Document of The World Bank Report No: ICR2980 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-48520 TF-56948) ON A LOAN IN THE AMOUNT OF US$ 147 MILLION AND A GLOBAL ENVIRONMENTAL FACILITY GRANT IN THE AMOUNT OF US$ 5 MILLION TO THE PEOPLE’S REPUBLIC OF CHINA FOR A SECOND SHANDONG ENVIRONMENT PROJECT June 19, 2014 China and Mongolia Sustainable Development Unit China and Mongolia Country Management Unit East Asia and Pacific Region CURRENCY EQUIVALENTS (Exchange Rate Effective January 1, 2014) Currency Unit = Renminbi Yuan (RMB) US$ 1.00 = US$ 6.1 RMB 1.00 = US$ 0.16 FISCAL YEAR [January 1 – December 31] ABBREVIATIONS AND ACRONYMS AP Affected Persons BOD Biochemical Oxygen Demand BOT Build Oprerate and Transfer COD Chemical Oxygen Demand CPS Country Partnership Strategy EA Environmental Assessment EDZ Economic Development Zone EIA Environment Impact Assessment EMP Environment Management Plan EOP End of Project EPB Environment Protection Bureau GEF Global Environment Facility GIS Geographic Information System GWSC Gaomi Water Supply Company IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding IMO International Maritime Organization IMS Information Management System LME Large Marine Ecosystems MIS Management Information System MoF Ministry of Finance NPV Net Present Value NRW Non Revenue Water O&M Operation and Maintenance PAD Project Appraisal Document PDO Project Development Objective QAG Quality Assurance Group QALP Quality Assessment of Lending Portfolio QER Quality at Entry Review QWC Qixia Wastewater Company RAP Resettlement Action Plan RCR Resettlement Completion Report RP Resettled Persons RUEC Rizhao Urban Environment Company SEP Shandong Environment Project SEP II Second Shandong Environment Project SDS-SEA Sustainable Development Strategy for the Seas of East Asia SPG Shandong Provincial Government SPFB Shandong Province Finance Bureau SPPMO Shandong Provincial Project Management Office UNDP United Nations Development Programme WTP Water Treatment Plant WWGC Weifeng Wastewater Group Company WWTP Wastewater Treatment Plant Vice President: Axel van Trotsenburg, EAPVP Country Director: Klaus Rohland, EACCF Sector Manager: Abhas Kumar Jha, EASIN Project Team Leader: Guangming Yan, EASCS ICR Team Leader: Guangming Yan, EASCS CHINA Second Shandong Environment Project CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph 1. Project Context, Project Development and Global Environment Objectives, and Design .......... 1 2. Key Factors Affecting Implementation and Outcomes ............................................................... 3 3. Assessment of Outcomes............................................................................................................. 7 4. Assessment of Risk to Development Outcome and Global Environment Outcome ................. 11 5. Assessment of Bank and Borrower Performance ...................................................................... 12 6. Lessons Learned ........................................................................................................................ 14 Annex 1. Project Costs and Financing .......................................................................................... 16 Annex 2. Project Outputs by Component ...................................................................................... 18 Annex 3. Economic and Financial Analysis.................................................................................. 21 Annex 4. Bank Lending and Implementation Support/Supervision Processes ............................. 34 Annex 5. GEF-supported Septic Tank Management Component ................................................. 36 Annex 6. Resettlement Implementation ........................................................................................ 40 Annex 7. Performance of Project-financed Wastewater Treatment Plants ................................... 42 Annex 8 Summary of Borrower's ICR ......................................................................................... 44 Annex 9. List of Supporting Documents ....................................................................................... 51 MAPS. IBRD 35288 and IBRD 34859R DATA SHEET A. Basic Information SECOND SHANDONG Country: China Project Name: ENVIRONMENT PROJECT Project ID: P077752,P090377 L/C/TF Number(s): IBRD-48520,TF-56948 ICR Date: 06/19/2014 ICR Type: Core ICR PEOPLE'S REPUBLIC Lending Instrument: SIL,SIL Borrower: OF CHINA Original Total USD 147.00M, USD 136.09M, Disbursed Amount: Commitment: USD 5.00M USD 5.00M Environmental Category: A Focal Area: I Implementing Agencies: Shandong Provincial Project Management Office Yantai Municipality Cofinanciers and Other External Partners: None B. Key Dates SECOND SHANDONG ENVIRONMENT PROJECT - P077752 Revised / Actual Process Date Process Original Date Date(s) Concept Review: 10/26/2005 Effectiveness: 06/07/2007 06/07/2007 Appraisal: 04/17/2006 Restructuring(s): 01/22/2010 Approval: 02/27/2007 Mid-term Review: 12/01/2009 03/30/2009 Closing: 12/31/2013 12/31/2013 CN-GEF-Second Shandong Environment Project - P090377 Revised / Actual Process Date Process Original Date Date(s) Concept Review: 10/26/2005 Effectiveness: 06/07/2007 Appraisal: 04/17/2006 Restructuring(s): Approval: 02/27/2007 Mid-term Review: 12/07/2009 03/30/2009 Closing: 12/31/2013 12/31/2013 i C. Ratings Summary C.1 Performance Rating by ICR Outcomes Moderately Satisfactory GEO Outcomes Moderately Satisfactory Risk to Development Outcome Low or Negligible Risk to GEO Outcome Low or Negligible Bank Performance Satisfactory Borrower Performance Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry Satisfactory Government: Satisfactory Implementing Quality of Supervision: Satisfactory Satisfactory Agency/Agencies: Overall Bank Overall Borrower Satisfactory Satisfactory Performance Performance C.3 Quality at Entry and Implementation Performance Indicators SECOND SHANDONG ENVIRONMENT PROJECT - P077752 Implementation QAG Assessments Indicators Rating: Performance (if any) Potential Problem Project Quality at Entry No None at any time (Yes/No): (QEA) Problem Project at any Quality of No None time (Yes/No): Supervision (QSA) DO rating before Satisfactory Closing/Inactive status CN-GEF-Second Shandong Environment Project - P090377 Implementation QAG Assessments Indicators Rating: Performance (if any) Potential Problem Project Quality at Entry No None at any time (Yes/No): (QEA) Problem Project at any Quality of No None time (Yes/No): Supervision (QSA) GEO rating before Satisfactory Closing/Inactive Status ii D. Sector and Theme Codes SECOND SHANDONG ENVIRONMENT PROJECT - P077752 Original Actual Sector Code (as % of total Bank financing) Sanitation 77 79 Solid waste management 9 9 Sub-national government administration 1 1 Water supply 13 11 Theme Code (as % of total Bank financing) Pollution management and environmental health 67 70 Water resource management 33 30 CN-GEF-Second Shandong Environment Project - P090377 Original Actual Sector Code (as % of total Bank financing) Sanitation 100 100 Theme Code (as % of total Bank financing) City-wide Infrastructure and Service Delivery 33 33 Pollution management and environmental health 67 67 E. Bank Staff SECOND SHANDONG ENVIRONMENT PROJECT - P077752 Positions At ICR At Approval Vice President: Axel van Trotsenburg James W. Adams Country Director: Klaus Rohland David R. Dollar Sector Manager: Abhas Kumar Jha Keshav Varma Project Team Leader: Guangming Yan Shenhua Wang ICR Team Leader: Guangming Yan ICR Primary Author: Guangming Yan iii CN-GEF-Second Shandong Environment Project - P090377 Positions At ICR At Approval Vice President: Axel van Trotsenburg James W. Adams Country Director: Klaus Rohland David R. Dollar Sector Manager: Abhas Kumar Jha Keshav Varma Project Team Leader: Guangming Yan Shenhua Wang ICR Team Leader: Guangming Yan ICR Primary Author: Guangming Yan F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The development objective is to improve the environmental conditions in participating municipalities/counties through a package of priority interventions, including upgrading and development of wastewater collection and treatment facilities, river embankment rehabilitation, solid waste management, water supply improvements, industrial pollution monitoring, and enhancement of the financial performance and efficiency of key urban environmental service agencies. Revised Project Development Objectives (as approved by original approving authority) Global Environment Objectives (from Project Appraisal Document) The Global Environment Objective of the GEF activity is to reduce land-based pollution along the Yantai coast and the Bohai Sea through development of a pilot septic-tank management system in Yantai and dissemination of the Yantai model in Shandong Province and in other parts of China. Revised Global Environment Objectives (as approved by original approving authority) (a) PDO Indicator(s) Original Target Formally Actual Value Values (from Revised Achieved at Indicator Baseline Value approval Target Completion or documents) Values Target Years Citizens’ satisfaction with wastewater, solid waste and water supply services Indicator 1 : in participating cities/counties Value (quantitative or 66% 92% 97% Qualitative) Date achieved 12/30/2005 12/31/2013 12/31/2013 Comments Achieved. End-of-project survey indicates citizen’s satisfaction with water iv (incl. % supply, wastewater and solid waste services is 99%, 94% and 98%,respectively. achievement) Indicator 2 : Improvement of water quality in cities/counties from Class V to Class IV Value (quantitative or 0 148km 129.5km Qualitative) Date achieved 12/30/2005 12/31/2013 12/31/2013 Indicator is problematic. Achievement is based on the assumption that river Comments water quality improved in the sections of river courses where untreated (incl. % wastewater flows were intercepted through project-financed interceptor sewers, achievement) but no methodology is provided. Indicator 3 : Percentage of population connected to WWTPs Value (quantitative or 58% 85% 90.7% Qualitative) Date achieved 12/30/2005 12/31/2013 12/31/2013 Comments (incl. % Achieved. achievement) Indicator 4 : Percentage of treated effluent reuse Value (quantitative or 0.2% 21% 18.2% Qualitative) Date achieved 12/30/2005 12/31/2013 12/31/2013 Achievement reported by SPPMO cannot be verified. The project did not finance Comments any tertiary treatment plant (for effluent re-use), largley to replenish rivers for (incl. % aesthetic purposes. As no definition on data collection and method was provided achievement) in the PAD, the accuracy of the data provided is questionable. Treated effluent was used only in Zaozhuang to replenish Dongsha River. Indicator 5 : Rate of compliance of connected industries with the discharge standards. Value (quantitative or 60% 90% 98.2% Qualitative) Date achieved 12/30/2005 12/31/2013 12/31/2013 Comments (incl. % Achieved. achievement) Indicator 6 : Percentage of population provided with solid waste services Value (quantitative or 84% 95% 95% Qualitative) Date achieved 12/30/2005 12/31/2013 12/31/2013 Comments Achieved. Solid waste services now cover all the original city beneficiaries (incl. % identified at project appraisal. achievement) v (b) GEO Indicator(s) Original Target Formally Actual Value Values (from Revised Achieved at Indicator Baseline Value approval Target Completion or documents) Values Target Years Indicator 1 : Pollution discharge to Bohai Sea reduced (BOD ton/year) Value (quantitative or 0 1,700 806.4 Qualitative) Date achieved 12/30/2005 12/31/2013 12/31/2013 Achievement is based on the corrected number of septic tanks (1,056 rather Comments 1,700) in the Pilot Area, and the verified volume of septic tanks (24 m3 instead (incl. % of 44 m3). It can be concluded that BOD reduction was in line with original achievement) target if the number of septic tanks and sizes are corrected. (Note: Measurement unit is tons/year; coincidentally, the baseline target is the same as the number of septic tanks assumed at appraisal) (c) Intermediate Outcome Indicator(s) Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years Indicator 1 : Volume of wastewater treated (million cubic m/year) Value (quantitative or 103 226 239.6 Qualitative) Date achieved 12/30/2005 12/31/2013 12/31/2013 Comments Achieved The project financed only two WWTPs. However, the networks (incl. % expanded under the project conveyed wastewater to the existing WWTPs in achievement) project cities and the two WWTPs constructed under the project Indicator 2 : Rate of wastewater treated in the cities/counties (%) Value (quantitative or 65 80 91.9 Qualitative) Date achieved 12/30/2005 12/31/2013 12/31/2013 Comments (incl. % Exceeded. achievement) Indicator 3 : Reduction of pollution load reaching the recipient rivers (ton COD/year) Value (quantitative or 9,400 28,000 37,125 Qualitative) Date achieved 12/30/2005 12/31/2013 12/31/2013 Comments Exceeded. (incl. % vi achievement) Municipal solid waste collected and transferred to sanitary landfill Indicator 4 : (tons/year) Value (quantitative or 293,460 450,775 351,660 Qualitative) Date achieved 12/30/2005 12/31/2013 12/31/2013 Final achievement is 78% of target (comprising 160,260 tons/yr in Heze. and Comments 191,400 tons/yr in Rizhao). The lower achievement assumed to be due to an (incl. % overestimation of waste generation at appraisal, including the waste achievement) minimization facility in Heze. Indicator 5 : Population with access to water supply services (%) Value (quantitative or 84 97 99 Qualitative) Date achieved 12/30/2005 12/31/2013 12/31/2013 Achieved, measured for Gaomi only. Even though Huantai water Comments investments were deleted, there was a significant expansion of the (incl. % distribution networks in the fluoride-affected areas in Gaomi to serve over achievement) 340,000 people. (21km of transmission and 403km distribution mains installed under project). Water production (a) Total Million cubic m/year; (b) Ground water Indicator 6 : /Total water production; (c) Liters/capital/day Value (a) 46.72; (b) 85%; (c) (a) 104.03; (b) (a) 70.72; (b) 0; (quantitative or 101 39%; (c) 127 (c) 100 Qualitative) Date achieved 12/30/2005 12/31/2013 12/31/2013 Based on original project (including Huantai), total water production target was not achieved. Based on Gaomi only, the target was achieved. The zero value for end-of-project target for use of groundwater is the result of Gaomi Comments action to terminate use of ground water in November 2012, formalized (incl. % through an October 16, 2013 Provincial regulation prohibiting the use of achievement) groundwater in urban areas. Achievement of 100 lpcd represents average water use in urban and rural area, whereas 127 lpcd was for Goami urban area only. Indicator 7 : Non-revenue water in % of water produced (%) Value (quantitative or 25 20 10 Qualitative) Date achieved 12/30/2005 12/31/2013 12/31/2013 Comments The indicator is not relevant to project activities. Achievement claimed (incl. % cannot be verified as the project did not finance any non-revenue water achievement) (NRW) reduction activities. Cost recovery ratio of (a) wastewater management operations; (b) solid Indicator 8 : waste management operations; (c) water supply management operations Value (a) 2.5; (b) 1.0; (c) 1.6 (a) 1.2; (b)1.4; (c) (a) vii (quantitative or 1.2 0.46/1.07/1.5; Qualitative) (b)0.55(c) 1.23 Date achieved 12/30/2013 12/31/2013 12/31/2013 Baseline data appears to be for the entire sector(s), while the targets appear to refer to the performance of utility companies funded under the project with covenanted targets. As some of the utility companies have been Comments provided funds other than revenue to meet operating costs, the cost recovery (incl. % ratio in some instances result in a value below 1.0. The cost recovery ratio achievement) for Weihai, Yantai and Gaomi wastewater companies is 0.46, 1.07 and 1.5 respectively, for Rizaho solid waste company is 0.55 and for Gaomi water is 1.23. Numbers of installation of online automatic monitoring stations at Indicator 9 : industrial discharge sites Value (quantitative or 366 800 810 Qualitative) Date achieved 12/30/2005 12/31/2013 12/31/2013 Comments Achieved, representing the number of industries with online monitoring (incl. % stations with a direct connection to the Provincial Environmental Protection achievement) Bureau monitoring network Public disclosure of the status of compliance of major pollution Indicator 10 : enterprises Value Real time (quantitative or Annual Report Monthly Report online Qualitative) monitoring Date achieved 12/30/2005 12/31/2013 12/31/2013 Comments Complied. SPEPB publicly discloses online automatic monitoring (incl. % information on its website (http://58.56.98.78:8801/webgis_wry/webgis/#) achievement) for the major industries. Note: The source of all target data, indicated against the indicators in the table above, was provided by the Shandong Province Project Management Office, which monitored performance throughout project, implementation and reported in the borrower’s semi-annual progress reports. viii G. Ratings of Project Performance in ISRs - Actual Date ISR Disbursements No. DO GEO IP (USD millions) Archived Project 1 Project 2 1 03/21/2008 S S S 28.19 0.50 2 06/25/2009 S S S 65.48 1.07 3 06/26/2010 S S S 78.37 1.78 4 03/06/2011 S MS S 86.89 3.31 5 03/03/2012 S MS S 110.89 4.09 6 11/26/2012 S MS S 118.58 4.29 7 06/07/2013 S MS S 119.77 4.29 8 12/16/2013 S S S 128.35 4.63 H. Restructuring (if any) Amount Disbursed ISR Ratings at Board Approved at Restructuring in Reason for Restructuring Restructuring USD millions Restructuring & Key Date(s) PDO GEO Changes Made DO GEO IP Project1 Project 2 Change Change To substitute a city for one that dropped out, and correct a drafting error in the legal agreement: (i) Zhoucun was 01/22/2010 N S S 74.94 substituted for Huantai that dropped out of the project; and (ii) the disbursement % for civil works for Zaozhuang was corrected to 100%. ix I. Disbursement Profile P077752 P090377 x 1. Project Context, Project Development and Global Environment Objectives, and Design 1.1 Context at Appraisal At the time of project appraisal, Shandong Province had a population of 92 million, with 40% living in urban areas. It has a 3,000-km coastline with the Bohai and Yellow Seas, both of which drain a major part of the province. Shandong Province was one of the fastest growing provinces in China in 2005. Infrastructure deficiencies in Shandong’s fast growing smaller cities included: (a) poor quality and intermittent drinking water supply, due to inadequate water resources and unsafe fluoride-affected ground water; (b) lack of proper solid waste management systems; (c) recurrent flooding and waterlogging due to inadequate protection; and (d) poor environmental conditions, including insufficient drainage and wastewater treatment and serious pollution of rivers, and pollution discharges the Bohai Sea. Environmental services managed by municipal departments were supply-driven, inefficient and lacked adequate cost recovery. Shandong Provincial Government (SPG) policies called for: accelerated restoration of ground water resources and surface resources through enhancing the treatment and water re-use; increased collection and treatment of wastewater to achieve 65 percent of treatment in municipal cities; and development adequate solid waste treatment and disposal facilities to handle 70% of solid wastes from municipalities. Shandong was also a signatory to the Memorandum of Agreement initiated by the United Nations Development Program/Global Environment Facility/International Maritime Organization (UNDP/GEF/IMO) Regional Program to manage the pollution of rivers and reduce land-based discharges into the Bohai Sea. Rationale for Bank Involvement. The project was consistent with the Provincial Government’s 11th Five Year Plan focus in addressing increased wastewater collection and treatment, reuse of treated effluent, protection of ground water resources, and supported Government priorities for sustainable improvement of environmental conditions through investments for improved water supply, wastewater, solid waste management, and reduced land-based pollution discharges to the Bohai Sea, with a GEF-supported pilot to demonstrate a lower cost technology to manage the pervasive pollution discharges from non-functioning septic tanks. The project provided the opportunity for the World Bank to continue the long association with the Province, and share its global experience for the new initiatives addressed in the project. 1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) The development objective was to improve the environmental conditions in participating municipalities/counties through a package of priority interventions, including upgrading and development of wastewater collection and treatment facilities, river embankment rehabilitation, solid waste management, water supply improvements, industrial pollution monitoring, and enhancement of the financial performance and efficiency of key urban environmental service agencies. Key indicators, as approved, are set out in the Data Sheet above. 1.3 Original Global Environment Objectives (GEO) and Key Indicators (as approved) The Global Environment Objective of the GEF-supported component was to reduce land-based pollution along the Yantai coast and the Bohai Sea through development of a pilot septic-tank management system in Yantai, and dissemination of the Yantai model in Shandong Province and 1 in other parts of China. The key GEO indicator, as approved, was ‘pollution discharge to Bohai Sea reduced (BOD ton/year)’. 1.4 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification. Not applicable. 1.5 Revised GEO (as approved by original approving authority) and Key Indicators, and reasons/justification. Not applicable. 1.6 Main Beneficiaries. The primary beneficiaries of the project were originally estimated at 3,500,000. At the end of the project, the total beneficiaries amounted to 4,169,000, including 340,000 people in fluoride- affected areas, about 300,000 beneficiaries under the GEF component, and participating government agencies, i.e., Shandong Provincial Finance Bureau, municipalities of Heze, Rizhao, Gaomi, Yantai, Weihai, Weifeng, Zhoucun, Qixia and Zaozhuang, and the Provincial Environmental Protection Bureau (EPB). 1.7 Original Components (as approved); The original project components included: (i) wastewater collection networks and treatment facilities in Gaomi, Huantai, Qixia, Weifang, Weihai, Yantai and Zaozhuang, with associated river embankment rehabilitation in Qixia, Weifang and Zaozhuang, and a GEF pilot septic tank management system in Yantai, including a fleet of septic tank emptying vehicles, and regulations for septic tank management; (ii) solid waste management in Heze and Rizhao; (iii) water supply improvements in Gaomi and Huantai; and (iv) institutional development and capacity building for utility companies, Environmental Protection Bureau (EPB), and decision-makers. A detailed component description is available in the Project Appraisal Document (PAD). 1.8 Revised Components Huantai (Zibo Municipality), which had water supply and wastewater investment, dropped out of the project in 2010 yielding Loan savings of US$19.2 million. Zhoucun district of the same municipality was substituted for Huantai. The new subcomponent, with a total cost of US$ 30 million financed 131 km of wastewater collection networks, and 23.2 km of km of river embankment improvements to control flooding. The collection networks also conveyed wastewater from the neighboring district upstream (Zouping), under a formal cost sharing agreement with Zhoucun, promoting inter-municipal cooperation. 1.9 Other significant changes Project Restructuring. The Loan Agreement was amended in January 2010 to: (i) delete Huantai and substitute Zhoucun as described above; and (ii) correct a drafting error in the legal agreement, to increase the civil works disbursement percentage for Zaozhuang from 70% to 100%. Baseline Data of the Pilot Area of the GEF Component. The original number and estimated volumes of septic tanks in the pilot area in Yantai were found to be incorrect, when tank emptying commenced. The number of septic tanks was found to be 1,056, instead of 1,700, and the average volume of a septic tank was found to be about 24 m3, instead of the figure of 44 m3 estimated during the baseline survey. These discoveries impacted on the performance targets for 2 the subcomponent. During implementation, the Yantai Septic Tank Management Office expanded the number of septic tanks covered by including an additional 520 septic tanks from outside the pilot area. Cancellation of Loan Savings. The original plan was to pre-treat wastewater intercepted from Weifang city in constructed wetlands downstream along the Bailang River. Due to the Government mandate that required new municipal WWTPs be upgraded to Class 1A discharge standards by 2015, the Weifeng Municipal Government decided to delete the pre-treatment and construct a new WWTP under a BOT contract. Up to Loan closure, the Weifeng Municipal Government and SPG was not able to formulate alternative proposals to utilize Loan savings, resulting in a total Loan saving of about US$ 11 million, which was canceled at Loan closure. 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry Project Preparation Soundness of Background Analysis. The Bank task team ensured that adequate background information on national policies and guidelines, past experience of similar projects in China, and specific background conditions in the Province, Bank policies and practices, and lessons learned were reviewed and analyzed early in the preparation. The terms of reference agreed for preparation of the project feasibility studies (by the client) also required that collection and analysis of the comprehensive background information. Consistency with Provincial Strategy and Goals. Project preparation was aligned with the Shandong Province’s environmental management strategy that included: (i) accelerated restoration of the ground resources; improved river water quality; discontinuation of ground water use by industries; (ii) increased collection and treatment of wastewater to reach 65% in municipalities; re-use of the treated effluent; (iii) improved efficiency, and financial viability of wastewater services in line with central government policy directives sustainability of sector agencies. Incorporation of Lessons Learned. Project design incorporated lessons learned from previous operations, e.g., lack of borrower ownership, insufficient investments in environmental infrastructure, need for financial reforms, over design, etc. Design and Quality at Entry Project Development Objectives. The PDO was consistent with the Province’s commitment to environmental improvement and sustainability objectives, and alleviating infrastructure deficiencies in cities that were urbanizing at a rapid pace. The GEO was also consistent with the Province’s commitment to the UNDP/GEF/IMO Regional Program for protect large marine ecosystems (LME) in the Bohai Sea. Project Design. Project design was consistent with the PDO, and addressed Borrower’s priorities including: (i) increased wastewater collection and treatment, improved river water quality, reduced land-based pollution discharges to the Bohai Sea, and enhanced wastewater management by industries; (ii) safe drinking water quality, including limitations on ground water abstraction; 3 (iii) improved solid waste management including waste separation, recycling and eco-friendly disposal; and (iv) improved financial performance of utility companies. Risk Assessment and Mitigation Measures. The overall risk of the project and components were correctly assessed as ‘modest’. The risks of delay in tariff setting and low user fees for wastewater and solid waste management services were assessed as ‘substantial’ at appraisal, which was somewhat overly conservative because, at the time of project appraisal, Shandong Province had formulated guidelines for minimum municipal wastewater and solid waste tariffs. The mitigation measure adopted for the delayed revision of utility tariffs was the definition of total revenue as the ‘total operating revenue and non-operating income’ in the Project Agreement. This measure was realistic and appropriate, specifically, in the early years of development of the wastewater sector in China. The mitigation measure adopted for solid waste tariff reform was a covenant requiring a study, recommendations and implementation of a tariff, which was appropriate in a climate where levy of direct solid waste charges is relatively new in China. Performance Indicators. As discussed in Section 2.3, the design of several indicators was weak in their definition, link to project activities, monitoring methods and targets. Adequacy of Government Commitment. Through past Bank-financed projects, Shandong Province had demonstrated its commitment to sound environmental management. The Province had formulated policies and guidelines to support sustainable operations of its utility agencies, including minimum municipal tariffs for water supply, wastewater and solid waste services. The Province had already signed Memorandum of Agreement of the UNDP/GEF/IMO Regional Program committing to reduction of land-based pollution to the Bohai Sea. and the Yellow Sea. The Province also designated the highly experienced Shanding Provincial Project Management Office (SPPMO) to manage project preparation, coordinate project activities, including close attention to social and environmental safeguards. QAG Quality at Entry Rating. A quality at entry review was not carried out by the Quality Assurance Group (QAG) at project appraisal. However, a Quality Assessment of Lending Portfolio (QALP) conducted in June 2010, judged the overall QAE as satisfactory, and this review agrees with the assessment. 2.2 Implementation Factors that Contributed to Successful Implementation. All original project components were completed by the original loan closing date of December 31, 2013, except for the pre-treatment facility at Weifeng, and the Huantai subcomponent, which was deleted. The original planned project outputs and actual achievements are described in detail in Annex 2. About US$ 136.7 million of the Loan and US 5.00 million of the GEF Grant were disbursed, and all covenants were complied with. Factors that contributed to the successful implementation of the project, on time, and within budget, include: (i) strong SPG ownership of the project; (ii) environmental management policies and framework, and experience in implementing Bank-financed projects; (iii) problem-free procurement performance; (iv) incorporation of SPG priorities, social and environmental targets, realistic implementation period, and achievable project covenants; (v) readiness for implementation, with detailed designs and bid documents completed for the first years’ implementation, that enabled early completion of the Weihai, Gaomi, Yantai, Heze and Rizhao components in 2010 and 2011, more than two years before the Loan closing date; (vi) the 4 flexibility shown by the Bank to accommodate Borrower’s requests for design changes, to substitute new components in lieu of a deletion, as in the case of Huantai; (vii) having the Task Team Leader, procurement, financial management and safeguard specialists located in the country office to facilitate early resolution of issues; and (viii) the determination of Yantai Municipality to formulate and implement the GEF-supported pilot septic tank management system with necessary adjustments and establishing a permanent Office for Septic Tank Management, despite the difficulties experienced with: incorrect baseline data; procurement and registration of foreign-manufactured septic tank emptying vehicles; and challenges of emptying septic with highly consolidated settled solids. Loan Savings from the Weifeng Component. As mentioned in Section 1.9 above, with the Government requirement that all new municipal WWTPs be upgraded to Class 1A discharge standard, Weifeng decided not to implement the pretreatment facility agreed at appraisal, but constructed a 100,000 m3/day WWTP in mid-2013, under a BOT arrangement, to treat the intercepted wastewater from Weifeng city. This decision resulted in a Loan saving of about US$ 11 million. Shandong was not able to provide alternative proposals for the use of the savings which were then canceled at closure. Changes in Qixia Component. The original plan to collect and treat wastewater from the Qixia economic development zone (EDZ) did not materialize because sufficient wastewater was not generated from the EDZ to utilize the 20,000 m3/d capacity of the WWTP, due to a change in policy on the type of industries permitted in the EDZ. The WWTP was not operating at Loan closure. However, Qixia Municipality plans to fully utilize the plant capacity through transfer of wastewater from its plant in the city. Accordingly, Qixia financed a new 30 km wastewater trunk main, which is currently 90% completed, and scheduled for completion by mid-2014. Mid-term Review. During the mid-term review, held in March/April 2009, the Bank agreed to substitute Huantai with Zhoucun, a district in the same municipality, and recognized the need to correct a drafting error in the disbursement percentage for civil works in Zaozhuang. This led to the restructuring of the project in January 2010. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization Design. Several indicators had problems of unclear linkage to project activities, definition monitoring methods, and targets. Specific cases were: (i) improvement of river water quality improvement (from Class V to Class IV) was indicated in kilometers with no explanation of how to measure; (ii) inclusion of a performance indicator for non revenue water even though the project did not finance this activity; (iii) misalignment of the cost recovery ratio indicator (Indicator 8 in datasheet section F); and (iv) incorrect baseline data on the number and volume of septic tanks for the GEF component indicator, which inflated the indicator targets for pollution discharge to the Bohai Sea. More accurate measurement of improvement of environmental conditions would have been possible had the Results Framework set baseline indicators by sector and by municipality. However, the PAD did include mid-term review (2009) targets, which were helpful to assess project progress. Monitoring. The SPPMO collated and reported monitoring results covering the full scope of the project, which were satisfactory for their reliability, quality and on-time reporting. 5 Utilization. Monitoring and evaluation information was used by the project cities, the SPPMO and the Bank to support decisions on change to components. The SPPMO brought to the attention of the Bank the difficulties to interpret and measure some indicators. The specific case of inaccuracies in the baseline data on the number and volume of septic tanks in Yantai came to light only after the septic tank emptying equipment was procured and deployed. Proposals to revise problematic indicators, developed after the mid-term review, were not acted upon because it was too late in the project implementation. The EPB utilized the results of online monitoring to apply sanctions on industries to ensure compliance, including imposition of fines and suspension of operations. 2.4 Safeguard and Fiduciary Compliance The project triggered three of the Bank’s safeguards policies as elaborated below. Social Safeguards. The project triggered the Bank’s operational policy OP 4.12 on Involuntary Resettlement and the safeguard screening category was S2. Resettlement Action Plans were prepared, in consultation with affected persons (AP), and publicly disclosed, complying with World Bank policies and procedures. Resettlement activities were carried out satisfactorily, except in Qixia and Zaozhuang, where implementation delays occurred due to the slow pace of land acquisition and resettlement. External monitoring of safeguard implementation was carried out by the Shandong Construction Development and Research Institute, in accordance with the requirements of the legal agreements. Annual safeguard compliance reports prepared by the project implementing units were submitted regularly. All resettlement was done in accordance with Chinese regulations and Bank policies. The Resettlement Completion Report (RCR) indicates that resettlement implementation was successfully completed with the full participation of the affected persons, and their standards of living improved, and no resettlement issues remained at project closure. More details are provided in Annex 8 (Resettlement Implementation). Environmental Safeguards. The project was designated as Category A for the purposes of the Bank’s Operational Policy 4.01 on Environmental Assessment. The EA and EMP were prepared according to national policies and regulations and the Bank safeguard policies. The EMP was implemented satisfactorily by the SPPMO. As part of the January 2010 restructuring, the Bank conducted an environmental survey of the newly proposed wastewater collection subcomponent in Zhoucun, and confirmed the subcomponent would be classified as Category “B” due its nature and potential impacts. An additional EA and EMP were prepared by the borrower and reviewed by Bank. The final drafts were disclosed locally and in the Infoshop on December 10, 2009. Dam Safety. The project also triggered the Bank’s operational policy on Safety of Dams (OP 4.37). Four existing dams/reservoirs, Bailang River Reservoir, Xiashan Reservoir, Wangwu Reservoir and Anli Reservoir Bailang River Reservoir, Xiashan Reservoir, Wangwu Reservoir and Anli Reservoir, were subjected dam safety requirements. Remedial works of Wangwu Reservoir were satisfactorily completed during 2000 to 2002, and accepted. Remedial works for Bailang River Reservoir and Xiashan Reservoir were also completed, Remedial works for Anli Reservoir were completed in August, 2011, and the remedial works of the spillway, spillway bridge, and embankment road, completed in 2011 were accepted in May 2012. In summary, dam and reservoir safety requirements were fully complied with. Procurement. Procurement activities were carried out satisfactorily by all project cities in full compliance with Bank procurement procedures. No particular issues were noted. 6 Financial Management. The financial management performance, including accounting, budgeting, internal control, funds flow, financial reporting and auditing, was satisfactory. Audit compliance was also satisfactory, without any audit qualifications. 2.5 Post-completion Operation/Next Phase All project companies are expected to continue using the following reforms introduced under the project: (i) preparation of annual budgets for adequate O&M of the facilities; (ii) preparation of annual financial statements, including projections to facilitate decisions on annual budget allocations including necessary subsidies and/or tariff increases; (iii) continuation of the training plans; and (iv) SPG will continue its policy to promote financial autonomy of wastewater companies. Gaomi Water Supply Company. The Gaomi Municipality will review the current institutional arrangements for rationalizing the provision of water supply and wastewater services, with the aim of improving the efficiency and cost effectiveness of service delivery. Solid Waste Companies in Heze and Rizhao. These companies plan to maintain the levels of service, and improve collection to keep cities clean. They will be funded through government budgets, including the cost of operation of the landfills. Yantai Septic Tank Management. The Yantai Municipal Government will: (i) provide adequate budget to continue the septic tank management program; (ii) make plans to expand the septic tank management program citywide in a phased manner; (iii) incorporate the cost of septic tank management in the wastewater tariff, in the next wastewater tariff revision; and (iv) review the city’s building code requirement of a septic tank for each building, irrespective of whether sewers are available. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation Objectives. The PDOs were fully consistent with the national government and Shandong Province policies for reducing domestic and industrial pollution discharges, improving water quality in the major rivers, protecting large marine ecosystems, improving environmental management in major cities, improving wastewater treatment rates, improving water supply coverage, and increasing water re-use. The objectives were also consistent with the Bank’s Country Partnership Strategy (CPS) of FY2006-FY2010 (Report 46896-CN) with respect to (i) managing resource scarcity and environmental challenges, especially related to water pollution reduction and conservation and observing international environmental conventions; and (ii) promoting balanced urbanization and improving the quality of urban life. The PDO remained well aligned with the new CPS (Report #67566-CN) of FY2013-FY2016. It also remained relevant to the priorities for Shandong Province at the end of the project. Design. Project design, including the blended GEF, correctly identified the crucial issues, and incorporated appropriate and necessary focused interventions for: (i) improved wastewater treatment rate, and water supply coverage; (ii) effective measures for septic tank management to remove a major source of land-based pollution discharge to the Bohai Sea; (iii) solid waste separation, recycling, composting and sanitary disposal; (iv) water supply in fluoride-affected 7 areas (v) sustainability and realistic cost recovery for water supply and wastewater services; (vi) expansion of online monitoring of industries; and (vii) utility institutional and financial reforms. Implementation. The project design and implementation arrangements, and the GEF support for project implementation, as described in the Section 2.1 and Section 2.2 above, contributed to achievement of the project objectives. 3.2 Achievement of Project Development Objectives and Global Environment Objectives Project Development Objective. The projects’ environmental investments in the nine medium- sized municipalities supported improvements in wastewater services (100,000 m3/d treatment capacity and 370 km of collection sewers), water supply services (105,000 m3/d treatment capacity and 432 km of distribution networks), and solid waste services (waste separation plant, collection and landfill equipment, and 780 tons/day of landfill capacity), that resulted in substantial environmental improvements and contributed to improved livability in their jurisdictions. The project satisfactorily achieved its objectives, as most performance targets were either met or exceeded. The rate of citizen satisfaction with services in these three sectors, which started at an average of 66%, reached on average 93% by project closing, slightly exceeding the end-of-project target of 92%. Wastewater Collection and Treatment and River Embankment Works. Outcome indicators for the wastewater component include: (i) volume of wastewater treated reached 239.6 million m3/year versus the end-of-project target of 226 million m3/year; (ii) the rate of wastewater treated in the cities/counties reached 91.9% exceeding the end-of-project target of 80%; (iii) the reduction in COD pollution load reaching the recipient rivers was 37,125 tons/year at end-of- project, compared to only 28,000 tons/year at project start; and (iv) was achievement in “improvement of water quality in the cities/counties from Class V to Class IV”, was 129.5 km, compared to the end-of-project target of 148 km (problems with this indicator are discussed in Section 2.3). As seen through these indicators, the works have improved wastewater collection and treatment, and improved water quality of river systems, which contributed to a better environment in project towns. Overall citizen satisfaction with wastewater services stood at 94.8% at project’s end. Water Supply. Outcome indicators for the water supply component include: (i) the percentage of the population with access to improved water supply rose from 84% to 99%, exceeding the target of 97%; (ii) groundwater abstraction, compared to total water production, dropped from 85% at project start to zero at the end-of-project, following provincial regulations prohibiting the use of groundwater in urban areas; and over 730,000 people received improved water supply, including 340,000 people in fluoride-affected areas. The citizen satisfaction level in the final survey was 99% for water supply. Solid Waste Management. Indicators of success of this component include: (i) municipal solid waste collected and transferred to a sanitary landfill was 293,460 tons/year at appraisal, and reached 351,660 tons/year compared to end-of-project target of 450,775 tons/year, due to an over- estimation of future waste generation at appraisal; (ii) the percentage of population provided with solid waste services rose from 84% at appraisal to 99% at project end, meeting the end of project target; and (iii) cleaner cities with waste disposal at landfills. The citizen satisfaction with solid waste services reached 98%. The financial performance of water supply, wastewater and solid waste companies improved, and they were in compliance with the financial covenants in their subsidiary loan agreements. This 8 achievement was possible through a provision in the legal agreements that defined net revenues to include operating revenue and non-operating income. This provision was particularly appropriate for the relatively new wastewater and solid waste sectors, which are considered still under consolidation. The capacity of the Provincial Environmental Protection Bureau, for industrial pollution control, was enhanced with expansion of the online monitoring of industries, and the publication of real time monitoring data on its website. It also resulted in increased compliance by industries. GEO. The outcomes of the GEF intervention are: (i) reduction of pollution discharges to the Bohai Sea; (ii) introduction of a lower cost technology for septic tank management; (iii) introduction of the culture of regular periodic emptying of septic tanks; (iv) establishment of permanent institutional arrangements for septic tank management in Yantai, including development of a GIS-based information management system to track and monitor tanker routes, operational data, and the frequency of emptying; (v) dissemination of the experience within China and abroad; and (vi) commencement of a discussion on septic tank design, and changes to building code requirements for septic tanks. The above achievements were possible, with adjustments made to the monitoring targets to be consistent with the correct baseline data relating to the number and volumes of septic tanks in the pilot area. On the basis of the corrected baseline data, the performance targets for BOD reduction are deemed achieved. Contributions to Meeting Core Sector Indicators. The project contributed to meeting the Core Sector Indicators as illustrated in the table below: Indicator Actual Achieved Voume(mass) of COD pollution load reduction 37,125 t achieved under the project Number of people in urban areas provided with 730,000 access to Improved Water Sources under the project Number of water utilities that the project is 1 supporting Total Number of project beneficiaries 4,169,000 3.3 Efficiency Rating: Satisfactory Economic Analysis was carried out, at appraisal, for all wastewater, water and solid waste components. A Cost Effective Analysis guided the selection of priority interventions for the project using least cost methodology. Alternative project designs were identified and evaluated in order to select the least cost solutions for the project. The least cost methodology was applied for all project components and included a financial comparison of the alternatives based on capital investments and cost of O&M. Cost Benefit of the components was quantified by analyzing NPV and EIRR. The results showed returns above 15%. End of project analysis was carried out to assess the economic return. An incremental approach was used, determining plusses and minuses to the economic return as a result of project changes during implementation. Overall, the analysis shows that project changes during implementation 9 did not have any significant effect on the economic return, and that all components maintained a satisfactory economic rate of return. Details on the economic analysis are found in Annex 3. Financial Analysis was carried out at appraisal to determine cost recovery tariffs. The Financial Internal Rate of Return (FIRR) analysis was not carried out, as most of the components were non- revenue-generating. Analysis of the tariff increases showed affordability by low-income households. During implementation, non-commercial wastewater and solid waste companies were in compliance with the cost recovery ratio covenant. The companies met cash outgoings with the help of Government subsidies. Water supply operations of GWSC complied with the cost recovery ratio covenant until 2011, but will need revision of the water tariff to remain in compliance in the future. GWSC was, however, able to meet cash outgoings. The current tariff level did not allow the water supply operations to be in compliance with the covenant on capital investment needs coverage. The covenanted debt service ratio did not apply to any of the project companies, as they all avoided incurring additional debt. Apart from Gaomi water tariffs revisions, project cities were only able to revise tariffs to a limited extent since project start. This is consistent with other cities in China where the wastewater tariff, in general, solely covers the direct expenses such as cost of O&M. Comparison of the utility tariff revisions with the overall economic development indicates that these were fully affordable to the beneficiary population. Moreover, the fiscal capacity of the participating municipalities improved during the project as municipal revenue increased significantly since 2005. Additional details on financial analysis are provided in Annex 3. 3.4 Justification of Overall Outcome Rating Rating: Moderately Satisfactory The PDO was relevant at the project start, and remained relevant through to the end of the project. The project development outcomes were achieved, as illustrated by the performance indicators, where many of the ‘end of project’ targets were exceeded. However, several indicators had problems of unclear linkage to the project activities, definition and monitoring method, causing difficulties in verifying achievements. Efficiency of the investments is satisfactory, per the economic analysis presented. Therefore, the overall outcome rating for the PDO was considered Moderately Satisfactory. The GEO remained relevant throughout implementation because the GEF-supported initiative removed one of the key sources of pollution discharges to the Bohai Sea. Through the dissemination efforts of the component, Yantai city officials and other stakeholders in China and regionally, shared the experience of an efficient low cost technology for septic tank management. However, as mentioned above, the issues with the baseline data on septic tanks inflated the targets for pollution discharge to the Bohai Sea, causing partial achievement of project target. Therefore, the overall outcome rating for the GEO was considered Moderately Satisfactory. 3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development The project had no specific interventions on poverty reduction, and gender issues. However, it did improve the living environment for the broader population in the project cities, including women 10 and the poor who benefited from improved water supply, better sanitation services, and improved opportunities for income enhancement from the extensive construction activities. The project is aligned with World Bank Group’s twin goals of ending extreme poverty and promoting shared prosperity among the population living in small and medium cities and lagging areas of Shandong Province. (b) Institutional Change/Strengthening The Yantai Septic Tank Management Office, established as part of the project, will gradually expand its emptying activities to cover much of the 19,000 septic tanks in the city. (c) Other Unintended Outcomes and Impacts (positive or negative) (a) Unintended Financial Benefit to Qixia Municipality. The inability to utilize the completed Qixia WWTP has resulted in an unintended outcome that will benefit Qixia city. This change has helped accelerate Qixia’s plan to relocate the existing WWTP within the city, and realize the opportunity cost of the land currently occupied by it. 3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops Not applicable 4. Assessment of Risk to Development Outcome and Global Environment Outcome Rating: Low The risk to development outcomes is low because the Shandong Province environmental management strategy is very much in sync with the PDO. Based on the track record, SPG is very likely to continue its commitment to enhance environmental management in the Province, and improve quality of life to sustain economic development and growth. SPG has formulated minimum tariffs for municipal water supply, wastewater and solid waste services to promote sustainability, ensured tariff revisions about every three years, and has supported increased autonomy in utility companies. The completed WWTP in Qixia was not operating at project closure due to low flows from the EDZ, which will delay benefits. However, this WWTP will be fully utilized by mid-2014 when the pipeline, under construction, is completed to transfer wastewater from the existing WWTP in Qixia city. The risk to project investments from climate change is low. Risks to some investments, particularly, the sea outfall in Yantai, is low, because the outfall pipeline is secured at the sea bed, and the incidences of typhoons and earthquakes in this area are low. The risks to operation of WWTPs from potential flooding will be temporary, hence considered low, The risk that the landfill in Heze will have a life shortened life, though possible, is small. Should the volume of waste transferred to the landfill continue to increase, the operation of the waste separation facility can be enhanced to minimize inorganic waste conveyed to the landfill. In addition, early planning could be done to expand the landfill. 11 The risk to the GEO is low because the Yantai Municipality has established a dedicated permanent office (Septic Tank Management Office), with staff and annual budget allocations, and plans to expand the operation citywide. The septic tank management system is also likely to be replicated in other municipalities in China. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory The Bank comprised a sound skill mix of technical staff with very senior environmental and sanitary engineers, a senior financial management specialist, a senior financial analyst, senior social and environmental safeguards specialists, and was headed by a Chinese speaking senior urban specialist. Many key team members were based in Beijing and/or were Chinese speaking, which facilitated communications. The team prepared the project in about one and a half years from Concept Review in October 2005 to Board approval in February 2007, at a cost of US$502,000. The PDO and GEO were highly relevant to address the critical issues in Borrower’s environmental management strategy and needs. They also conformed to the CPS goals and the Bank’s larger objective of protecting large marine ecosystems. Project design (as described above) and implementation arrangements were appropriate for the Borrower’s capacity level and satisfactory to achieve the outcomes at the least cost. Project design had realistic goals for sector development, particularly in the wastewater sector where a phased development approach was adopted for cost recovery. Bank performance in ensuring quality at entry is rated ‘satisfactory’, despite weaknesses in the design of performance indicators. As indicated earlier, the project was reviewed by QΑG under the 2010 Quality Assessment of Lending Portfolio. The ratings from this assessment were: (i) Objectives: likely to achieve project objectives; (ii) Project Design: Satisfactory; (iii) Results Framework: Moderately Satisfactory; (iv) Government Commitment: Highly Satisfactory; (v) Risk Assessment: Satisfactory; (vi) Readiness for Implementation: Highly Satisfactory; (vii) Effectiveness of Bank Management During Preparation/Appraisal: Satisfactory. This review agrees with QAG’s ratings. (b) Quality of Supervision Rating: Satisfactory Formal Bank supervision of the project twice a year, and the location of the task team leader and all fiduciary and safeguard staff in the country office, helped maintain frequent contact and support to the Borrower, contributed to satisfactory supervision. The Bank’s team represented a variety of skills adequate to supervise the project and benefited from expert guidance from Headquarters particularly on the septic tank management component. The average annual supervision budget of US$60,000 was sufficient to monitor progress and provide sufficient guidance. (See annex 4 for details.) The Bank was responsive and engaged actively with the Borrower during project implementation. When Huantai County was deleted from the project, Zhoucun district was selected and included into the project in a timely manner which ensured the designed project outcome. A number of 12 recommendations for utilizing the loan savings under the Weifang component were provided to the client, even though these attempts failed due to the disagreement between relevant stakeholders within Shandong Province. The Bank moreover proposed changes to several results indicators with weak linkages with the project but did not manage to revise these accordingly partly due to the failed attempt to carry out the restructuring. The Bank worked closely with Yantai Municipality to accelerate the implementation of the GEF- supported septic tank management component, which made relatively slow progress initially, which explains the ‘moderately satisfactory’ rating until late 2012. Generally speaking, the team identified and addressed implementation issues in a timely manner. The QALP review of 2010 rated the Bank’s supervision effort as satisfactory, with a highly satisfactory rating for adequacy of staffing arrangements, skill mix and staff continuity and for oversight of social aspects. The social specialist joined all formal supervision missions and carefully supervised implementation of the RAP as reflected in mission aide-memoires and the excellent resettlement outcomes. (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory As discussed above, and in the earlier sections, project design, quality at entry, and supervision were satisfactory, despite some weaknesses in the performance indicators. The overall Bank performance is rated ‘satisfactory’. 5.2 Borrower Performance (a) Government Performance Rating: Satisfactory The Shandong Provincial Government (SPG) performance is rated satisfactory because SPG: (i) was fully committed to the PDO; (ii) maintained its strong environmental management agenda; (iii) provided high quality project management and coordination of implementation in project cities/counties and supplied sufficient and timely counterpart funds; (iv) maintained its commitment to sustainability through advocating full cost recovery, and setting guidelines for minimum wastewater and solid waste tariffs to be adopted by municipal governments; (v) continued to give priority to industrial pollution control, and enhanced its capacity for online monitoring of industries; and (vi) promoted water conservation through regulatory measures to limit use of groundwater and re-use of treated wastewater. (b) Implementing Agency or Agencies Performance Rating: Satisfactory All implementing agencies in the project cities performed satisfactorily in preparation of detailed designs, procurement, contract management, quality control, safeguards implementation and financial management. Some implementing agencies completed their components in about three years from project start. Two project cities completed implementation in 2013, largely due to the difficulties with land acquisition. Unfortunately Weifeng was not able to come up with a satisfactory proposal to use its savings before the Loan closing date, leaving a large undisbursed Loan balance. Qixia was not able to utilize the completed wastewater treatment facility because of inadequate wastewater flows. However, this facility will be put into operation by the middle of 13 2014. All implementing agencies were in compliance with the financial performance covenants Implementing agency performance is rated satisfactory. (c) Justification of Rating for Overall Borrower Performance Rating: Satisfactory In view of the satisfactory performance of both the SPG and implementing agencies, described above, and the over satisfactory outcome of the project, the Borrower performance is rated ‘satisfactory’. 6. Lessons Learned Performance Targets for New Utility Companies. Experience from the project shows the wisdom of not subjecting newly created government-owned companies with no financial autonomy, to loan obligations or covenants they are not able to comply with. While such requirements may be more appropriate for the established water supply sector, they are highly challenging for new wastewater and solid waste sectors which are still developing. Newly set up companies in these sectors do not have an independent revenue stream and are fully dependent on government subsidies. Financial Autonomy of Utility Companies. Without an independent revenue stream, the wastewater and solid waste companies enjoy limited financial autonomy. Funds for expansion of facilities to meet growing demands, therefore, remain under the control of local authorities. The responsibility for the daily operations and maintenance, however, rests with the utility companies, using funds provided on an annual budget provided by local authorities. The operational and financial performance of utility companies could be improved by giving them increased financial independence through remitting utility service fees directly to the utility companies. This could potentially encourage the utility companies to optimize operations and increase revenue, and provide incentives to connect and service new customers, which would require change of the current ‘government fee’ to a tariff, the income of which will be subject to tax. A prerequisite for obtaining benefits linked to financial autonomy is, however, that service fees collected reflect the actual costs of providing the service. Projected Growth of EDZs. The Bank needs to make realistic assessments of growth for establishment of supply-driven economic development zones. China has a number of highly successful economic development zones established under the right conditions. However, EDZs established without the right underlying economic drivers, have slow starts or are not successful. Such was the case in Qixia where wastewater investments were planned on the basis of weak assessments of growth. Use of Septic Tanks. The experience and knowledge gained from implementing the GEF- supported septic tank management component have demonstrated the need for regular septic tank emptying as well as, and their relatively limited use when cities are fully sewered. They are also expected to influence government policy and building code requirements in the near future, with respect to: (i) the need to intercept and treat pollution discharge that would enter the Bohai Sea; (ii) modification of the building code to require septic tanks only where there are no sewer systems; (iii) regulations to require property owners to empty septic tanks at specified frequencies; and (iv) improvements to septic designs for enhanced BOD removal. 14 Performance Monitoring Indicators. Performance indicator design needs to receive careful attention at project appraisal to avoid difficulties during implementation. They need to be focused on the key outcomes of the development objective, and limited in number; indicators need to be clear and measurable; and explanatory notes should be provided where necessary, to explain the intent and method of measurement. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies The Borrower states that the project was very successful with most of its original objectives achieved particularly in terms of the planned physical interventions and it would be worthwhile for local governments and enterprises to learn from the Bank’s project appraisal methodologies. The Borrower also raised the issues listed below: a) The monitoring and evaluation framework and associated performance indicators proved to be poorly designed and the established performance baseline were inadequately documented. b) The Bank’s requirement to on-lend to agencies with no financial capacity to repay, is a repetition of mistakes from other projects. c) There were frustrating delays in obtaining some “no objections” where there was no obvious reason for any delay. d) The Bank could have shown more flexibility in dealing with the changes proposed in Weifang, leading to a lost opportunity to fully utilize the loan. Bank Comments: The problems with a few indicators lacking of adequate explanation of the basis for design and the method of measurement of the targets make it difficult to monitor the progress of the project; these should have been addressed during restructuring. The on-lending requirements have been dropped from recent project based on the lessons learned from this and other projects. The Bank team will continue to strive and seek ways to improve its efficiency, although in some cases the delays were the result of issues with format and procedures that were not followed. Finally, the Bank team tried very hard to find ways to use the loan savings as a result of changes proposed in Weifeng, unfortunately no agreement could be reached between different government levels about the use of these funds. (b) Cofinanciers: Not applicable (c) Other partners and stakeholders. A summary of the Borrower’s ICR is provided in Annex 5, and the full report is available in the project files. 15 Annex 1. Project Costs and Financing (a) Project Cost by Component (in USD Million equivalent) SECOND SHANDONG ENVIRONMENT PROJECT - P077752 Actual/Latest Appraisal Estimate Percentage of Components Estimate (USD (USD millions) Appraisal millions) A. Wastewater Management 1. Gaomi wastewater 8.62 7.13 82.7 2. Huantai wastewater 13.89 0.00 0.0 3. Qixia wastewater & associated 9.13 10.36 113.5 river improvements 4. Weifeng wastewater & 66.71 67.98 102.1 associated river improvements 5. Weihai wastewater 15.69 17.62 112.3 6. Yantai wastewater and GEF 23.75 29.92 126.0 septic tank management 7. Zaozhuang wastewater & 44.69 28.15 63.0 associated river improvements 8. Zhoucun wastewater & 0.00 26.18 100.0 associated river improvements Subtotal Wastewater 182.38 187.33 102.7 Management B. Solid Waste Management 1. Heze solid waste 13.31 18.10 136.0 2. Rizhao solid waste 7.95 11.15 140.3 Subtotal Solid Waste 21.26 29.25 137.6 Management C. Water Supply 1. Gaomi water supply 14.90 20.40 136.9 2. Huantai water supply 15.49 0.00 0.0 Subtotal Water Supply 30.39 20.40 67.1 D. TA & Capacity Building TA & Capacity Building 4.52 2.57 56.9 Subtotal TA & Capacity Building 4.52 2.57 56.9 Total Baseline Cost 238.55 Physical Contingencies 17.18 Price Contingencies 14.60 Total Project Costs 270.33 239.55 88.6 PPF 7.32 Front-end fee IBRD 3.46 Total Financing Required 281.11 16 CN-GEF-Second Shandong Environment Project - P090377 Appraisal Actual/Latest Percentage of Components Estimate (USD Estimate (USD Appraisal millions) millions) 1. Establishment of Septic Tank Institution 0.52 3.49 232.0 2. Provision of Facilities and Equipment 2.07 2.66 129.0 3. Project Operations 0.82 0.89 109.0 4. Joint Sewage-Septage Treatment in Xianhe 0.04 * 5. Consulting Services 0.98 6. Project Management, Monitoring, 1.20 39.0 0.77 Evaluation 7. Dissemination and promotion 0.20 0.25 125.0 Total Pilot Project Costs 5.40 8.49 157.0 *Included in Item 1 (b) Financing P077752 - SECOND SHANDONG ENVIRONMENT PROJECT Appraisal Actual/Latest Type of Estimate Estimate Percentage of Source of Funds Financing (USD (USD Appraisal millions) millions) Borrower Counterpart 134.11 105.55 78.7 International Bank for Reconstruction 147.00 134.69 91.1 Loan and Development P090377 - CN-GEF-Second Shandong Environment Project Appraisal Actual/Latest Type of Estimate Estimate Percentage of Source of Funds Financing (USD (USD Appraisal millions) millions) Borrower Counterpart 91.78* NA GLOBAL ENVIRONMENT - Loan 109.72* NA Associated IBRD Fund Global Environment Facility (GEF) Grant 5.00 8.49 157% *The basis of this allocation could not be found in project documents, Therefore the actual costs are not available (NA) 17 Annex 2. Project Outputs by Component The detailed description of the original project components is available in the PAD. The tables below illustrate outputs by component, as originally planned and at the end of the project. Almost all planned outputs have been achieved satisfactorily. Wastewater and River Embankment Improvements. The works shown below were essential in meeting the PDO of improving environmental conditions in the participating cities/counties. These works lead to achievement of the outcome indicators on volume of wastewater treated, rate of wastewater treated, and reduction of pollution load reaching the recipient rivers, per the Datasheet and Section 3.2 above. Wastewater Component, and Associated River and Embankment Improvements City Output Description at Appraisal Actual Completed Collection sewers (400mm-1000mm) 63.6 km Interceptor sewers (1200mm-1650mm) 8.4 km 72 km Gaomi Sewage pumping stations (1 #) 20,000 m3/d Completed Huantai Collection sewers (300mm-1200mm) 79.2 km Deleted Wastewater treatment plant (I #) 70,000 m3/d Zhoucun Collection sewers -- 131.0 km (Substitute Interceptor sewers -- For River embankment improvements -- 23.2 km Huantai) Qixia Primary, secondary and trunk collectors 60 km 22.8 km (300mm-800mm). River bed and embankment improvements 4.9km 4.9 km Wastewater treatment plant 20,000 m3/d Completed Relocation of a 400,000m3 open dumping area. 400,000 m3 730,000 m3 Interceptors along both banks of Bailang River 2 x 16.0 km 29.5km Weifeng (1.65m x 1.5m to 3.2m x 2.9m) Pre-treatment of intercepted flow in oxidation 360,000 m3 Deleted ponds (constructed wetlands) River bed and embankment improvements 2 x 16.0 km Completed as planned Extension of sewers (300mm to 1400mm). 62.9 km 55.4 km Weihai Transmission from PS to WWTP (1000mm) 1.65 km Treated effluent rising main (1400mm) 7.0 km 7.2 km Xin’anhe Wastewater treatment plant 80,000 m3/d 80,000 m3/d Yantai Interceptor sewers (400mm-1200mm). 14.1 km 15.7 km Extension of sea outfall (1500mm) 3.2 km 3.13 km Treated effluent supply pipe (300 mm) 1.0 km Completed Interceptor and combined sewers (600mm- 13.2 km 13.2 km 1500mm) along Dongsha River Trunk mains and sanitary sewers (300mm to 27.6 km 21.2 km 1400mm) along Xisha River Zaozhuang Treated water re-use supply pipelines for 16.4 km 4.9 km Dongsha and Xisha Rivers (350mm and (Dongsha deleted) 500mm) Xisha River rehabilitation including 5# bridges 10.3 km 8.8 km 18 and landscaping. Dongsha River rehabilitation including 7# 4.9 km 4.9 km bridges and landscaping. GEF Pilot (i) Septic tanks in pilot area (Number). 1,700 1,056 Septic Tank (ii) Septage collection per year (million Manageme m3/year) 150,000 100,020 nt (iii) Joint treatment of septage and wastewater Yantai (million m3/year) 150,000 100,020 (iv) Septage collection tankers (Number) 10 10 (v) Septage mixing facility (m3/day) 7,500 1,080 (vi) GIS-based database None Completed Water Supply. The water related works improved the quantity and quality of the water supply in Gaomi where citizens had been using groundwater with fluoride to supplement the municipal drinking water supply. These people, some 730,000, now have safe water and their satisfaction rate in a recent survey was 100%. Water Supply Component City Output Description at Appraisal Actual Completed New Kanjia waterworks 30,000 m3/d Completed Raw water transmission main (1000mm) 9.8 km Completed Treated water transmission main (1000mm 20.8 km 20.0 km and 800mm) Distribution network (125mm -800mm) 93.0 km 403 km Gaomi Expansion of Nanhu water works capacity. 30,000 m3/d Completed to 45,000 m3/d Expansion of Beihu water works capacity 15,000 m3/d Completed to 30,000 m3/d Upgrade water supply system, central Completed control room, control of NRW New waterworks 100,000 m3/d Raw water transmission main (1100mm) 14.9 km Huantai deleted Huantai Distribution network (100mm - 1100mm) 46.3 km from project Upgrade water supply system, central control room. Solid Waste. This component was delivered as designed and has contributed to improved environmental conditions by collecting and transporting municipal waste from the city centers and depositing it in a sanitary landfill in the case of Heze. Municipal solid waste collected and transferred to a sanitary landfill reached 351,660 tons/year by the end of the project. Solid Waste Management Component City Output Description at Appraisal Actual Completed Waste processing and recycling plant. 660 tons/d Completed Heze New sanitary landfill (280 tons/d with a 20 2.38 million Completed year life). m3 Composting plant 304 tons/d Completed Phase II of sanitary landfill with capacity of 3.24 million Completed 19 500 tons/d with an 18 year life. m3 Procurement of vehicles and equipment Completed (Construction of 20 waste collection Rizhao stations with capacity of 8 tons per station; 20 five-ton waste transport vehicles, 10 street cleaning vehicles, 10 street washing vehicles, 10 five-ton construction demolition transport vehicles.) Procurement of vehicles and equipment Completed (3 excavators, waste compactor, 2 earth movers, various loaders, 3 five-ton tip trucks, pesticide application vehicle, five- ton fuel truck, various vehicles, etc.) Institutional Development and Capacity Building. Outputs of the component are described below. (a) Construction Management and Business Development: Comprehensive project management services and implementation monitoring institutional and financial operational improvements to improve business development to water supply, wastewater and solid waste companies, and the SPPMO. All project companies (i) enhanced their financial management capacity through preparation of annual financial statements with projections; (ii) have well-funded O&M plans that are implemented on time; (iii) prepared and implemented training plans; (iv) are on a solid financial footing, even though there is an over-reliance on government subsidies. No progress was achieved on development of management succession plans and business plans, as they are irrelevant, being state-owned companies where management changes are the responsibility of the government human resources departments. (b) Solid Waste Sector Study for reform of technical, regulatory and management policies and programs, improve efforts in the 3Rs, and establish effective tariff, fee or charge structures and collection systems; (c) Capacity Strengthening of SPFB through improvement of debt management at the municipal and provincial levels (d) Capacity Strengthening of Provincial EPB through design and implementation of management information systems, including equipment, to strengthen its capacity for pollution control including industrial pollution at source. (e) Capacity Enhancement of Decision-makers and Project Owners through training and study tours for decision-makers. 20 Annex 3. Economic and Financial Analysis 1. Economic Analysis At appraisal, cost benefit analysis, including net present value and economic rate of return were calculated to demonstrate the economic justification of each component. The selection of priority interventions for the project was guided by cost effectiveness analysis using least cost methodology. Alternative project designs were identified and evaluated in order to select the least cost solutions. The economic costs of components were determined by making adjustments to the component’s financial costs. 1.1 Economic Development of the Project Cities/Counties The economies of project cities/counties have grown significantly since project appraisal, and the project has definitely contributed to the governments’ development objectives of continued sustainable economic growth. Economic output in the project cities has increased from RMB 637 billion in 2005 to RMB 1,993 billion in 2012, an increase averaging 17.7% per annum. The increase in economic output during the period of project implementation is illustrated in the table below. Table 1.1 Economic Development of Project Cities/Counties Municipality GDP 2005 GDP 2012 Increase Per capita Per capita Per Capita Million RMB RMB Million RMB RMB % % Heze 36,500 4,144 178,700 19,319 390% 366% Rizhao 38,700 13,723 135,237 46,941 249% 242% Weifang 124,600 14,647 389,782 45,820 213% 213% Weihai 100,881 40,614 233,000 91,888 131% 126% Yantai 163,000 25,200 528,128 87,252 224% 246% Zaozhuang 50,331 13,786 143,121 39,202 184% 184% Zibo 123,100 29,686 385,090 92,866 213% 213% Notes: 2012 GDP figures for Zibo and Weifang were not provided and averages of other cities’ growth rates are used in order to provide an overall project summary. 1.2 Cost Benefit Analysis: Apart from the overall high growth in GDP and the increased economic benefits achieved, the project has seen changes to the individual components during implementation which, overall, have had an impact on their economic return, including change of scope, changes in capital expenditures, and changes in cost of O&M of components. The analysis at appraisal found that the economic return of individual components was very sensitive to changes in the project costs. To assess the overall end-of-project economic return of the project, a review of individual project components was carried out. The review was done using an incremental approach, where the effects from project changes to the economic return were analyzed, to establish an overview of the development in economic return during implementation and operation. 1.2.1 Wastewater Management and River Improvement Component. The main economic benefits, identified at appraisal, for the wastewater and river improvement component included: (i) reduction of pollution load to the environment, (ii) land value appreciation, and (iii) reduced cost of damages from floods. The significant economic development in the project cities/counties since project start has undoubtedly had a positive, rather than negative impact on the economic benefits identified. It was 21 estimated that the benefits are at least at the same level at the end as at entry for subcomponents where the scope remained unchanged. The main drivers of economic costs of the individual wastewater and river improvement components include: the capital expenditures; and the cost of operation and maintenance. Calculation of the changes in capital expenditures since appraisal was based on actual financial results. Calculation of changes in costs of operation and maintenance were based on estimates. The impact on the economic return from changes in economic benefits and costs was roughly estimated. The review of the economic return is shown in Table 1.2. Table1.2. Cost Benefit Evaluation – Wastewater and River Improvement Component Component EIRR Main assumptions for the Cost Benefit Analysis Conclusion on the at entry Cost Benefit4 Benefit Drivers Cost Drivers Costs of Capital Costs O&M Gaomi 18.0% The economic benefits derives from: Appraisal: Appraisal: As the scope has RMB71 million RMB7.4 remained unchanged a. Reduction of pollution – quantified million /year during implementation based on survey Implementation: and the capital costs and RMB54 million Operation1: b. Additional benefits from treatment costs of operations and RMB5.7 maintenance has been The project component’s scope has million /year reduced, the economic remained unchanged during return of the component implementation and all targets set at is estimated to reach a appraisal were achieved level not less than the level expected at appraisal. 22 Huantai 19.2% The component was not implemented Appraisal: Appraisal: NA RMB114 RMB15.4 million million/year Qixia 14.5% The economic benefits derives from: Appraisal: Appraisal: The slightly higher RMB75 million RMB4.5 capital expenditures and a. Improved flood control – reducing million /year cost of operation and damages from flooding. Implementation: maintenance will solely RMB79 million Operation1: b. Benefits from improved have marginal effect RMB4.8 wastewater treatment. (app. 1%) on the million /year economic return and The project’s scope has remained thereby still be above a unchanged and targets are expected reasonable hurdle rate. to be reached when the treatment plant will commence operation by mid-2014. Weifang 12.7% The economic benefits derives from: Appraisal: Appraisal: Due to the deleted RMB547 RMB7.2 subcomponent together a. Improved flood control – reducing million million /year with the slightly lower damages from flooding. capital costs and costs Implementation: Operation1: b. Benefits from relocation of an of operation and RMB519 RMB6.8 open dumping area reducing maintenance, the million million /year pollution to the surroundings economic return of the component will fall to The project’s scope was changed just below 12%. marginally by not implementing However, benefits from oxidation ponds for pretreatment of land value appreciation wastewater. The overall value of the have not been taken into deleted subcomponent accounted for account leaving the less than 15% of the total quantifiable economic value on the benefits. safe side of a reasonable hurdle rate. Weihai 16.8% The economic benefits derives from: Appraisal: Appraisal: The slightly higher RMB129 RMB57.1 capital expenditures and a. Improved wastewater treatment. million million/year cost of operation and b. Reduced damages from occasional maintenance will solely Implementation: Operation2: incidents of blocked sewage pipes. have marginal effect RMB134 RMB57.1 (less than 1%) on the c. Land value appreciation from million million/year economic return. The relocation of existing treatment plant. return will thereby still The project’s scope remained be above a reasonable unchanged and targets set at appraisal hurdle rate. were achieved. Yantai 15.8% The economic benefits derives from: Appraisal: Appraisal: The higher capital (with GEF) RMB195 RMB17.0 expenditures and cost of a. Improved wastewater treatment million million/year operation and through reduced septic tank maintenance will have a overflows. Implementation: Operation3: marginal effect on the RMB228 RMB19.9 b. Reduced pollution discharges to economic return of app. million million/year the Bohai Sea 3-4%. The return will thereby still be above a The project’s scope largely remained reasonable hurdle rate. unchanged and targets were achieved. 23 Zaozhuang 15.0% The economic benefits derives from: Appraisal: Appraisal: The marginally lower RMB366 RMB3.0 benefits from the a. Improved flood control – reducing million million /year deleted subcomponent damages from flooding. together with the Implementation: Operation1: b. Improved wastewater treatment. substantial lower capital RMB214 RMB1.8 costs and costs of b. Reuse of water. million million /year operation and The project’s scope was marginally maintenance will changed by dropping one of two increase the economic water reuse subcomponents. It is return significantly. estimated that the deleted subcomponent accounts for less than 10% of the total benefits. Zhoucun - New component, substituted for NA NA NA Huantai 1) Cost of operation and maintenance has been estimated based on the actual capital financial expenditures. 2) It has not been possible to estimate changes to the cost of operation and maintenance, and the costs has been set to the same level as at project entry. 3) Cost of operation and maintenance has been estimated based on the reduced capital expenditures. The GEF component accounts only for a small part of the cost of operation and maintenance. 4) The impact on the ERR has been roughly estimated – the actual series of costs and benefits for an ERR calculation were not established. 1.2.2 Water Supply Component. The economic benefits identified for the water supply components at appraisal included: (i) safe water supply benefits; (ii)human health benefits; and (iii) Benefits from improved environment. The main drivers of the economic costs include: the capital expenditures; and the costs of O&M. The changes to capital expenditures since appraisal were based on actual financial results. Calculation of changes in cost of O&M was based on actual costs from the Water Company. The impact on the economic return from changes in economic benefits and costs was roughly estimated. The review of the economic return is shown in Table 1.3. Table 1.3. Cost Benefit Evaluation – Water Supply Components Component EIRR Main assumptions for the Cost Benefit Analysis Conclusion on the at Cost Benefit2) entry Benefit Drivers Cost Drivers Costs of Capital Costs O&M Gaomi 20.2% The economic benefits derives from: Appraisal: Appraisal: The higher capital RMB122 RMB22.2 expenditures and cost a. Water supply benefits based on million million/year of operation and willingness-to-pay. maintenance will alone Implementation: Operation1: b. Additional human health benefits. have an effect on the RMB155 RMB28.8 economic return of app. The project’s scope was expanded million million/year 8-10%. Due to the high by increasing the length of the ERR in the base case distribution network significantly. the economic return An increase in the economic benefit from implementing the is expected by connecting additional component still reach a households for provision of safe level above a water to 840,000 people, who were reasonably hurdle rate. 24 using ground water with high Increase in benefits fluoride levels. from connecting additional households has not been taken into account. Huantai 19.2% The component was deleted from the Appraisal: Appraisal: NA project RMB114 RMB 15.4 million million 1) Cost of operation and maintenance is actual number for Gaomi Water Company 2012. 2) The impact on the ERR has been roughly estimated – the actual series of costs and benefits for an ERR calculation has not been established. 1.2.3 Solid Waste Component. The economic benefits identified at appraisal included: (i) direct economic benefits from treatment of the solid waste; (ii) land value benefits; and (iii) financial benefits from sales of gas from the landfill. The main drivers of the economic costs of the solid waste components include: the capital expenditures; and the cost of operation and maintenance. Calculation of the changes in capital expenditures since appraisal was based on actual financial results. Calculation of changes in costs of O&M was based on estimates. The impact on the economic return from changes in economic benefits and costs was roughly estimated. The review of the economic return is shown in Table 1.4. 25 Table 3. Cost Benefit Evaluation – Solid Waste Components Component EIRR Main assumptions for the Cost Benefit Analysis Conclusion on the at Cost Benefit2 entry Benefit Drivers Cost Drivers Costs of Capital Costs O&M Heze 15.1% The economic benefits derives from: Appraisal: Appraisal: The higher capital RMB109 RMB9.4 expenditures will a. Solid waste treatment including million million/year reduce the level of waste minimization, waste recycling, economic return by and sanitary disposal. Implementation: Operation1: app. 3%. This will RMB138 RMB9.4 b. Land value appreciation from reduce the return from million million/year relocation of existing dump site. implementing the component to just The project’s scope remained above a reasonable unchanged and targets were hurdle rate. Increase in achieved. benefits due to rapid urban development since appraisal has not been taken into account. Rizhao 18.6% The economic benefits derives from: Appraisal: Appraisal: The higher capital RMB65 million RMB29.8 expenditures will a. Solid waste treatment including million/year reduce the level of waste minimization, waste recycling, Implementation: economic return by and sanitary disposal. RMB85 million Operation1: app. 4%. This will RMB29.8 b. Land value appreciation from reduce the return from million/year relocation of existing sites. implementing the component to just c. Sales of methane gas from the above a reasonable landfill site. hurdle rate. Increase in The project’s scope has been benefits due to rapid unchanged and targets were urban development achieved. since appraisal has not been taken into account. 1) Cost of operation and maintenance has for the estimation been kept at the same level as appraisal. A larger part of the cost of operation and maintenance are variable costs – labor, chemicals, electricity and petrol – which are not affected by increases in capital expenditures. 2) The impact on the ERR has been roughly estimated – the actual serious of costs and benefits for an ERR calculation has not been established. 26 2. Financial Analysis. An end-of-project financial analysis was conducted to: review the financial performance of revenue generating companies as covenanted in the legal agreements; tariff development and affordability of households; and affordability of participating municipalities. 2.1 Utility Tariff Analysis Compared to the overall rapid economic development since 2005, utility tariffs were revised at a slow pace. The highest increase in water supply tariff occurred in Gaomi, where the water tariff increased 40% since 2005. For wastewater tariffs, Qixia has implemented a wastewater tariff which was able to recover full costs. Yet the wastewater tariff in Yantai remained unchanged since 2005. As a result of the slow pace in revising utility tariffs, none of the tariffs levels projected at appraisal was achieved. Given the increased costs resulting from the project and the overall price increases, there will be a continuing reliance on government support in the foreseeable future. Table 2.1 presents the average tariff comparisons for water, wastewater and solid waste. The financial position of each project company is further discussed in Section 2.2. Table 2.1: Average Tariff Comparisons for Water, Wastewater and Solid Waste City 2005 2011 2012 2013 Actual proj.2 actual f.c.r.3 actual Actual Gaomi Water Supply (RMB/m3)1 1.40 2.80 1.97 2.35 1.97 1.97 Gaomi Wastewater (RMB/m3) 0.80 1.40 0.90 n/a 0.90 0.90 3) Heze Solid Waste (RMB/hh./mth) 1.00 none 1.00 1.00 1.00 3 4 Qixia Wastewater (RMB/m ) None 1.20 - 0.97 1.08 1.08 3) Rizhao Solid Waste (RMB/hh/mnth) 3.00 none 3.00 3.00 3.00 Weihai Wastewater (RMB/m3)5 0.83 1.35 4) 1.98 4) 0.99 3 6 Yantai Wastewater (RMB/m ) 0.82 1.15 ~ 0.8 - ~ 0.8 ~ 0.8 1 Base documents state 2005 actual to RMB 1.4/m3, as indicated. PAD indicates a level of 2.8. 2 Projected at the time of appraisal. 3 Full cost recovery (f.c.r.) comparison is based on latest financial results FY2012. For Heze and Rizhao f.c.r. 2012 are forecasted in the solid waste tariff reviews undertaken in 2010. 4 No wastewater tariff was levied in the Qixia EDZ area in 2005. The f.c.r. tariff is the computed tariff needed for 2014 based on estimates of income and expenditure provided by the Qixia PIU. 5 The average wastewater tariff in Weihai has declined slightly due to domestic sales rising more rapidly than income from other customer segments (government, industrial and commercial). 6 In Yantai no information is available to compute the average tariff, but there has been no increase in the tariff scale since 2005. Equally it is not possible to compute the f.c.r. tariff based on the information available. 2.2 Affordability of Water and Wastewater Tariffs Affordability of the public utility services, analyzed at project appraisal, concluded that the projected tariffs were fully affordable to all households. Specifically, the analysis confirmed full affordability by low-income households of projected water and wastewater tariffs, which covered on average 4.1% and 5.2% of the monthly income, which is an acceptable benchmark for affordability analysis. Review of improvement in affordability during the period of implementation was conducted by comparing tariff increases to income growth, where GDP per capita growth was been used as a proxy for income growth (see Table 2.2 below). The high growth of GDP per capita compared to the increase in tariffs indicates that affordability of utility service tariffs has improved during the project period. It was noted that tariff increases were mostly related to water supply rather than the wastewater service. Affordability of the municipal solid waste service was not analyzed at appraisal. 27 Table 2.2: Comparison of Tariff Increases with GDP Growth City 2005 2013 Tariff GDP domestic tariffs domestic tariffs per capita RMB/m3 WS WW Total WS WW total Increase Growth Gaomi 1.4 0.7 2.1 1.9 0.9 2.8 47% 236% Qixia - - - n/a 0.7 - - 116% Weifang 1.4 0.9 2.3 n/a n/a - - 213% Weihai 1.7 0.7 2.4 n/a 0.8 - - 126% Yantai 1.5 0.7 2.2 2.0 0.9 2.9 32% 246% Zaozhuang 1.0 0.7 1.7 1.5 0.8 2.3 35% 213% 1 The wastewater tariff in Qixia EDZ (the area served by the new SDEPII treatment plant), although approved by Qixia government has not yet been implemented by the Administration Committee of Qixia EDZ. 2.3 Financial Analysis of Project Companies Project companies prepared annual financial forecasts during project implementation as required under the terms in the Project Agreement. One of the purposes of the financial forecasts was to review compliance with the covenanted key indicators, i.e., cost recovery ratio of 1.0; and debt service ratio of 1.3 before the company can incur any additional debt. 2.3.1 Financial Performance of Wastewater and Solid Waste Companies The financial performance of wastewater and solid waste companies was in compliance with the financial covenant of cost recovery ratio, as defined in their subsidiary agreements. This was made possible through a provision in the legal arrangements that defined net revenues to include both operating revenue and non- operating income, and as such, included government subsidies. As the companies avoided taking on any additional debt, the debt-service-ratio covenant did not apply. Wastewater and solid waste services provided by project companies were financed partially through the government budgetary system, rather than on a fully commercial basis. Thus, wastewater and solid waste companies did not rely on an independent revenue stream to provide services. Wastewater tariffs collected via water supply companies were initially remitted to the Government and then released to the companies based on their financial needs. The Government assumed the responsibility for providing wastewater and solid waste companies sufficient funds to cover their expenses for operation, debt service and other costs. However, as the companies are supported on a net basis, they do not accumulate cash over time. As the companies’ expenses during implementation and operation were fully provided for by government subsidies, the cost-recovery-ratio is technically pre-set at 1, as the subsidies do not include an element allowing the company to generate cash in excess of annual needs. Financial support from the government was not solely provided as revenue to the companies, but also as additional capital. Due to the different ways of providing the subsidy, the support was not fully reflected in the companies’ income statement. Apart from the support for operating expenses and debt service, governments also provided wastewater and solid waste companies funds for ongoing capital expenditures, such as for expanding the networks to new areas as a result of urban expansion, etc. The above described government support was particularly appropriate for the new wastewater and solid waste companies, as the sectors were still under development, and full cost recovery tariffs in these two sectors would not be realistic or feasible. The tendency in recent Bank-funded wastewater and solid waste 28 projects in China has been to allow retention of the debt for wastewater and solid waste investments on government books, rather than being on-lent to the individual companies. 2.3.2. Financial Performance of the Project’s Water Supply Company Water supply operations of GWSC were fully commercialized, except for government-supported rural water supply programs. GWC made efficiency gains by reducing staff from about 380 to about 300 during the project. It also increased its annual water revenue from RMB 31 million/year to RMB 44 million/year in 2013. It was able to recover full costs from revenue generated, and is on a solid foundation, with equity to total balance at a robust 51%. GWC received budgetary allocations to finance its wastewater operations and the investment program. Water supply operations of GWSC were in compliance with the cost recovery covenant until 2011. The company failed to comply with the cost recovery covenant in 2012 and 2013 as depreciation exceeded provision for debt service. Taking into account that the subsidies to the Company’s wastewater operations do not allow the company to generate cash in excess of annual needs, the Company was in compliance with the covenant in 2012 and 2013, and has been able to meet their cash outgoings. The company will be in full compliance with the covenant again in 2014 with a smaller revision of the water tariff. The debt- service-coverage ratio requirements did not apply, as the company did not incur any additional debt. The Company was also required to generate sufficient revenues to cover any increase in working capital requirement and 20% of its three year rolling capital investment needs. The water supply operation was not able to meet this requirement, but will do so with the expected increase in tariffs. Financial forecasts are provided below. 2.3.3 Financial Forecasts of Project Companies The requirement of financial forecasts applied only to Gaomi Water Supply Operations, Weihai, Yantai and Qixia Wastewater Companies, and with the Rizhao Solid Waste Company. GWSC was the designated project company for the construction of the new water supply and wastewater facilities in Gaomi city. GWSC was financed through four main funding channels: water supply charges, which the Company collected and retained; Gaomi Government budget allocation for wastewater operations; company borrowing including the World Bank loan; government counterpart funding as a contribution to the project and other government sponsored investment projects e.g. rural water supplies. Table 2.4 below provides a medium term forecast of the performance of the water supply operations of GWSC based on the assumption that the current average tariff increases by 20% in 2014 to a level of RMB 2.35/m3. Table 2.4: Financial Projections for the Water Supply Operations of GWSC RMB’000 2011 2012 2013 2014 2015 base base year forecast forecast forecast year Water Supply Revenue 42,836 44,088 44,352 52,983 53,022 Operating support 0 3,074 0 0 0 Other revenue 10,115 6,183 6,199 6,416 6,640 Total Revenues 52,951 53,345 50,551 59,398 59,662 Personnel 7,123 5,925 6,000 6,060 6,121 Electricity Expense 5,350 4,865 4,870 5,078 4,948 Chemical 850 1,253 1,255 1,300 1,346 29 Sales Expenses 10,348 10,683 10,718 10,821 10,927 Administrative Expenses 11,496 11,789 10,790 11,004 11,224 Other Expenses 12,055 17,288 17,210 17,613 17,896 Expenses 47,222 51,802 50,843 51,875 52,462 EBITDA 5,728 1,543 -292 7,523 7,201 Depreciation 4,857 4,491 4,491 4,073 4,073 EBIT 871 -2,948 -4,782 3,450 3,127 Net interest payments 674 -335 0 1,342 1,695 EBT 197 -2,613 -4,782 2,108 1,433 Income Tax 78 0 0 527 358 Earnings after Tax 119 -2,613 -4,782 1,581 1,074 Cost Recovery Ratio 1.02 0.92 0.90 1.02 1.01 Debt Service Coverage Ratio1 1.21 0.26 -0.05 0.94 0.81 Additional requirement2 -1,021 -4,847 -5,735 1,385 432 1) The covenant did not apply as the water operation did not incur any additional debt 2) Surplus/Shortfall in meeting the additional requirement on coverage of 20% of Capital Investments The Yantai Xi Anhe Wastewater Company (YWC) was the designated project company for the construction and operation of the wastewater facilities implemented in Yantai city under the project. The company was established in 2006, consolidating treatment facilities, trunk sewers and pumping stations, while government retained control of secondary and tertiary networks. YWC is currently financed through the Yantai Government budgetary procedures. The company has no independent sources of revenue as the wastewater tariff in Yantai is a government fee under the overall administration of the Finance Bureau. YWC prepares an annual budget which, once approved, forms the basis of monthly budgetary allocations made to the Company. There is no relationship between wastewater fees collected from users in the Company’s service area and the revenue received by YWSC from Yantai Government. The equity to total balance of YWWC is at a low level of 9%, indicating that the Company is fully funded by Government contributions. Yantai Municipal Government pursued private sector participation in the wastewater sector through a number of BOT contracts for the wastewater treatment. Table 2.5 below provides a forecast of the performance of YWC based on what is considered to be a realistic service fee having regard to current wastewater tariff levels and the requirements of the project’s covenants. The projections indicate that a service fee of RMB 1.0/m3 for wastewater treated would allow the Company to cover their full costs. Table 2.5: Financial Projections ofYantai Xin’anhe Wastewater Treatment Company RMB’000 2011 2012 2013 2014 2015 base year base year forecast forecast forecast Wastewater revenue1 0 0 0 41,060 43,800 Operating support 28,742 26,209 28,518 0 0 Total Revenues 28,742 26,209 28,518 41,060 43,800 Personnel 7,074 6,939 7,364 7,564 7,828 Electricity Expense 11,683 12,001 11,916 11,868 13,641 Materials (Chemical and Water) 3,018 3,161 3,212 3,437 3,557 Maintenance 1,521 1,135 946 4,098 2,833 Sludge 1,297 966 1,739 2,010 2,026 Other Expenses 1,144 1,589 1,444 1,510 1,484 Operating Expenses 25,736 25,791 26,621 30,487 31,369 EBITDA 3,006 418 1,897 10,573 12,431 Depreciation 6,241 975 967 8,472 8,472 EBIT -3,235 -557 930 2,100 3,959 30 Net interest payments 0 0 0 610 577 EBT -3,235 -557 930 1,491 3,382 Income Tax 0 0 0 0 0 Earnings after Tax -3,235 -557 930 1,491 3,382 Service Price (RMB/m3)2 0.72 0.74 0.80 0.85 0.82 Full Cost Price (RMB/m3)3 0.91 0.75 0.80 1.00 0.95 1) Assumed revenue from wastewater fees 2) Service price required to meet cash outgoings 3) Service price required for full cost recovery The Weihai Water Group Company (WWGC) only operates the network, while treatment is outsourced based on a BOT agreement. WWGC is financed by a government budgetary and fees paid to the various BOT contractors are not recorded in WWGCs accounts. Weihai government only subsidizes cash outgoings and excludes any provision for asset depreciation. Table 2.6 below provides a forecast of the financial performance of the Wastewater Sector in Weihai based on the current wastewater tariff. Table 2.6: Projected Financial Performance of the Wastewater Sector in Weihai RMB’000 2011 2012 2013 2014 2015 base year base year forecast forecast forecast Wastewater revenue in Weihai1 49,799 52,787 55,612 57,520 57,825 Other income 0 0 0 0 0 Total Revenues 49,799 52,787 55,612 57,520 57,825 Sewers and Pump Station Personnel 7,860 9,001 11,384 11,726 12,077 Electricity Expense 12,065 13,862 13,800 13,938 14,008 Maintenance 6,155 6,501 7,741 7,973 8,212 Other Expenses 8,479 8,353 7,830 8,065 8,307 Outsource Expenses Sludge Disposal 210 214 214 214 214 WWTP BOT Fee 52,118 57,287 73,102 76,091 79,080 Other expenses 5,073 5,225 5,382 5,543 5,710 Total operating Expenses 91,961 100,442 119,453 123,550 127,608 EBITDA -42,161 -47,655 -63,840 -66,030 -69,783 Depreciation 383 11,892 17,219 19,089 20,958 EBIT -42,545 -59,547 -81,060 -85,119 -90,741 Net interest payments 0 0 0 3,476 3,300 EBT -42,545 -59,547 -81,060 -88,595 -94,041 Income Tax 0 0 0 0 0 Earnings after Tax -42,545 -59,547 -81,060 -88,595 -94,041 Assumed tariff (RMB/m3) 0.98 1.00 0.99 0.99 0.99 Service Price (RMB/m3)2 1.84 1.81 2.19 2.18 2.24 Full Cost Price (RMB/m3)3 1.84 1.98 2.44 2.45 2.54 1) Wastewater fees in Weifang based on assumed wastewater tariff 2) Service price required to meet cash outgoings 3) Service price required for full cost recovery Table 2.7 below provides a financial forecast for the Qixia City Dongsheng Water and Wastewater Company (QWC) based on the approved tariff to be implemented from 1st January 2014. The projections are illustrative only, as there is no history of past financial or operational performance. The wastewater treatment plant is not yet fully operational – the forecast is however made for the full year 2014 and 2015. Table 2.7: Projected Financial Performance of the Wastewater Sector in Qixia 31 RMB’000 2011 2012 2013 2014 2015 not opr. not opr. not opr. Forecast Forecast Wastewater revenue1 - - - 7,379 7,983 Other income - - - 0 0 Total Revenues - - - 7,379 7,983 Salaries - - - 1,285 1,330 Electricity Expenses - - - 2,837 3,030 Maintenance Expenses - - - 157 163 Administration - - - 503 521 Other Expenses - - - 214 226 Total operating Expenses - - - 4,997 5,269 EBITDA - - - 2,382 2,714 Depreciation - - - 1,507 3,014 EBIT - - - 875 -301 Net interest payments - - - 1,849 1,762 EBT - - - -975 -2,063 Income Tax - - - 0 0 Earnings after Tax - - - -975 -2,063 Assumed tariff (RMB/m3) - - - 0.63 0.64 Service Price (RMB/m3)2 - - - 0.97 0.93 Full Cost Price (RMB/m3)3 - - - 0.97 1.08 1) Wastewater fees in Qixia based on assumed wastewater tariff 2) Service price required to meet cash outgoings 3) Service price required for full cost recovery Table 2.8 below provides a financial forecast for the Rizhao Urban Environmental Company (RUEC) based on the current tariff. The Company owns and operates the landfill site only. Cost of collection and transfer is not included. The results show that the current tariff level cannot cover cash outgoings. Specifically, the financial projections indicate that a solid waste treatment tariff of about RMB 90/ton is needed to cover full costs. The current tariff of RMB 27/ton can solely cover a smaller part of the costs with the remaining part of the costs being met by government subsidy. The Rizhao Municipal Government is expected to continue subsidizing RUEC. Table 2.8: Financial Projections for the (RUEC) RMB’000 2011 2012 2013 2014 2015 base year base year Forecast forecast forecast Solid waste revenue1 3,829 3,860 3,897 4,131 4,378 Other income 0 0 0 0 0 Operating subsidies 2,640 3,483 3,442 3,648 3,867 Total Revenues 6,469 7,343 7,338 7,779 8,245 Personnel 695 738 820 880 950 Fuel Expense 680 804 890 943 1,000 Special Materials Expense 593 521 550 583 618 Wastewater Treatment Fee 2,583 3,429 3,640 3,858 4,090 Water and Electricity Expense 7 10 10 11 11 Maintenance Fee 174 289 194 201 208 Administrative expenses 1,822 1,817 2,287 2,534 2,780 Other Expenses 343 314 325 336 348 Total operating Expenses 6,897 7,923 8,716 9,346 10,005 EBITDA -429 -580 -1,378 -1,567 -1,760 Depreciation 0 0 0 4,259 5,910 32 EBIT -429 -580 -1,378 -5,827 -7,669 Net interest payments 0 0 0 282 267 EBT -429 -580 -1,378 -6,108 -7,936 Income Tax 0 0 0 0 0 Earnings after Tax -429 -580 -1,378 -6,108 -7,936 Assumed tariff (RMB/ton) 27 27 27 27 27 Service Price (RMB/ton)2 50 61 71 71 72 Full Cost Price (RMB/ton)3 50 61 71 87 97 1) Solid waste fees in Rizhao based on assumed solid waste tariff – tipping fee 2) Service price required to meet cash outgoings 3) Service price required for full cost recovery 2.3 Fiscal Sustainability Affordability of participating Municipalities was analyzed at project appraisal to ensure adequate fiscal capacity of local government for both debt servicing and incremental recurrent costs needed for the sustainable operations and maintenance of the project facilities. As illustrated in Table 2.9, municipal revenues have grown significantly since project start, and are adequate to meet the limited increases in project costs, and contribute to a positive development in affordability during project implementation. Table 2.9: Growth in Municipal Revenues during the Project Implementation City Revenue 2005 2012 Increase Growth RMB billion RMB billion Rate Heze Municipality 1.6 10.5 540% 30.4% Rizhao Municipality 8.4 14.9 78% 8.6% Weihai Municipality 10.6 23.1 120% 11.8% Weifang Municipality 11.9 52.3 331% 23.2% Yantai Municipality 12.6 46.3 267% 20.4% Zaozhuang Municipality 8.6 22.9 165% 14.9% Zibo Municipality 11.8 17.5 48% 5.7% 33 Annex 4. Bank Lending and Implementation Support/Supervision Processes (a) Task Team Members Responsibility/ Names Title Unit Specialty Lending Shenhua Wang Snr. Urban Specialist/Team Leader SASDU Overall Chaogang Wang Senior Social Development Specialist MNSSU Social Chongwu Sun Senior Environmental Specialist EASCS Environment David I Sr Financial Management Specialist LCSFM Financial Management Hardy M. Wong Consultant TWIWA Solid Waste Jaroslav Kozel Consultant ECSUW Engineering Ji You Urban Specialist EASCS Engineering Jian Xie Senior Environmental Specialist ECSEN Environment Mei Wang Consultant EASCS Economic Analysis Mingyuan Fan Sr Sanitary Engineer EASCS Engineering Patrick E. McCarthy Consultant EASUR Engineering Rajagopal S. Iyer Consultant SASDU Project Management EASUR – Sandra Greiner Environmental Specialist Environment HIS Shunong Hu Senior Water Engineer EASCS Engineering Xiaofeng Li Operations Analyst UDRUR Operations Xuemei Guo Country Program Assistant EACPQ Assistant Zhentu Liu Senior Procurement Specialist EASR2 Procurement Supervision/ICR Guangming Yan Infrastructure Spec./Team Leader EASCS Overall Chaogang Wang Senior Social Development Spec. MNSSU Social Chongwu Sun Senior Environmental Specialist EASCS Environment David I Sr Financial Management Specialist LCSFM Financial Management Hardy M. Wong Consultant TWIWA Solid Waste Hong Chen Operations Officer EASSD Procurement Jian Xie Senior Environmental Specialist ECSEN Environment Jingrong He Procurement Specialist EASR2 Procurement Jun Zeng Social Development Specialist EASCS Social Margaret Png Lead Counsel LEGLE Counsel Mei Wang Consultant EASCS Economic Analysis Miki Endo Operations Officer SEGES Operations Mingyuan Fan Senior Sanitary Engineer EASCS Engineering Nicolas Kotschoubey Consultant MNSHD Project Management Rajagopal S. Iyer Consultant SASDU Project Management EASUR – Sandra Greiner Environmental Specialist Environment HIS Shunong Hu Senior Water Engineer EASCS Engineering Vellet E. Fernandes Program Assistant EASIN Assistant Xuemei Guo Country Program Assistant EACPQ Assistant Xujun Liu Consultant EASCS Procurement Yi Geng Sr Financial Management Specialist EASFM Financial Management Zhentu Liu Senior Procurement Specialist EASR2 Procurement 34 (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY05 27.07 120.66 FY06 52.78 274.04 FY07 23.79 107.87 Total: 103.64 502.57 Supervision/ICR FY07 5.58 20.44 FY08 14.84 56.32 FY09 7.15 52.05 FY10 10.78 72.16 FY11 10.18 60.54 FY12 9.33 53.7 FY13 9.85 32.6 FY14 4.75 16.16 Total: 72.46 363.99 35 Annex 5. GEF-supported Septic Tank Management Component A. Background A key environmental problem generally found in Shandong Province was insufficient wastewater treatment and serious pollution of rivers, and the Bohai Sea. Despite the considerable investments made to collect and treat domestic and industrial wastewater and increase coverage of wastewater services in major cities, pollution in rivers has decreased only marginally. Most river quality data indicate they are Class IV or worse. Septage overflows from poorly maintained septic tanks emerged as a major contributor to pollution of rivers, and the severe damage caused to the shallow Bohai Sea ecosystem. Most cities depended on septic tanks for wastewater management, which was, and still is, a building code requirement for every building constructed. Septic tanks were rarely emptied, resulting in overflows of untreated wastewater to the river systems during sewer blockages and rain storms. Shandong Province, situated on the east coast of China, has a 3,000 km coastline with the Bohai and Yellow Seas, both of which drain a major part of the Province. During the preparation of the Second Shandong Environment Project (SEP II) for World Bank financing, the GEF provided a Grant of US$5 million additional support, per the request of Shandong Province, to demonstrate septage management techniques that could contribute to a reduction in land-based pollution reaching the Bohai Sea, which is a pollution hotspot in the seas of East Asia. Shandong was a signatory of Memorandum of Agreement initiated by the United Nations Development Program/Global Environment Facility/International Maritime Organization (UNDP/GEF/IMO) Regional Program. Yantai Municipality, which has about 19,000 septic tanks, was selected for the pilot GEF activity that was linked to the Yantai wastewater component of SEP II. An area with 1,700 septic tanks was selected for the pilot. GEF support was intended to implement major institutional and technology reforms, which would not otherwise be carried out by any wastewater sector agency in China. The goal of the pilot project was to demonstrate to Chinese municipalities the rationale for the proper management of septic tanks. The key objectives of the activity were to: (i) demonstrate the feasibility of institutional and technical arrangements required to ensure improvements in the local environment; and (ii) disseminate among Bohai Declaration signatories and to others the positive impacts that can be achieved by reducing the annual pollution load discharged from septic tanks to the Bohai and Yellow Seas. B. The GEF-supported Yantai Septic Tank Management Project Global Environmental Objectives. The Global Environmental Objective of the GEF activity was to reduce the land-based pollution along the Yantai coast and the Bohai Sea through development of a pilot septic tank management system in Yantai and dissemination of the Yantai model in Shandong province and in other parts of China. GEO Indicators. The GEO outcome indicator was tons/year of pollution discharges to Bohai Sea reduced. Project Beneficiaries. The septic tank management system benefitted about 800,000 people. GEF Project Components/Activities. The GEF-supported activities included: establishment of the septic tank management system and regulatory framework; provision or facilities and equipment, including a fleet of ten septage emptying vacuum tankers and associated equipment; joint sewerage-septage treatment facility at Xinanhe; dissemination and promotion; incremental operating costs; and consulting services for implementation support and assistance to the Yantai Municipality. The GEF project cost estimate at appraisal was US$5.40 million, including the GEF Grant of US$5.0 million. 36 Revised GEF Project Components/Activities and Significant Changes Two significant changes occurred during implementation. The number and volume of septic tanks estimated at appraisal were found to be incorrect, requiring adjustments during implementation, such as the addition of 520 septic tanks, outside the pilot area, to the program, and making adjustment to the indicator target. The second significant event was the decision of the Yantai Municipal Government to establish a permanent Septic Tank Management Office in a newly constructed building, staff and annual budget allocations. C. Key Factors Affecting Implementation and Outcomes Weaknesses in Baseline Data on Septic Tanks: The number of septic tanks in the pilot area was found to be 1,056, instead of the 1,700 estimated, and the average volume of a septic tank was found to be about 24 m3, instead of the figure of 44 m3 estimated during the baseline survey. These discoveries impacted on the performance targets for the subcomponent. During implementation, the Yantai Septic Tank Management Office expanded the number of septic tanks covered, by including an additional 520 septic tanks from outside the pilot area. Project Preparation and Design. The lack of records of existing septic tanks, their ownership and their operational status, influenced project design, impacted implementation and monitoring outcomes. Specifically, it impacted on the results indicator which was to measure tons/year of BOD reduced. Estimation of baseline data had to be done only through a survey, and to a degree, it was impossible to accurately assess the number and volumes of existing septic tanks in the pilot area, as there were no records available. Quality at Entry. Design and quality at entry is assessed as satisfactory, despite the weakness in the baseline data. The GEO was consistent with the Province’s commitment to sustainable environmental management, and to the UNDP/GEF/IMO Regional Program to protect large marine ecosystems (LME) in the Bohai Sea. Project design incorporated global experience, realistic expectations of BOD reduction in septic tanks, formulation of a framework and regulations for septic tank management, information collection and operations management systems to develop a detailed monitoring and evaluation protocol, and arrangements for dissemination of the experience of septic tank management, which was very relevant to China conditions where use of septic tanks is widespread even to date. D. Implementation All original GEF-supported activities were completed by the original loan closing date of December 31, 2013. The original planned project outputs and outcomes were not achieved due to the overestimation of baseline data. However, with the adjustments made during implementation, it is concluded that the outcomes were achieved. The GEF Grant of US$ 5.00 million was disbursed, and the Grant leveraged a Yantai Municipal Government contribution of US$ 3.49 million, compared to the contribution of US$0.40 million estimated at appraisal. Factors that contributed to the successful implementation of the project, on time, and within budget, include: (i) the strong commitment of Shandong Province and the Yantai Municipal Government; (ii) the environmental management policies and framework of Shandong Province; and (viii) the determination of Yantai Municipality to formulate and implement the GEF-supported pilot septic tank management system with necessary adjustments and establishing a permanent Office for Septic Tank Management, despite the difficulties experienced with: incorrect baseline data; procurement and registration of foreign- manufactured septic tank emptying vehicles; and challenges of emptying septic with highly consolidated settled solids. 37 E. Monitoring and Evaluation (M&E) Design, Implementation and Utilization Design. Incorrect baseline data on the number and volume of septic tanks for the GEF component indicator, inflated the indicator targets for reduction of pollution discharges to the Bohai Sea. However, with the information that became available during septic tank emptying, an additional 520 septic tanks were included, and the target was adjusted. An information system was designed to track routes of emptying vehicles, frequency of emptying, and volume of septage removed. Monitoring. A detailed monitoring was done on a daily basis and an information management system was developed and utilized for monitoring. The monitoring of the septic tank emptying data brought to light the inaccuracies in the baseline data on the number and volume of septic tanks in Yantai. Utilization. Monitoring and evaluation information enabled a more accurate assessment of the number and volumes, septage removed and adjustment of the indicator target. F. Outputs of the GEF-supported Septic Tank Management System GEF-supported project activities completed are described below. (a) Provision of a fleet of ten septic emptying vacuum tankers with capacity of 6 tons, 8 tons and 10 tons, and associated equipment. (b) Construction of a joint sewerage-septage treatment plant with a capacity of 45 m3/h, including deodorization and sewerage pumping facilities. (c) Development and publication of policy and regulations for septic tank management, including Regulations for Septic Tank Clean-up and Treatment Operation; and Yantai Urban Septic Tank Construction and Management Method), and Septic Tank Operation & Maintenance (O&M) manual. (d) Development of an Information Management System (IMS) for septic tank management. (e) Establishment of a permanent Septic Tank Management Office with new offices, staff and budget. (f) Septic tank emptying was internalized, and carried out in over 1,600 septic tanks for each of the past three years, as illustrated in the table below. Summary of Septic Tank Emptying Data Number of Cleaned-up and Treated Reduction of Year Septic Tanks Septage (tons) BOD5(tons) 2011 1,080 10,396.9 1,453.42 2012 1,600 10,018.1 806.42 2013 1,600 10,726.1 1,294.64 Total 4,280 31,141.1 3,554.48 (g) The Yantai Municipal Government project team participated in 12 international/national conferences, published five papers, and disseminated over 15,000 promotional materials sharing the experience of the septic tank management program. G. Achievement of Global Environment Objectives The Global Environment Objectives were achieved, as illustrated below (also refer to Results Framework in the Data Sheet in the main text of the ICR. 38 • Land-based pollution discharges to the Bohai Sea was reduced. BOD5 reduction was 1,185 tons/year on average (the target was 1700 t/a), which has greatly reduced the influence of land-source pollution in Bohai Sea bay • The joint sewerage-septage treated at the Xin’anhe WWTP was 10,380 tons/year on average (the target was 150,000 tons/year) • A lower cost technology for septic tank management was introduced and embraced by Yantai • The culture of regular periodic emptying of septic tanks was introduced, resulting in the enhanced functioning of septic tanks, and avoided damage caused by sewage overflows • A permanent institutional arrangement for septic tank management was established in Yantai • A GIS-based information management system to track and monitor tanker routes, operational data, and the frequency of emptying is in use in Yantai • The experience of the Yantai septic tank management system was disseminated within China and abroad • A discussion has begun among decision-makers on septic tank design, and changes to building code requirements for septic tanks • A dynamic monitoring and evaluation was developed, and is in use H. Post Completion Phase Activities planned by the Yantai Municipal Government for the post completion phase include: (a) continue the campaign to raise citizen awareness of the importance of septic tank maintenance through regular emptying ST maintenance; (b) enforce the requirement to empty septic tanks on a regular basis, and select, on a competitive bidding process, a panel of qualified private companies that will be licensed to undertake septic tank emptying; (c) support a phased expansion of the septic tank emptying program outside the pilot area; (d) continue support for the Septic Tank Management Office; (e) incorporate the cost of septic tank emptying in the wastewater tariff through a marginal increase, as the task is considered an integral function of wastewater management; (d) examine the continued use of septic tanks where sewer systems are available, and also consider changes to the current building code requirement of septic tanks in all buildings; 39 Annex 6. Resettlement Implementation Under the project, six cities/counties including Yantai, Heze, Weifang, Gaomi, Qixia, and Zaozhuang had resettlement activities. Resettlement Action Plans (RAP) were prepared, in consultation with affected persons (AP), and publicly disclosed, complying with World Bank policies and procedures. Resettlement activities were implemented according to the RAPs and were monitored by the Shandong Construction Development and Research Institute as the external monitoring agency. Annual safeguard compliance reports prepared by the project implementing units were submitted regularly. All resettlement activities were carried out satisfactorily in accordance with Chinese regulations and Bank policies. Resettlement activities comprised 1,331.3 mu of permanent land acquisition, 1,620.9 mu of temporary land use, and 94,750.8 m2 of house demolition. The total area of enterprise, institution and shops affected was 16,090.8 m2 . Population affected by the project was 4,200 persons. Details are shown in the table 1 below. Table 1 Comparison of Actual and Planned Resettlement Impacts of the Project Total Permanent Land Temporary Land Enterprise/institutio Affected Sub- House Demolition compensation Acquisition Occupation n/shop affected people component (m2) costs (mu) (mu) (m2) (Person) (104 Yuan) P A P A P A P A P A P A Yantai 59.5 60.9 296.6 303.8 - - - - 77 59 289.4 426.3 Heze 366 346 - - - - - - 350 271 668 658 Weifang 102.7 65.9 - - 24426 17694.1 - - 225 113 1185.3 1780.8 Gaomi 74.5 55.0 1211.8 1167.6 - - - - 119 108 368.5 302.6 10387. 11246. 23824. Zaozhuang 551.8 753.4 - - 107373 77056.7 16090.8 3228 3548 7 6 2 Qixia 59.35 50.1 393.5 149.5 - - - - 121 121 376.6 276.2 10387. 14134. 27268. Subtotal 1214 1331.3 1901.9 1620.9 131799 94750.8 16090.8 4718 4220 7 5 1 Huantai* 177 0 1218.5 0 0 0 0 0 83 0 614.5 0 Total 10387. 27268. 1391 1331.3 3120.3 1620.9 131799 94750.8 16090.8 4801 4220 147490 7 1 *Note: Huantai dropped out of the project in 2010. All APs were resettled properly according to the RAP. The implemented compensation standards for land use and house demolition were equal to or better than those stipulated in the RAP. All compensation was paid in time and all affected people were consulted fully throughout the whole resettlement process. Therefore no significant problems happened during the resettlement process. Surveys conducted among the APs in the project cities/counties indicated that the living quality of the APs is better than before and their income level has been restored and improved. Table 2 below presents the results of income restoration of sampled affected households in the project cities/counties. Of all the project affected population, only 23 people (from 9 households) were classified as belonging to vulnerable groups in Zaozhuang and Heze sub-components. After land acquisition and housing demolition, the local government guaranteed their living standards would not be adversely affected. A variety of training courses and employment information were provided to the family member of vulnerable groups to improve their work skills and increase their employment opportunities. Table 2 Income Restoration of Affected Households Sub-component No. of Sampled Household Income Increase 40 Households (RMB) (%) Notes 2007 2010 (Baseline) Yantai 8 64,000 106,000 65.6 Heze 4 39,400 113,500 188.1 a surveyed in 2006 Weifang 5 175,000a 323,000 84.6 Gaomi 5 138,500 167,000 20.4 Zaozhuang b surveyed in 2006 Dongsha River 38 910,160b 1,545,380c 69.8 c surveyed in 2009 d Xisha River 10 248,847d 267,598e 7.5 surveyed in 2011 e surveyed in 2012 f surveyed in 2006 Qixia 10 112,600f 144,800 28.6 41 Annex 7. Performance of Project-financed Wastewater Treatment Plants This annex provides information on the operational performance of wastewater treatment plants (WWTP) financed under the project, with respect to frequently encountered problems of over-design in terms of capacity, low influent BOD concentrations, and high treatment standards in China. Discharge Standards for Municipal Wastewater in China The Ministry of Environment (MOE) sets discharge standards of pollutants for municipal wastewater treatment plant for treated effluent (GB18918-2002). Table 1 below shows the parameters of the Chinese Standards. Table1. Highest Allowable Discharge Concentration of Water Pollutants from Sewage Treatment Plants (Daily Average) (Unit: mg/l) Class I Standard Basic Controlled Indicators A B Class II Standard Class III Standard COD 50 60 100 120 (1) BOD5 10 20 30 60 (1) Suspended Solids (SS) 10 20 30 50 Animal and Plant Oil 1 3 5 20 Petroleum 1 3 5 15 Negative Ion Surface Active 0.5 1 2 5 Agent Total Nitrogen (as N) 15 20 - - NH3-N (as N) 5 (8) 8 (15) 25 (30) - Total P Built before Dec 1 1.5 3 5 (as P) 2005 Built before Jan 1, 0.5 1 3 5 2006 Color (dilution magnitude) 30 30 40 50 PH 6-9 Bacillus Coli (count/l) 1000 10000 10000 - Notes: (1) Removal rate indicators should be higher than 60% when inlet water COD is higher than 350 mg/l, higher than 50% when BOD is higher than 160 mg/l; (2) Values outside brackets refer to controlled values when water temperature is >12 °C, those inside refer to controlled values when water temperature is ≤12 °C The Provincial Environment Protection Bureau (EPB) is responsible to assure that the MOE mandates are complied with in Shandong Province. Due to the importance attached to the north-south water transfer scheme and protection requirements for the Bohai Sea, WWTPs in Yantai and Qixia were required to adopt the Class 1B discharge standards for treated effluent. All WWTPs constructed have monitoring stations that are directly linked to the Provincial EPB monitoring system. Non-compliance invokes sanctions generally in the form of fines, and in the extreme cases, suspension of operations. Project-financed WWTPs. Two treatment plants were constructed under the project, (i) Yantai Xinanhe WWTP (80,000 m3/d); and (2) Qixia EDZ (20,000 m3/d). Details of the WWTPs and their operations are provided below. 42 (a) Yantai Xinanhe WWTP This sub-component was completed in November 2008. The completed works include: 16.5km wastewater collection networks including a 20,000 m3/day pump station; expansion of the existing 40,000 m3/d WWTP by 80,000 m³/d (total 120,000 m3/d), to meet Class 1B discharge standard; and a 3.13 km long sea outfall. At design stage, the parameters of influent BOD and COD concentrations used were 280 mg/l and 580 mg/l, respectively. By the end of 2013, the average daily wastewater treatment volume was 105,000 m3/d, corresponding to 87.5% of the designed capacity of 120,000m3/d. Table 2 provided the influent/effluent concentrations for January to September 2013. Table 2 Influent/effluent BOD concentrations for January to September 2013 Jan Feb Mar Apr May Jun Jul Aug Sep Influent 132.0 94.5 143.0 170.0 240.0 171.0 139.0 125.0 168.0 Effluent 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 (b) Qixia WWTP The 20,000 m3/d WWTP, as originally planned, was to collect and treat wastewater generated from an economic development zone (EDZ) established around the time of project appraisal. During project implementation, a Government decision mandated the high water consuming industries will not be permitted in the EDZ. This decision had an impact on the quantity of wastewater that will be generated from the EDZ. The matter was further complicated by the slow take up of plots in the EDZ, resulting in inadequate flows to operate the WWTP. The WWTP could not be commissioned for use by project closure. As the Qixia Government had plans to de-commission an old WWTP which is within the built-up area of the city, which happens to be prime valuable land. A decision was made, therefore, to accelerate the de- commissioning of the old WWTP, by diverting wastewater generated in the city to the project-constructed WWTP. Using own funds, Qixia city has commenced construction of a 30.2 km long sewer to convey city wastewater to the project-financed WWTP. About half the length of the pipeline was completed at project closure, and the sewer is expected to be completed by mid-2014. Upon completion of the pipeline, the Qixia WWTP will be commissioned and put into operation, utilizing the full 20,000 m3/day capacity in the second half of 2014. Data on the influent water quality and other operation al details were not available at the time of the preparation of the ICR. Conclusions. The capacity utilization in the expanded Yantai WWTP is satisfactory, with 87.5% utilization. The design influent BOD was 280 mg/l, but the actual BOD concentrations reaching the WWTP was highest in May (240 mg/l) and averaged about 55% of the design BOD concentration. The lower influent BOD can be attributed to two possible reasons: (i) about 20%-30% is removed in the septic tanks, or (ii)high levels of infiltration. The adoption of Class 1B discharge standards was necessary to protect sensitive water bodies, and to meet the requirements of the MOE. 43 Annex 8 Summary of Borrower's ICR The following is a summary of the Borrower’s Implementation Completion Report (January 2014), prepared by the Shandong Provincial Project Management Office on behalf of the Shandong Provincial Government. The full report with annexes is available in the Project File. (The Borrower’s ICR contains 10 Appendices, and reference is made to these Appendices throughout this Annex) 1. Assessment of Project Objective and Quality at Entry Original Project Objectives The project development objectives are described in the main text of the Bank ICR, and the Project Appraisal Document (PAD) (36316-CHA, January 30 2007), and are not repeated here. Quality at Entry To ensure the quality of project preparation, an international consulting company, was engaged to assist the project cities to provide design review and advisory services. To ensure successful preparation and implementation of the project, the provincial government set up a robust structure of project management arrangements comprising project leading groups and PMOs at both provincial and city levels, replicating proven arrangements from earlier Shandong projects, which were retained throughout the implementation period. However, looking back, with the benefit of hindsight, reveals a number of concerns over the quality of preparations for the “soft” non-infrastructure aspects. These are documented in Section 6 (lessons learned). 2. Achievement of objectives and Outputs Outcome/Achievement of Objectives The project has undoubtedly contributed to the high level objectives as set out in the PAD. In particular, both the loan-funded project components and the GEF grant component have contributed to reducing pollution discharges to the Bohai Sea and East China Sea – most especially the wastewater interventions in Yantai (which include the GEF intervention) and Weihai, both of which are coastal cities. These actions are examples of China meeting its obligations under international treaties to reduce pollution discharge to sensitive coastal waters. The project made positive impacts and benefits to both the environment and communities in the project cities, including reduced untreated wastewater discharges, improved water supply systems, improved solid waste collection, transportation and disposal, and community and economic development. The Yantai GEF pilot project contributed to a reduction in land-based pollution discharges from other cities reaching the marine environment. Where relevant, the project interventions allowed the project cities to meet the SPG 2010 targets for wastewater and municipal solid waste management. Appendix 9 and Appendix 11 provide details of the project environmental benefits, specific environment benefits of the GEF pilot project. Achievement of Project Components All physical works for nine participating cities/counties, including pilot GEF-supported septic tank management activity, were completed and the objectives were largely achieved. The institutional development and capacity building programs for project owners, SPHURCB, SPFB, SPEPB and local government decision-makers were implemented as agreed (see section 2.6 below). 44 A comparison of original physical components (Components 1, 2 and 3) and as-built components, and project costs are provided in Annex 2 and Annex 3, respectively, of the main Bank ICR, and are not repeated here. Details are also provided in Appendix 1 and Appendix 3 of the Borrower’s ICR. Procurement The procurement of all the project contracts was undertaken in accordance with the Bank Guidelines, and anll PIUs acknowledged the fair and high management standards of the bidding process. PIUs questioned the requirement to award contracts to the lowest responsive bidder. However, the bidding procedure itself undoubtedly was beneficial to the employers. Appendix 5 provides procurement details. Economic Benefits The Project has undoubtedly contributed to the Government’s development objectives of sustainable economic growth, rural to urban economic migration and the creation of liveable cities. Economic output in the project cities has increased from RMB 637.12 billion in 2005 to RMB 1963.7 billion in 2012, an increase averaging 17.4% per annum. Specific benefits at the city level are discussed in Appendix 6. The forms of direct economic benefits are variable due to various natures of different sub-components. Specific benefit streams have included: (i) flood protection, enhanced property values, amenity and tourism benefits from river rehabilitation; (ii) public health benefits, improved water quality in rivers and coastal waters from wastewater sub-components; (iii) meeting increasing demand, and health benefits by water supply component; and (iv) job creation and economic incentives by all sub-components. Financial Performance The financial viability of the Project’s water and wastewater components and Rizhao municipal solid waste component were assessed based on the ability of the relevant utility tariff to generate sufficient revenues for the project companies to meet their principal financial targets. These targets, which were also covenanted, with a cost recovery ratio of at least 1.0 and debt servicing coverage of at least 1.3, and set on the assumption that related financial and institutional reforms took place that would allow all related water, wastewater and solid waste charges revenues to be transferred to the relevant project companies. However these financial and institutional reforms were neither covenanted nor included in the project design, and have never taken place in the wastewater and municipal solid waste sectors. As a result, some technical non-compliance with the financial covenants have been reported annually to the Bank, even worse, local governments have been reluctant to increase water and other public utility tariffs in recent years. However, where revenues have fallen short of full cost recovery, all local governments have ensured the O&M costs of these key public services have been fully funded. The other sub-components of the project were deemed as “non- revenue generating” at project appraisal and therefore justified by assessing the financing sustainability of required budgetary support from the relevant local governments. Government revenues have grown stronger substantially over the period of project implementation, therefore the fiscal sustainability has enhanced further. As explained in Appendix 11, the financial sustainability of the septic tank management in Yantai was strengthened during the design and implementation of the GEF grant component by integrating septic tank management by a broader management and financing of the wastewater services in the city. This approach will be recommended to other cities where relevant, and the experience of Yantai has already been widely disseminated in and out of Shandong. 45 More information related to the Project companies’ financial performance and the current status of local government fiscal sustainability is in Appendix 8 of this report. Construction Management The construction management practice of all agencies involved in implementation has improved through their adoption of the institutional strengthening and training package. These arrangements enabled project construction to be carried out to a satisfactory standard and in a timely manner, such that most of physical works were completed well in advance of the original loan closure date. Effective construction management was a key factor for the successful completion of most contracts. Land Acquisition and Resettlement Land acquisition and resettlement of affected residents was undertaken in accordance with the RAP approved by the World Bank and endorsed by SPG. Resettlement compensation made generally good progress. All affected residents were resettled properly and received full compensation. External monitoring indicates that the income level of affected residents is higher than before the project and their standard of living has recovered or improved. Detailed information on implementation is provided in Annex 9, and Appendix 10. Environmental Management and Environmental Benefits During project implementation the PIUs carried out environmental management work in compliance with the project legal documents including the EMP. The project has achieved significant positive environmental impacts, such as improving the quality of water supply, reducing pollution of rivers and promoting appropriate solid waste management, and these impacts are beneficial to public health and the quality of urban life. Environmental improvements achieved at project closure include: (a) extension of wastewater facilities and river course rehabilitation have improved sanitation conditions and flood protection for about 2,017,000 people (the target was over 1,100,000 people). About 730,000 people (the target was about300,000 people) received access to new piped potable water supplies and 1,122,000 people (the target was 1,100,000 people) have benefitted from the provision of upgraded solid waste collection and treatment facilities; (b) the volume of wastewater treated reached 239.6 million m3/year (target was 226 million m3/year) and annual pollution abatement1 reached 22,579 tons of BOD (target was 22,080 ton/year), 4,640 tons of NH3-N (target was 4,031 ton/year), 673 tons of total phosphorus (target was 309 ton/year) and 43,437 tons of SS (target was 29,393 ton/year); (c) the volume of municipal solid waste collected and transferred to sanitary landfill reached 351,660 ton/year (target was 450,775 ton/year). The actual population growth for Heze and Rizhao did not reach the prediction made during the project appraisal stage, so the volume of municipal solid waste collected and transferred to sanitary landfill did not exceed the 2013 end target; and (d) urban water supply production reached 25.1 million m3/year (the target was 53.3 million m3/year). More information related to EMP implementation and the environmental benefits resulting from each sub-component are shown in Appendix 9. 1 Qixia EDZ WWTP has not put into operation yet, so the pollution abatement in terms of BOD, NH3-N, TP and SS is 0; and Weifang’s data not available 46 Poverty Alleviation and Social Impact Achievements in poverty alleviation and social benefits included: (i) significant local temporary job opportunities and over 200 new permanent jobs in O&M; (ii) health benefits to a population of 730,000, including 340,000 in fluoride-affected areas; (iii) public health and amenity benefits from improved flood control; (iv) extending solid waste collection and closure of unsanitary refuse dumps; (v) increased wastewater collection and treatment (including improved quality of coastal bathing waters in Yantai and Weihai); (v) equal access to services by the poor and vulnerable people including improved affordability due to rising income levels across the social spectrum’ (vi) all displaced persons benefited from strict application of the Bank’s policies on involuntary resettlement, thus mitigating the main social risk identified at project appraisal; and (vii) social benefits of the Yantai GEF project, including better residential environments by eliminating septic tank overflows, reducing pollution of the sea, improving the quality of bathing beaches and reducing the possibility of the spread of contagious diseases. 3. Major Factors Affecting Implementation and Outcome Factors outside the control of the local government or the implementing agency The exchange rate of US$ with RMB was steady 1:8.27 up to July 2005, but fell to around 1:6.05 by loan closure in December 2013. This total fall of over 25% significantly reduced the real value of WB loan and increased the level of counterpart funding required as most contracts were denominated in Chinese RMB rather than US dollars. Huantai County decided for its own reasons to withdraw from the project at a very early stage. This necessitated a project restructuring and the Zhoucun sewerage and river rehabilitation sub-component being introduced. Factors under the control of the local government Water, wastewater, and municipal solid waste user tariffs have not kept pace with inflation let alone increased to recognize the improved services now offered as a result of the project. This failure to act on the part of local governments has increased the level reliance on government subsidies, made involvement less attractive to the private sector, and further reduced the limited financial autonomy of the project implementing agencies (as well as compromising compliance with financial covenants in the loan legal documents). Qixia EDZ Administration has still to implement any wastewater tariff. Weifang government made several changes of mind and had long period of indecision in what wastewater treatment solution should be implemented for the area benefiting from the WB funded sewerage improvements. Although a solution is now being implemented via local funding, the achievement of a successful outcome was delayed and loan savings of about US$ 10.9 million resulted. Factors under the control of the PIUs The WB guidelines that the contract should be awarded to the bidder who offers the lowest substantially responsive bid was questioned by most PIUs. Some issues have occurred where contracts were awarded on the basis of the lowest cost with the contractor subsequently trying to increase its payments through variations and claims 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 the malign competition with low price bidding. 47 Although loan was allocated to each PIU for local training initiatives, most of these funds have not been used due to various reasons. The loan was intended for the PIU to identify their training needs in order to enhance technical, financial or institutional capability. Staff changes occurred during the project preparation and implementation which caused some difficulties. In most cases, there was no proper transition arrangement for staff changes resulting in a negative impact on the project implementation, such as impeding project monitoring by not providing updated information or data in time. Costs and Financing Costs. A breakdown of project costs by components is provided in Appendix 3 where the final project costs are compared with those identified in the PAD. Total project costs (including GEF) identified during project appraisal were US$ 281.11 million (refer to Annex 5 of the PAD), of which the total project cost for the loan project was US$275.71 million and the cost for the GEF project was US$5.4 million. The detailed completion costs for each of the project components are included in Appendix 3 of this report. Financing. Comparison of the final financing plans with that included in the PAD for the loan and GEF grant parts of the project are available in Annex 2 of the ICR. Counterpart funding sources included: state bonds, provincial government provision, and local finance from municipal government and the PIUs. The final financing ratio of Bank loan to counterpart financing was 50.5% to 49.5%. During project appraisal, that ratio was estimated to be 53.3% to 46.7%. The ultimate financing ratio of GEF Grant to counterpart financing was 58.9% to 41.1%. During project appraisal, that ratio was estimated to be 92.6% to 7.4%, with the significant difference resulting from additional investment made by Yantai into its facilities for managing septage. 4. Project Sustainability Prospects for Sustainability. We recognize sustainability of the Project needs to be viewed in terms of (a) whether an appropriate institutional arrangement has been set up to provide for managerial autonomy and sustainability; (b) the ability of assigned institutions to operate and maintain the facilities; and (c) financial sustainability. In our view the overall Project can be considered largely sustainable against these criteria, but there are some reservations. Except in Qixia, where O&M capacity has yet to be tested, all facilities are being well operated and maintained. Although all local governments are providing sufficient budget or subsidies to ensure project operations are fully financed, tariffs are generally not at a level that provide for financial sustainability. Ensuring sustainability was a key design feature of the GEF grant funded septic tank management (STM) study in Yantai, where the new management method clearly defines institutional responsibilities for STM, and financing of the service has been integrated with wastewater management. Project sustainability is briefly discussed in paragraphs 4.2 through 4.4 below and in further detail in Appendix 7. In summary, institutional sustainability is mixed, financial sustainability rests on the adequacy of continued budgetary subsidies from local government in almost every case, and operational sustainability can be considered to be well assured except in Qixia. Institutional and Managerial Sustainability. In the case of the Gaomi, Rizhao, and Weihai components, the IAs were already well established operating units experienced in relevant public utility management. All three are legally and nominally managerially autonomous but with autonomy partially compromised due to a lack of financial autonomy or the fact they are closely supervised by government departments. However, if there was the political will they could easily be made more fully autonomous. In the case of Heze, Yantai and Qixia, the PIUs were newly formed companies that are now also responsible for O&M 48 of the project facilities. Heze is staffed in a manner that would facilitate similar autonomy to Rizhao, but the Yantai and Qixia PIUs are currently not viable as independent institutions. Financial Sustainability. Financial sustainability for revenue generating sub-projects should be judged by the cost recovery rate. This was referred to in paragraph 2.5 and is discussed in more detail in Appendix 8. Currently only Gaomi water sub-component can be considered financially sustainable and this is further assured by recent policy announcements at national level that will result in significant increases in water tariffs. All the wastewater implementing agencies are still financed via budgetary transfers, which make no provision for depreciation. Thus technically they are not sustainable in financial terms as budgets and capital investment funding cannot be assured into the future - however, at the present time for all project components, the budgets are adequate for full funding of O&M requirements in 8 of the 9 cities. In Qixia, the project facilities have yet to be brought into operation. Operational Sustainability. In 8 of the 9 cities the project facilities are being operated satisfactorily and staff are adequately trained. In some instances, such as Yantai, Rizhao, Gaomi, Weihai and Heze, the project facilities have already been operational for a number of years and operational sustainability can be fully assured based on this experience. The only concern relates to Qixia in view of the fact the new WWTP cannot yet be brought into operation and therefore the sustainability of future operations cannot be assured at this time. 5. The Bank and Borrower Performance Bank Performance. From the Borrower’s perspective the actual performance of the Bank has been somewhat mixed. Whilst good advice on technical design was provided during project preparations, the monitoring and evaluation framework and associated performance indicators proved to be poorly designed and the established performance baseline was inadequately documented. Also some Bank stipulations in the legal documents were inappropriate (especially the requirement to on-lend to agencies with no financial capacity to repay, an issue referred to in the Design Review and Advisory Consultant’s report, and which repeated mistakes from other projects). During implementation, the Bank has been generally supportive and responsive, although there have been frustrating delays in obtaining some “no objections” where there was no obvious reason for any delay. From the governments perspective there could also have been more flexibility shown by the Bank in dealing with the changes proposed in Weifang, leading to a lost opportunity to fully utilize the loan. Borrower Performance. The national and provincial government’s commitment to the project remained strong and supportive during all phases of the Project. Local governments also generally performed well as evidenced by the fact that all physical works were completed on schedule, almost all loan covenants were fully complied with throughout project implementation, safeguard activities were mostly well managed, there were no instances of mis-procurement and only minor technical matters were raised during financial audits. Details of covenant compliance are provided in Appendix 12. However, exceptions to this general high level of performance were (i) Huantai government’s action to withdraw from the project, (ii) changes and delays in implementing an effective wastewater treatment in Weifeng (with consequential loan savings resulting), (iii) protracted delays in handling resettlement issues in Zaozhuang, and (iv) the reluctance on the part of all local governments to increase water, wastewater and MSW user tariffs. 6. Lessons Learned Overview. The SDEPII has been very successful with most of its original objectives achieved particularly in terms of the planned physical interventions. The entire implementation process has been a valuable experience for all the agencies involved, and much capacity building of the IAs has been achieved that 49 will help them with future projects. The WB loan has not just simply helped finance the Project, but has also introduced advanced management practices for project implementation and enterprise operation, such as modern project management, international practice of bidding and contracting, construction supervision, performance measurement, and the project completion evaluation. Significant capacity building in WB procurement, contract and project management, WWTP operations and maintenance, environmental monitoring, and financial management have been achieved. WB project implementation rules and procedures on procurement, contracts management and construction supervision have been broadly accepted as being fair and giving greater assurance of a satisfactory outcome. Good experience has been gained by practicing these rules and procedures, which have been replicated on similar projects not financed by WB. Implementation Lessons Multi Disciplinary Contracts. The PIUs expressed the view during the project completion phase that there may be some advantages in implementing projects, such as WWTP construction, by means of single multidisciplinary contracts. In two WWTP projects in Yantai and Qixia, this type of contracting approach was used. With this method, any interfaces between the different disciplines are the responsibility of a single contractor. This is a major advantage to the PIU and project owners, simplifies project management, transfers risk away from the project owner, and sharpens accountability for project delivery. Several of the PIUs now agree that such a contracting arrangement would be useful in the future. Collaboration for inter-municipal wastewater treatment: Zhoucun and Zouping County reached agreement on cost-sharing for capital and operating costs for wastewater facilities. Measures were also put in place to monitor the quality of effluent flowing from Zouping County to Zhoucun, and to measure the volume of flows. This achievement signifies collaboration for inter-municipal infrastructure planning and construction, including collaboration between neighbouring Environmental Protection Bureaus. Lessons for the Future Arrangement for Utilising the Remaining Bank Loan. Although loan savings were identified from 2010 onwards and discussed with the Bank in May 2011, it proved impossible to put these saving to effective use. The main cause was the lack of a scientifically prepared proposal, acceptable to the Bank, from the Weifang Government to justify its plans as an alternative means of achieving the PDO of SDEPII. The issue remained unresolved until the middle of 2013 leaving insufficient time for utilizing the loan saving by other project cities. It is felt the issue might have been resolved within reasonable time if the SPG had intervened earlier, and the Bank had shown greater flexibility and understanding in its consideration of Weifang’s plans. Prevention of Unreasonable Contract Variations. PMOs and IAs now realize the importance of accurately preparing the bidding documents, including designs, specifications and BOQ, etc. This will benefit the PIUs by enabling unreasonable variations to be easily rebutted in future. 50 Annex 9. List of Supporting Documents (i) Project Appraisal Document (ii) Loan Agreement and amendments (iii) Project Agreement and amendments (iv) Environmental Assessment dated February 2006 (v) Resettlement Action Plans (vi) Social Assessment (vii) Dam Safety Report (viii) Procurement Plans and updates (ix) Aide-memoires, Management Letters and 8 Implementation Status Reports (x) Restructuring Paper of January 2010 (xi) GEF Component: Project Completion Evaluation Report by ESD China Ltd. (xii) Complete Borrower’s Implementation Completion and Results Report, including ten (10) Appendices 51 To Chita 80°E 90°E 100°E 110°E 120°E 130°E He RUSSIAN FEDERATION ilo ng Jia ng To Chita KAZAKHSTAN CHINA HEILONGJIANG Qiqihar Harbin MO NGO LIA 40° To N Changchun Urumqi Ulaanbaatar J I L I N TAJ IK IST Shenyang A Kashi LIAON L I A O N IN ING DEM. 40°N L Anshan PEOPLE'S N GO Sea of X I N J I A N G M ON Hohhot REP. 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