Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No: 363 16-CN

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$147 MILLION

AND A Public Disclosure Authorized PROPOSED GRANT FROM THE

GLOBAL ENVIRONMENT FACILITY TRUST FUND

IN THE AMOUNT OF US$5 MILLION

TO THE

PEOPLE'S REPUBLIC OF CHINA

FOR A Public Disclosure Authorized SECOND SHANDONG ENVIRONMENT PROJECT

January 30,2007

Urban Development Sector Unit East Asia and Pacific Region

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

(Exchange Rate Effective May 9,2006)

Currency Unit = Renminbi Yuan (RMB) Renminbi Yuan 8.0065 = US$1.O US$0.1249 = RMB 1.0

FISCAL YEAR January 1 - December31

ABBREVIATIONS AND ACRONYMS FOR OFFICIAL USE ONLY

Vice President: James W. Adams Country ManagerDirector: David Dollar Sector Manager: Keshav Varma Task Team Leader: Shenhua Wang

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

CHINA Second Shandong Environment Project

CONTENTS

Page

A . STRATEGIC CONTEXT AND RATIONALE ...... 1 1. Country and Sector Issues ...... 1 2. Rationale for Bank Involvement ...... 2 3 . Higher Level Objectives to Which the Project Contributes ...... 3

B. PROJECT DESCRIPTION ...... 4 I . Lending Instrument ...... 4 2. Project Development Objective and Key Indicators ...... 4 3 . ProjectComponents ...... 5 4. Lessons Learned and Reflected in the Project Design ...... 5 5. Alternatives Considered and Reasons for Rejection ...... 6 C . IMPLEMENTATION ...... 7 1. Partnership Arrangements ...... 7 2. Institutional and Implementation Arrangements ...... 7 3 . Monitoring and Evaluation of Outcomes/Results ...... 8 4. Sustainability ...... 9 5 . Critical Risks and Possible Controversial Aspects ...... 9 6. Loan and Grant Conditions and Covenants ...... IO D. APPRAISAL SUMMARY ...... 11 1. Economic and Financial Analyses ...... 11 2. Technical...... 13 3 . Fiduciary ...... 13 4. Social ...... 14 5. Environment...... 15 6. Safeguard Policies ...... 16 7. Policy Exceptions and Readiness...... 17 8. Compliance with Readiness Criteria...... 18 Annex 1: Country and Sector Background ...... 19 Annex 2: Major Related Projects Financed by the Bank and/or Other Agencies .... 27 Annex 3: Results Framework and Monitoring ...... 28 Annex 4: Detailed Project Description...... 32 Annex 5: Project Costs ...... 38 Annex 6: Implementation Arrangements ...... 41 Annex 7: Financial Management and Disbursement Arrangements...... 43 Annex 8: Procurement...... 51 Annex 9: Economic and Financial Analysis ...... 61 Annex 10: Safeguard Policy Issues ...... 79 Annex 11: Project Preparation and Supervision ...... 100 Annex 12: Documents in the Project File ...... 103 Annex 13: Statement of Loans and Credits ...... 105 Annex 14: Country at a Glance ...... 110 Annex 15: Incremental Cost Analysis ...... 112 Annex 16: GEF Review by Scientific and Technical Advisory Panel ...... 122 Annex 17: Strategic Partnership Investment Fund ...... 130

Map Section IBRD35288. 34859 CHINA

SECOND SHANDONG ENVIRONMENT PROJECT

PROJECT APPRAISAL DOCUMENT

EAST ASIA AND PACIFIC

EASUR

Date: January 30,2007 Team Leader: Shenhua Wang Country Director: David R. Dollar Sectors: Sewerage (76%); Water supply Sector ManagedDirector: Keshav Varma (1 3%); Solid waste management (1 1%) Project ID: PO77752 Themes: Pollution management and Lending Instrument: Specific Investment Loan environmental health (P) Environmental screening category: Full Assessment Global Supplemental ID: PO90377 Team Leader: Shenhua Wang Lending Instrument: Specific Investment Loan Sectors: Sanitation (1 00%) Focal Area: I-International waters Themes: Access to urban services and housing Supplement Fully Blended?: Yes (PI

[XI Loan [ ] Credit [XI Grant [ ] Guarantee [ ] Other:

For Loandcreditdothers: Total Bank Financing: US$147.00 million Proposed Terms: Variable Spread Loan Grace Period: 5 years Years to Maturity: 20 years Commitment Fee: 0.75% ofundisbursed balance, subject to waiver Front-End-Fee on Bank Loan: 1% subiect to waiver

RECONSTRUCTION AND DEVELOPMENT GLOBAL ENVIRONMENT FACILITY 5.00 0.00 5.00 Total: 134.11 147.00 281.11

Borrower: The People's Republic of China

Responsible Agency: SPPMO No. 46 Xiaoweisi Road Jinan Shandong Province China 250001 Tel: 86-531-8708 8023; 8791 5106 Fax: 86-531-8794 1408 sppmo@jn-public .sd.cninfo .net; sppmo@ 163 .com

:Y 7 8 9 10 11 12 13 14 4nnual 0.00 10.00 20.00 25.00 30.00 32.00 20.00 10.00 Sumulative 0.00 10.00 30.00 55.00 85.00 117.00 137.00 147.00

-Y 7 8 9 10 11 12 13 14 4nnual 0.00 0.50 0.50 0.50 1.oo 1SO 0.50 0.50 Sumulative 0.00 0.50 1.oo 1SO 2.50 4.00 4.50 5.00

Does the project depart from the CAS in content or other significant respects? [ ]Yes [XINO Re$ PAD A.3 Does the project require any exceptions from Bank policies? Re$ PAD D. 7 [XIYes [ ]No Have these been approved by Bank management? [XIYes [ ]No Is approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated “substantial” or “high”? [XIYes [ ]No Ref: .# PAD C.5 Does the project meet the Regional criteria for readiness for implementation? [XIYes [ No Ref:.I PAD D. 7 Project development objective Re$ PAD B.2, Technical Annex 3 The development objective is to improve the environmental conditions in participating municipalitieskounties through a package ofpriority interventions, including upgrading and development ofwastewater collection and treatment facilities, river embankment rehabilitation, solid waste management, water supply improvements, industrial pollution monitoring, and enhancement ofthe financial performance and efficiency ofkey urban environmental service agencies.

Global Environment objective Re$ PAD B.2, Technical Annex 3 The Global Environmental Objective ofthe GEF activity is to reduce land-based pollution along the Yantai coast and the Bohai Sea through development ofa pilot septic-tank management system in Yantai and dissemination ofthe Yantai model in Shandong Province and in other parts of China.

Project description [one-sentence summary of each component] Re$ PAD B.3.a, Technical 4nnex 4 The proposed project has the following four components: (1) wastewater collection network and I treatment facilities in Gaomi, Huantai, Qixia, Weifang, Weihai, Yantai and Zaozhuang, with associated river embankment rehabilitation in Qixia, Weifang and Zaozhuang, and development of a pilot septic tank management system in Yantai co-financed by GEF; (2) solid waste management in Heze and Rizhao; (3) water supply improvements in Gaomi and Huantai; and (4) institutional development and capacity building for utilities, Environmental Protection Bureaus (EPBs) and decision makers (see Annex 4 for a detailed description, Annex 5 for a cost breakdown and Annex 15 for the GEF activity incremental cost).

Which safeguard policies are triggered, if any? Re$ PAD 0.6, TechnicalAnnex 10 Environmental Assessment (OP/BP/GP 4.0 1) Involuntary Resettlement (OP/BP/4.12) Dam Safety (OP4.37)

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

Loadcredit effectiveness: No project specific conditions.

Covenants applicable to project implementation: (a) Maintain the SPPMO and local PMOSthroughout implementation staffed with qualified and adequate personnel;

(b) On-lend the loan and pass the grant on terms and conditions satisfactory to the Bank;

(c) Qixia, Weifang and Zaozhuang to prepare and submit to the Bank, no later than February 28,2008, an operation and maintenance plan (including financing) of their respective river embankment and wastewater components;

(d) By June 30,2009, Heze and Rizhao to complete a study report of the fees and user charges needed to recover the costs of solid waste management services; the report of that study, to include proposals for improved collections, and a detailed action plan to enable recovery of costs to begin on January 1, 20 11 , after taking into account the Bank?s comments on the study report and action plan;

(e) Wastewater companies, together with the relevant governmental agencies such as local municipal administration bureaus and EPBs, to take measures to ensure effective monitoring and enforcement arrangements on acceptable wastewater quality entering its sewers and to record activities in periodic project progress reports (PPRs);

(f) By December 3 1, 2007, Gaomi, Qixia and Weifang to: (i)ensure completion of remedial work on involved dams, and (ii)submit satisfactory operational plans of the dams to the Bank;

(g) By February 28 of each year (with the exception of the first annual report being due on August 3 1,2007), an independent panel of dam safety experts to report on progress in remedial work and on the safety of the four dams; and

(h) Within one year from the commissioning ofthe water supply investments, the Huantai County Government to cause the industries located in the service area ofthe Huantai Water Supply and Wastewater Company, which have their own groundwater sources of water supply, to shut down such supplies and connect to the Huantai Water Supply and Wastewater Company water supply system. CHINA: Second Shandong Environment Project

A. STRATEGIC CONTEXT AND RATIONALE

1. Country and Sector Issues

1. China is experiencing rapid economic growth and urbanization, with over 40 percent of the population currently living in urban areas, up from 29 percent in 1995. Over the next 15 years, that trend is expected to continue with the urban population projected to reach 50 percent by 2020. This increase is a result of several factors, notably the government’s decision to reduce controls governing population mobility and a falling demand for farm labor. The rapid urban growth is putting pressure on cities to expand their public infrastructure, increase municipal services and provide employment for migrants. Strong city performance is, therefore, critical to China’s sustainable growth and economic development. Major urban environmental problems that are associated with fast growth, such as air and water pollution, are priority areas for development assistance. China has taken steps to address these problems through various programs and policies, including the recent development ofnational guidelines for reforming the country’s wastewater and solid waste sectors. These guidelines encourage utilities to set adequate user fees to achieve sufficient cost recovery, including capital costs, and promote private sector investment in utility operations.

2. Shandong Province, situated on the east coast ofChina, has a 3,000-km coastline on the conjunction between the Bohai and Yellow Seas, both ofwhich drain a major part ofthe province. The province is divided into 17 municipalities and 139 counties, districts and cities. It has a population ofnearly 92 million, with approximately 40 percent of people living in urban areas. Shandong Province is one ofthe fastest growing provinces in China. From 200 1 to 2005, its average GDP growth rate was 13.18 percent. In 2005, Shandong’s GDP totaled RMB1, 847 billon Yuan, ranking second in China, with a growth rate of 15.2 percent. However, its strong economic performance has come at a high environmental cost and investment in environmental protection has not kept pace with the province’s rapid economic development.

3. Infrastructure deficiencies generally found in Shandong’s fast growing smaller cities and county towns include: (a) poor quality and intermittent drinking water supply, due to inadequate water resources, which hinder the development ofreliable municipal water supply systems; (b) lack ofproper solid waste management systems; (c) low resistance to flooding as many cities and towns are built along rivers or adjacent to flood plains without adequate protection, resulting in recurring flood damage and insufficient land for urban expansion; and (d) unsatisfactory sanitation conditions, including insufficient drainage and wastewater treatment and serious pollution ofrivers, leading to severe damage ofthe shallow Bohai Sea ecosystem. Wastewater and solid waste services, which are managed by municipal departments, are often supply driven, with limited incentives to increase the efficiency ofservice provision or improve cost recovery.

1 4. The Shandong Provincial Government (SPG) has embraced the central government’s policies and guidelines for improving the efficiency of services and ensuring full cost recovery by promoting institutional reform through the establishment of separate self-financing companies and ensuring that adequate tariffs for the services are in place. Its policies on water resources call for accelerated restoration of ground and surface resources through enhancing the treatment and re-use ofwastewater. In the wastewater sector, provincial guidelines require that by 20 10 municipal cities and county towns adequately treat 65 percent and 40 percent oftheir wastewater, respectively, and that across the province 20 percent oftreated effluent be re-used. In the solid waste sector, provincial guidelines require that by 2010 municipal cities and county towns develop adequate solid waste management treatment and disposal facilities to handle 70 percent and 40 percent ofwaste, respectively. Shandong has also signed a Memorandum ofAgreement initiated by the United Nations Development Program/Global Environment Facility/International Maritime Organization (UNDP/GEF/IMO) Regional Program to foster collaboration among adjacent provinces in managing the pollution ofrivers and reducing land-based discharges into the Bohai Sea.

5. In addition, the Asian Development Bank (ADB) is also working with Shandong Province to support pollution control in the Hai River Basin. The ADB’s Hai River Basin Pollution Control Project would finance construction ofwastewater treatment facilities, installation ofwater recycling systems and the development of appropriate solid waste management systems, along with technical assistance (TA) and capacity building activities.

2. Rationale for Bank Involvement

6. The World Bank has worked successfully with Shandong Province on a number ofprojects, including the Shandong Environment Project (SDEP), approved in 1997 and closed in December 2005, and the Huai River Pollution Control Project, which was approved in 200 1 and is shortly to close. The proposed project would build on the strong relationship established with the province by both deepening and broadening the extent of support for the province’s agenda to sustainably improve environmental conditions, particularly through improved wastewater and solid waste management. As China possesses relatively little experience in the comprehensive management ofsolid waste, the project presents the opportunity not only to bring best international practices to China, but also to support the implementation ofnational guidelines on solid waste management.

7. The province, with the approval ofthe national authorities, has requested Bank support for this proposed project and expressed an interest in additional support from GEF’ to demonstrate septage management techniques. These techniques would contribute to a reduction in land-based pollution reaching the Bohai Sea, a pollution hotspot in the seas ofEast Asia. The GEF financing is made available through the

I GEF, established in 1991, helps developing countries fund projects and programs that protect the global environment. GEF grants support projects related to biodiversity, climate change, international waters, land degradation, the ozone layer, and persistent organic pollutants. GEF is the largest single funder of projects to improve the global environment.

2 Strategic Partnership Investment Fund for Pollution Reduction in the Large Marine Ecosystems of East Asia (the Fund), which operates under GEF’s OP10, the contaminant- based operational program. OP 10 stresses the removal of barriers to pollution reduction, which the Second Shandong Environment Project (SDEP2) targets by addressing septage management in a holistic way. The GEF activity is consistent with GEF Strategic Objectives (SOs) in the International Waters Focal Area. It is consistent with SO1 (catalyze reform and investment) as it will mobilize financial resources for implementing policy/institutional reforms and pollution-reducing investments to address septic tank servicing. With respect to SO3 (innovative demonstration), the GEF activity will demonstrate septage collection and its joint treatment with wastewater, which is a technical novelty in China and represents the least-cost technical solution in Yantai. The GEF activity generates a mix of local and ultimately global benefits by reducing pollution (Biochemical Oxygen Demand (BOD), nutrients) to the East China Sea.

8. GEF assistance is consistent with: (a) China’s strategy for reducing municipal water pollution and (b) various international agreements, including the recommendations of the Partnerships in Environmental Management for the Seas of East Asia (PEMSEA), the Bank’s partner in the Fund. The GEF activity is consistent with the aims and objectives of the World Summit on Sustainable Development, to which GEF subscribes. The Johannesburg Declaration made a renewed commitment to sustainable development and resolved to speedily increase access to such basic services as clean water. In addition, the Millennium Development Goal for environmental sustainability includes a target to halve, by the year 2015, the proportion of people without access to safe drinking water. Reducing water pollution contributes to furthering all of these aims.

9. China is eligible for GEF assistance through the World Bank, and the proposed activity fulfills all seven conditions stipulated by the Fund. The conditions stipulate that a project: (a) is located in the coastal watershed of East Asian Large Maritime Ecosystems (LMEs); (b) demonstrates an innovative technique to combat land-based pollution; (c) has a likelihood for replication in China and East Asia; (d) would not proceed without grant financing; (e) has supporting co-financing available; (f) has been endorsed by China’s GEF Focal Point at the Ministry of Finance (MoF); and (g) meets relevant Bank appraisal criteria.

3. Higher Level Objectives to Which the Project Contributes

10. The proposed project will address two key themes in the Bank’s new Country Partnership Strategy (2006-2010): (a) managing resource scarcity and environmental challenges, especially related to water pollution reduction and conservation; and (b) promoting balanced urbanization and improving the quality of urban life. It will also support the government’s Eleventh Five Year Plan (2006-2010) which sets out a “people- centered” strategy, aimed at achieving a “harmonious society” that balances economic growth with ecological concerns.

11. The GEF activity would facilitate China’s efforts in meeting the Putrajaya Declaration of Regional Cooperation for the Sustainable Development of the Seas of East

3 Asia, ofwhich China is a signatory. The declaration calls for nations to mobilize financial resources for implementing policy and institutional reforms and stress-reducing investments to address priority trans-boundary water issues, including reducing land- based pollution of a shared water body. In addition, the resources mobilized under this project are mainstreamed into the regular program ofa GEF agency, in this case the World Bank, under the framework ofthe Strategic Partnership among nations and the GEF agencies that supported the Plan of Implementation ofthe World Summit on Sustainable Development.

12. The GEF activity would take place within the Yantai wastewater component of the project. GEF support would enable implementation ofthe proposed major institutional and technological reform required to reduce land-based pollution which would not otherwise be carried out. The proposed project will be implemented simultaneously with the ADB supported Hai River Basin Environment Project. This would provide an opportunity for the two institutions to work collectively with the province on key sector reform issues.

B. PROJECT DESCRIPTION

1. Lending Instrument

13. The lending instruments are a Specific Investment Loan and a GEF co-financing grant. The loan will be a single currency, variable spread loan with a maturity of20 years, including a five-year grace period, at the Bank’s standard interest rate for LIBOR- based US dollars. There will be a Front-end Fee of 1 percent and a commitment charge of 0.75 percent on the unused portion ofthe loan, subject to any waivers.

2. Project Development Objective and Key Indicators

14. The development objective is to improve the environmental conditions in participating municipalities/counties through a package ofpriority interventions, including upgrading and development ofwastewater collection and treatment facilities, river embankment rehabilitation, solid waste management, water supply improvements, industrial pollution monitoring, and enhancement ofthe financial performance and efficiency ofkey urban environmental service agencies.

15. The Global Environmental Objective ofthe GEF activity is to reduce land-based pollution along the Yantai coast and the Bohai Sea through development of a pilot septic- tank management system in Yantai and dissemination ofthe Yantai model in Shandong Province and in other parts ofChina.

16. The key indicators to be used to gauge progress in meeting the objectives are detailed in Annex 3.

4 3. Project Components

17. The proposed project has the following four components: (a) wastewater collection network and treatment facilities in Gaomi, Huantai, Qixia, Weifang, Weihai, Yantai and Zaozhuang, with associated river embankment rehabilitation in Qixia, Weifang and Zaozhuang, and development of a pilot septic tank management system in Yantai co-financed by GEF; (b) solid waste management in Heze and Rizhao; (c) water supply improvements in Gaomi and Huantai; and (d) institutional development and capacity building for utilities, Environmental Protection Bureaus (EPBs) and decision makers (see Annex 4 for a detailed description, Annex 5 for a cost breakdown and Annex 15 for the GEF activity incremental cost).

4. Lessons Learned and Reflected in the Project Design

18. China has the largest lending portfolio in the Bank, and its quality is among the best performing. Previous assessments by the Bank’s Independent Evaluation Group and Quality Assurance Group have confirmed satisfactory project management, implementation and outcomes. Experience from a hll range ofprojects financed by the Bank in the infrastructure sector points to the importance ofborrower ownership, appropriate and efficient planning ofcapital investments, as well as appropriately- designed financing and institutional arrangements for proper operation and maintenance as key factors in project success. The key lessons learned from previous projects have been incorporated into the project design and are described below.

19. Borrower ownership and commitment. The province has shown strong commitment to the project by issuing the required policy guidance and by setting up the project management and implementing agencies.

20. Deepening, institutional reforms to ensure financially-sustainable water and sanitation services. On the basis ofa provincial government circular on cost recovery pricing, all project municipalities/counties have already increased wastewater tariffs from Y0.80/m3 to Y 1.00/m3. The project design has incorporated TA for all project utilities and local governments towards deepening intuitional reforms and further improving the efficiency and effectiveness ofutility services.

2 1. Industrial pollution control. Recent Bank experience in China has indicated that proactive steps are required to control industrial pollution, including: heightened citizen and decision-maker awareness of environmental protection; involvement ofindependent agencies in monitoring and reporting ofpollution sources; establishment of an emergency response system; and strengthening the capacity of local EPBs. These have been built into the design ofthe project.

22. Tendency to over-design basic infrastructure. Due to the use ofunrealistic population projections and per capita consumption levels, local governments have tended to over-design basic infrastructure, especially water supply and wastewater systems. This has led to a waste ofresources and higher than necessary user charges. This concern has

5 been addressed in the proposed project through a detailed analysis and assessment of population projections and water demand levels.

23. Inadeauate investment in wastewater collection systems and water supply networks. During project preparation, feasibility study (FS) reports that focused only on wastewater or water supply treatment plants were identified and modified to ensure that there is adequate investment in wastewater collection systems and water supply networks.

24. Over-estimated proiect cost. In previous Bank-supported urban projects in China, the use of conventional methods for estimating costs (which are partly based on “norms” rather than on market prices) has resulted in an overestimation ofproject costs. International and local consultants have conducted an independent review of cost estimates to ensure that the costs reported in the final FS report for all components are as close to market rates as possible.

5. Alternatives Considered and Reasons for Rejection

25. An interactive selection process was adopted to ensure project ownership and a general agreement on development objectives. Based on requests made by various municipalities, the provincial task force used criteria, including development priorities, needs, economic viability and financial capacity, to select a pipeline of investment proposals. The final selection ofthe project components reflects the reality that these are institutionally the weakest in terms of provision of services, as compared to other municipal activities.

26. Extensive analysis of alternatives was conducted for each proposed project component. During the feasibility stage, the design institutes carried out comprehensive analyses, evaluating each ofthe wastewater and water supply components, various alternatives for location, technologies and numbers ofwastewater treatment plants (WWTPs) and water works (WW). In-depth consideration was also given to alignments for transmission mains, construction ofpumping stations in comparison with gravity flows, selection of combined or sanitary sewer systems, and different layouts of wastewater and water supply networks. In each instance, the alternative with the lowest evaluated cost and least environmental and resettlement impacts was selected.

27. Location ofa GEF-supported pilot septic tank management activity in Yantai with joint sewage-septage in Xinanhe WWTP was compared with other possible alternatives and found to be the optimal site. Yantai Municipality has a sincere interest in implementing and disseminating the pilot project.

28. The analyses carried out for the solid waste management component in Heze compared a sanitary landfill facility with an integrated municipal solid waste processing, recycling and composting facility. The latter option was selected as it would produce marketable products for a large horticultural industry in the city while reducing the amount of waste requiring landfill disposal.

6 C. IMPLEMENTATION

1. Partnership Arrangements

29. The Bank would co-finance the project with the GEF Trust Fund under the Fund, managed by the Bank (see Annex 17). The GEF activity is integral to the activities financed by the Bank. The activities financed by the Bank and by the GEF Trust Fund would be properly coordinated to ensure appropriate sequencing and optimum results.

2. Institutional and ImplementationArrangements

30. Shandong Province established a leading group (LG) headed by a vice-governor to give policy guidance to its departments and municipal implementing agencies. The LG designated the existing Shandong Provincial Project Management Office (SPPMO) to coordinate the preparation activities ofthe city/county governments’ proposed investments. SPPMO has had previous experience in coordinating the implementation of Bank-financed projects, including SDEP and the Huai River Pollution Control Project.

3 1. The LGs and project management offices (PMOS) at municipality/county level would provide policy guidance and coordinate the implementation oftheir respective components. SPPMO would be responsible for coordination ofTA and construction management sub-components, including preparation, jointly with Shandong Province Finance Bureau (SPFB), ofthe financial management manual to achieve a consistent quality of accounting work (see Annex 7). A procurement manual, and centralized reviews ofprocurement for both International Competitive Bidding (ICB) and National Competitive Bidding (NCB) contracts at the provincial level, would help in mitigating procurement constraints (see Annex 8).

32. Implementation arrangements. All implementing companies/agencies are owned by the participating municipalities and counties. With the exception of Weifang and Zaozhuang, the water supply, wastewater and solid waste companies would have overall responsibility for implementation oftheir respective components. The companies would design, construct, own, operate and maintain the project-financed assets. In Weifang Municipality, the wastewater and river embankment components would be implemented by a municipally-owned entity, and thereafter maintained by the responsible municipal departments. In Zaozhuang Municipality, the wastewater and river embankment components would be implemented, and thereafter maintained by a recently established municipally-owned entity. The institutional development and capacity building component ofthe project would include assistance to the implementing agencies and to the parent local governments, as appropriate, to strengthen the management and financial oversight of implementing agencies for improved service delivery. The names ofthe agencies responsible for implementing the various components are included in Annex 6 and further details are provided in the Project File.

33. The provincial and Yantai municipal LGs, supported by SPPMO and Yantai PMO, would also give guidance to the GEF-supported pilot project including designing

7 the respective policies and monitoring and evaluation ofresults. The Yantai Xinanhe Wastewater Treatment Company would implement the wastewater treatment component, and Yantai Municipality the septage management component. The preparatory study identifying the institutional arrangements, septage collection and joint treatment has been completed. Any remaining studies and development ofthe project monitoring and evaluation system and a dissemination strategy will be completed by December 3 1, 2007.

34. Flow offunds. The loan of$147 million would be made to the People’s Republic of China at the standard interest rate for LIBOR-based US dollar single currency loans. China would on-lend the proceeds ofthe loan to Shandong Province on the same terms and conditions. Shandong Province would on-lend the respective amounts ofthe loan to the municipalities and counties on the same terms and conditions except for a mark-up of 0.2 percent on the interest rate. The municipalities and counties would on-lend the loan to their respective companies at an interest rate not less than the Bank’s rate to China plus 0.2 percent. All companies would bear the respective costs ofthe Front-end Fee, commitment charges and foreign exchange risks. A part ofthe loan, including respective costs ofthe Front-end Fee, commitment charges and foreign exchange risks, would be allocated to Shandong for the institutional development and capacity building component. The GEF grant would be passed on to Yantai Municipality through Shandong Province with no mark-up.

3 5. Retroactive financing. Eligible civil works, goods and services contracts awarded from June 15,2006 until loan signing, up to a limit ofUS$14.15 million, may be financed retroactively from the loan.

3. Monitoring and Evaluation of Outcomes/Results

36. Annex 3 lists the main outcome indicators for the project, as well as the principal results indicators for each component. SPPMO and the respective PMOSwould regularly collect the data required for monitoring and evaluation ofoutcomes/results and include these in component semi-annual progress reports. On the basis ofthe progress reports, SPG and SPPMO would: (a) review the results; (b) take appropriate corrective actions, where and when necessary; and (c) produce consolidated project semi-annual progress reports for the Bank. Implementation progress would be monitored through semi-annual progress reports (Annex 6), separate financial monitoring reports (Annex 7), and resettlement implementation monitoring reports and environmental management monitoring reports (Annex 10). All operations ofthe GEF-supported pilot project will be monitored in detail and evaluated against project targets and against targets at the LME scale (the Fund indicators) (see Annex 17); results will be included in SDEP2 semi- annual progress reports. The Bank will review these reports and recommend corrective actions for the pilot project, as needed, and make suggestions for dissemination activities.

8 4. Sustainability

37. The dedication of Shandong Province, at all levels, to improve urban environmental services indicates a high probability that the project and its outcomes would be sustainable. The municipalities and counties have demonstrated their commitment to the project. For example, they have already established wastewater and solid waste companies under the Company Law during preparation and at appraisal they provided assurances that the necessary physical, financial and staff resources will be available to carry out the project. Sustainable improvement ofthe financial performance, efficiency and effectiveness ofkey urban environmental services, which is the key to project success, is underpinned by Government Tariff Regulation 1192 (1999) and covenants in the legal agreements.

38. Shandong Province would also actively participate in the broad dissemination of the Yantai experience and would support the application oflessons learned from this innovative activity to other municipalities. Accordingly, it will arrange, jointly with Yantai Municipality, annual workshops attended by other coastal municipalities within Shandong to follow the progress and benefits ofthe Yantai pilot project, thus initiating dissemination ofthe experiment from its start. The first ofsuch workshops is planned for early 2007. Shandong Province would report the lessons and experiences from the Yantai pilot to central government agencies including MoF, the National Development and Reform Commission (NDRC) and the Ministry of Construction to promote further dissemination activities in other provinces ofChina.

5. Critical Risks and Possible Controversial Aspects

39. Potential project risks relate mainly to institutional and.financia1 factors as indicated in the following table.

Risk Rating with Potential Risks Proposed Risk Mitigation Measures Mitigation

Close supervision of fiduciary and safeguard Project level governance. M issues. Delay in required tariff setting Agreement reached with key provincial and and collection mechanisms, municipal leaders on setting realistic targets and low user fee collections, based on a comprehensive financial analysis; S threatening financial TA package on financial strengthening during sustainability. project implementation stage. To Component Results Inadequate technical and Timely training on Bank requirements and managerial capacity of some procedures; TA package on project implementing agencies implementation including independent RAP resulting in delayed project and environment monitoring, and close M implementation, including the supervision by SPPMO and the Bank. Resettlement Action Plan (RAP). Counterpart funding Counterpart funding plan reviewed and M

9 insufficient or late. confirmed by SPFB prior to appraisal. Environmental pollution TA to strengthen EPB monitoring and control measures not enforcement; pollution level data collection M effectively enforced. improvement. Composted material from Heze Process operational manual and quality composting facility not control measures including training of plant meeting standards for staff will be developed and instituted. M agricultural and horticultural applications. Overall risk rating. M

6. Loan and Grant Conditions and Covenants

Loan effectiveness: 40. No project specific conditions.

Implementation coven ants: (a) Maintain SPPMO and local PMOSthroughout implementation staffed with adequate qualified personnel;

(b) On-lend the loan and pass the grant on terms and conditions satisfactory to the Bank;

(c) Qixia, Weifang and Zaozhuang to prepare and submit to the Bank, no later than February 28,2008, an operation and maintenance plan (including financing) oftheir respective river embankment and wastewater components;

(d) By June 30,2009, Heze and Rizhao to complete a study report ofthe fees and user charges needed to recover the costs of solid waste management services; the report of that study, to include proposals for improved collections, and a detailed action plan to enable recovery of costs to begin on January 1, 201 1, after taking into account the Bank’s comments on the study report and action plan;

(e) Wastewater companies, together with the relevant governmental agencies such as local municipal administration bureaus and EPBs, to take measures to ensure effective monitoring and enforcement arrangements on acceptable wastewater quality entering its sewers and to record activities in periodic project progress reports (PPRs);

(0 By December 3 1, 2007, Gaomi, Qixia and Weifang to: (i)ensure completion of remedial work on involved dams, and (ii)submit satisfactory operational plans ofthe dams to the Bank;

(g) By February 28 ofeach year (with the exception ofthe first annual report being due on August 3 1,2007), an independent panel ofdam safety experts to report on progress in remedial work and on the safety ofthe four dams; and

(h) Within one year from the commissioning ofthe water supply investments, the Huantai County Government to cause the industries located in the service area ofthe Huantai

10 Water Supply and Wastewater Company, which have their own groundwater sources of water supply, to shut down such supplies and connect to the Huantai Water Supply and Wastewater Company water supply system.

Financial covenants: (a)(i) Commencing in 2008, the water supply company ofGaomi to generate revenues from water supply operations sufficient to cover operating and maintenance costs (before depreciation), increases in working capital, debt service, and 20 percent of the average capital expenditures made in a three-year period; and (ii)commencing in 20 1 1, or another date to be agreed, the water supply company ofHuantai to generate revenues from water supply operations sufficient to cover operating and maintenance costs (before depreciation), increases in working capital, debt service, and 20 percent ofthe average capital expenditures made in a three-year period;

(b)(i) Commencing in 2008, the wastewater companies ofGaomi, Weihai and Yantai to produce total revenues to permit them to break-even (ie., total revenues to cover operating costs and the greater ofdepreciation or debt service); and (ii)commencing in 201 1, or another date to be agreed, the wastewater companies ofHuantai and Qixia to produce total revenues to permit them to break-even (i.e., total revenues to cover operating costs and the greater of depreciation or debt service);

(c) Commencing in 2008, the Rizhao Municipal Environmental Engineering Company Ltd (REEC) to produce total revenues to permit it to break-even (Le., total revenues to cover operating costs and the greater of depreciation or debt service); and

(d) To ensure that any future debt can be serviced satisfactorily, the water supply, wastewater and solid waste companies will incur no additional debt without the Bank's agreement, unless a reasonable forecast shows that they would have a debt service coverage ofat least 1.3 times.

A udit coven ants : (a) The annual audit reports ofproject consolidated statements will be due to the Bank within six months after the end ofeach fiscal year; and

(b) Annual audit reports on the financial position and operating results ofthe utility companies will be due to the Bank within six months after the end ofeach fiscal year.

D. APPRAISAL SUMMARY

1. Economic and Financial Analyses

4 1. Economic analysis. A cost-benefit analysis was conducted for each component. These analyses examined the alternatives considered, including different technical specifications, different locations and differences in the scale ofeach component, to ensure that the best alternative was chosen to achieve the component objectives. "With"

11 and "without" senarios for each component were also examined to derive the incremental costs and benefits of each component.

42. Economic costs for each component were identified as the base cost plus physical contingencies, i.e., without inflation or taxes. Benefit proxies were identified for each component, e.g., health benefits and increased industry production value due to newly available water from the water supply projects, reduction in flood damage costs for the river embankment component, and pollution reduction benefits from the wastewater and solid waste treatment components. The estimated economic internal rates ofreturn (EIRRs) for these components are in the range of 11.8 to 21.6 percent (the discount rate used is 10 percent, as recommended by the NDRC (in 2002). Sensitivity analyses conducted to test the impact of switching the values ofcritical variables confirm that the estimated EIRRs are robust.

43. Following GEF guidelines, the economic analysis for the GEF component is an Incremental Cost Analysis, whereby the incremental benefit from the GEF intervention (monetary and otherwise) is compared to the additional cost of GEF component operation (see Annex 15).

44. Financial analysis. The total disposable receipts of Shandong Province in 2004 were RMB 124.1 billion Yuan. Through prudent management, total budgetary expenditures have risen less than receipts, resulting in surpluses. The average annual cost ofthe project investments represents a small fraction oftotal disposable receipts. The project cost is therefore easily affordable to the province. A financial analysis of participating local bodies was also performed. In all cases, the average annual counterpart funding requirements are less than the projected annual growth rates oflocally generated taxes, suggesting that the local governments can fund all their requirements from these sources. Financial projections were prepared for each utility (water supply, wastewater and solid waste management) company on an annual basis over the period 2006-2020. The projections are based on the following financial objectives ofthe participating municipalities and counties: (a) water supply companies: each company to (i)generate revenues from its water supply operations sufficient to cover operating and maintenance costs (before depreciation), increases in working capital, debt service, and 20 percent of the average capital expenditures made in a three-year period, and (ii)maintain a debt service coverage ratio ofnot less than 1.3 times; and (b) wastewater and solid waste management companies: each company to produce total revenues to (i)cover operating costs (including depreciation), and the amount by which debt service exceeds the provision for depreciation, and (ii)maintain a debt service coverage ratio ofnot less than 1.3 times.

45. The projected average tariffs are included in Annex 9. Projected financial statements and detailed operational and financial monitoring indicators for each company are included in the Project File (see Annex 12). The operation and maintenance and debt service costs ofthe wastewater and river embankment components would come from budgetary allocations (see Annex 9), for which Qixia, Weifang and Zaozhuang are

12 covenanted to prepare, no later than February 28, 2008, an operation and maintenance plan (including financing).

2. Technical

46. The project components were studied by high quality Chinese design institutes and reviewed by international consultants. The implementing agencies have retained the services of the design and tendering institutes to complete the engineering designs, cost estimates and bidding documents. Project designs are technically sound, represent the least cost alternative and use good engineering practices. Where possible, the calculated wastewater flow data were supported by measurements in the field. Selection of wastewater treatment technology, wastewater collection systems and solid waste facilities has been based on operational practices, taking into account the specific conditions in the project citieskounties. The Yantai GEF-supported activity is oriented towards removing legal, institutional and technical barriers faced in the septage sector in China. The primary objective is to develop methods for servicing septic tanks and treating septage sludge, activities that are almost non-existent in Chinese cities.

47. The approaches selected for solid waste management are sound. In Rizhao, the expansion of the existing landfill is in compliance with regulatory requirements as a sanitary landfill with proper measures for leachate, landfill gas, surface and groundwater, and monitoring. In Heze, integrated solid waste management activities would recover recyclable materials, produce compost and waste-derived fuel, thereby reducing the amount of waste requiring final disposal at the sanitary landfill.

3. Fiduciary

48. Financia2 management. The adequacy of the project financial management system was assessed based on guidelines issued by the Financial Management Sector Board on November 3,2005. The assessment concluded that the project meets minimum Bank financial management requirements as stipulated in BP/OP 10.02. It found that the project will have in place an adequate project financial management system that can provide, with reasonable assurance, accurate and timely information on the status of the project in the reporting format agreed with the Bank (see Annex 7).

49. Procurement assessment. The procurement capacity assessment concluded that the procurement risk is considered average. There will, however, be a need to further enhance the procurement capacity of SPPMO and the PMOS,through training, advisory support from the Bank office in Beijing and guidance from supervision missions. For further details on procurement, see Annex 8. The Procurement Capacity Assessment is available in the Project File (Annex 12).

50. SPPMO has selected two firms, namely the China Instrimpex International Tendering Company and the provincial Construction Engineering Tendering Center, as procurement agents for ICB and NCB procurement, respectively. Both are experienced

13 and competent procurement agents, and familiar with the Bank’s procurement procedures.

4. Social

5 1. Social benefit. People in the project area would benefit from the proposed construction ofwastewater treatment facilities, solid waste collection and treatment system, water supply works and river embankment. A social assessment was carried out for each ofthe proposed components. Various social aspects were covered, including participation, gender, social inclusion and exclusion, behavior change, impacts on poverty and social risks. These social aspects were addressed through improved project design. The process ofcarrying out the assessments showed that local people are supportive ofthe project activities since they can perceive benefits. They will have access to an improved water supply system compared to the heavily fluoridated water they have had up to now, particularly in Gaomi. Solid waste and wastewater investments can improve the sanitary environment and reduce exposure to waste-borne diseases. The Yantai GEF pilot project would generate various social benefits, such as the creation of better residential environments by eliminating septic tank overflows, reducing pollution ofthe sea, improving the quality ofbathing beaches and reducing the probability ofthe spread of contagious diseases.

52. Participation. Public consultation and participation played a key role in formulating RAPs. The affected residents, business people and district governments participated in the census, inventory and formulation ofthe livelihood rehabilitation strategy, measures and relocation sites. Their feedback was incorporated in the RAPs. The stakeholders who participated in the RAP preparation would continue to participate in the implementation ofthe RAP.

53. Poverty impacts. Special attention was paid to poor and vulnerable groups during project design and RAP preparation. First, the project design ensured that poor and vulnerable people would have equal access to the services provided by the project. Second, special arrangements have been made for this group ofpeople to ensure that the services provided would be affordable.

54. Social risks. The key adverse social impacts and social risks ofthe project are largely related to land acquisition and housing demolition. In accordance with local laws and regulations, and World Bank OP 4.12 on Involuntary Resettlement, RAPs were prepared for the different components. The RAPSare based on a detailed census ofthe affected people, inventory of affected assets, socio-economic surveys and extensive consultations with the project-affected people.

55. Monitoring ofsocial impacts. Both internal and external monitoring is designed as part ofthe project resettlement management. Independent monitoring would cover not only the physical progress ofRAP implementation, including compensation payments, allocation ofresidential sites, farmland allocation and restoration ofinfrastructure, but would also review the public consultation process, grievance redress mechanisms and

14 restoration ofthe livelihoods ofthe affected farmers.

56. Indigenous people. The detailed socio-economic survey indicates that the project will not affect any minority ethnic groups. Therefore, the Bank's Policy on Indigenous Peoples is not applicable.

57. Gender. The social assessment was carried out using a gender-sensitive approach. Women accounted for about 50 percent ofthe population interviewed during the socio- economic survey, for focus group discussions and individual interviews. There are no gender issues which need to be addressed in project design and implementation.

5. Environment

58. Environmental assessment. The project is classified as Category A under OP 4.0 1. The project consists of several urban infrastructures investments, including wastewater management and solid waste management in nine medium-sized and small cities in Shandong Province. Environmental Assessments (EAs) have been conducted for all the components. An EA for each ofthe project cities was carried out and an environmental management plan (EMP) developed. These followed national procedures and standards as well as the Bank's safeguard policies. The EAs cover the project description, baseline conditions, project justification, benefits, analysis of alternatives, potential environmental impacts, mitigation measures (both at construction and operational stages), EMPs, public consultation and information disclosure. The major findings ofthese EAs and EMPs are presented in Annex 10.

59. Environmental benejit. The project would bring about positive impacts and benefits to both the environment and communities in the project cities, including reduced untreated wastewater discharges, improved water supply systems, improved solid waste collection, transportation and disposal, and community and economic development. The Yantai GEF pilot project would demonstrate management of septic tanks resulting in environmental improvements. In addition, through dissemination in Shandong Province, it would contribute to a reduction in land-based pollution reaching the marine environment.

60. Mitigation measures. The project would cause mostly short-term adverse impacts during construction and some during the operation phase. The EMPs specify appropriate mitigation measures, supervision and monitoring plans, institutional arrangements and training and associated cost estimates. Major mitigation measures include control of construction practices, contractor management, analysis ofalternative alignments, materials and designs and installation ofnoise insulation and barriers at sensitive receptors.

61. Safety ofdams. Four existing reservoirs, Xiashan, Wangwu, Bailanghe, and Anli, would be involved in the project, either to provide raw water for water supply, or for flood regulation. The safety status ofthese dams was reviewed in the context of OPBP4.37, Safety ofDams. Starting from 2003, the province had conducted dam safety

15 inspections and assessments on all large and major medium sized dams, resulting in the project dams being classified as Class C dams, i.e., with quality defects, or unable to function under the design conditions. On the basis of that finding, the central Ministry of Water Resources (MWR) and Shandong Province developed a remedial program to correct the identified deficiencies. This is planned for completion in 2007. Until the remedial reinforcement is completed the water level and the impounding level in the affected dams will be kept at safe levels.

62. Assurances were given during negotiations that: (a) Gaomi, Qixia and Weifang will complete the remedial works by December 3 1, 2007; and (b) Shandong Province will cause Weifang and Yantai each to establish an independent panel of dam safety experts which will report by February 28 of each year (with the exception of the first annual report being due on August 3 1, 2007), on progress in the remedial work and on the safety of the four dams. The technical parameters, safety status and status of remedial actions of the four dams involved in the project are given in Annex 10.

6. Safeguard Policies

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [XI [I Natural Habitats (OP/BP 4.04) [I [XI Pest Management (OP 4.09) [I [XI Cultural Property (OPN 11.03, being revised as OP 4.1 1) [I [XI Involuntary Resettlement (OP/BP 4.12) [XI [I Indigenous Peoples (OP/BP 4.10) [I [XI Forests (OP/BP 4.36) [I [XI Safety of Dams (OP/BP 4.37) [XI [I Projects in Disputed Areas (OP/BP/ 7.60)* [I [XI Projects on International Waterways (OP/BP 7.50) [I [XI * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas.

a. What is the safeguard screening category of the project? (SI, S2, S3, SF): Category S2

b. What is the environmental screening category of the project (A, B, C, FI): Category A

c. Ifapplicable, what are the key safeguard policy issues raised by the project: The EA has not identified any serious environmental negative impacts. Sewage collection and treatment, river embankment, solid waste management and GEF components would have positive impacts on the cities' environmental conditions.

d. Ifapplicable, what are the main results of any safeguardpolicy related studies, and how have they been incorporated into the project? N/A

16 e. What is the borrower capacity to implement the safeguardpolicies recommendations, and, ifthe capacity is insufficient, how will this capacity be brought into the required level? SPPMO, which has guided the preparation and successful implementation ofthe Shandong Environment Project (Ln 4237-CHA) and the Huai River Basin Pollution Control Project (Ln 4597-CHA), has been strengthened by additional staff and given the responsibility to manage project preparation and implementation. The project will also support training, capacity building and implementation assistance to SPPMO and the PMOS. In addition, the Bank will closely supervise safeguard implementation.

f What types of consultations have been conducted regarding safeguard issues? How did these consultations influence the project design? During the project EA, there were at least two rounds ofpublic consultation in each city, involving public opinion questionnaires among directly-affected people, supplemented by meetings with key stakeholders. Issues and concerns raised were incorporated into the project EAs and EMPs, as appropriate.

g. When were the safeguard studies made available in the Infoshop? January 26,2006.

h. When and where safeguard studies were made available in the cooperating country? January 25,2006 in the project citieslcounties.

a. Does the project require any exceptions from Bank policies? No If so. what are thev and how are thev iustified? I b. Have these been atmoved bv Bank mananement? I NIA I

63. The project has obtained a waiver from Bank management with regards to the current BP 4.01 requirement relating to translations ofEIA reports. Chinese language EIA and RAP reports have been prepared for project activities proposed in each city; and have been reviewed and disclosed separately in each project city and in the Bank Infoshop as appropriate. In addition, a consolidated EIA and EMP for the project covering all cities, and a summary RAP for the entire project, have been prepared in English and disclosed. These documents include detailed findings and recommendations, and address in sufficient depth and detail all the critical issues and date needed to support their findings and recommendations. Bank management is satisfied that on the basis of staff review ofthese documents, as well as a review ofthe local language reports by qualified country office and international staff, that the Bank has complied with the review obligations set out in OP 4.01 without the need to resort to translate all ofthe detailed city specific reports into English. In addition, Bank management is satisfied that the Bank would meet the disclosure objectives set out in the policy through disclosure of

17 the above English language documents, together with the disclosure of city specific EIAs, EMPs and RAPSin the Chinese language. The project will comply fully with all other Bank policies.

8. Compliance with Readiness Criteria

Requirement Status 1. Fiduciary (financial management and procurement) Yes arrangements in place - 2. Proiect staff and consultants mobilized - Yes 3. Counterpart funds budgetedheleased - Yes 4. Tender documents for first year procurement are being Yes prepared and will be approved during negotiations - 5. Disclosure requirements met - Yes 6. Results assessment arrangements completed: monitoring and Yes evaluation (M&E) institutional obligations spelled out; M&E capacity in place; indicators specified; baseline data collected 7. Co-financing agreements signed - N/A 8. Land acauisition Dlans readv - Yes

18 Annex 1: Country and Sector Background CHINA: Second Shandong Environment Project

Background 1. Shandong has a land area of 156,700 km2and a 3,000-km coastline on the Bohai and Yellow Seas, both of which drain a major part of the province. Shandong Province has 17 municipalities, 3 1 county-level cities and 60 counties. About 40 percent of the 92 million population live in urban areas. With surface as well as ground water polluted to different degrees, and water resource per capita at one-sixth the national average, shortages of clean water have become the major bottleneck for development. Besides its negative impact on water resources, the uncontrolled wastewater pollution of rivers contributes to serious damage of the Bohai Sea’s ecosystem. Pollution of rivers, together with inadequate solid waste services in many municipalities, has led to a deterioration of the urban environment.

2. Provision of urban water supply, wastewater and solid waste services is the responsibility of municipalities/counties and their agencies. In 2004, wastewater agencies served over 30 million urban residents, of which 20 million had combined systems (12,675 km) and 10 million had separate systems (7,400 km). Wastewater generated in municipalities and counties reached 2.64 billion m3/year,of which 1.35 billion m3/year (51%) and 1.29 billion m3/year(49%) were residential and industrial volumes, respectively. The capacity of municipal/county treatment plants, jointly treating residential and industrial wastewater, reached 1.24 billion m3/year, (47% of wastewater), and in 2005 it increased to 1.8 billion m3/year, (50% of wastewater).

3. In 2004, the province’s water supply agencies produced 2.64 billion m3 of drinking water, servicing about 24.6 million people (at an average of 300 liters per capita per day), or about 68 percent of the total urban populationY2in addition to industry, commerce and institutions, through over 4.6 million water connections. In the same year, the province generated approximately 11.29 million metric tons of municipal solid waste, with a collection capacity of 10.89 million tons. Ofthis, only 3.6 million tons (24.6%) were treated or disposed of in “harmless” ways.

4. The Shandong Environmental Protection Bureau (SEPB) regularly monitors the environmental quality of Shandong’s rivers. Its 2004 statistics show that out of the 50 rivers monitored, over 47 percent failed to meet the Class V quality standard, which represents the environmental limit of acceptability. Pollution loads discharged into rivers from municipalities/counties, expressed in Chemical Oxygen Demand (COD), reached almost 800,000 tondyear, of which about 430,000 tondyear (5 1% of total) were residential.

5. Septic tanks, which are available, and a cost-free on-site treatment facility, are not used. Historically, the municipalities/counties have constructed combined drainage systems to collect raidstorm water as well as wastewater. In order to block the solids in wastewater from reaching recipient rivers, national regulations require that residential

Remaining population are self-suppliers mainly from own wells.

19 buildings use septic tanks as an on-site treatment facility. The efficient functioning of these tanks depends on the timely servicing and removal ofaccumulated sludge. Due to the expense involved, the tanks are emptied only when there is a blockage. Municipalities have not paid attention to this issue for various reasons; lack ofdata on the number, location and size oftanks, and lack of information on the number ofusers are among them. The absence of septic tank servicing has had a serious environmental impact. Reasonably well-operated septic tanks would catch solids and remove about 35 percent of pollution from wastewater.

Sector Strategy 6. For immediate improvement ofthe water sector, the Shandong strategy calls for (a) accelerated restoration ofthe ground and surface water environment, discontinuation of ground water extraction and limitation on its use by industries; (b) increased collection ofgenerated wastewater and treatment to achieve 65 percent and 40 percent oftreatment in municipalities and county towns, respectively, enhancement ofthe quality ofthe treated effluent, and where possible, re-use ofthe treated effluent instead ofusing fresh water; and (c) upgrading the management systems ofsector operating agencies.

7. In the solid waste sector, the overall strategy is to develop adequate solid waste management treatment and disposal facilities to handle 70 percent ofwaste from municipalities and 40 percent ofwaste from county-level towns, with an overall target of 60 percent. Specific goals include: (a) reforming and strengthening the regulatory, management and institutional capacities; (b) establishing tariff levels and tariff collection systems and; (c) establishing waste recycling policies and promoting public awareness for waste reduction, re-use and recycling (3Rs).

Key Issues 8. The key issues currently hindering Shandong’s wastewater sector development are: (a) the ratio between treated and untreated wastewater in Shandong is still very low; only about 50 percent ofwastewater is adequately treated; (b) construction ofwastewater collection systems is allocated low priority, therefore not matching for several years the larger capacity ofWWTPs; (c) the on-site treatment function ofseptic tanks is not used, and responsible units with equipment for tank operation, such as fecal collection tankers and disposal facilities for septage, do not exist in any municipality/county; in addition, the construction ofseptic tanks is still required in new developments which are already provided with separate sewer systems, making the septic tanks redundant; (d) the level of wastewater tariffs set and collected by the municipalities is low and inadequate for satisfactory operation of both the treatment and collection systems; and (e) the management ofthe wastewater sector needs upgrading3and changed from a supply driven approach to a management style that is responsive to consumers; due to its obvious dependence on water supply, the wastewater sector could be planned, operated

Wastewater companies are not involved in drainage. Therefore, in locations with combined sewerage the wastewater company owns and operates only the interceptor sewers and treatment plants. In a separate system the wastewater company owns and operates the entire wastewater collection system and treatment plants.

20 and managed jointly with water supply through independent and financially self- sufficient water supply and wastewater corporations, owned by municipalities.

9. Issues in Shandong Province’s solid waste sector include: (a) fragmented management responsibilities, with municipal governments responsible for disposal facilities, district and county-level cities for waste collection, and community organizations for maintaining sanitary conditions for localized areas, including street cleaning. In addition, the environmental sanitation departments are regulatory agencies as well as owners and operators ofwaste management systems and facilities, which does not foster a market economy nor accountability; (b) a lack ofprovincial policies, which would apply central government guidelines for operating waste management infrastructure and regulating tariffs; (c) an almost complete absence ofpolicies and programs in place for the 3Rs. Public awareness ofthe 3Rs is almost non-existent; and (d) a lack ofproperly designed and operated solid waste disposal facilities, as well as collection and transportation systems. Waste disposal facilities are often simple “open dumps” with little attention given to the potential contamination ofsurface and groundwater resources.

10. In the water supply sector, the issue of shortages in water resources is serious, requiring the construction ofreservoirs on perennial rivers, installation oflong-distance transmission mains and drilling of 300 to 400-meter deep wells. A substantial quantity of water supply is accessed by residents and industries themselves from their own wells, complementing the inadequate capacities ofmunicipal/county centralized systems. While the municipal/county water supply production and distribution facilities have been gradually expanded, little attention has been given to non-revenue water control and centralized water flow/pressure control in transmission and distribution mains.

Addressing Issues and Constraints 1 1. The province has been encouraging municipalities to (a) prioritize wastewater collection, wastewater treatment, and the re-use oftreated effluent in their investment plans; (b) upgrade their municipal solid waste management systems, which have become pressing urban environmental issues on account ofsub-standard collection and the poor sanitary conditions ofexisting disposal facilities; (c) establish corporate enterprises for the management of wastewater, either jointly with water supply, or as independent self- financing agencies; (d) set wastewater charges on a full cost recovery basis in accordance with central government policy directives as set out in Circular (1 999) 1192, jointly issued in September 1999 by the Ministry of Construction, NDRC and the State Environmental Protection Administration; and (e) establish corporate enterprises for management of solid waste operations as independent self-financing agencies towards recovering the costs ofproviding solid waste collection and disposal services.

12. In addressing the issue of septic tanks, Shandong has requested GEF assistance for Yantai, one ofthe municipalities proposed for inclusion in SDEP2, to initiate investments in a very under-financed and insufficiently managed part ofthe wastewater sector in China.

21 13. Promotion of urban wastewater re-use has been given high priority in the State Council Circular Number 36 of 2000, which outlines a number ofpolicies on water, such as increasing the water recycling rate, requiring the adoption of water saving facilities, increasing the urban wastewater treatment rate, and regular publication of water quality monitoring data for major cities. Shandong has issued guidelines encouraging re-use aiming at 20 percent of effluent re-use by 2010. Also, new WWTPs should reserve adequate land for potential future re-use facilities.

14. With its strong commitment to improving its water environment, the province has also co-signed the Memorandum of Agreement initiated by the UNDP/GEF/IMO Regional Program, establishing the Bohai Sea Environment Management Project with the goal of fostering collaboration among adjacent provinces in managing pollution and reducing waste discharges.

15. The central government recently issued guidelines on reforming the solid waste management sector. These guidelines recommend that utilities establish sufficient tariff levels to cover operations and debt service costs, and encourage the contracting of utility services to the private sector to improve efficiency. Several municipalities have taken steps in accordance with these guidelines, but many others have not yet done so due to capacity constraints. There is also a serious lack of oversight and regulatory capacity in the solid waste management sector. Following the central government’s initiative, Shandong has designated municipal solid waste management as one of the key areas of municipal service for development. The province plans, by 2010, to develop 111 new solid waste treatment and disposal facilities (excluding 16 facilities in Qingdao). 14 municipalities also plan to develop large-scale transfer facilities. These new projects would provide a total treatment and disposal capacity of 38,400 metric tondday. TA under SDEP2 would develop a solid waste sector reform program to address most of the issues identified.

Contribution of the Project to the Borrower’s Objectives for the Sector 16. This project would undertake a variety of environmental activities in nine small to medium sized municipalities/counties to assist Shandong in addressing key issues in the wastewater, solid waste and water supply sectors, which are considered the weakest among the municipal services. Accordingly, the project components include investments in wastewater collection and treatment, solid waste systems, and water supply and institutional strengthening of the respective operating agencies. Participating municipalities/counties are located throughout the province; three are on the coast, while the others are inland. The resulting environmental improvements would be substantial and would contribute to improving the livability of the cities through expanding the collection of wastewater, removing pollution loads currently reaching recipient rivers, collecting municipal solid waste and disposing it in a technically and environmentally acceptable fashion, contributing to rehabilitation of ground water resources, and reducing the public health hazards posed by insufficient management of raw wastewater and solid waste.

17. The proposed solid waste sub-projects would provide much needed waste processing, recycling and sanitary disposal facilities in Heze and Rizhao. Furthermore,

22 the two sub-projects would provide solid waste collection and disposal services to an additional population of approximately 335,000 urban residents by the year 2010.

18. The GEF-supported activity in this project would demonstrate the feasibility of ensuring normal servicing ofseptic tanks through technical and institutional arrangements and the positive impact that this would have on reducing pollution in recipient rivers. The GEF activity has significant potential for replication in Shandong, other provinces in China, and throughout East Asia. Cities in Shandong and in China generally collect wastewater by a mix ofcombined systems in older areas and separate systems in newly developed areas. Even if the long-term plans are for the conversion of all systems to separate systems, the high costs involved mean that this is unlikely to happen on a significant scale for several decades.

19. The GEF project would focus on the role of septic tanks in wastewater systems, document their contribution to pollution control in areas provided with combined sewer systems, and demonstrate the waste ofresources resulting from the current country-wide practice ofrequiring that septic tanks are constructed in areas even when they are already provided with separate systems, where their function is nil. Accordingly, Shandong would impress upon respective municipalities to consider, in their own projects, the upgrading of septic tank servicing in areas provided with combined systems even before the results ofthe Yantai experiment are made available. Shandong Province would also actively participate in disseminating the Yantai experience broadly upon completion of the GEF-supported activity and would consider applying regulatory steps supporting the application ofthe lessons learned from the experiment in other municipalities.

20. Institutional strengthening of operating agencies is one ofthe most important components ofthe project. The existing operating agencies are generally weak, with three ofthem established only recently. Their managerial, planning and financial capacities would need to be built up during project implementation. Current wastewater tariffs are relatively low, and fees collected by municipalities for solid waste management also low with none covering operational costs. The status reflects the recent OED report4 findings that wastewater fees paid by households, industry and other institutions in China typically cover only about 30 percent ofoperational costs, and less than 20 percent ofthe costs of operation and maintenance.

21. The Shandong project objective is to accelerate institutional progress within municipal governments and respective utilities, leading to gradual improvement in the overall financial health ofthe agencies (without which a slow downward spiral is imminent) and to improve the efficiency and effectiveness ofurban service delivery, including customer satisfaction.

22. The project would be located in the following six cities and three counties.

The World Bank and China’s Environment 1993-2003.

23 23. Gaomi is the capital City of Gaomi County, one of 12 counties within Weifang Municipality. It has 261,000 inhabitants in an area of 24.7 km2,and is expected to grow to a population of 500,000 by 2020. The component is located in the town but its water supply will also provide water to seven surrounding small townships. The town’s industries include textiles, food processing and machine manufacturing. The total GDP of the county is RMB 8.8 billion Yuan, shared between the first, second and tertiary sectors (1 8%, 50%, and 32%). The GDP comes mainly from industrial activity, with a substantial proportion related to the agricultural sector and a quite weak service sector. The surface water from Wangwu and Xiashan Reservoirs will provide from 85 percent to 100 percent of water, while the remaining 15 percent, from Jiaohe well-field, would be gradually abandoned due to increased water pollution. The component would expand wastewater collection to serve two existing treatment plants. The treated effluent from Gaomi WWTP would flow into the Xiao Kang River, with a required environmental quality of Class V.

24. Heze Municipality, located in the southeast mainland, has a current population of 380,000 in an area of 37.6 km2,which is expected to grow to 720,000 by 2020. The total GDP is RMB5.8 billion Yuan, shared between the first, second and tertiary sectors (21%, 41%, and 35%). Despite an important chemical and food-processing base, Heze has one of the weakest GDP levels within the medium-sized towns of Shandong. Heze municipality, with support from the province, has expressed interest in participating in the Clean Development Mechanism (CDM)’ managed by the Bank’s Carbon Finance (CF) Business Unit. Participation in the CF would provide the municipality with substantial revenues from selling the reduction in gas emissions to the Bank through the CDM.

25. Huantai, the capital City of Huantai County, one of eight within Zibo Municipality, is located near the Bohai Sea. Its 180,000 inhabitants in an area of 11.6 km2 are expected to increase to 400,000 in 2020. The component also affects four neighboring townships (Guihe, Tianzhuang, Tangshan and Guoli). The industries of the town include leather processing, medical chemistry, paper mill, food, building materials and machine manufacturing. The total GDP of the town is RMB10 billion Yuan, shared between the first, second and tertiary sectors (8%, 6 1%, 3 1%), which indicates a large proportion of industry in the economy. Huantai is closely linked to the development of Zibo town, one of the richest and biggest areas of Shandong. It is planned that, before 2025, Huantai would constitute the northern urban district of Zibo City. Surface water from the Yellow River, transferred through Xicheng Reservoir, would replace mainly groundwater extracted by industries, leaving that source exclusively for residential use. The component would expand wastewater collection and provide a WWTP. Treated effluent from Huantai would go into the Dong Zulong River, with a required environmental quality of Class V.

The CDM established by the Kyoto Protocol allows industrial countries to meet their greenhouse gas emission reduction through projects generating emission reductions in developing countries. Under this project, the CDM initiative does not have any linkage to the GEF grant.

24 26. Qkia is the capital City of Qixia County, one of 11 counties within Yantai Municipality, with 99,000 inhabitants. The total GDP of Qixia is RMB6.7 billion Yuan, shared between the first, second and tertiary sectors (24%, 43%, 33%), which indicates that farming makes up a large part of the local economy. The component is located in the Qixia Economic Development Zone, 20 km northwest of the town. The zone currently has a population of 35,000, which is projected to reach 63,000 by 2020. Industries in the zone’s current area of 18 km2include cement production, machine tools, electrical components, clothes making, fruit storage and processing. The component would expand the wastewater collection system, including upgrading of the river embankments, and provide a WWTP, water from which would be discharged into the Baiyang River, which feeds the drinking water reservoir for Yantai, with required environmental quality Level 1B.

27. Rizhao Municipality, located in the Shandong peninsula, is the second largest port of the province on the Yellow Sea, with a population of 430,000 in an area of 40 km2. The population is expected to grow to 820,000 by 2020. The economy is chiefly supported by the harbor and heavy industry. The total GDP is RMB 11.5 billion Yuan, shared between the first, secondary and tertiary sectors (21%, 51%, 28%), which indicates the importance of the agricultural sector and the weakness of the service sector.

28. Weifang Municipality, located on the Bohai Sea, has a population of 970,000 in an area of 118 km2.The population is expected to grow to 1.8 million by 2020. The city industries include chemicals, textiles, papermaking, food processing and machine manufacturing. The total GDP is RMB28.2 billion Yuan, shared between the first, second and tertiary sectors (5%, 6O%, 35%), which indicates the importance of industrial production and the weak of the agricultural sector in the economy. The component, reflecting the detrimental effect of pollution during extended dry periods in two central districts, would upgrade river water quality through the transfer and treatment of city effluent downstream of the city. Extensive improvement to the river embankments, including upgrading of flood protection, is also included. The recipient of Weifang effluent is the Bailang River, with planned quality within and downstream of the city of Class V, about 50 km downstream of Weifang before discharging into the Bohai Sea. The environmental regulation requires Class I11 quality.

29. Weihai Municipality, located in the Shandong peninsula, is a port on the Bohai Sea with 590,000 inhabitants in an area of 62 km2.The population is expected to grow to 1.25 million by 2020. The city industries include electronics, chemicals, plastics, food, construction materials, textile and machine manufacturing. The total GDP is RMB22.5 billion Yuan, shared between the first, second and tertiary sectors (7%, 54%, 39%), which indicates a good balance between the industrial and service sectors. The component would expand the wastewater collection system in the central district to serve a treatment plant which is under construction. Effluents from Weihai would flow into the Yellow Sea through a sea outfall, with a required environmental quality of Class 11.

30. Yantai Municipality, located in the Shandong peninsula, is a port on the Bohai Sea with 1.1 million inhabitants in an area of 135 km2.The city industries include textile, energy generation, chemicals and light equipment manufacturing. The total GDP is

25 RMB50.3 billion Yuan, shared between the first, second and tertiary sectors (5%, 58%, 37%) indicating that a large part is industrial, and very small proportion is agricultural. The component would expand the wastewater collection systems in two districts, including a WWTP and re-use of treated effluent. The GEF-supported activity would demonstrate the impact of regular servicing of septic tanks and joint treatment of septage with wastewater, on reducing pollution loads. Effluents would be directed to the Yellow Sea with a required environmental quality of Class I.

3 1. Zaozhuang Municipality, located in the southern mainland, has a population of 390,000 in an area of 42.3 km2,which is expected to grow to 480,000 by 2020. The city industries include coal mining and processing, power generation, chemicals, food processing and light equipment manufacturing. The total GDP is RMB3.57 billion Yuan, shared between the first, second and tertiary sectors (7%, 54%, and 39%). The per capita GDP is RMB7,275 Yuan, which is about half ofthe provincial average. The component would expand wastewater collection systems in the central districts along two rivers, including their upgrading, to serve two WWTPs, one existing and the second under construction, and re-use oftreated effluent. The recipients of the city effluent are the Yi Chengsha and Xisha Rivers, with planned quality within and downstream ofthe city of Class IV.

26 Annex 2: Major Related Projects Financed by the Bank and/or Other Agencies CHINA: Second Shandong Environment Project

Sector Issue

Yangtze Flood Restorationof social and economic Emergency Rehab. S S infrastructure damaged by flood. (Ln.4438, Cr. 3169 and ICR No. 24876)

Irrigation, drainage, flood prevention, protection of the river bank, improves critical Yangtze Dike sections of existing main dykes in Hunan and Strengthening S S Hubei Provinces, and supports institutional (Ln. 45700) reforms.

Policies, institutional arrangements for water supply, wastewater and pollution control; Shandong water and wastewater collection in Jinan; S Environment Project S water resource management in the Xiaoqing (Ln 4237) River basin; and management of pollution control and environmental services.

Water supply, municipal and industrial Japanese Bank for Implementationperformance reported wastewater treatment, air pollution International satisfactory. Assistance focused exclusively management (several projects). Cooperation on investment. Urban services, environment, water resources Asian Development Performance reported satisfactory. (several prqjects). Bank

IPDO Ratings: HS (Highly Satisfactory); S (Satisfactory); U (Unsatisfactory); HU (Highly Unsatisfactory)

27 Annex 3: Results Framework and Monitoring CHINA: Second Shandong Environment Project

Results Framework Use of Outcome PDO Information

The development objective of the -Citizens’ satisfactionwith Benchmarking~~ the performance and project is to improve the wastewater, solid waste and water efficiency of public services environmental conditions in supply services in participating satisfactory for citizens participating municipalities/counties cities/counties through a package of priority -Improvement of water quality interventions, including upgrading within participating cities/counties and development of wastewater -Percentage of population connected collection and treatment facilities, to WWTPs river embankment rehabilitation, solid -Percentage of treated effluent reuse waste management, water supply -Rate of compliance of connected improvements, industrial pollution industries with the discharge monitoring, and enhancement of the standards financial performance and efficiency -Percentage of population provided of key urban environmental service with solid waste services agencies. GEF Global Environment GEF Component: Benchmarking the performance of Objective: Pollution discharge to Bohai Sea the septic tanks management and The Global Environmental Objective reduced efficiency of reduction of pollution of the GEF activity is to reduce land- based pollution through demonstration and dissemination of the Yantai model in Shandong Province Intermediate Results Results Indicators for Use of Results Monitoring One per Component Each Component Wastewater Component: Wastewater Component: Wastewater Component: Expanded wastewater services in -Volume of wastewater treated in the -Key performance data in participating cities/countiesof cities/counties management information system of Shandong Province would (a) -Rate of wastewater treated in the wastewater companies substantially improve the local cities/counties -Input in provincial data base for environment; and (b) reduce the -Reduction of pollution load reaching defining sector policies and planning pollution load reaching recipient the recipient rivers further expansion of wastewater rivers and the Bohai Sea. services in participating cities/counties and elsewhere in Shandong Province Solid Waste Component: Solid Waste Component: Solid Waste Component: Expanded solid waste services in -Weight of municipal solid waste -Key performance data in participating cities/countiesof collected and transferred to sanitary management information system of Shandong Province would improve landfills solid waste companies local environment -Rate of municipal solid waste -Input in provincial data base for collected and transferred to landfill defining sector policies and planning further expansion of solid waste services in participating cities/counties and elsewhere in Shandong Province * Via reports from independent technic, and social audit teams.

28 R wlts Framework (Continue Intermediate Results Results Indicators for One per Component Each Component Water Supply Component: Water Supply Component: Water Supply Component: Substantial reduction of groundwater -Population-accessto water supply -Key performance data in mining and improved water supply services management information system of services in participating -Water production from ground and water supply companies cities/counties of Shandong Province. surface sources -Input in provincial data base for -Non-revenue water as percent of defining sector policies, with regard water produced to protection of groundwater in particular, and planning further expansion of water supply services in participating citieskounties and elsewhere in Shandong Province Sector Development and Capacity Sector Development and Capacity Sector Development and Capacity Building Component: Building Component: Building Component: -Improvement of the financial -Cost recovery ratio of wastewater -Key performance data in performance and efficiency of key management operations management information system of urban environmental services under -Cost recovery ratio of solid waste wastewater, solid waste, and water the control of participating management operations supply companies cities/counties in Shandong Province. -Cost recovery ratio of water supply management operations

-Improvement of the capacity of the -Numbers of installation of online -EPB key performance data in EPB in monitoring of industrial automatic monitoring stations at management information system pollution control. industrial discharge sites -Public disclosure of the status of compliance of major pollution enterprises GEF Component: GEF Component: GEF Component: Pilot demonstration of (a) impact of -Volume of septage collected in -Evaluation of achievement of pilot serviced septic tanks on reduction of Yantai demonstration objectives, inputs and pollution in recipient rivers; and (b) -Volume of septage jointly treated outputs dissemination experiment in with wastewater in Yantai -Dissemination plan of pilot Shandong cities. demonstration achievements in Shandong Province and in China

29 Arrr igements fc Results M nitoring Targel llection and RI wting Mid-Term Data Responsibilit Baseline Review Collection y for Data Dec 2005 Dec 2009 Instruments Collection -Citizens’ satisfaction Consolidated SPPMO SPPMO, with wastewater, solid Semi-annual Reports, participating waste and water supply (a) 66% (a) 75% (a) 92% PPR Independent cities/counties services in participating audits cities/counties

-Improvement of water quality in citiedcounties 0 148 km 148 km from Class V to Class VI

-Percentage of population 58% 80% 85% connected to WWTPs

-Percentage of treated 0.2% 15% 21% effluent reuse

-Rate of compliance of connected industries with 60% 70% 90% the discharge standards

-Percentage of population provided with solid waste 84% 90% 95% services

GEF Component: Consolidated Independent SPPMO, -Pollution discharge to Semi-annual audits Yantai Bohai Sea reduced 0 680 1700 PPR municipality (BOD todyear)

Results Indicators for Each Component Wastewater Consolidated SPPMO, SPPMO, Component: Semi-annual Supervision participating -Volume of wastewater 103 197 226 PPR Reports cities/counties treated (million m3/year) -Rate of wastewater treated in the 65% 70% 80% cities/counties (%) -Reduction of pollution load reaching the recipient 9,400 20,000 28,000 rivers (ton COD/year)

(a) Summary Social t iessment of the Second Shandon, kvironment Pi iect, February 2 16.

30 A pangerne led) 3llection and R jorting Data Responsibility Baseline Frequency Outcome Indicators zompletion Collection for Data Dec 2005 and Reports Dec 2009 Dec 2013 Instruments Collection Solid Waste Component: Clonsolidated SPPMO, SPPMO, .Municipal solid waste Semi-annual Supervision participating :ollected and transferred to 293,460 387,265 450,775 PPR reports citiesicounties sanitary landfill (todyear) Water Supply Component: Consolidated SPPMO, SPPMO, -Population access to water 84% 97% 97% Semi-annual Supervision participating supply services (YO) PPR reports citieshowns -Water production a) Total million m3/year 46.72 75.55 104.03 b) Groundwater/totalwater 85% 3 9% 3 9% production (YO) c) Liters/capita/day 101 115 127 -Nomevenue water in % of water produced (%) 25% 22% 20% Sector Development and Consolidated SPPMO, SPPMO, Capacity Building S emi-annual Supervision participating Component: PPR reports citiedcounties -Cost recovery ratio of wastewater management 2.5% 1.5% 1.2% operations (YO) -Cost recovery ratio of solid waste management operations 1.O% 1.3% 1.4% (Oh/.) -Cost recovery ratio of water supply management 1.6% 1.5% 1.2% operations (YO) -Numbers of installation of online automatic monitoring 366 600 800 stations at industrial discharge sites -Public disclosure of the Annual Quarterly Monthly status of compliance of major Report Report Report pollution enterprises GEF Component: Consolidated SPPMO, SPPMO, Yantai -Volume of septage collected 50 150 Semi-annual Supervision Municipality in Yantai (1,000 tonsiyear) PPR reports, GEF -Volume of septage jointly monitoring treated with wastewater in 50 150 and Yantai (1,000 tonsiyear) evaluation program

31 Annex 4: Detailed Project Description CHINA: Second Shandong Environment Project

1. The project’s physical components of wastewater, solid waste and water supply are located in six cities: Heze, Rizhao, Weifang, Weihai, Yantai, and Zaozhuang, and three counties: Gaomi, Huantai, and Qixia. The pilot GEF-supported septic tank management activity is associated with Yantai. The institutional development and capacity building component is spread over institutions involved in the project and wastewater, water supply and solid waste sectors. The detailed description of the project is as follows.

Component 1: Wastewater Management - US$206.9 million

2. Component includes construction ofwastewater collection systems, treatment plants, treated effluent re-use facilities, pilot septic tanks management and associated river improvements.

Pipeline Pump Name of City/ Collection Length km WWTP’ Associated River Improvement County Network Diameter Capacity mm m3/day m3/day Gaomi a) Sanitary sewers for 63.6 km 20,000 -- __ existing WWTP; 400-1000 serving existing b) Interceptor for 8.4 km WWTP Chengbei WWTP 1200-1650 combined system. Huantai Sanitary sewers for 79.1 km __ Bei, __ Bei WWTP. 300- 1200 70,000 mVday Qixia Primary and 60 km __ Dongsheng, a) Embankment (4.9 km) with secondary sanitary 300-800 20,000 service road (6 m wide) on crest at sewers and trunk mYday left bank of the Baiyang River; collectors for b) Tube rubber weir 1.5 m high at Dongsheng WWTP. the Yandi River.

Improvement ofrivers is a part of the project as an investment associated with wastewater, mainly for protection of interceptors laid along the rivers. The respective municipalities requested that such protection works include upgrading of the riverbanks (parks and greenery) and the Bank has not objected. Civil works contracts would combine both wastewater and river improvements into one contract.

32 Table 1: Wastewr er and Ass aiated E ver Impro :ment (Continued) Pipeline Name of Pump City/ Collection Length km WWTP, Station Associated River Improvement County Network Diameter Capacity &/day mm mVday Weifang a) Interceptor sewers 32.0 km (2 x __ a) Retaining walls (2 x 16 km) and on both banks along 16.0 km) bund road (6 m wide) along banks in the Bailang River; Sizes from urban section; 1.65 mx 1.5 b) Excavation of silt from the river m to 3.2 x 2.9 bottom’ along 21.7 km, and 400,000 m m3of abandoned solid waste dump; b) Pre-treatment of Oxidation c) Two rubber and 4 concrete gated flow intercepted along pond - weirs to form about 4 m depth in the the Bailang River. volume: river; 360,000 m3 d) Plant trees, greenery, and landscaping in urban section (573,000 mz). Weihai a) Extension of 62.9 km Power -- __ sanitary sewers in 300- 1400 supply/ districts Iand 11; controls b) Transmission main 1.65 km wang- from Laoji PS to 1400 dao and WWTP #2; Laoji c) Replacement of 7.0 km Pump treated effluent rising 1000 stations main; d) Emergency outlet 1.65 km from WWTP #2 to 1200 Laoji PS. Yantai a) Interceptor sewers; 14.1 km Mup. Xinanhe 400-1200 new 80,000 b) Treated water reuse 1.0 km 20,000 m31day supply pipe; 3 00 and Laishan c) Extension of sea 3.2 km upgrade outfall. 1500 Zao- a) Interceptor sewers 13.2 km a) Xisha River: rehabilitation (10.2 zhuang and combined sewers 600-1500 km), including embankments, for Dongsha WWTP; removal of silt from the river bottom’, 14 tube rubber weirs, 5 b) Trunk mains and 27.6km bridges, walkways, and 78,000 m2 sanitary sewers 300- 1400 river banks greening; serving Xisha WWTP; b) Dongsha River: rehabilitation (4.9 km), including embankment, c) Treated water reuse 16.4km removal of silt from the river supply pipe to enhance 350 and 500 bottomg, 5 rubber weirs (1 5-28 flows in Dongsha and wide, dia 3.0 m), seven bridges, 7 Xisha Rivers. km walkways, and 118,000 mz banks greening.

~______7 Total volume estimated at 2.0 million m’, of which 200,000 m3would be used for the greening of riverbanks and 1.8 million m3would be disposed of at sanitary landfill. Silt would be excavated from the river after the rainy season when the river dries out. Total volume estimated at 102,000 m3, ofwhich 31,300 m3would be used for the greening of riverbanks and 70,700 m’ would be disposed of at sanitary landfill. Silt would be excavated from the river after the rainy season when the river dries out. Total volume estimated at 37,000 m3,which would be used for the greening of riverbanks. Silt would be excavated from the river after the rainy season when the river dries out.

33 Number of Septic No of Fecal Daily Septage City’ Tanks in Tankers in Collected Auxiliary Facilities County the Pilot Operation m3/day Area De-silting device at pumping station Yantai 1,700 14 130 Parking lot for fecal tankers Washing bay for fecal tankers

Past experiences of Yantai and the various agencies involved, as well as those of PEMSEA and the World Bank will be revisited. Since no information needs assessment has been conducted in the past, effort will be exerted to ascertain the following, either through a mix of techniques, such as, secondary sources of information, focused group discussions and individual interview: (i)Awareness level; (ii) Information source; (iii)Information and training needs; (iv) System of dissemination and feedback; and (v) Relevant comments and suggestions.

The results will serve as basis in the production and dissemination. It will also ensure that the information is relevant to the public, the channels and approach used effective, and the materials useful as preparatory to consultation activities.

In addition to the project-funded dissemination activities described above, the GEF activity will also include separately funded-activities to disseminate and promote the adoption of various technologies and pilot projects.

34 Component 2: Solid Waste Management - US$24.3 million

3. Component includes construction of: (a) an integrated solid waste processing, recycling, composting and sanitary landfill facility in Heze; and (b) sanitary landfill extension, transfer stations, and collection facilities in Rizhao.

Table 2: Solid Waste City/ Disposal Facility Collection Facility Supporting Equipment County Heze a) Waste processing and recycling, -- Excavator, waste compactor, capacity of 660 tonslday; earth mover, various loaders, b) New sanitary landfill, pesticide vehicle, water spray site capacity of2.38 million m3, applicator, 11 five-ton tip service life of 20 years at 280 trucks, vacuum truck, fuel tonslday; and truck, electronic scale, c) Composting plant, various operational vehicles, Processing 304 tonslday. etc. Rizhao Phase I1of sanitary landfill, Construction of20 3 excavators, waste site capacity of 3.24 million m3, waste collection compactor, 2 earth movers, service life of 18 years at 500 stations with capacity various loaders, 3 five-ton tip tonslday, leachate collection and of 8 tons per station; 20 trucks, pesticide application treatment. five-ton waste transport vehicle, five-ton fuel truck, vehicles, 10 street various vehicles, etc. cleaning vehicles, 10 street washing vehicles, 10 five-ton construction demolition transport vehicles.

35 Component 3: Water Supply Management - US$34.6 million

4. Component includes construction and rehabilitation of WW, transmission mains, distribution network, and upgrading of central control systems.

Tal Transmission Main Distribution City/ ww Length in km Network County Capacity m3/day Diame r in mm Length in km Raw Water Treated Water Diameter in mm Gaomi a) New Kanjia WW To Kanjia WW From Kanjia WW 93.0 km, 30,000m3/day; 9.8 km, 1000 10.3 km, 1000, and 125-800 b) Increased capacity of mm 10.5 km, 800 (incl. supply to Nanhu WW fiom 30,000 villages with high m31dayto 45,000 m3/day; fluoride water 58 c) Increased capacity of km 125-300)’0 Beihu WW from 15,000 m’lday to 30,000 m3/day; and d) Upgrade water supply system, central control room, control ofNRW. Huantai a) New WW 14.9 km 100,000 m31day; and 1100 100-1100 b) Upgrade water supply system, central control room.

Component 4: Institutional Development and Capacity Building - US$4.5 million

5. Component includes the following:

(a) Construction management and business development (US$2.55 million) to support: (i)design review and advisory services for project management; (ii)procurement support for NCB and ICB; (iii)construction supervision; (iv) monitoring implementation of agreed EMPs and RAPS; (v) institutional improvements to the water supply, wastewater and solid waste management companies; and (vi) financial operational improvements to the water supply, wastewater and solid waste management companies;

10 A new Kanjia WW (30,000m3/d) will provide water for replacing a self-supply from individual wells in the city and in a few surrounding villages, with a population of about 120,000, where the health department requested piped supply to replace well water containing high levels of fluoride. Alternative treatment of that contaminated water was never considered. A system based on water with high fluoride would require construction of production wells, treatment (possibly by ion exchange), raw and treated water pumping, and disposal of wash-water from treatment. If groundwater sources would be used, (even when that source is being abandoned due to dropping water levels) it would be a better alternative to avoid high fluoride water pockets and construct production wells in non-fluoride areas, which exists around Kanjia. The current surface source is the abundant surface waters (Wangwu Reservoir with a volume of 74 million m3)obtained by gravity up to the WW. The water demand of the villages is about 6,000m3/day, representing about 20 percent of new capacity; the latter alternative will have, due to the economy ofscale, lower investment unit costs per m3than for the separate construction of production wells and WW.

36 (6) Sector studies (US$0.5 million) to: (i)develop, through a solid waste sector study, an integrated framework that would facilitate the reform of technical, regulatory and management policies and programs, identify environmental issues, improve efforts in the 3Rs, strengthen institutional capacity, establish effective tariff, fee or charge structures and collection systems, and develop a more competitive market economy for solid waste management; and (ii)reinforce the debt management capacity at the municipal and provincial levels of government through: a) a debt management study; b) upgrading the debt management system; and c) strengthening the capacity of the SPFB. In addition, associated with the proposed project, a water sector performance assessment, financed by the Consultant Trust Fund, is implemented by SPPMO. The assignment will collect and process data for urban water benchmarking in Shandong Province on the basis of the IBNET toolkit that will allow learning, sharing information and adopting best practices to bring about changes in performance. The report of the assessment will analyze the results and compare Shandong water supply utilities with its peers in northern China and around the world.

(c) Capacity building of provincial EPB (US$ 1 million) to support priority studies and training in the following two areas: (i)extension of on-line monitoring systems - “Digital Environment ”- which would include design and implementation of networks for data collection, transmission and processing, design and implementation of management information systems, provision of equipment for monitoring rivers, and training for system operation; and (ii)a study on restoration of watersheds. The component will assist the provincial EPB in strengthening its pollution control capacity, including controlling industrial pollution at source.

(d) Capacity enhancement of provincial and local government decision-makers and project owners (US$0.55 million) to provide advice and assistance to decision-makers in addressing urban environmental issues through focused training and study tours.

37 Annex 5: Project Costs CHINA: Second Shandong Environment Project

1. The estimated total cost of the project is US$270.33 million, including contingencies, taxes and duties. Estimates are based on FS Reports with unit prices adjusted to those received in recent bids and updated to end-2005. Physical contingencies are estimated at 7.5 percent of baseline costs and price escalation is based on a projected national inflation rate of2.0 percent for 2006 and thereafter and an international inflation rate of 3.4 percent for 2006, 1.5 percent for 2007 through 2009 and 1.3 percent thereafter. Summary cost estimates are provide below:

Local Foreign Total Project Costs by Component I I US%million A. Wastewater Management Gaomi Country Wastewater 6.17 2.45 8.62 Huantai Country Wastewater 10.23 3.66 13.89 Qixia Wastewater and Associated River Improvement 6.79 2.34 9.13 Weifang Wastewater and Associated River Improvement 49.14 17.47 66.61 Weihai Municipal Wastewater 11.18 4.51 15.69 Yantai Municipal Wastewater and GEF 13.50 10.25 23.75 Zaozhuang Wastewater and Associated River Improvement 36.69 8.00 44.69 Subtotal Wastewater Management 133.70 48.68 182.38 B. Solid Waste Management Heze Solid Waste 10.00 3.31 13.31 Rizhao Solid Waste 5.70 2.25 7.95 Subtotal Solid Waste Management 15.70 5.56 21.26 C. Water Supply

Gaomi Water SumlvII , 10.84 4.06 14.90 Huantai Water Supply 11.47 4.02 15.49 Subtotal Water Supply 22.31 8.08 30.39 D. Technical Assistance and Capacity Building Technical Assistance and CaDacitv Building 4.52 4.52 Subtotal of Technical Assistance and Capacity Building - 4.52 4.52 BASELINE COSTS 171.71 66.84 238.55 Physical Contingencies 12.88 4.30 17.18 Price Contingencies 10.80 3.80 14.60 TOTAL PROJECT COSTS 195.39 74.94 270.33 Interest during Construction 7.32 7.32 Commitment Charges 3.46 3.46 TOTAL COSTS TO BE FINANCED 206.17 74.94 281.11

38 Table 2: Total Cost

Total Costs Bank GEF Counterpart Charges during to be Loan Grant Fund Project Implementation cost Financed

54% 2% 44% 100% - 52% 2% 42% 96% 4 yo 100%

39 Total Yantai Pilot Project Component costs GEF Municipality US$ million Establishment of Septic Tank Institution 0.52 0.52 Provision of Facilities and Equipment 2.07 2.07 I Project Operations I 0.82 I 0.82 I Joint Sewage-Septage Treatment in Xinanhe 0.04 0.04 Consulting Services 0.98 0.98 Project Management, Monitoring, Evaluation 0.77 0.37 0.40 Dissemination and Dromotion 0.20 0.20 I Total Pilot Project Costs 5.40 I 5.00 I 0.40

40 Annex 6: Implementation Arrangements CHINA: Second Shandong Environment Project

1. Implementing Agencies. Water supply, wastewater and solid waste municipal agencies would have overall responsibility for implementation of the project, and upon completion, as the facilities’ owners, for their operation and maintenance. The implementing agencies would report to the participating municipalities and counties. The implementing agencies and project components are shown in the following table.

ImDlementine Agencies Municipality Proposed Component Responsible Agency (1)Water Supply Gaomi City Water Supply Weifang Municipality (2) Wastewater Company Heze Yuwa Solid Waste Heze Municipality Solid Waste Management Management Company (1) Water Supply Huantai Ji Yuan Water Supply Zibo Municipality (2) Wastewater and Drainage Company Qixia Dongsheng Water Wastewater, Associated Yantai Municipality Supply and Drainage River Improvement Company Rizhao Municipal Rizhao Municipality Solid Waste Management Environmental Engineering Co. Ltd. Wastewater, Associated Weifang Municipal Weifang Municipality River Immovement Maintenance Division Weihai Water Management Weihai Municipality Wastewater Group Company Yantai Xinan River Wastewater Wastewater and Drainage Yantai Municipality Company GEF-Septic Tank Yantai Municipality Management Wastewater, Associated Zaozhuang Yiyuan Zaozhuang Municipality River Improvement Wastewater Treatment Center

2. In China, the standard pattern for assisting implementing agencies with projects supported by foreign financing includes formation of a LG at the key agency level, to provide guidelines and to facilitate various approvals. A PMO, reporting to the LG, normally manages day-to-day operations of the project. In accordance with those procedures, Shandong has established the following implementation arrangements.

3. Provincial Leading Group. A provincial LG, headed by a vice-governor of Shandong Province, has been established to guide formulation and to give policy direction to implementing agencies. Members include the Mayors of Heze, Rizhao, Weifang, Weihai, Yantai and Zaozhuang Municipalities and Gaomi, Huantai and Qixia Towns, and the directors of the main provincial government bureaus and commissions,

41 including the Provincial Development and Reform Commission (DRC), Provincial Finance Bureau, Provincial Construction Bureau, the Provincial EPB and Land Management Bureau. The LG has designated the Shandong Provincial Construction Bureau as the provincial agency for managing preparation and implementation of SDEP2. The Bureau has decided to use, for day-to-day management and coordination of the project, its existing SPPMO.

4. Provincial Project Management Office. SPPMO's responsibilities include: (a) overall project coordination, management and monitoring; (b) annual budget preparation; (c) project-wide quality assurance; (d) regular progress reporting (on physical implementation, safeguards and financial management) to SPG and the Bank, including cost management, project impact and environmental improvement assessment; (e) interagency coordination and procurement support; and (f) training and TA facilitation. The Shandong Provincial Construction Bureau has reinforced SPPMO recently with new staff for financial and procurement functions, and would provide additional staff as necessary. SPPMO has adequate office space, furniture and equipment including computers, printers, copiers and scanners, telephones, vehicles and various office supplies.

5. A firm of consultants would support SPPMO in overall project management, advisory services, and reporting, including reviews of: (a) detailed engineering designs and bidding documents; (b) procurement support for NCB and ICB (bid evaluation and contract awards); and (c) construction supervision and contract management.

6. MunicipaYCounty Leading Groups and PMOs. Arrangements at the provincial level are mirrored at the municipalkounty level. The participating municipalities and counties have established and staffed LGs and PMOs. The responsibilities of the PMOs at the municipal and county levels are to guide the preparation and execution of the project components within their jurisdictions. They would receive functional guidance from and report to both LGs and SPPMO. A separate firm of consultants provided under the Package A consultancy contract will assist Yantai Municipality and its PMO in managing the GEF-supported pilot project.

7. The skill mix of SPPMO and the PMOs would be adjusted from-time-to-time, as necessary, to reflect the needs of the various phases of project preparation and implementation.

42 Annex 7: Financial Management and Disbursement Arrangements CHINA: Second Shandong Environment Project

1. Executive Summary. The Bank conducted an assessment of the adequacy of the project financial management system of SDEP2. The assessment, based on guidelines issued by the Financial Management Sector Board on November 3,2005, has concluded that the project meets minimum Bank financial management requirements, as stipulated in BP/OP 10.02. The project will have in place an adequate project financial management system that can provide, with reasonable assurance, accurate and timely information on the status of the project in the reporting format agreed with the project and as required by the Bank.

2. Funding sources for the project include the Bank loan, GEF grant and counterpart funds. The Bank loan proceeds and GEF grant will flow from the Bank into the project- designated accounts (DAs) to be set up at and managed by SPFB, to the Municipal Finance Bureaus (MFBs), to the County’s Finance Bureaus (CFBs) of the implementing cities, then to various project implementing entities, and finally to contractors or suppliers. The Bank loan and GEF grant will be signed between the Bank and the People’s Republic of China through its MoF, and on-lending agreements for the Bank loan will be signed between MoF and SPG through SPFB, and then between SPFB and various MFBs and CFBs, and finally on-lent to various implementing entities. The constitution of counterpart funds will be appropriations from municipal and county governments.

3. No outstanding audits or audit issues exist with any of the implementing entities involved in the project. However, the task team will continue to be attentive to financial management matters during project supervision.

4. Audit Arrangement. The Bank requires that project financial statements be audited in accordance with standards acceptable to the Bank. In line with other Bank- financed projects in China, the project will be audited in accordance with international auditing standards and the government auditing standards of the People’s Republic of China. The Shandong Provincial Audit Office has been identified as auditors for the project. Annual audit reports will be issued by the above audit office and will be subject to review by the China National Audit Office (CNAO). The Bank currently accepts audit reports issued by CNAO or provincial/regional audit bureaus/offices for which CNAO is ultimately responsible.

5. The annual audit report of the project’s consolidated financial statements will be due to the Bank within six months after the end of each calendar year. This requirement is stipulated in the Bank’s legal agreements and the GEF Grant Agreement. The responsible entity and timing are summarized as follows:

Audit Report Submitted by Due Date Consolidated project financial statements SPPMO June 30 each calendar year

43 6. In addition, annual audit reports on the financial position and the operating results of the following companies will be due to the Bank within six months after the end of each calendar year: Gaomi City Water Company, Heze Yuwa Solid Waste Management Company, Huantai Ji Yuan Water Supply and Drainage Company, Qixia Dongsheng Water Supply and Drainage Company, Rizhao Municipal Environmental Engineering Company, Weihai Water Management Group Company, and Yantai Xinan River Wastewater and Drainage Company.

7. The financial statements for these entities are not fiduciary requirements, but rather for sustainability purposes. The requirements for this audit will not be included as part of the loan covenant but rather included in Section 1I.B. of Schedule of the Project Agreement.

8. Funds Flow and Disbursement Arrangements. Funds flow for the Bank loan and GEF grant will follow Bank and MoF requirements. Two DAs, one each for the loan and grant, will be established and managed by SPFB. The funds flow will be as follows:

L MFBofHeze ’Heze Yuwa Solid Waste --+ MFB of Rizhao Rizhao Municipal Environmental - Engineering Co. Ltd -- D Weifang Three Rivers Construction - A Co., Ltd. CFB of Gaomi Gaomi City Water Company Limited -

S - B P MFB of Weihai Weihai Water Management Group e A F N B r h Yantai Xinan River Wastewater - Treatment Co. Ltd.

b I ir . , CFB of Qixia Qixia Dongsheng Water Supply and - Drainage Co. Ltd

Zaozhuang City Yiyuan Wastewater - Treatment Center

Huantai Ji Yuan Water Supply and - MFB of Zibo CFB of Huantai Drainage Company

9. Counterpart funds mainly will be appropriations from municipal and county governments. The appropriations will be provided to the implementing entities through various MFBs or CFBs.

44 10. Bank loan proceeds would be disbursed against eligible expenditures as indicated in the following table:

Table 1: Loan Disbursement Schedule

45 1 1. The GEF pilot project will be implemented by Yantai Municipality. GEF grant proceeds would be disbursed against eligible expenditures as the following table shows.

Table 2: GEF Disbursement Schedule Amount of the Grant Expenditures to be Category Allocated Financed (US$ million) (1) Goods and works for the implementation ofthe project at 2.37 100% Tongbozi pumping station and Xinanhe WWTP I (2) Consultants’ services, training and 1.81 100% dissemination under the project (3) Incremental oDerating: costs 0.82 100% I Total I 5.00 I I

12. Four disbursement methods are available for the project: reimbursement, advance, direct payment and special commitments. The statement ofexpenditures (SOE) will be used to document expenditures against the contracts not subject to prior review; invoice payment evidence will be required for expenditures against the contracts subject to the Bank review. Two DAs, one each for the World Bank loan and GEF grant, will be segregated accounts established in SPFB. For the World Bank loan, the authorized allocation ofDA is proposed to not exceed US$15 million. For the GEF grant, the authorized allocation of DA is proposed to not exceed US$0.75 million. SPFB will be directly responsible for the management, monitoring, maintenance and reconciliation of the DA activities ofthe project. Supporting documents required for Bank disbursements will be prepared and submitted by respective project implementing entities through MFBs and CFBs in each city, then to SPFB for final verification and consolidation before sending to the Bank for further disbursement processing. The flow of withdrawal applications is as follows:

46 Heze Yuwa Solid Waste Company 7MFBofHeze - Rizhao Municipal Environmental MFBofRizhao - EngineeringCo. Ltd-

Yantai Xinan River Wastewater Treatment Co. Ltd. - 4-j MFB of Yantai N Qixia Dongsheng Water Supply and CFB of Qixia Drainage Co. Ltd - Zaozhuang City Yiyuan Wastewater b MFB of - Treatment Center Zaozhuang

Huantai Ji Yuan Water Supply and CFB of Huantai MFB of Zibo - Drainage Company

MANAGEMENT AND REPORTING REQUIREMENT 13. Implementing entities. At the provincial level, the existing SPPMO will be responsible for coordinating the preparation and subsequent implementation ofthe project. Each city or county will have its own local PMO for coordination, while detailed implementation will be conducted by relevant entities. The detail organization chart is as follows:

47 GaomiPMO Gaomi City Water Company Limited

HezePMO + Heze Yuwa Solid Waste Company

Huantai Ji Yuan Water Supply and Drainage Company

Qixia PMO Qixia Dongsheng Water Supply and Drainage Co. Ltd

Rizhao Municipal Environmental Engineering Co. Ltd

Weifang PMO Weifang Three Rivers Construction Co., Ltd.

Weihai Water Management Group Company

Yantai Xinan River Wastewater Treatment Co. T trl

Zaozhuang Zaozhuang City Yiyuan Wastewater Treatment Center PMO

14. Budgeting. Although the cost table has been prepared for the project and the project will prepare its annual implementing plan, the budgeting system within the project is usually not well maintained or monitored. The Financial Management Specialist (FMS) will work with the related entities to improve their budgeting system during project implemenation.

15. Accounting. The administration, accounting and reporting ofthe project will be set up in accordance with the Circular #13 : “Accounting Regulations for World Bank Financed Projects’’ issued in January 2000 by MoF. The circular provides in-depth instructions for accounting treatment ofproject activities and covers the following:

Chart ofAccounts; 0 Detailed Accounting Instructions for Each Project Account; 0 Standard Set ofProject Financial Statements; and 0 Instructions on the Preparation ofProject Financial Statements

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

Balance Sheet; 0 Summary of Sources and Uses of Funds by Project Component; 0 Statement ofImplementation of Loan Agreement /Grant Agreement;

48 0 Designated Account Statement; and 0 Notes to the Financial Statements

17. Each of the implementing entities will be managing, monitoring and maintaining their respective project accounting records. Original supporting documents for project activities will be retained by the originating implementing entities. In addition, each implementing entity will prepare financial statements, which will then be submitted to SPPMO. SPPMO will then review and approve these financial statements. Subsequently, SPPMO will prepare a consolidated project financial statement for submission to the Bank for review and comment on a regular basis.

18. That adequate project accounting staff, with educational background and work experience, commensurate with the work they are expected to perform, is one of the factors critical to successful implementation of project financial management. Discussions, observation and review of the educational background and work experience of the staff identified for financial and accounting positions in the implementing entities (both “project” and “entity”), confirm that staff are qualified and appropriate to the work they are expected to assume.

19. To strengthen financial management capacity and achieve consistent quality of accounting work, a project financial management manual (the Manual) will be prepared. The Manual will provide detailed guidelines on financial management, internal controls, accounting procedures, fund and asset management and withdrawal application procedures. The Manual will be prepared by SPFB and submitted to the Bank. The FMS will review and provide feedback, and the Manual will be finalized and distributed to all the relevant financial staff before loan effectiveness.

20. As most of the financial staff are new to Bank-financed projects, a well-designed and focused training program in project financial management should be provided by SPPMO prior to project effectiveness, to all financial and accounting staff to ensure a good understanding and knowledge of the following:

0 Bank’s Financial Management Policy and Disbursement Procedures; Fund/Asset/Contract Management; 0 Format and Content of Project Financial Statements; 0 Audit Requirement; and 0 On-lending and Repayment Management

2 1. Implementing entities will use the computerized financial management system, “User Friend (Yong You)”, a well-established accounting software package approved by MoF, for this project.

49 22. Internal control and internal auditing. The related accounting policy, procedures and regulations were issued by MoF, and the project will follow these documents. The funds flow will be arranged and monitored through the finance bureaus, and will be based on an expenditure reimbursement basis.

23. There is no formal independent internal audit department for the project. However, this will not impact on the project’s financial management as SPPMO management and monitoring, and annual external audits will serve as mechanisms to ensure that financial management controls are functioning appropriately.

24. Financial reporting. The format and content ofproject financial statements represent the standard project financial reporting package agreed between the Bank and MoF, and have been discussed and agreed among all parties concerned. In-line with the Financial Monitoring Report (FMR) guidelines, the un-audited project consolidated financial statements will be submitted as part ofFMR to the Bank on a semi-annual basis (prior to February 28 and August 3 1 each year), and will include the following four statements: a Balance Sheet; 0 Summary of Sources and Uses ofFunds by Project Component; a Statement of Implementation of Loan AgreemendGrant Agreement; and a Designated Account Statement

25. Each implementing entity will prepare its own project financial statements, which will then be consolidated by SPPMO. The project consolidated financial statements will be sent by SPPMO to the Bank for review and comment on a regular basis.

26. Financial covenants. No additional financial covenants are proposed other than the standard financial covenants (e.g. maintaining project accounts in accordance with sound accounting practices, audit requirement and SOE) as described in the legal documents.

27. Supervision plan. A detailed supervision plan for this project will be included as part ofthe China Audit Strategy document. This document takes into consideration the size ofproject and the financial management risk rating ofthis project.

50 Annex 8: Procurement CHINA: Second Shandong Environment Project

A. General.

1. Procurement for the project would be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004; and “Guidelines: Selection and Employment ofConsultants by World Bank Borrowers” dated May 2004, and the provisions stipulated in the Legal Agreement. The general description ofvarious items under different expenditure categories is provided below. For each contract to be financed by the loan, the different procurement methods for consultant selection, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

2. Procurement of works. Works procured under this project would include: WWTPs, sewers and interceptors, water treatment plants (WTPs), raw water and water distribution pipelines, solid waste landfills, pump stations, river rehabilitation, etc. Procurement will be done using the Bank’s Standard Bidding Documents (SBDs) for all ICB, and the Chinese Model Bidding Documents (MBDs) agreed with the Bank for all NCB.

3. Procurement of goods. Goods procured under this project would include: wastewater collection and treatment equipment, water treatment equipment, solid waste treatment equipment, office equipment, vehicles, etc. Procurement will be done using the Bank’s SBDs for all ICB, and the Chinese MBDs agreed with the Bank for all NCB.

4. Selection of consultants. Consulting services procured under this project would include: Construction Management and Business Management (Package A) : will provide support to SPPMO for: (i)design review and procurement examination for NCB and ICB; (ii)construction supervision; (iii)advisory services for construction and project management; and (iv) capacity building of SPPMO; and support institutional development and capacity building ofexisting and newly established water, wastewater and solid waste management companies under the project. Solid Waste Study (Package B): will provide advisory on: (i)standard of classification; (ii)technology oftreatment; (iii)institutional improvement; and (iv) tariff collection system. Debt Management (Package C): will reinforce the debt management capacity at the municipal and provincial government levels through: (a) a debt management study; (b) upgrading the debt management system; and (c) strengthening the capacity of SPFB. Upgrade of Financial Management System (Package D): will provide assistance in improving the existing financial management system. Capacity Building for Shandong Provincial EPB (Package E): will support priority studies focused on training such as: (i)extension of on- line monitoring systems-- “Digital Environment ”--which would include design and implementation ofnetworks for data collection, transmission and processing, design and implementation ofmanagement information systems, provision of equipment for

51 monitoring rivers, and training for system operation; and (ii)a wetland study. Capacity Strengthening of Provincial Leaders and Project Owners (Package F): will provide training and study tours for a selected number of key provincial leaders from DRC, the Finance Bureau, the Construction Department and project owners. Capacity Strengthening of Provincial Financial Department (Package G): will provide training and study tours for key leaders from the Finance Department for project management, and Development of Management System for Septic Tanks (Package H).

5. Short lists of consultants for services estimated to cost less than US$300,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

6. Other. Under this project, a sub-component will be supported by a grant of US$5 million from GEF. This sub-component includes civil works and equipment of Dongbozi Pump Station and Xinanhe WWTP, and development of management system for septic tanks including procurement of related equipment.

B. Assessment of the Agency’s Capacity to Implement Procurement.

7. Procurement activities will be carried out by the following entities.

Project Management Office/ Project Component Implementing Agency Gaomi Wastewater and Gaomi Water Supply Co. Water Supply Huantai Water Supply and Huantai Water Supply & Drainage Co. (to be established Wastewater before appraisal) Qixia Wastewater I Dongsheng Water Supply and Drainage Co. Ltd. Three Rivers Project Construction and Development Co. Weifang Wastewater (Please note: agency is different in Annex 6) Weihai Wastewater I Weihai Water Management Group Co. Yantai Wastewater 1 Yantai Xinanhe Wastewater and Drainage Company ‘‘lid Waste and Zaozhuang Yiyuan Wastewater Treatment Center Wastewater Heze Yuwa Solid Waste Treatment Co. Ltd. Heze Solid Waste (Please note: agency is different in Annex 6)

Rizhao Solid Waste Rizhao Municipal Environment Engineering Co. Ltd.

TA and Consulting Services SPPMO

52 8. The Shandong Construction Engineering Tendering Center was employed to conduct NCB procurement and Instrimpex International Tendering Company for ICB procurement. In each PMO at least one staff person has been designated for procurement. At the provincial level, two staff persons will be responsible for coordination of procurement activities. As a component of the project, international consultants will also be employed for procurement management.

9. On January 9,2006, Mr. Zhentu Liu, a Bank procurement specialist, carried out an assessment of the capacity of the implementing agency to conduct procurement actions for the project. The assessment included a review of the organizational structure for implementing the project and the staffing of the project implementation agencies and SPPMO.

10. Most of the issueshisks concerning the procurement aspects of project implementation have been identified and include: (i)most of the project implementation units (PIUs) are new to World Bank projects; and (ii)the nature of project components is technically diverse. The corresponding corrective measures that have been agreed are: (i) centralized procurement - SPPMO will employ one tendering company for NCB and another for ICB, while SPPMO will oversee all the procurement activities with the assistance of international consultants (Package A in the description of consulting services above); and (ii)experience of previous projects (SDEP and Huai River Pollution Control Project) will be adopted.

11. The overall project risk for procurement is AVERAGE.

C. Procurement Plan.

12. The Borrower, at appraisal, developed a Procurement Plan for project implementation, which provides the basis for the procurement methods, prior or post review, contract estimate, implementation schedule, etc. This plan has been agreed between the Borrower and the Bank team on November 6,2006 and is available in SPPMO. It will also be available in the project’s database and in the Bank’s external website. The Procurement Plan will be updated in agreement with the Bank team annually or as required to reflect the actual project implementation needs and any requirements for improvement in institutional capacity.

D. Frequency of Procurement Supervision.

13. In addition to the prior review to be carried out from Bank offices, the results of the capacity assessment of the implementing agency has recommended that a supervision mission visit the field once every half year to carry out procurement supervision, and once each year for post review of procurement actions.

E. Advance Contracting and Retroactive Financing.

14. Advance contracting would be applied for expenditures incurred after June 15, 2006 (completion of appraisal) for civil works contracts and employment of consulting

53 firms. Procurement of contractors and consulting services, including required advertisements, will be carried out in accordance with Bank Guidelines. Proposed advanced contracting and retroactive financing is summarized in the table below.

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Note: Shandong Province was reminded that payments made in the expectation ofretroactive financing are at the Borrower’s risk and do not commit the Bank to making a loan for the operations or fmancing such payments.

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m 00 d 0 2 Annex 9: Economic and Financial Analysis CHINA: Second Shandong Environment Project

Economic Analysis

1. The project will support improvements in the urban environment and infrastructure development of selected cities and counties in Shandong Province. It provides a comprehensive assistance package to the province by financing components in three major areas: wastewater, including associated river embankments, water supply and solid waste management. Together, these components will enhance the participating cities and counties’ overall economic development potential through a healthier environment, strengthened river protection and improved livability. Detailed information, including assumptions for each sub-component and calculation, is available in the Project File.

Central Assumptions . Shadow pricing and conversion factors (e.g. offoreign exchange, wages) have been applied based on the recommendations contained in the current NDRC official document, “Guidance on Feasibility Study of Investment Projects” (2002) and the specific situation under the projects discussed. The conversion factor for the exchange rate is 1.08 and for wages is 0.88. . The discount rate has been taken to be the cost of capital in China for medium risk investments, currently assumed to be 10 percent per annum. costs

2. Component costs include capital costs, as well as operation and maintenance costs. Capital costs cover the costs of land, civil works and equipment, as well as the costs ofany associated resettlement, and have been phased over the construction period. Operation and maintenance costs have been identified for the project period following commissioning. Both capital and operation and maintenance costs have been adjusted to remove the effects of inflation, duties and taxes.

A. Wastewater Management Component

3. Objective. The primary objective ofthe wastewater management component is to reduce land and water resource pollution by building wastewater collection systems, treatment plants, treated effluent re-use facilities and associated river improvements in six citiedcounties. This component will also help enhance the health ofordinary people and improve the ecological environment.

4. Alternatives considered. The pros and cons of a wide-range of alternatives were carefully examined during the preparation ofeach sub-component. Such alternatives include different locations, treatment process, and technical designs and so on. In Yantai, for example, the choice of location and capacity ofthe WWTP was selected on the basis of less land occupation and cost effectiveness; the location ofthe pumping station was chosen based on the ease of construction.

61 5. In Qixia, the location ofthe plant was selected in consideration ofless damage to existing vegetation and more convenience for water reuse. In Zaozhuang, minimizing the discharge of polluted waters into rivers in a newly built area and minimizing resettlement in old areas were some of the factors considered in deciding the design ofthe systems.

6. Benefits. The expected incremental benefits ofthe wastewater sub-components are substantial and are generated by all three project approaches - sewage collection, treatment and river rehabilitation. The most obvious and immediate benefit is that the wastewater, previously going into the rivers without any treatment, will be treated and, as a result, will reduce negative environmental impacts and will in turn lead to substantial positive health impacts for ordinary people. A direct economic benefit is the wastewater treatment fee, newly collected under the sub- components, which represents the value placed on the service or the willingness to pay. Another direct benefit is the cost saving resulting from the utilization ofrecycled water. In addition, the river embankment sub-components will ensure that flood damage, such as to personal property, enterprises and public facilities, during flood years is avoided, A cost-benefit analysis has been conducted for each sub-component with associated sensitivity analysis. The results are shown in the table below - the EIRRs for all the projects are above the 10 percent discount rate and sensitivity tests confirm that EIRRs are robust.

Net Present Sensitivity Value Wastewater and River EIRR 10% + 10% Improvement ovpv) - (10,000 Investment Investment Yuan) Gaomi 4,229 18.0% 20.6% 15.0%

Yantai Xinanhe WWTP and Septage Treatment (GEF Co-financed Component)

7. The economic analysis for the Yantai component needs to be viewed in conjunction with the detailed incremental cost analysis ofthe GEF component presented in Annex 15.

8. Benefits. The benefits ofthis component are additive to the benefits from the extension of the Xinanhe WWTP and the sewage collection network. These combined investments are expected to contribute significantly to the improved wastewater service in Yantai urban area through collection and septage treatment and reduction of land-based pollution discharged into the Bohai Sea. There are substantial benefits expected to accrue as a result ofthe septage collection and treatment, including reducing the level of BOD pollutants. The direct benefits identified, in addition to the wastewater treatment and reuse benefits ofthe baseline component,

62 are: (a) septage collection and treatment; (b) reduction in BOD pollutants; and (c) environmental benefits from reducing pollution, improvement in public health and living conditions, and improvements to the aesthetic and scenic surroundings for Yantai’s urban residents. The environmental benefits are difficult to quantify, however, they are expected to be substantial.

9. EIRR and sensitivity analysis. By including the GEF pilot component into the Xinanhe wastewater treatment, the EIRR ofthe base case improved by 4 percent (see table above). The total combined benefits which will accrue over the life ofthe project are estimated to be 73 million Yuan in NPV terms at 10 percent discount rate, or three times higher than a scenario without the GEF increment. The results ofthe sensitivity tests ofthe economic benefits stream show that the costs of the project have to increase by about 40 percent in order for the EIRR to drop below 10 percent. The expected benefits have to drop by more than 35 percent for the EIRR to fall below the hurdle rate and the break-even point for NPV=O.

B. Water Supply Component

10. Objectives. The primary objective ofthe water supply component is to expand the water supply and the water supply networks in the project areas by constructing and rehabilitating WW, transmission mains, and distribution networks and upgrading control systems. The component will improve the living conditions ofordinary people, increase industrial production capacities, and reduce general water shortages and groundwater exploitation by making newly available water to households as well as to industries.

11. Alternatives considered. The pros and cons ofa wide range ofalternatives were carefully examined during the preparation ofeach sub-component. In Gaomi, for example, four alternative locations were considered for the Chengxi water plant and the final option was selected on the basis of cost effectiveness and the impact on areas with severe water pollution. The design of a water delivery pipe from Xiashan Reservoir- with a single pipe as the final choice- has taken into consideration the lower cost and reduced project complexity as a result ofone-time construction. In Huantai, the final selection ofa water intake location in Xincheng Reservoir was made by comparing two alternatives, with the objective ofensuring a stable and sufficient water supply. Another example in Huantai is its choice ofwater treatment process, which was based on the consideration ofbetter pollution abatement.

12. Benefits. Significant benefits will be generated under the water supply component. A major benefit will be the improvement in health ofthe residents of74 villages in Gaomi, where the widely used groundwater has a high content offluorine. Villagers here suffer from chronic fluorine poisoning. The newly-available tap water to these villages under the water supply component will improve the quality oftheir lives. The component will also make available more raw water to industries and thereby help increase industrial production. The water supply component will also help address the issues ofwater shortages and groundwater exploitation. Quantification ofthe benefits was calculated based on willingness-to-pay, more value-added industrial production (due to new raw water), and cost-saving as a result ofimproved health. The estimated EIRRs are shown in the table below -all are above the 10 percent discount rate and the sensitivity tests confirm the robustness ofthe EIRRs.

63 NPV Sensitivity Water Supply (10,000 EIRR - 10% of + 10% of Yuan) Investment Investment Gaomi 11,136 20.2% 24.2% 17.2% Huantai 17,098 21.6% 23.3% 20.2%

C. Solid Waste Component

13. Objectives. The objective ofthe solid waste component is to provide a higher standard of collection and cleansing service to the municipalities through the gradual expansion ofsolid waste collection services and the development ofnew waste treatment and disposal facilities.

14. Alternatives considered. A wide range ofalternatives were considered in terms of location, treatment scheme, composing technologies and so on. The final choice was made by comparing the advantages and disadvantages of each alternative. In Heze, for example, the location ofthe treatment plant was chosen by taking into consideration the distance from residential areas, the length of power line, the cost ofland value and the local Urban Master Plan. In Zaozhuang, remediation ofthe existing dump was chosen as the preferred approach versus transporting waste to other landfills.

15. BeneJits. The benefits ofthe solid waste component are substantial. They will improve the quality of surface as well as groundwater by reducing the amount ofpollution, enhance the health and quality oflife of residents and increase the livability ofthe city. The quantifiable economic benefits under this component include: a solid waste treatment fee to be collected; increased land value due to newly-available land, previously covered by loosely piled waste, for either commercial or domestic utilization; and the utilization ofmarsh gas. The results ofthe cost-benefit analysis are presented in the table below. The estimated EIRRs for these components are all higher than the 10 percent discount rate used. Sensitivity analyses conducted to test the impact of switching values of investment confirm that the estimated EIRRs are robust.

Table 3: Internal Rate of Return. Water ComDonent NPV Sensitivity Solid Waste (10,000 EIRR - 10% + 10% Yuan) Investment Investment Heze 4,018 15.1% 15.9% 11.9% Rizhao 4,749 18.6% 17.6% 19.8%

Financial Analysis

16. Provincial Finances. The table below summarizes the actual and projected receipts and expenditure data from 2003 to 2012 for Shandong Province. The table shows that project expenditures and counterpart funding requirements represent a fraction (less than 0.5 percent in any given year) of Shandong Province’s total receipts. Should participating local governments not be able to raise all their counterpart funding requirements, or provide funds for operation and

64 maintenance and debt service, Shandong Province would have no difficulty in providing the needed support.

Table 4: Shandong Provincial Finances (Y billion, current terms) Projected I 1 2003 I 2004 1 2005 I 2006 I 2007 I 2008 I 2009 I 2010 I 2011 I 2012 I Total Disposable 104.3 124.1 147.6 175.6 208.9 248.4 295.5 351.5 418.1 497.3 Receipts General Budgetary 101.1 118.9 141.4 168.2 200.1 238.0 283.2 336.8 400.6 476.6 Expenditures Project Expenditures - 0.11 0.51 0.66 0.54 0.20 0.10 Project Exp. as % of 0.06 0.24 0.27 0.18 0.06 0.02 Receipts - Counterpart Funds 0.0 0.05 0.05 0.03 0.01 0.0 as % of Receipts

17. Municipal and County Finances. A financial analysis was carried out for each participating municipality and county. Analyses ofthe historical receipts and expenditures statements show that some ofthe participating municipalities and counties are in a deficit situation in that their local tax receipts are not able to cover their statutory expenditures. Accordingly, they rely on transfers from higher authority, i.e. Shandong Province and/or the central government. All capital expenditures have traditionally been funded from such transfers.

18. Up to the end of2004, local governments separated their sources offunds into two accounts: on-budget funds and off-budget finds. On-budget finds include receipts from statutory taxes and levies, such as the urban construction and maintenance fund. Off-budget funds include non-tax receipts such as some types ofuser charges collected by administrative departments, e.g. long term leases of land. Commencing on January 1, 2005, on- and off-budget funds have been combined into one account, which is simply called the “budget”.

19. The fiscal impact ofthe project has been analyzed against 2003-2004 total disposable receipts, the data for which were provided by the participating municipalities and counties through the SPFB. To project future revenues (and expenditures), conservative annual increases were assumed for all municipalities. Details are in the Project File (see Annex 12). The following data indicate (a) project expenditures, and (b) counterpart funding requirements, each as a percentage of receipts for each municipality.

Heze Municipality 2006 2007 2008 2009 2010 Project expenditures as % of receipts 0.09 0.44 0.64 0.51 0.11 Counterpart funding as % of receipts 0.04 0.21 0.30 0.24 0.05

65 Rizhao Municipality 2006 2007 2008 2009 2010 2011 Project expenditures as % of receipts 0.00 0.37 0.73 0.90 0.40 0.07 CounterDart fundina as % of receiDts 0.00 0.17 0.34 0.42 0.19 0.07

I Weifang Municipality incl. Gaomi County I 2006 I 2007 I 2008 1 2009 I 2010 I 2011 I Project expenditures as % of receipts 0.27 2.76 1.78 1.41 0.65 0.09 Counterpart funding as % of receipts 0.13 1.30 0.84 0.66 0.30 0.04

Weihai Municipality 2006 2007 2008 2009 2010 2011 Project expenditures as % of receipts 0.13 0.44 0.36 0.22 0.04 0.01 Counterpart funding as % of receipts 0.06 0.21 0.17 0.10 0.02 0.01

Yantai Municipality, incl. Qkia County 2006 2007 2008 2009 2010 2011 Project expenditures as % of receipts 0.01 0.30 0.43 0.24 0.08 0.03 Counterpart funding as % of receipts 0.00 0.14 0.20 0.11 0.04 0.01

Zaozh uang Municipality 2006 2007 2008 2009 2010 2011 Project expenditures as % of receipts 0.40 2.37 1.67 1.12 0.29 0.07 Counteruart funding as % of receiuts 0.19 1.11 0.78 0.53 0.14 0.03

Zibo Municipality, incl. Huantai County 2006 2007 2008 2009 2010 2011 Project expenditures as % of receipts 0.05 0.64 0.75 0.31 0.13 0.06 Counterpart funding as % of receipts 0.02 0.30 0.35 0.15 0.06 0.03

20. In all cases, the average annual counterpart funding requirements are less than the projected annual growth rates oflocally generated taxes, suggesting that the local governments can fund all their requirements from these sources. Moreover, counterpart funding requirements will be met from various sources, including state bonds, domestic bank loans, internally generated funds, as well as land sales and from the local finance bureaus (see the table below). Therefore, the actual demand for funds from local taxes will likely be only the amounts indicated in the table below, under the heading of“Finance Bureau”, except that in Zaoahuang Municipality counterpart funding contributions would come from land sales as well. Debt service attributable to the project would be equivalent to between about 0.1 and 2.0 percent ofeach municipality’s regular capital budget. However, debt service on about 54 percent ofproject investments would be met from user charges, and would not, therefore, be a drain on municipal budgets. Additionally, the operation and maintenance expenses on the same 54 percent ofproject investments would be met from user charges.

66 Qixia wastewater & 35.82 47.04 82.86 river embankments Rizhao solid waste 34.04 38.96 73.00 Weifang wastewater & river 292.84 3 14.08 606.92 emhankments Weihai wastewater 63.19 78.16 141.35 Yantai wastewater 84.59* 86.00 170.59 Zaozhuang wastewater & river 167.51* 235.36 402.87 embankments Zaozhuang solid 1.48 9.84 11.32 waste

21. Local Government Preliminary Debt Analysis. Analysis of data provided by SPFB on the debt situation of participating local municipalities and counties indicates that the level of debt per capita varies greatly among them. The average indebtedness level (Y490 per capita) should not be a cause for concern as compared to GDP per capita among the nine participants (average about Y 17,274). However, three out of the nine participants have a total debt to total revenue ratio that exceeds 60 percent, with Weihai being the highest (79%), followed by Gaomi (62%) and Yantai (61%). Details are in the Project File (see Annex 12).

22. Utility Financial Analysis. Financial projections have been prepared for each utility (water supply, wastewater and solid waste management) company on an annual basis over the period 2006-2020. The projections are based on the following financial objectives of the participating municipalities and counties: (a) water supply companies: each company to: (i) generate revenues from its water supply operations sufficient to cover operating and maintenance costs (before depreciation), increases in working capital, debt service, and 20 percent of the average capital expenditures made in a three-year period; and (ii)maintain a debt service coverage ratio of not less than 1.3 times; and (6) wastewater and solid waste management companies: each company to produce total revenues to: (i)cover operating costs (including depreciation), and the amount by which debt service exceeds the provision for depreciation; and (ii)maintain a debt service coverage ratio of not less than 1.3 times. Projected financial statements and detailed operational and financial monitoring indicators for each company are included in the Project File (see Annex 12). The projected average tariffs over the implementation period of the project are given in Table 6.

Gaomi Water Supply and Wastewater

23. The Gaomi City Water Supply Company Limited (GWSC), a state-owned (by Gaomi County within Weifang Municipality) company was established in 1986. Wastewater operations were merged with the company in 1999. While the name of the company was not amended to reflect its additional wastewater responsibilities, its business license was so amended. The total staff strength of the company is 376, of which about 3 1 are wastewater operational staff. The management is responsible for both water supply and wastewater operations. GWSC serves the urban population of Gaomi City which currently is about 261,000. The population is projected to increase to 350,000 by 2010. GWSC would be responsible for the design, implementation,

67 ownership and operation and maintenance of the proposed water supply and wastewater investments, and for borrowing, and repaying World Bank loan proceeds.

24. Water supply services are currently largely supplied by industries with self-supply. GWSC operates one WWTP; another WWTP is under construction under a “Build-Operate- Transfer (BOT) operation.

25. Water supply and wastewater tariffs were last adjusted on January 1,2005 as follows:

Water Supply Wastewater Combined* Tariffs RMB/mj (from January 1,2005) Residential 1.354 0.70 2.617 Industrial 2.194 0.80 3.625 I Commercial I 3.194 I 0.90 I 4.805 I Construction 3.994 0.90 5.669 Special* * 4.394 0.90 6.101 Average 2.80 0.80 3.60 * The industrial, construction and special tariffs include (i)a water resource fee of Y0.33/m3 on surface water; and (ii)business taxes. ** Car wash, etc.

26. The water supply operations of GWSC have been profitable for at least the past four years (2002-2005). As indicated above, GWSC increased its water supply tariffs from the average of Y2.35/m3to Y2.80/m3, an increase of about 19 percent, assuring its continued profitability.

27. GWSC increased its average wastewater tariff from Y0.50/m3 to Y0.80/m3 also on January 1,2005, an increase of 60 percent, making its wastewater operations profitable.

Heze Solid Waste Management

28. The Heze Yuwa Solid Waste Management Company Limited (HSWC), a state-owned (by Heze Municipality) company, was established on December 30,2005. The initial staffing of HS WC came from Heze’s Domestic Solid Waste Comprehensive Treatment Center, which was established in April 2005 with a staff of four persons, to be responsible for preparing the solid waste component. HWSC would be responsible for the proposed Bank-financed investments of a composting plant and a sanitary landfill only, and for borrowing, and repaying World Bank loan proceeds. Two district governments, whose wastes would be deposited in the new facilities, would continue to be responsible for collection of wastes from (a) households, commercial establishments, institutions and industries, and (b) transportation of wastes to the new landfill and composting plant. HWSC would initially serve a population of 460,000.

29. Solid waste fees and charges were last adjusted in 2004. The current solid waste charge for residents is Y 1.OO/person/month. However, the true costs of providing solid waste services are probably not known with much certainty. Assurances were given during negotiations that Heze arrange to complete a report by June 30,2009 of the fees and user charges needed for the

68 recovery of the costs of providing solid waste collection and disposal services to domestic, institutional, commercial users and industrial users; the report is to include proposals for improved collection systems, including options for privatizing collections, and a detailed, time-bound action plan, acceptable to the Bank, to enable the recovery ofthe costs to begin commencing January 1, 20 11, after taking into account the Bank’s comments on the report and action plan.

Huantai Water Supply and Wastewater

30. The Huantai Ji Yuan Water Supply and Drainage Co. Ltd. (HWDC), a state-owned (by Huantai County within Zibo Municipality) company, was established on March 2 1, 2006. The initial staffing of HWDC is eight persons, to rise to about 110 upon commissioning of the works. HWDC would serve the towns of Guihe, Guoli and Tainzhuang which are located in a new development zone, which is not currently served by a public water supply or wastewater system.

3 1. Under both its water supply and wastewater sub-components, HWDC would be responsible for the design, implementation, ownership and operation and maintenance of the proposed Bank-financed investments, and for borrowing, and repaying World Bank loan proceeds. The water supply sub-component includes a WTP of 100,000 m3/dayto serve industry, which presently has self-supply sources. On completion of the WTP investment, the industrial sources would be shut down. Under its wastewater management sub-component, HWDC would construct a WWTP to treat industrial effluent including that of a paper mill, and the domestic effluent currently being pre-treated by the paper mill’s WWTP.

32. Other than the secondary and tertiary network belonging to the industries already established in this service area, there is no existing publicly-owned primary network, either in water or wastewater. HWDC would, therefore, begin with no existing assets to be taken over.

33. For indicative purposes only, water supply tariffs in Huantai City, last adjusted on May 1, 2004, and wastewater tariffs, last adjusted on December 1, 2005, are as follows:

Water Supply* 1 Wastewater Combined

From December 1, From May 1,2004 2005 Residential 2.22 1.oo 3.22 Industrial 2.87 1.oo 3.87 Commercial 2.97 1.oo 3.97 Construction 2.97 1.oo 3.97 Special 2.97 1.oo 3.97 Average rda 1.00 da

34. Financial projections show that following completion and commissioning of the works in 2008, HWDC would, commencing 2009, need to establish the following avera e tariffs in order to meet the covenanted requirements: Y 1.5 l/m3for water supply and Y 1.1 O/mB for wastewater.

69 Qixia Wastewater

35. The Qixia Dongsheng Water Supply and Drainage Company Limited (QWDC), a state- owned (by Qixia County within Yantai Municipality) company, was established in October 2005. QWDC currently has six staff; the number is projected to rise to 41 by completion of the project. Its service area is confined to the Qixia Economic Development Zone, located about 20 km from Qixia City, with a population of about 40,000. The Qixia State Assets Management Company Limited owns the share capital of QWDC on behalf of Qixia City. QWDC would be responsible for the design, implementation, ownership and operation and maintenance of the proposed wastewater investment, and for borrowing, and repaying World Bank loan proceeds.

36. There are no existing wastewater assets in the service area to be taken over by QWDC. A separate wastewater system including a WWTP and storm water and river embankment investments is to be constructed under the project. The Qixia City Government would be responsible for storm water operations. Water supply to the area is currently provided by industry through self-supply of groundwater. QWDC’s water supply operations would only commence when surface water from a branch of the SouthbJorth Water Transfer Scheme becomes available. At that point, all ground water installations would be closed down.

37. There are no water supply or wastewater tariffs being collected in the Economic Development Zone. The Qixia Water Conservancy Bureau collects a water resource fee (Y0.50/m3). When surface water supplies become available to the Economic Development Zone, QWDC would commence billing and collecting its own water supply tariffs, and collection of the water resources fee would be discontinued. QWDC would start billing and collecting a wastewater tariff only after it completes the project-financed investments.

3 8. The proposed wastewaterhiver embankment investment (Y82.8 million) by Qixia County is affordable, having an impact of only 0.03 percent on Yantai Municipality’s (the parent municipality of Qixia County) disposable receipts, and 0.3 1 percent on Yantai’s net balances.

Rizhao Solid Waste Management

39. REEC, a state-owned (by Rizhao Municipality) company, was established in 2002. It would be responsible for the design, implementation, ownership and operation and maintenance of the proposed solid waste facilities, namely (a) the second phase expansion of the existing landfill, (b) the construction of about 20 waste collection stations, and (c) the purchase of vehicles and on-site equipment, and for borrowing, and repaying World Bank loan proceeds. REEC already owns and operates Rizhao’s Phase 1 landfill facilities. On completion of the project-financed investments, REEC would take over the existing 36 waste collection stations and associated vehicles and equipment. The service area is the Donggang District of Rizhao City, with a population of about 300,000. REEC’s other responsibilities include construction of environmental investments, e.g. WWTPs. Its current staff strength is 36.

40. Residents are currently paying a charge of Y3.00/person/month for solid waste collection services. This charge, which was instituted in 2003, is collected by property management companies, which remit the collections to the Charging Office of the Rizhao Environmental

70 Sanitation Department. The Charging Office bills and collects directly from institutions, commercial enterprises and industries. REEC currently charges Y26.5Yton for disposing of wastes brought to its (Phasel) landfill. The Rizhao Finance Bureau also provides REEC with funds to defray its costs for collecting wastes from parks and other public areas.

4 1. The true costs of providing solid waste services are probably not known with much certainty. Assurances were given during negotiations that Rizhao arrange to complete a report by June 30,2009 of the fees and user charges needed for the recovery of the costs of providing solid waste collection and disposal services to domestic, institutional, commercial users and industrial users; the report to include proposals for improved collection systems, including options for privatizing collections, and a detailed, time-bound action plan, acceptable to the Bank, to enable the recovery of the costs to begin commencing January 1, 20 11 , after taking into account the Bank’s comments on the report and action plan.

Weifang Wastewater

42. The Weifang Municipal Administration Bureau is responsible for operating the wastewater and drainage networks in Weifang City.

43. The following wastewater assets are in operation: 0 No. 1 WWTP of 100,000 m3/day capacity. This plant has been under a BOT operation for several years under a 20 year contract, and is stated to be treating 110,000 m3/day; No. 2 WWTP of 40,000 m3/day capacity. This plant is owned by Hauting District and has just commenced operation; 0 No. 3 WWTP 20,000 m3/day capacity. This plant is owned by Fangzi District and has just commenced operation; Two pump stations of 70,000 m3/day and 30,000 m3/day capacity, operated by the Transfer-Operation-Transfer (TOT) operator of No. 1 WWTP; and Sewer network (combined in the old city; separate systems in new developments) owned and operated by district governments.

44. The only wastewater investments being proposed for Bank financing are interceptors on each side of the Bailang River, which are to be built into each embankment which is to be raised and strengthened. The cost of the wastewatedriver embankment investment is about Y606.9 million. The embankments are, and will continue to be maintained by the Weifang Municipal Maintenance Division, which reports to the Weifang Municipal Administration Bureau. As the interceptors would be part of the embankments the Weifang Municipal Maintenance Division would be responsible for operating and maintaining them as well. Other investments being proposed are (a) building of a counter gate; (b) building of rubber dams; and (c) dredging of the riverbed. The responsibility for ownership and the operation and maintenance of these investments will also rest with Weifang Municipal Maintenance Division.

45. The investments proposed by Weifang Municipality are affordable, having an impact of only about 0.4 percent on its disposable receipts, and about a 5.0 percent increase in existing debt service.

71 46. The Weifang Municipal Three River Rehabilitation Office would manage the construction of the project on behalf of Weifang Municipality. This Office has had past experience in implementing similar type investments. Weifang Municipality would sign all procurement contracts and be the borrower of World Bank loan proceeds.

47. The following wastewater tariffs, last adjusted on November 1, 2004, are currently being billed and collected by the Weifang Water Supply Company:

Water Supply* I Wastewater Combined RMB/m3 Tariffs From August 1, From November 1, 1999 2004 Residential 2.00 0.90 2.90 Industrial 2.60 1-00 3.60 Commercial 3.70 1.10 4.70 Special 4.20 1.10 5.30 Average da 1.oo da * Includes a water resource fee ofY0.50/m3.

48. The above wastewater tariffs have been calculated to cover the operating costs (excluding debt service on No. 1 WWTP) of all three WWTPs, the two pump stations, and the network between the pump stations and No. 1 WWTP.

49. The price paid to the TOT operator is stated to be Y0.93/m3. This includes the operations ofthe No. 1 WWTP, two pump stations, and the network between the pump stations and the WWTP. The monthly payment is about Y2.9 million.

50. The water supply company bills and collects the wastewater tariffs. The Weifang Municipal Water Saving Office bills and collects wastewater tariffs from industries with self- supply which discharge to sewers. The collection rate is stated to be about 50 percent.

5 1. Financial Proiection. As there will be no corporate wastewater company involved in providing wastewater services, only simplified (cash) financial projections were prepared. These show that wastewater tariffs would need to be increased by about 25 percent in 2008 and 20 percent in 201 1 (see Table 6). The proceeds of wastewater tariff collections would cover operation and maintenance costs, TOT payments and debt service on the Bank loan.

Weihai Wastewater

52. The Weihai Water Management Group Company (WWMC), a state-owned (By Weihai Municipality) company was formed in 2003 with the merger of wastewater operations with the existing water supply company. WWMC is responsible for (a) water supply services; (b) raw water supply; and (c) wastewater operations in Weihai City. It would be responsible for implementing, and operating and maintaining the proposed wastewater investments under the project as well as owning and operating and maintaining the existing investments.

72 53. WWMC’s wastewater responsibilities are divided between (a) a drainage company @.e. a separate cost center) responsible for the network, including the primary, secondary and tertiary sewers, and pump stations; and (b) three WWTPs (each operating as separate cost centers). As most of Weihai City has separate wastewater and storm water systems, WWMC is responsible only for the wastewater network. The total staff strength of WWMC is 820 of which 200 are responsible for wastewater operations. One management team is responsible for all WWMC’s activities.

54. No. 3 WWTP of 50,000 m3/day capacity is expected to commence operations in July 2006. Ofits total capacity, 40,000 m3/dayis to be made under a BOT operation. In the future, when flows increase, WWMC would be responsible for operating the remaining 10,000m3/day capacity.

55. The following wastewater tariffs, last adjusted on January 1, 2005, are currently being billed and collected by WWMC:

RMB/mj Tariffs From August 15, From January 1, -- 2000 2005 Residential 2.05 0.80 2.85 Industrial & Inst. 2.05 0.80 2.85 Commercial 2.05 0.90 2.95 Construction 5.35 0.90 6.25 Special 5.35 0.90 6.25 Average nla 0.83 nla Water reuse 1.00 * Includes a water resource fee of RMB 0.35/m3

56. WWMC’s wastewater tariff structure includes the BOT cost (currently estimated at Y0.937/m3). In 2005, WWMC incurred a small loss on its wastewater o erations. By the end of 2006 it expects to adjust its wastewater tariffs to an average of Y 1.1O/m r3 at which time it would expect to break even. WWMC’s water re-use tariff is stated to be Yl.00/m3. Currently, it is selling its re-use water to the municipality for greening purposes. It has, however, received a letter of interest from the Hua Neng Energy Plant to purchase its re-use water.

57. WWMC’s collection rate is said to be between 95 to 98 percent. However, the collection rate (by the Water Resources Bureau) of wastewater tariffs billed to industries with self-supply discharging to the sewer network is said to be only 10 percent. The Weihai Municipal Government would address this issue either by closing down the self-supply and transferring the service to WWMC if there is spare capacity in its system, or improving the collection performance.

73 Yantai Municipality

58. The Yantai Xinan River Wastewater and Drainage Co. Ltd. (YWDC), a state-owned (by Yantai Municipality) company, was established on March 14,2006. The service area of YWDC covers three districts - the southern part ofZhifu District, Laishan District and the western part of Muping District - all ofwhich are connected to Xinanhe WWTP. YWDC would take over the ownership and operation and management of (a) Xinanhe WWTP, (b) the trunk sewers serving the plant; and (c) associated pump stations only. The secondary and tertiary network would remain with the district governments for operation and maintenance. YWDC would be responsible for the design, implementation, ownership and operation and maintenance of Yantai’s proposed component, and borrow, and repay World Bank loan proceeds.

59. Valuation ofthe existing assets to be taken over by YWDC is underway and is expected to be completed by September 30,2006. The associated secondary and tertiary sewers would, as stated above, remain with the districts for the time being. Being old infrastructure, there are few details available oftheir value, size, etc.

60. As there is presently no breakdown of data on water supplied, wastewater flows, and customers served, etc. in YWDC’s service area, the Yantai Municipal Government (YMG) has agreed that after its establishment, YWDC would begin to collect all relevant data in its service area. YWDC would, by December 3 1,2007, prepare financial projections ofits future operations which would show, amongst other things, the levels oftariffs that would be necessary to sustain its operations and service its debt requirements. The company would also benefit from TA to be provided under the Package A consultancy contract. Yantai officials confirmed that YWDC would not commence with any existing debt to be serviced as Xinanhe WWTP and associated assets were financed solely from budgetary allocations.

6 1. Wastewater tariffs. The following wastewater tariffs, last adjusted on March 1, 2006, are being billed and collected by the Yantai Water Supply Company:

Water Supply* I Wastewater Combined

Residential 2.20 0.70 2.90 Industrial 2.80 0.90 3.70 Commercial 2.80 0.90 3.70 Construction 2.80 0.90 3.70 SPecial 9.00 1.oo 10.00 Average n/a n/a n/a Water re-use 1.20

62. Should YWDC establish facilities for the production and sale ofre-use water; the price would likely be in the region of Y 1.20/m3, which is currently the sale price ofTaoziwan WWTP located in the northern part ofZhifu District.

74 63. The wastewater tariffs of YWDC would be billed and collected by the water supply companies serving its service area. The collection rate ofwastewater tariffs from industries with self-water supply is said to be low. It is the intention ofYMG to phase out such self-supply. Under the project, Yantai would receive TA to help improve collection rates, or design an improved collection system.

Zaozhuang Wastewater

64. The Zaozhuang Yiyuan Wastewater Treatment Center (ZWTC), a state-owned (by Zaozhuang Municipality, an entity with a legal person status) company was established in 2004. Its responsibilities include the construction and operation and maintenance ofthe wastewater, river rehabilitation and solid waste investments proposed to be financed under the project. The current staff strength is about 100. Zaozhuang Municipality would be the borrower of World Bank loan proceeds, and be responsible for repayment.

65. Zaozhuang’s existing WWTP, or Dongsha WWTP, of 70,000m3/day capacity, is situated on the southeastern part of Shizhong District on the Dongsha River. The WWTP was financed by the Austrian Government and commissioned in 1997. A 50,000m3/day water re-use plant is now under construction at the site. The WWTP is stated to be treating about 50 percent ofthe wastewater and storm water flows ofShizhong District. It is operated and maintained by the Zaozhuang Municipal Drainage Management Division. There is an old combined network in the core urban area ofShizhong District. This is operated and maintained by the Zaozhuang Municipal Engineering Management Division. The Zaozhuang Municipal Government (ZMG) is planning to construct a WWTP of40,000m3/day capacity on the Xisha River on the southwestern side of Shizhong District. The central government requires Zaozhuang to complete this WWTP by January 1, 2007 to coincide with the completion ofthe South/North Water Transfer Scheme. For that reason, the plant is being financed partly by state bonds, central government grants and partly by local resources. ZMG originally planned to construct the plant under a BOT contract. However, in view ofthe urgency to complete its construction by the end of2006, ZMG is proceeding with its construction, expecting to complete it under a partial BOT arrangement, or failing that, to enter into a TOT contract for its operation.

66. The proposed wastewater investments under the project include: (a) a combined interceptor and combined sewers to serve Dongsha WWTP; (b) combined trunk mains and sanitary sewers to serve Xisha WWTP; and (c) re-use pipe work at both WWTPs.

67. Other investments to be financed under the project include river rehabilitation on both the Dongsha and Xisha Rivers, embankments for flood protection, greening ofthe embankments, rubber dams, dredging and the demolition and reconstruction offive bridges.

68. ZMG is aware that unless it rationalizes its current institutional arrangements for wastewater collection, treatment and disposal, four agencies would be involved in the service. These four agencies are the Zaozhuang Municipal Drainage Management Division for Dongsha WWTP; the Zaozhuang Municipal Engineering Management Division for the combined network in the urban core area of Shizhong District; ZWTC for the project-financed investments; and a possible BOT/TOT operation of Xisha WWTP.

75 69. Therefore, ZMG proposes to: (a) issue a tender for, or negotiate a TOT contract to operate its Dongsha WWTP; and (b) make ZWTC responsible also for the old combined network currently being operated and maintained by the Zaozhuang Municipal Engineering Management Division (ZMG has already issued a circular directing ZWTC to take over and operate the combined sewer system. ZWTC would do so after the project-financed investments are commissioned.). In this way, one organization - ZWTC -would be made responsible for operating and maintaining all existing and proposed wastewater and storm water networks in Shizhong District, to serve two prospective privately operated WWTPs.

70. The total investment in wastewater and river embankment improvements is Y402.8 million. Zaozhuang’s investment in solid waste is Y 11.3 million. The investments are affordable to Zaozhuang, having only about a 1.2 percent impact on disposable receipts, and about 7 percent on existing debt.

7 1. The Zaozhuang Water Supply Company bills and collects wastewater tariffs on its water bills. The following wastewater tariffs, last adjusted in 2005, are being billed and collected:

Water Supply* I Wastewater Combined

From October 1, 2000 Residential 1.25 0.70 1.95 Industrial 1.75 0.80 2.55 Commercial 1.75 0.80 2.55 Construction 2.45 0.90 3.35 I Self-sumh I 0.75 I 0.90 I 1.65 I Surface Water 0.30 0.90 1.20 Heating Supply n/a 0.25 0.25 Low Income n/a 0.25 0.25 Families * Includes a water resource fee.

72. Zaozhuang also has industries with self-supply of water which discharge to the sewer network. The Zaozhuang Water Resources Bureau bills and collects a wastewater tariff from such industries. The collection rate is said to be low. It is the intention ofZMG to phase out such self-supply. Under the project, Zaozhuang would receive TA to help improve collection rates, or design an improved collection system.

73. In the light ofthe institutional realignment adopted by ZMG, only simplified financial projections were prepared. The projections show that wastewater tariffs would need to be raised by about 25 percent in 2007 and 30 percent in 201 1 (see Table 6). The tariff collection proceeds would cover operation and maintenance costs, BOT payments and debt service.

76 74. Tariffs. The table below indicates the projected average water supply, wastewater and solid waste tariffs over the implementation period.

Table 6: Actual and Projected Average Tariffs (Y/m3,current prices, for water supply and wastewater)

* Actual.

Affordability of Tariffs

75. Projected tariff (water supply and wastewater) increases were compared to average monthly income, with particular reference to low-income households. The tariffs result in being an average of between 4.1 percent and 5.2 percent of the monthly income of low-income households, which is approximately within the accepted benchmark for affordability of utility charges for the lower income groups, i.e. about 5 percent of household income. Details are in the Project File (see Annex 12).

River Embankment cum Wastewater Investments

76. Qixia County (within Yantai Municipality), Weifang Municipality and Zaozhuang Municipality have proposed river embankment works into which wastewater interceptors are to be constructed. These sub-components will be implemented by already established organizations, with responsibility for the management, and operation and maintenance of the completed embankments, as set out in Annex 6. The Project Agreement includes a covenant requiring local governments to prepare, in 2007, an operation and maintenance plan (including financing) for the assets created under these three components, satisfactory to the Bank, for subsequent implementation.

77 Fiscal Impact of River Embankment cum Wastewater Investments

77. A financial analysis ofthe projected charges (i.e. debt service and maintenance cost) was prepared for the river embankmentjwastewater investments in Qixia, Weifang and Zaozhuang, comparing the projected annual charges as a percentage ofthe local tax receipts for each local body (see Table 7 below). For Qixia County, Yantai Municipality fiscal data were used for affordability purposes. The table indicates that the project-related debt service and maintenance costs as a percentage oflocal tax receipts range from a low of0.1 1 percent (Yantai Municipality) to a high of7.0 percent (Zaozhuang Municipality). The municipalities/counties have the potential to absorb these costs from their own sources.

Table 7: Debt Service and Operating Costs For River Embankment (RE) cum WW Sub-Components N million: current terms) Qixia County River 2006 2007 2008 2009 2010 2011 EmbankmenWastewater Debt service (RE&WW) 0.5 0.7 0.7 0.8 Maintenance costs 0.2 0.4 0.4 0.4 0.4 (RE&WW) Percentage of local tax receipts (of Yantai 0.12 0.1 1 0.14 0.15 Municipality)(RE&WW) Weifang Municipality River Embankment/Wastewater

78 Annex 10: Safeguard Policy Issues CHINA: Second Shandong Environment Project

1. The project is classified as a Category A project, due to the complexity ofthe environmental issues associated with the WWTPs and landfills. The design ofthe proposed components complies with urban development plans, environmental regulations and ongoing programs in Shandong, and with the Chinese standards stipulating the protection ofwater and air quality, minimization ofnuisances, energy saving and reduction in greenhouse gases emissions. The project will bring about positive impacts and benefits to the environment and communities in the nine project cities, including reduced raw wastewater discharges, improved water supply, improved solid waste collection and disposal, and community and economic development. The following Bank safeguard policies are applicable: a) environmental assessment; b) involuntary resettlement; and c) safety ofdams.

Environmental Assessment (OP 4.01) 2. The project FSs were prepared by Chinese design institutes supported by the Design Review and Advisory (DRA) Consultant assisting SPPMO. Specialized institutes, independent of those who prepared the FSs, carried out environmental impact assessments (EIAs) and Environmental Mitigation Plans (EMPs) for each sub-project. The DRA consolidated individual EIAs and EMPs, initially prepared in Chinese, into reports in English. The consolidated documents identify potential environmental benefits and consequences ofthe project, propose measures to avoid, mitigate or otherwise compensate negative environmental impacts during construction and operation, and allow incorporation of appropriate measures in the design to mitigate negative impacts to a minimum and acceptable level. The documents have been prepared on the basis ofthe country’s legal and policy framework for pollution control and environmental protection, the master plans and environmental plans ofthe nine project cities, as well as applicable World Bank safeguard policies. Technically, the consolidated EA and EMP reports have applied methodologies set out in various technical guidelines issued by the State Environmental Protection Administration and World Bank’s OP 4.0 1 Environmental Assessment in particular. The scope ofthe project covered by the EA report is based on project FS reports for each ofthe project components. The individual EIAs/EMPs and the consolidated EA were reviewed by the Bank team during project preparation and found acceptable.

3. Policv framework and institutions. China has adopted multi-pronged policies for managing the water issues ofNorth China. They include preventing and reducing water pollution, implementing rational prices for water (including irrigation), recovering costs for the wastewater sector, reducing consumption of water, promoting re-use ofwater, and building the South-North water transfer project. Reflecting these national policies, Shandong has been implementing its share in these activities through: (a) the Bohai Blue Sea Action Program, which is being implemented in three stages from 2000 through 20 15 with the aim ofreducing land- based pollution and restoring the damaged ecological system in the sea; and (b) the South-North project, which includes Huantai and Zaozhuang within its pollution reduction program, for construction ofmunicipal sewage treatment works for the Shandong section ofthe South-North project.

79 4. Shandong provincial and municipal EPBs are in charge of: drafting and issuing local laws and regulations; organizing environmental monitoring and control; supervising the treatment of pollution; dealing with the major pollution incidents; and carrying out education and training in environmental protection. Accordingly, within its duties, SEPB reviewed and approved the individual EIAs.

5. Brief Proiect description. The project’s wastewater, solid waste and water supply components are located in six cities: Heze, Rizhao, Weifang, Weihai, Yantai, Zaozhuang, and three counties: Gaomi, Huantai, and Qixia. The GEF-supported operation is located in Yantai.

6. Baseline environmental conditions. Shandong Province has an area of 156,700 km2with a total population of 92 million in 2004. It is composed of 17 municipalities and 139 counties. Shandong is part of the North China Plain. It borders the Bohai Sea and the Yellow Sea and is crossed by the Yellow River. Mountainous terrains lie in the centre ofthe province. The mountains are surrounded by the fluvial plains of the Yellow River to the west, the Huai River to the southwest, and the Jaolai River in the east, between the mainland and the peninsula.

7. Many rivers in Shandong Province are seasonal, discharging only during the summer months. A great number ofreservoirs have been built for water storage and for flood protection. Rivers in urban areas are generally ofpoor quality, less than Class I11 to VI required by standards. With relatively poor water resources, the province relies on substantial water quantities diverted from the Yellow River. The rapid demographic, urban and economic growth has led to environmental deterioration. The shortcomings in sanitation and waste management turn many rivers into open sewers or garbage fields, especially during low or no flows. The main environmental issues are air pollution, water pollution and water scarcity.

8. Proiect alternatives. Extensive analysis oftechnical alternatives including the “without project” scenario was conducted for each proposed project component during the feasibility stage to ensure project ownership, consultation and agreement on the development objectives. From requests made by various municipalities, the provincial task force further selected a pipeline of investment proposals, based on development priorities, needs, economic viability, financial capacity and environmental safeguards.

9. For water and waste water components, the design institutes carried out comprehensive analyses, evaluating various alternatives for locations, technologies and numbers ofWWTPs and WW, alignments for transmission mains, construction ofpumping stations in comparison with gravity flows, selection ofcombined or sanitary sewer systems, and different layouts of wastewater and water supply networks. In each instance, the alternative with the lowest evaluated cost and least environmental and resettlement issues was selected. For example, four alternative locations were considered for Chengxi water plant in Gaomi and the final option was selected on the basis ofcost effectiveness and the impact on areas with severe water pollution.

10. For the solid waste component, a wide range ofalternatives were considered in terms of location, treatment scheme, composting technologies and so on -the final choice was made by comparing the advantages and disadvantages of each alternative. In Heze, for example, the location ofthe treatment plant was chosen by taking into consideration distance from residential

80 areas, the length of power line, the cost of land value and the local Urban Master Plan. Tables A and B below are summaries ofthe selection process.

Table A. Alternatives for the Wastewater Component

Huantai Choice between 1 or 1. Option A: 1 WWTP with 79 km sewer 1 Lower cost 3 WWTPs network 20% longer sewer network 2. Option B: 3 WWTPs with 65 km sewer network. Treatment process 1. CASS (Cyclic Activated Sludge 3 Higher pollution abatement Technology) Lower energy consumption 2. Oxidation Ditch Less land occupation 3. NO Lower investment and operation costs Easier operation

Qixia

~ Location of WWTP Site 1: close to industrial area 1 Less damage to existing vegetation Site 2: farther from industrial area Better convenience for water reuse Better accessibility Treatment processes 1. Oxidation ditch 1 Higher land occupation 2. ICEAS Higher power consumption 3. A210 Ease of operation Average investment Wastewater network Two alternative routes (see FSR) 2 Higher impact on traffic Lower cost

Yantai Location and capacity 1. New WWTP at Mouping 2 Less land occupation of WWTP 2. Extension Xinanhe WWTP Lower cost Extension of Xinanhe 1. North of current site 1 Lower impact on economic (farming) activities WWTP 2. East of current site Combined or separate 1. Combined 1 in old areas, 2 Minimizes discharge of polluted waters to rivers sewer system 2. Separate in new-built in new- built area, while minimizing resettlement areas in old areas Minimizes civil works and costs in old area

Choice of interceptor 1:l ratio

Main intercepting 1. Pipes at both sides of moat 2 Avoids clearance of 10,000 m2 of buildings, pipes along Beiguan 2. The same, but pipe is laid only at one 1785 m of walls, and one transformer road side in some places, and sewage from the Lower cost two sides is conveyed to this pipe Pipeline route 2 routes (see FSR) Less land occupation Pipelines pass under Xiangzhuang Jigeng Road in the forest Lower cost Location of pumping I.South side of Yan-Wei highway 1 Ease of construction station xossing with Yuniao River 2. North side

81 Choice of treatment 1. A2/0 1 Better N and P removal process" 2. BIOLAK Land occupation 5.3 instead of 6.3 ha 3. Orbal oxidation channel Power consumption 0.3 instead of 0.35/0.46 kWm3 Better operation convenience (+experience in China) Lower cost: Resp. total investment (million RMB), annual operation cost (thousand RMB), unit handing cost (RMB/m') and unit operating cost (RMB/m3) 1. 114; 22; 0.77; 15; 0.52 2. 112; 24; 0.82; 16; 0.53 3. 129; 26; 0.89; 18; 0.62 Choice of - Where to add the coagulant; Polyaluminium Efficiency dephosphorization - Choice of coagulant salt added Convenience of use process'2 between biological basin and secondary sedimentation basin Choice of 1. Chlorination with liquid chloride 3 Safer operation sterilization process'' 2. Chlorination with chlorine dioxyd Less land occupation 3. Sterilization with UV rays Ease of operation Sludge management 1. Anaerobic digestion; 2 Simplicity of operation 2. Aerobic treatment Lower investment cost Design of underwater 1. Discharge at 7 meter depth 1 Lower cost pipe sea outlet 2. Discharge at 10 meter depth Both alternatives satisfy seawater quality criteria

~ ~ ~ Options for water 1. Circulating cooling water in existing short term: 2 1 Investments for delivery are expensive and reuse power plants in Mashan Industrial Park or long term: 1 current consumption possibilities are small Mouping Development Zone can be 2. Greening irrigation Binhai road discussed Weifang 1. Interception culvert boxes 1 : 1 + 1 Interception box culvert + artificial wetland artificial wetland Rainwater adjusting storage scheme 2. Smaller interception culvert boxes 1.2 + Cost lower storm water balance tank Good pollutant removal Lower power consumption Large land occupation but out of city area No water replenishment to the river Zaozhuang Combinedkeparate 1. Combined 1 in old areas, 2 Minimizes discharge of polluted waters to rivers system 2. Separate in new-built in new- built area, while minimizing resettlement areas in old areas

Current: BIOLAK process. Current NP removal not sufficient. Operation ofsome parts ofthe process not correct l2Chemical dephosphorization step proposed since current P removal not sufficient. 13 Sterilization is required for discharge into the sea.

82 Minimizes civil works and costs in old area Pipeline route 1. Two interceptor mains along both banks 2. One interceptor main in the middle of the river West bank of Dongsha River 1 1. Along north outer ring road till WWTP Ease of connection in the south Saving the need of lifting pump station 2. North outer ring road-Hongkong St.- Zaozhuang St -RenDa Wall-along west bank of Xisha River-WWTP East bank of Dongsha River 1. North outer ring road-Xinhe Rd.- Dongshahe railway bridge-RenminRd.- invert siphon-west bank interceptor main 2. Qitao Rd.-Chang’an Rd.-Renmin Rd.- invert siphon-west bank interceptor main East bank of Xisha River 2 Limited resettlement 1. Along east bank of Xisha River- Shorter pipe Shiliquan Rd.-WWTP Ease of connection 2. Xichang Rd.- Shiliquan Rd.-WWTP

~ ~ ~~ West bank of Xisha River 1 Ease of connection Along west bank of Xisha River-Shiliquan Rd.-WWTP Wenhua Rd.- Jingji San Lu-Shiliquan Rd.- WWTP Transverse river 1. Complex section 1 More land acquisition and resettlement section pattern 2. Rectangular section Nicer scenery Higher cost (188 instead of 169 million RMB, including resettlement) Land appreciation by 100,000 Rh4B/mu (surplus revenue of 40 million RMB at least)

~~ Rubber weirs or 1. Rubber weirs Lower cost (174 instead of 214 million RMB) regulating locks 2. Regulating locks Nicer scenery

83 Table B. Alternatives for the Solid Waste Component

Heze Location of treatment 1. Yuwayao: North of Heze, 8 km to the 1 Longer distance to residential area (m) plant center Drinking water protection area close to site 2 2. Gengwayao: North-West of Heze, 15 Larger storage volume km to the center Shorter necessary power line 1. is more in accordance with Urban Master Plan Lower land value Treatment scheme 1. Sanitary landfill 4 Minimizes environmental impact 2. High temperature composting Higher cost 3. Incineration 4. Synthetic treatment Cornposting 1. Storehouse static aerobic composting Lower investment technologies 2. Silo intermission dynamic Ease of operation composting 3. Skip stacking machine turn-over aerobic composting Treatment process for 1. Membrane filtration and discharge 2 Lower investment and operation costs leachate and into surface water wastewater 2. NO with discharge into municipal sewage system Isolation of landfill 1. Curtain wall drilling (grouting) 2 2 greater safety than 1 bottom 2. Lining with on-site available 1 lower cost than 3 materials and with artificial materials; 3. Both

11. Impact Assessment and Mitigation. The project would have a significant positive impact as it would improve the quality of water supply, reduce pollution of rivers and promote the appropriate solid waste management, and through these impacts it would be beneficial for public health and the quality of life of residents. Extension of wastewater facilities would improve sanitation conditions for about 700,000 people, over 400,000 people will enjoy better flood protection, and over 300,000 people will receive access to piped potable water. The Huantai, Yantai and Qixia WWTPs would remove annual pollution loads ofmore than 13,300 tons of BOD, 17,000 tons of suspended solids, 2,300 tons ofNH3-N and 300 tons oftotal phosphorus. Besides, the project will collect an additional 220,000 m3/day of wastewater in Gaomi, Weihai, Weifang and Zaozhuang. Collected wastewater will be treated in WWTPs built with other financing sources. It has been estimated that the additional collection will allow annual pollution abatement of about 14,000 tons of BOD, 19,000 tons of suspended solids, 2,500 tons of NH3-N and 79 tons of total phosphorus. In addition, the river rehabilitation in Qixia, Weifang and Zaozhuang would create pleasing urban river landscapes and relaxing environments.

12. The total pollutant load to the Bohai Sea and the Yellow Sea will also decrease globally through lesser pollutant loads going into the rivers in different cities. The reduction in pollutant loads to the environment at project completion can be estimated as follows.

84 Reduction of Pollutant Loads to the Environment

Load Reduction Sub- Main Recipient project Water Body

Gaomi Xiaokang River 5256 6935 934 29 Dong Zhulong River 5877 7 154 818 77 Huantai and Yuej in River Qixia I BailangRiver I 1314 I 1752 I 256 I 26 I Weifang Baiyang River 2707 3572 48 1 15 Weihai Yellow Sea 4408 5817 784 24 Yantai Yellow Sea 6424 8176 1226 204 (+GEF) (+300) Zaozhuang I DongshaandXisha 1 1971 1 2601 I 350 I 11 I Rivers

Key impacts durinp construction 13. Ecoloav: The project will not involve any destruction ofvaluable natural land. The selected project sites have no particular ecological value. The construction may cause the cutting of street trees and the EMP would ensure replacement by replanting oftrees. The baseline survey of aquatic ecology in the rivers demonstrated a high level ofpollution ofthe rivers near project sites and, therefore, further significant impacts ,during construction are not anticipated. Impacts during operation would be globally beneficial on the rivers and the downstream. Impact ofwater supply components on the aquatic ecology ofreservoirs would be negligible since the water withdrawn would account for only 1.O percent to 3.0 percent ofthe average annual storage of reservoirs.

14. Historical and cultural values: There are no historical or cultural values on the project sites reported. However, the EMP will provide for measures to avoid all possible damage to potential buried cultural relics.

15. Landscape: To minimize potentially negative impacts ofthe newly built WW and WWTPs an appropriate program oflandscaping and planting oftrees around the WWTPs would be carried out. The landfills would have no impact on landscape.

16. Excavated sediment: Significant volumes of soil generated during the construction would be removed from the sites by trucks, which will result in nuisance for residents and affect public safety through risk oftraffic accidents. To minimize nuisances, the civil works contractor would prepare and submit a sediment management plan. Bottom silt from the rivers would be removed during dry seasons after drying out ofthe rivers. The large amounts of this silt, free ofheavy metals, would be put to practical uses such as land reclamation or production ofconstruction material. Details on the silt excavation process would be provided in the EMP.

85 17. Old waste dump in Weifann: The abandoned waste dump located on the Bailang River island, with an estimated volume of 400,000 m3,will be removed. The composition ofthe waste is 70 percent of construction waste materials and 30 percent of domestic waste. Detailed excavation procedures have been provided in the EMP. The waste dump and surplus silt excavated from the river would be deposited at the city landfill about 25 km from Weifang.

Key impacts during; operations 18. Odor at WWTPs: Odor-generating wastewater treatment units would be covered or located in buildings with ventilation systems to vent odorous gas to high level. Planting a separation strip and a 100 m buffer zone would minimize the risk ofunpleasant smells for the nearest residents. Air quality monitoring during WWTP operation would be detailed in the EMP.

19. Sludge management: The total amount of sludge produced by WWTPs would be about 200 tons/day with 20 percent of dry solids. After dewatering and stabilization, the sludge would be transported to landfills in enclosed containers to avoid spill. The landfills would be provided with combined anti-seeping measures in both vertical and horizontal directions so as to prevent pollution of surface and ground water. The measures provided in each component for sludge management, render the health-related risk insignificant.

20. Industrial wastewater discharge: Practically all large industries in Shandong and in the project locations have wastewater pre-treatment facilities. In addition, in the 11 th five-year environmental protection plans, the key industrial polluters have been ordered to rectify their pollution status. Point pollution sources in Shandong would be monitored and compliance enforced. To ensure the safe and stable operation of WWTPs, effluents from various industries should meet both the wastewater discharge standards set for the industries concerned and the quality standards set for wastewater to be discharged into municipal sewerage (CJ3082- 1999) before entering the municipal WWTPs.

2 1. Solid waste collection: The solid waste containers at collection stations would be covered to minimize odor impact; the trucks would be air-proof to minimize odor and prevent spilling the waste onto the road. The stations would be covered and maintained cleanly. Transportation to landfills would increase traffic noise, dust, and traffic accident risks when passing through villages. Mitigation measures in the EMP include: a) selection and design of access; b) implementation of traffic safety rules; and c) training for the drivers.

22. Leachate: The landfill leachate would be biologically treated at the landfill sites to reach Class I11 standard, and then piped to the WWTP. The sludge produced would be recycled within the treatment process, or be used in landfills.

23. Greenhouse gas emissions: The project may lead to reductions in emissions of greenhouse gases through the collection and use of biogas at landfills, and composting in Heze. The production is estimated at 10- 13 million m3of biogas.

24. Odors at waste disDosal sites: The odor impact would be serious in Heze, reaching about 500 m in distance. Odor-removal processes would be installed for the fermentation workshop, the generated biogas would not be emitted without burning, and the greening belt would also be

86 planted to isolate the foul odor impacts. In Zaozhuang, the landfill cover would reduce the current impact on nearby residents. In Rizhao, due to the location ofthe site in a natural valley, no impact from site operation is expected on residents beyond 50 m.

25. Mitigating, measures: A series ofmitigation measures have been planned to reduce the impacts to acceptable levels during construction and operation. Mitigation monitoring procedures have been established, and the organizations responsible for this monitoring have been designated.

26. Details ofmitigation measures, their location, time frame and the responsible agencies for their implementation and supervision, have been provided in the EMP. The EMP covers areas such as watedwastewater management, air quality control, noise management, construction waste management, covering piles to limit erosion, runoff management and water storage in construction, correct orientation ofroads and paths, traffic management and speed control. EMP annexes contain a series of ‘Guidelines’ on site clearance, construction methodology, and debris disposal.

Summary of Impacts and R itigation Measures - Construction S ige Responsible Possible Impacts Proposed Mitigation Measures Institutes

Generally limited impact on wildlife for Monitoring of construction sites. PMOs components located in densely built or cultivated areas. Contractors

Disturbancewill occur for wildlife (mainly birds) Avoid noise at night time. Local EPBs for components located near larger reservoirs. Trees felled in the streets or in green areas to be Risk of tree cutting along streets. replaced at the end of construction. Vegetation clearing during construction. New vegetation.

~ ~~~ ~~

Anticipated volumes of earthwork excavation and A detailed demolition program, including PMOS fill are estimated at: phasing, proposal for transport route and description of proposed disposal sites, will be Contractors - Excavation: 6 million m3 required from the concerned contractor(s) prior - Fill: 3.5 million m3(+0.5 million needed in Heze) to the starting of the works. - Demolition soil: 2.5 million m3 On-site reuse of demolition and excavation material as fill will be maximized where applicable.

New vegetation after every work phase.

Dust and sediment discharge to rivers. Contractor environmental specifications include PMOs rules for piling, compacting and spraying soil waiting for evacuation or reuse. Temporary Contractors storage of earth piles on construction sites should be drained into sedimentation basins before discharge to the river.

Dust may affect nearby residents. Sewedwater pipes networks will be constructed in segments in order to minimize soil production during the construction.

Transport of material as earth fill, earth soil, sand Washing posts should be installed for trucks

87 Responsible Possible Impacts Proposed Mitigation Measures Institutes and gravel to or from sites may affect urban areas. leaving construction sites to limit mud transport in city roads. Strict obligations regarding size of trucks, of load, necessary load cover, routes and timing will be imposed by concerned contractors.

Test results show that dredged materials are not PMOs hazardous and they would be disposed to green lands and forest. During project implementation, Contractors follow-up test would be carried out. If any River hazardous material was found, the disposal management would be based on the following national units standards: a) Standards for Hazardous Wastes Identification (GB-5085-1996); b) Standards for Sludge Reuse in Agriculture (GB-4284-84); and c) Standards for Pollution Control for Landfilling of Domestic Refuse (OB-16889-97).

Dredging (excavation) may affect the river bottom Contractor environmental specificationsto and cause later infiltration of river water to address dredging issue. groundwater. Dredging Contractor to prepare Dredging & Sediment Management Plan for approval by Municipality.

Construction in densely built urban area to cause Setting up of an efficient organization for the PMOs air pollution, noise and safety problem. environmental supervision and monitoring, with clear operational procedures for rapid and Contractors effective treatment of non-compliance. Local EPBs Preparation of detailed environmental and social specifications for the contractors, to be part of the bidding documentation. Contractor environmental obligations are part of the contract documentation.

Noise from heavy machinery, particularly in Enforcement of existing noise standards related PMOs residential areas to machinery and working period. Contractors No construction from 10 pm to 6 am. Local EPBs

ITraffic congestion resulting from pipe network Contractor obligations include public construction or bridge works may result in information and appropriate construction temporary higher levels of pollutants (TSP, NOx, practices and organization, with road signs and CO). coordination with traffic police to minimize impacts and ease traffic during works.

If inappropriately managed, labour camps may Contractor obligations include specifications for Contractors become the site of epidemic burst out among the organization and the management of labour workers and spread to surrounding population. force and camps. PMOs Contractor to prepare a Camp Management Plan Local health for approval by PIU. bureau

Monitoring of labour camps and of worker health conditions by the SupervisionEngineer

88 Responsible Possible Impacts Proposed Mitigation Measures Institutes

and Department of Public Health.

Occupationalhealth and accident issues, resulting Contractor specifications include preparation of Contractors in serious wounds or death of workers. a Health & Safety Plan for approval by PIU. In this plan, Contractor clearly defines the safety PMOS procedures in case of accident on site, ensures Local health that minimum first aid equipment is available on bureau all sites and ensures availability and enforcement to wear PPE.

~______During network construction, water, gas or even An information procedure will be set up with PMOS electricity may be cut-off for a few hours to a few Contractor and concerned agency, to anticipate days, creating a nuisance for the concerned cut-off and to inform the public in advance Local utility population. through appropriate communication media; bureau

Extension of works is optimized to reduce Contractors duration of inconvenience.

Possible presence of archaeological or historical Clearance from cultural bureau to be obtained. Contractors relics during excavation works. Specific procedures (chance-find procedures, Local cultural see section 4.3) to be set up and followed if bureau underground relics are identified during excavation works, including stoppage of works.

The newly built WWTPs will contribute to Beneficial long term impact to be monitored by WWTP reducing the annual discharge of BOD and SS to the EPB. the environment by 27,000 and 36,000 tons Local EPB respectively with beneficial impacts on groundwater, surface water and seawater quality.

Treated effluent discharge may locally impact the Monitoring of effluent quality by the operator of WWTP river quality, but pollution level is low under the facility. Monitoring of river water quality efficient operation of the WWTP and current river nearby discharge. Local EPB water quality. Spare power source and spare pumps to replace Accidental discharge of non-treated effluent may accidental failure of equipment. occur if WWTP is in stand-by or overloaded or if treatment process is affected by illegal industrial Strict control of industrial discharges into the discharge of toxic substance in the sewers sewer system. Industries should reduce their emissions to sewers by adopting their own pre- treatment facilities.

~ ~~~

Sludge production: WWTPs will produce a total of Monitoring of sludge quality before leaving the WWTP ca. 185 tonsiday of sludge with a water content of WWTP. Appropriate monitoring of sludge 80%. treatment and eventual disposal as Local EPB recommended in the EA. Preparation of sludge management plan.

27. Public consultations. Two rounds ofpublic consultation were carried out during the EIA, the first at the preparation of EIA terms of reference between July and December 2005, and the second on completion of the draft EIA reports, between January and May 2006. The primary technique used in public consultation was a survey through public opinion questionnaires, which was supplemented by focused interviews and public meetings with key affected groups and

89 individuals. The people consulted included mainly those who will be affected directly by the project. Relevant government and non-governmental organizations and experts from academic and other professional institutions on various environmental and socio-economic issues were also consulted. The detailed information on public consultations is available in the Project File.

28. Information disclosure. In compliance with EIA process requirements of Chinese government and the World Bank, the completed draft EIA and EMP reports were released in public places in the project areas, including libraries, EA team offices, local project owner offices, neighborhood committees, and city’s websites on the Internet. The concerned public can access and review the reports at these places.

29. Environment management plan. An EMP has been developed as a separate and stand- alone document for each ofthe nine project cities. These EMPs include policies and applicable environmental standards, environmental management systems, mitigation measures, monitoring plans, institutional arrangements, capacity-building and estimated costs for the mitigation measures and monitoring programs for both the construction and operation phases.

30. The EMP includes environmental monitoring programs for both the construction and operation phases. The parameters to be monitored include resettlement, noise, dust, water quality, and solid waste disposal. To ensure the strict and efficient implementation ofthe mitigation measures proposed, including environmental obligations during construction, a program of monitoring activities will be required, which includes mainly two types of monitoring (details are in the EMP): (a) environmental supervision, i.e. the general environmental monitoring of construction sites and activities; and (b) compliance monitoring, i.e. the specific monitoring of water quality, air quality and noise level.

3 1. Environmental management. Designated by SPG, SPPMO will be responsible for overall coordination ofthe project implementation including EMP implementation. SPPMO has had previous experience in coordinating the implementation ofBank-financed projects, including SDEP and the Huai River Pollution Control Project. PMOSof municipalitieskounties (including EPB staff) and PIUs will be responsible for the implementation oftheir respective components including their EMP implementation. To ensure that applicable national, provincial and municipal environmental laws, regulations and standards, as well as the World Bank environmental requirements are respected during project preparation and implementation, environmental management units would be established both at the SPPMO and PIU levels.

90 During Construction

~~ SDEP2 level SPPMO TA Consultants Shandong Provincial (Shandong EPB) EPB TA Consultants Sub-project level Implementing Construction Construction 1. Monitoring Programme as Agency and PIU Supervision Supervision defined in EMP, carried out Engineer (or Environmental by Construction Supervision Institute) engaged Engineers and Environmental Engineers by the Agency EnvironmentalField 2. Regulatory monitoring by Site Inspectors (within local Environment Monitoring the Construction Station under authority of the Supervision Engineer EPB team) Local EPMD During Operation- SDEP2 level ~inci~~dongEPB Sub-project level Management, Environmental 1. Monitoring Programme as Operation and Management Unit + defined in EMP, carried out Maintenance Environmental by Environmental Monitoring Agency Monitoring Unit Unit 2. Regulatory monitoring by local Environment Monitoring Station under authority ofthe EPB

32. Training requirements. To ensure effective implementation ofthe above measures and plans staff ofimplementation agencies will be trained in environmental impacts and how to ensure timely responses to accidents. The training program will covers issues such as environmental laws and regulations, standards, project-related environmental science and environmental management. The training will be held prior to the commencement of construction and will be attended by at least one senior management staff person and one environmental staff person from each ofthe contractors and supervision companies.

33. Monitoring. The EMP lists environmental performance indicators such as air and water quality, noise levels, construction sites and camps, as well as details ofmonitoring programs, such as specific locations and time ofsampling and the agencies responsible for reviewing monitoring programs and results.

34. Supervision and reporting. The Bank will supervise the project’s environmental aspects twice a year. SPPMO will be responsible for reporting including semi-annual progress reports with a sectiodchapter on EMP implementation. During project implementation beginning in 2008, an annual report prepared by an independent monitoring agency on the EMP will be furnished to the Bank by February 28 of each year, along with any revisions proposed to the EMP to achieve its objectives.

91 35. Funding arrangements and schedule ofimplementation. The costs ofmitigating the effects from construction will be included in the cost offacilities. Monitoring ofair and water quality, noise, worker health, and site safetyhygiene will be conducted by local environmental monitoring units or consultants, and financed from counterpart funds.

36. Budget estimates. Tentative monitoring and training budgets for EMP are summarized in the following table. The cost ofmonitoring includes monitoring to be carried out during the operation and construction phases. The cost will be distributed to each project owner, and over time. The total cost ofthe EMP was estimated to be RMB21.8 million Yuan, which represents 1.24 percent ofthe overall budget (base cost) of the project.

Summary of EMP Cost Estimates Provided in Sub-project EMP Reports

Construction Sub-project Component I s/N Gaomi Water supply 100,800 2 183,600 284,400 Huantai Water supply 1,719,200 3 1,688,700 3,407,900 Qixia Waste water 2,050,000 2 1,843,440 3,924,240 Weifang Waste water 397,000 2.5 2 15,400 651,400 EWeihai Waste water 894,800 2 1,765,200 2,660,000 Yantai Waste water 465,000 2 736,000 1,201,000

Zaozhuang - wastewater Waste water 2,235,480 2 1,932,480 4,167,960

I 9 Heze Solid Waste 787,700 1 3,820,300 I 4,608,000 I 10 ITOTAL I 21,783,000 Safety of Dams (OP4.37) 37. Four existing reservoirs, Xiashan, Wangwu, Bailanghe, and Anli, would be involved in the project, either to provide raw water for water supply, or for flood regulation. The safety status of their dams was reviewed in the context ofOPBP4.37, Safety ofDams. Starting from 2003, the province conducted dam safety inspections and assessments on all large and major medium sized dams, resulting in the project dams being classified as Class C dams, i.e. with quality defects, or unable to function under the design conditions. On the basis ofthat finding, the central MWR and Shandong developed a remedial program to correct the identified deficiencies. The remedial works for one reservoir was complete in 2005; two would be completed by end of2006; and the remedial works for Weifang Bailianghe Reservoir is planned to be completed in 2007. Until the remedial program is completed, the dam safety would be assured by keeping the water level and the pounding level lower than during normal operating condition in accordance with the Operating Plans for Flood Season for Dams Calcij?edas Class C.

38. Assurances were given during negotiations that (a) Gaomi, Qixia and Weifang will complete the remedial works for all four dams by December 3 1, 2007; (b) Shandong Province will cause Yantai and Weifang each to establish an independent panel of dam safety experts, which will review the operation plans for all four dams prior to each flood season and

92 recommend to the province to take all necessary actions if any to ensure the safe operation ofthe dams during the flood seasons; and (c) the panel will also report to the province and the Bank on progress in the remedial work and on the safety ofthe four dams by February 28 ofeach year (with the exception ofthe first annual report being due on August 3 1,2007).

39. The technical parameters, safety status and status of remedial actions ofthe four existing dams involved in the project are given in the table below:

Component/ Dam Safety Status Remedial Actions Dam Name Parameters Gaomi/ Dam type: (a) Inadequate design and “The Preliminary Design of Xiashan homogeneous construction of the spillway, which Remedial and Reinforcement for earth filled, may fail to discharge the flood Xiashan Reservoir” had been completed safely in the event of 200 year approved by the Huai River 1966, recurrence; (b) Zhenggong and Water Conservancy Commission height 21 m, Nanxin Sections of the dam are of and “Construction Design of length 32.9 km potential liquefaction under a Remedial and Reinforcement for crest 6 m. Grade VI1 earthquake; (c) the main Xiashan Reservoir“ by the dam section may lose its stability Shandong Provincial Water at a higher water level caused by Bureau respectively. The seepage through the dam body construction of remedial works (higher phreatic line); (d) excessive has started in 2003 with seepage found at the bottom of scheduled completion in 2006. many sections of the dam, with collapses found along the dam sections; and (e) all the electrical and mechanical equipment is outdated and cannot perform under normal conditions. Gaomi/ Dam type: The dam is now, after upgrading, Shandong included remedial Wangwu homogeneous able to function as it was designed, works for Wangwu dam in the earth filled, i.e. to protect the downstream first phase of national-wide completed against a 50 year flood, with check reinforcement program of unsafe 1958, flood of 1,000 year. dams, i.e. “Special Plan for height 14.4 m Remedial Works and Reinforcement of Unsafe Dams and Gates Structures of the Country, 2001”, approved by MWR. The civil works and equipment installation have been completed in 2005.

93 Component/ Dam Safety Status Remedial Actions Dam Name Parameters Weifangl Dam type: (a) The dam body and foundation Following the completion of the Bailanghe homogeneous at river course section are of dam safety assessment, the earth filled, potential liquefaction under a “Feasibility Study Report for completed Grade VI1 earthquake; (b) seepage Remedial and Reinforcement of 1960, appears at a higher elevation on the Bailanghe Reservoir“ and height 23 m, dam slope (higher phreatic line) “Preliminary Design for length 6.7 km and excessive seepage through the Remedial and Reinforcement of crest 6.0 m foundation in some dam sections; Bailanghe Reservoir” had been (c) many cracks were found on the prepared by Weifang gate piers and slabs ofthe Municipality and approved by spillways and some of the cracks Shandong DRC and Huai River run through the slabs, as well as Water Conservancy Commission the concrete strength does not respectively. Such remedial comply with the requirements of works have been scheduled to be the national codes; (d) discharging implemented during 2006 and condition at the tailrace of 2007. Prior to the completion of releasing tunnels do not comply remedial works, the panel will with the requirements of national review the operation plan for codes; (e) the size of spillway flood season and recommend the sections is not sufficient to actions to be taken for assurance discharge the design flood; and (f) of the dam safety during the all gates and lifting equipment are flood seasons. The province shall outdated and cannot perform under commit to take all actions normal condition. recommended by the panel. Yantai - Qixia Dam type: In August of 2000, the Yantai Following the completion of the County/ sand filled Bureau of Water Resources had dam safety assessment, the Anli Dam with clay core, undertaken the dam safety remedial works had been listed in completed assessment according to the Rules “Special Plan for Remedial 1960, for Dam Safety Assessment issued Works and Reinforcement of height 28 m by MWR and such an assessment Unsafe Dams and Gates was reviewed and confirmed by Structures of the Country, 2001”, the Dam Safety Management which had been approved by Center of MWR in September MWR. Upon the approval by 2000. The dam was classified as MWR, the feasibility study and Class C dam and had been preliminary design for remedial included in the first phase for the works had been prepared by reinforcement of unsafe dams. The Yiantan Municipality and remedial works are to be approved by Shandong DRC and completed in 2006. Huai River Water Conservancy Commission respectively. Upon the approval of the construction design by Shandong Provincial Water Bureau, the construction of remedial works started in late 2005 and is scheduled to be completed in 2006.

1 ~ dam safety class cation criteria are given below: 0 Class A: actual flood protection complies with the requirements of “Flood Control Standards” (GB50201- 94) and dam and its appurtenances are under normal conditions, no major quality defects identified and the dam can perform under design conditions; ii) Class B: actual flood protection capability is not lower than the near-term requirements for the flood protection of the reservoirs to be reinforced stipulated by MWR, but not comply with the requirements of

94 “Flood Control Standards” (GB5020 1-94), dam and its appurtenances are basically under normal conditions, the dam can perform safely with a controlled operation; and iii) Class C: actual flood protection capability is lower than the near-term requirements for the flood protection ofthe reservoirs to be reinforced stipulated by MWR or dam and its appurtenances are of major quality defects threatening the safety ofoperation ofthe dam under design conditions.

Involuntary Resettlement (OP 4.12) 40. Individual RAPs for each project component were prepared in Chinese by the respective design institutes, assisted by respective PMOs, house demolition offices, national land resources bureaus, affected villages and communities, and potential displaced persons. The initially contemplated resettlement impacts have been significantly reduced through optimizing the project design and implementation arrangements. For example, the river regulation scope in Zaozhuang was reduced from 80 to 40 meter width in residential sub-districts, and in Weifang, from 50 to 10 meter width. Similar measures were taken to minimize the resettlement impacts in the component. In the process of project design, the project owners and design institutes paid much attention to possible linkages with associated ongoing or previous activities. PMOs and the design institutes analyzed all components and found no linkage. On the basis of individual RAPs, the DRA Consultant produced a Summary Resettlement Report in English, which was reviewed and approved by SPPMO and is available in the Project File.

41. Scope of impacts. Land: 150.0 mu is for nursery, 137.2 mu for forest, 40.6 mu for garden plots, and 5.3 mu for fisheries. The project resettlement impacts mainly include permanent land acquisition, residential house demolition, enterprise and public institutions demolition, shop demolition, infrastructures and ground attachments. All these impacts will be scattered across about 32 villages or communities in 19 rural townships or urban districts in seven municipalities or counties. In total 4,801 persons will be affected by the project including a floating population, which includes: (a) 3 15 households (1,023 persons and 758 agriculture labourers) affected by permanent collective land acquisition; (b) 606 households (2,282 person) affected by urban residential house dem~lition’~;(c) 120 households (387 persons) affected by rural residential house demolition; (d) 28 households (71 9 persons with a floating population of 598) affected by rural non-residential housing demolition; (e) five enterprises partly affected with no affected employee; (f) six public institutions (63 persons) and 42 affected shops (1 47 persons); and (8) 734 persons affected in the short-term due to temporary use of collective land. Total permanent acquisition of collective land by the project is about 1391.O mu, of which, 54.3 mu is for irrigated land, 234.8 mu for dry pond, 258.9 mu for river bed, 20.4 mu for housing plots, 323.6 mu for waste land, and 63.3 mu for other types of land. The total temporary use of collective land is about 1143.7 mu, including 701.1 mu of dry land, 145.6 mu of irrigated land, 95.2 mu of orchards, 155.9 mu of forest, 33.2 mu of vegetable land and 12.7 mu of small roads on farm land.

42. Policy obiectives and legal framework. The individual RAPs were prepared in line with relevant Chinese laws and regulations, and World Bank OP 4.12 on Involuntary Resettlement. The following basic principles were adopted for resettlement planning:

~~ l4Demolition of structures occurs only in Weifang and Zaozhuang

95 Acquisition ofland and other assets, and relocation ofpeople, will be minimized as much as possible. All project affected people residing, working, doing business or cultivating land required for the project as ofthe date ofthe baseline surveys are entitled to be provided with rehabilitation measures sufficient to assist them to improve or at least maintain their pre- project living standards, income-earning capacity and production levels. Lack of legal rights to the assets lost will not bar them from entitlement to such rehabilitation measures. The rehabilitation measures due to land acquisition are: (i)agricultural land for land of equal productive capacity; (ii)compensation for land acquisition and resettlement subsidy for the farmers affected by land acquisition; and (iii)other forms ofassistance. Replacement of agricultural land will be made as close as possible to the land that was lost. Plans for acquisition of land and other assets and provision ofrehabilitation measures will be carried out in consultation with the affected people. Financial and physical resources for resettlement and rehabilitation will be made available as and when required. Institutional arrangements will ensure effective and timely design, planning, consultation and implementation ofthe RAP. Effective and timely supervision, monitoring and evaluation ofthe implementation will be carried out.

43. Compensation standards. The land acquisition compensation included land compensation, resettlement subsidy, and young crop compensation. The land acquisition fund is calculated based on annual production value according to the Law of Land Administration. The compensation rates of structures are determined based on their replacement cost. Different indicators, such as the prices ofnew commercial houses, second hand houses in better condition, economic houses and resettlement houses, are used as reference to determine the replacement cost for housing in different cities. During implementation, the housing to be demolished will be evaluated by qualified real estate evaluation institutions and the evaluated value compared with compensation rates provided in the RAP. The higher value will be used as the compensation rate.

44. Rehabilitation measures. The results ofsocio-economic surveys indicated that the share of agricultural income is only 0.1 to 26.3 percent oftotal income of affected farmers. Key income is generated from non-agricultural activities, including temporary jobs outside the community or small business operations. Therefore the resettlement will have small impacts on the income ofaffected people in the rural area. To reflect the small impacts on their income, three forms ofcompensation are proposed, based on consultation with the affected people: a) cash compensation; b) land redistribution; and c) training for temporary jobs.

45. Affected residents: Based on consultations with the affected population, various relocation methods would be applied for rural and urban affected households. For urban residents, the project would offer three options: a) cash compensation; b) replacement housing; and c) a cheap house for rent. For rural residents, the project would offer two options: a) a full package of cash compensation, including structures and land; and b) cash compensation for structures and a housing plot for self build.

96 46. Affected enterprises, institutions, and shops: Compensation for business losses has been provided in the RAPs. New sites have been planned for affected enterprises, institutions and shops. The employees will not be affected due to resettlement.

47. Affectedpublic infrastructure: Compensation based on replacement value will be paid to the relevant government agencies or local governments to restore the affected infrastructure and services.

48. Implementation arrangements. A multi-level organization has been established for the implementation ofthe RAPs. An independent monitor has been selected for resettlement implementation. Details of staffing and their responsibilities are provided in the RAPs.

49. Budget and funding arrangements. Each component RAP contains a detailed resettlement budget that covers all basic resettlement costs, management costs, contingencies, survey, design and monitoring costs. The basic resettlement cost includes compensation for land, houses, other structures, standing crops and trees, business profit loss, reconstruction ofaffected infrastructure and relocation subsidies. The total resettlement budget is estimated at RMB315 million Yuan. Details ofthe resettlement budget are shown in the following table.

65 1.4 424.5 274.4 41.7 179.2 990.1 2790.1 8.85% 109.78 123.36 104 - 475.34 1.51% - I - I 774.7 - I 1308.8 I 2083.5 I 6.61% Urban housing I- - I - I 1719.8 - I 10043.2 I 11763 I 37.32% Enterprises I- - I - I 1131.5 - I 128.7 I 1260.2 I 4.00% Institutions I- - I 661.6 I 661.6 I 2.10% Shops I- - I - I 3600.1 - I 803.7 I 4403.8 I 13.97% Attachment I 1.5 16.6 1.51 2.33 306.1 6.2 36.8 371.04 I 1.18% Illegal structure I - - - - - 33.8 33.8 0.1 1% Total of above I 368.5 668 535.8 400.1 7573.9 289.4 14006.7 23842.4 75.65% Design I 7.4 13.4 10.72 8 151.5 5.8 280.1 476.92 1.51% ~~~ External monitoring 11.1 26.7 10.72 12 151.5 11.6 280.1 503.72 1.60%

Internal monitoring 7.4 13.4 10.72 8 75.7 I 5.8 140.1 261.12 0.83% Overhead 11.1 33.4 16.08 12 378.7 14.5 700.5 1166.28 3.70% t cost Gaomi Heze Huantai Qixia Weifang 1 Yantai Zaozhuang Total % Training 3.7 26.7 5.36 4 113.6 1 11.6 420.2 585.16 1.86%

Contingency 40.9 33.4 58.94 44.4 378.7 ~ 14.5 700.3 1271.14 4.03% Taxes 295.7 1125.9 562.69 230.7 55.2 1 207.3 932.6 3410.09 10.82% Sub total 377.1 1272.9 7674.2 24.35% I I I 675.2 I 319.1 I 1304.9 I 271.1 I 3453.9 I I Total I 745.6 I 1940.9 I J211 I 719.2 I 8878.8 I 560.5 I 17460.6 I 31516.6 I 100.00%

97 50. Consultation and grievance procedures. Public consultation and participation have played a key role in formulating the RAPS.The affected residents, business people and district governments participated in the census, inventory and formulation ofthe livelihood rehabilitation strategy, measures and relocation sites, and their feedback has been incorporated. Each RAP contains a list ofmaj or consultations. Public consultation and participation will continue during RAP implementation. Project information will be provided to the affected people through TV, radio broadcast, newspapers, bulletins and posters. The RAP will be summarized into a resettlement information booklet and distributed to every affected household.

5 1. Grievance redress mechanism. A grievance mechanism was established during preparation ofthe project resettlement plan. The mechanism, based on the principle that displaced persons can prosecute any resettlement aspect including compensation rates, has the following four phases:

Phase 1: Displaced persons can appeal verbally or in writing to the village committee or project demolition implementation institution if they are not satisfied with resettlement plans. For a verbal appeal, the village committee should record with the demolition institution in written form and solve the problems within two weeks; Phase 2: If displaced persons are still not satisfied with the decision, they can appeal to municipal PMOs/administration institutions after receiving decision notices, and the latter should resolve it within two weeks; Phase 3: If displaced persons are still not satisfied with the decision ofmunicipal PMOs/administration institutions, they can appeal to a component leading team or local municipal construction commission after receiving decision notices. The latter should handle the case within two weeks; and Phase 4: If displaced persons are still not satisfied with the decision ofthe component leading team or local municipal construction commission, they can bring a lawsuit in a civil law court in case ofobjection to any aspect ofthe resettlement plan after receiving decision notices.

52. The resettled persons will be informed ofthe above procedures through meetings, or by other means, so that they know their right to appeal. Publishing will also be made through the mass media to promote public awareness. Complaints and suggestions about the resettlement work will be sorted out and submitted to the resettlement agencies at all administrative levels for prompt study and/or solution. Appeals and grievances to every agency or organization are free, and a reasonable cost will be paid from the contingencies ofthe project land acquisition and demolition offices.

53. Monitoring arrangements. Internal and external monitoring is a part ofthe project resettlement management. The project resettlement offices will carry out internal monitoring of resettlement implementation. The monitoring procedures, content, staffing, responsibility, timeframe and reporting have been detailed in the RAPs. An independent external monitor has been selected for examining RAP implementation, which would include a review ofphysical progress, compensation payments, allocation ofresidential sites, farmland allocation, and restoration of infrastructure. The independent monitor will also review the public consultation process, operation ofthe resettlement project offices, grievance redress mechanisms, and

98 restoration oflivelihood ofthe affected farmers. Independent monitoring will be conducted once a year during the project implementation period.

54. Povertv impacts. Special attention was paid in project design to ensure that poor and vulnerable groups would have equal access to the services provided by the project. The social assessment revealed that tariff increases for services provided might accentuate the financial burden on poor people, although they will benefit from the improved service. For the time being only a few municipalities have issued preferential policies for poor people, who are covered by Dibao system to access the services without exacerbating their financial burden. To mitigate the impact ofgrowing tariffs for services on the poor the following measures will be taken.

55. Public hearing meetings will be organized before any tariff increase occurs and representatives ofthe poor people will be invited to participate.

56. A social monitoring mechanism will be set up to monitor the impacts oftariff increases on the poor population during project implementation. If the monitoring report should indicate that poor people are suffering from increased tariffs, SPPMO will coordinate, with the local government involved in the project, measures to be taken for reducing the impacts.

Public Disclosure (OP 17.50) 57. In compliance with EIA process requirements ofthe central government and the World Bank, the completed draft EIA and EMP reports were released in public places in the project area, including libraries, EA team offices, local project owner offices, neighborhood committees, and city’s websites on the internet. The concerned public can have access to, and review the reports at these places. The EA team plans to disclose the final EA reports in public places to the general public once the final version is completed.

99 Annex 11: Project Preparation and Supervision CHINA: Second Shandong Environment Project

Planned Actual PCN review October 2005 October 2005 Initial PID to PIC October 2005 October 2005 Initial ISDS to PIC October 2005 October 2005 Appraisal June 2006 June 2006 Negotiations AugustISeptember 2006 November 2006 BoardRVP approval November 2006 Planned date of effectiveness February 2006 Planned date of mid-term review May 2009 Planned closing date December 3 1,20 13

Key institutions responsiblefor preparation of the project:

1. Shandong Province established a provincial LG under the chairmanship of a vice- governor to give policy guidance to provincial agencies and municipal governments. SPPMO, which has guided the preparation and successful implementation of SDEP and the Huai River Basin Pollution Control Project, has been strengthened by additional professional staff and given the responsibility to manage the preparation of the project. At the municipal/county level, LGs, PMOs, and PIUs have also been established. The list of key members of the provincial LG, SPPMO, PMOs and implementing agencies are shown in the following table.

NAME AGENCY TITLE

I Peng Zhenhua I Provincial Project Management Office I Deputy Director Gaomi Town Leading Group Du Hongjun Gaomi Municipal People’s Government Deputy Mayor Zheng; Youkui Gaomi MuniciPal Construction Bureau Director Gaomi Town Project Implementation Unit Du Xiukun I Gaomi Water Supply Company I Deputy Manager

100 Heze Municipal Leading Group Danp; Wenshena I Heze MuniciDal Construction Bureau I Director

Luo Dong Huantai County Dev.and Planning Bureau Deputy Director Zham Jiliang Huantai Countv Construction Bureau DeDutv Director

Wang Guoqun Yantai Municipal People’s Government Deputy Mayor Wang Guihe Yantai MuniciDal Drainage Division Director

Zaozhuang Municipal Project Management Office Chen Yucai I Zaozhuang World Bank Project Office I Director

101 2. Bank staff and consultants who worked on the project and respective reviewers are shown in the following table.

Name SpecializationE'roject responsibility Shenhua Wang Task Team Leader Raia Iver Institutions and management

GEF and Strategic Partnership Investment Nicolas Kotschoubey Fund You Ji Carbon finance Jaroslav Kozel Sanitary engineering (consultant) Patrick McCarthy Finance and institutions (consultant) Hardy Wong Solid waste management (consultant)

Peer Reviewers Alain Locussol, Lead Water and Sanitary engineering Sanitation Specialist, SASE1 Daniel Hoornweg, Senior Solid waste management Environmental Engineer, LCSFW Jonathan Kamkwalala, Lead Financial Finance and institutions I Analyst, ECSIE

102 Annex 12: Documents in the Project File CHINA: Second Shandong Environment Project

A. General

1990 and 08 1990 and 2000 Shandong Population Census China Statistical Publishing House 2000 09 Shandong Cities Construction Yearbook 2ooo 2o01 Shandong Construction Commission - 2003-2004

B. Studies and Designs

Institutional and Financial Assessment lo 12-2005 Group Huit-SCE Report 11 Environmental Assessment Report 12-2005 Group Huit-SCE 12 Resettlement and Social Assessment Report 12-2005 Group Huit-SCE CN & EN Tongji University Design and 13 Gaomi WS & WWT Project FSR draft 2005.12.01 Research Institute North China Municipal 14 Heze SW Project FSR draft CN EN Engineering Design & Research 2005.12.03 Institute CN & EN Jinan Municipal Engineering 15 Huantai WS & WWT Project FSR draft 2005.1 1.29 Design and Research Institute

103 Date of the No Name of document Prepared by document CN 2005.12.05 Jinan Municipal Engineering 16 Rizhao SW FSR draft EN abstract Design and Research Institute 2005.1 1.09 CN & EN Shanghai Municipal Engineering 17 Weifang WWC & RR Project FSR draft 2005.1 1.29 Design and Research Institute CN North China Municipal 2005.1 1-01 18 Weihai WWT Project FSR draft Engineering Design & Research 1 EN abstract Institute I I 2005.11.29 CN 2005.12.11 Jinan Municipal Engineering 19 Zaozhuang WWC & RR FSR Project draft EN Design and Research Institute 2005.1 1.14 ~ ~ ~~~ CN abstract North China Municipal & EN 20 Zaozhuang SW Project Proposal draft Engineering Design & Research abstract Institute 2005.10.17 Draft Individual Environmental Assessment Shandong Provincial DI of 21 report in Chinese for each sub-project except 12-2005 Environmental Protection Science; Huantai and Zaozhuang Solid Waste Haiyang University for Yantai Draft Individual Resettlement Action Plan 22 12-2005 Group Huit-SCE Report in Chinese ~ Proposal of Social Assessment Report in 23 12-2005 Group Huit-SCE Chinese Project Development Facility October 17, 24 Request for pipeline entry and PDF Block B Bank GEF Staff 2005 approval North China Municipal Management of Septic Tanks in Yantai- September 25 Engineering Design & Research Feasibility Study 2006 Institute

C. Bank Staff Assessments

Liu Zhentu, Procurement 01 Procurement Capacity Assessment Report Jan 13,2006 ecialist, EACCF Financial Management Assessment Yi Geng, Financial Management 02 Jan 127 2o06 Specialist, EACCF 03 Economic Calculations May 2006 Mei Wang, Economist 04 Financial Analysis April 2006 P. McCarthy, Financial Specialist

104 Annex 13: Statement of Loans and Credits CHINA: Second Shandong Environment Project

Difference between expected and actual Original Amount in US$ Millions disbursements Proiect ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d PO91020 2007 CN-Fujian Highway Sector Investment 320.00 0.00 0.00 0.00 0.00 320.00 0.00 0.00 PO83322 2007 CN-SICHUAN URBAN DEV 180.00 0.00 0.00 0.00 0.00 180.00 0.00 0.00 PO75732 2006 CN-SHANGHAI URBAN APL2 180.00 0.00 0.00 0.00 0.00 153.11 -10.22 0.00 PO81255 2006 CN-ChangjiangPearl River Watershed 100.00 0.00 0.00 0.00 0.00 99.75 3.42 0.00 Reha PO81348 2006 CN-HENAN TOWNS WATER 150.00 0.00 0.00 0.00 0.00 150.00 0.00 0.00 PO82992 2006 CN-GEF-Termite Control Demonstration 0.00 0.00 0.00 14.36 0.00 14.36 0.00 0.00 PO705 19 2006 CN-Fuzhou Nantai Island Peri-Urban 100.00 0.00 0.00 0.00 0.00 100.00 6.33 0.00 Dev PO84742 2006 CN-IAIL I11 200.00 0.00 0.00 0.00 0.00 169.04 13.46 0.00 PO85 124 2006 CN-Ecnomic Refom Implementation 20.00 0.00 0.00 0.00 0.00 18.44 -1.23 0.00 PO85333 2006 CN-5th Inland Waterways 100.00 0.00 0.00 0.00 0.00 87.51 5.75 0.00 PO96158 2006 CN-Renewable Energy I1(CRESP 11) 86.33 0.00 0.00 0.00 0.00 86.11 -0.22 0.00 PO99992 2006 CN-Liaoning Medium Cities 218.00 0.00 0.00 0.00 0.00 218.00 0.00 0.00 Infrastructure PO94388 2006 CN-HFC-23 Emissions Reduction 0.00 0.00 0.00 0.00 0.00 999.84 0.00 0.00 PO93906 2006 CN-3rd Jiangxi Hwy 200.00 0.00 0.00 0.00 0.00 200.00 0.00 0.00 PO86629 2006 CN-Heilongjiang Dairy 100.00 0.00 0.00 0.00 0.00 99.75 0.50 0.00 PO67828 2005 CN-Renewable Energy Scale-up Program 87.00 0.00 0.00 0.00 0.00 86.57 43.97 0.00 PO75730 2005 CN-HUNAN URBAN DEV 172.00 0.00 0.00 0.00 0.00 165.14 23.47 0.00 PO67625 2005 CN-GEF-RenewableEnergy Scale-up 0.00 0.00 0.00 40.22 0.00 38.22 -0.35 0.00 Program PO72721 2005 CN-GEF-Heat Reform & Bldg Egy Eff. 0.00 0.00 0.00 18.00 0.00 16.20 3.27 0.00 PO71094 2005 CN - Poor Rural Communities 100.00 0.00 0.00 0.00 0.00 95.95 32.89 0.00 Development PO68752 2005 CN-Inner Mongolia Highway & Trade 100.00 0.00 0.00 0.00 0.00 81.77 3.44 0.00 Corrid PO57933 2005 CN-TAI BASIN URBAN ENVMT 61.00 0.00 0.00 0.00 0.00 43.41 10.53 0.00 PO81161 2005 CN-CHONGQING SMALL CITIES 180.00 0.00 0.00 0.00 0.00 177.10 19.38 0.00 PO81346 2005 CN-LIUZHOU ENVIRONMENT 100.00 0.00 0.00 0.00 0.00 92.55 3.65 0.00 MGMT PO69862 2005 CN - Agricultural Technology Transfer 100.00 0.00 0.00 0.00 0.00 92.25 15.29 0.00 PO87291 2005 CN-PCF Jincheng Coal Bed Methane 0.00 0.00 0.00 0.00 0.00 19.13 0.00 0.00 Project PO86505 2005 CN-NINGBO WATER & ENVMT 130.00 0.00 0.00 0.00 0.00 116.09 0.09 0.00 PO69852 2004 CN-Wuhan Urban Transport 200.00 0.00 0.00 0.00 1.oo 133.83 125.35 0.00 PO66955 2004 CN-ZHEJIANG URBAN ENVMT 133.00 0.00 0.00 0.00 0.00 104.05 12.87 0.00 PO65463 2004 CN-Jiangxi Integrated Agric. Modem. 100.00 0.00 0.00 0.00 0.00 81.57 32.01 0.00 PO65035 2004 CN-Gansu & Xinjiang Pastoral 66.27 0.00 0.00 0.00 0.00 35.39 10.85 0.00 Development PO73002 2004 CN-Basic Education in Westem Areas 100.00 0.00 0.00 0.00 0.00 52.67 44.47 0.00 PO84003 2004 CN-GEF GUANGDONG PRD URB 0.00 0.00 0.00 10.00 0.00 9.82 2.63 0.00 ENV PO75035 2004 CN - GEF-Hai Basin Integr. Wat. 0.00 0.00 0.00 17.00 0.00 12.93 7.39 0.00 Env.Man.

105 PO75602 2004 CN-2nd National Railways (Zhe-Gan 200.00 0.00 0.00 0.00 1.00 47.56 -44.78 -45.78 Line) PO75728 2004 CN-GUANGDONGPRD UR ENVMT 128.00 0.00 0.00 0.00 0.64 85.50 -12.39 0.00 PO81749 2004 CN-Hubei Shiman Highway 200.00 0.00 0.00 0.00 1.00 81.02 15.35 0.00 PO77615 2004 CN-GEF-Gansu & Xinjiang Pastoral 0.00 0.00 0.00 10.50 0.00 7.91 6.57 0.00 Develop PO77137 2004 CN-4th Inland Waterways 91.00 0.00 0.00 0.00 0.46 73.79 11.91 11.41 PO70441 2003 CN-Hubei Xiaogan Xiangfan Hwy 250.00 0.00 0.00 0.00 0.00 41.71 28.38 0.00 PO70191 2003 CN-SHANGHAI URB ENVMT APLl 200.00 0.00 0.00 0.00 0.00 122.44 36.00 0.00 PO68058 2003 CN-Yixing Pumped Storage Project 145.00 0.00 0.00 0.00 0.00 79.13 24.00 0.00 PO76714 2003 CN-2nd Anhui Hwy 250.00 0.00 0.00 0.00 0.00 108.01 20.01 0.00 PO58847 2003 CN-3rd Xinjiang Hwy Project 150.00 0.00 0.00 0.00 0.00 30.70 16.03 0.00 PO67337 2003 CN-2nd GEF Energy Conservation 0.00 0.00 0.00 26.00 0.00 7.93 25.60 0.00 PO40599 2003 CN-TIANJIN URB DEV I1 150.00 0.00 0.00 0.00 0.00 132.04 42.94 0.00 PO71147 2002 CN-Tuberculosis Control Project 104.00 0.00 0.00 0.00 0.00 51.52 24.44 0.00 PO70459 2002 CN-Inner Mongolia Hwy Project 100.00 0.00 0.00 0.00 0.00 20.33 -2.34 0.00 PO68049 2002 CN-Hubei Hydropower Dev in Poor 105.00 0.00 0.00 0.00 0.00 22.35 13.35 0.00 Areas PO64729 2002 CN-Sustainable Forestry Development 93.90 0.00 0.00 0.00 0.00 36.74 21.78 0.00 PO58846 2002 CN-Natl Railway Project 160.00 0.00 0.00 0.00 5.00 13.14 18.14 0.00 PO60029 2002 CN-GEF-Sustain. Forestry Dev 0.00 0.00 0.00 16.00 0.00 8.01 13.13 0.00 PO56 199 2001 CNJrd Inland Waterways 100.00 0.00 0.00 0.00 0.00 20.54 8.38 0.00 PO51859 200 1 CN-LIAO RIVER BASIN 100.00 0.00 0.00 0.00 0.00 23.21 20.78 0.00 PO58845 2001 CN-Jiangxi I1Hwy 200.00 0.00 0.00 0.00 54.77 6.46 61.23 0.00 PO56596 2001 CN-Shijiazhuang Urban Transport 100.00 0.00 0.00 0.00 0.00 53.90 53.90 0.00 PO47345 2001 CN-HUAI RIVER POLLUTION 105.50 0.00 0.00 0.00 0.00 35.87 35.87 -5.87 CONTROL PO45915 2001 CN-Urumqi Urban Transport 100.00 0.00 0.00 0.00 0.00 33.14 33.14 0.00 PO56424 2000 CN-Tongbai Pumped Storage 320.00 0.00 0.00 0.00 100.00 39.50 142.70 3.26 PO459 10 2000 CN-HEBEI URBAN ENVIRONMENT 150.00 0.00 0.00 0.00 0.00 43.86 38.53 0.00 PO49436 2000 CN-CHONGQING URBAN ENVMT 200.00 0.00 0.00 0.00 29.50 16.11 101.41 -2.70 PO58843 2000 CN-Guangxi Highway 200.00 0.00 0.00 0.00 19.70 3.37 23.07 3.37 PO58844 2000 CN-Henan Provincial Hwy 3 150.00 0.00 0.00 0.00 0.00 25.41 25.41 0.00 PO42109 2000 CN-BEIJING ENVIRONMENT I1 349.00 0.00 0.00 25.00 0.00 234.11 234.11 -0.72 PO64730 2000 CN-Yangtze Dike Strengthening 210.00 0.00 0.00 0.00 0.00 73.99 73.99 1.98 PO64924 2000 CN-GEF-BEIJING ENVMT I1 0.00 0.00 0.00 25.00 0.00 20.21 24.87 4.48 PO42299 1999 CN-Tec Coop Credit IV 10.00 35.00 0.00 0.00 5.84 15.08 19.02 0.00 PO43933 1999 CN-SICHUAN URBAN ENVMT 150.00 2.00 0.00 0.00 0.00 56.29 56.31 4.21 PO36953 1999 CN-HEALTH IX (Shiyong Wang, Back- 10.00 50.00 0.00 0.00 0.40 18.14 17.09 16.12 UP) PO41268 1999 CN-Nat Hwy4kIubei-Hunan 350.00 0.00 0.00 0.00 36.50 0.12 36.61 0.00 PO38 12 1 1999 CN-GEF-RENEWABLE ENERGY 0.00 0.00 0.00 35.00 0.00 11.95 34.77 25.55 DEVELOPMENT PO57352 1999 CN-RURAL WATER IV 16.00 30.00 0.00 0.00 0.00 1.12 0.86 0.83 PO5 1856 1999 CN-Accounting Reform & Development 27.40 5.60 0.00 0.00 0.00 8.06 7.95 0.51 PO51705 1999 CN-Fujian I1 Highway 200.00 0.00 0.00 0.00 0.00 21.16 21.16 10.82 PO46829 1999 CN-RenewableEnergy Development 100.00 0.00 0.00 0.00 0.00 0.06 0.06 0.06 PO36414 1998 CN-GUANGXI URBAN ENVMT 72.00 20.00 0.00 0.00 13.48 26.16 39.07 11.98 PO03619 1998 CN-2nd Inland Waterways 123.00 0.00 0.00 0.00 40.21 3.88 44.09 7.09 PO03614 1998 CN-Guangzhou City Transport 200.00 0.00 0.00 0.00 20.00 60.43 80.43 60.43

106 PO03566 1998 CN-BASIC HEALTH (HLTHS) 0.00 85.00 0.00 0.00 0.00 6.40 4.13 0.00 PO03539 1998 CN-Sustainable Coastal Resources Dev. 100.00 0.00 0.00 0.00 2.06 24.72 26.78 22.00 PO44485 1997 CN-Shanghai Waigaoqiao 400.00 0.00 0.00 0.00 0.00 29.26 29.26 29.26 PO36405 1997 CN-Wanjiazhai Water 400.00 0.00 0.00 0.00 75.00 4.41 79.41 4.41 PO03594 1996 CN-Gansu Hexi Corridor 60.00 90.00 0.00 0.00 0.00 36.40 40.72 28.86 Total: 10,413.40 317.60 0.00 237.08 406.56 6,333.76 2,082.22 191.56

Statement of the IFC’s Held and Disbursed Portfolio (US$ million) Com m itted Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2002 ASIMCO 0.00 10.00 0.00 0.00 0.00 10.00 0.00 0.00 2006 ASIMCO 0.00 0.00 4.12 0.00 0.00 0.00 3.61 0.00 2005 BCCB 0.00 59.21 0.00 0.00 0.00 59.03 0.00 0.00 2003 BCIB 0.00 0.00 12.04 0.00 0.00 0.00 0.00 0.00 2006 BUFH 8.14 0.00 0.00 0.00 8.14 0.00 0.00 0.00 2005 Babei 0.00 5.00 0.00 0.00 0.00 5.00 0.00 0.00 Babei Necktie 11.00 0.00 0.00 6.00 8.94 0.00 0.00 4.88 1999 Bank of Shanghai 0.00 21.76 0.00 0.00 0.00 21.76 0.00 0.00 2000 Bank of Shanghai 0.00 3.84 0.00 0.00 0.00 3.84 0.00 0.00 2002 Bank of Shanghai 0.00 24.67 0.00 0.00 0.00 24.67 0.00 0.00 2005 BioChina 0.00 3.70 0.00 0.00 0.00 3.13 0.00 0.00 2002 CDH China Fund 0.00 2.02 0.00 0.00 0.00 0.00 0.00 0.00 2005 CDH China I1 0.00 17.99 0.00 0.00 0.00 11.38 0.00 0.00 2006 CDH Venture 0.00 20.00 0.00 0.00 0.00 0.51 0.00 0.00 2005 CT Holdings 0.00 0.00 40.00 0.00 0.00 0.00 0.00 0.00 2004 CUNA Mutual 0.00 10.53 0.00 0.00 0.00 0.00 0.00 0.00 2006 Capital Today 0.00 25.00 0.00 0.00 0.00 0.32 0.00 0.00 2005 Changyu Group 0.00 18.07 0.00 0.00 0.00 18.07 0.00 0.00 1998 Chengdu Huarong 3.36 3.20 0.00 3.13 3.36 3.20 0.00 3.13 2004 China Green Ener 20.00 0.00 0.00 0.00 15.00 0.00 0.00 0.00 2004 China Re Life 0.00 0.27 0.00 0.00 0.00 0.27 0.00 0.00 1994 China Walden Mgt 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 2006 Chinasoft 0.00 0.00 15.00 0.00 0.00 0.00 10.00 0.00 2004 Colony China 0.00 15.31 0.00 0.00 0.00 9.29 0.00 0.00 2004 Colony China GP 0.00 0.84 0.00 0.00 0.00 0.49 0.00 0.00 2006 Conch 81.50 40.93 0.00 0.00 81.50 0.00 0.00 0.00 2006 Dagang Newspring 25.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 Darong 10.00 0.24 0.00 8.00 6.67 0.24 0.00 5.33 2006 Deqingyuan 0.00 2.85 0.00 0.00 0.00 2.85 0.00 0.00 1994 Dynamic Fund 0.00 2.21 0.00 0.00 0.00 2.01 0.00 0.00 2007 Epure 0.00 10.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 Fenglin 17.64 0.00 6.00 13.47 13.64 0.00 6.00 12.53 2006 Fenglin HJ MDF 0.23 0.00 0.00 3.27 0.00 0.00 0.00 0.00

107 2005 Five Star 0.00 0.00 7.00 0.00 0.00 0.00 0.00 0.00 2006 GDIH 50.85 0.00 0.00 0.00 50.85 0.00 0.00 0.00 2003 Great Infotech 0.00 1.73 0.00 0.00 0.00 1.03 0.00 0.00 2006 Hangzhou RCB 0.00 10.85 0.00 0.00 0.00 0.00 0.00 0.00 2005 HiSoft Tech 0.00 4.00 0.00 0.00 0.00 3.00 0.00 0.00 2006 HiSoft Tech 0.00 4.34 0.00 0.00 0.00 1.74 0.00 0.00 2004 IB 0.00 52.18 0.00 0.00 0.00 52.18 0.00 0.00 2004 Jiangxi Chenming 40.00 12.90 0.00 18.76 40.00 12.90 0.00 18.76 2006 Launch Tech 0.00 8.35 0.00 0.00 0.00 8.33 0.00 0.00 2001 Maanshan Carbon 5.25 2.00 0.00 0.00 5.25 2.00 0.00 0.00 2005 Maanshan Carbon 11.00 1.00 0.00 0.00 5.00 1.oo 0.00 0.00 2005 Min s h e ng 15.75 0.00 0.00 0.00 7.00 0.00 0.00 0.00 2006 Minsheng & IB 25.09 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2001 Minsheng Bank 0.00 23.50 0.00 0.00 0.00 23.50 0.00 0.00 2005 Minsheng Bank 0.00 2.80 0.00 0.00 0.00 2.79 0.00 0.00 2001 NCCB 0.00 8.94 0.00 0.00 0.00 8.82 0.00 0.00 1996 Nanjing Kumho 0.00 3.81 0.00 0.00 0.00 3.81 0.00 0.00 2004 Nanjing Kumho 31.38 2.23 0.00 0.00 31.38 2.23 0.00 0.00 2006 Neophotonics 0.00 0.00 10.00 0.00 0.00 0.00 10.00 0.00 2001 New China Life 0.00 5.83 0.00 0.00 0.00 5.83 0.00 0.00 2005 New Hope 0.00 0.00 45.00 0.00 0.00 0.00 0.00 0.00 1995 Newbridge Inv. 0.00 0.22 0.00 0.00 0.00 0.22 0.00 0.00 2005 North Andre 8.00 6.74 0.00 0.00 0.00 4.25 0.00 0.00 2003 PSAM 0.00 2.01 0.00 0.00 0.00 0.00 0.00 0.00 RAK China 13.00 0.00 0.00 0.00 13.00 0.00 0.00 0.00 2006 Renaissance Sec 0.00 0.00 20.04 0.00 0.00 0.00 0.00 0.00 2006 Rongde 0.00 35.00 0.00 0.00 0.00 31.38 0.00 0.00 SAC HK Holding 0.00 1.60 0.00 0.00 0.00 1.oo 0.00 0.00 2003 SAIC 12.00 0.00 0.00 0.00 12.00 0.00 0.00 0.00 2006 SBCVC 0.00 20.00 0.00 0.00 0.00 2.00 0.00 0.00 2000 SEAF SSIF 0.00 3.74 0.00 0.00 0.00 3.37 0.00 0.00 SH Keji IT 3.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 SHCT 38.18 0.00 0.00 28.64 29.04 0.00 0.00 21.78 2004 SIBFI 0.14 0.07 0.00 0.00 0.00 0.07 0.00 0.00 1998 Shanghai Krupp 19.25 0.00 0.00 36.75 19.25 0.00 0.00 36.75 2006 Shanshui Group 50.00 5.50 2.20 0.00 50.00 5.50 0.00 0.00 1999 Shanxi 12.61 0.00 0.00 0.00 12.61 0.00 0.00 0.00 SinoSpring 0.00 0.00 20.00 0.00 0.00 0.00 0.00 0.00 Stora Enso 20.83 0.00 0.00 4.17 11.00 0.00 0.00 0.00 2005 Stora Enso 29.17 0.00 0.00 20.83 0.00 0.00 0.00 0.00 2006 Stora Enso 50.00 0.00 0.00 175.00 0.00 0.00 0.00 0.00 2006 TBK 4.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00 2006 VeriSilicon 0.00 1.oo 0.00 0.00 0.00 1.oo 0.00 0.00 Wanjie High-Tech 9.89 0.00 0.00 0.00 9.89 0.00 0.00 0.00 2004 Wumart 0.00 1.62 0.00 0.00 0.00 1.62 0.00 0.00 2003 XACB 0.00 17.95 0.00 0.00 0.00 0.64 0.00 0.00 2004 Xinao Gas 25.00 10.00 0.00 0.00 25.00 10.00 0.00 0.00 2006 Zhejiang Glass 50.00 24.96 0.00 18.00 0.00 0.00 0.00 0.00 2003 Zhengye-ADC 10.43 0.00 0.00 4.87 10.43 0.00 0.00 4.87

108 2002 Zhong Chen 0.00 4.78 0.00 0.00 0.00 4.78 0.00 0.00 2006 Zhongda-Yanjin 21.89 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total portfolio: 733.58 577.30 181.40 340.89 470.95 371.06 29.61 108.03

Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic. 2002 SML 0.00 0.00 0.00 0.00 2004 NCFL 0.00 0.00 0.02 0.00 2007 Xinao CTC 0.04 0.01 0.00 0.14 2004 China Green 0.00 0.00 0.01 0.00 2006 Launch Tech 0.01 0.00 0.00 0.00 2005 MS Shipping 0.00 0.01 0.00 0.00 2003 Peak Pacific 2 0.00 0.01 0.00 0.00 Total pending commitment: 0.05 0.03 0.03 0.14

109 Annex 14: Country at a Glance CHINA: Second Shandong Environment Project

East Lower- POVERTY and SOCIAL A8la 8 middle- Development diamond' Chlna Pacific Income 2005 Population , m id-year (millions) 1,304.5 1,885 2,475 Life expectancy GNIpercapita (Atlas method, US$) 1740 1,627 1,918 GNI (Atlasmethod, US$ billions) 2,269.8 3,067 4,747 Average annual growth, 1999-05 T Population (%) 0.7 0.9 1.0 Gross Labor force (%) 1.0 1.3 1.4 primary Most recent estimate (latest year available, 1999-05) capita enrollment Poverty (%of population belo wnational po verty line) Urban population (%of totalpopulation) 40 41 50 Life expectancyat birth (pars) 71 70 70 Infant mortality (per1000live births) 26 29 33 Child malnutrition (%ofchildmnunder5) 8 15 12 Access to improved water source Access to an improvedwatersource (%ofpopulation) 77 79 82 Literacy(%ofpopulation age 154 91 91 89 Gm ss primary enro llment (%of scho 01-age population) 118 115 114 -China Male 118 116 115 ~ Lo wer-middle-income group Female 1l7 114 113 KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1985 1995 2004 2005 Eco no m ic rat io s* GDP (US$ billions) 304.9 728.0 1,931.7 2,228 9 Gross capital formation/GDP 37.8 39.3 38.7 Trade Exports of goods and serviceslGDP 0.0 23.1 34.0 Gross domestic savingslGDP 33.6 41.5 41.2 Gross national savings/GDP 34.0 40.1 42.2 T Current account balance/GDP -3.8 0.8 3.6 5.0 Domestic Capital Interest payments/GDP 0.2 0.6 0.2 savings formation Total debt/GDP 5.5 16.2 P.9 Total debt service/exports 7.7 8.6 3.5 Present value of debt/GDP P.5 1 Present value of debt/exports 35.7 Indebtedness 1985-95 1995-05 2004 2005 2005-09 (average annualgrou4h) GDP 9.7 8.8 n.1 9.9 8.0 -China GDP percapita 8.2 8.0 9.4 9,2 7.3 ~ Lo wer-middle-income orou~ Exports of goods and services 9.4 18.7 28.4 23.6 n.3

STRUCTURE of the ECONOMY 1985 1995 2004 2005 /Growth of capltal and GDP (%) (%of GDP) Agriculture 28.4 18.8 13.1 lndustty 43.1 47.2 46.2 Manufacturing 34.9 Services 28.5 33.1 40.7 1 Household final consumption expenditure 53.2 47.5 48.5 00 01 02 03 04 05 General gov't final consumption expenditure u.2 11.0 13.2 -GCF -GDP Imports of goods and services 14.1 20.9 31.4

2004 1985-95 1995-05 2005 Growth of export8 and Imports (Yo) (average annualgrou4h) Agriculture 4.2 3.3 6.3 5.0 40 T Industry 42.8 9.9 11.1 t1.8 30 M anufactunng n.0 Services 9.5 9.7 9 .a D.l Household final consumption expenditure 13.2 5.7 1.1 ::- 1 General gov't final consumption expenditure 9.4 8.9 6.8 O' 00 0, h 03 04 d5 Gross capital formation 9.4 33.1 13.0 13.5 -Exports -9-lrQOrtS I Imports of goods and services n.3 ff.4 22.5 15.3

Note: 2005 data are preliminatyestlmates. This table was produced from the Development Economics LDB database. 'Thediamonds showfourkey indicators in thecountry(in boid)comparedwith its income-groupaverage. Idataaremissing,thediamondwiil be incomplete. 110 China

PRICES and GOVERNMENT FINANCE 1985 1995 2004 2005 Inflation (Oh) Domestic prices (% change) I Consumer pnces .. 16.9 4.0 1.8 Implicit GDP deflator 10.1 13.7 6.9 3.8 Government finance (% of GDP, includes current grants) Current revenue 28.0 10.8 16.6 17.5 Current budget balance 7.3 0.6 1.7 2.0 -GDP deflator *CPI Overall surpluddeficit 0.0 -1.5 -1.5 -1.3 I

TRADE 1985 1995 2004 2005 ixpott and Import levels (US$ mill.) (US$ millions) I Total exports (fob) 27,350 148,780 593,369 771,511 ,000,000 Food 3,803 9,954 18,870 T I Mineral fuels, lubricants, and related material 7,132 5,332 14,476 Manufactures 13,522 127,295 552,818 727,191 Total imports (cifl 42,252 132,084 561,423 674,331 Food 1,553 6,132 9,156 Fuel and energy 172 5,127 48,003 Capital goods 16,239 52,642 252,624 230,369 99 00 01 02 03 04 05 Export price index (2000=100) 52 118 102 106 Import price index (2000-1OOj 74 107 112 119 Exqort8 lrnwlts Terms of trade (2000=100) 70 110 91 88 I

BALANCE of PAYMENTS 1985 1995 2004 2005 Current account balance to GDP (%) (US$ millions) Exports of goods and services 30,489 167,974 655,827 843,537 6T Imports of goods and services 43,092 151,882 606,543 746,150 Resource balance -12,602 16,092 49,284 97,386 Net income 841 -11,774 -3,523 4,668 Net current transfers 243 1,434 22,898 10,000 Current account balance -11,518 5,752 68,659 112,055 Financing items (net) 6,096 16,711 137,705 98,000 Changes in net reserves 5,422 -22,463 206.364 -210,055 I 99 W 01 02 03 04 05 Memo: Reserves including gold (US$ millions) .. 80,277 622,945 826,303 Conversion rate (DEC, localNS$j 2.9 8.4 8.3 8.2

EXTERNAL DEBT and RESOURCE FLOWS 1985 1995 2004 2005 Composition of 2004 debt (US$ mill.) (US$ millions) Total debt outstanding and disbursed 16,696 118,090 248,934 IBRD 498 7,209 11,035 11,140 A: 11,035 IDA 431 7,038 10,670 9,741 8: 10,670 Total debt service 2,478 15,066 23,657 IBRD 26 810 1,054 1,139 IDA 4 63 264 296 G 117,592 Composition of net resource flows Official grants 117 330 381 Official creditors 1,117 7,902 16 Private creditors 2,867 5,013 7,970 Foreign direct investment (net inflows) 1,659 35,849 54,936 Portfolio equity (net inflows) 0 0 10,923 World Bank program Commitments 1,092 3,148 1,285 A - IBRD E - Bilateral Disbursements 565 2,269 1,188 1,131 B .IDA D - Other mitilateral F .Pnvate Principal repayments 0 364 999 1,004 C - IMF G - Short-term Net flows 565 1,905 190 127 Interest payments 29 509 319 430 Net transfers 536 1,396 -130 -303

Note: This table was produced from the Development Economics LDB database. 811 2/06

111 Annex 15: Incremental Cost Analysis CHINA: Second Shandong Environment Project

A. Broad Development Goals and the Baseline

1. Background: SDEP2, for which Shandong Province requested Bank upp port'^, has components located in nine urban centers, and includes investments in wastewater, water supply, solid waste and institutional strengthening of agencies operating the respective facilities.

2. The province has a population of about 90.8 million, of which approximately 36 million (40%) live in urban areas. The municipalities have so far not been able to provide adequate water supply and wastewater services to meet the requirements of the entire population. In 2004,2,639 million m3of drinking water was supplied to only 24.6 million people or about 68 percent of the total urban population16.This is in addition to water supplied to industries and institutions through over 4.6 million water connections. In the same year, the wastewater agencies provided services to nearly 30 million of the urban population, of which about 20 million had combined sewage systems (12,675 km long) while 10 million had separate sewage systems (7,400 km long). Together, the two systems collected approximately 1,900 million m3of wastewater, of which approximately 900 million m3was treated. The majority of treated waste water, about 832 million m3,was treated in secondary treatment plants. The remaining 1,000 million m3was left untreated. Most of this land-based pollution load was discharged either directly or via river systems into the Bohai and Yellow Seas.

3. Construction regulations in China require that owners provide septic tanks for their buildings as on-site wastewater treatment. Buildings located in areas served by separate sewers and treatment plants are excluded from that requirement. There are no regulations or guidelines forcing owners to regularly service septic tanks. Due to the expenses involved with such periodical servicing, the owners of buildings pump out their septic tanks only when there are blockages. This situation has serious negative environmental impacts. Raw wastewater passing through non-functioning tanks flows through drains and adds to pollution load. Municipalities have so far not paid adequate attention to this issue. There are a number of reasons for this lack of attention, including: an absence of septic tank legislation; a lack of responsible institutions which have limited capacity; low public awareness of the problem; a shortage of funding; and unclear responsibility for providing funding.

4. Sector Status in Yantai: Yantai is a coastal city with an urban population of over one million. Its economy is based on a large port and machinery, electronics, and equipment industries. It is also a popular summer vacation spot for Shandong and Beijing urbanites due to its sandy beaches and relatively warm sea.

5. Wastewater in Yantai is collected by both separate but mostly combined sewer network and treated in Taoziwan and Xinanhe WWTPs with a total capacity of 290,000 m3/day. Taoziwan WWTP, located in the north of the city and in operation since 1998, has a capacity of 250,000 m3/day, of which 2 10,000 m3/day is treated by sedimentation and 40,000 m3/day is

l5The frst project (SDEP) dealt with water supply and environment in a few municipalities. 16 The remaining population is self-suppliers mainly from their own wells.

112 treated biologically and subsequently re-used in nearby industries. After treatment, wastewater is discharged into the Yellow Sea through a deep outfall. Xinanhe WWTP, located in the south of the city and in operation since 2003, has a capacity of 40,000 m3/day and serves Laishan, eastern Zhifu and Moping Districts. These are all served by a combined sewerage system. The treatment technology used is a biological process and the effluent is discharged into the Yellow Sea by a sea outfall.

6. Yantai Baseline Scenario: In the baseline scenario the Bank-supported project (without the GEF activity) would provide facilities for collection and treatment of additional wastewater generated by the expansion ofthe city and its boundary. However, raw sewage from houses not connected to the system and overflows of combined sewers would still reach the sea due to non- functioning septic tanks.

7. The Yantai baseline scenario includes: (a) expansion ofXinanhe WWTP from 40,000 to 120,000 m3/day to serve the projected additional population of 500,000 by the year 2013, as well as additional institutions and industries; (b) construction of 14 km of interceptor sewers and upgrading of Tongbozi pumping station; and (c) establishment of a self-financing municipal enterprise, YWDC17 to manage wastewater activities.

8. The Xinanhe drainage area is served by combined sewers discharging wastewater partly into an interceptor sewer and partly into the nearest (seasonal) rivers and ultimately into the sea. The proposed interceptor sewer will bring wastewater into the treatment plant. The table below shows that in the worst-case scenario (without the Bank-supported project) the total pollution reaching the ocean would be 1.8 tons/day BOD518.In the baseline scenario (IBRD only), the new interceptor and expanded treatment plant would increase the wastewater catchment area, and would reduce the pollution by 14.4 tons/day BOD5 by 2009, and reduce pollution by 21.6 todday BOD5by 20 13, It is expected that the project proposed institutional improvements would ensure sustainable operation and maintenance of old and new wastewater facilities.

~ ~~

” YWDC was established in March 2006. ’* BODs= biochemical oxygen demand (five day laboratory test) is considered the most characteristic parameter indicating the general quality of water and wastewater. It cannot be used for brackish waters.

113 Capacity of Population BODS BOD5 Residual BOD5 Xinanhe WWTP served by generated in removed BOD5 discharged in m3/day Xinanhe the area (54 in WWTP discharged” under “no WWTP gkapitdday) (80% into recipients project” efficiency) scenario’’

(current) 40,000 165,000 I 9.0 7.2 1.8 1.8 (extension: 2009) 335,000 18.0 14.4 3.6 80.000 10.8 (total in 20 13) 500,000 27.0 21.6 5.4 19.8 120,000 Vote: BOD removal el about 10 percent of pollution load bekg uncollected fkom properties not connected to the drainage system.

B. Yantai GEF Global Environmental Objective

9. Yantai GEF Origin: While the existence of septic tanks is generally recognized, neither the province nor the project municipalities have considered the issue ofseptic tanks in the project. This is chiefly due to the non-municipal ownership ofthese tanks. However, Yantai Municipality has agreed to study the issue and requested GEF support to help analyze the status ofseptic tanks and find ways for improving the situation. The province concurred that Yantai is the most suitable recipient of GEF support and has goals of (1) proving that (a) regular servicing of septic tanks will contribute to reducing the amount of land-based pollution reaching the Bohai and Yellow Seas, and (b) joint treatment ofseptage with sewage in conventional municipal wastewater plants is feasible as well as the most economical viable solution for its disposal; and (2) disseminating in Shandong, among Bohai Declaration signatories21 and beyond the feasibility of the institutional and technical arrangements tested under the GEF activity.

10. Yantai GEF Development Objectives: The GEF activity would be implemented within the Yantai wastewater component of SDEP2. GEF support would initiate and make possible the implementation ofmajor institutional and technology reforms, which would not otherwise be carried out by any wastewater sector agency in China. The goal ofthe pilot project is to demonstrate to Chinese municipalities the rationale for the proper management ofseptic tanks. The key objectives ofthe activity are to: (a) demonstrate the feasibility ofinstitutional and technical arrangements required to ensure improvements in the local environment; and (b) disseminate among Bohai Declaration signatories and to others the positive impacts that can be achieved by reducing the annual pollution load discharged from septic tank sources to the Bohai and Yellow Seas. A matrix ofthe baseline project and GEF pilot project is shown in Attachment 1.

19 For simplification the impact of storm overflows is disregarded. 2o Treatment capacity is fixed at 7.2 tonslday. 21 The Bohai Declaration was signed on July 25, 2000 by the State Oceanic Administration, Shandong, Hebei and Liaoning Provinces and Tianjin Municipality.

114 C. Alternative

11. Yantai GEF Alternative: The GEF alternative scenario will go beyond the Bank- supported project by: (i)providing the institutional arrangements and necessary facilities for regular maintenance ofseptic tanks; and (ii)experimenting with the joint treatment ofseptage with wastewater.

12. GEF funds would support a significant improvement in the Yantai baseline scenario. With GEF support, Yantai institutions responsible for management ofdrainage and wastewater will include, within their general responsibilities, the regular servicing ofseptic tanks, review any overlapping responsibilities for this activity, develop suitable and enforceable policies and operating procedures, and integrate their activities to implement the proposed innovations.

13. The objective ofthe alternative is to demonstrate the benefits of serviced septic tanks as compared to non-serviced septic tanks in a limited, controlled and small representative sample. The rationale for the GEF alternative in Yantai is the current lack ofattention given to the septic tank problem and a poor understanding ofthe important role septic tanks play within the existing combined drainage system in China.

14. Yantai Sample Investigation: There are no records kept by the municipality or wastewater agency on constructed septic tanks22. A preliminary investigation has therefore provided a first insight into the septic tank issue in Yantai. This investigation in turn will provide the basis for a detailed institutional, investment and operational program for the activity.

15. Sample field investigations, which were limited to Laishan and eastern Zhifu Districts with a population of268,000 (2006), identified about 1,700 septic tanks. The investigation found that about 95 percent ofexisting tanks are not recorded by the construction authority and about 50 percent ofthe tanks appear to be ofsubstandard quality, possibly too small for the level of wastewater generated or by-passed with outlets connected directly to the municipal drains. The majority ofthe tanks, about 85 percent, are owned by property management companies or private owners. About 5 percent ofthe tanks are owned by YMG and for the remaining 10 percent ofthe tanks the owners are unknown. The clogging of outlets and overflow oftanks are common problems. On a daily basis, the Yantai Drainage Management Department cleans, on an emergency basis, several overflowing tanks.

16. Yantai GEF Activity Description: The GEF activity will be carried out by a STU which will be established in early 2007 by Yantai Municipality. It will be attached to YWDC with reporting lines to its Vice-president. The STU will initiate the necessary municipal institutional actions for facilitating regular maintenance of septic tanks and start-up operations. This will include appointment ofand training for staff as well as planning and implementation of operations and monitoring systems, procurement ofworks and goods required for the pilot project and other required tasks.

17. Framework Schedule: The STU will ensure the recording ofwater quality in overflows from interceptors between June-August 2007 - the rainy season. This will help assess pollution

22 Records should be kept by the owners, but that practice is very rare.

115 reaching the Yellow Sea prior to implementation of the septic tank management pilot. Starting in early 2008, the pilot septic tank management will include initial servicing of septic tanks, collection of data on the tanks and the quality of overflows from interceptors, and generally setting up of management and monitoring protocols, and will last for one year until early 2009. Simultaneously, the treatment of the sewage-septage mix in the existing (40,000 m3/day) Xinanhe plant will start. The full experiment on joint treatment, in the expanded Xinanhe WWTP (80,000 m3/day), will begin in early 2009. The evaluation of results and wider dissemination of the findings from the pilot in Shandong and other provinces are expected to extend through the end of 2010.

18. The GEF physical activity (pilot project) will serve eastern-Zhifu and Laishan Districts, covering about half ofthe Xinanhe plant watershed. The fecal tankers of the pilot project will service septic tanks and transport the septage into the Tongbozi pumping station, which is the last station on the interceptor sewer before Xinanhe WWTP. There the septage will be de-silted and mixed with wastewater before being sent (about 1 km) into the plant for treatment. All data and the parameters of operations will be monitored and stored in the pilot project data-based system.

19. Evaluation and dissemination of the data will also gradually be developed. The bi-annual and annual findings will be evaluated and first disseminated within Shandong Province and then to major municipalities located nearest and discharging wastewater into, the Bohai and Yellow Seas. The final findings, including experience with the joint treatment experiment, will also be disseminated within Bohai Sea Declaration signatories, to professionals and the general public in China and East Asia.

D. Scope of the Analysis

20. Baseline Scenario: The expected output of the baseline scenario (Yantai component of SDEP2) will include: (a) an improved wastewater service to a population of about 335,000 (by 20 13) through the establishment of YWDC; (b) expanded collection and treatment of wastewater in the Xinanhe watershed; and (c) a reduction in land-based pollution discharged into the Yellow Sea from 27.0 tons/day to 5.4 tons/day expressed in BODS.

21. Alternative Scenario: The output ofthe alternative scenario (GEF pilot project) will be limited to a reduction in land-based pollution discharged into the Yellow Sea generated by a population of about 18 1,000 through the servicing of septic tanks in the project pilot area. The estimated annual output would be a reduction in pollution of about 2.7 tons of BODSper year or about 1.5 kg to 2.0 kg of BODSannually per person.

22. Assuming that in 2010 the institutional arrangements and the STU activity have been expanded in Yantai City, with a population of over 1.2 million, the annual reduction of land- based pollution discharged into the Yellow Sea would reach about 1,700 tons of BOD5 (see Attachment 2).

23. If the GEF experience from Yantai was replicated only in Shandong municipalities bordering the Bohai Sea, a population of about 20 million could be served by combined systems.

116 The land-based pollution discharged into the Bohai and Yellow Seas could be reduced by at least 30,000 tons ofBOD5 annually.

24. The current status ofseptic tanks in Yantai is characteristic of provinces neighboring the Bohai and Yellow Seas and the pilot project will demonstrate institutional and technical ways of increasing the efficiency ofthe tanks. Global benefits ofthe pilot project could also materialize through promotion and dissemination of Yantai findings.

E. Costs

25. Yantai Baseline Cost: With the estimated investment costs ofXinanhe WWTP in the above baseline scenario ofUS$11.8 million, the cost per connected person is about US$35 and the treatment of 1.O ton ofpollution per year expressed in BOD5 requires an incremental investment in Xinanhe of about US$2,200. This approximation does not include the costs of wastewater collection networks and assumes that the actual status ofseptic tanks is “non- operative” and that their treating impact is zero.

26. Alternative Cost: Alternative costs include the creation ofinstitutional arrangements, provision of facilities and equipment, operations of septic tanks servicing and disposal of septage. Cost estimates for the Yantai GEF activity expanded to Yantai City and Shandong Province are as follows.

117 Pilot Yantai Shandong Action Project a) City b) Province c) US$ Establishment of institutional arrangements 520,000 700,000 11,500,000 Provision of facilities and equipment 2,070,000 8,000,000 130,000,000 Management. monitoring. etc. 1.830.000 3.000.000 50.000.000 Total investments d) 4,420,000 11,700,000 191,500,000 Annual operations of septic tanks servicing 82,000 480,000 8,000,000 Septage disposal in WWTP 20,000 e) 120,000 2,000,000 Total annual operations 102,000 600,000 10,000,000

27. The construction cost of septic tanks is not included in the summary cost since it has already been taken care of by the owners of buildings on the basis of legislation regarding their impact on pollution reduction. The following estimates are provided only for orientation: construction cost of septic tanks is lower per serviced person as compared to that of central treatment plants; however, it is higher for treatment performance. As an example, construction of a simple septic tank23for 70 persons with a volume of 0.15 m3per person would cost about $1,500 or about US$20 per connected person as compared with US$35 in the case of Xinanhe WWTP. With regular servicing its treatment performance expressed in BOD5would be about 35%, resulting in removal of 20g of BOD5 per capita and day (g/c/d) from initial load of 54 g/c/d. This means that the investment cost of removing 1.O todyear of BOD5 would reach about US$3,000 in a septic tank, as compared to US$2,200 in Xinanhe central WWTP.

28. Incremental Cost: Incremental costs are defined as expenditures made in connection with regular maintenance of septic tanks located in urban sections served by the municipal combined sewerage system including disposal of septage. Those tanks have been constructed by owners of buildings and do not provide the initially intended environmentalhealth benefits without regular servicing. Municipalities will have to build up their respective institutional and physical infrastructure to expand their wastewater services to include management of septic tanks. Required investments and annual operating cost estimates based on the proposed GEF pilot project in Yantai are shown in the following table.

23 Simple septic tank function is mainly mechanical, i.e. sedimentation; it has a small volume (100-400 Vc). Biological septic tank function is biodegradation, has a volume of 1.O m3/cand much higher treatment performance; it requires servicing once in five years and its effluent can be disposed of in underground drains.

118 Incremental Cost I Alternative: I Disseminated in Pilot I Parameter Baseline 1 YantaiCi. I Shandong I " Province Incremental Cost Global environmental BOD5 0 0 0 0 benefit a) todyear Domestic benefit 5,250 2.7 1,700 30,000 Investment cost US$ 11.8 4.4 11.7 191.5 Annual operating cost million 220 0.1 0.6 10.0

29. In cities, septic tanks are an important part ofthe combined sewer system, which has been constructed in the vast majority ofChinese cities. From an economic point ofview, the combined system complemented by septic tanks in old and fully built parts of cities represents a far cheaper alternative compared to the potential replacement by a new separate system constructed in new developments. Replicating the GEF experiment in areas with existing combined systems, a public utility would use, with marginal incremental costs, a dormant facility provided by a third party. Besides the substantial and positive impact on the final recipient, the Bohai and Yellow Seas, the use of septic tanks would contribute to environmental improvement in rivers, particularly in inner city stretches. Joint treatment of septage with wastewater would solve the otherwise difficult and costly issue ofits disposal.

F. Process of Agreement

3 0. Shandong Province: Shandong Province would actively participate in broadly disseminating the Yantai experience and would support the application oflessons learned from the experiment in other municipalities. Accordingly, it will arrange, jointly with Yantai Municipality, annual workshops attended by Shandong municipalities to follow the progress and benefits ofthe Yantai pilot project and initiate dissemination ofthe experiment from its start. The first of such workshops is planned for early 2007.

119 Attachment 1: Matrix of Project ( bjectives Project Development Objective Scenario/ / Global Environmental Higher Level Objective Objective Objective I To promote sustainable (a) To manage resource scarcity improvements in the urban and environmental challenges, environment in selected especially related to water Baseline municipalities ofthe province pollution reduction and Scenario through implementation of sector conservation; and reforms, priority investments in (b) To promote balanced wastewater collection-treatment, urbanization and improve the water supply and solid waste. quality ofurban life. To reduce land-based pollution To mobilize financial resources along the Yantai coast and the for implementing Bohai Sea through development policy/institutional reforms and Alternative GEF ofa pilot septic-tank management stress-reducing investments to Scenario system in Yantai and address a priority trans-boundary dissemination ofthe Yantai water issue (land-based pollution model in Shandong Province and of a shared water body). in other arts ofChina.

120 Attachment 2: Baseline and GEF Scenario - Generated and Residual Pollution I Scenario: I GEF- I Item

Remaining BOD5in wastewater during 3 15 days Tons 20,4 10 15,410 WWTP performancez5in reduction of BOD5 % 90 90 Reduction of BOD5 in WWTPs during 3 15 davs Tons 18.400 13.900

Number of days with storm overflows Number 50 50 Percentage of BOD5overflowing YO 75 75 Pollution reaching the Seas with overflows in 50 Tons 2,430 1,830 days Percentage of BOD5 reaching WWTPs YO 25 25 Reduction of BOD5 in seDtic tanks during 50 davs Tons 0 800 Reduction of BOD5 in WWTPs during 50 days Tons 810 610 Total reduction of BOD5during 50 days Tons 810 1,410 Total Annual BOD5 reduction Tons/year 19,210 20,3 10 Residual Dollution in BOD4 reaching the Seas Tonshear 6.870 5.170

24 By 2010 about 30 percent of Yantai will be served by sanitary (separate) sewers. 25 By 20 10 Taoziwan WWTP treatment will be upgraded to tertiary technology.

121 Annex 16: GEF Review by Scientific and Technical Advisory Panel CHINA: Second Shandong Environment Project

1. In accordance with GEF guidelines, a Scientific and Technical Advisory Panel (STAP) review of the proposed project has been performed by Dr. Jeffrey Thornton, a member of the STAP Roster of the GEF. The STAP review below was received on November 2 1, 2006.

J. A. Thornton PhD PH CLM Managing Director InternationalEnvironmental Management Services Ltd. United States of America

Introduction

2. This review responds to a request from The World Bank (WB) to provide a technical review of the proposed International Waters project element integrated into the Second Shandong Urban Environment Project. This project element is proposed to be funded under the Strategic Partnerships modality established within the GEF Partnerships in Environmental Management for the Seas of East Asia (PEMSEA) Program.

3. Inote that Iam a designated expert on the STAP Roster of Experts with particular experience and knowledge concerning watershed management and land-ocean interactions. I have served as Government Hydrobiologist with the Zimbabwe Government, Chief Limnologist with the South African National Institute for Water Research, Head of Environmental Planning for the City of Cape Town (South Africa), and, most recently, as Principal Environmental Planner with the Southeastern Wisconsin Regional Planning Commission (USA), a position that Ihold concurrent with my position as Managing Director of International Environmental Management Services Ltd, a not-for-profit corporation providing environmental education and planning services to governments worldwide. In each of these positions, Ihave had oversight of projects and programs designed to assess contaminant loads to aquatic ecosystems from land- based activities, and to develop appropriate and affordable mitigation measures to reduce such loads and minimize their impacts on the aquatic environment, both freshwater and marine.

4. This review is based upon a thorough review of the Project Document (22 pages plus Annexes 1 through 15, and 17), and the Partnership Investment Fund Brief (23 pages) of the GEF-WB International Waters project, entitled: “Partnership Investment Fund for Pollution Reduction in the Large Marine Ecosystems of East Asia,” dated September 2005. Other, relevant documents served as reference sources, including the GEF Operational Strategy, Agenda 21, and related materials establishing the necessity and priority of land-based activities to control marine pollution as set forth in the Global Program of Action for the Protection of the Marine Environment from Land-Based Activities. This. review is focused primarily on the proposed GEF-funded element ofthe much larger “Second Shandong Environment Project” set forth in the Project Appraisal Document (PAD).

122 Scope of the Review

5. This review addresses, seriatim, the issues identified in the Terms of Reference for Technical Review ofProject Proposals. As noted above, this review focuses on the GEF-IW element ofthe “Second Shandong Environment Project,” into which the GEF project is fully integrated.

Key Issues

6. Key issue 1. Scientifzc and technical soundness of the project. Overall, the project appears to be scientifically and technically sound. The approach proposed, which includes a capacity development, institutional strengthening, and demonstration project-based program, adequately addresses the needs to initiate actions to reduce urban-based contaminant loads to the East Asia Regional Seas by creating and implementing an ongoing program to inspect, maintain, and monitor onsite sewage treatment systems (septic tanks) required to be constructed in sewered areas ofChina. (The PAD notes that this requirement is duplicative, given that onsite sewage disposal systems are required only within areas served by public water-borne sewerage systems! Indeed, this requirement may actually underlie the lack ofmaintenance provided for the onsite systems, as they may be perceived of as having little utility in municipal water pollution control.)

7. Functioning onsite sewage disposal systems can provide a high level of sewage treatment at a relatively low cost. Construction oftraditional onsite sewage disposal systems is well established, and technologies are readily available to support the construction of efficient sewage disposal systems. Nevertheless, ongoing maintenance ofthese systems is required to ensure their continued functioning. One element ofthe use of onsite systems is the need for inspection, periodic pumping and occasional replacement ofthese systems over time. State-of-the-art recommendations relating to septic system maintenance include annual pumping ofthe systems to ensure capacity, inspection of system integrity on a three- to four-year basis, and relocation of drain field on an approximately 20-year rotation to ensure consistent treatment ofthe septage. Pumped septage should be disposed ofat a wastewater treatment facility capable ofreceiving pumper truck discharge, or disposed ofby land spreading the septage. Functioning onsite sewage disposal facilities can provide up to 90 percent retention ofcommon water contaminants, such as phosphorus, and elimination ofbacterial contaminants.

8. Consequently, creating an appropriate regulatory framework, and an understanding ofthe need for maintenance ofonsite sewage disposal systems, as well as creating the necessary infrastructure to service such systems, is fundamental to not only water quality management but also maintenance ofthe public health. Where onsite sewage disposal systems coexist with onsite water supply systems (wells or boreholes), adequate onsite sewage disposal system management is essential for limiting risks from waterborne diseases spread by contamination ofwell water by waste water. Development and implementation of an appropriate management system would address both ofthese issues.

9. An initial step in this process would be to obtain data on the locations ofthe onsite systems, and establishment ofa data base documenting these locations. The resultant data base would then support a systematic pumping and inspection system. This data base should be linked

123 to the building permit system to enable regular updating ofthe locations and ages ofthe various onsite sewage disposal systems, and maintenance ofinspection records.

10. Key issue 2. Identijkation of global environmental beneJits andor drawbacks of the project, and consistency with the goals of the GEF. The proposed project establishes a framework within which to address one the major causes ofenvironmental stress within the aquatic environment ofthe Bohai Sea, and, ultimately, ofthe Yellow Sea into which the Bohai Sea discharges; namely, the discharge ofuntreated and under-treated septage from non- functioning or malfunctioning onsite sewage disposal systems.

11. The threat ofongoing degradation fiom wastewater discharges from urban enclaves includes both water quality degradation and public health impacts related to the spread of waterborne diseases. Waterborne diseases remain the single greatest cause ofinfant mortality, despite significant improvements in water supply and sanitation. If unchecked, discharges from non-functioning or malfunctioning onsite sewage disposal systems will continue to threaten the globally significant ecosystems ofthe Bohai and Yellow Seas. These ecosystems, in addition to their inherent importance as water bodies, are either directly or indirectly connected to the trans- boundary waters ofthe East China Sea Large Marine Ecosystem (LME). Consequently, true global benefit is presumed as a result ofthis connection with the Pacific Ocean Kuroshio Current.

12. The project is consistent with the goals and objectives of OP contributing to the global effort to address priority environmental concerns arising from land use practices and land- based activities, in this case focusing on the treatment ofsewage using onsite sewage disposal systems, and the dissemination of “best practices” for the management ofpollution from septage.

13. In this regard, the participation ofthe relevant governmental organizations with responsibility for wastewater treatment would be an important element in ensuring the implementation ofthe project outcomes. This participation is provided through the relevant national, provincial, and local government agencies. Establishment of a functional operational agency, as proposed in the project document, will contribute to achieving this objective.

14. This project is complementary to other GEF initiatives within the East China Sea. As noted above, this project is complementary to, and integrated, with ongoing WB investments in environmental infrastructure in Shandong Province and contributes to the GEF aim of incrementally funding projects that contribute to sustainable economic development in a replicable manner. The current proposal and its companion activities would seem to be well- suited to achieving such an aim.

26 Operational Program 10 (OP 10) includes as indicative activities, inter alia, global projects which are designed to “demonstrate ways of overcoming barriers to the use of best practices for limiting releases of contaminants..., and to involve the private sector in utilizing technological advances for resolving these trans-boundary priority concerns.” Priority trans-boundary concerns include “land-based activities ..., contaminants released from ships, persistent toxic substances such as persistent organic pollutants (POPS), and targeted regional or global projects useful in setting priorities for possible GEF interventions, meeting the technical needs of projects in this focal area, or distilling lessons learned from experience.” This Operational Program is intended to include “projects that help demonstrate ways of overcoming barriers to the adoption of best practices that limit contamination of the International Waters environment.”

124 15. Key issue 3. Regional context. While the project is centered on the Bohai Sea, an internal sea wholly within China, the connection of the Bohai Sea to the Yellow Sea and ultimately via the Kuroshio Current to the Pacific Basin argues that adequate and appropriate consideration has been given to the regional context of the project. Actions proposed to better integrate the national regulatory initiatives within a regional program are fully consistent with the development of a sustainable regional approach to managing these waters. These actions are proposed in the project to strengthen the national regulatory programs and institutions. The proposal clearly indicates an intention to disseminate information and results on a regional basis, both within the Bohai Sea Basin and elsewhere in the East Asia Sea region. In part, this dissemination process will utilize the offices of the Provincial government, and, potentially, lead to development of legislative requirements to promote onsite sewage disposal system management.

16. Key issue 4. Replicability. The implementation of the Yantai demonstration project is a key feature of this project, and clearly contributes to the potential for replication of beneficial practices and techniques. Further, the inclusion of mechanisms for disseminating information and results achieved fosters replication of effective and successful measures throughout Shandong Province. Notwithstanding, it is recommended that this project seek to ensure the dissemination of lessons-learned in the broadest possible manner, given that the joint use of onsite sewage disposal systems in areas served by public sanitary sewerage system is widespread in China.

17. Key issue 5. Sustainability of the project. The PAD indicates that a significant element of the sustainability of the project rests upon the implementation of the onsite sewage disposal system maintenance initiatives by the Provincial authority, and, through their action, by local governments. In addition, the need for country-level actions to replicate the project is indicated, given the reported widespread nature of onsite sewage disposal systems within urban areas.

18. The initial commitment of the Provincial authorities to support project activities provides some assurance that the project results will be continued beyond the immediate period of project implementation with GEF support. Further, the project proposes to address a key element of sustainability through the development and strengthening of appropriate governmental units and agencies, including the development of necessary financing mechanisms to sustain an ongoing septic system maintenance program. The development of a trained cadre of individuals, the strengthening of appropriate institutions with the knowledge and ability to implement actions to protect the LME environment, and the promulgation of the necessary enabling legislation are included as elements of the proposed project. To this end, the project document also sets forth an array of financial and other mechanisms, both in-hand and proposed, to ensure the sustainability of the onsite sewage system maintenance program elements proposed to be developed during the project.

19. Key issue 6. Targeted Research Projects. Targeted technical demonstration and capacity building projects are key features envisioned within the GEF International Waters Contaminant- based Operational Program. These activities are clearly included as major elements of this proposed project. There is provision within the PAD for developing and replicating the necessary infrastructure to implement the proposed onsite sewage disposal system inspection and

125 maintenance program. Implementation ofthese provisions is strongly recommended. The interventions, funded in part by the GEF, strive for sustainability and the continuation of successful interventions beyond the project period. For this reason, it is most important that the onsite sewage disposal system management measures identified by the project be internalized within the appropriate ministries such that they continue to be implemented over the longer term. Likewise, it is equally important that the demonstration projects continue to be monitored, and the results reported using the information dissemination mechanisms previously identified, beyond the project period. Such continuity is totally consistent with the catalytic nature of the GEF, and an essential element to the sustainability ofthe project. Capacity building and institutional strengthening, envisioned in the PAD, thus become the basic building blocks upon which this project will succeed or fail, both from the point ofview ofits sustainability and from its scientific and technical integrity.

Secondary Issues

20. Secondary issue 1. Linkage to other focal areas. This project is formulated as an International Waters project under OP 10 ofthe GEF Operational Strategy. While no specific cross-cutting areas are identified, the project clearly has linkages to the cross-cutting area of protection of aquatic biodiversity in terms of its potential beneficial impact on fisheries.

2 1. Secondary issue 2. Linkages to other proposals. The project recognizes the complementarities between the management of septage and other WB- and GEF-related initiatives in the region; indeed, the integration ofthe GEF-financed activities into the Shandong Environment Project provides specific linkages with the East Asia Sea LME projects and with complementary land-based actions to minimize environmental degradation as a result ofland- based activities.

22. In addition, it is recommended that the project make use ofIW: LEARN. Such an overt linkage provides a high degree of sustainability and connectivity to this project, and contributes to the likelihood that lessons learned can and will be transferred beyond the project boundaries to other, similar situations and locations within the East Asia Sea region and beyond.

23. Secondary issue 3. Other beneficial or damaging environmental effects. The project has no known or obvious damaging environmental impacts associated with the activities proposed to be executed. The beneficial impacts ofthe project have been fully articulated above, and include the implementation oftargeted interventions that address both chronic land-based sources and catastrophic ocean-based events that contribute to the degradation ofthe Bohai Sea and its resources. The provision oftrained staff and institutional capacities needed to enforce and enhance existing environmental protection regulations, and the dissemination ofsuccessful management measures further contribute to the benefit ofthe Sea and its drainage basin. All of these benefits accrue not only within the project area, but, as a result oftheir wider dissemination using the electronic and other media provided, also to the wider Yellow Sea basin and beyond.

24. Secondary issue 4. Degree of involvement of stakeholders in the project. The involvement of stakeholders is limited to governmental agencies. Involvement ofthe wider public is catered for through the implementation ofthe onsite sewage disposal system management program. The

126 PAD alludes to the participation ofthe relevant regulatory agencies and ministries in the execution and implementation ofthe project activities, and the project explicitly indicates support for capacity building and institutional strengthening with respect to these organizations. Such involvement is critical to the sustainability ofthe project and its expansion into areas not specifically involved in the demonstration projects.

25. Secondary issue 5. Capacity building aspects. Capacity building is a critical element of the proposed project. Creation and strengthening ofappropriate institutions, conduct ofthe demonstration project, and the training of agency staff form the core ofthe GEF-financed elements ofthe Shandong Environment Project. Annex 4, Table A, also notes that dissemination oflessons learned with respect to onsite sewage disposal system management practices within the wider East Asia Sea area is an essential element ofthe GEF-financed project activities. These elements should be implemented in conjunction with the best practices data base being compiled by the United Nations Environment Program (UNEP) and the IW: LEARN initiatives being executed by the UnitedNations Development Program (UNDP). These efforts will enable wider dissemination of knowledge ofpractices that have positive effects. Such knowledge is an essential element in building capacity and strengthening institutions in the region.

26. Secondary issue 6. Innovativeness. Development of appropriate management practices for the management ofonsite sewage disposal systems is a critical element for the protection of the marine environment, within the context ofan integrated land- and water-based management program. By creating and strengthening the appropriate human resources, institutions, data acquisition and dissemination systems, and shared management mechanisms, the proposed management program will complement other point source pollution abatement measures being implemented by the basin governments and stakeholders. The proposed actions and approaches reflect state-of-the-art practice; their application in the Bohai Sea Basin will significantly advance current practice in that specific Basin as well as within the region as a whole. In this manner, the project promotes innovation and development ofregionally applicable remedial practices and experiences.

General Conclusion and Recommendations

27. Overall, it is the conclusion ofthis reviewer that the proposed project is wholly consistent with the GEF International Waters operational program, its broader philosophy, and funding criteria. Consequently, this project is recommended for funding.

127 Response by the Task Team to the STAP Expert’s Comments

28. Dr. Thornton’s support ofthe proposed project is very welcome. His agreement with the project’s integrated approach and a pilot starting with Yantai is encouraging.

29. The task team would like to respond to the following comments by Dr. Thornton in the order of the sections where the comments were made. The original comments are provided in italics and are followed by the task team response.

1. “An initial step in thisprocess would be to obtain data on the locations of the onsite systems) and establishment of a data base documenting these locations. The resultant data base would then support a systematic pumping and inspection system. This data base should be linked to the building permit system to enable regular updating of the locations and ages of the various onsite sewage disposalr systems, and maintenance of inspection records. ’) (Key issue 1)

The team fully agrees that data collection on the locations of the onsite systems and setting up of a data base for these locations would be needed to ensure that an appropriate management system is developed and implemented. One of the proposed GEF financed activities is the establishment of such a data base - a Management Information System.

2. “Notwithstanding, it is recommended that this project seek to ensure the dissemination of lessons-learned in the broadestpossible manner, given that the joint use of onsite sewage disposal systems in areas served by public sanitary sewerage system is

widespread in China. )) (Key issue 4)

The central government of China fully endorses the Yantai pilot. During the implementation of the project, Shandong Province would report the lessons and experiences from the Yantai pilot to central government agencies including MoF, NDRC and the Ministry of Construction to promote further dissemination activities in other provinces of China.

3. “In addition) it is recommended that the project make use of IW: LEARN. )’ (Secondary issue 2)

The team fully agrees that IW: LEARN will be used to strengthen the linkage of the proposed project to others for sustainability. The use of IW: LEARN is incorporated in Annex 4.

4. “Annex 4, Table A, also notes that dissemination of lessons learned with respect to onsite sewage disposal system management practices within the wider East Asia Sea area is an essential element of the GEF-Jinancedproject activities. These elements should be implemented in conjunction with the best practices data base being compiled by the United Nations Environment Program (UNEPj and the IW: LEARN initiatives being

executed by the United Nations Development Program (UNDP). I) (Secondary issue 5)

128 The team understands that capacity building and dissemination should be carefully designed and conducted to achieve the project objective. In this regard, the team believes that the UNEP best practices data base and the UNDP IW: LEARN as recommended will help ensure the application ofbest practices in septic tank management from other countries to the proposed project. The use ofboth tools is suggested in the PAD. The team has also required Yantai to use both tools when they prepare the monitory and dissemination plan.

30. Again, the task team expresses its appreciation to Dr. Thornton for his comments and his depth of understanding of the development objective and impact of the proposed project.

129 Annex 17: Strategic Partnership Investment Fund CHINA: Second Shandong Environment Project

1. In 1995, 12 East Asian countries came to ether with a common vision to ensure the sustainable development of their shared waters?’This partnership of governments, with the support of GEF, UNDP, and IMO, created the Partnerships in Environmental Management for the Seas of East Asia (PEMSEA). One of the main achievements of the countries through their contribution to PEMSEA has been the development and adoption of the Sustainable Development Strategy for the Seas of East Asia (SDS-SEA), which was endorsed by each of the 12 countries in December 2003. The SDS-SEA is significant as it is the first, and the broadest, partnership agreement in the region to address the management of the regional seas. One of the highest priorities for action in the SDS-SEA is the reduction of land-based pollution that has an impact on the marine environment.

2. The countries of East Asia have recognized that a coordinated and innovative approach with a strong focus on scaling up investment is urgently needed to implement the SDS-SEA. GEF’s new operational modality--the Strategic Partnership--has provided East Asia with an opportunity to undertake the necessary actions with coordinated support from GEF and the World Bank. The WB/GEF Strategic Partnership Investment Fund for Pollution Reduction in the Large Marine Ecosystems of East Asia (Fund), an US$SO million grant financing facility managed by the World Bank, was approved by GEF in November 2005. The Fund forms the key financing arm of the Strategic Partnership.

3. The objective of the Fund is to scale up investments in coastal land-based pollution reduction in East Asia through co-financing ofprojects that remove technical, institutional, and financial barriers which currently limit efficient investment in pollution reduction. The US$SO million grant financing provided by GEF is expected to leverage between US$SOO million and US$ 1.5 billion in counterpart financing from the World Bank and other sources, including the public and private sectors. The Fund has adopted a coordinated approach to monitoring such that the contribution of all projects to the overall objectives of the Fund can be measured. Tables 1 and 2 below show the overall Fund indicators and the expected contribution of the project.

Projects under the Fund

4. The GEF-Ninrzbo Water and Environment Project (GEF-NWEP) was the first project to be financed by the Fund. This project provided a significant environmental enhancement to the IBRD-financedNWEP, which was approved by the World Bank in March 2005. Under NWEP, Cixi City, located on the coast of the Hangzhou Bay and the East China Sea, will construct two WWTPs with a total treatment capacity of 150,000 m3/day. The GEF-NWEP would enhance Cixi’s wastewater treatment strategy and coastal management through the provision of a constructed wetland to provide tertiary treatment at the largest of the two WWTPs. This pilot was expected to prove the technical and economic viability and increased environmental benefits of wetland treatment compared with the chemical tertiary treatment process more conventionally

~ ~~~ ’’ The original 12 countries included Brunei Darussalam, Cambodia, China, Indonesia, Japan, DPR Korea, RO Korea, Malaysia, Philippines, Singapore, Thailand and Vietnam. Two additional countries joined in 2005 (Lao PDRand Timor-Leste) making a current total of 14.

130 used in China. In addition, the project would support innovations in coastal management in China through the conservation of a natural coastal wetland for non-point source pollution control, establishment of a wetland education center, and policy reform to support coastal wetland conservation and management.

5. The GEF-Second Shandonn Environmental Proiect (SDEP2) is the second project to be financed under the Fund. GEF co-financing would take place within the Yantai wastewater component of SDEP2. GEF support would initiate and facilitate implementation ofthe proposed major institutional and technological task to demonstrate to Chinese municipalities the rationale ofproper management of wastewater facilities. The key objectives are to: (a) demonstrate in the pilot-size septic-tank project the feasibility of institutional and technical arrangements ensuring improvement of local environment status, and (b) disseminate in Shandong Province, among Bohai Declaration signatories, and beyond the feasibility of positive impact on reduction of pollution load annually discharged in the Bohai and Yellow Seas.

131 3Y

3 0 z N 0" N 0 W

0 0 0a N 8 2 + Table 2. GEF-Second Shandong Envir Target Indicators Explanation Outcome Indicators 2010 Increased investment in pollution reduction 215.3 Estimated investment from IBRD and GEF (US$ million) (23.8 + 191.5) fin an c in g Cumulative tons (2007- Pollution Reduction by one joint sewage-septage Reduction in discharge of BOD to seas of East 15) treatment plant upgraded under the project and IBRD: 42,000 Asia (tons) disseminationwithin Shandong Province GEF: 10,000 IBRD + GEF: 52,000 Result Indicators I Removal of barriers to oollution reduction: Number of cost-effective technologies/ techniques demonstrated in specific country 1 Septage management: collection and treatment contexts New institutional arrangement between sewage Number of institutional and/or regulatory 1 company, property owners and drainage reforms approved and implemented department

Number of countries that have established a Not applicable to this project. revolving fund Minimum amount of capital invested in Not applicable to this project. revolving funds (US$ million) Dissemination of demonstrated technologies, techniques and mechanisms: Septage management company to be set up will Products: Number of publications 1 write handbook Products: Number of project websites 1 Establish project website Dissemination of the output primarily to Bohai Declaration signatories through workshops, Events: Number of country workshops 6 seminars, study tours and study visits, training, publishing of pamphlets etc. Events: Number of regional TBD Participate in international workshops conferences/workshops participated in

Number of Strategic Partnership Council Fund level indicator, not applicable to individual meetings participated in by World Bank -..-:--*- staff (events/year) I pNJJGGlb. Number of World Bank CAS which include I I Fund level indicator, not applicable to individual Fund I projects.

133

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