World Bank Document

Document of The World Bank

FOR OFFICIAL USE ONLY

Public Disclosure Authorized Report No: 46872-CN

PROJECT APPRAISAL DOCUMENT

ON A

Public Disclosure Authorized PROPOSED LOAN

IN THE AMOUNT OF US$200 MILLION

TO THE

PEOPLE’S REPUBLIC OF CHINA

FOR A

SHANGHAI URBAN ENVIRONMENT PROJECT

Public Disclosure Authorized IN SUPPORT OF THE THIRD PHASE OF THE

SHANGHAI URBAN ENVIRONMENT PROGRAM

June 2, 2009

Urban Development Sector Unit Sustainable Development Department East Asia and Pacific Region

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

(Exchange Rate Effective August 1, 2008) Currency Unit = Renminbi Yuan (RMB) RMB 6.842 = US$ 1 US$ 0.146 = RMB 1

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS APL Adaptable Program Loan APL LG Adaptable Program Loan Leading Group BOT Build-Operate-Transfer BSSM Bailonggang South Sewer Main CEAM Shanghai Chengtou Environmental Asset Management Company Limited CNAO China National Audit Office COD Chemical Oxygen Demand CRR Cost Recovery Ratio DA Designated Account DFV District Financing Vehicle DN Diameter Nominal DSCR Debt Service Coverage Ratio EA Environmental Assessment EIA Environmental Impact Assessment EIRR Economic Internal Rate of Return EMP Environmental Management Plan EPP Emergency Preparedness Plan FIRR Financial Internal Rate of Return FMM Financial Management Manual FMS Financial Management Specialist GDP Gross Domestic Product GEF Global Environmental Facility ICB International Competitive Bidding IST Institutional Strengthening and Training JHWF Jiading Hazardous Waste Treatment and Disposal Facility LIBOR London Inter-Bank Offered rate MOF Ministry of Finance NCB National Competitive Bidding NDRC National Development and Reform Commission NI Nanjing Institute NPV Net Present Value OECD Organization for Economic Co-operation and Development OMM Operation and Maintenance Manual PAD Project Appraisal Document PAP Project Affected People FOR OFFICIAL USE ONLY

PIU Project Implementing Unit PMO Project Management Office PPI Private Participation in Infrastructure QCS Qing Cao Sha QCSC Qing Cao Sha Investment Construction and Development Company Limited QCSRWP Qing Cao Sha Raw Water Project RAP Resettlement Action Plan RMB Renminbi SBD Standard Bidding Documents SCC Shanghai Construction and Communications Commission SCEIC Shanghai Chengtou Environmental Investment Company, Ltd. SEP Shanghai Environmental Project SFB Shanghai Finance Bureau SDRC Shanghai Development and Reform Commission SMAO Shanghai Municipal Audit Office SMG Shanghai Municipal Government SMSC Shanghai Municipal Sewerage Company, Ltd SOE Statement of Expenditure SSP Shanghai Sewerage Project SWA Shanghai Water Authority SWDC Shanghai Solid Waste Disposal Center UDIC Urban Development and Investment Corporation, Ltd UFW Unaccounted-for-Water UNDB United Nations Development Business WSC Water Supply Company WTP Willingness-to-Pay WWTP Wastewater Treatment Plant

Vice President: James W. Adams, EAPVP Country Manager/ Director: David R. Dollar, EACCF Sector Manager: Keshav Varma, EASUR Ede Jorge Ijjasz-Vasquez, EASCS Task Team Leader: Hiroaki Suzuki (TTL), EASUR Axel E.N. Baeumler (Co-TTL), EASUR

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

CHINA Shanghai Urban Environment Project - APL Phase III

CONTENTS Page

I. STRATEGIC CONTEXT AND RATIONALE ...... 1 A. Country and sector issues...... 1 B. Rationale for Bank involvement ...... 3 C. Higher level objectives to which the project contributes...... 3

II. PROJECT DESCRIPTION ...... 3 A. Lending instrument ...... 3 B. Program objective and phases...... 4 C. Project development objective and key indicators...... 5 D. Project components...... 6 E. Lessons learned and reflected in the project design...... 7 F. Alternatives considered and reasons for rejection ...... 8

III. IMPLEMENTATION ...... 8 A. Partnership arrangements (if applicable) ...... 8 B. Institutional and implementation arrangements...... 8 C. Monitoring and evaluation of outcomes/results...... 10 D. Sustainability...... 10 E. Critical risks and possible controversial aspects...... 10 F. Loan/credit conditions and covenants...... 11

IV. APPRAISAL SUMMARY ...... 12 A. Economic and financial analyses...... 12 B. Technical...... 14 C. Fiduciary ...... 16 D. Social...... 16 E. Environment...... 17 F. DFV Safeguards Framework ...... 18 G. Safeguard policies...... 19 H. Policy Exceptions and Readiness...... 20 Annex 1: Country and Sector or Program Background ...... 21

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ...... 41

Annex 3: Results Framework and Monitoring ...... 42

Annex 4: Detailed Project Description...... 50

Annex 5: Project Costs ...... 67

Annex 6: Implementation Arrangements ...... 69

Annex 7: Financial Management and Disbursement Arrangements...... 73

Annex 8: Procurement Arrangements...... 81

Annex 9: Economic and Financial Analysis ...... 90

Annex 11: Project Preparation and Supervision ...... 115

Annex 12: Documents in the Project File ...... 117

Annex 13: Statement of Loans and Credits...... 118

Annex 14: Country at a Glance ...... 123

Annex 15: Maps...... 125

CHINA

SHANGHAI URBAN ENVIRONMENT PROJECT - APL PHASE III

PROJECT APPRAISAL DOCUMENT

EAST ASIA AND PACIFIC

EASUR

Date: June 2, 2009 Team Leader: Hiroaki Suzuki Country Director: David R. Dollar Sectors: Water supply (75%); Sewerage (20%); Sector Manager/Director: Keshav Varma, Solid waste management (5%) Ede Jorge Ijjasz-Vasquez Themes: Pollution management and environmental health (P);Environmental policies and institutions (P);Water resource management (P);Municipal governance and institution building (P);Regulation and competition policy (S) Project ID: P096923 Environmental screening category: Full Assessment Lending Instrument: Adaptable Program Loan

Project Financing Data [X] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other:

For Loans/Credits/Others: Total Bank financing (US$m.): 200.00 Proposed terms: VSL Financing Plan (US$m) Source Local Foreign Total Borrower 0.00 0.00 0.00 International Bank for Reconstruction and 102.82 97.18 200.00 Development Local Govts. (Prov., District, City) of 312.02 119.12 431.14 Borrowing Country Total: 414.84 216.30 631.14

Borrower: People's Republic of China China Responsible Agency: Shanghai Municipal Government No. 1 Lane 1114, Liyang Rd. China Tel: (86-21) 5666-8104 Fax: (86-21) 6540-6094 [email protected] Shanghai Municipal Government China

Estimated disbursements (Bank FY/US$m) FY 2010 2011 2012 2013 2014 2015 Annual 3.44 28.53 73.87 73.87 10.29 10.00 Cumulative 3.44 31.97 105.84 179.71 190.00 200.00 Project implementation period: Start October1, 2009 End: December 31, 2014 Expected effectiveness date: December 1, 2009 Expected closing date: June 30, 2015

Does the project depart from the CAS in content or other significant respects? Ref. [ ]Yes [X] No PAD I.C. Does the project require any exceptions from Bank policies? Ref. PAD IV.G. [ ]Yes [X] No Have these been approved by Bank management? [ ]Yes [ ] No Is approval for any policy exception sought from the Board? [ ]Yes [ ] No Does the project include any critical risks rated “substantial” or “high”? [X]Yes [ ] No Ref. PAD III.E. Does the project meet the Regional criteria for readiness for implementation? Ref. [X]Yes [ ] No PAD IV.G.

Project development objective Ref. PAD II.C., Technical Annex 3 The project development objective for the APL3 is to improve Shanghai’s resource and environmental sustainability in the core and suburban areas through strategic priority investments and selective institutional reforms in the water and wastewater sectors.

Project description [one-sentence summary of each component] Ref. PAD II.D., Technical Annex 4

The project consists of three components along with technical assistance:

1. Water Supply and Management Construction of raw water transmission pipelines and booster pumping stations in Pudong New District and Nanhui District of Shanghai (collectively, “Nanhui Conveyor”) to enable water from Qing Cao Sha Reservoir (under construction) to be supplied to the outer metropolitan areas in southeastern Shanghai Municipality.

2. Wastewater Management Construction of trunk sewers, pumping stations and associated facilities in the Puxi area to extend the area of service by the existing Bailonggang Wastewater Treatment Plant to the south.

3. District Environment Management Program Provision of financing for environment-related infrastructure investment sub-projects in suburban districts through the existing District Financing Vehicle (“DFV”) and strengthening of DFV’s institutional and operational capacities to provide such financing.

4. Institutional Strengthening (a) Carrying out of studies, training, study tours and workshops to support water sector policy and institutional reforms, including (i) introduction of performance benchmarking and economic regulation methods in the water sector; (ii) use of water demand management as a means to increase efficiency in the use of water resources; and (iii) improvement of the security of water supply.

(b) Carrying out of studies, training, study tours, and workshops to support the institutional

development of SCC and its subsidiary companies, including: (i) improvement of capability in project management of urban infrastructure investments; (ii) reviewing the feasibility of adopting an asset management system; and (iii) optimization of the operation and management of water and wastewater systems by SCC’s water sector subsidiaries.

Which safeguard policies are triggered, if any? Ref. PAD IV.F., Technical Annex 10 Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP/BP 4.37) Significant, non-standard conditions, if any, for: Ref. PAD III.F. Board presentation: n/a Loan/credit effectiveness: n/a Covenants applicable to project implementation:

Financial covenants: • Cost Recovery Covenant (applied only to the SMSC). The CRR requires that total revenue (from operating and non-operating sources, including operating subsidies) is equivalent to not less than the sum of its: (i) total operating expenses (including depreciation), and (ii) the amount by which the debt service requirements exceeds the provision for depreciation.

• Debt Service Coverage Covenant (applied to both the SMSC and the QCSC). The DSCR requires that the project company shall not incur any debt unless a reasonable forecast of its revenues and expenditures shows that its estimated net revenues for each fiscal year during the term of the debt to be incurred shall be at least equal to its estimated debt service requirements in such year on all of its debt, including the debt to be incurred.

• Cost Recovery Covenant (applied to the beneficiaries of DFV sub-loans): The CRR requires that the DFV sub-loan beneficiary shall produce, commencing twenty-four (24) months after the date of commissioning of facilities constructed under any sub-project, total revenues (from operating and non- operating sources) equivalent to not less than the sum of: (i) its total operating expenses (including depreciation) and (ii) the amount by which debt service requirements exceeds the provision for depreciation.

Key implementation covenant:

• SMSC shall undertake to complete construction of the Pudong section of the Bailonggang Southern Trunk Conveyor by the time that construction of the Puxi section of said conveyor is finished to enable conveyance of wastewater to the Bailonggang Wastewater Treatment Plant.

• CEAM shall undertake to furnish to Bank by December 31, 2011, a time-bound action plan, prepared in accordance with terms satisfactory to the Bank (including consulting with Chengtou on said plan) for the strategic institutional and financial development of the DFV during medium term.

iii

I. STRATEGIC CONTEXT AND RATIONALE

A. Country and sector issues

1. The Shanghai Municipality (Shanghai) is China’s premier economic, financial, and industrial center. The city lies at the heart of a major metropolitan region in the Yangtze River Delta in eastern China. The metropolitan region has undergone rapid economic and population growth. In 2006, Shanghai was estimated to have 18.2 million residents1 and its population is expected to grow to about 24.5 million by 2020.2 Shanghai’s economy maintained double-digit economic growth over the past fifteen consecutive years. In 2006, its Gross Domestic Product (GDP) reached RMB1,037 billion (US$152 billion) and GDP growth was 11.9 percent. Its per capita GDP reached RMB 57,695 (US$8,432), which is the highest among Chinese cities. Though the recent global financial crisis adversely affected China’s economy, Shanghai is expected to continue relatively steady economic development.

2. Though rapid economic growth brought significant benefits, including improved living standards, Shanghai faces serious problems related to resource and environmental sustainability. The Shanghai Municipal Government (SMG) recognizes these challenges, and is committed to building a more resource-efficient and environmentally sustainable city. In Shanghai’s 11th Five- Year Plan (2006 – 2010), authorities delineated initiatives to improve resource and environmental management, including in land, energy, water, environmental protection, pollution control and treatment, and environmental infrastructure development in suburban areas. Shanghai’s third Three-Year Environmental Action Plan (2006 – 2008) reemphasized priority areas of the 11th Five-Year Plan, and outlined an investment program of RMB 40 billion (US$5.8 billion), including in water supply, wastewater, and solid waste. Shanghai has confirmed its commitment to building a “harmonious society” by hosting the World Expo 2010: Better City, Better Life, whose main theme is environmentally sustainable urbanization.

3. Shanghai’s sector strategies for environmental management gradually shifted from providing physical infrastructure to improving sector structure and governance. A critical step took place in 2005 when the SMG established a clearer separation between sector policymaking and regulation, and utility investment and management. For example, SMG transferred the ownership of all utility companies in the water and wastewater sectors from Shanghai Water Authorities (SWA) to Shanghai Chengtou Corporation.3 Shanghai has fully corporatized all water and wastewater companies under the umbrella of Shanghai Chengtou Corporation, allowing the SWA to increasingly focus on strategic planning and regulatory aspects of the water and wastewater sectors. In addition, Shanghai Chengtou Corporation and its subsidiary companies introduced innovative approaches to environmental management and financing, including issuing China’s first corporate bond in the environmental infrastructure sector, and introducing a private participation in infrastructure (PPI) scheme: most notably, a 50-year concession of Pudong’s water supply and distribution system to a joint venture between Veolia and Shanghai Chengtou Corporation.

1 Out of 18.2 million peoples, the floating population accounts for 4.7 million (Shanghai Statistical Yearbook 2007). 2 “Shanghai Urban Environmental Project – APL3 Report No.1 – Shanghai Population Projection to 2030” (April 2008) (A report submitted by NJS Consultants as a deliverable of consulting services for APL3 project preparation). 3 Shanghai Chengtou Corporation is the Urban Infrastructure Development Corporation (UDIC), responsible for investment, construction, and operation of urban infrastructure. 1

4. Since 2003, the Bank’s Adaptable Program Loan (APL) has helped Shanghai to address its complex environmental management challenges. Through the APL program, the Bank supported several high priority infrastructure investments in the water supply, wastewater, and solid waste sectors. The Bank supported innovative financial approaches such as the previously mentioned corporate bond issuance, and introduced the District Financing Vehicle (DFV), a financing mechanism addressing critical environmental infrastructure needs in the rapidly growing suburbs of Shanghai. Based on the successful Bank-Shanghai partnership in the first two phases of the APL program, this APL3 aims to further contribute to Shanghai’s commitment to building a more resource-efficient and environmentally sustainable city. The specific issues that this APL3 aims to address are described below.

5. In the water sector, one of the most pressing challenges is insufficient raw water of good quality to meet future demand. Water quality has declined in the Huangpu River, Shanghai’s main existing water source, but demand has grown from sustained economic and population growth. It is estimated that demand for raw water will increase to about 13.6 million m3/day by 2020, which would require that Shanghai boost its raw water intake by about 7.3 million m3/day. Shanghai thus needs to implement a comprehensive water resource management strategy, building on the latest Water Master Plan (2002). The proposed strategy should have three main pillars. First, Shanghai needs to complement its two existing raw water sources with a new raw water source.4 Shanghai has started to implement the Qing Cao Sha Raw Water Project (QCSRWP) which is located at the estuary of the Yangtze River and which, upon completion, is expected to serve more than half of Shanghai’s population. Second, Shanghai needs to plan strategic connections between existing water sources and the QCSRWP Reservoir System to ensure flexible and secure water supplies throughout the city. Third, Shanghai needs to complement physical investments with a comprehensive water conservation policy, which could include improved water demand management and further improvements in operational efficiency and water system management.

6. In the wastewater sector, Shanghai needs to continue to expand its wastewater collection and treatment system. The latest Master Plan (2001) fully recognizes this challenge and delineates priority projects to expand the sewer network, and rehabilitate or enhance wastewater collection systems and additional treatment facilities. Overall, the Master Plan aims to increase wastewater treatment from 73 percent in 2007 to 85 percent by 2010. One of the priority projects will expand wastewater collection capacity in the outer southeast area of Shanghai. This region has experienced significant economic and population growth, driven partially by the economic success of and regional development linked to Pudong International Airport, and the major new container port in Nanhui district. Existing wastewater collection and treatment services in this area are near capacity and require augmentation. Shanghai also needs to optimize the institutional arrangements in the wastewater sector and control non-point pollution run-off, which is a major source of pollution. The SMG is currently preparing a pollution reduction pilot project in the suburban areas of Shanghai with support from the Global Environmental Facility (GEF) (see Box A 1.2 of Annex 1 for details).

4 The two main existing raw water sources are the Upper Huangpu River and the Chenhang Reservoir system. 2

7. Challenges in environmental infrastructure are particularly pressing in Shanghai’s suburban areas. Since the 1990s, the SMG has promoted the de-concentration of population and enterprises from the core city to the suburbs, such as developing district towns and encouraging industrial relocation. The suburban areas are now growing much more rapidly than the core city: population growth in these areas was, respectively, 23.0 percent and -6.3 percent over the past five years. Although Shanghai’s suburban areas have rapidly grown, development of environmental infrastructure has lagged behind. This is partially attributable to the SMG’s decision to concentrate key environmental infrastructure investments in the core city, leaving suburban areas dependent on small-scale individual systems that are often not planned and managed in integrated ways. To appropriately balance development between the core city and the suburban areas, Shanghai requires a more strategic approach to integrated environmental management across its metropolitan areas.

8. Finally, Shanghai’s environmental management challenges are exacerbated by potential threats from climate change. According to a recent report of the Organization for Economic Co- operation and Development (OECD), Shanghai is one of the top ten global cities most exposed to a potential sea level rise, coastal flooding, and large scale typhoons.5 These risks have real implications on the infrastructure designs that Shanghai is implementing, especially in water resource management and wastewater treatment, where projects often have life spans of 30 years or more. In sum, Shanghai needs to pay increasing attention to climate change factors in planning and managing environmental infrastructure.

B. Rationale for Bank involvement

9. Shanghai’s decision to seek financing from the Bank amid other financing options is motivated by the city’s desire to consolidate and deepen its existing partnership with the Bank by implementing priority investments and selective institutional and financial reforms under the APL program. The APL program aims to develop innovative approaches to address complex urban management challenges, and introduces new lending approaches in the Bank-China partnership that could be replicated in other provinces and cities.

C. Higher level objectives to which the project contributes

10. The APL3 will support two of the three Country Partnership Strategy themes: (i) managing resource scarcity and environmental challenges; and (ii) improving public and market institutions. The APL3 will also support the objectives of China’s 11th Five-Year Plan (2006-10) that aims to create a “harmonious society” balancing economic growth with distributional and environmental concerns.

II. PROJECT DESCRIPTION

A. Lending instrument

5 R. J. Nicholas, et all. “Ranking Port cities with High Exposure and Vulnerability to Climate Extremes.” Environment Working Paper No.1. 3

11. The lending instrument is an Adaptable Program Loan (APL). The Borrower has selected the variable-spread option in which the spread over the London Inter-Bank Offered Rate (LIBOR) is reset each semester. The Borrower’s main reason for selecting the variable spread loan over a fixed-spread loan is because the interest rate for the fixed spread loan is currently slightly higher than variable-spread loan.

B. Program objective and phases

12. The overall objective of the APL program is to improve Shanghai’s environmental conditions through progressive development and implementation of integrated, metropolitan- wide measures, as defined in the Project Appraisal Document (PAD) of the APL1.6 The original APL program objective remains valid because Shanghai still faces important environmental challenges, particularly in rapidly growing suburban areas. Through the APL, Shanghai has pursued innovative ways to provide services to Shanghai’s 18 million residents, and extend services to less affluent districts outside the core city (about 64 percent of the population), focusing particularly on water supply, wastewater, and solid waste management.

13. Specifically, the APL program aims to assist Shanghai to address critical environmental deficiencies by improving water quality (i.e., halting deterioration of existing raw water sources and investing in new raw water sources); explanding the water supply system; upgrading wastewater collection systems and expanding wastewater treatment (i.e., introducing sludge management); and improving solid waste collection and disposal practices. The APL program also aims to help Shanghai to develop and implement an enhanced institutional framework for managing urban environmental infrastructure services, focusing particularly on improving strategic master planning and sector governance, developing sustainable financing strategies, and introducing an integrated approach to delivering services on a metropolitan-wide scale.

14. During implementation of the APL, the SMG made significant progress on institutional and sector reforms. Among other successes, major achievements accomplished to date for the APL include: (i) preparation of sector master plans for wastewater, solid waste management, and air pollution control; (ii) establishment of clear separation between the SMG’s sector policymaking and regulatory functions, and Chengtou’s utility investment and management functions; (iii) periodic wastewater tariff increases; (iv) expansion of Chengtou’s utility services to suburban districts through capital participation in district utility companies; (v) establishment of the DFV for financing utility investments in suburban districts; (vi) issuance of the first corporate bond in China in the urban wastewater sector; and (vii) introduction of PPI.

15. The objectives and highlights of implementation progress for the first two phases of the APL program are as follows:

• APL1: The specific objectives of the APL1 (as defined in the APL1 PAD) are to put in place the underpinnings and enabling conditions for the SMG to pursue an integrated, metropolitan-wide approach to environmental management. The APL1 is financing sewerage networks, wastewater treatment plants, a landfill, upgraded services in underserved historic areas, and Institutional Strengthening and Training (IST). The APL1 has made good

6 The Shanghai APL is the first and only (to date) adaptable program loan to China 4

progress, with about 79 percent of the loan disbursed. It is expected that the APL1 will be completed by March 2010. The project performance rating is satisfactory.

• APL2: The specific objectives of the APL2 (as defined in the APL2 PAD) are to expand Shanghai’s environmental management agenda in metropolitan areas through support for a set of priority investments, enhancement of financial architecture for urban environmental infrastructure, and policy and institutional reform initiatives. The APL2 is financing water supply distribution networks, wastewater collection networks and sludge treatment, closure of existing solid waste dumps, and IST activities. Through the DFV, the APL2 is financing wastewater and solid waste investments in peri-urban districts outside the core city. Implementation progress is satisfactory, with about 32 percent of the loan disbursed. The relatively slow disbursement is mainly due to complex technical issues related to sludge treatment facilities. However, the Shanghai Municipal Sewerage Company (SMSC) is making progress on resolving major issues, and disbursement is expected to accelerate in the near future. The Bank also recommends that the APL3 be implemented at this stage, as its key component, the Nanhui Conveyor, is an integral part of the QCSRWP, and a major part of the QCSRWP will be completed before the World EXPO 2010. The project performance rating of the APL2 is satisfactory.

16. APL3 Triggers. The APL program defined clear triggers for progressing to subsequent phases. The APL program triggers were designed to track progress towards overall APL program objectives, particularly those related to institutional reform.

17. Compliance with all six APL3 triggers was assessed during project appraisal.Critical APL program objectives include a subset of the broad institutional reforms described above. The objectives focused specifically on the development of infrastructure financing mechanisms; the evolution of institutions in the water and solid waste sectors; and selected topic areas, such as extension of water services to underserved areas, improved sludge management, and air pollution control. A Bank review committee assessed compliance with the APL3 triggers (consistent with the practices adopted under the APL2) and confirmed that all APL3 triggers have been met.

18. Details on compliance with the APL3 triggers are summarized in Appendix 1 of Annex 1, and pertain to developments in infrastructure financing (trigger 1), evolution of the solid waste sector (trigger 3), evolution of the water sector (trigger 4), and control of air pollution (trigger 6). The status of compliance on each trigger is summarized in Table A1.4 of Annex 1. The required information to assess compliance on the extension of water supply services in Qingpu District (trigger 2) and sludge management (trigger 5) is also provided in this table.

C. Project development objective and key indicators

19. The project development objective for the APL3 is to improve Shanghai’s resource and environmental sustainability in the core and suburban areas through strategic priority investments and selective institutional reforms in the water and wastewater sectors. The particular aims are to increase the secure provision of good quality water, reduce the load of untreated pollution discharged into water sources, and facilitate sustainable investments in environmental infrastructure in suburban areas.

20. Annex 3 contains the detailed results framework for project outcome indicators and intermediate results indicators. Key outcome indicators include: (1) total volume of quality water supplied by the Qing Cao Sha raw water system; (2) reduction of water pollution in Puxi area of the Upper Huangpu River (i.e., annual reduction in Chemical Oxygen Demand (COD)); (3) adoption of a management decision by Shanghai Chengtou Corporation on the DFV’s strategic evolution; and (4) improvement in water sector management in areas supported by the project’s Institutional Strengthening and Training (IST) components.

D. Project components7

21. The project consists of three investment components and one technical assistance (TA) component.

• Water Supply and Management Component (Estimated Base Cost: RMB 2,537.74 million or US$409.31 million/IBRD loan: US$137.20 million). This component includes the construction of the Nanhui Raw Water Conveyor, which is one of the nine components of the QCSRWP.8 The remaining eight components of the QCSRWP are being funded by Shanghai, and are not part of the APL3. The Nanhui Raw Water Conveyor, which will have a capacity of 1.28 million m3/day, will supply raw water to the rapidly growing metropolitan areas in southeastern Shanghai, including the new container port development, and the high tech industry and logistical complexes around the Pudong International Airport. This conveyor will serve about 1.8 million peoples. This component will finance 37.7 km of twin steel pipes varying from Diameter Nominal (DN) 2000mm to DN1200 mm; 3.6 km of steel pipes of DN1800 mm; and 7.3 km of steel pipes of DN1600 mm as raw water conveyors, which will connect to a control system and the north Nanhui Pumping Station.

• Wastewater Component (Estimated Base Cost: RMB 420.61 million or US$67.84 million/IBRD loan: US$29.40 million). This component supports construction of the Puxi Trunk Sewer, which is one of two sections of the extension of the Bailonggang Southern Trunk Sewer system. The Puxi Trunk Sewer will collect about 390,000m3/day of wastewater in the Xuhui District, and consists of 6.66 km of DN 3000 mm trunk sewer, 1.10 km of DN 3000 mm river crossing, 0.45 km of DN 2200 mm connecting sewer, and a 7.96 m3/second pumping station. The other section (Pudong Trunk Sewer), which is linked to the Bank-funded wastewater component above, will be funded by Shanghai, and completed within the same time horizon as the Bank-funded Puxi Trunk Sewer. Wastewater collected through the Puxi and Pudong Trunk Sewers will be treated at the

7 The exchange rate used here is RMB6.2 = US$1. It is different from the exchange rate on the cover page, as it is the projected five-year average exchange rate. 8 The nine components of QCSRWP are: (i) Qing Cao Sha reservoir (area of 70 km2 and 7 m water depth) and pumping stations for water abstraction, storage and conveyance; (ii) raw water conveyor on Changxing Island; (iii) raw water conveyor tunnel crossing the Yangtze River; (iv) Wuhaogou raw water pumping station; (v) raw water conveyor Yangqiao and associated pumping station; (vi) raw water conveyor of Lingqiao and associated pumping station; (vii) raw water conveyor Jinhai and associated pumping station; (viii) raw water conveyor of Nanhui and associated pumping station; and (ix) rehabilitation of raw water system of Upper Huangpu river. The Nanhui Conveyor under APL 3 is the eighth component. 6

existing Bailonggang Wastewater Plant. The capacity of the Bailonggang Plant will be increased from 1.6 million m3/d to 2.4 million m3/d by 2012 to meet future demand.

• District Environment Management Program Component (Estimated Cost: RMB 534.49 million or US$86.21 million/IBRD loan: US$30 million). This component will support the DFV, a subsidiary of Shanghai Chengtou Corporation, which is dedicated to financing environmental investments in Shanghai’s suburban areas. This component extends the DFV component under the APL2, and will adopt a programmatic approach. As a result, the Bank focused its appraisal on the DFV’s Operational Manual and pipeline of investment projects. In addition, the Bank identified a specific investment to be financed under the APL3: Phase III of Jiading’s Hazardous Waste Treatment and Disposal Facility (JHWF).

• Institutional Strengthening and Training Component (Estimated Cost: RMB21.08 million or US$3.40 million/IBRD loan US$3.40 million). This component will provide strategic IST to Shanghai Chengtou Corporation, its subsidiary raw water and wastewater companies, and the SWA. The component has two dimensions: sector wide policy and institutional issues at the government level, and operational efficiency and institutional development issues at the Chengtou utility company level. Specifically, the IST will include the following six sub-components: (i) performance benchmarking and economic regulation methods in the water sector; (ii) water demand management (WDM); (iii) security of water supply; (iv) project management of urban infrastructure investments; (v) feasibility study of asset management system; and (vi) optimization of the operation and management of water and wastewater systems. The IST component will be delivered through strategic studies, trainings, study tours, and workshops.

E. Lessons learned and reflected in the project design

22. The following lessons were incorporated into the project design:

• Technical Design. Previous Bank-financed projects in Shanghai faced particular challenges in balancing support for long-term strategic sector objectives with implementation timelines and short-term development goals. In this context, the project was designed to meet Shanghai’s implementation timeline while ensuring that investments are compatible with the strategic sector goals that the Bank aims to support. For example, the Nanhui Conveyor is an important investment that will fulfill Shanghai’s immediate goal to increase the supply of raw water. At the same time, the Bank’s dialogue focuses on ensuring that this investment is fully compatible with the strategic sector goal of introducing conjunctive use of Shanghai’s major raw water sources.

• Programmatic Approach. To broaden development of the China-Bank partnership in urban development, the project will test a programmatic approach to on-lending for smaller investment components. Specifically, in light of the DFV’s good track record during the APL2 in processing Bank-financed sub-projects, a programmatic approach for the DFV will be adopted under the APL3. This approach reflects the request of the

Government of China to introduce broader innovations in urban environmental management in Shanghai that could be replicated in other cities across China.

• Tariffs and User Charges. For political and social reasons, provincial and municipal governments in China are often reluctant to sanction large increases in water and wastewater tariffs, preferring to raise charges by small increments. Although Shanghai recently increased water and wastewater tariffs for non-domestic customers, tariffs are still not at levels that ensure full compliance with financial covenants. Given Shanghai’s mixed record in adhering to financial covenants under previous Bank-financed projects, this project includes realistic financial covenants, including the explicit inclusion of operating subsidies. In addition, a financial sustainability assessment that reviews more than tariffs is included among the operational and financial performance indicators, with a view to enhancing financial transperancy and monitoring operational efficiency.

F. Alternatives considered and reasons for rejection

23. Raw Water Supply System. Two methods were reviewed to enhance the security of the raw water supply: a deep ring main conveyor and an ordinary linkage system using a connecting conveyor pipe linking the QCS raw water system and the Upper Huangpu raw water system. The ring main conveyor method was rejected for four reasons: (i) technical concerns on the quality of the raw water in the deep main ring; (ii) lack of precedents in applying deep ring systems in large scale raw water conveyor projects; (iii) insufficient data to accurately undertake cost-benefit analyses of the different options; and (iv) lengthy procedural requirements for changing the method already approved by the SMG, particularly given the tight schedule for completing a major part of the QCSRWP before EXPO 2010.

24. Program Design of DFV. Program design options for the DFV included repeating the APL2 process for DFV development and appraisal, or promoting further institutional reform by introducing a programmatic approach. A pilot programmatic approach was agreed for the DFV, with the objectives of reducing transaction costs between the Bank and government counterparts, and testing innovative, new approaches in Shanghai that could be replicated in other cities.

III. IMPLEMENTATION

A. Partnership arrangements (if applicable)

25. Not applicable.

B. Institutional and implementation arrangements

26. An APL Leading Group (APL LG), chaired by the Secretary General of Shanghai, was established to provide policy guidance, coordinate important issues, and monitor progress on the urban environment improvement strategy. The members of the APL LG include the directors of the Shanghai Development and Reform Commission (SDRC), the Shanghai Construction and Communications Commission (SCC), the Shanghai Finance Bureau (SFB) and the SWA.

27. Under the Leading Group, the APL Project Management Office (PMO) will be responsible for overall management, supervision, reporting, and monitoring and evaluation of project activities. The PMO, headed by the SDRC, will act as a coordinating body, while the investment and IST components will be implemented by the subsidiaries of the Shanghai Chengtou Corporation, as follows: (i) Water Supply Component—the Qing Cao Sha Investment Construction and Development Company (QCSC); (ii) Wastewater Component—the SMSC; (iii) District Environment Management Program through the DFV—the Shanghai Chengtou Environment Asset Management Company (CEAM); and (iv) IST Component —the QCSC and the SMSC. The SMSC and the CEAM are implementing agencies under the APL1 and/or APL2. Though the QCSC is a new entity, most of its staff comes from Chengtou’s existing subsidiaries.

28. Shanghai Chengtou Corporation is an investment company established in 1992 as an investment and stock holding corporation to raise funds on behalf of the SMG. It is the biggest Urban Development and Investment Corporation (UDIC) in China, with total assets of RMB 214 billion (US$31.4 billion). Shanghai Chengtou Corporation implements infrastructure projects, including in roads, water, wastewater, and landscaping, in Shanghai’s core urban area. Shanghai Chengtou Corporation will coordinate all APL components in close collaboration with the PMO.

29. The following agencies are responsible for implementing individual components (further details are included in Annex 6):

• Qing Cao Sha Investment Construction and Development Company (QCSC), a subsidiary under Shanghai Chengtou Corporation, is responsible for implementing all nine sub-projects under the Qing Cao Sha Raw Water Intake scheme, including the Qing Cao Sha Nanhui Conveyor (financed under the APL 3). The QCSC is currently a construction company established to implement the Qing Cao Sha project.

• Shanghai Municipal Sewage Company (SMSC), another subsidiary of Shanghai Chengtou Corporation, is responsible for implementing the Bailonggang South Sewer component of the APL3. The SMSC is Shanghai’s integrated sewer company in charge of providing sewage collection, sludge treatment, and wastewater tariff collection in the core urban area. The SMSC has implemented previous Bank projects, including the wastewater component under the APL2.

• Shanghai Chengtou Environmental Asset Management Company (CEAM),9 a subsidiary under Shanghai Chengtou Corporation, is implementing the DFV established under the APL2. The DFV sub-projects will be implemented by utility companies or entities with support from the CEAM, under supervision of their respective district governments.

• Institutional Strengthening and Training component. Shanghai Chengtou Corporation will provide overall coordination of IST components. The QCSC and the SMSC will be responsible for implementing IST components and assuming debt repayment obligations. During actual implementation, the SWA will play a leading role in the activities related to water sector policy and institutional reform (i.e., performance benchmarking, and economic

9 The term “DFV” is used interchangeably with the term “CEAM” in this PAD. 9

regulation methods pertaining to the water sector, water demand management, and water supply security).

C. Monitoring and evaluation of outcomes/results

30. Annex 3 lists the outcome indicators for the project as well as the principal results indicators for each component. The PMO will consolidate data at the project level and produce semi-annual reports to monitor progress from inputs collected by the SWA, the QCSC, the SMSC, and the CEAM on the project’s water supply, wastewater, and DFV components, respectively. Baseline data for results indicators are available, and no capacity constraints on collection of indicator data and analysis of results are foreseen.

D. Sustainability

31. Past experience in the APL1 and the APL2 suggests that the investment program is likely to be designed to high-quality standards. To strengthen sustainability of Shanghai’s water system, the SMG intends to adopt, in phases, conjunctive use of three raw water sources through a new water distribution system that enables secure and sustainable supplies of raw water. In terms of institutional sustainability, the SMG has long recognized the importance of complementing physical investments with institutional reforms. The APL program was designed to include a more explicit focus on institutional dimensions, including through the institutional reform triggers for the APL1, 2, and 3, which have been largely met. This focus on institutional reform is maintained under the APL3. The proposed project includes specific IST assistance to the SWA and Chengtou to manage the sector and utilities in more efficient and financially sustainable ways, which will help ensure provision of environmental infrastructure services over the long-term. While the DFV is playing an important role in financing environmental infrastructure investments in suburban areas, the DFV is not financially sustainable mainly due to institutional constraints. These constraints will be addressed under the APL3 through technical assistance funded by the Bank-Netherland Water Partnership Trust Fund. The APL3 will support institutional reforms to make the DFV a more sustainable institution.

E. Critical risks and possible controversial aspects

32. The table below provides a summary of key development risks, including risk ratings, relating to project implementation, and mitigation measures to minimize and manage risks.

Project Risks Risk Mitigation Measures Risk Rating with Mitigation* • Tariff Adjustment: Shanghai has • The financial covenants are structured to explicitly increased water and wastewater account for subsidy payments to ensure tariffs for non-domestic uses, but transparency on actual and projected payment it is still difficult for the SMG and requirements. In addition, the performance the utility companies to fully indicators account for subsidies of each project Substantial recover their financial and implementing company, and other key financial and operational maintenance costs operational indicators have well-defined, from tariff revenue. Currently, transparent definitions. Supervision will pay special deficits are offset by subsidies attention to this monitoring framework and continue from Shanghai Chengtou policy dialogue on the financial sustainability of the 10

Corporation and/or the SMG. Any water sector utilities under the IST component of change in subsidy payments from the APL 3. Shanghai Chengtou Corporation and /or the SMG (e.g. due to fiscal or policy changes) may precipitate a deterioration of the project companies’ financial positions, because of their continuous dependency on the subsidies.

• Impact of the Qing Cao Sha Raw • The key objective of the SMG and utility Water Project on the financial companies’ engagement in institutional reform is to sustainability of the water sector: help to develop sustainable financing strategies for Given the size of the investment the water sector. Significant Trust Fund resources of the QCSRWP (US$2.25 have been mobilized during project preparation to billion), the overall cost structure establish the analytical foundation for engaging of the water sector will be government and company counterparts on optimal affected significantly, especially financing strategies. The SMG also mandated that by potentially higher water supply Shanghai Chengtou Corporation fully engage with Substantial input prices for Shanghai’s water the Bank on all financial sustainability issues. The companies. Inappropriate Bank will help Chengtou in its financing strategy structuring of financing and cost under the IST component of the APL 3. sharing for the QCSRWP may impact the financial sustainability • Dedicated, focused support will be provided to the of the water sector as a whole. SMG and the utility companies during supervision.

• Implementation of the Sector • The IST component was designed through a full Institutional Reform: A focus on needs assessment, and Shanghai Chengtou completing the main QCSRWP Corporation and the SMG have assumed full components to provide raw water ownership of the IST component. In addition, to the Shanghai EXPO site by outlines of Terms of Reference (TOR) for each IST Substantial May 2010 may focus attention on component have been prepared. physical investments to the detriment of policy dialogue and institutional reform under the IST.

• DFV’s Medium-Term Reform: • The Bank team has mobilized Trust Fund resources The DFV will not be able to to support the DFV in its reform efforts. further advance its medium-term • The project includes a dated covenant under which reform agenda due to difficulties Chengtou needs to adopt a strategic decision on Substantial in addressing regulatory DFV’s future evolution. constraints. • The Bank will provide continuous support during project implementation. * Probability that an outcome will not be achieved: High >75%; Substantial >50%; Modest >25%; Low <25%

F. Loan/credit conditions and covenants

33. Disbursement conditions include:

• Subsidiary Agreements: All implementing companies will be required to enter into subsidiary agreements acceptable to the Bank as a condition of disbursement since they will be implementing parts of the project and they are legally autonomous companies.

34. Other covenants applicable to project implementation include the following.

Financial covenants:

35. Financial covenants will include a cost recovery ratio (CRR) and debt service coverage ratio (DSCR) covenant. The DSCR will apply to both the QCSC and the SMSC. The CRR will apply only to the SMSC and the beneficiaries of DFV sub-loans. The financial covenants are as follows:

• Cost Recovery Covenant (applied only to the SMSC). The CRR requires that total revenue (from operating and non-operating sources, including operating subsidies) is equivalent to not less than the sum of its: (i) total operating expenses (including depreciation), and (ii) the amount by which the debt service requirements exceeds the provision for depreciation.

• Cost Recovery Covenant (applied to the beneficiaries of DFV sub-loans): The CRR requires that the DFV sub-loan beneficiary shall produce, commencing twenty-four (24) months after the date of commissioning of facilities constructed under any sub-project, total revenues (from operating and non-operating sources) equivalent to not less than the sum of: (i) its total operating expenses (including depreciation) and (ii) the amount by which debt service requirements exceeds the provision for depreciation.

Key implementation covenant:

IV. APPRAISAL SUMMARY

A. Economic and financial analyses

36. Financial analysis was conducted to: (i) analyze and advise on project financing plans, and forecast required tariff levels and capital and operating subsidies to ensure financial sustainability of the project companies; (ii) estimate the financial internal rates of return (FIRRs) of project investments; (iii) demonstrate that any estimated tariff increases will be affordable for low-income households; and (iv) show that the SMG has sufficient financial resources to meet all capital and operating subsidy requirements under the project. The economic analysis presents a cost-benefit analysis for the QCSRWP. Summary results follow, with details provided in Annex 9.

37. Project level Financial Analysis. FIRRs were prepared for the project’s QCSRWP and Bailonggnang South Sewer components, considering total incremental revenues from both tariffs and subsidies and capital and operating costs under a 25-year project lifespan. Projected base case FIRRs for all components are about 6 percent, which is the level required for similar investment projects in China.

38. Entity Level Project Financing Plan. Both project implementing entities (the QCSC and the SMSC) will require ongoing operating subsidies from the SMG and Shanghai Chengtou Corporation. This reflects the significant size of the investments being undertaken in the raw water sector (RMB 16 billion for the QCSRWP) and the wastewater sector (RMB 10 billion for wastewater collection and treatment expansions). It also reflects the relatively low water and wastewater tariffs in Shanghai (although both tariffs were recently increased). The current QCSC raw water tariff of RMB 0.37/ m3 is estimated to constitute only about one third of the needed full cost recovery tariff of RMB 1.00/ m3 in 2010. This implies an operational subsidy of RMB 0.63/m3 unless the actual raw water tariff is increased.10 At the SMSC, despite recent tariff increases for non-domestic consumers and anticipated increases for domestic customers in 2009, financial self-sufficiency remains a challenge, and the SMSC is projected to require operating subsidies through 2014.

39. Affordability. Projected tariff levels are affordable by low income households, as combined expenses on water and wastewater tariffs for these households are around 0.5 percent of total household income, which is well within the generally accepted margin for affordability of up to 5 percent. The affordability analysis indicates that there is room to increase water and wastewater tariffs to levels that would support the financial viability of water and wastewater companies. This, in turn, would create space for higher actual raw water tariffs to be charged to the WSCs.

40. Subsidies. Under the current raw water and wastewater tariffs, operating subsidies from the SMG and Shanghai Chengtou Corporation will be important to the QCSC and the SMSC. Base case financial projections indicate that the required subsidy will reach RMB1.7 billion in 2011, which constitutes 0.63 percent of the SMG’s local fiscal revenue. Though the SMG is able to afford this operating subsidy, the SMG needs to strategically decide the extent to which subsidies should support the water and wastewater sectors, especially as current water and wastewater tariff levels are relatively low.

10 However, the evolution of Shanghai’s raw water tariff needs to be considered in conjunction with its impact on Shanghai’s Water Supply Companies (WSCs) which are already experiencing financial stress. 13

41. Economic Analysis. Economic cost-benefit analysis was conducted for the QCSRWP. Though a Willingness-to-Pay (WTP) survey was not conducted during project preparation due to political and social sensitivities, estimates indicate that the QCSRWP would produce a high economic return if WTP were comparable to what is paid in other Chinese cities. The QCSRWP was assessed as economically feasible; it will achieve an economic internal rate of return (EIRR) of more than 10 percent, provided the actual WTP for each user category is at least 2.4 times the current water tariff rate. If the WTP were similar to Beijing’s current water tariff levels, the EIRR would be over 15 percent.

B. Technical

42. QCS Raw Water Supply System. Water demand in Shanghai will increase from 6.8 million m3/d in 2007 to 8.9 million m3/d by 2020. However, no more raw water is available to be abstracted from the Upper Huangpu River through Shanghai’s two main intakes (Da Qiao and Min Hang), or through several smaller intakes. Further, water deterioration in recent years precludes further expansion. The location of the Da Qiao intake, the current main water intake, is suboptimal in terms of available water from upstream sources. Shanghai thus concluded that it should investigate development of other resources. These resources could include wastewater reuse and desalination, greater use of minor local river systems, and significant abstractions from the Yangtze River to the north of the city. Detailed analysis showed that abstractions from the Yangtze represent the only practical and cost effective source of raw water.

43. However, Shanghai’s potential abstraction points along the Yangtze River were found to have unacceptable salinity during periods of low flow, requiring sufficient storage to ensure reliability. Shanghai proved unable to negotiate a more reliable abstraction point with less salinity further upstream; such a point would be in an adjacent province, outside the control of Shanghai, and involve a costly transmission system, which might prove unreliable. The optimal technical option to supply Shanghai with the 7 million m3/day of needed additional water was to abstract from a point on the Yangtze where the city could: (i) obtain clear rights and control; (ii) provide sufficient local riverbank storage to ensure fresh raw water during periods of salinity; and (iii) enhance the distribution of raw water to existing and new water treatment plants. Remodeling and strengthening the existing treatment and distribution systems would also be required. This option was assessed to be the least cost solution.

44. QCS Raw Water Distribution System. A detailed hydraulic and technical analysis of the proposed Nanhui Conveyor was undertaken to optimize pumping energy, ensure system security, and maximize hydraulic efficiency. The number of pumping stations was significantly reduced, and pipe diameters optimized. In addition, different pipe laying and tunneling/thrust boring methods were assessed for their costs, technical feasibilities, and land and resettlement requirements. It was concluded that to ensure long-term raw water supply and system security, Shanghai would need to construct a ringed system in stages. However, the pace of increased demand for raw water (see above) was such that the optimized QCS system, including the Bank- funded Nanhui Conveyor, can meet current technical requirements. Where steel pipes are to be used, the provisions for corrosion protection were fully assessed and considered satisfactory. The location of the conveyor aims to minimize citizen disruption and land and resettlement costs, and tunneling and thrust boring/pipe jacking techniques will be adopted where appropriate.

Shanghai’s water supply policy requires that important pipelines are laid in duplicate to ensure system security. Though this policy does not necessarily represent a least cost approach, it was found acceptable as a surrogate risk mitigation measure.

45. Water Security and Conjunctive Use. Shanghai developed plans to address concerns about water security by introducing the conjunctive use of raw water sources. Several sub- projects under the overall QCS raw water scheme add to Shanghai’s water security. The specific sub-project which relates to the Bank financed Nanhui conveyor is the planned construction of an additional water conveyor connecting the Yangqiao and Jinhai/Nanhui conveyors. This link is under the12th Five-Year Plan. The link will ensure system viability in the event of a failure of the QCS water intake and pumping stations by providing access to alternative raw water sources, including the existing Da Qiao raw water intake. Under the APL3’s IST component, this sub- project will be further reviewed as a part of efforts to enhance the security of water supplies. In addition, Shanghai plans to implement a program that links water distribution and treatment plants served by Da Qiao to the QCS system, and to improve raw water quality in the Upper Huangpu. These measures are important initiatives to enhance the security of Shanghai’s water supplies.

46. The QCS Reservoir storage and pumping arrangements (fully financed by Shanghai) were reviewed conceptually and considered generally satisfactory. The system controls required for pumping and distribution management are complex, and will require careful assessment. However, Shanghai has over a century of experience in water supply management. The raw water treatment requirements for the new Yangtze abstraction system will be based on the experience gained from a decade operating the Chenhang system, which abstracts from the Yangtze. In addition, the SMG should continue efforts to enhance water conservation and water demand management to ensure sustainability of water resources and the environment, and the economic efficiency and social development of Shanghai.

47. Wastewater System Enhancements: Bailonggang Southern Trunk Sewer. The key deficit identified in the Wastewater Management Master Plan is inadequate capacity in wastewater collection serving the outer southeastern section of Shanghai. This outer metropolitan area has undergone significant development, driven partially by the economic success of and regional development related to the Pudong International Airport and major investments in the new Nanhui deepwater port. In addition, the economic growth of the Minhang and Wujing areas on the west side of the Hunagpu has brought existing wastewater collection services near capacity. Consistent with the Master Plan, flows would be intercepted and conveyed to wastewater treatment facilities at Bailonggang, where treatment facilities are expanding. The existing Bailonggang Watewater Treatment Plant (WWTP) has a capacity of 1.6 million m3/d, and SMSC plans to expand it to 2.4 million m3/d by 2012 to meet the future demand.

48. Although the project supports investment in the Bailonggang Southern Trunk Sewer, it also calls for construction of secondary sewers and linked sewer connections to convey wastewater from buildings, industries, and dischargers to the trunk sewer. Consideration was given in the Master Plan to treat large volumes of wastewater in dispersed local WWTPs, but this strategy was found to be suboptimal both financially and environmentally. The location of the conveyor systems will aim to minimize citizen disruption and land and resettlement costs; and

tunneling and thrust boring/pipe jacking techniques will be adopted where appropriate. The construction industry in Shanghai has considerable experience in addressing the challenges of large scale infrastructure in developed and developing metropolitan areas. Implementation proposals were thus considered rational for strengthening environmental sustainability and economic competitiveness.

C. Fiduciary

49. Financial Management. The Financial Management Specialist (FMS) conducted an assessment of the adequacy of the project financial management system. The assessment, based on guidelines issued by the Financial Management Sector Board on November 3, 2005, concluded that the project meets the minimum Bank financial management requirements, as stipulated in OP/BP 10.02. It was assessed that the project will be able to maintain adequate financial management arrangements acceptable to the Bank. This arrangement, as part of the overall arrangements that the Borrower has in place for implementing the operation, will provide reasonable assurance that the proceeds of the loan will be used for the purposes for which the loan is granted. Financial management risk is defined as the risk that World Bank loan proceeds will not be used for the purposes intended, and is a combination of country, sector, and project specific risk factors. Considering the risk mitigation measures proposed under the project, a “low” financial managment risk rating was assigned to the project at the appraisal stage.

50. Procurement. Procurement for the proposed project will be carried out in accordance with the World Bank’s "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004 and revised in October 2006, and the "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004 and revised in October 2006. Procurement will be subject to provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in Annex 8. The Procurement Plan agreed between the Borrower and the Bank specifies, for each contract to be financed by the Loan, the different procurement or consultant selection methods, needs for pre-qualification, estimated costs, prior review requirements, and timeframes. The Procurement Plan will be updated at least annually to reflect project implementation needs and improvements in institutional capacity.

D. Social

51. The project has significant social benefits and some negative impacts arising mainly from involuntary resettlement. However, special care was taken during project design to minimize resettlement to the extent possible. Required resettlement will be implemented in accordance with the approved Resettlement Action Plans (RAP) and Resettlement Policy Framework (RPF).

52. Following Chinese laws and regulations and the World Bank OP 4.12 on Involuntary Resettlement, the PMO prepared two RAPs for the QCS Raw Water Supply and the Bailongang South Sewer components.11 A RPF was also prepared for projects linked to the Bailongang South Sewer component. Resettlement planning work was carried out by the implementing agencies under the guidance of the Hohai University and the Shanghai Academy of Social

11 Neither the RAP nor the RPF was prepared for the Bailonggang Wastewater Treatment Plant because the wastewater treatment plant is an existing plant. 16

Science. Planning activities included inventory surveys measuring project impact, social economic surveys, and consultations on resettlement and livelihood rehabilitation strategies. In addition, the resettlement framework for the DFV was updated.

53. Major impacts include land acquisition and building demolition. The project will require land acquisition, relocation of houses, compensation for businesses, and relocation of infrastructure. The project will acquire about 561 mu (37.4 ha)12 of land, of which about 100 mu (6.7 ha) are cultivated. The project will require the demolition of 3,413 m2 of housing. Land acquisition and house demolition will impact 290 peoples. Impacts are detailed in the RAPs. Most resettlement impacts in rural areas are relatively scattered and marginal, considering the small scale of civil works and the significant share of household income from non-farm activities.

54. The RAPs (summarized in Annex 10) describe in detail the overall legal framework, project impacts, strategy and action plans for relocation and livelihood rehabilitation, consultations, grievance methods, implementation schedules, costs and budget figures, and institutional and monitoring arrangements.

55. Each project implementing agency will assume overall responsibility for implementing the resettlement program under the supervision of the PMO. An independent monitor will be engaged. All resettlement costs will be financed by the implementing agencies through their counterpart funds.

56. The social economic surveys confirmed that there are no ethnic minority communities in the project areas. Based on this finding, the Bank assessment concluded that this project does not trigger OP 4.10 on Indigenous Peoples.

E. Environment

57. The Project is classified as a “Category A” project. Environment Assessment (EA) reports were prepared in accordance with national requirements and the Bank’s OP/BP/GP 4.01. These reports include: i) the Environmental Impact Assessment (EIA)/Environmental Management Plan (EMP) for the Nanhui Conveyor; ii) the EIA/EMP for the wastewater component; iii) the EIA Summary/Update for the QSCRWP; and (iv) an overall EA Executive Summary of the whole project. In addition, the Environmental Impact Assessment (EIA) Framework of the DFV Operation Manual was updated.

12 One mu is 1/15 hectare. 17

58. The EAs cover baseline information on environmental and socio-economic conditions. They also describe alternatives considered as part of feasibility studies for each component, and address linkage issues. The overall environmental impact of the project is positive. However, some negative impacts may arise during project implementation, including limited impacts on soil, air, water, acoustic environments, flora/fauna, and surrounding communities, mostly during construction. These impacts will be temporary and localized, and proper mitigation measures during construction should minimize or even eliminate them. Preventive measures during the construction and operation phases were prepared and are noted in the EMP.

59. Environmental impacts were also assessed for linkage projects, which include part of the QCSRWP13 and the Pudong Trunk Sewerage that extends from the Bailonggang Southern Trunk Sewer System and the existing Bailonggang WWTP. These projects are considered linkage projects because they are: (i) directly and significantly related to the Bank-funded project, (ii) necessary to achieve the project development objectives, and (iii) planned to be carried out simultaneously with the project. Environmental safeguard documents for all linkage projects were submitted to the Bank for review as part of due diligence. It was confirmed that these projects complied with domestic laws, regulations, and policies. No major issues were found presenting reputational risks to the Bank. The above mentioned EIA Summary/Update of the QCSRWP includes a supplementary EMP (mitigation measures) for the construction and operation of the Qing Cao Sha Reservoir. The EA/EMP for the Nanhui Conveyor, the EA/EMP for the wastewater component, and the EA Executive Summary also address the environmental issues of the linked activities.

60. Two stages of public consultations were conducted for residents and those affected by the proposed project. The consultations took many forms: expert consultations, questionnaires, symposia, interviews, and public hearings. Most of those consulted expressed strong support for the project, and acceptance of short-term inconveniences during construction, such as noise and dust. Consultees were, overall, supportive of measures to improve municipal water supplies and services, and wastewater treatment capacity.

61. Information about the project was disclosed in major local newspapers from May to September 2008. Telephone hotlines were established for the public to access relevant documents and offer comments. The disclosure of EAs was announced in a local newspaper on August 30 and September 4, 2008, and EAs were made available at the PMO, PIUs, public libraries, and on websites. The final English version EA/EMP and EA Summaries were submitted to the Bank and disseminated through the Infoshop in November 2008.

F. DFV Safeguards Framework

62. The performance of environmental and social safeguards was reviewed for DFV sub- projects financed under the Shanghai APL2. Based on this review, the EIA Framework and Resettlement Policy Framework of the Operations Manual were amended to clarify sub-project

13 Linkage activities under QCSRWP include: (i) Qing Cao Sha Reservoir; (ii) raw water conveyor on Chongxing Island; (iii) the raw water conveyor tunnel crossing the Yangtze River; and (iv) the Wuhaoogou raw water pumping station and raw water conveyor of Jinhai. 18 screening with respect to project cycle and institutional arrangements for preparation of EAs and RAPs.

G. Safeguard policies

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

Natural Habitats

63. Activities financed by the IBRD loan are not expected to significantly impact natural habitats. One linked project – the construction and operation of the Qing Cao Sha Reservoir – will, however, affect natural habitats for migratory birds (though none critical under OP4.04). Analysis confirmed that the affected wetland areas are used mainly as back-up habitats for migratory birds under unfavorable weather conditions. Based on discussions with relevant stakeholders, including local ecologists working in the estuary area, appropriate mitigation measures were designed to properly mitigate ecological impacts of the Qing Cao Sha Reservoir on wetland habitats during winter. At this time, the Reservoir may need to store water to avoid water quality degradation from sea water intrusion. A detailed analysis of the impacts and mitigation measures was completed for the Qing Cao Sha EA Summary/Update, including a supplementary EMP (mitigation measures) to be executed by the implementing agency. Assuming proper implementation of the supplementary EMP, the Reservoir should generate positive ecological impacts on wetland habitats for migratory water birds, as it would create a large wetland area free from human disturbance that may be used by migratory water birds.

Dam Safety

64. The Nanhui Raw Water conveyor sub-project triggers the Bank’s safeguard policy on Safety of Dams (OP 4.37), as the sub-project depends on the QCS Reservoir for its raw water supply. Dam safety issues were reviewed by the Dam Safety Management Centre of the Ministry of Water Resources and the Nanjing Institute (NI) in accordance with OP 4.37. Liquefaction analysis was also carried out. The findings from the NI and the liquefaction analysis concluded that requirements of OP4.37 were met. QCSC also confirmed that the potential impacts of climate change, especially on sea levels, have been reflected in the height of the dam of the QCS

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed area. 19

Reservoir. In addition, the Design Institute agreed to incorporate the recommendations received during the review into detailed design and operations and maintenance plans.

65. Based on the requirement of OP 4.37, an independent panel of dam safety experts was established, and this panel has been advising the QCSC on matters related to dam safety and operations. The frameworks of the Operations & Maintenance Manual (OMM) and Emergency Preparation Plan (EPP) were discussed and agreed during project appraisal. The QCSC will also carry out workshops with the dam safety experts and the Bank to discuss and finalize the EPP one (1) year prior to the initial filling of the reservoir, and the OMM six (6) months prior to the same. The initial filling of the reservoir is scheduled for April 2010.

H. Policy Exceptions and Readiness

66. The PMO and the implementing agencies have been established. The preparation of detailed designs of project components has substantially advanced. There is no policy exemption.

Annex 1: Country and Sector or Program Background CHINA: Shanghai Urban Environment Project - APL Phase III

A. Background

Sustainable Development in Shanghai

1. The Shanghai Municipality (Shanghai) is China’s premier economic, financial, and industrial center. The city lies at the heart of a major metropolitan region of the Yangtze River Delta in eastern China. The metropolitan region has undergone rapid economic and population growth. In 2006, Shanghai was estimated to have 18.2 million residents,14 and its population is expected to grow to about 24.5 million by 2020. 15 Shanghai’s economy maintained double-digit economic growth over the past fifteen consecutive years. In 2006, its GDP reached RMB 1,037 billion (US$152 billion) and GDP growth was 11.9 percent. Its per capita GDP reached RMB 57,695 (US$8,432), which is the highest among Chinese cities. Though the recent global financial crisis adversely affected the China’s economy, Shanghai is expected to continue relatively steady economic development.

2. Shanghai has been “a model city” for other Chinese cites in growth and innovation. Over the next five years, Shanghai is committed to maintaining “international competitiveness” as a main theme of development, while achieving sustainable development and a harmonious society. The Shanghai Municipal Government (SMG) is emphasizing the importance of improving the quality of life and developing a global-market-oriented economy. The SMG is also focusing on improving the efficiency of land, energy, water and other resource use, and reinforcing environmental protection and pollution control and treatment. Furthermore, Shanghai has confirmed its commitment to building a “harmonious society” by hosting the “World Expo 2010,” which is the first Expo to be held in a developing country.

Box A1.1: Shanghai EXPO 2010: “Better City, Better Life”

Expo 2010 will be held in Shanghai from May 1 until October 30, 2010. The main theme of the Expo is “Better City, Better Life,” The theme “urbanization” addresses the concerns of many developed and less developed countries, given estimates that more than 55 percent of the population will be living in urban areas by 2010.

Shanghai aims to display and share information on its social, economic, cultural, scientific and technological achievements for countries around the world. The city expects 200 countries and international organizations to take part in exhibitions and 70 million people to visit. The World Bank has been assisting Shanghai in EXPO 2010 as a member of the international selection committee of the Urban Best Practice Area (UBPA).

EXPO 2010 will support the vision of a “harmonious city” in China’s 11th Five-Year Plan. Shanghai intends to illustrate the harmony between men and nature, and between past and future. (Source: http://en.expo2010china.com/expo/expoenglish/oe/es/index.html and the World Bank)

14 Out of 18.2 million peoples, the floating population accounts for 4.7 million (Shanghai Statistical Yearbook 2007). 15 “Shanghai Urban Environmental Project - APL3 Report No.1 – Shanghai Population Projection to 2030” (April 2008) (A report submitted by NJS Consultants as a deliverable of consulting services for APL3 project preparation.). 21

Metropolitan Management Challenges in Shanghai

3. Shanghai faces complex management challenges linked to its growing population and economy. One of its principal urban management challenges includes the integrated management and development of its core and suburban areas. To date, the core city16 and suburban areas17 have exhibited different development patterns. Since the 1990s, the SMG has promoted the de- concentration of population and enterprises from the core city to suburban areas, including development of district towns and industrial relocation. Suburban areas are growing much faster than the core city: population growth in the core city and the suburbs was -6.3 percent and 23.0 percent, respectively, over the past five years.

4. Although Shanghai’s suburban areas have developed rapidly, their infrastructure lags behind. This is partially due to Shanghai’s city planning, which has emphasized development in the core city rather than suburban areas. Major environmental infrastructure investments are concentrated in the core city, while suburban areas depend on small-scale individual systems that are often not planned and managed in an integrated manner. To balance development between the core city and the suburban areas, and to build a competitive and harmonious city, Shanghai needs to have a strategic approach for integrated urban and suburban area development.

5. These challenges are exacerbated by the fact that climate change is not only a global concern but a real threat to Shanghai. According to a recent OECD report, Shanghai is one of the top ten port cities in the world most exposed to possible sea level rise, coastal flooding, and large scale typhoons.18 This has real implications for the design of Shanghai’s infrastructure investments, especially in water resource management and wastewater treatment, which often have life spans of 30 years or more. Moreover, Shanghai needs to pay increasing attention to how climate change impacts its environmental infrastructure planning and management.

6. Shanghai is vulnerable to flooding, especially in low lying areas, and the threat of flooding will increase from climate changes. Flooding may likely be caused by sea surges and tidal flooding, exacerbated by heavy rain and a potential rise in sea level. This flooding could overflow drainage systems and cause rising groundwater. It is possible that a combination of these flood sources may occur simultaneously.

7. Planning will need to account the increased risks of flooding. It will be important that Shanghai assesses required flood defenses and implements improved flood management systems. Flooding barriers and storage and discharge of flood water need to be considered. The efficiency

16 It refers as Shanghai Proper (上海市区), which includes the following 9 districts: Huangpu District, Luwan District, Xuhui District, Changning District, Jing’an District, Putuo District, Zhabei District, Hongkou District, and Yangpu District. 17 It refers to the following 9 districts and 1 county: Pudong New District, Baoshan District, Minhang District, Jiading District, Jinshan District, Songjiang District, Qingpu District, Nanhui District, Fengxian District, and Chongming County. 18 R. J. Nicholas, et all. “Ranking Port cities with High Exposure and Vulnerability to Climate Extremes.” Environment Working Paper No.1. 22

of flood response measures and the ability to recover after a flood are critical in mitigating the human and economic damages of flooding.

Shanghai’s Development Response

8. The SMG recognizes these complex challenges and is committed to building a more resource-efficient and environmentally friendly city. In its 11th Five-Year Plan (2006 – 2010), Shanghai outlines a number of initiatives to improve resource and environmental management, including land, energy, and water efficiency, enhance environmental protection and pollution control/treatment, and accelerate environmental infrastructure development in suburban areas. Shanghai’s 3rd Three-Year Environmental Action Plan (2006-2008) reemphasized these priority areas and outlines an investment program of RMB 40 billion across a number of sectors, including water supply, wastewater and solid waste. It also emphasizes the importance of technological and institutional innovation, and enhancement of policy guidance and legislation to support these initiatives. With these visions, Shanghai aims to become a pilot city for the national circular economy program, and to strengthen regional ecological and environmental protection and rehabilitation, while maintaining rapid economic growth.

9. Shanghai’s sector strategies for environmental management gradually shifted from focusing on providing physical infrastructure to rationalizing the overall sector structure. One critical step took place in 2005 when the SMG established a clearer separation between the role of sector policymaking and regulation, and utility investment and management. In the water and wastewater sector, the ownership of all utility companies was transferred from Shanghai Water Authorities (SWA) to Shanghai Chengtou Corporation.19 As a result, Shanghai has now fully corporatized all its water and wastewater companies under the umbrella of Shanghai Chengtou Corporation, with the SWA being able to increasingly focus on strategic aspects of Shanghai’s water and wastewater sector development policy and planning. Shanghai Chengtou Corporation and its subsidiary companies have also been at the forefront of introducing innovative approaches to environmental management through, for example, issuing China’s first corporate bond in the environmental infrastructure sector, and introducing Private Participation in Infrastructure (PPI) schemes.

Previous Assistance from the Bank

10. The Bank has been supporting Shanghai in addressing its complex environmental management challenges since the 1980s. A total of five Bank-funded projects have been implemented. The areas include urban wastewater investment (First and Second Shanghai Sewerage Projects, SSP1 and SSP2) and urban water supply and solid waste management (Shanghai Environment Project, SEP). Furthermore, the Bank committed an APL of US$700 million comprising three phases:20 APL1 (US$200 million, May 2003); APL2 (US$180 million,

19 Shanghai Chengtou Corporation is an Urban Infrastructure Development Corporation (UDIC) in Shanghai, and it is responsible for investment, construction and operation of urban infrastructure. 20 The total loan amount of APL 1-3 is US$580 million, leaving US$120 million uncommitted. NDRC encouraged Shanghai to raise US$120 million from financing sources without a sovereign guarantee, such as from the IFC. However, such non-sovereign financing has not materialized thus far; mainly because financial terms of other sources are less attractive than the IBRD loan. 23

June 2005); and APL3 (US$200 million, FY09). Through the APL1 and the APL2, the Bank has been supporting several priority urban environmental infrastructure investments in the water supply, wastewater, and solid waste sectors. The Bank also supported innovative approaches, including the corporate bond issuance and PPIs mentioned above, and introduced the District Financing Vehicle (DFV), a financing mechanism dedicated to addressing critical environmental infrastructure needs in the fast growing suburban areas of Shanghai. Based on the successful Bank-Shanghai partnership in the first two phases of the APL program, the APL3 aims to further contribute to Shanghai’s commitment to building a more resource-efficient and environmentally friendly city.

B. Sector Strategies

Water Demand and Supply

11. The quality of water in the Huangpu and the Yangtze Rivers, the two main raw water sources for Shanghai, has been deteriorating. Several factors are affecting the quality and yield of these sources: excessive abstractions and uncontrolled pollution from regional development and urbanization in the upper catchments; the tidal nature of each river; effects of typhoons; and saline intrusion in the Yangtze River estuary. In addition, numerous cities upstream discharge wasterwater, in some cases partially treated or untreated, into the Yangtze River. The Yangtze River also receives large quantities of pollutants from agricultural run-off. These factors present Shanghai with unusual and hard-to-manage challenges as the “last water user.”

12. Despite the deterioration of water quality, urban water demand is increasing so rapidly that Shanghai will face insufficient raw water in the near future. Based on the 2000 census and a 2005 survey, annual population growth in Shanghai is 1.7 percent. If the city continues to grow at the current pace, the total population is estimated to reach approximately 24.5 million by 2020. Furthermore, water production per capita and per day is 385 liter in Shanghai, which is relatively high compared to 200 liter in Paris and 325 liter in London. If no water saving measures are implemented, water demand will increase from 6.8 million m3/d in 2007 to 8.9 million m3/d by 2020. In order to supply 8.9 million m3/d, the maximum raw water required will be 13.6 million m3/d. The total capacity of the two existing raw water sources (i.e. Daqiao Intake and Chenhang Reservoir) in 2005 was 6.3 million m3/d.21 This means that by 2020, Shanghai needs to find additional raw water supply of about 7.3 million m3/d.

21 There are additional raw water source intakes of up to 5.5 million m3/day which are mainly used for stand-by purposes. Given that the raw water quality in these intakes is not good, SMG aims to replace them with new raw water sources, specifically through the QCS scheme. 24

Figure A1.1: Water Demand and Raw Water Requirement m3/day 16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 2000 2005 2010 2015 2020 Year QCS Chenhang Daquiao Maximum raw water requirement

(Source: Project preparation documents and the World Bank team’s estimate)

13. The above analysis highlights that Shanghai should adopt and implement a comprehensive water resource management strategy to meet future demand and supply adequate water to its citizens. The proposed strategy has three focus areas.

14. First, Shanghai needs to find an additional source of raw water. In response, Shanghai is constructing a new intake, reservoir, and distribution facilities (i.e. QCSRWP) to abstract and distribute raw water from the Yangtze River. This new source and the existing two sources will together be able to supply 15 million m3/d of raw water. The SMG gives high priority to complete this project on schedule, as it will provide an adequate volume of good quality water not only to more than half the population of Shanghai, but also to the site of EXPO 2010.

15. Second, Shanghai needs to adopt a conjunctive use of the existing raw water sources, together with the Qing Cao Sha Reservoir system. The conjunctive use includes the network integration and the adjustment of water treatment facilities and operations. This will ensure flexible provision of raw water, and enhance water supply security in Shanghai. Moreover, initial estimates show that conjunctive use may lead to cost savings. Although the construction of the QCSRWP has already started, Shanghai has indicated that it will implement a conjunctive use strategy in phases.

16. In order to ensure water supply security through conjunctive use of different sources of water, the SMG, Chengtou and the Bank project team considered several options. The initial

option proposed was a deep ring main system. However, this proposal was rejected for following four reasons: (i) technical concerns on the quality of the raw water in the deep main ring; (ii) lack of precedents in applying deep ring systems in large scale raw water conveyor projects; (iii) insufficient data to accurately undertake cost-benefit analyses of the different options; and (iv) lengthy procedural requirements for changing the method already approved by the SMG, particularly given the tight schedule for completing a major part of the QCSRWP before EXPO 2010. As an alternative option, the SMG and Chengtou plan to construct a raw water pipe from the Jinhai pumping station to Yangqiao raw water conveyor by 2015 to ensure water supply security in case of any failure of the Qing Cao Sha water intake.

17. Third, Shanghai needs to introduce water conservation policies. The tables below show the current water consumption level and water tariff in Shanghai. It is clear that the average water consumed per day has been increasing steadily over the past fifteen years. On the other hand, Shanghai has a relatively low tariff compared to other cities in China. The current water tariff is RMB 1.03 for domestic use and RMB 2.0 per m3 for non-domestic, after a recent increase enabcted in April 2009. In Beijing, they are RMB 2.8 and RMB 2.1, respectively.

Table A1.1: Trends in Water Sales and Consumption in Shanghai Indicators 1990 2000 2005 2006 Sales Volume of Tap Water (100 million m3) 12.25 19.75 22.81 23.30 Industrial Use 5.90 5.49 6.42 6.43 Domestic Use 6.36 14.26 16.39 16.88 Daily Average Water Consumed (10,000 m3) 335.60 541.20 624.80 638.50 Source: Shanghai Statistical Yearbook 2007

Table A1.2: Comparison of Water Tariff in Major Cities in China (as of April 1, 2009) (unit: per m3, RMB) Domestic Industrial Institutional Commercial Shanghai 1.03 2.0 2.0 2.0 Chongqing 2.1 2.35 2.1 2.1 Beijing 2.8 4.1 3.9 4.1 Source: Project preparations document

18. In response, Shanghai identified major goals in water conservation policy in the 11th Five-Year Plan. These include: (a) demand management through water tariff increases, while keeping tariffs for lifeline consumption of low income households low; (b) re-organization of water system management (water companies will become progressively responsible for the secondary water supply system); (c) unaccounted-for-water (UFW) control,22 and reduction of water leakages; and (d) recycling of used industrial water. Shanghai has implemented some of these water conservation measures, including water tariff increases for industrial and commertial/ institutional users. For domestic users, Shanghai has implemented an increasing block tariffs system, and a water tariff increase is currently under consideration.23

22 The UFW for Shanghai is above 30 percent in the project preparation report, prepared by the SMG’s consultant. 23 Water tariff increase for domestic user is under public hearing from March 27 till April 27, 2009. Based on the hearing, the price bureau will determine the price of water tariff, in consultation with the SWA and the SMG. 26

19. Quality of raw water is another major issue for Shanghai. Due to the economic and agricultural development in surrounding areas in Jiangsu and Zhejiang Provinces, as well as eutrophication in Taihu Lake (the source of the Huangpu River), quality of the raw water from the upper catchments has deteriorated such that its water does not satisfy the national standard for raw water. The main causes of water pollution are: (i) domestic animal waste, (ii) untreated domestic wastewater from households, (iii) farm straw, and (iv) non-point agricultural run-off from fertilizers and pesticides. Urgent action is required to manage livestock waste and to implement non-point source pollution control facilities.

Box A1.2: Shanghai Agricultural and Non-point Pollution Reduction Project (SANPR)

In response to the problem of non-point source pollution, the SMG is currently preparing a pilot project with the GEF. The project objectiv is to demonstrate effective and innovative pollution reduction activities in Shanghai’s rural areas in order to reduce the rural/ agricultural pollution load to the East China Sea. It covers: (i) comprehensive management (collection, treatment and resource recovery/ waste-to-energy) of livestock wastes; (ii) rural domestic wastewater treatment; (iii) recovery and use of straw as a resource; and (iv) reduction in the use of chemical fertilizer and chemical pesticides.

Currently, the project is under preparation with the GEF, and is expected to commence in 2009. The result of the preparation phase would be a clearer understanding of the pollution problems to be addressed, their nature, quantity, load and geographic distribution, and the technologies to use. The implementation phase would serve as a demonstration of the approaches and technologies applied. The dissemination and replication of these activities on a large scale in future phases of the APL would contribute to improved water quality in the East China Sea.

Wastewater

20. In the wastewater sector, one of the major issues is the lack of capacity of existing sewerage systems to cope with rapid urbanization and population growth. In urban Shanghai, there are 16 wastewater treatment plants with a total capacity of 4.3 million m3/day, which treat wastewater totaling 3.7 million m3/day, or 84 percent of wastewater volume generated in 2007. The Shanghai Municipal Sewerage Company (SMSC) is responsible for sewage collection, sludge treatment, and wastewater tariff collection in the core urban area of Shanghai.24 The situation is worse in the suburban areas: the SMSC treated 0.8 million m3/day, which count for only 46 percent of the total volume generated in 2007. The average percentage of wastewater treated in urban and suburban areas is 73 percent.

Table A1.3: Summary of Wastewater Treatment Sector in Shanghai (2007)

Urban Suburban Total Number of plants 16 32 48 Design capacity (million m3/day) 4.3 1.2 5.6 Wastewater treated (million m3/day) 3.7 0.8 4.5 Plant utilization rate 85% 68% 81%

24 Effective April 1, 2009, SMSC was merged with three wastewater operating companies (North, South, and Central Wastewater Operating Companies), while a new wastewater treatment company, called Chengtou Wastewater Treatment Company, was created to operate all the SMSC-owned wastewater treatment plants. SMSC became responsible for all the wastewater operations in Shanghai, except for wastewater treatment operations. SMSC remains the owner of all the wastewater related assets in urban Shanghai. 27

Wastewater treated 84% 49% 73% Source: Shanghai Municipal Sewerage Company

21. Shanghai needs to expand its wastewater collection and treatment system to ensure environmental sustainability and underpin economic competitiveness. The Wastewater Master Plan (2001) provides a wastewater sector development strategy through 2020. According to the Master Plan, Shanghai will adopt a separate system for the newly built system, and the boundary between the existing combined and separate systems will be clarified. The existing combined facilities will be improved. The individual WWTPs in urban areas will gradually be replaced with more centralized WWTPs. The SMG has been investing heavily in the wastewater sector through collaboration both with the World Bank and the Asian Development Bank over the past few decades. Ultimately, it plans to increase wastewater treatment from 73 percent in 2007 to 85 percent by 2010.

22. Moreover, there is a mix of combined and separate wastewater collection systems in Shanghai. Even in the separate system, many sewerage pipes are connected to storm water pipes. Hence, the city is prone to overflow of wastewater during the flood season, which is a major environmental concern. Another problem in rural areas is that the construction of treatment facilities in rural areas does not comply with pipeline construction. This leaves some potential areas not connected to the treatment facility, which causes underutilization of the treatment facility.

23. One of the priority projects is expansion of the wastewater collection capacity serving the outer southeast area of Shanghai. This region has experienced significant development, driven partially by the economic success and consequent regional development related to the Pudong International Airport, and major investments in the new Nanhui deepwater port. The sewer in the Puxi section has experienced flooding during rainy season. This means that existing wastewater collection services in that area are nearing capacity and need to be augmented, as does treatment capacity.

24. To respond to the potential threat posed by climate change, Shanghai has prepared an 11th Five-Year Water Sector Emergency Response Plan, which describes actions that water supply and wastewater utilities (including drainage) take in response to a major event, such as a natural disaster or a man-made emergency. The impacts of climate change and related adaptation measures will be also considered in the water provision security enhancement sub-component of IST component under the APL 3.

25. In addition, unlike in the water sector, Shanghai has been at the forefront of introducing wastewater tariffs. It was one of the first cities in China to introduce a wastewater tariff in the late 1990s, and has raised wastewater tariffs regularly since then. In April 2009, the SMG approved an additional increase in the wastewater tariff: wastewater tariffs for non-domestic users were increased by an average of RMB 0.6/m3, or by 50 percent of existing tariff levels. With this increase, non-domestic tariffs will reach RMB 1.8/m3 for industries and RMB 1.7/m3 for institutions.

C. Urban Environmental Infrastructure: Institutional and Financial Challenges

26. The scale and pace of urban development Shanghai is facing is unprecedented in China. To cope with growing population and rapid industrialization, Shanghai has been investing heavily in urban infrastructure. From 1989 to 2004, RMB 540 billion was invested in urban infrastructure, which formed part of the RMB 2,300 billion for all types of fixed asset formation in Shanghai. This indicates that Shanghai has been very successful in mobilizing resources for urban infrastructure, including environmental infrastructure. Shanghai’s future challenge is how to further optimize its approaches to financing these investments.

27. The financing challenges that Shanghai faces are not unique. Like all provincial and municipal governments in China, the SMG cannot borrow directly from commercial banks or the capital markets. As a result, the Shanghai Chengtou Corporation was established in 1992 as an investment and stock holding corporation to raise funds on behalf of the SMG. Chengtou is in charge of implementing infrastructure projects in various sectors, including sewerage, roads, water, wastewater and landscaping. Thus far, Chengtou and its subsidiaries financed RMB 200 billion (US$29 billion) to invest in about 60 large infrastructure projects, including key bridges, road and rail infrastructure besides prominent buildings and real estate development in Shanghai. By the end of 2004, Chengtou had become the biggest governmental investment corporation in Shanghai, and the biggest UDIC in China.

28. Under the APL1 and the APL2, the Bank maintained a dialogue with the SMG on how to improve the financing of urban infrastructure in Shanghai. For example, the APL2 supported the first environmental infrastructure bond issue used to contribute counterpart funds for the APL2 project investments. Under the APL3, the Bank will continue to help the SMG and Chengtou improve urban environment sector performance and its institutional development through the IST components. A specific emphasis will be placed on the institutional and financial dimensions of Shanghai's reform agenda. One critical part of the IST component aims to improve financial and operational efficiency and build institutional capacity at the level of Shanghai Chengtou Corporation and its operating companies through activities dedicated to project management and financial management, asset management, and operation improvement and optimization. Furthermore, these Chengtou focused activities will be complemented by broader SMG-wide IST activities focused on water performance benchmarking and economic regulation, water demand management, water provision security enhancement.

29. Shanghai Chengtou Corporation traditionally focused its investments on the core urban districts. It has only recently begun to address the needs of environmental infrastructure in suburban areas. In the APL2, it established the DFV under Shanghai Chengtou Corporation to help suburban districts develop and implement environmental infrastructure projects. It is based on a centralized mechanism through which a portion of the Bank’s loan can be distributed to district governments and their affiliated companies for long-term financing of environmental infrastructure. The establishment of the DFV allows Shanghai and Shanghai Chengtou Corporation to apply more integrated metropolitan management, including in the fast growing suburbs.

30. In its two years of operations, the DFV has successfully implemented the subcomponents under the APL225 by appraising all the sub-projects and by disbursing about 50 percent of the loan allocated to the sub-component. The Bank found the performance of the DFV satisfactory, including implementation of the environmental and social safeguard framework defined in the operation manual. Building on this significant momentum under the APL3, the DFV will become a programmatic wholesale financing entity under the APL3, where the DFV will independently identify, appraise and approve sub-projects on the basis of technical, financial, environmental and social criteria stipulated in the operations manual revised under the APL3. To utilize the mechanism of the DFV and maximize its impacts beyond the APL 3, the Bank will help the DFV to develop its long-term institutional and financial development strategy, with support of the grant funded by the Dutch Government (See Appendix 1 of Annex 4 for details on DFV performance).

25 During the period, the DFV has delivered 4 projects, Chongming Chengqiao Wastewater Treatment Plant (Phase 1), Chongming Municipal Solid Waste Landfill (Phase 1), Qingpu Huaxin Trunk Sewer (Phase 1) and Qingpu Baihe Trunk Sewer. Moreover, 2 other projects are either preparation or identification stage. 30

Appendix 1: Current Status of the APL1 and the APL2 and Compliance with the APL3 Triggers

1. The Shanghai Urban Environment Project is the first adaptable program loan in China, and has the overall objective of improving environmental conditions in Shanghai by progressive development and implementation of integrated, metropolitan-wide environmental management measures. The total amount of the Bank’s loan for the APL program (APL1-3) is up to US$700 million, and it is divided into three phases.

2. APL1. The project development objectives of the APL1 are to put in place underpinnings and enabling conditions for the SMG to pursue an integrated, metropolitan-wide approach to environmental management. During the implementation of the APL1, regulations were formulated to enhance management of water resources, market-based approaches for solid waste services, development of new financing instruments, and the testing of alternative approaches for improving urban environment services in the suburbs. The APL1 was approved by the Board in June 7, 2003, with the loan amount of US$200 million. Progress on implementation is satisfactory, with about 79 percent of the loan disbursed, as of April 24, 2009. Ratings for progress toward development objective and overall implementation progress are satisfactory.

3. The APL1 comprises five components. Most of the components are completed or have made sufficient progress to be completed before the end of March 2010. A brief description of each component is below: (a) Urban Wastewater Management: to provide separate storm water and wastewater networks in Baoshan, wastewater networks in Yangpu/Hongkou and Pudong, and wastewater interception and treatment at a new wastewater treatment plant at Zhuyuan. (b) Urban Solid Waste Management: to extend the Laogang landfill, and provide ancillary equipment and facilities. (c) Urban Planning and Pilot Upgrading: construction of off-site environmental infrastructure and renovation of buildings in Hongkou District. (d) Upper Huangpu Catchment Management: to support environmental improvements and protect water resources, through construction of wastewater treatment plants and collection systems in three towns in the districts of Fengxian and Jinshan, outside the core Shanghai urban area, to treat wastewater and animal waste. (e) Institutional Strengthening and Training: to provide technical assistance for developing new financial instruments, construction supervision and project management, and institutional and financial strengthening.

4. APL2. In relation to the APL1, the APL2 will further enhance Shanghai’s environmental institutional and policy agenda to: (a) further refine its water supply, wastewater and solid waste sector strategies; (b) expand the municipal government’s environmental management interventions to the greater metropolitan area where the economic and urban population growth is most rapid, and the environmental protection and service levels are lagging; (c) implement the first stage of infrastructure finance initiatives started in the APL1 (i.e., bond finance, the DFV, and continued PPI); and (d) deepen other reform initiatives supported by the APL1, including

heritage protection and air quality. The APL2 was approved on July 5, 2005, with the loan amount of US$180 million. Implementation progress is satisfactory, with about 32 percent of the loan disbursed as of April 24, 2009. The relatively slow disbursement is mainly due to complex technical issues related to sludge treatment facilities. The SMSC is making progress in this area, and it is expected that the disbursement will accelerate in the near future. Ratings for progress toward the development objective and overall implementation progress are satisfactory.

5. The APL2 comprises five components. A brief description of each component is below: (a) Water Supply Management Component: to improve water service coverage and quality in parts of Qingpu District serving about 200,000 residents by expanding the distribution network. (b) Wastewater Management Component: to manage wastewater in the northwest area of Shanghai by renewing and rerouting a trunk sewer interceptor and implementing a phased program to dispose of sludge from two large wastewater treatment plants in an environmentally sustainable manner. (c) Solid Waste Management Improvements: to improve the city’s sanitary standards by closing and rehabilitating two solid waste sites on prime land, and introducing new management tools. (d) Urban Environmental Infrastructure Services Financing (through the DFV): to support environmental infrastructure improvements in suburban districts by establishing a new municipal financial management instrument. (e) Institutional Strengthening and Training: to support a range of strategic studies in water supply, wastewater, and solid waste management, and capacity-building activities.

6. Institutional Reforms. In addition to financing actual environmental infrastructure investments, the APL program has facilitated significant institutional and sector reforms. Among others, major achievements accomplished to date for the APL1 and the APL2 include: (i) preparation of sector master plans (wastewater, solid waste management, air pollution control); (ii) establishment of clear separation between the SMG’s sector policymaking and regulatory functions, and Chengtou’s utility investment and management functions; (iii) wastewater tariff increases; (iv) expansion of Chengtou’s utility services to suburban districts through capital participation in district utility companies; (v) establishment of the DFV for financing utility investments in suburban districts and successful sub-project financing; (vi) issuance of the first corporate bond in the urban wastewater sector in China by Chengtou; and (vii) PPI for infrastructure investments.

7. Status of Triggers for APL3. The APL program defined a set of triggers for progressing from one phase to the next. As for the APL2, APL3 triggers were designed to track progress towards the overall APL program objectives. The APL3 requires that 4 out of 6 triggers need to be met. In addition, triggers 1, 2 and 3 must be among the 4 triggers fulfilled.

8. During project appraisal, compliance with the APL3 triggers was assessed. Critical APL program objectives, which are reflected in the triggers, included the development of infrastructure financing mechanisms; the institutional evolution of the water and solid waste

32 sector; and specific topic areas, such as extending water services to underserved areas, improving sludge management practices, and the promoting air pollution control.

9. The following summarizes the key sector developments relevant to infrastructure financing (trigger 1), the solid waste sector evolution (trigger 3), the water sector evolution (trigger 4), and air pollution control (trigger 6). The state of compliance on each trigger is summarized in Table A1.4. The required information on assessing compliance with triggers 2 and 5 is also provided in Table A1.4.

Financing Shanghai’s Environmental Infrastructure (Trigger 1)

10. Shanghai has been moving towards financing its environmental infrastructure in a more sustainable manner. A critical concern at the time of the APL project design was the heavy reliance on short-term financing for infrastructure. Rolling-over such short-term financing led to a mismatch between assets and liabilities on the balance sheets of Shanghai’s infrastructure companies. Furthermore, long-term financing sources were only scarcely available, especially in underserved suburban districts where much of Shanghai’s environmental infrastructure investments were projected to take place. During the time of the APL implementation, Shanghai has moved its infrastructure financing reform agenda forward and is beginning to introduce a more market-oriented financing system for urban environmental infrastructure investments.

11. Since its inception in the early 1990s, Shanghai Chengtou Corporation has issued at total of 17 corporate bonds raising RMB 18.8 billion. More recently, Shanghai Chengtou Corporation expanded its bond issuing practices into urban environmental infrastructure. In 2006, Shanghai Chengtou Corporation issued the first ever Chinese corporate bond focused exclusively on water and wastewater. The bond raised RMB 1.5 billion and had an interest rate of 4.25 percent and a maturity of 15 years. The bond issue was supported by the APL2 and technical assistance provided by United States Trade and Development Agency (USTDA). In 2008, Shanghai Chengtou Corporation issued an additional “green” bond dedicated to environmental infrastructure projects across a number of environmental sectors. The bond issue amounted to RMB 6 billion, with a maturity of up to 15 years.

12. Shanghai Chengtou Corporation began to provide longer term financing to district level investments through the creation of the DFV (also supported under the APL2). The DFV has financed a total of 4 projects, with on-lending (to date) comprising about US$18 million of World Bank loans. Going forward, the DFV will continue to provide long term financing to suburban districts during the APL3, and will place a particular emphasis on arranging co- financing for its investments to further extend overall leverage. However, providing long term financing on a stand-along basis, outside the context of the DFV, still remains a critical challenge, especially for some of the smaller environmental infrastructure investments in suburban Shanghai.

13. Shanghai has also been at the forefront of introducing PPIs in urban environmental infrastructure management. Some of the landmark PPIs include: Shanghai Chengtou Corporation’s 2002 sale of 50 percent of equity of Pudong Water to Veolia, and Shanghai Chengtou Corporation’s 2007 sale of a 40 percent equity stake in Shanghai Huanchang

Renewable Energy Company (solid waste incineration) to Veolia. The Laogang Solid Waste Landfill is also operated by a joint venture between Shanghai Chengtou Corporation and the Shanghai Environment Group (SEG), a subsidiary of Shanghai Chengtou Corporation, owning 30 percent, Veolia 60 percent, and Citic (HK) 30 percent.

14. To enable and further promote market based urban environmental infrastructure financing solutions, Shanghai worked on promoting financial sustainability by increasing user fees and tariffs. Shanghai had been one of the first cities in China to introduce a wastewater tariff in the late 1990s and has since raised wastewater tariffs regularly. In April 2009, the SMG approved an additional increase in wastewater tariffs: wastewater tariffs for non-domestic users were increased by an average of RMB 0.6/m3, or by 50 percent of existing tariff levels. Under this increase, non-domestic tariffs will reach RMB 1.8/m3 for industries and RMB 1.7/m3 for institutions. The SMG is also approved an increase in water tariffs for non-domestic customers in April 2009 after not having increased the tariff for seven years. The SMG is working on a water tariff increase for domestic customers, although the exact timing for implementating the increase is uncertain.

Institutional Evolution of the Solid Waste Sector (Trigger 3)

15. Institutional reform and marketization of the solid waste sector also advanced significantly. At the time of APL program’s design, most of Shanghai’s solid waste sector was run exclusively by government departments. A key concern was to promote the corporatization of the solid waste sector and to improve regulation, including through clearer rules for the management of concession contracts.

16. Up to 2003, the Shanghai’s Sanitation Bureau (SCESAB) was in charge of managing all aspects of solid waste. In 2003, the SMG decided to separate the role of government into agencies responsible for the planning, policy formulation, and supervision of the solid waste sector (by SCESAB) on the one hand, and operating companies on the other. The Shanghai Environment Group (SEG), a subsidiary of Shanghai Chengtou Corporation, has become the main company responsible for solid waste sector operations.

17. To execute its responsibilities, the SEG has entered into joint ventures, most significantly by forming a joint venture with Veolia and Citic (HK) (SEG holds 30 percent, Veolia 60 percent, and Citic 30 percent) for operating the Loagang Landfill (China’s largest landfill). 33 percent of total domestic solid waste in Shanghai is disposed in Laogang. The remaining 67 percent is disposed, principally, in incineration plants in Jiangquiao and Yuqiao, and a compost facility in Meishang. The Jiangquiao incineration plant is run by Shanghai Huanchang Renewable Energy Company, also a joint venture between the SEG and Veolia (with SEG owning 60 percent and Veolia 40 percent).26

26 In terms of transfer, all solid waste transferred by trucks is the responsibility of the SEG. There is also a large barge transport system in Shanghai (most of the solid waste transported to Loagang is by barges). The SEG is currently investing in two major ports to optimize the transport by barges. In terms of primary collection: this still remains the responsibility of district level Sanitation Bureaus, as is common across China. 34

18. To govern the increasing number of concession management arrangements (there are now 13 concession contracts in the solid waste sector in Shanghai), the SMG adopted, in July 2008, Government Order No. 5 on the “Shanghai Municipal Solid Waste Collection and Disposal Management Method”. This order specifies the service contract and bidding arrangments for solid waste management operations in Shanghai, including the concession management arrangments. The Government Order covers the overall administrative framework for contract bidding procedures, eligibility criteria, pricing (etc.), and the corresponding implementation regulations, including contract and service supervision.

19. All of the above initiatives have contributed to clear improvements in service levels in Shanghai’s solid waste sector. 63 percent of total domestic solid waste is disposed of in a sanitary manner in 2007, up from 38 percent in 2005. 100 percent of solid waste is collected, and all waste is transported in a satisfactory manner (i.e., 100 percent is transported in enclosed containers versus more open transport modes).

Institutional Evolution of the Water Sector (Trigger 4)

20. Shanghai’s water sector challenges mirror those of the solid waste sector, though the institutional reforms in the water sector had been further advanced at the time of APL program’s design. For example, the water sector (both water supply and wastewater) had already been fully corporatized.

21. The Shanghai Water Authority (SWA) was established in 2000 as the central agency in charge of integrated management of the water sector, covering water resources, water supply, and wastewater. Initially, the SWA was responsible for operating all water, wastewater, and water resource companies. In 2005, as was the case for solid waste, the SMG decided to separate the responsibilities for sector planning, policy, and supervision from investment and operation. Since 2005, all water companies are subsidiary companies of Shanghai Chengtou Corporation. As a result, the SWA can more exclusively focus on sector management, particularly its core areas: (i) sector master planning; (ii) policy setting and regulation; (iii) standard setting and supervision; (iv) cooperation with the price bureau on tariff issues; and (v) legislation enforcement and supervision.

22. Water service improved. Wastewater collection and treatment increased from 63 percent to 73 percent between 2003 and 2007, and the treatment rate is expected to be higher than 80 percent by 2010. In water supply, some underserved urban areas were connected to an improved water distribution system (such as in Huangpu, see also table A1.4/trigger 2). Shanghai also improved the quality of its water supply in suburban areas: all water supply companies in suburban areas are now required to take water from designated sources, and meet specific water quality standards. In the core urban areas, the renovation of secondary distribution sewers (pipelines, water tanks, pipes in residential buildings) led to better water quality and a reduction in water losses.

Air Quality Pollution Control (Trigger 6)

23. Though not an investment focus of the APL program, air quality improvements were considered a fundamental element in improving the overall urban environment in Shanghai. The APL program, therefore, includes a specific trigger on air quality.

24. Shanghai prepared an Air Quality Report which contains a time bound action plan and specific investment proposals. The report reflects the priorities of the 11th five year plan on air quality pollution reduction. One of the principal areas of focus of the action plan was the desulfurization of coal power generators.

25. The action plan requires that all coal power plants undertake desulfurization measures. By 2008, 70 percent of power stations had installed desulfurization technologies that directly led to a reduction of 250,000 tons of sulphur emissions. An additional goal of the action plan was to ensure that the urban area inside the outer ring-road would be coal free. This target has been fully achieved. For the outer ring road, the target in the action plan was to construct a “controlled coal dust area”. Furthermore, suspension/dust control from building sites was introduced. Finally, vehicle pollution control was introduced: starting in 2006, the new national standard (standard 3) has been applied in Shanghai (for public buses only). Since 2007, all cars are required to meet standard 3. Shanghai is planning to introduce a national standard, standard 4, in 2009.

26. As a result of these measures, air quality improved in Shanghai. Before 2001, 81 percent of days complied with the city’s air pollution minimum targets (Level I or II of air quality based on Air Pollution Index of China).27 By 2007, this increased to over 90 percent.

27 3 Air Pollution Index of China measures daily average pollutant concentration. Level refers to <0.05 mg/m of SO2, 3 3 3 3 <0.08 mg/m of NO2, and <0.05 mg/m of PM10. Level II refers to 0.05 – 0.15 mg/m of SO2, 0.08 – 0.12 mg/m of 3 NO2, and 0.05 – 0.15 mg/m of PM10. 36

Table A1.4 Triggers for APL 3 (September 2008)

The APL3 would be considered by the Bank when four of the six triggers shown below have been met. In addition, triggers 1,2 and 3 must be among the 4 triggers fulfilled. Activities proposed for implementation under the APL3, which are related to any outstanding trigger, would not be excluded from funding under the APL3, but would be taken up as and when the trigger condition is met. The table below presents a summary of the compliance with all APL3 triggers.

Triggers Evidence Received Status Trigger Met (Y, N) Trigger 1 (must be met) (a) The SMG has adopted a 1. Financing plans for project The SMG has adopted a sustainable, long term financing plan for the environmental Y sustainable financing plan for the components infrastructure investments planned under the APL3. The APL3 will finance three components: environmental infrastructure (i) The Nanhui Conveyor under the Qing Cao Sha project (QCS), Bailonggang South Sewer investments planned under the APL3 (BSS), and the DFV. The specific evidence that the trigger is met is as follows: and such financing plan would provide that: about 50% of the local 1. Overall, the trigger requires that 50% of local costs (counterpart funds) are financed from costs would be financed from the long term sources or the DFV. For the QCS component, all counterpart funds (100%) are long proceeds of long term infrastructure term with maturities ranging from 10-25 years (mainly from syndicated bank loans and a loan bonds, or long term loans from local from an insurance company). For the BBS component, the SMSC does not take on any loans banks, or from the District Financing for the project, other than the World Bank loan. In summary, this trigger is therefore met, as Vehicle; and on aggregate at least 70% of local costs (counterpart funds) are sourced from long term sources.

(b) Each public utility which is a 1. Inputs for financial projections Shanghai has been at the forefront of introducing and regularly increasing its wastewater Y beneficiary of such financing has tariff, with the last tariff increase adopted in April 2009. Water tariffs for non-domestic taken steps to ensure that the rates of customers were also revised at the same time. The water tariff is RMB2.0 per m3, increased fees, tariffs or charges for services are from RMB1.3 per m3 for industrial customers and from RMB1.5 per m3 for commercial/ adequate to cover the redemption and/ institutional customers. The SMG indicated that it is beginning to work on water tariff or repayment of such financing. increases for domestic customers. The specific evidence that the trigger is met is as follows:

1. The trigger requires that each public utility which receives funds under the project (i.e. the QCSC and the SMSC) has taken steps to ensure that the rates of fees, tariffs or charges for services are adequate to cover the redemption and/ or repayment of such financing. Financial projections indicate that, for the SMSC, debt service payment constitutes on average ~30% of total revenue from tariffs/ user fees. For the QCSC, debt service payment constitutes on average ~ 70% of total revenue from tariffs/ user fees. Therefore revenue from tariffs/ user fees is sufficient to cover debt service payments.

Trigger 2 (must be met) At least 50,000 peoples in 1. Water supply improvement in Trigger 2 required that at least 50,000 peoples in underserved areas of Qingpu District Y underserved areas of Qingpu District Xujing, Huaxin of Qingpu benefited from improved water supply services through the APL2. APL2’s Qingpu District have benefited from improved water (Chinese/English) water supply and distribution project has successfully been implemented. Water is being supply services through the APL2. 2. Result of satisfactory survey of supplied through trunk water pipes to two water pumping stations (Linkong, Xuanxiang). As 37

water supply to the residents in a result people living in the east area of Qingpu District are served with improved and more Xujing and Huaxin of Qingpu secure water supply. The specific evidence to demonstrate that the trigger is as follows: District with four example answers (Chinese/ English) 1. The number of beneficiaries in underserved areas of Qingpu District is about 205,000 3. Water quality data at Changqiao people. Water Treatment Plant 2. Measurement of water quality at Changqiao water plant shows improvements in quality (Chinese/English) levels.

Trigger 3 (must be met) (a) Solid waste services covering at 1. Shanghai Municipal Solid Waste Shanghai’s solid waste services are increasingly managed by corporate entities, with almost Y least 25% of the total volume of solid Marketization and all of Shanghai’s solid waste in the urban areas of Shanghai managed by corporate entities, as waste in the urban areas of Shanghai Commercialization Status required by the trigger. The specific evidence to demonstrate that the trigger is met is as Municipality are managed by (Chinese/English) follows: corporate entities; and 1. In 2007, 33% of solid waste generated in Shanghai is disposed by Shanghai Laogang Municipal Solid Waste Treatment Co., Ltd. which is a joint venture between Chengtou/Veolia/CITC (a Hong-Kong based investor). 2. Furthermore, 100% of the solid waste transported to Laogang solid waste site (which represents 33% of total solid waste generated in Shanghai) is managed by the Logistics and Transportation Company under Shanghai Chengtou Corporation.

(b) The SMG has adopted an 1. Shanghai Government Order No. 5 In China, the execution of service/ management/ concession contracts for solid waste service Y administrative framework and - Shanghai Municipal Solid Waste traditionally has been governed by decrees from Ministry of Housing Urban and Rural implementing regulations for the Collection and Disposal Construction. More recently, the SMG adopted a Shanghai specific administrative framework execution of service or management Management Method (Chinese/ and implementing regulation for the execution of service provision contracts for solid waste. or concession contracts for solid English) The specific evidence to demonstrate that the trigger is met is as follows: waste services. 2. Brochure of Shanghai Laogang MSW Treatment Co., Ltd. which is 1. In July 2008, the SMG has adopted Government Order No. 5 on “Shanghai Municipal a joint venture between Solid Waste Collection and Disposal Management Method”. This Government Order Chengtou/Veolia/CITC. (Chinese/ specifies the service contracting and bidding arrangments for solid waste management English) operations in Shanghai, including for concession arrangments. The dimensions of the 3. Summary statement of background Government Order cover the overall administrative framework in terms of service provider to concession by the former General contract bidding procedures, eligibility criteria, pricing etc., and the corresponding Manager of Shanghai Laogang implementing regulations, including contract and service level supervision. MSW Treatment Co.,Ltd.

Trigger 4 The institutional capacity and 1. The SWA Charter issued by the SWA’s key responsibilities include drawing up planning and investment strategy related to Y resources of the Shanghai Water SMG in 2000 (Chinese) water, wastewater and drainage in the entire municipal area of Shanghai. In 2005, the SWA Authority have been increased to 2. The SWA Institutional Brochure transferred responsibility of owning and operating all utility companies to Chengtou which enable it to carry out its responsibility from 2005 enabled it to focus exclusively on its core role as the lead planning and regulating agency in for: (a) the planning and investment 3. Meeting notes on Water Planning Shanghai. Specific evidence on SWA’s continued evolution to better carry out its planning strategies for urban environment and Design Research Institute and investment strategy functions, as required by the triggers, is as follows: Capacity 38 services related to water, wastewater 4. Chengtou Organization Chart and 1. In 2005, the SWA refocused its activities on regulation and planning with the formal and drainage across the entire Business Description transfer of the responsibility for all water resource, water supply, and wastewater municipal area; and 5. Press Article on “Shanghai Water companies to Chengtou. Affairs- Reform with 2. The SWA increased its staff and budget in its Water Planning and Design Research Development, Evolution with Institute, a key division responsible for planning and regulation. Reforms”: (http://www.chinawater.com.cn/sl b/3b/t20060808_185990.htm)

(b) The preparation and 1. The Third Three-Year Action Plan The SMSC completed a technical assistance project (IST project under the APL1) which Y implementation of the Upper of Environmental Protection of supported the development of the Upper Huangpu Management Plan. The IST project was Huangpu Catchment Management Shanghai (Chinese) completed in 2005 and its proposals were included in SWA’s and EPB’s considerations for Plan. (http://www.sepb.gov.cn/3nianjih Upper Huangpu management plan and, specifically, the three-year environmental protection ua/main.jsp) plan. The specific evidence to demonstrate that the trigger is met is as follows: 2. Ongoing and Planned WWTP and Sewer Construction In Upper 1. The three year environmental protection plan includes a series of investments to improve Huangpu River Area the water quality in the Upper Huangpu Catchment Area. The investments in support of the (Chinese/English) Upper Huangpu management plans are: 10 WWTP/sewer projects are currently under construction and 4 WWTP projects are under planning in Songjiang/ Jiangshan/ Qingpu areas.

Trigger 5 Environmentally acceptable and 1. Signed Agreement for Sludge Environmentally acceptable and sustainable sludge management practices are being Y sustainable sludge management Disposal for Zhuyuan WWTP and implemented at Zhuyuan and Bailonggang. The specific supporting evidence is as follows: practices are being implemented Bailonggang WWTP (Chinese) through: (a) the signing of contracts 1. The SMSC and Shanghai Environment Group Ltd. signed a sludge management agreement for sludge management facilities at to treat and dispose of sludge. the Zhuyuan complex and 2. The arrangement for Zhuyuan and Bailonggang WWTP sludge disposal is specified in the Bailonggang complex; and agreement, including duties of participating parties, contract price, service approach, etc. 3. In May 2006, Bailonggang Wastewater Company and Zhuyuan Wastewater Company signed a contract with Laogang Landfill Company that about 400 tons of sludge per day is transported into Laogang Landfill Phase I.

(b) acceptable arrangements 1. Sludge treatment and disposal Acceptable sludge management arrangements are being implemented at the major (over Y implemented at the major (over arrangement for WWTP over 50,000 m3/d) wastewater treatment plants (including Zhuyan and Bailongang mentioned 50,000 m3/d) wastewater treatment 50,000m3/day (Chinese/English) above). The specific supporting evidence is as follows: plants in Shanghai. 2. Approval of Bailonggang WWTP sludge disposal project from 1. 20 of 22 major WWTP in Shanghai (those above 20,00 m3/d) dispose sludge to sanitary Shanghai EPB (Chinese) landfill after dewatering. 1 WWTP disposes the sludge to landfill after dewatering and incineration. For the Bailonggang WWTP, the EPB approved the sludge management plan, a part of which is the transfer of sludge to Laogang land fill. All the sludge treatment (dewatering, incineration, etc.) and subsequent disposal in sanitary landfills practices are assessed to be satisfactory.

Trigger 6 The SMG has prepared a time bound 1. The World Bank – Shanghai APL The SMG has prepared a time bound action plan for improving air quality in Shanghai. The Y action plan for improving air quality 2 project: Identification of the specific supporting evidence is as follows: in Shanghai. Measures for Air Quality Improvement in Shanghai 1. The Air Quality Report explicitly mentions (fifth chapter of “Identification of the measures (Chapter 5 translated) for air quality improvement in Shanghai”) that the SMG prepared a time bound plan and 2. Three-year action plan of specific investment proposals such as desulfurization of coal power generators and three Shanghai environmental pilot projects for NOx control. protection and construction for 2. In addition, the third chapter of “three-year action plan of Shanghai environmental 2006-2008. protection and construction for 2006-2008” details action targets and major tasks of (http://www.sepb.gov.cn/3nianjihu “governance and protection of atmospheric environment”. “Shanghai 11th five-year plan for a/main.jsp ) national economic and social development” provides for “sustainable improvement of 3. Shanghai 11th five year plan atmospheric environmental quality, e.g. sulfur dioxide emissions will be reduced by 35% from 2005 to 2010, environmental air quality maintains above 85%, areas without coal burning and dust control areas will be built, standardized management of all types of dust pollution resources will be strengthened and more stringent vehicle emission management will be introduced.

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies CHINA: Shanghai Urban Environment Project - APL Phase III

Performance Rating Project Sector Issue Development Implementation Objective on Progress Bank-Financed Projects in Shanghai Shanghai Environment Urban environment, water supply, Satisfactory Highly Satisfactory Project (Ln. 3711) wastewater management, solid waste management, and pollution mitigation. Second Shanghai Urban environment, wastewater and Satisfactory Highly Satisfactory Sewerage Project (Ln. tariff reform policy. 3987) Shanghai APL1 Urban environment, pollution Satisfactory Satisfactory (Ln. 4705) management and environmental health, access to urban services for the poor, environmental policies and institutions. Shanghai APL2 Urban environment, pollution Satisfactory Satisfactory (Ln. 4801) management and environmental health, access to urban services for the poor, environmental policies and institutions. Bank-Financed Projects in China Second Tianjin Urban Wastewater treatment, road Moderately Moderately Development and construction, and traffic Satisfactory Unsatisfactory Environment Project management. (Ln. 4695) Zhejiang Urban Wastewater treatment and solid Satisfactory Satisfactory Environment Project waste management (Ln. 4695) Guangdong Pearl River Wastewater treatment, solid waste Moderately Moderately Delta Urban Environment management, and water quality Satisfactory Satisfactory Project (Ln. 4742) monitoring Ningbo Water and Quality of water and wastewater Satisfactory Satisfactory Environment Management services, public health protection. Project (Ln 4770) Liuzhou Environnent Wastewater treatment, solid waste Satisfactory Satisfactory Management Project management, industrial pollution (Ln. 4781) control

Other MDB’s and Agencies Suzhou Creek Rehabilitation Project (ADB) Water supply, sanitation and waste management Nanjing Qinhuai River Environmental Improvement Water supply, sanitation and waste management Project (ADB) Wuhan Wastewater Management Project (ADB) Wastewater management and protection of water resources Guangxi Nanning Urban Environmental Upgrading Water supply, sanitation and waste management (Guangxi Nanning Urban Infrastructure Development) (ADB)

Annex 3: Results Framework and Monitoring CHINA: Shanghai Urban Environment Project - APL Phase III

Results Framework for the Overall APL Problem being addressed Strategy to address the problem Results expected APL Program The economic competitiveness and longer-term Implement a 3-phase APL, including policy Elimination of key urban environmental growth of Shanghai are threatened by the presence development and capacity building (APL1), deficiencies within Shanghai Municipality of urban environmental deficiencies, a legacy of deepening the environmental agenda (APL2), caused by deteriorating raw water quality, the area’s past and due to recent rapid growth, and consolidating achievements, beginning to incomplete sewage collection and treatment, particularly in terms of sub-standard water reap benefits of past efforts (APL3). unsanitary disposal practices of solid waste, quality, incomplete wastewater collection and and insufficient policy and institutional treatment, and inadequate disposal practices for incentives for long-term cost-effectiveness municipal solid waste. and secured operational and financial sustainability of the responsible entities in the sectors, in particular on a metropolitan-wide scale. APL1 – Policy By implication, incomplete environmental Pursue gaps in wastewater service coverage, Put in place some of the underpinnings and Development and infrastructure in the core city and a perceived lack expand shared landfills, and protect upstream enabling conditions to pursue an integrated, Capacity of sufficient underpinnings and enabling sources of water supply. metropolitan-wide approach for managing the Building conditions to pursue an integrated/regional urban environment. approach to environmental issues. APL2 – Environmental deficiencies have developed as a Upgrading of water and wastewater facilities, Significant progress in the elimination of key Deepening the legacy of the area’s past and rapid recent growth, solid waste program consolidation, environmental deficiencies within Shanghai environmental particularly in terms of sub-standard water introduction of bond financing, and the DFV, Municipality, complemented by reduced agenda quality, incomplete wastewater collection and and continued advances in urban service waste volumes per capita and related treatment, and inadequate disposal practices for pricing and public information. behavior adjustments. municipal solid waste. APL3 – Deterioration of raw water quality and increase in Invest in the creation of a new raw water Improved, secure, and operationally and Consolidation – water demand due to continued rapid development supply system and the extension of wastewater financially sustainable raw water supply and beginning to reap remain prominent issues; incomplete wastewater collection system. Promote institutional wastewater service provision. Development benefits of past collection and treatment requires further reforms through institutional development of of a dedicated entity to address environmental efforts investment; and environmental infrastructure gaps Shanghai’s urban environmental infrastructure infrastructure investment needs on a remain in the suburban areas. Physical service providers. Reform and further develop metropolitan-wide scale. investments need to be complemented with the DFV as a mechanism to finance continued institutional reform initiatives. environmental infrastructure in suburban areas.

Results Framework APL3

PDO Outcome Indicators Use of Outcome Information To improve Shanghai’s resource and environmental 1. Total volume of quality water supplied by Qing Cao Track progress towards achieving the PDO. sustainability in the core and suburban areas through Sha raw water system strategic priority investments and selective 2. Reduction of water pollution in Puxi area of the institutional reforms in the water and wastewater Upper Huangpu River (annual COD reduction) sectors. 3. Adoption of management decision by Shanghai Chengtou Corporation on DFV’s future strategic evolution 4. Improvement in the water sector management in the areas supported by IST components Intermediate Results – one per component Results indicators for each component Use of results monitoring Water Supply and Management Component Increased secure provision and distribution of quality 1.Total population served through the Nanhui Track progress on and adjust physical and institutional raw water through the Nanhui conveyor. conveyor reform aspects of the delivery of raw water supply 2.Volume of raw water supplied through the Nanhui services. conveyor to receiving water treatment plants 3.Raw water quality transported through the Nanhui conveyor to receiving water treatment plants Wastewater Component Increased interception of untreated wastewater through 1.Total population served through the Bailonggang Track progress on and adjust physical and institutional the Southern Trunk Sewer (Puxi section). Southern Trunk Sewer (Puxi section) reform aspects of the delivery of wastewater services. 2.Amount of wastewater intercepted and conveyed by the Bailonggang Southern Trunk Sewer (Puxi section) to the centralized treatment system District Environment Management Program Introduced short and medium-term reforms of the 1.Number of projects approved by DFV Track progress on and adjust institutional evolution of DFV. 2.Amount of DFV loan disbursed the DFV 3.Number of DFV projects co-financed with other financial institutions Institutional Strengthening and Training (IST) Implemented a range of strategic studies and capacity 1. Number of participants trained Track progress on and adjust institutional development building activities for implementing agencies. 2. Number of courses offered and capacity building initiatives. 3. Number of study tours conducted 4. Survey results on satisfaction of participants

Arrangements for results monitoring APL3

Project Outcome Indicators Unit Base Line 2010 2011 2012 2013 2014 2015 Frequency and Data collection Responsibilities for (2009) Reports Instruments data collection Total volume of quality water supplied thousand m3/ - 3,045 4,112 4,778 4,854 4,928 5,003 Annually Semi-Annual PMO by Qing Cao Sha raw water system day PPR (cumulative) Reduction of water pollution in Puxi 1,000 t/year 450 450 450 450 450 450 464 Annually Semi-Annual PMO area of the Upper Huangpu River PPR (annual COD reduction)

Adoption of management decision by n.a. - - adopted - - - - Annually (key action DFV Reports PMO Shanghai Chengtou Corporation on 2011) DFV’s future strategic evolution Improvements in the management of Report(s) - Interim Final Annually (key Report based on PMO the water sector in the areas supported Report Report evaluation 2012 and interviews/ focus by the IST components 2014) group discussion Intermediate Results Indicators

Water Supply Management Total population served through the million - - - - 1.5 1.66 1.81 Semi annually QCS Reports PMO Nanhui conveyor (cumulative)

Volume of raw water supplied through thousand - - - - 480 528 580 Semi annually QCS Reports PMO the Nanhui conveyor to receiving water m3/day treatment plant (cumulative) Raw water quality transported through based on raw - Class II Class II Class II Class II Class II Class II Semi annually QCS Reports PMO the Nanhui conveyor to receiving water water quality treatment standard Wastewater Management Total population served through the million 0 0 0 0 0 0 0.94 Semi annually SMSC Reports PMO Bailonggang Southern Trunk Sewer (cumulative) (Puxi section)

Amount of wastewater intercepted and thousand 0 0 0 0 0 0 195 Semi annually SMSC Reports PMO conveyed by the Bailonggang Southern m3/day Trunk Sewer (Puxi section) to the (cumulative) centralized treatment system District Environment Management

Program Number of project approved by the number of - 1 1 2 2 3 3 Semi annually DFV Reports PMO DFV project (cumulative) Amount of DFV loan disbursed million US$ - 5 10 15 20 30 30 Semi annually DFV Reports PMO (cumulative)

Number of DFV projects co-financed number of - 1 1 2 2 2 2 Semi annually DFV Reports PMO with other financial institutions project (cumulative) Institutional Strengthening and Training Number of participants trained man-day - Semi annually IST Reports PMO (cumulative) Number of studies completed Number of - Semi annually IST Reports PMO studies (cumulative) Number of study tours conducted man-day - Semi annually IST Reports PMO (cumulative) Baselines to be defined at the outset of each IST component. Survey results on satisfaction of grade of - Semi annually Evaluation sheets PMO participants of the training as well as satisfaction collected after the result of the studies and TA. and each training usefulness (poor – excellent)

Operational and Financial Performance Indicators

The following operational and associated financial performance indicators are included as additional indicators to be monitored throughout the project implementation period. They are separate from the Results Framework, as the APL3 project investments and interventions do not explicitly focus on operational improvements in the water sector project companies. However, given the importance of operational efficiency and associated financial performance, it was decided to include the indicators listed below in the regular PMO reporting mechanisms.

1. Qing Cao Sha Raw Water Investment and Development Corporation (QCSC) Operational/ Financial Indicators Unit Base Line 2010 2011 2012 2013 2014 2015 Frequency Data collection Responsibilities for (2009) and Reports Instruments data collection Water Supply Management – QCSC Key Operating Assumptions City Population (total) Million 19.4 19.8 20.2 20.7 21.1 21.6 22.0 Annually Statistic Bureau PMO Water Production thousand m3/ - 3,045 4,112 4,778 4,854 4,928 5,003 Annually QCSC Reports PMO day Water Sales Volume thousand m3/ - 2,846 3,843 4,465 4,536 4,606 4,676 Annually QCSC Reports PMO day Unaccounted-for-Water* % 7 7 7 7 7 7 7 Annually QCSC Reports PMO Key Operational Indicators Unit Cash Operating Cost RMB/m3 - 0.48 0.44 0.42 0.43 0.43 0.44 Annually QCSC Reports PMO Water Sales Volume per Employee thousand - 9.3 12.6 14.6 14.9 15.1 15.3 Annually QCSC Reports PMO m3/day/person Unit Consumption of Electricity kwh/m3 - 0.15 0.16 0.16 0.17 0.18 0.18 Annually QCSC Reports PMO Key Financial Indicators Total Revenue million RMB - 1,039 1,403 1,630 1,887 1,917 1,946 Annually QCSC Reports PMO Water Supply Companies (WSC) million RMB - 386 522 606 673 683 693 Annually QCSC Reports PMO Subsidy (from SMG or Chengtou) million RMB - 653 881 1,024 1,215 1,234 1,252 Annually QCSC Reports PMO Operating Income million RMB - 111 263 324 471 453 433 Annually QCSC Reports PMO Net Income million RMB - (11) 141 202 (263) (335) (352) Annually QCSC Reports PMO Financial Covenant Debt Service Ratio - 3.5 5.1 5.9 1.2 1.1 1.0 Annually QCSC Reports PMO Raw Water Tariff Overall Tariff RMB/m3 - 1.00 1.00 1.00 1.14 1.14 1.14 Annually QCSC Reports PMO Tariff charged to WSC RMB/m3 - 0.37 0.37 0.37 0.41 0.41 0.41 Annually QCSC Reports PMO Subsidy Portion RMB/m3 - 0.63 0.63 0.63 0.73 0.73 0.73 Annually QCSC Reports PMO * UFW for raw water transportation only.

2. Shanghai Municipal Sewage Company (SMSC)

Operational/ Financial Indicators Unit Base Line 2010 2011 2012 2013 2014 2015 Frequency Data collection Responsibilities (2009) and Reports Instruments for data collection Wastewater Management - SMSC Key Operating Assumptions City Population (total) million 19.4 19.8 20.2 20.7 21.1 21.6 22.0 Annually Statistic Bureau PMO Total Population Served by SMSC Thousand 9,214 9,412 9,618 9,829 10,044 10,264 10,489 Annually SMSC Reports PMO Water Supplied thousand m3 1,351 1,384 1,418 1,453 1,490 1,527 1,565 Annually SMSC Reports PMO From Water Supply Company thousand m3 1,250 1,283 1,317 1,353 1,389 1,426 1,464 Annually SMSC Reports PMO From Self Supplied Sources thousand m3 101 101 101 101 101 101 101 Annually SMSC Reports PMO Key Operational Indicator Unit Cash Operating Cost RMB/m3 0.93 1.07 1.17 1.19 1.18 1.18 1.18 Annually SMSC Reports PMO Wastewater Volume treated per Thousand 0.50 0.52 0.53 0.54 0.56 0.57 0.58 Annually SMSC Reports PMO Employee m3/day/person Unit Consumption of Electricity kwh/m3 0.35 0.35 0.35 0.35 0.35 0.35 0.35 Annually SMSC Reports PMO Key Financial Indicators Total Operating Revenue million RMB 1,709 1,785 1,828 2,475 2,536 2,598 3,223 Annually SMSC Reports PMO Operating Income million RMB (39) (240) (864) (302) (304) (309) 239 Annually SMSC Reports PMO Net Income million RMB (15) (148) (216) (158) (132) (193) 76 Annually SMSC Reports PMO Internal Cash Generation million RMB 651 717 1,200 1,200 1,200 1,200 1,419 Annually SMSC Reports PMO Operating Subsidy (from SMG or million RMB 39 240 864 302 304 309 0 Annually SMSC Reports PMO Chengtou) BOT Payments million RMB 205 325 335 345 345 345 345 Annually SMSC Reports PMO Key Financial Ratios Cost Recovery Ratio 1.0 1.0 1.0 1.0 1.0 1.0 1.1 Annually SMSC Reports PMO Debt Service Ratio 1.6 1.2 1.6 1.7 1.8 1.8 2.2 Annually SMSC Reports PMO Domestic Wastewater Tariff RMB/ m3 1.2 1.2 1.2 1.6 1.6 1.6 1.9 Annually SMSC Reports PMO Non-Domestic Wastewater Tariff Industrial RMB/ m3 1.8 1.8 1.8 2.3 2.3 2.3 2.8 Annually SMSC Reports PMO Institutional RMB/ m3 1.7 1.7 1.7 2.2 2.2 2.2 2.7 Annually SMSC Reports PMO

Definitions of Selected Results Monitoring Indicators

Indicator Definition Outcome Indicators Total volume of quality water supplied by Qing Cao Sha raw water system Amount of class II or better raw water supplied through the entire Qing Cao Sha Reservoir system, including non-Bank financed components Reduction of water pollution in Puxi area of the Upper Huangpu River (annual COD Formula to calculate: Q m3/d x C mg/L reduction) Q = wastewater collected at Puxi section of the Southern Trunk Sewer in m3/d C = concentration of the influent COD in mg/L Adoption of management decision by Chengtou on DFV’s future strategic A strategic report on DFV’s future evolution and an action plan, endorsed by evolution management of Shanghai Chengtou Corporation (at the level of the Vice- General Manager) Improvements in the management of the water sector in the areas supported by Report on improvements in the management of the water sector in the areas the IST components supported by the IST components. Intermediate Outcome and Key Output Indicators Water Supply and Management Total population served through the Nanhui conveyor Formula to calculate: (Q m3/d x F %) / (S Lpcd) Q = raw water received by existing water supply plants in 2012 F = percentage of domestic consumption S = water consumption per person per day in Lpcd Volume of raw water supply through the Nanhui conveyor to receiving water Amount of raw water received at the water treatment plants from the Nanhui treatment plants conveyor (Bank-financed component only) Raw water quality transported through the Nanhui conveyor to receiving water Defined by the main parameters of surface water standards, i.e. pH, DO, color, treatment plants BOD, COD, N and P. Wastewater Management Total population served through the Bailonggang Southern Trunk Sewer (Puxi Formulate to calculate: (QD m3/L) / (W Lpcd) section) QD = wastewater flow from domestic discharges in m3/d W = wastewater generation per person per day in Lpcd Amount of wastewater intercepted and conveyed by the Bailonggang Southern Amount of wastewater conveyed by the Bailonggang Southern Trunk Sewer Trunk Sewer (Puxi section) to the centralized wastewater system (Puxi section) Institutional Strengthening and Training Survey results on satisfaction of participants and the implementing agencies of Satisfaction evaluated by participant and the implementing agencies after TAs, training or study tours/studies and TAs.

Definitions of Selected Operational Performance Indicators

Indicator Definition Operational Performance Indicators Water Supply Management –QCSC Unit cash operating cost (raw water supply) Formula to calculate: C RMB / Q m3 C = total cash operating cost per year, 2008 price Q = total raw water volume produced per year Water Sales Volume per Employee Formula to calculate: Q m3/day / N Q = total water sales volume per day N = total number of employee at QCSC Unit Consumption of Electricity Formula to calculate: E kwh/ Q E = total electricity consumed per year Q = total water production and sales volume per year Wastewater Management – SMSC Unit cash operating cost (wastewater management) Formula to calculate: C RMB / QW m3 C = total cash operating cost per year, 2008 price QW = total wastewater volume treated by SMSC’s own plants (except for BOT plants) per year Wastewater volume treated per employee Formula to calculate:QW m3/d / N QW = Wastewater volume collected and treated by SMSC’s own plants (except for BOT plants) per day N = total number of employees operating SMSC systems, including those of the Shanghai Wastewater Treatment Company Unit Consumption of Electricity Formula to calculate: E kwh/ QW m3 E = total electricity consumed per year QW = total wastewater volume collected and treated per year

Annex 4: Detailed Project Description CHINA: Shanghai Urban Environment Project - APL Phase III

1. The project development objective of the APL 3 is to improve Shanghai’s resource and environmental sustainability, in the core and suburban areas, through strategic priority investments and selective institutional reforms in the water and wastewater sectors. The particular aims are to: provide good quality water to more than 10 million Shanghai citizens; reduce the amount of pollution load discharged without treatment into water sources; and facilitate sustainable investments in environmental infrastructure in Shanghai’s suburban areas. The total investment costs of the APL328 are estimated to be US$631.14 million,29 with an anticipated Bank loan of US$200 million. The APL 3 consists of the following four components:

Water Resources Development and Protection

2. The economy and population of Shanghai are expected to continue to grow significantly over the next two decades, reaching some 24.5 million inhabitants by 2020. This growth is expected to lead to an estimated demand for raw water of some 13.6 million m3/day in 2020. Presently, the principal sources of water for Shanghai are the Huangpu River and the Yangtze River estuary. Though Shanghai will need to continue use of the two existing raw water intake facilities—Daqiao and Chenhang—in the future, Shanghai also calls for development of an additional raw water source abstracting from the Yangtze to meet the growing water demand. Strategically, Shanghai should implement a comprehensive water resource development and protection plan to ensure water supply safety through conjunctive use of different raw water sources (i.e., network integration, adjustment of institutional arrangements, adjustment of water treatment facilities and their operations), and should implement a program to strengthen efforts to reduce and control pollution in the Yangtze and Huangpu Rivers. To contribute to longer term water resource development and protection in a strategic manner as has been done via previous Bank funded projects, the APL3 includes: (a) construction of the Nanhui (Raw Water) Conveyer; and (b) construction of the Puxi section of the Southern Trunk Sewerage System.

(1) Water Supply and Management Component (Estimated Base Cost: RMB 2537.74 million or US$409.31 million/IBRD loan:30 US$137.20 million)

3. The work to be carried out is one of the nine components of the ongoing QCSRWP. The nine components of the QCSRWP are: (i) Qing Cao Sha reservoir (70 km2 and 7 m water depth) and pumping stations for water abstraction, storage and conveyance; (ii) raw water conveyor on Changxing Island; (iii) raw water conveyor tunnel crossing the Yangtze River; (iv) Wuhaogou raw water pumping station; (v) raw water conveyor Yangqiao and associated pumping station; (vi) raw water conveyor of Lingqiao and associated pumping station; (vii) raw water conveyor Jinhai and associated pumping station; (viii) raw water conveyor of Nanhui and associated pumping station; and (ix) rehabilitation of raw water system of Upper Huangpu river. The

28 APL 3 project total cost does not include the costs of the QCRWSP, except for the cost of Nanhui Conveyor. 29 The exchange rate: RMB 6.2 = US$ 1. The estimate cost is base cost excluding physical contingencies and financial charges. 30 IBRD loan amount for respective components, except for IST component, includes the front-end fee proportionally allocated to respective components (US$500,000 in total). 50

QCSRWP will be implemented by the QCSC. After completion of the project, the QCSRW system will cover the core city, Pudong, Nanhui, and Changxing Island, serving over 10 million residents. The total investment cost of the QCSRWP is preliminarily estimated at about RMB 16 billion (about US$2.25 billion). Excluding the construction of Nanhui Conveyor, the other components of the QCSRWP are not part of the APL3.

4. The Bank-funded component is the construction of Nanhui Conveyor, which has a capacity of 1.28 million m3/day, and will supply raw water to the rapidly growing outer metropolitan areas in southeastern Shanghai, including the major new container port development in Nanhui District, and the high tech industry and logistical complexes developing around the Pudong International Airport. This component consists of about 37.7 km of twin steel pipes of diameters varying from DN2000 to DN1200 mm, 3.6 km of steel pipes of diameter DN1800 mm, and 7.3 km of steel pipes of diameter DN1600 mm, raw water conveyors with a connecting control system, and a north Nanhui pumping station.

5. The Nanhui Conveyor will be constructed through a pipe jacking method with adaptation of cathodic protection for long-term corrosion prevention.

6. In order to improve the security of raw water provision for Shanghai, the SMG and Chengtou intend to implement the following projects with their own funds outside the APL 3 in a phased manner: • An additional pipe connecting the Yanqiao and Jinhai/Nanhui branches. • Rehabilitation of the Linjiang PS so that it can operate in both directions (North to South when water is supplied from QCS and South to North when water is supplied from Daqiao), and an emergency PS with an approximate capacity of 1,200,000m3/d and a head of 10m; • Rehabilitation and maintenance of the intake facility at Daqiao as well as the culverts between Daqiao and the Caohang working well (outside the QCSRW project).

(2) Wastewater Management Component (Estimated Base Cost: RMB 420.61 million or US$67.84 million/IBRD loan: US$29.40 million)

7. This component supports the extension of the Bailonggang Southern Trunk Sewer system. The Bailonggang Southern Trunk Sewer system covers a service area of 839.87 km2 and serves 6.9 million peoples in the rapidly growing eastern part of Shanghai in Pudong. The Bailonggang Wastewater Treatment Plant was constructed under the Bank-funded Shanghai Sewage Project Phase II and its sludge treatment facility is being constructed under the APL 2. This component will be implemented by the Shanghai Municipal Sewerage Company (SMSC).

8. This component supports construction of the Puxi Trunk Sewer, which is one of two sections of the extension of the Bailonggang Southern Trunk Sewer system. The Puxi Trunk Sewer will collect about 390,000 m3/day of wastewater in the Xuhui District, and consists of 6.66 km of DN 3000 mm trunk sewer, 1.10 km of DN 3000 mm river crossing, 0.45 km of DN 2200 mm connecting sewer, and a 7.96 m3/second pumping station. The other section (Pudong Trunk Sewer with 25.8 km double trunk sewers and 5 pumping stations), which is the linkage 51

project of the Bank-funded above wastewater component, will be funded by Shanghai, and completed within the same time horizon as the Bank-funded Puxi Trunk Sewer.

Urban Environment Infrastructure Services Financing

(3) District Environment Management Program (Estimated Base Cost: RMB 534.49 million or US$86.21 million/IBRD loan: US$30 million)

9. The DFV is a financing mechanism adopted during the APL2 that supports environmental infrastructure investments (mainly water, wastewater, and solid waste) in suburban districts of Shanghai. The DFV is in charge of project financing, identification and appraisal. The DFV’s operation is based on the Operation Manual agreed with the Bank. Overall, the Bank has found the performance of the DFV under the APL2 satisfactory, including the DFV’s environmental and social safeguard management based on the environmental and social safeguard framework defined in the Operations Manual. Building on this successful track record, it was decided that the DFV will become a programmatic wholesale lending entity under the APL3: the DFV will identify, appraise and approve sub-projects according to the Operations Manual (developed under the APL2, and updated for the APL3). At appraisal, one investment project was identified and included in SDRC’s foreign capital utilization plan submitted to NDRC: namely, the Phase III of Jiading Hazardous Waste Treatment and Disposal Facility. Additional DFV investment projects will be identified during the APL3 implementation. As the Jidaing Hazardous Waste Treatment and Disposal Facility is a relatively large and technically complex sub-project, the DFV shall require the Bank’s ex-ante no objection to the DFV’s financing thereof. The DFV will approve other sub-projects, and the Bank supervision team will conduct ex-post reviews of these sub-projects. The detailed analysis on the DFV’s performance as well as its institutional and financial issues is provided in Appendix 1.

Institutional Development and Capacity Building

(4) Institutional Strengthening and Training (IST) Component (Estimated Cost: RMB 21.08 million or US$3.4 million/IBRD loan US$3.4 million)

10. This component will provide strategic IST support to Shanghai Chengtou Corporation, its subsidiary raw water and wastewater companies, and the SWA. The overall foci are sector wide policy and reforms, operation efficiency, and institutional development through studies, training, study tours, and workshops.

11. The IST components for water sector policy and reform are as follows:

• Performance Benchmarking and Economic Regulation Methods in the Water Sector. The objective of this IST component is to assist the SMG in further improving the efficiency of its water sector by introducing performance benchmarking and economic regulation methods. It consists of four parts: (i) operational performance and benchmarking, which review operational performance and efficiency of the water sector; (ii) review of institutional performance and responsibilities to identify improvement areas; (iii) economic regulation assessments to recommend how the water sector should

be managed from a financial and economic perspective; and (iv) introduction of best practices through study tours.

• Water Demand Management (WDM). The objective of this IST component is greater efficiency in the use of water resource through WDM. A strategic study will be conducted under the component, which consists of seven activities: (i) review, assess, and develop WDM regulations; (ii) promote a public education and awareness program on WDB; (iii) develop cost effective and best practices in billing; (iv) impose water audits for major water users, such as big companies and universities; (v) demand profile management ; (vi) enhance a water reclamation/reuse program; and (vii) use economic instruments for reduction of water pollution control.

• Security of Water Supply. The objective of this IST component is to assist the SMG in further improving security of its water provision by introducing a vulnerability assessment methodology and identifying specific areas of improvements. It consists of these parts: (i) a water resources strategic planning study; (ii) a vulnerability assessment to help water utility companies, including adaptation to the climate change impacts; and (iii) emergency/incident planning to train staff of water utility companies and help them to develop a plan to respond to emergencies.

12. The IST components for Chengtou institutional development program are as follows:

• Project Management of Urban Infrastructure Investment. This IST component aims to improve the efficiency and transparency of urban infrastructure investment by enhancing the capacity of Chengtou and its subsidiaries (i.e. the QCSC, the SMSC, and others) in project management and financial management. The component will be delivered in two ways: (i) basic training of standard practices and case studies in urban infrastructure investment, and (ii) overseas study tours and secondment programs to international water and wastewater companies to acquire hands-on experience from other water utility companies.

• Feasibility Study of Asset Management System. Under this IST component, a feasibility study of adopting an asset management system (AMS) of Chengtou and its subsidiaries will be conducted. The study will review the current activities of Chengtou and explore pros and cons of the AMS and lessons learned from other cases. It will also assess required changes to the management and operation system, data and management system, and system consistency across Chengtou’s subsidiaries. Finally, it will propose an action plan, cost estimate, and implementation plan for the introduction of the AMS for Chengtou to consider.

• Optimization of Operation and Management of Water and Wastewater Systems. The objective of this IST component is to optimize water and wastewater systems operation and management under Chengtou’s water sector subsidiaries (i.e. the QCSC, the SMSC, and water companies). This subcomponent would cover: (i) operation audit/evaluation to identify system vulnerability and improve operational efficiency; ; (ii) water loss reduction and management; (iii) pressure control; (iv) district metering; (v) telemetry and

SCADA systems and (vi) study tours for best practices of operations and maintenance of water and wastewater utilities.

Appendix 1. District Financing Vehicle

1. This appendix summarizes the key issues concerning the DFV’s implementation track record under the APL2, and outlines proposed options for short- to medium-term reforms under the APL3. Two in-depth studies were undertaken for the appraisal of the APL3. The first reviewed the DFV’s operations under the APL2, and the second focused on DFV’s institutional and financial sustainability issues, as well as reform options under the APL3. Both reports are in the Project Files.

Background

2. The DFV was introduced as one of the project components under the APL2 to provide financial, technical, and managerial expertise to help develop and implement environmental improvement projects in suburban Shanghai. Shanghai has been facing significant environmental challenges in suburban areas, where much of the economic and population growth has taken place. Traditionally, the SMG was responsible for and focused on infrastructure development in core urban areas while suburban district governments were in charge of investments in their respective districts. The DFV was expected to become a focal point for mobilizing financial, technical, and managerial expertise for suburban environment improvement projects, and to bridge the gap between the SMG and the suburban district governments by introducing metropolitan-wide utility management practices. The DFV was also intended to provide services comparable with Bank practices to smaller investment projects in district governments in suburban Shanghai that the Bank and the SMG could not support directly.

3. In 2004, the Chengtou Environment Asset Management Company (CEAM) was established as the implementing entity of the DFV component in accordance with China’s Enterprise Law. The CEAM and the DFV are used interchangeably in this PAD. The CEAM’s registered capital is RMB 20 million, and it is fully owned by Shanghai Chengtou Corporation. Chengtou Corporation owns 90 percent and Shanghai Chengtou Environment Industry Development Company (SCEID) owns 10 percent. Chengtou Corporation is the SMG’s Urban Development and Investment Corporation in charge of mobilizing finance for urban infrastructure development across a variety of sectors, including roads and bridges, real estate, water, wastewater and environmental projection. SCEID is a wholly owned subsidiary of Chengtou Corporation responsible for environmental protection-related investments traditionally in core urban areas of Shanghai. SCEID had 58 staff at the end of 2007.

4. At the time of the APL2 appraisal, the immediate task of the DFV was to identify suitable investments and prepare projects to utilize US$30 million of available APL2 loan proceeds. In its initial Five Year Business Plan, the DFV planned to process seven projects in the first two years using the APL2 (US$30 million) and other (US$35 million) loans, and to increase its activities to process an additional eleven projects and mobilize US$130 million in the subsequent three years. In accordance with this plan, the DFV was expected to generate sufficient revenues to become a fully self-sustainable entity, based on a management fee of 1.5 percent charged on the arranged loan amounts. It was also envisaged that in the long term, the DFV would issue bonds and securitize its own assets to raise the funds required for expansion of its operation.

Current Status of the DFV

Projects Financed by the DFV under APL2

5. The following four sub-projects were financed for the DFV component of US$30 million during the APL2 appraisal:

• Chengqiao Wastewater Management (Phase I) – Chongming District • Chongming Municipal Solid Waste Landfill (Phase I) – Chongming District • Huaxin Wastewater Collection (Phase I) － Qingpu District • Jinshan Municipal Solid Waste Collection (Phase I) – Jinshan District

6. Project appraisal reports for these projects were prepared by the DFV with support of consultants. The first three projects have already been constructed and are in operation. The fourth project (i.e., the Jinshan Municipal Solid Waste Collection) is awaiting approval to proceed with DFV financing, pending completion and approval of the feasibility study for the associated Jinshan Municipal Landfill Project.

7. A fifth project, the Baihe Town Wastewater Collection (Phase I) in Qingpu District, was added to the DFV’s loan portfolio after the APL2 appraisal in light of loan savings available from the first three projects. The project appraisal report was prepared independently by the DFV for the first time without consultant support. The Bank issued a letter of no objection for this project in June 2007 to receive DFV financing under the APL2. The project costs and the initial Bank loan allocation for each project are summarized in the table below. At the time of the APL2 appraisal, it is estimated that there will be some additional loan savings under the DFV component, which provides space for financing additional projects.31

Table A4.1 Summary of Sub-projects of DFV under APL2

Total Cost WB loan Disbursement Physical (Y million) (Y million)(US$ million Rate (WB) Completion Chengqiao (Chongming) WWTP (phase I) 202 58 7.0 49% 100%

Chongming Landfill (phase I) 110 43 5.2 52% 100%

Huaxin (Qingpu) Trunk Sewer Project (phase 140 71 8.5 76% 100%

Qingpu Baihe Wastewater Treatment 103 41 5.0 95% 93%

Jinshan MSW Collection and Treatment 50 31 3.7 NA NA

IST 5 5 0.6 33% NA

Total 605 244 30.0

31 It was reported that Jinshan MSW collection system may withdraw its application for DFV funding. As a result DFV may have additional APL2 loan savings which could be used for other project investments. 56

8. Under the APL2, the performance of the DFV has been generally good, particularly with respect to complying with the Bank requirements on procurement32 and safeguards. All lending to date has been conservative and well secured. However, the DFV has not yet succeeded in mobilizing capital resources other than the Bank loan into its funding sources, and in arranging syndication loans for sub-projects. Moreover, all sub-projects financed by the DFV thus far are limited to those owned by SCEID, a subsidiary of Shanghai Chengtou Corporation, DFV’s parent company as described in the table below.

Table A4.2 DFV: Ownership of Sub-project Companies and Involvement of Commercial Banks

Shareholders Chengtou Group Others Chengqiao Wastewater Management (Phase I) SCEID 100%

Chongming Solid Waste Landfill (Phase I) SCEID 55% SCCID 45%

Huaxin Wastewater Collecion (Phase I) SCEID 95% GSIEN 5%

Baihe Wastewater Collection (Phase I) SCEID 100%

SCEID: Shanghai Chengtou Environment Industry Development Co., Ltd SCCID: Shanghai Chongming Construction Investment & Development Co., Ltd GSIEN: GSIEN Protection Ltd

9. At the initial stage of the DFV’s operations, the direct involvement of Shanghai Chengtou Corporation was required since there were no other central entities in Shanghai able to promote environment improvement projects in Shanghai’s suburban districts. Shanghai Chengtou Corporation was well recognized by the suburban district governments as having a good track record in this sector. The situation was recognized during the APL2 appraisal, and the Bank supported Shanghai Chengtou Corporation’s involvement in the ownership of DFV sub-projects.

10. DFV’s internal policies and procedures do not explicitly document how to deal with potential problems arising from a conflict of interest inherent in this institutional arrangement. However, the DFV considers that the potential problems in connection with a conflict of interest have not materialized due to the following routine practices: rigid review of project and operation costs; detailed financial analysis; acquisition of security for loans from the best available sources in local markets; and establishment of loan agreements with standard lending terms.33 Furthermore, the requirement to conduct competitive bidding for the award of a project concession from local government also mitigates against conflict of interest problems.

32 The DFV has signed Consigned Procurement Agreements with the project clients and signed procurement contracts with suppliers and contractors. The Bank loan transfers from SHFB to DFV once relevant documents submitted by DFV are approved by SHFB. 33 Local commercial banks entered into a letter of intent to provide supplemental loans for all the DFV-funded projects, although actual lending has not occurred because all the projects are currently expecting certain loan savings in DFV’s loan commitment. 57

DFV Internal Organization and Staffing Arrangements

11. The DFV has nine professional staff, including a Deputy General Manager, who is responsible for its day to day operation and management. All of the DFV’s staff has good educational backgrounds and relevant professional experience in environmental engineering, financial analysis, business management etc. All nine professional staff members are involved in loan processing under the supervision of a project manager appointed for each project. The focus areas of internal evaluation are project and operating cost analysis, credit analysis of the guarantor, and cash flow analysis focusing on debt service capacity. The initial evaluations of project designs, and EAs and RAPs are conducted by various design institutes, and findings are reviewed internally by the DFV.

12. Overall, the Bank’s assessment is that the current organizational structure and staffing arrangements allow the DFV to execute its core functions successfully. During the appraisal of the APL3, the Bank conducted a full review of the extent to which the DFV has implemented and complied with its Operational Manual (OM). This review identified only minor potential improvements focused mainly on social and environmental safeguards. Accordingly, the DFV OM has been updated to reflect the required changes (see Safeguards Section in this PAD). The updated OM also incorporates the Bank’s new Anti-Corruption guidelines.

DFV Financial Situation

13. The DFV’s financial performance is summarized in the table below. The DFV generated fee revenue of RMB 1,257,000 in 2006 and RMB 261,000 in 2007. At the end of 2006, The DFV had completed processing of three of the four sub-projects under the APL2, and around US$21 million of the total APL2 allocation of US$30 million had been committed. Fee revenue generated from the Bank loan has been the main source of operating revenue for the DFV, as it does not charge any mark-up on Bank loan funds transferred to sub-projects. Fee revenue is based exclusively on a 1.50 percent charge on the committed loan amount: half of this fee is paid at signing, while the balance is provided upon the full disbursement of the Bank loan. All fee revenue until 2007 came from sub-projects under the APL2. Fee revenue from preparation of QSCRWP amounting to RMB 300,000 will be added in 2008.34 It is clear that the DFV is currently not structured in a way that would enable it to be financially self-sustainable.

14. The Bank loans are currently recorded as long-term liabilities in the DFV’s audited financial statements. Assets matching the Bank loans are recorded as other receivables in current assets. Under Chinese law, a company like DFV is not allowed to extend loans. The DFV therefore interpreted the use of proceeds of Bank loans as advance payments for sub-projects to secure goods and services. During the preparation and appraisal of the APL3, it was recommended that other receivables should be recorded as long-term assets, not just current assets. However, whether the loan is recorded as current or long term asset, the DFV is currently in a difficult situation, as it runs a payment default risk on de facto loans its extends to sub- projects without appropriately charging for such risk.

34 The total fee amount of RMB 2million will be provided to DFV from Chengtou Corporation in connection with its advisory role for QCSRWP, which will be extended during the period until the full disbursement of the Bank loan. 58

Table A4.3 DFV: Summary of Financial Performance and Projection 1) (RMB ,000)

Reported Statements Restated Statements 2006 2007 2008 2006 2007 2008

Fee Revenue 1,257 261 599 1,257 261 599

Operaing Expenses 927 223 540 674 118 390 Prepaid Expense Born by Sub-proje 253 105 150 Operating Expeses Supported By Chengtou 3) 1,721 2,292 2,398

Operating Income 330 38 59 -1,138 -2,149 -2,189

Non-operating Income 337 286 389 337 286 389 Non-operating Expense 4) 88 245 305 0 0 0

Net Income Before In come Tax 579 79 143 -801 -1,863 -1,800 1) the figures are audited for 2006, provisional for 2007 and projected for 2008 2) prepaid expense of preparing EA, RAP and bidding documents etc, which will be born by sub-projects is included. 3) salary and welfare (RMB1,514,000 in 2007), property management fee (RMB 230,000), and office rent (RMB 548,000). 4) front-end fee and commitment fee in connection with the Bank loan which was paid by DFV, but should be born by sub-projects 5) outsourcing costs are not included in the statements

15. The difficult financial situation arises from the fact that the DFV does not have a financial intermediary license. The DFV attempted to obtain a financial intermediary license during the APL2’s appraisal, but eventually abandoned these efforts due to the Central Government’s reluctance to grant new financial intermediary licenses. As a result, the DFV has not been allowed and is unable to on-lend APL2 Bank loans on a normal basis, charging a mark- up which would fully cover its operating cost and reflect the credit risks incurred. However, as the suburban environmental infrastructure business provides new business opportunities and a potential new market for Shanghai Chengtou Corporation, Shanghai Chengtou Corporation’s current financial support can be viewed as being “business development expenditure,” making the short term financial self-sustainability of the DFV less of an immediate challenge, though it does remain a long term concern.

Legal and Regulatory Issues

16. A financial intermediary license for a trust company is issued by the People’s Bank of China (PBC), which sets regulations and monitors performance of trust companies. According to the rules and regulations, all companies formed under Chinese Corporate Law can apply for such a license if they satisfy the following conditions: (i) equity capital of at least RMB 300 million; and (ii) demonstrable capacity to conduct investment businesses. However, in reality, very few new financial intermediaries have been approved by PBC, particularly after the failure of several trust companies during the Asian Crisis, most notably the Guangdong International Trust and Investment Company.

17. Given that the DFV is not a financial intermediary, APL2’s appraisal determined that OP 8.30 does not apply.

Potential Market for the DFV

18. Eligible investmetns for DFV financing are: (i) revenue-generating capital investments in water supply, wastewater collection and treatment, and solid waste management;(ii) other similar environment-related infrastructure; (iii) capital investments in non revenue-generating public sector infrastructure projects. Under the APL2, the DFV financed two trunk sewer projects, one wastewater treatment plant, and one landfill project. The size of sub-projects ranged from RMB 100 million to RMB 200 million, while the size of lending was RMB 40 million to RMB 70 million. Similar projects have been financed mainly by state bonds or funds from district governments. Local commercial banks recently entered this market, competing with the DFV by providing quick and easy credit. The China Development Bank (CDB) is also financing environmental improvements in suburban Shanghai, but the CDB focuses mainly on larger investments: its average lending is at least a few hundred million RMB. Nevertheless, the CDB’s Shanghai Branch indicated interest in participating jointly with the DFV on environmental projects in suburban Shanghai. The DFV identified wastewater, solid waste, and hazardous waste as a potentially interesting market segments.

19. Together, these sectors should provide significant market potential for the DFV. In terms of wastewater, it is China’s national policy objective that wastewater treatment will be increased from the current 40 percent to 70 percent in 2010. This would require 1,000 wastewater treatment plants with an estimated total investment of RMB 400 billion. Another two hundred billion RMB would be required to construct the network. In accordance with the SMG’s plan, treatment of wastewater will be increased from the current 49 percent to 70 percent in suburban Shanghai. This would require an estimated total investment of RMB 3 billion. Another RMB 3 billion would be required for construction of the network. This investment does not include upgrading of existing facilities. In terms of hazardous waste, it is estimated that the quantity of hazardous waste generated in Shanghai will increase from 0.45 million tons/year in 2007 to 0.53 million tons/year in 2010, with a number of specific projects currently being contemplated by the SMG.

Major Issues and Challenges

20. The DFV has established a good track record implementing Bank-financed project components under the APL2, but it now faces distinct challenges that will influence its development trajectory under the APL3 and beyond. As identified above, the potential market for the DFV exists, but to tap this market potential, the DFV needs to address key issues and challenges. The most critical issues are as follows:

Identifying a Strong APL3 Project Pipeline

21. Under the APL2, all sub-projects were selected for DFV financing before appraisal. Under the APL3, a programmatic lending approach will be used (see below), in which sub-

60 projects can be identified during implementation of the APL3. Based on DFV’s successful track record, it was decided that the Bank’s appraisal would focus on updating DFV’s Operations Manual and a review of the pipeline of potential investment projects. However, despite potential markets, the DFV has faced difficulties identifying a strong pipeline of appropriate projects. Only one specific investment was identified, though a longer list of potential project candidates exists (see future evolution section).

Streamlining Loan Processing

22. Several projects initially identified as being suitable for DFV financing had to be dropped from consideration because local governments were reluctant to accept the special conditions required for using DFV funds – in particular, compliance with Bank policies and procedures on EA, resettlement, and procurement. In addition, projects proposed for DFV funding must be approved at the Municipal level – feasibility studies by the SDRC and designs by the Shanghai Construction and Transportation Commission. These requirements were thought to result in unacceptable delays and increased costs. The DFV needs to expedite its internal loan processing. At the same time, the SDRC approval process and requirements need to be more flexible and streamlined to the extent possible.

Finding Additional Financing Sources

23. Under the APL2, World Bank loan proceeds represented the only funding source for the DFV. Local commercial banks entered into a letter of intent to provide supplemental loans for all DFV-funded projects, although actual lending has not occurred because of loan savings realized in DFV’s loan commitment.This funding situation will remain unchanged during implementation of the APL3, unless Chengtou and the SMG decide to provide additional funds for DFV’s operation by providing additional equity or guarantees for long-term debt financing. In addition, the DFV may actively pursue co-financing opportunities with the CDB and other commercial lenders. Whether additional equity will be provided by Shanghai Chengtou Corporation needs to be addressed in the context of resolving the strategic positioning issues elaborated below.

Establishing Sustainability

24. The DFV is not a financially sustainable entity, mainly because the DFV is not a licensed financial intermediary and is thus not allowed to extend ordinary loans to sub-projects, and appropriately charge for operational costs and credit risk exposure. The current legal status of the DFV does also not allow formation of syndication loans, and restricts activities to advisory functions to arrange financial packages. Unless the DFV’s legal status is changed and/or the scale of DFV operations increases significantly, financial sustainability challenges will remain. As mentioned above, financial sustainability is not initially a critical issue, as expenses can be viewed as “business development expenditures” by Shanghai Chengtou Corporation (provided Shanghai Chengtou Corporation wants to pursue the suburban business over the medium to longer term). However, this issue is a concern over the medium-term.

Reaffirming the DFV’s Role

25. Traditionally, the SMG is responsible for developing the core urban area of Shanghai while district governments are in charge of investments in each district. Due to this demarcation of jurisdictional responsibility, the SMG does not have clearly identified resources for investments in suburban Shanghai, except in special cases, such as industrial development areas and designated projects on which SMG places special importance. Small environmental improvement projects that the DFV has been targeting are not included as such special cases. Shanghai Chengtou Corporation got involved in only very few environmental infrastructure investments in suburban Shanghai on the invitation of district governments that needed Chengtou’s expertise in the sector. The current jurisdictional constraints make it difficult for Chengtou and the SMG to mobilize funds for DFV’s operation in suburban Shanghai. The SMG and Shanghai Chengtou Corporation should therefore outline a vision on how environment improvement projects should be strategically developed in suburban Shanghai, and what role the DFV should play over the medium to long term.

Shanghai Chengtou Corporation On-Lending

26. The initial design of the DFV under the APL2 had some inconsistencies. The DFV was designed to on-lend Bank loans and mobilize co-financing from other sources. However, as the DFV is a subsidiary of Shanghai Chengtou Corporation, and Shanghai Chengtou Corporation is not a ‘bank’ but rather an investment corporation and a holding company for Shanghai’s infrastructure companies, Shanghai Chengtou Corporation cannot extend loans. Its core function is to mobilize financing from other sources on behalf of its subsidiary companies. DFV’s business model of on-lending Bank loan proceeds is somewhat in conflict with this core function. This tension explains why the DFV faced difficulties obtaining a financial intermediary license. A strategic question is in what way Shanghai Chengtou Corporation, through the DFV, should be engaged in the on-lending business, which is a somewhat different business than that pursued by its other subsidiaries.

Future Evolution of the DFV

27. The potential role of the DFV remains significant given the magnitude of environmental challenges in suburban areas and the limited ability to manage and finance environmental infrastructure investments in an integrated manner. However, to manifest its full potential, the the DFV needs to resolve the critical issues and challenges outlined above. As the DFV is unable to resolve all issues by loan approval, a two pronged reform strategy was adopted:

• First, for the APL3 preparation and appraisal, a set of initial reforms that would address some key identified challenges would be introduced.

• Second, for the APL3 implementation, it was decided that the Bank will provide ongoing support to resolve the more difficult, medium-term reforms.

28. The APL3 also included a dated covenant requiring Chengtou’s General Management to adopt a strategic decision on the future of the DFV. The decision will need to address the key issues with respect to the DFV’s business model and its institutional and financial viability. To support Shanghai Chengtou Corporation and the DFV in this respect, the Bank mobilized support

through Trust Funds resources from the Dutch Government, through the BNWP window. This Trust Fund will finance consulting support in early 2009 dedicated to developing practical medium term reform options.

Under the APL3

29. Under the APL3, the DFV was appraised in a programmatic manner. This required the appraisal of the updated DFV’s Operational Manual and an indicative list of project investments. Specifically, it was agreed that at appraisal only the already identified projects will need to be included in SDRC’s foreign capital utilization submission to NDRC. The SDRC needs only the approval of the project proposal, not the final feasibility study. At appraisal, one firm investment has been identified: the Jiading District Hazardous Solid Waste Treatment and Disposal Facility (for an initial project overview see the box below). A list of additional potential projects, a subset of which could be financed under the APL3, is included at the end of this annex.

30. Furthermore, it was also agreed that DFV investments would include co-financing from other financial institutions. Though it was too early to finalize co-financing arrangements for the Jiading Hazardous Solid Waste Facility, the Bank agreed that a maximum of US$20 million could be used to support this project. Given the indicative project financing requirements and the proposed financing plan for the project (30 percent equity from SEICD, the rest debt, including from the DFV), co-financing is likely to be required. Co-financing mobilized by the DFV is an explicit project monitoring indicator (see results framework section).

31. Together, these two immediate reforms and innovations should address two critical issues and concerns identified above. Movement toward a programmatic approach should lower project transaction costs of the DFV and the Bank interactions, and provide more flexibility during implementation. The provision for co-financing should increase the scale of DFV’s operation, and mobilize additional sustainable long term financing for suburban environmental infrastructure investments. The first innovation is a major breakthrough, as the DFV is the first entity in the Bank’s urban program for China allowed to follow a programmatic approach.

Box A4.1: Hazardous Solid Waste Treatment and Disposal – Jiading District

Proponent: Shanghai Solid Waste Disposal Center Project Scope: Centralized hazardous solid waste treatment and disposal facilities, to be built immediately next to the existing Shanghai Solid Waste Disposal Center in Zhu Jiaqiao Town, Jiading District. (Since the project is located within the confines of the existing facilities, no new land acquisition or resettlement will be required.) Future Plans: The planned total capacity for treatment and disposal of hazardous wastes is 130,000 t/year, broken down as follows: (a) 30,000 t/year for incineration; (b) 40,000 t/year for oily wastes (emulsified liquid and mineral oil); (c) 54,100 t/year for heavy metal wastes (acids, alkalis, copper waste, waste fluorescent tubes, and electronics manufacturing wastes); (d) 5,000 t/year for organic solvents; and (e) 900 t/year for other hazardous wastes. Service Area: Shanghai Municipality (core urban and sub-urban areas) Current Status: Project proposal submitted to the SDRC for approval Project Company: Shanghai Solid Waste Disposal Center Ownership: 100 percent Shanghai Chengtou Environment Industry Development Company Ltd. Concession Arrangements: The project facilities will be operated under a market-oriented approach, receiving hazardous wastes from industries and other sources for treatment and disposal in an approved facility operated under regulatory supervision and monitoring from the Shanghai EPB.

Project Capital Costs (Phase I): The total capital investment required for this project is estimated to be about RMB 484.44 million. Financing Arrangements: SCEID will provide equity of 30 percent, with the remaining amount to be financed from debt sources, including from the DFV.

Medium Term Reforms

32. During the implementation of the APL3, the DFV is expected to address some difficult medium term reform options. As these reforms would need to address difficult challenges, and relate to regulatory changes outside the DFV’s and the SMG’s direct control, the Bank is taking a realistic approach to the future of the DFV. The Bank considers most important that the DFV continues to advance the reform agenda and explore all possible options, and that Shanghai Chengtou Corporation make a strategic management decision on DFV’s future role. While the exact outcome of this decision cannot be pre-judged at appraisal, options for reform could include the following:

• Option 1: the DFV focuses on advisory functions only;

• Option 2: the DFV becomes a Financial Intermediary by:

(i) applying for a new financial intermediary license; or (ii) purchasing an existing financial intermediary company;

• Option 3: the DFV becomes Shanghai Chengtou Corporation’s focal point for suburban investments by Chengtou taking these actions:

(i) increasing the capital base of the DFV; or (ii) establishing an environment investment fund.

A summary review of the pros and cons of these options follows. Further evaluation will take place during project implementation:

33. Shifting emphasis exclusively to advisory functions (Option 1) would not be fully satisfactory. What is needed in suburban Shanghai is capital mobilization and professional capacity to evaluate and process environmental improvement projects. Focusing only on advisory services would fall short at meeting a critical development objective. The DFV could complement its core financing business with advisory services, as it is already doing (i.e., the DFV provides advisory services on the QCSRWP), but it this option is unlikely to be a viable long term, stand-alone reform alternative.

34. Converting the DFV into a fully fledged financial intermediary (Options 2) would resolve some constraints that the DFV is currently facing—specifically: (i) in terms of on-lending with appropriate marks-ups and pricing for credit risk; and (ii) being able to syndicate loans from other financial institutions. However, obtaining a financial intermediary license is likely to be difficult in light of the regulatory constraints the DFV has been facing. Purchasing an existing financial intermediary company may be costly and would raise questions on the possible

“strategic fit” of the purchased intermediary with Shanghai Chengtou Corporation’s overall business mandate.

35. Making the DFV the focal point for all of Shanghai Chengtou Corporation’s equity investments in sub-urban areas of Shanghai (Options 3) would be a possible reform option. The DFV would not need to obtain a financial intermediary license, and providing equity investments would fit Shanghai Chengtou Corporation’s business mandate. For this option to work, the SMG and Shanghai Chengtou Corporation need to establish a strategic and medium-term agreement on extending Shanghai Chengtou Corporation’s reach to include suburban areas, and to allocate sufficient capital and equity behind such an expansion strategy.

36. To further explore the above reform options for the DFV, BNWP Trust Fund resources were mobilized. The consulting assignment is expected to be implemented early in 2009. The assignment will draw on lessons learned from related work on UDIC reform options in China, such as work on UDIC in Chongqing. In addition, the APL3 project contains a dated covenant requiring the SMG and Shanghai Chengtou Corporation to provide to the Bank a proposal on the medium-term strategic evolution of the DFV. However, given the difficult reform challenges facing the DFV, the DFV component entails high risks that Chengtou/DFV may have difficulty adopting recommended reform options.

Table A4.4 Potential Projects Under DFV

Total Responsible Stage of Planned time No. Project Name Location Type of Project Description Investment （100 Authority Development schedule m RMB ） Phase 3 expansion of Shanghai Municipal SW Jiading District Solid Waste To build treatment and disposal facilities fo r oily waste, heavy metal waste etc. the Draft Project 1 Jiading District 4.8 Sep-08 Disposal Centre Government Disposal expansion capacity is 130,000t/year. Proposal is ready Jinshan Haichuan Water Supply Plant Jinshan District Preliminery Design is 2 Jinshan District water supply Expansion of existing water treatment plant from 200,000 to 400,000 m3/day 5.7 Jan.-09 Expension Government under preparation Shanghai Fengxian Preliminery Design is 3 Fengxian Water Supply Plant Expension Waterworks water supply Expansion of existing water treatment plant from 200,000 to 300,000 m3/day 3.4 Sep.-09 District under preparation FengXian Co.Ltd. Qingpu District Draft Project 4 Qingpu No.2 Water Treatment Plant Expansion Qingpu District water supply 3.3 Government Expansion of existing water treatment plant from 200,000 to 400,000 m3/day Proposal is ready eco-industrial Pudong New Area Solid Waste To build Laogang Base into an eco-industrial park aiming at recycl e and reuse of Solid Project Plan is under 5 Laogang Base Construction and Development 20 Oct-09 park in Pudong District Disposal Waste. Size: preparation Jiading District Wastewater 6 Jiading Northern WWTP Jiading District 0.9 at end of 2010 Government Treatment Expansion of existing wastewater treatment plant from 50,000 to 100,000 m3/day Jiading District Wastewater 7 Jiading secondary WWTP Jiading District 0.9 at end of 2010 Government Treatment Expansion of existing wastewater treatment plant from 50,000 to 100,000 m3/day Jiading District Wastewater 8 An'ting WWTP Jiading District 0.9 at end of 2010 Government Treatment Expansion of existing wastewater treatment plant from 50,000 to 100,000 m3/day Jinshan District Wastewater 9 Fengjing WWTP Jinshan District Expansion of existing wastewater treatment plant from 14,000 to 28,000 m3/day 0.3 at end of 2010 Government Treatment Nanhui District Wastewater 10 Nanhui Central WWTP upgrading Nanhui District Expansion of existing wastewater treatment plant from 50,000 to 150,000 m3/day 1.7 at end of 2010 Government Treatment Chongming Wastewater 11 Chengqiao WWTP Chongming stage 2 expansion project, capacity is 25,000m3/d 0.2 at end of 2010 Government Treatment Fengxian Fengxian District Wastewater 12 Fengxian Western WWTP Expansion of existing wastewater treatment plan t from 100,000 to 250,000 m3/day 0.4 at end of 2020 District Government Treatment Qingpu District Wastewater 13 Qingpu WWTP Qingpu District Expansion of existing wastewater treatment plant from 15,000 to 35,000 m3/day 0.5 at end of 2020 Government Treatment Qingpu District Wastewater 14 Xicen WWTP Qingpu District Expansion of existing wastewater treatment plant from 2,500 to 10,000 m3/day 0.3 at end of 2020 Government Treatment Qingpu District Wastewater 15 Jinze WWTP Qingpu District Expansion of existing wastewater treatment plant from 2,500 to 10,000 m3/day 0.3 at end of 2020 Government Treatment Songjiang Songjiang District Wastewater 16 Songjiang Northeast WWTP Expansion of existing wastewater treatment plant from70,000 to 140,000 m3/day 1.2 at end of 2020 District Government Treatment Songjiang Songjiang District Wastewater 17 Songjiang Eastern WWTP Expansion of existing wastewater treatment plant from70,000 to 105,000 m3/day 0.6 at end of 2020 District Government Treatment Jiading District Wastewater 18 Nanxiang WWTP Jiading District New Construction, capacity is 50,000m3/d 1 at end of 2020 Government Treatment Chongming 19 Chongming municipal solid waste landfill Chongming MSW Treatment stage 2 integrated MSW treatment project 1 Government

Annex 5: Project Costs CHINA: Shanghai Urban Environment Project - APL Phase III

Project Cost

Local Foreign Total Project Cost By Component US $million US $million US $million

Water Supply and Management Component 258.34 150.97 409.31 Wastewater Management Component 40.31 27.53 67.84 District Environment Management Program 50.61 35.60 86.21 Institutional Strengthening and Training 1.70 1.70 3.40 Component

Total Baseline Cost 350.96 215.80 566.76 Physical Contingencies 31.33 0.00 31.33 Price Contingencies 0.00 0.00 0.00 Total Project Costs 382.29 215.80 598.09 Interest during construction 32.55 0.00 32.55 Front-end Fee 0.00 0.50 0.50 Total Financing Required 414.84 216.30 631.14

Local Foreign Total Project Cost By Activity US $million US $million US $million

Civil Works 215.10 175.98 391.08 Equipment & Materials 0.00 24.70 24.70 Land Acquisition & Resettlement 80.34 0.00 80.34 IST35 1.88 1.70 3.58 Other 53.65 13.41 67.06

Total Baseline Cost 350.96 215.80 566.76 Physical Contingencies 31.33 0.00 31.33 Price Contingencies 0.00 0.00 0.00 Total Project Costs36 382.29 215.80 598.09 Interest during construction 32.55 0.00 32.55 Front-end Fee 0.00 0.50 0.50 Total Financing Required 414.84 216.30 631.14

35 In the Table of Project Cost by Activity, IST cost includes the agency fees for external monitoring of EMP and RAP (US$0.18miillion) to be funded by SMSC. This cost is included in the Wastewater Management Component in the Table of Project Cost by Component. 36 Identifiable taxes and duties are US$ 22.09 million, and the total project cost, net of taxes, is US$ 609.5 million. Therefore, the share of project cost net of taxes is 96.5%. 67

Financing Plan

Bank Loan Counterpart Total Financing Plan By Component US $million Fund US $million US $million

Water Supply and Management Component 136.85 272.46 409.31 Wastewater Management Component 29.32 38.52 67.84 District Environment Management Program 29.93 56.28 86.21 Institutional Strengthening and Training 3.40 0.00 3.40 Component

Total Baseline Cost 199.50 367.26 566.76 Physical Contingencies 0.00 31.33 31.33 Price Contingencies 0.00 0.00 0.00 Total Project Costs 199.50 398.59 598.09 Interest during construction 0.00 32.55 32.55 Front-end Fee 0.50 0.00 0.50 Total Financing Required 200.00 431.14 631.14

Bank Loan Counterpart Total Financing Plan By Activity US $million Fund US $million US $million

Civil Works 183.85 207.23 391.08 Equipment & Materials 12.25 12.45 24.70 Land Acquisition & Resettlement 0.00 80.34 80.34 IST 3.40 0.18 3.58 Other 0.00 67.06 67.06

Annex 6: Implementation Arrangements CHINA: Shanghai Urban Environment Project - APL Phase III

1. An APL Leading Group (APL LG), chaired by the Secretary General of Shanghai, was established to provide policy guidance, coordinate important issues and items, and monitor progress on the overall urban environment improvement strategy. The members of the APL LG are the directors of the SDRC, the SCC, the SFB and the SWA.

2. Under the leading group, the APL Project Management Office (PMO), led by the SDRC, will act as a coordinating body with the following subsidiaries of Chengtou: (i) the Water Supply and Management Component — the QCSC; (ii) Wastewater Component — the SMSC; and (iii) District Environment Management Program — the CEAM; (iv) IST Component — the QCSC and the SMSC. The SMSC and the CEAM are implementing agencies under the APL1 and/or APL2. While the QCSC is a new entity, most of its staff comes from Chengtou’s various subsidiaries. Shanghai Chengtou Corporation will coordinate all the APL components within Chengtou in close collaboration with the PMO.

Implementing Agencies

3. The project implementation arrangements are in line with the previous arrangements under the APL program. However, relative to the APL1 and the APL2, Shanghai Chengtou Corporation is expected to play a more important role in implementing the APL3. While the primary project implementation responsibility still rests with the individual project implementing utility companies (see detailed description below), Shanghai Chengtou Corporation has decided to establish a project coordinating office to strengthen overall coordination and supervision of the APL program. The specific implementation arrangements are as follows:

• Qing Cao Sha Investment and Construction Development Company (QCSC). The QCSC, a subsidiary under Shanghai Chengtou Corporation, is responsible for implementation of all nine sub-projects under the QCSRWP, including the Nanhui Conveyor (the Bank-financed component). At the present time, the QCSC is a construction company, established for the purpose of implementing QCSRWP, though the SMG has already began to investigate options for its further institutional development.37

• Shanghai Municipal Sewage Company (SMSC). The Bailonggang South Sewer component will be implemented by the SMSC, also a subsidiary under Shanghai Chengtou Corporation. The SMSC is Shanghai’s integrated sewer company in charge of providing sewage collection, sludge treatment, and wastewater tariff collection in the core urban area. The SMSC was established in 1995 and has been responsible for implementing a number of Bank financed projects, starting with the Bank’s first sewage project in Shanghai (Shanghai Sewage Project) in the late 1980s (and since then SSP2, and SSP3/APL2). The SMSC is a holding company which owns the major sewage network and treatment assets. They are

37 In addition to QCSC, there are two other companies operating raw water system in Shanghai: Chengtou Raw Water Company (CRWC), established in 2006, is responsible for the raw water transfer to Shanghai’s water supply companies; Shanghai Raw Water Company (SRWC), a publicly listed company, is responsible for the management of the water intake in the Upper Huangpu River 69

operated by three operating companies (Shanghai South, Central, North Drainage Companies) and Bailonggang WWT Company.

• Chengtou Environmental Asset Management Company (CEAM)/ District Financing Vehicle (DFV): The DFV is implemented by the CEAM, a subsidiary under Shanghai Chengtou Corporation. It was established under the APL2. The DFV is responsible for implementing all APL3 projects relating to investment in the suburban areas in Shanghai. The sub-projects under the DFV would be implemented by the utility companies or entities with support from the CEAM, and under supervision of their respectful district governments.

Table A6.1: Overview of Implementation Arrangements Ownership of Assets O&M of Assets Project Project Implementing Created under the Created Under the Debt Service Component Agency Project Project Repayment Obligation Qing Cao Sha Investment and Qing Cao Sha Construction Raw Water Development Company Intake (QCSC) QCSC QCSC QCSC Shanghai Municipal Bailonggang Sewage Company South Sewer (SMSC) SMSC SMSC SMSC Chengtou Environmental Asset Individual Sub-Project Management Co. Ltd Individual Sub-Project Individual Sub-Project Operating Companies as DFV (CEAM), Operating Companies Operating Companies the End Borrower Property Right to be owned by QCSC and Adaption of the study IST QCSC and SMSC SMSC outcome. QCSC and SMSC

4. Shanghai Chengtou Corporation. As described above, the water supply and management component, the wastewater management component, and the DFV component will be implemented by various subsidiaries under Shanghai Chengtou Corporation.

5. Shanghai Chengtou Corporation was established in 1992 as an investment and stock holding corporation. Shanghai Chengtou Corporation implements projects in infrastructure including in sewerage, roads, water, wastewater and landscaping mainly in the core urban area of Shanghai. The SMG, like all local and municipal governments in China, cannot borrow directly from banks and needs an intermediary. Therefore, Shanghai Chengtou Corporation Shanghai raises funds on behalf of the SMG. In May 2005, the administrative supervision agency for Shanghai Chengtou Corporation has been changed from Shanghai Construction Commission to the State Asset Supervision and Management Committee. 70

6. Shanghai Chengtou Corporation and its wholly owned 24 subsidiaries have financed RMB 200 billion through about 60 large infrastructure projects, including key bridges, road and rail infrastructure, in addition to prominent buildings and real estate development in Shanghai. As of December 31, 2006, Shanghai Chengtou Corporation had total assets of RMB 214 billion (out of which, RMB 36.3 billion relates to water and wastewater assets). By the end of 2004, Shanghai Chengtou Corporation has become the biggest governmental investment corporation in Shanghai and the biggest UDIC in China. It has mobilized a total of more than RMB 140 billion for direct investment in urban infrastructure. The organization chart of Shanghai Chengtou Corporation is shown in figure A6.1:

Shanghai Chengtou Corporation

Administrat Party- Discipline Production Science and Project Fund and Asset Audit ion and Masses Inspection Manageme Technology Planning Financial Manageme Department Human Working and nt Manageme Department Department nt Resource Department Supervision Department nt Department Department Department Department

Figure A6.1: Organization Chart of Shanghai Chengtou Corporation

Table A6.2 IMPLEMENTATION SCHEDULE

ACTIVITY 2008 2009 2010 JF M A M JJAS O NDJ F M A M JJAS O NDJ F M A M JJAS O NDJ F M A M JJAS O NDJ F M A M JJAS O NDJ F M A M JJAS O NDJ F M A M JJAS O NDJ F M A M JJAS O ND

WB Loan Period Loan Effective Loan Close

A. Part A-Nanhui Raw Water Conveyor

1. Nanhui Raw Water Conveyor

Other QCSRWS component (NBF)

1. QCS Reservoir & Intake Pump Gates

Reservoir Filling 2. Changxing Island Raw Water Conveyor

3. Changjiang Raw Water River Crossing

4. Wuhaogou Pump Station 2011 2012 2013 2014 2015

5. Yangqiao Branch

6. Lingqiao Branch

7. Jinhai Branch

8 Upper Huangpu Rehabilitation

9 Jinhai - Yangqi ao Emergency Link Planning Start B. Southern Sewer Trunk Main

1. Puxi Sewer, River Crossing and PS

2. Pudong Sewer and PS (NBF) Planning Start C. DFV

1. Potential Project I (Jiading HW Phase III)

2. Potential Project II

2. Potential Project III

3. Potential Project IV

D. IST

1. Water Sector Efficiency Regulation 72

2. Water Demand Management (WDM)

3. Water Security

4. Preoject and Financial Management

5. Asset management system

6. Operational improvement & Optimization

NBF WB - plan WB - not yet planned Annex 7: Financial Management and Disbursement Arrangements CHINA: Shanghai Urban Environment Project - APL Phase III

Introduction

1. The Financial Management Specialist (FMS) conducted an assessment of the adequacy of the project financial management system. The assessment, based on guidelines issued by the Financial Management Sector Board on November 3, 2005, concluded that the project meets the minimum Bank financial management requirements, as stipulated in OP/BP 10.02. It was assessed that the project will be able to maintain adequate financial management arrangements acceptable to the Bank. These arrangements, as part of the overall arrangements that the Borrower has in place for implementing the operation, will provide reasonable assurance that the proceeds of the loan will be used for appropriate purposes. Financial management risk is defined as the risk that World Bank loan proceeds will not be used for the purposes intended and is a combination of country, sector and project specific risk factors. Taking into account the risk mitigation measures proposed under the project, a “low” FM risk rate was assigned to the project at the appraisal stage.

2. Funding sources for the project include Bank loan and counterpart funds. The Bank loan proceeds will flow from the Bank into a project designated account (DA) to be set up at and managed by the Shanghai Finance Bureau (SFB), to various Project Implementing Units (PIUs), and finally to contractors or suppliers. The Bank loan agreement will be signed between the Bank and the People’s Republic of China through its Ministry of Finance (MOF), and on-lending agreements for the Bank loan will be signed between the MOF and the SFB, and in turn between the SFB and each PIU.

Country Issues

3. To date, the World Bank has not carried out a Country Financial Accountability Assessment (CFAA) for China, though dialogue with the Government of China on a CFAA has been initiated. However, based on studies and material produced by others; observations of developments in public expenditures, accounting and auditing; and Bank experience implementing other projects in China, substantial achievements in the aforementioned areas were noted, and further improvement are expected in the next few years. Much work is in progress, and as the economic reform program unfolds, the Government of China is realizing the importance of establishing and maintaining an efficient and effective market mechanism to ensure transparency and accountability, and minimize potential for fraud or corruption.

4. Due to the rather unique arrangements of the Government of China, funding of Bank projects (particularly Bank loans and grants) is controlled and monitored by the MOF and its extension at the sub-national level: finance bureaus at provincial, municipal/prefecture and county levels. However, project activities are usually carried out by implementing entities active in specific industries or sectors due to the level and complexity of needed expertise. Though this separation of duties provides added fiduciary assurance, the above arrangement usually requires greater project coordination, as the multi-level management of project funding and implementation sometimes acts to the detriment of smooth execution.

Summary of Project Description

5. The estimated base cost of the proposed project is approximately US$567 million. The proposed Bank loan is US$200 million. The development objective of the proposed project is to further advance the overall APL program goal by promoting continuous sector reforms and institutional development, and selected strategic investments in the water and wastewater sector. The particular aims are to increase the secure provision of raw water supply, reduce the amount of pollution load discharged without treatment into water sources, and facilitate sustainable investments in environmental infrastructure in Shanghai’s suburban areas. The APL3 includes the following components: (1) water and management component; (2) wastewater component; (3) district environment management component; and (4) institutional strengthening and training component. For the detailed project description, please refer to the Annex 4 – Detailed Project Description in the PAD.

Audit Arrangements

6. The Bank requires that project financial statements be audited in accordance with standards acceptable to the Bank. In line with other Bank financed projects in China, the project will be audited in accordance with the International Auditing Standards and the Government Auditing Standards of the People's Republic of China. The Shanghai Municipal Audit Office (SMAO) has been identified as auditors for the project. Annual audit reports will be issued by the SMAO and subject to reviews by the China National Audit Office (CNAO). The Bank currently accepts audit reports issued by CNAO, or provincial/regional audit bureaus/offices for which CNAO is ultimately responsible.

7. The annual audit report of project financial statements will be due with the Bank within 6 months after the end of each calendar year. This requirement is stipulated in the loan agreement. The responsible agency and timing are summarized as follows:

Table A7.1: Audit Report of Project Financial Statements Audit Report Submitted by Due date Consolidated project financial statements PMO June 30 of each calendar year

Risk Assessment and Mitigation

8. The following risks with corresponding mitigating measures have been identified during the assessment:

Table A7.2: Risk Assessment and Mitigation Risk Risk Incorporated Risk Risk Conditions of Rating Mitigating Measures Rating After Negotiations, Before Mitigating Board or Mitigating Measures Effectiveness Measures

Inherent Risk • Country level Modest Continuous dialogue with Modest

related government entities and technical assistance from the Bank will help the government to improve its public sector financial management. In the short- term, annual audit requirements will reduce the risk of project funds not being used for their intended purposes. For those areas where government systems cannot be used, the Bank's specific requirements will be embedded into the project financial management system. • Entity Level Modest The project has 3 PIUs: the Low Shanghai Qing Cao Sha Raw Water Engineering Co., Ltd. (QCSC), the Shanghai Municipal Sewerage Company Ltd. (SMSC) and the Shanghai Chengtou Environment Asset Management Company (CEAM). The SMSC and the CEAM have experience with the Bank financed APL1 and/or APL2. The QCSC, a new PIU responsible for executing the largest part of the APL3, does not have experience with Bank financed projects. However, it has recruited an experienced and competent finance manager who has experience with the APL1 and other Bank financed projects in Shanghai. • Project Level Modest The APL3 is a repeat of the Low APL1 and the APL2. Each PIU will be responsible for the execution of 3-4 subprojects. The project structure is relatively straightforward. Control Risk • Budgeting Modest There are some existing Modest budgeting controls at PIUs, although these are not specifically focused on project activities. The FMS will work with each of the PIUs to strengthen their 75

budgeting processes for project components and activities. • Accounting Modest Accounting policies and Low procedures for the Bank loan are already in place from previous APL projects. All the PIUs are experienced with maintaining accounting records and ledgers. Periodic supervision from the task team will ensure these procedures are still functioning as designed. • Internal Modest Each PIU has existing Modest Control internal controls and control procedures are documented in the existing Financial Management Manual (FMM). The SMSC and the CEAM will continue using the FMM of the APL1 and/or APL2, which have been updated for the APL 3 use. • Funds Flow Modest The flow of withdrawal Low applications and loan proceeds will go only through the SFB, which will enhance project implementation efficiency. The SFB has experience with Bank financed projects and its involvement and review will mitigate FM risks. • Financial Modest The format and contents of Low Reporting financial statements have been stipulated by the MOF and all the PIUs will use them for project financial reporting. Since the project has only 3 PIUs, consolidation of PMO financial statements is not complicated. Also, all PIUs are experienced in financial reporting requirements. • Auditing Modest The external auditor, SMAO, Low has experience with previous Bank projects. Overall Modest Low

9. The overall FM risk rating assigned to this project at the appraisal stage is low, contingent upon the proposed mitigating measures being carried out. The FMS will monitor the effectiveness of the measures and FM risk during project implementation. .

Disbursement Arrangements

10. This project has four disbursement methods: advance, reimbursement, direct payment and special commitment. Supporting documents required for Bank disbursement under the different disbursement methods will be documented in the Disbursement Letter issued by the Bank. Applications will be supported by:

(a) The list of payments against the contracts, and records on eligible expenditures (e.g., copies of receipts and supplier invoices) for the contracts subject to the Bank’s prior review, as indicated in the table below:

Table A7.3: Expenditure Category Expenditure Category Contracts More than US$ Equivalent Civil Works 15 million Goods 500,000 Firm Consultant 200,000 Individual Consultant NA

(b) Statement of Expenditures (SOEs) for any other expenditure.

11. One segregated designated account (DA) denominated in US dollars will be established at a commercial bank acceptable to the Bank and managed by the SFB. The ceiling of the DA for the Bank loan will be finalized later in the Disbursement Letter issued by the Bank.

12. The SFB will be directly responsible for the management, maintenance and reconciliation of the DA activities of the project. Supporting documents required for Bank disbursements will be prepared and submitted by respective PIUs, and then sent to the SFB for further disbursement processing. The flow of funds and withdrawal applications for the loan will proceed as follows:

Figure A7.1: Flow of Funds and Withdrawal

Direct Payment

WB DA at SFB PIU Contractors /Suppliers

Flow of withdrawal applications

Flow of fund

13. Counterpart funds will be contributions from local government appropriations and commercial bank loans.

14. The Bank loan would be disbursed against eligible expenditures per the following table.

Table A7.4: Eligible Expenditure Table

Amount of % of Expenditure Cat Description Loan Proceed financed by IBRD (US$)

Goods and civil works under Water Supply and Management Component and 01 under Wastewater Management Component 166,170,000 80

Goods and civil works under District 02 Environment Management Program 29,930,000 100

Consultants’ services, training, and study 03 tours under Institutional Strengthening 3,400,000 100

04 Front End Fee 500,000 100

Subtotal

Total Loan Amount 200,000,000

Financial Management and Reporting Arrangements

Strengths and Weaknesses

15. Strengths. Two of the three PIUs have experience with World Bank financed projects. The SFB is familiar with managing the designated account and withdrawal applications procedures for Bank financed projects.

16. Weaknesses and Action Plan . The QCSC does not have experience with Bank-financed projects. However, it has recruited an experienced and competent financial manager who has solid accounting knowledge and experience with Bank financed projects. In addition, the QCSC has an updated FMM to serve as the project FMM.

Implementing Agencies

17. An APL Leading Group (APL LG) has been established, chaired by the Vice Mayor of Shanghai with the Deputy Secretary General of Shanghai as the Deputy Chief, to provide policy guidance, coordinate important issues and items, and monitor progress in pursuing the overall urban environment improvement strategy. The members of the APL LG are the directors of the Shanghai Development and Reform Commission (SDRC), Shanghai Construction and Communications Commission (SCC), the SFB, and Shanghai Water Authority (SWA).

18. Under the APL LG, the APL Project Management Office (PMO), led by the SDRC, will act as a coordinating body for all the investment components implemented by the subsidiaries of Shanghai Chengtou Corporation: (i) the Water Supply and Management Component – the

QCSC; (ii) Wastewater Component – the SMSC; (iii) District Environment Management Program – CEAM; and (iv) IST Component – the QCSC and the SMSC. The SMSC and the CEAM are implementing agencies for the APL 1/APL 2. The QCSC is a new entity with most of its staff coming from Shanghai Chengtou’s various subsidiaries.

Budgeting

19. Although the cost table was prepared for the project and the project will prepare its annual implementing plan, the budgeting system of the project is usually not well maintained or monitored. The FMS will work with related entities to improve their budgeting system during project implemenation.

Accounting

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

• Chart of account • Detailed accounting instructions for each project account • Standard set of project financial statements • Instructions on the preparation of project financial statements

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

• Balance sheet of the project • Statement of sources and uses of fund by project components • Statement of implementation of loan agreement • Statement of designated account • Notes to the financial statements

22. Each PIU will be managing, monitoring and maintaining its respective project accounting records for their respective components. Original supporting documents for project activities will be retained by each PIU. In addition, each PIU will prepare its own financial statements, which will be reviewed, approved and consolidated by the PMO before sending to the Bank for review and comment, which will be done on a regular basis.

23. The FMM will provide detailed guidelines on financial management including internal controls, accounting procedures, fund and asset management, withdrawal application procedures, financial reporting and auditing arrangements. Since the the APL3 is a follow-on project, the SMSC and the CEAM will continue using their previous FMMs while the QCSC will tailor its FMM to project features.

24. All PIUs will use their existing computerized financial management information software.

Internal Control and Internal Auditing

25. The related project accounting policy, procedures and regulations were issued by the MOF and are reflected in their financial management manual.

26. There is no independent internal audit department for the project. However, this lack will not impact the project’s financial management. Management and monitoring from PIUs and relevant finance bureaus and annual external audits will ensure that financial management controls are functioning appropriately.

Financial Reporting

27. The format and content of project financial statements are based on the standard project financial reporting package agreed between the Bank and the MOF, and have been discussed and agreed with all concerned parties.

28. Each implementing agency will prepare financial statements on its components, which will be used by the SMSC to prepare consolidated project financial statements, which will be submitted to the Bank for review and comment on a regular basis. The interim un-audited project financial statements should be submitted to the Bank on a semi-annual basis.

Financial Covenants

29. Financial covenants applicable to the project include standard ones such as project audit and interim financial reports, and specific financial covenants for the implementing companies: the QCSC and the SMSC.

Supervision Plan

30. The supervision strategy for this project is based on its FM risk rating, which will be evaluated regularly by the FMS in consultation with the relevant task team leader.

Annex 8: Procurement Arrangements CHINA: Shanghai Urban Environment Project - APL Phase III

A. General

1. Procurement for the proposed project will be carried out in accordance with the World Bank’s "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004 and revised October 2006; and the "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004 and revised October 2006; and provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. The Procurement Plan, agreed by the Borrower and the Bank, specifies for each contract financed by the Loan the different procurement and consultant selection methods, the needs for pre-qualification, estimated costs, prior review requirements, and timeframe. The Procurement Plan will be updated at least annually to reflect actual project implementation needs and improvements in institutional capacity.

2. Procurement of Works: Works procured under this project would include civil works in these components: (i) Nanhui Raw Water Conveyor; (ii) Puxi section of Bailonggang South Trunk Sewer System; and (iii) District Financing Vehicle (DFV).

3. Preliminary and detailed designs shall be approved by the Bank in advance for all prior review and post review contracts.

4. The procurement will be done using the MOF’s Model Bidding Documents (MBD), dated May 1997 and agreed with the Bank for National Competitive Bidding (NCB) through post qualification (each contract below US$20 million), and the latest Bank’s Standard Bidding Documents (SBD) for International Competitive Bidding (ICB) (each contract above US$20 million). The current versions of SBD are from the “Standard Procurement Document, Prequalification Document for Procurement of Works and User's Guide” dated August 2006 and revised May 2007, and the “Standard Bidding Document, Procurement of Works, April 2007.” Contracts above US$15 million are subject to Bank prior review.

5. Procurement of Goods: Goods procured under this project would include equipment and instruments in these components: (i) Nanhui Raw Water Conveyor, (ii) Puxi section of Bailonggang South Trunk Sewer System, (iii) DFV, and (iv) Institutional Strengthening and Training (IST).

6. The procurement will be done using MOF’s MBDs dated May 1997 agreed with the Bank for NCB (each contract less than US$500,000 and more than US$100,000), and the latest version of the Bank’s SBDs for ICB (each contract more than US$500,000) and Shopping (each contract less than US$100,000). The current versions of SBDs are Procurement of Goods, May 2004, revised May 2005, September 2006 and May 2007; and SBDs for Procurement of Plant Design, Supply and Installation & User’s Guide, April 2008. Contracts above US$500,000 are subject to Bank prior review.

7. Procurement of non-consulting services: Not applicable.

8. Selection of Consultants: Consultants selected under this project will provide services to the IST component. The procurement methods will be: Quality and Cost Based Selection (QCBS) or Quality Based Selection (QBS) conforming with sections 2.8 and 3.2 of the Consultant Guidelines for all contracts above US$200,000; Selection based on Consultants Qualifications (CQS) for all contracts below US$200,000; and Individual Consultants (IC) in conforming with section V of the Consultant Guidelines. Consultant services estimated to cost less than US$200,000 equivalent per contract, may, with the Bank's prior agreement, be procured in accordance with the provisions of paragraphs 3.9 through 3.13 and 5.4 of the Consultant Guidelines for Single Source Selection.

9. Short lists of consultants for services estimated to cost less than US$300,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. Consultants that are universities and government research institutions will be selected in accordance with the provisions of paragraphs 1.11(c) and 2.8 of the Consultant Guidelines. The Bank’s latest Standard Request for Proposal (SRFP) shall be used. The current version is: Standard Request for Proposal, Selection of Consultants May 2004. Contracts above US$200,000 for firm and all Single Source Selection are subject to the Bank’s prior review. In addition, all TORs, regardless contract value, will be subject to the Bank’s prior review.

10. Operating Costs: Not applicable.

11. Others: NA

B. Assessment of the agency’s capacity to implement procurement

12. Procurement activities will be carried out by each Project Implementation Unit (PIU) and its Procurement Agent under the supervision of government line agencies. The procurement will be coordinated by the APL Project Management Office (PMO) for the following components: • Shanghai APL Project Management Office (PMO) for project coordination; • Shanghai Municipal Sewerage Company Ltd. (SMSC) for South Trunk Sewer; • Shanghai Qing Cao Sha Investment Construction & Development Co. Ltd. (QCSC) for Nanhui Raw Water Conveyor, assisted by the CEAM; • Shanghai Chengtou Environmental Assets Management Corp. Ltd. (CEAM) for the DFV; • The QCSC and the SMSC for IST.

13. The SMSC, the QCSC, and the CEAM are subsidiaries of Chengtou. The PMO is led by the government line agencies of the SDRC, the Shanghai Finance Bureau (SFB), the Shanghai Water Authority (SWA) and the Shanghai Construction and Communications Commission (SCC). Daily works of the PMO will be carried out by the staff of the SMSC. The Procurement Agent will assist the PIU in preparing the commercial part of bidding documents, publishing the Specific Procurement Notices, hosting the bid opening, participating in bid evaluation, and sending the bidding documents and the Bid Evaluation Reports to the Bank for review, as instructed by PIU and line agencies .

14. An assessment of the capacity of the PMO, PIU and line agencies to implement procurement actions was carried out in August 2008. The assessment reviewed their organizational structures for implementing the project, and the interaction between the project staff responsible for procurement activities in these agencies and procurement agents.

15. The assessment found that there are some deviations from Bank guidelines in government procurement practices. The proposed provisions in the legal agreements for NCB procurement, Bank prior review, and post review of procurement activities, as well as training on the Bank’s policies and procedures, will address these issues. The Bank’s procurement policies and procedures for Bank financed contracts will be followed.

16. The key issues and risks concerning procurement during project implementation have been identified and are shown in Table A 8.1 (details are included in the procurement capacity assessment report). The agreed corrective measures are also shown in Table A8.1.

Table A8.1 Procurement Assessment – Risks, Issues and Corrective Measures No Risks and Issues Corrective Measures 1 Coordination between the PMO, PIU, procurement PMO and PIUs update and distribute procurement agents , and the government line agencies manual for procurement staff in all PIUs 2 Training for PIU staff in operation of procurement PMO will organize periodically, or send staff to, procurement trainings, seminars, study tours and workshops targeting procurement staff and other staff in line agencies. On-the-job training will be conducted for all staff from time to time to strengthen the agency’s capacity to implement the procurement for the project 3 Disclosure of procurement under the project Publish a General Procurement Notice (GPN) on United Nations Development Business (UNDB) online and dgMarket before any SPN

17. The overall project risk for procurement is average.

C. Procurement Plan

18. The Bank project team and PIU and PMO agreed on a Procurement Plan for project implementation. It will be available in the Project database and on the Bank’s website. The Procurement Plan will be updated in agreement with the Project Team annually to reflect actual project implementation needs and improvements in institutional capacity.

19. Prior review thresholds for the Project will be:

Table A8.2: Prior Review Thresholds Civil Works Goods Consultant Consultant services services Firm Individual Above US$ 15 million 500,000 200,000 NA

20. In addition, the Bank will undertake prior review for the first contract procured under each procurement method, regardless of its contract amount.

21. Procurement method thresholds for the Project will be:

Table A8.3: Procurement Method Thresholds Civil Procurement Method Works Goods Consultant services ICB >US$20 >US$ >US$300,000 (short list to contain million 500,000 not more than 2 firms from any NCB advertisement in a >US$2 >US$ country) national newspaper million 300,000 US$200K: QCBS / QBS provincial newspaper million 300,000

22. Advertisement. All Procurement Notices for ICB and consultant contracts above US$200K for firms shall be advertised on UNDB online, dgMarket, and in a national newspaper. Expressions of Interest (EOIs) to select consulting firms shall included advertisements in a national newspaper, regardless of the contract value.

23. Information on bid/proposal evaluation and contract award shall be published in accordance with the Guidelines 2.60, 3.4 and 3.7 for works and goods, and 2.28, 3.8 and 3.13 for consultant services.

D. Frequency of Procurement Supervision

24. The Bank will monitor procurement closely through its prior review procedures, regular supervision missions, and procurement post-review missions. Based on the capacity assessment of the implementing agency, it is recommended that the Bank procurement supervision mission conduct post review of procurement every 12 months.

Table A8.4: Contract packages in the Procurement Plan prepared by borrower

Contract Package for Nanhui Conveyor for QCS Raw Water Supply Contract Price RMB Procure- N Review by Duration Start Contract No. Contract Name Quantities 10,000 ment o. Bank (Month) Bidding (in US$ Methods 1, 000) Nanhui Conveyor 2×DN2000，1×DN1800， 16669 1. QNZ-C1 ICB Prior 20 2010 Works C1 Pipe Jacking3036m，wells 7 (26,885) 2×DN2000，Pipe Jacking1219m，wells 3 ；1×DN1800，Pipe Jacking1316m，wells Nanhui Conveyor 4 ；1×DN1200, Pipe Jacking103m； 10689 QNZ-C2 NCB Prior 20 Works C2 2×DN1200， 1434m，Wells 3 ； (17,240) 2×DN1200，Pipe Jacking486m，wells 4 。

Nanhui Conveyor 2×DN2000，Pipe Jacking3471m，wells 9 14404 2. QNZ-C3 ICB Prior 20 Works C3 。 (23,232)

Nanhui Conveyor 2×DN2000，Pipe Jacking3521m， 14467 3. QNZ-C4 ICB Prior 20 Works C4 wells 7 。 (23,333) Nanhui Conveyor 2×DN2000，Pipe Jacking3630m， 14417 4. QNZ-C5 ICB Prior 20 Works C5 wells 9 。 (23,253) Nanhui Conveyor 2×DN2000，Pipe Jacking3531m， 14024 5. QNZ-C6 ICB Prior 20 Works C6 wells 6 。 (22,619) Nanhui Conveyor 2×DN1800，Pipe Jacking3443m， 12319 6. QNZ-C7 NCB Prior 20 Works C7 wells 6 。 (19,869) Nanhui Conveyor 2×DN1800，Pipe Jacking3807m， 14018 7. QNZ-C8 ICB Prior 20 Works C8 wells 6 。 (22,609) Nanhui Conveyor 2×DN1800，Pipe Jacking3790m， 13961 8. QNZ-C9 NCB Prior 20 Works C9 wells 7 。 (22,517)

Contract Price RMB Procure- N Review by Duration Start Contract No. Contract Name Quantities 10,000 ment o. Bank (Month) Bidding (in US$ Methods 1, 000) Nanhui Conveyor 2×DN1800，Pipe Jacking3765m， 13523 9. QNZ-C10 NCB Prior 20 Works C10 wells 6 。 (21,811) Nanhui Conveyor 2×DN1800，Pipe Jacking3563m， 12797 10. QNZ-C11 NCB Prior 20 Works C11 wells 5 。 (20,640) Nanhui Conveyor 1×DN1600，Pipe Jacking7245m， 13287 11. QNZ-C12 NCB Prior 20 Works C12 wells 13 。 (21,430) Hanhuibei Pump Station 3207 12. QNZ-C13 Buildings and Pipelines etc. NCB Post 24 2010 Works (5,172) Nanhui Conveyor 3034 13. QNZ-E1 Valves, connectors etc. ICB Prior 10 2010 connecting equipment (4,893)

Hanhuibei Pump Station Pumps, motors, valves, electrical control 8980 14. QNZ-E2 Equipment Supply & ICB Prior 20 2010 equipment etc. (14,483) Install

179796 Total (289,993) Notes: 1 Cost is based on Preliminary Design for Nanhui Conveyor in August 2008.

Contract Package for Puxi Section of Bailonggang South Trunk Sewer System Contract Price RMB Procure- N Review by Duration Start Contract No. Contract Name Quantities 10,000 ment o. Bank (Month) Bidding (in US$ Methods 1,000) 9,700 15. SST1.1 Puxi Linking Sewer NCB Prior 16 Dec. 2009 (15,645)

Pudong Linking Sewer and Huangpu river 11,400 16. SST1.2 Pudong Linking Sewer NCB Prior 16 Dec. 2009 crossing Sewer (18,387)

6,800 17. SST1.3 Pump Station Works NCB Post 16 Dec. 2009 (10,967)

3,300 18. SST1.4 Pump Station Equipment ICB Prior 16 Dec. 2009 (5,322)

31,200 Total (50,322) Notes: 1 Cost is based on Feasibility Study Report for Huangpu River Crossing and Linking of South Trunk Sewer for Beilonggang, July 2008. 2 Unit Price of main materials in the cost: No. main materials Unit price RMB at July 2008 1. Steel bar RMB 6,000/t 2. #425 Cement RMB 340/t 3. #325 Cement RMB 300/t 4. DN2700 pipe RMB 4200/m

Contract Package for DFV component Contract Price RMB Procure- N Review by Duration Start Contract No. Contract Name Quantities 10,000 ment o. Bank (Months) Bidding (in US$ Methods 1,000) JD1.1 Jiading hazard waste Shanghai solid waste treatment works, third 37,852 19. ICB/NCB Prior/post 2009 ~JD1.n treatment stage, multiple contracts (61,051)

20. To be identified ICB/NCB Prior/post 2010

21. To be identified ICB/NCB Prior/post 2011

37,852 Total (61,051)

Contract Package for IST Procure- N Total Price Review by Duration Start Contract No. Services Delivery Form ment o. US$ Bank (Months) Bidding Methods Performance Benchmarking and Strategic Study, Study Tour(s) QCBS/CQ Prior/ 22. SWA1 Economic Regulation of Shanghai’s 400,000 2010 and workshop (s) S/SOE post Water Sector38 to Improve Efficiency Water Demand Management (WDM) Studies, Pilot Demonstration for Decision Makers, Planners, and Scheme(s), Study Tours, QCBS/CQ Prior/ 23. SWA2 400,000 2010 Senior Staff of Shanghai’s Water Training Courses, and Seminars. S/SOE post Sector. Integrated Strategy for Water Study. Training and Study QCBS/CQ Prior/ 24. SWA3 Security Risk Assessment of 400,000 2010 Tour(s) S/SOE post Shanghai’s Water Sector39

38 The Water sector covers water resource, water supply, and wastewater sectors. 39 The Water sector covers water resource, water supply, and wastewater sectors. 88

Procure- N Total Price Review by Duration Start Contract No. Services Delivery Form ment o. US$ Bank (Months) Bidding Methods Training courses and (2) overseas study tours and Urban Infrastructure Project secondment programs to QCBS/CQ Prior/ 25. CT1 Management and Financial 800,000 2010 international water and S/SOE post Management wastewater companies.

Feasibility Study on Introduction of 26. CT2 Asset Management System (AMS) Study. 200,000 QCBS Prior 2011 for Chengtou and its Subsidiaries Optimization of Water Facilities Study. Training and Study QCBS/CQ Prior/ 27. CT3 600,000 2011 Operation and Management Tour(s) S/SOE post

Optimization of Wastewater Study. Training and Study QCBS/CQ Prior/ 28. CT4 600,000 2011 Facilities Operation and Management Tour(s) S/SOE post

Total 3,400,000

SWA; Shanghai Water Authority CT; Chengtou

Annex 9: Economic and Financial Analysis CHINA: Shanghai Urban Environment Project - APL Phase III

1. During project preparation, a comprehensive financial analysis was conducted to: (i) analyze and advise on project financing plans, and estimate tariff levels and capital and operating subsidies required to ensure financial sustainability of project companies; (ii) estimate the financial internal rate of returns (FIRRs) of project investments; (iii) demonstrate that estimated tariff increases would be affordable for low-income households; and (iv) show that the SMG has sufficient financial resources to meet project subsidy requirements. The economic analysis also presents a cost-benefit analysis for the QCSRWP. The summary findings and conclusions are presented below, with detailed financial and economic analyses contained in the project files. The institutional and financial analysis of the DFV is provided separately in Appendix 1 of Annex 4.

A. Financial Analysis

Shanghai’s Raw Water Supply and the Qing Cao Sha Project

2. Shanghai Raw Water Supply—Sector Overview. There are four water supply companies (WSCs) serving Shanghai’s core urban area, which accounts for about 70 percent of water demand in Shanghai. These include Shibei, Shinan, Pudong, and Minhang. Suburban areas are served by 12 district level water supply companies that operate 84 county water supply companies. Shanghai Raw Water Company (SRWC) and Chengtou Raw Water Company (CRWC) currently supply raw water to all WSCs in the urban area except the Minhang Water Supply Company, which abstracts raw water from its own intake. About 75 percent of Shanghai’s raw water comes from the Huangpu River, and 25 percent from the Yangtze river. SRWC is a listed company on the Shanghai Stock Exchange, and 46 percent of SRWC is owned by the Chengtou Group. SRWC had been the only company supplying raw water to urban Shanghai until Chengtou Corporation created CRWC in 2007 and took over the Yangtze raw water system. SRWC now retains only the Upper Huangpu raw water system.40

3. Shanghai’s total water consumption is projected to increase from 6.8 million m3/ day in 2007 to 8.9 million m3/ day in 2020, at an average annual growth rate of 2.11 percent. Accordingly, average raw water production will have to increase from 8.3 million m3/ day to 10.5 million m3/ day by 2020—leading to a corresponding increase in maximum raw water requirement from 10.7 million m3/ day in 2007 to 11.3 million m3/ day in 2010. The QCSRWP is the main project which will address the need for increased water supply capacity. According to QCSRWP’s current plan, its volume of raw water supplied is estimated to reach 5.48 million m3/ day in 2010, and increase to 6.20 million m3/ day by 2015, which could service up to 65 percent of Shanghai’s demand. The QCSRWP will be implemented by the Qing Cao Sha Investment Construction & Development Company (QCSC), which is an engineering and construction company. When the QCSRWP becomes fully operational, QCSC’s consolidation into one of the

40 The SRWC also owns Minhang WSC, which was given to the SRWC in exchange for the Yangtze raw water system. 90

existing raw water companies is recommended which can help ensure an integrated use of raw water from the Yangtze and Huangpu rivers.

4. QCSRWP Project Investment and Financing Plan. Total project costs of the QCSRWP are estimated at RMB 16.0 billion: of this total, RMB 6.0 billion will be provided by the SMG as equity, and the balance of RMB 10.0 billion will be financed by debt, yielding an overall debt to equity ratio of 38:62. Of this, RMB 7.0 billion will be provided by a local bank syndication led by the China Agricultural Bank and China Development Bank, under a 25-year term and a grace period of 5 years. The interest rate is floating: the base lending rate minus 10 percent. RMB 2.0 billion will be provided by an insurance company. The term of the later loan will be 10 years from 2007 to 2017, with a bullet repayment. The interest rate is fixed at 6.11 percent. Chengtou Group will guarantee both the local bank syndication and the insurance company loans. The World Bank loan will provide the remaining RMB 1 billion.

Table A9.1 QCSRWP: Financing Plan

amount share (RMB billion)

Equity 6.0 38%

Debt 10.0 62%

Local Bank Syndication 7.0 44%

Insurance Company 2.0 13%

World Bank 1.0 6%

Total 16.0 100%

5. Key Assumptions—Raw Water Sales, Raw Water Tariff, and Subsidies. The financial analysis focuses on the financial issues of the QCSC, a company responsible for raw water but not water treatment and distribution. The QCSC is the project implementing company. The capacity of QCSRWP’s raw water production is projected to increase from 6.4 million m3/day in 2010 to 7.2 million m3/day in 2015 and thereafter. Under an assumed rates of utilization (92 percent) and water loss (7 percent) in the raw water distribution system only,41 QCSC’s annual sales volume for raw water could reach 5.5 million m3/ day in 2010, and increase to 6.2 million m3/day in 2015 and thereafter. During project preparation, it was established that the QCSC’s production would not reach its potential maximum given physical constraints on connecting to existing and planned water distribution and treatment capacity in the QCS service area. Estimated raw water sales are estimated to reach only 48 percent of capacity in the first year of operation (2010) and increase to 72 percent by 2015. The actual volume of raw water sold by the QCSC will depend on connecting the QCSRWP to the water distribution system, and decisions

41 These water losses refer to water losses in the transmission to water treatment plants only. Additional water losses occur in the distribution system from water treatment plants to water end users. For the base case financial analysis, these are assumed to be 19 percent and are projected to remain constant to reflect conservative modeling assumptions. 91

by the SMG on using raw water from the new QCSRWP scheme relative to the existing raw water intakes in the Upper Huangpu and Yangtze rivers. It is important to note that the capacity utilization rate is the single most important factor impacting the financial viability of the QCSC. Taking an integrated institutional view on raw water resource management is, therefore, critical from a financial viability perspective.

6. Shanghai’s current raw water tariff is RMB 0.33/ m3, which was raised from RMB 0.10/m3 in October 2002. This raw water tariff is not sufficient to ensure QCSC’s financial sustainability and achieve a financial internal rate of return (FIRR) of at least 6 percent, which is suggested by Chinese national regulations.42 Therefore, in addition to capital subsidies already provided to support initial investment costs (i.e., the SMG’s equity contribution of RMB 6.0 million), significant operating subsidies are likely required to support QCSRWC, even if the raw water tariff is gradually increased.

7. In the following analysis, the concept of an “overall raw water tariff” is introduced. The “overall raw water tariff” consists of two components: (i) the actual raw water tariff charged to and received from WSCs; and (ii) an operating subsidy charged to and received from the SMG. Based on financial projections during project preparation, it is estimated that the overall raw water tariff needs to start at RMB 1.0 in 2010. This includes the assumed actual raw water tariff of RMB 0.37/m3 in 2010, and implies a required operating subsidy from the SMG of RMB 0.63/ m3. The overall raw water tariff is assumed to increase every three years at the rate of inflation. Under such an increase, the QCSRWP is considered financially viable at project and entity levels.

8. Project Financial Return. Given an overall raw water tariff set at RMB 1.00/m3 in 2010, which includes the RMB 0.63/ m3 operating subsidy from the SMG, and the indicated increases at the rate of inflation, a financial internal rate of return (FIRR) of at least 6.0 percent is achieved assuming a project life of 25 years from 2010 until 2034. As shown in the table below, either a 10 percent revenue reduction (i.e., potentially caused by delayed and/or lower raw water tariff increases or subsidies, etc.) or a 10 percent increase in costs (i.e., caused by construction delays, cost overruns, etc.) would lower the financial rate somewhat. If these two scenarios occurred together, the project would fall short of the targeted financial rate or return, requiring a higher overall raw water tariff. Conversely, if revenues are higher (e.g., under higher raw water sales, or earlier and higher actual raw water tariff increases) and operating cost lower (e.g., under improved water demand management measures), then the projected FIRR will be higher.

Table A9.2 FIRR Base Case 6.4%

Case1: 10% revenue reduction/ increase 4.8% 7.9%

Case2: 10% cost increase/ reduction 4.9% 8.1%

Case3: Case 1& 2 combined 3.2% 9.6%

42 “Municipal Water Pricing Management Method” by NDRC/Ministry of Construction (09/23/ 1998) 92

9. Entity Operational and Financial Analysis. Detailed financial projections were prepared during project preparation with summary results of entity financial projections for the QCSC shown in the table below. With the overall raw water tariff set at RMB 1.00/ m3, total revenue is estimated to be RMB 1.0 billion in 2010. With the raw water tariff assumed to increase every three years at the rate of inflation, revenues are estimated to be RMB 1.9 billion in 2015. As part of these revenues, the SMG is expected to contribute a subsidy of RMB 0.65 billion in 2010 and the required subsidy amount will be increased to RMB1.2 billion in 2015. To reduce the operating subsidy, the raw water tariff charged to the water supply companies would need to be raised. Given that the QCSC is a new company, its operational efficiency will be significantly impacted by the strategic design of its physical investments. As mentioned above, capacity utilization (relative to design capacity) is the single most critical factor in this respect. Summary income statements, cash flow statements, and balance sheets are attached at the end of this annex.

Table A9.3 Summary Results of QCSC

2010 2011 2012 2013 2014 2015

Key Operating Assumptions City Population (million) 19.8 20.2 20.7 21.1 21.6 22.0 Water Production (,000 m3/day) 3,045 4,112 4,778 4,854 4,928 5,003 Water Sales Volume (,000 m3/day) 2,846 3,843 4,465 4,536 4,606 4,676

Key Operational Indicators Unit Cash Operating Cost (RMB/m3) 0.48 0.44 0.42 0.43 0.43 0.44 Water Sales Volume per Employee (,000 m3/day/person) 9.3 12.6 14.6 14.9 15.1 15.3 Unit Consumption of Electricity (kwh/m3) 0.15 0.16 0.16 0.17 0.18 0.18

Key Financial Indicators (RMB million) Total Revenue 1,039 1,403 1,630 1,887 1,917 1,946 Water Supply Companies (WSC) 386 522 606 673 683 693 Operating Subsidy (from SMG or Chengtou) 653 881 1,024 1,215 1,234 1,252 Operating Income 111 263 324 471 453 433 Net Income Before Tax (11) 141 202 (263) (335) (352)

Key Financial Ratios Debt Service Ratio 3.5 5.1 5.9 1.2 1.1 1.0

Raw Water Tariff (RMB/m3) Overall Tariff 1.00 1.00 1.00 1.14 1.14 1.14 Tariff charged to WSC 0.37 0.37 0.37 0.41 0.41 0.41 Subsidy Portion 0.630.630.630.730.730.73

10. Financial Covenants. In light of the substantial operating subsidies required for the QCSC, the financial covenants were explicitly designed to allow and account for subsidies. One financial covenant adopted is a debt service coverage ratio (DSCR) to ensure that the QCSC generates sufficient cash to service the Bank loan. A cost recovery ratio was not adopted, as subsidies constitute a significant part of total revenues, rendering the concept less applicable. The DSCR will require the following (for definition of financial terms refer to the Project Agreement):

• The DSCR requires that the project company shall not to incur any debt unless a reasonable forecast of its revenues and expenditures shows that its estimated net revenues shall be at least one times its estimated debt service requirements.

11. QCSRWP Impact on Water Supply Companies. The evolution of the raw water tariff also needs to consider potential impacts on Shanghai’s WSCs. One of the limiting factors to increasing Shanghai’s actual raw water tariff is that the increases would likely adversely impact the financial viability of WSCs, some of which are already under financial stress. Shanghai’s water supply tariff is generally low, though tariffs for non-domestic consumers were increased in April 2009. An analysis of one of APL2’s implementing WSCs (Shinan) suggests that there is little room to absorb increases in raw water tariffs, unless the water supply tariff is increased substantially. Shinan’s average water supply tariff was RMB 1.14/ m3 in 2008, 25 percent of which is dedicated to meeting its raw water tariff expenses. Each RMB 0.10/ m3 increase in the raw water tariff would add about 10 percent to Shinan’s operating costs. Any revision of the raw water supply tariff would therefore need to be assessed in the context of Shanghai’s overall approach to water tariffs, including the raw water and water supply tariffs. Estimates suggest that a water supply tariff of about RMB 2.30 per m3 would be needed to enable the Shinan WSC to be financially viable without any subsidy from the SMG. This is almost double the current water tariff charged by SWC.

12. Water Demand Management. Shanghai already introduced water demand management measures, including an increasing block tariff for domestic consumers. Continued water demand management initiatives are critical to improve the financial viability of Shanghai’s water sector. The base case water demand projection used for the financial analysis assumes a steady improvement in water demand management. For example, per capita domestic water consumption was projected to reach levels similar to European cities by 2030 (therefore accounting, in part, for water demand income and price elasticity effects, etc.). Additional water demand management measures, including possible reductions in operating costs, have been evaluated by the sensitivity analysis of the projected FIRRs.43 However, the impact of water demand management measures on the financial viability of the QCSC is somewhat indirect, as QCSC’s financial viability depends on its specific raw water sales relative to others, such as existing raw water sources in the Upper Huangpu and Yangtze River.

13. Major Risks and Sensitivity. The major financial risks faced relate to the revenue stream. The QCSC revenue stream could be negatively impacted through lower than estimated raw water sales and lower and/or later than expected raw water tariff increases. On the cost side, principal risks relate to construction delays and cost overruns. The impact of these risks has been evaluated through sensitivity analysis of the projected FIRRs, and it was assessed that if both these risks materialize simultaneously, the overall raw water tariff (either through higher actual raw water tariff or subsidies) will need to be higher to ensure the financial sustainability of the QCSRWP. Furthermore, in terms of its financing strategy, the main risk is interest rate fluctuation with respect to the local syndicated bank loans. Total interest rate expenses are estimated to account for up to 34 percent of total cost by 2015. Therefore, the QCSC should

43 Note that the main benefits of reduced water losses would accrue to Shanghai’s WSCs, and not its Raw Water Companies, such as QSICDC, in light of the fact that the majority of water losses (19%) occur in the distribution network after water is treated by the WSCs. Water losses in the raw water distribution system are 7%. 94

consider opportunities to fix interest rates (i.e. through interest rate swaps) and/or issue corporate bonds in support of the QCSRWP. Chengtou Corporation is already considering options to mitigate its financing risk along these dimensions.

Shanghais’ Wastewater Sector and the Bailonggang Sewer Project

14. Shanghai Wastewater—Sector Overview. The SMSC is responsible for sewage collection, sludge treatment, and wastewater tariff collection in the major areas of urban Shanghai. In 2007, the SMSC treated wastewater totaling 3.1 million m3/day, which represents around 84 percent of wastewater volume treated in urban Shanghai. The SMSC owns the sewer network in the served area, and nine treatment plants with a total capacity of 1.5 million m3/ day. The SMSC is fully owned by Chengtou Group. The SMSC treats 1.4 million m3/ day by its own plants, which equal around 46 percent of its total wastewater volume treated in 2007, while the balance of 54 percent was treated by five plants operated by contractors such as Yongsheng Group, Urban Construction Group, etc.

15. The SMG plans to increase wastewater treatment across the municipality from 73 percent to 85 percent in 2010. This will require significant investments in the sector. The SMSC is currently planning to invest RMB 10 billion through 2010. The Bailonggang South Sewer Conveyor (BSSC) component is part of this investment plan; this component aims to connect SMSC’s service area to Bailonggang thereby increasing the wastewater treatment volume at Bailonggang. The BSSM component will enable the SMSC to convey wastewater volume of 0.8 million m3/day, which will be treated by expanding the capacity of the Bailonggang wastewater treatment plant. The current capacity of 1.2 million m3 per day will be increased to 2.0 million m3/per day by the end of 2008, and then to 2.4 million m3/day in 2010.

16. BSSC Project Investment and Financing Plan. The total project cost of BSSC combining the Puxi section and the Pudong section is estimated at RMB 3.76 billion. The Bank will finance the Puxi section of the BSSM. The total project cost of the Puxi section is estimated at RMB 472 million, of which RMB 182 million will be provided by the Bank and the balance will be provided by Chengtou Corporation (and/or the SMG in the form of equity). The project cost of upgrading and expanding the treatment capacity at Bailonggang is estimated at RMB 1.30 billion, which will be financed by Chengtou (and/or the SMG in the form of equity). SMSC’s overall RMB 10 billion capital expenditure program, of which the Bailonggang project is a part, is summarized in the table below.

Table A9.4 SMSC: Capital Expenditures Schdule and Financing Plan (RMB million) 2008 2009 2010 total Capital Expenditures 2,465 3,504 4,092 10,061

Financing Plan 2,465 3,504 4,092 10,061 Equity 1,701 1,804 2,123 5,628 Debt 764 1,700 1,969 4,433

17. Major Assumptions—Wastewater Tariffs and Subsidies. The SMG approved wastewater tariff increases for non-domestic costumers in September 2008 averaging RMB 0.4/m3. Non-domestic tariffs are now RMB 1.5/m3 for commercial/institutional customers and RMB 1.6/m3 for industrial customers. A further increase of RMB 0.2/m3 for non-domestic customers was enacted in April 2009. The SMG is in the process of considering higher domestic wastewater tariff levels (which remain unchanged at RMB 0.9/m3). The financial analysis assumes that domestic wastewater tariffs will increase from RMB 0.9/m3 to RMB 1.2/m3 at some point during 2009, followed by tariff increases for all types of customers of 30 percent in 2012 and 20 percent in 2015. Note, that RMB 0.25 per m3 of the wastewater tariff is reserved for the Suzhou Creek rehabilitation project, thus the effective tariff revenue for SMSC’s normal wastewater operations is lower than the indicated nominal tariff rate. In 2007, the SMSC received an operating subsidy of RMB160 million, about 10 percent of its total operating cost, which allowed the SMSC to comply with the financial covenants under the APL1 and the APL2. With the above indicated wastewater tariff increases and continued subsidies, the project is assessed to be financially viable at the project and entity levels.

18. Project Financial Return. The BSSC component was evaluated in the framework of the entire Bailonggang expansion project, including the expansion of the wastewater treatment plant, as if a new stream of revenues was generated for additional wastewater treated under this project. The project period is assumed to be 25 years until 2034. Based upon the above assumptions, the financial internal rate of return for the BSSM component is estimated at 7.0 percent.44 If a 10 percent revenue reduction and a 10 percent cost increase take place simultaneously (potentially caused by different factors, such as construction delays, cost overruns, delayed wastewater tariff increases, etc.), the internal rate of return will fall to 3.9 percent, in which case higher wastewater tariffs and/or operating subsidies would be required. Conversely, if costs decrease and revenue increases, lower wastewater tariffs and/or operating subsidies will be required.

Table A9.5 FIRR Base Case 7.0%

Case1: 10% revenue reduction/ increase 5.4% 8.5%

Case2: 10% cost increase/ reduction 5.5% 8.7%

Case3: Case 1& 2 combined 3.9% 10.2%

19. Entity Operational and Financial Analysis. The summary results of financial projections are shown in the table below. The summary income statement, cash flow statement, and the balance sheet are attached at the end of the annex. With the tariff increase schedule indicated above, the SMSC is projected to require operational subsidies through 2014 to remain financially viable. Given that operational efficiency is important to minimize any subsidy requirement, the Bank assessed SMSC’s current efficiency. The Bank found that the SMSC has begun to address operational efficiency challenges by, for example, entering Build-Operate-Transfer (BOT) arrangements for wastewater treatment. However, SMSC’s ability to manage its operational

44 The internal rate of return is calculated at 4.8% (if the tariff portion of RMB 0.25 per m3 reserved for SCRP is not counted in the revenue stream). 96

efficiency systematically is limited because the SMSC is the owner of wastewater facilities, but not the actual operator (facilities are operated either though BOTs, or largely independent subsidiaries). The SMSC does not have a fully integrated operational and financial management system that favors higher efficiency. To monitor operational efficiency, key financial and operational performance indicators will be included in the project’s results framework. Table A9.6 SMSC: Summary Results

2008 2009 2010 2011 2012 2013 2014 2015 Key Operating Assumptions City Population (,000) 18,956 19,364 19,780 20,213 20,656 21,108 21,570 22,043 Population Served (,000) 9,020 9,214 9,412 9,618 9,829 10,044 10,264 10,489 Water Supplied(,000 m3) 1,319 1,351 1,384 1,418 1,453 1,490 1,527 1,565 from Water Supply Company (WSC) 1,218 1,250 1,283 1,317 1,353 1,389 1,426 1,464 from Self Supplied Sources 101 101 101 101 101 101 101 101

Key Operational Indicators Unit Cash Operating Cost (RMB/m3) 0.93 1.07 1.17 1.19 1.18 1.18 1.18 Wastewater Volume Treated per employee (,000 m3/day/person) 0.50 0.52 0.53 0.54 0.56 0.57 0.58 Unit Consumption of Electricity (kwh/m3) 0.35 0.35 0.35 0.35 0.35 0.35 0.35

Key Financial Indicators (RMB million) Total Operating Revenue 1,207 1,709 1,785 1,828 2,475 2,536 2,598 3,223 Operating Income (389) (39) (240) (864) (302) (304) (309) 239 Net Income Before Tax 2 (15) (148) (216) (158) (132) (193) 76 Internal Cash Generation 579 651 717 1,200 1,200 1,200 1,200 1,419 Operating Subsidy (from SMG or Chengtou) 389 39 240 864 302 304 309 0 BOT Payments 205 205 325 335 345 345 345 345

Key Financial Ratios Cost Recovery Ratio 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.1 Debt Service Ratio 2.7 1.6 1.2 1.6 1.7 1.8 1.8 2.2

Domestic Wastewater Tariff (RMB/m3) 0.9 1.2 1.2 1.2 1.6 1.6 1.6 1.9 Non-Domestic Wastewater Tariff Industrial 1.3 1.8 1.8 1.8 2.3 2.3 2.3 2.8 Institutional 1.2 1.7 1.7 1.7 2.2 2.2 2.2 2.7

20. Financial Covenants. In light of the substantial operating subsidies required for the SMSC, the financial covenants are explicitly designed to allow and account for such subsidies. Given that SMSC’s required subsidies as a percent of total revenue are significantly smaller than those for the QCSC, the Bank included both a costs recovery (CR) and debt service coverage ratio (DSCR). This is intended to ensure that the SMSC has sufficient cash to not only repay the Bank loan, but also to fully fund its operations and replace depreciating assets. The covenants require the following (for definition of financial terms refer to the Project Agreement):45

• The CRR requires that total revenue (from operating and non-operating sources, including operating subsidies) is equivalent to not less than the sum of: (i) total operating expenses (including depreciation) and (ii) the amount by which debt service requirement exceeds the provision for depreciation.

45 Note that the covenants are slightly different from those defined in APL1 and APL2. APL1/2 covenants will be restructured to ensure full consistency across the covenants of all APL program components. 97

21. Major Risks and Sensitivity. The major financial risks relate to the revenue stream. The SMSC’s revenue stream could be negatively impacted, principally, by lower and/or later than expected wastewater tariff increases. On the cost side, the principal risks relate to construction delays and cost overruns. The impact of these risks was evaluated through sensitivity analysis of the projected FIRRs, and it was assessed that if both risks materialize simultaneously, the SMSC’s revenue (either through higher actual raw water tariffs or subsidies) will need to be higher to ensure the financial sustainability of the SMSC. Alternatively, SMSC’s ambitious capital investment program over the next few years will need to be curtailed or delayed.

Affordability of Tariffs

22. An analysis of the affordability of water and wastewater tariffs by low income households was conducted (low income households are defined as those in the lowest income quintile). The results of the affordability analysis demonstrate that total water and wastewater tariffs represent around 0.5 percent of household income levels, which is well within the generally accepted margin for affordability of up to 5 percent. The affordability analysis also indicates there is room to increase water and wastewater tariffs to levels that can help ensure the financial viability of water and wastewater companies. This creates space for higher actual raw water tariffs to be charged to the WSCs. Table A9.746 Affordability Analysis

2008 2009 2010 2011 2012 2013 2014 2015 Tariff Water Supply (RMB/m3) 1.03 1.03 1.34 1.34 1.34 1.74 1.74 1.74 Waste Water (RMB/m3) 0.90 1.20 1.20 1.20 1.56 1.56 1.56 1.87

Low Income Household Per Capita Income (RMB) 10,466 11,303 12,208 13,184 14,239 15,378 16,608 17,937

% of Low Income Househol d Income Water 0.3% 0.2% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% Wastewater 0.2% 0.3% 0.2% 0.2% 0.3% 0.3% 0.2% 0.3% Total 0.5% 0.5% 0.5% 0.5% 0.5% 0.6% 0.5% 0.5%

Fiscal Impact of Subsidy Requirements

23. Under the current raw water and wastewater tariffs, operating subsidies provided by the SMG will play an important role for both the QCSC and the SMSC. In addition to the equity contribution of RMB 6 billion to the QCSC, the SMG is expected to provide the QCSC with a subsidy of RMB 0.65 billion in 2010 and RMB1.2 billion in 2015, based on base case assumptions made in the financial projection. The accumulated operating subsidy indicated over the project life of 25 years is estimated at RMB 52 billion (or RMB 14 billion today, discounted at 10 percent). The estimated subsidy could be as much as the original investment costs of RMB

46 Adjustment of water and wastewater tariffs is subject to laws and regulations in Shanghai. 98

16 billion. The ultimate amount of the operating subsidy will depend on the actual raw water tariff levels charged to the WSCs. The SMG is expected to provide the SMSC an operating subsidy between RMB 0.03 million and RMB 0.8 million through 2014 (at which point no additional subsidies would be required). This is in addition to an SMG equity contribution to the SMSC of RMB 5 billion. Given the critical importance of operational subsidies, the project monitoring indicators contain explicit monitoring requirements for annual operating subsidies paid to the QCSC and the SMSC.

24. Under these assumptions, the required subsidies will reach a maximum of RMB1.7 billion in 2011, which equals 0.63 percent of the local fiscal revenue of the SMG. Although the subsidies will increase over time, the percentage of these subsidies relatively to the SMG’s revenue base will decline (based on conservation projection assumptions). Assessments show that the operating subsidies required for the QCSC and the SMSC are considered affordable by the Shanghai Municipal Government. Therefore, the SMG needs to consider trade-offs between higher/lower raw water, water supply, and wastewater tariff levels, and higher/lower required operating subsidies.

Table A9.8 Estimated Operating Subsidy Required for QCSC and SMSC (RMB million) 20082009201020112012201320142015 Operating Subsidy QCSC 653 881 1,024 1,215 1,234 1,252 SMSC 389 39 240 864 302 304 309 0 Total Operating Subsidy 389 39 893 1,745 1,326 1,519 1,543 1,252

Operating Subsidy/Local Fiscal Revenue 0.19% 0.02% 0.36% 0.63% 0.43% 0.44% 0.40% 0.29%

Tariff (RMB/m3) Raw Water 0.33 0.33 0.37 0.37 0.37 0.41 0.41 0.41 Wastewater for domestic customers 0.90 1.20 1.20 1.20 1.56 1.56 1.56 1.87

B. Economic Analysis

25. Scope of Analysis. An economic cost-benefit analysis was conducted for the QCSRWP as a whole.47 The project itself is limited to providing new infrastructure that will ensure adequate and safe supply of high-quality raw water to existing and planned water treatment plants owned by a number of water companies serving different parts of Shanghai. However, the benefits of the project will ultimately accrue to the end users of treated water. Therefore, the scope of the economic cost-benefit analysis takes into account not only direct capital and operating costs of the QCSRWP, but also any concurrent and future capital and operating costs associated with the treatment and distribution of water to end users in the QCS service area. The total capital and operating costs required to realize the project benefits are described below, as are the specific assumptions relating to estimation of the project’s benefits.

26. Key Assumptions. Like in the financial analysis, the economic analysis is based on total estimated costs and benefits from 2007 to 2034. Construction of the QCSRWP began in 2007,

47 The Bank-financed Nanhui conveyor was also analyzed and assessed on a least cost basis. Technical alternatives—including parameters such as required land acquisition costs, energy operating cost—were compared on a life cycle NPV basis, with the least cost option adopted. 99

and all capital investments thereafter are included in the economic analysis. Most QCSRWP facilities will become operational in early 2010 (the main exception is the Nanhui Conveyor component, which is scheduled for completion at the end of 2011). Thus, realization of project benefits is assumed to begin from the start of 2010, and the economic analysis covers the first 25 years of project operation, from 2010 to 2034. Since the useful service life of QCSRWP facilities and related infrastructure investments will, on average, extend beyond 2034, the results obtained from the economic analysis are likely conservative. The economic analysis was conducted in real (versus nominal) terms, and assumes constant prices for both costs and benefits from 2007 to 2034. Economic prices are assumed to equal financial prices, but are adjusted for cost elements that constitute transfers (such as tax, debt service, etc.) or non-cash costs (such as depreciation).

27. Project Cost. The economic costs of supplying raw water to treatment plants in the QCS service area include both initial capital investments and ongoing operating costs. The main capital costs include construction of QCSRWP facilities that will supply water to individual water treatment plants: the raw water intake; pumps, pipelines and tunnels conveying water to the mainland; and several pumping stations and transmission pipelines. Total capital costs are estimated at RMB 16 billion. The annual operating costs for raw water supply are based on the results of the financial analysis above. Using the same projected operating costs as estimated in the financial analysis, and subtracting tax, interest, depreciation, and water resource charges (all of which represent transfers rather than economic costs), the average economic unit cost of supplying raw water to the treatment plants was found to be RMB 0.386 per m3 of raw water sold.

28. Since the project’s economic benefits ultimately accrue to end users of treated water, the costs of water treatment and distribution are also be considered. Given the large number of water treatment plants located in the QCS service area, it was not practical to determine the actual average operating costs for every water company. Assuming the costs to produce and distribute treated water are similar for all water companies in Shanghai, operating costs from one representative company (Shinan) were used to develop a single unit cost in the economic analysis. A review of Shinan’s financial results for 2007 and its operating projections for 2008 through 2010 revealed total current operating costs for water treatment and distribution of about RMB 1.61 per m3 of water sold. However, this value reflects the full accounting costs of water production. To convert this value into a total unit economic cost, both depreciation and interest expenses, which are non-economic costs, as well as raw water supply cost, which was determined separately in the economic analysis, are subtracted. The average economic operating cost for water treatment and distribution is estimated to be RMB 0.862 per m3 of water sold.

29. Future capital costs estimates were extrapolated from current depreciation charges, because an integrated overview of all planned capital investment projects in the water supply sector was unavailable during project preparation. Shinan’s annual depreciation expense in 2007 equaled RMB 0.288 per m3 of treated water sold. Based on 2007 depreciation, a unit capital cost of RMB 0.245 per m3 of water sold (i.e., 0.85 x 0.288) was used in the economic analysis to approximate future capital expenditures required to meet increased demand for treated water.

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30. Project Benefits. The QCSRWP will provide the infrastructure to ensure sufficient and safe supply of quality water to existing and planned water treatment plans for different parts of the Shanghai municipality. The population estimated to benefit from the QCSRWP is over 10 million peoples, with a total daily water supply of 7.0 million m3/ day in 2020. To calculate the economic benefits of the project, a Willingness-to-Pay (WTP) survey is generally conducted to estimate the maximum amount domestic and non-domestic consumers are prepared to pay to secure access to safe supply of quality water. During project preparation, conducting a WTP survey was considered but Shanghai did not agree due to concerns it might signal a possible water price increase. As a result, the cost-benefit analysis derived implied values of a potential WTP survey for water supply in Shanghai: alternative water prices were compared with those prevailing in Shanghai, and a minimum tariff level was established that would ensure economic viability of the proposed investment. In addition, a transfer price methodology based on a recent WTP survey conducted for Chongqing corroborated the findings.

Table A9.9: Tariff Overview User Category Shanghai* Guangzhou Chongqing Beijing* Rates in Effect Since: 01 Dec 2005 01 Jan 2006 01 Jul 2006 01 Aug 2004 Domestic 1.03 1.32 2.10 2.80 Industrial 2.0 1.83 2.35 4.10 Institutional 2.0 1.62 2.10 3.90 1.32 Service – Others 2.0 Business and Service 2.71 Commerce 3.10 4.10 Hotel and Restaurant 4.60 Special 3.38 Construction 2.70 Drinking Manufacture 2.50 * For simplicity, some small specific-use categories are not shown.

31. In lieu of actual WTP data, three different sets of assumed WTP values were used in the economic analysis. The first set of values was based on a fixed percentage increase equal to twice the current tariff rate for each of the four main categories of water use; this roughly corresponds to the tariff increase required to achieve full cost recovery for water supply in Shanghai. The second set of values was based on a fixed percentage increase equal to 2.4 times the current tariff rate for the four main categories of water use. The third set of WTP values is based on the current water tariff rates in Beijing, which are among the highest rates charged in China. Such assumed increases were compared to the results of the transfer price methodology regarding WTP in Shanghai. Data from a recent WTP survey in Chongqing and adjustments for Shanghai specific variables (i.e., income levels) yield a WTP for domestic costumers of RMB 2.9/ m3, which is at the upper end of assumed WTP values for Shanghai.

32. The provision of water supply and sanitation infrastructure often results in indirect benefits that can be valued and included in an economic analysis, such as reduction in water- borne diseases, which results in lower health care expenditures, and increased economic productivity. However, in a modern urban setting such as Shanghai, where reasonably good- quality piped water has been available for many years, significant economic benefits relating to improved public health or time savings are unlikely.

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33. In the case of the QCSRWP, more important indirect benefits are associated with improved water security. Assigning a price to such benefits is difficult, as it requires a detailed risk assessment to identify the nature, frequency, duration, and monetary impacts of different water security events, such as an upstream chemical spill that could result in a temporary shutdown of one or more raw water intakes. Depending on the location and duration of an event, it might be necessary to limit water use by industries and households. Given that water security related impacts have not been explicitly included in the economic analysis, the inclusion of these additional benefits could lead to higher than estimated economic returns.

34. Results and Sensitivity. Summing the estimated costs in each year and subtracting the sum of estimated total benefits in the same year results in a net benefit stream. This net benefit steam can be used to determine an EIRR and net present value (NPV) for the project. As described above, three separate cases were modeled, using the three different sets of assumed WTP values to estimate project benefits to end users, as previously described. The results are summarized in the following table, along with the proxy amounts for WTP values. As the table shows, the QCSRWSP is economically feasible (i.e., it achieves an EIRR of more than 10 percent, which is assumed to be the economic threshold for similar projects in China) if the actual WTP for each user category is 2.4 times the current water tariff rate. If WTP values adopt Beijing’s current water tariffs, the EIRR will be over 15 percent.

Table A9.10 Summary Results of Economic Cost-Benefit Analysis (RMB per m3) WTP Estimated as WTP Estimated as WTP Estimated at Parameter 2.0 x Current Tariffs 2.4 x Current Tariffs Beijing Tariff Rates ERR (%) 5.5 10.8 16.2 NPV (RMB millions) @ 10.0% Discount Rate -4,001 794 6,779 Assumed WTP by User Category (RMB/m3) Domestic 2.06 2.47 2.8 Commercial/Institutional 2.8 3.36 4 Industrial 2.6 3.12 4.1 Other 33.64

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Table A9.11 Summary Financial Statements of QCS (RMB million)

2010 2011 2012 2013 2014 2015

Income Statement Total Revenue 1,039 1,403 1,630 1,887 1,917 1,946 Water Supply Companies 386 522 606 673 683 693 Shanghai Municipal Government 653 881 1,024 1,215 1,234 1,252 Total Operating Cost 928 1,140 1,306 1,417 1,464 1,513 Depreciation 312 356 399 444 444 444 Operating Income 111 263 324 471 453 433

Interest Expense 122 122 122 734 788 785

Net Profit Before Tax (11) 141 202 (263) (335) (352)

Cash Flow Statement Internal Cash Generation 423 583 673 915 897 876 Long-term Borrowing 1,885 1,493 1,592 53 0 0 Equity Contribution 000000 Total Sources 2,308 2,076 2,265 968 897 876

Capital Expenditures 1,500 1,000 1,000 0 0 0 Interest During Construction 385 493 592 53 0 0 Debt Service 122 122 122 750 844 841 Principal Repayment 0 0 0 16 56 56 Interest Payment 122 122 122 734 788 785 Increase in Working Capital 52 27 14 23 (0) (0) Total Applications 2,059 1,642 1,729 826 844 841

Net Cash Change 248 434 536 142 52 36

Balance Sheet Cash 248 682 1,218 1,360 1,413 1,448 Total Current Assets 377 855 1,419 1,593 1,649 1,688

Gross Fixed Assets 12,461 14,222 15,961 17,751 17,751 17,751 Less Accumulated Deprecation 312 667 1,066 1,510 1,954 2,397 Net Fixed Assets 12,149 13,555 14,895 16,241 15,798 15,354 Work in Progress 2,262 1,972 1,782 (0) 0 0 Total Fixed Assets 14,411 15,528 16,677 16,241 15,798 15,354

Total Assets 14,788 16,383 18,096 17,834 17,447 17,042

Total Current Liabilities 76 94 107 116 120 124 Long-term Debt 8,723 10,195 11,743 11,735 11,679 11,622 Equity 5,989 6,094 6,246 5,983 5,647 5,295 Shareholders Equity 6,000 6,000 6,000 6,000 6,000 6,000 Retained Earnings (11) 94 246 (17) (353) (705)

Total Liabilities & Equity 14,788 16,383 18,096 17,834 17,446 17,042

Financial Ratio Debt Service Coverage Ratio 3.5 5.1 5.9 1.2 1.1 1.0

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Table A9.12 Summary Financial Statements of SMSC (RMB million)

2008 2009 2010 2011 2012 2013 2014 2015

Income Statement Total Operating Revenue 1,207 1,709 1,785 1,828 2,475 2,536 2,598 3,223 Total Operating Cost 1,596 1,747 2,025 2,692 2,777 2,839 2,907 2,985 Depreciation 552 624 690 1,173 1,173 1,173 1,173 1,173 Operating Income (389) (39) (240) (864) (302) (304) (309) 239

Interest Expense 109 176 281 319 284 250 220 189

Operating Subsidy 389 39 240 864 302 304 309 0

Net Profit Before Tax 2 (15) (148) (216) (158) (132) (193) 76

Cash Flow Statements Internal Cash Generation 579 651 717 1,200 1,200 1,200 1,200 1,419 Long-term Borrowing 764 1,700 1,969 0 0 0 0 0 Equity Contribution 1,701 1,804 2,123 0 0 0 0 0 Total Sources 3,044 4,155 4,809 1,200 1,200 1,200 1,200 1,419

Capital Expenditures 2,465 3,504 4,092 0 0 0 0 0 Debt Service 218 396 605 752 717 683 668 647 Principal Repayment 110 219 324 433 433 433 448 457 Interest Payment 109 176 281 319 284 250 220 189 Increase in Working Capital (27) 92 (60) (182) 151 (2) (3) 147 Total Applications 2,656 3,992 4,637 570 868 681 666 794

Net Cash Change 389 164 171 630 331 519 534 625

Balance Sheet Cash 703 866 1,038 1,667 1,998 2,517 3,051 3,676 Total Current Assets 1,031 1,331 1,523 2,164 2,671 3,206 3,757 4,552

Gross Fixed Assets 11,510 13,010 14,367 24,428 24,428 24,428 24,428 24,428 Less Accumulated Deprecation 3,677 4,302 4,992 6,164 7,337 8,509 9,682 10,854 Net Fixed Assets 7,782 8,657 9,324 18,213 17,040 15,868 14,695 13,523 Work in Progress 5,322 7,326 10,061 0 0 0 0 0 Total Fixed Assets 13,104 15,983 19,385 18,213 17,040 15,868 14,695 13,523 Long-term Investments 2323232323232323 Other Assets/ Investments 261 261 261 261 261 261 261 261

Total Assets 14,418 17,598 21,192 20,661 19,995 19,358 18,737 18,359

Total Current Liabilities 464 508 589 783 808 826 846 868 Long-term Debt 2,228 3,575 5,113 4,604 4,072 3,548 3,100 2,642 Equity 11,726 13,514 15,490 15,274 15,116 14,984 14,791 14,848 Shareholders Equity 12,055 13,859 15,982 15,982 15,982 15,982 15,982 15,982 Retained Earnings (329) (345) (492) (708) (866) (998) (1,191) (1,134)

Total Liabilities & Equity 14,418 17,598 21,192 20,661 19,995 19,358 18,737 18,359

Financial Ratios Cost Recovery Ratio 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.1 Debt Service Coverage Ratio 2.7 1.6 1.2 1.6 1.7 1.8 1.8 2.2

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Annex 10: Safeguards Policy Issues

CHINA: Shanghai Urban Environment Project - APL Phase III

Environment Assessment 1. The Project is classified as a “Category A” project. Environment assessment was carried out by the Shanghai Investigation, Design & Research Institute (SIDRI), Shanghai Academy of Environmental Sciences (SAES), East China Normal University (ECNU), East China Sea Fisheries Research Institute of the Chinese Academy of Fishery Science, and international consultants. EA reports were prepared for the APL3 in accordance with China’s national requirements and the Bank’s OP/BP 4.01. These reports include: i) the EIA/EMP for the Nanhui Raw Water Conveyor; ii) the EIA/EMP for the Southern Sewer Project of the Bailonggang Sewer System; iii) the EIA Summary/Update, including a supplementary EMP (mitigation measures) for the linked Qing Cao Sha Reservoir; and iv) an overall EA Executive Summary for the project and all linked activities. In addition, the EIA Framework of the DFV Operational Manual under the APL2 was updated.

2. The EAs cover baseline information on environmental and socio-economic conditions. They also describe alternatives considered by feasibility studies for each component, and linkage issues.

3. Environmental Benefits. The project is expected to significantly benefit the environment and public health by improving services and capacity in water supply and wastewater treatment. The Nanhui Conveyor component will strengthen water supply capacity and improve water quality. The Bailonggang Southern trunk sewer extension will increase the wastewater collection rate, which will protect the environment amid urban development pressures, mitigate wastewater overflow during rainy seasons, and form a key component of the Shanghai sewerage network.

4. Potential Environmental Impacts/ Risks and Mitigation Measures. The project’s objective is to improve water supply capacity and wastewater management in Shanghai to increase the quality of life of urban residents and comply with national and Shanghai environmental plans. The overall environmental impacts are clearly positive. However, some negative impacts may result from project implementation, mainly during the construction phase. These include limited negative impacts during construction on soil, air, water, acoustic environments, flora and fauna and surrounding communities. These impacts will be temporary and localized. Further, proper mitigation measures during construction can minimize or eliminate them.

5. A series of mitigation measures were prepared under the EMP to reduce impacts to acceptable levels during the construction and operation phases. Mitigation monitoring procedures were established and the organizations responsible for monitoring designated. The mitigation measures are discussed in the EA/EMP.

6. Construction phase: Some project components will have short-term impacts, such as noise, air and water pollution, flora/fauna impacts, increased traffic, soil erosion and issues related to worker safety and waste management. These concerns are relatively minor, and

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measures to reduce them to acceptable levels, and monitor their effective implementation, have been discussed and detailed in the EA and EMP. In addition, mitigation measures related to contractors will be included in bid documents and contracts.

7. Operations phase: The proposed components will have impacts such as noise and issues related to solid waste and odor. Noise will come mainly from pump stations. In the water supply subproject, the noise level during operation of the Nanhui North pump station was calculated and is within the required Class II standard. Moreover, noise impacts on surrounding areas are minimized. In the wastewater component, all proposed pump stations are located inside the “urban greening” district, and no sensitive objects fall inside a 600m area. The selected submerged centrifugal pump or scroll mix-flow pumps also make relatively little noise.

8. The project’s solid waste will come mainly from operation staff and pumping screens. The expected quantity is small, and the project will commission a sanitary department to collect and clean the waste periodically.

9. The pumping station will utilize ionized oxygen technology to remove bad odor. According to practical monitoring data and analysis, the H2S and NH3 discharge concentrations and rates should be well below required standards.

10. Linked Project. The environmental impacts of linked projects were carefully reviewed and assessed in the EA reports. The following linked projects were identified: (a) Qing Cao Sha Reservoir Water Resource Project (including the Qing Cao Sha Reservoir, the raw water conveyor on Changxing Island, the raw water conveyor tunnel crossing the Yangtze River, and the Wuhaoogou raw water pumping station and the raw water conveyor of Jinhai); and (b) the Pudong Trunk Sewage of the extension of the Bailonggang Southern Trunk Sewer System and the existing Bailonggang WWTP.48 These projects were determined as linkage projects because they are: (i) directly and significantly related to the Bank-funded project; (ii) necessary to achieve the project development objectives; and (iii) planned to be carried out simultaneously with the project. The above mentioned EIA Summary/Update of the QCSRWP includes a supplementary EMP (mitigation measures) for the construction and operation of the Qing Cao Sha Reservoir. The EA/EMP for the Nanhui Conveyor, the EA/EMP for the Bailonggang Southern Trunk Sewerage, and EA Executive Summary also entail all the linked activities.

11. Due diligence review was conducted for the above linked projects. Key impacts are identified and mitigation measures are incorporated into the EMP.

Table A10.1 Linked Project Components for Bank’s Due Diligence Review Project Env. Safeguards Status of Bank Team’s Component Subcomponent Deliverable Deliverable Review Findings 1 Qing Cao Sha EA Summary Submitted to Bank in No major issues Reservoir (includes EMP) Oct 2008 (in English) 1 Raw water conveyor EA-EMP The EA-EMP was No major issues on Changxing Island (in Chinese) submitted to the Bank and reviewed by the Bank team.

48 Locations of the linked projects are indicated in the map (Annex 15). 106

1 Raw water conveyor EA-EMP The EA-EMP was No major issues tunnel crossing the (in Chinese) submitted to the Bank Yangtze River and reviewed by the Bank team. 1 Wuhaoogou raw EA-EMP The EA-EMP was No major issues water pumping (in Chinese) submitted to the Bank station and raw water and reviewed by the conveyor of Jinhai Bank team. 2 Bailonggang WWTP Operational results This analysis was No major issues (Implementation of included in the EA- EMP, including EMP for the Southern sludge mgmt.) Sewer Project of Bailonggang Sewerage System and APL EA summary. 2 Pudong Trunk EA-EMP This analysis was No major issues Sewage of the included in the EA- extension of the EMP for the Southern Bailonggang Sewer Project of Southern Trunk Bailonggang Sewer System Sewerage System and APL EA summary.

12. Environmental safeguard documents for all linked subcomponents under Component 1 were submitted to the Bank for due diligence review. No major issues were found that could present a reputational risk to the Bank.

13. The operational results for the Bailonggang WWTP were included in the EA-EMP for the Southern Sewer Project of Bailonggang Sewerage System, and a due diligence review was conducted. No major issues were found that would present a reputational risk to the Bank.

14. Alternative Analysis. During project preparation, alternative locations and alternative technical processes and designs were explored and considered. The EA identified, evaluated and compared various options for water supply system layout, sewage drainage system layout, construction methods, pipeline materials and deodorant technologies (etc.) with a view to avoiding and minimizing adverse environmental and social impacts, and maximizing environmental benefits. The EA teams worked closely with the project planners, owners and feasibility study teams to compare and evaluate alternatives, and optimal alternatives were selected to balance avoidance of adverse social and environmental impacts with economic, technical, and financial considerations. A “no project” scenario was also considered as an alternative to each subproject.

Environmental Management Plan (EMP)

15. An EMP was developed as a separate and stand-alone document. It includes policy bases, applicable environmental standards, environmental management systems, mitigation measures, monitoring plans, institutional arrangements, capacity building strategies, and estimated costs for mitigation measures and monitoring programs during construction and operation. An EMP table was designed for each subproject. The table includes potential impacts, mitigation measures,

107 implementation schedules, implementation and supervisory agencies, monitoring indicators, supervision frequencies and locations, and the EMP budget for the construction and operation phases. Generic measures for environmental management of construction were also designed as technical specifications to be included in contracts.

16. Supervision and Reporting: Contractors and supervising agencies will meet quarterly to monitor progress and submit detailed reports to the PMO. The World Bank will receive a semiannual report on the EMP, along with a proposal for EMP revision to achieve objectives.

17. Funding Arrangements: The costs associated with EMP measures are included in the project cost estimates; component-specific costs are provided in the EMP. The monitoring of air and water quality, noise, and odor will be conducted by external environmental monitoring stations, and monitoring activities will be financed by counterpart funds. In the operation phase, costs related to mitigation and monitoring will be borne by the IAs.

18. Monitoring: The contractors are fully responsible for complying with the mitigation measures stipulated in their contracts and detailed in the EMP. An environmental monitoring program for the project’s construction and operation phases is in the EA and is a component of the EMP. The monitoring program covers air, water quality, noise levels, odor etc. The program specifies relevant parameters, frequencies, time, locations, responsible agencies and estimated costs. The monitoring program further specifies reporting and response procedures to ensure follow-up actions on identified issue. A professional monitoring agency will be contracted to monitor the parameters specified in the EMP employing standard methods recognized by regulatory authorities. Environmental monitoring will provide key and timely information, especially on environmental impacts and mitigation, to the borrower and the Bank to evaluate the success of environmental management. This monitoring process will verify compliance with the EMP and determine mitigation measures if the EMP is not properly implemented.

Public Consultation and Information Dissemination

19. Public Consultations: Two stages of public consultations were conducted with those affected by the proposed project, and include people from different groups, occupations, socio- economic and educational backgrounds and gender. The primary objective of the first round was to canvass public opinion on the project. The second round communicated findings from EA, discussed intended mitigation measures and confirmed public acceptance and satisfaction with the project. In addition, several rounds of consultations with government agencies and other stakeholders were organized to discuss site locations, project scopes, and potential environmental and socio-economic impacts. These consultations assumed many forms, including expert consultations, questionnaires, symposiums, interviews, and public hearings.

20. A majority of consulted parties indicated strong support for the project and acceptance of short-term inconveniences, such as noise and dust, during the construction phase. They supported project measures to improve municipal water supply facilities and services, and wastewater collection and treatment capacity. Public concerns and opinions are detailed in the EAs, and are incorporated into the project design and environmental mitigation measures.

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21. Information disclosure: Information on the project was disclosed in major local newspapers from May to September 2008. Telephone hotlines were established for the public to access relevant documents and offer comments. Disclosure of EAs was announced in a local newspaper on August 30 and September 4, 2008, and EAs were made available at public libraries, the PMO, PIUs and in websites. The final English version EA/EMP and EA Summaries were submitted to the Bank and disclosed at the Info shop in November 2008.

Natural Habitats

22. Activities financed by the IBRD loan are not expected to have significant impacts on natural habitats. A linked project, the construction and operation of the Qing Cao Sha Reservoir, will, however, cause the loss of natural habitats for migratory water birds (though none critical in the sense of OP4.04). It was confirmed that affected wetlands are mainly back-up habitats for migratory water birds during unfavorable weather conditions. Based on discussions with relevant stakeholders, including local ecologists working in the estuary area, appropriate mitigation measures were designed to properly mitigate the ecological impacts of this Reservoir on wetland habitats during winter. The Reservoir may need to store water in the winter to avoid water quality degradation caused by sea water intrusion. A detailed analysis of impacts and mitigation measures was prepared for the Qing Cao Sha EA Summary/Update, including a supplementary EMP specifying mitigation measures to be executed by the implementing agency. With proper implementation of the supplementary EMP, the Reservoir should generate positive ecological impacts on wetland habitats for migratory water birds, as it would create a large wetland area free from human disturbance. The detailed map of relevant wetlands can be found in the disclosed EA Summary for the QCSRWP. The EA Summary also indicates that a total of RMB 143.53 million (US$21.1 million) is allocated for implementation of EMP as a part of the total project investment. The environmental management work during construction period will be borne by project implementing unit, construction supervision units, and construction contractors.

23. In addition, the SMG has its own wetland conservation plan, and its implementation has expanded the total area of Shanghai’s wetlands. Shanghai’s 11th Five-Year Plan set targets to continue to conserve wetlands. Many government agencies actively participated in wetland protection, and their responsibilities are clearly specified. The annual budget of RMB 8 million (US$1.2 million) is allocated to ensure that wetland protection is sufficiently financed and successfully implemented during the period of 11th Five-Year Plan. The Shanghai Municipal People’s Congress supervises the implementation of this 11th Five-Year Plan. Detailed information is described in QCS EA Summary.

Involuntary Resettlement

24. Two of the project’s four components will cause involuntary resettlement and resettlement impacts were determined during project preparation. In accordance with local laws and Bank requirements, individual Resettlement Action Plans (RAPs) for these two components were prepared in Chinese and English by the Shanghai PMO, with assistance from house demolition offices, local land bureaus, affected villages and communities, potentially displaced persons, and Resettlement Consultants. The initially contemplated resettlement impacts were significantly reduced by optimizing project design and implementation arrangements. For

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example, pipe-jacking technology will be employed during project implementation, which will reduce resettlement impacts, and the alignment of the southern sewage line project was altered to avoid significant resettlement. During project design, the project owners and design institutes paid attention to possible linkages to associated on-going or planned resettlement practices. As a result, a linked project in the Water Supply and Management Component was identified and included in the project RAP, and the second linked project (Pudong Trunk Sewer) related to the Waste Water Component was identified and a Resettlement Policy Framework (RPF) was prepared.49 At present, the following Social Safeguards documents have been prepared to minimize adverse impacts of land acquisition and relocation by compensating and rehabilitating project-affected persons.

Water Supply and Management Component (Nanhui Conveyor Component) and its linked projects: RAP (English and Chinese) Waste Water Component (Puxi Trunk Sewer): RAP (English and Chinese) Pudong Trunk Sewer linked to the above Waste Water Component: RPF (English and Chinese)

25. Scope of Impacts. Major impacts relate to land acquisition and demolition of buildings. The project will require land acquisition, relocation of houses, compensation for businesses and relocation of infrastructure. The project will require the acquisition of about 561 mu (37.4 ha) of land. About 100 mu (6.7 ha) is cultivated land. The project will also require demolition of 3413 m2 of housing areas. The project will affect 290 people through land acquisition and house demolition. An interview with a village head confirmed that the income of PAPs is not based on land; instead, most villagers earn money in nearby township enterprises. The average household income from agricultural activities is thus estimated as less than 12 percent of total household income. PAPs are expected to change their Hukou status from “farmer (rural)” to “citizen (urban)”, which will provide access to public services and social insurance. Project impacts are detailed in the RAPs. Most resettlement impacts in rural areas are relatively scattered and marginal, particularly considering the small scale of civil works and the significant share of household income from non-farm activities.

Table A10.2: Impacts of Land Acquisition and Resettlement Component Land Acquisition HH’s House Relocated Number of PAPs (mu) Demolition (m2) Households Nanhui 550 3413 26 269 Southern Sewage 11 0 0 21 Total 561 3413 26 290

26. Policy objectives and legal framework. The individual RAPs were prepared in line with relevant Chinese laws and regulations, and the World Bank OP 4.12 on Involuntary Resettlement. Key principles, considerations and salient activities in project design and RAP preparation included: • Acquisition of land and other assets, and relocation of people, will be minimized as much as possible.

49 For the Pudong Trunk Sewer, the exact alignment of the section was not be finalized during appraisal, and the resettlement impact of the part could not be determined. Thus, RPF was prepared instead of RAP. 110

• A socio-economic survey will be conducted to determine baseline conditions, especially of project affected persons. • Compensation for houses or other properties will be determined at full replacement value. • Compensation will be provided to all project affected persons, including shop operators, those with leasing arrangments and those who lack house registration or other documents, such as business documents and legal documents. • Basic infrastructure and service facilities will be provided in areas where project affected persons will be resettled. • Affected persons will be consulted during planning for acquisition of land and other assets, and provision of rehabilitation. • Financial and physical resources for resettlement and rehabilitation will be made available when required. • Special consideration will be given to vulnerable groups. • Institutional arrangements will be established to ensure effective and timely design, planning, consultation and implementation of the RAP. • Effective and timely supervision, monitoring and evaluation of project implementation will be executed.

27. Compensation Standards. Land acquisition compensation will include land compensation, a resettlement subsidy, and compensation for standing crops. The land acquisition fund is calculated based on land output value according to local regulation. The compensation rates for structures are determined based on their replacement costs. Relocation allowance will be provided to project affected factories. New factory buildings will be provided for lease within the same village.

28. Rehabilitation program. All land losses, house demolition and business losses will be compensated according to local regulations. Skills trainings were planned. A Social Insurance Scheme will be adopted in the project as an additional measure for livelihood restoration.

29. Affected public infrastructure. Compensation based on replacement value will be paid to relevant government agencies or local governments to restore affected infrastructure and services.

30. Implementation arrangements. A multi-level organization was established to implement the RAPs. An independent monitor will be selected for resettlement implementation and livelihood restoration. The PIUs will be responsible for internal monitoring and will provide semi-annual internal monitoring reports to the PPMO and the Bank. Details of staffing and their responsibilities are provided in the RAPs.

31. Budget and funding arrangement. The Borrower will prepare a sufficient budget from counterpart funding to conduct resettlement of projects.

32. Public participation. Project-affected persons and organizations were informed about the project and its impacts in meetings during the preparation of the RAPs. Comments and recommendations received from these meetings were incorporated in the RAPs and feasibility

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studies. Public participation will continue during RAP implementation. Project information will be provided to affected persons through television, newspapers, bulletins and posters. The RAPs will be summarized in a resettlement information booklet and distributed to affected households.

33. Gender issues. Gender issues were considered and sensitive approaches were applied in resettlement planning. Both males and females affected by the project were consulted during RAPs preparation and the social assessment process. Men and women's group were separately interviewed. Resettlement impacts on men and women were found to have no discrepancies; both men and women will equally benefit from the proposed project.

34. Grievance mechanism. A grievance mechanism was established during the preparation of the RAPs. All relevant telephone numbers were disclosed to PAPs. The PAPs can prosecute any resettlement aspect, if needed. All prosecuted cases will be recorded in paper.

35. A Resettlement Policy Framework was developed according to relevant local laws and regulations and the World Bank OP 4.12 on Involuntary Resettlement for resettlement practices on the Southern Sewage Line Project (Pudong Part). The RPF describes the legal framework, planning principles, procedures, compensatory and rehabilitation approaches, consultation and participatory requirements, grievance redress mechanisms, and organization and monitoring arrangements.

Indigenous Peoples

36. The social economic surveys confirmed that there are no ethnic minority communities collectively attached to the project areas. It is the Bank team’s assessment that this project does not trigger Bank OP 4.10 on Indigenous Peoples.

Safety of Dams

37. The Qing Cao Sha (QCS) reservoir, at the estuary of the Yangtze River, will be the raw water supply source for the Bank-financed Nanhui raw water conveyor subproject. The Reservoir is under construction and will be completed by end-2010. Shanghai will fund all aspects of the Qing Cao Sha project except for the Nanhui Conveyor, and the main structures include embankments, a water intake and pump stations. The reservoir has an area of 66.26 km2 and a capacity equal to 524 million m3. The total length of embankments is 48.79 km, consisting of a 7.65 km south embankment, a 2.82 km west embankment, a 18.96 km north embankment, a 3.01 km east embankment, and a 16.35 km Changxi Island embankment. The maximum height of the embankment and maximum level of storage water are 20 m and 7 m, respectively.

38. The reservoir (outside of the embankment) was designed for a once in a century flood with the same frequency wind wave, and checked against a once in a 300 year flood with same frequency wind wave. The reservoir (inside the embankment) was designed for its maximum storage water level plus a category 10 wind on the Beaufort scale. In addition, the level of the reservoir was designed at 6.20 m during sea water intrusion, with a minimum design reservoir level equal to minus 1.50 m. The level of the reservoir was designed at 3.60 m for fresh water periods, with an average storage water level equal to 2.70 m, and minimum operation level at 2

112 m. The earthquake peak ground acceleration at the dam site was designed at 0.10g, corresponding to a seismic damage intensity ranking of VII.

39. Dam and Dyke Structure. The Bank hired the Dam Safety Management Center of MoWR (Nanjing Institute, NI) to execute a dam safety review, and NEWJEC Inc. from Japan to review the result of the dam liquefaction resistance analysis conducted by Chengtou’s consultant, in accordance with Bank’s dam safety policy OP4.37, between September 2007 and September 2008. The reviews made the following recommendations:

(a) The liquefaction analyses were carried out by the PL method and 2-dimensional dynamic analysis using a finite element method, and it was considered that the liquefaction analyses were carried out properly. Although the upper sandy clay layer was used for hydraulic filling and was considered relatively easy to liquefy, the results of analyses were valid because historically small earthquakes had been experienced in Shanghai.

(b) The settlement of dykes due to consolidation is about 1 m according to the settlement analysis, and is relatively small. The slope stability analysis after completion of the embankment was carried out, and the safety of slopes was confirmed. The embankment on soft ground in the estuary area often causes unanticipated geotechnical problems during construction. Placing the geomembrane on the surface of the foundation ground and reinforced-hydraulic fill (stacked large geomembrane bags) at the toe of the slope will enhance the stability of the dyke. However, for the sake of safety, monitoring is recommended during construction.

(c) The hydraulic filling without the geomembrane would result in loose soil. Hence, settlement may occur not only in the foundation ground but also in the embankment body itself to some degree. In addition, the body of the dyke may become relatively weak against seepage flow and earthquakes. However, it is impossible to compact the embankment soil under the water. Adopting the hydraulic fill method, which is the same way as the reclamation method, is thus unavoidable. Consequently, the cutoff wall of jet-grouted pile should be inevitable against seepage flow. And safety in earthquakes has to be confirmed, not on the assumption of soil properties at the design stage, but with as-built properties by soil exploration after completion.

(d) Site monitoring shall be conducted to ensure dam safety. The recommended items for monitoring are pore water pressure in the foundation ground and in the hydraulic fill material, and settlement and lateral displacement at the crest and toe of the dyke. During construction, attention should be focused on pore water pressure. However, in general, accurately monitoring pore water pressure is more difficult than measuring displacement. Hence, monitoring the movement of the dykes during construction, which will be useful for later consideration, is necessary. After construction, the movement of the dykes should be monitored over the long term to catch unusual shifts that might influence the operation. Pertinent reference values should be included in the Operation and Maintenance Manual for the reservoir.

(e) Soil exploration should be carried out to identify soil characteristics after completion of the embankment. The safety of the dykes and dams for as-built properties should be confirmed against liquefaction, slope stability, piping flow, settlement and so on. A comparison with the design analysis should be carried out and satisfactory results should be certified by the

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Supervising Engineer. If the results of the analysis for as-built properties are not satisfactory, additional countermeasures, such as soil improvement, have to be considered. The upper layer (silty sand and sandy silt) in the foundation ground and the hydraulic fill material have to be explored to identify soil properties for liquefaction analysis, stability analysis and seepage analysis. Hence, drilling exploration, in-situ soil tests, and laboratory soil tests (density, grain size distribution, triaxial test, cyclic triaxial test and so on) should be carried out after completion of the embankment.

(f) The firm surface protection was executed on the slope of both sides of the dyke. The surface protection could resist erosion by wave overtopping and overflow. However, surface protection on the crown of the dyke is also important as well as protection on the slope. The surface protection on the crown of dyke has to prevent not only erosion but also infiltration by rain, overtopping and overflow. Although the surface protections are firm, it would be preferable to place wave dissipating concrete blocks on the slope to prevent wave erosion over the long term. The location of the wave dissipating concrete blocks should be decided based on the direction of waves and wind.

40. Based on OP4.37, Chengtou established an independent panel of dam safety experts whose TORs were agreed by the Bank. The panel reviewed and advised the QCSC on dam design, construction, safety, and operations. In addition, frameworks for the Operations and Maintenance Manual (OMM) and the Emergency Preparedness Plan (EPP) were discussed and submitted to the Bank. The QCSC and Chengtou agreed to prepare the OMM and the EPP based on the agreed frameworks, and they will conduct workshops jointly with the Bank to discuss and finalize the EPP one year prior to the initial filling of the Qing Cao Sha Reservoir, and the OMM six months prior to the initial filling of the said reservoir, which is scheduled for April 2010.

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Annex 11: Project Preparation and Supervision CHINA: Shanghai Urban Environment Project - APL Phase III

Planned Actual PCN review 11/26/2007 11/26/2007 Initial PID to PIC 02/20/2008 Initial ISDS to PIC 01/24/2008 Appraisal 09/01/2008 09/16/2008 Negotiations 04/13/2009 04/15/2009 Board/RVP approval 06/12/2009 Planned date of effectiveness 12/01/2009 Planned date of mid-term review 06/30/2012 Planned closing date 06/30/2015

Key institutions responsible for preparation of the project:

Overall Project Preparation Management and Coordination: APL Project Management Office led by the SDRC Deputy Director and composed of the representatives of various municipal government agencies and Shanghai Chengtou Corporation.

Project Implementation: (i) Water Supply Component—the Qing Cao Sha Investment Construction and Development Company (QCSC); (ii) Wastewater Component—the Shanghai Municipal Sewerage Company (SMSC); (iii) District Environment Management Program—the Shanghai Chengtou Environment Asset Management Company (CEAM); and (iv) IST –QCSC and SMSC.

Bank staff and consultants who worked on the project included:

Name Title Unit Hiroaki Suzuki Task Team Leader/ Lead EASUR Operations Officer Axel N. Baeumler Co-Task Team Leader/ Senior EASUR Economist Anthony Whitten Senior Biodiversity Specialist EASRE Yiren Feng Environmental Specialist EASCS Jun Zeng Social Development Specialist EASCS Sing Cho Urban Specialist EASCS Dawei Yang Procurement Specialist EASCS Ximing Zhang Dam Safety Expert EASCS Yi Geng Financial Management EASCO Specialist Haixia Li Financial Management EASCO Specialist Jiang Ru Operations Officer EASOP Margaret Png Senior Counsel LEGEA Alessandro Palmieri Lead Dam Specialist OPCQC 115

Khairy Al-Jamal Senior Infrastructure MNSSD Specialist Sheng Li Senior Learning Specialist WBIBJ Vellet E. Fernandes Program Assistant EASUR Carlos E. Velez Peer Reviewer LCSUW Vahid Alavian Peer Reviewer ETWWA Abha Joshi-Ghani Peer Reviewer FEU Anthony Pellegrini Peer Reviewer Consultant Geoffrey Read Engineer Consultant Mats Andersson Urban Management Specialist Consultant Eddie Ke Siong Hum Environmental Engineer Consultant Masato Sawaki Financial Analyst Consultant Toyoko Kodama Operations Specialist Consultant

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Annex 12: Documents in the Project File

CHINA: Shanghai Urban Environment Project - APL Phase III

Master Plans and Feasibility Studies: • Shanghai Water Sector Master Plan • Shanghai Waste Water Sector Master Plan • Feasibility Studies for Proposed Investments

Environmental Assessments: • Environmental Impact Assessment for Nanhui Conveyor Works • Environmental Impact Assessment for Bailonggang Sewerage System • Environmental Management Plan for Nanhui Conveyor Works • Environmental Management Plan for Bailonggang Sewerage System • Environmental Assessment Executive Summary for the APL3 • Environmental Assessment Summary for Qing Cao Sha Raw Water Project

Resettlement Action Plans and Resettlement Policy Framework: • Land Acquisition and Resettlement Action Plan for Nanhui Conveyor • Resettlement Action Plan for Bailonggang Southern Trunk Sewer - Puxi section • Resettlement Policy Framework for Bailonggang Southern Trunk Sewer – Pudong section

Dam Safety: • Qing Cao Sha Dam Safety Review Report

Financial and Economic Analysis: • Shanghai Population Projections to 2030 • Financial Analysis • Economic Analysis/ Willingness to Pay Survey

Business Licenses and Company Charters: • Business License and Company Charter of QCSC • Business License and Company Charter of SMSC • Business License and Company Charter of CEAM/ DFV

DFV and CEAM Related Documents: • DFV Operations Manual • DFV Environmental Impact Analysis Policy Framework • DFV Land Acquisition and Resettlement Policy Framework • Review of Operations of the DFV

World Bank Assessment Reports: • Procurement Capacity Assessment • Financial Management Assessment

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Annex 13: Statement of Loans and Credits CHINA: Shanghai Urban Environment Project - APL Phase III

Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d P086035 2007 CN-CF-Tianjin Landfill Gas Recovery 0.00 0.00 0.00 0.00 0.00 8.39 0.00 0.00 P086515 2007 CN-3rd National Railway 200.00 0.00 0.00 0.00 0.00 200.00 13.33 0.00 P083322 2007 CN-SICHUAN URBAN DEV 180.00 0.00 0.00 0.00 0.00 170.70 19.20 0.00 P087318 2007 CN--GEF-Guangxi Integrated Forestry 0.00 0.00 0.00 5.25 0.00 4.65 0.13 0.00 Dev. P081776 2007 CN-GUANGDONG/PRD2 96.00 0.00 0.00 0.00 0.00 96.00 4.33 0.00 P088964 2007 CN-Guangxi Integrated Forestry Dev 100.00 0.00 0.00 0.00 0.00 84.09 -14.25 0.00 P090377 2007 CN-GEF-2nd Shandong Environment 0.00 0.00 0.00 5.00 0.00 4.50 0.00 0.00 P096285 2007 CN-MSE Finance 100.00 0.00 0.00 0.00 0.00 100.00 81.33 0.00 P075613 2007 CN-Shaanxi Ankang Road Development 300.00 0.00 0.00 0.00 0.00 300.00 10.57 0.00 P095315 2007 CN-W. Region Rural Water & Sanitation 25.00 0.00 0.00 0.00 0.00 25.00 0.00 0.00 P077752 2007 CN-SHANDONG ENVMT 2 147.00 0.00 0.00 0.00 0.00 132.00 -10.83 0.00 P092618 2007 CN-LIAONING MED CITIES INFRAS 2 173.00 0.00 0.00 0.00 0.00 173.00 0.00 0.00 P091020 2007 CN-Fujian Highway Sector Investment 320.00 0.00 0.00 0.00 0.00 320.00 34.50 0.00 P081255 2006 CN-Changjiang/Pearl River Watershed 100.00 0.00 0.00 0.00 0.00 96.80 15.47 0.00 Reha P082992 2006 CN-GEF-Termite Control Demonstration 0.00 0.00 0.00 14.36 0.00 14.36 1.03 0.00 P081348 2006 CN-HENAN TOWNS WATER 150.00 0.00 0.00 0.00 0.00 149.63 19.63 0.00 P082993 2006 CN-GEF-PCB Mgnt & Disposal 0.00 0.00 0.00 18.34 0.00 17.57 9.12 0.00 P084742 2006 CN-IAIL III 200.00 0.00 0.00 0.00 0.00 113.92 5.62 0.00 P070519 2006 CN-Fuzhou Nantai Island Peri-Urban Dev 100.00 0.00 0.00 0.00 0.00 99.75 21.00 0.00 P085124 2006 CN-Ecnomic Reform Implementation 20.00 0.00 0.00 0.00 0.00 18.44 3.27 0.00 P075732 2006 CN-SHANGHAI URBAN APL2 180.00 0.00 0.00 0.00 0.00 146.64 13.31 0.00 P085333 2006 CN-5th Inland Waterways 100.00 0.00 0.00 0.00 0.00 68.70 22.53 0.00 P099992 2006 CN-Liaoning Medium Cities 218.00 0.00 0.00 0.00 0.00 190.41 -7.18 0.00 Infrastructure P096158 2006 CN-Renewable Energy II (CRESP II) 86.33 0.00 0.00 0.00 0.00 72.67 28.06 0.00 P094388 2006 CN-HFC-23 Emissions Reduction 0.00 0.00 0.00 0.00 0.00 1,040.81 0.00 0.00 P093906 2006 CN-3rd Jiangxi Hwy 200.00 0.00 0.00 0.00 0.00 169.89 -0.11 0.00 P090336 2006 CN-GEF-NINGBO WATER & ENVMT 0.00 0.00 0.00 5.00 0.00 4.50 1.33 0.00 P086629 2006 CN-Heilongjiang Dairy 100.00 0.00 0.00 0.00 0.00 94.64 14.48 0.00 P086505 2005 CN-NINGBO WATER & ENVMT 130.00 0.00 0.00 0.00 0.00 92.53 -2.97 0.00 P075730 2005 CN-HUNAN URBAN DEV 172.00 0.00 0.00 0.00 0.00 155.62 50.79 0.00 P081161 2005 CN-CHONGQING SMALL CITIES 180.00 0.00 0.00 0.00 0.00 154.70 42.97 0.00 P072721 2005 CN-GEF-Heat Reform & Bldg Egy Eff. 0.00 0.00 0.00 18.00 0.00 14.95 7.66 0.00 P067625 2005 CN-GEF-Renewable Energy Scale-Up 0.00 0.00 0.00 40.22 0.00 37.67 -0.35 0.00 Program P071094 2005 CN - Poor Rural Communities 100.00 0.00 0.00 0.00 0.00 77.01 44.51 0.00 Development P081346 2005 CN-LIUZHOU ENVIRONMENT MGMT 100.00 0.00 0.00 0.00 0.00 66.38 1.23 0.00 P067828 2005 CN-Renewable Energy Scale-up Program 87.00 0.00 0.00 0.00 10.00 5.41 10.91 0.00 P087291 2005 CN-CF-Jincheng Coal Bed Methane 0.00 0.00 0.00 0.00 0.00 18.13 0.00 0.00 Project

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P069862 2005 CN - Agricultural Technology Transfer 100.00 0.00 0.00 0.00 0.00 76.17 31.27 0.00 P057933 2005 CN-TAI BASIN URBAN ENVMT 61.00 0.00 0.00 0.00 0.00 34.18 19.36 0.00 P068752 2005 CN-Inner Mongolia Highway & Trade 100.00 0.00 0.00 0.00 0.00 45.76 -8.82 0.00 Corrid P081749 2004 CN-Hubei Shiman Highway 200.00 0.00 0.00 0.00 1.00 9.19 -13.14 0.00 P084003 2004 CN-GEF GUANGDONG PRD URB 0.00 0.00 0.00 10.00 0.00 9.58 6.04 0.00 ENV P077615 2004 CN-GEF-Gansu & Xinjiang Pastoral 0.00 0.00 0.00 10.50 0.00 5.29 8.44 0.00 Develop P077137 2004 CN-4th Inland Waterways 91.00 0.00 0.00 0.00 0.46 52.06 25.69 25.19 P065035 2004 CN-Gansu & Xinjiang Pastoral 66.27 0.00 0.00 0.00 0.00 23.75 12.19 0.00 Development P075728 2004 CN-GUANGDONG/PRD UR ENVMT 128.00 0.00 0.00 0.00 0.64 74.54 19.92 0.00 P075602 2004 CN-2nd National Railways (Zhe-Gan 200.00 0.00 0.00 0.00 1.00 0.25 -22.08 -23.08 Line) P075035 2004 CN - GEF-Hai Basin Integr. Wat. 0.00 0.00 0.00 17.00 0.00 10.33 11.13 0.00 Env.Man. P073002 2004 CN-Basic Education in Western Areas 100.00 0.00 0.00 0.00 0.00 35.52 32.70 0.00 P065463 2004 CN-Jiangxi Integrated Agric. Modern. 100.00 0.00 0.00 0.00 0.00 61.14 35.40 0.00 P066955 2004 CN-ZHEJIANG URBAN ENVMT 133.00 0.00 0.00 0.00 0.00 90.34 39.55 0.00 P069852 2004 CN-Wuhan Urban Transport 200.00 0.00 0.00 0.00 1.00 70.83 68.53 0.00 P067337 2003 CN-2nd GEF Energy Conservation 0.00 0.00 0.00 26.00 0.00 7.17 25.84 0.00 P040599 2003 CN-TIANJIN URB DEV II 150.00 0.00 0.00 0.00 0.00 126.17 76.92 1.58 P068058 2003 CN-Yixing Pumped Storage Project 145.00 0.00 0.00 0.00 0.00 48.19 35.96 0.00 P070191 2003 CN-SHANGHAI URB ENVMT APL1 200.00 0.00 0.00 0.00 0.00 88.67 52.85 0.00 P070441 2003 CN-Hubei Xiaogan Xiangfan Hwy 250.00 0.00 0.00 0.00 0.00 19.25 19.25 0.00 P058847 2003 CN-3rd Xinjiang Hwy Project 150.00 0.00 0.00 0.00 0.00 12.25 11.58 0.00 P076714 2003 CN-2nd Anhui Hwy 250.00 0.00 0.00 0.00 0.00 42.71 13.55 0.00 P060029 2002 CN-GEF-Sustain. Forestry Dev 0.00 0.00 0.00 16.00 0.00 4.59 14.45 0.00 P058846 2002 CN-Natl Railway Project 160.00 0.00 0.00 0.00 5.00 1.56 6.56 0.00 P064729 2002 CN-Sustainable Forestry Development 93.90 0.00 0.00 0.00 0.00 20.14 13.25 0.00 P068049 2002 CN-Hubei Hydropower Dev in Poor Areas 105.00 0.00 0.00 0.00 0.00 14.39 7.85 0.00 P070459 2002 CN-Inner Mongolia Hwy Project 100.00 0.00 0.00 0.00 0.00 14.15 8.15 0.00 P071147 2002 CN-Tuberculosis Control Project 104.00 0.00 0.00 0.00 0.00 41.63 27.33 0.00 P045915 2001 CN-Urumqi Urban Transport 100.00 0.00 0.00 0.00 0.00 23.16 23.16 0.00 P047345 2001 CN-HUAI RIVER POLLUTION 105.50 0.00 0.00 0.00 0.00 15.25 15.25 0.47 CONTROL P051859 2001 CN-LIAO RIVER BASIN 100.00 0.00 0.00 0.00 0.00 14.47 14.01 0.00 P056199 2001 CN-3rd Inland Waterways 100.00 0.00 0.00 0.00 0.00 4.56 3.31 0.00 P056596 2001 CN-Shijiazhuang Urban Transport 100.00 0.00 0.00 0.00 0.00 38.31 38.31 0.00 P042109 2000 CN-BEIJING ENVIRONMENT II 349.00 0.00 0.00 25.00 26.51 156.56 183.07 10.76 P045910 2000 CN-HEBEI URBAN ENVIRONMENT 150.00 0.00 0.00 0.00 0.00 27.83 27.83 5.38 P064730 2000 CN-Yangtze Dike Strengthening 210.00 0.00 0.00 0.00 0.00 64.21 64.21 40.54 P064924 2000 CN-GEF-BEIJING ENVMT II 0.00 0.00 0.00 25.00 0.00 18.95 25.00 10.48 P049436 2000 CN-CHONGQING URBAN ENVMT 200.00 0.00 0.00 0.00 29.50 53.32 82.82 17.81 P056424 2000 CN-Tongbai Pumped Storage 320.00 0.00 0.00 0.00 100.00 27.76 132.96 6.68 P051856 1999 CN-Accounting Reform & Development 27.40 5.60 0.00 0.00 0.00 6.25 6.03 5.25 P038121 1999 CN-GEF-Renewable Energy 0.00 0.00 0.00 35.00 0.00 4.27 34.77 28.90 Development P042299 1999 CN-Tec Coop Credit IV 10.00 35.00 0.00 0.00 5.84 10.87 14.18 0.00 P036953 1999 CN-Health IX 10.00 50.00 0.00 0.00 0.40 9.61 7.85 7.85

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P036414 1998 CN-GUANGXI URBAN ENVMT 72.00 20.00 0.00 0.00 13.48 10.96 23.80 3.80 P003614 1998 CN-Guangzhou City Transport 200.00 0.00 0.00 0.00 20.00 41.85 61.85 41.85 P003539 1998 CN-Sustainable Coastal Resources Dev. 100.00 0.00 0.00 0.00 2.06 8.63 10.69 8.63 Total: 9,205.40 110.60 0.00 270.67 216.89 6,116.08 1,789.44 192.09

CHINA STATEMENT OF IFC’s Held and Disbursed Portfolio In Millions of US Dollars

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

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

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2002 Zhong Chen 0.00 4.78 0.00 0.00 0.00 4.78 0.00 0.00 2006 Zhongda_Yanjin 21.89 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total portfolio: 733.58 577.30 181.40 340.89 470.95 371.06 29.61 108.03

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

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Annex 14: Country at a Glance CHINA: Shanghai Urban Environment Project - APL Phase III East Lower- POVERTY and SOCIAL Asia & middle- Development diamond* China P acific income 2006 Population, mid-year (millions) 1,311.8 1,900 2,276 Life expectancy GNI per capita (Atlas method, US$) 2,000 1,863 2,037 GNI (Atlas method, US$ billions) 2,623.6 3,539 4,635

Average annual growth, 2000-06 Population (%) 0.6 0.9 0.9 GNI Gross Labor force (%) 1. 0 1. 3 1. 4 per primary M ost recent estimate (latest year available, 2000-06) capita enrollment Poverty (% of population below national poverty line) ...... Urban population (% of total population) 41 42 47 Life expectancy at birth (years) 72 71 71 Infant mortality (per 1,000 live births) 23 26 31 Child malnutrition (% of children under 5) 81513 Access to improved water source Access to an improved water source (% of population) 77 79 81 Literacy (% of population age 15+) 91 91 89 Gross primary enrollment (% of school-age population) 113 114 113 China M a l e 113 115 117 Lower-middle-income group F e m a l e 112 113 114

KEY ECONOM IC RATIOS and LONG-TERM TRENDS 1986 1996 2005 2006 Economic ratios* GDP (US$ billions) 295.7 856.1 2,243.9 2,644.7 Gross capital formation/GDP 38.6 40.4 43.9 44.6 Trade Exports of goods and services/GDP 11.8 20.1 37.3 40.1 Gross domestic savings/GDP 35.8 42.5 49.4 52.5 Gross national savings/GDP 35.9 41.3 51.0 54.1

Current account balance/GDP -2.8 0.8 7.2 9.4 Domestic Capital Interest payments/GDP 0.2 0.5 0.1 .. savings formation Total debt/GDP 8.0 15.0 12.6 .. Total debt service/exports 8.2 8.7 3.0 .. Present value of debt/GDP .. .. 12.3 .. Present value of debt/exports .. .. 30.6 .. Indebtedness 1986-96 1996-06 2005 2006 2006-10 (average annual growth) GDP 10 . 1 9 . 0 10 . 4 10 . 7 10 . 6 China GDP per capita 8.6 8.2 9.7 10.1 9.9 Lower-middle-income group Exports of goods and services 10.0 21.8 24.3 23.3 17.4

STRUCTURE of the ECONOMY

1986 1996 2005 2006 Growth of capital and GDP (%) (% of GDP) Agriculture 27.1 19.5 12.5 11.7 20 Industry 44.0 47.5 47.5 48.4 15 M anufacturing 35.2 33.5 33.5 .. 10 Services 28.9 33.0 39.9 39.9 5 0 Household final consumption expenditure 49.3 43.5 36.1 33.2 01 02 03 04 05 06 General gov't final consumption expenditure 14.9 14.0 14.5 14.3 GCF GDP Imports of goods and services 14.7 18.0 31.7 32.2

1986-96 1996-06 2005 2006 Growth of exports and imports (%) (average annual growth) Agriculture 4.3 3.5 5.2 5.0 40 Industry 13.5 10.1 11.7 12.5 30 M anufacturing 12.8 10.2 12.1 .. 20 Services 9.4 9.8 10.5 10.3 10 Household final consumption expenditure 10.9 7.8 5.8 6.3 0 General gov't final consumption expenditure 10.4 9.5 11.6 10.9 01 02 03 04 05 06 Gross capital formation 11.9 10.2 11.6 13.2 Export s Imports Imports of goods and services 11.9 18.5 11.4 14.3

Note: 2006 data are preliminary estimates. This table was produced from the Development Economics LDB database. * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete.

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China

PRICES and GOVERNMENT FINANCE 1986 1996 2005 2006 Inflation (%) Domestic prices (% change) 8 Consumer prices .. 8.3 1.8 1.5 6 Implicit GDP deflator 4.6 6.4 4.2 3.6 4 Government finance 2 (% of GDP, includes current grants) 0 C u r r e n t r e v e n u e 0 . 0 10 . 5 17 . 2 18 . 4 -2 01 02 03 04 05 06 Current budget balance -17.7 0.2 2.4 3.0 GDP deflator CPI Overall surplus/deficit -24.8 -1.4 -1.3 -0.7

TRADE 1986 1996 2005 2006 Export and import levels (US$ mill.) (US$ millions)

Total exports (fob) 30,942 151,048 761,999 969,073 1,250,000 Food 4,448 10,231 22,481 25,722 M ineral fuels, lubricants, and related materials 3,683 5,931 17,621 17,776 1,000,000 M anufactures 19,670 129,123 712,960 916,147 750,000 Total imports (cif) 42,904 138,833 660,118 791,614 500,000 Fo o d 1,625 5,672 9,388 9,997 Fuel and energy 504 6,877 63,957 89,002 250,000 Capital goods 16,781 54,763 290,628 357,107 0 00 01 02 03 04 05 06 Export price index (2000=100) 5 9 12 2 10 4 10 7 Import price index (2000=100) 7 6 10 8 118 12 4 Export s Imports Terms of trade (2000=100) 77 113 88 87

BALANCE of PAYM ENTS 1986 1996 2005 2006 Current account balance to GDP (%) (US$ millions) Exports of goods and services 34,952 171,678 836,888 1,061,681 10 Imports of goods and services 43,453 154,127 712,090 852,769 Resource balance -8,501 17,551 124,798 208,912 N e t i n c o m e - 2 3 - 12 , 4 3 7 10 , 6 3 5 11, 7 5 5 5 Net current transfers 378 2,129 25,385 29,200 Current account balance -8,146 7,243 160,818 249,867 Financing items (net) 6,419 24,462 46,198 -2,842 0 Changes in net reserves 1,727 -31,705 -207,016 -247,025 00 01 02 03 04 05 06 Memo: Reserves including gold (US$ millions) . . 111, 7 17 8 3 1, 4 2 7 1, 0 4 6 , 4 6 5 Conversion rate (DEC, local/US$) 3.5 8.3 8.2 8.0

EXTERNAL DEBT and RESOURCE FLOWS 1986 1996 2005 2006 Composition of 2005 debt (US$ mill.) (US$ millions) Total debt outstanding and disbursed 23,719 128,817 281,612 .. I B R D 9 6 5 7 , 6 16 11, 14 0 11, 4 15 A : 11, 14 0 IDA 774 7,579 9,741 9,997 B: 9,741 D: 5,532 Total debt service 2,973 15,756 27,361 .. E: 25,819 IB RD 66 840 1,139 1,443 IDA 8 73 296 316 G: Composition of net resource flows 148,267 Official grants 155 245 332 .. Official creditors 1,165 4,401 844 .. F : 8 1, 113 Private creditors 3,693 6,454 5,144 .. Foreign direct investment (net inflows) 1,875 40,180 79,127 .. Portfolio equity (net inflows) 0 0 20,346 .. World Bank program Commitments 1,120 1,900 1,277 0 A - IBRD E - Bilateral Disbursements 607 2,097 1,131 1,170 B - IDA D - Other multilateral F - Private Principal repayments 0 364 1,004 1,144 C - IM F G - Short-term Net flows 607 1,734 127 27 Interest payments 75 549 430 615 Net transfers 532 1,185 -303 -588

Note: This table was produced from the Development Economics LDB database. 9/28/07

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IBRD 36643 DECEMBER 2008 MONGOLIA L JILIN O G N O LIAONING M DEM. PEOPLE’S Qingcaosha E I REP. OF KOREA YangtzeYangtze N BEIJING Beijing Reservoir TIANJIN HEBEI REP. OF KOREA SHANXI SHANDONG Yellow QINGHAI NINGXIA Sea GANSU HENAN JIANGSU Area SHAANXI of map ANHUI SHANGHAI SHI HUBEI SICHUAN East ZHEJIANG China XIZANG JIANGXI CHONGQING Sea HUNAN RiverRiver FUJIAN GUIZHOU

TAIWAN YUNNAN GUANGDONG GUANGXI HONG KONG MACAU VIETNAM LAO South MYANMAR PEOPLE’S DEM. HAINAN China Sea THAILAND REP. PHILIPPINES

CHINA Bailonggang Sewerage SHANGHAI URBAN Treatment Plant ENVIRONMENT PROJECT APL PHASE III

Component 1: Water Supply, Nanhui Conveyor

Linjiang Water Plant Component 2: Wastewater, South Sewer Main Expansion (Puxi Section)

HuangpuHuangpu RiverRiver Component 1: Water Supply, Nanhui Conveyor

0 5 10 15 Kilometers