Document of The World Bank Public Disclosure Authorized

Report No: 21860 Public Disclosure Authorized

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF USS100 MILLION

TO THE

PEOPLE'S REPUBLIC OF CHINA Public Disclosure Authorized FORA

LIAO RIVER BASIN PROJECT

May 21, 2001

Urban Development Sector Unit East Asia and Pacific Region Public Disclosure Authorized CURRENCY EQUIVALENTS (Exchange R.ate Effective May 1, 2001) Currency Unit = Yuan (Y) Y 1.00 = US$0.12 USSLOO = Y8.3

FISCAL YEAR January 1 -- Decernber 31

ABBREVIATIONS AND ACRONYMS

AIC Average IncrementalCost LFD LiaoningProvincial Finance Department CAS Country AssistanceStrategy LIEP Liaoning IntegratedEnvironment Program CITC China InternationalTendering I.P LiaoningProvince Company LPG LiaoningProvincial Government CNAO China National Audit Office LRB Liao River Basin COD ChemicalOxygen Demand LRBP Liao River Basin Project DRA DesignReview & Advisory LUCRPOLiaoning Urban Construction& Renewal Project (Consultancy) Office EA EnvironmentalAssessment MOC Ministryof Construction EMP EnvironmentalManagement Plan MOF Ministry of Finance EPB EnvironmentalProtection Bureau i NCB National CompetitiveBidding ERSF Environment Revolving Subloan NGO NongovernmentalOrganization Facility OED Operations EvaluationDepartment ES EnvironmentSubloans PAP Project-AffectedPersons EU EuropeanUnion PDMC Panjin MunicipalDrainage ManagementCompany FMS Financial ManagementSystem PMO Project ManagementOffice GPN GeneralProcurement Notice PRC People's Republicof China ICB InternationalCompetitive Bidding RAP ResettlementAction Plan IPCAP IndustrialPollution Control Action SDPC State Developmentand PlanningCommission Plan SEPA State EnvironmentalProtection Agency IST InstitutionalStrengthening & Training SOE Statementof Expenditures JDMC JinzhouDrainage Management TOR Terms of Reference Company UMIS Urban ManagementInformation System JPMC Jincheng Paper Making Company WTP Willingnessto Pay LCC Liaoning ProvincialConstruction YDC Yingkou Drainage Company Commission YPMC Yingkou Paper Making Company LCHB Liaoning Cultural HeritageBureau LEP LiaoningEnvironment Project LEPB Liaoning EnvironmentalProtection Bureau

Vice President: Mr. Jemal-ud-din Kassurn, EAPVP Country Director: Mr. Yukon Huang, EACCF Sector Director: Mr. Keshav Varma, EASUR Task Team Leader: Mr. Geoffrey Read, EASUR CHINA LIAO RIVER BASIN PROJECT

CONTENTS

A. Project Development Objective Page

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

B. Strategic Context

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

C. Project Description Summary

1. Project components 6 2. Key policy and institutional reforms supported by the project 7 3. Benefits and target population 7 4. Institutional and implementation arrangements 8

D. Project Rationale

1. Project alternatives considered and reasons for rejection 9 2. Major related projects financed by the Bank and other development agencies 10 3. Lessons learned and reflected in proposed project design 12 4. Indications of borrower commitment and ownership 13 5. Value added of Bank support in this project 13

E. Summary Project Analysis

1. Economic 13 2. Financial 14 3. Technical 15 4. Institutional 15 5. Environmental 16 6. Social 18 7. Safeguard Policies 20

F. Sustainability and Risks

1. Sustainability 20 2. Critical risks 20 3. Possible controversial aspects 21 G. Main Loan Conditions

1. Effectiveness Condition 21 2. OtherDisbursement condition; Implelentation & Financial covenants 21

H. Readiness for Implementation 23

I. Compliance with Bank Policies 23

Annexes

Annex 1: Project Design Summary 24 Annex 2: Detailed Project Description 26 Annex 3: Estimated Project Costs 32 Annex 4: Cost-Effectiveness Analysis Summary 38 Annex 5: Financial Summary 52 Annex 6: Procurement and Disbursement Arrangements 57 Annex 7: Project Processing Schedule 72 Annex 8: Documents in the Project File 73 Annex 9: Statement of Loans and Credits 75 Annex 10: Country at a Glance 79 Annex 11: Project Implementation Schedule 80 Annex 12: Environmental Assessment and Mitigation Measures Summary 84 Annex 13: Resettlement 96 Annex 14: Project Financial Management Review 99

MAP(S) IBRD 31284 CHINA Liao River Basin Project Project Appraisal Document

East Asia and Pacific Region EASUR Date: May 21, 2001 Team Leader: Geoffrey Read Country Manager/Director: Yukon Huang Sector Manager/Director: Keshav Varma Project ID: P051859 Sector(s): US - Urban Environment Lending Instrument: Specific Investment Loan (SIL) Theme(s): Urban Poverty Targeted Intervention: N ProgramFinancing Data [X] Loan [ ] Credit [ ] Grant I ] Guarantee [ ] Other: For LoanslCredits/Others: Amount(US$m): 100.0 ProposedTerms (IBRD): Variable Spread& Rate Single CurrencyLoan (VSCL) Grace period(years): 5 Years to maturity:20 Commitmentfee: 0.75% Front end fee on Bank loan: 1.00% FinancingPlan (US$m): Source Local Foreign Total BORROWER 0.00 0.00 0.00 IBRD 34.00 66.00 100.00 LOCAL GOVTS. (PROV., DISTRICT, CITY) OF BORROWING 84.80 18.80 103.60 COUNTRY

Total: 118.80 84.80 203.60 Borrower: PEOPLE'S REPUBLIC OF CHINA Responsibleagency: LIAONING PROVINCE, AND THE RESPECTIVE 3 PROJECT CITIES Liaoning Provincial Govemment Address: Liaoning Urban Construction and Renewal Project Office (LUCRPO) 19 Caita Street, Shenyang, China 110015 Contact Person: Mr. Zhao Xin Liang, Vice Govemor, Liaoning Provincial Govemrnent Tel: (024) 2384-2898 Fax: (024) 2392-2290 Email: [email protected],cn

Estimateddisbursements ( Bank FY/US$m): FY 2002 2003 2004 2005 2006 2007 2008 Annual 7.60 31.30 27.60 20.90 9.60 1.70 1.30 Cumulative 7.60 38.90 66.50 87.40 97.00 98.70 100.00 Project implementationperiod: December 2001 - December 2006 Expectedeffectiveness date: 11/01/2001 Expectedclosing date: 12/31/2007 ,CS PAn F . 2Ow A. ProjectDevelopment Objective

1. Projectdevelopment objective: (see Annex 1) The developmentobjective of the proposedLiao River BasinProject (LRBP) is to assist the environmental recovery of the Liao River Basin (LRB) in Liaoning Province (LP) and to enhance water quality managementdecision-making on the basis of an integratedriver basin managementapproach. The objective would be pursued through (a) provision of facilities for collection and treatment of wastewater; (b) establishmentof competent municipal utilities capable of managing these facilities; (c) upgrading basin-wide water quality managementand monitoring capabilities;and (d) technical assistance and training.

The projectrepresents the first stage of LP's effortstoward meetingits objectivewith WorldBank support. The main investmentswould be in (a) two cities and one paper-makingcompany in the lower reaches of LRB; and (b) one city and one paper-makingcompany in an adjacent river basin close to the Bohai Sea. The second stage is expectedto commencein about a year's time and would focus on ShenyangCity, situatedon the Hun River,a tributaryof the Liao River.Shenyang would use the interveningtime to refine its wastewatertreatment processes and designs, to develop further its urban upgrading proposals, and arrangefinancing.

The project water quality objective,taken from the Liao River Basin Plan adopted by the Provincial Government,is to reducepollution in the LRB in order to bring qualityup to at leasta minimumof Class V (agriculturalwater supply or general amenity use) water quality throughoutthe basin by 2010. The parameterused for tracking water quality is COD (chemicaloxygen demand), a standardmeasure that synthesizesthe scale and impacts of the major industrial and domestic pollutants.The water quality objectivewould be achievedthrough a combinationof measures,including: (a) regulationand reductionof pollution from industries; (b) priority wastewater treatment works in all cities in the river basin; (c) improvedcollection and disposalof sludgefrom wastewatertreatment plants; (d) protectionof water used for agricultureand aquaculture;(e) measures to improve water quality in the Bohai Sea; and (f) other initiatives that may include reduction of overall per capita water demand, the adoption of water conservationmeasures and public outreachprograms. This project supportsmany of these measuresand is one of a numberof activitiesin the Basin aimedat achievingwater qualityimprovement, in the contextof overallimproved water resourcemanagement.

2. Key performanceindicators: (see Annex 1) The developmentobjectives of the project wouldbe monitoredthrough key perfomianceindicators in terms of: (a) improvementsin water qualityin the LRB; and (b) efficiencyof the new urban utilitiesin providing wastewatertreatrnent and disposalservices.

B. StrategicContext 1. Sector-related Country AssistanceStrategy (CAS)goal supportedby the project: (see Annex 1) Documentnumber: R98-107 Dateof latestCAS discussion: 05128/98 CAS Memorandumof April 22, 1999 and CountryProgram Matrix(FY99-0 1)

Improvingthe environment,and in particularwater quality in the major river basins,is one of the major focal points of the Bank's strategy in China.Within this overall strategy,the project would contributeto upgrading water quality in the LRB and help reduce the incidence of red tides in the Bohai Sea.

- 2 - Specifically, the project would assist in the development of an integrated river basin management approach to water quality planning and decision-making and provision of wastewater treatment facilities, and in meeting urban environmental infrastructure needs. It will strengthen and, where necessary, establish new institutions.

Strategic planning of river basin management has also been identified as a key part of the ongoing long-term European Union (EU)-funded Liaoning Integrated Environment Program (LIEP) in which a Water Resources Management component is focusing on the Liao River Basin in Liaoning Province. The proposed investments arose from the analysis of a prioritized list of interventions and investment projects identified through the EU-funded program.

2. Main sector issues and Government strategy: The principal sector issue is the rapid deterioration in both surface and groundwater quality that has occurred throughout China. This has occurred as a result of: (a) an inadequate framework for water resources management; (b) ineffective regulatory control; (c) rapid and uncontrolled growth in the industrial and agricultural production sectors, coupled with increased urbanization; and (c) financial weakness of municipal providers of environmental services.

Demands for water for industry, agriculture and domestic use have been steadily increasing, and this has imposed increasing pressure on water resources, in particular in the areas of limited resources in the north of China. At the same time, quantities of wastewater have increased rapidly as have the associated pollution loads. Less than 10 percent of wastewater flows are treated and comply with discharge standards, largely a result of ineffective enforcement of environmental regulations. The discharge of these increasing quantities of inadequately treated wastewater to rivers with limited dilution and assimilative capacity has resulted in severe water quality problems in many river systems in China.

In the latter half of the 1990s, the focus of river basin management in China changed from the traditional hydraulic approach to that of attaching a greater importance to environmental protection. Pollution control as part of water resources management is listed as one of the top priorities in China's tenth Five-Year Environmental Protection Plan. Among the most significant features is the attention paid by the highest levels of central government to the severe environmental degradation in China's major river and lake basins and the formulation of the priority "Three Rivers, Three Lakes" environmental program within the overall national environmental strategy, of which the Liao River is one of the targeted rivers. Fundamnental components of the overall strategy for addressing this continuing degradation include the integration of municipal and industrial wastewater treatment, where appropriate, and the establishment of efficient wastewater utilities with sound cost recovery, both to ensure sustained facilities operations and to contribute to capital investment.

3. Sector issues to be addressed by the project and strategic choices: The "Three Rivers, Three Lakes" program encompasses six separate environmental protection programs coordinated by the State Environmental Protection Agency (SEPA); it was conceived in response to a national outcry over a major pollution incident in the Huai River in 1994. The Liao River was confirmed in 1996 as one of the three river basins to be included in the program. The LRB is located in northeastern China and lies within the two provinces of Jilin and Liaoning and the autonomous region of Inner Mongolia. It comprises two separate rivers, the Liao and the Daliao, the latter basin being located entirely within LP.

-3- The LRB as a whole is a water-scarce region, with total resources on a per capita basis of only 20 percent of the national average. The water resources of the LRB are already heavily developed with a number of dams on the upper tributaries (within LP) and major abstraction of the groundwater resources, which underlie the central, more urbanized part of the Basin. Much of the water is abstracted for agricultural use in the fertile areas of the plain adjacent to the cities but the basin, particularly within LP, is also a major center of industry in northern China and subject to high industrial and urban demands for water. The problems of water shortage are made significantly worse by the high discharges of urban domestic and particularly industrial wastewater. As a consequence, a large part of the river system in the Basin within the Province fails to comply with even the lowest defined (Class V) water quality standard. The poor quality of water at this level makes it unacceptable for domestic or agricultural use and causes severe degradation of the natural ecosystems. The close physical interconnections between the rivers and the groundwater in the central basin result in the pollution impacting the available groundwater, to the extent that some wellfields are being abandoned. The negative impact of this pollution is felt also in the Bohai Sea, into which the Liao Basin rivers ultimately discharge, and which is an important fisheries and aquaculture resource. There are reports of a significant decline in the fishing industry in the Bohai Sea, likely linked to the pollution load.

In spite of limited water resources in LRB and the increasing impact of pollution on the availability of resources, initial water demand projections used in project formulation for basin cities showed ambitious increases in use for domestic and industrial purposes. Those projected levels of water consumption in the basin are likely to be unsustainable, and a major basin-wide demand management and water conservation program will be necessary, in addition to the efforts to reduce pollution and the damage that it is causing to the available resources.

Water Resource Management in the Basin. There are a number of activities under way in the Basin to address the overall water resource management issues. The issue of integrated river basin management has been under discussion by Bank and Provincial officials for several years but progress has been slow. A significant institutional step has been the bringing of groundwater management under the authority of the Department of Water Conservancy, who have responsibility for surface water. An Aquifer Study is planned to help better understand the relationship between surface and groundwater and to begin to address the effects of pollution at this interface. Currently the EU is supporting a Water Resources Management component as part of the four-year technical assistance under LIEP. This work will develop a Basin Planning Strategy, outlining an integrated water resources and pollution control plan for the Liao River within the Province. Preparation of this current project has been coordinated closely with the EU team (based in the Liaoning Environmental Protection Bureau). The LIEP, which is presently in the first half of its work plan, will address water use and demand management in the Basin as well as review proposals for expansion of the water supply system, and this work will inform the development of the wastewater systems in the Basin. At the same time, it is understood that Liaoning is one of the provinces selected as a pilot under a national water conservation program, supported by the UK Government Department for Intemational Development (DflD) which is due to commence shortly.

Management of water demand, across all sectors (agriculture, industry and domestic), is essential for the long-term development of LP and will impact the scale and costs of the ultimate wastewater system. In the short to medium term, the scale of wastewater infrastructure required is not sensitive to water usage, since it is primarily dealing with a backlog or deficiency in the current system. Nevertheless, preparation of the project has specifically addressed water use and wastewater projections in the project cities. Current projections are significantly lower than those first offered because they now take into account more realistic estimates of industrial water use following industry reform and restructuring. In Shenyang, where overall demand projects are still high, the Water Company has made considerable progress in introducing realistic

-4 - tariffs and in reducing unaccounted-for-waterbut the heavy use of "self-supply" by industry from groundwateris still a concern. The water resource fee currently charged is very low and-offers little incentiveto economize.This is one of the issuesbeing addressedin the EU work.

Wastewater Systems. Liaoning Province comprises 14 municipalities, 8 of which are within LRB. Of these, only two municipalities currently have functioning wastewater treatment plants, and two further plants are under constructionas part of the Liaoning EnvironmentProject (LEP, Ln. 3781-CHA).The existingLiao River Basin Plan defineswater quality objectivesfor all river reacheswithin the basin in LP, and proposes an ambitious program of reduction of COD loads from all eight municipalities, the aggregate reduction by 2010 being 77 percent. The project would support priority wastewater treatment investments in Panjin and Yingkou,providing the maximumenvironmental benefit (in terms of improvementin water quality in the basin, evaluated on an integrated river basin management approach) for a given level of expenditure. The project would also support priority wastewater treatment investments in Jinzhou located in the Xiaoling River Basin to reduce pollution loads entering the Bohai Sea.

Many municipalities in LRB rely on groundwater for urban water supply. Water supply aquifers are under threat from overexploitation and also from pollution as a result of inadequately controlled disposal of municipal and industrial solid wastes. The Liaoning Provincial Government (LPG) recognizes that additional funding will be necessary in order to finance a range of investments to complement those included in the proposed project. These would include investments in solid waste management and/or sludge treatment or disposal facilities, and further urban upgrading. LPG expects to commence preparation of, and seek funding for, these investment programs after launch of the LRBP and the expectd follow-up investments in basin clean-up focusing on Shenyang.

The establishment of wastewater companies is a relatively recent innovation in China, and in LP. Experience with them is limited and mixed. The project would provide technical assistance to LRB municipalities to determine appropriate tariff levels and user charges. In order to ensure sustainable and sound wastewater management practice in cities, a central government decree issued in September 1999 stipulated that financially autonomous wastewater enterprises shall be established, and that wastewater tariffs shall be charged and collected to cover operation and maintenance of sewerage networks and wastewater treatment plants. This decree, therefore, envisages full cost recovery in principle, although this might be achieved only over time, commensurate with a progressive and sustained program of tariff adjustments.

Project investments are designed to assist in meeting the objectives of improvement of water quality in LRB to Class V standard, and protection of water resources. In the first stage, these objectives would be achieved through treating all municipal wastewater in LRB, and treating all industrial discharges at source. The immediate planned investments under the proposed project would concentrate on two cities in two river catchments within LRB: Daliao River-Yingkou and Liao/Shuangtaizi River-Panjin. In addition, pollution prevention measures for Jinzhou City and the Jincheng Paper-Making Company on the Xiaoling and Daling Rivers, respectively, would reduce the pollution load to the Bohai Sea.

Industrial Pollution Control. Without a significant effort to control industrial wastewater pollution, expected environmental benefits from municipal investments would be marginal. LPG has agreed to address this issue by: (a) implementing an Industrial Pollution Control Action Plan (IPCAP); and (b) providing environment subloans to small- and medium-size industries to carry out environmentally focused subprojects, upgrading in-plant processes, with support from the project. The operating regulations of this subloan facility, which is similar to the revolving fund facility currently being operated under the ongoing

- 5 - LEP, are included in the Project File (see Annex 8).

The IPCAP would reduce pollution loads discharged from the key polluting sectors: fertilizer, pulp and paper, food, chemicals, steel and mining, by means of a program of investments in wastewater treatment and clean technology, covering process improvements and materials substitution. In the case of pulp/paper production, the IPCAP would adopt a sector-wide approach based on restructuring and rationalization to ensure affordability of pollution control and sustainability for the sector. The initial phase of the IPCAP would involve local investments at 133 large polluting enterprises in the fertilizer, chemicals, paper and steel sectors. Implementation of the IPCAP would be funded from govemment and industry sources.

Integration with Region-wide Water Resource Management. The establishment of water pollution control as a fundamental and integral component of water resources management is ranked as one of the highest priorities in the National Tenth Five-Year Environmental Protection Plan. However, Liaoning currently lacks analytical tools and management support systems to integrate the water quality and quantity data from various sources to pennit an integrated basin approach to water quality planning and decision-making. The project would support the development of a modem geographic information-based urban management information system (UMIS) for the government and for utilities to project demand for infrastructure and services, assess their impact on the environment, and monitor trends. This would complement the current EU-supported technical assistance initiative to develop a water resources management strategy for the LRB in Liaoning.

C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown):

Indicative Bank- % of Component Sector Costs % of financing Bank- (US$M) Total (US$M) financing Panjin Wastewater Interception & Pollution Control 39.50 19.4 14.80 14.8 Treatment / Waste Management Yingkou Industry Wastewater Pollution Control 17.00 8.3 13.50 13.5 Treatment / Waste Management Yingkou Wastewater Interception & Pollution Control 46.30 22.7 21.40 21.4 Treatment / Waste Management Jincheng Industry Wastewater Pollution Control 14.00 6.9 10.10 10.1 Treatment / Waste Management Jinzhou Wastewater Interception & Pollution Control 32.80 16.1 15.60 15.6 Treatment / Waste Management Urban Management Information Urban 6.50 3.2 5.70 5.7 System Management Environmental Quality Monitoring Other 5.60 2.8 4.90 4.9 Environment

-6 - Environment Subprojects Urban 20.00 9.8 9.90 9.9 Environment Institutional Strengthening and Training Institutional 3.10 1.5 3.10 3.1 Development Total ProjectCosts 184.80 90.8 99.00 99.0 Interest during construction 17.80 8.7 0.00 0.0 Front-end fee 1.00 0.5 1.00 1.0 Total Financing Required 203.60 100.0 100.00 100.0

2. Key policy and institutional reforms supported by the project: The policy and institutional reforms would concentrate on: (a) integrated river management; (b) utility enterprise operational and financial efficiency improvements; (c) resource mobilization and cost recovery measures; (d) underpinning of long-term financial and economic sustainability; and (e) industrial pollution control reduction through a focused time-bound action plan with respect to pollution, principally from fertilizer, pulp/paper, food/beverage and mining. The institutional strengthening and training (IST) component would enhance policies and operational experience in environmental protection and water, and wastewater management, and emphasize sustainability of services over the economic life of the utilities' assets. Support for these initiatives has been grouped into a number of main composite packages for the various executing agencies, covering institutional development, financial management improvement, construction supervision and training. The component would also support provincial and sector city agencies, a public outreach program, an aquifer study, future project preparation and other programs of assistance to be defined.

3. Benefits and target population: Benefits: The project would help the Liaoning Provincial Govemment (LPG) to put in place the policies, institutions, and infrastructure to sustain environmental quality and improve urban services. The proposed project would generate benefits in terms of improvements in environmental quality, health, municipal services and institutional capacity:

* Environmental Benefits: improved ambient water quality in rivers currently highly polluted; * Health Benefits: reduced incidence of water pollution-related diseases as a result of improved sewer systems and reduced surface and groundwater pollution near water intakes; * Improved Municipal Services: expanded coverage of wastewater collection, treatment and disposal for the urban populations of Jinzhou, Panj in and Yingkou; * Institutional Reforms: strengthened financial and management autonomy would enable utilities to sustain and expand the provision of essential services for a growing population. Support for institutional development would ensure the long-term sustainability of the organizations and of the physical investments.

Target Population: The project targets the urban populations of the principal polluting cities and their industries in the Liao River Basin within Liaoning Province, specifically Jinzhou, Panjin and Yingkou. The urban population in these cities is expected to reach 1.7 million by 2010, an increase of about 13.3 percent over the current level of 1.5 million.

Liaoning is a coastal province in the northeastern part of China and is a key link between China's northeast economic zone and the Bohai Sea Rim economniczone. It is also a communications hub, connecting the

- 7 - Eurasian rail-bridge into Russia with China's northeast, and for the conduct of foreign trade. LP covers an area of 145,900 square kilometers (km2), with a population of 41 million. It is rich in natural resources with more than 100 varieties of minerals, including oil and gas. These resources have been exploited with little regard up to the present on any environmental impact. The water resources within LP have, as a result, been badly depleted and polluted by the heavy industries that have been established to take advantage of the proximity of their required raw materials. One of the worst affected areas is the Liao River Basin, covering 42,000 km2, which is now considered one of the most environmentally polluted in China. In 1995, the gross annual output of LRB was Y305 billion, representing about 60 percent of LP's total output. LRB is also a major grain producer, with about 2 million hectares (ha) of land, or 29 percent of the total basin area, under cultivation. Irrigation for paddy rice is the principal user of surface water within LP accounting for up to 70 percent of the total water used. Archaeological discoveries have shown that LP has been occupied by humans for over 5,000 years and is rich in cultural relics.

4. Institutional and implementation arrangements: At the provincial and municipal levels, leading groups have been established to give policy direction to the environmental recovery of the LRB. The provincial leading group is headed by the Vice-Govemor of the province, and municipal leading groups are headed by mayors or vice mayors. The leading groups have established project management offices to coordinate the implementation of their policy decisions. At the provincial level there are (a) the project office of the EU-funded LIEP under the Liaoning Environmental Protection Bureau (LEPB); and (b) the Liaoning Urban Construction and Renewal Project Office (LUCRPO) under the Liaoning Provincial Construction Commission. In order to expedite the preparation of the proposed Liao River Basin Project (LRBP) LPG has brought together LIEP, LUCRPO and the Provincial Water Conservation Department within the offices of LEPB. Each municipality has set up a project management office, either within the municipal government structure or within its designated implementing agency.

The municipal wastewater components of Jinzhou, Panjin and Yingkou would be implemented by the cities' recently created financially autonomous wastewater companies. The environmental water quality monitoring component would be implemented by LEPB through provincial and municipal monitoring stations. The urban management information system (IMS) component would be managed by the Liaoning Provincial Construction Commission (LCC), in affiliation with LEPB. The Environment Subprojects (ES) component would be managed jointly by LEPB and the Liaoning Finance Bureau (LFB). LUCRPO would be responsible for coordinating the Institutional Strengthening and Training (IST) component.

The China International Tendering Company (CITC) and the Shenyang Tendering Center has been retained as procurement agents for all aspects of civil and electrical and mechanical works requiring bidding through international competitive bidding (ICB) procedures. Institutional and financial strengthening and construction supervision services would be provided by international firms using joint international/national supervision teams.

Onlending Arrangements: The proposed loan of $100 million would be made to the People's Republic of China. The loan would be for 20 years, including 5 years of grace, at the Bank's standard interest rate for LIBOR-based US dollar single currency loans. The proceeds of the loan would be onlent to LP on the same terms and conditions as the Bank loan to China, including passing on the front-end fee and a commitment charge of 0.75 percent a year. LP would onlend part of the proceeds of the Bank loan to the municipalities of Jinzhou, Panjin and Yingkou on the same terms and conditions as it received from China. The municipalities would onlend proceeds of the Bank loan to their wastewater companies for 15 years

- 8 - including 5 years of grace, at an interest rate not less than the Bank's rate to China plus the municipalities' portion of the front-end fee and a commitment charge of 0.75 percent a year. This onlending rate is considered appropriate, considering that the companies are new and inexperienced; these arrangements are also consistent with other Bank Group-supported sector projects. Jinzhou and Yingkou Municipalities would onlend Bank loan proceeds to their respective paper-making companies at not less than the Bank rate to China plus a spread of 1.5 percent a year, and a commitment charge of 0.75 percent a year. The maturity of the loans would be up to 10 years including up to 4 years of grace. Liaoning would use part of the loan proceeds to onlend to small and medium-size industries at an interest rate not less than the Bank rate to China; this rate is considered appropriate for environment investments which have high social or public good benefits. The maturity of the subloans would be for 3 to 5 years, including a I to 2-year period of grace. Repayments of subloans would be deposited into Liaoning's existing Enviromnental Revolving Subloan Facility (ERSF) for future onlending for subprojects.

Financial Management: An assessment of project financial management including an assessment of the relevant revenue-earning implementing agencies was carried out during appraisal, to ensure that the Bank's minimum financial management requirements as stipulated in OP/BP 10.02 are met. Traditional disbursement techniques would be used in accordance with an agreement reached between the Bank and the Ministry of Finance (MOF). To facilitate disbursements, a Special Account would be opened with an authorized allocation of $8.0 million, equivalent to the estimated average expenditures to be financed by the Bank over about a four-month period. The account would be opened in US dollars in a bank acceptable to the Bank and be managed by the Liaoning Finance Department (LFD).

Auditing Arrangements: As with other Bank Group-financed projects in China, the Foreign Investment Audit Bureau of the China National Audit Office (CNAO), established in 1983 under the name of State Audit Administration, would have overall responsibility for auditing the accounts of the project. The actual auditing work would be conducted by the Liaoning Provincial Audit Department under CNAO's supervision. The Bank currently accepts audits performed under the responsibility of CNAO. Audits of the project accounts and the financial statements of implementing agencies and audits of the Special Account and statements of expenditures (SOEs) would be submitted to the Bank within six months after the end of the financial year. During appraisal, LPG confirmed that the audit reports of the implementing agencies would include opinions on whether the agencies were in compliance with their respective financial covenants, and whether these agencies had taken out adequate insurance on goods and works financed from loan proceeds.

Monitoring and Evaluation Arrangements: The project would be supervised through Bank missions scheduled for twice a year. Headquarters and country office staff would cooperate in this activity. During implementation, project performance, including the achievement of project outputs and progress toward the attainment of development objectives, would be monitored through the use of semiannual progress reports prepared by the LUCRPO. The first such monitoring report would be submitted by January 31, 2002, and the last by July 31, 2007. A mid-term review would be undertaken jointly with LPG in 2004 to evaluate the project's achievements and identify any corrective measures necessary. An implementation completion report, reviewing the planned objectives and the achievements of the project, including costs and benefits derived, and performance and contribution of all parties associated with project execution, would be prepared by LUCRPO and submitted to the Bank within six months of the loan closing date.

-9- D. Project Rationale 1. Projectalternatives considered and reasonsfor rejection: A managementplan has been preparedfor each administrativearea in LRB, initiallyat a municipal level and combinedinto a provincialplan formningthe basis of the "LiaoRiver BasinWater PollutionPrevention under the "Ninth Five-YearPlan" and Planning for the Year 2010". This was approved by the State Council in 1999 and forms the basis of the currentand ongoingwork of the authoritiesin the basin. The four stated principlesthat underlie the planning are: sustainabledevelopment; water resource protection; total load controlof pollutants;and priorityto major pollutingsources.

The focus of the plan, however, is specificallydirected at the reductionof COD loads by means of the control of urban and industrialwastewater discharges. The details of the load reductionsrequired in the plan were determinedby distributingthe overall load reductionrequired between the basinmunicipalities. These allocated load reductions were then further distributedby the municipalitiesbetween specific industriesand urbanwastewater discharges to generatea list of projectsfor implementationunder the plan.

Water quality objectivesfor river catchmentswithin LRB have been specified,as have program targets coveringthe period 2000-10. The linkages between the load reductionsand the water quality objectives have been modeled,and the pollutantload reductionscalculated using simple lineartechniques. In view of the limiteddilution available in LRB, it will be necessaryin the futurefor wastewatertreatment to include also the removalof ammonia.Moreover, the plan considersonly point source loads of a single pollutant, whereas otherpollutants may be significant,as also may be dischargesfrom sourcesnot as yet considered, such as agriculturalrunoff, air pollutionfall-out and wastewaterdischarges from small-scaleindustry.

Consideringthe seriousnessof the water resource pollution,and the outcome of the modeling, it was considered optionalfor this stage to concentrate on the highest impact municipal systems, adopting a "worst first" approach(see Annex 12, which sets out the detailedimpacts); further, to meet China'sproject and loan processinggoals, MOF advisedthat it would be optimalto implementthe basinplan in stages,the first of which would have World Bank support, focusing on 3 cities, Jinzhou, Panjin and Yingkou. A follow-onstage which wouldbe importantfor LRB clean-upis plannedby Liaoningfocusing on Shenyang. The plan at this time considersquality in the surface watersof LRB. However,many cities and townsrely upon groundwaterfor urban supply,and, therefore,protection of groundwaterquality is critical.A basin plan should therefore also considerthe need for groundwaterprotection, including the possibleneed to improvestandards of disposalof municipalsolid wastes and the controlof hazardouswastes from industry.

2. Major relatedprojects financed by the Bank and/orother development agencies (completed, ongoingand planned). Latest Supervision Sector Issue ] Project (PSR)Ratings ______0(Bank-financed projectsonly) Implementation Development Bank-financed Progress(IP) Objective(DO) UrbanEnvironment: Water, YunnanEnvironment Project S S wastewater,sanitation, solid waste, (Ln 4055/Cr2892-CHA) industrialpollution

- 10- Urban Environment: Water, Guangxi Urban Environment S S wastewater, sanitation, solid waste, Project (Ln 4348/Cr industrial pollution 3097-CHA) Urban Environment: Wastewater & Second Shanghai Sewerage HS HS tariff reform policy Project (Ln 3987-CHA) Urban Environment: Water, Shandong Environment Project S S wastewater, district heating, industrial (Ln 4237-CHA) pollution Urban Environment: Water, Shanghai Environment Project HS HS wastewater, solid waste, pollution (Ln 371 1-CHA) mitigation Urban Environment: Water, Sichuan Urban Environment S S wastewater, sanitation, solid waste, Project (Ln 4496/Cr industrial pollution 3251-CHA) Urban Environment: Water, Chongqing Urban Environment S S wastewater, solid waste Project (Ln 4561-CHIA) Urban Environment: Water, Hebei Urban Environment S S wastewater, industrial pollution Project (Ln 4569-CHA) Urban Environment: Industrial Chongqing Industrial Pollution S S pollution management and control Control & Reform Project (Ln 4045-CHA) Urban Environment: Water, Liaoning Environment Project S S wastewater, solid waste, industrial (Ln 378 1-CHA) pollution, environmental rehabilitation and reconstruction, Environment Revolving Subloans River Basin Pollution Control: Huai River Pollution Control Wastewater, industrial pollution in two Project (Ln 4597-CHA) provinces Other developmentagencies The Asian Development Bank (ADB) Reported to have been generally has supported a range of investment successful investment programs in the urban sector of China, programs. Expansion of ADB mainly supporting urban environmental support to the urban sector is services, in provinces that do not under way. overlap with World Bank-supported programs. Bilateral support from a number of These investments have sources, including KfW and the generally been successfully Governments of Austria, Australia, implemented, though attention Finland and Denmark, has financed has not been paid to equipment for urban water supply, institutional and financial wastewater and industrial waste matters. Finance has been treatment plants. available mainly to support equipment sourced (restrictively) from the lending country. -i The Department for International Performance has been reported Development--DFID (of the United to be satisfactory. Kingdom) has focused support on institutional and financial development needs of urban utilities, and on broad aspects of environmental management. The Government of Japan remains a Performance is reported to be major source of international finance satisfactory. Financial policies for equipment for urban water supply, and conditionality are not wastewater and industrial waste developed, however. treatmnentplants.

IP/D0Ratings: HS (Highly Satisfactory), S (Satisfactory),U (Unsatisfactory),HU (Highly Unsatisfactory)

3. Lessons learned and reflected in the project design: Greater Reliance on User Charges. A major finding from the Operations and Evaluation Department (OED) review of Bank water and sanitation projects has been a generally good achievement of physical targets but less success in sustaining the financial viability of municipal service providers. Preliminary indications from an ongoing OED review of the Banks China water supply and wastewater program appear to confirm these findings. Recent sector work on China ("Urban Environmental Service Management," Report No. 13073-CHA) notes the need for greater reliance on user charges, which are presently levied at unsustainable levels. Hence, tariff reforms will be a centerpiece of the policy dialogue with the LRB municipalities, and adjustments of tariff levels are an integral part of the project design.

Timing of Tariff Increases. Previous urban environment projects in China have frequently encountered difficulties implementing agreed tariff increases in a timely manner, sometimes delaying project implementation by six months or more. Tariff increases often represent politically difficult decisions for local governments, but are critical for the sustainability of the project. To avoid such delays after loan effectiveness, and to ensure that changes meet the approval of all relevant authorities, this project design requires that tariff adjustments be implemented during the preparation stage, as early as project appraisal. These tariff adjustments were implemented prior to appraisal.

Experience with Pollution Control in River Basins. Experience with pollution control projects in river basins, e.g., in Brazil (Guarapiranga/Sao Paulo, Parana, and Minas Gerais, as well as in an upcoming project in Paraiba du Sul River Basin) has shown the importance of adequate monitoring and databases, as well as the need to link the data to investment planning with regard to wastewater treatment. The project includes an environmental water quality monitoring component to adequately monitor river water quality. Further, the urban management information systems component would address the issue of linking the data to urban investment planning with regard to wastewater treatment and environmnentalmanagement.

Support for Institutional Management. The establishment of financially autonomous utility enterprises to develop and manage urban services is a long-standing Chinese practice, and avoids many of the management difficulties of publicly owned utilities in other countries. However, wastewater collection and treatment have only recently been given the same autonomy, generally by absorbing the existing drainage bureaus and construction management units already active in the sector into separate enterprises. The prior experience of these bureaus will undoubtedly allow a smoother transition, but high levels of technical assistance will be needed to strengthen the new enterprises' financial, managerial, and technical capacities. Tariffs, charges, and reallocation of existing taxes and urban construction charges would help ensure

- 12 - adequatefunds for operationand management.The establishmentof financiallyautonomous utilities prior to project implementationhas provided additional time for managementand operationalissues to be clarified.During project formulationand preparation,detailed analyses of institutionalstrengthening and training (IST) needs were undertaken;this led to the design of a comprehensiveIST componentto be includedin the project that would assist the projectutilities address the challengesdescribed above.

4. Indicationsof borrowercommitment and ownership: Thehigh-level commitment to the projectis evidencedby the inclusionof the Liao Riverwithin the priority "ThreeRivers, Three Lakes"program. Provincial and municipalcommitment to the project is demonstrated by the formationof dedicatedproject offices and the identificationof candidateprojects withinan overall plan frameworkand commitments in writing to implementthe long-terrn Liao River Basin clean-up program.Liaoning has substantialexperience in implementingBank-financed projects.

5. Valueadded of Bank supportin this project: The Bank brings considerableinternational experience in terms of assisting in policy formulationand investmentprogram design. Bank assistancewill also draw upon our growing experiencein addressing regional environmentalissues through ongoingprojects in Liaoningand in other priority environmental improvemnentprojects in China,including the cleanupof DianchiLake (as part of the YunnanEnvironment Project)and the Huai River Basin,both includedin the priority "ThreeRivers, Three Lakes" prograrn.

Bankassistance in the project designphase has enabledthe basin municipalitiesto formulateand evaluatea more programmaticapproach to the provision of urban environmentalservices and to introduce the principlesof integratedriver basinmanagement into planningof waterresource and pollutionmanagement strategies.

E. Summary Project Analysis (Detailedassessments are in the project file, seeAnnex 8) 1. Economic(see Annex 4): O Costbenefit NPV-US$ million;ERR = % (see Annex4) X Costeffectiveness O Other(specify) Theproject willprovide economicbenefits to the Liao River Basinarea by improvingthe qualityof surface and groundwaterand thus protectinga range of activitieswhich rely on the water in the Basin. LUCRPO has made estimatesof the economicbenefits of the project and its components,based on identificationof avoided costs, productivity improvementsand health benefits. These estimates suggest considerable benefitsbut the uncertaintiesin the estimatesare such that an ERR for the projectcannot be estimatedwith confidence.

The pollution loads are large in relationto flows in the basin and are degradingexisting water sources. Consequently,reductions in pollution will have benefits in terms of postponing new water supply investments.Estimates have been made of the marginalcosts of new water supplybut it is not yet possible to define a relationship between pollution reduction and delay in water supply expansion and so the economicvalue of the pollution reductioncannot be valued on this basis. (The impactsof price increases and other demand managementmeasures have been includedin the design of individualschemes but these measuresdo not avoid the need for large scale wastewatertreatment to protect existingresources.)

The investmnentsare therefore evaluatedon a cost-effectivenessbasis, using an average incrementalcost (AIC) approach,and comparedwith each other and with comparablefigures for other schemesin China.

- 13- The key parameter for water quality in the Liao is COD which can be both a measure of loads of pollution (as tons of COD) and a measure of ambient quality (as concentration in the river). In the. long term, achievement of the water quality goals will be measured by reductions in COD concentrations (since this is basis of formal classification) but since very large reductions in COD loads are required to achieve this, pollution management efforts at this stage are focused on load reduction. Cost effectiveness of COD pollution load reduction (either by prevention or by treatment) is therefore the key parameter in comparing approaches and individual projects. There are various industrial interventions that could achieve COD reduction at relatively low cost and the AIC for COD removal is one of the criteria for support of any industrial interventions. However, industrial pollution load reduction alone would not be sufficient to achieve the target quality improvements and it certainly could not be implemented in a reasonable period so that municipal treatment is also required. The estimated AICs for the municipal schemes proposed are comparable with each other and with figures from other schemes, indicating that they are consistent with good practice.

Results from an affordability and willingness to pay study analysis for urban environmental services show generally low elasticity for different levels of tariffs and household income, indicating the need for a concerted campaign of awareness raising and education about water use and wastewater treatment. The proposed tariffs appear affordable to the population, on the basis of these analyses.

2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4) The base cost estimates of the project reflect preliminary engineering designs and price levels prevailing in March 2001. The unit prices were derived from the following sources: (a) quotations obtained from manufacturers and suppliers; (b) prices of goods and works from recent contracts; and (c) construction costs according to prices published by the Central and Liaoning governments, all adjusted for inflation. Physical contingencies have been applied to civil works base costs at the rate of 15 percent, and to other costs at the rate of 10 percent. Construction supervision services costs, estimated at 2.5 percent of the civil works and I percent of the materials and equipment costs of the wastewater component have been included in the project cost estimates. Project management and engineering overhead costs of 10 percent are also included. Price contingencies have been applied to expenditures at projected global foreign and local inflation rates, as follows: local: 2 percent in 2001 and 3 percent thereafter; foreign: 3.6 percent in 2001, 3.7 percent in 2002, 2.6 percent in 2003 and 2.2 percent thereafter. The dollar/yuan exchange rate has been assumed to vary in order to maintain purchasing power parity.

The financial objectives set by LPG for its wastewater utility companies are to achieve at least full cost recovery on their operations. The tariff adjustments necessary to meet these financial objectives were executed prior to appraisal. Financial projections have been completed for each utility company indicating the levels of tariffs required annually to meet the stated objectives. However, in practice, wastewater companies' tariffs are adjusted only every two or three years, taking into account the tariff requirements of other utilities, e.g., water, power, gas and telephone. It is possible, therefore, that in the intervening years between tariff adjustments, the agencies may not be able to meet their annual targets. In such eventualities, the agencies' operating revenues would need to be supplemented from the general revenues of the parent municipality in order to remain financially viable.

Paper-Making Companies. Financial assessments of the industrial wastewater treatment investments proposed for the Jincheng Paper-Making Company (JPMC) and Yingkou Paper-Making Company (YPMC) were carried out on the basis of the financial soundness (as measured by minimum thresholds for debt service coverage ratio, current ratio and quick ratio) of their operations. The companies are forecast to be able to maintain adequate current and quick ratios and a minimum debt service coverage ratio of 1.4

- 14 - during the projection period. Copies of the financial projections of JPMC and YPMC are included in the Project File (Annex 8).

Fiscal Impact: Liaoning Province's on- and off-budget receipts and expenditures in 2000 both totaled about Y73 billion ($8.8 billion equivalent). Jinzhou, Panjin and Yingkou's on- and off-budget receipts and expenditures in 2000 totaled about Y2.4 billion, YI.7 billion and Y2.4 billion, respectively. Provincial receipts and expenditures are projected to grow at about 3 percent per year in current terms; municipal receipts and expenditures are projected to grow at about 5.5 percent per year in current terms. LP expects to pass on about 74 percent of the Bank loan proceeds to the municipalities and their subborrowers. Should the cities and their subborrowers be unable to fulfill their obligations, LP would have no difficulty in covering debt service through its own resources as the debt services represented by the project is small compared to total provincial receipts. LP would provide all funding not met by (a) the proceeds of the Bank loan; (b) municipal contributions; and (c) funds generated intemally by the implementing agencies. LFD has independently assessed the municipalities' ability to generate their required counterpart funds from assured sources and found these satisfactory.

3. Technical: The proposed physical investments were designed by first-class Chinese design institutes, taking into account the latest Ministry of Construction (MOC) design standards. The engineering designs and bid documents were reviewed by intemational consultants and found to be satisfactory. The technologies involved are proven and within the capability of Chinese contractors and manufacturers if successful in winning bids.

4. Institutional:

4.1 Executing agencies: The self-funding, self-accounting state-owned wastewater companies of Jinzhou, Panjin and Yingkou were established during project preparation; this represents a major step in utility reform, consistent with stated national policy. The staff of these companies were transfered from the existing municipal engineering administration departments responsible for sewerage and drainage services. Therefore, while the wastewater companies would start with operational experience, they as yet lack a "corporate" culture. They would therefore benefit from technical assistance to be provided under the project to help them improve, as necessary, their business planning, financial management and operational skills, again stressing the positive steps taken and planned in utility reform and underpinning tangible moves to market pricing.

4.2 -Project management: LUCRPO, working closely with LEPB, LIEP other interested agencies and its Design Review and Advisory (DRA) consultants, has arranged for project preparation work to be completed to the satisfaction of LPG and the Bank. LUCRPO will be strengthened and the personnel mix adjusted to reflect the needs of the implementation and construction phases of the project. Each city has formed, budgeted and staffed a project management office (PMO), which has been involved throughout project formulation and preparation. It is expected that these PMOs, with support from LUCRPO, would significantly enhance project launch and subsequent implementation. 4.3 Procurement issues: The Procurement Capacity Assessment (see Project File, Annex 8) found no concerns of substance.

- 15- Attention would be given to procurement matters listed in its Action Plan during project supervision, building on the experience of Liaoning as an existing borrower from the World Bank Group. 4.4 Financial management issues: The task team conducted a financial management assessment of the adequacy of the financial management arrangements of the Liao River Basin Project (the project). The information presented in Annex 14, more fully describes the financial management arrangements for financial management.

The Liaoning Urban Construction and Renewal Project Office (LUCRPO) has overall responsibility for the preparation, training and implementation of the Project. The Project implementation will be undertaken at the municipal level. The Project will use "Accounting Sandards for State-owned, Infrastructure-oriented Projects" during the initial construction stage and switch to "Accounting Standards for Industrial Enterprises" afterwards. In terms of disbursements, the Project will be producing project financial management reports in line with the format and content agreed to between the Bank and the Government. In addition, traditional disbursement techniques will be used as opposed to the PMR-based disbursement.

In line with other Bank-funded projects in China, the Project will be audited in accordance with Government Auditing Standards of the People's Republic of China. The Foreign Investment Audit Bureau of the China National Audit Office (CNAO) will have the overall responsibility for auditing the project accounts and the required entity financial statements. Liaoning Provincial Audit Bureau has been identified as the auditors for the Project. Auditors' reports will be submitted to the Bank within six months after the end of each reporting year, with separate opinions on the statement of expenditures and on the special account. There is no noncompliance with audit covenants for existing Bank-financed projects in Liaoning, though the auditors raised a few issues relating to Jinzhou Water Supply Company which is not a project implementing agency for the Project (section 8 of Annex 14).

There is clearly a risk that tariffs collected by the water supply companies may not be fully turned over to the wastewater companies, who are ultimately responsible for the repayment of the Bank loan. This risk could be mitigated if ring-fenced controls are established to safeguard the interests of the wastewater companies. Please refer to section 8 of Annex 14 for further discussion.

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. The Liao River Basin is one of the three priority river basins in China for water quality improvement. The general lack of water resources in the basin means that an integrated approach to water quality planning wilf be necessary rather than the previous application of uniformnconcentration based standards regardless of the receiving environment.

An environmental assessment (EA) has been carried out for LRBP. During its preparation and evaluation, national procedures, including those indicated in the "Circular on Strengthening Environmental Impact Assessment Management for Construction Projects Financed by Intemational Financial Organizations (June 1993)" as well as those required by the Bank Group, were diligently followed. The Comprehensive EA documents such as Environmental Assessment Report and Executive Summary were prepared, incorporating Bank conmments.The Environmental Management Plan (EMP) is an integral part of the EA. A detailed annex covering environmental assessment and impact has been prepared (Annex 12), summarizing the findings of the Chinese EAs on the various components.

- 16- Potential Impacts. The environmental impact of the project, is on balance, substantially positive and the benefits greatly outweigh the adverse impacts. The city wastewater treatment components substantially reduce the pollution loads to the rivers in the Liao River Basin and make a significant contribution towards achieving the desired water quality objectives for these rivers.

Mitigation Measures. The EA specified the appropriate mitigation measures, environmental monitoring plans, institutional arrangements and training and equipment requirements, together with cost estimates for implementation of the mitigation measures. Major mitigation measures include controls on construction practices, careful siting of facilities with appropriate buffer zones and controls on noise.

Public Consultation and Feedback. During the 12 months leading up to the delivery of the provincial consolidated EAs and RAPs, many meetings took place with LUCRPO, city PMOs, utility companies, city EPBs, and other affected city organizations to discuss the proposed project and the preparation of the subcomponent environmental assessment reports. These meetings took place monthly at a minimum and resulted in the full collaboration of local officials and community representatives leading to the full support of the project and the EA process. In addition, the Terms of Reference (TOR) for the EAs, the draft EAs and the final EAs were made available publicly in each of the project municipalities.

Information Disclosure. The EA was reviewed during January 2001, and found to be satisfactory, and sent to the Infoshop on January 25, 2001. The EA was approved by the Provincial authorities in late 2000, and approved by the State Environmental Protection Agency (SEPA) in March 2001. 5.2 What are the main features of the EMP and are they adequate? Under the EMP, an environmental protection management system has been established for the purpose of implementing existing laws and regulations in each of the municipalities, with contractors and the utility companies being responsible for carrying out environmental management and monitoring activities during construction and during plant operations respectively. Information gathered will be made available to LEPB and the municipal EPBs, as well as to the public. An Annual Safeguard Compliance Report will summarize the previous year's environmental and social indicator data. The EMP is assessed to be appropriate for the project. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: December 2000

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 of consultation that were used and which groups were consulted? Consultation was carried out in three ways: bulletins to the press, public opinion questionnaires and surveys. LUCRPO published detailed environment and project infornation in the following newspapers: Jinzhou Evening, Panjin Daily and Yingkou Daily. Surveys were undertaken of the public, the project-affected people; willingness-to-pay surveys wee also conducted. Further, a public opinion survey was carried out in the project cities, seeking stakeholders' opinions, and sirnultaneously informing them about the project, its benefits and implications. (See Annex 12 which also contains details of the public consultations). 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? Besides regular environmental reviews to be carried out during supervision missions, the Annual Safeguard Compliance Report (see Section 5.2) will provide a year-by-year snapshot of progress on the environmental

- 17 - front.Project monitoring indicators (see Annex 1) will systematicallymeasure the environmentalimpact of the project. 6. Social: 6.1 Summarizekey social issuesrelevant to the project objectives,and specifythe project'ssocial developmentoutcomes. The project is expectedto have a significantpositive social impact, once the project-financedclean-up of the water and land resourcesin the Liao River Basin has been completed.Adverse social impactsof the project are largely related to land acquisitionand structure demolitionrequired for implementation.The project would require the acquisitionof 18.7 hectares of land for the constructionof the wastewater treatmentplants, affecting about 175people. The constructionand rehabilitationof the interceptorswould result in the temporarylease of a large amount of land, includingthe removal of both residentialand commercialstructures. About 1,375people would be affectedthrough removal of residentialstructures. A total of 154 shops,vendors and governmentinstitutions would be affected,of which 110 are street vendors. Altogetherabout 418 employeeswould be affected through relocation or temporarycessation of their commercial operations. There are no land acquisition requirements or resettlement for the two paper-makingcompanies.

With assistance from the project consultants,the city project offices carried out resettlementplanning. Planning activities included a census of affected people, an inventory of affected assets, a sample socioeconomicsurvey in the directlyaffected areas and extensiveconsultations with the affectedgroups on the resettlementstrategy. As a result,a multiprongresettlement strategy has been developedfor the affected population.

For farmers who lose farmlandto the wastewatertreatment plants, the livelihoodrehabilitation strategy is land- and agriculture-based.All affectedfarmers would be allocatedfarmland within the village, and land compensationfunds would be paid to the village and used collectivelyin the villagesfor agricultureand sidelinedevelopment.

For peoplelosing houses,two optionsare planned,i.e., cash compensationand replacementhousing. Urban residentscould choose to find and buy their own replacementhousing with the cash compensation.For those who do not want to find and buy theirown replacementhousing, the projectwould provide ownership of a replacementhousing unit in government-builtapartments. For relocatingrural residents,the project would providecompensation at replacementcost with no depreciation,and any salvageablematerials would belong to the affectedresidents. They would receivealternative housing plots withintheir villagesto build replacementhousing.

Most of the shops, vendors and institutionswould be affectedtemporarily during the constructionof the interceptorsand would resume businessafter the construction.Compensation would be paid for business loss and the employees'salary duringthe constructionperiod. A few governmentagencies and shopswould require relocationand new sites have been planned for them. The project would also impact some public infrastructure.Compensation at replacementcost would be paid to the relevant governmentagencies to restore the affectedinfrastructure and services.

On the basis of these,a ResettlementAction Plan (RAP)was preparedfor eachof the three project citiesin line with local laws and World Bank OD 4.30 on InvoluntaryResettlement. The RAPs containthe details of (a) the census,(b) inventory,(c) the socioeconomicsurvey, (d) the legal frameworkand resettlement principles,(e) organization,(f) grievance mechanism, (g) implementationschedule, (h) budget and (i) monitoringarrangements.

- 18- The proposed investments in Panjin City would affect some ethnic minority households as defined by the government. A survey to identify ethnic minority groups found that, of the 1,354 relocating population in the city, 208 people belong to officially defined ethnic minority groups, including 83 Manchurian, 121 Korean and 4 Mongolian persons. The survey and interviews found that all the affected persons were urban residents, scattered throughout the project area, and the project would not have specific impact on ethnic minority communities. Project information was disseminated among them during the consultation sessions. Their feedback has been incorporated into the RAPs and the consultation session concluded that the resettlement and rehabilitation measures planned under the RAPs, would be adequate to address and mitigate any project impact on such ethnic minority groups.

Environment subloans would be made available under the project. The specific investment subprojects would be selected during the course of implementation, drawn from the existing candidate list. A resettlement policy framework has been developed for application in the event an environment subproject necessitates loss of land or assets. 6.2 Participatory Approach: How are key stakeholders participating in the project? The major beneficiaries would be the majority of the population of the cities of Jinzhou, Panjin and Yingkou, who would enjoy a cleaner environment through wastewater collection, treatment and disposal. The implementing agencies would also benefit through the IST incorporated into the project. The cities would benefit, overall, through benefits emanating from improved city management, and from the implementation of cost-effective tariffs and charges for these services.

All the affected households and communities have been identified through the census and inventory. Project information was provided to the affected population through newspapers, posters and public meetings. Focus group discussions and key informant interviews have been extensively conducted with local government officials and the affected communities to (a) further disseminate project information, (b) collect people's concems and suggestions, and (c) consult the affected people over the resettlement and rehabilitation strategy.

Information dissemination and consultation are designed to continue into implementation. A resettlement information booklet would be distributed to the affected people prior to resettlement implementation. Both internal and independent monitoring of the resettlement program would be conducted regularly during project implementation. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? A number of meetings took place between project proponents and representatives of local communities to solicit views and concerns. In the absence of local nongovernmental organizations (NGOs) in China, the interests of most communities are represented by both elected and appointed representatives. The entire process of resettlement planning has been participatory. Census and socioeconomic surveys were conducted with the full participation of the affected persons. The National Resettlement Research Center has been contracted as the independent monitor for the implementation of the resettlement program. Annex 12 contains details of public consultations. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? Financially autonomous consumer/beneficiary-oriented entities have been formed that would, in line with current China policy, be responsible for project implementation and urban service delivery. This would

- 19- enable a strong customer orientation, since consumers would be in direct contact with the service provider due to the regular payment of tariffs. Resettlement offices have been set up to implement the resettlement programs. The institutional arrangements are detailed in the RAP. 6.5 How will the project monitor performance in tenns of social development outcomes? Wastewater services improvement and river water quality would be regularly monitored, and reported through the project progress reporting arrangements. A public outreach program to be undertaken through the EU-funded Liaoning Integrated Environment Program (LIEP) has been designed. The outreach program will conduct annual surveys to monitor performance in terms of social impacts. The project also includes investments for water quality monitoring. See Annex 12.

7. Safeguard Policies: 7.1 Do any of the followingsafeguard policies applyto the project? [ : ff Sti;00jif 0Pok#.iffu::ia;j:A: t00X000TiT i0000::: i; :j Oolicability t i EnvironmentalAssessment (OP 4.01, BP 4.01, GP 4.01) * Yes 0 No Satural habitats(OP 4.04, BP 4.04, GP 4.04) 0 Yes 0 No Forestry(OP 4.36, GP 4.3aW 0 Yes 0 No Pes Maaeet O409) 0Yes 0No |Cultural Proert P 11.03) = Yes *9 No IndigenousPeoples (OD 4.20 * Yes O No InvoluntaryResettlement (OD 4.30) * Yes O No |Safety of Dams(OP 4.37, BP 437)jLj 0X Yes *DNo |Projects in InternationalWaters (OP 7.50, BP7.50_GP 750 O Yes * No Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60) 0 Yes * No

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. Compliance would be monitored during routine supervision and the Annual Safeguard Compliance Report would provide full details annually.

F. Sustainabilityand Risks 1. Sustainability: The project is expected to be sustainable in three respects: (a) financially; (b) institutionally; and (c) in achieving its development objectives. Tariff reforms would enhance the financial viability of the municipal service providers. Institutionally, the creation of financially autonomous wastewater companies and continued technical assistance for the participating institutions would strengthen utility management and water quality monitoring capacity. Finally, the project addresses an issue of high priority to -both the local and the national government: vital self-interest in achieving environmental conditions necessary for sustained economic growth, which are a strong motivation to continue implementing the long-term water resource strategy.

- 20 - 2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Risk _ Risk Rating Risk MitigationMeasure FromOutputs to Objective Complementary pollution reduction in M Monitoring and resource management industry and agriculture delayed information system that clearly tracks sources of pollution and nonattainment of quality targets

Pollution abatement action plan incorporated into the project

FromComponents to Outputs Autonomy of wastewater organizations M Companies created before appraisal Financial sustainability of wastewater M Tariffs established, implemented and services covenanted; financial performance to be core activity of project supervision

OverallRisk Rating M Risk Rating- H (HighRisk), S (SubstantialRisk), M (ModestRisk), N(Negligible or LowRisk)

3. Possible Controversial Aspects: Public reaction to wastewater tariff increases to maintain the financial viability of the wastewater companies.

G. Main Loan Conditions 1. Effectiveness Condition * Execution of subsidiary loan agreements between the project municipalities (Jinzhou, Panjin and Yingkou) and their wastewatercompanies, satisfactory to the Bank.

2. Other [classify according to covenant types used in the Legal Agreements.] Disbursement condition: * The signing of contractswith consultant firms for (a) institutional and financial technicalassistance, and (b) construction supervision services and quality control, as a condition of disbursement of the civil works category; * The adoption of an OperationalManual acceptableto the Bank for environmentalsubloans as a condition of disbursementof this category;and * The execution of subsidiary loan agreements between Jinzhou and Yingkou and their paper-making companies,satisfactory to the Bank, as a condition of disbursementof the goods subcategoriesfor Jincheng

-21 - and Yingkou.

Implementation covenants: At negotiations, assurances were obtained from Liaoning Province (LP) that it would: * carry out, or cause to be carried out, the resettlement of persons affected by the project in a manner and according to the Resettlement Action Plan (RAP) satisfactory to the Bank; * cause the Jincheng Paper-making Company to demolish, by December 31, 2006, its mercury electrolysis facility and clean up the demolition site in a manner satisfactory to the Bank; * cause the project agencies to carry out, in a manner satisfactory to the Bank, the findings of the Environmental Assessment (EA) and related implementation program; * maintain the Liaoning Urban Construction and Renewal Project Office (LUCRPO) and the city project management offices (PMOs), and urban management information system (UMIS) centers throughout implementation, with functions and responsibilities satisfactory to the Bank, and with competent staff in adequate numbers for the duration of the project; * carry out, or cause to be carried out, the time-bound Industrial Pollution Control Action Plan (IPCAP) for the Liao River Basin in accordance with a schedule acceptable to the Bank and discuss and agree any revisions with the Bank; and * arrange for each project city to fumish to the Bank, by December 31, 2001, a time-bound investment program, acceptable to the Bank, to strengthen its wastewater collection systems, and begin implementation of said program by July 31, 2002, taking into account the Bank's comments thereon.

Financial covenants: At negotiations, assurances were obtained from LP that it would:

* make subloans to small and medium-size industries on terms and conditions satisfactory to the Bank, and use the repayments of such subloans to finance additional subloans through its Environment Revolving Subloan Facility (ERSF);

* cause Jinzhou, Panjin and Yingkou to onlend part of the loan proceeds to their respective wastewater companies, on terms and conditions satisfactory to the Bank;

* cause Jinzhou and Yingkou to onlend part of the loan proceeds to their respective paper-making companies, on terms and conditions satisfactory to the Bank; * cause financial management to be carried out in accordance with the guidelines set out in the Financial Management System (FMS) Manual, and arrange for the following annual audits to be submitted to the Bank within six months after the end of the financial year, commencing with fiscal year 2002: (a) audit of the project accounts maintained by the Liaoning Urban Construction and Renewal Project Office (LUCRPO), Liaoning Provincial Construction Commission (LCC), Liaoning Environmental Protection Bureau, (LEPB), Urban Management Information System (UMIS); (b) audit of the Special Account; (c) audit of statements of expenditures (SOEs); (d) audits of the financial statements of the wastewater companies of Jinzhou, Panjin and Yingkou; and (e) audits of the financial statements of Jincheng Paper-making Company (JPMC) and Yingkou Paper-making Company (YPMC); * commencing with fiscal year 2001, cause the wastewater companies of Jinzhou, Panjin and Yingkou to (a) produce revenues from their respective wastewater operations sufficient to cover operations and maintenance costs (including depreciation), and the amount by which debt service requirements exceed the provision for depreciation; and (b) incur no additional debt without the Bank's agreement, unless a reasonable forecast shows that the entity would have a debt service coverage of at least 1.3 times; and * cause the wastewater companies of Jinzhou, Panjin and Yingkou to prepare, before September 30, 2002, and in each of the following fiscal years, forecasts satisfactory to the Bank, (a) to review whether they would meet

- 22 - the covenantedrequirements set forth above in such year and the following fiscal year, and (b) to furnishthe results of such reviews to the Bank; if any such reviews would show that the entity would not meet the requirements set out above, the entity would take all necessary measures, including adjustments to the structure of its tariffs and charges,in order to meet the requirements;and * commencing with fiscal year 2001, cause Jincheng Paper-making Company and Yingkou Paper-making Company to (a) maintain a quick ratio of 0.8; (b) maintain a current ratio of 1.5; and (c) incur no additional debt without the Bank's agreement,unless a reasonable forecast shows that the entity would have a debt servicecoverage of at least 1.4 times.

Reporting and Monitoring: At negotiations, assurances were obtained from LP that it would: * cause each implementingagency to prepare semiannualproject progress reports; and LUCRPO to send a consolidatedreport to the Bankby January 31 and July 31 of each year, beginning on January31, 2002; and * carry out with the Bank a mid-termreview of the project by December31, 2004, and implement,or cause to be implemented,agreed recommendations.

H. Readiness for Implementation 3 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. Ii 1. b) Not applicable.

1 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. [ 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):

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

ffreyRead v airna ukon Huang Team Leader Sector Manager/Director Country ManagerlDirector

- 23 - Annex 1: Project Design Summary

CHINA: Liao River Basin Project _

A414~~~

Outputfrom each OutputIndicators: Projectreports: (fromOutputs to Objective) Component: Market-orientedpricing and Ratio of actual tariff to Wastewatercompany statistics; Governmentmaintains tariffs at financialmanagement introduced recommendedcost recoverytariff project supervisionmission cost recoverylevels in participatingmunicipal increased wastewatercompanies in the LRB Infrastructurecapacity for Volume increased for wastewater Liaoningand companystatistics Connectionsmade to wastewater wastewaterincreased collectedand safely disposed and periodic reports networks Cost-effectivewastewater Small and medium industries Statisticsof Liaoning EPB. Pilot experience disseminated pollution abatement measures adopt clean technology,and IPCAPis implementedin and adopted throughout undertaken in industry implementend-of-pipe treatment accordancewith scope and timing Liaonings industrysector; agreed effectiveregulation Water qualitymonitoring and Long-termwater quality LiaoningEPB; draft and final Long-termstrategy is being managementcapacity monitoringstrategy developed strategydocuments implemented. strengthened and staff trained in water quality monitoring

- 24 - ProjectComponents I Inputs: (budgetfor each Project reports: (from Componentsto Sub-components: component) Outputs) Wastewatermanagement Achievementof planned Project ProgressReports, Wastewatercompanies are objectives(see Annex 3) supervisionmissions, data of establishedand sustained companiesand EPB Environmentalquality Water and air qualityto comply Project ProgressReports, Laboratorystaff resourcelevels monitoring with Chinese DrinkingWater and supervisionmissions, data of increased or sustained,laboratory Air Quality Standards companiesand EPB operating budgets increased/ sustained as required,training in Increasein level of monitoring-- Laboratoryrecords for industrial use of equipmentprovided number of samplingpoints, wastewaterand environmental numberof samples analyzed, qualityanalysis number of parametersmonitored Urban managementinformation Developmentof operational ProjectProgress Reports, Sharing of data by interested systems systems,improved base mapping supervisionmissions agencies,avoidance of duplication Environmentsubprojects Subloansmade to approvedsmall Project Progress Reports,data of Reductionof polluting discharges and medium-sizedindustries industries,LEPB and LFD Institutionalstrengthening and Improvementsin organizational, ProjectProgress Reports, Governmentcommitment to training managerialand financial supervisionmissions financing "intangibles" capability;numbers of managementand staff trained in systemoperations, financial managementand business planning General Achievementvs. Target reviewed Benchmarkingto be undertaken, through ProgressReports and agreed at the ProjectLaunch Workshop(PLW)

- 25 - ProjectMonitoring Indicators CHINA: Liao RiverBasin Project

The effectivenessof the project in meetingits DevelopmentObjectives would be assessedthrough the regularmonitoring, recording and reportingof key performanceindicators. Monitoring indicators were discussedand agreedwith LUCRPOand are given in the table below. The baselineand targets would be reviewedand updatedduring the ProjectLaunch Workshop. Indicator 2001 2005 2007 2010 1. Water qualityin Hun, Taizi, Liao and Daliao rivers - 50 70 90 meets Class V standards for COD (% of time) 2. Aggregatequantity of wastewatertreated at project N/A 30 60 80 city wastewater treatment plants (% of system flow) 3. Industrialwastewater meeting river discharge 50 70 75 80 standards (% of total flow) 4. Industrialwater use per unit of output(m3/Y10,000) 120 100 80 60

Indicator Baselineat Intermediate Achievementand ProjectStart Achievement Date and Date LiaoningProvincial Government Draft Plan ApprovedJune 2002 approvalof the RiverBasin Plan 2001 (Y/m3) 2003 (Y/m3) 2005 (Y/m3) Wastewatertariffs implementedto Panjin:0.34 Panjin: 0.49 Panjin:0.72 meet financialprojections Yingkou:0.25 Yingkou:0.46 Yingkou:.77 Jinzhou:0.29 Jinzhou:49 Jinzhou:0.85 Completionof wastewaterinterception Zero 3 (December2006) and treatment plants Class V river water qualityachieved No Yes (December in Daliaoand Liao 2006) Paper-makingcompanies 2004:50% of December2006: financial 80%covenanted targets financialtargets

- 26 - Annex 2: Detailed Project Description CHINA: Liao River Basin Project Background

The Province, Water Resources and Pollution. The Liaoning Province overlooks the Bohai and Yellow Sea in the south, and faces the Korean Peninsula and the Yalu River to the southeast. Liaoning is a communications hub, connecting with the Eurasian rail bridge into Russia, and a vital industrial and commercial link for foreign trade. Liaoning Province has a total area of 145,000 square kilometers, a population of 41 million, and comprises of 14 cities, 17 county-level towns and 17 counties. Shenyang is the provincial capital. Liaoning is rich in mineral resources including iron, boron, magnesite, diamond, jade and solvent-grade limestone, and oil and gas reserves. The exploitation of these abundant resources has taken place at a rapid pace, with serious impacts on the environment.

Water resources within the province have been both badly depleted and polluted by the heavy industries. The Liao River Basin has now been recognized as one of the most environmentally degraded within China, and the State Council has included this basin in its "Three Rivers and Three Lakes" environmental clean-up initiative. The Liao River Basin covers an area of 42,000 square kilometers, of which 27,000 square kilometers form the Hun-Taizi-Daliao Rivers catchment, and the remaining 15,000 square kilometer form the Liao river catchment.

In 1995, the gross annual output of the Liao River Basin totaled Y305 million ($36.1 million), representing about 60 percent of the total provincial output, with heavy industries contributing more than half the output. The remainder is from over 900 large and medium state enterprises located in the basin. The Liao River plain is very fertile, and has been a major grain producer for many years. Two million hectares (29 percent of the basin area) within the Liao catchment are under cultivation, and the 1995 agricultural output was about Y20 million.

Despite Liaoning Province being a water-scarce region, per capita consumption is typically between 100 liters per capita per day (lpcd) and 300 Ipcd, and increasing. Outdated production processes have resulted in high water utilization in industries. Raw water for both municipal and industrial supply is obtained from impounding reservoirs located within the upper catchment of the Liao River basin or from groundwater abstraction. Irrigation for paddy rice is the principal user of surface water between May and September, accounting for 70 percent of water use.

Only 6 percent of surface water achieve the national standards for drinking water. Recorded primary pollutant indices include COD, ammonia, potassium permanganate, copper and cyanide. The Taizi River near the city of Benxi is the most polluted. It is evident that at least 216,000 hectares of paddy rice is currently irrigated with surface water that exceeds Category V classification prescribed for irrigation.

Pollution is worsened by wastewater discharged by Tieling and Panjin further downstream. The major sources of pollution are wastewater discharges from Fushun and Shenyang. Below Shenyang, water quality exceeds Category V classification. Above Yingkou, the water quality within the Daliao River is generally poor as a result of upstream discharges, but is made worse by municipal wastewater from Yingkou and industrial wastewater form the Yingkou Paper Factory.

The Liao River Basin flow statistics indicate wastewater discharges exceeding 10,000 cubic meter per day, with major industrial discharges exceeding 3 tons of COD per day. Within Liaoning Province, Chemical Oxygen Demand (COD) has been identified as the key pollutant indicator.

- 27 - Pollution Control Strategy. The key objectives of the 2010 Program for Prevention and Cure of Liaohe River Valley Water Pollution are: (a) protection of sources of domestic water supply, (b) regulation of pollutants discharged by industry, (c) protection of the sources used for agriculture and aquaculture, and (d) construction of wastewater treatment facilities designed to reduce the critical pollutant loads. The Plan details the allowable COD discharges into the surface water between the years 2000 and 2010, as indicated below.

Location Allowable Maximum COD Discha ge (tons/year) 2000 2005 2010 Whole Liao River Valley 271,200 208,800 193,200 West Liao River 31,700 29,000 10,300 East Laio River 34,900 25,400 16,800 Within Liaoning Province 207,000 169,600 166,100

The Ninth Plan identifies a number of quality control targets that should be attained by the years 2000, 2005 and 2010, together with a series of policy objectives. These policy initiatives include: (a) introduction of regulations to control pollution, based on total load control rather than concentration, (b) pollution load allocation based on low river flow conditions, (c) economic pricing of water and tariff reform, (e) protection of water resources, (f) closure or reform of inefficient industries, and (g) improved monitoring.

The Liao River Basin Environmental Improvement Program, financed under a comprehensive technical assistance package from the European Union, has prepared the Basin planning framework for pollution control, water resource management and priority investments required to reduce pollution from both municipal and industrial wastewater in the next 20 years. Thirty critical and high-priority projects for wastewater treatment have been identified for implementation in the next 20 years, and include Shenyang, Yingkou, Panjin, Tieling, Liaoyang, Qingyuan, Changfu, Haicheng, Xinbin, Kalyuan, Anshan and Xinmin, in that order.

At present there are only three operational wastewater treatment plants within the Liao River Basin. These are: 400,000 m3/day and 100,000 m3/day plants in Shenyang, and a 220,000 m3/day plant at Anshan serving Angang Steel Manufacturing Plant. A third plant of 200,000 m3/day for Shenyang, and other wastewater treatment plants are under construction for Fushun and Benxi. Pollution control regulations require treatment of wastewater at source, and a number of state-owned industries have constructed treatment facilities, while some industries have been closed.

In the short to medium term, the primary wastewater treatmnentobjective focuses on the removal of COD throughout the river basin, with no consideration given to ammonia removal. In the long term, facilities may be required to provide for flexible nitrogen removal with a view to moving toward greater compliance with Class V River Water Quality Requirements. The requirements for wastewater treatment have been based upon the Class V Water Quality Objective for COD under river flow conditions consistent with 75 percentile flow in April, on the assumption that water quality will generally not be expected to meet Class V requirements during the winter months (January to March) or when river flows are less than the design condition. Based on the above, a COD standard of 100 mg/l has been adopted for municipal wastewater discharges.

An Industrial Pollution Control Action Plan will be implemented by the Provincial Govemment, as a complementary activity in parallel with the implementation of the LRBP.

- 28 - Liao RiverBasin Project (LRBP) Investments

Summary project costs are provided in the table below. A detailed description of project components follows.

Y million/a $ million/a %of total 1. Panjin Water Interceptionand Treatment 323.3 39.5 21 2. Yingkou Paper Mill IndustrialWastewater Treatment (red liquor 138.4 17.0 9 treatmentand evaporation) 3. Yingkou WastewaterInterception and Treatment 378.6 46.3 25 4. JinchengPaper Mill WastewaterTreatment (change of electrolysis 114.2 14.0 8 process to preventmercury pollution} 5. JinzhouWastewater Interception and Treatment 267.3 32.8 16 6. Urban ManagementInformation System for the three cities 53.0 6.5 4 7. EnvironmentalWater Quality Monitoring 45.7 5.6 3 8. EnvironmentRevolving Fund 166.0 20.0 11 9. InstitutionalStrengthening, Construction Supervision and Training 25.6 3.1 3 Total ProjectCost (March2001 prices) 1,512.1 184.8 100 L/May be errors due to rounding.

By Component:

ProjectComponent I - US$39.50million Panjin Wastewater Interception and Treatment (Y323.3 million).

Existing Conditions.Panjin is located in the southwestof Liaoning Province,inland from the Bohai Sea. The Shuangtaizi River divides the city into two districts--the Shuangtaizi district north of the river and the Xinglongtai district south of the river. The proposal in the project relates to the Xinglongtai District, which has a wastewater collection system that serves about 70 percent of the 200,000 urban population. Septic tanks are widely used. It is reported that by 2005, wastewater produced by the four major industries (petrochemical, asphalt, chemical and thermal industries) equal to about 26,640 m3/d will be treated at sourceand dischargedto the Panxie Ditch. The city has no treatmentfacility. All wastewateris discharged to the Panxie Ditch, which conveys wastewater to the Shuangtaizi River. The masterplan indicates developmentof wastewater treatment for the Xinglongtaidistrict in the first phase, with Shuangtaizi scheduledfor the next phase.

Component Description. LRBP investments would serve the Xinglongtai district south of the Shuangtaizi River, and would include: construction of 10.1 km of interceptor sewers comprising 3.0 km of 2.8m x 2.Om and 2.4m x 2.Om reinforced concrete box culvert, and 7.1 km of reinforced concrete pipeline DN 1200 and DN1400; two new pumping stations (5,951 m3/hr and 6,757 m3/hr); modification of 13 existing pumping stations; a 100,000 m3/day wastewater treatrnent plant located west of Panjin; sanitary landfill for sludge disposal, and provision of equipment necessary for operations. (A section of the box culvert, estimated to cost Y20.0 million, is currently under construction, financed with funds from the Panjin Municipality.)

Project Component2 - US$17.00million Yingkou Industry Wastewater Treatment (Y138.4 million)

Existing Conditions. The Yingkou Paper-making Company produces 100,000 tons/d of sulfite pulp from reed as part of the paper and paperboard production. The pulping process is highly polluting, carrying

- 29 - some 80 percent of the mills' discharge of pollutants to the Daliao River, with the rest coming from paper manufacture. Wastewater is discharged to the Daliao River upstream of Yingkou City, and accounts for two third of the pollutant load in this stretch of the Daliao River. Improvement in the river water quality at Yingkou can be achieved only if wastewater from both the paper mill and the city are treated. There is the additional concem regarding the potential effect on drinking water sources, and pollutants entering the Bohai Sea. The mill proposes to undertake modifications to its process to treat white liquid and red liquor, and improve efficiency in water use, to comply with the Liao River Basin pollutant reduction requirements. White liquid treatment, through coagulation and filtration for recovery of fiber and talc, would be carried out with the assistance of Austrian funding and technology.

Component Description. The LRBP would finance the treatment of concentrated process liquor from pulping operations (red liquor) comprising: wastewater treatment, recycling and process modifications, which includes as by-products the recovery of process raw materials and production of lignosulfonate binder material, primarily for zinc manufacture.

ProjectComponent 3 - US$ 46.30 million Yingkou Wastewater Collection, Interception and Treatment (Y378.6 million)

Existing Conditions. The city of Yingkou (current population of 463,000) is located in the south of Liaoning Province, near the estuary of the Daliao River with the Bohai Sea. The wastewater collection system is a combined sewerage system, and comprises open sewers. There is no wastewater treatment facility, and municipal wastewater is discharged from a series of outfalls into the Daliao River. The existing sewerage system covers about 60 percent of the central urban area, which is divided into the southwest and northeast catchments by the Renzaosi Flood Ditch. High levels of nutrient pollutants entering the Bohai Sea originating upstream of Yingkou are thought to be responsible for the increasing incidence of red tides that have had considerable impact on fish yields. The two dominant industries within Yingkou--the Yingkou Paper Mill and the Power Development Company--together produce a large proportion of the municipal pollutant load discharged to the Daliao River. Untreated wastewater from the Yingkou Paper Mill produces a COD loading equivalent to a population of 1.25 million. The development of Yingkou wastewater collection and treatment facilities over the next 20 years is planned to occur in two phases. This includes interception and treatment of wastewater (100,000 m3/day capacity) from the southern and western areas of the city up to 2010 in the first phase. The second phase (2010 to 2020) includes the expansion of this plant to 150,000 m3/day, a new interceptor, and a 100,000 m3/day wastewater treatment plant to serve the northern and eastem districts of the city above the Renzaosi Flood Ditch. It is also anticipated that the plants would be upgraded for nitrification by 2020.

Component Description. LBRP investments would serve the southern and western drainage catchments of Yingkou. They would include: construction of 12.8 km of interceptor sewer, upgrading of five existing pumping stations, construction of three new pumping stations, upgrading of the sewer network, construction of a wastewater treatment plant of 100,000 m3/day capacity at Xipaotai, located west of the city, sanitary landfill for sludge disposal, and equipment necessary for operations.

ProjectComponent 4 - US$14.00million Jincheng Industry Wastewater Treatment (Y1 14.2 million)

Existing Conditions. The chlorine-alkali plant, with an annual capacity of 8,500 tons of chlorine and 10,000 tons of caustic soda, consumes some 700 grams of mercury per ton of caustic soda produced, resulting in a loss of about 600-700 kg of mercury per year. It is estimated that the wastewater discharge from the plant contains about 65 to 130 kg of mercury, discharged directly into the Daliao River. The

- 30 - mercury level in the wastewater varies from 0.1 mg/i to 2.0 mg/I, representing 5 to 10 times pernitted discharge levels. This wastewater discharge has serious impacts on the Dalinghe river water quality, the water resources for Jinzhou, and marine life in the Bohai Sea, which also receives flows from the Hun, Taizu, Daliao, Liao, Xiaoling and Dalinghe Rivers. It poses a health hazard to humans through mercury accumulation in the food chain. As the Daliao River feeds the groundwater aquifer providing water to Jinzhou, there is a risk of direct impact on the health of the population of the city.

Component Description. LRBP investments would finance the replacement of the mercury cell process for production of chlorine. The component includes the construction of a new chlorine production facility based on modem ion membrane cell technology, and remedial measures to recover mercury in the plant and in the surrounding grounds. Disbursement of funds for construction of the new plant will be subject to production of an action plan for demolition of the mercury electrolysis facility and the satisfactory completion of the remedial measures for cleaning up waste mercury.

Project Component5 - US$32.80million Jinzhou Wastewater Interception and Treatment (Y267.3 million)

Existing Conditions. The city of Jinzhou (current population about 600,000) is located along the banks of the Xiaoling River near the coastline of the Bohai Sea. Xiaoling River is the only river outside the Liao River Basin. It is contiguous with the Liao River Basin, is highly industrialized, and the municipal and industrial wastewater have a significant impact on drinking water sources, and on the Bohai Sea. At present, there are no wastewater treatment facilities, and untreated domestic and industrial wastewater from industrial complexes, located within the central urban area, is discharged to the public sewerage system, and ultimately to the Xiaoling River. The north bank of the Xiaoling River has II outfalls, and south bank has 5 outfalls. Current industrial discharges to the public sewer system include: Power Plant No. 1: 10,000 m3/day; Power Plant No. 2: 10,000 m3/day; Brewery: 3,000 m3/day; and Oil Refinery: 20,000 m3/day. Industries are expected to install on-site treatment, and discharge their effluents directly to the Xiaoling River. Future plans for wastewater collection and treatrnent includes a first phase (up to 2010) to serve the districts north of the Xiaoling River.

Component Description. LRBP investments would include interception and treatment of wastewater from the districts north of the Xiaoling River, in this initial phase. The interceptor would be sized to receive wastewater flows from the southem districts in the next phase. Works and equipment to be financed include: 10 km of reinforced concrete pipe and triple-cell box culvert interceptors along the north bank of the Xiaoling River, a wastewater treatment pant of 100,000 m3/day capacity, located at Dishuihi, initially to serve the northem part of the city, sanitary landfill for sludge disposal, central control equipment, and vehicles and equipment necessary for operations.

ProjectComponent 6 - US$6.50million Urban Management Information System (Y53.0 million)

The component would (a) support updating urban mapping in the project cities, and (b) strengthen the urban management information center by developing a GIS-based engineering management system for infrastructure planning, especially water and wastewater, preparing a provincial urban information system to facilitate policy and strategy formulation and implementation, formulating and implementing a strategy for cities and the province to provide urban and environmental information on the Intemet for public access. Four provincial cities would take part in this broad urban management component, namely Jinzhou, Panjin, Shenyang and Yingkou.

- 31 - ProjectComponent 7 - US$5.60million Environmental Quality Monitoring (Y45.7 million)

The Governmentprovides environmental monitoring services to all levelsof govermment,with technological support,supervision and service, in environmentalmanagement. Over the years, environmentalstations in the Provincehave undertakenenvironmental tasks in environmentalquality, industrialpollution source, abruptpollution accidents, and arbitrationover pollutiondisputes. With the start of the PollutionControl Program of the Liao River Basin, the tasks of environmentalmonitoring have becomeheavier than before, and expandingand strengtheningthe environmentalmonitoring has becomea priority.

The project would support the Liaoning EnvironmentalProtection Bureau to expand and strengthen environmentalwater quality monitoringand limitedair qualitymonitoring through provision of equipment to improveprovincial and city monitoringstations.

Project Component8 - US$20.00million Environment Subloans (Y166.0 million)

The component would comprise the provision of short-term subloans for focused, high environmental-impact investments in in-plant clean technology process change, supporting core investments in air and wastewater management. Subloans repaid would be used to make additional subloans through Liaoning's existing Environment Revolving Subloan Facility (ERSF).

Project Component9 - US$3.10million Institutional Strengthening and Training (Y25.6 million)

The componentwould provide supportto the recently formed wastewatercompanies to strengthentheir financial,institutional, operational and managementcapacities in the areas of (a) corporate strategy and businessplanning; (b) financialmanagement; (c) tariff setting,billing and collection;(d) operationalskills; and (e) informnationand data management. These areas are identified as critical for the wastewater companiesto become autonomousand ensure sustainabilityof investments.The componentwould also support provincial and municipal govermmentagencies to strengthen their (a) financial management capacities,including the operationof the ERSF; and (b) managementof infrastructureprojects, through technicalassistance, training and study tours. The project would also finance (a) constructionsupervision and quality control of the wastewatercompanies' components; (b) an aquifer study; and (c) feasibility studiesfor future projectpreparation.

- 32 - Annex 3: Estimated Project Costs CHINA:Liao River Basin Project

CHINA LIAORIVER BASIN PROJECT % % Total ExpenditureAccounts Project Cost Summary (Local) (US$) Foreign Base Local Foreign Total Local Foreign Total Exchange Costs I. InvestmentCosts A. Civil Works 339.2 145.4 484.6 40.9 17.5 58.4 30 37 B. Equipment& Materials 284.8 153.2 438.0 34.3 18.5 52.8 35 34 C. Land Acquisition & Resettlement 54.8 - 54.8 6.6 - 6.6 - 4 D. TechnicalAssistance & Training 8.4 31.8 40.2 1.0 3.8 4.8 79 3 E. ConstructionSupervision Services & QualityControl 7.9 12.3 20.2 0.9 1.5 2.4 61 2 F. Engineering & Management 91.3 - 91.3 11.0 - 11.0 - 7 G. EnvironmentalPollution Control 33.2 132.8 166.0 4.0 16.0 20.0 80 13 TotalBASELINE COSTS 819.6 475.5 1,295.1 98.7 57.3 156.0 37 100 PhysicalContingencies 92.3 40.1 132.4 11.1 4.8 16.0 30 10 PriceContingencies 58.7 25.8 84.6 8.9 3.9 12.8 31 8 TotalPROJECTCOSTS 970.6 541.5 1,512.1 118.7 66.0 184.8 36 118

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- 34 - UAORNER BASIN PROECT Tabb a Yn$qu Wastwl IrIMepDon& TmaInet Dealed Costs Ol) BaseCost TodalshckK g Can cles 2001 2002 2003 20C4 2005 2D05T obl 2001 2002 2D03 2004 2005 2006T oa L Int Costs A CMI Works YWM)01.01 .eofr08n HuoXIr6a Rd-LaWege - 4.6 7.7 9.2 6.1 3.1 30.7 - 5.5 9.4 11.6 8.0 4.1 38.6 YWAN1.02WeptomLaoyegeTorernit - 2.6 4.3 5.1 3.4 1.7 170 - ao 5.2 6.4 4.4 2.3 21.4 YW 101X03dUp9ackVd aed"g9i5es 0.7 3.6 5.0 4.3 0.7 - 14.4 0.8 4.3 6.2 5.5 0.9 - 17.7 YWW1 ioofhoS 1.6 7.8 10.9 9.4 1.6 - 31.2 1.8 9.3 13.4 11.8 2.0 - 38.3 YWW,01.05UpgraiPut5 pStakb - 2.7 4.5 5.4 3.6 1.8 17.9 - 3.2 5.5 6.8 4.7 2.4 22.5 YWW01.06Lay & Upgae S5s Cadc3Paico3 nvS5bimr - 5.1 8.6 10.3 6.8 3.4 34.2 - 6.1 10.5 130 8.9 4.6 43.0 YWMW1.07SteeWors riWaterSuppy 0.5 1.5 - - - - 2.0 0.6 1.8 - - - - 2.4 WYWW,01.03100 ,000TasywatTreertRrt - 12.0 15.0 180 9.0 6.0 80.0 - 14.3 184 227 11.7 ao 75.2 WWV1.01 Sa0 arSzyLaforSudgeDepo - - - 1.5 1.5 - 3.0 - - - 1.9 2.0 - 3.8 SdutdICM Works 2.8 39.9 55.9 63.1 32.7 16.0 210.4 3.2 47.5 6856 79.7 42.6 21.4 263.0 B, Eqipnwt & MateIs YWN/21.01PassaenVeies - - 1.4 0.2 - - 1.5 - - 1.4 0.2 - - 1.6 YNWQI102 OI uqorrmtE rd EquTwt bbek iDdetogT Cwcsh ert - - 1.9 0.2 - - 2.1 2.2 0.3 - - 2.5 YWWV/21 O3Sudge Vd*es&Loade - - 1.4 0.2 - 1.6 - - - 1.6 0.2 - 1.8 YVW1V21.04Ec orWasleaerTearnPr - 100 15.0 20.0 5.0 - 50.0 - 11.4 17.6 24.2 6.2 - 59.4 YVWVf21.05LaatyEcqTft - - 2.8 0.3 - 31 - - - 34 04 338 PaS."* - - - 25 0.3 28 - - - 30 0.3 - 34 &9telEqu & b_ert&MateWs - 10.0 182 27.1 5.8 61.1 - 11.4 21.3 326 7.1 - 72.4 C. Constails Services 1 cau t andSU 0YWW,MGe1 03 0.3 04 03 02 .6 01 04 04 0.5 04 02 1.9 D. LandkAi n,&Rese6emert 0.4 02 0.2 - - - 08 04 02 02 - - - 0.9 E.Corsrudtorn 5p4slon Serviwes & 0u^ Cor*d CM Works 0a1 1.0 1.4 1.6 0.8 0.4 5.3 0.1 1.1 1.6 1.9 1.0 0.5 6.3 Equp- t &Matnals - 02 03 0.5 0.1 - 1.2 - 02 0.4 06 01 - 1.4 3bDt Cmorb S;oni SWAMk & QulayCCbdv 0.1 12 17 21 09 0.4 6.4 0.1 1.4 2.0 2.5 1.2 0.5 7.7 F.ErBnirerk & Maageel CM Works 0.3 40 5.6 6.3 3.3 1.6 21.0 0.3 45 6.6 7.6 4.1 2.0 25.2 Equiprnert& Mmalis - 1.0 1.8 27 0.6 - 6.1 - 1.1 2.1 3.3 0.7 - 7.3 Ccnsutris Saervs 0.0 0.0 0.0 0.0 0.0 ao 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.2 LridrA A nim&RResdue 0.0 0.0 0.0 - - - 0.1 0.0 0.0 0.0 - - - 0.1 SubEJaleeing &Ma dgeit 03 5.0 7.5 9.1 3.9 1.6 27.4 04 5.7 8.8 109 4.8 2.1 32.7 Tctw 3.7 56.6 63.9 101.8 43.6 18.2 307.7 4.2 66.5 101.2 126.3 56.1 242 378.6

- 35 - CHA LoAMRARMEN RrEU Tab4 Jh±H- hisy\AbAt

MM 2n2 20B 2M4 2005 a 0 Tod 21M) an2 20M 24 -2M 26 TcW

A C4I.\i .IPD101NW* 24 7.1 94 27 84 - - - - 11.1 SFY 2 1mricnfBtrs Facy 4.0 40 - - - 8.0 46 4.8 9.4 9a OAJ is 64 11.1 - - - - 17A 7.4 132 - - - -

.RV1 DCHoddPcoE%EqpTvt - 556 62 - - - 618 - 633 72 - - - 706 w1i2m aitrVVF*ktn - 7.5 08 - - - 83 - &5 1.0 - - - 95 IBIy& yCEq*m - 27 - _ - - 27 - 31 - - - - a1 S EU lt&Mms - 658 70 - - - 728 - 749 82 - - - 83.1

.RD1AdySatsfrWVV iRrn 0.1 01 - - - - 02 01 0.1 - - - - 02 D5qowi&Nbmgwrt GAVV6 0.6 1.1 - - - - 1.7 0.7 1.3 - - - - 20 Eai&lV ds - 66 0.7 - - - 7.3 - 75 08 - - - &3 J&B#M*& M39Wut 0.6 7.7 0.7 - - - 9.0 0.7 8.8 08 - - - 103 Td1J 7.1 B46 7.7 - - - 994 82 9&9 90 - - - 1142

Taf5rkUVTW tlr , &TMIErt OlCS (IXa4 hk T~~db*guBrc 201 2 2M_2 -4 2M5 2 Tcdi 2M1 2DM MM 2M4 2)05 aZo6 TcS LkshtCosb A CWW cs WWYD1 pPUeQkv I 2dTfW0 10D 14D 1Z0 20 - 40D0 23 119 172 152 26 - 492 f)1J21O(OT ETcnCY,sk Tanrtabrt . 10D0 125 150 7.5 5.0 50D - 119 153 189 98 67 6Z6 JMOl yLfr9±Do - - - 53 5.3 - 106 - - - 67 69 - 136 av.SIBV wb6:TraPbrtS - 128 - - - - 128 - 152 - - - - 15.2 S&alCw 06 20 328 265 323 14.8 5.0 11a4 23 391 325 408 193 67 14a6

J4101 lrtrV\rTMr8tPt - 10.0 15.0 20.0 5.0 - S0 - 114 176 242 62 - 934 .WY n1re3Vi & lEt - - - 6.9 0.8 - 7.7 - - - 7.6 0.9 - a5 Q1DJ03PMarV - - 1.6 02 - - 1.8 - - 1.7 02 - - 19 D 4M VE 23 03 - - 2.5 - - 24 03 - - 27 Q 1a 5 - - - 1.4 02 - 15 - - - 1.6 02 - 18 XWA106Orjd TwtE2M - - - 39 04 - 43 - - - 4.7 0.5 - 52

bbet Itot1STCnprt - - 1.4 02 - - 16 - . 1.7 02 - - 19 RbW 4 - - - 3.1 03 - 34 - - 0,4 - 4.1 SIb Ecipm IMAMS- s 10.0 23 358 67 - 72B - 11.4 234 424 82 - 855 c camkiSVss 1 Gr*aw lwt&&4a6i 0.1 0.3 03 04 03 02 1.6 0.1 04 0.4 05 0.4 02 19 Lad n & M 48 24 24 - - - 9.6 53 27 28 - - - 109 E Coit 9p mSom &QCa*d CAVVUs 0.1 OB 0.7 08 0.4 0.1 28 0.1 09 0.8 1i 05 02 34 EVqnat&M1\1 - 02 0.4 0.7 0.1 - 1.4 - 02 0.5 OB 02 - 16

& Oy*Caikd 01 1.D 1n 1S 0.5 0.1 42 0.1 12 12 1B 0.6 02 5.0 FB4mmig &Mhgvt 0ci1v 02 33 27 32 15 05 113 02 37 31 39 18 06 135 & & M*A*1xnert - 1i 2D 3.6 0.7 - 7.3 - 1.1 24 43 08 - &7 Ca bLiartswAces OL0 0. 0. 0.0 0.0 .OD 02 ao OD 0.0 0.0 On0 ao Q2 LarjAoh n&MA 0.5 02 02 - - - ID 0.5 03 03 - - - 1.1 Sa -gi &hBMW, 0.7 46 5.0 69 22 05 197 OB 52 sB 83 27 0.7 234 TcU 7.6 51.1 555 768 245 58 2214 a6 9s9 661 3.8 312 7.7 2673

- 36 - IPOR\ERB^9NR~E cod

Q^) BtSo T ;9k%ktmk3k 2DI 23 20M 2DI 2005 20M Tdh 23I MM MM M MM MM TcW

AEt& lIA LMS2l0Zl0 TprsFIde&S:ee - 65 33 1.1 - 109 - 7.4 38 13 - - 126 LMS21DElaOfc - 7.1 7.1 - - - 14.1 - 80 83 - - 163 "liaerpkI-ae&SJae - 08 - - 08 - Q9 - - - - 09 AmhmA(afhOJec1cn - 1.7 1 - 1.7 - 19 19 9a a ma4t&hU - 161 103 1.1 - - 275 - 183 121 13 - - 31.7 BTed &Asr&Tmft UvAS2MWTedTB1P9tE&TEaT9 Agn lSdLae - 42 125 - - - 166 - 47 146 - - - 193 TalriTEiis&9*^ae - 1.7 - - - 1.7 - 1.9 - - - - 19 TOW - 219 22B 1.1 - - 458 - 250 2&7 13 - - 0

LFORRB6E1SNRE Tdb7.IBikrudQ * Mr*g

t TM _ MIih g5 T 231 31 23 2lB4 20!i 23] TcU 23)1 3112 2XB 23)4 21} 2311 Td1 LhwsimtOl AETiwt&M*" VWMM1 rViTr&QivbtbgE t - 36D 4.0 - - - 4D - 410 4.7 - - - 457 Tdo 36W- 40 - - - 40 - 41D 4.7 - - - 457

CHINA UAORNVER BASIN PRQJEC Table8. EnvitnniertS4bAoar Detailed Costs (Local) BaseCost Totals includi CoringenAies 2001 2002 2003 2004 2005 2006 Total 2001 2002 2003 2004 2005 2006 Totl

1. Investment Costs A Subbans - 16.6 41.5 41.5 58.1 8.3 166.0 - 16.6 41.5 41.5 58.1 8.3 166.0 ToWl - 16.6 415 41.5 58.1 8.3 166.0 - 16.6 41.5 41.5 58.1 8.3 166.0

LIADRVR BASNPIRECr Tstie9.TWTvicAs ce&Tmg DetdCosts (UxB eCrst TdWi5 9 Coe* rces 2101 2012 23)32 004 2006 20D6 Tda 23)1 20m 2003 04 2106 2006 Tci L swt Cos A C u ySrv s & T,ds* PRie A - 4.1 4.1 4.1 4.1 - 164 - 4.7 4.8 5.0 5.1 - 19.5 PaegB - 0.8 0.8 0.8 0.8 - 3.1 - 0.9 0.9 0.9 1.0 - 3.7 PReC - 0.5 0.5 05 0.5 Zo - 0.6 0.6 06 06 - 24 Tdal - 5.4 5A 5.4 5.4 - 21.5 - 6.1 6.3 6.5 6.7 - 25.6

- 37 - Annex 4: Cost EffectivenessAnalysis Summary CHINA:Liao River Basin Project

The Liao River Basin

Liaoning Province is a key crossroads in northern China, overlooking the Bohai and Yellow Seas, bordering the Korean Peninsula, and on the main rail line from Beijing into northeast China and eastern Russia. Liaoning was the original seat of the Qing Dynasty which ruled China from 1644 to 1911. The province covers an area of 145,900 km2 and has a total population of about 41 million. It includes 14 cities, including Shenyang, the capital. Liaoning is rich in mineral resources, including large deposits of iron, boron, magnesite and oil. Recent development of the Liaohe oil field has made this one of the largest producers in China. Exploitation of the mineral resources has resulted in the development of a large industrial sector in Liaoning but the pace of development has had very severe impacts on the environment.

Much of the development and accompanying pollution and other impacts have occurred in the Liao River Basin, which is the heart of the province, draining into the Bohai Sea. The Basin covers about 42,000 km2 and contains 23 million people, representing a little over half the total population of the province. There are three main rivers (Liao, Hun and Taizi) which flow northeast to southwest and the central part of the Basin is the large Liaohe plain which overlies significant groundwater resources. The central river plain area covers about 27,900 km2. The Tertiary sediments (which include the petroleum resources) are up to 1,000 m thick. Above this are Quaternary sediments up to 420 m thick, which form the most important aquifers.

Gross Regional Domestic Product was Y413 billion in 1999. Annual growth was over 10 percent a year through the period 1983-97 but slowed to 6.5 percent in 1999. In 1998, the proportions of primary, secondary and tertiary industry were 14, 43 and 43 percent respectively. Total provincial government expenditures were about Y39 billion, of which Y4.7 billion went for capital construction.

Average per capita income in 1998 was Y4,617 in urban areas and Y2,580 in rural areas. These figures represent cash income and do not include housing subsidies and other benefits that are often provided by the work unit. The Statistical Yearbook shows that 45 percent of incomes is spent on food and 15 percent on clothing.

Half the land area in the Basin is used for agriculture, mainly in the central plain, since the eastern region is dominated by forest while the western area has thin soils with little potential for sustainable agriculture. Maize (90 percent rainfed) is the dominant crop and produces two-thirds of the Province's output. Half a million hectares of irrigated rice (mainly in Panjin and Shenyang Municipalities) provide a quarter of the Province's grain. Agricultural patterns are shaped by the short growing season; less than half the year is frost-free in most areas.

Total inves ment in fixed assets was Y105 billion in 1998, of which municipal investments were Y6 billion, including about Y400 million each on water supply, drainage and sanitation. Details are given for the project cities for 1998 in Table 1, but it should be noted that levels of investment vary considerably from year to year.

- 38 - Table 1: Municipal Investments in 1998 (Y million)

Total Water Supply Draina e Sanitation Shenyang 1,539 135 164 43 Jinzhou 195 7.4 1.5 18 Yingkou 138 4.3 19 18 Panjin 743 89 14 40 LiaoningProvince 6,092 409 446 445

Water Resources in the Basin

Availability. The Liao Basin is a water-scarce area, with annual rainfall varying from 450 mm in the northwest of the basin to about 800 mm in the southeast. The heaviest rainfall is in the months of July and August, accounting for half the annual total. For 10 months of the year, evaporation exceeds rainfall and average runoff into the rivers ranges from over 300 mm in the upper Taizi to about 20 mm in the upper Liao (the section in Liaoning). At the same time, direct abstraction and/or groundwater drawdown have reduced flows in the Hun (with average runoff of about 160 mm) to about 20 percent of the natural flows. The average per capita availability of surface water is 535 m3, which is about one fifth the national average.

In 1998 the total surface water resource in the province was 35.23 billion m3 from 22 large surface water reservoirs, and total groundwater resource was 10.95 billion m3. The most significant groundwater resources is the Quatemary aquifer which reaches 400 m thickness near Bohai Bay. There is also an extensive deep aquifer at about 500-1,000 m depth, which is probably fossil groundwater, although it may be linked to the shallow aquifer.

The surface waters are heavily regulated, with nine major reservoirs, providing about 8,000 million m3 of storage, and many smaller ones. They are operated conjunctively with the groundwater resources, including providing releases for the recharge of bankside wellfields. The main surface water reservoirs are along the western slopes of the basin, upstream of the urbanization and the surface waters are used for irrigation across the basin and for supply to Fushun and Benxi, both of which are relatively far upstream. The principal groundwater resources are in the central area of the basin, underlying the major urban areas of Shenyang, Liaoyang, and Anshan. There are a number of other river regulation structures, and although average flows in the basin's rivers are low, peak flows can be high and there is an extensive flood control system, based on the reservoirs and on levees.

Water Utilization. Calculation of the total available water resources in the basin is difficult because of the complex interactions between surface water and groundwater, where the aquifers provide a balancing storage from year to year. The Liaoning Integrated Environment Project (LIEP) has a Water Resources Management subproject which has estimated water balances for years 1996-98.

The estimated water balance for 1998 (a reasonably typical year) shows:

* Roughly two-thirds of overall rainfall is lost to evaporation. * About one-sixth of the net rainfall goes to direct groundwater recharge (the remainder is runoff). * About one-sixth of the river flows also goes to groundwater recharge. * Surface water abstractions are evenly shared between direct abstraction and reservoir releases. * Most of the groundwater abstraction is from the shallow aquifer.

- 39 - The estimatesshow that total water utilizationin the Basin is about 10 billion m3 a year, on a net basis, with about 60 percent of abstractionsreturned to the system as effluents or drainage. Agriculturetakes about 64 percent of the total and urban(including industry) takes 31 percent,with the remaindergoing for other rural uses. The source of this water is about evenly split between surfaceand groundwater,although over the period 1995-98the contributionof groundwaterwas an increasingproportion (43 going to 52 percent). It is estimatedthat utilizationis now running at about 60 percent of total available resources. Estimates made for the Water ResourcesManagement component of the LIEP (supportedby the EU) indicate that overall water utilizationis reasonablysteady (see Table 2) but a clear shift from surface to groundwatersources can be seen, much of which occurs in agriculture.Some of this shift in agricultureis believedto be associatedwith improvedirrigation, where the lack of solids in groundwaterallows more sophisticatedand efficientequipment to be used.

Table 2: Water Utilization, 1995-98 (units: Million m3 a year) Year RURAL URBAN TOTAL Domestic Industry Agriculture Domestic Industry Surface Ground Surface Ground Surface Ground Surface Ground Surface Ground Surface Ground water water water water water water water water water water water water 1998 28 317 53 66 3,608 2,833 333 745 872 1,205 4,894 5,166 1997 23 320 30 95 4,336 2,511 248 605 938 1,320 5,575 4,851 1996 22 301 1 30 4,078 2,381 370 518 1,084 1,187 5,555 4,417 1995 45 196 0 82 4,332 1,826 323 614 832 1,435 5,532 4,153 Source: LIEP WRM Report. The largest urban demand is at Shenyang, where the water utilization is about 650 million m3 a year, of which 85 percentis municipalsupply and the remainderis self-supplyby industry.It is estimatedthat up to 80 percent of the domestic water supply for Shenyang is obtained from groundwater resources. Continued overabstraction has resulted in substantial depression of the groundwater level, reported in places to about 33 m below the natural groundwater level.

In recent years, the water table has been lowered in the plains due to overabstraction of groundwater and it is reported than an area of 389 km2 is affected by excessive drawdown. The groundwater level is typically 2-4 m deep over much of the basin but there are major cones of depression at the major municipal wellfields,especially at Shenyangand Liaoyang,with drawdownof more than 20 m, and increasingin places at more than a meter per year. However,over the basinas a whole,recharge on averagestill exceeds abstraction.

Pollution Impacts. The major pollution sources on the Liao river system are located in the industrial regions of Liaoning Province. Data from 1995 showed that there were 900 medium/ large state-owned enterprises contributing 43 percent of industrial output in the basin. Many of these were constructed in the 1950s and 1960s with limited attention to environmentalimpacts. They are polluting and water- and energy-inefficient, but they are important in terms of employment and production. Data from 1995 also showed a large number of small town and village enterprises (TVEs) which contributed 28 percent of industrial output. Many of these TVEs are also inefficient and polluting and are understood to have been shut down by local envirom-nentprotection bureaus. Current estimates are being made by LIEPJLEBP of municipal and industrial pollution loads.

- 40 - A significant feature of the water resource patterns and an increasing problem is the impact of urban and industrial wastewater on the water cycle. For example, wastewater from Fushun (where a treatment plant is being constructed under LEP) enters the Hun and impacts both the river at Shenyang and the groundwater systems fed by the Hun. In addition, pollution, particularly industrial, is believed to be entering the groundwater at many points although the details of the impacts are not clear. Similarly, effluents from Benxi impact the Taizi downstream, with particular problems at the Shenwo Reservoir where accumulated polluted sediments are seriously threatening the water supply. Most main river reaches fail to meet Class V for COD and NH4-N. Monitoring of surface water quality in the cities shows average COD levels in the range 50-100 mg/l in most places, with the Xihe (in Shenyang) averaging 240. (The Class V COD standard is 40 mg/I.). Ammonia levels are typically in the range 2-10 mglI, although the Xihe averages 40 mg/I. In this context, COD can be seen both as a problem in its own right, because of the oxygen demand, and also as an indicator of levels of industrial pollution and the probable existence of other pollutants of concern, such as oils, phenols and other chemicals.

Recharge by polluted water has also resulted in the contamination of the groundwater. Few specifics are available, but the government has identified 4.35 million people in the Province who are exposed to contaminated shallow water. It is reported that about 25 percent of the groundwater sampled in Shenyang in 1999 did not meet national potable water standards. Areas of polluted groundwater can have elevated ammonia and heavy metals levels. A disturbing example is that groundwater near the heavily polluted Xihe was clearly polluted and outside the standard, obviously as a result of recharge from the river. One area contaminated by chromium was associated with a specific point source. In response to these problems, Y300 million is being spent on 1,690 deep wells, going to the lower layers in the main Quatemary aquifer.

There is intensive agriculture in the lower basin, including large areas of irrigated rice. These areas use both surface and groundwater for irrigation. The surface waters are often quite heavily polluted and, although groundwater is used to supplement and replace the surface water in some uses, there are reported appreciable impacts on agricultural productivity from the pollution. At the same time, agriculture is itself a significant source of pollution throughout the basin, particularly through nutrient runoff from overapplication of fertilizer and from pesticide in the drainage water. The nutrients are a problem particularly in Bohai Bay where eutrophication is a serious and increasing problem. The Bohai Bay at Liaoning is highly degraded and near shore fisheries have declined to very low levels. The major problems are COD and especially nutrients. Estimates suggest that agriculture and mariculture are the largest sources of nutrients.

The Project EA provides anecdotal examples of problems due to pollution of the river water. However, no data are provided on the extent of the different problems reported. According to this source:

* In many rural villages, the surface water is no longer suitable for driniking water and the local population has to turn to groundwater. As overabstraction of the groundwater continues, wells have to be drilled deeper to ensure supply for domestic use and for irrigation. * Groundwater resources that are no longer suitable for drinking water have to be abandoned and new water sources found. In some cases, moderately polluted wells can be directed to industrial uses. * Long term use of heavily polluted surface water for irrigation has resulted in significant increases in levels of toxic substances in the soil and in the extreme, farms have been abandoned.

- 41 - Management of Basin Water Resources. In China, responsibilities for water resources management are shared between provincial and municipal authorities, within a framework set nationally. At the provincial level, the key organizations with a direct interest in water resources are the Department of Water Conservancy which is responsible for the development of surface water resources and which has recently also been given responsibility for groundwater; and the Provincial Construction Commission, which is responsible for all urban infrastructure, including water supply and wastewater (as well as solid waste, drainage and a range of other functions). The Provincial Planning and Finance Commissions have key roles in the approvals and financing of investments. The Provincial Environmental Protection Bureau is responsible for environmental planning, regulation and monitoring.

The Provincial Department of Water Conservancy increasingly manages water conjunctively, using aquifer storage to cope with dry years. This approach is based on operational experience and basin-wide analysis and modeling and has not yet been developed as a standard tool.

In general, water and wastewater facilities are constructed by the Construction Commission, at provincial or municipal level and transferred to a Bureau or a Water Company (or Wastewater Company) for operation. Tariffs typically cover only operation and maintenance and any major works are funded directly by government.

The policy framework for pollution control activities in the basin is the Ninth Five-Year Plan and 2010 Program for the Prevention and Cure of Liao River Basin Water Pollution. The document identifies COD as the critical pollution indicator and adopts a total load approach to pollution control. Overall, the targets are for COD loads in the basin to drop from 271,000 tons in 2000 to 193,000 tons in 2010.

The four objectives of the Plan are:

* Protection of the sources of domestic water supply; * Regulation of the pollutants discharged by industry; * Protection of sources used for agriculture and aquaculture; and * Provision of wastewater treatment facilities to reduce pollutant loads.

The State Government asked the Bank to support Liaoning Province in addressing the fourth of these objectives.

The Departrnent of Water Conservancy is introducing a range of demand management measures, including leakage reduction, metering and tariff increases, reuse of treated effluents, education and awareness, and so on. However, many of these efforts are in the early stages and their impacts are limited so far.

From the economic point of view, considering the impacts on the natural and financial resources of Liaoning Province, it is essential to take an integrated approach to managing the water cycle, addressing water supply, water usage and wastewater disposal aspects. In this context, the River Basin Management work under the Liaoning Integrated Environment Project, funded by the European Union, has prepared a Draft Basin Planning Report which can be used as a basis for comprehensive discussion of the issues with all interested parties.

The idea of establishing a river basin management agency in the Liao Basin has been under discussion by Bank and Provincial officials since the early stages of planning for the first Liaoning Environment Project in the 1980s. The issue is now under review by the LIEP team and a draft institutional strengthening report is being prepared. The approach being proposed by the LIEP consultants is the inclusion of the objective of

- 42 - river basin management in the coming Tenth Five-Year Plan, together with a cooperative interagency agenda that is allocated specific funding. On this basis it may then be possible to establish a Leading Group at provincial level, together with a (specially funded) coordinating group that would negotiate with the responsible agencies at provincial and municipal levels to ensure the joint implementation of the agenda. Such an approach could evolve into a practical coordination mechanism if sufficient enthusiasm can be generated for dealing with the increasingly urgent problems of the basin.

EconomicCosts of Pollution

It is clear that the high levels of pollution (from both municipal and industrial sources) have direct economic impacts on rural and urban water supply and on agricultural and fisheries productivity. Some estimates of these economic costs have been made but figures need to be reviewed and refined.

Productivity of Agriculture and Aquaculture. Agriculture is an important economic activity in the province. Two million hectares are currently cultivated, with a substantial portion of the area being increasingly irrigated. Wastewater is increasingly being used to irrigate croplands, either directly or as a result of drawing from heavily polluted drains and watercourses. It has been estimated that at least 216,000 ha of rice paddy are currently irrigated with surface water whose quality is worse than Class V. Many farmers have switched to groundwater for irrigation but these sources are increasingly becoming contaminated by infiltration from the heavily polluted surface waters.

There is increasing evidence of decreased yield in areas irrigated with wastewater. There are even anecdotal accounts of areas being irrigated with wastewater that is so contaminated that the produce becomes unfit for human consumption. A 1998 technical report on the Hai River Basin notes that raising water quality in the Hai, the most polluted main river of China in terms of percentage of tributaries below Class V standard, to the level mandated by the Government would raise the agriculture production by at least 5 percent using an earlier water resource model.

It is reported that a study by the Agricultural Environmental Protection Institute concluded that farmlands irrigated with wastewater yield 210 kg less per hectare compared with those irrigated with clean water. However, there are some doubts over the methodology and results. The same study further estimated that livestock death due to wastewater contamination in Liaoning Province amounted to Y580 million in 1992 but this is clearly a very high figure and must be questioned.

The fisheries sector is an important industry in the Province with 1998 output valued at over Y15 billion. River pollution affects freshwater fisheries, particularly aquaculture, because surface water is used for ponds.

Productivity of Bohai Bay. Environmental factors have been estimated to contribute as much as 50 percent to the existing resource pressure on the Bohai Bay. The influence of environmental pollution is principally manifested in nutrient enrichment and possibly the frequency of red tide, and mortality rates observed in nearshore mariculture (primarily shellfish). Environment-related pressure may be associated with production losses through the mid to late 1 990s amounting to some $75 million. This does not include possible ecosystems and biodiversity losses.

The major sources of pollution of inshore coastal waters around Bohai Bay include: a large zinc smelter in the Jinxi area southwest of Jinzhou; industrial pollution from petrochemicals and discharges from the city of Yingkou. Coupled with overfishing, pollution results in large declines in finfish and shellfish populations. Despite extreme resource depletion, the coastal area is still considered an important spawning

- 43 - area for a number of species, including jellyfish, small pelagic shrimp, prawn, and the Chinese crab.

Impacts on Water Supply. There are also impacts on the costs and availability of surface and groundwater supplies, although it is very difficult to put definitive figures on these because of the complexity of the natural water systems. Groundwater is the main source of municipal water supply in the Project area and contamination has already reached shallow groundwater aquifers and is affecting over 4 million individuals in the basin. Urbanization has modified natural hydrological cycles with the construction of drainage canals that now function as artificial recharge sources.

There are indications that the poor water quality may be contributing to a relatively high incidence of water-related health problems, although the evidence is indirect. There is no specific linkage to increasing pollution levels in the water but that is obviously a possible explanation for at least some of the increase.

Maurer et al. (1999) reported that untreated urban wastewater in China typically contains large numbers of pathogenic microorganisms such as schistosomial ova, cercaria, and ova of parasitic flukes and worms. Further, the majority of urban river sections are also polluted to varying degrees by chemicals and toxic compounds including volatile phenol, petroleum, permanganate and mercury. The possible impacts on health from pathogen-laden waters include morbidity and infant mortality from diarrheal diseases, cholera, and viral hepatitis.

Mortality and morbidity as a result of cancer and/or other chronic diseases can stem from drinking water contaminated with substances such as PCBs, lead and mercury. A study (Xia Guang, 1999) has shown that the incidence of liver and stomach cancer in areas reliant on polluted drinking water were six times higher than in areas using unpolluted water. A World Resources Institute (1999) study documents the case of incidences of liver cancer correlating to the extent of contamination of drinking water in Jiangsu and Guangxi. It also documents that since the 1970s, there have been significant increases in cancer rates and deaths, as well as birth defects in areas that rely on wastewater for irrigation.

In the Province, a study by Xiong et al. (1999) shows that 76.8 percent of municipal water and 19.6 percent of self-provided water are contaminated (73.2 percent biological and 26.8 chemical contaminants). The same study shows that rates of intestinal diarrheal diseases in the Province is 27 percentage points higher than the national average. PMOs report increases in diarrhea, dysentery and gastroenteritis by 50 to 200 percent since 1990.

Despite the well-established links between poor water quality and a range of diseases, it is very difficult to quantify these links in any given set of circumstances and therefore it is not possible to estimate the health damages with any level of accuracy.

Biodiversity and ecosystems impacts have not been valued. The province contains important freshwater, wetland, and marine ecosystems. There are 119 freshwater species. There are also rich biological resources near shore--107 species of plankton, 280 species of benethic species and 137 pelagic species. Except for prawn and crab, most marine species are migratory. In recent years, marine resources have been changing, with traditional economically important species disappearing.

Estimates have been made of the overall economic costs of pollution and the likely benefits in each of the project cities. These estimates suggest that the net present value (NPV) of the benefits that could be achieved by the project is of the order of Y1-2 billion. These figures are highly uncertain but do show that the present pollution control measures and pricing systems seriously undervalue the impacts.

-44 - Costs of Water in the Basin

It is very difficultto put an economicvalue on reducingpollution in the basin. However,consideration of the unit costs of both water supplyand wastewatercollection and treatmentprovide importantinsights into the way in which the directand indirectvalues of the water resourcesare reflectedin the pricespaid and the choicemade at both the macro and micro levels.

Althoughthe Liao River Basin is a water scarce area, the presentwater chargesare low and there is little incentiveto economizeon water use. The average costs of supply are not high, reflectingthe relative simplicityof the currentsystem, based on providingstorage on the upper river reaches and sinkingwells into the shallowaquifers in the centralplain.

Domesticwater tariffs in 1999 for the largercities in the basinrange from YO.70/m3to Y1.20/m3, with the wastewatertariff (where applied) normally YO.20/m3,applied to a volume of 80 percent of the water supplied.The effectivetariff then is about YO.9-1.41m3of water used. In fact, the average figure for Shenyanglast year was Y1.62/m3.Different tariffs normally apply to domestic, industrial,institutional, commercialand specialhigh volumeuses.

However,the currentwater supply system is not adequate, and shortages and restrictionsare occurring more frequently.The province must deal with a number of trends that make future water resources developmentmore complexand more expensive:

* Water demandsare increasingand water shortagesoccur more frequently. * The pollutionof the water resourcescontinues to get worse and is affectingthe groundwateras well as the surfacewater. * The easiestand cheapest resourceshave been developedand the marginalcosts of expandingsupply are startingto rise.

Average Costs. Estimateshave been made of the averageand marginalcosts of water supply [using the AverageIncremental Cost (AIC) approach].These costs representboth the actual cost of expandingthe supplyand also the valueof the resourcesthat are being lost becauseof the high levelsof pollution.

In Shenyang,the present average tariff for water supply (total supply divided by total billings) is Y1.42/m3.The Water Supply Companyestimates that an increaseof about Y1/m3 is requiredto cover O&M and some depreciation.This puts the average cost of supply to Shenyangat about Y2.5/m3,on a basis which covers some but not all of the costs of capital.Details are not availableon the costs of bulk supplyversus distributionbut since 80 percent of Shenyang'ssupply is from local groundwater,which is relativelycheap, it is a reasonableassumption that supplycosts would be about one-quarterto one- third of the total, or YO.6-0.8/m3.(There would include the "Water Resource Fee" for groundwaterabstraction which is currentlyYO.20/m3.) On this basis, distributioncosts for the water is aboutYl.7-1.9/m3.

There are few data availableon the incrementalcosts of supplyto urban areas in the Liao RiverBasin, but pollutionof groundwateris requiringreplacement of convenientsources with wells that are deeperand/or further from the system.The costs of water from these sources will be greater than the assumedaverage cost of aboutYO.8/m3.

Expansion of Water Supply. There are 13 schemes under considerationby the Provincial Urban ConstructionCommission to increase the available water supply in the upper part of the Liao Basin. Collectivelythese wouldprovide up to 16 billion m3 a year for a reportedconstruction cost of Y8.1 billion.

- 45 - Details of these schemes are not available but they include water transfers, dam augmentation, increased diversion and so on. It is not clear whether the increased yields are water available in the river for agricultural and other purposes or whether they include augmentation of specific urban supplies. On the basis of these simple numbers, a rough estimate has been made of the AIC (financial) of the schemes and depending on the assumptions, the figure would be around YO.2-0.3/m3. (This appears to be a very low number but may represent the costs of expansions to large irrigation schemes.)

Some information has been obtained on the "East-West Transfer" scheme proposed by the Provincial Department of Water Conservancy. This is a major interbasin water resources project under consideration for the Tenth Five-Year Plan as a way to solve the water supply problems in the urban areas. The key element of the scheme is an 80 km long tunnel from below Huairen Reservoir to existing rivers and eventually to Dahuofang Reservoir. The capacity of the scheme would be 1.8 billion m3/a and the basic costs would be Y6.7 billion. A further YI0 billion would be required to distribute the increased flows to the urban centers for which the supply is intended. A rough estimate of the AIC for this scheme is Yl .5-3.0/m3 (however, the figures are sensitive to assumptions about the rate at which the demand is taken up and the O&M costs).

For comparison, the AIC costs for water supply augmentation in two cities in Hebei have been estimated at Y1.34 and Yl.66/m3.

There are no data available at present on the price or costs of irrigation water supplies.

The difference between the present actual tariffs recovered and the real costs of water supply represents, in broad terms, the magnitude of the indirect support that the governments (at all levels) provide to water users. There is not enough information on usage patterns to allow an estimation to be made of the demand curve and therefore an approximation to be made of the real levels of support being provided.

Analysis of AIC estimates can provide insights into the overall water resources challenge but does not bring out the problems of peaks in demand, which are critical both to system design and to the reliability of the supply. Since some of the key components of the costs of water supply schemes are related to capacity to deal with peaks in supply or to provide security in infrequent droughts, a more sophisticated analysis would have to take these into account.

The broad conclusion from these figures is that the costs of augmenting urban water supply are somewhere in the range of YO.6/m3 to more than Y3.0/m3. Pollution of the groundwater-affecting the cheapest and most accessible source--will continue to drive up the costs of water supply, and therefore effective measures to reduce that pollution can provide benefits in terms of water supply costs. However, measurement of these benefits is complicated and uncertain.

Range of Interventions and Cost Effectiveness

The water resources problems in Liaoning Province are particularly complex because of the overall pressures on resources; the close connection between surface and groundwater; and the relatively high volumes of wastewater discharged in urban areas, in relation to typical river flows. Dealing with these problems and ensuring adequate supplies of water for human, productive and ecosystem requirements will need an integrated and sustained effort. The Province is beginning to come to grips with these issues and the LIEP Water Resources Management Project is providing an analytic basis for determining priorities but progress is still slow.

- 46 - The recent inclusion of groundwater resources under the responsibilityof the Department of Water Conservancywas a significantstep in achieving a comprehensiveapproach. A proposal has been put forward for an aquifer study, to be financed under this project and carried out in conjunctionwith the Departmentof Water Conservancy,which would examinethe impactsof pollutionon waterresources. The study could also examinethe feasibilityof increasinggroundwater recharge at key locations.

Any integratedapproach must deal with a number of key issues including:more efficientuse of water in agriculture and reduced demandsin industryand urban uses; improvedconjunctive use of surface and groundwaterresources in order to deal with peak demands;significant reductions in pollutionloads from industry and from urban areas; and careful economicjustification of any major expansion of supply systems.Varied progress is being made on these issues,some of which are of directconcern to this project.

DemandManagement. There are a number of differentlong-term demand projectionsfor the province, which provide differentresults. It is understoodthat these differencesare under review by the Provincial Governmentand that Liaoningwill be includedin a nationalDemand Management Pilot Projectstarting in 2001, with support from the UK Departmentfor IntemationalDevelopment. Overall, domesticdemand projectionsare reasonablyconsistent with nationalfigures but there are variationsthat need to be examined carefullyin the projectedagricultural and industrialdemands.

Per CapitaDemands. All the project citieshave made projectionsof water use, whichprovide a basis for the design estimates of wastewaterflows. However, reliable informationis lacking for accuratewater demandand wastewaterflow projections.

Domestic Water Demand Projection Total Core Urban Per Capita Domestic Consumption Demand City Year PopulationPopUlan Demand Vlc/d (m31d) 2010 640,000 138 88,320 Ji.zhou 2025 740,000 150 111,000 Panjin 2010 550,000 130 71,500 2025 691,200 160 110,592 2010 4,540,000 171 776,340 Shenyang 2025 4,780,000 174 831,720 .gkou 2010 520,000 120 62,400 Yingkou 2025 600,000 130 78,000 Note: Shenyangincluded for comparisonpurposes.

- 47 - Wastewater Flow Projection Domestic Industrial Total City Year Wastewater Wastewater Wastewater m3/d m3/d Demand m3/d Jinzhou 2010 70,656 82,800 153,456 2025 88,800 87,120 175,920 Panjin 2010 57,200 146,160 203,360 2025 88,474 151,920 240,394 2010 621,072 896,880 1,517,952 Shenyang 2025 665,376 922,480 1,587,856 2010 49,920 187,280 237,200 2025 62,400 246,720 309,120

These estimateshave been discussedat each stage of project developmentand in most cases, the figures have been reviseddownward, to reflectthe increasingpressures on water supplyand projectedchanges in industrystructure toward more efficientand less water-intensivefirms. It is to be expectedthat the industry restructuringand productivityimprovements will keep down growthin industrialusage, especiallyif water tariffs continueto rise as anticipated.However, there is still concern that the current and projectedwater use figures for Shenyangare high in comparisonto other major Chinese cities, particularly in such a water-scarcearea.

The uncertaintiesin the projectionsof water demandsand wastewaterflows cannotbe resolvedin the near term. It is importanttherefore to strengthenmeasures to bring water demandsinto line with the available resources, taking into account the increasingreal costs of expandingthe overall water supply. It is also essentialto allow sufficientflexibility in water supplyand wastewaterplanning to adjustto changesin the type, size and locationof futuredemands.

DemandManagement Efforts. Populationand industrial outputwill continue to grow in Liaoning but gross per capita usage must be reduced.The figures for purely domesticuse are reasonableand consistent with Chinesedesign figures.However, major efficienciesin industrialdemand must be achievedas industry pattems change and the high "institutional"usage needs to be reduced.The difficultiesin assessing the impact of the floatingpopulation makes per capita figures unreliablebut there is clearly,a need for strong, ongoingefforts to reducewater and wastewatervolumes.

It is essential for water and wastewatertariffs to be set at levels which ensure financial viability and promote conservation,in accordancewith State Governmentprinciples. The Bank intendsto review of the success of the water conservationcomponent in Dalian in the LEP and of lessons that may be applied generally. The socioeconomicsurvey demonstrateda weak understandingby the population of the importanceof conservation.Increased efforts should be put into providingthe public with informationon water conservationand pollution reduction and an amount has been included under the Institutional Strengtheningtechnical assistance for this.

All industrialpollution controlinterventions should support efforts to move toward less water-intensive industry and should promote cleaner production, water conservationand waste minimization.Specific criteriaand conditionswill be includedin the differentcomponents.

- 48 - Understanding the Costs of Increasing Water Usage. Although some of these costs are broad estimates and will need to be refined, they do indicate that the real costs of expanding water use in the Liao River Basin will be high. Adding the costs of treatment (at 0.8 of the quantity) to the costs of supply show that the average financial costs of water in the central basin area will be of the order of Y3.8/m3 once wastewater treatment is provided and that these costs will continue to increase as the marginal costs of supply go up.

Since typical tariffs at present (for water plus wastewater) total less than Y2/m3, and the current combined demands in the project cities are about 3.3 million m3 a day, the potential financing gap is of the order of Y2 billion a year, unless demand falls or tariffs increase.

Benefits of Reclaiming Water. In the circumstances of the basin, opportunities for recycling or reclaiming water need to be pursued as strongly as possible. (Recycling refers to reuse of water within a process or plant; reclairned water is wastewater which is treated to a degree which allows it to be used again, typically for industrial or agricultural purposes.)

The use of reclaimed water in the basin is increasing. For example, the Angang Steel Plant is Anshan has constructed a reclamation plant, with the support of LEP, from which all the water is used in the plant for slag quenching and other low-grade uses. The city of Tieling (which was initially in this project) is now understood to be redesigning its wastewater plant to provide reclaimed water to supply the nearby power station. A reclaimed water plant at Benxi will provide water to the Bengang Steel Works, supplying over 100,000 m3/day at an estimated average cost of YO.6/m3, including depreciation. This figure is below the estimated marginal costs of increased supply to Bengang, particularly since there are no distribution works required.

In practice, there is also considerable "informal" reuse of water in the basin, especially in agriculture, since at times the lower reaches of the rivers consist predominantly of wastewater flows. The figures quoted above for the impacts of wastewater on agricultural and aquaculture productivity clearly demonstrate that this type of informal reuse has significant costs.

Wastewater Interception and Treatment. In the conditions of Liaoning Province, the impacts of untreated wastewater discharges are severe and treatment is clearly necessary. In contrast to other situations in China where the discharges are to large watercourses which have the capacity to cope with such loads, at least in the short to medium term, the Liao River system is already heavily overloaded by wastewater, to the point where discharges from some of the major cities are greater in volume than the rivers to which they discharge for large parts of the year. The provincial requirements for secondary treatment with ammonia removal appear to be appropriate in this context. However, the investments under this project are focused on the removal of COD, with ammonia removal as a later stage of treatment. The most useful basis for evaluation of the schemes proposed is therefore the incremental costs (measured as AIC) of COD removal and of wastewater treatment.

To some degree, improvement of the levels of wastewater being discharged will protect the existing surface water and groundwater resources (particularly the latter) and therefore could in theory be costed at the shadow price of new water sources. However, there is currently no basis for establishing the relationship between reduced pollution and volumes of groundwater protected, although this is one of the issues that should be addressed in the aquifer study proposed under the project. For the present, therefore, the key criterion is the cost effectiveness of pollution removal from the system.

- 49 - Unit Costs.Estimates have been made of the AIC of the wastewaterinterception and treatmentcomponents proposedunder this project.On the basis of the figurespresently used for project costs, the figures are as follows.

Table:AIC Estimates COMPONENT AICCOD AICflow (Y/ton) Y/m3 Jinzhou 3,420 0.99

Panjin 3,301 0.89

Shenyang 2,703 0.83

Yingkou municipal 2,765 0.91

Yingkou industrial 261 Not applicable

The variability in the AIC for COD removal relates mainly to the different assumptions on influent quality, as well as site-specific factors. The figures compare satisfactorily with the figure of Y3,600/ton estimated for secondary treatment in the Chongqing Urban Environment Project.

The low costs of COD removal at the Yingkou Paper Mill reflect the technical efficiency of treating concentrated waste streams and reinforce the importance in the river basin context of also tackling the major industrial point sources. In discussions on the proposed expansion of the EPB's Revolving Fund for Industrial Pollution Control, it has been recommended that the AIC of COD removal should be one of the basic criteriafor evaluatingproposals.

The AICs for flow are consistent with the range of Y0.73-1.25/m3 calculated for plants in the recently approved Hebei Urban Environment Project.

Since there are no ongoing Wastewater Companies in the project, there is no baseline for the real average costs of operating the sewerage system, including collection, interception and treatment. Estimates were provided of the basic cost of running the existing Northern Treatment Plant in Shenyang, giving a figure of about YO.4/m3,which does not includedepreciation or sludgemanagement. Allowing a reasonableamount for these factors, the real costs would probably be about Y0.8/m3, which is consistent with the estimates for the new investments.The costs associatedwith the collection system and interceptors,as a first approximation,would be of the same order,giving an estimatedaverage cost of the systemof Y1.6/m3.

- 50 - Willingness to Pay and Affordability

Wastewater tariff levels needed to cover the cost of existing operations and new services are estimated in financial analysis. Recommended tariff increases are step by step until 2006 to achive a break-even positio in 2007. Tariffs remain constant in real terms after 2006. The recommended tariffs for residential users range from 0.57 to 1.50 per cubic meter in 2006. They vary across project cities due to differences in project costs, distribution of users, and population. On average, household expenditure on wastewater treatment will range from 0.27 to 1.05 percent of average household income. Analysis by income group shows that for the poorest 10 percent of each project city's population, expenditure on wastewater treatment will be 0.6 to 2.2 percent of household income. This broadly refects that the tariff rates are affordable.

Initial conclusions from the socioeconomic survey show that most of the households are willing to pay wastewater tariffs at 0.40 Yuan per cubic meter. The results also broadly indicate that neither households nor industry would reduce their usage much if water prices double or even triple. A surprisingly high percentage, up to 20 percent in the Shenyang sample, buy bottled water or install filters because of concems about water quality. The results also show a broad acceptance of the need to pay for wastewater, even at prices above the current level. The overall conclusion is that affordability is not a general issue, although it is of course more of a concem for those without regular incomes.

Summary of benefits and costs: Addressed in the above text.

Main Assumptions: Addressed in the above text.

Cost-effectiveness indicators: See AIC data quoted in the above text.

- 51 - Annex 5: FinancialSummary CHINA:Liao River Basin Project Main assumptions:

Provincialand Municipal Finances

1. Assumptionsfor Financial Projections. The assumptionsmade when calculatingthe projections of the on-budgetrevenue and expenditurestatements of (a) LiaoningProvince; and (b) Jinzhou,Panjin, and Yingkou Municipalitiesfor the period 2001-06 are set out below. On-budgetrevenues are those arising from taxes levied on enterprises operatingin these areas; off-budgetrevenues consist of special fees to enterprisesand are used chieflyfor capitalexpenditures.

2. RevenueForecast. The actual (1998-2000)on-budget revenue figures have been derived from data providedby the provincialand municipalgovernments. Between 1998 and 2000, the average annual increase in revenue was between -1.5 and 5.6 percent in current terms. To estimatefuture revenues, an overallconservative average annual increaseof about 3 percentfor LiaoningProvince and 5.5 percent for the municipalitiesin currentterms has been assumedusing 2000 as the base year.

3. ExpenditureForecast. Historically, on-budget expenditureshave registeredbetween 95 to 100 percent of on-budgetrevenues. To estimate future expenditures,an overall average annual increaseof about 100 percentin currentterms has been assumedusing 2000 as the base year.

4. The followingtables summarizeprojected revenue and expendituredata from 2001 to 2006 for LiaoningProvince and the participatingmunicipalities. Projected project expenditures are also included.

Table 1: Liaoning Provincial Finances (Y billion, current terms)

Actual Actual Actual Proj. Proj. Proj. Proj. Proj. Proj. Proj. 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Receipts 62.05 72.69 72.98 65.21 69.22 73.64 78.49 76.79 81.96 87.65 Expenditures 61.43 72.69 72.98 65.21 69.22 73.64 78.49 76.79 81.96 87.65 Project Expenditures - - - 0.08 0.50 0.35 0.34 0.17 0.05 - Project as %ofReceipts - - - 0.12 0.72 0.48 0.43 0.22 0.06

- 52 - Table 2: Municipal Finances (Y million, current terms)

Actual Actual Budget Proj. Proj. Proj. Proj. Proj. Proj. Proj. 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Jinzhou Receipts 2,260 2,300 2,403 2,520 2,642 2,775 2.918 3,073 3,529 3,728 Expenditures 2,260 2,300 2,403 2,520 2,642 2,775 2,918 3,073 3,239 3,728 Project Expenditures - - - 21 152 73 80 23 8 - Project as % of Receipts - - - 0.83 5.75 2.63 2.74 0.75 0.23 -

Panjin Receipts 1,793 1,900 1,714 1,630 1,694 1,765 1,853 1,939 2,043 2,156 Expenditures 1,783 1,903 1,667 1,630 1,694 1,765 1,853 1,949 2,043 2,156 Project Expenditures - - - 53 62 83 85 27 9 - Project as % of Receipts - - - 3.25 3.66 4.70 4.59 1.39 0.44 -

Yingkou Receipts 2,074 2.275 2,386 2,536 2,697 2,870 3,054 3,252 3,463 3,690 Expenditures 1,971 2,228 2,327 2,473 2,630 2,798 2,978 3,170 3,377 5,597 Project Expenditures - - - 4 191 113 125 55 24 - Projectas%ofReceipts - - - 0.16 7.08 3.94 4.09 1.69 0.69

PublicUtility Financial Analysis

5. WastewaterCompanies. Prior to the establishmentof the wastewater companiesof Jinzhou, Panjin, Shenyangand Yingkou during project preparation,wastewater collection, treatment and disposal were the responsibilityof the MunicipalEngineering Departments of the cities. Budgetaryallocations were made to fund these services.As is the practice in departmentaloperations, no provision was made for depreciation.The financial objectivesof the municipalitiesfor their wastewatercompanies are that they shouldbe permittedto set and maintaintheir tariffs at levels that, at the least, would pennit them to break even (i.e., wastewaterrevenues to cover operatingcosts and the greaterof depreciationand debt service). The wastewatercompanies would incur no additionaldebt withoutthe Bank's agreementunless reasonable forecastsshow they would have a debt servicecoverage of at least 1.3 times.

6. All participatingwastewater companies have recentlyintroduced wastewater tariffs, to be basedon 80 percentof water consumptionfor both domesticand nondomesticconsumers. Wastewater tariffs will be collected by the water supply companiesand the proceeds passed to the wastewater companies,less handlingcharges. Industries with self-supplybut which dischargeto the sewer system will be billedby the water-savingdepartment in each city. The proceeds of the collectionswill be passed to the wastewater companies.

7. The actualand projectedtariffs over the implementationperiod of the project are given in Table3. They include the portion (30 percent of the tariff rate) to be turned over to LFD for the financingof wastewaterinvestments in the province.The assumptionsused in the financial projections are set out below.The projectedoperational and financialstatements are includedin the ProjectFile (see Annex8).

- 53 - Table 3: Actual and Projected Tariffs (Y/m3, current prices)

Actual Actual Proj. Proj. Proj. Proj. Proj. Proj. Proj. Proj. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Jinzhou WW 0.17 0.29 0.40 0.47 0.56 0.68 0.88 0.92 0.95 0.99 Panjin WW 0.16 0.34 0.39 0.47 0.52 0.60 0.62 0.64 0.66 0.68 Yingkou WW 0.16 0.25 0.34 0.46 0.62 0.77 1.03 1.07 1.11 1.14

ASSUMPTIONS TO UTILITY FINANCIAL PROJECTIONS

Wastewater Companies

8. Assumptions to the projections of the main financial statements of Jinzhou Drainage Management Company (JDMC), Panjin Drainage Management Company (PDMC) and Yingkou Drainage Company (YDC) for the period 2001-15 have been prepared.

9. Inflation and Exchange Rates. Yearly general domestic inflation rates used in the projections are 2.0 percent in 2001 and 3.0 percent thereafter. Foreign price increases are estimated at 3.7 percent in 2002, 2.6 percent in 2003 and 2.2 percent thereafter. The exchange rate used to convert foreign costs to local currency, where applicable, was Y8.3 per $1.0. It is assumed that exchange rate adjustments would, on average, maintain purchasing power parity over the projection period.

Income Statement

10. Sales. Projections of sewage quantities are based on "minimum demand" and maximum capacity figures, and at the equivalent of 80 percent of water bills.

11. Tariffs. Tariffs quoted in Table 3 above are gross average tariffs, and prices are expressed in yuan per m3.

12. Operating Costs. Salaries, wages and staff benefits are assumed to increase at the rates given in para. 9 above. Energy, materials and other costs are assumed to increase in line with general inflation also. For JDMC, PDMC and YDC, the following depreciation rates have been applied to (a) assets over 15 years: 2.5 percent per year, and (b) assets under 15 years: 7.0 percent per year. The entities will be exempt from sales and income taxes.

13. Interest and Amortization Expenses. The proceeds of the IBRD loan are assumed to be onlent to JDMC, PDMC and YDC at 6.0 percent a year. Amortization of loans would be on the basis of equal payments of principal and interest. The companies would bear the foreign exchange risk. The municipalities would provide the local capital counterpart funds as capital grants.

Balance Sheet

14. Inventories. Inventories have been projected to take into account general inflation as well as any expanded levels of operations and construction.

15. Accounts Receivable. Accounts receivable is assumed to be as follows: JDMC--72 days; PDMC--72 days; and YDC--72 days.

- 54 - Sourceand Applicationof Funds

16. Working Capital Needs. Working capital needs represent the excess, or otherwise, of the current year's current assets (net of cash), less the excess of the previous year's current assets (net of cash) over current liabilities.

17. Change in Cash. Change in cash (which includes short-term investments) calculates the balance sheet cash balance for the current year.

Paper-Making Companies Financial Analysis

YingkouPaper-Making Company

Financing Plan. The table below shows the financing plan for the Yingkou Paper-Making Company (YPMC). The proceeds from the World Bank loan would cany a LIBOR-based US dollar single currency loan interest rate plus a spread of 1.5 percent per year, a commitment charge of 0.75 percent, and a front-end fee of 1 percent, which would be financed under the loan. The maturity would be 10 years, including 4 years of grace. YPMC would.carry the foreign exchange risk.

Y million = Project cost 138.4 100

Local bank loan 26.4 19 World Bank loan 112.0 81 Total 138.4 100

Financial Performance. The company has not made a profit for the last four years. However, reforms begun in 2000 which focus on controlling costs and expenses, post-efficiency salary system, reduction in staff, etc., are expected to make YPMC profitable from 2001. Ten-year projections prepared by YPMC show a profit from 2001 onward, with the company generating substantial cash surpluses from about 2003 onward. Between 2001 and 2002, most of the profit arises from pulp sales, which show about a two-and-a-half-fold increase in tons produced. From 2003, sales of binder would substantially increase profits. The company has so far financed its operation and expansions mainly through short-term and long-term debt.

In order to ensure financial viability of the Yingkou Paper-Making Company, agreement would be reached at negotiations that Yingkou Municipality would ensure that commencing in fiscal year 2001, YPMC: (a) achieves a quick ratio of 0.8; (b) maintains a current ratio of 1.5; and (c) maintains a debt service coverage of 1.4 times.

The risk of nonrepayment of Bank loan proceeds is minimal as Yingkou Municipality (a) being the company's owner, would repay in the event of default by YPMC; (b) is willing to absorb the financial responsibility; (c) intends to operate the company for some time as it has just begun major reforms to ensure its long-term profitability; and (c) recognized that YPMC is a major employer within the city.

JinchengPaper-Making Company

Financing Plan. The table below shows the financing plan for the Jincheng Paper-Making Company (JPMC). The proceeds from the World Bank loan would carry a LIBOR-based US dollar single currency loan interest

- 55 - rate plus a spread of 1.5 percent per year, a commitment charge of 0.75 percent, and a front-end fee of 1 percent, which would be financed under the loan. The maturity would be 10 years, including 4 years of grace. JPMC would carry the foreign exchange risk.

Y million ° Project cost 114.2 100

Local bank loan 30.2 26 World Bank loan 84.0 74 Total 114.2 100

Financial Performance. Financial statements from 1996 show that JPMC made net profits of about 9 percent per year on turnover. Ten-year projections prepared by JPMC continue to show healthy profits, with the company generating substantial cash surpluses in the outer years. Sales of binder from about 2002 would account for the increased profits. The company has so far financed its operations and expansions through a combination of short-term and long-term debt and intemal cash generation. From 2004 onward, JPMC's projections through 2010 show no more long-term borrowings.

In order to ensure financial viability of the Jincheng Paper-Making Company, agreement would be reached at negotiations that Jinzhou Municipality would ensure that commencing in fiscal year 2001, JPMC (a) achieves a quick ratio of 0.8; (b) maintains a current ratio of 1.5; and (c) maintains a debt service coverage of 1.4 times.

The risk of nonrepayment of Bank loan proceeds is minimal as Jinzhou Municipality (a) being the company's owner, would repay in the event of default by JPMC; (b) is willing to absorb the financial responsibility; and (c) intends to operate the company for some time as it is a major employer within the city.

- 56 - Annex 6: Procurementand DisbursementArrangements CHINA:Liao River Basin Project

Procurement

1. Procurement Capacity Assessment. Two sets of procurement laws and regulations exist in China for procurement administration--Chinese bidding regulations, and procedures for procurement financed by external donors. This status is expected to continue until a National Procurement Law is adopted. This law is under preparation with the assistance of ADB. However, Bank-financed procurement has been carried out satisfactorily through exemptions to the domestic bidding requirements.

2. All Chinese agencies using own funds are required to operate within the framework of Chinese procurement regulations issued by the MOF, MOC and other sector ministries. Some provisions in these regulations that are inconsistent with Bank procurement guidelines and procedures include: preferential bid notification, short bidding period, preferential prequalification methods, and bracketing and merit point system for bid evaluation. Since the last Bank CPAR review of 1997, a number of changes in procurement practices have taken place in China: (a) the Government has adopted the Construction Law of PRC (November 1997), and the PRC Bidding Law (January 2000), (c) the State Development and Planning Commission (SDPC) has mandated national newspapers for notification of ICB bid invitations, and (d) the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) has recommended contract award for mechanical and electrical equipment to lowest evaluated bidders.

3. Special provisions in the Chinese Public Procurement Regulations specifically exempt Bank-fnanced procurement from the requirement to observe Chines bidding regulations. In other past and ongoing Bank-financed projects, Bank procurement guidelines and procedures have been used without exception, satisfactorily, with two exceptions. These relate to the practice of notification of bid invitations in provincial newspapers, and updating the General Procurement Notice (GPN) annually. The SDPC has issued instructions in 2000, regarding bid invitation notifications in designated national newspapers.

4. The primary coordinating agency, LUCRPO, has acquired experience of World Bank procurement procedures through implementing three urban infrastructure projects during the last 15 -years. LUCRO has a solid core of procurement staff with considerable experience in procurement management. LUCRPO is responsible for preparation and issue of bidding documents on behalf of all project agencies, incorporating bills of quantities and drawings provided by project cities. The cities are responsible for opening bids, evaluation, award, and signature of contracts and administration of contracts. LUCRPO performance in all stages of procurement administration has been satisfactory. One project agency has had experience with Bank financed projects. Procurement staff in the project agencies has limited experience in Bank-financed procurement. The Liaoning Provincial Government has reaffirmed that all Bank-financed procurement will be carried out in accordance with Bank procurement guidelines.

- 57 - 5. The agreed action plan of the Procurement Capacity Assessment Report (a copy is in the Project File; see Annex 8) includes: (a) implementing a an intensive training program on procurement for staff of project agencies; (b) updating of GPNs annually; (c) completing 20 percent detailed engineering design and bid documents by appraisal (achieved); (d) appointing an international tendering company for ICB procurement activities, by negotiations (achieved); and (e) inserting bid invitation notifications in national newspapers as instructed by SDPC.

6. Procurement Methods (Table A). Procurement procedures and arrangements satisfactory to the Bank, as reflected in Table A, were agreed upon with the Liaoning Urban Construction Renewal Office (LUCRPO) and the implementing agencies. All procurement would be undertaken in accordance with the Bank's Procurement Guidelines--"Procurement Under IBRD Loans and IDA Credits" dated January 1995 and revised in January and August 1996, September 1997 and January 1999, and "Selection and Employment of Consultants by World Bank Borrowers" dated January 1997 and revised in September 1997 and January 1999. If none is available, procedures shall be consistent with Bank Guidelines and approved by the Bank.

7. The China NCB procedures for works have been reviewed by the World Bank Group and found some deviations in the internal procurement procedures, such as bracketing and merit point system used in prequalification and bid evaluation. The Implementation Agencies are fully committed to strictly comply with the Bank's procurement procedures/policies for the Bank-financed contracts. In case there are any discrepencies between local policy and the Bank's requiremeent, the Bank policy and guidelines will prevail. The Liaoning Municipal Government shall pay particular attention to ensure that the following procedures are followed:

(a) all invitations to prequalify or to bid shall be advertised in a newspaper of national circulation in the Borrower's country;

(b) such advertisement shall be made in sufficient time for prospective bidders to obtain prequalification or bidding docuemtns and prepare and submit their responses; and in any event a minimum of 30 days shall be given to bidders between the date of advertisement in such newspaper and the deadline for submission of bids, and the advertisement and bidding documents shall specify the deadline for such submission;

(c) qualification requirements of bidders and the method of evaluating the qualification of - each bidder shall be specified in detail in the bidding documents;

(d) all bidders shall be required to provide security in an amount sufficient to protect the Project Municipality in case of breach of contract by the contractor, and the bidding documents shall specify the required form and amount of such security;

(e) the time for opening of all bids shall be the same as the deadline for receipt of such bids;

(f) all bids shall be opened in public; all bidders shall be afforded an opportunity to be present (either in person or through their representatives) at the time of bid opening; but bidders shall not be required to be present at the bid opening;

- 58 - (g) no bid may be rejected solely on the basis that the bid price falls outside any standard contract estimate, or margin or bracket of average bids established by the Project Municipality; and

(h) each contract shall be awarded to the lowest evaluated bidder, that is to say, the bidder who meets the appropriate standards of capability and resources and whose bid has been determined (i) to be substantially responsive to the bidding documents and (ii) to offer the lowest evaluated cost. The winning bidder shall not be required, as a condition of award, to undertake responsibillities for work not stipulated in the bidding documents or otherwise to modify the bid as originally submitted.

8. Procurement Arrangements. LUCRPO has appointed China International Tendering Company(CITC) and Shenyang Tendering Center (STC) to provide assistance in ICB procurement activities. Both companies have been engaged in procurement activities of past World Bank-financed projects in Liaoning Province. CITC, a specialized procurement agency, is a subsidiary of the China National Technical Import & Export Corporation (CNTIC), and was founded in 1984. Up to 1998, the total value of ICB procurement managed by CITC had reached $16.2 billion. The Shenyang Tendering Center was found in 1986 and it was authorized by the State Economic and Trade Commission in 1989 to handle the international procumbent for the World Bank financed projects in China. It has managed 94 ICB contracts with a total value of $146 million since 1989. Both tendering companies are competent procurement agents experienced in international competitive bidding (ICB) work on Bank Group-financed projects. The General Procurement Notice (GPN) was published in the UN Development Business, No 546 dated November 16, 2000; it would be updated annually. Tender documents to be used for ICB would be those agreed between the World Bank and the Government, and other standard bidding documents of the World Bank. Tender documents to be used in the project for international and national competitive bidding (NCB) would be based on Model Bidding Documents (MBDs) (May 1997), agreed between the World Bank Group and the Government and where these are not available, Bank Standard bidding documents would be used. All works contracts will be grouped whenever practical into contract packages of estimated value equivalent to $6.0 million or more each, and all goods contracts will be grouped whenever practical into contract packages of estimated value equivalent to $300,000 or more each, which would be procured through ICB procedures.

9. Civil Works. Total value of civil works is estimated at about $73.0 million, of which about $17.6 million (24 percent) would be procured through ICB procedures. ICB procedures would be used for all civil works contracts of estimated value more than equivalent of $6.0 million each. Civil works that are small, scattered, scheduled too far apart to be packaged into larger contracts, or would not attract the interest of foreign bidders, estimated to cost about $50.7 million (69 percent), would be awarded through NCB procedures acceptable to the Bank. NCB procurement to be used in Liaoning for Bank-financed procurement have been reviewed by the Bank recently, and were found to be satisfactory. Interested foreign bidders would be allowed to bid for NCB contracts. Post-qualification of contractors would be adopted as appropriate. Domestic preference would not apply for works contracts.

- 59 - 10. Goods. Excluding equipment to be procured under environment subloans, the total value of goods is estimated at about $62.4 million, of which about $58.6 million (some 94 percent) would be procured using ICB procedures. All goods contracts of estimated value more than the equivalent of $300,000 each, would be procured using ICB procedures. Goods estimated to cost less than $300,000 equivalent for each contract, would be procured using NCB procedures acceptable to the Bank, up to an aggregate amount of $1.5 million. Post-qualification of suppliers would be adopted as appropriate. Domestic preference would apply for goods contracts. Contracts for goods costing $ 50,000 equivalent each or less, up to an aggregate amount of $0.5 million, would be procured through national shopping procedures acceptable to the Bank, based on comparison of priced quotations obtained from at least three suppliers with award to the lowest evaluated responsive bidder in accordance with Articles 3.5-3.6 of the Guidelines.

11. Environment Subloans. Goods financed under subloans would be procured in accordance with established local private sector or commercial practices, which have been found acceptable to the Bank. Such practices include price comparisons from at least three qualified suppliers whenever possible. Services (e.g., design and supervisory consultants services) less than $200,000 equivalent would be procured in accordance with commercial practices, which have been found to be acceptable to the Bank.

12. Technical Assistance and Training. All consultants to be engaged under the project would be procured in accordance with the World Bank's Guidelines for Selection and Employment of Consultants by World Bank Borrowers, January 1997, and revised in September 1997 and January 1999. Contracts estimated to cost more than the equivalent of $200,000 or more would be procured using Quality and Cost Based Selection (QCBS) procedures, seeking expressions of interest through notification in the UN Development Business. For contracts estimated to cost less than $200,000 equivalent, national consultants may be engaged using QCBS or Quality Based Selection (QBS) procedures. For contracts estimated to cost less than $100,000 equivalent for firms or $50,000 for individuals, single-source selection may be used, with the prior agreement of the Bank. Consultants would be engaged using the Bank's Standard Form of Contract for Consultants' Services--July 1997. Drafts of Letters Invitation and Terms of Reference for Financial and Institutional Support (Package A) and Construction Supervision Services (Package D) would be reviewed at negotiations. Details of Packages A, Package B (Other-Studies and Future Project Preparation), Package C (Training and Study Tours) and Package D, are sumnrnarized in Annex 2. The signing of contracts for Package A and Package C is a condition of disbursement for civil works. Terms of reference for Packages A and D are in the Project File. The estimated value of technical assistance is $9.3 million.

13. Retroactive Financing. Retroactive financing of up to $6 million would be applied to expenditures incurred after March 21, 2001, for (a) Panjin: interceptor and two pump stations, (b) Yingkou: (i) interceptor; (ii) sewer upgrading; (iii) reinforced double-box culvert; and (c) Jinzhou: reinforced double-box culvert.

14. Reserved Procurement. Expenditures not financed by the Bank loan will reserved for procurement by the Liaoning Provincial Government using direct contracting procedures. These

- 60 - include: (a) expenditure of about $7.6 million on land and resettlement, and (b) expenditure of about $4.7 million for civil works in Panjin (for the interceptor) and Yingkou Paper Mill (red liquor abstraction and evaporation), and for goods for electricity supply to pump stations and treatment plants, computer hardware and sofware, and data collection under the Jinzhou UMIS component. Single-source selection would be utilized for contracts for staff training and studies costing less than $100,000 per contract in the case of firms, and less than $50,000 per contract in the case of individuals. Standard Request for Proposals, dated July 6, 1997, revised in April 1998 and July 1999, will be used to procure consultant services. 15. Engineering and Management Costs. Engineering and management overhead of implementing agencies, not financed under the project is estimated at $10.8 million equivalent. Procurement Contract Packaging 16. Contract Packaging. Contract packaging for the project is provided in Tables D and E, showing the works, goods and services contracts proposed for each component. 17. Procurement Schedule for Civil Works and Goods. (Table E). This schedule is in the Project File (Annex 8); a summary is shown in Annex 11

Procurementmethods (Table A)

Annex 6, Table A: Project Costs by Procurement Arrangements (in $ million equivalent) Total Cost Expenditure Category Procurement Method (including

______ICB NCB Other NBF Contingencies) 1. Civil Works 17.6 50.7 4.7 73.0 (7.1) (20.3) - (0.0) (27.4) 2. Goods 58.6 1.5 0.5 1.8 62.4 (51.6) (1.3) (0.4) (0.0) (53.3) 3. Subloans 20.0 20.0 (10.0) (10.0) 4. Services 8.3 0.4 8.7 (8.3) (0.0) (8.3) 5. Miscellaneous - 20.7 20.7

- - (0.0) (0.0) 6. Interest during construction - - 17.8 17.8

- - (0.0) (0.0) 7. Front-end Fee - 1.0 - 1.0 (1.0) (1.0)

Total 76.2 52.2 29.8 45.4 203.6 (58.7) (21.6) (19.7) (0.0) (100.0) Note: Other = procurement through national shopping, (also for subloans under the Environment Revolving Subloan facility), consultant services and training, and front-end fee. NBF = Non-Bank-financed includes land acquisition and resettlement, reserved procurement, (e.g., power supply contracts), project agency costs for design and administration, and interest during construction. Figures in parentheses are the amounts to be finance d by the Bank loan.

- 61 - Table Al: ConsultantSelection Arrangements (optional) (US$ million equivalent)

Selection Method ConsultantServices 4Expedtre Category QCBS QBS SFB LCS CQ Othher N.8.F. TotalCost' A. Firms 8.10 0.20 0.00 0.00 0.00 0.00 0.40 8.70 (8.10) (0.20) (0.00) (0.00) (0.00) (0.00) (0.00) (8.30) B. Individuals 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) Total 8.10 0.20 0.00 0.00 0.00 0.00 0.40 8.70

(8.10) , (0.20) (0.00) - (0.00) (0.00) (0.00) (0.00) (8.30) 1\ Includingcontingencies

Note: QCBS= Quality-and Cost-BasedSelection QBS = Quality-basedSelection SFB = Selectionunder a Fixed Budget LCS = Least-CostSelection CQ = SelectionBased on Consultants'Qualifications Other = Selectionof individualconsultants (per Section V of ConsultantsGuidelines), CommercialPractices, etc. (Not all selectionmethods currently anticipated)

N.B.F.= Not Bank-financed Figuresin parenthesisare the amountsto be financed by the Bank Loan.

- 62 - Priorreview thresholds (Table B) Prior Review Thresholds (Table B)

18. Prior review procedures would be used for (a) all civil works contracts (2 contracts, representing about 24 percent of value of works) estimated to cost the equivalent of $6.0 million or more per contract, (b) all goods contracts (about 16 contracts, representing about 94 percent of value of goods), estimated to cost $300,000 or more per contract, and (c) consultant services contracts estimated to cost the equivalent of $200,000 or more per contract for finns, and the equivalent of $50,000 or more per contract for individuals. In the case of consultant services, all terms of reference and single-source selections, regardless of their value, would be subject to prior review. Table B: Thresholdsfor ProcurementMethods and Prior Review

ContractValue ContractsSubject to Threshold Procurement Prior Review ExpenditureCategory Method 1. Works More than $6.0 million ICB 2 contracts $14.4 million subject to prior review NCB 16 contracts $39.7 million not subject to prior review 2. Goods More than $0.3 million ICB 16 contracts $58.6 million subject to prior review

Between $0.3 million and NCB 5 contracts $0.05 million $1.3 million not subject to prior review

Up to $0.05 million National Shopping $0.4 million not subject to prior review 3. Services More than $0.10 million QCBS or QBS $6.2 million subject to for firms, more than $0.05 prior review million for individuals 4. Miscellaneous 5. Miscellaneous 6. Miscellaneous

Total value of contractssubject to prior review: $70.1 million (62%)

Overall ProcurementRisk Assessment

Average

Frequency of procurement supervision missions proposed: One every 6 months (includes special procurement supervision for post-review/audits)

- 63 - Thresholdsgenerally differ by country and project. Consult OD 11.04"Review of Procurement Documentation"and contactthe RegionalProcurement Adviser for guidance.

-64 - Disbursement

Allocation of loan proceeds (Table C) 19. Allocation of Loan Proceeds (Table C). Allocation of loan procceds is shown in Table C.

Annex 6, Table C: Allocation of Loan Proceeds Expenditure Category Loan Amount Financing Percentage in $ million CivilWorks 25.0 40% of expenditures Goods 51.0 100%of foreignexpenditures or 100% of local expendituresfor locally manufacturedgoods or 75% of local expendituresfor other itemspro cured locally

Subloans 10.0 95% of amountsdisbursed

ConsultancyServices & 8.0 100%of expenditures Training

Front-endFee 1.0 100%

Unallocated 5.0

Total 100.0

20. Use of Statements of Expenditure (SOEs). Withdrawal from the loan amount would be made on the basis of SOEs for expenditures for: (a) civil works under contracts costing less than $6.0 million; (b) goods under contracts costing less than $300,000; (c) training; (d) services provided by consulting firms under contracts costing less than $100,000; (e) amounts disbursed under subloans and (f) services provided by individual consultants under contracts costing less than $50,000.

21. Authorization, Allocation and Operation of Special Account. To facilitate disbursements, a Special Account would be opened with an authorized allocation of $8 million equivalent, the estimated average expenditures for about a four-month period.

- 65 - Annex 6, Table D: Procurement Contract Packaging La

Pan jin: Wastewater Interception and Treatment | Contract No. Item Description Procurement Method Civil Works PWW/01.0 Wastewater treatment plant of 100,000 m3/d capacity, ICB including provision for extra foundation costs PWWi01.02 Two new pumping stations: PS #1: Q=5951 m3/hr, and PS #2: NCB Q=6757 m3/hr PWW/01.03 Interceptor: 3.0 km box culvert, 2.8m x 2.0m, 2.4m x 2.0m; NCB 7.14 km pipeline: DN 1200 and DN 1400, and rehabilitation of existing PSs PWW/O1.04 Sanitary landfill for sludge disposal, adequate for at least 100 NCB tpd for 3 years Materials and Equipment PWW/21.01 Supply and installation of equipment for WWTW ICB PWW/2 1.02 Sludge transport vehicles NCB PWW/21.03 Equipment to be identified through IST Component NCB/NS Consultants Services Contracts Contract management and supervision NBF Utility Contracts Power supply NBF Other Interceptor: 4.7 km box culvert 2.8 m x 2.0 m (under NBF construction) Land cost including resettlement NBF

Yingkou Industry Wastewater Treatment | Contract No. Item Description Procurement Method Materials and Equipment YPK/2 1.01 Supply and installation of red liquor abstraction equipment, ICB including technical assistance and training YPK/2 1.02 Supply and installation of red liquor evaporation equipment, ICB including technical assistance and training YPK/2 1.03 Equipment for process modification to reduce water use ICB Consultant Services Con tracts YPK/22.01 Advisory services for process modifications to reduce water QBS use Other Civil works for red liquor abstraction and evaporation works NBF /a The detailed arrangements of the implementation of the first year's construction/activities are shown in the Project Summary, including the Project Implementation Plan. See Annex 8.

- 66 - Yingkou: Wastewater Interception and Treatment Contract No. Item Description Procurement Method Civil Works YWW/01.01 Interceptor, 4.52 km. From Huochang Road - Laoyege- NCB Treatment plant, of DN 1400 to DN2400 of reinforced concrete/ductile iron pipe YWW/01.02 Interceptor, 3.00 km. From Laoyege Tre atment Plant, of NCB DN 1400 to DN2400 of fiberglass reinforced pipe/c oncrete box culvert. YWW/01 .03 Sewer upgrading in Shachangchaogu, 2.23 km. of reinforced NCB concrete culvert of size 3.6 m x I.8 m. YWW/01.04 Reinforced double box culvert (sewer) in Xichaogu, 3. 1km NCB long, of size 5.7 mx 2.0m, and 3.8 mx 2.Om YWW/01.05 Upgrading five pump stations of capacities 3, 5, 6, 8, and I NCB m3/hr. YWW/01.06 Urban sewer upgrading, including 3 pumping stations NCB YWW/0 .07 Site works at treatment plant site, including water supply 3.5 NCB km. of DN 200 YWW/01.08 Wastewater treatment plant of capacity 100,000 m3/d, ICB including provision for outfall including extra foundation costs YWW/01.09 Sanitary landfill for sludge disposal, adequate for at least 100 NCB tpd for 3 years Materials and Equipment YWW/21.01 Passenger vehicles: I car, I four-wheel drive, I minibus, I bus NCB YWW/21.02 Office equipment including equipment to be identified through NCB/NS IST Component YWW/21.03 Four sludge vehicles and loader NCB YWW/21.04 Supply and installation of equipment for WWTW ICB YWW/21.05 Laboratory equipment ICB Consultants Services Contracts YWW/22.01 Contract management and supervision QBS Utility Contracts Power supply NBF Other Land NBF

- 67 - Jinzhou Industry Wastewater Treatment Contract No. Item Description Procurement Method Civil Works JPM/0I.01 Civil works for new works NCB JPM/01.02 Demolition of electrolysis facility including remedial work s for NCB mercury recovery Materials and Equipment JPM/21.01 Supply, installation and commissioning chloro-alkali process ICB equipment JPM/21.02 Equipment for process modification to reduce water use ICB JPM121.03 Laboratory and office equipment ICB Consultant Services Contracts JPM/22.01 Advisory services for process modifications to reduce water QBS use

Jinzhou: Wastewater Interception and Treatment ContractNo. Item Description Procurement Type Civil Works JWW/01.0 Interceptor, comprising 10.0 km reinforced concrete pipe NCB comprising 1.83 km. DN 1000mm, 16.92 km. DN 1600mm, and 0.33 km of 2.2m x 2.Omtriple cell culvert JWW/01.02 Wastewater treatment plant of capacity 100,000 m31d NCB JWW/01.03 Sanitary landfill for sludge disposal, adequate for at least 100 NCB tpd for 3 years Materials and Equipment JWW/21.01 Supply and installation of equipment for WWTW ICB JWW/21.02 Sludge vehicles and landfill equipment ICB JWW/21.03 Passenger vehicles (car, bus, eleven-seater van, jeep, NCB maintenance vehicle, water sampling car) JWW/21.04 Sewer maintenance vehicles (1-sewer jetting vehicle, I- ICB vacuum tanker) JWW121.05 Laboratory equipment NCB/NS JWW/21.06 Control Center equipment ICB JWW/21.07 Misc. office equipment including equipment to be identified NCB/NS through IST Component Consultants Services Contracts JWW/22.01 Contract management and supervision QBS Utility Contracts Power Supply NBF Other Site Works at Wastewater Tre atment Plant site NBF Land acquisition including resettlement NBF

- 68 - Urban Management Information System | Contract No. Item Description Procurement Method Materials and Equipment UMIS/2 1.01 Computer hardware and software for: ICB Liaoning clearing house [Y 1.7 m] Shenyang [Y 3.3 m] Panjin [Y 3.7 m] Yingkou [Y 2.2 m] UMIS/2 1.02 Data collection for: ICB Shenyang [Y 10.8 m] Panjin [Y 1.2 m] Yingkou [Y 2.1 ml Consultant Services Contracts UMIS/22.01 Advisory technical assistance, training and application QCBS software Shenyang [Y 10.8 m] Panjin [Y 3.3 m] Yingkou [Y 1.5 m] Liaoning clearing house [Y 0.8 m] Other Jinzhou- computer hardware and software NBF Jinzhou- data collection NBF Jinzhou- advisory technical assistance, training and NBF application software

Environmental Q ality Monitoring Contract No. Item Description Procurement Method Materials__ and Equipment WQM/22.01 Supply miscellaneous water and air quality monitoring ICB/NCB/NS equipment for water quality monitoring stations at Liaoning (slice and package) (Central), Dalian, Shenyang. Fuxin, Yingkou, Panjin, I Chaoyang, Dandong, Tieling and Fushun

Environment Subloans Contract No. Item Description Procurement Method Subloans to Industries Not applicable Loans administered by Liaoning Environmental Protection Other Bureau and Liaoning Finance Department to industries for pollution reduction _ Counterpart contribution by industries NBF

0______Construction Supervision & Quality Control Contract No. Item Description Cost (Y million) Procurement Method Package D Construction supervision & quality control for 20.2 QCBS wastewater (see Note) Note: Includes Y2.0 million for technical assistance to help improve local construction industry standards, technical specifications and bills of quantities.

- 69 - Annex 6, Table E: Institutional Strengthening, Studies and Training

TA Description of Assignment TA Person Training Base cost Ref. Months Y million Y million National Int'l A PACKAGE A: FINANCIAL/INSTITUTIONAL SUPPORT/TRAINING Al. Panjin Drainage company 52 9 1.2 A2. Yingkou Drainage Company 52 9 1.3 A3. Jinzhou Drainage Management Company 50 9 1.2 A4. Panjin Municipality 12 2 0.4 A5. Yingkou Municipality 12 2 0.5 A6. Jinzhou Municipality 12 2 0.4 A7: Assistance to LEPB and LFD to improve 10 2 operations of Environment Revolving Subloan facility Subtotal AI to A 7/a 200 35 5.0 16.4 Procurement Method: QCBS B Package B: OTHER BI. Aquifer study 40 8 B2. Future project preparation 5 3 Subtotal Package B 45 11 3.1 Procurement method: QCBS C PACKAGE C: TRAINING AND STUDY TOURS Training for provincial and municipal agencies on 2.0 project administrati on Subtotal Package C 2.0 Procurement method: QCBS D PACKAGE C: CONSTRUCTION SUPERVISION Dl. Panjin Drainage Company 115 15 D2. Yingkou Drainage Company 115 15 D3. Jinzhou Drainage Management Company 115 15 [t hie Resi.ler.lf ni el W\V\'-[ W .(Equip ',ltl'i1.Xpr''gt N,kl,chamn-a1 I.nfi-ineer

D4. LUCRPO, and improvements to local 25 15 construction industry standards, specifications and bills of quantities Costed Subtotal Package D 370/b 60 elsewhere Procurement Method: QCBS /b

/a This packagewould be managedby LUCRPO.The consultantsto be retained,would make their services availableto each city accordingto the city's scheduleof technicalassistance, training and equipmentprocurement /b Construction Supervision Services and Quality Control calculated as follows: Civil works @2.5 percent of investmentcost, and Equipmentand Materials@ 1.0percent of investmentcost.

- 70 - Annex 7: ProjectProcessing Schedule CHINA:Liao River Basin Project

IProjectSchedule Planned Actual Timetaken to preparethe project(months) 24 15 FirstBank mission (identification) 07/11/2000 07/11/2000 Appraisalmission departure 03/05/2001 03/12/2001 Negotiations 05/07/2001 05/08/2001 PlannedDate of Effectiveness 06/21/2001 10/31/2001

Preparedby: LiaoningUrban Construction& RenewalProject Office (LUCRPO),under the directionof the Liaoning Municipal Government Leading Group, and the Liaoning Construction Commission.Supported by LiaoningEnvironmental Protection Bureau.

Preparationassistance: Formulation of the River Basin Strategy and the development framework assisted by a European Union-supportedprogram. PHRD funds, provided by the Governmentof Japan; trust fumdsfrom the UnitedKingdom; loan funds from ongoingLiaoning Environment Project (3781-CHA) also utilized.

Bankstaff who worked on theproject included: Name Speciality NancyChen FinancialManagement VelletFemandes ProgramAssistant RuneFranzen Paper Specialist Jack Fritz EnvironmentalAssessment ChandraGodavitame MunicipalEngineering David Hanrahan ProjectEconomics RajagopalIyer InstitutionalDevelopment JeffreyLecksell Cartography Bobo Lu Procurement PatrickMcCarthy FinancialAnalysis MargaretPng LegalCounsel GeoffreyRead Task Management Keiko Sato InstitutionalAnalysis ChongwuSun EnvironmentalAssessment GeorgeTaylor Water Quality & WastewaterTreatment Strategies ChaogangWang Resettlement DaweiYang Procurement ChaohuaZhang Resettlement MingZhang UrbanPlanning & Land Management,Task Management

- 71 - Annex 8: Documentsin the ProjectFile* CHINA:Liao River Basin Project

A. ProjectImplementation Plan 1. See Item29 below,supplemented by Items 20 and 25 below.

B. BankStaff Assessments 1. BankMission Reports, July 1999 throughMarch 2001. 2. "LiaoRiver BasinOverview Report," M. Warwick,October 1999. 3. SupervisionReport for LiaoningEnvironment Project (Loan 3781-CHA), July 1999 and subsequent.

C. Other 1. "DraftFeasibility Report, Volume 1: SummaryReport," Montgomery Watson, September 2000. 2. "DraftFeasibility Report, Volume 2: City Reports(Jinzhou, Panjin, Shenyang,Yingkou)," MontgomeryWatson, September 2000. 3. "EnvironmentImpact Assessment for the Liao RiverBasin Project (Final)," Liaoning Urban Constructionand RenewalOffice, LiaoningProvincial Scientific Research Institute for Environment Protectionwith assistancefrom Montgomery Watson, February 2001. 4. "EnvironmentalAssessment Summary Report," LUCRPO and MontgomeryWatson, January 2001. 5. "EnvironmentManagement Plan for the LiaoRiver BasinProject (Draft)," Liaoning Urban Constructionand RenewalOffice, LiaoningProvincial Scientific Research Institute for Environment Protectionwith assistancefrom MontgomeryWatson, January 2001. 6. "AssessmentReport on InstitutionalStrengthening and TrainingNeeds (SecondDraft)," Consultant Team, TsinghuaUniversity, October 25, 2000. 7. "ResettlementAction Plan for JinzhouWastewater Treatment Project (Draft)," Jinzhou Drainage ManagementCompany, October 2000. 8. "ResettlementAction Plan for PanjinWastewater Treatment Project (Draft)," Panjin Wastewater TreatmentProject Construction Headquarter, December 2000. 9. "ResettlementAction Plan for ShenyangWastewater Treatment Project (Draft),"Shenyang Urban ConstructionProject Office, December 2000. 10. "ResettlementAction Plan for YingkouWastewater Treatment Project (Draft)," Yingkou Drainage Company,October 2000. 11. "WorldBank Mission 10/30/00-11/09/00Extracts from Draft FeasibilityStudy Report,Sumnmary of WWTWUniform Process Engineering Design and Cost Estimates,"October 2000. 12. -"Reporton Applyingto the World Bankfor the RevolvingFund Loan in LiaoningEnvironmental Control(Feasibility Study for Usingthe RevolvingFund)," Environmental Protection Bureau of LiaoningProvince, July 2000. 13. "TheProposal of EnvironmentalMonitoring Capacity Building in LiaoningProvince (The Parts for ApplyingWorld Bank Finance) (New ProjectProposal)," Liaoning Provincial Environment Protection Bureau,November 2000. 14. "List of Direct-DischargeIndustrial Enterprises in Liao River Basin,"October 2000. 15. "AssessmentReport on InstitutionalStrengthening & TrainingNeeds", Consultant Team, Tsinghua University,April 2001 (Chineseand English). 16. JinchengPaper Making Company Financial Projections, March 20011. 17. YingkouPaper Making CompanyFinancial Projections, March 2001. 18. FeasibilityStudy Report for EnvironmentRevolvirg Fund, preparedby LEPB, February2001.

- 72 - 19. Summaryof ProposedOptional Projects Under Environment Revolving Fund Component,prepared by LEPB, February2001. 20. ProcurementPlan Summary,prepared by LEPB, February2001 (see ProjectImplementation Plan, Item 29 below). 21. FinancialProjections dated March 21, 2001 of: * JinzhouDrainage Management Company * PanjinDrainage Management Company * YingkouDrainage Company 22. "ResettlementAction Plan for JinzhouWastewater Treatment Project (Draft)," Jinzhou Drainage ManagementCompany, March 2001; final version(English and Chinese),March 31, 2001. 23. "ResettlementAction Plan for PanjinWastewater Treatment Project (Draft)," Panjin Wastewater TreatmentProject Construction Headquarter, March 2001; finalversion (English and Chinese),March 31, 2001. 24. "ResettlementAction Plan for YingkouWastewater Treatment Project (Draft)," Yingkou Drainage Company,March 2001; finalversion (English and Chinese),March 31, 2001. 25. "ProcurementCapacity Assessment Report," dated February15, 2001, updatedApril 10, 2001. 26. "FinalFeasibility Report, Volume 1: SummaryReport," Montgomery Watson, April 2001. 27. "FinalFeasibility Report, Volume 2: City Reports(Jinzhou, Panjin, Yingkou)," Montgomery Watson, April 2001. 28. "LiaoRiver BasinProject: Information Glossary for ProjectNegotiations," LUCRPO/Liaoning ProvincialGovernment, May 7, 2001. 29. Liao RiverBasin Project:Final FeasibilityReport; ExecutiveSummary and ProjectImplementation Plan," LUCRPOlMontgomeryWatson, April 2001. 30. "LiaoningRiver Basin Project: Urban ManagementInformation System (UMIS), Appraisal Document,"LUCRPO/Meixner Consulting Engineers, March 2001. 31. LiaoningDraft Final,"Environmental Monitoring Capacity Building," Liaoning Environmental ProtectionBureau, LIEP-EU China, May 2001. 32. Draft PAD and legaldocuments, May 7, 2001. Including electronicfiles

- 73 - Annex 9: Statement of Loans and Credits CHINA: Liao River Basin Project May-2001 Difference between expected and actual Original Amount in US$ Millions disbursements Project tO FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Revd P056516 2001 WATERCONSERVATION 74.00 0.00 0.00 0.00 74.00 4.60 0.00 P056596 2001 SHIJIAZHUANGURBAN TRANSPORTPROJECT 100.00 0.00 0.00 0.00 100.00 0.00 0.00 P047345 2001 CH-HUAIRIVER POLLUTION CONTROL 105.50 0.00 0.00 0.00 105.50 0.00 0.00 P045915 2001 URUMOtURB.TRANSP 100.00 0.00 o.00 0.00 100.00 3.73 0.00 P058843 2000 GUANGXIHWY Project 200.00 0.00 0.00 0.00 192.00 13.67 0.00 P042109 2000 CH-BEIJINGENVIRONMENT 11 349.00 0.00 25.00 0.00 373.02 37.22 0.00 P058844 2000 3RD HENAN PROV HWY 150.00 0.00 0.00 0.00 142.50 -4.83 0.00 P056424 2000 TONGBAIPUMPED STCRA 320.00 0.00 0.00 0.00 320.00 15.23 0.00 P045264 2000 SMALLHLDRCATTLE DEV 93.50 0.00 0.00 0.00 83.24 21.24 0.00 P049436 2000 CN-CFIONGQINGURBAN ENVIRCNMENT 200.00 0.00 0.00 0.00 200.00 7.00 0.00 P045910 2000 CH-HEBEIURBAN ENVIRONMENT 150.00 0.00 0.00 0.00 142.52 0.52 0.00 P064730 2000 Yangtze Dike StrengtheningProject 210.00 0.00 0.00 0.00 198.90 26.40 0.00 P050036 1999 ANHUI PROVINCIALHWY 200.00 0.00 0.00 0.00 139.88 17.72 0.00 P051705 1999 FUJIAN 11HWY 200.00 0.00 0.00 0.00 175.44 55.94 0.00 P043933 1999 CH-SICHUANURBAN ENVIRONMENT 150.00 2.00 0.00 0.00 101.90 14.77 0.00 P051856 1999 ACCNTGREFORM & DEV 27.40 5.60 0.00 0.00 25.61 20.14 0.00 P049665 1999 ANNING VALLEYAG.DEV 90.00 30.00 0.00 0.00 77.08 4.74 0.00 P041268 1999 NAT.HWY4-HUBEI/HUNAN 350.00 0.00 0.00 0.00 271.10 30.77 0.00 P046051 1999 CN-HIGHEREDUC. REFORM 20.00 50.00 0.00 0.00 39.45 25.32 0.00 P046829 1999 RENEWABLEENERGY DEVELOPMENT 100.00 0.00 35.00 0.00 100.00 17.50 0.00 P046564 1999 WESTERN POVERTYRED 60.00 100.00 0.00 0.00 128.42 25.17 0.00 P051888 1999 GUANZHONGIRRIGATION 80.00 20.00 0.00 0.00 80.79 24.24 0.00 P041890 1999 LIAONINGURB TRANSP 150.00 0.00 0.00 0.00 117.48 49.98 0.00 P058308 1999 CN-PENSIONREFORM PJT 0.00 5.00 0.00 0.00 4.68 4.19 0.00 P036953 1999 CN-HEALTHIX 10.00 50.00 0.00 0.00 52.68 7.92 0.00 P057352 1999 CN-RURAL WATERSUPPLY IV 16.00 30.00 0.00 0.00 40.79 9.42 0.00 P056216 1999 LOESSPLATEAU II 100.00 50.00 0.00 0.00 119.52 40.25 0.00 P060270 1999 ENTERPRISEREFORM LN 0.00 5.00 0.00 0.00 4.80 6.22 0.00 P003653 1999 CONTAINERTRANSPORT 71.00 0.00 0.00 3.13 59.83 60.93 0.00 P042299 1999 TEC COOPCREDIT IV 10.00 35.00 0.00 0.00 40.38 -2.37 0.00 P063123 1999 YANGTZEFLOOD EMERGY 40.00 40.00 0.00 0.00 10.00 8.95 7.62 P045788 1998 TRI-PROVINCIALHWY 230.00 0.00 0.00 0.00 143.19 63.43 0.00 P036414 1998 CH-GUANGXIURBAN ENVIRONMENT 72.00 20.00 0.00 0.00 83.93 32.16 0.00 P035698 1998 HUNANPOWER DEVELOP. 300.00 0.00 0.00 0.00 297.00 159.50 0.00 P036949 1998 NAT.HWY3-HUBEI 250.00 0.00 0.00 0.00 131.77 5.11 0.00 P046563 1998 TAR1MBASIN II 90.00 60.00 0.00 0.00 99.27 43.04 0.00 P051736 1998 E. CHINAtJIANGSUPWR 250.00 0.00 0.00 0.00 193.59 184.73 127.30 P003591 1998 STATEFARMS COMMERCI 150.00 0.00 0.00 80.91 8.45 40.63 2.61 P003566 1998 CN-BASICHEAL1H (HLTH8I) 0.00 85.00 0.00 0.00 60.88 18.62 0.00 P037859 1998 EGY CONSERVATONPRO 0.00 0.00 22.00 0.00 10.99 18.93 0.00 P040185 1998 CH-SHANDONGENVIRONMENT 95.00 0.00 0.00 0.00 50.57 32.07 0.00 P003539 1998 SUSTCOAST RESDEV 100.00 0.00 0.00 0.00 67.95 22.13 0.00 P049700 1998 IAIL-2 300.00 0.00 0.00 0.00 160.14 34.40 0.00 P003614 1998 GUANGZ.CITYCRT.TRP 200.00 0.00 0.00 0.00 130.81 105.43 0.00 P046952 1998 FOREST.DEV. POOR AR 100.00 100.00 0.00 0.00 142.21 -2.91 47.84 P003619 1998 2ND INLANDWATERWAYS 123.00 0.00 0.00 0.00 107.50 60.50 0.00 P003606 1998 ENERGYCONSERVATION 63.00 0.00 22.00 0.00 57.08 10.08 0.00 P038988 1997 HEILONGJIANGADP 120.00 0.00 0.00 0.00 45.83 26.13 0.00 P003654 1997 HUNAN/GUANGHWY2-NH2 400.00 0.00 0.00 0.00 169.60 109.60 0.00 P036405 1997 WANJIAZHAIWATER TRA 400.00 0.00 0.00 75.00 103.69 79.36 4.36 P034081 1997 XlAOLtAGDI MULTI. II 430.00 0.00 000 0.00 158.23 165.22 0.00 P035693 1997 FUELEFFICIENT IND. 0.00 0.00 32.80 0.00 11.20 32.79 0.00 P044485 1997 SHANGHAIWAIGAOOIAO 400.00 0.00 0.00 0.00 349.21 124.38 27.09 P003643 1997 XINJIANGHWY II 300.00 0.00 0.00 60.00 111.11 145.45 0.00

- 74 - Differencebetween expected OriginalAmount in US$ Millions and actual disbursements' Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Fnr Revd P003637 1997 CH-NATIONALRURAL WATER IlIl 0.00 70.00 0.00 0o00 41.42 27 32 21.58 P003590 1997 QINBAMTS.POVTY RED 30.00 150.00 0.00 000 97.85 75.67 0.00 P003650 1997 TUOKETUOPOWER/INNER 400.00 0.00 0.00 102.50 226.04 290.68 7.34 P036952 1997 CN-BASICED. IV 0.00 85.00 0.00 0.00 5.24 -1.33 0 00 P003635 1997 CN-VOC.ED. REFORMPROJ 10.00 20.00 0.00 0.00 2.88 2.34 0.00 P040513 1996 2ND HENANPROV HWY 210.00 0.00 0.00 0.00 129.66 105.33 0.00 P036950 1996 CN-BASICED. POOR III 0.00 100.00 0.00 0.00 0.46 8.34 0.00 P003646 1996 CN-CHONGOINGIND POLCT 170.00 0.00 0.00 164.82 3.88 159.03 36.70 P003563 1996 ANIMAL FEED 150.00 0.00 0.00 127.50 4.82 132.32 4.82 P003569 1996 SHANGHAI-ZHEJIANGHi 260.00 0.00 0.00 53.34 22.98 76.32 15.37 P003599 1996 CH-YUNNANENVIRCNMENT PROJECT 125.00 25.00 0.00 0.00 118.39 82.37 13.97 P003638 1996 SEEDS SECTORCOMMER. 80.00 20.00 0.00 9.40 28.90 26.17 0.00 P003589 1996 CN-DISEASEPREVENTION(HLTH7) 0.00 100.00 0.00 0.00 24.16 34.39 0.00 P003594 1996 GANSU HEXICCRRIDOR 60.00 90.00 0.00 0.00 101.95 49.60 0.00 P003602 1996 CH-HUBEB URBAN ENVIRONMENT 125.00 25.00 0.00 28.32 70.28 96.44 22.22 P034618 1996 CN-LABORMARKETDEV. 10.00 20.00 0.00 0.00 15.82 18.12 0.00 P003652 1996 2ND SHAANXIPROV HWY 210.00 0.00 0.00 0.00 66.62 62.62 0.00 P003507 1996 ERTANHYDRO 11 400.00 0.00 0.00 0.00 6.69 12.33 0.00 P003648 1996 CH-SHANGHAISEWERAGEPROJECT 11 250.00 0.00 0.00 0.00 114.82 100.65 0.00 P003649 1996 SHANXIPOVERTY ALLEV 0.00 100.00 0.00 0.00 18.56 14.61 0.00 P003600 1995 TECHNOLOGYDEVELOPME 200.00 0.00 0.00 3.02 54.49 49.41 0.00 P003603 1995 CH-ENTERPRISEHOUSING&SOCSECREF 275.00 75.00 0.00 20.00 115.99 134.75 28.40 P003598 1995 CH-LIAONINGENVIRONMENT PROJECT 110.00 0.00 0.00 0.00 30.44 30.34 0.00 P003402 1995 NATURERESERVEMGMT 0.00 0.00 0.00 0.00 1.27 2.56 0.00 P003493 1995 INLAND WATERWAYS 210.00 0.00 0.00 15.00 6.41 21.41 4.01 P003571 1995 RAILWAYSVII 400.00 0.00 0.00 29.00 204.42 192.92 100.15 P003585 1995 SHENYANGIND REFORM 175.00 0.00 0.00 0.00 46.21 43.21 0.00 I\003596 1995 YANGTZEBASIN WATER 100.00 110.00 0.00 0.00 4.49 5.62 0.00 Py03634 1995 CN-MATERNAL CHLO HEALT(HLTH6) 0.00 90.00 0.00 0.00 6.78 10.06 0.00 P0 3639 1995 SOUTHWESTPOV. REDUC 47.50 200.00 0.00 0.00 34.38 55.16 0.00 P003642 1995 ZHEJIANGPOWER DEVT 400.00 0.00 0.00 0.00 72.22 55.06 0.00 P003647 1995 ECONOMICLAW REFORM 0.00 10.00 0.00 0.00 4.93 5.65 0.00 P036947 1995 SICHUANTRANSMISSICN 270.00 0.00 0.00 65.00 45.50 110.50 10.50 P036041 1995 FISCAL& TAX REF.& 25.00 25.00 0.00 0.00 6.23 8.65 0.79 P003586 1994 CH-SHANGHAIENVIRCNMENTPROJECT 160.00 0.00 0.00 0.00 40.93 40.93 5.49 P003626 1994 FUJIAN PROV HIGHWAY 140.00 0.00 0.00 0.00 32.02 32.02 25.70 P003641 1994 YANGZHOUTHERMAL POW 350.00 0.00 0.00 0.00 16.95 16.95 -3.71 P003540 1994 LOESSPLATEAU 0.00 150.00 0.00 0.00 5.22 -6.94 0.00 P003557 1994 FORESTRESOURCE DEV 0.00 200.00 16.40 0.00 7.65 11.63 -24.09 P003644 1994 XIAOLANGDI RESETTLEMENT 0.00 110.00 0.00 0.00 16.69 14.92 0.00 P003609 1994 SICHUAN GAS DEV & CONSERVATiON 255.00 0.00 10.00 0.00 60.44 57.98 0.00 P003595 1994 RED SOILS II DEVELCP 0.00 150.00 0.00 0.00 15.82 12.54 10.37 P003404 1994 SICHUAN GAS DEV, CON 0.00 0.00 10.00 0.00 0.21 0.96 0.00 P003593 1994 SONGLIAO PLAIN ADP 0.00 205.00 0.00 0.00 7.74 2.39 0.00 P003623 1993 FINANCIALSECTORT.A 0.00 60.00 0.00 0.00 19.13 13.73 13.27 P003473 1993 CH-ZHEJIANG MULTICITIES DEVELCPMENT 0.00 110.00 0.00 000 10.23 10.26 7.50 P003616 1993 TIANHUANGPING HYDRO 300.00 0.00 0.00 17.00 25.30 38.80 0.00 P003559 1993 AGRIC.SUPPORTSERVI 0.00 115.00 0.00 0.00 2.95 -2.72 0.00 P003627 1993 GRAIN DISTRIBUTiON P 325.00 165.00 0.00 0.00 111.39 112.22 58.89 P003632 1993 CN-ENVIRONMENTTECHASS 0.00 50.00 0.00 0.00 7.53 8.29 7.97 P003592 1993 REF. INSTL.& PREINV 0.00 50.00 0.00 0.00 4.78 5.39 0.00 P003597 1993 TAIHU-BASIN FLOOD CO 100.00 100.00 0.00 0.00 4.71 0.40 0.40 P003580 1993 CH-SO. JIANGSU ENVMTPROT. 250.00 0.00 0.00 8.49 1.26 9.69 0.00 P003570 1993 RAILWAY VI 420.00 0.00 0.00 2.82 19.61 22.43 10.79 P003624 1992 CN-INFECTIOUS DISEASES (HLTH5) 0.00 129.60 0.00 0.00 4.95 1.38 1.34

Total: 15101.90 3597.20 175.20 865.25 8467.39 4565.23 596.57

- 75 - CHINA STATEMENT OF IFC's Held and Disbursed Portfolio May-2001 In Millions US Dollars

Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1999/00 Bank of Shanghai 0.00 3.84 0.00 0.00 0.00 3.84 0.00 0.00 1996 BeijingHommel 3.57 0.50 0.00 3.30 3.57 0.50 0.00 3.30 1998/00 CIG HoldingsPLC 0.00 3.00 0.00 0.00 0.00 0.00 0.00 0.00 1996 CaltexOcean 21.00 0.00 0.00 40.91 21.00 0.00 0.00 40.91 1998 Chengdu Chemical 7.40 3.20 0.00 0.00 0.00 0.00 0.00 0.00 1998 Chengxin-IBCA 0.00 0.36 0.00 0.00 0.00 0.36 0.00 0.00 1987/92/94 ChinaBicycles 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1994 China WaldenJV 0.00 3.86 0.00 0.00 0.00 3.86 0.00 0.00 1994 China WaldenMgt 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 1994 Dalian Glass 0.00 2.40 0.00 0.00 0.00 2.40 0.00 0.00 1999 Dujiangyan 25.59 0.00 0.00 30.00 0.00 0.00 0.00 0.00 1995 DupontSuzhou 17.13 4.15 0.00 26.00 17.13 4.15 0.00 26.00 1994 DynamicFund 0.00 10.01 0.00 0.00 0.00 8.35 0.00 0.00 2000 Elkem Carbon 6.30 1.70 0.00 6.00 0.00 0.00 0.00 0.00 1999 Hansom 0.00 16.10 0.00 0.00 0.00 16.10 0.00 0.00 1996 Jingyang 40.00 0.00 0.00 92.31 40.00 0.00 0.00 92.31 1998 LeshanScana 6.10 1.35 0.00 0.00 4.50 1.35 0.00 0.00 1996 Nanjing Kumho 9.74 3.81 0.00 27.68 9.74 3.81 0.00 27.68 2001 New China Life 0.00 30.70 0.00 0.00 0.00 23.32 0.00 0.00 1995 NewbridgeInv. 0.00 2.13 0.00 0.00 0.00 2.13 0.00 0.00 1997 Ningbo 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1997 Orient Finance 12.38 0.00 0.00 15.48 12.38 0.00 0.00 15.48 1997/00 PTP Holdings 0.00 0.03 0.00 0.00 0.00 0.03 0.00 0.00 1997 PTP Hubei 12.63 0.00 0.00 25.38 12.63 0.00 0.00 25.38 1996 Pacific Ports 0.00 3.64 0.00 0.00 0.00 3.64 0.00 0.00 1998 RabobankSHFC 1.58 0.00 0.00 1.58 1.58 0.00 0.00 1.58 2000 SSIF 0.00 6.00 0.00 0.00 0.00 0.00 0.00 0.00 1998 ShanghaiKrupp 30.00 0.00 0.00 68.80 0.00 0.00 0.00 0.00 1999 Shanxi 19.00 0.00 0.00 0.00 8.30 0.00 0.00 0.00 1993 ShenzhenPCCP 3.76 0.99 0.00 0.00 3.76 0.99 0.00 0.00 1995 SuzhouPVC 18.33 2.48 0.00 18.50 18.33 2.48 0.00 18.50 1998 WIT 5.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1996 Weihai Weidongri 3.03 0.00 0.00 0.00 3.03 0.00 0.00 0.00 1993 Yantai Cement 10.39 1.95 0.00 5.54 10.39 1.95 0.00 5.54 1998 Zhen Jing 0.00 2.00 0.00 0.00 0.00 2.00 0.00 0.00 Total Portfolio: 252.93 104.21 0.00 361.48 166.34 81.27 0.00 256.68

- 76 - ApprovalsPending Comrmitment FY Approval Company Loan Equity Quasi Partic 2000 SBCFI 0.00 0.00 15.00 0.00 2001 Sino-Forest 25.00 0.00 0.00 0.00 2000 Wan lie Hospital 15.00 0.00 0.00 0.00 2000 CIG Zhapu 6.00 5.00 0.00 0.00 2000 CIMIC Tile 15.00 5.00 0.00 15.00 1997 Chinefarge 12.80 0.00 0.00 20.00 2000 Jinfeng 9.00 0.00 0.00 7.30 1998 Orient Fin A Inc 3.33 0.00 0.00 0.00 1998 PTP Hubei BLINC 0.00 0.00 0.00 1.50 Total PendingCommitment: 86.13 10.00 15.00 43.80

-77 - Annex 10: Country at a Glance CHINA: Liao River Basin Project East Lower. POVERTY and SOCIAL Asia & middle .. China Padltic Income Development diamond' 1999 Population. mid-year (millions) 1.253.6 1,837 2.094 Life expectancy GNP Per capita (Atlas method,US$) 780 1,000 1.200 GNP (Atlas method, USS billions) 977.8 1,833 2.513 Average annual growth. 1993-99

Population (X) 1.0 1.2 1.1 GNP Labor force (1) 1.0 1.3 1.2 GNr Gross per primary Most recent estimate (latest year avallable. 1993-99) capita enrollment Poverty (X of population below national poverty line) 5 Urban population f% of total Populati0n) 31 34 43 Life expectancy at birth (years) 70 69 69 Infant mortality (per 1,000 live births) 31 35 33 Child malnutrition (% of children under 5) 16 22 15 Access to safe water Access to improved water source (ff of population) 83 84 86 Illiteracy (f1of population age 15.) 17 15 16 Gross Drimarv enrollment (%Of school-aQepopulation) 123 t19 114 China Male 123 121 114 Lower-middle-income group Female 123 121 116

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1979 1959 1998 1999 _ .s_ _: :______Economic ratios' GOP (USS billions) 175.6 342.3 938.3 996.3 Gross domestic investmentlGDP 36.5 36.0 38.8 38,3 Trade ExDorts of goods and services/GOP 6.4 12,7 21.9 22.1 Gross domestic savinqslGDP 35.3 35.3 43.2 41.2 Gross national savinqs/GDP 35.5 35.4 41.9 39.9 Current account balance/GDP -t.4 -0.9 3.1 1,6 Domestic Interest DaymentslcOP 0.0 0.7 0.6 0.6 Savings Investment Total debtlGOP 1.2 13.1 16.5 12.8 Savigs Ie n Total debt servicelexports 0.4 9.6 8.5 5.8 Presentvalue otdebt/GDP . .. t14.4 : Present value of debtlexPorts .. .. 63,3 Indebtedness 1979-89 1989-99 199S 1999 1999-03 (average annual growth) GDP 10.3 10.5 7.8 7,t 7.2 China GNP Per capita 8.9 9.0 6,7 6.3 6.2 Lower-middle-income group ExDorts of goods and servicees 19.6 14.0 7.3 13.9 10.5

STRUCTURE of the ECONOMY 1979 1989 1998 1999 Growth of investment and GDP (%) (I% of GOP) 30 Agriculture 31.2 25.0 18.6 17.3 Industry 47.4 43.0 49.3 49.7 20 Manufacturing 40.2 34,5 37.6 37.8 l _ Services 21.4 32.0 32.1 32.9

Private consumption 49.5 52.7 44.7 45.8 94 95 96 97 98 99 General qovernment consumption 15.2 12.0 12.1 12.9 -G01 P GDP Imports of goods and services 7.5 13.5 17.5 19.1

1979-89 1989-99 1998 1999 Growth of exports and Imports (%) (average annual growth) Agriculture 6.0 4.4 3.5 2.8 30 Industry 11.3 14.2 B.9 8.1 20 Manufacturinq 10.5 13.6 8.7 7.7 Services 14.0 9.0 8.3 7.5 10 Private consumption 10.1 8.7 6.2 8.3 General aovernment consumotion 9.9 9.8 8.4 7.9 0 Gross domestic investment 11.0 12.0 7.6 3.8 94 95 96 97 9s 99 Imports of goods and services 20.4 12.2 3.0 20.7 - Exports Imports Gross national Product 10.5 10.2 7.8 7.3

Note: 1999 data are preliminary estimates. 'The diamonds show four key indicators in the country (in bold) comDared with its income-qroup average. If data are missing, the diamond will be incomplete.

- 78 - China

PRICESand GOVERNMENTFINANCE 1979 1989 1998 1999 Inflatton(%) DomesticpHces 30 (% change) Consumerprices .. 18.0 -0.8 -1.4 20 ImplicitGDP deflator 3.9 8.8 -2.4 -2.2 10 Governmentfinanceia (% of GDP,includes current grants) 94 95 96 97 Currentrevenue .. 19.3 13.0 14.2 -10 Current budgetbalance .. 2.8 1.4 1.2 -GDP deflator CPt Overall surplus/deficit -3.4 -0.9 -1.2 -2.1

TRADE 1979 1989 1998 1999 Exportand Importlevels (US$mill.) (US$ millions) Total exports (fob) 13,658 52,551 183,529 194,931 200,000 Food .. 6,145 10,619 10,459 Fuel 4,321 5,181 4,646 150,000L Manufactures .. 37,460 163,157 175,003 Total imports (cif) .. 59,140 140,166 165,718 .00_ Food .. 4,192 3,793 3,618 50s0000 11111 Fuel and energy 1,650 6,773 8,912 Capital goods .. 18,207 56,768 69,469 93 94 95 96 97 93 99 Exportprice index (1995=100) 25 38 88 81 Importprice index (1995=100) 24 38 89 84 U Exports * Imports Terms of trade (1995=100) 104 100 99 97

BALANCEof PAYMENTS 1979 1989 1998 1999 Current account balance to GDP (0/o) (US$ millions) Exportsof goodsand services 15,046 57,101 207,586 218,711 4 Importsof goodsand services 17,842 60,655 165,899 189,799 Resourcebalance -2,796 -3,554 41,687 28,912 Net income -319 229 -16,645 -17,973 L 1 m ii 1 Net current transfers 626 381 4,278 4,943 Currentaccount balance -2,489 -2,944 29,321 15,882 0. L 94 95 96 97 9 99 Financingitems (net) 2,489 2,386 -23,073 -7,377 Changesin net reserves 0 558 -6,248 -8,505 -2 Memo: Reservesincluding gold (US$ millions) .. .. 149,811 158,337 Conversionrate (DEC,locallUSS) 2.3 4.9 8.3 8.2

EXTERNALDEBT and RESOURCEFLOWS 1979 1989 1998 1999 (USS millions) Composition of 1999 debt (USS mill.) Totaldebt outstandingand disbursed 2,183 44,932 154,603 127,639 IBRD 0 2,330 9,644 10,639 G 4 IDA 0 2,296 8,693 8,907 . A: 10,639 Totaldebtservice 61 5,650 18,186 13,204 IBRD 0 223 941 1,161 D/4, IDA 0 14 97 118 Compositionof net resourceflows Officialgrants -30 143 91 201 E:24,238 Officialcreditors 199 2,277 2,288 3,913 F: 798,76 Privatecreditors 1,580 3,801 1,642 -2,945 Foreigndirectinvestment 57 2,613 41,118 38,752 Portfolioequity 0 -180 -3,927 -9,836 WorldBank program Commitments 0 1,760 2,636 2,311 A -IBRD E - Bilateral Disbursements 0 1,111 2,066 1,780 8- IDA D - Other multilateral F - Private Principalrepayments 0 62 434 558 C- IMF G -Short-term Netflows 0 1,049 1,632 1,222 Interestpayments 0 175 604 720 Net transfers 0 874 1,028 502

DevelopmentEconomics _ - 79 - Additional Annex 11

Proposed Implementation Schedule CHINA: Liao River Basin Project

Year 2001 2002 2003 2004 2005 2006 PROJECTCOMPONENT 1|213|41|2|3|4 1|2|314 12134 1|2131411 2|3|4 T. Panjin Wastewater Management Design and Documentation . _m m . * . Tender Procedure * Construction _ _ _ . _ _ _ 2. Yingkou Wastewater Management Design and Documentation _ U U * U * m U m Tender Procedure **** m * Construction ___ . _ . ______. 3. Yingkou Paper Making Design and Documentation Tender Procedure Construction _ _ _ _ m 4. Jinzhou Wastewater Management - - - Design and Documentation mU m U m Tender Procedure * _ . ______Construction ______5. Jincheng PapoerMaking Design and Documentation Tender Procedure Construction, 6. U-rbanMgt Information Systems Design and Documentation Tender Procedure Implementation 7. Environmental Quality Monitoring Design and Documentation Tender Procedure Implementation P Anex8 mee 8. Environm-entalSubprojects Subloans made i- MMM u*E 9. institutional Strengthening, Construction Mgmt Supervision, and Studies Design and Documentation Tender Procedure Implementation,M EMMM M Note: The detailed arrangementsof the implementationof the first year's construction/activitiesare shown in the ProjectSummnary, including the Project ImplementationPlan. See Annex 8.

- 80 - Additional Annex 12

EnvironmentalAssessment and MitigationMeasures Summary CHINA:Liao RiverBasin Project

A. Background

The Liaoning Provincial Scientific Research Institute for EnvironmentalProtection carried out the EnvironmentalAssessment (EA) of the proposed Liao River Basin Project (LRBP) in accordancewith Chinesenational and Bank procedures,with supportfrom independentinternational consulting specialists. Various draftswere reviewedand discussedin detail during project preparation.The draft EA documents were submittedto the Bank in January 2001 and reviewedby the Bank during a mission in March 2001. The final EA Report,Environmental Action Plan (EAP) and Executive Summary(ES) were submittedto the Bank January 17, 2001 and found to be satisfactory.The EA Report was sent to the Bank's InformationCenter January 25, 2001. During the EA work, the local people were consulted,and their opinionshave been reflectedin the project designand environmentalmitigation measures, as appropriate.

The policy and administrativerequirements for environmentalassessment of developmentprojects in China were followedduring preparation and evaluationof the EA, as well as the Bank's policy.Major laws and regulationsapplied to the EA are as follows:(a) EnvironmentalProtection Law of the People's Republicof China;(b) AtmosphericPollution Control Law; (c) EnvironmentalNoise ControlLaw; (d) Water Pollution ControlLaw; (e) CulturalHeritage Protection Law; (f Notice of Strengtheningthe EA ManagementWork of ConstructionProjects financed by InternationalFinancial Organizations; and (g) TechnicalGuidelines for EnvironmentalImpact Assessment.

B. Brief ProjectDescription

The LRBP includesthe followingcomponents for which EAs have been completed:

* Panjin Wastewatertreatment and associatedsewerage in Panjin * Jinzhou Wastewatertreatment and associatedsewerage in Jinzhou * Yingkou Wastewatertreatment and associatedsewerage in Yingkou * Industry Cleanerproduction investments at two large pulp and paper mills

Central to the project are capacity- and institution-buildingmeasures, urban information systems development,training and environmentaland water qualityimpact monitoring.

C. Baseline Environmental Description

Natural Environment

Liaoning Province is located in the north east of China and bounded by the Jilin Province and the autonomousregion of Inner Mongoliato the North, by DPR Korea to the east, by the Bohai Sea to the south and by Hebei Provinceto the west. The LRB lies withinLiaoning and also withinJilin Provinceand

- 81 - Inner Mongolia; some 44 percent of the total basin area of 95,500 km2 is within Liaoning, occupying 28.8 percent of the area of the Province. It comprises two separate rivers, the Liao and the Daliao, the latter basin being located entirely within Liaoning. The Xiaoling River Basin is located entirely within the western part of Liaoning and to the west of the LRB. The Liao Basin rivers and the Xiaoling discharge into the Bohai Sea. This is a semi-enclosed water body connecting with the Yellow Sea only by the Bohai Strait.

The provincial capital Shenyang is located in the upper reaches of the Hun River, a tributary of the Daliao, some 58 km downstream of the large multipurpose Dahuofang Reservoir. The other project cities within the LRB are Panjin, located on the Liao River, and Yingkou, located on the Daliao estuary. The remaining project city Jinzhou is located on the Xiaoling River.

The basin topography generally slopes from north to south and from east and west toward the center. The elevations of the more inland cities of Shenyang and Panjin are 30-60 m above sea level, with those of the coastal cities of Yingkou and Jinzhou being 4-7 m. Liaoning has a rich and complex geology. The mountainous areas of east and west Liaoning are composed of a diverse assemblage of igneous, metamorphic and sedimentary rocks that are hosts to mineral deposits of national importance. The Liao River valley forms a low flat plain between the mountainous areas and erosion products of the mountains have been deposited in the river rift valley to form a sedimentary sequence containing significant petroleum resources.

The climate of the basin is characterized by distinct seasons. Spring and summer are mild and the winter period from November to March is extremely cold, with minimum temperatures in January as low as -30 C. This is reflected in the long frost periods for the project cities, ranging from 130 to 151 days. Annual average precipitation in the project cites ranges from 550 mm in Yingkou to 800 mm in Panjin. There is a pronounced wet season lasting from June to September and accounting for 80 percent of annual precipitation.

Socioeconomic Situation

The total population of Liaoning province is approximately 41 million, of which 56 percent (approximately 22.8 million) reside in the basin. The province comprises 14 municipal areas of which 8 basin municipalities lie within the basin; these municipalities generate 63 percent of the provincial Gross Regional Domestic Product (GRDP). The average per capita GRDP of Liaoning was Y9,415 (1998), which is almost 50 percent higher than the national per capita GDP of Y6,404.

The principal cities in the basin are major centers of industry in China, and the industrial sector is based on heavy industry processing and manufacture, principally oil, chemicals, steel and machinery production. The portion of the river basin in Liaoning (29 percent of the total) accounts for 93 percent of the gross industrial output of the basin as a whole. The establishment of much of the industry in Liaoning occurred in the early part of the 20th century and many of the enterprises are more than 50 years old. Many are based on the use of machinery and equipment that is outdated and inefficient, much dating from the 1950s.

In spite of the harsh climate the basin is also an important agricultural area, with farmland accounting for approximately 20 percent of the total basin area. In 1995 the gross agricultural product was Y47 billion. The estuary and the Bohai Sea coastal zone are used for capture fisheries and increasingly for aquaculture, principally prawns.

- 82 - Water Resources

The LRB is limited in terns of its water resources. The surface water resource is equivalent to only 535 m3 per capita, which is about 20 percent of the national average, and the average water quantity available for agriculture is only 220 m3/mu (3,300 m3/ha), which is only 12 percent of the national average. In the Xiaoling River there is little or no flow during the dry season. The limited water resources of the basin are heavily exploited, with utilization rates of 81 percent and 43 percent for surface and groundwater respectively. As a consequence municipal wastewater accounts for a substantial proportion of overall river flows downstream of cities during the dry season.

The situation is particularly acute in the case of the Hun river downstream of Shenyang, where wastewater from Fushun and Shenyang represents the majority of the river flow. The situation appears less acute in the case of Yingkou but in addition to the city wastewater there is a discharge of highly polluting wastewater from a pulp and paper mill.

Water demands are dominated by agriculture, which accounts for 64 percent of total demands. Industry accounts for a further 21 percent and municipal use in urban areas for about 11 percent. Most cities in the basin use groundwater for municipal supply. The aquifers from which supplies are derived are recharged at least in part by the rivers in the basin, and are therefore at risk of pollution.

Water Quality

The limited water resources of the basin, which result in extremely low river flows during the dry season, and the extensive exploitation of water resources result in poor water quality in the basin rivers. This is exacerbated by the generally low degree of municipal wastewater treatment. Of the river sections regularly monitored more than 90 percent fail to meet the Category V standard of water quality, the least stringent of the water quality classifications. All river sections in the province cities fail to meet the Category V standard.

The impact of the poor surface and groundwater quality has been widespread both throughout the basin and in the Bohai Sea as follows:

* Poor drinking water quality in urban areas--in many cities aquifers have been abandoned due to pollution * Poor drinking water quality in rural areas--pollution of surface water has forced rural communities to use groundwater for potable supply * Pollution of irrigation water--poor quality surface water had increased pollution of soils, in extreme cases leading to farms being abandoned * Virtual extinction of fisheries in basin rivers--fisheries almost entirely restricted to reservoirs * Pollution of coastal waters of the Bohai Sea--in particular the high nutrient loads carried by the basin rivers have resulted in increased incidence of "red tides."

In addition there has also been degradation of the Shaungtaizi wetland near the Daliao River estuary about 30 km from Panjin. This wetland has been designated a National level Natural Protection Zone because of its significant ecological value. There are 321 resident species including 236 birds and the wetland is an important habitat for migratory birds of which some hundreds of thousands stay temporarily at the wetland during migration. The wetland is at risk from pollution from the city of Panjin and the Liao River Oilfield.

- 83 - FutureWater QualityObjectives

Pollution of the LRB has reached such a level that it was included in national priority "Three Rivers Three Lakes" program. Management plans had been prepared for each administrative area in the basin, initially at municipal and combined into a provincial plan. This formed the basis of the "Liao River Basin Water Pollution Prevention under the Ninth Five-Year Plan and Planning for the Year 2010," and was approved by the State Council in 1999. the objectives of this plan were:

* Targeted reductions in COD loads ,both in the basin as a whole and from individual administrative areas; and * Compliance by all basin rivers with the requirements of Category V of the national environmental quality standard.

The first objective relates to a single pollutant, whereas the second implies a need to reduce the loads of other pollutants of which the most important is ammonia. Achievement of both plan objectives will require substantial levels of expenditure over many years and the focus of the project is the first phase of wastewater treatment investment targeted at reducing wastewater COD loads. This will result in important improvements both in terms of river water quality and protection of groundwater quality.

A complication arises in terms of the criterion of compliance with the environmental quality standards. In the dry season there is little natural flow in the basin rivers and therefore very limited dilution and assimilative capacity.

Compliance with standards on a year round basis implies a very stringent wastewater discharge standard, probably unachievable in the harsh winter climate of the basin. Moreover, during the driest winter months the basin rivers are largely subjected to ice cover and have limited beneficial uses. An approach was therefore derived during project preparation based on compliance with standards on a seasonal basis reflecting the desired beneficial uses of the basin rivers, principally agricultural irrigation and aquifer recharge. On this basis the wastewater treatment interventions were targeted at achieving Category V standards for COD in the basin rivers based on a 75 percentile low flow in April, the beginning of the irrigation season.

D. EnvironmentalBenefits

The project municipal wastewater treatmnentinvestments will reduce the annual COD loads to the Liao basin by approximately 143 000 tons and will result in a significant improvement in water quality in the basin rivers as may be seen in Figures 1-3. These show the concentrations of COD along the Liao and the Daliao tributaries the Hun and Taizi both with and without the project municipal wastewater treatment investments. The improvement in water quality in the Hun river as a result of wastewater treatment at Shenyang is particularly important because of the very low level of dilution of the large Shenyang wastewater flow.

However, from Figures 1-3 it is clear that the project, although dealing with a number of major pollution loads including that from Shenyang, the largest individual municipal wastewater pollution load in the basin, will not of itself achieve the overall desired improvement water quality throughout the basin as a whole. To meet the Category V water quality objective on a basin-wide basis will require much greater reductions in COD loads (in the order of 600,000 tons/year) and it will therefore be necessary also to provide effective wastewater treatment both in the other cities in the basin and equally importantly for the major industries that discharge wastewater direct to the basin rivers. This is particularly the case for the Yingkou pulp and

- 84 - Liao Rliver Modelled COD Concentration Hun River Modelled COD Concentration

CODconoantralion (mgII) CODConmentratIon QngAj 0 0

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4 9 3 3 _ -1~~~~~~~~~~~~~~~~~~~~258 'C

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450 400 350 300 250 200 150 100 50 0 Chlnag. ({km)

- Yer 20C05No.WWTWs Year2005 - OnlyWord BankWWTWs -Year 2025- All WWTWB& No Ind-sy WWVTW - Yea, 2025- All WWTW. & All IndosIryWWTWM - ' CODCla.s V init (40 mgfl)

The improved surface water quality will bring other environmental benefits to the project regions. These will include reduced risk of groundwater contamination, compliance or approach to compliance with irrigation water standards, improved sanitation and hygiene for residents near LRB rivers and enhanced environmental aesthetics to communities of the project areas.

The treatment of the red liquor from pulp production at the Yingkou Paper-Making Company will reduce the COD load to the Daliao by up to 80,000 tons/year and in addition will result in the production of 200,000 tons/year of a lignosulfonate binder product for tuse in the metallurgical industries in Liaoning. At the Jincheng Paper-Making Company the replacement of the existing mercury-based electrolytic process for production of chlorine (for use in pulp bleaching) by a more energy-efficient membrane-based system will both eliminate the discharge of mercury in the wastewater from the mill and will reduce electricity consumption per unit of chlorine (and hence of pulp) by about 40 percent.

E. Potential Environmental Impacts and Their Mitigation Measures

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.

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 will be on the order of 300 tons of dewatered sludge cake per day. Sludge management plans have been produced by the project cities, but although composting is proposed in some cases, the dominance of industrial wastewater in the

- 86 - urban wastewater stream will restrict the use of the sludge in agriculture. Moreover, the harsh winter climate would preclude the use of sludge for a major portion of the year. Disposal of at least part of the sludge will therefore have to be by landfill, and dedicated environmentally secure landfill facilities will be provided for at least three years until longer-term sludge management systems and facilities have been provided.

Construction Spoil. Substantial quantities of spoil will be generated as a result of excavation for pipeline installation and for the construction of wastewater treatment plants. Most of the material will be reused on site, and spoil disposal plans have been prepared for each project component where excess spoil will be generated. It is expected that all spoil will be beneficially used in other local construction activities and therefore spoil disposal will not be problematic.

Impact on Agriculture. Where the routes of pipelines crosses agricultural land, the fertility of land will be protected by the careful separate storage and stockpiling of topsoil and subsoil for subsequent replacement.

Other Construction Impacts. 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 concemed.

Other Operational Impacts. The other significant potential impacts of the operation of wastewater treatment plants and pumping stations are noise and, in the case of wastewater treatment plants, odor. These will be minimized by the siting of the plants and by the provision of buffer 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.

F. Public Consultation and Information Disclosure

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 of the positive and negative impacts of each of the proposed schemes. All schemes proposed were well received by the public.

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

Public Participation Phasing and Goals in the Four Cities

Round Roundseparation Major participationgoals

I st round Environmentalscreening Identify stakeholdergroups; secure proponentcommitment (screening) to public participationprogram; agree on extent and mode of participation

2nd round Shortlyafter environmental Identifystakeholders; disclose relevant project screening,before the EA TOR information;determine stakeholder concerns and include finalized them in the TOR.

- 87 - 3rd round After EA report (draft) is Disclose informationon study methodsand findings;agree prepared on proposed mitigationmeasures with stakeholders;let stakeholdersdetermine whether their concerns are adequately addressed

* 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 of the project investments.

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

* 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.

* Survey of the Public: The survey invited 4167 individuals, 76 government agencies, 65 NGOs, 89 corporations and 10 villages, whose opinions were considered and inquiries answered.

- Survey of the Project-Affected People: 1262 primarily rural residents of villages adjacent to the project sites.

The Environmental Assessment and Resettlement Action Plans were made public locally in the project cities; this availability was advertised through the local press. Following submission to and review by 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.

- 88 - Panjin Wastewater

Public Consultation Substance By whomand with When Where Bank's requirement whom Interviewduring field social By LiaoningESRI Jul 2000 Wangjiavillage OD 4.20; OD 4.30 and OP economicsurvey and the first With affected villagers 4.01 public meetings and the general public RAP outline consultation Draft EA TOR consultation By LiaoningESRI Aug 2000 Wangjiavillage OP4.01: consultation With affected villagers during TOR stage (their and the generalpublic work done before OP requirement) EA TOR consultation OP4.01:consultation duringTOR stage (their work done before OP requirement) Distributionof questionnaires By LiaoningESRI May 2000 Along interceptors and key EA and RAP messages To affectedvillagers and around the in bullet point format and the general public treatmentplant construction site Distributionof project By LiaoningESRI Dec 2000 Wangjiavillage OP4.01: informationand draft EA and To affectedvillagers Consultationprior to RAP in second public meetings and the general public finalization of draft report Final EA Final RAP

Information Disclosure Document Date of Disclosure Location Bank's Requirement Copiesof EA and TOR and RAP May 2000 PanjinEnv. MonitoringStn. OP 4.01; OD 4.20; outline 107Sheyou St. OD 4.30; BP 17.50 Questionnairesand key EA and Jun 2000 Villagesand affected RAP messages communities Draft EA and RAP reports Sep 2000 Villagesand affected communities Final EA and RAP reports Jan 15,2001 PanjinEnv. MonitoringStn. 107 Sheyou St. Notice for availabilityof EA and Dec 12,2000 PanjiinEvening News (prime RAP reports at PMO and CDC localnewspaper) Resettlementinformation booklet _

-89 - Jinzhou Wastewater

Public Consultation Substance By whom and with When Where Bank's requirement

whom ______Interview during field social By Liaoning ESRI Jul 2000 Dishuilu village OD 4.30 and OP 4.01 economic survey and first With affected villages public meetings and the general public RAP outline consultation Draft EA TOR consultation By Liaoning ESRI Aug 2000 Dishuilu village OP4.0 1: consultation With affected villages during TOR stage and the general public EA TOR consultation OP4.01: consultation during TOR stage Distribution of questionnaires By Liaoning ESRI May 2000 Along interceptors and key EA and RAP With affected villages and around messages in bullet point and the general public treatment plant format construction site Distribution of project By Liaoning ESRI Nov 2000 Dishuilu village OP4.01: information and draft EA and With affected villages Consultation prior to RAP in second public and the general public finalization of draft report meetings Final EA Final RAP

Information Disclosure Document Date of Disclosure Location Bank's Requirement Copies of EA and TOR and RAP May 2000 Jinzhou PMO OP 4.01; OD 4.30; outline BP 17.50 Questionnaires and key EA and Jun 2000 Neighborhood committees RAP messages Village meeting room Draft EA and RAP reports Sep 2000 Jinzhou PMO Final EA and RAP reports Jan 15, 2001 Jinzhou PMO Notice for availability of EA and Dec 11, 2000 Jinzhou PMO RAP reports at PMO and CDC Resettlement information booklet

- 90 - Yingkou Wastewater

Public Consultation Substance By whom and with When Where Bank's requirement whom Interview during field social By Liaoning ESRI July 2000 Yingkou Utility OD 4.30 and OP 4.01 economic survey and first With affected villages Bureau public meetings and the general public RAP outline consultation Draft EA TOR consultation By Liaoning ESRI Aug 2000 Yingkou Utility OP4.0 1: consultation With affected villages Bureau during TOR stage (their and the general public work done before OP requirement) EA TOR consultation OP4.01: consultation during TOR stage (their work done before OP requirement) Distribution of questionnaires By Liaoning ESRI May 2000 Along interceptors and key EA and RAP With affected villages and around the messages in bullet point and the general public treatment plant format construction site Distribution of project By Liaoning ESRI Dec 2000 Yingkou Utility OP4.01: information and draft EA and With affected villages Bureau Consultation prior to RAP in second public and the general public finalization of draft report meetings Final EA X = ___ X_X__ Final RAP

Information Disclosure Document Date of Disclosure Location Bank's Requirement Copies of EA and TOR and RAP May 2000 Yingkou PMO, 37 Qinjian St. OP 4.01; OD 4.30; outline BP 17.50 Questionnaires and key EA and Jun 2000 Neighborhood committee RAP messages Village meeting room Draft EA and RAP reports Nov 2000 Yingkou PMO, 37 Qinjian St. Final EA and RAP reports Notice for availability of EA and Nov 28, 2000 Yingkou Daily (prime local RAP reports at PMO and CDC newspaper) Resettlement information booklet .

- 91 - Additional Annex 13

Resettlement CHINA: Liao River Basin Project

ProjectDescription

1. The proposed project consists of (a) three wastewater treatment plants, (b) industrial pollution control schemesat two paper mills, (c) institutionalstrengthening and (d) severalnonphysical components related to environmentalmanagement. The project schemesare located in two cities in the Liao River Basin and one city in the adjacentXiaoling River Basin. ResettlementPlanning 2. The three city project offices, together with contracted resettlement specialist and the foreign consultants,carried out the resettlementplanning. These resettlementplanning activities provide a detailed record of project adverseimpacts, includingland, houses, industries,institutions, and the number of people affected. Socioeconomicsurveys were conducted through questionnaires,interviews and focus group discussions as part of the resettlement planning process. Different methods of construction have been exploredto reduce adverse impacts.Three resettlementaction plans (RAPs) were prepared. ProjectImpacts 3. The project componentswill require land acquisition,temporary leasing of land, relocation of houses and business. Land acquisitionis only required for the wastewatertreatment plant and pumping stations while the interceptors mostly require only leasing of land for the construction period. The interceptorcomponent will requiredemolition of residentialhouses. The details of impacts are as follows. Summaryof ProjectImpacts Component Land Businesses Acquisition PAected PAPs (No.) Ha No. Land House Employee Jinzhou City WastewaterTreatment Plant 10.0 1 36 23 Interceptors Panjin City WastewaterTreatment Plant S.2 60 Interceptors 16 1,354 182 Pumping stations 0.4 29 Yinkou City WastewaterTreatment Plant Interceptors 137 213 Pumping station 0.1 21 Total 18.7 154 125 1,375 418

* Exclusiveof state-ownedland to be allocatedand land to be temporarilyleased. Legal Framework 4. The RAP was prepared in line with relevant Chinese laws, regulations and World Bank OperationalDirective 4.30 on InvoluntaryResettlement. The followingbasic principles were adopted for resettlementplanning: * Compensationwill be paid at replacementcost without depreciation

- 92 - * Land compensationwill be paid before acquisition * Housecompensation will be paid before constructionof the new house * Compensationrates will be finalizedthrough consultation * Lack of legal title will not bar a PAP from his or her entitlements * The objectiveof resettlementis to enable the PAPs to improveor at least restore their living standard RehabilitationStrategy, Ethnic Minoritiesand ActionPlan 5. For farmers who lose farmland to the wastewater treatment plants, the livelihood rehabilitation strategy follows the traditional Chinese approach, which is land and agriculture based, and depends on village collectives for livelihood restoration.All affected farmers will be allocated farmland within the village and the land compensationfund will be paid to the village and used collectivelyin the villages for agricultureand sidelinedevelopment. 6. About 1,375people in 324 householdswill lose theirresidential houses to the project.The majority of these households are urban residents. After extensive consultationswith the affected population, the project has planned to offer two options for their rehabilitation,i.e., cash compensationand replacement housing. Urban residents could choose to find and buy their own replacement housing with the cash compensation.For those who do not want to find and buy their own replacementhousing, the project will provide ownership of a replacement housing unit in government-builtapartments. For relocating rural residents, the project will provide compensation at replacement cost with no depreciation, and any salvageablematerials will belong to the affected residents. They will receive alternative housing plots withintheir villagesif they want to build replacementhousing by themselves. 7. One hundred fifty-four shops, stalls and governmententities will be affected. The number of employees affected is 418. Most of them will be affected temporarily during the constructionof the interceptors and will resume business after the construction.Compensation for business loss has been provided for in the RAP. A few governmentagencies will require relocation and new sites have been planned for them. The project will also impact some public infrastructure.Compensation based on replacementvalue will be paid to the relevant governmentagencies or local governmentsto restore the affected infrastructureand services. 8. The proposedinvestments in Panjin City would affectsome ethnic minority householdsas defined by the government.A survey to identify ethnic minority groups found that, of the 1,354 relocating population in the city, 208 people belong to officially defined ethnic minority groups, including 83 Manchurian, 121 Korean and 4 Mongolianpersons. The survey and interviews found that all the affected persons were urban residents, scatteredthroughout the project area, and the project would not have specific impact on ethnic minority communities.Project information was disseminated among them during the consultation sessions. Their feedback has been incorporatedinto the RAPs and the consultation session concludedthat the resettlementand rehabilitationmeasures plannedunder the RAPs, would be adequateto address and mitigateany project impact on such ethnic minoritygroups. ManagementOrganization 9. A multilevel organization has been established for the implementation of the RAPs. This organizationincludes the Project ResettlementOffice, four city leadinggroups and offices for resettlement, and project offices in the drainage companies.An independentmonitor has been selected for resettlement implementation.Details of staffing and their responsibilitiesare providedin the RAP. Public ConsultationAnd Participation 10. Public consultation and participationhas played a key role in formulatingthe RAP. The affected farmers, village leaders and local governmentsparticipated in the census, inventory and they have been

- 93 - widely consulted through the socioeconomicsurvey and social assessment on the project alignment, compensation rates, livelihood rehabilitation strategy and relocation sites. Their feedback has been incorporatedin the RAP. The RAP containsa list of major consultationsessions. 11. Public consultationand participation will continue in the RAP implementation.Affected people will play a key role in farmland allocation,new site identificationand new house construction.Project information will be provided to the affected people through television, radio broadcast, newspapers, bulletins and posters. The RAP will be summarized into a resettlement information booklet (RIB) and distributedto every affectedhousehold. Regular consultationmeetings will be held in villages. The RAPs were placed in the Bank Info Shop on January 26, 2001 and in all county/city libraries on September5, 2000. The availabilityof these reports in these librarieswas advertisedin four local newspapers. Grievance Redress Mechanism 12. A mechanism has been designed for grievance redressal under the project. All grievances can be filed in both written and verbal forms. The redressal channel lies within the project management systems at village, township, county and project resettlement offices. Recording requirements and timeframe have been established for grievance resolution. This mechanism will be disclosed as part of the RIB. ResettlementImplementation Monitoring 13. Intemal and external monitoring have been designed as part of the project. The project resettlement offices will carry out internal monitoring of the resettlement implementation. The monitoring procedures, content, staffing, responsibility,timeframe and reporting have been detailed in the RAP. An external monitor and a resettlement advisor have been contracted for independent monitoring of the RAP implementation. Independent monitoring will cover physical progress of RAP implementation, including compensation payment, allocation of residential sites, farmland allocation, restoration of infrastructure. The independentmonitor will also review the public consultationprocess, operationof the resettlementproject offices, grievance redress mechanisms and restoration of livelihood of the affected farmers. Independent monitoring will be conducted twice a year during the project implementation period. CompensationAnd ResettlementBudget 14. The RAPs contain compensationrates for various impacts. Land compensationrates are included in land compensationand resettlementsubsidy. Different rates were developedfor different types of land in line with the "Land Administration Law". Compensation rates for structures are calculated for replacement costs. The affected infrastructure will be compensated for reconstruction and the compensation budget was finalized through negotiation with the owning government agencies. 15. The RAPs contain detailed resettlement budget that covers all basic resettlement costs including management, contingencies, survey, design and monitoring. The basic resettlement cost includes compensation for land, house, other structures, standing crops and trees, business profit loss, reconstruction of affected infrastructure and relocation subsidies. Management cost is included in the budget as well. A total contingency of 10 percent is provided in the budget. The total resettlement budget is estimated at Y64.6 million, equivalent to US$7.81 million. Fund disbursement procedures and monitoring mechanisms are designed and documented in the RAP.

- 94 - Additional Annex14

FinancialManagement Review CHINA:Liao RiverBasin Project

1. ExecutiveSummary

The task team has conducted a financial management assessment of the adequacy of the financial management arrangements of the Liao River Basin Project (the Project).

The Liaoning Urban Construction and Renewal Project Office (LUCRPO) has overall responsibility for the preparation, training and implementation of the Project. The Project implementation would be undertaken at the municipal level. The Project would use "Accounting Standards for State-owned, Infrastructure-oriented Projects" during the initial construction stage and switch to "Accounting Standards for Industrial Enterprises" afterwards. In terms of disbursements, the Project would be producing project financial management reports in line with the format and content agreed to between the Bank and the Government. In addition, traditional disbursement techniques would be used as opposed to the PMR-based disbursement.

In line with other Bank-funded projects in China, the Project would be audited in accordance with Government Auditing Standards of the People's Republic of China. The Foreign Investment Audit Bureau of the China National Audit Office (CNAO) would have the overall responsibility for auditing the project accounts and the required entity financial statements. Liaoning Provincial Audit Department has been identified as the auditors for the Project. Auditors' reports would be submitted to the Bank within six months after the end of each reporting year, with separate opinions on the statement of expenditures and on the special account.

There is currently no noncompliance with audit covenants for existing Bank-financed projects in Liaoning, though the auditors raised a few issues relating to Jinzhou Water Supply Company which is not a project implementing agency for the Project. Please refer to section 9 for details.

There is clearly a risk that tariffs collected by the water supply companies may not be fully turned over to the water treatrnent companies, who are ultimately responsible for the repayment of Bank loan. This risk could be mitigated if ring-fenced controls are established to safeguard the interests of the water treatment companies. Please refer to section 8 for further discussion.

2. Background

The development objective of the Project is to assist in the environmental recovery of the Liao River Basin in Liaoning Province and to enhance water quality management decision making based on an integrated river basin management approach. The objectives would be pursued through:

* Provision of facilities for collection and treatment of wastewater; * Establishment of competent municipal utilities capable of managing these facilities; * environment pollution management subloans; * Wastewater infrastructure upgrading; and * Upgrading basin-wide water quality management, modeling and monitoring capabilities.

- 95 - The objectiveof the financialmanagement review of the Projectwas to determinewhether the. Project has in placean adequatefinancial management system as requiredby OP/BP 10.02.The review was performed in accordancewith the following:

* The Guide for Review and Design of Accounting and Reporting System for World Bank Projects (EAPCO,December 1997); * Reviewof FinancialManagement System (Annex II, LACIImplementation Handbook); and * ProjectFinancial Management Manual (Loan Department, The WorldBank)

The review includedthose procedures considered necessary and appropriateto the Project's circumstances, includingsite visits, discussionand observation.

3. Institutional Arrangements

Financial management functions would be carried out by the following entities: (a) the Liaoning Urban Construction and Renewal Project Office (LUCRPO) has overall responsibility for coordinating the preparation, training and implementation of the Project; (b) the project management office (PMO) in each city is responsible for coordinating with the implementing agency in preparation and implementation; (c) Liaoning Provincial Finance Department and Municipal Finance Bureaus; and (d) project implementing agencies in four cities as follows:

* Shenyang: Municipal Construction Commission; * Yingkou: Yingkou Drainage Company and Yingkou Paper-Making Company; * Jinzhou: Jinzhou Drainage Management Company and Jinzhou Jincheng Paper-Making Company; and * Panjin: Panjin Municipal Drainage Management Company.

The task team noted that Liaoning Finance Department (LFD) and LUCRPO are familiar with the Bank's financial management and disbursement procedures through previous and ongoing Bank-funded projects. The environmental subloans would be managed through the LFD, and the environmental monitoring through the Liaoning Environmental Protection Bureau (LEPB).

4. Loan Disbursement Arrangement

The Project would be disbursing based on traditional disbursement techniques and would not be using PRM-based disbursements, in accordance with the agreement between the Bank and Ministry of Finance (MOF).

The Special Account would be managed by and maintained by the LFD. Funds would flow from the Bank, to MOF, to LFD, to the concemed Municipal Finance Bureaus and then to project implementing agencies and suppliers through the loan and onlending agreements. The expenditures submitted by the project implementing agencies/suppliers would be consolidated by Municipal PMOs, reviewed for accuracy and validity by the Municipal Finance Bureau concemed, and approved and processed by LFD prior to submission by the LFD to the Bank for reimbursement. Subloans and monitoring disbursements would come through LEPB and LFD, respectively.

- 96 - The original supporting documents would be maintained by the implementing agencies for review and examination during Bank supervision.

5. Staffng and Training

The staffing arrangements at various project locations are as follows:

* Shenyang: Currently staffed with a chief accountant, an accountant and a cashier. The chief accountant is a CPA and has been involved in Bank-funded projects since 1988. It was agreed that no extra staffing would be required. Shenyang is responsible only for the implementation of part of the UMIS component; * Panjin : Except for a chief accountant who is on board, the PMO is yet to be staffed with two accountants and one cashier; * Yingkou: To be staffed with one chief accountant, one accountant and one cashier. The Chief Accountant, with more than 20 years of experience, graduated from an accounting technical school; * Jinzhou: Currently staffed with an accountant who has more than 20 years of experience in accounting and is familiar with construction and industrial accounting standards and project costing; a junior accountant who graduated from an accounting technical school in 1996; and a cashier who also graduated from an accounting technical school.

Since some of the project implementing agencies (the newly fonrned wastewater enterprises in Jinzhou, Panjin and Yingkou) did not have prior experience with Bank projects and accordingly were not familiar with the Bank requirements, a well-designed and focused training program was provided to all relevant finance and accounting staff in September 2000 to cover the financial management arrangements required by the Bank, disbursement procedures as well as Bank's new financial products. To ensure personnel of quality commensurate with job responsibilities, the Bank plans to readdress in detail the major aspects of project financial management and reporting requirements during a Project launch workshop by loan effectiveness.

6. Financial and Accounting System

The Project would use "Accounting Standards for State-owned, Infrastructure-oriented Projects" during the initial construction period and switch to "Accounting Standards for Industrial Enterprises" afterwards. These standards would be used as the basis for bookkeeping and preparation of financial statements and management reports, and would dictate the Chart of Accounts and related account instructions. Double entry and accrual accounting would be adopted by the Project. Accounting ledgers, journal vouchers and supporting documents would be maintained by the implementing agencies.

7. Reporting Requirements

The Bank and MOF have jointly agreed on a standard reporting package to be used on Bank-fumded projects in China as follows:

Project Balance Sheet * Statement of Sources and Uses of Funds by Project Activity * Statement of Implementation of Loan Agreement * Statement of Special Account

- 97 - The project reporting package would be prepared by each implementing agency, reviewed by the municipal PMO and consolidated by LUCRPO.

In addition, the implementing agencies would prepare the following financial statements in accordance with the accounting standards described in Section 6:

* Balance Sheet * Income Statement * Cash Flow Statement

In terms of the reporting cycle, it has been agreed between the Bank and MOF that project financial statements would be submitted biannually (no later than October and April, respectively) to the Bank.

8. Risks and Internal Controls

Financial Viability of the Implementing Agencies is key to success and sustainability of the Project. The financial viability could potentially be impaired if water tariffs collected by the water supply company on behalf of the implementing agencies are not turned over to the implementing agencies. Regulation [2000] No. 385 on Liaoning Province Wastewater Treatment Tariff Management Procedures stipulates the ceilings on tariffs based on operating costs and affordability by the consumers, but there is no specific provision which would protect the interests of the water treatment companies/implementing agencies. In addition, under the proposed arrangement, water tariffs would be collected by the water supply companies which pass the tariffs (net of handling charges) directly to the municipal finance bureaus, which then transfer the funds based on the estimated operating costs net of a fee of 0.3 percent to the implementing agencies. The accuracy of the tariffs collected and turned over to the implementing agencies would be subject to dispute, as the funds have to go through both the water supply companies and the municipal finance bureaus before they are eventually received by the implementing agencies.

Based on a review of the audit report, Jinzhou Water Supply Company (JWSC) has been experiencing liquidity problems under the existing Liaoning Environment Project. Though it is not an implementing agency of the Project, JWSC would be responsible for the collection of water tariffs on behalf of Jinzhou Municipal Wastewater Treatment Company. It is not clear whether other water supply companies suffers similar difficulty. Liquidity problems with water supply companies would aggravate the above mentioned issues. It was agreed that an official agreement would be signed by the water supply companies, water treatment companies and local governments to ensure that tariffs are turned over to the water treatment companies for loan repayment purposes. It is further suggested that this official agreement be listed as a financial covenant.

Financial Analysis of the Implementing Agencies. To avoid overlap, the work carried out by the Bank's Financial Analyst is relied upon to determine the viability and financial performnanceof the revenue-earning entities.

Asset Valuation Reports. The Task Team was advised that asset valuation of the revenue earning entities would not be completed until the end of 2002 due to technical complexity as well as the recent government reorganization. The proposed arrangement is not in line with good financial management practice and should be discussed with the Government during the Project negotiations.

Counterpart Funds. The audit report of the existing Liaoning Environment Project indicated that lack of

- 98 - counterpartfunds caused slow down in project implementation.It has been agreedby the PMOs and the implementingagencies that a detailedplan would be developedto ensure counterpartfunds would be in place on a timelybasis. In addition, the local governmentshave signed a guaranteeto ensure counterpart funds would be in place on a timely basis. The detailed plan would be documentedin the Financial Management Manual.

ComputerizedAccounting Software. The implementingagencies have either adopted or plan to adopt computerizedaccounting software. Given the number of PMO and implementingagencies involvedin accounting and consolidation of project accounts, consistency and compatibility of these software applicationsare importantto ensurethe integrityof financialinformation. It is thereforerecommended that a commonsoftware platform be used.

FinancialManagement Manual. It has been agreedthat the MunicipalPMO would prepare its own project financial managementmanual (the Manual ) tailored to the project specifics,and that LUCRPOwould prepare a generalproject financialmanagement manual on commonissues and controlprocedures that are applicableto all implementingagencies. The discussionswith the PMOsand project implementingagencies confirmedthe commonunderstanding of the importanceof internalcontrols to projectsuccess. The Manual would encompassthe followingkey features:

* A system of authorization,verification, reconciliation, recording procedures and project reporting adequateto providereasonable control over project costs and securityof assets; * Segregationof incompatibleduties; and • Timelyand accuratefinancial reporting

To further strengthenproject management and provideguidance in accountingand reporting,the task team recommendedthat well defined roles, job descriptionsand operatingprocedures be documentedin the Manualand made availableto all staff.The draft Manualwould be updated followingthe Bank's reviewat projectnegotiations, and wouldbe finalizedprior to loan effectiveness.

9. Audit Arrangementsand Audit Issues

In line with other Bank financed projects in China, the Project would be audited in accordancewith GovemmentAuditing Standards of the People's Republicof China (1997 edition).The ForeignInvestment Audit Bureau of the China National Audit Office (CNAO)would have overall responsibilityfor auditing the project accounts and the required entity financial statements. The Liaoning Provincial Audit Departmenthas been identifiedas the auditorsfor the Project. It is proposedthat separateproject audit reports wouldbe issuedfor each project city. Auditors' reportswould be submittedto the Bank within six monthsafter the end of eachreporting year, with separateopinions on the statementof expendituresand on the specialaccount.

The ongoingLiaoning Environment Project (Loan 378 1-CHA) is managedby LUCRPO,with supportfrom LEPB; the same arrangement would apply to the managementof this project. Though there is no noncompliancewith audit covenants, the Liaoning Provincial Audit Department raised a few issues requiringattention:

* the ProvincialFinance Departmentshould ensure that no ineligible expendituresare submittedfor reimbursement; * Lack of counterpartfunds has sloweddown the implementationof the existingproject. A time-bound

99 - action plan should be developed to address the issue, thereby ensuring smooth project implementation. Please refer to section 8 for an agreement to address the issue of counterpart funds; and * Viability of water supply company. Please refer to section 8 above.

10. Budgeting

Detailed annual budgets would be prepared by the participating agencies and submitted to the municipal governments for review and approval. The municipal governments would provide their share of contributions based on the budgets. The budgets would be used as a basis for cost control and performance monitoring. Comparison of budget versus actual would be performed on an annual basis by the municipal PMOs and any major deviation or overrun would be followed up and corrected. It is recommended that the budgeting process be documented in the Manual and used as a guide for all parties concerned.

11. Conclusion

Based on the above assessment, the overall financial management risk is considered average. Assuming all the identified issues are adequately addressed, the Project would satisfy the Bank's financial management requirements as stipulated under OPJBP 10.02. In the team's opinion, the Project would have in place an adequate project financial management arrangement that can provide, with reasonable assurance, accurate and timely information on the status of the Project in a reporting format agreed with the project management offices and as required by the Bank. Further, the institutional and financial strengthening component included in the project would be expected to underpin improvements in these arrangements.

- 100 - Report on the Assessment of Project for PMR-Based Disbursements

Proiect Title: CHINA: Liao River Basin Proiect: Proiect ID: CN-P051859

Ineligible for PMR-Based Disbursements

Part I - Financial Management Svstem.

I have reviewed the financial management system relating to this project. The objective of the review was to determine whether the project has in place an adequate financial management system as required by the Bank/IDA under OP/BP 10.02.

My review, which included visits to the project implementing agency, was based on the Bank's guidelines for "Review of Financial Management System", and focused on the assessment of the project's accounting system, internal control, planning, budgeting and financial reporting system, selection of an auditor as well as the formnatand contents of the Project Management Report (PMR) to be submitted by the borrower in support of Withdrawal Applications.

I confirm that the project will satisfy the Bank's minimum financial management requirements subject to addressing the items in the attached action plan. In my opinion, the project has in place an adequate project financial management system that can provide, with reasonable assurance, accurate and timely information on the status of the project, in the reporting format agreed with the Borrower and as required by the Bank/IDA.

[I have detailed in the attachment actions required to remedy the situation.

The project will not be using PMR-based disbursements; traditional disbursement mechanisms will be used.

Signedby: 2z OI Financial Management Specialist ' | QC *a| Name, Dept./Div. Date

- 101 - CHINA: Liao River Basin Project Detailed Action Plan for Financial Management

Main Issues: Need to (i) ensure the financial viability of the implementing agencies, (ii) to address the risk of water tariffs collected not being passed on to the implementing agencies on a timely and accurately basis and (iii) to address the lack of adequate internal control policies and procedures.

COMPONENT RESPONSIBLE TIME PARTY 1. Asset ValuationReports and the outstandingcapit al PMOs,Bank By loan effectiveness(to be verificationreports of the project implementingagencies are discussedduring the reviewedby the Bank. negotiations). 2. Financialcovenant includes a formal agreementsigned PMOs,LUCRPO, To be agreed duringthe by watersupply companies,water treatment companies and Bank negotiations. the local governmentsto ensurethat the tariffs areturned over to the water treatmentcompanies on a timely and accuratelybasis. 3. Completefinancial analysis of YingkouPaper Company PMOs, By negotiations. to determineits eligibilityas an implementingagency. LUCRPO,Bank Developa detailed actionplan to addressits continuing operatinglosses. 4. Reviewthe FinancialManagement Manual to ensure that Bank By negotiations. there are sufficientcontrol policies and procedureswhich adequatelyaddress poor financialmanagement practices as identifiedduring the FinancialManagement Review by the Bank. 5. All accountingstaff (of both the PMOs and implementing PMOs,Bank By Loan effectiveness agencies)are on board

Part 1I- Procurement/Contract Management S stem

I have reviewed the procurement/contract management system relating to this project. The objective of the review was to determine whether the procurement/contract management system adopted by the project conforms to the Bank's guidelines for procurement in investment projects.

My review was based on the "Assessment of Agency's Capacity to Implement Project Procurement, Setting of Prior Review Thresholds and Procurement Supervision Plan" guidelines issued by the Bank.

I confirm that the project satisfies the Bank's minimum procurement management requirements. In my opinion, the project has in place an adequate procurement/contract management system that can provide the appropriate data on major procurement and contract management, in the reporting format agreed with the Borrower and as required by the Bank/IDA.

Signed by: Procurement Specialist Name, Dept./Div. Date

- 102 - Part III: Phvsical Monitorable Indicators and Overall Assessment

I have reviewed the project's system for monitoring physical implementation progress, including its monitorable indicators for major outputs. In my view, the system can provide the appropriate data on physical progress, in the reporting format agreed with the Borrower and as required by the Bank/IDA.

I also certify that based on the assessments of the FMS-OPR and PS given respective in Parts I and II above, taken together with my overall assessment of the project, and the wish expressed by the Borrower's Governmental authority, this project is ineligible for PMR-Based Disbursement procedures; traditional disbursement mechanisms will be used.

Signed by: Task Team Leader C, ? - | 1 ame, Dept./Div. Date

Part IV. Concurrence of LOA for Eligibilitv of Project for PMR-Based Disbursements

I have conducted a reasonableness review of the process followed by the Task Team in assessing the project, and I concur with its recommendation that this project is not eligible for PMR-Based Disbursements; traditional disbursement mechanisms will be used.

Signed by: FMS-LOA/DO _ __ _ Name, Dept./Div. Date

- 103 - - 104 - MAP SECTION

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