PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB5877 Bayannaoer Water Reclamation and Environment Improvement Project Name Project Public Disclosure Authorized Region EAST ASIA AND PACIFIC Sector General water, sanitation and flood protection sector (55%);Water supply (45%) Project ID P115695 Borrower(s) PEOPLE’S REPUBLIC OF The People’s Republic of China China

Implementing Agency Bayannaoer Hetao Water Affairs Group Co. Ltd., No. 11, Yuhongxin Street, Linhe Inner Mongolia Autonomous Region Public Disclosure Authorized China 015000 Tel: (86-478) 828-7827 Fax: (86-478) 828-7832 [email protected] Environment Category [X] A [ ] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared November 10, 2010 Date of Appraisal July 29, 2010 Authorization Date of Board Approval March 10, 2011

1. Country and Sector Background

Public Disclosure Authorized Since economic reform in the 1980s, poverty has been substantially reduced in China through rapid economic development. However, an uneven economic distribution, to the disadvantage of inland regions, remains a problem. Inner Mongolia is a region significantly lagging behind coastal provinces in terms of economic development, due historical and geographic reasons, and due to limited availability of water resources for industrial development.

Bayannaoer is a poor municipality in Inner Mongolia with an economy heavily dependent on agriculture, with an irrigated plain of 570,000 ha covering almost half of its territory. It is also rich in natural resources, especially in minerals, coal and non-ferrous metals. Some neighboring regions have seen rapid industrial development recently and Bayannaoer has also started developing some local industries, mainly in food processing. However, water allocations from the in Bayannaoer may be used for agricultural purposes only, causing a lack of

Public Disclosure Authorized water resources for industry. As there is an extreme and increasing shortage of water in the Yellow River basin, this situation is unlikely to improve in the future. Groundwater is limited in supply and is of high quality, and therefore its use for industries other than food processing is considered unsustainable. The Bayannaoer Municipal Government wants to wean off industries from their use of groundwater. Currently, 96% of fresh water used in Bayannaoer comes from the Yellow River, 3% from groundwater, and 1% from local surface runoff. Only very limited use is made of agricultural drainage water as a water source. Domestic and industrial uses account for about 4% of water consumption. In the coming decade, agricultural water demand is projected to decrease due to increased efficiency, but domestic and industrial water demands are projected to increase, resulting in a net increase in the overall water demand by about 85 million m3 per year.

The main project area consists of five industrial estates which are located on the fringes of the northern boundary of the Bayannaoer municipality, outside the irrigation areas. The use of agricultural drainage water and domestic wastewater presents a possibility for local industry, as it is not subject to restrictions of use. Drainage water mixed with treated/untreated domestic and industrial wastewater is currently discharged into Wuliangsuhai Lake and then into the Yellow River. As drainage water contains a variety of pollutants, it needs to be treated before it can be used industrially.

In addition, increasing volumes of wastewater from local industries and urban populations also require treatment. Adequate safeguards should be established to ensure that toxic substances generated are recycled within the industries before being discharged.

2. Objectives

The project development objectives are to support Bayannaoer Municipal Government to: (i) better utilize water resources to develop higher income activities to local residents without compromising the water use for irrigation, which would adversely affect the rural poor; and (ii) improve the water environment by reducing water pollution entering Wuliangsuhai Lake.

These objectives will be achieved through: i) supplying reclaimed water, reclaimed from irrigation drainage and wastewater, to selected industrial development estates; ii) extending the wastewater service to selected industrial development estates, iii) piloting non-point pollution control measures selected drainage catchments and developing artificial wetlands at the discharge points of the drainage canals to the Wuliangsu Lake so as to reduce the discharge of pollutants into the lake; and iv) providing technical assistance to enhance the capacity of the Implementation Agency in project design, management and operation and in developing adequate safeguards to handle all toxic substances and a practical business plan for the BWAG’s transition, as well as the training activities.

3. Rationale for Bank Involvement

The World Bank has extensive experience with water supply, wastewater treatment and integrated water and wastewater management. In addition, the Bank has experience with the project area through the Northern Irrigation Project, which assisted the government in rehabilitating vast irrigation areas in 1988.

Extensive technical expertise and advice are necessary to effectively implement water reclamation projects, as well as constructed wetlands in the cold weather of Northern China. The Borrower is looking to the Bank to leverage external assistance from Europe, USA and/or Japan on water reclamation as technologies are still underdeveloped in China. Although the Bank doesn’t have direct experience with water reclamation, the Bank is particularly well positioned to enlist support from overseas external parties.

4. Description

The project consists of four components, with a total project investment costs, with financial costs, of US$172.7 million as detailed below:

Component 1. Reclaimed Water Supply (US$74.0 million): This component will support investment in water reclamation and distribution facilities, including 4 water reclamation plants with a total design treatment capacity of 115,000 m3/d, 55 km of raw water transmission mains, and 82.6 km of distribution networks in 4 industrial estates, i.e. Wulatehouqi, Ganqimaodu, Hangjinhouqi, , and Wuyuan. These installations will source their water from agricultural drainage water and treated domestic and industrial wastewater.

Component 2. Wastewater Management (US$53.5 million): This component will assist the government in the construction of 3 new wastewater treatment plants in Wulateqianqi, Ganqimaodu and Wulatehouqi Industrial Estates, with a total design capacity of 80,000 m3/day for primary, secondary and tertiary treatment, as well as 116.62 km of distribution networks for recycled water. The required sewer collection systems already exist or will be built by the industrial estate authorities.

Component 3. Constructed Wetlands, Pilot Non-point Pollution Control and Channelization of Wuliangsuhai Lake (US$35.5 million): This component will support: i) establishment of 6,034 ha of constructed wetlands to contribute to natural reduction of pollutants from point and non-point sources entering Wuliangsuhai Lake, located downstream of the Hetao Irrigation District; ii) construction of 145 km of canals in Wuliangsuhai Lake to improve the water circulation of the lake; and iii) a pilot of non-point control measures to support a long-term government program on optimized application of chemical fertilizers to reduce nutrient discharge.

Component 4. Technical Assistance (US$2.7 million): This component will assist BWAG, the implementation agency, in: i) reviewing designs and bidding documents, managing contracts, and preparing project progress and monitoring reports; ii) developing an adequate industrial clean production mechanism for pollution control in industrial processes; iii) preparing a strategic business plan; and iv) training BWAG staff on corporate governance, strategic development, and operation.

5. Financing

Total project required investment is estimated to be US$172.7 million, with a loan amount of US$80.0 million, with contingencies and financial costs. The Bayannaoer Municipal Government commented to provide all the counterpart funds mainly from its own budget as well as government grants, including that from the government agricultural development program. The Bayannaoer Municipal Government inquired about retroactive financing for the construction of 3 wastewater treatment plants. Retroactive financing would need to meet the Bank’s limits and conditions, including: i) the total expenditures do not exceed 20% of the loan amount and shall be made after the project appraisal but within 12 month prior to the expected loan signing date; ii) the payments for expenditures are eligible under the loan agreement; iii) the BWAG needs to prepare the General Procurement Notice for the Bank’s clearance and then published the GPN in UNDP on line in a dgMarket; iv) the procurement plan shall be agreed by the Bank; and v) the procurement process including advertisement, bidding documents, contract award recommendations, etc. shall be subject to the Bank’s no objection.

Source: ($m.) Borrower 92.7 International Bank for Reconstruction and Development 80.0 Total 172.7

6. Implementation

Bayannaoer Municipal Government has already established a Leading Group (LG) chaired by the mayor and comprising all relevant authorities.

Bayannaoer Hetao Water Affairs Group (BWAG), established in 2006, is the implementing agency of the project. It has established a World Bank Project Management Office (PMO), with divisions in charge of project procurement, contract management, and accounting and reporting of the project account, among other functions.

The project will be implemented over a period of 7 years. All wastewater treatment plants will be procured prior to the signing of the legal documents of the project, using retroactive financing. The construction of the first three water reclamation plants will be completed in the third year, and the fourth water reclamation plant will be finished in the fourth year of the project. Trial operations will be started immediately after completion of construction. The constructed wetlands will be completed in the third year of the project, while the last canal in Wuliangsuhai Lake will be finished in the sixth year of the project.

7. Sustainability

The governments at all levels have shown a strong dedication to the project and commitment to improve the management and environment conditions of water resources. BMG has committed itself to raise all counterpart funds (50% of the project cost) from its fiscal revenue. The project is able to fully recover O&M and capital costs.

There will be minor cross-subsidization among the components in the industrial estates, but none between the new and existing services provided by BWAG. The operation of the project assets as a whole would remain profitable as water supply and wastewater tariffs will be levied to cover the full costs. As production is expected to reach its full capacity within four years after start of production, the onset period with little revenues is relatively short. For the constructed wetlands, the growth of reeds will generate revenues to the managing company, and substantial income for local farmers, which will encourage the ongoing controlled harvesting of reeds, which is an important part of the wetland operation and maintenance. Reduced pollutants in Wuliangsuhai Lake will help in the development of tourism, which will confer further economic benefits to the local population, and thus provide an additional incentive to adequately maintain and protect the wetlands.

8. Lessons Learned from Past Operations in the Country/Sector

The Bank has significant experience in assisting China to develop rural and urban infrastructure. For the water and sanitation sector, Chinese and international experience with water reuse are brought to the project in its preparation and implementation. Key lessons incorporated include:

a) wastewater treatment must result in water quality that is suitable for the particular reuse application; b) guidelines linked to reuse must ensure the safety of water reuse; c) source control of contaminants is essential, particularly for industrial wastewater; d) institutional coordination is essential between government authorities, civil society, and industries; and e) international experience shows that environment improvement of lakes usually requires a set of integrated measures rather than a single approach.

In addition, Bank experience with numerous water supply and wastewater projects in China has repeatedly shown two problems which both amplify the estimated and actual budget requirements: oversizing and overestimating.

a) Oversizing refers to highly optimistic projections of future growth in demand, leading to very large sizing of investments, which in turn may lead to under- utilization of constructed facilities, poor economic performance, and technical complications. In the project, initial proposals for water reclamation plants and wastewater treatment plants were downsized by about 50%, based on more conservative demand projections, and by phasing (planning for further investments to be made in later phases, once demand materializes). b) Overestimating of costs is a result of local design institutes applying officially listed prices rather than market prices. This has frequently resulted in loan savings in previous projects in China. By insisting on the use of market prices, cost estimates were cut by well over 10% from initial estimates during the course of project preparation.

International experience shows that water reclamation is generally not carried out by individual industries due to safety considerations. Safeguards in treatment of all reclaimed water are especially important. In addition, separate distribution networks are necessary to ensure that there are no possibilities of cross connections between potable water and reclaimed water. Pipe for reclaimed water are buried in different depths and are color coded so as to clearly distinguish them from normal potable water systems. 9. Safeguard Policies (including public consultation)

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [X] [ ] Natural Habitats (OP/BP 4.04) [X] [ ] Pest Management (OP 4.09) [ ] [X] Indigenous Peoples (OP/BP 4.10) [ ] [X] Physical Cultural Resources (OP/BP 4.11) [ ] [X] Involuntary Resettlement (OP/BP 4.12) [X] [ ] Forests (OP/BP 4.36) [ ] [X] Safety of Dams (OP/BP 4.37) [X] [ ] Projects on International Waterways (OP/BP 7.50) [ ] [X] Projects in Disputed Areas (OP/BP 7.60)* [ ] [X]

10. List of Factual Technical Documents

1. Project Feasibility Study Report, Bayannaoer Water Reclamation and Environment Improvement Project;

2. Executive Summary of Environment Assessment Report, Bayannaoer Water Reclamation and Environment Improvement Project;

3. Environment Assessment Report, Bayannaoer Water Reclamation and Environment Improvement Project;

4. Environment Management Plan, Bayannaoer Water Reclamation and Environment Improvement Project;

5. Resettlement Action Plan, Bayannaoer Water Reclamation and Environment Improvement Project;

6. Social Assessment Report, Bayannaoer Water Reclamation and Environment Improvement Project;

11. Contact point

Contact: Shunong Hu Title: Senior Water Engineer Tel: 5788+7763 Fax:

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties’ claims on the disputed areas Email: [email protected] Location: Beijing, China (IBRD)

12. For more information contact:

The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Email: [email protected] Web: http://www.worldbank.org/infoshop