Document of The World Bank

Public Disclosure Authorized Report No: 26359-CHA FOR OFFICIAL USE ONLY

Public Disclosure Authorized PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$133 MILLION

TO THE

PEOPLE'S REPUBLIC OF CHINA

FOR Public Disclosure Authorized ZHEJIANG URBAN ENVIRONMENT PROJECT

December 18.2003

Urban Development Sector Unit China Country Unit East Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents mav not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized CURRENCY EQUIVALENTS (Exchange Rate Effective July 31, 2003) Currency Unit = Renminbi Yuan (RMB Y) Y 1 = US$0.12 US$1 = Y 8.28

FISCAL YEAR January 1 -- December 31

ABBREVIATIONS AND ACRONYMS AIC Average Incremental Cost NGO Non-governmental organization AIEC Average Incremental Economic Cost NMG Ningbo Municipal Government AIFC Average Incremental Financial Cost NSCL Ningbo Sewage Company Limited CAAB City Appearance Administration Bureau NTWC Ningbo Municipal Tap Water General Company CACDCC Cicheng Ancient County Development and NUIDO Ningbo Urban Infrastructure Development Office Construction Co., Ltd. CIF Cost, Insurance, Freight PIP Project Implementation Plan CITC China International Tendering Company PIU Project Implementation Unit CMP Catchment Management Plan PMO Project Management Office DLIDC Dongqian Lake Investment and Development Company PRC People's Republic of China DLMC Dongqian Lake Management Commission PV Present Value DRA Design Review Advisory QBS Quality-Based Selection EA Environmental Assessment QCBS Quality and Cost-Based Selection EAP Environmental Action Plan RAP Resettlement Action Plan EMP Environmental Management Programs SBD Standard Bidding Documents EOCC Economic Opportunity Cost of Capital SMG Shaoxing Municipal Government EPB Environmental Pollution Bureau SPMO Shaoxing Project Management Office FMS Financial Management System SWM Solid Waste Management FRR Financial Rate of Return TA Technical Assistance GDP Gross Domestic Product TOR Terms of Reference GPN General Procurement Notice UCMF Urban Construction Maintenance Funds HMG Hangzhou Municipal Government UFMD Urban Facilities Management Division HPCMO Historic Precinct Conservation Management Office UMB Urban Management Bureau (Shaoxing) HSWC Hangzhou Solid Waste Company, Ltd. UNDB United Nations Development Business IA Implementing Agencies WACC Weighted Average Cost of Capital ICB International Competitive Bidding WWTP Wastewater Treatment Plant IPCAP Industrial Pollution Control Action Plan ZFB Zhejiang-- Finance Bureau JBIC Japanese Bank for International Cooperation ZHPCMC Zhejiang Provincial Construction Management Commission MBD Model Bidding Documents ZMCDP Zhejiang Multicities Development Project MEAAB Municipal Engineering and Appearance Administration ZPCB Zhejiang Provincial Construction Bureau Bureau MFB Municipal Finance Bureau ZPG Zhejiang Provincial Government MOF Ministry of Finance ZUDPO Zhejiang Urban Development Project Office NCB National Competitive Bidding ZUEP Zhejiang Urban Environment Project NERC Ningbo Economic Research Center

Vice President: Jemal-ud-din Kassum Country Managermirector: Yukon Huang Sector ManagerDirector: Keshav Varma Task Team Leader/Task Manager: Wiebe Moes FOR OFFICIAL USE ONLY CHINA ZHEJIANG URBAN ENVIRONMENT PROJECT

CONTENTS

A. Project Development Objective Page

1. Project development objective 3 2. Key performance indicators 3

B. Strategic Context

1, Sector-related Country Assistance Strategy (CAS) goal supported by the project 3 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 5

C. Project Description Summary

1, Project components 5 2. Key policy and institutional reforms supported by the project 6 3. Benefits and target population 8 4. Institutional and implementation arrangements 10

D. Project Rationale

1. Project alternatives considered and reasons for rejection 11 2. Major related projects financed by the Bank and/or other development agencies 12 3. Lessons learned and reflected in the project design 13 4. Indications of borrower commitment and ownership 14 5. Value added of Bank support in this project 14

E. Summary Project Analysis

1. Economic 15 2. Financial 17 3. Technical 18 4. Institutional 21 5. Environmental 22 6. Social 24 7. Safeguard Policies 25

F. Sustainability and Risks

1. Sustainability 25 2. Critical risks 26 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed [without World Bank authorization, 3. Possible controversial aspects 27

G. Main Conditions

1. Effectiveness Condition 28 2. Other 28

H. Readiness for Implementation 30

I.Compliance with Bank Policies 30

Annexes

Annex 1: Project Design Summary 31 Annex 2: Detailed Project Description 34 Annex 3: Estimated Project Costs 45 Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 49 Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary 61 Annex 6: (A) Procurement Arrangements 74 (B) Financial Management and Disbursement Arrangements 83 Annex 7: Project Processing Schedule 89 Annex 8: Documents in the Project File 90 Annex 9: Statement of Loans and Credits 91 Annex 10: Country at a Glance 95 Annex 11: Safeguard Issues 97 Annex 12: Heritage Conservation and Tourism in Historic City-center Upgrading 113

MAP(S) CN328 9 8 CN32901 CHINA Zhejiang Urban Environment Project Project Appraisal Document East Asia and Pacific Region EASUR

Date: December 18,2003 Team Leader: Wiebe Moes Sector Managermirector: Keshav Varma Sector(s): Sewerage (35%), Roads and highways (25%), Country ManagerDirector: Yukon Huang Other social services (25%), Solid waste management Project ID: PO66955 (1 O%), Water supply (5%) Lending Instrument: Specific Investment Loan (SIL) Theme(s): Municipal govemance and institution building (P), Pollution management and environmental health (P), Access to urban services for the poor (P), Infrastructure services for private sector development (S), Other urban development (S)

[XI Loan [ J Credit [ J Grant [ J Guarantee [ ]Other: For LoanslCreditslOthers: Loan Currency: United States Dollar Amount (US$m): 133 Borrower Rationale for Choice of Loan Terms Available on File: Yes Proposed Terms (IBRD): Variable-Spread Loan (VSL) Grace period (years): 5 Years to maturity: 20 Commitment fee: 0.75% Front end fee (FEF) on Bank loan: 1.00% Pavment for FEF: Capitalize from Loan Proceeds

BORROWER 201.32 0.00 201.32 IBRD 13.78 119.22 133.00 Total: 215.10 1 19.22 334.32 Borrower: PEOPLE’S REPUBLIC OF CHINA Responsible agency: ZHEJIANG PROVINCIAL GOVERNMENT Zhejiang Urban Development Project Office (ZUDPO) Address: F9, 138 Tianrnushan Road, Hangzhou, Zhejiang, PRC Contact Person: Mr. Zhou Weiqun, Director Tel: 0571 87053002 Fax: 0571 88390232 Email: [email protected] .cn Other Agency(ies): Ningbo PMO Address: F25, 208 South Jiefang Road, Ningbo, Zhejiang, PRC 315010 Contact Person: Mr. Zhu Guoping, Director Tel: 0574 87191087 Fax: 0574 87197348 Email: [email protected] .cn Shaoxing PMO Address: 248 West Renrnin Road, Shaoxing, Zhejiang,PRC 3 12000 Contact Person: Mr. Wang Xiaojun, Director Tel: 0575 5129105 Fax: 0575 5143812 Email: [email protected] Hangzhou PMO Address: 252 Tiyuchng Road, Hangzhou, Zhejiang, PRC 3 10003 Contact Person: Mr. Chen Wei Tel: 0571 85172754 Fax: 0571 85102638 Email: hmb@163 .com Istimated Disbursements ( Bank FY/US$m):

Project implementation period: 2003 - 2010 Expected effectiveness date: 07/15/2004 Expected closing date: 06/30/2010 s P+L Form R,” M. bl am

-2- A. Project Development Objective

1. Project development objective: (see Annex 1) The objective ofthe Zhejiang Urban Environment Project (ZUEP) is to enhance the efficiency and equity of waste management in Ningbo and Hangzhou municipalities and the redevelopment of the historic inner city in Shaoxing and Cicheng, and thereby facilitating the sustainable development ofthese cities and establishing a model for conservation ofcultural heritage in other Chinese cities.

The project will support measures to increase the utilization ofwaste treatment facilities, increase sewerage services in underserved areas including the fast-growing suburban areas and satellite towns in Ningbo; and to improve waste management institutions and finances through implementation ofutility reform measures.

Redevelopment ofthe historic inner-city and conservation ofbuilt heritage in Shaoxing and Cicheng is a top priority ofthe municipal governments and the project will contribute to improving the quality of life of their citizens, sustain their cultural and historic nature through tourism development, upgrade their housing stock and safeguard environmental conditions.

2. Key performance indicators: (see Annex 1) Key performance indicators would include quantified targets for reduced water pollution from the urban areas into rivers, reduced water pollution from the industrial sector, expanded safe solid waste disposal, improved living conditions in inner cities, reduced level of subsidies for investments in urban environmental infrastructure, enhanced cultural heritage conservation, enhanced tourism development, and improved awareness, management and control in urban planning and environmental protection.

B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: R2002-0218 (IFC/R2002-0224) Date of latest CAS discussion: Dec. 19, 2002 The project will support two main CAS themes of "facilitating rural-urban transition and sustainable development" and three specific goals under it: strengthening environmental protection, improving natural resource management, and improving urban management and public service provision.

2. Main sector issues and Government strategy: The Zhejiang project cities, like so many other cities in Chma, have undergone rapid growth and transformation over the last two decades, economically and physically. As rapid urban economic growth is expected to continue well into the future, the pressure for further expansion of infrastructure would continue. The government has taken a more forceful position for environmental protection, economic revitalization ofthe old city centers and heritage conservation, which helped direct extensive resources devoted to environmental services such as waste collection and disposal and housing renovation through inner-city renewal.

This effort brings to the fore the issue of efficiency in infrastructure investment and utilization. The government recognizes that technical, institutional, and financial capacities need to be strengthened to improve the efficiency and sustainability ofinfrastructure. To that end, it has been promoting corporatization, full-cost recovery, and limited private participation in infrastructure. Chinese cities have undergone breathtaking growth and transformation over the last two decades, economically and physically. Radical decentralization offiscal and administrative authority in the early 1980s unleashed sustained heavy investments going into infrastructure and housing, which had deteriorated badly during the preceding two decades but now can be considered at least adequate for most cities of China. As rapid urban economic growth is expected to continue well into the future, the pressure for further expansion ofinfrastructure would also continue. On the other hand, the singular focus on expansion is yielding to broader and more qualitative issues ofsustainability, efficiency, and equity.

Rapid industrial and urban growth is also increasing the concern over environmental sustainability. The government has taken a more forceful position regarding environmental protection since the late 1980s, compared with many other matters largely delegated to local govemments. This helped direct extensive resources devoted to environmental protection and industrial renovation, and as a result, the growth of industrial pollution has slowed and, in many large cities, has been reversed. Nevertheless, water pollution remains serious and is growing, due mainly to increasing wastewater from domestic and semi-rural sources. The government has made the clean-up ofthe Hangzhou Bay, on which all three project cities are located, a priority program; embarked on a program to increase water conservation and mandated all municipalities in the country to treat 50% ofwastewater, and the larger ones to treat 70%, by 2010.

While much remains to be done, especially for environmental protection, the extensive urban reconstruction over the last two decades has reduced most glaring infrastructure deficiencies while increasing the resource requirements to operate and maintain the enlarged stock ofinfrastructure. At the same time, the on-going reduction ofthe state sector is constraining the fiscal and quasi-fiscal resources. This brings to the fore the issue ofefficiency in infrastructure investment and utilization. An example ofinefficiency includes idle wastewater treatment plants due to overdesign or lack of operating funds. The government recognizes that technical, institutional, and financial capacities need to be strengthened to improve the efficiency and sustainability ofinfrastructure. To that end, it has been promoting corporatization, full-cost recovery, and limited private participation in infrastructure. While the on-going downsizing ofgovernment is spurring these structural transitions, it is weakening the regulatory and planning capacities that need to be strengthened for healthy market-based infrastructure provision.

The effective development ofthe urban areas requires the appropriate conservation and reuse ofthe historic urban centers. These form the focus of social and cultural environments for their regions. The Government is determined not to sacrifice the protection of its cultural heritage in the push for rapid urbanization, high density development, and expanding population. It has been gradually realized that historic conservation and cultural activities contribute to economic development by maintaining the distinctive character ofthe communities and their environment. The preservation ofcultural heritage is, however, facing many challenges and China has expressed its keen interest to learn from other countries that have faced this in the past. In the context ofemerging and highly competitive tourism markets, the sustainability and growth of the historic areas, and the adequate return on investments made by both the public and the private sectors, requires adequate institutional capacities to make carefully planned approaches to growth and change. Sustainable growth requires the identification ofpotential and beneficial use in the context ofthe values and significance of the historic environments, and the support ofthe communities in the conservation and development oftheir historic environments. The project aims at assisting the governments to improve their urban environments through appropriate conservation ofthe historic inner-cities in Shaoxing and Cicheng and develop a clear strategy for the development oftourism to promote long-term sustainability and economic growth (see Annex 12).

-4- 3. Sector issues to be addressed by the project and strategic choices: The overall objective of the project would be to support the Zhejiang government's efforts to improve the competitive advantage of its main cities through improved urban environmental conditions, thus improving the quality of urban life within the municipality and the sustainability of its infrastructure. This long-term development program would comprise a blend of policy, institutional and investment initiatives. The program would support a stronger market orientation for municipal service pricing, and institutions delivering those services would be strengthened, as would the Environmental Protection Bureaus in its regulatory function ofmonitoring water quality.

The project builds on the main tenets of the Bank's urban strategy -- liveability, good govemance, bankability and competitiveness -- and extends the idea of sustainable development. By focusing on client concerns about environmental improvement and heritage conservation, the project addresses two interlocking issues--environmental quality and competitiveness--both seen as central to improving quality of life and earning a decent livelihood in the province. Sector reforms embedded in the project also have the effect of improving city financial practices and institutions, and demonstrating the imperatives of market pricing and cost recovery for environmental services. The borrowers are keenly aware that the municipalities must achieve a coherence of effort in its regulations, service delivery and financial practices if they are to stay competitive in the domestic and global markets and responsive to its citizens.

The proposed redevelopment of the historic city-centers in Cicheng and Shaoxing requires a strategic approach and enhanced community participation. Drawing on cultural heritage increases the impact and effectiveness of development efforts, by incorporating the traditions, values, skills and knowledge of local communities, and enhances the quality of life for residents. The project will enhance the awareness of dealing with urban poverty since many ofthose living in the historic centers are older people with modest incomes. Unavoidable resettlement with this type of projects will deal with equity, social impact and economic implications. Such an approach not only provides the much needed infrastructure improvements but also enhances the potential for investments in tourism, which is a rapidly growing sector in China.

C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The project in the three municipalities ofNingbo, Shaoxing and Hangzhou consists of a mixture of environmental infrastructure services, urban redevelopment and cultural heritage conservation components, along with associated technical assistance.

-5- e

Ningbo (a) South Jiangdong Sewerage and Treatment Plant 44.17 13.2 26.28 19.8 (b) Zhenhai Sewerage and Treatment Plant 25.08 7.5 13.70 10.3 (c) Cicheng Infrastructure Development 3 1.64 9.5 8.53 6.4 (d) Dongqian Lake Development 40.48 12.1 18.89 14.2 Shaoxing Historic City-Center 121.91 36.5 47.88 36.0 Hangzhou Landfill Expansion 33.29 10.0 7.87 5.9 Services, training and Implementation Support 36.42 10.9 8.52 6.4

Front-end fee 1.33 0.4 1.33 1.o Total Financing Required 334.32 100.0 133.00 100.0

2. Key policy and institutional reforms supported by the project: Utility Reform. While Zhejiang has been one ofChina’s leading provinces in implementing reforms in the industrial and commercial sectors, it has made less progress in reforming its public utility services, particularly wastewater and solid waste management. Until early 2003, wastewater in Ningbo and solid waste management in Hangzhou were still being managed within a pre-reform structure by government departments rather than by autonomous utility companies. Consequently, the reform ofthese services is a key policy component ofthe proposed project. The project is serving as a catalyst for such reforms by establishing financially autonomous utility companies that can efficiently and effectively manage and operate the assets placed under their ownership. Consistent with this objective, existing cost recovery systems are being restructured so that each utility company implements its own tariffs at levels sufficient to ensure financial autonomy and sustainability.

Significant progress has already been achieved toward the key reform objectives ofthe project. In November 2002, the Ningbo Sewage Company Limited (NSCL) was legally established to assume ownership and operating responsibility for all wastewater treatment plants, all pump stations, the sanitary sewer system, and the combined sanitary/stormwater system within the Ningbo urban area. By March 2003, the transfer ofall fixed assets within the core urban districts of the city that are due to be the responsibility of the company was completed. Municipal staff from those departments previously responsible for the wastewater system have been reassigned to the new NSCL. The wastewater surcharge on the water bill, which was introduced in 1999 and set at YO.lO/m3 for all customers, was replaced in July 2003 by a utility company tariff set at an average level of Y0.49/m3. This new tariff is being billed and collected by the Ningbo Municipal Tap Water General Company (NTWC) and then remitted directly to NSCL, rather than to the Municipal Finance Bureau (MFB) as had been the case.

In Hangzhou, the municipal govemment has begun implementation of a program for the reform ofthe solid waste management sector in the city. In September 2002, the Hangzhou Solid Waste Treatment Company

-6- Limited (HSWC) was established to assume responsibility for landfill disposal and treatment. This includes the existing Tianziling Landfill and the new ZUEP funded landfill to be constructed immediately adjacent and on top of the existing facility. The existing landfill was transferred to the company in April 2003 together with a reassignment ofthe staff responsible for their management and operation. In order to ensure that HSWC is financially sustainable, the city has agreed to reform the company’s charges structure. The existing landfill tipping fee, which is presently Y15/t, will be increased to Y49/t in 2004, which should be sufficient to achieve full recovery ofits operating expenses, including depreciation. Initially, this new higher tipping fee will incorporate a subsidy component that is funded by the municipal and district governments. However, as retail solid waste charges are progressively increased, this subsidy will decline and eventually be eliminated.

Although significant progress has been made in establishing a sector reform framework in both Ningbo and Hangzhou, much remains to be achieved in terms ofits implementation. The new companies are just becoming operational and are still transitioning from government units to autonomous utility companies. To date, management focus has been on company establishment and the transfer ofassets, staff and revenues. Most ofthe planning, management and financial systems required by the companies have yet to be fully developed and implemented. A priority task will be to formalize the staff transfers from the municipal governments to the NSCL and HSWC. The project will actively support the design and implementation of these systems and tasks, particularly through the Package A TA for Institutional, Financial and Operational Strengthening.

While these reforms are being implemented at the company level, there is also a need to implement corresponding reforms within the municipal departments responsible for the supervision and regulation of the sectors. With the separation of operating functions from the municipal government, new regulatory structures and mechanisms need to be established so that government can protect the interests of consumers, in terms ofservice provision and charges, while at the same time ensuring the financial and managerial autonomy ofthe new utility companies. The project will assist in this regard through the Package A TA component.

Cultural Heritage Protection. The government has indicated its determination not to sacrifice the protection ofChina’s cultural heritage during its push for rapid urbanization and to reconcile the needs ofpreservation and development. The proposed project will assist this policy ofrecognizing cultural heritage in inner-city redevelopment as an asset to enhance economic development and increase development impact and quality ofurban life by incorporating traditions, values and knowledge of local communities. By examining the linkages between heritage resource management and tourism, the project cities will be enabled to support conservation goals by attracting investment and providing on-going revenues to promote long-term sustainability (see Annex 12).

-7- 3. Benefits and target population:

The construction ofthe Hangzhou Landfill No. 2 will have a positive impact on the environment, as it will provide a technically, environmentally and financially sound, long term, municipal solid waste (MSW) disposal facility for Hangzhou. This in turn will allow MSW collection and removal rates to continue increasing, the service area to expand and hence ensure further improvements in urban environmental sanitation and in the exploitation of economic development opportunities. The supply of adequate MSW collection and disposal systems is a minimum need to allow the city to grow and develop economically in the future. In addition, tourism is a major economic activity in Hangzhou and the maintenance of a clean city will foster its image as a tourist destination. The proposed modern leachate treatment processes (LTP), replacing the existing inadequate LTP, will treat leachate to the required standard for discharge of effluent to the municipal sewer. The increased generation of landfill gases from the new landfill will be used to generate power, increasing the financial and economic benefits of the project. The impacts of the proposed project are all beneficial because they preserve and sustain the positive benefits of the successful operation ofthe existing landfill operation at Tianziling.

The impacts of the proposed project to redevelop and restore the historic city center of Shaoxing are many and varied, with broader implications to modernize the city and build bridges to connect with and preserve the heritage of Shaoxing’s historical past. The main economic impact of the proposed investment in renovation and conservation of the Old City’s cultural heritage will be felt by the tourism sector and the multiplier effect it will have throughout the whole local economy. The direct beneficiary will be the Shaoxing Cultural Tourism Investment and Development Corporation, which will be the custodian and management enterprise responsible for historic sites on behalf of SMG. The other beneficiaries will be the hotels, restaurants, shops and other commercial outlets, transport and telecommunications agencies providing services to the tourism industry. Indeed, the sector will account for a rising proportion of GDP and will be an important source of future direct and indirect employment opportunities. The proposed improvement and upgrading of traditional houses in the five historic precincts will significantly enhance property and rental values in the project area. The results ofthe socioeconomic survey demonstrate the high to medium priority which respondents attach to improvements in their housing conditions, living environment, key urban services and measures which will enhance the status of Shaoxing, especially the conservation of the historic city center. Therefore, it is expected that the improvements will generate an increase in property and rental values in the immediate project area and potentially in adjacent neighborhoods. This was confirmed in discussions with the Shaoxing Construction Bureau and Shaoxing Land Resources Bureau.

The proposed project in Shaoxing forms part of the overall strategy to redevelop and modernize the city center, while restoring and conserving the cultural heritage of the Old City itself. This medium to long-term development program will have a beneficial environmental impact in a number of areas: (a) environmental landscaping and public parks - these will improve the general appearance of the Old City and complement many ofthe other development initiatives take by SMG to enhance the image of Shaoxing as a modern city which welcomes tourists; (b) reduced pollution in the rivers and canals of the Old City - the dredging and lining ofthe canals, coupled with the proposed flushing and reduced direct wastewater discharges from the five historic precincts, will improve water quality and enhance the overall ambience of the city center; (c) reduced air pollution - more provision of open spaces and green areas, plus more effective control of city traffic in and around the Old City, will lead to an improvement in local air quality; and (d) renovation and upgrading of historic buildings and traditional residential houses - the restoration and improvements to many ancient buildings will preserve the old cultural heart of the city and reverse the dilapidation and disrepair in the historic areas.

-a- The impacts ofthe proposed project to improve the environmental infrastructure of Ningbo involve a series of component projects. One of the main objectives for developing and improving sewerage and wastewater treatment services in Ningbo is to safeguard and improve general standards of public health. The proposed four sewerage sub-components will contribute to health improvements through the reduction in many ofthe physical vectors which can transmit waterborne and water-related diseases (e.g. septic tanks, night soil facilities, other basic sanitation facilities, vermin and rodents, unsanitary canals and waterways, etc.), but parallel initiatives will be needed in public health education and improvements to personal hygiene to ensure that all the potential health benefits are realized.

The provision and extension of sewerage and wastewater treatment facilities in Ningbo will enhance property values in the four project areas. The projects should generate significant cost savings through the replacement of septic tanks and night soil facilities, which are old and outdated but still important modes of sanitation in the four project areas. The environmental pollution from these basic forms of sanitation will also be eliminated or significantly reduced.

Effective environmental protection and pollution reduction is a municipal priority in Ningbo. In this context, one of the central objectives is the rehabilitation and clean-up of many of the principal waterways and water bodies in the City and the districts: (a) Zhenhai - Yong River, minor tributaries and water courses, and the inshore waters of Hangzhou Bay itself; (b) Jiangdong - Yuyao and Fenghua Rivers, Yong River, and minor tributaries and water courses; (c) Cicheng - canals and waterways in the Old Town, Ci River, and minor tributaries and water courses; and (d) Dongqian Lake - the lake itself, and minor tributaries and water courses.

The aim of the proposed road around Dongqian Lake is to improve transport communications for local residents and facilitate access to the natural countryside and beauty spots within the catchment area of the lake as part ofthe programme to support tourism development. Similarly, the proposed road improvements in Cicheng will improve local mobility and enhance the City’s appearance and flow of tourists in and through the City.

The overall project will directly benefit about one million people through improved wastewater and solid waste services, better environmental conditions through improved water quality in rivers, lakes and city canals, and improved housing in the inner-cities for some and relocation to new housing elsewhere for others. Indirectly, many more people will benefit from improved environmental and living conditions. While the project does not target special groups, the enhanced basic urban services and inner-city renewal will particularly benefit the lower-income underserved areas and the older people still living in the old city-centers.

The tourism sector is in its infancy in China but the growth is expected to increase exponentially over the next decade as one of the world’s major tourist destination with focus on cultural heritage sites and scenic beauty. The project cities have both and their proximity to Shanghai constitute significant potential to develop tourism as a major contribution to economic growth. Preserving heritage resources and developing a strong tourism industry rely heavily on the presence ofsound attitudes among the population. Building a constituency for tourism by providing inclusion through participation of the local communities is therefore essential part of the project.

-9- 4. Institutional and implementation arrangements: The Zhejiang Provincial Construction Bureau (ZPCB) is responsible for the overall coordination of the project. The Zhejiang Urban Development Project Office (ZUDPO), which has been established within the ZCB, will directly implement this coordination function. ZPCB and ZUDPO will report to, and by guided by, the Project Leading Group (PLG) which consists ofheads of relevant commissions and bureaus. The PLG and ZUDPO already exist, having been originally established for the successfully implemented Bank-financedZhejiang Multicities Development Project (ZMCDP) that was completed in 200 1. Therefore, appropriate functions, staffing and have already been arranged and are in place.

Each of the three project cities has established a project management office to oversee the implementation of its components. In Ningbo, this will be the existing Ningbo Urban Infrastructure Development Office (NUIDO), which was established for ZMCDP, while new PMOShave been created in Shaoxing and Hangzhou. These new offices have accessed staff from the previous PMOSresponsible for ZMCDP to ensure continuity of experience with Bank procedures.

The companies that will operate the project assets upon completion will hold direct implementation responsibility for each component. The Ningbo Sewage Company Ltd. (NSCL), which was established in November 2002, will implement all wastewater components in Ningbo (Jiangdong, Cicheng, Zhenhai and Dongqian Lake). NUIDO will implement the non-wastewater components in Cicheng on behalf of the CichengAncient County Development and Construction Co. Ltd. The newly established Dongqian Lake Investment and Development Company (DLIDC) will be responsible for the implementation of the non-wastewater works within the Dongqian Lake project component.

The Hangzhou Solid Waste Company Ltd. (HSWC), which was established in September 2002, will implement the Hangzhou component. Experienced staff from the existing Municipal Engineering and Appearance AdministrationBureau (MEAAB), which is presently responsible for providing solid waste services in the city, will be transferred into HSWC. Additionally, the Hangzhou PMO, which has been established specifically for the project, will be transferred into the HSWC.

As noted above, the Shaoxing project components will be executed by the Shaoxing Project Management Office (SPMO), which was established in April 2002 within the Municipal ConstructionBureau. SPMO will closely coordinate with the Historic Precincts Conservation Management Office (HPCMO), an agency of the municipal government that is responsible for the implementation and management of heritage conservation and housing redevelopment in the historic city center.

-10- Zhejiang Provincial

Project Leading

c I +I Ningbo PMO Shaoxing PMO Tianziling Upgrading 5 I Landfill Roads, sewers, bridges, historic precincts

DLIDC Wastewater in Roads and South Jiangdong, sewerage in Zhenhai, Dongqian Lake conveyance from Cicheng and nDongqian Lake D. Project Rationale 1. Project alternatives considered and reasons for rejection: The ZUEP is a hlfillment ofearlier agreements with the provincial government to complement the ongoing water supply and urban development started under ZMCDP with a follow-up project focussed on improving environmental services in selected urban areas ofZhejiang province. In early 2000, the Zhejiang Government and project cities started identifying the size and scope ofthe proposed project and pre-feasibility studies were prepared. Since then, the selection of project cities and the scope ofwork changed frequently because the cities had access to alternative financing sources which could proceed more rapidly. At the end of 2001 the provincial government presented a final project proposal which was accepted by the Bank despite the lack of customary preliminary studies for the many of the new components. Subsequently, international consultants were selected and started their assignment in March 2002.

The Ningbo sewerage and sewage treatment component and the Hangzhou solid waste management component, representing some 50% of the total project costs, are consistent with the initial objective for ZUEP on basic urban environmental services. Having already satisfied the immediate need for upgrading and expanding basic urban services, the inner-city rehabilitation and heritage preservation components in

- 11 - Shaoxing and Cicheng reflect the increasing need for cities to improve the living conditions for its inhabitants and to revitalize the city-centers to facilitate economic growth and enhance competitiveness, while preserving its cultural heritage. The Cicheng and Dongqian lake components also address the need for upgrading ofinfrastructure in suburban and smaller towns while similarly addressing the needs for sustainable economic growth through the development of their most important assets such as cultural heritage and recreational opportunities. The project presents opportunities for the Bank to be involved in more integrated urban development with heritage conservation as an integral part, rather than more narrowly defined interventions in specific sub-sectors.

2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). This is the second urban development project in Zhejiang province with the same municipalities. The first project focussed mainly on provision ofwater supply infrastructure in Hangzhou and Ningbo, inner-city road reconstruction in Ningbo and development of a new industrial zone in Shaoxing. The project was rated satisfactory for some components and highly satisfactory for others. The proposed project builds on these investments by focussing on much needed environmental infrastructure, inner-city redevelopment and heritage conservation with associated tourism aspects. Other multilateral and bilateral agencies have been and plan to be involved in future infrastructure development in the project cities in addition to major local investments indirectly or directly related to the proposed project. These include expansion ofwastewater collection and sewage treatment in all three cities, housing renovation and redevelopment ofthe city-centers in Shaoxing and Cicheng, and heritage conservation and tourism development in Shaoxing and Dongqian lake. UNESCO has expressed interest in participating in the cultural heritage aspects ofthe project.

Latest Supervision Sector Issue Project (PSR) Ratings 1Bank-financed projects only) Implementation Development Progress (IP) Objective (DO) Bank-financed Water supply, industrial (completed) Zhejiang Multicities S S Development Project Wastewater and solid waste, industrial Hubei Urban Environment S S pollution control, water pollution Project Water supply, wastewater, industrial Hebei Urban Environment S S pollution control Project Air pollution, wastewater Beijing Urban Environment 2 S S Xher development agencies Asian Development Bank Japanese Bank for International Shaoxing wastewater treatment Cooperation (JBIC) (Highly Unsatis

-12- 3. Lessons learned and reflected in the project design: Experience from a full range ofprojects financed by the Bank in the urban sector points to the importance ofborrower ownership, high quality, appropriateness and efficiency ofdesign ofcapital investments, financing and institutional arrangements for proper maintenance and operation. The project will incorporate these lessons as it makes efficiency and sustainability as a main project objective, and its components are based on the priorities outlined in the cities’ official urban and environmental master plans. Furthermore, Bank involvement would facilitate utility reform, financial sustainability ofbasic urban services and, where possible, private sector participation. Furthermore, the Bank can contribute its wealth of experience with heritage conservation in urban redevelopment from both within China and outside.

The design and phasing ofthe financial and institutional reforms for the Ningbo wastewater component have been based on the Bank’s experience with similar recent projects in China. The Bank’s approach has been to support State policies for the wastewater sector, which promote the corporatization ofsector assets and operations. Corporatization is intended to improve efficiencies in the sector as well as to better facilitate adequate and timely tariff increases by establishing a more transparent and commercially oriented basis for cost recovery. However, in some cases, the achievement ofthese goals has been limited because corporatization has initially been extended only to those facilities being constructed under the Bank-funded project. As a result, existing assets have continued to be operated under a pre-reform arrangement by bureaus ofthe municipal government, at least over the project implementation period. This then has meant that cost recovery and tariff setting have not been fully brought within the new corporatized framework for the sector. Based on the Bank’s experience, the reform plan developed for Ningbo has been specifically extended to the entire wastewater sector in the city. Furthermore, the basic elements ofthis plan have already been implemented during project preparation. The Ningbo Sewerage Company Limited was established during project preparation and has already assumed ownership and direct operating responsibility for all existing wastewater assets. The wastewater tariff was re-established as a utility company tariff and, since March 2003, all collections have been remitted directly to the Company. Therefore, the structures needed to facilitate timely and adequate tariff increases have already been put into place.

The project design relied mainly on lessons from the recent similar Bank operations in China, and a few recent Bank studies, mainly on pollution control management and wastewater treatment performance in China. A key lesson from these is the tendency to over-design treatment plants, inadequate investments in collection systems resulting in underutilization ofthe installed treatment capacity, and insufficient technical and financial capacity to operate and maintain the facilities properly. The project preparation team has carefully reviewed the appropriate capacity and standards for the case ofthe proposed South Jiangdong WWTP as well as the adequacy ofthe collection systems. The current drive for secondary treatment in China will substantially increase the volume ofsludge, which will require additional methods and facilities for treatment and disposal. While water quality improvement is the main objective for building environmental infrastructure, this objective can only be achieved in full when pollution sources, often outside the immediate project area, are being dealt with. This is particularly true for pollution control of industries upstream ofthe project areas, and the project includes action plans to address these problems.

The current institutional arrangements for the implementation ofthe Dongqian Lake development, Cicheng town revitalization and Shaoxing inner-city renovation are based on construction implementation units with unclear responsibilities for operation and maintenance ofthe facilities. Older urban projects in China have demonstrated the risks ofsuch an approach for long-term sustainability and assurances are sought on adequate representation ofoperating agencieshtilities within these project development units during design and construction implementation.

- 13- 4. Indications of borrower commitment and ownership: All three cities participated in the recently completed Zhejiang Multicities Development Project (ZMCDP) with excellent performances in terms oftimeliness ofproject preparation and procurement, efficient financial management, effective construction supervision, adequate and timely provision ofcounterpart funds, and above all highly qualified staff with management guidance. The government has already spent considerable resources in developing overall urban master plans, infrastructure sectoral plans, conservation plans for the preservation ofthe considerable cultural heritage. In addition, the government is providing considerable amount ofcounterpart funds for preparatory activities by local agencies, design institutes as well as facilities for the international consultants.

The government has established well staffed project management offices in all three cities prior to the preparation activities with appropriate accommodations and resources. Furthermore, the city governments have already spent considerable funds in the sub-sectors addressed by the proposed project, including a pilot project for urban upgrading ofroads, housing and essential urban services. ZMCDP complied fully with the institutional reform agenda covenanted in the legal agreements, and the water sector agencies have attained adequate financial sustainability .

The commitment ofthe Shaoxing and Ningbo municipal government to cultural heritage conservation was demonstrated beyond a doubt under ZMCDP and both have participated actively in national and international activities organized by the Bank over the years. The government in Shaoxing is keenly aware ofthe national importance ofits cultural heritage and the need for preservation, while Ningbo recognizes the considerable potential for tourism development through careful development ofits cultural and recreational assets.

5. Value added of Bank support in this project: The proposed project is a mixture of expanding basic urban infrastructure services, including needed utility reform which have been successfully achieved in many similar projects in China, and integrated urban renewal of old city-centers with a strong cultural heritage conservation component. The scope oflarge scale inner city redevelopment in Shaoxing and Cicheng is quite ambitious in terms ofinnovations attempted but is justified since both Shaoxing and Ningbo municipal governments have demonstrated will and competence to carry out innovations in infrastructure and environmental sectors. Under the recently completed Zhejiang Multicities Development Project (1 993-200 1) they have successfully implemented a broad variety of difficult infrastructure components at high quality and pace.

Bank involvement has substantially enhanced the environmental impact ofthe project by identifying complementary measures to ensure that the environmental objectives, particularly water quality improvement in canals rivers and lakes, will be achieved. These measures are supported by the project through technical assistance but the implementation will be funded by the responsible governments and their agencies and consist of: (a) catchment management plan for Dongqian Lake in Ningbo; @) wastewater treatment plant sludge management plan in Ningbo; (c) additional secondary and tertiary sewerage in Shaoxing and Ningbo; and (d) industrial pollution control in Ningbo. In addition, detailed water quality modelling studies ofDongqian Lake demonstrated that the proposed dredging ofthe lake, which would have significant negative environmental impact, would hardly improve the water quality in the lake and the proposal was replaced by a catchment management plan dealing amongst others with non-point pollution from agriculture (see Chapter E - Summary Project Analysis).

Cultural heritage preservation is gradually becoming an integral part of city development activity. China

- 14- has indicated that it wants to leam from other countries and intemational institutions such as UNESCO. The Bank has built up considerable expertise in this area, in China and worldwide, and has contributed, through various projects in Ningbo, Lijiang, Chongqing, Shenyang, etc., to raising awareness about the importance ofurban heritage conservation, making intemational expertise and experience available to local experts in this field, stressing the importance ofeconomic sustainability ofhistoric sites, and providing seed funding for conservation when it was most urgently needed. Assisting with integrated historic city/town redevelopment and conservation is an important next step in safeguarding China's unprecedented cultural treasures while promoting economic development and environmental enhancement.

Tourism development is largely a municipal function through the established Tourism Bureaus. They are promoting many projects, ranging from golf courses to attracting investments but does so largely in isolation from other major agencies. The Bureaus often lack a cohesive tourism plan that states an overall tourism vision and sets out priorities, with the danger that some developments may be inconsistent with cultural heritage theme on which future tourism to the area depends. The project will assist the project cities of Shaoxing and Ningbo to develop all inclusive tourist development strategies, assist with human resource development within Tourism Bureaus as well as in the tourist service communities, and provide technical assistance for skills development an awareness-building about the service industry and heritage resource management.

As part ofthe ZUEP preparation, broad social assessments were carried out for all the project components to assess the affected communities' attitudes towards and participation in project design and implementation, opportunities for voluntary resettlement and participation in tourism development. A more detailed follow-up survey was carried out in Shaoxing's Jishan historic precinct, proposed as a pilot project for integrated urban upgrading. While supporting the project objectives and proposals, the respondents lacked adequate information to fully understand the implications ofthe project while expressing the desire for more participation in the economic activities associated with tourism development. Sufficient number ofresidents have expressed a desire to move to newer and better accommodation outside the historic city centers which would enable the authorities to carry out most ofthe resettlement in a voluntarily manner. Technical assistance has been included in the project design to further community consultation and participation (see Chapter E - Summary Project Analysis and Annex 2).

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): 0 Cost benefit NPV=US$ million; ERR = % (see Annex 4) 0 Cost effectiveness 0 Other (specify)

Project Benefits. The project will generate a range ofimportant benefits. The new landfill to be constructed in Hangzhou will be the primary means for the disposal ofmunicipal solid waste in the city. As such, the project beneficiaries constitute 70% - 80% ofthe municipality's urban population. In Ningbo, the four wastewater components ofthe project (Jiangdongnan, Zhenhai, Cicheng, Dongqian Lake) will increase the volume ofwastewater treated in the city by 66%, from 290,000 m3/d to 480,000 m3/d. The project will also increase the utilization of existing treatment capacity through an expansion ofthe sewer network. The population directly benefiting from these service improvements is estimated to be about 600,000 in 2008, when the project assets are fully operational, and will then increase to over 800,000 by 2020. The non-wastewater improvements in the Cicheng and Dongqian Lake areas ofNingbo will benefit existing and future residents of these communities as well as tourists visiting these areas. In Shaoxing, the project will upgrade housing and provide improved infrastructure (wastewater, water, electricity, gas, telephone)

- 15- services to the five historic precincts of the old city and thereby directly benefit the 20,000 residents ofthis area. The project will also provide the restoration ofhistoric and protected buildings, rehabilitation of canals, road widening, new bridges and parks in the historic city. These improvements will benefit all residents of Shaoxing as well as the tourists who will visit this culturally and historic significant area.

Economic Analvses. Many ofthe project benefits, particularly those relating to environmental and public health improvements could not be quantified. For this reason, the choice for priority interventions for the project has been guided by cost effectiveness analysis. Based on this approach, alternative project designs were identified and evaluated in order to identify the least cost solution for incorporation into the project.

In Hangzhou, the project design is based on the least cost solution of constructing a new sanitary landfill adjacent to and partially overlying the existing Tianziling Landfill. This conclusion was reached after a review ofthe various disposal systems available (landfilling, incineration, composting, recycling) and an analysis ofnine alternative sites for the landfill.

In Ningbo, least cost analyses were undertaken to support the selection ofthe preferred secondary treatment processes for the Zhenhai and Jiangdongnan wastewater treatment plants. On the basis ofthis analysis, as well as due to its favorable operating record and applicability to China, the oxidation ditch has been selected as the preferred alternative for Zhenhai. For Jiangdongnan, the sequencing batch reactor (SBR) process is estimated to be least cost solution although it enjoys only a slight cost advantage over extended aeration activated sludge (A20).However, relative to the A20 process, there are comparatively few existing SBR applications in China and the SBR process is typically supplied as a proprietary process. In contrast, because the A20 process is much more common in China, local maintenance and equipment replacement is much easier. For these reasons, the A20 process has been selected as the preferred alternative despite its slightly higher cost.

Two options for the treatment ofwastewater generated in Ningbo’s Cicheng town have been assessed: centralized treatment at the new Jiangdongnan WWTP; and, decentralized treatment by constructing a small WWTP in Cicheng. The centralized option is estimated to be 10% less costly than decentralized treatment. On this basis, centralized treatment has been selected as the preferred option. An analysis was then undertaken to determine the optimal diameter ofthe 12.7 km pipeline that will transfer ofwastewater to Jiangdongnan. Over the shorter-term planning horizon, either a 500 mm or 600 mm would be the least cost. However, over the longer-term, a 700 mm diameter pipeline is the least cost. Based on these findings, the 600 mm diameter is considered to be preferable because it represents a reasonable compromise solution for both the shorter and longer planning horizons.

Wastewater collected from the Dongqian Lake area ofNingbo will also be transferred to the Jiangdongnan WWTP, through a new 12.5 km pipeline constructed under the project. As was the case for Cicheng, in order to determine the optimal diameter, two planning horizons have been considered. Over the shorter term, in which the average flow is 20,000 m3/d, the costs ofthe 700 mm and 800 mm diameter options are essentially the same. Over the longer term, in which the average flow is 70,000 m3/d, both the 1100 mm and 1200 diameter pipelines are the least cost solutions. Based on these results, the 900 mm diameter represents a good compromise solution and, therefore, appears to be the optimal solution. However, the optimal diameter is highly dependent on the rate at which flows increase as the Dongqian Lake area is developed. Therefore, a more detailed analysis of wastewater flows will be undertaken during preliminary and detailed design in order to finalize the diameter.

- 16- 2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4)

Financial Viabilitv. The FRR for the Hangzhou Solid Waste component is calculated as 1.3%, which is slightly below the weighted average cost of capital, which is estimated to be 3.3%. Therefore, the project does not achieve full cost recovery over its entire life. However, the project does fully recover all operating costs and about 85% ofcapital costs. The average incremental financial cost (AIFC), which is calculated on the basis ofZUEP funded landfill, is estimated to be Y49/t. Given that the present value of average tariff over this same period is estimated to be Y45/t, the financial subsidy is the difference; Y4/t. This subsidy is provided in the form ofequity contributions by the municipality toward the cost of fixed assets, including the ZUEP funded landfill.

For the project wastewater components in Ningbo, the FRR has not been calculated because the concept of incremental revenues is not fully applicable. Since all wastewater generators pay the charge regardless of whether they are connected to the public sewer, the major wastewater expansion provided under the project cannot be directly linked to an incremental revenue stream. However, the AIFC has been estimated to assess the cost effectiveness and subsidy requirements ofthe components. The AIFCs for the Zhenhai, Jiangdongnan, Cicheng and Dongqian Lake components are Y 1.99/m3, Y0.84/m3, Y0.86/m3 and Y 1.27/m3 respectively. The significant variations in the AIFC reflect significant differences in the both the capital and operating cost structures between the four components. The overall AIFC for the four components is Y l.O3/m3. Since the average tariff, which is Y 1.53/m3 ofwastewater treated over the 2003 - 2017 forecast period, is actually higher than the overall AIFC ofY l.O3/m3, the net subsidy over this period is zero. However, while the overall net subsidy is zero, subsidies are provided in form of municipal and district government contributions toward the capital cost ofZUEP. The average tariff exceeds the AIFC because ofthe anticipated need to implement significant tariff increases in 2010 and 20 1 1 to cover the capital and operating costs ofplanned wastewater expansions.

Financial Reforms. A major component of the project is the development and implementation of a comprehensive financial reform program within Hangzhou solid waste and Ningbo wastewater sectors. During project preparation, both sectors have been corporatized with municipal companies being established to own and operate all major assets, including those to be constructed under the project. These new companies are financially autonomous in that they have control over their respective revenue streams through the application ofutility company tariffs that have replaced the municipal charges previously applied. Furthermore, increases in the new tariffs are being implemented in order to ensure the financial sustainability ofthe new companies. In Hangzhou, the landfill tipping fee will be increased from Y 15/t to Y49/t in 2004, which should be sufficient to achieve full cost recovery. In Ningbo, the average wastewater tariff was increased from YO.lO/m3 to an average ofY0.49/m3 as ofOctober 2003. Over the period to 2010, additional tariff increases totaling just over 80% will be required, bringing the average tariff to Y0.79/m3.

An analysis of the impact ofthe increases in solid waste and wastewater tariff increases on low-income domestic consumers indicates that these tariffs are affordable. For a low-income household in Ningbo, the proportion ofincome required to pay for water and wastewater is projected to increase only very slightly from 1.6% in 2003 to 1.7% by 2010, well below the generally accepted upper limit of 5%. In Hangzhou, the existing solid waste transport and disposal charge represents only 0.2% ofhousehold income for the low-income group. If the municipal subsidy component ofthe tipping fee is eliminated by the end of2006, retail charges will need to be increased substantially. Under this scenario, the proportion ofincome will peak at about 0.9% of income for this group, still well within the limits ofaffordability.

- 17- Proiect Companv Financial Proiections. Financial projections have been prepared for the three project companies, Hangzhou Solid Waste Management Treatment Company Ltd. (HSWC), Ningbo Municipal Sewage Company Ltd. (NSCL), and the Dongqian Lake Investment and Development Company Ltd. (DLIDC). Based on the agreed financial reform program, the HSWC tipping fee will be set at Y49h in 2004, which should be sufficient to fully recover operating expenses, including depreciation. The company is also expected to be able to contribute toward counterpart funding of the new ZUEP landfill. The NSCL is projected to generate cash operating surpluses as it implements annual tariff increases beginning in 2004. These surpluses will be used to fund about 16% ofthe capital cost ofthe project, which will, therefore, reduce the required counterpart contributions from the municipal and district governments in Ningbo. With full operations ofthe project assets and debt service commencing in 2007 and 2008 respectively, net income and cash generation will decline but remain well within acceptable levels. For the DLIDC, financial projections are based on a conservative scenario regarding future increases in the price ofland. Even on the basis ofthis conservative scenario, the projections indicate that DLIDC should be financially viable and sustainable over the 2003 - 20 15 forecast period. The company should be able to generate the funding needed to implement its overall development program, which includes the ZUEP component, and repay all associated debt.

Fiscal Impact: An analysis of the availability of counterpart funds has been undertaken by reviewing revenues and expenditure in each ofthe project cities. Counterpart contributions are to be provided by the municipal governments in all three project cities as well as the Zhenhai District Government in Ningbo. Based on conservative assumptions regarding future revenue growth, the analysis indicates that the project components are affordable in all three cities. The project will be relatively more onerous in the case of Zhenhai District, though still well within affordability. Requirements for project counterpart funds from the three municipal governments and Zhenhai District as a proportion oftotal revenues varies between 0.1% in Hangzhou (0.4% in the peak year), 0.4% in Ningbo (0.9% in the peak year), 0.9% in Zhenhai District (2.5% in the peak year), and 2.5% in Shaoxing (6.3% in the peak year). When considering only revenues that can be allocated for funding capital expenditures, the incidence ofthe project counterpart funds varies between 0.2% on average in Hangzhou (1 .O% in the peak year, 2004), 2.0% in Ningbo (4.1% in the peak year, 2004), 5.9% in Zhenhai District (15.6% in the peak year, 2004), and 4.2% in Shaoxing (10.0% in the peak year, 2004).

3. Technical:

Development context of the urban upmading. works. The urban upgrading proposals in Cicheng and Dongqian Lake have been presented in a larger and long-term strategic context whereby past developments and future investments, including those outside the scope of the Bank-funded project, are clearly outlined. An implementation plan covering a period of 10-12 years outlines the upgrading of the old town of Cicheng, a new resettlement area (60 ha.) for residents that will leave the old town, as well as the development of a new satellite town to provide growth for the town. A loan from the State Development Bank in the amount of some $150 million has been concluded recently to finance the above activities. Similarly, the development plans for Dongqian Lake have been further detailed, based on the concept plan prepared by an international development consultant and financially underpinned by a viable business and market plan (see Annex 5).

Donmian Lake Catchment Management Plan Detailed modeling studies concluded that the proposed dredging ofthe Lake would constitute a major project cost, having significant environmental implications

- 18- but limited benefits in terms ofwater quality improvement. As a result, the Ningbo municipal government agreed to forego the lake dredging and await the beneficial impact ofthe wastewater interception works and implementation ofthe lake catchment management plan on the water quality in the lake. Water quality in Dongqian Lake is declining as a consequence of inputs ofa range ofpollutants from a number of sources. The pollution source ofmost immediate concern is domestic wastewater, the majority ofwhich will be either diverted out ofthe lake by means of the ZUEP project interventions. However, for the water quality in the lake is to be sustained at acceptable levels, a integrated Catchment Management Plan (CMP) has been prepared, involving both physical interventions and policy instruments to control potentially polluting activities in the catchment. The CMP will involve: (a) quantification ofthe hydrological and pollution load inputs to the lake through monitoring and other appropriate studies; (b) on-going control of dispersed domestic wastewater sources through collection andor treatment and control of overflowshpillages; (c) relocation ofindustry outside the lake catchment into an industrial estate; (d) physical interventions and policy instruments on agriculture (in particular confined animal rearing) within the catchment; (e) controls on aquaculture and management ofrecreational use ofthe lake; (f) implementation of erosion control programs in agriculture and of forestry reclamation programs to prevent lake sedimentation; (g) introduction ofpolicy instruments to prevent or control the use ofpolluting substances (e.g fertilizers, detergents and pesticides) in the catchment; and (h) educational and information management programs. The total costs ofthe CMP has been estimated at some $90 million and will be funded and implemented by the Dongqian Lake Investment and Development Company Ltd. (DLIDC). Technical assistance with the preparation activities and plan implementation has been included in technical assistance Package C for the project (see Annex 2).

Centralized Wastewater Treatment Ningbo. Detailed technical and financial studies demonstrated that centralized treatment at Ningbo ofthe wastewater from Cicheng town and Dongqian Lake is more efficient and effective than localized treatment. Therefore the capacity ofthe wastewater treatment plant in Jiangdongnan in Ningbo has been augmented to 160,000 m3/d to accommodate these flows. The newly established Ningbo Wastewater Treatment Company will be responsible for the operation and maintenance ofthe sewer networks in Cicheng and Dongqian Lake as well as the wastewater conveyance systems and will charge the residents in these places the same tariff that applies to Ningbo city proper.

Ningbo Sludge Management Plan In addition to the ZUEP wastewater treatment interventions, the city of Ningbo has planned for a substantial program ofinvestment in wastewater treatment to meet the requirements of central Government in particular in respect of increasing wastewater treatment coverage rates. A consequence ofthis program will be the generation ofrapidly increasing quantities of wastewater treatment sludge, which will require safe and efficient disposal. An outline Sludge Management Plan (SMP) has been developed covering all wastewater treatment sludge generated by treatment plants in the municipality area. The SMP involves monitoring ofwastewater composition and of sludge production at the various wastewater treatment plants in the Ningbo municipality area to quantify progressive future sludge loads, evaluation and development ofcosts of other potential options in order to formulate a longer term sludge disposal program, and evaluation and development as appropriate ofpotential options for the beneficial use ofwastewater treatment sludge to reduce disposal costs and conserve disposal resources. Technical assistance Package C includes assistance with the further development and subsequent implementation ofthe SMP. As an immediate term strategic action Ningbo will develop with their own funds a new sanitary landfill at Lupu village in Yinzhou district which will be completed by 2006, in time for the new wastewater treatment plants come into operation.

Comulementary Sewerage Works in Ningbo. A detailed plan for the construction of secondary sewer networks (not Bank funded) in South Jiangdong district ofNingbo was developed to complement the Bank-funded trunk sewer infrastructure and consist ofsome 55 km of pipelines with diameters varying

- 19- from 300 - 1000 mm. The 6-year program (2003-2008) will cost Y120 million and will be financed by the Ningbo municipal government from their regular annual development budget. Similarly, complementary secondary sewerage will be provided in the Dongqian Lake development zone but no details are available as yet. For both sewer programs, essential to achieve the project's objectives, a Resettlement Policy Framework was agreed upon.

Industrial Pollution Control in Ningbo. Industrial wastewater accounts for a substantial proportion ofthe overall quantities of wastewater within Ningbo, and the ZUEP wastewater components will allow for interception and treatment only ofindustrial wastewater generated within the catchments ofthe proposed wastewater treatment plants. A substantial portion ofindustrial wastewater will continue to be discharged to watercourses. Unless there is effective control ofthe pollution loads from these industries, the full benefits ofZUEP will not be realized. As part ofthe ZUEP preparation an effective Industrial Pollution Control Action Plan (IPCAP) has been prepared with the objectives to increase the effectiveness of control ofindustrial pollution, both in terms ofprotection of water quality in receiving watercourses and to ensure sustainability of sewerage system and wastewater treatment investments. There is evidence that water consumption per unit of output by some industry in Zhejiang is very high and the introduction of water conservation measures and cleaner production techniques in existing industry is therefore paramount. Technical assistance Package C has been included in the project to assist with the implementation of the IPCAP and will involve: (a) effective procedures for the licensing and control ofindustrial wastewater discharges to the sewerage systems owned and operated by the Ningbo Wastewater Company to enable the company to protect its sewerage and wastewater treatment assets and ensure compliance with discharge standards; (b) efficient industrial wastewater monitoring systems by the Wastewater Company and by Ningbo EPB to ensure effective monitoring without duplication of effort; (c) by Ningbo EPB the preparation oftime-bound action plans to control pollution from discharge of industrial wastewater directly to critical watercourses in order to meet future water quality objectives for these watercourses; and (d) an implementation program for water conservation in industry to be phased to achieve targeted reductions in water consumption by industry per unit ofoutput (25% by 2007 and 50% by 2010). This would be achieved by a combination ofthe introduction ofwater auditing programs in industry and strengthening of the Water Conservation Office in terms ofmore realistic setting ofwater quotas and their effective monitoring and enforcement. The costs for the implementation ofthese measures will be bome by the Ningbo Wastewater Company and respective industries.

Water Oualitv ofthe Canals in Shaoxing. A major objective ofthe Shaoxing project is to enhance the water quality in the canals in the old city to improve the environmental conditions for residents and make them attractive for tourism purposes. The project will assist in the rehabilitation ofthe canals and provide improved facilities for better and more regular flushing ofthe canals with water from the moat that surrounds the old city. However, the water quality in the canals can only improve with these measures if simultaneously the water quality in the moat is enhanced through expanded collection ofwastewater discharges in the southem part ofthe city and interconnecting the moat with the small rivers that have better water quality. The Shaoxing municipal government has agreed to implement the necessary works during the project period with funding from their regular development budget. The Project Office also agreed to improve on the accuracy ofthe water quality model during final design preparation in order to optimize the pumping and sluice gate arrangements and minimize the operational costs.

Retroactive Financing ofPrioritv Works. The following project components have been identified as urgent and require prompt execution prior to loan effectiveness: (a) existing landfill in Hangzhou requires urgent expansion since its current capacity will be depleted by end 2003; (b) some ofthe main sewers in Ningbo city need to be combined with urgent (non-Bank funded) road construction; (c) the pilot projects in Jishan historic precinct in Shaoxing and one quarter of Cicheng town need to start early in order to be able to

- 20 - apply the lessons leamed timely in the upgrading ofthe other areas; and (d) some ofthe technical assistance needs to start early to assist with the implementation of the retroactive financed activities and prepare the design and tender documents for priority components. Thereto, it has been agreed to allow retroactive financing ofup to $10.0 million for the above works and may be applied to expenditures made after September 1,2003 for the procurement ofworks, goods and services, consistent with the Procurement Guidelines. A detailed procurement and implementation plan has been prepared.

4. Institutional:

4.1 Executing agencies: The Hangzhou component will be executed by the newly established Hangzhou Solid Waste Company (HSWC), which has been staffed from the existing municipal sanitation agency as well as the Hangzhou PMO created for this project. However, these agencies do not bring previous experience in implementing Bank-funded projects and will require strengthening, preferably from staff that participated in the previous Bank-funded Zhejiang Multicities Development Project (ZMCDP), as well as training. The close proximity to the experienced ZUDPO will assist offsetting some ofthe experience deficiencies.

The wastewater components in Ningbo (Jiangdongnan, Cicheng, Zhenhai and Dongqian Lake) will be executed by the newly established Ningbo Sewerage Company Ltd. (NSCL). The non-wastewater components in Cicheng will be executed directly by Ningbo Municipality through the Ningbo PMO. Dongqian Lake Investment Development Company (DLIDC) will be responsible for the execution of the non-wastewater works within the Dongqian Lake project component. Both NSCL and DLIDC are new to implementing Bank-funded projects and will require substantial assistance from the PMO, which is very familiar with Bank projects through its experience in implementing ZMCDP.

The Shaoxing components will be executed by the Shaoxina Municipal Construction Bureau through its newly established Shaoxing Project Management Office (SPMO), which has been established specifically for the Bank project and is under the direct supervision of the municipal Construction Bureau. Although having considerable construction experience, SPMO is basically new to implementation of Bank funded projects and its specific procurement, financial management and reporting requirements. Similarly, the Historic Precincts Conservation Management Office, which has been incorporated into SPMO, is responsible for the implementation and management of the heritage conservation and housing redevelopment in the historic city-center also needs strengthening and training for the project.

4.2 Project management: The overall project will be coordinated by the Provincial Urban and Rural Construction Commission, supported by its Project Management Office (ZUDPO). ZUDPO has already been established for the earlier Bank-funded Zhejiang Multicities Development Project (ZMCDP) and has gained considerable experience with Bank-funded projects. However, quite a number of experienced key staff have left and it would be appropriate to obtain assurances for strengthening the Office. In Ningbo the existing Ningbo Urban Infrastructure Development Office (NUIDO) will manage the project as the PMO and has demonstrated its ability to do so efficiently. New project management offices have been established in Shaoxing and Hangzhou but should draw upon staff from the previous PMOSfor the ZMCDP to ensure continuity of experience with Bank procedures. However, further strengthening and training has been incorporated in the project design to ensure successful implementation.

The implementing agencies will retain the services of: (a) local design institutes to assist with the remaining

-21 - design work during project implementation; (b) intemational and local consultants to assist with design review, construction implementation management and quality assurance; (c) local supervision companies to assist with the day-to-day construction implementation; and (d) tendering companies for assistance with ICB procurement. In addition, independent agencies will be retained for the monitoring ofthe resettlement implementation and the environmental mitigation activities. 4.3 Procurement issues: Intemational civil works contractors are unlikely to be interested in the contracts under the project given the competitiveness of the local construction industry, the routine technical nature ofmost ofthe works, and the small size of the individual contracts, none likely to be over $15 million. NCB may therefore be appropriate for all civil works contracts.

The comprehensive Project Implementation Reports include detailed procurement and implementation plans for all the six works components. Details ofthe procurement capacity assessment for the project are discussed in Annex 6 (A). 4.4 Financial management issues: Financial management systems and issues are discussed in Annex 6 (B). No special issues have been identified. 5. Environmental: Environmental Category: A (Full Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. An extensive environmental assessment (EA) has been carried out for ZUEP. During its preparation and evaluation Chinese national procedures and those required by the Bank Group were diligently followed. Comprehensive EA documents comprising an Environmental Assessment Report and an Executive Summary have been prepared, incorporating Bank comments, reviewed and found satisfactory. An Environmental Management Plan (EMP) is an integral part of the EA. A detailed annex covering environmental assessment and impact, together with mitigation measures, has been prepared (Annex 11). This summarizes the findings ofthe environmental assessment on the various components and reflects the preparation and appraisal mission findings.

Potential Impacts. The environmental impact ofthe project is on balance substantially positive and the benefits greatly outweigh the negative impacts. The Hangzhou solid waste component will provide a long term sustainable waste disposal resource for the city and allow it to increase wastes management service coverage. The landfill site is designed and will be operated to intemational standards of sanitary landfill. The Ningbo components will greatly increase wastewater collection and treatment rates within the municipality area and will substantially improve water quality both in the main river reaches in the urban areas and particularly in the urban watercourses. In Shaoxing the infrastructure upgrading component allows the modernization ofthe city while at the same time conserving its important heritage and, together with the canal rehabilitation works, will significantly improve water quality in the urban canals.

The principal potential impacts during construction include excavation, spoil disposal, noise and disruption ofurban services. Operational phase impacts ofwastewater treatment include the need to dispose safely of the increasing quantities ofwastewater treatment plant sludge and poor water quality in the mixing zones of treated wastewater outfalls. The principal landfill impacts are the generation ofleachate and landfill gas.

Mitigation Measures. The EA specified the appropriate mitigation measures, environmental monitoring plans, institutional arrangements and training and equipment requirements together with cost estimates for

- 22 - implementation ofthe mitigation measures and monitoring plans. Major mitigation measures for the landfill component include provision ofan impermeable site liner and leachate treatment and expanded use ofthe existing landfill gas collection and utilization scheme. The long-term requirements for sludge disposal have been addressed through the preparation of a specific sludge management plan for the Ningbo Municipality area as a whole. In the immediate term it is envisaged that disposal will be primarily by environmentally secure landfill. Outfall discharges will be equipped with carefully designed diffuser systems to maximize dispersion. Construction phase impacts will be minimized through controls on working practices and operational impacts through careful siting offacilities with appropriate buffer zones and controls on noise.

Public Consultation and Feedback. Local people were consulted during the EA preparation. The approaches used for public consultation were: consultation meetings with local government representatives and questionnaire analysis ofpublic opinion supplemented by interviews. Consultations were carried out at various stages in accordance with the requirements ofOP 4.01. Details ofthese activities with dates, participants, public notifications and locations are provided in tabular form in Annex 11.

Information Disclosure. The final EA Report and Executive Summary were submitted to the Bank in July 2003, as were final Resettlement Action Plans (RAPS). Both reports were reviewed and found to be satisfactory. Draft copies ofthe reports were submitted to the Bank Group Information Center starting March 2003 and subsequently updated (Annex 8). Notice ofavailability ofthese reports was publicized in the project cities before appraisal (Appraisal completion date: August 23, 2003). Details ofdocuments, disclosure dates and locations are provided in tabular form in Annex 11. 5.2 What are the main features of the EMP and are they adequate? Details in Annex 11. Specific comprehensive action plans were prepared for Ningbo Sludge Management and Dongqian Lake Catchment Management.

5.3 For Category A and B projects, timeline and status ofEA: Date ofreceipt offinal draft: July 2003

5.4 How have stakeholders been consulted at the stage of(a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms ofconsultation that were used and which groups were consulted?

Consultation was undertaken in three ways: bulletins to the press, public opinion questionnaires and surveys. The questionnaires and surveys covered residents and community committees and the meetings with the public and public officials show that the project is well received by the public. Details in Annex 11. 5.5 What mechanisms have been established to monitor and evaluate the impact ofthe project on the environment? Do the indicators reflect the objectives and results ofthe EMP? Project environmental monitoring indicators have been identified and discussed in detail in the EA/EMP (see also Annex 1). These cover both targeted improvements in environmental management infi-astructure operations, such as increasing collection and treatment rates for urban wastewater and compliance with treated wastewater discharge standards, and additionally improvements in ambient environmental quality. In addition there are investments (in equipment and training) included in project financing to ensure appropriate attention to environmental issues. The project specifically includes strengthening ofa number ofinstitutions in the water and environmental services sectors in the project cities. See also Annex 11.

- 23 - 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. The proposed urban upgrading and conservation works in the historic centers of Shaoxing and Cicheng and the villages along Dongqian Lake will directly affect a substantial number ofresidents and businesses. Key social outcomes ofthe project relate to: (a) improvement ofliving conditions ofresidents in the often cramped and poorly served historic city-centers of Shaoxing and Cicheng, through housing renovation and area upgrading; (b) better environmental conditions through in-house (e.g. toilet, bathroom, kitchen) improvements and upgrading ofthe outside environment through cleaning the canals, paving the road, new parks and community facilities; (c) maximizing voluntary resettlement through consultation and selection of residents that seek to leave the historic areas; (d) participation ofthe communities in tourism development in their areas to maximize the economic benefits to the local residents.

6.2 Participatory Approach: How are key stakeholders participating in the project? The participatory approach for the resettlement aspects ofthe project, particularly those associated with inner-city redevelopment have been dealt with in the RAP preparation and the separate social assessment surveys. Tourism development by its nature require consultation and participation ofthe local communities, businesses and civil society institutions at large. The development ofthe tourism strategies in Shaoxing and Ningbo and the preparation oftourist master plans will be carried in a participatory approach.

6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? While the RAP and EA procedures already secure substantial consultation processes concerning the mechanisms oftemporary and permanent resettlement oflarge number ofdisplaced persons, additional social surveys indicated the need for enhanced communication and participation to achieve the best social and economic outcome for the project. These surveys added a different dimension ofcommunity consultation on social and economic aspects which are not directly related to resettlement but deal with community development after renovation ofthe historic areas and how the residents can benefit from participation in tourism development. The design ofthe project has included substantial technical assistance (see Annex 2) to help the project agencies to better achieve these outcomes.

6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? The institutions that assisted the project agencies with the social assessment surveys will continue to be involved in further project preparation and implementation to develop more detailed processes for community consultation and participation as well as monitoring indicators to evaluate the social development outcomes

6.5 Howwill the project monitor performance in terms ofsocial development outcomes? Independent institutes will be retained to monitor and evaluate the implementation ofthe RAPSas well as achievements of community involvement in the development ofthe newly upgraded communities and participation in the economic development, in particular tourism.

- 24 - 7. Safeguard Policies:

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. Project activities are primarily in urban areas, except for the Dongqian Lake Development subcomponent. However the lake is not considered to be a "natural habitat" as defined in OP4.04 and there are no existing or proposed protected areas in the project area. The Dongqian Lake subcomponent substantially reduces the overall pollution and nutrient loads to the lake through point source control; the remaining loads to the lake arise principally from non-point sources such as runoff from agricultural areas and erosion from deforested areas. The Catchment Management Plan will identify and implement policy and physical interventions to sustain water quality consistent with the lake's primary ecological functions.

A Resettlement Policy Framework has been formulated and agreed upon for linkage activities that are important for achieving the major objectives of the project. The project agencies agreed that resettlement aspects related to non-Bank funded activities in: (a) urban upgrading in Gucheng district in Shaoxing municipality outside the project areas; (b) housing renovation in Cicheng town in Jiangbei district of Ningbo municipality; (c) implementation ofthe proposed landfill in Lupu village, needed for the disposal of wastewater treatment plant sludge; and (d) complementary secondary sewerage by the Borrower in Ningbo city (Jiangdongnan) and Dongqian Lake will comply with relevant Bank guidelines. Thereto, the Borrower has provided a Resettlement Policy Framework document for these non-Bank funded activities. In due time, Ningbo and Shaoxing will submit the design documentation and EA and RAP report to the Bank for review and no objection.

Compliance with the Environmental Assessment, Environmental Management Programs, Resettlement Action Plans, and Resettlement Policy Framework will be monitored by independent institutions that will be hired under the project management

F. Sustainability and Risks 1. Sustainability:

The proposed project will contribute to the sustainability ofthe project cities' overall development by helping to improve collection and safe disposal of sewage and solid waste, improve water quality in rivers, lake and canals, improve living conditions within the historic city-centers, conserve important cultural

- 25 - heritage sites, and increase economic development through enhanced tourism development.

Institutional reform and cost recovery have now become established government policy in China to improve efficiency and sustainability in the provision ofbasic urban services. The proposed project contributes to this policy by strengthening technical, institutional and financial capacities and capabilities through corporatization ofmunicipal utility agencies, financial self-sufficiency and autonomy, training and technical assistance.

Cultural heritage conservation and associated tourism development are recognized as a powerfd tool for sustainable economic development and social well-being while maintaining the need for modernization to build competitive cities. The proposed project contributes to this urbanization process by providing the needed expertise for conservation, tourism development and urban planning as well as financing the supporting infrastructure while securing the sustainability ofoperation and maintenance through institution building.

Enhanced community consultation and participation in the urban upgrading process and tourism development will enable substantial resettlement under the project to be largely voluntary and create more economically sustainable communities

2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Some ofthe critical risks identified below are generic for this type of urban project while others are project specific. The implementation ofa number ofnon-Bank financed activities, such as the Dongqian Lake Catchment Management Plan, Cicheng Housing Renovation and Conservation Plan, Industrial Pollution Control Action Plan, and complementary secondary sewerage in Ningbo city and Dongqian Lake are are essential for achieving the major objectives of the project. Overall, the project risk is rated modest because the project cities have demonstrated in the past strong commitment to Bank-funded projects and their objectives as well as adequate project management capabilities.

- 26 - Risk Risk Ratina Risk Mitiaation Measure From Outputs to Objective Ningbo WWC may not be able to develop M Upfront legal reform, establishment of financial and institutional capacity and companies and tariff increase. Covenanting the capabilities to operate and maintain the extent and pace ofutility reform during sewerage systems and wastewater implementation and adequate future tariff treatment plants increases. Provision oftechnical assistance with utility management. Inadequate flows to the WWTPs M Implementation plan for complementary jeopardizing the effectiveness and secondary and tertiary sewer network with efficiency of the treatment processes. secured local funding. House connection program. Unable to control pollution sources S Implementation plans for control ofagribusiness outside the scope of the project in Donqian Lake area, industrial pollution jeopardizing the water quality upstream ofNingbo city (IPCAP), and improvements expected from the project :omplementary sewerage in Shaoxing city.

Municipal governments and utility M Ensure realistic financing program from both companies unable to provide timely and municipal budgets and surplus utility revenues. adequate counterpart funds for the project

Tourism development falls behind M Establish effective tourism institutions and expectations, jeopardizing the economic implementation plan for tourism strategy. growth to sustain the improvements in the historic town centers From Components to Outputs Sewers and treatment works may not be M Ensure quality of design, efficient procurement built soundly or within time and budget and adequate construction supervision

Untimely land acquisition and resettlemenl S Ensure adequate community consultation and may delay project implementation timely compensation, early planning and progress effective implementation, condition for contract award Annual or bi-annual tariff increases for S Annual financial projections for the companies Hangzhou solid waste and Ningbo and tariff increases covenanted in the legal wastewater companies agreements Overall Risk Rating M Risk Rating - H (High Risk), S (Substantial Ris , M (Modest Risk), F Negligible or Low Risk)

3. Possible Controversial Aspects: None

- 27 - G. Main Loan Conditions 1. Effectiveness Condition The Project Municipalities and their respective Project Company or Project Companies, as the case may be, have each entered into a Subsidiary Loan Agreement satisfactory to the Bank in accordance with the provisions of the Project Agreement.

2. Other [classify according to covenant types used in the Legal Agreements.] Condition of Disbursements

Zhejiang shall enter into a contract or contracts with consulting firm or firms, acceptable to the Bank for the provision ofdesign review and construction management ofthe Project and for the provision of technical assistance in institutional and financial strengthening.

Implementation Covenants

Ningbo shall carry out the Complementary Sewer Connection Plan dated April 2003 for the construction ofsecondary sewer networks to complement the trunk sewer infrastructure being financed under this Project and complete construction of secondary sewer networks by December 3 1,2008.

Ningbo shall: (i)by no later than June 30,2004, hrnish to the Bank for review and comments, a time-bound action plan for the management (including construction ofa new landfill in Lupu village) of sludge generated by all wastewater treatment plants in Ningbo, prepared in accordance with terms of reference acceptable to the Bank; and (ii)thereafter, implement said plan (including completion ofthe said landfill by June 30,2006 taking into account the Bank’s comments thereon.

Ningbo shall carry out the Industrial Pollution Control Action Plan, dated March 2003, prepared by Ningbo PMO in a manner satisfactory to the Bank and not modify or amend the Industrial Pollution Control Action Plan without the prior concurrence of the Bank.

Ningbo shall carry out, or caused to be carried out, the Dongqian Lake Catchment Management Plan dated March 2003, for management and control of activities that potentially pollute the water in Dongqian Lake.

Ningbo to: (a) by no later than June 30, 2004, hrnish to the Bank for review and comments, a time-bound action plan for the housing upgrading and conservation ofold Cicheng town prepared in accordance with terms ofreference acceptable to the Bank; and (b) thereafter, implement said plan taking into account the Bank’s comments thereon.

Shaoxing to: (a) by no later than June 30,2004, hrnish to the Bank for review and comments, Shaoxing shall cause a time-bound action plan for the improvement of water quality ofits canals (including expanded collection ofwastewater discharges in the southern part ofthe city and inter-connecting the moat with small rivers with better water quality), prepared in accordance with terms ofreference acceptable to the Bank; and (b) thereafter, implement said plan taking into account the Bank’s comments thereon.

Financial Covenants

NMG and HMG will raise wastewater and solid waste tipping fees annually or bi-annually to a level sufficient to cover operating, maintenance, depreciation costs ofall sector assets as per financial covenants

- 28 - in the Project Agreement.

Before September 30 in each of its fiscal years, each of Ningbo SC and Hangzhou SWC shall, on the basis offorecasts prepared by each ofthem and satisfactory to the Bank, review whether it would meet the revenue covenant requirements in respect ofsuch year and the next following fiscal year and shall furnish to the Bank the results ofsuch review upon its completion.

Each respective project company shall undertake to furnish to the Bank, to Zhejiang and to its respective Project Municipality, as soon as available, but in any case not later than six (6) months after the end of each such year certified copies ofsaid financial statements and accounts for such year as so audited; the report of such audit by said auditors in such scope and detail as the Bank, Zhejiang or the respective Project Municipality shall have reasonably requested; and all such other information concerning said records, accounts and financial statements, as well as the audit thereof, as the Bank, Zhejiang or the respective Project Municipality shall reasonably request.

Zhejiang will furnish to the Bank as soon as available, but in any case not later than six months after the end ofeach such year (or such other period agreed to by the Bank), (A) certified copies of the financial statements referred to in paragraph (a) ofthis Section, for such year (or such other period agreed to by the Bank), as so audited, and (B) an opinion on such statements by said auditors, in scope and detail satisfactory to the Bank;

Zhejiang will prepare and furnish annual financial monitoring reports, in form and substance satisfactory to the Bank, which set forth sources and uses offunds for the Project, both cumulatively and for the period covered by each said report, showing separately funds provided under the Loan, and explain variances between the actual and planned uses ofsuch funds. The first such financial management report shall be furnished to the Bank not later than 45 days after the end ofthe first calendar semester after the Effective Date.

Project Management Covenants

Maintain a Project Leading Group, chaired by the Secretary General ofZhejiang Provincial Government and consisting of line departments ofprovincial governments, such as Zhejiang Provincial Development and Planning Commission, ZPFB, Zhejiang Provincial Audit Bureau, Zhejiang Provincial Environment Protection Bureau, Zhejiang Provincial Price Bureau.

Maintain a Provincial Project Management Office (ZUDPO) with sufficient authority, staffing, facilities, and budget to carry out, coordinate, or supervise all project activities, including the procurement, financial management, resettlement, environmental impact mitigation, and progress reporting.

Maintain Subproject Offices in each ofthe project cities and Implementing Agencies for each project component with sufficient staffing, facilities, and budget to carry out, coordinate, or supervise all activities for the component implementation, including the procurement, financial management, resettlement, environmental impact mitigation, and progress reporting.

ZUDPO will provide the Bank with implementation quarterly progress reports, in a format satisfactory to the Bank, within 3 weeks after the period under review, starting fi-om January 21,2004 until the project completion.

ZUDPO will submit to the Bank a project implementation completion report no later than six months after

- 29 - the closing ofthe loan account.

Resettlement and Environment Protection Covenants

Zhejiang shall, and shall cause the Project Municipalities and their Respective Project Companies to: (a) implement policies and procedures adequate to enable them to monitor and evaluate, in accordance with guidelines acceptable to the Bank, the implementation ofthe Environmental Management Plan, the Resettlement Action Plans, and the achievement ofthe objectives of said Plans, including the engagement of experienced and qualified independent monitoring agencies acceptable to the Bank; (b) include the results ofsuch monitoring and evaluation activities in annual reports by independent monitoring agencies, together with any revisions proposed to be introduced into such Plans in order to achieve their respective objectives; and (c) introduce such revisions into such Plans as shall have been agreed with.

H. Readiness for Implementation 1. a) The engineering design documents for the first year's activities are complete and ready for the start ofproject implementation. 0 1. b) Not applicable.

iXi 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. Ixi 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. 0 4. The following items are lacking and are discussed under loan conditions (Section G):

I. Compliance with Bank Policies 1. This project complies with all applicable Bank policies. 0 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies.

wjjef&boes Team Leader Country ManagedDirector

- 30 - Annex 1: Project Design Summary CHINA: Zhejiang Urban Environment Project

Sector indicators: Sector/ country reports: (from Goal to Bank Mission) Strengthen environmental urban water quality indicators national and local statistics of continued economic growth xotection and natural water pollution and urbanization 'esource management mprove urban management growth of urban economics statistical reports and reform offinancial and md public service provision and coverage ofinfrastructure occasional sector reviews enterprise systems

Voject Development Outcome I impact Project reports: (from Objective to Goal) lbjective: indicators: mprove sustainability, :fficiency and equity ofurban levelopment in Ningbo, jhaoxing and Hangzhou hrough: 0 Improved coverage and area, population, and volume operational and monitoring Industrial pollution discharge effects of sewerage of sewerage in urban and reports of wastewater is controlled and sewer services suburban locations; water companies connections made quality at canals, rivers, lakes Environmental monitoring and Hangzhou Bay; duration reports and extent of flooding 0 Improved efficiency and :ost recovery user charges, operating and financial political will to reform sustainability ofbasic revenue collection, autonomy reports ofutility companies, utilities, performance utility services afutilities, financial reports by municipal incentive system, effective performance, asset quality regulators sector regulation 0 Improved collection and volume ofgarbage collected, operational and financial efficient collection fiom all disposal of solid waste gas recovery volumes and reports SWM companies, residential and industrial revenues, general appearance environmental monitoring areas irban areas reports 0 Renovation and :ea1 estate market operational reports from quality ofrenovation, real upgrading ofhistoric levelopment, property values housing agencies, reports and estate marketing strategies housing areas statistics from taxation bureaus 0 Historic area upgrading iuality of conservation annual reports Cultural experience and skills of and cultural heritage neasures Heritage Bureaus contractors conservation 0 Tourism development lumber oftourists, Tourist Bureau statistics Preparation and implementation oftourism strategy

- 31 - Output from each Output Indicators: Component: Collection and disposal of Area coverage of sewer progress reports, wastewater tertiary sewer systems are wastewater systems, number ofpeople companies' operation reports built, residences and connected, volume delivered businesses connected at treatment plants Wastewater treated 160,000 m3ld South WWTP operation reports adequate wastewater volumes Jiangdong WWTP, 30,000 to sustain biological processes, m3ld Zhenhai WWTP adequate funding for operation Effluent reuse in urban volumes ofeffluent taken WWTP operation reports marketing by wastewater landscape maintenance from WWTP companies Pollution reduction in canals, water quality classification EPB monitoring reports household connection plan lakes and rivers implemented, industries connected to sewer network. treatment plants operating effectively [mproved utility management level of user charges, annual financial reports strengthening regulatory md finances collection performance, wastewater companies regime, pace ofinstitutional efficiency operations reform, human resource development [ncreased tourism statistics from tourism bureau, annual reports tourism expanded and improved economic development bureaus and taxation tourist facilities, establishment growth departments of a responsive tourist service industry Vingbo Sludge Management Quantities ofsludge Wwtp operation reports Adequate wastewater treated; Plan satisfactorily treated and adequate operating budget for disposed of sludge disposal Dongqianhu Catchment Lake water quality improved EPB reports Policy instruments and Management Plan and sustained controls implemented ?reject Components / Inputs: (budget for each Project reports: (from Components to Su b-components: component) Outputs) Vingbo South Jiandong sewerage and $44.2 million progress reports quality construction and :reatment plant installation Ehenhai sewerage and $25.1 million progress reports quality construction and uastewater treatment plant installation Zicheng Infrastructure $3 1.6 million progress reports simultaneous renovation of Redevelopment houses and relocation of enterprises Dongqian Lake Development $40.5 million progress reports timely integration with other (NBF) development activities Shaoxinq gousing renovation $76.9 million progress reports consultation & participation community, timely resettlement, 3eritage conservation $10 million progress reports quality and skills of contractors, effectiveness of supervision Jnderground infrastructure $10 million progress reports Coordination different utilitier

- 32 - Canal rehabilitation and flood $10 million progress reports quality of construction and control installation Roads, bridges and parks $15 million progress reports quality construction, community participation Hannzhou Solid waste disposal $33.3 million progress reports quality construction toe dam and liner placement

Technical assistance $8.6 million progress and consultant knowledgeable consultants, reports adequate budgets, qualified counterparts

ZUEP Monitoring Indicators

Monitoring Indicator 2003 2004 2005 2006 2007 2008 2009 2010

Tariff Increase Ningbo wastewater (average Yim3) 0.45 0.45 0.45 0.59 0.59 0.59 0.79 0.79 Hangzhou Solid Waste (tipping fee Yit) 15 49 83 105 105 105 105 105

Sewerage - Jiangdongnan (Ningbo) New secondary sewers - length (km) 11.4 7.4 7.7 13.6 9.9 5.3

Wastewater treatment in Ningbo city - South Jiangdong WWTP (m3id x 1000) 100 100 100 100 150 150 310 360 - Zhenhai WWTP (m3id x 1000) 44 44 44 44 44 44 74 74 - sewage treatment coverage (%) 27 28 28 27 38 37 72 80

Shaoxing Upgrading - housing renovatiodresettlement (%) 10 50 20 10 10 - water quality canals (Class) V IV IV - sewerageltreatment coverage (%) 50 70 72 74 76 79 82 85 - sewage treatment capacity (m3id x 1000) 300 550 550 550 600 600 600 600

Cicheng Upgrading - housing renovatiodresettlement (%) 15 45 30 10

- sewerage coverage (%) 30 50 80 90 90 90 - sewage treatment capacity (m3/d x 1000) 10 10 10

Dongqian Lake Redevelopment - Lake water quality (Class) IV IV IV IV IV IV IV 111 - sewerage coverage (YO) 50 55 60 65 70 - sewage treatment capacity (m3/d x 1000) 20 20 20 20

Note: any tariff adjustments are subject to national and municipal laws and regulations

- 33 - Annex 2: Detailed Project Description CHINA: Zhejiang Urban Environment Project

By Component:

Project Component 1 - US$44.17 million Sewerage and Sewage Treatment in South Jiangdong District of Ningbo Municipality Sewerage and wastewater treatment: Construction of sewerage trunk infrastructure in South Jiangdong (43 km pipes and 4 lift pumping stations) of Ningbo municipality, including a wastewater treatment plant (secondary treatment) with capacity of 160,000 m3/d and discharging to the nearby Yongjiang river. The wastewater flows from Cicheng town and Dongqian Lake area sewerage systems will be connected to the treatment plant in South Jiangdong through pumping stations and pressure mains with a length of 12.7 km and 12.5 km respectively.

Component Description Capacity/size I Function Sewer system Constructionof new PVC and reinforced PVC sewers, DN300 to DN400, 19.2 km I To convey wastewater produced in the 1 concrete (RC) sewers from DN300 to RC sewers, DN.500 to DN2200,23.4 !a southem catchment (current pop. DN2200 to strengthen existing sewerage River crossings, 0.6 km Approx. 335,000) ofNingbo city to the network, intercept sewage flows currently Total length of all pipelines, 43.2 km Jiangdongnan WWTP. discharged to river and connect system to the proposed Jiangdongnan WWTP. Sewage lift Constructionof two new lift sewage pumping Ningzhong PS (refurbish) 540 Us (peak) Pumping stations and refurbishment of two existing lit? Wudongzha PS (refurbish) 790 lis (peak) and convey to the proposed WWTP Stations stations. Wangchun PS (new) 530 Us (peak) Qioubi PS (new) 330 Us (peak) Jiangdongnan Construction of an activated sludge treatment Average daily flow 160,000 m3id Wastewater plant with biological and chemically assisted area, and from Yinzian, Dongqian Treatment Plant Phosphorus removal. Includes inlet pumping, Lake, and Cicheng fine screens, grit removal, anaerobic and aerobic tanks, final settlement tanks and sludge dewatering. Vehicles - to be 3 vehicles for staff transport Truck (4.5 t), sludge transport, 8 Nos Provide transport for company staff and located at new 13 vehicles for operational uses Excavator (1 .5 t), for sludge, 2 Nos improve efficiency of wastewater WWTP Truck (1.5 t), sewer maintenance, 2 Nos company operations. Truck (5 t), flat bed for general use 1 No Minibus 1 No, Coach 1 No, Car 1 No

Project Component 2 - US$25.08 million

Sewerage and Sewage Treatment in Zhenhai district of Ningbo Municipality

Construction of sewerage trunk infrastructure in Zhenhai district (44 km of pipes and 6 lift pumping stations) ofNingbo municipality, including a wastewater treatment plant (secondary treatment) with an initial capacity of 30,000 m3/d, discharging to the sea.

- 34 - Component I Description I Capacity/size I Function Sewer system in I Constmction of new PVC and reinforced concrete I PVC sewers, DN300 to DN400, 24.1 km I To convey wastewater produced Chengguan (RC) sewers from DN300 to DN1400 to strengthen RC sewers, DN500 to DN1400,20.0 km in the Chkngguan catchkt of catchment of existing sewerage network, intercept sewage flows Crossings, 0.1 km Zhenhai (current pop. Approx.

Zhenhai currently discharged to river and connect system to Total length of all oioelines.SI 44.2 km 100.000) to the urouosed the proposed Zhenhai Houhaitang WWTP. - 1 2heha;Houhaitan‘g WWTP. Sewage lift Construction of five new lift sewage pumping Dongmen PS (refurbish), 170 I/s (peak) 1 To lift sewage into the hunk Pumping Stations stations and refurbishment of one existing lift station Linjiang PS (new), 125 lis (peak)- sewers to the proposed WWTP in Chengguan Weihailu PS (new), 610 I/s (peak) catchment of Hongyuan PS (new), 75 lis (peak) Zhenhai cHaitian PS (new), 75 Vs (peak) Zhenhai Average daily flow 30,000 m3/d To treat the wastewater from the Houhaitang treatment plant with biological and chemically Chengguan urban district of Wastewater assisted nutrient removal. Includes inlet pumping, Zhenhai. Treatment Plant screens, grit removal, anoxic tank anaerobic tank, oxidation ditch, final settlement tanks, sludge dewatering and short sea outfall.

Project Component 3 - US$31.64 million

Infrastructure Upgrading in Cicheng Town in Jiangbei District of Ningbo Municipality

The proposed infrastructure improvements under ZUEP, which are complementary to a larger redevelopment and conservation of this historic town, consist ofrehabilitation and expansion of the traditional road infrastructure (total 12.5 km) with associated underground infrastructure, sewage collection, pumping main and treatment facilities (10,000 m3/d), modest ringroad and bridges along the historic moat around the town (5 km), dredging of the moat (1 10,000 m3), embankment repairs and flood control structures.

Component Description Capacity/size Trunk and Main and secondary sewers laid in roads in the old PVC sewers, DN300 to DN400, 10.0 km To improve water quality in secondary sewers. town to provide a separate sewerage system, RC sewers, DN500 to DNXOO, 2.2 km the moats and watercourses o intercepting sewage currently entering watercourses Total length of all pipelines, 12.2 km the old city. from the old city, and convey sewage to a transfer pumping station. Sewage transfer Construct new sewage pumping station adjacent to Cicheng PS (new, Phase l),189 Ws (peak) pumping station old town and transmission pipeline to head of RC pipe, DN 600, 12.7 km Cicheng to Jiangdongnan and pumping main gravity trunk sewer in Jiangdongnan WWTP WWTP for treatment (assuming catchment. “centralized” treatment option is adopted). Road Improvement Upgrade roads in the old town in accordance with Urban roads: Total length of 13.3 km, with works the Master plan. Work to include re-surfacing with widths varying between 6 and IOm. X RC vehicles to specific areas of stone paving, removal of illegal structures bridges with spans from 6 to 12 m. the old town. obstructing traffic flow and new bridges over new Ring road: Total length of 5 km, with width of 7 Resurfacing with stone canals. m. 4 RC bridges with spans from 15 m to 25 m. paving to make roads more in Provide ring road and associated bridges around the Note: Roads widths include lanes for motor keeping with historic old town adjacent to moat. vehicles and cvcles and footuaths. character of old city

- 35 - Project Component 4 - US$40.48 million

Road and Sewerage Infrastructure Dongqian Lake in Ningbo Municipality

The project is assisting the rapid development in the area through clean-up of the lake through additional sewerage and treatment infrastructure to intercept the numerous discharges of wastewater to the lake (some 50 km ofpipes, 8 pumping stations, pumping main (12.5 km) to Jiangdongnan WWTP in Ningbo). In addition, the project will improve access to the lake by expanding and rehabilitation of the road system along a part of its shores (33 km)

Description Capacity/size Function Trunk sewers to intercept sewage discharges PVC sewers, DN300 to DN400 - 25.4 km. To prevent wastewater currently entering the lake. Sewage pumping mains GRP sewers, DN300 to DN500 - 5.6 km entering the lake. Improve associated with network pumping stations. RC sewers, DN300 to DN900 - 22.0 km water quality in the lake. Steel sewers, DN700 - 1.5 km. Total length of all sewers - 54.5 km. Eight sewage pumping stations transferring flows No 2 PS (new -temporary) 10 lis To pump collected sewage around Dongqian Lake. No 3 PS (new - phase 1) 100 l/s around the lake to Pumping No 4 PS (new -phase 1) 20 lis Station for pumping to No 5 PS (new - phase 1) 40 lis Jiangdongnan WWTP No 7 PS (new - temporav) 70 l/s No 8 PS (new - phase 1) 100 l/s Pumping station sized for approx 70,000 m3/d in Average daily flow 22,500 m3id in 2010 To transfer wastewater from pumping main to 2020. Average daily flow of 70,000 m3/d in 2020 the towns and villages Jiangdongnan WWT GRP Pumping main of 900” dia, length 12.5 around Dongqian Lake to km. Jiangdongnan WWTP for treatment vehicles for DLIDC staff transport Truck (1.5 t), for sewer maintenance 1 No Provide transport for Truck for maintenance Minibus 1 No company staff and improve Coach 1 No efficiency of maintenance Car 1 No gangs. Road construction Widening and surfacing of existing gravel roads New 6m wide road 15.3 km Improved access to and construction of new surfaced roads around the Widening and surfacing 18.1 km perimeter of lake to increase perimeter of the lake. No of culverts 48 potential for tourism r- develowment.

Project Component 5 - US$121.91 million

Housing Renovation, Heritage Conservation & Infrastructure Upgrading in Shaoxing Historic City Center

Housing Renovation and Heritage Conservation in the five historic precincts of the Old Town: improve living conditions for residents living in old Ming and Qing dynasty housing through repairs, upgrading kitchen and sanitary facilities; improve appearance ofmore recent structures to fit within the historic setting (some 1.2 million m2 floor space); restoration and some rebuilding ofhistoric and protected structures (57,000 m2) to prevent further structural deterioration and improve amenity of the historic sites for residents and tourists.

Underground infrastructure: provision of tertiary and secondary sewers in the small streets ofthe historic precincts (18 km) to intercept numerous discharges into the canals and improve the aquatic environment; water supply and gas pipelines (34 km) to improve public health and provide a cleaner energy source over frequently used charcoal. The collected wastewater will be discharged into the city-wide sewer network and subsequently treated at the recently completed sewage treatment plant.

- 36 - Canal Rehabilitation and Flood Control: Rehabilitation of the comprehensive canal system in the historic city-center (17 canals) including dredging, widening, embankment repair and reinstatement ofan old canal (350 m) to improve water quality through enhanced water circulation and benefit navigation oftour boats; rehabilitation and expansion ofthe river training works. including pumping stations (12,000 m3/d) and ‘ flow control gates (4 new, 10 repair) to increase canal flushing.

Roads, bridges andparh: repair and widening of existing roads to improve access for emergency services (24,000 m2); re-paving ofroads with more appropriate stone slabs to enhance appearance (32,500 m2); new bridges over the new canal section (4); new parks at relocated factory sites to provide recreation for residents and tourists (100,000 m2); and car parking for tourists (30,000 m2) to improve access to the historic sites and precincts.

Component Description Capacitylsize Function Restoration of Restoration and rebuilding ofprotected Protected structures - 50.275 m2 Prevention offiuther structural Historic/ structures within the historic old city. deterioration; improve amenity of Protected conservation areas for residents and Structures tourists. Improvement Renovation of Ming and Qing housing Renovate buildings - 582,200 m2 Provide improved living conditions for of historic and including modem kitchen and sanitary Demolish buildings - 269,900 m2 residents; restore historic appearance to modem facilities. Modification of more modem Modify modem buildings - 248,200 m2 conservationarea; encourage tourism. buildings in buildings to improve appearance Provide kitchens &bathrooms - 97,100 conservation m2 areas Sewerage system Construction of new sewerage pipelines to 17.8 km of DN200 and DN300 pipes Prevent domestic sewage entering the create a separate system and connected to canals. Improve water quality and local municipal sewerage system and existing environment WWTP. Provision of Provide piped water and gas distribution Water - 34.4 km of DN25 and DN200 Improve sanitation and environment improved gas systems to the conservation areas. pipes through provision of piped clean water and water supply Gas - 34.4 km of DN25 and DN200 and reduce reliance on charcoal. pipes Modification of Increasing depth of 17 canals through Dredging 100,000 m3 Clearing of the seriously silted canal urban canals dredging. Widening and new stone revetment Excavate 35,000 m3 sections. Benefits for navigation. for 5 canals. Restoration of 35Om of Stone revetment 11,500m3 Complete circuit of canals for tour boats. 1 Guanxiang River (canal) Possible water quality benefit River pumping I Svstem of uumuI. stations and Igates used to New 12,000 m3hpump station. Increased canal flushing- to one change- stations and pump water from the city moat to “flush” the Replace seven pumps in three existing per day in order to improve water qualit) control gates urban canals to improve water quality. stations, each 4,000 m3h. in urban canals for amenity purposes. Construct one new PS and flow control gates, Provide 4 new flow control gates and and rehabilitate 3 existing PS and associated repaidreplace IO others. gates Roads, bridges, Re-paving of existing roads with traditional Re-paving - 32,550 m2 Improve appearance ofhistoric car parks and stone paving, repair of existing roads, Road repair - 24,010 m2 conservation area. Provide access across public spaces construction of new bridges over new canal New bridges - 4 No new canal. Provide controlled parking and creation of spaces for landscaped parks Car parks - 29,250 m2 for tourists. Provide more landscaped 1 and car parking. Landscaped areas and parks - 98,140 m2 areas

- 37 - Project Component 6 - US$33.29 million

Expansion of Tianziling Landfill in Hangzhou City The Hangzhou project components relate to the provision of a new landfill and associated facilities, adjacent to and partially overlying the existing Tianziling landfill site located near the village of Qinglongwu, some 18 km north-west of the center ofHangzhou city. Expansion ofthe existing landfill with 22 million m3 capacity will enable the city to dispose of its garbage safely during the next 25 years, including a leachate treatment plant (1500 m3/d), and provision of additional equipment and vehicles for operation of the landfill. Facilities for landfill gas recovery and electricity production will be provided under a public-private partnership that currently is engaged with the existing landfill. The individual works proposed in this component project are summarized below.

Component 1 Description Capacity/size Function Landfill site, Construction of 22 million cubic meter 22 million cubic meter capacity landfill. Provision of safe and environmentally capacity solid waste landfill. Includes civil Leachate storage reservoir in old quarry acceptable solid waste disposal for period works for containment of solid waste, 150,000 m3 leachate storage. in excess of 24 years for the city of collection and transfer of leachate and gas Hangzhou. generated by the landfill, leachate storage, access roads and surface water control. Leachate Construction of leachate treatment plant Leachate treatment plant, 1,500 m3/d For leachate treatment to achieve national Treatment Plant (LTP). Outfall to municipal sewerage standard for discharge of industrial effluent system. to public sewer. Solid waste Provision of 28 new vehicles and mobile Compactors (various types), 3 No For staffbusiness transport and for landfill transport and landfill compactingplant including Bulldozers (various types), 5 No handling and compaction. compacting plant bulldozers, excavators and trucks Excavatoriloaders, 4 No Large dumper trucks, 7 No Sewage vacuum tanker, 1 No Truck mounted concrete mixer, 1 No Truck mounted crane (50 tonne),] No Breakdown truck, 1 No, Minibus, 1 No

Project Component 7 - US$8.52 million

Technical Assistance with InstitutionaVFinancial Utility Reform, Design Review and Construction Management, Industrial Pollution Control, Tourism Development and Heritage Conservation.

Package A - Institutional Strengthening, Financial Reform & MIS/GIS Systems (US$2.37 million)

The objective ofthe technical assistance is to give support and advice so that appropriate institutional, managerial, financial and operational arrangements are put in place to ensure operational effectiveness, efficiency ofmanagement and the financial sustainability ofthe newly formed Hangzhou Solid Waste and Ningbo Wastewater companies.

(a) Institutional and Managerial. The objectives ofthis part ofthe consultancy are to assist the companies to improve their business performance through the introduction ofappropriate institutional and management improvements. Specifically these include: (i)the development of business strategy, business plans, together with the planning processes and information systems to support these; (ii)establishing standards ofservice, setting and monitoring of

- 38 - performance targets, and establishing a framework for a performance contract with the supervising municipal government organization. Such a contract to allow for genuine autonomy ofmanagement within the scope of agreed plans and targets; (iii)reviewing the Company organization and developing manpower plans and human resources policies appropriate to autonomous enterprise companies; and (iv) undertaking related managerial training.

(b) Financial Strengthening. The objectives ofthis part of the consultancy are to strengthen the financial management ofthe companies by: (i)supporting the acquisition and initial operation ofcomputerized accounting and financial information and reporting systems (or where these already exist to review their capability and make appropriate enhancements); (ii)providing financial management reporting guidelines; (iii)the review and revision ofwater supply charges and billing and income collection systems to achieve full operating cost recovery; and (iv) conducting related financial training.

(c) Operational Enhancement. The objectives of this part ofthe consultancy are to strengthen the operational management of the companies by: (i)identifying and implementing agreed operational cost saving initiatives; (ii)introduction of advanced operational methods and equipment where relevant and cost effective to do so, including related operations training; and (iii)improvements to service quality and reliability through the use of operational standards and procedures linked to defined service standards and targets.

Package B - Design Review Advisory and Construction Management (US$3.77 million)

Objective of Technical Assistance (TA) Package B is to provide design review advisory, construction management, and quality assurance during project implementation. The International Consultant team (Consultant) are required to engage National Consultants to assist the Consultant in meeting the objectives ofthis TA.

(a) Desien Review Advisow. The objective of this portion ofthe Technical Assistance (TA) is to assist the staff of ZPMO, the municipal project offices, implementation agencies (utility companies) and the design institutes to ensure that bid documents for the project are developed with sufficient level ofquality to meet Bank standards.

(b) Construction Management. The objective of this portion ofthe TA is to assist the staff of ZPMO, MPMOs and IAs in developing and implementing a construction management program based on sound engineering practice.

(c) Oualitv Assurance. The objective of this portion ofthe TA is to assist the staff ofZPMO, the IAs, and the construction supervision companies employed by the project component offices in developing and implementing a quality assurance program. The quality assurance program must ensure that all construction meets the quality requirements identified in the contract documents signed by the Contractor and the implementing agency.

Package C - Industrial Pollution Control (US$0.89 million) Industrial wastewater accounts for a substantial proportion of the overall quantities of wastewater within the project areas, and the wastewater components under ZUEP will allow for interception and treatment

- 39 - only ofindustrial wastewater generated within the catchments of the proposed wastewater treatment plants. The majority of industrial wastewater will continue to be discharged to watercourses. Unless there is effective control ofthe pollution loads from these industries, the full benefits of ZUEP will not be realized. For this reason an effective time-bound action plan for the control ofpollution from industry in Ningbo has been prepared. The objectives of the plan are to increase the effectiveness ofcontrol of industrial pollution, both in terms of protection of water quality in receiving watercourses and to ensure sustainability of sewerage system and wastewater treatment investments. There is also evidence that water consumption per unit of output by some industry in Zhejiang is very high by comparison with experience elsewhere. A further important objective is the introduction of water conservation measures and cleaner production techniques in existing industry. This would have the benefits of resource conservation, improving process efficiency and reducing the discharge of pollutants. The reduction in pollutant discharges will extend the effective operating lifetime ofsewerage and wastewater treatment plant assets and provide added protection to water quality in the receiving waters. Therefore, the following technical assistance components have been identified:

(a) Licensing. Recommendations for improvements to the existing licensing systems have been proposed by the preliminary IPCAP study and generic licensing documentation has been prepared to assist the new WWCs including proposals for sampling and flow measurement or estimation. It is now necessary, therefore, for the wastewater companies to develop an effective licensing and permitting system for all discharges ofindustrial wastewater to their sewerage systems, as allowed for by the regulations controlling discharges to sewers and a database of all industrial wastewater discharges for each area, with each discharge being subject to limits in terms ofmaximum discharge quantity and rate and ofwastewater composition.

(b) Industrial Wastewater Monitoring. The wastewater companies clearly need to take responsibility for discharges to sewer and to develop a monitoring and control program to safeguard the operation oftheir sewerage and wastewater treatment assets. The monitoring program should target typical parameters such as CODCr, BOD5 suspended solids and ammoniacal nitrogen (ionized and unionized ammonia nitrogen) and certain other parameters characteristic ofspecific discharges such as metals, and other toxic compounds and in some instances the measurement ofwastewater flows. The principal objective ofthis component of the IPCAP is therefore to initiate an industrial discharge-monitoring program that will promote effective industrial pollution control within the Ningbo Municipality. In particular this will address the transfer ofresponsibility for industrial discharges to sewer to the WWC whilst seeking to avoid duplication ofeffort and to minimize cost.

(c) Industrial Pollution Control In Critical Catchments. The ZUEP project will provide substantial enhancement ofwastewater treatment capacity in the Ningbo municipality area, which will achieve significant reductions in pollution loads discharged to the water environment. However, there will remain very substantial discharges ofindustrial wastewater to watercourses within the municipality area, and unless these are effectively controlled the benefits ofthe major investments by the municipalities will not be fully realized. Moreover, some of the industrial wastewater discharges are to watercourses used for urban water supply and therefore threaten the quality ofwater in supply. The objective ofthis component ofthe IPCAP is to assist the Ningbo EPB to develop an effective time-bound action plan to permit sustained achievement ofwater quality objectives in critical catchments and thereby to safeguard key beneficial water uses.

(d) Water Conservation and Cleaner Production. Industrial wastewater accounts for a major

- 40 - proportion of overall wastewater flows in Ningbo city, and the generally low pollutant concentrations in many industrial wastewater discharges indicates that water use is very inefficient. Preliminary studies identified that of the industrial water consumption, around 28.5% originated from water supply companies with an equivalent amount being abstracted direct from rivers for cooling purposes. Comparison ofwater consumption figures, from enterprises audited in Ningbo, with benchmark data and observed values ofnonproductive water consumption, indicates that potential water savings of 30 to 90% ofcurrent usage are possible and it is concluded that overall potential savings ofat least 50% are achievable. The objective for water conservation and cleaner production is the development ofa time-bound program for water conservation within enterprises in the Ningbo Municipality with the objective ofachieving a 50% reduction in water consumption by the year 2010.

(e) Sludge Management Plan Ningbo. Ningbo is embarking on a major program of wastewater treatment in addition to that included in the project but there were no comprehensive plans for disposal ofwastewater treatment sludge. As part of the ZUEP preparation an outline Sludge Management Plan has been prepared covering the long term disposal needs ofall wastewater treatment sludge from Ningbo. The first stage of this plan was completed during project preparation and the completion ofthe plan will be supported in the technical assistance program.

(0 Catchment ManaPement Plan Donqian Lake. The Dongqianhu component was initially dominated by engineering projects the benefits of which were not demonstrated quantitatively and did not contribute adequately to the long term sustainable management ofthe lake. As part ofZUEP preparation a outline Catchment Management Plan for the lake was prepared and identified a range of policy instruments to sustain lake water quality. The technical assistance will support the responsible agencies will the further development ofthe catchment management plan.

Package D - Tourism Development and Community Participation (US$0.75 million) The tourism industry in Ningbo and Shaoxing is in its very early stages of development. The Strategic Plan that was recently developed for some “early actions” indicates the potential of the tourism industry to be expanded significantly. The challenge Ningbo and Shaoxing face is to manage the direction of tourism growth in a wise manner from this early point in its development, to avoid the problems that have occurred in so many new tourism destinations where careful planning was lacking. The tourism industry is at a critical moment in its evolution and the Municipalities have the opportunity to maximize tourism’s economic benefits through a Master Plan that will set the tourism industry on a clear and productive path over the next 15 years.

Tourism Development. The objectives of the TA include assistance with the development of: (a) Master Planning - Both cities have their Tenth Five Year Plan for Tourism but the plan lacks a vision and a set of actions and investments for the next ten to fifteen years that are agreed upon by Shaoxing’s public and private sectors involved in tourism There is no overall strong central Plan guiding the decisions made in each of the cities and there is a need to establish a stronger central authority over tourism development in the areas; (b) Information Collection - Successful ’ tourism destinations are those that have accurate knowledge about their tourism markets and expenditures. Both cities have inaccurate tourism visitation statistics and it is difficult to calculate real growth in real tourism (and not recreation) each year as well as to evaluate the success of marketing efforts or to make corrections in the approach to marketing and product development. Internationally applied method of collecting tourism arrivals statistics will be

-41 - introduced; (c) Training - Many of the people who were interviewed during the project preparation expressed a need for training that will help them to make their cities more competitive in the international, global tourism market. The lessons of other tourism destinations in the world show that the more highly trained the managers, the more successful the tourism industry; (d) Private Sector Participation - Experience elsewhere have shown clearly that the most successful tourism industries are those where there is a strong and positive relationship between government and the private sector. Some tour operator companies from the private sector have expressed their desire to work more closely with government to develop tourism. Currently, they are largely separate from government and there is only limited cooperation and the TA will ensure that the private sector is given a regular opportunity to work with govemment and to provide its advice and input to decision-making; (e) Zoning for Tourism - One of the problems faced by the tourism industry around the world is conflicting land uses. There is a need for tourism zoning that ensures that “tourism zones” are identified in areas where there is strong potential, or where there are excellent resources for tourism. A key output ofthe TA will be a Tourism Zoning map that is agreed upon by government, and that protects those areas most suited to tourism from the establishment of conflicting land uses; (f) Product Development - “Product” means the attractions (i.e., historical, cultural, nature-based, man-made) and infrastructure base that are required by tourists (Le., hotels, gas stations, transportation, arts and crafts, etc.). At present, there are some improvements that need to be made to local product to make Ningbo and Shaoxing a more attractive tourism destination, and to provide increased opportunities for tourists to spend money and, hence, to stimulate economic development. The TA will identify those priority components of the local tourism product that need to be developed or improved to make the city more competitive; (g) Market Research and Marketing - The most successful tourism destinations are those who study their markets, understand them, plan their product for them, and market to them effectively. The TA will develop a data base on the various types of markets with greatest potential to come to Ningbo and Shaoxing, and will establish a Marketing Plan to attract these markets. Community Particbation. Another objective ofthis TA is to determhe the means by which stakeholders within the various communities affected can participate in and benefit from the employmentleconomic development opportunities that are projected to occur as a result ofthe project, particularly in the tourism industry in Shaoxing. Assistance include: (a) identification ofkey stakeholders, and assessment oftheir interests, capacities, conflicts and likely levels of suppodparticipation in projected outcomes ofproject implementation; (b) identification ofsocioeconomic development activities, issues and needs, and their relationships to preservation and tourism goals; (c) identification ofeconomic developmentlincome generating activities for the project area communities that can contribute positively to conservation and tourism goals, and assessment ofpossible means by which to support such development; (d) identification ofthe current involvement ofthe population in tourism and opportunities for community-based initiatives in the tourism sector; and (e) assessment ofcurrent levels ofparticipation ofcommunities in decision-making related to the project, and existing structures for participation.

Package E - Heritage Conservation and Urban Upgrading (US$0.77 million)

Space Planning & Resettlement Planning. Building on the findings ofthe Jishan Social Survey, the needs ofoccupants who stay or move out (residential and other) will be assessed on a 100% interview basis through the agency responsible for resettlement, housing allocation and property rental. The needs ofthe, as-yet unknown, purchasers or tenants who will move into the upgraded building stock will determined by a form ofmarket survey. Clustering ofretained premises and vacated premises will need to be identified in order to devise new accommodation plans which provide increased space per occupant, allow for the expressed needs ofresidents and particularly to satisfy functional needs such as maintenance of access and provision ofbathrooms and kitchens. The responsible agency for this work would be the resettlementlproperty allocation department. The disciplines required for this work are: estate manager;

- 42 - estate surveyor/property officer; social worker from an NGO; market researcher; and an interiors architect.

Monitoring and Post-evaluation. This is a wide-ranging task aimed at assessing the performance ofhistoric conservation and upgrading using Jishan precinct as a pilot. Monitoring and evaluation indicators have been drafted (Interim Report Table 13.2). They need to be refined and formally adopted by SMG. They should cover comprehensively the full range ofimpacts and implications arising from the works in Jishan precinct including: impacts from resettlement and occupation ofupgraded premises by existing and new occupants; improvement in standard ofliving and in services; property and rental values and the take-up of upgraded property; the physical quality ofbuildings, landscaping and public spaces; population, employment, tourism and the economy; investment by property owners on maintenance and improvements; community participation; and sustainability ofinstitutions; etc. Another aspect is the degree ofsuccess in applying the conservation principles and guidelines manual. The task requires: establishment of a framework for monitoring; recording ofinformation or assessments by relevant disciplines; analysis and interpretation of findings; and feedback to improve planning and implementation in the other precincts and in Gucheng in general. The responsible agency for this work would be the HPCMO. The disciplines required are: resettlement specialist; conservation architect in quality control; economist/property market specialist. Training in Management & Maintenance ofRenewed property. This task is about training and skills development for the management and maintenance ofupgraded property in the conservation precincts. The Task would be the responsibility ofHPCMO in conjunction with the resettlemendproperty allocation department. The discipline involved is estate management and the organization ofmaintenance. This task involves comprehensive training across the spectrum of conservation management approaches and techniques, covering: familiarization with conservation charters; exposure to international practice to widen experience, extend the imagination and vision of what is possible; knowledge of good conservation practice; conservation in the context ofurban planning; design, materials technology and building services for conservation, building component by component using the already drafted Conservation Principles and Guidelines (by DRA consultants); refinement and publication ofthe manual; and maintenance techniques, and funding mechanisms and conditions. This task would be effected through participatory training workshops in Shaoxing and an international study visit, together with application to sub-packages E. 1 and E.2 specifically. The responsible agency would be HPCMO in conjunction with SPMO. .The disciplines involved would be conservation architect, building materials specialist, property market specialist, estate manager, estate surveyor/property officer, resettlement specialist, and recreatiodtourism planner. Exdanatorv Plans and Public Information. Through the formulation ofdetailed plans for the conservation precincts, the idea would be to produce more detailed plans ofan explanatory nature to better communicate with the public, concerned professionals and to feed back into the updating process for the Shaoxing Urban Master Plan. The responsibility would rest with the SPMO and the City Planning and Design Research Institute (within the Construction Bureau). A high level planner from the government side would be needed to act as a catalyst for changes in the plan preparation and publication process. The planner would need to work closely with a publicity specialist. Social Assessment in Historic Precincts. A social survey in Jishan precinct has already been completed and provides a model for further surveys in the other four precincts. A TOR for this work is covered elsewhere. TrainindStudv Tours. In addition to participatory workshops conducted in Shaoxing, there would be a domestic study tour, an overseas study tour, and funding of some junior professionals to attend a short course in heritage conservation. The domestic study tour would be for the purpose of the top level management (suggested four persons) in the SPMO and HPCMO to visit, observe and gain from the experience and processes of an advanced or completed World Bank supported cultural conservation project

- 43 - in China. The overseas study tour would be to three canal towns in Holland (e.g. Leiden, Delft, Utrecht and Amersfoort) for one week, with a two day stay in Singapore on the return leg. Holland is a lowland country with similar physiography to Shaoxing and laced with historic canals; these towns have inner city canal environs at a similar scale to Shaoxing; many of the canals are narrow like in Shaoxing; there is a long and successful track record ofcultural heritage conservation in a canal environment; and these areas have a great attraction to townspeople, local and foreign tourists alike; and in Singapore to see efforts at conservation in a Chinese environment, en route back from the visit to Holland.

- 44 - Annex 3: Estimated Project Costs CHINA: Zhejiang Urban Environment Project

Ningbo (1) South-Jiangdong sewerage and wastewater treatment 19.61 18.55 38.16 (2) Zhenhai sewerage and wastewater treatment 1 1.94 9.65 21.59 (3) Cicheng Infrastructure Development 2 1.49 6.29 27.78 (4) Dongqian Lake Infrastructure Development 21.50 13.87 35.37 S haoxinn (5) Historic City-center Development and Conservation 70.82 35.56 106.38 Hannzhou (6) Tianziling Landfill Expansion 18.41 11.50 29.86

(7) Services, Training & Implementation Support 26.70 5.90 33.61

Total Baseline Cost 190.48 101.33 292.75 Physical Contingencies 15.24 7.32 22.63 Price Contingencies 9.38 9.24 18.68 1 Total Proiect Costs 215.10 117.89

Front-end fee Total Financing Required 4334.32

Goods 6.70 22.33 29.03 Works 106.52 88.86 195.38 Land Acquisition and Resettlement 72.16 0.00 72.16 Services, Training & Implementation Support 29.73 6.69 36.42

I Total Proiect Cost; I 215.10 I 117.89 I 332.99

Front-end fee 1.33 1.33 Total Financing Required 215.10 119.22 334.32

1 Identifiable taxes and duties are US$13.26m and the total project cost, net oftaxes, is US$321.6m. Therefore, the project cost sharing ratio is 41.43% of total project cost net of taxes.

Initial cost estimates for the Zhejiang Urban Environment Project have been prepared by the local design

- 45 - institute on the basis of a mixture of government price books, the institute’s own experience and cost data obtained from local construction units and project offices for similar types ofwork recently undertaken in Shaoxing, Hangzhou and Ningbo municipalities. The intemational consultant for design review and advisory (DRA) has carried out an independent check of these estimates, using the following approaches:

0 For treatment plant, pumping stations and flow control gates costing models were used developed by the DRA on previous WB projects in China and calibrated for Zhejiang. 0 For the geomembrane liner in Hangzhou the rates were based on supply costs for CIF Shanghai and added a reasonable allowance for laying in China. 0 For vehicles and compaction plant (8% of total base cost for Hangzhou) quotations from reputable suppliers with offices in Shanghai were obtained. 0 For pipelines unit rate cost models were updated using typical pipe supply and laying costs obtained from recent contracts in the Ningbo area. 0 For specialized work types, such as building renovation, the DRA has used unit rates based on the actual costs incurred for similar work undertaken in a number of streets in the Gucheng area of Shaoxing during the preparation phase. 0 For general civil works items such as road construction rates were based on out-tum cost data from intemational cost consultant firms, who are extensively involved in the property and industrial construction sector in the Shanghai area and adjacent provinces. A further check on the project’s cost estimates was done with cost data from recent Bank-funded urban environment projects in Hebei and Hubei provinces. Cost and related design data were obtained from both Hubei (sewerage - out-tum costs) and Hebei (Tangshan and Handan WWTP -bid costs). These costs were then compared with the costs predicted by the cost models for this project using the same design details. To enable the two sets ofcost data to be compared the costs were adjusted using factors to compensate for capacity differences between the different schemes and location variations in costs found between different provinces in the PRC arising out ofdifferences in economic development and availability ofprimary construction materials. As a result is was found that the treatment plant cost estimates were close to actual bids received in Hebei while the sewerage cost were adjusted downwards with an average 5% based on out-tum costs in Hubei. In conclusion, the above described process for cost estimation resulted in an overall cost reduction ofsome 20% compared to the original cost estimates prepared by the local design institutes. Although this is somewhat less than the cost savings occurring on many of the urban projects in China (20-30%), the cost estimates for the project appear appropriate, considering also that the previous Bank-funded project in Zhejiang did not incur substantial cost savings.

- 46 - Annex 3: Estimated Project Costs CHINA: Zhejiang Urban Environment Project (US$ million) ------2006 - Project Cost By Component LC Total -LC Total LC Total LC FX Total ------Hangzhou 1. Tianziling Landfill Expansion 9.2 1.8 11.0 6.5 4.5 10.9 1.4 2.0 3.4 1.o 2.0 3.0

Shaoxing 2. Cultural Heritage, Housing & Infrastructure Upgrading 5.7 0.0 5.7 18.2 4.8 23.C 16.7 8.5 25.2 16.2 8.0 24.2

Ningbo 3. Jiangdongnan Sewerage & Treatment 2.4 0.0 2.4 3.0 1.9 4.8 3.9 3.3 7.2 4.9 5.5 10.5 4. Zhenhai Sewerage & Treatment 0.7 0.0 0.7 3.3 1.1 4.4 1.8 1.7 3.5 2.3 1.8 4.1 5. Cicheng Infrastructure Upgrading 0.0 0.0 0.0 8.8 0.7 9.5 5.9 1.3 7.2 4.3 1.7 6.0 6. Dongqian Lake Infrastructure Upgrading 1.2 0.0 1.2 5.4 2.8 8.2 5.9 3.8 9.7 6.0 4.0 10.0

7. Services, Training & Implementation Support 6.1 0.2 6.3 8.6 1.7 10.3 7.6 1.9 9.5 3.4 1.1 4.5

Total Baseline Cost 25.2 2.0 27.3 53.6 17.5 71.1 43.0 22.1 65.5 38.2 24.2 62.3 Physical Contingencies 2.0 0.2 2.2 4.3 I.4 5.; 3.4 1.8 5.2 3.1 1.9 5.C Price Contingencies -0.1 -0.0 -0.2 -1.O -0.7 -1.i -2.0 -1.E -3.8 -2.9 -2.8 -5.7 Total Project Cost -27.4 -2.2 -29.6 -58.9 -19.6 -78.5 -48.4 -26.; -74.6 44.1 -28.9 -73.c Interest during constmction -0.0 -0.0 -0.0 -0.0 -0.2 -0.; -0.0 -0.6 -0.8 -0.0 -1.5 -1.5 Front-end fee -0.0 -0.0 -0.0 -0.0 -0.3 -0.: -0.0 -0.: -0.3 -0.0 -0.3 -0.3 27.4 29.6 20.2 79.1 48.4 27.: 75.8 44.1 30.8 74.9 Total Financing Required - -2.3 - -58.9 - - - -2007 I 2008 2009 - - T* - Project Cost By Component LC FX Total LC FpT Total LC FX Total - - - - - Hangzhou 1. Tianziling Landfill Expansion 0.4 0.7 1.1 0.0 0.0 O.( 0.0 0.0 0.C 18.4 11.0 29.4

Shaoxing 2. Cultural Heritage, Housing & Infrastructure Upgrading 10.5 7.8 18.3 3.5 2.6 6.1 0.0 0.0 0.C 70.8 31.8 102.f

Ningho 3. Jiangdongnan Sewerage & Treatment 4.2 4.6 8.8 1.3 1.3 2.: 0.0 0.0 0.C 19.6 16.6 36.: 4. Zhenhai Sewerage & Treatment 2.2 2.5 4.7 1.8 1.6 3.1 0.0 0.0 O.( 11.9 8.7 20.t 5. Cicheng Infrastructure Upgrading 1.6 1.2 2.8 0.9 0.7 1.t 0.0 0.0 OS 21.5 5.6 27.1 6. Dongqian Lake Infrastructure Upgrading 2.3 1.5 3.8 0.7 0.5 1.: 0.0 0.0 O.( 21.5 12.7 34.:

7. Services, Training & Implementation Suppolt 1.0 0.2 1.1 0.1 0.0 0.' 0.0 0.0 0.C 26.7 5.1 31.1

Total Baseline Cost 22.- 18.: 40.6 8.: 6.8 15.( 0.0 0.r 0.C 190.: 91.: 282J Physical Contingencies 1.1 1.: 3.3 0.' 0.5 1.: 0.0 O.( OS 15.; 7.: Price Contingencies -2.. -2.: 5.0 1.: 1.2 2.: 0.0 O.( -OS -9.L -9.: Total Project Cost -26.. -22.t 48.9 IO.( 8.5 18.: 0.0 O.( -0.C -215.1 -108s Interest during construction -0.1 -2.: 2.3 O.( 2.6 2.t 0.0 2.8 -2.1 -O.( -9.1 -0.1 -0.: 0.3 O.( 0.0 O.( 0.0 0.1 -O.( -O.( -1.: Total Financing Required -26.: -25.: 51.5 lo.( 11.1 21.: 0.0 2.d -2.L -215.1 -119.; 334.3 LC: Local currency cost FX: Foreign exchange cost

- 47 - Annex 3: Estimated Project Costs CHINA: Zhejiang Urban Environment Project (Y million) - -2003 - - - - 2005 - -2006 - Project Cost By Component LC FX Total LC Total LC Fpz LC FX Total - - - Hangzhou 1. Tianziling Landfill Expansion 76.0 15.1 91.1 52.5 36.5 89.0 10.9 16.2 27.1 8.2 15.6 23.9

Shaoxing 2. Cultural Heritage, Housing & Infrastructure Upgrading 47.4 0.c 47.4 147.7 39.3 187.0 133.8 68.6 202.4 130.0 64.0 194.1

Ningbo 3. Jiangdongnan Sewerage & Treatment 19.6 0.0 19.6 24.0 15.4 39.4 31.2 26.4 57.6 39.4 44.4 83.7 4. Zhenhai Sewerage & Treatment 5.4 0.0 5.4 26.6 8.8 35.4 14.2 13.6 27.8 18.1 14.5 32.6 5. Cicheng Infrastructure Upgrading 0.0 0.0 0.0 71.4 5.7 77.1 47.2 10.7 57.9 34.3 13.7 48.1 6. Dongqian Lake Infrastructure Upgrading 9.9 0.0 9.9 44.0 22.7 66.7 47.4 30.5 77.8 48.2 32.2 80.4

7. Services, Training & Implementation Support 50,l 1.8 51.9 69.7 13.9 83.6 61.0 15.0 76.0 27.2 9.1 36.3

Total Baseline Cost 208.4 16.9 225.3 436.0 142.2 578.3 345.5 181.0 526.6 305.5 193.5 499.0 Physical Contingencies 16.7 1.4 18.0 34.9 11.4 46.3 27.6 14.5 42.1 24.4 15.5 39.9 Price Contingencies -1.1 -0.2 -1.3 -7.9 -5.7 -13.7 -16.0 14.9 30.9 -23.2 -22.4 -45.5 Total Project Cost -226.1 -18.5 -244.6 -478.9 -159.4 -638.2 -389.2 353.1 231.3 -584.4 Interest during construction -0.0 -0.1 -0.1 -0.0 -1.9 -1.9 -0.0 -0.0 -12.3 -12.3 Front-end fee -0.0 -0.0 -0.0 -0.0 -2.7 -2.7 -0.0 -0.0 -2.7 -2.7 Total Financing Required 226.1 -18.6 244.8 478.9 164.0 642.8 389.2 353.1 246.3 599.4 - -2007 ------Total - Project Cost By Component LC FX Total LC Total LC Total LC FX Total ------Hangzhou 1, Tianziling Landfill Expansion 2.9 5.7 8.6 0.1 0.1 0.2 0.0 0.0 0.0 150.6 89.2 239.8

Shaoxing 2. Cultural Heritage, Housing & Infrastructure Upgrading 84.2 62.3 146.5 27.9 20.9 48.9 0.0 0.0 0.0 571.1 255.1 826.2

Ningbo 3. Jiangdongnan Sewerage & Treatment 33.8 36.8 70.6 10.0 10.3 20.4 0.0 0.0 0.0 158.1 133.2 291.3 4. Zhenhai Sewerage &Treatment 17.8 19.9 37.6 14.2 13.0 27.1 0.0 0.0 0.0 96.2 69.8 166.0 5. Cicheng Infrastructure Upgrading 12.8 9.6 22.4 7.5 5.6 13.1 0.0 0.0 0.0 173.3 45.3 218.6 6. Dongqian Lake Infrastructure Upgrading 18.2 12.3 30.5 5.6 4.1 9.7 0.0 0.0 0.0 173.3 101.8 275.0

7. Services, Training & Implementation Support 7.7 1.3 9.1 0.8 0.2 1.0 0.0 0.0 0.0 216.6 41.3 257.9

Total Baseline Cost 177.4 147.9 325.3 66.1 54.2 120.3 0.0 0.0 0.0 1,539.1 735.7 1,274.7 Physical Contingencies 14.2 11.8 26.0 5.3 4.3 9.6 0.0 0.0 0.0 123.1 58.9 182.0 Price Contingencies -18.6 -21.6 -40.1 -8.6 -9.3 -17.9 -0.0 -0.0 -0.0 -75.4 -74.1 -149.5 Total Project Cost -210.2 -181.3 -391.4 -80.1 -67.8 -147.9 -0.0 -0.0 -0.0 -1,737.5 -868.7 !,606.2 Interest during construction -0.0 -18.5 -18.5 -0.0 -21.0 -21.0 -0.0 -18.8 -18.8 -0.0 -78.8 -78.8 Front-end fee -0.0 -2.7 -2.7 -0.0 -0.0 -0.0 -0.0 -0.0 -0.0 -0.0 -10.7 -10.7 Total Financing Required 210.2 202.4 412.5 80.1 88.8 168.8 0.0 18.8 18.8 1,737.5 958.2 1,695.7

LC: Local currency cost FX: Foreign exchange cost

- 48 - Annex 4: Cost Effectiveness Analysis Summary CHINA: Zhejiang Urban Environment Project

Zhejiang and Project Cities

1. Zheiianrr Province. Zhejiang Province is one of the most important eastern coastal provinces in China and is an integral component of the Yangtze Economic Zone, which includes over 200 million people in neighboring Shanghai Municipality, and the provinces of Jiangsu and Anhui. The region forms one of the largest concentrations of international trade and commerce in the Asia-Pacific region. Zhejiang covers an area of 102,000 km2 (1% of the national total) and has a population of about 45 million (3.5% of national total), of which 22% is urban and 78% rural. Since 1985, the population growth has averaged 0.7% per year, with an average urban growth rate of 3.2% per year, which has risen to about 4.5% per year in the late 1990s. The rural growth rate was 0.2% per year, indicating a clear trend in rural-urban migration.

2. Based on its strategic location and favorable climate, Zhejiang has developed a strong industrial sector, flourishing international trade and a prosperous agricultural base. Provincial gross domestic product (GDP) has increased over seven-fold in current prices over the last decade from Y90 billion (US$18.8 billion, at Y4.78/US$1.00) in 1990, to Y353 billion (US$42.2 billion, at Y8.35/US$1.00) in 1995, and Y675 billion (USSS1.5 billion, at Y8.28/$1.00) in 2001. By 2001, Zhejiang’s economy was the fourth largest nationally. Real economic growth averaged 7.6% between 1985 and 1990, 19.1% from 1990 to 1995, and 11% from 1995 to 2001. Economic growth is being driven primarily by the industrial sector (48% of GDP) and the tertiary sectors (29%). In this context, the rapid expansion of export-oriented development zones has been a major stimulus to the provincial economy. Total foreign trade has increased significantly, registering US$32.8 billion in 2001, compared with US$27.9 billion in 2000 and US$18.3 billion in 1999. Exports account for 70% of foreign trade, of which manufactured goods account for 90%.

3. Over the last 15 years, Zhejiang’s per capita GDP has increased nearly 13-fold in current prices, from Y1,063 (US$362) in 1985, to Y2,122 (US$443) in 1990, Y8,087 (US$970) in 1995 and Y13,461 (US$1,625) in 2000. GDP growth has been substantially above the national average; 20% above in 1985, nearly 70% above in 1995 and almost double the national average in 2000. Average per capita disposable income in 2000 was Y9,279 (US$1,120) in urban areas and Y5,325 (US$645) in rural areas.

4. The remarkable economic growth of the last 10 - 15 years and the resulting structural transformation has resulted in rapid urbanization, rising real incomes, a sustained construction boom and increasing pressure on basic infrastructure and public services. In the environmental context, this has resulted in significant deficiencies in the management of wastewater and solid waste, which the project is designed to address.

5. Hangzhou. Located on the northern bank of the Qiantang River at the apex of Hangzhou Bay, Hangzhou is the capital and largest city in Zhejiang. The total municipal population is 6.2 million, of which 3.7 million reside in the eight urban districts with the remaining population located in three county-level cities and two counties. Hangzhou accounts for about 23% of Zhejiang’s total GDP, with the city’s economy being focused on secondary (51% of GDP) and tertiary (41% of GDP) industries. In manufacturing, Hangzhou is famous for silk and satin textiles, and has also developed significant production capacity in electronics, telecommunications, machinery and transport equipment. Hangzhou is also a major national tourist destination with many ancient sites and scenic landscapes, including the internationally famous West Lake. In 2000, domestic tourist visits to the city totaled 23 million while

- 49 - international visits were just over 700,000. The value added by the tourist sector was estimated to be Y8.5 billion in this same year. Over the past decade, Hangzhou’s per capita GDP has increased more than seven-fold in current prices, from Y3,310 (US$690) in 1990 to Y25,070 (US$3,030) in 2001.

6. Ningbo. Ningbo is the second largest city in Zhejiang Province, bordering Hangzhou Bay and the East China Sea about 170 km east ofHangzhou and 108 km from Shaoxing. Ningbo’s total population is 5.4 million, ofwhich about 1.2 million reside in the five districts comprising the core city area. There are also three county-level cities and three counties within the municipality. Ningbo accounts for 20% ofthe total provincial GDP and growth in real GDP averaged 17% between 1990 and 2000 period. Secondary industry accounts for 56% ofGDP, followed by tertiary industry with 36%, and primary industry with 8%. Industrial development has been the main engine of growth, especially in textiles, machinery, petrochemicals, paper, power, electronics and metallurgy. Foreign trade has also been a major factor in Ningbo’s development, with the continuing development ofmajor port facilities at Beilun, Zhenhai and Ningbo itself. GDP per capita in Ningbo increased almost nine-fold in current prices between 1990 and 2001, from Y2,845 (US$595) in 1990 to Y24,200 (US$2,920) in 2001.

7. Shaoxing. Shaoxing is an important industrial city with an extremely rich cultural heritage, located on Hangzhou Bay about 67 km to the southeast ofHangzhou. The total population ofthe municipality is 4.3 million, the fourth largest in the province, with about 500,000 in the core urban district ofYuecheng and the rest in the five surrounding counties. Shaoxing accounts for 13% ofprovincial GDP. In real terms, GDP growth has averaged about 12% per year since 1985, and 8% to 9% over the last three years. Between 1990 and 200 1, Shaoxing’s per capita GDP has increased more than nine-fold in current prices, from Y2,OOO (US$420) in 1990 to Y19,OOO (US$2,290) in 2001. Secondary industry (manufacturing and construction) accounts for 61% of GDP, followed by tertiary industry (service sectors) with 29%, and primary industry with 10%. Industrial development has been main driver of economic growth, especially in textiles and clothing, plus machinery and chemical products. However, over the past decade, tourism has played an increasingly important role in the city’s economy. Expenditures by tourists in Shaoxing were estimated to be Y6.3 billion in 2001 and the number ofdomestic visitors increased by almost 130% between 1990 and 2000, from 3.2 million to 7.3 million. The old city area, which incorporates the five conservation precincts to be restored and upgraded under ZUEP, has a history dating back 2,500 years. The city also attracts tourists because ofits historical connections to the modem era. Shaoxing is the hometown ofmany well-known Chinese historical figures, such as the late Premier Chou Enlai, authors and scholars Lu Xun and Cai Peiyuan, and revolutionaries Xu Xilin and Qiu Jin.

B. Project Benefits and Beneficiaries

8. The physical infrastructure components ofthe project include improvements in wastewater collection and treatment in four areas ofNingbo, road improvements in Cicheng town and Dongqian Lake (Ningbo), the provision of a new sanitary landfill in Hangzhou, and housing renovation, heritage conservation and infrastructure upgrading in Shaoxing. The investments in wastewater are primarily expansions ofexisting sewer network, in some cases to new catchment areas, and additional treatment of waste that is presently discharged untreated to watercourses. The new landfill in Hangzhou will be constructed adjacent to and eventually on top ofpart ofthe existing Tianziling Landfill, which is at the end ofits operating life. The road upgrading in Cicheng is part ofa larger redevelopment and conservation project for this historic town. The road improvements in Dongqian Lake constitute part ofthe basic infrastructure for this newly developing residential and commercial zone ofNingbo. The housing renovation and cultural heritage to be undertaken in Shaoxing will improve housing conditions for residents ofthe historic five precincts ofthe old town and restore historic and protected bui1dings;which is of national importance. The project will also provide modem underground infrastructure to the five precincts,

- 50 - including sewers, water supply, gas, electricity, and telephone.

9. Where possible, economic benefits were quantified for each project component. In cases where this was not possible, a qualitative assessment ofthe projects benefits has been undertaken. Of those benefits that could be quantified, those relating to tourism are the most significant, particularly in Hangzhou and Shaoxing. A summary ofthese benefits by project component is given below for each project city.

10. Hanrrzhou. The new landfill to be constructed under the project will be the primary means for the sanitary disposal ofmunicipal solid waste in Hangzhou. As such, the project beneficiaries constitute 70% - 80% of the population in the urban districts ofthe municipality. The main project benefits are: improvements in public health; environmental quality and quality of life; the generation ofenergy from landfill gas; and the provision ofthe basic environmental infrastructure necessary for the continued development oftourism in the city.

1 1. Under the “without project” scenario, the resulting lack of adequate solid waste disposal would have a direct and potentially significant adverse impact on Hangzhou’s status as a major tourist destination in China, both for domestic and international visitors. Tourism presently accounts for 6% ofHangzhou’s GDP and much ofthis is focused on the natural and cultural amenities in and around the West Lake area of the city. Even if the impact on tourism under the “without project” is very limited, it would be significant relative to the total size ofthe project. For example, the loss in tourism benefits would exceed the total present value (PV) ofthe capital and operating cost ofthe project if the reduction in existing value added from tourism exceeds only 0.75%.

12. Ninrrbo. The four wastewater components ofthe project (Jiangdongnan, Zhenhai, Cicheng, Dongqian Lake) will increase the volume ofwastewater treated in Ningbo from 290,000 m3/d to 450,000 m3/d. The project will also increase the utilization of existing treatment capacity through an expansion of the sewer network. The population directly benefiting from these service improvements is estimated to be about 600,000 in 2008, when the project assets are fully operational, and will then increase to over 800,000 by 2020. The non-wastewater improvements in Cicheng and Dongqian Lake will benefit existing and future residents of these communities as well as tourists visiting these areas. The project will improve public health, quality of life, environmental quality, flood control, transportation within and around Cicheng and Dongqian Lake and protect and enhance tourism in all of the project areas, but particularly in Cicheng and Dongqian Lake.

13. As a proxy ofthe quality oflife and environmental benefits accruing to households from the project wastewater improvements, the willingness to pay for these improvements has been estimated. Over the economic life of the project, the PV ofthis willingness to pay is estimated to be Y49 1 million, equivalent to 70% of the project capital cost. Public health benefits are estimated to be a further Y97million, although a portion of this benefit may have been captured within willingness to pay. Both the wastewater and other project infrastructure improvements will support the development oftourism in the Dongqian Lake area and enhance and expand tourism in Cicheng Town. The PV of these tourism benefits is estimated to be Y287 million over the project life, equivalent to almost 60% ofthe project capital cost.

14. Shaoxing. The project will upgrade housing and provide improved infrastructure (wastewater, water, electricity, gas, telephone) services to the five historic precincts ofthe old city and thereby directly benefit the 20,000 residents ofthis area. The project will also provide the restoration ofhistoric and protected buildings, rehabilitation ofcanals, road widening, new bridges and parks in the historic city. These improvements will benefit all residents of Shaoxing as well as the tourists who will visit this culturally and historic significant area.

- 51 - 15. Of those project benefits that can be quantified, tourism is the most significant. Tourism presently accounts for about 6% of Shaoxing’s GDP and the main attractions for visitors to the city are located within the historic precincts to be restored and upgraded under the project. As part ofproject preparation, a tourism and cultural heritage strategy was developed for Shaoxing, which includes projections oftourist visits over the 2002 - 2015 period. These projections have been prepared under a “with project” scenario and estimate that visits will increase at an average annual rate of 3.5% to 2005, 5% from 2006 to 2010 and 5.5% from 201 1 to 2015. Domestic tourists will continue to account for over 90% of visits over this period. The length of stay is also projected to increase from the current average of 1.2 days to 2.2 days by 2015. Under the “without project” scenario, the projected growth in tourist visits is lower; 3% over the entire period to 2015. Furthermore, under this scenario, a lower increase in the average length ofstay is projected; from 1.2 to 1.5 days. The difference in tourist expenditures between the two scenarios is the incremental benefit of the project. The PV ofthese expenditures over the project life is Y829 million, which exceeds project capital and operating costs, which are estimated to be Y675 million.

C. Economic Analysis

16. Methodolom. Although some ofthe project benefits have been quantified and are discussed below, many of the benefits, particularly those relating to environmental and public health improvements could not be quantified. For this reason, the choice for priority interventions for the project has been guided by cost effectiveness analysis. Additionally, average incremental costs (AIC) in both economic and financial terms have been calculated and compared to average tariffs, in constant terms, to evaluate the subsidy element of the project components (Table 1). Incremental costs and output are calculated from the difference between a “with project” scenario and the “without project” scenario. The economic costs for the components are determined by making adjustments to the component’s financial costs. All taxes and duties were excluded from the calculation. Price contingencies, interest during construction and net working capital increases are also excluded.

17. Cost Effectiveness Analvsis. Alternative project designs were identified and evaluated in order to identify the least cost solution for incorporation into the project. The findings ofthese analyses are presented below and summarized in Tables 1 and 2.

Table 1: Summary ofLeast Cost Analysis for Wastewater Treatment

Options PV Costs AIEC Selected (Y million) (Yim3) Option A. Zhenhai WWTP Extended Aeration Activated Sludge (A20) 71 1so Treatment Process Sequencing Batch Reactor (SBR) 71 1.49 Oxidation Ditch 69 1.45 X B. Jiangdongnan Extended Aeration Activated Sludge (A20) 216 0.85 X WWTP Treatment Sequencing Batch Reactor (SBR) 203 0.80 Process Oxidation Ditch 233 0.92 Centralized at Jiangdongnan 31 1.66 X C. Cicheng - Centralized vs. Decentralized - WWTP in Cicheng 35 1.85 Decentralized

- 52 - 18. Hangzhou Landfill. The project design is based on the least cost solution of constructing a new sanitary landfill adjacent to and partially overlying the existing Tianziling Landfill. Landfilling ofwaste was selected because it is significantly less costly than alternative disposal systems such as incineration. Furthermore, incineration does not completely replace the need for adequate landfill capacity because ofthe requirement for ash disposal. Composting and recycling can be used to reduce waste, but again these alternatives do not eliminate the requirement for landfilling. Additionally, composting has a very mixed record of success in China due to the lack ofadequate markets for composted materials and technical problems in operating large scale composting facilities.

19. Nine alternative sites for the new landfill were identified and assessed. Of the nine sites, only two warranted a detailed evaluation; adjacent to the existing Tianziling Landfill and at Jinling Mount, near Shima village. The Tianziling site was determined to be the preferred. It possesses a greater capacity, has fewer environmental constraints, is closer to Hangzhou and, because it is adjacent to the existing landfill, has a less complicated approval process. Furthermore, by combining the two landfills on the same site, cost savings can be realized because some ofthe existing infrastructure, such as the power plant, the access road, and buildings, can be used for the new landfill. The ability to use this existing infrastructure, combined with the larger capacity available at Tianziling, means that the capital cost m3 ofwaste is about 20% lower than that estimated for Jinling Mount. The estimated capital cost is Y13.Ym3 for Tianziling and Y16.8/m3 for Jinling Mount. Additionally, unit operating costs at Tianziling should also be lower. Staffing efficiencies can be achieved because some ofthe same staff can be used both the new landfill and for post closure management ofthe old landfill. The cost oftransporting waste to Tianziling will also be lower because it is closer to Hangzhou. Therefore, ofthe two alternatives, Tianziling is the least cost solution.

20. Ningbo - Zhenhai Wastewater Treatment. A least cost analysis was undertaken to support the selection ofthe preferred secondary treatment process. The alternatives considered were extended aeration activated sludge (A20), sequencing batch reactor (SBR) and oxidation ditch ( Table 1). Both the A20 and oxidation ditch systems are common in China and generally have good operating records. Relative to the oxidation ditch, the A20 process has a higher capital cost, including equipment replacement over the life ofthe system, but has lower operating costs. The SBR system is less common, requires higher automation and, therefore, may be less suited to application in China. However, it does possess a number ofadvantages including shock load resistance, high capacity and flexible operations, and requires less land than either the A20 or oxidation ditch. Although the difference is only very marginal, the least cost solution was determined to be the oxidation ditch. On this basis, as well as due to its favorable operating record and applicability to China, the oxidation ditch has been selected as the preferred alternative.

2 1. Ningbo - Jiangdongnan Wastewater Treatment. The least cost analysis was used to support the selection ofthe preferred secondary treatment process among three alternatives; A20, SBR and oxidation ditch. Of the three alternatives, the SBR is estimated to have the lowest life cycle cost; Y0.80/m3 compared to YO.8Ym3 for A20 and Y0.92/m3 for the oxidation ditch ( Table 1). However, the difference is not significant with the estimated cost ofthe A20 process being only 6% higher. Furthermore, as noted above, there are comparatively few existing SBR

- 53 - applications in China and there is concern with repairing SBR decanters in China. Additionally, the SBR process is typically supplied as a proprietary process. In contrast, because the A20 process is much more common in China, difhsers are now manufactured in China and maintenance and equipment replacement is much easier. For these reasons, the A20 process is selected as the preferred alternative even though its estimated cost is slighter higher than that for the SBR process.

22. Ningbo - Cicheng Centralized vs. Decentralized Treatment. Two options for the treatment ofwastewater generated in Cicheng town: (i)centralized treatment at the new Jiangdongnan WWTP; or, (ii)decentralized treatment by constructing a small WWTP in Cicheng. Under the centralized option, the capital and operating cost ofwastewater treatment would be lower but there would be additional costs associated with the construction and operation ofthe 12.7 km pipeline between Cicheng and Jiangdongnan. The centralized option was determined to be least cost solution. The life cycle unit cost ofthis option is estimated to be Y 1.66/m3 compared to Y 1.85/m3 for decentralized treatment (Table 1). On this basis, centralized treatment has been selected as the preferred option.

23. Ningbo - Cicheng Pipeline Diameter Optimization. The life cycle cost of a range of pumping main diameters has been estimated to determine the least cost pipe diameter. Two different planning horizons have been incorporated into the analysis; the shorter-term horizon in which the average flow is 10,000 m3/d, and the longer-term in which the average flow is 20,000 m3/d (Table 2). Over the shorter-term, the costs of the 500 mm and 600 mm diameter options are essentially the same at Y14.6 million and Y15.0 million respectively. Over the longer-term, the 700 mm diameter is least cost although the 600 mm and 800 mm options are only about 10% more costly. Based on these findings, the 600 mm is the recommended diameter because it represents a reasonable compromise solution for both the shorter and longer planning horizons. However, the final selection ofpipe diameter will be made during detailed design after adequate consideration of all relevant technical issues. These include the risk ofsediment deposition and septicity in a larger diameter pipeline over the shorter term due to low peak velocities and long retention times.

24. Ningbo - Dongqian Lake Pipeline Diameter Optimization. The life cycle cost of a range of pumping main diameters has been estimated to determine the least cost pipe diameter for the 12.5 km pipeline that will convey sewage from the Dongqian Lake area to the Jiangdongnan WWTP. Two different planning horizons have been incorporated into the analysis; the shorter-term horizon in which the average flow is 20,000 m3/d, and the longer-term in which the average flow is 70,000 m3/d (Table 2). For the shorter-term, the costs ofthe 700 mm and 800 mm diameter options are essentially the same at Y14.8 million and Y14.9 million respectively. Over the longer-term, the 1100 mm and 1200 diameter pipelines represent the least cost solutions. Based on these results, the 900 mm diameter represents a good compromise solution between the results for the shorter and longer terms. However, this depends on the ultimate flow generated and the period over which this ultimate flow is achieved. If flows increase relatively rapidly toward an ultimate flow of 70,000 m3/d, then it may be preferable to initially construct a 700 mm diameter pipeline and then construct a second 700 mm pipeline in the hture. However, if flows increase at a relatively slower rate or do not ultimately reach 70,000 m3/d, the single 900 mm option is

- 54 - considered to be preferable. This issue will be reviewed in greater detail during preliminary and detailed design in order to finalize the selection.

Table 2: Summary ofLeast Cost Analysis for Wastewater Transfer Pipeline Diameter

PV Costs (Y million) Recommended Option Shorter Term Flows” Longer Term Flows2’ A. Cicheng 300 mm 43.5 n.a. 400 mm 17.5 64.2 500 mm 14.6 29.6 600 mm 15.0 21.1 X 700 mm 16.1 19.1 800 mm n.a. 21.1 B. Dongqian Lake 600 mm 16.4 n.a. 700 mm 14.8 n.a. 800 mm 14.9 58.4 900 mm 17.6 41.4 X 1000 mm 23.1 34.1 1100 mm n.a. 31.5 1200 mm n.a. 31.8

I’ Cicheng: 10,000 m3/d;Dongqian Lake: 20,000 m3/d. *’Cicheng: 20,000 m3/d;Dongqian Lake: 70,000 m3/d.

25. Shaoxing - Cultural Heritage, Housing and Infrastructure Umzrading. Consistent with a least cost approach to achieving the development objectives, the project design is based on investments that are the most cost effective. The main development objectives for this component are to preserve the heritage of Shaoxing’s historical past and to ensure that a socially and economically viable community is maintained and enhanced in those areas to be upgraded under the project. Therefore, the most cost effective investments are those likely to have the greatest impact in promoting economic growth and sustainability within the project communities. This depends on making the communities viable and attractive places to reside, work and to visit. Consequently, the project interventions are targeted specifically at achieving these goals.

26. Shaoxing - Housing Uunrades. As an historic area, most ofthe existing housing stock is old and increasingly unattractive in its present form and condition for modem residential use. With the recent reform ofChina’s housing sector, a very wide range ofmore modem housing altematives now exist outside the old city. Therefore, if left unchecked, the resident population in the old city is likely to progressively decline, which would serve to gradually undermine the social and economic viability of these communities. Consequently, the largest sub-component of project works in Shaoxing, almost $92 million or 75% of the

- 55 - total, will upgrade about 1.2 million m2 ofthe existing housing stock while at the same time retaining its historic and cultural value. This will include increasing average floorspace by combining two or more existing small units into a single larger residence. It will also provide modem kitchen and sanitary facilities within existing housing and convert some housing into commercial uses. The housing improvements will also upgrade building exteriors using historically appropriate methods, thereby enhancing the residential appeal of the communities, as well as maintaining and strengthening their tourism potential. Some existing modem buildings in the old city will need to be demolished in order to restore the historic appearance ofthe area on which tourism depends. However, wherever possible, this will be minimized in favor ofthe lower cost altemative ofmodifying building exteriors.

27. Shaoxinn - Restoration ofHistoric Buildinas. The second largest sub-component in Shaoxing is the restoration and rebuilding ofdesignated historical buildings in the old city. The total floorspace of buildings to be restored is estimated to be 57,000 m2 at a total cost ofalmost $15 million, equivalent to 12% of the total cost ofthe Shaoxing component. Most ofthese buildings are considered ofbeing of national importance in terms oftheir heritage value and draw large numbers oftourists to the city. Therefore, if allowed to deteriorate, the resulting adverse impact on tourism would be significant. This would not only undermine the core economic base ofthe old city but would have a wider impact on the entire municipality.

28. Shaoxina - Improved Utilities Services. Complementing the housing upgrades and building restorations, this sub-component will provide improved utility services to residents and visitors, including sewerage, water, gas, power, and telecommunications. The total cost ofthis sub-component is estimated to be just over $4 million, equivalent to 3% of the total Shaoxing component. The sewerage improvements, which constitute almost 40% of the cost ofthis sub-component, will provide for the replacement ofthe existing combined collection system with a fully separated system. These works adopt the least cost solution ofconnecting the new separated system to the existing municipal sewer system so that the wastewater generated in the old city can be treated at an existing treatment facility.

29. Shaoxina - Improvements to Urban Canals, Roads. Bridges Car Parks & Public Spaces. This total cost ofthis sub-component is estimated to be $11 million, equivalent to 9% ofthe Shaoxing component. The urban canal improvements will improve water quality in the canals and enable navigation by tour boats. Although the capital cost of canal improvements is relatively low, the operating costs ofthe pumps needed to flush the canals are potentially significant. Therefore, the focus ofthe least cost analysis was on optimizing pumping arrangements. This involved modeling flushing volumes under different pump capacities, pumping times, and gate designs. Based on this analysis, a preliminary design was developed that reduced the cost ofpumping by 45%, to Y6,OOO per day from the Y11,OOO per day originally estimated on the basis ofinitial designs.

30. Shaoxina - Justification for Government Intervention. Government financing ofmost ofthe project cost is justified for two major reasons. First, approximately 70% ofthe housing in the old city, and virtually all of the historic buildings, are owned and managed by the municipal government. Therefore, as owner ofthese properties, it is appropriate that the municipal government bear the cost ofupgrading. Second, the upgrading ofboth public and private properties creates significant extemalities because the benefits extend well beyond the level ofindividual households and businesses. These include the cultural value ofappropriately restored and upgraded buildings, the public health benefits ofimproved water and sanitation facilities, and the significant economic activity generated by tourists attracted to the old city. Much of these benefits cannot be intemalized although a portion ofthe tourist benefits accruing to businesses located in the restored areas will be captured through increased rents for commercial properties. Additionally, 45% ofthe cost ofinterior upgrading ofprivately owned houses is to be borne by individual

- 56 - homeowners to reflect the direct benefits they accrue from this work. However, these internalized benefits will be small relative to the total cost ofthe project.

3 1. Average Incremental Economic Cost (AIEC). The AIECs for the Hangzhou solid waste and Ningbo wastewater project components are calculated as the PV ofthe sum ofcapital and operational and maintenance costs (evaluated at economic prices) divided by the PV ofthe quantity ofoutput. For each component, the AIEC was calculated on the basis of the economic life ofthe project. For the Hangzhou SWM component, this is the 28 year period from 2003 to 2030, which includes a two year landfill closure and site remediation phase. For the wastewater components in Ningbo, the economic life of the project is the 39 year period from 2003 to 2038. The economic opportunity cost ofcapital (EOCC), assumed to be 12%, was used to discount incremental costs and volumes in order to calculate the AIEC.

Table 3: Summary of Economic and Financial Analysis

AIEC AIFC FRR Tariff" I WACC e!) 2008 2010 Ave. e?)

Hangzhou Solid Waste flit) 68 49 1.3 45 52 45 3.3 Ningbo Wastewater (Y/m3) A- Zhenhai 3.56 1.99 n.a. n.a. n.a. n.a. 2.8 B - Jiangdongnan 1.34 0.84 n.a. n.a. n.a. n.a. 2.6 C- Cicheng 2.02 0.86 n.a. n.a. n.a. n.a. 2.8 D - Dongqian Lake 2.90 1.27 n.a. n.a. n.a. n.a. 2.8 Total - Ningbo 1.81 1.03 n.a. 1.54 2.09 1.53 2.7

Tariffs expressed on a PV basis discounted at WACC. For the wastewater components, the average tariff is calculated as the realized revenue divided by volume of wastewater treated in order to provide a basis for comparison of AIEC and AIFC. Average wastewater tariff calculated on the basis of projected tariffs over the 2003 - 2017 period. Average solid waste tariff calculated on the basis ofprojected tariffs over the 2003 - 2010 period.

32. Hanmhou Solid Waste. The difference between the AIEC and the average tariff represents a mix of economic and financial subsidies. The AIEC is calculated to be Y68/t, which exceeds the present value ofthe projected average tariff over the project life, which is Y45/t. The difference, Y23/t, represents an economic subsidy. This subsidy is attributable to two main factors. First, it incorporates a financial subsidy, estimated to be Y4/t, which reflects equity contributions by the municipality toward the cost of fixed assets, including the ZUEP fhded landfill. Second, an economic subsidy arises from the pricing distortions that exist in the markets for capital and operating inputs consumed in the construction and operations of the solid waste management system.

33. Ningbo Wastewater. The AIECs for the Zhenhai, Jiangdongnan, Cicheng and Dongqian Lake components are Y3.5611113, Y1.341m3, Y2.021m3 and Y2.90Im3, expressed on the basis ofwastewater treated. The overall AIEC for the four components is Y 1.8 llm3. The significant variations in the AIEC reflect significant differences in the both the capital and operating cost structures between the four components. Although the cost structures ofthe various components differ, a uniform wastewater tariff is

- 57 - applied in all areas served by the NSCL. The present value of the average wastewater tariff, expressed in terms ofwastewater treated, is projected to be Y1.54/m3 in 2008, Y2.09/m3 in 2010. Over the entire 2003 - 2017 forecast period, the average tariff is projected to be Y 1.53/m3 ofwastewater treated. The difference between this average tariff and the overall AIEC, which is Y0.28/m3, represents an economic subsidy. Most of this subsidy is attributable to the pricing distortions that exist in the markets for capital and operating inputs consumed in the construction and operations of the wastewater system. A significant portion ofthis subsidy is due to the subsidized cost ofproject financing provided through loans that carry interest rates below the opportunity cost of capital as well as government equity contributions.

34. Sensitivitv Analysis. An analysis was conducted for project items that have an impact,on the project’s economic viability and for which there is considerable uncertainty. Table 4 summarizes the results of the sensitivity analysis on the economic parameters. For all project components, the AIECs are most sensitive to variations in capital costs.

Table 4. Results of Sensitivity Analysis

Key Variable Change Wastewater Zhenhai Jiangdongnan Cicheng Dongqian Lake AIEC AIFC AIEC AIFC AIEC AIFC AIEC AIFC

Base Case 3.56 1.99 1.34 0.84 2.02 0.86 2.90 1.27 Capital Cost +lo% 3.83 2.10 1.43 0.88 2.21 0.92 3.16 1.37 O&M Costs +lo% 3.64 2.08 1.39 0.89 2.04 0.88 2.94 1.31 Combination 3.92 2.19 1.48 0.92 2.23 0.94 3.19 1.40

Key Variable Change Solid Waste Hangzhou FIRR AIEC AIFC

Base Case 1.3 68 49 1. Capital Cost +lo% 0.2 72 52 2. O&M Costs +lo% -0.3 70 52 3. Combination of (1 + 2) -1.4 74 54

D. Financial Analysis

35. Methodolow. In order to determine the financial viability of the solid waste management project component in Hangzhou, the financial rate ofreturn (FRR) is calculated. The FRR is defined as the discount rate, or rate of return, which equalizes the present value (PV) of incremental project costs to the PV ofincremental revenues. The Project component is considered to be financially viable if the FRR is equal to, or greater than, the actual cost ofproject funding which is referred to as the weighted average cost ofcapital (WACC). In the case ofthe Ningbo wastewater project components, the city employs a polluter-pay approach to the application ofwastewater charges in that all wastewater generators pay the charge regardless ofwhether they are connected to the public sewer. Consequently, while the wastewater

- 58 - system expansions provided under the project will significantly increase the proportion ofthe population receiving service, the proportion ofthe population paying the charge will remain unchanged. As a result, increases in revenues will be limited to that resulting from tariff increases and population growth. For this reason, the concept ofincremental revenues underlying FRR is not fully applicable and, therefore, FRR is not calculated for the wastewater project components.

36. An analysis ofthe cost effectiveness and subsidy requirements ofboth the solid waste and wastewater project components has been undertaken. The average incremental financial cost (AIFC), which is an approximation ofthe long run marginal cost, is calculated. The AIFC is defined as the PV of capital and operation costs at financial prices divided by the PV of the quantity ofwastewater treated and paid for in each year over the life ofthe system. The PV is calculated by discounting all cash flows at the WACC. In order to identify those factors posing the greatest risk to the financial viability of the Project, an analysis ofthe sensitivity ofFRR and AIFC to adverse changes in selected key variables is also undertaken.

37. Maior Assumutions. The period ofanalysis is the economic life of each project component, which is the same as that employed in the economic analysis. The FRR is calculated on a pre-tax basis. All revenues and costs are expressed on an incremental basis in constant 2003 prices. Capital costs are baseline costs plus physical contingencies. In addition, an allowance for the replacement ofmechanical and electrical components over the economic life ofthe project is made. Incremental revenues over the 2003 - 2018 are projected on the basis ofthe average tariff requirements determined for each project company. Beyond 2017, user fees are assumed to remain at 2018 levels. As shown in Table 3, the WACC is calculated separately for each project component and varies between 2.6% and 3.3% depending on the precise financial structure ofeach component.

38. Hangzhou Solid Waste. The FRR is calculated as 1.3%, which is slightly below the WACC, which is estimated to be 3.3% (Table 3). Therefore, the project does not achieve full cost recovery over its entire life. However, the project does fully recover all operating costs and about 85% ofcapital costs. The AIFC, which is calculated on the basis ofZUEP funded landfill, is estimated to be Y49lt. Given that the present value ofaverage tariff over this same period is estimated to be Y45/t, the financial subsidy is the difference; Y41t. This subsidy is provided in the form of equity contributions by the municipality toward the cost offvted assets, including the ZUEP funded landfill.

39. NinPbo Wastewater. The AIFCs for the Zhenhai, Jiangdongnan, Cicheng and Dongqian Lake components are Y1.991m3, YO.84lm3, YO.86lm3 and Y1.27lm3, expressed on the basis ofwastewater treated. The overall AIFC for the four components is Y l.O3/m3. As was the case for the AIECs, the significant variations in the AIFCs reflect significant differences in the both the capital and operating cost structures between the four components. The AIFC for the Zhenhai project component is the highest because district’s location well outside the core city area ofNingbo, a relatively small-scale treatment plant needs to be constructed for the district. Although wastewater from the Dongqian Lake area will be pumped for centralized treatment at Jiangdongnan, the cost ofconstructing and operating the pipeline increases its AIFC. The Jiangdongnan AIFC is lower because ofthe economies ofscale of constructing and operating a relatively large centralized treatment plant.

40. A comparison ofthe AIFC with the average tariff will indicate the presence ofany financial subsidies. Since the average tariff, which is Y 1.53lm3 of wastewater treated over the 2003 - 2017 forecast period, is actually higher than the overall AIFC ofY1.031m3, the net subsidy over this period is zero. However, while the overall net subsidy is zero, subsidies are provided in form ofmunicipal and district government contributions toward the capital cost ofZUEP. The average tariff exceeds the AIFC because of the anticipated need to implement significant tariff increases in 2010 and 201 1. These increases will be

- 59 - needed to cover the capital and incremental operating costs associated with a major wastewater expansion project planned to be implemented over the 2008 - 2012 period.

41. Sensitivitv Analvsis. An analysis was conducted for project items that have an impact on the project’s financial viability and for which there is considerable uncertainty. Table 4 summarizes the results. In the case ofthe Hangzhou solid waste component, the FIRR is most sensitive to variations in revenue. The AIFC for this component is equally sensitive to changes in capital and operating costs. For the wastewater components in Cicheng and Dongqian Lake, the AIFC is most sensitive to changes in capital costs. In the case ofthe Zhenhai and Jiangdongnan wastewater components, the sensitivity ofthe AIFC to changes in capital and operating costs is essentially the same.

Summary of benefits and costs:

Main Assumptions:

Cost-effectiveness indicators:

- 60 - Annex 5: Financial Summary CHINA: Zhejiang Urban Environment Project A. Municipal Finances

1. An analysis ofthe availability of counterpart funds was undertaken by reviewing revenues and expenditure in each ofthe project cities. Table 1 presents a summary of this analysis. Detailed tables for revenues and expenditures are available in the project file. The data analyzed refer to what is referred to in Chinese government accounting as on-budget and off-budget funds. On-budget and off-budgetary funds include revenues from statutory taxes and levies. Their allocations are subject to approval by higher level ofgovernments. Off-budget are non-tax revenues such as net income remitted from municipally controlled enterprises, and some types of user charges collected by administrative departments. There is less control by higher level ofgovernment on these revenues sources. In all three project municipalities, some ofthe off-budget funds are actually transferred to on-budget revenues and are generally allocated for the purpose ofcapital investments. One ofthe most important off-budget sources offunds for the three cities that is partially allocated to the on-budget capital investment fund is the proceeds of long-term leases ofmunicipal land.

2. The primary source of funding for counterpart funding in the three project cities is the urban construction maintenance funds (UCMF) ofthe municipal governments. Therefore, the capital investment capacity ofeach municipality, and particularly the ability ofeach city to provide the necessary counterpart funding, is assessed on the basis ofthe UCMF. In the case of the Ningbo wastewater component, a portion of the counterpart funds will also be contributed by the Zhenhai District Government from its UCMF and from the internally generated revenues ofthe Ningbo Municipal Sewage Company Limited (NSCL). For the Dongqian Lake component in Ningbo, the project implementing agency, the Dongqian Lake Investment and Development Company Ltd. (DLIDC), will provide the full amount ofthe counterpart contribution.

3. The analysis ofhistorical trends indicates very large increases in revenues and expenditures in recent years in the project cities. This is a reflection ofthe strong economic growth in the cities and throughout Zhejiang Province over the past decade. For example, between 1999 and 2002, total municipal revenues increased at an average rate of25% in Hangzhou, 21% in Ningbo and 14% in Shaoxing. Total revenues generated by Zhenhai District also increased by similar rates; about 15% per year over this same period. In the case ofNingbo, Zhenhai District and Shaoxing, the revenues allocated to the UCMF increased even more rapidly than total revenues. Over the 1998 - 2002 period, revenues allocated to the UCMF increased at annual average rate of33% in Ningbo, 17% in Zhenhai and 51% in Shaoxing. The increase in Hangzhou averaged 10% per year between 1998 and 2002, lower than the increase in total municipal revenues, but still very significant. These very high growth rates in capital funding are a reflection ofthe focus ofthe cities in making the infrastructure investments needed to improve living standards and provide the basis for sustainable economic growth.

4. Financial projections have been prepared to assess the capacity ofthe three project municipalities and Zhenhai District to provide the necessary counterpart funding for ZUEP. Relative to actual growth rates over the recent past, the projections are based on more conservative assumptions, both for total revenues as well as that portion allocated to the UCMF. Over the 2003 - 2008 period, UCMF funding is projected to increase at an average annual rate of 10% in Hangzhou, 3% in Ningbo and 6% in Shaoxing. Funding allocations to the UCMF in Zhenhai District are actually projected to decline by a total of20% over this period because of an expected reduction in the sale oflong-term leases ofdistrict controlled land.

-61 - Table 1: Municipal Finances (Y million - current prices) 2003 2004 2005 2006 2007 2008 2009 Total

Hangzhou Municipal Government Municipal Revenue 13,090 14,280 15,652 L 7,046 18,625 20,349 22,233 121,274 Capital Investment Capacity 6,063 6,561 7,191 7,83 1 8,557 9,349 10,214 55,765 Project Contributions 43 64 20 0 0 0 0 126 Project as % of Revenues 0.3% 0.4% 0.1% 0.0% 0.0% 0.0% 0.0% 0.1% Project as % of Capital Budget 0.7% 1.O% 0.3% 0.0% 0.0% 0.0% 0.0% 0.2%

Ningbo Municipal Government Municipal Revenue 4,954 5,270 5,617 5,999 6,419 6,880 7,388 42,527 Capital Investment Capacity 1,070 1,100 1,134 1,171 1,249 1,332 1,422 8,477 Project Contributions 23 45 42 34 27 0 2 173 Project as % ofRevenues 0.5% 0.9% 0.7% 0.6% 0.4% 0.0% 0.0% 0.4% Project as % of Capital Budget 2.2% 4.1% 3.7% 2.9% 2.2% 0.0% 0.1% 2.0%

Zhenhai District Government District Revenue 740 820 886 964 1,045 1,132 1,227 6,814 Capital Investment Capacity 124 131 138 150 163 177 192 1,074 Project Contributions 7 20 2 1 23 11 0 63 Project as % of Revenues 0.9% 2.5% 0.2% 0.1% 2.2% 1.0% 0.0% 0.9% Project as % of Capital Budget 5.5% 15.6% 1.2% 0.4% 13.9% 6.1 % 0.0% 5.9%

Shaoxing Municipal Government Municipal Revenue 2,352 2,618 2,912 3,240 3,604 4,008 4,459 23,192 Capital Investment Capacity 1,534 1,653 1,734 1,843 2,050 2,281 2,537 13,632 Project Contributions - Total 67 166 144 120 66 5 9 575 Project as % of Revenues 2.8% 6.3% 4.9% 3.7% 1.8% 0.1% 0.2% 2.5% Project as % ofCapital Budget 4.3% 10.0% 8.3% 6.5% 3.2% 0.2% 0.3% 4.2%

5. Based on the conservative assumptions regarding future revenue growth, the analysis indicates that the project components are affordable in all three cities. The project will be relatively greater impact in the case ofZhenhai District, though still affordable. Requirements for project counterpart funds from the three municipal govemments and Zhenhai District as a proportion oftotal revenues vanes between 0.1% in Hangzhou (0.4% in the peak year), 0.4% in Ningbo (0.9Y0 in the peak year), 0.9% in Zhenhai District (2.5% in the peak year), and 2.5% in Shaoxing (6.3% in the peak year). When considering only revenues that can be allocated to the UCMF, which is an approximation offinancial capacity to contribute to the project, the incidence ofthe project counterpart funds varies between 0.2% on average in Hangzhou (1 .O% in the peak year, 2004), 2.0% in Ningbo (4.1% in the peak year, 2004), 5.9% in Zhenhai District (15.6% in the peak year, 2007), and 4.2% in Shaoxing (10.0% in the peak year, 2004).

- 62 - 6. While the impact ofcounterpart funding on the capital budgets is within the range considered to be affordable, there is some uncertainty regarding actual revenues available to fund these budgets over the project implementation period. This uncertainty arises because the UCMFs are relatively dependent on less certain off-budget sources offunds. An important source offunds for the UCMFs in all three municipalities and Zhenhai District is the proceeds of long-term leases ofmunicipal land, an off-budget item. For example, in 2002, land lease revenues are estimated to have comprised 35%, 38% and 52% of total allocations to the UCMFs in Shaoxing, Zhenhai District and Ningbo respectively. Annual revenues from land leases could vary significantly from year to year in response to changes in the overall rate of economic growth and in the demand for land. Projected revenue from land leases are based on the very conservative assumption oflittle or no growth over the project implementation period. In fact, for Ningbo, annual revenues are assumed lower over the 2003 - 2008 period than in 2002 in order to reflect expected trends.

7. To evaluate the sensitivity ofproject affordability to the risk of counterpart funds shortages, a worst-case scenario for the project was also projected. Under this worst-case scenario, revenue from land leases is assumed to be only half that projected under the base case scenario. This scenario would reflect a major decline in the real estate markets of the cities. However, even under this extreme scenario, the project remains affordable. Project contributions as proportion ofthe capital budget would be 2.2% in Ningbo (4.5% in the peak year, 2004), 6.9% in Zhenhai (18.5% in the peak year, 2004) and 5.1% in Shaoxing (12.0% in the peak year, 2004). Although affordable, Zhenhai would need to carefully manage its capital budget, particularly in the 2004 peak year, in order to ensure the ZUEP counterpart funds are made available in a timely manner. The impact of this scenario is assessed for Ningbo, Zhenhai District and Shaoxing. This scenario is not applied to Hangzhou because even if land lease revenues were zero, the project would remain affordable.

B. Project Company Financial Projections and Institutional Arrangements

8. Financial projections have been prepared for each ofthe project companies on an annual basis over the 2003 - 2015 period. These projections are based on the requirement of each company to comply with the agreed upon financial covenants regarding cost recovery, debt service coverage, and internally generated contributions toward capital investments. Summary financial projections for each company are given in Tables 5 - 7. Detailed fmancial projections are included in the project file.

- 63 - Ningbo Municipal Sewage Company Ltd.

9. Institutional Set-up. Until late 2002, the wastewater sector was managed under a pre-reform structure with government departments being responsible for all capital, operating and maintenance functions. The major sector assets, including the sewer mains, pumping stations, and wastewater treatment plant were under the management ofthe Urban Facilities Management Division (UFMD), which reported to the city government through the Urban Management Bureau (UMB). Local sewers were under the management of the district governments. Capital and operating costs were funded by municipal government budgetary allocations, a portion ofwhich was derived from by a surcharge on the water bill. However, in 2002, the city began implementing a major reform of the sector to bring it into compliance with national policies. In November 2002, the Ningbo Municipal Sewage Company Limited (NSCL) was legally established to own and operate all major wastewater infrastructure in the city. The NSCL is owned by two government companies, the Ningbo Municipal Tap Water General Company (NTWC - 55%) and Ningbo Construction and Shareholder Company (45%). The majority ownership ofthe NSCL by the NTWC has proven to be an effective arrangement that could serve as a model for other Chinese cities. NSCL’s senior management team has come from the NTWC, which has given it an immediate competence in public utility management. This shareholding arrangement has also meant that agreements for combined billing and collection ofthe water and wastewater tariffs, which are critical to the financial autonomy ofthe NSCL, have been quickly concluded and implemented.

10. Within its geographic jurisdiction, the NSCL owns and operates all wastewater treatment plants (WWTP), all pump stations, the sanitary sewer system, and the combined sanitaryhtormwater system. The company is not responsible for the separate stormwater system, which will remain with the municipal government. All fixed assets within the core urban districts of the city that are due to be the responsibility ofthe NSCL have been transferred. All staff responsible for the operation and maintenance ofthese fixed assets have been reassigned to the company.

1 1. Reform Framework The design and phasing ofthe financial and institutional reforms for the Ningbo wastewater component have been based on the Bank’s experience with similar recent projects in China. The Bank’s approach has been to support State policies for the wastewater sector, which promote the corporatization of sector assets and operations. Corporatization is intended to improve efficiencies in the sector as well as to better facilitate adequate and timely tariff increases by establishing a more transparent and commercially oriented basis for cost recovery. However, in some cases, the achievement of these goals has been limited because corporatization has initially been extended only to those facilities being constructed under the Bank-fbnded project. As a result, existing assets have continued to be operated under a pre-reform arrangement by bureaus ofthe municipal government, at least over the project implementation period. This then has meant that cost recovery and tariff setting have not been fully brought within the new corporatized framework for the sector. In fact, in most cases where these pre-reform arrangements for existing assets have been maintained, there is no direct financial or legal relationship between the wastewater tariff and the new wastewater company. The tariff continues to be a fee applied under the legal authority of the municipal government rather than the wastewater company. As such, all tariff collections have continued to be remitted to the municipal government with the wastewater company then being dependent on municipal budgetary allocations, which are not necessarily related to the amounts actually collected. This disconnect between the tariff and the wastewater company, and the resulting lack of financial autonomy, have been important factors that have limited the effectiveness ofthe overall reform program in these Bank-funded projects.

12. Based on the Bank’s experience, the reform plan developed for Ningbo has been specifically extended to the entire wastewater sector in the city. Furthermore, the basic elements ofthis plan have

- 64 - already been implemented during project preparation. As noted earlier, the NSCL was established during project preparation and has already assumed ownership and direct operating responsibility for all existing wastewater assets. The wastewater tariff was re-established as a utility company tariff and, since March 2003, all collections have been remitted directly to NSCL. Therefore, the structures needed to facilitate timely and adequate tariff increases have already been put into place. A major increase in the tariff, which should be sufficient to meet the company’s needs until at least the end of 2005, has been approved by the municipal govemment and is now awaiting final concurrence from the provincial government. The existing arrangement under which the billing and collection ofthe wastewater tariff is undertaken by the Ningbo Tap Water General Company (NWTC) will be maintained. Since the introduction ofthe wastewater tariff in 1999, NWTC has undertaken this function and collection performance has been very good, averaging more than 90%. The financial projections conservatively assume that collection performance declines significantly in response to the tariff increase. However, the new tariff is projected to be sufficient to meet NSCL’s financial needs even under such a worst-case scenario.

13. With the basic reform framework having been put into place, the focus ofthe program will now shift to the implementation ofthose detailed program elements needed for NSCL to complete its transition from govemment unit to autonomous utility company. To date, management’s focus has been on company establishment and the transfer of assets, staff and revenues. As a result, most ofthe planning, management and financial systems required by the company have yet to be fully developed and implemented. A priority task over the coming year will be to formalize the staff transfers from the municipal government to NSCL. Although NSCL is responsible for these staff, which includes personnel management and payment of wages, salaries and benefits, they still retain their status as government employees. The municipal government is presently developing procedures for the transfer or termination ofbenefits for staff transferred from govemment to all companies under its control. Once developed, these procedures will be applied to NSCL and the legal transfer of staff can be completed. These procedures are expected to be in place by early 2004.

14. Tariff Requirements. A wastewater surcharge on the water bill was introduced in July 1999 and set at YO. 10/m3 for all customers. In May 2003, this municipal surcharge was eliminated and replaced with a wastewater tariff applied by the NSCL. As such, the tariff is billed and collected together with the water bill and remitted directly to the NSCL rather than to the Municipal Finance Bureau, as was the case with the surcharge. In August 2003, the municipal government approved a major increase in tariff levels that will bring the average tariff to about Y0.49/m3 (Table 2). Under this new structure, tariff levels vary by customer group ranging from Y0.25/m3 to Yl.OO/m3 for special uses. These new tariffs will be implemented by October 2003 after final concurrence from the provincial govemment. Over the period to 2010, additional tariff increases totaling just over 60% will be required, bringing the average tariff to Y0.79/m3. These increases are presently proposed to be implemented in two years; 2006 and 2009. The 2006 increase is part ofa planned restructuring ofwater and wastewater tariffs in which increasing block tariff structures for both services are to be introduced. The increase in 2009 is largely related tQthe commencement offull operations ofthe ZUEP assets together with debt service on the project loan.

- 65 - Table 2: Ningbo - Existing and Projected Wastewater Tariffs (Y/m3 water consumed, current terms) Customer Group Actual Approved I Projected Jan 2003 Dec 2003 2004 2005 2006 2007 2008 2009 201C

Domestic 0.10 0.25 0.25 0.25 0.30 0.30 0.30 0.41 0.41 Institutional 0.10 0.40 0.40 0.40 0.48 0.48 0.48 0.65 0.65 Commercial 0.10 0.60 0.60 0.60 0.72 0.72 0.72 0.97 0.97 Industrial 0.10 0.60 0.60 0.60 0.72 0.72 0.72 0.97 0.97 Special Uses 0.10 1.00 1.00 1.00 1.20 1.20 1.20 1.62 1.62 Average 0.10 0.49 0.49 0.49 0.59 0.59 0.59 0.79 0.79 % Increase” 0% 0% 20% 0% 0% 35% 0%

l’ Refers to % increase in weighted average tariff.

15. Financial Performance. By implementing the required increases in tariffs in 2006 and 2009, together with improvements in collection performance, the NSCL will generate cash surpluses, a portion of which can be contributed toward the capital cost ofZUEP (Table 5). Over the 2004 - 2008 project implementation period, internally generated revenues are estimated to be able to fund 16% ofthe cost of the Ningbo wastewater component. With full operations ofthe project assets and debt service commencing in 2009, net income is projected to decline but remain well within acceptable levels.

Hangzhou Solid Waste Management Treatment Company Ltd.

16. Institutional Set-up. Until the reforms implemented in late 2002 and early 2003, solid waste management services were provided directly by government bureaus at the municipal and district levels of government. The municipal government’s City Appearance Administration Bureau (CAAB) managed the landfill while the district sanitation bureaus operate the transfer stations and vehicles transporting waste to the landfill. Consistent with national policy, the city has now begun to separate SWM operating functions from direct government involvement through corporatization ofthe sector services. In September 2002, the municipal government established the Hangzhou Solid Waste Management Treatment Company Limited (HSWC). The company is wholly owned by the Hangzhou Municipal Investment Holding Company Ltd., which in tum is owned by the municipal government. The HSWC has assumed responsibility for landfill disposal and treatment, which includes the existing Tianziling Landfill and the new ZUEP funded landfill to be constructed immediately adjacent and on top ofthe existing facility. The existing landfill was transferred to the company in April 2003 together with a reassignment ofthe staff responsible for their management and operation.

17. Reform Framework Over the next 1 - 2 years, the HSWC will focus on completing the core elements of its transition to a fully operational utility company. The former municipal government unit comprising the HSWC will be fully integrated into the management and operating structures ofthe new company. The management and financial systems required for the effective and efficient operation ofthe company need to be developed and implemented. The legal transfer ofstaff that have been reassigned to the company will be completed once the municipal government has finalized procedures that will apply to all municipal employees.

18. Tariff Requirements. The company revenues are derived from a tipping fee that is applied to waste delivered to the existing Tianziling landfill by the district sanitation bureaus and other waste

- 66 - generators. The current tipping fee tipping fee, which is presently Y 15/t, will need to be increased to Y49/t in 2004 and Y51/t in 2005 (Table 3) so that HSWC can achieve full cost recovery. Based on the financial projections, the next increase will be required when principal repayments on the Bank loan begin in 2009. The projected tipping fee required in 2009 is Y63/t. These fee requirements will be reviewed and confiied every year through the preparation ofannual financial projections for HSWC, which will be required under the Project Agreement. In order to moderate the shorter-term impact ofthe fee increase in 2004 on retail charges, the tipping fee will incorporate a subsidy component that is funded by the municipal and district governments. As retail solid waste charges are progressively increased, the subsidy component in the tipping fee will decline and eventually be eliminated.

19. Financial Performance. Based on the agreed fee reform program, HSWC will begin in 2004 to fully recover its operating expenses, including depreciation, from its landfill tipping fee. With the increase in the tipping fee in 2004, the company will be HSWC will initially recover the cost of its services from a mix of customer charges and the municipal subsidy for the domestic group. However, with increases in its charges over the 2004 - 2006 period, this subsidy will be phased out so that by 2007, the company will fully recover its costs from customer charges. The company is also expected to be able to contribute toward the counterpart funding requirements of the new ZUEP landfill. Most of this will be derived from a portion ofthe Y60 million initial equity contribution made by the municipal government into the company. However, intemally generated revenues should also be sufficient to provide a small contribution. Taken together, the company’s total contribution to counterpart funding is expected to be equivalent to almost 25% of the total cost ofthe landfill (Table 6).

Table 3: Hangzhou - Projected Landfill Tipping Fees (Y/t, current terms) Charge Actual1 Projected 2003 2004 2005 2006 2007 2008 2009 2010

Tipping Fee (Y/t) 15 49 51 51 51 51 63 63

Dongqian Lake Investment and Development Company Ltd.

20. Institutional Set-up. The objective ofthe Ningbo Municipal Government (NMG) is to develop the area around Dongqian Lake into a major residential and commercial area and as a tourism site with both local and national appeal. The area around Dongqian Lake has been placed under the administrative jurisdiction ofthe Dongqian Lake Management Commission (DLMC), which has the equivalent status of a county level government and reports direct to the NMG. DLMC established the Dongqian Lake Investment and Development Company Ltd. (DLIDC) in November 200 1 to directly implement the development, including the non-wastewater components under ZUEP. DLIDC has been given the rights to the sale of development land around the lake in return for undertaking its broader development role for improving the lake and surrounding area. DLIDC is responsible only for the provision ofsite services and then will sell the serviced lots to developers.

2 1. The Dongqian Lake development is a key component ofthe development plan for Ningbo. As a result, the NMG is strongly committed to the success of the development. The NMG commitment is particularly important because it can significantly influence the success of the project through its control over the overall supply ofland available for development in Ningbo Municipality.

- 67 - 22. Business & Market Plans. The ZUEP component in Dongqian Lake is a very small part ofthe overall development project for the area to be implemented by DLIDC. Over the 2003 - 2008 period, it is planned that the company will develop 660 hectares of land. Of this total, 55% will be for residential with the remainder being for commercial, institutional, parks and recreation, and industrial uses. The total cost ofthe planned investments by DLIDC in developing this land is Y4.5 billion, ofwhich the ZUEP works represent only about 7%. ZUEP will provide portions ofthe basic road and wastewater infrastructure needed for the overall development. As a result, the success ofZUEP component in Dongqian Lake depends on the success ofthe overall development. Consequently, the overall development has been carefully assessed in order to properly appraise the viability ofthe ZUEP component. A detailed market analysis was prepared in February 2003 by the Ningbo Economic Research Center (NERC). The NERC assessment was then reviewed and assessed by the DRA consultant as well as the Bank mission and discussed with DLIDC management.

23. There appears to be sufficient demand for the residential developments planned for Dongqian Lake. There is considerable unmet residential demand in Ningbo, most of which is by existing Ningbo residents seeking to upgrade to larger and better quality residential dwellings. A secondary factor is population growth caused by in-migration to Ningbo from other areas ofZhejiang and China. Over the 2003 - 2007 period, the Dongqian Lake development would provide only about 18% ofthe total projected supply of residential floorspace in Ningbo.

24. Over the 2003 - 2007 period, DLIDC plans to develop and sell 325 hectares ofland for commercial uses. These planned developments are primarily intended to serve the residents ofDongqian Lake. Since there should be adequate demand for the planned residential developments, the sales projections for commercial land geared toward meeting the needs of local residents appear to be realistic. However, there are also a number ofdevelopments planned that are targeted partially or largely toward residents outside Dongqian Lake. This includes a major conference center and hotel, recreational facilities and a range oftourist facilities. The largest is the conference center and hotel, which would occupy 7 1 hectares of land. Although DLIDC recently signed a memorandum of understanding with a developer for the hotel, the viability ofthis type ofdevelopment is more uncertain because its primary market would be non-residents ofDongqian Lake. The ability ofthe development to attract non-residents has not been established. Therefore, in order to provide a more conservative basis for the assessment of the overall development, the conference center and hotel were excluded from the DLIDC financial projections.

25. The proposed initial sale prices for the developed land are consistent with current market prices and household affordability in the Ningbo area. The estimated average prices for developed residential and commercial land in 2003 are Y 15.9 million and Y 18.1 million per hectare respectively. However, as potential buyers see the development takes shape, buyer confidence in the development is anticipated to increase, which then increases demand and, therefore, prices. Based on actual experience with similar developments in Ningbo and Zhejiang, NERC estimates that prices should more than double by 2005. However, in order to provide a more conservative basis for the financial assessment ofthe project and DLIDC, this increase has assumed to be only 33%. Thereafter, prices are assumed to increase only at the local rate ofinflation.

26. Financial Performance. Financial projections have been prepared for DLIDC on the based on a conservative scenario regarding future increases in the price ofland (Table 7). Even on the basis ofthis conservative scenario, the projections indicate that DLIDC should be financially viable and sustainable over the 2003 - 2015 forecast period. The company should be able to generate the funding needed to implement its overall development program, which includes the ZUEP component, and repay all associated

- 68 - debt.

C. Affordability Analysis

27. An affordability analysis has been undertaken in order to ensure that domestic customers, particularly those in the lower income group, can afford the new wastewater tariffs in Ningbo and solid waste charges in Hangzhou. Two representative household groups are considered in the affordability analysis: (i)the average income group; and, (ii)the low-income group, which is defined as the average of the group earning the lowest 10% ofincome distribution. In both Ningbo and Hangzhou, incomes are conservatively projected to increase at annual real rate of4% over the 2003 - 2010 period, which is significantly below that actually achieved over the past decade. The results ofthis analysis are shown in Table 4 and indicate that the tariffs are anticipated to be affordable over the entire 2003 - 2010 period.

28. For Ningbo, affordability is assessed by comparing incomes to the total cost ofwastewater and water supply. The water tariff is assumed to increase at the same rate as the wastewater tariff over the 2004 - 2010 period. Since current water tariffs are closer to full cost recovery levels than that for wastewater, this assumption may overestimate future increases in the cost of water. However, this is intended to provide a very conservative basis for the affordability analysis. On this basis, the combined cost ofwater and wastewater for an average income household is projected to increase from 1.O% in 2004 and remain at this level to at least 20 10. For a low-income household, the proportion ofincome required to pay for water and wastewater is projected to increase slightly from 1.6% in 2004 to 1.7% by 2010. For both household groups, this combined cost is well within the generally accepted guideline that the cost of water supply and sanitation should not exceed 5% ofhousehold income.

29. For Hangzhou, the domestic retail tariffs that are required to cover the cost ofwaste transport and disposal are used as the basis for assessing affordability. Presently, the proportion of income required to pay this charge is very low, only 0.2% for the low-income group and 0.1% for the average income group. However, as the municipal subsidy incorporated into the tipping fee is phased out, retail charges, including those for domestic customers, will need to be increased. For example, if the subsidy were phased out by the end of2006, retail charges would need to be significantly increased over this period, which increases the proportion of income required to pay the charge. Under this scenario, the peak year would be 2006, in which the average and low-income groups would be required to allocate 0.4% and 0.9% ofincome respectively to the solid waste charge. Beyond 2006, the impact ofthe charge on households in both groups would gradually decline because income growth is expected to continue to be relatively strong, while the need for further increases in solid waste charges is limited. However, even during the peak year, the charges are considered to be affordable.

- 69 - Table 4: Affordability Analysis for Domestic Consumers Project Component Utility Bill as a YOof Household Income Jan 2003 Jun 2003 2004 2006 2008 2010

Ningbo Wastewater Low Income: Water 1.1% 1.5% 1.5% 1.5% 1.6% 1.8% Wastewater 0.1% 0.3% 0.3% 0.3% 0.3% 0.4% Total 1.2% 1.8% 1.8% 1.7% 1.9% 2.2% Average Income: Water 0.7% 1.0% 0.9% 0.9% 0.9% 1.0% Wastewater 0.1% 0.2% 0.2% 0.2% 0.2% 0.2% Total 0.8% 1.1% 1.1% 1.0% 1.1% 1.2%

Hangzhou Solid Waste Low Income 0.2% 0.2% 0.3% 0.9% 0.8% 0.7% Average Income 0.1% 0.1% 0.1% 0.4% 0.3% 0.3%

- 70 - Table 5: Ningbo Municipal Sewage Company Ltd. - Summary Financial Projections (Y million, current terms) Projected 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 ncome Statements Operating Revenue 34 87 91 111 120 125 169 182 222 238 293 310 318 Oueratine Expenses 35 37 38 40 42 84 91 98 102 136 146 155 160 -1 Depreciation 25 25 26 26 26 26 49 73 73 73 99 124 125 Operating Income (25) 25 27 45 51 15 28 12 47 28 49 31 32 Operating Subsidies 25 - Net Interest Expense 10 9 8 8 14 11 7 Income Tax 0 8 9 15 17 5 6 1 13 7 11 7 8 Net Income 0 17 18 30 34 10 13 2 26 14 23 13 17 ources & Applications of Funds Sources Intemal Cash 25 42 44 56 61 36 72 83 107 95 136 149 149 Long-Term Debt 4 39 77 120 100 71 36 57 82 53 - 30 86 Equity Contributions 34 83 67 54 60 30 71 170 190 125 - 17 38 Total 63 164 188 230 221 137 179 310 379 273 136 195 273 Applications Capital Investments 52 142 179 219 173 133 185 233 278 185 7 73 198 Working Capital Increase 5 7 (1) 0 (1) 2 8 4 1 14 22 9 2 Interest 10 9 8 8 14 11 7 Debt Repayment 27 27 64 77 77 77 77 Total 57 149 178 219 171 135 229 272 351 283 120 170 284 Cash Changes 7 15 10 11 49 2 (50) 37 28 (10) 16 25 (11) Ending Cash Balance 4 15 20 25 67 59 7 40 60 37 54 78 63 alance Sheets Assets Current Assets 10 29 33 39 79 75 32 69 90 84 123 156 143 Net Fixed Assets 441 421 401 381 360 339 1,139 1,073 1,006 940 1,786 1,668 1,550 Work in Progress 50 190 368 588 763 900 237 468 748 938 - 67 262 Total 501 640 803 1,007 1,202 1,315 1,408 1,610 1,844 1,962 1,909 1,892 1,956 Liabilities and Equity Current Liabilities 1 1 1 1 2 30 31 68 82 84 85 85 35 Long Term Debt 4 44 120 240 340 384 394 386 391 367 290 243 302 Equity 496 595 681 765 860 900 984 1,155 1,372 1,510 1,533 1,563 1,618 Total 501 640 803 1,007 1,202 1,315 1,408 1,610 1,844 1,962 1,909 1,892 1,956 inancial Covenants

Cost Recovery” 0.6 1.4 1.4 1.7 1.8 1.1 1.2 1.1 1.2 1.0 1.2 1.1 1.1 Debt Service Ratio 8.2 12.3 9.9 9.1 7.5 3.7 1.9 21 1.3 1.0 1.5 1.7 1.7

Operating revenues divided by the total ofoperating and maintenance expenses plus the greater of depreciation or debt service.

- 71 - Table 6: Hangzhou Solid Waste Management Treatment Company Ltd. - Summary Financial Projections (Y million, current terms) Projected 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 ncome Statements Operating Revenue 9 23 34 36 38 41 39 42 43 45 47 48 50 Operating Expenses 12 11 21 22 24 25 24 25 26 27 29 30 32 Depreciation 6 8 8 8 8 8 13 13 13 13 14 15 15 Operating Income (9) 3 4 6 7 7 2,5 4 4 4 3 3 Net Interest Expense 2 2 2 2 1 1 1 1 Income Tax 1 1 2 2 2 0 1 1 1 1 1 1 Net Income (9) 2 3 4 4 4 0 2 1 2 2 1 1 ources & Applications of Funds Sources Intemal Cash (3) 10 11 12 13 14 15 16 16 17 17 17 18 Long Term Borrowing 1 31 18 18 7- Equity Injection 85 80 20 7- Total 82 121 50 37 20 14 15 16 16 17 17 17 18 Applications Fixed Asset Investment 138 114 45 34 11 0 4 4 4 5 35 5 6 Working Capital Increase 3 3 4 2 (1) (1) 0 0 (0) (1) 0 0 0 Interest 0 0 1 1 2 2 2 2 2 1 1 1 1 Debt Repayment 5 5 5 5 5 5 5 Total 142 117 51 37 12 1 11 11 11 10 42 12 12 Cash Changes (59) 4 (1) 0 8 12 4 5 5 6 (25) 5 6 Ending Cash Balance 1 4 3 4 11 24 27 32 37 43 18 24 29 lalance Sheets Assets Current Assets 4 11 15 17 25 37 40 45 51 56 32 38 44 Net Fixed Assets 114 205 197 189 181 173 273 261 269 260 251 271 262 Work in Progress 18 33 79 114 127 127 18 22 4 5 35 5 6 Total 136 249 292 320 332 336 331 328 325 321 318 314 311 Liabilities and Equity Current Liabilities 0 0 1 1 2 7 7 7 7 7 7 7 7 Long Term Debt 1 31 50 68 75 70 65 60 55 50 45 40 35 Equity 135 217 241 251 256 259 260 262 263 265 266 267 269 Total 136 249 292 320 332 336 331 328 325 321 318 314 311

‘inancial Covenants

Cost Recovery” 0.4 1.0 1.0 1.1 1.2 1.2 1.1 1.1 1.1 1.1 1.1 1.1 1.1 Debt Service Ratio NA 26.2 11.1 8.2 7.1 7.4 2.2 2.4 2.5 2.6 2.7 2.8 2.9

Total revenues divided by the total of operating and maintenance expenses plus the greater of depreciation or debt service.

- 72 - Table 7: Dongqian Lake Investment & Development Company Ltd. - Summary Financial Projections (Y million, current terms) Projected 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 ncome Statements Operating Revenue 264 1,210 1,547 1,868 1,920 1,791 1,841 1,892 1,945 2,000 424 436 449 Land Purchase Costs 108 467 536 645 663 624 641 659 678 697 154 158 163 Operating Expenses 18 56 91 118 129 137 144 151 159 167 112 118 124 Depreciation 13 53 98 139 182 197 212 228 244 261 266 272 Operating Income 137 674 866 1,006 988 848 858 869 880 892 (102) (106) (110) Net Interest Expense 56 44 86 61 38 20 7 1 1 1 Income Tax 45 222 286 314 312 251 263 274 284 292 - Net Income 92 451 580 637 633 511 534 557 576 593 (103) (107) (111) ources & Applications of Funds Sources Intemal Cash 92 464 634 791 816 779 793 807 825 844 158 160 162 Long Term Borrowing 81 424 627 529 522 2- Equity Injection 200 200 - Total 372 1,088 1,260 1,320 1,338 781 793 807 825 844 158 160 162 Applications Fixed Asset Investment 303 923 1,009 950 964 345 356 366 376 387 131 135 139 Working Capital Increase 75 237 196 34 (59) (103) (61) (52) 41 9 (246) 2 2 Interest 2 17 46 72 89 86 61 38 20 7 1 1 1 Debt Repayment 217 217 425 425 425 208 208 6 6 6 Dividend 346 296 - Total 380 1,177 1,251 1,274 1,211 753 782 777 991 907 (107) 144 148 Cash Changes (8) (89) 9 46 127 27 10 30 (166) (63) 266 16 14 Ending Cash Balance 92 4 13 59 186 213 224 254 87 24 290 306 320 alance Sheets Assets Current Assets 167 315 520 601 668 593 543 553 395 341 361 380 396 Net Fixed Assets 292 1,179 2,136 2,962 3,790 3,937 4,081 4,219 4,352 4,478 4,343 4,206 Work in Progress 306 940 1,055 966 1,010 345 356 366 377 387 131 135 139 Total 472 1,547 2,755 3,703 4,641 4,728 4,837 5,001 4,991 5,080 4,971 4,858 4,741 Liabilities and Equity Current Liabilities 217 217 425 425 425 240 208 6 6 6 6 Long Term Debt 81 504 914 1,225 1,323 899 474 266 59 53 47 41 35 Equity 392 1,043 1,624 2,260 2,893 3,404 3,937 4,494 4,725 5,021 4,918 4,811 4,700 Total 472 1,547 2,755 3,703 4,641 4,728 4,837 5,001 4,991 5,080 4,971 4,858 4,741 inancial Covenants Cost Recovery” 2.7 3.9 4.5 4.2 5.1 3.3 3.2 3.4 4.5 4.8 3.5 1.1 1.1 Debt Service Ratio 39.7 28.1 13.8 2.7 2.7 1.5 1.6 1.7 3.6 3.9 21.9 22.6 23.3

Revenues divided by the total of operating and maintenance expenses plus the greater of depreciation or debt service.

- 73 - Annex 6(A): Procurement Arrangements CHINA: Zhejiang Urban Environment Project

Procurement

Summary of the Assessment of Agencies' Procurement Capacity

The Provincial Project Management Office (ZUDPO) under the Zhejiang Provincial Construction Management Commission (ZHPCMC) will be responsible for coordinating procurement for the Bank-financed activities in this project. ZUDPO has successfully managed the Zhejiang Multiple City Development Project which was completed in 2001 (Credit No.2475). Hangzhou PMO has chosen China Far East Intemational Trading Corporation as their procurement agent for all Intemational Competitive Bidding (ICB) ofgoods and Shaoxing and Ningbo PMOShave selected the Joint Venhre of China Instrument Intemational Tendering Company and Zhejiang Intemational Tech & Equipment Tending Co., Ltd for the same services. All ITCs have adequate experience with Bank and other donor funded procurement.

The assessment found that the designated implementing agencies (Us) are capable ofmanaging all procurement activities satisfactorily under the guidance of ZUDPO and assistance from the ITCs. Some staff members in the ZUDPO and Ningbo PMO were involved in the previous Bank-financed Zhejiang Multiple City Development Project and are familiar with the Bank's procurement procedures. Areas that need strengthening, such as procurement training, bidding document preparation, have been identified and an action plan has been agreed upon. The action plan includes training, recruitment ofexperienced staff for PMOS, preparation and dissemination ofa project procurement manual, among other things.

The assessment identified some deviations in the local or municipal regulations which are not acceptable to the World Bank Procurement Guidelines, in addition to those identified in the OPR ofChina (see Procurement Capacity Assessment Report). All the inconsistencies will be incorporated in the Procurement Schedule to the legal agreement.

Provisions will be incorporated into the Procurement Schedule ofthe Loan Agreement to confii exemptions for Bank financed procurement from the provincial/municipal regulations and the Bidding and Tendering Law ofChina in case of discrepancies.

Procurement Arrangements

Procurement Plan. Procurement plans for each of the three project cities have been prepared and are included in the Project Implementation Plan (PIP) for each city. The procurement packaging plan has been prepared taking into consideration the specialties ofthe project (Shaoxing) and prospective capabilities of the contractors and suppliers at home and abroad, as well as capabilities ofthe employers' project management (see Table C).

Procurement procedures. The following Bank guidelines will govern all Bank-financed procurement under the project:

For goods and worb. Procurement under IBRD Loans and IDA Credits (dated January 1995 and revised in January and August 1996, September 1997 and January 1999). The bidding documents will clearly specify qualification requirements, for post-qualification ofbidders.

- 74 - For the selection of consultants. Selection and Employment ofConsultants by World Bank Borrowers (dated January 1997 and revised September 1997, January 1999 and May 2002).

Format ofthe Documentation. The following formats will apply:

Evaluation reports. The Bank's Standard Bid Evaluation Form, Procurement ofGoods or Works (dated April 1996, translated into Chinese by MOF May 1997), and Sample Form of Evaluation Report for Selection ofConsultants (dated October 1999).

Model Bidding Documents. The Bank-approved Chinese Model Bidding Documents (MBD) (dated May 1997, prepared by MOF based on the Bank's Standard Bidding Documents (SBDs) will be adopted for all ICB and NCB activities for goods and works. All new revisions to the Bank SBD since 1997 will be incorporated into the existing MBDs. The World Bank SBD will be used when applicable MBD is not available. Also as indicated in the OPR of China, the harmonized Standard Bidding Documents will be used in this project when available.

Domestic Preference. For goods contracts, qualified domestic bidders will be eligible for a preference equal to 15 percent ofthe cost, insurance and freight (CIF) price, or the sum of the customs duties and import tax payable by a nonexempt importer, whichever is less. For works, there will be no preference for domestic contractors as China's GDP has exceeded the Bank determined threshold.

Advertisement. The General Procurement Notice (GPN) was published in the United Nations Development Business (UNDB), Issue No.599 of 3 1 January 2003, and will be updated every year until all major ICB procurement activities and major consultant assignments have been completed. Specific Procurement Notices (SPNs) for all ICB and NCB procurement activities will be published in at least one newspaper with a national circulation. In addition, the SPNs for Goods contracts estimated to cost more than $500,000 will be published in the UNDB, allowing at least 45 days for bid preparation. Similarly, invitations for expressions of interest for consulting contracts expected to cost more than $100,000 equivalent will be advertised in the UNDB at least fourteen days before the preparation ofthe short list. All other contracts for selection of consulting firms will be advertised in a national newspaper.

Procurement methods (Table A)

A total of $223 million ofworks and goods is expected to be financed under the project, using the following procedures:

Works:

NCB. About $183.5 million ofworks for construction ofinterceptor and sewage collection pipelines, pumping stations, wastewater treatment plants, roads, heritage protection, river rehabilitation, municipal infrastructure, and landfill, estimated to cost between $1 million and $15 million per contract will be procured using NCB procedures. Those contracts would not be of interest to foreign contractors.

Goods: ICB. About $30.5 million worth of equipment, including four packages worth between $2 million and $6 million, will be procured using ICB procedures, for four wastewater treatment plants and twenty pump stations in Ningbo; HDPE membrane and landfill equipment in

- 75 - Hangzhou. This represents about 100% oftotal procurement of goods. (Installation included).

NCB. Equipment and materials estimated to cost between $100,000 and $500,000 per contract will be procured using NCB procedures, up to an aggregate of $0.5 million. Those contracts would not be ofinterest to foreign suppliers.

Shopping. Other minor items which are readily available off-the-shelf and estimated to cost less than $100,000 per contract, with an aggregate amount not exceeding $400,000, will be procured following national shopping procedures as stated in Articles 3.5 and 3.6 ofthe guidelines. National shopping will also be on the basis of a comparison of at least three quotations and may be used where the desired goods are ordinarily available from more than one source, at competitive prices.

Consulting Services and Training. The value of all consulting services to be procured is estimated to be about $34.3 million, including design, supervision, and management expenses, most ofwhich will not be financed by the Bank. Consultant services and training estimated to cost about $9.0 million will be financed by the Bank except for taxes and duties, estimated at some 3% ofthe total project costs. Two contracts for about $7.1 million in total will be procured under Quality and Cost-Based Selection (QCBS) procedures. Three contracts for review ofinstitutional options for industrial pollution control management, tourism development, and heritage conservation, estimated to cost about $0.8 million each, will be procured through Quality Based Selection (QBS).

Retroactive financing. Retroactive financing ofup to $10.0 million may be applied to expenditures made after September 1,2003 for the procurement ofworks and goods, consistent with the Procurement Guidelines. The following project components require prompt execution prior to loan effectiveness: (a) existing landfill in Hangzhou requires urgent expansion as proposed under the project since its current capacity will be depleted by end 2003; (b) some ofthe main sewers in Ningbo city need to be combined with urgent (non-Bank funded) road construction; (c) the pilot projects in Jishan historic precinct in Shaoxing and one quarter of Cicheng town need to start early in order to be able to apply the lessons leamed timely in the upgrading ofthe other areas; and (d) some ofthe technical assistance needs to start early to assist with the implementation of the retroactive financed activities and prepare the design and tender documents for priority components (see also Table C).

- 76 - Table A: Project Costs by Procurement Arrangements (US$ million equivalent)

Figures in parentheses are the amounts to be financed by the Bank Loan. All costs include contingencies.

2, Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i)managing the project, and (ii)re-lending project funds to local government units.

- 77 - Table AI: Consultant Selection Arrangements (optional) (US$ million equivalent)

\ ' Including contingencies Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed Figures in parentheses are the amounts to be financed by the Bank Loan.

- 78 - Prior review thresholds (Table B)

Table B: Thresholds for Procurement Methods and Prior Review’

1, Works

Equal or Above 100 and NCB All contract above $5 Less than 10,000 million ($134M)

Less than 100 I Small Works I 2. Goods Equal to or Above 500 ICB 1 All contracts ($23.8M) Less than 500 but equal to NCB (none) or above 100

below 100 NS (none) 3. Services Equal to or above 100 QCBS or QBS All contracts ($8.55 (firms) million)

Less tan 100 (firm) CQ (none)

Individual Other (none) 4. Miscellaneous 5. Miscellaneous 6. Miscellaneous I I Total value of contracts subject to prior review: $167 million Overall Procurement Risk Assessment: Average Frequency of procurement supervision missions proposed: One every 6 months (includes special procurement supervision for post-review/audits)

- 79 - Table C. Contract Packaging (Base costs)

Contract Packages

Ningbo Wastewater (NWW) Civil Work Contracts SJWWK.1 - Sewers Hingjiang Road (incl. 1 P.S.)’ 3 1.37 NCB NSCL 40.97 NCB NSCL SJWW/C.2 - Sewers West Beltway, Bayiun & Lantian roads (incl. 1 P.S.)’ 40.79 NCB NSCL SJWW/C.3 Sewers South Beltway (incl. 1 P.S.) - 21.46 NCB NSCL SJWW/C.4 Sewers Yinfeng, Changcun and Qiwen roads (incl. 1 P.S.) - 67.17 NCB NSCL SJWW/C.S - Wastewater Treatment Plant in Jiangdongnan 9.83 NCB NSCL ZHWWK.1- Sewers Zhenning Road’ 23.67 NCB NSCL ZHWWK.2- Sewers Suidaolu, Daximen and Lingjiang roads (incl. 1 P.S.) 34.05 NCB NSCL ZHWWK.3 - Sewers Anhailu and Weihai roads (incl. 2 P.S.) 23.31 NCB NSCL ZHWWK.4 - Sewers Binhai Expressway (incl. 2 P.S.) 26.12 NCB NSCL ZHWW/C.S - Wastewater Treatment Plant & Sea Outfall in Zhenhai 27.81 NCB NSCL DLWW/Cl - Transport Pipeline & P.S. to SJWWTP 15.64 NCB NSCL CCWW/Cl - Transport Pipeline & P.S. to SJWWTP

Mechanical & Electrical “Supply and Installation” Contracts 8.07 ICB NSCL 3JWWIM.l - Pumping Station Equipment for first batch Pumping Stations :SJWW,ZHWW, DLWW, CCWW) 8.08 ICB NSCL SJWWIM.2 - Pumping Station Equipment for second batch Pumping Stations (SJWW,ZHWW, DLWW, CCWW) 50.42 ICB NSCL SJWWIM.3 - SJWWTP Equipment 23.81 ICB NSCL ZHWWIM.l- ZHWWTP Equipment ?.? NBF NSCL YBWW/E.l - Power Supply to Pumping Stations (19) and Wastewater rreatment Plants (2) in Jiangdongnan, Zhenhai, Cicheng & Dongqian Lake

Dongqian Lake Development Civil Work Contracts DLRD/C.l - Lake Road Section A (incl. trunk sewers & 2 PSs) 66.03 NCB DLIDC DLRD/C.2 - Lake Road Section B (incl. trunk sewers & 3 PSs)‘ 27.33 NCB DLIDC DLRD/C.3 - Lake Road Section C (incl. trunk sewers & 3 PSs) 74.41 NCB DLIDC DLRDK.4 - Secondary Sewers in Dongqian New Town 27.51 NCB DLIDC

Cicheng Town Infrastructure Development Civil Work Contracts CCRD/C.l - Upgrading Jiefang Road (incl. sewers) 6.12 NCB NBPMO CCRD/C.2 - Upgrading 3 roads in N.E. of old city (incl. sewers) 21.36 NCB NBPMO CCRDK.3 - Ringroad 22.60 NCB NBPMO CCRDIC.4 - Upgrading 10 roads in N.W. and South of old city (incl. 43.05 NCB NBPMO sewers)

- 80 - Contract Procurement Implementing Contract Packages (cont’d) Y million type Agency Shaoxing Historic City-center Upgrading and Conservation Civil Works

SXCWC.1- Repair of National and Provincial Level Cultural Relics in 36.94 NCB SXPMO Luxunlu, Xixiaohe & Baziqiao Precincts SXCWC.2 - Repair ofMunicipal Level Cultural Relics and Typical Local 10.01 NCB SXPMO Style Housing in Jishan Precinct. SXCWC.3 - Repair ofMunicipal Level Cultural Relics and Typical Local 42.37 NCB SXPMO Style Housing in Yuezicheng, Luxunlu, Xiaohe and Baziqiao Precincts SXHWC.4 - Housing Renovation Yuezicheng Precinct, North & East 64.54 NCB SXPMO 3XHWC.5 - Housing Renovation Yuezicheng Precinct, West 62.71 NCB SXPMO SXHWC.6 - Housing Renovation Luxunlu Precinct 31.80 NCB SXPMO SXHWC.7 - Housing Renovation Xixiaohe Precinct 94.20 NCB SXPMO SXHWC.8 - Housing Renovation Jishan Precinct, part A’ 86.38 NCB SXPMO 34.64 NCB SXPMO SXHWC.9 Housing Renovation Jishan Precinct, part B* - 67.32 NCB SXPMO SXHWC.10 - Housing Renovation Baziqiao Precinct SXRDK.11 Road Improvement, Landscaping and Underground - 19.08 NCB SXPMO Infrastructure in Yuezicheng Precinct. SXRD/C.12 Road Improvement, Landscaping and Underground - 15.51 NCB SXPMO Infrastructure in Jishan Precinct. 28.04 NCB SXPMO SXRDK.13 - Canal Improvements & Water Regulation Structures

Hangzhou Landfill Expansion Civil Work Contracts HZSWK.1 - Landfill Preparatory Works 30.09 NBF HSWC HZSWK.2 - Leachate Treatment Plant 11.48 NBF HSWC HZSWK.3 - Balancing Tank, Dam and Grouting 18.38 NBF HSWC HZSWK.4 - Landscaping 4.00 NBF HSWC Mechanical & Electrical “Supply and Installation” Contracts

HZSWM.1 - Landfill Machinery, Transport Vehicles & 37.86 ICB HSWC Monitoring Equipment HZSWM.2 - Landfill Liner* 42.48 ICB HSWC HZSWE.1 - Power Supply ?.? NBF HSWC

Contracts selected for funding under retroactive financing arrangements

-81 - Person-months Contract Valve Technical Assistance National International US$ million Package A - Institutional, Financial & Operational Strengthening 125 2.37 Package B - Design Review and Construction Management 320 76 3.77 52 Advisory 61 13 I 0.89 Package C - Industrial Pollution Control Management 0.75 Package D - Tourism Development and Community Participation 44 17 0.77 Package E - Heritage Conservation in Urban Upgrading

I\ Thresholds generally differ by country and project. Consult "Assessment ofAgency's Capacity to Implement Procurement" and contact the Regional Procurement Adviser for guidance.

- 82 - Annex 6(B): Financial Management and Disbursement Arrangements CHINA: Zhejiang Urban Environment Project

Financial Manapement 1. Summary of the Financial Management Assessment

1. The task team has conducted an assessment of the adequacy ofthe project financial management system ofthe Zhejiang Urban Environment Project. The assessment, based on guidelines issued by the Financial Management Sector Board on June 30,2001, has concluded that the project meets minimum Bank financial management requirements, as stipulated in BP/OP 10.02. In the team’s opinion, the project will have in place an adequate project financial management system that can provide, with reasonable assurance, accurate and timely information on the status ofthe project in the reporting format agreed with the project and as required by the Bank.

2. Funding sources for the project include Bank loan and counterpart funds. The Bank loan proceeds will flow from the Bank into the project special account to be set up at and managed by the Zhejiang Provincial finance bureaus (ZPFB), to project implementing agencies (or project companies), and finally to contractors or suppliers. The Bank loan will be signed between the Bank and the People’s Republic of China through its Ministry ofFinance (MOF), and on-lending arrangement for the Bank loans will be signed between PRC through its MOF and Zhejiang Provincial Government through ZPFB. And then further on-lending agreements will be signed between provincial government and Hangzhou, Ningbo and Shaoxing municipal governments through ZPFB and respective municipal financial bureau (MFB) and finally ended between each municipal government through MFBs and implementing agencies. In terms of disbursement technique, the project will be disbursing based on the traditional disbursement techniques and will not be using PMR-based disbursements, in accordance with the agreement between the Bank and MOF. The counterpart hnds to be contributed directly to the project will come from three sources: appropriations by the municipalities through their respective municipal or district finance bureaus; loans from domestic commercial banks and contributions by some of the project companies from the upfront tariff increase.

Financial Management Organization.

3. There is a leading group to provide policy guidance, chaired by Lou Xiaodong, the secretary-general ofZhejiang Provincial Government and consisting of the line departments ofprovincial governments, such as Zhejiang Provincial Development and Planning Commission, ZPFB, Zhejiang Provincial Audit Bureau, Zhejiang Provincial Environment Protection Bureau, Zhejiang Provincial Price Bureau. Under the leading group, the provincial PMO, ZUDPO has been established within ZPCB to directly implement overall coordination and supervision functions. For components implementation, municipal PMOSand companies that will implement each project components have been established, including Hangzhou Solid Waste Company Ltd. (HSWC), Ningbo Wastewater Company Ltd. (NWWC) and Dongqian Lake Investment and Development Company (DLIDC). The organization chart is as follows:

- 83 - Government

Group ,

ZUDPO

I I

Ningbo Shaoxing Municipal Municipal

4. In addition, the Foreign Fund Division of ZPFB will play a major role in the project implementation, including overall monitoring, fmancing arrangement, financial management, etc. ZPFB will also be responsible for maintaining, monitoring and reconciling special account to be established for the project, and reviewing, verifying and approving withdrawal applications prepared by the project implementing agencies before submitting by ZPFB to the Bank for disbursement processing. The Division has had prior experience with Bank projects and is familiar with Bank disbursement procedures. In addition, the Bank’s prior experience with ZPFB in terms of Special Account management and disbursement processing indicates that ZPFB has met and complied with the Bank’s relevant policies or procedures. For smooth and successful project implementation, close cooperation and coordination between ZPFB and PMOSand PIUs are extremely critical.

5. Funding for the project includes Bank loan and counterpart funds. One special account will be set up and managed by the Zhejiang Provincial Finance Bureaus. On-lend agreements will be signed between MOF and ZPFB, between ZPFB and project implementing agencies (project companies). The counterpart funds to be contributed directly to the project will come from three sources: appropriations by the municipalities through their respective municipal or district finance bureaus; loans from domestic commercial banks and contributions by some of the project companies from the upfront tariff increase.

Staffing

6. Adequate project accounting staff with educational background and work experience commensurate with the work they are expected to perform is one of the factors critical to successful implementation ofproject financial management. Based on discussions, observation and review of educational background and work experience ofthe staff identified for financial and accounting positions in implementing entities (both “project” and “entity”), the task team note that the staff are qualified and

- 84 - appropriate to the work they are expected to assume. To strengthen financial management capacity and achieve consistent quality ofaccounting work, the task team has suggested that a project financial management manual (Manual) be prepared. The manual will provide detailed guidelines on financial management, internal controls, accounting procedures, fund and asset management and withdrawal application procedures. The draft manual has been completed by ZUDPO and the task team recommends that the finalized copy made available to all relevant project staff before project effectiveness.

7. As most implementing entities are new to the Bank’s projects, a well-designed and focused training program in project financial management should be provided prior to project effectiveness by PMO and ZPFB to all financial and accounting staff to ensure a good understanding and knowledge ofBank’s financial management policy and disbursement procedures, fundassetlcontract management, format and content ofproject financial statements and audit requirement.

Accounting; and Policy Procedures

8. The administration, accounting and reporting ofthe project will be set up in accordance with the following regulations/circulars issued by MOF:

In line with other Bank financed projects in China, the project will use the “Temporary Regulations on Financial and Accounting Management for Projects Financed by the World Bank” (Circular #127 issued in 1993) by MOF as a basis for bookkeeping and preparation ofproject financial statements and management reports. Accrual accounting and double entry bookkeeping will be adopted by the project.

Circular #12: “Regulation for the Submission ofWithdrawal Applications’’ issued in December 1996 by MOF - includes detailed procedures for preparing and submitting withdrawal applications and retention of supporting documentation.

Circular #13: “Accounting Regulations for World Bank Financed Projects” issued in January 2000 by MOF. The circular provides in-depth instructions ofaccounting treatment ofproject activities and covers the following:

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

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

0 Balance sheet 0 Statement ofsource and use offund

0 Statement of implementation ofcrediaoan agreement 0 Statement of special account

Both circular #127 and #13 are simplified versions ofthe Accounting Standards for State-owned, Infrastructure Oriented Projects (the “Standards”), taking into consideration ofunique characteristics of

- 85 - Bank projects. The Standards are modeled after the principles ofIntemational Accounting Standards and provides detailed guidelines to accounting for activities of Bank financed projects.

10. Each ofthe implementing entities will be managing, monitoring and maintaining respective project accounting records. Original supporting documents for project activities will be retained by originating implementing entities. In addition, each implementing entities will prepare financial statements, which will then be reviewed, approved and consolidated by ZUDPO before sending by ZUDPO to the Bank for review and comment on a regular basis. The intemal audit department of each implementing agencies will assume intemal audit responsibilities. The task team will evaluate work performed by such intemal auditors and determine degree ofreliance in respect ofproject implementation and Bank supervision mission.

Reporting and Monitoring and Format ofFinancial Statements

1 1. Each implementing entity will prepare its own project financial statements, which will then be consolidated by ZUDPO. The project consolidated financial statements and financial statements of each implementing entities will be sent by ZUDPO to the Bank for reviews and comment on a regular basis. The format and content ofthe following project financial statements represents the standard project financial reporting package agreed to between the Bank and MOF, and have been discussed and agreed with all parties concerned. In line with the newly issued Financial Monitoring Report (FMR) guidelines, the project consolidated financial statements will be submitted as part ofFMR to the Bank on a semi-annual basis (prior to August 15 and February 15 ofthe following year), and include the following four statements:

0 Balance Sheet; 0 Summary of Sources and Uses ofFunds by Project Component; 0 Statement ofImplementation ofLoan Agreement; and 0 Statement of Special Account

2. Audit Arrangements

12. Intemal Audit. The intemal audit department of each implementing agencies will assume intemal audit responsibilities. The task team will evaluate work performed by such intemal auditors and determine degree ofreliance in respect ofproject implementation and Bank supervision mission. External Audit. The Bank requires that project financial statements be audited in accordance with standards acceptable to the Bank. In line with other Bank financed projects in China, the project will be audited in accordance with the Government Auditing Standards ofthe People's Republic ofChina (1997 edition). The Zhejiang Provincial Audit Office has been identified as auditors for the project. Annual audit reports will be issued in the name of Zhejiang Provincial Audit Office.

13. The annual audit reports ofproject consolidated financial statements will be due to the Bank within 6 months ofthe end ofeach calendar year. In addition, once operations commence, annual audit reports on financial position and operating results ofthe following implementing entities will be due to the Bank within 6 months of the end ofeach calendar year:

0 Hangzhou Solid Waste Company Ltd. (HSWC) 0 Ningbo Wastewater company Ltd. (NWWC) 0 Dongqian Lake Investment and Development Company (DLIDC)

- a6 - 3. Disbursement Arrangements

14. The project will be disbursing on the traditional disbursement techniques and will not be using PMR-based disbursements, in accordance with the agreement between the Bank and MOF. Bank loan proceeds would be disbursed against eligible expenditures as follows: (i)civil works - 40% ofexpenditures (may be increased to 50% during appraisal), (ii)equipment - 100% offoreign expenditures, 100% of local expenditures (ex-factory) and 75% of other items procured locally, (iii)Consulting service and training - 91% ofexpenditures, and (iv) TA or training-lOO% of expenditures.

15. Disbursement methods, such as replenishment, direct payment and special commitment, are available for the project. The SOE limits will be set up in line with procurement post-review threshold, as follows: (i)all contract for goods estimated to cost the equivalent of $ 500,000 or less; (ii)all contract for civil works estimated to cost the equivalent of$ 5,000,000 or less (iii)consultant contract estimated to cost $ 300,000 (firm)/$ 50,000 (individual) or less; (iv) All training activities.

Allocation of loan proceeds (Table C) 16. The proposed loan ofUS$133.0 million would be disbursed over a period of about seven years, up to the closing date of June 30,2010. The allocation of loan proceeds according to expenditure category is listed in Table C.

Table C: Allocation of Loan Proceeds

Expenditure Category I Amount in US$million I Financing Percentage Civil Works 89.48 40% (expected to increase to 50% at project appraisal Goods 23.79 100% offoreign expenditures, 100% of local expenditures (ex-factory cost) and 75% oflocal expenditures for other items procured locally

Consultant Services and Training 7.79 ~ 91% Unallocated 10.61

Total Project Costs with Bank 131.67 Financing Front-end fee 1.33

Total 133.00

Use of statements of expenditures (SOEs): 17. Withdrawals for the loan account will be made on the basis of SOEs for the following expenditures :

Works contracts ofless than $5,000,000 Goods contracts of less than $500,000 Consulting firm contract of less than $300,000 Individual consultant contracts ofless than $50,000 All training activities

- 87 - Special account: 18. Authorization, allocation and operation of the special account. One special accounts (SA) will be established in ZPFB. The authorized allocation of SA is proposed to not exceed USD 7 million. From the SA, the Bank fimds would be disbursed to the special account set up at ZPFB, and then to project implementing entities and/or supplier and contractors. However, the authorized allocation will be limited to US$5 million equivalent until the aggregate withdrawals and outstanding Special Commitments will be equal to or exceed US$ 33 million equivalent.

19. Zhejiang Provincial Finance Bureaus will be directly responsible for the management, monitoring, maintenance and reconciliation ofthe SA activities ofthe project. Supporting documents required for Bank disbursements will be prepared and submitted by respective project implementing entities through each implementing entities to related municipal finance bureau then to ZUDPO and finally to ZPFB for final verification and consolidation before sending by ZPFB to the Bank for further disbursement processing.

Action plan

20. The following proposed time-bound actions that have no major impact on project preparation or Board presentation, but should be adequately addressed by the project:

Action I Responsible person I Completion Date 1. Financial management I ZPFBiZUDPOiBank task team I Before effectiveness training to all relevant project staff 2. Financial management manual ZUDPO Before effectiveness finalized and issued

2 1. As there is quite a few implementing agencies involved in the project, supervision coverage for each mission is expected to be limited and therefore rotational basis should be adopted. Furthermore, to maximize effectiveness and efficiency, procurement and FMDisbursement specialists should jointly participate in supervision missions for procurement and SOEs reviews.

22. For the initial implementation stage, more supervision missions (such as twice a year) should be carried out to have better coverage and ensure that procurement guidelines are followed and expenditures incurred are eligible and well supported. More detailed reviews at the initial implementation phase can also help ensure that financial management system is properly set up and financial statements are prepared in line with stipulated format and content.

- 88 - Annex 7: Project Processing Schedule CHINA: Zhejiang Urban Environment Project

I Negotiations I 0711 512003 I I Planned Date of Effectiveness 0311 5/2004

Prepared by: Zhejiang Urban Development Project Office in cooperation with the Project Management Offices of Hangzhou, Ningbo and Shaoxing municipalities and under the guidance ofthe Zhejiang Construction Commission and Provincial Government.

Preparation assistance: Mott MacDonald International Ltd, Blackstone Corporation, China Nonferrous Engineering and Research Institute (ENFI), Hohai University - Social Development Institute, Beijing Huaihai Engineering Management Consulting Co. Ltd., North China Engineering Design Institute.

Bank staff who worked on the project included: I Name Speciality Moes, Wiebe Engineer, Task Team Leader Manila, Socorro Program Assistant O'Heam, Dan Financial Analyst'Economist Taylor, George Environmental Specialist Hankey, Donald Urban PlannedCultural Heritage Specialist Zhang, Zhun Institutional Specialist Liu, Zhentu Procurement Specialist Liu, Zhefu Safeguard Specialist Hanrahan, David Peer reviewer: Environment Duer, Kreszentia Peer reviewer: Cultural Heritage McPhail, Alex Peer reviewer: FinanciaUEconomics Wang Peishen Environmental Specialist Zhang Fang Financial Management Specialist Margaret Png/Hoi-Chan Nguyen Legal Counsel

- 89 - Annex 8: Documents in the Project File* CHINA: Zhejiang Urban Environment Project

A. Project Implementation Plan Project Feasibility Study by Mott MacDonald, July 2003 Project Implementation Plan, July 2003 Environmental Assessment Report, June 2003 Resettlement Action Plan and Resettlement Policy Framework, May 2003 Feasibility reports and design and tender documentation for individual components, July 2003 Terms of References for Design Review Advisory and Construction Management, Institutional/Financial Utility Reform, Industrial Pollution Control Management, Tourism Development and Community Participation, Heritage Conservation and Environmental Management. Catchment Management Plan for Donqian Lake in Ningbo Industrial Pollution Control Action Plan for Ningbo Municipality

B. Bank Staff Assessments FMS Assessment, August 2003 Procurement Capacity Assessment, July 2003 Financial Analysis of Project Utility Companies, Economic Analysis of the Project Component, Mission Aide Memoires, Implementation Completion report, Zhejiang Multicities Development Project

C. Other

*Including electronic files

- 90 - Annex 9: Statement of Loans and Credits CHINA: Zhejiang Urban Environment Project 16-Am-2003 Diffelence between expected and actual Original Amount in US$ Millions disbursements' Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd PO68058 2003 CN-Yixing Pumped Storage Project 145.00 0.00 0.00 0.00 145.00 0.00 0.00 PO70441 2003 CN-Hubei Xiaogan Xiangfan Hwy 250.00 0.00 0.00 0.00 247.50 22.83 0.00 PO58847 2003 CN-3rd Xinjiang Hwy Project 150.00 0.00 0.00 0.00 141.50 6.50 0.00 PO60029 2002 Sustainable Forestry Dev(Natura1Forest) 0.00 0.00 16.00 0.00 16.57 0.30 0.00 PO64729 2002 SUSTAINABLE FORESTRY DEVELOPMENT PRO 93.90 0.00 0.00 0.00 88.46 -2.30 0.00 PO58846 2002 CN-Natl Railway Project 160.00 0.00 0.00 0.00 65.33 -7.17 0.00 PO70459 2002 CN-Inner Mongolia Hwy Project 100.00 0.00 0.00 0.00 95.50 0.50 0.00 PO68049 2002 CN-Hubei Hydropower Dev in Poor Areas 105.00 0.00 0.00 0.00 105.00 8.50 0.00 PO71147 2002 CN-Tuberculosis Control Project 104.00 0.00 0.00 0.00 95.33 -8.67 0.00 PO58845 2001 Jiangxi II Hwy 200.00 0.00 0.00 0.00 161.23 -1.77 0.00 PO51859 2001 CN-LIAO RIVER BASIN 100.00 0.00 0.00 0.00 83.15 14.23 0.00 PO56199 2001 CN-3rd Inland Waterways 100.00 0.00 0.00 0.00 93.34 2.84 0.00 PO45915 2001 CN-Urumqi Urban Transport 100.00 0.00 0.00 0.00 65.26 31.16 0.00 PO56596 2001 CN-Shijiazhuang Urban Transport 100.00 0.00 0.00 0.00 92.28 41.68 0.00 PO56516 2001 WATER CONSERVATION 74.00 0.00 0.00 0.00 50.59 3.14 0.00 PO47345 2001 CN-HUAI RIVER POLLUTION CONTROL 105.50 0.00 0.00 0.00 98.31 -7.19 0.00 PO56424 2000 TONGBAI PUMPED STORA 320.00 0.00 0.00 0.00 301.06 75.46 0.00 PO49436 2000 CN-CHONGQING URBAN ENVMT 200.00 0.00 0.00 0.00 179.86 37.26 0.00 PO42109 2000 CN-BEIJING ENVIRONMENT II 349.00 0.00 25.00 0.00 312.22 142.08 0.00 PO45264 2000 SMALLHLDR CATTLE DEV 93.50 0.00 0.00 0.00 32.43 17.48 0.00 PO45910 2000 CN-HEBEI URBAN ENVIRONMENT 150.00 0.00 0.00 0.00 135.81 36.56 0.00 P0 5 8 84 4 2000 3rd Henan Prov Hwy 150.00 0.00 0.00 0.00 105.29 32.29 0.00 PO64730 2000 Yangtze Dike Strengthening Project 210.00 0.00 0.00 0.00 140.48 79.48 0.00 PO58843 2000 Guangxi Highway 200.00 0.00 0.00 0.00 137.17 44.67 0.00 PO64924 2000 CH-GEF-BEIJING ENVMT II 0.00 0.00 25.00 0.00 24.19 13.76 0.00 PO42299 1999 TEC COOP CREDIT IV 10.00 35.00 0.00 0.00 37.39 -7.35 0.00 PO41890 1999 CN-Liaoning Urban Transport 150.00 0.00 0.00 0.00 56.61 45.41 0.00 PO36953 1999 CN-HEALTH IX 10.00 50.00 0.00 0.00 40.86 16.62 0.00 PO38121 1999 CN-GEF-RENEWABLE ENERGY DEVELOPMENT 0.00 0.00 35.00 0.00 26.93 19.72 2.46 PO43933 1999 CN-SICHUAN URBAN ENVMT 150.00 2.00 0.00 0.00 97.50 55.12 12.17 P0 4 6 8 2 9 1999 RENEWABLE ENERGY DEVELOPMENT 100.00 0.00 0.00 0.00 12.87 99.87 0.00 PO41268 1999 CN-Nat Hwy4iHubei-Hunan 350.00 0.00 0.00 0.00 107.40 39.65 0.00 PO46564 1999 Gansu &Inner Mongolia Poverty Reduction 60.00 100.00 0.00 0.00 79.01 35.76 -8.01 PO46051 1999 CN-HIGHER EDUC. REFORM 20.00 50.00 0.00 0.00 27.96 27.70 0.00 P0 4 96 6 5 1999 ANNING VALLEY AG.DEV 90.00 30.00 0.00 0.00 34.04 7.65 0.00 PO03653 1999 CN-Container Transport 71.00 0.00 0.00 18.61 3.89 22.35 0.00 PO51856 1999 ACCOUNTING REFORM & DEVELOPMENT 27.40 5.60 0.00 0.00 20.83 20.53 0.00 PO60270 1999 CN-ENTERPRISE REFORM LN 0.00 5.00 0.00 0.00 2.75 4.44 2.93 PO51888 1999 GUANZHONG IRRIGATION 80.00 20.00 0.00 0.00 54.25 32.55 0.00 PO51705 1999 Fujian I1 Highway 200.00 0.00 0.00 0.00 94.56 77.06 0.00 PO50036 1999 Anhui Provincial Hwy 200.00 0.00 0.00 0.00 70.08 28.58 0.00 PO56216 1999 LOESS PLATEAU II 100.00 50.00 0.00 0.00 60.60 48.82 0.00 P0 5 83 0 8 1999 CN-PENSION REFORM PJT 0.00 5.00 0.00 0.00 1.89 2.04 0.00 P0 5 73 5 2 1999 CN-RURAL WATER IV 16.00 30.00 0.00 0.00 27.99 15.95 1.08 PO37859 1998 CN-GEF Energy Conservation 0.00 0.00 22.00 0.00 4.1 1 21.97 0.00 P0 4 97 0 0 1998 IAIL-2 300.00 0.00 0.00 0.00 16.67 6.59 0.00 P0 4 69 5 2 1998 FOREST. DEV. POOR AR 100.00 100.00 0.00 0.00 54.11 -52.96 9.39 PO40185 1998 CN-SHANDONG ENVIRONMENT 95.00 0.00 0.00 1.40 28.29 25.29 0.00 PO51736 1998 E. CHINNJIANGSU PWR 250.00 0.00 0.00 86.00 62.95 148.95 4.36 PO46563 1998 TARIM BASIN II 90.00 60.00 0.00 2.67 45.26 39.17 0.00 PO03619 1998 CN-2nd Inland Waterways 123.00 0.00 0.00 0.00 69.06 61.06 0.00 PO35698 1998 HUNAN POWER DEVELOP. 300.00 0.00 0.00 145.00 84.76 211.76 9.16 PO03614 1998 CN-Guangzhou City Transport 200.00 0.00 0.00 0.00 129.54 128.46 0.00

- 91 - Difference between expected and actual Original Amount in US$ Millions disbursements' Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd PO03566 1998 CN-BASIC HEALTH (HLTHB) 0.00 85.00 0.00 0.00 36.28 21.88 0.00 PO03606 1998 ENERGY CONSERVATION 63.00 0.00 22.00 0.00 42.34 15.01 0.00 PO03539 1998 SUSTAINABLE COASTAL RESOURCES DEV. 100.00 0.00 0.00 2.31 50.84 40.65 4.27 PO45788 1998 Tri-Provincial Hwy 230.00 0.00 0.00 0.00 48.00 29.20 0.00 PO36949 1998 CN-Nat Hwy3-Hubei 250.00 0.00 0.00 0.00 33.00 10.50 0.00 PO36414 1998 CN-GUANGXI URBAN ENVMT 72.00 20.00 0.00 0.00 76.87 58.92 8.47 P0 0 3 5 9 0 1997 QINBA MOUNTAINS POVERTY REDUCTION 30.00 150.00 0.00 0.00 47.61 51.05 0.00 PO03643 1997 CN-2nd Xinjiang Hwy 300.00 0.00 0.00 60.00 9.78 69.78 9.78 PO03637 1997 CN-NAT'L RURAL WATER 3 0.00 70.00 0.00 0.00 3.84 6.43 6.26 PO44485 1997 SHANGHAI WAIGAOQIAO 400.00 0.00 0.00 0.00 122.29 79.59 19.34 PO36405 1997 WANJIAZHAI WATER TRA 400.00 0.00 0.00 75.00 49.86 124.86 24.86 PO35693 1997 FUEL EFFICIENT IND. 0.00 0.00 32.80 0.00 8.79 32.81 0.00 PO38988 1997 HEILONGJIANG ADP 120.00 0.00 0.00 0.00 13.08 13.08 0.00 PO34081 1997 XIAOLANGDI MULTI. II 430.00 0.00 0.00 78.53 0.28 118.73 7.88 PO03654 1997 Nat Hwy2iHunan-Guangdong 400.00 0.00 0.00 0.00 71.59 71.59 0.00 PO03650 1997 TUOKETUO POWERANNER 400.00 0.00 0.00 102.50 41.31 129.86 -3.43 PO03599 1996 CN-YUNNAN ENVMT 125.00 25.00 0.00 19.48 53.28 72.17 -4.56 PO40513 1996 2nd Henan Prov Hwy 210.00 0.00 0.00 0.00 42.88 42.88 12.88 PO03602 1996 CN-HUBEI URBAN ENVIRONMENT 125.00 25.00 0.00 28.32 44.54 74.90 7.90 PO03649 1996 SHANXI POVERTY ALLEV 0.00 100.00 0.00 0.00 2.12 11.40 0.00 PO03648 1996 CN-SHANGHAI SEWERAGE II 250.00 0.00 0.00 0.00 60.16 60.16 -0.70 PO34618 1996 CN-LABOR MARKET DEV. 10.00 20.00 0.00 0.00 5.54 7.77 0.00 PO03646 1996 CN-CHONGQING IND POL CT 170.00 0.00 0.00 164.82 1.31 166.13 1.31 PO03589 1996 CN-DISEASE PREVENTION (HLTH7) 0.00 100.00 0.00 0.00 13.07 22.68 0.00 PO03594 1996 OANSU HEXI CORRIDOR 60.00 90.00 0.00 0.00 78.39 57.14 0.00 PO03638 1996 SEEDS SECTOR COMMER. 80.00 20.00 0.00 16.00 5.20 22.25 -0.57 PO03571 1995 CN-7th Railways 400.00 0.00 0.00 119.00 50.25 169.25 40.28 PO03585 1995 SHENYANG IND. REFORM 175.00 0.00 0.00 0.00 33.02 33.02 0.00 PO36947 1995 CN-Sichuan Power Transmission Project 270.00 0.00 0.00 95.00 11.79 106.79 6.59 PO03647 1995 China Economic Law Reform -LEGEA 0.00 10.00 0.00 0.00 3.40 3.92 0.00 PO03642 1995 CN-ZHEJIANG POWER DEVT 400.00 0.00 0.00 0.00 34.79 40.29 0.00 PO03598 1995 CN-LIAONING ENVIRONMENT 110.00 0.00 0.00 8.50 0.30 8.80 8.80 PO03603 1995 CN-ENT HOUSING a SSR 275.00 75.00 0.00 50.36 59.67 108.34 7.31 PO03404 1994 SICHUAN GAS DEV. CON 0.00 0.00 10.00 0.00 0.02 0.78 0.00 PO03644 1994 XIAOLANGDI RESETTLEMENT 0.00 110.00 0.00 0.00 0.04 -1.85 -1.95 PO03626 1994 Fujian Prov Highway 140.00 0.00 0.00 18.11 6.65 24.76 24.74 PO03609 1994 SICHUAN GAS DEV 8 CONSERVATION 255.00 0.00 10.00 37.67 9.1 1 46.78 0.00 PO03595 1994 RED SOILS II AREA DEVELOPMENT PROJECT 0.00 150.00 0.00 0.00 4.95 0.10 -1.73 PO03473 1993 CN-ZHEJIANG MULTlClTlES DEVELOPMENT 0.00 110.00 0.00 0.00 0.14 0.30 -2.02 PO03592 1993 REF. 1NST'L.B PREINV 0.00 50.00 0.00 0.00 2.07 2.48 2.48

Total: 12902.30 1752.60 197.80 1129.27 5543.44 3721.53 211.72

- 92 - CHINA STATEMENT OF IFC's Held and Disbursed Portfolio Jun 30 - 2002 In Millions US Dollars

Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1997 Orient Finance 9.52 0.00 0.00 11.90 9.52 0.00 0.00 11.90 1997100 PTP Holdings 0.00 0.03 0.00 0.00 0.00 0.03 0.00 0.00 1997 PTP Hubei 11.72 0.00 0.00 23.29 11.72 0.00 0.00 23.29 1996 Pacific Ports 0.00 2.54 0.00 0.00 0.00 2.54 0.00 0.00 2001 Peak Pacific 0.00 0.00 25.00 0.00 0.00 0.00 0.00 0.00 1998 Rabobank SHFC 0.90 0.00 0.00 0.90 0.90 0.00 0.00 0.90 2000 SSIF 0.00 6.00 0.00 0.00 0.00 0.45 0.00 0.00 1998 Shanghai Krupp 30.00 0.00 0.00 68.80 19.74 0.00 0.00 45.26 1999 Shanxi 17.87 0.00 0.00 0.00 15.32 0.00 0.00 0.00 1993 Shenzhen PCCP 3.76 0.99 0.00 0.00 3.76 0.99 0.00 0.00 2001 Sino-Forest 25.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00 1995 Suzhou PVC 0.00 2.48 0.00 0.00 0.00 2.48 0.00 0.00 1998 WIT 5.00 0.00 0.00 5.00 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 1.92 0.00 0.00 0.00 1.92 0.00 0.00 0.00 1993 Yantai Cement 11.13 1.95 0.00 0.00 11.13 1.95 0.00 0.00 1998 Zhen Jing 0.00 2.00 0.00 0.00 0.00 2.00 0.00 0.00 2002 Advantage 0.00 0.25 0.00 0.00 0.00 0.00 0.00 0.00 1999100102 Bank of Shanghai 0.00 24.67 0.00 0.00 0.00 24.67 0.00 0.00 1996 Beijing Home1 2.50 0.50 0.00 1.65 2.50 0.50 0.00 1.65 1998/00 CIG Holdings PLC 0.00 3.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 CPEF 0.00 20.00 0.00 0.00 0.00 0.00 0.00 0.00 1996 Caltex Ocean 18.53 0.00 0.00 28.64 18.53 0.00 0.00 28.64 1998 Chengdu Huarong 7.40 3.20 0.00 8.60 3.70 3.20 0.00 4.30 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 0.2 1 0.00 0.00 0.00 0.2 1 0.00 0.00 1994 Dalian Glass 0.00 2.40 0.00 0.00 0.00 2.40 0.00 0.00 1999 Dujiangy an 25.59 0.00 0.00 30.00 16.11 0.00 0.00 18.89 1995 Dupont Suzhou 12.46 4.15 0.00 10.40 12.46 4.15 0.00 10.40 1994 Dynamic Fund 0.00 9.75 0.00 0.00 0.00 8.09 0.00 0.00 1999 Hansom 0.00 16.10 0.00 0.00 0.00 16.10 0.00 0.00 2002 Huarong AMC 31.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 IEC 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1996 Jingyang 32.50 0.00 0.00 69.23 32.50 0.00 0.00 69.23 1998 Leshan Scana 6.10 1.35 0.00 0.00 4.50 1.35 0.00 0.00 2001 Maanshan Carbon 9.00 2.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 NCCB 0.00 26.58 0.00 0.00 0.00 26.46 0.00 0.00 1996 Nanjing Kumho 6.82 3.81 0.00 19.38 6.82 3.81 0.00 19.38 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 Total Portfolio: 304.22 166.98 25.00 277.79 206.13 127.02 0.00 233.84

- 93 - Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic 2002 Darong 10.00 0.00 1.50 8.00 2002 Narada Battery 6.60 0.00 0.00 0.00 2002 Zhong Chen 25.00 0.00 0.00 32.00 2002 ASIMCO 0.00 13.50 1.50 0.00 2002 Sino Mining 5.00 0.00 0.00 5.00 2002 Shuang Deng 12.50 0.00 2.80 0.00 2002 KHIT 0.00 0.00 3.00 0.00 2002 SML 0.00 0.00 6.00 0.00 1996 Jingy ang 4.00 0.00 0.00 0.00 1998 PTP Hubei BLINC 0.00 0.00 0.00 1.50 2000 CIG Zhapu 6.00 5.00 0.00 0.00 2000 Meijing 9.00 0.00 0.00 7.30 2000 CIMIC Tile 15.00 5.00 0.00 15.00 2001 Daning Coal 0.00 0.00 2.00 15.00 2001 AACI 0.00 0.00 2.00 0.00 2001 Minsheng 0.00 23.50 0.00 0.00 2002 Huarong AMC 15.00 0.00 3.00 0.00 2002 IEC 0.00 5.00 0.00 0.00 Total Pending Commitment: 108.10 52.00 21.80 83.80

- 94 - Annex IO: Country at a Glance CHINA: Zhejiang Urban Environment Project East Lower- POVERTY and SOCIAL Asia i3 middle- China Pacific income Development diamond* 2001 Population, mid-year (millions) 1,271.9 1,826 2,164 Life expectancy GNI per capita (Atlas method, U F) 890 900 1,240 GNI (Atlas method, US$ billions) 1,129.3 1,649 2,677 Average annual growth, 1995-01 Population I%) 0.9 1.1 1.o Labor force (%) 1.o 1.3 1.2 Most recent estimate (latest year available, 1995-01) Poverty (% of population below national p0~ei-f~line) 5 Urban population (% of total population) 38 37 46 Life expectancy at birth (years) 71 69 69 Infant mortality (per 1,000 live births) 32 36 33 Child malnutrition (% ofchildren under 5) 10 12 11 Access to improved water source Access to an improved water source I% ofpopulation) 75 74 80 I Illiteracy (% ofpopulation aqe 15+) 15 14 15 Gross pnmary enrollment (% of school-aqe population) 107 107 107 - tChina Male 106 106 107 - Lower-middle-income qroup 1 Female 109 108 107

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1981 1991 2000 2001 Economic ratios* GDP (US$ billions) 228 3 402.6 1,077.5 1,150.1 Gross domestic InvestmenffGDP 32 5 34.8 38.1 37.9 Trade Exports of goods and services/GDP 8.6 19.4 25.9 25.8 Gross domestic savings/GDP 32.9 38.1 38.8 40.3 - Gross national savingslGDP 32 8 38.5 38.0 39.4 Current account baiancelGDP 04 3.8 1.9 1.5 interest payments/GDP 02 0.7 0.6 0.6 Investment Total debffGDP 25 15.0 13.9 14.8 Total debt serviceiexports 69 10.1 7.4 6.8 1 Present value of debtlGDP 12.5 11.7 Present value of debffexports 46.0 43.5 Indebtedness 1981-91 1991-01 2000 2001 2001-05 I (average annual growih) GDP 100 97 8.0 7.3 6.9

GDP per capita 8.4 8.6 7.1 6.6 6.1 ~ Lower-middle-income1 group I Exports of goods and services 12.1 8.3 30.6 5.0 7.7 STRUCTURE of the ECONOMY 1981 199.1 2000 2001 Growth of investment and GDP (X) (% of GDP) 20 Agriculture 31.8 24.5 15.9 15.2 ..T Industry 464 421 I Manufacturing 385 327 Services 21 8 334 33.2 33 6 Private consumption % 97 98 99 00 01 I General government consumption 145 13 1 131 137 a GDI 'IOIGDP imports of goods and services 82 161 23 2 234 -

1981-91 1991-01 2000 I Growth of exports and imports (Oh) (average annual growth) 1 Agriculture 5.2 4.0 2.4 2.8 40 T I Industry 11.4 12.6 9.6 8.7 Manufacturing 11.1 11.6 9.1 9.0 Services 12.6 8.7 7.8 7.4 Q&%/ 97 98 99 00 01 I Private consumption 8.3 8.6 8.7 6.2 General government consumption 9.9 8.5 12.2

Gross domestic investment 10.4 10.3 4.2 12.8 'A w -'Exports +Imports ImDorts of aoods and services 9.6 6.4 24.5 10.8

Note: 2001 data are preliminary estimates. *The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete

- 95 - China

PRICES and GOVERNMENT FINANCE 1981 1991 2000 2001 Domestic prices (% change) Consumer prices 25.7 3.4 0.4 0.7 implicit GDP deflator 2.3 6.7 0.9 0.0 Government finance (% of GDP, includes current grants) Current revenue 24.2 16.9 15.3 17.2 Current budget balance .. 2.3 0.6 1.o GDP deflator *CPI Overall surplusldeficit 0.8 -1.1 -3.6 -3.2 - I

TRADE 1981 1991 2000 2001 Export and import levels (US$ mill.) (US$ millions) Total exports (fob) 22,007 71,843 249,210 266,155 300.000 T Food 2,924 7,226 12,282 12,780 I 7,851 8,420 Fuel 5,228 4,754 200 000 Manufactures 11,759 55,698 223,752 239,800 Total imports (cifl 22,015 63,791 225,097 243,610 Food 3,622 2,799 4,758 4,980 100 000 Fuel and energy 83 2,113 20,637 17,490 Capital goods 5,866 19,601 91,934 107,040 0 95 96 97 98 99 00 Export price index (1995=100) 16 51 67 65 0 Exports Imports Import price index (1995=100) 13 49 75 73 W O1 Terms of trade (1995=100) 118 103 90 90 I

BALANCE of PAYMENTS 1981 1991 2000 2001 Current account balance to GDP (Oh) (US$ millions) Exports of goods and services 24,410 78,909 279,561 299,410 Imports of goods and services 23,426 65,339 250,688 271,324 'T Resource balance 984 13,570 28,873 28,086 Net income -124 840 -14,666 -19,173 Net current transfers .. 830 6,311 8,492 Current account balance 860 15,240 20,519 17,405 Financing items (net) .. -4,149 -9,971 29,920 Changes in net reserves .. -11,091 -10,548 -47,325 I 95 96 97 98 99 w 01 Memo: Reserves including gold (US$ millions) .. 48,154 171,753 219,970 Conversion rate (DEC, /ocal/US$) 2.1 5.4 8.3 8.3

EXTERNAL DEBT and RESOURCE FLOWS 1981 1991 2000 2001 (US$ millions) Composition of 2001 debt (US$ mill.) Total debt outstanding and disbursed 5,798 60,259 149,800 170,000 0 iBRD 3,494 11,118 11,479 G: 17,682 A 11,479 IDA 0 3,672 8,771 8,550 Total debt service 1,744 8,305 21,728 20,900 IBRD 0 357 1,291 1,716 IDA 0 23 131 164 Composition of net resource flows Omcial grants 19 406 147 Official creditors 506 2,044 1,927 Private creditors 89 2,493 -2,302 Foreign direct investment 0 4,366 42,096 47,052 Portfolio equity 0 565 7,814 2,404 World Bank program

Commitments 196 2,622 1,536 1,230 A ~ IBRD E ~ Bilateral

Disbursements 0 1,280 1,907 1,947 B - IDA D ~ Other multilateral F - Private Principal repayments 0 131 644 999 C - IMF G - Short-term Net flows 0 1,149 1,263 948 Interest payments 0 250 778 801 Net transfers 0 899 485 67

- 96 - Additional Annex 11 : Safeguard Issues CHINA: Zhejiang Urban Environment Project

A. Summary of Environmental Impacts and Environment Management Plans

Background

1. The Zhejiang Environmental Protection Research Institute carried out the Environmental Assessment (EA) ofthe proposed Zhejiang Urban Environment Project (ZUEP)‘in accordance with Chinese national and Bank procedures, with support from independent intemational consulting specialists. Various drafts were reviewed and discussed in detail during project preparation. The draft EA documents were submitted to the Bank in January 2003 and reviewed by the Bank during a mission in March 2003. The final EA Report, Environmental Action Plan (EAP) and Executive Summary (ES) were submitted to the Bank in March 2003 and found to be satisfactory. The EA Report was sent to the Bank’s Information Center in March 2003. During the EA work local people were consulted, and their opinions have been reflected in the project design and environmental mitigation measures as appropriate.

2. The policy and administrative requirements for environmental assessment of development projects in China were followed during preparation and evaluation of the EA, as well as the Bank’s policy. Major laws and regulations applied to the EA are as follows: (a) Environmental protection Law of the People’s Republic of China; (b) Atmospheric Pollution Control Law; (c) Environmental Noise Control Law; (d) Water Pollution Control Law; (e) Cultural Heritage Protection Law; (f) Notice of Strengthening the EA Management Work of Construction Projects financed by htemational Financial Organizations; and (g) Technical Guidelines for Environmental Impact Assessment.

Brief Project Description

3. The Zhejiang Urban Environment Project includes the following components for which EAs have been completed:

0 Hanazhou. Extension of a major landfill disposal site in Hangzhou

0 Ningbo. Wastewater treatment and associated sewerage in Ningbo and Zhenhai; sewerage and roads in Dongqian Lake; and infrastructure upgrading in Cicheng

0 Shaoxing. Urban infrastructure upgrading, conservation ofhistoric buildings and rehabilitation ofurban watercourses in Shaoxing

Central to the project are capacity- and institution-building measures, urban information systems development, training and environmental quality monitoring and control.

- 97 - Baseline Environmental Description

4. Natural Environment. Zhejiang Province (population 45 million) is the third smallest province of China with an area of 101,800 km2. It is located on the East cost ofChina and is bounded by Shanghai and Jiangsu Province to the north, the East China Sea to the east, Fujian Province to the south and Jiangxi and Anhui Provinces to the west. The greater part of Zhejiang Province lies to the south ofHangzhou Bay and is largely mountainous. It has a rocky and deeply indented coast, dotted with more than 18,000 islands, forming numerous natural harbors. The north-western section ofthe province lies within the fertile Yangtze River Delta, with its labyrinth ofrivers and canals; its coastal lowlands are protected by dikes.

5. Hangzhou (population 3.7 million) the provincial capital command an important geographical location stands on the north bank ofthe Qiantang estuary at the apex ofHangzhou Bay and is the southern terminus ofthe Grand Canal. The city is one ofthe key historical, cultural and scenic centers ofChina with a history stretching back more than 2200 years. It stands on the shore ofthe famous Xi Hu (West Lake), which adds to the reputation ofthe city as a major tourist destination for both domestic and foreign visitors.

6. The port city ofNingbo (population 1.25 million), located 170 km east ofHangzhou, is the second city ofZhejiang and has for many years been an important trade and industrial center. Shaoxing (population 0.9 million), located 67 km south east of Hangzhou, is also an industrial city but has a remarkable cultural heritage, with a history dating back more than 2500 years. The Old City has many buildings and sites ofhistorical interest.

7. Zhejiang has a humid subtropical climate, controlled chiefly by monsoon airflows, modified by local influences. Considerable differences exist between the coast and the hinterland, between the lowlands and the highlands, and between the north and the south, particularly in winter. Hangzhou has an average January temperature of4" C, while that of Wenzhou on the coast is about 8" C. Summers are hot throughout the province, with average July temperatures in the order of28" C. Annual rainfall throughout the province is more than 1000 mm, with the hilly interior having more precipitation than the coast, which is frequently visited by typhoons, particularly during late summer and early autumn.

8. Socioeconomic Situation. Zhejiang is one of the most prosperous provinces ofChina, with a per capita GDP ofUS$1625 in 2000. Its agriculture is among the most diversified ofthe provinces ofChina, with less than half its farm output by value coming from food or cash crops. Because ofthe hilly topography, only about one-fifth ofthe land surface is arable and about 80% ofthis is irrigated. Zhejiang is among the leading provinces in farm productivity in the tea industry and in sericulture.

9. Most ofthe wealth ofZhejiang derives from light industry, which in part reflects the historic role of the province as a commercial and handicraft center and a significant textile producer since the 1890s. The province has become a major exporter with a number ofspecialized export centers for light industrial products and handicrafts. Hangzhou has become a major industrial city since 1949 and produces a wide range of industrial and consumer goods, including machinery, textiles, agricultural implements, chemicals, radios, and televisions. Ningbo is also a major industrial center and its designation as one ofChina's "open" cities has stimulated foreign investment and technology transfer. Shaoxing is also an important industrial city specializing in textiles and wine production.

- 98 - 10. Zhejiang is served by an extensive high quality highway network centered on Hangzhou and linking all major towns in the province. Heavy freight is often moved by rail, especially for longer distances, and Hangzhou is linked by rail to many ofthe major cities of China. Although the rivers play an important role in the province's transport, with about half ofthe total freight volume traveling on these inland waterways, coastal shipping accounts for only a small percentage ofthe total freight volume. There are three intemational airports (at Hangzhou, Ningbo and Wenzhou) allowing air transport to Hong Kong.

1 1. Water Oualitv. Zhejiang has substantial rainfall and therefore generally adequate water resources. River flows are also substantial and water quality in the mainstreams in the province is generally good. However, water quality in some sections of these rivers in the urban areas ofthe province is poor because ofthe generally low collection and particularly treatment rates for municipal wastewater in the major cities. Pollution is particularly severe in the tributaries and urban watercourses within these cities.

12. In the case ofNingbo as a whole the wastewater treatment rate is very low, only approximately 10%. There is only one functioning wastewater treatment plant in Ningbo at Jiangdongbei, with a capacity of 100,000 m3/d but operating at only 50% ofdesign capacity. The city is required by Central Government to increase the wastewater treatment rate to at least 60% by 2010. There is no wastewater treatment in either Zhenhai, or Cicheng and as a consequence there is serious pollution ofurban watercourses in these areas. In the case of Dongqian Lake there is discharge ofuntreated municipal wastewater to the lake, which is also polluted by other sources, particularly small scale rural agriculture.

13. There have been major investments in wastewater collection and treatment in Shaoxing, but in the historic inner city collection rates are low and there is no wastewater collection in the historic conservation areas, which are served by nightsoil collection systems. Substantial volumes ofwastewater are therefore discharged to the canals in the old city, which is causing serious deterioration in water quality in these canals. Water quality in the canals is controlled to a degree by flushing using water pumped from the moat surrounding the old city, but it frequently fails to meet even Category V of the environmental quality standards in part as a consequence of declining water quality in the moat.

14. Wastes Management. Wastes management for the major cities in the province involves a combination oflandfill and incineration. Disposal of wastes from Hangzhou is mainly at a major landfill site in a valley at Tianziling, some 20 km from the city center, with wastes from two adjacent counties being incinerated. This site is operated to a high standard, but leachate collection is incomplete. Landfill gas is collected from the site and used for electricity generation for export to the local electricity grid. This is undertaken via an arrangement with an intemational private sector wastes management contractor. Most importantly the site is nearing completion and a replacement site is urgently required to sustain wastes management operations for the city.

Environmental Benefits

15. The extension ofthe Tianziling landfill serving Hangzhou will provide the city with a high quality and environmentally secure long term disposal resource for municipal solid wastes operated to intemational standards ofsanitary landfill. This will enable the city to continue to increase the waste collection service area and thereby ensure further improvements in urban environmental sanitation. The secure landfill site liner will effectively eliminate leachate pollution ofgroundwater and the expansion ofthe gas collection and utilization systems will substantially reduce greenhouse gas emissions from the landfill.

- 99 - 16. The wastewater treatment and associated sewerage system investments in the Ningbo municipality area will substantially increase the wastewater treatment rate in the area and will alleviate the pollution of urban watercourses and ofthe major rivers. In addition they will improve standards ofpublic health through the reduction ofmany ofthe physical vectors that contribute to the transmission ofwaterborne and water-related diseases. The associated improvements in the living environment in the areas covered by the project investments is expected to have a positive impact on property values in these areas. Moreover the removal or replacement of outdated septic tank and night soil facilities will both reduce the pollution fiom these facilities and substantially reduce sanitation system operating costs.

17. In the case ofthe Dongqian Lake component the wastewater collection and treatment proposals will very substantially reduce the pollution load to the lake from municipal wastewater, which is among the principal pollution sources. A comprehensive Catchment Management Plan has been prepared during project preparation with the objectives ofmanagement and control of other pollution sources and to develop policy instruments to restrict and control polluting activities within the lake catchment on a sustainable basis.

18. The urban reconstruction and conservation ofhistoric buildings in Shaoxing will assist in modernizing the city while at the same time preserving the heritage ofthe city’s history. The provision of piped sewerage systems in the historic conservation areas and the rehabilitation ofurban watercourses in the city through a combination of dredging and improved pumping to enhance flushing rates will improve both flow characteristics and water quality in the canals. At the same time optimization ofpumping arrangements will reduce the present high operating costs for canal flushing.

Potential Environmental Impacts and Their Mitigation Measures

19. The project as a whole is substantially positive in environmental terms, with the benefits greatly outweighing the negative impacts. Nevertheless some negative impacts have been identified in the EA process for all components, and these require mitigation measures. The principal impacts and their appropriate mitigation measures are described below.

20. Sludge Production. Treatment of wastewater at the treatment plants proposed will generate substantial quantities of sludge. The aggregate quantity of sludge produced at the treatment plants at Jiangdongnan and Zhenhai WWTPs will be in the order of 100 tons of dewatered sludge cake per day. The Ningbo Municipal Government has other extensive plans to enhance levels ofwastewater treatment, which will hrther increase quantities of sludge requiring disposal, and has therefore produced a comprehensive Sludge Management Plan covering the entire Municipality area. In the immediate term disposal will need at least in part to be by landfill, and environmentally secure landfill facilities will be provided.

2 1. Landfill Impacts. The principal impacts associated with landfill will be the generation ofleachate and landfill gas. Pollution ofgroundwater will be minimized by the installation of an impermeable membrane liner, and extensive leachate treatment facilities are being provided within the project to allow the disposal of treated leachate to the municipal sewerage system. In addition it is proposed to use (and extend as necessary) the landfill gas collection and power generation facilities at the existing landfill to serve the new landfill.

22. Zhenhai Outfall Imuact. There will be a water quality impact in the immediate vicinity ofthe marine outfall discharging treated wastewater from Zhenhai and marine environmental quality standards will not be met within the associated mixing zone. The area of this zone will be minimized by the use of an

- 100 - efficient diffuser system on the outfall pipeline designed on the basis of detailed mathematical dispersion modelling.

23. Construction Spoil. Substantial quantities of spoil will be generated as a result of excavation for pipeline installation, dredging of canals in Shaoxing and Cicheng and for the construction ofwastewater treatment plants. Most ofthe material will be re-used on site, and spoil disposal plans have been prepared for each project component where excess spoil will be generated. It is expected that most spoil will be beneficially used in other local construction activities and therefore spoil disposal will not be problematic. Where it is necessary to dispose of dredged material, it will be monitored for contamination in order to determine suitable disposal options.

24. Pipeline and Road Impacts on Sensitive Areas. Impacts on sensitive areas will be minimized by route realignment or by protection. Where the routes ofpipelines cross agricultural land, the fertility of land will be protected by the careful separate storage and stockpiling oftopsoil and subsoil for subsequent replacement.

25. Other Construction Imuacts. Other impacts of construction include noise from construction machinery, generation of dust and disruption of local traffic. These will be minimized by appropriate restrictions on working hours and operational procedures of the contractors concerned.

26. Other Operational Impacts. The other significant potential impacts ofthe operation ofwastewater treatment plants and pumping stations are noise and, in the case ofwastewater treatment plants, odor. These will be minimized by the siting of the plants and by the provision ofbuffer zones and landscaping. Where there are sensitive noise receptors close to the facilities, the noise emissions will be minimized by appropriate acoustic insulation of machinery.

27. There will also be traffic impacts associated with the delivery ofwaste for disposal at the Tianziling landfill and with the transport of dewatered wastewater treatment sludge for off-site landfill disposal. These will be minimized by restrictions on the times ofday allowed for these activities; in the case ofthe existing landfill at Tianziling such restrictions are already in place.

Public Consultation and Information Disclosure

28. The following approaches were adopted for public consultation: (a) meetings with city Project Management Offices (PMOS), utility companies, municipal EPBs, and other affected city departments; and (b) surveys to gauge the public perception ofthe positive and negative impacts ofeach of the proposed schemes. All schemes proposed were well received by the public.

29. The public participation exercise was undertaken in three forms: bulletins in the press, public opinion questionnaires and surveys of the public. The phasing ofthe public participation exercise is shown in the following table.

- 101 - Public Participation Phasing and Goals in the project Cities

Round Round separation Major participation goals 1st round Environmental Identify stakeholder groups; secure proponent commitment (screening ) screening to public participation program; agree on extent and mode ofparticipation 2nd round Shortly after Identify stakeholders; disclose relevant project environmental screening, information,; determine stakeholder concerns and include before the EA TOR them in the TOR. finalized 3rd round After EA report (draft) Disclose information on study methods and findings; agree is prepared on proposed mitigation measures with stakeholders; let stakeholders determine whether their concerns are adequately addressed

0 Bulletins in the press: Bulletins were published in the local press in the project cities containing the general pollution situation in the basin rivers and the objectives ofthe project investments

0 The Willingness to Pay Surveys; These surveys were carried out at an early stage ofthe project preparation to assess the overall acceptability of the project to the people ofthe project cities in the light of increased tariffs.

0 Public Opinion Questionnaire: Opinion polls were carried out in the districts affected by the project in the various cities. The questionnaire obtained written individual opinions of the project.

0 Survey of the Public: The survey invited individuals, government agencies, community organizations, corporations and villages , whose opinions were considered and inquiries answered.

30. The EA and ES were made public locally in the project cities; this availability was advertised through the local press. Following submission to the Bank the documents were sent to the Bank’s Public Information Center. Details pertaining to the public consultations and information disclosure for each of the project cities are provided in the following tables.

- 102- Hangzhou Tianziling Landfill

Public Consultation

Substance By whom and with whom When I Where I Bank’s requirement Interview during field social Wang Huizhen 0611996 I 231-B Tivuchane lOD 4.30 and OP 4.01 economic survey and first public Liu Baohua I Rd., Hangzhou meetings Yu Jiyu, etc. 7 people ’-1 RAP outline consultation People of Shitang Town 08/2002 - Shitang Town 07/2003 12/14/1999 Zhongbei Hotel, OP4.0: consultation Zheng Wei Liang Hangzhou during TOR stage (their Gao Jianzhong, etc. work done before OP requirement)

Jia Zhijiu Hangzhou during TOR stage (their Xu Hong, etc. work done before OP I 14people requirement) Distribution of questionnaires and I People of Shitang Town; 12/06/2002 Shitang Town key EA and messages in People of BanshG Town bullet point format Distribution of project information People of Shitang Town; and draft EA and RAP in second People of Banshan Town Banshan Town Consultation prior to public meetings Final EA People of Shitang; 0712003 Shitang Town, People of Banshan Town Final RAP People of Shitang Town; 0712003 Shitang Town, I People of Banshan Town

Information Disclosure

Document I Date of Disclosure I Location I Bank’s Requirement Copies of EA and TOR and RAP I 1211999 I Zhongbei Hotel, Hangzhou lOP 4.01; OD 4.30; outline BP 17.50 .Questionnaires and key EA and RAP 03/05/2003 Hangzhou Daily messages Draft EA and RAP reports 03/22/2000 Zhongbei Hotel, Hangzhou Final EA and RAP reports 0712003 252 Tiyuchang Rd., Hangzhou Notice for availabilitv of EA and 0112003 Shitane Town. Banshan Town RAP reports at PMdand CDC Resettlement information booklet 1 08/01/2003 1 WWW.cnlandfill.com

- 103- Ningbo Jiangdongnan Wastewater

Public Consultation

Substance By whom and with whom When Where Bank's requirement Interview during field social 'eople with PMO, agencies for 0412002 Linjia Village in OD 4.30 and OP 4.01 economic survey and the first ,esettlement, housing and land Zhonggongmiao Town nublic meetings RAP outline consultation Project Office Draft EA TOR consultation The location for WWTP in OP4.0: consultation during Yinzhou District TOR stage (their work done before OP requirement) EA TOR consultation litto 0612002 - 0812002 Downtown work done before OP I requirement) Distribution of questionnaires and EA: People for the reports 0412002 - The location for WWTP in I key EA and RAP messages in preparation 0212003 bullet point format RAP: People with PMO, agencies for resettlement, 0512002 housing and land adminis- - 0912002 tration and affected people areas Distribution of project informatioi Ningbo Daily, reading room in OP4.0 1: and draft EA and RAP in second Bao Yugang Library & Consultation prior to public meetings website: www.nbepb.cnnb.net finalization of draft report

Ningbo Daily, reading room in the Bao Yugang Library and esettlement, housing and land Linjia Village in idministration and affectedpeople ZhonggongmiaoTown Final EA Uudated timelv Final RAP PMO esettlement, housing and land

Information Disclosure

Document I Date of Disclosure I Location I Bank Requirement Copies of EA and TOR and RAP I 0412002 I PMO I OP 4.01; OD 4.30; outline BP 17.50 Questionnaires and key EA and RAP EA: 04/2002 - 0212003 The location for WWTP in Yinzhou District and messages Ningbo Downtown RAP: 0512002 - 0912002 Offices of PMO, agencies for resettlement, housing and land administration and affected areas. Draft EA and RAP reports EA: 03/11/2003 Ningbo Daily, reading room in the Bao Yugang Library and website: www.nbeph.cnnb.net RAP: 1012002 Ningbo Daily, reading room in the Bao Yugang Library

I and citv PMO Final EA and RAP reports 107/2003 1 PMO Notice for availability of EA and I0312003 I PMO RAP reports at PMO and CDC Resettlement information booklet 0412003 Offices of PMO, agencies for resettlement, housing and land administration and affected areas

- 104- Ningbo Zhenhai Wastewater

Public Consultation

Substance By whom and with w horn When Where Bank’s requirement Interview during field social Peopls u ith PMO, agencies for ressnlsment, 0412002 Zhenhai District OD 4.30 and OP 4.01 economic survey and first public housing and land administration and affected meetings people RAP outline consultation PMO and affected people 0412002 PMO Draft EA TOR consultation People for the report preparation 0412002 The location for WWTP in OP4.0: consultation Zhenhai during TOR stage (their District work done before OP requirement) EA TOR consultation People for the report preparation 0612002 - The location for WWTP in OP4.01: consultation 0812002 Zhenhai and Ningbo during TOR stage Downtown Distribution of questionnaires and EA: People for the report preparation 3412002 - The location for WWTP in key EA and RAP messages in 3212003 Zhenhai District and bullet point format Ningbo Downtown PMO, agencies for

RAP: PMO and agencies for resettlement and 3512002 ~ resettlement, housing and housing administration 3912002 land administration and affected areas Distribution of project informatior EA: People for the report preparationand PMO 1112003 Ningbo Daily, reading OP4.01: and draft EA and RAP in second room in the Bao Yugang Consultation prior to public meetings Library & website: finalization of draft report www.nbepb.cnnb.net RAP: People with PMO, agencies for 1012002 Ningbo Daily, Bao resettlement, housing and land administration Yugang Library & and affected people Zhenhai District Final EA People for the report preparation Updated Updated timely timely Final RAP PMO, agencies for resettlement, housing and 0312003 PMO land administration and affected people

Information Disclosure

Location Bank Requirement PMO OP 4.01; OD 4.30; outline BP 17.50 The location for WWTP inZhenhai District and Ningbo messages Downtown RAP: 0512002 - 0912002 Offices of PMO, agencies for resettlement, housing and land administration and affected areas Draft EA and RAP reports EA: 0311 112003 Ningbo Daily, reading room in the Bao Yugang Library & website: www.nbepb.cnnb.net RAP: 1012002 Ningbo Daily, reading room in the Bao Yugang Library &

I city PMO Final EA and RAP reports I07 2003 PMO Notice for availabilit) of EA and I RAP, 03 2003 PMO RAP reports at PMOand CDC Resettlement infomation booklet 0412003 Offces of PMO, agencies for resettlement, housing and land administration and affected areas

- 105- Ningbo - Cicheng Urban Development

Public Consultation

~~ Substance I By whom and with whom When Where Bank’s requirement Interview during field social I People with PMO, agencies for 0412002 Cicheng Town lD 4.30 and OP 4.01 economic survey and first public resettlement, housing and land meetings administration and affected

I nennler--r-- RAP outline consultation I PhlO and affscted peopls 0412002 PMO Draft EA TOR consultation I People for the report 0412002 The location for the sub-project in lP4.0: consultation during preparation Cicheng Town ’OR stage (their work done iefore OP requirement) EA TOR consultation People for the report 0612002 - Cicheng Town, Jiangbei District OP4.01: consultation during preparation 0812002 and Ningbo Down- TOR stage (their work done town before OP requirement) Distribution of questionnaires and EA: People for the report 0412002 - Cicheng Town, key EA and RAP messages in preparation and people with 0212003 Jiangbei District and Ningbo bullet point format Cicheng Town Government Downtown RAP: PMO and agencies for 0512002 - Offices of PMO, agencies for resettlement, and housing 0912002 resettlement, housing and land administration and affected administration and affected are= people. Distribution of project informatior EA: People for the report 0311112003 Ningbo Daily, reading room in the lP4.01: and draft EA and RAP in second preparation and PMO Bao Yugang Library & website: Zonsultation prior to public meetings www.nbepb.cnnb.net inalization of draft report RAP: People with PMO, 1012002 Ningbo Daily, reading room in the agencies for resettlement, Bao Yugang Library & Cicheng housing and land Town office administration and affected I people Final EA I People for the report Updated Updated timely I preparation timely Final RAP I People with PMO, agencies for 0312003 PMO resettlement, housing and land administration and affected people

Information Disclosure

Document I Date of Disclosure Location Bank’s Requirement Copies of EA and TOR and RAP I 0412002 PMO OP 4.01; OD 4.30; outline I BP 17.50 Questionnaires and key EA and RAP EA: 0412002 - 0212003 Cicheng Town, Jiangbei District and Ningbo messages Downtown RAP: 0512002 -0912002 Offices of PMO, agencies for resettlement, housing and land administration and affected areas Draft EA and RAP reports EA: 0311 112003 Ningbo Daily, reading room in the Bao Yugang Library, Cicheng Town & website: www.nbepb.cnnb.net RAP: 1012002 Ningbo Daily, reading room in the Bao Yugang

I Library, Cicheng Town Office and city PMO Final EX and R.4P repons I 072003 PMO Sotice for availabilitv of EX and I RAP. 03 2003 PMO RAP reports at PMOand CDC I Resettlement information booklet 0412003 Offices of PMO, agencies for resettlement, housing and land administration and affected areas

- 106- Ningbo - Dongqianhu Wastewater and Roads

Public Consultation

~ Substance By whom and with whom Bank requirement Interview during field social People with PMO, agencies for ID 4.30 and OP 4.01 economic survey and first public resettlement, housing and land meetinm administration. affected ueoule I RAP outline consultation Affected people and PMO 0412002 I PMO Draft EA TOR consultation People for the report preparation 04/2002 I The location for the sub-proiect lP4.0: consultation during

in Dongqian Lake Town- OR staee"\ (their work doni efore OP requirement) EA TOR consultation People for the report preparation 0612002 - Dongqian Lake Town, Yinzhou OP4.01: consultation 08/2002 District and Ningbo Downtown during TOR stage Distribution of questionnaires and EA: People for the report 0412002 - Dongqian Lake Town, Yinzhou key EA and RAP messages in preparation 0212003 District and Ningbo Downtown bullet point format Offices of PMO, agencies for RAP: PMO and agencies for OS12002 - resettlement, housing and land resettlement, housing, and land 0912002 administration, affected areas administration, affected people Distribution of project information EA: People for the report 0311 112003 Ningbo Daily, reading room in lP4.01: and draft EA and RAP in second preparation and PMO the Bao Yugang Library, Town :onsultationprior to public meetings office and website: nalization of draft report www.nbepb.cnnb.net RAP: PMO, agencies for 1012002 Ningbo Daily, reading room in resettlement, housing and land the Bao Yugang Library and Dongqian Lake Town Office Final EA People for the report preparation Updated Updatedtimely

Final RAP People with PMO, agencies for 0312003 resettlement, housing and land administration, affected people : Information Disclosure

Document I Date of Disclosure Location I Bank Requirement Copies of EA and TOR and RAP I 0412002 PMO I OP 4.01: OD 4.30: oufline I BP 17.50 Questionnaires and key EA and RAP EA: 0412002 - 02/2003 Dongqian Lake Town, Yinzhou District and Ningbo I messages DoGfown RAP: OS/2002 - 0912002 Offices of PMO, agencies for resettlement, housing and land administration and affected areas Draft EA and RAP reports EA: 0311 112003 Ninabo Daily, reading room in the Bao Yuaang Libriry, Dongqian Lake Town office and website: www.nbepb.cnnb.net RAP: 10/2002 Ningbo Daily, reading room in the Bao Yugang Library, Dongqian Lake Town office and PMO PMO PMO

Offices of PMO, agencies for resettlement, housing and land administration and affected areas

- 107- Shaoxing Urban Upgrading

Public Consultation

Substance By whom and with whom I When 1 Where Bank’s requirement

I economic sweiand first oublic I units. ueoule with ConstruciionBureau. I I I I meetings I PMO iniresettlement agencies RAP outline consultation I PMO, affected people and resettlement I 0412002 I CityPMO experts Draft EA TOR consultation PMO, affected people and resettlement 1212002 City PMO OP4.0: consultation during TOR experts and environmental stage (their work done before OP administrators requirement) EA TOR consultation PMO, agencies for resettle- 0112002 City PMO OP4.01: consultation during ment and housing and TOR stage (their work done affectedpeople before OP requirement) Distribution of questionnaires and PMO, agencies for resettle- 03/2002 - PMO, resettlement key EA and RAP messages in ment and housing affectedpeople and 1012002 and housing bullet point format consultants administration Distribution of project information PMO, agencies for resettle- 1112002 PMO OP4.01: and draft EA and RAP in second ment and housing, affected people and Consultation prior to finalization public meetings I consultants lof draft report

experts and environment experts Final RAP PMO, offices for resettlement, housing 0412003 PMO administration, affected people and resettlement experts.

Information Disclosure

Document I Date of Disclosure I Location I Bank’s Requirement Copies of EA and TOR and RAP I 0312002 I CityPMO I OP 4.01; OD 4.30; outline BP 17.50 Questionnaires and key EA and RAP 0412002 - 1012002 PMO, agencies for resettlement and housing messages administration Draft EA and RAP reports 1112002 City PMO Final EA and RAP reports EA: 0712003 City PMO, and website: m.zjep,gov.cn RAP: 0712003 City PMO, library and archives Notice for availability of EA and 0412003 Shaoxing Daily RAP reports at PMO and CDC Resettlement information booklet 0412003 PMO, agencies for resettlement and housing administration

- 108- B. Land Acquisition and Resettlement

Introduction

3 1. This part ofthe Annex reviews adverse impacts related to land acquisition and house demolition for the environment project, and the arrangements proposed in the Resettlement Action Plan (RAP) to mitigate them. Consistent with World Bank Operational Policy 4.12 on Involuntary Resettlement, the objectives ofresettlement planning for the project have been to avoid or minimize adverse impacts, and to ensure that incomes and living standards are improved (or at least restored) for all persons adversely affected by the project. Special care has been taken in resettlement planning to ensure that rehabilitation measures are sufficient in particular areas where the labor-to-land ratio is comparatively low.

Land Acquisition and Resettlement-Related Impacts

32. Based on project designs to date, the project will be undertaken in 3 cities in Zhejiang Province, consisting of 6 components; one in Hangzhou city, another one in Shaoxing city and other 4 in Ningbo city. The project will require the permanent acquisition of 1,424.14 mu ( 95 hectares) of land. This includes 456 mu ( 30 hectares) ofcultivated land owned by collectives, and 17 mu ( 1 hectares) of state-own land. Of the collective cultivated land to be acquired, yearly contracted farm land is used by private farmers. A total of466 households with 1,6 10 individuals will be affected by land acquisition. An additional 65 mu ( 4 hectares) of collective land and 254 mu ( 17 hectares ) of state-own land will be used temporarily during the construction period. Structural demolition ofprivate residential housing is expected to total 73,977 square meters, with 705 households ( 2221 individuals) affected. There are 63 enterprises and 15 units with 3,840 employees to be affected by structure demolition.

33. Particularly, the Shaoxing municipal government encourages some ofresidential citizens to move out ofYue District as to improve people’s living condition funded by local finance resources and reduce the pressure of high density ofpopulation in the area. Based on social development master plan, it assumed that a total of 8,485 families with 26,488 persons would be voluntary to move out of the area within 2 decades. It was investigated there would be 2,357 families with 7,034 volunteers during the Bank project period. The Bank considers that the voluntary resettlement is linked to the Bank financed project and will be supervised timely as the Bank requirement. Consequently, the Bank policy associated to involuntary resettlement will apply to the linked master plan.

34. Relatively minor design changes are likely to continue until implementation. Typically, final designs result in marginal decreases in land acquisition and structural demolition, as well as changes in proportion among categories of affected land and structures.

Legal and Policy Framework

35. The legal basis for land acquisition and resettlement planning includes national, Zhejiang provincial laws and regulations. Relevant national laws or regulations include the Land Administration Law (1999). In China, all land officially designated as all cultivated rural land is owned by village collectives. As a result, there are two types ofland acquisition for this project. One is to acquire collectively owned rural land, with compensation and other forms of assistance provided to the collectives losing the land permanently. The other type ofland acquisition is to use collective land temporarily. In this case, the acquiring agency or unit must provide adequate compensation by the periods of agricultural

- 109- production seasons and the cost ofrecovering the agricultural land. When collectively owned farmland is acquired, the future land user pays compensation for land, loss ofcrops and attached properties, and a resettlement subsidy for the rehabilitation ofaffected persons. According to the land regulation of Zhejiang Province and involved local municipal regulations, the land compensation will be varied by locations of the land. The compensation rates were evaluated by local land administrative units and agreed by villages. Young crop compensation and compensation for affected structures or other fixed assets are paid directly to individuals. The land compensation and resettlement subsidy is to be paid directly to the village-based collectives losing the land. This compensation is to be used for production development, nonfarm employment, income-generating activities or cash for the affected people. With village members in prior approval and district resettlement office in prior approval further, it can also be used for improving community facilities or services. By law, separate accounts on resettlement compensation are to be kept at each affected village, with financial reports provided annually to the next higher level of government.

Compensation Standards

36. The project office in each city consults and negotiates the compensation with each district involved. The actual compensation rates will be based on replacement cost for various categories of affected assets. For the land compensation, it will be based on the highest average annual output value per mu among the same land in the affected districts. In each case, however, compensation rates meet or exceed legal requirements, and meet or exceed replacement cost valuation. (for detailed information regarding compensation rates for structures and land, please see the 6 relevant RAPS). In many cases, local authorities may increase compensation rates for acquired land and demolished structures in response to local variations in property valuation or to meet other local contingencies. In all cases, however, compensation will meet or exceed standards established in the RAP. The project also will affect public infrastructure. Compensation based on replacement value will be paid to the relevant government agencies or local governments to restore the affected infrastructure and services.

Rehabilitation Arrangements

37. The proposed environment projects will be undertaken in 3 municipalities in Zhejiang province. The rural population densities are comparatively high at average population with 0.4 mu of farm land. Resettlement planning has included review of impacts on incomes which is based on village impact analysis. Hangzhou and Ningbo are well developed cities in China, in which collective and private enterprises play an important role in locally economic development. Most of employees are local farmers and labors from other provinces. Farmers do not rely on agricultural income. The agricultural income rages 5- 10% of entire family income. In fact, villages have to request farmers to use the land for agricultural production yearly and pay the cost ofwater supply and power supply as to carry out state policies and strategies. However, the land acquisition would not affect farmers significantly. The PMO and villages guaranteed that vulnerable group ofpeople in the affected villages will not be involved in land redistribution if there are the cases. Villagers will decide to use the land compensation.

Institutional Arrangements

38. In China, the project office has no authority to acquire land through regulatory means, or to directly implement any resettlement-related measures. Land acquisition authority, and resettlement-related responsibilities, lie instead with the municipal districts involved. Under such circumstances, close coordination between the project office and the relevant land administration bureaus is essential to effective resettlement. Building on past Bank experience with Bank financed environment projects in

- 110- Zhejiang province, the PMO and each municipalities have established a "provincial leading group" and "municipal leading group" to address any issues that may arise during implementation. The PMO also has established an intemal land acquisition and resettlement division to work with municipal district-level authorities on routine matters.

Village Participation and Public Disclosure

39. Potentially affected villages were consulted during both project design and preparation of the RAP. Additional formal and informal consultations were undertaken by municipal level and district-level land administration officials, and village-based communities. The consultation process was initiated well during the project design and the RAP preparation. Consultations with potentially affected persons occurred during the process ofconducting impact surveys, which began in March 2002. Affected persons were involved in identifying project-related impacts and in measuring potential losses of land, structures and other assets. The consultation process will continue throughout implementation in conjunction with resettlement monitoring activities.

40. Information regarding the project and the resettlement program has been publicly disclosed as required by Bank policy. The draft RAP is available for public review at the provincial library and relevantly municipal libraries, with notification published in the local newspapers on XXX, 2003. Additionally, the draft RAP was placed in the Bank Information shop on XXX ,2003. In addition to formal RAP disclosure, separate campaigns have been, or will be, undertaken to ensure that affected persons are informed about resettlement aspects of direct relevance to them. This information, published in booklets for distribution to households or in posters for village and enterprise display, includes the projected timetable, compensation standards, rehabilitation measures, and information regarding whom to contact and procedures to be followed for those with complaints.

Resettlement Cost and Implementation Schedule

4 1. The cost of land acquisition and implementing resettlement measures is budgeted at some Yuan 613 million (about US$75 million), including payment ofassociated fees, monitoring costs and contingency allowances. Estimated resettlement costs are included in the project budget.

Monitoring of Resettlement Implementation

42. Resettlement implementation will be subject to external project monitoring, to be conducted by two teams that are to function independently ofthe project. Extemal reports will be submitted to the PMO and the Bank twice a year. The reports will review whether implementation is in compliance with RAP terms and will evaluate the effectiveness of resettlement measures in improving or restoring incomes and living standards, including voluntary resettlement implementation in Shaoxing municipality.

- 111 - Details of Resettlement Cost (RMBY)

Items I Hangzhou I Shaoxing I Ningbo I Sub-total Land acquisition I 32,661,600 I 01 38,324,300 I 70,985,900

I total Note: Resettlement management fees range from 3% to 4% of resettlementbudget, depending on the resettlement work, training budget 1%, resettlement planning 2% , independent monitoring 1.5%. The contingency is 10% of resettlement budget.

- 112- Additional Annex 12: Heritage Conservation, Environmental Improvement and Tourism Development in Urban Upgrading CHINA: Zhejiang Urban Environment Project

Development Objectives 1. The Zhejiang Urban Environment Project would support the municipalities of Shaoxing and Ningbo (Cicheng town and Dongqian Lake) in implementing the first phase of a long-term urban heritage conservation and environmental improvement program to recover from past environmental degradation of its water and land resources, to enable adjustment of land use and standards of accommodation in historic areas, to provide upgraded urban services, access, traffic and pedestrian movement,. The project also seeks to ensure the sustainability of the urban environments to suit the new tourism and commercial markets in the context ofthe cities’ emerging roles in their regions.

2. Progress toward this objective would be measured in terms of: (a) enhanced quality of life through housing renovation and population de-densification, (b) reduction of pollution from the urban sector through selective high-impact environmental improvements, (c) expansion of capacity for urban management and municipal service provision in historic areas; (d) increase in tourism; and (e) enhanced community participation and employment in the tourism sector.

Strategic Context 3. There are three major issues facing the Municipalities concerned in upgrading the historic urban environments: (a) understanding market demands and opportunities for appropriate reuse and upgrading of historic environments; (b) structural and detailed levels of urban planning withm the municipalities in relation to emerging markets for land use; (c) achieving sustainability through realistic tariffs and pricing mechanisms

4. The effective development ofthe urban areas requires the appropriate conservation and reuse of the historic urban centers. These form the focus of social and cultural environments for their regions. In the context of emerging and highly competitive tourism markets, the sustainability and growth of the historic areas, and the adequate retum on investments made by both the public and the private sectors, requires adequate institutional capacities to make carefully planned approaches to growth and change. Sustainable growth requires the identification of potential and beneficial use in the context of the values and significance of the historic environments, and the support of the communities in the conservation and development oftheir historic environments.

Rationale for Bank Involvement 5. The Zhejiang Urban Environment Project (ZUEP) has incorporated heritage conservation in the proposed urban upgrading work in Shaoxing city and Cicheng town ofNingbo municipality because it was recognized early on that the urban and built heritage is an asset for economic growth and development and that cultural heritage conservation contributes to the goals ofcity livability and competitiveness.

- 113- 6. The proposed conservation of Shaoxing and Cicheng’s traditional urban fabric, its neighborhoods and streetscapes, will preserve urban areas built on a human scale and mixed use activities that effectively support daily life. Conservation of historically significant buildings and monuments will preserve areas of architectural beauty, evidence of past achievements, and cultural traditions, which in tum can create community identity, civic pride and energy for development. Conserving and upgrading traditional public areas such as central squares and marketplaces will preserve convivial spaces and helps maintain positive patterns of interaction and communal activity. In addition, protecting historic natural settings in urban areas will preserve park and recreation space, assets that are in short supply.

7. Economic growth in the ShanghaUZhejiang region has changed and intensified the nature of competition among cities. As diversity becomes more rare, cities with a unique sense of place and living culture are more highly prized. Historic conservation and cultural activities as proposed under the project will maintain the distinctive character of communities in Shaoxing and Cicheng and provide them with an additional means of attracting high-value investments. In addition, conservation and cultural activities will enhance the potential for investments in tourism. Historic sites, cultural entertainment and local crafts will draw tourists and provide residents with the opportunity to participate in one of the fastest growing sectors in China.

8. Over the last two decades, the project cities in Zhejiang province have experienced unprecedented economic growth and expanding populations. The infrastructure upgrading required by this growth has generated much redevelopment in city centers, raised standards of living, and set the stage for continued development by improving transportation, housing, communications, and services. However, the continuous pressure for high density urbanization and the pace of this development, has also resulted in the loss their ancient urban heritage. There is a recent and growing awareness on the part of the municipal governments, that urban heritage is an asset for development, job creation and civic pride and they are now actively seeking assistance on incorporating heritage concerns into urban planning. Moreover, the increasing education, affluence and leisure time that the citizens are enjoying is allowing them to reflect on their physical, social, cultural and spiritual world. There is a growing interest in places which retain historic associations, which tell of past cultures and achievements and which put in perspective the values of today’s world.

Urban Upgrading and Conservation Needs 9. Infrastructure such as roads, drainage and power lines in the historic project cities inevitably will need upgrading if it is to continue to offer efficient and safe environments for residents. A few elements of the proposed infrastructure upgrading work were given special attention in the context ofhistoric areas. In order to avoid the unnecessary destruction ofurban heritage it was essential that infrastructure planning be carried out under a multi-sectoral approach at an early stage to improve project effectiveness. Urban services upgrading under the proposed project will use materials and techniques that are compatible with traditional streetscapes, and reduce the impact on the historic environments. Inventive design solutions for the installation of street lighting, telephone lines and water and drainage services will make upgrading compatible with historic streetscapes. Equally, for historic buildings, the new serviced environments need to be designed using appropriate materials, technology and workmanship to minimize impact on the historic fabric and to permit future maintenance that does not damage the value and significance of the historic fabric.

- 114 - 10. China has extensive heritage protection laws at the state, provincial and municipal levels. While these laws are well formulated and address a broad range of issues, conservation professionals often lack sufficient staff and authority to effectively implement these laws. At the local level, pressure from property developers, inconsistencies between urban master plans, construction programs and municipal district projects make effective coordination a major priority. To address this issue in relation to the proposed project, multi-sectoral committees were established consisting of department heads with responsibilities in historic areas (public utility, infrastructure, planning etc.) in order to coordinate the decisions that would affect the city’s cultural heritage.

11. As experience and capacity building efforts take hold in Zhejiang province, local officials and planners have recognized that the challenges of heritage conservation can be addressed through sensitive planning for conservation and development. Conservation master plans have been developed as essential planning tools and were the fundamental document on which all proposals for development in historic areas have been based. Donor and local funds have been used to support technical assistance teams working with representatives of the construction and cultural relics bureaus, to develop upgrading and conservation activities in historic neighborhoods identified by the cities’ master plans.

12. Cultural landscapes and parks are often major visual elements in historic towns. In addition to communicating the values and aesthetics of the past, parks and gardens will provide urban residents with, often rare, opportunities for recreation, contemplation, and the enjoyment of nature. Authentic conservation and restoration of historic buildings is the key to maintaining their historic values and significance. Authentic restoration will be based on written, photographic or other archived documentation; original construction techniques and materials, to the greatest extent possible will be used. New work will be reversible as far as possible in order to allow for the use offuture technology or research fmdings.

13, The introduction of financial and economic sustainability into urban heritage Conservation activities is essential for the proposed interventions to be viable. The proposed project advocates that public heritage sites add to their often inadequate government allocations for operation and maintenance by pursuing activities that generate revenue. To counteract the perception that heritage conservation is simply a drain on government budgets, the project also aims to increase officials understanding and ability to calculate the in-direct revenues created by these heritage sites through the numbers of tourist visits and spending on hotels, local transport services, cafes and restaurants. If these revenues are taken into account, many of Shaoxing and Cicheng’s monuments, which are expensive to maintain, will be shown to be good investments. As in many countries, the skills for understanding markets and their mechanisms has yet to be developed and is the subject offuture TA programs.

14. The conservation of historic areas or buildings that are not protected as cultural monuments requires their adaptation for active modem use in economically viable roles such as housing, commercial space or cultural venues. Finding appropriate new uses for historic buildings that provide an adequate income stream for operation and maintenance requires detailed planning and analysis. For this reason the proposed project will support capacity building in estimating the costs of repairing and upgrading old structures; identifylng the markets for alternative uses; determining the future costs of operation and maintenance; and calculating the financial retums that can be expected from these projects.

15. Because redeveloping traditional areas for active will require large investments, the proposed project is supporting capacity building for municipal governments to negotiate equitable development arrangements with the private sector. In these partnerships, local government often takes responsibility for

- 115- urban services upgrading. The private sector develops the site under conservation oriented controls that regulate the extent, design, methods and materials for customizing historic buildings and mandate operation and maintenance practices.

16. The conservation work undertaken by urban upgrading projects can. through building awareness, raise the public’s appreciation of their city’s heritage. Several municipal leaders have found that public interest and scrutiny greatly expands the city’s ability to protect cultural property from such threats as unauthorized demolition and development. Therefore, public participation has been solicited through extensive consultation and social assessment surveys. These actions to encourage people’s involvement in developing effective solutions to the trade-offs between conservation and development.

Historic City-center of Shaoxing 17. Shaoxing has a 2,400 year old history and is a birthplace ofthe Chinese nation, which through the ages has played a key role as a regional political, economic and cultural center. In 490 B.C. it was the capital of the Yue kingdom, later it was the temporary capital of the Southern Song Dynasty and in 1130 A.D. was made the alternate capital of Southern Song Dynasty. The city is renowned for its cultural and physical setting. Wangxizi was a well-known calligrapher and several sites in the city contain reminders of his life. Shaoxing was also the home ofthe famous writer, Lu Xun, in his early years. His writings include many references to customs and characteristics of the city. Thirty-three rivers once flowed through the city, crossed by 229 stone bridges. Over the years many have disappeared and now 17 rivers and 78 stone bridges remain. Yet there is still a unique pattern of streets and rivers referred to locally as “one river with one street”, “one river with two streets” and “one river with no street”, the latter denoting houses built directly on to the riverbanks.

18. Like many cities of modern China it is subject to great increase in its urban population and requirement for employment. It has suffered from degradation arising from a lack of effective detailed physical, social and economic planning and from demographic and economic changes. The old City of Gucheng’s environment had been losing its natural and historic qualities and potential to benefit from its assets. 19. The project seeks to provide options and good practice for project management, design, protection, rehabilitation, area conservation planning and architecture, building and landscape detailing, urban services and access infrastructure upgrading, and sustainable use of the built assets of the historic Old City of Gucheng in Shaoxing. The City has completed comprehensive planning studies ofthe five historic precincts and has set out proposals for urban infrastructure and services, transportation and land use, housing and resettlement, and the Conservation and reuse ofthe natural and built environments.

Project Scope 20. The project will assist with improvement of the urban infrastructure and architecture of historic Shaoxing with the following works and services: Housing Renovation and Restoration of Historic Sites. This component will assist with improving the living conditions for residents living in old Ming and Qing dynasty housing through repairs, upgrading kitchen and sanitary facilities; improve appearance of more recent structures to fit within the historic setting (some 1.2 million m2 floor space); restoration and some rebuilding of historic and protected structures (57,000 m2) to prevent further structural deterioration and improve amenity ofthe historic sites for residents and tourists. Street- and landscaping. Repair and widening ofexisting roads to improve access for emergency services (24,000 m2); re-paving ofroads with more appropriate stone slabs to enhance appearance

- 116- (32,500 m2); new bridges over the new canal section (4); new parks at relocated factory sites to provide recreation for residents and tourists (100,000 m2); and car parking for tourists (30,000 m2) to improve access to the historic sites and precincts. Underground services. Provision of tertiary and secondary sewers in the small streets of the historic precincts (1 8 km) to intercept numerous discharges into the canals and improve the aquatic environment; water supply and gas pipelines (34 km) to improve public health and provide a cleaner energy source over frequently used charcoal. The collected wastewater will discharged into the city-wide sewer network and subsequently treated at the recently completed sewage treatment plant. Renovation of Canals and Waterways. Controlling and improving the rivers inside the ancient city (dredging, widening, opening up), making new waterways, and building new wharf, including 135,000m3 of earthworks 25,200m3 of revetments, 4 new bridges, 22 ancient stone bridges strengthened, and repaired, a new water pump station with a capacity of 1,901,000m3 Id and 4 steel sluice gates across rivers will be added. These works are discussed in the Annex on the water engineering.

Community Participation. There is also a need for the community to participate in the conservation and planning process to a greater extent and this is hard to achieve when works are undertaken rapidly. It is therefore important that conservation areas are monitored in the future and the planning policies are to be accompanied by adequate reasoning and analysis so that a sense of “ownership” and “belonging” are possible at community level.

Tourism Develoument. The technical assistance provided during the project preparation helped considerably to provide baseline data for understanding tourism trends and potential pricing structures and economic benefits. The Municipality will strengthen its ability to assist or to give guidance on the planning of appropriate conversion of historic and existing property for contemporary and sustainable use. Specific technical assistance has been included in the project to further develop the tourism potentials as well as optimizing the benefits oftourism development for the local communities.

Human Resource Develoument. There remains a need for additional training and development of good professional practice in the whole process of planning, surveys of value and significance, assessment of condition and potential for upgrading of existing properties, and understanding market and pricing trends. These are taken into account in devising appropriate technical assistance.

Cicheng Town

21. Cicheng is an ancient town located to the north-west of Ningbo and situated in a flat lowland surrounded by picturesque agricultural fields and wooded hills. Town is defined by a circular moat, with a man-made lake at the north end, and is comprised of a densely built, pedestrian-scale urban environment that was first established some 2500 years ago during the Han Dynasty. Although most of the old city canals have been filled in, the town has maintained its ancient urban form and scale. Most of the ancient buildings have been lost but there are a few important buildings that remain. The school building in the center of the village is a particularly important structure, given its age and design, the extraordinary numbers ofscholars from the school who passed the “national emperor’s exams” over the centuries. 22. Comprehensive conservation and urban master plans have been prepared by Tongji University,

- 117- covering proposals for the various land use, infrastructure, access, movement and conservation requirements of the town itself and underpin the proposed project activities as well as the complementary works financed by the town itself. There are several conservation projects already underway: re-building of the ancient government county hall for use as a conference/function center with retail and accommodation to create a new high profile landmark for the town; and renovation of the ancient Kung temple and school. The proposed phasing of the improvement program for the entire town (2.16 km2) will be done in three stages over a period of 11-12 years: i.e. the northeast sector by 2005, the northwest sector by 2008, and the southern sector will take 5-6 years. The first stage of 0.5 km2 is focused on the northeast whereby many historic buildings such as school, county administration, temple and lake will be completed by 2005. Reducing population density is as one important aspect to improve living conditions within the old town. A 60 ha resettlement area will be constructed at Xing Liang, with 480,000 m2 building space, to be completed by 2005. Appropriate allocations for the financing of the non-Bank financed activities have been secured.

Project Scope

23. The proposed project support with upgrading of basic infrastructure and services is an essential element to complement the town’s conservation efforts, enhance vehicles access and safety, and improve water quality in the town canals and moat. The project scope include:

Road and bridge improvements. Upgrade of major roads with a total length of some 13 km, including resurfacing with stone paving, removal of illegal structures obstructing traffic flow. Eight new reinforced concrete bridges with a span from 6- 12 m.

Undermound services. Prior to the road rehabilitation new water, sewer and gas pipes will be laid together with new power, telephone and tv cables.

Wastewater treatment and disposal. The wastewater collected from the town will be pumped (190 Vs) via a pipeline (600 mm, 13 km) to the Jiangdongnan treatment plant in Ningbo, which will be constructed under the proposed project.

Ring-road A modest 7 m. wide ring-road around the town along the moat should enable proper access to all parts ofthe historic town while many town-center areas will be pedestrianized.

Tourism development, communitv participation and human resource development. See Shaoxing above.

- 118- Dongqian Lake

24. Donqian Lake, located some 15 km southeast ofNingbo, is a natural scenic area in the eastern part of the province with numerous historic and cultural sites. The 20 km2 fresh water lake has traditionally been a mixed-use area, comprised of a variety of recreational uses, some middle-income housing, fishing activities, and small scale tourism. The municipal government recently embarked on a comprehensive development program to establish it as a major tourism resort, including such components as: upscale residential subdivisions, several hotels, a Buddhist Retreat, spas; “Houseboat Hotel”, zoo, botanical garden, golf clubs, horseback riding stables, etc.. With the development of Donqian Lake as a major upscale, mass market resort, and Cicheng Village as a smaller-scale, traditional village, a very good “tourism axis” will arise in Ningbo, comprising a solid “critical mass” of accommodations, support services and tourism products for the visitor. Given the rapidly growing domestic and regional markets, there should be a good opportunity to attract visitors for overnight stays, especially when the proposed bridge across Hangzhou Bay is developed, allowing quick access from Shanghai. 25. The Dongqian Lake scenic area has a total population of 20,000, including 18 villages (of which 15 are close to the lake), Fuquanshan tea plantation residents, and army personnel and families. The population is planned to increase from around 40,000 to 50,000 in the short-term, and 99,500 long-term - comprising 93,500 for Dongqian new town, and 6,000 in seven villages with population ranging from 500 to 2,000. Of the current population two-thirds are being encouraged to move (about 20,000)and resettlement housing has or is being built, particularly in conjunction with the development of the new town.

26. Over the next five year period, it is planned that some 660 hectares of land will be developed of which 55% will be for residential with the remainder being for commercial, institutional, parks and recreation, and industrial uses. The total cost of the planned investments is more than $500 million. A detailed market analysis showed that there appears to be sufficient demand for the residential developments planned for Dongqian Lake. There is considerable unmet residential demand in Ningbo, most of which is by existing Ningbo residents seeking to upgrade larger and better quality residential dwellings.

27. However, the water quality in the lake has deteriorated over time due to soil erosion from the surrounding hills, wastewater discharge from the various towns and villages around the lake, and agricultural pollution. Initial plans to dredge the lake have been abandoned because of demonstrated limited contribution to water quality improvement as well as the substantial environmental impact of dredging material disposal. Instead, interception of wastewater discharges to the lake and comprehensive catchment management measures will substantially reduce the pollution load to the lake. The implementation of the Catchment Management Plan will enable management and control of other pollution sources and to develop policy instruments will be developed to restrict and control polluting activities within the lake catchment on a sustainable basis.

Project Scope 28. The proposed project assists the rapid tourism development in the area through improving the access to the lake’s shores by improving and expanding the road network, providing sewerage and treatment infrastructure to intercept the numerous discharges of wastewater to the lake thereby improving water quality in the lake, better watershed management through a Catchment Management Plan. The project scope include: Wastewater interception. Construction of interceptor sewers along the lake shores (54.5 km with

- 119- diameters 300-700 mm), including eight lift pumping stations (10-100 l/s). Lake-side road development. Construction of some 15 km of new lakeside roads with an average width of 6 m and resurfacing and widening of some 18 km of existing gravel roads. Wastewater treatment and disposal. The wastewater collected from the existing town and villages as well as the proposed new developments will be pumped (22,500 m3/d) via a pipeline (900 mm, 13 km) to the Jiangdongnan treatment plant in Ningbo, which will be constructed under the proposed project Tourism development. communitv participationand human resource development. See Shaoxing above.

- 120- MAP SECTION