Document of The World Bank

FOR OFFICIAL USE ONLY

Public Disclosure Authorized Report No: 33668-CN

PROJECT APPRAISAL DOCUMENT

ON A

Public Disclosure Authorized PROPOSED LOAN

IN THE AMOUNT OF US$150 MILLION

TO THE

PEOPLE'S REPUBLIC OF CHINA

FOR A

HENAN TOWNS WATER SUPPLY AND SANITATIONPROJECT

Public Disclosure Authorized May 30,2006

Urban Development Sector Unit East Asia Pacific Region

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

Public Disclosure Authorized Bank authorization. CURRENCY EQUIVALENTS

(Exchange Rate Effective May 1,2006)

Currency Unit = Renminbi (RMB) or Yuan cy) Yl.00 = US$0.125 US$l.OO = Y8.008

FISCAL YEAR January 1 - December31

ABBREVIATIONS AND ACRONYMS

ADB Asian Development Bank PPMO Provincial Project Management Office CAS Country Assistance Strategy PSP Private Sector Participation CQS Consultant Quality Selection QC3S Quality and Cost based Selection CY Calendar Year RAP Resettlement Action Plan DBO Design Build Operate RMB Renminbi, Chinese currency EA Environmental Assessment SA Special Account EMP Environmental Management Plan SOE Statement ofExpenditures EPB Environmental Protection Bureau TA Technical Assistance ERR Economic Rate ofReturn TOR Terms ofReference FB Finance Bureau WACC Weighted Average Cost ofCapital FM Financial Management ws Water Supply FMS Financial Management Specialist wsc Water Supply Company FRR Financial Rate ofReturn WTP Willingness to pay FY Financial Year WUC Water Utility Company GDP Gross Domestic Product wwc Wastewater Company HPEPD Henan Provincial Environmental WWT Wastewater Treatment Protection Department HPFD Henan Provincial Financial Department IC3 International Competitive Bidding IBRD International Bank for Reconstruction and Development IDA International Development Association MLA Minimum Living Allowance MOF Ministry ofFinance MWR Ministry ofWater Resources NCB National Competitive Bidding PMO Project Management Office

Acting Vice President: Jeffkey S. Gutman, EAPVP Country Managermirector: DavidR. Dollar, EACCF Sector Director: Keshav Varma, EASUR Task Team Leader: Takuya Kamata, EASUR I Songsu Choi, SASE1 CHINA HENAN TOWNS WATER SUPPLY AND SANITATION PROJECT

CONTENTS

Page

A . STRATEGIC CONTEXT AND RATIONALE ...... 1 1. Country and sector issues...... 1 2 . Rationale for Bank involvement ...... 1 3 . Higher level objectives to which the project contributes ...... 2 B. PROJECT DESCRIPTION...... 2 1. Lending instrument ...... 2 2 . Program objective and Phases : Not Applicable ...... 2 3 . Project development objective and key indicators ...... 2 4 . Project components ...... 3 5 . Lessons learned and reflected in the project design...... 3 6 . Alternatives considered and reasons for rejection ...... 4 C . IMPLEMENTATION ...... 5 1. Partnership arrangements (if applicable) ...... 5 2 . Institutional and implementation arrangements...... 5 3 . Monitoring and evaluation ofoutcomeslresults ...... 5 ... 4 . Sustainability ...... 6 5 . Critical risks and possible controversial aspects...... 6 .. 6 . Loadcredit conditions and covenants...... 7 D. APPRAISAL SUMMARY ...... 7 1. Economic and financial analyses ...... 7 2 . Technical ...... 9 3 . Fiduciary ...... 10 4 . Social...... 10 5 . Environment ...... 11 6 . Safeguard policies ...... 12 7 . Policy Exceptions and Readiness...... 12 Annex 1: Country and Sector or Program Background ...... 13 Annex 2: Major Related Projects Financed by the Bank andlor other Agencies ...... 19

Annex 3: Results Framework and Monitoring...... 20 Annex 4: Detailed Project Description...... 22 Annex 5: Project Costs ...... 26 Annex 6: Implementation Arrangements ...... 29 Annex 7: Financial Management and Disbursement Arrangements ...... 36 Annex 8: Procurement...... 41 Annex 9: Economic and Financial Analysis ...... 54 Annex 10: Safeguard Policy Issues...... 66 Annex 11: Project Preparation and Supervision ...... 76 Annex 12: Documents in the Project File ...... 77 Annex 13: Statement of Loans and Credits ...... 79 Annex 14: Country at a Glance ...... 83

Map: IBRD34329

CHINA

HENAN TOWNS WATER SUPPLY AND SANITATION PROJECT

PROJECT APPRAISAL DOCUMENT

EAST ASIA AND PACIFIC

EASUR

Date: November 12,2005 Team Leader: Takuya Kamata I Songsu Choi Country Director: David R. Dollar Sectors: Water supply (50%); Sub-national Sector Director: Keshav Varma government administration (30%); Sanitation (20%) Themes: Access to urban services and housing (P); Municipal governance and institution building (P); Environmental policies and institutions (P) Project ID: PO81348 Environmental screening category: B 3 ", " .Project Financing Data [XILoan [ ]Credit [ ]Grant [ ]Guarantee [ ]Other:

For LoanslCreditdOthers: Total Bank financing (US$m.): 150.00 Proposed terms: A single currency, variable spread loan, with a maturity of 20 years, including a 5-year grace period, front-end fee of 1% subject to 75 basis point waiver, and commitment fee of 0.25%

Borrower: People's Republic ofChina

Responsible Agency: The Henan Provincial Finance Department's Foreign Loan Financed Project Management Office Address: 25 Jingsan Road, Zhengzhou, Henan Contact Person: Mr. Ma Xinguang, Director Tel: 0086-371-65808018, Fax: 0086-371-6571 0590, E-mail: yangl901@,sohu.com; cv37 1a, 126.com

Estimated disbursements (Bank FY/US$m) ’Y 2007 2008 2009 2010 2011 2012 2013 hual 7.5 30.0 30.0 30.0 30.0 15.0 7.5 hmulative 7.5 37.5 67.5 97.5 127.5 142.5 150.0

Re$ PAD D. 7 Have these been approved by Bank management? Is approval for any policy exception sought fkom the Board? [ ]Yes [XINO Does the project include any critical risks rated “substantial” or “high”? [x]Yes [ ]No Re$ PAD CS Does the project meet the Regional criteria for readiness for implementation? [x]Yes [ ]No Re$ PAD D. 7 Project development objective Re$ PAD B.2, Technical Annex 3 The project objective is to help create or expand water supply and wastewater management services and improve the planning, regulatory, and operational capacity ofsector institutions, thereby helping improve living conditions and the economic growth ofparticipating county towns with relatively low incomes. Project description Re$ PAD B.3.a, Technical Annex 4

Component I: Water Supply (US$203.95 million, ofwhich the IBRD loan is US$114.99 million): (a) water production facilities, ofabout 790,000 m3lday capacity, in 34 counties in 12 municipalities; and (b) over 2,400 km ofwater distribution networks, including user connections and installation ofmeters.

Component I.;Wustewuter ~anagement(US$44.01 million, of which the IBRD loan is US$26.78 million): (a) over 440 km ofwastewater collection pipes in 11 counties under six municipalities; and (b) wastewater treatment facilities of about 105,000 m3lday capacity in four counties under three municipalities.

Component III: Technical Assistance (US$7.86 million): Technical assistance for (a) institutional development including (i)regional planning for county town development, (ii)water sector regulations, and (iii)project management and utility staff training; and (b) detailed engineering design and design review, as necessary.

Which safeguard policies are triggered, if any? Re$ PAD D. 6, Technical Annex 10 > Environmental Assessment’ > Involuntary Resettlement P Safety ofDams

Significant, non-standard conditions, if any, for: Re$ PAD C. 7 rBoard presentation: None

Loan effectiveness: Signing ofeight subsidiary loan agreements, satisfactory to IBRD, between project counties and their county water utility companies. A second effectiveness condition -- “provision offinancial management training to all the relevant staff responsible for implementation, which is satisfactory to IBRD” -- will be deleted from the legal documents if the Bank receives from Henan before signing of legal documents, evidence that such training has been completed.

Im~~ementationCovenant: 1) Five NCB procurement contracts for civil works and engineering, and DBO will be subject to IBRD review prior to completion ofbid documents in the first year and two ofeach in subsequent years; 2) Performance improvement action plans for the low-performing companies as listed in Section D. 1. will be submitted to the Bank by December 3 1,2006; and 3) Baofeng county and Queshan county will carry out the remedial works in accordance with the plans set forth in the Verification ofDam Inspection and Assessments, and implement operational and monitoring procedures, satisfactory to Henan and IBRD.

Financial Covenant: Each water utility company shall produce total revenues equivalent to not less than the sum ofits: total operating expenses; the amount by which debt service requirements exceed the provision for depreciations; and the amount ofcapital expenditures required by the water utility company to implement its respective parts ofthe project as indicated in Annex 5.

Financial Management Covenant: Henan Province will provide lBRD with audited project account statements within six months ofthe end ofeach calendar year, during project implementation.

Disbursement Covenant: Expenditures under each subproject will be eligible for loan financing only if there is a signed subsidiary loan agreement between the project county and its water utilitv comoanvlies and a legal oDinion confirming the arzreement.

A. STRATEGIC CONTEXT AND RATIONALE

1. Country and sector issues

Industrial and urban development ofrural areas has been key to China’s remarkable economic growth. As a result, the number oftowns increased from about 3,000 in 1980 to about 20,000 in 2003, and about 400 towns have grown into full-fledged cities. In general, a “town” is the official designation in China for smaller urban areas with fewer than 120,000 residents; they are semi-rural and serve as the frontline ofnon-farm employment for the rural population, which represents almost 60% oftotal employment. They are also crucial to economic and social services for the rural population. While towns have led the industrial urban growth, the pace has slowed recently, constrained by limited economies ofscale, lack ofurban services, and inadequate human resources. Given the importance oftowns in economic growth and public welfare, especially for the rural population, the government has made their development a top priority.

Henan is the most populous province in China, with about 97 million inhabitants. It covers the central plain fed by the Yellow and Huai Rivers and is a key agricultural region, historically considered the core ofthe nation. While agriculture now contributes only about 20% ofits GDP, the province is still largely rural, with an urban population ofonly 23% compared with 42% for the country as a whole. The province is relatively poor: per capita income--RMB 6,4364s about 75% ofthe national average, and the lowest quartile ofChina’s per capita distribution. The provincial government has made accelerating the pace ofurbanization a pivotal development strategy, a crucial part ofwhich is developing its major towns.

However, the water supply in Henan towns is inadequate and polluted. Even in the major towns, coverage is below 50%, compared with over 90% for Chinese cities and towns as a whole. One reason is the overall water scarcity in Henan and the pollution ofshallow groundwater resources. This insufficient supply ofclean water limits the towns’ capacity to absorb additional population from neighboring rural areas and accommodate increased economic activities. To expand the supply will require substantial financial resources that are beyond the current ability ofthe small water utilities, Many ofthe water utility companies in Henan are earning little beyond the financial break-even point, while they are fairly well operated. The unaccounted-for water in project towns is 17%-60%, and the number ofemployees per 1,000 connections ranges fiom 7 to 55.

2. Rationale for Bank involvement

A major part ofBank assistance for China’s urban development and environment has been support for the rapid build-up ofwastewater management capacity in large cities, which has been a key national priority. More recently, however, the Bank has been working with the central government to increase support to smaller urban areas, so they can meet basic needs. The project intends to help a large number ofsmall urban areas develop basic urban services required both for an acceptable quality of life and for growth. It will also be an important opportunity for the Bank to develop and refine operational mechanisms that involve a large number oflocal governments and utility companies.

-1- While most ofthe engineering skills needed for project preparation and implementation are available locally, Bank involvement will increase the efficiency ofplanned investments significantly by refining the investment scope and technologies. The Bank’s long-term financing, combined with enhanced investment plans and capacity improvement programs, also will reduce the risks related to loans from local financial institutions to small utilities.

3. Higher level objectives to which the project contributes

By addressing a key deficiency in water supply services, the project will improve living conditions for the towns’ residents and those in nearby rural areas, most ofwhom are poor. This will enhance the capacity ofthe towns to attract and serve additional residents and businesses, which in turn will increase job opportunities. Further, the model established during project preparation and implementation, as well as the capacity building included in the project, will help Henan extend similar improvements to other small towns and help other provinces as well.

The project is in line with one ofthe five strategic pillars in the China Country Partnership Strategy (CPS, FY 2006-2010, Report No. 35435): managing resource scarcity and better environmental management. In addition, it supports the acceleration ofurbanization and improvement ofgrowth and welfare in the rural and semi-urban areas, which is one ofthe policy directions of China’s 1lth Five-Year Plan (2006-2010).

B. PROJECT DESCRIPTION

1. Lending instrument

The lending instrument is a Specific Investment Loan because the proposed project consists of clearly identified and appraised physical and institutional development components. It will be a single currency, variable spread loan, with a maturity of20 years, including a five-year grace period, a front-end fee of 1% subject to a 75 basis-point waiver, and commitment fee of 0.25%.

2. Program objective and Phases :Not Applicable

3. Project development objective and key indicators

The project objective is to help create or expand water supply and wastewater management services and improve the planning, regulatory, and operational capacity ofsector institutions, thereby helping improve living conditions and the economic growth ofparticipating county towns with relatively low incomes.

Key outcome indicators for the project towns include: (a) the number ofpeople with access to improved water supply; (b) the number ofpeople with access to improved wastewater management services; (c) population growth; and (d) aggregate net profit after taxes ofthe water utility companies. See Annex 3 for more details.

-2- 4. Project components

The project will help create or expand urban water supply systems in 38 project towns and create four complete and six partial wastewater management systems in 11 towns. The project towns were selected on the basis of: (a) current limited access to improved water and sanitation services; (b) ability to provide needed counterpart funding; and (c) willingness to form and staff a county project office. The selected towns are all county seats - the county administrative center and in most cases the largest town of the county or county-level cities. The project counties report to 12 prefectural municipalities, which supervise and support counties on behalf ofthe provincial government. While the towns are located throughout the province, all except those in Nanyang municipality are within a three-five hour drive from Zhengzhou, the provincial capital. Average per capita income in the counties falls below the national average, and 13 ofthe project counties are either nationally or provincially designated as “poor.”

Component 1: Wuter Supply (US$203.95 million, ofwhich the IBRD loan is US$114.99 million): (a) water production facilities, of about 790,000 m3lday capacity, in 34 counties in 12 municipalities; and (b) over 2,400 km ofwater distribution networks, including user connections and installation ofmeters.

Component 11: Wustewuter Management (uS$44.01 million, ofwhich the IBRD loan is US$26.78 million): (a) over 440 km ofwastewater collection pipes in 11 counties under six municipalities; and (b) wastewater treatment facilities ofabout 105,000 m3lday capacity in four counties under three municipalities.

Component III; Technical Assistance (US$7.86 million): Technical assistance for (a) institutional development including (i)regional planning for county town development, (ii)water sector regulations, and (iii)project management and utility staff training; and (b) detailed engineering design and design review, as necessary.

5. Lessons learned and reflected in the project design

The project design incorporates recent lessons from similar Bank projects in China and relevant ex-post operation evaluations. Three lessons considered during preparation were: (a) a tendency to develop excessive capacity for water and sewerage treatment facilities; (b) a critical need for pricing reform to ensure financially sustainable water and sanitation services; (c) a strong need for provincial-level project management capacity.

Experience in China’s water and sanitation projects demonstrates that many local governments forecast unrealistically high demand for water and sewerage treatment, and design and build excessive capacity. In addition, cost estimates used at the design stage tend to be significantly higher than actual bid prices. Thus, financial resources are allocated inefficiently, utility operations are not financially sustainable, and IBRD loans are underutilized during implementation. As a result ofspecific guidelines for forecasting methodologies, particularly with respect to population projections and large-volume industrial water consumption, project cost estimates have been reduced by 30% compared to those at the pre-feasibility design stage.

Another lesson from previous and on-going operations is that a strong commitment by utility companies and regulatory authorities to carry out tariff reforms is crucial to ensure financially sustainable water and sanitation services. Following the national government decree mandating municipalities to implement full-cost pricing for water utility services, many project counties have already increased tariffs which has enabled the utilities to break even financially. The project’s social assessment also demonstrated that over 70% ofresidents in the project areas who are not now connected to improved water supply and wastewater systems were quite willing to pay for connections; these residents include the low-income population.

Strong project management at the provincial and county level is essential for successful project implementation. This is particularly true in the proposed project, where, given the large number oftowns involved, an innovative model will be needed to scale up project preparation and implementation. The project design addresses this issue by providing technical assistance (TA) to the Provincial Project Management Office (PPMO) through training workshops and setting up an expert group to offer guidance during project preparation and implementation.

6. Alternatives considered and reasons for rejection

Alternatives considered are strategic and technical. They include:

Physical investment in wastewater ~anagement.In 2004, Henan introduced a policy that required at least one wastewater treatment plant to be built in each county by 2007. However, a recent Bank study of China’s wastewater treatment plants has shown that capacity often far exceeds that ofthe collection network, and the level oftreatment is not cost-effective relative to the quality of the incoming wastewater and the receiving water bodies. Further, many plants become inoperative due to the limited financial and technical resources ofthe local governments and utilities. Thus, the project includes: (a) wastewater systems with a minimum treatment capacity, compatible both with demand and available financial resources; (b) conveyance networks for 11 towns; and (c) project-financed user connections. Investment needs in wastewater management were assessed based on specific environmental needs, financial, technical and managerial capacities ofthe towns, as well as a decision by the Province to regulate pollution discharges from industries. For example, the technological choice to develop an oxidation ditch or sequenced batch reactor was made after the professional skills available in the selected towns were considered.

Private sector~artic~ation.Private sector participation (PSP) will be an important way to further expand the water supply and wastewater management services in China, especially in small urban areas. There has been considerable discussion between the project towns and potential investors. Nevertheless, few arrangements have been confirmed, mainly because ofthe lack of effective regulations and guidelines; thus, the project will not only support utilities being privatized, but also help develop a regulatory framework and relevant capacity building, which is a prerequisite for PSP. The institutional development component provides for these activities.

-4- C. I~PLEMENTATION

1. Partnership arrangements (if applicable)

The proposed Project is free-standing and does not have other international co-financiers.

2. Institutional and implementation arrangements

The on-lending and financial supervision, construction supervision, coordination ofprocurement, and monitoring will be provided by the government in the normal chain ofcommand as described below:

The proposed loan of US$l50 million will be made to the People’s Republic ofChina, which in turn will make the loan proceeds available to Henan Province on the same terms and conditions as the Bank loan to China. Proceeds for Components Iand I1will be on-lent to water utility companies (WUCs) through counties under subsidiary loan agreements with a 20-year maturity including five year grace period, while Component I11 will be implemented by the Henan PPMO. It was agreed that the WUCs will be responsible for the foreign exchange risk.

The WUCs are the implementing agencies responsible for Components Iand 11, including project design, implementation, monitoring and reporting, and will procure the civil work contracts for the water supply and wastewater systems. Most ofthem have qualified technical staff.

The project will be supervised and supported by county govenunents (e.g., representatives from the regulatory bureaus), along with WUC staff.

Municipal governments will review the quality ofplanning and construction as necessary, as well as disbursement applications; they will then submit these to the Provincial Project Management Office (PPMO).

The Henan PPMO, located in the Provincial Finance Department, will coordinate the project: in particular, it will have the primary responsibility for processing disbursement, managing the Special Account, and supervising procurement and audits. It will be the implementing agency for Component 111, in coordination with the relevant provincial departments, in particular, the Construction Department, the Development and Reform Commission, the Water Resource Department, and the Environmental Protection Department.

An expert group was established and has worked with the PPMO on feasibility studies and project design, and will continue to provide guidance during implementation. The Project Steering Committee, chaired by a Henan vice governor, will offer overall policy guidance and support.

3. Monitoring and evaluation of outcomeslresults

Henan PPMO will consolidate the data at the project level and produce semi-annual reports to monitor progress. Baseline data for results’ indicators are available and no capacity constraints are foreseen.

-5- 4. Sustainability

Participating local govenunents as well as the WUCs have shown strong ownership ofthe project and have established PMOSto prepare and implement it. In addition, the Provincial govement has demonstrated commitment to quality assurance by mobilizing grant funds for feasibility studies. Most project towns have already introduced full cost-recovery tariffs for their systems and all have provided letters ofcommitment to raise tariffs further, according to full cost-recovery principles, once the new systems are commissioned.

5. Critical risks and possible controversial aspects

Risks Risk Mitigation- Measures I RiskRating with Mitigation To project development WSML objective

Inadequate financial and technical resources offull cost-recovery tariffs and commitment to revising them fiuther, as needed. Training staff under TA, Weak project preparation and implementation

Technical and managerial weaknesses

To component results Uncertainty ofwater demand focusing on industrial water use and

Threat to ground and surface water quality due to discharge ofincreased volume of untreated wastewater. Water will be unaffordable to the poor and some industries once private wells are closed.

Lack of counterpart funding

Overall risk rating

-6- 6. Loanlcredit conditions and covenants

Loan Eflectiveness: Signing ofeight subsidiary loan agreements, satisfactory to IBRD, between project counties and their county water utility companies. A second effectiveness condition -- “provision of financial management training to all the relevant staff responsible for implementation, which is satisfactory to IBRD” -- will be deleted fiom the legal documents if the Bank receives fiom Henan before signing of legal documents, evidence that such training has been completed.

~~ple~entationCovenant: 1) Five NCB procurement contracts for civil works and engineering, and DBO will be subject to IBRD review prior to completion of bid documents in the first year and two ofeach in subsequent years; 2) Performance improvement action plans for the low-performing companies as listed in Section I).1. will be submitted to the Bank by December 3 1,2006; and 3) Baofeng county and Queshan county will carry out the remedial works in accordance with the plans set forth in the Verification of Dam Inspection and Assessments, and implement operational and monitoring procedures, satisfactory to Henan and IBRD.

Financial Covenant: Each water utility company shall produce total revenues equivalent to not less than the sum of its: total operating expenses; the amount by which debt service requirements exceed the provision for depreciations; and the amount ofcapital expenditures required by the water utility company to implement its respective parts ofthe project as indicated in Annex 5.

Financial Management Covenant: Henan Province will provide IBRD with audited project account statements within six months ofthe end ofeach calendar year, during project implementation.

Disbursement Covenant: Expenditures under each subproject will be eligible for loan financing only if there is a signed subsidiary loan agreement between the project county and its water utility companylies and a legal opinion confirming the agreement.

D. APPRAISAL SUMMARY

1. Economic and financial analyses

Economic Analysis Economic benefits ofthe water supply investments will vary among towns, depending on residents’ willingness to pay (WTP) for improved water supply, public health externalities, and economic costs. The financial rate ofreturn (FRR) associated with cost-recovery tariff levels sets the lower-bound economic rate ofreturn (ERR) for each water supply component. In a representative sample of towns, the consumer surplus for residential customers was estimated in order to provide a more complete picture ofthe economic benefits fiom an improved water supply.

-7- The main results ofthe analysis are: (a) on average, residents are willing to pay for an improved water supply at a level well above the water tariffs projected for each town; (b) residential consumers with private water systems are expected to gradually switch to the improved system, even in the poorest towns; (c) the relative contribution ofconsumer surplus to the project’s overall economic benefits is noticeably high, with ERRSof water supply investments averaging above 25%, ranging from 19.8%-33.6% under different scenarios; (d) significant consumer surplus will contribute to the project’s overall economic benefits in the poorest towns.

Financial Rate of Return The FRR was reviewed for the water supply and wastewater components for each town. Preliminary analyses demonstrate that the project is financially viable: FRRs for water supply components are mostly above lo%, ranging fiom 9.6%-17.8%, and those for wastewater components are above 5%, ranging from 5.1%- 6.1%. Sensitivity analyses, as presented in the table below, indicate that even with impacts from various factors (eg, cost over-runs, inefficient operations and lower than expected revenues), the project will be financially justified.

FRR and Sensitivity Analyses

Tariffs Most ofthe participating counties have already introduced fdl cost-recovery tariffs for the water supply systems and all have committed to revising tariffs according to such principles once the new systems are commissioned. Average water supply tariffs are expected to increase from RMB1.3/m3 to RMB1.61m3 for residential users. A majority ofthe counties have already introduced wastewater charges through WUCs, typically RMB 0.4-0.651 m3, which will contribute to counterpart funds for the wastewater components. At present, average urban households spend 0.5% oftheir annual income on water tariffs, and those with low-incomes spend up to 1.25%. When tariffs for water supply and wastewater increase as planned, the combined amount will rise to 3% - 5% ofaverage household income. For details on willingness to pay and affordability, see the Social Assessment in Annex 9.

WSCs ’ Fin~ncialPerformance The WSCs’ current financial performance will only partly predict future performance since the proposed investments will increase the production volume several times over. Still, water supply companies are generally performing well enough to break even, primarily because they have introduced fill cost-recovery tariffs. Also, their reasonably strong billing and collection performance contributes to sound liquidity. None have any significant long-term debt: the typical ratio oflong-term debt to total debt and equity is 0.1%-10%.

Seven low-performing WSCs (Jiaxian, Xiayi, Xinyie, Queshan, Xincai, Xixian and Mengzhou) listed a net loss ofover RMl3 0.5 million in 2004; these WSCs will submit action plans to improve the performance to the Bank by December 3 1,2006.

-8- The WSCs’ financial performance is expected to improve after project implementation. A typical WSC’s annual revenues will increase from the current RM.B 1-3 million to RMB 15-20 million. The working ratio (excluding depreciation) is projected to remain sound at 35%-45 %. WSCs will generate positive net profit margins (before taxes) from 20%-30% within one or two years after the new water supply systems are commissioned. Also, WSCs will be able to maintain sound current ratios above 1.5-3.0. Their capital structure will be appropriately leveraged: the ratio oflong-term debt to total debt and equity will start from 50%-60% in the first year of operation, and rapidly consolidate to around 35%-45% in six years.

Fiscal Capacity of County Governments An analysis ofeach participating county’s fiscal capacity was carried out, based on its debt profile (total outstanding debt over total revenue) and overall economic strength (per capita GDP). The table below summarizes the findings: counties with high per capita GDP and a low level ofdebt have a relatively strong fiscal capacity to undertake substantial investments (Group I); those with low GDP and low debt will need gradual tariff increases and might require subsidies to ensure long-term viability (Group 11); counties that have both high GDP and high debt will need to increase tariffs in a timely manner to minimize liabilities (Group 111); poor and highly indebted counties may accumulate fimds by phased investment plans and higher contributions from WUCs or might need subsidies (Group IV). Financing plans ofthis project for the last group are fully discussed and found satisfactory. However, some counties in this last group, for which county govements plan to make counterpart contributions, might require subsidies when necessary.

Fiscal Capacity of the Participating Towns

High GDP per,capita Low GDP per capita Group Icounties (Baofeng, Huangchuan, Group II counties (Xixian, Xiayi, Suiping, Xiangcheng, Xinye, Kaifeng, Xincai, Suixian, Zhengyang, Fengqiu, Mengjin, Xiping, Shan, Xinxiang and Yiyang, Queshan, Lankao, Yuanyang, Yima) can afford substantial investments. Sheqi, and Xichuan) will need gradual tariff increases to ensure long-term

Tongxu, Weishi, Dengzhou and Minggan) Shenqiu, Luoshan, Zhecheng, will need to maximize WUC contributions Songxian, Qixian and Xiangcheng) by increasing tariffs in timely manner. will need to accumulate funds before starting investment or might be

2. Technical

The components represent cost-effective and affordable technical solutions, and avoid creating excess productive capacity. The technical evaluation covered the following areas:

Vater sources: These were assessed for quality, reliability and production costs. In about 80% of the towns, the source is groundwater from shallow, medium and deep aquifers, which is

-9- preferred, given quality and cost considerations, Deep or shallow infiltration galleries were also evaluated as alternative supply sources.

Wastewater treatment: The least-cost options considered included individual or communal septic tanks, improved anaerobic filters, primary treatment systems, packaged treatment plants, stabilization ponds, and centralized or shared treatment plants. For towns where no or few sewers have been constructed, it was decided to start with separate sewers for storm water and sewage, which is the long-term solution adopted for Chinese cities. User connections have been included in the project to ensure that wastewater plants receive sewage flows and obsolete septic tanks are disposed ofwhere sewer lines are built.

Water Demand Projections and Excess Capacity: See Section B.5.

Cost Estimates: Unit costs were estimated for major work items based on the market price of materials and construction methodology.

3. Fiduciary

A. Financial Management An. assessment ofthe project’s financial management system concluded that it meets minimum Bank requirements, as stipulated in BPlOP 10.02. It will be able to provide, with reasonable assurance, accurate and timely information on the status ofthe implementation in the reporting format agreed upon, as required by the Bank. See Annex 7 for details.

B. Procurement An assessment ofthe implementing agencies’ procurement capacity was conducted and concluded that the overall risk ofthe procurement process is average, Agencies at all levels have allocated adequate resources, including experienced staff, to implement the project. The agencies are familiar with Bank procurement procedures, either through previous and ongoing Bank- financed projects or training provided by the Bank. An action plan to further strengthen the agencies’ procurement capacity has been agreed upon. To address China’s Tendering and Bidding Law’s deviations from the Bank Guidelines, waivers for Bank-financed NCB procurement are incorporated into the project’s Legal Agreements. See Annex 8 for details.

4. Social

A consolidated resettlement action plan (RAP) was prepared for all 38 towns and distributed locally to keep the public informed. Resettlement impacts will be relatively small: total land acquisition for all project towns will be 1,208 mu, with an average of27 mu per sub-component. All acquired land will be farmland located in the towns’ suburbs. In addition, an extensive rehabilitation program was prepared for the people affected by land acquisition. The county governments recently named one staff each to be in charge ofresettlement. Monitoring systems were established at all provincial, municipal and county levels.

A comprehensive Social Assessment was conducted that focused on consumer willingness to pay and affordability ofthe increased water tariffs. The socio-economic assessment ofvarious stakeholders at the town and county levels demonstrated that expected tariff increases will be moderate and residents will have no difficulty paying the water and wastewater charges. An

- 10- overwhelming majority of residents supported the proposed project to improve access to reliable and safe water. The SA also recommended that additional care be taken to ensure that the resettlement-related transition will be gradual for the rural households whose land will be used for the new water plants. Low-income households will benefit from a preferential policy of receiving 2-3 tons ofwater free of charge when the towns expand and they have to connect to the town water supply. Provincial guidelines require a conversion from well-supplied water to the connected water supply during 2007 to 2010, three years after the system is completed. The detailed socio-economic survey indicates the project will not affect indigenous peoples within the definition ofthe Bank’s policy. Thus, the Bank’s Policy on Indigenous Peoples does not apply*

5. Environment

The project is classified as a “Category B” and a consolidated environmental impact assessment (EA) for all project towns was prepared and disclosed to the public in October 2005.

The project will have a significant positive impact as it will improve the quality ofwater and wastewater treatment, reduce water pollution and promote the sustainable development of the project towns. Most water supply systems in the project will rely on deep groundwater resources and as consumers switch to the piped water supply, the extraction ofpolluted shallow water will be significantly reduced. In addition, wastewater will be collected from urban residences and be treated to remove pollutants, thereby improving the quality ofthe receiving surface waters.

Potential negative impacts during construction will be relatively minor and easily mitigated. Details of mitigation measures and monitoring requirements are provided in the EA and the Environmental Management Plan (EMP). The PPMO will be responsible for keeping track of and reporting on the monitoring ofall implementation entities. Possible negative impacts during the operational phase will also be relatively minor and many ofthe concerns were addressed in the facilities’ design. See Annex 10 for more details on environmental issues. The EA report for each county, the consolidated EA and the EMP are available in the project files.

Safety of Dams

The proposed Project will not involve constructing new dams or rehabilitating others. However, four water supply schemes under the Project will draw water from reservoirs with existing dams: reservoirs in Lushan County, Queshan County, Minggan County, and Baofeng County. These reservoirs are used mainly for irrigation, flood control and water supply; each has a unit that manages daily operations and maintenance. The project’s proposed water intake systems, water channels and pipes will neither affect the reservoirs’ operations nor the dam structures.

According to OPiBP 4.37, an independent specialist reviewed the safety of the four dams. The Lushan and Minggan reservoirs were rehabilitated in 2005 and found to be satisfactory, in compliance with national regulations and IBRD requirements. Rehabilitation ofthe reservoirs in Queshan and Baofeng is scheduled to be completed by 2007, which will ensure their safety, when work under the project begins.

Dam safety will be monitored every year, according to the Rules ofDam Safety. These aspects are reflected in EMP.

-11- 6. Safeguard policies

Safeguard Policies Triggered by the Project Yes NO Environmental Assessment (OPIBPIGP 4.0 1) [XI [I Natural Habitats (OPIBP 4.04) Pest Management (OP 4.09) Cultural Property (OPN 11.03, being revised as OP 4.1 1) Involuntary Resettlement (OPIBP 4.12) Indigenous Peoples (OD 4.20, being revised as OP 4.10)' Forests (OPIBP 4.36) Safety ofDams (OPIBP 4.37) Projects in Disputed Areas ,(OPIBP/GP 7.60)2 Projects on International Waterways (OPIBPIGP 7.50)

7. Policy Exceptions and Readiness

No exceptions are required from Bank policies. The project meets all key readiness criteria,

' Including ethnic minorities By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claim on the disputed areas

- 12- Annex 1: Country and Sector or Program Background CHINA: HENAN TOWNS WATER SUPPLY AND SANITATION PROJECT

Urbanization and small towns

Towns represent a major share ofChina’s growing urban system and are crucial to the country’s socio-economic development. The category of“town” or “small town” (zhen or xiaochengzhen) refers to a semi-urban settlement, larger and more urban than a village but smaller than a large city (shi). In the Chinese official definition, a statutory town (iimhi zhen) is an administrative jurisdiction at the same level as a township (xiang); both are part ofa county and contain one or more ‘4c0mm0n” towns, as well as many villages.

During the 1960s and 1970s, towns grew slowly-although faster than cities-under policies and programs designed to decentralize the population and industries, which were neither efficient nor sustainable. However, recent economic reforms have fueled their rapid growth. Thousands of villages grew into officially designated towns, which increased from fewer than 3,000 in 1980 to over 20,000 today, in addition to 30,000 that are truly “small” or “townships.” While all towns are sometimes called “small,” almost 500 have populations ofover 100,000 and about 400 have grown to hll-fledged cities in the last two decades.

Their development over the past 25 years has been closely linked to broader national urbanization trends and the country’s rapid and far-reaching economic transformation. While changing statistical conventions and administrative designations ofcities and towns have made it difficult to precisely define the country’s urbanization trends, the consensus is that China is now slightly over 40% urbanized and the proportion ofurban areas to the total has doubled over the last 25 years. This is broadly consistent with changes in the country’s economic structure, where secondary and tertiary sectors now account for over 85% ofGDP, up from about 65% in the early 1980s.

The rural industries’ and towns’ rapid growth can be attributed at least partly to opportunities left unexploited by urban economies previously based on over-regulated and overprotected state- owned enterprises. Township and village enterprises in suburban and peri-urban areas faced fewer constraints to formation, operation, and hence employment generation. Thus, the most rapid non-farm employment growth in the first half ofthe 1990s occurred in towns on the urban periphery and in smaller cities.

One constraint to the growth of towns is environmental degradation. Many have few water resources as well as severe pollution. Wastewater discharges from semi-urban areas in metropolitan regions are already close to or even exceed those from cities, seriously polluting surface and shallow groundwater. In response, the Government introduced a national policy mandating at least one wastewater treatment plant be built in small towns by 2007. The new policy also includes integrated water resource management, commercialization ofthe water and wastewater sectors, tariffs at full cost-recovery levels, and private investment.

Project towns

The 38 project towns are in 12 municipalities: Jiaozuo, Kaifeng, Luoyang, Nanyang, Pingdingshan, Sanmenxia, Shangqiu, Xinxiang, Xinyang, Xuchang, Zhoukou and Zhumadiari,

-13- i0,698 3,632

4,757

5,684

4, i 22 NP 3,056 I”2 2,637

S,tMO 7 3,779 NP 5,365 NP S,Z80

N/A N0% 3,146 NP ~~69~NP 3,195 5,446 2,687

2,664 MP 5,859

4,46 1 2,884 PP NiA PP 4,46 i %!A Current status of Henan ’s water resources

Henan Province is located in central China, covering the large and moderately fertile plain between the Yellow and Huai Rivers, with an east-to-west distance of 580 km and a south-to- north distance of 550 km. Its total land area is 167,000 km2 and consists of 18 prefecture-level cities (municipalities), 89 county-level cities and 2,130 towns. The population in 2003 was 96.7 million, ofwhich, 77.2 million (79.8% ofthe total) were in agriculture.

Henan has a serious water shortage. Total average water resources are estimated about 40.5 billion m3 a year. According to 2003 population and agricultural land use statistics, annual per capita water resources were 420 m3, and farm land 375m3, which is only a fifth ofthe national average. Henan’s northern and eastern areas, where most economic activities are based on agriculture, have even less.

While many official statistics show over 90% ofthe population in Henan’s towns draw their water supply from taps, the 2003 census found the figure to be only 45%, and in some areas, the number was below 20%. An estimated 90% of enterprises depend on private wells for their water and many rural towns draw their water from small, old wells, a large number ofwhich are contaminated. Private wells account for 50% ofthe total supply, and water quality tends to be poor.

There are growing concerns that groundwater is being over-exploited. Since the late 1980s, groundwater levels throughout Henan have continually dropped, due to increased exploitation. The percentage ofwater in aquifers that are less than 4m deep decreased from 82.8% in 1974 to 32.3% in 2002, while that of aquifers 4-8m deep increased from 16.3% to 50.4%.

Earlier studies demonstrated that groundwater has been increasingly polluted and small seasonal rivers in urban areas are more contaminated and used as sewage canals. Water quality in towns is worse or equally bad as in big cities, due to their industrial structure and lack ofgovernance and enforcement ofenvironmental lawslregulations. With the development ofindustry and agriculture, and increasing urbanization, more wastewater has been discharged without proper treatment, while frequent use ofpesticides and fertilizers, and random piles of solid waste have caused secondary pollution of surface water. The major industries in many Henan towns are paper and pulp, chemicals and food processing, all ofwhich are highly polluting.

Water utility companies and sector issues

The towns’ water supply systems are usually small and simple. The average number of households served is 10,000, but ranges from 5,000 to 19,000. Water production is in the range of2,800m3/day-43,400m3/day, with an average of8,300 m3/day. Most water utility companies (WUCs) manage their operations moderately well. Average unaccounted-for water is 38%, but the number rises to 60%-70% in some systems. Each WC’s performance indicators are presented in Tables 1-3 below.

Most WUCs’ annual revenues are RMB 2-3 million. The working ratio, at 0.75-0.90, is sound. Most report only marginal net profits or losses-ofless than 5% oftotal revenue-mainly because many counties granted them tariff increases in recent years, based on fill cost-recovery

- 16- - 17- I I I I

- IS- Annex 2: Major Related Projects Financed by the Bank andlor other Agencies CHINA: HENAN TOWNS WATER SUPPLY AND SANITATION PROJECT

Latest ISR Ratings Project Sector Issue Development I Implementati

China Liuzhou Environment Wastewater treatment, solid waste - S S Management (CT 478 10) management China Poor Rural Communities Livelihood security, and rural poor - S S Development (Cr 73 100) participation China Chongqing Small Cities Infrastructure service delivery, and - S S lnfrastructure Improvement (Cr 47940) rapid urban growth China Smallholder Cattle Development Henan cattle productivity, marketing - S (Cr 45300) linkages, and farmer incomes S Irrigation, water resource management China - Water Conservation (Cr 45890) 1 and farmer incomes I HS I HS China - HaiBasin Integrated Water and Water resource management and Environment management (GEF) pollution control S s China Hebei Urban Environment (Cr Environmental degradation ofwater - S 45690) and land resources, safe water supply s Safe water supply, sanitation and China - Rural Water IV (Cr 44850) health behaviors in poor rural areas ISIS China -Tai Basin urban Environment Water resources degradation and urban (CT 47480) environment improvement S 3 China - GuangdonglPRD Urban S S Environment (CT 47420) Rationalization ofenvironmental GEF GUngdonflRD Urban service delivery in the regional plan china MS S Environment (CTF533 59) Flood protection, wastewater and ajr China - Hunan Urban Development (Cr S MS 475 10) pollution China - Ningbo Water and Environment Quality of water and wastewater Management- (CT 47700) services, public health protection ISIS Other MDBs and Agencies West Henan Agricultural Development Horticulture and livestock industry of Project (ADB) low-income households Henan Wastewater Management and Wastewater rngt and water supply for Water Supply Project (ADB) public health and urban environment Private Sector Water Supply Project in China (ADB) Safe water supply to urban residents Water and Agricultural Management in Water resources management in Hebei (WAMH) Project (AUSIUD) agriculture

- 19- Annex 3: Results Framework and Monitoring CHINA: HENAN TOWNS WATER SUPPLY ANI) SANITATION PROJECT

Framework of Results

PDO Outcome Indicators In

The project objective is to support the Improved quality and reliability ofwater To measure progress towards the PDO urban transition and improve living supply and wastewater collection in with regard to improved services for the conditions in major towns by helping participating towns. target population and poor households expand water and wastewater services (HH) in participating towns. and improve the sector's regulatory, managerial, and operational capacities. Evidence of improved operational efficiency To recommend planning adjustments for and financial viability ofparticipating local govemments and WUCs regarding WUCS. future investments andor operations for water and sewerage systems. Aggregate population growth of participating towns.

Results Indicators for Each Component Use of Results Monitoring

Component One: Water Supply Component One: Water Supply Component One:

o Expansion of water production o Number of people with access to To verify the delivery ofproject capacity and connections improved water supply outputs; track progress ofphysical o Meter installation/ replacement works and PPMO's operational o Expansion of water distribution performance; ensure effective delivery networks in new service areas to the underserved population.

Component Two: Wastewater Component Two: Wastewater Mgt Component Two: Management

o Expansion ofsewage collection o Number ofpeople in project towns To track the progress ofphysical works systems with access to wastewater management and delivery ofexpected project o Construction ofwastewater services outputs; ensure effective delivery to the treatment facilities underserved population.

Component Three: Capacity Building Component Three: Capacity Building Component Three:

o Institutional Development o Net profits after taxes ofparticipating To help Henan province make necessary o Regulatory Development and wscs. adjustments to ensure utilities are Utility Management managed and operated efticiently, plan o Project management capital expenses for water supply, and regulate utilities effectively.

- 20 -

Annex 4: Detailed Project Description CHINA: HENAN TOWNS WATER SUPPLY AND SANITATION PROJECT

The project will support sustainable water and wastewater investments in 38 towns under 12 Henan municipalities; 13 ofthe towns are classified as poor counties. To assure investments and institutions are sustainable, the project includes technical assistance (TA) to improve capacity for implementing projects, managing utilities and performing regulatory activities.

Water Supply: (Total Cost: US$203.95 million)

The component will improve water supply in 38 towns under 12 municipalities by increasing water production capacity, rehabilitating and expanding distribution networks, as well as installing or replacing meters and connections in areas relying on private water supplies. The component will construct: (1) 396 wells that will tap aquifers at different depths (fiom 70 meters-400 meters), depending on the geographical location and water quality; (2) water intakes and water treatment plants, using surface water fiom rivers to produce 130,000 m3 each day; (3) associated ground storage facilities and pumping stations, 205 km ofraw transmission pipelines, and 2,468 km oftransmission mains and distribution networks. It will also install: (1) water connections and 200,000 meters so as to serve users through the extended distribution facilities; and (2) pressure and flow measurement equipment, communications facilities, laboratory and maintenance equipment and materials to rehabilitate existing assets. Details for each city are provided in the table below.

Water sources are predominantly groundwater aquifers already tapped by existing medium and deep wells that can increase their safe yields reliably. As groundwater is generally ofgood quality, simple treatment will involve chlorination. In several towns where groundwater cannot be economically developed, surface water sources will be used: these include one river and six reservoirs whose quality is reasonable and which have no substantial pollution problems. Treatment will involve conventional sedimentation and filtration with chlorination. The quality ofthe treated water will conform to national drinking water standards. The supply will be continuous (on a 24-hour basis) and service coverage is expected to increase fi-om an average of 40%-50% to 80% by 2010.

Wastewater Management (Total Cost: US$44.01 million)

This component includes wastewater treatment of 105,000 m3lday in the towns ofBaofeng, Mengjin, Songxian, and Yuanyang, under three municipalities. Collection networks of440 km will be constructed in the four towns and in seven others (Huangchuan, Luoshan, Runan, Suiping, Suixian, Tongxu and Xinye). Sewer connections will be funded in areas where the present system ofseptic tanks will be replaced by sanitary systems.

Henan plans to provide wastewater management in towns in an incremental manner and will follow country guidelines to use separate sewer systems for sewage and rainwater. A few larger towns will be provided conveyance systems and to a lesser extent, treatment facilities. Others will continue using individual building or area septic tanks.

- 22 - Primary treatment will involve screening, grit removal and mechanical decantation, and treated effluent will meet discharge water quality standards. Sludge will be disposed ofin existing landfills along with municipal solid waste.

Sanitary sewer networks, sized for future extension, will be provided to ensure that most ofthe wastewater generated will be conveyed to the treatment facilities and that the self- cleaning velocity is met even under initial low levels of service, Where sewers are provided without any kind oftreatment, wastewater will be removed from the populated areas on an interim basis to other basic facilities, such as communal septic tanks or stabilization ponds. Wastewater treatment facilities will be constructed later, after the project is completed.

Table 4-1: Summary of Project Sub-Component by Towns

Kaifeng Municipality 1 Weishi 7,000 35,000 27,120 65.38 2 Tongxu 8,000 35,000 17,680 75.25 3 Lankao 5,000 30,000 28,670 78.07 4 Kaifeng 18,000 10,000 5 1.45 5 Qixian 25,000 25,100 63.77 Luoyang Municipality 6 Mengjin 5,000 20,000 10,670 5 1.70

~ 7 Yiyang 10,000 25,000 23,700 49.16 8 Songxian 7,000 30,000 15,240 68.90 Pingdingshan Municipality 9 Baofeng 8,000 15,000 16,385 77.19 10 Jiaxian 10,000 20,000 17,100 40.43 11 Lushan 30,000 20,500 72.06 Xinxiang Municiaplity 12 Xinxiang 40,000 6,000 54.57 13 Yuanyang 20,000 30,000 19,460 47.3 1 14 Fengqiu 25,000 16,100 33.72 Xuchang Municipality 15 Xiangcheng 20,000 20,000 24,100 65.25 Sanmenxia Municipality 16 Shanxian 80,000 20,000 2 1,240 40.49 17 Yima 13,000 22,550 40.71 Shangqiu Municipality 18 Suixian 5,000 20,000 12,620 3 1.65 19 Xiayi 5,000 30,000 24,100 59.38 20 Zhecheng 6,000 17,100 67.93 Nanyang Municipality 21 Dengzhou 25,000 30,000 26,530 88.77 22 Xinye 12,000 20,000 24,100 66.45 23 Sheqi 7,000 20,000 13,900 52.16 24 Xichuan 5.500 25,000 20,300 45.67

- 23 - Current Number of Estimated Designed WS Add. WS Water # County wT project cost Capacity (&/day) Supply DNw) scocm) (&/day) (RMBm) (&/day) Connection

Zhumadian Municipality 25 Queshan 4,600 15,000 20,640 55.13 43.1 26 Xincai 5,000 20,000 18,100 56.58 44.4 27 Xiping 10,000 20,000 23,200 40.54 50.1 28 Zhengyang 5,000 15,000 15,500 6 1.54 48.1 29 Suiping 6,000 30,000 24,100 67.94 25.87 82.7 30 Runan 5,000 30,000 17,240 67.96 36.76 81.9 Zhoukou Municipality 31 Shenqiu 8,000 20,000 25,300 68.84 55.9 32 Xiangcheng 6,000 24,100 73.00 35.4 Xinyang Municipality

35 Luoshan

DN: Distribution network I

Technical Assistance (Total Cost: US$7.86million) Project investments will be completed with TA on: (a) institutional development; (b) detailed engineering design and design review; and (c) local operation and maintenance training

(a) InstitutionalDevelopment (US$3.20 million) Project investments will be complemented with TA to: (i)improve regional planning for small town development; (ii)strengthen regulatory capacity to support the commercialization ofutility companies and private sector participation in the water sector; and (iii)support project implementation. TA will be implemented through a combination ofstudies, overseas tours, and domestic training. Detailed terms ofreference are provided in the Project File. The component includes the following sub-components:

(i)Regional Planning for Small Town Development (US$700,000), TA will support the socio-economic development and urbanization of small towns by strengthening planning capacity at both provincial and county levels through: (1) strategic planning models for county town development in some demonstration counties; (2) study tours abroad to provide high-level officials with first-hand experience ofbest-practice regional planning and (3) domestic training to disseminate lessons from the study tour and facilitate transfer of knowledge from the demonstration counties to others. TA will be conduced under the guidance ofthe Steering Committee.

- 24 - (ii)Water Sector Regulation (US$700,000). TA will help Henan in its effort to: (1) improve institutional capacity to perform regulatory functions at the provincial and county levels; and (2) establish a regulatory framework for the WUCs’ commercialization and private sector participation (PSP). The following activities will be conducted to meet these objectives: (1) assessing institutional capacity for regulating the sector and creating an action plan to address key regulatory needs; (2) designing a commercialization strategy for WUCs to improve sector efficiency; (3) producing a roadmap to attract PSP and offer regulatory advice on selected PPP transactions; (4) conducting a study tour abroad to provide high-level officials with first-hand experience ofbest-practice regulations; and (5) offering domestic training to familiarize county officials and WUCs with key regulatory developments. TA will be implemented under the Steering Committee.

(iii)Project Management (US$1.14 million). TA will strengthen the PPMO’s and .implementing agencies’ management capabilities in: (1) technical issues; (2) monitoring and evaluation; and (3) procurement and contract supervision. The component will be managed at the provincial level; however, the experts group will also help the WUCs implement the project in an adequate and timely manner.

(iv) Utility Staff Training (US$660,000). TA will support the training ofall water and wastewater utility staff responsible for work ofoperation and maintenance (including board members, treatment plant attendants, equipment repairmen, and pumping station foremen), by providing specific engineering and technical training for operation and maintenance ofthe new systems built under the project. It is expected that 3,000 will participate. The PPMO had carried out a “Training Needs Assessment” between appraisal and negotiations. The report has defined a set ofproposals for the project implementationperiod, including the strengthening of training institutes and training programs, and it will list associated costs.

(b) Detailed Engineering Design and Design Review (US$4.66 million) This TA component will support, as necessary, design and review for engineering work ofwater supply, wastewater treatment plants, distribution networks, sewer networks and household connection. Given the large number ofproject town and their limited experience in expanding water supply and wastewater systems, the component will assist individual utility companies to design engineering works financed under the project and review technical soundness. This component will not only bring both international and local expertise during engineering design process, but also ensure that the design is well adapted for local environments and demands.

-25- Annex 5: Project Costs CHINA: HENAN TOWNS WATER SUPPLY AND SANITATION PROJECT

Project Total Cost By Component andlor Activities Local Foreign Total US$ million US$ million US$ million Component I, Water Supply: 126.75 77.20 203.95 - Production 54.27 29.22 83.49 - Distribution Networks and End-user Connection 68.29 45.53 113.82 - Rehabilitationof Existing Wells and Networks 1.51 1.01 2.52 - Power Supply 2.68 I.44 4.12 Component II, Wastewater Management: 27.07 16.95 44.01 -Treatment 8.48 6.94 15.42 - Sewer Networks and User Connections 18.45 9.93 28.38 - Power Supply 0.14 0.08 0.22 Component 111, Technical Assistance: 5.12 2.74 7.86 - Technical Assistance for Institutional Strengthening 1.16 2.04 3.20 - Design and Design Review 3.96 0.70 4.66 Land Acquisition and Resefflement 30.56 0.00 30.56 Project Overheads 13.80 2.44 16.24 Total Project Costl: 203.31 99.32 302.62 Interest during Construction: 29.38 29.38 Commitment Fee: 3.32 3.32 Front-end Fee: 0.38 0.38 Total Financing Required:, 203.31 132.40 335.70

1. Identifiable taxes and duties are US$m 10.61, and the total project cost, net of taxes, is US$m 292.48. Therefore, the share of project cost net of taxes is 51.3%.

Table 5-1: Project Costs bv Financing

Expenditure By Component andlor Activities IBRD Financing Local Financing Total US$ million US$ million US$ million Component I, Water Supply: 114.99 88.96 203.95 - Production 38.64 44.85 83.49 - Distribution Networks and End-user Connection 74.69 39.12 113.82 - Rehabilitation of Existing Wells and Networks 1.66 0.87 2.52 - Power Supply 0.00 4.12 4.12 Component 11, Wastewater Management: 26.78 17.23 44.01 -Treatment 8.15 7.26 15.42 - Sewer Networks and User Connections 18.62 9.75 28.38 - Power Supply 0.00 0.22 0.22 Component 111, Technical Assistance: 7.86 0.00 7.86 - Technical Assistance for Institutional Strengthening 3.20 0.00 3.20 - Design and Design Review 4.66 0.00 4.66 Land Acquisition and Resefflement 0.00 30.56 30.56 Project Overheads 0.00 16.24 16.24 Total Project Cost1: 149.63 153.00 302.62 Interest during Construction: 29.38 29.38 Commitment Fee: 3.32 3.32 Front-end Fee: 0.38 0.38 Total Financing Required: 150.00 185.70 335.70 1Identifiable taxes and duties are US$m 10.61, and the total project cost, net of taxes, is US$m 292.48. Therefore, the share of project cost net oftaxes is 5 1.3%.

- 26 - Table 5-2: Funding Arrangements for Water SuDplv and Sewerage Network (RMB’OOO1

Local World Bank Commercial State Bonds County County funding wsc Bank Kaifeng Municipality 1 Weishi 60,056 34,100 (57%) 0 (0%) 0 (0%) 12,836 (21%) 13,120 (22%) 2 Tongxu 80,987 46,347 (57%) 7,300 (9%) 0 (0%) 27,000 (33%) 340 (0%) 3 Lankao 51,668 30,000 (58%) 0 (0%) 0 (0%) 21,668 (42%) 0 (0%) 4 Kaifeng 26,996 16,095 (60%) 0 (0%) 0 (0%) 10,901 (40%) 0 (0%) 5 Qixian 58,899 32,895 (56%) 0 (0%) 0 (0%) 26,004 (44%) 0 (0%) Luoyang Municipality 6 Mengjin 48,471 26,366 (54%) 5,000 (10%) 0 (0%) 10,000 (21%) 7,105 (15%) 7 Yiyang 57,894 32,017 (55%) 7,000 (12%) 0 (0%) 14,500 (25%) 4,026 (7%) 8 Songxian 49,726 27,932 (56%) 0 (0%) 0 (0%) 21,794 (44%) 0 (0%) Pingdingshan Municip. 9 Baofeng 45,335 24,000 (53%) 11,000 (24%) 0 (0%) 10,000 (22%) 335 (1%) 10 Jiaxian 35,071 20,000 (57%) 0 (0%) 7,500 (21%) 5,000 (14%) 2,571 (7%) 11 Lushan 57,689 32,000 (55%) 0 (0%) 0 (0%) 0 (0%) 25,689 (45%) Xinxiang Municipality 12 Xinxiang 46,000 26,000 (57%) 8,000 (17%) 0 (0%) 7,000 (15%) 5,000 (11%) 13 Yuanyang 57,018 27,360 (48%) 14,540 (26%) 2,500 (4%) 3,000 (5%) 9,618 (17%) 14 Fengqiu 54,949 29,193 (53%) 5,000 (9%) 8,500 (15%) 5,000 (9%) 7,256 (13%) Xuchang Municipality 15 Xiangcheng 54,829 30,462 (56%) 10,000 (18%) 0 (0%) 0 (0%) 14,367 (26%) Sanmenxia Municip. 16 Shanxian 49,504 28,000 (57%) 0 (0%) 20,000 (40%) 0 (0%) 1,504 (3%) 17 Yima 41,263 24,000 (58%) 0 (0%) 0 (0%) 12,281 (30%) 4,982 (12%) Shangqiu Municipality 18 Suixian 69,308 36,840 (53%) 10,000 (14%) 0 (0%) 9,000 (13%) 13,468 (19%) 19 Xiayi 58,755 32,000 (54%) 0 (0%) 6,000 (10%) 0 (0%) 20,755 (35%) 20 Zhecheng 48,350 22,000 (46%) 10,000 (21%) 7,500 (16%) 0 (0%) 8,850 (18%) Nanyang Municipality 21 Dengzhou 83,725 45,735 (55%) 18,000 (21%) 0 (0%) 8,000 (10%) 11,990 (14%) 22 Xinye 71,832 40,787 (57%) 8,000 (11%) 0 (0%) 16,000 (22%) 7,045 (10%) 23 Sheqi 53,227 28,855 (54%) 13,000 (24%) 0 (0%) 11,372 (21%) 0 (0%) 24 Xichuan 47,328 27,000 (57%) 10,000 (21%) 0 (0%) 6,000 (13%) 4,328 (9%) Zhumadian Municip. 25 Queshan 35,027 27,360 (78%) 0 (0%) 6,000 (17%) 6,000 (17%) 3,027 (9%) 26 Xincai 41,602 24,000 (58%) 4,000 (10%) 7,000 (17%) 6,000 (14%) 602 (1%) 27 Xiping 50,348 27,479 (55%) 0 (0%) 0 (0%) 10,000 (20%) 12,869 (26%) 28 Zhengyang 44,275 24,000 (54%) 6,000 (14%) 9,500 (21%) 7,000 (16%) 2,225 (5%) 29 Suiping 85,680 49,497 (58%) 7,150 (8%) 0 (0%) 27,033 (32%) 2,000 (2%) 30 Runan 75,150 30,000 (40%) 10,000 (13%) 0 (0%) 35,150 (47%) 0 (0%) Zhoukou Municipality 31 Shenqiu 53,606 28,000 (52%) 0 (0%) 10,000 (19%) 8,000 (15%) 7,606 (14%) 32 Xiangcheng 65,340 30,000 (46%) 0 (0%) 15,000 (23%) 0 (0%) 20,340 (31%) Xinyang Municipality 33 Minggan 43,527 24,193 (56%) 5,000 (11%) 0 (0%) 11,000 (25%) 3,334 (8%) 34 Xixian 38,428 22,000 (57%) 10,428 (27%) 0 (0%) 6,000 (16%) 0 (0%) 35 Luoshan 75,348 48,000 (64%) 18,000 (24%) 0 (OYO) 8,000 (11%) 1,348 (2%) 36 Yangshan 96,132 49,660 (52%) 0 (0%) 0 (0%) 43,435 (45%) 3,037 (3%) 37 Huangchuan 62,886 35,562 (57%) 0 (0%) 17,500 (28%) 9,824 (16%) 0 (0%) Jiaozhou Municipality 38 Mengzhou 66,201 35,000 (53%) 31,201 (47%) 0 (0%) 0 (0%) 0 (0%) 0 218 2*142 !*?75 (55%) (11%) 0.117 (5%) billion0*415 (19%) bi;lion (10%) Total funding billion billion iiiit

.. 27 - Table 5-3: Funding arrangements Wastewater Treatment Plants CRMB '000)

Local World Bank Commercial State Bonds County WWC County funding Bank Luoyang Municipality 6 Mengjin 50,939 24,800 (49%) 0 (0%) 0 (0%) 16,139 (32%) .10,000 (20%) 8 Songxian 77,844 42,535 (55%) 14,000 (18%) 0 (0%) 12,000 (15%) 9,309 (12%) Pingdingshan Municip. 9 Baofeng 57,947 30,342 (52%) 6,205 (11%) 21,400 (37%) 0 (0%) 0 (0%) Xinxiang Municipality 13 Yuanyang 57,000 28,500 (50%) 0 (0%) 10,000 (18%) 18,500 (32%) 0 (O%] Total funding 243,730 126,177 (52%) 20,205 (8%) 31,400 (13%) 46,639 (19%) 19,309 (8%)

- 28 - Annex 6: Implementation Arrangements CHINA: HENAN TOWNS WATER SUPPLY AND SANITATION PROJECT

Each phase ofproject implementation (e.g., the on-lending and financial supervision, construction supervision, coordination ofprocurement and monitoring) will be provided by the government in the normal chain ofcommand. The organizational structure ofthe implementing agencies is as follows:

Chart 1: Organizational Structure of Proiect Implementation Apencies

Table 6- 1 describes the responsibilities and implementation arrangements at each level.

- 29 - I

I

I 0 rc, I I 4 I 8. I M I

I 8 Provincial Project Management Office (PPMO)

The PPMO consists ofprofessional staff from the Provincial Finance Department as well as technical experts. At present, the PPMO has four full-time staff that include a:

- Deputy Director, supervising overall project management, with experience of working on Bank- and ADB-financed projects since 1989; - Division Chief, supervising financial management and auditing aspects, with experience ofworking on Bank- and ADB-financed projects since 1987; - Project Officer, supervising engineering and procurement aspects, with experience ofworking on Bank- and ADB-financed projects since 1989, specializing in ICB and NCB procurement; - Project Officer, supervising safeguards.

To enhance PPMO capacity, an expert group was established within the organization that includes representatives from French consulting firms (BRL), the Henan Engineering Consulting Company, and often high level professionals ofHenan Province. The group has been working with the PPMO on feasibility studies and project design and will continue to provide guidance during implementation. The local experts from Henan include three experts on water supply and wastewater operations from authorities ofZhengzhou city; two experts on water resource and construction from Henan Provincial Departments, and a professional on finance and accounting; and an academia on socio-economics and architecture.

Water Utility Companies (WUCs)

The county WUCs were converted from government bureaus to independent public institutions or publicly-owned share companies, following province-wide efforts to convert them into corporations in the last few years. Each WUC is a state-owned enterprise, a privately-owned enterprise, or a limited company. The list ofWUCs and the year they were established is provided in Table 6-2.

Chart 2 presents the WUCs’ organizational and managerial structure. As part ofimproving the WUCs’ operational capacity, each will recruit an average of seven administrative personnel, six technicians and 30 production personnel. Training will be provided in managing construction, production and commercial operations.

Newly established WUCs such as in Kaifeng, Xinxiang, Yuanyang, and Huangchuan, which have no existing systems, have started preparatory works within the county government offices with an average of30 staff, including financial and technical experts. They have participated fully in preparing the project, which included feasibility studies and project designs; they will function as independent companies while the project is implemented.

- 32 - Table 6-2: List of WUCs

Kaifeng Municipality 1 Weishi Weishi County Water Supply Company March 20,2003 SOE 2 Tongxu Tongxu County Water Supply Company September 1,2004 SOE (Collective) 3 Lankao Lankao County Water Supply Company March 15,2004 SOE 4 Kaifeng Kaifeng County Water Supply Company October 8,2005 SOE 5 Qixian Qi County Water Supply Company October 23,2000 SOE Luoyang Municipality 6 Mengjin Mengjin County Water Supply Company April 8,2003 SOE 7 Yiyang Yiyang County Water Supply Company March 5,2003 SOE 8 Songxian Song County Water Supply Company December 24,2004 SOE Pingdingshan Municipality Baofeng County Water Supply Company May 13,2004 SOE 9 Baofeng Baofeng County Water Water Treatment Plant September 20,2004 SOE 10 Jiaxian Jia County Water Supply Company April 7, 1999 SOE (Collective) 11 Lushan Luwei Water Works Company July 4,2005 POE** Xinxiang Municipality Xinxiang County Chenyuan Water Works Limited 12 Xinxiang April 20,2005 Liability Company Yuanyang Water Supply Company July 2,2003 LC 13 Yuanyang Yuanyang Wastewater Treatment Limited November 10,2005 Company LC 14 Fengqiu Fengqiu Water Supply Company June 9,2004 SOE Xuchang Municipality 15 Xiangcheng Xiangcheng Water Supply Company February 25,2004 SOE Sanmenxia Municipality 16 Shanxian Shan County Water SuppIy Company April 14,2004 SOE 17 Yima Yima City Water Supply Company November 3,2003 LC Shanqiu Municipality 18 Suixian Sui County Water Supply Company March 15,2005 SOE 19 Xiayi Xiayi County Water Supply Company October 30,2003 SOE 20 Zhecheng Zhucheng Water Supply Company June 7,2005 SOE Nanyang Municipality 21 Dengzhou Dengzhou Water Supply Company March 3 1,2003 SOE 22 Xinye Yinye County Water Supply Company September 16,2005 SOE 23 Sheqi 3heqi County Water Supply Company April 20,2005 SOE 24 Xichuan Yichuan County Water Supply Company May 3,2003 SOE Zhumadian Municipality 25 Queshan Queshan County Water Supply Company March 25,2005 LC

- 33 - County Name of Company Established Type of Company

26 Xincai Xincai County Water Supply Company August 20,2003 SOE 27 Xiping Xiping County Water Supply Company July 28,2003 SOE Zhengyang County Sanyuan Water Supply 28 Zhengyang March 11,2003 LC Company 29 Suiping Suiping County Water Supply Company March 16,1999 SOE 30 Runan Runan County Water Supply Liability Company March 30,2004 LC Zhoukou Municipality 31 Shenqiu Shenqiu County Water Supply Company April 29,2004 POE Xiangcheng Jiahao Biologic Water Works Liability June 10,2005 LC 32 Xiangcheng Company Xinyang Municipality Pingqiao District Mingxiang Huaiquan Water Minggan, Pingqiao December 15,2003 LC 33 District Supply Liability Company 34 Xixian Xi County Water Supply Company March 2,2005 SOE Luoshan County Water Supply Limited Liability 35 Luoshan June 2,2004 LC Company 36 Yangshan Xinyang City Water Supply Liability Company May 20,2002 LC Huangchuan County Huaili Wastewater Treatment 37 Huangchuan December 17,2005 LC Co., Ltd Jiaozhou Municipality 38 Mengzhou I Mengzhou- City Water Supply- Company-- August 17,2005 SOE - I __ I *Type of company: SOE - State-owned Enterprise; POE: Private-owned Enterprise; LC: Limited Company **: 100% foreign company owned

Chart 2: Orpanizational and Manavement Structure of WUCs

CZcJManager

I I I

Project Implementation Schedule

Table 6-3 provides a project implementation schedule for each town, grouped into four phases.

- 34 -

Annex 7: Financial Management and Disbursement Arrangements CHINA: HENAN TOWNS WATER SUPPLY AND SANITATION PROJECT

The Financial Management Specialist (FMS) assessed the adequacy ofthe financial management system ofthe Henan Towns Water Supply and Sanitation Project. The assessment, based on guidelines issued by the Financial Management Sector Board on October 15,2003, concluded that the project meets minimum Bank requirements, as stipulated in BPlOP 10.02. It determined that the project has an adequate financial management system that can provide, with reasonable assurance, accurate and timely information on the status ofthe project in the reporting format agreed upon (under the project) and as required by the Bank.

The project’s funding sources include the Bank loan and counterpart funds. Loan proceeds will flow from the Bank into the project special account (SA) to be established at, and managed by, the Henan Provincial Finance Department (HPFD), and then to the municipal and county financial bureaus. From there, funds will be transferred to the Water Supply Companies (WSCs) or Wastewater Companies (WWCs). The on-lending agreement will be signed by the Ministry of Finance (MOF), Provincial Finance Department, municipal finance bureaus, county finance bureaus and the WSCslWWCs. Amounts will be listed in US dollars and the WSCslwwCs will bear the exchange rate risks. Counterpart funds will be contributed fiom the county, state bonds, self-financing from the WSCslWWCs in the form ofshares, andlor commercial loans.

Audit Arrangement

The Bank requires that project financial statements be audited according to standards it considers acceptable. In line with other Bank- financed projects in China, the project will be audited according to ISA and Government Auditing Standards ofthe People’s Republic ofChina (1997 edition). The Henan Provincial Audit Office has been identified as the project auditor. Annual audit reports will be issued in the name ofthe Henan Provincial Audit Office.

The annual audit report ofthe project’s consolidated financial statements will be due at the Bank within six months of the end of each calendar year, as stipulated in the loan agreements. The responsible entity and timing are summarized as below:

Component Submitted by Due date Consolidated project financial Provincial PMO June 30 statements

Disbursement Arrangement

The project will use traditional disbursement techniques; it will not use FMR-based disbursements, according to an agreement between the Bank and Ministry ofFinance (MOF).

- 36 - Allocation of Loan Proceeds

Loan proceeds will be disbursed against expenditure categories as shown in the table below and there would be retroactive financing up to US$4.5 million.

* It is a round-up figure, the exact amount is $3 75,000.00

Use of Statement of Expenditures (SOEs)

Some proceeds may be disbursed on the basis of SOEs, indicated in the table below.

Expenditure Category Contracts Less than US$ Equivalent (1) Civil Works US$ 5,000,000

(a) individuals US$50,000 (b) firms us$100,000

Expenditures exceeding the above limits will be made according to procurement guidelines and signed contracts.

Special Account (SA)

One special account (SA) will be established in the Henan Provincial Finance Department (HPFD). The authorized allocation ofthe SA will be determined between the Bank and Borrowers during negotiations.

HPFD will be responsible for the management, monitoring, maintenance and reconciliation of the SA. Supporting documents required for Bank disbursements will be prepared and submitted by the WSCs~Csthrough county finance bureaus, municipal finance bureaus, and HPFD for final verification and consolidation before they are sent to the Bank for disbursement. The flow ofthe withdrawal application is as follows:

-37- WSC~CS County finance Municipal Provincial World bureaus * financebureaus -b Finance + Bank Department

Financial Management and Reporting Arrangements

Implementing entity. The PPMO has five professional staff from the Henan Provincial Finance Department as well as technical experts. Municipal government offices will coordinate WSClwwCs’ activities within the municipalities and cities where inter-county coordination is critical. County govement offices will also supervise implementation by the WSClwwCs. In most cases, the WSCs~Csin the county towns are independent public institutions. The organizational chart is as follows:

Government

County Government

WSC and

Flow of funds. The flow ofBRD funds will follow the usual route from the World Bank to the SA in Henan Provincial Finance Department, then to the municipal and county FBs. From there, funds will be transferred to the WSCs and WWCs. The flow is as follows:

SA The World managed by Municipal County FBs wscs I Bank HPFD FBs --b --b wwcs L

-38- able to meet the Bank’s minimum requirements, but some need to improve their technical capacities. Thus, financial management training should be provided by the provincial PMO before project effectiveness, since all the financial staff are new to the World Bank project.

To strengthen their financial management capacity and ensure that work is ofa consistent quality, the task team suggested that a project financial management manual (the Manual) be prepared; it will provide guidelines on financial management, internal controls, accounting procedures, fund and asset management and withdrawal application procedures.

The first draft ofthe Manual prepared by the provincial PMO was submitted to the Bank, whose comments were, in turn, provided to the PPMO for their incorporation. The Manual will be finalized and distributed to all financial staff before project effectiveness.

Accounting procedures. The administration, accounting and reporting ofthe project will be established according to Circular #13: “Accounting Regulations for World Bank Financed Projects” issued in January 2000 by the MOF. The circular covers the following:

0 Chart ofaccount 0 Detailed accounting instructions for each project account 0 Standard set ofproject financial statements 0 Instructions for preparing financial statements

The standard set ofproject financial statements mentioned above has been agreed upon by the Bank and MOF, applies to all Bank projects appraised after July 1, 1998 and includes the following:

0 Balance sheet 0 Statement of source and use of funds by project components 0 Statement ofimplementation ofloan agreement 0 Statement of special account 0 Notes to financial statements

All WSCs~Cswill manage, monitor and maintain project accounting records and retain original supporting documents for project activities. Also, each will prepare financial statements, which will then be reviewed, approved and consolidated by municipal PMOSand finally by the provincial PMO, before bring sent to the Bank for review and comment on a regular basis.

Internal audit. There is no formal independent internal audit unit for most ofthe WSCsNvwCs. Where this function was structured within the companies, the internal audit units are either not sufficiently staffed or do not directly report to the general managers. However, this will not affect the project’s financial management because PMO management and monitoring, Bank. supervision visits, and yearly external audits will ensure that financial management controls are functioning properly.

- 39 - Information system. Only three WSCs are using the accounting software named “Kingdee” to process accounting transactions, Thus, project activities will be accounted for manually. However, the financial reporting will be generated using Excel.

Financial management action plan. The following time-bound actions are proposed:

Action Responsible person Completion Date 1. Financial management Provincial PMO I Before effectiveness training to relevant project I (condition for effectiveness)* staff 2. Financial management Provincial PMO Before effectiveness manual finalized and issued (not a condition for to relevant financial staff effectiveness) * The effectiveness condition -- “provision offinancial management training to all the relevant staff responsible for implementation, which is satisfactory to IBRD” -- will be deleted from the legal documents if the Bank receives from Henan before signing oflegal documents, evidence that such training has been completed.

Supervision plan. A detailed supervision plan will be included as part ofthe China Audit Strategy document; it will consider the size and FM risk rating ofthis project.

- 40 - Annex 8: Procurement CHINA: HENAN TOWNS WATER SUPPLY AND SANITATION PROJECT

General

Procurement for the project will be carried out according to the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits," May 2004; "Guidelines: Selection and Employment ofConsultants by World Bank Borrowers," May 2004, and provisions in the Legal Agreements. Various items under different expenditure categories are described below. For each contract financed by the Loan, the procurementlconsultant selection methods, the need for pre- qualification, estimated costs, prior review requirements, and time fi-ames have been agreed upon by the Borrower and Bank in the Procurement.Plan. The Plan will be updated at least annually or as required to reflect actual implementation needs as well as improvements in institutional capacity.

Procurement of works. About $245 million ofcivil and electro-mechanical works will be procured to construct water supply plants and distribution systems, wastewater collection systems and treatment plants. Contracts will be relatively small (each less than US$lO million) and scattered over many small towns, where foreign contractors or major national contractors are not likely to be interested. Thus, contracts will be procured on an NCB basis and ICB contracts for works are not expected. Two types ofcontracts will be used: (a) C+E: Civil works plus equipment supply, installation and commissioning; and @) DBO: Detailed engineering design plus civil works, equipment supply, installation and commissioning, as well as operation and maintenance ofthe plants for 1-3 years. The PPMO will prepare project-specific sample bidding documents for the two, based on Bank-approved Chinese Model Bidding Documents for NCB Procurement of Works. Contracts above US$200,000 will be awarded on an NCB basis. For those below US$2 million, procurement may be advertised in a provincial newspaper only. Those under US$200,000 will be awarded by comparing ofat least three quotes, for which the PPMO will prepare project-specific sample procurement documents for use by the countieslcities involved.

Procurement of goods. Since the equipment for the water supply and wastewater treatment plants will be procured along with the civil works, separate procurement ofgoods is not expected. However, in order to provide flexibility for possible adjustments ofthe procurement plan during implementation, the Legal Agreements will provide: (a) contracts for goods, estimated to cost US$500,000 or more, to be awarded on an ICB basis; (b) contracts for goods estimated to cost US$lOO,OOO-US$5OO,OOO, to be awarded on an NCB basis; and (c) other contracts for goods that cost $100,000 or less, to be awarded on the basis ofcomparing at least three quotes (the PPMO will prepare project-specific sample shopping procurement documents). NCB procurement for goods may be advertised in a provincial newspaper only, if contracts are under US$300,000.

Selection of consultants. About US$7.2 million ofconsulting services will be required to develop policies, build capacity, produce engineering designs and supervise construction, project management, etc. Contracts for consulting services, each estimated at US$lOO,OOO or more, will be awarded following the procedures ofQuality and Cost Based Selection (QCBS). For services

-41 - estimated to be less than US$lOO,OOO, contracts will be awarded following the procedures of Selection Based on Consultants’ Qualifications (CQS), according to the Bank’s Consultant Guidelines. Procedures of Selection ofIndividual Consultants will be followed for assignments that meet the requirements of paragraph 5.1 & 5.3 ofthe Consultant Guidelines. Short lists of consultants for services estimated at under US$300,000 per contract may be composed entirely of national consultants, according to the provisions ofparagraph 2.7 ofthe Consultant Guidelines. For some services, government-owned universities or research institutions may be hired because oftheir unique and exceptional roles in the sector; their participation will follow the requirements ofparagraph 1.1 1(b) and (c) ofthe Consultant Guidelines.

Training workshops, seminars and study tours. About US$600,000 will be required for training workshops, seminars and study tours. With the Bank’s agreement on the terms of reference, planning of activities and budgets, disbursements will be made against reasonable actual costs.

Assessment of the agency’s capacity to implement procurement

The PPMO was established within Henan Provincial Finance Department and has five qualified full-time staff. Under the PPMO’s guidance, most ofthe Bank-financed procurement will be carried out by selected tendering companies. An assessment ofthe capacity ofthe Implementing Agencies to carry out Procurement was made in July 2005 and updated in September 2005. The assessment reviewed the organizational structure and hctions, staffing plan, adequacy of support and control systems, legal and regulatory fiamework, etc. The overall project risk for procurement is average.

Actions agreed upon to address the weaknesses identified by the assessment include: (a) the PPMO will oversee and guide the procurement process; (b) procurement training workshops will be provided to PMO staff at various levels; (c) the PPMO will prepare and disseminate project- specific procurement documents; and (d) to address the differences between Bank Guidelines and the Tendering and Bidding Law ofChina, waivers for Bank-financed NCB procurement shall be included in the Legal Agreements ofthe project, according to recommendations in the Bank’s Operational Procurement Review ofChina (February 17,2003), which was further standardized by the Bank (see Attachment 1 ofthis Annex).

Procurement Plan

A procurement plan for implementation provides the basis for the methods to be adopted. This plan was agreed upon by the PPMO and Bank, and is available at the PPMO: 27 Jing San Road, Zhengzhou City, Henan Province, China, Post Code 450008. The plan is included in the Project File and will also be available in the Bank’s external website. The plan will be updated in agreement with the Bank annually or as required, to reflect project implementationneeds and improvements in institutional capacity.

- 42 - Frequency of Procurement Supervision

Besides the prior review supervision to be carried out from the Bank’s offices, the capacity assessment ofthe Implementing Agency recommended a launch workshop and one supervision mission to visit the field to make a post-review ofprocurement every six to eight months. At least 25% ofpost-review contracts should be sampled and reviewed.

Details of the Procurement Arrangements

Procurement Methods Thresholds I Prior Review Thresholds I I Goods ICB (not XJS$500,000 1) All contracts for expected) goods above 1 US$500,000 I NCB us$loo,ooo-us$5oo,ooo 2) All contracts for I works above US$5 1 million 3) First five NCB contracts for works in the first year Works ICB(not XJS$15 million 4) First five NCB contracts for goods in expected) I the first year 5) First two NCB NCB US$200,000- US$15 million contracts for works in each subsequent year 6) First two NCB Shopping ~us$200,000 contracts for goods in each subsequent year

Consulting QCBS 2us$loo,ooo US$lOO,OOO for fm and services US$50,000 for individuals CQS

IC Assignments meeting the requirements ofPara. 5.1 and 5.3 ofthe Consultant Guidelines

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Qi L 1 u E e I 2 I Attachment 1: NCB Waivers for China

Procedures to be followed for National Competitive Bidding (NCB) shall be those set forth in the Law on Tendering and Bidding of the People's Republic ofChina promulgated by Order No. 21 ofthe President of the People's Republic ofChina on August 30, 1999, with the following clarifications required for compliance with the Guidelines:

1) All invitations to pre-qualify or bid shall be advertised in a newspaper ofnational circulation in the Borrower's country, except for civil works contracts that are estimated to cost less than US$2 million each and for goods contracts that are estimated to cost less than US$300,000 each, which may be advertised in a provincial daily newspaper. Such advertisements shall be made in sufficient time for prospective bidders to obtain prequalification or bidding documents and prepare and submit their responses. A minimum ofthirty (30) days shall be given to bidders between the date ofthe newspaper advertisement and the deadline for submission ofbids; the advertisement and bidding documents shall specify the deadline for such submission. 2) Qualification requirements ofbidders and the method ofevaluating the qualification of each shall be specified in detail in the bidding documents. 3) All bidders that meet the qualification criteria set out in the pre-qualification document shall be allowed to bid and there shall be no limit on the number ofpre-qualified bidders. 4) All bidders shall be required to provide security in an amount sufficient to protect the Recipient and Henan Province in case ofbreach ofcontract by the contractor, the bidding documents shall specify the required form and amount ofsuch security. 5) The time for opening all bids shall be the same as the deadline for receiving the bids. 6) All bids shall be opened in public; all bidders shall be offered an opportunity to be present (either in person or through their representatives) at the time ofbid opening, but bidders shall not be required to be present. 7) No bid may be rejected solely on the basis that the bid price falls outside any standard contract estimate, margin or bracket ofaverage bids established by the Recipient or Henan. 8) Each contract shall be awarded to the lowest evaluated responsive bidder, that is, the bidder who meets the appropriate standards ofcapability and resources and whose bid has been determined: (a) to substantially respond to the bidding documents; and (b) to offer the lowest evaluated cost. The winning bid shall not be required, as a condition of award, to undertake responsibilities for work not stipulated in the bidding documents or otherwise modify the bid as originally submitted. 9) Each contract financed with the Loan proceeds shall state that suppliers and contractors shall permit the Bank, at its request, to inspect their accounts and records on their performance (with respect to the contract) and to have these audited by those appointed by the Bank. 10) Re-bidding should not be allowed solely because the number ofbids is less than three (3).

- 53 - Annex 9: Economic and Financial Analysis CHINA: HENAN TOWNS WATER SUPPLY AND SANITATION PROJECT

Economic Analysis (Water Supply Component)

The project will benefit an estimated 4.5 million people in 38 county towns (13 ofwhich are nationally or provincially designated as poor counties). The economic benefits ofeach component will vary from county to county, depending on residents’ willingness-to-pay (WTP) for improved water, public health externalities, and economic costs. The use ofa financial covenant requiring cost-recovery water tariffs sets a base ERR for the water supply components. Since the standard conversion factor for China is 1.O, major equipment and material inputs are acquired through ICB, and no major domestic input has an economic price above its financial price, the FRR associated with cost-recovery tariff levels sets the lower-bound ERR for each water supply component.

Consumer surplus has been estimated in three sample counties for a more complete picture ofthe economic benefits from an improved water supply. The actual ERR is expected to be higher in all counties since the consumer surplus analysis does not reflect the positive public health externalities.

Selection of counties. The consumer surplus analysis was conducted for three counties that represent a range ofGDP per capita: Yiyang (low-income), Suixian (middle-income) and Weishi (high-income), Table 1 presents background information on the three.

Table 1: Counties Selected for Economic Analvsis

Per Capita Population (000) Range(” County Annual GDP Water Resources 2004 2010 RMB

RMB 3,700 - 5,400

Note: (1) 2003 data.

Willingness-to-pay (WTP) for improved water. In all three counties, the connection rate is relatively low, and most residents rely on a private water supply. The WTP is the key variable determining the rate of substitution from privately-supplied water to an improved water supply. However, no market information is available to estimate the WTP for improved water for those with a private supply. Lacking such information, the estimated price ofself-provision represents a good proxy ofmaximum WTP for improved water. To estimate the cost ofself-supplied water, the following elements were considered:

0 Water resource fees. Self-supplied residents pay a water resource charge, which varies from county to county and ranges from RMBO.09 - RMl3O. l/m3.

- 54 - 0 The cost ofbottled water. Contaminated surface water and shallow groundwater make self-supplied water unsafe for drinking and cooking. While the health costs ofdrinking contaminated water cannot be estimated due to limited data, consumption ofbottled water for drinking is used as a proxy for the cost ofun-safe water. Conservative estimates have been made for consumption ofbottled water. Results indicate that the cost ofunsafe water is sufficiently high to trigger substitution to an improved water supply. 0 The opportunity cost oftime, The time required to obtain water from a particular source is a major determinant ofdemand for improved water. It depends, first, on the level of household income; the higher the income, the higher the opportunity cost ofpursuits that do not yield monetary income, such as gathering water. The cost oftime is also affected by the type ofwater source; the time needed to gather unimproved water is generally higher for residents relying on surface water than for those using shallow groundwater sources. Conservative assumptions have been made for water gathering time: only 7.5 and 4 minutes per round trip are assumed for surface sources and well-water, respectively. Nevertheless, results indicate that the opportunity cost ofgathering water from unimproved sources will justify consumers switching to an improved water supply (see Table 2).

Table 2: Labor cost of fetching water from private wells

Annual per capita income (RMB) 3,378 4,329 Average household size 4.0 3.1 4.4 Laborers per household 2.8 2.2 3 .O

Annual household income (RMB) 13,510 11,854 19,047 Assumed hours of work per year 9,141 7,391 10,007 Average income per hour (RMB) 1.5 1.6 1.9

Daily water gathering time (h) 0.6 0.3 0.4 Cost of time rn/m3) 4.6 2.7 3.2

Planned water tariff (2008) 1.95 1.9 2.0 Source: Henan Water Supply (and Sewerage) Project Social Impact Assessment, Statistical Yearbook.

The main results ofthe WTP analysis are: (a) self-supplied consumers are expected to gradually switch to an improved water supply, as their WTP is, on average, significantly above the future level ofwater tariffs; and (b) gradual substitution to an improved supply is expected to occur even in nationally designated poor counties.

Economic rate of return (ERR). When consumer surplus from an improved water supply is accounted for in the overall economic benefits ofthe project components, the ERRSincrease noticeably across all counties. As shown in Table 3, the ERRSfor the three water supply investments are all above 25%, ranging from 19.8%-33.6% under different scenarios. A comparison between the FRR and ERR in the three project counties (see Table 3 below) highlights the significant contribution of consumer surplus to the overall economic benefits in the poorest counties. The consumer surplus for the resident population is estimated based on a

- 55 - constant elasticity demand for improved water. Changes in consumer surplus are calculated for a 20-year period on a cumulative basis in order to properly compare the effect ofthe project against the 'no project' scenario.

Sensitivity analysis. Various sensitivity analyses were conducted under different scenarios. Results show robust economic justification for the project under the following scenarios:

Scenario I:WTP for an improved supply is 20% lower than in the base case scenario. e Scenario 11: Per capita consumption levels in the first year ofoperation are 10% lower than in the base case scenario. Scenario 111: Scenarios Iand I1combined.

The ERR for the three selected counties and results ofthe sensitivity analysis are presented in Table 3. A detailed assessment of economic benefits is included in the project file.

Table 3: Economic Rate of Return (%I

FRR (lower-bound ERR) 5.9 9.6 14.2 ERR (Base case scenario) 25.8 25.0 33.6

Sensitivity Analysis Scenario I:20% reduction in WTP 22.2 22.4 29.7 Scenario 11: 10% reduction in consumption 22.6 22.1 30.8 Scenario 111: Scenario Iand 11 combined 21.0 I 19.8 I 28.3 8a-

Financial Analysis of Water Supply and Wastewater Components

Financial rates ofreturn (FRR) have been reviewed for the water supply and wastewater components for each county. Preliminary analysis demonstrates that the project is financially viable: FRRs for water components are mostly above lo%, ranging from 9.6%-17.8%, and those for wastewater components are above 5%, ranging from 5.1%- 6.1%. Analyses were also made to test the sensitivity of the FRRs to the adverse effect ofchanges in key parameters, which include reduced revenues, increased capital costs and increased O&M costs. The results presented in Table 4 indicate that the proposed investments in water supply and wastewater systems are financially robust. In Table 10, all the FRRs for each county are provided.

- 56 - Table 4: FRR and Sensitivity Analyses

Revenues: - 10% 7.7% - 14.9% Capital costs: + 10% 8.5% - 16.2% O&M cost: + 10% 9.0% - 16.9% 4.5% - 5.4%

Tariffs

Water Tariffs. Most counties have already increased tariffs to levels that allow WUCs to financially break-even: residential tariffs are RMB0.9-RMB2.41 m3,with a median value of RMB1.21 m3. The tariff range and median value by user group are presented in Table 5.

Table 5: Current Water Tariffs lRMB/m31

All project counties confirmed their plans to raise tariffs further in letters ofcommitment, once the new systems are commissioned. The future tariffs are expected to cover the weighted average cost ofcapital (WACC) and the capital expenditures associated with new investments. The WUCs’ new capital structure will reflect the financing arrangements ofthe sub-projects - a combination ofWUCs’ internal cash generation, counties’ budget contributions as equity, and subsidiary loans from the World Bank. through the counties, as well as state bonds and commercial bank loans in most cases (see Annex 5 on funding arrangements).

Based on these plans, residential tariffs will rise by an average of33% over existing levels. Other customer groups will face increases of27% (industrial) to 48% (special commercial). The median tariff value will increase from RMB1.2 to RMB1.6m3 for residential, from RMB1.5 to RMB 1.9/m3 for institutional, from RMB 1.6 to RMB2. l/m3for industries, from RMB 1.7 to RMB2.4/m3 for commercial, and from RMB2.1 to RMB3. l/m3for special commercial. The tariff range and median value offiture increased tariffs by user group are presented in Table 6.

-57- Table 6: Planned Water Tariffs for Future (RMB/m3)

All tariff increases will occur within the next two years: 14 counties will raise tariffs in 2006,7 counties in 2007 and 14 counties in 2008. Yima has recently raised tariffs, bringing its rates significantly above the median value for all counties (see Table 15). Yima plans to raise tariffs further, in 2010. The tariff schedule is summarized in Table 7. Residential tariffs and the years the increases take effect for each county are reported in Table 11, County-by-county tariff information by user group is available in the project file.

Table 7 :Tariff Imdementation Schedule

Note: Yirna has recently increased water tariffs and another raise is planned for 2010.

Wastewater Tariffs. Eleven counties have sewer collection and WWT plants as project component^.^ All counties have already introduced wastewater charges through water utility companies to contribute to the wastewater components. Wastewater charges are set at the provincial level; based on provincial guidelines, they are to be set at R1MB0.65/m3 for residential users, RM130.8/m3for institutional, industrial and commercial users and RMBl.0/m3 for special commercial users. Five out of 11 counties have already raised wastewater charges. In the other counties, the provincial-level wastewater charges will be introduced in 2006. As a result, current wastewater tariffs are within a similar range in all the project counties. The current wastewater charges are presented in Table 8.

Table 8: Current Wastewater Tariffs (RMB/m?

The following counties are included in the analysis ofwastewater charges: Baofeng, Huangchuan, Luoshan,, Mengjin, Runan, Songxian, Suiping, Suixian, Tongxu, Yuanyang, and Xinye.

- 58 - Category Tariff range Median tariff I 0.4 - 0.65 0.5 - 0.8 0.5 - 0.8

Nine out of 11 counties are planning to increase wastewater charges over the next two years, pending provincial approval. These tariffs are listed in Table 9.

Table 9: Planned Wastewater Tariffs for the Future (RMB/m31

0.8 -1.29

Table 10: Water and Wastewater Tariffs for Residential and FRR Base in Proiect Town (RMB/In31

Residential Tariff FRR County ' Yead') base case Current Planned

Water Supply Kaifeng Municipality 1 Weishi 14.11% 1*o 1.4 2007 2 Tongxu 10.96% 1.0 1.4 2006 3 Lankao 15.10% 1.1 1.5 2008 4 Kaifeng 12.84% 0.98 1.2 2006 5 Qixian 9.90% 1.2 1.5 2006 Luoyang Municipality 6 Mengjin 16.39% 1.85 2.0 2006 7 Yiyang 9.62% 0.9 1.6 2006 8 Songxian 12.10% 1.05 1.55 2008 Pingdingshan Municipality 9 Baofeng 14.49% 1.2 1.4 2008 10 Jiaxian 14.09% 0.93 1.56 2007 11 Lushan 14.70% I.o 2.0 2006 Xinxiang Municipality 12 XinxiangCity 13.76% 1.3 1.8 2008 13 Yuanyang 12.57% 1.25 1.75 2006 14 Fengqiu 14.58% 1.2 1.5 2006 Xuchang Municipality 15 Xiangcheng (Xuchang) 13.52% 1.o 1.3 2006 Sanmenxia Munici ality 16 Shanxian tR 12.63% 2.4 2.7 2007 17 Yima 14.73% 2.4 3.2 2010 Shangqiu Municipality 18 Suixian 10.17% 1.21 1.8 2008 19 Xiayi 14.40% 1.2 1.7 2007 20 Zhecheng 12.66% 1.1 1.4 2006

- 59 - Note: (1) NP = Poor county at national level; PP = poor county at the provincial level. (2) Year ofimplementation ofthe planned tariff increase. (3) Shanxian charges residential customers an increasing block Tariff (IBT), where the unit tariff varies with level of consumption based on the following block structure: First block: 1.7 RMBlm3 [0-121 m3, Second block 2.5 RMB Im3 [12 -181 m3 Third block 2.5 RMB Im3 above 19 m3. The average tariff is estimated assuming average water consumption of71 Vdaylperson.

Projected financial performance of WUCs

Financial projections ofparticipating WUCs were prepared to determine their viability after the project is completed. Some examples are discussed below (see Table 11 and Table 12 for details).

- 60 - Tongxu County Water Supply Company. Revenues will increase during the first four years of operation and stabilize at RMB 22 million annually. The operating margin (before interest and taxes) is 50%, and the working ratio remains sound at 45%. Net profit before taxes will be above RMB 3 million the first year, with a net profit at 25% ofrevenue.

The total asset value will increase to over RMB 90 million. Since 33% ofthe funds for the investments are equity contributions from local governments, the level ofequity is adequate from the start ofimplementation. The debtlequity ratio (ratio oflong term debt to total debt and equity) evolves positively during the period from a satisfactory level of 60% at the start, to 30%, 10 years later.

The projections show a high net inflow, ofover RMB 6 million annually, fiom year six onwards. The debt service coverage ratio is above 3 and the company will thus easily cover its debt obligations. The current ratio is projected to be over 1.5 throughout the period, and accounts receivable are less than 15 days of total annual revenues. The company is not expected to face liquidity problems over this time.

Yuanyang County Wastewater Company. Revenues will increase during the first four years of operation and stabilize at RMB 9 million annually. The operating margin (before interest and taxes) is 60%, and the working ratio remains sound at 35%. Net profits before taxes will be over RMB 2 million fiom the second year onwards, with net profits before taxes of25%.

The total asset value will increase to over RMB 55 million. As 50% ofthe funds for the investments are equity contributions from state bonds and local government contributions, the level ofequity is adequate fkom the start ofimplementation. The debtlequity ratio evolves positively during the period fiom a satisfactory level of50% at the start, to 30% 10 years later.

The projections show a high net inflow ofover RMB 2.5 million annually fiom the first year of operation. The debt service coverage ratio, at its lowest, is 1.3, which shows the company can safely meet its obligations. The current ratio is projected to be over 1.5 throughout the projection period, and accounts receivable are less than 15 days oftotal annual revenues. The project is expected to improve the liquidity ofthe company over the time period.

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3 I Fiscal Capacity Analysis

A fiscal capacity analysis was made for the participating counties to assess the healthiness ofthe borrowing local governments’ fiscal position, i.e. the fiscal and debt repayment capacity. The analysis focuses on two important areas ofmunicipality creditworthiness: economic strength and existing debt burden. GDP per capita was used to measure economic strength and outstanding explicit debt over revenue was used for the debt burden (not total debt, since data on contingent liabilities are not available). The analysis shows that most ofthe 38 counties are poor and their average GDP per capita is about RMB5,000, which is much lower than national level of RMB8,OOO. The debt analysis indicates that although the counties’ level ofindebtedness is somewhat high, it is still manageable. The average ratio ofoutstanding explicit direct debt over total revenue is 80%, which is higher than the international standard of70% for the ratio oftotal debt (including both explicit debt and contingent liabilities) over revenue. The analysis also suggests significant variations among individual borrowing counties for both indicators.

Based on the above analysis, a framework for fiscal capacity analysis was developed that provides a clear profile for the borrowing counties and will help guide a range offiscal actions to help counties ofdifferent fiscal capacities.

Cut-off points. The framework is shown in the matrix below, with two cut-off points: RMB5,OOO RMB for GDP per capita and SO% for debt over total revenue. Counties with GDP per capita above RMB5,OOO are considered as having relatively strong economies and those having debt over revenue ratios of less than 80% are considered to have a reasonable level of debt when compared to their peer borrowing counties. Both cut-off points were chosen based on median points ofper capita income and indebtedness ofthe 37 borrowing counties.

County Groups and Fiscal Action Recommendations. Table 13 summarizes the fiscal capacity ofparticipating counties. Those with high GDP per capita and a low level ofdebt have relatively strong fiscal capacity to undertake substantial investments (Group I). Counties with low GDP per capita and a low level ofdebt will need gradual tariff increases and subsidies to ensure long-term viability (Group II). Counties that have both high GDP per capita and a high level of debt need to increase tariffs in a timely manner to minimize liabilities (Group III), Finally, poor and highly indebted counties will need budget fund accumulation by phased investments and higher contributions &om WCsor subsidies, if necessary (Group IV). Some counties in Group IVYwhose governments intend to make counterpart contributions, might require subsidies.

- 64 - Table 13: Fiscal CaDacitv Analvsis Matrix

SuipGg, Xiangcheng, Xinye, Kaifeng, Xincai, Suixian, Zhengyang, Fengqiu, Mengjin, Xiping, Shan, Xinxiang and Yiyang, Queshan, Lankao, Yuanyang, Yima) can afford substantial investments. Sheqi, and Xichuan) will need gradual tariff increases to ensure long-term

Tongxu, Weishi, Dengzhou and Minggan) Shenqiu, Luoshan, Zhecheng, will need to maximize WUC contributions Songxian, Qixian and Xiangcheng) by increasing tariffs in timely manner. will need to accumulate funds before starting investment or might be subsidized.

Group IV counties and their funding arrangements. Further analysis ofthe finding arrangements was made for counties in the lower right comer ofthe matrix, due to their dire fiscal conditions. As Table 14 demonstrates, four out ofeight counties-Luoshan, Qixian, Runan and Songxian-are expected to provide counterpart finds through their budgets. The expected budget was compared with the revenue “available” @e,, total revenue minus salary expenditures).

Table 14: Ratio of Budgetaw Suuport to Available Revenue

Ratio of “Available” revenue in Budgetary Budgetary County budgetary 2004 support County support to contribution total revenue salary ratio over - “availab1e expenditure three years revenue” Luoshan 800 15,942 5 yo 2% Qi Xian 2,600 13,220 20% 7% Runan 3,515 15,302 23% 8% Shenqiu 800 -1,368 - Songxian 3,379 18,018 19% 6%

For Luoshan, proposed budget support will be 2% of“available” revenue over the three-year period (assuming revenues remain constant during that time); the figures are 6%, 7%, and 8% for Songxian, Qixian and Runan, respectively. While the fiscal pressure to produce counterpart funds for Luoshan seems manageable, it may not be true for the others. Shenqiu County’s revenues were not high enough to cover salaries in 2004 and it is unlikely the county will be able to provide counterpart funds. The above analysis suggests that some Group IVcounties need plans to improve their fiscal capacity and accumulate budget funds before any investment actions begin or might need to seek subsidies when necessary.

- 65 - Annex 10: Safeguard Policy Issues CHINA: HENAN TOWNS WATER SUPPLY AND SANITATION PROJECT

Summary of Environmental Impacts and Environment Management Plans

Background

China’s Institute of Water Resources and Hydropower Research, with support fiom international consulting specialists, conducted the Environmental Assessment (EA) for the proposed project according to China’s national requirements as well as Bank policies and procedures. The TORS and draft EAs were discussed in detail during project preparation with the Bank. EAs have been completed for each component and cover, inter alia, baseline environmental conditions (water resources and quality, air quality) and socio-economic conditions. They also describe alternatives considered while feasibility studies for each component were prepared.

The draft English-version EA report, together with two sample project component EA reports- one for water supply and one for wastewater treatment-were submitted to the Bank in mid- October 2005 and reviewed by the Bank before and during appraisal and found satisfactory. .

While the EA was being prepared, local residents were consulted at least twice; their opinions are reflected in the project design and environmental mitigation measures. Public announcements were made about the project and the EA on local radio and television stations, as well as in newspapers and on the internet. These notices informed the public ofthe locations (generally the county government) where the EA and RAP could be reviewed and commented on, as well as contact telephone numbers. Posters summarizing the EA and RAP were displayed in community centers and public meetings were held. The EA was disseminated in the project counties and municipalities from January to August 2005. The documents were sent to the Bank’s Infoshop in Washington and Beijing in October 2005. Details ofpublic consultations and information on each component are available in the project files.

Sub-EAs were cleared either by the Henan Provincial Environmental Protection Department (HPEPD) or local EPBs at the end ofOctober 2005. The consolidated final EA report was reviewed by the HPEPD in December, 2005 and a formal clearance document was obtained in December 2005.

Environmental Benefits

Establishing and improving the water supply in Henan’s medium and small cities and county towns is needed for the area’s economic and social development. Project investments will have long-lasting positive health and environmental effects and improve the infrastructure; e.g., through the wastewater component, domestic effluent will be collected from urban residents and treated to remove pollutants (CODc,, BODS,NH3-N, and TP), which will improve the quality of the surface waters into which it is discharged.

- 66 - Potential Environmental ImpactslIiisks and Mitigation Measures

Construction phase. Some project components could have short-term impacts, such as dust, noise, traffic, soil erosion, worker safety and public health issues. However, these problems are relatively minor and various measures have been planned to reduce them to acceptable levels; these measures and the monitoring needed to ensure effective implementation are described in the EA and EMP. The PPMO will be responsible for tracking and reporting the monitoring ofall project implementing agencies. Also, to ensure the measures are effective, independent consultants will be hired to monitor them, as described in the EMP.

Operations phase. It is expected the quality ofthe local water supply and drinking water will be improved. However, environmental issues, such as lower groundwater levels in Weishi County and chlorine leakage from water treatment plants, need to be addressed. Details ofmitigation measures, their location, time fiame and the agencies responsible were described in the EMP; e.g., the document covers areas such as managing surface and groundwater, controlling quality, managing noise, handling construction site waste, removing soil by layers and separate stockpiling, covering piles to limit wind erosion, constructing runoff channels and water storage units, and orienting roads and paths.

Environmental Management Plan (EMP)

A unit will be created in the PPMO to manage the EMP and will be staffed with at least one professional. PPMO staff will be trained in producing and applying environmental regulations, creating mitigation measures, holding public consultations, monitoring the environment, arranging for training ofrelevant officials, and producing progress reports. An environmental specialist from the supervisory consultant team will ensure that construction is done in an environmentally sound manner.

Names Responsibilities RemarkslStaffing Henan PMO Coordinating the EMP One or two environmental specialists

Municipality and county Conducting and managing One or two environmental specialists government environmental protection measures

Monitoring the environment in Contracts will be signed between Environmental monitoring both periods project implementing agencies and departmentslconsultants environmental monitoring departmentslconsultants at city/county levels

Supervision and reporting, The Bank will supervise the project’s environmental aspects twice a year. Semi-annual progress reports from the PPMO will include a sectionlchapter on the EMP. During project implementation and beginning in 2007, an annual report on the EMP will be hrnished to the Bank by March 3 1 ofeach year, along with any revisions proposed to the EMP to achieve its objectives.

- 67 - Names Resnonsibilities 1. Supervise the adoption of environmental laws/regulations Henan Provincial Environmental and overall management. Protection Department 2. Coordinate environmental management among various departments. 3. Provide final environmental acceptance ofconstruction project. 1 Assist the provincial department in its supervision tasks. Municipal EPBs and county EPBs 2. Approve the environmental monitoring report.

Training requirements. To ensure the above measureslplans are adopted, staff will be trained in identifylng environmental impacts and ensuring timely responses to accidents. The training will cover areas such as lawslregulationslstandards, project-related environmental science and environmental management.

Funding arrangements and implementation schedule. The costs associated with mitigating the effects ofconstruction are included in the cost estimates ofproject components, which are noted in the EMP. Also, monitoring ofair and water quality, noise, worker health, and site safetyhygiene will be conducted by local environmental monitoring units or consultants, and financed from counterpart funds

Monitoring. The EMP lists environmental performance indicators such as air and water quality, noise levels, conditions ofconstruction sites and camps, as well as details on where and when they will be monitored, and the agencies responsible for reviewing them. Henan’s PMO will be responsible for reporting on the monitoring ofmitigation measures by the agencies listed below.

Name Responsibilities Develop a monitoring framework, manage the monitoring Henan PMo and ci~’coun~governments and environmentduring construction Environmental management staff of Conduct and manage environmental protection measures project implementing agencies during construction Conduct in-depth environmental monitoring during Environmental monitoring consultants construction and operations as commissioned by the PMO engaged by city/county agencies and city/county governments

Public Consultations and Information Dissemination

Public consultations. Many consultative meetings were held during the preparation period with city and county PMOS, utility companies and others to discuss the proposed projects and EAs. Also, two rounds of public consultations for the project-affected populations were held during the EA: the first meetings were from 2002-2004, and the second from January to June 2005. Consultations included meetings with local residents, communities, and government representatives. Also, questionnaires to detennine public opinion were distributed and analyzed. Most ofthe public received information about the project’s significance and expected benefits, and are aware ofits positive effects on the national, regional and local economylenvironment.

- 68 - As a result ofmeetings, it was found the project has strong public support. The public understands that the construction phase will produce noise, dust and traffic, and land will need to be acquired. Most residents expect the project to be completed quickly and welcome the fact that benefits will be realized in the near future. However, some expressed concern about the quality of construction and water resources, for which the EMP offered further explanation about the project activities and standards to be adopted.

Information dissemination. At the municipab'county level, public announcements about the project and the EA were made from January to August 2005 on local radio and television, and in newspapers. They explained where the EA and RAPSmay be inspected and discussed (generally at the PMO in each citykounty). They also provided contact telephone numbers for obtaining additional information. Posters summarizing the EA and RAPSwere displayed in town centers and at public meetings. At the provincial level, an announcement was posted at www.hncz.g;ov.cn by the Henan PMO in October 2005 about the proposed project and availability ofdocuments describing the environmental safeguards.

Dam Safety

The project does not include activities to construct new dams or rehabilitate existing ones. However, reservoirs in Lushan County, Queshan County, Minggan County, and Baofeng County provide water resources to the four project towns.

According to the World Bank's OPIBP4.37 on dam safety, an independent dam specialist, a former director and senior researcher ofthe Water and Hydropower Research Institute ofthe Ministry ofWater Resources (MWR), assessed the safety status ofthe dams.

Project County Name Dam Height Storage Capacity Types Baofeng county Longxingsi 40 m 25.22 million m Homogeneous Reservoir earth filled dam Queshan county Boshan Reservoir 48.1 m 620 million m Sand and gravel shells with inclined clay core Lushan county Zhaopingtai 35.5 m 713 million m3 Sand and gravel Reservoir shells with ' inclined clay core Minggan county Hongshizui 26 m 48.48 million m Homogeneous (Pingqiao District) Reservoir earth filled dam

The review concluded that the Zhaopingtai and Hongshizui reservoirs in Lushan and Minggan counties are safe, since remedial works were completed in 2005. The Longxingsi and Boshan reservoirs in Baofeng and Queshan counties will be satisfactory when the planned renovations are carried out in 2006-2007. However, before this work begins and is completed, pond levels must be controlled; they will also need to be inspected after the flood season. Also, strict operational rules must be prepared and adopted to ensure the dams can operate safely before and during any flooding.

- 69 - While a comprehensive dam safety assessment is to be conducted every six-ten years, complying with the Rules for Dam Safety Assessment devised by the MWR in 2000, the review made additional recommendations. These include:

A dispatching program for each reservoir should be prepared by the reservoir management entities along with local authorities before each annual flood season; Dam safety monitoring programs should be strengthened and the dams should be inspected at least once a year; e Data from the monitoring should be compiled yearly and analyzed jointly by the reservoir management entities and local authorities; remedial work proposed in the analyses should be carried out.

Based on these recommendations, Henan Province will arrange for an independent dam specialist to inspect all four dams each year, before the second supervision mission (after the project becomes effective). The inspection report should be provided to the Bank's supervision team through the Henan PMO. The TOR for the specialist should be satisfactory to the Bank. These recommendations are reflected in the EMP.

Involuntary Resettlement

Project Impacts. The 38 water supply schemes (including the plants and water resource facilities) require that 1,005 mu ofland be acquired, averaging 27 mu per scheme. The five wastewater treatment schemes need 206 mu ofland, or an average of41 mu for each. All areas involve fmland in the suburbs ofthe county towns. The water distribution system and sewage network will occupy land temporarily during construction, for which farmers will be paid compensation. Details about land needed for the water supplylwastewater treatment schemes are in Table 10-1.

Table 10-1: Anticipated Land Acauisition

Kaifeng Municipality 1 Weishi 18.9 4 22.9 2 Tongxu 18.9 3 21.9 3 Lankao 30 4 34 4 Kaifeng 0 0 0 5 Oixian 30 2 32 Luoyang Municipality 6 Mengjin 45 71 7 Yiyang 3224 0.: 41 73.3 8 Songxian 22.3 1 0 I 22.3 Pingdingshan Municipality 9 Baofeng 17.6 2 37.8 57.4 10 Jiaxian 18.3 1.5 19.8

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- 71 - project living standards, income-earning capacity and production levels. Lack of legal rights to the assets lost will not prevent them from receiving compensation; 3. Providing rehabilitation measures due to land acquisition such as: (a) being allotted agricultural land of equal productive capacity; (b) being compensated for land acquisition and resettlement subsidies (for farmers); and (c) being given other forms ofassistance; 4. Providing replacement land that is as close as possible to the land that was taken; 5. Consulting with the people affected when designing plans for acquiring land and other assets and providing compensatory measures; 6. Providing financial and physical resources for resettlement and rehabilitation, when needed; 7. Ensuring effective and timely design, planning, consultation and implementation of the resettlement plan through specific institutional arrangements; and 8. Carrying out effective and timely supervision, monitoring and evaluation ofthe implementation.

Legal framework. Chinese lawslregulations, along with the Bank’s Operational Policy 4,12, govern the Resettlement Plan. At the national level, these include the State Land Law and its Implementation Regulations; at the provincial level, Henan Province Implementation Strategies for the ‘Land Law ofthe People’s Rqublic ofChina’; and at the prefecture level, regulationsldecrees relating to land acquisition and resettlement as issued by municipal governments,

Institutional arrangements. Responsibility for implementing the Resettlement Plan is as follows: 1. The Provincial PMO has overall responsibility for enforcing the Plan. Each county government is responsible for the day-to-day activities in its jurisdiction and will ensure that the public participates in adopting the Plan. 2. Funds for implementing the Plan will be incorporated into the project budget and provided by local governments, which will consult with the affected villagers.

Participation and disclosure. Various stakeholders took a strong role in preparing the Resettlement Plan. The consolidated Plan was simplified into a Resettlement Pamphlet and distributed in each village affected; in turn, villagers will help design and implement the Plan. Further, town and village governments will inform all households oftheir entitlements and rehabilitation choices.

Complaints and grievances. Issues that arise with respect to the project, such as the area selected, land compensation and rehabilitation measures, will be handled as follows: 1, In the fust stage, complaints and grievances will be presented to village, township and county governments. Ifindividuals are not satisfied with the local authorities’ decisions, they may present their cases to the Provincial PMO. 2. If they are not satisfied with the Provincial PMO’s decisions, their cases may be submitted to the People’s Court. 3. The mechanism for complaints and grievances will be made known to all those affected before resettlement begins.

- 72 - Implementation schedule. Land acquisition will begin in early 2006. Compensation and other rehabilitation entitlements (cash or in-kind) will be completed before the scheduled startup date ofworks at the project sites.

Monitoring and supervision. The project covers 38 towns, with limited land acquisition in each. Close monitoring by local authorities is vital. Further training on implementing the Resettlement Plan will be provided at project launch. A Semi-Annual Progress Table and the Semi-Annual Internal Monitoring Report are described in the Resettlement Plan.

Estimated costs. Resettlement costs will be -212.42 million, 8% oftotal project costs. They will cover: 1. Land acquisition, ground attachment, and house demolition (RMB41.97 million) 2. Reconstruction ofroads for installing pipes (R.MB105.66 million) 3. Design, training, monitoring and management fees (RMB10.77 million) 4. Taxes and fees (RMB47.72 million) 5. Contingencies (RMB6.30 million)

Indigenous Peoples4

Four ofthe 38 project counties in Henan include Hui ethnic minorities who live in the countryside (see below). However, none live in the project-affected towns.

Yuanvang 15.000 3.3

Tongxu 23,000 4.6 I Lankao 1 30.000 I 5.5 I

Social Assessment

Willingness-to-pay WP)water tariff. An extensive social assessment ofstakeholders in the county towns focused on WTP for improved water. It found that most residents supported the project because: 1. Most drinking water comes fkom shallow groundwater and is contaminated. 2. At present, a reliable and sufficient water supply, through tap connections, covers fewer than 45% ofhouseholds.

Table 10-3 shows the level ofsupport for the project and WTP water tariffs for three types of stakeholders:

Including ethnic minorities

- 73 - I

Stakeholders* Water Supply System Wastewater Treatment System Support Not Object Support Not Care Object Care 1, Urban residents 72.82% 21.89% 5.29% 76.0% 18.1% 5.3% 2. Migrants from rural areas 67.81% 27.31% 4.88% 63.7% 29.1% 7.2% 3. Rural residents affected by land 37.59% 55.30% 7.11% 68.2% 22.7% 9.1% acquisition

Affordability of water tariffs. An analysis of affordability was made for urban residents, in general, and low-income urban residents, in particular. On average, the combined water supply and wastewater tariff is now 0.5% ofincome for three towns (see below). With the planned increase in both tariffs, the combined amount will be 3%-5% ofaverage household income,

Table 10-4: Affordabilitv to Pav Water Tariff

For low-income urban households (4.47% ofthe urban population in the project areas, which is slightly below the 4.81% in Henan Province), local governments provide monthly minimum living allowances (MLAs). The lowest monthly MLA is W80per person in Yuanyang County and the highest is RMl3 150 in Pingdingshan City. For low-income households, the Henan Provincial Government waives tariffs for 3 tons ofwater a month, which basically removes the monthly water tariff for one person per household. With an average household size of3.66 individuals, by removing one person’s tariff, the monthly amount for urban low-income household is reduced to a moderate level, as shown below in the Table 10-5.

- 74 - Category Annual Average Annual Average Payment for Percentage ofWater Income (RMBlcapita) Water Tariff (RMB /capita) Tariff to Income 1. Urban poor 1,500.00 18.75 1.25% 2. Urban poor in 1,800.00 18.75 1.04% Pingdingshan (150 x 12) 3. Urban poor in 960.00 18.75 1.95%

Impact on the poor. Ten counties defined as 44p~~r”by the national government and three by the province are included among the 38 project towns. The urban population ofthe 38 county towns is 4,052,600, ofwhich 174,300 (4.3%) are considered poor and supported by monthly MLAs. A qualitative analysis ofthe project’s effects demonstrates that poor households’ living standards will be improved significantly by having better access to improved water quality.

Gender. Traditionally, women carry water from hand pumps. During the field survey, most women and children were enthusiastic about the benefits fi-om the expanded water supply and said they were willing to pay the water tariff. Many women said the groundwater quality was poor and sickened their families, particularly children. Thus, they considered it worthwhile to pay the water tariff, instead ofmedical bills. Also, they said piped water would save time and labor.

- 75 - Annex 11: Project Preparation and Supervision CHINA: HENAN TOWNS WATER SUPPLY AND SANITATION PROJECT

Planned Actual PCNreview 11/03/2004 Initial PID to PIC 1112012004 09/27/2005 Initial ISDS to PIC 1211812004 09/27/2005 Appraisal 11/02/2005 11/02/2005 Negotiations 04/03/2006 0511612006 BoardRVP approval 05/25/2006 Planned date ofeffectiveness 12/15/2006 Planned date ofmid-term review 0511012009 Planned closing date 0613012013

Key institutions responsible for preparation ofthe project: Henan Provincial Government Henan Engineering Consulting Company BRL

Bank staff and consultants who worked on the project included:

Name Title Unit Takuya Kamata Senior Financial Analyst / Current TTL EASUR Songsu Choi Lead Urban Economist / Former TTL SASE1 Margaret Png Senior Counsel LEGEA Shunong Hu Water Engineer 46 Haiyan Wang Disbursement Officer LOAGl Xiaoping Li Senior Procurement Specialist EAPCO Yi Dong Financial Management Specialist 66 Ivan Velev Corporate Strategy Officer SFRSI Takao Ikegami Senior Sanitary Engineer ECSIE Mei Wang Senior Economist OPCIL Chongwu Sun Senior Environment Specialist EASEN Youlan zou Senior Social Development Specialist EASSD Elisa Muzzini Junior Professional Associate EASIN Xiaofeng Li Senior Program Assistant EACCF Vellet Fernandes Program Assistant EASUR Edouard Henri Motte Consultant EASUR Yoonhee Kim Consultant 66 Knud Bitsch Lauritzen Consultant LL Bum-Ho Lee Consultant 66

- 76 - Annex 12: Documents in the Project File CHINA: HENAN TOWNS WATER SUPPLY AND SANITATION PROJECT

1. “Integrated Feasibility Study Report for Water Supply Project ofHenan Middle and Small City with the World Bank Loan”, October 2005. Prepared by Henan Engineering Consulting Company (HECC), October 2005

2. “Environment Impact Assessment Report And Environment Management Plan For the Water supply and water drainage project in small towns ofHenan Province”, October 2005. Prepared by China Institute of Water Resources and Hydropower Research

3, “Report Form ofEnvironmental Impact ofWorld Bank-Funded Tongxu County Water Supply Project”, September 2005. Prepared by the National Environmental Protection Agency.

4. “Report Form on Environmental Tmpact of the Construction Project - Wastewater Treatment Plant ofMengjin County Seat”, May 2005. Prepared by the National Environmental Protection Agency,

5. “The Report on the Social Evaluation of the Water Supply & Drainage Project in the Medium and Small Cities ofHenan Province”, May 2005. Prepared by the Social and Resettlement Institute ofNCWU.

6. “Resettlement Planning Report of Henan Towns Water (Supply and Drainage) Project the Peoples’ Republic of China”, October 2005. Prepared by the Foreign-Loan Project Management Office of Henan Province.

7. “The Report on the Social Evaluation ofthe Water Supply & Drainage Project in the Medium and Small Cities ofHenan Province”, May 2005. Prepared by the Social and Resettlement Institute ofNCWU.

8. Financial Statements Summary ofWater Utility Companies of38 towns in 2003 and 2004, November 2005, Prepared by the WUCs.

9. “Financial Projections of Water Utility Companies: Tongxu Water Supply CompaJlies and Yuangyang Wastewater Companies”, November 2005, Prepared by the Project Task Team.

10. Financial Rate of Return Calculation Table, November 2005, Prepared by the Project Task Team

11. Current and revised tariff plan data and letters of commitment fiom counties, November 2005, Submitted by the WCs,

12. Financing Plan Data, November, 2005, Prepared by the HECC.

- 77 - 13, Monitoring Indicators Baseline and Target Values, November 2005, Prepared by the Project Task Team

14. Detailed Implementation arrangement, November 2005, Prepared by the Project Task Team

15. Analysis ofand Terms of Reference for low-performing WSCs and WCs, November 2005, Prepared by the Project Task Team

16. Memorandum on land issues, November 2005, Prepared by EASUR

17. Charters and Licenses of Water Utility Companies, December 2005, Submitted by the wucs

18. Training Needs Assessment for Utility Stdf, December 2005, Submitted by the Henan Provincial Project Management Office

- 78 - Annex 13: Statement of Loans and Credits CHINA: HENAN TOWNS WATER SUPPLY AND SANITATION PROJECT

Difference between expeated and actual Original Amount in US$ Millions disbursements

Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d PO65463 2004 CN - Jiangxi Integrated Agric. Modem. 100.00 0.00 0.00 0.00 0.00 100.00 1SO 0.00 PO65035 2004 CN-Gansu & Xinjiang Pastoral 66.27 0.00 0.00 0.00 0.00 65.61 4.53 0.00 Development PO66955 2004 CN-Zhejiang Urban Envmt 133.00 0.00 0.00 0.00 0.00 133.00 0.00 0.00 PO73002 2004 CN-Basic Education in Western Areas 100.00 0.00 0.00 0.00 0.00 100.00 0.00 0.00 PO77615 2004 CN-GEF-Gansu & Xinjiang Pastoral 0.00 0.00 0.00 10.50 0.00 10.50 0.80 0.00 Develop PO67337 2003 CN-2nd GEF Energy Conservation 0.00 0.00 0.00 26.00 0.00 14.60 16.57 0.00 PO40599 2003 CN-TIANJIN URB DEV I1 150.00 0.00 0.00 0.00 0.00 148.50 -1 SO 0.00 PO58847 2003 CN9rd Xinjiang Hwy Project 150.00 0.00 0.00 0.00 0.00 106.13 9.47 0.00 PO68058 2003 CN-Yixing Pumped Storage Project 145.00 0.00 0.00 0.00 0.00 140.95 2.13 0.00 PO76714 2003 CN-Anhui Hwy 2 250.00 0.00 0.00 0.00 0.00 250.00 15.33 0.00 PO70441 2003 CN-Hubei Xiaogan Xiangfan Hwy 250.00 0.00 0.00 0.00 0.00 156.78 -20.56 0.00 PO70191 2003 CN-SHANGHAI URB ENVMT APLl 200.00 0.00 0.00 0.00 0.00 198.00 -2.00 0.00 PO64729 2002 CN-SUSTAINABLE FORESTRY DEV. 93.90 0.00 0.00 0.00 0.00 76.07 1.58 0.00 PROJECT PO58846 2002 CN-Natl Railway Project 160.00 0.00 0.00 0.00 0.00 37.04 0.37 0.00 PO71147 2002 CN-Tuberculosis Control Project 104.00 0.00 0.00 0.00 0.00 92.67 -1 1.33 0.00 PO60029 2002 CN-Sustain. Forestry Devvatural 0.00 0.00 0.00 16.00 0.00 14.11 3.00 0.00 Forest) PO70459 2002 CN-Inner Mongolia Hwy Project 100.00 0.00 0.00 0.00 0.00 88.82 6.49 0.00 PO68049 2002 CN-Hubei Hydropower Dev in Poor 105.00 0.00 0.00 0.00 0.00 87.68 12.84 0.00 Areas PO58845 2001 Jiangxi I1Hwy 200.00 0.00 0.00 0.00 0.00 133.42 8.75 0.00 PO56199 2001 CN-3rd Inland Waterways 100.00 0.00 0.00 0.00 0.00 80.46 5.96 0.00 PO56516 2001 CN - WATER CONSERVATION 74.00 0.00 0.00 0.00 0.00 41.14 9.71 0.00 PO56596 2001 CN-Shijiazhuang Urban Transport 100.00 0.00 0.00 0.00 0.00 85.41 52.47 0.00 PO47345 2001 CN-HUAI RIVER POLLUTION 105.50 0.00 0.00 0.00 0.00 89.85 -15.65 0.00 CONTROL PO51859 2001 CN-LIAO RIVER BASIN 100.00 0.00 0.00 0.00 0.00 74.72 32.02 0.00 PO45915 2001 CN-Urumqi Urban Transport, 100.00 0.00 0.00 0.00 0.00 52.54 47.34 0.00 PO45910 2000 CN-HEBEI URBAN ENVIRONMENT 150.00 0.00 0.00 0.00 0.00 119.36 46.36 0.00 PO49436 2000 CN-CHONGQING URBAN ENVMT 200.00 0.00 0.00 0.00 3.70 157.50 65.17 0.00 PO56424 2000 TONGBAI PUMPED STORA 320.00 0.00 0.00 0.00 100.00 155.85 96.19 0.00 PO45264 2000 CN-SMALLHLDR CATTLE DEV 93.50 0.00 0.00 0.00 0.00 12.84 6.87 0.00 PO42109 2000 CN-BEUING ENVIRONMENT I1 349.00 0.00 0.00 25.00 0.00 286.54 180.67 0.00 PO58844 2000 3rd Henan Prov Hwy 150.00 0.00 0.00 0.00 0.00 61.19 26.86 0.00 PO58843 2000 Guangxi Highway 200.00 0.00 0.00 0.00 0.00 102.57 46.57 0.00 PO64924 2000 CH-GEF-BEUING ENVMT I1 0.00 0.00 0.00 25.00 0.00 25.93 18.84 2.86 PO64730 2000 CN - Yangtze Dike Strengthening 210.00 0.00 0.00 0.00 0.00 111.52 95.52 0.00 Project PO50036 1999 Anhui Provincial Hwy 200.00 0.00 0.00 0.00 9.60 34.96 34.16 0.00

- 79 - PO51705 1999 Fujian I1Highway 200.00 0.00 0.00 0.00 0.00 65.73 63.07 0.00 PO51856 1999 ACCOUNTING REFORM t 27.40 5.60 0.00 0.00 0.00 17.89 17.84 0.00 DEVELOPMENT PO41268 1999 CN-Nat Hwy4/Hubei-Hunan 350.00 0.00 0.00 0.00 0.00 59.72 37.72 0.00 PO57352 1999 CN-RURAL WATER IV 16.00 30.00 0.00 0.00 0.00 21.81 15.87 8.72 PO58308 1999 CN-PENSION REFORM PJT 0.00 5.00 0.00 0.00 0.00 1*77 1.75 0.00 PO56216 1999 CN - LOESS PLATEAU I1 100.00 50.00 0.00 0.00 0.00 24.54 26.67 0.00 PO60270 1999 CN-ENTERPRISE REFORM LN 0.00 5.00 0.00 0.00 0.00 2.71 4.29 4.07 PO38121 1999 CN-GEF-RENEWABLE ENERGY 0.00 0.00 0.00 35.00 0.00 28.91 27.18 7.95 DEVELOPMENT PO5 1888 1999 CN - GUANZHONG IRRIGATION 80.00 20.00 0.00 0.00 0.00 32.26 25.50 0.00 PO49665 1999 CN-ANNING VALLEY AG.DEV 90.00 30.00 0.00 0.00 0.00 19.19 10.38 0.00 PO4605 1 1999 CN-HIGHER EDUC. REFORM 20.00 50.00 0.00 0.00 0.00 5.70 7.31 0.00 PO43933 1999 CN-SICHUAN URBAN ENVMT 150.00 2.00 0.00 0.00 0.00 91.74 78.60 24.15 PO42299 1999 TEC COOP CREDIT IV 10.00 35.00 0.00 0.00 0.00 36.03 -11.40 0.00 PO41890 1999 CN-Liaoning Urban Transport 150.00 0.00 0.00 0.00 0.00 36.96 36.96 0.00 PO36953 1999 CN-HEALTH IX 10.00 50.00 0.00 0.00 0.00 36.85 22.30 0.00 PO03653 1999 CN-Container Transport 71.00 0.00 0.00 0.00 18.61 3.62 22.20 0.79 PO46829 1999 RENEWABLE ENERGY 100.00 0.00 0.00 0.00 0.00 12.87 99.87 8.23 DEVELOPMENT PO46564 1999 CN - Gansu & Inner Mongolia Poverty 60.00 100.00 0.00 0.00 13.30 44.87 34.07 -6.75 Red. PO03614 1998 CN-Guangzhou City Transport 200.00 0.00 0.00 0.00 20.00 100.31 120.31 100.31 PO03606 1998 ENERGY CONSERVATION 63.00 0.00 0.00 22.00 0.00 35.87 18.81 0.00 PO35698 1998 HUNAN POWER DEVELOP. 300.00 0.00 0.00 0.00 145.00 3 1.45 173.45 -18.46 PO49700 1998 CN- MIL-2 300.00 0.00 0.00 0.00 0.00 3.97 3.97 0.66 PO37859 1998 CN-GEF Energy Conservation 0.00 0.00 0.00 22.00 0.00 0.71 22.06 0.00 PO03619 1998 CN-2nd Inland Waterways 123.00 0.00 0.00 0.00 37.00 19.18 54.54 6.46 PO40185 1998 CN-SHANDONG ENVIRONMENT 95.00 0.00 0.00 0.00 1.40 20.07 21.47 1.58 PO03566 1998 CN-BASIC HEALTH (HLTHS) 0.00 85.00 0.00 0.00 0.00 38.40 23.65 0.00 PO46563 1998 CN - TARIM BASIN 11 90.00 60.00 0.00 0.00 2.67 14.78 16.88 0.00 PO45788 1998 Tri-Provincial Hwy 230.00 0.00 0.00 0.00 0.00 19.18 16.12 0.00 PO03539 1998 CN - SUSTAINABLE COASTAL 100.00 0.00 0.00 0.00 2.06 47.54 46.27 36.72 RESOURCES DEV. PO51736 1998 E. CHNNJIANGSU PWR 250.00 0.00 0.00 0.00 86.00 50.31 136.31 13.22 PO46952 1998 CN - FOREST. DEV. POOR AR 100.00 100.00 0.00 0.00 0.00 29.62 -71.61 9.25 PO36949 1998 CN-Nat Hwy3-Hubei 250.00 0.00 0.00 0.00 0.00 21.15 21.15 0.00 PO36414 1998 CN-GUANGXI URBAN ENVMT 72.00 20.00 0.00 0.00 0.00 71.56 66.02 25.79 PO03637 1997 CN-NATL RURAL WATER 3 0.00 70,00 0.00 0.00 0.00 0.56 3.77 3.35 PO03590 1997 CN - QINBA MOUNTAINS 30.00 150.00 0.00 0.00 0.00 13.16 16.34 -0.95 POVERTY REDUCTION PO35693 1997 FUEL EFFICIENT IND. 0.00 0.00 0.00 32.80 0.00 6.83 32.81 0.00 PO03654 1997 Nat Hwy2/Hunan-Guangdong 400.00 0.00 0.00 0.00 0.00 48.52 48.52 20.68 PO03650 1997 TUOKETUO POWEWINNER 400.00 0.00 0.00 0.00 102.50 37.37 139.87 27.63 PO38988 1997 CN - HEILONGJIANG ADP 120.00 0.00 0.00 0.00 0.00 7.72 7.72 4.54 PO44485 1997 SHANGHAI WAIGAOQIAO 400.00 0.00 0.00 0.00 0.00 84.49 56.03 44.04 PO36405 1997 CN - WANJIAZHAI WATER TRA 400.00 0.00 0.00 0.00 75.00 22.58 97.58 10.00 PO03602 1996 CN-HUBEI URBAN ENVIRONMENT 125.00 25.00 0.00 0.00 28.32 39.72 70.08 32.41 PO03599 1996 CN-YUNNAN ENVMT 125.00 25.00 0.00 0.00 19.48 35.68 56.92 7.10 PO405 13 1996 2nd Henan Prov Hwy 210.00 0.00 0.00 0.00 19.00 16.69 35.69 23.69

- 80 - PO03594 1996 CN - GANSU HEX1CORRIDOR 60.00 90.00 0.00 0.00 0.00 73.92 58.83 0.00 PO03589 1996 CN-DISEASE PREVENTION (HLTH7) 0.00 100.00 0.00 0.00 0.00 1.97 10.99 0.00 PO34618 1996 CN-LABOR MARKET DEV. 10.00 20.00 0.00 0.00 0.00 5.66 7.75 0.00 PO03648 1996 CN-SHANGHAI SEWERAGE I1 250.00 0.00 0.00 0.00 0.00 39.94 39.94 4.81 PO03571 1995 CN-7th Railways 400.00 0.00 0.00 0.00 119.00 10.28 129.28 20.28 PO03639 1995 CN-SOUTHWEST POVERTY 47.50 200.00 0.00 0.00 0.01 1.21 25.36 25.36 REDUCTION PROJECT PO03647 1995 China Economic Law Reform -LEGEA 0.00 10.00 0.00 0.00 0.00 0.50 0.83 0.00 PO03603 1995 CN-ENT HOUSING & SSR 275.00 75.00 0.00 0.00 57.46 38.52 93.86 2.17 PO03596 1995 CN-Yangtze Basin Water Resources 100.00 110.00 0.00 0.00 1.92 0.34 4.75 4.75 Project PO03540 1994 CN-LOESS PLATEAU 0.00 150.00 0.00 0.00 0.00 1.12 0.50 0.00 PO03632 1993 CN-ENVIRONMENT TECH ASS 0.00 50.00 0.00 0.00 0.00 1.11 1.73 1.41 Total: 11,719.07 1,722.60 0.00 214.30 862.03 4,981.42 2,925.76 456.82

CHINA STATEMENT OF IFC’s Held and Disbursed Portfolio In Millions ofUS Dollars

~~ ~ ~~ ~~ Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2001 Peak Pacific 0.00 0.00 25.00 0.00 0.00 0.00 0.00 0.00 0 Rabobank SHk 0.45 0.00 0.00 0.45 0.45 0.00 0.00 0.45 2000 SSIF 0.00 6.00 0.00 0.00 0.00 0.89 0.00 0.00 1998 Shanghai Krupp 28.92 0.00 0.00 65.63 28.92 0.00 0.00 65.63 1999 Shanghai Midway 0.00 16.02 0.00 0.00 0.00 16.02 0.00 0.00 1999 Shanxi 16.75 0.00 0.00 0.00 14.20 0.00 0.00 0.00 1993 Shenzhen PCCP 3.76 0.00 0.00 0.00 3.76 0.00 0.00 0.00 Sino Gold 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 2001 Sino-Forest 25.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00 1995197 Suzhou PVC 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998 WIT 5.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2000 Wanjie Hospital 15.00 0.00 0.00 0.00 15.00 0.00 0.00 0.00 1996 Weihai Weidongri 1.03 0.00 0.00 0.00 1.03 0.00 0.00 0.00 2003 XACB 0.00 19.93 0.00 0.00 0.00 0.00 0.00 0.00 1993 Yantai Cement 6.33 1.95 0.00 0.00 6.33 1.95 0.00 0.00 0 Zhen Jing 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2003 Zhengye- ADC 15.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00 2002103 Advantage 0.00 0.50 0.00 0.00 0.00 0.50 0.00 0.00 2003 BCIB 0.00 0.00 11.60 0.00 0.00 0.00 0.00 0.00 1999/00/02 Bank of Shanghai 0.00 24.67 0.00 0.00 0.00 24.67 0.00 0.00 2002 CDH China Fund 0.00 16.36 0.00 0.00 0.00 2.38 0.00 0.00 1998100 CIG Holdings PLC 0.00 3.00 0.00 0.00 0.00 3.00 0.00 0.00 2003 CSMC 0.00 12.00 0.00 0.00 0.00 7.20 0.00 0.00

- 81 - 1998 Chengdu Huarong 6.73 3.20 0.00 7.82 6.73 3.20 0.00 7.82 1998 Chengxin-IBCA 0.00 0.36 0.00 0.00 0.00 0.36 0.00 0.00 1987192194 China Bicycles 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1994 China Walden Mgt 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 1994 China Walden Ven 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1994 Dalian Glass 0.00 2.40 0.00 0.00 0.00 2.40 0.00 0.00 1995 Dupont Suzhou 9.35 4.15 0.00 0.00 9.35 4.15 0.00 0.00 1994 Dynamic Fund 0.00 8.76 0.00 0.00 0.00 7.10 0.00 0.00 2003 Great Infotech 0.00 3.50 0.00 0.00 0.00 2.10 0.00 0.00 1999 Hansom 0.00 0.08 0.00 0.00 0.00 0.08 0.00 0.00 2002 Huarong AMC 23.74 3.00 0.00 0.00 14.74 0.01 0.00 0.00 2002 IEC 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998 Leshan Scana 5.36 1.35 0.00 0.00 3.76 1.35 0.00 0.00 2001 Maanshan Carbon 9.00 2.00 0.00 0.00 9.00 2.00 0.00 0.00 2001 Minsheng Bank 0.00 23.50 0.00 0.00 0.00 23.50 0.00 0.00 2001 NCCB 0.00 26.58 0.00 0.00 0.00 26.46 0.00 0.00 1996 Nanjing Kumho 3.89 3.81 0.00 11.07 3.89 3.81 0.00 11.07 2001 New China Life 0.00 30.70 0.00 0.00 0.00 23.32 0.00 0.00 1995 Newbridge Inv. 0.00 1.95 0.00 0.00 0.00 1.95 0.00 0.00 1997198 Orient Finance 0.00 0.00 0.00 0.00 0.00 0,oo 0.00 0.00 2003 PSAM 0.00 1.93 0.00 0.00 0.00 0.00 0.00 0.00 1997100 PTP Holdings- 0.00 0.03 0.00 0.00 0.00 0.03 0.00 0.00 Total portflio: 195.31 217.74 36.64 84.97 139.16 158.44 0.00 84.97

~~ Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic. 2002 ASIMCO 0.00 0.00 0.01 0.00 2003 Anjia 0.00 0.01 0.00 0.00 2004 CCB-MS NPL 0.03 0.00 0.00 0.00 2004 CUNA RCCI 0.00 0.01 0.00 0.00 2003 Cellon 0.00 0.01 0.00 0.00 2002 Darong 0.01 0.00 0.00 0.01 2002 Huarong AMC 0.02 0.00 0.00 0.00 2002 IEC 0.00 0.00 0.01 0.00 2002 WIT 0.00 0.00 0.00 0.00 2003 Peak Pacific 2 0.00 0.01 0.00 0.00 2003 SAIC 0.01 0.00 0.00 0.00 2002 SML 0.00 0.00 0.00 0.00 2002 Sino Mining 0.01 0.00 0.00 0.01 2002 Zhong Chen 0.03 0.00 0.00 0.03 Total pending committment: 0.1 1 0.04 0.02 0.05

- a2 - Annex 14: Country at a Glance

CHINA: HENAN TOWNS WATER SUPPLY AND SANITATION PROJECT East Lower- POVERTY and SOCIAL Asia & middie- China Paciflc income Development diamond‘ 2002 Population, midyear (millions) 12810 1838 2pn Life expectancy GNI per capita (Atlas method, US$) 950 950 1,390 GNI (Mas method, US$ billions) 1219.1 $740 3,352 Average annual growth, 1996-02 Population (%) 0.8 10 10 Labor force (%) 0.9 l2 l2 Gross primary M ost recent estimate (latest year available, 1896-02) capita enro Iim ant Poverty (%of population belo wnationalpover?y/ine) 5 Ubnpopulation (%of tota/po~lation) 38 38 49 Lde expectancy at birth (pars) 71 69 69 hfant mortality(pr 10L)L)livebirths) 30 33 30 Childmalnutrition (%ofchi!dmnunder5) x) 15 n Access to improved water source Access to an improved water source (%of population) 75 76 81 Illiteracy (%of population age %+) 14 t3 t3 Gross ptimaryanmllment (%of sc~o/~~~~lation)XI6 106 m -China Male 105 105 in -- - Lo~r-m~d/e-incomegroup Female x)8 x)6 lx)

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1892 2001 2002 Economlc ratios’ GDP (us% billions) 221.5 454.6 1167.1 1232.7 1 38.5 41.0 Gross domestic investmentlGDP 332 362 Trade worts of goods and servkaslGDP 89 8.5 25.5 29.5 Gmss domestic savingslGDP 34.8 37.7 40.9 44 .O Gross national savingslGDP 35.1 38.0 40.0 438 Current account balancelGDP 2.4 19 15 29 Domestic 4 investment hterest papentslGDP 02 0.6 0.5 05 savings Total debtlGDP 3.8 15.9 14.6 P.6 Total debt servicelexports 8.0 8.6 7.7 6.1 1 Present value of debWGDP 14.1 Present value of debtlaxports 528 Indebtedness

1982-92 1982-02 2001 ~ 2002 2002-06 (average annualgrorulh) -China GDP 9.7 9.0 7.5 8.0 75 GDP percapita 8.1 8.0 6.7 72 6.6 I

lgg22001 Zoo2 ’ Growth of investment and GDP (%) (%of GDP) Agriculture 338 218 hdustry 450 439 Manufactunng 373 331 342 445 SeNICeS 217 343 341 337 I Private consumption 50.7 492 45.7 425 97 98 9s 00 01 02 General government consumption 14.5 13.1 13.4 135 i -GDI -GDP hpOrtS Of goods and Services 7.3 18.0 23.1 265 - - 1982-92 1992-02 2001 (average annualgrorulh) Agricuture 4.6 37 2.8 hdustry 11.6 11.3 8.4 ~anufacturing 112 a4 9 a Services 11.7 8.4 8 9 Private consumption n.4 81 2.8 General government COflSUmPtiOn 9.9 8.4 n.5 Gross domestic investment 9.5 9.7 t3.9 hports of goods andservices 9.7 P.8 a.8

- 83 - PRICES and GOVERNMENT FINANCE 1982 1902 2001 2002 lntlatlon (X) Domestic prices (%CmnbW 10 T Consumer prices 6.0 6.4 0.7 -0.6 hpliiit GOP defiator -02 7.9 t2 -2.6 Government finance (%of GDP, includes current grants) Current revenue 22.9 14.7 l7.1 l7.9 Current budget balance 2.0 11 0.0 i GDPdellator -CPI Overall sutplusldeficit -03 -10 -4.7 -3.0 -

TRADE 1982 1992 2001 2002 ~rtand Import levels (US0 mill.) (US$ mi//ions) Totaleqorts (fob) 22321 84,940 266,m 325,565 Food 2,908 8W9 P,780 14,623 Fuel 5314 4,693 8,420 8372 Manufactures P271 67,936 239,802 297,085 Total imports (cif) 19285 80,585 243,60 295203 Food 4201 3,146 4,980 5237 Fuel and energy 183 3,570 7,495 19285 Capital goods 3204 3132 x)7p40 f37,030 Eqort price index (S95=ZW) 41 85 83 78 hporl price lndex(995cZW) 71 95 91 86 Terms of trade (SS-xlo) 58 69 91 90

BALANCE of PAYMENTS 1982 1992 2001 2002 !Current account balance to GDP (%) (US$ mi//ions) , Eqorts of goods and services 24,900 94,196 299,409 365,395 hports of goods and services 20.555 86,752 271,325 326,013 Resource balance 4,350 7,446 28,084 37,383 Net income 376 249 -8,T74 -14,945 Net current transfers 486 1W 8,492 P.984 Current account balance 522 8850 7,401 35,422 Financing items (net) -995 -a952 30m 40,085 Changes in net reserves -42l7 2-a -47,447 -75507 9e 97 98 89 00 01 02 Memo: Reserves including gold (US$ mi//ions) 24842 220,051 297,721 Conversion rate (DEC, iocaVUS$) 2.4 5.9 8.3 8.3

EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US$ miUions) :omposltlon of 2002 debt (US0 mill. Total debt outstandingand disbursed 8,358 72628 l70.110 65,678 IBRD 0 3,752 1W P,O51 A. 12.051 IDA 1 4267 8,654 8,729 Total debt service 2,25 8,6B 24297 23,688 BRO 0 460 1550 1,631 IDA 0 30 151 175 Compositionof net resourceflows Official Qrants 47 327 240 Official creditors 657 2,343 2,156 -839 Privatecrediiors -p2 8949 -4,OO -13593 Foreign direct investment 430 11156 44241 49,308 Portfolio equity 0 1243 3,015 2,266 F 62,x)3 World Bank program Commitments 330 1865 782 583 4 - IBRD E - Bilaterd Disbursements 1 1331 I791 1,733 3 - IDA D - OIW mtltilaterd F. Private Principal repayments 0 87 904 1,157 >-IMF G - Short-terr

- 84 - MAP SECTION

JAPAN JAPAN APRIL 2006 IBRD 34329 PACIFIC OCEAN Japan Sea of Sea East China KOREA REP. OF REP. PHILIPPINES KOREA D.P.R. OF D.P.R. Sea JILIN TAIWAN TAIWAN SHANGHAI Yellow HEILONGJIANG EXPRESSWAYS UNDER EXPRESSWAYS CONSTRUCTION HIGHWAYS UNDER HIGHWAYS CONSTRUCTION RAILROADS SELECTED CITIES PROVINCE CAPITAL BOUNDARIES MUNICIPALITIES PROVINCE BOUNDARIES LIAONING ZHEJIANG JIANGSU FUJIAN NANYANG MUNICIPALITY: MUNICIPALITY: NANYANG Dengzhou Xinye Sheqi Xichuan ZHUMADIAN MUNICIPALITY: Queshan Xincai Xiping Zhengyang Suiping Runan ZHOUKOU MUNICIPALITY: Shenqiu Xiangcheng MUNICIPALITY: XINYANG Minggan Xixian Luoshan Yangshan Huangchuan JIAOZHOU MUNICIPALITY: Mengzhou TIANJIN

ANHUI HONG KONG 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 SHANDONG JIANGXI MACAO HEBEI GUANGDONG BEIJING BEIJING HUBEI HENAN HUNAN SHANXI CHINA

HAINAN NEI MONGOL MONGOL NEI GUANGXI

SHAANXI CHONGQING CHONGQING NINGXIA NINGXIA RUSSIAN GUIZHOU VIETNAM FEDERATION FEDERATION GANSU P.D.R. P.D.R. MONGOLIA SICHUAN LAO YUNNAN PROJECT TOWNS* AND SANITATION PROJECT AND SANITATION N KAIFENG MUNICIPALITY: KAIFENG MUNICIPALITY: Weishi Tongxu Lankao Kaifeng Qixian MUNICIPALITY: LUOYANG Mengjin Yiyang Songxian PINGDINGSHAN MUNICIPALITY: Baofeng Jiaxian Lushan XINXIANG MUNICIPALITY: Xinxiang Yuanyang Fengqiu XUCHANG MUNICIPALITY: Xiangcheng SANMENXIA MUNICIPALITY: Shanxian Yima SHANGQIU MUNICIPALITY: Suixian Xiayi Zhecheng

1 2 3 4 5 6 7 8 9 PROJECT TOWNS*: 10 11 12 13 14 15 16 17 18 19 20 HENAN TOWNS WATER SUPPLY SUPPLY HENAN TOWNS WATER QINGHAI MYANMAR MYANMAR XIZANG National Capital Province Boundaries International Boundaries XINJIANG 36° 35° 34° 33° 32° 31°

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