Document of The World Bank Report No: 32364-CHA IMPLEMENTATION COMPLETION REPORT (IDA-28920 SCL-40550) ON A LOAN AND CREDIT IN THE AMOUNT OF US$125 MILLION AND SDR 17.4 MILLION (US$25 MILLION EQUIVALENT) TO THE PEOPLE'S REPUBLIC OF CHINA FOR A YUNNAN ENVIRONMENT PROJECT June 28, 2005 Urban Sector Development Unit East Asia and Pacific Region CURRENCY EQUIVALENTS (Exchange Rate Effective December 31, 2004) Currency Unit = Renminbi Yuan (RMB Y) Y 1.00 = US$ 0.12 US$ 1 = Y 8.3 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS BTO Back-to-Office Report CAS Country Assistance Strategy DEAP Dianchi Environmental Action Plan EA Environmental Assessment EPCSL Environmental Pollution Control Subloans Facility GOC Government of China ICR Implementation Completion Report KDC Kunming Drainage Company MOF Ministry of Finance ODA Overseas Development Administration (UK) PAP Project Affected Persons PSR Project Status Report QAG Quality Assurance Group RAP Resettlement Action Plan SAR Staff Appraisal Report STW Sewage Treatment Works TA Technical Assistance TM (TTL) Task Manager (Task Team Leader) WTP Water Treatment Plant YEPO Yunnan Environment Project Office Vice President: Mr. Jemal-ud-din Kassum, EAPVP Country Director: Mr. David Dollar, EACCF Sector Director: Mr. Keshav Varma, EASUR Task Team Leader: Ms. Shenhua Wang, EASUR CHINA YUNNAN ENVIRONMENT PROJECT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 6 5. Major Factors Affecting Implementation and Outcome 12 6. Sustainability 13 7. Bank and Borrower Performance 14 8. Lessons Learned 17 9. Partner Comments 18 10. Additional Information 19 Annex 1. Key Performance Indicators/Log Frame Matrix 20 Annex 2. Project Costs and Financing 21 Annex 3. Economic Costs and Benefits 23 Annex 4. Bank Inputs 25 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 27 Annex 6. Ratings of Bank and Borrower Performance 28 Annex 7. List of Supporting Documents 29 Annex 8. Experiences in Land Acquisition and Resettlement 30 Annex 9. Summary of Borrower's Project Evaluation 31 Project ID: P003599 Project Name: YUNNAN ENVIRONMENT PROJECT Team Leader: Shenhua Wang TL Unit: EASUR ICR Type: Core ICR Report Date: June 28, 2005 1. Project Data Name: YUNNAN ENVIRONMENT PROJECT L/C/TF Number: IDA-28920; SCL-40550 Country/Department: CHINA Region: East Asia and Pacific Region Sector/subsector: General water, sanitation and flood protection sector (81%); Petrochemicals and fertilizers (11%); Sub-national government administration (8%) Theme: Pollution management and environmental health (P); Water resource management (P); Environmental policies and institutions (P); Municipal governance and institution building (P); Other urban development (P) KEY DATES Original Revised/Actual PCD: 12/16/1994 Effective: 03/12/1997 Appraisal: 03/20/1996 MTR: 10/19/1999 Approval: 06/25/1996 Closing: 12/31/2002 12/31/2004 Borrower/Implementing Agency: People's Republic of China/Yunnan Province Other Partners: STAFF Current At Appraisal Vice President: Mr. Jemal-ud-din Kassum Mr. Russell Cheetham Country Director: Mr. David R. Dollar Mr. Nicholas Hope Sector Director: Mr. Keshav Varma Ms. Katherine Sierra Team Leader at ICR: Ms. Shenhua Wang Mr. Geoffrey Read ICR Primary Author: Mr. Herbert Boehm 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: L Institutional Development Impact: M Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: Yes QAG did not review this project for quality at entry. 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: Background. Rapid urbanization, industrialization and income growth in the 1980s and 1990s exerted great pressure on urban environmental services in Yunnan Province. Pollution loads in urban centers had destroyed potable water sources, reduced agricultural yields, and ended recreational use of a number of lakes. The worst conditions were found in Kunming, the capital city of Yunnan, and the adjacent Lake Dianchi. The environmental situation was also quite severe in the cities of Gejiu and Qujing. The State and Provincial Governments therefore set up a phased development program for the Province to improve environmental conditions on a sustainable basis. The major aim of the Yunnan Environment Project was thus to assist the Borrower in carrying out the first phase of this program. The project's objectives were to: (a) strengthen policies, regulations and institutional arrangements for pollution control, and municipal water, wastewater, solid waste and nightsoil management; (b) support the improvement of the lakes environment in Gejiu and Kunming in order to allow the waters to be used for potable supply, industry or agriculture as appropriate; (c) facilitate complementary sustainable investments in pollution control and municipally provided urban environmental services; and (d) introduce a comprehensive approach to planning, prioritization, and financing of urban environmental infrastructure investments. Assessment of Objectives. The Project objectives firmly reflected China's and Yunnan Province's desire and commitment to improving the environment. The Bank's China Country Assistance Strategy, discussed by the Board in June 1995, also considered environmental protection as one of four major areas of focus. The project objectives correctly embraced not only the needed physical infrastructure improvements, but to a large degree the regulatory, institutional and management improvements of urban entities entrusted with implementing environmental policies and programs, since environmental services in China are fittingly provided at the municipal level. This dual aim was particularly appropriate because in the past, Bank-supported projects achieved good physical progress but were somewhat less successful in terms of overall sector development and financial viability. Focusing on institutional and sustainability aspects, the project objectives pointedly addressed these past deficiencies. The objectives fully supported China's Environmental Action Plan and the so-called Agenda 21; the latter provided the basis for joint Government and Bank programs in the environmental sector, particularly in urban areas. Furthermore, the objectives took into account the most critical environmental problems affecting Yunnan Province after its rapid economic growth from development in industry and the service sector in the 1980's and early 90's. Urban services, especially water supply, wastewater and solid waste removal became increasingly deficient. The investments proposed under the project also firmly supported the Dianchi Environment Action Plan and similar plans for Qujing and Gejiu. These plans called for the immediate and comprehensive reversal of environmental degradation in the most environmentally challenged cities in the Province. The design thus was consistent with these objectives. The project objectives refrained from promising complete clean-up of the environment through this project. Rather, the project explicitly intended to be the first part of a phased development program that realistically, comprehensively and cautiously aimed at supporting necessary improvements to permit the - 2 - eventual reversal of the environmental decline in the Province. 3.2 Revised Objective: Although the project was restructured in the fall of 2002 to include three new components, but the original objectives did not require revision. 3.3 Original Components: The project had five components comprising a mix of policy and investment initiatives, as outlined below. Component 1: Lake Dianchi Basin Water Quality Recovery (US$199.6 million). Investments supported the Dianchi Environmental Action Plan (DEAP), and included control of point and non-point pollution in the Dianchi Lake Basin through improved catchment management, wastewater and stormwater collection, treatment and disposal, improved collection, transport and disposal of municipal solid waste and night soil, remediation of polluting practices causing lake eutrophication, and measures to strengthen Dianchi Lake basin management, and improvements to basin water resource allocation. Component 2: Industrial Pollution Control (US$34.1 million). Investments were provided to abate industrial pollution from enterprises identified in the DEAP as most threatening to basin resources. The clean-up was to focus on two fertilizer plants, found to be the top-ranked industrial polluters of Lake Dianchi, and support was also provided to abate pollution from smaller polluting enterprises through an Environmental Pollution Control Subloans Facility. Component 3: Provincial Urban Environmental Services (US$48.6 million). Investments were in catchment management, wastewater and stormwater collection and treatment systems to protect Gejiu Lake and the Nanpanjiang River, as well as selected investments in water supply extension and improved solid waste collection in Qujing. Component 4: Environmental and Water Quality Monitoring (US$6.2 million). This component was to provide support for upgrading and modernizing environmental management and water quality information and monitoring systems. Component 5: Institutional Development, Training and Construction Supervision (US$19.1 million). This provided technical assistance (TA) to strengthen provincial, municipal, project and financial management, construction supervision, training in utility operations, updating city environmental action plans and feasibility studies, and to prepare future operations. Assessment of Project Design Overall, project design, conceived as the first of a multi-stage approach, was appropriate, albeit quite ambitious considering that virtually none of the large number of project entities had adequate experience in implementing large and complex projects, particularly in the areas of wastewater treatment and solid waste management, and had almost no prior experience in executing projects under international financing. Nevertheless, to assist in the recovery of the Lake Dianchi Basin, the Gejiu Lake and the Nanpanjiang River, the principal focus of the Yunnan Environment Project, a multifaceted and comprehensive approach was necessary. Thus, the broad spectrum of the project design encompassed the major sources of pollution, i.e., industry, household wastewater and solid waste, and non-point pollution. In addition, it correctly targeted improvements in the regulatory, institutional, and financial framework needed to effectively implement the project and to ensure long-term safeguards and financial and economic sustainability of the improvements achieved under the project. - 3 - While the project's policy and regulatory improvements were aimed at the whole Province, the majority of the physical investments (about 80% of total costs) were limited to the capital city of Kunming, and to the cities of Qujing and Gejiu. Clearly, the project's main focus in terms of investment was put on stemming the further environmental decline of Dianchi Lake, Gejiu Lake and their associated river systems. The project focus was entirely consistent with the Province's environmental policies and fully supported the State Government's official "Three Rivers Three Lakes Program" which comprises the Huaihe, Haihe and Liaohe Rivers and Taihu, Chaohu and Dianchi Lakes. The second project objective specifically names both water bodies. Interestingly, Qujing, the fastest growing city in Yunnan, was not explicitly named in the project objectives. Similarly, the small towns sanitation component and the rural sanitation component could have received more prominent mentioning in the objectives as they expand the mainly urban focus of the project and also address non-point pollution, a major source of lake and river pollution. In hindsight, the question can be raised whether in light of the institutional constraints, the design of this first phase of the development program to improve the environmental conditions of Yunnan Province should have been scaled back to a proportion which would have been less demanding and more achievable within the original project implementation period. 3.4 Revised Components: The mid-term review exercise in October 1999 found that (a) substantial savings from the Industrial Pollution Control Component would be realized because the Kunming Chemical Fertilizer Factory was completed without Bank financing; (b) the proposed second phase of Kunyang Phosphate Fertilizer Factory, which had no direct impact on the water quality of Lake Dianchi, would be delayed beyond the expected project implementation period; and (c) a number of savings accumulated due to reserved procurement on contracts that had to be expedited in the run-up to the 1999 World Horticultural Exposition and because of lower than expected contract prices. In light of these savings, it was agreed to add three new components consistent with the project objectives: (1) solid waste management for Shilin Autonomous County to primarily benefit the popular attraction of the Stone Forest area; (2) wastewater treatment and collection for the city of Mengzi; and (3) wastewater treatment and collection for the city of Xuanwei. These new investments received the same rigorous review and evaluation as the original components, including technical and economic feasibility, environmental impact assessment and resettlement analysis. It was further agreed to extend technical assistance support to these components to ensure timely implementation. 3.5 Quality at Entry: Quality at entry of the project was not assessed by the Bank's Quality Assurance Group (QAG). The ICR rates quality at entry as moderately satisfactory because the project's assumptions concerning the project agencies' capacity to implement the project turned out to be too optimistic. In contrast, the project's consistency with the Bank's CAS as well as with government's environmental priorities and action plans weigh on the positive side of the ICR rating. Also the comprehensive design and approach to tackle the intricate solutions to initiate the recovery of a large lake basin, such as Dianchi Lake, also fall on the positive side of the rating. Environmental degradation of large water bodies is exceedingly complex and requires finding optimal and economically feasible approaches as to how to achieve a reversal of long-term deterioration. While the main culprits, such as industrial effluents, untreated urban wastewater and solid waste, can normally be identified, other sources, such as agricultural non-point pollution, and small township and village pollution are more difficult to identify and correct. The project did an innovative job in striking a balance between the large urban centers and the rural areas. Because of the project's complexity and size, not all investment proposals were prepared by the design - 4 - institutes as thoroughly as desired. In Kunming, for example, an updated sewerage master plan was not available until late into project execution. A number of technical feasibility studies lacked essential information, such as geotechnical data needed for tunneling and pipe-jacking. Moreover, the institutional assessment of project offices and implementation agencies was overly optimistic as at project start-up, most of them were neither fully staffed nor trained with many lacking basic familiarity with Bank procurement guidelines. This resulted in severe implementation delays, amounting to over one year at the time of the mid-term review, and ultimately contributed to the need to extend the Loan/Credit by two years. Risk Assessment Almost eight pages in the Staff Appraisal Report (SAR) were devoted to systematically and realistically analyzing the project's potential risks and proposing mitigation measures. The risks identified were: (a) municipal counterpart funding jeopardizing project financing; (b) delays in transforming utilities, particularly wastewater treatment entities, to autonomous enterprises; (c) financial uncertainties of the companies borrowing funds under the industrial pollution component; (d) potential operational failures by enterprises under the industrial pollution component to properly operate their pollution abatement investments; (e) resistance by the respective authorities to timely implement tariff adjustments for water and wastewater to ensure financial viability of the utilities under the project; (f) reluctance by industry and the authorities to constrain pollutants at source possibly offsetting gains achieved through the project; and (g) potential pollution from other sources outside the project cities, such as nonpoint source pollutants from agriculture. The risks identified were comprehensive but lacked precision and prioritization. It may have been desirable to weight the risks by the likely probability as to the extent they could jeopardize the outcome of the project. Furthermore, the main factor which caused substantial implementation problems remained unidentified, namely the weak capacity building efforts of the project entities to carry out procurement under the Bank's guidelines. In contrast, the precipitous steel price increases beginning in Fall 2002 could have hardly been anticipated at the time of project appraisal. Compliance with Safeguard Policies The project's compliance with safeguard policies was exemplary. While the project's main focus was to significantly improve the water quality in the most populated areas in Yunnan, especially that of Lake Dianchi and Gejiu Lake, potential adverse effects of the planned interventions required the classification of the project as a "Category A" in accordance with the World Bank's Directive on Environmental Assessment (EA). Consequently, a comprehensive EA was prepared, reviewed by the Bank and approved by the Borrower. The recommendations of the EA were fully complied with during project implementation. In particular land acquisition and resettlement, relatively modest for the project size, were strictly handled according to the detailed resettlement action plan (RAP). Socio-economic surveys of project affected persons (PAPs) belonging to minority groups, defined in the RAPs, were carried out satisfactorily. (For more details on land acquisition and resettlement see Annex 8). In 1997, a four-member team of the Southwest Jiatong University made an initial field assessment, and in particular, gathered relevant opinions of PAPs. The group reported that land acquisition and resettlement proceeded in accordance with the official Land Acquisition and Resettlement Plan. In 1999, the QAG reviewed the project's supervision and found that safeguard policies were followed. Several of QAG's recommendations concerning resettlement, compensation and impact on PAPs were followed, and the September 2000 supervision mission confirmed that results were satisfactory. When three new components were added during the mid-term review, complete EAs and RAPs were - 5 - prepared. The impact of the new components on minority populations was also taken into account. After incorporating comments by the Bank, the documents were deemed sound. The Kunming urban sewer network component was finalized only in 2001, quite late during project implementation. Detailed design preparation started after the Kunming municipal government had prepared the sewer master plan for the Kunming's central areas in May 2001. It was envisaged that the construction would cause considerable traffic problems and inconveniences to business and residents. The Bank therefore insisted on the development of a social impact assessment in addition to the normal environmental impact assessment and a RAP. Social design institutes in Kunming were subsequently asked to closely monitor possible adverse effects from this massive in-city construction program. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The project is expected to achieve its main original development objectives over the long-term. The ICR ratings for the specific objectives (see Section 3.1) are given in Table 4.1. Table 4.1: Outcome/Achievement Ratings of Objectives Project Objective Rating (1) Strengthen policies, regulations and institutional arrangements for pollution Satisfactory control, and municipal water, wastewater, solid waste and night soil management (2) Support the improvement of the lakes environment in Gejiu and Kunming Highly satisfactory (3) Facilitate complementary sustainable investments in pollution control and Satisfactory municipally-provided urban environmental services (4) Introduce a comprehensive approach to planning, prioritization, Satisfactory management, and financing of urban environmental infrastructure investments. As specified in the first objective, Yunnan Province and the project cities have strengthened regulations and institutions to improve water, wastewater and solid waste management. The project put the need for autonomous and financially self-reliant utility companies firmly in the foreground, with the Bank highlighting, on an on-going basis, that sustainability can only be achieved if the enterprises are allowed to take complete responsibility for the management and financial well-being of their operations. The newly created wastewater utilities and solid waste management enterprises have only recently been put into operation, and while self-reliance has not yet been achieved, the process (which will require political support) towards reaching these goals has been put into place. As stipulated in the second objective, significant environmental benefits have accrued to the Dianchi Lake Basin and other water bodies in the project areas as a result of successful wastewater interception and treatment, and the disposal of solid waste in the sanitary landfills constructed under the project. While the degradation of water quality in Lake Dianchi appears to have been arrested, the longer term goal for reversal to the point where lake water would again be a source for potable water (with only a minimum of - 6 - treatment) has not yet been achieved. Since most of the wastewater and solid waste investments have only recently been put into operation, and further actions are needed to control industrial pollution, a dramatic turnaround of such a large water body as Dianchi Lake would be quite unrealistic. The results achieved in the much smaller Lake Gejiu, however, are impressive. The third objective was met in a satisfactory manner. Investments in water supply, wastewater and solid waste management exceeded SAR expectations. Moreover, at mid-term three additional components were added, further supporting environmental improvements in Yunnan. Although the industrial pollution investments were implemented largely without Bank funding, the results fully met the project objectives. The rating of this project objective could have been even higher if doubts about long-term viability and sustainability of the newly created wastewater and solid waste utilities could have been put to rest. Benefiting from the institutional requirement of the project, all the water and wastewater entities within the project scope have been reformed from municipal departments to companies with self-accounting and financial responsibilities. Significant progress has been achieved on tariff adjustments. The municipal governments have plans and policies in place for the above-mentioned water and wastewater companies to fully cover costs, capital expenditures and debt service within the next three years. Among the solid waste management entities, only Kunming Domestic Solid Waste Transportation and Disposal Center remains a municipal department. All others have been reformed to utility companies. Full cost recovery, including capital expenditures and debt service, will be achieved later than for the water/wastewater companies. The government has readied a five-year plan to achieve full cost recovery for them. The achievements with regard to the fourth objective are satisfactory. On the positive and more general side, the development of a longer term plan for improving the environment of Yunnan Province and the greater degree of understanding of the underlying issues and future requirements on the part of key provincial government agencies are noteworthy. In particular, the Provincial Planning Commission can be singled out as an agency with comprehensive vision equipped with the needed tools for solid planning and the capacity to propose priority interventions. Also, the project utilities substantially improved their planning and financial forecasting capabilities during the project. On the negative side, however, at the level of individual agencies and jurisdictions, institutional strengthening in terms of procurement planning, priority assessment, and construction and operational management was rather weak in the early stages of implementation and therefore was rated unsatisfactory during this period. The proposed technical assistance program under the Loan/Credit provided a considerable amount of training and hands-on demonstration, but failed to an extent to provide the support required to overcome the initial management and institutional constraints of the newly created entities. Nevertheless, through the project, all the project entities have substantially increased their management capacities. In view of the continued enterprise reform process in China, these project entities will be monitored with the aim of improving their management performance even after the external (international and domestic) experts have withdrawn. 4.2 Outputs by components: Overall project outputs were satisfactory. As described earlier, the project design was appropriate and location-specific to fulfill the quite broadly defined objectives. Construction quality in general was satisfactory, with systematic monitoring and vigilant follow-up by consultants. During field visits, supervision missions also carefully observed and commented on construction quality. The ratings of the main component outputs are given in Table 4.2 and explained thereafter. - 7 - Table 4.2: Component Ratings Component Rating (a) Lake Dianchi Basin Water Quality Satisfactory (b) Industrial Pollution Control Satisfactory (c) Provincial Urban Environmental Services Highly satisfactory (d) Environmental and Water Quality Monitoring Satisfactory (e) Institutional Development, Training and Construction Supervision Marginally satisfactory (f) Added Components Satisfactory (a) Lake Dianchi Basin Water Quality Recovery In Kunming, two landfills in Hongshuitang and Baishuitang with a daily capacity of 1,500 tons including collection and transportation, and transfer stations were built. The landfills, which include leachate and gas collection and treatment, have successfully resolved the solid waste management problems of Kunming city and thereby prevented untreated run-off and the illegal dumping of solid waste into Lake Dianchi. In order to lengthen the service life of the landfills, recycling policies and waste minimization strategies have been introduced and efforts to improve their effectiveness are underway. Completed in 2003, the water supply project in Kunming enables the city to provide 100% coverage of potable water to all residents. The project comprised the construction of a new water treatment plant (WTP) at Beijiaochang with a daily capacity of 100,000 m3, the expansion of the existing WTP No.1 by 70,000 m3 per day, and the laying of a 16.5 km raw water pipeline from the Songhuaba reservoir to the Beijiaochang WTP. With about 40% of total project costs, the Kunming wastewater subcomponent was by far the largest investment. It included the construction of upgraded and expanded facilities at Sewage Treatment Works No. 1 to boost daily treatment capacity by 55,000 m3, and improved the facilities at Plant No. 4b and Plant No. 5. The subcomponent also included the construction of 24 km of sewers, force mains and pump stations. The recently completed works will provide Kunming with wastewater collection and treatment with a total capacity of over 500,000 m3 per day, sufficient to handle approximately 95% of the city's total wastewater. Effluents fully meet national standards. The project consequently was able to remove one of the main sources of pollution of Dianchi Lake and the Panlong River. Under the small towns wastewater subcomponent, the project included wastewater treatment plants in the towns of Chenggong and Jinning with a capacity of 15,000 m3 per day each, together with associated trunk and sewer pipelines. This resulted in an annual 5.5 m3 million reduction of effluents for each city. The actual effluents, which now meet 100% of the national standards, had a drastic effect on the adjoining waters of Lake Dianchi. The rural sanitation subcomponent introduced pioneering work in ten villages on a pilot basis to demonstrate the benefits of properly treating wastewater, refuse and agricultural waste products. It also assisted in demonstrating environmentally sound techniques in composting, farmland terracing and the use of renewable energy. The project has been very successful in expounding the benefits of reducing pollution of Lake Dianchi and the Songhuaba catchments. It is encouraging to see that the communities themselves have continued to invest in some of these areas after project completion. However, it is too early to predict the project's replicability over the long term. This is one area which ought to be pursued in a possible - 8 - follow-on project. (b) Industrial Pollution Control In order to meet the Government's May 1, 1999 deadline to reduce industrial discharges into Lake Dianchi, the Kunming Chemical Fertilizer Plant was compelled to implement the proposed investment using its own funds. Although taken out of the project, the investment fully achieved the originally planned reduction in discharges of phosphorus to Lake Dianchi. The second fertilizer factory under the project, the Kunyang Phosphate Fertilizer Plant, successfully constructed an in-house industrial wastewater plant, but dropped, due to lack of counterpart funds, the intended second phase which was targeted at production-enhancing technologies. The second phase was supposed to be a process upgrading proposal that in any case would not have had an impact on the water quality of Lake Dianchi. The Environmental Pollution Control Subloans Facility (EPCSL), which was originally designed as a revolving fund, provided funding for pollution control projects to seven small industrial enterprises throughout Yunnan. The interest rate for subproject lending, fixed at the same level throughout the project, became uncompetitive with alternative sources of locally available funding. In the end, the facility proved to be largely ineffective, non-revolving and financially troubled. Overall, it did little to contribute to environmental improvements within Yunnan. Under this component two additional companies, the Yunfeng Paper Mill and the Kunming Steel General Company, formerly two major polluters in the Dianchi Basin area, agreed to carry out their pollution abatement action plans. As originally planned, funding for the necessary investments came from other than Bank sources. The effective treatment of their discharges before they enter the Tanglangchuan River has made a significant environmental difference to the Dianchi Basin. (c) Provincial Urban Environmental Services Under this component investments were aimed at solid waste management, water supply, wastewater collection and treatment. The results of this component greatly exceeded original expectations. In Gejiu, the project successfully initiated and established wastewater treatment, with a daily treatment capacity of 25,000 m3, meeting national effluent standards. The sub-component further added sewers, force mains and pumping stations, created eight settlement ponds, and built a 4.9 km service tunnel for storm and wastewater. The wastewater treatment had a remarkable impact on the water quality of Lake Gejiu since completion of the subcomponent in 2002 to the extent where bird and aquatic life has returned to the lake. The tunnel has significantly reduced flood conditions in the city, sparing its residents the frequent flood damage of the past and preventing other attendant hardship. The project has thus markedly contributed to a better quality of life of its residents. In Qujing, the city's first sanitary solid waste landfill was constructed with a daily capacity of 370 tons replacing the aging existing, and now closed, landfill. A new water treatment facility was also built in Qujing. Ancillary facilities included a 40 km raw water pipeline, a 9.3 km service tunnel and a distribution pipeline of over 11 km. With its daily capacity of 60,000 m3, the city can now provide 100% coverage to its residents. An 80,000 m3 per day wastewater treatment facility was built in the vicinity of the confluence of the Baishi and Xiaoxiang Rivers. Related investments comprised sewers, force mains extending over 8.3 km and ancillary equipment. The treatment process currently does not meet the secondary treatment standards stipulated by the State, as this was not required at appraisal. Upgrading of the plant is, however, contemplated. Even now this wastewater sub-component has significantly reduced pollution of the local river systems. - 9 - (d) Environmental and Water Quality Monitoring Under this relatively small component, the Kunming Environment Monitoring Center received a newly equipped laboratory building which substantially improved its analytical and field monitoring capacity. Also, the Yunnan Environmental Monitoring Center (together with environmental monitoring stations for Qujing Municipality, Qujing City, Honghe Prefecture, and Gejiu City) was upgraded and its management strengthened. The component appreciably improved the environmental information system and thus had quite a positive impact on the analytical capacity of the participating institutes. It also helped to raise public awareness of environmental issues in the three participating prefectures in Yunnan. (e) Institutional Development, Training, and Construction Supervision This component originally comprised nine composite packages for the benefit of the executing agencies basically to carry out their responsibilities under the project. It also included support for provincial and city sector agencies, master planning, future project preparation and other programs to be defined during implementation. However, only $7 million (about half of the original funding) was actually expended. The lack of adequate training, development and management, at least in the early project phase, plagued most of the implementing agencies to the extent that Bank supervisions rated this component "unsatisfactory." Because the project did not receive the level of technical assistance and training support at the very beginning of the project (as designed at appraisal), the question arises as to whether this component was the main cause for the slow progress of the project in the early phases. At the same time, this component did have some remarkable successes strengthening construction supervision, engineering design review, procurement management, quality control, and progress monitoring. In addition, all training activities directed at the project implementing agencies were carried out as originally designed, albeit with considerable delays. Training activities were also extended to the agencies in charge of the three additional mid-term review components. The Borrower indicated that this component substantially improved its capacity to efficiently execute and monitor projects. (f) Additional Components Three investments were added after the mid-term review: (a) Shilin solid waste management; (b) wastewater collection and treatment in Mengzi; and (c) wastewater collection and treatment in Xuanwei. Under the Shilin solid waste management subcomponent, a solid waste collection system and disposal site were provided for the county-level town of Shilin and the renowned Stone Forest area. The associated landfill was established with a daily capacity of 80 tons. With this system a welcome solution has been created in this tourist mecca to handle all of the area's refuse in an environmentally friendly manner. In Mengzi, a wastewater treatment facility with a daily capacity of 20,000 m3 was built together with sewer pipelines extending over 5 km. Effluents fully meet national requirements. The facility drastically reduced the pollution load for the Lijiang River and the Changqiaohai Lake. A similar project was implemented for Xuanwei city. The treatment capacity, however, is somewhat larger with a daily capacity of 30,000 m3 and the ancillary sewer distribution and force mains measuring almost 30 km. The treated wastewater, which fully meets national standards, has a positive effect on the Dong River and the upper reaches of the Pearl River system. - 10 - 4.3 Net Present Value/Economic rate of return: The economic analysis to be employed for this project was subject to intensive discussion within the Bank. An overall economic internal rate of return for the project was not calculated at the time of project appraisal because it was felt that future benefits from certain sub-projects, such as solid waste management and wastewater collection and treatment programs, were difficult to quantify. In particular, the project impact on health, amenity, and commodity production uses could not be expressed in precise monetary terms. Consequently, for the proposed investments in Gejiu and Qujing, alternative design options were evaluated on the basis of the least-cost analysis method. The three additional sub-components in Shilin, Mengzi and Xuanwei, proposed during the mid-term review, were also examined using least-cost analysis. For investments impacting on the water quality of Lake Dianchi, the appraisal compared the proposed investments with a "do nothing" scenario, which in the long-run would require increased treatment of the water or increasingly foregoing the use of lake water and replacing it with water from sources at greater distances. As Lake Dianchi supplies about 50% of Kunming's water, the damage of the "do nothing" option would become increasingly more expensive. Such a damage analysis makes sense when all options are still available, but does not make sense after an investment option has been implemented. Alternatively, the prevention of pollution damage to Lake Dianchi could be assessed through the assessment of such benefits as increased health conditions, higher fishing yields, and augmented touristic activities. However, quantifications of such benefits lack a reasonable degree of confidence and therefore have been omitted here. In addition, for health impact assessments, time series data over a finite period of time are required but are not available. For the water supply investments in Kunming, the appraisal compared the average economic incremental benefits of the new supply with the willingness by the consumers to pay for this supply. As both resultant values came approximately to the same result, it was presumed that the net present value of the investments would most likely be positive. For a more precise quantification the staff appraisal report would have needed more evidence on the shape of the demand curve which did not exist at the time. Because of the lack of willingness-to-pay survey data to develop such a demand curve, the ICR is also unable to reconstruct the appraisal analysis. Anecdotal evidence obtained by supervision missions indicate that the residents of the project cities would not oppose full cost recovery water rates by the utilities as long as water quality is maintained and the utilities are operated efficiently. Solid waste landfill options were compared at appraisal with incineration alternatives, the latter of which all proved to be economically much less attractive. At the time of the ICR, this conclusion has clearly not changed for the four solid waste management projects under the project. The appraisal selected the individual design options again on the basis of least-cost analysis. The same method was used for the new solid waste component in Shilin. For the two chemical fertilizer plants under the industrial pollution control component, the appraisal team estimated an economic rate of return of 24% based of the fact that the annual discharge of phosphorus into Lake Dianchi would decline from 93 tons to two tons per year. As stated, one of the plants dropped out of the project, but implemented the work on its own, and for the other, only the wastewater treatment was completed. The overall reduction of phosphorus discharge into Lake Dianchi was achieved nonetheless, and it can be presumed that their investments turned out to be quite attractive. No economic analysis was presented in the SAR for the relatively small environmental subloan facility (EPCSL). 4.4 Financial rate of return: Financial rates of return were not estimated at appraisal. The SAR did provide useful information about the public utilities in existence and provided financial reviews and projection summaries of all major - 11 - project agencies. In particular, it discussed in detail tariffs required to ensure that the entities would comply with the Loan/Credit covenants and provide long-term viability. 4.5 Institutional development impact: Overall, the institutional development impact from the project has been modest. At the beginning of the project, Yunnan Provincial Government had designated 13 agencies to implement the various components of the project; the three new components raised this number to a total of 16. While the water supply companies in Kunming and Qujing had been established previously, the wastewater companies were converted from within municipal departments to self-accounting and self-funding enterprises to implement the wastewater components of the project. However, at the end of project implementation, some of the project enterprises continued to have limited autonomy, particularly with respect to financial performance. In Qujing and Xuanwei, wastewater revenues are not channeled directly to the companies, but through the respective municipal departments. A follow-up project to the Yunnan Environment Project would carefully monitor developments in these critical areas. Yunnan Province struggled throughout most of implementation to build up management capacity of the participating agencies, particularly insofar as procurement processing, construction supervision, adequate staffing and training were concerned. Lack of institutional strengthening, especially in the newly established wastewater companies, extended over a period of six years. Concerns were especially raised regarding the Qujing drainage and solid waste management agencies. Similarly, weaknesses in procurement processing delayed a number of components and it took extraordinary efforts by Yunnan Environment Project Office (YEPO), in conjunction with their consultants, to provide the necessary training. Sewage treatment plants under the small towns component received needed special training from other cities through collaborative arrangements for transfer of knowledge. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: Global economic slowdown in the late 1990s, and especially the financial and economic crisis in Southeast Asia in 1997/1998, had an overall negative effect on many provinces in China. However, because of the World Horticultural Exposition, which took place in Kunming during the summer months of 1999, the State and provincial governments provided extensive strategic and financial support to the project to complete the bulk of the needed municipal infrastructure. These efforts primarily benefited the Kunming solid waste landfills, the wastewater plant, the water supply project and the Kunming Chemical Fertilizer Factory. On the negative side, due to the extensive construction for the World Horticultural Exposition, the city proper became highly occupied by infrastructures and buildings, the sewer system within the city proper had to be redesigned for cost-effective implementation. In addition, a number of the civil works projects were badly hit by the precipitous increase in steel prices beginning from Fall 2002. This development caused a marked slow down in implementation of the Kunming sewer component. A severe flood in the summer of 1996 caused major damage to the Gejiu wastewater component prompting substantial design changes. These modifications had the beneficial effect of protecting the city and in particular the sewer system against future flooding; this major redesign resulted in a significant, but in the end worthwhile, delay in completing this component. 5.2 Factors generally subject to government control: Counterpart funding caused delays in the beginning of the project because the approval and delegation process was too cumbersome. Funding problems resurfaced again after 2002, halting work on the - 12 - wastewater treatment plan in Qujing, and delaying progress on the Kunming sewer component. Project progress during the first few years bogged down to a large degree by institutional weaknesses until the Provincial Government strengthened the project management framework around the time of the mid-term review in October 1999. 5.3 Factors generally subject to implementing agency control: The project's restructuring in December 2002, initially proposed during the mid-term review, became necessary as a consequence of the slow project start-up which led to several components (e.g., the raw water pipeline within the Kunming water supply component and the Kunming Chemical Fertilizer Plant) seeking other than Bank financing. The first Loan/Credit extension was needed for the most part because the urban and suburban sewerage systems in Kunming could not be completed within the original implementation period which ended December 31, 2002. The main causes for the delays were concerns about sewer alignments; major design revisions of the Kunming urban sewer component; the combined system for sewage and for storm water proposed under the new Master Plan; and inadequate site surveys. The later added sewerage subcomponents for Mengzi and Xuanwei could also not be completed before the end of 2002. The second Loan/Credit extension from December 31, 2003 to December 31, 2004 was required on account of continued difficulties in the Kunming urban sewer component, where the laying of sewer pipes (using novel pipe-jacking technology in highly congested and trafficked areas) exceeded expected time lines. Unexpected ground conditions and some contractor problems, which eventually were resolved satisfactorily, exacerbated the problem. Better site surveys and planning, and improved coordination and management could have lessened these problems. Given the lack of any experience with pipe-jacking in Kunming, the final result was highly satisfactory and a credit to the client who decided to professionalize the bidding process by including institutes from other provinces with relevant pipe-jacking experience. 5.4 Costs and financing: Actual project costs totaled $234 million, representing savings of about 27% over the SAR estimate of $320 million. The Government provided 55% of the total project costs, and the Bank Group financed 45%. Originally, the Bank was expected to finance about 47% share of the project costs. After the restructuring about $19 million of the Loan was cancelled and, since after Loan closing about $25 million remained undisbursed, this amount was cancelled as well. The IDA Credit was fully disbursed. As a result, of the $150 million Bank funding, only about $106 million were utilized. The main reason for the loan savings were overestimation on the costs of most procurement contracts and elimination of several components from the project. 6. Sustainability 6.1 Rationale for sustainability rating: Sustainability is rated likely with some reservations. Based on eight years of dialogue with the authorities on the sustainability for the provision of urban services, the results are mixed: tariff adjustments have not been fully adequate, but government willingness and support towards successful provision of urban services were strengthened. Concerning tariff adjustments, most utility companies do not generate sufficient funds to fully meet their operating costs, debt service and depreciation reserves. The lack of sustained financial viability of these companies remains a matter of concern. The utilities are well aware that cost recovery is important, but the periodic tariff revisions sought continue to be subject to approval by government authorities at a higher level as water and - 13 - wastewater utilities are still not independently run entities. The authorities, especially at the planning and finance bureau level, repeatedly expressed their commitment to the principles of full cost recovery through adequate tariff adjustments, but also asked for patience as rate increases can only be achieved gradually. In particular, they point out that such increases are especially difficult to achieve when the facilities, such as wastewater plants and solid waste landfills, are still under construction and have not commenced operation. At the same time, the municipal governments fully understand the importance of the provision of urban services and environmental protection. For all the urban services subprojects, governmental authorities hold strong commitments, and have given policy and financial support. The governments' short-term subsidies will meet the subprojects' operations and debt service obligations and mitigate social constraints in several cities/counties resulting from very rapid increase of price indices in a short period. The governments' actions also take into account opinions expressed in public hearings. In the past, solid waste and wastewater treatment services, where available, were provided at no cost by the municipal authorities. Kunming introduced a solid waste charge in 1995, Shilin in 2002, and Qujing in 2003. These charges are still insufficient to cover operating costs, but should be interpreted as a good start towards achieving financial viability over time. In order to have a solid basis for future deliberations and decisions, a Cost Analysis and Action Plan for solid waste disposal services was prepared for Kunming, Shilin and Qujing. As the State and Provincial Governments pursue their efforts to convert municipal utilities to full-fledged autonomous enterprises, they will gradually cede the responsibility for tariff adjustments to the utilities. The extensive attention given to construction and equipment quality during construction, as well as to the careful planning for the transition from construction to operation (see section 6.2 below) should keep operational costs and maintenance/replacement of the assets within reasonable limits. 6.2 Transition arrangement to regular operations: In 2004, YEPO conducted a workshop on operational and management requirements and provided briefing and sample materials to the companies. The plans prepared by the utilities represent a solid base for the long-term operation and management of the entities. Several of the project utilities have recently contemplated private sector participation and external management contractors. 7. Bank and Borrower Performance Bank 7.1 Lending: The Bank's performance in the lending phase, encompassing project identification, preparation and appraisal, is rated satisfactory. It took exactly two years from the first identification mission (July 1994) to Board approval (in June 1996), a very short time compared to most other lending operations in China at that time. The skill mix and resources used for the preparation and supervision of the project are given in Annex 4. As set out in Section 3.1 aboe, project identification and preparation built on the findings and recommendations of the Dianchi Environmental Action Plan, and similar plans developed for Gejiu and Qujing. The first identification mission selected most of the components included in the final project, with the exception of a cultural heritage improvement component and a number of additional project cities which were later dropped. Likewise, the principal policy initiatives to be covered under the project were identified at that point and refined thereafter. One could, however, argue that the project objectives were too broadly defined, when the core project goal was the clean up of Lake Dianchi and the related water bodies. However, the proposed processing schedule, the overall project cost, and the Bank share thereof was precisely adhered to. - 14 - As the project was, for the most part, prepared by outside consultants with the assistance of Yunnan officials, the Borrower's role was probably more passive than it should have been. The outcome of the project unmistakably proved that Yunnan and the project cities did not have sufficient time internally to adequately prepare for project implementation. The appraisal mission produced a comprehensive, high quality SAR. Nevertheless, the economic analysis received some criticism from within the Bank. This ICR evaluation, however, finds the analysis thoughtful and honest, attempted to provide quantification for the economic justification of the various components only where meaningful data was available. The legal covenants were considered as overly harsh by the Borrower, particularly those stipulating the prompt creation of autonomous enterprises for wastewater and solid waste operations, and the introduction of full cost recovery through utility services even before respective plants were commissioned. While these conditions were normal Bank practice in infrastructure projects at that time, the Borrower felt that on the basis of their firm commitment to full self-reliance by the enterprises, a more gradual and thus more politically palatable approach would have avoided the project to be rated unsatisfactory in terms of financial performance. The appraisal team overestimated the initial capacity of the provincial and three main city coordinating offices, as well as the implementing agencies, to implement the project efficiently and in a timely manner. The significant start-up problems are evidence of the Bank's optimistic valuation. The technical assistance packages, especially those including international experts, were essential as the coordinating offices and the implementation agencies were ill-equipped to handle procurement management without such expert advice. Procurement training was included in the packages, but was not utilized from the outset as expected. As stated earlier, the appraisal estimates substantially overestimated contract prices, even though unit prices were derived from quotations from suppliers and manufacturers as well as from published construction costs obtained from government sources. Virtually all bid prices came in substantially lower due to competitive pressures and the expectation by some bidders to get adjustments through variation orders and price adjustments. At negotiations, the Bank imposed stringent and probably unrealistic conditions on the Borrower, in particular with regard to conversion of the wastewater sections within the municipal departments to autonomous agencies as Loan/Credit effectiveness conditions. In reality, the stipulated actions could not have been accomplished within the given time and therefore were done only on paper. Nevertheless, the wastewater companies gained considerable operational experience as the project progressed. 7.2 Supervision: The supervision performance of the Bank is rated satisfactory, despite resource constraints to carry out missions with the needed frequency, intensity and capacity complement. Considering unsatisfactory ratings for procurement, financial compliance and institutional development, missions were often too short and understaffed, often with only one or two staff. Supervision missions could have been more frequent and intensified, particularly during the first couple of years when it became evident that project schedules were slipping and the institutional capacity of the agencies was not commensurate with project demands. The Borrower complained about having to deal with four task managers (TMs) with different approaches; however, for the bulk of the time only two Bank staff managed the project. Assistance, advice and compliance monitoring by the two principal TMs was exemplary as they highlighted issues honestly, consistently and vigilantly. Their reviews of compliance with safeguard policies and their project ratings - 15 - were consistent and realistic. The project benefitted greatly from moving the procurement review function for this project from Washington to the Bank's Beijing Office. Task team produced detailed and informative BTO-reports, highlighting problems and proposing recommended actions. Safeguards, including EAs and RAPs, were monitored and followed up by all supervision teams. Ratings were realistc. 7.3 Overall Bank performance: The Bank's overall performance is rated satisfactory, as both the lending and supervision phases benefitted from skilled, experienced and highly motivated task teams comprising, inter alia, engineers, environmental and resettlement experts, financial analysts, and economists working over a period of ten years from project identification to Loan/Credit closure. The Borrower also rated the Bank's performance as satisfactory. Borrower 7.4 Preparation: Borrower's performance during preparation was satisfactory, although it could have been more actively involved. The Borrower asserts in its own evaluation of the project that staff in the project coordination offices, as well as in the implementation units, were insufficiently trained to actively assist in project preparation and implementation and thus had to fight an uphill battle from project start-up to cope with project procedures, management, bid document preparation, construction supervision, cost control and institutional development. They further felt that in the appraisal exercise and the preparation of the SAR they were only able to play a passive role, especially in the development of the procurement programs. Once they fully understood the documents and procedures, they were compelled to seek revisions, resulting in delays in bid documentation, and the project overall. These are indeed good observations; however, project agencies, many of whom had been recently established, did an admirable job of providing an enormous amount of technical, organizational, financial, environmental data and analysis during project preparation. Considering that they had neither prior experience with international organizations nor with highly complex environmental projects, all involved project agencies need to be commended for their efforts under very difficult circumstances. 7.5 Government implementation performance: Government's implementation performance was satisfactory. All provincial and municipal authorities remained firmly committed to the project throughout the project period, both in terms of leadership and financial support. In the early stages of project implementation, they focused to a large extent on construction activities. Their dedication to ensure that the project would have no unreasonably adverse impact on the environment, minority groups and persons who needed to be resettled, is commendable. Provision of Provincial counterpart funding was initially delayed by one year because of an overly lengthy approval process and less than expected revenues. Because the Government failed to establish a strong project management team at the beginning of the project, institutional weaknesses plagued the project for an extended period of time, especially in procurement management and financial performance of project entities. Implementation was also less successful concerning Government compliance with financial Loan/Credit covenants. The Borrower was to convert the three major implementation agencies in Kunming, Gejiu and Qujing from entities within municipal government departments to autonomous enterprises. However, the start of this conversion process, including valuation and transfer of assets, was delayed by more than one year and took several years to complete. Tariff adjustments for utility services as described earlier, were - 16 - also delayed. Despite these difficulties, the overall achievement of institution building under the project has been impressive. 7.6 Implementing Agency: The performance of the coordinating offices and the implementing agencies was overall satisfactory. Institutional weaknesses hampered the project throughout the implementation period, mainly because: (a) neither the provincial and the municipal project coordination offices, nor the implementing agencies had prior experience with international organizations and their particular project monitoring and procurement rules; (b) 16 implementation agencies had to be coordinated; and (c) the roles of the Yunnan Environment Project Office (YEPO), the other municipal project offices (Kunming Environment Project Office, Gejiu Environment Project Office and Qujing Environment Project Office), and the implementing agencies was not clearly defined from the outset and never fully understood by the parties. Responsibilities vis-à-vis other government authorities, such as Finance and Construction, also needed clarification. Nevertheless, the coordinating offices and the 16 implementation offices completed this very complex project superbly insofar as the original specifications were concerned. In fact, not a single component failed to achieve the production and quality output originally envisaged under the project; several exceeded them. The Kunming Drainage Company needs to be mentioned here as it organized the Kunming sewers implementation extremely well. Their efforts, directed towards by far the largest component of the project, were quite successful in achieving a critical reduction of pollution loads to Lake Dianchi. It further is commendable that the Borrower sought to use Loan savings to add three new subcomponents furthering the initial project objectives to enhance the environment in Yunnan. The project offices produced good-quality progress reports regularly and also ensured the preparation of covenanted audit reports. Several consultant firms provided effective and constructive assistance to the project agencies, particularly in engineering design review, construction oversight, progress reporting, procurement management, and training. 7.7 Overall Borrower performance: The overall Borrower performance is rated satisfactory. The Provincial as well as the municipal governments maintained a strong commitment to the project objectives and provided management for and oversight over a large and complex project. All coordinating project offices and the implementing agencies performed well in the preparation and implementation phases of the project. The Borrower would have earned an even higher rating if the institutional and sustainability aspects of the project could have been achieved on a more consistent basis. 8. Lessons Learned A number of valuable lessons were learned from the implementation of this project. They should be carefully considered during the preparation of any second Yunnan environment project. The recommendations also may be applicable to a wide range of projects in China and elsewhere. (a) Institutional development always is a prime focus of Bank support. Throughout almost the entire period of this project, institution building and procurement management remained poor. The lesson here is that the Borrower's capacity to implement a project must be carefully assessed and if deficiencies are detected, sufficient training, technical assistance and, most importantly, the necessary time must be allotted before project commencement to strengthen the project agencies. This is indispensable when the project agencies have no or little prior Bank experience. - 17 - (b) Procurement problems stemmed from the overwhelming volume of contracts (originally 113). The lesson here is, when the confidence level concerning the project agencies' competence and experience is low, project needs to be simplified by reducing components, number of participating cities, variety of activities, and project cost. Since environmental projects are customarily multifaceted, dividing a project in tranches may be advisable. A first urban lending operation in a new area may thus be better done by starting with a relatively small project followed in quick succession by one or more larger, more complex operations. (c) Procurement processing in the field may be another helpful lesson. Procurement processing improved markedly, when the Bank's ICB and NCB processing was switched from Washington, D.C. to the Bank's Beijing Office, owing to prompt reviews and improved communication with and follow-up support to the project agencies in Yunnan. (d) Utility service tariff adjustments were a bone of contention between the Bank and the Borrower. While the Borrower supported the basic premise for full cost recovery, substantial rate increases have to overcome political and bureaucratic hurdles. The lesson here calls for gradual adjustments over a reasonable period of time, taking into consideration whether, for example, a wastewater treatment plant in still under construction or has been commissioned. (e) During project implementation wastewater treatment standards were raised by the Government. This resulted in the inability of one of the wastewater treatment plants, namely the one in Qujing, to meet legal effluent standards without major process modifications. While Bank-supported projects cannot always predict government actions, the lesson here is that all environmental activities should be required to conform to the highest domestic and/or international standards. Governments rarely make quick decisions about regulatory changes. Appraisal missions should therefore investigate whether any changes affecting the project are in the offing, and if in the affirmative, plant and process design should be flexible enough to make quick and economic modifications in the future. (f) China still possesses relatively little experience in modern sanitary landfill design and operation. Consequently, the lesson should be for the Bank to strengthen its project preparation support in this area, including the need to provide specific training to the design institutes responsible for project design. Adequate funds for technical assistance also need to be set aside for the construction and operation of solid waste landfills. (g) The work of some design institutes was flawed by inadequate attention to detail and design requirements. Such weaknesses may cause undue delays and variation orders, once construction commences. The lesson here is to make design institutes and reviewing consultants, if applicable, more accountable for their work. This can be accomplished by (i) assigning sufficient time, adequate resources, and full responsibility to these firms on the basis of clearly set out TORs for detailed design preparation, including topographic and geotechnical investigations; and (ii) requiring them to accept professional liability through insurance or other form of security at their own expense. The roles and accountability of design institutes and reviewing consultants should be explored by a Bank-sponsored study. 9. Partner Comments (a) Borrower/implementing agency: The Borrower through its Yunnan Environment Project Office has submitted its own excellent and comprehensive report which served as an important input to this ICR. It is summarized in Annex 9. - 18 - After review of the Bank's final draft ICR, the Borrower provided an overall assessment of the report and submitted a number of suggestions for revising the report. They have been taken into account in the final report version. In its overall comments the Yunnan Environment Project Office stated: "YEPO is very pleased to see that the Bank has drafted a detailed ICR which correctly evaluated the project and honestly revealed the problems faced, experience gained, and valuable lessons learned. It is an asset to improve the future international project. We appreciate the Bank support to the project, the capacity built during the project, and the ICR to stimulate us to further improve the capabilities of Yunnan Government." (b) Cofinanciers: Not applicable (c) Other partners (NGOs/private sector): Not applicable 10. Additional Information Not applicable - 19 - Annex 1. Key Performance Indicators/Log Frame Matrix Outcome / Impact Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate 1. Quality & quantity of water supply and wastewater management; Water Supply: Quantity and Quality 100 % 100% Wastewater Management: Interception Ratio 95% 95% Connection Ratio 95% 95% 2. Quality of lake water - Lake Dianchi improvement and aquatic life quality; Lake Dianchi Class > V Class V Lake Gejiu Class IV Class IV Eutophication Index Inner Lake 79.9 79.9 Outer Lake 63.6 63.6 3. Achievement of complementary Under Implemenation Virtually Completed investments (DEAP); 4. Operational performance - financial indicators and operational efficiency Financial Indicators Awaiting Government Approval Government Approval Expected Operational Efficiency Achieved Achieved 5. Phosphorus removal at all STW; 95% 95% 6. Institutional development - Achievement of Action Plans In Progress Achievement Expected over Long-Term Output Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate Water Supply Capacity Improvements Kunming 170,000 m3/day 170,000 m3/day Qujing 60,000 m3/d 60,000 m3/dm Wastewater Treatment Improvements Kunming 190,000 m3/d 190,000 m3/d Gejiu 25,000 m3/d 25,0000 m3/d Qujing 80,000 m3/d 80,000 m3/d Xuanwei 30,000 m3/d 30,000 m3/d Mengzi 20,000 m3/d 20,000 m3/d Chenggong 15,000 m3/d 15,000 m3/d Jinning 15,000 m3/d 15,000 m3/d Expanded Solid Waste Disposal Capacity Kunming 2 Landfills; 1,500 tons/d 2 Landfills; 3,000 tons/d Qujing 250 tons/d 250 tons/d Shilin 80 tons/d 80 tons/d Rural Sanitation for 10 Villages Completed Completed Enhanced Pollution Monitoring Completed Completed Industrial Pollution Control Kunming Chemical Fertilizer Factory Completed with Own Financing Completed with Own Financing Kunyang Phosphate Fertilizer Factory First Phase Completed First Phase Completed Env. Pollution Control Subloans Fully Disbursed; Not Revolving Not Revolving Institutional Achievements Conversion of Utilities to Enterprises Not Fully Achieved Eventually Fully Achieved Tariff Adjustments Adjustments Still Pending Full Compliance Possible over Long-Term Training Completed Completed 1End of project - 20 - Annex 2. Project Costs and Financing Project Cost by Component (in US$ million equivalent) Appraisal Actual/Latest Percentage of Estimate Estimate Appraisal Component US$ million US$ million Lake Dianchi Basin Water Quality Recovery 167.01 157.21 94.1 Industrial Pollution Control 30.08 8.19 27.2 Provincial Urban Environmental Services 39.43 55.30 140.3 Environmental and Water Quality Monitoring 5.06 6.15 121.5 Institutional Development, Training, Construction 15.66 7.00 44.7 Supervision Total Baseline Cost 257.24 233.85 Physical Contingencies 30.79 Price Contingencies 19.55 Total Project Costs 307.58 233.85 Interest during construction 12.30 Total Financing Required 319.88 233.85 Project Cost by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent) Category ICB NCB Other NBF Total Cost Works 73.8 79.6 0.0 1.1 154.5 (32.2) (35.8) (0.0) (0.0) (69.0) Goods 74.4 1.5 11.6 4.0 91.5 (54.6) (1.2) (6.2) (0.0) (62.0) Services 0.0 0.0 19.0 0.0 19.0 (0.0) (0.0) (19.0) (0.0) (19.0) Misc. 0.0 0.0 0.0 42.6 42.6 (0.0) (0.0) (0.0) (0.0) (0.0) Total 148.2 81.1 30.6 47.7 307.6 (87.8) (37.0) (25.2) (0.0) (150) - 21 - Project Cost by Procurement Arrangements (Latest Estimate) (US$ million equivalent) Category ICB NCB Other NBF Total Cost Works 54.48 25.79 0.00 0.00 78.27 (27.75) (7.70) (0.00) (0.00) (35.46) Goods 31.94 0.56 3.06 0.00 35.55 (24.33) (0.00) (1.49) (0.00) (25.82) Services 0.00 0.00 9.85 0.00 9.85 (0.00) (0.00) (5.82) (0.00) (5.82) Miscellaneous 0.00 0.00 82.40 27.80 110.20 (0.00) (0.00) (38.90) (0.00) (38.90) Total 84.41 26.36 95.31 27.80 233.88 (52.09) (7.70) (46.21) (0.00) (106.00) Project Financing by Financier (in US$ million equivalent) Percentage of Appraisal Financier Appraisal Estimate Actual/Latest Estimate Bank Govt. CoF. Bank Govt. CoF. Bank Govt. CoF. Yunnan Government 165.60 125.60 75.8 Industrial enterprises 4.30 2.30 53.5 IBRD/IDA 150.00 106.00 70.7 - 22 - Annex 3. Economic Costs and Benefits Lake Dianchi was declared one of the three most important lakes in China in 1996. The lake serves many purposes, including domestic, industrial and agricultural water supply, water storage, flood control, fishing, aquaculture, tourism and recreation. From the 1960s and 1970s onward, the lake began to degrade rapidly with organic matter, suspended solids, heavy metals and organic chemicals the main lake pollutants. Both parts of the lake (the so-called Inner Lake and the Outer Lake) became eutrophic on account of high total phosphorus pollution. The water quality of Lake Dianchi is below Class V. The main causes for its pollution are domestic and industrial sewage inflow, farm drainage, erosion products, mining wastes, solid waste dumping and atmospheric pollutants. The principal goal of the Yunnan Environment Project was to assist in the reversal of the degradation of Lake Dianchi and the Dianchi Catchment area and was consistent with the highest government priority of Yunnan Province. The improvement of the lake was also declared a key national objective. The preparation of the Yunnan Environment Project relied heavily on the Dianchi Environmental Action Plan (DEAP) which was developed beginning in July 1995. DEAP identified programs and projects for an 18-year period focusing on water resources, municipal infrastructure, industrial pollution control, and rural environment. The necessary `hardware' was selected on the basis of whether they would meet the strategic objectives of DEAP and alleviate the major causes of lake deterioration. In addition, those investments were chosen which had the highest rates of return taking into account their benefits on the environment and on human well-being. After reviewing the Government's analysis and visits to the proposed project cities, the identification mission concurred with the Government's selection of project cities. Within each municipality, those investments among viable alternatives were selected which would derive the largest net benefits in economic terms. However, it became quickly clear that some of the benefits sought under the project, such as improvements in health and human well-being, and increases from tourism and recreation could not be easily quantified. Therefore, an overall economic internal rate of return for the project was not calculated at the time of project appraisal. For the proposed investments in Gejiu and Qujing alternative design options were evaluated on the basis of the least-cost analysis method. The three additional subcomponents in Shilin, Mengzi and Xuanwei, proposed during the mid-term review, were also examined using least-cost analysis. For investments impacting upon the water quality of Lake Dianchi, the appraisal exercise compared the proposed investments with the "do nothing" scenario which in the long-run would require increased treatment of the water or increasingly foregoing the use of lake water and replacing it with water from sources at greater distances. As Lake Dianchi supplied, at the time of appraisal about 50 percent of Kunming's water, the damage of the "do nothing" option would become increasingly more expensive. Such a damage analysis makes sense when all options are still available, but does not make sense after an investment option has been implemented. Alternatively, the prevention of pollution damage to Lake Dianchi could be assessed through the assessment of such benefits as increased health conditions, higher fishing yields, and augmented touristic activities. However, quantifications of such benefits would require time-consuming and - 23 - expensive studies by a team of engineers and epidemiologists. As such studies were not available to the appraisal or the ICR team, no attempt was made to perform such a calculation using unsubstantiated guesses. For the water supply investments in Kunming, the appraisal compared the average economic incremental of the new supply with the willingness by consumers to pay for this supply. As both resultant values came to approximately the same result, it was presumed that the net present value of the investments would most likely be positive. For a more precise quantification the staff appraisal report would have needed more evidence on the shape of the demand curve which at the time did not exist. With no "lack-of-willingness-to-pay" survey data to develop such a demand curve, the ICR is also unable to reconstruct the appraisal analysis. Solid waste landfill options were compared at appraisal with incineration alternatives, the latter of which all proved to be much less attractive economically. At the time of the ICR, this conclusion has clearly not changed for the four solid waste management projects under the project. The appraisal selected the individual design options again on the basis of the least-cost analysis. For the two chemical fertilizer plants under the industrial pollution control component, the appraisal team estimated an economic rate of return of 24 percent based of the fact that the annual loss of phosphorus would decline from 93 tons to 2 tons per year, thus proportionally improving the quantity of fertilizer production. As stated, one of the plants dropped out of the project, but implemented the work on its own, and for the other only the wastewater treatment was completed. The overall reduction of phosphorus discharge into Lake Dianchi was achieved nonetheless and it can be presumed that their investments turned out to be quite attractive. No economic analysis was presented in the SAR for the relatively small environmental subloan facility (EPCSL). - 24 - Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, 1 FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective Identification/Preparation 07/01/1994 6 TTL & SANITARY ENG. (1); SANITARY ENGINEER (1); MUNICIPAL ENGINEER (1); ENVIRONMENTAL ECONOMIST (1); WATER QUALITY SPEC. (1); FINANCIAL ANALYST (1) 01/23/1995 7 TTL & SANITARY ENG. (1); ENVIRONMENTAL ENG. (2); SOCIAL DEV. SPEC. (1); WATER QUALITY SPEC. (1); ENVIRONMENTAL SPEC. (1); FINANCIAL ANALYST (1) 11/20/1995 4 TTL & SANITARY ENG. (1); ENV. ECONOMIST (1); MUNIPAL SPEC. (1); FINANCIAL ANALYST (1) Appraisal/Negotiation 03/15/1996 7 TTL/MUNICIPAL ENGINEER (1); COST ENGINEER (1); ENVIRONMENTAL ENG. (1); ENVIRONMENTAL ECONOMIST (1); SANITARY ENGINEER (1); FINANCIAL ANALYST (1); ENVIRONMENTAL CONSULTANT (1) Supervision 07/25/1997 3 TTL/MUNICPAL ENG. (1); S S ENVIRONMENATL ENG. (1); FINANCIAL CONSULTANT (1) 03/01/1998 5 TASK MANAGER (1); S S SANITARY ENGINEER (1); FINANCIAL CONSULTANT (1); PROCUREMENT CONS. (1); INTERPRETER (1) 01/28/1999 4 TASK TEAM LEADER (1); S U FINANCIAL CONSULTANT (1); MUNICIPAL ENGINEER (1); PROCUREMENT - 25 - SPECIALIST (1) 03/18/2000 3 TTL & FIN. ANALYST (1); S S PROCUREMENT SPEC. (1); SOLID WASTE MGMT SPEC. (1) 09/08/2000 5 TTL/FINANC. ANALYST (1); S S MUNICIPAL ENGINEER (1); RESETTLEMENT SPEC. (1); PROCUREMENT SPEC. (2) 01/19/2001 1 TTL & FIN ANALYST (1) S S 08/12/2001 2 TTL & FIN ANALYST (1); S S ENGINEER (1) 10/27/2001 3 FIN ANALYST & TTL (1); S S MUNICIPAL ENGINEER (1); PROCUREMENT SPECIALIST (1) 04/13/2002 3 TTL, URBAN FINANCE SPT S S (1); SANITARY ENGINEER (1); PROCUREMENT SPECIALIST (1) 11/23/2002 2 FIN ANALYST & TTL (1); S S MUNICIPAL ENGINEER (1) 03/21/2003 2 TTL & FIN ANALYST (1); S S ENGINEER (1) 11/13/2003 2 ENGINEER (1); S S FINANCIAL ANALYST (1) 06/19/2004 2 TTL/FINANC. ANALYST (1); S S MUNICIPAL ENGINEER (1) 11/27/2004 4 URBAN FINANCE SPEC. (1); S S URBAN ENVMT. SPEC. (1); MUNICIPAL ENGINEER (1); PROCUREMENT SPEC. (1) ICR No formal ICR mission was S S conducted (b) Staff: Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ ('000) Identification/Preparation 94.6 450.0 Appraisal/Negotiation 17.8 90.6 Supervision 146.2 570.0 ICR 7.0 25.0 Total 265.6 1,135.6 Regional direct to full costs mark-up is 25% for fiscal years up to and including FY99. - 26 - Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating Macro policies H SU M N NA Sector Policies H SU M N NA Physical H SU M N NA Financial H SU M N NA Institutional Development H SU M N NA Environmental H SU M N NA Social Poverty Reduction H SU M N NA Gender H SU M N NA Other (Please specify) H SU M N NA Private sector development H SU M N NA Public sector management H SU M N NA Other (Please specify) H SU M N NA Other: Pilot rural sanitation subproject had positive demonstration effect; plus public awareness was raised for prevention of industrial and non-source pollution. - 27 - Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.1 Bank performance Rating Lending HS S U HU Supervision HS S U HU Overall HS S U HU 6.2 Borrower performance Rating Preparation HS S U HU Government implementation performance HS S U HU Implementation agency performance HS S U HU Overall HS S U HU - 28 - Annex 7. List of Supporting Documents 1. Staff Appraisal Report: Yunnan Environment Project, dated May 28, 1996, Report No.: 15361-CHA. 2. Borrower's Implementation Completion Report, dated March, 2005. 3. Quarterly Progress Reports by Yunnan Environment Office (about 30 in total). 4. Executive Summary by Project Related Land Acquisition and Resettlement, dated March 2005. 5. Document on major milestones of Yunnan Environment Project prepared by Borrower, dated March 2005. 6. Detailed financial projections for all service utilities, prepared by each enterprise for a period of about 10 years, 2000-2007/9, dated April 2005. 7. Project proposal for the comprehensive treatment of the pollution of Lake Dianchi, prepared by Borrower, dated May 1993. 8. Yunnan Environmental Assessment Report, prepared by Borrower & Consultants, dated February 1996. 9. Yunnan Environment Project, public summary report, prepared by consultants for Government of Yunnan Province, dated January 1998. 10. Extending the Closing Date of Yunnan Environment Project up to December 31, 2004, Action Plan. - 29 - Additional Annex 8. Experiences in Land Acquisition and Resettlement At project commencement, senior officials from the relevant provincial and municipal departments formed a committee to oversee land acquisition and resettlement throughout the project implementation period. All PAPs were treated and compensated according to the RAPs which fully adhered to national, provincial and municipal laws as well as to Bank requirements. For the preparation of the initial RAPs, the Yunnan Finance and Trade College made field visits, gathered information and conducted surveys on the social and economic conditions of PAPs and areas affected by the project. YEPO oversaw and recorded the findings obtained by this group. During implementation, the Foreign Capital Introduction and Utilization Institute of Southwest Jiatong University monitored and evaluated the activities under the RAPs. About five missions were sent to active project sites. According to the Institute's findings, the standard of living of all PAPs was improved or at least maintained. Considering the size of the project, a relatively small number of persons, totaling 2,779, had to be resettled, and some 206 ha of land was acquired. Authorities temporarily leased 99 ha of land for the duration of construction. The area of affected enterprises, exclusively in Kunming, amounted to about 19,800 m2. The overall cost for land acquisition and resettlement totaled $19 million. The Quarterly Reports on project progress routinely provided details and highlighted issues, if any had come to the fore, during the previous three months. Bank supervision missions regularly discussed issues, if any, with the Borrower and monitored compliance during their field visits Precise details about resettlement information by project site are included in the Borrower's submission for the ICR and are available in the project file. - 30 - Additional Annex 9. Summary of Borrower's Project Evaluation The project is part of a phased development program of Yunnan Province (YP) to improve environmental conditions and sustain urban services management. The principal objective of the project is to provide a sustainable environmental framework for the long term economic and social development of the Province, while providing a conductive foundation for industrial growth. Full details of objectives have been provided in the Staff Appraisal Report Number 15361-CHA of May 28, 1996 ­ Section 3A, Project Objectives, and Annex 2: Detailed Project Description. The same objectives are cited in the Loan Agreement Number 4055 CHA and the Development Credit Agreement Credit Number 2892 CHA, both of them were signed on September 13, 1996. 1.0 Revised Components There were several changes in the design of some of the project components in order to optimize the project outputs without the change in Project Objectives. 1.1 Changes in Sub-Components Design The changes in sub-component design are summarized below. Deleted sub-component: 1. Under Component B, the investment for Kunming Chemical Fertilizer Factory was eliminated from the WB Loan due to the urgency the investment (urgency in the treatment of water pollution from the factory discharge) to allow the Factory to be in compliance with discharging standard before May 1, 1999 (a deadline set forth by Government for industrial enterprises in Dianchi Basin.) However, the project component was completed as originally designed using local fund. 2. Under Component B, the second phase investment in Kunyang Phosphate Fertilizer Factory was deleted from the original design. The component was designed in two phases. The first phase focused on wastewater treatment and clean production. The second phase was to introduce advanced technology and increase production capacity in order to enhance its economics. Changes in Project Design Scope: Water Supply in Qujing: The original design of extension of existing No. 2 WTP with increased capacity of 30,000 m3/d was changed to the construction of a new WTP with capacity of 60,000 m3/d. The change was due to the restructuring of Qujing from prefecture into municipality and the change in the Government policy to encourage the rapid urbanization of Qujing as a Class II city. Such changes resulted in the change in the subproject scope. The change was approved by the Bank and the Government . Added sub-components: 1. Under Component A, Shilin Solid Waste Management was added to the original project design. It was added to the Project at the mid-term review. The scope included a solid waste collection system for Shilin and a sanitary landfill for Stone Forest Park. 2. Under Component C, Mengzi Wastewater treatment was added to the original design. It was added to the Project at the mid-term review. Works included a 20,000 m3 per day wastewater treatment plant and a sewer system of about 5.4 km in length within the county. 3. Under Component C, Xuanwei Wastewater treatment was added to the original design. Works included a wastewater treatment plant of 30,000 m3 per day and a sewer system of about 29 km in length for the new area in the City. - 31 - All the changes were discussed with the World Bank (WB) during the mid-term review and supervision missions. The agreed revisions were recorded in the Mid-Term Review Report and relevant mission Aide Memoires. In addition, with an agreement with a WB supervision mission, the TA Contract has been extended to cover consultancy services of the three new project components. 1.2 Changes in the Method of Implementation In addition to the changes in sub-components design, there were changes in the engineering method of implementation for some project components. These changes are summarized below. Part A: Lake Dianchi Basin Water Quality Recovery 1. Kunming Municipal Solid Waste Management To enhance the long term safety of the landfill, during the implementation stage KSWTDC changed the grade of the material for the leakage protection lining. A higher quality (and more expensive) HDPE material was selected for landfill lining, and it was procured for the entire area of the landfill. This change significantly increased the cost of the lining, and thus the cost of the project component. In addition, due to the poor geologic conditions in the locations of several transfer stations, the quantity of the civil work was substantially increased. The number of transfer stations was reduced from 18 to 7 stations due to the optimization of designs for transportation vehicles. 2. Kunming Water Supply The Xiaotunshan service reservoir was dropped from the Project due to land acquisition problems, leading to a revise of the overall system design. The Songhuaba Reservoir Augmentation work (DBM/3.3) was eliminated. A new bulk water meter was installed but not under the Project. Provision of equipment for metering and utility system management was cut from the Project. Laboratory equipment for water quality testing (at the Kunming Water Supply Company) was added following the mid-term review. Leakage detection equipment was considered by the KWSC to be so expensive as to be not cost-effective. It was therefore cut from the scope of work. 3. Kunming Wastewater The work on the Kunming Wastewater System was completed as planned with all the sub-components implemented. However, sewer alignments and quantities were redesigned to abide by the Kunming Master Plan for Sewerage, and it is different from those in the Project preparation documents. 4. Small Towns Wastewater The Small Towns Wastewater Component includes the wastewater treatment and associated sewer systems in the counties of Chenggong and Jinning. All the work was completed as planned. There were only small changes in pipeline alignments without change in system capacities and functions. 5. Rural Sanitation The engineering design was changed in Dounan Water Supply. The branch pipelines and fire protection equipment were added to the design for better system functions. In Wulong and Dounan wastewater treatment plants, the treatment methods were re-designed for cost effectiveness and for better water quality of the effluent. For solid waste treatment composting facilities in all locations, composting methods were re-designed to achieve the commercial standard for the composting product. Part B: Industrial Pollution Control 1. Kunyang Phosphate Fertilizer Factory The first phase of the subproject has been implemented as originally designed. The second phase was deleted from the loan due to the lack of counterpart funding. 2. Kunming Chemical Fertilizer Factory It withdrew from the Project due to the urgent need in investment to treat wastewater from the factory. Counterpart funding was used to complete the subproject. - 32 - 3. Environmental Pollution Control Sub-Loans It was executed as originally designed. Seven pollution control projects have used the Sub-Loans. The current problem is the difficulty in revolving the fund. Part C: Provincial Urban Environmental Services 1. Municipal Solid Waste Management in Qujing There was no change in the scope for Qujing Municipal Solid Waste Management. However, due to the lower quality of the engineering design, there were a number of engineering design modifications during construction. The transfer stations were cancelled due to the changes in zoning and administration in Qujing city, and the optimization of design for transportation vehicles. For overall solid waste management, Qujing has taken action to close the old dumpsite. The closure of the old dumpsite will eliminate the illegal dumping in the old site and enhance the environmental management and protection in the area. 2. Wastewater Collection and Treatment in Gejiu There was no change in capacity of the Gejiu wastewater treatment plant capacity. However, the design of Gejiu sewer system was significantly changed. In 1996, a serious flood damage occurred in Gejiu City. To prevent future flood damage, Gejiu Municipal Government initiated a comprehensive sewer treatment and flood control plan, the sewer system was therefore redesigned. The new design reserved full capacity of the sewer treatment and increased the flood control function and capacity. Due to this major change in design, project schedule was significantly delayed. Part D: Environmental and Water Quality Monitoring 1. Kunming Environment Monitoring Center There was no change in the scope of Kunming Environment Monitoring Center. However, the location of the Center was changed during implementation and the geologic condition in the new location is quite different. Therefore, the foundation design and the quantity of the civil work changed during the implementation. 2. Yunnan Environment Monitoring and Management System There was no change during the implementation. Part E: Institutional Development, Training and Construction Supervision Implementation of the Construction Supervision Component was enhanced with deeper involvement of the international consultants in engineering design review, bidding document preparation, construction supervision, progress monitoring, quality control and progress reporting. Implementation of the training was conducted as designed. Trainings in Kunming for all the PIAs were carefully designed and presented. In addition, trainings for individual PIA and trainings for the key staff in add-on subprojects were conducted at the subproject sites. Institutional Development was kept in pace with the Government plan and the provincial/city economic reforming process. Concerning the lack of readiness of a number of subproject entities to make the necessary changes during the project implementation, an agreement has been reached between the PIAs and a WB supervision mission in 2000 to re-arrange the program for institutional development strengthening: the international consultants' involvement of the development process was simplified during the project implementation. Instead of using extensive effort from international consultants, local consultants together with the PIAs were used to prepare "Institutional Development Strategy and Action of Yunnan Environment Project", which was forwarded to WB for review. The WB showed satisfaction with the document. The consultants' budget savings were shifted to enhance the construction supervision. 2.0 QUALITY AT ENTRY - 33 - Project preparation at appraisal can be evaluated as satisfactory. The overall project design (as stated in SAR) proved to be in line with the government and WB development strategy in China and it is in line with the environmental protection plans for the province, cities and counties. The scope of the project and the primary project design proved to be appropriate. The feasibility studies and engineering design for each project component (as well as for the overall project) proved to be generally appropriate. Most of the technical designs employed advanced yet commercially available technologies. The major problems at project preparation stage were: 1. Cost estimates for most of the project components were excessive. 2. PIAs capacities in executing the project was overestimated in the areas of understanding the WB procedures, preparing bid documents, and mitigating environmental/social impacts. 3. Due to the overestimation of the PIAs capacity, WB did not timely initiate the necessary training before project implementation. 3.0 ACHIEVEMENT OF OBJECTIVE AND OUTPUTS 3.1 Outcome / Achievement of Objective Due to the rapid industrial and urban development in Kunming City as well as in other regions of the province, air, water, and solid waste pollution became very serious since early 1990. In order to mitigate the pollution, Yunnan Provincial Government formulated a comprehensive environmental protection plan to curb the pollution. This project abides by the Provincial Environmental Protection Plan (up-dated once in every five years) and the Dianchi Lake Water Pollution Mitigation Plan (1993) which calls for RMB 3 billion investment to clean the Dianchi Lake Basin in 18 years. (With the continued implementation of Dianchi Lake Water Pollution Mitigation Plan, it has been realized that it would be a long-term, arduous and complex tasks for Yunnan to improve water quality of Dianchi Lake. It is unlikely to improve water quality in Dianchi Lake in a short-term, to allow the water to be used for potable supply. The determination and confidence of the Government of Yunnan Province to improve water environment of Dianchi Lake keeps unchanged. However, the later version of the plan adjusted the earlier versions to form a more workable action plan.) This project contribute significantly to the mitigation of water pollution in the Dianchi Lake Basin and contribute significantly to the priority subprojects in water supply, wastewater treatment, solid waste management in other regions of the province. In turn, the project will positively impact the long term economic and social development of Yunnan Province. The solid waste, water supply and wastewater components in Kunming, Qujing, Gejiu Cities are being well utilized and their positive impacts on the local environment are already being felt. Other water supply, wastewater and solid waste management facilities provided by the project in counties and small towns in the province are also similarly well utilized. Three new subprojects were added during project implementation to broaden the project area, and to achieve greater environmental benefits. In summary, the project has achieved greater pollution load reduction objectives than originally envisaged. The overall project can be evaluated as satisfactory. In addition, the industrial component, environmental and water quality monitoring component, and institutional development component have comprehensively enhanced the overall pollutant monitoring and mitigation, environmental management, and capacity building in the project region. 3.2 Institutional Development Impact There are 16 subproject entities within the overall project. Among the 16 entities, KEMS and YEMS are environmental Monitoring Centers under KEPB and YEPB. KWSC had been a state-owned company, and KPFF is an industrial company, their institutional improvement have been from the internal improvements within their existing structure. EPCSL belongs to the Sub-Loans component and is not directly applicable. Other 11 subproject entities were utility entities or departments under the municipal governments. At the completion of the project implementation, seven of them have created or convert to - 34 - companies. The converting of the utility entities to company structures are expected to take place gradually, and will serve as the foundation for the current government's market oriented reform agenda. Plans and innovations towards the reform have been clearly noticed, which include the formation of joint water supply and waster companies (in Qujing and Xuanwei), transfer of all wastewater assets and budgets (as in Gejiu), entering into management contracts (as in Jinning), and formation of asset holding companies (as in Kunming). Institutional arrangements in the solid waste sector are taking place at a fast pace. Three solid waste management entities have completed their cost analyses and proposed plans for full cost recovery. Municipal governments have given support to the policy installation and fee adjustments. 3.3 Poverty Alleviation and Social Improvements Whilst the objectives of the Project were essentially environmental in nature there have been important social side benefits. In the project area, over 280 permanent jobs have been created in the public utility companies. The construction added over 10,000 temporary jobs during project implementation. Over 6 million people are now benefiting from the environmental improvements resulting from the increased water supply coverage and reliability, and from the establishment/improvement of sewerage system and solid waste management. These improvements have been especially beneficial for the poorer people in the local communities. The mitigation of water pollution in lakes and rivers will also benefit residents in both cities and rural area downstream the project area, in terms of their health, hygiene and agriculture production. In addition, through the implementation of the project, the public attitudes towards environmental awareness and participation, water quality, sanitation, and price hearings for utilities have been significantly improved. On the other side, Government has gained useful inputs and comments from the public, which are beneficial for the future planning and policy making. Through the cost analyses for three solid waste management subprojects (required by the project) and for all the water supply utilities (initiatives under government reform process), long-term sustainability of the utility companies and the affordability of poor people have been identified and addressed. To respond to the findings, most municipal governments in the project region have formed plans to assist the poor people through carefully designed wavers and incremental tariff structure. 4.0 MAJOR FACTORS AFFECTING IMPLEMENTATION AND OUTCOME 4.1 Factors Outside the Control of Government or Implementing Agency 1. Having long been familiar with the procedures and management in non-market-oriented project investment for urban infrastructure, the YEPO, PMOs and PIAs, in the project preparation and appraisal stages, have nearly no experiences in managing and implementing WB financed projects. YEPO, PMOs and PIAs lacked of better understandings on WB procedure and competitive bidding process (China's Law on Tendering and Bidding was not promulgated and not came into effect until 2000). This had resulted in major changes in bid packages and delays in subproject executions at the beginning of the project implementation. 2. In 1997, China MOF and WB reached agreement to shift WB old Model Bid Document to the current Model Bid Document. For YEP, that was at the beginning of the project implementation. The project design institutes spent considerable time and effort to make the change. 3. During the first two years of project implementation (1997-1998), the WB bid document review and approval were through the WB Headquarters in Washington, D.C. Untimely review, comments, revision and approval had occurred. The problem was solved in 1999 when WB Beijing Office took the responsibility for bid document review and approval. 4. During project implementation, WB has changed four project managers with different styles, and all of them were also busy with other projects at the same time. Although the project managers made - 35 - special efforts, it had resulted in difficulties in terms of timely help YEP to solve implementation problems. Delays in document review, approval, loan disbursement coordination have occurred. 5. The design of Gejiu Municipal Sewerage subproject was affected significantly by the serious flood damage occurred in 1996 in the city. To prevent future flood damage, Gejiu Municipal Government formed new plan for sewer system operation and flood control. Within the comprehensive framework of sewer and flood control, the new design reserved full capacity of the sewer treatment and increased the flood control function in the system. This resulted in major changes from the original design, and the subproject schedule was significantly delayed. 4.2 Factors Generally Subject to Government Control 1. Before the project implementation, YEPO, PMOs and PIAs received insufficient trainings in project implementation (including project procedure, management, bid document preparation, construction supervision, cost control and institutional development, etc.). The effects of training were weakened due to changes in project management staff of PIAs. As SAR was prepared by WB staff, the borrower was passively involved in the formulation of the project procurement program. This had resulted in significant changes in bid packages, and delays in bid document preparation and project implementation. 2. During project implementation, most PIAs have given priority to construction but put less effort in institutional development and financial management improvement. Though the Government, through YEPO, has put efforts to enhance the institutional and financial areas, at the completion of the project, there is still small difference in WB anticipated institutional arrangement and the project real achievement in this aspect. 3. Government, in the Loan Agreement, has promised to timely adjust utility tariffs to recover the costs of the subproject utility entities. During project implementation, the utility tariffs have been initiated and adjusted step by step to the levels approaching to break-even point. Some of the utility entities still need government financial support to maintain the operations. Currently, the Government is making progress in this aspect, and at the same time, carefully evaluating the impact of the full-cost-recovery tariffs towards the affordability of the residents and the development of the local economy. 4. The design of Kunming Municipal Sewerage subproject was affected significantly by the winning of the 99 International Horticulture Exposition in Kunming City. After winning the right of hosting the International Horticulture Exposition, Kunming Municipal Government implemented a number of large scale projects ahead of planned schedule. The action changed the City Development Plan significantly. It resulted in the original design of the KMSC subproject to undergo major change. In the old city proper, full separation of the stormwater from municipal sewerage had become economically unviable. The original design of the sewer system, pipeline alignment, and associated equipment had to be changed accordingly. It also resulted in a significant delay in the subproject schedule. 4.3 Factors Generally Subject to Implementing Agency Control 1. It could have been more practical if the subproject entities had bid package experience and took initiatives with the WB to formulate bid packages and project procurement program. The SAR bid package, to some extent and for some subprojects, was unrealistic or difficult to execute. This had resulted in lengthy discussions and re-package of the packages for most of the subprojects. During implementation, the 72 SAR formulated packages were re-designed as 107 packages. And procurement process was substantially delayed. 2. In project preparation stage, the project cost estimation for most of subprojects was too high compared to the real cost of the project. The higher cost estimation had caused difficulty in gathering counterpart funding for some of the subproject entities. And it also resulted in inefficient use of both the WB and counterpart funding. The SAR estimated total project cost was RMB 2,960 million. The real - 36 - project completion cost is RMB 1,941 million. The utilization is only 66% of the assigned WB loan. 3. Low bid prices occurred in the procurements of some packages. Due to the lack of experience and not-fully-regulated China construction market, the PIAs could not prevent the low capability contractors to win some of the bid packages. This has caused delayed implementations in some engineering and civil works. It also generated difficulties in strictly following FIDIC Contract Management practice. 4. The capacity and efficiency of PIAs in managing the subprojects have been differentiated, which had caused difficulties for YEPO and PMOs (who lacked of experience at the beginning of the project implementation stage) to coordinate and communicate among the relevant agencies for such large-scale and comprehensive project. In addition, due to the longer time period of implementation, project management teams and key personnel have changed substantially. All these facts have increased the difficulties in implementation. 5.0 SUSTAINABILITY In overall terms the project can be considered sustainable although there are, and will continue to be, some transitional issues and problems particularly in respect of local tariffs and in the collection of these user fees. Sustainability needs to be viewed in terms of (i) the ability of staff to operate and maintain the facilities, (ii) the institutional arrangements put in place, and (iii) adequate financing arrangements for financial sustainability. Among the utility companies, solid waste management companies were the very last to introduce fee to the public for their service. Consequently, more effort is required for their financially sustained operation and for the public to accept the fee. To overcome the barriers, three solid waste management subproject entities have accomplished Cost Analysis and Action Plan for Solid Waste Disposal Service in their own service areas. 6.0 BANK PERFORMANCE The WB's performance during the identification, preparation and appraisal phases of the project is considered to be satisfactory. The change of WB project managers by the Bank was understood by the Government. The diligence of WB managers and staff was appreciated by all the implementing agencies. The work of the WB Beijing Office was highly appreciated in terms of timely instructions to YEP on WB procedures; review, comment, and approval of bid documents; and instructions on institutional and social dimensions. 7.0 BORROWER PERFORMANCE The national and provincial government's commitment to the project remained strong and supportive during all phases of the project. The YEPO and City/County PMOs resumed active management functions throughout the project. Each subproject entity has designated necessary resources to execute the subproject. Government has assisted all the subproject entities to gather sufficient counterpart funding, except for the second phase of Kunyang Phosphate Fertilizer Factory, which is industrial process modernization in nature. In addition, Government has given full support to the initiation and management of the Environmental Pollution Control Sub-Loans. However, the disadvantage in the interest rate of the sub-loans (comparing to the local short-term loans) prohibited it from actively revolving. At the project completion stage, it only achieved partial success. Municipal governments in the project region have given utmost support for the construction at all the subproject sites. Most of the construction sites have required strong coordination for the layout of pipelines in busy city streets. Government support is also related to the successful implementation of the project related land acquisition and resettlement. Provincial and municipal governments have made great effort towards the initiating and adjusting the utility tariffs. For those tariffs that may have notable impacts to social and - 37 - economical situations, Government has formed action plans for the tariff adjustments. 8.0 LESSONS LEARNED The YEP is an important project for Yunnan Province to significantly curb its pollution and to create a sustained environment for its economic and social development. The implementation process has been a successful and valuable experience for all the agencies involved. Lessons have been learned in respect of implementation management, institutional and financial reforms, promotion of environmental protection, and raise of public awareness and participation. Some of the main points can be summarized here: 1. Experience was gained in the development of a large scale environmental project, which comprehensively considering feasibilities, alternatives, least-cost approach, institutional development, policy support, and the impacts to the environment, society, economy, poverty reduction and long-term sustainability. 2. Significant capacity building has been achieved by the adoption of modern project management method, international practice of bidding and contracting, project supervision, performance measurement, and the completion evaluation. 3. WB project implementation rules and procedures on procurement, contracts management, and construction supervision have been broadly recognized as advanced management procedures. Good experience has been gained by practicing these rules and procedures. The procedures have been replicated on similar projects not being financed by WB. 4. Project base cost and the physical and financial contingencies at Appraisal were excessive, resulting in large amount of loan savings. For future projects, engineering cost should be carefully estimated using price-inquiry based method for all the major equipment and for most of the works and services. Levels of contingencies should be carefully reviewed. 5. Though the project preparation/implementation capacities have been built at provincial level and for the YEP involved agencies, other agencies and potential future subproject entities do not have the capacity. For the future Yunnan WB projects, the WB and the Government should initiate the trainings early enough for those agencies that may later be involved in project development and implementation. 6. In the project preparation stage, feasibility studies must be conducted in enough details for all aspects of technical, financial, economical, institutional, environmental and social topics, following WB rules and guidelines, so as to pave a sound base for the WB project appraisal, and for the timely and successful implementation of the project. 7. Both WB and the Government should avoid setting unduly optimistic goals and objectives for the project to achieve in the project preparation stage. This includes the goals and objectives in environmental improvement, institutional achievement, financial improvement, and tariff settings. Some of the project goals and objectives may have a number of institutional, social and economic constraints. Setting realistic goals and using stepped approach (with a workable action plan) may be more practical. - 38 - - 39 -