Document of The World Bank Report No: ICR00001641 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-47480) ON A LOAN IN THE AMOUNT OF US$61.0 MILLION TO THE PEOPLE’S REPUBLIC OF CHINA FOR A TAI BASIN URBAN ENVIRONMENT PROJECT June 29, 2011 China and Mongolia Sustainable Development Unit Sustainable Development Department East Asia and Pacific Region CURRENCY EQUIVALENTS Exchange Rate Effective June 29, 2011 Currency Unit = Renminbi RMB1.00 = US$0.154 US$1.00 = RMB6.4 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS BOD Biochemical Oxygen Demand CAS Country Assistance Strategy COD Chemical Oxygen Demand DFMD Drainage Facilities Management Division (Suzhou) EA Environmental Assessment EIA Environmental Impact Assessment EMP Environmental Management Plan EPB Environmental Protection Bureau GDP Gross Domestic Product GIS Geographic Information System HWTC Huishan Water Treatment Company Limited IDT Institutional Development Training IT Information Technology KPI Key Performance Indicator M&E Monitoring and Evaluation MIS Management Information System MOF Ministry of Finance NH3-N Ammonia Nitrogen NDRC National Development Reform Commission O&M Operation and Maintenance PAD Project Appraisal Document PAP Project Affected Persons PDO Project Development Objective PH Phosphorus PIU Project Implementing Unit PMO Project Management Office PSP Private Sector Participation RAP Resettlement Action Plan RCR Resettlement Completion Report SDC Suzhou Drainage Company SQCC Suzhou Qingyuan Construction Company Limited SWAB Suzhou Water Affairs Bureau TBUEP(O) Tai Basin Urban Environment Project (Office) i TP Total Phosphorus WAMC Wuzhong Asset Management and Administration Company WMG Wuxi Municipal Government WWTP Wastewater Treatment Plant XEDZ Xishan Economic Development Zone XWTC Xishan Wastewater Treatment Company Vice President: Mr. James W. Adams, EAPVP Country Director: Mr. Klaus Rohland, EACCF Mr. Ede Jorge Ijjasz-Vasquez, EASCS/ Sector Managers: Mr. Vijay Jagannathan, EASIN Project Team Leader: Ms. Toyoko Kodama, EASIN ICR Team Leader: Ms. Toyoko Kodama, EASIN ii CHINA Tai Basin Urban Environment Project CONTENTS Data Sheet 1. Project Context, Development Objectives and Design ............................................... 1 2. Key Factors Affecting Implementation and Outcomes............................................... 4 3. Assessment of Outcomes .......................................................................................... 10 4. Assessment of Risk to Development Outcome......................................................... 14 5. Assessment of Bank and Borrower Performance...................................................... 15 6. Lessons Learned........................................................................................................ 19 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners........... 20 Annex 1. Project Costs and Financing .......................................................................... 21 Annex 2. Outputs by Component.................................................................................. 22 Annex 3. Economic and Financial Analysis ................................................................. 25 Annex 4. Resettlement Implementation........................................................................ 30 Annex 5. Bank Lending and Implementation Support/Supervision Processes............. 34 Annex 6. Summary of Borrower’s ICR and/or Comments on Draft ICR ..................... 36 Annex 7. List of Supporting Documents....................................................................... 47 Annex 8: Environmental Monitoring Indicators ........................................................... 48 Annex 9: Status of Compliance with Key Covenants................................................... 57 MAPS CHN32768/CHN32769 iii A. Basic Information TAI BASIN URBAN Country: China Project Name: ENVIRONMENT PROJECT Project ID: P057933 L/C/TF Number(s): IBRD-47480 ICR Date: 01/12/2011 ICR Type: Core ICR Lending Instrument: SIL Borrower: PRC Original Total US$61.0M Disbursed Amount: US$57.5M Commitment: Revised Amount: US$57.5M Environmental Category: A Implementing Agencies: Tai Basin Project Management Office (PMO) Cofinanciers and Other External Partners: N/A B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 05/14/2003 Effectiveness: 12/20/2004 12/20/2004 Appraisal: 11/10/2003 Restructuring(s): 07/14/2009 Approval: 08/03/2004 Mid-term Review: 10/31/2007 09/03/2007 Closing: 12/31/2009 06/30/2010 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately satisfactory Risk to Development Outcome: Low or Negligible Bank Performance: Moderately satisfactory Borrower Performance: Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Moderately Satisfactory Government: Satisfactory Implementing Quality of Supervision: Satisfactory Satisfactory Agency/Agencies: Overall Bank Overall Borrower Moderately Satisfactory Satisfactory Performance: Performance: iv C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments (if Indicators Rating Performance any) Potential Problem Project Quality at Entry No None at any time (Yes/No): (QEA): Problem Project at any time Quality of Supervision No None (Yes/No): (QSA): DO rating before Satisfactory Closing/Inactive status: D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Flood protection 10 10 Sewerage 90 90 Theme Code (as % of total Bank financing) Infrastructure services for private sector development 14 14 Other urban development 28 28 Pollution management and environmental health 29 29 Water resource management 29 29 E. Bank Staff Positions At ICR At Approval Vice President: James W. Adams Jemal-ud-din Kassum Country Director: Klaus Rohland Yukon Huang Sector Manager: Ede Jorge Ijjasz-Vasquez Keshav Varma Project Team Leader: Toyoko Kodama Stuart Whitehead ICR Team Leader: Toyoko Kodama F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) To improve the quality of life of the rapidly increasing urban population and enhance economic competitiveness in Wuxi and Suzhou, key municipalities in the Tai Basin and the Yangtze River Delta economic region, by alleviating degradation of water resources and improving the quality of the urban environment. Revised Project Development Objectives (as approved by original approving authority) Not applicable. v (a) PDO Indicator(s) Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years Reduction in proportion of untreated wastewater in urban and rapid growing suburban Indicator 1 : project areas. Suzhou: 90%; Suzhou: 85%; Value Suzhou: 0%; Xishan: 85% Xishan: 83% (Urban) quantitative or Wuxi Xishan: nearly 0%; (Urban) and 70% and 62% (Town); Qualitative) Wuxi Huishan: nearly 0% (Town); Huishan: Huishan: 80% 90% Date achieved 04/26/2005 12/31/2009 06/30/2010 Mostly achieved. Actual capacity installed increased from 280,000 cubic meters per day Comments (m3/d) to 305,000 m3/d; however, the reduction in the proportion of untreated (incl. % wastewater fell short of the target because the project areas grew much faster than achievement) originally projected. Cleaner urban water environment and improved livability in the two major urban and Indicator 2 : tourism centers. Some data show Value initial improvements quantitative or Not indicated. Not indicated. in some Qualitative) environmental indicators. Date achieved 04/26/2004 12/31/2009 06/30/2010 Comments Uncertain. All the financed wastewater treatment plants are operating under the Class (incl. % 1A standards, and the water quality of receiving water bodies has improved. However, achievement) there is no clear way to measure improved livability. Sound enterprise capital structure with manageable debt, experienced and cost effective Indicator 3 : operations, financial autonomy and adequate cost recovery as well as satisfactory level of capacity utilization at project-financed WWTPs. -All wastewater companies Wastewater companies Value All wastewater corporatized; either not established or not quantitative or companies fully -Wastewater operating as independent Qualitative) corporatized. companies not corporate entities. authorized to levy and collect tariffs Date achieved 04/26/2004 12/31/2009 06/30/2010 Partially achieved; however, the levels of autonomy, financial viability and Comments sustainability granted were limited (see Annex 9). The capacity utilization of the (incl. % project-financed plants is high, and further expansions are planned in some project achievement) areas. Updating/preparation of wastewater master plans covering city and rapidly growing Indicator 4 : areas in Wuxi and Suzhou. Value Wastewater master The Suzhou master N/A quantitative or plans for Wuxi and plan was approved in vi Qualitative) Suzhou early 2010. municipalities are The Wuxi master updated. plan was completed in March 2010, and it is under review. Date achieved 04/26/2004 12/31/2009 06/30/2010 Comments (incl. % Partially achieved. achievement) (b) Intermediate Outcome Indicator(s) Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised Target approval Completion or Values documents) Target Years i) Area covered, households connected and wastewater flows collected and treated Indicator 1 : meeting the government objectives; and ii) quality of discharge from WWTPs meeting standards. i) Total capacity installed 305,000 m3/d i) Total capacity i) Total capacity Coverage: Huishan- Value 160,000 m3/d wastewater installed 280,000 installed 85%; Xishan in (quantitative treatment capacity in the m3/d 305,000 m3/d Wuxi-87.5%; and, or Qualitative) project area ii) Class 1B ii) Class 1A and Fuxin and Loujiang in Suzhou- 92%. ii) Class 1A Date achieved 04/26/2004 12/31/2009 07/14/2009 06/30/2010 Comments Achieved. Additional capacity of 25,000 m3/d was constructed in Huishan. The project (incl. % contributed to increasing the service coverage ratio. achievement) Indicator 2 : Direct transfer of wastewater revenues to wastewater enterprises in Wuxi and Suzhou. Value (quantitative 0 100% 100% or Qualitative) Date achieved 04/26/2004 12/31/2009 10/10/2009 Comments (incl. % Achieved. Municipal Finance Bureau transferred all revenue collected to the districts. achievement) Indicator 3 : Improved ambient water quality in main monitoring indicators. Suzhou: PV7.0; Wuxi Xishan: Value Suzhou: PV6.9; Chemical oxygen (quantitative Wuxi Xishan: N/A; No target indicated. demand (COD) 30- or Qualitative) Wuxi Huishan: N/A 40mg/l; Wuxi Huishan: 6.4 mg/l vii Date achieved 04/26/2004 12/31/2009 Comments Unclear. It is not possible to ascertain whether the ambient water quality has improved (incl. % without clear target. Some environmental data (See Annex 8) that the water quality of achievement) the receiving water bodies has gradually improved in some parameters. Indicator 4 : Satisfactory level of capacity utilization at project financed WWTPs. Suzhou: 73%; Suzhou: 85%; Suzhou: 100%; Value Wuxi Xishan: 70% Wuxi Xishan: 90% Wuxi Xishan: 100% (quantitative (Dongting) and 0% (Dongting) and 60% (Dongting) and 70% or Qualitative) (Anzhen); (Anzhen); (Anzhen); Wuxi Huishan: 0% Wuxi Huishan: 90% Wuxi Huishan: 100% Date achieved 04/26/2004 12/31/2009 06/30/2010 Comments (incl. % Achieved. Capacity utilizations were about 70% to 100%. achievement) Indicator 5 : TA and institutional and financial training. Value Staff trained: Staff trained: (quantitative Suzhou: 100; No target indicated. Suzhou: 150; or Qualitative) Wuxi: 0 Wuxi: 84 Date achieved 04/26/2004 12/31/2009 Comments There was no clear target defined. Nevertheless, all the WWTPs have staff with (incl. % adequate skill sets to operate and manage the plants. The training under the project achievement) contributed to the development of this institutional capacity. G. Ratings of Project Performance in ISRs Date ISR Actual Disbursements No. DO IP Archived (US$ millions) 1 09/30/2004 Satisfactory Satisfactory 0.00 2 06/14/2005 Satisfactory Satisfactory 4.62 3 04/11/2006 Satisfactory Moderately Satisfactory 12.17 4 06/19/2007 Satisfactory Satisfactory 26.82 5 03/31/2008 Satisfactory Satisfactory 34.67 6 06/25/2009 Moderately Satisfactory Moderately Satisfactory 46.82 7 01/21/2010 Satisfactory Satisfactory 54.04 H. Restructuring (if any) ISR Ratings at Amount Board Restructuring Restructuring Disbursed at Reason for Restructuring & Key Approved PDO Date(s) Restructuring Changes Made Change DO IP in US$ millions Additional works to utilize loan savings arising from the deletion 07/14/2009 N MS MS 46.82 of one subproject, increase of civil works disbursement percentage to 100 percent and extend the loan viii ISR Ratings at Amount Board Restructuring Restructuring Disbursed at Reason for Restructuring & Key Approved PDO Date(s) Restructuring Changes Made Change DO IP in US$ millions closing date by six months. I. Disbursement Profile ix 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal 1. Deterioration of water quality in Lake Tai and Tai Basin rivers has been a key concern for Jiangsu Provincial Government, indeed for the country, because of the importance of these water bodies as primary water sources for the region. The Tai Basin is an integral part of the Yangtze economic region that also includes Shanghai Municipality and Zhejiang Province. It is one of the most prosperous regions in China, with GDP growth of 10 percent per annum over the past two decades. However, the provision of environmental infrastructure, including collection and treatment of wastewater, lagged behind the area’s rapid economic growth. By 2000, the increasing discharges of untreated industrial and municipal wastewater put the river system under severe environmental pressure. Water quality in rivers and canals in Suzhou and Wuxi, two cities north of Tai Lake, continued to degrade to worse than Class V standard (the lowest class in the Chinese classification system). 2. In response to the situation, the national and local governments established policies and action plans to improve the water environment of Lake Tai. The State Environmental Protection Administration issued the “Three Lakes and Five Rivers Policy” in 1999 and identified Lake Tai as one of the three lakes to receive high environmental priority. In Jiangsu Province, an action plan was formulated under the Tenth Five Year Plan (2001-2005). It emphasized increasing the collection and treatment of point-source pollution in cities, districts, counties and small towns and the circulation of water in the Basin’s rivers and streams through water transfers from the Yangtze River. This plan translated into expanding the collection and treatment of wastewater, reducing total phosphorus (TP) discharges to the heavily polluted water bodies, rehabilitating Wuli Lake and Meiliang Lake, transferring Yangtze River water, and strengthening local capacity for water environment monitoring and management. Remedial plans were implemented, and key polluting industries were closely monitored to reduce pollution discharges. 3. In spite of these efforts, results were limited partly due to fragmented urban water supply and wastewater services. Cities, counties and districts were individually responsible for providing services in their respective areas, and there was a lack of: regional planning, inter-jurisdictional coordination, consolidation of wastewater investments, an effective regulatory framework, and environmental monitoring and enforcement -- all of which limited the effectiveness of the investments as well as the ability to realize economies of scale. In addition, district wastewater authorities had no legal basis for collecting revenue from wastewater services provided because the wastewater fee was considered government revenue, which was collected by the Municipal Finance Bureau which in turn provided a portion of the revenue collected to the wastewater agencies to meet operation and maintenance (O&M) costs. In this 1 context, the Jiangsu Provincial Government requested the Tai Basin Urban Environment Project (TBUEP) as described below. 1.2 Original Project Development Objectives (PDO) and Key Indicators 4. The PDO was to improve the quality of life of the rapidly increasing urban population and enhance economic competitiveness in Wuxi and Suzhou, key municipalities in the Tai Basin and the Yangtze River Delta economic region, by alleviating degradation of water resources and improving the quality of the urban environment. 5. The key performance indicators in the Project Appraisal Document (PAD) were: (i) reduction of the proportion of untreated wastewater discharges in Wuxi and Suzhou Municipalities; (ii) cost-effective and autonomous operation of wastewater treatment systems and capacity utilization for wastewater treatment plants (WWTPs) under the project; and (iii) cost recovery by wastewater enterprises to ensure sustainability. While the indicators were appropriate for the latter part of the PDO, they do not cover the overall ultimate goal of quality of life improvement in specific ways. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification: Not applicable. 1.4 Main Beneficiaries 6. The PAD indicates that the primary beneficiaries were the project cities and residents of Suzhou Municipality, Xishan District including the Xishan Economic Development Zone and Huishan District. The project was also to benefit Wuxi Municipality through support for its comprehensive program to improve water quality in Lake Tai through reduction of point source pollution resulting from untreated municipal wastewater that would have otherwise entered Lake Tai. The number of beneficiaries in the service areas of the investments made was about 2.2 million.1 1.5 Original Components (1) Wuxi Municipality 7. Wuli Lake Rehabilitation (US$35million: 19.6% of total project cost): (i) construction of pollution control facilities (sluice gates and ship locks) on selected canals and streams that connect Wuli Lake; (ii) rehabilitation of selected sections of embankments around Wuli Lake; and (iii) ecological rehabilitation, on a pilot basis, in one or more selected areas of Wuli Lake. The investment aimed to reduce internal 1 The number of beneficiaries in the PAD was 5 million, but it appears to have been over-estimated because the population of the project areas was not that big. 2 pollution coming from deposited lake bed sediments, thereby improving water quality in Wuli Lake and eventually contributing to water quality improvements in Lake Tai. 8. Wastewater Treatment Plants and Networks (US$68.5 million; 38.3% of total project cost): (i) construction of the first phase of the Chenbei-Huishan WWTP in Huishan District with a capacity of 25,000 m3/d of secondary wastewater treatment, and the associated sewer network to convey sewage flows, with about 58 km of sewers to serve the Changan and Youqiao industrial areas; (ii) expansion of the existing Dongting wastewater treatment plant in Xishan District to increase the plant capacity from 20,000 m3/d to 50,000 m3/d and construction of about 40 km of associated sewers; (iii) construction of a 20,000 m3/d capacity secondary wastewater treatment plant in Xishan District (i.e., Anzhen), and about 146 km of associated sewers to serve Anzhen, Houqiao and Yangjian townships and Wuxi East Industrial Park, all within Xishan District. The investment aimed to reduce point-source pollution discharges to the river system, focusing on smaller urban districts. (2) Suzhou Municipality 9. Urban Area Canal Network Rehabilitation (US$19.7 million; 11% of total project cost): (i) construction of control gates (sluice gates and ship locks) on Xujiang River and Shangtang River; and (ii) sediment dredging in canals in the core urban area of Suzhou. The investment aimed to control flooding and regulate water flows to the Grand Canal. 10. Wastewater Treatment Plants and Networks (US$49.4 million; 27.7% of total project cost): (i) construction of the second phase of the Fuxin secondary wastewater treatment plant with a capacity of 100,000 m3/d; (ii) construction of the second phase of the Loujiang secondary treatment plant with a capacity of 80,000 m3/d; and (iii) construction of the first phase of a secondary wastewater treatment plant with a capacity of 25,000 m3/d and about 43 km of associated sewers to serve the Wuzhong Economic Development Zone in Wuzhong District. The investment aimed to reduce point-source pollution discharges to the river system, focusing on the core urban area of Suzhou. (3) Implementation Management and Sector Development Assistance (US$ 1.9 million; 1.1% of total project cost) 11. This component provided technical assistance and equipment to: (i) develop municipality-wide wastewater management master plans for Wuxi and Suzhou; (ii) enhance the capacities of project implementing agencies to operate and manage wastewater utility operations as autonomous and financially sustainable entities in a commercial and competitive environment; and (iii) enhance capacity of implementing agencies to implement the project, including design reviews, procurement and project management, and construction management. The component aimed to enhance the 3 capacity of agencies for planning, procurement, project management, contract management and utility management, and to enhance sustainability. 1.6 Revised Components 12. Three revisions were made: (a) Under Component 1(a), Wuli Lake rehabilitation was implemented using local funds because there was pressure on the Wuxi Municipal Government to clean up Lake Tai quickly because of frequent algae blooms, and to accelerate implementation using less onerous domestic procurement procedures; (b) under Component 2(b), the wastewater component in Wuzhong District was cancelled because the District pursued private financing due to a shortage of counterpart funds; and (c) with loan savings from Wuli Lake rehabilitation and the Wuzhong WWTP, the project financed a second phase of construction of the Huishan WWTP to increase capacity by 25,000 m3/d with tertiary treatment. 1.7 Other significant changes 13. Amendment to Legal Agreements. Legal agreements were amended in July 2009, at the request of the Borrower, to: (i) delete the Wuzhong subcomponent; (ii) include additional work on the Huishan WWTP (i.e., 25,000 m3/d increased capacity); (iii) increase the disbursement percentage for works and goods from 57 percent to 100 percent to use loan savings; and (iv) extend the loan closing date by six months to complete the additional works at Huishan. The amendment was approved by the Country Director. 14. Enhanced Treated Wastewater Discharge Standard. During project implementation, the Provincial Environmental Protection Bureau (EPB) mandated that all WWTPs in the Lake Tai Protection Area reach the Class 1A discharge standard, which required addition of relatively costly tertiary treatment at all treatment plants constructed under the project. Additional goods and works required to meet the higher standard were financed by counterpart funds, except for the second phase of the Huishan WWTP, for which the project financed tertiary treatment. 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry 15. Rationale for Bank’s Intervention. The project supported several key themes of the Country Assistance Strategy in effect at the time, including: improving water resources management and ensuring environmentally sustainable urban development. The project was consistent with the Bank’s Urban Sector Strategy and Water Sector 4 Strategy, which emphasized improved livability and economic competitiveness and promoted sustainable wastewater and water resources management. The value addition of the Bank’s involvement in project design was to demonstrate cost-effective and sustainable approaches to managing wastewater systems through rationalizing planning, optimizing facilities, and promoting more financially sustainable and autonomous utility companies. 16. Soundness of the Background Analysis. Analysis done during project preparation revealed the inherent inefficiencies in: the fragmentation of wastewater service provision in the two municipalities; the absence of utility practices because services were provided by government sanitation divisions; and the lack of long-term investment planning to reduce the discharge of untreated wastewater to the river systems. Lessons were drawn from the Bank’s experience in the sector in China and East Asia to support the analysis. However, the appraisal team underestimated local institutional complexities, and incorporated an institutional and financial reform agenda that was far too pioneering in the local context and had little chance of realization (See 5.1 (a)). 17. Project Development Objective and Technical Design were appropriate to address the key sector issues, and primarily targeted “alleviating degradation of water resources and improving the quality of the urban environment.” However, the broader objective of improving quality of life was less amenable to practical measurements. Project design was technically comprehensive, but it did not include adequate technical assistance for implementation of the reform agenda, which was quite ambitious, comprising: (i) consolidation of wastewater services to achieve economies of scale through merger of district wastewater services; (ii) conversion of the wastewater fee to a commercial tariff; (iii) wastewater companies to levy and collect revenues for wastewater services provided; (iv) return of all wastewater revenues to the districts where the services were provided; and (v) financial performance criteria relating to recovery of full operating costs with no provision for non-operating income or government subsidies. These reforms were reflected in the key performance indicators (KPI), but not in the PDO. The KPI also should have included measures of urban environment quality improvement to better reflect the PDO. 18. Risk Assessment. Risks assessed and mitigation measures incorporated in the project design included: prioritization of investments; selection of small districts to address pollution discharges in a more comprehensive manner; and phased expansion of treatment capacity and network expansion so as not to create excess capacity. However, the Bank’s risk assessment was weak, as some risks that were not anticipated surfaced during project implementation. These include the possibility that some Districts would withdraw from the project due to counterpart funds shortage and access to other financing options; the commitment of the Government to realize the ambitious reform agenda; and the institutional challenges of merging wastewater services. 5 19. Other factors that affected outcomes were: the relatively small size of the loan for the wealthy southern part of Jiangsu Province; the long time that elapsed between project identification and the project concept review; requirements for project preparation and participation; and the perceived onerous procurement procedures. These factors may have resulted in: the loss of potential subprojects, reduced project leverage, pushing Wuxi to use local funds for the Wuli Lake rehabilitation; and the withdrawal of Wuzhong District. 2.2 Implementation 20. Physical Investments. Overall, physical implementation of the project was successful and exceeded the targets. The project was completed at 85.4 percent of the budget, even though one subcomponent was deleted and another brought in to replace it, as illustrated in Annex 1. Besides the scope changes described in Section 1.6, the Bank declined to finance one civil works contract under the Suzhou Urban Canal Rehabilitation subproject because of a considerable delay in reaching a bid award decision, and the subsequent withdrawal of the winning bidder due to increased costs. 21. Institutional and Financial Reforms. The project intended to promote institutional and financial reforms, as covenanted in the legal agreements. The results were somewhat mixed because of an over-optimistic assessment during project appraisal (see Section 5.1). The performance regarding compliance with the covenants was also influenced by changes in the domestic requirements in discharge standards and the lack of incentives for utility companies to promote efficiencies in utility operations (see Section 5.2(a)). Status of compliance with these particular covenants is summarized in Annex 9. 22. Wastewater Master Plan (2007-2020) Preparation. The wastewater master plans for both Suzhou and Wuxi were updated. The Suzhou plan was approved in early 2010. The Wuxi master plan, which was completed in March 2010, was under review pending approval at loan closure. There was inadequate priority given to this task by the counterpart to ensure rapid and cost-effective completion, given their continued focus on the investments financed by the project. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 23. M&E design. Performance indicators listed in the PAD covered both technical and institutional components of the project, but some of them were not clearly defined. There were indicators that had no baseline data or final targets. Two out of three KPIs focused on the institutional reforms that the PDO did not include. In addition, the Project Agreement did not have the same KPIs as in the PAD, and the side letter (from negotiations) listed simple output indicators, and no outcome indicators to measure achievement of the PDO. As indicated before, the KPIs also should have included 6 measures of urban environment quality improvement, and the PDO should have avoided the broader (and difficult to measure in the context of this project) objective of improvement of quality of life. 24. M&E implementation and utilization. M&E was carried out primarily through monitoring the key outcome and output performance indicators listed in the PAD, and progress reports prepared by the Tai Basin Urban Environment Project Office (TBUEPO). The prime source for M&E information was the series of TBUEPO’s consolidated semi-annual progress reports summarizing implementation progress and financial expenditures by component, including details of resettlement, and revisions to the RAP’s measurement of monitoring indicators. However, because of the design problems cited just above, indicators were not used to inform decision-making. 25. In addition to the project’s performance indicators, environmental monitoring data was collected during preparation of the ICR, to illustrate impacts of the project on a broader basis. This data had been maintained by the utility companies and the respective Environmental Protection Bureaus, who were responsible for monitoring surface water quality in the river systems. The environmental monitoring indicators are summarized in Annex 8. 26. An important complementary activity of the municipal wastewater treatment was the performance by industries in pollution prevention, which included cleaner production and connection to the city sewer systems, and primary treatment of wastewater on-site before discharge to the sewer systems. The Bank received annual reports for Inventoried Enterprises to be connected to the sewer networks served, as required in Schedule 2, Section 5 of the Implementation Program in the Project Agreement. 2.4 Safeguard and Fiduciary Compliance 27. Social Safeguards. Resettlement activities were carried out satisfactorily in both municipalities. External monitoring of the Resettlement Action Plan (RAP) implementation was carried out in accordance with the legal agreements. Annual safeguard compliance reports prepared by the project implementing units were submitted regularly. Resettlement issues are summarized below. 28. The total number of persons resettled under the project was 420. The area of house demolitions was about 5,050 m2, which was less than estimated at appraisal. Permanent land acquisition was about 31 ha, and temporary land acquisition was 515 ha. All resettlement was done in accordance with Chinese regulations and Bank safeguards policies. The project affected persons (PAPs) were satisfied with the resettlement arrangements, which improved their living standards (following transition to urban residence) with stable incomes and employment in nearby factories as well as access to social insurance benefits. The resettled communities now enjoy an 7 employment rate over 96 percent, and their average annual income has increased from RMB 5,860 in 2002 to RMB 16,000 in 2010. The Resettlement Completion Report (RCR) indicates that resettlement implementation was successfully completed with the full participation of the PAPs; the standard of living of PAPs had improved; and no resettlement issues remained at loan closure. More details are provided in Annex 4. 29. Environmental Safeguards. Dictated by changes during project implementation, the Environmental Impact Assessments (EIAs) and the Environmental Management Plan (EMPs) were prepared for the new sub-projects. These documents were reviewed by the Bank and cleared, in compliance with domestic EIA law and Bank safeguard policies. 30. During project implementation, dedicated environmental staff were assigned to the Project Management Office (PMO) at the provincial level and to the Project Implementing Units (PIUs) in Suzhou and Wuxi. An accredited monitoring institute conducted environmental quality monitoring of a range of key parameters. Using these inputs, an international consultant conducted broader EMP monitoring work, including effectiveness of mitigation measures, training, etc. Based on the monitoring and evaluation results, and the field observations of Bank supervision missions, the mitigation measures developed during environmental assessment (EA) preparation were implemented satisfactorily. Recommendations from the environmental consultant and Bank missions were implemented as appropriate. Environmental training was provided to PMO/PIU staff, contractors and supervision engineers during implementation. Overall, the project EMP compliance is considered satisfactory. 31. Financial Management. The project had an adequate project financial management system that provided, with reasonable assurance, accurate and timely information that the loan was used for the intended purposes. The project accounting and financial reporting were in line with the regulations issued by the Ministry of Finance (MOF) and the requirements specified in the Loan Agreement. In addition, the withdrawal procedures and funds flow arrangements were appropriate throughout project implementation, and loan proceeds were disbursed in a timely manner. Annual audits were conducted and the reports were always unqualified and submitted on time for the Bank to review. 32. Procurement. Procurement of works and goods as well as selection of consultants in the project were conducted in accordance with the Bank’s guidelines. The factors which affected the implementation of procurement included the coordination between the provincial PMO and the municipal PMO, and the quality of the service provided by the tendering companies employed by the PMO. 33. The factors that led to the Bank refusing to finance the one civil works contract under the Suzhou Urban Canal Rehabilitation were, as mentioned in Section 2.2 (b), the prolonged bid evaluation due to a lack of procurement experience by the 8 implementation agency as well as the withdrawal of the lowest priced bidder, which refused to maintain the bid price due to cost increases in the year that elapsed after bid submission. 2.5 Post-completion Operation/Next Phase 34. In Wuxi, agreement was not reached during the project period to merge Dongting WWTP Phases 1 and 3 in the Xishan Economic Development Zone (XEDZ), with the Xishan Wastewater Treatment Company (XWTC), as specified in the agreements. The XEDZ – which financed Phases 1 and 3 of the WWTPs – preferred to consolidate all three stages in order to improve operational efficiency. However, the Xishan District Financial Bureau and the Xishan Economic Development Zone Financial Bureau have not yet come to an agreement. On the other hand, the TBUEPO confirmed that Wuxi still plans to merge small treatment plants in Xishan’s townships (Donggang, Ehu and Xibei) under the Xishan Wastewater Company in the future. 35. Suzhou plans to transfer ownership of all wastewater facilities in the main urban area of Suzhou Municipality to the Suzhou Drainage Company (SDC) by 2012, following the completion of auditing and finalization of project accounts. The future status of the Suzhou Qingyuan Construction Company (SQCC), which still owns the assets constructed under the project (Fuxin and Loujiang WWTPs), as well as transfer of debt repayment liabilities, is still under discussion within the Suzhou Municipal Government. 36. Huishan District plans to expand wastewater collection and treatment capacity because the wastewater treatment capacity (50,000 m3/d), installed under the project, is already fully utilized and it also intends to extend its coverage to neighboring townships. 37. An alternative approach to achieving financial reforms was under serious discussion in Wuxi and Suzhou during the last year of the project. The proposal is to use the structure of service agreements – which offer a sound way of achieving the reform objectives – by ensuring they are implemented in their entirety. This approach can also build capacity for possible future private sector participation (PSP) options, as a service agreement would require government agencies to adopt a contract management role that is similar, in some respects, to the regulatory and contract oversight function in PSP arrangements. However for this approach to be successful and comply with utility practices, it is essential that the service fees are transparent and comprehensive (i.e., a clear assignment of responsibilities for asset depreciation and debt-servicing) to create the necessary financial autonomy and sustainability. At project closing, broad agreement had been reached on this approach at the municipality level, but the proposal had not been implemented before loan closure. 9 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation: Rating: Moderately satisfactory 38. The project remained highly relevant throughout implementation, as improving Lake Tai’s water quality has been, and remains, a priority for Jiangsu Province and the central government. The project formed part of the comprehensive effort on behalf of Suzhou and Wuxi Municipalities to improve water quality in the third largest freshwater lake in China. Both cities are in the Lake Tai Protection Area, with substantial and growing populations and industries, and had programs for control of point- and non-point source pollution discharges. 39. In addition to wastewater investments in the main urban areas, the project design also included some second-level districts where, in the past, less attention had been given to the control of pollution discharges that eventually flow to Lake Tai. Wastewater collection and treatment in these areas were (and remained) part of the government’s strategy to improve water quality in Lake Tai. Project design rightly incorporated consolidation of wastewater services to rationalize investments, improve efficiency, and achieve economies of scale. Implementation arrangements recognized the situations of the prevailing funding and ownership arrangements, which generally inhibited consolidation of facilities. Despite the known difficulties, project design attempted consolidation of wastewater facilities in one district (Xishan) as a demonstration. 40. The design of institutional reforms for the wastewater companies was unrealistic. The financial performance requirements for utility companies, incorporated in the project, attempted to set a higher level of autonomy and viability, and were pioneering for Bank-financed projects in China. However, they were quite ambitious, and some changes were so fundamental that they had little chance of realization. Since tariff-setting is the prerogative of governments, it is questionable whether it was realistic for the project to require full cost recovery from the newly-established wastewater companies, with no provision for subsidies from government even as a temporary measure. Furthermore, Chinese municipalities have taken an approach of structured provision of subsidies to utilities in a reliable manner that ensures full coverage of financial requirements. The above problems notwithstanding, the wastewater services were separated from the government to companies, wastewater revenues were returned to the districts from where they were collected, and relatively high wastewater tariffs were introduced in the municipalities. 41. The PDO and KPIs as designed did not reflect the project scope well. The PDO was too broad, and included statements such as “improve the quality of life,” and “enhance economic competitiveness in Wuxi and Suzhou.” The project had no KPI to measure these achievements. The focus on “alleviating degradation of water resources 10 and improving the quality of the urban environment” was highly appropriate, and could have been reinforced with the inclusion of sustainability as an objective. The emphasis on institutional and financial reform in the project design was not reflected in the PDO. 3.2 Achievement of Project Development Objectives Rating: Moderately Satisfactory 42. The primary focus of the PDO was alleviating degradation of water resources and improving the quality of the urban environment, and these were substantially achieved. Wastewater treatment rates in Suzhou increased from 30 percent to 85 percent during 2005 to 20010 through project investments, and treatment rates in Xishan and Huishan Districts in Wuxi Municipality improved significantly from near zero to about 60 percent to 80 percent. Total installed treatment capacity in Suzhou and the Wuxi Municipalities nearly doubled from 160,000 m3/d in 2004 to 305,000 m3/d in 2009, exceeding the target of 280,000 m3/d. The proportion of untreated wastewater discharged to the river systems was significantly reduced by 62 percent to 85 percent, thus contributing to the improvement of water quality in Lake Tai. Capacity utilization of the treatment plants constructed under the project was around 70 percent to 100 percent, which is optimal. 43. Additional data on pollution reduction, water quality and performance of wastewater treatment plants financed under the project show that the project mitigated further pollution to the water environment and improved the quality of the urban environment in the project areas. Standards of water quality for effluents from WWTPs remained high, and significant amounts of pollutants were reduced. For example, the cumulative amount of chemical oxygen demand (COD) reduction from 2007 to mid- 2010 is in the range of 3,900 tons to 18,000 tons, depending on the WWTP. Moreover, surface water quality data indicate that the water quality in receiving waters gradually improved after implementation of the project. The reason why the water quality of the receiving water bodies did not immediately improve was because wastewater flows to the WWTPs initially included both domestic and industrial wastewater, as it requires different treatment. Detailed information can be found in Annex 8. 44. The institutional and financial reforms were partially achieved in some areas and not achieved in others (six of the nine institutional and financial covenants were not complied with – see Annex 9 for details). The rationalization of planning and consolidation of wastewater services did not take place. Yet, financial reforms introduced under the project were pioneering in the China context, and resulted in all wastewater revenues collected by the Finance Bureaus being returned to the Districts. The authority for wastewater companies to levy and collect wastewater tariffs was a ground-breaking and ambitious attempt by the Bank, but was not realized. Even though wastewater tariffs are still insufficient to meet full costs in the districts of Wuxi, the average tariff adopted in Suzhou and Wuxi is significantly higher than for most 11 Chinese cities, and the respective governments met any shortfalls The project contributed to water resource protection efforts in the Lake Tai Basin and to improving water quality for discharges to Lake Tai. 3.3 Efficiency Rating: Satisfactory 45. Economic Performance. At project appraisal, the economic justification of the project was based on cost effectiveness, and no economic rate of return was calculated. Instead, each sub-project was assessed based on development impact (i.e., its likely contribution to achieving the primary development objective) and using least cost analysis, with least cost options selected in every case. All original project components have been constructed as appraised at lower than appraised costs, and are operating satisfactorily. Additional treatment capacity was actually built using loan savings. 46. It is difficult to quantify all the direct and indirect economic benefits from the project partly because of lack of reliable data from the project area to quantify the benefits. The project design did not attempt to compile such data and complete a comprehensive economic assessment. Some of the key benefits that can be related to the project include: (i) reduced pollution discharges to Basin rivers and Lake Tai, and progressive improvement in some environmental indicators; (ii) savings by industries discharging to municipal sewers, rather than treating wastewater prior to discharge; (iii) protection and enhancement of the tourism industry in Suzhou; and (iv) permanent and temporary job creation. 47. Financial Performance. The financial justification of the project was not made by the traditional method normally used for “revenue generating” sub-components (i.e., there was no comparison of the estimated financial rate of return with the weighted average cost of capital). Instead, the financial viability of the sub- components was appraised based on an assessment of the long term financial sustainability of the wastewater companies and least-cost analysis. This was a reasonable approach to take. 48. The wastewater tariff revenues are still collected by the respective water supply companies and passed to a special account controlled by the municipal finance bureaus. However, since 2009, all the wastewater revenue received by the Wuxi Finance Bureau was returned to the Districts, in compliance with a government regulation and the project covenant. The Districts then provided the wastewater companies a treatment fee based on the quantity of wastewater treated and an allowance for O&M of the collection networks. The budget was meant to cover all operating expenses including debt service requirements. However, even with the relatively high tariffs, wastewater revenues in Xishan and Huishan were inadequate to fully fund the XWTC and the Huishan Water Treatment Company (HWTC), and the District Finance Bureaus had to provide a subsidy to supplement the tariff revenues. 12 This situation arose partly due to the cost of tertiary treatment mandated by the Province, and partly due to the small scale of district level WWTPs, which have inherently higher unit costs than larger WWTPs. 49. Tariffs were revised twice during the project period, the last starting from July 2009. Current average tariffs are: RMB1.36/m3 in Suzhou and RMB1.43/m3 in Wuxi. Financial projections for 2009 indicate that these tariffs enabled the recovery of about 100 percent of the full costs in Suzhou, 46 percent of the full costs in Huishan, and 73 percent of the full costs in Xishan. In Huishan, actual cost recovery is enhanced through a supplementary tariff of RMB3.30/m3 which is levied on some industrial enterprises. The financial projections showed that, in 2010, tariffs should have been increased to RMB 3.08/m3 and RMB 2.92/m3 in HWTC and XWTC, respectively, to meet the full costs. However, the municipal governments in all cities are providing adequate financial resources to ensure the full operation of the WWTPs. 3.4 Justification of Overall Outcome Rating 50. Rating: Moderately Satisfactory The PDO was consistent with the Bank’s Country Assistance Strategy (CAS) and highly relevant to the government’s wastewater management and pollution reduction efforts in the Tai Lake basin area. However, the assessment of the final achievement of the intended PDO can only be partially ascertained. Some key indicators that were measurable were mostly achieved (e.g., reduction of proportion of untreated wastewater and preparation of wastewater master plans). Other indicators were not well defined and had no clear baseline to determine achievement (e.g., cleaner urban water environment and improved livability). Finally, although the institutional and financial reforms were only partially achieved, the project introduced some possible paths for the wastewater systems to achieve greater financial viability and long-term sustainability, which were the ultimate goals of the municipalities. While the investments were effectively implemented, and the treatment facilities are operating as planned with clear reduction in pollution loads, the PDO as defined and the indicators proposed do not allow for a full determination of achievement. On balance, the ICR’s conclusion is that the overall outcome rating was Moderately Satisfactory. 3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 51. The project design was not meant to address poverty or gender issues, but generated some indirect benefits. The project had positive impacts on poor PAPs who received substantial benefits in the form of new urban housing, employment and social security. From the project inception in 2004 until completion in 2010, the project created several thousand temporary jobs. Also, over 120 permanent job opportunities were created as a result of the project works, such as construction and expansion of the 13 Anzhen and Dongting WWTPs in Wuxi Municipality and the Fuxin and Loujiang WWTPs in Suzhou Municipality. The average income of the PAPs increased to about three times their income before the project. Access to improved sanitation and improved hygiene likely reduced the incidence of waterborne diseases among the poor, although evidence is only anecdotal. (b) Institutional Change/Strengthening 52. A significant financial outcome of the project was the return of wastewater revenues collected by the government back to the Districts where the revenue was collected, which improved the autonomy of the companies. Other outcomes included: the improved capacity for project management and procurement; preparation of annual financial projections of the WWTP operations; establishment of wastewater companies -- albeit with limited autonomy; and achieving relatively high levels of cost recovery through setting higher tariffs. (c) Other Unintended Outcomes and Impacts (positive or negative) Not applicable. 3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops Not applicable. 4. Assessment of Risk to Development Outcome Rating: Low 53. The risk to development outcome is low because: (a) In 2007 the water crisis caused by algae blooms in Lake Tai prompted renewed efforts by the central government to address water quality issues in Lake Tai (and other two lakes), resulting in the National Development Reform Commission (NDRC) preparing a national Master Plan – “Lake Tai Watershed Water Environment Integrated Restoration 2007 – 2020” – to be implemented by Jiangsu and Zhejiang Provinces and Shanghai Municipal Government. Jiangsu Province has been implementing this large and comprehensive environmental remediation plan, to control point- and non-point source pollution, and to improve the water quality in Lake Tai. All towns and districts in the Lake Tai Protection Area, including the project cities and districts, are required to continue making environmental investments as part of the larger plan; (b) The Jiangsu Provincial Government is highly committed to cleaning up the rivers and streams in the Lake Tai Protection Area in order to improve water quality in Lake Tai. Appropriation of funds for this project was not an issue in this relatively affluent Province. 14 (c) The provincial government has an intensive monitoring program on the utilization, operation and discharge standards of all wastewater facilities in the Lake Tai Protection Area, under its obligations to the central government; (d) The utilization of the installed wastewater treatment capacity has been high, and further expansions are being planned in some project cities where capacity is already fully utilized; (e) The wastewater companies are well staffed with experienced staff who have undergone training in utility management and plant operations; and (f) Wastewater facilities are properly operated and maintained, and adequate budgets are made available by the relevant local governments in order to ensure their long-term financial sustainability. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Moderately Satisfactory 54. The Bank can be credited with designing a project linking the sustainable development of the Tai Basin, the Ninth Five Year Plan, the CAS, and the Long-term Program on Water Pollution Prevention and Control of the Tai Lake Basin while also addressing the pollution reduction needs of the municipal and district governments. The task team, including safeguards and fiduciary specialists, was committed and provided support for the clients who had little experience in implementing Bank- financed projects, in its efforts to address one of the most serious environmental issues of the region and the country. 55. However, the Bank’s project design had several flaws. Firstly, the Bank pushed forward with ambitious institutional and financial sector reforms, which went beyond initiatives pursued in previous Bank-financed projects in the sector and prevailing China practice. Some of the reforms, such as full cost recovery with no subsidies, were so fundamental that they had little chance of realization in China. Secondly, the Bank was weak in background analysis of the sector and risk assessment and mitigation, and it over-estimated the Borrower’s commitment to the reform agenda. Thirdly, it took more than three years to undertake the initial stage of project identification and preparation, and that resulted in a reduction in the scope of the project. Lastly, the PDO was too broad, and the focus on institutional and financial reforms was not reflected in the PDO. The KPIs that were incorporated into the Project Agreement and the negotiations side letter were different from those in the PAD, which were output indicators, rather than outcome indicators that would measure achievement of project 15 objectives. The weak M&E framework made tracking project progress and assessing the achievements much more difficult. (b) Quality of Supervision Rating: Satisfactory 56. The performance of the task team in terms of supervision was satisfactory. The Bank spent considerable time and resources, pursuing the agreed institutional and reform agenda incorporated in the legal agreements and the PAD, even though they were not explicitly part of the PDO. The task team had discussions on a possible project restructuring at the Mid-term Review, to amend some covenants, but decided against it because of the short time left before the original loan closing date. Moreover, the discussions during the Mid-term Review focused on the cancellation of the Wuzhong component and usage of loan savings rather than on the project covenants. Nevertheless, the task team’s efforts finally bore some fruit towards the end of the project when limited but important reforms were achieved. Safeguards Compliance Rating: Satisfactory 57. Specialists of the Bank’s Beijing office satisfactorily supervised environmental and social safeguards. They carried out adequate field visits to review progress and ensured the timely submission of the external monitor’s report on safeguard implementation. The team’s environmental specialists worked with the counterparts closely and provided specific analysis and advice on the implementation of monitoring activities and recommendations on actions to take, as evidenced in the Aide Memoires. Fiduciary Compliance Rating: Satisfactory 58. Oversight of financial management and procurement activities was carried out satisfactorily by members of the task team from the Beijing office, ensuring compliance with procurement procedures, audit requirements and financial management. (c) Justification of Rating for Overall Bank Performance Rating: Moderately Satisfactory 59. In line with ICR guidelines, the overall Bank performance rating is moderately satisfactory, given the ratings at entry and supervision. 5.2 Borrower Performance (a) Government Performance Rating: Satisfactory 60. The Jiangsu Provincial Government and the two municipalities demonstrated strong commitment to the project objectives through two key actions in mandating: (i) 16 a relatively high uniform wastewater fee in all municipalities and districts; and (ii) a higher discharge standard for treated wastewater, to reduce nitrogen and phosphorus. Introduction of tertiary treatment also increased the unit cost of treatment by about RMB 0.30/m3, which made it difficult for wastewater companies to achieve the financial performance criteria. While this requirement is commendable, there is evidence that about 50 percent of the pollution in the Lake Tai Basin is from non point sources, (i.e., nitrogen and phosphorus, which are generated from agricultural activities); hence, the justification of this tertiary treatment requirement for WWTPs in districts and small towns is uncertain. 61. The Suzhou and Wuxi Municipal Governments updated their wastewater master plans, transferred wastewater revenues to the Districts, and added tertiary treatment in all treatment plants to comply with the enhanced discharged standard. 62. The transfer of wastewater revenues from the Municipal Finance Bureau to the Xishan and Huishan Districts, however, did not assure that the wastewater companies received and managed all the funds. The District Finance Bureaus functioned in the same way that the Municipal Finance Bureau did earlier, by providing a budget to the wastewater companies for O&M in the form of a treatment fee, and used the balance of revenue for network expansion. Thus, the full financial autonomy of wastewater companies was only partially achieved. This notwithstanding, the Xishan District Government provided additional funding to XWTC to meet its debt services payments. 63. Suzhou Municipality established the Suzhou Municipal Drainage Company, as stipulated in the legal agreements, to operate and maintain its wastewater facilities. However, the transfer of wastewater assets was not completed before loan closure due to the length of time required to complete audit procedures and asset valuations. 64. As late as 2007, Xishan confirmed its intention to consolidate the wastewater services in the District. However, Wuxi Municipality was not able to effect the consolidation because agreement could not be reached with the parties for the merger due to the complex capital asset financing procedures, and the desire by each entity to retain full control of its assets. In Dongting, the Phase 1 and Phase 3 WWTPs were constructed by the Xishan Economic Development Zone outside the project, and the Phase 2 WWTP was constructed under the project, and the Xishan Economic Development Zone Finance Bureau did not agree to a merger with Xishan District. Similarly, XWTC has not been able to reach agreement to consolidate the small WWTPs in the townships that were financed with their own funds. Consolidation of facilities in the Xishan District could have been achieved only with a stronger commitment by the Wuxi Municipal Government to address the jurisdictional and financial issues. 17 (b) Implementing Agency or Agencies Performance Rating: Satisfactory 65. It was an exceptional achievement of the implementing agencies to complete all the original physical components below appraisal costs, in spite of the drastic exchange rate change (from RPM 8.07 per a dollar in January 2006 to RMB 6.90 per a dollar in June 2008), and before the original closing date. All implementing agencies performed satisfactorily in executing the functions assigned to them (e.g., operating and maintaining assets allocated to them, except for SQCC), as described below. 66. Suzhou Qingyuan Construction Company (SQCC). Performance of SQCC as the construction agent of Suzhou Municipality was satisfactory, as it completed the two wastewater treatment plants and the collection networks well before the loan closing date. The assets created under the project remained with SQCC, but the transfer of assets to SDC is still under discussion. SQCC cannot be faulted for not meeting the financial performance covenants set out in the legal agreements, as it had no revenue stream from wastewater services operations. The debt is serviced by the Suzhou Municipal Finance Bureau. 67. Suzhou Drainage Company (SDC), following its establishment in 2009, is in charge of O&M of its project assets as well as all other wastewater assets in the central districts of Suzhou, and its technical performance is satisfactory. However, it is not yet financially sustainable or autonomous. SDC does not own these wastewater assets, had no revenue stream apart from its government budget allocation, and was not responsible for debt servicing. SDC received an annual budget to cover its O&M costs based on the quantity of wastewater treated and a payment for network maintenance. 68. Xishan Wastewater Treatment Company (XWTC). The XWTC was responsible for constructing the Anzhen WWTP and the Dongting WWTP Phase 2, which were successfully completed. However, XWTC is responsible only for O&M of the Anzhen WWTP and its associated facilities, and the Xishan Economic Development Zone provides O&M for all three phases of the Dongting WWTP, although it was originally planned to be merged with XWTC. 69. Huishan Water Treatment Company (HWTC). The HWTC demonstrated solid commitment to wastewater management through construction of a WWTP with a total capacity of 50,000 m3/d to meet the increasing demands of the district. The second phase 25,000 m3/d plant was constructed and put into operation in a record time of 12 months. However, HWTC is responsible only for the treatment plant; the Huishan Economic Development Zone owns and maintains the collection networks separate from the HWTC. 70. There was a lack of appreciation of the need to consolidate management of collection networks and treatment plants in order for wastewater management to be fully effective. District governments constructed additional collection networks and 18 operate them using other organizations or outsourcing O&M of networks, as in Huishan. Under such arrangements, it was also difficult to assess the true cost of providing wastewater services or to determine the necessary tariffs. (c) Justification of Rating for Overall Borrower Performance Rating: Satisfactory 71. Through its commitment to improving the water environment and promoting sustained economic development, the Jiangsu Provincial Government supported the preparation and satisfactory implementation of the project, which reduced point-source pollution discharges through the enhanced collection and treatment of wastewater. All the original sub-projects, except for the Wuzhong sub-project, were completed and are in operation; wastewater services were separated from government sanitation departments; relatively high levels of tariff were adopted; and a key financial reform of returning wastewater revenue to Districts was implemented. The Borrower implemented the agreements for some of the institutional and financial reforms, except those that were inherently difficult to achieve. The Borrower is continuing to make the environmental improvements, and has commenced preparation of a follow-on project focusing on water quality improvement in Meiliang Lake, and non-point source pollution control through restoration of wetlands for enhanced natural treatment of surface water and rural pollution management. 6. Lessons Learned 72. Mandatory Requirement for Tertiary Treatment. The requirement for all WWTPs in the Tai Lake Protection Area to introduce tertiary treatment demonstrates the government’s commitment to pollution reduction. However, through its application irrespective of the size of the facility of jurisdiction, it ignores the costs and benefits, and practical realities of the incremental cost, feasibility of levying adequate tariffs, and the technical capacity necessary to operate such plants, especially by small towns that operate plants with capacities of 5,000 m3/d to 15,000 m3/d. The requirement also runs the risk that small towns may construct such plants to comply with the requirement, but may not operate them for practical reasons. It is therefore necessary to develop an incremental approach to treatment standards taking account of ground realities depending on the size of facilities and the capacity of small towns. 73. Appropriate Utility Institutional Model in China. The institutional model defined by the Bank for the wastewater services in the project was clearly not appropriate in the context of institutional development trends and choices in China. The project design and covenants called for corporatization of services, wastewater tariffs set at full cost-recovery levels without any subsidies, and independent utility companies free of direct government intervention and responsible for creating funds for asset replacement. The ultimate objective of this model was to provide effective 19 wastewater collection and treatment services in the project areas. Chinese municipalities are achieving this objective in medium- and large-size cities with a different model. Municipalities define a tariff level – based on a political decision that takes into consideration local economic conditions – and a complementary subsidy that are passed on the utilities to cover their financial requirements. Utility companies provide wastewater services for a treatment fee, as service providers. This approach has been effective in providing good wastewater service and treatment coverage with very rapid expansion, particularly during the last decade. This model may provide an opportunity to move to the next level of institutional development, by developing service agreements between the government and the utility companies -- with the treatment fees that include costs of O&M, debt service and depreciation -- to set the companies on a path towards full autonomy. The project managed to achieve the first step of return of revenue collected by the Financial Bureau in Wuxi and Suzhou to the districts, but it failed to achieve further reforms, including passing all these funds on to the utility companies either in their entirety or under service agreements, and consolidating services on a regional basis and achieving the economies of scale. 74. Reduction of Point- and Non-point Source Pollution. The project reduced point-source pollution discharges through wastewater collection and treatment in the project cities. However, control of point-source pollution alone will not be adequate to improve water quality in the Lake Tai Basin. Technical reports of the Lake Tai basin indicate that non-point source pollution now constitutes about 50 percent of the total pollution loads that enter the water systems, primarily from agricultural sources and untreated urban runoff. It would therefore be appropriate for future projects to include both point- and non-point source pollution interventions in the same operation, or address non-point source pollution separately. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies 75. The Borrower has raised a number of issues about project formulation and the lack of clarity in the legal agreements. The Borrower is correct in the observation that there is an inconsistency in the requirement for the SQCC to comply with the financial performance criteria because the company was not responsible for O&M and did not have a revenue stream to meet the specified financial performance. The Borrower claims that some financial reforms had no chance of success. The task team agrees that some reforms were quite ambitious at the time of project implementation. (b) Cofinanciers Not Applicable (c) Other partners and stakeholders Not Applicable 20 Annex 1. Project Costs and Financing CHINA: Tai Basin Urban Environment Project (a) Project Cost by Component (in US$ Million equivalent) Actual/Latest Appraisal Estimate Percentage of Components Estimate (US$ (US$ millions) Appraisal millions) Wuxi: Wuli Lake Rehabilitation 31.65 31.34 99.0 Wuxi: Dongting & Anzhen 43.47 41.49 95.5 Wastewater System Wuxi: Huishan Wastewater 17.68 23.16 131.0 System (Phases 2 & 2) Wuxi: Huishan Wastewater -- 6.75 System (Phase 3) Suzhou: Urban Canal 6.60 6.62 100.4 Rehabilitation Suzhou: Water Regulation in 11.30 7.23 64.0 Shantang Xujiang Rivers Suzhou: Fuxin Wastewater 18.02 19.48 108.1 Treatment Plant Suzhou: Loujiang Wastewater 12.82 11.56 90.2 Treatment Plant Suzhou: Wuzhong Wastewater 13.28 0.00 0.00 System Implementation Support & Sector 1.68 1.03 61.6 Development Total Baseline Cost 156.50 148.67 95.2 Physical Contingencies 7.83 Price Contingencies 10.13 Total Project Costs 174.46 148.67 85.4 Interest during construction 3.64 3.99 109.6 Front-end fee IBRD 0.61 0.27 44.51 Total Financing Required 178.71 152.93 85.6 Note: Actual costs incurred for the Wuli Lake rehabilitation were not provided by the Borrower. Based on publicly available figures, the investment costs were RMB210 million. (b) Financing Appraisal Actual/Latest Type of Estimate Estimate Percentage of Source of Funds Cofinancing (US$ (US$ Appraisal millions) millions) Borrower 113.16 91.64 81.0 International Bank for Reconstruction 61.30 57.33 93.5 and Development Total 174.46 148.97 85.4 21 Annex 2. Outputs by Component CHINA: Tai Basin Urban Environment Project Project outputs agreed at project appraisal were all realized, except for the Suzhou Wuzhong wastewater treatment works which were completed outside the project. The following paragraphs provide details of the project’s outputs. A. Wuxi Municipality 1. Wuli Lake Rehabilitation: (i) Ecological dredging removed 2,480,000 m3 of polluted lake bed sediment, comprising an average thickness of 0.5 meter over an area of 5.7 km2; (ii) most of the wastewater generated was intercepted through construction of 75 km of interception sewers, 67 km of branch sewers, and 11 control gates to stop pollution discharges from reaching the lake; (iii) Wuli Lake surface area was increased from 6.4 km2 to 9.5 km2 through the return of land encroached upon by fish farms; (iv) water exchange between Wuli Lake, Meiliang Lake and Liangxi River was improved, through construction of a 50 cubic meter per second (m3/sec) pumping station, four control gates and associated structures; (v) ecological environmental rehabilitation was carried out in an area of 981,000 m2 by planting over 5 million floating vegetation plants, sowing 138 kg of seeds for submerged vegetation, introduction of 50 tons of snails, clams and mussels, and 160,000 baby fish; and (vi) the lake embankment was rehabilitated in a 50m-250m wide belt, 38 km long, including landscaping and forestation, producing a new and renovated green area covering 464.5 hectares, including 159 hectares of roadside greenbelt, and 294.2 hectares of open park, 38 km long. A pilot study of ecological environment rehabilitation was also completed, to develop strategies for pollution control and sustainable lake management. This component was implemented with the counterpart funds, but it was kept as part of the project scope. 2. Wastewater Treatment Plants (WWTPs) and Networks: (i) Huishan District: Two phases of wastewater treatment, located in north Huishan Development Zone, with a total capacity of 50,000 m3/d including tertiary treatment, and 58 km of collection networks, serving Chang’an and Yanqiao industry park; (ii) Xishan Dongting WWTP extension (from 20,000 m3/d to 50,000 m3/d) and 40 km of sewers, bringing the total capacity installed in Dongting to 120,000 m3/d; and (iii) A new WWTP (25,000 m3/d) and 146 km of sewers, including three lifting pumping stations to form complete structures linking wastewater network with users, and to serve Anzhen, Houqiao, Yangjianzhen and East Industry Parks. 22 3. Updated Wastewater Master Plan for Wuxi Municipality. The updated master plan now provides wastewater projections, treatment plant expansion requirements and investment costs. At closing, it was still under review. B. Suzhou Municipality 1. Pollution Prevention and Canal Dredging Work in Central City: construction of gate/ship locks on Xujiang and Shangtang Rivers; and dredging of about 874,000 m3 of sediment: (a) to enhance flood control ability and prevent intrusion of polluted water from the Grand Canal and (b) to prevent clean water outflow from the Wangyu River through Xitang River. The scheme was also part of the Suzhou flood control master plan. This component included construction of a gate/ship locks on the Xujiang and Shangtang Rivers, embankment heightening and dredging of 65 km of canals in the urban area to rehabilitate the canal’s flow detention and flood control capacity. 2. Wastewater Treatment Plant and Wastewater Pipeline Network. This comprises: (i) Fuxin WWTP extension (100,000 m3/d), serving southwest of Suzhou; and (ii) Loujiang WWTP extension (80,000 m3/d), serving northeast of Suzhou, and associated networks. The Wuzhong WWTP extension (25,000 m3/d) and associated networks, which was originally included in the project scope, was done outside of the project. C. Updated Wastewater Master Plan for Suzhou Municipality. The master plan provides wastewater projections, treatment plant expansion requirements and investment costs. The plan was approved in early 2010 and implementation is underway. The details of the scope of works are summarized in the table below. Subcomponent Works Agreed at Appraisal Actual Work Completed A.1 Wuli Lake Rehabilitation Lake capacity increased: All agreed works and Interceptors: 75km considerable additional facilities Sewers: 67 km were constructed with own funds, Water transfer 50m3 per sec but it is still part of the project. capacity The Bank team conducted Embankment rehabilitation and supervision during landscaping implementation. A.2(i) Huishan District Sewers: 58 km All agreed works were Wastewater WWTP: 25,000 m3/d completed, and additional Discharge Std: Class 1B treatment capacity of 25,000 m3/d was constructed. Discharge Std: Class 1A A.2(ii) Xishan Dongting Sewers: 30,000 m3/d All agreed works were Wastewater WWTP: 40 km completed. Discharge Std: Class 1B Discharge Std: Class 1A A.2(iii) Xishan (Anshen) Sewers: 146 km All agreed works were District Wastewater WWTP: 25,000 m3/d completed. Discharge Std: Class 1B Discharge Std: Class 1A 23 Subcomponent Works Agreed at Appraisal Actual Work Completed B.1 Suzhou Urban Canal Increased flood control capacity All agreed works were Rehabilitation through dredging. completed. Gates: Two B.2(i) Suzhou Fuxin Sewers: Included above All agreed works were Wastewater WWTP: 100,000 m3/d completed. Discharge Std: Class 1B Discharge Std: Class 1A B.2(ii) Suzhou Loujiang Sewers: No sewers All agreed works were Wastewater WWTP: 80,000 m3/d completed. Discharge Std: Class 1B Discharge Std: Class 1A Suzhou Wuzhong Wastewater Sewers: 43km Subcomponent was done outside WWTP: 25,000 km of the project. 24 Annex 3. Economic and Financial Analysis CHINA: Tai Basin Urban Environment Project A. Economic Performance and Benefits 1. The economic justification of the project was established using cost effectiveness criteria. Economic rate of return was not calculated for the project, nor was there any systematic attempt to quantify all the potential economic benefits at appraisal. Therefore, it is not possible to assess whether there were economic benefits derived from the project. 2. High levels of pollution have direct economic impacts on rural and urban water supplies, and on agricultural and fisheries production. Degradation of water quality and the lack of adequate wastewater treatment facilities adversely affect the economic opportunities and growth of the area and diminish the quality of life for the residents. The possible economic benefits associated with the successful implementation of the TBUEP include the following: • protection of water quality in local waterways and Lake Tai, which is a key surface water resource in the region; • protection and enhancement of the tourism industry in Suzhou (see paragraph 4); • provision of centralized wastewater treatment to avoid the need for many small industries to install more expensive on-site treatment, and consequently contributing to keeping local industries in business; and • job creation in the new WWTP and during construction. 3. Most importantly, the project provided major indirect economic benefits by facilitating the continued expansion of the Xishan and Huishan districts of Wuxi municipality in an environmentally sustainable manner. The expansion of these districts is part of China’s response to rural-to-urban migration pressure, a key element in the country’s economic development strategy. Indicators of economic development of the project area between 2002 (base year for the appraisal) and 2009 (on which the ICR is based) are provided in the tables below: Indicator 2002 2009 Increase (%) Suzhou Municipality (main city districts) Total GDP (RMB billion) 246.82 687.05 178 Population (million) 2.03 2.35 14.9 GDP per capita (RMB) 121,586 292,362 140 Urban Population (million) 1.04 1.55 49 Percentage of Urban Population (%) 51 66 15 Huishan District (Wuxi Municipality) Total GDP (RMB billion) 15.2 38.46 153 Population (million) 0.37 0.41 10.8 GDP per capita 41,081 93,805 128 Urban Population (million) n/a n/a n/a Percentage of Urban Population n/a n/a n/a 25 Xishan District (Wuxi Municipality) Total GDP (RMB billion) 13.75 33.52 144 Population (million) 0.426 0.411 (3.5) GDP per capita 32,277 81,557 153 Urban Population (million) 0.15 0.175 16.7 Percentage of Urban Population 35 43 8 4. In Suzhou, the number of tourists and revenues from the tourism industry over the same period increased dramatically. Suzhou has been one of the most popular tourist sites in China, and some project sites are near the tourist spots. The project supported economic growth of the areas through the protection and enhancement of the tourist industry as illustrated in the table below. Indicator 2002 2009 Increase GDP from tourism (RMB billion) 19.8 73.5 271% Number of tourists (million) 21.0 55.1 162% 5. One potential economic benefit identified at appraisal that was not achieved was economies in scale in operational management by merging WWTPs in the Xishan District of Wuxi. The creation of a single wastewater utility to serve the District did not prove feasible. B. Financial Performance and Sustainability Financial Reform of Wastewater Sector 6. The PAD identified that the priority reform requirement over the immediate term was to convert the wastewater tariff into a commercial fee, and not the achievement of a particular level of wastewater tariff. In this way, revenues would be under the full control of the individual project companies, and this would create the necessary financial autonomy. The underlying reform objective was that the project companies would become “self-funded,” which implied they would be financed entirely from the wastewater tariff, and would receive revenues based on the actual services they provided. The operation of the project companies under service agreements could provide an alternative way to achieve this objective. 7. Wuxi and Suzhou Municipal Governments agreed at appraisal to change the legal status of the wastewater fee to that of a wastewater utility tariff by the end of 2006. However, this change was not implemented as planned. This was not a realistic approach that could be implemented under the prevailing local circumstances. 8. Wastewater tariffs in Suzhou and Wuxi are amongst the highest in China, and the Jiangsu Provincial Government has taken a strong lead to ensure the wastewater services are financed to the maximum extent possible from user charges in accordance with national policies. Wastewater tariffs in Wuxi were raised in July 2009 and in Suzhou in December 2009 for non-residential and industrial customers, and in April 2010 for residential customers. 26 Full Cost Recovery Analysis 9. The second reform requirement set up was to fully recover the costs of wastewater utilities in Suzhou and Wuxi. The full cost recovery was reflected by two financial covenants as follows: • Cost recovery ratio – at least 1.0 in each year. • Debt service coverage ratio – not less than 1.3. Full Cost Recovery Analysis in Suzhou 10. Institutional Arrangements. In Suzhou, there are three units relating to wastewater utilities. SQCC, established for the Project, was responsible for the construction of wastewater utilities in Suzhou. The assets created by SQCC were to be transferred to Suzhou Municipal Drainage Company (SDC). SDC was formed to operate the wastewater utilities in Suzhou, including WWTPs, pumping stations, and sewershowever, the pumping stations are owned by the Drainage Facilities Management Division (DFMD). To conduct a full cost recovery analysis, it is assumed that all assets were transferred to SDC. 11. Full Cost Recovery Analysis. Based on the above institutional assumptions, a financial analysis was performed on SDC, rather than on SQCC (as was done in the PAD). The results of the analysis are presented below. 2009 2010 Average wastewater tariff (RMB per m3) 1.15 1.36 Cost recovery ratio 1.60 1.12 Debt service coverage ratio N/A N/A 12. The tariffs in Suzhou currently could achieve full cost recovery. In reality, however, only RMB 0.60 per m3 out of RMB 1.15 per m3 was appropriated to SDC from the Suzhou Finance Bureau in 2009. RMB 0.60/m3 accounted for about 84 percent of full cost recovery. The total amount was determined by the volume of wastewater SDC actually treated. In 2010, the funds appropriated to SDC for wastewater treatment would be made on the real demand of cash. Full Cost Recovery Analysis in Wuxi Huishan Economic Development Zone 13. Institutional Arrangements. HWTC provides wastewater treatment service to Wuxi Huishan Economic Development Zone. The sewers are operated and maintained by the Planning and Construction Bureau of the Management Committee for Wuxi Huishan Economic Development Zone. The sewers that collect the wastewater in Yanqiao Town are operated and maintained by the Yanqiao Town Government. To conduct a full cost 27 recovery analysis, it was assumed that all assets were transferred to the Huishan Water Treatment Company Limited. 14. Full Cost Recovery Analysis. Based on the above institutional assumption, a financial analysis was performed on HWTC. The results of the analysis are presented below. The tariffs in Wuxi currently cannot achieve full cost recovery, although revenues were fully remitted to HWTC. The tariffs themselves only fulfill around 46 percent of full cost recovery. To meet the requirements regarding the cost recovery ratio and the debt service coverage ratio, the average wastewater tariff in 2010 should have been increased to RMB 1.80/m3. 2009 2010 Actual Projection Average wastewater tariff (RMB/m3) 1.27 1.43 1.80 Cost recovery ratio 0.49 0.52 1.00 Debt service coverage ratio 0.50 1.47 3.50 Full Cost Recovery Analysis of Xishan Wastewater Treatment Company 15. Institutional arrangements. XWTC provides wastewater collection and treatment to part of Xishan District. Only the WWTP is operated and maintained by XWTC, while the pumping stations and sewers are outsourced to another company for operation and maintenance by XWTC. To conduct a full cost recovery analysis, it was assumed that all assets were operated and maintained by XWTC. 16. Full Cost Recovery Analysis. Based on the above institutional assumptions, a financial analysis was performed on XWTC. The results of the analysis are presented in the table below. 2009 2010 Actual Projection Average wastewater tariff (RMB per m3) 1.27 1.43 2.92 Cost recovery ratio 1.72 0.73 1.48 Debt service coverage ratio N/A 0.46 1.30 17. The WWTP operated by XWTC was only put into operation in late 2009. The data used for the financial analysis did not reflect the real situation of XWTC. The projection for 2010 shows that the current average wastewater tariff can only achieve 73 percent of full cost recovery, although the tariff revenue is fully remitted to XWTC. To meet the requirements of the cost recovery ratio and the debt service coverage ratio, the average wastewater tariff in 2010 should have been increased to RMB 2.92 per m3. Conclusion 18. It is clear that the project has brought major economic benefits to the area and supported the continuous growth of the regional economy. Financial sustainability that was put forward in the reform agenda was not achieved. Nevertheless, tariffs at Suzhou 28 and Wuxi are already at a high level, compared to other municipalities in China, and one of the wastewater treatment companies (i.e., SDC) could achieve full cost recovery, based on an assumption that all assets are transferred to the wastewater treatment companies that are responsible for operation and maintenance. 29 Annex 4. Resettlement Implementation Report CHINA: Tai Basin Urban Environment Project 1. Summary. Resettlement activities were carried out satisfactorily, and all PAPs were resettled in accordance with the agreed resettlement action plan (RAP). The actual compensation standards for both land acquisition and house demolitions were higher than those stipulated in the RAP. All compensation payments were made on time, and all PAPs were fully consulted during the entire resettlement process. PAPs’ incomes have been restored. In accordance with the Provincial Government policy, PAPs, except students, also became eligible for rural social security. Actual house demolitions were reduced significantly due to optimization during detailed design and actual construction. 2. Independent Monitoring. Independent monitoring of resettlement implementation was done, as agreed at appraisal. The External Monitor’s report indicated that resettlement implementation was satisfactory: the institutional arrangements for land acquisition and house demolitions were clearly defined; the resettlement agencies were well staffed and had good communication skills; the performance of the resettlement staff was satisfactory during project preparation and implementation. Living standards of the PAPs were restored and incomes were restored or enhanced. 3. Resettlement Institutions. Institutions with responsibility for land acquisition and house demolition were identified at the provincial, municipal and implementing agency levels, and responsibilities were assigned. The agencies coordinated with each other during implementation. 4. The report of the External Monitor indicates satisfaction with the institutional arrangements and coordination as well as staffing of the resettlement institutions, and the house demolition administration and implementation institutions had good communication skills. The External Monitor made these assessments based on interviews, and found that the resettlement institutions performed their responsibilities satisfactorily, and completed their tasks in a timely manner during both project preparation and implementation. There were a few instances of lack of understanding of the Bank’s policies, but the operational skills and understanding of the staff of the resettlement institutions improved during project implementation. 5. Compensation for Land Acquisition and Income Restoration. Resettlement activities were carried out in accordance with the RAP and the resettlement-related documents issued by the local governments. In the Wuxi Xishan component, resettlement of PAPs was conducted in accordance with the Wuxi Government Document No. (2004)128: “The Rules for Implementation of Xishan District Government of Wuxi Municipality on Provisional Measures of Land Acquisition Compensation and Affected Farmers Livelihood Protection,” and Document No. (2004)129: “Pilot Scheme of Land Compensation and Solutions of Historical Problems of Resettlement.” The compensation standards in these documents were higher than those in the RAP, which mandated RMB 48,000/mu, or RMB 3,200/ha. 30 6. The district government issued regulations and provided special care to safeguard the living standard of PAPs. According to the provisions in Documents No.128 and 129 (2004), farmers whose land was acquired were entitled to special social security, so as to achieve the required minimum basic living standard. Furthermore, Nianyu Village Committee and Zhuangqiao Residents Committee agreed to arrange employment for the PAPs so as to safeguard their living standards. Furthermore, the Huishan District Government issued a document at the end of 2006, regarding the basic livelihood guarantees to farmers whose land had been acquired, and decided that Huishan District Government would allocate RMB 3.6 billion to finance a basic living guarantee system, from January 2007, which would bring 116,800 farmers into the system. In addition, all villagers have been included in the basic old-age rural social security system, except for students, military and special populations. Farmers who lost land were included in the basic livelihood security system. The situation of Suzhou in this regard is almost the same. 7. Income Restoration. The external monitoring agency carried out a random sampling survey to investigate income restoration among the resettled households, covering about 20 percent of total affected households. The survey obtained information on household size, agricultural and non-agricultural production, main products, house construction progress, annual income and expenditures of the family, and living standards. 8. The survey results show that, on average, the annual net income per person in the sample of Hujiadu village amounted to RMB 13,258/yr in 2009, compared to the annual income of RMB 5,800/yr in 2002. Annual gross expenditures per person were RMB 5,200 yr in 2002, compared to about RMB 7,388/yr in 2009. 9. The data indicates that although the living expenditures of villagers increased after land acquisition, their incomes grew more rapidly, and enterprises’ income grew more rapidly than expenditures. Therefore, incomes and living standards are better than before. See the Chart 1 below. Chart 1: Income Restoration of PAPs (in RMB) 31 10. A similar situation prevailed in Wuxi Xishan and Suzhou in terms of income restoration of the project affected villagers, who are satisfied with the resettlement compensation and income recovery. Findings and Conclusions 11. Changes in Project Impacts. Due to design optimization and planning adjustments, changes occurred in the actual resettlement impacts in following three sub-projects during project implementation. First, in Wuxi Huishan sub-project, the land for future expansion was acquired together with the land for the current project. Consequently, the area of land acquisition increased by 5.82ha (87.42 mu), compared with the RAP. Second, in Wuxi Xishan sub-project, the area of land acquisition is more than that in RAP by 0.67 ha (10 mu). Third, in Suzhou sub-project, the area of permanent land acquisition was decreased by 0.86 ha (13 mu), the area of temporary land occupation was 6.9 ha (103.5 mu) less, and the area of house demolitions declined by 4,650 m2. Moreover, no residential houses were involved, and the number of demolished enterprises was reduced from eight to two. Table 1 (at the end of this annex) summarizes planned and actual resettlement impacts of the project. 12. Completion of Resettlement Compensation. All the PAPs and enterprises received compensation in accordance with the compensation agreement. The project management office assisted the project affected enterprises in moving and reconstruction. The income of the resettled persons was not affected and their living standard was restored or improved. 13. Payment of Compensation Fee. Through interviews with villagers, the external monitoring team found that compensation fees were paid to the villagers on schedule at the end of each year. 14. Recovery of Production and Livelihood. Local enterprises are generally prosperous and incomes of the PAPs came mainly from working for those enterprises. From the trace investigation of sample families, livelihoods and businesses of the PAPs have recovered and in some cases improved. All PAPs were covered by the basic living safeguard system of the local government, and have a secure future. 15. Good Performance of Resettlement Administration Organizations. The resettlement administration organizations performed highly efficiently, although they did not understand the requirements and procedures of the World Bank very well initially. 16. Public Participation. During resettlement implementation, the policies and procedures relating to public participation (such as evaluation and public hearing, etc.) were strictly adhered to. The PAPs were able to select the agencies responsible for house evaluation and house demolition, so as to ensure fairness, transparency, and smooth implementation of house demolition and enterprise relocations. 17. Good Filing of Project Documents. The project management office collected the various documents on land acquisition and resettlement during project implementation (e.g., photos of affected enterprises before and after demolition, resettlement and compensation agreements, records of temporary land occupation, hand-over procedures of temporary land occupation, etc.) in a timely manner. A good filing system was established for resettlement activities, which provided the basic data for project completion and take-over inspection and project evaluation and monitoring. 32 Table 1: Planned vs. Actual Resettlement Impacts of the Project Component name Enterprise/ Affected people Total Resettlement Permanent Land Temporary Land House Demolition institution/ shop (# Persons) Costs Acquisition Occupation (ha) (m2) affected (#) (RMB million) (ha) Planned Actual Planned Actual Planned Actual Planned Actual Planned Actual Planned Actual Wuxi - Huishan 12.28 18.1 129.31 129.31 - Xishan 5.37 6.04 322.73 338.27 80 129 Subtotal of Wuxi: 17.65 24.14 452.04 467.58 80 129 Suzhou - Incoming wastewater 1.59 0.73 2.39 0 9708 5050.42 8 3 157 95 11.61 10.36 control project - Watercourse dredging 0 0 52.44 47.93 0 0 0 0 172 196 6.91 3.77 project - WWTPs 6.10 6.10 0 0 0 0 0 0 0 0 0 Subtotal of 7.69 6.83 54.83 47.93 9708 5050.42 8 3 329 291 18.52 14.14 Suzhou Total 25.34 30.97 506.87 515.51 9708 5050.42 8 3 409 420 18.52 14.14 33 Annex 5: Bank Lending and Implementation Support/Supervision Processes CHINA: Tai Basin Urban Environment Project (a) Task Team members Responsibility/ Names Title Unit Specialty Lending Stuart Whitehead Financial Specialist EASIN Task Team Leader Mara Warwick Sr. Environmental Engineer EASIN Env. Engineering Zhun Zhang Institutional Specialist Cons. Institutional Chongwu Sun Sr. Environmental Specialist EASCS Environment Songling Yao Social Development Specialist EASCS Social Lixin Gu Sr. Infrastructure Specialist EASCS Environment Mingyuan Fan Sr. Municipal Engineer EASCS Mun. Engineering David I Sr. Financial Management Specialist EAPFM Fin. Management Supervision/ICR Country Sector Coordinator/Sr. Mara Warwick EASIN Task Team Leader Environmental Engineer Mingyuan Fan Sr. Sanitary Engineer EASCS Task Team Leader Toyoko Kodama Operations Officer EASIN Task Team Leader Chandra Godavitarne Municipal Engineer EASCS Mun. Engineering Lixin Gu Senior Infrastructure Specialist EASIN Infrastructure Jianjun Guo Procurement Specialist EAPPR Procurement David I Sr. Financial Management Specialist EAPFM Fin. Management Haixia Li Sr. Financial Management Specialist EAPFM Fin. Management Xiaoping Li Senior Procurement Specialist AFTPC Procurement Chongwu Sun Sr. Environmental Specialist EASCS Environment Lynn Wang Financial Management EAPFM Fin. Management EASTE – Stuart Whitehead Financial Specialist Financial Analysis HIS Ning Yang Environmental Spec. EASCS Environment Songling Yao Social Development Spec. EASCS Social Zhun Zhang Institutional Specialist Cons. Institutional Fang Zhang Financial Management Analyst EAPFM Fin. Management Wu Ning Financial Specialist Cons. Fin. Analysis Wenyan Dong Operation Analyst EASCS Institutional Vellet Fernandes Program Assistant EASIN Program Assistant (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle US$ Thousands (including No. of staff weeks travel and consultant costs) Lending 34 FY00 1.3 2.71 FY01 3.46 15.71 FY02 3.73 25.01 FY03 24.76 126.59 FY04 75.02 419.48 FY05 0.65 3.38 Total: 108.9 593.64 Supervision/ICR FY05 15.25 29.72 FY06 13.77 39.83 FY07 9.6 25.65 FY08 15.46 53.42 FY09 7.0 FY10 8.27 FY11 0.6 Total: 69.95 148.62 35 Annex 6. Summary of Borrower’s ICR and/or Comments on Draft ICR CHINA: Tai Basin Urban Environment Project 1. This Annex is a summary of the very comprehensive Borrower’s Implementation Completion Report (ICR), and does not repeat matters presented in the main text of the ICR. In addition to providing a detailed account of implementation, achievements and outcomes, the Borrower’s ICR provides a good discussion of project design, ground realities, and lessons and suggestions for future project formulation. For completeness, the Bank ICR has drawn liberally from the Borrower’s ICR. A. Achievements and Outputs 2. Environmental Achievements. 100,000 m3/day of wastewater treatment capacity was added to Wuxi Municipality, raising the wastewater treatment capacity in the project areas by 26.5 percent. 180,000 m3/day of wastewater treatment capacity was added to Suzhou Municipality, raising the wastewater treatment capacity for Suzhou old town center by 50 percent. Major pollutants reduction include 0.81tons/d of total phosphorus (TP), 4.39 tons/d of Ammonia Nitrogren (NH3-N), 63.77 tons/d of COD and 30.10 tons/d of BOD5 in Suzhou and 0.17 tons/d of TP, 1.23 tons/d of NH3-N, and 18.64 tons/d of COD in Wuxi. 3. Wastewater Investment Planning and Prioritization. An important output of the project was the development of wastewater master plans for Wuxi and Suzhou Municipalities: (a) Suzhou Municipality Wastewater Master Plan. The 2007-2020 Suzhou wastewater master plan was approved by Suzhou Municipal Government at the beginning of 2010. The implementation of the wastewater projects indicated in the Suzhou Master Plan has been started. (b) Wuxi Municipality Wastewater Master Plan. The wastewater master plan for Wuxi Municipality has been drafted, and is still under review and modification. Based on this draft plan, in March 2010, Wuxi prepared the proposals for wastewater management for the 12th Five- Year-Plan, which sought to strengthen drainage management in Wuxi municipality, enhance the wastewater management capability, and target social-economically sustainable development as the ultimate goal. 4. Institutional Strengthening. Project preparation for the institutional development and training (IDT) component set out some laudable objectives, which were generally consistent with Government policy objectives and which aimed to provide for long term project sustainability. These objectives included: (i) greater institutional consolidation in the wastewater sector in Wuxi; (ii) encouraging increased commercialization in wastewater management; (iii) full cost recovery through the user charges; and (iv) integrated management of WWTP and wastewater collection networks. The preparatory phase also identified sludge disposal as a key secondary pollution issue that needed to be properly addressed. Unfortunately, the practicality of implementing some of the specific reforms proposed during the preparations, and agreed at appraisal, do not seem to have been as well thought through or anticipated as they perhaps 36 should have been. Specific examples were the proposed conversion of the wastewater fee to become a user charge, and the potential political obstacles in institutional consolidation that existed locally. If these had been foreseen at the time then possibly an alternative reform strategy to meet the same objectives could have been formulated. 5. IDT objectives have been partially achieved. In Suzhou, the provision of wastewater services is now fully corporatized, integrated wastewater management is practiced except in Huishan District, and the distribution of wastewater tariffs is now conducted in a manner that meets the understandings reached at appraisal. However, in both Suzhou and Wuxi, the wastewater fee remains a government-administered fee, and there has been no institutional consolidation of the Wuxi wastewater sector. 6. Institutional, Financial and Operations Training. This technical assistance was included under Package TA B1.The procurement of this package was delayed until towards the end of the project implementation period in order to allow the project companies to focus initially on the physical construction aspects of project implementation, and also because some of the companies were set up initially as project construction entities rather than as wastewater utilities. The Package was procured in the autumn of 2008 and a one-year contract was signed, although it was subsequently extended by six months when the World Bank loan closure was extended. The TA consultant has provided advice, training and support to the project companies, the TBUEPO, local PMOs and related project agencies in the areas of institutional development, utility management, business planning, financial management, operational management, wastewater tariffs and management and information systems (MIS). B. Capacity Building 7. Financial Capacity Building and Business Planning. The three project companies were intended to be the end borrowers of the World Bank loan and to be responsible for debt repayment from their own revenues. They were also expected to assume the risks associated with any interest and foreign exchange rate fluctuations that might occur. The current method of financing the companies via a budgetary allocation means that, in practice, the financial risks associated with borrowing are currently being assumed by the local governments and not by the project companies themselves, as without a dedicated source of service income of their own the companies have no capacity to assume such risk. However, it is now proposed that the project companies enter into service agreements with their respective local governments. Provided that the fee structures and levels within these service agreements provide for debt servicing and asset replacement obligations, then the companies will acquire the required financial capacity to assume the stated risks. Such a contracting and fee arrangement will also allow for the TBUEP financial covenants to be met. 8. All the project companies have computerized accounting and financial management systems and their staff are familiar with the use of these systems. The Package B1 TA consultant has provided support in the preparation of business plans, in financial planning and in establishing budgetary procedures and reporting. 37 9. MIS Development. The information systems of SDC and the SMDD in Suzhou are already reasonably sophisticated by Chinese standards. These organisations have shown themselves capable of implementing and maintaining such information technology (IT) systems, which include a geographic information system (GIS) of the wastewater collection network. The future focus will be on incremental improvement, and especially in data capture. These systems were mostly developed when both SDC and SMDD were a single organization and systems and data sharing has continued following the institutional reform. 10. In contrast, the IT systems in XWTC and HWTC are in their infancy. This is largely because these small companies are still immature organizations and do not have specialist IT staff to support systems development and/or operations. However, being smaller companies their MIS needs are also more modest. The TA consultant has suggested simple IT strategies for these companies, with the identified priorities being on improving MIS for process control and for financial management. 11. Operational Management Capacity. All the WWTPs financed by the TBUEP loan are operating to their design standards and are adequately staffed. Operating systems have been established at each WWTP and the staff have the technical capacity to operate the processes on a day to day basis. A more in-depth understanding of the treatment process and how its performance can be enhanced has been given under TA Package B1. C. Achievement of TBUEP Institutional and Financial Reforms Status of Reform Progress, Explanation for Proposed Alternatives. 12. Institutional Reforms in Suzhou. The legal agreements stipulate that the following institutional and financial arrangements would operate in Suzhou: (i) SQCC would levy and retain all wastewater charges collected from the Old Districts of Suzhou; (ii) SQCC would own the TBUEP-constructed assets and be responsible for debt servicing; (iii) SQCC would outsource management and operations of the TBUEP assets to the new SDC (although it also assumes that this should be competitive); (iv) SQCC would generate sufficient funds to meet the stipulated financial covenants (cost recovery and debt service); and (v) SDC would also manage the other wastewater assets (non-TBUEP funded) serving the Old Districts 13. The arrangements set out in the legal agreements appear to be flawed in that: (i) If all funding goes to SQCC, but SQCC is only responsible for TBUEP assets then how are other parts of the wastewater system financed? (ii) The financial covenants only relate to SQCC and hence TBUEP assets. This would not provide for financial sustainability of the whole wastewater sector, which is the objective of these covenants. (iii) Asset ownership of the non-TBUEP assets is not referred to. 14. These flaws are fundamental in nature and, in themselves, justify an alternative approach to the achievement of the original reform objective. That objective is that the institutional and financial arrangements should give adequate assurance over the sustainability of wastewater 38 services in Suzhou. Specific issues and considerations regarding how to achieve this objective are therefore discussed here. 15. Asset Ownership. Currently asset ownership is fragmented. While all the wastewater assets are government owned, the custodial arrangements are split between SQCC, SDC and the Suzhou Water Affairs Bureau (SWAB, under Suzhou Drainage Administration). It is logical for custody of all wastewater system assets to be unified. How this is done depends on the institutional arrangements decided upon. 16. Institutional Reforms in Xishan District, Wuxi. The proposed institutional reforms in Xishan District, Wuxi were that an institutional consolidation would take place whereby all wastewater services in the District would be provided by XWTC. Despite Xishan confirming this intention to the Bank in 2007, this consolidation has not been implemented. The current situation is that local administrations within Xishan (such as township governments) generally own and manage their own wastewater collection networks and WWTPs. The only exception is the Anzhen WWTP catchment which is managed by XWTC, the designated TBUEP project company. XWTC also constructed and owns Phase 2 of the Dongting WWTP in the Dongting EDZ of Xishan, while Dongting EDZ constructed and owns Phases 1 and 3 of that WWTP, and manages the entire facility. 17. In order to rationalize this fragmented situation with respect to the ownership of Dongting WWTP, the plan was to transfer the whole plant to XWTC. However, the Dongting EDZ Administration, which is the statutory authority responsible for the EDZ area, and which is fully autonomous from Xishan District Government, objected to this proposal, As Dongting EDZ was established as a national-level economic zone, this situation could only be resolved by Jiangsu Province referring this matter to the national level. The outcome of such a referral would be uncertain given the objections to the transfer from the EDZ, which argues that the WWTP and the wastewater collection network are best managed locally and together with other EDZ infrastructure, such as local roads. Jiangsu Province does not believe this issue merits such a referral and therefore, after consultation with Xishan and Dongting EDZ, a compromise solution of transferring the Phase 2 WWTP to Dongting EDZ (together with the related debt servicing obligation) was proposed. This solution has also now been accepted by the World Bank and is in the process of being implemented. Dongting WWTP already has well established operations with experienced management, so the proposed solution does not adversely affect the standards of O&M of the TBUEP facility or its long term sustainability. 18. Similar objections have been made by the township governments in Xishan to the concept of the local WWTP being brought under XWTC management. These WWTPs were domestically funded and are not part of the TBUEP, but their operational performance is important to achievement of TBUEP objectives and hence the concern during TBUEP project preparations that they be properly managed. The funding arrangements for these WWTPs and the misgivings of the townships governments now make it politically difficult for Xishan District Government to implement its earlier WWTP management consolidation proposal, even though this could lead to greater efficiency and better use of technical expertise. Therefore, for the time being at least, Xishan does not propose to pursue this reform. This situation was explained to the World Bank mission in November 2009, and the Mission, on making a site visit, conceded the 39 townships’ plants appeared to be well managed and adequately funded. Thus the project team does not believe a failure to implement this reform will impact on TBUEP objectives in any way. 19. Wuxi authorities have indicated that reform of the wastewater sector is likely in the medium term, and that rationalization of the numerous institutions at all levels would be a desirable objective for such reform. While, there are no specific plans or timeline for this rationalization at the present time, they point out that a similar rationalization has been achieved in the Wuxi water supply sector, and that integrated management of water supply and wastewater is becoming increasingly popular in China. The TBUEP experience in Xishan, however, illustrates the practical difficulties such a reform would face, including undoubtedly requiring strong leadership from senior levels in the Wuxi Municipal Government. Retention of a Government-Administered Wastewater Fee 20. Suzhou and Wuxi Municipalities, in common with almost all Chinese municipalities, levy common wastewater charge across all urban areas under their jurisdiction. However, as identified in the PAD, the real costs of providing wastewater services vary between different Districts. These variations in costs relate to greater treatment process economies of scale in highly populated central urban areas, and also naturally higher wastewater collection costs in outlying, less populated urban areas. 21. The use of a wastewater fee levied by government allows for greater flexibility in the distribution and application of the fees, as well as some other advantages that include: (i) wastewater charge proceeds can be distributed on the basis of real needs (and costs), thus retaining the common wastewater charge across the whole municipality; (ii) fees can be charged on unconnected properties, whereas commercial charges could be charged only where a service is provided. Thus, the regime of charging government fees encourages connection to the wastewater collection network, whereas use of commercial charges could discourage connection. (iii) the fee proceeds can be distributed among individual service providers and stakeholders, where institutional arrangements either segregate operations and asset management or separate these responsibilities from debt servicing or the financing of new capital investment. 22. In contrast, the introduction of a commercial charge would require each service provider’s level of charge to be individually assessed based on their specific service obligations and needs. This would result in different levels of wastewater charges between the different service providers and almost certainly a lower charge in the richer central area than in poorer outlying areas. These differential charges could be very difficult to justify from a political perspective and would be socially regressive in their impact. Thus, the retention of the current fee arrangement can be justified for the time being on the following grounds of: (i) being fairer to all wastewater dischargers, as they have no control over economies of scale or how services are organized (the institutional arrangements); (ii) being easier to justify to wastewater dischargers (as all pay the same within the whole municipal area); (iii) encouraging dischargers to connect (as they pay anyway); and 40 (iv) the arrangements being compatible with current institutional arrangements. 23. Given the above arguments we believe the retention of the government fee is fully justified for the time being and that this proposed reform was flawed and did not adequately take account of the specific circumstances in Suzhou and Wuxi. It is accepted that, in hindsight, authorities in Jiangsu Province should have raised this issue more emphatically with the World Bank at the time of loan negotiations. D. Major Factors Affecting Implementation and Outcome Factors out of the control of the local government or the implementing agency 24. The exchange rate of US$ to the Chinese RMB changed from 1:8.3 at the time of project appraisal in July 2005, to 1:6.90 in June 2008. 25. The rule that the contract should be awarded to the bidder who offered the lowest bid price was questioned. Some issues have occurred where contracts are awarded on the basis of the lowest cost with the contractor subsequently trying to increase his payments as a result of ambiguities in the contract documents. It has, therefore, been identified that contract documents in general should be of a higher quality to prevent this practice from occurring. Factors under the control of the local government 26. The Project was carried out in locations where economies were rapidly developing. Some project components were regarded as key contributors to the local economic development. 27. Because World Bank procedures can take some time compared to local procurement procedures, some contracts were procured by PIUs using 100 percent local funding (non-Bank financed). This was the main reason that the original amount of the World Bank loan was not fully utilized. Factors under the control of the project implementing units (PIUs) 28. Actually bidding prices and outturn costs in many cases were significantly lower than appraisal estimates that were based on the government’s standard pricing criteria, which was the reason for loan savings. The project has enabled the PIUs to improve their capacity and efficiency in project management. Due to the comparatively long project implementation period there have been a number of changes in the project management personnel. The comparatively long project implementation period caused some difficulties during project implementation, but the end result has not been adversely affected. E. Prospect of Sustainability 29. To identify a project as sustainable, the following principles should be adhered to: (i) satisfactory transition to full operations with the staff able to operate and maintain the facilities; (ii) institutional arrangements put in place; and (iii) assessment made on whether or not there are 41 adequate financing arrangements for financial sustainability. From the project team’s viewpoint and in consideration of the aforementioned principles, the Project can be regarded as sustainable. The newly built WWTPs are operating well and being maintained appropriately. The wastewater tariffs form an integral part of financial sustainability. However, the operation costs for some small-scale WWTPs are relatively high, which has led to financial shortages for the local governmental in this part, as cross-compensation may still be required. It is believed that the combination of the newly established institutional arrangements with new tariffs and project companies will provide a solid foundation for the sustainable development of wastewater services in Suzhou and Wuxi municipalities. In this section, each of the three aspects is considered in turn. 30. Transition to Full Operations and Operational Management Capacity. All five of the WWTPs constructed or expanded under TBUEP have been successfully commissioned and are treating effluent to their design quality standards. The volumes treated by each plant are increasing as collection networks are expanded and economic development proceeds. There is little doubt the facilities will be fully utilized within a few years. 31. All the WWTPs are being operated by the in-house staff of the project companies, and the staffing is adequate in terms of numbers and technical capacity to undertake the day-to-day operational duties. At each WWTP, detailed operating and maintenance systems have been established and are continuously evolving as greater experience with the local operating situation is gained. 32. Although the TBUEP facilities were designed to achieve the national Class 1B effluent standard, the effluent discharge standard has subsequently been raised to Class 1A. Therefore, during 2008 and 2009 each of the WWTPs has had to undergo further upgrading of their facilities to achieve this higher standard -- primarily using domestic funding. This upgrading were fully completed and effective at all the WWTPs by the second half of 2010, at which time all the TBUEP facilities are capable of producing effluent to the Class 1A standard ensuring their operations are compatible with the latest environmental quality objective that has been set. 33. We therefore consider the TBUEP facilities and the operations capacity created provide good assurance for the long term sustainability of WWTP operations in the project area at standards which exceed the original project targets. 34. Institutional Arrangements. During 2009 it was agreed that each project company would operate under a service agreement signed with its relevant local government. These service agreements fully define the relationship between the companies and their government owners and supervisors, and once implemented will enhance management and financial autonomy accordingly, and in line with the TBUEP institutional objectives. 35. Institutional development will be an evolutionary process to ensure: (i) mechanisms are put in place which create incentives for further service and efficiency improvements (to the extent this needs to be done after service agreements are implemented); (ii) a regulatory/supervisory mechanism is established such that each local government retains arms- length control over wastewater management. Under current proposals, the regulatory mechanism 42 will be based around the service agreements and performance of the Project Companies will be monitored against agreed business plans; and (iii) effective operation is achieved. Although consolidation of the management of the Xishan wastewater sector has not yet been achieved, the institutions involved are all currently operating effectively. It is accepted the small scale of these institutions does raise a concern over future sustainability of the arrangements. The Wuxi Municipal Government (WMG) is aware of this issue and, at the appropriate time, will move to deal with this. 36. In conclusion, the project team believes a strategy exists that will create institutions that can prove themselves as genuinely sustainable. To date, greater progress has been made in this respect in Suzhou than in Wuxi (where the local situation is more complex) -- but the required framework is already in the process of being implemented in both cities. 37. Operation of Facilities. The project components relating to wastewater treatment involved the expansion of existing WWTPs and the strengthening of operational capacity. The two newly-built WWTPs are now fully operational. Once the specified effluent quality of the treated effluent from all five WWTPs was met, the operation and maintenance arrangements were finalized. Experienced operational staff were recruited for the newly-built Xishan and Huishan WWTPs. New staff training was started at the same time as the commissioning of the WWTPs. In addition, the Consultants engaged for TA Package B3 have provided advice and training with regards to operational procedures and treatment processes. The training also covered aspects of asset management systems and an awareness of pollution control, together with inflow quality control to address the issue of pollution at source. 38. Following Project completion, all the WWTPs’ effluents have complied with the requirements of the Class-1A National Discharge Standard. The wastewater treatment rate reached 100 percent, and all sewer and pipeline system performance was satisfactory. F. The Bank and Borrower’s Function 39. The Bank. The Bank’s assistance during project identification, preparation, appraisal and implementation proved to be extremely helpful. The Bank’s staff have worked very hard and made all PIUs feel satisfied. The Bank’s Representative Office in Beijing has provided timely advice on World Bank project procedures and has reviewed and provided feedback on the bidding documents, which was highly appreciated. 40. The World Bank performance both during the loan preparation period and during the supervision period proved to be satisfactory, with two supervision missions per year. The World Bank staff have left a remarkable impression on the local project units and have satisfied the Jiangsu Provincial Government. During project preparation and appraisal, the Bank staff provided instructive assistance to projects in both Suzhou and Wuxi. All bidding documents and bid evaluation reports were approved by the Bank in a timely manner. In addition, the Bank provided valuable guidance to the Borrower regarding the revised use of the remaining loan. 41. The Borrower. During project implementation, the various levels of the government have provided concrete support, and project management offices (PMOs) at all levels have 43 performed their functions in partnership with the various PIUs. PIUs of all project components have ensured that all resources were put in place to ensure successful implementation of the Project. The Government has assisted PIUs of all project components in obtaining sufficient counterpart funds. 42. Municipal governments of the project cities have greatly contributed to the implementation of the tariff charges. Rapidly rising tariffs have an impact on social and economic conditions. To this end, the government will progressively adjust the tariff. G. Lessons Learned 43. The Tai Basin Urban Environment Project has been very successful, with most of its original objectives achieved particularly in terms of institutional interventions. The World Bank was not only a funding resource but also provided state-of-the-art management experience regarding project implementation and business operations such as modern project management, international bidding and contracting, construction supervision, international routine practices, performance measurement, and project completion reporting. Significant capacity building in relevant aspects of procurement using World Bank’s guidelines, contracting and project management, WWTP facility operations and maintenance, environmental monitoring, and financial management have been achieved. In particular, application of the Bank’s construction management procedures, demonstrating fairness and accuracy, were considered to be a prerequisite of project success. (a) Project Highlights. 44. Capacity building for project officials. The project has provided training to municipal officials for utilization of international funding in project preparation, application, design, construction, supervision, project management, reimbursement and disbursement, and well as project wrap-up procedures. A number of project entities, including relevant government departments, implementation units, design institutes, contractors and construction supervision teams, have gained useful knowledge, such as procurement and project management methodology and Bank safeguards principals. The experience gained from the Project will be a great benefit to those undertaking similar work in the future. 45. Improved overall water quality for the project cities. The improvement in water quality of the water network in Suzhou municipality could only have been achieved with two vital actions: (i) WWTPs’ expansion and water pollution prevention, and (ii) city-wide canal network dredging. The surface water quality in major urban areas in Suzhou municipality has been improved due to relevant components of the Project, including the engineering of water gates, flooding control facilities, canal dredging, wastewater interception, as well as the provision of WWTPs. It is significant that both Suzhou and Wuxi municipalities have received awards for contribution to water quality improvement during the period of the Project construction. 46. Improved images for the project cities. The success of the Project has enabled both Suzhou and Wuxi municipalities to be awarded with a number of honors within the Project implementation period. All these honors involve surface water control in urban areas -- to which the Bank has made great contributions: (i) Suzhou – National Clean City; (ii) Suzhou – World 44 Cultural & Heritage City; (iii) Suzhou – National Key Tourist City; (iii) Suzhou – 2008 World Outstanding Health City Award; (iv) Wuxi – “Global Green City” of 2009 awarded by UN; (v) Wuxi – Green Environmental Protection City Special Contribution Award; and (vi) Wuxi – 2006 Residential Environment Award of China (Water Environment Improvement Top Model City). 47. Improvement of the flood control capability for Suzhou City. The project has provided several hydraulic control facilities. The completion of Xujiang Gate Engineering means the completion of the entire flood control program of the Suzhou Downtown Area (total of 82 km2), from the original once-in-50-years flood control level up to a once-in-100-years level. The flood control program of Suzhou commenced in 2004 and was completed in 6 years. The Project investment in canal dredging and provision of several hydraulic control facilities, together with other locally funded facilities, has enabled Suzhou to complete its flood control program. 48. Effluent quality monitoring by EPB. The acceptance of the WWTPs has been supported by an online automatic monitoring system, which was installed by the local Environment Protection Bureau (EPB). In the Tai Basin area, wastewater treatment effluent is all monitored independently by the local EPB. This on-line monitoring data is provided for WWTPs’ use and at the same time it directly links to the headquarter offices of the EPBs. By Project completion (the end of June 2010), all WWTPs under the Project were installed with on-line monitoring equipment, and all the data is being collected. 49. Sludge Management. When the two major wastewater treatment plants in Suzhou were completed, the issue of sludge handling increased in importance. The Suzhou Fuxin wastewater treatment plant has started operation, and the daily sludge production is 120 tons/day. The Loujiang wastewater treatment plant sludge production is 70-80 tons/day. Both plants use belts for dewatering the sludge. The dewatered sludge has 80 to 82 percent water content. The sludge from Fuxin wastewater treatment plant is transported by barge via the Grand Canal, and the sludge from the Loujiang wastewater treatment plant is transported by truck. Both are transported to a local landfill site. A review was also made in 2009 of sludge handling in the Wuxi Huishan and Xishan wastewater treatment plants, and the report showed that the sludge is being appropriately handled and disposed of. In Suzhou, the Suzhou Water Administration Bureau has started to consider a new sludge master plan for the WWTPs in the city, and is looking for a longer-term suitable treatment and disposal solution. 50. During the construction, the PIUs and contractors attached great importance to the protection of local cultural relics. For example, the Xujiang Gate Component in Suzhou was implemented near municipal-level cultural heritage site (the Rainbow Bridge and Hengtang Post House). All parties involved took suitable protection measures , including keeping relevant construction an appropriate distance away from the cultural heritage site. 51. Project success encouraging next Bank loan project. By implementing this Project, all the municipalities involved have accumulated experience and enriched their understanding and comprehension of World Bank project requirements. Wuxi municipality has already begun to prepare a future Bank project. 45 (b) Notices for Future. 52. Prevention of unreasonable contract variations. PMOs and PIUs emphasized the importance of accurately preparing the bidding documents, including designs, specifications and Bill of Quantity, etc. This will benefit the PIUs by preventing unreasonable variations later during the construction. 53. Familiarity with procurement procedures. It was noted that, in future similar projects, PIUs would benefit from guidance with regards to the Bank’s procurement procedures. 54. Shortening of the project preparation period. This Project identification started at the end of 2001, and the loan agreement was signed in November 2004, making the overall project preparation time three years. This duration of project preparation was too long for some of the components. For instance, Xishan government in Wuxi City had plans to construct five WWTPs during 2001 to 2005, including Anzhen and Dongting Phase 2 WWTPs. Because of the longer period of Bank project preparation, these WWTPs were not completed by 2005. In addition, some of the wastewater pipeline projects required some engineering variations as a result of the delays. It is suggested that in future Bank projects it would be better to consider these factors and try to shorten the project preparation duration. (c) Specific lessons learned. 55. It is vital to the success of project implementation to have : (i) strong government support, fulfillment of covenants agreed and close cooperation by all parties in the Project; (ii) timely applications and approvals for domestic authorities of various levels; and (iii) a strong and stable project management organization. • The transferring of supervisory responsibility for the Project from Bank headquarters office in Washington DC to Beijing Office greatly helped communications between TBUEPO and the Bank. The arrangement of a China-based Bank task manager also brought with it a greater benefit for the Project: it helped the understanding of the local situation and constraints faced by the implementing agencies, together with bringing a more constructive approach to problem solving. • Some of the covenants required in the Loan Agreement in relation to institutional development and financial reform were not implemented in the Project. In hindsight, some of these problems could have been foreseen; this was disappointing both for the Bank and the Borrower. More dialogue and rigorous risk assessment of the proposed reforms during the Project preparation might help to avoid this situation in the future. • Institutional reforms in China can take considerable time and effort to implement. In the earlier stages of the Project, inadequate attention was given to this aspect, and there were unrealistic expectations. 46 Annex 7. List of Supporting Documents CHINA: Tai Basin Urban Environment Project 1. Project Appraisal Document 2. Loan Agreement 3. Project Agreement 4. Mission Aide Memoires and Back-to- Office reports 5. Project Status Reports and Implementation Status Reports 6. Semi-annual Project Progress Reports 7. Borrower’s Implementation Completion Report 47 Annex 8: Environmental Monitoring Indicators CHINA: Tai Basin Urban Environment Project 1. This annex provides detailed data on pollution reduction, water quality and performance of the wastewater treatment plants financed under the project. These data supplement the project’s outcome/output indicators. The annex provides summary environmental data that illustrates the impact of the project on: (i) wastewater collection and treatment; (ii) influent and effluent water quality in the WWTPs; (iii) reduction of pollutants; (iv) surface water quality (annual average); and (v) impact of Suzhou river dredging on ground water quality. A Wastewater Collection and Treatment. 2. Table 1 illustrates the project’s contribution to reducing the discharge of untreated wastewater to the river systems. Significant improvements in the collection and treatment rates were achieved in service areas both in Wuzi and Suzhou. The collection and treatment rates for WWTPs in Wuxi increased from zero to about 90 percent and 80 percent, respectively. In Suzhou, the rates increased to 92 percent and 90.3 percent, respectively. Table 1: Water Collection and Treatment Rates Wuxi Components Collection Rate Treatment Rate Huishan WWTP 85 85 Dongting WWTP 90 85 Anzhen WWTP 80 70 Suzhou Components Loujiang WWTP 92 90.3 Fuxing WWTP 92 90.3 B Influent and Effluent Water Quality in the WWTPs. 3. Jiansu Province mandated that all WWTPs in the Lake Tai Protection Area treat wastewater meet the Class 1A discharge standards (see Table 2 below), adopting tertiary treatment. The data in Tables 2 and 3 and Charts 1 through 4, below) depict achievement of the stipulated discharge standard at the WWTPs constructed under the project. Table 2: Discharge Standard of Pollutants for Municipal Wastewater (GB18918-2002) Class 1 Class 2 Class 3 A B COD 50 60 100 120 BOD5 10 20 30 60 [1] TP 0.5 (1) 1 (1.5) 3 5 2 NH3-N 5 (8) 8 (15) 25 (30) - [1] The value in a bracket applies if the wastewater treatment plant was constructed before Dec. 31, 2005. [2] The value in a bracket applies when water temperature is below 12C. 4. Huishan WWTP. The figures in Table 3 indicate that the treated effluent discharged at the Huishan WWTP achieved the Class 1A discharge standard following tertiary treatment. 48 However, the project financed tertiary treatment only at the Phase 2 plant; the other plants (Phases 1 and 3) were upgraded with own funds. Table 3: Treated Effluent Discharge at Huishan WWTP Year Pollutant COD TP NH3-N mg/l 2007 Influent 275 1.83 17.37 Effluent 60 0.91 1.89 2008 Influent 149 1.8 19 Effluent 39 0.37 1.33 2009 Influent 205 2.2 15.4 Effluent 35 0.3 1.3 2010 Influent 278 2.6 16.4 Effluent 36.2 0.23 1.3 5. Charts 1 through 4 show average water quality before and after treatment at each WWTP. The project financed secondary treatment to meet Class 1 discharge standards. Tertiary treatment was subsequently added with own funds. Chart 1: Dongting WWTP (mg/l) Chart 2: Anzhen WWTP (mg/l) 49 Chart 3: Loujiang WWTP (mg/l) Chart 4: Fuxing WWTP (mg/l) C Reduction of Pollutants 6. As shown in the charts and tables below, the project achieved significant pollution load reductions, particularly in the reduction of COD, which is a key indicator of pollution. The removal of these amounts of pollution contributed to mitigating further deterioration of water quality in the Tai Basin rivers. Wuxi Components 50 Chart 5: Huishan WWTP Pollution Reduction (tons/yr) Table 4: Huishan WWTP Treatment Volumes Year WW Treated m3/yr 2007 3,881,000 2008 5,536,000 2009 8,378,000 2010* 4,580,000 Total 22,375,000 *The figure in 2010 is up to the end of June. Chart 6: Dongting WWTP Pollution Reduction (tons/yr) 51 Table 5 shows data up to June 2010. Table 6: Anzhen WWTP Pollution Reduction (tons/yr) Year TP Reduction NH3-N COD BOD WW Treated (tons/yr) Reduction Reduction Reduction m3/yr (tons/yr) (tons/yr) (tons/yr) 2008-2010 8.1 61 810 - 9,500,000 Note: Table 6 shows average figure from July 2008 to end of June 2010. Suzhou Components Chart 7: Loujiang WWTP Pollution Reduction (tons/yr) Table 8: Loujiang WWTP Treatment Volumes Year WW Treated m3/yr 2009 39,598,000 To end of June 2010 19,104,000 Total 58,702,000 52 Chart 8: Fuxing WWTP Pollution Reduction (tons/yr) Table 9: Fuxing WWTP Treatment Volumes Year WW Treated m3/yr 2009 4,124.0 To May 2010 1,796.1 Total D Surface Water Quality (Annual Average) 7. The following tables provide water quality data of the receiving water bodies after treatment (of inflows to the water body) at the project’s WWTPs. Water quality in the receiving water bodies did not immediately improve because wastewater flows to the WWTP initially included both domestic and industrial wastewater, as it requires different treatment. In fact, the water quality during the period of 2003 to 2008 was even worse than before WWTP commissioning in some locations. Nevertheless, in general, surface water quality data indicate that the water quality in receiving waters gradually improved after implementation of the project. For ease of reference, the Chinese Environmental Quality Standards for Surface Water are reproduced in Table 15, further below. Table 10: Wuxi Dongting WWTP (milligrams per liter [mg/l], except pH) Year Receiving Monitoring pH COD NH3-N TP DO Water Body Section 2003 Xinxintang Yacheng 7.44 42 4.41 0.28 1.9 2007 - Jiulihe Qiao 7.43 56 6.73 0.53 2.5 2008 7.43 38 4.81 0.31 1.9 2009 7.63 27 3.51 0.24 3.4 Table 11: Wuxi Anzhen WWTP (mg/l, except pH) Year Receiving Monitoring pH COD NH3-N TP DO Water Body Section 2003 7.6 22 7.89 0.4 2.6 2007 Shengtanghe Baimitang 7.26 22 1.85 0.36 6.6 2008 Qiao 7.54 24 5.66 0.39 1.6 53 2009 7.43 23 2.08 0.20 4.3 Table 12: Wuxi Huishan WWTP (mg/l, except pH) Year Receiving Monitoring pH COD NH3-N TP DO Water Body Section 2003 7.46 28 3.93 0.35 4.2 2008 Xibei Wuhao Qiao 7.62 44 3.23 0.57 4.2 2009 Channel 7.54 35 1.44 0.5 4.29 2010 6.64 27 3.8 0.56 4.3 Table 13: Suzhou Loujiang WWTP (mg/l, except pH) Year Receiving Monitoring pH COD NH3-N TP DO Water Body Section 2009 Loujiang Loujiang Bridge 7.7 8.5 2.5 0.243 6.3 River Table 14: Suzhou Fuxing WWTP (mg/l, except pH) Year Receiving Monitoring pH COD NH3-N TP DO Water Body Section 2009 Jinyuan Bridge 7.7 27.5 2.3 0.28 5.5 Environmental Quality Standards for Surface Water Standard Categary No. Value Class I Class II Class III Class IV Class V Item 1 PH 6—9 Saturation 2 Dissolved oxygen factor90% 6 5 3 2 or7.5 3 Permanganate Index 2 4 6 10 15 4 BOD5 3 3 4 6 10 5 NH3-N 0.15 0.5 1 1.5 2 6 Hg 0.00005 0.00005 0.0001 0.001 0.001 7 Lead 0.01 0.01 0.05 0.05 0.1 8 Volatile Phenol 0.002 0.002 0.005 0.01 0.1 9 Oil 0.05 0.05 0.05 0.5 1 54 E. Impact of Suzhou City River Dredging on Ground Water Quality 8. Monitoring data indicates that the river water quality improved after dredging and the groundwater quality did not change significantly at the sludge landfill. The monitoring was undertaken in September 2009 at both sites of the Phase-1 location and Phase- 2 location. The monitoring results, as indicated below, show that the project achieved the desired improvement of the water quality in Suzhou Municipality. They also indicate that there is no significant impact on ground water quality. Table 16: Summary of Suzhou City River Dredging Ground Water Quality Monitoring (mg/l, except pH Date Sampling Monitoring Location pH TSS Total Nitrate- Hardn PO3- Phenol CODMn NH3-N Zn Cr6+ Pb Ni Cu As N ess Standard 6.5 1000 450 0.1 20 3.0 0.2 1.0 0.01 0.05 0.05 1.0 0.05 8.5 Sept. U1 7.4 400 355 0.13