The World Bank
Report No: 36316
Draft 12/13/2006
PROJECT DOCUMENT
ON A
PROPOSED LOAN
IN THE AMOUNT OF US$147 MILLION
AND A
PROPOSED GRANT FROM THE
GLOBAL ENVIRONMENT FACILITY TRUST FUND
IN THE AMOUNT OF US$5 MILLION
TO THE
PEOPLES’ REPUBLIC OF CHINA
FOR A
second shandong environment PROJECT
{PROJECT DATE}
Urban Development Sector Unit
China Country Unit
East Asia and Pacific Region
CURRENCY EQUIVALENTS
(Exchange Rate Effective {Date})
Currency Unit / = / Yuan or Renmimbi (RMB)Yuan 8.0 / = / US$1.0
US$0.125 / = / Yuan 1.0
FISCAL YEAR
January 1 / – / December 31ABBREVIATIONS AND ACRONYMS
3R / Waste Reduction, Reuse, and RecyclingADB / Asian Development Bank
BOD / Biochemical Oxygen Demand
BOT / Build-Operate-Transfer
CAS / Country Assistance Strategy
CDM / Clean Development Mechanism
CF / Carbon Finance
CFB / County’s Finance Bureau
CNAO / China National Audit Office
COD / Chemical Oxygen Demand
CW / Civil Works
DA / Designated Account
DRA / Design Review and Advisory (Consultant)
DRC / Development and Reform Commission
EA / Environmental Assessment
EIA / Environment Impact Assessment
EMP / Environment Management Plan
EPB / Environment Protection Bureau
FMR / Financial Management Report
FMS / Financial Management Specialist
FS / Feasibility Study
Fund / Strategic Partnership Investment Fund for Pollution Reduction in the Large Marine Ecosystems of East Asia
GEF / Global Environment Facility
GWSC / Gaomi City Water Supply Company Limited
HSWC / Heze Yuwa Solid Waste Management Company Limited
HWDC / Huantai Ji Yuan Water Supply and Drainage Company Limited
IBRD / International Bank for Reconstruction and Development
ICB / International Competitive Bidding
IMO / International Maritime Organization
IW:LEARN / International Waters Learning Exchange and Resource Network
LG / Leading Group
LME / Large Marine Ecosystem
Manual / Project Financial Management Manual
MBD / Model Bidding Document
MFB / Municipal Finance Bureau
MoF / Ministry of Finance
MWR / Ministry of Water Resources
NCB / National Competitive Bidding
NDRC / National Development and Reform Commission
NPV / Net Present Value
NWEP / Ningbo Water and Environment Project
PEMSEA / Partnerships in Environmental Management for the Seas of East Asia
PIU / Project Implementation Unit
PMO / Project Management Office
PPR / Project Progress Report
QBS / Quality-Based Selection
QCBS / Quality- and Cost-Based Selection
QWDC / Qixia Dongsheng Water Supply and Drainage Company Limited
RAP / Resettlement Action Plan
RE / River Embankment
REEC / Rizhao Municipal Environmental Engineering Company Limited
SBD / Standard Bidding Document
SDEP / Shandong Environment Project
SDEP2 / Second Shandong Environment Project
SDS-SEA / Sustainable Development Strategy for the Seas of East Asia
SEPB / Shandong Environment Protection Bureau
SO / Strategic Objective
SOE / Statement of Expenditures
SPG / Shandong Provincial Government
SPFB / Shandong Province Finance Bureau
SPPMO / Shandong Provincial Project Management Office
STAP / GEF Scientific and Technical Advisory Panel
STU / Septic Tank Unit
TA / Technical Assistance
TOT / Transfer-Operation-Transfer
UNDP / United Nations Development Program
UNEP / United Nations Environment Program
WTP / Water Treatment Plant
WW / Water Works
WWMC / Weihai Water Management Group Company Limited
WWTP / Wastewater Treatment Plant
YWDC / Yantai Xinan River Wastewater and Drainage Company Limited
YMG / Yantai Municipal Government
ZMG / Zaozhuang Municipal Government
ZWTC / Zaozhuang Yiyuan Wastewater Treatment Center
Vice President: / James W. Adams
Country Manager/Director: / David Dollar
Sector Manager: / Keshav Varma
Task Team Leader: / Shenhua Wang
CHINA
Second Shandong Environment Project
Contents
Page
A. STRATEGIC CONTEXT AND RATIONALE 6
1. Country and Sector Issues 6
2. Rationale for Bank Involvement 7
3. Higher Level Objectives to Which the Project Contributes 8
B. PROJECT DESCRIPTION 9
1. Lending Instrument 9
2. Project Development Objective and Key Indicators 9
3. Project Components 10
4. Lessons Learned and Reflected in the Project Design 10
5. Alternatives Considered and Reasons for Rejection 11
C. IMPLEMENTATION 12
1. Partnership Arrangements 12
2. Institutional and Implementation Arrangements 12
3. Monitoring and Evaluation of Outcomes/Results 13
4. Sustainability 14
5. Critical Risks and Possible Controversial Aspects 14
6. Loan and Grant Conditions and Covenants 15
D. APPRAISAL SUMMARY 16
1. Economic and Financial Analyses 16
2. Technical 18
3. Fiduciary 18
4. Social 19
5. Environment 20
6. Safeguard Policies 21
7. Policy Exceptions and Readiness 22
8. Compliance with Readiness Criteria 22
Annex 1: Country and Sector Background 23
Annex 2: Major Related Projects Financed by the Bank and/or Other Agencies 31
Annex 3: Results Framework and Monitoring 32
Annex 4: Detailed Project Description 36
Annex 5: Project Costs 42
Annex 6: Implementation Arrangements 45
Annex 7: Financial Management and Disbursement Arrangements 47
Annex 8: Procurement 55
Annex 9: Economic and Financial Analysis 65
Annex 10: Safeguard Policy Issues 84
Annex 11: Project Preparation and Supervision 106
Annex 12: Documents in the Project File 109
Annex 13: Statement of Loans and Credits 111
Annex 14: Country at a Glance 116
Annex 15: Incremental Cost Analysis 118
Annex 16: GEF Review by Scientific and Technical Advisory Panel 127
Annex 17: Strategic Partnership Investment Fund 135
Map of Project Locations 138
1
CHINA: Second Shandong Environment Project
A. STRATEGIC CONTEXT AND RATIONALE
1. Country and Sector Issues
China is experiencing rapid economic growth, with over 40 percent of the population currently living in urban areas, up from 29 percent in 1995. Over the next 15 years, that trend is expected to continue with the urban population projected to reach 50 percent by 2020. This increase is a result of several factors, notably the government’s decision to reduce controls governing population mobility and a falling demand for farm labor. The rapid urban growth is putting pressure on cities to expand their public infrastructure, increase municipal services and provide employment for migrants. Strong city performance is, therefore, critical to China’s sustainable growth and economic development. Major urban environmental problems, such as air and water pollution, that are associated with fast growth, are priority areas for development assistance. China has taken steps to address these problems through various programs and policies, including the recent development of national guidelines for reforming the country’s wastewater and solid waste sectors. These guidelines encourage utilities to set adequate user fees to achieve sufficient cost recovery, including capital costs, and promote private sector investment in utility operations.
Shandong Province, situated on the east coast of China, has a 3,000-km coastline on the conjunction between the Bohai and Yellow Seas, both of which drain a major part of the province. The province is divided into 17 municipalities and 139 counties, districts and cities. It has a population of nearly 92 million, with approximately 40 percent of people living in urban areas. Shandong Province is one of the fastest-growing provinces in China. From 2001 to 2005, its average GDP growth rate was 13.18 percent. In 2005, Shandong’s GDP totaled RMB1, 847 billon Yuan, ranking second in China, with a growth rate of 15.2 percent. However, its strong economic performance has come at a high environmental cost and investment in environmental protection has not kept pace with the province’s rapid economic development.
Infrastructure deficiencies generally found in Shandong’s fast growing smaller cities and county towns include: (a) poor quality and intermittent drinking water supply, due to inadequate water resources, which hinder the development of reliable municipal water supply systems; (b) lack of proper solid waste management systems; (c) low resistance to flooding as many cities and towns are built along rivers or adjacent to flood plains without adequate protection, resulting in recurring flood damage and insufficient land for urban expansion; and (d) unsatisfactory sanitation conditions, including insufficient drainage and wastewater treatment, and serious pollution of rivers, leading to severe damage of the shallow Bohai Sea ecosystem. Wastewater and solid waste services, which are managed by municipal departments, are often supply driven, with limited incentives to increase the efficiency of service provision or improve cost recovery.
The Shandong Provincial Government (SPG) has embraced the central government’s policies and guidelines by promoting institutional reform through the establishment of separate self-financing companies and ensuring that adequate tariffs for the services are in place. Its policies on water resources call for accelerated restoration of the ground and surface resources through enhancing the treatment and re-use of wastewater. In the wastewater sector, provincial guidelines require that by 2010 municipal cities and county towns adequately treat 65 percent and 40 percent of their wastewater, respectively, and that across the province 20 percent of treated effluent be re-used. In the solid waste sector, provincial guidelines require that by 2010 municipal cities and county towns develop adequate solid waste management treatment and disposal facilities to handle 70 percent and 40 percent of waste, respectively. Shandong has also signed a Memorandum of Agreement initiated by the United Nations Development Program/Global Environment Facility/International Maritime Organization (UNDP/GEF/IMO) Regional Program to foster collaboration among adjacent provinces in managing the pollution of rivers and reducing land-based discharges into the Bohai Sea.
In addition, the Asian Development Bank (ADB) is also working with Shandong Province to support pollution control in the Hai River Basin. The ADB’s Hai River Basin Pollution Control Project would finance construction of wastewater treatment facilities, installation of water recycling systems, and the development of appropriate solid waste management systems, along with technical assistance (TA) and capacity building activities.
2. Rationale for Bank Involvement
The World Bank has worked successfully with Shandong Province on a number of projects, including the Shandong Environment Project (SDEP), approved in 1997 and closed in December 2005, and the Huai River Pollution Control Project, which was approved in 2001 and is shortly to close. The proposed project would build on the strong relationship established with the province by both deepening and broadening the extent of support for the province’s agenda to sustainably improve environmental conditions, particularly through improved wastewater and solid waste management. As China possesses relatively little experience in the comprehensive management of solid waste, the project presents the opportunity not only to bring best international practices to China, but also to support the implementation of national guidelines on solid waste management.
The province, with the approval of the national authorities, has requested Bank support for this proposed project and expressed an interest in additional support from GEF[1] to demonstrate septage management techniques, which would contribute to a reduction in land-based pollution reaching the Bohai Sea, a pollution hotspot in the seas of East Asia. The GEF financing is made available through the Strategic Partnership Investment Fund for Pollution Reduction in the Large Marine Ecosystems of East Asia (Fund), which operates under GEF’s OP10, the contaminant-based operational program. OP10 stresses the removal of barriers to pollution reduction, which the Second Shandong Environment Project (SDEP2) targets by addressing septage management in a holistic way. The GEF activity is consistent with GEF Strategic Objectives (SOs) in the International Waters Focal Area. It is consistent with SO1 (catalyze reform and investment) as it will mobilize financial resources for implementing policy/institutional reforms and pollution-reducing investments to address septic tank servicing. With respect to SO3 (innovative demonstration), the GEF activity will demonstrate septage collection and its joint treatment with wastewater, which is a technical novelty in China and represents the least-cost technical solution in Yantai. The GEF activity generates a mix of local and ultimately global benefits by reducing pollution (Biochemical Oxygen Demand (BOD), nutrients) to the East China Sea.
GEF assistance is consistent with (a) China’s strategy for reducing municipal water pollution and (b) various international agreements, including the recommendations of the Partnerships in Environmental Management for the Seas of East Asia (PEMSEA), the Bank’s partner in the Fund. The GEF activity is consistent with the aims and objectives of the World Summit on Sustainable Development, to which GEF subscribes. The Johannesburg Declaration made a renewed commitment to sustainable development and resolved to speedily increase access to such basic services as clean water. In addition, the Millennium Development Goal for environmental sustainability includes a target to halve, by the year 2015, the proportion of people without access to safe drinking water. Reducing water pollution contributes to furthering these aims.
China is eligible for GEF assistance through the World Bank, and the proposed activity fulfills all seven conditions stipulated in the Fund. The conditions stipulate that a project: (i) is located in coastal watershed of East Asian Large Maritime Ecosystems (LMEs); (ii) demonstrates an innovative technique to combat land-based pollution; (iii) has a likelihood for replication in China and East Asia; (iv) would not proceed without grant financing; (v) has supporting co-financing available; (vi) has been endorsed by China’s GEF Focal Point at the Ministry of Finance (MoF); and (vii) meets relevant Bank appraisal criteria.
3. Higher Level Objectives to Which the Project Contributes
The proposed project will address two key themes in the new Country Partnership Program: (a) managing resource scarcity and environmental challenges, especially related to water pollution reduction and conservation; and (b) promoting balanced urbanization and improving the quality of urban life. It will also support the government’s Eleventh Five Year Plan (2006-2010) which sets out a “people-centered” strategy, aimed at achieving a “harmonious society” that balances economic growth with ecological concerns.
The GEF activity would facilitate China’s efforts in meeting the Putrajaya Declaration of Regional Cooperation for the Sustainable Development of the Seas of East Asia, of which China is a signatory. The declaration calls for nations to mobilize financial resources for implementing policy and institutional reforms and stress-reducing investments to address priority trans-boundary water issues, including reducing land-based pollution of a shared water body. In addition, the resources mobilized under this project are mainstreamed into the regular program of a GEF agency, in this case the World Bank, under the framework of the Strategic Partnership among nations and the GEF agencies that supported the World Summit on Sustainable Development’s Plan of Implementation.