Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized

Report No: 27984-CHA Public Disclosure Authorized PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$91 MILLION

TO THE

PEOPLE'S REPUBLIC OF CHINA

FOR A Public Disclosure Authorized

FOURTH INLAND WATERWAYS PROJECT

March 1, 2004

Transport Sector Unit East Asia and Pacific Region 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. Public Disclosure Authorized CURRENCY EQUIVALENTS (Exchange Rate Effective January 1,2004)

Currency Unit = RMB (Yuan) RMB1.OO = US$O.l2 US$l.OO = RMB 8.28

FISCAL. YEAR January 1 -- December 31

ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy CFAA Country Financial Administration Assessment CNAO China National Audit Office DSP Dam Safety Panel EAP Environmental Action Plan EIA Environmental Impact Assessment GDWB Guangdong Waterways Bureau GXWCDC Guangxi Xijiang Waterways Construction & Development Co. GXCD Guangxi Communications Department ICB International Competitive Bidding IWT Inland Waterway Transport IWW Inland Waterway kWh Kilo-watt-hour MOC Ministry ofCommunications MOF Ministry of Finance MBD Model Bidding Documents MW Mega-watt PFB Provincial Finance Bureau PIP Project Implementation Plan PMO Project Management Office RAP Resettlement Action Plan SOE State-owned enterprise TA Technical assistance TOR Terms ofreference WTO World Trade Organization

Vice President: Jemal-ud-din-Kassum, EAPVP Country Managermirector: Yukon Huang, EACCF Sector ManagedDirector: Jitendra Bajpai, EASTR Task Team Leader/Task Manager: Graham Smith, EASTR FOR OF'FICLAL USE ONLY

CHINA FOURTH INLAND WATERWAYS PROJECT

CONTENTS

A. Project Development Objective Page

1, Project development objective 3 2. Key performance indicators 3

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 3 2. Main sector issues and Government strategy 4 3. Sector issues to be addressed by the project and strategic choices 6

C. Project Description Summary

1. Project components 9 2. Key policy and institutional reforms supported by the project 10 3. Benefits and target population 11 4. Institutional and implementation arrangements 11

D. Project Rationale

1. Project alternatives considered and reasons for rejection 12 2. Major related projects financed by the Bank and/or other development agencies 13 3. Lessons learned and i-eflected in the project design 14 4. Indications of borrower commitment and ownership 14 5. Value added ofBank support in this project 14

E. Summary Project Analysis

1. Economic 15 2. Financial 16 3. Technical 17 4. Institutional 19 5. Environmental 20 6. Social 21 7. Safeguard Policies 23

F. Sustainability and Risks

1. Sustainability 24

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. 2. Critical risks 24 3. Possible controversial aspects 25

G. Main Loan Conditions

1. Effectiveness Condition 25 2. Other 25

H. Readiness for Implementation 26

I. Compliance with Bank Policies 21

Annexes

Annex 1: Project Design Summary 28 Annex 2: Detailed Project Description 31 Annex 3: Estimated Project Costs 34 Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 36 Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary 40 Annex 6: (A) Procurement Arrangements 44 (B) Financial Management and Disbursement Arrangements 57 Annex 7: Project Processing Schedule 63 Annex 8: Documents in the Project File 64 Annex 9: Statement of Loans and Credits 65 Annex 10: Country at a Glance 69 Annex 11 : Environmental Assessment and Action Plan Summary 71 Annex 12: Summary of Resettlement Action Plans 81 Annex 13: Social Assessment and Poverty Alleviation Impact Assessment 85

MAP(S)

IBRD 32887 Fourth Inland Waterways Project IBRD 32888 Fourth Inland Waterways Project, Guangxi Province, Naji Navigational Complex, Channel Improvements IBRD 32889 Fourth Inland Waterways Project, Guangdong Province, Xiniu Navigational Complex, Beijiang Channel Improvements IBRD 32890 Fourth Inland Waterways Project, Guangdong Province, Lao-Long-Hu Channel Improvements and Bridge Replacement CHINA Fourth Inland Waterways Project Project Appraisal Document East Asia and Pacific Region EASTR

Date: March 1,2004 Team Leader: Graham Smith Sector Managermirector: Jitendra N. Bajpai Sector(s): Ports, waterways and shipping (58%), Country ManagedDirector: Yukon Huang Renewable energy (42%) Project ID: PO77137 Theme(s): Infrastructure services for private sector Lending Instrument: Specific Investment Loan (SIL) development (PI, Water ~"-ce management (PI, Rural services and infrastructure (S), Public expenditure, financial management and procurement (S) Project Financing Data

BORROWER 151.30 I 18.10 I 169.40 [BRD 0.00 91.00 91.00 Total: 151.30 109.10 260.40 Borrower: PEOPLE'S REPUBLIC Responsible agency: GUANGXI ZHUANG AUTONOMOUS REGION & GUANGDONG PROVINCE Guangxi Communications Dept. project executed by Guangxi Xijiang Waterways Construction and Dev. Co. Ltd Address: 67 Xinmin Road, Nanning, Guangxi 530012, P.R. China Contact Person: Mr. Li, Shangyan Tel: 86-771-21 1-5065/86-771-262-0575 Fax: 86-77 1-261-4441186-771-280-5550 Email: [email protected] Other Agency(ies): Guangdong Communications Dept.; project executed by Guangdong Provincial Waterways Bureau Address: 195 Yanjiang Zhong Road, Guangzhou 510120, PR. China Contact Person: Mr. Chen, Zichao Tel: 86-20-8330-5766 Fax: 86-20-8332-3084 Email: [email protected] Ministry of Communications Address: 11 Jianguomennei Ave, Beijing 100736, P.R. China Contact Person: Ms. Xia Hong Tel: 86-10-6529-3158 Fax: 86-10-6529-3156 Email: xiahong@,moc.gov.cn -2- A. Project Development Objective

1. Project development objective: (see Annex 1) The Project’s main objective is to improve access for poor regions ofsouthern China by upgrading navigation conditions on the region’s major east-west river and other waterways feeding traffic into the Pearl River Delta region. A secondary objective is to harness water flow in two ofthese rivers to generate environmentally clean electricity to help meet growing energy demand in the provinces of Guangdong and Guangxi. (Note: Guangxi is an Autonomous Region; the use of the term ‘province’ in this document is for convenience only.)

2. Key performance indicators: (see Annex 1) The most meaningful indicator ofimproved access will be lowered transport costs for goods carried on the Project waterways. Another indicator will be the average size ofvessels using the Project waterways, as the lowered transport costs will be made possible by investments in infrastructure that allow larger vessels to navigate safely year-round. For the agencies managing the waterways, monitoring vessel size is far simpler than monitoring transport tariffs, which are privately negotiated between the cargo owners and vessel operators and not reported to any government agencies. Thus average vessel size will be the basic indicator.

Increased traffic volumes will show that the market has responded to the lower transport costs and improvement in related services. The waterway transport’s market share in these corridors (vis-A-vis road and rail transport) will show that waterway transport has made a comeback and has made itself relatively more attractive.

Efficiency in construction of electric generating capacity will be measured by the cost per kW capacity installed and the cost per kWh delivered, compared with generating units of similar size elsewhere in China. Efficiency in operation and maintenance ofthe power houses will be measured by the hours per year when the turbines are available for use (at times when electricity is demanded and the water level in the reservoir permits operation).

B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 25141 Date of latest CAS discussion: December 19, 2002 The 2002 CAS stresses that the Bank’s operational strategy is to support China in making two historic transitions --from a rural, agricultural society to an urban, industrialized society, and from a centrally-planned economy to a more globally integrated market-based economy. To this end its main goals are to: a) improve the business environment and help accelerate China’s transition to a market economy; b) address the needs of the poorer and disadvantaged people and regions; and c) facilitate a more environmentally sustainable development process.

-3- The project aims to provide infrastructure services needed to support private sector development and rural non-farm income generation, especially in poorer regions and in environmentally benign ways.

2. Main sector issues and Government strategy: The rapid growth ofthe Chinese economy has overloaded its transport network, which is struggling to keep pace. In varying degrees the infrastructure of all transport modes has been modernized and upgraded, but the tonnages to be moved have grown so fast and so broadly that in places there have been long time lags before new capacity could be put into operation. The expansion of cities has especially strained urban transport systems designed for far smaller populations. The introduction of higher-capacity and higher-quality transport services -notably long-distance trucking-has also lagged behind demand. Private road transport operations are growing rapidly but state-owned enterprises still have a substantial market share. Bottlenecks in infrastructure have been the main focus ofinvestments in all modes: roads, railways, waterways, and especially urban transport. A sectorwide issue is how to ensure transparency in the awarding of contracts (competitive bidding) and ensuring compliance with their price and quality provisions (supervision). Bottlenecks in services remain serious. Because ofthe under-development of China’s services sector, the long inland distances, and the railway’s concentration on its traditional bulk cargoes, it was estimated in 1999 that China’s logistics costs (transportation, warehousing and distribution) were high at 18 % ofGDP, compared to 9.5 % in the USA in the mid-1990s. Moreover, whereas in developed economies transport accounts for 25% ofthe total logistics cost, in China it was closer to half. Over the past five years big improvements have been made in the transportation infrastructure and services in the coastal provinces, but the inland provinces are still lagging.

Private sector participation in the growth ofChina’s highway system is advanced in terms ofboth development models and private capital flows. The private sector has contributed nearly 10% of China’s total commitment to new construction since the inception ofeconomic reform in the early 1980s --high compared to most countries. However, the degree of risk transfer from the public sector has been limited and obstacles to increased flows of funds are found in the legal and regulatory framework for private participation in infrastructure.

Transport’s role in promotion of trade: China’s exports are crucial to the success of its economy. However, internal transport costs are high, so that coastal provinces enjoy a considerable advantage in competition with inland provinces. Part of the problem for the inland provinces is distance; part is inefficiency or inappropriate pricing. Intermodal logistic chains are weak. If the inland provinces are to share in the export boom --either directly or as suppliers of inputs to manufacturers near the coast--, special efforts are required to improve their access to seaports and to overcome resistance to cooperation across institutional boundaries. China’s membership of WTO requires opening up oftransport services to foreign participation. This may be good news for exporters but bad news for Chinese transport firms.

-4- Issues related to roads: The Government faces many strategic choices: how to balance the population's desire for greater personal mobility (car ownership) with protecting the environment and especially air quality; how to balance spending on expressways with lower class roads; how to share costs between national and provincial governments; how to finance highways -whether by tolls or through a user charge added to fuel; how to attract private finance and management skills into road construction and maintenance; and how to make all roads safer. It also faces the question: how far should it intervene to promote efficient service-oriented trucking companies in the private sector, and by what means? Government spending has been concentrated heavily on the expressways making up the national trunk highway network, raising questions whether spending more on upgrading and maintaining existing roads might have done more to improve access in poor regions. The legal framework for private participation in infrastructure needs attention.

Railway issues: After careful deliberation and analysis of international experience, the Government has adopted strategic goals for the national railway system, aiming to make it more responsive to the market. It is gradually spinning off non-transport activities as independent companies. In certain regions it has set up passenger services as profit centers separate from freight. It plans to legally separate transport operations from government oversight, but it remains to be decided how and when. Secondary strategic goals also need to be decided upon: how far to enable competition among companies offering rail transport services (private or otherwise); how far to allow pricing flexibility so that prices can reflect costs more closely, service by service, and carriers and customers can enter into contracts covering not only price but also service quality; and how to deal responsibly with surplus labor, as information technology eliminates the need for many jobs.

Inland waterway issues: More than many countries, nature has blessed China with large navigable rivers linking many of its major concentrations ofpopulation, especially in the center and south where rainfall is high. Some rivers carry passengers; all carry large volumes ofbulk cargoes, especially coal, construction materials such as sand and gravel, timber, and mineral ores. Many ofthese cargoes are hauled from rural areas (mines, quarries and forests) to urban areas for processing. These mines, quarries and forests are often important sources of employment in poor rural areas. However, on the rivers' upper reaches limited water depth prevents safe year-round access by vessels over 100 tons. Many ofthe costs of operating vessels vary far less than their carrying capacity, so larger vessels and sets ofbarges pushed by a single power unit can offer substantially lower costs per ton carried. At relatively modest cost the navigation channels on these rivers can be deepened sufficiently to enable much larger vessels to reach far upstream but then may require periodic maintenance. Separating the power unit from the barges allows the former to be kept in revenue-earning operation while the barges await loading and unloading. Inland waterway transport (IWT) offers the added advantage that it has less impact on the environment than rail or road transport. Accordingly, to ease the pressure ofdemand for new roads and improved railways, the Government has recently stepped up investment in waterways to deepen navigation channels and upgrade navigational aids, at the same time as it has undertaken public works to control floods.

-5- Government strategy The Government is tackling all the above issues with varying degrees of success. Construction goes well everywhere. The Government has decided in principle to introduce a fuel surcharge to fund roads but has not yet passed legislation to implement it, apparently due to the complexity of the issue and opposition from vested interests. Much remains to be done to make the roads safer, especially on driver education and enforcement. A window of opportunity may be closing to take tough action to restrain private car use, as one new car-manufacturing joint venture after another is announced. On urban transport the more innovative cities are building undergrounds (metros) or busways; some are improving traffic management and taking steps to make streets safer for cyclists and pedestrians. Many are catering to private cars to excess, without addressing the longer-term sustainability ofcar-based city land-use plans and the urgent need for an orderly parlung regime (space, charges and enforcement) and other measures to manage demand. The Ministry ofRailways, having announced its general intention to undertake 'three separations', needs to set a timetable to implement them and address its surplus labor issue. The Ministry of Communications (MOC) is drafting laws to govern inland waterways (the infrastructure) and inland water transport (the services), to bring more consistency in relevant public policies from province to province and to codify good practice. On export competitiveness the Government is eager to improve access for inland provinces and is seeking ways to lower their transport costs and strengthen the logistics services linking them with external markets.

3. Sector issues to be addressed by the project and strategic choices: The market for inland waterway transport: China's geography and the location ofpopulation are exceptionally favorable to IWT and until the 1960's waterway transport accounted for 70-90 percent ofChina's inland transport market. But today it accounts for only 5-10 percent ofChina's inland transport market. A study financed under the current Second Inland Waterways Project found that inland water transportation oflow-value commodities such as coal had a distinct cost advantage over other modes for distances less than 400 km but lost out to road in terms of flexibility. In Jiangsu province, whose waterways allow vessels ofup to 400-500 ton capacity and where bargehow combinations are beginning to be used, the average inland water transport tariff is about 1.1 US cent per ton-km, and this could be reduced by 20-30% if more vessel owners were to take full advantage and trade up to larger vessels and bargehow combinations. The situation is comparable to other countries that use inland water transportation extensively. Efficient river transport on the Mississippi or the Rhine, for example, can offer rates of 0.5-1 .O US cent per ton-km for consignments of 500-2,000 tons, which can rarely be equaled by rail (typically 1-3 US cents per ton-km for consignments of 100-1,000 tons), while trucks usually cost 6-10 cents per ton-km (for consignments of 5-20 tons).

Whether a cargo owner prefers river transportation to rail or road, however, depends on the specifics ofhis demand. His choice is driven by not only the line-haul price but also the size and frequency of consignment, its volume and regularity, the need for speedy or predictable delivery, care in loading and unloading, and control against pilferage. Transport in large river vessels will be attractive to customers with large volumes ofundifferentiated cargo of low value, needing to be hauled over regular routes in large consignments, from origins and to destinations near a riverbank.

-6- As the Chinese economy matures and shifts toward manufacturing ofhigh-value intermediate and finished products, the primary sector and construction will decline in relative importance, shrinking the market for IWT. This transition will be felt first in the coastal provinces. However, IWT may continue to thrive inland for bulk cargoes, oversize loads or dangerous cargo and even in the coastal provinces it may prosper where the road or rail altemative is not readily available, such as a river delta. A niche market may also develop for containers where the service by road or rail is deficient. Taken together, it is likely that the demand for transport on China's major rivers will remain substantial for at least the next couple of decades.

Coordinating multiple uses of rivers: Rivers are useful not only for transport but also for urban water supply, farm irrigation, and generation of electricity. In much of China rainfall is highly seasonal, so river flows need to be regulated and the risk of flooding has to be managed. Dams built for flood protection, electricity generation and irrigation impose a need for ship locks and integrated management ofwater releases throughout the year. Managing the rivers for these multiple uses and reconciling conflicting demands is not easy and merits Bank support.

Promotion of independent power producers: In 2003 the Chinese government launched a major restructuring ofthe power sector, ending the provincial monopolies ofintegrated generation, transmission and distribution companies by spinning off generation. For many years already hydro dams have sold their power to the integrated monopolies from a weak position, being paid only enough to cover their identifiable costs ofproduction. In the new, competitive structure, they will gain in negotiating power and financial autonomy, as they acquire the right to deliver power directly to major customers at privately negotiated prices; and all generators, hydro or thermal, become legally independent ofthe distribution companies, so the hydro producers will no longer be selling to their competitors. Peak hour pricing will also be introduced. Most hydro plants focus on peak production because they lack sufficient water in the dry season for daylong generation, so this will give them an opportunity to increase their revenue substantially. In compensation, the 'family-style' cooperation with their buyers which has prevailed hitherto will be replaced by more contractual, arms-length commercial relationships, and risks will have to be evaluated more formally and allocated appropriately.

The proposed project involves two such independent power producers, one in each province. Technical assistance to be provided under the project will help these entities prepare for life in the new competitive power market.

Steering IWT operators toward larger vessels: Entrepreneurs contemplating investing in barges and tows want to be assured ofa steady demand from cargo owners and ofuniform and assured navigating conditions on the routes sought by the cargo owners. Since the Government has devolved the operation ofriver fleets to the private sector, the means available to it to encourage new enterprises to enter the IWT market are limited to: (i)providing the infrastructure, (ii)pricing it appropriately, (iii)licensing operators for safety, and (iv) providing transitional assistance in promoting the market between cargo owners and vessel operators and ensuring the dissemination ofmarket information (logistics centerdinland container terminals).

-7- In 2001 the Government promulgated rules on (a) standards for vessels and (b) management of old and over-age vessels. However, barring many of the existing vessels on the grounds that they are old and perhaps unsafe will not ensure that new larger vessels are put into use. A large number ofvessels operating on China’s waterways are small barges or self-powered boats owned by individuals and operated by the owner and his family, living on board. They lack the financing to trade up to larger vessels. Upgrading of the fleet will require a shift from small family-based ownership to larger corporate ownership, a willingness to invest in newer technology, and access to financing.

Public policy instruments to promote the use of larger vessels have been the subject ofa study carried out for Jiangsu province under the Bank-supported Second Inland Waterway Project. The study documented that the market response in Jiangsu has been good, but recommended the provincial government to consider taking certain measures to speed up the transition. These range from the creation of a special fund to finance the construction of standardized vessels, differential charges for use of channels and locks to discourage the continuing use of small vessels, restricting the use of locks for small vessels, prohibiting the use ofnon-standard vessels and crafts with a capacity of less than 60 tons in Class 5 waterways over a phased period, and administrative measures to deny the registration ofnew vessels that are non-standard.

These conclusions are options that Guangxi and Guangdong may consider, should the two provincial governments deem it necessary to introduce measures to speed up the transition to larger vessels. However, for the time being, Guangxi and Guangdong do not intend to intervene, as in both provinces the market has and can be expected to continue to respond well, as is shown by the fact that of the nearly 1,500 vessels over 300 ton capacity operating in Guangxi, two-thirds were built in the last five years.

Cost recovery for waterway infrastructure: The national government expects provinces to recover some but not all public expenditures on waterway infrastructure through charges to IWT users. Most provinces with large waterway systems levy an annual fees on vessels to cover channel maintenance and charges for the use of shiplocks. They aim to generate enough revenue from these fees to cover operation and maintenance. The remaining finance has to come from power sales revenues, or where (as in Jiangsu) the shiplocks are not combined with power plants, from general revenues available to the province, with some funding also from the national budget. Those provinces which have borrowed from the World Bank also aim to cover their debt service on the Bank loan, which typically is about 40% ofthe capital cost. This results in a level of cost recovery for waterway investment and maintenance that is one ofthe highest in the world. Governments in the EU and North America do not seek substantial cost recovery from inland waterways, because oftheir environmental benefits.

This policy on cost recovery for inland waterway infrastructure strikes an appropriate balance between subsidy and financial autonomy, but there remains room for improvement, such as in modifying the structure and level of fees to give stronger incentives for efficient use ofthe infrastructure and to make the grounds for subsidy more transparent.

-8- Technical assistance to be provided under the project, while directly serving the implementing agencies, may also provide pointers for the national government and other provincial governments to pursue these questions ofhow to modernize the management of inland waterways transport, how to encourage restructuring of the fleet, and what pricing and cost recovery policies to adopt for waterways infrastructure.

C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): A. Guangxi: to allow navigation by vessels ofup to 500 ton capacity on the You (Right) River between the cities ofBaise and Nanning (357 km) and generate electricity, through civil works and associated investments (Map 32888). 1) Construction ofthe Naji Navigation Complex about 38 km downstream from Baise. It will consist of a 20m-high dam to regulate river depth, including a shiplock which will assure a minimum 2.5m ofwater above its entrance sill, and a power plant of 57 MW capacity; access roads to the Complex on both banks with a total length of about 9 km, a bridge across the river, bank protection, and two substations to link the power plant to the Baise grid; 2) Purchase ofturbines and other equipment for the above powerhouse, and oflock gates; 3) Construction ofdikes and dredging of shoals between Baise and Nanning and upgrading ofnavigational aids; and 4) Resettlement ofabout 320 residents (farmers and others) living in the intended reservoir zone and along the alignment ofthe approach roads.

B. Guangdong: to improve navigation conditions and generate electricity through civil works and associated investments on three waterways (Maps 32889 and 32890). 1) Channel improvements and regulation works on the Lao-Long-Hu Waterway (about 16 km), an east-west waterway in the Pearl River Delta network serving mainly traffic between the rural southwest ofGuangdong and the special enterprise zones around Shenzhen, as well as Hong Kong, to allow vessels ofup to 1,000 ton capacity to operate safely year-round; 2) Replacement oftwo bridges over the Lao-Long-Hu Waterway, which are too low for the intended larger ships; 3) Channel improvements on the middle reaches ofthe Bei (North) River between Shaoguan and Qingyuan (about 180 km) to allow vessels ofup to 300 ton capacity to ply safely year-round; 4) Construction ofthe Xiniu Navigation Complex on the Lian River, a tributary ofthe North River. It will consist ofa 10.5m-high dam to regulate river depth, including a shiplock to assure a minimum 2.5m water depth above its sill, and a power plant of 10 MW capacity, two substations to link the Complex to the power grid serving the city ofYingde, and minor channel improvements on about 13 km; 5) Purchase ofturbines and other equipment for the powerhouse, and of lock gates; and 6) Compensation to about 500 farmers for land to be flooded by the intended Xiniu reservoir.

-9- C. Institutional strengthening and technical assistance (TA). To strengthen the technical and management skills ofpersonnel ofthe two project entities, consulting services, overseas training and study tours will be provided. The TA program is designed to meet the specific needs of each entity. In Guangxi, the project entity was established as a commercial enterprise to develop and manage navigational complexes. A relatively new company, its need is for assistance and policy support in finance, planning and corporate management. Guangdong's project entity, on the other hand, is a line department of the provincial government and its current objective is to acquire skills and competency in the tools and techniques of administration. Topics covered by the program include: (i)the financing, development and management of integrated water basin resources, (ii)power plant operation and maintenance, (iii)power sales strategy and pricing, (iv) shiplock operation and management, (v) procurement and contract management, (vi) development and implementation of computer-based information systems to facilitate administrative control and coordination, (vii) implementation ofInternet-based systems to give waterway users information on river flow, tide and draft conditions in real time, and (viii) environmental protection.

Guangxi Naji Dam (Navigation Complex) 75.76 29.1 43.13 47.4 Guangxi You River training works 13.56 5.2 0.00 0.0 Guangxi study tours & technical assistance 14.49 5.6 1.42 1.6 Guangxl: resettlement 22.3 1 8.6 0.00 0.0 Guangdong improvement ofthe Lao-Long-Hu Waterway 23.21 8.9 10.34 11.4 Guangdong regulation of North River Middle Reaches 17.29 6.6 10.19 11.2 Guangdong Xiniu Dam (Navigation Complex) 31.31 12.0 21.59 23.7 Guangdong study tours & technical assistance 16.69 6.4 3.05 3.4 Guangdong resettlement 8.28 3.2 0.00 0.0 0.4

Front-end fee 1 0.91 I 0.3 1 0.91 I 1.o Total Financing Required I 260.43 I 100.0 1 91.00 I 100.0

The Bank loan will be split between Guangxi ($45 million) and Guangdong ($46 million); the loan will cover 35 percent of the total financing required. The national government will contribute the equivalent of $74 million (28 percent ofthe total) as an equity contribution from the national budget. Each province will contribute $29 million (1 Ipercent each) from the provincial budgets. GXWCDC will contribute $12 million fiom its own retained earnings (5 percent ofthe total) and Guangxi will complete the financing with a domestic loan or loans equivalent to about $25 million (10 percent of the total). The national government will on-lend the Bank loan to the provinces on the same terms, including passing on the exchange risk.

2. Key policy and institutional reforms supported by the project: The project will seek to promote reforms in the following areas: a) Building capacity in the public agencies responsible for inland waterways;

- 10- b) Regulation and facilitation of inland water transport; c) Strengthening of independent power producers as part ofthe on-going restructuring of the power sector; and d) Encouraging integrated water resource management.

3. Benefits and target population: The project is expected to benefit users ofthe transport corridor from Yunnan and Guizhou Provinces through Guangxi to Guangzhou, who will be able to take direct advantage of the water transport on the river from Baise to the Pearl River Delta area. They will include many inhabitants ofpoor rural areas, as these areas are commonly the source ofmany ofthe cargoes carried on the river. The average income per head in the Baise prefecture (rural western Guangxi) is about $500, and in the Lian River valley and the Xiniu area (the hilly northern part of Guangdong) it is about $400, well below the average for each province. Yunnan and Guizhou are also well below the national average in income per head. Other inhabitants ofthe corridor will also benefit indirectly from the reduced congestion on the competing rail route and from the creation of new industries attracted by the transport improvements.

4. Institutional and implementation arrangements: Executing Agencies. The implementing agencies of the project are the Guangxi Xijiang Waterway Construction 2% Development Co. (GXWCDC) for the project components in Guangxi and the Guangdong Waterway Bureau (GDWB) for the components in Guangdong: GXWCDC is an independent legal entity established and wholly owned by Guangxi for the purpose of developing and managing the region’s network ofinland waterways and currently manages and operates the hydro-electric damshavigation complexes at Guiping and Guigang, down river from the Project works. GDWB is a line department ofthe Guangdong Provincial government with direct responsibility for the province’s inland waterways and reports to the Guangdong Communications Department. Each implementing agency has set up a project management office (PMO) which has a full-time team oftechnical staff with prior experience in implementing a World Bank project. The Guangxi PMO brings together staff from GXDC and GXWCDC, many ofwhom worked on the Bank-supported first Inland Waterways Project (IWWl), completed in 200 1, which financed the Guigang dam and shiplock. The Guangdong PMO has managed successfully its component of the on-going Second Inland Waterway Project (IWW2).

Funds Flow. The proceeds ofthe Bank loan will flow fiom the Bank to the provincial finance bureaus (PFB) where the special accounts will be set up, to the project implementing agencies (or project company), and finally to contractors or suppliers. The loan will be with the People’s Republic of China through its Ministry ofFinance (MOF), and on-lending agreements will be signed between MOF and the governments of Guangxi and Guangdong through their PFBs, and between each PFB and the implementing agencies --supervised, in the case ofGuangxi, by the regional Communications Department. The loan will be disbursed using traditional techniques and not based on project management reports, in accordance with a general agreement between the Bank and MOF.

-11 - Project Management Activities

Project Implementation Plan. Each Project Office has prepared a project implementation plan for their respective component(s), which the Bank has reviewed.

Procurement. An institutional assessment conducted before appraisal shows that adequate skills are available to manage the procurement operations (Annex 6A). A procurement plan has been developed as part ofthe Project Implementation Plan.

Financial management. Responsibilities for all financial management activities were likewise confirmed before appraisal. A financial management specialist has reviewed the current set-up and found it adequate to manage project funds (Annex 6B). A financial management manual has been developed by each Client.

Environment. Each Province has submitted an Environmental Impact Assessment (EM) and an Environmental Action Plan (EAP), which the Bank has reviewed and found satisfactory. Responsibilities for all environmental management activities are included in the Plans.

Resettlement. Each Province has prepared a Resettlement Action Plan (RAP), which sets out responsibilities for implementing resettlement. They have been reviewed and found satisfactory by the Bank.

D. Project Rationale 1. Project alternatives considered and reasons for rejection: Project scope. Guangxi appraised three alternative locations for the Naji dam, the option of locating the shiplock adjoining the north or south bank, and alternative reservoir elevations. Geological considerations determined the choice ofthe dam site. After considering its initial designs, Guangxi devised flood protection embankments that cut back the number ofpeople whose land would be inundated from over 1,000 to fewer than 200.

Guangdong likewise compared three alternative locations for its dam as well as three alternative design elevations for the reservoir, and three options regarding the turbines: four small, three medium-size or two large. It chose the location which offered the best geology, and the reservoir level and turbine configuration which offered the lowest cost per kW ofpower capacity.

Project size. The size ofeach Province’s component was driven mainly by the financial capacity ofeach province to cover the local cost from its own resources and to service the Bank loan.

Riverbank cargo loading facilities: Consideration was given to including new or improved river ports in the project, but was not pursued. Existing loading facilities along the You River from Baise to Naming in Guangxi have a total designed cargo handling capacity of about 6 million tons, while the actual total tonnage handled in 2002 was 5.05 milliontons. In Guangdong, ports on the middle reaches ofthe North River have a design capacity of4.2 million tons; those served by the Lao-Long-Hu waterway have a capacity of 5.4 million tons, while on the upper reaches above the Xiniu dam there are facilities that can handle some 1.3 million tons. In addition, along the riverbanks are numerous jetties belonging to cargo owners used mainly for loading and

-12- unloading bulk cargo. Many are rudimentary and inadequate for the planned traffic volumes, and will be submerged by the new reservoirs. The municipal governments and main user state-owned enterprises plan to replace them with new improved quays. These facilities are not under the jurisdiction of the waterway bureaus and their sponsors do not seek Bank funding.

The government's intention is to develop the larger and better-located river ports into distributing ports to complement the major hub ports ofHong Kong, Guangzhou and Shenzhen. Additional berths capable of handling vessels exceeding 1,000 tons capacity are already in place. Cargo carried on the inland waterways will flow from feeder ports into distributing ports and in some cases on to hub ports. The government's plan and strategy for inland water port development is adequate for the foreseeable future. A re-assessment of the development plan sometime in 2010 may be necesssary when the results ofthe improvements ofthe project waterways become evident.

2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Latest Supervision Sector Issue Project (PSR) Ratings (Bank-fkncel projects only) Implementation Development Progress (IP) Objective (DO) Bank-financed Remove transport bottlenecks by IWWl (completed) S S improving IWT facilities. Remove transport bottlenecks by IWW2 (on-going) S S improving IWT facilities. Construct power-generating facilities as IWWl (completed) & S S part of integrated ddpowerhousel IWW3 (on-going) shiplock complex Develop intermodal transportation Container Transport S S serving inland provinces (on-going) Modernize river vessel fleets & PHRD TA in association with S S ownership IWW2 and IWW3 Procurement using ICB Guangxi Prov. Highways and S S many others (on-going) Waste water treatment for several cities Pearl River Delta Environment in Pearl River Delta area (appraised early 2004) Xher development agencies Improve access to rural southwestern ADB: Guangxi Roads Dev't I1 areas through construction of (Naming-Bake Expressway) high-standard highway '/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory),I- (Highly Unsatis

-13- 3. Lessons learned and reflected in the project design: As repeat borrowers, the implementing agencies for the proposed project have drawn usefid lessons from the experiences ofthe one completed inland waterway transport project financed by the Bank in China (the Guigang dam in Guangxi and the Dayuandu dam in Hunan), and the two on-going projects: IWW2 in Guangdong and Jiangsu and IWW3 in Hunan (Zhuzhou dam) --see Map 32887. The project agencies have learned international good practice on procurement, cost estimation, and preparation ofenvironmental assessments and resettlement plans in accordance with Bank requirements, including wide consultation with stakeholders. Joint ventures of international and Chinese consultants have advised on techniques for efficient collecting of data on fleets and ports, as a basis for monitoring the achievement ofproject objectives. Consultants have also assessed the potential impact of fleet restructuring on employment in inland water transport, and developed programs for improved navigational aids and management information systems.

The proposed project will enable Guangxi and Guangdong to take these institution-building measures to the next logical stage.

4. Indications of borrower commitment and ownership: Long before the identification mission, starting in the early 1990s the two provincial waterway bureaus undertook a considerable amount of analytical and design work for their respective components with help from local consultants. The Naji Dam in Guangxi is planned as part of a 'ladder' of as many as ten dams on the whole length ofthe You River and the Yu Rwer into which it flows; three others exist, one (Baise) is under construction and five more are planned (Map 32888). The Xiniu Dam in Guangdong likewise is one 'rung' in a ladder oftwelve on the Lian River, the other eleven having already been built between 1958 and 1975 (Map 32889). The PMOShave been receptive to suggestions from the Bank staff and consultants on ways to enhance the project design.

5. Value added of Bank support in this project: Since both provinces are prior subborrowers from the Bank for major infrastructure, they know what the Bank offers. They appreciate the savings that have accrued to them by virtue ofthe Bank's international competitive bidding procedures. Even if almost all works contracts go to Chinese fms, the Bank procedures are recognized as imposing demanding standards of transparency and the bidders respond accordingly. It is also recognized that Bank-imposed contract supervision ensures a high standard of compliance with the conditions of contract. The risk ofpolitical interference is minimized. The Bank is also seen as adding value in its probing of project altematives to ensure adoption ofthe most cost-effective option, and in the window it opens on international experience regarding complex project management and matters ofpublic policy. On the negative side the Bank's safeguards are seen as onerous and adding not much value relative to compliance with Chinese laws on environmental and social impacts and resettlement.

The above applies to all infrastructure. Why waterways? Until the mid-1990s China had spent much on railways and highways but little on waterways; they remained technically outdated. The

-14- Bank's support for waterways put the spotlight on them and encouraged the Government to invest in them. The institutional arrangement for implementing the inland waterway projects in Guangxi and Hunan and manage the waterways thereafter --proposed by the Bank-- has been innovative for China: legally independent state-owned enterprises, which for part oftheir budget have to rely on revenue streams collected from users. These special-purpose firms have worked well so far, but they are still young and will benefit from firther institutional advice and guidance as they consolidate their roles.

The waterways' navigation function is vulnerable to the risk that priority may be given to use of the river flow for other purposes, inimical to the stability sought for navigation. In its recent water resources assistance strategy for China the Bank encourages the national and provincial governments to adopt integrated water resource planning approaches. This project would contribute a working example. For the Naji and Xiniu dams the Bank has encouraged the PMOS to strengthen mechanisms to coordinate water releases from the dams immediately upstream or downstream and resolve possible conflicts (see Section E3.5).

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4): Cost benefit NPV=USSl61 million; ERR = 22 % (see Annex 4) 0 Cost effectiveness 0 Other (specify) (i)The high overall economic return on the Project is due mainly to the Lao-Long-Hu Waterway which, by providing a short-cut for a very large volume of traffic --about 8 million tons per year-- is expected to yield very high benefits. The improvements to channel depth on the North River are also expected to yield large benefits because a relatively modest investment will serve a large volume of traffic. (ii)The two dams rely for their economic return mainly on the production ofelectricity in markets where additional capacity is needed to keep pace with briskly growing demand. In Guangxi the demand for electricity in the Baise region is expected to remain strong. When the Naji dam starts generating, local supply will meet only 15% ofthe demand, including Naji's contribution of4%. In other words, Naji will supply about 29% ofelectricity generated for use in the Bake region. (Power generated by the Baise Dam will not be fed into the local grid but will be transmitted at high voltage to larger centers of consumption.) Likewise in Guangdong, local supply will meet less than a quarter ofpower demand in the Yingde region; the Xiniu dam will cover only 3% oftotal demand and contribute 12% oflocal supply. (These estimates are for 2008.) Each distribution company will have to cover the shortfall by importing power from outside its region. Considering the transmission losses involved, local suppliers will enjoy a substantial cost advantage. (iii)The economic value oftheir output is equivalent to the cost of installing and operating a thermal plant ofthe same capacity. Since the dams will be used primarily for peak-hour generation, the comparable thermal technology would most likely be a gas turbine plant. The cost of electricity generated by such a plant is estimated at about 6.5 US cents per kwh. At that price the value ofelectricity will make up the lion's share ofbenefits from the Naji dam,

- 15- giving a satisfactory ER ofabout 18%. Xiniu dam, having a far smaller, run-of-river generating capacity, will depend more evenly on electricity and navigation benefits, with a best-estimate ER ofabout 14%. (iv) Since achievement ofthe intended increase in vessel size is outside the direct control ofthe Government, it remains subject to some uncertainty. Ifthis goal is met, the ER ofall components is acceptable, but if not, the ER on the Xiniu Dam will be marginal; GDWB would then be advised to take action to encourage a faster shift to larger vessels. (The value of green-house gas emissions avoided by relying on hydro power rather than thermal has not been estimated, but will add to the economic return.) (v) In the case ofthe Naji dam, the ‘Do Nothing’ alternative entails growing congestion on the competing railway lines, which we have not attempted to value. It is also hard to predict the railway’s competitive response to the Project, especially since reform ofthe railway is planned but uncertain as to its scope and timing. However, the expected ER is robust enough to realistic risk in the main variables, to give a high probability ofa satisfactory value.

2. Financial (see Annex 4 and Annex 5): NPV=US$ -43 million; FRR = 1.X % (see Annex 4) Based on their past and current performance, expected revenue from electricity sales and other sources ofincome, supplemented by budget allocations, both GXWCDC and GDWB are expected to be able to service the proposed loan, as well as meet operating costs and existing debt service.

The financial performance ofGXWCDC and GDWB has been satisfactory. Revenue from operations supplemented by budget appropriations has been able to meet operating costs and loan repayments. In the case ofGXWCDC, net cash surplus declined from RMB 19.0 million in 2000 to RMB 3.2 million in 2002 due to service on the Bank’s IWWl loan. GDWB, whose repayment ofprincipal on the Bank’s IWW2 loan does not start until 2004, has a net cash surplus that has improved steadily fiom RMB -10.5 million to RMB +21.5 million during the same period.

The Guangxi regional government will not have to contribute to the servicing of its debt to IBRD for IWWl and IWW4 because GXWCDC’s cash flow from power sales from its existing dams will suffice. GDWB in contrast may face minor deficits during the IWW4 construction period but the deficit relative to the total revenue for each year will be small (less than 2%). The yearly deficit will be made good with budget allocations from Guangdong Province and should not affect day-to-day operations. The province’s contribution to project costs is small relative to its total budget. In 2009, the first year in which principal repayments will come due, Guangdong province will have to allocate about 13 percent of its total revenue to the servicing of its debt to IBRD for IWW2 and IWW4. After 2009, the share will be smaller. Thus, on the basis ofthe flow of finds analysis, the project is financially viable.

Cost recovery policies: The waterway companies are revenue-earning but are not expected to cover all their recurrent costs from electricity sales, supplemented by waterway user fees. As noted above, 50 percent ofthe project’s capital cost will be covered by grants from the national

- 16- and provincial budgets. The financial performance and debt service record ofprovinces which have borrowed from the Bank have been generally good.

Contingencies: After an inflationary period in the first half ofthe ‘90s when many projects suffered cost over-runs, more recently several projects have yielded large savings relative to feasibility study cost estimates. The front-end fee and commitment fee had nonetheless to be paid on amounts that were subsequently canceled. The Chinese govemment has argued for smaller contingency margins than those normally advocated by the Bank In response the Bank has recommended that consultants preparing the project revise unit prices downward to reflect recent bidding experience. This portfolio-wide issue is now the subject of dialogue between the two parties. In the inland waterways projects thus far, bid prices for civil works have tended to come in below the estimated costs, while those for equipment have been in the region oftheir cost estimates. As an interim measure pending a general resolution, the present document uses the cost estimates from the preliminary engineering and provides for price escalation of4 percent over the construction period 2004-9 and 8 percent physical contingencies.

Fiscal Impact:

See above

3. Technical: 3.1 Naji Dam geological and foundation issues Among the three sites evaluated for the Naji dam as part ofthe feasibility study, the middle site was found to be the most suitable on grounds of topography, geophysical conditions and hydrology. It was model tested in a hydraulic laboratory. However, the geology consultants pointed to unsatisfactory, possibly unsafe, geological foundation conditions for the dam and powerhouse at the selected location, thus suggesting additional investigations. Following the Bank’s comments, a series of additional geological investigations were undertaken by different geology consultants. The interim evaluations of the last investigations showed more favorable conditions than the earlier ones. To overcome the issue of different interpretations, the Bank and GXWCDC agreed that both geology consultants, supported by the geology expert member of the Naji Dam Safety Panel, would together analyze all findings, and make recommendations for the design ofthe foundations for the different parts of the complex. The main conclusions from these investigations were as follows: In the event of seismic activity there would be no danger of sand-soil liquefaction in the reservoir area, including the area of the dam structure. Analysis ofthe material in the area ofthe shiplock and the powerhouse shows that the possibility of a side-shear slide between the adjoining structures is small. Extensive grouting under and around the permanent structures and temporary cofferdams will be necessary to prevent water seapage. Placing both the powerhouse and the shiplock on the river’s right bank will allow both to be brought into operation one to one-and-a-half years before completion of the left-bank overflow gates, a substantial economic advantage. Existing small coal mines within the reservoir area will not affect the storage and safe operation ofthe Naji reservoir.

- 17- The preliminary design ofthe shiplock, powerhouse, dam and reservoir was essentially complete at appraisal, and preparation of the detailed design and bidding documents began shortly thereafter. That stage entailed some fiuther investigation into how much grouting will be needed around the dam’s foundations. Any extra cost that may result is expected to be well within the contingency provided in the cost estimates.

3.2 The Lao-Long-Hu Waterway regulation works The critical location on the Waterway is the area where a major excavation is foreseen to reduce curvature at a bend, near a point where another channel enterdleaves the Waterway. To verify the soundness ofthe design, the consultant prepared a large number ofmathematical model tests, supplemented by a hydraulic model ofthis key stretch.

GDWB’s consultants presented an environmentally satisfactory solution to the disposal ofthe 1.2 million m3 ofmaterial to be dredged from the Waterway (Annex 11).

Future maintenance ofthe protective embankments will require careful supervision, since the southem bank will be maintained by GDWB while the northem bank will be maintained by the Guangdong Water Conservancy. To the north is a populated area which already has embankments for flood protection, whereas areas to the south are as yet largely unpopulated and not protected. Regular sideslope maintenance will be critical with the appearing on the Waterway of large vessels (of 1,000 ton capacity). GDWB has assured the appraisal team that the Water Conservancy will maintain the northern bank appropriately. A covenant in the Project Agreement commits Guangdong to ensuring that this is carried through (Schedule 2, para. 9).

Two bridges spanning the waterway will be demolished by the provincial govenunent prior to opening of the Waterway. These bridges provide only a 3.5m vertical clearance at high water, too low to allow the foreseen large vessels to pass. They will be replaced by bridges providing the needed clearance. A covenant in the Project Agreement commits Guangdong to ensuring that this is done by June 30, 2007 (Schedule 2, para. 10).

3.3 Regulation of the Middle Reaches of the North River (Bei Jiang) Consultants conducted extensive investigations and tests to verify the hydraulic soundness of the proposed groins designed to direct water flow into the central navigation channel. They are satisfactory to serve as the basis for detailed engineering, launched after the appraisal.

3.4 Xiniu Dam geological and foundation issues As with the Naji dam, among the three sites evaluated for the Xiniu dam as part ofthe feasibility study, the middle site was found to be the most suitable on grounds oftopography, geophysical conditions and hydrology, and was model tested in a hydraulic laboratory.

The preliminary design ofthe shiplock, powerhouse, dam and reservoir were essentially complete at the time ofappraisal. However, in light ofthe presence oflimestone caves in the vicinity ofthe dam axis, additional investigations ofthe substrata were then conducted. These were completed

- 18- to the Bank's satisfaction before loan negotiations and allowed work to proceed on the detailed design ofthe foundation works.

The detailed design is being prepared by the Transportation Planning Survey and Design Institute ofHunan, a more experienced consulting company than those who prepared the feasibility study. GDWB has appointed a Xiniu Dam Safety Panel to assist and advise it and its consultants on geological and construction issues (as required by the Bank's Operational Policy 4.37).

3.5 Coordination of water releases with other dams Exchange of information with other agencies will be important in both the construction and operation phases ofthe two Project dams. This will apply especially to the Naji dam vis-a-vis the much larger Baise dam 60 km upstream, now under construction and due to start operating by 2005. (Between 1998 and 2000 the Bank worked on preparing a loan for the Baise dam, but the Government withdrew its request when the Bank ended IDA lending to China and tightened its IBRD loan terms. The Bank's assessment of the dam was generally favorable as far as it went.) From the time the dams start operating, day-by-day consultations and coordination will be needed regarding the release of water from each dam to achieve stable navigating conditions. The Baise Dam is managed by the Youjiang Water and Power Corporation, a company set up for this purpose by the province. It operates under the guidance of a 'project leading group' headed by the provincial govemor and made up ofrepresentatives ofprovincial agencies with an interest in the dam, including the Communications Department. Two other dams in the vicinity ofBaise city --Chengbihe and Dongsun-- also will release water into the Right River above Naji. (Please refer to Maps; IBRD 32888 "Surface Profile of Stepped Dams Development in Yujiang Valley" attached to this document.)

As a condition of the Subloan Agreement between Guangxi and GXWCDC, GXWCDC will, by December 2007, enter into an agreement with the entities responsiblefor these three dams: Guangxi Youjiang Water Conservancy Development Co. Ltd, Baise Chengbihe Reservoir Administration Bureau, and Baise Electric Power Co. Ltd, in accordance with a letter of intent signed among the parties in October 2003, for exchange of information on the safety of the dams and the coordination of water releases from the three upstream dams, to ensure the achievement of the purposes, and the safety, of the Naji dam (Project Agreement, Annex to Schedule 2, para. 16).

4. Institutional:

4.1 Executing agencies: See Section C4. 4.2 Project management: No problem is foreseen within the two existing PMOS. They will benefit from periodic reviews of project progress by the two dam safety panels. 4.3 Procurement issues: Procurement will be undertaken in accordance with Bank's procurement guidelines. Contract

- 19- packaging and the method of procurement for each contract is to be found in Annex 6A. An assessment based on the revised instruction for assessment of an executing agency’s capacity to implement procurement issued by OPCPR in July 2003 was carried out before appraisal. The assessment concluded that the PMOShave accumulated sufficient experience on the Bank’s procurement guidelines and would be able to manage procurement under the project satisfactorily. 4.4 Financial management issues: The financial management arrangements are summarized above in Section C4, and details are given in Annex 6B. Our assessment, based on guidelines issued by the Financial Management Sector Board in June 2001, has concluded that the project meets minimum Bank financial management requirements. In the team’s opinion, the project will have in place an adequate project financial management system that can provide, with reasonable assurance, accurate and timely information on the status ofthe project in the reporting format agreed with the project and as required by the Bank. 5. Environmental: Environmental Category: A (Full Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. The environmental assessment was entrusted to independent institutes in each province. Drafts of their Environmental Impact Assessment reports (EIAs) and Environmental Action Plans (EAPs) were reviewed by the Bank. Public consultation was conducted twice: once just after completion ofthe draft TOR of the EIA and the other after completion of the draft EIA. The final EIAs and EAPs have been submitted to the Bank for review, found satisfactory and disclosed at InfoShop.

This project will cause environmental impacts similar to those that have been experienced under the previous inland waterway projects. The potential major environmental issues during construction are water pollution control, waste material dumping, protection ofresidential areas, and protection ofecological environment. Those impacts will be mitigated to the levels that satisfy national and local environmental standards, provided that mitigation measures described in the EAPs are appropriately implemented.

The following are the main mitigation measures for each sub-component.

Naji Navigation Complex: 0 The dadshiplock will be built within a cofferdam format. Generation of suspended solids will be carefully controlled through the use of silt curtains and settling ponds. 0 To address interference with migratory fish patterns, the Project Office will establish fish conservation centers. The provincial governments are now considering establishing fish conservation centers, the purpose ofwhich might include the rehabilitation of biodiversity in the reservoir. 0 On the recommendation ofthe relevant authority, the project will excavate 1,000 square meters of Poluo Relics to protect some pre-historic artefacts found in an area that will be flooded by the reservoir.

Lao-Long-Hu Waterway regulation: 0 Dredged materials will be disposed ofin the former navigational channel (replaced by the

- 20 - new Sanjiaowei Bend) and several upland sites. At the latter, dredged materials will be hydraulically pumped from barges to the disposal sites, the effluent ofwhich will be carefully regulated to control suspended solids.

North River regulation: 0 During dredging works, silt curtains will be used to protect water quality. Dredged materials will be dumped at designated dumping areas within the river. 0 No blasting will be conducted and regulation work will avoid fish reproduction seasons.

Xiniu Navigation Complex: 0 The ddshiplock will be built within a cofferdam format. Generation of suspended solids will be carefully controlled through the use of silt curtains and settling ponds. 0 A wastewater treatment facility will be installed to treat the wastewater from the construction camp in order to protect the water intake for Xiniu Town. 0 Dredged material, to the extent suitable, will be used either as part ofthe dam foundation or as part ofthree new river regulation spurs. Unsuitable material will be dumped at designated dumping areas in the river. 5.2 What are the main features of the EMP and are they adequate? The environmental action plans include mitigation measures, environmental monitoring plans, and institutional arrangements for supervision and monitoring. Implementation ofthe EAPs will be made a legal obligation of each contractor through the contract documents. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: July 2003

5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? Extensive public consultations were conducted with a broad representation ofpeople during the preparation of all the TORS and the draft EIAs, including public meetings, interviews, and mail questionnaires. Face-to-face interviews were conducted with people who are illiterate. The stakeholders comprise farmers ofthe areas to be inundated, village people, schoolteachers, local government officials, and local politicians. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? The EAPs define the environmental indicators and issues to be monitored, monitoring methods and frequencies. They also define institutional arrangements to conduct the environmental supervision and monitoring. The results will be reported to the Bank in quarterly project progress reports, and annually in independent annual reports. The annual monitoring reports will be fumished to the Bank during construction and the first three years of operation following the completion ofconstruction.

6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project’s social development outcomes.

-21 - Each province commissioned a social assessment study and a study to evaluate the poverty reduction impacts ofthe project. They indicated that it is expected to promote social and economic development in these areas through improving the navigation conditions and adding to the electricity supply. The studies also revealed concems ofthe affected population and proposed measures to address these concerns. These were incorporated into the project design.

The adverse impact ofthe project is related to land acquisition and relocation ofpeople. Both project offices engaged experienced consultants to work with the local governments to carry out the resettlement planning. The planning activities included socioeconomic surveys, a detailed inventory ofimpacts, a census ofthe affected population, and consultations with each affected farmer group to design their rehabilitation measures. The Resettlement Action Plans were prepared on the basis ofthis field work in line with relevant Chinese laws, regulations and the World Bank Operational Policy 4.12 on Involuntary Resettlement.

The social assessments included a screening exercise for, and consultations with, affected ethnic minority groups. This assessment was carried out by independent institutes in both directly and indirectly affected areas. While no ethnic minority communities were identified in the project areas in Guangdong, the Guangxi Component will impact a large population of Zhuang ethnicity. The Cross-cultural Research Center ofZhongshan University carried out field and analytical work on the affected Zhuang population for compliance with World Bank Operational Directive 4.20 on Indigenous People. They included further research ofacademic data and historical records, focus group discussions, and interviews with local leaders and farmers. This assessment indicated a high level of integration ofthe Zhuang ethnic group into the Han population and this is reflected in all aspects oftheir social, political, economic and cultural life. The social assessment concluded that the Zhuang population affected under the project did not fall under the Bank's definition of indigenous people and therefore the policy would not apply to this project.

The project preparation team also looked at the gender aspects ofthe project, particularly in the context ofproject impacts, mitigation measures and ethnic minority groups. These were designed into the terms ofreference ofthe social assessment and resettlement planning exercises. The questionaires had specific gender-related questions. The social assessments conducted focus group discussions with women and interviewed women members ofthe affected communities. These aimed at creating spaces and opportunities for women to express their opinions and concems about the project and participate in the project planning process.

During the project design process, screening of cultural relics was also conducted for possible impacts in both provinces. Bothprovinces had the provincial cultural relics institutes conduct these surveys. Both institutes produced survey reports. Some cultural sites were identified and required measures have been proposed and designed (see 5.1 above). The relevant policy requirements, screening process, field surveys and findings as well as designed measures are documented in the project environmental assessment reports. 6.2 Participatory Approach How are key stakeholders participating in the project? The project has followed a participatory approach in resettlement planning. Primary stakeholders were identified through the social assessment exercises. Project information was disseminated

- 22 - among local governments and the affected communities through public postings, radios and village meetings. The project offices tried to post inventory, census and compensation information in all villages for feedback. The resettlement planning teams worked together with each farmer group to develop their own livelihood rehabilitation measures. Resettlement information booklets are being developed and distributed to every household for implementation. This participatory approach is designed to continue during the implementation of the project. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? The Cross-culture Research Center and Guangzhou Social Science Academy carried out the social assessment and poverty reduction impact assessment for both Guangxi and Guangdong components ofthe project. Guangxi Land Resources Survey Institute, Guangzhou Social Science Academy and East China Power Design Institute were also engaged to carry out the resettlement planning for the project. All the village committees in the affected areas took part in the resettlement planning process. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? Both provinces have established an institutional structure to implement the resettlement program. The structure includes resettlement offices at the provincial, county, and township offices, the design institutes, and the independent monitor. These offices will be staffed with competent and experienced staff and equipped with all necessary equipment. An internal management and monitoring system is already designed and documented in the draft resettlement action plans. 6.5 How will the project monitor performance in terms of social development outcomes? Guangxi and Guangdong have each hired an external institution experienced in resettlement planning and implementation to carry out the independent monitoring of the resettlement program implementation.

7. Safeguard Policies:

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

See Sections 5 and 6 above.

- 23 - F. Sustainability and Risks 1. Sustainability: The potential response ofthe market to the availability of improved water transport infrastructure will depend on many factors, most ofthem beyond the control ofthe project implementing agencies. In the Bank-financed first Inland Waterways Project, completed in 2001, the average size of vessels passing through the Guigang lock increased 17% in the first year ofoperation and a further 44% the following year. In light ofthe experience, both Guangxi and Guangdong do not propose to intervene in the market to stimulate the transition to larger vessels. However, both PMOSwill monitor traffic volumes against the forecasts, so that they can modify this decision and consider intervening if the traffic fails to meet their expectations. As noted in the preceding section, the Xiniu Dam is the case where this would be most critical to achieving a satisfactory return on investment.

There is little doubt that the electricity generated by the two proposed dams will be purchased by the local power distribution companies. Today generating capacity is short; in the future the low marginal cost of hydro-electricity will make it attractive. The national government is seeking ways to reduce acid rain, putting hydro-electricity in a strong position. Furthermore, the peak season for electricity demand (air conditioning) coincides with the peak rains; the dnest months (late autumn) fortunately are also months oflow power demand in the South. GDWB has reached provisional agreement with the power purchaser on the purchase price of power to be generated in Xiniu. Power pricing is included in the technical assistance to assist GXWCDC in negotiating the sale ofpower generated in Naji.

2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Risk Rating Risk Mitigation Measure

Businesses are not attracted to Project M Provinces would develop and disseminate IWT corridors despite improved IWT. marketing strategy. Ship operators fail to invest in large S Provincial governments do not at this stage wish vessels. to intervene, but if market response proved disappointing, they would decide on an action plan of incentives and promulgate it, monitor response, then if warranted, modify measures or dissemination campaign. Revenue potential from power sales is M Technical assistance on power pricing is to be impaired by delayed implementationof included in project. power sector restructuring. Droughts are more frequent or severe than M Coordination among agencies managing dams in recent past, restricting river use & on different reaches of same river will be power generation. strengthened. From Components to Outputs Qualified Dam Safety Panel, adequacy of M Dam Safety Panel consisting of experts in engineering designs, qualified contractors, various fields has reviewed outcome of and quality of supervision and satisfactory investigations and preliminary designs. RAP implementation of RAP not in place. satisfactory to the Bank is in place.

- 24 - Effective coordination mechanism for GXWCDC has signed a letter of intent with the water release between Baise and Naji entities responsible for three upstream dams, dams not in place. committing to coordination provisions acceptable to the Bank. Overall Risk Rating M

3. Possible Controversial Aspects: None.

G. Main Loan Conditions 1. Effectiveness Conditions 1.1 Receipt of legal opinions from the national government on the Loan Agreement and from Guangxi and Guangdong on the Project Agreement.

1.2 Signing of the subsidiary loan agreement between Guangxi and GXWCDC, in accordance with the relevant provisions set out in the Project Agreement's Schedule 2 and its annex.

2. Other [classify according to covenant types used in the Legal Agreements.] Agreement reached with the Government

2.1 The Borrower will on-lend the proceeds of the loan to Guangxi ($45 million) and Guangdong ($46 million) on the same terms and conditions as the Bank loan, including the foreign exchange risk; and Guangxi will on-lend its subloan to GXWCDC on the same terms and conditions as the Bank loan plus a fee (for Guangxi) of 1% of the subsidiary loan amount.

Agreements reached with Guangxi and Guangdong

2.2 Financial performance targets: GXWCDC is to maintain a debt service ratio of not less than 1.2 and an operating ratio ofnot less than 73%; and for both GXWCDC and GDWB other performance targets are set out in Annex 1.

2.3 Flow of funds: Authorized allocation for the two special accounts: each starts at $2 million, raised to $3 million once disbursements from the corresponding part of the loan exceed $10 million.

2.4 is allowed up to $9 million in aggregate on expenditures made after September 1, 2003.

2.5 Guangxi and Guangdong are to carry out their respective training prom-ams in accordance with an annual training plan acceptable to the Bank.

2.6 Guangxi and Guangdong are to carry out their respective environmental action plans and resettlement actions plans, furnish to the Bank any proposed revisions to these plans, and carry out those revisions to which the Bank agrees.

- 25 - 2.7 Guangxi and Guangdong are to monitor the implementation oftheir EAPs and RAE'S and submit monitoring reports to the Bank twice a year, by February 15 and August 15 ofeach year, starting February 15, 2005.

2.8 Dam safety: GXWCDC is to continue to employ a panel ofdam safety experts for the Naji Dam to review the adequacy ofits design and construction procedures, prepare an acceptable plan for (i) construction supervision and quality assurance, (ii)instrumentation, (iii)operation and maintenance, and (iv) emergency preparedness acceptable to the Bank, and carry out periodic safety inspections ofthe Dam after its completion.

2.9 GDWB is to continue to employ a panel ofdam safety experts for the Xiniu Dam to review the adequacy ofits design and construction procedures, prepare an emergency preparedness plan acceptable to the Bank, and carry out periodic safety inspections ofthe Dam after its completion.

2.10 Progress reporting and Mid-project review: Each PMO is to submit a semi-annual progress report on project implementation by February 15 and August 15 ofeach year, starting with February 2005 and until the project is completed. Each PMO is also to submit a mid-project implementation progress report by November 15,2006, to be reviewed with the Bank by March 15,2007.

2.1 1 Coordination with other entities for proiect implementation: GXWCDC is to submit by December 3 1, 2007 an agreement on coordination ofwater releases with dams upstream, consistent with the Letter of Intent signed on October 22, 2003 (prior to negotiations).

2.12 Guangdong Province is to take all actions required to (a) cause demolition and replacement of the two low bridges on the Lao-Long-Hu Waterway by June 30,2007; and (b) maintain at all times the embankment protection on the northem bank ofthe Lao-Long-Hu Waterway to acceptable standards.

H. Readiness for Implementation 0 1. a) The engineering design documents for the first year's activities are complete and ready for the start ofproject implementation. 0 1. b) Not applicable.

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

The preliminary detailed engineering designs were reviewed by the Bank during appraisal (August 2003) and found to be essentially complete. Guangdong launched detailed engineering immediately thereafter, whereas in Guangxi selection ofthe consultants was completed only in December 2003. Guangdong is expected to complete full engineering drawings and design documents by April 2004 and Guangxi a month or so later.

The launch ofproject implementation is being timed such that the main civil works contracts can begin in October-November 2004 during the dry season (late September to April). Procurement documents for the first year's activities will be fmalized upon completion ofthe detailed designs, to be ready for the start of

- 26 - project implementation in accordance with this timetable. Terms of reference for the technical assistance, training and studies were finalized at appraisal and the first such contracts can be awarded soon as the loan becomes effective, expected by July 2004.

The two Project Implementation Plans have been appraised and found to be realistic and of satisfactory quality.

I. Compliance with Bank Policies IXI 1. This project complies with all applicable Bank policies. 0 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies.

None.

Gr;aham smith Jitendra N. Bajpai Yukon Huang Team Leader Sector ManagedDirector

- 27 - Annex I: Project Design Summary CHINA: Fourth Inland Waterways Project

Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) [mprove accessibility for poor Zontribution ofpoor regions Yational income statistics Transport improvement xovinces, especially :o GDP; income per head in stimulates economic Pegarding export opportunitie 2eneficiary provinces development and thus helps alleviate poverty. Reduce greenhouse gas Mix ofrenewable and fossil Energy statistical reports Air quality will not be :missions and pollution by Fuel sources for power overwhelmed by growth in shifting energy mix away ;eneration. other polluting sources (e.g. Som fossil fuels. automobiles). 'roject Development 3utcome / Impact 'roject reports: (from Objective to Goal) 3bjective: ndicators: Improve waterway access for ronnage moving by waterway rransport statistical yearbook Lowered tariffs on IWT will ioor regions in Guangdong, md IWT's share of market in attract traffic in significant 3uangxi and neighboring otal inland transport market. volumes (new and diverted xovinces (Guizhou & from other transport modes). 'r'unnan) iaise efficiency ofwaterway 3reater use of large vessels 'roject monitoring of river Fleet owners will invest in ransport (vessels) md barge+pusher leet composition. larger vessels for use on :ombinations Project waterways. (a) MOC's policy guidelines for vessel modemization are followed and have their intended effect; (b) ship owners have access to financing for larger vessels; & (c) loading facilities for larger vessels are improved as planned. ,ewer tariffs charged by IWT ,ewer cargo tariffs. 'eriodic sampling by PMOS Competitive market, no :arriers If tariffs paid. collusion or govt intervention to discourage rate competition. Railway is not subsidized, nor does railway pursue aggressive competitive response to protect its market. 3enerate power to supplement :ost per kW ofcapacity: Gnal construction cost Hydro-electricity has lowest ,ources available to remote (aji: $1,300 per kW isolating cost of power marginal cost (near zero); reas Ciniu: $2,650 per kW louse) local demand will exceed assigning 213 ofdams' cost to local supply lower generation)

- 28 - - Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: Year-round safe, stable Minimum water depth PMO to monitor routinely. Frequency and severity of navigating conditions on eack available throughout defined droughts remain much as in waterway section. waterway in dry season. the past. Ship locks allow rapid and Passage through lock in not Waterway bureaux to conduct Traffic volumes 'with project' orderly transit at all times. more than minutes (one way) sample surveys. will grow at pace that implies for 95% ofvessels in any waiting times will begin to month. build after 10-15 years use. Power generating facilities arr output: Financial statements will Frequency and severity of properly operating Naji: 253 GWyr Issess: (a) expected output; droughts remain much as in Xiniu: 45 GWyr [b) actual output; (c) output the past. Sale price: > RMB 0.4kWh $old; and (d) revenue. Turbine availability: > 4,500 Production reports hoursiyear (Le. 50% of time)

Project Components I Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) Project waterways are Budgets (incl. contingencies): Yavigation charts Survey and updated Jpgraded to: navigation charts are completed. Navigable limits You River: Class 111 - 1,000 You River: $15.2 m are marked and waterway :ons category is reclassified. Lao-Long-Hu: Class 111 Lao-Long-Hu: $25.5 m .1,000 tons 3ei (North) River: Class V Bei (North) River: $17.2 m ,300 tons Lian River: Class VI - 100 ons

Two project shiplocks are Naji Nav. Complex: $84.8 m Monitoring report for Lock operators are skilled, :ompleted and operating ihiplocks operate locks efficiently and :fficiently, and power Xiniu Nav. Complex: $34.9 m fairly ('first come first ;enerating facilities are served'). iroperly functioning and Locks are maintained naintained properly. Staff trained to ensure lock cycle time of not more than 9C minutes (both ways).

'roduction report for power No faulty construction, no ;tations major flooding during construction, no earthquakes. Design and maintenance of turbines are as expected. Price ofelectricity from competing sources stays high. Availability ofturbines output: 90%

- 29 - Capacity Building Guangxi: $16.2 Guangdong: $20.0 Land Acquisition $34.3

Interest, Front-end Fee $10.8

Project Performance Indicators Attainment ofProject Performance Indicators 2003 2006 Obiectives Baseline Improve market access Waterway traffic (000 tons): in remote inland areas (i)Baise-Nanning 814 928 2,043 2,180 (ii)Shaoguan-Qingyuan 4,900 6,250 6,860 7,180 (iii)Lao-Long-Hu Waterway 1,200 2,000 8,600 9,300

Lower transport costs Average barge size (dwt) through use of larger (i)Baise-Nanning 97 101 141 152 vessels (ii)Shaoguan-Qingyuan 150 150 200 300 (iii)Lao-Long-Hu Waterway 80 80 300 500

Efficient generation of Power plant output at power to supplement (i)Naji 194 Gwh 253 Gwh supply in remote areas (ii)Xiniu 42 Gwh 45 Gwh

Vessel transit time Transit time through lock through lock incl. waiting time (minutes) (both ways) (i)Naji 90 90 (ii)Xituu 90 90

Project Implementation Monitors FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY2009 GX GD GX GD GX GD GX GD GX GD % of civil works 0052 30 83 50 98 60 100 100 100 100 completed % of equipment (by 00 0 10 51 70 98 90 100 100 7100 100 value) contracted

% of training 6 10 26 25 66 50 96 75 100 100 100 100 (person-months) completed

% of resettlement 100 20 00 50 .oo 80 100 90 100 100 100 100 I completed

- 30 - Annex 2: Detailed Project Description CHINA: Fourth Inland Waterways Project

The project involves the integrated development ofwater resources to regulate water flows of rivers for flood control, improvement of inland navigation and generation ofpower in the poorer areas ofthe Guangxi Zhuang Autonomous Region and Guangdong Province. In Guangxi, the project consists of a dam, shiplock and hydro-electric power plant at Naji on the upper reaches ofthe You (Right) River and improvement of the navigational channel between Baise and Nanning. In Guangdong, the project comprises improvements to the navigation channels on the 15.5 km long Lao-Long-Hu Waterway and the middle reaches ofthe Bei (North) River between the cities of Shaoguan and Qingyuan, a distance ofabout 184 km, and a dam, power station and shiplock at Xiniu on the Lian River. On completion, the developments at Naji will generate some 250 GWh ofpower per year and enable 500-ton capacity vessels and barge-pusher combinations to navigate all the way from Baise to Nanning, a distance of 357 km; the developments in Guangdong will enable 1,000-ton capacity vessels and barge-pusher combinations to use the Lao-Long-Hu Waterway, shortening their travel by an average of 70 km, 300-ton capacity vessels will be able to ply the middle reaches of the North River, and cities in the north ofthe province will be supplied with about 45 GWh per year of electric power. The hamessing of the waters at Xiniu will also open up the Lian River to navigation of 100-ton capacity vessels on 181 km ofits main stream (out of275 km).

The specifics ofthe developments are as follows. Costs indicated for each component and sub-component include contingencies.

By Component:

Project Component 1 - US$148.10 million Guangxi

A. Naji Dam and Shiplock (US$84.8 million)

Al. Construction of shiplock, dam, power station, and construction or installation (as appropriate) ofauxilliav facilities (US$43.1 million): The power station and the shiplock will be near the right bank ofthe river. The shiplock will be a Class I11 in accordance with the Chinese lock classification and capable of accommodating vessels up to 1,000 ton capacity with an effective chamber of 190 x 12 x 3.5m. The dam will provide a weighted average head of 11.9m (design head 10.5m). The power station will have an installed capacity of 57 MW with a mean annual generation of 253 GWh (net ofinternal losses). The power plant will be connected to the grid for Bake Prefecture by a 110-kV transformer for the sub-station at Honglingpo, a 110-kV line, and a 220-kV transformer at Shapo.

A2. Construction ofaccess roads and bridge (US$3.7 million): The access roads are about 9 km long; the bridge at the dam site connects both river banks.

- 31 - A3. Reservoir banks protection (US$2.5 million) The reservoir bank protection mainly includes the embankment and bank protection engineering, to ensure that farmlands and village settlements will not be inundated and that the slope will be stable. The areas for the embankment will be 65.5 ha., and the total length of slope protection will be 11.7km.

A.4 Purchase ofturbines, shiplock gates and other equipment (US$33.3 million)

AS Site management complex (US$2.2 million)

B. Channel Improvement on You River between Bake and Nanning including installation of auxiliary facilities (US$15.2 million): The channel ofthe You River between Baise and Nanning, a distance of 357 km, currently has a depth of 1.0-1.2m. The channel will be improved to a depth of 1.8m with dimensions of 330 x 50 x 1.8m downstream of Sanjiangkou and 330 x 30 x 1.8m upstream of Sanjiangkou. Within the reservoir, a double-line channel of 330 x 50 x 2. lm will be provided.

C. Institutional Strengthening, Consultant Services and Training (US$16.2 million) Capacity building will be provided to Guangxi Communications Department, including the Project Management Office and GDWCDC through technical assistance, training and study tours. Studies will be carried out on (a) the financing, management and operation of integrated waterways and power generation resources, and (b) the development and installation ofa comprehenbsive management information and control system.

D. Resettlement and Land Acquisition (US$25.0 million)

E. Interest during construction (US$6.4 million) and front-end fee (US$ 0.45 million).

Project Component 2 - US$112.40 million Guangdong

A. Lao-Long-Hu Waterway (US$25.5 million)

A 1. Channel Improvement on Lao-Long-Hu Waterway including construction or installation (as appropriate) ofauxiliary facilities (US$17.6 million). This comprises the deepening and widening ofthe 15.5-km long waterway to 4m and 50m respectively from the current depth of 1.2-2.0m and width of 20-30m; construction of a diversion channel at its junction with the Lao-lao-xi Waterway at Xiezhousha to shorten the channel and bank protection at the Longquanhai and Babao stretches. The deepening ofthe channel requires the removal by dredging of some 1.2 million cubic meters of sediment and the blasting and removal of the Xianglushi reef and seventeen other rocky spots. The widening ofthe channel necessitates the replacement ofthe dikes at the entrance ofthe waterway into the Yingzhou River. The improvements will upgrade the channel from Class 6 to Class 3.

- 32 - A2. Replacement of Two Bridges over Lao-Long-Hu Waterway (US$7.9 million). The two bridges at Lianyao and Longma will be replaced with new 1,18 lm and 1,483m long bridges with a height clearance of 10m above the channel's normal water level.

B. Middle Reaches ofNorth River (US$17.2 million)

B 1. Channel Improvement on North River between Shaoguan and Qingyuan including installation of auxiliary facilities (US$17.2 million) About 184 km ofthe channel between Shaoguan and Qingyuan will be improved to accommodate 300-ton capacity vessels. Improvements will consist of dredging mostly coarse sand and small cobble, with placement of the dredged materials in off-channel areas or as part ofriver-flow regulation spurs. About 1.2 million cubic metres of material will be dredged.

C. Xiniu Navigation Complex (US$34.0 million)

C 1. Construction ofa shiplock, dam, power station, access road, and auxilliary facilities (US$22.3 million); A dam 10.5m high to regulate water depth to 2Sm, a shiplock and a power plant of 10 MW will be built, including 2 substations to connect to the power grid at Yingde, as well as reservoir embankment protection.

C2. Purchase of turbines, lock gates and other equipment for the navigation complex (US$l 1.7 million)

D. Upgrading ofNavigational Aids (US$O.9 million)

E. Institutional Strengthening, Consultant Services and Training (US$18.7 million) Capacity building will be provided to Guangdong Communications Department, including the Provincial Waterways Bureau and the Project Management Office, through technical assistance, training and study tours. Studies will be carried out for (a) development and implementation of a waterway electronic mapping system, and (b) development and implementation of a shiplock management system.

F. Acquisition of Service Vessels, Service Vehicles and Surveying and Monitoring Equipment (%1.3 million)

G. Land Acquisition (US$ 9.3 million)

H. Interest during construction (US$3.5 million) and front-end fee (US$ 0.46 million).

- 33 - Annex 3: Estimated Project Costs CHINA Fourth Inland Waterways Project

Suangxi 4. Construction ofNaji dam, power station and shiplock 19.51 19.00 38.51 B. Construction of access roads 3.33 0 3.33 2. Bank protection (dam and reservoir) 2.23 0 2.33 3, Turbines, lock gates and other equipment 6.74 23.02 29.76 3. Channel improvement, Baise-Nanning 13.56 1.42 13.56 q. Institution strengthening, consultants services, training 13.07 1.42 14.49 3. Resettlement and land acquisition 22.3 1 0 22.3 1 3, Site management complex 1.92 0 1.92

Total Baseline Cost (Guangxi) 82.67 43.44 126.11 Physical Contingencies 6.61 3.48 10.08 Price Contingencies 3.3 1.74 5.05 Total Project Costs’ (Guangxi) 92.58 48.66 141.24 Interest during construction 6.37 0 6.37 Front-end fee 0.00 0.45 0.45 Total Financing Required (Guangxi) 98.95 49.11 148.06 hangdong 1. Channel Improvement - Lao-Long-Hu Waterway 7.86 7.85 15.71 3. Replacement of 2 bridges 3.51 3.51 7.02 :. Channel Improvement, North River Middle Reaches 7.66 7.67 15.33 I.Construction ofXiniu dam, power station, shiplock and access 9.96 9.95 19.9 1 oad <.Turbines, lock gates and other equipment 1.04 9.41 10.45 :. Upgrading navigational aids 0.08 0.71 0.79 3. Computer hardware for electronic mapping, shiplock management 0.14 1.26 1.40 and MIS 1. Service vessels, service vehicles, survey, monitoring and ancillary 0.12 1.08 1.20 equipment 5.01 11.68 16.69 I.Institutional strengthening, consultant services, training . Land acquisition 8.28 0 8.2

Total Baseline Cost (Guangdong) 43.66 53.12 96.78 Physical Contingencies 3.49 4.25 7.74 Price Contingencies 1.75 2.12 3.87 Total Project Costs (Guangdong) 48.90 59.49 108.39 Interest during construction 3.51 0 3.51 Front-end fee 0 0.46 0.46 Total Financing Required (Guangdong) 52.41 59.95 112.36

- 34 - Civil Works 77.89 53.74 131.63 Goods 9.09 39.75 48.84 Services 20.02 12.35 32.37 Training 0.22 2.3 1 2.53 Resettlgrnent 34.26 0.00 34.26 Total Project Costs’ 141.48 108.15 249.63 Interest during construction 9.88 0 9.88 Front-end fee 0.91 0.91 Total Financing Required 151.36 109.06 260.42

I Identifiable taxes and duties are about SlOm and the total project cost, net of taxes, is US$250m. Thus the Bank loan will finance 36% of total project cost net of taxes.

- 35 - Annex 4: Cost Benefit Analysis Summary CHINA Fourth Inland Waterways Project

US$ million

[For projects with benefits that are measured in monetary terms]

Benefits: 300 I costs: 139

Net Benefits: 161 -43

IRR: 22 2

Economic benefits from all components are valued at opportunity costs to society at large. Two ofthe four project components will generate no revenue and so their financial benefits are zero. For the others, the two powerplantishiplock complexes, financial benefits count only revenues eamed assuming conservative tariffs throughout the evalution period. For the financial evaluation and fiscal impact see Annex 5.

I If the difference between the present value of financial and economic flows is large and cannot be explained by taxes and subsidies, a brief explanation of the difference is warranted, e.g. "The value offinancial benefits is less than that ofeconomic benefits because of controls on electricity tariffs."

Summary of Benefits and Costs: 1. Naji Dam and Shiplock

The main benefit from the dams will be the electricity produced. The economic value ofthe incremental power to be generated by the project is estimated by reference to the next cheapest alternative source, which would be a gas turbine generator --taking into account that the project dams will generate mostly peak-hour power. The gas turbine altemative is provisionally estimated at RMB 0.54 (6.5 US cents) per kWh, being the sum ofthe variable production cost (mostly fuel) ofRMB 0.40 per kWh and a capacity charge of about RMB 600 per kW per year, corresponding to a capital cost of about US$350 per kW.

The second (in value) major quantified benefit is the reduction in transport costs for existing flows of traffic on the river. This reduction is expected to follow from (a) improved operating conditions for existing vessels, allowing them to operate hlly loaded year-round instead ofpartly loaded or immobilized during dry months, and (b) a shift to larger vessels, whose unit cost of carriage is far less. We assume, based on observations at Guigang Dam in eastern Guangxi (First Inland Waterway Project) and Jiangsu (on-going Second Inland Waterway Project) that within five years the mix of vessels will have charged markedly, lowering the unit cost to less than two thirds of its present level.

- 36 - The third category of benefits is the consumer or producer surplus associated with traffic diverted from road or rail, together with generated traffic: the difference between the With project and Without project traffic. The present waterway cannot handle more than about 0.9 million tons per year, whereas the improved waterway will be able to handle about 5.3 million tons per year. (Theoretically the Naji shiplock could handle more, but congestion is likely to discourage more than this amount.) We lack information on traffic flows between specific origin-destination pairs that today move by road or rail and are potentially divertible, and lack data on the costs, times and other factors which determine the cargo owners choice of mode. Thus, the estimates ofboth these two traffic categories rely on a considerable degree of conjecture. We have measured the benefit to diverted and generated traffic by the reference to savings to the base traffic, applying the “rule of half’. Measured on this basis, such traffic is not critical to the economic or financial viability of any component; more detailed data collection or analysis would not materially affect the goho go evaluation.

According to the feasibility study, traffic is expected to grow, in the “with project” case, rapidly during the 5-6 years after the project is completed, leading to a doubling of tonnage between 2006 and 2009, and a tripling from 2006 to 2012. Thereafter growth is expected to ease off to a rate matching the growth of construction in the regional GDP, that is, 7% in the second five years and declining to 4% in the second decade. Much ofthe bulk cargo is for construction purposes. Coal is the other main component, and coal consumption is expected to grow at a similar rate. The Bank considers these growth rates reasonable and consistent with its broader macro-economic forecasts.

The unit savings per ton carried by river are estimated based on today’s tariffs for trips from the main loading points on the You River, such as Baise city and Pingguo (site of a large aluminum smelter) to the Pearl River Delta. The lowering ofthese tariffs as cargo shifts to larger vessels reflects synthesized estimates of the operating costs ofthe larger vessels, based on experience on the lower Xi (West) River between Naming and Guangzhou. The tariffs are expected to drop from an average of $11 per ton to an average of $7.25.

Our best estimate ofthe economic rate ofreturn (ER), assuming the above economic value for electricity (6.5 cents) and the expected shift toward larger vessels, is 18%. Our analysis shows that an acceptable ER will still be achieved if the shift to bigger vessels occurs as expected and the average value ofelectricity is no higher than the present average tariff, that is 4.0 cents. If the shift to bigger vessels does not materialize at all, the project would need an average value of power of about 5.3 cents to achieve an ER of 12%.

2. Lao-LonnHu Waterwav

The main benefit ofthe widening and deepening ofthe Lao-Long-Hu Waterway is that traffic originating in the southwestern parts ofGuangdong province will be able to reach Hong Kong, Shenzhen and other special industrial zones on the east side ofthe Pearl River Delta much more easily. Today such traffic moves either on larger vessels which have to go down the river to the sea, along the coast off Macau and come back up the eastern waterways, or on small vessels

- 37 - which go upriver, through some shiplocks open to vessels no larger than 100 ton capacity, and across and down. The Lao-Long-Hu offers both large and small vessels a safe and direct short-cut that will allow the scale economies of large vessels without the longer distance and dangers of crossing open water. (These dangers are substantial during the summer monsoon season.)

The short cut reduces the distance by about 70 km. The average tariff is expected to fall by about $1.80 per ton.

Traffic growth is expected to match the growth ofthe industrial and construction parts ofregional GDP in southeastern Guangdong, that is, at 8-9% per year over the next decade. The feasibility study expects about 8 million tons per year to be diverted through the short-cut in the year it opens. About two-fifths ofthis traffic will be in containers. At this rate the volume using the improved waterway will grow by about 50% to some 13 million tons by 2015, after which growth will slow gradually to 3-4% by the second decade after opening. The Bank considers these forecasts reasonable. The ER under these assumptions will be about 50%, so high that it would still be acceptable if only 2 million tons instead of 8 million were diverted to the Lao-Long-Hu and no growth occurred. (The same result would occur if only 4 million tons diverted with no growth and a unit saving of$0.90, that is, half the best estimate.)

The Lao-Long-Hu's capacity will be sufficient to carry this traffic without significant congestion during the 25-year evaluation period.

3. Improvement of Middle Reaches ofNorth River

The main benefit will be reduced transport costs for base traffic (existing traffic and growth that is independent of the river transport costs). The typical haul is over about 150 km. As the average vessel size grows from a capacity ofabout 120 tons to about 300 tons, the average tariff is expected to decline from $3.60 per ton to $2.50 within five years of the project's completion, a decline ofabout 30%. Without the project traffic is expected to grow at no more than about 3% per year for the foreseeable future, whereas with the project it is expected to grow vigorously during the first 6-8 years, doubling from about 5 million tons to nearly 10 million tons. Thereafter, further growth will be constrained by limits on the channel's capacity (estimated at about 11 million tons).

As traffic reaches this level, in the second decade after the channel improvements are made, the Feilaixia dam's shiplock will also begin to see growing congestion and waiting. However, as larger vessels and vessels with standard dimensions come to haul a larger part ofthe traffic, they will make more efficient use of the shiplock's capacity, so that the shiplock will not impose a significant additional constraint on traffic. In the 'without project' case, traffic is not expected to reach levels that would strain the channel's capacit) in the foreseeable future.

- 38 - The ER is expected to be ample (about 24%), provided that the vessel owners respond to the opportunity and invest in larger vessels. Even if they do not at all, the ER will still be satisfactory (15%). Some four-fifths ofthe benefits are expected to accrue to the base traffic, so'uncertainty as to the extent ofgenerated traffic is not critical.

4. Xiniu Dam and Shiulock

The economic evaluation of the Xiniu Dam is similar to that ofthe Naji Dam, except in so far as Xiniu's power production --constrained by the smaller volume ofwater and lower head- will be only a sixth ofNaji's. IWT savings will provide about 55% of total benefits and the generation of electricity about 45%, assuming the same parameters for power pricing for Xiniu as for Naji. The ER under these assumptions will be about 13%.

The navigation benefits are based on the assumption that the shift in vessel size will bring a saving of about $1.20 per ton. The present constraints on total tonnage handled are the size ofthe largest vessel that can ply up-river ofXiniu town. It is expected that the tonnage moving through the shiplock will rise at an average of4% per year without the project. With the project tonnage will grow strongly during the first six years, after which it too will be deterred by congestion on the North River Middle Reaches and growing waiting times at Feilaixia. It is expected to level off at around 3.5 million tons some time between 2015 and 2020, that is, about a decade after completion of the Xiniu dam.

Xiniu has the lowest ERs of the four components because its power generating capacity will be small and river traffic volume is also the smallest. Ifthe shift to larger vessels failed to materialize, the return would be only about 7%. GDWB would then be advised to make vigorous efforts to stimulate the shift to larger vessels. If the shift to larger vessels materializes promptly and operation and maintenance costs of the complex are kept low (about 2% ofthe construction cost after the first five years), then the breakeven power price is about 5.5 US cents per kWh.

Main Assumptions: see above

Sensitivity analysis / Switching values of critical items: see above

- 39 - Annex 5: Financial Summary CHINA Fourth Inland Waterways Project The Financial Objective of the Project Entities 1. The main financial objective ofthe two project entities is to generate sufficient funds to cover operating and non-operating expenses and maintenance and to repay project loans. The rationale for development is the provision ofcompetitive services and greater efficiency in the use ofthe inland waterways, not the financial return measured by the investment’s financial internal rate ofretum (FIRR) or its net present value (NPV). The project comprises developments located in remote areas in Guangxi and Guangdong. The project will provide not only short-term benefit to the project areas (goods and services purchased and employment in the process ofconstruction) but also long-term benefits --a cheap transport means for low-value cargoes, power and water supplies, water and soil conservation, imgation, tax contributions, etc.-- to those poor rural communities. To this end, the investment is financially justifiable if cash inflow (revenue from power sales, budget appropriations and other sources ofincome) is able to meet cash outflow (operating cost and loan repayment).

Past and Present Financial Performance 2. The past and present financial performance ofthe two project entities has been satisfactory.

3. GXWCDC is a wholly owned company ofthe Guangxi Communications Department (GXCD). The company currently owns and operates the Guiping navigation complex (domestic funded, completed in 1990,) and the Guigang navigation complex (Bank-financed under the first Inland Waterways Project, completed in 2000). The company is financially sound and receives only construction grants from the Government. There is no subsidy for operation. The company meets all its financial obligations through internally generated funds. Due to loan repayments, in the three years 2000-02 the net surplus of GXWCDC progressively declined. However, the company in the past had accumulated a large cash reserve and adequate provisions had been set aside for depreciation. These will help to tide the company over the difficult period until the situation improves around 2005. (Table 2.2, Sources and Applications ofFunds, the project file). Despite its low net cash surplus, both the working ratio (operating efficiency ofthe company) and the debt service coverage ratio (cash flow available to meet annual payments on debt) were in the comfortable range of 22.3 percent and 1.1, respectively, in 2002. The current ratio (ability to pay short-term debt) has been maintained at a level of 1.6 or above since the company was formed in 1999, although the debuequity ratio (financial leverage- the use ofborrowed money to enhance the retum on owner’s equity) last year exceeded 50 for the first time.

The details (Table 2.1. the project file), are summarized as follows:

GXWCDC: Consolidated Income Statement (RMB million)

Ratios: Working (%) 11 17 22 Self financing e?) 9 8 26 Debt service coverage 1.9 1.2 1.1

-40- 4. GDWB has only one outstanding loan, which was obtained from the Bank under the Second Inland Waterway Project in 1998. Repayment of the loan will commence in 2004. GDWB is a government entity in the Guangdong province. In 2000 and 2001, the changes of the exogenous parameters (the implementation ofthe new budget system and the new tariffs) caused financial deficits in inland waterway operation. With strong support from the government, GDWB quickly revitalized from the financial deficits through internal reforms by dissolving many unprofitable operating units. In 2002, its total revenue exceeded the total expendtures, the net surplus was RMB 21.5 million (or 6.7% ofthe total revenue). The detailed financial operation (2000-2002) is found in Table 1.1 of the project file and is hghlighted as follows:

GDWB: Consolidated Income Statement (RMB million)

I 2000 I 2001 I 2002 I I Total oDerating revenue I 183.1 I 211.2 I 322.1 I I Operating costs, taxes and expenses I 193.6 I 230.7 I 300.6 ] I Net cash surplus I -10.5 I -19.5 I 21.5 Ratios: Working (%) I.I I 106 I 109 I 93 Self financing (%) -24 -13 12 Debt service coverage ------

Future Financial Performance

5. Both Naji and Xiniu are in remote areas where about 75 percent and 65 percent, respectively, of the electricity consumed is generated from the outside. The shortage of electricity in the project areas will provide a strong demand for the power produced by the two navigational complexes.

6. The proposed Naji navigation complex is scheduled to be put into trial operation in 2008 and into full operation in 2009. The company does not expect any cash shortage over the life of the project (Table 2.3, the project file).

7. The proposed Xiniu navigation complex is also scheduled to be put into the trial operation in 2008 and into full operation in 2009. Total revenue will be able to cover total operating costs, including depreciation, but it will not be able to cover loan repayments (estimated at RMB 6.7 million per year), which will commence in 2009 and will be met by GDWB, which will pay both principal and interest. Such payments are within the financial capacity of GDWB, as the sum of the principal and interest payments for the two Bank’s loans at RMB 95 million in 2009 constitutes only about 13.2 percent of total revenue of GDWB for that year (RMB 723 million). The financial risk in the investment is minimal so far as the availability of funds for loan repayments is concerned.

8. GDWB may face minor deficits during the construction period (2004-2008) due to loan repayments for the current Bank loan and capital expenditure for construction during this period. The total deficit amount, compared to the total revenue, is relatively small (less than 2 percent of total revenue in any given year). The deficits are not expected to affect the day-to-day operation ofGDWB until 2010.

-41 - Return on Investment

9. For the financial projection, the price ofpower and the shiplock fee for the two proposed navigation complexes are calculated on the basis ofcurrent power sale prices and shplock charges in each locality. Because ofthe current rigid price control, a conservative forecast is assumed (an increase of 1.9 percent per year), which is lower than the estimated long-term domestic CPI growth rate of2.8% p.a. -that is, we assume tariffs will decline in real terms. Although reforms in the power sector are likely to take effect by 2008, which will probably result in an increase in the forecasted revenue due to the application ofpeak hour pricing, for financial prudence a conservative approach with regard to the pricing ofpower sales has been taken here. The assumed cost offinancing at 5.1%, being the weighted average cost of funds, may also be considered conservative, since current Bank loans carry a rate ofaround 1.6%.

Power Sales Prices and Shiplock Charges Power I Shiplockfee I

Xiniu I 0.40 0.30 / Naii I 0.35 I 0.40 / 1 I /-1: Only applies to the ships going downstream.

10. On the basis of the assumptions used (Table 1.4 and Table 2.4, the project file), the FIRR and NPV ofthe investments in the navigational complexes are projected to be 1.8 percent and RMB -354 million, respectively.

FIRR and Net Present Value I xlniu 1 Naji I Total FIRR (in %) I -6.6 I 3.4 I 1.8 I NPValue ([email protected]%) I -214 I -152 I -354 I

11. The above financial outcome should be considered in the context ofthe following:

(a) No power delivery network Neither of the proposed navigation complexes has its own power delivery network. The power must be sold to the local power company, which uses its power delivery network to reach end users.

(b) Low power prices and shiplock fee. Both the power price and the shiplock fee are currently strictly regulated by the government. Any change in power prices or shiplock fees may require approval from various government agencies, which is a very time-consuming process. For the proposed two navigation complexes, given (i)the small scale ofpower generation, (ii)no delivery network, and (iii)locations in the remote poor areas ofthe two provinces, GXWCDC and GDWB have limited leverage when negotiating the sale ofpower. However, it is physically feasible that one or the other could install transmission lines to major industrial consumers, allowing for price competition with the grid company and substantially strengthening their bargaining position.

(c) Minimal subsidy During the construction period, MOC and the local governments may provide some grants, mixed with the loans, to GXWCDC and GDWB. After the completion ofthe project, MOC will not provide any funds to meet operating costs, particularly in the case of GXWCDC.

- 42 - (d) Low profit margin. The inland waterways have always had low operating surpluses because of (i)rigid price control, and (ii)no charges on the navigation channel. In contrast to highways, it is not technically feasible to collect channel fees from ships, other than at shiplocks. The FIRR ofan inland waterway project, consequently, is invariably low.

Financial Risks

12. This is the Bank’s second loan for both Guangdong and Guangxi. Guangxi delivered the last project, which is similar to this one, on time and with about 10 percent cost savings. For Guangdong, the on-going inland waterway project has been progressing smoothly. With the experiences learned from the previous projects and a good construction record, the chance ofa lengthy delay and a large cost overrun in the proposed project is relatively modest.

Financial Performance Indicators

13. To ensure that the project entities will have sufficient liquidity, assurances have been obtained that beginning in 2005, GDWB and GXWCDC will prepare annually a rolling five-year financial plan, which will be discussed with the Bank specifically with regards to the projected total revenue and the projected total expenditures.

14. For financial monitoring, the operating ratio, self-financing ratio and debt service coverage ratio will be used. During project supervision, these indicators will be closely monitored by the Bank. A variance of less than 15 percent from agreed financial forecasts will be acceptable. GXWCDC is required by covenant to maintain an operating ratio of 73% and a debt sewice ratio of at least 1.2. In the event that the targets are not achieved, GDWB and GXWCDC will be required to improve their financial performance by increasing tariffs or reducing costs or capital expenditures.

- 43 - Annex 6(A): Procurement Arrangements CHINA Fourth Inland Waterways Project

Procurement Procurement Assessments

1. The Bank assessed the procurement capacity ofthe Guangdong Project Management Office in April, 2003, and ofthe Guangxi PMO in June and July, 2003. The Project Capacity Assessment Report for each component is in the project files. The following summarizes their fmdings.

Guangxi Component

2. Guangxi Xijiang Waterway Construction and Development Company (GXWCDC), a legally independent body wholly owned by the Guangxi government, will be the executing agency for the Guangxi component. Guangxi Communications Department (GXCD) has established a Project Management Office to manage the component overall. Construction of the Naji Navigation Complex will be managed by a Project Cons!mction Office established within GXWCDC. The PMO staff are drawn from staff of GXCD and GXWCDC and include individuals who were involved in carrying out the first Inland Waterways Project (IWWI). The overall performance on IWW1 was acceptable.

Actions

None. Applicable laws stipulate that Applicable to the Agency procurement law. intemational financial institution requirements shall prevail when there are inconsistencies. (iii)Acceptability of Rules and Deviations of intemal NCB Ieviations of intemal NCB procedures Procedures of NCB procedures from Bank NCB vi11 be waived in favor of World Bank procedures. irocedures in the procurement schedule o the Project Agreement. (iv) Intemal procedures and PMO and Naji Construction Intemal procurement procedures and manuals Office are new organizations and manuals need to be formalized. The as such procedures and manuals procurement procedures generated for have yet to be drafted. IWWl may be used as a basis. (b) Procurement Cycle Management (i)Procurement Planning PMO has developed contingency PMO is to follow Bank procedures for plans which include the construction supervision services and financing of construction equipment. supervision services and equipment. (ii)Preparation ofBidding Procurement activities have not None. Documents yet started. The PMO staff also were utilized for IWW1.

- 44 - Bank’s new SBD for ICB MOF shall prepare and issue a change procurement shall be used. list to be included in the bidding documents. (iii)Management ofBidding The price ofbidding documents PMO to ensure that bid document Process from Advertisement to Bi for the Bank financed contracts pricing shall cover only printing costs. Opening ofIWWl were to cover only the cost ofprinting, but it was found that higher price was charged. (iv-vi) Bid Evaluation, Contract Acceptable. None. Award, Preparation, and Signing of the Contract (vii) Contract Management Large cost overruns were None. experienced on non-Bank financed contracts of IWWl due to poor design preparation. Bank-financed contracts were managed successfully. (viii) General Handling of Acceptable None. Procurement Cycle (c) Organization and Functions (i)Organizations of Procurement Acceptable None. Lnit and Allocation of Functions (ii)Internal Slanuals and PMO and Naji Construction Internal procurement procedures and Instructions Office are new organizations and manuals need to be formalized. The as such procedures and manuals procurement procedures generated for have vet to be drafted. IWWl mav be used as a basis. (d) Support and Control Systems (i)Procurement Oversight and Acceptable None. Auditing (ii)Internal Technical and The Mechanic and Electrical OPR recommends Min. Commerce to Administrative Controls Products ImportExport Dept in perform post reviews rather than prior Ministry ofCommerce is reviews. responsible for monitoring of ICB urocurement of eaubment. (iii)Code of Professional Behavio Acceptable. None. and Ethics [iv) Special Anti-Corruption Acceptable None. [nitiatives [e) Record Keeping Acceutable None. [f)Staffing Acceptable. All procurement staff will be trained in the uudated Bank SBD and rmidelines. [g) General Procurement Acceptable None. Environment :h) Private Sector Viewpoint Autonomy of SOE’s and the None. consulting industIy is progressing.

-45- Guangdong Component

3. Guangdong Provincial Waterways Bureau (GDWB) will be the executing agency for the project. GDWB’s existing Project Management Office (namely “World Bank Project Loan Office, GDWB”) is responsible for implementing the current Second Inland Waterways project and will be responsible for executing IWW4. The PMO’s overall performance on IWW2 has been acceptable.

Procurement Capacity Element Assessment Actions (a) Legal Aspects and Procurement Practices (i)Legal Corporate Status Acceptable. None (ii)Laws and Regulations Lack of consolidated national Applicable laws stipulate that Applicable to the Agency procurement law. international financial institution requirements shall prevail when there are inconsistencies. (iii)Acceptability ofRules and Deviations of internal NCB :1) Deviations of internal NCB Procedures ofNCB procedures from Bank NCB xocedures will be waived in favor of procedures. World Bank procedures in the xocurement schedule to the Project 9greement. (2) Post reviews shall be held. (3) Training shall be provided on the Bank’s procurement guidelines. (iv) Internal procedures and Acceptable. None. manuals (b) Procurement Cycle Management (i)Procurement Planning Training of PMO staff during Training will continue under IWW4. IWW2 was found to be useful. Selection of local design Bank will not finance the preliminary institutes for the preliminary and and detailed engineering services. detail engineering did not follow Bank procedures. (ii)Preparation of Bidding Procurement activities have not None. Documents yet started. PMO performance on IWW2 has been acceptable. Bank’s new SBD for ICB MoFinance shall issue a change list to procurement shall be used. be included in the bidding documents. (iii)Management ofBidding Acceptable None. Process from Advertisement to Bid Opening (iv-vi) Bid Evaluation, Contract 4cceptable None. Award, Preparation, and Signing of the Contract (vii) Contract Management Acceptable None. (viii) General Handling of 4cceptable None. Procurement Cycle

-46 - (c) Organization and Functions (i)Organizations of Procurement Acceptable None. Unit and Allocation ofFunctions (ii)Internal Manuals and Acceptable None. Instructions (d) Support and Control Systems (i)Procurement Oversight and Acceptable None.

(ii)Intemal Technical and E-procurement method is not in Bank guidelines should be applied. Administrative Controls line with Bank guidelines. (iii)Code of Professional Behavior Acceptable. None. and Ethics (iv) Special Anti-Comption Acceptable None. Initiatives (e) Record Keeping Acceptable None. (0 Staffing PMO staff are acceptable. Staff All procurement staff will be trained in in the design institutions lack the updated Bank SBD and guidelines. experience in Bank-financed 1 procurement. (g) General Procurement I Acceptable 1 None Environment (h) Private Sector Viewpoint Autonomy of SOE's and the None consulting industry is progressing.

Procurement Arrangements

4. Procurement will be carried out as shown in Tables A, B, C and D. Procurement ofworks and goods fmanced by the Bank loan will follow the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" ( January 1995, revised January and August 1996, September 1997 and January 1999) and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" (January 1997, revised September 1997, January 1999 and May 2002) will be applicable for the selection ofconsultants. The Bank-approved Chinese Model Bidding Documents (MBD) will be adopted for ICB and NCB activities for goods and works. All new revisions to the Bank standard bidding documents since 1997 will be incorporated into the existing MBDs. The World Bank standard bidding documents will be used when an applicable MBD is not available. Also, as indicated in the Bank's 2003 overall procurement review of China, the harmonized Standard Bidding Documents may be used in this project when available. Selection ofconsultants will use the Standard Request for Proposals-Selection ofConsultants (July 1997, revised April 1998, July 1999 and March 2002).

5. Works (US$ 131.62 m, including contingencies). Civil works costing US$15 million and above per contract will be procured through international competitive bidding (ICB). Four contracts, one in Guangxi and three in Guangdong, with an estimated aggregate value of US$95.23 million, will be awarded under this procedure (see Tables C1 and C2). Pre-qualification ofbidders will be required and invitations for pre-qualification will be advertised in UN Development Business, Development Gateway and at least two newspapers ofnational circulation in China. Contracts with an estimated value of less than US$15 million, of which there

- 47 - are three (two in Guangdong and one in Guangxi --see Tables C1 and C2) with an estimated aggregate value ofUS$7.46 m, will be awarded following national competitive procedures (NCB), subject to modification in accordance with standard provisions applied by the Bank for NCB in China (see below). Construction of the two bridges at Lianyao and Longma in Guangdong estimated at $7.86 m will be undertaken by the local government. The access road and bridge, channel improvement works and the site management complex in Guangxi amounting to a total contract value ofUS$2 1.07 m will be financed locally and their procurement will follow local procurement procedures.

3. Equipment (US$48.85 m including contingencies). Thirteen contracts with an aggregate value of US$42.63 m will be awarded following ICB procedure (Tables B1 and B2). Specific procurement notices will be published through the same channels as cited in the previous paragraph; a general procurement notice was already published in July 2003. Three contracts, each of less than $500,000, will be awarded through NCB. The aggregate value of NCB contracts is estimated at $1.18 m. Other items or groups of items of small pieces ofequipment readily available off the shelf estimated to cost less than $100,000 per contract may be procured following national shopping procedure on the basis of a comparison ofprice quotations solicited from at least three suppliers. The aggregate value of items to be procured through national shopping procedure is estimated at US$0.56 m.

4. Consultants (US$34.92 m including contingencies). All consultant services financed by the Bank will be procured according to the Bank’s guidelines on the selection and employment of consultants and on terms and conditions acceptable to the Bank. The Standard Request for Proposals will be used. Consultant services that are estimated to cost less than $100,000 per contract, may, with the Bank’s prior agreement, be procured by Consultants’ Qualifications (CQ) according to paras 3.1 and 3.7 ofthe guidelines. Bank financing ofconsultant services will amount to US$4.47 million. Details of staff training, technical assistance and outline terms of references for stud.ies are found in the project file.

5. Procurement Scheduling. The main milestone events for procurement are shown in Tables B3 and B4 below. A more detailed Gantt chart prepared by the PMO forms part ofeach Project Implementation Plan and is available in the project file.

-48- Procurement methods (Table A)

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

(45.05) (3.60) (0.00) (0.00) (48.65) 2. Goods 42.63 1.18 0.56 4.48 48.85 (35.63) (0.86) (0.48) (0.00) (3 6.97) 3. Services 0.00 0.00 5.91 29.01 34.92 (0.00) (0.00) (4.47) (0.00) (4.47) 4. Resettlement 0.00 0.00 0.00 34.26 34.26 (0.00) (0.00) (0.00) (0.00) (0.00) 5. Interest during 0.00 0.00 0.00 9.88 9.88 /construction I I I I I I (0.00) (0.00) (0.00) (0.00) (0.00) 6. Front-end fee 0.00 0.00 0.91 0.00 0.91 (0.00) (0.00) (0.91) (0.00) (0.91) Total 137.86 8.64 7.38 106.56 260.44 (80.68) (4.46) (5.86) (0.00) (91.00)

-49- Table AI: Consultant Selection Arrangements (optional) (US$ million equivalent)

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

- 50 - Prior review thresholds (Table B) 5, Prior review procedures will be applied on:

(a) civil works contracts with an estimated value of US$ 5 million or more; (b) contracts for the supply of equipment expected to cost US$ 0.5 million or more; (c) consultant contracts with a value ofUS$ 0.3 million or more for firms and US$ 50,000 or more for individuals.

The first contract in Guangxi and the first contract in Guangdong procured through each procurement method ofNCB, NS, QCBS and CQ will also require Bank’s prior review. Prior review will be applicable in 99% of the total contract value of works and 99% ofthe aggregate contract value ofgoods financed by the Bank.

6. Contracts below the above limits will be subject to post review by the Bank, in a sampling ratio of 1 to 5.

7. The threshold ceiling for short-listing ofnational consultants for each of Guangxi and Guangdong shall be US$300,000

Table B: Thresholds for Procurement Methods and Prior Review’

2. Goods 500 ICB, NCB 17 contracts (44.0)

3. Services(firms) 300 QCBS, CQ 5 contracts (5.2) (individuals) 100 CQ 1 contract (0.2)

Total value of contracts subject to prior review: 150.9 Overall Procurement Risk Assessment: Average Frequency of procurement supervision missions proposed: One every 6 months (includes special procurement supervision for post-reviewlaudits)

- 51 - Table B1: Procurement Packaging -- Guangxi

No. Contract Procure- Estimated Bank ment Contract Financing Method Value (US$ m)

ICiviI works 20.11 W1 /Construction ofNaji Navigation Complex comprising 1 ICB 43.14 19.00 dam, power house,-shiplock, & dam &ea bankprotection W2 Bank protection works for reservoir area NCB 2.49 1.11 W3 IChannel imurovement works including navigational aids I NBF 15.19 W4 Access roads NBF 3.73 W5 Site management complex (including drainage) NBF 2.15 Equipment and installation 33.34 23.02 G1 Power station equipment (including turbines, generators ICB 16.64 13.36 and control systems) G2 Monitoring system (incl. installation) for power station, ICB 1.66 1.33 dam and shiplock G3 Shiplock hoist ICB 1.25 1.oo G4 Metal structures for dam and power station ICB 2.95 2.37 G5 Hoists for dam and power station ICB 1.46 1.17 G6 Power transmission line works ICB 1.32 1.05 G7 Transformers for power station, shiplock and dam ICB 0.74 0.59 G8 Electrical equipment for power station, shiplock and dam ICB 1.98 1.59 G9 Cranes NCB 0.62 0.36 310 Miscellaneous equipment (tools, instruments, office NS 0.25 0.20 equipment, etc.) 31 1 Metal structures for shiplock NBF 0.75 3 12 Temporary power lines NBF 0.38 3 13 Auxiliary equipment for power station and dam NBF 2.93 314 Auxiliary equipment for shiplock NBF 0.42 Consultant Services 16.22 1.42 T 1 Management ofintegrated water resources, etc. QCBS 0.80 0.20 T2 /Management information system 1 QCBS 0.67 0.18 T3 ITraining I co 1.04 1.04 7.65 0.94 T6 /Project management cost 5.12 lother 24.99 01 Land acquisition NBF 14.50 02 Resettlement compensation NBF 10.49 Total Cost (incl. contingencies) 141.25 44.55 1 Costs include 12% contingencies

- 52 - Table B2: Procurement Packaging -- Guangdong __ No. Contract Procure- Estimated Bank ment contract financing Method value (US$m) (US$ m) 3vil Works 64.93 28.53 _. w1 Jonstruction of Xiniu dam, shiplock and powerhouse, and ICB 18.52 9.26 - ransmission lines -w2 >ao-Long-Hu channel regulation works ICB 17.60 8.80 w3 qorth River rermlation works I ICB I 15.97 1 7.99 -w4 kcess road and site management comulex I NCB 1 3.77 1 1.89 -w5 rerminals and maintenance stations on North River NCB 1.20 0.60 W6 teplacement of Lianyao and Longma bridges NBF 7.86 - ~ ~~ 2quipment 15.50 13.95 G1 Yectronic and mechanical equipment for Xiniu ICB 8.37 7.53 qavigation Complex G2 rurbines, metal structures, operation machinery and other ICB 3.34 3.00 lncillary equipment for Xiniu Navigation Complex G3 jervice vessels ICB 1.03 0.93 -G4 d1S hardware ICB 1.01 0.9 1 -G5 qavigational aids ICB 0.88 0.80 -G6 lardware for electronic map NCB 0.34 0.30 G7 lardware for shiulock management svstem NCB 0.22 0.20 G8 ;urvev, monitoring and ancillary equiument 1 NS 1 0.31 I 0.28

2onsultant Services 18.70 3.05 T1 :onstruction suuervision over all civil works OCBS 1.18 1.06 -T2 Ievelopment of Waterway Electronic Mapping System QCBS 0.45 0.40 -T3 hpervision over equipment for Xiniu component QCBS 0.22 0.20 -T4 Ievelonment of shidock management svstem OCBS 0.11 0.10 T5 :onsultant service for Xiniu comuonent I CO I 0.17 I 0.15 1 -T6 herseas training CQ 1.27 1.14 -T7 Iomestic training NBF 0.22 -T8 Iesign and engineering NBF 6.42 T9 'roject Management and other fees NBF 8.66 Ither -01 .and acquisition NBF 1 9.27 - Total Cost (incl. contingencies) 1 108.39 45.54 nclu e 12% contingencies

- 53 - Table B3: Procurement Schedule -- Guangxi

No. Description of contract Contract Comple- signing tion method G10 Miscellaneous equipment 0.25 Ask price to three 0812012004 0612012007 (for tools, instruments, potential suppliers: - office equipment, etc.) 04 w1 Construction of Naji 0613012004 0913012004 1212012008 Navigation Complex (dam, power house, ship lock & dam area bank protection) G2 Monitoring system for 0810112004 1113012004 0411 512008 dam, power station and - shiplock G8 Electrical equipment for 0612012005 10/20/2005 1212012006 dam, power station and shiplock

-G3 Shiplock hoist j ;E; ~ 04 20 2005 0612012005 10 20 2005 12'20 2006 G1 Power station equipment 07 30 2004 1013012004 01/2012005 02/01 2007 (incl. turbines, generators (1st unit )

and control systems) ~ -G9 Cranes 1 ';'c"B" ~ 1211512004 0211 512005 0612012005 0312012006 G4 Metal structures for dam 0311 012005 0511012005 0912012005 0812012006 and power house G5 Hoists for dam and power 1.46 ICB 1211512004 0211 512005 0612012005 0312012006 - house w2 Reservoir area protection 2.49 NCB 1211012004 0312012005 0713 Ol2005 1212012008 - works G7 Transformers for dam, 0.74 ICB 0711012005 0911 Ol2005 0 111 Ol2006 0612012007 - Powemlant & shidock G6 Power transmission line 1.32 ICB 0311 Ol2006 0511012006 07/10/2006 0612012007 - works T1 Management of integrated 0.80 QCBS - water resources etc. T2 Management information 0.67 QCBS - system T3 Overseas training 1.04 co

- 54 - Table B4: Procurement Schedule -- Guangdong

- 55 - Procedures for National Competitive Bidding

The procedures to be followed for National Competitive Bidding under Part C. 1 ofthis Section shall be those set forth in the Law on Tendering and Bidding ofthe People's Republic ofChma promulgated by Order No. 21 ofthe President ofthe People's Republic ofChina on August 30, 1999, with the following clarifications required for compliance with the Guidelines:

(i)All invitations to prequalify or to bid shall be advertised in a newspaper ofnational circulation in China and such advertisement shall be made in sufficient time for prospective bidders to obtain prequalification or bidding documents and prepare and submit their responses. In any event, a minimum ofthirty (30) days shall be given to bidders between the date ofadvertisement in such newspaper and the deadline for submission ofbids, and the advertisement and bidding documents shall specify the deadline for such submission.

(ii)Qualification requirements ofbidders and the method ofevaluating the qualification of each bidder shall be specified in detail in the bidding documents.

(iii)All bidders shall be required to provide security in an amount sufficient to protect the Borrower, in case ofbreach of contract by the contractor, and the bidding documents shall specify the required form and amount ofsuch security.

(iv) The time for opening ofall bids shall be the same as the deadline for receipt ofsuch bids.

(v) All bids shall be opened in public; all bidders shall be afforded an opportunity to be present (either in person or through their representatives) at the time ofbid opening, but bidders shall not be required to be present at the bid opening.

(vi) No bid may be rejected solely on the basis that the bid price falls outside any standard contract estimate, or margin or bracket of average bids established by the Borrower.

(vii) Each contract shall be awarded to the lowest evaluated responsive bidder, that is, the bidder who meets the appropriate standards ofcapability and resources and whose bid has been determined (A) to be substantially responsive to the bidding documents and (B) to offer the lowest evaluated cost. The winning bidder shall not be required, as a condition ofaward, to undertake responsibilities for work not stipulated in the bidding documents or otherwise to modify the bid as originally submitted.

(viii) Each contract financed with the proceeds ofthe Loan shall provide that the suppliers and contractors shall permit the Bank, at its request, to inspect their accounts and records relating to the performance ofthe contract and to have said accounts and records audited by auditors appointed by the Bank.

"Thresholds generally differ by country and project. Consult "Assessment of Agency's Capacity to Implement Procurement" and contact the Regional Procurement Adviser for guidance.

- 56 - Annex 6(B): Financial Management and Disbursement Arrangements CHINA: Fourth inland Waterways Project

Financial Management 1. Summary of the Financial Management Assessment The project team conducted an assessment ofthe adequacy of the project financial management system. It concluded that the project meets minimum Bank financial management requirements, as stipulated in BPiOP 10.02. In the team’s opinion, the project will have in place an adequate project financial management system that can provide, with reasonable assurance, accurate and timely information on the status ofthe project in the reporting format agreed with the project and as required by the Bank.

The loan will be disbursed using traditional disbursement techniques and not based on project management reports, in accordance with the agreement between the Bank and MOF.

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

Country Issues. To date, no country financial administration assessment (CFAA) has been performed for China, though dialogue with the Government ofChina in respect of the CFAA exercise is currently underway. The planned approach to CFAA is to build on the Asian Development Bank’s study of Financial Management and Governance Issues in China in 2000, and analyze areas that have changed rapidly in the past few years or that deserve further scrutiny and over time cover all major areas usually assessed as part ofa full CFAA exercise. Currently, for reference purpose, the Bank relies on study work conducted by the Asian Development Bank.

Nevertheless, based on observations ofdevelopments in the areas ofpublic expenditures, accounting and auditing, and Bank experience with China projects for the past few years, we note that substantial achievement has been made in the above areas and further improvement is expected in the next few years. As the economic reform program further unfolds, the Government of China has come to realize the importance ofestablishing and maintaining an efficient and effective market mechanism to ensure transparency and accountability, and minimize potential fraud or corruption.

Due to a rather unique arrangement by the Government ofChina, the funding of Bank-supported projects --and in particular the Bank loans-- is controlled and monitored by MOF and its extension, i.e. finance bureaus at provincial, municipal/prefecture and county level. However, project activities are usually carried out by implementing agencies of a specific industry or sector. The above arrangement then usually requires more and closer coordination on the project, as the multi-level management ofthe funding and implementation mechanism sometimes works to the detriment of smooth project implementation.

- 57 - Strengths and Weaknesses. (i) Strengths: The proposed project is the second Bank project to be implemented in both Guangxi and Guangdong. Project personnel identified to fill financial or accounting positions have relevant adequate work experience and educational background. In addition, the project management offices (PMOs) for the proposed project have accumulated extensive experience from the prior projects (Le. (first) Inland Waterways for Guangxi and IWW2 for Guangdong) and also will benefit from the rich experience the Guangxi and Guangdong Finance Bureaus have had with other Bank projects. The prior records indicate that both PMOs and provincial/regional Finance Bureaus have been found satisfactory in respect ofproject financial management and withdrawal applications. fii) Weaknesses: The two members of the Guangdong PMO staff identified to assume financial and accounting work for the project had relevant academic background and work experience, but they had not received training on Bank-financed projects. They missed the launch workshop for the Second Inland Waterways project, because they were not hired until implementation of the project had began and initial expenditures were incurred. Therefore, training in project financial management and disbursement was provided by Guangdong Finance Bureau and the PMO after the present project was appraised. In addition, one more staff member was hired to strengthen the team. The Bank will provide guidance as and when needed throughout project implementation.

Implementing Entities. The implementing agencies of the project are the Guangxi Xijiang Waterway Construction & Development Co. (GXWCDC) for project components in the Guangxi Zhuang Autonomous Region and Guangdong Waterway Bureau (GDWB) for project components in Guangdong Province. GXWCDC is an independent legal entity established and wholly owned by Guangxi for the purpose ofdeveloping and managing the region’s network of inland waterways and currently manages and operates the navigation complexes at Guiping and Guigang. GDWB is a line department ofthe Guangdong Provincial government with direct responsibility for the province’s inland waterway and reports to the Guangdong Communications Department. Each executing agency has set up a PMO to manage preparation and implementation ofthe project. Each has a full-time team oftechnical staff with prior experience in implementing a World Bank project. The Guangxi PMO brings together many staff who worked on IWW1, completed in 2001. The Guangdong PMO has managed successfully its component of the on-going Second Project.

The Foreign Funds Division ofthe finance bureaus in the Project provinces will also play a major role in project implementation, including overall monitoring, financing arrangements, procurement, financial management, etc. The provincial finance bureaus will also be responsible for maintaining, monitoring and reconciling the special accounts to be established for the project, and reviewing, verifying, consolidating and approving withdrawal applications prepared by the respective PMOs before submitting them to the Bank for disbursement processing. Each Foreign Funds Division has had prior experience with Bank projects and is familiar with Bank disbursement procedures. Consequently, for smooth and successful project implementation, close cooperation and coordination between finance bureaus and PMOs is important.

- 58 - Funds Flow. (0 Bankfunds: Bank loan proceeds in general will flow from the Bank to the provincial fmance bureaus (PFB) where the special accounts will be set up, project implementing agencies, and finally to contractors or suppliers. The Bank loan will be signed with the People's Republic of China through its Ministry ofFinance (MOF), and on-lending agreements will be signed between MOF and the Government ofGuangxi and Guangdong through their respective PFBs, and between the PFBs and the implementing agencies. (io Counterpartfunds: The counterpart funds for Guangxi region will come from a local commercial bank loan and self-financing besides appropriations by the Ministry of Communications (MOC) and Guangxi Communications Department (GXCD). For Guangdong province counterpart funds will come from appropriations by MOC and Guangdong Communications Department (GDCD). The counterpart funds will be contributed by MOC and GXCD and GDCD directly to the project.

Staffing. Adequate project accounting staff with educational background and work experience commensurate with the work they are expected to perform is one ofthe factors critical to successful implementation ofproject financial management. For the financial/ accounting staff already identified for the project, the Bank task team notes that, based on discussions, observation and review of educational background and work experience, they are qualified and appropriate for the positions and work they are expected to perform.

To strengthen financial management capacity and achieve consistent quality ofaccounting work, at the Bank's request each PMO prepared a project financial management manual. It provides detailed guidelines on financial management, internal controls, accounting procedures, fund and asset management and withdrawal application procedures. Finalized versions ofthese manuals acceptable to the Bank were received in February 2004.

Accounting Policies and Procedures. The administration, accounting and reporting ofthe project will be set up in accordance with the following regulations/circulars issued by MOF: a. In line with other Bank-financed projects in China, the Project will use the "Temporary Regulations on Financial and Accounting Management for Projects Financed by the World Bank" (Circular #127 issued in 1993) by MOF as a basis for bookkeeping and preparation of project financial statements and management reports. Accrual accounting and double entry bookkeeping will be adopted by the Project. b. Circular # 12: "Regulation for the Submission ofWithdrawal Applications" issued in December 1996 by MOF - includes detailed procedures for preparing and submitting withdrawal applications and retention of supporting documentation.

C. Circular #13: "Accounting Regulations for World Bank Financed Projects" issued in January 2000 by MOF. The circular provides in-depth instructions on the accounting treatment ofproject activities and covers the following: 0 Chart ofaccounts 0 Detailed accounting instructions for each project account 0 Standard set ofproject financial statements 0 Instructions on the preparation ofproject financial statements

- 59 - Both circular #127 and #13 are simplified versions ofthe Accounting Standards for State-owned, Infrastructure Oriented Projects (the "Standards"), taking into consideration the unique characteristics ofBank projects. The Standards are modeled after the principles of International Accounting Standards and provide detailed guidelines to accounting for activities ofBank-financed projects.

Each PMO will manage, monitor and maintain accounting records on the project components for which it is responsible. They will retain original supporting documents for project activities. In addition, they will prepare project financial statements and submit them to the Bank for review and comments on a regular basis.

Internal Audit. The intemal department under GXWCDC will perform internal audits for the Guangxi component. The task team will evaluate work performed by such internal auditors and determine the degree ofreliance oftheir work in respect ofproject implementation and Bank supervision missions. As for Guangdong, an internal audit department exists but they have no audit arrangement for Bank projects, so the PMO and the finance bureau will carry out regular supervision.

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

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

But upon operation, the following unaudited financial statements from Guangxi Xijiang Waterway Construction and Development Co. will be required to be submitted on a semi-annual basis: Balance Sheet Income Statement 0 Statement ofCash Flow

Information Systems. A computerized financial management system is in place in both PMOS, and a widely accepted accounting software, Yongyou, which has been used in previous Bank projects (First and Second Inland Waterway Projects) and proved to be adequate for their financiaUaccounting work and will continue to be used in the proposed Fourth Project, as well to keep track ofproject activities. Yongyou is a mature financial software widely used in China's business community, and is considered appropriate for the

- 60 - financial and accounting work of the project. However, the task team will closely monitor accounting work to ensure proper recording and reporting.

Supervision Plan. For the initial implementation stage, more frequent supervision missions (such as twice a year) should be carried out to have better coverage and ensure that project accounts are properly set up, procurement guildelines are followed, and expenditures incurred are eligible and well supported. More detailed reviews at the initial implementation phase can also help ensure that the financial management system is functioning as intended and financial statements are prepared in line with stipulated format and content. The mission frequency can then be subsequently reduced from the mid-point to the normal level (once a year). Furthermore, to maximize effectiveness and efficiency, procurement and FMDisbursement specialists should jointly participate in supervision missions for procurement and SOEs ex post reviews.

2. Audit Arrangements 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 Government Auditing Standards ofthe People's Republic of China (1997 edition). The Guangxi Zhuang Autonomous Region Audit Bureau and Guangdong Provincial Audit Bureau have been identified as the auditors for the Project. Annual audit reports will be issued in the name ofprovincialhegional audit bureaus and subject to reviews by the China National Audit Office (CNAO). The Bank currently accepts audit reports issued by CNAO or provinciaVregiona1 audit bureaus for which CNAO is ultimately responsible.

Audit reports on annual project financial statements of each project provinces will be due to the Bank within 6 months of the end of each calendar year.

3. Disbursement Arrangements (a) The Bank loan will be disbursed against (i)50 percent ofthe expenditures for civil works; (ii)100 percent ofthe foreign expenditures for directly imported equipment and materials quoted on a CIF basis; (iii)100 percent of expenditures ex-factory for locally manufactured goods; (iv) 75 percent of other local expenditures; and (v) 91 percent of the expenditures for consulting services, and 100 percent for study tours and training. (b) The estimated annual disbursement schedule is shown in the Project Financing Data on page 2 and detailed in the PIPS(available in the project file). It is based on the project implementation schedule and is in line with Bank experience ofpumped storage power projects. Disbursements are expected to be completed in 6 years from 2004 to 2009. The project is expected to completed by July 3 1,2009 and the loan closing date is January 3 1, 2010. (c) Retroactive financing in an aggregate amount ofUS$9 million would be provided for anticipated expenditures (construction equipment, consulting services and training) incurred after September 1, 2003 and before signing ofthe loan. (d) Guangxi and Guangdong will each have a special account. The authorized allocation for

- 61 - each account will start at $2 million and will be raised to $3 million, once disbursements from the corresponding part of the loan exceed $10 million.

Allocation of loan proceeds (Table C)

Table C: Allocation of Loan Proceeds

Expenditure Category I Amount in US$million I Financing Percentage /Part A. Guanexi I I I I Civil works 18.08 50 Goods 20.69 100 (foreign) / 100 (local ex-factory) / 75 (other local) Consultants services 0.44 91 Training 0.84 100 Part B. Guangdong 0.00 Civil works 25.66 50 Goods 12.54 100 (foreign) / 100 (local ex-factory) / 75 (other local) Consultant services 1.72 91 Training 1.02 100 Unallocated 9.10

Total Project Costs with Bank 90.09 Financing Interest during construction 0.00 I Front-end fee I 0.91 I I Total 9 1.OO

- 62 - Annex 7: Project Processing Schedule CHINA: Fourth Inland Waterways Project

ITime taken to prepare the project (months) I I 16 I /First Bank mission (identification) I I 03/01/2002 I Appraisal mission departure 0910 112003 08/25/2003 Negotiations 12/08/2003 1211 112003 Planned Date of Effectiveness 07/01/2004

Prepared by: Guangxi Communications Department and Guangdong Waterways Bureau

Preparation assistance: See Annex 8.

Bank staff who worked on the project included: I Name Speciality Graham Smith Lead Transport Economist John Scales Senior Transport Specialist Robin Carmthers Lead Transport Economist Naoya Tsukamoto Senior Environmental Specialist Chaohua Zhang Senior Social Sector Specialist Kekchoo Chung Senior Port and Waterway Specialist, Consultant Toshiro Tsutsumi Senior Ports Engineer Richard Scheiner Senior Civil Engineer, Consultant Hongyun Liu Senior Power Engineer, Consultant Scott MacKnight Environmental Specialist, Consultant Han-Kang Yen Research Analyst Xin Chen Program Assistant Dawei Young Procurement Specialist Karin Nordlander Lead Counsel Robert O'Leary Senior Finance Officer (Loan administration)

- 63 - Annex 8: Documents in the Project File* CHINA: Fourth Inland Waterways Project

A. Project Implementation Plan 1. Guangxi Communications Department: "Guangxi Youjiang Waterway Development Project: Naji Navigation Complex Project ImplementationProgram", August 2003

2. Guangdong Provincial Waterway Bureau: "Proposed Fourth Inland Waterways Project, Guangdong Component, Project Implementation Plan (Revised Version)", September 2003

B. Bank Staff Assessments 1. Economic Evaluation of Project Components (EXCEL tables)

2. Financial Evaluation of Project Components.

C. Other 1. Naji Navigation Complex; Engineering Feasibility Study, June 2002 2. Naji Navigation Complex: Economic Evaluation Report, August 20023. 3. Naji Navigation Project: Report of Dam Safety Review Panel Meeting No.l,24 February, 2003 4. Channel Regulation Engineering in Lao-Long-Hu Waterway and Channel Regulation Engineering for North River (Shaoguan to Qingyuan Section) 5. Brief Report on the Feasibility Study of the Lao-Long-Hu Waterway Regulation Works, 26 August 2002 6. Feasibility Research Report on Channel Regulation of Middle Reaches ofNorth River (Shaoguan-Qingyuan), August 2002 7. Brief Report on the Feasibility Study ofXiniu Navigation Complex, 16 August, 2002 8. Guangdong Provincial Waterways Bureau: "A Survey Report on Throughput and Facilities of the Project-Related Ports", May 2003 *Including electronic files

- 64 - Annex 9: Statement of Loans and Credits CHINA: Fourth Inland Waterways Project 03-Feb-2004 Difference between expected and actual Original Amount in US$ Millions disbursements" Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd 0.75 0.00 PO65463 2004 CN ~ Jiangxi Integrated Agric. Modern 100.00 0.00 0.00 0.00 100.00 P0 6 5 0 3 5 2004 CN-Gansu 8 Xinjiang Pastoral Development 66.27 0.00 0.00 0.00 65.61 3.88 0.00 PO66955 2004 CN-Zhejiang Urban Envmt 133.00 0.00 0.00 0.00 133.00 0.00 0.00 PO73002 2004 CN-Basic Education in Western Areas 100.00 0.00 0.00 0.00 100.00 0.00 0.00 PO77615 2004 CN-GEF-Gansu 8 Xinjiang Pastoral Develop 0.00 0.00 10.50 0.00 10.50 0.70 0.00 PO67337 2003 CN-2nd GEF Energy Conservation 0.00 0.00 26.00 0.00 15.00 15.98 0.00 PO40599 2003 CN-TIANJIN URB DEV II 150.00 0.00 0.00 0.00 150.00 0.00 0.00 PO56847 2003 CN-3rd Xinjiang Hwy Project 150.00 0.00 0.00 0.00 106.13 6.55 0.00 PO68058 2003 CN-Yixing Pumped Storage Project 145.00 0.00 0.00 0.00 140.95 1.47 0.00 PO76714 2003 CN-Anhui Hwy 2 250.00 0.00 0.00 0.00 250.00 13.42 0.00 PO70441 2003 CN-Hubei Xiaogan Xiangfan Hwy 250.00 0.00 0.00 0.00 178.66 -3.01 0.00 PO70191 2003 CN-SHANGHAI URB ENVMT APLI 200.00 0.00 0.00 0.00 200.00 0.00 0.00 PO64729 2002 CN-SUSTAINABLE FORESTRY DEV. PROJECT 93.90 0.00 0.00 0.00 80.48 3.65 0.00 PO58846 2002 CN-Natl Railway Project 160.00 0.00 0.00 0.00 37.23 -2.35 0.00 PO71 147 2002 CN-Tuberculosis Control Project 104.00 0.00 0.00 0.00 92.67 -1 1.33 0.00 PO60029 2002 CN-Sustain. Forestry Dev(Natura1Forest) 0.00 0.00 16.00 0.00 17.68 2.60 0.00 PO70459 2002 CN-Inner Mongolia Hwy Project 100.00 0.00 0.00 0.00 88.82 5.15 0.00 PO68049 2002 CN-Hubei Hydropower Dev in Poor Areas 105.00 0.00 0.00 0.00 87.89 10.72 0.00 PO58845 2001 Jiangxi iI Hwy 200.00 0.00 0.00 0.00 133.42 5.08 0.00 PO56199 2001 CN-3rd Inland Watelways 100.00 0.00 0.00 0.00 84.12 7.62 0.00 PO56516 2001 CN -WATER CONSERVATION 74.00 0.00 0.00 0.00 41.42 8.46 0.00 PO56596 2001 CN-ShljiazhuangUrban Transport 100.00 0.00 0.00 0.00 88.58 53.81 0.00 PO47345 2001 CN-HUAI RIVER POLLUTION CONTROL 105.50 0.00 0.00 0.00 90.68 -14.82 0.00 PO51859 2001 CN-LIAO RIVER BASIN ' 100.00 0.00 0.00 0.00 80.23 35.23 0.00 PO45915 2001 CN-Urumqi Urban Transport 100.00 0.00 0.00 0.00 52.54 46.04 0.00 PO45910 2000 CN-HEBEI URBAN ENVIRONMENT 150.00 0.00 0.00 0.00 123.53 48.03 0.00 PO49436 2000 CN-CHONGQING URBAN ENVMT 200.00 0.00 0.00 3.70 161.67 64.70 0.00 PO56424 2000 TONGBAI PUMPED STORA 320.00 0.00 0.00 100.00 164.64 97.81 0.00 PO45264 2000 CN-SMALLHLDR CATLE DEV 93.50 0.00 0.00 0.00 14.62 8.34 0.00 PO42 109 2000 CN-BEIJING ENVIRONMENTII 349.00 0.00 25.00 0.00 294.22 183.70 0.00 PO58844 2000 3rd Henan Prov Hwy 150.00 0.00 0.00 0.00 67.17 29.51 0.00 PO58843 2000 Guangxi Highway 200.00 0.00 0.00 0.00 105.76 46.76 0.00 PO64924 2000 CH-GEF-BEIJING ENVMT II 0.00 0.00 25.00 0.00 26.26 18.43 2.20 PO64730 2000 CN - Yangtze Dike Strengthening Project 210,oo 0.00 0.00 0.00 114.03 94.03 0.00 P0 5 0 0 3 6 1999 Anhui Provincial Hwy 200.00 0.00 0.00 9.60 43.79 40.39 0.00 PO51705 1999 Fujian II Highway 200.00 0.00 0.00 0.00 65.86 62.53 0.00 PO51856 1999 ACCOUNTING REFORM & DEVELOPMENT 27.40 5.60 0.00 0.00 19.24 19.16 0.00 PO41268 1999 CN-Nat Hwy4iHubei-Hunan 350.00 0.00 0.00 0.00 59.72 34.72 0.00 PO57352 1999 CN-RURAL WATER IV 16.00 30.00 0.00 0.00 21 .84 15.42 7.68 PO58308 1999 CN-PENSIONREFORM PJT 0.00 5.00 0.00 0.00 1.77 1.75 0.00 PO56216 1999 CN - LOESS PLATEAU II 100.00 50.00 0.00 0.00 29.24 31.38 0.00 PO60270 1999 CN-ENTERPRISE REFORM LN 0.00 5.00 0.00 0.00 2.71 4.29 4.07 PO38121 1999 CN-GEF-RENEWABLE ENERGY DEVELOPMEN1 0.00 0.00 35.00 0.00 28.58 26.50 7.57 PO51888 1999 CN - GUANZHONG IRRIGATION 80.00 20.00 0.00 0.00 38.11 30.52 0.00 PO49665 1999 CN-ANNING VALLEY AG.DEV 90.00 30.00 0.00 0.00 21 33 11.52 0.00 PO46051 1999 CN-HIGHER EDUC. REFORM 20.00 50.00 0.00 0.00 5.70 7.31 0.00 PO43933 1999 CN-SICHUAN URBAN ENVMT 150.00 2.00 0.00 0.00 93.14 77.33 23.93 PO42299 I999 TEC COOP CREDIT IV 10.00 35.00 0.00 0.00 36.14 -10.18 0.00 PO41890 1999 CN-Liaoning Urban Transport 150.00 0.00 0.00 0.00 36.96 36.96 0.00 P0 3 6 9 5 3 1999 CN-HEALTH IX 10,oo 50.00 0.00 0.00 37.49 22.26 0.00 PO03653 1999 CN-Container Transport 71.00 0.00 0.00 18.61 3.62 22.19 0.66 PO46829 1999 RENEWABLE ENERGY DEVELOPMENT 100.00 0.00 0.00 0.00 12.87 99.87 6.07 PO46564 1999 CN - Gansu 8 Inner Mongolia Poverty Red. 60.00 100.00 0.00 13.30 49.81 38.19 -3.54

- 65 - Difference between expected and actual Original Amount in US$ Millions disbursements'

Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd PO03614 1998 CN-Guangzhou City Transport 200,oo 0.00 0.00 20.00 100.31 120.31 100.31 PO03606 1998 ENERGY CONSERVATION 63.00 0.00 22.00 0.00 36.22 18.22 0.00 PO35698 1998 HUNAN POWER DEVELOP. 300.00 0.00 0.00 145.00 31.45 172.70 -22.46 PO49700 1998 CN- IAlL-2 300.00 0.00 0.00 0.00 4.52 4.52 0.60 PO37859 1998 CN-GEF Energy Consewation 0.00 0.00 22.00 0.00 0.44 22.06 0.00 PO03619 1998 CN-2nd Inland Waterways 123.00 0.00 0.00 17.00 39.18 54.12 4.29 PO40185 1998 CN-SHANDONG ENVIRONMENT 95.00 0.00 0.00 1.40 20.07 21.47 -0.79 PO03566 1998 CN-BASIC HEALTH (HLTH8) 0.00 85.00 0.00 0.00 39.66 23.29 0.00 PO46563 1998 CN - TARiM BASiN II 90.00 60.00 0.00 2.67 14.78 16.58 0.00 P0 4 5 7 88 1998 Tri-Provinciai Hwy 230.00 0.00 0.00 0.00 19.81 15.98 0.00 PO03539 1998 CN -SUSTAINABLE COASTAL RESOURCES DE 100.00 0.00 0.00 2.06 47.54 45.44 33.72 PO51 736 1998 E. CHINNJIANGSU PWR 250.00 0.00 0.00 86.00 51.14 137.14 11.55

PO46952 1998 CN ~ FOREST. DEV. POOR AR 100.00 100.00 0.00 0.00 40.02 -61.48 17.91 PO36949 1998 CN-Nat Hwy3-Hubei 250.00 0.00 0.00 0.00 21.15 21.15 0.00 PO36414 1998 CN-GUANGXI URBAN ENVMT 72.00 20.00 0.00 0.00 71.56 65.25 23.72 PO03637 1997 CN-NAT'L RURAL WATER 3 0.00 70.00 0.00 0.00 0.00 3.20 2.78

PO03590 1997 CN ~ QINBA MOUNTAINS POVERTY REDUCTIO 30.00 150.00 0.00 0.00 13.16 16.34 -3.28 PO35693 1997 FUEL EFFICIENT iND, 0.00 0.00 32.80 0.00 7.62 32.81 0.00 PO03654 1997 Nat Hwy2/Hunan-Guangdong 400.00 0.00 0.00 0.00 48.52 48.52 16.70 PO03650 1997 TUOKETUO POWEWINNER 400.00 0.00 0.00 102.50 37.37 139.87 25.18 PO38988 1997 CN - HEiLONGJlANG ADP 120.00 0.00 0.00 0.00 7.85 7.85 3.84 PO44485 1997 SHANGHAI WAiGAOQIAO 400.00 0.00 0.00 0.00 85.11 55.33 39.65 PO36405 1997 CN - WANJlAZHAi WATER TRA 400.00 0.00 0.00 75.00 22.58 97.58 5.00 PO03602 1996 CN-HUBEI URBAN ENVIRONMENT 125.00 25.00 0.00 28.32 39.72 70.08 29.74 PO03599 1996 CN-YUNNAN ENVMT 125.00 25.00 0.00 19.48 40.68 61.92 8.06 PO40513 1996 2nd Henan Prov Hwy 210.00 0.00 0.00 19.00 16.69 35.69 22.69 PO03594 1996 CN - GANSU HEXI CORRIDOR 60.00 90.00 0.00 0.00 73.92 58.83 0.00 PO03589 1996 CN-DISEASE PREVENTiON (HLTH7) 0.00 100.00 0.00 0.00 3.08 12.18 0.00 PO34618 1996 CN-LABOR MARKET DEV. 10.00 20.00 0.00 0.00 5.60 7.77 0.00 PO03648 1996 CN-SHANGHAI SEWERAGE II 250.00 0.00 0.00 0.00 39.94 39.94 -0.19 PO03571 1995 CNJth Railways 400.00 0.00 0.00 119.00 13.10 132.10 23.10 PO03639 1995 CN-SOUTHWEST POVERTY REDUCTION PROJE 47.50 200.00 0.00 0.01 1.21 25.36 25.36 PO03647 1995 China Economic Law Reform -LEGEA 0.00 10.00 0.00 0.00 0.61 0.93 0.00 PO03603 1995 CN-ENT HOUSING 8 SSR 275.00 75.00 0.00 57.46 38.95 94.26 1.23 PO03596 1995 CN-Yangtze Basin Water Resources Project 100.00 110.00 0.00 1.92 0.34 4.75 4.75 PO03540 1994 CN-LOESS PLATEAU 0.00 150.00 0.00 0.00 1.12 0.50 0.00 PO03632 1993 CN-ENVIRONMENTTECH ASS 0.00 50.00 0.00 0.00 1.11 1.73 1.41

Total: 11719.07 1722.60 214.30 842.02 5141.55 2977.32 423.52

- 66 - CHINA STATEMENT OF IFC's Held and Disbursed Portfolio June 30,2003 In Millions US Dollars

Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 2001 Peak Pacific 0.00 0.00 25.00 0.00 0.00 0.00 0.00 0.00 1998 Rabobank SHFC 0.45 0.00 0.00 0.45 0.45 0.00 0.00 0.45 2000 SSIF 0.00 6.00 0.00 0.00 0.00 0.89 0.00 0.00 1998 Shanghai Krupp 28.92 0.00 0.00 65.63 28.92 0.00 0.00 65.63 1999 Shanghai Midway 0.00 16.02 0.00 0.00 0.00 16.02 0.00 0.00 1999 Shanxi 16.75 0.00 0.00 0.00 14.20 0.00 0.00 0.00 1993 Shenzhen PCCP 3.76 0.00 0.00 0.00 3.76 0.00 0.00 0.00 Sin0 Gold 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 Sino-Forest 25.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00 2001 suzhou PVC 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1995197 WIT 5.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998 Wanjie Hospital 15.00 0.00 0.00 0.00 15.00 0.00 0.00 0.00 2000 Weihai Weidongri 1.03 0.00 0.00 0.00 1.03 0.00 0.00 0.00 1996 XACB 0.00 19.93 0.00 0.00 0.00 0.00 0.00 0.00 2003 Yantai Cement 6.33 1.95 0.00 0.00 6.33 1.95 0.00 0.00 1993 Zhen Jing 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0 Zhengye- ADC 15.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00 2003 Advantage 0.00 0.50 0.00 0.00 0.00 0.50 0.00 0.00 2002103 BCIB 0.00 0.00 11.60 0.00 0.00 0.00 0.00 0.00 2003 Bank of Shanghai 0.00 24.67 0.00 0.00 0.00 24.67 0.00 0.00 1999100102 CDH China Fund 0.00 16.36 0.00 0.00 0.00 2.38 0.00 0.00 2002 CIG Holdings PLC 0.00 3.00 0.00 0.00 0.00 3.00 0.00 0.00 1998100 CSMC 0.00 12.00 0.00 0.00 0.00 7.20 0.00 0.00 2003 Chengdu Huarong 6.73 3.20 0.00 7.82 6.73 3.20 0.00 7.82 1998 Chengxin-IBCA 0.00 0.36 0.00 0.00 0.00 0.36 0.00 0.00 1998 China Bicycles 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1987192194 China Walden Mgt 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 1994 China Walden Ven 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1994 Dalian Glass 0.00 2.40 0.00 0.00 0.00 2.40 0.00 0.00 1994 Dupont Suzhou 9.35 4.15 0.00 0.00 9.35 4.15 0.00 0.00 1995 Dynamic Fund 0.00 8.76 0.00 0.00 0.00 7.10 0.00 0.00 1994 Great Infotech 0.00 3.50 0.00 0.00 0.00 2.10 0.00 0.00 2003 Hansom 0.00 0.08 0.00 0.00 0.00 0.08 0.00 0.00 1999 Huarong AMC 23.74 3.00 0.00 0.00 14.74 0.01 0.00 0.00 2002 IEC 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 Leshan Scana 5.36 1.35 0.00 0.00 3.76 1.35 0.00 0.00 1998 Maanshan Carbon 9.00 2.00 0.00 0.00 9.00 2.00 0.00 0.00 2001 Minsheng Bank 0.00 23.50 0.00 0.00 0.00 23.50 0.00 0.00 2001 NCCB 0.00 26.58 0.00 0.00 0.00 26.46 0.00 0.00 2001 Nanjing Kumho 3.89 3.81 0.00 11.07 3.89 3.81 0.00 11.07 1996 New China Life 0.00 30.70 0.00 0.00 0.00 23.32 0.00 0.00 2001 Newbridge Inv. 0.00 1.95 0.00 0.00 0.00 1.95 0.00 0.00 1995 Orient Finance 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1997198 PSAM 0.00 1.93 0.00 0.00 0.00 0.00 0.00 0.00 2003 Total Portfolio: 195.31 217.74 36.60 84.97 139.16 158.44 0.00 84.97

- 67 - Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic 2002 ASIMCO 0.00 0.01 0.00 0.00 2003 Anjia 0.00 0.00 0.01 0.00 2004 CCB-MS NF'L 0.03 0.00 0.00 0.00 2004 CUNA RCCI 0.00 0.00 0.01 0.00 2003 Cellon 0.00 0.00 0.01 0.00 2002 Darong 0.01 0.00 0.00 0.01 2002 Huarong AMC 0.02 0.00 0.00 0.00 2002 IEC 0.00 0.01 0.00 0.00 2002 KHIT 0.00 0.00 0.00 0.00 2003 Peak Pacific 2 0.00 0.00 0.01 0.00 2003 SAIC 0.01 0.00 0.00 0.00 2002 SML 0.00 0.00 0.00 0.00 2002 Sino Mining 0.01 0.00 0.00 0.01 2002 Zhong Chen 0.03 0.00 0.00 0.03 Total Pending Commitment: 0.10 0.02 0.05 0.05

- 68 - Annex IO: Country at a Glance CHINA: Fourth Inland Waterways Project East Lower- POVERTY and SOCIAL Asia B middle- China Pacific income Development diamond' 2002 Population, mid-year (millions) 1,281.0 1,838 2,411 Life expectancy GNi per capita (Atlas method, US$) 950 950 1,390 GNI (Atlas method, US$ billions) 1,219.1 1,740 3,352 Average annual growth, 1996-02 T Population I%) 0.8 1.o 1.o Labor force (%J 0.9 1.2 1.2 GNi Gross per primary Most recent estimate (latest year available, 1996-02) capita nrollment Poverty (% of population below nationalpoverty line] 5 Urban population (% of total population) 38 38 49 Life expectancy at birth (years) 71 69 69 I Infant mortality (per 1,000 live births) 30 33 30 Child malnutrition (% of children under 5) 10 15 11 Access to improved water source Access to an improved water source (% ofpopulation) 75 76 81 Illiteracy (% ofpopulation age 15+) 14 13 13 Gross primary enrollment (% of school-age population) 106 106 111 China

Male 105 105 111 ~ Lower-middle-income group Female 108 106 110

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1992 2001 2002 Economic ratios' GDP (US$ billions) 221.5 454.6 1,167.1 1,232.7 Gross domestic investmenVGDP 33.2 36.2 38.5 41.0 Trade Exports of goods and services/GDP 8.9 19.5 25.5 29.5 Gross domestic savingsiGDP 34.8 37.7 40.9 44.0 Gross national savings/GDP 35.1 38.0 40.0 43.8 T

Current account balancelGDP 2.4 1.9 1.5 2.9 Jomestic investment Interest payments/GDP 0.2 0.6 0.5 0.5 savings Total debVGDP 3.8 15.9 14.6 12.6 Total debt service/exports 8.0 8.6 7.7 6.1 Present value of debtfGDP 14.1 Present value of debtfexports .. 51.8 indebtedness 1982-92 1992-02 2001 2002 2002-06 (average annual growth) -China GDP 9.7 9.0 7.5 8.0 7.5 __ GDP per capita 8.1 8.0 6.7 7.2 6.6 Lower-middle-income group

STRUCTURE of the ECONOMY 1982 1992 2001 2002 1 Growth of investment and GDP (%) (?A of GDP) L Agriculture 33.3 21.8 15.8 14.5 20 Industry 45.0 43.9 50.1 51.7 '5 " Manufacturing 37.3 33.1 34.2 44.5 Services 21.7 34.3 34.1 33.7 0 Private consumption 50.7 49.2 45.7 42.5 97 98 99 00 01 02 General government consumption 14.5 13.1 13.4 13.5 -GDI -GDP Imports of goods and services

1982-92 1992-02 2o01 2o02 Growth exports and imports (average annual growth) of (Oh) Agriculture 4.6 3.7 2.8 2.9 40 Industry 11.6 11.3 8.4 9.9 30 Manufacturing 11.2 10.4 9.0 8.1 20 Services jf.7 8.4 8.4 7.3 10 Private consumption 11.4 8.1 2.8 1.9 General government consumption 9.9 8.4 10.5 7.0 -10 Gross domestic investment 9.5 9.7 13.9 14.9 "--Exports 'D'lmports Imports of goods and services 9.7 12.8 10.8 27.5 I

- 69 - China

PRICES and GOVERNMENT FINANCE 1982 1992 2001 2002 Domestic prices (% change) Consumer prices 6.0 6.4 0.7 -0.8 Implicit GDP deflator -0.2 7.9 1.2 -2.6 Government finance (% of GDP, includes current grants) Current revenue 22.9 14.7 17.1 17.9 2.0 Current budget balance .. 1.1 0.0 j -GDPdeflator -0-CPI Overall SurDlusldeficlt -0.3 -1.0 -4.7 -3.0 I

TRADE 1982 1992 2001 2002 Export and import levels (US$ mill.) (US$ millions) Total exports (fob) 22,321 84,940 266,155 325,565 Food 2,908 8,309 12,780 14,623 400’000 T Fuel 5,314 4,693 8,420 8,372 ‘300,000 Manufactures 12,271 67,936 239,802 297,085 Total imports (cif) 19,285 80,585 243,610 295,203 200 000 Food 4,201 3,146 4,980 5,237 100 000 Fuel and energy 183 3,570 17,495 19,285 Capital goods 3,204 31,312 107,040 137,030 0 Export price index (1995=100) 41 85 83 78 Import price index (1995=100) 71 95 91 86 Terms of trade (1995=100) 58 89 91 90

BALANCE of PAYMENTS 1982 1992 2001 2002 Current account balance to GDP (%) (US$ millions) I Exports of goods and services 24,906 94,198 299,409 365,395 Imports of goods and services 20,555 86,752 271,325 328,013 Resource balance 4,350 7,446 28,084 37,383 Net incnme 376 249 -19,174 -14,945 Net current transfers 486 1,155 8,492 12,984 Current account balance 5,212 8,850 17,401 35,422 Financing items (net) -995 -10,952 30,046 40,085 Changes in net reserves -4,217 2,102 -47,447 -75,507 Memo: Reserves including gold (US$ millions) .. 24,842 220,051 297,721 Conversion rate (DEC, local/US$) 2.4 5.9 8.3 8.3

EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US$ millions) Composition of 2002 debt (US$ mill.) Total debt outstanding and disbursed 8,358 72,428 170,110 155,678 IBRD 0 3,752 11,550 12,051 A: 12,051 IDA 1 4,287 8,654 8,729 Total debt service 2,125 8,618 24,297 23,688 IBRD 0 460 1,550 1,631 IDA 0 30 151 175 Composition of net resource flows Official grants 47 327 240 Official creditors 657 2,343 2,156 -839 Private creditors -122 8,949 -4,017 -13,593 Foreign direct investment 430 11,156 44,241 49,308 Porffolio equity 0 1.243 3,015 2,286 F: 62,103 World Bank program Commitments 330 1,865 782 563 A - IBRD E - Bilateral Disbursements 1 1,331 1,791 1,733 B - IDA D - Other multilateral F - Private Principal repayments 0 197 904 1,157 C - IMF G - Short-term Net flows 1 1,134 887 576 Interest payments 0 293 797 649 Net transfers 1 841 90 -73

- 70 - Additional Annex I1 Environmental Assessment and Action Plan Summary CHINA Fourth Inland Waterways Project

A. Background

1. This project consists of the Naji Navigation Complex in Guangxi Zhuang Autonomous Region and three components in Guangdong Province: Lao-Long-Hu Waterway Improvement, North River Channel Improvements (dredginghegulation) and Xiniu Navigation Complex. The respective Inland Waterways Bureaux retained independent consultants to prepare the Environmental Assessment documentation (EIA, EAP and Summary EA). The task team reviewed the Terms of Reference for the EA and the first, second and third draft versions ofthe EIA and EAP documents. A summary ofthe consultants and the status ofEAs is provided in the following table:

Components EA consultants Final EL4 and EAP submission Naji Navigation Complex Environmental Protection Research Institute of June 11,2003 Guangxi Zhuang Autonomous Region Lao-Long-Hu Waterway Scientific Research Institute ofthe Pearl River May 18,2003 Improvement Water Resource Protection North River Channel South China Institute of Environmental Sciences May 18,2003 Jinprovements Xiniu Navigation Comdex South China Institute of Environmental Sciences Mav 18.2003

2. During the EA work, the local people in the project areas were intensively consulted, and their opinions are reflected in the project design. For example, after consultations, project design was adapted to upgrade the level ofwastewater treatment at the construction camp, to avoid blasting a shoal at a fish protection zone, to move the location of a new bridge, and to plant trees along the reservoir.

3. The national policy and administrative requirements for environmental assessment of development projects in China were satisfied during preparation and evaluation ofthe EA, as was the Bank’s OP 4.01 on Environmental Assessment. The following major environmental laws apply to the proposed Project:

(a) Environmental Protection Law of the Peoples’ Republic of China (PRC); (b) Water Pollution Control Law ofPRC; (c) Water and Soil Conservation Law ofPRC; (d) Atmospheric Pollution Control Law of PRC; (e) Environmental Noise Control Law ofPRC; (f) Cultural Relics Protection Law ofPRC; and (g) Circular on Strengthening Environmental Impact Assessment Management for Construction Projects Financed by International Financial Organizations.

-71 - B. Brief Project Description

4. Naji Navigation Complex will be located in the northwest part of Guangxi on the You (Right) River, about 3 16 km upstream of Nanning and about 40 km downstream from Baise City. It will be the fourth often dams that are being developed within the YouNu River Master Plan. The Complex is to include: (1) construction of a shiplock for 1,000 ton capacity vessels; (2) construction of a 196m wide x 19.55m high spillway and power house (57 MW capacity); (3) construction of a 409m access bridge and 8.7 km ofaccess roads, and (4) dredging/ regulation to address 9 shoals near Baise City and 135 shoals between Naji and Nanning. The resultant headpond will inundate 791 ha ofland. The project site lies within two fault basins, the Baise Basin and Tianyang Basin, between the Guangxi and Yunnan mountain masses.

5. Lao-Long-Hu Waterway Improvement provides for navigational improvements to an existing 15.5 km channel, located in the lower reach ofthe Xi (West) Rver near Jiangmen City at the western side ofthe Pearl River Delta. It forms part of the Pearl River Delta Master Plan, which was also partially addressed within China 2nd Inland Waterways Project. It will facilitate movement of 1,000-ton capacity vessels from Guangxi, Guizhou, and Yunnan to Hong Kong or Macao. The sediments are mostly fine silts and clays.

6. Bei (North) River Channel Improvement provides for navigational improvements to five sections (75 km) of the River between Shaoguan City and Qingyuan City. It will enable 300-ton capacity vessels to navigate the 184-km section during all seasons. The riverbed in the upstream consists of sands, pebbles and some bedrock, in the middle stream of sand and pebbles, and in the lower stream of sands mixed with small pebbles.

7. Xiniu Navigation Complex will be located in the northwest ofGuangdong Province on the Lian River, the largest branch ofthe North Rwer. The project site is located 3.5 km upriver of Xiniu Town and about 20 km from the confluence with the North River. The complex will be constructed between two sandbars in the middle ofthe river. It is the last and the most downstream of 12 steps that have been developed along the Lian River. It includes (I)shiplock for 100-ton capacity vessels; (2) construction of a dam (10.5m height) and powerhouse (10 MW capacity); and (3) dredging of 1.6 km and regulation of 13 km ofthe Lian River. Construction of the complex will inundate 95 ha ofland.

C. Baseline Environment Description

8. Climatic Conditions. All the components are located in the sub-tropical monsoon zone. The rainy season is from May to October in general, and average rainfall is from 1,100 mm to 2,500 mm. The average annual temperature is from 20 C to 22.7 C.

9. Social Situations. (1) Naji Navigation Complex: Baise City has a population of 332,000. The major industry is agriculture (rice, sugar, vegetables, and fruits). Bake Port mostly handles coal with bauxite and sand as lesser products with shipment to Nanning and thence to Guangdong, Hong Kong and Macao. Annual average net income ofa farmer living in Tianyan County is 2,519 RMB. (2) Lao-Long-Hu Waterway: Jiangmen City has a population of420,000

- 72 - with an average per capita income of4,43 1 RMB for farmers and 9,525 RMB for non-farm workers. (3) North River Regulation: The population of Shaoguan City and Qingyuan City are 3.1 and 3.9 million respectively, and average per capita income is 3,300 RMB. (4) Xiniu Navigation Complex: The population of Xiniu Town and surrounding villages is about 20,000 with an average per capita income of2,500 to 3,120 RMB. The major industry is agriculture.

10. Ecological Environment

(a) Naji Navigation Complex. Guangxi Zhuang Autonomous Region has several natural protected areas; e.g., in the upper tributaries ofthe Right River are two water resources protection areas, Chengbihe and Baidonhe, and one nature protection area, Dawangling. The EIA predicts no impacts, as they are significant distances from the project site. The 343 ha area to be inundated is 62% cultivated land, 19.8% garden plot, 9.5% residential and commercial areas, 4.8% water area and 3.9% forest. Site investigations by local academic experts identified no protected areas or critical natural habitats, a result confirmed with local authorities. The EIA findings on protected natural areas were checked with "A Directory of Asian Wetlands" (International Union for Conservation ofNature and Natural Resources) and "A Biodiversity Review of China" (World Wildlife Federation).

(b) Lao-Long-Hu Waterway Improvement. This chain ofthree waterways is located in a relatively undeveloped area near Jiangmen City. Site investigation was conducted along the project site (16 km in total), quarries, and dumping sites. The EIA report identifies no protected area or critical natural habitats within the impact area of the project site, which was confirmed with local authorities.

(c) North River Channel Improvement. The EIA report identifies the Yebei and HuaNanHu Nature Conservation Areas, but both are more than 100 km away from the projects sites. The project design provides that no civil works will be conducted within or near upstream of the three "no-fishing" areas in Qingyuan City. Site investigation involving local academic experts identified no critical habitats of fauna and flora and the results were confirmed with local authorities.

(d) Xiniu Navigation Complex. The vegetation around the project site is farmland and bamboo bush. The 95 ha area to be inundated is mostly within the existing flood plain and is 90% bush and 6% bamboo. The EIA report identifies no protected areas or critical natural habitats near the project site. This finding was confirmed with local authorities.

11. Water Quality. The proposed projects sites are remote from large populated areas or major industrial sources ofpollution. According to the monitoring data during past several years, all the project sites in general comply with Class I1 or 111 water quality standards; water quality at the Xiniu Navigation Complex is as good as Class I.There is a drinking-water intake at Xiniu Town.

12. Sediment Quality. Though the proposed projects sites are remote from populated areas or major industrial sources ofpollution, elevated concentrations ofarsenic and cadmium were noted for the Naji Navigation Complex in Guangxi, which is common in this region and regarded as of

- 73 - natural origin. According to the national regulation, the materials cannot be placed on agricultural land, but will be disposed in off-channel sites. Sediments in other areas are acceptable for disposal on land as fill materials.

13. Existing Noise and Air Quality. The noise levels at villages around Naji Navigation Complex and Xiniu Navigation Complex have almost reached the maximum allowed under the national standard because of existing commercial activities. Noise mitigation measures and monitoring to address this situation will be implemented. Air quality measurements are within appropriate national standards.

14. Cultural Relics. Archeological authorities conducted investigations using both document reviews and site inspections. At Naji, Poluo Relics, a pre-historic ruin, was identified within the inundation area, where pottery pieces with rope-figures, stoneware, and bone tools are found. According to national and regional laws, the relics will be excavated and preserved by the Autonomous Region Cultural Administration Department. At Lao-Long-Hu, four sunken ships from the Tang Dynasty were found within the Waterway, but not in the actual project areas. The provincial antiquities bureau concluded that the proposed project would not impact the sunken ships due to distance.

D. Potential Environmental Impacts and Their Mitigation Measures D-1. Naji Navigation Complex 15. Analyses of Alternatives. Four alternatives for the location of the complex, and three alternatives for the water level of the reservoir as well as the no-project alternative were analyzed. The EIA rejected the "no-project" alternative due to the need for navigation improvements. The EIA concluded that the proposed location is the most appropriate from an engineering and environmental viewpoint because it requires the least amount ofcivil works. The middle water level was selected to provide the best navigational depth for 1,000-ton capacity vessels, while also minimizing disruption to resettlement and existing ecology.

16. Construction Phase. The potential major environmental issues during construction are (a) water pollution due to increased suspended solids, (b) waste material dumping, (c) protection of residential areas, (d) protection of aquatic ecosystem, and (e) protection ofthe cultural relics. Proposed mitigation measures include:

(a) The main source ofwater pollution is discharge of accumulated water from the foundation excavation. Settling ponds will be constructed to control the concentration of suspended solids in the discharges within the national standard of 70 mg/L.

(b) Disposal sites for surplus excavated materials were carefully selected among several low-lying areas, with little ecological value or for agricultural production. Dredged material will be dumped in the river, primarily for use in river regulation. While concentrations of some trace metals are elevated, this is due to natural geology and not anthropogenic contamination.

- 74 - (c) Residential areas and a school near the project site or along transportation roads were identified as environmentally sensitive areas. Noise and dust control measures will include spraying water or limiting construction schedules.

(d) The EIA report does not identify significant impacts to the biodiversity ofthe aquatic ecosystem because there are many tributaries of similar environment, including the composition of fauna and flora. In addition, the provincial government is considering enhancing the proposed fish conservation center to include rehabilitation of biodiversity in the proposed reservoir.

(e) According to national and regional laws, the project will excavate 1,000 sq.m. of Poluo Relics site to protect pre-historic items.

17. Operation Phase. The potential major environmental issue during operation is eutrophication ofthe reservoir. The EIA predicts water quality will be controlled withm Class I11 level, provided that public wastewater treatment facilities, now in planning, will be constructed as scheduled. The report recommends a good ecological balance be achieved, by stocking the proposed reservoir with a variety of fish species.

D-2. Lao-Long-Hu Waterway Improvement

18. Analysis of Alternatives. Three alternatives for routes, two alternatives for changes to the channel alignment, two alternative sources for quarries, and the '(no-project" alternative were analyzed. The selected route and alignment provide the best benefits in terms ofboth engineering and environment. The selected channel alignment also provided for the best curvature providing for the minimum of excavation and therefore environmental impacts. Both quarries satisfy the needs ofthe project and the one with the poorer existing vegetation was selected.

19. Construction Phase. The identified major environmental issues during construction are: (a) water pollution, (b) waste material dumping, (c) nearby residential area, and (d) the aquatic ecological environment. Proposed mitigation measures are as follows:

(a) The major source of suspended solids/turbidity will be the clamshell dredging and upland disposal. Multi-cell sedimentation ponds will be constructed for each dumping site, with a discharge control of 70 mg/L for suspended solids. Waste material dumping sites were selected in consultation with local governments. They are a combination ofan unused river channel and borrow pits from earlier town construction. Dredged materials will be hydraulically pumped to each dumping site.

(b) Sediments proposed for dredging are relatively uncontaminated due to the limited industrialization or urbanization ofthe general waterway area.

(c) A large portion of the proposed excavation (channel bend re-alignment) will be conducted "in the dry" to significantly reduce impacts to the aquatic environment.

- 75 - (d) Noise and dust prevention measures related to bridge re-construction near a residential area, will include limiting the construction schedule and spraying water.

(e) Blasting and regulation work will avoid fish reproduction seasons. All disturbed vegetation will be rehabilitated including the quarry and dumping sites.

20. Operation phase. The project will rehabilitate the existing waterway and enable it to be used by larger ships. While a higher volume oftraffic is expected, there will be a decrease in the chance of accidents causing oil spills. The risks associated with the project works are considered to be minor, and no major environmental issues are identified for the operating phase.

D-3. North River Channel Improvements

21. Analysis of Alternatives. Five sections ofthe river will be dredged and regulated. For sections A, B, and E, there are options in terms of engineering specification ofregulation. Combining these options, three alternatives were developed. The three alternatives and the "no-proj ect" alternative were analyzed. The recommended altemative minimizes the extent of construction of spurs and groins, reduces the need for blasting ofshoals to none and minimizes the amount of dredging. The EIA report concludes the recommended alternative is the best from both the environmental and engineering viewpoints.

22. Construction Phase. The potential major environmental issues during construction are: (a) water pollution due to increased suspended solidshrbidity, particularly in water protection and "no fishing" areas; (b) dumping of dredged materials and (c) protection of fish and other aquatic organisms. Because there are no terrestrial aspects ofthis component, no major impacts to terrestrial vegetation are expected. Noresidential areas were identified within the project impact zone. Proposed mitigation measures are:

(a) During dredging, silt curtains will be deployed to contain waters with elevated concentrations of suspended solids/turbidity. The dredged materials will be dumped by pump-style equipment to minimize dispersion.

(b) Sediments proposed for dredging are relatively uncontaminated as much ofthe material is medium to coarse sand and fine to medium cobble.

(c) Dredged materials will be dumped at designated dumping areas either in deep off-channel areas or between river regulation groins.

(d) No blasting will be conducted and regulation work will avoid fish reproduction seasons. The project will cooperate with the fishery authority to release fry to the river.

- 76 - 23, Operation Phase. The project will rehabilitate the existing waterway and enable it to be used by larger ships. While there will be higher volume oftraffic, there will be a decrease in the chance ofaccidents causing oil spills. The risks associated with the project are considered to be minor, and no major environmental issues are identified for the operating phase.

D-4. Xiniu Navigation Complex

24. Analyses of Alternatives. As this is the last of 12 dams/shiplocks modifying the Lian River, final site alternatives were limited. Three alternatives for the location and the "no-project" alternative were analyzed. The EIA concluded that the proposed location is good for the engineering and the environmental because it requires the least amount ofcivil works. The reservoir water level was determined at the minimum to ensure year-round navigation for 100-ton capacity vessels to the next step up the river.

25. Construction Phase. The potential major environmental issues during construction are: (a) water pollution due to increased suspended solids, particularly with respect to the drinking water intake at Xiniu Town, (b) waste material dumping, (c) protection ofresidential areas, and (d) protection ofthe ecological environment. Proposed mitigation measures are:

(a) During construction of the cofferdams and excavation of the facility foundation, the project will coordinate with Xiniu Town water utility to protect the quality of water at the intake. Settling ponds will be constructed to control the concentration of suspended solids in the discharges within the national standard of 70 mg/L.

(b) Soil and rock from construction ofthe complex will be reused at the construction site. Material dredged from the river will be dumped into the river to augment river regulation. No waste material dumping sites will be established outside ofthe construction area.

(c) The transportation routes for the quarried rock were surveyed and one school was identified as an environmentally sensitive site. Noise and dust prevention measures will be taken.

(d) With respect to the ecological environment, the EIA report does not predict significant impacts for aquatic fauna and flora because ofthe small size ofthe complex and that this is the last and the most downstream step of 12 that regulate the flow ofthe Lian River. To rehabilitate fish resources, the Waterway Bureau proposes to introduce a variety of fish species. In addition, all disturbed vegetation will be rehabilitated.

26. Operation Phase. Nomajor environmental issues are identified. Oil leakage from the vessels during normal operation will be monitored by the Communications Department. An action program and placement ofnecessary response equipment for accidents will be prepared.

27. Lessons Learned from the Previous Project. The Guigang Navigation Complex in Guangxi was part ofthe (first) Inland Waterways Project; the Hutiaomen and L-S-R Waterway Improvements were part ofthe Second Inland Waterways Project, now nearing completion. This Fourth Project benefited from both Communications Departments' having completed EA

- 77 - documentation for Bank-financed projects. The understanding of Bank requirements was much improved, as reflected in more complete EIA and EAP documents. The role ofpublic consultation during the pre-construction phase was also increased through additional meetings and a better use ofconsultation methods. Public comments were utilized in changes to the project design.

28. Cumulative and Indirect Impacts

(1) Naji Navigation Complex will (as noted above) be the fourth often dams proposed under the YofluRiver Master Development Plan. The major cumulative impacts ofthese developments are interference with fish migration, alteration ofriverbanks, increased water pollution from shipping, and change in river hydraulics. The EIA concludes that good protection works ofthe riverbanks, installation and good management ofwastewater-collection tanks in ships and good treatment ofwastewaters at land-based facilities will be able to control the pollution. Further, the changes in river hydraulics were modeled and the channel designed to address issues of siltation. The EIA report predicts limited induced environmental impacts associated with the expansion ofport and terminal facilities, as their design will address impacts related to land use and highways. Produced electricity will be primarily used for industrial development in Bake City and adjacent towns. The production ofhydroelectric power will reduce the demand for burning ofcoal to generate electricity, thereby reducing greenhouse gas emissions.

(2) Lao-Long-Hu Waterway Improvement. The Pearl River Delta is one ofthree major areas within China that have a significant potential for transportation improvement through the use of inland waterways. The Delta is being developed within a Master Plan with improvements to three major north-south and three major east-west waterways. The Second Inland Waterway Project is enhancing two ofthe other waterways. The major cumulative impacts of these developments are alteration ofriverbanks, increased water pollution from shipping and changes in waterway hydraulics. The EIA concludes that good protection works ofthe riverbanks, installation and good management ofwastewater-collection tanks in ships and good treatment of wastewaters at land-based facilities will be able to control the pollution. Further, the changes in waterway hydraulics were modeled and the channel designed to address issues of siltation. The EIA report predicts limited induced environmental impacts associated with the expansion of loading and unloading facilities located on other or adjacent waterways, as their design will address impacts related to land use and highways. Industrial development of the Tan River valley is and will occur irrespective ofthe waterway project. There will be a beneficial induced impact as shipping traffic to Hong Kong will be able to use a shorter and more protected waterway than the current South China Sea route outside the Delta.

(3) North River Waterway Improvement. The EIA report analyses cumulative impacts related to the existing three dams/shiplocks and their reservoirs and earlier modifications to the lower section ofthe River. The major issue will be water pollution caused by suspended sediments and its secondary impact to aquatic ecology. The impact will be short-term based on occurrence only during construction and will be controlled through timing ofconstruction and the use of silt curtains. There are no readily identifiable induced impacts related to this sub-component.

- 78 - (4) Xiniu Navigation Complex. From 1959 to1974, 11 water resources dams were constructed on the Lian River with provision of shiplocks to enhance river navigation. The major deleterious cumulative impact has been the interference to migratory fish species. However, as the proposed component will be the last on the Lian River, additional cumulative impacts are not expected. Local communities have been taking various measures to recover fish resources, including stocking of headponds. The component is part of a larger economic development and poverty-reduction effort in the northeastem part of the Province. The proposed improvement of river transportation will enhance such resource industries as coal, cement, metallic substances, construction materials and local agricultural products, as well as improve irrigation capacity and contribute to agricultural productivity.

E. Environmental Monitoring

32. Monitoring will be carried out to verify predicted impacts, identify unexpected environmental problems at an early stage and implemenuadjust mitigation measures, as appropriate. For example, the concentration of suspended solids in the effluent from sedimentation ponds will be monitored at least twice per week, with the rate of discharge adjusted to comply with the national standard. Monitoring will cover both pollution-related and ecological environment issues. Monitoring will be conducted by independent monitoring institutions to be selected through a bidding process. The results ofmonitoring will be reported both quarterly and annually to the Bank and to relevant local authorities.

F. Institutional Arrangements and Training

33. The Department of Communications in both Guangxi and Guangdong will assign staff to be responsible for the implementation of environmental protection. An organization will be or has already been established to implement the project. For example, the Guangxi Xijiang Waterway Construction and Development Co. Ltd. is responsible for the Naji Navigation Complex. The implementing organizations will have a department in charge of environmental protection and full-time or part-time staff will be assigned. At local levels, supervision groups will be set up for each contract. One ofthe members ofeach group will be assigned for environmental supervision. Rules on reporting offindings and recording ofactions will be established to facilitate effective supervision.

34. Local environmental authorities continue to work on the project. They and their field offices will independently oversee the compliance issues. The project will provide the results of the environmental monitoring to them.

35. Implementation ofthe EAP will be a part of the contract between the Communication Departments and contractors. Each contractor will be required to assign one or more staff members to the project for environment protection activities.

36. To enhance environmental protection knowledge and skill, staff in charge ofenvironmental protection will receive training. The training program is proposed to include lectures by experts,

- 79 - site visits to similar projects and national and intemational training. A training budget of US$ 398,000 has been allocated.

G. Public Consultation and Information Disclosure

37. Public Consultation and Feedback. During preparation ofthe TOR and the EIA, people within the project areas were intensively consulted. Apart from the resettlement-related issues, the public showed a wide range ofconcems from water quality at drinking water intakes to noise impacts to schools. Their opinions have been reflected in the final project design and mitigation measures: e.g., upgrading the level of wastewater treatment at the construction camp, avoiding shoal blasting within a fish protection zone, location of a new bridge, and planting oftrees within the reservoir catchment area.

38. A two-stage public consultation was carried out according to the World Bank's guideline: (a) shortly after environmental screening and before the terms ofreference for the EA were finalized; and (b) after the draft EA report was prepared. The consultations were conducted through meetings and surveys, with questionnaires at towns and villages near the project sites. The number ofpeople consulted at the last stage is estimated as 3,68 1 including individual citizens, organizations ofconcerned villagers, and village committees. A summary of consultation activities appears in the table below.

Consultation I Consultation of Disclosure of EMand I Components 1 ' ofTOR EIA 1 EAPRe~orts Naji Navigation Complex April 2002 July 2002 August 30,2003 Xiniu Navigation Complex June 2002 August 2002 August 30,2003 North River Regulation June 2002 August 2002 August 30,2003 Lao-Long-Hu Regulation June 2002 August 2002 August 30,2003

39. Information Disclosure. The fourth and final versions of EL4 report and EAP were submitted to the Bank in June 2003. The EA and EAP documents were disclosed at the World Bank's InfoShop and locally at Communications Dept. offices in relevant cities within the project areas, public libraries and project offices, as announced by advertisement in local and provincial newspapers.

40. Conclusions. This project will cause environmental impacts similar to those that have been experienced in previous inland waterway projects. Those impacts will be mitigated to the levels that satisfy national and local environmental standards, provided that mitigation measures described in the EAPs are appropriately implemented.

- 80 - Additional Annex 12 Summary of Resettlement Action Plans (RAP)

CHINA: Fourth Inland Waterways Project

Background

1. The project components require land acquisition and relocation ofhouseholds. GXCD and GDWB hired experienced consultants to work with local governments and completed the resettlement planning. East China Survey and Design Institute in Zhejiang Province and the First Mapping Institute ofGuangxi conducted the inventory, census, and socioeconomic survey for Naji Dam in Guangxi during December 2002 - March 2003. Guangzhou Social Science Academy carried out the same planning activities for Xiniu Dam and Beijing Navigation Channel during October 2001 - May 2002. The consultants worked with the affected villages and developed specific rehabilitation schemes for each affected farmer group. At the same time, the Cross-cultural Research Center of Zhongshan University and Guangzhou Social Science Academy carried out social assessments for both components. Field surveys confirmed that the channel regulation components in both Guangxi and Guangdong would not require any land acquisition or house relocation. On the basis of the above field work, the following resettlement action plans were prepared,

a) Resettlement Action Plan for Naji Navigation Complex (Guangxi Component) b) Resettlement Action Plan for Lao-Long-Hu Channel Improvement Scheme c) Resettlement Action Plan for Xiniu Navigation Complex d) Summary Resettlement Action Plan for Guangdong Component

2. The RAPSwere prepared in accordance with the Land Administration Law ofthe People's Republic ofChina, the Implementation Regulations ofthe Land Law in Guangdong and Guangxi Provinces and World Bank Operational Policy 4.12 on Involuntary Resettlement. The objective ofthe resettlement programs is to ensure the restoration and improvement ofthe livelihoods of the adversely affected people.

Project Impacts

3. Much consideration has gone into the resettlement planning in minimizing the adverse impacts. Different altematives have been compared as to the alignment ofthe regulated channels and protective measures for farmland in the inundation areas. These are detailed in the RAPS.

4 The project will require the acquisition of land, relocation ofhouses and tombs, and cutting down oftrees. The project also will have an impact on some infrastructure, such as roads and power and communication lines. The project will require the acquisition of 14,852 mu of land, of which cultivated land is 5,358 mu, 36% ofthe total, and non-used land 6,020 mu, about

-81 - 40%. Most of the lands to be lost are low-yielding river bank lands that are subject to annual flooding. The affected farmers all have their regular productive plots outside the inundation areas. The impact ofthe land loss is relatively small.

5 The total number ofpeople affected through land acquisition is 15,690 in 3,769 households. The project also will require the demolition of 9,522 sq.m. ofhousing, including 6,990 sq.m. of residential housing, which requires the relocation of 166 people in 32 households. The impacts are summarized as follows:

Summary Impacts

Strategy for Livelihood Restoration

Principles. The following were the guiding principles for developing the RAPS:

The affected people should improve or at least restore their original living standards. Anyone who loses his or her house should get new free plots for new house construction in his or her current village. Resettlement plans, sites ofnew houses, standards and building areas should be determined after consultation with the affected people. For all affected buildings, compensation should be calculated on the basis ofthe current replacement cost without consideration ofdepreciation. The salvageable materials from the houses to be demolished belong to the owners of the houses. The affected farmers will determine their own livelihood rehabilitation measures. The project office and local governments will assist them in developing these measures. Redistribution ofremaining farmland among the farmers is the fimdamental measure for livelihood development and must be carried out for all seriously affected villages. Cash payment to individual household is only allowed in the case ofminor impact and only with the endorsement of the villager councils. Lack oftitle would not bar affected people from resettlement entitlements.

- a2 - 7. Relocation of households. Only the Naji Dam in Guangxi requires the relocation of houses. This involves 14 farmer households and 18 urban households. The rural houses are planned to be built in their existing villages. The villages will provide new residential plots, and the specific house sites will be finalized through consultation with the affected households. The farmers will build their own houses with cash compensation at replacement costs. Resettlement is scheduled to be completed before civil works starts. For the urban households, two options were made available to the affected households for compensation, i.e. cash payment and replacement housing at existing site with a temporary residence support. The affected households all chose the latter option. A detailed unit rate analysis was conducted for the replacement cost of the different types of affected buildings

8. Rehabilitation of infrastructure and business. The infrastructure affected is mainly power, telecommunications, water conservancy and transportation facilities, as well as roads. For these facilities, compensation based on the reconstruction cost will be paid to the government departments who are responsible for these facilities. The government departments will be in charge ofthe reconstruction. Some business will be affected through either loss of some attached structures such as walls or temporary stop of operations during the construction period. None requires relocation. They will be compensated in cash.

9. Livelihood restoration. Consultations were carried out in all affected farmer groups over their rehabilitation strategies and measures. The affected villages have tentatively agreed on their village approach as well as specific measures for rehabilitation. Farmers losing agricultural land will follow a rehabilitation strategy combining land-for-land measures and a cash payment option. Redistribution ofthe remaining village land is the primary measure among those affected. This measure is planned for all seriously affected villages. If land loss is marginal and farmers prefer cash compensation to going through the process of land redistribution, cash compensation will be provided as an option. In the seriously affected villages, the project office, local governments and the farmers worked together and formulated a rehabilitation strategy. They identified areas of need and developed measures for each ofthese villages. These measures include development of cash crops, on-farm works, reinforcing extension services, farmer training, agro-processing and reclamation ofbarren mountain. These are detailed in the RAPS.

Implementation Schedule

10. The RAP implementation will be aligned with civil works construction. New house construction will occur in accordance with the civil works schedule. Resettlers must be given at least four months to build their new houses before the demolition ofthe old houses. Before new house construction, a notice will be provided three months in advance to allow for resettlement site selection, planning, and development. Civil works will start after land acquisition is completed; land redistribution will be done during winter. All affected infrastructure will be reconstructed before inundation.

- 83 - Resettlement/Land Compensation Organization

11. Both GXCD and GDWB are in overall charge of implementing resettlement and land compensation. A resettlement institutional structure has been established in each province and this includes resettlementhompensation offices at provincial, municipal, county, township and village level. These offices will employ competent and experienced staff. Their respective responsibilities and functions are detailed in the RAPS.

Monitoring and Evaluation

12. Both internal and external monitoring is planned for resettlement implementation. The resettlement offices in GXCD and GDWB will be responsible for the internal monitoring. External institutes will be appointed to undertake the independent monitoring ofthe resettlement programs. The monitoring scope, targets, indicators, procedures, methodology and reporting requirements are described in the RAP.

Resettlement and Land Compensation Cost

13. The total resettlement cost is RMB 284 million, equivalent to US$34.3 million, including $25.0 million for Guangxi and $9.3 million for Guangdong. This budget includes the compensation fund for land, houses and attached structures, infi-astructure and trees, various relocation allowances, business loss during transition, costs of environmental and cultural property protection measures, reservoir clearance costs, special allowance for vulnerable groups, management and monitoring costs, contingencies and taxes. All resettlement costs will be financed by domestic funding.

- 84 - Additional Annex 13 Social Assessment and Poverty Alleviation Impact Assessment CHINA Fourth Inland Waterways Project

1. GXCD and GDWB engaged the Cross-Cultural Research Center ofZhongshan University and the Guangzhou Social Science Academy to conduct social assessment and assessment of the project impacts on poverty reduction. Both institutes organized expert teams, consisting of sociologists, anthropologists and economists as well as ethnic minority experts for the Guangxi Component. Both teams prepared working plans and developed guidelines for conducting group meetings, interviews and questionnaires. Training was provided to the teams before field work started. The assessment was conducted during September 2002 in Guangxi and April-July 2002 in Guangdong.

Social Assessment 2. The social assessment exercises aimed to (i)identify the broad socioeconomic environmental and social development issues in the project areas; (ii)identify stakeholders and solicit their perceptions, concerns, and recommendations for the project; (iii)facilitate community participation and mobilization in project planning activities; (iv) assess the social impacts of the project and propose measures to address these impacts in line with World Bank policies; and (v) identify any ethnic minority communities in the project areas, assess project impacts on them, and propose necessary mitigation measures.

3, The social assessment included research of statistics and historical records, meetings with relevant departments in provincial, county, township governments, interviews ofkey government officials and surveys in the sampled villages. The sample (six villages in Guangxi and 11 villages in Guangdong) was determined on the review ofthe project data, government statistics and relevant academic researches. Both consultants employed participatory rural appraisal methodologies for their work in the sampled villages. They include focus group discussions, interviews of key informants (leaders, elders, school teachers ) and questionnaire surveys. During group discussions and village meetings, the assessment teams also employed community mapping, resource diagramming, preference ranking, problem trees, seasonal calendars, and daily activity charts. Separate groups were organized for women, ethnic minority groups and fishing communities, as well people engaged in waterway transport.

4. The following are key findings.

a) The project areas vary in socio-economic development. The Guangdong components spread out in two areas north ofthe Pearl Delta (Xiniu and North River schemes) and west ofit (Lao-Long-Hu scheme). The former is largely a mountainous area, with agriculture as the dominant industry and limited non-farm sector development. It is among the least developed areas ofthe province. The latter is in the plain areas, a hometown for overseas Chinese. Overseas investment has boosted its non-farm development in the past two decades. Its agriculture is relatively developed, engaging more in aquaculture and agro-processing. The Guangxi component is in the Baise Prefecture, one ofthe poorest areas ofthe province. It has rich natural resources, with agricultural as its main industry.

- 85 - Waterways offer a cheaper means ofcommunications but generally require improvement in the local areas. The project is expected to improve access to markets, employment opportunities and investment conditions. This project, with improved communication conditions, is expected to facilitate economic development in the local area and reduce income disparity in the provinces.

The project will affect large groups ofcommunities. These include people engaged in fishing, people living on boats, and those engaged in waterway transport, who are all expected to benefit from the project, as well as people who will lose assets to the project, such as land and houses. Consultations with these different groups indicate that they mostly believe the project will benefit them and promote local development. They have also expressed concerns about adverse impacts and proposed mitigation measures.

Major adverse impacts are related to land acquisition and house demolition. Most concerns are about information dissemination, transparency in resettlement planning process, full and timely delivery of compensation fund, inadequate compensation rates and use of compensation funds. The recommendations ofthe social assessment teams have been adopted in the resettlement plans.

Most ofthe project-affected people in Guangxi belong to the Zhuang ethnic group, the largest officially recognized minority group in China. They are the majority in the project areas, about 77% of the total population in Baise Prefecture. The social assessment reviewed social, economic, cultural and institutional aspects ofthe Zhuang people in the project areas (history, language, traditions, festivities, religious beliefs, marriages, economic activities, resources sharing, education, political representation and opportunities to development etc.) as well as interactions between Zhuang and Han people.

The social assessment concluded that there is a clear self-identification among Zhuang people, and they have maintained distinct features in language, culture and social customs. However, centuries of co-existence have led to a significant level of sharing and mutual influencing between Han and Zhuang groups. There are hardly any differences between them in resources sharing, livelihood activities, institutions and political representation. The social assessment concluded that the measures developed in the resettlement program are ethnically and culturally appropriate and there is no need for a free-standing ethnic minority people’s development plan. There are no ethnic minority communities in the project areas in Guangdong Component.

The social assessment reveals that women shoulder a large share ofthe family responsibilities. In addition to the farm work they share with their husbands, they have to do the family chores and take care ofthe animals as well as gardening. Those whose husbands work away from the villages undertake a much heavier workload. In most cases, women are not active in village affairs, largely due to the heavy workload. Women enjoy equal status in the family because oftheir crucial role. Local women are expecting to benefit from the project by reducing fn-ewood collection with power generation, shortening

- 86 - traveling time to markets, replacing hand-pump irrigation with improved irrigation system with the project and better marketing offarm products.

Assessment of Project Impact on Poverty Reduction

5. The impact assessments were conducted on the basis of the social assessments with some additional fieldwork. They adopted the same approach and methodology for the social assessment, with the objective for a better understanding of (i)the natural environment and social and economic development of the local areas; (ii)poverty status, reasons for the poverty, the government strategy and measures to reduce poverty; and (iii)perceptions of local people of the project's impact.

The team analyzed the collected information and the key findings are as follows,

The project covers some ofthe poorest areas of Guangdong Province and Guangxi Region. The Guangdong components will have impacts in six of the sixteen poverty counties ofthe province, particularly the Xiniu and North River schemes, where the average GDP ranges between 20-30% of that ofthe province. Baise and Tianyang counties of the Guangxi Component are both province-designated poverty counties.

There are many reasons for the poverty situation. They include poor natural conditions (mountainous area, little arable land or poor quality of farmland), frequent natural disasters such as floods, few opportunities for non-farm development, weak agriculture extension and support system, little investment in infrastructure development, a poor and inefficient transport system, and lack ofinformation and access to markets.

Both provincial governments have developed long-term poverty reduction strategies with clear objectives and plans. The poverty counties and townships have all developed poverty reduction plans, following a multi-sectoral approach. The proposed project fits in this general strategy. The project is expected to improve the transport system in the project areas, facilitate transfer oflocal resources, promote tourism and improve local access to markets and information.

The majority ofthe local population support the project and believe it will help facilitate local economic development. They believe it will improve the local transport system, help reduce the cost of electricity and irrigation, generate job opportunities, and promote tourism development, as well as improve health and education services in the long term.

- 87 - - 88 - MAP SECTION