World Bank Document

Document of The World Bank

FOR OFFICIAL USE ONLY

Public Disclosure Authorized Report No: 56067-CN

PROJECT APPRAISAL DOCUMENT

ON A Public Disclosure Authorized PROPOSED LOAN

IN THE AMOUNT OF US$100 MILLION TO THE

PEOPLE’S REPUBLIC OF CHINA

FOR A

ZHEJIANG QIANTANG RIVER BASIN SMALL TOWN ENVIRONMENT PROJECT Public Disclosure Authorized

December 12, 2010

China and Mongolia Sustainable Development Unit Sustainable Development Department 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 Public Disclosure Authorized Bank authorization.

CURRENCY EQUIVALENTS

Exchange Rate Effective March 22, 2010

Currency Unit = Renminbi (RMB) Yuan (Y) RMB 6.8 = US$ 1 US$ 0.147 = RMB 1.00

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

BCR Benefit/Cost Ratio BOT Built Operate Transfer CVM Contingent Valuation Method CNAO China National Audit Office COD Chemical Oxygen Demand CPS Country Partnership Strategy CQ Consultants Qualifications DA Designated Account DRA Design Review Advisory EA Environmental Assessment EAP East Asia Pacific EDZ Economic Development Zone EIRR Economic Internal Rate of Return EMP Environmental Management Plan EPP Emergency Preparedness Plan FMM Financial Management Manual FMS Financial Management Specialist FYP Five Year Plan GDP Gross Domestic Product IRBM Integrated River Basin Management IA Implementing Agency ICB International Competitive Bidding ICR Implementation Completion Report IST Institutional Strengthening and Training MOF Ministry of Finance NCB National Competitive Bidding NDRC National Development and Reform Commission NGO Non-governmental Organization NPV Net Present Value O&M Operation and Maintenance PCR Physical Cultural Resources PDO Project Development Objective PIU Project Implementation Unit

PMO Project Management Office PPMO Provincial Project Management Office QBS Quality Based Selection QCBS Quality and Cost Based Selection RAP Resettlement Action Plan RP Resettlement Plan RPF Resettlement Policy Framework SA Social Assessment SBD Standard Bidding Documents SBR Sequencing Batch Reactor TA Technical Assistance TN Total Nitrogen TP Total Phosphorous TQC Total Quantity Control UDIC Urban Investment and Development Company WA Withdrawal Application WDR World Development Report WSC Water Supply Company WTP Willingness-to-Pay WWTP Wastewater Treatment Plan ZPAO Zhejiang Provincial Audit Office ZPFB Zhejiang Provincial Finance Bureau ZUEP Zhejiang Urban Environmental Project

Vice President: James W. Adams, EAPVP Country Director: Klaus Rohland, EACCF Sector Managers: Ede Jorge Ijjasz-Vasquez, EASCS Vijay Jagannathan, EASIN Task Team Leader: Axel E. N. Baeumler, EASIN

CHINA Zhejiang Qiantang River BASIN SMALL TOWN ENVIRONMENT PROJECT

CONTENTS

Page

A. STRATEGIC CONTEXT AND RATIONALE ...... 1 I. Country and sector issues ...... 1 II. Rationale for Bank involvement ...... 2 III. Higher level objectives to which the project contributes ...... 3 IV. China Country Partnership Strategy (CPS) ...... 3

B. PROJECT DESCRIPTION ...... 4 I. Lending instrument ...... 4 II. Program objective and Phases ...... 4 III. Project development objective and key indicators ...... 4 IV. Project components ...... 5 V. Lessons learned and reflected in the project design ...... 6 VI. Alternatives considered and reasons for rejection ...... 7

C. IMPLEMENTATION ...... 7 I. Partnership arrangements (if applicable) ...... 7 II. Institutional and implementation arrangements ...... 7 III. Monitoring and evaluation of outcomes/results ...... 8 IV. Sustainability ...... 8 V. Critical risks and possible controversial aspects ...... 9 VI. Loan/credit conditions and covenants ...... 9

D. APPRAISAL SUMMARY ...... 10 I. Economic and financial analyses ...... 10 II. Technical ...... 12 III. Fiduciary ...... 13 IV. Social ...... 14 V. Environment ...... 14 VI. Safeguard policies ...... 16

Annex 1: Country and Sector or Program Background ...... 18

Annex 2: Major Related Projects Financed by the Bank and other Agencies ...... 25

Annex 3: Results Framework and Monitoring ...... 27

Annex 4: Detailed Project Description ...... 31

Annex 5: Project Costs ...... 37

Annex 6: Implementation Arrangements ...... 40

Annex 7: Financial Management and Disbursement Arrangements ...... 45

Annex 8: Procurement Arrangements ...... 54

Annex 9: Economic and Financial Analysis ...... 59

Annex 10: Safeguard Policy Issues ...... 73

Annex 11: Project Preparation and Supervision ...... 83

Annex 12: Documents in the Project File ...... 84

Annex 13: Statement of Loans and Credits ...... 85

Annex 14: Country at a Glance ...... 90

Annex 15: Maps...... 92

CHINA

ZHEJIANG QIANTANG RIVER BASIN SMALL TOWN ENVIRONMENT PROJECT

PROJECT APPRAISAL DOCUMENT

EAST ASIA AND PACIFIC

EASCS

Date: December 12, 2010 Team Leader: Axel E. N. Baeumler Country Director: Klaus Rohland Sectors: Sewerage (10%); Solid waste Sector Manager/Director: Ede Jorge Ijjasz- management (74%); Water supply (16%) Vasquez/ Vijay Jagannathan Themes: Pollution management and environmental health (35%); Access to urban services and housing (30%); Municipal governance and institution building (25%); Environmental policies and institutions (10%) Project ID: P116656 Environmental category: A-Full Assessment Lending Instrument: Specific Investment Loan Joint IFC: Joint Level:

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

For Loans/Credits/Others: Total Bank financing (US$m.): 100.00 Proposed terms: Single currency loan; variable spread with a maturity of 20 years, including 5 years grace period at the Bank’s standard rate for LIBOR based US$ loans. Financing Plan (US$m) Source Local Foreign Total Borrower 116.00 0.00 116.00 International Bank for Reconstruction and 75.00 25.00 100.00 Development Total: 191.00 25.00 216.00

Borrower: People’s Republic of China; c/o Ministry of Finance, Sanlihe, Beijing, 100820, P.R. China; Tel: 86-10-68551123; Fax: 86-10-68551125 Responsible Agency: Zhejiang Provincial Construction Commission Hangzhou, Zhejiang Province, China Contact: Ms. Chen Jianqiu, PPMO Director Tel: (86-571) 8705-5129; Fax: (86-571) 8705-5049 [email protected]

Estimated disbursements (Bank FY/US$m) FY 2012 2013 2014 2015 2016 2017 Annual 15.0 25.0 25.0 20.0 10.0 5.0 Cumulative 15.0 40.0 65.0 85.0 95.0 100.0 Expected effectiveness date: June 1, 2011 Expected closing date: December 31, 2016

Does the project depart from the CAS in content or other significant respects? [ ]Yes [X]No Ref. PAD A.III. Does the project require any exceptions from Bank policies? Ref. PAD D.VII. [X]Yes [ ]No Translation Waiver: In April 2007 Bank senior management endorsed “Guidelines for the use of English Translation of Summaries of Environmental Assessment Reports and Resettlement Action Plans in China Projects” which allowed the creation of English language comprehensive summaries of RAP and EA reports for projects that meet certain criteria. On February 12, 2008, the Guidelines were enhanced and endorsed by Bank senior management for a further period of two years until February 2010. In accordance with these guidelines, the applicable English translation waivers were granted at the PCN stage on September 17, 2009. Consequently, the Environmental Impact Assessment (EIA), the associated Environmental Management Plan (EMP), and the Resettlement Action Plan (RAP) for each Project Province were developed in the Chinese language. These have been reviewed by Bank staff who are native Chinese speakers, and found acceptable to the Bank. The Consolidated Environmental Assessment (CEA) Report and the Consolidated RAP have been translated into English, and have been reviewed and approved by the Bank. The English language CEA Report and the Consolidated RAP have been disclosed through the Bank's Infoshop, while the Chinese language EIAs, EMPs, and RAPs have been disclosed in China. Have these been approved by Bank management? [X]Yes [ ]No Is approval for any policy exception sought from the Board? [ ]Yes [X]No Does the project include any critical risks rated “substantial” or “high”? [ ]Yes [X]No Ref. PAD C.V. Does the project meet the Regional criteria for readiness for implementation? [X]Yes [ ] No Ref. PAD D.VII.

Project development objective Ref. PAD B.III., Technical Annex 3

The project development objective is to assist Zhejiang Province in improving access to sustainable urban environmental infrastructure in selected cities, districts and towns in the Qiantang River Basin.

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

The project consists of the following four components.

 Component 1: Water Supply and Distribution (US$35.64 million, of which the IBRD loan is US$18.99 million). Construction and/or installation of water supply treatment plants

and clear water distribution networks to enhance water supply in the sub-urban areas and adjacent towns in: Zhuji City of Shaoxing Municipality and Wucheng District of Jinhua Municipality.

 Component 2: Wastewater Collection and Treatment (US$158.03 million, of which the IBRD loan is US$68.05 million). Construction and/ or installation of wastewater collection networks and treatment facilities, stormwater collection networks, associated roads, and river embankment rehabilitation works in: Jiande City of Hangzhou Municipality; Qujiang District of Quzhou Municipality; Lanxi City/ Youbu Town of Jinhua Municipalty; Pan'an County/ Jianshan Town of Jinhua Municipality; Pan'an County/ Shenzhe District of Jinhua Municipality; Pan'an County/ Yunshan District of Jinhua Municipality; Tonglu County/ Jiangnan Town of Hangzhou Municipality; and Longyou County/ Chengbei New District of Quzhou Municipality.

 Component 3: Solid Waste Management (US$20.32 million, of which the IBRD loan is US$10.96 million). Improvements in solid waste management in Jiande City of Hangzhou Municipality through the construction of the Qingshankejiawu landfill in Meicheng Town which will serve five towns and one community of Jiande City; the construction of a tertiary leachate treatment plant; the closure of three existing open dumps; and the provision of solid waste collection vehicles and equipment.

 Component 4: Institutional Strengthening and Training (IST) (US$2.00 million, IBRD loan). This component consists of: i) provision of technical assistance for project management and implementation including advisory and quality control services to the PPMO, PMOs, and PIUs in support of the project’s infrastructure investments and on institutional and financial sustainability issues; ii) provision of technical assistance to support the development of strategic master plans and/ or other specific sector studies as the Bank may agree for sustainable environmental infrastructure service provision in small towns; and iii) provision of training and carrying out of study tours to build capacity of the PPMO, PMOs, and PIUs on technical, operational and institutional aspects of sustainable environmental infrastructure service provision in small towns.

Which safeguard policies are triggered, if any? Ref. PAD D.VI., Technical Annex 10

Environmental Assessment (OP/BP 4.01), Physical Cultural Resources (OP/BP 4.11), Involuntary Resettlement (OP/BP 4.12), and Safety of Dams (PO/BP 4.37) Significant, non-standard conditions, if any, for: Ref. PAD C.VI. Board presentation: none

Loan/credit effectiveness: none

Covenants applicable to project implementation:

1. Disbursement Conditions:

 Subsidiary Loan or Implementation Agreements: no withdrawal shall be made for payments made by or for the benefit of a project participant under its respective sub- category until the respective Subsidiary Loan Agreement or Subsidiary Implementation Agreement (as the case may be) has been entered into between the project participant concerned and its respective project company, satisfactory to the Bank.

2. Dated Implementation Covenants:

 Operations and Management (O&M) Action Plans: Zhejiang shall cause the concerned project participants by no later than January 30, 2012, to furnish to the Bank a time- bound operation and maintenance action plan prepared following terms of reference satisfactory to the Bank: i) for the management of water supply in the Wucheng District; ii) for the management of wastewater in Jiande City, Qujiang District, Youbu Town/ Lanxi County, and Jiangshan Town/ Pan’An County; and iii) for the management of solid waste in Jiande City; and by no later than June 30, 2012 to commence implementation of the action plans, taking into account the comments, if any, made by the Bank thereon.

3. Financial Covenants:

 Financial Reports and Projections. Zhejiang shall cause each project participant implementing water supply activities in Zhuji City and Wucheng District or wastewater treatment activities in Jiande City, Qujiang District, Youbu Town/ Lanxi City, Jiangshan Town/ Pan’an County to furnish to the Bank by September 1 each year, starting September 1, 2012, audited financial statements related to the water supply and wastewater operations of the project companies of the project participants concerned and financial projections, in accordance with terms of reference satisfactory to the Bank, for their respective project companies; and Jiande City to furnish to the Bank by September 1 each year, starting September 1, 2012, a financial report covering costs and revenues from its solid waste operations and financial projections, in accordance with terms of reference satisfactory to the Bank, for its project company.

A. STRATEGIC CONTEXT AND RATIONALE

I. Country and sector issues

1.. Socio-Economic and Urban Development Trends in Zhejiang. Zhejiang Province is located in the southern wing of the Yangtze River Delta, one of China’s largest urban agglomerations, and has experienced rapid economic growth over the past decade. In 2009, with only 1% of the nation’s land area and 3.8% of its total population, Zhejiang’s GDP reached RMB 2.28 trillion, accounting for 6.8% of China’s total GDP. Its GDP per capita was US$ 6,490, ranked 4th after Beijing, Shanghai and Tianjin. Zhejiang is also one of the most urbanized regions in China, with 57.9% of the population living in cities and towns in 2009, compared to the national average urbanization rate of 46.6%. It is expected that by 2020, Zhejiang’s urbanization rate will reach 72%, which will add 5 to 6 million people to the urban population. A very distinct feature of Zhejiang’s urbanization trajectory has been that small towns, although at the lowest level in the urban hierarchy, have served as a major engine of economic growth. While fully recognizing the benefits of agglomeration economies and the role of larger cities, Zhejiang’s 11th Five-year Plan (2006-10) also aims to further promote the development of small towns, including in their role as the connecting tissue between rural and urban areas.

2. Environmental Challenges in the Qiantang River Basin. The Qiantang River, known as the “mother river” of Zhejiang, is the province’s largest river and one of eight major water bodies in the province. With a total area of 49,113 km2, the Qiantang River Basin covers five municipalities, including Hangzhou, Quzhou, Jinhua, Shaoxing and Lishui, consisting of 27 counties/ cities/ districts and 188 towns. With a total population of 15 million, the Qiantang River Basin accounts for about 32% of Zhejiang’s total population and 35.3% of its GDP. However, Zhejiang’s rapid growth and urbanization has put significant pressures on the water quality of the Qiantang River. The most recent Zhejiang Environmental Status Report (2008) found that although 73% of the Qiantang River can meet Class I to III water quality, only 62% of the monitored river water quality is meeting its stipulated quality standards. The equivalent pollution loads from industrial, domestic and non-point sources are 45%, 36% and 19% respectively. Given that the Qiantang River is the water source for 80% of Hangzhou City and most counties in the basin, the environmental pollution poses serious threat to the living conditions and safety of drinking water to a large number of urban and rural residents.

3. Environmental Infrastructure Services in Small Towns. Zhejiang’s larger cities, such as Hangzhou, Ningbo and Shaoxing have made good progress in addressing urban environmental challenges with significantly increased urban environmental infrastructure service coverage rates. However, small towns are lagging behind. For example, water supply is estimated to be safe in only 29% of Zhejiang’s small towns; wastewater treatment coverage rate in small towns is only 26%, compared to 73% for cities (including county towns) and sanitary solid waste disposal facilities are almost non-existent. One of the reasons for the lower service coverage rates is the much weaker financial position of small towns and the resulting lower public infrastructure investment rates. For example, fiscal revenue per capita in the towns included in this project is estimated to be only 5% to 40% of that in the provincial capital, Hangzhou.

4. Limited Institutional and Management Capacity. In addition to financial constraints, the institutional and technical capacity to manage urban environmental infrastructure is also very limited. Small towns are only at the beginning of introducing basic institutional reforms, with solid waste and wastewater entities not corporatized, and services provided, if at all, in a highly fragmented manner. Revenues from tariffs are not sufficient to cover full costs, with wastewater tariffs as low as RMB 0.4-0.5/m3, and solid waste fees, if applied, only inconsistently collected. Some private sector participation in infrastructure exists, but principally in form of ‘Built Operate Transfers’ (BOTs) arrangements for wastewater treatment plants, but often with mixed results due to a lack of integrated planning for network connections or because of financial constraints. Even in bigger cities, the challenges of operating urban environmental infrastructure in a sustainable manner cannot be underestimated, with many wastewater treatment plants in Zhejiang’s cities not operating at their design capacities. These facts are symptomatic of the challenges of urban infrastructure service provision in China, which are likely to be more acute, the lower down in the urban hierarchy services are provided.

5. Zhejiang’s Response to Environmental Problems in the Qiantang River Basin. Zhejiang Provincial Government has fully recognized these challenges and has put in place provisions to improve urban environmental infrastructure services, including in the 11th Five Year Plan for Qiantang River Basin, the Eco-Province Construction Plan, and the most recent Environmental Protection “811” Action Plan. The overall government strategy is to provide financial and technical support to counties/ towns to invest in urban environmental infrastructure and to prioritize environmental protection in the Qiantang River Basin. The government’s goal is to ensure that, by 2020, the required water quality standards for the Qiantang River are fully met. Given that the larger cities in the Qiantang River Basin are more advanced in terms of improving their urban environment, increasing service provision in small towns is a key next generation environmental management challenge. The government’s specific targets for small towns are to increase, by 2020, service coverage for safe water supply to 100%; for wastewater treatment to 70%; and for sanitary solid waste collection and disposal to 90%. The overall goal is to reach 100% of the required water quality standards in the Qiantang River by 2020.

II. Rationale for Bank involvement

6. The World Bank has to date implemented two urban projects in Zhejiang Province, one of which, the Zhejiang Urban Environmental Project, is still ongoing and is expected to close in FY11.1 These projects have focused on improving urban environmental infrastructure and protecting cultural heritage in the larger cities in Zhejiang, including in Hangzhou, Ningbo, Shaoxing, and Wenzhou. As mentioned above, Zhejiang has made good progress on enhancing environmental protection in most of its larger cities. Service coverage rates are increasing and institutional reforms are progressing steadily with service providers fully corporatized, and in the case of Ningbo, regional consolidation of wastewater service provision gradually increasing. It is therefore a natural progression to address, through the new Bank-financed project in the Province, the next generation of urban environmental infrastructure challenges, namely those pertaining to small towns.

1 There are also two Bank urban projects focusing on Ningbo Municipality: the Ningbo New Countryside Development Project and the Ningbo Water and Environment Project. 2

7. The project is also part of a series of recent urban projects in the Bank’s portfolio in China which increasingly focuses on small towns (i.e., Sichuan Small Towns Project), urban- rural integration (i.e., Chongqing Urban Rural Integration Project), and new country side development (i.e., Ningbo New Country-side Development Project). The importance of addressing critical development challenges in small towns is also highlighted by the 2009 World Development Report (WDR) on economic geography which stresses the central role small towns play as the “connective tissue between urban and rural areas”.

III. Higher level objectives to which the project contributes

8. This project will support three out of the five themes of the 2006-2010 Country Partnership Strategy (CPS): (i) reducing poverty, inequality, and social exclusion; (ii) managing resource scarcity and environmental challenges; and (iii) improving public and market institutions. By focusing infrastructure investments in small towns, the project will also support the objectives of China’s 11th Five-year Plan (2006-10) which aims to facilitate the development of small towns and secondary cities as a key component of an optimized urbanization strategy, promote urban-rural integration and build a more environmentally friendly society.

IV. China Country Partnership Strategy (CPS)

9. A Progress Report on implementation of the 2006-2010 China CPS was discussed by the Board in January 2008 (Report 46896-CN). Since that time, implementation progress has continued to be strong. The program has been carried out as envisaged, in alignment with the Government’s 11th Five-year Plan objectives. During this CPS period, the Bank has lent US$6.9 billion for 49 projects. Portfolio performance continues to be solid—with a realism index of 100 percent. Eleven of 81 projects under implementation are rated as problem projects. World Bank Group programs have provided global knowledge, best practice and experience to support China’s expanding global engagement and south-south cooperation. Bank Group financing and TA have enhanced the piloting of innovative approaches as well as establishing replicable demonstration models for scaling-up. A number of projects have also addressed the needs of under-served areas and vulnerable groups. A Completion Report on the 2006-2010 CPS is in progress and its lessons will inform the new Strategy.

10. From July 1, 2005 through June 30, 2010, IFC invested US$2.4 billion for its own account in China (of which US$1.4 billion in loans and US$1 billion in equity) in over 100 projects in financial markets, manufacturing and infrastructure sectors. In addition, IFC mobilized about 400 million in B-loans from participants during the same period. IFC policy recommendations and advisory services have facilitated the continued transition to markets and strengthened competition and productivity. IFC plans to deliver US$450-500 million of investment in FY11 to support the strategic themes of climate change and balanced rural-urban development, as well as supporting South-South investment. MIGA has been active in supporting both FDI into China and Chinese outward investment. During the CPS period, MIGA has supported 10 projects in China with gross exposure of US$188.52 million. The vast majority of projects supported are in the infrastructure sector (96 percent), with the remaining 4 percent in services and manufacturing. MIGA has cooperated with Sinosure and China Eximbank and other partners in support of Chinese outward investments. MIGA, along with FIAS, also provided TA

to the central and provincial government to support both FDI into China and Chinese outward investment.

11. The current CPS was expected to conclude in December 2010, however, the Government has requested that the new CPS be co-terminous with, and aligned to, its 12th Five- year Plan covering 2011-2015 which will be available in Spring 2011. The new CPS will therefore be completed along this timeframe, and will be submitted to the Board for its consideration with the first operation of FY12. The Bank Group is supporting the Government in 12th FYP development, and preliminary consultations on the new Partnership Strategy have been initiated in parallel. Including this operation, for the remainder of FY11, the Bank is working on a US$1.5 billion program of 11 operations, all fully consistent with the CPS objectives, supporting investments in energy efficiency, environmental improvements, rural roads, water conservation, small towns, inland waterways, railway and forestry projects.

B. PROJECT DESCRIPTION

I. Lending instrument

12. The lending instrument is a Specific Investment Loan. The loan is a single currency, variable spread loan of US$100 million, with a maturity of 20 years, including 5 years grace period at the Bank’s standard rate for LIBOR based US$ loans. There will also be a front end fee of 0.25%.

II. Program objective and Phases

13. Not applicable

III. Project development objective and key indicators

14. Project Development Objective. The project development objective is to assist Zhejiang Province in improving access to sustainable urban environmental infrastructure in selected cities, districts and towns in the Qiantang River Basin. This will be achieved by supporting infrastructure investments in the water supply, wastewater and solid waste sectors, as well as capacity building activities to ensure the long term sustainability of the assets created.

15. Progress towards meeting the PDO would be measured through a variety of indicators detailed in the project’s results framework, including:

 Number of people served with potable water supply;  Amount of COD, TN, and TP reduced (tons/year)2;  Number of people served with sanitary solid waste collection and disposal;  Number of agreed O&M action plans operationalized;  Number of project areas/ cities wastewater tariffs introduced.

2 Chemical Oxygen Demand (COD), Total Nitrogen (TN), and Total Phosphorous (TP). 4

16. As the project constitutes only a small part of Zhejiang Province’s large investment program to upgrade urban environmental infrastructure services in small towns, the project aims to contribute to the Province’s own activities by helping to create models for sustainable small town environmental infrastructure services, especially in terms of institutional, operational and financial sustainability.

IV. Project components

17. Project Scope. The total project costs are estimated to be US$216 million (including contingencies and financing charges) which implies - with a 46% financing percentage - an IBRD loan of US$100 million. The project consists of the following four components subject to modifications, consistent with the project development objective, the Borrower and the Bank may agree upon.

 Component 1: Water Supply and Distribution (US$35.64 million, of which the IBRD loan is US$18.99 million). Construction and/or installation of water supply treatment plants and clear water distribution networks to enhance water supply for residents in the suburban areas and adjacent towns in: Zhuji City of Shaoxing Municipality and Wucheng District of Jinhua Municipality.

PPMO, PMOs, and PIUs on technical, operational and institutional aspects of sustainable environmental infrastructure service provision in small towns.

V. Lessons learned and reflected in the project design

18. The project draws on lessons from similar Bank projects in China, including from Implementation Completion Reports (ICRs), assessments by the Independent Evaluation Group, and other Bank reports, including China Urban Development Program: A World Bank Portfolio Review (2007); Stepping Up: Improving the Performance of China 's Urban Water Utilities (2007); Town Water Supply and Sanitation: Challenges, Solutions, and Guidelines (2008); Financing Water Supply and Sanitation Investments (2005); Characteristics of Well Performing Public Water Utilities (2006); and Models of Aggregation for Water and Sanitation Provision (2005). In particular, the following lessons were considered during preparation.

19. Institutional Sustainability. Small towns often fall into a ‘management gap’: neither the community-based management models effective in rural areas, nor the utility models that work in larger urban centers can be easily applied. As a result, the project explored opportunities of horizontal and vertical consolidation of service provision. Where possible, existing water, wastewater, and solid waste companies or agencies in nearby towns or larger cities were selected as the responsible implementing unit. In some project cities this was achieved during the project preparation phase (i.e., the Jiande City Meicheng Town solid waste and the Tonglu County Jiangnan Town wastewater subprojects). For others, continued optimization of institutional arrangements will need to be supported during implementation.

20. Financial Sustainability. Lessons learned from the Bank’s urban projects in China suggest that tariff increases follow agreed domestic procedures and are only in a very limited way, if at all, influenced by Bank projects, even if financial covenants are included. More attention was therefore paid to ensuring a balanced capital expenditure financing strategy and mobilizing higher level government grant support. Reflecting lessons learned on the gradual nature of tariff increases, the cost recovery objective is to cover only O&M costs as opposed to requiring full cost recovery, except for the water supply components where tariffs are already at cost recovery levels. The agreed debt allocation strategy is that for all components, except for water supply, debt is allocated to county governments and not to the implementing agencies.

21. Counterpart Funding. Small towns often face difficulties in raising counterpart funding to support their proposed investments. As a result, the Provincial Government decided to provide grant support to all project cities/ counties, using existing provincial regulations, at about 5% of total project investments. Furthermore, small towns with weak financial capacity were screened out by the Provincial Finance Bureau at the project identification stage. During project preparation, counterpart funding strategies were agreed with the Provincial Finance Bureau and all participating project cities and counties.

22. Technical Capacity. Technical capacity in small towns is generally found to be low, both in terms of project management and in terms of sustainable operation of the assets created. As a result, dedicated Design Review Advisory (DRA) consulting services, under Package A of the IST component, are included in the project to ensure that all project cities, counties, and

towns receive the required support to implement the project satisfactorily. Particular attention will be paid to in-depth review of all subprojects’ designs to minimize contract variation orders. In addition, Package C of the IST component aims to build capacity through study tours and training in key technical areas.

23. Overdesign and Cost Estimates. Unreliable baseline information, inadequate sector planning and optimistic projections of economic development often lead to over design of the planned infrastructure investments. During project preparation designs of the proposed facilities were therefore developed based on a combination of accurate future demand projections, cost- effective technical specifications, and appropriate design standards. In addition, cost estimates were reviewed to ensure that they are as close to market prices (as opposed to norms) as possible.

VI. Alternatives considered and reasons for rejection

24. Programmatic Approach. During preparation, opportunities to introduce a programmatic approach under this project were explored whereby an operational manual would be agreed based on which some sub-projects would be appraised during project implementation. A programmatic approach was investigated as lessons from other Bank-financed small town projects indicate that subprojects could drop out during implementation. A programmatic approach would, in principle, allow for a greater flexibility to respond to client demand by allowing for the incorporation of additional investments in support of the project development objective. However, Zhejiang DRC and NDRC requested that the Bank identifies and appraises all subprojects upfront, therefore deciding against a programmatic approach under this project.

25. River Basin Management. The Bank team also explored adopting an Integrated River Basin Management Approach (IRBM) approach given that the equivalent pollution loads from industrial, domestic and non-point sources are 45%, 36% and 19% respectively. However, the Provincial Project Management Office (PPMO) decided that applying an IRBM approach under this project was not appropriate as Bank-financing is targeted only to point pollution sources and that Bank financing constitutes only a small fraction of the total investment program to address water pollution issues in the Qiantang River Basin. Furthermore, the PPMO is located at the Construction Commission whose mandate includes urban infrastructure construction and not broader water resource management challenges.

C. IMPLEMENTATION

I. Partnership arrangements (if applicable)

26. Not applicable

II. Institutional and implementation arrangements

27. Provincial-level Project Implementation. Implementation arrangements at the provincial level are the same as those for the existing Zhejiang Urban Environmental Project (ZUEP) which are functioning well. The Provincial Leading Group is headed by the Vice Secretary General of Zhejiang Provincial Government and comprises representatives from all key Provincial Government agencies. The PPMO is housed at the Provincial Construction 7

Commission and comprises members of the Provincial Development and Reform Commission (DRC) and the Finance Bureau. The PPMO Director is the Division Chief in the Foreign Economic Liaison Division in the Provincial Construction Commission. The PPMO is responsible for overall coordination of project management and implementation.

28. Project City/ County/ Town-level Project Implementation. All project cities and counties have established local Leading Groups, comprising all key government agencies. Local Project Management Offices (PMOs) and Project Implementing Units (PIUs) have also been established. Local PMOs will be responsible for overall project coordination, and local PIUs for project implementation and the operation of the assets created under the project.

29. Project Management and Implementation Support. Given that all project cities and counties are new to Bank projects, DRA consultants, funded under the Package A of the IST component, will be engaged to support the PPMO, PMOs and PIUs in project management, contract management, detailed design review, bid document review, and project monitoring and reporting. Project implementation support will be provided at two levels: general project management support for the project as a whole, and specific project management support to individual project components.

III. Monitoring and evaluation of outcomes/results

30. Project monitoring arrangements follow standard Bank procedures. Annex 3 defines the project outcome indicators, all of which have been agreed with the PPMO and the local PMOs. The PPMO will consolidate all data at the project level and produce annual reports to monitor progress. Baseline data for results indicators were defined during project preparation. The results framework identifies overall project outcome indicators for each project sector, and intermediate outcome indictors for each sub-project.

IV. Sustainability

31. Zhejiang Provincial and Local Governments’ commitment to improve urban environmental infrastructure in small towns, and the experience the PPMO gained through past and existing Bank loans in project management, assures a high probability that the project will be implemented at high-quality standards. However, long-term institutional, operational, and financial sustainability are critical challenges under this project. To address these issues, during preparation, special attention was paid to ensuring appropriate technical designs (i.e., avoiding over design, selecting least cost solutions), sustainable institutional arrangements (i.e., consolidation of service provision), and financing strategies (i.e., higher level government support and appropriate debt allocation). To support implementation, the IST component will consist of three packages: Package A - Project Management and Implementation Assistance; Package B - Master Planning for Small Town Urban Environmental Infrastructure in Zhejiang Province; and Package C - Training and Study Tours.

V. Critical risks and possible controversial aspects

Table 1: Summary of Risks and Risk Mitigation Measures Risk Rating Risk Risk Mitigation Measures with Mitigation To project development objective As is common in projects with  The number of sub-projects was limited to eleven, Substantial many sub-components, some thereby reducing the risk of projects dropping out. components may drop out, which  If loan savings materialize, additional components in could lead to changed project support of the project development objective would be outcomes and/ or loan savings considered at mid-term review.

To component outputs/results Weak capacity in small towns  Ensuing strong project implementation support through Substantial may impact successful project IST for participating project cities and towns. implementation.  Involving experienced infrastructure operators to optimize implementation arrangements (i.e., consolidation of service providers, etc.). Financial sustainability for  Aiming to achieve full cost recovery through tariffs only Modest environmental infrastructure is gradually over time. difficult to achieve in light of low  Adopting a balanced strategy of financial support from tariffs and high capital higher level government and optimal debt allocation. investments. Lack of counterpart funding in  Providing higher level government financial support for Modest financially weak cities/ counties counterpart funds. may slow down project  Screening out of financial weaker project cities at project implementation. identification. Technical risks of not connecting  Scrutinizing technical designs and standards, with a Modest to sewer networks and of properly particular emphasis on ensuring connectivity to sewer operating wastewater facilities. networks and avoiding over design of treatment facilities. Meeting the Bank’s procurement  Completed financial management and procurement Modest and financial management assessments. requirements may be a challenge  Placing special emphasis on training and capacity given that project cities are new building, so as to help project cities meet all financial to Bank policies. management and procurement requirements. Overall Risk Rating Modest

VI. Loan/credit conditions and covenants

32. Loan Effectiveness: none.

33. Disbursement Conditions:

34. Dated Implementation Covenants:

35. Financial Covenants:

 Financial Reports and Projections. Zhejiang shall cause each of project participant implementing water supply activities in Zhuji City and Wucheng District or wastewater treatment activities in Jiande City, Qujiang District, Youbu Town/ Lanxi City, Jiangshan Town/ Pan’an County to furnish to the Bank by September 1 each year, starting September 1, 2012, audited financial statements related to the water supply and wastewater operations of the project companies of the project participants concerned and financial projections, in accordance with terms of reference satisfactory to the Bank, for their respective project companies; and Jiande City to furnish to the Bank by September 1 each year, starting September 1, 2012, a financial report covering costs and revenues from its solid waste operations and financial projections, in accordance with terms of reference satisfactory to the Bank, for its project company.

D. APPRAISAL SUMMARY

I. Economic and financial analyses

36. Institutional Set-up. The three sectors covered in this project, i.e., water supply, wastewater and solid waste, are at different stages of institutional and financial maturity. While the water sector already has reached a relatively advanced level of institutional and financial autonomy, the wastewater and solid waste sectors are in very early stages of institutional development and are only now being commercialized. For most wastewater and solid waste subprojects, companies are only being established in the context of this project, with government departments currently providing rudimentary collection and treatment services.

37. Tariffs and Cost Recovery. Water supply tariffs are set at RMB 1.40-1.45/ m3 for residential customers, a level sufficient to cover full O&M costs as well as capital expenditures. Wastewater tariffs and solid waste user fees, on the other hand, are far below full cost recovery levels and are yet to be levied in some of the project towns (although wastewater tariffs and solid waste user fees do exist in the core urban areas in all project cities and counties). Wastewater tariffs range between RMB 0.2/m3 to RMB 0.4/m3 for residential customers, a level which is below Zhejiang Provincial Government’s recommendation of RMB 0.8/m3 for county towns. The solid waste user fees are set at RMB 24/year for households in the project towns of Jiande City, but they are not collected systematically and cover only the cost of street cleaning.

38. Financial Projections. The specific objective under this project is to support a gradual move toward recovery of O&M costs, except for the water supply components which are already able to cover full costs. Furthermore, the project financing strategy does not place undue burden on the emerging implementing companies, with World Bank debt repayment responsibility allocated to the local county Finance Bureaus, except for the water supply components which are financially stronger. In addition, all counterpart funds are provided as equity grant contributions, including from earmarked funds from the Zhejiang Provincial Finance Bureau. Based on this financing plan, financial projections indicate, as shown in Table 2, that tariffs will only need to increase gradually over time to achieve financial sustainability for all implementing agencies, except in the case of solid waste where more significantly increased user fees would be required to cover even O&M costs.

Table 2: Current and Projected Tariff Levels Water Supply Component Current Water Supply Tariffs Projected Av. (RMB /m3) Tariffs (RMB /m3) Residents Average Full Costs 1. Zhuji Water Supply and Distribution 1.45 1.7 2.0 2. Wucheng Water Supply and Distribution 1.40 1.7 1.7 Wastewater Component Current Wastewater Tariffs Projected Av. (RMB /m3) Tariffs (RMB /m3) Residents Average O&M 3. Jiande Wastewater Collection and Treatment 0.4 0.9 1.0 4. Qujiang Wastewater Collection and Treatment 0.2 0.5 0.9 5. Youbu Wastewater Collection and Treatment Currently not levied in the project 1.2 area 6. Jianshan Wastewater Collection and Treatment Currently not levied in the project 1.1 area 7. Shenze Wastewater Collection 0.4 0.9 NA* 8. Yunshan Wastewater Collection 0.4 0.9 NA* 9. Jiangnan Wastewater Collection Currently not levied in the project NA* area

10. Longyou Wastewater Collection Currently not levied in the project NA* area Solid Waste Component Current Solid Waste User Fee Projected Av. Fee (RMB/household/year) (RMB/h/y) Residents O&M 11. Meicheng Solid Waste Management 24 200 * Note: No projections were prepared as the investments are for sewerage networks.

39. Tariff Affordability. The current and projected tariffs are affordable for the residents in all project cities/ counties even under conservative planning assumptions (i.e., low growth in disposable income). The combined water and wastewater bill is around 1% of household income for households in the lowest income quintile. If solid waste is included, the combined bill would still not exceed 2% of household income.

40. Fiscal Analysis. All project cities/ counties have sufficient financial resources to contribute the required counterpart funds and service the debt incurred under the project. Counterpart funds and debt service constitute, at a maximum, 10% and 2% of the total budget revenues respectively. In all project cities and counties, the Bank project therefore is only a small part of total budget revenues. Furthermore, the debt/ GDP ratio for all project cities/ counties is at acceptable levels reaching 23% in only one county.

41. Economic Analysis. The main economic benefits are an improved local environment, as well as improved living standards and public health of local residents in the project areas. Economic Rates of Return (EIRRs) were calculated for the water supply and wastewater components as summarized in Table 3. Results of the sensitivity analysis show that the EIRR of each component is above the 10% threshold required for project appraisal even under the assumptions of both a 10% decrease in economic benefits and a 10% increase in total costs. Therefore, the investments are assessed to be robust from an economic point of view. For the solid waste component, cost-effectiveness analysis was adopted to compare different technologies and landfill sites.

Table 3: Economic Rates of Return

Water Supply Component EIRR (%)

1. Zhuji Water Supply and Distribution 20.05 2. Wucheng Water Supply and Distribution 16.51

Wastewater Component EIRR (%)

3. Jiande Wastewater Collection and Treatment 27.52 4. Qujiang Wastewater Collection and Treatment 24.38 5. Youbu Wastewater Collection and Treatment 22.92 6. Jianshan Wastewater Collection and Treatment 24.16 7. Shenze Wastewater Collection 17.67 8. Yunshan Wastewater Collection 14.49 9. Jiangnan Wastewater Collection 19.23 10. Longyou Wastewater Collection 25.03

II. Technical

42. All investment components have been prepared by domestic Design Institutes with assistance from domestic and international consultants. The project design is technically sound and based on good engineering practice.

43. Water Supply and Distribution. Water supply schemes will abstract raw water of good quality from existing dams and are least cost options. The investments are in line with the national water supply development strategy which calls for extension of urban water supply

services to adjacent rural settlements. All water supply schemes include action plans for water supply source protection. In addition, routine water quality monitoring and spot checks, either by the concerned authority or by independent laboratories, will be built into the operation of all water supply schemes.

44. Wastewater Treatment Technology, Design Capacity and Sewage Connections. The selected treatment technology was determined by the stringent treated effluent discharge standards as well as limited land availability. The design capacity of the wastewater treatment plants reflects projected treatment demand. To ensure full functionality of the wastewater treatment plants, investments have been allocated for improved sewer connections, including through upgrading and rehabilitating existing sewer networks. Combined sewer overflow structures were also considered for the rehabilitation of existing sewer networks.

45. Wastewater Effluent Discharge Standards. Based on the stipulated Qiantang river water functional zones, river assimilation capacity, and river water quality standards, three of the four project cities/ counties are required to meet treated effluent standards of Class 1-A and the remaining one of Class 1-B. Secondary treatment processes evaluated were: (i) Anaerobic- anoxic-oxic process; (ii) oxidation ditches; and (iii) sequencing batch reactors. The treatment technology proposed for the three wastewater projects (Qujiang, Youbu, Jianshan) is a variation of the sequencing batch reactor (SBR) process, based on smaller land occupation and compact layout of the reaction tank compartments; capacity to remove biological nutrients; ability to produce high quality effluent; minimization of capital and operating costs; stable effluent quality; high efficiency of treatment; and experience in construction and operation of SBR in China. For the Jiande wastewater project, an extension of the existing treatment plant, an oxidation ditch will be used. For tertiary treatment, chemical coagulant addition followed by sedimentation and filtration, because they are the least cost option to comply with Class 1-A effluent standards.

46. Solid Waste Management. Besides the construction of a sanitary landfill site, this component includes solid waste collection, transportation, as well as capping of existing open dumps. Therefore, the project follows a “Cradle to Grave” approach which will enhance the sustainability of the services provided.

III. Fiduciary

47. Financial Management. A Bank assessment of the adequacy of the financial management systems for the project, based on guidelines issued by the Financial Management Sector Board on March 1, 2010, concluded that the project meets Bank financial management requirements, as stipulated in OP 10.02. Taking into account the risk mitigation measures proposed under the project, the financial management risk is assessed as moderate.

48. Procurement. Procurement assessment of the PPMO, PMOs, and PIUs was carried out. The Procurement Plan and Procurement Management Manual are in place and the PPMO is organizing procurement training for all staff from local PMO and PIUs. The procurement risk is assessed as moderate.

IV. Social

49. Involuntary Resettlement. The project will improve the environment and promote the quality of life for local residents. However during project construction, negative social impacts will be generated due to land acquisition and resettlement. The project triggers OP 4.12.

50. Alternatives Considered. Design alternatives were considered to avoid and/or mitigate resettlement impacts. Through extensive consultations with, and participation of, affected people and the responsible local authorities, resettlement impacts were properly mitigated, fully investigated and documented, and measures for livelihood and household restoration were explored. Individual resettlement plans (RP) were prepared for all sub-projects which form the basis for the consolidated RP. In addition, a resettlement policy framework (RPF) was prepared in case new sub-projects would be added during implementation.

51. Resettlement Impacts. The key resettlement impacts include: 99 ha collective land will be permanently acquired, from 596 household with 2014 persons; 82 ha land will be temporarily occupied, including 34 ha of collective land from which 711 households with 2642 persons derive a portion of their income; and 183 households with 650 persons will have their houses demolished.

52. Resettlement Plans. The RPs, compliant with the Bank requirements, were endorsed by the PPMO and local governments and will be implemented by the local PMOs under the overall coordination of the PPMO. They were publically disclosed in local libraries and through announcements in local newspapers in April 2010, and submitted to the Bank’s InfoShop for disclosure in June 2010.

53. Linked Activities. Five activities outside of the project scope but closely linked and not financed by the Bank were identified during preparation: two have completed resettlement within two years prior to the identification mission; the other three will undertake resettlement during the project. Completed resettlement is reflected in Annex 3 of the RP. Resettlement in the remaining linked activities will be implemented according to the RPF.

54. Social Assessment. A Social Assessment (SA) informed project design and resettlement. The key SA findings relate to: stakeholder attitudes to the project; technical and/ or institutional capacity of local government; social risk analysis and mitigation measures in project preparation, implementation and operations; identification of vulnerable people; affordability of water and wastewater tariffs and solid waste fees; and willingness to pay. The SA confirmed that OP 4.10 is not triggered

V. Environment

55. Environmental Assessment. Environmental Assessments (EA) were conducted by accredited EA consulting institutes for each of the eleven sub-projects and a consolidated EA for the proposed project was prepared. The documents have been prepared in accordance with China legal and EA policy frameworks as well as applicable Bank safeguard policies. The project triggers OP4.01.

56. Environmental Benefits. The project brings positive environmental benefits and contributes to Zhejiang’s strategy of scaling-up environmental infrastructure provision and improving the water quality of the Qiantang River. Specifically, the benefits include an overall annual reduction of CODcr by 4,510 tons/y and T-N by 300 tons/y by 2015 at four WWTPs financed under the project; water supply for approximately 360,000 people in two cities; and municipal solid waste disposed in an environmentally sound manner in Jiande City.

57. Principal Impact and Mitigation Measures. The principal potential adverse impact during operation includes the need to dispose safely of the WWTP sludge and water quality impact in the mixing zones of the effluent outfall, and the generation of leachate and landfill gas. The main potential adverse impacts during construction include excavation, construction spoil disposal, noise and disruption of urban services. The EA specifies mitigation measures, environmental monitoring, institutional arrangements, training and equipment requirements, together with budget estimates for implementation of the mitigation measures and monitoring plans. WWTP sludge will be dewatered and sent to nearby sanitary landfills for safe disposal. Outfall location will be carefully selected to avoid sensitive receptors and a higher discharge standard will be applied, if warranted. Leachate pollution will be eliminated by the installation of an impermeable membrane liner, and the leachate will be collected for further treatment. Landfill gas will be collected and flared in the short term and utilized when there is adequate gas generation at the landfill. The mitigation measures for the construction phase (spoil, noise etc.) will be entered into bidding documents and supervised by relevant institutions. Due diligence for associated facilities was also conducted.

58. Physical Cultural Resources. Four old bridges on the Youbu Stream have been identified by a survey as the Physical Cultural Resources (PCRs) which are located in the vicinity of the Youbu Town subproject. To avoid any adverse impact on the four old bridges during construction, mitigation measures in line with Bank policy and the national regulatory and legal framework concerning cultural heritage, have been agreed on with the concerned parties. These include mitigation of vibration, dust, noise, solid and water pollution; avoidance of night- time construction; minimization of traffic in sensitive areas, and development of temporary traffic plans to detour traffic around construction sites. Chance finds procedures are also included as a mitigation measure.

59. Public Consultations and Information Disclosure. In accordance with World Bank safeguard policies and Chinese EA regulations, public consultations were conducted during the environmental assessment, including public consultation meetings, and questionnaire surveys on project affected people and other key stakeholders. Their opinions and concerns have been taken into account in the EA process and project design. The EAs & EMPs were locally disclosed in April 2010 through announcements published in local newspapers and on the websites of local cities and counties. The safeguard documents were sent to the Bank InfoShop for disclosure in June 2010.

60. Safety of Dams. The project does not finance the construction of dams, but some of the water supply systems to be constructed under the project would draw directly from reservoirs controlled by existing dams: Xinfan Dam in Wucheng District and Qingshan Dam in Zhuji City.

The Bank’s dam safety expert confirmed that both dams are operationally safe. O&M and Emergency Preparedness Plans (EPP) for both dams exist and are acceptable. During project implementation the O&M and safety plans will be monitored to ensure that the Project complies with the OP 4.37.

VI. Safeguard policies

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

VII. Policy Exceptions and Readiness

61. The project fully complies with Bank policies.

62. The Safeguard Policy on Resettlement, OP 4.12 and the Safeguard Policy on Environmental Assessment, OP 4.01, require the Borrower to prepare RAPs and EA reports in a form, manner, and language that are understandable to the displaced persons and local NGOs, which in this case would be Chinese. The Chinese language RAPs and EA reports for the subprojects have been reviewed by the Bank, meet the requirements of OP 4.12 on involuntary resettlement, and OP 4.01 on environmental assessment, and have been publicly disclosed. An English language comprehensive summary of the RAPs and an English language comprehensive summary of the EA reports have also been prepared, reviewed and disclosed through the Bank’s InfoShop.

63. In April 2007 Bank senior management endorsed “Guidelines for the use of English Translation of Summaries of Environmental Assessment Reports and Resettlement Action Plans in China Projects” which allowed the creation of English language comprehensive summaries of RAP and EA reports for projects that meet certain criteria. On February 12, 2008, the Guidelines were enhanced and endorsed by Bank senior management for a further period of two years until February 2010. In accordance with these guidelines, the applicable English translation waivers were granted at the PCN stage on September 17, 2009. The Regional Safeguards Secretariat has confirmed that the proposed project meets these criteria. Accordingly, English language comprehensive summaries of the RAPs and EA reports covering all relevant parts of the Chinese-language EA reports and RAPs were created. Chinese-speaking Bank safeguard specialists have reviewed both the English language comprehensive summaries of the RAPs and

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas 16

EA reports and the Chinese language full-length safeguard documentation approved and adopted by the Project Bank experience over the years has established the general practice of requesting the Implementing Agencies, and have confirmed the consistency between the English and Chinese documentation, and compliance of the full set of safeguards documents with Bank policy.

Annex 1: Country and Sector or Program Background CHINA: Zhejiang Qiantang River Basin Small Town Environment Project

1. Socio-Economic and Urban Development Trends in Zhejiang Province. Located in the southern wing of the Yangtze River Delta, Zhejiang Province has experienced rapid economic and demographic growth over the past decades. From 1995 to 2007, the Province’s GDP has increased at an annual rate of 14.9%, one of the highest provincial growth rates in China. In 2009, with only 1% of the nation’s land area and 3.8% of its total population, Zhejiang’s GDP reached 2.28 trillion Yuan, accounting for 6.8% of China’s total GDP. Its GDP per capita was USD 6,490, ranked 4th in China, after Beijing, Shanghai and Tianjin. In line with its strong economic development, Zhejiang’s urbanization has also increased rapidly at an annual rate of 2.1%, much higher than the national average. Zhejiang is now one of the most urbanized regions in China with 57.9% of the population living in cities and towns in 20093, up from 22% in 1978. It is expected that by 2020 the urbanization rate of Zhejiang Province will reach 72%, corresponding to an annual increase in urban population of 1-1.2% percentage points. 5 to 6 million people are expected to be added to the urban population over the same period.4

2. The Qiantang River Basin in Zhejiang Province. The Qiantang River, also known as the “mother river” of Zhejiang Province, is the largest river and one of the most important water sources in Zhejiang. With a total area of 49,113 km2, the Qiantang River Basin covers five municipalities/ prefectures, including Hangzhou, Quzhou, Jinhua, Shaoxing and Lishui, comprising 27 counties/ cities/ districts and 188 towns. With a total population of 15 million, the Qiantang River Basin accounts approximately for 32% of Zhejiang’s total population and 35.3% of its GDP. Economic development in the basin is geographically concentrated in the lower part, such as Hangzhou and Shaoxing, with the upper part comparatively less developed. This is in line with the overall regional development pattern in Zhejiang. Adjacent to Shanghai in the north, the Hangzhou Bay area is the most dynamic region in the province. With 51% of Zhejiang’s population, this region produced 66% of the province’s GDP. In 2004, GDP per capita reached RMB 33,690, 1.3 times that of the province’s average. By contrast, cities in the mountainous hinterland, including Jinhua, Quzhou and Lishui, produced only 13% of Zhejiang’s GDP with 21% of the province’s population. GDP per capita in 2004 was RMB 16,105, only 62% of the province’s average.

3. Special Role of Small Towns in Zhejiang Province. Sustainable urbanization has been adopted as a key pillar of China’s national development policy in the 11th Five Year Plan. While emphasizing the pivotal role of metropolitan areas as main drivers of economic growth, the Government of China’s national urbanization strategy also actively encourages the growth of secondary cities and small towns, with the aim to relieve the burden of infrastructure and service provision on large urban centers and to ensure balanced growth on a regional scale. A distinct feature of Zhejiang’s urbanization trajectory has been that small towns5, although relatively small in scale compared to cities and at the lowest level in the urban hierarchy, have played a

3 China’s average urbanization rate in 2009 was 46.6%. 4 Zhejiang Province Urban System Plan (2008-2020). 5 “Small towns” refer to statutory towns, including county seats, as defined in “Advice on How to Promote Small Towns Development” by State Council, July 2007. Towns in Zhejiang are relatively small, with an average population of 36,772. Nevertheless, there are still 35 towns whose population exceeded 100,000, with 4 towns exceeding 200,000. 18

very important role in the province’s development. Led by national policies that favored a dispersed urbanization and restricted the growth of big cities in the 1980s, urbanization of small towns in Zhejiang began to accelerate as small and medium sized light manufacturing enterprises in towns and rural areas flourished and attracted most of the surplus rural labor, who were unable to migrate to major cities because of hukou regulations. Since late 1990s, Zhejiang provincial government initiated a set of policies to prioritize development of a few selected towns with better location and growth potential, and expanded their jurisdiction and authority through consolidation of surrounding towns and townships. As a result, the role of small towns as major engines of local economic development and key absorber of rural surplus labor and migrants has been significantly enhanced. While fully recognizing the role of larger cities, Zhejiang’s 11th Five Year Plan also aims “to promote the development of small towns based on the specialized economy”.

4. Project Cities and Towns. The 11 sub-projects will serve 22 towns/townships and two core urban areas in eight districts/ counties/ county-level cities across four municipalities: Hangzhou, Shaoxing, Jinhua and Quzhou. Table 1.1 summarizes the urbanization rate and key economic statistics of the project cities/ districts/ counties (see also Figure 1.1 for administrative hierarchies). Although most project cities/districts/ counties exhibited substantial economic growth in recent years, most of them have lower urbanization rates, GDP per capita and fiscal revenue per capita compared to the provincial average6. Those located in the upper and middle part of Qiantang River Basin, i.e., Jinhua and Quzhou municipalities, exhibit larger gaps compared to cities in the lower stream. Table 1.2 summarizes the population of the project towns/townships/villages. The population of the project towns/townships/villages ranges from less than 1,451 to over 50,000. Most project components cover towns and townships that were not designated as “provincial central town”, as well as some of their surrounding villages.

Table 1.1: Project Cities Overview (2008) Fiscal GDP GDP per Total Urbanization Revenue per Municipality District/County/CLC (RMB Capita Population Rate (%) Capita bln) (RMB) (RMB) Hangzhou Jiande City 513,200 35 16.227 31,706 3,783

Tonglu County 399,100 49.2 16.445 41,249 4,010

Shaoxing Zhuji City 1,064,200 58.9 49.591 46,689 4,729 Jinhua Wucheng District 616,800 55 * 24.786 40,158 6,658

Lanxi City 657,000 50 14.26 21,685 2,451

Pan’an County 209,300 35* 3.793 18,160 2,360 Quzhou Qujiang District 401,700 32 5.32 13,310 867

Longyou County 403,100 45.9 9.072 22,545 1,844 Provincial - - 57.6 - 42,214 7,957 average *Data of 2005

6 One exception is Zhuji city, which has a higher urbanization rate and GDP per capita than the provincial average. 19

Table 1.2: Population of Project Towns (2008) Total Provincial Municipality District/County/CLC Town/Township/Community population central town7 Hangzhou Jiande City City proper 113,856* central city Meicheng 43,725* √ Dayang 34,394 Sandu 25,895 Yangcunqiao 20,307 Xiaya 26,218 Yangxi 5,564 Tonglu County Jiangnan 50,661 Shaoxing Zhuji City Datang 30,734 √ Caota 44,539 Wangjiajing 34,330 Paitou 47,792 √ Anhua 33,687 Jinhua Wucheng District Tangxi 44,781 √ Luofu 35,240 Yangfu 15,556 Jiangtang 19,078 √ Xinfan 1,451 Lanxi City Youbu 38,208** √ Pan’an County Yunshan area 5,000*** Shenze 13,619 Jianshan 13,197 √ Quzhou Qujiang District City proper 60,000 central city Longyou County Chengbei industrial park plus 12 15,183 villages *Data of 2006; **Data of 2007; ***Projected data of 2012

5. Environmental Pollution in Qiantang River Basin. Zhejiang’s rapid urbanization and economic growth, particularly the proliferation of small-size enterprises in small towns and the dispersed pattern of urbanization, have put significant pressures on the water environment of the Qiantang River. From 1990 to 2007, the amount of wastewater discharged in Zhejiang has more than doubled, and the industrial solid waste has more than quadrupled. The equivalent pollution loads from industrial, domestic and non-point sources are 45%, 36% and 19% respectively.8 In 2006, Zhejiang Provincial Government responded by establishing water functional zones for each county in the Qiantang River Basin.9 Based on the required water quality of the specified water functional zones and corresponding assimilative capacity, each county government was asked to effectively enforce the existing water pollution control laws and regulations. However, the most recent Zhejiang Environmental Status Report (2008) found that although 73% of the Qiantang River can meet Class I to III water quality, only 62% of the monitored river water quality meets the stipulated quality standards. Given that Qiantang River is the water source of

7 Zhejiang has identified 200 “provincial central towns” as potential growing centers which will be given more fiscal and socio- economic management power to attract population and industrial development, and to provide public and infrastructure service to surrounding rural areas. 8 Qiantang River Basin Water Pollution Control and Ecological Protection Planning Report, 2006 (data for 2004). The major pollutants of Qiantang River are COD, ammonia nitrogen and total phosphates. 9 Based on a study on Zhejiang Water Functional Zones and River Water Assimilative Capacity Study jointly undertaken by Zhejiang Water Resources Bureau and Zhejiang Environmental Protection Bureau (EPB). 20

80% of Hangzhou and most counties in the Basin, environmental pollution poses a serious threat to living conditions and safety of drinking water to a large number of urban and rural residents.

6. Urban Environmental Infrastructure Services in Small Towns. Zhejiang’s larger cities, such as Hangzhou, Ningbo and Shaoxing have made good progress in terms of addressing urban environmental management challenges with a resulting, marked increase in urban environmental infrastructure service coverage. However, small towns are significantly lagging behind.

 Water Supply: Cities still have to complete their agenda of extending piped water supply into peri-urban areas, surrounding towns/ townships and villages. Due to a lack of such water supply extension schemes, as well as water source pollution, it is estimated that water supply is safe in only 29% of Zhejiang’s towns/townships.

 Wastewater Treatment: Wastewater treatment coverage in towns/ townships is currently 26%, compared to 73% for cities (including county towns).10 Moreover, the lack of sewer networks to transport wastewater from surrounding towns and villages leads to low utilization of existing treatment plants, often less than 75% of their design capacity.11

 Solid Waste: Integrated solid waste management services, including segregated collection and sanitary disposal of solid waste, hardly exists. Solid waste facilities are not in place in 8,080 villages, or 64% of the total number of villages in the Qiantang River Basin, with most solid waste simply disposed in open dumps. The resulting leachate has being causing serious pollution on the water body.

7. One of the reasons for lower service provision rates is the much weaker financial position of small towns and the resulting lower public infrastructure investment rates. For example, fiscal revenue per capita in the project cities/counties was only 5% to 40% of the provincial capital, Hangzhou.12 In the Qiantang River Basin, the gap in environmental investments is especially large in small towns along the middle and upper parts, such as Jinhua and Quzhou Municipality, reflecting their comparatively lower level of economic development (see Table 1.1).

8. Weak Institutional Capacity in Small Towns. The institutional capacity of small towns for managing urban environmental infrastructure is also extremely weak. Small towns are only now beginning to introduce basic institutional reforms, with the majority wastewater and solid waste entities not yet corporatized. Some private sector participation in infrastructure exists, mainly in form of BOTs for wastewater treatment plants, often with mixed results due to a variety of reasons (i.e., lack of integrated planning leading to low sewer connection rates and financial constraints). Tariffs and fees are only inconsistently collected and not sufficient to cover the full costs of operation, except for water supply, which has been operating with some degree of institutional and financial autonomy. Wastewater tariffs are as low as RMB 0.4-0.5/m3 in the project cities/counties whereas the Zhejiang provincial tariff policy stipulates a minimum

10 Source: Zhejiang Construction Department Statistical Yearbook 2008. Among the project cities and towns, wastewater central treatment rate is particularly low in those located in the upper and middle stream, such as Lanxi (12.55%), Longyou (24.91%) and Quzhou (16.40%). 11 Zhejiang Province 11th Five Year Plan for Cities and Towns Wastewater Treatment Facilities Construction (2006-2010) 12 Fiscal revenue per capita in Hangzhou city proper was RMB 16,519 in 2007; while among the project county level cities /counties, it ranges from only RMB 867 (Qujiang District), to RMB 6,658 (Wucheng District). 21

wastewater tariff level of not less than RMB 0.8/m3 for county towns and above. Solid waste fees are also very low and collection efficiency is limited (less than 50%) and is estimated to cover only street cleaning activities.

9. Zhejiang’s Response to Environmental Problems in the Qiantang River Basin. Zhejiang Provincial Government has fully recognized these challenges. It has put in place various provisions, inter alia in the 11th Five Year Plan (2006-10) for Qiantang River Basin, the Eco-Province Construction Plan (2003-2020), and the Environmental Protection “811” New Three-Year Action Plan (2008-2010) to improve urban environmental infrastructure. The overall provincial strategies are: (a) to provide financial and technical support to county towns and townships in the Qiantang River Basin to invest in environmental pollution control facilities so that the required river water quality of the stipulated water functional zone of each county could be met at the end of the 11th Five Year Plan; and (b) to prioritize environmental protection in the Qiantang River Basin, i.e. “the pollution control objectives of Qiantang River Basin should be higher than in other areas, the progress should be faster than in other areas, and the effectiveness should be better than in other areas”13. The overall goal is to reach 100% of the required standards for water quality in Qiantang River by 2020.14

10. Given that the larger cities in the Qiantang River Basin already have much higher urban environmental infrastructure service coverage rates, increasing sustainable service provision in small towns constitutes a key “next generation” challenge for urban environmental management in Zhejiang together with continuing to address the difficult challenge of industrial pollution control. Consequently the Provincial Government has set the following explicit targets for service coverage rates in small towns: (a) for water supply: to ensure that quality of water supply in small towns should reach 100% of safety standard by 202015; (b) for wastewater treatment: to increase sewage treatment rate in small towns from less than 30% to 70% by 2020, including through the completion of the construction of treatment facilities in all remaining 123 un-served towns in the Qiantang River Basin by 201016; and (c) for solid waste: to increase solid waste collection and treatment rate in small towns to 90% by 2020.17

Table 1.3: Major Policies to Improve Environmental Quality in Qiantang River Basin Key Policy Main Objectives

Zhejiang Environmental  KPI: One KPI is to reduce the total amount of COD emission by 15.1% by Protection 11th Five Year 2010 compared to 2005; Plan (2006-10)  Qiantang River Basin: The pollution control objectives of Qiantang River Basin should be higher than in other areas, the progress should be faster than in other areas, and the effectiveness should be better than in other areas. Qiangtang River Basin  Water Quality: No water is worse than Class V water quality in Qiantang Pollution Management 11th River, 85% of water functional zones meet stipulated standard, 100% of cross Five Year Plan (2006-10) sectional water functional zones meet stipulated standard by 2010; water quality in Qiantang River fully meet stipulated standard by 2020  Wastewater: 1) Wastewater treatment rate reaches 75% in cities, 60% in county towns by 2010, and 80% in cities, 70% in county towns by 2020; 2)

13 Zhejiang Environmental Protection 11th Five Year Plan (2006-10) 14 Qiangtang River Basin Pollution Management 11th Five Year Plan (2006-10) 15 Notice on Effectively Strengthening Urban and Rural Drinking Water Safety, Zhejiang 2006. 16 Environmental Protection “811” New Three-Year Action Plan (2008-2010). 17 Qiangtang River Basin Pollution Management 11th Five Year Plan (2006-10) 22

100% of industrial effluent discharge meet stipulated standards; 80% of sewage discharge in large-scale livestock breeding farms by 2010;  Solid Waste: 1) domestic solid waste non-hazardous treatment rate reaches 90% in cities, 85% in county towns by 2010, and 95% in cities, 90% in county towns by 2020; 2) domestic solid waste collection rate reaches 72% in rural areas by 2010, and 85% in rural areas by 2020 Environmental Protection  Wastewater: 1) Fully complete construction of wastewater treatment facilities “811” New Three-Year in cities and towns in Taihu Lake Basin, basically complete construction of Action Plan (2008-2010) wastewater treatment facilities in statutory towns in Qiantang River Basin and central towns in other regions, encourage construction of central wastewater treatment facilities in priority industrial towns and other small towns. 2) Facilitate construction of sewer networks in towns and villages that can be served by nearby existing WWTPs; for those that can’t be covered by existing WWTPs, rural domestic wastewater should be treated through separate wastewater treatment facilities (i.e., bio-tech and bio-gas facilities). 1/3 of administrative villages should have domestic wastewater treatment facilities in place by 2010.  Solid Waste: 1) Solid waste facilities in cities above county level should fully meet non-hazardous standards by 2010; 2) Based on the principles of “collected in villages, transferred in towns, disposed in counties”, facilitate construction of integrated urban and rural domestic solid waste collection and disposal facilities.  Industrial Pollution Control: 1) Key industrial pollution sources should meet discharge standards, and 80% of sources monitored by flight inspection should meet discharge standard; 2) According to the environment statistics, enterprises that accounts for more than 90% of total pollution load should install online monitoring device; 3) Fully establish a pollutant discharge permit system, prohibit enterprises from discharging without permits or exceeding the allowed emission amount. Qiantang River Basin Total  Water Quality: 85% of river water meets stipulated water quality standards, Quantity Control of Major 100% of cross-section river water meets stipulated water quality standards, Pollutants Implementation 100% of drinking water source in cities and towns meets stipulated water Plan (2006-2020) quality standards by 2010; river water fully meets stipulated water quality standards, drinking water source in cities, towns and rural areas fully meets stipulated water quality standards.  Total Quantity Control (TQC): TQC will be implemented in seven pilot counties/districts where less than 70% of water functional zones meet stipulated water quality standards, including Xiaoshan, Jinhua city proper, Dongyang, Yiwu, Yongkang, Pujiang and Jiangshan. The goal is to reduce total amount emission to the level that is defined by the water environmental capacity by 2010.

Figure 1.1: Administrative Levels of Project Cities and Towns

Central Government

Provinces Autonomous Regions Municipalities

Hangzhou, Shaoxing, Prefectures Jinhua, Quzhou Tonglu, Pan’an, Longyou

Wucheng, Jiande, Districts Counties County-level Cities Qujiang Zhuji, Lanxi

Meicheng, Dayang, Yangcunqiao, Xiaya, Yangxi, Towns/Townships Jiangnan, Datang, Caota, Wangjiajing, Paitou, Anhua, Tangxi, Luofu, Yangfu, Jiangtang, Xinfan, Youbu, Villages Chengbei New District plus 12 villages Yunshan area, Shenze, Jianshan

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

CHINA: Zhejiang Qiantang River Basin Small Town Environment Project

Latest ISR Ratings Delivery Project Sector Issue Date Development Implementation Objective Progress

Bank Financed

General water sanitation and Nanning Urban Environment flood protection, Sewerage, 06/01-2010 N.A. N.A. (Ln.78980) Pollution management and environmental health, Environmental policies and institutions General water and sanitation, Chongqing Urban-Rural Roads and Highways, 05-05-2010 N.A. N.A. Integration Project Vocational training, and Health, Water resource management, Rural services and infrastructure, Other rural development

Ningbo New Countryside Water and Sanitation, Roads and 01-26-2010 N.A. N.A. Development Project Highways, Sub-national Government Administration, Rural Service and Infrastructure, Other Urban Development Water supply, Wastewater, Sub- Jiangsu Water and Wastewater national government 06-02-2009 S S (Ln.76840) administration, Water supply, Pollution management and environmental health, Regional water supply integration Yunnan Urban Environment (Ln. Sewerage, Solid waste, Water 05-05-2009 S S 76920) sanitation, Preservation of cultural heritage and environmental policies

Han River Urban Environment Sewerage, Solid waste 04-29-2008 MS MS Improvement Project (Ln.75170) management, Sub-national government administration, Pollution management and environmental health, Municipal governance and institution building

Second Liaoning Medium Cities Sewerage, Water supply, Solid 06-26-2007 MS MS Infrastructure Project (Ln. waste management, Pollution 48640) management and environmental health

General water, sanitation and GEF Ningbo Water and flood protection sector, Other 06-29-2006 S S Environment Management (TF environment and natural 56692) resources management

Water supply, Sub-national Henan Towns Water Supply and government administration, 06-27-2006 US MU Sanitation Project (Ln. 48290) Sanitation, Access to urban services and housing, Municipal governance and institution building, Environmental policies and institutions Chongqing Small Cities Water Supply, Flood Protection, 06-21-2005 S S Infrastructure Improvement (Cr Roads, Public Sanitation, IST, 47940) Other urban development, pollution management and environmental health

Water supply, Sewerage, Ningbo Water and Environment Pollution management and 03-17-2005 S S Management (Ln. 47700) environmental health, Water resource management, Municipal governance and institution building Tai Basin Urban Environment Sewerage, Flood protection, 08-03-2004 S S (Cr 47480) Water resource management, Pollution management and environmental health, Environmental policies and institutions, other urban development

Zhejiang Urban Environment Sewerage, Roads and highways, 01-29-2004 S S Project (Ln. 47240) other social services, Solid waste management, Water supply, Municipal governance and institution building, Pollution management and environmental health, Access to urban services for the poor, Infrastructure services for private sector development, other urban development

Annex 3: Results Framework and Monitoring

CHINA: Zhejiang Qiantang River Basin Small Town Environment Project Results Framework

PDO Project Outcome Indicators Use of Project Outcome Information The project development objective is (1) Water Supply: Number of people served with To track overall progress to assist Zhejiang Province in potable water supply toward meeting the Project improving access to sustainable Development Objectives urban environmental infrastructure in (2) Wastewater: Amount of COD, TN, and TP selected cities, districts and towns in reduced (tons/year) the Qiantang River Basin. (3) Solid Waste: Number of people served with sanitary solid waste collection and disposal

(4) Institutional: Number of agreed O&M plans operationalized

(5) Financial: Number of project areas/ cities tariffs/ user fees introduced

Intermediate Outcomes Intermediate Outcome Indicators Use of Intermediate Outcome Monitoring 1. Water Supply Component - Expansion of water supply and - % of potable water connection to households Monitoring water supply distribution capacity - % of full cost covered by tariffs plant and distribution services and financial performances of water supply companies.

2. Wastewater Component - Expansion of wastewater - % of wastewater collected and treated Monitoring wastewater collection & treatment capacity - % of O&M treatment cost covered by tariffs collection and treatment services and financial performance of waste water companies. 3. Solid Waste Component - Expansion of solid waste - Number of open solid waste dumps closed Monitoring solid waste collection & landfill capacity - % of solid waste collected & sanitarily disposed collection and disposal - % of O&M cost covered by user fees services, and financial performance of sector. 4. Institutional Strengthening Component - Support project implementation - Completion of TA/ studies / training on Measuring actions on and capacity building sustainable environmental infrastructure service required institutional provision in small towns capacity building activities.

Arrangements for results monitoring

Target Values Data Collection and Reporting Project Outcome Indicators Baseline YR1 YR2 YR3 YR4 YR5 Frequency Data Responsibility for 2009 2011 2012 2013 2014 2015 Collection Data Collection Instruments (1) Water Supply: Number of people 60,000 157,000 172,000 256,000 316,000 360,000 served with potable water supply in project areas

(2) Wastewater: Amount of COD reduced (tons/year) - - 2,411 2,961 3,394 3,745 Amount TN reduced (tons/year) - - 154 189 216 239 Amount TP reduced (tons/year) - - 25 35 40 45

(3) Solid Waste: Number of people - - 155,000 162,000 168,000 175,000 Progress Local PMOs/ served with sanitary solid waste Annual Reports PPMO collection and disposal

(4) Institutional: Number of agreed - - 6 6 6 6 O&M plans operationalized (cumulative)

(5) Financial: Number of project areas 7 7 9 9 11 11 tariffs/ user fees introduced (cumulative)

Intermediate Outcome Indicators 1. Water Supply Components (1.1) % of potable water connections to households: a. Zhuji City 30 75 80 85 90 95 b. Wucheng District 0 0 0 50 80 95 Progress Local PMOs/ Annual (1.2) % of full costs covered by water Reports PPMO supply tariffs: a. Zhuji City 80 80 80 90 90 100 b. Wucheng District - - - 80 90 100

2. Wastewater Components (2.1) % wastewater collected and treated: a. Jiande City - - 55 65 75 85 b. Qujiang District - - 60 65 70 80 c. Lanxi City Youbu Town - - 30 45 65 70 d. Pan’an County Jianshan Town - - - 50 55 65 e. Pan’an County Shenze District - - - - 10 30 f Pan’an County Yunshan District - - 50 55 65 75 g. Tonglu County Jiangnan Town - - 50 55 65 75 Progress Local PMOs/ h. Longyou County - - 60 65 75 85 Annual Reports PPMO

(2.2) % of O&M treatment cost covered by wastewater tariffs: a. Jiande City - - 90 90 100 100 b. Qujiang District - - 80 80 90 90 c. Lanxi County Youbu Town - - 50 50 70 70 d. Pan’an County Jianshan Town - - 50 50 70 70

3. Solid Waste Component (3.1) Cumulative number of open solid - - - - 1 3 waste dumps closed in Jiande City

(3.2) % of solid waste collected and - - 70 80 90 90 Progress Local PMOs/ disposed at a sanitary landfill in Jiande Annual Reports PPMO City

(3.3) % of O&M cost covered by solid - - - 10 10 20 waste user fees in Jiande City

Monitoring Indicators: Definitions and Explanatory Notes

Project Outcome Indicators Definition (1) Water Supply: Number of people served with potable water supply in project areas Incremental number of people in the project area who have access to piped water supply system with water quality meeting China Drinking Water Standards. The numbers include Zhuji City and Wucheng District. Wucheng District is has values of zero till 2012 and then values of 67,300 (2013), 110,900 (2014), 135,600 (2015). Baseline calculation sheet included in project files.

(2) Wastewater: Amount of COD reduced (tons/y); Amount TN reduced (tons/y); COD/TN/TP = Total WW Collected and Treated Annually X (Influent Amount TP reduced (tons/y) COD/TN/TP – Effluent COD/TN/TP). Baseline calculation included in project files. Numbers refer only to those project cities that have a wastewater treatment component.

(3) Solid Waste: Number of people served with sanitary solid waste collection and Incremental number of people in the project area whose solid waste is collected disposal and disposed in a sanitary fashion at the newly constructed landfill site. Baseline calculation included in project files.

(4) Institutional: Number of agreed O&M plans operationalized (cumulative) Number of O&M plans agreed implemented in a manner acceptable to the Bank. For which cities the O&M refer to dated covenants

(5) Financial: Number of project areas/ cities tariffs introduced (cumulative) Number of project areas that do charge a wastewater tariff

Intermediate Outcome Indicators 1. Water Supply Components (1.1) % of potable water connections to households % = 100% X (Total quantity domestic water sales)/(Estimated domestic water consumption)

(1.2) % of full cost covered by tariffs Full cost recovery tariffs are defined as the level of tariffs sufficient to cover the cost of operation, maintenance, interest payments and the larger of depreciation and debt service. Compared to the financial projections in Annex 9, the target value for both water supply components are conservatively set lower than 100% in the earlier years allowing the companies to gradually reach the 100% target. 2. Wastewater Components (2.1) % wastewater collected and treated % = 100% X (Total quantity of wastewater treated)/(Estimated wastewater generated in service area)

(2.2) % of O&M treatment cost covered by tariffs O&M treatment cost recovery is defined as the level of tariffs sufficient to cover the operating and maintenance cost of treatment only. Compared to the financial projections in Annex 9, the target value for all wastewater components are conservatively set allowing to a gradual increase to higher levels.

3. Solid Waste Component (3.1) Cumulative number of open solid waste dumps closed Number of open solid waste dumps closed under the project

(3.2) % of solid waste collected and sanitarily disposed % = 100% X (Total quantity of solid waste received at sanitary landfill)/(Estimated domestic solid waste generation)

(3.3) % of O&M cost covered by tariffs The O&M cost calculation covers collection, transfer and landfill site operations. The target values are also conservatively set and take into account that the solid waste tariff currently only covers street cleaning activities and that solid waste tariff collection rates are very low.

Annex 4: Detailed Project Description CHINA: Zhejiang Qiantang River Basin Small Town Environment Project

1. The project consists of four components: (i) water supply and distribution; (ii) wastewater collection and treatment; (iii) solid waste management; and (iv) institutional strengthening and training. The total project cost is US$216 million, of which the IBRD loan is US$100 million. The following is the content of the project components appraised. There may be modifications during implementation which can be accommodated in full consistency with the project description as provided in the Loan Agreement.

Component I: Water Supply and Distribution (US$35.64 million)

2. The component consists of two sub-components in Zhuji City of Shaoxing Municipality and Wucheng District of Jinhua Municipality. Under the proposed component, new water supply facilities and clean water distribution networks will be built to mitigate drinking water problems in the suburban areas and adjacent towns and townships of Zhuji City and Wucheng District. By the year 2015, about 360,000 more people will have access to clean and reliable water supply services.

I-1. Zhuji City Water Treatment and Distribution System (US$18.61 million)

3. Zhuji City is located in the lower part of the Qiantang River Basin and had a population of 1.06 million in 2008. At present three water supply plants, namely the 200,000 m3/d Chengnan Water Treatment Plant (WTP), the 2,000 m3/d Sandu WTP and the 5,000 m3/d Dongbaihu WTP, are supplying clean water to residents in the urban center of Zhuji City, and ten surrounding towns and townships. However, about 70% of the residents in Datang, Caota, Wangjiajing, Paitou and Anhua towns of Zhuji City do not have access to clean and reliable water supply services.

4. The investment will improve the water supply services in the Datang, Caota, Wangjiajing, Paitou and Anhua towns of Zhuji City through construction of (i) a 0.50 km x DN800 steel raw water transmission main, (ii) a 40,000 m3/d Qingshan water treatment plant and a 44,000 m3/d raw water pumping station; and (iii) 44.5 km x DN300 ~ DN800 ductile cast iron water distribution networks and a pumping station of 15,000 m3/d.

I-2. Wucheng District Water Treatment and Distribution System (US$17.03 million)

5. Wucheng District is located in the middle part of Qiantang River Basin and had a total population of 616,800 in 2008. There are four existing water plants in Wucheng District, namely the 20,000 m3/d Jinxi water plant, the 2,000 m3/d Xingfan water plant, the 45 m3/d Yangbu water plant, and the 400 m3/d Luobu water plant. However, they cannot meet the current water demand of the total urban population in Wucheng District. In 2009, about 122,000 residents in the western part of Wucheng District, which consists of Tangxi town, Yangbu town, Luobu town, Jiangtang town and Xingfan Township, did not have access to clean and reliable water supply. In addition, at the points of abstraction, the raw water quality of three of thefour water plants does not consistently meet the required water standards.

6. The investment will improve water supply services in four towns and one township, namely Tangxi town, Yangbu town, Luobu town, Jiangtang town and Xingfan township in Wucheng District. The investment consists of two parts. Part I is Bank financed and Part II is non-Bank financed. The Bank financed part supports the construction of (i) a 0.50 km x DN800 steel gravity main from Xinfan reservoir; (ii) the 50,000 m3/d Tangxi water treatment plant; and (iii) a 16.0 km x DN800 ~ DN900 clear water main. The non-Bank financed part supports the construction of (iv) a 1,500 m3 Dongmenshan high level clear water tank; (v) 15.2 km DN110- DN600 secondary water distribution networks in Tangxi town; and (vi) 24.4 km DN110-DN315 secondary water distribution networks in Jiangtang town.

Component II: Wastewater Collection and Treatment (US$158.03 million)

7. The component consists of eight sub-components in Jiande City and Tonglu County of Hangzhou Municipality; Youbu Town and Pan’an County (with three sub-projects) of Jinhua Municipality; and Qujiang District and Longyou County of Quzhou Municipality. Under this component, four wastewater treatment plants with aggregate capacity of 50,000 m3/d and sewer networks will be built to abate the pollution discharges of core urban areas of Jiande City, Qujiang District, Youbu Town and Jianshan Town. In addition, sewer and stormwater networks, river rehabilitation works as well as associated roads will be constructed.

II-1. Jiande City Wastewater Treatment and Sewer Networks (US$17.35 million)

8. Jiande City is located in the lower part of Qiantang River Basin and its core city consists of Genglou Community, Xinanjiang Community and Yangxi Community with a population of 113,860 people in 2008. About 40,000m3/d wastewater is currently generated in the urban area of Jiande City, which is discharged into the existing 20,000 m3/d Xinanjiang wastewater treatment plant. In line with the city’s new master plan, the existing 20,000 m3/d Xinanjiang wastewater treatment plant will need to be demolished in order to provide space for further development of the inner city and a new wastewater treatment plant (Chengdong wastewater treatment plant) with a Phase 1 capacity of 30,000 m3/d is under construction.

9. The investment will upgrade and expand wastewater collection and treatment system in the core urban area of Jiande City by expanding the capacity at the Chengdong wastewater treatment plant. The project supports the construction of (i) 24.0 km of sewer networks; (ii) the 19,000 m3/d expansion of the Chendong WWTP (from 30,000 m3/d to 49,000 m3/d) and concomitant upgrading of treatment processes to meet treated effluent Class 1-A standards; and (iii) a 4,500m3/d pumping station.

II-2. Qujiang District Wastewater Treatment, Stormwater and Sewer Networks (US$25.28 million)

10. Qujiang District is located in the upper part of the Qiantang River basin and consists of Qujiang New District, Jianxin Island, Qujiang EDZ and a logistics park, and had a total population of 401,700 in 2008. There is currently no wastewater treatment plant in Qujiang District with only incomplete sewer and stormwater networks in place. As a result untreated

residential wastewater and industrial wastewater with only preliminary treatment is directly discharged into the nearby river.

11. The investment consists of two parts. Part I is Bank financed and Part II is non-Bank financed. The Bank financed part supports the construction of (i) 9.6 km of sewer networks with DN300 ~ DN1200, 10.5 km of stormwater networks, and Chengdong wastewater treatment plant with a capacity of 20,000 m3/d; and (ii) 30.8 km of sewer networks and 22.0 km of stormwater networks under 13 roads to the west of Xiafei Road. The non-Bank financed part supports the construction of 4.2 km sewer networks & 3.0 km stormwater networks under Zhengxingxi road and Tongjiang road.

II-3. Lanxi City Youbu Town Wastewater Treatment, Sewer Networks, Road, Stromwater Networks, and River Bank Rehabilitation (US$12.09 million)

12. Youbu Town is located 18 km away from Lanxi City in the upper part of the Qiantang River Basin and had a population of 38,200 people in 2008. There is currently no wastewater treatment plant in Yobu town, with only incomplete sewer and stormwater networks in place. As a result untreated residential wastewater and industry wastewater with only preliminary treatment is directly discharged into the nearby river.

13. The investment supports the construction of (i) a 5,000 m3/d wastewater treatment plant and a 1.7 km discharge pipe; (ii) the upgrading of 1.7 km of ancient roads with associated sewer and stormwater networks in the old town center; (iii) 1.5 km new roads with associated sewer and stormwater networks in new town area; (iv) 11.1 km sewer networks in new area; and (v) the rehabilitation of 0.7 km of the Guxi river embankment.

II-4. Pan'an County Jianshan Town Wastewater Treatment and Sewer Networks (US$7.48 million)

14. Jianshan town is located in the northeast of Pan’an County in the upper part of the Qiantang River Basin and had a population of 13,200 people in 2008. Currently, there is no wastewater treatment plant in Jianshan town, with incomplete sewer and stormwater networks in place. As a result untreated residential wastewater and industry wastewater with only preliminary treatment is directly discharged into the nearby river.

15. The investment supports the construction of (i) 4.75 km of sewer networks for Jianshan town; (ii) three pumping stations with capacities of 5,000 m3/d, 3,000 m3/d and 2,000 m3/d; and (iii) a wastewater treatment plant with a capacity of 6,000 m3/d.

II-5. Pan'an County Shenzhe District Road, Stormwater and Sewer Networks (US$23.94 million)

16. Shenzhe District of Pan’an County in the upper part of the Qiantang River Basin is part of the core urban area of Pan’an City and had a population of 13,600 people in 2008. In 2008, a 10,000 m3/d wastewater treatment plant was built under a BOT contract in the core urban area of Pan’an County Town (Anwen Town), but its actual operational capacity was only about 5,000 m3/d as a result of insufficient sewer networks.

17. The investment supports the construction of (i) 2.30 km Cuxi river embankment rehabilitation and 2 x 2.3 km sewer networks on the both sides of Cuixi river; (ii) 4.3 km of Panjin road expansion and associated sewer and stormwater networks; and (iii) 2 x 5.0 km of main sewers from Shenzhe to existing Anwen wastewater treatment plant.

II-6. Pan'an County Yunshan District Sewer Networks (US$8.55 million)

18. Yunshan District is located in the south of Pan’an County in the upper part of the Qiantang River Basin and had a population of 1,450 people in 2008. There are no sewer networks in place. As a result untreated residential wastewater and industry wastewater with only preliminary treatment is directly discharged into the nearby river.

19. The investment supports the construction of (i) 17.1 km x DN200 ~ DN500 of sewer networks and (ii) a pumping station with capacity of 2,000 m3/d in Yunshan tourist resort area. After the completion of this project, all wastewater in this area will be transported to the existing Anwen wastewater treatment plant.

II-7. Tonglu County Jiangnan Town Road, Stormwater and Sewer Networks (US$19.58 million)

20. Jiangnan Town is about 15 km at the east of Tonglu County Town in the lower part of Qiantang River Basin and had a total population of 50,600 in 2008. Currently, there is no wastewater treatment plant in Jiangnan Town, with only incomplete sewer and stormwater networks in place. As a result, untreated residential wastewater and industry wastewater with only preliminary treatment is directly discharged into the nearby river.

21. The investment supports the construction of (i) two pumping stations with capacity of 6,000 m3/d and 6,000 m3/d (long term 12,000 m3/d), 4.1km pressure pipes and 13 km of sewer netwoks with DN300-DN1200; (ii) 13km stormwater networks with DN300-DN800; and (iii) 5km of road with width from 12m to 32m and associated sewer and stormwater networks in villages.

II-8. Longyou County Chengbei New District Road, Water Supply, Stormwater and Sewer Networks (US$43.77 million)

22. Longyou County is located in the upper part of the Qiantang River Basin and had a population of 403,100 people in 2008. Longyou County Town consists of Longzhou Community, Donghua Community, and Chengbei New District. The Chengbei New District is an economic development zone (EDZ) which has been developed in phases. Phase one of the EDZ of about 7 km2 has been completed and Phase two of an additional 7 km2 is under implementation. Currently, there is a 20,000 m3/d WWTP which is serving the core urban area of Longyou County Town. A second WWTP of 40,000 m3/d in the EDZ is being implemented under a BOT contract and is expected to be in operation in 2011.

23. The investment consists of two parts. Part I is Bank financed and Part II is non-Bank financed. The Bank financed) part supports the construction of (i) 7.3 km of DN300-DN1,500 sewer networks, 7.3 km of storm water networks, 7.3 km of clean water distribution networks of DN200-DN400, 7.3 km of industrial water supply distribution networks; (ii) 7.3 km of roads;

(iii) 1.0 km of effluent discharge outlet; and (iv) 1.4 km water distribution networks, and 1.4 km sewer networks and 1.4 km of discharge pipes all surrounding villages. The non-Bank financed part supports the construction of (i) 11.8 km of sewer, stormwater, clean water distribution and industrial water distribution networks; and (ii) 11.8 km of roads.

Component III: Solid Waste Management (US$20.32 million)

III-1. Jiande City Meicheng Town Solid Waste Collection and Sanitary Landfill (US$20.32 million)

24. Jiande City is located in the lower part of the Qiantang River Basin and the city as a whole, including surrounding towns, had a population of 513,200 in 2008. Presently, there is one sanitary landfill serving the core urban area of Jiande City. However, the solid waste generated in towns and townships further away from the core city can only be disposed in designated open dumps or is burned in simple facilities.

25. The project will improve the collection and sanitary disposal of solid waste in Dayang Town, Sandu Town, Yangcunqiao Town, Xiaya Town and Yangxi Community of Jiande City. The project supports the construction of (i) the first phase (210,000 m3 capacity) of a sanitary landfill (4,270,000 m3 capacity) in Meicheng Town, (ii) a tertiary leachate treatment plant, (iii) the closure of three existing open dumps in Meicheng Town, Yangcunqiao Town and Xiaya Town, and (iv) upgrading of garbage collection fleet.

Component IV: Institutional Strengthening and Training (US$2.00 million)

26. The Technical Assistance (TA) component consists of three packages: Package A - Project Management and Implementation Assistance; Package B - Master Planning for Small Town Urban Environmental Infrastructure in Zhejiang Province; and Package C - Training and Study Tours.

Package A: Project Management and Implementation Assistance (US$ 1.00 million)

27. This package will provide advisory and quality control services to support the project’s infrastructure construction investments as well as institutional and financial sustainability issues. The PPMO, local PMOs, and PIUs will receive assistance in reviewing project designs and bidding documents, preparing and evaluating bids, negotiating contracts, monitoring contract execution and supervision, scheduling and resolving contract issues, and preparing progress reports and the ICR. In addition, local PMOs and PIUs will receive support on advancing the institutional and financial aspects of project implementation, including the preparation and implementation of the O&M action plans. The package will also include monitoring implementation of EMPs and RAPs by independent consultants.

Package B: Master Planning for Small Town Urban Environmental Infrastructure in Zhejiang Province (US$ 0.30 million):

28. This package will help Zhejiang Province develop a strategic masterplan, or any other such study the Bank may agree upon, for small town urban infrastructure in support of environmentally, institutionally, operationally, and financially sustainable service provision. The

package will cover various aspects of the master plan process, including key technical aspects, such as optimal location of infrastructure in a regional context and appropriate technology selection; key institutional issues, such as options for regional consolidation of infrastructure service provision; and key financial issues, such as appropriate tariff and financing strategies for environmental infrastructure.

Package C: Trainings and Study Tours (US$ 0.70million):

29. This package will help build capacity for the PPMO, local PMOs, and PIUs on technical, operational and institutional aspects for sustainable infrastructure service provision in small towns. The objective is to expose decision makers to relevant international and domestic best practices in areas directly relevant to the successful project implementation.

Annex 5: Project Costs CHINA: Zhejiang Qiantang River Basin Small Town Environment Project

Table 5.1: Project Costs by Expenditure Category

Project Cost* World Bank Financing* US$ RMB US$ % of total Bank Financed 141.66 963.32 100.00 71% 1. Works, Equipment & Materials 139.42 948.04 97.75 70% Zhuji 15.11 102.77 10.25 68% Wucheng 9.28 63.08 8.69 94% Jiande 11.96 81.30 8.32 70% Qujiang 19.59 133.22 14.24 73% Youbu 8.18 55.60 6.06 64% Pan'An Jianshan 6.15 41.80 4.67 76% Pan'An Shenze 18.27 124.21 11.51 63% Pan'An Yunshan 6.99 47.53 4.40 63% Jiangnan 13.50 91.80 8.64 64% Longyou 16.20 110.17 10.04 62% Meicheng 14.20 96.56 10.93 77% 2. Institutional Development 2.00 13.60 2.00 100% 3. Front-End Fee 0.25 1.68 0.25 100% Non-Bank Financed 74.33 505.44 0.00 0% 4. Works, Equipment & Materials 22.92 155.84 0.00 0% Wucheng 4.58 31.17 0.00 0% Qujiang 1.14 7.74 0.00 0% Longyou 17.20 116.93 0.00 0% 5. Land Acquisition & Resettlement 27.02 183.71 0.00 0% 6. Other 11.61 78.97 0.00 0% 7. Interest During Construction** 12.78 86.91 0.00 0% Total Project Costs 215.99 1,468.76 100.00 46% * Including contingencies ** Only Bank interest

Table 5.2: Project Costs by Project City/ County/ District

Project Cost* World Bank Financing* US$ million RMB million (US$ m) % of total Zhuji City 18.61 126.57 10.27 55% 1. Zhuji Water Supply 18.61 126.57 10.27 55% Jiande City 37.67 256.13 19.29 51% 2.Meicheng Solid Waste 20.32 138.18 10.96 54% 3. Jiande Waste Water 17.35 117.95 8.33 48% Wucheng District 17.03 115.82 8.71 51% 4.Wucheng Water Supply 17.03 115.82 8.71 51% Qujiang County 25.28 171.91 14.28 56% 5.Qujiang Waste Water 25.28 171.91 14.28 56% Longyou County 43.77 297.62 10.07 23% 6. Longyou Waste Water 43.77 297.62 10.07 23% Pan'An County 39.97 271.80 20.63 52% 7. Pan'An Shenze Waste Water 23.94 162.78 11.54 48% 8. Pan'An Yunshan Waste Water 8.55 58.13 4.41 52% 9. Pan'An Jianshan Waste Water 7.48 50.89 4.68 63% Lanxi County 12.09 82.20 6.07 50% 10. Lanxi Youbu Waste Water 12.09 82.20 6.07 50% Tonglu County 19.58 133.12 8.66 44% 11.Tonglu Jiangnan Waste Water 19.58 133.12 8.66 44% Institutional Development 2.00 13.60 2.00 100% 12. Package A 1.00 6.80 1.00 100% 13. Package B 0.30 2.04 0.30 100% 14. Package C 0.70 4.76 0.70 100% Total Project Costs 215.99 1468.76 100.00 46% * including contingencies

Table 5.3: Project Cost by Sector

Project Cost* World Bank Financing* US$ m RMB m (US$ m) % of total Water Supply 35.64 242.38 18.99 53% 1. Wuchen Water Supply 17.03 115.82 8.71 51% 2. Zhuji Water Supply 18.61 126.57 10.27 55% Waste Water 158.03 1,074.60 68.05 43% 3. Jiande Waste Water 17.35 117.95 8.33 48% 4. Qujiang Waste Water 25.28 171.91 14.28 56% 5.Youbu Waste Water 12.09 82.20 6.07 50% 6. Pan'An Jianshan Waste Water 7.48 50.89 4.68 63% 7. Pan'An Shenze Waste Water 23.94 162.78 11.54 48% 8. Pan'An Yunshan Waste Water 8.55 58.13 4.41 52% 9. Tonglu Jiangnan Waste Water 19.58 133.12 8.66 44% 10. Longyou Waste Water 43.77 297.62 10.07 23% Solid Waste 20.32 138.18 10.96 54% 11. Meicheng Solid Waste 20.32 138.18 10.96 54% Institutional Development 2.00 13.60 2.00 100% 12. Package A 1.00 6.80 1.00 100% 13. Package B 0.30 2.04 0.30 100% 14. Package C 0.70 4.76 0.70 100% Total Project Costs 215.99 1,468.76 100.00 46% * including contingencies

Annex 6: Implementation Arrangements CHINA: Zhejiang Qiantang River Basin Small Town Environment Project

Project Management and Leadership 1. The project will be managed at two levels of the government: (i) the provincial government and (ii) county level governments, including county level cities and districts, and their utility companies or urban investment and development companies (UDICs).

2. Provincial-level Project Management. The implementation arrangements at the provincial level are the same as those for the existing Zhejiang Urban Environmental Project (ZUEP). The Provincial Leading Group is headed by the Vice Secretary General of Zhejiang Provincial Government and comprises representatives from all key Provincial Government agencies, including the Provincial DRC, Finance Bureau, and Environmental Protection Bureau. The Provincial Project Management Office (PPMO) is housed at the Provincial Construction Commission and is headed by the Division Chief in the Foreign Economic Liaison Division. The PPMO is responsible for overall coordination and implementation of the project.

3. Local-level Project Management. Local Leading Groups and PMOs were set up at county level (instead of at the level of the municipality) reflecting the high degree of autonomy counties enjoy in Zhejiang Province. The Leading Groups include representatives from all key government agencies. The local PMOs are responsible for coordinating overall project management and for overseeing the respective Implementing Agencies. None of the local PMOs have had prior experience in managing Bank-funded projects. As a result, strong project management support in all key areas (overall project coordination, procurement, financial management, etc.) is provided through a dedicated technical assistance component under Package A of the IST component. Each county-level PMO will oversee one to three Project Implementation Units (PIUs) in the Implementing Agencies. The structure of the project and the PMO and PIU setup is shown below.

Chart 6.1: Overview of PPMO, PMOs and PIUs PPMO Zhejiang Province

ShaoxingShaoxing Hangzhou JinhuaJinhua QuzhouQuzhou MunicipalityMunicipality MunicipalityMunicipality MunicipalityMunicipality MunicipalityMunicipality

PMO PMO PMO PMO PMO PMO PMO PMO Zhuji TongluTonglu Jiande Wucheng Pan’an Lanxi Qujiang Longyou Zhuji County Jiande Wucheng Pan’an Lanxi Qujiang Longyou CityCity County CityCity DistrictDistrict CountyCounty CityCity DistrictDistrict CountyCounty

JiangnanJiangnan TownshipTownship PIUPIU PIUPIU PIU PIUPIU PIUPIU PIU PIUPIU PIUPIU PIUPIU PIUPIU PIUPIU

4. Responsibilities of local PMOs and PIUs. The local PMOs and the PIUs are responsible for all major project management functions, including engineering and construction supervision, procurement and contract management, disbursement, implementation of safeguard and fiduciary measures, and project monitoring and reporting. Depending on the components and institutional setup, either local PMOs or the utility companies and UDIC will take the lead in managing project implementation. Training for project management and operational management has been incorporated into the technical assistance components under Packages A, B, and C of the IST component. The Implementing Agencies are listed in Table 6.1.

Ownership, management of assets, and on-lending arrangements 5. On-lending Arrangements and Asset Ownership. The proposed loan will be made to the People’s Republic of China, which will on-lend the loan proceeds to Zhejiang Province. The Province in turn to will on-lend the loan to the project county governments on the same terms and conditions as the Bank loan to China. Further on-lending to implementing agencies is as follows:

 For the water supply components in Wucheng District and Zhuji City, the World Bank loan will be on-lent from the local governments to the water supply companies through subsidiary loan agreements.

 For all other components, i.e., all wastewater and the solid waste components, the county level governments will remain the end-borrower. The proceeds from the World Bank loan will be passed on by the governments to the operating implementing agencies as equity grants. All implementing agencies will enter into subsidiary agency agreements with their county level governments.

Table 6.1: Implementing Agencies, Ownership, O&M and Debt Service Obligations No Location Project Implementation Agency Ownership of O&M of assets Debt service assets obligations Water Supply 1. Zhuji City Zhuji City Water Affairs Group WSC WSC WSC Co. Ltd. (WSC) 2. Wucheng Xinfan Reservoir Management WSC WSC WSC District Division of Wucheng District (WSC) Wastewater 3. Jiande City Jiande City Xinanjiang Wastewater IA IA Jiande City Treatment Plant Co. (IA) 4. Qujiang Qujiang District Urban Rural IA IA Qujiang District Construction Development Co. District Ltd. (IA) 5. Lanxi City Lanxi City Youbu Infrastructure IA IA Lanxi City Construction Co. Ltd. (IA) 6. Pan’an County Pan’an Industrial Park IA IA Pan’an (Jiangshan) Development and Investment County Company Ltd. (IA) 7. Pan’an County Pan’an New Urban District IA IA Pan’an (Shenze) Construction Investment Co. Ltd. County (IA)

8. Pan’an County Pan’an County Yunshan IA IA Pan’an (Yunshan) Development Construction and County Development Co. Ltd. (IA) 9. Tonglu County Tonglu Jiangnan Township New IA IA Tonglu Village Town and Village County Construction Co. Ltd. (IA) 10. Longyou Longyou County Longbei IA Wastewater: IA Longyou County Economic Development Company Water Supply: County Co. Ltd. (IA) Longyou Water Company Solid Waste 11. Jiande City Jiande City Urban Management & IA IA Jiande City Law Enforcement Bureau (IA)

Water Supply and Distribution Component

6. Zhuji City. Zhuji City Water Affairs Group Co. Ltd. will implement the water supply component in Zhuji City. The company was established in 2001 with a paid in capital of RMB 100 million. It is an independent legal entity with a business license (33068110081103 – December 31, 2001) and a company charter (October 12, 2009) and is fully owned by Zhuji City Government. The company has 345 employees in three branch companies: water supply, water engineering and real estate. The company owns and operates the existing water supply to the core urban areas of Zhuji City and neighboring towns. Through the project investments, the company will be able to extend water supply service in currently unserved areas of Zhuji City and surrounding towns.

7. Wucheng District. Xinfan Reservoir Management Division of Wucheng District will implement the water supply component. The Division is a government entity under the Water Resource Bureau and has an independent legal status with a government certificate (133070200070 - March 3, 2003). It currently manages three water reservoirs, of which the main one is the Xinfan Reservoir, and a small power plant, water treatment plant and irrigation schemes. The Division has 48 employees. As the company does not have prior experience in operating the assets to be constructed under the project, the Division has entered an agreement with Jinxi Water Supply Company to form a Joint Venture Company for the operation of the project assets. Jinxi Water Supply Company currently operates the water supply in the area which will be connected to the new water supply. After construction the JV Company will take over the constructed project assets as well as the existing water supply system. The new company will be owned 75% by the Reservoir Management Division while the remaining 25% will be owned by Jinxi Water Supply Company.

Wastewater Collection and Treatment Component

8. Jiande City. The Jiande City Xinanjiang Wastewater Treatment Plant Company will implement the wastewater component in Jiande. The company, which is a government owned enterprise, was established in 2002 with a paid in capital of RMB 1 million with a government certificate (330182000004984 - March 10, 2009). The company owns and operates the current wastewater treatment plant in Jiande which is to be expanded as a part of the project. The company has 35 employees. Future operation of the expanded wastewater treatment plant 42

component will remain the responsibility of the company. The existing sewage network is operated by the government.

9. Qujiang District. Qujiang District Urban Rural Construction Development Co. Ltd. will implement the waste water component in Qujiang District. The company is responsible for establishing wastewater infrastructure for town areas and villages in the District. The company is fully owned by Qujiang District State Owned Assets Operation Company Ltd., which is the government owned company responsible for establishing infrastructure in Qujiang District. The company was established in 2009 as government owned company with a paid in capital of RMB 10 million, a business license (330803000010057- May 5, 2009) and a company charter (April 20, 2009). The company has 27 employees. It plans to establish a wastewater company to own and operate the facilities.

10. Lanxi City. Lanxi City Youbu Infrastructure Construction Co. Ltd. will implement the component in Qujiang District. The company, which is owned by the Youbu Government was established in 2009 with a paid in capital of RMB 15 million, a business license (330781000021867 - April 10, 2009) and a company charter (April 9, 2009). Its main task is to undertake financing and management of public construction work in Youbu Town. The company is owned by the local government and has a staff of nine. The company has already established a wastewater subsidiary company to be responsible for the ownership and operation of the assets created under the project.

11. Pan’an County/ Jianshan Town. The wastewater components in Jianshan Town will be implemented by Pan’an Industrial Park Development and Investment Company Ltd. The company is owned by the Pan’an Government and was established in 2003 with a paid in capital of RMB 50 million, a business license (330727000008942 - September 28, 2009) and a company charter (May 22, 2007). The company has 23 employees. The company will establish a division to own and operate the facilities.

12. Pan’an County/ Shenze New Urban Area. The wastewater components in the Shenze New Urban Area will be implemented by Pan’an New Urban District Construction Investment Company Ltd. The company is owned by the Pan’an Government and was established in 2004 with paid in capital of RMB 10 million, a business license (3307271000743 - April 4, 2004) and a company charter (March 29, 2004). The company has 39 employees and will carry out the operation and maintenance of the sewage pipes.

13. Pan’an County/ Yunshan Area. The wastewater components in Yunshan Area will be implemented by Pan’an County Yunshan Development Construction and Investment Company Ltd. The company is owned by the Pan’an Government and was established in 2000 with paid in capital of RMB 3 million, a business license (330727000009927 - April 21, 2009) and a company charter (April 13, 2009). The company has 13 employees and will operate and maintain assets created under the project.

14. Tonglu County. Tonglu Jiangnan Township New Village Town and Village Construction Co. Ltd. will implement the component in Jiangnan Town of Tonglu County. The company was established in 2006 with a paid in capital of RMB 1 million, a business license (330122000007322 - October 26, 2006) and a company charter (December 6, 2007). Its main

task is to undertake financing and management of infrastructure construction in Jiangnan Town. The company is owned by the local government and has a staff of 15. The operation of the assets will be a responsibility of the implementing agency.

15. Longyou County. Longyou County Longbei Economic Development Company Ltd. will implement the combined water supply, wastewater and road component in Longyou County’s Chengbei New District EDZ. The company was established in 2003 with a paid in capital of RMB 110 million, is an independent legal entity with a business license (330825000006907 - February 9 2009) and a company charter (April 24, 2007) and is fully owned by Longyou County. The company has 61 employees. The company is responsible for development of the EDZ located at the outskirts of Longyou County Town, which is currently developing a second phase expansion. Apart from the water supply facilities, the company itself will operate and maintain all assets created under the project. Longyou Tap Water Company will provide water and be responsible for the operation and maintenance of the constructed water supply network.

Solid Waste Management Component

16. Jiande City. Jiande City Urban Management & Law Enforcement Bureau will implement the solid waste component in Jiande. The Bureau has a staff of 420. The Bureau’s Landfill Site Division is currently in charge of operating the existing sanitary landfill which serves the core urban area of Jiande City and will also be in charge of the operation of the newly constructed landfill in Meicheng Town. Collection and transportation of solid waste to the land fill from the surrounding towns be the responsibility of the Bureau’s Sanitation Division, a responsibility it currently has for Jiande’s core urban area.

IST Component

17. The PPMO will take the lead role in coordinating the implementation of all three packages under the IST component.

Annex 7: Financial Management and Disbursement Arrangements CHINA: Zhejiang Qiantang River Basin Small Town Environment Project

Executive Summary

1. The Financial Management Specialist (FMS) conducted an assessment of the adequacy of the project financial management system for the Zhejiang Qiantang River Basin Small Town Environment Project. The assessment, based on guidelines issued by the Financial Management Sector Board on March 1, 2010, has concluded that the project meets the minimum Bank financial management requirements, as stipulated in BP/OP 10.02. In the FMS’s opinion, the project will maintain adequate financial management arrangements acceptable to the Bank and, as part of the overall arrangements that the borrower has in place for implementing the operation, provide reasonable assurance that the proceeds of the loan will be used for the purposes for which the loan is granted. Financial management risk is the risk that World Bank loan proceeds will not be used for the purposes intended and is a combination of country, sector and project specific risk factors. Taking into account the risk mitigation measures proposed under this project, a “Modest” FM risk rate was assigned to the project at the appraisal stage.

2. Funding sources for the project include Bank loan and counterpart funds. The Bank loan proceeds will directly flow into a project designated account (DA) to be set up at and managed by the Zhejiang Provincial Finance Bureau (ZPFB). The Bank loan will be signed between the Bank and the People’s Republic of China through its Ministry of Finance (MOF), and on-lending arrangements for the Bank loan will be signed between MOF and the Zhejiang Provincial Government through its ZPFB, and then between ZPFB and relevant city/county governments through their respective finance bureaus. Finally, on-lending arrangements will be signed between these city/district/county finance bureaus and project implementing units (PIUs), if the repayment obligation will be taken by PIUs. Counterpart funds are comprised of local government appropriations and domestic financing.

Country Issues

3. To date, no CFAA has been carried out by the Bank for China. Our knowledge of the system is however fairly comprehensive, thanks to several studies carried out by the Government and others.18 Based on the studies and material produced by others, our observations of developments in the areas of public expenditures, accounting and auditing, and Bank experience with China projects for the past several years, we noted that substantial achievement in the aforementioned areas has been made and further improvement is expected in the next few years. This is a work in progress and as the economic reform program further unfolds, the Government of China has come to realize the importance of establishing and maintaining an efficient and

18China Report on the Observance of Standards and Codes - Accounting & Auditing (World Bank 2009) Financial Management and Governance Issues in China (ADB 2000) Public Sector Management Issues in China (Christine Wong 2005) Government Budgeting and Accounting Reforms in China (Lou Jiwei 2001) OECD Challenges for China’s Public Spending Chapter 1 WB China Provincial Public Expenditure Review (Christine Wong 2000) WB 2000 (Country Economic Memorandum) managing Public Expenditures for Better Results

effective market mechanism to ensure transparency and accountability, and minimize potential for fraud or corruption.

4. Due to the rather unique arrangement by the Government of China, funding (particularly Bank loan/grants) of Bank projects is controlled and monitored by MOF and its extension at the sub-national level, i.e., finance bureaus at provincial, municipal/prefecture and county level. However, project activities are usually carried out by implementing entities of a specific industry or sector due to the level and complexity of expertise involved. While this segregation of duties provides added fiduciary assurance, the above arrangement then usually requires more coordination at the project level, as the multi-level management of the funding and implementation mechanism sometimes works to the detriment of smooth project implementation.

Summary Project Description

5. The project development objective of the proposed project is to assist Zhejiang Province in improving access to sustainability urban environmental infrastructure services in selected cities, counties and towns in the Qiantang River Basin. This will be achieved by supporting infrastructure investments in the water supply, wastewater and solid waste sectors, as well as capacity building activities to ensure the long terms sustainability of the assets created. For a detailed project description, please refer to Annex 4.

Audit Arrangements

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

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

Audit Reports Submitted by Due date Project consolidated financial statements Zhejiang Provincial June 30 of each calendar year PMO (PPMO)

Risk Assessment and Mitigation

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

Risk Risk Incorporated Risk Risk Rating Conditions of Rating Before Mitigating Measures After Negotiations, Mitigating Mitigating Board or Measures Measures Effectiveness Inherent Risk Continuous dialogue with related government entities and technical assistance from the Bank will help the government to improve its public sector financial management. In the short-term, annual audit Country level Modest requirements will reduce the risk Modest N that project funds are not used for their intended purposes. For those areas where government systems cannot be used, the Bank’s specific requirements will be embedded into project financial management system. The PIUs at city/ county /township level lack experience with Bank projects. However, the PPMO and ZPFB are both experienced with Bank projects. Therefore, close monitoring and N guidance from the PPMO and

Entity Level Substantial ZPFB as well as the Bank’s Modest

regular supervision can mitigate

this risk to some extent. In addition, a well-designed FM manual (FMM) and training sessions will be provided to all project financial staff before and during project implementation. The project is spread across 9 cities, counties and has 11 PIUs. As such, a well designed FMM is required to unify and Project Level Substantial Modest N standardize project financial management and disbursement arrangements at each project implementing agencies. Control Risk Procedures for budget preparation and execution have been agreed by the Bank and government. The FM team will Budgeting Substantial Modest N review execution status during implementation and assist in improving any identified weak areas. Accounting policies and Accounting Substantial Modest N procedures are already in place.

Circular #13 has been issued by MOF and adopted for all World Bank financed projects. The circular will be documented in the project FMM. A well designed training workshop will be provided to all financial staff before project start. Detailed internal control procedures (including segregation of duties, review, approval, and reporting procedures, as well as N Internal Control Substantial Modest safeguarding assets) will be established within the project. These are included in the FMM which will be monitored during project implementation. Bank loan proceeds will be managed and monitored through the finance bureau channels and all disbursement requests will be subject to their substantive reviews. The funds flow Funds Flow Modest Low N arrangement is straight forward and approval processes have been streamlined. To avoid disbursement delays, related requirements and procedures will be documented in the FMM. The format and content of financial statements have been stipulated by MOF. The project FMM specifies the format, Financial Modest content and timing requirements Modest N Reporting for such financial reporting. The PPMO will consolidate the project financial statement with the assistance of ZPFB. The external auditor, ZPAO, has Auditing Modest extensive experience with Low N previous Bank projects. Overall Substantial Modest

9. The overall FM risk-rating assigned at appraisal is modest, provided the proposed mitigating measures are carried out. The FMS will monitor the effectiveness of the measures and the project FM risk during project implementation.

Fund Flow and Disbursement Arrangements

10. Four disbursement methods are available for the project: advance, reimbursement, direct payment and special commitments. Supporting documents required for Bank disbursements

under different disbursement methods are documented in the Disbursement Letter issued by the Bank. Applications will be supported by:

 For reporting eligible expenditures paid from the Designated Account (DA) for requesting for reimbursement:

(a) List of payments against contracts, together with records evidencing eligible expenditures (e.g., copies of receipts, supplier invoices) for the contracts subject to the Bank’s prior review; and (b) Statement of Expenditure in the form detailed in the Disbursement Letter for all other expenditures / contracts not subject to the Bank’s prior review.

 For requests for Direct Payment: records evidencing eligible expenditures, e.g., copies of receipts, supplier invoices.

11. The Bank loan would be disbursed against eligible expenditures (taxes inclusive) as in the following table.

Amount of the Loan Percentage of Allocated Expenditures to be Category (expressed in financed Dollars) (inclusive of Taxes) (1) Goods and Works for: (a) Part I.1 of the Project (Zhuji City) 10,250,000 68%

(b) Part I.2 of the Project (Wucheng District) 8,690,000 94%

(d) Part II.2 of the Project (Qujiang District) 14,240,000 73%

(e) Part II.3 of the Project (Lanxi City/ Youbu 6,060,000 64% Town) (f) Part II.4 of the Project (Pan'an County/ Jianshan 4,670,000 76% Town) (g) Part II.5 of the Project (Pan'an County/ Shenzhe 11,510,000 63% District) (h) Part II.6 of the Project (Pan'an County/ Yunshan 4,400,000 63% District) (i) Part II.7 of the Project (Tonglu County/ Jiangnan 8,640,000 64% Town) (j) Part II.8 of the Project (Longyou County/ 10,040,000 62% Chengbei New District) (k) Part III of the Project (Jiande City/Meicheng 10,930,000 77% Town) (2) Consultants’ services and Training for Part IV of the 2,000,000 100% Project (3) Front-end Fee 250,000 Amount payable pursuant to Section 2.03 of this

Amount of the Loan Percentage of Allocated Expenditures to be Category (expressed in financed Dollars) (inclusive of Taxes) Agreement in accordance with Section 2.07(b) of the General Conditions (4) Premium for Interest Rate Cap or Interest Rate Collar 0 Amount payable pursuant to Section 2.07(c) of this Agreement and Section 4.05(c) of the General Conditions TOTAL AMOUNT 100,000,000

12. Retroactive financing will be applied to the project for the expenditures incurred and paid prior to the signing date and after May 1,2010. The total amount for retroactive financing is up to USD20,000,000.

World Bank

ZPFB

PPMO

City/County FB City/County PMO PIUs

WAs Flow Contractor/ Supplier Fund Flow

13. One segregated DA in US dollar will be opened at a commercial bank acceptable to the Bank and will be managed by ZPFB. The ceiling of the DA will be determined and documented in the Disbursement Letter.

14. ZPFB will be directly responsible for the management, maintenance and reconciliation of project DA activities. Supporting documents required for Bank disbursements will be prepared and submitted by each PIU, through the respective finance bureau to PPMO, for approval and verification before sending to the ZPFB for further disbursement processing. The proposed flow of funds and withdrawal applications (WAs) are as shown in the figure above.

Financial Management and Reporting Arrangements

Strengths

15. Both ZPFB and PPMO have accumulated extensive experience in project financial management and disbursement, which will benefit project implementation.

Weaknesses and Action Plan

16. The following significant weaknesses and action plan for addressing each weakness have been identified:

Significant weaknesses Actions Responsible Completion Date Person PIUs at the city/ county/ The FM and disbursement related PPMO and For FMM, before township level are new to training should be provided to all ZPFB project the Bank-financed project. project financial staff. A well negotiation. prepared FMM to detail and standardize financial management requirements and disbursement arrangements was finalized by negotiation.

Implementing Agencies

17. Provincial-level. The Provincial Leading Group is headed by the Vice Secretary-General of Zhejiang Provincial Government and comprises representative from all key Provincial Government agencies. The PMO will continue to be the Zhejiang Provincial Project Management Office of the World Bank’s projects (PPMO), who is currently managing and coordinating the existing Zhejiang Urban Environment Project. The PPMO is responsible for project management, coordination, planning, implementation, monitoring and reporting, and financial management.

18. City/ county /township level. Project implementation units have also been established to implement the various project components at the local level. All the PIUs are state-owned commercial enterprises and public services units. A description of each agency and which activities they are implementing are stated in Annex 6.

Budgeting

19. Each PIU will prepare its respective annual project implementation plan, including the budget, and submit to it the PPMO for review and consolidation. The budget for counterpart funds committed by local governments will be reviewed and approved by the local People’s Congress at each level and will be included in their sectoral budget. Based on the approved budget and implementation progress, the related finance bureaus will provide government appropriations to the project. Budget variance analysis will be conducted regularly by all PIUs and necessary action will be taken to implement the project as planned. The Bank will work with the PPMO and PIUs to enhance their budget preparation and execution during project implementation.

Accounting

20. The administration, accounting and reporting of the project will be set up in accordance with 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 of project activities and covers the following:

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

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

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

22. The PPMO and each PIU will manage, monitor and maintain the respective project accounting records for the components they execute. Original supporting documents for project activities will be retained by the PPMO or PIUs. The PIUs will prepare their own financial statements, which will then be consolidated by the PPMO before submission to the Bank for review and comment on a regular basis.

23. Adequate project accounting staff, with educational background and work experience commensurate with the work they are expected to perform, is one of the factors critical to the successful implementation of project financial management. Based on discussions, observation and review of educational background and work experience of the staff identified for financial and accounting positions in the PPMO and each PIU, the task team noted that they are qualified and appropriate to the work they are expected to carry out. Well designed training sessions will

be provided to all project financial staff before project implementation to furnish them Bank financial management requirements and disbursement procedures. In addition, during implementation, their capacities will be further strengthened through Bank review.

24. To strengthen financial management capacity and achieve consistent quality of accounting work, a project FMM was prepared. The FMM provides detailed guidelines on financial management, including internal controls, accounting procedures, fund and asset management, withdrawal application procedures, financial reporting, and auditing arrangement..

25. Each PIU will individually decide whether they would utilize computerized financial management information system or manually record and maintain the project accounting books. The task team will monitor the accounting process, especially during the initial stage, to ensure complete and accurate financial information will be provided in a timely manner.

Internal Control and Internal Auditing

26. The related accounting policy, procedures and regulations have been issued by MOF. The FMM, which includes these regulations, will uniformly align the financial management and disbursement requirements among PPMO, ZPFB and PIUs.

27. There is no formal independent internal audit department for the project. However, management and monitoring from various levels of finance bureaus and the PPMO, which will review the withdrawal applications, and annual external audits will serve as the mechanism to ensure that financial management controls are functioning appropriately.

Financial Reporting and Covenants

28. The format and content of project financial reports have been agreed between the Bank and the PPMO and ZPFB. Interim financial reports will be prepared and submitted to the Bank for review on a semi-annual basis

29. Each PIU will prepare project financial statements on their implemented components, which will then be used by the PPMO for preparing consolidated project financial statements and submitted to the Bank for review and comment on a regular basis. The unaudited semi-annual interim consolidated project financial statements will be prepared and furnished to the Bank by PPMO no later than September 1 and March 1 in each year after the end of each calendar semester, in form and substance satisfactory to the Bank.

30. No specific financial covenants are applicable to the project except for those standard financial covenants like project audit and interim financial reports.

Supervision Plan

31. Supervision strategy for this project is based on its FM risk rating, which will be evaluated on a regular basis by the FMS and raised as required in consultation with the task team leader.

Annex 8: Procurement Arrangements CHINA: Zhejiang Qiantang River Basin Small Town Environment Project

1. Procurement for the proposed project would be carried out in accordance with the World Bank’s "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004 revised October 2006; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004 revised October 2006, and the provisions stipulated in the Legal Agreement. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

2. Procurement of Works. Works procured under this project would include: construction of water supply and wastewater treatment plants, pipeline networks and pumping stations, solid waste collection and sanitary landfill, roads and river bank rehabilitation. Procurement will be done using the Bank’s Standard Bidding Documents (SBD) for all International Competitive Bidding (ICB) and National SBD agreed with or satisfactory to Bank. For works contract valued at and above US$20 million each, ICB will be applied; for contracts valued less than US$ 20 million each, National Competitive Bidding (NCB) will be used; for contract valued less than US$ 200,000 each Shopping will be used.

3. Procurement of Goods. Goods procured under this project would include: equipment and instruments for water supply and wastewater treatment plants, quality monitoring sensor network, solid wastes collection vehicles, storage facility and transferring equipment, and computer and office equipment; etc. Procurement will be done using the Bank’s SBD for all ICB and National SBD agreed with or satisfactory to the Bank. For goods contracts valued at and above $1,000,000 each, ICB procedures will be followed and World Bank’s standard bidding documents (SBD) and bid evaluation report will be used. For contracts valued less than US$ 1,000,000 each, NCB procedures will be followed. Small devices for office equipment supplies, which are readily available off-the-shelf and estimated to cost less than US$ 200,000 per contract, would be procured through Shopping. In case of Supply and Installation of Plant and Equipment contracts, ICB will be used for contracts value at/ or above US$ 20 million each, and NCB will be used for contracts valued lower than US$20 million each.

4. Selection of Consultants. Consulting services would be required under this project and cover a variety of tasks for TA on project implementation support and strategic studies etc. Consulting contracts expected to cost more than US$200,000 per contract will use the Quality and Cost Based Selection (QCBS) or Quality Based Selection (QBS). For consulting services estimated to fall under US$ 200,000 cost per contract, the selection based on Consultants Qualifications (CQ) would be used for these contracts. Chinese universities and research institutes may be included in shortlists as a source of consultants. In such cases, QBS or CQ would be used. Short lists of consultants for services estimated to cost less than US$ 300,000

equivalent per contract may be composed entirely of national consultants. Individual consultants would be selected and contracts awarded as needed.

5. Single Source Contracting. Any need for single source contracting of firms or individuals will be identified in the final procurement plan and agreed with the Bank. Detailed justification for single source contracts and description of services will provided to the Bank.

6. Training and workshops. Training, including study tours and workshops, are required under the project. Detailed programs would be developed by the PPMO and sub-project PIUs during project implementation and included in the annual work plan for Bank review. Actual expenditures incurred in accordance with the approved detailed programs would be used as the basis for reimbursement.

7. Procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods, are provided in the project operational manual.

Assessment of the agency’s capacity to implement procurement

8. An assessment of the Borrower’s capacity to implement the project was completed during pre-appraisal. The assessment evaluated the capacity of the implementation units to conduct procurement and the risk level associated with this activity. Based on the findings: (i) the PPMO and PIUs have been equipped with well-educated full-time staff; (ii) procurement responsibility of each level has been clearly defined; (iii) a qualified procurement agency will be hired by the PPMO to strengthen its capacity and provide help to PIUs; and (iv) procurement staff from the PPMO and PIUs participated or will participate in procurement training organized by the PPMO with the assistance from the task team. The overall risk to implementation is considered to be Moderate.

Procurement Plan (refer to attachment 1)

9. The initial 18-month procurement plan has been agreed between the Borrower and the Project Team on November 19, 2010 and is available at the Zhejiang Provincial Construction Commission, Hangzhou, Zhejiang Province. It will also be available in the project’s database and in the Bank’s external website. The Procurement Plan will be updated in agreement with the task team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

Frequency of Procurement Supervision (refer to attachment 2):

10. In addition to the prior reviews, the Bank will supervise annually and conduct post- reviews at least once a year, including review of fiduciary aspects and end-usage.

E. Prior Review Thresholds (refer to attachment 2):

11. For goods contracts estimated to cost US$ 500,000 or more, and the first Shopping contract in each sub-project, regardless of value, will be subject to prior review. Works contracts

estimated to cost US$ 5 million or more and the first Shopping works contract to be procured by each sub-project will be subject to this review. Consultant services estimated to cost more than US$ 200,000 per contract for firms and the first CQS contract, and all single source selection of consulting firms and individual consultants, regardless of value, will also be subject to Bank prior review. All other contracts will be subject to Bank post-review with a ratio of 1 in 10.

12. Advance contracting may be applied for the contracts awarded starting from May 1, 2010. The ceiling amount for retroactive financing is 20% of the loan amount. Procurement of all contracts subject to retroactive financing will be in accordance with Bank guidelines, including with respect to related Bank safeguards policies. The expenditures will be subject to the project external audit.

Attachment 1: Retroactive, ICB, and Consulting Service Contracts

Procure. Review by Contract Name Contract Content Contract No. Method Bank

WS - ZHUJI (ZJ)

*WSZJ1C CW of WTP Construction of 40,000 m3/d Qingshan WTP NCB PRIOR

CW of raw water Construction of 0.50 km x DN800 steel raw water transmission main and transmission main and 44.5km x DN300 ~ DN800 *WSZJ2C NCB PRIOR clear water distribution ductile CI water distribution networks and a networks pumping station of 15,000 m3/d

SIC of goods for WTP SIC of goods for 40,000 m3/d Qingshan WTP and *WSZJ1S NCB PRIOR and pump stations 44,000m3/d raw water pump

WS - JINHUA WUCHENG (WC)

Construction of (i) 0.17 km x DN800 steel raw CW of WTP and raw *WSWC1C water gravity main from Xinfan reservoir, and (ii) NCB PRIOR water main 50,000 m3/d Tangxi WTP

CW of clear water Construction of 12.73 km x DN800 ~ DN900 clear *WSWC2C NCB PRIOR distribution networks water distribution networks *WSWC1S SIC of goods for WTP SIC of goods for 50,000 m3/d WTP NCB PRIOR WW - LANXI - YOUBU (YB) CW of WWTP and Construction of 5,000 m3/d WWTP and 1.7 km *WWYB1C treated effluent discharge NCB PRIOR treated effluent discharge pipe pipe CW of WW pipe in Construction of 3 km sewers in south part of new *WWYB2C south part area and NCB PRIOR area and 3.3 km DN600 main sewer to WWTP collector Construction of 1.5 km new roads (Tianfu/ *WWYB4C CW of new roads Yongxin / Yongfu), sewer and storm water NCB PRIOR networks *WWYB1S SIC of goods for WWTP SIC of goods for 5000m3/d WWTP NCB PRIOR WW - PAN'AN Jianshan (JS) CW and SIC of goods Construction and SIC of goods for 6000 m3/d *WWJS1C NCB PRIOR for Jianshan project WWTP, 3 pump stations and sewer networks

Procure. Review by Contract Name Contract Content Contract No. Method Bank

WW - TONGLU - JIANGNAN (JN) Construction of Zhongxing Road north extension + CW of Zhongxing Road *WWJN1C Zhengxing West Road + Shichang Road, sewer and NCB PRIOR and Zhengxing Road storm networks WW - LONGYOU (LY) Construction of 0.461 km Jingqi Road+ 1.754 km CW of Jingqi and Weisi *WWLY1C Weisi Road and associated potable WS, industrial NCB PRIOR Roads WS, WW and storm water networks Construction of 1.755 Km Jingsan Road and *WWLY2C CW of Jingsan road associated potable WS, industrial WS, WW and NCB PRIOR storm water networks CW of treated effluent Construction of 1.0 km WWTP treated effluent *WWLY3C NCB PRIOR discharge pipe discharge pipe Construction of 0.921 km Weiyi Road + 0.747 km CW of Weiyi and Weier *WWLY4C Weier Road and associated potable WS, industrial NCB PRIOR Roads WS, WW and storm water networks SW - JIANDE Meicheng (MC) Construction of the first phase (210,000 m3 CW of Meicheng capacity) of a sanitary landfill (610,000 m3 *SWMC1C NCB PRIOR sanitary landfill capacity) inclusive of laying of horizontal antiseepage system Design, construction, , Design, construction, supply, installation and supply, installation and commission of leachate treatment system for *SWMC2C NCB PRIOR commission of leachate Meicheng sanitary landfill and provision of treatment system monitoring instruments Supply of Meicheng SW SWMC1G Supply of cars, buses and trucks ICB PRIOR goods list 1 Supply of Meicheng SW SWMC2G Supply of SW collection fleet and landfill machine ICB PRIOR goods list 2 Institutional Development (ID) Package A: Project Management and QTTA1 QCBS PRIOR Implementation Assistance Package B: Master Planning, or any other agreed QCBS/ QTTA2 study, of Small Town Urban Environmental PRIOR CQS Infrastructures in Zhejiang Province SOE Non- QTTA3 Training and Study Tours consultant services

Annex 2 Thresholds for Procurement Methods and Prior Review

Expenditure Contract Value Threshold Procurement Contracts Subject to Prior Category (US$ million) Method Review (US$ million) 1. Works, Equal or above US$20 million ICB All contracts equal to or above Supply and US$5 million and the first Installation of Less than US$20 million NCB Shopping contract in each sub- Plant and project Equipment

Less than US$0.20 m Shopping ------

2. Goods Equal to or Above US$1 m ICB All contracts equal to or above US$0.5 m Less than US$ 1 m NCB First Shopping Contract in each sub-project, regardless contract value Less than US$ 0.20 m Shopping

3.Consulting Above US$ 0.20 (firm) QCBS/QBS All contracts equal to or above Services US$ 0.2 m

Equal to or Less than US$ 0.20 CQS The first CQS contract, regardless (firm) contract value

Individuals IC Any specific assignments

All SSS contracts SSS

Overall Procurement Risk Assessment: Moderate

Frequency of procurement supervision missions proposed Once every year (includes special procurement supervision for post- review/audits)

Annex 9: Economic and Financial Analysis CHINA: Zhejiang Qiantang River Basin Small Town Environment Project

A. Financial Analysis

1. Financial analysis was conducted to: (i) identify the most appropriate project financing and debt allocation/ repayment strategy taking into account that cost recovery from tariffs is in only early stages, especially for the wastewater and solid waste subprojects; (ii) estimate cost recovery tariff levels and tariff increases and/or potential subsides required to ensure financial sustainability of all implementing agencies; (iii) demonstrate that any required tariff increases would be affordable for low-income households; and (iv) show that all participating county level governments have sufficient financial resources to meet counterpart funding and debt service payments under the Bank project, either for those components where they carry direct debt repayment, or indirectly, in case project companies would not be able to meet the obligations under the project. Analysis of debt levels of each project city and county was also conducted.

Institutional and Financial Background

2. The three sectors covered in this project, water supply, wastewater service and solid waste service, are all at different levels of institutional and financial maturity. While the water sector has reached a certain level of institutional and financial autonomy, the wastewater and solid waste sectors are only at very early stages of development.

3. Water supply to the core urban areas is well developed institutionally and financially. Water supply companies exist as corporatized entities with full financial autonomy. Revenue from water tariffs generally covers the full costs of the companies’ operations. Although the project will provide piped supply of potable water to town, village and peri-urban areas, the operational responsibilities will remain with the existing water supply companies. Water supply tariffs in the project areas are in place and will, with some minor adjustments, cover the full costs of the operations.

4. Wastewater collection and treatment is institutionally and financial less developed compared to the water supply sector, especially in the smaller towns covered in this project. Wastewater companies, if they exist, rely on government support for their investments and operations, as revenue from tariffs can only cover part of total costs. The project areas for the wastewater components are mainly located outside the core urban areas, which are typically only partly covered with sewer networks connected to a wastewater treatment plant. If treatment facilities exist, they are operated by government owned enterprises or, for one of the components, are based on a BOT arrangement. Due to the fact that wastewater tariffs are low or non-existing in some project areas, full cost recovery from tariff can only be a medium-term target. Zhejiang Provincial Government is aware of the need to increase wastewater tariffs, and has issued guidelines recommending tariffs of RMB 0.8/ m3 for county towns and above.

5. The solid waste sector is the least developed institutionally and financially. Solid waste services are generally provided by government departments, with a solid waste tariff or sanitation fee covering only a very small part of actual costs. For the project’s solid waste

component in Jiande City, revenue collection from solid waste fees, which has not been revised for several years, is very low and can only cover street cleaning activities. However, initiatives are underway to implement an improved solid waste tariff system.

Financial and Institutional Project Objectives

6. In light of the different levels of institutional and financial maturity of the three sectors, realistic funding and cost recovery objectives have been adopted for this project. Full cost recovery will be targeted for water supply, while the target for the wastewater and solid waste is recovery of O&M cost only. Moreover, in light of the challenging financial operating environment for the wastewater and solid waste components, the project financing strategy is to on-lend the World Bank loan only to those entities that are financially sustainable (i.e., the water supply subprojects), while for others (i.e., wastewater and solid waste subprojects) the debt repayment responsibility will rest with the local county finance bureaus. Furthermore, the Provincial Government has fully recognized these financing challenges and as a result has implemented polices to support counties in their infrastructure investment programs, at a level of about 5% of the total funding needs. The specific cost recovery targets and financing strategies are as follows:

 Water supply and distribution component: Full cost recovery from tariffs is targeted in light of the sufficiently high water supply tariff levels as well as the relatively more advanced financial and institutional autonomy of the water supply companies. World Bank debt repayment responsibility rests with the water supply companies and Subsidiary Loan Agreements will be signed between the country government and the PIUs. All assets created will be owned by the PIUs.

 Wastewater collection and treatment component: Cost recovery from tariffs for O&M costs only is targeted, in light of the low (or non-existing in some project areas) wastewater tariffs. Given the low level of financial self-sustainability of the wastewater companies, World Bank debt repayment responsibility rests with the county governments, with Subsidiary Agency Agreements signed between the country government and the PIUs. All assets created will be owned by the PIUs.

 Solid waste management component: Cost recovery from tariffs, even for O&M costs, can only be achieved to a limited extent, as the current solid waste user fees are very low. Ongoing government subsidy support will therefore be required. World Bank debt repayment responsibility will rest with the county governments, with a Subsidiary Agency Agreement signed between the country government and the PIU.

7. In addition to supporting a gradual approach towards financial self-sustainability, the project aims to advance the institutional development of the three sectors, in particular through the consolidation of the service provision. For example, in the case of Wucheng District, the aim is to support the establishment of a JV Company responsible for the provision of all water supply services. For wastewater, the aim is to ensure that O&M of the wastewater treatment plants is the responsibility of experienced companies, for example through management contracts. For solid waste operations in Jiande City corporatization of the sector will be pursued. Project

covenants require that O&M Action Plans will be developed for most of the project cities and counties and implemented in a manner satisfactory to the Bank. Local PMOs and PIUs will receive support on advancing this agenda through IST consultant support.

Entity-Level Financial Analysis

8. Financial projections were prepared for all major project components. The objective of the financial projections is to assess the financial sustainability of the PIUs based on the above described cost recovery and financing strategy. The results are as follows:

 Water supply and distribution component: The proposed components are financially sustainable as the current tariffs are almost sufficient to ensure full cost recovery from tariffs with only minor tariff increases required in the case of Zhuji City. The projected full cost recovery tariffs range from 1.7 RMB/m3 to 2.0 RMB/m3. Full cost recovery tariffs are defined as the level of tariffs to cover the cost of operation, maintenance, interest payments and the larger of depreciation and debt service.

 Wastewater collection and treatment component: The proposed components are financially sustainable on an O&M cost recovery basis, provided some tariff adjustments are implemented, especially in those cases where no wastewater tariffs currently exist in the project areas. The required wastewater tariffs sufficient to cover O&M costs range from 0.9 RMB/m3 to 1.2 RMB/m3 water supplied.

 Solid waste management component: The proposed component is financially sustainable only with continued government subsidy support, even on an O&M cost recovery basis. The projected required tariff to cover O&M costs (collection, transfer and landfill site operations) is RMB 200 per ton (or per household per year), which would constitute an eight-fold increase over the existing tariff level.

Table 9.1: Present and projected Tariffs

Water Supply and Distribution Component Current Water Supply Projected Av. Tariffs Tariffs (RMB/m3) (RMB/m3) Residents Average Full Costs1 1. Zhuji Water Supply and Distribution 1.45 1.7 2.0 2. Wucheng Water Supply and Distribution 1.40 1.7 1.72 Wastewater Collection and Treatment Component Current Wastewater Projected Av. Tariffs Tariffs (RMB/m3) (RMB/m3) Residents Average O&M2 3. Jiande Wastewater Collection and Treatment 0.4 0.9 1.0 4. Qujiang Wastewater Collection and Treatment 0.2 0.5 0.9 5. Youbu Wastewater Collection and Treatment Currently not levied in 1.2 the project area4

6. Jianshan Wastewater Collection and Treatment Currently not levied in 1.1 the project area4 7. Shenze Wastewater Collection 0.4 0.9 NA5 8. Yunshan Wastewater Collection 0.4 0.9 NA5 9. Jiangnan Wastewater Collection Currently not levied in NA5 the project area4 10. Longyou Wastewater Collection Currently not levied in NA5 the project area4 Solid Waste Component Current Solid Waste Projected Tariff Av. Tariff (RMB/household/year) (RMB/ton) Residents O&M 11. Meicheng Solid Waste Management 246 2006 1 Full cost recovery tariffs are defined as the level of tariffs to cover the cost of operation, maintenance, interest payments and the larger of depreciation and debt service. 2 The current tariff of RMB 1.7/m3 will be able to cover the full costs of operation. The break-even tariff is marginally lower at around RMB 1.5/m3. The projected tariff will be able to cover the cost of the operation of the proposed new Joint Venture Company as well as the debt service responsibility of the implementing agency. 3 O&M is defined as operating and maintenance expenditures excluding interest and depreciation. The projected tariffs cover O&M of wastewater treatment solely. 4 The project area does presently not levy a wastewater tariff, although nearby county town tariffs exist. 5 No wastewater tariff has been projected as only sewer networks are to be implemented 6 The current tariff can only cover street cleaning activities. The projected tariff, which covers the costs of O&M of solid waste collection, transfer and landfill site operations, is per ton and corresponds to a household tariff per year. Households in the project area typically produce around one ton of solid waste per year.

Financial Projections – Highlighted Examples

9. Water Supply. As an example, the results of the financial projections for Zhuji Water Supply Company are shown below. The projections demonstrate that the company will be on a sound financial footing with the tariff increase of 20% which the company is planning for 2011. Revenues from water tariffs will increase during the first 5 years of operation and stabilize at RMB 117 million annually. The margin at EBITDA level (before depreciation, interest and taxes) is at 65% and at EBIT level (before interest and taxes) at 35%. Net profit before taxes will reach RMB 10 million, and will be positive for all years of operation. The total fixed asset value will decrease from a peak level of RMB 450 million at the time of construction completion. The ratio of equity to total asset value is initially low at around 12% and will only improve slightly during operation to reach a level of 14%. The projections show a high net inflow of cash of over RMB 10 million annually and the company is as such not expected to face any liquidity problems over the projected period. The debt service coverage ratio is above 1.5 and the company will easily cover its debt obligations. Financial rate of return calculations shows that the investment made by the company generates a satisfactory return of over ten percent based on return on equity. Sensitivity analysis further shows that an increase in capital costs, costs of O&M or decrease in revenue at 10% only marginally influences the rate of return.

Table 9.2: Zhuji Water Supply Company - Financial Projections (million RMB)

Base Years Implementation Years of Operation 2007 2008 2009 2010 2011 2012 2013 2014 2015 Technical and financial assumptions Production capacity (tm3/day) 219 219 219 219 200 240 240 240 240 Water produced (tm3/day) 144 146 151 163 176 202 204 207 208 Water sold (tm3/day) 121 126 129 139 150 171 173 174 176 Av. Water tariff (RMB/m3) 1.51 1.60 1.74 1.74 2.08 2.08 2.08 2.08 2.08 Income Statement Operating Revenue 63 71 77 82 107 121 123 124 125 Expenditures -70 -78 -85 -91 -100 -112 -113 -115 -117 Profit before income tax -7 -7 -8 -9 7 10 10 10 10 Less income tax 00 00000 -1 -3 Net Profit -7 -7 -8 -9 7 10 10 9 8 Balance Sheet Current Assets 327 338 641 632 757 765 773 780 786 Construction in progress 183 206 220 240 267 311 354 397 438 Fixed and intangible assets 5 1 1 1 127 1 1 1 1 Total Assets 138 132 420 391 363 454 419 383 348 Current Liability 327 338 641 632 757 765 773 780 786 Long term loans 288 306 614 614 614 614 614 614 614 Equity 0 0 0 0 98 97 95 93 92 Total Liabilities and Equity 39 32 27 18 45 55 64 73 81 Cash Flow Statement Cash flow from operations -9 -37 19 50 68 80 80 79 77 Cf. from investment act. -4 -4 -2 0 -126 0 0 0 0 Cf. from financing activities 85 9 -27 -31 84 -38 -36 -36 -36 Cash generated in year 72 -32 -10 19 25 42 43 42 41 Opening Balance 7 79 47 37 56 81 123 167 209 Closing Balance 79 47 37 56 81 123 167 209 250 Financial Ratios Working Ratio 0.8 0.8 0.4 0.4 0.4 0.3 0.3 0.4 0.4 Debt Service Coverage Ratio 1.3 0.5 0.1 1.6 2.1 2.2 2.2 2.2 2.1

10. Wastewater. The results of financial projections for Jiande Wastewater Company are shown below. The financial projections demonstrate that the company will be on a sound financial footing with a slightly increased level of wastewater tariff to around 1.0 RMB/m3. This tariff level is sufficient to cover O&M cost at EBITDA levels. Assumptions made for the projections include that the loans related to the project stays on the government’s books and that assets are transferred to the company as an equity contribution. Revenues will increase during the first 5 years due to the increased service coverage and stabilize at RMB 22 million annually. EBITDA will continue to decrease over the years due to the effect of inflation and reach a marginal value in year 2015. As Jiande Wastewater Company is only expected to cover O&M cost from tariff collection, the income statement show a loss due to impact of asset depreciation. The total asset value will decrease slowly during the projected period from a level of RMB 100 million to RMB 40. Since all assets are transferred to the company as equity contribution, the equity stays at a level of 100%. The projections show a reasonable net inflow of cash, and the company is as such not expected to face any liquidity problems over the projected period.

Table 9.3: Jiande Wastewater Company - Financial Projections (million RMB)

Base Years Implementation Years of Operation 2007 2008 2009 2010 2011 2012 2013 2014 2015 Technical and financial assumptions WW Treatment Cap. (tm3/day) 18 18 18 18 30 49 49 49 49 Wastewater treated (tm3/day) 14 16 18 18 28 33 39 44 49 Av. Wastewater tariff (RMB/m3) 0.86 0.86 0.86 1.00 1.00 1.00 1.00 1.00 1.00 Income Statement Operating Revenue 4.9 5.0 6.9 8.2 12.8 15.2 17.6 20.0 22.4 Expenditures -8.2 -8.7 -9.7 -10.0 -14.4 -17.0 -23.3 -26.6 -30.1 Profit before income tax -3.3 -3.7 -2.8 -1.8 -1.6 -1.8 -5.7 -6.6 -7.7 Less income tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net Profit -3.3 -3.7 -2.8 -1.8 -1.6 -1.8 -5.7 -6.6 -7.7 Balance Sheet Current Assets 1.9 1.3 1.6 2.8 5.5 7.9 9.6 10.4 10.2 Construction in progress 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Fixed and intangible assets 25.4 25.6 22.2 57.8 104.4 99.8 92.1 85.0 77.8 Total Assets 27.3 26.9 23.8 60.6 109.8 107.7 101.8 95.4 88.0 Current Liability 3.1 2.8 2.5 2.0 1.8 1.5 1.3 1.6 1.9 Long term loans 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Equity 24.2 24.0 21.2 58.6 108.0 106.2 100.5 93.8 86.1 Total Liabilities and Equity 27.3 26.9 23.8 60.6 109.8 107.7 101.8 95.4 88.0 Cash Flow Statement Cash flow from operations 0.0 -0.3 0.6 1.7 2.9 2.7 2.0 1.1 0.0 Cf. from investment act. 1.1 -1.3 0.0 -39.1 -51.1 0.0 0.0 -0.6 -0.5 Cf. from financing activities -0.2 0.9 -0.7 38.5 50.5 -0.5 -0.4 0.1 0.1 Cash generated in year 1.0 -0.7 -0.1 1.1 2.3 2.2 1.6 0.6 -0.4 Opening Balance 0.8 1.8 1.1 1.0 2.1 4.4 6.6 8.2 8.8 Closing Balance 1.8 1.1 1.0 2.1 4.4 6.6 8.2 8.8 8.4 Financial Ratios Working Ratio 1.0 1.1 0.9 0.8 0.8 0.8 0.9 0.9 1.0

11. Solid Waste. The financial projections of the solid waste component located in Jiande City are presented below. The projections are based on the assumptions that a single entity, Jiande Solid Waste Operations, is responsible for collection, transfer and landfill site operations in Jiande Town as well as Meicheng Towns after the construction. The existing and the project solid waste assets are included in the projection, as it is assumed that the operation will take over these on a debt free basis. The projections show that due to the increased service the cost of operation and maintenance of the solid waste operations will increase to a level around RMB 23 million annually after 5 years. The projections indicate that O&M costs (collection, transfer and landfill site operations) cannot be covered without substantial subsidies from the local government. Currently the tariff collection can only cover the street cleaning activities which are not included in the projections below. The projected cost of O&M is around RMB 200/ton solid waste which corresponds generally to a tariff of RMB 200/household/year. The current fee is at a level of RMB 24/household/year in Meicheng and RMB 32/household/year in Jiande. The projections assume that tariffs gradually increase to a level of around one third of the cost recovery tariff. Due to the asset ownership the entity will be operating with a loss, as it is assumed that only the costs of O&M will be covered by tariffs and government support. The total asset value will decrease slowly during the projected period from a level of RMB 150 million after implementation to RMB 90 million after 5 years.

Table 9.4: Jiande Solid Waste Operations – Financial Projections (million RMB)

Base Years Implementation Years of Operation 2007 2008 2009 2010 2011 2012 2013 2014 2015 Technical and financial assumptions Solid Waste (ton/day) 160 160 160 160 160 290 290 290 290 SW Tariff (RMB/ton) 0 0 0 0 0 30 50 63 63 Govern. Support (mill RMB) 7.8 8.0 8.2 9.0 9.2 14.3 14.8 14.0 14.5 Income Statement Operating Revenue 7.8 8.0 8.2 9.0 9.2 19.6 20.1 20.6 21.1 Expenditures -10.2 -10.4 -10.6 -11.5 -11.7 -30.5 -31.0 -31.5 -32.0 Profit before income tax -2.5 -2.5 -2.5 -2.5 -2.5 -10.9 -10.9 -10.9 -10.9 Less income tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net Profit -2.5 -2.5 -2.5 -2.5 -2.5 -10.9 -10.9 -10.9 -10.9 Balance Sheet Current Assets 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 Construction in progress 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Fixed and intangible assets 37.0 34.5 32.1 29.6 145.2 134.3 123.4 112.5 101.6 Total Assets 40.2 37.7 35.3 32.8 148.4 137.5 126.6 115.7 104.8 Current Liability 0.6 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 Long term loans 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Equity 39.5 37.1 34.6 32.1 147.7 136.8 125.9 115.1 104.2 Total Liabilities and Equity 40.2 37.7 35.3 32.8 148.4 137.5 126.6 115.7 104.8 Cash Flow Statement Cash flow from operations 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Cf. from investment act. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Cf. from financing activities 0.0 0.0 0.7 0.0 0.0 -0.4 0.0 -0.1 0.0 Cash generated in year 0.0 0.0 0.7 0.0 0.0 -0.4 0.0 -0.1 0.0 Opening Balance 2.5 2.5 2.5 3.2 3.2 3.2 2.8 2.8 2.6 Closing Balance 2.5 2.5 3.2 3.2 3.2 2.8 2.8 2.6 2.6 Financial Ratios Working Ratio 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0

Tariffs and Affordability

12. Affordability for Low Income Households. An analysis of affordability for low income households demonstrates that current and projected tariffs are fully affordable for the residents in the cities and counties covered by the project even under a conservative planning assumption of low growth of disposable income. Specifically, the affordability analysis demonstrates that the combined water and wastewater bill will be at a level of 1% of urban household income for the average household in the lowest income quintile. Assessing the impact on rural households also affected by project, the water and wastewater bill will not exceed around 4% of the total income for poorest families. This lies within the parameters of the general accepted affordability benchmark of a maximum of 5% for the combined water and wastewater bill. To illustrate the results, the example of Pan’an County, which has the lowest income per capita among the project cities/ counties, is show below. If solid waste is included, the total fee would not exceed 2% for urban low income families and 7% for rural families.

Table 9.5: Tariff Affordability of Low Income Households

2010 2011 2012 2013 2014 2015 Water Supply tariff (RMB/m3) 0.95 0.95 0.95 0.95 0.95 0.95 Wastewater tariff (RMB/m3) 0.30 0.30 1.20 1.20 1.20 1.20 Total tariff (RMB/m3) 1.25 1.25 2.15 2.15 2.15 2.15 Water fee (RMB/year) 139 139 139 139 139 139 Wastewater fee (RMB/year) 44 44 175 175 175 175 Total fee payable1(RMB/year) 183 183 314 314 314 314 Low family income2 (RMB) 26,547 27,875 29,268 30,732 32,268 33,882 Water fee as % of income 0.5% 0.5% 0.5% 0.5% 0.4% 0.4% Wastewater fee as % of income 0.2% 0.2% 0.6% 0.6% 0.5% 0.5% Total fees as % of low income 0.7% 0.7% 1.1% 1.0% 1.0% 0.9% 1: Family of four members with water consumption each of a hundred liters per day. 2: Low income family of four with annual income of RMB 24,000 (2008) with 5% annually increase.

Local Government Financial and Debt Analysis

13. Zhejiang Province is the fourth richest province in China in terms of GDP per capita. For the project cities and counties, GDP/capita range between RMB 15,000 per capita in Qujiang District to over RMB 45,000 per capita in Zhuji County. GDP growth has been strong throughout recent years with annual rates of over 10%, though growth slowed down during part of 2008 and 2009 in light of the international financial crisis. In line with high GDP growth, local governments’ total fiscal revenue has also increased, with annual increases of between 15% and 25% from 2006 to 2008. However, a large share of about 50% of the local government total fiscal revenue derives from fiscal transfers from higher level governments.

14. Local Government’s Debt. Debt capacity analysis, conducted using debt data provided by local Finance Bureau, shows that the government debt/ GDP ratio is at low levels of around 10%, with only Longyou County at a level of around 20%. The World Bank loan will for most of the counties constitutes less than 10% of total outstanding loans with only Pan’an seeing a major increase in its total debt to around 30%. Local government debt service obligations compared to total revenue is at a ratio around 10% for most project cities/ counties, except for Longyou County and Qujiang Districts where it is at 20%.

15. Fiscal Impact of Projects. An analysis of the impact of the project investments on municipal finances was conducted to estimate whether the project cities and counties have sufficient resources to support the Bank project through counterpart funding contributions and servicing the World Bank loan. The analysis shows that the project’s impact on local government revenue is generally low. However, for three of the counties, i.e., Pan’an, Qujiang and Longyou, counterpart funding commitments are at somewhat higher levels of between 5% and 10%. Debt-service of the World Bank loan will only account for a minor part of not more than 2% of the total revenue. Financial obligations under the project are thus assessed to be affordable for all local governments.

Table 9.6: Governments Fiscal Status and Project Expenditures Governments’ GDP, debt and revenue1 Peak impact from project on governments’ fiscal situation County/District Total Debt Total WB- Total Debt- Counterpart WB-Debt- to GDP loan to Total Service to Funding to Service to Debt Total Total Total Revenue2 Revenue3 Revenue4 Zhuji County 7% 2% 9% <1% <1% Wucheng District 13% 3% 9% 1% <1% Jiande City 8% 8% 9% 3% <1% Qujiang District 9% 16% 22% 10% 2% Pan’an County 12% 30% 12% 7% 2% Longyou County 23% 7% 18% 5% 1% Tonglu County 8% 5% 11% 2% <1% Lanxi County 11% 2% 13% 1% <1% Median 10% 6% 11% 2% <1% 1 The GDP, revenue and debt information is from the year 2008. 2 Total revenue includes off budget revenue and transfers from higher level governments. The debt service is projected based on a loan of 10-years maturity and interest rate of 5.5%. For Longyou County the actual debt-service level is used for the calculations. 3 It is assumed that the implementation period is within two fiscal years. The funding includes all parts which have an impact on local governments’ expenditures but not loans from commercial banks. The total revenue is projected based on 2008 figures with annual increase of 5%. 4 The largest impact from the debt-service on the World Bank loan will be the first year of repayment. The governments’ total revenue is projected based on 2008 revenue with annual increase of 5%.

B. Economic Analysis

16. The project will bring various economic benefits to beneficiary populations as summarized in the table 9.7 below. The project’s economic costs are capital investment costs and operation and maintenance (O&M) costs. The economic analysis assumes that market prices for all elements of costs and benefits do not vary significantly from their economic value. Therefore, 2009 market prices were used in the analysis. All values are net of inflation, duties, and taxes. In China, the government normally uses a discount rate of 8% for analysis of environmental projects. To make the analysis more conservative, 10% is used for this project.

17. For water supply and wastewater components economic benefits can be quantified and monetized to some extent. Cost-benefit analysis, as well as various valuation techniques such as contingent valuation, productivity change, and benefit transfer, was used to evaluate the economic viability of the investments.

 For the water supply component, contingent valuation method (CVM) was used to quantify local population’s willingness-to-pay (WTP) for improved water supply and estimate economic values of the components for domestic users. Productivity change approach was applied to quantify and monetize economic benefits of water supply components for industrial users.

 For the wastewater component, a benefit transfer approach was applied to estimate the economic value of the investments. The economic loss (proportion of annual local GDP) caused by water environment degradation in East China including Zhejiang province is estimated based on results from the China’s Green National Accounting study (2004). Avoided economic losses due to reduced water pollutant discharge are estimated and regarded as economic benefits of the wastewater facilities development components.

 For the solid waste component, as most of the environmental and health benefits are difficult to quantify and monetize, the cost-effectiveness approach was applied to evaluate different alternative options and select the least cost one.

Table 9.7: Identified Benefits of the Project by Categories of Components Benefits Wastewater Water supply Solid waste facilities facilities facility development development development Public health and living quality ++ ++ ++ improvement Avoided agricultural and ++ fishery productivity loss + Avoided water treatment costs ++ for industrial and other users + Amenities and land/property ++ ++ value increase ++ Industrial and tertiary sector ++ ++ productivity increase ++ Water body and ground water ++ ++ protection/conservation ++

Results of Economic Analysis

Water Supply Component

18. Zhuji City. The purpose of this subcomponent is to meet water demands of domestic and industrial users by building a water supply facility and distribution networks with a capacity of 40,000m3/day. In the “no project” scenario, of the five towns that would be served by the project, two are not covered by existing water supply networks, and the local population relies on groundwater from wells of their own. The other three are covered by existing networks, but the quantity and quality of water supply is not guaranteed. The project duration is assumed to be 23 years including 3 years of construction and 20 years of operation.

19. To estimate economic benefits to local residents, CVM was used to estimate average WTP for improved water supply service, valued at RMB 22.05 per household per month (or RMB 264.6 per household per year and RMB 75.86 per person per year). The average water consumption in the city is 11.65 ton per household per month. The household WTP value is equivalent to RMB 1.89 per ton of water consumed. Thus the total value of economic benefit to households is estimated at RMB 21.55 million in 2015, and RMB 21.85 in 2020.

20. The productivity change approach was utilized to estimate the value of increased productivity of industrial and tertiary sectors due to expanding water supply. It is projected that the proposed water supply investment will increase water consumption in industrial and teritary sector by 5,000 m3 /day by 2015, and 6,000 m3/ day by 2020. According to the statistics data, the water productivity of Zhuji City in 2008 was RMB 333 per ton of water consumed. A coefficient of 0.05 representing the share of the contribution of water consumption to industrial and tertiary GDP, which was estimated in nearby Jiaxing City in 2007, was used to estimate the share in incremental GDP contributed by water supply expansion. That resulted in an estimated annual economic value of RMB 18.25 million by 2015 and RMB 24.33 million by 2020.

21. The results of the economic analysis are summarized in the table 9.8 below. It shows the investment will yield an EIRR of 20.05%, a net present value (NPV) of RMB 113.79 million (US$ 19.17 million) and a benefit/ cost ratio (BCR) of 1.81. Sensitivity analysis was also carried out. Under the assumptions of a 10% increase in total cost and a 10% decrease in total benefits, the investment would still provide an EIRR of 16.39% and the NPV of RMB 74.14 million with a BCR of 1.48. Therefore, the economic analysis results of the investment are economically feasible and robust.

Table 9.8: Zhuji City Water Supply Cost Benefit Analysis Benefit/ Cost Present 2010 2011 2012 2013 2014 2015 2020 2030 2032 (mRMB) Value Benefits Willingness to pay of local 129.48 0.00 0.00 0.00 17.24 17.24 17.24 21.85 21.85 21.85 population Industrial productivity 125.64 0.00 0.00 0.00 14.60 14.60 14.60 24.33 24.33 24.33 increase Total benefit 255.12 0.00 0.00 0.00 31.84 31.84 31.84 46.18 46.18 46.18 Costs Capital 103.02 44.60 61.65 15.34 0.00 0.00 investment O&M 38.31 0.00 0.00 0.00 5.99 5.99 5.99 5.99 5.99 5.99 Total Cost 141.33 44.60 61.65 15.34 5.99 5.99 5.99 5.99 5.99 5.99 Net Economic - - 113.79 -61.65 25.85 25.85 40.19 40.19 40.19 40.19 Flows 44.60 15.34 EIRR % 20.05 B/C Ratio 1.81

22. Wucheng District. Cost-benefit analysis of the Wucheng sub-component presented an EIRR of 16.51%, NPV 64.91 million yuan (US$ 9.46 million) and BCR 1.49. Sensitivity analysis indicated that the investment would still yield an EIRR of 13.12% even under the assumption of a 10% increase in total cost and a 10% decrease in total benefit. Therefore, the investment in Wucheng is economically feasible and robust.

Wastewater Component

23. Youbu Town. As an example, the cost-benefit analysis of wastewater treatment and collection in Youbu Town, Lanxi City is presented below with the results of the remaining seven wastewater components summarized in a table at the end of this section. The Yobu sub-project consists of the construction of a WWTP, sewer networks and an auxiliary scenery road. It covers three communities, thirteen administrative villages (5 by 2015), and one industrial zone, serving a projected population of 8,000 by 2015 and 12,900 by 2025. The project duration includes a 5 year construction period and 20 years of operation.

24. A benefit transfer approach is applied to estimate economic value of the environmental benefits of wastewater collection and treatment in the cost-benefit analysis. According to the research results of China’s Green National Accounting 2004 which was issued jointly by China Ministry of Environmental Protection and National Statistical Bureau in 2006, the annual environmental cost of water environment degradation in the eastern region of China is equivalent to 1.5% of GDP of the region. In Zhejiang Province, this means a total economic loss of RMB 32.2 billion in 2008. In the same year, the province discharged 538,600 tons of COD. Therefore, the estimated economic cost avoided by reducing one ton of COD is about RMB 59,840. In 2008, the total COD discharge in Lanxi was 5,400 tons. If fully operated, the proposed wastewater treatment in Youbu town will reduce 803 tons of COD which otherwise will be discharged into the environment. To be conservative, an operation rate of 80% is assumed and applied in the analysis, which means 642 tons of COD eliminated annually by the project. The economic benefit of COD reduction is estimated at RMB 38.44 million per year. It is further assumed that only 70% of total benefits would be realized in the first three operation years and 90% in the fourth year due to equipment testing and partial operation. The present value of the total economic benefits of this investment will amount to RMB 193 million.

Table 9.9: Yobu Town Wastewater Cost Benefit Analysis Benefit/Cost Present 2010 2011 2012 2013 2014 2015 2020 2030 2032 (mRMB) Value Benefits Avoided loss due to water 183.78 0.00 0.00 0.00 0.00 0.00 26.91 38.44 38.44 38.44 environment Total benefit 183.78 0.00 0.00 0.00 0.00 0.00 26.91 38.44 38.44 38.44 Costs Capital 58.48 25.86 12.39 14.70 11.26 9.65 0.00 0.00 0.00 0.00 investment O&M 15.22 0.00 0.00 0.00 0.00 0.00 2.88 2.88 2.88 2.88 Total Cost 73.70 25.86 12.39 14.70 11.26 9.65 2.88 2.88 2.88 2.88 Net Economic - - - 110.07 -11.26 -9.65 24.03 35.56 35.56 35.56 Flows 25.86 12.39 14.70 EIRR % 22.92 B/C Ratio 2.49

25. The results are summarized in the table above. It shows that EIRR is 22.92%, NPV RMB 110.07 million and BCR 2.49. Sensitivity analysis indicates that under the assumption of a 10%

increase in total cost and a 10% decrease in total benefits, the EIRR would be 19.82% (above 10%). Therefore, the investment is economically feasible and quite robust.

26. Summary of Other Wastewater Components. Cost-benefit analyses were conducted for the other seven wastewater components. As shown in the table below, the results of the analyses indicate that all of the seven components are economically feasible. Sensitive analyses further show that these investments still have good returns even under the assumption of a 10% increase in total costs and a 10% reduction in total benefits.

Table 9.10: Wastewater Components Cost Benefit Analysis Components EIRR NPV BCR Sensitive Analysis (RMB EIRR when EIRR when Combined million) benefit cost case decreased by increased by 10% 10% Jiande WW 27.52% 158.66 1.89 24.95% 25.20% 22.76% Qujiang WW 24.38% 265.46 2.57 22.59% 22.76% 21.02% Jianshan WW 24.16% 57.70 1.99 21.64% 21.86% 19.47%

Shenze WW 17.76% 106.10 1.84 16.33% 16.47% 15.07% Yunshan WW 14.49% 23.38 1.50 13.29% 13.40% 12.22% Tonglu WW 19.23% 101.60 2.1 17.78% 17.92% 16.51% Longyou WW 25.03% 628.43 3.58 23.59% 23.72% 22.31%

Solid Waste Component

27. Meicheng Sanitary Landfill in Jiande City. As most of the benefits are difficult to quantify, cost-effectiveness analysis was conducted to identify the least-cost option among alternative options. Two alternative solid waste treatment technologies and two alternative landfill sites were compared in order to select the least cost ones. Alternative solid waste technologies examined are landfill and incineration, respectively. Analysis shows that the total capital investment needed for landfill would amount to RMB 130.60 million while that for incineration amount to RMB 110.01 million. However, the annual O&M cost for incineration is RMB 24.46 million, much higher than that for landfill’s RMB 3.05 million. Despite of the estimated revenue from power generation by incineration, the landfill method is still cost- effective compared with incineration.

Table 9.11: Jiande City Solid Waste: Cost Effectiveness Analysis Alternative Landfill Sites Qingshan Qiujiawu Treatment Capacity (‘000 m3) 600 510 Capital Investment (RMB million) 209.16 266.19 Annual O&M Cost (RMB million) 3.05 3.05 Total Cost (RMB million) 169.84 231.40 Unit Cost (RMB / m3) 283 454

28. Two landfill sites in Qingshan and Qiujiawu, respectively are analyzed too. The Qingshan site will be developed in two successive phases, Phase I for three years and Phase II for two years. The total capacity of solid waste treatment of Qingshan landfill site is 600,000 m3 (200,000 m3 for Phase I plus 400,000 m3 for Phase II). The results of alternative sites are shown in the table below, indicating that the unit cost Qingshan is less than Qiujiawu and thus selected.

29. Public support and willingness to pay. A WTP survey was also conducted for the proposed solid waste treatment in Jiande City. 335 respondents were selected by random sampling and interviewed. Among them, 311 survey questionnaires were valid. About 85% (263) of respondents expressed their willingness to pay for provision of solid waste collection and treatment service and the average WTP value per household is 3.18 yuan per month.

Annex 10: Safeguard Policy Issues CHINA: Zhejiang Qiantang River Basin Small Town Environment Project

A. Environmental Safeguards

1. The project will not have significant adverse environmental impacts because of proper project design and the type and small scale of the investments which are distributed across eight cities/ counties. The proposed facilities will not bring significant adverse impact on sensitive receptors, nor cause degradation of air, water or soil. Environmental Assessments (EAs) were conducted by accredited EA consulting institutes for each of the eleven subprojects under the project. During the EA process four bridges in the vicinity of Youbu Town subproject were identified as city level Physical Cultural Resources (PCRs). The EA confirmed that there will be no adverse impacts to natural habitats in the influence area of the project. Various EA drafts were reviewed and discussed in detail during project preparation. Local people were consulted, and their opinions are reflected in the project design and environmental mitigation measures, as appropriate. The latest EA and Environmental Management Plan (EMP) were submitted to the Bank in May 2010, and were sent to the Bank's Infoshop in June 2010.

2. The policy and administrative requirements for environmental assessment of development projects in China, as well as the Bank's safeguards policies, were followed during the preparation and evaluation of the EA. Major Chinese laws and regulations applicable to the EA are: (a) Environmental Protection Law of the People's Republic of China; (b) Environmental Impact Assessment Law; (c) Atmospheric Pollution Control Law; (d) Environmental Noise Control Law; (e) Water Pollution Control Law; (f) Cultural Heritage Protection Law; (g) Notice of Strengthening the EA Management Work of Construction Projects financed by International Financial Organizations; and (h) Technical Guidelines for Environmental Impact Assessment.

Brief Project Description

3. The Zhejiang Qiantang River Basin Small Towns Environment Project includes the following components for which EAs have been completed:

Table 10.1: Disclosure of the EA Documents

County/ Disclosure Date in EA&EMP for Subproject Disclosure City China (1) Zhuji City Water Treatment and Distribution “Zhuji Daily” Zhuji 4-14-2010 System http://www.zhuji.gov.cn “Today Wucheng” (2) Wucheng District Water Treatment and Distribution Wucheng 11-27-2009 http://www.wuch.gov.cn System Local PIU “Today Jiande” (3) Jiande City Wastewater Treatment and Sewer Jiande 4-9-2010 http://www.jiande.gov.cn Networks Xi’shang village Qujiang Daily (4) Qujiang District Wastewater Treatment, Qujiang 4-23-2010 http:// qj.qz.gov.cn Stormwater and Sewer Networks Local PIU (5) Lanxi City Youbu Town Wastewater Treatment, “Lanjiang Herald” Lanxi Sewer Networks, Road, Stromwater Networks, and 4-9-2010 http:// www.lanxi.gov.cn

River Bank Rehabilitation Youbu Public Service Center.

County/ Disclosure Date in EA&EMP for Subproject Disclosure City China 5.1) Youbu Town Wastewater Collection and Treatment 5.2)Youbu Old Town Infrastructure Project “Today Pan’an” (6) Pan'an County Jianshan Town Wastewater 4-14-2010 http:// www.panan.gov.cn Treatment and Sewer Networks Lou’zai Village “Today Pan’an” (7) Pan'an County Shenzhe District Road, Stormwater 4-19-2010 http:// www.pays.gov.cn Pan’an and Sewer Networks http:// www.panan.gov.cn

Local PIU “Today Pan’an” http:// www.pays.gov.cn (8) Pan'an County Yunshan District Sewer Networks 4-16-2010 http:// www.panan.gov.cn Local PIU “Today Tonglu” (9) Tonglu County Jiangnan Town Road, Stormwater Tonglu 4-23-2010 http:// www.tonglu.gov.cn and Sewer Networks Local PIU “Today Longyou” (10) Longyou County Chengbei District Road, Water Longyou 4-21-2010 http:// www.longyou.gov.cn Distribution, Stormwater and Sewer Networks Local PIU “Today Jiande” (11) Jiande City Meicheng Town Solid Waste Jiande 4-19-2010 http://www.jiande.gov.cn Collection and Sanitary Landfill Jiangshan village

Baseline Environmental Description

4. Natural Environment. Zhejiang Province (population 51.2 million as of 2008) is one of China”s smallest provinces (an area of 103,800 km2) and is located in the southern wing of the Yangtze River Delta. The Qiantang River, the largest river (annual run-off of 40.4 billion cubic meters) in Zhejiang Province, starts from Xiuning County of Anhui Province and, passes through Zhejiang Province, and flows to the East China Sea at Hangzhou Bay. Its catchment area, upstream of Hangzhou Gate, is 42,000 km2 and the length of its main stream is 484 km. The catchment in Zhejiang Province is 35,500km2.

5. Climate. Qiantang River Basin falls under a subtropical monsoon humid climate zone with four well marked seasons, with long winters and summers, but short springs and autumns. The average annual rainfall in the Qiantang River Basin is between 1,200 – 2,200 mm.

6. Water Quality. Water quality the Qiantang River in Zhejiang is generally good. However, it is being threatened by rapid economic development and population growth. The river is faced with increasing pollution loads (e.g. NH3-N, BOD5, phosphous) from industry, as well as urban and rural areas. The problems include, inter alia, relatively low collection and treatment rates for wastewater and solid waste, particularly in small cities and counties. In 2008, a total of 2.48 billion m3 of wastewater was discharged to the Qiantang River Basin. Approximately 73% of wastewater discharged from cities and counties were treated, but the wastewater treatment coverage rate in small towns reached only 26.2%.

7. Wastes Management. In 2008, a total of 11.5 million tons of solid waste was generated in Zhejiang Province. Waste management in the province involves a combination of landfills and incineration; the province has 64 landfills and 21 incineration facilities.

8. Zhejiang Province has formulated a number of policies, regulations, and master plans to protect the Qingtang River,, e.g., Zhejiang 11thFive Year Environmental Protection Plan, and the Qiantang River Basin 11thFive Year Pollution Prevention and Abatement Plan, based on which the total discharge amount of COD and NH3-N has been cut down gradually by implementing a number of pollution abatement programs. As part of this program, the proposed project will finance collection and treatment of waste and wastewater in eight small cities and counties in the Qingtang River Basin.

Environmental Benefits

9. Project benefits are described below.

10. Wastewater Collection and Treatment. Increased wastewater treatment capacity of 50,000 m3/day and associated collection rates, will alleviate pollution loads into the Qingtang river, i.e. an overall annual reduction of CODcr by 4,510 ton/y and T-N by 300 ton/y by 2015 (only in those areas that have wastewater treatment plant investments). In addition, their investments will reduce odor in water bodies and many of the physical vectors that contribute to the transmission of waterborne and water-related diseases. The associated improvements in the living environment will contribute to improved public health and visual quality.

11. Water Treatment and Distribution. The project will improve current water treatment capacity by 90,000m3/d, and benefit about 360,000 people in two cities, and contribute to the improvement of the health of residents.

12. Solid Waste Management. The solid waste from six towns in Jiande city will be disposed of in an environmentally sound manner, with Leachate pollution being effectively eliminated. The project will improve urban environmental sanitation by providing solid waste collection service for 175,000 people. The project will close three existing dump sites which will greatly improve conditions at the site in the surrounding areas, minimize the risk of direct contact of people with waste, seal the odor and avoid the contact of rainwater with the waste, and the generation of wastewater/ leachate.

13. Other Impacts. Rehabilitation of the Youbu stream through a combination of river bank reinforcement, landscaping and provision of sewage interceptors will improve aquatic environment, public health, visual impact of the stream and surrounding area. Repaving two streets in Youbu Town will enhance the appearance of the streets and provide sewer and stormwater networks underneath the streets to intercept discharges from houses.

Potential Environmental Impacts and Their Mitigation Measures

14. The principal negative impacts and their mitigation measures described in the EA/ EMP, are summarized below.

15. Sludge . 22.4 tons of dewatered sludge cakes per day, from the WWTPs will be sent to a nearby landfill for disposal.

16. Leachate and Landfill Gas Impact. Groundwater pollution from leachate will be minimized by the installation of an impermeable membrane liner, and a leachate collection and treatment facility. Landfill gas will be collected and flared in short term, and will be utilized in long term when there is adequate gas generation.

17. Outfall Impact. The impact of the outfall on the receiving rivers would be minor: (a) the four WWTPs are small and scattered across different cities/ counties; and (b) the rivers have high receiving capacities. In addition, impact of the outfall will be minimized by: (a) proper site selection to avoid sensitive receptors; and (b) applying more stringent discharge standards (Class 1A), if warranted.

18. Construction Spoil. Construction spoil will be re-used on site, and spoil disposal plans will be prepared where excess spoil will be generated. Most spoil will be beneficially used in other construction activities and therefore spoil disposal will not be problematic.

19. Other Construction Impacts. Construction noise from machinery, generation of dust and disruption of local traffic will be minimized by appropriate restrictions on working hours and operational procedures for contractors.

20. Physical Cultural Resources Impact. To avoid any adverse impact on four PCR bridges on the Youbu Stream and a few nearby old buildings, mitigation measures will be implemented in line with the national regulatory and legal framework concerning cultural heritage. These include: (a) engaging qualified and experienced contractors, who will be required by contract to mitigate vibration, dust, noise, solid and water pollution, avoid night-time construction, minimize traffic in sensitive areas, and develop temporary traffic plans to detour traffic around construction sites; (b) training of workers on PCRs and environmental protection before commencement of construction; and (c) chance find procedures included in mitigation measures and contracts. Public consultation with concerned and affected parties on the proposed measures has been conducted, and concerns about the management of spoil, noise and dust during construction have been incorporated into the PCR Management Plan.

21. Other Operational Impacts. The other significant potential impacts of the operation of wastewater treatment plants and pumping stations are noise and, in the case of wastewater treatment plants, odor. These will be minimized by proper siting and by the provision of buffer zones and landscaping. Where there are sensitive noise receptors close to the facilities, noise emissions will be minimized by appropriate acoustic insulation of machinery. Traffic impacts associated with the delivery of waste for disposal at the landfill and with the transport of dewatered wastewater treatment sludge for off-site landfill disposal will be minimized by restrictions on the times of day allowed for these activities.

22. Environmental Risks. There are potential risks from legacy issues with the closure of three existing dump sites. Baseline monitoring at these sites indicate that groundwater is generally in good condition. Closure of dump sites will minimize future environmental impacts, and the closed sites will be revegetated to improve aesthetics of the sites. Future land use will contain restrictions as needed to maintain environmental quality. The closure of the dump sites will reduce water pollution at the sites and the surrounding area, which will be confirmed by

regular monitoring after the site closure. Appropriate correctives measures will be taken if required (as specified in the EMP).

Alternative Analysis

23. Technical alternatives were considered for the investment components during the feasibility study and the EA to minimize environmental impacts. The EA and the feasibility study analyzed alternatives for the new landfill in terms of waste disposal technology, landfill sites, liner system, leachate treatment, potential environmental and social impacts, and the project costs. For the water and wastewater treatment components, a comparative analysis for the sites was carried out, taking into consideration the current situation, resettlement, and, in the case of the wastewater treatment plants, outfall impacts, sensitive receptors, sludge disposal and wastewater treatment process technology.

Environment Management Plan (EMP)

24. An EMP has been developed as a separate and stand-alone document for each subproject, based on which a consolidated EMP has been included in the Consolidated EA. These EMPs include mitigation measures, monitoring plans, institutional arrangements, capacity building, and estimated budget of the mitigation measures and monitoring programs for both the construction and operation phases.

Public Consultations and Information Disclosure

25. In accordance with Bank Safeguard policies and Chinese regulations, public consultations were conducted during the environmental assessment, including public consultation meetings and questionnaire survey, with project affected persons and other stakeholders. Their opinions and concerns have been taken into account in the EA process and project design.

26. The EA and EMPs were locally disclosed in April 2010 through announcements published in the local newspapers and on the internet website of local cities and counties. The safeguard documents were sent to the Bank InfoShop for disclosure in June 2010.

Due Diligence

27. The EA has reviewed existing associated facilities: e.g. sanitary landfills to receive dewatered sludge; WWTPs to receive sewage from the sewer network financed by the project, and water sources for the water treatment plants. These facilities are already in operation, except for two facilities which will become operational by the end of 2010. The review confirmed their compliance with Chinese national laws and regulations, which are broadly consistent with the Bank Safeguard policies. Details are summarized in the Annex of the Consolidated EA Summary Report.

B. Social Safeguards

Background

28. The project will improve the local environment and quality of life for local residents through improved drinking water supply and enhanced treatment of wastewater and solid waste. During project construction there will be negative social impacts on local communities due to land acquisition and resettlement. The project will permanently acquire land at the construction sites of the wastewater treatment and water supply plants, and at the location of the landfill site. In addition, the project will lead to temporary use of land related to the construction of water pipelines and sewer networks. The project therefore triggers OP 4.12. OP 4.10 on Ethnic Minority is not triggered.

OP 4.10 Ethnic Minorities

29. The SA indicates that there is one ethnic minority village [Gewuta Village] in the Wucheng subproject, constituting 71% of the total population, mainly She, Miao minorities; however, these minorities are part of mainstream society. They do they have their own language but speak Mandarin. In addition, they do not have customary economic, social, or political institutions separate from the dominant society. As such, they do not fall under the definition of Indigenous Peoples as per OP 4.10, and hence the policy is not triggered.

OP 4.12 Involuntary Resettlement

30. Resettlement Management Instruments. Resettlement planning instruments cover a consolidated RP with a RPF and 11 individual RPs. Resettlement documents include: the consolidated RP with an annex of the RPF;Wucheng Water Supply Resettlement Plan;Jiande Wastewater Resettlement Plan;Jiande Meicheng Landfill Resettlement Plan;Tonglu Jiangnan Wastewater Resettlement Plan;Zhuji Qingshan Water Supply Resettlement Plan;Longyou Chengbei Wastewater Resettlement Plan;Lansi Youbu Town Resettlement Plan;Pan’an Jianshan Wastewater Resettlement Plan;Pan’an Shenze Resettlement Plan;Pan’an Yunshan Resettlement Plan;Qujiang Wastewater Resettlement Plan.

31. Resettlement Impacts. Attention was paid during project design to avoid and/ or mitigate resettlement impacts. Through extensive consultations with and participation from affected villages and responsible local authorities, resettlement impacts were properly mitigated, fully investigated and documented, and measures for livelihood and household restoration were explored. The main resettlement impacts include: (a) 99 ha collective land will need to be permanently acquired, from 596 household, with 2014 persons; (b) 82 ha land will be temporarily occupied, including 34 ha of collective land from which 711 households with 2642 persons derive a portion of their income; and (c) 183 households with 650 persons will have their houses demolished. The major resettlement impacts are shown in the following table.

Table 10.2: Main Resettlement Impacts Resettlement Impacts Hangzhou Shaoxing Quzhou Jinhua Total Permanent land acquisition (mu) 499.4 28.2 768 188 1484 Collective land 498 28.2 768 188 1484 State-owned land 1.4 0 0 0 1.4 Temporary land acquisition (mu) 116 459 217 438 1230 Collective land 74 0 45 391 510 State-owned land 42 459 172 47 720 Households to be relocated (#) 145 0 19 19 183 Persons to be relocated (#) 523 0 71 56 650 Enterprises to be relocated (#) 2 0 0 0 2 Note: 15 mu = 1 ha

32. Legal Framework and Compensation. Domestic laws/ regulations and OP 4.12 regulate the resettlement planning process. All houses will be compensated at building replacement cost, and will be restored in several ways: cash compensation/self construction with planned residential plot, or house replacement. All affected households will receive movement subsidies and transition allowances, in addition to asset compensation. Land compensation will be calculated in line with Zhejiang regulations, and land users will be compensated first in cash and can voluntarily participate in social security program. Temporarily use land will be compensated during occupation period and will be restored and returned to the owners after use; compensation standards are equivalent to replacement costs.

33. Livelihood Development. Land acquisition impact is very limited in the affected villages: on average 2.14 % farmland will be taken; only one village will lose more than 20% farmland. Key measures for livelihood restoration include cash compensation, social security, and training, as land redistribution in villages is not possible. Farmers who will lose land will be provided two options: a package of cash compensation, living subsidies/pension, and free job training, or cash compensation plus training. Those who lose land temporarily will receive periodic rent during land occupation and may repossess their land after construction.

34. Household development. All 183 affected households under the six subprojects are in rural areas, and they will be separately provided: cash compensation; cash compensation plus residential plot; or cash compensation plus the right to purchase replacement house for resettlers. Resettlement planning concluded that the proposed cash compensation will meet the requirements for housing restoration. In addition, all the relocated households have the right to receive moving subsidies and transition allowance. Vulnerable households have been identified and will be provided extra financial and physical assistance in house rehabilitation.

35. Budget and Financial Sources. The budget for project resettlement amounts to RMB 167 million and this has been integrated into the project budget. Relevant city governments have committed to promptly and fully finance resettlement related activities from government financial sources and/or commercial loan

36. Consultation and Participation. Project resettlement consultation was conducted in the 46 affected villages in 13 townships through meetings, focus group discussions, questionnaire surveys, and asset investigation. All stakeholders, including government, villagers, and designers were involved to select locations of plants/pump stations, as well as realignment of pipes to mitigate resettlement impact, and to develop rehabilitation measures. The consolidated RP includes a set of tables which shows the consultation issues, process and outputs, and a plan for consultation during the next stage.

37. Vulnerable Households. The five vulnerable households identified by the SA are being provided supplementary assistance, including house provision, as well as lifeline subsidies or job.

38. Gender Issues. Resettlement planning has: (a) integrated women into the project consultation and participation processes; (b) ensure that compensation contracts will be signed by both spouses together, when applicable; (c) prioritized women for training courses provided by local governments to enhance their potential for earning additional income; and (d) prioritized appropriate employment for women.

39. Information Disclosure. All resettlement documents were disclosed locally in April 2010, through announcements in local newspapers. They were also made available on relevant websites and in PMO offices. All documents were also disclosed in the InfoShop in June 2010.

40. Management and Monitoring. The PPMO will coordinate resettlement implementation, and the specific activities of resettlement and land acquisition will be handled by the local PMOs. The RPs have developed management systems for the project resettlement implementation, from the provincial level to the subproject offices at county levels, including the organizations and their responsibilities, personnel, financial resources and training arrangements, etc.. The consolidated RP has listed resettlement staff in each city project management office and has determined monitoring indicators as well as reporting systems for internal and external monitoring.

41. Linked Activities. Five linked activities outside the project but clearly linked and not financed by the Bank were identified during project preparation. Of these two had completed resettlement within two years prior to identification mission, and the other three will undertake resettlement during the implementation of the proposed project. The components where linked resettlement was completed relate to: (a) Longyou, where the collected sewage will be delivered in a wastewater treatment plant currently being constructed; and (b) Panan/ Jianshan, where sludge will be disposed in a landfill. These are described in Annex 3 of the RP. Activities where linked resettlement will be completed relate to: (a) Panan Shenze planned road construction; (b) Quzhou/ Qujiang planned road and sewer construction; and (c) Tonglu Jiangnan planned road construction. These will be implemented in accordance with the project RPF.

Other Social Issues

42. A SA was conducted in the project areas, which provided inputs to project planning and design, as well as resettlement. The main inputs relate to: (a) attitudes of various stakeholders to

the project; (b) technical and/or institutional capacity of local government and relevant authorities/agencies; (c) social risk analysis and mitigation measures in project preparation, implementation and operation ; (d) identification of vulnerable people; (e) affordability of water and waste water tariffs and solid waste fees; and (f) willingness to pay.

C. Safety of Dams:

43. OP 4.37 Safety of Dams. The project does not finance the construction of dams. However however the water supply systems to be constructed under the project would draw directly from two existing dams: (a) Xinfan Dam in Wucheng District, Jinhua City; and (b) Qingshan Dam in Zhuji City. The Bank’s dam safety expert has visited the two dams and reviewed documents concerning the safety of these dams. Both Xinfan Dam and Qingshan Dam are operationally safe. O&M and Emergency Preparedness Plans (EPP) (where remedial works were completed at the end of 2009) exist for both dams and are acceptable. During project implementation, both the O&M and safety status will be monitored. See Table 10-3 for more details.

44. The Chinese Government has issued guidelines and regulations for dam safety management including Reservoir Dam Safety Management Regulation, Regulations on Reservoir Dam Safety Review, Guidelines for Dam Safety Review, Guidelines for Emergency Preparedness Plan, and Guidelines for Operation, Maintenance and Surveillance of Dams. During implementation, the Borrower will provide information on the safety of the two dams, and arrange for site visits to the dams. The Task Team and the project implementing agencies will monitor dam safety status and supervise implementation of any remedial works to ensure that the Project complies with OP4.37.

45. The Bank task team will include a dam safety expert, who will: (a) inspect and evaluate the safety of existing dams, their appurtenances, and performance history; (b) review and evaluate the owner’s operation and maintenance procedures; and (c) provide written reports of findings and recommendations for any remedial work or safety-related measures necessary to upgrade the existing dams to an acceptable standard of safety. The dam safety expert would also inspect the design and implementation of the dams which need to be strengthened.

Table 10.3: Dam Safety Plan of Zhejiang Qiantang River Basin Small Town Environment Project

Safety Total Latest Government Year of Height Type of Status Remedial Action No. Name Location Capacity Review Operator Owner Agency in Completion (m) Dam (Class I, Plan Plan (m m3) Date charge II, or III) Wucheng Xinfan Xinfan Wucheng clay core District, normal normal Reservoir Reservoir Water and 1 Xinfan 1979 45 37.73 earth and 2009 II Jinhua O&M O&M Management Management Hydropower rock dam City Station Station Bureau

Zhuji City Zhuji City Water Water concrete Zhuji City Caota Resources Resources core sand remedied normal Water and 2 Qingshan Township, 1963 27.5 1.345 2007 III Investment Investment and rock by 2009 O&M Hydropower Zhuji City and and dam Bureau Development Development Corporation Corporation

Annex 11: Project Preparation and Supervision CHINA: Zhejiang Qiantang River Basin Small Town Environment Project

Planned Acutal PCN review 11/19/2009 10/15/2009 Initial PID to PIC 10/20/2009 11/16/2009 Initial ISDS to PIC 10/20/2009 11/16/2009 Appraisal 06/01/2010 06/01/2010 Negotiations 09/24/2010 11/19/2010 Board/RVP approval 01/20/2011 Planned date of effectiveness 06/01/2011 Planned date of mid-term review 11/30/2013 Planned closing date 12/31/2016

Key institutions responsible for preparation of the project:

Zhejiang Provincial Project Management Office (PPMO) Project City Project Management Offices (PMOs) Project City Project Implementing Units (PIUs)

Bank staff and consultants who worked on the project included:

Name Title Unit

Axel Baeumler Task Team Leader EASIN Ji Feng Environmental Specialist EASCS Songling Yao Social Specialist EASCS Yan Guangming Municipal Engineer EASCS Eddie Hum Sr. Municipal Engineer/ Consultant EASIN Knud Lauritzen Sr. Financial Analyst/ Consultant EASIN Jian Xie Sr. Environmental Specialist EASER Mansha Chen Urban Specialist WBIUR Ximing Zhang Water Resource Specialist EASCS Xiaowei Guo Senior Procurement Specialist EAPPR Fang Zhang Financial Management EAPFM Marta Molares Lead Counsel LEGES Vellet Fernandes Program Assistant EASIN Xuemei Guo Program Assistant EACCF Jennifer Sara Peer Reviewer LCSSD Ming Zhang Peer Reviewer LCSUW Param Iyer Peer Reviewer MNSWA

Annex 12: Documents in the Project File CHINA: Zhejiang Qiantang River Basin Small Town Environment Project

A. Government and Consultant reports

1. Consolidated Feasibility Study Report (English) 2. Consolidated Environmental Assessment and Environmental Management Plan (Chinese and English) 3. Consolidated Resettlement Action Plan and Resettlement Policy Framework (Chinese and English) B. Bank Staff Assessments 4. Pre-Identification Mission Aide Memoire: March 2009 5. Identification Mission Aide Memoire: June 2009 6. Preparation Mission 1 Aide Memoire: September 2009 7. Preparation Mission 2 Aide Memoire: February 2010 8. Pre-Appraisal Mission Aide Memoire: March 2010 9. Appraisal Mission Aide Memoire: June 2010 10. Procurement Capacity Assessment Report, May 2010 11. Financial Management Manual, December 2010 12. Financial Projections for Project Companies, December 2010

Annex 13: Statement of Loans and Credits CHINA: Zhejiang Qiantang River Basin Small Town Environment Project

Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev‘d P098078 2011 CN-Huai River Basin Flood Management 200.00 0.00 0.00 0.00 0.00 200.00 0.00 0.00 an. P105872 2011 CN-Integrated Forestry Development 100.00 0.00 0.00 0.00 0.00 99.75 0.00 0.00 P099751 2010 CN-Sustainable Dev. in Poor Rural Areas 100.00 0.00 0.00 0.00 0.00 99.75 0.00 0.00 P100455 2010 CN-Henan Ecological Livestock Project 80.00 0.00 0.00 0.00 0.00 79.80 0.00 0.00 P081615 2010 CN-Taiyuan Urban Transport Project 150.00 0.00 0.00 0.00 0.00 150.00 0.00 0.00 P086446 2010 CN-Chongqing Urban-Rural Integration 84.00 0.00 0.00 0.00 0.00 83.79 2.67 0.00 Pro P101716 2010 CN-Jilin Food Safety 100.00 0.00 0.00 0.00 0.00 99.75 0.00 0.00 P096920 2010 CN-Ningxia Highway 250.00 0.00 0.00 0.00 0.00 249.38 0.00 0.00 P117107 2010 CN-Tech Vocational Ed 40.00 0.00 0.00 0.00 0.00 39.90 0.00 0.00 P113766 2010 CN-Energy Efficiency Financing II 100.00 0.00 0.00 0.00 0.00 99.75 0.00 0.00 P112838 2010 CN-Wuhan Second Urban Transport 100.00 0.00 0.00 0.00 0.00 99.75 0.00 0.00 P112759 2010 Shandong Ecological Afforestation 60.00 0.00 0.00 0.00 0.00 59.85 0.00 0.00 P111421 2010 CN-Anhui Medium Cities Urban 100.00 0.00 0.00 0.00 0.00 99.75 0.00 0.00 Transport P111163 2010 CN-Xinjiang Water Conservation Project 100.00 0.00 0.00 0.00 0.00 99.75 0.00 0.00 P108627 2010 CN - Nanning Urban Environment 100.00 0.00 0.00 0.00 0.00 99.75 0.00 0.00 P106956 2010 CN - Ningbo New Countryside 50.00 0.00 0.00 0.00 0.00 48.38 -1.50 0.00 Development P096926 2009 CN-Jiangsu Water and Wastewater Project 130.00 0.00 0.00 0.00 0.00 99.49 -2.68 0.00 P096923 2009 CN-Shanghai APL III 200.00 0.00 0.00 0.00 0.00 199.50 11.44 0.00 P096812 2009 CN-Yunnan Urban Env 150.00 0.00 0.00 0.00 0.00 134.13 0.19 0.00 P091950 2009 CN-Guizhou Cultural and Natural 60.00 0.00 0.00 0.00 0.00 59.70 6.52 0.00 Heritage P096707 2009 CN - GD Tech&Vocational ED and 20.00 0.00 0.00 0.00 0.00 17.25 2.05 0.00 Training P114107 2009 CN-Wenchuan Earthquake Recovery 710.00 0.00 0.00 0.00 0.00 648.00 258.83 0.00 Project P112359 2009 CN-NanGuang Railway 300.00 0.00 0.00 0.00 0.00 299.25 0.03 0.00 P107559 2009 CN-Guizhou-Guangzhou Railway 300.00 0.00 0.00 0.00 0.00 299.25 13.33 0.00 P101988 2009 CN-Jiangxi Shihutang Navi & 100.00 0.00 0.00 0.00 0.00 68.89 43.58 0.00 Hydropower P101829 2009 CN Xining Flood and Watershed Mgmt 100.00 0.00 0.00 0.00 0.00 77.58 0.16 0.00 P101258 2009 CN-Hubei Yiba Highway 150.00 0.00 0.00 0.00 0.00 148.63 34.02 0.00 P100968 2009 CN-Shanxi Coal Bed Methane 80.00 0.00 0.00 0.00 0.00 79.80 19.20 0.00 Development P096556 2009 CN-Eco-Farming 120.00 0.00 0.00 0.00 0.00 103.05 8.35 0.00 P093963 2008 CN-Guiyang Transport 100.00 0.00 0.00 0.00 0.00 32.77 6.83 0.00 P091949 2008 CN-Gansu Cultural & Natural Heritage 38.40 0.00 0.00 0.00 0.00 23.87 -0.84 0.00 P093882 2008 CN-Shandong Flue Gas Desulfurization 50.00 0.00 0.00 0.00 0.00 33.95 27.81 0.00 P092631 2008 CN-Xi'an Sustainable Urban Transport 150.00 0.00 0.00 0.00 0.00 130.24 8.98 11.06 P099224 2008 CN-Liaoning Med. Cities (LMC) III 191.00 0.00 0.00 0.00 0.00 164.16 64.04 0.00

P099112 2008 CN-Anhui Highway Rehab & 200.00 0.00 0.00 0.00 0.00 60.01 -62.33 0.00 Improvement P099062 2008 CN-ShiZheng Railway 300.00 0.00 0.00 0.00 0.00 244.24 8.32 0.00 P084437 2008 CN-Rural Health 50.00 0.00 0.00 0.00 0.00 39.21 -7.33 0.00 P084874 2008 CN- Energy Efficiency Financing 200.00 0.00 0.00 0.00 0.00 130.07 49.47 0.00 P085376 2008 CN-Migrant Skills Dev. and Employment 50.00 0.00 0.00 0.00 0.00 47.45 9.57 0.00 P087224 2008 CN-Han River Urban Environment 84.00 0.00 0.00 0.00 0.00 74.53 39.84 0.00 P096925 2008 CN- Bengbu Integrated Environment 100.00 0.00 0.00 0.00 0.00 87.94 17.53 0.00 Improv P096285 2007 CN-MSE Finance 100.00 0.00 0.00 0.00 0.00 5.00 5.00 0.00 P083322 2007 CN-SICHUAN URBAN DEV 180.00 0.00 0.00 0.00 0.00 90.64 82.47 0.00 P081776 2007 CN-GUANGDONG/PRD2 96.00 0.00 0.00 0.00 0.00 76.31 31.31 0.00 P086515 2007 CN-3rd National Railway 200.00 0.00 0.00 0.00 0.00 43.40 -3.33 0.00 P088964 2007 CN-Guangxi Integrated Forestry Dev 100.00 0.00 0.00 0.00 0.00 11.55 -40.28 0.00 P077752 2007 CN-SHANDONG ENVMT 2 147.00 0.00 0.00 0.00 0.00 60.11 -19.39 0.00 P091020 2007 CN-Fujian Highway Sector Investment 320.00 0.00 0.00 0.00 0.00 17.10 -60.43 0.00 P092618 2007 CN-LIAONING MED CITIES INFRAS 2 173.00 0.00 0.00 0.00 0.00 133.92 39.38 0.00 P095315 2007 CN-W. Region Rural Water & Sanitation 25.00 0.00 0.00 0.00 0.00 10.49 -0.28 0.00 P081255 2006 CN-Changjiang/Pearl River Watershed 100.00 0.00 0.00 0.00 0.00 56.57 34.91 1.09 Reha P075732 2006 CN-SHANGHAI URBAN APL2 180.00 0.00 0.00 0.00 0.00 66.36 48.86 0.00 P081348 2006 CN-HENAN TOWNS WATER 150.00 0.00 0.00 0.00 0.00 105.77 65.77 0.00 P070519 2006 CN-Fuzhou Nantai Island Peri-Urban Dev 100.00 0.00 0.00 0.00 0.00 31.58 16.99 -8.07 P099992 2006 CN-Liaoning Medium Cities 218.00 0.00 0.00 0.00 0.00 107.01 49.01 0.00 Infrastructure P096158 2006 CN-Renewable Energy II (CRESP II) 86.33 0.00 0.00 0.00 1.65 8.86 10.51 0.00 P093906 2006 CN-3rd Jiangxi Hwy 200.00 0.00 0.00 0.00 0.00 10.33 7.42 0.00 P086629 2006 CN-Heilongjiang Dairy 100.00 0.00 0.00 0.00 0.00 55.51 55.01 0.00 P085124 2006 CN-Ecnomic Reform Implementation 20.00 0.00 0.00 0.00 0.00 14.18 21.51 0.00 P081346 2005 CN-LIUZHOU ENVIRONMENT MGMT 100.00 0.00 0.00 0.00 0.00 14.33 11.29 0.00 P081161 2005 CN-CHONGQING SMALL CITIES 180.00 0.00 0.00 0.00 0.00 38.94 26.87 0.00 P075730 2005 CN-HUNAN URBAN DEV 172.00 0.00 0.00 0.00 0.00 95.29 92.12 14.29 P069862 2005 CN - Agricultural Technology Transfer 100.00 0.00 0.00 0.00 0.00 18.75 18.59 0.00 P071094 2005 CN - Poor Rural Communities 100.00 0.00 0.00 0.00 0.00 6.45 6.45 0.00 Development P066955 2004 CN-ZHEJIANG URBAN ENVMT 133.00 0.00 0.00 0.00 0.00 18.58 18.58 4.26 P075728 2004 CN-GUANGDONG/PRD UR ENVMT 128.00 0.00 0.00 0.00 0.92 53.07 53.99 43.45 P077137 2004 CN-4th Inland Waterways 91.00 0.00 0.00 0.00 0.46 1.84 2.29 1.84 P068058 2003 CN-Yixing Pumped Storage Project 145.00 0.00 0.00 0.00 10.00 15.95 25.95 0.00 P040599 2003 CN-TIANJIN URB DEV II 150.00 0.00 0.00 0.00 0.00 62.08 62.08 45.82 Total: 9,441.73 0.00 0.00 0.00 13.03 6,242.03 1,220.73 113.74

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

Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2002 ASIMCO 0.00 10.00 0.00 0.00 0.00 10.00 0.00 0.00 2006 ASIMCO 0.00 0.00 4.12 0.00 0.00 0.00 3.61 0.00 2005 BCCB 0.00 59.21 0.00 0.00 0.00 59.03 0.00 0.00 2003 BCIB 0.00 0.00 12.04 0.00 0.00 0.00 0.00 0.00 2006 BUFH 8.14 0.00 0.00 0.00 8.14 0.00 0.00 0.00 2005 Babei 0.00 5.00 0.00 0.00 0.00 5.00 0.00 0.00 Babei Necktie 11.00 0.00 0.00 6.00 8.94 0.00 0.00 4.88 1999 Bank of Shanghai 0.00 21.76 0.00 0.00 0.00 21.76 0.00 0.00 2000 Bank of Shanghai 0.00 3.84 0.00 0.00 0.00 3.84 0.00 0.00 2002 Bank of Shanghai 0.00 24.67 0.00 0.00 0.00 24.67 0.00 0.00 2005 BioChina 0.00 3.70 0.00 0.00 0.00 3.13 0.00 0.00 2002 CDH China Fund 0.00 2.02 0.00 0.00 0.00 0.00 0.00 0.00 2005 CDH China II 0.00 17.99 0.00 0.00 0.00 11.38 0.00 0.00 2006 CDH Venture 0.00 20.00 0.00 0.00 0.00 0.51 0.00 0.00 2005 CT Holdings 0.00 0.00 40.00 0.00 0.00 0.00 0.00 0.00 2004 CUNA Mutual 0.00 10.53 0.00 0.00 0.00 0.00 0.00 0.00 2006 Capital Today 0.00 25.00 0.00 0.00 0.00 0.32 0.00 0.00 2005 Changyu Group 0.00 18.07 0.00 0.00 0.00 18.07 0.00 0.00 1998 Chengdu Huarong 3.36 3.20 0.00 3.13 3.36 3.20 0.00 3.13 2004 China Green Ener 20.00 0.00 0.00 0.00 15.00 0.00 0.00 0.00 2004 China Re Life 0.00 0.27 0.00 0.00 0.00 0.27 0.00 0.00 1994 China Walden Mgt 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 2006 Chinasoft 0.00 0.00 15.00 0.00 0.00 0.00 10.00 0.00 2004 Colony China 0.00 15.31 0.00 0.00 0.00 9.29 0.00 0.00 2004 Colony China GP 0.00 0.84 0.00 0.00 0.00 0.49 0.00 0.00 2006 Conch 81.50 40.93 0.00 0.00 81.50 0.00 0.00 0.00 2006 Dagang NewSpring 25.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 Darong 10.00 0.24 0.00 8.00 6.67 0.24 0.00 5.33 2006 Deqingyuan 0.00 2.85 0.00 0.00 0.00 2.85 0.00 0.00 1994 Dynamic Fund 0.00 2.21 0.00 0.00 0.00 2.01 0.00 0.00 2007 Epure 0.00 10.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 Fenglin 17.64 0.00 6.00 13.47 13.64 0.00 6.00 12.53 2006 Fenglin HJ MDF 0.23 0.00 0.00 3.27 0.00 0.00 0.00 0.00 2005 Five Star 0.00 0.00 7.00 0.00 0.00 0.00 0.00 0.00 2006 GDIH 50.85 0.00 0.00 0.00 50.85 0.00 0.00 0.00 2003 Great Infotech 0.00 1.73 0.00 0.00 0.00 1.03 0.00 0.00 2006 Hangzhou RCB 0.00 10.85 0.00 0.00 0.00 0.00 0.00 0.00 2005 HiSoft Tech 0.00 4.00 0.00 0.00 0.00 3.00 0.00 0.00 2006 HiSoft Tech 0.00 4.34 0.00 0.00 0.00 1.74 0.00 0.00

2004 IB 0.00 52.18 0.00 0.00 0.00 52.18 0.00 0.00 2004 Jiangxi Chenming 40.00 12.90 0.00 18.76 40.00 12.90 0.00 18.76 2006 Launch Tech 0.00 8.35 0.00 0.00 0.00 8.33 0.00 0.00 2001 Maanshan Carbon 5.25 2.00 0.00 0.00 5.25 2.00 0.00 0.00 2005 Maanshan Carbon 11.00 1.00 0.00 0.00 5.00 1.00 0.00 0.00 2005 Minsheng 15.75 0.00 0.00 0.00 7.00 0.00 0.00 0.00 2006 Minsheng & IB 25.09 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2001 Minsheng Bank 0.00 23.50 0.00 0.00 0.00 23.50 0.00 0.00 2005 Minsheng Bank 0.00 2.80 0.00 0.00 0.00 2.79 0.00 0.00 2001 NCCB 0.00 8.94 0.00 0.00 0.00 8.82 0.00 0.00 1996 Nanjing Kumho 0.00 3.81 0.00 0.00 0.00 3.81 0.00 0.00 2004 Nanjing Kumho 31.38 2.23 0.00 0.00 31.38 2.23 0.00 0.00 2006 Neophotonics 0.00 0.00 10.00 0.00 0.00 0.00 10.00 0.00 2001 New China Life 0.00 5.83 0.00 0.00 0.00 5.83 0.00 0.00 2005 New Hope 0.00 0.00 45.00 0.00 0.00 0.00 0.00 0.00 1995 Newbridge Inv. 0.00 0.22 0.00 0.00 0.00 0.22 0.00 0.00 2005 North Andre 8.00 6.74 0.00 0.00 0.00 4.25 0.00 0.00 2003 PSAM 0.00 2.01 0.00 0.00 0.00 0.00 0.00 0.00 RAK China 13.00 0.00 0.00 0.00 13.00 0.00 0.00 0.00 2006 Renaissance Sec 0.00 0.00 20.04 0.00 0.00 0.00 0.00 0.00 2006 Rongde 0.00 35.00 0.00 0.00 0.00 31.38 0.00 0.00 SAC HK Holding 0.00 1.60 0.00 0.00 0.00 1.00 0.00 0.00 2003 SAIC 12.00 0.00 0.00 0.00 12.00 0.00 0.00 0.00 2006 SBCVC 0.00 20.00 0.00 0.00 0.00 2.00 0.00 0.00 2000 SEAF SSIF 0.00 3.74 0.00 0.00 0.00 3.37 0.00 0.00 SH Keji IT 3.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 SHCT 38.18 0.00 0.00 28.64 29.04 0.00 0.00 21.78 2004 SIBFI 0.14 0.07 0.00 0.00 0.00 0.07 0.00 0.00 1998 Shanghai Krupp 19.25 0.00 0.00 36.75 19.25 0.00 0.00 36.75 2006 Shanshui Group 50.00 5.50 2.20 0.00 50.00 5.50 0.00 0.00 1999 Shanxi 12.61 0.00 0.00 0.00 12.61 0.00 0.00 0.00 SinoSpring 0.00 0.00 20.00 0.00 0.00 0.00 0.00 0.00 Stora Enso 20.83 0.00 0.00 4.17 11.00 0.00 0.00 0.00 2005 Stora Enso 29.17 0.00 0.00 20.83 0.00 0.00 0.00 0.00 2006 Stora Enso 50.00 0.00 0.00 175.00 0.00 0.00 0.00 0.00 2006 TBK 4.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00 2006 VeriSilicon 0.00 1.00 0.00 0.00 0.00 1.00 0.00 0.00 Wanjie High-Tech 9.89 0.00 0.00 0.00 9.89 0.00 0.00 0.00 2004 Wumart 0.00 1.62 0.00 0.00 0.00 1.62 0.00 0.00 2003 XACB 0.00 17.95 0.00 0.00 0.00 0.64 0.00 0.00 2004 Xinao Gas 25.00 10.00 0.00 0.00 25.00 10.00 0.00 0.00 2006 Zhejiang Glass 50.00 24.96 0.00 18.00 0.00 0.00 0.00 0.00 2003 Zhengye-ADC 10.43 0.00 0.00 4.87 10.43 0.00 0.00 4.87 2002 Zhong Chen 0.00 4.78 0.00 0.00 0.00 4.78 0.00 0.00 2006 Zhongda_Yanjin 21.89 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total portfolio: 733.58 577.30 181.40 340.89 470.95 371.06 29.61 108.03

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

Annex 14: Country at a Glance CHINA: Zhejiang Qiantang River Basin Small Town Environment Project

Annex 15: Maps CHINA: Zhejiang Qiantang River Basin Small Town Environment Project

RUSSIAN FEDERATION To Changzhou 119° 120° 121° 122° JIANGSU To Shanghai Tai Hu 31º 0 25 50 75 100 MONGOLIA Changxing Sea of To Wuhu SHANGHAI 31° Japan KILOMETERS D.P.R. OF BEIJING KOREA Huzhou To Shanghai REP. OF JAPAN Jiashan KOREA Jiaxing

East Pinghu China Tongxiang ZHEJIANG Sea Anji National Capital Deqing Haiyan Province PACIFIC Haining Boundaries OCEAN MYANMAR International Yuhang LAO VIETNAM Boundaries P.D.R. PHILIPPINES Gongshu Ti an m H an u Shangcheng a W 118° HANGZHOU n ou Lin’an Xihu Jianggan gzh Cixi Binjiang Xiaoshan 30° ANHUI Fuyang Shaoxing Yuyao Cengang

g Zhoushan n 30° ia Shaoxing Shangyu Zhenhai J Putuo un Jiangbei ch Beicang To Tunxi Fu Ningbo Haishu Jiangnan Yinzhou Jiangdong Tonglu Zhuji Fenghua

Chun’an ng ia Shengzhou Meicheng J g n a y u Xinchang Xiangshan Jiande Pujiang P

Yiwu e

o a Ninghai g C n a East China Sea Lanxi Ji Dongyang a Jianshan Kaihua nhu Ji Sanmen iang Wucheng Tiantai Qu J Qujiang Jinhua Pan’an 29° Youbu 29° Longyou Changshan Jian Quzhou Yongkang ing g CHINA Xianju L Linhai Jiangshan ZHEJIANG QIANTANG Jinyun Taizhou Suichang Huangyan RIVER BASIN Liucheng Luqiao To Shangrao SMALL TOWN Songyang Lishui ENVIRONMENT PROJECT JIANGXI Wenling PROJECT CITIES/TOWNS ngquan Lo Xi Yongjia Yueqing Yuhnan WATER SUPPLY COMPONENT Longquan Yunhe Qingtian 28° Wenzhou WASTEWATER TREATMENT COMPONENT 28° Jingning Ouhai Longwan SOLID WASTE COMPONENT FUJIAN Wencheng Rui’an EXPRESSWAYS Pingyang Qingyuan PROVINCIAL CAPITAL NATIONAL ROADS This map was produced by the Map Design Unit of The World Taishun PREFECTURE PROVINCE BOUNDARIES Bank. The boundaries, colors, Cangnan denominations and any other COUNTY/DISTRICT/CLC PREFECTURE BOUNDARIES IBRD 37143R1 information shown on this map do not imply, on the part of The TOWN/TOWNSHIP COUNTY/DISTRICT/CLC MAY 2010 World Bank Group, any judgment on the legal status of any BOUNDARIES territory, or any endorsement or 118° acceptance of such boundaries. 119° 120° To Fuzhou 121° 122°