Document of The World Bank

Public Disclosure Authorized

Report No: ICR00001101

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-46170 TF-50520)

Public Disclosure Authorized ON A

LOAN

IN THE AMOUNT OF USD100 MILLION

TO THE

PEOPLE'S REPUBLIC OF CHINA

FOR THE

Public Disclosure Authorized LIAO RIVER BASIN PROJECT

June 15, 2009

Sustainable Development Department East Asia and Pacific Region

Public Disclosure Authorized CURRENCY EQUIVALENTS ( Actual Exchange Rate) Currency Unit = Yuan Yuan 1.00 = USD 0.13 USD 1.00 = Yuan 7.6

Fiscal Year January 1 to December 31 ABBREVIATIONS AND ACRONYMS BOD Biological Oxygen Demand CNY Chinese Yuan (RMB) COD Chemical Oxygen Demand DC Drainage Company EA Environmental Assessment GDP Gross Domestic Product GIS Geographic Information System ICR Implementation Completion & Results (Report) IA Implementation Agency JDC Jinzhou Drainage Company JMG Jinzhou Municipal Government LMC2 2nd Liaoning Medium Cities Infrastructure Project Ln48640 LP Liaoning Province LPG Liaoning Provincial Government LRBP Liao River Basin Project LUCRPO Liaoning Urban Construction Renewal Project Office MOF Ministry of Finance O&M Operation and Maintenance PAD Project Appraisal Document PDC Panjin Drainage Company PDO Project Development Objective PHRD Policy and Human Resources Development (Grant from Japan) PMG Panjin Municipal Government PIU Project Implementing Units PUB Public Utilities Bureau QAE Quality at Entry QSA Quality of Supervision Assessment RAP Resettlement Action Plan RMB Chinese Yuan (Renminbi) UMIS Urban Management Information System WWTP Wastewater Treatment Plant YDC Yingkou Drainage Company YMG Yingkou Municipal Government

Vice President Mr. James W. Adams Country Director Mr. David R. Dollar Sector Manager Mr. Ede Jorge Ijjasz Vasquez Task Team Leader Mr. Mingyuan Fan China LIAO RIVER BASIN PROJECT

CONTENTS

1. Basic Information 2. Key Dates 3. Ratings Summary 4. Sector and Theme Codes 5. Bank Staff 6. Project Context, Development Objectives and Design 7. Key Factors Affecting Implementation and Outcomes 8. Assessment of Outcomes 9. Assessment of Risk to Development Outcome 10. Assessment of Bank and Borrower Performance 11. Lessons Learned 12. Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1. Detailed Performance Indicators/Results Annex 2. Project Costs and Financing Annex 3. Outputs by Component Annex 4. Economic and Financial Analysis Annex 5. Implementation of the Industrial Pollution Control Action Plan Annex 6: Resettlement Implementation Annex 7. Bank Lending and Implementation Support/Supervision Processes Annex 8. Summary of Borrower's ICR and/or Comments on Draft ICR Annex 9. List of Supporting Documents MAP No. 31284R

A. Basic Information

Liao River Basin Country: China Project Name: Project IBRD-46170,TF- Project ID: P051859 L/C/TF Number(s): 50520 ICR Date: 06/15/2009 ICR Type: Core ICR PEOPLE'S Lending Instrument: SIL Borrower: REPUBLIC OF CHINA Original Total USD 100M Disbursed Amount: USD 91.5M Commitment: Environmental Category: A Implementing Agencies: (i) Liaoning Urban Construction and Renewal Project Office (LUCRPO) (ii) Municipal Governments and Drainage Companies of Panjin, Yingkou and Jinzhou (iii) Yingkou Paper Mill and Jincheng Paper Mill (iv) Liaoning Provincial Construction Commission (v) Liaoning Environmental Protection Bureau Cofinanciers and Other External Partners:

B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept 10/26/2000 Effectiveness: 05/23/2002 05/23/2002 Review: 12/01/2007 Appraisal: 03/12/2001 Restructuring(s): - 12/01/2008 Mid-term Approval: 06/19/2001 12/31/2004 07/02/2004 Review: Closing: 12/31/2007 12/31/2008

C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Satisfactory Risk to Development Outcome: Moderate Bank Performance: Satisfactory Borrower Performance: Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Satisfactory Quality of Implementing Satisfactory Satisfactory Supervision: Agency/Agencies: Overall Bank Overall Borrower Satisfactory Satisfactory Performance: Performance:

C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Rating Performance (if any) Potential Problem Quality at Entry Project at any time No None (QAE): (Yes/No): Problem Project at any Quality of No None time (Yes/No): Supervision (QSA): DO rating before Moderately

Closing/Inactive status: Satisfactory

D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Other industry 10 17 Sewerage 83 75 Sub-national government administration 7 8

Theme Code (Primary/Secondary) Pollution management and environmental health Primary Primary Water resource management Primary Primary

E. Bank Staff Positions At ICR At Approval Vice President: Mr. James W. Adams Mr. Jemal-ud-din Kassum Country Director: Mr. David R. Dollar Mr. Yukon Huang Sector Manager: Mr. Ede Jorge Ijjasz-Vasquez Mr. Keshav Varma Project Team Leader: Mr. Mingyuan Fan Mr. Geoffrey Read ICR Team Leader: Mr. Mingyuan Fan ICR Primary Author: Mr. Chandra Godavitarne

F. Results Framework Analysis

Project Development Objectives (from Project Appraisal Document) The development objective is to assist the environmental recovery of the Liao River Basin (LRB) in Liaoning Province and to enhance water quality management decision- making on the basis of an integrated river basin management approach.

Revised Project Development Objectives (as approved by original approving authority) Project objectives remained unchanged during the project period.

(a) PDO Indicator(s)

Original Target Formally Actual Value Values (from Revised Achieved at Indicator Baseline Value approval Target Completion or documents) Values Target Years Water quality in Hun, Taizi, Liao and Daliao Rivers meets Class V Indicator 1 : standards for COD (% of time). Value quantitative or N/A 70% 70% Qualitative) Date achieved 05/31/2001 12/31/2007 12/31/2008 Target for 2007 was met in 2008. 2008 figures for Yingkou, Panjin and Comments Jinzhou are 100%, 50%, and 58%, respectively, yielding an average of (incl. % 70%. The 90% target by 2010 is likely to be achieved because LPG has achievement) enhanced discharge standards Aggregate quantity of wastewater treated at project city wastewater Indicator 2 : treatment plants (% of system flow). Value quantitative or 0% 80% 48% Qualitative) Date achieved 05/31/2001 12/31/2010 12/31/2008 Target is on track to be met. Quantities have already been reached within Comments the service areas, but the municipalities actually grew much faster than (incl. % anticipated in the project design stage. Additional treatment plants will be achievement) completed by 2010. Indicator 3 : Industrial wastewater meeting river discharge standards (% of total flow). Value quantitative or 50% 80% 92% Qualitative) Date achieved 05/31/2001 12/31/2010 12/31/2007 Target exceeded. LPG has implemented the Industrial Pollution Control Comments Action Plan addressing the 20 worst polluting industries identified at (incl. % appraisal. Major action was taken against paper mills, resulting in the achievement) closure of over 200 paper mills. Indicator 4 : Industrial water use per unit of output (m3/Y10,000) Value quantitative or 120 60 48 Qualitative) Date achieved 05/31/2001 12/31/2010 12/31/2007 Comments Target exceeded. Implementation of the Industrial Pollution Control (incl. % Action Plan yielded excellent water-saving results. achievement) Indicator 5 : Liaoning Provincial Govt. approval of the River Basin Plan Value quantitative or Draft plan Approval Approved Qualitative) Date achieved 05/31/2001 06/30/2002 June 2002 Comments Target met. LPG has adopted river basin management concepts for (incl. % prioritization of investments, demand management and pollution control achievement) and management. Indicator 6 : Wastewater tariffs implemented to meet financial projections. Baseline in 2001 Target for 2005 Actual since 2005 Value (Y/m3): (Y/m3): (Y/m3): quantitative or Yingkou: 0.25 Yingkou: 0.77 Yingkou : 0.62 Qualitative) Panjin: 0.34 Panjin: 0.72 Panjin : 0.86 Jinzhou: 0.29 Jinzhou: 0.85 Jinzhou : 0.63 Date achieved 05/31/2001 12/31/2005 12/31/2005 Target met in principle. Tariffs were increased at intervals until 2005. Comments However, municipal subsidies (as permitted under the Project Agreement) (incl. % are currently still required to enable the drainage companies to meet achievement) operating cost and debt service. Indicator 7 : Class V river water quality achieved in Daliao and Liao Value Daliao: Achieved Target should be quantitative or zero Liao: Short of achieved Qualitative) target Date achieved 12/31/2001 12/31/2006 12/31/2008 Comments Target met for Daliao River, not yet achieved for Liao River. See Annex (incl. % 1 for details on the achievements made in improving water quality in the achievement) Liao, Daliao, and Daling Rivers. Indicator 8 : Paper-making companies to achieve financial targets Value 80% quantitative or zero achievement Qualitative) Date achieved 05/31/2001 12/31/2006 Target partially met. This indicator was inappropriate as the project Comments investments were very minor in relation to the overall operation of the (incl. % paper companies. One of the PMs was profitable until 2008, the other achievement) made losses throughout the project.

(b) Intermediate Outcome Indicator(s)

Original Target Formally Actual Value Values (from Revised Achieved at Indicator Baseline Value approval Target Completion or documents) Values Target Years Indicator 1 : Completion of wastewater interception and treatment plants. Value Completed & (quantitative Zero Completion Commissioned or Qualitative) Date achieved 05/31/2001 12/31/2006 12/31/2006 Comments Target met. All treatment plants planned at appraisal were completed and (incl. % commissioned by the end of 2006, and they are operating near full achievement) capacity by project completion.

G. Ratings of Project Performance in ISRs

Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 06/20/2001 Satisfactory Satisfactory 0.00 2 12/21/2001 Satisfactory Satisfactory 0.00 3 03/08/2002 Satisfactory Satisfactory 0.00 4 11/01/2002 Satisfactory Satisfactory 12.40 5 06/06/2003 Satisfactory Satisfactory 16.85 6 10/21/2003 Satisfactory Satisfactory 19.77 7 06/22/2004 Satisfactory Satisfactory 35.74 8 08/20/2004 Highly Satisfactory Highly Satisfactory 40.72 9 06/16/2005 Highly Satisfactory Highly Satisfactory 59.30 10 05/24/2006 Satisfactory Highly Satisfactory 72.73 Moderately 11 06/28/2007 Satisfactory 85.53 Satisfactory Moderately 12 06/29/2008 Satisfactory 91.52 Satisfactory Moderately Moderately 13 02/12/2009 91.52 Satisfactory Satisfactory

H. Restructuring (if any)

ISR Ratings Amount Board at Disbursed at Restructuring Reason for Restructuring Approved Restructurin Restructurin Date(s) & Key Changes Made PDO Change g g in USD DO IP millions Utilization of loan savings 12/01/2007 MS S 85.53 for additional works Extension of disbursement 12/01/2008 MS MS 91.52 period

I. Disbursement Profile

1. Project Context, Development Objectives and Design

1.1 Context at Appraisal The Liao River Basin (LRB) in Liaoning Province (LP) is a water-scarce region. Water resources of the LRB are already heavily developed with a number of dams on the upper tributaries and major abstraction of ground water resources. Much of the water is abstracted for agricultural use in the fertile areas of the plain. LP is also a major center of industry in northern China and subject to high industrial and urban demands for water. Water resource problems were made significantly worse by the high discharges of untreated urban domestic and industrial wastewater. As a consequence, a large part of the river system in the Basin within the Province failed to comply with even the lowest defined (Class V) water quality standard, and which made water unacceptable for domestic or agricultural use, and caused severe degradation of the natural ecosystem. The close physical interconnections between the rivers and groundwater in the central basin resulted in pollution impacting the available groundwater. The projected levels of water consumption in the basin were unsustainable and major demand management and water conservation programs were necessary, in addition to efforts to reduce pollution and damage that it was causing to available resources.

The underpinning of the project was the Liao River Basin Management Plan prepared with the support of the European Union, which provided the planning framework for pollution control, water resource management, and priority investments required to reduce pollution from both municipal and industrial wastewater in the next 20 years. Shenyang, Yingkou, Panjin, Tieling, Liaoyang, Qingyaun, Changfu, Haicheng, Xinbin, Kaiyuan, Anshan and Xinmin were among the 30 high-priority projects for wastewater treatment identified in the Plan. The projects’ water quality objective was the same as that defined in the Liao River Basin Management Plan.

1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) The development objective was to assist the environmental recovery of the Liao River Basin (LRB) in Liaoning Province (LP) and to enhance water quality management decision-making on the basis of an integrated river basin management approach.

Progress in meeting the development objective was to be measured in terms of: (a) improvements in water quality in LRB; and (b) efficiency of the new urban utilities in providing wastewater treatment and disposal services.

1.3 Revised PDO and Key Indicators (as approved by original approving authority), and reasons/justification Although the target value of one of the key indicators was adjusted, the project development objectives and key indicators remained unchanged during the project period.

1.4 Main Beneficiaries (original and revised) Original Beneficiaries. The main beneficiaries were the urban populations of the main polluting cities and their industries in the LRB within the Liaoning Province, specifically, about 1.7 million people in Jinzhou, Panjin and Yingkou.

Revised Beneficiaries. Based on the reported 2007 urban populations of the three project cities and the expanded wastewater collection coverage using loan savings, the actual beneficiaries are estimated to be about 2.3 million at the time of loan closure.

1.5 Original Components (as approved)

People’s Republic of China Liao River Basin Project

Project components are summarized in the table below.

Component Description Cost (mUSD) and % of total 1 Panjin Wastewater 10.1km interceptor sewers, modification of 13 39.50 21% Interception and Treatment pumping stations, and a 100,000 m3/d WWTP 2 Yingkou Paper Mill Treatment of red liquor, comprising wastewater 17.00 9% Wastewater Treatment collection, recycling and process modification (A 20,000 m3/d wastewater treatment plant was to be constructed with bilateral support) 3 Yingkou Wastewater 12.8km interceptor sewers, upgrading of the 46.31 25% Interception and Treatment sewer network, modification of 8 pumping stations, and a 100,000 m3/d WWTP 4 Jincheng Paper Mill Construction of a new chlorine production 14.00 8% Wastewater Treatment facility, demolition of mercury electrolysis facility, and recover mercury in plant grounds. 5 Jinzhou Wastewater 10.0km interceptor sewers, and a 100,000 m3/d 32.79 18% Interception and Treatment WWTP (interceptor sized to collect wastewater from increased area in next phase) 6 Urban Management Updating urban mapping in project cities, 6.50 4% Information System development of a GIS-based engineering management system, development of a provincial urban information system 7 Environmental Water Support to LEPB to strengthen environmental 5.60 3% Quality Monitoring water and air quality monitoring 8 Environment Revolving Short-term sub-loans for investments in in-plant 20.00 11% Fund clean technology process changes. Repayments were to be used to make additional loans 9 Institutional Strengthening Technical assistance for: (a) institutional 3.10 2% and Training strengthening of wastewater companies; (b) provincial and municipal governments; and (c) construction supervision and preparation of an aquifer study.

Industry Pollution Reduction. In addition to the above components, an Industrial Pollution Control Action Plan was agreed at project appraisal, to be implemented by LPG as a non-Bank financed complementary activity in parallel with the implementation of LRBP.

1.6 Revised Components The following revisions and additional works were included to meet planning requirements and to use loan savings:

(i) Additional networks and interceptors in Jinzhou to expand wastewater collection in an area of about 24 km2 south of the Daling River, utilizing 1.73 million USD in loan savings to increase the service area of the Jinzhou Wastewater Interception and Treatment component.

(ii) A re-use water plant of 30,000 m3/d capacity and supply lines in Yingkou to supply industry were constructed using 3.28 million USD loan savings, to complement the Yingkou Wastewater Interception and Treatment component. This investment supported the project objectives by reusing industrial wastewater of a power plant.

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People’s Republic of China Liao River Basin Project

(iii) Equipment for the coal ash sedimentation plant and SO2 emission reduction for the Jincheng Paper Mill in Jinzhou was constructed using loan savings of 3 million USD.

1.7 Other significant changes In December 2007, the decision was made to reallocate loan savings for additional works, and extend the loan closing date by one year.

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry Significant factors that affected preparation, design and quality at entry included:

Soundness of the Background Analysis The background analysis was satisfactory. The project was and has remained consistent with national and provincial priorities, and Bank strategy for improving the environment and water quality in major river systems. This consistency with the priorities of both the Borrower and the Bank facilitated the implementation of the project. The project preparation was further facilitated by the availability of a Japanese PHRD grant, which funded international experts to share best practice of river basin management in the project feasibility study.

Assessment of the Project Design The project design was largely satisfactory. The following elements were highlights in the design, and were implemented smoothly: (a) Adoption of the river basin management approach to meet water quality objectives; (b) Implementation of key elements of the Liao River Basin Management Plan; (c) As part of the project implementation covenants (PAD page 22), the Bank required the LPG to carry out the-bound Industrial Pollution Control Action Plan for the Liao River Basin; (d) Wastewater treatment in the project of three key cities and two paper mills, which contributed high levels of pollutants to the river systems and the Bohai Sea; (e) Demolition of the mercury-based electrolysis facility and clean up of the demolition site at the Jincheng Paper Mill;

The project design included the following minor flaws: (a) Although the PDO included institutional reform objectives, in hindsight it may have been helpful for the implementation of the project if institutional reform would have been designed in a phased manner. This might have benefited the viability of implementation of institutional reforms. (b) The indicator related to the financial covenants of the paper mills turned out to be inappropriate as the project investments were very minor in relation to the overall operation of the paper companies. (c) Although the following didn’t impact on project implementation, it is worth a mention. River names in the first monitoring indicator in the PAD incorrectly listed Hun, Taizi, Liao and Daliao Rivers. In fact, these rivers were not in line with the rivers in the final project components. The final project components at appraisal, and throughout implementation of the project, impacted on the Daliao, Shuangtaizi (Liao), and Daling Rivers.

Adequacy of Government’s Commitment, stakeholder involvement In accordance with Bank procedures, the LPG and municipal governments were engaged in the project design, and demonstrated strong commitment to the project and its covenants. In

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People’s Republic of China Liao River Basin Project addition, LPG agreed to implement a complementary industrial pollution control action plan to reduce pollution from the major polluting industries, which turned out to be very successful.

Assessment of Risks and Mitigation Measures Identified at Appraisal. Risks and mitigation measures identified during project appraisal were valid, but some of the identified risks still had some impact on the implementation of the project.

Risks included: (a) complementary pollution reduction in industry and agriculture could be delayed; (b) sufficient autonomy of wastewater companies was unlikely to be achieved; and (c) financial sustainability of wastewater services was unlikely to be attained. These risks were assessed as ‘moderate’.

Mitigation measures incorporated in the project included: (a) inclusion of an industry pollution abatement plan, agreed with the Province, and strengthening of the monitoring capability of the government; (b) creation of autonomous wastewater companies by project appraisal, along with technical assistance for institutional strengthening and utility management; and (c) establishment and implementation of tariffs to achieve financial viability, and covenanting them in the legal agreements.

Autonomy of wastewater companies did turn out to be difficult to achieve, as was their financial viability based on wastewater tariffs only. On the positive side, having identified these risks at the outset did allow local governments sufficient time to prepare subsidies for the wastewater companies. A Quality at Entry assessment was not carried out by the Quality Assessment Group.

2.2 Implementation Overall, project implementation was completed satisfactorily. Almost all the original components were completed to good quality standards, except for the urban management information system, well within the original project period. The loan closing date was extended by one year to enable completion of construction of the planned urban management information system and additional works at the Jincheng Paper Mill. About USD92 million of the loan was utilized.

Factors outside the control of government or implementing agencies SARS. The occurrence of SARS in the spring of 2003, although short-lived, caused significant disruptions across China, and resulted in delays in construction of several months, with some associated cost overruns.

The following factors were beyond the control of the provincial government: USD – RMB Exchange Rate. The decoupling of the US Dollar – Chinese Yuan exchange rate in the summer of 2005, and the subsequent appreciation of the Chinese Yuan, reduced the amount of the Bank loan in local currency terms. The need for unanticipated supplementary financing created difficulties for the implementing agencies (IAs) and caused some payment delays to contractors on contracts signed in currencies other than USD. The cost overrun (7% of project cost) was attributable to the appreciation of the RMB. In terms of RMB there was no cost overrun.

Wastewater Tariffs. Local governments increased tariffs at regular intervals until 2005. However, because of national policy to control inflation by limiting increases in prices of essential items, including utility tariffs, no further increases have been made. This affected the

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People’s Republic of China Liao River Basin Project ability of the Borrower to achieve indicator 6 concerning adequate wastewater tariffs. The economic downturn from the second half of 2008 is another contributing factor.

Factors subject to provincial government control Positive: Experienced project management. Project management, coordination of implementation and progress monitoring and evaluation were provided by the Liaoning Urban Construction and Renewal Project Office (LUCRPO), which has gained considerable experience through managing World Bank and ADB projects over the past decade.

Industrial Pollution Control Action Plan. LPG made good progress in the implementation of the Industrial Pollution Control Action Plan including addressing issues in the worst polluting industries identified at appraisal. Across the whole of LP, compliance with discharges increased from around 50% in 2001 to about 93% in 2007. (See Annex 5 for details). This firmly supported progress towards achievement of water quality objectives.

Adoption of LRB Water Resources Management Plan. The Liao River Basin Plan was adopted by the LPG in 2002. The Plan facilitated progress towards achievement of the project’s water quality objectives, as it comprises: (a) regulation and reduction of pollution from industries; (b) priority wastewater treatment works in all cities in LRB; (c) improved collection and disposal of sludge from wastewater treatment plants; (d) protection of water used for agriculture and aquaculture; (e) measures to improve water quality in the Bohai Sea; and (f) reduction of per capita water demand, adoption of water conservation measures and public outreach programs.

Introduction of Stricter Discharge Standards for Paper Mills. The Provincial Government enhanced the discharge standard for paper mills in 2007, requiring treatment to achieve 50 mg/l COD when discharged to water bodies, and 150 mg/l when discharged to wetlands (which was the case for the Jincheng Paper Mill). The application of the new discharge standard resulted in the permanent closure of over 200 paper mills. The Provincial Government also stopped operations of both Yingkou and Jincheng Paper Mills in April 2008 until compliance. Additional treatment facilities were constructed at both paper mills to comply with the new discharge standard. The Jincheng Paper Mill restarted operations in November 2008, and the Yingkou Paper Mill restarted operations in March 2009.

Negative: Limited direct influence on municipal governments. LUCRPO was the key Liaoning Provincial Government agency to coordinate implementation of the project. However, LUCRPO had limited direct influence on municipal governments, especially on institutional and financial aspects of the newly established drainage companies, and hence was unable to engage the municipal governments in supporting institutional reforms.

Crucial Aquifer Study was deferred. Although it didn’t impact on the achievement of the project objectives, it should be mentioned that the crucial aquifer study was cancelled because the national and provincial governments had issued regulations on the abstraction and use of groundwater and the LPG had constructed a water diversion project to supply adequate surface water to six municipalities of Shenyang, Fushun, Liaoyang, Anshan, Yingkou and Panjin..

Factors subject to municipal government and Drainage Company control Positive:

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People’s Republic of China Liao River Basin Project

Jincheng Paper Mill got stock market listed. In a significant move in 2006, the Jincheng Paper Mill changed from a 100% state-owned company when it acquired to two shareholders, and listed the company in the stock market. As part of this process the Mill shed some of its social responsibilities, e.g., hospital, school, etc., improving its financial viability.

Negative: Slow pace of institutional reforms. Municipal governments focused on the minimum requirements of establishing drainage companies with the capacity to complete construction and operate and maintain assets. Thereafter, they did not encourage the development of autonomous drainage companies. This affected the achievement of institutional reform objectives.

Tariffs and wastewater charge collections. Drainage companies relied on the municipal finance bureaus to take responsibility for collection of wastewater charges (both from residential properties served by water companies and from self-supply industries and households) and to transfer the collections to them. This resulted in their relying on the finance bureaus for revenue management, and in the later years, when there was a revenue shortfall, to provide subsides towards debt service payments.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization M&E design. Most indicators identified to monitor progress toward the PDO were suitable and adequate. Additional phased milestones for institutional reforms might have been helpful.

M&E implementation. Monitoring and evaluation of outcomes and outputs was largely satisfactory. Semi-annual progress reports were prepared by LUCRPO. The reports were based on information collected from the implementing agencies and from the provincial and city Environmental Protection Bureaus. Reporting was done on the progress in meeting project monitoring indicators set out in the PAD. Bank supervision teams carried out their own monitoring and evaluations and reported the relevant issues in mission Aide Memoires, back-to- office reports and Implementation Status Reports (ISR). Following the mid-term review in 2004, the project was restructured to utilize loan savings. The selection of additional components was based on project monitoring data. The project indicators will continue to be measured, and may be used to identify future actions.

2.4 Safeguard and Fiduciary Compliance

Social Safeguards. Resettlement activities were carried out satisfactorily. External monitoring of safeguard implementation was carried out in accordance with the legal agreements. A final report on resettlement implementation was also produced. The actual resettlement impacts include 26.2 hectares of permanent land acquisition, 30.0 hectares of temporary land use, 18,815 m2 of residential housing demolition, including 9,862 m2 of nonresidential structures. About 687 persons were affected in total. Actual housing demolished and population affected were much less than planned, due to a minor revision in the construction location of an interceptor sewer in Panjin Municipality. More details are provided in Annex 6.

Environmental Safeguards. The project was assigned as Category A. The EA and EMP were prepared according to the national policies and regulations, and the Bank safeguard policies. The EMP was implemented satisfactorily during project implementation. The mercury electrolysis facility at the Jincheng Paper Mill was demolished and the site was cleaned up. The wastewater treatment plants met discharge standards, with an aggregate COD load reduction of about 23,200

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People’s Republic of China Liao River Basin Project tons/year. COD load reduction in the two paper mills was considerably larger at about 114,850 tons/year.

Financial Management. Appropriate financial management arrangements were put in place to ensure proper use and accounting of project funds. Financial management was carried out satisfactorily, and no significant issues arose during implementation. Financial audit reports were submitted on time and had no particular issues.

Procurement. Procurement activities were carried out satisfactorily by all agencies, and there were no cases of misprocurement. Some difficulties in procurement included the following: Under the UMIS component, procurement of hardware and software was not completed by the Provincial Construction Commission; bids received in August 2007 were not opened due to a disagreement with the Finance Bureau over financing.

2.5 Post-completion Operation / Next Phase WWTPs and Drainage Companies. Normal operations have begun at all three treatment plants, which are operating at near 100 percent capacity, meeting the designed effluent quality standards. All the facilities are well-managed and maintained. Adequate budgets and trained staff are available to provide operation and maintenance of facilities. JDC and YDC have recruited additional skilled staff to manage their expanded treatment facilities. All three companies have made use of the operational procedures developed under the project technical assistance. JDC is continuing to fine-tune the operations of its treatment plant to further improve the quality of treated effluent. PDC has signed an outsourcing contract for the operation and maintenance of its treatment plant with an experienced contractor, to give assurance over operational standards. All three DCs will continue to operate, and are foreseen to gradually receive fewer subsidies and rely more on wastewater tariffs.

Monitoring indicators after project completion. Most of the indicators in PAD have set targets for 2010. These indicators are meaningful for tracking future progress.

Follow-on Project. Two municipalities which were involved in the project, Yingkou and Panjin, are among eight cities which are also involved in a Bank-financed follow-on project, titled “2nd Liaoning Medium Cities Infrastructure Project”, or LMC2. More wastewater treatment plants and interception networks are being constructed in Yingkou and Panjin under LMC2, which will continue to contribute to improving water quality.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation

Rating: Satisfactory Objectives. The project development objectives were fully consistent with national and provincial priorities, the central government’s “Three River, Three Lakes” program, and the Bank’s strategy in China with regard to improving the environment, particularly, the water quality in the major river basins. The strategy also supported the global environmental protection objective of reducing pollution discharges to the Bohai Sea, including the reduction of incidence of red tides.

Design. The design was relevant. Project design supported the development of: an integrated river basin management approach to water quality planning; a program to reduce COD loads

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People’s Republic of China Liao River Basin Project from eight municipalities by 77 percent by 2010; provision of municipal and industrial wastewater treatment facilities to meet urban environmental infrastructure needs; study recommendations to reduce the threat to groundwater aquifers; and sustainable institutional arrangements for utility management.

3.2 Achievement of Project Development Objectives

Rating: Satisfactory

Water Quality Objective – Satisfactory The project satisfactorily assisted the environmental recovery of the Liao River Basin as measured through its key indicator of making improvements in the water quality as measured by COD levels. The project's first key indicator, for COD levels, was that the water quality in LRB rivers should meet Class V standards 90% of the time by 2010, and 70% of the time by 2007. As last measured in December 2008, the Class V standards for COD were being met 70% of the time, one year later than target. Further improvements in water quality are expected in 2009, because LPG has raised discharge standards for the paper industry. More than 200 paper mills were closed down in 2008 as they were not able to comply. This should enable the 90% target to be achieved in 2010.

For example, in 2001, only the Shuangtaizi River at Panjin ever met the Class V COD target, and it was only 25% of the time. The other rivers never met the target. Now, partly thanks to the project's investments, in 2008, the Daliao River at Yingkou met the COD target 100% of the time, the Shuangtaizi River at Panjin met the target 50% of the time, and the Daling at Jinzhou met the target 58% of the time, for an average of 70% of the time. Please refer to Annex 1 for more details.

The second indicator required 80% of wastewater system flow to be treated at project city wastewater treatment plants. This target is on track to be met. Due to the project investments, 80% of wastewater treated has already been reached within the service areas, as compared to 0% in 2001. However, the municipalities grew much faster than anticipated, increasing the amount of wastewater beyond the project areas. The cities have commenced construction of their second WWTP under the Bank-financed follow-up project LMC2 and one city is using its own funds, which will be completed by 2010. With the addition of these WWTPs, the target for 2010 is likely to be met.

The third indicator, concerning the percentage of industrial wastewater meeting discharge standards in Liaoning Province, was exceeded. Before 2001, less than 50% of industrial wastewater met discharge standards. The target for 2010 was set at 80%. In fact, 92% was reached by 2007. As the target area covered the entire Liaoning Province, achievement of this target should be mainly attributed to the implementation of the Industrial Pollution Control Action Plan.

The fourth indicator concerned industrial water use per unit of output. In 2001, prior to the project, the water use was 113 m3/Y10.000. By 2007, 48 m3/Y10.000 was reached, easily passing the target of 80 m3/Y10.000 set for 2008, and even passing the target of 60 m3/Y10.000 set for 2010. This is mainly attributable to the implementation of the Industrial Pollution Control Action Plan.

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People’s Republic of China Liao River Basin Project

The fifth indicator regarded LPG adopting the River Basin Plan developed with support from the EU. This target was met, as LPG adopted the plan in June 2002.

The sixth indicator set targets for wastewater tariffs to meet financial projections of the wastewater companies. Although tariffs were raised several times up to 2005, they were not raised enough to allow the DCs to be financially viable from tariff revenues only. It could be said that this target was met in spirit, however, because government has provided adequate subsidies (as permitted under the Project Agreement1), and demonstrated commitment to continue to provide subsidies for as long as is needed. Implementation of the project has contributed to raising tariffs to their current levels.

The seventh indicator required achievement of Class V water quality in the Daliao River at Yingkou and the Liao River at Panjin. This target was easily met for the Daliao River (at COD 26 mg/L), but not quite met for the Liao River (average COD was 67 mg/L, still over the 40 mg/L cut-off rate). The Daling River at Jinzhou was not expected to reach this target at appraisal (COD levels were very high at the time), but eventually reached 58 mg/L, approaching the Class V COD target.

The eighth indicator required paper-making companies to achieve financial targets. This indicator, although partially achieved, is considered to have been inappropriate, as the key project objective was to make the paper mills less polluting and not to make them financially viable. Jincheng PM was profitable until forced suspension of operations in 2008, whilst the Yingkou PM was loss-making throughout the project.

The intermediate indicator on completion of wastewater interception and treatment plants was achieved, as all treatment plants planned at appraised were completed and commissioned by the end of 2006. Loan savings were utilized for additional improvements.

The process modifications at the two paper mills, demolition of the mercury electrolysis facility and the clean up of the demolition site at the Jincheng Paper Mill, resulted in: (a) significant COD load reduction (114,850 ton/yr), more than the three wastewater treatment plants combined (15,367 ton/yr); (b) eliminating a public health hazard form mercury pollution in water; (c) introducing a more energy-efficient bleaching process; (d) reducing energy consumption by about 40%; (e) reducing water consumption per ton of pulp/paper produced; and (f) reducing 311.07 ton/d dust emission following coal ash sedimentation, and reducing SO2 emissions by 13.14 ton/d, at the Jincheng Paper Mill.

The satisfactory implementation by LPG, of the complementary Industrial Pollution Control Action Plan addressing adverse impacts at the 20 worst polluting industries, resulted in a large reduction of COD loads discharged to major river systems, by 107,329 tons per year.

Negative: The Environmental Sub-loan Facility was not so successful, partly due to an alternative program which was implemented by the LPG to provide (more attractive) grants to deserving industries to undertake environmental improvements, using emission charges levied. The first round of loans

1 Loan Project Agreement, Schedule 3 "Principle Terms and Conditions of the Subsidiary Loan Agreements", Section II, Paragraph 9 (a), and (i): “The term ‘total revenues’ means the terms of total operating revenues and net non-operating income.”

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People’s Republic of China Liao River Basin Project from the Environmental Sub-Loan Facility has been made, but not paid back because they are not due yet, so it has thus far not been utilized as a revolving fund.

Institutional Development Objective – Satisfactory The drainage companies were legally established in all three municipalities prior to negotiations. During the construction period, i.e., until the end of 2006, these companies functioned as construction agencies; thereafter they have been operating and maintaining the assets. All three drainage companies have gained valuable experience in procurement and project management. Wastewater treatment plants appear to be well managed, and effective operating and maintenance systems have been developed and implemented (with support from project technical assistance). Assets are managed through a variety of arrangements: in Panjin, operational management of the wastewater treatment has been contracted out for 30 years; in all three cities, the old drainage networks are managed by the municipality. All three wastewater treatment plants are almost fully utilized, and the treated effluents meet specified discharge standards. Treatment plant sludge is disposed of in an acceptable manner.

Financing for the drainage companies is adequate, through a combination of revenues from wastewater tariffs and municipal subsidies. As the tariff decisions are made by the municipal governments, within the overall guidance of the provincial and central governments, the Project Agreement envisaged the provision of municipal subsidies to make up any shortfalls from operating revenues to meet costs. Given the strong commitment of the national and Liaoning Provincial Governments to maintain the environmental quality of the Liao River Basin, adequate financing, either entirely from wastewater revenues or complemented by municipal subsidies, is unlikely to be a problem and sustainability is likely.

The ‘moderately satisfactory’ rating for DO in the last two years of project implementation, and ‘moderately satisfactory’ for IP in the last year of project implementation, were assigned to highlight the importance of institutional development and emphasize that some catching up was required. At project close, under the Bank supervision, all three cities had prepared action plans for institutional and financial reform, and Jinzhou Municipal Government had issued a public notice regarding an increase in wastewater fees and its institutional reform agenda. However, institutional development of the drainage companies, as was anticipated at appraisal, is an on- going process. It needs to be continued before the drainage companies operate as fully autonomous enterprises operating in a commercially viable manner without subsidies. The on- going Second Liaoning Medium Cities Infrastructure Project includes a $2.35 million technical assistance package to support institutional development and financial sustainability through: utility benchmarking; public-private partnerships in Jinzhou; utility management, including development of institutional and business models; and utility regulation. Successful implementation of this technical assistance will go a long way towards achieving the long term institutional objectives for the sector.

3.3 Efficiency

Rating: Satisfactory

Financial The current tariff levels in DCs are inadequate to achieve financial viability without tariff revisions. Prevailing tariff levels are generally adequate to meet operation and maintenance expenditures, but inadequate to meet debt service liabilities, which are paid by the respective municipalities. Tariffs were revised twice in the last eight years for all three DCs. The full costs

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People’s Republic of China Liao River Basin Project of services provided require continuing government subsidies. Further raising of tariffs was not feasible due to national government inflationary concerns.

Economic Economic justification of the project was done on the basis of cost effectiveness criteria, as quantification of all economic benefits was not possible. All planned physical outputs, and additional investments utilizing loan savings, were made at costs slightly over the original project cost estimate (the cost overrun of 107% was mainly attributable to the appreciation of the RMB and raising of the allocation for the Environmental Revolving Fund through increased counterpart funds). Thus, all anticipated economic benefits identified, and more, were achieved for less cost. The Project undoubtedly contributed to the continued and sustainable economic growth of the Province and project cities, helped manage rural-urban economic migration (through improving the sustainability of urbanization), increased inland values, and improved public health.

Pollution reductions from municipal wastewater treatment and improvements at the paper mills contributed directly to: improved urban and rural water supplies through reduced contamination of water sources; reduced pollution discharges, including mercury pollution, to the Bohai Sea, thus protecting the vibrant fishing industry; and improved agricultural production through the availability of irrigation water of Class V standard (improved from less than Class V standard), which reduced health risks and enhanced productivity.

Investments in the two paper mills achieved significant economic benefits from process modifications and other improvements, including energy savings, pulp bleaching using energy- efficient membrane-based system, reduced water use per ton of pulp processed, reduced chlorine per ton of pulp produced, increased binder production, and enhanced capacity for pulp production (see Annex 4 for details). Moreover, the investments allowed the paper mills to continue operations despite the more stringent wastewater discharge standards imposed on them, thus protecting many local jobs in the mills themselves and in the broader local economy. This is a significant social benefit and achievement of the project.

Environmental Environmental benefits are measured in terms of COD load reductions to major rivers. The project has achieved significant: reduction of COD loads discharged to rivers; maintaining water quality of Liaoning Rivers at Class V standard most of the time; replaced the mercury-based electrolytic process at the Jincheng Paper Mill with chlorine production for pulp bleaching; coal ash sedimentation; and elimination of groundwater aquifer contamination. A benefit not projected at appraisal was the reduction of SO2 emissions resulting from process modifications at the Jincheng Paper Mill.

The LPG-financed Industrial Pollution Control Action Plan made significant contributions to reducing COD pollution discharges through wastewater treatment and introduction of cleaner technology in the 133 large polluting enterprises in the fertilizer, chemicals, paper, and steel sectors. Other significant benefits will accrue from the introduction of stricter discharges standards and other environmental controls. (See Annex 5 for details)

3.4 Justification of Overall Outcome Rating

Rating: Satisfactory

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People’s Republic of China Liao River Basin Project

The overall outcome rating is assessed as ‘satisfactory’ in view of the: (a) adoption and implementation of the Liao River Basin Management Plan; (b) the relevance of objectives, design and implementation; (c) the achievement of water quality objectives for the Shuangtaizi (Liao), Daliao and Daling Rivers, following reduction of pollution discharges from project cities; (d) the contribution to pollution reduction in the sensitive Bohai Sea; (e) the larger environmental benefit from the pollution reduction measures in the two paper mills, more than all the three wastewater treatment plants combined; and (f) the successful implementation of the industrial pollution control action plan which resulted in the significant reduction of COD loads. The ongoing requirement for government subsidies to Drainage Companies somewhat diminish the sustainability of the overall project outcomes as envisioned at appraisal. However, given the current satisfactory level of operations of the wastewater assets, combined with the commitment of provincial and municipal governments to continue to provide subsidies to sustain these operations until they become financially viable, this issue is assessed to be a minor shortcoming in the overall outcome of the project.

3.5 Overarching Themes, Other Outcomes and Impacts

(a) Poverty Impacts, Gender Aspects, and Social Development Not applicable.

(b) Institutional Change/Strengthening LPG Institutional Strengthening (institutional development of the DCs is covered in other sections). The use of river basin-based planning demonstrated important linkage between sustainable development, urban planning, industrial re-structuring and environmental protection, which improved its capacity for: (a) selection and prioritization investments; (b) introduction of demand management as a planning and financial management tool; and (c) planning industrial pollution control; and (d) introducing controls based on total pollution discharges.

(c) Other Unintended Outcomes and Impacts (positive or negative, if any) The introduction of stricter discharge standards for the paper industry in 2008 (of 50 mg/l) will reform the industry, and is foreseen to have a great impact on the reduction of the large COD load contributors. Operations were suspended in about 460 paper mills until they achieve compliance. About 200 were forced to close down permanently as they were not able to meet the new discharge standard.

An unintended side-benefit of the efforts to reduce wastewater discharges at the Jincheng Paper Mill was significant dust and SO2 emission reductions.

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops Not applicable

4. Assessment of Risk to Development Outcome

Rating: Moderate The risk to development objectives is rated as ‘moderate’. The risk would be that government discontinues the provision of adequate subsidies for the operation, maintenance, and eventual replacement of the physical investments. However, the strong government commitment to continue with industrial pollution reduction and wastewater management, will assure that environmental improvements will continue. There is heightened awareness of the need to protect the water environment, and particularly the need to ensure water security, which is essential for

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People’s Republic of China Liao River Basin Project development. Theoretically, if the municipal governments reduce the available subsidies in the future, the development outcome may be jeopardized. However, given the increasing level of commitment of all levels of the Chinese government towards controlling water pollution, it is considered unlikely that this will happen.

The sustainability of the Yingkou and Jincheng Paper Mill investments depends on the economic future of these two industries. However, both are viewed by LP as playing a strategic role in the future of the Province’s paper-making industry and their modernization and expansion plans have attracted Government investment accordingly.

5. Assessment of Bank and Borrower Performance

5.1 Bank

(a) Bank Performance in Ensuring Quality at Entry

Rating: Satisfactory

Bank assured quality at entry through the following: (a) firmly linking the project to the Liao River Basin Management Plan, the development of which was funded by the EU; (b) incorporating municipal and industrial wastewater pollution reduction, and a parallel industry pollution abatement plan to support the primary water quality objective; (c) developing appropriate performance indicators to assess water quality improvements; (d) formulating an appropriate institutional reform agenda designed to develop sustainable utility companies; and (d) incorporating technical assistance for capacity building and implementation support to achieve the institutional development objective. However, the financial performance indicator for the paper companies was unrealistic, as the project investments in the paper companies focused purely on reducing environmental pollution and were not meant to have any impact on their product mix and pricing in a highly competitive industry. In hindsight, it may have been better to allow more time for the institutional development of the Drainage Companies.

(b) Quality of Supervision

Rating: Satisfactory The project was supervised on an on-going basis by a task team comprising an appropriate mix of experts (engineering, procurement, environmental, social, institutional and financial, and financial management) from Washington and Beijing. Although task management responsibility changed a number of times as a result of mandatory retirement and rotation from the China urban program, there were a number of staff and consultants in the project from start to end, providing continuity even in the light of changing task managers. Implementation issues were identified early and addressed effectively with counterpart agencies at the appropriate level. However, in some cases, e.g., implementation of the UMIS component and wastewater tariff increases during the later years of the project, these efforts were not always fully successful. Also, at the time of restructuring, more measurable intermediate outcome indicators regarding institutional and financial reform should have been included. Project supervision responsibility was effectively transferred to the task team preparing the Second Liaoning Medium Cities Infrastructure Project (currently under implementation), which enabled wastewater sector issues, in particular continued institutional development, to be addressed on an on-going basis under the new project. The financial statements of DCs for 2008 were compiled, and are summarized in Annex 4. The Bank agreed to finance the additional

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People’s Republic of China Liao River Basin Project works, and to extend the loan closing date, in order to deepen the achievement of the development objectives.

Safeguards Compliance

Rating: Satisfactory Specialists of the task team from the Beijing office satisfactorily carried out the supervision of implementation of safeguard issues. The team carried out adequate field visits to review progress and ensured the submission of the external monitor’s report on safeguard implementation.

Fiduciary Compliance

Rating: Satisfactory Oversight of financial management and procurement activities was carried out satisfactorily by members of the task team from the Beijing office, ensuring compliance with audit requirements and procurement procedures. Quick responses, were provided to the clients’ requests for clarification and guidance on procurement matters.

(c) Justification of Rating for Overall Bank Performance

Rating: Satisfactory

The Bank team ensured satisfactory quality at entry and supervised the project satisfactorily to achieve satisfactory outcomes with moderate risks to development outcome. Bank supervision ensured compliance with safeguards and fiduciary aspects.

5.2 Borrower

(a) Government Performance

Rating: Satisfactory

Provincial Government – Rating: Satisfactory Positive: (i) A number of provisions of the Liao River Basin Management Plan were implemented. (ii) The Industrial Pollution Control Action Plan was implemented satisfactorily, contributing in a large measure to reducing COD loads discharge to river systems. (iii) The LPG demonstrated firm commitment to address the serious pollution discharges from the paper industry by imposing stricter COD discharge standard (of 50 mg/l), and suspension of operations in about 460 paper mills until compliance. This move was significant because many of the mills were unable to comply, and were forced to close down. (iv) The borrower made serious efforts to achieve institutional objectives by encouraging and urging municipal governments to increase wastewater tariffs and implement the reforms agreed with the Bank. (v) COD load reductions from the two Paper Mills through elimination of the mercury hazard and improved efficiency of operation of the Mills were implemented well.

(b) Implementing Agency or Agencies Performance

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People’s Republic of China Liao River Basin Project

Rating: Satisfactory

Municipal Governments – Rating: Satisfactory Positive: (i) Municipal governments successfully implemented, and provided financial support to operation and management of the three municipal wastewater treatment plants, thus reducing COD load discharges to the major river systems. (ii) Municipal governments were committed to support DCs with adequate staff and budgets to enable DCs to manage and maintain facilities to a good standard.

Negative: (i) Municipal governments could have played a stronger part in establishing autonomous, commercially viable drainage companies. However, such enterprise reforms take time, and this was implicitly acknowledged at appraisal by allowing the drainage companies to receive municipal subsidies in order to meet their financial covenants.

Drainage Companies, Paper Mills and other implementing agencies: A description of the situation of each of the DCs and PMs has been provided in section 2.2b. The following is a rating of the performance for each of these implementing agencies and a short justification:

(a) Drainage Companies: Satisfactory. Within the powers granted to them by the municipal governments, the drainage companies implemented the construction phase satisfactorily, and are currently operating and maintaining the wastewater assets in a satisfactory manner with almost full capacity utilization and effective treatment. (b) Yingkou Paper Mill: Satisfactory. One of the two largest sources of COD load reduction in the project occurred from improvements. (c) Jincheng Paper Mill. Satisfactory. One of the two largest sources of COD load reduction in the project occurred from improvements and a major mercury pollution hazard was eliminated. (d) Liaoning EPB: Satisfactory. The environment monitory equipment has been successfully procured and fully utilized. Within the constraints of the stringent terms for providing environmental sub-loans (the availability to companies of more readily accessible grants), the EPB was able to make technically and financially justified sub-loans for environmental improvements. (e) Provincial Construction Bureau for UMIS: Unsatisfactory. Failure to complete procurement of hardware and software for the UMIS was ascribed to an internal problem. There appear to be no plans to complete the component at loan closure.

Compliance with Financial Covenants

The drainage companies were in compliance with the financial covenants defined in the Project Agreement, which implicitly allowed for subsidies from municipal governments to make up for shortfalls in wastewater revenues, if required. The local governments each raised tariffs twice during the project period. Drainage companies did not require subsidies until 2007, when the plants became fully operational.

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People’s Republic of China Liao River Basin Project

As discussed earlier, the financial covenants for the paper mills were inappropriate, and it was fortuitous that Jincheng Paper Mill largely complied with the covenants until 2008. Yingkou Paper Mill did not comply with the covenants throughout the project period.

(c) Justification of Rating for Overall Borrower Performance

Rating: Satisfactory The Borrower – Liaoning Provincial Government, the three municipal governments, and the various implementing agencies – made strenuous, and quite successful, efforts to implement a complex project in a satisfactory manner. They are addressing the longer-term institutional development agenda of the wastewater sector through the on-going Second Liaoning Medium Cities Infrastructure Project. Only the relatively small UMIS component was not fully implemented because of unanticipated delays.

6. Lessons Learned (a) Government commitment to pollution control in the Liao River Basin was crucial to the successful implementation of the project. Government, at all levels – national, provincial and municipal – was committed to the objective of controlling pollution in the Liao River Basin. It partnered with the European Union in preparing the Liao River Basin Management Plan, which underpinned the project, and commenced implementation through effective use of retroactive financing and made full use of loan savings for additional investments to enhance project benefits. Government commitment enabled the original project to be implemented within the original closing date, despite disruptions of about six months in 2003, caused by SARS. (b) Establishing drainage companies requires greater institutional analysis, stakeholder ownership, and a longer time frame. The project adopted the traditional Bank approach of requiring drainage companies to be established in each city, and assumed that through technical assistance under the project these nascent companies would become autonomous commercially oriented enterprises by the end of the project. Significant reforms are required in government policies and procedures to enable the transfer of government functions to enterprises, including existing assets, staff (as well as staff benefits for past service), authority and responsibility for decision making, etc. In particular, achieving a commercial orientation and autonomous decision making takes time for government officials. It is important to spell these requirements and steps out clearly and reach stakeholder ownership at appraisal, and also to agree on their implementation in a phased manner, with clear step-by-step indicators. The project is fortunate in that the follow-on project provides an opportunity for institutional reforms to be continued over a longer period of time. (c) Financial viability of new drainage companies in medium sized cities through full cost recovery is not a one step process. Bank projects in medium sized cities (such as Jinzhou, Panjin, and Yingkou) often provide limited service coverage at a relatively high cost. Even in China, where wastewater charges are levied on all properties (irrespective of whether they have a sewer connection, or even have a sewer in the street), including industries which neither receive piped water supply nor discharge wastewater into sewers, it has not been possible to set high enough tariffs and collect wastewater charges from eligible parties to achieve full cost recovery without subsidies. Instead of permitting unspecified subsidies to make up revenue shortfalls, it would be more effective to seek to achieve full cost recovery over a period of time, with levels of subsidy being reduced to zero on a specified graduated basis over time.

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People’s Republic of China Liao River Basin Project

(d) Institutional arrangements besides “full service” drainage companies should be considered. The institutional arrangement of a drainage company for each city has been the Government’s and the Bank’s default option in the Bank’s China projects in the sector. However, the provision of an efficient wastewater service can be achieved through a variety of other institutional arrangements, including: (a) a water company providing both water supply and wastewater services; (b) unbundling the sewage collection, sewage treatment, and sludge disposal to different institutions, including some in the private sector, e.g., wastewater treatment plant construction and/or operation; and (c) retaining existing combined systems with the municipality, while establishing a drainage company for sanitary sewers and wastewater treatment. It is suggested to conduct sector studies to evaluate the various alternatives. (e) Efficacy of revolving funds for environmental improvements through small loans should be reviewed. The Environmental Sub-Loan Facility component of the project was carefully developed, taking into account the lessons of experience under an earlier project in Liaoning Province (Liaoning Environment Project), and was diligently implemented by the EPB. Nevertheless, both the EPB and the Liaoning Finance Bureau did not appear to have sufficient interest in maintaining the facility as a revolving fund, using the reflows. In future projects, it is suggested not to make use of this kind of revolving fund.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies The borrower raised the following issue in their ICR: The PAD incorrectly stated that the existing sewerage assets in the project cities, and that the staff responsible for their management and operations, had already been transferred to the new Drainage companies. This was only partly true. The PAD also referred to the new Drainage companies becoming managerially and financially autonomous, without clearly defining what this entailed. There was therefore no clear consensus or local stakeholder ownership of the required reforms at the commencement of project implementation. The borrower had no other comments.

At the time of ICR, it was unclear why the PAD included the incorrect statement mentioned above. The autonomy of the DCs and other institutional reforms have been covered in previous sections.

(b) Cofinanciers There is a Recipient-executed Trust Fund (TF050520) “Assistance to Urban Poor in Liaoning Province through Japan Social Development Fund”, linked to this project. The objectives of the grant are to assist the urban poor, living far below the provincial average income level, in gaining skills and means for better living and to help the poor communities strengthen their capacity to organize themselves for their well-being. The designed objectives of the grant were achieved in a highly satisfactory manner.

(c) Other partners and stakeholders Not applicable.

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People’s Republic of China Liao River Basin Project

Annex 1. Detailed Performance Indicators/Results

CHINA: Liao River Basin Project

A: Detailed Performance Indicators vs Actual Performance

Indicator 1: Water quality in Hun, Taizi, Liao and Daliao Rivers meets Class V standards for COD (% of time)2

Table 1.1: Water Quality in Rivers, Meeting Class V Standard for COD (% of time) Indicator/Year 2001 2005 2007 2008 2010

Indicator in PAD － 50% 70% － 90%

Daliao River – Yingkou3 0% 75% 100% 100% －

Shuangtaizi (Liao) River – Panjin 25% 27% 50% 50% －

Daling River – Jinzhou 0% 0% 0% 58% －

Average4 8% 34% 50% 70% － Source of data: LEPB

Graph 1.1: Water Quality in Rivers, Meeting Class V Standard for COD (% of time) 100%

80%

60% Yingkou Panjin 40% Jinzhou

20%

0% 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source of data: LEPB

2 River names in the first monitoring indicator in the PAD incorrectly listed Hun, Taizi, Liao and Daliao Rivers. In fact, these rivers were not in line with the rivers in the final project components. The final project components at appraisal, and throughout implementation of the project, impacted on the Daliao, Shuangtaizi (Liao), and Daling Rivers. 3 No water quality measurements have been made of the Daliao River at Yingkou from December until March, due to the fact that the river is frozen over in this period. This is accepted by the local environmental protection bureau. 4 Average based on equal weighting of the three rivers.

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People’s Republic of China Liao River Basin Project

The 90% target by 2010 is highly likely to be achieved because LPG has enhanced discharge standards for the paper industry in 2007, and more than 200 paper mills were closed down in 2008 as they were not able to comply.

Indicator 2: Aggregate quantity of wastewater treated at project city wastewater treatment plants (% of system flow)

Table 2.1: Wastewater Treated in Project Cities (% of system flow) Indicator/Year 2001 2005 2007 2008 20105

Indicator in PAD － 30% 60% － 80

Yingkou 0% 0% 32% 43% (87%)

Panjin 0% 0% 15% 50% (90%)

Jinzhou 0% 0% 50% 50% (90%)

Average 0% 0% 32% 48% (89%) Source of data: LUCRPO

Within the service areas, the project has achieved target values, but the municipalities grew much faster than anticipated, thus expanding the area which needs to be covered. Yingkou and Panjin have started construction of their second WWTPs under LMC2, and Jinzhou will do so by self-funding, each with 100,000 m3/d capacity, expected to be completed and commissioned in 2010. With the addition of these WWTPs, the target for 2010 is likely to be met.

Indicator 3: Industrial wastewater meeting river discharge standards (% of total flow)

Table 3.1: Industrial Wastewater Meeting Discharge Standards (% of total flow) Indicator/Year 2001 2005 2007 2010

Indicator in PAD 50 70 75 80

Yingkou 30.84 91.62 97.39

Panjin 84.37 92.82 92.18

Jinzhou 49.45 85.06 86.27

Liaoning Province 95.09 92.91 Source of data: LEPB

LPG has implemented the Industrial Pollution Control Action Plan addressing the 20 worst polluting industries identified at appraisal. LPG has aggressively pursued industrial pollution control with close monitoring, including closing down industries that are not able to comply with

5 Data for 2010 represents the target (indicator in PAD), and projections for the project cities

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People’s Republic of China Liao River Basin Project standards. Major action was taken against paper mills, including setting higher discharge standards, resulting in the closure of over 200 paper mills.

Graph 3.1: Industrial Wastewater Meeting Discharge Standards (% of total flow)

100%

80%

60% Yingkou Panjin 40% Jinzhou

20%

0% 2001 2002 2003 2004 2005 2006 2007

Source of data: LEPB

Indicator 4: Industrial water use per unit of output (m3/Y10,000)

Table 4.1: Industrial water use per unit of output in Liaoning Province (m3/Y10,000) Indicator/Year 2001 2005 2007 2008 2010

Indicator in PAD 120 100 80 － 60

Liaoning Province 113 70 48 Source of data: Liaoning Province Statistical Yearbook

Implementation of the Industrial Pollution Control Action Plan yielded excellent water-saving results. Project targets for 2005 and 2007 were exceeded by a wide margin.

Indicator 5: Liaoning Provincial Government approval of the River Basin Plan

LPG has adopted the River Basin Plan, including river basin management concepts for prioritization of investments, demand management and pollution control and management, in June 2002.

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People’s Republic of China Liao River Basin Project

Indicator 6: Wastewater tariffs implemented to meet financial projections

Table 6.1: Wastewater Tariffs in Project Cities, PAD Targets vs. Actual (Y/m3) Indicator/Year 2001 2005 2005 2010* PAD Target Actual Required

Yingkou 0.25 0.77 0.62 0.80

Panjin 0.34 0.72 0.86 1.17

Jinzhou 0.29 0.85 0.63 0.89 *Tariffs which would be required to meet financial projections without any government subsidies. These tariffs may or may not be approved by local government

Graph 6.1: Actual Wastewater Tariffs in Project Cities

0.90

0.80

0.70 Yingkou Panjin 0.60 Jinzhou

0.50

0.40 2001 2002 2003 2004 2005 2006 2007 2008

Source of data: LUCRPO

Although several tariff increases have occurred up to 2005, these increases were not sufficient to meet financial viability of the DCs without government subsidies.

Indicator 7: Class V river water quality achieved in the Daliao and Liao Table 7.1: Average COD in Project Cities, PAD Targets vs. Actual (mg/L) Indicator/Year 2006 2007 2008 PAD Target Actual Actual

Yingkou 40 35 26

Panjin 40 63 67

Jinzhou n/a 358 58 Source of data: LEPB

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People’s Republic of China Liao River Basin Project

For the Liao River, the average COD values for 2008 (67 mg/L) were still above the cut-off value for Class V (40 mg/L). The Daling River at Jinzhou saw a very significant improvement in water quality in 2008, reaching 58 mg/L in 2008. These improvements have contributed to reduction of pollution discharges to the Bohai Sea.

Indicator 8: Paper-making companies to achieve financial targets

This indicator is inappropriate, as the objective of the project’s support to the two paper companies was to reduce pollution from the factories and not to make them financially viable. Jinzhou PM was profitable until the forced suspension of operations in 2008. The Yingkou PM was loss-making throughout the project.

B: Environmental Impacts of the Project

Summaries of beneficial impacts on environment of the project, after completion and commissioning of physical works, have been provided below.

Table 10.1: Pollutant Reduction by Wastewater and Paper Mill Components Components Wastewater COD Removal SS Removal COD Treatment (t/a) (t/a) Removal (1000 m3/d) （％） Panjin Wastewater 100 8,395 4,380 6.08% Yingkou Wastewater 100 6,972 3,240 5.05% Jinzhou Wastewater 100 7,814 5,576 5.66% Yingkou Paper Mill *80,000 57.96% Jincheng Paper Mill 50 34,850 11,050 25.25% Total 350 138,031 24,246 100.00% *Assuming pulp production at full capacity. The Yingkou PM was temporarily shut down after the introduction of enhanced discharge standards for the paper industry.

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Table 10.2: Pollutant Reduction by Yingkou Wastewater Component BOD COD SS Effluent Mean Year (t) (t) (t) (1000 m3/d) (1000 m3/d) 2006 2,450 3,243 2,827 50-110 54 2007 4,086 6,362 4,400 40-120 74 2008 4,397 6,972 3,240 60-120 89 Subtotal 10,932 16,577 10,467

Table 10.3: Pollutant Reduction by Panjin Wastewater Component BOD COD SS Effluent Mean Year (t) (t) (t) (1000 m3/d) (1000 m3/d) 2006 924 1,485 776 10-50 26 2007 954 1,699 798 20-50 30 2008 3,944 8,395 4,380 80-120 109 Subtotal 5,822 11,579 5,954

Table 10.4: Pollutant Reduction by Jinzhou Wastewater Component BOD COD SS Effluent Mean Year (t) (t) (t) (1000 m3/d) (1000 m3/d) 2006 2,404 5,893 3,998 45-93 77 2007 3,642 7,814 5,576 78-108 101 2008 4,661 9,512 7,228 66-115 101 Subtotal 10,707 23,219 16,802

Table 10.5: Benefits of Red Liquor Extraction/Evaporation at the Yingkou Paper Mill Before Project After Project Total Reduction or Saving COD Discharge COD Before Red liquor COD After red liquor Reduction: Reduction Red Liquor evaporation: 100,000 t/d evaporation: 2,000 t/d 98,500 t/d COD evaporation & WWTP Total COD discharged 20,000 t/d 2,000 t/d Reduction: from wastewater 17,500 t/d COD Water Savings Before Bleaching Eqpt: After Bleaching Eqpt: Water Savings: 200 m3/ton of pulp 50 m3/ton of pulp 150 m3/ton of pulp Saving in Steam 4 t/ton of binder 1 t/ton of binder Saving in Steam: consumption 3t/ton of binder Increase in Binder 30,000 t/a 200,000 t/a Increase in Binder Production* Production: 170,000 t/a Revenue From Binder RMB 3 million/a RMB 39 million/a Revenue Increase : Sales RMB 36 million/a *Binder production increase due to increase in red liquor extraction rate, from 15% to 9%

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Table 10.6: Benefits of Process Modification at the Jincheng Paper Mill - Water Savings Item Production Before the project After the project Water t/d Unit cstn. Total cstn. Unit cstn. Total cstn. saving (t/d) (t/d) (t/d) (t/d) (t/d) 1 Pulp 440 10 44,000 40 17,600 26,400 making 2 Paper 440 75 33,000 60 26,400 6.600 making Total 33,000

Table 10.7: Benefits of Process Modification at the Jincheng Paper Mill - Energy Savings Item Prodtn. Before the project After the project Power t/d Unit cstn. Total cstn. Unit cstn. Total cstn. saving (kwh/t) (kwh/t) (kwh/t) (kwh/t) (kHz/t) Pulp 44,000 kwh/ 440 300 132,000 200 88,000 making d, 5.4 tce/d

Table 10.8: Benefits of Process Modification at the Jincheng Paper Mill – COD Discharge Item Prodtn Before Project After Project Reduced t/d Produced Discharged Recycled Discharged COD (t/d) COD (t/d) COD (t/d) COD (t/d) COD (t/d) 1 Pulp 440 528 443 492 36 492 making 2 Paper 30,000 t 22.5 22.5 18 4.5 18 making water Total 550.5 465.5 510 40.5 512 (93%)

Table 10.9: Jincheng Paper Mill – COD Discharge Reduction in Wastewater Treatment Process Wastewater Discharged COD concentration Discharged amount Reduced COD discharge 5,000 t/d 150 mg/l 7.5% 98.6%

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Attachment to Annex 1

Explanatory Note on Water Quality Classifications, Water Quality Parameters and Designated Uses

Water Quality Classifications. Surface water quality in China is classified under the Environmental Quality Standard for Surface Water issued (GB3838-2002) by the State Environmental Protection Administration in April 2002, as follows:

Class I Naturally unpolluted and specific nationally designated water sources Class II Water bodies designated as Class A, protection areas for potable water use, habitat of rare aquatic organism, spawning grounds of fish and shrimp, and feeding grounds of young fish Class III Water bodies designated as Class B protection areas for potable water use, fishing areas including winter grounds and migration channels of fish and shrimp, and aquatic plants, and swimming areas Class IV Water bodies designated for general industrial use and recreation without direct contact with human skin Class V Water suitable for agriculture use and general irrigation/landscaping use

Water Quality Parameters. Whether a water body meets the classification is determined by a number of parameters. Key parameters include: pH, dissolved oxygen (DO), permanganate index, COD, BOD5, ammonia nitrogen (NH3-N), total phosphorus (P) and total ammonia (NH3. The table below indicates the limiting values of parameters applicable to the different classifications. Designated sources of water for potable use must achieve at least Class III. Ideally, water sources for major cities should reach Class II. Targets are set based in the intended water use and the location.

Limiting Values of Key Water Quality Parameters for Surface Water

Clarification

No. Standard Class I Class II Class III Class IV Class V

Item 1 Water Water temperature variation caused by factitious environment should be temperature limited in the range of: (C) Max. Weekly Average Temperature Rise 1 Max. Weekly Average Temperature Drop 2

2 pH 6-9 3 DO Saturation 6 5 3 2 factor 90% (or 7.5) 4 Permanganate ≤ 2 4 6 10 15 index 5 COD ≤ 15 15 20 30 40 6 BOD5 ≤ 3 3 4 6 10 7 NH3-N ≤ 0.15 0.5 1.0 1.5 2.0 8 Total P ≤ 0.02 (0.01 0.1 (0.025 0.2 (0.05 for 0.3 (0.1 for 0.4 (0.2 for for lakes and for lakes and lakes and lakes and lakes and reservoirs) reservoirs) reservoirs) reservoirs) reservoirs) 9 Total NH3 ≤ 0.2 0.5 1.0 1.5 2.0

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Annex 2. Project Costs and Financing

CHINA: Liao River Basin Project

(a) Project Cost by Component (in USD million equivalent) Actual/Latest Appraisal Estimate Percentage of Components Estimate (USD (USD million) Appraisal million) PANJIN WASTEWATER 33.34 38.99 117% INTERCEPTION & TREATMENT YINGKOU INDUSTRY 14.35 18.93 132% WASTEWATER TREATMENT YINGKOU WASTEWATER 39.09 44.42 114% INTERCEPTION & TREATMENT JINCHENG INDUSTRY 11.82 19.01 160% WASTEWATER TREATMENT JINZHOU WASTEWATER 27.68 28.15 102% INTERCEPTION & TREATMENT URBAN MANAGEMENT 5.49 6.62 121% INFORMATION SYSTEM ENVIRONMENTAL QUALITY 4.73 5.06 107% MONITORING ENVIRONMENT SUBPROJECTS 16.88 31.48 186%6 INSTITUTIONAL 2.62 4.94 189% STRENGTHENING & TRAINING

Total Baseline Cost 156.00

Physical Contingencies 16.00

Price Contingencies 12.80 Total Project Costs 184.80 197.40 107% Interest during construction 17.80 Front-end fee IBRD 1.00 Total Financing Required 203.60

Note that the apparent cost overrun of 107% is in fact attributable to the appreciation of the RMB. The table below, showing project costs in RMB, gives a more accurate picture.

6 The cost of the Environmental Revolving Fund was RMB 166 million at appraisal, whilst the actual cost was RMB 237.7 million, representing 143% of the original estimate. The cost of the Environmental Revolving Fund was raised, but the eligible percentage of Bank financing was reduced, keeping the total loan amount unchanged. This apparent cost overrun is in fact only made up of increased counterpart funds.

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(a1) Project Cost by Component (in RMB million) Actual/Latest Appraisal Estimate Percentage of Components Estimate (RMB (RMB million) Appraisal million) PANJIN WASTEWATER 323.3 263.2 81.4% INTERCEPTION & TREATMENT YINGKOU INDUSTRY 138.4 142.9 103.3% WASTEWATER TREATMENT YINGKOU WASTEWATER 378.6 336.2 88.8% INTERCEPTION & TREATMENT JINCHENG INDUSTRY 114.2 140.0 122.6% WASTEWATER TREATMENT JINZHOU WASTEWATER 267.3 214.1 80.1% INTERCEPTION & TREATMENT URBAN MANAGEMENT 53.0 50.0 94.3% INFORMATION SYSTEM ENVIRONMENTAL QUALITY 45.7 38.3 83.8% MONITORING ENVIRONMENT SUBPROJECTS 166.0 240.7 145.0% INSTITUTIONAL 25.6 37.3 145.7% STRENGTHENING & TRAINING Total Project Cost 1,512.1 1,508.0 99.7%

(b) Financing Appraisal Actual/Latest Type of Percentage of Source of Funds Estimate Estimate Cofinancing Appraisal (USD millions) (USD millions) Borrower 0.00 0.00 0.00 International Bank for Reconstruction 100.00 92.10 92.1% and Development Local Govts. (Prov., District, City) of 103.60 105.30 102% Borrowing Country

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Annex 3. Outputs by Component

CHINA: Liao River Basin Project

Panjin Wastewater Interception and Treatment: Construction of a 100,000 m3/d wastewater treatment plant to secondary treatment standard, 10 km of interceptor and collector sewers, and modification of 13 existing pumping stations. The treatment plant is almost fully utilized, and treated effluent meets specified discharge standard. Sludge is disposed in a power plant. About 50% of wastewater generated in Panjin is now treated.

Yingkou Paper Mill Wastewater Treatment: Construction of process improvements for red liquor extraction and evaporation, binder production facility, 20,000 m3/d plant wastewater treatment plant, and water and energy saving facilities. Plant operations were suspended in early 2008, to make mandatory improvements to meet the higher discharge standard introduced by LPG. Operations restarted in November 2008.

Yingkou Wastewater Interception and Treatment: Construction of a 100,000 m3/d wastewater treatment plant to secondary treatment standard, and 12.8 km interceptor and collector sewers. The treatment plant is almost fully utilized, and treated effluent meets specified discharge standard. Sludge is disposed in a temporary landfill until a permanent facility is constructed. About 43% of wastewater generated in Yingkou is now treated.

Additional works: A re-use water plant of 30,000 m3/d capacity and supply lines in Yingkou to supply industry were constructed using 3.28 million USD loan savings. This investment supported the project objectives by reusing industrial wastewater of a power plant. About two thirds of this reclaimed wastewater will be supplied to a coal power plant starting August 2009.

Jincheng Paper Mill Wastewater Treatment: The mercury-based electrolysis process was demolished, and the site was cleaned up using acceptable environmental practice. Facilities constructed include: red liquor extraction and evaporation, upgraded bleaching process, binder production facility, and a 50,000 m3/d wastewater treatment plant.

Additional works: Equipment for the coal ash sedimentation plant and SO2 emission reduction for the Jincheng Paper Mill in Jinzhou was constructed using loan savings of 3 millionUSD.

Jinzhou Wastewater Interception and Treatment: Construction of a 100,000 m3/d wastewater treatment plant to secondary treatment standard, and 10 km interceptor and collection sewers. The treatment plant is almost fully utilized, and treated effluent meets specified discharge standard. Sludge is disposed in a landfill. About 50% of wastewater generated in Jinzhou is now treated.

Additional works: Additional networks and interceptors were constructed in Jinzhou to expand wastewater collection in an area of about 24 km2 south of the Daling River, utilizing 1.73 million USD in loan savings to increase the service area.

Urban Management Information System: Construction of a GIS-based urban infrastructure mapping for all infrastructure facilities in project cities of Panjin, Yingkou and Jinzhou, and Shenyang. The urban management information system for the Liaoning Provincial Construction Bureau was not completed.

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Environmental Water Quality Monitoring: Monitoring equipment procured for water and air quality procured for nine cities of Shenyang, Yingkou, Panjin, Dandong, Tieling, Chaoyang, Jinzhou, Fuxin and Fushun. The cities have upgraded their capacity for automatic water quality monitoring, and to deal with emergency pollution events.

Environment Revolving Fund: Sixteen loans have been made to industries to support clean technology process changes providing considerable environmental improvements in air quality and wastewater discharges and some water conservation. The average size of each loan was about 500,000 USD, a total of about 7.75 million USD has been used so far. It is unlikely to be used as a revolving fund, because it is under-utilized.

Institutional Strengthening and Training: Comprised four components, including: (a) Financial management services and training: Provided to drainage companies for institutional development, utility management, business planning, financial management, operations and maintenance, wastewater tariffs and MIS. (b) Aquifer Study and Future Project Preparation: This package was not implemented. (c) Training and Study Tours: The package was managed by the Liaoning Provincial Department of Finance, and organized training and study tours regarding project implementation and management for provincial and municipal government and agencies. (d) Construction management and training: Consulting services for comprehensive project management, procurement and construction supervision, including review of engineering design of all five infrastructure components.

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Annex 4. Economic and Financial Analysis

CHINA: Liao River Basin Project

Economic Analysis The economic justification of the project was established using cost effectiveness criteria. Therefore no economic rate of return was calculated for the project, nor was there any systematic attempt to quantify all the potential economic benefits. Therefore it is not possible to assess in fully quantifiable terms, whether the economic benefits derived from the project are greater or lesser than envisaged. However, the project financed construction of a greater amount of infrastructure than envisaged at marginally increased cost in dollar terms, whilst achieving the core environmental objective. Thus it can be reasonably concluded that the project has been implemented in a cost effective manner, and the original economic justification has been vindicated.

High levels of pollution have direct economic impact on rural and urban water supplies, and on agricultural and fisheries production. The economic benefits that can be identified as being associated with the successful implementation of LRBP include the following:

 Improved public health in the urban areas of Jinzhou, Panjin and Yingkou served by the project, due to the improved wastewater collection and treatment.  Improvement of river quality to class V, where this has been achieved, has made available improved quality irrigation water. This will reduce health risks and also enhance the productivity of irrigated land that had been in decline.  Protection and sustaining productivity of the Bohai Bay fishing industry.  Provision of centralized wastewater treatment has avoided the need for many small industries to install more expensive on-site treatment.  Preservation of jobs and key industries through the industrial wastewater treatment components.  Job creation in the new WWTP and during construction, on which normal economic multipliers can be applied.  Creation of a 30,000 m3/day supplementary water resource in Yingkou that is suitable for industrial and other non-potable use.  Indications are increases in water and wastewater tariffs (in part promoted by the project) have resulted in less water wastage, which, given the high estimates of the economic cost of water in Liaoning, is an important benefit. In addition, the Project has provided a major indirect economic benefit by facilitating the continued expansion of the Jinzhou, Panjin and Yingkou municipalities in an environmentally sustainable manner. The expansion of these municipalities is part of China’s response to rural to urban migration pressure, which is itself consistent with the country’s economic development strategy. Specifically, loan savings were utilised to extend the wastewater collection network in Jinzhou to serve an area of 24 km2 and population of 200,000. Key assumptions made at Appraisal that potentially could have adversely affected the economic performance of the Project appear to have proved robust or conservative, and therefore there has been no dilution of economic benefit as a result of poor assumptions. These assumptions and estimates included the rate of population growth, wastewater flows and the optimum sizing of the new WWTP.

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Social, Health and Quality of Life Benefits. The project has had important social benefits, despite its objectives being originally focused on environmental improvement.

 Over one hundred new, permanent jobs have been created in the three new municipal drainage companies, and many temporary jobs were created during the construction of the facilities.

 Reduced incidence of water pollution-related diseases as a result of improved sewer systems and reduced surface and groundwater pollution near water intakes that might endanger the safety of water supplies;

 Protection of employment and living standards by preservation of productivity in the Bohai fishery, and greatly reducing the risk of closure of Jincheng and Yingkou paper mills (which would be detrimental to its local economy and undoubtedly lead to social suffering).

 The improved water quality in the local rivers will benefit many farmers and families in the area by providing better living conditions and improved public health. The poor, who are the most vulnerable to unhygienic living conditions, will therefore benefit most from the improvements.

 In addition, the Project facilitated social development by providing for rural to urban migration in an environmentally sustainable manner.

Improved Municipal Services. This objective has been fully achieved through the expanded coverage of wastewater collection, treatment and disposal for the urban populations of Jinzhou, Panjin and Yingkou, which have been implemented as planned and are operating in a fully satisfactory manner.

Institutional Capacity. The Project involved the creation of new wastewater enterprises in Panjin, Yingkou and Jinzhou as a basis for improving the prospects of sustainability of wastewater services in the three cities. The Jinzhou and Yingkou enterprises have matured progressively during the Project and now manage the WWTP they constructed and are adequately staffed and financed for this purpose. Operations and maintenance of the Panjin wastewater have been contracted out for a period of 30 years.

Financial Analysis

Drainage Companies

The financial objective of the municipalities was to have the drainage companies to generate wastewater revenues to cover operating costs and the greater of depreciation and debt service. Recognizing that the drainage companies were newly established at the time of appraisal, had no wastewater treatment facilities to operate, and no experience in functioning as commercial enterprises, the Project Agreement envisaged municipal subsidies to make up for any shortfalls in wastewater revenues.

At the time of the borrower’s ICR, financial projections were reviewed to determine the average tariffs required in each drainage company to achieve the financial objectives. The table below indicates the projected average tariffs in each city in 2005 at appraisal, compared to the actual tariffs since 2005, and the calculated tariffs to be required by 2010 for financial viability of DCs without government subsidies:

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PAD-projected Actual tariffs Required tariffs for 2005 since 2005 tariffs 2010 (RMB/m3) (RMB/m3) (RMB/m3) Jinzhou 0.85 0.63 0.89 Panjin 0.72 0.86 1.17 Yingkou 0.77 0.62 0.80

As the wastewater treatment plants were operational only by the end of 2006, the actual tariffs were adequate to meet expenditures until 2006. However, it was not possible for municipal governments to increase wastewater tariffs from 2006 because of national government guidelines; since mid-2008 there has also been the impact of the economic crisis. Municipal governments have therefore subsidized the drainage companies, particularly in meeting debt service requirements.

In 2006, Liaoning Provincial Government issued Document (2006) No. 75, urging action by local governments to improve wastewater treatment plant management and financing in Liaoning Province. As a result, and also because of discussions with Bank missions, municipal governments will be increasing tariffs in a phased manner, with Yingkou already set to increase average tariffs to RMB0.80/m3 by the end of 2009. Technical assistance under the follow-on Second Liaoning Medium Cities Infrastructure Project, currently under implementation, includes a Public Utility Program, which covers: utility benchmarking; public-private partnerships; utility management; and utility regulation.

As a result of the above, project drainage companies are expected to be able to function without municipal financial subsidies in a phase manner. Key steps to be taken in the coming years include: (a) The drainage companies taking the lead in coordinating with the water supply company (which collects wastewater charges as part of the water bill) to improve the percentage of wastewater charges collected, and for remitting the collections promptly. (b) The municipalities taking effective steps to improve wastewater charge collections from the remaining “self-supply” industrial companies, and transmitting them to the drainage companies in a timely manner. (c) The municipalities permitting the drainage companies to receive wastewater charge collections directly from water companies. (d) The municipalities permit wastewater tariff increases on a periodic basis after reviews by the Price Bureau and public hearings.

Yingkou and Jincheng Paper Mills. At appraisal, it was noted that Jincheng Paper Mill had been profitable since 1996 and was projected to continue being profitable. Yingkou Paper Mill had not made a profit for the four years prior to appraisal; however, as a result of reforms undertaken in 2000, the company was projected to be profitable from 2001. It was further noted at appraisal that as the two mills were major employers in their respective cities, the two municipalities, who were their principal owners, were willing to absorb the financial responsibility of repaying the Bank loan, should the paper mills be unable to do so.

Financial covenants were included in the Project Agreement in respect of the paper companies on quick ratio, current ratio, and incurring additional debt. These were inappropriate, as the objective of the project’s support to the two paper companies was to reduce pollution from the factories and it was not realistically possible for the municipalities (or the Bank) to enforce

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People’s Republic of China Liao River Basin Project financial covenants as the companies operate in a competitive paper industry, and have social obligations as major employers in the two cities.

Neither paper mill fully met the financial covenants during the project period. Nevertheless, Liaoning Province considers these two mills to have strategic significance and is investing public funds in their modernization and expansion.

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Annex 5. Implementation of Industrial Pollution Control Action Plan

CHINA: Liao River Basin Project

1. Introduction The Industrial Pollution Control Plan adopted by LPG under the Tenth Five-year Plan of Liaoning Province focused on pollution reduction in 133 industrial enterprises which discharged wastewater directly into Liao River (LR), and 20 key enterprises which were identified in the “Priority Industry Wastewater Pollution Control Action Plan (2000) of Liaoning”.

2. General Approach to Liao River Basin Pollution Management Applicable industrial pollution management regulations are: (a) “Decision To Strengthen Environmental Protection” in 2007, in the “Eleventh Five-year Plan of Provincial Ecosystem Environmental Protection”; (b) “Environmental Protection Ability Construction Program of Eleventh Five- year”; and (c) “Target Responsibility Guarantee for Reducing Main Pollutant Total Amount” applicable to the 14 municipalities.

3. Water pollution prevention/management of the key river basin area is based on the LEPBs “Water Pollution Prevention and Management programming (2006-2010)” and “General Programming of Environmental Protection of Bohai Sea”. A Special fund for Liao River Basin (LRB) water pollution prevention and management was set up. Up to now, 33 urban wastewater treatment plants have been constructed, with a total capacity of 3,563,000 m3/d. The rate of urban wastewater treatment has now reached 50%, and a provincial on-line supervision system has been set up at these treatment plants.

Table A: Summary of Annual Wastewater Discharge and Treatment in Liaoning (million m3) Index 2001 2002 2003 2004 2005 2006 Total amount of discharged 2,056 1,892 1,918 1,953 2,187 2,130 wastewater Amount of industrial 1,090 920 892 918 1,051 947 wastewater discharged Amount of domestic 965 972 1,027 1,035 1,136 1,182 wastewater discharged Amount of industry wastewater 872 808 817 862 999 880 discharge meeting standard Industrial wastewater 79.96% 87.85% 91.61% 93.93% 95.09% 92.91% discharge meeting standard (%) Source: Liaoning Province Statistical Yearbook in 2007.

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4 Status of Pollution Control in 20 Key Industry Enterprises The amount of main pollutant discharge in 2007, compared to the year 2000 as baseline, from the 20 key enterprises for wastewater pollution is listed in the table below. It shows that for the 20 key pollution enterprises, COD discharge reductions between 2000 and 2007 was amounted to 96.46%, or 107,329 tons per year.

Table B: Status of Pollution Control in 20 key Industry Enterprises Discharge Main Discharge Name of enterprises in 2000 Pollutants in 2007 (t/yr) (t/yr) Zhongxin Printing & Dyeing Factory, COD 10,500 18 Haicheng Kaiweiteng Printing & Dyeing COD 1,962 62 Factory, Anshan Sanxing Printing & Dyeing Factory, COD 767 26 Haicheng Haifeng Printing & Dyeing Factory COD 1,129 597 Haicheng Jinqiao Cardboard Co., Ltd., COD 188 126 Haicheng Xiliu Printing/Dyeing Factory, COD 1,663 117 Haicheng Guangyuan Printing/Dyeing Factory, COD 594 80 Haicheng Kuangquan Brewery, Anshan COD 1,460 12 Taian Paper Mill, Anshan COD 640 Closed Chemical Fertilizer Factory, Benxi NH4 271 Closed Paper Mill, Beining COD 2,664 Closed 1300 Paper Mill Co., Ltd., Heishan COD 3,388 (closed) 23 Luyan Paper Company, Yingkou COD 1,170 (closed) Paper Mill, Yingkou COD 40,360 771 Xiaoqing Mine of Tiefa Mining SS 215,572 n/a Bureau Tiefa Mining Bureau SS 64,075 n/a Snajiazi Paper Mill, Kaiyuan COD 4,061 Closed Moni Brew House Company, Tieling COD 33,750 55 Petroleum Chemical Fiber, Liaoyang COD 5,302 457 Qingyang Chemical Company, COD 1,668 293 Liaoning Total COD 111,266 3,937 Source: LEPB

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Table C: Monthly Water Quality report of River Stream (July, 2008) Name of river- Name of river City to be located Category of water quality section Ajipu II Fushun Gebu bridge IV Qijianfang V Hun Dongling bridge V Sanshan Worse than V Shenyang Qitaizhi Worse than V Yujiafang Worse than V Laoguanlazhi II Benxi Cxingan V Front of Shenwo dam IV Liaoyang Xiawangjia IV Taizi Xiakouzhi IV Tangmazhai IV Anshan Liujiatai IV Xiaojiemiao IV Panjin Sanchahe Worse than V Daliao Heiyingtai V Yingkou Liaohe park V Fudedian IV Tieling Sanhetun V Zhuershan Worse than V Mahushan III Liao Shenyang Hongmiaozhi III Xingan IV Panjin Shuguang bridge IV Zhaoquanhe IV Nandaqiao I Chaoyang Dukou V Zhangjiying V Daling Wangjiagou III Jinzhou Zhangjiapu IV Xibaqian V Huanggou II Jiangqiao II Yalu Dandong Anwen II Xiazhigou II Source: LEPB (September 2008)

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Progress in the achievement of compliance with discharge standards in project cities is illustrated in the table below:

Table D: Industrial Wastewater Discharge Meeting Standard in Yingkou, Panjin and Jinzhou (2001-2007) Discharge rate which meet the standard (%) Year Yingkou Panjin Jinzhou 2001 38.04 84.37 49.45 2002 46.42 82.06 58.86 2003 46.72 87.95 65.79 2004 91.60 92.80 71.68 2005 91.62 92.82 86.06 2006 93.57 92.17 83.18 2007 97.39 92.18 86.27 Source: LEPB (September 2008)

Concentrations of COD, BOD and NH for the period 2000-2007 are provided in the table below:

Table E: Historic Water Quality Data (2000-2007) of Liao, Daliao, Daling Rivers and Percentage of COD samples that meet Class V Water Quality

COD reaching Class City River- River Year COD BOD NH4 V located section (%) 2000 129 4.85 2.261 0.0 2001 120 3.29 5.024 14.3 Heiyingtai 2002 97 2.07 2.886 0.0 (upstream of 2003 129 6.94 5.421 12.5 urban 2004 55 4.96 3.425 12.5 section) 2005 27 6.88 3.893 87.5 2006 25 8.03 2.805 100.0 2007 35 8.33 3.388 87.5 Daliao Yingkou 2000 166 5.06 1.788 0.0 2001 167 2.73 2.717 0.0 Liaohe Park 2002 125 2.29 1.805 0.0 (downstream 2003 102 7.02 3.891 25.0 of urban 2004 44 5.15 3.459 37.5 section) 2005 34 6.56 2.623 75.0 2006 26 8.23 2.546 100.0 2007 35 6.76 3.124 100.0 2000 48 6.39 1.732 60.0 2001 35 6.32 2.454 75.0 Xingan 2002 40 9.30 3.453 66.7 (upstream of 2003 47 8.41 5.101 60.0 Liao Panjin urban 2004 55 11.04 2.955 36.4 section) 2005 61 16.71 2.955 63.6 2006 100 24.96 3.897 45.5 2007 59 20.44 3.465 50.0 Shuguang 2000 96 4.54 7.800 0.0

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COD reaching Class City River- River Year COD BOD NH4 V located section (%) bridge 2001 48 6.10 13.197 25.0 (downstream 2002 100 19.27 7.479 0.0 of urban 2003 60 7.86 8.827 40.0 section) 2004 63 10.12 6.928 27.3 2005 79 14.05 4.677 27.3 2006 102 22.45 5.664 0.0 2007 63 20.07 4.987 50.0 2000 * 13 3.19 5.563 2001 * 13 2.99 1.565 Zhaoquanhe 2002 * 22 12.75 2.855 (wetland 2003 * 13 8.13 3.690 protection 2004 * 14 7.49 1.850 zone) 2005 * 11 11.38 2.833 2006 * 23 16.18 2.320 2007 * 21 16.68 3.012 2000 15 2.53 0.152 100.0 2001 15 2.05 0.137 100.0 2002 19 3.60 0.167 100.0 Wangjiagou 2003 17 1.81 0.297 87.5 (upstream of 2004 13 1.80 0.339 70.0 Yi county) 2005 21 2.68 0.448 70.0 2006 11 1.98 0.379 100.0 2007 8 1.34 0.185 91.7 2000 28 6.80 1.890 100.0 2001 43 4.77 1.605 50.0 2002 44 6.76 1.870 55.6 Zhangjiapu 2003 32 1.81 1.413 87.5 Daling Jinzhou (upstream of 2004 39 6.15 2.051 70.0 Linghai city) 2005 33 3.15 1.488 70.0 2006 20 2.92 2.661 100.0 2007 19 3.44 3.353 91.7 2000 2802 733.27 0.710 0.00 Xibaqian 2001 1890 289.62 0.491 0.00 (sea 2002 739 373.13 0.612 0.00 entrance, 2003 758 195.32 0.661 0.00 down stream 2004 701 165.78 0.985 0.00 of Linghai 2005 472 68.09 0.832 0.00 city) 2006 452 91.93 2.001 0.00 2007 358 60.40 1.301 0.00 * index by permanganate method. Source: LEPB (Sept. 2008)

5. Summary of Achievements The Ministry of Environment has tested and confirmed that there is a significant decrease in the discharge of the main pollutants in Liaoning in 2008. For example, the COD discharge was 583,900 tons, a decrease of 6.96% compared with 2007 and the SO2 discharge was 1,130,000

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People’s Republic of China Liao River Basin Project tons, a decrease of 8.36% compared with 2007. Water quality of the Liao River has significantly improved, as pollutant density in 26 main river sections has decreased by 50%.

6. Water environment conditions before 2007

The LRB is one of seven large river basins in China, comprising Liao, Hun, Taizi, Daliao rivers. The major area of the basin is located in the central plain of Liaoning, which is heavily industrialized, with high population density and intensive agricultural production. Among 26 river-section monitoring points of the four rivers, results of 22 showed overall water quality worse than Class V. The Liao River was mostly polluted, with all four of the main monitoring indices surpassing the required standards, and the water quality of the full length of the Liao river was worse than Class V.

In order to rectify the serious pollution state of the Liao River, Liaoning Government put forward a management target in its 11th Five-year Plan to “eliminate Class V water along main courses within three years, and convert urban sections to be landscaped channels within five years”. Therefore, 8 paper-making enterprises which could not conform to relevant regulations and seriously impacted river water quality have been closed. The monitoring result at outfalls and impacted river-section points show that about 10% of the pollutant concentration reduced after these enterprises ceased production with the maximum reduction reaching 65.6%. As time passes, previous wastewater and sediment in the river course will gradually be diffused and degraded to provide continuous water quality upgrading.

7. Introduction of Stricter Discharge Standards and Water Quality Targets.

LEPB and the Provincial Technical Supervision Bureau have prepared “Comprehensive Wastewater Discharge Standard of Liaoning” to realize the total pollutant reducing task within Eleventh-Five Year period and the management target to “eliminate Class V water along main courses within three years, and for urban sections to be converted to landscaped channels within five years,” sponsored by Liaoning Government. The new discharge standard has been in effect since 1st August 2008. They are stricter than the national standards.

Stricter Discharge Standards for Paper Mills. The previously allowable COD discharge concentration to water sensitive areas in Liaoning was 60-80mg/l. The new standard does not allow this level of discharge. The previous maximum allowable COD discharge direct to surface waters was 100mg/l, but the new standard is 50mg/l. For paper making enterprises, the previous COD discharge limit was 400mg/l, but the new standard requires that the discharge from these enterprises must meet 50mg/l.

8. Implementation of new standards

The new standards implemented by Liaoning will focus on the following four aspects:

(a) Provide guarantees to realize energy-saving, reduce pollution discharge amounts and achieve the management target of the river basin.

(b) Adjust industrial layout and structure to favor concentration control of the pollution.

(c) Implement the new standards to promote and increase structural adjustments in industrial production, and promote process upgrading and strengthened pollution management in

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paper making, metallurgy, chemical, petroleum chemical, textile, dyeing and other industries.

(d) Ensure safety of drinking water: Categorizing the management standards for provincial water bodies will be realized through the method of dividing them into wastewater discharge control zones and key protection zones.

9. Additional Regulatory Actions Implemented in 2008 for Liao River Basin Pollution Prevention and Removal

In May 2008, LEPB published the next stage program for Liao River Basin pollution prevention and removal according to the policy of Liaoning Provincial Government:

Ban industrial enterprises causing serious pollution to environment

The first batch of industrial enterprises to be banned is 225 small paper mills. The business licenses were cancelled, power supply cut, and equipment demolished in all the 225 paper mills before 30 May 2008.

Enterprises which are not in accordance with the industrial policy, such as the printing and dyeing, furfural and alcohol production, are discouraged and those failing to meet discharge standards are required to close.

The industrial policy clearly stipulates cement industries are to be banned. The various local governments were made responsible for issuing orders to close them before the end of the June 2008. All the cement enterprises with a capacity lower than 200,000 tons and not able to meet the environmental requirement were required to close before the end of 2008.

River Training and Greening of the Liao River

Grass will be planted on the both sides of Liao, Hun, Taizi and Daling Rivers. Eighty industrial discharge outlets were removed by the end of 2008, and a further 34 urban discharge outlets will be closed by the end of 2009.

Recent LPG regulations to limit approvals

(i) Stricter criteria will be adopted for new industry approvals.

(ii) Approval for construction projects will be restricted for local governments that do not achieve the targets for closing paper mills, de-sulfuring and wastewater treatment.

(iii) Stricter discharge standards will be adopted for paper mills, which will be forced to close until compliance. (Operations in 417 paper mills were suspended, of which 200 were closed permanently).

(iv) In order to establish a long term pollution prevention mechanism, the LPG issued the comprehensive wastewater discharge standard, effective from August 1, 2008.

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People’s Republic of China Liao River Basin Project

(v) An environmental warning mechanism has been established. The environmental protection department will be responsible for giving yellow or red alarm to cities with environmental problems according to monitoring results.

(vi) Liaoning Province has under consideration compensation and punishment mechanism to be applied for any city whose river sections at the downstream boundary exceed the required standard.

(vii) In order to resolve the domestic wastewater pollution problem, it is planned to construct 99 wastewater treatment plants in the next 2 years with treatment capacity increased by 4,536,000 tons/day.

(viii) Ecological treatment will be implemented in main rivers and tributaries to give more comprehensive improvements in river quality. From 2008, de-silting work has commenced in 6 seriously polluted rivers.

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People’s Republic of China Liao River Basin Project

Annex 6. Resettlement Implementation

CHINA: Liao River Basin Project

The Liao River Basin Project supported eight components among which three components included resettlement activities. These three components were Jinzhou wastewater, Panjin wastewater and Yingkou wastewater. The resettlement activities were implemented according to the resettlement action plan (RAP) which was prepared at the appraisal stage of the project and was finally completed in December 2002.

Total completed resettlement activities comprised 26.2 hectares of permanent land acquisition, 29.97 hectares of temporary land use, and 18814.81 m2 house demolition (including residential houses and enterprise’s houses). The total population affected by the project was 687 people including 216 people affected by the land use and 471 people affected by the house demolition. The detailed resettlement quantities are showed in the table below. Detailed resettlement implementations status is provided in the Resettlement Completion Report for LRBP.

All affected people were resettled properly according to the resettlement action plan. Compensation standards for land use and house demolition were not lower than those stipulated in the resettlement action plans. All compensations were paid on time, and all affected persons were consulted fully during the entire resettlement process. Overall, the resettlement objective was realized and resettlement results were satisfactory.

Actual house demolitions were reduced greatly in Panjin compared to the original resettlement action plan. The Panjin wastewater component was revised for one interceptor contract. A 1 km long interceptor from South Liaohe Road to Taishan Road which was originally designed to be constructed along the south bank of Pangxie ditch was amended and constructed on the north bank of the Pangxie ditch. Changes in the construction scheme led to actual house demolitions were reduced by 15,185 m2.

In addition, the Panjin government implemented the comprehensive management for the both banks of Liuling River, and spare unused land was selected for construction of the 3.5 km interceptor on the east bank of Liuling River. These activities resulted in 11,000 m2 house demolition, but it is included in the project as collateral resettlement activity.

No. PAP Land Acqd Houses Relocated Shops, etc. Cost (ha) (m2) Demolished (m2) (Y m) Panjin 386 8.2 7,998.9 160.0 15.50 Yingkou 112 8.0 442.1 655.8 1.90 Jinzhou 189 10.0 512.0 *9,046.0 10.50 Total 687 26.2 8,953.0 9,861.8 27.90 *Represents piggeries

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People’s Republic of China Liao River Basin Project

Actual Impacts and Resettlement for the Project

Component name Permanent land acquisition Temporary land use House demolition Quantity Affected Resettlement (Person) Quantity Re- Enterprise Residential Demolitio Affected (Hectare) people Land Cash (Hectare) cultivate /institution household n area people (Person) adjustment compensation d /shop (m2) (Person) Panjin wastewater 8.2 60 60 0 25.05 25.05 1 76 8158.90 326 Yingkou wastewater 8.0 0 0.00 0.00 28 11 1097.91 112 Jinzhou wastewater 10.0 156 0 156 4.92 4.92 2 2 9558.00 33 Total 26.2 216 60 156 29.97 29.97 30 89 18814.81 471

Comparison of Actual and Planned Resettlement for the Project

Component name Permanent land House demolition Temporary land Affected people Total resettlement cost acquisition (m2) use (1000 Yuan) (Hectare) Planned Actual Planned Actual Correlation Planned Actual Panned Actual Planned Actual project Panjin wastewater 8.2 8.2 34344.76 8158.90 11,000 26.80 25.05 1596 386 46,487 15,510 (62households) Yingkou wastewater 8.0 8.0 450.00 442.11 0.00 0.00 238 112 5,037 1,085 Jinzhou wastewater 10.0 10.0 9558.00 9558.00 3.00 4.92 69 189 8,226 10,501 Total 26.2 26.244352.76 18814.81 29.80 29.97 1903 687 55,216 27,096 Note: Correlation project in the above table means that part of resettlement activities relating to the project, it is not implemented by the implement agency, but is implemented by the local Government (Panjin).

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Annex 7. Bank Lending and Implementation Support/Supervision Processes

CHINA: Liao River Basin Project

(a) Task Team Members

Responsibility/Spec Names Title Unit ialty Lending China Department, Urban Municipal Geoffrey Read Senior Municipal Engineer Environment Division Engineering David Hanrahan Economist Bank Headquarters Economic Analysis Environmental Jack Fritz Environmental Specialist EAP Urban Unit Analysis Management Rajagopal Iyer Management Specialist EAP Urban Unit Analysis Margaret Png Legal Counsel EAP Legal Legal Institutional Keiko Sato Institutional Specialist Bank Headquarters Analysis Chaogang Wang Resettlement Specialist Resident Mission, China Social Development Chaouhua Zhang Resettlement Specialist Bank Headquarters Social Development Dawei Yang Procurement Specialist Resident Mission, China Procurement Environmental George Taylor Treatment Specialist Consultant Engineering Patrick McCarthy Financial Analyst Consultant Financial Analysis Municipal Chandra Godavitarne Municipal Engineer Consultant Engineering Wu Ning Financial Specialist Consultant Financial Analysis Vellet Fernandes Program Assistant EAP Urban Unit Program Support Supervision/ICR Municipal Geoffrey Read [TTL 1] Municipal Engineer EAP Urban Unit Engineering Institutional Raja Iyer [TTL 2] Lead Management Specialist EAP Urban Unit Analysis Water Resources Greg Browder [TTL 3] Water Resources Specialist EAP Urban Unit Management Zhang Hao [TTL 4] Municipal Engineer Resident Mission, China Sanitary Engineering Senior Sanitary Mingyuan Fan [TTL 5] Municipal Engineer Resident Mission, China Engineering Senior Environmental Chongwu Sun Resident Mission, China Environment Specialist Social Development Chaogang Wang Resident Mission, China Social Development Specialist Youlan Zou Resettlement Specialist Resident Mission, China Resettlement Ming Zhang Urban Planning Specialist Resident Mission, China Urban Planning Financial Management Financial David I Resident Mission, China Specialist Management Liu Zhentu Senior Procurement Specialist Resident Mission, China Procurement

People’s Republic of China Liao River Basin Project

Financial Management Financial Haixia Li Resident Mission, China Specialist Management Eddie Hum Sanitary Engineer Consultant Sanitary Engineering Financial/Institution Patrick McCarthy Financial Analyst Resident Mission, China al Margaret Pg Legal Specialist EAP Legal Legal Financial Management Financial Robert Leonard O’Leary Loan Administration Specialist Management Xuemei Guo Program Assistant Resident Mission, China Program Assistance Municipal Chandra Godavitarne Municipal Engineer Consultant Engineering

(b) Staff Time and Cost

Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including No. of staff weeks travel and consultant costs)

Lending FY99 7.10 FY00 13 87.35 FY01 57 354.00 FY02 0.00 FY03 0.00 FY04 0.00 FY05 0.00 FY06 0.00 FY07 0.00 FY08 0.00

Total: 70 448.45 Supervision/ICR FY99 0.00 FY00 0.00 FY01 0.00 FY02 12 71.08 FY03 12 31.62 FY04 6 28.30 FY05 8 39.18 FY06 4 21.01 FY07 8 39.47 FY08 8 32.82 FY09 3 0.00

Total: 61 263.48

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People’s Republic of China Liao River Basin Project

Annex 8. Summary of Borrower's ICR and/or Comments on Draft ICR

CHINA: Liao River Basin Project

1. Assessment of Project Objective and Quality At Entry

Descriptions of the original and revised project objectives, components and beneficiaries are detailed in Section 1.2 of the main ICR. They are not repeated here.

Project Changes. No project components were deleted or added during implementation, however, a few changes occurred within the scope of project components as summarized below:

Yingkou Wastewater. Yingkou utilized loan savings to construct a 30,000 m3/d wastewater reclamation plant. The feasibility study report (FSR) was provided in August 2003, and the proposed additional 6 new contracts were agreed by the Bank during the mid-term review in June-July 2004, along with other minor adjustments.

Jinzhou Wastewater. Jinzhou utilized loan savings to construct more interceptors. The proposed 5 additional contracts were agreed by the Bank during the period 2002-2005, along with other minor adjustments.

Jincheng Industry Wastewater Treatment. The component proposed during appraisal included modification of an old chlorine-alkali plant and water reduction process. A feasibility study report for new proposals was submitted to the Bank in December 2002 and approved by the Bank in principle in May 2003. The new proposal included 5 contracts for construction of a comprehensive wastewater treatment plant, pre-treatment of high concentration process wastewater, etc.

Institutional Development and Training (IDT). As discussed in paragraph 2.2 below, Package B of the Institutional Development component was not proceeded with.

Project Delays. The original closing date of the loan was December 31, 2007. However, Jinzhou Drainage Company applied for utilizing loan savings of USD 2.5 million to construct a wastewater reclamation plant, and Liaoning Urban Construction & Renewal Project Office (LUCRCPO) requested an extension of loan closing date in May 2007 in order to accommodate this. The Bank accepted the proposed extension in December 2007, and extended the loan closing date to December 31, 2008. All other works, including those using loan savings, were substantially completed by the original closing date.

Quality at Entry. Project preparation of the physical investments at appraisal has been proved largely satisfactory. The feasibility studies and engineering designs for each project component (as well as for the overall project) proved to be appropriate. Most of the technical designs employed advanced yet commercially available technologies that proved to be suitable for the purpose. The procurement plan, as appraised, proved to be executable. However, some of the appraised cost estimates proved excessive; as a result of large contingencies included at Bank insistence, led to loan savings.

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People’s Republic of China Liao River Basin Project

Project preparation for the institutional development and training (IDT) component laid some good foundations for the Project by requiring tariff increases in advance of appraisal and the implementation of joint billing of water and wastewater charges, but in some aspects was less satisfactory. The PAD incorrectly stated that the existing sewerage assets in the project cities, and the staff responsible for their management and operations, had already been transferred to the new Drainage companies. This was only partly true. The PAD also referred to the new Drainage companies becoming managerially and financially autonomous, without clearly defining what this entailed. There was therefore no clear consensus or local stakeholder ownership of the required reforms at the commencement of project implementation.

2. Achievement Of Objective And Outputs

Outcome/Achievement of Objective. The municipal wastewater components in Panjin, Yingkou and Jinzhou are already in operation achieving their design capacity (100,000 m3/d in each case) and producing effluent that meets the required quality standards. In addition, the inclusion of a wastewater reclamation component in Yingkou has made available 30,000 m3/d of reclaimed wastewater as a resource suitable for industrial and other low grade uses.

Process modifications in the Yingkou Paper Mill have reduced about 80% of pollution loads discharged into the local receiving water bodies. The wastewater treatment facilities of Jincheng Paper Mill have also significantly reduced pollution loads into the local receiving water bodies.

The Project constructed wastewater treatment capacity of 350,000 m3/d in total, with an estimated reduction in COD discharge of 138,031 t/a. This has contributed significantly to protecting water quality in the lower reaches of the Liao River basin (LRB) and the Bohai Sea. The physical interventions have made a significant contribution to the project objective of assisting the environmental recovery of the LRB.

Output by Components

Panjin Wastewater (RMB 323.3 million PAD; RMB 263.2 million at completion). Satisfactorily implemented as appraised between 2001 and 2007. It is now providing 100,000 m3/d of secondary treatment capacity, and about 50% of total municipal wastewater flow from the city is now treated in compliance with discharge standards.

Yingkou Wastewater (RMB 378.6 million PAD; RMB 336.2 million at completion). The main facility was satisfactorily implemented as appraised, between 2001 and 2006. It is now providing 100,000 m3/d of secondary treatment capacity, and about 43.4% of total municipal wastewater flow from the city is now being treated in compliance with the discharge standard. In addition, a facility to provide 30,000 m3/d of reclaimed wastewater has been constructed and made operational. This wastewater reclamation facility will potentially improve the financial strength of the wastewater company and increases the economic benefits of the component.

Yingkou Paper Mill (RMB 138.4 million PAD; RMB 142.9 million at completion). Satisfactorily implemented between 2002 and 2006. The red liquor treatment works have reduced about 97% of the pollution loads discharged from the company into the Daliao River and have produced up to 76,000 t/year of commercially valuable binder. In addition, a wastewater treatment facility of 20,000 m3/d capacity built using local funding was commissioned in December 2008.

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People’s Republic of China Liao River Basin Project

Jinzhou Wastewater (RMB 267.3 million PAD; RMB 214.1 million at completion). Satisfactorily implemented as appraised between 2001 and 2007. It is now providing 100,000 m3/d of secondary treatment capacity, with 50% of the city’s municipal wastewater flow now being treated in compliance with the discharge standard. In addition, construction of additional interceptors utilizing loan savings has extended wastewater collection for an area of 24 km2 and population of 200,000 in southern of the city.

Jincheng Paper Mill (RMB 114.2 million PAD; RMB 140.0 million at completion). Satisfactorily implemented between 2003 and 2008, in accordance with the revised FSR agreed by the Bank. The 50,000 m3/d wastewater treatment and flue gas treatment facilities have reduced the pollution loads discharged into Daling River and atmosphere from the paper mill.

Urban Management Information System (RMB 53 million PAD; RMB 50 million at completion). The component was implemented from 2001 to 2008 with some delays. The objectives of the component were to update urban mapping in the project cities and strengthen the urban management information center by developing a GIS-based engineering management system for infrastructure planning, especially water and wastewater, preparing a provincial urban information system to facilitate policy and strategy formulation and implementation, including arrangements for cities and the province to provide urban and environmental information on the Internet for public access.

Four participating organizations, three cities, Panjin, Shenyang and Yingkou, and the Liaoning Provincial Construction Bureau (LPCB), were involved in the component, which was substantially completed, with the exception that the LPCB only partly completed its work scope. Yingkou city also used local counterpart funds to complete its purchase of Computer Hardware and Software (UMIS/21.01-C).

LPCB originally planned to implement two contract packages, UMIS/22.01 (UMIS Advisory Services) and UMIS/21.01-D (Computer Hardware & Software). UMIS/22.01 was completed as planned. UMIS/21.01-D was deferred because a number of cities in the province are still at the stage of building or to build their own UMIS system. LPCB intends to implement this part later using local funding, when most of cities have completed their UMIS in a manner that is compatible to the provincial system.

Environmental Water Quality Monitoring (RMB 45.7 million PAD; RMB 38.3 million at completion). Satisfactorily implemented in two contracts between 2002 and 2006. Environmental monitoring stations from 9 cities of Shenyang, Yingkou, Panjin, Dandong, Tieling, Chaoyang, Jinzhou, Fuxin and Fushun, have procured monitoring equipment for water and air, which has upgraded their capacity in water quality monitoring and automation level, as well as their ability to deal with emergency pollution events.

Environment Revolving Fund (RMB 166.0 million PAD; RMB 240.7 million at completion). Since October 2002, the Fund has satisfactorily provided to 16 sub-projects to support clean technology process changes providing considerable environmental improvements in air quality and wastewater discharges and some water conservation.

Institutional Development and Training (RMB 25.6 million PAD; RMB 37.3 million at completion). Based on the PAD this component was to be implemented between 2001 and 2007 and involved four TA packages, (A, B, C and D). Packages A and D were subsequently

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People’s Republic of China Liao River Basin Project extended in line with the revised loan closure to 31 December 2008. The apparent cost overrun is because Package D was not included in the original component cost estimate. (a) Financial management services and training ("Package A"). This package was originally scheduled for construction and institutional reforms were delayed, it was agreed with the WB to extend the work of the Package A consultant over all of the remaining loan period. The TA consultant has provided advice, training and support to the IAs, LUCRPO and related project agencies in the areas of institutional development, utility management, business planning, financial management, operations and maintenance, wastewater tariffs and MIS. (b) Aquifer Study and Future Project Preparation ("Package B"). This package was not implemented. During the project implementation, the national (China) and provincial (Liaoning) government issued several notifications to protect underground aquifer and restrict the extraction of groundwater. At the same time, Liaoning Provincial Government had planned to close self- supplied water supply wells step by step, and constructed a 85 km (in length) tunnel and diverted up to total of 1.79 billion m3/year surface water from Huanren Reservoir located within Huanren County, providing adequate surface water to six big municipalities, Shenyang, Fushun, Liaoyang, Anshan, Yingkou and Panjin, for their growing urban population and expanding economy. Liaoning Government therefore decided that in view of the changed circumstances the Aquifer Study was not urgent and should be conducted at a future time using local resources, and when the effect of these new initiatives could be properly evaluated. (c) Training and Study Tours ("Package C"). The package managed by LPDF, organized training and study tours regarding to project implementation and management for provincial and municipal government and agencies and achieved the PAD objectives. (d) Construction management and training ("Package D"). TA-Package D was successfully implemented between May 2002 and December 2008. Major tasks of the TA consultant were to provide consulting services for project management, procurement and construction supervision, including review of engineering design of all five infrastructure components. All the bidding documents, bid evaluation reports and cost overrun reports were reviewed by the TA consultant team before LUCRPO submitted them to WB for approval. All variation applications by the IAs, valued over RMB 200,000, were also subject to review by the TA consultant. The consultant team visited the five project sites regularly and provided full support for project management and implementation together with associated training., The TA achieved significant capacity building for the staff of LUCRPO, participating municipalities, IAs and local construction supervision firms on WB project implementation rules and procedures on procurement, contract management and construction supervision. The Package was undoubtedly most helpful in ensuring the successful and timely implementation of the structural part of the Project.

Economic Benefits. The economic justification of the project was established using a cost effectiveness approach rather than by a detailed quantitative evaluation of benefits. The Project has undoubtedly contributed to the Governments’ development objective of continued and sustainable economic growth, and helped facilitate the policy of rural to urban economic migration. Economic output in Liaoning has increased from RMB 503.3 billion in 2001 to RMB 1102.2 billion in 2007, an increase averaging 13.95% per annum. Specific economic benefits include preservation of economic activities in the Bohai Sea, protection of groundwater aquifers used for local water supplies, and the protection of employment in the key paper-making industry.

Financial Performance. The financial viability of the Project wastewater components was assessed based on the ability of the wastewater tariff to generate sufficient revenues for the

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People’s Republic of China Liao River Basin Project project companies to meet their principal financial targets. These targets were a cost recovery ratio of at least 1.0 and debt service coverage of at least 1.3, set on the assumption that all wastewater charges revenues would be transferred to the companies. This financial reform has yet to take place, and therefore all three companies are technically non-compliant with the related loan covenants. However, in all three cities the municipal government is providing adequate financial resources to ensure the full operation of the new WWTPs.

The financial performance of the Jincheng and Yingkou Paper Mills has been adversely affected by the forced suspension of operations during 2008. These two companies have both failed to meet their financial covenants, but Jincheng has at least proved profitable for most of the implementation period.

Institutional Development Impact. The Project involved the creation of new wastewater enterprises in Panjin, Yingkou and Jinzhou as a basis for improving the prospects of sustainability of wastewater services in the three cities. The Jinzhou and Yingkou enterprises have matured progressively during the Project and now manage the WWTP they constructed and are adequately staffed and financed for this purpose. For various reasons, the Panjin enterprise has not been given the opportunity to mature in the same way. However, broader sector reforms to create integrated wastewater companies responsible for the wastewater collection network as well as the WWTP have not proceeded as indicated in the PAD, and the enterprises have only very limited financial or managerial autonomy.

Procurement. All procurement was undertaken in accordance with WB guidelines and there were no incidents of misprocurement during LRBP implementation. The only change in procurement method was for IDT package C which changed from QCBS to direct disbursement of costs. All bid documents were subject to review by TA-Package D consultants and approval by LUCRCPO. Extensive use was made of the WB “prior review” procedure which operated successfully.

Poverty Alleviation and Social Impact. The provision of wastewater treatment facilities at the Jincheng and Yingkou Paper Mills has potentially protected two important local industries and the employment they provide.

The wastewater components have directly provided significant local temporary job opportunities during construction and over 100 permanent jobs on the treatment plants. The significant reduction in the discharge of untreated wastewater has improved the urban environment and living conditions in the cities, reduced the risk of health concerns due to groundwater contamination and helped preserve the productivity of the Bohai Sea fishery resource. As a facilitator of sustainable economic development, the Project will have continuing beneficial poverty alleviation and social impacts.

Environmental Impact. No significant environmental management issues arose during project construction and the environmental management plans prepared to mitigate potential adverse environmental impacts resulting from the Project activity were implemented. The Project is set to achieve the beneficial impacts that were identified in the PAD Environmental Assessment.

Land Acquisition and Resettlement. All land acquisition and resettlement of affected persons was successfully dealt with in accordance with the resettlement plans approved by the Bank. Only minor delays occurred in resettlement, but this did result in some construction delays. A separate completion review report on these activities has been provided to the Bank.

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People’s Republic of China Liao River Basin Project

3. Major Factors Affecting Implementation and Outcome

Factors Outside the Control of Local Government or Implementing Agency

(a) Construction was affected by the Severe Acute Respiratory Syndrome (SARS) event in 2003, resulting in a delay to the construction schedule of approximately 6 months and corresponding increases in construction cost.

(b) The exchange rate of USD with RMB was 1:8.27 at the time of appraisal, but started to drop from July 2005 as the PRC government started to implement new exchange rate policies. By January 2006 the rate had fallen to 1:8.07 and by June 2008 to 1:6.90. This significantly reduced the real value of the World Bank loan and increased the level of counterpart funding required, as most contracts were denominated in Chinese RMB. The need for unanticipated supplementary financing created difficulties for the implementing agencies (IAs) and caused some payment delays to contractors on contracts signed in currencies other than USD.

Factors Generally Subject to Local Government Control

(a) Stricter environmental standards introduced in April 2008 by the Liaoning provincial government resulted in Yingkou and Jincheng paper mills being ordered to stop production until they could demonstrate meeting the new standards. Jincheng Paper Mill resumed production in November 2008 and Yingkou Paper Mill was allowed to resume on a test basis in March 2009.

(b) The early engagement of consultants to work on design and bid document review speeded up the procurement process and allowed the construction to start promptly.

(c) Local governments have proved largely unwilling to fully implement the agreed program of financial and institutional reforms, despite pressure from the Bank, LUCRPO and the TA package A consultant.

(d) Local governments have failed to increase wastewater tariffs to a level that can fully sustain wastewater services in the cities and provide funds for new investment. Whilst tariffs rose at regular intervals up to 2005, no increases have occurred since. National economic policy to control inflation and recent concerns on the social effects of the global economic slowdown, have been major contributing factors over the last two years.

(e) In some cases, particularly in respect of the proposed wastewater re-use facility in Jinzhou, the local government decision taking process over the use of loan savings was prolonged and indeterminate. This resulted in a largely unnecessary 12 month loan extension, which is something to be avoided on future WB projects.

Factors Generally Subject to Implementing Agency Control

(a) Most of the engineering design had been based on sound engineering information and satisfactory. However, upon request of IAs for the purpose of speeding up project implementation, some of engineering designs were prepared without detailed geological exploration information resulting in preventable variations and delays in construction.

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People’s Republic of China Liao River Basin Project

(b) Land acquisition and resettlement of LRBP were generally satisfactory, however, in a few cases, the land acquisition and resettlement process resulted in a delay in project implementation

(c) Jinzhou and Yingkou IAs both paid careful attention to training and the development of operating procedures, which has resulted in WWTP with effective operational management systems, and which meet required discharge standards.

(d) The absence of sub-metering of electricity within the WWTP makes the monitoring and control of power consumption difficult to achieve and is something that should be rectified in future projects.

Costs and Financing

Costs. Total project cost at the appraisal was USD203.60 million (refer to Table A, Annex 6 of the PAD), and USD184.80 million or RMB1,512.10 million, excluding front-end fee and interest during construction (refer to Annex 3 of the PAD). The completion cost of LRBP is currently estimated at RMB 1,508 million which is 99.7% of the estimated project cost at appraisal, and includes the cost of additional works funded partly from loan savings. There were three major reasons for this:  Municipal wastewater components: although the appraisal estimation was over-stated, the resulting loan savings were fully utilised for mid-term project adjustments, such as Yingkou wastewater reclamation plant, and additional interceptors in Jinzhou.  Jincheng Paper Mill: the work scope of the component was changed with the approval of the Bank. The original planned 6 contracts for modification of an old chlorine-alkali plant and water reduction process (estimated cost at the appraisal of RMB 103.9 million) were replaced by 5 contracts for construction of a comprehensive wastewater treatment plant and pre-treatment of high concentration process wastewater (estimated cost of RMB 148.6 million in the proposal submitted to the Bank for approval). The completion cost of the component was RMB 140 million, representing 134.7% of the original PAD estimates.  Environment Revolving Fund: the appraisal cost estimate in the PAD was RMB 166 million, while the actual cost is RMB 240.7 million, representing 145% of the original estimate. The reason for this difference is that eligible percentage of World Bank funding was reduced, therefore enabling the loan budget to be more widely spread.

Financing. The necessary counterpart funds were provided through a mixture of state bonds, provincial grants and the resources of the municipal governments and implementing agencies and the final financing split is expected to be 51.2% of World Bank Loan: 48.8% of local funding, compared to the 49.1% (WB Loan): 50.9% (local funding) at the Appraisal.

4. Sustainability

Prospects for Sustainability. We recognise sustainability of the Project needs to be viewed in terms of (a) whether an appropriate institutional arrangement has been set up to provide for managerial autonomy and sustainability; (b) the ability to operate and maintain the facilities; and (c) financial sustainability. In our view the overall Project can be considered partly sustainable against these criteria. The new WWTPs are being well operated and maintained, and each municipal government is providing sufficient budget to ensure these operations are fully

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People’s Republic of China Liao River Basin Project financed. However, tariffs are not at a level that provide for financial sustainability and low income collection rates are also a continuing threat to financial sustainability.

In 2006, the Liaoning Provincial Government (LPG) issued Document (2006) No. 75, which urges action by local governments to improve WWTP management and financing in Liaoning Province, and this initiative together with institutional action plans developed jointly between LUCRPO and the Bank can we believe ensure LRBP is fully sustainable.

Sustainability of the new Yingkou wastewater re-use facility is assured once the new power plant due to take the treated water is commissioned in late 2009. Conclusion of a long term purchase agreement with the power company is at an advanced stage. The sustainability of the Yingkou and Jinzhou Paper Mill investments depends on the economic future of these two industries, however, both are viewed by LP as playing a strategic role in the future of the Province’s paper- making industry and their modernisation and expansion plans have attracted Government investment accordingly.

Transition Arrangements to Regular Operation. All three of the municipal wastewater treatment plants have made a largely smooth trouble-free transition to normal operations with both the treatment capacity and effluent quality having achieved design requirements. For the operation staff, Jinzhou and Yingkou IAs recruited some skilled staff from other WWTP to the newly built wastewater treatment facilities and trained newly recruited staff before and during the commissioning and trial production period. Panjin Urban Construction Bureau has signed an outsourcing contract for the operation and maintenance of the WWTP with an experienced contractor to give assurance over operational standards. In all three cities, use has been made of operational procedures developed jointly between the IAs and the package A consultant.

Yingkou wastewater reclamation plant has also been successfully commissioned with both the treatment capacity and effluent quality having achieved design requirements. However, it has not yet been put into production. Originally, the Yingkou wastewater reclamation plant was planned to be a 50,000 m3/day for civil facilities and 30,000 m3/day for equipment (first phase) with the equipment installation for remaining 20,000 m3/day during second phase. The Yingkou Drainage Company will sign an agreement with Huaneng Yingkou Thermo-Electric Plant for supplying 50,000 m3/day of reclaimed wastewater for cooling water, and the installation of equipment for second phase of the wastewater reclamation plant (for remaining 20,000 m3/day capacity) is now being undertaken with local counter-part funds. Huaneng Yingkou Thermo- Electric Plant has already completed the civil construction and equipment is currently under installation. Yingkou Drainage Company will need to start supplying reclaimed wastewater for the commissioning of the thermo-electric plant scheduled for the end of August 2009.

5. Bank and Borrower Performance

Bank. The World Bank’s performance is considered to be highly satisfactory both during the lending and supervision phases. The diligence of World Bank staff impressed all the IAs involved, and was also much appreciated by LPG. During the phase of identification, preparation and appraisal for the project, World Bank staff provided helpful guidance to assist LUCRPO and the IAs in project preparation. During the implementation phase, the World Bank deployed supervision missions (on average twice a year) and related experts (technical, financial and institutional) to help the Borrower to achieve project objectives. All the bidding documents and bid evaluation reports (subject to prior Bank review) were reviewed and approved by the Bank in a timely manner with no delays. The Bank has also done their best to provide the Borrower with

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People’s Republic of China Liao River Basin Project valuable guidance and services in dealing with changing circumstances, such as timely approval for proposals of re-packaging and the use of loan savings by mid-term adjustments to some project components.

Borrower. The national and provincial government’s commitment to the project remained strong and supportive during all phases of the Project. The provincial government took a strong lead on tariff reform by issuing provincial guidelines urging municipalities to increase tariffs; they also supported the Project by directing and coordinating the implementation efforts.

The LUCRPO, Participating municipalities and IAs all performed active project management functions throughout the implementation with the municipalities making great efforts to designate necessary resources for component execution. The Project has been implemented satisfactorily, and in accordance with WB project implementation rules and procedures on procurement, contracts management and construction supervision. The main physical components were completed in good time, well in advance of the original loan closure deadline. However, it must be acknowledged that the municipalities have performed less well in the implementation of the institutional and financial reforms that had been agreed on with the Bank at the time of Appraisal.

6. Lessons Learned

The Liao River Basin Project has been very successful and has achieved most of its original objectives, especially in respect to the physical interventions. The entire implementation process has been a valuable experience for all the agencies involved, and much capacity building of the IAs has been achieved that will help them with future projects. The WB loan has not just simply helped finance the Project, but has also introduced advanced management practices for project implementation and enterprise operation, such as modern project management, international practice of bidding and contracting, construction supervision, performance measurement, and the completion evaluation. Significant capacity building in World Bank procurement, contract and project management, WWTP operations and maintenance, environmental monitoring, and enterprise accounting and financial management have been achieved. World Bank project implementation rules and procedures on procurement, contracts management and construction supervision have been broadly accepted as being fair and giving greater assurance of a satisfactory outcome. Valuable experience has been gained by practicing these rules and procedures, which have been replicated on similar projects not financed by the World Bank. Specific lessons learned include: (i) Government support, such as fulfilment of covenants, cooperation and timely approval from domestic authorities of various levels, and a strong and stable project management organization are crucial for success in project implementation. (ii) Project physical and financial contingencies at Appraisal were excessive, resulting in large scale loan savings. Levels of contingencies should be reviewed for future projects. (iii) Before engineering design, sufficient engineering information, especially the geological exploration data, should be available to reduce unnecessary and preventable variations during construction and avoid delay for construction. (iv) Some covenanted requirements were unduly optimistic relative to what could be achieved in the times frame set in the loan documents. This particularly applied to the achievement of full cost recovery from tariffs.

ICR-Annex 10

People’s Republic of China Liao River Basin Project

(v) Institutional reforms to create integrated wastewater companies did not have the necessary “buy-in” from the participating municipalities and have proved difficult to implement. Equally there was and continues to be resistance to create wastewater companies that are genuinely autonomous in management and financing. (vi) The Liaoning Environmental Revolving Fund has proved an effective vehicle for promoting small to medium scale investment in environmental improvements by local industries. However, it has not operated on the “revolving” basis as originally intended, but instead as a series of small “one-off” sub-loans. (vii) There is an active market for re-cycled treated wastewater effluent in Liaoning; however the experience at Yingkou has revealed many practical difficulties, together with associated health concerns, in its use via dual potable/non potable water distribution systems. These lessons need to be carefully evaluated and applied in any future reuse application of this type (viii) The Project was an initiative under the Liao River Basin Management Plan. The preparation and implementation of this Plan has introduced the principles of integrated water resource management (IWRM) to relevant provincial and local governments with the following results: The Plan has provided a framework for the selection and prioritisation of investment projects, including both LRBP and the follow–on Second Liaoning Medium Cities Infrastructure Project (LMC2). Much increased emphasis is now placed on the demand management side of water resources:  A sub-plan to address industrial pollution control has brought very significant reductions in the volume of pollutants discharged and generally brought the Province’s industries into compliance with environmental regulations.  Important lessons have been learned in the linkage between sustainable development, urban planning, industrial re-structuring and environmental protection.  Controls based on total pollution discharge volumes have been introduced  Planning, wastewater discharge, and water abstraction regulations and standards have been strengthened, as well as their monitoring and enforcement

ICR-Annex 11

People’s Republic of China Liao River Basin Project

Annex 9. List of Supporting Documents

CHINA: Liao River Basin Project

1. Project feasibility studies and project proposal 2. Project Appraisal Document 3. Loan Agreement 4. Project Agreement 5. Mission Aide Memoires and Back-to- Office reports 6. Project Status Reports and Implementation Status Reports 7. Semi-annual Project Progress Reports 8. Borrower’s ICR Annex (with comprehensive details on all topics)

ICR-Annex 12

122° 124°To Changchun 126° CHINA LIAO RIVER BASIN PROJECT NEI MONGOL To Tongliao JILIN PROJECT COMPONENTS: PROVINCE PROVINCE LIAO RIVER BASIN Jinzhou PROJECT CITY Kangping Changtu WASTEWATER COLLECTION SYSTEMS Xifeng L AND TREATMENT PLANT (WWTP) iu H To Jilin e Kaiyuan INDUSTRIAL POLLUTION CONTROL Faku Tiefa M URBAN MANAGEMENT INFORMATION SYSTEMS Zhangwu

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e ia Gai Xian lu J Xiuyan Ya RUSSIAN FEDERATION Suizhong Bohai Sea Dandong DEMOCRATIC HEILONGJIANG PEOPLE'S 40° MONGOLIA 40° Donggou JILIN Qinhuangdao REPUBLIC To Tangshan JAPAN LIAONING D.P.R. OF KOREA NEI MONGOLBEIJING OF KOREA BEIJING Zhuanghe HEBEI TIANJIN REP. OF Fu Xian SHANXI SHANDONG KOREA

QINGHAI NINGXIA GANSU JIANGSU Xinjin SHAANXI HENAN ANHUI SHANGHAI HUBEI SICHUAN ZHEJIANG YELLOW CHONGQING This map was produced by the Map JIANGXI Jin Xian HUNAN Design Unit of The World Bank. The GUIZHOU FUJIAN SEA boundaries, colors, denominations IBRD 31284R PACIFIC 0 25 50 75 100 and any other information shown on YUNNAN TAIWAN OCEAN Dalian this map do not imply, on the part MAY 2009 GUANGXI GUANGDONG KILOMETERS of The World Bank Group, any HONG KONG judgment on the legal status of any MACAO VIETNAM territory, or any endorsement or LAO 120° 122° 124° acceptance of such boundaries. P.D.R. HAINAN PHILIPPINES