “Report on Zhougongzhai Resettlement,” December 2004. Prepared by World Bank Ningbo Task Team (Attached to Safeguard Clearance Memo).

64

Annex 13: Statement of Loans and Credits CHINA: Ningbo Water and Environment Project

Original Amount in US$ Millions

Difference between expected and actual

disbursements ~ _ _ _ ~

Project ID FY Purpose IBRD IDA SF GEF Cancel Undisb Ong Frm Rev’d

PO57933

PO73002

PO66955

PO65035

PO69852

PO81749

PO77615

PO77 137

PO75602

PO75728

PO65463

PO67337

PO68058

PO767 14

PO40599

PO58847

PO70441

PO70191

PO60029

PO58846

PO71147

PO70459

PO68049

PO64729

PO56199

PO51859

PO47345

PO56516

PO56596

PO58845

PO45915

PO49436

PO58843

PO42109

PO459 10

PO58844

2005

2004

2004

2004

2004

2004

2004

2004

2004

2004

2004

2003

2003

2003

2003

2003

2003

2003

2002

2002

2002

2002

2002

2002

2001

2001

2001

2001

2001

2001

2001

2000

2000

2000

2000

2000

_ _ _ ~ ~

CN-Tai Basin Urban Environment

CN-Basic Education in Western Areas

CN-ZHEJIANG URBAN ENVMT

CN-Gansu & Xinjiang Pastoral Development CN-Wuhan Urban Transport

CN-Hubei Shiman Highway

CN-GEF-Gansu & Xinjiang Pastoral Develop

CN-4th Inland Waterways

CN-2nd National Railways (Zhe-Gan Line) CN-GUANGDONWPRD UR ENVMT

CN - Jiangxi Integrated Agric. Modem.

CN-2nd GEF Energy Conservation

CN-Yixing Pumped Storage Project

CN-2nd Anhui Hwy

CN-TIANJIN URB DEV I1

CN-3rd Xinjiang Hwy Project

CN-Hubei Xiaogan Xiangfan Hwy

CN-SHANGHAI URB ENVMT APLl CN-Sustain. Forestry Dev(Natura1 Forest) CN-Natl Railway Project

CN-Tuberculosis Control Project

CN-Inner Mongolia Hwy Project

CN-Hubei Hydropower Dev in Poor Areas

CN-SUSTAINABLE FORESTRY DEV. PROJECT

CN-3rd Inland Waterways

CN-LIAO RIVER BASIN

CN-HUAI RIVER POLLUTION CONTROL

CN -WATER CONSERVATION

CN-Shijiazhuang Urban Transport

Jiangxi I1 Hwy

CN-Urumqi Urban Transport

CN-CHONGQING URBAN ENVMT

Guangxi Highway

CN-BEUING ENVIRONMENT I1

CN-HEBEI URBAN ENVIRONMENT

3rd Henan Prov Hwy

61.30

100.00

133.00

66.27

200.00

200.00

0.00

91.00

200.00

128.00 100.00

0.00 145.00

250.00

150.00

150.00

250.00

200.00 0.00

160.00

104.00

100.00

105.00

93.90

100.00

100.00

105.50

74.00

100.00

200.00

100.00

200.00

200.00

349.00

150.00

150.00

0.00 0.00

0.00 0.00

0.00

0.00 0.00

0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00

0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00

0.00

0.00 0.00

0.00

65

0.00

0.00 0.00 0.00

0.00 0.00

0.00

0.00 0.00

0.00

0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00

0.00 0.00 0.00

0.00 0.00

0.00

0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00

0.00

0.00 0.00

10.50

0.00

0.00

0.00 0.00

26.00

0.00

0.00 0.00 0.00

0.00 0.00

16.00

0.00 0.00 0.00 0.00

0.00

0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00

25.00

0.00 0.00

0.00 61.30

0.00 99.34

0.00 133.00

0.00 64.41

0.00 198.00

0.00 200.00

0.00 10.50

0.00 91.00

0.00 200.00

0.00 128.00

0.00 99.00

0.00 14.60

0.00 132.52

0.00 247.50

0.00 143.82

0.00 99.33

0.00 135.32

0.00 184.92

0.00 14.11

0.00 31.60

0.00 81.22

0.00 85.63 0.00 84.02

0.00 76.07

0.00 71.59

0.00 59.98

0.00 81.08

0.00 32.85

0.00 85.41

54.77 60.62

0.00 46.16

3.70 146.15

0.00 87.29

0.00 276.92

0.00 113.96

0.00 43.61

0.00

-0.66

0.00 7.08

109.48

0.00

1.38

0.58

0.00

0.00

4.73

19.42

-2.80

25.08

5.33

17.25

-19.68

7.50

5.00

8.26

-22.78

11.30

21.35

13.24

7.26

28.23

-24.42

8.95

60.04

10.72

46.16

76.65

45.79

193.74

53.46

23.94

0.00

0.00

0.00

0.00

0.00

0.00 0.00

0.00

0.00

0.00

0.00 0.00 0.00

0.00

0.00

0.00

0.00 0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00 0.00

0.00

0.00

0.00

0.00

0.00

0.00 0.00

PO64924 2000

PO64730 2000

PO45264 2000

PO56424 2000

PO58308 1999

PO43933 1999

PO57352 1999

PO03653 1999

PO41268 1999

PO38121 1999

PO60270 1999

PO36953 1999

PO41890 1999

PO42299 1999

PO51705 1999

PO50036 1999

PO49665 1999

PO46564 1999

PO46829 1999

PO46051 1999

PO51856 1999

PO51888 1999

PO56216 1999

PO36414 1998

PO03619 1998

PO46563 1998

PO35698 1998

PO03614 1998

PO03606 1998

PO45788 1998

PO51736 1998

PO49700 1998

PO37859 1998

PO03539 1998

PO46952 1998

PO40185 1998

PO03566 1998

PO36949 1998

PO03590 1997

PO03637 1997

PO36405 1997

PO03650 1997

PO44485 1997

PO40513 1996

CN-GEF-BEUING ENVMT I1 CN - Yangtze Dike Strengthening Project

CN-SMALLHLDR CATTLE DEV

CN-TONGBAI PUMPED STORA

CN-PENSION REFORM PJT

CN-SICHUAN URBAN ENVMT

CN-RURAL WATER lV

CN-Container Transport

CN-Nat HwyWHubei-Hunan

CN-GEF-RENEWABLE ENERGY DEVELOPMENT CN-ENTERPRISE REFORM LN

CN-HEALTH IX CN-Liaoning Urban Transport

TEC COOP CREDIT IV

Fujian I1 Highway

Anhui Provincial Hwy

CN-ANNING VALLEY AG.DEV

CN - Gansu & Inner Mongolia Poverty Red.

RENEWABLE ENERGY DEVELOPMENT

CN-HIGHER EDUC. REFORM

ACCOUNTING REFORM & DEVELOPMENT CN - GUANZHONG IRRIGATION

CN - LOESS PLATEAU I1 CN-GUANGXI URBAN ENVMT

CN-2nd Inland Waterways

CN - TARIM BASIN I1

HUNAN POWER DEVELOP.

CN-Guangzhou City Transport

ENERGY CONSERVATION

Tri-Provincial Hwy

E. CHINNJIANGSU PWR

CN- IAIL-2

CN-GEF Energy Conservation

CN ~ SUSTAINABLE COASTAL RESOURCES DEV.

CN - FOREST. DEV. POOR AR CN-SHANDONG ENVIRONMENT

CN-BASIC HEALTH (HLTH8)

CN-Nat Hwy3-Hubei

CN - QINBA MOUNTAINS POVERTY REDUCTION CN-NAT'L RURAL WATER 3

CN - WANJIAZHAI WATER TRA

TUOKETUO POWEWINNER

SHANGHAI WAIGAOQIAO

2nd Henan Prov Hwy

0.00 210.00

93.50

320.00

0.00 150.00

16.00

71.00

350.00

0.00

0.00

10.00

150.00

10.00

200.00

200.00

90.00

60.00

100.00

20.00

27.40

80.00

100.00

72.00

123.00

90.00

300.00

200.00

63.00

230.00

250.00

300.00

0.00

100.00

100.00

95.00

0.00 250.00

30.00

0.00 400.00

400.00

400.00 210.00

0.00 0.00

0.00 0.00 5.00

2.00

30.00

0.00 0.00 0.00

5 .OO

50.00

0.00 35.00

0.00 0.00

30.00

100.00

0.00

50.00 5.60

20.00

50.00

20.00

0.00

60.00

0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00

100.00 0.00

85.00

0.00

150.00

70.00

0.00 0.00

0.00 0.00

66

0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00

0.00

0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00

0.00

0.00

0.00

0.00 0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00

0.00 0.00 0.00

0.00 0.00

0.00 0.00 0.00

25.00

0.00

0.00

0.00 0.00 0.00 0.00 0.00 0.00

35.00

0.00 0.00

0.00 0.00 0.00

0.00 0.00

0.00

0.00

0.00 0.00

0.00

0.00 0.00

0.00 0.00 0.00 0.00

22.00

0.00 0.00 0.00

22.00

0.00

0.00

0.00 0.00

0.00 0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.00

0.00

100.00

0.00 0.00 0.00

18.61

0.00 0.00

0.00 0.00

0.00

0.00 0.00 9.60

0.00 13.30

0.00

0.00 0.00

0.00

0.00 10.19

37.00

2.67

145.00

20.00

0.00 0.00

86.00

0.00

0.00 2.06

0.00

1.40

0.00

0.00

0.00

0.00

75.00

102.50

0.00

19.00

23.32

102.82

9.13

141.62

1.17

84.94

18.39

3.01

50.33

21.87

2.25

32.94

23.52

34.23

43.45

20.23

15.79

30.71

12.87

5.69

17.60

21.84

15.89

58.34

15.35

7.14

21.52

100.31

31.67

15.58

40.55

1.65

0.71

43.92

21.97

20.07

34.44

21.15

3.20

0.56

13.07

29.55

70.81

12.88

20.76

102.82

4.75

115.99

1.17

85.43

15.43

21.62

41.17

30.28

3.75

24.07

23.52

-12.39

43.45

29.83

11.95

27.54

99.87

7.31

17.51

19.07

18.02

66.60

52.35

10.44

166.52

120.3 1

19.17

15.58

126.55

1.65

22.06

45.98

-77.09

21.47

24.52

21.15

6.55

3.77

88.07

132.05

48.91

31.88

6.17

0.00

0.00

0.00

0.00 29.36

11.40

0.93

0.00 11.80

3.53

0.90

0.00

0.00

0.00 0.00

0.00

-9.97

10.00

0.00 0.00

0.00

-2.47

32.52

2.66

0.00

-9.25

100.31

0.00 0.00

16.12

1.05

0.00 -0.40

10.80

11.30

0.00 0.00

-0.07

3.35

1.09

29.55

52.02

24.88

PO03594 1996 CN - GANSU HEX1 CORRIDOR 60.00 90.00 0.00 0.00 0.00 71.13 60.31 0.00 PO03599 PO346 18 PO03602

PO03639

PO03571

PO03603 PO03596

PO03540 PO03 6 3 2

1996 1996

1996 1995

1995 1995

1995

1994 1993

CN-YUNNAN ENVMT

CN-LABOR MARKET DEV.

CN-HUBEI URBAN ENVIRONMENT

CN-SOUTHWEST POVERTY REDUCTION PROJECT

CN-7th Railways

CN-ENT HOUSING & SSR

CN-Yangtze Basin Water Resources Project CN-LOESS PLATEAU

CN-ENVIRONMENT TECH ASS

125.00 10.00

125.00

47.50

400.00 275.00

100.00

0.00 0.00

25.00

20.00 25.00

200.00

0.00 75.00

110.00

150.00 50.00

0.00 0.00

0.00 0.00 0.00 0.00

0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00

0.00 0.00

19.48

0.00 41.32

0.01

119.00

57.46 1.92

0.00 0.00

35.68 5.56

17.07 1.21

10.28

38.00 0.21

0.93 0.86

56.92 7.67

66.43 25.36

129.28

93.38 4.60

0.27 1.44

18.43 0.00

5.44

25.36

10.28

9.70 4.60

0.00 1.12

Total: 11,829.37 1,612.60 0.00 181.50 945.99 5,199.81 2,888.65 412.51

CHINA STATEMENT OF IFC’s

Held and Disbursed Portfolio In Mi l l ions of U S Dollars

~~ ~ ~

Committed Disbursed

IFC IFC

FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic

2002 2003 2004 2003 1999/00/02 2002

2003

2004 1998 1998

1992

2004 2004 2004 1994 2004 2004 2002 1995 1994 2004 2003 2002 2004 2002

ASIMCO

Anjia

Antai

BCIB

Bank of Shanghai

CDH China Fund

CSMC CUNA Mutual

Chengdu Huarong

Chengxin-IBCA

China Bicycles

China Green Ener

China I1 China Re L i fe

China Walden Mgt

Colony Capital

Colony China

Darong Dupont Suzhou

Dynamic Fund

Fenglin

Great Infotech

Huarong AMC

IB

IEC

0.00 0.00

40.00

0.00 0.00

0.00

0.00

0.00 5.61

0.00 4.50 20.00 28.00 0.00 0.00 0.00

0.00 10.00 6.23 0.00 19.00 0.00

9.00 0.00

20.00

10.00

2.00 0.00

0.00 24.67 14.96

12.00 12.00 3.20

0.25 0.00 0.00

0.00 15.41 0.01

17.31 0.96 1.50 0.00 7.91 6.00

3.50 2.51

52.18 0.00

0.00

0.00 0.00

11.60 0.00

0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00 0.00

0.00

0.00 0.00

0.00

0.00 0.00

0.00 0.00 0.00

0.00

0.00

0.00

0.00 0.00

0.00 0.00

0.00

0.00 0.00 6.25

0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00

8.00 0.00 0.00

18.00

0.00 0.00 0.00

0.00

0.00

0.00 0.00

0.00 0.00

0.00

0.00 0.00

5.61

0.00 4.50 0.00

0.00 0.00 0.00

0.00 0.00

0.00

6.23 0.00 0.00

0.00 9.00 0.00

0.00

10.00

2.00 0.00

0.00

24.67 3.97

9.60 1.41 3.20 0.25 0.00 0.00

0.00 15.41

0.01 0.00

0.00

0.00 0.00 6.25

0.00 2.80 0.01

52.18

0.00

0.00

0.00 0.00

0.00

0.00

0.00 0.00

0.00

0.00

0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00 0.00 0.00

0.00 0.00

0.00

0.00

0.00

0.00 0.00

0.00

0.00

0.00

0.00 0.00

0.00 6.25 0.00 0.00 0.00

0.00 0.00

0.00

0.00

0.00 0.00 0.00

0.00 0.00

0.00

0.00 0.00 0.00

67

2004

1998

200 1 200 1

2001

1996104

2001

1995

1997

2003

1997100

2001

2003

2004

2000

1998

1999

1993

2002

2001

1995

2000

1996

2004

2003

2004

1993

2003

2002

Jiangxi Chenming

Leshan Scana

Maanshan Carbon

Minsheng Bank

NCCB

Nanjing Kumho New China Life Newbridge Inv. Orient Finance

PSAM FTF' Holdings

Peak Pacific

SAIC

SBTS

SSIF

Shanghai Krupp

Shanghai Midway

Shanxi

Shenzhen PCCP

Sino Gold

Sino-Forest

Suzhou PVC

Wanjie Hospital Weihai Weidongri

Wumart

XACB

Xinao Gas Yantai Cement

Zhengye- ADC

Zhong Chen

0.00

3.61

8.25

0.00 0.00

34.00

0.00

0.00 5.71

0.00

0.00 0.00 12.00

0.00 0.00

26.25

0.00

15.36

3.76

0.00

21.67

0.00

13.64

0.71

0.00 0.00

25.00

4.73

15.00

0.00

12.90

1.35

2.00

23.50

26.58

2.23

30.70

1.95

0.00 1.93

0.03

0.00

0.00 0.08

4.50

0.00 16.02

0.00

0.00 4.00

0.00 2.48

0.00 0.00

6.48

19.94

10.00

0.00

0.00

5.00

0.00

0.00 0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 25.00

0.00 0.00

0.00 0.00 0.00

0.00

0.00 0.00 0.00 0.00

0.00 0.00

0.00 0.00 0.00 0.00

0.00

0.00

0.00 0.00

0.00 0.00

0.00

0.00 0.00 0.00

7.14

0.00 0.00

0.00 0.00

0.00 0.00

57.74

0.00 0.00 0.00

0.00

0.00

0.00 0.00

0.00 0.00

0.00 0.00 0.00

7.00

0.00

0.00 3.61

8.25

0.00 0.00

0.00 0.00

0.00 5.71

0.00

0.00 0.00 5.00

0.00 0.00

26.25

0.00

12.81

3.76

0.00

16.67

0.00

13.64

0.71

0.00 0.00

0.00 4.73

6.14

0.00

0.00

1.35

2.00

23.50

26.46

0.00

23.32

1.95

0.00 0.00

0.03

0.00

0.00 0.00

1.02

0.00

16.02

0.00

0.00 4.00

0.00 2.48

0.00 0.00

6.48

0.00 10.00

0.00

0.00

0.00

0.00 0.00

0.00 0.00

0.00

0.00

0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00

0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00 0.00

0.00

0.00

0.00 0.00

0.00

0.00

0.00 0.00

0.00 0.00

7.14

0.00 0.00

0.00 0.00

0.00

0.00

51.14

0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00

0.00

0.00

0.00 0.00 2.86

0.00

Total portfolio: 352.03 358.04 36.60 104.13 132.62 250.43 0.00 73.99

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

2002

2004

2004

2003

2004

2004

2002

2002

2002

2004

2003

2004 2002

ASIMCO

Antai

CCB-MS NPL

Cellon

Chenming LWC

China Green

Huarong AMC

IEC

KHIT

NCFL Peak Pacific 2

SIBFI SML

0.00 0.00

0.00

0.00

0.06

0.00

0.02

0.00

0.00 0.00 0.00

0.00 0.00

68

0.00 0.00 0.00 0.01

0.00 0.00 0.00 0.00

0.00

0.02

0.01

0.00

0.00

0.01

0.00

0.00 0.00 0.00

0.01

0.00 0.01

0.00

0.00 0.00 0.00

0.00

0.00 0.04

0.00

0.00 0.16

0.00 0.00 0.00

0.00

0.00 0.00

0.00

0.00

2002 Sino Mining 0.01 0.00 0.00 0.01 2002 Zhong Chen 0.00 0.00 0.00 0.03

Total pending commitment: 0.09 0.04 0.03 0.24

69

Annex 14: Country at a Glance CHINA: Ningbo Water and Environment Project

POVERTY and SOCIAL

2002

GNI per capita (Atlas mefhod, US$)

Average annual growth, 1996-02

Population (4 0 8 Labor force (%) 0 9

M o s t recent es t imate ( la tes t year available, 1996-02)

Poverty (77 of population belo wnationalpo vertyline) 5 Urban population (%of totalpopulation) 38 Life eqectancyat birth (years) 71 Infant mortality (per lrOOOlive births) 30

10 75 14

Gross primaryenrollment (%of school-age population) 108 Male 105 Female 108

C hlna

Population, mid-year (millions) 12810 950

GNI (Atlas method, US$ billions) 1219 1

Child malnutrition (% o f children under 5) Access to an improvedwatersource (%ofpopulation) Illiteracy (%of population age E+)

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1982 1992

GDP (US$ billions) 2215 4546 Gross domestic investmentlGDP 332 362

Gross domestic savmgslGDP 348 377 Gross national savingsiGDP 351 380

Current account balanceiGD P 2 4 l.9 Interest paymentsIGDP 0 2 0 6 Total debtiGDP 3 8 159 Total debt sewicelevorts 8 0 8 6 Present value of debtlGDP Present value of debtieqorts

Evorts of goods and sewices/GDP 8 9 8 5

1982-92 1992-02 2001 (average annualgrowth) GDP 9 7 9 0 7 5 GDP Dercaoita 8 1 8 0 8 7

Eas t Lower- As ia & mlddie-

Pac i f i c Income

1,838 950

1,740

10 12

38 89 33 15

76 t3

106 105 106

2001

1,137 1 38 5 25 5 40 9 40 0

15 0 5

146 7 7 141 518

2,411 1,390

3,352

1.0 12

49 69 30

81 t3 111 111 110

n

2002

1232.7 41.0 29.5 44.0 43.8

2.9 0.5 P.6 6.1

2002 2002-06

8.0 7 5 7 2 6.6

STRUCTURE o f the ECONOMY

(ao f GDP) Agriculture Industry

Sewices

Private consumption General government consumption Imports of goods and sewices

Manufacturing

(average annualgrowth) Agriculture lndustty

Services

Private consumption General government consumption Gross domestic investment Imports o f goods and sewices

Manufacturing

1962 1992

33.3 218 45.0 43.9 37.3 33.1 21.7 34.3

50.7 49.2 14.5 t3.1 7.3 18.0

1982-92 1992-02

4.6 3.7 11.6 113 112 10.4 11.7 8.4

11.4 8.1 9.9 8.4 9.5 9.7 9.7 E.8

2001

15.8 50.1 34.2 34.1

45.7 x3.4 23.1

2001

2.8 8.4 9.0 8.4

2.8 10.5 t3.9 10.8

2002

14.5 51.7 44.5 33.7

42.5 t3.5

26.5

2002

2.9 9.9 8.1 7.3

1.9 7.0 14.9

27.5

I Development diamond'

I Life expectancy

~ 7 GNI Gross per primary capita nrollment

1 Access to improvedwatersource

-*-b'ee China

Lo wr-middle-income group

Economic rat ios '

Trade

T 3 Investment Domestic

savings

Indebtedness

as--- China Lo wr-middle-income group

97 98 99 00 01 02

4 *--.-GDI - O - G D P

Growth o f expor ts and impor t s ( O h )

T 30

20

10

0 IlOl 97 98 99 00 01

--*\ -ExDorIs -1morls

70

China ~

P R I C E S and G O V E R N M E N T F I N A N C E

D o m e s t i c p r l c e s (%change) Consumer prices 6 0

1982

implicit GDP deflator -02

Government f lnance (%of GDP, includes current grants) Current revenue 22 9 Current budget balance Overall sumlusideficit -0 3

T R A D E

(US$ millions) Totaleports (fob)

Food Fuel Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Ekport price index (1995=7.70) Import price index(W95=110) Terms of trade (895=W0)

B A L A N C E o f P A Y M E N T S

(US$ mlilio ns) Eports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

1982

22,321 2,908 5,314 P271 8,285 4201

183 3204

41 71 58

1982

24,908 20,555

4,350

376 486

Current account balance 5228

Financing items (net) Changes in net reserves

-995 - 4 2 7

M e m o : Reserves including gold (US$ millions) Conversion rate (DEC, local/US$) 2.4

E X T E R N A L D E B T a n d RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

1982

8,358 IB RD 0 ID A 1

Total debt service IBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Portfolio equity

World Bank program Commitments Disbursements Principal repayments

2,285 0 0

47 657 -P2 430

0

330 1 0

1992

6.4 7.9

14.7 2.0 .l.O

1992

84,940 8,309 4,693

67,936 80,585

3,146 3,570 3t3Q

85 95 89

1992

94,198 86,752 7446

249 1.155

8,850

-D,952 2,132

24,842 5.9

1992

72,428 3,752 4287

8,618 460

30

327 2,343 8,949 11156 1243

1,865 1,331 8 7

2001

0.7 12

7.1 1.1

-4.7

2001

266,155 P,780 8,420

239,802 243,613

4,980 7,495

137,040

83 91 91

2001

299,409 271,325 28,084

-8,774 8,492

7,401

30,046 -47,447

220,051 8.3

2001

70, lD 11,550 8,654

24297 1,550

151

240 2,156

-4,07 44241

3,015

782 1,791 904

2002

-0.8 -2.6

7 .9 0.0

-3.0

2002

325,565 14,623 8,372

297,085 295203

5,237 19285

137,030

78 86 90

2002

365,395 328,013 37,383

-14,945 P,984

35,422

40,085 -75,507

297,721 8.3

2002

155,678 P,051 8,729

23,688 1,831

7 5

-839 -13,593 49,308

2286

563 1,733 1,E7

I n f l a t i o n ( O h ) h

Expor t a n d i m p o r t l e v e l s (US$ mill.)

400,000 T

O2 I 96 97 98 99 00 01

a Exports Imports

Cur ren t a c c o u n t ba lance t o G D P (%)

' T

1 96 97 98 99 00 01 02 1

1 C o m p o s i t i o n o f 2002 debt (US$ mi l l .

I A. 12,051

I F 62,103

1 A . l8RD E - Bilateral B -IDA D. Other mltilateral F. Private C - I M F G. Short-terr

71

MAP SECTION