Document of The World Bank

Public Disclosure Authorized FOR OFFICIAL USE ONLY

Report No: 27172-CHA Public Disclosure Authorized PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US61.3 MILLION

TO THE

PEOPLE'S REPUBLIC OF CHINA

Public Disclosure Authorized FOR

TAI BASIN URBAN ENVIRONMENT PROJECT

June 29,2004

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

Public Disclosure Authorized I This document has a restricted distribution and may be used by recipients only in the performance of their Iofficial duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective April 1,2004) CunencyUnit = Yuan0 Y 1.00 = US$O.12 US$l.OO = Y 8.28

FISCAL YEAR January 1 -- December 31

ABBREVIATIONS AND ACRONYMS AIEC Average Incremental Economic Cost CP Clean Production DFMD Drainage Facilities Management Division (Suzhou) EA Environmental Assessment EMP Environmental Management Plan GPN General Procurement Notice HWTC Huishan Water Treatment Company Limited ICB International Competitive Bidding JPFB Jiangsu Provincial Finance Bureau MOF Ministry of Finance NCB National Competitive Bidding PIP Project Implementation Plan PLG Project Leading Group RAP Resettlement Action Plan RPF Resettlement Policy Framework SBR Single Batch Reactor SQCC Suzhou Qingyuan Construction Company Limited SWAB Suzhou Water Affairs Bureau SWIDC Suzhou Water and Investment Development Company Limited TBA Tai Basin Authority TBUEPO Tai Basin Urban Environment Project Office TP Total Phosphorus UNDB United Nations Development Business WAMC Wuzhong Asset Management and Administration Company Limited WDC Wuxi Drainage Company WETDZ Wuzhong Economic and Technical Development Zone Company WWTP Wastewater Treatment Plant XWTC Xishan Wastewater Treatment Company Limited

Vice President: Jemal-ud-din Kassum Country ManagerDirector: Yukon Huang Sector ManagerDirector: Keshav Varma Task Team Leadermask Manager: Stuart Whitehead FOR OFFICIAL USE ONLY

CHINA TAI BASIN URBAN ENVIRONMENT PROJECT

CONTENTS

A. Project Development Objective Page

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

B. Strategic Context

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

C. Project Description Summary

1, Project components 7 2. Key policy and institutional reforms supported by the project 8 3. Benefits and target population 9 4. Institutional and implementation arrangements 10

D. Project Rationale

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

E. Summary Project Analysis

1. Economic 14 2. Financial 15 3. Technical 17 4. Institutional 18 5. Environmental 20 6. Social 22 7. Safeguard Policies 24

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. F. Sustainability and Risks

1. Sustainability 24 2. Critical risks 25 3. Possible controversial aspects 25

G. Main Conditions

1, Effectiveness Condition 26 2. Other 26

H. Readiness for Implementation 28

I.Compliance with Bank Policies 28

Annexes hex1: Project Design Summary 29 Annex 2: Detailed Project Description 32 Annex 3: Estimated Project Costs 41 hex4: Economic Analysis 42 Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary 50 Annex 6: (A) Procurement Arrangements 65 (B) Financial Management and Disbursement Arrangements 79 Annex 7: Project Processing Schedule 89 Annex 8: Documents in the Project File 90 hex9: Statement of Loans and Credits 91 hex10: Country at a Glance 95 Annex 11 : Social and Environmental Analysis 97

MAW4 CHN 32768 CHN 32769 CHWA TAI BASIN URBAN ENVIRONMENT PROJECT Project Appraisal Document East Asia and Pacific Region EASUR ._. - - Date: June 29,2004 Team Leader: Stuart Whitehead Sector ManagerlDirector: Keshav Varma Sector(s): Sewerage (85%), Flood protection (1 5%) Country ManagerlDkector: Yukon Huang Theme(s): Water resource management (P), Pollution Project ID: PO57933 management and environmental health (P), Environmental Lending- Instrument: Specific Investment Loan (SIL) policies and institutions (P), Other urban development (S)

[XI Loan [ ] Credit [ 1 Grant [ ] Guarantee ] Other: For LoanslCreditslothers: Loan Currency: United States Dollar Amount (US6m): $61.3 Borrower Rationale for Choice of Loan Terms Available on File: IxI Yes Proposed Terms (IBRD): Variable-Spread Loan (VSL) Commitment fee: 0.75% Front end fee (FEF) on Bank loan: 1 .OO% Payment for FEF: CaDitalize from Loan Proceeds

tBRD - 0.37 60.93 61.30 Total: 96.85 8 1.86 178.71

Project hplementatlon period: 5 years Expected effectiveness date: 11/15/2004 Expected closing date: 12/3 1/2009 A. Project Development Objective

1. Project development objective: (see Annex 1) The Government's objective for the proposed Tai Basin Urban Environment Project (TBUEP) is to improve the quality of life of the rapidly increasing urban population and enhance economic competitiveness in Wuxi and Suzhou, key municipalities in the Tai Basin and the Yangtze River Delta economic region, by alleviating degradation ofwater resources and improving the quality of the urban environment.

To meet this objective, the project is designed to increase the capture and treatment of wastewater in core cities and the rapidly hdustrializing suburban districts through physical investments and institutional and financial reforms that will enhance the viability and sustainability of wastewater systems, particularly in these rapidly developing districts. The project will support rehabilitation and water quality improvement in several urban and district canal and river systems through physical investments and improved water management. In addition, the project will support lakeshore rehabilitation around Wuli Lake as a new development and amenity area for Wuxi City. Finally, the project will seek to strengthen water resource protection in the Tai Basin through improved and integrated planning, water quality monitoring and environmental management. The project design therefore reflects the core elements of the Bank's Urban Strategy - livability, good governance, competitiveness and bankability.

2. Key performance indicators: (see Annex 1) For the wastewater components, key performance indicators (summarized in Annex 1) will include specific targets for: reducing the proportion ofuntreated wastewater discharges in Wuxi and Suzhou' Municipalities; cost-effective and autonomous operation of wastewater treatment systems and capacity utilization for wastewater treatment plants under the project; and cost recovery by wastewater enterprises to ensure sustainability. Monitoring data will also be recorded in periodic progress reports on measures under Jiangsu's Cleaner Production (CP) Program to reduce polluting discharges by industries discharging into project financed wastewater systems. For the lakeshore, river rehabilitation and water quality improvement components, key performance indicators will include targets relating to improved water quality at key locations in the river network, improved lakeshore conditions at Wuli Lake and for enhanced water circulation in the canal network.

B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: Report No. 25141 Date of latest CAS discussion: December 19,2002 The project will support several key CAS themes, including: improving water resources management; ensuring environmentally sustainable urban development; and expanding livelihood opportunities during the rural-urban transition, including for surplus rural labor. The project will support the Bank's Urban Sector Strategy which emphasizes improved livability and economic competitiveness, as well as the Bank's Water Sector Strategy which promotes sustainable wastewater and water resources management.

2. Main sector issues and Government strategy: The Lake Tai Bash forms an integral part ofthe Yangtze River Delta economic region, which is China's most important industrial base and one of the most heavily populated areas of China. In 2000, over half of the Basin's residents lived in cities and peri-urban towns, and urbanization continues to increase. Driven by high levels of foreign direct investment, total gross domestic product (GDP) in the Basin has been growing at over 10 percent per year on average and presently stands at Renminbi (RMB) 1 trillion - approximately 11 percent of the national total. In 1999, Suzhou (RMB 136 billion) and Wuxi (RMB 114 billion) together accounted for almost three quarters of the GDP.

The Tai Basin is also one of China’s most important water resources. Lake Tai and its dense network of rivers and canals provide water supply for the majority ofthe Basin’s 36.3 million residents including those who live in the large and growing urban economies of Wuxi and Suzhou in Jiangsu Province. Lake Tai is also the source ofwell over half of the domestic water supply for Shanghai Municipality, ,

Despite the region’s dependence on the water resources ofthe Basin for water supply, the provision of environmental infrastructure and services, including the collection and treatment ofwastewater, has failed to keep pace with the rapidly growing economy of the region. Increasing flows ofuntreated domestic, industrial and agricultural wastewater into the Basin’s rivers and lakes have put the region’s water resources under severe environmental pressure. The consequences ofcontinued rapid growth and urbanization have become increasingly apparent.

Government reports indicate that the water quality in over 85 percent ofthe main water bodies in the Basin is Class N or worse (unsuitable for domestic supply) and deteriorating. The canals within Suzhou and Wuxi cities are reportedly worse than Class V, the lowest classification according to Chinese water quality standards. Water quality in the upper Huangpu River, which is fed by Lake Tai and is the main source of drinking water for the Shanghai metropolis, has become increasingly polluted over the last five years and is now only marginally acceptable as a drinking water source. Urban environmental conditions as poor as these have significant negative impact on citizens’ health and the livability and economic prospects of urban areas.

Recognition ofthe need for urgent action to protect the health and economic well-being ofcommunities relying on this increasingly polluted lake and river network led the State Council to establish the Lake Tai Basin Water Resource Protection Leading Group in 1996 and a pollution control program with the goal of resolving the region’s water pollution problems by 2010.

The first stage of the program was conducted under the Ninth Five-Year Plan (1996 - 2000). The National Ninth Five-Year Plan and Long-Term Program on Water Pollution Prevention and Control to the Year 2010 for the Taihu Lake Basin was issued by the State Council on January 6,1998 and focused almost entirely on industrial and domestic pollution point source control. It listed 54 domestic wastewater treatment plants planned to be built in the Tai Basin prior to the year 2000. Industrial Pollution Control Action Plans were also developed and some progress was made to bring key polluting enterprises (particularly in core city areas) into compliance with environmental regulations.

However, the success of the Ninth Five-Year plan was limited for several reasons. First, vast numbers of enterprises, particularly in the heavily industrializing districts and counties surrounding the core cities within the Basin, were generally not brought into compliance with the targets during the plan period. In addition, progress was slow on the collection and treatment of domestic sewage; only 29 ofthe proposed 54 domestic treatment plants were completed or partially finished by the end of2000. The Government attributed the lack of implementation success to the scarcity oflocal government fimds for investment in the wastewater sector, and to poor enforcement of environmental regulations at enterprises.

Following the Ninth Five-Year Plan, which concluded in 2000, the Government has continued to identify improvement ofwater quality in the lake and river system ofthe Tai Basin as a national priority and municipalities are aiming to collect and treat 50 percent of wastewater in smaller cities and 70 percent in

-3- larger cities by 20 10. However, the Government’s strategy was modified somewhat in the Tenth Five-Year Action Plan for Lake Tai Pollution Control (2001-2005). Whilst this plan continues to emphasize collection and treatment of point source pollution, it also seeks to enhance the results of pollution control activities by increasing circulation in the Basin’s rivers and lakes through water transfers from the Yangtze River. In summary, this plan under which the current project is proposed, places priority on: (a) improving wastewater management, particularly collection and treatment of domestic sewage; (b) improving water quality by reducing Total Phosphorus (TP) discharges into heavily polluted water bodies such as Meiliang and Wuli Lakes in Wuxi Municipality and by transferring higher quality water from the Yangtze River to increase circulation and improve water quality in the lake and canal system; and (c) strengthening local capacity for water environment monitoring and management. The Tai Basin Authority (TBA) is planning and constructing infrastructure to facilitate these transfers, including gates and pumping systems. Pilot transfer activities have been undertaken by TBA during the last few years to determine the viability ofthe key transfer schemes, such as that through the WangYu River.

In response to the Ninth and Tenth Five-Year Plans, in Zhejiang Province, wastewater capture and treatment capacity has been substantially increased and additional facilities and networks are under construction and planned (e.g. in Jiaxin City, which lies on a major tributary of Shanghai’s Huangpu River). Jiangsu and Zhejiang Provinces have also introduced bans on the production and sale of phosphorous-baseddetergents in the Basin, which were estimated to contribute up to 15 percent of TP in the lakes and rivers and Jiangsu is enhancing its water quality monitoring capability. Shanghai Municipality and its districts continue to make substantial investments in wastewater networks and facilities, many with Bank support, and Shanghai has shown leadership in radically restructuring the institutional framework to improve planning, financing and delivery of water and wastewater services.

Whilst considerable strategy work for environmental improvement in the Basin lying within Jiangsu Province has already been completed by TBA and provincial agencies, less progress has been achieved in translating these strategies into well coordinated, operational plans for the main implementers within the Basin’s municipal and district governments.

In Wuxi and Suzhou for example, selected key polluting industrial enterprises are being more closely monitored using automatic equipment, though this remains a relatively small proportion oftotal existing industries. For some industrial sectors (e.g. dyeing), discharge standards are being tightened to reduce the overall pollution contribution of large enterprises in that sector. However, many important pollution Sources such as non-point source pollution from agriculture, animal husbandry facilities and the vast numbers ofsmall-scale industries, have yet to be effectively addressed by the national or local environmental regulatory authorities.

In the domestic wastewater sector in China, responsibility for urban water and wastewater services is generally divided between municipal governments with jurisdiction over core city areas, and district governments, responsible for towns. Many district govemments in the Tai Basin area have recently been upgraded from county level governments to expand their role in providing urban public infrastructure and utility services in urbanizing towns and industrial development zones. Responding to national priority plans and provincial strategies, locally-funded programs are underway at the municipal level, albeit slowly, and with limited coordination, to rehabilitate and expand wastewater systems in the core city areas of Changzhou, Wuxi and Suzhou. The rapidly developing districts surrounding these cities are also now scrambling to collect and treat increasing wastewater flows, particularly in areas where industries continue to concentrate. mekey limitation ofthe municipalities’ and districts’ response to the national planning initiatives in the

-4- Tai Basin h@ been the fragmented approach to local planning and management of environmental intiastructure in the Basin. A lack of effective inter-jurisdictional coordination in service planning and delivery, as well as relatively weak regulatory oversight and environmental monitoring/enforcement capacity, has limited the effectiveness of implementation. For example, in the wastewater sector, district governments in the Basin are actively developing independent wastewater facilities under new wastewater agencies, rather than consolidating new service areas under existing, more experienced municipal wastewater companies. Sewer networks, where they exist, are often inadequate to fully capture wastewater flows even for the relatively small district treatment plants in place. In the area ofwater transfers, planning has been hampered by a lack oflocal consensus on the location of gates and other infrastructure.

neGovernment recognizes the need to build the capacity ofagencies responsible. for wastewater management by strengthening the planning, management and financing capabilities of these agencies to improve the efficiency and sustainability of the substantial investment required. In particular, gov-ent policies aim to strengthen the market orientation ofwastewater service by promoting establishment of autonomous and financially viable wastewater enterprises and limited private sector participation, including through partnerships with private sector operators.

Consistent with these objectives for overall environmental sector reform, some municipalities in the Basin are reforming organizational structures to consolidate the water resources (including transfers and other hydraulic control measures), water supply and wastewater sectors under a single Water Affairs Bureau, These reforms generally transfer ownership of wastewater networks and facilities to an asset management company and promote outsourcing ofoperations and maintenance for these systems to experienced operators. While these are positive developments, which bring the promise of better coordination of the water and wastewater sectors in the future, they generally do not yet extend to district governments. Moreover, without reform of funding arrangements, wastewater companies, particularly at the district level, will be unable to operate in the market oriented and financially sustainable manner sought by government policies.

Indeed, achieving financial viability and sustainability has been a considerable challenge for the small district wastewater systems in the Tai Basin because, first the lack ofeconomies of scale and the relatively high proportion of industrial wastewater, result in relatively high unit investment and operating costs, Second, district governments do not have sufficient authority to establish tariff levels or levy separate wastewater fees reflecting their higher cost base. Third, district wastewater companies lack any legal claim over wastewater fees levied by municipal governments on consumers in the districts and there is presently no agreed mechanism in place to return municipal wastewater fee revenues to district wastewater companies to meet debt service obligations and operating expenses.

3. Sector issues to be addressed by the project and strategic choices: The project will meet a strategic need for expanded and more sustainable coverage of environmental planning and protection systems in one of China's most rapidly industrializing and urbanizing areas where both physical and institutional infrastructure for wastewater management is inadequate. A start will be made under the project on four key sector issues: (a) the lack of environmental infrastructure existing in key areas in the Tai Basin, (b) the poor water quality in the urban and district canals and river system; (c) the lack of financial and institutional sustainability of existing wastewater service delivery arrangements in the Basin; and (d) the weak and uncoordinated planning and environmental management in major urban centers. The project's contribution to these sector issues is as follows.

-5- First, the project will support physical investments to reduce the present high level of untreated discharges of domestic and industrial wastewater flows. Second, the project will help protect water quality in Wuli Lake (one ofLake Tai’s most heavily polluted perimeter lakes located in Wuxi Municipality) from heavy inflows of polluted wastewater and flooding, and will support rehabilitation of canals in the central city of Suzhou. Third, the project will support institutional and financial reforms that will provide a more viable, market-oriented basis for managing and operating wastewater systems particularly at the district level. Fourth, both Wuxi and Suzhou are undertaking wastewater masterplanning exercises involving the rapidly growing districts as well as core cities,

Three strategic choices have been made during the design of this project. First, emphasis has been placed on working not only with municipal governments, but also with governments in the districts, where a significant portion ofthe total urban population of the Basin lives, and where most new industrial development and urbanization is taking place. Existing experience in district and town sewerage systems is mixed. Typically, the staff of agencies that become responsible for these systems require extensive and lengthy capacity building. Moreover, as noted above, unit operating costs can be relatively high for small wastewater systems especially as in many cases, investments are often almost entirely debt financed. The need for efficient models for the management of district level wastewater systems in rapidly urbanizing districts is widespread in China and is recognized as a priority in the Government’s strategy for sanitation sector development.

Second, a strategic choice has been made to support the Government’s strategy of complementing pollution control with water transfers in order to improve water quality in the Basin’s river and canal network as articulated in the Tenth Five-Year Plan. In 200112002, the Tai Basin Authority conducted several pilot water transfers from the Yangtze River through the WangYu River to Lake Tai. These pilots showed that water transfers can have a major impact on improving the water quality in Lake Tai and can speed up circulation in the lake and river network Analysis ofthis pilot program indicates that all neighboring areas including Suzhou, Wuxi and Shanghai benefit from these transfers. However, to realize the benefits of these transfers, several structural and non-structural measures are required to reduce pollution entering the system, This project will support the Government’s pollution ControYtransfer strategy through physical investments in pollution control and hydraulic works in Wuxi and Suzhou. In addition, the locally-financed wastewater masterplanning in Wuxi and Suzhou Municipalities should enhance stakeholder involvement and clarify sector objectives and interventions for improved water quality management.

Third, in recognition of the rapid and continuing development in the Tai Basin, a strategic choice has been made to support investments that tackle existing industrial wastewater, as well as domestic discharges, and provide for future growth. The market for private sector fitlancing is not considered to be sufficiently mature at this time to fully provide these services, and therefore local govemment and Bank intervention is warranted. The Jiangsu Provincial Government and the municipal and district government counterparts in this project are currently working towards developing prudent ways to encourage private participation in this sector. The project will support these efforts to reform the wastewater sector in this heavily industrialized area of Jiangsu Province by providing assistance in the development of strategies for private sector involvement, and in providing opportunities to pilot certain strategies such as combination of areas under single wastewater systems and outsourcing for operation and maintenance.

-6- C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): A. Wuxi Municivalitv

Wuli Lake Sub-project ($35.0 million): These non-Bank financed activities deal with the most-heavily polluted perimeter lake - Wuli Lake, and include: (a) pollution control facilities (10 sluice gates, 1 shiplock); (b) lake-bank restoration (19.4 km); and (c) pilot research in ecological restoration.

Wastewater Treatment Plants (WWT.P) and Networks ($68.5 million): The component will include: (a) the first phase of the Chengbei-Huishan WWTP in Huishan District with a capacity of 50,000 m3lday of primary and 25,000 m3lday ofsecondary treatment, as well as 58 lan of sewers serving Changan and youqiao industrial area; (b) expansion of Dongting WWTP in Xishan District (from 20,000 to 50,000 m3lday capacity) and 40 km of sewers; (c) a new WWTP (25,000 m3lday capacity) and 130 km of sewers including three lifting stations to develop the full skeleton ofthe sewer network and user connections serving Men,Houqiao and Yangjian tqwnships and the proposed Wuxi East Industrial Park, all within Xishan District.

Urban Area Canal Network Rehabilitation ($19.7 million): The component would include: control gates on Xujiang and Shangtang Rivers to enhance flood protection and prevent the intrusion ofpolluted water from the Grand Canal into Suzhou’s urban canal system; and to prevent the loss ofclean water diverted through Xitangh River from the WangYu River. This scheme is also part of the overall flood protection plan for Suzhou City area. The component includes one sluice gatelshiplock on the Xujiang River and one sluice gatelshiplock on the Shangtang River with bank heightening works. The component would also finance sediment dredging for 65 km to restore transit and absorptive flood capacities of canals in the urban area of Suzhou.

Wastewater Treatment Plants and Networks ($49.4 million): The component will include: (a) a second phase of the Fuxin WWTP (100,000 m3lday capacity) serving the south and west areas of Suzhou City; (b) a second phase of the Loujiang WWTP (80,000 m3lday capacity) serving the north and east areas of Suzhou City; and (c) the first phase of a WWTP (25,000 m3lday capacity) and 72 km of associated sewers sewing Wuzhong Economic Development Zone in Wuzhong District.

C. Imvlementation Manapement and Sector Develovment Assistance ($1.9 million): This component will include: (a) technical assistance for capacity building for wastewater utilities management and financing; (b) training in project management; (c) technical assistance for engineering design and construction supervision; and (d) locally-financed preparatiodupdating ofwastewater masterplans for Wuxi and Suzhou Municipalities.

-7- 0.0 Wuxi - Wastewater Treatment Plantslnetworks 68.49 38.3 28.44 46.4 Suzhou - Wastewater Treatment Plantslnetworks 49.42 27.7 22.50 36.7 Suzhou - Central Urban Area Canal NetworkRehabilitation 7.29 4.1 3.88 6.3 Suzhou - Polluted Water Control Schemes (on Xujiang and 12.38 6.9 4.12 6.7 Shangtang Rivers) Technical Assistance (TA) and Capacity Building 1.75 2.9 Other Other Other Total Project Costs 174.46 97.6 60.69 99.0 Interest during construction 3.64 2.0 0.00 0.0 Front-end fee 0.61 0.3 0.61 1.o Total Financing Required I 178.71 I 100.0 I 61.30 I 100.0 I

2. Key policy and institutional reforms supported by the project. As part of overall institutional reforms Within municipal governments in the Lake Tai Basin, a new institutional model for public utilities is emerging. The objectives of this model are to: (a) consolidate strategic planning and oversight of water-related functions; and (b) separate asset ownership from the operation of assets as a means to open up new iinancing opportunities for utility services and to improve the efficiency ofutility management.

Based on this model, Suzhou Municipality has consolidated its water and wastewater functions under a Water Affairs Bureau. In addition, in 2002 it established the Suzhou Water Investment and Development Company Limited (SWIDC) for the purposes ofholding all sector assets through subsidiary companies. fie Suzhou Qingyuan Construction Company (SQCC) is one such subsidiary and is responsible for wastewater sector assets in central Suzhou City area including those developed under the project. By 2006, the Drainage Facilities Management Division (DFMI)) will be corporatized also as a subsidiary under SWIDC to manage and oversee operation and maintenance of all wastewater systems in Suzhou's central districts. Similarly, Wuxi Municipality has recently established a Public Utilities Management Group and an asset management company to oversee and supervise operating companies for water supply, wastewater and town gas in its central urban districts.

However, as indicated above, these institutional reform initiatives at the municipal level have not yet been extended to the rapidly urbanizing districts outside the central city areas. In these districts, plans for new wastewater systems have typically involved establishment ofseparate wastewater systems and institutions for each township, thereby increasing institutional fragmentation and making coordinated planning more difficult, as well as increasing the cost of delivering wastewater service. The project therefore seeks to begin consolidation of management arrangements for wastewater systems at the district level. By also outsourcing operations and maintenance, the project will overcome the lack ofin-house experience for managing wastewater systems in these districts.

-8- Moreover, these institutional reforms will not be fully effective without supporting reforms to the funding arrangements for wastewater operations. Although existing wastewater fees applied in Suzhou and Wuxi are amongst the highest in China, they are applied under the legal authority of the municipal governments, not the wastewater companies. As such, the fees are remised to the finance bureau ofeach municipal government, or to the district government in the case of Wuzhong, with sector funding then being provided through budgetary allocations. A substantial share of the proceeds is generally retained by municipalities for other purposes and the allocation to the wastewater agencies is often insufficient for adequate maintenance of the assets in operation. Of even greater concern, in Huishan and Xishan Districts in Wuxi, no systematic arrangements are in place for the return ofwastewater revenues to enable the districts to finance operation of existing systems and to undertake much needed expansions. These existing funding arrangements are based on traditional institutional structures, in which government bureaus directly provided all wastewater services. However, with asset ownership and management functions now being separated through the corporathation model, these new companies need their own sources of operating revenue.

The project would therefore seek to assist Suzhou and Wuxi to make the municipal and district institutional reforms fully operational. As a first step, the project will assist in implementing, at both the municipal and district levels, the recently approved state guidelines by corporatizing wastewater utilities to enhance prospects oftapping private sources of capital for future investments, possibly through public/private partnerships, To further improve the cost effectiveness ofwastewater operations, proposed investments in several townships in Xishan District in Wuxi Municipality have been combined into substantially more economical engineering confrgurations. For example, Xishan District is merging all wastewater systems within the district starting with the existing wastewater system at Dongting with the proposed new system to Serve townships at Men,Houqiao and Yangjian, as well as the Wuxi East Industrial Estate. In addition, the SQCC that presently manages wastewater operations in Suzhou City is to be contracted to manage implementation of the wastewater system in adjacent Wuzhong District.

Funding arrangements for wastewater service providers are also to be reformed under the project. The legal basis for wastewater revenues is to be changed from a municipal wastewater fee to a wastewater utility tariff that is legally due to the responsible wastewater companies. This will allow revenues to be transferred directly to wastewater companies by the water supply companies that presently act as collection agent for wastewater fees. To implement this reform, Wuxi and Suzhou Municipalities will formulate an action plan early during project implementation for transferring all wastewater revenues back to the districts to finance wastewater operations and for counterpart funding of investments under the project,

Ap-reement was reached at nepotiations on the timetable for these initiatives.

3. Benefits and target population: Consistent with the Bank’s Urban Strategy, the project is designed to enhance the livability, govemance of core public services, competitiveness and bankability oftwo major urban centers that are facing continued rapid growth.

The project would directly benefit about five million people presently living and working in Wuxi and Suzhou Municipalities, as well as substantial downstream communities, including Shan-. These benefits would include reduced health risks and improved productivity and livelihood prospects, including for rural-urban migrants.

Expansion of wastewater service in rapidly industrializing districts under the project will help establish a

-9- viable model for managing small wastewater systems and will reduce pollution ofthe region’s critical water resources and supply, and thereby help ensure the environmental sustainability of continued economic growth and the Government’s policy for urban transition.

The canal rehabilitation program in Suzhou will help reduce flooding and further enhance the quality of life for residents and the tourism potential of this historic city. Similarly, the locally-financed Wuli Lake rehabilitation program will help reduce the frequency and severity of flooding in Wuxi City and, at the same time, open up a new area for development in Wuxi City with substantial amenity value for commercial, residential and recreational uses.

Finally, wastewater masterplanning in Wuxi and Suzhou Municipalities would contribute to the goals sought by the ongoing municipal reforms in the water/wastewater sector, including consolidation of strategic planning and oversight of water-related functions to achieve more cost effective options for the very substantial future investment that will be required in the wastewater sector in the Basin,

4. Institutional and implementation arrangements: The Tai Basin Urban Environment Project Office (TBUEPO), which has been established within the Jiangsu Provincial Finance Bureau, has taken the lead in coordinating the work of the intemational consultant team for review of project proposals and will be responsible for overall coordination of project implementation. TBUEPO will exercise this coordination function proactively to avoid the difficulties experienced by Jiangsu Provincial Environment Bureau during implementation of the recently completed Southem Jiangsu Environment Protection Project. A timetable for recruiting experienced staff in procurement and project financial management, environmental, and resettlement aspects has been agreed. TBUEPO will report to the provincial Project Leading Group (PLG) which consists of heads of relevant provincial commissions and bureaus.

Suzhou and Wuxi Municipalities have each established a PLG and a PMO also under the respective Municipal Finance Bureau, and Project Implementation Units (PIUs) for individual components,

In Wuxi Municipality, the locally-financed Wuli Lake Rehabilitation component will be implemented by the Wuxi Water Conservancy Bureau, which gained satisfactory experience implementing a component of the Tai Basin Flood Control Project, and has already implemented dredging works, relocation of fishponds and water transfer works in the lake.

The Huishan Water Treatment Company Limited (HWTC) established in March 2003, will be responsible for implementing the Huishan wastewater component and, following construction, will outsource operations and maintenance functions to an experienced operator. Similar arrangements are proposed for the Dongting and Menwastewater systems, which are being merged under the new Xishan Wastewater Treatment Company Limited (XWTC).

~nSuzhou, the SQCC will be directly responsible for implementation ofthe canal rehabilitation component including the control gates on the Shangtang and Xujiang Rivers, and the dredging program as well as for the implementation of the expansion to the Fuxin and Loujiang wastewater treatment plants. The (corporatized) DFMD will be responsible for operations and maintenance of the wastewater treatment plants following construction. The Wuzhong Asset Management and Administration Company Limited (WAMC), set up under the Wuzhong Economic and Technical Development Zone Company (WETDZ), will be responsible for implementing and managing the proposed wastewater system in the Wuzhong industrial zone area. However, WETDZ is arranging to contract SQCC to manage implementation and

-10- will outsource networks and facilities to an experienced operator, following construction.

Confirmation was obtained at nepotiations on these arrangements and that the DFMD will be comoratized bv December 31.2006. as a subsidiary under SWDC to manage and oversee operation and maintenance of all wastewater svstems in Suzhou's central urban districts.

Confirmation was also obtained at negotiations on satisfactory arranaementsfor imtdementation suaDort for wastewater treatment comoanies.

D. Project Rationale 1. Project alternatives considered and reasons for rejection: The original project design focused on improving water quality in Lake Tai. However, this narrow focus on the lake did not adequately recognize the impact of the highly polluted canal and river network throughout the Basin on the quality of life and economic prospects ofthe residents of the area. If economic growth in the region is to be sustained, and quality of life improved for all residents, improved wastewater planning and management including additional investment and increased institutional capacity in the wastewater sector is urgently needed in the rapidly urbanizing and industrializing districts surrounding the major cities, including in areas that do not drain directly into Lake Tai. Therefore, the project design has been adjusted to focus on improving the local environment in the core urban centers and the rapidly urbanizing districts in the large conurbations ofWuxi and Suzhou.

This project focus reflects much ofthe work already being led by the Government, and the local authorities in the Tai Basin. As indicated above, programs to improve urban environmental conditions, including wastewater management in particular, are underway in many parts of the Basin, including in Shanghai Municipality, Zhejiang Province and in Changzhou, WwCi and Suzhou Municipalities within Jiangsu Province. The Bank project will complement and build on these existing efforts.

Moreover, the original project design hinged on implementation ofcontrol structures on the western bank of the WangYu River to protect water transfers from pollution in the river catchment. In the absence of expanded infrastructure and environmental monitoring to address pollution in the river catchment at source, local governments have become concerned over possible negative environmental impacts of the control structures on nearby communities. The investments under the project, particularly in Xishan District, seek to address this issue by reducing untreated wastewater discharges that presently flow into the WangYu River and will thereby also have a positive impact on Lake Tai water quality.

- 11 - 2. Major related projects financed by the Bank andlor other development agencies (completed, ongoing and planned). Latest Si stvision Sector Issue Project (PW 1tings (Bank-flnancec irojects only) Implementatlon Development Progress (IP) ObJectlve(DO) Bank-financed Urban Environment including Yunnan Environment Project , S S wastewater management and Lake basin pollution control including industrial pollution and non-point source pollution control Urban Environment including Guangxi Urban Environment S S wastewater and water resources Project management Urban Environment including Second Shanghai Sewerage S S wastewater Project Urban Environment including Shanghai Environment Project S HS wastewater Urban Environment including Sichuan Urban Environment S S wastewater Project Urban Environment including Chongqing Urban Environment S S wastewater Project Urban Environment including Hebei Urban Environment S S wastewater Project Urban Environment including Liaoning Environment Project S S wastewater Toxichazardous waste Industrial Southern Jiangsu pollution and domestic wastewater Environmental Protection Project Toxichazardous wastes U U Industrial Pollution Control U U Domestic wastewater HS HS Other development agencies PlDO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), t (Highly Unsati ICtOry)

3. Lessons learned and reflected in the project design: China has the largest portfolio in the Bank and its quality is amongst the best performing. A recent OED assessment, China: Review of the Bank’s assistance to the Urban Water Supply and Wastewater Sector, Report No, 24979 rated the outcome of Bank’s assistance as having been moderately satisfactory, its sustainability as likely, but its institutional impact as modest. me ICR for the Southern Jiangsu Environment Protection Project noted considerable difficulties with the sustainability of industrial pollution control and toxic and hazardous waste components, which represented over 80 percent of investments under the project and were rated unsatisfactory. By contrast, the report

-12- rated the wastewater component as highly satisfactory having been well designed and implemented below appraised cost and fully meeting the water quality objectives as set out in each city’s long-term water quality master plan. However, the project failed in two ways, a) to achieve full cost recovery for wastewater investments; and b) to convert the wastewater companies into fully autonomous entities in accordance with the 1994 company law, thus perpetuating their dependence on the municipal public utility bureaus and finance bureaus. Key lessons learned from past projects, which will have been reflected in project design include the need for: (a) strong client ownership; (b) improved coordination at the provincial level; (b) greater focus on utility reform to implement the Government’s policies toward development of autonomous, commercially oriented utilities, with tariffs adequate to ensure financial sustainability and emure satisfactory operation and maintenance of assets created; and (d) encouraging private sector participation, where there is political support for it.

The project design has also been shaped by recent experience that has highlighted a tendency for local investment plans that make inadequate provision for collection networks resulting in underutilization ofthe treatment plants that are often over-designed. Investments in networks have been increased to fully capture wastewater flows to support existing, as well as proposed new wastewater treatment plants, which have been reviewed and scaled down, where appropriate, to reflect more realistic wastewater flows. The turnkey coneacts for wastewater treatment plants in Suzhou should ensure that plants operate at peak efficiency and lowest operating cost when handed over following commissioning and initial operation.

The institutional design of the project for asset management looks to outsourcing operation and maintenance activities to experienced operators rather than relying solely on strengthening in-house capacity, which has had mixed results elsewhere. Reforms in funding arrangements address major impediments to sustainability and expansion ofwastewater service in districts.

4. Indications of borrower commitment and ownership: Project components are based on the priorities outlined in the cities’ urban and environmental master plans and the extensive ongoing programs of locally funded wastewater investments, including for rehabilitation of city sewer networks in both Wuxi and Suzhou. The National Development and Reform Commission (NDRC) identified the project as a key priority for Bank support. Assurances were obtained at negotiations that an action Dlan would be FAmished to the Bank bv June 30, 2005 for imnlementation of the locally-financed Wuxi Sewer Network Rehabilitation Promam.

Project implementation arrangements are being finalized provincial and municipal project management ofices are in place, and charters for all executing wastewater companies have been revised to meet the requirements for project implementation. Municipalities have retained procurement agents and have set an implementation schedule that calls for advance contracting and retroactive financing for some components. Aspects ofthe Huishan and Dongting wastewater components in Wuxi and the Canal Rehabilitation program in Suzhou, for which retroactive financing has been requested, are already underway. Most importantly, municipal governments have committed to reform funding arrangements to ensure financial autonomy and viability ofwastewater investments, particularly in rapidly developing districts.

5. Value added of Bank support in this project: The value of Bank assistance in terms of effective investment outcomes is already known to the client, who successfully implemented the wastewater investments under the Southem Jiangsu Environmental Protection Project. To build on this satisfactory experience, Bank involvement during project preparation has highlighted practical opportunities to modernize management arrangements for district wastewater utilities and improve the cost effectiveness and financial sustainability of wastewater systems and to help strengthen

- 13- institutional arrangements for sector coordination. The project, therefore, seeks to address a priority in the Government’s strategy for wastewater sector management by helping to shape viable approaches for smaller districtltownship wastewater systems that generally have relatively higher unit costs and more difficulty in mobilizing experienced operating staff to ensure efficient and economical operation and maintenance of networks and treatment facilities. In particular, more cost effective and viable configurations requiring fewer separate wastewater treatment plants and institutions have been developed for district wastewater systems. In addition, the proposed expansion of sewer networks, both for existing, as well as for proposed new treatment facilities under the project, will minimize the risk ofunderutilization of these assets in the project area, which is a growing problem for many existing wastewater systems in China. Use oftumkey contracts including detailed design, construction, equipment supply/installation, commissioning and initial operation for wastewater treatment plants in Suzhou, should ensure these plants operate at peak performance and at lowest operating cost when handed over to the responsible wastewater company, thereby reducing wastewater feeltariff increases needed. Outsourcing of implementation management and operation and maintenance functions to experienced operators should enable the new wastewater companies being established to avoid lengthy and costly implementation delays due to inexperience, and to set clear performance accountabilities for the efficient and reliable operation and maintenance of wastewater systems. Dialogue through project preparation has also encouraged municipalities to initiate reform of funding arrangements noted above to make the ongoing municipal institutional reforms fully effective.

Water quality modeling during project preparation has helped target project investments in wastewater systems in the area of some ofthe most heavily polluted rivers. Expanded testing ofwastewater treatment plant sludge for hazardous material, is a significant enhancement of environmental safeguards in light of the proportion of industrial wastewater being treated. In addition, the locally-financed wastewater masterplans in Wuxi and Suzhou will provide a basis to strengthen coordination between jurisdictions in strategy and action planning for improved water quality management in these rapidly developing areas.

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

The project will improve the quality ofthe urban environment through improved wastewater and water quality management in the key municipalities of Wuxi and Suzhou and more widely in the Tai Basin which will facilitate sustainable urban economic growth and social development. The locally-financed Wuli Lake rehabilitation program will help reduce the frequency and severity of flooding in Wuxi City and will open up a substantial new area for development with significant amenity value for commercial, residential and recreational use. Similarly, the canal rehabilitation program in Suzhou City will reduce the fiequency and severity offlooding and will further enhance the quality of life for residents and the tourism potential of this historic city. Expansion ofwastewater treatment capacity in Suzhou City will benefit most ofthe city’s population. Expansion of wastewater service in rapidly industrializing districts in Wuxi and Suzhou will help to reduce pollution of the region’s critical water resources. By expanding sewer networks, the project will help utilize wastewater treatment capacity, including at existing plants thereby increasing the productivity ofwastewater investments. It will also help reduce health risks and enhance livelihood prospects and productivity in these rapidly growing areas and for downstream communities. The project support8 Critical institutional and frnancial reforms that will provide a more viable and

- 14- sustainable basis for wastewater investments, particularly in those small systems serving the rapidly developing outlying districts. The locally-financed wastewater masterplanning to be undertaken by Wuxi and Suzhou Municipalities would, for the fmt time, incorporate rapidly-growing peri-urban districts in action plans that address the growing pollution of water resources in a strategic area in the basin.

Economic Analyses. Many ofthe project benefits, particularly those relating to environmental and public health improvements, could not be reliably quantified. For this reason, the choice ofpriority wastewater investments under the project has been guided by cost effectiveness analysis. Based on this approach, alternative project designs were identified and evaluated in order to determine the least cost solutions.

In Huishan, the option of channelling wastewater to an existing wastewater treatment plant in the Wuxi City system was considered was rejected due to limited expansion capacity. In Xishan, separate wastewater systems were initially proposed for each of the seven townships and an industrial development area. However, a comparison of investment and long-run operating costs indicated that one or two wastewater treatment plants could serve these areas more efficiently and economically, resulting in lower operating and overhead costs. Combining the Xishan systems and the Dongting system would further reduce costs. For the Wuzhong system, the option of conveying wastewater for treatment in nearby Suzhou City was considered, but rejected in light of the characteristics of the mainly industrial area being served and the desire to integrate future wastewater systems in the district under a single wastewater company. The sequential SBR was selected as the most economical treatment process for the relatively small mpsproposed in the three districts.

The overall, locally-financed Wuli Lake rehabilitation program includes dredging and water diversion, as well as control gates, embankment work and pilot ecological restoration. Two options were considered to divert waterto Wuli Lake and Wuxi City’s canals from either Gong Lake, where the WangYu River enters Lake Tai, or from Meiliang Lake, which is more polluted, but significantly less so than Wuli Lake. Water quality modeling simulations indicated that diverting water from Gong Lake could improve the water quality in Wuli Lake to a higher degree than from Meiliang Lake. However, the other option was favored by Jiangsu Province and the TBA as a way to also draw water in from Lake Tai, thereby also improving water guality in Meiliang Lake. Moreover, Wuli Lake is intended to serve only as a tourism water body and diverting water from Meiliang Lake can meet this requirement.

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

Financial projections over the 2004 - 2015 period have been prepared for the four project wastewater companies, SQCC, WAMC, HWTC, and XWTC for the merged Dongting and Menwastewater system. These projections are based on the requirement ofeach company to comply with the agreed upon furancial covenants regarding cost recovery, debt service coverage, as well as the need for intemally generated contributions toward project counterpart funding. The kev financial covenant reauires that each project comvanv generates annual overatino revenues that are sufficient to cover all oDeratinP emenses, including-- devreciation. anv loss on non-onerating activities. vlus the amount. if anv. bv which debt service exceeds devreciation. This ratio of operating revenues to costs is expressed as the cost recovery ratio, which, therefore, must be at least 1.O in each year. In addition. a debt service coverage ratio covenant will also be avvlied under which the comvanies ’ abilitv to incur additional debt will be conditional on them maintaining this ratio at not less than 1.3, To safeauard good Drosnects for financial viabilitv. agreement was reached that the Bank will be advised and Piven an ovnortunitv to comment on any additional borrowing bv wastewater companies.

-15- The main source of revenue for project wastewater companies is the existing municipal wastewater fees, which at RMB 1.15/m3 in Suzhou and RMEl 1.10/m3 in Wuxi, are amongst the highest in China. With conversion ofthis fee to a wastewater utility tariff, all revenues generated fiom the tariffs will be directly transferred to the project companies. This will give the companies their own source ofoperating revenue and provides the basis on which they can establish themselves as financially viable and sustainable enterprises consistent with their independent legal status under govmentpolicy. However, the companies will also need to carefully manage their operations, as well as their capital investment programs, so as to achieve the greatest possible efficiency in the use of these revenues. This is particularly important for the three small district wastewater companies because opportunities to achieve low cost operations through economies of scale are limited. This challenge has been addressed through a number ofmeasures incorporated into the project designs. Project investments are based on the least cost solutions over the opqating life of each wastewater component. Additionally, the operating scope of each company has been maximized to the extent presently achievable in order to minimize management and other overhead costs. Operating efficiencies will be further enhanced through the outsourcing of operations and maintenance to experienced wastewater operators.

If moderate tariff increases are implemented every three to four years in Suzhou, tariff revenues should be sufficient to enable SQCC to filly recover the cost of its operations, as well as to make contributions toward capital investments, including a portion ofproject counterpart funding requirements. The tariff would need to be increased by a modest 15 percent in 2006, to RMB 1.32/m3, and then by a further 18 percent to RMB 1.561m3 by 2009, when the project facilities are fully operational and principal repayment on the Bank loan begins. After 2009, the need for further increases is anticipated to be limited to that required to cover general inflationary increases in operating costs. Over the 2004 - 2007 period, the company will generate an operating surplus that should be sufficient to fund almost 40 percent ofproject counterpart funding. The cost recovery ratio is projected to exceed the covenant minimum of 1.O in all years and average 1.3 over the 2005 - 2015 period. The debt service coverage ratio is also projected to be satisfactory, remaining well above the 1.3 minimum in all years. prior to the commencement ofoperations of the project-funded facilities in 2008, the wastewater company in Huishan would not have any operating assets while the companies in Xishan and Wuzhong would have only limited assets in operation. Therefore, a large share of the revenue generated from the wastewater tariffs over this period can be allocated to counterpart fimding. In Huishan, tariff revenues should be sufficient to cover 45 percent of counterpart funding requirements. In Xishan, the company will be operating the existing Dongting WWTP, but this will require only about 50 percent ofrevenue over the 2004 - 2008 period, with the remaining 50 percent allocated to cover almost 20 percent of counterpart funding requirements. Wuzhong is projected to be able to generate just under 40 percent ofrequired counterpart funds from the tariff. Revenue generation in Wuzhong is based on projected increases in Suzhou’s municipal tariff, referred to above. For Huishan and Xishan, the projections are based on anticipated increases in the municipal tariff applied throughout Wuxi. Tariff increases of 15 percent in 2006 and 20 percent in 2009 are envisaged.

With the new wastewater systems beginning operation in 2008 - 2009, revenues would then be used primarily to cover the operating costs and debt service obligations ofthe four project companies. Given that wastewater tariffsin both Suzhou and Wuxi are set on a municipality-wide basis, and therefore largely reflect lower unit cost structures in the central urban areas, the projections indicate that these tariffs will be insufficient to fully recover the costs ofthe district companies beginning in 2008. In order to cover this anticipated shortfall, each district company will apply a surcharge on industrial waste generators. The existing municipal fee is set at the same level for all customers, but since the cost oftreating industrial

-16- wastewater is generally higher than that for other groups, the surcharge will reallocate charges so that they better reflect the actual cost of providing wastewater services to the different customer groups. In 2008, the projected requirement for the surcharge is RMB 0.501m3 in Huishan, RMB 0.80/m3 in Xishan, and RMB 0.65/m3 in Wuzhong. On this basis, all three companies should comply with the cost recovery ratio in each year over the forecast period. In Huishan, the cost recovery ratio is projected to average 1.3 over the first eight years of system operations, 2008 - 2015. In Xishan, where the project facilities are expected to enter operation in 2009, the cost recovery ratio over the 2009 - 2015 averages 1.2. For Wuzhong, the average cost recovery ratio is 1.2 over the 2008 - 2015 period. The debt service coverage ratio is projected to also meet the covenant requirement in most years, but in the case ofHuishan and Xishan, may fall slightly below 1.3 in one or two years just after the project facilities enter operation. However, the companies should have sufficient cash reserves from previous years that will ensure that they can meet their debt service obligations.

Fiscal Impact: An analysis of the availability of counterpart funds was undertaken by reviewing revenues and expenditures in the project cities and districts. Although revenues from the wastewater tariff will be used to meet a portion of counterpart funding for the project wastewater components, contributions are also required from the capital budgets of the municipal and district governments. For the non-wastewater components, all counterpart funding is provided from the capital budgets ofthe municipal governments in Suzhou and Wuxi. Based on conservative assumptions regarding future revenue growth, the analysis indicates that the project components are considered to be affordable to the municipal and district governments. Requirements for project counterpart hdsfrom the two municipal governments and three districts as a proportion of total revenues vary between 0.2 percent on average in Suzhou (0.5 percent in the peak year), 0.2 percent in Wwi (0.5 percent in the peak year), 0.4 percent in Wuzhong (0.8 percent in the peak year), 0.5 percent in Huishan (1.1 percent in the peak year), and 1.9 percent in Xishan (3.7 percent in the peak year), When considering only revenues that can be allocated to the infrastructure investment, which is an approximation of financial capacity to contribute to the project, counterpart contributions as a proportion of the capital budget varies between 0.6 percent on average in Suzhou (1.5 percent in the peak year), 0.4 percent in Wuxi (1.2 percent in the peak year), 1S percent in Wuzhong (2.9 percent in the peak year), and 1.9 percent in Huishan (3.8 percent in the peak year), and 5.5 percent in Xishan (1 1.3 percent in the peak Year).

3. Technical:

The choice ofthe treatment process for the proposed wastewater treatment plants has taken into account the high proportion of incoming industrial wastewater (50 to 70 percent of total flow) and the potential fluctuations in this influent quality. For district wastewater treatment plants, the borrowers’ selection of SBR is the most appropriate and cost-effective choice. In the case ofthe larger Suzhou WWTPs, additional sampling data will determine the most appropriate system, and the borrower has agreed to proceed through a tumkey bid. Under this type of contract, bidders would be asked to make technical proposals through a two-stage approach, Le. by including the design as part oftheir services.

- 17- While treatment facilities have been designed to accommodate some fluctuations in the quality and quantity ofinfluent, this uncertainty is to be minimized through capacity building and institutional strengthening. National law requires industrial enterprises treat their effluent to a preliminary level such that the effluent quality meets prescribed standards (equivalent to domestic strength wastewater) for release into the public sewers. Under the project, wastewater utilities will take responsibility for protecting their own assets by directly monitoring the incoming effluent at its entry to the sewer network, and by policing the acceptability ofusers' discharges. The charters of the wastewater companies in this project include provisions that allow them to seek intervention and ultimately to refuse industrial sewage from non-conforming industries. Agreement was reached at negotiations on measures to be taken to ensure effective monitoring and enforcement arrangements and to record activities in ueriodic proiect promess reuorts.

4. Institutional:

4.1 Executing agencies: In Wuxi Municipality, the locally-financed Wuli Lake Rehabilitation component will be implemented by the Wwi Water Conservancy Bureau, which has considerable experience implementing the type of works involved.

Wastewater components in Huishan will be implemented by the HWTC, which was established in March 2003 and will require technical assistance for institutional strengthening. The Dongting wastewater system and the Anzhen wastewater system will be implemented by the XWTC, established in January 2004, which will require technical assistance for institutional strengthening for project implementation and to effectively merge wastewater operations and maintenance throughout Xishan District.

In Suzhou, the SQCC, an autonomous agency under the Water AfTairs Bureau will be responsible for the implementation of all components in Suzhou City - canal rehabilitation component including the control gates on the Shangtang and Xujiang Rivers, canal dredging and the expansion ofthe Fuxin and Loujiang WWTPs, following completion ofthe first phase construction ofthese plants that is also under its implementation. SQCC has good experience in carrying out similar programs despite its limited number of staff and usually delegates technical responsibilities to qualified autonomous units through adequate biddinghelection process. The Wuzhong wastewater system will be the responsibility of the WAMC established in October 2003, a new wastewater company established under the WETDZ. Arrangements are being made to contract implementation management ofthe Wuzhong wastewater system to SQCC and, following construction, operation and maintenance ofnetworks and facilities will be outsourced to an experienced operator. 4.2 Project management: The overall project will be coordinated by the Provincial Finance Bureau, through the TBUEPO. Additional staffing needs have been identified to ensure effective project management by TBUEPO, and assurances were obtained at negotiations on a satisfactow timetable for recruitment of additional staff for the TBUEPO with exaerience satisfactow to the Bank

New PMOs have been established to coordinate implementation ofcomponents in Wuxi and Suzhou Municipalities, respectively. These PMOs are under the respective Municipal Finance Bureaus to ensure close coordination with TBUEPO at the provincial level. Close coordination was also established by these municipal PMOs and their respective implementing agencies during project preparation. However, additional staffkg needs in municipal PMOs for procurement management and project financial management, in particular, have been identified. Assurances were received dun" negotiations on a

- 18- satisfactom timetable-for the recruitment of experienced staft

TBUEPO will retain international and local consultants to assist with design review and engineering supervision, as well as outsourcing of operation and maintenance of wastewater facilities and networks, institutional strengthening for utilities management and overall quality assurance. TBUEP will also organize foreign study tours for PMO staff in project management.

Implementing agencies will retak (a) local design institutes to assist with remaining design work; @) local supervision companies to assist in construction supervision; and (c) local tender companies for assistance with international competitive bidding (ICB) procurement. Independent agencies will also be retained for independent monitoring of resettlement action plans and environmental management plans and mitigation activities. 4.3 Procurement issues: The responsibilities of procurement management are defined in the final Procurement Manual, which has been prepared by TBUEPO. A procurement assessment was undertaken by the Bank to determine the capabilities of all the implementation units and PMOSfor this project. Further details are given in &mex 6. The risk of problems was assessed as average. Most implementation units have designated specific departments with adequate staff to be responsible for procurement. Also, additional training programs will be provided by TBUEPO to ensure that all responsible staff are fully conversant with the Bank’s guidelines and procedures. Except for the two turnkey contracts for wastewater treatment plants in Suzhou, all contracts will be procured under national competitive bidding (NCB) procedures because of the nature and relatively small size of these contracts; very few are likely to be over $7 million. Retroactive financing estimated at $5 million will be provided to finance some civil works in the sewer networks at Huishan and Dongting as well as advisory services for design ofturnkey contracts for FWrin and Loujiang WWTPs in Suzhou. . 4.4 Financial management issues: The assessment, based on guidelines issued by the Financial Management Sector Board on June 30,2001, has concluded that the project will meet the Bank financial management requirements, as stipulated in BP/OP 10.02, subject to addressing the action plan in Annex 6@).

Funding sources for the project include Bank loan and counterpart funds. The Bank loan proceeds will flow from the Bank into the project Special Account to be managed by the Jiangsu Provincial Finance Bureau, to project implementing agencies (or project companies), and finally to contractors or suppliers. The Bank loan will be signed between the Bank and the People’s Republic of China through its Ministry of Finance (MOF), and Subsidiary Loan Agreements will be signed between MOF and JPFB and then between JPFB and Suzhou and Wuxi govemments through Suzhou and Wuxi Finance Bureaus, respectively, and finally between Suzhou and Wuxi Finance Bureaus and implementing agencies. In accordance with the agreement between the Bank and MOF, disbursements will be based on the traditional reimbursement arrangements and will not use projeet management report (PMR)-based disbursements. Counterpart funds will be provided by appropriation from provincial and municipal govemments, including from wastewater fees and tariff revenues, and some local commercial debt.

No outstanding audits or audit issues exist with any of the implementing agencies involved in the proposed project,

The company charters for all wastewater enterprises have been revised to align the company’s mandate with functions and responsibilities under the project and in line with Chinese utility enterprise accounting

-19- regulations, staffing schedules and job descriptions and experience/qualifications requirements for Project Accountants and training requirements.

Training needs have been identified for staff in implementing agencies in the use ofthe Financial Management Manual, that has been prepared by Jiangsu Provincial Finance Bureau for the project. Moreover, implementation management arrangements in XWTC and WAMC, which are newly established, are being fmedup and staffing will not be required until late 2004. Agreement was reached at negotiations that imvlementinp apencies will comvlete staffing appointments and training, as well as anv remaining actions for organizational arrangements, accountina and financial manaaement and reporting svstems. as a condition of Bank disbursement on respective components.

5. Environmental: Environmental Category: A (Full Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. Hohai University carried out the consolidated Environmental Assessment (EA) of the proposed TBUEP in accordance with China's national policies and Bank procedures, with support from an independent international consulting environmental specialist. The terms of references and various draft versions were reviewed and discussed in detail during project preparation. The draft English version ofEA documents were submitted to the Bank in late September 2003 and reviewed by the Bank during the appraisal mission and revised accordingly. The final EA report, EA Summary and Environmental Management Plan (Em) were submitted to the Bank in December 2003 and following additional clarification and analysis in February 2004, were found to be satisfactory. The Final EA documentation, as supplemented, was sent to the Bank's Infoshop in Washington and in Beijing in March 2004. During the EA preparation, local people were consulted at least twice, and their opinions have been reflected in the project design and environmental mitigation measures, as appropriate.

Project investments will have positive environmental impacts in tenns of improving water quality in the Tai Basin. Domestic and industrial wastewaters will be collected and treated at six WWTPs to remove pollutants. For year 2010, the expected reduction ofpollutant discharges to surface waters from the six WWTPs are 122 tonnes/day (tpd) of chemical oxygen demand (COD)Cr, 62 tpd of biological oxygen demand (BOD)S/day, 6 tpd of NH3-N, 80 tpd of suspended solids (SS), and 0.6 tpd of TP. These reductions will improve the quality of the receiving surface waters in Suzhou and Wuxi and downstream areas. The canal network rehabilitation investments in Suzhou under this project - including dredging and construction ofsluice gates and shiplocks - will improve the water quality and reduce the risk of flooding in this city. The locally-financed Wuli Lake restoration activities, also under this project, will improve the water quality and aquatic life in the Lake, and create a public greenbelt for tourism and recreation.

Minor adverse impacts during construction and operation ofparticular investments are expected, but will be mitigated. The adverse impacts will be mostly in the form ofnoise, odor (stink gas), particulate matter (PM) emissions, sediment and sludge discharges, and traffic congestion. Noise emissions from WWTP have been assessed at the boundary line of WWTPs, and found to be in excess of standards only in the case of the Fuxin WWTP (both day and night times), Huishan WWTP (only at night time), and Loujiang WPs(only at night time). However, adverse impacts on receptors -which are 200 m to 500 m away from these WWTPs - are not expected. Regarding transportation ofsediments dredged fiom the Suzhou Canals to the disposal site, alternatives were evaluated considering such factors as noise and traffic impacts. Mitigatory measures for noise emissions will include no construction at night, use ofequipment with low noise, use of vehicles with noise control, and setting up ofconstruction barriers. In addition, cargo ships will not be allowed at any time and pleasure boats will not be allowed at nights in the

- 20 - Shangtang and Xujiang networks in Suzhou; ship noise will be limited to 55 &A, silencers will be installed on ships for noise suppression, siren duration and frequencies will be minimized; and use of sirens will not be permitted in residential areas.

Odor emissions fiom the sedimentation and SBR tanks ofWWTPs will be minimized by proper operation through adjustment of the air flow rate ofthe blower to bring wastewater to aerobic state, and through timely sludge dewatering, handling of sludge cakes in dewatering rooms, use of sealed trucks for transporting the sludge to the disposal site, sprinkling temporary sludge storage areas with bleach, and planting trees around the aeration tanks and WWTP. To mitigate PM emissions, vehicles will be covered, their speed will be limited to 40 km/h, and their wheels will be cleaned of mud.

Sediments from Suzhou Canals have been tested for hazardous materials and, in almost all cases, found to be within standards prescribed by applicable Chinese regulations, with most indicators low or undetectable. In accordance with the regulations, these will be disposed at a site at Sanjiaozui that is zoned as green area in Suzhou's masterplan. Further testing for hazardous materials is to be undertaken of sediments in the Xiaomiduqiao River section prior to dredging to determine if other disposal arrangements are needed, for example at purpose built cells at the municipal landfill. Sludge from WWTPs will be tested for hazardous characteristics under applicable Chinese regulations/st. Any sludge found to be hazardous will be disposed at a hazardous waste landiill. If the sludge is found to be non-hazardous, it will be disposed at a separate cell that is designed and operated in compliance with Chinese Government regulations, in a sanitary landfdl. Prior to receiving the sludge, the hazardous andor sanitary landfills will be certified as designed and operated in compliance with applicable govemment regulations relating to disposal of wastewater treatment plant sludge. Transportation ofthe WWTP sludge will be conducted by leak proof trucks. Confirmation of these awanaements was received at neaotiations.

Public consultations have revealed considerable support for this project. However, concerns were also expressed about the potential unpleasant odors from WWTPs, and greater noise and dust levels, as well as traffic. Some suggested shorter construction periods to reduce adverse impacts during the construction period. The shiplock at the Shangtang River was re-sited further away from the historic Hangshang Temple. Agricultural use ofthe WWTP sludge was viewed not feasible by affected people for the Wuzhong and Dongthg WWTPs. These concerns have been incorporated into the project design and in the EMP.

TWOsuggestions are made at the conclusion ofthe EA Report. The first one regarding implementation of the locally-financed Wuli Lake ecological restoration sub-component as a pilot activity (instead of an activity for full-scale implementation) is reflected in the project design. The second relates to the implementation of industrial pollution prevention measures (in particular, water recycle and reuse at industrial facilities) as a means to reduce costs associated with wastewater treatment and sludge management. Aweement was reached at negotiations that industries discharoing into vroiect-financed ~Pswill be included in the Jianasu CP vropram and that ueriodic vroiect vropress reuorts will reuort on uollution prevention audits and implementation of recommended measures bv firms discharping into vroiect-financed wastewater svstems. Confirmation was also received at negotiations that periodic vroiect vrogress rel;lorts will reuort on imvlementation of all activities reauired under the XP.

5.2 What are the main features of the EMP and are they adequate? For each sub-component, the Environmental Management and Monitoring Plan identifies the media to be monitored, the location of the monitoring site, the parameters to be'monitored, and the frequency of

-21 - monitoring. A training program for management and technical personnel of WWTPs, as well as for the Wuli Lake restoration and Suzhou sewer network rehabilitation has been identified. Bank’s comments on the EMP were provided on October 12,2003, to strengthen deficiencies with respect to the Bank requirements (OP 4.01). The EMP was amended accordingly and finalized in February 2004.

5.3 For Category A and B projects, timeline and status ofEA: Date ofreceipt of final draft:

Bank received the fvst drafi of EA in English in late September 2003 during the preappraisal mission. Bank’s comments were provided on October 12,2003. The EA was finalized with all clarifications and analysis in February 2004.

5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) drafl EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? Consultations with the potentially affected people were conducted by the EA team in two stages. First stage public consultations were held prior and during preparation of the EA Report (period between October 2002 and August 2003). At this stage, the EA team held meetings with the potentially affected people to discuss the EA TOR, including information about the project components and activities involved, potential environmental impacts, mitigatory measures, and the implementation schedule. Informal discussions and on-site visits were held, and questionnaires were distributed to understand the public attitudes and needs about the project’s environmental aspects. The interviewees were from different sexes, age groups, culture levels, and family structures.

Second stage public consultations were conducted in July 2003 by the EA team after completion of the draft EA Report to disseminate the conclusions of the EA Report and disclose the mitigatory measures to the potentially affected people. This provided an opportunity to address the concerns that had been raised by the affected people regarding the project. Consultative meetings were held regarding the Anzhen WWTP (in Nianyu Village), Dongting WWTP (in Wangsongbang), Wuzhong WWTP (Yinxi Village), and Wuli Lake restoration (in DahTown, Dongjiang Town, Jingcheng and Xuelang Towns). In addition, on-the-spot interviews were held and questionnaires were used to receive feedback. In August 2003, the Project was publicized by the EA team in Hohai University’s website (httu://www.hhu.edu.cn), and a 24-hour telephone hotline was opened. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results ofthe EMP? As part of the EMP, monitoring programs have been drafted for each project componenthub-component. Monitoring arrangements and reporting procedures have been strengthened in the Final EA report, as supplemented, in February 2004. The indicators regarding “improved urban water quality environment” specified in hex1 of the project appraisal document (PAD)reflect objectives ofthe EMP. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project’s social development outcomes.

The key adverse social impacts ofthe project are largely related to land acquisition and demolition of structures for different components of the project. In accordance with local laws, regulations and the World Bank OP 4.12 on Involuntary Resettlement, two Resettlement Action Plans (RAPS)have been

- 22 - prepared for the various components, includingwastewater treatment plants, sewerage networks, canal dredging, flood control facilities, sluice gates and embankment ofWuli lake in Suzhou and Wuxi . Municipalities, respectively. The two RAPs are each based on a detailed census of the affected people, inventory of affected assets, socioeconomic surveys and extensive consultations with the project affected people.

The various components of the project will require a total of904.7 mu of land, demolition of 53,967 m2 of houses, and relocation of 16 enterprises. These would affect 536 people due to land acquisition and 774 people in 176 households due to house demolition. Cash compensation or replacement housing will be offered to those who will lose their residence. Enterprises will be offered an alternative site and compensated for property loss. For persons whose employment will be affected temporarily, cash compensation will be paid for their income losses. The RAPs detail the census, inventory, project resettlement policy, compensation rates and budget, compensation and rehabilitation programs, institutional and monitoring arrangements.

A retroactive review was undertaken for related resettlement activities which have already been completed. The retroactive review provided detailed information ofthe number of affected people and the status of livelihood rehabilitation.

A Resettlement Policy Framework has been prepared in accordance with local laws, regulations and World Bank OP 4.12 on Involuntary Resettlement for the linked sewer networks rehabilitation in Suzhou. Details are available in Annex 1 l-B.

No indigenous ethnic minority communities have been identifiedliving in the project areas,

6.2 Participatory Approach: How are key stakeholders participating in the project? The project components were prepared in a participatory manner. The project entity, with its team of international and national consultants, have organized various consultative meetings with representatives of the provincial and municipal governments to apprise them of the environmental and development issues. These have facilitated participatory consultations, garnering stakeholder support for the project concept, and educating these stakeholders on their roles and responsibilities in project execution.

Local consultants carried out social surveys of potential beneficiaries and users ofproject services. The participatory approach for the resettlement aspects ofthe project has been dealt with in the RAP, following Chinese and Bank procedures and guidelines closely.

Consultations will continue with communities in the areas directly affected by project works. All affected households and communities in the project areas have been identified through socio-economic and inventory surveys. Project information, including resettlement policies, has been provided to the affected populations through various channels. They have been extensively consulted and have participated in the preparation of the resettlement and rehabilitation program.

6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? Local government officials and community organizations in the areas affected have been consulted and have participated in the resettlement program preparation. Households directly impacted by works have been surveyed Neighborhood meetings have been organized to solicit their views and concerns, as well as

-23- kalizing the resettlement program.

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

6.5 How will the project monitor performance in terms of social development outcomes? Internal and external monitoring of resettlement implementation will be carried out periodically as set forth in the RAPs.

7. Safeguard Policies: 7.1 Are-any of the following safeguard policies triggered by the project? Policy Triggered I

I Proiects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* 0 Yes 0 No I

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. An EA, EMP and RAPs have been prepared by the TBUEPO in conjunction with Wuxi and Suzhou Municipalities. Final EA, EMP and RAPShave been reviewed to ensure that they fully reflect the Bank’s comments and comply with Bank policies and guidelines.

F. Sustainability and Risks 1. Sustainability: The project would contribute to the sustainability of continued strong economic growth by improving wastewater management and environmental conditions in areas ofWuxi and Suzhou that are experiencing rapid urban and industrial growth; and by assisting ongoing efforts to stem continued deterioration of critical water resources in the Tai Basin. The project wouId strengthen the sustainability ofwastewater services through improvements in the management and financing of responsible wastewater utility enterprises.

- 24 - 2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Some project risks relating to institutional arrangements for strengtheningwastewater management are generic, but are more pronounced at the district level, where sector management experience is less mature and key reforms are being implemented in association with the project. Sector development through (locally-financed) wastewater masterplans is important to achieving the project's longer-term objectives. However, achieving the level ofinter-jurisdictional coordination and consem required for this will be challenging. Even so, overall project risk is assessed as modest because of the strong commitment by the leadership in Suzhou and Wuxi Municipalities and participating districts and because overall project coordination has been placed under the Finance Bureau to avoid the unsatisfactory experienced under the Southern Jiangsu Environmental Protection Project.

Risk Rlsk Rating Risk Mitigation Measure 'From Outputs to Objective Failure to construction collector sewers N Project will finance full wastewater systems Low commitment to Inter-jurisdictional S Inclusion of locally-financed wastewater master coordination in wastewater planning and plans that would include rapidly-growing management districts as well as core city areas. Viability and sustainability of wastewater M Assessment during preparation of most cost enterprises effective engineering configurations and institutional approaches, reform of funding arrangements during implementation and Limits on debt financing, outsourcing O&M functions and capacity building under project. Little improvement in circulation and M Locally financed activities including water quality in Wuli Lake and Wuxi City rehabilitation of sewers in Wuxi City as well as canals non-Bank financed construction of gates and embankment work, etc., to reduce pollution rive] water discharges to Lake, and ongoing implementation oflocally-financed water transfer scheme from Meiliang Lake. From Components to Outputs Satisfactory engineering designs M Design review TA during implementation.

Linked resettlement on local1y-funded M RPF for locally funded works consistent with Suzhou sewer network upgrading program Bank guidelines Overall Rlsk Rating M Risk Rating - H (High Risk), S (Substantial Ris , M (Modest Risk), I :Negligibleor Low Risk)

3. Possible Controversial Aspects: NIA

- 25 - G. Main Loan Conditions 1. Effectiveness Condition Subsidiary Loan Agreements that are satisfactory to the Bank to be signed between the SQCC, HWTC and WAMC with the respective municipaYdistrict govemments.

2. Other [classify according to covenant types used in the Legal Agreements.] Disbursement Conditions:

Staffing appointments and training for WAMC under the WETDZ and in XWTC, the new company merging the Xishan Economic and Technical Zone Company and the Xishan Wastewater treatment Company Limited, that are satisfactory to the Bank, unless completed prior to Loan signing.

Action Plan

Technical

Jiangsu to appoint qualified consultants for construction management by December 3 1, 2004.

Wuxi Municipality to submit to the Bank by June 30,2005 a time-bound action plan for implementation of the Wuli Lake Restoration Component.

Wuxi Municipality to submit to the Bank by June 30,2005 a time-bound action plan for rehabilitation of the sewer network in Wuxi City.

Jiangsu to fumish to the Bank by March 31,2005 a time-bound action plan for updating/preparation of wastewater masterplans in Wuxi and Suzhou.

Financial

Wuxi Finance Bureau to submit an action plan to the Bank by June 30,2005 for transferring municipal wastewater revenues from the municipal wastewater fee to HWTC and XWTC.

By December 3 1,2006, Wuxi Municipality and Suzhou Municipality, respectively, to authorize project wastewater companies to levy and collect utility company wastewater tariffs to replace existing municipal wastewater fees within their respective service areas. Starting with fiscal year 2005, each project wastewater company to generate operating revenues sufficient to cover O&M costs, the excess of debt service over depreciation and any excess ofnon-operating costs over non-operating revenues.

Starting in Fiscal Year 2005, project wastewater companies will be required to:

0 generate annual operating revenues that are sufficient to cover all operating expenses, including depreciation, any loss on non-operating activities, plus the amount, if any, by which debt service exceeds depreciation; and

0 maintain a debt service coverage ratio under which the excess of operating revenues over costs is not less than 1.3 times the cost of debt service; and the Bank will be advised and given an opportunity to comment on any additional borrowing by wastewater companies.

-26- Starting September 2004, all participating wastewater enterprises will prepare financial projections annually for submission to the Bank prior to September 30 each year, to confirm operating revenues projected for the following fiscal year are sufficient to cover projected O&M, depreciation and the excess of debt service over depreciation and implement such changes to achieve this outcome.

Jiangsu to furnish Audit Reports to the Bank on project accounts and on project wastewater enterprises within six months following the close of the fiscal year to which they relate.

Institutional

Suzhou Municipality to corporathe the DFMD by January 2006, as a subsidiary under SWIDC, to manage and oversee O&M of all wastewater systems in Suzhou's central urban districts.

Jiangsu to furnish to the Bank by December 3 1,2005 a time-bound action plan for merger in ownership, management and operation of wastewater operations throughout Xishan District, Wuxi Municipality by December 3 1,2006.

Project Management

Jiangsu to maintain a PLG, chaired by the Vice Governor or Secretary General of Jiangsu Provincial Government and consis!hg of line departments such as Provincial Development and Reform Commission, Provincial Construction Bureau, Provincial Environment Protection Bureau, Provincial Finance Bureau, provincial Water Resources Bureau, and Provincial Price Bureau.

Jiangsu to maintain a PMO under the Provincial Finance Bureau with sufficient authority, staffing, facilities, and budget to cany out, coordinate, or supervise all project activities, including the procurement, financial management, resettlement, environmental impact mitigation, and progress reporting. Jiangsu to recruit experienced staff in procurement, project financial management, environmental and resettlement aspects under a timetable agreed with the Bank.

Wuxi Municipality and Suzhou Municipality to each maintain a Sub-Project Management Office under the respective Municipal Finance Bureau, and a Project Implementing Unit for each project component with sufficient staffing, facilities, and budget to carry out, coordinate, or supervise all activities for the component implementation, including the procurement, financial management, resettlement, environmental impact mitigation, and progress reporting.

TBUEPO will provide the Bank with implementation quarterly progress reports - in a format satisfactory to the Bank - within three weeks after the period under review, starting from June 30,2004 until project completion.

TBUEPO will submit to the Bank a Project ICR no later than six months after the closing of the loan account.

Resettlement and Environment Protection

Jiangsu shall cause the Project Municipalities and their Respective Project Companies to: (a) maintain policies and procedures adequate to enable them to monitor and evaluate, in accordance with guidelines acceptable to the Bank, the implementation ofthe EMP, the RAPSand Resettlement Policy Frameworks,

- 27 - and the achievement of the objectives of said Plans, including the engagement of experienced and qualified independent monitoring agencies acceptable to the Bank; (b) include the results of such monitoring and evaluation activities in annual reports by independent monitoring agencies, together with any revisions proposed to be introduced into such Plans in order to achieve their respective objectives; and (c) introduce such revisions into such Plans as shall have been agreed with. In particular, activities under the EMP to be recorded in periodic project progress reports submitted to the Bank, including testing ofWWTP sludge for hazardous materials, disposal arrangements, audits under Jiangsu Provincial Clean Production Program for industries discharging into project wastewater systems and the results ofrecommended measures.

Jiangsu to furnish the Bank by January 1 each year commencing in 2005 with an inventory of enterprises discharging to project-financed wastewater systems, indicating their participation in Jiangsu's CP Program, a summary ofthe results of the technical audit on inventoried enterprises, and the impact ofimplementation of the pollution prevention plan for them.

Wastewater companies to directly monitor incoming effluent from industries, and to prohibit industries from discharging effluent into project wastewater systems that is overstrength and not in compliance with govemment discharge standards, as necessary.

Jiangsu to furnish to the Bank a certification ofcompliance with national regulations for the construction and operation of disposal sites for sludge fiom project-financed wastewater systems.

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

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

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

Yukon Huang Team Leader Country ManagedDirector

- 28 - Annex 1: Project Design Summary CHINA TAI BASIN URBAN ENVIRONMENT PROJECT

Sector-related CAS Goal: Sector Indicators: Sector/ country reports: from Goal to Bank Mission) 3nvironmentally sustainable Growth of urban economies Statistical reports and htinued national lrban development. and livelihood opportunities occasional sector reviews. conomic growth and egional competitiveness inproved wastewater Water quality indicators National and local statistics ncreased coverage of nanagement in Tai Basin of water pollution. vastewater service and eform of wastewater utility interprises.

Jroject Development Outcome I impact ProJectreports: from Objective to Goal) 3bjective: Indicators: Facilitate sustainable urban :conomic growth through:

[ncreased collection and Reduction in proportion of Monitoring reports of Sewer connections made reatment of domestic and untreated wastewater in wastewater companies, ind industrial discharge industrial wastewater; urban and rapidly growing environmental protection ctandards enforced suburban project areas. bureaus (EPBs), etc.

Restored urban water Cleaner urban water Annual environmental Zlean up and restoration of :nvironmenC environment and improved reports and tourism irban canals and lakes, (an( livability in the two major statistics by municipalities water diversion through urban and tourism centers. and province. mgineering gates). [mproved sustainability of Sound enterprise capital Operating and financial Political will to reform wastewater service. structure with manageable reports of wastewater wastewater utility debt, experienced & cost companies. Reports by management and financing effective operations, external auditors and arrangements and to financial autonomy and municipal regulators. coordinate wastewater adequate cost recovery as planning. well as satisfactory level of Sound financing Plans that capacity utilization at limit debt to prudent levels. project financed WWTPs.

Enhanced capacity for Updatingpreparation of The delivery of wastewater Updated wastewater masta wastewater wastewater masterplans master plans. plans cover rapidly covering city and rapidly urbanizinghndustrializing growing areas in Wuxi and areas in Wuxi and Suzhou, Suzhou.

- 29 - Key Performance Indicators Critical Assumptions butput from each Output indicators: lroject reports: rom Outputs to Objective) :omponent: :eduction in proportion of i)Area covered, households Iperational reports by rwTps are built or ntreated wastewater in connected and wastewater vastewater companies and rpanded in municipal and rban and rapidly growing flows collected and treated nonitoring reports by istrict areas. Sewer uburban district areas. meeting the government !PBs. :tworks are built and objectives; and :sidencesl businesses ii)quality ofdischarge from "wed. WWTPs meeting standards I mproved urban water Improved ambient water hbient water quality [rban canals and lakes are nvironment. quality in main monitoring nonitoring data reported by leaned up and restored indicators; and ii)flood !PB and water authority, rough environmental and frequency from once every tatistic of city tourism ngineering measures and 50 years to once every 100 ncome published by dequate maintenance years in city canals. ourism bureau, and civil iereafler. ~ffairsauthority, data of looding property loss. hhanced institutional i)Time-bound

- 30 - {educed incidence and cost Reduced seventy and cost Semi-annual project Zompletion of gates on If flooding. 3f flooding damage in areas xogress reports and bank Nuli Lake and at Shangtang affected. 3upervision missions. ind Xujiang Rivers.

'roject Components I Inputs: (budget for each sroject reports: from Components to Sub-components: component) )utputs) ,&e Wuli Rehabilitation 835.0 million Semi-annual project rimely completion of xogress reports, Bank mgineering designs, Iupervision missions iatisfactory and timely tide-memoks, Project rocurement, quality mplementation completion :onstruction and .eport (ICR). nanagement, mplementation of ocally-financed pumping ;tation, gates, etc. by Wuxi Municipality. Vuxi Wastewater treatmenl 168.5 million 4s above rimely completion of 'lants and Networks ngineering designs, satisfactory and timely pcurement, quality :onstruction/management . ~uzhouWastewater $49.4million 4s above As above and rreatment Plantshetworks implementation of Suzhou City sewer network rehabilitation program. huhou Polluted Water ;1 9.7 million 4s above Timely completion of Zontrol Schemes (on engineering designs, Cujiang and Shangtang satisfactory and timely tivers) and procurement, quality juzhou Central Urban Area construction and :anal Networks management. tehabilitation Implementation of locally- financed canal widening anc other works by Suzhou Municipality. TA and Capacity Building. ;1.9million 4s above plus consultants' Effective experienced :valuation reports. consultants and timely completion of masterplans.

-31 - Annex 2: Detailed Project Description CHINA: TAI BASIN URBAN ENVIRONMENT PROJECT

By Component: Project Component 1 - Wuxl Sewerage and Sewage Treatment In Hulshan Dlstrlct of Wuxi Municipality - US$19.70 milllon

Huishan District was separated some two years ago from the original, larger Xishan district and occupies a total area of km2. It already has two small WWTPs which mostly serve industrial areas. Under this project, Huishan will construct: (a) a 25,000 m31d wastewater treatment plant; and (b) the associated network to convey sewage flows to the new plant. The network development would consist of about 58 lan of tnuik and secondary pipes and 3 lifting stations.

The WWTP would treat sewage up to secondary level for a capacity of 25,000 m31d; all industries are expected to provide preliminary treatment of their own effluent so as to meet applicable regulations for handling sewage at the municipal level. In the event that faster economic development in these industrial zones generates greater industrial wastewater flows than anticipated, secondary treatment can be expanded on site. The ultimate treatment capacity for the whole serviced area would be 50,000 m3/d. After review ofthe various possible treatment processes, the proposed treatment technology agreed upon would be SBR as it fits the expected flow and load composition ofmixed industrial and domestic users, as well as the operational capabilities of district staff. Particulars of the quantities of pipe supplies and pumping characteristics are indicated in the Project files. All facilities to be constructed would be under the supervision of a PMO under the District Construction Commission and handed over to a District Wastewater Company.

Component Description Capacityhize Function Secondary Construction of new reinforced concrete HDPE sewers, DN 400 and trunk (RC) sewers under 19 roads from DN to DN600, 10,668 m; wastewater sewers 400 to DN 1600 to strengthen existing RC sewers, DN 400 to produced in the sewerage network, intercept sewerage DN 1600,46949m. Huishan catchment flow currently discharged to river and Total length of all of Huishan district connect system to the proposed Huishan pipelines, 57.62 km to the Huishan WWTP WWTP Sewerage lift construction of 3 new lift sewage PS Yanxin PS 11,000m31d To lift sewage in the Pumping (average), trunk sewer system stations (PS) Kuchang PS 15,000 m3/d md convey to the (average), proposed WWTP Xicheng PS 4,000 m31d (average) Huishan Construction of an activated sludge Average daily flow wastewater treatment plant with biological and 50,000 m31d in the future wastewater from treatment chemically assisted P removal. Includes md 25,000 m3/d in the Huishan district plant inlet pumping, fine screens, grit Fitstage. removal, SBR tanks and sludge dewatering

- 32 - Project Component 2 - Dongtlng and Anzhen Sewerage and Sewage Treatment in Xishan District of Wuxi Municipality - USt48.79 million

Parts of the remaining Xishan District are expected to be administratively integrated with the four urban districts of Wuxi Municipality within a few years. Currently, Xishan District has three wastewater treatments plants, either recently commissioned or under completion. These are located in Dongting (20,000 m3/d), Meicun, and Shoufang (both of 15,00Om3/d). The present project component wouldfocus on: (a) extension of the Dongtingplant to 50,000 m3/d and construction of associated sewer networks; and (b) construction of a secondary WWTP of 20,000 m3/d capacity at Anzhen and construction of associated sewerage networks and associated lifting stations.

The Dongting plant will serve urban areas now under intense industrial development as it is closely located to the old Wuxi urban districts. The Anzhen scheme will serve the three urban districts ofMen, Yangjie, Houqiao and industrial zone of Xishan District. This combined scheme is the least-cost altemative for sewerhg each area and treating the resulting effluent. As in the case of Huishan above, these two plants would use the SBR treatment process, since they face identical operating characteristics with significant and not yet fully defined industrial effluents. The plant location in Menis in an agricultural area, close to the WangYu River, where the plant effluent will be discharged.

These plants would be serviced by a network of about 40 km oflarge trunk and secondary sewer lines in the Dongting area, and 146 km of trunk and secondary sewer lines in the Anzhen area. This program has already started With district financing, as the present Dongting first phase is still under-utilized. The present project would dso include funding of sewer connections for the domestic users. Most industries are built with preliminary wastewater treatment facilities, but their operations are not always up to the standard required. In order to protect wastewater assets (plant and network) constructed under the project against over strength industrial influent resulting from insufficient preliminary treatment by the industries connected to the network, the wastewater company charter would include provisions giving rights to the company to sample incoming discharges from the serviced industries and to close their connections in case of inadequate preliminary treatment. The Dongting network would also include one lifting station; the Mennetwork would have three lifting stations.

Xishan District Govemment intends to merge these plants under a single wastewater enterprise. While networks and plants are not interconnected, a single wastewater company would present substantial advantages in terms of reduced management overheads and staff training requirements.

- 33 - Dondinn Sewerage and Savage Treatment in Xishan District of Wuxi Municipalitv

Component Description I Capacityhize Function Secondary and Construction of new RC I RC sewers, DN 300, To convey wastewater trunk sewers sewers under 19 roads from 4043; DN 400,20817; produced in the Dongting DN 300 to DN 1000 to DN 500,4195; DN catchment of Xishan district strengthen existing sewerage 600,4350; DN 800, to the Dongting WWTP network, intercept sewerage 3793; DN 1000,2824; flow currently discharged to Siphon 325 m. river and connect system to Total length of all the proposed Dongting pipelines, 40.35 km WWTP Sewerage lift Construction of one new lift Zhuhui PS 510 YS To lift sewage in the trunk PS Sewage pumping station (average) sewer system and convey to the proposed WWTP Dongting Constructionof an activated Average daily flow To treat the wastewater from WWTP sludge treatment plant with 30,000 m31d Dongting Industrial Park, biological and chemically secondary treatment in Zhaqiao and Gangxi town of assisted P removal. Includes the first stage. Dongting district inlet pumping, fine screens, grit removal, SBR tanks and sludge dewatering

Anzhen Sewera 1 and Sewage Treatment in Xishan District of Wuxi Municivalitv

Component Description Capacityhize Function Secondary Construction of new RC sewers DN400,83254m; DN 500, To convey wastewater and trunk under 19 roads from DN 400 to Db 43 160m; DN 600,11465m; produced in the sewers 1600 to strengthen existing DN 800,4795m; DN 1000, &en, Yangiian, sewerage network, intercept 1605m; DN 1200,4 15m; DN Houqiao and industrial sewerage flow currently discharged 1400,500m; Siphon, DN 200 zone catchment of to river and connect system to the to DN 400,255m Xishan district to the proposed Xishan WWTP Total pipelines, 145.5 km Anzhen WWTP Sewerage lift Construction of three new lifl Anzhen PS 99.99 Ys To lift sewage in the PS Sewage PS (average), trunk sewer system and Yangjian PS 99.99 l/s convey to the proposed (average), WWTP Houqiao PS 134.9 l/s (average) Anzhen Construction of an activated sludge Average daily flow 20,000 To treat the wastewatei WWTP treatment plant with biological and m31d secondary treatment in from &en, chemically assisted phosphorus the first stage Yangjian, Houqiao and removal. Includes inlet pumping, industrial zone of frne screens, grit removal, SBR Xishan district tanks and sludge dewatering

ProJectComponent 3 - Wull Lake Rehabllltation of Wuxi Municipality - US$ 35.00 mlliion

-34- This non-Bank financed component comprises: (a) the construction of IOnew sluice gates and one shiplock on canals and streams connected the Wuli Lake to the hinter land; @) the rehabilitation of about some 20 km of embankments around Wuli Lake; and (c) pilot ecological restoration in selected areas of Wuli Lake. The above investments are part of an overall scheme of investments, including some already implemented under local financing, consisting of a large pumping station, to increase the flow circulation in the Wuli Lake at low flow periods; and a sewer interceptor on the northem side ofthe lake. The overall justification for this scheme is the interception of all incoming sewage flows into the lake and the increased circulation of flow in the lake area in particular at low flow periods, in order to avoid the growth of algae. The gates and shiplock .are intended to protect the lake fiom incoming polluted flows coming from the canal network during the low flow season, as well as excess flood flows during the rainy season. In addition to these works, a sewerage network and interceptors will be constructed under an ongoing program of sewer development in the WWri city.

Component Description Capacity/size Function Sluice Gate and C~gguangxi, Huanhuhe gate, 2*8m; To regulate the water level in Shiplock Xiaoxuanbang, Changfenghe gate, 1*6m; Wuli Lake and block Dongxinhe, Xianjingbang gate, 1*6m; wastewater from entering into Xiejingbang, Xiaoxuangang gate, 1*6m; the Wuli Lake and provide Xianj ingbang, Dongxlnhe gate, 1*6m; transportation for barges. Banqiaogang, Miaodongbang, 1*6m; Huanhuhe, Maligang gate, 1* 12m; Miaodongbang, Changguangxi gate, Maligang Sluice gates 1* 1Om; Banqiaogang gate, and Caowangjing 10 1*12m; Caowangiing gate, Sluice Gates and 1 1*6m; Caowangjing, Shiplock 16*120m+12m Rehabilitation Rehabilitation of Rehabilitation of 19.4 km To increase the standards of embankment Embankment in of embankment around embankment and to match with recovered fishery pond Wuli Lake. Three types the surroundings areas, rehabilitation of are: soil slope, landscape embankment in slope and ecological residential and landscape. commercial areas Ecological Pilot works in one small rehabilitation area to assess viable ootions

Project Component 4 - Fuxin Sewage Treatment In Central District of Suzhou Munlcipality - USS20.13 million

Fuxin is the site of a first phase wastewater treatment plant With a capacity of 80,000 m31d for secondary treatment. The commissioning ofthese works, funded by Japan Bank for International Cooperation (JBIC), is underway and a locally-funded program oftrunk sewer development and sewer connections is also taking place in parallel in the southem and westem parts of the city which drain into the plant. Theproject component would consist of the construction of the secondphase of the Fuxin works (100,000 m3/d expansion) for secondary treatment. The feasibility work points to selection of SBR treatment process, but municipal officials wish to consider various treatment options and propose to invite bids on tumkey contracts that would include design, construction and installation. The proposed capacity ofthe

- 35 - wastewater treatment plant has been determined in order to compensate for the lack oftreatment of phosphorus removal in the existing, first phase installations. The proposed design capacity would be sufficient for wastewater flows until year 2010. As present, sewage volumes reaching the plant are relatively low, pending completion ofthe locally-fmanced sewer network rehabilitation program in Suzhou. Special attention would be given in the final design to the number and modules oftreatment lines to be constructed so that during periods of low demand, only needed lines would be in operation, Plant effluent would be discharged to the Grand Canal.

Component Description Capacitylsize Function Fwrin WWTP Construction of an activated The existing capacity To treat the wastewater from sludge treatment plant with is 80,000 m3/d in the southem and westem parts of biological and chemically first stage. Expand central districts. assisted phosphorus removal. average daily flow by Includes inlet pumping, fine 100,000 m3ld in the screens, grit removal, SBR project and sludge dewatering

Project Component 5 - Loujlang Sewage Treatment in Central District of Suzhou Municipality - USL14.41 milllon

The 60,000 m3ld fust phase of the Loujiang WWTP was also funded by JBIC. The project component funded by the Bank consists of the secondphase of a secondary treatmentplant to expand capacity by 80,OOOm3/d, The component would also accommodate the treatment and removal of phosphorus based substances. The Loujiang site drains most ofthe northern and eastern parts ofSuzhou City. The approach for implementing this plant is similar to the one presented above for Fwrin. The discharge of the plant effluent will flow into a channel draining into the Grand Canal.

~~ Descrintion 1 Canacitv/size I Function Construction ofan activated 1 The existing capacity To beat the wastewater from sludge treatment plant with is 60,000 m3ld in the northem and eastern parts of biological and chemically frrst stage. Expand central districts. assisted phosphorus removal. Average daily flow by Includes inlet pumping, fine 80,000 m3/d in the screens, grit removal, SBR project and sludge dewatering

- 36 - Project Component 6 - Sewerage and Sewage Treatment in Wuzhong District of Suzhou Municipality - US$ 14.89 million

Wuzhong is an economic development zone located south of Suzhou's city center and has been designated to provide sites and services to industries and institutional partners. Theproject component would include: (a) a secondary WWTP of a 25,000 m3/d capacity; (b) the relevant sewerage network amounting to about 43 km overall, including a under canal siphon of 150 m, for the above treatmentplant and forpart of the service area of another plant under construction by private operators, including three lifiing stations. All industries are expected to treat their effluent to preliminary treatment level before being discharged in the public sewer network. Both wastewater plants are to be located next to one another, and will discharge into the Grand Canal.

Zomponent Description Secondary and Construction of new PVC and hunk sewers RC sewers from DN 300 to DN 1200 to strengthen existing sewerage network, intercept sewerage flow currently discharged to river and connect system to the proposed Wuzhong WWTP

Sewerage lift Construction 3 new lift Dongwu PS 259 Us To lift sewage in the trunk sewer PS Sewage PS (average), system and convey to the Constructed zone PS proposed WWTP 153 l/s (average), Grand canal PS 347Vs (average) Wuzhong Construction of an activated Average daily flow To treat the wastewater from WWTP sludge treatment plant with 25,000 m31d in the Wuzhong district biological and chemically first stage, assisted phosphorus removal.

Includes inlet pumping, fine I screens, grit removal, SBR

tanks and sludge dewatering I

Project Component 7 -Water Regulation works on the Xujiang and Shangtang Rivers of Suzhou Municipality - USS12.38 million Suzhou Municipality is in the process of cleaning up its htemal nework of canals inside the historic city, and to protect it from pollution initiated along the Grand Canal by Town and Village Industries (TVEs) and

- 37 - by other cities. This component will improve the water environment in these canals and throughout this popular tourist area. A number of industries have been relocated outside of the historic city and use of cargo barges in the area is also being reduced. There are two key points of entry for outside pollution at Xujiang and Shangtang. The project will construct two new gates and 1 shiplock on the Xujiang River next to the Grand Canal and one shiplock in Shangtang River. The gates are designed to block entry of polluted water to the inner system ofcanals, including from pollution spills on the Grand Canal, as well as protect against flooding during high flow periods. The locks are designed to accommodate traffic flows of tourist barges. Suzhou municipality has also embarked on a locally-financed program of house connections that would permit separation of rainwater from sewage in the networks and also intercept all sewage still entering canals.

Component Description Capacitylsize Function Gate and shiplock on Construction of one Sluice Gate in south To control the polluted Xujiang River gate in soutli branch of branch, 3*1Om. grand canal water Xujiang, and one Sluice gate in north flowing into Suzhou sluice gate plus one branch, 1*15m city inner canal. Ship lock in north of Shiplock in north of branch of Xujiang branch, 12m*8Om Shiplock on Construction of one shiplock in Shangtang To control the polluted Shangtang River Shiplock in Shangtang river, 16m*60m grand canal water river flowing into Suzhou citv inner canal.

Project Component 8 - Sediment Dredging in the inner canal of central district of Suzhou Municlpallty - USS7.29 million

The project will finance a dredging program to remove flow bottlenecks in Suzhou ’s inner canals to restore their initial transit and absorptiveflood capacity and provide clean flowing water through the historic city. Most inner canals - 65.7” - would be subject to dredging and the collected sludge evacuated by barges to a site outside the historic center. Preliminary estimates of volumes for the sludge amount to 1.29 million m3 and indicate a sludge content that is mostly free from toxic materials and heavy metals.

Component Description Cauacitvlsize Function Sediment Sediment dredging of 129 Name*Area (km2) *Length (km) To reduce intemal dredging in million m3 sludge in North, *Dredging volume (m3) polluting source and central district East, South city, Xujiang North city:12.3 * 14.65 *0.33; increase the water Panxi, Hedong New Area East city: 9.63*7.43*0.12; capacityof . and Shangtang, the total South city:7.32*6.68*0.11; self-purification, and to area is about 60 km2, the Xujiang Panxi: 10,88*20.31*0.36; reduce urban flood length of river and canals is Hedong: 10.6*5.84*0.11; 65.7 km, the total dredging Shangtang: 9.13* 10.80*0.25; volume is 1.29 million m3. Total:60*65.7* 1.29 Project Component 9 - Technical Assistance for implementation Support and Sector Development - US$ 1.90 million

Wastewater Masterplans For Wuxi And Suzhou Municipalities

60. Background: Neither Wuxi nor Suzhou Municipalities currently have an up-to-date approved wastewater masterplans upon which investments can be based. Suzhou relies on a masterplan prepared in 1995 for the core city area only. Wuxi recently updated its original wastewater masterplan, but this is not yet approved by the municipal government. It is understood, however, that the updated masterplan is again restricted to a separate plan for each administrative district. Other plans in place include Jiangsu Province’s Tenth Five-Year Plan, and those of the municipalities. For the urbanizing districts, these plans call for individual wastewater systems operated by separate companies in each town. In both Suzhou and Wuxi, several districts located close to the core cities have been absorbed into the city area, but the wastewater plans do not reflect these fundamental administrative changes.

6 1, There is a need to develop more integrated infrastructure plans, including for sewerage, that adequately cover the rapidly urbanizing areas surrounding cities and to reduce the fragmentation and duplication that results from separate plans based on old administrative boundaries. It is also important to develop more cost-effective wastewater systems, which would likely favor a smaller number of larger treatment plants located strategically around the urbanizing districts. Thus, there is an urgent,need in both Suzhou and Wuxi to conduct a wastewater masterplanning exercise considering each municipality as a whole, in order to determine the optimal configuration ofwastewater systems in terms of number, size and location. 62. TA will be provided to help ensure that wastewater strategies and masterplans for both Wuxi and Suzhou Municipalities reflect present conditions and major trends, the types ofdevelopment existing and proposed (and therefore accurately characterize likely wastewater conditions), and that optimize the types, locations and size of wastewater systems in the future. These planning exercises should be conducted on a municipality-wide basis, and should include all urban districts and sub-municipalities within Suzhou and WwiMunicipalities. In addition, where combined industrial and domestic wastewater systems are proposed, these planning exercises should ensure full integration of information and recommendations from the relevant municipal and district bureaus (Le. water resources, water affairs, environmental protection, etc.).

Institutional Strengthening of Wastewater Utilities and Training in Project Management.

63. This TA would strengthen the capacity of the wastewater utilities responsible for the project’s wastewater components. The key overall objectives of the proposed TA are:

e to assist the project companies in establishing themselves as autonomous and financially sustainable utility companies that can effectively and efficiently meet the service obligations set out for them; e to assist the project companies and their parent municipal and district governments in complying with all relevant national policies for the reform ofthe wastewater management sector; and, to assist the project companies and their parent municipal and district governments in developing plans and programs for private sector participation in the wastewater sector that support government policies for optimizhg the efficiency and effectiveness of wastewater service delivery.

- 39 - 64. This assistance will be implemented within the framework of a defined and agreed upon sector plans for each project municipality and district (see above). These plans will establish the basic policies, plans and implementationprograms for achieving the overall development goals for the sector. The assistance is then intended to support achievement of these development goals through assistance in the implementation of the specific institutional, financial and operational aspects of the sector plans.

65. The project provides for foreign training in project management for staff of the provincial and municipal PMOs.

Scope of Technical Assistance for Project Construction Management and

Assistance in Bid Preparation

66. The project Will deal with five PIUS,three ofthem having new staff with little experience on bidding requirements under external funding and contract management. For one PIU (Suzhou) there will be a need to write carellly worded Tumkey Bidding Documents, and good coordination between the Tendering Company, the Design Institute and the Client. This is utmost importance to ensure satisfactory documentation for bids for design, supply, installation and construction of two wastewater treatment plants. In addition, the constructiion of five complete wastewater treatment units will require constant guidance to the PMOs for ensuring that contractors perfom as expected.

To ensure success of the construction activities and its timely execution, the TA will be provided to PIUs and the cities PMOs for the fmt two years of the project for: 0 preparation of technical specifications 0 bid preparation, and bid review oftechnical specifications; 0 assistance in bid evaluation; 0 contract management; 0 strengthening of construction supervision; 0 trouble shooting interventions.

International Local Budget ($000~base) A. Sector Development A.1 Urban Wastewater Mastelplan Review Panel 115 Preparation Advisory Services for Wuxi and Suzhou Municipalities B. Project Implementation Assistance B. 1 Institutional, Financial & Operational 28 97 920 Strengthening B.2 PMO Training 50 B.3 Construction Supervision 54 person months 600 total - local and I expatriate I I

-40- Annex 3: Estimated ProJectCosts CHINA: TAI BASIN URBAN ENVIRONMENT PROJECT

Ei - Wuli Lake Rehabilitation 19.85 11.80 31.65 Wuxi - Huishan Wastewater System 9.51 8.17 17.68 Wuxi - Dongthg & MenWastewater System 25.94 17.53 43.47 Suzhou - Water RegulationWorks on Shantang & Xujiang 6.39 4.91 11.30 Rivers Suzhou - Canal Sediment Dredging 3.55 3.05 6.60 Suzhou - Fuxh Wastewater Treatment Plant 8.57 9.45 18.02 Suzhou - Loujiang Wastewater Treatment Plant , 5.64 7.18 12.82 Suzhou - Wuzhong Wastewater System 7.04 6.24 13.28 ImplementationSupport & Sector Development 0.51 1.17 1.68 Total Baseline Cost 87.00 69.50 156.50 Physical Contingencies 4.35 3.48 7.83 Price Contlngencles 5.50 4.63 10.13 Total Project Cost: 96.85 77.61 174.46 Interest during construction 3.64 3.64 Front-end fee 0.61 0.61 I Total Financing Rewired 96.85 81.86 178.71 1

1 Identifiable taxes and duties are 5.54 (USSm) and the total project cost, net of taxes, is 173.17 (USSm). Therefore, the project cost shariag ratio is 35.4% of total project cost net of taxa.

-41 - Annex 4: Economic Summary CHINA TAI BASIN URBAN ENVIRONMENT PROJECT

Project Setting

1. Tai Basin. The Tai Basin, which incorporates southem Jiangsu Province and the project cities of Suzhou and Wuxi, is one of the economically active areas in China. In 2000, the total population in the Basin was 36.3 million with over half residing in urban areas. In this same year, total GDP in the Basin was estimated to be RMB 890 billion, about 10.8 percent of the national total, and growing at an average annual rate of over 10 percent since 1998.

2. Jiangsu Province. Jiangsu Province is one of the most important eastem coastal provinces in China and is an integral part of the Yangtze Economic Zone, with over 200 million people, including in neighboring Shanghai Municipality, and the provinces of Zhejiang and Anhui. The region forms one of the largest concentrations of international trade and commerce in the Asia-Pacific region. Jiangsu covers an area of 103,000 km2 (1 percent of the national total) and has a population of about 74 million (5.7 percent of national total), of which 30 percent is urban. Jiangsu accounted for 9.9 percent of China’s total GDP in 2001.

3. Economic growth is being driven primarily by the secondary and tertiary sectors, which respectively accounted for 52 percent and 37 percent of GDP in 2001. The strongest growth has been in the tertiary sector, which has doubled its share ofGDP since 1980. Over this same period, the proportion ofGDP accounted for by the primary sector declined from just under 30 percent to 11 percent. Although the tertiary sector is becoming increasingly important, Jiangsu continues to have a significant heavy industry sector, which accounted for 57 percent ofthe province’s total industrial output in 2001. Among the heavy indusmes, machinery and equipment is the largest sector which accounted for 32 percent of the province’s total industrial output, followed by chemicals.

4. The very rapid expansion of export-oriented development zones has been a major stimulus to the provincial economy. Total foreign trade has increased significantly, registering USS9.2 billion in 2000 to US$70.3 billion in 2002, an increase of almost 43 percent. Between 1985 and 2001, exports grew 17 times while imports grew 55 times. Manufactured goods accounted for 97 percent and 88 percent ofthe province‘s exports and imports respectively. Much of this growth in foreign trade is being driven by foreign investment. In 2001, Jiangsu ranked first nationally in terms of foreign direct investment with total commitments of US$15.1 billion during the year.

5. Suzhou is an important historical and cultural heritage city, located in the central part of Yangtze River Delta Area with Shanghai to the east, Zhejiang to the south and WWri to the west. It covers an area of 8,488 lan2. In 2000, the total population of Suzhou municipality was 5.8 million, the largest in the province, with about 2.5 million residing in urban areas ofthe municipality, ofwhom about 800,000 live in the inner city. Suzhou accounts for 18 percent ofprovincial GDP. Suzhou’s per capita GDP has increased from RMB 23,618 (US$2,850) in 1999 to RMB 30,400 (US$3,670) in 2001. The city’s economy is based on the secondary sector, which accounts for 56 percent ofGDP, followed by the tertiary sector, which accounts for 37 percent. Foreign trade has been an extremely important factor in Suzhou’s growth over the past decade. In term of the total volume offoreign trade and exports, Suzhou ranks second only to Shanghai in the Yangtze Delta region. The total value ofexports in 2000 was US$20.1 billion. Foreign investment was US4.7 billion in 2000, up from US$2.9 billion in 1999.

-42- 6. Wuxi. WWri is the third largest municipality in Jiangsu Province, 128 km east of Shanghai, bordering the Yangtze River to the north, and the Lake Tai to the south. Wuxi’s total population is 4.4 million, ofwhich about 2.1 million reside in urban areas. The municipality covers an area of 4,650 km2, including 5 18 km2 as the city center. The municipality comprises seven districts and two county-level cities. Wuxi accounts for 15 percent ofthe total provincial GDP. Per capita GDP increased from Rh4B 18,000 (US$2,155) in 1995 to RMB 31,200 (US$3,770) in 2001. Industrial development has been the main engine of growth, especially in machinery, electronics, textiles, metallurgical, chemical and pharmaceuticals.

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

Project Benefits and Beneficiaries

8. The project will improve the quality of the urban environment through improved wastewater and water quality management in the key municipalities of Wuxi and Suzhou and more widely in the Tai Basin in order to facilitate sustainable urban economic growth and social development. The physical infrastructure components of the project include improvements in wastewater collection and treatment in Suzhou and Wuxi, canal dredging in Suzhou, control ofpolluted water on the Xujiang and Shangtang Rivers in Suzhou, and pollution control and lake bank restoration for Wuli Lake in Wuxi. The project is also supporting critical institutional and financial reforms that will provide a viable and sustainable basis for the wastewater investments being implemented under the project, particularly those in small systems serving the rapidly developing areas of Suzhou and Wuxi. A summary of the major benefits by project component is given below.

9. Project Wastewater Components. The investments in wastewater in Suzhou and Wuxi include expansions of existing systems as well as construction of new collection and treatment facilities to areas presently not served, where waste is presently discharged untreated to watercourses. Expansion of existing systems will be undertaken in the Suzhou core city area (Fuxin and Loujiang) and in Wuxi’s Xishan District Oongting). New systems will be constructed in Wuzhong District in Suzhou, Huishan District in ’ Wuxi, and in Xishan District (Anzhen). The project will also support the rehabilitation and expansion of the sewer network in the Wuxi city center area. Combined, these investments will provide additional secondary treatment capacity of 280,000 &/day. This additional treatment capacity is projected to reduce COD discharges into the environment by about 35,500 t/year. Expansion ofthe wastewater systems in central urban districts of Suzhou and Wuxi will benefit most ofthe cities’ populations. Expansion of wastewater service in rapidly industrializing outlying districts in Wuxi and Suzhou will reduce pollution of the region’s critical water resources and supply and thereby enable these areas to achieve the targets for 70 percent wastewater service coverage by 2010. By expanding sewer networks, the project will help utilize wastewater treatment capacity, including for existing plants, more fully and, thereby, increase the productivity of investments in wastewater assets overall. It will also reduce health risks and enhance livelihood prospects and productivity in these rapidly growing areas and for downstream communities, Through the protection of drinking water sources, the project will generate savings through avoided costs of water supply treatment. The project will provide the basis for sustainable economic growth. In the city core of Suzhou, the wastewater improvements will protect and enhance tourism, which is a major economic activity. In the districts, the investments in wastewater will provide a more sustainable basis for the very rapid urbanization of these areas.

-43- 10. Suzhou - Fuxin & Loujiang Wastewater. The project component will provide additional secondary treatment capacity of 180,000 m3/day, including BNR, through the expansion of the existing Fuxin and Loujiang WWTPs. The project should achieve a reduction in COD discharges into the environment of about 16,700 t/year. With this expansion, virtually 100 percent ofthe wastewater generated in the central district of Suzhou will receive secondary treatment compared to less than 60 percent at present. The population directly benefiting from these service improvements is estimated to be about 800,000 in 2008 when the project facilities commence operations. However, all 2.5 million urban residents of Suzhou will benefit through a mix of direct and indirect benefits.

11. Tourism is a major economic activity in Suzhou and the main focus oftourism is the natural and cultural amenities of the historic city center, which includes the canal network. The city attracted over 17 million tourists in 2001, more than double the number in 1990. Total income from tourism in Suzhou was estimated to be about RMB 20 billion in 2002., The project will have a direct impact in protecting and enhancing tourism through its role in improving environmental conditions in the central city.

12. Suzhou - Wuzhong District. The project will fimd the construction of a new wastewater collection and treatment facility with an initial capacity of 25,000 m3/day. The new facility is projected to reduce COD discharges into the environment by about 3,800 Vyear. The project will serve a rapidly developing industrial area and its adjacent residential and commercial developments. The project will protect local surface water resources and public health, which are coming under pressure as a result of economic growth in the district. Through this, it will provide a basis for more sustainable industrial and urban growth in Wuzhong.

13. Wtuci - Huishan District. The project component will provide wastewater collection and treatment to a rapidly developing area of Huishan District that presently has no centralized wastewater management. The project will provide secondary treatment capacity of 25,000 m3/day, but will be designed to accommodate a future expansion in secondary treatment to 50,000 m3/day. The new system is projected to achieve a reduction in COD discharges into the environment of about 4,300 Uyear. The project component will protect surface water resources, safeguard public health and facilitate sustainable economic growth in the district.

14. Wui-Xishan District. In Wuxi's Xishan District, the project will fund the expansion ofthe existing Dongting wastewater treatment and collection system as well as the construction of a new system in Anzhen. This will provide additional secondary treatment capacity of 50,000 m3/day. The Dongting system will serve urban areas of Xishan District adjacent to the central city ofWuxi, which are undergoing rapid industrial development. The new Anzhen system will have an initial secondary treatment capacity of 20,000 m3/day. It will serve the three urban areas ofAnzhen, Yangjie, Houqiao and a rapidly expanding industrial zone within the district. The two new systems are projected to achieve a combined reduction in COD discharges into the environment of about 10,750 t/year. As in the case of the Huishan component, the wastewater improvements in Dongting and Anzhen will provide a more sustainable basis for the rapid economic and population growth of the district through the environmental and public health protection.

15. Suzhou -Water Regulation Gates on Xujiang dk Shangtang Rivers. This project component is part of the overall flood protection plan for Suzhou and will also support the municipality's ongoing pro- for cleaning up its internal network of canals within the historic city. The gates will control the flow ofpolluted water from the Grand Canal into the inner canal system and prevent the loss of clean water diverted through Xujiang from the WangYu River. The improvement in flood control will reduce economic losses arising from flooding in the central city. Based on analyses undertaken in preparation ofthe Suzhou

-44- Flood Control Masterplan, the PV of avoided damages due to reduced flooding that can be directly attributed to this project component is estimated to be RMB 188 million, significantly greater than its economic cost, RMB 110 million. The improvement in the water quality of the inner city canals will also significantly enhance their amenity and recreation value, both to city residents as well as to tourists and other visitors, for which the canals represent one of the main city attractions.

16. Suzhou - Central City Canal Dredging. This project component is designed to compliment an ongoing program for the separation of the existing combined sewer system that would intercept all sewage still entering the inner city canals. Dredging of 65 km ofurban canals in Suzhou will improve water quality and enhance the capacity of the canals to provide for flood control. This will reduce the incidence of localized flooding and associated damages. Based on the results of the water quality modelling undertaken during project preparation, the dredging could reduce COD concentrations by 0.1 - 0.8 mg/l and NH3-N by 0.1 - OS m@. As in the case of the water regulation gates, improved water quality will increase the amenity and recreation value of the inner city area that is permeated by canals and will have a direct economic impact through tourism and other activities.

17. Wuxi - Wuli Lake Rehabilitation. The locally-financed Wuli Lake component ofthe project will contribute toward the restoration of the lake through pollution control (10 sluice gates, one shiplock), restoration of 19.4 km oflake bank, and pilot research in ecological restoration. The program will also help to reduce the frequency and severity of flooding in Wuxi City and open up a substantial new area for development with significant amenity value for commercial, residential and recreational use. As in Suzhou, tourism is an important economic activity in Wuxi. The number of tourists visiting Wuxi in 2001 was 12 million and tourist income was RMB 15 billion in 2002. Since Wuli Lake is one of the city’s main tourist attraction, the lake restoration will have a direct and significant impact on economic activity in Wuxi. The restoration will also directly benefit city residents for whom Wuli Lake is a major recreational resource.

Economic Analysis

18. Methodology. Although attempts to quantify project benefits were undertaken, many of the benefits, particularly those relating to environmental and public health improvements could not be quantified For this reason, the choice for priority interventions for the project has been guided by cost effectiveness and least cost analyses. Incremental costs and output are calculated fiom the difference between a “with project” scenario and the “without project” scenario. The economic costs for the components are determined by making adjustments to the component’s financial costs. All taxes and duties were excluded in deter”* g economic costs. Price contingencies, interest during construction and net working capital requirements are also excluded.

19. Least-Cost Analysis. Alternative project designs were identified and evaluated in order to identify the least cost solution for incorporation into the project. The findings of these analyses are summarized below.

20. Wastewater System ConJigurations. One ofthe main objectives of the project wastewater interventions is to minimize service costs through the consolidation ofservice areas and treatment facilities. In some of the districts, and particularly in Xishan, the original preliminary proposals included plans for separate collection and treatment facilities for each small town and industrial development. During project preparation, these plans were revised on the basis ofleast cost analysis, which indicated that a more consolidated approach was more cost effective and preferable on environmental grounds.

-45- 2 1. Wuxi - Xishan District. Originally, separate systems were proposed for each of the seven towns in southern Xishan. This was found to be significantly more expensive than providing services through either one single system or through two systems. Under this second alternative, one WWTP would be located at Menand serve Anzhen, Yangjian and Houqiao, while the second WWTP would located at Dangkou and cover Dangkou, Houzhai, Hongshen and Galu towns. The least-cost analysis indicated that the unit cost of the two-system option was slightly less expensive than the single system over the economic life of the facilities. The average incremental economic cost (AIEC) of the two system option is estimated to be RMB 2.18/m3 ofwastewater treated, compared to RMB 2.32/m3 for the single system. Although this cost differential is not significant, the two system option possesses the additional advantage ofnot requiring long distance transfer of wastewater. There are technical concems associated with this transfer that could not be adequately quantified and incorporated into the least-cost analysis. Therefore, the two-system alternative has been incorporated into the project design as the least-cost option. The Mensystem has been included in the project while the second system, serving Dangkou, Houzhai, Hongshen and Galu, will be undertaken by the district government directly with local hding.

22. Wui- Huishan District. In Huishan, the optimal configuration for serving the three towns --Yanqiao, Changan, Xizhang -- plus the Huishan Industrial Park, was assessed on the basis of three alternatives. Under Option 1, a new WWTP and collection system would be constructed to serve this entire service area. Under Option 2, the new WWTP would serve only two of the towns, Yanqiao and Changan, plus the industrial park. Wastewater from Xizhang would be collected and treated at the existing Chengbei WWTP, which would then require expansion. Under Option 3, all wastewater from the three towns and industrial park would be collected and transferred to the Chengbei WWTP. However, this third altemative was soon rejected once it was confirmed that insufficient land was available at Chengbei for the necessary expansion. A least-cost analysis was then undertaken for the two remaining altematives, which indicated that Option 1, a single WWTP serving all three towns and the industrial park was the least cost. The AIEC for Option 1 is estimated to be RMB 1.83/m3, compared to RMB 2.23/m3 for Option 2. Therefore, the selected design of this project component is based on Option 1.

23. Suzhou - Wuzhong District. Two altemative system configurations were assessed, Under Option 1, the wastewater within the project service area would be collected and transferred to the existing Songlin WWTP, which is outside the project service area but within Wuzhong District. This existing WWTP, has an existing capacity of only 5,000 m3/day, is presently being expanded to 10,000 m3/day, but would need to be expanded by a further 25,000 m3/day under this option. Under Option 2, a separate WWTP would be constructed within the project service area in the Wuzhong Economic Development Zone. The AIEC for Option 2 is estimated to be RMB 1.98/m3, compared to RMB 2.26/m3 for Option 1, Therefore, Option 2 was found to be the least cost and has been adopted as the preferred project configuration.

24. Treatment Process Selection. A least-cost analysis was undertaken to support the selection of the preferred secondary treatment process for each wastewater component (“able 1). The processes considered were oxidation ditch, conventional activated sludge process under the anaerobic/anoxic/oxidationmode, and SBR. In addition, for the Fuxin and Loujiang WWTP expansions, the proprietary UNITANK process was also evaluated because the existing first phase ofboth facilities employs this process. However, the oxidation ditch process was not considered for Fuxin and Loujiang because there is insufficient available land at these sites. For the district systems, the SBR process is estimated to be the least cost although in Huishan and Xishan, the difference between SBR and activated sludge is not significant. For all ofthe district systems, the SBR process has been selected as the preferred treatment process. For the Dongting wWTP in Xishan District, the SBR process was selected without undertaking a detailed least-cost analysis because the existing first phase of this WWTP employs the SBR process. For Fuxin and Loujiang, all three processes evaluated, activated sludge, SBR and UNITANK, are essentially the same cost. Although

-46- the selection ofthe UNITANK process would be advantageous in that it provides for full compatibility between the first and second phases ofthe WWTPs, the process is proprietary. However, since UNITANK is a technical modification of the SBR process, the preferred process is selected as SBR, without specific patent.

Table 1: Summary of Least Cost Analysis for Wastewater Treatment Processes

Activated Sludge OD - Oxidation Ditch

25. Cost Effectiveness of Wastewater Investments. The marginal cost ofpollutant removal provides an indication of the relative cost effectiveness of each wastewater component. The AIEC per tonne of COD removed for each project alternative is given in Table 2. AIECs for the Fuxin and Loujiang WWTP expansions are comparable to those for other larger scale expansions proposed for Bank funding. For example, AIECs calculated for the wastewater components in the Second Liao River Basin Project (2003) were between RMB 3,170 and RMB 3,305 per tome of COD removed. For the secondary treatment altemative assessed for inclusion in the Chongqing Urban Environment Project (2000), the AIEC per tonne of COD removed was estimated to be RMB 3,630.

26. For the project wastewater components in the districts, the cost of COD removal is significantly higher, ranging between RMB 7,570 and RMB 9,050 per ton ofCOD removed. While the smaller scale of these facilities increases unit capital and operating costs, the major reason is these project components include the construction of a sewer network in addition to the WWTP. In contrast, the Fuxin and Loujiang components incorporate only WWTP expansion.

-47- Table 2: Unit Cost of COD Removal

Project Component 1 CODRemoved 1 AIECofCOD I Removed WYear) (RMBlt) SUZ~OU- F~in 1 8,480 1 3,875 I Suzhou - Loujiang 1 8,190 1 2,510 I Suzhou - Wuzhong 3,840 9,050 Wuxi - Huishan 4,300 7,570

Wuxi - Xishan (Dongting & 10,750 8,030 Anzhen)

27. Average Incremental Cost (AIC). For each wastewater component, the AIC is expressed in both economic prices (AIEC) and financial prices (average incremental financial cost - AIFC) and given in Table 3. The AICs are calculated on the basis of the economic life ofthe project. This is the 30-year operating life of the project plus the construction period, which is either four or five years, depending on the specific project component. The economic opportUnity cost of capital (EOCC), assumed to be 12 percent, is used to discount incremental costs and volumes in order to calculate the AIEC. The discount rate used to calculate AIFC is the weighted average cost of capital (WACC). The WACC is calculated separately for each project component depending on the specific financial structure of each component, but varies only slightly, between 5.3 percent and 5.9 percent.

Table 3: Summary of PV & AIC Analysis

Project Component PV Economic AIC (RMB/m3) cost (RMB AIEC AIFC million)

Suzhou - F~in 168 0.97 0.92

Suzhou - Loujiang 105 1.02 0.97

Suzhou - Wuzhong 178 3.81 2.94 Wuxi - Huishan 166 3.56 2.5 1

Wuxi - Xishan (Dongting & 393 4.73 3.30 &hen)

-48- 28. The AICs are significantly higher for the district wastewater systems than for Fuxin and Loujiang systems in the central Suzhou. The AIEC for Fuinand Loujiang is estimated to be RMB 0.97/m3 and RMB l.O2/m3 of wastewater treated respectively, while those of the district systems are between 3.7 and 4.9 times higher. Of the district systems, the least-cost system is Huishan with an AIEC of RMB 3.56/m3. The highest cost systems are those in Xishan with an AIEC of RMB 4.73/m3. The AIEC for the Wuzhong system is RMB 3.81/m3. There are a number ofreasons for the significant difference in incremental costs between the district systems and those in central Suzhou. As for the cost effectiveness analysis, the most important reason is the inclusion of sewer networks in the district project components while those in central Suzhou consist only of WWTP expansion. Furthermore, adding treatment capacity through an expansion of existing facilities is less expensive than through the construction of new facilities. All of the district WWTPs included in the project, with the exception ofthe Dongting WWTP expansion in Xishan, will be entirely new. Another reason for the higher incremental costs for the district systems is that they will receive a higher proportion of more costly to treat industrial wastewater than the central Suzhou systems. In 2008, industrial wastewater is projected to contribute 48 percent oftotal wastewater flows in central Suzhou. In contrast, industry is projected to account for 82 percent in Wuzhong, 68 percent in Huishan, and 6 1 percent in Xishan.

- 49 - Annex 5: Financial Summary CHINA TAI BASIN URBAN ENVIRONMENT PROJECT

k Municipal and District Finances

1. An analysis of the availability of counterpart funds was undertaken by reviewing revenues and expenditures in the project cities and districts. Table 1 presents a summary of this analysis. The complete analysis is available in the project file. The data analyzed relates to what is referred to in Chinese government accounting as on-budget and off-budget funds. On-budget and off-budgetary funds include revenues from statutory taxes and levies. Their allocations are subject to approval by higher level governments. Off-budget are non-tax revenues such as net income remitted from municipally controlled enterprises, and some types of user charges collected by administrative departments. There is less control by higher level government on these revenues sources. In the two project municipalities, some of the off-budget funds are actually transferred to on-budget revenues and are generally allocated for the purpose of capital investment expansions.

2. For the four project wastewater components, an important source of counterpart funds is the municipal wastewater fee. However, revenue generated from this fee is not sufficient to cover all counterpart funding requirements. Therefore, contributions are also required from the capital budgets of the municipal and district governments. For the non-wastewater components, all counterpart funding is provided from the capital budgets of the municipal governments in Suzhou and Wuxi. Therefore, the capital investment capacity of each municipality and district, and particularly the ability of each city/district to provide the necessary counterpart funding, is assessed on the basis of these capital budgets, In the case of the Huishan and Xishan wastewater components in Wuxi and the Wuzhong wastewater component in Suzhou, the districts will provide the local government contribution from their capital funds, For the other components, the municipal governments are responsible for the provision of counterpart funding.

3. The analysis of historical trends indicates very large annual increases in revenues and expenditures in recent years in the project cities, at both the municipal and district levels. This is a reflection of the strong economic growth in the cities and throughout Jiangsu Province over the past decade. For example, between 1998 and 2002, municipal revenues within the core urban districts increased at average annual rates of 42 percent in Suzhou and 3 1 percent in Wuxi. For the entire municipal areas, which also include the outlying districts and counties, average annual revenue growth in Suzhou was even greater, 48 percent, over this same period. This reflects the tremendous growth in new industrial parks and residential areas in Suzhou outside the core city. In Wuxi, revenue growth for the entire municipality was 28 percent between 1998 and 2002, only slightly lower than that in the core city area, indicating strong economic growth in the newly developing districts. The capital investment budgets ofboth cities also increased significantly over the 1998 - 2002 period in both cities, although the increase was much greater in Wuxi. Over this period, revenues allocated to the city’s capital investment budget increased at an average rate of 69 percent, well above the increase in total municipal revenues. This reflects the City’s focus on infrastructure investments needed to improve living standards and provide the basis for continued economic growth. In Suzhou, growth in funds allocated to the capital budget was much lower, 15 percent per year. These very different growth rates reflect large differences in historic capital investment levels. Although the cities have roufly comparable populations in their urban core areas, capital investment levels in Suzhou were much higher than in Wuxi up to 2002.

- 50 - 4. Financial projections have been prepared to assess the capacity of the two project municipalities and three districts to provide the necessary counterpart funding for TBUEP. Relative to actual growth rates over the recent past, the projections are based on more conservative assumptions, both for total revenues, as well as that portion allocated to their capital investment budgets. Over the 2003 - 2009 period, total municipal revenues are projected to increase at average annual rates of 6 percent in Huishan, 9 percent in Suzhou, Wuxi and Xishan, and 12 percent in Wuzhong. Over this same period, revenues allocated to the capital budget are projected to increase at an average annual rate of 8 percent in the urban core districts of Suzhou and Wuxi. Revenues allocated to capital budget of the three districts are projected to increase at average annual rates of 10 percent in Huishan, 18 percent in Xishan and 20 percent in Wuzhong and over the 2003 - 2009 period.

5. The analysis indicates that the project components are considered to be generally affordable to all ofthe municipal and district govemments. Requirements for project counterpart funds from the two municipal governments and three districts as a proportion oftotal revenues vary between 0.2 percent on average in Suzhou (0.5 percent in the peak*year), 0.2 percent in Wuxi (0.5 percent in the peak year), 0.4 percent in Wuzhong (0.8 percent in the peak year), 0.5 percent in Huishan (1.1 percent in the peak year), and 1.9 percent in Xishan (3.7 percent in the peak year). When considering only revenues that can be allocated to the infrastructure investment, which is an approximation of financial capacity to contribute to the project, counterpart contributions as a proportion ofthe capital budget vary between 0.6 percent on average in Suzhou (1.5 percent in the peak year), 0.4 percent in Wuxi (1.2 percent in the peak year), 1.5 percent in Wuzhong (2.9 percent in the peak year), and 1.9 percent in Huishan (3.8 percent in the peak year), and 5.5 percent in Xishan (1 1.3 percent in the peak year).

-51 - Table 1: Municipaland District Finances (RMB million- current prices) 2003 2004 2005 2006 2007 2008 2009 Total”

Suzbou Municipal Government! Municipal Revenue 17,044 18,593 20,289 22,146 24,180 26,408 28,401 Capital Investment Capacity 5,065 5,825 6,699 7,703 8,859 10,188 11,716 Project Contributions 72 101 35 20 2 229 Project as %ofRevenues O.P? 0.4% 0.5% 0.2% 0.1% 0.Ph 0.0% 0.2% Project as % of Capital Budget OB?? 1.2% 1.5% 0.5% 0.2% 0.0% 0.0% 0.6%

Wwhong District Government DistrictRevenue 2,563 2,852 3,177 3,542 3,951 4,412 4,930 Capital Investment Capacity 642 738 849 977 1,073 1,180 1,264 Project Contciiutions 28 25 - 53 Project as % of Revenues 0.0% 0.0% 0.0% 0.8% 0.6% 0.0% 0.0% 0.4% Project as % of Capital Budget 0.0% 0.0% 0.0% 2.9% 2.3% 0.0% 0.0% 1.5%

Wuxi Municipal Government’ MunicipalReVenue 14,209 15,499 16,911 18,457 20,151 22,006 23,666 Capital Investment Capacity 6,184 6,803 7,483 8,231 9,054 9,960 10,757 Project Contributions 79 55 15 3 3 154 project as % ofRevenues 0.0% 0.5% 0.3% 0.1% O.oo/o O.oO! 0.0% 0.2% Project as % of Capital Budget 0.0% 1.2% 0.7% 02% 0.0% O.oO/o 0.0% 0.4%

Huishan DMct Government DiStliCtRevenUe 1,638 1,779 1,933 2,102 2,286 2,487 2,669 Capital Investment Capacity 499 528 559 582 607 633 659 Pmject Contributions 20 20 4- 44 Project as % ofRevenues 0.0% 1.1% 1.0?? 0.2% 0.0% 0.Ph 0.0% 0.5% Project as % of Capital Budget 0.0% 3.8% 3.6% 0.7% 0.0% 0.0% 0.0% 1.!?A

Xishan District Government DistrictRevenue 1,583 1,720 1,868 2,031 2,208 2,402 2,578 Capital Investment Capacity 444 521 613 721 793 873 929 Project Contributions - Total 11 69 76 38 - 19 Project as % ofRevenues 0.0% 0.6% 3.7% 3.7% 1.7% 0.0% O.P? 1.Y? Project as % of Capital Budget OD?? 2.0% 11.3% 10.5% 4.8% 0.0% O.G% 5.5Y

- 52 - B. Sector Funding and Cost Recovery

6. Sector Funding. China employs a polluter-pays approach to sector funding under which charges are applied to all wastewater generators in urban areas regardless of whether they are connected to the public sewer. In Suzhou and WWri, a municipal wastewater fee is applied through the municipal and district water supply companies (WSC) to those receiving piped water supply. Funding ofthe wastewater sector from the municipal fee is, therefore, dependent on the service coverage of the WSCs. In the central cities, coverage is near universal, while in the three project districts, coverage levels are much lower. However, with the municipal water supply system now being rapidly extended into Huishan and Xishan, revenue from the wastewater fee is now beginning to increase significantly. In 2002, collections of the municipal wastewater totaled about RMB 100 million in Suzhou and 140 million in Wuxi. By 2004, the amount collected from Huishan and Xishan is anticipated to increase total municipal collections by a further RMB 24 million and then more than double over the next 3 - 4 years.

7. Reform of Wastewater Fee. Existing wastewater fees applied in Suzhou and Wuxi are amongst the highest in China, RMB 1.15/m3 and RMB 1.1O/m3 ofwater consumed respectively. However, these fees are applied under the legal authority ofthe municipal governments in both cities and as such, are remitted to the municipal finance bureaus in each city, not to the wastewater companies. In the case of Wuzhong District, the fee is collected by the district water supply company and remitted to the district finance bureau. Funding ofthe sector is then provided through budgetary allocations to the wastewater companies rather than directly from the wastewater fee. In Huishan and Xishan districts in Wuxi, the situation has been particularly challenging because there has been no mechanism in place to retum wastewater fees to the district companies, even through the budgetary allocations. Therefore, the priority reform requirement, at least over the immediate term, does not relate to fee levels but rather to the direct transfer of fee collections to the wastewater companies. Wuxi and Suzhou Municipal Governments have agreed to address this requirement by changing the legal status ofthe existing municipal fee to that of a wastewater utility tariff by the end of2006. With this reform, tariffs will be directly remitted to the wastewater companies in Wuxi, including those in Huishan and Xishan districts, and not through the finance bureaus. Over the interim period, Wuxi Municipal Government will transfer the fbll amount ofthe fees collected in Huishan and Xishan to the district governments.

8. Cost Recovery Mechanisms in the Project Districts. Existing wastewater fees are set by the municipal governments in Suzhou and Wuxi and applied on a uniform basis throughout each municipality. The fees are set primarily on the basis of capital and recurrent funding requirements within the central urban area ofeach municipality where most of the existing wastewater infrastructure is located. Consequently, there is no direct linkage between the setting offee levels that are applied in the three project districts and the actual costs of providing wastewater services in these areas. Furthermore, future increases in wastewater fees will also be dictated primarily by the cost structures in the central cities. However, the project wastewater systems in the three districts will have higher unit costs because oftheir relatively small scale and greater proportion of more costly to treat industrial wastewater. Therefore, the municipal wastewater fee may not be sufficient by itself to filly recover the costs of the district companies once the project iimded facilities begin operations. To supplement tariff revenues, the district companies plan to apply a surcharge on the industrial waste generators. The municipal fee is applied on a uniform basis, but the cost of treating industrial wastewater is generally higher. Therefore, the surcharge will reallocate charges so that they better reflect the actual cost ofproviding service to the industrial group.

- 53 - C. Project Company Financial Projections and Institutional Arrangements

9. Financial projections have been prepared for each project wastewater company on an annual basis over the 2004 - 2018 period. These projections are based on the requirement of each company to comply with the agreed upon financial covenants regarding cost recovery and debt service coverage, as well as the need for intemally generated contributions toward project counterpart funding. The key financial covenant requires that each project company generates annual operating revenues that are sufficient to cover all operating expenses, including depreciation, any loss on non-operating activities, plus the amount, if any, by which debt service exceeds depreciation. This ratio of operating revenues to costs is expressed as the cost recovery ratio, which, therefore, must be at least 1.O in each year. In addition, a debt service coverage ratio covenant will also be applied under which the companies’ ability to incur additional debt will be conditional on them maintaining this ratio ,at not less than 1.3.

10. The projections incorporate the proposed change in the legal status ofthe existing municipal wastewater fee to that of a utility company tariff. Therefore, these tariffs are considered to be the operating revenue ofthe project companies. Summary financial projections for each company are given in Tables 5 - -8. Detailed fmancial projections are included in the project file.

Suzhou Qingyuan Construction Company Limited

11. Institutional Structure. Suzhou has embarked on a comprehensive program of reforms for its water and wastewater sectors based on the following principles: (i)integrated management of water and wastewater under a single municipal agency; (ii)increased commercialization ofthe sector; and, (iii) separation ofasset ownership from the operation ofthese assets through outsourcing. In 2002, responsibility for water and wastewater was consolidated with the establishment ofthe Suzhou Water Affairs Bureau (SWAB). Also in 2002, the municipal government established the SWIDC for the purposes of holding all sector assets together with those entities responsible for the sector operations. SWIDC is wholly owned by the municipal government and is under the supervision of SWAB. SWIDC is intended to facilitate greater commercialization ofthe water and wastewater sectors and specifically as a vehicle for attracting financing into these sectors. Within SWIDC, subsidiary asset management companies hold sector assets while other subsidiaries are responsible for asset operations.

12. The SQCC is a subsidiary of SWIDC responsible for asset management and project implementation in the city’s wastewater sector. It was established in 1999 and is presently is responsible for the implementation and management of the first phases ofthe Fwrin and Loujiang collection and treatment systems, as well as the expansion ofthese facilities under TBUEP. Operations of existing wastewater assets in the central urban districts are undertaken by the DFMD, an agency ofthe municipal government under the supervision of SWAB.

13. Reform Framework Although the basic reform framework for the Suzhou wastewater sector has been established, the implementation ofthis framework is still in its early stages. While SQCC has been established as legally independent entity from government, it has been functioning essentially as a dependent govemment project implementation unit. Furthermore, since the initial assets under its management, the first phases of Fuxin and Loujiang systems, are still in their find stages of construction, it has not yet assumed responsibility for existing Operating assets. With these systems commencing operations shortly, SQCC needs to develop an asset management capability, an important part ofwhich will be the management of the outsourcing process. The TA for Institutional, Financial & Operational Strengthening to be provided under TBUEP will support SQCC in developing an adequate capacity for

-54- asset management and outsourcing. By 2005, all existing sector assets will be transferred from the municipal government to SQCC. The operation of these assets will be initially undertaken by DFMD, which by end 2006 will be corporatized and become a subsidiary of SWIDC. However, the operation of new assets, including those hdedunder the project, will be outsourced through competitive bidding.

14. To be fully successful, the institutional reforms being implemented in Suzhou’s wastewater sector require supporting financial reforms. The existing system of budgetary allocations to fund the sector in Suzhou is based on traditional institutional arrangements, in which government bureaus directly provided all wastewater services. However, with asset ownership and management functions now being separated from govemment and transferred to SQCC, the company needs to have its own source of operating revenue. This requires a change in the legal status of the existing municipal wastewater fee to that of a utility company tariff. This change will establish SQCC as a financially viable and sustainable entity consistent with its independent legal status. The municipal government plans to reform the wastewater fee over the project implementation period and apply the new tariff throughout the municipality. Therefore, in addition to the Suzhou urban core area in which SQCC operates, these reformed funding arrangements would also be applied the project hdedwastewater component in Wuzhong District.

Customer Group Actual Projected 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

15. Tariff Requirements. Wastewater tariffs are set on a municipality wide basis primarily on the basis of the cost structure of the central city wastewater system over which SQCC holds responsibility. Therefore, future tariff requirements are estimated specifically on the basis of the financial requirements of SQCC. This means that, unlike the district companies that will need to apply a surcharge, SQCC does not require a supplemental revenue source. The most recent increase in the municipal fee, which brought it to RMB 1.15/m3, was implemented in May 2002. The next increase is tentatively planned for 2006 and future increases could realistically be implemented every 3 - 4 years. On this basis, it is estimated that the municipal tariff will need to be increased by 15 percent in 2006, to RMB 1.32/m3 (Table 2). The next increase would then be about 18 percent in 2009, bringing the tariff to RMB 1.56/m3. Beyond 2009, the need for further increases is relatively limited. Based on the fmancial projections for SQCC, increases of 10 percent would be needed in 2013 and then again around 2018.

16. Financial Performance. Unlike the district companies, which will have few if any operating assets over the project implementation period, SQCC will need to begin to fund operating assets as of 2004. The company will also have to use its tariff revenues to fund a portion ofthe cost ongoing capital investments, in addition to TBUEP, over the 2004 - 2008 period. However, despite these other demands on internally generated cash flows, the financial projections indicate that the company should be able to hdalmost 40

- 55 - percent of TBUEP counterpart funding (Table 5). Most of this company contribution, which is estimated to total RMB 45 million, would be provided in 2006 with a smaller contribution in 2007. The municipal govemment would provide the remaining 60 percent of counterpart funding, about RMI3 75 million, over the 2005 - 2007 period With the completion of the project, capital expenditures would decline but still average almost RMB 50 million annually, virtually all of which would be allocated to replacement and expansion ofthe sewer network. Tariff revenues are projected to be sufficient to enable SQCC to fund these annual expenditures entirely from internal cash flows. The company is projected to empositive net income and comply with both the cost recovery and debt service covenant in all years over the 2004 - 20 15 forecast period. Over the 2005 - 2015 period, the cost recovery ratio is projected to average 1.3 and above the 1.0 minimum in all years. The debt service coverage ratio should also remain well above the 1.3 minimum, largely because the company should not require any additional debt after that provided under TBUEP.

Suzhou Wuzhong Asset Management and Administration Company Limited

17. Institutional Structure. Wuzhong District is located adjacent to the core urban area of Suzhou and has experienced very rapid growth over the past decade. Much of this growth has been concentratedin the Wuzhong Economic Development Zone (WEDZ). However, the management ofthe wastewater generated by this growth has lagged significantly. All wastewater generated within the WEDZ, most of which is from industries, is presently untreated except for that partially treated by the induskes themselves. Outside the WEDZ, there is only one small wastewater treatment facility that serves part of the urban area of the district. No single entity has been responsible for providing wastewater services on a district-wide basis. In order to provide for a more comprehensive approach to service delivery, the district govemment and WEDZ established the Suzhou WAMC. WAMC is responsible for the implementation, ownership and operation for the TBUEP funded wastewater component in Wuzhong. The company is to be responsible for wastewater management throughout WEDZ, as well as through those other areas ofWuzhong District not connected to the Suzhou city wastewater system, which are served by SQCC.

18. Reform Framework. With WAMC only just having been established, it has yet to assume the responsibilities and functions set out for it. Over the immediate term, WAMC will complete its initial staff recruitments and develop and implement the core management, legal and financial systems required for the company. Initially, the company’s primary function will be to oversee implementation ofthe TBUEP wastewater component in Wuzhong. However, the company will need to start preparing itself for the operation of these facilities, presently scheduled for 2008. WAMC will not directly operate these facilities, but will outsource this function through competitive bidding. The TA for Institutional, Financial & Operational Strengthening to be incorporated into the project will support the company in the design and implementation ofthese outsourcing arrangements and regulatory oversight ofthe effectiveness ofthe operating fm contracted. The reform of sector funding arrangements by the municipal govemment will mean that collections of the wastewater tariff by the district water supply company will be remitted directly to WAMC, rather than to the district financial bureau. This will then give WAMC the operating revenue needed to initially contribute toward the capital cost of the TBUEP component in Wuzhong and then later to cover the cost of operating these facilities and debt repayment.

19. Tariff Requirements. Wastewater tariffs are set on a municipality wide basis and are determined primarily on the basis ofrequirements in the Suzhou central urban area. Therefore, the tariffs applied in Wuzhong over the forecast period will be the meas those for SQCC (Table 23. However, in addition to the wastewater tariff, WAMC will also apply an industrial surcharge beginning in 2008 when the project assets enter service. It is projected that the surcharge will need to be initially set at RMB 0.65/m3. Increases of RMB 0.1O/m3 would then need to be implemented in 20 11 and 20 15, bringing the surcharge to

- 56 - RMB 0.851m3.

20. Financial Performance. The projected financial performance of WAMC is assessed on the basis of its operating scope being the entire WDZ (Table 6). Those areas outside the WEDZ have not been included in the projections because the schedule for the company’s takeover ofthese areas has not yet been confiied. Within the WEDZ, a privately invested WWTP, with a first phase capacity of 15,000 m3/day, is presently under construction and is scheduled to begin operating in 2006. The tentative plan is to double its treatment capacity by about 201 1. This WWTP impacts upon WAMC in two important ways. First, WAMC will be responsible for the operation and maintenance of the sewer network providing wastewater to this facility. Second, payments to the owners of the WWTP will be made from the collections of the wastewater tariff. Therefore, WAMC revenues are net of these payments while its operating expenses include those related to the sewer network discharging waste into the private WWTP. Although the net impact is to reduce WAMC’s ability to generate project counterpart funding from tariff revenues, it is still anticipated to be able to meet almost 40 percent of this requirement from this source. Of total counterpart funding of about RMB 86 million, RMB 33 million would be generated from the tariff with the remaining RMB 53 million provided by the district government. With operation of the project facilities commencing in 2008, net income will decline significantly but remain positive over the forecast period. Principal repayment on the Bank loan will begin in 2009, placing a further demand on internal cash flows. However, the company’s overall cash position should actually improve somewhat because, with the completion of project construction, reduced capital expenditures more than offset the increase in debt service. The company is projected to comply with both the cost recovery and debt service covenant in each year over the forecast period. Over the initial eight years of operations ofthe project facilities, 2008 - 2015, the cost recovery ratio is projected to average 1.2 and remains above 1.O in each year. The debt service coverage ratio is projected to average about 2.3 over this same period, well above the 1.3 minimum.

Huishan Water Treatment Company Limited (FIWTC)

2 1. Institutional Structure. Huishan is a rapidly urbanizing district within Wuxi Municipality that had been a county until early 2002. As a new district outside Wuxi’s urban core area, coverage by urban wastewater treatment systems has been limited to four small facilities owned and operated by the different towns that these systems serve. No entity has existed at either the district or municipal level that is responsible for wastewater service provision throughout the district. The district government began to assume a direct role in the sector with its establishment ofthe HWTC in March 2003. HWTC is responsible for the implementation, ownership and operation ofthe TI3UEP funded wastewater component in the district. Although HWTC is presently responsible only for this component, the legal operating scope of the company incorporates the entire district. Therefore, it is planned that HWTC will gradually assume responsibility for the entire district. Such an expansion would enable HWTC to achieve greater economies of scale, which in turn would reduce its unit cost structure and thereby moderate the company’s tariff requirements.

22. Reform Framework Huishan has been somewhat ahead of the other two project districts, Xishan and Wuzhong, in establishing its wastewater company. The new company has then progressed in establishing a basic organizational structure and has begun to recruit staff. HWTC’s initial functions will be limited to those directly relating to the implementation ofits TBUEP funded component. However, as construction ofthese facilities is completed and they enter service, the company will then assume responsibility for the management ofthese assets. Direct operation and maintenance of the completed system will be outsourced to a qualified wastewater facility operator. Therefore, the company will need to develop an adequate capacity for the design, tendering and management of outsourcing arrangements. The TA for Institutional, Financial & Operational Strengthening to be incorporated into the project has been

- 57 - designed to provide support in developing this capacity. ' One ofthe most important reforms to be implemented is that relating to sector financing arrangements. Presently, the municipal wastewater fee is collected and remitted to the municipal finance bureau. However, as ofthe end of 2006, the legal status of the wastewater fee will be changed to that of a utility company tariff. Therefore, the tariff will be applied under the legal authority of HWTC within its service area. The Wwri Water Supply Company will bill and collect the tariff and then transfer collections to HWTC.

23. Tariff Requirements. Wastewater tariffs are set on a municipality-wide basis in Wuxi and are determined primarily on the basis of requirements in the central urban area ofthe municipality. Based on anticipated increases in this municipal tariff, the company is also expected to need to implement a surcharge beginning in 2008 when the project assets enter service (Table 3). Given anticipated increases in the municipal tariff of 15 percent in 2006 and 20 percent in 2009, the COD surcharge would need to be set at RMB 0.50/m3 in 2008. It could then be maintained at this level until 2012, when it would need to be increased to about RMB 0.55Im3.

Customer Group Actual Projected 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

"Weighted average tariff incorporates both municipaltariff and COD surcharge.

24. Financial Performance. The financial projections for HWTC have been prepared on the basis that the company's operating scope is limited to the service area ofthe TBUEP funded project component ( Table 7). Although HWTC plans to assume responsibility for the entire district, this will occur gradually and the timing and phasing of this expansion plan has yet to be confirmed This provides a more conservative assessment of financial performance because it limits revenue generation to the area served under the project. Over the project implementation period, virtually all revenue from the wastewater tariff can be allocated to project capital costs. Between 2004 and 2007, about RMB 35 million will be generated from the wastewater tariff and allocated to project capital investments, which represents 45 percent of total counterpart funding requirements. With operations beginning in 2008, revenues will then be used primarily to cover operating costs and debt service requirements. The most critical period for HWTC is anticipated to be between 2009 and 2011. The project funded assets are fully operational and, in 2009, principal repayment on the Bank loan begins. Furthermore, an expansion in secondary treatment capacity is planned for 2010 - 201 1, which places an additional demand on internally generated cash flows. However, given that the tariff increases are implemented as projected, the company should be able to meet these various funding requirements. Net income is projected to remain positive and the cash position of the company will be within acceptable levels. The company is projected to comply with the cost recovery covenant in each year over the forecast period. Over the initial eight years of operations of the project facilities, 2008 -

- 58 - 2015, the cost recovery ratio is projected to average 1.3 and remains above 1.0 in each year. The debt service coverage ratio is projected to average 2.3 over this same period, well above the 1.3 minimum, but might fall slightly below this minimum in 201 1 and 2012. Although this would limit the company's ability to take on additional debt, no such requirement is anticipated until an expansion program is undertaken beginning in 2016, by which time the ratio is projected to be well above 1.3.

Xishan Anzhen Wastewater Treatment Company Limited & Dongting Wastewater Treatment Company Limited

25. Institutional Structure. Xishan is similar to Huishan in that it is a new district ofWuxi Municipality outside the urban core, which is undergoing rapid economic growth and urbanization, Presently, the only existing treatment facility is the Dongting WWTP, which will be expanded under the project. Also like Huishan, no entity at the municipal or district level has been responsible for wastewater service provision on a district-wide basis. The district considered to establish two wastewater companies, to be initially responsible for the wastewater components at Dongting and Men,respectively. This responsibility includes project implementation, asset ownership and management. The Wuxi Xishan Dongtmg Wastewater Treatment Company Limited is responsible for the existing Dongting treatment and collection system, as well as the project funded expansion. The responsibilities of the Xishan Anzhen Wastewater Treatment Company Limited would have been limited to the Anzhen project component, However, in order to provide the basis for the rationalization of the sector in Xishan, the two companies will now merge. Once operations begin under the management of this merged company, direct operating and maintenance functions will be outsourced to a qualified operator.

26. Reform Framework. The most important reform objective over the immediate term is to merge the two companies in Xishan. This would provide the basis for more effective and efficient service delivery, not only in Dongting and Men,but because the merged company will operate on a district-wide basis, throughout Xishan District. Once merged, the new company will immediately assume responsibility for the existing Dongting facility, as well as prepare for the operation ofthe expanded and new facilities that will enter service in 2009. With operations being outsourced, the company will need to have an adequate capacity for the design, tendering and management ofoutsourcing arrangements. Support in developing this capacity will be provided under the project TA for Institutional, Financial & Operational Strengthening. As in the case of Huishan, sector financing arrangements will also be reformed over the next two years. As of the beginning of 2004, collections ofthe wastewater fee in Xishan District will be transferred to the district finance bureau. The district will then allocate these revenues to the project companies. By end 2006, this fee will be converted into a utility company tariff and directly remitted to the project companies.

27. Tariff Requirements. As noted for Huishan, wastewater tariffs are set on a municipality-wide basis throughout Wuxi and, therefore, may not reflect the actual cost structures in of the systems in Xishan. Based on anticipated increases in this municipal tariff, the merged wastewater company responsible for both Dongting and Menis expected to also require a surcharge to fully recover its costs uable 3). While the structure of the surcharge would be the same as that in Huishan, it is projected that the actual charge level required in Xishan is higher, RMB 0.80/m3 in 2008 compared to RMB 0.501m3 in Huishan. This is primarily due to main factors: (i)the unit costs of the Xishan systems are higher; (ii)the revenue base for the surcharge in Xishan is somewhat smaller because the proportion of total wastewater from industry is lower; and (iii)the proportion of customers paying the tariff that actually have their wastewater treated is somewhat more limited in Huishan, at least over the period to 2012. However, the need for future increases in the surcharge in Xishan is more limited. A small increase, to RMB 0.85/m3, is estimated to be required in 2012, but then the surcharge could likely remain unchanged up to at least 2018.

- 59 - 28. Financial Performance. The financial projections have been prepared for the merged company, referred to here as the XWTC, which will be established from the two companies in Dongting and Anzhen ( Table 8). The projections have been prepared for this combined entity as of2004. Before the project-funded assets enter service in 2009, the operating assets under the company’s management will be limited to the existing Dongting facility. Over this 2004 - 2008 period, about 50 percent of revenue would need to be allocated to cover the operational costs of Donghng. The remaining 50 percent would then be allocated to cover about 18 percent oftotal counterpart funding requirements for the Dongting and Anzhen components. With operations of the project facilities beginning in 2009, revenues will then be used primarily to cover operating costs and debt service requirements. This first year of operations, in which the principal repayment on the Bank loan will also begin, is expected to be the most challenging year for XWTC in terms of its financial performance. Although net income is projected to remain positive, the cost recovery ratio will be just above the covenant minimum of 1.O. The debt service coverage fatio may actually be slightly below the 1.3 minimum before increasing to an acceptable 1.5 in 2010. However, there are no plans for the company to take on any additional debt until around 2015, by which the ratio would be in an acceptable range. After 2009, financial performance is projected to gradually improve significantly. merthe initial seven years of operations ofthe project facilities, 2009 - 2015, the cost recovery ratio is projected to average 1.2, while the debt service ratio averages 1.8 over this same period.

D. Affordability Analysis

29. An affordability analysis has been undertaken in order to ensure that domestic customers, particularly those in the lower income group, can afford the wastewater tariffs in Suzhou (Suzhou urban core and Wuzhong District) and Wuxi (Huishan and Xishan Districts). Two representative household groups are considered in the affordability analysis: (i)the average income group; ,and, (ii)the low-income group, which is defined as the household eaming approximately the 20th percentile of income distribution. In both Suzhou and WWi, incomes are conservatively projected to increase at an annual real rate of four percent for the average income household and two percent for the low-income household over the 2004 - 2010 period, which is significantly below that actually achieved over the past decade. The results of this analysis, which are summarized in Table 4, indicate that the tariffs are anticipated to be affordable over the entire 2003 - 2010 period.

-60- Table 4: Affordability Analysis for Domestic Consumers Project Component Utility Bill as a % of Household Income 2003 2004 2006 2008 2010

Suzhou Wastewater Low Income: Water 0.8% 0.7% 0.8% 0.7% 0.8% Wastewater 1 .O% 1.O% 1.1% 1.O% 1.1% Total 1.8% 1.7% 1.9% 1.7% 1.9% Average Income: Water 0.5% 0.5% 0.5% 0.5% 0.5% Wastewater 0.7% 0.7% 0.7% 0.6% 0.6% Total 1.2% 1.2% 1.2% 1.1% 1.1%

W uzhong Wastewater Low Income: Water 0.7% 0.7% 0.8% 0.7% 0.7% W aste water 1.0% 1 .O% 1 .O% 0.9% 1 .O% Total 1.7% 1.7% 1.8% 1.6% 1.7% Average Income: Water 0.5% 0.5% 0.5% 0.4% 0.4% Wastewater 0.7% 0.6% 0.7% 0.6% .0.6% Total 1.2% 1.1% 1.1% 1 .O% 1.0%

Huishan Wastewater Low Income: Water 0.6% 0.6% 0.6% 0.6% 0.6% Wastewater 0.7% 0.1% 0.8% 0.7% 0.8% Total 1.3% 1.3% 1.4% 1.3% 1.4% Average Income: Water 0.5% 0.5% 0.5% 0.4% 0.4% Wastewater 0.6% 0.6% 0.6% 0.5% 0.5% Total 1.0% 1.O% 1.1% 1 .O% 1.O%

Xishan Wastewater Low Income: Water 0.6% 0.6% 0.7% 0.7% 0.7% Wastewater 0.7% 0.8% 0.9% 0.8% 0.9% Total 1.4% 1.4% 1.6% 1.5% 1.6% Average Income: Water 0.5%' 0.5% 0.5% 0.5% 0.5% Wastewater 0.6% 0.6% 0.7% 0.6% 0.6% Total 1.1% 1.1% 1.2% 1.1% 1.1%

-61 - 30. Affordability is assessed by comparing incomes to the total cost of wastewater and water supply. The water tariff is assumed to increase at the same rate as the wastewater tariff over the 2004 - 2010 period. On this basis, the combined cost of water and wastewater for an average-income household is projected to actually decline slightly, from 1.2 percent in 2003 to 1.1 percent by 2010 in the Suzhou urban core and from 1.2 percent to 1.O percent over this same period in Wuzhong. For a low-income household, the proportion of income required to pay for water and wastewater is projected to increase only very marginally, from 1.8 percent in 2003 to 1.9 percent by 2010 in Suzhou, and remain constant at 1.7 percent in Wuzhong. The combined cost of water and wastewater for an average-income household in Huishan and Xishan is projected to be 1.0 percent and 1.1 percent respectively in both 2003 and 2010. For the low-income household in Huishan, this cost is projected to increase slightly from 1.3 percent in 2003 to 1.4 percent in 2010. In Xishan, the increase between these same years for the low-income group is from 1.4 percent to 1.6 percent. In all cases, the combined cost of water and wastewater services is well within the generally accepted guideline that the cost of water supply and sanitation should not exceed 5 percent of household income.

- 62 - - 138.4 135.4 1482 1412 1495 1667 1747 173.6 1732 1852 1924 194.8 - 33.9 550 592 620 85.4 Sa0 93.9 975 101.4 1M9 110.8 116.0 - 6.1 203 23.1 31.0 37.4 435 45.6 47.4 49.2 Sa9 525 54.2 - 98.4 60.1 6aO 61.1 26.7 33.1 353 28.7 226 28.4 ’ 292 245 - 1.5 1.8 1.9 1.9 4.1 4.1 3.9 3.6 3.4 32 3.0 27 - 7.7 10.5 105 10.7 7.4 9.6 10.4 83 6.3 83 87 72 - 89.1 47.8 47.7 48.6 15.1 195 21.0 16.8 129 16.9 17.6 14.6

- 96.7 €9.9 78.6 815 56.6- 67.1 70.4 67.9 65.5 71.0 73.0 71.6 1189 48.0 482 452 18.5 - 161.1 60.0 n7 24.0 iao - 2800 204.7 190.7 147.8 llR0 55.6 67.1 70.4 67.9 65.5 71.0 73.0 71.6

28QO 203.5 195.7 149 113.0 9.9 57.0 49.0 492 45.5 429 41.4 49.4 - 142 (a4) 1.5 0.7 (0.9 20 0.9 (0~1) (aa) 13 0.8 02 - 1.5 1.8 1.9 1.9 4.1 4.1 3.9 3.6 3.4 32 3.0 27 6.0 164 16.4 16.4 164 144 16.4 28aO 2192 197.1 1443 115.6 54.5 69.1 702 692 653 63.8 61.6 68.8 - (145) (63) 3.5 25 2.2 (21) 02 (13) 0.2 72 11.4 27 262 1111 4,s 64 68 9.0 49 7.1 5.8 6.0 132 24.6 273

262 26.8 203 23.9 25.0 27.8 27s 23.1 27.8 28.1 347 49.1 523 - 3135 7226 725.6 7662 9933 lpo68 10103 1,0120 1,0083 1@33 9892 944 408.6 792.5 59.7 170.1 2136 - 438.6 636.5 806A 923.4 lpoS.6 lp24.8 Ip38.4 1,M32 1,043.6 1,0402 1,@40.8 1,0421 1,@405

- 0.9 20 22 23 9.5 20.0 202 203 20.4 205 20.7 20.9 180.0 228.0 2762 321.4 339.9 333.9 317.5 301.1 284.6 2682 2~1.8 2353 218.9 ZSU 407.7 528.1 59.8 6664’ 6815 70(19 n1.9 738.7 751.6 7685 786.1 800.7 438.6 6365 806.4 923.4 lpo8.6 1,024.8 1,038.4 1,M32 1,043.6 1,0402 lW.8 1,0421 l,W5

- 3.5 1.8 1.7 1.7 12 12 13 1.2 1.2 12 12 1.1 - 632 25.8 231) 205 13.7 46 35 3.4 33 3.6 3.8 3.7

- 63 - Table 7: Hulshan Water Treatment Company Ltd. - Summary Flnanclal Projections (RMEI million, cwent tm) Estimate Projected 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 ncome Statements Operating Revenue - 9.0 10.5 12.9 15.0 17.9 23.4 26.7 28.9 33.4 37.1 39.3 43.7 Operatiig Exp" - 0.4 1.2 1.3 1.8 10.3 11.4 12.1 12.7 18.1 19.7 21.1 22.0 Depreciation --. - 3.2 6.5 6.6 6.7 7.2 7.9 8.0 8.3 operating Income - 8.6 9.3 11.5 13.2 4.4 5.4 8.0 9.5 8.1 9,5 10.2 13.3 Net Interest Expense --. - 1.8 1.8 1.7 1.5 1.9 1.6 1.3 1.0 Income Tax --- - 0.8 1.2 2.1 2.6 2.0 . 2.6 3.0 4.1 Net Income - 8.6 9.3 11.5 13.2 1.7 2.4 4.3 5.4 4.1 5.3 6.0 8.2 lash Flow Statements sources Internal Cash - 8.6 9.3 11.5 13.2 6.8 10.8 12.6 13.6 13.3 14.8 15.3 17.6 Long-Term Debt - 8.8 29.1 22.5 13.3 - - 7.2 8.1 - Equity Contributions - - 20.0 20.0 4.0 - - 1.8 2.1 - Total - 17.3 58.4 54.1 30.4 6.8 10.8 21.5 24.4 13.3 14.8 15.3 17.6 Application Capital Investments - 17.6 G.8 52.1 29.1 2.3 3.5 13.: 14.8 1.9 3.9 5.3 9.6 WorkingCapitalInfnase - 0.9 0.2 0.2 0.2 0.3 0.7 0.4 0.3 0.4 0.4 0.2 0.5 1 Interest --. - 1.8 1.8 1.7 121 1.9 1.6 1.3 1.0 I Debt Repayment -.. - 4.9 6.4 8.4 8.4 8.4 8.4 4.9 Total - 18.5 65.0 52.4 29.3 4.4 10.9 21.5 24.9 12.6 14.3 15.2 16.1 Cash Changes - (1.2) (6.5) 1.7 1.1 2.4 (0.1) (0.0) (0.5) 0.7 0.5 0.1 1.5 Ending Cash Balance 10.0 8.2 0.7 1.0 0.4 2.7 2.6 2.4 1.3 2.0 2.5 2.6 4.1 Lalance Sheets Assets current Assets 10.0 9.1 1.8 2.3 1.9 4.9 5.5 5.7 4.9 6.2 7.2 7.6 9.6 Net Fixed Assets .-- - 167.4 164.3 158.9 153.4 174.4 170.4 167.7 169.0 work in Rogresa - 18.2 84.0 137.5 168.4 - - 12.2 26.3 - Total 10.0 27.4 85.8 139.8 170.3 172.3 169.9 176.8 184.6 180.6 177.6 175.3 178.6 Liabilities and Equity Cumnt Liabilities - 0.0 0.0 0.0 0.0 5.2 6.7 8.8 8.8 9.0 9.1 5.7 5.7 8.8 37.9 60.4 73.7 68.8 62.5 61.3 61.0 52.6 44.2 39.3 34.4 I Long Term Debt - Esuity 10.0 18.6 47.9 79.4 96.6 98.2 100.7 106.7 114.8 118.9 124.3 130.3 138.5 Total 10.0 27.4 85.8 139.8 170.3 172.3 169.9 176.8 184.6 180.6 177.6 175.3 178.6 'Inaneid Covennnb Cost Recovery" NA 8.8 4.8 4.7 4.2 1.3 1.3 1.3 1.2 1.2 1.3 1.3 Debt WiceRatio NA 13.6 9.7 8.2 7.6 3.7 1.6 1.5 1.3 1.3 1.5 1.6 3.0 I opsratins revenues divided by the total of Opatine and "ance expnuea plus the greater atdepreciation or debt service.

- 64 - Annex 6(A): Procurement Arrangements CHINA TAI BASIN URBAN ENVIRONMENT PROJECT

Procurement

Summary of the Assessment of Agencies' Procurement Capacity

1. The TBUEPO under the Jiangsu Provincial Finance Bureau will oversee Bank-fmanced activities in this project. Municipal PMOs in Suzhou and Wuxi Municipalitieswill manage the procurement under their own components. The TBUEPO will take the following responsibilities during project implementation: (i)monitoring the overall progress of the project; (ii)preparing progress reports to Jiangsu Provincial Government and the World Bank; (iii)managing the technical assistance to control the quality of procurement documents; and (iv) organizing training on procurement. The Municipal PMOs will take the following responsibilities: (i)resolution of all inter-agency problems encountered by Project Implementing Units (PIUs) at municipal and district levels; and (ii)conduct monthly progress meetings with the TBUEPO and the PIUs.

2. The PIUSare identified as:

Project Sub-component PIU Procurement Unit Tendering Company 1) Wuxi - Huishan Huishan Water Procurement Wuxi Jianghui Tendering Wastewater Treatment System Treatment Company Unit co. Limited. 2) Wuxi - Wastewater Xishan Wastewater Procurement Unit Wuxi Jianghui Tendering Treatment Systems (Dongtmg Treatment Company co. and Men)in Xishan District Limited 3) Suzhou - Expansion of Suzhou Qingyuan Procurement China Instrimpex Fuxin and Loujiang WWTPs Construction Company Section International Tendering Limited under Suzhou co. Water Affairs Bureau 4) Suzhou - Polluted Water Suzhou Qingyuan Procurement China Instrimpex Control Scheme on Xujiang andconstructionCompany Section InternationalTendering Shangtang River Limited under Suzhou co. Water Affairs Bureau 5) Suzhou - Canal Sediment Suzhou Qingyuan Procurement China Instrimpex Dredging Construction Company Section International Tendering Limited under Suzhou co. Water Affairs Bureaa

6) Suzhou - Wuzhong Suzhou Wuzhong Asset Procurement Jiangsu Wastewater Treatment System Management and Management Unit Provincial AdministrationCompany International Limited Tendering Co. 7) TA and Capacity Building Provincial TBUEPO

-65- 3, All PIUs have designated specific departments and personnel to be responsible for preparation and implementation ofprocurement. SQCC recently gained experience with similar procurement under a JBIC-financed project. Other PIUs have experience with procurement under local procedures. TA for procurement management is necessary to help the PIUs to manage procurement activities including preparation and review procurement documents.

4. Primary training on procurement has been provided during project preparation. Areas that need further strengthening have been identified and an action plan has been agreed upon. The action plan includes further training, recruitment of experienced staff for PIUS, preparation and dissemination of a Project Procurement Manual, bidding document preparation, among other things (see Table D). In view of the experience gained of Bank's procurement procedures and the demonstrated commitment of all PIUs to observe the Bank's Procurement Guidelines, the general risk is assessed as average.

5. The assessment identifed some deviations in provincial or municipal regulations which are not acceptable under World Bank Procurement Guidelines, in addition to those identified in the OPR of China, The deviations will be noted in the loan agreement to confim exemptions for Bank-jnancedprocurement from theprovincial/municipal regulations and the Bidding and Tendering Law of China, in case of discrepancies.

Procurement Arrangements

6. Procurement Plan. A draft procurement plan for the two project cities has been prepared using computer project management software and included in the Project Implementation Plan (PIP). The packaging plan is in Table C.

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

For goods and works. Procurement under IBRD Loans and IDA Credits (dated January 1995 and revised in January and August 1996, September 1997 and January 1999). The bidding documents will clearly specify qualificationrequirements, for post-qualification of bidders. For the selection of consultants. Selection and Employment ofConsultants by World Bank Borrowers (dated January 1997 and revised September 1997, January 1999 and May 2002).

8. Format of the Documentation. The following formats will apply:

Evaluation reports. The Bank's Standard Bid EvaluationForm, Procurement of Goods or Works (dated April 1996, translated into Chinese by MOF in May 1997), and Sample Form of Evaluation Report for Selection of Consultants (dated October 1999). Model Bidding Documents. The Bank-approved Chinese Model Bidding Documents (MBD) dated May 1997, prepared by MOF based on the Bank's Standard Bidding Documents (SBDs) will be adopted for all ICB and NCB activities for goods and works. All new revisions to the Bank SBDs since 1997 will be incorporated into the existing MBDs. The World Bank SBDs will be used when an applicable MBD is not available. Also, as indicated in the OPR of China, the harmonized SBD will be used in this project when available. The bidding documents for the two ICB performance-based contracts in Suzhou will be prepared based on the World Bank SBD-Supply and Installation of Plant and Equipment (two-stage bidding).

- 66 - 9. Advertisement. The General Procurement Notice (GPN) has been published in the United Nations Development Business (UNDB) and dg-market in October 2003. Specific Procurement Notices (SPNs) for all ICB and NCB procurement activities will be published in at least one newspaper with national circulation. In addition, the SPNs for ICB contracts will be published in the UNDB online as required by the World Bank Procurement Guidelines. Similarly, invitations for expressions of interest for consulting contracts expected to cost more than $200,000 equivalent will be advertised in the UNDB and at least 14 days will be allowed for responses before the preparation of the shortlist. All other contracts for selection of consulting firms will be advertised in a national newspaper.

Procurement Methods (Table A)

10. A total ofUS$l13.48 million of works and goods, excluding project management, is expected to be financed under the project, using the following procedures: ICB About US $3 1.09 million of civil works and goods will be procured under two performance-based contracts for construction of two wastewater treatment plants in Suzhou. Prequalification of bidders will be applied to these two contracts. NCB Works: About $80.96 million ofworks for construction of interceptor and sewage collection pipelines, pumping stations, wastewater treatment plants, gates, shiplocks, and sediment dredging will be procured using NCB procedures. Each contract is estimated to cost between $1 million and $6 million. Those contracts would not be of interest to foreign contractors. Goods: Equipment for Xujiang and Shangtmg gates estimated to cost $1.44 million will be procured under two contracts using NCB procedures. Each contract is estimated to be around US$600,000 and US$700,000. Those contracts would not be ofinterest to foreign suppliers.

11, NCB. In order to ensure economy, efficiency, transparency and broad consistency with the provision of Section Iof the Guidelines, the procedures normally used for public procurement in the People's Republic of China shall be modified in accordance with the following provisions:

Particiuation in Bidding; and Preferences (i) For clarification purposes, it is understood that "Approvals of draft bidding documents, bid evaluation reports and proposals for award shall be obtained in accordance with the relevant rules and procedures of the World Bank Procurement Guidelines." (ii) Government-owned enterprises in the People's Republic of China shall be eligible to participate in bidding only if they can establish that they are legally and financially autonomous, operate under commercial law, and are not a dependent agency of the Borrower or the procuring entity. Military or security units, or enterprises which belong to the Ministry ofDefense or the Ministry ofPublic Security shall not be permitted to bid. (iii) Foreign bidders shall be eligible to participate in bidding under the same conditions as local bidders, and local bidders shall be given no preference (either in the bidding process or in bid evaluation) over foreign bidders, nor shall bidders located in the same province or city as the procuring entity be given any such preference over bidders located outside that city or province. (iv) Bidders shall be allowed to participate in bidding without being listed in the Government

- 67 - Database on Bidder Information. (v) Foreign bidders shall not be required, in order to participate in bidding, to enter into a joint venture with a local bidder, or to subcontract part of their contract to a local bidder. (vi) If there is prequalification, all prequalified bidders shall be invited to bid. (vii) If there is limited bidding because there are only a limited number of bidders who can meet the requirements of the bidding documents, all of these bidders shall be invited to bid. (viii) Bidders shall not be required, as a condition ofparticipation in the bidding, to provide suppliers' credits.

Advertising:- Time for Bid Preparation

(ix) Invitations to bid shall be advertised in at least one widely-circulated national newspaper. In addition, the Borrower is encouraged to advertise in the Government Public Procurement Bulletin when established and on a fiee and open access website.

Standard Bidding Documents

(x) The Borrower's SBDs shall be acceptable to the Bank. The bidding documents shall provide clear instructions on how bids should be submitted, how prices should be offered, and the place and time for submission of bids. A mini" of 30 days for the preparation and submission of bids shall be provided. Bidders shall be allowed to submit bids by hand or by mail. halification Criteria and Evaluation Criteria

(xi) Qualificationcriteria shall be clearly specified in the bidding documents, and all criteria so specified, and on& criteria so specified, shall be used to determine whether a bidder is qualified. Qualifications of a bidder found to meet the specified qualification criteria shall not be taken into account in the evaluation of such bidder's bid.

(xii) Evaluation criteria shall be clearly specified in the bidding documents, and evaluation criteria other than price shall be quantified in monetary terms. All evaluation criteria so specified, and onh evaluation criteria so specified, shall be taken into account in bid evaluation. Merit points shall not be used in bid evaluation.

Bid Evaluation and Award of Contract

(xiii) Bid received after the deadline for bid submission shall be returned to the bidders unopened.

(xiv) A bid containing material deviations from, or reservations to, the terms, conditions or specifications of the bidding documents shall be rejected as not substantially responsive. A bidder shall not be permitted to withdraw material deviations or reservations once bids have been opened.

(xv) Evaluation of bids shall be made in strict adherence to the criteria specified in the bidding documents, and contracts shall be awarded to the qualified bidder offering the lowest, evaluated and responsive bid.

-68- (mi) A bidder shall not be required, as a condition for award, to undertake obligations not specified in the bidding documents, or otherwise to modify the bid as originally submitted.

(xvii) There shall be no post-bidding negotiations with the lowest or any other bidder.

12. Consulting Services and Training. The value of all consulting services to be procured is estimated to be about $1.75 million, including $0.05 milIion for training to be financed by the Bank except for taxes and duties, estimated at 3 percent of the total cost. All contracts (except for foreign training) will be procured under Quality and Cost-Based Selection (QCBS) procedures. In addition, two contracts for about $0.1 3 million equivalent will be procured by Wuxi and Suzhou Municipalities under local procedures for the updatinglpreparation of wastewater masterplans that are not Bank-financed.

13. Retroactive financing. Retroactive financing of up to $5.0 million may be applied to expenditures made after November 2003 for the procurement of works, consistent with the Procurement Guidelines.

- 69 - Procurement methods (Table A)

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

(1 6.1 7) (41.41) (0.00) (0.00) (57.58) , 2. Goods 0.00 1.44 0.00 0.00 1.44 I (0.00) (1.36) (0.00) (0.00) (1.36) 3. Services 0.00 0.00 0.00 17.41 17.41 (0.00) (0.00) (0.00) (0.00) (0.00) 4. Consultants Services 8 0.00 0.00 1.75 0.13 1.88 Training (0.00) (0.00) (1.75) (0.00) (1.75) 5. Interest during 0.00 0.00 0.00 3.64 3.64 construction (0.00) (0.00) (0.00) (0.00) (0.00) 6. Front-end fee 0.00 0.00 0.61 0.00 0.61 (0.00) (0.00) (0.61) (0.00) (0.61) Land 0.00 0.00 0.00 11.84 11.84 1 (0.00) (0.00) (0.00) (0.00) (0.00) ' Total 3 1.09 82.40 2.36 62.86 178.71 ( 16.17) (42.77) (2.36) (0.00) (61.30) Figures in parentheses are the amounts to be financed by the Bank Loan. All costs include contingencies. Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project; and (ii) re-lending project funds to local government units.

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

Consultant Services

A. Firms (1.70) (0.00) (0.00) (0.00) (0.00) (0.05) (0.00) (1.75) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) 1.70 0.00 0.00 0.00 0.00 0.05 0.13 1.88 (1.70) (0.00) (0.00) (0.00) (0.00) (0.05) (0.00) (1.75) Including contingencies Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed Figures in parentheses are the amounts to be financed by the Bank Loan.

-71 - Prior review thresholds (Table B)

Table B: Thresholds for Procurement Methods and Prior Review’

two turnkey contracts.)

All contracts above $4 Less than 15,000 NCB million ($69.1) 2. Goods Equal to or Above 500 ICB All contracts (0)

1 Lessthan500 I NCB I ~llcontracts equal to or above $300,000 ($1.4) 3. Services Qual to or above 100 QCBS All contracts ($1.6) (firms)

Individual Other All contracts equal to or above $50,000 ($50,000) 4. Miscellaneous 5. Miscellaneous 6. Miscellaneous

Total value of contracts subject to prior review: $102.2 million (base costs) Overall Procurement Risk Assessment: Average Frequency of procurement supervision missions proposed: One every 6 months (includes special procurement supervision for post-reviewlaudits)

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

Table 1: Packages of Huishan Wastewater Component

Contract Procure- Contract Description Base Cost Date of Bank Prequalifi- Number ment (RMB 000s) Start Review cation Type m1c1 NCB Yangshi Road, Huchang 20,204.6 May 04 Prior No (Retroactive) Road, East-West and South-NorthAvenues and Huishan Avenue, 20.5km m1c2 NCB Yanxin, Dongzhong 42,558.1 July 04 Prior No (Retroactive) Roads, East No 1,2,3,4 and 5, East extension of Huchang Road, Luqu, Wushuchang Avenue, Yanxin and Huchang 1 Pumping Stations, 3S.8km HWWIC3 NCB 1 North and West Ring 10,772.0 Oct. 04 Post NO ROA, Southeast NO- 1 Road, Yuqi and Qianzhou Roads and Xicheng I Pumping Station, i3.7km m/c4 NCB I WWTP civil works, 47,672.1 July 04 Prior Yes I equipment supply and installation.

HWWE1 ~ 500.0 oct. 04 No No

TOTAL 121,706.8

-73- Table 2: Packages of Dongting and MenWastewater

Contract Procure- Base Cost Date of I Bank (Prequali- Number ment Type Review ication DWW/Cl NBF July 04 No

DWWICZ NCB No (Retroactive) Pumping Station DWWlC3 NCB Collection System and 27,022.1 Oct. 05 Post No Pumping Station DWWIC4 NCB WWTP Civil Works, 32,676.6 May05 Prior Yes Equipment Supply and

NFJ3 Sept, 05 No No

TOTAL AWW/C 1- NCB July 04 Prior No c4 Park Collection System, Pumping Station and Trunk; Anzhen Collection System, Pumping Station and Trunk Anzhen Collection System, Pumping Station and Trunk; Yangjian Collection System, Pumping Station and TeHouqiao Collection System, Pumping Station and Trunk; AWWIC5 NCB WWTP Civil Works, 30,654.7 Feb. 05 Yes Equipment Supply and

AWE1 NBF Oct. 06 No

TOTAL 196,055.6

- 74 - Table 3: Packages of Wuli Lake Rehabilitation Component

Contract Procure Contract Description Base Cost Dateof I Bank ' 'requalifi- (RMB 000s) cation Changguangxi, 7,690.0 Dec. 03 Prior No (Retroactive) Xiaoxuanbang, Dongxinhe, Xiejingbang and Xianjingbang Caowangjing Sluice Gate and 8,000.0 tDec. 03 Prior No (Retroactive) Shiplock Banqiaogang, Huanhuhe, 50,803.0 Jan.03 Post NO &Miaodongbang, Maligang Rehabilitation of 19.4 lun 118,343.2 July04 Prior No for the first one, Post for the Test West Wuli Lake, East Wuli 4,000.0 Oct.04 Prior NO Lake package for the first one, Post for the rest

~ TOTAL 188.836.2

Table 4: Packages of Fuin and Loujiang Wastewater Component

Contract I Procure I Contract Description Base Cost Date of Bank Prequalifi- Number I mentType I (RMB 000s) Start Review cation FWW/Tl I ICB I WWTP Design, Civil 125,961.0 Oct. 05 Prior Yes Works, Equipment Supply and Installation and Commissioning

Sub-TOTAL 125,961.0 LWw/Tl ICB WWTP Design, Civil 95,721.0 Oct. 05 Prior Yes Works, WWTP Design, excluding Equipment Supply and commissioning Installation and Commissioning

Sub-TOTAL 95,72 1.O Ill I Total 221,682.0

- 75 - Table 5: Packages of Wuzhong Wastewab

Contract Procure- Base Cost /";k /'":li- Number ment Type Contract Description (RMB 000s) Revie fication 1 WWWIC1 NCB Hedong Collection 8,160.0 Aug.04 Prior I I Sewers, 7km I WWWfC2 I NCB I Collection System and I 27.409.5 Road Recovery and 1 Pumping Station in Dongwu Area, 16.1h, pumping station and siphon for crossing the Grand Canal WWWfC3 NCB Collection System and 28,790.7 Oct. 05 Post No Road Recovery and 1 Pumping Station in the Constructed Area, 20.2h DWWlC4 NCB WWTP Civil Works, 29,630.6 July04 Prior Yes Equipment Supply and Installation DWE1 NBF Power Supply 3,364.0 Oct. 04 NO No

TOTAL 97,354.8

Table 6: Packages of Suzhou Sediment Dredging Component

Contract Procure- Contract Description Base Cost Date of Bank Prequalifl- Number ment Type (RMB000s) Start Review cation SSDIC1 NCB Section 1: Dredging for 22,866.6 Sept. 04 Prior No 16.634 km (359,7001113) of 65.7 km rivers and canals and corresponding landfill (9,206,700); Section 2: Dredging for 22.083 km (452,000) of 65.7 km rivers and canals and corresponding landfill (13,720,100) SSDfC2 NCB Dredging for 26.992 km 17,840.9 Sept. 05 Post No (474,900m3) of 65.7 km rivers and canals and corresponding landfill TOTAL 40,705.5 1 1 1

- 76 - Table 7: Packages of Xujiang & Shangtanghe Gates Component

I Contract I Procure- Contract Description I Base Cost 1 Date of 1 Bank 1 Prequall- I (RMBOOO~)1 Start I Review I fication Civil work and Gate 1 32,335.7 I July04 I Prior I NO Manufacturing and installation for Xujiang gate and shiplock Civil work and Gate 16,644.2 Sept. 04 Post No Manufacturing and installation for Shangtang I I shiplock XSGMl NCB Hoisting equipment for 3,529.8 Oct. 04 Prior No Xujiang and Shangtang works Electrical control 6,868.4 Oct. 04 Prior No equipment and instruments for Xujiang and Shangtang works

I TOTAL I 59,378.1

Table 8: TA Packages

Budget Date of Start Method of Procurement A. Sector Development

A. 1 Urban Wastewater Master Plan Preparation $0.13 million ' Feb, 05 Non-Bank financed Advisory Services for Wuxi and Suzhou Municipalities

B. Project Implementation Assistance B .1 Institutional, Financial & Operational $0.92 million Dec, 04 Quality and Cost Based

- 77 - Table D. Action Plan

In order to assure that Plus undertake procurement in an efficient and transparent manner, the following actions will be undertaken to strengthen their capacity for implementation ofthe proposed Tai Basin Urban Environment Project:

Proposed Action Plan Due Date 1. The TBUEPO should establish a procurement management system for the project Completed and prepare a Procurement Manual to ensure the quality and smooth preparation and

2. The TBUEPO should organize procurement training on preparation of bidding Before procurement documents and bidding procedures. under retroactive financing and repeated periodically 3. The TBUEPO should prepare the GPN for publication as required. Completed 4. Wuxi-Xishan should establish their legal entity for procurement as soon as possible. Completed 5. The TBUEPO and the new PIUs should take other actions to strengthen their Before procurement procurement capacity which, includes recruiting competent personnel, using the under retroactive experience from the procurement agents, employing consultants for project management, financing and continuing etc. 6. The TBUEPO should coordinate with all the PMOsFIUs to finalize the detailed Continuing procurement plan. The plan should be updated annually. 7. All PIUs should select experienced design institutes to be responsible for the design of Completed the project and preparation of technical bidding document. 8. Wuzhong and Xishan should finalize the selection of their NCB procurement agents. Completed

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

- 78 - Annex 6(B): Financial Management and Disbursement Arrangements CHINA: TAI BASIN URBAN ENVIRONMENT PROJECT

Financial Manapement 1. Summary of the Financial Management Assessment

1. The FM Specialist has conducted an assessment ofthe adequacy ofthe project financial management system of the Tai Basin Urban Environment Project. The assessment, based on guidelines issued by the Financial Management Sector Board on June 30,2001, has concluded that the project will meet the minimum Bank financial management requirements, as stipulated in BP/OP 10.02, subject to addressing the action plan stipulated in paras. 49 and 50 below. In the financial management specialist’ (FMS) opinion, the project will have in place an adequate project financial management system that can provide, with reasonable assurance, accurate and timely information on the status ofthe project in the agreed reporting format and as required by the Bank.

2. Funding sources for the project include Bank loan and counterpart funds. The Bank loan proceeds will flow from the Bank into the project special account to be set up at and managed by the JJPFB, to project implementing agencies (or project companies), and finally to contractors or suppliers. The Bank loan will be signed between the Bank and the People’s Republic of China through its MOF, and on-lending arrangement for the Bank loans will be signed between MOF and JPFB and then between JPFB and Suzhou and Wuxi governments through Suzhou and Wuxi Finance Bureaus, respectively; and finally between Suzhou and Wuxi Finance Bureaus and implementing agencies. In terms of disbursement technique, the project will be disbursing based on the traditional disbursement techniques and will not be using project management report (€“)-based disbursements, in accordance with the agreement between the Bank and MOF. The constitution of counterpart funds will be provincial, municipal and district govemment budgetary appropriations including itom wastewater service and some local commercial debt.

3. No outstanding audits or audit issues exist with any ofthe implementing agencies involved in the proposed project. The task team, however, will continue to be attentive to financial management matters and audit covenants during project supervision.

Summary Project Description

4. The objectives of the proposed Tai Basin Urban Environment Project are to: (i)improve the quality of the urban environment through improved wastewater and water quality management in the key municipalities ofWuxi and Suzhou and more widely in the Tai Basin, and (ii)facilitate sustainable urban economic growth and social development in’the region. The project will therefore support Jiangsu Province in implementing priority long-term urban environmental services to alleviate environmental degradation of its water resources, including through physical investments and institutional and financial reforms, that would provide a viable and sustainable basis for small wastewater systems in rapidly developing areas,

- 79 - 5. The main components of the project include:

A. Wuxi Municipality a Wuli Lake Sub-project a WWTPs and networks

B. Suzhou Municipality a Central urban area canal network rehabilitation a Polluted water control scheme on Xujiang and Shangtang rivers a WWTPs and networks

6. The estimated cost of the proposed project is $174.46 million excluding interest during construction, commitment fees and front-end fees and the proposed Bank Loan amount is $60.69 million (excluding fiont end fee).

Country Issues

7. To date, no country financial accountability assessment (CFAA) has been undertaken for China. The Bank has relied on a similar exercise carried out by the Asian Development Bank in 2000 for reference and a direct dialogue with the government of China in respect of the CFkA exercise has been initiated and is currently underway.

8. Bank experience and substantial achievement in the areas of public expenditures, accounting and auditing with China projects for the past few years is notable. However, further improvement is expected in the next few years. As the economic reform program further unfolds, the government ofChina has come to realize the importance of establishing and maintaining an efficient and effective market mechanism to emure transparency and accountability, and minimize potential fraud or conuption.

9. Due to rather unique arrangements by the government ofChina, fimding (in particular Bank loan) of Bank projects is controlled and monitored by MOF and its extension, i.e. finance bureaus at provincial, municipaVprefecture and districtkounty levels. However, project activities are usually carried out by implementing agencies of a specific industry or sector due to the level and complexity of expertise involved. The above arrangement usually requires more and closer coordination of the project, as the multi-level management ofthe funding and implementation mechanism sometimes works to the detriment of smooth project implementation.

- 80 - Risk Analysis

10. The followhg risks with corresponding mitigating measures have been identified during assessment:

Risk Ratin

The wastewater companies in Xishan and I Wuzhong Districts have yet to be established and have no prior experience with I Bank-financed projects. The Task Team will ensure that mechanism will be in place in order that Bank and counterpart bdswill be released to the ultimate beneficiaries on a timelv basis. c. Staffing =gh The financial staff ofthe wastewater companies in Xishan, Huishan and Wuzhong Districts should be recruited before disbursements on components involved. d. Accounting Policies and Procedures Low Accounting policies and procedures are already in place. e, Intemal Audit Moderate No intemal audit arrangement for the project. However, some implementing entities will be supervised by their supervising agencies. f. External Audit LOW The extemal auditors, the Jiangsu Provincial Audit Office, has extensive audit experience with Bank projects. :. Reporting and Monitoring LOW Format offinancial statements and frequency ofsubmission have been clearly defined by the Bank and MOF. Checking by the Bank's Task Team at the initial implementation stage to ensure correct setup, which should be followed up by regular sumvision missions.

Strengths and Weaknesses

11. Strengths. In light of the strong revenue base of project municipalities, provision of counterpart funds by implementing agencies is not expected to be a problem. In addition, the JPFB has previous experience on several Bank projects, including the completed Southem Jiangsu Environment Protection Project.

-81 - Significant weaknesses Resolution 1. Some frnancial staff are new to Bank Strong assistance and training program should be projects and are short of relevant experience. provided by provincial TBUEPO and the Bank. 2. Financial staff of some implementing Formulation of an agreed action plan and agencies have not yet been recruited. timetable for recruiting staff with satisfactory qualifications and experience.

Implementing Entity

13. The TBUEPO has been established comprising staff from the Provincial Finance Bureau and Provincial Environmental Protection Bureau. A leading group has also been established at the provincial level and in each of the project municipalities. Under the Municipal Leading Groups, Municipal PMOS have been set up to monitor the preparation and implementation of the proposed project. Sub-PMOs or PWs have also been set up for individual project components. The project organization is as follows:

suzhou 0

PIU for PIU for PIU for Wuli Huishan

- a2 - Funds Flow

14. Funding for the project includes Bank loan and counterpart funds. One special account will be set up and managed by the JPFEj. The hdsflow is as follows:

The World SA Suzhou and Implementing Suppliers and Bank 4 managed by Wuxi finance + agencies + contractors JPFB bureau 4

15. Counterpart funds will be provided from provincial, municipal and district government budgetary appropriations including from wastewater service fees and some local commercial debt.

Staffing

16. Adequate project accounting staff with satisfactory educational background and work experience commensurate with the work they are expected to perf- is critical to successfhl implementation of project financial management. Based on discussions, observations and review of educational background and work experience of the staff identified for financial and accounting positions in implementing entities (both “project” and “entity”) has been undertaken.

17. To strengthen financial management capacity and achieve consistent quality ofaccounting work, a Project Financial Management Manual (Manual) has been prepared by JPFB. The Manual, which has been reviewed by the Bank as satisfactory, provides detailed guidelines on financial management, internal controls, accounting procedures, fund and asset management and withdrawal application procedures for use by all project implementing agencies.

18. Most of the implementing entities are new to Bank-financed projects. A well-designed and focused training program in project financial management is to be prepared by the Provincial PMO for all financial and accounting staff to ensure a good understanding and knowledge ofthe following: a Bank’s financial management policy and disbursement procedures e Fundasset‘contract management e Format and content ofproject financial statements 0 Audit requirements

19. World Bank ofice in Beijing (WBOB) will provide training assistance as and when needed.

- 83 - Accounting Policies and Procedures

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

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

0 Chart of accounts 0 Detailed accounting instructions for each project account 0 Standard set ofproject financial statements 0 Znstructions on the preparation of project financial statements

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

4 Balance Sheet 0 Statement of Sources and Uses of hds 0 Statement ofImplementation of the Loan Agreement 0 Statement of Special Account

2 1. Each ofthe implementing entities will be managing, monitoring and maintaining respective project accounting records. Original supporting documents for project activities will be retained by these agencies. In addition, each implementing entity will prepare on a timely basis, financial statements, which will then be reviewed, approved and consolidated by the TBUEPO before forwarding to the Bank for review and comment.

2. Audit Arrangements

Internal Audit

22. There is no formal independent Internal Audit department for the project. However, disbursements will be reviewed by JPFb and Bank supervision missions.

External Audit

23, Project financial statements are required to 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 ISA and the Govemment Auditing Standards ofthe People’s Republic of China (1997 edition). The Jiangsu Provincial Audit Bureau has been identified as auditor for the project. Annual audit reports will be issued in the name ofJiangsu Provincial Audit Bureau.

24. The annual audit reports ofproject consolidated financial statements will be due to the Bank within six months of the end of each fiscal year. In addition, annual audit reports on the financial position and operating results of the following implementing entities will be due to the Bank within six months of the end of each calendar year: 0 Huishan Water Treatment Company Limited 0 Xishan Wastewater Treatment Company Limited 0 Suzhou Qingyuan (Water Environment) Construction Company Limited 0 Wuzhong Asset Management and Administration Company Limited.

Reporting and Monitoring and Format of Financial Statements

25. Each implementing entity will prepare its own project financial statements, which will then be consolidated by TBUEPO. The project consolidated financial statements and audit reports on financial statements of each implementing entity will be forwarded by TBUEPO to the Bank for review and comment on a timely basis. Audited project accounts are required to meet the Bank’s fiduciary requirements. Audited accounts of wastewater enterprises are required to assess performance on achieving financial viability and sustainability objectives.

26. The format and content of the project financial statements represents the standard project financial reporting package agreed to between the Bank and MOF, and have been discussed and agreed with all parties concerned. In line with the newly issued Financial Monitoring Report (FMR) guidelines, the project consolidated financial statements will be submitted as part of the FMR to the Bank on a semi-annual basis (prior to August 15 and February 15 of the following year), and consisting of the following four statements:

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

Information Systems

27. Accounting software developed by the Bank will be recommended to all implementing agencies under the project during construction phase. The Bank task team will closely monitor the FM information system, especially at the initial setup and preparation offinancial statements, and provide assistance, if required.

Impact of Procurement Arrangements

28. Thresholds set for procurement post-review will be consistent with that set for statement of expenses (SOE) for disbursement purposes. To have maximum effectiveness and efficiency, FMS and procurement staff from the Bank will participate in supervision missions to ensure the following:

0 Contracts awarded are in line with the Bank’s procurement guidelines; 0 Contract payments made are in accordance with the terms ofthe contract and well supported.

3. Disbursement Arrangements

29. In accordance with the agreement between the Bank and MOF, project disbursements will be based on the traditional disbursement techniques and will not be using PMR-based disbursements. Bank loan proceeds would be disbursed against eligible expenditures as follows: (i)civil works - averaging 51.4 percent ofexpenditures; (ii)equipment - 100% of foreign expenditures, 100 percent oflocal expenditures (ex-factory) and 75 percent of other items procured locally; (iii)Consulting service - 9 1 percent of

- 85 - expenditures; and (iv) TA or training- 100 percent ofexpenditures.

30. Disbursement methods, such as replenishment, hectpayment and special commitment, are available for the project.

3 1, JPFB will be directIy responsible for the management, monitoring, maintenance and reconciliation of the special account (SA) activities of the project. Supporting documents required for Bank disbursements will be prepared and submitted by respective project implementing entities through Suzhou and Wuxi finance Bureau to JPFB for final verification and consolidation before sending to the Bank for further disbursement processing.

Allocation of loan proceeds (Table C) 32. The proposed loan of US$61.3 million would be disbursed over a period of about five years, up to the closing date of December 3 1,2009. The allocation of loan proceeds according to expenditure category is listed in Table C. Table C: Allocation of Loan Proceeds Expenditure Category f Amount in US$million I Financing Percentage r (1) Civil Works (including supply and install contracts) for: (a) Parts A.2(a) ofthe Project 8.63 57% jimplemented by HWTC) (b) Parts A.2(b) and (c) of the Project 16.78 49% (imdemented bv XWTC) (c) Part B.2(a) and (b) of the Project 14.41 52% (implemented by SQCC) (d) Part B.2(c) ofthe Project 5.64 48% (implemented by WAMC) (e) Part B. 1(a) of the Project 2.52 41% (implemented by SQCC) (f) Part B.l(b) of the Project 3.51 69% (implemented by SQCC) (2) Goods for Part B.l(a) of the Project 1.30 100% of foreign expenditures, 100% of (implemented by SQCC) local expenditures (ex-factory cost) and 75% of local expenditures for other item! procured locallv (3) Consultants' Services 1.52 91% (4) Training 0.05 100% (5) Unallocated 6.33 Total Project Costs with Bank 60.69 Financing Interest during construction 0.00 J Front-end fee 0.61 Amount due under Section 2.04 ofthis Agreement Total 61.30

- 86 - Use of statements of expenditures (SOEs): 33. Withdrawals for the loan account will be made on the basis of SOEs for the following expenditures:

e Works contracts of less than $4,000,000 Goods contracts of less than $300,000 e Consulting fm contract of less than $100,000 e Individual consultant contracts of less than $50,000 e All training activities

Special account: 34. One Special Account will be established in JPFB. The authorized allocation of SA is proposed not to exceed US$4.2 million. Bank funds would be disbursed to the SA set up at JPFB, and then to project implementing entities andlor suppliers and contractors. However, the authorized allocation will be limited to US$3.0 million equivalent until the aggregate withdrawals and outstanding Special Commitments will be equal to or exceed US$17 million equivalent.

35. JPFB will be responsible directly for the management, monitoring, maintenance and reconciliation of the SA activities of the project. Supporting documents required for Bank disbursements will be prepared and submitted by respective project implementing entities through the related Municipal Finance Bureau, then to TBUEPO and finally to JPFB for final verification and consolidation before sending to the Bank for further disbursement processing.

Action plan

36. The following proposed time-bound actions should be adequately addressed by the project:

Action I Responsible person 1 Completion Date

1. Financial staff of wastewater TBUEPO Prior to disbursements on companies in Xishan, and respective components if not Wuzhong District completed by Loan signing 2. Financial Management TBUEPO Prior to disbursements on Manual finalized and issued respective components if not to related financial staff. completed by Loan signing

- 87- 37. Some of our assessments were carried out based on documents provided by the implementing agencies, such as the company charters of Xishan and Wuzhong wastewater treatment companies, job description for financial staff of Xishan, Huishan and Wuzhong wastewater treatment companies. These issues will be followed up before the signing of the loan agreement.

Financial Covenants

38. Further specific financial covenants (if any) applicable to project “entities” will be provided by the Bank’s Task Team in addition to 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. For the financial covenants on the “entity” portion, please refer to section G of PAD.

Supervision Plan

39. A detailed supervision plan for this project will be included as part of the China Audit Strategy document which is currently in process. This document will take into consideration of the size of project and the risks identified.

- aa -

Annex 8: Documents in the Project File* CHINA: TAI BASIN URBAN ENVIRONMENT PROJECT

A. Project ImplementationPlan Project Feasibility Study by Montgomery Watson Harza, September 2003 Project Implementation Plan, September 2003 Project-wide Environmental Assessment Report, October 2003 Resettlement Action Plan for Wuxi and for Suzhou and Resettlement Policy Framework for Suzhou, September 2003 Feasibility reports and design and tender documentation for individual components, September 2003 Terms of References for: Wastewater Master Plans For Wuxi And Suzhou Municipalities; Environmental Monitoring; Catchment Management Plan For Wang Yu River; Institutional, Financial and Operational Strengthening of Wastewater Utilities; Design Review, Construction Management and Procurement Management. Supplementary Imfonnation for EA, February 2004

B. Bank Staff Assessments FMS Assessment, August-September 2003 Procurement Capacity Assessment, August-September 2003 Financial Analysis of Project Utility Companies, Economic Analysis ofthe Project Components, Mission Aide-Memoires, Implementation Completion Report, Southern Jiangsu Environment Protection Project

C. Other

'Including electronic files

- 90 - Annex 9: Statement of Loans and Credits CHINA: TAI BASIN URBAN ENVIRONMENT PROJECT 29-Apr-2004 Difference between expeded and actual Original Amount in US$ Millions disbursements' ProjectID FY Purpose IBRD IDA GEF Cancel. Undisb. Orlg FnRev'd PO66955 2004 CN-ZHWIANG URBAN ENVMT 133.00 0.00 0.00 0.00 133.00 0.00 0.00 PO65463 2004 CN - Jlangd Integrated Agric. Modem. 100.00 0.00 0.00 0.00 100.00 2.25 0.00 PO65035 2004 CN-Ganau 6 Xinjiang Pastoral Development 66.27 0.00 0.00 0.00 65.61 5.18 0.00 PO73002 2004 CN-Bash Education in Weotm Areas 100.00 0.00 0.0 0.00 100.00 0.00 0.00 PO77615 2004 CN-GEF-Gansu6 Xinjiang Pastoral Develop 0.00 0, 00 10.50 0.00 10.50 0.90 0.00 PO77137 2004 CN4th Inland Walwwaya 91.00 0.00 0.00 0.00 91.oo 0.00 0.00 PO69852 2004 CN-Wuhan Urban Tram@ 200.00 0.00 0.00 0.00 200.00 26.65 0.00 PO67337 2003 CK2nd GEF Energy Conservation 0.00 0.00 26.00 0.00 14.60 17.15 0.00 Po40599 2003 CN-TIANJIN URE DEV ii 150.00 0.00 0.00 0.00 148.50 -1.50 0.00 PO58847 2003 CN-3rd Xinjiang W Project 150.00 0.00 0.00 0.00 106.13 12.38 0.00 PO68058 2003 CN-Ylxing Pumpd Storaga Project 145.00 0.00 0.00 0.04 133.25 4.w 0.00 PO76714 2003 CN-Anhui Hwy 2 250.00 0.00 0.00 0.00 247.50 14.75 0.00 W70441 2003 CN-Hubd Xiaogan Wangfan Hwy 250.00 0.00 0.00 0.00 156.78 -16.22 0.00 PO70191 2003 CN-SHANGHAI URB ENVMT APLI 200.00 0.00 0.00 0.00 190.00 -10.00 0.00 PO71147 2002 CN-Tubenulesia Control Project 104.00 0.00 0.00 0.00 90.28 -13.72 0.00 PO60029 2002 CN-Swtain. Foreaby Dev(Naiural Forest) 0.00 0.00 16.00 0.00 14.11 3.40 0.00 Po64729 2002 CN-SUSTAINABLE FORESTRY ON. PROJECT 93.90 0.00 0.00 0.00 76.07 3.91 0.00 PO58846 2002 CN-Natl Rpihvay Project 160.00 0.00 0.00 0.00 34.62 0.87 0.w W70459 2002 CN-Inner Mongolia Hwy Project 1w.00 0.00 0.00 0.00 85.84 4.84 0.00 PO68049 2002 CN-HUM Hydropowar Dev in Pwr Areas 106.00 0.00 0.00 0.0 87.68 15.18 0.00 PO56199 2001 CN-3rd Inland Watemayn 100.00 0.00 0.00 0.00 79.80 7.10 0.00 PO51859 2001 CN-LIAO RIVER BASIN 100.00 0.00 0.00 0.00 70.70 30.30 0.00 PO58845 Mol JiillgdllHwy 200.00 0.00 0.00 0.00 127.20 6.20 0.00 PO45915 2001 CN-U"qI Urban Transport 100.00 0.00 0.00 0.00 52.54 48.64 0.00 Pa47345 2001 CNHUAl RIVER POLLUTION CONTROL 105.50 0.00 0.00 0.00 87.18 -18.32 0.00 Po56596 2001 CKShijiazhuangUrban Transport 100.00 0.00 0.00 0.00 85.41 54.31 0.00 PO56516 2001 CN - WATER CONSERVATION 74.00 0.00 0.00 0.00 37.49 7.59 0.00 PO64924 2000 CKOEF-EEIJING ENVMT II 0.00 0.00 25.00 0.00 23.32 19.26 3.52 PO45264 2000 CNSMAWLDR CAmEDEV 93.50 0.00 0.00 0.00 11.60 5.95 0.00 W64730 2000 CN - Yangtze Dlka StrengtheningProject 210.00 0.00 0.00 0.00 109.29 97.29 0.00 PO45910 ZOO0 CN-HEBEl URBAN ENVIRONMENT 150.00 0.00 0.00 0.00 119.36 48.86 0.00 PO49436 2000 CN-CHONGQINQURBAN ENVMT 200.00 0.00 0.00 3.70 152.28 64.58 0.00 PO58843 2000 Guangd Highway 200.00 0.00 0.00 0.00 100.22 47.22 0.00 PO42109 2000 CN-BEWING ENVIRONMENT II 348.00 0.00 25.00 0.00 286.54 185.32 0.00 PO58844 2000 3rd Henan Prov Hwy 150.00 0.00 0.00 0.00 55.58 24.58 0.00 PO56424 2000 CN-TONGBAI PUMPED STOW 320.00 0.00 0.00 100.00 148.71 1.21 0.00 W50036 1999 Anhui Provlndai Hwy 200.00 0.W 0.00 9.60 32.94 34.79 0.00 PO57352 1999 CN-RURAL WATER N 16.00 30.00 0.00 0.00 21.42 16.26 9.69 PO56216 1999 CN - LOESS PLATEAU II 100.00 50.00 0.00 0.00 22.35 24.48 0.00 PO51888 1999 CN - GUANZHONG IRRIGATION 80.00 20.00 0.00 0.00 28.59 22.88 0.00 PO51656 I999 ACCOUNTING REFORM 6 DNELOPMEM 27.40 5.60 0.00 0.00 17.89 17.86 0.00 PO56308 19% CN-PENSION REFORM PJT 0.00 5.00 0.00 0.00 1.77 1.75 0.00 W51705 1969 Fujian I1 Highway 2w.00 0.00 0.00 0.00 65.73 63.73 0.00 PO49665 1999 CN-ANNiNG VALLN AG.DEV 90.00 30.00 0.00 0.00 19.19 11.38 0.00 w36953 1999 CN-HEALTHO( 10.00 50.00 0.00 0.00 34.47 21.83 0.00 POSO270 1999 CN-ENTERPRISE REFORM LN 0.00 5.00 0.00 0.00 2.71 4.29 4.07 W38121 1999 CN-GEF-RENEWABLE ENERGY DEVELOPMENT 0.00 0.00 35.00 0.00 23.09 27.86 8.34 PO41268 1999 CN-Nat Hwy4RluWlHunsn 350.00 0.00 0.00 0.00 59.72 40.72 0.00 PO03653 1999 CN-Container Transput 71.00 0.00 0.00 18.61 3.16 21.74 0.46 ~041~~0 1449 CN.Laoning Urbpn Transport 150.00 0.00 0.00 0.00 33.14 33.14 0.00 W46829 1999 RENEWABLE ENERGY DEVELOPMENT 100.00 0.00 0.00 0.00 12.87 99.87 10.40 PO46564 1999 CN - Gansu a Inner Mongdia Poverty Red. 60.00 100.00 0.00 13.30 37.89 28.93 -10.99 PO46051 1999 CN-HIGHER EDUC. REFORM 20.00 50.00 0.00 0.00 5.70 7.31 0.00 '

-91 - Difference between expected and actual Original Amount In US$ Millions disbursements' ProjectID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig FnRev'd Po43933 1999 CN-SICHUAN URBAN ENVMT 150.00 2.00 0.00 0.00 88.89 78.42 22.92 PO42299 1999 TEC COOP CREDF IV 10.00 35.00 0.00 0.00 36.03 -11.40 0.00 PO37859 15% CN-GEF Energy Consewaeon 0.00 0.00 22.00 0.00 0.71 22.06 0.00 Po40185 15% CNSHANOONG ENVIRONMENT 95.00 0.00 0.00 1.40 20.07 21.47 3.95 PO38414 1998 CNGUANGXI URBAN ENVMT 72.00 20.00 0.00 0.00 71.56 66.78 27.87 PO03606 1998 ENERGY CONSERVATION 63.00 0.00 22.00 0.00 33.80 17.68 0.00 PO35698 1998 HUNAN POWER DEVELOP. 300.00 0.00 0.00 145.00 31.45 174.20 -14.46 PO03614 1998 CN-Guangzhw city Transpod 200.00 0.00 0.00 20.00 100.31 120.31 100.31 PO03619 1998 CKZnd Inland Watemap 123.00 0.00 0.00 37.00 16.35 52.12 5.79 Po03586 15% CN-BASIC HWTH(HLTH8) 0.00 85.00 0.00 0.00 36.95 23.71 0.00 PO03539 1998 CN -SUSTAINABLECOASTAL RESOURCES DE 100.00 0.00 0.00 2.06 45.61 45.18 37.80 PO51736 15% E. CHINNJIANGSU PWR 250.00 0.00 0.00 88.00 44.95 130.95 10.36 PO49700 1988 CN- IAIL-2 300.00 0.00 0.00 0.00 3.97 3.97 1.26 PO46952 1998 CN -FOREST. DEV. POOR AR 100.00 100.00 0.00 0.00 29.62 -71.11 11.24 PO46563 1998 CN -TARIM BASIN II 90.00 60.00 0.00 2.67 7.14 9.54 0.00 PO45788 1998 Trl-Pmvlnciaf Hw 230.00 0.00 0.00 0.00 16.51 14.21 0.00 PO36949 1998 CN-Not W3-HubsI 250.00 0.00 0.00 0.00 21.15 21 .I5 0.00 PO03637 1997 CKNAT'L RURAL WATER 3 0.00 70.00 0.00 0.00 0.56 3.77 3.25 PO03590 1997 CN - QINW MOUNTAINS POVERTY REDUCTIO 30.00 150.00 0.00 0.00 13.16 16.34 1.39 PO03850 1997 TUOKETUO POWERANNER 400.00 0.00 0.W 102.50 30.47 132.97 23.19 PO44485 1997 SHANGHN WAIGAOalAO 4GQ.00 0.00 0.00 0.00 73.65 46.51 38.21 PO36405 1987 CN- WANJIPZHAI WATERTRA 400.00 0.00 0.00 75.00 22.58 97.58 15.00 PO38988 1997 CN - HElLONGJlANO ADP 120.00 0.00 0.00 0.00 7.80 7.80 5.26 PO35893 1997 FUEL EFFICIENTIND. 0.00 0.00 32.80 0.M) 6.74 32.81 0.00 Po03654 1997 Net HyZMunanGuengdong m.00 0.00 0.00 0.00 48.52 48.52 24.66 PO03602 1986 CN-HUBEI URBAN ENVIRONMENT 125.00 25.00 0.00 28.32 39.72 70.08 35.08 PO03599 1996 CN-YUNNAN ENVMT 125.00 25.00 0.00 19.48 35.68 58.92 11.13 PO03648 19% CNSHANGHAJ SEWERAGE II 250.00 0.00 0.00 0.00 32.67 32.67 2.54 Po03594 19% CN - GANSU HWCORRIDOR 60.00 80.00 0.00 0.00 73.92 61.33 0.00 PO03589 1964 CN-DISEASE PREVENTION(HLTH7) 0.00 100,00 0.00 0.00 1.87 10.93 0.00 PO34618 19% CN-LABOR MARKET DEV. 10.00 20.00 0.00 0.00 5.56 7.67 0.00 PO40513 1998 2nd Hanan Pmv Hwy 210.00 0.00 0.00 19.00 12.88 31.88 20.88 Po03571 1% CN-7th Rsihwaya 400.00 0.00 0.00 119.00 10.28 12928 20.28 Po03639 1895 CKSOUTHWEST POVERTY REDUCTION PROJE 47.50 200.00 0.00 0.01 121 25.36 25.36 PO03647 1995 China Economic Law Reform -LEGEA 0.00 10.00 0.00 0.00 0.50 0.83 0.00 PO03603 1995 CN-EM HOUSINQ & SSR 275.00 75.00 0.00 57.46 37.16 92.53 2.19 PO03596 1995 CN-Yangtze Basin Water Resources Project 100.00 1to.w 0.00 1.92 0.21 4.50 4.60 PO03540 1994 CKLOESS PLATEAU 0.00 150.00 0.00 0.00 0.93 0.27 0.00 PO03632 1993 CN-ENVIRONMENT TECH ASS 0.00 50.00 0.00 0.00 1.02 1.sa 1.26

~~ ~ ~ Total: 12010.07 1722 60 214.30 862.02 5117.15 2896.09 466.91

- 92 - CHINA STATEMENT OF lFCs Held and Disbursed Porffolio Ma - 2004, In Millions US Dollars

Committed Dlsbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 2004 China II 28.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 China Re Life 0.00 15.41 0.00 0.00 0.00 15.29 0.00 0.00 1994 China Walden Mgt 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 1995 Dupont Suzhou 7.79 0.00 0.00 0.00 7.79 0.00 0.00 0.00 1994 Dynamic Fund 0.00 8.05 0.00 0.00 0.00 6.40 0.00 0.00 2003 Great Infotech 0.00 3.50 0.00 0.00 0.00 2.80 0.00 0.00 1999 Hansom 0.00 0.08 0.00 0.00 0.00 0.08 0.00 0.00 2002 Huarong AMC 9.00 3.00 0.00 0.00 9.00 0.49 0.00 0.00 2004 IB 0.00 52.18 0.00 0.00 0.00 0.19 0.00 0.00 2002 IEC 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998 Leshan Scana 5.21 1.35 0.00 0.00 3.61 1.35 0.00 0.00 2001 Maanshan Carbon 9.00 2.00 0.00 0.00 9.00 2.00 0.00 0.00 2001 Minsheng Bank 0.00 23.50 0.00 0.00 0.00 23.50 0.00 0.00 2001 NCCB 0.00 26.58 0.00 0.00 0.00 26.46 0.00 0.00 1996 Nanjing Kumho 0.00 3.81 0.00 0.00 0.00 3.81 0.00 0.00 2001 New China Life 0.00 30.70 0.00 0.00 0.00 23.32 0.00 0.00 1995 Newbridge Inv. 0.00 1.95 0.00 0.00 0.00 1.95 0.00 0.00 1997 Orient Finance 6.67 0.00 0.00 8.33 6.61 0.00 0.00 8.33 2003 PSAM 0.00 1.93 0.00 0.00 0.00 0.00 0.00 0.00 1997100 PTP Holdings 0.00 0.03 0.00 0.00 0.00 0.03 0.00 0.00 2001 Peak Pacific 0.00 0.00 25.00 0.00 0.00 0.00 0.00 0.00 2003 SAIC 12.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 SBTS 0.00 0.08 0.00 0.00 0.00 0.00 0.00 0.00 2000 SSIF 0.00 4.50 0.00 0.00 0.00 1.02 0.00 0.00 1998 Shanghai Krupp 27.50 0.00 0.00 61.43 27.50 0.00 0.00 61.43 1999 Shanghai Midway 0.00 16.02 0.00 0.00 0.00 16.02 0.00 0.00 1993 Shanxi 15.36 0.00 0.00 0.00 12.81 0.00 0.00 0.00 2002 Shenzhen PCCP 3.76 0.00 0.00 0.00 3.76 0.00 0.00 0.00 200 1 Sin0 Gold 0.00 4.00 0.00 0.00 0.00 4.00 0.00 0.00 I995 Sino-Forest 23.33 0.00 0.00 0.00 18.33 0.00 0.00 0.00 2000 Suzhou PVC 0.00 2.48 0.00 0.00 0.00 2.48 0.00 0.00 19% Wanjie Hospital 13.64 0.00 0.00 0.00 13.64 0.00 0.00 0.00 2004 Weihai Weidongri 0.73 0.00 0.00 0.00 0.73 0.00 0.00 0.00 2003 Wumart 0.00 6.48 0.00 0.00 0.00 6.48 0.00 0.00 1993 XACB 0.00 19.93 0.00 0.00 0.00 0.00 0.00 0.00 2003 Yantai Cement 4.73 0.00 0.00 0.00 4.73 0.00 0.00 0.00 2002 Zhengye- ADC 15.00 0.00 0.00 7.00 6.14 0.00 0.00 2.86 2002 Bong Chen 0.00 5.00 0.00 0.00 0.00 0.00 0.00 0.00 2003 ASlMCO 0.00 10.00 0.00 0.00 0.00 10.00 0.00 0.00 2003 Anj ia 0.00 2.00 0.00 0.00 0.00 0.00 0.00 0.00 1999/00/02 BCIB 0.00 0.00 11.60 0.00 0.00 0, 00 0.00 0.00 2002 Bank of Shanghai 0.00 24.67 0.00 0.00 0.00 24.67 0.00 0.00 2003 CDH China Fund 0.00 15.17 0.00 0.00 0.00 2.09 0.00 0.00 CSMC 0.00 12.00 0.00 0.00 0.00 9.60 0.00 0.00 Total Portfolio: 212.50 311.86 36.60 83.80 134.49 188.96 0.00 79.66

- 93 - Approvals Pending Commitment FY Approval Company Loan Equity Quasi 'Partic 2002 ASIMCO 0.00 5.00 0.00 0.00 2004 CCB-MS NPL 0.00 0.00 3.00 0.00 2003 Cellon 0.00 0.00 5.70 0.00 2004 Colony China 0.00 0.00 50.00 0.00 2002 Darong 10.00 0.00 1.50 8.00 2002 Huarong AMC 15.00 0.00 0.00 0.00 2002 IEC 0.00 5.00 0.00 0.00 2002 KHIT 0.00 0.00 3.00 0.00 2004 NCFL 0.00 0.00 17.88 0.00 2004 Nanjing Kumho Ex 34.00 0.00 6.00 0.00 2003 Peak Pacific 2 0.00 0.00 10.00 0.00 2004 SIBFI 0.26 0.00 0.00 0.00 2002 SML 1.oo 0.00 0.00 0.00 2002 Sino Mining 5.00 0.00 0.00 5.00 2002 Zhong Chen 0.00 0.00 0.00 32.00 Total Pending Commitment: 65.26 10.00 97.08 45.00

- 94 - Annex IO: Country at a Glance CHINA TAI BASIN URBAN ENVIRONMENT PROJECT Easl Lower- Asia & mlddls- ChlM Pacfflc Income Development diamond* 2002 PopulaUon, mld-year (ml//ion.sJ 1,281 .O 1,838 2,41 I Life expectancy GNI per capita (Atias method, US$) 950 950 1,390 ON1 (Atlas method, US$ bllllons) 1,218,l 1,740 3,352 T I Aversgs annual growth, 199&02 Population (%) 0.8 I.o 1.o Labor form (%) 0.9 I.2 I.2 GNI Gross F primary Most recent estlmnte (latent year avallable, lQW2) =Pita nrollment Poverty (% of pcpulatlon below netionel povaW line) 5 Urban populatlon (% of tofalpopulatlan) 38 38 49 life expectancy at birth &ears) 71 69 69 I rtalii (per 1,OOO JiveMthsJ 3!l 33 30 nutrition (% of chlldrsn under 5) 10 15 11 Access to Improved water source Access to an Improved Water 8oum (% ofpopuleffon) 75 76 81 Illiteracy (% of popu/auOn we Id+) 14 13 13 Gmss primafy enrollment I% of schoolsge population) 108 106 It1 -Chma Male 105 105 Ill -Lower-mlddlehcome group Female 108 106 110 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1002 2001 2002 Economlc ratios' GDP (US$ bllllons) 221.5 454.6 1,167.1 1,232.7 Gmss dome& InvestmenffGDP 33.2 36.2 38.5 41.0 Trade Exports of &s and services/GDP 8.9 19.5 25.5 29.5 Gross domestic aavlngdGDP 34.8 37.7 40.9 44.0 T Gross national sevinWGDP 35.1 38.0 40.0 43.8 T I.9 I.5 2.9 Domestic Current account balancelGDP 2.4 Investment lntered papntdGDP 0.2 0.6 0.5 0.5 savings Total debUGDP 3.8 15.9 14.6 126 Total debt servlcelexwrts 8.0 8.8 7.7 6.1 Present value of debtlGDP 14.1 Present value d debtfaxports 51.8 Indebtedness

' 1882-02 100242 2001 2002 2002.08 (avemga ennual growfhj -Chha GDP 9.7 9.0 7.5 8.0 7.5 Lower-middle-income group GDP per Capita 8.1. 8.0 6.7 -

STRUCTURE of the ECONOMY 1982 1992 2001 2002 Growth of lnvastment and GDP (%) (% ofGDP) M 33.3 21.8 15.8 14.5 Agrlwlture *5 45.0 43.9 50.1 51.7 Industry 10 Manufacturing 37.3 33.1 34.2 44.5 5 SENhS 21.7 34.3 34.1 33.7 0 Private consumption 50.7 49.2 45.7 42.5 87 48 9s w 01 02 General govemment consumption 14.5 13.1 13.4 13.5 -GDI *GDP Imports of goods and serVi~eS 7.3 18.0 23.1 26.5

1082.92 1902-02 2001 2002 Growth of exports and Imports (%) (everage annual growth) Agricutlure 4.6 3.7 2.8 2.9 '0 T i industry 11.6 11.3 8.4 9.9 30 Manufacturing 11.2 10.4 9.0 8.1 20 Services 11.7 8.4 8.4 7.3 10 Pllvata consumption 11.4 8.1 2.8 I.9 0 General govemment consumption 9.9 8.4 10.5 7.0 I Gross domestic investment 9.5 9.7 13.9 14.9 Imports of gads and sawices 9.7 12.8 10.8 27.5

- 95 - PRICES and GOVERNMENT FINANCE 1982 1992 2001 2002 Domestic plices f% change) Consumer prices 6.0 6.4 0.7 4.8 lmpllci GDP deflator 4.2 7.9 1.2 -2.6 Govemnmnt ffnn.nc8 (% of GDP#includes cumnt grants) Current revenue 22.9 14.7 17.1 17.9 Currant budget balance .I 2.0 1.I 0.0 -0DP ddator +CPI Overall surpluddeflcit -0.3 -1,0 47 -3.0 1

TRADE 1982 1992 2001 2002 Export and Import leveln (US$ mlll.) (US$ millions) Total exports (fob) 22,321 84,940 266,155 325,565 I Food 2,908 8,309 12,760 14,623 I Fuel 5,314 4,693 8,420 6,372 Manufactures 12,271 67.936 239,802 297,085 Total imports (clfl 19,285 80,585 243,810 295,203 Food 4,201 3,146 4,980 5,237 Fuel and energy 163 3,570 17,495 19,285 Capital goods 3,204 31,312 107,040 137,030 Ea 97 98 8% 00 01 Exporl price Index (f9954W.J) 41 85 83 78 Import prlce Index (1995=lMJ 71 95 91 86 .Exparts mrmpotla O2 Terms of trade (f9QS=fW.Jl 58 89 91 90 I I

BALANCE of PAYMENTS 1982 1992 2001 2002 15;mnt ascount balance to GDP (Y.) (US$ millions) ~xportsof poods and services 24,906 94,198 299,409 365,395 Imports of QO% and servlces 20.555 66,752 271,325 326,013 Resource balance 4,350 7.446 28,084 37,383 Net income 376 249 -19,174 -14,945 Net current transfers 486 1,155 8,492 12,964 Current account balance 5,212 6,650 17,401 35,422 Financing items (net) -995 -10,952 30,046 40,085 Changes in net resa1yBs 4,217 2,102 -47,447 -75,507 Memo: Reserves Including gold (US$ millions) .. 24,642 220,051 297,721 Conversion rate (DEC, locaYUS$j 2.4 5.9 8.3 8.3

EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US$ millions) Comporttion of 2002 deM (US$ mill.) Total debt outstanding and dicrbursed 8,358 72,428 170,110 155,678 IERD 0 3,752 11,550 12,051 A: 12,051 IDA 1 4,287 8,654 8,729 0:43, Total debt oewlce 2,125 6,618 24,297 23,668 IBRD 0 460 1,550 1,631 IDA 0 30 151 175 Composttiin of net resou~c~flows Oftlcial grants 47 327 240 . offrcil credltors 657 2,343 2,156 -639 Ptivate creditors -122 8,949 -4,017 -13,593 Foreign direct investment 430 11,156 44,241 49,308 Portfolio equlty 0 1,243 3,015 2,266 u F 62,103 World Bank program Commitments 330 1,865 782 563 A- IBRO E - Bilsfsral Dibursementa 1 1,331 1.791 1,733 B - IDA D - Other multilateral F - Privals Prlncipel repayments 0 197 904 1,157 C - IMF 0 - Shor(.tm Net Rows 1 1,134 667 576 Interest payments 0 293 797 649 Net transfers 1 841 90 -73 Additional Annex 11: Safeguard Issues CHINA: TAI BASIN URBAN ENVIRONMENT PROJECT

A. Summary of Environmental Impacts and Environment Management Plan

Background

1, Hohai University carried out the consolidated EA of the proposed TBUEP in accordance with China’s national and Bank policies and procedures, with support from an independent international consulting environmental specialist. The TORSand various draft versions were reviewed and discussed in detail during project preparation. The draft English version EA documents were submitted to the Bank in late September 2003 and reviewed by the Bank during pre-appraisal mission and comments requiring clarifications and some additional analysis were made at that time. The draft EA documentation was sent to the Bank’s InfoShop in Washington and in Beijing in October 2003. The draft final EA report, EA Summary and Environmental Management Plan (Em)were submitted to the Bank in October 2003 and, following clarification and additional analysis on a number of points raised during review by the Bank, the revised EA was finalized in February 2004 and EMP was found satisfactory. These revised documents were lodged in the InfoShop in March 2004. During the EA preparation, local people were consulted at least twice, and their opinions have been reflected in the project design and environmental mitigation measures as appropriate.

2. The policy and administrative requirements for environmental assessment of development projects in China were followed during preparation and evaluation of the EA, as well as the Bank’s policy, OP 4.01 in particular.

Brief Project Description

3. The Project includes the following components for which the EAs have been prepared

Suzhou Municiualitv: 0 Wastewater treatment plants (WWTPs) and networks: - Wuzhong WWTP (25,000 m3Iday) and associated sewer network - Second phase (80,000 m3lday) of Loujiang WWTP and associated sewer network - Second phase (100,000 m3/day) of Fuxin WWTP and associated seweraetwork 0 Urban area canal network rehabilitation: - River course dredging and rehabilitation - Polluted water control in Suzhou (two sluice gates and one shiplock on Xujiang River, and one shiplock on Shangtang River).

Wuxi Municinality: 0 Wastewater treatment plants (WWTPs) and networks: - Huishan WWTP (25,000 m3/day secondary treatment) and associated sewer network - Second phase (30,000 m3/day) ofDongting WWTP and associated sewer network - Anzhen WWTP (25,000 m3lday) arid associated trunk line and sewer network

- 97 - a Local1y- financed Wuli‘Lake restoration: - Polluted water control and water level regulation (construction of 11 sluicegates on individual waterways that link Wuli Lake and the urban river network of Wuxi City) - Embankment rehabilitation(19.4 km around Wuli Lake) - Ecological restoration

Baseline Environmental Description

4. Natural Environment. The Tai Basin (total area 36,500 km2) is located in the middle part of China’s coastal area. The basin is bounded by the Yangtze (Changjiang) River to the north, East China Sea to the east, Qiantangjiang River to the south, and Tianmu Mountain, Jielin, Mao Mountain, Qinghuai River and Shuiyangjiang water system to the west. Wuxi Municipality stands on the northeast bank of Lake Tai and stretches to the Yangtze River, with a urban population 2.1 million. Suzhou Municipality is located in the east bank of the Lake Tai and stretches to the Yangtze River, with urban population 2.5 million and is a key historical, cultural and scenic centers of China with a history stretching back more than 2000 years. Both municipalities have a large and rapidly increasing industrial base.

5. TODOEraDhY. The topography of Bash can be roughly divided into hilly areas coverhg 1/6 of the westem part of the basin area and the Taihu Plain, which tilts gradually by about 4-5 m from west to east. About 115 of Taihu Plain is lakes and river network. The density of streams/river network in this area is 34m.

6. -Climate. The Basin has a semi-tropical monsoon climate. The annual average temperature is 15-18 degrees Centigrade, while the hottest monthly temperature of 27.5-3 1.2 degrees Centigrade is in July, and the coldest temperature of -5.5 to -8.5 degrees Centigrade is in January. The average annual precipitation is 1,200 mm, ofwhich 70-80 percent occurs between May to October, increasing water flows in the rivers and lakes.

7. Socioeconomic Situation. The Basin includes Metropolitan Shanghai; the four municipalities of Suzhou, Wuxi, Changzhou and Zhenjiang in Jiangsu Province; and the three municipalities of Hangzhou, Jiaxing and Huzhou in Zhejiang Province. The Basin covers only 0.4 percent of total national land area, and the population amounting to 36.8 million at the end of 2000 including 18.6 million (51 percent) urban, represented 2.9 percent of the national population. The population density of the area, at 978 personskm2, is seven times higher than the national average and amongst the highest in China as is the urbanizationrate.

8. GDP in the Bash was estimated at RMB 890 billion, accounting for 10.8 percent of national GDP in 2000. Suzhou (RMB 135.864 billion) and Wuxi (RMB 113.802 billion) together accounted for almost three quarters of the GDP the area of the Basin within Jiangsu Province. Among the sectors, agricultural output was RMB 21.104 billion (6.1 percent), industry was RMB 195.012 billion (56.5 percent) and service sector was RMB 129.052 billion (37.4 percent).

9. Cultivated land in Lake Tai Basin is 21.45 million mu (1 ‘43 million ha), accounting for 43 percent of land area in the Basin and 1.8 percent of national cultivated land. The main crops include paddy rice, wheat, silk, tea, bamboo, fruits, etc.

10. Current Water Oualitv. Pollution sources of southern Jiangsu Province within the Basin include indhal, municipal/domestic, agricultural and traffic sources, of which industrial pollution is the most serious. According to municipal EPB statistics for 2000, COD discharge from industrial wastewater in

- 98 - Suzhou city and Wuxi city totaled 151,200 tla. Discharges of untreated domestic wastewater is increasing rapidly due to increasing urbanization and because of the low present capacity for collection and treatment of municipal wastewater in the major cities. According to 2000 statistics, wastewater discharged from domestic sources in Suzhou and Wuxi was 304.03 million tons per year (tpy), total COD was 136,700 tpy. Eutrophication is widespread in Lake Tai, as well as in the perimeter lakes.

(a) Water quality of main watercourses in Wuxi City: According to monitoring data source for 2001-2003, NH3-N concentration in four major rivers in Wuxi city exceeded the specified standard, resulting in a classificationof worse than Class V (the lowest water quality classification in China). Other items, e.g., COD, DO and TP exceeded Class IV standards.

(b) Water quality of main watercourses in Suzhou City: According to monitoring data of 2002, NH3-N concentration in eight main rivers in Suzhou severely exceeded Class V standard. Remaining items, such as COD, DO, TP, exceeded the prescribed standard, apart from oil content. The riverkanal system in the city center and the Shangtang River is most severely polluted, mainly by NH3-N, TP, DO, COD, and biological oxygen demand (BOD).

(c) Water quality of the Grand Canal (Beijing-Hangzhou Canal): based on 2001-2002 monitoring data, the water quality in the Suzhou section of the Grand Canal can meet its designated Class IV water quality standards (suitable for navigation, irrigation, and landscaping) except for NH3-N and TP. However, monitoring results for the Wuxi section of the Grand Canal have shown that many pollutant parameters (e.g. NH3-N, TP, DO, COD) exceed Class IV standard, indicating that pollution from the Wuxi and Changzhou urban areas contribute substantially to the bad water quality of the Grand Canal.

11. Future Water Oualitv Obiectives. Since 1996, the State Council has incorporatedLake Tai into the major national priority water pollution control program. Governments at all levels in Jiangsu Province have worked out an implementation plan (Tenth Five-Year Plan 2001-2005). The plan aims at protecting the water quality of the Lake Meiliang and Wuli Lake, both of which are part of the Lake Tai system, constructing a series of city/township wbtewater treatment systems that include only limited sewer networks, dredging river courses and lakes, and implementing water conservation programs. Key objectives are to improve water quality in the area of main drinking water sources in the Lake and main connecting rivers/canals to Class 111 (COD content) and to reduce TP concentration below the level of 2000. Furthermore, the water quality of the river network in Suzhou city center should meet the requirement for a scenic area.

Potential Environmental Impacts and their Mitigation Measures

12. Wastewater Treatment. The project includes construction of six WWTPs: the Wuzhong, Loujiang, and Fuxin WWTP in the Suzhou area; and the Huishan, Dongting, and MenWWTP in the Wuxi area. For year 2010, the expected reduction of pollutant discharges to surface waters from the six WWTPs are 122 tons per day (tpd) of CODCr, 62 tpd of BODS/day, 6 tpd OfNH3-N, 80 tpd of SS, and 0.6 tpd of TP. These reductions Will improve the quality of the receiving surface waters in the Suzhou and Wuxi areas. The predicted water quality improvements - in terms of chemical oxygen demand manganese (CODMn) concentrations (mg) in ambient waterways have been projected for the following three scenarios: Scenario I- went condition with the construction of six WWTPs to be financed under this project; Scenario I1- the condition in year 2010 with the construction of these six WWTPs; and Scenario III - the condition in year 2010 with the construction of 108 WWTPs in the Wuxi, Suzhou, and Changzhou areas under the overall 10th. five year plan. Under Scenario I,inferior to Class V waters will decrease from 16.0 percent of the total length of the rivers to 11.5 percent, while Class IV waters will increase from

- 99 - 30.9 percent to 33.6 percent, and Class III waters will increase from 1.9 percent to 3.7 percent (with no change for Class I1and V waters). With full implementationof the loth Five Year plan, the impact would be much greater, resulting in better water quality in Lake Taihu: Inferior to Class V waters will decrease to 3.1 percent, Class V water will decrease to 20.4 percent, Class IV waters will increase to 64.9 percent, and Class III waters will increase to 11.2 percent (with no change in Class I1waters). Important elements of the program are underway or planned with local financing for rehabilitation of the sewer networks in Changzhou, Suzhou and Wuxi. Other elements require inter-institutional cooperation and a more cost-effective investment plan and sector management arrangements.

13. Wuzhonp WWTP. The Wuzhong WWTP will be located in an industrial zone, surrounded by factories on three sides and the Grand Canal on one side. This WWTP will serve an area of 15.26 lan2 in Suzttou through a 43 km sewer network to treat wastewaters from domestic and industrial sources (there are 10 industries). The Bank will finance both the WWTP and the sewer network.

14. The current and projected wastewater flows (m3/day) that will be collected for treatment at the Wuzhong WWTP are as follows:

Domestic Industrial TOTAL Present 6,000 5,326 11,326 2010 10,000 18,000 28,000 2020 15,000 28,000 43,000

15. The WWTP will be designed for a capacity of 25,000 m3/day using the SBR process. The SBR process was selected through comparison with alternative processes (the anaerobiclanoxidoxidic process -i.e, the A2/0 process- and the oxidation ditch process). The WWTP is scheduled to commission by the end of 2005. The treated water will be discharged to the Grand Canal (a Class IV water body).

16. The expected pollution loads in the Wuzhong WWTP inflow and effluent are shown below, By 2010, pollution loads will reduce COD loading by about 85 percent; BOD loading by about 89 percent; NH3-N loading by about 56 percent; suspended solids (SS) loading by 92 percent; and TP loading by 57 percent.

CODCr -BOD5 NH3-N --43s -TP

Year 2010 Mluent to WWTP (tpd) 11.4 5.7 0.9 7.2 0.07 Effluent from WWTP (tpd) -1,7 -0.6 -0.4 0.6 -0.03 Reduction (tpd) 9.7 5.1 0.5 6.6 0.04

.(%) 85.1 89.5 55.6 91.7 57.10

Year 2020 Influent to WWTP (tpd) 14.8 7.4 1.2 9.4 0.10 Effluent from WWTP (tud) -2.6 -0.9 -0.7 -0.9 -0.00 Reduction (tpd) 12.2 6.5 0.5 8.5 no data

82.4 87.8 41.7 85.9 no data

- 100- Area Waterways Scenario I Scenario II Scenario Wuxi - Grand Luoshe 0.30 0.32 6.36

Urban area 0.40 0.44 5.51 Xinhongqiao 0.80 0.98 2.67 0.39 0.55 2.5 1

I Yangcheng Lake* * Waterway that receives the WWTP effluent.

17. The wastewater discharge from the Wuzhong WWTP will meet Category ByGrade 1 of the Pollutant Discharge Standard for Town WWTPs (GB 18918-2002), except for COD and total phosphorus, which will meet the more stringent Category A, Grade 1 of the same standard. Grade 1 is for surface waters used for potable water supply, habitats of rare aquatic species, spawning site for fish and shrimp. The applicable standards are as follows:

Parameter Standard PH 6-9 Chemical oxygen demand (COD) 50 mgfl Biological oxygen demand (BODS) 20 mgA Suspended solids (SS) 20 mg/l Animal and vegetable oil 3mgfl

- 101 - Oils 3 mgil Surface active ions 1 mg/l Total nitrogen 20 mgil Ammonia nitrogen - water temp. less than 12 degrees Centigrade 8 mg/l - water temp. greater thanlequal 12 degrees Centigrade 15 mgA Total phosphorus 1 ms/l Color (dilution factor) 30 , Fecal coliform 104 individuavl

18. About 47 m3/day of sludge will be generated from the Wuzhong WWTP. The sludge from the WWTP will be tested for hazardous characteristics according to applicable Chinese regulatiodstandards. Iffound to be hazardous, it will be disposed at a hazardous waste landfill that a1 be ready by end 2005. Ifthe sludge is found to be non-hazardous, it will be transported by leak-proof, 10-ton trucks for 15 km to the Qizishan sanitary landfill. The transportation time to this landfill will be between 4am-6am and 7pm-lOpm to minimize adverse impacts on local traffic. This landfX, put in service in 1993 for a 15-year service, was designed to receive solid wastes from the Suzhou area. The Quizishan sanitary landfill has a capacity of4.7 million tons and is surrounded with hills and there are no residences in the area. The leachate from the landfill is piped to the WWTP at the High and New Technology Zone. Prior to receiving the sludge, this landfill will be certified as designed and operated in compliance with applicable government regulations.

19. Based on modeling results, the noise emissions fkom the Wuzhong WWTP - which is located in an industrial zone - are not expected to exceed the daytime standard of 65 dBA and nighttime standard of 55 dJ3A. The nearest receptor to the Wuzhong WWTP is a factory 100 m away. Therefore, the noise emissions from the Wuzhong WWTP are not expected to adversely affect the recepton in the area.

20. Odor emissions from the sedimentation and SBR tanks will be "ized through proper adjustment ofthe air flow rate ofthe blower to bring the wastewater to aerobic state, and through timely sludge dewatering, handling of sludge cakes in dewatering rooms, use of sealed trucks for transporting the sludge to the disposal site, sprinkling temporary sludge storage areas with bleach, and planting trees around the aeration tanks and WWTP.

2 1. LouiianP WWTP. This WWTP will be a 80,000 m3/day expansion (second phase) ofa 60,000 m3/&y WWTP. The second-phase WWTP will serve an area of 40.10 lun2 in Suzhou to treat wastewaters from domestic and industrial sources. The industrial wastewaters are from 22 industries (mostly textile, chemical, metallurgical, and metal finishing industries). Bank financing will include only the second-phase WWTP.

22. The current and projected wastewater flows (&/day) that will be collected for treatment at the Loujiang WWTP are as follows:

Domestic Industrial TOTAL Present 88,000 39,561 127,561 2010 74,000 55,000 129,000 2020 82,000 57,000 139,000

23. The second-phase WWTP will be designed for a capacity of 80,OOO &/day using the SBR process. The SBR process was selected through comparison with altemative processes (the

- 102 - anaerobiclanoxicloxidicprocess, i.e. the A210 process and the oxidation ditch process). The treated water will be discharged to the Louijang River (classified as a Class IVwater body, but currently is worse than Class V water body), which flows to Yangtze River.

24. The expected pollution loads in the Loujiang WWTP inflow and effluent are shown below. By 2010, the treatment will reduce the COD loading by 84 percent, BOD loading by 89 percent, NH3-N loading by about 55 percent, SS loading by 9 1 percent, and TP loading by about 67 percent.

CODCr -BOD5 NH3-N --4s -TP

Year 2010 Influent to WWTP (tpd) 47.0 23.5 4.2 29.4 0.30 Effluent from WWTP (tad) -7.6 2.6 -1.9 2.6 0.10 Reduction (tpd) 39.4 20.9 2.3 26.8 0.20

("/.I 83.8 89.0 54.8 91.2 66.70

Year 2020 Influent to WWTP (tpd) 48.0 24.0 4.2 30.0 0.40 Effluent from WWTP (tad) -8.3 -2.8 2.2 -2.8 0.10 Reduction (tpd) 39.7 21.2 2.0 27.2 0.30

(%I 82.7 88.3 47.6 90.7 75.00

25. The wastewater discharge from the Loujiang WWTP will meet Category B, Grade 1 of the Pollutant Discharge Standard for Town WWTPs (GB18918-2002), except for COD and total phosphorus, which will meet the more stringent Category A, Grade 1 of the same standard, These standards are the same as those given for the Wuzhong WWTP.

26. About 72 m31day of sludge will be generated from the Loujiang WWTP. The sludge from the WWTP will be tested for hazardous characteristics according to applicable Chinese regulationslstandard. Iffound to be hazardous, the sludge will be disposed at a hazardous waste landfill that will be ready by end 2005. If the sludge is found to be non-hazardous, it will be transported by leak-proof, 10-tontrucks for 20 km to the Qizishan sanitary lancWl. The transportation time is selected to be between 4am-6am and 7pm-lOpm to minimize adverse impacts on local traffic. Characteristics of this landfll were provided above under the discussion for the Loujiang WWTP. Prior to receiving the sludge, the landfiU will be certified as designed and operated in compliance with applicable government regulations.

27. The noise emissions from the Loujiang WWTP are expected to exceed the nighttime noise criteria of 55 &A at the WWTP boundary, although in compliance with the daytime criteria of 65 dBA. However, these noise emissions from the WWTP are not expected to be a concem because the nearest sensitive receptor is a guest house, which is to be changed to an alternative use, 200 m on the north side of the WWTP.

28. Odor emissions from the sedimentation and SBR tanks will be minimized through proper adjustment of the air flow rate of the blower to bring the wastewater to aerobic state, and through timely sludge dewatering, handling of sludge cakes in dewatering rooms, use of sealed trucks for transporting the sludge to the disposal site, sprinkling temporary sludge storage areas with bleach, and planting trees around the aeration tanks and WWTP.

- 103- 29. Fuxin WWTP. This WWTP will be a 100,000 m3/day expansion (second phase) of a 80,000 m3/day WWTP. The second-phase WWTP will serve an area of 46.60 km2 in Suzhou to treat wastewaters from domestic and industrial sources. The industrial wastewaters are from 20 industries (mostly pharmaceutical, textile, and chemical industries). The Bank financing will include only the second-phase WWTP.

30. The current and projected wastewater flows (m3/day) that will be collected for treatment at the Fuxin WWTP are as follows:

Domestic Industrial TOTAL Present 66,000 57,937 123,937 2010 60,000 5 1,000 111,000 2020 7 1,000 56,000 127,000

3 1. The second-phase WWTP will be designed for a capacity of 100,000 m3/&y using the SBR process. The SBR process was selected through comparison with alternative processes (the anaerobic/anoxic/oxidic process, i.e. the A210 process and the oxidation ditch process). The treated water will be discharged to the Grand Canal.

32. The expected pollution loads in the Fuxin WWTP inflow and effluent are shown below. By 2010, the treatment will reduce the COD loading by 82 percent, BOD loading by 88 percent, NH3-N loading by about 48 percent, SS loading by 91 percent, and TP loading by about 67 percent.

CODCr BOD5 NH3-N -TP

Year 2010 Influent to WWTP (tpd) 36.9 18.5 3.3 23.0 0.30 Effluent from WWTP (tad) -6.7 -2.2 -1.7 -2.2 -0.10 Reduction (tpd) 30.2 16.3 1.6 20.8 0.20

(%I 81.8 88.1 48.5 91.3 66.70

Year 2020 Influent to WWTP (tpd) 40.1 20.0 3.6 25.0 0.30 Effluent from WWTP (tad) -7.6 2.5 -1.9 -2.5 -0.10 Reduction (tpd) 32.5 17.5 1.17 22.5 0.20

(%I 81.0 87.5 47.2 90.0 66.70

33. The wastewater discharge from the Fuxin WWTP will meet Category ByGrade 1 of the Pollutant Discharge Standard for Town WWTPs (GB189 18-2002), except for COD and total phosphorus, which will meet the more stringent Category A, Grade 1 of the same standard. These standards are the same as those given for the Wuzhong WWTP.

34. About 107 m3Jday of sludge will be generated from the Fuxin WWTP. The sludge from the WWTP will be tested for hazardous characteristics applicable Chinese regulations/standards. If found to be hazardous, the sludge will be disposed at a hazardous waste landfill that will be ready by end 2005. If the sludge is found to be non-hazardous, it will be transported by leak-proof, 10-ton trucks for 10 km to the

- 104 - Qizishan sanitary landfill. The transportation time is selected to be between 4am-6am and 7pm-l0pm to mihimize adverse impacts on local traffic. Characteristics of this landfill were provided above under the discussion for the Fuxin WWTP. Pnor to receiving the sludge, the landfd will be certified as designed and operated in compliance with applicable government regulations.

35. During &ytime and at nights, the noise emissions from the Fuxin WWTP are expected to exceed the noise criteria (60 &A and 55 dBA, respectively) at the WWTP boundary. However, these impacts noise (as well as odorous) emissions from the WWTP are not a concem because the nearest receptor is a residence located 500 m from the WWTP.

36. Odor emissions from the sedimentation and SBR tanks will be minimized through proper adjustment of the air flow rate of the blower to bring the wastewater to aerobic state, and through timely sludge dewatering, handling of sludge cakes in dewatering rooms, use of sealed trucks for transporting the sludge to the disposal site, sprinkling temporary sludge storage areas with bleach, and planting trees around the aeration tanks and WWTP.

37. Huishan WWTP. This WWTP will serve an area of 39.55 km2 in Wuxi through a 58 km sewer network to treat wastewaters from domestic and industrial sources (there are 65 industries -- dyeing, textiles, chemical, metallurgical industries -- located mostly within and some outside the industrial development zone). The Bank will finance both the WWTP and the sewer network.

38. The current and projected wastewater flows be collected for treatment at the Huishan WWTP are as follows:

Domestic Industrial TOTAL Present 6,000 7,025 13,025 2010 13,000 30,000 43,000 2020 19,000 50,000 69,000

39. The WWTP will be designed for a capacity of 25,000 m3lday for secondary treatment using the SBR process, The SBR process was selected through comparison with altemative processes (the anaerobiclanoxicloxidic process, i.e. the A210 process and the oxidation ditch process),

40. The treated water will be discharged to the Xibei Canal (which is classified as a Class Tv water body, but currently is a Class V water body). This decision was based on a comparison with the discharge altemative to the Xicheng Canal through study of the extension of the pollution plume and increase in maximum COD concentrations in the receiving water bodies. The Xibei Canal flows to WangYu River (a Class III-IV water body), which discharges to Lake Tai.

4 1. The expected pollution loads in the Huishan WWTP inflow and effluent are shown below. By 2010, the treatment will reduce the COD loading by 90 percent, BOD loading by 92 percent, NH3-N loading by about 47 percent, SS loading by 94 percent, and TP loading by about 71 percent.

- 105- CODCr -BOD5 NH3-N ----ss -TP

Year 2010 Influent to WWTP (tpd) 25.4 9.7 1.5 13.4 0.07 Effluent from WWTP hd) -2.5 -0.8 -0.8 -0.8 -0.02 Reduction (tpd) 22.9 8.9 0.7 12.6 0.05 (%I 90.2 91.7 46.7 94.0 7 1.40

Year 2020 Influent to WWTP (Qd) 39.4 14.7 2.1 20.6 0.20 Effluent from WWTP (todl -4.2 -1.4 -1.o -1.4 0.10 Reduction (tpd) 35.2 13.3 1.1 19.2 0.10 (%I 83.3 90.5 52.4 93.2 50.00

42. The wastewater discharge from the Huishan WWTP will meet Category B, Grade 1 of the Pollutant Discharge Standard for Town Wastewater Treatment Plants (GB 189 18-2002), except for COD and total phosphorus, which will meet the more stringent Category A, Grade 1 of the same standard. These standards are the same as those given for the Wuzhong WWTP. The Huishan WWTP is expected to contribute to the quality improvement of Lake Tai.

43. About 47 m3lday of sludge will be generated from the Huishan WWTP. The sludge from the WWTP will be tested for hazardous characteristics according to applicable Chinese regulationslstandards. Iffound to be hazardous, the sludge will be disposed at a hazardous waste landfill to be identified. Prior to receiving the sludge, the landfill will be certifiedas designed and operated in compliance with applicable government regulations. If the sludge is found to be non-hazardous, it will be transported by leak-proof, 10-ton trucks for 10 km to the Taohuashan sanitary landfill. The transportation time is selected to be between 5am-7am and 7pm-9pm to minimize adverse impacts on local traffic. This landfill, was put in service in 1994 for Phase Iand in 1995 for Phase II. The landfill, which has a 12-year design service life, receives solid wastes from the Wuxi area. The landfill covers an area of 20.5 ha and has a capacity of 4.6 m3. The leachate from the landfill is piped for 6.3 km to the Lucun WWTP. 44. Based on modeling results, the noise emissions from the Huishan WWTP are expected to exceed the nighttime standard of 55 dBA, but in compliance with the daytime standard of 70 dBA. However, these noise emissions from the WWTP are not expected to be a mncem because the nearest sensitive receptors (Yanqiao Township's Government offices and a fire fighting station) are located 500 m upwind in the eastem direction fiom the WWTP.

45. Odor emissions from the sedimentation and SBR tanks will be minimized through proper adjustment of the air flow rate of the blower to bring the wastewater to aerobic state, and through timely sludge dewatering, handling of sludge cakes in dewatering rooms, use of sealed trucks for transporting the sludge to the disposal, site, sprinkling temporary sludge storage areas with bleach, and planting trees around the aeration tanks and WWTP.

46. DonPtinP WWTP. This WWTP will be a 30,000 m3/day expansion (second phase) of a 20,000 m3Iday WWTP in Wuxi. The second-phase WWTP will serve an area of 64.60 km2 through a 40 km Sewer network in Wuxi to treat wastewaters from domestic and industrial sources. The industrial wastewaters are from 70 industries (mostly dyeing, chemical, and metallurgical industries). The Bank will finance both the WWTP and the sewer network.

- 106 - 47. The current and projected wastewater flows (m3/day) that will be collected for treatment at the Dongting WWTP are as follows:

Domestic Industrial TOTAL Present 14,000 14,570 28,570 2010 18,000 39,000 57,000 2020 25,000 74,000 99,000

48. The second-phase WWTP will be designed for a capacity of 30,000 m3/&y using the SBR process. The SBR process was selected through comparison with alternative processes (the anaerobic/anoxic/oxidic process, Le. the A210 process and the oxidation ditch process). The treated water will be discharged to the Xinxingtang River (a Class IV water body).

49. The expected pollution loads in the Dongting WWTP inflow and effluent are shown below. By 2010 the treatment will reduce the COD loading by 85 percent, BOD loading by 90 percent, NH3-N loading by 47 percent, SS loading by 92 percent, and TP loading by 40 percent.

CODCr BOD5 NH3-N 4 -TP

Year 2010 Influent to WWTP (tpd) 22.9 11.5 1.7 14.7 0.10 Effluent from WWTP hd) -3.4 -1.1 -0.9 -1.1 0.06 Reduction (tpd) 19.5 10.4 0.8 13.6 0.04

(%I 85.2 90.4 47.1 92.5 40.00

Year 2020 Influent to WWTP (tpd) 35.0 17.5 2.5 22.6 0.20 Effluent from W" (tpd] -5.9 -2.0 -1.5 -2.0 -0.15 Reduction (tpd) 29.1 15.5 1.o 19.2 0.15

(%I 83.1 88.6 40.0 85.0 75.00

50. The wastewater discharge fiom the Dongting WWTP will meet Category B, Grade 1 of the Pollutant Discharge Standard for Town WWTPs (GB189 18-2002), except for COD and total phosphorus, which will meet the more stringent Category A, Grade 1 of the same standard. These standards are the same as those given for the Wuzhong WWTP.

5 1, About 24 m3hyof sludge will be generated from the Dongting WWTP. The sludge from the WWTP will be tested for hazardous characteristics according to applicable Chinese regulationslstandards. Iffound to be hazardous, the sludge will be disposed at a hazardous waste landf'ill to be identified. If the sludge is found to be non-hazardous, it will be transported by leak-praof, 10-ton trucks for 25 km to the Taohuashan sanitary landfill. The transportation time is selected to be between 5am-7am and 7pm-9pm to minimize adverse impacts on local trac. Characteristics of this landfill were provided above under the discussion for the Dongting WWTP. Prior to receiving the sludge, the landfii will be certified as designed and operated in compliance with applicable government regulations.

- 107 - 52. The DongtmgWWTP is located in an industrialpark that includes industries as well as residences. Based on modeling results, the noise emissions from the Dongting WWTP are expected to comply with the nighttime standard of 55 dBA and daytime standard of 65 &A. No adverse impacts of noise pollutionon the receptors are expected.

53, Odor emissions from the sedimentation and SBR tanks will be minimized through proper adjustment of the air flow rate of the blower to bring the wastewater to aerobic state, and through timely sludge dewatering, handling ofsludge cakes in dewatering rooms, use of sealed trucks for transporting the sludge to the disposal site, sprinkling temporary sludge storage areas with bleach, and planting trees around the aeration tanks and WWTP.

54. Anzhen WWTP. A 6.9 lun long trunk sewer and sewer network of 146 km will transport wastewaters from an area of 40 km2 in Wuxi to the MenWWTP. The Nianyu Village and the Village of Chengengshang, both in Anzhen Town, were evaluated as the potential sites for the Anzhen WWTP. The site at the Nianyu Village was favored through this evaluation.

55. The Anzhen WWTP will be designed for a capacity of 25,000 m3/day using the SBR process. The SBR process was selected through comparison with alternative processes (the anaerobiclanoxicloxidic process, i.e. the A210 process and the oxidation ditch process). The Bank will finance both the WWTP and the trunk and sewer network.

56. The current and projected wastewater flows (m3/day) that will be collected for treatment at the MenWWTP are as follows:

Parameters Inflow to WWTP (mg/l) Effluent from WWTP (mdl) COD 300-600 60

BOD5 150-200 20

ss 200-300 15

NH3-N 25-30 20

TP 2-3 1

57. The wastewater discharge from the Anzhen WWTP will meet Category B, Grade 1 of the Pollutant Discharge Standard for Town Wastewater Treatment Plants (GB18918-2002), except for COD and total phosphorus, which will meet the more stringent Category A, Grade 1 of the same standard. These standards are the same as those given for the Huishan WWTP.

58. About 40 m3lday of sludge will be generated from the MenWWTP. The sludge from the WWTP will be tested for hazardous characteristics according to applicable Chinese regulatiodstandards, Iffound to be hazardous, the sludge will be disposed at a hazardous waste landfill to be identifled. Ifthe sludge is found to be non-hazardous, it will be transported by leak-proof 10-ton trucks for 20 lun to the Taohuashan sanitary landfill. The transportation time is selected to be between 5am-7am and 7pm-9pm to "jze adverse impacts on local traffic. Characteristics of this landfill were provided above under the discussion for the Anzhen WWTP. Prior to receiving the sludge, the landfill will be certified as designed and operated in compliance with applicable government regulations.

- 108- 59. Based on modeling results, the noise emissions from the WenWWTP are expected to comply with the nighttime standard of 50 dbA and daytime standard of 60 &A. No adverse impacts of noise pollution onthe receptors are expected (the nearest receptors being Xihetou, which is about 80 m from the WWTP, and Tanggengxiang, which is about 100 m from the WWTP).

60. Odor emissions fiom the sedimentation and SBR tanks will be minimized through proper adjustment ofthe air flow rate of the blower to bring the wastewater to aerobic state, and through timely sludge dewatering, handling of sludge cakes in dewatering rooms, use of sealed trucks for transporting the sludge to the disposal site, sprinkling temporary sludge storage areas with bleach, and planting trees around the aeration tanks and WWTP.

River Course Dredging and Rehabilitation:

6 1. This activity involves sediment dredging in 65.7 km of waterways in the central urban area of Suzhou as flood protection and water quality improvement measures. Besides increasing the water flow (about doubling) at Jiuqugang (in Xujiang Panxi District), this component improves the quality of the waterways in Suzhou in terms of reduction ofthe CODMn concentrations by 0.16-0.84 mgll or 2.6-12.3 percent (see Table 2). CODMn concentrations in a few waterways not dredged are expected to increase. Dredging complements the locally-financed activities that include widening of some of these canal sections and diversion ofwater from the Xitang River to Suzhou City’s waterways. The overall city plan requires a minimum riverlcanal width of 6 m in ancient urban areas, 8 m in other existing urban and suburban areas, and 15 m in newly built urban areas. With the implementation of these additional measures, the reductions in CODMn concentrations in Suzhou’s waterways are expected to be as high as 2.9 mgA or up to 25.3 percent (Table 2).

62. The dredged sections of Suzhou’s waterways will have a sediment thickness of at least 0.6 meter. The volume ofthe dredged sediments is estimated to be 1.287 million m3. Based on site characteristics (narrow canals with limited work space) mechanical dredging with a grab dredger of 0.3-0.5 m3 will be used.

63. Suzhou’s waterways to be dredged are seriously polluted, with no benthos or plants. During dredging, the turbidity in water will increase by 2 to 7 times than the operation period. However, this increase will be limited to some local areas for a short period and the adverse impact will disappear with the completion ofdredging.

64. Sediments from Suzhou Canals have been tested for hazardous materials and found to be within standards prescribed by applicable Chinese regulations - most indicators were low or undetectable - and, in accordance with applicable Chinese regulations, will be disposed at an unused site at Sanjiaozhui (located north of the Shanghai-Nanjing expressway and east ofthe Shinziyang River). This site, which is 3.8 km long and 150 km wide, 3 m depth, and 1.5 m elevation, is zoned as green area in Suzhou’s masterplan. Even so, further testing for hazardous materials is to be undertaken of sediments in the Xiaomiduqiao River section prior to dredging to determine if other disposal arrangements, for example at purpose built cells at the municipal landfiu, is required.

* 109 - Table 2 - Improvements in Suzhou Waterways through Dredging and Implementation Integrated Rehabilitation Measures

65. The transportation methods considered for dredged sediments to the sludge application site included barge transportation and land transportation. Based on evaluation ofimpacts, barge transportation was selected. Barge transportation will be conducted in specified routes (mostly concentrated in Yuanhetang and Dalonggang) in such a manner not to adversely affect the navigation traffic.

66. Accordingly, sediments will be dewatered on site prior to loading in barges for transportation for a distance of about 5- 19 km according to predetemined routes.

67. There are residential areas at distances ranging from 20-120 m from the dredging areas. These sensitive receptors will be protected from noise emissions through such mitigatory measures as prohibition of construction work at nights, setting up noise barriers, and arrangement oftransportation routes away from sensitive areas. In addition, cargo ships will not be allowed at any time and pleasure boats will not be

- 110 - allowed at nights in the Shangtang and Xujiang networks in Suzhou; ship noise will be limited to 55 &A, silencers will be installed on ships for noise suppression; siren duration and frequencies will be "ked; and use of sirens will not be permitted in residential areas. To "ize PM emissions on land, vehicles will be covered and their speed will be limited to 40 kmlh, and mud on their wheels will be cleaned off.

Polluted Water Control in Suzhou:

68. This component involves construction of a shiplock and two sluice gates on Xujiang River, and a shiplock on the Shangtang River to prevent the upstream poor quality water of the Grand Canal flowing into the urban waterways of Suzhou. In addition, these measures reduce the risk of flooding in Suzhou. The sites ofthese barriers are located at the intersection of Grand Canal with Xujiang River, and the boundary ofthe central urban district of Suzhou and its new district.

69. Xujiang River is divided into two branches (north and south) at its intersection with Grand Canal. Two siting altematives (two separate gates, and a combined gate) were evaluated using the following criteria: (i)geological conditions ofthe site; (ii)effect ofpollution control from Grand Canal; (iii)impact on historic relics near the project sit; (iv) impact on navigation safety; (v) construction conditions; and (vi) costs (land acquisition, excavation, resettlement). Based on this evaluation, two separate gates, each on a branch of the Xujiang River, were selected.

70. Two altemative sites were considered for the shiplock on the Shangtang River. The evaluation criteria consisted of: (i)size of the lock system; (ii)pollution and flood control from Grand Canal; (iii) impact on historic relics near the project site; (iv) impact on navigation safety; (v) complexity of project management; and (Vi) construction conditions. Based on this evaluation, the site between the Laifeng Bridge and Jiangfeng Bridge was selected.

7 1. With the closing ofthe Xujiang River with sluice gates and the Shangtang River with a shiplock, the water quality improvements - in tenns ofreductions ofCODMn concentrations - are estimated to be 0.95 mgA at the Guangji Bridge over Shangtang River, 0.05 mgA at the Tairang Bridge over the Xujiang River, and 0.38 mg.4 and 0.33 mg/l at the westem and southern lines ofthe Waicheng River under the influence of improved water quality of the Shangtang and Xujiang Rivers.

72. The construction work at the Xujiang River sites will generate about 51,000 m3 of sediments and 10,000 m3 ofsoils, and the Shangtang River site will generate about 64,000 m3 ofsediments and 13,000 m3 of soils that require disposal. Ifthe sediments are found to be non-hazardous, then these sediments and excavated soils will be land disposed. Five alternative sites were considered for the disposal of sludge generated from gate construction in Suzhou. These alternatives included the site of (i)the abandoned fish pond at Sanjiaozui by Shiziyang River; (ii)an abandoned brewery site; (iii)Anli Chemical Co. Ltd. (the industry is to be relocated); (iv) an abandoned paper mill (Huasheng Paper Mill); (v) an abandoned fish pond and farmland at Xuelang; and (vi) a vacant land at the intersection ofXihuan Road and Shuangqiao Road. The evaluation factors included the current land use and the sensitive receptors in the area. The evaluation results indicate that sediments and soils from the Xujiang River sites could be piled at the vacant land (at the intersection of Xihuan Road and Shuangqiao Road) for sale, and the sediments and soils from the Shangtang River site could be filled into the abandoned fish pond at Sanjiaozui by Shiziyang River and used for plantation.

73. There are residential areas at distances ranging from 10-70 m from the dredging areas. These sensitive receptors will be protected from noise emissions through such mitigatory measures as no construction at night, use ofequipment with low noise, use ofvehicles with noise control, and setting up of

- 111 - construction barriers. Vehicles will be covered and their speed will be limited to 40 kmlh, and mud on their wheels will be cleaned off.

74. This component requires permanent land acquisition of 23.9 mu and temporary land occupancy of 49.1 mu, and relocation ofresidential and factory houses totaling 6,602 m2 and building of 1,953 m2. Vegetation along the river banks include willow, paulownia, and other trees planted by man. Although some tress will be destroyed by construction, the impacts will be minor. Mer completion of construction, vegetation will be restored.

Wuli Lake Restoration:

75. The locally-financed sub-components for Wuli Lake restoration include: (i)polluted water control and water level regulation; (ii)embankment rehabilitation; and (iii)ecological restoration. These . subcomponents will complement the locally-fimded activities that include dredging of sediments in the Lake, restoration of fish ponds, and water diversion.

76. Before control of the Wuli Lake water entrances, wastewaters in the surrounding areas entering the Lake freely deteriorated its quality. With the implementation of the water level regulation sub-component, the mean water level in the Wuli Lake will increase from 3.06 m to 3.30 myand the wastewater quantity entering the Lake is expected to be reduced by 60 percent, with reductions in pollutant loadings in the amounts of 445 tpy for CODCr, 5 1.4 tpy for total nitrogen, and 4.9 tpy for total phosphorus. However, water quality in some of the waterways in the surrounding areas of Wuli Lake will deteriorate. For example, with the construction of gates at Xiaoxuabngang, Ludianqiaobvang, and Lixi River, the mean value of CODMn is expected to increase by approximately 0.1-0.6 mgA, but is not expected to change significantly in other waterivays further away from the Lake.

77. With the implementation of the integrated rehabilitation project, the reductions in pollutant concentrations ofWuli Lake will be 35.3 percent for CODMn to reach 6.6 mgA, 33.8 percent for total phosphorus to reach 0.1 1 mgA, and 18.5 percent for total nitrogen to reach 4.57 mg/l. As such, the Lake will reach Class IV for CODMn and total phopphorus, and Class V for total nitrogen. Rehabilitation ofthe Wuxi City sewer network will fiutfier improve on this as overall wastewater capture increases.

78. Polluted water control and water level regulation. Under this sub-component, gates will be built on the rivers that connect Wuli Lake with the inner river network ofthe urban area ofWuxi. In addition, a PS is being built with local funding to artificially control the water level ofthe Wuli Lake, the direction of water flow in the Lake area and the quality ofwater entering the Lake.

79. Embankment rehabilitation. Under this sub-component, 19.4 km of shoreline of the total of 29.3 km shoreline around the Wuli Lake will be rehabilitated as a public greenbelt for tourism and recreation. It will help reduce soil erosion and improve the Lake water clarity. As no endangered flora or fauna has been recently identified in the lakeshore construction area, the embankment rehabilitation sub-component will not have a negative impact on the ecological environment around the Lake. In addition, along with this activity, vegetation coverage of the belt along the shore will increase, improving the ecological conditions over the current status.

80. Ecological restoration. Under this sub-component, plantation will be carried out in a small pilot area, followed by the introduction of benthos and fishes. Emerging aquatic plants such as cattail and reed will be planted in zones with water depth less than one meter; and tape glass, black algae, and waterweed will be planted in zones with water depth greater than one meter. The pilot will complement research under

- 112- the national "863 Program."

EA Suggestions

8 1. Two suggestions are made at the conclusion of the EA Report: (i)implementation of the Wuli Lake ecological restoration sub-component as a pilot activity (instead of an activity for full-scale implementation); and (2) the implementation of industrial pollution prevention measures (in particular, water recycle and reuse at industrial facilities) as a means to reduce costs associated with wastewater treatment and sludge management. The project design responds to both these suggestions by scaling the ecological restoration component in Wuli Lake to a pilot activity and by incorporating industries that will discharge into project-financed WWTPs in Jiangsu Province's Cleaned Production Program.

Public Consultation and Information Disclosure

82. A social survey of the public in the project area was conducted to find out about their demands and concerns. The following methodologies were used:

0 First stage public consultations. Prior and during preparation of the EA Report (period between October 2002 and August 2003), the EA team held meetings with the potentially affected people to discuss the EA TOR, including information about the project components and activities involved, potential environmental impacts, mitigatory measures, and the implementation schedule. Informal discussions and on-site visits were held, and questionnaires were distributed to understand the public attitude and needs on the project's environmental aspects. The interviewees were from different sexes, age groups, culture levels, and family structures. The majority were supportive of project activities. Concerns were expressed about unpleasant odors from WWTps, greater noise and dust levels and as well as traffic. Some suggested shorter construction periods to reduce adverse impacts. Regarding the shiplock at the Shangbng River, the Hangshang Temple was emphasized and the shiplock was re-sited. Agricultural use of the WWTP sludge was viewed not feasible by affected people for the Wuzhong and Dongting WWTPs.

83. Public consultations were held at the following locations:

Project comoonentlsub-comaonent Location of consultations Wuzhong WWTP Yinxi Village, Hongzhuang Loujiang WWTP, Fwin WWTp Hengtang Town, Xing110 Village, Youlian Village, Meiwan Village Huishan WWTP Huishan District Dongting WWTP Wangsongbang Village, Zhuangqiao Village WenWWTP Nianyu Village, Nongxin Village River Course Dredging (Suzhou) Pingjiang District, Jinchang District, Canglang District Polluted Water Control (Gates in Suzhou) Jinchang District Wuli Lake Restoration Dafu Town, Dongjiang Town, Jincheng and Xuelang Towns a Second stage public consultations. After completion ofthe draft EA Report, the EA team disseminated the conclusions of the EA Report and the mitigatow measures were disclosed to potentially-affected people. This provided an opportunity to address the concerns that had been raised

- 113- by the affected people regarding the project. Consultative meetings were held regarding the Anzhen WWTP (in Nianyu Village), Dongting WWTP (in Wangsongbang), Wuzhong WWTP (Yinxi Village), and Wuli Lake restoration (in Dafu Town, Dongjiang Town, Jingcheng and XuelangTowns). Over 80 percent of the consulted people, expressed favorable views on the project. They viewed the importance ofthe improvement to the local environment (60 percent of the public are not satisfied with the quality ofthe current environment). The concerns raised were about the stinking gases (37 percent), traffic (12 percent), dust (10 percent), potential harm to cultural relics (9 percent), and construction safety (2 percent). Good mitigatory measures, especially noise control during the construction period, are expected. In addition, on-the-spot interviews were held and questionnaires were used to receive feedback. In August 2003, the Project was publicized by the EA team in Hohai University’s website ( m://www.hhu.edu.c@, and a 24-hour telephone hotline was opened.

84. The draft EA documentation was sent to the Bank’s InfoShop in Washington and in Beijing in October 2003. The EA and EMP were finalized, with all clarifications and analysis, and forwarded to the Bank’s InfoShop in March 2004.

B. SummaryofRAP

Project Description

85. The proposed project will cover two municipalities, i.e. Wuxi and Suzhou. In Wuxi, the physical works ofthe project consist of: (i)Huish WWTP with capacity of 50,000 cubic meters/day and 58 km of sewers; (ii)Dongting WWTP with capacity of 30,000 cubic meterdday and 40 km ofsewers; (iii) Anzhen WWTP with capacity of 25,000 cubic meterdday and 146 km of sewers in Xishan District; and (iv) 10 sluice gates, 1 shiplock, 19.4 km ofembankment and pilot ecological restoration in designated areas for the locally-financed Wuli Lake Rehabilitation. In Suzhou, the physical works of the project consist of (i)Phase 11 ofFuxin (additional 100,000 cubic metershy) and Loujiang WWTP (additional 80,000 cubic metershay); (ii)Sluice gates on Xujiang and Shangtang Rivers for water quality protection in Suzhou canals and flood control; (iii)65.7 km of canal dredging; and (iv) Wuzhong WWTP with a capacity of 25,000 cubic metershy and 43 km of sewers.

Resettlement Planning

86. Jiangsu Provincial PMO together with PMOSof Wuxi and Suzhou Municipalities are responsible for the resettlement planning of the proposed project, and have organized separate teams to carry out the assignment in Wuxi and Suzhou respectively. Resettlement planning includes detailed census of affected people, inventory of impacts and socioeconomic surveys. These resettlement planning activities provide a detailed record ofproject adverse impacts, including land, house, business, institutions, the number of people affected. Socioeconomic surveys were conducted through questionnaires, interviews and focus group discussions as part of the resettlement planning process. Two resettlement action plans (RAPS) and one resettlement policy framework were developed, and two retroactive review reports were prepared. Project Impacts

87. Project components will require land acquisition, temporary land use, relocation of houses and business. The details ofimpacts are as follows:

-114- Summary of Project Impacts

WWTP Sluice gates 15.8 mu 8.44 35.8mu -I- 8 I 117 3367 m2 house 6306 m2 factory

* households and persons affected by temporary land use.

Legal Framework

88. The RAP was prepared in line with relevant Chinese laws, regulations and World Bank OP 4.12 on Involuntary Resettlement. The following basic principles were adopted for resetttement planning:

0 Compensation will be paid at replacement cost without depreciation 0 Land compensation will be paid before acquisition 0 House compensation will be paid before construction ofthe new house 0 Compensation rates must be finalized through consultation e Lack oflegal title will not bar an affected person from his or her resettlement entitlements 0 The objective of resettlement is to enable the affected persons improve or at least restore their living standard

Rehabilitation Strategy and Measures

89. The proposed project will require acquisition of farmland. For farmers who will lose farmland, the livelihood rehabilitation strategy follows the traditional Chinese approach, which is land and agriculture based, and depends on village collectives for livelihood restoration. All affected farmers will be allocated farmland within the village and the land compensation fund will be paid to the village and used collectively in the villages for agriculture and sideline development.

90. About 774 people in.176 households will lose their residences. The affected households consist of both urban and rural residents. Different relocation methods are applied for rural- and urban-affected households based on extensive consultations with the affected population. For relocating urban residents, the project has planned to offer three options: (i)cash compensation; (ii)replacement housing; or (iii) provision of a cheap house for rent. Urban residents could choose to find and buy their own replacement housing with the cash compensation. For those who do not want to fmd and buy their own replacement housing, the project will provide either ownership of a replacement housing unit in govemment-built apartments or a cheap house for rent. For relocating rural residents, the project will provide compensation at replacement cost with no depreciation.

9 1. About 16 enterprises will be affected. Compensation for business loss has been provided for in the RAPS. A few government agencies will require relocation and new sites have been planned for them. The project will also impact some public infrastructure. Compensation based on replacement value will be paid to the relevant government agencies or local governments to restore the affected infrastructure and services.

Management Organization

92. A multi-level organization has been established for the implementation ofthe RAPs. An independent monitor has been selected for resettlement implementation. Details ofstaffing and their responsibilities are provided in the RAPS.

Public Consultation And Participation

93. Public consultation and participation has played a key role in formulating the RAPs. The affected residents, business people and district governments participated in the census, inventory and formulation of the livelihood rehabilitation strategy, measures and relocation sites. Their feedback has been incorporated in the RAPs. The RAP contains a list ofmajor consultation sessions.

94. Public consultation and participation will continue in the 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 (RIB) and distributed to every affected household.

Grievance Redress Mechanism

95. A mechanism has been designed for grievance redress under each ofthe project components. All grievances can be filed in both written and verbal forms. The redress channel lies within the project management and government systems. Recording requirements and timeframe have been established for grievance resolution. This mechanism will be disclosed as part of the RIB.

- 116 - Resettlement Implementation Monitoring

96. Internal and external monitoring have been designed as part of project resettlement management. The project resettlement offices will cany out internal monitoring ofresettlement implementation. The monitoring procedures, content, staffing, responsibility, timeframe and reporting have been detailed in the RAPS. An external monitor has been selected for independent monitoring of RAP implementation. Independent monitoring will cover physical progress of RAP implementation, compensation payment, allocation ofresidential sites, farmland allocation, and restoration of infrastructure. The independent monitor will also review the public consultation process, operation of the resettlement project offices, grievance redress mechanisms and restoration of livelihood of affected farmers. Independent monitoring will be conducted once a year during the project implementation period.

Compensation And Resettlement Budget

97. The RAPs contain compensation rates for various impacts, Land compensation rates include land compensation and resettlement subsidy. Compensation rates for structures are calculated for replacement costs. The affected infrastructure will be compensated for reconstruction and the compensation budget will be finalized through negotiation with the owning govemment agencies.

98. The RAPs contain 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, house, other structures, standing crops and trees, business profitloss, reconstruction of affected infrastructure and relocation subsidies. Management cost is included in the budget as well. The total resettlement budget is estimated at RME3 202 million, equivalent to 24.7 million US$ at an exchange rate of RMB 8.27 = US$1. Resettlement costs will be financed from counterpart funds. Disbursement procedures and monitoring mechanisms are designed and documented in the RAP.

Other Environmental Management Aspects A. Cleaner Production for Industry

99. Implementation of a CP program for pollution reduction began in Jiangsu Province as a pilot program in 1997 after the Jiangsu Provincial Government issued a circular entitled 4*Opini~~on Implementing CP Audits.” In Wuxi and Suzhou Municipalities, the CP program implementation has so far progressed through two stages: a pilot (shi dim) stage from 1997 to 200 1 and implementation stage from 2002 to 2003. Since the enactment ofthe national CP law in 2002, CP has been accelerated in Wuxi and Suzhou.

100. Most recently, in September 2003, the Jiangsu Provincial Government issued a circular entitled “Circular Concerning the Issuance of the Plan for Implementation ofCleaner Production in Jiangsu Province during the Final Three Years ofthe Tenth Five-Year Plan. This circular has the following three main requirements:

0 By the end of 2004, all enterprises in the following categories must complete CP audits: (a) All main polluting enterprises in the dyeing, metallurgy, chemical, power production, building materials, light industry etc., sectors within the Lake Tai Basin and in all areas of the Province; (b) all enterprises in the province that do not comply with discharge standards; and (c) some primq

- 117- and tertiary enterprises.

0 By the end of 2005, all enterprises in the following categories must complete CP audits: (a) all polluting enterprises in the Lake Tai Basin and all other main polluting enterprises in the province; (b) all enterprises in the province that do not comply with discharge standarb, (c) all enterprises that use or discharge toxic materials; and d) some primary and tertiary enterprises.

0 All new, expanding or changing enterprises shall conduct CP audits and commence implementation during construction acceptance.

10 1. The following table summarizes the number of enterprises that have participated in Suzhou and Wuxi’s CP program since its inception in 1997:

Year 1997 1998 1999 2000 2001 2002 2003 WUXi 4 10 8 6 10 35 60 Suzhou 2 2 3 5 5 42 65

102. As a result of the issuance of the new circular in September 2003, the Wuxi and Suzhou Municipal authorities report that the implementation ofthe CP progre is expected to accelerate within the next few years. For example, Suzhou Economic and Trade Commission (ETC) reported that it is expected that more than 90 enterprises will participate in 2004, an increase of 40 percent over 2003. According to Wuxi’s plan, over 300 enterprises and institutions in sectors of chemical, metallurgical, dyeing and textile, mechanical, pharmaceutical, etc., will have completed CP activities by 2005.

103. The investments made in the CP program are significant, as are the environmental achievements. For example, in Suzhou Municipality, during the pilot years of the program (1997-2001), more than 230 million RMB was invested by enterprises in CP measures. The total estimated benefits of the program were a reduction in wastewater discharge of 9.5 million tons per annum (tla), a reduction in water use of 7.24 million tla and an economic benefit ofRMB 136 million.

104. Since 2000, the municipal economic and trade commissions have become the lead authorities for implementation ofthe CP program, with EPBs providing technical support.

105. With respect to the largest enterprises discharging to the municipal WWTPs to be constructed under the project, the Suzhou and Wuxi authorities reported that many of these enterprises have already participated in the CP program. For example, all five of the largest industrial wastewater dischargers to the Fuxin WWTP (see annex to the project EA), have participated in the Suzhou CP program between 2001 and 2003. Similarly, many ofthe largest enterprises that will discharge to the Huishan and Dongting WWTPs in Wwci have already participated in the program. For example, the single largest wastewater discharger, the Wuxi Xianjiang Chemical Industry Co. Ltd. (discharging to the Dongting WWTP) participated in the CP program in 2003.

106. The Wuxi and Suzhou EPBs implemented a system ofpublic disclosure to complement their CP programs. These EPBs published the environmental performance ofall the enterprises under their supervision in categories of “black, red, yellow, blue and green” twice a year through the media including newspaper and television.

- 118- B. Ambient Environmental Monitoring

107. The Jiangsu Provincial Government has made significant investments in environmental monitoring in recent years. A particular focus ofthe authorities is environmental monitoring in the Lake Tai Basin.

108. Water quality monitoring in Jiangsu Province is the responsibility ofthe provincial and lower level EPBs. There are 90 river monitoring stations and 20 lake monitoring stations in the Lake Tai Basin manned by municipal EPBs but under the direction of the Provincial EPB. The river monitoring stations are located on key tributaries ofLake Tai, and on reaches ofrivers that cross administrative boundaries (e.g. from municipality to municipality). Each of these stations monitors 12 main water pollution parameters once per month, as required by national laws, and the results are reported to the Provincial EPB.

109. The Jiangsu Provincial EPB provides environmentaI monitoring data to key organizations with responsibility for Lake Tai, including the TBA.

1 10. Institutional strengthening: The Jiangsu Provincial EPB has instigated a significant program of institutional strengthening for environmental monitoring during 2003. This included the establishment, with Provincial Government approval, ofthe “Jiangsu Provincial Environmental Monitoring Coordination Group” under the leadership ofthe Provincial EPB. The members ofthis Coordination Group comprise the Provincial EPB, Provincial Monitoring Station, municipal monitoring stations, district and county monitoring stations, and key enterprises. The objectives of this group are to provide coordination and training for all certified environmental monitoring units (including private and public).

11 1. Jiangsu Provincial Government has implemented a program whereby large, well-equipped enterprises can apply for certification to conduct environmental monitoring. Mercertification, these enterprises can provide fee-for-service monitoring services for other enterprises. The certified enterprises participate in the Coordination Group’s activities.

112. Hardware andsoftware improvements: During the recent few years, the Jiangsu Provincial Government has invested RMB 173 million in its environmental monitoring network. This has included the establishment ofnine automatic water quality monitoring stations in key locations within the Lake Tai Basin (three already commissioned, six under final installation). In addition, laboratories have been upgraded, and a new computer system for the collection of data has been brought on line. The Jiangsu Provincial EPB reports that the investments made so far are adequate to meet its needs at this time.

1 13. In addition to these local investments, a TA assistance of $200,000 was provided by USTDA (US Trade Development Agency) in 2003 (primarily for international consultancy services) during the initial provision of the automatic monitoring system.

114. Longer-term plans for environmental monitoring improvement include the establishment of 21 more automatic monitoring stations, increases h the number of parameters that can be monitored at all stations, and the introduction of “ecological monitoring” using remote sensing.

115. In addition to monitoring by the EPBs in the province, water resource monitoring is conducted by the water resources bureaus. The water resource bureaus maintain a system ofmonitoring stations that primarily carry out monitoring of flow and flooding, in addition to water extractions. This system is separate from the EPB water qality monitoring system.

- 119- C. Environmental Planning

116. Recognition ofthe need for urgent action to protect the health and economic well-being of communities relying on the Lake Tai Basin led the State Council to establish the Lake Tai Basin Water Resource Protection Leading Group in 1996 and a multi-stage program with the goal ofresolving the region’s water pollution problems by 2010. However, to date, implementation ofthe Government’s program in the provinces, municipalities and districts within the Basin is behind schedule and the program’s interim pollution control targets have not been met.

117. The first stage ofthe Government’s pollution control program (1996 - 2000) for the Lake Tai Basin focused on reducing both industrial and domestic wastewater discharges. Industrial Pollution Control Action Plans were developed and implemented by local governments. Progress was made towards bringing key polluting enterprises, particularly those within core city areas, into compliance with environmental regulations. However, at the end of the program’s implementation period, the heavily industrializing districts and counties surrounding the core cities within the Basin were still not in compliance with the targets. In addition, progress was slow on the collection and treatment ofdomestic sewage.

1 18. The second stage of the Government’s strategy was articulated in the Tenth Five-Year Action Plan for Lake Tai Pollution Control (2001-2005). This strategy places high prioriw on: (a) improving wastewater management, particularly collection and treatment of domestic sewage; (b) improving water quality by reducing TP discharges into heavily polluted water bodies such as Meiliang and Wuli Lakes in Wwri Municipality and by transferring higher quality water from the Yangtze River to the lake and canal system to increase circulation; and (c) strengthening local capacity for water environment monitoring and management.

119. In recent years, the Jiangsu Provincial EPB has continued to prepare smaller plans for individual priority areas within the Lake Tai Basin. In total nine plans are to be developed, some ofwhich are already issued, or under preparation. For example, the “Pollution Control Plan in the West Bank Area ofWangYu River” was issued in 2002 by the Jiangsu Provincial Government. This plan lists 101 industrial enterprises and 40 large-scale agricultural farms located on the WangYu River and four main tributaries (Xibei Canal, Zhangjiagang River, Xin-xin Tang, and, Bodugang River) to be subjected to point source pollution control measures.

120. In the short-term (before the end of2OO5), the Jiangsu EPB will fulfill the national planning requirements by reporting on progress during the loth Five-Year Plan and develop the 1lth Five-Year Plan for Lake Tai. This plan will ultimately form part ofJiangsu Province’s 1 Ith Five-Year Plan.

12 1, The Jiangsu Provincial Water Resources Bureau noted that the National Water Resources Ministry has required all provincial water resources bureaus to develop “water resource comprehensive plans,” which include water quality planning. This is not the traditional planning responsibility for the water resources administration, and for this reason, the Jiangsu Provincial Water Resources Bureau has met considerable institutional difficulties in fulfilling this required task.

122. According to national requirements, a water resource comprehensive plan should include three main components -water resource protection, ground water utilization and, surface water utilization.

123. To complete this task in Jiangsu Province, a leading group has been established with the Jiangsu Provincial Planning Commission at its head. The main implementing agency (and the head ofthe plan’s

- 120- PMO) is the Jiangsu Water Resources Bureau. A total of RMB 30 million will be required to complete this plan, but at this stage, funds allocated by the Provincial Planning Commission and Finance Bureau are so far still insufficient.

124. Environmental planning in the Lake Tai Basin suffers from institutional fragmentation. The water resources administration is taking over much of the environmental planning work (including water quality planning), but this is a new task for this administration, and for this reason, it is not proceeding smoothly. In Jiangsu Province, there is limited cooperation between the EPB and water resources bureaus at all levels. The traditional rivalry between the agencies is hampering the development ofcohesive, well-integrated plans. Solving this problem, which is vital for Jiangsu Province to achieve its goals of sustainable development, will require strong and committed leadership by the Jiangsu Provincial Government, in particular the Jiangsu Planning Commission and Finance Bureau.

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