Report No. PID8500

Project Name China-Huai River Pollution Control Project (@)

Region East Asia and Pacific Region

Sector Urban Environment

Project ID CNPE47345 Public Disclosure Authorized Borrower(s) PRC

Implementing Agency Address MINISTRY OF FINANCE Anhui Provincial Finance Bureau, Anhui Province and Anhui Project Management Office and the municipalities of Bengbu, Bozhou, Fuyung, Guoyang, Huaibei, Huainan, Luan and Suzhou 238 Funan West Road, Hefei 230061, Anhui Province Contact Person: Ms. Liu Hua, Deputy Director, World Bank Loan Division Tel: 86-551-5100160 Fax: 86-551 510-0162 Email: [email protected] pmo Public Disclosure Authorized Environment Category B

Date PID Prepared October 23, 2000

Projected Appraisal Date October 23, 2000

Projected Board Date March 2001

1. Country and Sector Background Within the last decade, the quality of surface and ground water has declined all over China, resulting from a rapid increase in discharged, untreated wastewater. For example, from 1980-97 the country's urban water supply grew from 9 to 45 billion m3/year but only 4 billion m3/y were Public Disclosure Authorized treated in 1997. There are various reasons for this, such as inefficient enforcement of existing environmental regulations requiring polluters to treat wastewater prior to discharge, inadequate allocations of financial resources for wastewater treatment by both industries and municipalities, and also a poor institutional framework for managing wastewater matters in municipalities.Pollution control strategy. Recognizing the deteriorating environment, the Government adopted a strategy for water pollution control in the mid-1990s. The key features of that strategy are: (a) immediate substantial reduction of industrial pollution through strict enforcement of discharge standards; and (b) gradual reduction of residential pollution so that about 60% of the country's residential wastewater is treated in municipal wastewater treatment plants by 2010. The integration of industrial and residential wastewater treatment where appropriate, and establishment of wastewater utilities with sound cost-recovery to contribute to investment in addition to ensuring sustained operations are Public Disclosure Authorized parts of that strategy.Huai River. The proposed project is located in the Huai River Basin, home to over 150 million people. The watercourse measures approximately 1,000 km long, and forms a large basin (190,000 km2) with multiple water users, both industrial and residential. In the mid-1990s, the growing pollution in the Basin reached a level, which resulted in serious accidents, and which caused factories and municipal water supplies to close for several days. To correct this situation, the Government decided to accelerate improvements in the water quality of the Basin and delegated responsibility for implementation to the four provincial governments of the Basin: Henan, Anhui, Shandong and Jiangsu. In general, the provinces were instructed to reach Class III surface water quality standards in the Huai main stream and its key tributaries by the year 2000. Huai River pollution control. Initially, the provinces focused on industry. Small, inefficient plants were closed and the remaining enterprises were ordered to construct treatment facilities or implement clean technologies by the end of 2000. These actions are gradually achieving results. For example, during 1996-97 in Henan and Anhui provinces, the industrial pollution discharges expressed in chemical oxygen demand (COD) dropped from 968,000t/y to 244,000t/y. Since there was not a single municipal treatment plant in the Basin in 1996, the Government directed that municipal wastewater treatment plants (WWTPs) for 73 major cities should be under construction or completed by end-2000. Of these, 18 WWTPs are to be in Anhui Province and 14 in Shandong.Huai River monitoring. The Huai River Basin's water quality is monitored by the Huai River Basin Commission (HRBC), which also records flows in the Basin and in the Provinces. The HRBC samples the water at 31 locations at boundaries between the provinces while the provincial water resources bureaus and environmental bureaus sample the water quality in 82 nationally monitored river sections and verify compliance with wastewater discharge standards within each Province. The monitoring of water quality variables by various laboratories often overlaps, while quality control, including the exchange of data among the agencies, is rare. Due to historical reasons, organic pollution is identified in terms of COD. The biochemical oxygen demand (BOD), which provides a better estimate of the biological effect of organic matters on the River and which is widely recognized as a key variable for surface water quality assessment, is used sporadically. Also, laboratories of various institutions use different methodologies; coordination among laboratories, including sharing and comparing the data, is negligible.

2. Objectives

1. Project development objective and key performance indicators :The development objective of the proposed project focuses on supporting the Government's strides for environmental recovery of the Huai River and its tributaries. The project would pursue the objective through: (a) providing facilities for collection and treatment of wastewater; and (b) establishing competent municipal wastewater utilities to be responsible for managing the facilities in the parts of the Huai River Basin administered by Anhui and Shandong Provinces. The project would also upgrade water quality monitoring practices in the Basin.Indicators. Progress in meeing the development objective would be measured in terms of: (a) collection efficiency of wastewater generated within the project entities; (b) reduction of pollution generated by the project entities; (c) operational performance of the new wastewater utilities; and (d) successful completion of a pilot project, which would detail the implementation steps for upgrading the Basin-widewater quality monitoring system.

3. Rationale for Bank's Involvement The Bank Group brings considerable experience to assist in policy formulation and investment program design. It also draws on its growing

-2 - experience in addressing institutional and financial reform within water and wastewater utilities in China. During the identification and design phase, Bank Group assistance enabled the provinces to better select subprojects in cities, to prepare the latter to face financial requirements of large investments by definig relevant, balanced financial contributions through fees and taxes; and to address integrated management of sewerage activities. The integration of septic tank management into the wastewater program is new in China projects and will result in a substantial improvement of operational practices. The Bank Group's involvement will enhance the construction quality control of the physical investments, accelerate strengthening and training, and contribute its experience in bringing about meaningful utility reform in the sector. For the river quality monitoring of the Huai Basin, the Bank Group's support will also complement reforms in river basin management and organization carried out with the assistance of UN agencies. Monitoring water quality through applying uniform sampling methods and identical criteria and standards by involved water monitoring agencies will enable the basin agency to establish better assessment of pollution status.

4. Description The project has three main components: (a) Anhui component; (b) Shandong component; and (c) the Huai water quality monitoring component. The Anhui component includes interventions in the municipalities of Huaibei, Bengbu, Huainan, Fuyang, Bozhou, Suzhou, Luan, and Guoyang. The project will finance the construction of sewers, wastewater pumping stations, office buildings, office and sewer maintenance equipment, and technical assistance for implementation. The component will also provide institutional strengthening for the Anhui Monitoring Center to upgrade its equipment, estalish a computer network, provide vehicles to transport staff and water samples, and improve the skills of staff. The total cost of the component is estimated at US$143.7 million. The Shandong component includes interventions in the municipalities of Feicheng, Heze, Rizhao, and to Ju County. The Shandong component will finance sewers, wastewater pumping stations and water treatment plants. It will also finance interventions aimed at making improvements to the mill's processing technologies. The project will also improve on-site sanitation facilities for the mill's staff accommodations. The total cost of the component is estimated at US$68.2 million. Huai water quality monitoring component will upgrade the water quality monitoring system in the Huai Basin River Commission. The total cost of the component is estimated at US$2 million.

5. Financing Total ( US$m) GOVERNMENT 128.6 IBRD 103.7 Total Project Cost 232.3

6. Implementation Implementing Arrangements. Each province would manage the implementation of its component. For that purpose they created Leading Groups (LG) comprising officials of the provincial bureaus headed by Vice-Governors in 1997 and 1998. The LGs designated Anhui Finance Bureau and Shandong Construction Commission as the agencies responsible for managing the respective components. These established and staffed Provincial Project

-3 - Management Offices (PMO) to guide the execution of sub-components by respective municipalities. The Huai River Basin Commission, which would manage implementation of the Huai water quality monitoring component (jointly with the State Environmental Protection Agency), has also established and staffed a PMO.The municipalities which were selected by provincial LGs are completing project preparation. They would manage the implementation of their respective sub-components. Within the municipalities, LGs were created for municipal coordination and guidance. The municipal Project Management Office (MPMO) would be in charge of the implementation. These have also created specialized wastewater companies (WCs) as municipal enterprises, and decentralized the direct responsibility for execution of the sub-component to these companies. The WCs would operate and maintain the facilities upon completion of construction. The Chengwu Paper Mill would establish a special unit to execute the IBRD-funded component and provide regular reports to the provincial project office.Monitoring and Reporting Arrangements. The provincial PMOs would have principal responsibility for monitoring and reporting on implementation progress of the Anhui and Shandong components through semi-annual progress reports based on information compiled from the municipalities. In addition, PMOs would annually submit compliance reports on the status of the environment, resettlement and institutional development and various financial statements.

7. Sustainability Sustainability would be assured by actions to be implemented within the project in three area: (i) finance; (ii) institution building; and (iii) engineering and operations. The recently enacted Tariff Regulation 1192 sets the framework not only for the proposed project but also for the whole sector by applying a rational tariff policy geared at sustaining wastewater operations. The creation of autonomous utility companies with proper management with direct use of their collected revenues, which was supported by the State and the two provinces, should foster the development of the wastewater companies as business undertakings that would apply modern management principles. Comprehensive training combined with a focussed technical assistance program would build up the competence and motivation for implementing, operating and maintaining the wastewater treatment plants. Sustaining the impact of the research and analytical capacity within the Huai River Basin Commission would be assured by enhancing the Basin-wide monitoring system, unifying the sampling and analytical methods, and strengthening the respective capacities within the Basin. Finally the project addresses an issue of high priority to local, provincial and state government in delivering affordable basic urban services within conducive environmental conditions necessary for sustained economic growth with unpolluted water resources becoming and increasing scarce commodity.

8. Lessons learned from past operations in the country/sector The lessons from past operations focus on several areas of concern related to this project: (a) basin-wide capacity for environmental monitoring, and (b) management systems of municipal wastewater agencies. Experience in river basin management demonstrates the need and efficiency of macro-managing the Basin's water quality with water quantity. There would be an important role for the Bank in assisting with institutional reforms to integrate the Huai Basin River Commission as the resource management unit and ensure necessary cooperation with the provinces, which would

-4 - remain the executing bodies. Tariff Setting Principles: In most wastewater agencies, tariffs are set too low vis-a-vis operation and maintenance costs to generate positive net cashflow. Consequently, agencies are burdened with fairly significant disincentives to develop technology, institutional design and manpower advancement that would maintain and improve services. Past projects have often encountered difficulties in implementing agreed tariff increases in a timely manner sometimes occasionally delaying loan/credit effectiveness and generally affecting effective institutional development. Central core agencies have come to understand the issue and have introduced guidelines that specifically apply to priority areas and river basins. This project has benefited from an early decision made by the provinces to establish provincial guidelines and implementation of tariffs that became effective when Planning Authorities endorsed the technical project. Municipal Governments involved in this project have clearly faced the expected financial efforts of future requirements and those who could not make satisfactory commitments were dropped out of project consideration. Support for institutional reform: The establishment of financially autonomous utility enterprises to develop and manage urban services is a long standing Chinese practice and avoids many of the management difficulties of publicly owned utilities in other countries. However wastewater companies have only recently been given the same autonomy generally by absorbing drainage bureaus and construction management units already active in the sector into separate enterprises. While prior experience of the bureaus will benefit the transition, substantial levels of technical assistance will be needed to strengthen the new companies' managerial, financial and operational capacities. In order to avoid potential delays that affected start-up in other similar operations, in the present case the Borrower and Bank missions developed an institutional development plan during preparation and carried out early measures which required little external assistance.Extent of technical assistance: Full utilization of TA funds by borrowers at the local level remains problematic in the China urban portfolio. The costs of the identified packages are modest in terms of percentage of the total project costs. Since the technical assistance is essential for achieving the project objectives, the main TA packages will be procured through advanced contracting and are part of the conditions of disbursement.

9. Program of Targeted Intervention (PTI) The project is not in the program of targeted interventions.

10. Environment Aspects (including any public consultation) Issues : Complete environmental assessments have been prepared, reviewed by Bank staff and found to be satisfactory meeting all criteria and guidelines outlined in OP/BP/GP 4.01. Fundamentally, from an environmental standpoint, project components will collect and treat wastewater which had previously been discharged untreated from many point sources. In this respect, once completed, the works will provide environmental benefits to river reaches near the project municipalities; the most important of thee benefits is to improve water quality around water intakes. The EA clearly shows this to be the case through a variety of water quality modeling results. Temporary environmental concerns include those typically associated with construction of wastewater treatment plants, such as excavation, site management, acquisition of land, and potential resettlement of small numbers of residents. During the

- 5 - operation of the treatment systems, major concerns include disposal of sludge, the safe handling of chemicals, and sustainability of plant operations in general so that receiving waters would not be degraded. For the construction of new sewer networks, the expected environmental impacts are those associated with urban construction projects, such as some disruption of traffic, spoils and soil management, noise and dust pollution. The most important issues which the EAs addressed are:a) Sludge Disposal: The EA documents indicate that sludge coming from the treatment plants will be deposited into local landfills or used as a soil amendment. Written agreements to this affect have already been signed by the parties.b) Discharge Water Quality: Each of the treatment plants must meet national standards. These values are currently BOD, 30 mg/L, COD, 100 mg/L and SS, 30 mg/L (the Bank guidelines are much more liberal). It is expected that the proposed treatment plants will be fully able to meet these goals when operating properly.c) Industrial Discharges: Since this project will not deal directly with industrial discharges, enterprises must be encouraged to pre-treat prior to discharging directly into the municipal sewer system and comply with existing sewer standards for BOD, COD, SS, grease, heavy metals, phenols, toxins, etc. (see GB 8978-88-Integrated Wastewater Discharge Standards).

11. Contact Point:

Task Manager: Edouard Henri Motte The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: (202) 458-2923 Fax: (202) 522-1787

12. For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop

Note: This is information on an evolving project. Certain components may not be necessarily included in the final project.

This PID was processed by the InfoShop during the week ending October 27, 2000.

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