FOR OFFICIAL USE ONLY

Public Disclosure Authorized Report No: PAD3388

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN Public Disclosure Authorized IN THE AMOUNT OF €89.10 MILLION (US$100 MILLION EQUIVALENT)

TO THE

PEOPLE'S REPUBLIC OF CHINA

FOR A

SICHUAN WATER SUPPLY AND SANITATION PUBLIC PRIVATE PARTNERSHIP (PPP) PROJECT Public Disclosure Authorized

FEBRUARY 10, 2020

Water Global Practice East Asia and Pacific Region Public Disclosure Authorized

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

CURRENCY EQUIVALENTS

(Exchange Rate Effective December 31, 2019)

Currency Unit = Chinese Yuan (CNY)

CNY 6.96 = US$1

EURO 0.89 = US$1

FISCAL YEAR January 1–December 31

ABBREVIATIONS AND ACRONYMS

BCC Behavior Change Campaign CAPEX Capital Expenditure CBA Cost-Benefit Analysis CEA Cost-effectiveness Analysis CNAO China National Audit Office CPF Country Partnership Framework CP Condition Precedent DA Designated Account DBO Design, Build, and Operate EIA Environmental Impact Assessment EIRR Economic Internal Rate of Return ENPV Economic Net Present Value EPC Engineering, Procurement, and Construction ESF Environmental and Social Framework ESCP Environmental and Social Commitment Plan ESMP Environmental and Social Management Plan FM Financial Management FMM Financial Management Manual FSR Feasibility Study Report FYP Five-year Plan GBV Gender-based Violence GDP Gross Domestic Product GHG Greenhouse Gas GI&CE Gender Inclusion and Citizen Engagement GIF Global Infrastructure Facility

GRS Grievance Redress Service HUCB Housing and Urban Construction Bureau HUDB Housing and Urban Development Bureau IFC International Finance Corporation IFC C3P IFC PPP Advisory Team IPF Investment Project Financing IT Information Technology JDFB Jingyang District Finance Bureau JDG Jingyang District Government Jingyang Jingyang District KPI Key Performance Indicator M&E Monitoring and Evaluation MBR Membrane Bio-reactor MOF Ministry of Finance NCDP New Countryside Development Program NDRC National Development and Reform Commission NPV Net Present Value NRW Nonrevenue Water O&M Operation and Maintenance OM Operations Manual OPEX Operating Expenditure PDO Project Development Objective PIP Project Implementation Plan PLG Project Leading Group PMO Project Management Office PPP Public-private Partnership PPSD Project Procurement Strategy for Development RAP Resettlement Action Plan RPF Resettlement Policy Framework SEP Stakeholder Engagement Plan SOE State-owned Enterprise SPAO Sichuan Provincial Audit Office SPFD Sichuan Province Finance Department SPV Special Purpose Vehicle TA Technical Assistance UNICEF United Nations Children's Fund VAT Value Added Tax WAB Water Affairs Bureau

WASH Water, Sanitation, and Hygiene WSS Water Supply and Sanitation WTP Water Treatment Plant WWTP Wastewater Treatment Plant

Regional Vice President: Victoria Kwakwa Country Director: Martin Raiser Regional Director: Benoit Bosquet Global Director: Jennifer Sara Practice Manager: Sudipto Sarkar Task Team Leader(s): Gang Qin, Victoria Hilda Rigby Delmon

The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

TABLE OF CONTENTS DATASHEET ...... 1 I. STRATEGIC CONTEXT ...... 6 A. Country Context...... 6 B. Sectoral and Institutional Context ...... 8 C. Relevance to Higher Level Objectives ...... 11 II. PROJECT DESCRIPTION ...... 14 A. Project Overview and Key Concepts ...... 14 B. Project Development Objective ...... 16 C. Project Components ...... 17 D. Project Beneficiaries ...... 20 E. Project Theory of Change and Results Chain ...... 21 F. Rationale for World Bank Involvement and Role of Partners ...... 23 G. Lessons Learned and Reflected in the Project Design ...... 25 III. IMPLEMENTATION ARRANGEMENTS ...... 27 A. Institutional and Implementation Arrangements ...... 27 B. Results Monitoring and Evaluation Arrangements...... 30 C. Sustainability ...... 31 IV. PROJECT APPRAISAL SUMMARY ...... 32 A. Project Technical, Financial, and Economic Analysis ...... 32 B. Fiduciary ...... 38 C. Legal Operational Policies ...... 40 D. Environmental and Social ...... 40 V. GRIEVANCE REDRESS SERVICES ...... 43 VI. KEY RISKS ...... 43 VII. RESULTS FRAMEWORK AND MONITORING ...... 46 ANNEX 1: IMPLEMENTATION ARRANGEMENTS AND SUPPORT PLAN ...... 54 ANNEX 2: FEASIBILITY STUDY REPORT AND OPTIMIZATION OF TECHNICAL DESIGN ...... 61 ANNEX 3: PPP STRUCTURING OPTIONS ...... 63 ANNEX 4: SUMMARY OF TERMS OF DRAFT PPP AGREEMENT ...... 68 ANNEX 5: ECONOMIC AND FINANCIAL ANALYSIS ...... 73 ANNEX 6: GENDER INCLUSION AND CITIZEN ENGAGEMENT PLAN ...... 81 ANNEX 7: PROJECT MAP ...... 87

The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

Click here to enter text. DATASHEET

BASIC INFORMATION BASIC_INFO_TABLE Country(ies) Project Name

China Sichuan Water Supply and Sanitation PPP Project

Project ID Financing Instrument Environmental and Social Risk Classification

Investment Project P168025 Substantial Financing

Financing & Implementation Modalities

[ ] Multiphase Programmatic Approach (MPA) [ ] Contingent Emergency Response Component (CERC)

[ ] Series of Projects (SOP) [ ] Fragile State(s)

[ ] Disbursement-linked Indicators (DLIs) [ ] Small State(s)

[ ] Financial Intermediaries (FI) [ ] Fragile within a non-fragile Country

[ ] Project-Based Guarantee [ ] Conflict [ ] Deferred Drawdown [ ] Responding to Natural or Man-made Disaster

[ ] Alternate Procurement Arrangements (APA)

Expected Approval Date Expected Closing Date

03-Mar-2020 31-Dec-2026

Bank/IFC Collaboration Joint Level

Yes Complementary or Interdependent project requiring active coordination

Proposed Development Objective(s)

The objectives of the Project are to improve access to water supply and sanitation services and improve the quality and efficiency of water supply and sanitation service delivery in select peri-urban and rural areas of Jingyang District of Deyang City in Sichuan Province.

Components

Component Name Cost (US$, millions)

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

Institutional Strengthening and Infrastructure Investments to Improve WSS Services in 153.40 Jingyang District Institutional Capacity Building and Technical Assistance (TA) for PPP Oversight, Project 1.00 Management, and Scale Up of the PPP Approach

Organizations

Borrower: People's Republic of China Implementing Agency: Jingyang Project Management Office

PROJECT FINANCING DATA (US$, Millions)

SUMMARY-NewFin1

Total Project Cost 154.40

Total Financing 154.40

of which IBRD/IDA 100.00

Financing Gap 0.00

DETAILS-NewFinEnh2

Private Sector Investors/Shareholders

Equity Amount Debt Amount

Government Contribution 6.50 IFI Debt 100.00

Government Resources 6.50 IBRD 100.00

Non-Government Contributions 34.40 Commercial Debt 13.50

Private Sector Equity 34.40 Unguaranteed 13.50

Total 40.90 113.50

Expected Disbursements (in US$, Millions)

WB Fiscal Year 2020 2021 2022 2023 2024 2025 2026 2027

Annual 0.00 5.00 15.00 20.00 20.00 20.00 15.00 5.00

Cumulative 0.00 5.00 20.00 40.00 60.00 80.00 95.00 100.00

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

INSTITUTIONAL DATA

Practice Area (Lead) Contributing Practice Areas Water

Climate Change and Disaster Screening This operation has been screened for short and long-term climate change and disaster risks

SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT)

Risk Category Rating

1. Political and Governance ⚫ Low

2. Macroeconomic ⚫ Moderate

3. Sector Strategies and Policies ⚫ Substantial

4. Technical Design of Project or Program ⚫ Substantial

5. Institutional Capacity for Implementation and Sustainability ⚫ High

6. Fiduciary ⚫ Substantial

7. Environment and Social ⚫ Substantial

8. Stakeholders ⚫ Substantial

9. Other

10. Overall ⚫ Substantial

COMPLIANCE

Policy Does the project depart from the CPF in content or in other significant respects? [ ] Yes [✓] No

Does the project require any waivers of Bank policies? [ ] Yes [✓] No

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

Environmental and Social Standards Relevance Given its Context at the Time of Appraisal

E & S Standards Relevance

Assessment and Management of Environmental and Social Risks and Impacts Relevant

Stakeholder Engagement and Information Disclosure Relevant

Labor and Working Conditions Relevant

Resource Efficiency and Pollution Prevention and Management Relevant

Community Health and Safety Relevant

Land Acquisition, Restrictions on Land Use and Involuntary Resettlement Relevant

Biodiversity Conservation and Sustainable Management of Living Natural Relevant Resources

Indigenous Peoples/Sub-Saharan African Historically Underserved Traditional Not Currently Relevant Local Communities

Cultural Heritage Relevant

Financial Intermediaries Not Currently Relevant

NOTE: For further information regarding the World Bank’s due diligence assessment of the Project’s potential environmental and social risks and impacts, please refer to the Project’s Appraisal Environmental and Social Review Summary (ESRS).

Legal Covenants

Sections and Description For the purposes of carrying out the Project, the Project Implementing Entity shall cause the Jingyang District, to on-lend the proceeds of the Loan to the Project Company, pursuant to an on-lending agreement (the “On-lending Agreement”) under terms and conditions acceptable to the Bank, identical to those of the Loan.

Sections and Description Without limitation to the generality of Section 5.03 of the General Conditions, plan and provision each year in its annual district budget, funds in an amount sufficient to ensure the viability of Part 1 of the Project, to provide to the Project Company availability payments in accordance with the provisions of the PPP Agreement, for the purpose of financing, among other things, the financing costs related to the operation of the new utility established under Part 1 of the Project, debt servicing, return on equity and operational subsidies

Sections and Description

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

The Project Implementing Entity shall, and shall cause the Jingyang District to, ensure that the Project is carried out in accordance with the Environmental and Social Standards, in a manner acceptable to the Bank.

Sections and Description Throughout the implementation of the Project, the Project Implementing Entity shall, and shall cause the Jingyang District to, apply the Project Operations Manual in a timely and efficient manner acceptable to the Bank. The Project Implementing Entity shall, and shall cause the Jingyang District to, not amend, suspend, or waive said Project Operations Manual or any provision or schedule thereof, without the prior written agreement of the Bank. In the event of any inconsistency between the provisions of the Project Operations Manual and those of the Project Agreement or the Loan Agreement, the provisions of the Project Agreement and the Loan Agreement shall prevail.

Sections and Description Without limitation to the provisions of Section II.A.1 of the Project Agreement, the Project Implementing Entity shall, and shall cause the Jingyang District to, prepare, under terms of reference acceptable to the Bank, and furnish to the Bank no later than June 30, 2023, a consolidated mid-term review report for the Project, summarizing the results of the monitoring and evaluation activities carried out from the inception of the Project, and setting out the measures recommended to ensure the efficient completion of the Project and to further the objectives thereof.

Sections and Description The Project Implementing Entity shall, and shall cause the Jingyang District to (with inputs from the Project Company), provide to the Borrower not later than five (5) months after the Closing Date, for incorporation in the report referred to in Section 5.08 (c) of the General Conditions all such information as the Borrower or the Bank shall reasonably request for the purposes of that Section.

Sections and Description No later than December 31, 2021, carry out a water and sewerage sanitation tariff roadmap study to identify a medium-to long-term pathway for raising tariffs (and reducing subsidies) so that the tariff be both affordable to customers and financially sustainable for the Concession and the Jingyang District’s water and sewerage sanitation services.

Conditions

Type Description Effectiveness The On-lending Agreement has been entered into between the Jingyang District and the Project Company in accordance with the provisions of Section I.B.1 (a) of the Schedule to the Project Agreement.

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I. STRATEGIC CONTEXT

A. Country Context

1. Over the past 40 years, China experienced a period of high growth and significant poverty reduction. Rapid economic growth was made possible by a wide range of reforms, which transformed a state-dominated, planned, rural, and closed economy into a more market-based, urbanized, and open one. Real per capita income increased 16 times between 1978 and 2017. More than 850 million people lifted themselves out of poverty.

2. China has now entered a new stage in its development, transiting to slower but more balanced and sustainable growth. Its previous growth model, based on resource-intensive manufacturing, exports, and cheap labor, has largely reached its limits and has led to economic, social, and environmental imbalances. The country is now undergoing a major economic transformation, shifting to a new growth model that is slower but more balanced and based on services, consumption, innovation, and private sector participation.

3. Despite China’s economic and social gains, inequality and disparities remain a challenge. As of 2015, about 10 million Chinese still lived below the international poverty line of US$1.90 a day.1 Others live in moderate poverty, still vulnerable to poverty shocks: there were 95.5 million people below the ‘lower middle income’ poverty line of US$3.20 a day (in terms of purchasing power parity) and 373.1 million people below the ‘upper middle income’ line of US$5.50 a day.2

4. Geography and the associated disparities in access to public services explains much of the inequality in China. Unequal access to infrastructure and municipal services, which is associated with rural-urban disparity, is a significant contributor to overall inequality. Disparities between coastal and inland provinces are also high. The quality of public services in rural and lagging regions is often significantly worse than in coastal urban areas, reflecting different fiscal capacities.

5. China has made progress in improving urban water supply and sanitation (WSS) services, but these are lagging in the rural areas. There is still a need to improve WSS management, particularly in rural areas.3 China’s rural population accounts for 50 percent of the total population, but only 73 percent of these rural residents have access to a piped water supply (compared to 95 percent in urban areas). While most rural households have some form of on-site sanitation (often basic septic tank facilities 4 ), safe and complete wastewater management services in rural areas lag behind water supply service provision. Nationwide, only 8 percent of the rural domestic sewage is collected and properly treated, mostly in coastal regions. Local governments in rural and peri-urban areas lack the technical and managerial capacity for operations and

1 “Poverty headcount ratio at US$1.90 a day (2011 purchasing power parity) (% of population) | Data,” data.worldbank.org. 2 “Poverty headcount ratio at US$3.20 a day (2011 purchasing power parity) (% of population) | Data” and “Poverty headcount ratio at US$5.50 a day (2011 PPP) (% of population) | Data,” data.worldbank.org. 3 China’s administrative hierarchy consists of central (capital) level, provincial level, prefecture level, county/district level, and township/town level. Rural areas refer to the areas at the township/town level and below. A township/town usually consists of a township-seat and several villages in the jurisdiction of the township/town, some are nearby, and some are remote. Urban areas in China refer to the residential, industrial, and business areas at the central, provincial, prefecture, and county levels. 4 Most rural townships/towns have on-site sanitation and rudimentary discharge pipes, and households collect wastewater using septic tanks and use the waste as fertilizer.

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service delivery of WSS, particularly for wastewater, and low household connection rates combined with low tariffs lead to sustainability challenges.

6. Local government financing challenges impact on the quality of public services in rural areas. Following China’s 1994 Tax Reform, local governments receive lower levels of fiscal transfers from the Central Government and are responsible for funding a larger share of local spending with their own funds. To finance investments for rapid urbanization and development, local governments have relied increasingly on complex financing structures, often in the form of ‘off-budget’ loans, which has led to unsustainable levels of debt. In response, the Central Government has introduced constraints on local government spending, along with measures to improve local debt management and limit off-budget borrowing and contingent liabilities.5

7. Public-private partnerships (PPPs) are viewed as a way to address these fiscal challenges and to improve service delivery in China. China’s Central Government actively promotes PPPs as an alternative procurement model for financing public infrastructure and services, recognizing the potential role PPPs can play in reducing the fiscal burden of local governments (provided that associated contingent liabilities are manageable), while bringing technical expertise, operational efficiency, and financing from the private sector. The PPP approach has been applied extensively in WSS in China,6 although less so in rural WSS. However, Chinese experience in WSS PPPs is mixed. Many PPP projects have been structured sub-optimally, have lacked rigorous and effective procurement processes, have not been tailored to the development challenge they were trying to solve (particularly in rural WSS, as discussed below), and have not clearly separated the roles and responsibilities of service provider and government.

8. China’s Ministry of Finance (MOF) and the National Development and Reform Commission (NDRC) recognized the shortcomings in PPPs in China and have recently undertaken a number of measures to encourage local governments to manage debt levels prudently. In December 2015, the MOF issued a document7 requiring that total debt of a local government should not exceed the quota allocated by its upper level of government.8 Local governments that exceed their quota are not allowed to borrow from any bank (including the World Bank). The MOF also strictly regulates PPP projects and tracks them through a PPP approval process. In March 2019, the MOF issued a document,9 elaborating clear regulatory criteria that PPP projects are required to meet to be eligible for approval. Two such criteria include (a) the cumulative contingent liability for all PPP projects in the local jurisdiction must be less than 10 percent of general budgeted expenditures in any given year and (b) any subsidies to the PPP partner must be paid based on performance. If these regulatory conditions are met for such approved PPP projects, any operating expenditure (OPEX) subsidies or viability gap funding paid by local governments to the PPP partner for providing long-term services to the public can be considered regular expenditure of the government, rather than as government debt. In addition, under such regulated PPP arrangements, any obligations to raise and repay commercial debt would be the responsibility of the PPP partner and not the local government. With these measures, the MOF and NDRC have begun to seek and support well-designed demonstration PPPs that present better PPP structures and mechanisms and that can be applied and promoted in different sub-sectors in China.

5 Article 35 of the Budget Law of the People’s Republic of China and a document issued by the State Council (Guofa No. 43, 2014). http://www.gov.cn/zhengce/content/2014-10/02/content_9111.htm. 6 According to the China PPP Center national PPP database, as of May 2019, there were 9,001 WSS PPP projects in China. 7 “Suggestions on Implementation of Debt Quota Management for Local Governments,” China Ministry of Finance. December 2015. 8 Debt quota allocations are allocated down through all levels of government, from province, to municipality, to district, and so on. 9 “Promoting Regulated PPP in China.” China Ministry of Finance. March 2019.

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

B. Sectoral and Institutional Context

9. Experience with WSS PPPs in China has been mixed. As noted above, PPPs have been applied extensively in WSS in China (although less so in rural areas) and have contributed greatly to the rapid expansion in wastewater treatment capacity. However, a PPP Risk Allocation Study conducted for this proposed project and the market sounding conducted by the International Finance Corporation (IFC) during the project preparation (see the Rationale for World Bank Involvement section below) identified the following general challenges with PPPs in WSS in China:

(a) State-owned enterprises (SOEs) dominate the market and often operate outside their core sector. (b) PPP projects typically focus more on construction of infrastructure rather than on sustainability of operations and service delivery, resulting in rapid system breakdowns and a cycle of ‘build- neglect-build’. (c) Contracts lack clarity on risk allocation and scope and typically lack performance-based payments. (d) There is rarely a requirement nor incentives in the PPP to connect households. (e) Tenders are often priced unrealistically low. (f) Government authorities typically lack the capacity to manage and enforce PPP contracts. (g) For projects in small towns and rural areas, local government payment risk is often a concern.

10. In addition, World Bank experience with WSS services in rural and peri-urban areas in China indicates a number of technical and management capacity challenges in the sector, including the following:

(a) Inappropriate design and technology. Water and sewage treatment plants tend to be overdesigned and/or overly complex because rural water use forecasts fail to account for migration patterns away from rural areas and expensive treatment technologies are often used. This results in unaffordable facilities that are costly to build and operate. (b) Unsustainable finances. While China promotes the principle of cost recovery in WSS systems, water and wastewater tariffs are too low to recover costs, and often, rural wastewater tariffs are not charged at all. As a result, operating revenues are low and, combined with costly and overdesigned facilities, the services are not financially sustainable and require significant government subsidy. (c) Few utility models. WSS is typically managed by separate district-level engineering bureaus with limited focus on customer service or business management. There are very few combined utilities for WSS serving peri-urban and rural areas and limited cases of integrated water management. WSS systems are also typically managed by men, with limited voice from women. (d) Household connections are incomplete. Especially for rural sanitation, the focus is on building treatment facilities and less on connecting households, leading to underutilized treatment plants. (e) Local people have little or no voice in decision making on WSS initiatives. This is particularly the case for women even though they are the primary household managers of water.

11. The proposed project is located in Jingyang District (Jingyang) in Sichuan Province in southwest China. Sichuan Province is one of China’s less-developed economies, ranking 22nd among China’s 31 mainland

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

provinces by gross domestic product (GDP) per capita, and has an estimated population of 83 million, of which 48 percent is rural.10 As typical with provinces in China, the rural population is declining as the younger generation is attracted to urban areas. Sichuan Province’s GDP per capita in 2018 was about US$6,811 (below the national average of US$9,770). Agriculture represents 11 percent of the GDP in Sichuan Province, employing nearly half of the population,11 most of which lives in rural areas such as the one covered under the project. Sichuan is divided into 21 prefecture-level divisions, 18 prefecture-level cities, and 3 autonomous prefectures. It has 54 districts, 17 county-level cities, 108 counties, and 4 autonomous counties.

12. Jingyang is the main district of Deyang City and is a priority area for water pollution control as it is in the upstream tributary area of the Yangtze River, and clean-up of the river is a priority of the Government of China. Draft legislation has been proposed to protect the river through pollution control and water quality improvement. Climate change is also expected to make the upstream Yangtze River region more vulnerable to droughts.12 Accelerating urban construction and development pose significant challenges to the local water environment in Jingyang, even though the district has in the past 20 years implemented several rural water and environmental protection initiatives. Jingyang is an industrial city located on the northeast edge of the Chengdu Plain in Sichuan Province, 70 km north of Chengdu, and covers 11 towns and 88 villages around (but not including) Deyang City. The total population of Jingyang is over 750,000, with about 47 percent living in rural areas. The proposed project area focuses on towns and villages (rural and peri-urban) of Jingyang, covering an area of approximately 450 km2 and a population of 380,000.

Current Situation for Water Supply Management

13. In Jingyang, approximately 73 percent of the population in the peri-urban and rural project area currently has access to a piped water supply system (211,600 people), in line with the national average of 73 percent. The current supply of piped water, however, is intermittent and unreliable, and water quality poses potential health concerns. The water source is mostly shallow aquifer groundwater along with some local reservoirs, both of which can be easily contaminated. Naturally occurring iron and manganate content in the groundwater exceeds standards. For households that rely on boreholes, the situation is even worse as the water quality varies considerably depending on the characteristics of the groundwater, time of the year, and proximity to any contamination source. In addition, drinking water sources are not properly protected from encroachment and pollution, posing further risks to hygiene and safety. Many households keep drinking water tanks (a tank of 19 Liters cost CNY 38), for emergency and/or regular drinking use. Water quality testing is sporadic, with the district lacking appropriate equipment and personnel, and drinking water sources are not properly protected from encroachment and pollution, posing further risks to drinking water hygiene and safety. Nonrevenue water (NRW)13 is high at around 32 percent and the systems are typically small-scale, incomplete, and scattered. Even though the water supply systems are relatively new (having been largely rebuilt after the 2008 Sichuan earthquake), the focus (including funding allocations) has been on construction rather than

10 National Bureau of Statistics. 11 Sichuan Statistical Yearbook 2018, Sichuan Statistical Bureau. 12 The results of a study based on CMIP5 climate change forecast data and a variable infiltration capacity (VIC) hydrological model (Guihua, Lu & Wu, Hongwei & Xiao, Heng & He, Hai & Wu, Zhiyong. 2016. “Impact of Climate Change on Drought in the Upstream Yangtze River Region.” Water. 8. 10.3390/w8120576) show that temperatures in the upstream Yangtze River region will generally rise and annual precipitation slightly increase in 2021–50, but that the summer and fall precipitation in most areas will drop. This means the next 30 years will see more frequent and prolonged droughts, and stronger regional droughts in the upstream Yangtze River region. 13 NRW is the difference between the volume of water that is treated and distributed and the volume that is billed to consumers.

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operations, maintenance, and service delivery. This has led to premature breakdowns of systems, affecting service and sustainability.

14. Sichuan provincial and county governments are now proactively planning and implementing investment programs aimed at improving WSS services. Objectives include moving away from decentralized groundwater sources and toward centralized surface water systems and where feasible integrating rural townships into the service areas of larger urban utilities nearby. For townships that cannot be connected to larger systems, governments support development of independent piped water systems.

Current Situation for Wastewater and Sanitation Management

15. In Jingyang, only 15 percent of the population in the peri-urban and rural project area is connected to a formal sewer system (43,350 people), with the rest of the population being served by septic tanks and on-site treatment, many of which are not well designed or are malfunctioning. In the project area, there are six recently commissioned wastewater treatment plants (WWTPs) and 154 anaerobic tanks (large septic tanks). These WWTPs all reportedly meet required standards but are operating sub-optimally due to overdesign and insufficient inflows (inflows are only 10–15 percent of design capacity). The local government has no capacity to operate the WWTPs, and they are currently operated by the construction companies that built them, under year-to-year contracts. The local government has not focused attention until now on building sewers and connecting households to the wastewater system. Some households in the area use septic tanks (most are functioning); otherwise, wastewater is discharged directly into nearby rivers without treatment—leading to environmental pollution and broader public health risks downstream. Wastewater tariffs are only charged in a few parts of the project area.

16. Sichuan’s current Three-Year Action Plan for Urban Sewage Treatment Facilities Construction (2017– 19) (Three-Year Action Plan)14 requires that, by 2020, sewage from 50 percent of administrative villages in Sichuan Province should be collected and treated. Sichuan has planned to construct 1,238 wastewater treatment facilities and complete investment of CNY 38.8 billion (US$5.63 billion) to improve wastewater management. The provincial plans also aim to improve existing water supply service quality and capacity in peri-urban areas. Moreover, the development of ‘complete’ wastewater management services (that is, starting from improved household toilets, through sewage collection, treatment, and safe final disposal) is at the core of the province’s development goals and is closely aligned with the Three Red Lines and Ecological Civilization goals.15

Current Institutional Arrangements for Service Delivery

17. Piped water systems in Jingyang are owned and managed by the Water Affairs Bureau (WAB) of Jingyang District Government (JDG). There are over 40 water service providers in the project area, and water treatment facilities are operated by a mixture of bureau staff, water supply companies, farmers associations, and local communities. Wastewater and sanitation management are the responsibility of the Housing and

14 Three-year Action Plan for Urban Sewage Treatment Facilities Construction (2017-2019): issued by Sichuan Department of Housing and Urban-Rural Development. 15 China’s 13th national FYP for Social and Economic Development (FYP, 2016–2020) prioritizes the ideas of ‘Ecological Civilization’ and ‘Beautiful China’. These goals together ensure China’s economic development is characterized by more ‘harmonious coexistence between humans and nature’—balancing priorities of GDP growth, with a new legal and policy framework that facilitates green and low-carbon development.

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Urban Development Bureau (HUDB) of the JDG. The WWTPs are operated under temporary contracts by the contractors that built them. As noted, the focus in both sub-sectors has been on construction and operation of assets. There is limited focus on maintenance, service delivery, connecting households and customer service, or on integrated water resource management as the WAB and HUDB operate as separate engineering entities rather than as a single utility. Some of the current workforce is under contract, reporting to different business units. There is no business or asset management planning. There are currently few performance indicators focused on service delivery.

18. WSS cost recovery in Jingyang is low, particularly with respect to wastewater. The cost recovery from tariffs for operational expenditures of wastewater is around 20% for the wastewater plants that are in operation. Costs that cannot be covered by tariffs are covered by the resources of the local government. Inefficiencies in water management, together with high levels of water losses/NRW and low household connection rates, result in much of the water produced not being billed and few paying customers. Rural sanitation and wastewater services are not currently billed in most parts of the project area. There is significant room to improve system efficiency and expand service for WSS. As is the case elsewhere in China, rural water and wastewater tariffs are below the level of operation and maintenance (O&M) cost recovery.16 However, local governments, as a matter of national rural development policy, ensure that capital and operating costs are covered by tariffs or with subsides, as needed.

Climate Change Context

19. The project area’s main climate change vulnerability is increased stress on local water resources. The project area lies along the sensitive upper tributaries of the Yangtze River, and unpredictable changes in rainfall patterns potentially threaten water source availability and the project’s ability to supply water to rural beneficiaries. This risk is compounded by the current conditions, where untreated wastewater is being discharged directly into local water bodies. Therefore, properly managing efficient rural WSS systems to save water and duly maintain infrastructure is important for adaptation to climate change-related water stress.

C. Relevance to Higher Level Objectives

20. This project supports China’s national and provincial policy plans and priorities, including the Development-Oriented Poverty Reduction Program for China’s Rural Areas (2011–2020). These plans and policies promote the development of rural infrastructure and the expansion of access to safe drinking water in rural areas. The proposed World Bank financing helps improve access, quality, and affordability to WSS services in rural areas of Sichuan, through a PPP model that aims to combine fragmented WSS services under one sustainable utility model with modern systems and a clear risk allocation that can be replicated in Sichuan Province and elsewhere in China. In particular, the project activities and achievements are highly relevant to support China’s NCDP and the Sichuan Three-Year Action Plan; and the project will also help bridge the gap between urban and rural service provision

21. The project supports the Chinese Central Government's ongoing efforts to strengthen policies for PPP-financed projects in key sectors. Document No. 10,17 issued by the MOF in March 2019, identifies an

16 Current tariff rates in Jingyang are CNY 2.0 per m3 average for water and notionally between CNY 0.4 and CNY 0.85 per m3 for wastewater (although wastewater tariffs are only charged in a few locations), while O&M breakeven points when the project investments have been made are CNY 2.4 per m3 and CNY 4.0 per m3, respectively. 17 See footnote 9.

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objective to improve and standardize specific aspects of PPP project arrangements, including: allocating risk between the public and private parties, ensuring that performance-based payment mechanisms are used, ensuring value for money of the investments, and ensuring transparency in financial management (FM). This project was selected by the MOF and NDRC (see section II-E) to be a pilot for these PPP improvements, and the MOF and NDRC officials responsible for PPP policy in China have participated in key preparation activities— from pre-identification to appraisal. The project preparation itself has already contributed to institutional strengthening, guiding the JDG to manage sophisticated PPP contracts and shift to its new role as WSS sector regulator, and by piloting improved PPP design practices, including legal due diligence, technical assessment, and PPP procurement, which are not typically done in China. Such a model could potentially be scaled up to the 2,500 similar rural counties across China and could also be replicated to improve water and sanitation services in other countries. All of the project experience and lessons will be summarized and shared with relevant officials in Sichuan Province and at the China Central Government.

22. The project is consistent with the World Bank Group (WBG) Country Partnership Framework (CPF) for China (FY2020–2025) (Report 117875-CN), which was discussed by the Board of Executive Directors on December 5, 2019. The project introduces an innovative approach focused on one of China's key development challenges – closing the urban-rural gap in access to quality public services – while responding to the unique set of technical, institutional, and financial challenges in the rural WSS sector, described above. The project supports a new institutional set-up to provide WSS services in Jingyang, which may serve as a demonstration project for PPP reforms on the national level and in other regions in China. It further responds to several of the CPF’s selectivity criteria by delivering critical services in lagging regions, fostering the private sector, and strategic piloting of approaches to address key development priorities.

(a) Delivering critical services in lagging regions. This project provides innovative institutional and managerial solutions for WSS in rural China by creating a modern, efficient WSS utility that improves access to and quality of WSS services. The project draws on World Bank global water sector experience, including extensive project experience in China, to introduce systematic institutional changes—including modern utility management, appropriate treatment technologies, tariff rationalization, and cost recovery—for the provision of sustainable rural WSS services. The project also supports other domestic and global public goods, such as greener growth by protecting local environments through reduced discharge of untreated wastewater, protecting water sources, reducing groundwater use, and constructing disabled-accessible public toilets. The experience and lessons from this project are relevant for scale-up to similar rural districts across China and in other countries. (b) Fostering private sector engagement. This will be the first World Bank-financed PPP project in the water sector in China. The water sector PPP experience in China has been mixed, and there are needs at different levels to strengthen the market. At the national level, private entities in the water sector need further clarity on PPP policies and regulations to inform their market analyses and corporate strategies. Both the public and private entities need better clarity on their respective roles and responsibilities for a given project, as well as on the allocation of risks for each party so that both sides can understand and manage their roles and risks. At the transaction and contracting level, the sector can benefit from improved processes and practices for PPP project preparation and procurement, including disclosure of possible market advantages conferred by the status of state-owned enterprise, in line with World Bank procurement policy. This project responds to all of these needs by introducing a global, best-in-practice approach intended to serve as a demonstration for PPP projects in the rural water sector in China. The

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project leverages financial and knowledge resources from the Government and the World Bank Group to attract private sector expertise in WSS system operations, customer service, and financial sustainability, along with private sector capital investment. As a demonstration, the project experience will be shared widely in China and will help strengthen the market environment and give greater confidence to the private sector.

(c) Strategic piloting of approaches to address key development priorities. This project has been prepared by the World Bank and IFC working collaboratively as a joint team based on international good practice. The World Bank brings global technical experience in the water sector and project experience in China. The IFC is the formal transaction adviser to the client for this project, bringing global experience in project financing and infrastructure PPPs and advising the JDG on the PPP preparation, due diligence, project structuring, and procurement strategy to optimize open and transparent competition in selecting an operator. The pre-qualification and the bidding process will ensure that the selected utility operator has the technical and financial qualifications to provide quality services. The lessons of this demonstration PPP project for rural WSS services can be replicated in similar rural settings in China and the project will facilitate the dissemination of this project’s experience.

23. The project supports other World Bank corporate objectives, including the following:

(a) Mobilizing Finance for Development. The proposed project leverages public assets to mobilize capital from the private sector through a well-structured PPP for rural WSS service delivery. The design of the PPP ensures that the PPP partner invests equity into the project, thereby easing financial pressure on the JDG while improving service delivery and system efficiency through the private sector expertise. (b) Citizen engagement. Citizen engagement is seen as key to the success of the project. The project has been designed to actively engage local citizens (who are the end users of WSS services), with particular emphasis on female participation through community-based monitoring of customer satisfaction, regular community meetings seeking feedback on WSS service quality, and customer feedback mechanisms established within the project company (Project Company).18 The project also includes Water, Sanitation, and Hygiene (WASH) behavior change campaigns (BCCs) to promote household connections to the WSS systems and to motivate better community hygiene practices. The project approach for citizen engagement includes differentiated roles and responsibilities for the Government, the Project Company, and the community members (see section III-A). (c) Gender inclusion. WSS systems in Sichuan are typically managed by men. 19 Women play a significant role as the primary managers of WASH in families and households; yet, they have little or no information on WSS planning, no involvement in water operations or their management, and little or no voice in decision making or feedback on water services at the community level. For example, studies on village committees have shown an average of 25 percent of members

18 Special purpose vehicle (SPV) Project Company to be formed by the winning bidder for the PPP Agreement, see section II-A. 19 An International Benchmarking Network (IBNET)/World Bank Utility Survey from 2018 to 2019 found that only about 25 percent of water and sanitation utility employees in China are women.

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are women.20 To address this gap, feedback from local monitoring groups formed under this proposed project will play a key role in informing monitoring reports on the private operators in each village and their key performance indicators (KPIs), with poor performance being linked to a potential deduction in payment for these companies. To increase gender inclusion, the newly formed village monitoring groups (appointed by the village committees) will be required to have at least 60 percent female members, a substantive shift from current norms. Further, at least 40 percent of the participants providing feedback on WSS services in community meetings are targeted to be women. These targets and specific actions on outreach to women also aim to address the gender differential in access to information on the project.

II. PROJECT DESCRIPTION

A. Project Overview and Key Concepts

24. The proposed project seeks to demonstrate an improved institutional model for delivering integrated WSS services in rural areas in China. The project creates a modern, rural WSS utility to consolidate existing infrastructure and expand services to new customers in Jingyang. The project also introduces an approach to design and operate the WSS utility as a PPP based on international best practices, with the aim to improve the quality and efficiency of the WSS services delivered. By investing in service delivery and infrastructure, the project also intends to increase the resilience of communities in the project area to water stress, which is expected to be exacerbated by climate change. Recognizing the WSS and PPP challenges discussed in section I and the financing constraints on the local government, the project strengthens institutional capacity for high-quality service delivery by the newly established WSS utility and also strengthens the institutional capacity for the JDG to effectively manage the PPP contract and provide regulatory oversight for the WSS sector. The project focus on institutional strengthening began with the detailed studies and analysis conducted during project preparation (see section II-F), and lessons from the project can be scaled up in China.

WSS Utility

25. The project seeks to transform rural WSS service delivery through the establishment of an integrated WSS utility, which will be an Special Purpose Vehicle (SPV) Project Company established between the JDG and a competitively selected operator. The Project Company will take on the typical functions of a modern utility in the project area. Holistic utility functions include construction/expansion/rehabilitation of WSS infrastructure, efficient and optimized system O&M, water and sanitation service delivery, customer service and interface, billing and collection, accounting, long-term asset management, and utility administration. The Project Company will also take on core responsibilities of water quality compliance. The Project Company will be monitored in accordance with a specified performance regime and clearly defined KPIs set out in the PPP

20 This gap was confirmed qualitatively during the project social analysis, and while recent quantitative data specific to the project area was limited, the Women in Development Index for Enshi Autonomous Prefecture (2010) showed that only 25 percent of the members of villagers’ councils were women. (Source: Zeng, Benxiang. 2014. Women 's Political Participation in China: Improved or Not? International Journal of Women's Studies. 15(1):136-150)

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Agreement (see next paragraph), including KPIs for service coverage, service quality, customer satisfaction, system efficiency, and financial sustainability, among others.

PPP Agreement and Procurement Process

26. The JDG and the Project Company will enter into a 25-year, output- and performance-based PPP Agreement that will incentivize expanded coverage, efficiency, and improved customer service of the WSS system. The PPP Agreement will be structured using the ‘Concession with Subsidy’ model.21 Under this model, JDG retains legal ownership of the WSS system and awards a long-term concession to the Project Company who will have beneficial use and ownership to construct, expand, rehabilitate, operate, and maintain the WSS assets. Under the PPP Agreement, the Project Company will be contractually mandated to expand coverage of WSS services (pipe networks and household connections), deliver high-quality WSS services, provide responsive customer service, and sustainably operate and maintain the system assets. The PPP Agreement will require the Project Company to hire existing members of the workforce that wish to transfer from the current service providers. Under the PPP agreement the Project Company will also be required to maintain a minimum level of equity (debt to equity ratio), ensuring that the Project Company and PPP partner are fully committed and incentivized over the long-term contract period. The JDG will provide performance and regulatory oversight of the Project Company. Annex 3 includes further detail on the allocation of roles and responsibilities under the PPP.

27. The PPP will consist of two phases. Phase 1 will be a five-year (2020–2025) institution establishment and infrastructure construction/rehabilitation phase, coinciding with the World Bank project implementation period. During Phase 1, the Project Company will be established as an integrated WSS utility and will undertake the engineering works as outlined in Subcomponent 1b. During the construction phase, the Project Company will operate the existing WSS system in accordance with the existing (pre-project) performance standards for service delivery. Phase 2 will be a 20-year (2025–2045) service delivery and operations phase, commencing toward the end or after the World Bank project implementation period. During Phase 2, the Project Company will operate the expanded and upgraded WSS system and will be subject to service level standards, specified by rigorous KPIs in the PPP Agreement.

28. The PPP Agreement will be output- and performance-based, with clearly defined KPIs linking performance payments to the Project Company. The KPIs will be defined with targets that are based on sector efficiency values (water, energy, and so on) and that incentivize the Project Company to innovate and optimize the construction and operation of the WSS utility and infrastructure. KPIs will include, but not be limited to, expanded WSS service coverage, water and wastewater treatment capacity, increased water metering, NRW, piped water quality, treated effluent quality, energy consumption, efficiency in redressing customer complaints, and cost recovery. In particular, because energy consumption (for pumping, treatment, and distribution) is the main operational cost component of WSS systems, the efficiency KPIs in the PPP Agreement will be a major incentive to reduce water losses (NRW) and energy use. The performance regime under the PPP Agreement will be overseen by a third-party independent engineer, to be hired jointly by the Project Company and JDG before effectiveness of the PPP Agreement. This kind of a performance-based incentive structure is unique for water sector PPPs in China. See further details on the PPP in section II-A and annex 3.

29. Revenues to the Project Company will come from water and wastewater tariffs as well as significant subsidies from the JDG. The Project Company will collect tariff revenue directly from customers. The current

21 During project preparation, three different PPP structuring models were considered. See section IV-A and annex 3 for details.

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levels of water and wastewater22 tariffs in Jingyang are insufficient to fully cover operating costs. The JDG will need to provide subsidies to the Project Company under the PPP Agreement for the entire duration of the agreement to cover 100 percent of capital expenditure (CAPEX) and a portion of OPEX. The JDG has committed to funding the required subsidies and has included/approved these subsidies in the next three years of its budget. The PPP Agreement will specify formulas for paying CAPEX and OPEX subsidies under a performance- based regime linked to the WSS service delivery KPIs described earlier. The OPEX subsidies will be based on predetermined ‘efficient level’ O&M expenses, including energy. An innovative feature of the PPP design under this project is that the PPP bidding documents will use the CAPEX subsidy as the bid parameter, incentivizing bidders to minimize the total subsidy paid over the life of the agreement. The JDG is conducting a WSS tariff road map study23, with the support of the World Bank, to identify a medium- to long-term pathway for raising tariffs (and reducing subsidies) so as to be both affordable to customers and financially sustainable for the WSS utility and JDG. Further details on the Project Company costs, revenues, tariffs, and subsidies are included in the financial analysis discussion of section IV-A and in annex 5.

30. Procurement of the PPP partner will be through a competitive bidding process and in line with international best practice. Prequalification criteria for the PPP partner have been developed to ensure that only bidders with relevant operating experience are eligible to bid. SOEs are not precluded from bidding. However, as per Bank procurement policy, they would need to establish that they: a) are legally and financially autonomous (implying that they are not dependent on subsidies); b) operate under a commercial law; and c) are not under supervision by the agency contracting them. Also, Bank procedures allow the rejection of abnormally low bids that raise material concern about the capability of the bidder to meet the contract conditions for the offered price. This is designed to ensure that the bid price is economic to provide quality services and competitive among the pre-qualified bidders, irrespective of their ownership (SOE or private). Market sounding carried out for the project indicated that there is potential interest from both SOEs as well as private companies. Bid parameters used in the PPP procurement are defined so that qualified bidders compete to minimize the total cost borne by the JDG over the life of the agreement.

B. Project Development Objective

PDO Statement

31. The objectives of the project are to improve access to water supply and sanitation services and improve the quality and efficiency of water supply and sanitation service delivery in select peri-urban and rural areas of Jingyang District of Deyang City in Sichuan Province.

PDO Level Indicators24

32. The following five Project Development Objective (PDO) level results indicators reflect the specific outcomes that the project is aiming to achieve:

(a) Number of people benefiting from improved water supply services25

22 Wastewater tariffs are not currently collected in Jingyang; however, once construction has been completed, the JDG will introduce billing for wastewater services for the first time. 23 The tariff roadmap study is currently underway and expected to be completed by the end of 2021. 24 See the Results Framework in section VII for definitions of the indicators. 25 This indicator is also disaggregated by gender.

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(b) Number of people benefiting from safely managed sanitation services25, 26 (c) Percentage of customers satisfied with the services provided by the Project Company25 (d) Reduction in Non-Revenue Water Rate (NRW) (percentage of NRW in total water produced) (e) Cost recovery in water supply services

C. Project Components

33. The project has two components:

Component 1: Institutional Strengthening and Infrastructure Investments to Improve WSS Services in Jingyang District (Estimated cost: US$153.4 million; IBRD loan: US$99 million) (Water: 34 percent, wastewater: 66 percent)

34. This component has three key activity areas:

(a) Establishment of a modern, integrated WSS utility. The project will support the establishment of the WSS utility and systems to enable efficient WSS service delivery. Establishing the utility includes preparing and executing the PPP transaction as well as setting up and developing the institutional systems (for example, management, personnel, administration, and billing and accounting). Project support will also include developing an integrated smart water management platform and installing smart meters to enable the Project Company to monitor, manage, and operate WSS system assets efficiently. Establishing a financially sustainable, efficiently managed, and well-maintained WSS utility will lead to a reduction in NRW and more reliable water and sanitation services with less service interruptions and more consistent water quality. The investments will enhance water security and reduce the discharge of untreated wastewater into the tributaries of the Yangtze River (an important source of water), thereby increasing the reliability and quality of the water and making the residents in the targeted areas more resilient to climate change-exacerbated water shortages. (b) Establishment of WSS utility customer service mechanisms. The project will support the WSS utility to set up and conduct ongoing citizen engagement activities, including a community-based customer satisfaction survey, community meetings on WSS service quality, and WASH BCCs. The project will also support establishment of customer feedback mechanisms within the WSS utility, including a customer call center and a smartphone application to address complaints, questions, requests for repairs, and general feedback on the services provided. All of the citizen engagement activities and customer feedback mechanisms will be overseen and managed by a customer relations officer designated within the Project Company and in coordination with a social focal point within the Project Management Office (PMO) (see section III). (c) Support for engineering works. The project will support engineering works for both water supply and sanitation, as listed below. All investments under the project will be implemented and operated by the Project Company, providing the JDG with a single interface and contracting party, rather than the many contractors and operators.

26 Safely managed sanitation services mean access to (a) sewerage systems or (b) septage collection, together with, in each case, adequate treatment and disposal.

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(i) For improved access to higher quality and more efficient piped water systems. The project will support consolidation and upgrading of the current 40 treatment facilities operated by different providers (of which 32 utilize groundwater as source, 7 utilize surface water, and 1 utilizes a nearby urban water treatment plant [WTP] as source) to a more integrated configuration using two centralized surface WTPs27—one newly constructed (Bailong WTP, with capacity of 25,000 m3 per day) and one expanded (Xinliu WTP, with capacity of 2,000 m3 per day)—operated by a single service provider. The above activities will lead to a more efficiently operated utility and an increased supply of good quality water. The project will also support protection of drinking water source sites and water intakes/wells, construction and rehabilitation of pipe networks to expand the network and reduce losses/NRW (including 148 km of transmission main, 347 km of distribution pipes, and 459 km of household connection pipes), and installation of 86,000 smart meters. All these investments will increase the supply of water and the service reliability, thus increasing community resilience to potential climate change-related droughts. The project will also fully finance the costs of household water supply connections, targeting to cover 94 percent of households. (ii) For improved access to higher quality and more efficient sanitation. The project will support upgrading four existing WWTPs28 with a total capacity of 12,400 m3 per day and construction of 10 new WWTPs29 with total capacity of 335 m3 per day. The project will support construction of 93 km of trunk sewer pipes, 788 km of branch network sewer pipes, 1,063 km of household service pipes, and 51 wastewater pump stations (42 new and 9 existing septic collection tanks converted into pump stations). In hilly areas, the project will support construction of individual household septic tanks to serve 6,712 scattered households. The project will fully finance the costs of household sewer service connections and septic tanks, for a total of 60,086 households. All these activities will reduce the volume of untreated wastewater discharged into water bodies, reducing pollution and lowering health risks to the population, as well as lowering the cost of treating the wastewater to given standards. (iii) Other works. There will also be improvements to public facilities, including providing access to services for the disabled. Recent projects in China have also demonstrated that making small investments in community public areas to enhance residents’ experience creates an environment where households are more willing to connect. The Feasibility Study Report (FSR) design includes some small investments for rehabilitation, ‘greening’, and beautification of public areas.

27 Project WTPs will use conventional treatment processes, consisting of coagulation, aeration, sedimentation/clarification, and filtration. 28 The upgraded WWTP at Bailong will have a treatment capacity of 395 m3 per day and will utilize aeration tank and secondary sedimentation treatment technology. The other three upgraded WWTPs will have a combined capacity of 10,700 m3 per day and will utilize the following treatment technology: primary treatment, cyclic activate sludge system, coagulative precipitation, denitrifying deep-bed filter, cloth filter, and ultraviolet disinfection. 29 Among the new WWTPs, treatment technologies and capacities are membrane bio-reactor (MBR): 390 m3 per day, trickling bio- filter: 145 m3 per day, anaerobic/anoxic/oxic: 200 m3 per day.

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Component 2: Institutional Capacity Building and Technical Assistance (TA) for PPP Oversight, Project Management, and Scale Up of the PPP Approach (Estimated cost: US$1.0 million; IBRD loan: US$1.0 million).

35. This component has four key activity areas:

(a) Engagement of a project manager/independent engineer. The project will support the hiring of an independent engineer (consultant) to oversee the performance of the PPP Agreement, to supervise infrastructure construction, and to supervise the environmental and social management of the project. The independent engineer will also be responsible for verifying the KPI results and the energy and water efficiency gains reported by the Project Company against the targets in the PPP Agreement. (b) Local government capacity building for PPP oversight and project management. The public counterpart (especially HUDB and the PMO) will have key functions that are not delegated to the Project Company, including implementation of WSS policy and regulations, regulatory oversight of the Project Company, business planning, tariff setting, long-term asset management, and WSS system planning. The project will include capacity-building activities to support HUDB and the PMO carry out these functions, such as project management and PPP oversight training, technical training, FM, and PPP procurement training, as well as study tours of successful water sector PPP projects in China and abroad. Project management and implementation support will include management of and coordination with the independent engineer; establishment and operation of a monitoring and evaluation (M&E) system; monitoring of Project Company KPI and efficiency performance; and acquisition of office equipment, vehicles, and other operating resources (c) Coordination of gender inclusion and citizen engagement (GI&CE) activities. The project will support the PMO to supervise and monitor the GI&CE activities and customer feedback mechanisms executed by the Project Company (described in Subcomponent 1b). The PMO will designate a social focal point to coordinate closely with the Project Company on the community- based satisfaction survey, the community meetings, and the operations of the customer call center and smartphone application (see the institutional arrangements discussion in section III). (d) Documentation and sharing of project experience (including lessons learned and PPP project templates). The project will support TA activities to identify mechanisms for scaling up the PPP approach developed under this project to other areas across Sichuan and China. In particular, the project’s overall lessons in institutional strengthening and structuring the PPP will be highly relevant to upstream PPP policies in China, including the implementation and investment decisions under the ongoing Sichuan Province Three-Year Action Plan (see section I). Specific TA activities include (i) preparing a summary report on experiences and lessons learned in PPP project preparation and procurement, (ii) preparation of PPP template documents to be used in the scale-up and replication of the project approach (for example, model contracts, bidding documents, and project management tools), and (iii) dissemination events/publications at the provincial/national level.

Readiness of PPP Transaction

36. The project has been prepared to meet domestic requirements as well as taking international good practice into account. It is anticipated that: (a) requests for proposals for the PPP will be issued to qualified

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bidders in June 2020. The request for proposals will be only sent to pre-qualified firms that can demonstrate that they meet the technical and financial requirements to deliver the required services. To pre-qualify, companies would have to submit information on their ownership, qualifications, experience, and financial statements, allowing for a transparent process to assess the eligibility of a company to be pre-qualified; b) the private sector partner will be selected by October 2020, and (c) the PPP will reach financial close by December 2020 and that construction will commence soon thereafter. The construction (Phase 1) is expected to be completed by the end of 2024; the PPP will then step into Phase 2 (O&M) from the beginning of 2025. The PPP procurement documents and procurement processes will be subject to World Bank Operations Procurement Review Committee30 (OPRC) review and no objection.

Project Financing

37. The total estimated project amount is US$154.4 million, including price and physical contingencies. The JDG will finance US$6.5 million as counterpart funds. The remaining financing will come from the World Bank loan (US$100 million), and the Project Company will be responsible to raise US$47.9 million, either through equity or commercial loans, with the requirement that the equity investment must be a minimum of 20 percent at all times to ensure financial sustainability of the Project Company. The World Bank loan will be on-lent by the JDG to the Project Company at the same cost provided by the World Bank to the MOF. The proposed lending instrument is Investment Project Financing (IPF) with a 5-year implementation period, a maturity of 25 years, and grace period of 6 years. For more information on the financing arrangements, see section IV-A and B and annex 1.

Table 1. Project Cost and Financing by Component IBRD Project Cost IBRD Financing Project Components (US$, Financing (US$, millions) (%) millions) Component 1: Institutional Strengthening and Infrastructure Investments 153.37 99.0 64.67 to improve WSS Services in Jingyang District Component 2: Institutional Capacity Building and Technical Assistance 1.00 1.0 100.00 (TA) for PPP Oversight, Project Management, and Scale Up of the PPP Approach Total project costs 154.40 100.0 64.78 Total financing required 154.40 100.0 64.78

D. Project Beneficiaries

38. The main beneficiaries are rural residents in the project area of Jingyang that will directly benefit from newly constructed or rehabilitated water supply and wastewater services and connections, about 50 percent of whom are women. It is anticipated that, by end 2025, out of 235,000 residents in the project area, 94 percent will be served by improved water supply service and 85 percent will be served by safely managed sanitation service. This will involve 86,310 households for water supply and 53,374 households for sewer connection and 6,712 households for access to safely managed septage system. Additionally, because the project as

30 The OPRC reviews high value, high risk procurement contracts for goods, works, non-consulting, and consulting contracts over specified values, by risk and by type of contract, as detailed in the World Bank Procurement Procedure.

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implemented through the PPP will provide higher-quality water services and wastewater management, a larger number of residents in the district will also indirectly benefit. The project’s holistic utility service delivery model and introduction of commercial financing and expertise will benefit the WSS sector through modernization, operational efficiency, and capacity building for district officials to more effectively serve the broader public.

E. Project Theory of Change and Results Chain

39. The Theory of Change for the proposed project is shown in Figure 1, illustrating the link from the project’s key activities through to the main project objectives and outcomes. The project aims to improve access to WSS services and improve the quality and efficiency of WSS service delivery. The project draws on best practices from domestic and international experience to introduce a new model for a holistic, integrated WSS utility operated as a PPP in peri-urban and rural areas of Jingyang in Sichuan Province. Engineering works expand and improve WSS infrastructure and facilities, and citizen engagement activities will increase women’s and men’s engagement in WSS service quality monitoring and improvement and motivate positive changes in community WSS behaviors. Establishing community monitoring groups, with a majority being female members, will reduce the gap in women’s voice in WSS service delivery and foster increasing their role in broader WSS community decision making. The project pays special attention to institutional strengthening, through establishment and capacity building of the new integrated, single WSS utility, and through capacity building for the JDG to play its new role as WSS sector regulator and overseer of the PPP arrangement.

40. The success of the project following the Theory of Change relies on several assumptions. First, it is assumed that in setting up the WSS service provider (Project Company) under the PPP model, there will be sufficient interest from qualified operators to participate in the bidding. The project preparation work between the World Bank, the client, and the IFC transaction advisory support help ensure this. Second, based on recent surveys31 conducted in similar regions of China, it is assumed that rural households in the project area will be willing to pay affordable tariffs for WSS services. The project citizen engagement activities help ensure increased household connections and payment of tariffs. Third, it is assumed that the JDG will secure annual budget for the subsidies required under the PPP arrangement. Budget has already been committed for the next three years in the district budget, and the JDG’s close participation in the project preparation and the selection of the proposed PPP structure help support this condition into the future.

(see Figure 1 on the next page)

31 See the references and assumptions in the economic analysis section of annex 5.

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Figure 1. Project Theory of Change Diagram

Activities Outputs Outcomes/PDOs Long-term outcomes Preparation Support • PPP design & options analysis An established WSS service • PPP transaction support provider (Utility) • Robust and financially sustainable WSS Utility Component 1 A customer service division within delivers high-quality WSS the utility services Establishment of a modern • Improved water and energy WSS utility (through PPP) An integrated smart water Improved access to efficiency of WSS service • management platform Setup of utility (contract, WSS services delivery staffing, functions, KPIs, etc.) • Reduced pollution and • Customer service mechanism Infrastructure established: • Number of people improved environment • Capacity building benefiting from improved Water: protected water sources, water supply services WTPs, pipe network, household • Improved public health • Number of people connect Engineering works: benefiting from safely • Increased community • Piped water systems Sanitation: sewer pipe network, managed sanitation engagement in WSS service • Sanitation systems WWTPs, septage collection and services delivery treatment, household connect • Increased voice of women Component 2 in community WSS and Engagement of independent Service delivery and KPI reports resilience planning engineer for monitoring • Increased resilience of project area communities Capacity building for local Local government staff with Improved quality and to climate change–related government improved skills & capacity efficiency of WSS service droughts • PPP oversight & mgmt. delivery • Improved financial situation • WSS policy and regulation • Annual community-based • Percentage of customers of the JDG • satisfaction survey and satisfied with the services Project management • Rural WSS utility PPP model ▪ Gender Inclusion monitoring committees provided • Percentage of women w/ replicated in Sichuan and • Company service more China responsive to women and men voice on WSS services Coordination and oversight of in communities • NRW • Project experience is • Cost Recovery: water documented and shared in GI&CE • Customers are aware and supply service Sichuan and China understand more about benefits of WSS Documentation and sharing of project experience Summary report on project • Inform China’s PPP policies experience • Dissemination workshops (including lessons learned and Replicate lessons: regulations, PPP project templates) policy, and knowledge sharing

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F. Rationale for World Bank Involvement and Role of Partners

41. The MOF and NDRC sought cooperation with the World Bank to develop demonstration projects for improved PPP approaches across several sectors in China, including water, transport, and energy. In light of the technical, financial, and institutional challenges presented in section I-B, this project was selected by the MOF and NDRC from a large database of potential projects and has benefited from close participation and support from their experts at the central, provincial, and district levels. This project was selected as a priority, representative demonstration project for the rural WSS sector in China because the project area faces many challenges that are typical to the rural WSS sector in China and because Jingyang, like many counties/districts in China, has reached its debt quota. During project preparation, a World Bank Group task team—including experts from the World Bank and the IFC PPP Advisory team (IFC C3P),32 and supported by the Global Infrastructure Facility (GIF)33—has mobilized extensive experience with WSS projects and international PPP transactions to support the JDG in designing the PPP structure, the PPP Agreement, and the institutional arrangements to ensure project success. In particular, the project has been designed to add significant value in (a) strengthening of institutional capacity, (b) transfer of PPP knowledge, (c) innovation, and (d) strategic piloting. The solutions demonstrated through this PPP project are replicable in many rural counties and districts with similar conditions in Sichuan Province, as well as to many of the 2,500 rural counties across China. The model used in this project can also be replicated to improve water and sanitation services in other countries.

42. Focus on strengthening institutional capacity. A key focus of the project is to strengthen institutional capacity for improved and sustainable WSS service delivery. China has significant capacity in infrastructure engineering and construction, but as noted in section I, many rural water and sanitation systems in China struggle with long-term sustainable operations. Furthermore, World Bank Group global experience has shown that, while PPPs have become a powerful instrument to address financing challenges for development, the capacity of implementing governments typically needs substantial strengthening for PPPs to be successful and sustainable. Therefore, this project focused on building institutional capacity during project preparation (see next paragraph) and fully embedded institutional strengthening in the design of the project components. Component 1 establishes the new rural WSS utility/Project Company to be operated as an output- and performance-focused PPP. Such a utility model does not currently exist in Jingyang and represents an institutional innovation. Component 2 focuses on building institutional capacity of the JDG to play its new role as the WSS system asset owner and regulator for the WSS sector, as well as its role to ensure high-quality customer service and customer satisfaction through community engagement and gender inclusion.

43. Transfer of PPP knowledge. The World Bank Group task team conducted detailed studies to inform the design of the PPP which helped transfer knowledge on this topic to the authorities, with the support of a grant from GIF. The World Bank Group provided institutional strengthening during project preparation (and which will continue until PPP commencement), including the following:

(a) Detailed PPP risk allocation study for rural WSS. Supported by the World Bank, drawing on best international practice and lessons learned from domestic projects to inform the design of institutional and financial arrangements for the project. The study compared risk

32 IFC is a global development institution focused on private sector development and PPPs. 33 GIF is a trust fund administered by the World Bank among governments, multilateral development banks, and financiers that provides funding and expertise to governments in bringing well-structured and bankable infrastructure projects to market.

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allocation in contracts in 20 similar rural WSS PPPs, looking at both successful and unsuccessful PPP projects. It concluded that PPP agreements in the sector in China typically lack a clear allocation of risks between the parties, that there are few performance-focused KPIs, that the PPPs do not address household connections, and that projects focus on construction and basic operations rather than on service delivery and customer service. This study was shared with China’s Central Government to inform upstream PPP policies. (b) PPP transaction advisory support. To prepare the PPP for competitive bidding, the World Bank Group team leveraged its experience and international best practices to support the JDG in conducting due diligence and the design of the PPP structure. Support included (i) a detailed market sounding analysis to understand the risk appetite of potential PPP bidders (such good practice market sounding is not typically done for PPP transactions in China), (ii) a procurement strategy and tailor-made bidding documents(that is, bid parameters, two- envelope bidding, two-stage request for proposals, and prequalification of eligible PPP bidders), and (iii) a tailor-made PPP Agreement drawing on international best practice with clear risk allocation and strong independent project management and dispute resolution mechanisms. (c) PPP structure options analysis. During project preparation, the World Bank Group team supported rigorous analysis and comparison of three PPP structuring options to find the structure most suitable to the JDG’s specific objectives and institutional context (including cost comparisons and consideration of fiscal affordability). Three options were considered: (i) an engineering, procurement, and construction (EPC) + O&M/design, build, and operate (DBO) structure, (ii) a lease/affermage structure, and (iii) a concession with subsidy structure. The JDG selected the concession with subsidy structure, which requires the PPP partner to bring equity—this helps align incentives and manage risks and is also compatible with the JDG’s borrowing constraints. The PPP options analysis is described in more detail in section IV-A and annex 3. (d) WSS tariff road map. During project preparation, the World Bank Group task team supported a tariff study34 and worked with the JDG to develop a WSS tariff road map. The tariff study analyzed existing tariffs and tariff methodologies used in similar jurisdictions in rural Sichuan, elsewhere in China, and in international practice. The study presented options and made recommendations for moving toward tariffs that are financially sustainable and affordable for Jingyang. The tariff road map charts a pathway to gradually raise tariffs over time and thereby increase OPEX35 cost recovery for both water and sanitation services and reduce the burden of annual subsidies paid by the JDG to the Project Company. Under the road map, the JDG commits to apply water tariffs that achieve at least 85 percent OPEX cost recovery and introduce rural wastewater tariffs, for the first time, that achieve 21 percent of cost recovery by the end of the project. Project tariffs, subsidies, and the tariff road map are further discussed in section IV-A. (e) Technical revisions to the FSR. The World Bank Group team supported the JDG and its FSR consultant to improve technical solutions, reduce costs, and strengthen project viability. Revisions included (i) more accurate population and service demand projections that helped

34 The tariff roadmap study is currently underway and expected to be completed by the end of 2021. 35 In China, CAPEX of rural WSS systems are still supported by the central and provincial governments, under policies for national and social development, and are not expected to be fully recovered through tariffs.

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right-size proposed system facilities, (ii) redesign of WTPs (two centralized, consolidated plants rather than the original 40 decentralized plants) that significantly reduced land and resettlement requirements), (iii) introduction of low-cost, rural-appropriate bio-trickling filters for WWTPs, (iv) a whole-lifecycle costing approach (CAPEX + energy costs) to select least-cost technical solutions (such an approach had not previously been used in similar FSRs in China), (v) smart water meters to improve revenue collection, (vi) a revised wastewater effluent discharge standard suitable for rural localities presented to and adopted by government regulators, and (vii) basing the asset valuation methodology on the price of beneficial use of assets (in line with international practice), which resulted in US$48 million in project cost savings. These revisions led to lower upfront costs and are likely to reduce operating costs. 44. Innovation. This project presents an opportunity to innovate within China’s WSS sector with a PPP design and risk allocation model suited to China’s unique institutional context. Innovations in the project include the following:

(a) A model PPP approach for innovative service delivery and procurement that responds to the request from the MOF and NDRC for a replicable performance-based PPP approach. The PPP model will establish a fully functioning, utility-like Project Company with clear roles for the Government and the service provider and clear project management and dispute resolution mechanisms to ensure transparency and objectivity. There will also be a requirement for the PPP partner to raise some capital to ensure and incentivize its commitment and efficiency, and the Project Company will have a mandate to deliver high- quality and sustainable rural WSS services (the term sheet for PPP Agreement as set out in annex 4). (b) An integrated approach for rural wastewater management that combines structural, infrastructure elements with nonstructural elements, such as tariff collection, low-cost rural- appropriate technology, and citizen-oriented design. Together, these provide integrated, long-term solutions that have lower upfront investment and lifecycle costs and are appropriate and affordable for low-capacity rural areas. (c) An incentive structure for performance is being incorporated into the PPP structure and transaction documents with clear KPIs in the PPP contract to incentivize the Project Company to achieve operating efficiencies and reduce NRW in system facilities.

45. Strategic piloting. This project supports an improved model for WSS service delivery that can be replicated elsewhere in China and beyond. Lessons have been captured in real time as the project has been prepared and will be incorporated into replicable design and transaction templates. The World Bank Group has supported the Government to prepare a dissemination strategy for sharing project lessons and knowledge products. It is also proposed to share experience internationally through case studies and learning events.

G. Lessons Learned and Reflected in the Project Design

46. The following are relevant challenges and implementation lessons encountered in previous World Bank projects, which have been considered in the design for this project.

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47. Behavior change communication and impact on demand and design. International experience, as well as early site visits and surveys for this project, shows that without early consultation and engagement of beneficiary communities, residents will not be aware of project benefits and will be less likely to accept the final project system and associated costs (that is, costs of household connections and tariffs for WSS services). In a World Bank project in Nicaragua, 36 effective public communication campaigns helped achieve very high connection rates, even in poor communities. In WSS projects in China and elsewhere, activities raising awareness at the community level of the benefits from improved WSS and WASH have helped increase willingness to connect to WSS systems and pay for WSS services. During preparation of the project FSR, the engineering, environment, and social consultants carried out household surveys and disseminated project information to the local population. Citizen engagement has been included in both project components, to be carried out by the Project Company and the PMO, in accordance with the PPP Agreement, during project implementation and throughout the duration of the PPP. Educational and behavior change activities are being provided during preparation and will continue during implementation to improve WASH habits and instruct on basic care and maintenance of WSS home facilities. These activities will help inform the community on how to benefit and improve their quality of life through the new and improved WSS services. The assumptions on resultant change in behavior regarding WSS and increased demand in the short to medium term were factored into the engineering design and financial analysis.

48. Full involvement of the entity responsible for system operation during project design strengthens ownership. In some previous government or development assistance projects, infrastructure and facilities were constructed by a project office, and then ownership and operations were transferred to a third party when the project was complete. Because of a lack of ownership or lack of experience, the management of the constructed treatment facilities and the delivery of services were weak, and the projects did not fully succeed. This project has incorporated this lesson into the design by making the Project Company responsible for detailed design, implementation, and operation of WSS infrastructure and service delivery under the project. In addition, the two departments that will retain legal ownership of the water and sanitation assets have been involved in project design and will be responsible for oversight of the project to ensure that the Project Company meets its service delivery obligations.

49. WWTPs need to be connected to sewers and houses. Previous efforts at rural wastewater management in Jingyang (and in other parts of China) have faced difficulties because WWTPs and sewer mains were built without simultaneously connecting households. Thus, inflows to WWTPs did not have enough organic matter to ensure proper functioning of biologic wastewater treatment processes and WWTPs have been underused. Recent World Bank experience with small-town and rural WSS projects in China and elsewhere has provided useful lessons, and in this project, household water and sewer connections (or septic tanks) will be fully financed with project funds. This also helps local residents to afford the new and improved WSS services.

50. Right-sizing wastewater plants and assessing demand. In rural China, wastewater plants are often oversized, as a result of inaccurate population and demand forecasting or because unsuitable design standards are used. Oversized WWTPs are inefficient, and ultimately unsustainable. To overcome this, the revised FSR surveyed population growth, water demand, and actual wastewater generation across a range of different building types specific to Jingyang (for example, at single- and multi-family households, at

36 Greater Managua Water and Sanitation Project, P110092; Report No. ICR3467.

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hotels, and at restaurants). From these building types, better service estimates were determined, which informed the sizing of investments.

III. IMPLEMENTATION ARRANGEMENTS

A. Institutional and Implementation Arrangements

51. A Project Leading Group (PLG) and a PMO have been established under the JDG. The PLG is chaired by the district mayor, with members from key government institutions including the HUDB, the WAB, the Finance Bureau, the Development and Reform Bureau, and the Ecology and Environment Bureau. The preparation of the project has benefited from strong support from Deyang City and Sichuan Provincial Government, as well as the NDRC and MOF at the Central Government level.

52. As noted above, it is estimated that the PPP will reach financial closure before the end of 2020. Before commencement of the PPP (pre-and post-project approval), the PMO has been and will continue to be responsible for project preparation, including FSR design and approval, project appraisal, PPP tendering, PPP selection, and PPP contract signing. In these efforts, the PMO has also coordinated inputs and support from local government line agencies and from the World Bank Group. After PPP commencement, the Project Company will be responsible for implementation of the PPP—including the design, construction, financing, and O&M of the assets; establishment of a utility; and holistic service delivery. The PMO structure and staff will remain in place at this stage, but their role and responsibilities will change to focus on supervising Project Company performance of contractual responsibilities and service delivery during implementation. The PMO will also function as a representative of the asset holder and will implement any project and WSS activities that are outside the scope of the PPP. The PMO will also remain responsible for M&E reporting throughout the project and will draw on data prepared by the Project Company (as required by the PPP Agreement). The World Bank will work closely with the Government and the PMO to ensure the PPP transaction is successful and will continue to supervise project implementation.

53. Before effectiveness of the PPP Agreement, the JDG and the Project Company will jointly hire an independent engineer consultant responsible for monitoring and verifying the performance and results of the Project Company, including the KPIs in the PPP Agreement (see the results monitoring and evaluation arrangements section). The World Bank will support the JDG in providing terms of reference for the consultant. The PMO will hire environment and safeguards consultants to monitor implementation of the safeguards documents.

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Figure 2. PPP Transaction Structure and Participant Roles

JDG’s role • JDG awards long-term concession to private investor who will construct, expand, Water Supply and rehabilitate, operate, maintain, wastewater/sewer and manage assets. PPP Agreement services • JDG retains legal Project Customers title/ownership of water JDG Company (users) supply/sewerage system. Concessional Revenue from • JDG provides subsidy (and IBRD loan + supply/service potential guarantees) to private investor to make PPP subsidy financially viable. Project Company’s role • Project Company has beneficial Assets use and control of assets. O&M/ • Project Company provides rehabilitation water/wastewater services to consumers. • Project Company is responsible to fund residual CAPEX requirements not covered by the subsidy.

54. Assessment of the JDG and the PMO. Throughout project preparation, the JDG has demonstrated strong ownership and commitment to the project. The PMO is now fully staffed, with a dedicated working space. The JDG and PMO have worked closely with the World Bank and IFC teams and their consultants to improve the technical analysis during the revised feasibility study.

55. Assessment of the Project Company. The PPP bidding documents and PPP Agreement will allocate roles and responsibilities between the JDG and the Project Company, including responsibilities for investment, management, construction, customer service, and other service utility functions, as well as for all of the assets and management systems created or upgraded under the project (see term sheet in annex 4). The PPP will follow the concession with subsidy model, whereby the JDG will retain legal ownership of the WSS infrastructure and assets but will award a long-term concession to a competitively selected PPP partner or consortium, which will establish and capitalize a limited liability company as the Project Company (see Figure 2). The Project Company will enter into the PPP Agreement and be required to construct/expand/rehabilitate, operate, and maintain the WSS assets and provide WSS services to customers in the project area in accordance with a specified performance regime with KPIs that will be overseen by a third-party independent engineer. The Project Company will collect tariff revenue directly from customers. It will take on relevant existing employees and contractors working in the service area that have agreed to transfer. The JDG will provide a subsidy/annuity to cover capital costs, O&M costs, and IBRD and commercial loan financing costs.

56. Gender inclusion. The project social analysis and stakeholder consultations carried out during preparation found that women in the project areas generally had less information about the project and its benefits, and that in most areas, women were less involved in community decisions about WSS

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infrastructure construction and operations. However, at the same time, women were found to play the leading role for managing and carrying out family WASH activities. Within family households, women tend to be more concerned with WSS service quality (availability, convenience, and affordability) and water quality (as related to household cleanliness; family health; home environment; and the longevity of family clothing, goods, and appliances). The project has incorporated the following gender inclusion activities (see also annex 6).

(a) Increasing women’s voice through village monitoring groups. Each participating village committee will appoint a group of five people who will use a community scorecard or simple questionnaire to assess service delivery provided by the Project Company. They will monitor two times per year for the first five years and then once a year thereafter. At least three of these monitors, or a majority, will be women to address the gap in women’s voice in monitoring and feedback on water. The group will collect the data, summarize the findings, and submit a report to the village committee, which will then submit to the Project Company and the PMO. The PMO will use the report for monitoring performance of the Project Company to improve customer service, a KPI for which payment deduction can be made in case of low performance. The percentage of women members and leaders of monitoring groups is an intermediate result tracking progress toward reducing the gap in women’s voice in WSS O&M. (b) Increasing women’s active participation in community feedback on WSS service. Outreach will be conducted to include women’s concerns and issues about WSS service delivery in community meetings, through a smartphone application, and by other means to ensure their voice is included and taken into account. A target of 40 percent women providing feedback will be monitored for the Results Framework.

57. Citizen engagement. Achieving sufficient household connection rates for water supply and sewerage is key for project success. Experience has also shown that while connecting households can take time, effective citizen engagement, education, and behavior change activities can accelerate willingness of households to connect to systems and pay WSS tariffs. Therefore, the project design emphasizes citizen engagement, including the specific actions to address the gap in women’s representation discussed above. The project has incorporated the following citizen engagement actions (annex 6 describes the coordination of the GI&CE activities):

(a) Clearly defined activities and institutional arrangements for citizen engagement actions in WSS. The GI&CE project activities will mostly be carried out by the Project Company, in close coordination the PMO and local village committees. The Project Company will develop two formal mechanisms within the WSS utility for customer feedback: a customer call center and a smartphone application (see next paragraph). The Project Company will also develop and conduct an ongoing community-based customer satisfaction survey, regular community meetings on WSS service quality, and ongoing WASH BCCs. To manage these activities and feedback mechanisms, the Project Company will designate a customer relations officer. The PMO will coordinate with the Project Company to monitor the outcomes of the GI&CE activities and provide technical support to the village committees for the community-based customer satisfaction monitoring. The PMO will designate a social focal point for this purpose. The JDG will also play an important supervising role to ensure completion and quality of the activities. These roles and responsibilities will be clearly defined in the formal

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bidding documents and the PPP Agreement. It is expected that these arrangements may be revised as the project proceeds to adjust and respond to external changes and new lessons from project experience. (b) Customer feedback mechanisms will be created by the Project Company including a call center and a smartphone application to address complaints, questions about bills and services, requests for repairs, and feedback on WSS services. The customer relations officer will track the feedback, disaggregated by gender, and send outreach messages by smartphone seeking women’s feedback on services. The customer relations officer will also attend selected BCC events to seek community feedback (see below). (c) Regular WSS service quality community meetings. The Project Company will organize regular meetings with community members (with special effort to encourage attendance and participation by women) to solicit formal feedback and opinions on the quality of the WSS services delivered. Meetings will be held during both the construction and the operational stages of the project. Feedback will be collected, documented, and shared back to the Project Company and JDG leadership for careful consideration and incorporated into decision making. The project targets 85 percent of communities to provide such feedback, and a minimum of 40 percent of people providing feedback to be women. (d) WASH BCCs. BCC strategy and materials will be developed by the Project Company, in coordination with the communities (village committees and local governments at the district and township levels). These campaigns will be tailored to motivate local people, in particular women, to use safer and cleaner tap water instead of borehole groundwater and connect to wastewater systems. The campaigns will also raise awareness of local residents, particularly those living in hilly areas, on proper maintenance of household septic tanks. They will learn how to request septic emptying services from the Project Company. The campaigns will also include proper care and maintenance of household water and toilet equipment and better hygiene practices.

58. To monitor the execution and outcomes of the GI&CE activities under the project, specific M&E indicators have been included, and a number of indicators are disaggregated by gender (see Results Framework).

B. Results Monitoring and Evaluation Arrangements

59. The Project Company will be responsible for monitoring and reporting its WSS service delivery performance, as related to the specific KPIs defined in the PPP Agreement. The Project Company will regularly report KPIs and project M&E to the PMO and/or the independent engineer (consultant) responsible for project M&E. These reporting arrangements will be contractually specified in the PPP Agreement. The community-based satisfaction monitoring data will be reported by the village committees to the PMO/independent engineer and then shared with the Project Company. The independent engineer will be responsible for collecting and verifying the results reported by the Project Company against the KPIs in the PPP Agreement. Monitoring of the environmental and social safeguards will be done by the environmental and social safeguards consultants and will be reported to the PMO (and through the PMO to the World Bank).

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C. Sustainability

60. The preparation of this project has been carried out so as to ensure long-term sustainability of the project investments, considered from three perspectives: institutional, technical, and financial sustainability.

61. Institutional sustainability. This project was designed to include strong institutional arrangements that will contribute to long-term sustainability. The PPP has been carefully structured, drawing on international best practice, to ensure clear delineation of roles and responsibilities between the public and private parties, supported through a strong management and dispute resolution mechanism including a project manager/independent engineer that will objectively monitor and manage contractual performance of the Project Company and JDG. The winning bidder will be required to inject equity into the Project Company and finance some of the activities and will be paid based on outputs throughout the project period, providing incentives for sustainable and efficient service delivery. Moreover, the new, holistic, and integrated WSS utility (Project Company) established through PPP under the project is being set up with the full support from the World Bank Group task team. The project also focuses on GI&CE, which are critical to ensure the institutional sustainability of the project (refer to section I-C).

62. Technical sustainability. From the technical perspective, and as noted in section I-B, a comprehensive review of the project FSR identified several significant improvements to the proposed technical designs which would right-size system facilities, select affordable and rural-appropriate technologies, improve efficiency, and better enable system maintenance. In particular, consolidation of the current complex and decentralized system and the introduction of a market-oriented WSS utility (Project Company) will help manage assets and improve long-term and sustainable performance of the project technical investments. Full financing of the household connections for water supply and sewerage will also help to ensure the viable operation of the WSS facilities.

63. Financial sustainability. As noted previously, during project preparation, measures were taken to reduce project up front and annual O&M costs. Least-cost analysis was used to identify and select among a range of WSS treatment technologies. Detailed economic and financial modeling was used to assess and recommend the most suitable PPP procurement and structuring option (see annex 3). Fiscal affordability analysis was also conducted to estimate the JDG's long-term ability to financially manage and support the project assets and service delivery under the selected option (see section IV-A and annex 5). The JDG has committed budgetary funds for the annual CAPEX and OPEX availability payments to the Project Company under the PPP Agreement, and the fiscal analysis concluded that the JDG has both adequate funding and budget space for these payments. During market sounding, some potential bidders expressed concern about the payment risk of the JDG. If this becomes an issue during procurement of the PPP and if deemed necessary, then the JDG will consider risk mitigation mechanisms.37 To ensure financial sustainability of the project, the JDG is also conducting a tariff road map by the end of 2021 to rationalize tariff revenue with O&M costs.

37 Such mechanisms could include setting aside several periodic subsidy payments, guarantees, and letter of credit–the feasibility of each of which would be assessed.

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IV. PROJECT APPRAISAL SUMMARY

A. Project Technical, Financial, and Economic Analysis

PPP Options Analysis

64. Three options for structuring the PPP were considered: Option 1 - EPC + O&M/DBO structure, Option 2 - lease/affermage structure, and Option 3 - concession with subsidy structure. The three options were rigorously analyzed in line with international practice to assess and compare factors relevant to the JDG’s specific objectives and institutional context, including value for money, financial viability and fiscal affordability, incentivization of the PPP partner to improve service quality and efficiency, demand uncertainty, government creditworthiness and payment risk, and existing system legacy issues. These analysis factors were informed by the project preparation due diligence and market sounding. Option 1 and Option 2 involve only public financing by the JDG, while Option 3 includes some financing to come from the PPP partner (as equity or debt). The total costs for the three options, in terms of net present value (NPV) and the net financial flow, are shown in Table 2. Further details on the PPP options, their advantages and disadvantages, and the comparative analysis are included in annex 3 and annex 5.

Table 2. PPP Options Analysis - Total Costs to Government Option Cost, NPV Net Financial Flow PPP Structure Option (CNY, millions) (CNY, millions) Option 1 - EPC + O&M/DBO structure 1,037 1,825 Option 2 - Lease/affermage 1,107 1,950 Option 3 - PPP concession with subsidy 1,308 2,320

65. The JDG ultimately selected Option 3, the concession with subsidy structure. While Option 3 is more expensive (NPV) than the other options, it has a number of advantages for the JDG’s fiscal and risk allocation context:

(a) The PPP partner equity contribution aligns incentives and manages risk. Option 3 involves an equity contribution from the PPP partner, which, along with the long-term duration of the contract, helps ensure better alignment of interests between the PPP partner and JDG, even considering that such contribution is eventually paid back through the capital subsidy and that the cost of capital is higher. With the equity investment, the PPP partner is less likely to walk away after construction (as it will only recover the costs of investment over the contract period). The company also has a stronger incentive to construct facilities and manage operations efficiently, as it will take on full commercial risk as an integrated business. This model also helps achieve better risk allocation because the PPP partner is responsible for efficient maintenance and management of the assets. The risk of nonperformance of assets during the concession period and the consequent replacement of such assets is also with the operator. Under the terms of the PPP contract, the PPP contractor is paid an operational subsidy based on efficient level of O&M expenses, including energy. Any excessive use of energy, chemicals, or other items required for O&M beyond efficient levels will be borne by the PPP partner. Finally, the model also passes the risk of any additional CAPEX (beyond the CAPEX subsidy) to the PPP partner, and hence promotes efficient capital investments in contract execution.

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(b) Option 3 is consistent with China’s debt management and PPP regulations. For the JDG, the current total level of debt is close to the debt quota allocated by Deyang Municipal Government. Therefore, the JDG is no longer allowed to borrow from any commercial bank, nor the World Bank (see the discussion on relevant PPP regulations in section I-A). For this reason, Option 1 and Option 2 could not be selected. However, under the PPP structure of Option 3, where the World Bank loan will be on-lent to the Project Company, the JDG is allowed to borrow from the World Bank according to the MOF’s specific regulations and requirements for PPPs. The World Bank loan, and any financing raised through a commercial bank, will be held on the balance sheet of the Project Company and not counted as JDG public debt. The JDG’s contingent liability for the project will be the annual subsidy to the Project Company for CAPEX and OPEX. These subsidies will be performance-based, as defined by the KPIs in the PPP Agreement, and will represent less than 5 percent of the JDG’s general budget expenditure. With no other significant PPP projects in the district, that is, the sum of all similar annual debt or subsidy obligations, the total cumulative liability for all PPP projects in Jingyang is well below the 10 percent threshold set by the MOF. Therefore, Option 3 fully meets the MOF's criteria for regulated PPPs.

Technical

66. FSR. The revised FSR was prepared by a selected design institute which had experience with World Bank projects. The FSR was prepared in line with national and local technical standards and has been reviewed by Sichuan Development and Reform Commission. The feasibility study was strengthened to include key engineering aspects (described in more detail in annex 2): taking into account population and water demand projections, wastewater projections, centralization of the water supply schemes, selection of optimal wastewater and sanitation technical solutions, and applying a feasible rural effluent discharge standard. In addition, attention was given to the reduction of NRW and improvement of the overall efficiency and rate of household connections. Performance indicators and an incentive mechanism will be incorporated into the PPP Agreement.

67. Project Implementation Plan (PIP) and project readiness for implementation. The PIP has been completed by the PMO and includes descriptions on how each project component will be implemented; a summary of the key PPP contract terms, FM, safeguards, and M&E plans; and descriptions of the institutional arrangements and terms of reference for the project manager/independent engineer. The bidding documents for the PPP will be consistent with the PIP.

68. Integrated smart water management platform. The WSS infrastructure and facilities to be built under this project are distributed in 11 towns and 88 villages, covering more than 450 square kilometers, and making efficient operations and management difficult. To improve management efficiency, the Project Company will develop a ‘cloud-based’ integrated smart water management platform (smart platform). Construction of the smart platform includes automation of WTPs, pump stations, and distribution networks; automation of WWTPs and collection networks; installation of system monitoring equipment (for pressure, flow, and so on); installation of household smart meters; construction of a network control center (including a machine room, tiled display screens, and network and storage devices); installation of internet connectivity and transmission hardware; and development of software management platforms for water supply, sewage, environment, and customer account management (for both billing and complaints information). The smart platform is expected to improve the level of WSS

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management in Jingyang, improve labor efficiency, improve WSS connectivity of towns and villages, and save water and energy in system operations.

69. Energy saving and efficiency. Rural water supply and wastewater management systems are large users of energy and can have an impact on climate change-causing carbon emissions. The energy efficiency activities of this project (reducing leakage and upgrading equipment and facilities) will also help reduce carbon emissions and mitigate global climate change. The PPP Agreement will emphasize energy efficiency in line with keeping costs down, thus creating a framework for controlling the energy demand from the project investments.

70. GHG accounting assessment. The GHG analysis indicates that the project will see an overall net increase in carbon dioxide equivalent (tCO2) per year in GHG emissions when compared to the without project case. This is because of the large number of project beneficiaries who currently do not have adequate sanitation services and who will be connected to wastewater collection and treatment systems under the project, and the resulting increase in power use for those systems. However, for the water investments, reduced NRW and improved energy efficiency (from replacement/upgrading of system facilities, reduced leakages, and optimization of treatment and distribution processes using the proposed smart water platform) will contribute a net energy reduction when compared to the without project case, helping to offset the total lifetime GHG emissions. Taking water and wastewater/sanitation activities together, the net impact of the project on GHG emissions would be an increase of 290 tCO2 per year, or a lifetime increase of 6,089 tCO2. The value of net GHG emissions under the project, using the Shadow Price of Carbon, is negative ENPV of US$ 0.10 million. Details from the GHG accounting assessment for the project’s relevant water and wastewater/sanitation activities, under the with- and without- project scenarios, are included in annex 5.

Financial Analysis

Overview of Financial Arrangements

71. As noted previously, the JDG selected the concession with subsidy model to structure the PPP. Under this model, the JDG retains legal ownership of the WSS system and awards a long-term concession to the Project Company which will have beneficial use and ownership to construct, expand, rehabilitate, operate, and maintain the WSS assets. This model also requires the PPP partner to invest equity into the project. The total capital costs for the project are estimated at CNY 1.1 billion (20 percent of which are to be financed by the PPP partner’s equity, and the remainder a mix of the World Bank loan and commercial sources).

72. The JDG will pay the Project Company to expand, rehabilitate, and improve the WSS system through an annual availability payment (CAPEX), which will be an on-lent portion of the World Bank loan (see next paragraph). The JDG will also pay the Project Company to deliver improved WSS services through an annual OPEX payment.

73. The World Bank loan will be progressively on-lent (at the same rate of interest and with no surcharges) down through the administrative levels and ultimately to the Project Company, that is, from the Sichuan Province Finance Department (SPFD) to the Deyang Municipal Finance Bureau, to the Jingyang District Finance Bureau (JDFB), and then to the Project Company. The World Bank loan will be disbursed by the World Bank directly to the Project Company.

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74. Revenues from tariffs paid by WSS system users will be collected and retained by the Project Company and will be accounted for when calculating the OPEX subsidy. The Project Company will be paid for delivering the WSS services through the OPEX subsidy based on the fixed and variable O&M and energy costs incurred (using efficient, optimized unit cost values) and less the total collected user tariff revenues (also using efficient unit rates and optimized volumes to promote system efficiency). It is proposed that there will be a performance penalty for failure to meet specified service efficiency targets.

75. Given that the Project Company is to be operated on a commercial basis and to attract sufficient interest from potential investors, the PPP structure and financial arrangements also include an expected return on equity for the Project Company.

76. To assess the financial arrangements of the project’s PPP design, a financial analysis was conducted to examine the financial gains and costs of the Project Company over the 25-year contract period, and a fiscal affordability analysis was conducted to estimate the JDG's long-term ability to financially manage and support the project assets and service delivery under the selected option. Further details and the key assumptions for the financial analysis (for example, inflation, water demand, tariffs, and operating margin) are summarized in annex 5.

Assessment of Tariffs, Revenues, and Required Subsidies

77. As noted, the Project Company will collect tariff revenue directly from customers. However, the current levels of water and wastewater tariffs in the district are insufficient to fully cover operating costs. To make up for this O&M shortfall, as well as to cover the operating margin and repay the capital costs (financed by debt and equity), the JDG will need to provide CAPEX and OPEX subsidies to the Project Company under the PPP Agreement for the entire duration of the contract. The JDG has committed to fund the required subsidies and has included/approved these subsidies in the next three years of its budget. Under the PPP Agreement, these will be paid in accordance with an established and performance- based schedule. Overall, the project is expected to achieve the target return on equity and meet its debt service obligations, with a debt service coverage ratio of 1.74 (at the lowest).

78. Low rural water and wastewater tariffs are a significant challenge for sustainable WSS operation and cost recovery. While the current water tariff rate of CNY 2.0 per m3 is near to the O&M breakeven point for water services (CNY 2.4 per m3), sewerage fees are not currently charged to customers in the majority of the project area (in line with the practice in rural areas elsewhere in China). The JDG is conducting a WSS Tariff Roadmap study, with the support of the World Bank, to identify a medium- to long-term pathway for raising tariffs (and reducing subsidies) so as to be both affordable to customers and financially sustainable for the WSS utility and local government. Because of the decentralized and scattered nature of the water systems, it is difficult to estimate the current cost recovery ratio for water system OPEX. However, under the tariff roadmap, the JDG has committed to apply water tariffs that meet at least 85 percent of the level for cost recovery of OPEX by the end of the project construction period (and in line with local administrative and decision-making procedures). These water supply cost recovery objectives are also in line with the NDRC’s tariff policies for cost management in the water sector. For rural wastewater, the sector is less market-oriented and developed than for water supply, and the Government has committed to subsidizing wastewater collection and treatment services to improve the lives of rural residents. Based on the tariff roadmap and under this project, the JDG is proposing to introduce a sewerage fee of CNY 0.85 per m3 in 2025, to be collected along with water supply tariffs, once construction has been completed and after the Project Company has made the necessary improvements

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in sanitation services. This tariff will be in line with national and provincial regulations and will achieve approximately 21 percent of the CNY 4.0 per m3 O&M cost recovery point for the sewerage services.

Financial and Fiscal Affordability Analysis

79. The project’s fiscal impact on the JDG is marginal. The IBRD loan is on-lent at each level of government to the JDG and then on to the Project Company. The only element of the project and the PPP that is booked on the JDG balance sheet is the estimated annual subsidy. This then serves as the legal basis for future government spending. A fiscal assessment report was conducted for the JDG,38 to evaluate the fiscal burden on the JDG balance sheet as a result of the annuity subsidy. The JDG’s contingent liability from the project is estimated to be 1.2 percent (maximum) of the district’s GDP. This is well below the 5 percent threshold permitted by the MOF for local governments and indicates that the district’s economy is large enough to take on this project. The JDG does not have other significant contingent liabilities. The JDG is committed to fund subsidies to cover capital and operating costs and has included the required subsidies for the next three years in its capital and operating budget plans. Furthermore, these subsidy obligations have been reviewed and approved by the local People’s Congress, which represents a firm and legal commitment from the Government.

80. Despite these commitments and estimates indicating that the project is affordable to the JDG, market sounding conducted during project preparation indicated that some investors may have reservations about government payment risk, given perceptions on the nature of the district’s revenue. If these issues are raised during the procurement process, and if deemed necessary, credit enhancements may be considered to be incorporated into the request for proposals.

Economic Analysis

81. The main economic benefits of the project include improved living conditions, amenities, and public health owing to improvement in WSS services (both quality and quantity), along with productivity and efficiency gains in the development and operations of water supply and wastewater treatment facilities through the institutional arrangements of the project. The economic costs of the project include capital investments (and associated resettlement and environmental mitigation costs) and O&M costs.

82. The economic analysis was carried out for a 25-year period, from 2020 to 2044 (inclusive of a five- year construction period) and using a discount rate of 10 percent. The economic benefits and costs were expressed in domestic currency and constant 2019 prices—net of the costs of transfer, financial charges, and price contingencies. International costs were converted to local currency at an exchange rate of CNY 7.0 to US$1.00. An average value added tax (VAT) of 13 percent is excluded from goods, and shadow wage factors of 0.8 and 1.0 were applied to unskilled and skilled labor, respectively.

83. As the data needed to estimate public health benefits are neither unavailable nor would be easy to obtain, a mix of cost-benefit analysis (CBA) and cost-effectiveness analysis (CEA) has been used for the economic analysis of the project. Additional details are presented in annex 5.

38 Contingent liability was calculated based on World Bank-International Monetary Fund (IMF) developed, Project Fiscal Risk Assessment Model (PFRAM) to calculate fiscal impact on the government balance sheet of the project.

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84. CBA was employed for water supply investments. With the project, the majority of the population in the project area will be able to enjoy better-quality and more reliable water supply services provided by new WTPs and upgraded water supply networks. Several technical design scenarios were first proposed and analyzed cost-effectively. The scenario of constructing WTPs, water treatment stations, water distribution stations, pumping stations, and additional water mains is the least-cost option and is selected for CBA.

85. The economic benefit of the above option was further quantified from the willingness to pay for improved water supply service of the beneficiary households. Using the benefit transfer approach (adjusted to the current income level in the project area) and the results of willingness-to-pay studies conducted in similar regions in China, the willingness-to-pay assumptions are 1.5 percent of disposable income for those currently without access to piped water (approximately 27 percent of future service population); 0.5 percent for population currently with access to piped, albeit inferior quality, water supply (73 percent of the future service population); and CNY 3.0 per ton for non-domestic water supply (that is, the current mean industrial tariff). It was estimated that the water supply investment will yield an economic internal rate of return (EIRR) of 13.7 percent. It is worthwhile noting that the estimated EIRR is conservative because the analysis does not include other benefits such as the efficiency gains due to NRW reduction nor the benefits from reduced pressure on the many sensitive water resource protection areas, and so on. Sensitivity analysis was carried out to assess a potential 20 percent increase in water supply capital investment costs, with a resulting EIRR of 11.6 percent.

86. The wastewater treatment and sanitation investments are well aligned with the regulatory and development targets that have been set by national and local governments. These targets are based on their importance to public health and the quality of life of local residents, and the development and modernization of small towns more generally. Due to the difficulty in quantifying and monetizing the benefits of these components, the cost-effectiveness approach was used to ensure the selection of the least-cost technical design option to achieve the development targets established by the governments. The analysis first divided the project area into two districts by topography: Plain District and Hills District. A few technical design alternatives were considered and compared. In the Plain District, the least-cost design is to use 4 existing WWTPs and construct 881 km of sewerage collection networks and 30 pumping stations. In the Hills District, centralized sewerage treatment systems are costly. The project will first continue to use the two small-size wastewater treatment stations (200 m3 per day) and centralized septic tanks already built in the area and extend their household coverage as long as gravity flow allows. The project will further build 10 small-size wastewater treatment facilities (at around 50 m3 per day) with house connection pipelines in other township seats and large villages. For clusters of households with over 50 people but located far from existing or proposed WWTPs or stations, building septic tanks separately for each household will be cost-effective and selected. Other scattered households will continue to use their existing pit toilets without intervention from the project.

87. Given the objectives and economic benefits that the proposed project aims for, the population in the project areas would generally benefit from the investment. As local governments agree to a block tariff scheme to support and secure the basic water consumption of low-income households, the project anticipates no negative impacts on the poor.

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B. Fiduciary

Financial Management

88. The district PMO staff are new to World Bank-financed operations. Since the JDG is approaching the debt ceiling as regulated by the MOF, the full IBRD loan will be on-lent to the Project Company. The JDG will account for any contingent liability in accordance with relevant regulations. The Project Company will be responsible for routine FM tasks during project implementation and will be required to recruit qualified financial staff to ensure project FM is smooth. The PMO will be responsible for overall project FM.

89. The FM capacity assessments identified the principal FM risks to include (a) the fact that, as this is the first World Bank-financed PPP project in China and the winning bidder will not have been selected until after project assessment, the capacity of the winning bidder and Project Company to implement project activities is uncertain; and (b) lack of knowledge and experience in managing World Bank-financed projects as project staff at the district level do not have experience of World Bank-financed projects. This could lead to misuse or inefficient use of project funds. Mitigation measures to be put in place to address these risks are (a) inclusion of FM-related requirements in the PPP Agreement and bidding documents for procuring the PPP partner, (b) preparation and distribution of a Financial Management Manual (FMM) to standardize project FM procedures, and (c) provision of FM technical training and knowledge-sharing workshops to be arranged by the World Bank and PMO. The foreign currency exchange risk will be jointly borne by the JDG and the Project Company. The Project Company will bear the risk of the amount of World Bank loan available to draw down in local currency, while the JDG will bear the risk on the amount of principal to be repaid in euros.

Procurement

90. Procurement institutional arrangements. With the assistance of the other relevant government line agencies, the PMO will be responsible for the selection of the PPP partner. HUDB will sign the PPP Agreement on behalf of the JDG. The PMO will have the opportunity to benefit from the experience of previous local PPP projects undertaken by the financial bureau of the JDG.

91. A procurement capacity assessment was undertaken through field visits and interviews with the PMO. The JDG will conduct the procurement of the private partner through HUDB and the financial bureau will provide support. As the government authority monitoring government procurement, the financial bureau has knowledge of the domestic laws and rules regulating procurement of PPPs. In addition, the PMO hired IFC as its transaction adviser to design the transaction and to propose an appropriate procurement strategy. IFC has prepared a transaction structure report with recommendations on the procurement method, setup of qualification criteria, evaluation methodology, and other details.

92. To enhance the PMO’s capacity to undertake the selection of the PPP partner, a domestic procurement agent with extensive experience working on World Bank-funded operations and practical experience of PPP procurement has been hired. From discussion with the procurement agent, the firm is familiar with the domestic procedural requirements and policies related to PPP projects and has a set of existing procurement documents (for example, prequalification and bidding documents) that have been widely adopted for the domestic projects. The procurement agent is assisting the PMO to draft the procurement documents, organize the selection process, and manage formalities on a centralized

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procurement information platform—all in coordination with, and on the basis of the transaction model developed by, IFC. The procurement agent is also responsible for drafting the Project Procurement Strategy for Development (PPSD).

93. The key procurement risks identified in the project risk assessment are the following:

(a) PPP has significantly more inherent complexity than traditional procurement methods, with significant risk of lengthy selection process, multiple iterations of review, and consequent delay in implementation; (b) The PMO is unfamiliar with the World Bank’s new procurement framework and has a tendency to follow the local practices in conflict with World Bank Procurement Regulations; (c) Inadequate management and coordination capacity may lead to serious delay in implementation; and (d) The downstream procurement using the Project Company’s own procedures are in conflict with World Bank core procurement policy and deemed not acceptable.

94. To mitigate these risks, the following actions were recommended:

(a) The PMO should assign experienced procurement staff and ensure a procurement agent with qualifications and experience in World Bank projects has been hired to provide such assistance; (b) Working with the transaction adviser, procurement agent, and other line agencies, the PMO should develop sound and detailed guidelines for managing the PPP process, setting up realistic time frames and enhancing performance monitoring; (c) The World Bank will provide constant procurement training and support during project implementation; (d) The PMO should develop an Operations Manual (OM) (already completed at time of appraisal) including requirements for procurement using commercial practices to guide procurement and contract management during implementation; and (e) The PPSD should be prepared by the PMO to describe how procurement supports the PDOs and achieves value for money.

95. Anticorruption. World Bank’s Anti-Corruption Guidelines shall apply. The PMO will stipulate in the OM anticorruption requirements and a complaint-handling mechanism for the project. In addition, the standard anticorruption provisions would be included in the OM so that they can be easily added to the relevant procurement documents. The PMO would be required to report to the World Bank on time the allegations of fraud and corrupt cases identified in the progress report. The World Bank will supervise project implementation on a regular basis to verify if the relevant requirements are fulfilled on the ground.

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. C. Legal Operational Policies . Triggered? Projects on International Waterways OP 7.50 No Projects in Disputed Areas OP 7.60 No .

. D. Environmental and Social . The environmental risk of the project is Moderate. The physical activities of the project include the construction, upgrading, and rehabilitation of municipal wastewater and drinking water facilities, and improvement of the living environment of eleven villages in the project area. The size of each specific facilities ranges from very small (less than 50m3/day) to medium (25,000m3/day). The locations of the activities are generally in rural areas already intensively affected by human activities, without involving critical natural habitats and legally protected cultural heritages.

Overall, the project is expected to have positive environmental and social benefits in terms of reducing water- borne diseases through provision of clean drinking water, and reduction of water pollution in receiving water bodies by collecting and treating the wastewater. Adverse environmental and social impacts of the project during construction stage include noise, dust, solid waste and wastewater, soil erosion, and the social disturbance, such as traffic and road safety. During the operation stage, the project could lead to increase in odor, noise and sludge, occupational health and safety concerns due to bacteria/pathogens within the wastewater treatment facilities and working in a confined space. These impacts are expected to be of limited magnitude given the size of the project. The non-physical activities (technical assistance and construction of cloud platform) will not cause adverse environmental impacts. In future, dismantled water meters, originating from non-physical activities, will need to be disposed properly.

The Client and its Project Management Office (PMO) in charge for project preparation, has been committed to allocate adequate resources in terms of budget and full-time staff to coordinate and procure a Special Purpose Vehicle (SPV), the project company, with the adequate environmental and social management capacity for the implementation. ESMP and ESCP set requirements for SPV.

To address the risk and impacts associated with the project activities the following instruments were prepared, disclosed and consulted prior to appraisal: Environmental Impact Assessment (EIA), Social Impact Assessment (SIA), Environmental and Social Management Plan (ESMP), Resettlement Action Plan (RAP) all for identified activities, Stakeholder Engagement Plan (SEP) and Environmental and Social Commitment Plan. The documents were prepared by the Client following the ESF and the WB EHSGs, and relevant requirements of China, covering all the project activities. Given that the borrow pits/deposit sites are not yet determined and the site and alignment of water/wastewater facilities may be subject to modifications at the preliminary design stage, the Environmental and Social Management Framework (ESMF) and Resettlement Policy Framework (RPF) have been prepared.

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The treated effluent from the wastewater treatment plants will be discharged into Mianyuan, Shiting and Kai rivers. The river sections within the assessment area are identified as natural habitats but with low biodiversity value. Static modelling of the effluent impact on water quality in the three rivers show that the water quality will not be affected. Conversely, the water quality of the rivers will be improved by the project, which will help achieve the net gain of biodiversity in the long term.

Nearly all the project water will be taken from the Renmin Canal built in 1958 to transfer water from the Minjiang River to irrigate farms in the Chengdu Plain, and not and not existing reservoirs. A water resource study has been completed indicating that a very small percentage of the water will be taken by the project and will not adversely affect downstream users. The Renmin Canal section within Jingyang District is being polluted by wastewater discharge from households. The water source protection plan, prepared by the Deyang Municipal Government, stipulates comprehensive actions protection and mitigation actions. A further evaluation of actions has been incorporated into the ESCP to cope with this issue.

The environmental code of practice (ECOP) and site-specific measures have been developed under the ESMP. To address concerns on traffic and community safety, a labor camp management plan and traffic management plan, as well as a traffic safety awareness program for communities, have been developed under the ESMP and incorporated into the ESCP. The occupational health and safety measures have been developed. In addition, a sludge management plan has been developed covering the sludge quantity estimate, transportation and disposal arrangements, and supervision. Monitoring requirements for sludge quality have been incorporated into the environmental monitoring plan of the ESMP.

The social risk of the project is substantial.

The project will involve limited number of direct workers and contracted workers. In addition, government staff will be involved in the early stage of the project implementation. Civil works will involve potential occupational health and safety associated with the operation of the wastewater facilities. Occupational health and safety measures have been developed and integrated into the ESMP and the ESCP. The labor management procedure for direct workers and contracted workers has been developed as part of the ESMP. GRM has been established separately for this ESS2 in the ESMP.

Construction will mostly be along the roads and cause disturbance to local traffic. Increased traffic near the communities particularly schools may pose safety risks given the rural context. A traffic management plan has been developed as part of the ESMP and ESCP, which also contain traffic safety awareness program for the affected schools and communities. The social assessment indicated that moderate amount of land will be acquired to accommodate project activities affecting 179 persons from 58 households on collective land. Two enterprises will be resettled affecting 2 persons from 2 households. Consequently, a RAP has been prepared. The water source protection plan, to be finalized by early implementation, is expected to further increase land restrictions of around 70 mu. An RPF has been prepared to address land acquisition that can only be confirmed during implementation. Both the RAP and RPF prepared have been informed by consultations with the affected persons, and the draft RAP and RPF has been disclosed to all stakeholders before finalizing. The social assessment confirms that no ethnic minorities as defined by World Bank ESF have been identified in project sites.

A screening of cultural heritage concluded that the project will not affect any legally protected cultural heritage

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sites. However, a small temple built by local villagers in 2010 for good harvest blessing has been identified to be potentially affected. A small pumping station will be built by the project 5 meters away from this temple. Dust, noise, and vibration may be detrimental to this temple during construction stage, and noise and vibration during operation. It is concluded that these impacts are moderate and readily mitigated by good engineering design and measures. Villagers have been consulted in accordance to the project SEP and are supportive of the project and agreed to the measures proposed to maintain the integrity of the temple. Alternative analysis for the location of the pumping station indicates that this site is the only one feasible environmentally, socially and financially. Mitigation measures including the Code of Conduct for workers have been developed, and it is expected that the temple will not incur any material damage provided that the mitigation measures are implemented. A chance find procedure has been developed and incorporated into the ESMP and the ESCP. No intangible cultural heritage has been identified by the social assessment.

The social assessment screened for risks of gender-based violence (GBV) and concluded that given the largely urban and peri-urban character of the area and the location of the camps, the GBV risks will be low. The social assessment indicated that the only risk is at worker camps where there are female workers, and their health and safety in the living and work environment might be neglected by construction companies. To address this risk, the Environmental & Social Commitment Plan (ESCP) include that sound labor management procedures covering GBV issues as part of the bid evaluation process for construction companies. Regular project supervision will include monitoring GBV. Bidders should also present procedures on worker management, where there is large number of workers from outside the area. Regarding risks from influx of labor, GBV risks should also be addressed when educating these workers. The social assessment also found that the WSS sector decision-making is almost exclusively a male domain for which women have little or no information, no involvement in water operations or their management, and little or no voice in decision-making related to water services at the community level. The project will address this gap by engaging women as members and leaders in village monitoring groups, assessing the quality of service provided by the Project Company. It will also include outreach to women for customer feedback through a mobile phone app. This data will inform the .KPI for satisfaction with services which is subject to deduction.

96. Disclosure of the project safeguards package. The full environmental and social safeguards package for this project was disclosed on December 6, 2019.

97. Consultation with existing employees. The JDG has developed a plan for managing existing employees working on WSS services in the service area, including retention, redeployment, transfer to the Project Company, and retirement, and has consulted with existing employees. The JDG and the Project Company will engage with existing employees and contractors to identify individuals who may wish to transfer to the Project Company and on terms and conditions of employment and on capacity building and training. The engagement of the public and communities and of existing employees has already begun in the FSR and will continue through the preliminary design and subsequent project implementation stages.

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V. GRIEVANCE REDRESS SERVICES

98. Communities and individuals who believe that they are adversely affected by a World Bank supported project may submit complaints to existing project-level grievance redress mechanisms or the World Bank’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Project affected communities and individuals may submit their complaint to the World Bank’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of the World Bank’s non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and World Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/en/projects-operations/products- and-services/grievance-redress-service. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org.

VI. KEY RISKS

99. Project overall risk rating. The overall risk rating is Substantial. During project preparation, the identified project-level risks were substantially mitigated.

100. Sector Strategies and Policies Risk (Substantial). The water sector in China generally faces a number of issues around unrealistic demand projections, unrealistic rural sewerage discharge standards, facility overdesign, and household connection challenges, among others. Water and particularly wastewater tariffs are lower than the level required for the full cost recovery of OPEX costs. To mitigate these risks, a robust FSR (considering the typical sector issues) was prepared, the PPP transaction has been designed to be performance-based and customer service-oriented (instead of the typical construction- oriented), and the World Bank has worked with the local government to develop a road map to revise tariffs for water and wastewater, and in line with local administrative and decision-making procedures. The project can also draw on experience documented in the recent World Bank Water Global Practice report, ‘Doing More with Less: Smarter Subsidies for Water Supply and Sanitation’, which can provide insights into tariff policies for Jingyang, and for other provinces in China.

101. Technical Design of the Project (Substantial). Although the comprehensive preliminary technical designs and the FSR have been completed, the Project Company has not yet been selected and will be responsible for completing the detailed technical designs, which will then have to be approved by the authorities. There is a risk that the cost requirements for the final system designs will be higher than those estimated in the FSR, raising the burden of annual subsidies to be paid by the JDG. Additionally, construction of the physical works will take place over a wide area, which may pose challenges. These technical risks have been substantially mitigated by the close participation of the World Bank Group task team in project preparation, which provided expertise for the detailed review and robust revisions to the FSR technical designs and cost estimates. These risks will also be addressed through the independent engineer providing oversight for efficient implementation of works under the guidance of the local authorities. Finally, there is the risk that rural households may be unwilling to connect to the WSS systems and pay tariffs. To mitigate these risks, the project will fully finance household water and sewer

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connections and will include community engagement activities to help promote household connections and tariff payment.

102. Institutional Capacity for Implementation and Sustainability (High). A PPP approach has not been used by the JDG before, and the JDG has not implemented a World Bank project before. In addition, the WSS services are currently being managed under two separate bureaus and implemented by multiple service providers. The newly proposed institutional arrangements have been fully agreed with the Government, and measures have been taken to ensure sustainability of the project. Notably, (a) the World Bank Group team has provided/will provide PPP transaction, implementation, and capacity-building support to the PMO and JDG; (b) a robust FSR has been prepared, in which CAPEX and OPEX were minimized; (c) subsidies are structured and agreed upon to enable long-term financial viability; and (d) output-based performance requirements will be incorporated into the PPP Agreement. There have been consultations with existing employees and contractors providing WSS services in the project area, and the JDG has developed a staff transfer and redeployment plan that will be implemented by the JDG and Project Company.

103. Fiduciary (Substantial). FM control risk was assessed as Substantial. Most project staff do not have World Bank-financed project experience. To mitigate the risk, an FMM, which is one of the chapters of the project OM (completed at time of appraisal), has been prepared to provide guidance and training to project staff. In addition, the World Bank FM specialist provided necessary guidance and training to the project financial staff. Procurement risk was assessed as Substantial. The IFC transaction advisory team carried out early market sounding, bidding documents have been prepared based on best international practice (adapted to the local context), the IFC transaction team has worked with the client to properly identify risk allocation between public and private sectors, and a procurement strategy has been developed that includes prequalification to ensure competent bidders. Finally, a robust financial analysis was conducted, and the subsidies required were tailored to match the JDG’s financial capability, and a study on WSS tariffs was conducted to support the financial analysis.

104. Environment and Social (Substantial). The Environmental and Social Framework (ESF) applies to the project. As the JDG and PMO are new to the ESF, the World Bank team will support capacity building during preparation and implementation of the project. The EIA and the ESMP, RAP, Social Assessment, and Beneficiary Participation Plan have been prepared to meet the World Bank’s policy requirements. Overall, the works for this project are small, without major disruptions to the environment and the affected people. The environmental issues which were identified to have potential adverse impacts have been clearly defined, and countermeasures have been included in the EIA. The social issues which were identified to have potential adverse impacts have been clearly defined, and countermeasures have been included. In the tariff structure, vulnerable and low-income beneficiaries will be exempt from payment of water tariff up to a monthly baseline volume of water. Details refer to Section D Environmental and Social.

105. Stakeholders (Substantial). A lack of awareness of the benefits of piped water and a connection to the wastewater system combined with the additional wastewater tariff may make households reluctant to connect to WSS systems, posing a risk to the Project Company financial sustainability. To mitigate this risk, the project will include a stakeholder participation mechanism to explain the benefits of connecting to the WSS systems. The project will also support consultations and WASH BCCs for the participating communities. The Project Company and the PMO will each play key roles with respect to community engagement, and these will be clearly defined in the bidding documents and the PPP Agreement. Another

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stakeholder risk is the willingness of existing employees working on WSS services to transfer to the Project Company. The JDG has developed a plan for managing these employees. Existing staff willing to transfer will be hired by the Project Company. Other staff will be redeployed by the JDG or will take retirement. The transfer of existing employees and contractors to the Project Company will be closely monitored, and the Project Company will provide capacity building and training to transferred employees to enable a smooth transition. Engagement with community members, including measures to give women more voice, and existing employees began in the FSR and will continue through preliminary design and project implementation. .

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VII. RESULTS FRAMEWORK AND MONITORING

Results Framework COUNTRY: China Sichuan Water Supply and Sanitation PPP Project

Project Development Objectives(s) The objectives of the Project are to improve access to water supply and sanitation services and improve the quality and efficiency of water supply and sanitation service delivery in select peri-urban and rural areas of Jingyang District of Deyang City in Sichuan Province.

Project Development Objective Indicators

RESULT_FRAME_T BL_PDO Indicator Name DLI Baseline End Target

To improve access to WSS services in Jingyang District of Deyang City in Sichuan Province.

Number of people benefiting from improved water supply 0.00 220,900.00 services (Number)

Female (Number) 0.00 110,450.00

Number of people benefiting from safely managed sanitation 0.00 199,750.00 services (Number)

Female (Number) 0.00 99,875.00

Percentage of customers satisfied with the services provided by 0.00 85.00 the Project Company (Percentage)

Female (Percentage) 0.00 50.00

To improve the quality and efficiency of WSS service delivery

Reduction in Non-Revenue Water Rate [NRW] (Percentage) 32.00 17.00

Cost Recovery in water supply services (Percentage) 100.00 100.00

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PDO Table SPACE

Intermediate Results Indicators by Components

RESULT_FRAME_T BL_IO Indicator Name DLI Baseline End Target

Project Company Performance Quality of water at tap meets quality standards (Yes/No) Yes Yes Quality of effluent from wastewater treatment plants meets effluent standards (Yes/No) Yes Yes Project company is in compliance with the key performance 0.00 100.00 indicators set out in PPP Agreement (Percentage) Community Engagement and Gender Inclusion Percentage of communities (village committees) having provided feedback on the WSS services provided by the Project Company 0.00 100.00 (Percentage) Percentage of women in the communities participating in the community feedback meetings on WSS service quality 0.00 40.00 (Percentage) Percentage of female members on the village service quality monitoring groups (Percentage) 0.00 60.00 Infrastructure Number of households connected to improved piped water system (Number) 0.00 86,310.00 Number of new households connected to wastewater system 0.00 53,374.00 (Number) Number of households with improved septic tank and collection 0.00 6,712.00 and septage removal (Number) Project Experience Sharing and Policy Support Roadmap for tariff setting in Jingyang district to achieve No Yes operational cost recovery approved by JDG (Yes/No) Number of workshops to share project experience and lessons in 0.00 3.00

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

RESULT_FRAME_T BL_IO Indicator Name DLI Baseline End Target

Sichuan Province and China (Number)

IO Table SPACE

UL Table SPACE

Monitoring & Evaluation Plan: PDO Indicators Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection The number of people who previously did not have access to piped water The Project Company Communities supply, or had access to an collect population Project Company Once per served by the Number of people benefiting from unimproved piped water information from the (verified by Ind. M&E year Project improved water supply services supply and who now do communities it consultant) Company. have access to an improved severed.

piped supply as a result of the project. Measured in the project areas. Female Safely managed sanitation services means access to (i) sewerage systems or (ii) Communities The Project Company Project Company septage collection, together Once per served by the collects population Number of people benefiting from safely (verified by Ind. M&E with, in both cases, year Project information from the managed sanitation services Team) adequate treatment and Company communities it served.

disposal The number of people who previously did not have access to sewerage

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

systems or septage collection together with adequate treatment and disposal and who now do have access as a result of the project. Measured in the project areas. Female The result of In the annual service the annual satisfaction survey Every year, the Project service conducted by the Project Company will conduct a The Project Company Percentage of customers satisfied with Once satisfaction Company, the percentage of service satisfaction (verified by Ind. M&E the services provided by the Project per year survey users who chose survey using local social consultant) Company conducted by “satisfactory” among the media (mobile Apps). the Project total number of user Company. participant in the survey.

The result of the annual Every year, the Project service The Project Company Company will conduct a satisfaction (verified by Breakdown of the parent Once a year service satisfaction Female survey independent M&E indicator, as percent female. survey using local social conducted by consultant) media (mobile apps). the Project

Company.

Directly The Project Company measured in calculates the different Project Company Reduction of NRW in the Once Reduction in Non-Revenue Water Rate the field between the volume of (verified by Ind. M&E service area of the Project per year [NRW] based on the the drinking water it Team) Company design of pumps to the service M&E system, areas and the volume

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

as included in of the billed drinking the PPP water. Agreement.

Total operating revenues (including tariffs and Based on operations Reported by The Project Company government subsidies), Once per and financial the Project (verified by Ind. M&E Cost Recovery in water supply services divided by total operating year accounting from Project Company. consultant). costs (excluding financing, Company.

assets, and depreciation costs). ME PDO Table SPACE

Monitoring & Evaluation Plan: Intermediate Results Indicators Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection Directly measured in Drinking water sample the field will be taken by the based on the Project Company (verified In compliance with GB 5749- Once per Project Company and Quality of water at tap meets quality design of by Independent M&E 2006, "Standards for year sent to a certified standards M&E system, Team) Drinking Water Quality" laboratory for as included in measurement. the PPP

agreement.

Treated sewerage complies Directly Online water quality Quality of effluent from wastewater with the "Water Pollutant Once per measured in measurement or taking Project Company (verified treatment plants meets effluent Discharge Standards for Tuo year the field sample to the by Ind. M&E Team) standards and Min River Basins in based on the laboratory to test. Sichuan Province" as well as design of

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

discharge standards for M&E system, small-scale of WWTPs as as included in specified in the Project EIA. the PPP Agreement.

The Project Company's The percentage of KPIs meet The Project Company Project company is in compliance with the Twice semi-annual Refers to the PPP that meets the targets as (verified by Inde. M & E key performance indicators set out in PPP per year KPIs Agreement included in the PPP Consultant). Agreement Compliance R Agreement eport.

The result of Percentage of communities Percentage of communities (village the survey participating in the service Once Using local social media Project Company (verified committees) having provided feedback on conducted by satisfaction survey per year (mobile Apps). by Ind. M&E Team) the WSS services provided by the Project the Project conducted by the Project Company Company. Company

The Project Company has regular meetings with the communities, seeking feedback to the service it delivers. The The Project number of the women Percentage of women in the communities The percentage of women Once Project Company (verified Company's who participate in the participating in the community feedback who participate in the per year by Ind. M&E Team) Report. meetings will be meetings on WSS service quality community meetings. recorded, along with the total number of participants. Suggestions provided by women will be noted, along with

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

company actions on those suggestions.

The project monitoring committees will Village committees under provide written reports the project are to be to the Project Company composed of at least five The Project on the quality of their The Project Company Once per Percentage of female members on the people in each village. This Company's service at least once a (verified by Ind. M&E year village service quality monitoring groups indicator relates to the Report. year, including the consultant)

percentage of village number of women committee members who members and the are women. gender of the group leader.

The number of households that previously were not Directly previously connected to measured in The Project Company improved piped water Once per the field collect data from the Project Company (verified Number of households connected to supply that are now year based on the community and by Ind. M&E Team) improved piped water system connected to an improved design of contractors. piped supply as a result of M&E system the project. Measured in the project areas. The number of households Directly that previously were not measured in The Project Company connected to the Once per the field collects data from Project Company (verified Number of new households connected to wastewater system that year based on the community and by Ind. M&E Team) wastewater system now do have access to the design of contractor. wastewater system as a M&E system result of the project.

Measured in the project

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

areas.

The number of households that previously did not have Directly an improved septic tank measured in The Project Company Number of households with improved with collection, septage Once per the field collects data from Project Company (verified septic tank and collection and septage removal and treatment year based on the community and by Ind. M&E Team) removal that now have such a design of contractor. system as a result of the M&E system project. Measured in the project areas. PMO demonstrate to Roadmap for tariff setting in the Bank team that the Roadmap for tariff setting in Jingyang Once per Jingyang district to achieve PMO roadmap has been PMO district to achieve operational cost year operational cost recovery prepared and obtained recovery approved by JDG approved by JDG. government approval.

PMO reports to the Number of workshops to Number of workshops to share project Once Bank team the share project experience PMO PMO experience and lessons in Sichuan per year workshop has been and lessons in Sichuan Province and China conducted. Province and China

ME IO Table SPACE

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

ANNEX 1: IMPLEMENTATION ARRANGEMENTS AND SUPPORT PLAN

COUNTRY: People's Republic of China Sichuan Water Supply and Sanitation PPP Project

Project Institutional and Implementation Arrangements

1. A PLG and a PMO have been established under the JDG. The PLG is chaired by the District Mayor, with members from key government institutions including the HUDB, WAB, Finance Bureau, Development and Reform Commission, and Environmental Protection Bureau. The preparation of the project has benefited from strong support from Sichuan Provincial Government as well as the NDRC and MOF at the Central Government level. Deyang City has also supported the preparation and will continue to support implementation of the project.

2. Before the PPP transaction (that is, before PPP selection and contract signing), the PMO continues to be responsible for project preparation, including FSR design and approval, project appraisal, PPP tendering, PPP selection, and PPP contract signing. In these efforts, the PMO will also coordinate the inputs and support from the local government line agencies and from the World Bank and IFC teams. After commencement of the PPP transaction, the Project Company will be established (see paragraph 4) and will be responsible for implementation of the PPP including the design, construction, financing, and O&M of the assets and establishment of a utility and holistic service delivery. The PMO structure and staff will remain in place at this stage, but their role and responsibilities will change to supervising the Project Company and its performance of contractual responsibilities during implementation. The PMO will also function as an asset holder and will implement any activities that are outside the scope of the PPP. The PMO will remain responsible for M&E reporting throughout the project and will draw on data prepared by the Project Company (as required by the PPP Agreement). The World Bank will work closely with the Government and the PMO to ensure the PPP transaction is successful and will continue to supervise project implementation.

3. Figure 1.1 shows a schematic of the institutional arrangements under the project.

4. The Project Company. The PPP will follow the concession with subsidy model, whereby the JDG will retain legal ownership of the WSS infrastructure and assets but will award a long-term PPP Agreement to a competitively selected partner (or consortium), which will form a Project Company. Where land and assets are owned by farmers collectives, the JDG will enter into easement contracts with the farmers collectives to gain access to the land and the assets. The Project Company will be responsible under the PPP Agreement to construct/expand/rehabilitate, operate, and maintain the WSS assets, while providing high-quality WSS services to customers in Jingyang. The Project Company will collect tariff revenue directly from paying customers; and the JDG will also provide a subsidy to cover capital costs, O&M costs, and the financing costs for the IBRD loan and any commercial loan. The Project Company will subcontract the majority of its obligations under the PPP Agreement under an EPC contract and to an O&M contractor. There are likely to be several investors in the Project Company (depicted as investor A and investor B). Figure 1.2 shows a schematic of the key contracts under the project.

5. The proposed project seeks to create an integrated sustainable utility approach to WSS through the PPP structure while introducing private sector efficiency, commercial finance, and a customer focus.

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

In addition to the physical investments in the pipelines and treatment facilities, the project will support investment in management systems that are used by modern utilities (for example, Geographic Information System, customer management, and accounting systems). Few PPP contracts in China are focused on these elements of service delivery and performance. The PPP model used in this project will be output and performance based, incentivizing improved performance and service delivery.

Figure 1.1. Schematic of Project Institutional Arrangements

PLG

Government Authorities PMO Central: MOF + NDRC Coordination World Bank Group Local: HUDB, WAB, Finance and Oversight Bureau, DRC, EPB Team: Support World Bank IFC C3P Project Company (SPV) GIF Holistic WSS Utility

Figure 1.2. Schematic of Project Contracts

FM Arrangements

6. The district PMO staff are new to World Bank operations. Since the JDG is approaching the debt ceiling as regulated by the MOF, the full IBRD loan will be on-lent to the Project Company. The JDG will account for any contingent liability in accordance with relevant regulations. The Project Company will be

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responsible for routine FM-related tasks during project implementation and will be required to recruit qualified financial staff to ensure FM is smooth. The PMO will be responsible for overall project FM.

Accounting and Financial Reporting

7. Project disbursement (see in ‘Disbursement Arrangements’) and FM tasks will be handled by the Project Company and the PMO (for reviewing and supervising). The ‘Accounting Regulations for Enterprises’ issued by the MOF will be adopted in the project. However, financial statements will be prepared in the format stipulated by the MOF’s Circular 13.

8. The Project Company will manage, monitor, and maintain project accounting records for all project activities including the TA activity. Original supporting documents will be retained by the company. Project financial statements will be prepared by the company and then reviewed by the district PMO. The unaudited semiannual project interim financial reports (whose format and content will be in accordance with Circular #13, as agreed by the MOF) will be furnished to the World Bank by the district PMO no later than 60 days following each semester, and will be in form and substance satisfactory to the World Bank.

9. Adequate project accounting staff with relevant educational background and commensurate work experience in the work they are expected to perform will be one of the critical factors for successful implementation of project FM. The district PMO was required to submit the curricula vitae of financial staff of the PMO to the World Bank for review. The assessment identified that the district PMO does not have World Bank-financed project experience and it is highly possible that the Project Company, once formed, also will not. This could lead to misuse or inefficient use of project funds. Mitigation measures to address this risk are as follows: (a) FM-related requirements are included in the bidding document for procuring the Project Company, (b) preparation and distribution of an FMM to standardize project FM procedures, and (c) provision of FM technical training and knowledge sharing workshops to be arranged by the World Bank and the PMO.

10. The task team will monitor the accounting process, including the adequacy of the FM system and staff training, especially during the initial stage to ensure complete and accurate financial information is provided on time.

Internal Control

11. The internal control system comprises the following:

(a) Primary FM responsibilities of the district PMO will be, but not limited to, providing guidance to the company’s FM work, reviewing expenditure reporting and financial reports submitted by the company, and submitting the financial reporting to the World Bank. Although the Project Company will be responsible for day-to-day FM work and submitting project financial reports to the district PMO, it is required that a sound internal control system should be established in the Project Company to ensure project funds are used for the intended purposes.

(b) SPFD will oversee the disbursement document and the use of the World Bank loan for its intended purpose.

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

(c) Appropriate segregation of roles and responsibilities in all project entities is required.

(d) Project FMM is to be prepared to unify project FM work.

(e) Annual external audit to evaluate the performance of the overall internal control system. The foreign currency exchange risk will be jointly borne by the JDG and the Project Company. During the construction period, it will be fully borne by the Project Company; during the World Bank loan repayment period, it will be fully borne by the JDG.

12. However, there are potential risks associated with weak communication between the PMO and the Project Company about project FM and inadequate supervision of the works conducted by the Project Company. To mitigate the risk, detailed internal control procedures including segregation of duties, authorized review, approval and reporting procedures as well as the safeguarding of assets will be established and documented in the FMM.

Audit Arrangements

13. The Sichuan Provincial Audit Office (SPAO) will be assigned by China National Audit Office (CNAO) as auditor for the project. The annual audit report will be issued by SPAO. SPAO has extensive experience with previous World Bank projects and is deemed acceptable to the World Bank. In addition, according to CNAO’s quality assurance procedures, each first year’s audit report issued by provincial audit offices should be reviewed by CNAO before the audit report is submitted to the World Bank.

14. The PMO will be responsible for submitting annual audit reports with project financial statements to the World Bank within six months of the end of each fiscal year (June 30). According to the agreement reached with the MOF and CNAO, the audit report and audited financial statements will be publicly available in both World Bank and SPAO’s official websites. This requirement is stipulated in the loan agreement.

Disbursement Arrangements

15. The proposed lending modality is an IPF. Therefore, the project will apply a traditional disbursement mechanism by which disbursement will be made against eligible expenditure. A Designated Account (DA) is to be established and managed by the provincial finance department; and furthermore, the Project Company will be required to inject equity and invest the registered capital before commencement of construction which means it should have sufficient funds to start the project activities. Before the Project Company is established, no expenditure is expected to be financed from the World Bank loan proceeds. To ensure that the winning bidder for the PPP leverages its own money to invest in the project and does not only use debt, the Project Company is required to maintain a minimum equity level of 20 percent (that is, a debt to equity ratio of 80:20). The disbursement percentage of World Bank loan would be 85 percent (civil works and goods) and 100 percent (consultancy service, non-consultancy service, and trainings). Four disbursement methods—advance, direct payment, reimbursement, and special commitment—are available to the proposed project. The disbursement categories and amounts are as listed in table 1.1.

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

Table 1.1. Project Disbursement Categories and Amounts Amount of Loan Disbursement Category Allocated Disbursement Percentage (in EUR) Goods and works, under the 87,986,250 85% Project Non-consulting services, consulting services, Incremental Operating Costs and Training 891,000 100% and Workshops under the Project Front-end Fee Amount payable pursuant to Section 2.03 of the Loan 222,750 Agreement in accordance with Section 2.07 (b) of the General Conditions Total 89,100,000

Budgeting

16. The annual PIP, including the funding budget and resources, will be prepared by the Project Company. The district PMO will submit the annual plan to the World Bank for comment once it has been approved. Budget variance analysis will be conducted by the Project Company on a semiannual basis and any necessary actions will be taken to ensure that the project is implemented as planned. The World Bank will work with the PMO to supervise the annual project plan and to enhance budget preparation and execution during project implementation.

Funds Flow

17. The World Bank loan will be progressively on-lent (at the same rate of interest and with no surcharges) down through the administrative levels from SPFD to the Deyang Municipal Finance Bureau, to the JDFB, and finally to the SPV company (see figure 1.3). Considering the prevailing lower interest reference rate for the euro, Deyang decided to select the euro as the commitment currency with fixed spread. Total maturity is to be 25 years to match with the PPP agreement term, including six years grace period. The front-end fee would be financed out of the loan proceeds; and premium and interest costs would be financed by the government counterpart funds. The JDFB will then pay the Project Company through both the on-lent loan portion for CAPEX costs (also at the same interest rate and with no surcharges) and through the annual subsidy for OPEX costs. WSS system users/customers will pay tariffs to the Project Company, which will then transfer to the JDFB (not shown in figure 1.3).

18. The project will use the traditional expenditure-based disbursement method and the payment request prepared by the SPV company will be submitted to the PMO first, then reviewed by the JDFB and the prefecture finance bureau, and then submitted to the provincial finance department. The reimbursed funds will be delivered from DA to prefecture finance bureau, district bureau, and finally to contractors/Project Company (if it is prepaid by the company). Based on the project’s request, the World Bank can also disburse to the Project Company directly if related requirements are met.

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

19. The proposed funds flow arrangement and related processing period should ensure that the Project Company receives payment within the date range stipulated in the PPP Agreement. The World Bank will closely monitor disbursement efficiency during implementation. If material payment delays resulting from slow disbursement are observed, the World Bank will guide the project to explore a more streamlined funds flow arrangement.

Figure 1.3. IBRD Loan Funds Flow Schematic

World Bank

SPFD LEGEND

Prefecture Finance Bureau Funds flow

District Finance Bureau WA/Document flow

District PMO

Project Company

Procurement

20. The implementation arrangements for procurement are described in the following paragraphs.

21. Applicable procurement rules and procedures. Procurement will be carried out in accordance with the ‘World Bank Procurement Regulations for IPF Borrowers’, dated July 1, 2016, and revised in November 2017 and August 2018, and hereafter referred to as ‘Procurement Regulations’. In addition to the upstream procurement for selection of the private partner, downstream procurement will normally be based on predominant domestic practices. ‘Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants’, revised as of July 1, 2016, shall apply to the project. The procurement of the PPP partner is expected to be completed by September 2020.

22. Institutional arrangement for procurement. A PMO sitting at the district housing and urban-rural development bureau had been established. The other relevant line agencies—such as WAB, financial bureau, and district PPP center—are also involved in PMO operation. The PMO is staffed with the officials from different line agencies. In addition to involving relevant line agencies, the PMO has been engaging external consultants to provide specialized assistance for the implementation of the project. Specific to

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the procurement, IFC has been hired to design the transaction structure including the proposed procurement methodology while a procurement agent has also been hired to deal with the processing of procurement on the platform managed by the authority.

23. Major procurements envisaged. The major procurement under the project is the selection of the private partner to reach PPP agreement, which is also referred to as upstream procurement. The selection of the private partner would be managed by the PMO and go through competitive process. The selected partner is expected to establish a Project Company, to handle the procurement of works, goods, consultancy service related to the project, which is regarded as downstream procurement under the PPP arrangement. The downstream procurement will adopt the Project Company’s own procedures that are deemed acceptable by the World Bank. The procurement procedures that are applicable for this project would be defined in the OM. The PMO will be responsible for ensuring that the procurement rules specified in the OM are followed in practice.

24. Procurement strategy. A PPSD has been prepared by the borrower covering the aspects of operational context, capacity assessment market analysis, procurement risk analysis, and other details. Based on the transaction model and market sounding, taking the routine domestic practice for PPP procurement into account, the preferred procurement approach for upstream procurement will be open competitive process, to be more specific, single stage two envelops with prequalification. The PPSD illustrates the logic to select such procurement approach.

25. OM. An OM was prepared at the project appraisal stage and sets out the rules to be followed for implementing the downstream procurement. The procurement procedures that are applicable for this project are described in the OM. Moreover, the OM specifies the minimum requirement on procurement in the case of adopting commercial practice, which includes the following:

(a) The World Bank’s Anti-Corruption Guidelines shall apply. In particular, the contracts to be financed by the proceeds of entrusted loan shall include relevant provisions on anticorruption.

(b) The contracts cannot be awarded to firms or individuals suspended and/or debarred by the World Bank (the listing of debarred firms can be found on the World Bank website: www.worldbank.org/debarr).

(c) Procurement should ensure there is provision in the contract, permitting the World Bank to inspect all accounts, records, and other documents relating to the procurement process and selection and/or contract execution and to have them audited by auditors appointed by the World Bank.

(d) In addition, conflicts of interest should be avoided in procurement.

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ANNEX 2: FEASIBILITY STUDY REPORT AND OPTIMIZATION OF TECHNICAL DESIGN

COUNTRY: People's Republic of China Sichuan Water Supply and Sanitation PPP Project

1. FSR. The revised FSR was prepared by a selected design institute which had prior experience with World Bank and PPP projects. The FSR was prepared in line with national technical standards. The FSR has been cleared by Sichuan Development and Reform Commission. The engineering design and technical issues listed in the following list have been given special attention to during project preparation.

(a) Water demand projections. Realistic water demand projections for the project were conducted to determine CAPEX and OPEX costs and were prepared based on (i) national codes, (ii) survey of households and user groups (1,000 households) on water use, (iii) historic operational data from survey of existing water supply plants, (iv) provincial population projections, and (v) standards for water use (including municipal, industrial, landscaping, firefighting, and public facility water uses).

(b) Wastewater projections. Wastewater projections were prepared based on (i) national codes, (ii) field survey of households and water user groups on wastewater generation data, (iii) operational data and information from a survey of existing WWTPs in the townships, (iv) current and projected water use (short term and long term), and (v) water pollution coefficients derived for the project area;

(c) Water supply schemes. Current Government of China policy requires centralization of WTPs. Two alternative configurations for water supply schemes were compared to identify the least-cost option (based on CAPEX and energy costs). These included (a) improving the current existing decentralized WTPs and supply schemes (largely drawing on groundwater) and (ii) consolidating water supply to be provided by two centralized, surface water schemes. Option (ii) was preferred because it simplifies the overall system and is in line with the Government of China’s policy aims toward centralization and surface water, while still utilizing existing assets (that is, the regional distribution networks and WTPs—where two of the existing WTPs will be expanded/upgraded and the remaining WTPs will serve as pumping stations). Option (ii) also avoids significant land acquisition and resettlement costs and has the lowest life cycle combined CAPEX and OPEX cost.

(d) Options for wastewater and sanitation schemes. In Jingyang, in the five years before appraisal, six rural WWTPs were built—serving towns located in the relatively flat plains area of the district. All of these plants were substantially oversized and underutilized (operating at 10–15 percent of capacity). Three wastewater and sanitation options were compared: (i) a centralized sewer scheme for all areas; (ii) a centralized sewer scheme for the plains area, and decentralized solutions for hilly areas of the district; and (iii) decentralized solutions for all areas (that is, improved septic tanks). Option (ii) was preferred because it connects more households to the recently built and underutilized WWTPs and does not require construction of additional large-scale WWTPs or septage treatment facilities. Under Option (ii) in the plains, four WWTPs will be upgraded to comply with higher discharge standards and six small-scale (less than 50 m3/d) WWTPs will be built. In the hilly areas where

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population and settlements are more remote and scattered, rural households will be served by properly designed, prefabricated septic tanks—instead of building centralized sewer networks. Option (ii) has the lowest combined CAPEX and OPEX cost.

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

ANNEX 3: PPP STRUCTURING OPTIONS

COUNTRY: People's Republic of China Sichuan Water Supply and Sanitation PPP Project

1. The following three main PPP structures were considered during project preparation: (a) a EPC + O&M/DBO structure, (b) a lease/affermage structure, and (c) a concession with subsidy structure. These three options are defined and described in Figure 3.1, Figure 3.2, and Figure 3.3. To analyze and compare the PPP structuring options, the following issues were considered (some of which were identified in market sounding):

Financial Viability and Government Affordability

(a) Given that revenues are limited and will be insufficient to cover capital and operating expenses, the JDG will be required to provide significant subsidies to the Project Company to ensure reasonable return. (b) The local government would like to limit such subsidies to CNY 100 million per year.

Demand Uncertainty and Lack of Commercial Data

(a) As the nature of the current service provision is quite informal, there are limited data available on the operations and finances of the existing service providers. The social consultant has conducted a household survey on the affordability of tariffs, and a potential drop in water consumption due to price elasticity needs to be factored in. (b) CAPEX annuity (availability payment) or a guarantee on revenues and volumes will be critical.

Creditworthiness/Government Performance Payment Risk

(a) Given the need for a significant government subsidy, market feedback has indicated that some potential bidders have concerns regarding the liquidity/creditworthiness of government payments, and several have had experience of local governments in other areas in China defaulting on their payment obligations. This could be mitigated through guarantees, securities, and credit enhancements. However, it is proposed to initiate procurement without such credit enhancements and see later if this is necessary.

Long-term Incentive for Sponsors to Improve Service Quality

(a) If the PPP were structured as an EPC, there would be a profit margin, but there may be an imbalance in favor of the construction stage, because the O&M operations are a relatively small part of the business (with less than 100 staff). Therefore, there is a risk that with low O&M margins the PPP partner could walk away from the contract after the profitable construction stage. (b) Incentivizing operators to focus on both construction and O&M is a critical success factor. This is better achieved through a bundled concession structure to the PPP, with reasonable lock-in periods and stringent KPIs for operations. This could also be achieved to some extent

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

through a DBO structure, but there is still a risk of focus on construction under such model as the construction costs are paid for against milestones.

Transfer of Operations/Legacy Issues

(a) The existing operators are scattered and informal. Integrating them into a rural water utility will require aggregating 40 small-scale operations, including transferring the use of their assets and the staff. (b) Legacy issues (for example, latent defects and claims) will also have to be addressed in the PPP structure and bidding documents.

Figure 3.1. Option 1 - EPC + O&M/DBO Structure

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

Figure 3.2. Option 2 - Lease/Affermage

Figure 3.3. Option 3 - PPP Concession with Subsidy

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

PPP Structure Options Comparison

2. The advantages and disadvantages of each option are set out in Table 3.1:

Table 3.1. Advantages and Disadvantages of Three PPP Structure Options

Option 1 Option 2 Option 3 EPC + O&M/DBO Lease /Affermage Concession + Subsidy

Pros • It is less risky for PPP • It moves more operating risk • It requires PPP partner to partner. to the PPP partner to align raise finance for certain • Selecting one party incentives with the works, thereby ensuring that responsible for both government by allocating it is vested, as it will only EPC and O&M will commercial risk on recover the costs of minimize interface risk operations. investment over the contract and allow • Public financing for capex period, and less likely to walk synergies/economies should lead to lower cost of away after construction. and good coordination capital. • It creates a stronger incentive overall. for PPP partner to construct • Public financing for facilities and manage capex should lead to operations efficiently as it will lower cost of capital. take full commercial risk on an integrated business.

Cons • Financing risk rests • Financing risk rests with • It introduces a higher cost of with government. government. Government has capital for financing CAPEX, Government has constraints on financing CAPEX which eventually gets passed constraints on requirements. on to the Government. financing CAPEX • As tariff is insufficient to cover • As tariffs are insufficient to requirements. operational expenses, a cover operational expenses, a • As tariff is insufficient subsidy is required. subsidy is required—which to cover operational • Subsidy may reduce the will potentially be larger than expenses, a subsidy is incentive for the PPP partner for other options. required. to manage operations • The subsidy may reduce the • Project is more likely to efficiently or to maximize incentive of the PPP partner be skewed toward volumes/revenues. This could to manage operations construction. While be mitigated through efficiently or to maximize incentives can be operating KPIs and a capacity volumes/revenues. This could included to prioritize annuity, or through minimum be mitigated through service delivery during revenue or volume guarantees, operating KPIs and a capacity operations, the private while imposing construction annuity or through minimum party can still and NRW ramp-up. revenue or volume potentially walk away • It creates interface risk for guarantees, with after it has made profit government on the construction/NRW ramp-up. on construction. This construction contracts. Alternatively, such risks could risk could be mitigated Government has to manage be priced into the bids, with through lock-in periods multiple contracts—with a the subsidy amount as the bid and KPIs. potential for cost overruns. parameter (this approach is • The domestic PPP market in recommended for this China is unfamiliar with this project): approach. o Greater complexity

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Option 1 Option 2 Option 3 EPC + O&M/DBO Lease /Affermage Concession + Subsidy o More contingent liabilities o Riskier for the PPP partner

PPP Structure Options Cost Analysis

3. As noted, three options for structuring the PPP were considered (including cost comparisons and consideration of fiscal affordability) to find the structure most suitable to the JDG’s specific objectives and institutional context. Cost analysis was conducted for the three PPP options to compare the total costs to the local government. For details refer to annex 5.

4. The first two options involve only public financing by the JDG, while Option 3 includes financing from other commercial sources to be raised by the PPP partner (as equity or debt). The JDG selected Option 3, the ‘concession with subsidy model’, for reasons mentioned in section II-E of the main text.

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ANNEX 4: SUMMARY OF TERMS OF DRAFT PPP AGREEMENT

COUNTRY: People's Republic of China Sichuan Water Supply and Sanitation PPP Project

1. A draft of the PPP Agreement will be appended to the request for proposals for bidders for the PPP. Proposed key terms of the draft PPP Agreement are set out as follows:

Key Terms Description

1. Parties • The JDG represented by Jingyang Housing and Urban-Rural Development Bureau • Project Company

2. Conditions • Project Company precedent (CPs) to o Commercial debt financial close commencement o Other standard CPs date • Government o IBRD loan financial close and execution of on-lending agreement with the Project Company o Land expropriation/rights over collective land/easements/temporary land occupation rights o Other standard Conditions Precedent (CPs) • Common CPs for both Parties o Handover of existing infrastructure o Permits/administrative authorizations o Direct agreement with lenders

3. Consequences of • If none of the CP are satisfied or waived before the scheduled commencement failure to achieve date, the parties shall meet and agree on a solution to satisfy or waive the CPs commencement before a long stop date. date • If the Project Company fails to meet CPs under its responsibility before the long stop date, the Government has the right to terminate the PPP Agreement early and draw on the bid security. • If the Government fails to meet CPs under its responsibility before the long stop date, the Project Company has the right to terminate the PPP Agreement early and the Government shall return the bid security.

4. Term • 25 years from Commencement Date, including five-year construction phase and 20-year operation phase • Commencement date achieved upon the satisfaction or waiver of all CPs

5. Extension of term • Term may be extended in accordance with the PPP Agreement: o In case of Government default that justifies an extension of the scheduled service commencement date or the operation period, o In case implementation of the PPP is prevented by a force majeure event, or o As a means of compensation, for example, for political force majeure or change in law.

6. Transfer at project • On the Handover Date, the Project Company shall transfer to the Government all handover project infrastructure and assets in accordance with the handover requirements

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Key Terms Description

and procedures under the PPP Agreement, free and clear of any liens or encumbrance. • The Project Company shall ensure that the relevant financing documents contain provisions giving unconditional effect to the handover requirement.

7. Project agreements • IBRD Loan On-Lending Agreement - to be concluded between the JDG and Project Company • Easement agreements/temporary land occupation agreements/contracts for construction and operation of water infrastructure on collective land - to be concluded between the Government and farmer collectives

8. Scope of PPP • Rehabilitation of existing water supply plants/stations and upgrade of existing Agreement sewage treatment plants • Construction of new water supply plants, sewage treatment stations, and related pipelines • Construction of drinking water source protection works and cloud information technology (IT) platform • Operation of existing, rehabilitated, upgraded, and new infrastructure referred above • Ongoing improvement of services based on feedback from village monitoring groups, community meetings, customer satisfaction surveys, and other feedback from women and men

9. Existing • 40 water supply plants/stations, 6 sewage treatment plants, 9 biogas tanks, and infrastructure existing water supply and sewage pipelines to be operated by the Project Company in their existing conditions during the construction phase • Rehabilitation, upgrade, financing, and operation of existing infrastructure to be under the responsibility of the Project Company

10. New infrastructure • New water purification plants, water source protection works, pump stations, water supply and sewage pipelines, demonstration projects, and cloud IT platform • Financing, construction, and operation of new infrastructure to be the responsibility of the Project Company • Standard construction and commissioning provisions to be included in the PPP Agreement

11. Land • The Government is responsible for expropriating land or securing rights to construct and operate infrastructure on collective land. • The Government or farmer collectives (where applicable) remain the owner of land and land use rights. • The Government undertakes in the PPP Agreement that the Project Company has the exclusive right to occupy and use the land throughout the project term • The Government ensures that easements and temporary land occupation rights required for pipelines are obtained from third parties. • The Project Company will bear land use taxes and costs incurred by expropriation, easements, and temporary occupation of collective land (if any).

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Key Terms Description

12. PPP development • Fees taken on by the Government to carry out the feasibility study, environmental fees assessment, design (if any), and land expropriation is to be borne by the Government.

13. Land ownership • The Government remains the owner of the land and real properties. • The Project Company will own moveable assets.

14. Government’s • Provision of land specific obligations • Issuance of permits / provision of administrative authorizations • General assistance • Provision of subsidy • Guidance on application of tariffs and regulations

15. Financing • Maximum debt equity ratio - 80:20 (subject to consultation with prospective lenders who may require lower debt-to-equity ratio cap) • Debt - US$ 100 million World Bank loan, plus commercial debt to be contributed in accordance with the PPP Agreement • Equity - to be contributed by the Project Company shareholders in accordance with the PPP Agreement • Securities - pledge of receivables and pledge of Project Company shares • Direct agreement with banks providing step-in rights

16. Stability of • Lock-in period - construction phase + 2 years or more with several intervening shareholders periods to allow for gradual step-down, during which no transfer of the Project Company equity allowed beyond lock-in restrictions • Upon expiry of lock-in period - change of control of the Project Company subject to the Government’s approval

17. Regulatory • Piped water tariff payable by end users and to be collected directly by the Project revenues Company

18. Non-regulated • Sewage treatment service fees payable by the Government to the Project revenues Company (sewage treatment fees - collected by the Government through the Project Company as agent; the Government then pays sewage treatment service fees to the Project Company)

19. Subsidy structure • The Government will pay the Project Company the following subsidies: o CAPEX subsidy to cover CAPEX and debt finance cost and equity return o OPEX subsidy to cover shortfall of regulated revenues (at optimized volumes) over efficient OPEX (optimized volumes are target volumes of water supplied and wastewater treated) (This subsidy includes sewage treatment service fees.)

20. Performance bonds • Performance bonds for construction • Performance bonds for O&M • Performance bonds for project hand back (and warranty) at the end of the project term

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Key Terms Description

21. Liquidated damages • The Project Company to pay liquidated damages for the delay in achieving payable by the scheduled service commencement date Project Company

22. KPIs • Separate KPI regimes for water supply, sewage treatment, and pipe network, covering (among others) water supply capacity and quality, sewage discharge quantity and quality, and female and male customer satisfaction with services • Differentiated KPI regime for five-year construction period adapted to existing infrastructure and to allow ramp up in capacity and transition to more efficient operations • KPIs subject to payment deductions or liquidated damages

23. Existing employees • Government employees remain within the Government other than those that agree to transfer to the Project Company and whom the Project Company agrees to hire.

24. Utilities • The Government is responsible for providing power and water at the boundary limit of the project site. • The Project Company is responsible for connections/use of public utilities within the project site. • Power tariff - Power is to be provided by the Government, based on regulated power tariffs which will be a pass-through item, although efficiency in power consumption is a risk to be borne by the private partner.

25. Government access • The Government will have access to the project site in accordance with terms and conditions of the PPP Agreement. • The Government will have access to information in accordance with terms and conditions of the PPP Agreement.

26. Reporting • Performance, security, financials, budget, issues, commercial contracts, requirements environmental and social, water quality, water supply and sewage treatment, health and safety, audit, and so on • Annual reports - customer service satisfaction survey, customer feedback, and actions taken.

27. Material breach • Project Company’s material breach: o Failure to achieve commissioning date within a certain period o Failure to consistently meet KPIs (that is, persistent breach) o False or misleading representations and warranties o Abandonment of project o Assignment of any rights or obligations in contravention of the PPP Agreement o Voluntary or involuntary bankruptcy, insolvency, or wind-down of the Project Company • Government’s material breach: o Persistent failure to make payments in accordance with the terms of the PPP Agreement o False or misleading representations and warranties o Other material breach defined in the PPP Agreement

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Key Terms Description

28. Force majeure • Nonpolitical force majeure event—for example, lightning, fire, earthquake, tsunami, flood, cyclone, or other natural calamity/act of God, epidemic or plague, accident or explosion • Political force majeure event—for example, change in law, expropriation, nationalization, act of war, terrorism, civil unrest, strike, act of foreign enemy, politically motivated sabotage war, or failure to obtain or provide necessary administrative approvals • Suspension of affected obligations during subsistence of force majeure event • In case of a natural force majeure event—affected party has a termination right that can be exercised after the expiry of the prolonged force majeure period • In case of a political force majeure event—the Project Company has a termination right that can be exercised after the expiry of the prolonged force majeure period

29. Termination • In case of a material breach by a party, the non-defaulting party may terminate the PPP Agreement early after a cure period is provided to the defaulting party. • In case of a prolonged force majeure, the affected party has a termination right after the expiry of the prolonged force majeure period.

30. Termination • Government material breach/political force majeure event compensation o Outstanding debt subject to gearing cap applicable from commencement date o Equity o Certain level of return on equity, OR o Fair market value of the concession based on NPV of the CAPEX subsidy (similar to other China PPP projects) • Material breach of the Project Company o Maximum to be outstanding debt subject to gearing cap applicable from commencement date • Prolonged natural force majeure event o Outstanding debt subject to gearing cap applicable from commencement date o Equity o Minus insurance indemnity

31. Assignment • There will be no assignment of rights and obligations under the PPP Agreement, unless the other party has granted its prior consent. • The Project Company can pledge project revenues and the Project Company’s shares to financing parties for project financing.

32. Governing law and • Governing law - Government of China law dispute resolution • Independent expert for technical disputes • China International and Economic Trade Arbitration Commission arbitration

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ANNEX 5: ECONOMIC AND FINANCIAL ANALYSIS

COUNTRY: People's Republic of China Sichuan Water Supply and Sanitation PPP Project

Economic Analysis

1. The main economic benefits of the project are improved living conditions, amenities, and public health owing to the investments of improving WSS (both quality and quantity) and productivity and efficiency gains in the investment and operations of water supply and wastewater treatment facilities by private sector participation. The economic costs of the project are capital investments costs (and associated resettlement and environmental mitigation costs of the investments) and O&M cost.

2. The economic analysis was carried out for a 25-year period, from 2020 to 2044 inclusive of a five- year construction period, and using a discount rate of 10 percent. The economic benefits and costs were expressed in domestic currency and constant 2019 prices net of costs of transfer, financial charges, and price contingencies. International costs were converted to local currency at an exchange rate of CNY 7.0 to US$1.00. An average VAT of 13 percent is excluded from goods, and shadow wage factors of 0.8 and 1.0 are applied to unskilled and skilled labor, respectively.

3. As the data needed to estimate public health benefits are either unavailable or would be very difficult to obtain, a mix of CBA for water supply investment and CEA for wastewater treatment and sanitation investment has been used in the economic analysis of the project.

Potential Economic Gains from PPPs

4. The main argument behind the promotion of infrastructure PPPs is that they may lead to efficiency gains in service delivery because the long-term nature of the contracts generates adequate incentives for private partners to internalize potential positive spillovers between the building and the operating phases of the project.

5. Moreover, PPPs may offer a combination of private efficiency gains and public sector-specific choice of performance indicators, such as quality or coverage. Indeed, PPPs offer the possibility for the Government to contract over defined performance requirements by tying payments and penalties to them, thus incentivizing the private operator to minimize its costs given these requirements. These incentives may lead them to exert specific efforts to reduce some of the main and recurring problems in large-scale infrastructure projects, namely construction delays and cost overruns.

6. For water utilities, Jiang and Zheng (2014) analyze a panel data set of water utilities from 200 Chinese cities between 1998 to 2007. Starting in the 1990s, there was entry of foreign water companies, particularly through build-operate-transfer schemes39. They conclude that private sector participation in water utilities has led to cost savings, and they find positive, although not significant, effects on labor productivity and total factor productivity. For this project, economic efficiency and quality improvements potentially arising from PPP arrangements may be observed in the following areas: (a) reduction in

39 Yi Jiang and Xiaoting Zheng, "Private Sector Participation and Performance of Urban Water Utilities in China," Economic Development and Cultural Change 63, no. 1 (October 2014): 155-189.

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technical losses (for example, spills/leakages can be used as a proxy for inefficiency), (b) improved access, and (c) improved water quality.

Water Supply Investment

7. Baseline and problems of current water supply systems. In 2018, approximately 70 percent of the population in the project area had access to a piped water supply from 40 small-scale water treatment facilities provided by the rural township. The remaining 30 percent had to rely on boreholes on their property for water supply. The current situation has failed to provide high-quality water supply to the population in terms of quality, quantity, and reliability. The existing 40 small piped water supply systems are small-scale, incomplete, and scattered, with poor reliability. As water supply is currently dependent on groundwater, water quality also poses potential health concerns. The water source is mostly shallow aquifer groundwater, along with some local reservoirs, both of which can be easily contaminated. Naturally occurring iron and manganate content in the groundwater exceed standards. For the population who live outside the existing water supply coverage area and rely on boreholes, the situation is even worse as the water quality varies considerably depending on the characteristics of the groundwater, time of the year, and proximity to any contamination source. In addition, drinking water sources are not properly protected from encroachment and pollution, posing further risks to hygiene and safety. Many households keep drinking water tanks, usually 19 L in size and costing CNY 38 per tank, for emergency and/or regular drinking use. This illustrates the poor quality of current water supply systems faced by the population.

8. Projected beneficiary population of improved water supply service. Due to rural-to-urban migration, the overall population in the project area is projected to decrease at an average annual rate of 0.5 percent. The proposed project will construct larger and more centralized WTPs to replace the existing 40 small water treatment facilities and most of the boreholes and develop and upgrade water supply systems. The project is expected to increase to the coverage of municipal water supply to 94 percent of the total population by 2025. Table 5.1 shows the projection of served population over years.

Table 5.1. Projection of the Served Population of Piped Water Network 2025 2030 2035 2040 2044 Water supply served population 235,365 230,108 225,531 221,486 218,550

9. Proposed technical interventions - Decentralized versus centralized piped water supply. The proposed project will convert the current configuration of 40 water treatment facilities operated by different providers to a more integrated configuration. Before assessing the economic return of the proposed water supply investment, a set of technical scenarios were evaluated, from relatively decentralized to more centralized water treatment and service provision. Across the spectrum of without- and with-project scenarios, three scenarios were evaluated. Table 5.2 presents the details of the three scenarios’ technical designs and costs.

10. Identification of the least-cost intervention. Of the three scenarios assessed, Scenario 1 has minimal costs associated with water source protection and overall better service quality and reliability, albeit at slightly high energy costs to pump the water through the longer pipeline network. Once the opportunity cost of future land development is considered, this scenario comes out as the preferred technical solution with the least amount of land restricted from development to protect the water source.

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40 water supply stations (32 using ground water and 8 using surface water) available; 2413 km Current Situation water supply pipelines (1107 km inter-village water mains and 1316 km within villages). Table 5.2. Least-cost Analysis of Centralized Water Supply (US$, millions)

Scenairo 1 Scenairo 2 Scenairo 3

40 water supply stations (32 using ground water and 8 using surface water) available; 2413 km Current Situation water supply pipelines (1107 km inter-village water mains and 1316 km within villages).

2 water treatment plants, 2 14 water treatment plants, 2 6 water treatment plants, 2 water treatment stations (<200 water treatment stations, 25 water treatment stations, 33 Description of tons/day), 37 water water distribution stations, 1 water distribution stations, 1 alternatives distribution stations, 5 pumping station, and 90 km pumping station, 123 km water pumping stations, and 148 km water mains mains additional water mains. Capital investment Land and construction cost of water source 4.97 19.71 6.48 areas Land acquision Cost 0.81 0 0.7 Water treatment plants 7.18 14.57 9.17 Water mains 9.26 3.51 7.69 Water distribution 0.11 0.04 0.07 stations Pumping stations 0.43 0 0 Subtotal 22.76 37.83 24.11 O&M costs (20 years) 4.53 1.82 3.25

11. A CBA was further conducted on the least-cost scenario to assess the economic return on the water supply investment scenario, as compared to the without-project scenario.

12. Costs consist of capital investments and annual cost of O&M, both estimated in economic terms in domestic currency and constant 2019 prices, net of costs of transfer, financial charges, and price contingencies.

13. Benefits of the water supply investments mainly come from improved quality of life owing to the improvement in sanitation conditions, amenities, and public health. The benefit was conservatively valued at the total value of the willingness to pay of the beneficiary population for improved water supply service. For domestic water supply, willingness to pay is estimated as a percentage of per capita disposable income, considering households’ current access to piped water supply. As no willingness-to-pay survey was done in the project area for the proposed project, the benefit transfer approach was adopted using survey values from similar regions.

• For those currently without access to piped water today (approximately 27 percent of future service population), willingness to pay is estimated based on past survey results. One survey (2006) of 1,500 households in five districts of the Chongqing municipality concluded that willingness to pay for improved water service was between 1.5 percent and 2.0 percent of the disposable income.40 Another survey among residents of Beijing suggested a similar

40 Wang, H, J. Xie, and H. Li. “Water Pricing with Household Surveys: A Study of Acceptability and Willingness to Pay in Chongqing, China.” China Economic Review 21 (2010): 136–149.

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range of 1.2 percent and 2.0 percent. Both surveys revealed a higher percentage of household disposable income willing to be allocated to pay for improved water supply among rural households whose absolute income is lower. Given these considerations, the analysis assumes the willingness to pay for improved water supply among rural residents of the project area at 1.5 percent of disposable income. • For those currently with access to piped, albeit inferior quality, water supply (approximately 70 percent of the future service population), a study measuring willingness to pay of piped water quality improvement using a contingent valuation survey in Songzi, Hubei (2011) estimated a willingness to pay for the drinking water quality improvement program at 0.3 percent of the household disposable income.41 As the quality improvement brought about by the project investments goes beyond drinking water to all aspects of water consumption in household daily life, the willingness to pay as a percentage of household income is assumed at 0.5 percent of disposable income. • For non-domestic water supply, willingness to pay is assumed at CNY 3.0 per ton, the mean tariff for industrial customers in the project towns.

14. The above willingness-to-pay results were adjusted to reflect the current income level in the project area. In 2018, per capita disposable income among rural residents of Jingyang stood at CNY 18,524, thus translating to a per capita willingness to pay for improved water supply of CNY 278 a year for individuals currently without access to piped water, and CNY 92.6 for those currently with access to piped water supply.

Table 5.3. Estimates of Willingness to Pay Estimates of Willingness to Pay Percentage of Service Willingness to Pay as Willingness to Pay Population Percentage of Income (CNY) Domestic • Currently with access 73 0.5 92.6 per year • Currently without access 27 1.5 277.9 per year Non-domestic Mean industrial water tariff in the project townships 3.0 per ton

15. Outcome of the CBA. Based on the above assumptions, the water supply component of the project yields an EIRR of 13.7 percent, exceeding the economic opportunity cost of capital. Thus, the investment is economically justified. The GHG impact, for water investments, has a rather trivial impact on the project’s economic return as the projected savings in carbon emissions are negligible. After factoring in the shadow price of carbon, the EIRR of the project investment is estimated at 13.8 percent. Moreover, it is worthwhile noting that the EIRR estimate here is conservative because the analysis does not include other benefits such as the efficiency gains due to NRW reduction.

41 Jin Jianjun, Wang Wenyu, Fan Ying and Wang Xiaomin. “Measuring the Willingness to Pay for Drinking Water Quality Improvements: Results of a Contingent Valuation Survey in Songzi, China.” Journal of Water and Health (2016) 14(3): 504-512.

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16. Sensitivity analysis. Sensitivity analysis was carried out to assess the scenarios for potential increases in total capital investment cost. With an assumption of a 20 percent increase in the cost, the EIRR is 11.6 percent, which is still above the acceptable threshold. Therefore, the results are quite robust.

Wastewater Treatment and Sanitation Investment

17. Baseline situation. Currently, only 15 percent of the population in the project area is connected to a municipal sewer system. The rest of the population is served by septic tanks and on-site treatment, many of which are not well designed or are malfunctioning. The project area is currently served by six recently commissioned WWTPs and 154 anaerobic tanks (large septic tanks). All 6 WWTPs are operating sub-optimally due to overdesign and insufficient inflows (inflows of only 10–15 percent of the design capacity), although all plants do meet Class 1A standards. Some households in the area utilize septic tanks, or else, wastewater is discharged directly into nearby rivers without treatment, resulting in environmental pollution and broader public health risks downstream as polluted water flows into the river system.

18. Proposed interventions. The project will upgrade the existing wastewater treatment facilities and significantly expand the sewerage collection networks. It will increase the percentage of population under the coverage of municipal sewerage collection systems to 85 percent, that is, 216,000 people, by 2025.

19. Benefits of sanitation investments. Economic, environmental, and social benefits will be generated by improved wastewater management and sanitation. This includes avoided or reduced health costs linked to diarrheal disease and other water-borne diseases, increased quality of living of the local population due to better collection and treatment of wastewater and septage, reduced pressure on the local aqua system (including underground water sources in the project areas), and increased operational efficiency of the WWTPs. These health and environmental benefits are difficult to quantify, and as a result, a CBA has not been conducted. A CEA was, therefore, conducted to analyze alternative options and select the least-cost solution.

20. The wastewater treatment and sanitation investment is well aligned with regulatory and development requirements and with the targets that have been set by national, provincial, and local governments, such as the rural water pollution control laid out in the China Water Pollution Prevention and Control Law which required enhancing centralized wastewater treatment, the Water Pollution Prevention and Control Action Plan issued by the State Council, and a series of ecosystem protection and green development plans of Sichuan Provincial Government. These targets are based on their importance to public health and the quality of life of local residents and the development and modernization of small towns.

21. The analysis first divided the project area by topography into two districts: Plains District and Hills District. In the Plains District, different technical scenarios to collect and treat residential wastewater were identified and analyzed using the least-cost approach.

22. In the Plains District. Table 5.4 presents two technical alternatives considered for wastewater in the Plains District and their cost estimates. It shows Alternative 1, which will upgrade and use the existing 4 WWTPs and build 881 km sewerage collection pipelines and 30 pumping stations to fully use the treatment capacity of the 4 WWTPs, will cost less, and this was selected in the project.

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Table 5.4. CEA of Wastewater Treatment in Plains Area (US$, millions) Current situation 4 WWTPs with a treatment capacity of 12,800 m3 per day available, however only 8,190 m3 per day wastewater was actually collected and treated; 154 centralized large septic tanks each serving a cluster of multiple households; 229 km sewerage collection networks built Alternative 1 Alternative 2 Technical design Upgrade and use the existing 4 WWTPs Upgrade and use the existing 4 WWTPs and construct 881 km sewerage collection and build 29 new wastewater treatment pipelines and 30 pumping stations. stations and additional 826 km sewerage collection pipelines without the need for pumping. Capital cost Sewerage networks 62.07 60.07 New pumping stations 1.51 0.00 New wastewater treatment 0.00 8.07 stations Upgrading existing WTPs 5.14 5.14 Subtotal 68.72 73.27 O&M cost (20 years) 47.82 65.39 Total 116.53 138.67

23. In the Hills District. It is infeasible to adopt centralized wastewater treatment systems as it is very costly to construct sewerage collection pipelines and pumping stations in hilly landscape. The project will first continue to use existing two small-size wastewater treatment stations (200 tons per day) and centralized septic tanks and extend their household coverage as long as the gravity allows. Ten small-size wastewater treatment facilities (at around 50 tons per day) with house connection pipelines will be built in other town seats and large villages. A number of wastewater treatment technologies (bio-trickling filter process, biological contact oxidation processes, anaerobic/anoxic/oxic process, and MBR process) were considered and compared. MBR technique is selected based on its quality of reducing wastewater and relatively easy management.

24. For the cluster of households with over 50 people but located far from existing or proposed WWTPs or stations, the options of separate septic tanks and centralized septic tanks were analyzed according to their cost-effectiveness. The results of the CEA are shown in Table 5.5. It shows that building septic tanks separately for each household will be cost-effective, and this approach was selected.

Table 5.5. CEA of Wastewater Treatment in Hills Area (Taking Zhongxing Village as an Example) (US$, millions) Current situation 91 households and 228 residents living in the village, all using simple pit toilets or septic tanks; no sewerage collection and treatment facilities Alternative 1 Alternative 2 Technical design Separate septic tank (1 m3) in each One centralized septic tank for all targeted household households Capital investment Household connection cost 1.13 1.13 Separate septic tanks 0.39 0.00

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Collection pipelines 0.00 1.30 Centralized septic tanks 0.00 0.32 Subtotal 1.52 2.75 O&M (20 years) Septic tanks 2.08 0.28 Sewerage networks 0.00 1.25 Subtotal 2.08 1.54 Total 3.60 4.28

GHG Accounting Assessment

25. Based on the results of the GHG accounting assessment of the project’s relevant activities, GHG impact is estimated based on power consumption under the with- and without- project scenarios.

26. Water supply. Under the with-project scenario, the piped water system will be expanded and rehabilitated, there will be more households connected to the system, and there will be reductions in NRW and improvements in efficiency (all under Subcomponent 1b). Combined, these component activities should result in a decrease in power consumption from 4,173 MWh per year for the without- project scenario to 3,635 MWh per year for the with-project scenario. See the table below. With the grid emission factor at around 0.65 kg per kWh in Sichuan Province, the project would emit an estimated 2,712 tCO2 per year under the without-project scenario (i.e. at the current level of NRW) and 2,363 tCO2 equivalent per year with reduced NRW under the with-project scenario. The net impact is a reduction in GHG emissions of 349 tCO2 per year because of the project, or a lifetime avoidance of 7,335 tCO2 due to energy efficiency. After factoring the shadow price of carbon at the midpoint of the upper and lower bounds recommended by the World Bank’s Guidance Note on Shadow Price of Carbon in economic analysis, the net GHG impact of the water supply component is valued at an economic net present value (ENPV) of US$ 0.16 million.

Table 5.6. GHG Impact of the Water Supply Component

Electricity (MWh Annual Emission Lifetime Lifetime (tCO2) per year) (tCO2 per year) (US$, millions @ 10%) Without project 4,173 2,712 56,956 (1.27) With project 3,635 2,363 49,621 (1.10) Net impact (537) (349) (7,335) 0.16

27. Wastewater and sanitation. Under the with-project scenario, the operations of the WWTPs, pump stations, and septic tanks will consume an estimated 2,288 MWh of electricity each year, compared to the without-project case of an estimated 693 MWh per year. See the table below. The increase under the project is because the wastewater system is being expanded, many more households are being connected to the network, and more septage is being collected and treated (all under Subcomponent 1b). The net incremental power consumption associated with the project investment is around 1,595 MWh per year. With the grid emission factor at around 0.65 kg per kWh in Sichuan Province, the net impact under the with-project scenario for wastewater sanitation component would be an additional 1,036 tCO2 emitted each year due to higher electricity consumption. The component will also impact emissions of CH4 and N20 from the wastewater processes, with a net emission reduction for both gases under the

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with-project case, i.e. 192 tCO2 per year reduced for CH4 and 205 tCO2 per year reduced for N2O (see the table below). Combining the net emissions from electricity and from direct wastewater gases, the Project wastewater component will have a net annual increase in GHG of 639 tCO2 per year, or a total net lifetime increase in GHG emissions of 13,424 tCO2. After factoring the shadow price of carbon at the midpoint of the upper and lower bounds recommended by the World Bank’s Guidance Note on Shadow Price of Carbon in economic analysis, the net GHG impact of the wastewater and sanitation component is valued at a negative ENPV of US$ 0.30 million

Table 5.7. GHG Impact of the Wastewater and Sanitation Component Annual Electricity Electricity CH4 N2O Lifetime emission Lifetime (MWh per (tCO2 per (tCO2 per (tCO2 per (US$, millions (tCO2 per (tCO2) year) year) year) year) @ 10%) year) Without 693 451 607 1,521 2,579 54,154 (1.20) project With project 2,288 1,487 415 1,316 3,218 67,578 (1.50) Net impact 1,594 1,036 (192) (205) 639 13,424 (0.30)

28. Taking water and wastewater/sanitation activities together, the net impact of the project on GHG emissions would be an increase of 290 tCO2 per year, or a lifetime increase of 6,089 tCO2. The value of net GHG emissions under the project, using the Shadow Price of Carbon, is negative ENPV of US$ 0.10 million.

Financial Analysis

29. A financial analysis was conducted to examine the financial gains and costs of the Project Company for a 25-year contract period, using current prices. Key details and assumptions follow the revised project FSR and include the following: • Inflation (annual inflation rate applied to O&M costs and tariffs) • Construction period • Population, customer base, and water demand • NRW and changes over time • Water and wastewater tariffs • Cost of funds • Operating margin 30. To assess and compare the costs of three PPP options to the Government, the Government's financial flows under each option were calculated. This financial analysis provided detailed comparison of the lifecycle costs of the three PPP options considered and helped to inform the selection of the option most suitable for Jingyang District’s context and objectives. The total net financial flows and their NPV to the Government are Option 1 - CNY 1,825 million (NPV - CNY 1,037 million), Option 2 - CNY 1,950 million (NPV - CNY 1,107 million), and Option 3 - CNY 2,320 million (NPV - CNY 1,308 million). Detailed financial projections for each of the three options are available in the project files but have not been disclosed here per the request from the client and authorities, in order to protect information for the PPP procurement process.

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

ANNEX 6: GENDER INCLUSION AND CITIZEN ENGAGEMENT PLAN

COUNTRY: People's Republic of China Sichuan Water Supply and Sanitation PPP Project

Overview

1. Global experience has clearly demonstrated the critical role of community participation in the success and sustainability of water and sanitation programs. Citizen engagement in the planning and implementation of programs is important to build a sense of local ownership and willingness to adopt and pay for connections for improved water and wastewater systems, properly care for household sinks and toilets, empty septic tanks routinely, and change hygiene behavior. It is also important to ensure that citizen engagement is inclusive, particularly for women because they play critical roles in management of household water and sanitation. Women’s voices are seldom heard in planning for water and sanitation development, particularly in rural areas where women have lower levels of education and fewer opportunities for earning income. Few women play leading roles in local governance particularly related to infrastructure. The SIA for this project found that women in the project area are less informed than men about water and sanitation projects.

2. The project’s GI&CE plan provides a road map for raising awareness among both women and men in project communities about the risks of using borehole water and of improperly disposing of waste. This will be achieved through a BCC designed by the Project Company’s consultant and carried out by local grassroots organizations, including women’s organizations. The plan also provides a road map for gender inclusion and women’s empowerment, by engaging community members, a majority of whom will be women, and 60 percent of the group leaders will be women, in monitoring customer satisfaction with the Project Company’s actions to minimize the impacts of construction and, after construction, the quality of water and sanitation service provision. The reports of these committees will inform the Results Framework and the Project Company KPIs. In addition, it calls for the creation of customer relations/customer service mechanisms within the Project Company, including establishment of a customer relations officer, setting up a customer call center, and setting up a smartphone application as a convenient means for customers, particularly women, to ask questions about billing and service, request repairs, report problems, and provide feedback on the services. The public relations officer will also attend selected BCC events to answer customer questions and receive feedback on the quality of services. It also calls for the establishment of a social focal point in the PMO who will have oversight on GI&CE activities.

Scope of the GI&CE Activities

Workplan and Time Line

3. The Project Company will develop a workplan and time line for the BCC and customer relations mechanisms. The PMO social focal point will review the plan to ensure that it meets the requirements of the Results Framework. The village committee leaders will review the plan and time line to ensure that they will respond to the needs and schedules of the community members.

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Behavior Change Communication Campaign on WSS Connections, Household Maintenance, and Hygiene

4. The Project Company will hire a BCC consultant to develop a BCC strategy and campaign package appropriate for the project beneficiaries. The package will incorporate international best practices in WASH BCC (World Bank Water and Sanitation Program, International Red Cross, World Health Organization, UNICEF, and so on) and adapt existing materials, messages, and participatory activities (for example, use of song, drama, and games) to the needs, concerns, and levels of education of the project beneficiaries. The consultant will consult with village committees to ensure that the proposed messages, participatory activities, and materials will be understandable and motivating to all of their community members. The BCC consultant will also train village committee representatives and grassroots organization leaders on the content of the BCC package and effective, participatory methods for behavior change communication. The BCC consultant will provide advice and technical support to the grassroots organizations during the first year of the BCC as needed. The Project Company will be responsible for the quality oversight for the BCC package and the quality and completeness of the training and technical support provided by their BCC consultant.

5. Development of the WASH BCC strategy and campaign package will begin as soon as the PPP contract is awarded. The BCC will continue through the end of the construction phase (five years).

6. The WASH BCC will focus on increasing community households’ understanding of the importance of and promoting behavior change on connection to safe water, connection to wastewater systems (or routine septic tank septage removal), good practices to care for and avoid clogging drains or damaging water and sanitation equipment within the home, and good hygiene practices for water and sanitation (for example, hand washing, handling and disposal of infant fecal material, and cleaning toilet area).

7. The PMO social focal point and the village committees will provide support in identifying grassroots organizations for training and implementing the WASH BCC and mobilizing community members to participate in the BCC activities. Special outreach will be undertaken by the village committees and grassroots organizations to ensure women’s participation. Local opinion leaders (for example, village committee members, teachers, and grassroots organization leaders) will be encouraged to participate in the BCC events and mobilize others to join them. The results of the BCC activities led by the company will be measured by the numbers of connections to safe tap water and to wastewater.

Community Monitoring of the Quality of the WSS Service Delivery

8. Village committees in each participating village will appoint five-person community monitoring groups to monitor community satisfaction with WSS conditions and services. The PMO social focal point will assist the village committees in establishing the village service delivery monitoring groups and their leaders. A minimum of three women will participate in each monitoring group. Through the customer service data collection activity, the group will represent the community regarding customer satisfaction with the performance of the Project Company.

9. The purpose of these groups is to conduct customer satisfaction assessment using scorecards or simple surveys with community members and summarize the findings, broken down by male and female respondents, and report then to the village committee who will send them to the PMO and the Project Company. These community satisfaction data will be used by the Project Company to improve service and by the PMO for monitoring the customer satisfaction indicator in the Results Framework.

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10. Clear, measurable, and easy-to-understand criteria for assessing customer satisfaction will be developed in collaboration with community representatives and PMO WSS specialists to ensure that the wording will be understandable for community members and that the criteria for water and wastewater or septic tank services is consistent with the Results Framework indicators (for example, (a) for construction period - the Project Company actions to reduce noise, air, land, and water pollution from construction, traffic and road safety issues and (b) for service delivery - adequacy of water pressure; continuous or interrupted service; water quality—smell, color, and clearness; response time for service requests (unclogging sewer pipes, emptying septic tanks, and repairing water pipes); responses to customer questions about billing and service; and so on). The PMO social focal point will be responsible for finalizing the customer satisfaction scorecard that will be used in all of the villages.

11. The PMO social focal point will provide technical support and capacity building to the village committees on forming the monitoring groups and training to collect customer satisfaction data and summarize the findings, disaggregated by male and female responses. These monitoring data are part of the project Results Framework. The PMO and village committees will be responsible for the supervision and quality of the monitoring work.

12. The Project Company will pay a fee for this reporting to the village committees who will pay the members of the monitoring group for their work. Payment will be 50 percent in advance, and the remainder will be paid after the completed community satisfaction checklist/survey report is submitted. The monitoring groups will be required to collect customer satisfaction responses from at least 50 percent of the members of each community.

13. The scorecard or simple survey data will be administered by the monitoring group two times per year during years 2–6 of the project, and once per year during the period after the sixth year. During years 2–4, the focus will be on construction issues. In year 5, the focus will be on both construction and service delivery. From year 6 onward, the focus will be on service delivery.

Project Company Customer Relations Mechanisms

14. The Project Company will establish a customer relations office with staff. A customer relations officer will coordinate with the PMO social focal point on citizen engagement activities.

15. The customer relations officer will oversee the development of effective mechanisms for customer feedback and questions including, but not limited to, a mobile phone application based feedback mechanism, following the approach used in the World Bank’s Zhejiang Rural Water Supply and Sanitation Project (P133018), and a telephone call center to enable community members to ask questions about services and billing, request repairs, voice complaints, and make suggestions for improving services.

16. The Project Company customer database will include time-stamped customer requests, (disaggregated by male and female) and dated responses to customers, as well as customer feedback on services, which will be reported annually. Special efforts will be made to seek feedback from women, as the primary managers of WASH in households. The village committee will encourage community members to provide feedback to the Project Company, particularly women.

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

Table 6.1. Roles and Responsibilities for GI&CE Activities Community Members and Contract Company PMO Village Committees Grassroots Organizations Activity: GI&CE planning

• Prepare a workplan and time line for GI&CE activities in • Appoint a social focal point to • Provide feedback coordination with PMO and village committees. lead the GI&CE activity on the company monitoring. GI&CE workplan • Prepare a plan and time line for and time line. the community monitoring. • Provide feedback on contract company GI&CE workplan and time line. Activity: Community monitoring of customer satisfaction

• Pay a fee per monitoring report to the village committee for • Train and provide technical • Identify five • Group collects the work of the monitoring group. support to village committees. members of the satisfaction • Analyze results of monitoring and report on actions to be • Organize representatives from community data from at taken to address any issues. village committees and satisfaction survey least 50% of monitoring groups to discuss the (at least three the wording and completeness of the women). community— monitoring criteria. • Train and supervise both women • Finalize the scorecard to be used the community and men. in all villages. monitoring group in • Group • Supervise development of data collection. summarizes monitoring scorecards to ensure • Guide group findings on the outputs will be consistent analysis of the smartphone with the Results Framework findings (breaking application and reporting. down the results by transmits to • Review village monitoring group male and female). the village reports and company response. • Transmit findings to committee. the PMO and Project Company

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

Community Members and Contract Company PMO Village Committees Grassroots Organizations • Submit report to independent using smartphone engineer for the Results application. Framework monitoring. • Pay the monitoring • Note that TA will be required to group for their train the social focal point and work (fee paid by develop the application for contract company). submitting the study findings. Activity: BCC

Contract BCC consultant to: • Review the BCC package to ensure • Review the • Grassroots • Adapt existing best practice WASH BCC materials, media, and the messages are consistent with campaign package groups carry activities to Jingyang plains and mountain areas populations. government policy and project to ensure that the out the BCC at • Develop appropriate messages for women, men, and children objectives. messages will be the village level on benefits of safe water and wastewater system connections, understood by the with advice as risks of not connecting, hygiene, and care and maintenance of local community. needed from water and sanitation facilities in homes. • Identify groups the village • Provide a BCC package to each village committee (materials, (such as social committee and activities, and messages). organizations with a BCC contractor. • Train groups identified by village committees to use the government materials and activities to conduct the WASH campaign. mandate to work • Provide technical support as needed to the groups conducting on community the campaign during the first year of the campaign. development) to carry out the WASH campaign. • Help mobilize community members to participate in BCC. • Conduct special outreach to encourage

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

Community Members and Contract Company PMO Village Committees Grassroots Organizations women’s participation. Activity: Customer relations

• Appoint a customer relations officer who will coordinate with • Coordinate with customer • Encourage • Community the PMO social focal point and lead customer service activities relations officer of the contract community members of the company. company. members to provide • Set up a call center for customer questions and complaints. provide feedback to feedback to • Set up a smartphone application for customer questions, the contract company complaints, repair requests, and billing and payment. company, through • Participate in selected BCC activities to answer community particularly women. smartphone members’ questions and seek their feedback. app and call • Conduct special outreach to women, seeking their feedback center and through email and other media. during BCC • Record feedback from male and female customers and report events to PMO and independent engineer. attended by public relations officer of the contract company.

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The World Bank Sichuan Water Supply and Sanitation PPP Project (P168025)

ANNEX 7: PROJECT MAP

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