Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 15846

IMPLEMENTATION COMPLETION REPORT

CHINA

SHANGHAI SEWERAGE PROJECT(CREDIT 1779-CHA/LOAN 2794-CHA)

June 28, 1996

Environment and Municipal Development Operations Division

China and Mongolia DepartmentEast Asia and Pacific Regional Office

This document has a restricted distribution and may be used by recipients only in the performnance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CtURRENCY EQUIVALENTS

Currency Name: RenmLinbiCurrency Unit: Yuan (Y)

(as at Appraisal Date, September 1986) (as at December 31. 1995)

Y 1.00 100 fen Y 1.00 = 00 fenY 1.(0 $0.27 Y 1.00 = $0.12$1.0( = Y 3.7 $1.0() = Y 8.4

WEIGHTS AND MEASUJRES

I meter (m) = 3.2808 teet (ft)1 kilometer (kim) = 0.6214 mile (mi)1 cubic meter (mr') = 35.3147 cubic feet (ft-')I cubic meter (1ns) or ton of water = 284 U S gallons1 liter(l) , 0 264- US gallons (gal)1 cubic meter per second (m'/sec) = 35.3 145 cubic feet per second (ft3/sec)

FISCAL YEAR

January I - December 31

ABBREVIATIONS AND ACRONYMS

BMEA Bureau of Municipal Engineering AdministrationERR Economic Rate of ReturnICB International Comiipetitive BiddingMDAD = Municipal Drainage Administration DivisionMEAD = Municipal Engineering Administration DivisionNCB National Competitive BiddingSAR = Staff Appraisal ReportSMG = Shanghai MuLnicipal GovernmentSMSC Shanghai Municipal Sewerage CompanySMWC = Shanghlai Municipal Watervorks CompanySSC = Shanohai Sewerage CompanySSPCC = Shanghai Sewerage Project C onstruction Company

FOR OFFICIAL USE ONLY

CONTENTS

Preface............................................................................................................................iiEvaluation Summary ........................................................... iii

PART 1: PROJECT IMPLEMENTATION ASSESSMENT ................................. 1A. Statement/Evaluation of Objectives ............................................................ 1B. Achievement of Project Objectives ............................................................ 2C. Implementation Record and Major Factors Affecting the Project ...............4D. Project Sustainability ............................................................ 8E. Bank Performance ............................................................ 9F. Borrower Performance ............................................................ 9G. Assessment of Outcome ........................................................... 10H. Future Operations ........................................................... 10T. Key Lessons Learned ............................................................ 1.1

PART II: STATISTICAL TABLES .......................................................... 12Table 1: Summary of Assessments ........................................................... 12Table 2: Related bank loans ........................................................... 13Table 3: Project Timetable ........................................................... 13Table 4: Credit/Loan Disbursements: Cumulative Estimated and Actual ..... 14Table 5: Key Indicators for Project Implementation ...................................... 15Table 6: Key Indicators for Project Operation ................................................ 16Table 7: Studies included in Project .......................................................... 16Table 8a: Project Costs .......................................................... 17Table 8b: Project Financing ........................................................... 17Table 9: Economic Costs and Benefits ........................................................... 17Table 10: Status of Legal Covenants .......................................................... 18Table 11: Compliance with Operational Manual Statements ......................... 20Table 12: Bank Resources: Staff Inputs ......................................................... 20Table 13: Bank Resources: Missions .......................................................... 21

Annex 1: Project Review From The Borrower's Perspective ..................................... 22Annex 2: Financial Status .......................................................... 27

| his document has a restricted distibution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed wiLhout World Bank authorization.

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IMPLEMENTATION COMPLETION REPORT

CHINA

SHANGHAI SEWERAGE PROJECT

(CREDIT 1779-CHA/LOAN 2794-CHA)

PREFACE

This is the Implementation Completion Report (ICR) for the Shanghai SewerageProject in China, for which Credit 1779-CHA in the amount of SDR 78.9 million ($100million equivalent) and Loan 2794-CHA in the amount of $45.0 million equivalent wasapproved on April 14, 1987, and made effective on March 7, 1988.

The loan/credit was closed on December 31, 1995, compared with the originalclosing date of June 30, 1993. It was fully disbursed, and the last disbursement took placeon December 1, 1995.

The ICR was prepared by Geoffrey Read, Environment and MunicipalDevelopment Division (EA2EM), of the China and Mongolia Department. East Asia andPacific Region, and Terry Hall (consultant) and was reviewed by Mr. Songsu Choi, ActingChief, EA2EM, and Mr. Juergen Voegele, Acting Project Advisor.

Preparation of this ICR was begun during the Bank's supervision mission inFebruary 1996, in connection with Loan 371 1-CHA (Shanlghlai Environmnent Pro ject). and isalso based on materials in the project file. The Borrower contributed to the preparation ofthe ICR by providing review comments on the dra-ft tCxt, a1n throu-gLlh tilhe SbiubissioI of adetailed Project Completioni Report (Anlex 1).

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CHINA

SHANGHAI SEWERAGE PROJECT

(CREDIT 1779-CHA/LOAN 2794-CHA)

EVALUATION SUMMARY

Introduction and Project Objectives

1. The project objectives were to: (a) establish appropriate institutional andorganizational arrangements for the management of liquid wastes and environmentalprotection in Shanghai; (b) establish a self-financing company to deliver and manage urbanwastewater services; (c) strengthen mechanisms to control discharge and improve waterquality in the Huangpu River and its tributaries; and (d) support the first part of a phasedprogram of work to provide primary wastewater infrastructure services to enable economicgrowth.

2. Shanghai is one of the largest cities in Asia, with an urban population in December1995 of some 12 million, and a rapidly growing economy. The project was the first part ofa program of works to improve the environment in Shanghai through the interception,treatment and disposal of about 1.4 million m3/day of wastewater that discharged into theHuangpu River and Suzhou Creek. The project was designed to benefit about 2.6 millionpeople in these areas of the city and comprised intercepting and linking sewers, pumpstations, and treatment and discharge facilities.

3. Prior to the project, operation and maintenance of wastewater services in Shanghaiwere funded through governmnent budgetary allocations through the Bureau of MunicipalEngineering Administration (BMEA) of the Shanghai Municipal Government (SMG). InMarch 1987, the start of the project, the Shanghai Sewerage Company (SSC) wasestablished with the objective of becoming a financially-autonomous sewerage company tomanage the liquid waste of the city. Direct-user service charges (Y 0.12/mi3 ) forcommercial and industrial consumers were introduced for the first time in Shanghai in late1986. The project financial covenants required wastewater tariffs to be implemented sothat, after 1992, SSC's revenues at least covered its operating and maintenance expensesand the larger of either depreciation or total debt service.

4. The project's physical objective of providing infrastructure services was realisticand appropriate. It responded to a serious pollution problem in the local water bodies and toChinese and Bank goals for environmental remediation in urban areas. However, theproject's institutional and financial goals, though laudable, were ambitious, and provedattainable only in the longer term. During much of the project period, China's economyand institutional structure continued to rely on central planning principles, without a market

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orientation. In this environment, the introduction of a market orientation in one of the keyinstitutions providing municipal services proved challenging. In time, however, withShanghai's general adoption of commercial principles, the city administration became morereceptive to new approaches. Progress in financial and institutional reform realized ratherrecently is expected to continue during the follow-on Second Shanghai Sewerage Project(SSPII), supported under Loan 3987-CHA.

Implementation Experience and Results

5. The project objectives have been generally met: (a) institutional arrangements forliquid waste management were in place by the end of the project; (b) though delayed andlater than planned, putting in place arrangements for charging for wastewater services forthe first time in Shanghai was a significant step to achieve financial sustainability; (c) thecreation of a managed Upper Huangpu Protection Zone supported by training in dischargemonitoring and analysis began to make a quantifiable improvement on the environmentalquality of the waterways; and (d) the physical investment program provided, by the end ofthe project, essential wastewater services to meet the needs of some 2.5 million urbanresidents, and infrastructure for enabling urban redevelopment and related economicgrowth.

6. The project was originally planned to be implemented in five years through March1992. Construction proceeded generally satisfactorily, with high-quality workmanship,although delays arose due to slow startup by a Borrower unfamiliar with Bank procedures(this was the first Bank-supported environment project in China), unexpectedly difficultground conditions along sections of trunk sewers, lengthy investment project approvalprocedures by central government, and technical difficulties on a major tunnel outfallcontract. The project closing date was extended by a total of 2.5 years for the abovereasons. Nevertheless, the project has been commissioned and is already operating at abouttwo thirds of its designed capacity and is effecting significant improvement in the waterquality of the Suzhou Creek (29 percent reduction in biochemical oxygen demand isreported).

7. SMG/SSC complied with covenants in the project legal documents, although withsome major delays. Project goals for SSC's institutional and financial development into anindependent, financially self-sustaining entity were only marginally met. These wereprobably overoptimistic objectives for this first Bank Group-supported environmentalinvestment in Shanghai. Low wastewater tariffs set by SMG, out of concern foraffordability as well as popular reaction, have left SSC with a continuing need for indirectcharging arrangements and government subsidies, apparently contrary to the CentralGovernment's policy of "polluter pays." SMG is addressing the financial and institutionalweaknesses of SSC under SSPII.

8. The total project cost is estimated at $441 million (Y 3.704 million) compared to theappraisal estimate of $356 million (Y 1,530 million). The 24 percent project cost increasesince appraisal in dollar terms was mainly due to unprecedented increases in the costs of

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materials and labor. The project cost increase in yuan terms of 242 percent reflects: (a) thedevaluation of local currency; (b) the fact that most expenditures were in local currency, andincreased by the unprecedented labor and materials cost increases; and (c) the pricecontingencies allowed at 4.1 percent were underestimated. These increases are consideredreasonable, under the circumstances.

9. Bank Group financing of a Credit of SDR 78.9 million and a Loan of $45 millionamounted to $153.34 million (35 percent of project costs) which was fully disbursed. SMGprovided the balance of the counterpart funds in a satisfactory manner.

10. The Bank enjoyed an open and frank working relationship with SMG and SSC, andmaintained staffing continuity on the project. The Borrower managed the project withhighly-competent staff and maintained staff continuity from preparation through tocompletion. These facts enabled large-scale physical works to be completed in reasonabletime, and supported an open dialogue when the more challenging project initiativesconcerning institutional strengthening and implementing wastewater tariffs commenced.

11. With project objectives generally met, the project outcome is satisfactory.Sustainability of project investments is likely in view of a strong institutional capability foroperation and maintenance and SMG's renewed commitment to making the seweragesystem financially self-sustaining. Wastewater tariffs have been increased substantially,and are expected to be further raised to meet financial covenants under SSPII. With thestrong commercial orientation now pervasive in Shanghai, the prospects for SMG'sfulfillment of these covenants is quite good.

Summary of Findings, Future Operations and Key Lessons Learned

12. The physical works were completed satisfactorily. However, the institutionalstrengthening and financial autonomy of SSC was only initiated under the project. Reasonsfor this include the allocation of construction and operational responsibilities for the projectunder separate companies (SSPCC, the Shanghai Sewerage Project Construction Company,and SSC, respectively). SMG's management emphasis on the construction of works, anddue to pressure to complete the more visible physical work, less attention being given toinstitutional issues, and a late requirement under the project's financial covenants for direct-user domestic charges (five years into the project).

13. In order to address the above deficiencies, SMG arranged that SSC be upgraded to aself-financing public utility company, and major direct-user wastewater tariff enhancementswere approved in July 1995. In November 1995, SMG established the Shanghai MunicipalSewerage Company (SMSC), comprising the merged operations of SSC and SSPCC, as afinancially-autonomous state-owned enterprise responsible for all aspects of urbanwastewater management in Shanghai. This brought together all of the city's sewerageoperations under one organization. Putting in place a financially-sustainable urbanwastewater utility company was a major step forward, stemming from the project. Theoutcome of these major institutional and financial changes will be monitored under therecently-approved SSPII project.

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14. The key lessons learned from the project are:

(a) Institutional development is a slow process, depending on an enablingenvironment;

(b) Programs of physical works should be closely-linked with actions for theinstitutional and financial development of the utility enterprise;

(c) The Bank can play a meaningful role in supporting large-scale urbaninfrastructure, especially through encouraging the Borrower to give attentionto institutional and financial matters;

(d) The low ICB ceilings of $3.0 million and $270,000 for civil works andequipment contracts, respectively, did not attract international contractors.In future similar lending operations, there may be a strong case for verylarge management contracts moving toward program lending;

(e) High-quality planning and project management yield results on the ground;and

(f) Project design should be formulated to ensure that sufficient time is allowedto put in place arrangements to achieve covenants that could be difficult toimplement.

15. The formation of SMSC, drawing on the experience gained through the project,will make it one of the largest wastewater companies in the world. This will assistShanghai in providing essential urban environmental services well into the next century,providing for growth and reducing the current service backlog. The implementation oftariffs, though levied later than expected, will sustain the provision of services and serveas a role model for other major cities in China.

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IMPLEMENTATION COMPLETION REPORT

CHINA

SHANGHAI SEWERAGE PROJECT

(CREDIT 1779-CHA/LOAN 2794-CHA)

PART I: PROJECT IMPLEMENTATION ASSESSMENT

A. STATEMENT/EVALUATION OF OBJECTIVES

1. The project objectives were to: (a) establish appropriate institutional andorganizational arrangements for the management of liquid wastes and environmentalprotection in Shanghai; (b) establish a self-financing company to deliver and manageurban wastewater services; (c) strengthen mechanisms to control discharge and improvewater quality in the Huangpu River and its tributaries; and (d) support the first part of aphased program of works to provide primary wastewater infrastructure services to enableeconomic growth.

2. The project was the first part of a comprehensive staged program of works toimprove the environment in Shanghai through the interception, treatment, and disposal ofwastewater from the main commercial areas of the city; and enhance residential andindustrial development along the Suzhou Creek, one of the main waterways within the city.Project infrastructure was designed to serve about 2.6 million people by the year 2000 inthese areas of the city (estimated about half of the population of the urban area at that time),and comprised: (a) construction of a sewerage system that includes 35 kilometers (km) ofintercepting sewers, about 21 km of link sewers, 2 main and 8 smaller pumping stations, atreatment plant and other ancillary works; (b) conducting of four project-related studies; and(c) staff training. The project was also intended to develop the institutions for providingsewerage services and managing and protecting the environment. This involved setting upa self-financing sewerage company, the Shanghai Sewerage Company (SSC), and creating amechanism to control and improve water quality in the Huangpu River and its tributaries.The Huangpu River is the main source of water supply for Shanghai.

3. The project's physical objective of providing infrastructure services was realisticand appropriate. It responded to a serious pollution problem in the local water bodies and toChinese and Bank goals for environmental remediation in urban areas. However, theproject's institutional and financial goals, though laudable, were ambitious, and provedattainable only in the longer term. During much of the project period, China's economyand institutional structure continued to rely on central planning principles, without a marketorientation. In this environment, the introduction of a market orientation in one of the key

institutions providing municipal services proved challenging. In time, however, withShanghai's general adoption of commercial principles, the city administration became morereceptive to new approaches. Progress in financial and institutional reform realized ratherrecently is expected to continue during the follow-on Second Shanghai Sewerage Project(SSPII), supported under Loan 3987-CHA.

B. ACHIEVEMENT OF PROJECT OBJECTIVES

Project Implementation

4. Status of Achievement of Objectives. The project objectives were generally met:(a) institutional arrangements for liquid waste management were in place by the end of theproject; (b) though delayed and later than planned, the project's establishment ofarrangements to charge for wastewater services for the first time in Shanghai was asignificant step to achieve financial sustainability; (c) the creation of a managed UpperHuangpu Protection Zone supported by training in discharge monitoring and analysis beganto make a quantifiable improvement on the environmental quality of the waterways; and (d)the physical investment program provided, by the end of the project, essential wastewaterservices to meet the needs of some 2.5 million urban residents and infrastructure forenabling urban redevelopment and related economic growth.

5. Physical Objective. This project was the first in China supported by the BankGroup to address environmental protection, reflecting the increasing importance attached byGovernment in recent years to this neglected area. The main objective of this project wasthe provision of physical works for the interception and treatment of wastewater flowsdischarging to the Huangpu River and Suzhou Creek, and disposal of the wastewaterthrough deep submarine outfalls to the Changjiang estuary in the vicinity of Zhuyuan (about10 kmn east of Shanghai City). The facilities, designed for a flow of 1.4 million m3/day,were substantially completed and commissioned in mid-1994 (about two years later thanoriginally scheduled), with the wastewater flow presently reported around1.0 million m3/day (71 percent of design flow). Apart from the technical difficultyexperienced due to the collapse of the southern outfall tunnel (caused by gaseous methane)under the Changjiang estuary, the physical works as originally planned and designed havebeen successfully completed by the Shanghai Sewerage Project Construction Company(SSPCC).

6. Institutional and Financial Objectives. Prior to the project, Shanghai's Bureau ofMunicipal Engineering Administration (BMEA) was mainly responsible for sewerageservices in Shanghai, with operation and maintenance shared by two divisions, namely theMunicipal Drainage Administration Division (MDAD) and the Municipal EngineeringAdministration Division (MEAD). At that time, all wastewater operation and maintenanceservices were funded through governmental budgetary allocations; no direct-user chargeswere levied. During project formulation, the Shanghai Municipal Government (SMG)recognized this unsatisfactory situation, and established SSC in March 1987 as a conditionof Board Presentation. As stated by the Government, SSC's objective was to become a

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financially-autonomous sewerage company to manage the liquid wastes from ShanghaiCity.

7. The engineering and administrative staffs from MDAD and MEAD provided a baseorganization for SSC, with financial and accounting staff recruited externally. In tandemwith SSC's establishment, direct-user service charges were introduced in December 1986for industrial and commercial consumers (Y 0.12/m 3). Financial covenants requiredwastewater tariffs to be implemented so that after 1992, SSC's revenues were to be not lessthan the sum of: (a) total operating expenses (including depreciation); and (b) the amountby which debt service exceeded depreciation (Project Agreement Clause 3.03). SSC's netrevenue was to be at least 1.3 times its maximum debt service requirements. To achievethese objectives, the following actions were taken:

(a) tariff policies and proposals were recommended in the Final Tariff Reportprepared by consultants under the project in October 1992; and

(b) detailed tariff proposals were made by SSC in January 1993, together with aTariff Action Plan (cleared with the Bank) to ensure covenant compliance.

8. However, SMG did not follow all of the recommendations and related timing of theTariff Action Plan. Compliance with the financial covenants was maintained by SMGthrough a combination of very low direct-user charges to commercial and industrialconsumers only, utility tax allocations, and governmental budgetary provisions. Only inJuly 1995 was SSC authorized by SMG to charge domestic consumers and to adjust itstariffs to the following levels: domestic consumers-Y 0.14/mr3 and nondomesticconsumers-Y 0.34/m3 . Importantly, the domestic consumers would be billed throughjoint-billing with the Shanghai Municipal Waterworks Company (SMWC), with thewastewater charge shown separately. This is thought to be the first time in China thatdomestic consumers have been charged for wastewater services. Implementation of thisauthorized adjustment was not confirmed until April 1996.

9. Institutional change is a slow process, and in 1995 (eight years after beingestablished), SSC still operated very much along the lines of the government departmentfrom which it was formed, i.e., depending on governmental budgetary allocations for day-to-day operation and maintenance of its assets. However, in preparation for the SecondShanghai Sewerage Project (SSPII, Loan 3987-CHA), which was approved by the Bank'sBoard on March 21, 1996, SMG established in December 1995 the Shanghai MunicipalSewerage Company, Ltd. (SMSC) as a self-accounting, self-funding state-owned enterprise.SMSC was formed following the merger of SSC and the Shanghai Sewerage ProjectConstruction Company (SSPCC). Unlike SSC, which had a relatively flat structure of 36units reporting to a Director's Office, SMSC has a rational, pyramnidal organization tofacilitate operational effectiveness, as recommended by an organizational study carried outunder the first project. Institutional development and training support being provided underthe second project, including financial and management improvements, are expected toallow SMSC to function as an independent and legally-autonomous public enterprisehaving all the rights and powers of a company, including being held responsible for its

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operations, with the exception that SMG still sets tariffs and charges. In future, thefinancial objective of SMSC would be to: (a) preserve the value of its assets; and (b) earnfrom its wastewater operations funds sufficient to meet operation and maintenance costsand debt service, and generate funds for future investments.

10. In summary, while the financial covenants under the project were technicallycomplied with by SMG/SSC (although with some delays and after prompting by Bankmissions), SMG did not abide by what the Bank understood to be the spirit of theagreements reached at appraisal and negotiations.' Given the lack of any previous debtservice, SSC's tariffs were intended to eliminate the need for operating subsidies and allowit to cover its operating expenses, pay interest during construction, finance normal capitalinvestments, and accumulate a cash surplus during the project implementation period.However, tariffs were set at levels that necessitated SSC's having to receive substantialoperating subsidies during the whole implementation period in order to be in compliancewith the financial covenants. Contrary to the Central Government's policy of "polluterpays," SMG has been reluctant to set wastewater tariffs at levels that would allow SSC to beself-financing, citing affordability and community reaction as the chief concerns.Nevertheless, some important actions have been taken recently. The formation of SMSC asa broad-based service utility at the end of the project period was a major step forward ininstitutional development, and the improved tariff structure was a major step forward on thefinancial side. Further action aimed at enhancing SMSC's financial condition will berequired under SSPII. The first project thus paved the way for the follow-on project. Thesteps taken to implement comprehensive wastewater tariffs citywide, together with theformation of SMSC have created a financially-strong utility as shown in the financialprojections in Annex 2. The projections take account of the expected investments (andconsequent revenues) to be financed under SSPII.

C. IMPLEMENTATION RECORD ANDMAJOR FACTORS AFFECTING THE PROJECT

11. The project was originally planned to be implemented during a five-year periodthrough March 1992. Following appraisal in September 1986 and Board Presentation inApril 1987, Project Effectiveness was delayed until March 1988, awaiting the "registration"of SSC as a company. Due to the delayed effectiveness and the initial unfamiliarity of theexecuting agency, SSPCC, with Bank procurement procedures and requirements, projectconstruction started more slowly than anticipated. Nevertheless, construction proceededgenerally satisfactorily, and the quality of construction workmanship was reported to be of avery high standard.

12. The project closing date was extended three times for periods totaling 2.5 years(from June 30, 1993, to December 31, 1995) for the following reasons:

SMSC does not agree with these statements. SMG advised that while being in agreement with the financialobjectives, the needed increase in direct charges should be phased in over a longer time to respect concern overaffordability levels.

(a) difficult ground conditions that were not expected along parts of the trunkconveyor routes;

(b) clearance procedures by central government for bidding invitations forequipment and materials, and works to be procured under InternationalCompetitive Bidding (ICB) procedures; and

(c) technical difficulties experienced on a major contract (Contract 9.1) thatentailed the construction of twin 4.2 meter diameter wastewater outfalltunnels, some 1.4 km long under the Changjiang estuary. In late 1992,construction crews in the southern tunnel encountered unexpectedly largepockets of gaseous methane, dispersed randomly in unstable organic silt andlenses of highly-unstable fine sand. This caused the partially-completedtunnel linings to buckle in several places and to subsequently collapse.Meanwhile, the northern tunnel was completed satisfactorily and wascommissioned in December 1993.

13. Because of these problems, the project closing date was extended as indicatedabove: (a) to October 31, 1993, to allow SMG time to make arrangements for SSC to meetits financial covenant under the project; (b) to December 31, 1994, to enable projectcompletion with Bank support; and (c) to December 31, 1995, to ensure completion of asecond outfall tunnel to replace that collapsed. It was estimated that all works for the tunnelreconstruction would be completed by December 1995, although it was acknowledged thatthe program of construction left no room for slippage. By October 31, 1995, some 1,170meters of the replacement tunnel had been excavated and lined, although progress had beenslow due to recurring methane problems and the need for maintenance and replacement ofessential parts of the tunneling equipment. By December 31, 1995, the second tunnel wasabout 86 percent complete. Due to the difficult ground conditions of running sand beingencountered, the work was suspended in December 1995. The contractor, with agreementfrom SSPCC, decided to install air locks in the completed tunnel and behind the tunnelboring machine so that the excavation can be carried out under air pressure; and thetunneling equipment has been refurbished. Tunneling started again in March 1996, and thework is expected to be completed and operational by August 1996. Otherwise, all majorinfrastructure works in the project have been completed and satisfactorily commissioned,including the completion of link sewer systems in six additional catchment areas to provideimproved service delivery to about 1 million residents in these areas.

14. Construction. A consultant team, supported by the Australian InternationalDevelopment Assistance Bureau, was engaged by SMG to assist in preparing the projectthrough appraisal. This team was retained during project implementation to assist SSPCCand the local design bureaus in finalizing key tender documents and procurementprocedures. Subsequently, the consultant team assisted SSPCC in project monitoring andreporting and provided specialist inputs (e.g., tunnel expert and control system engineer), asrequested by SSPCC. Supervision of the works was undertaken by SSPCC in combinationwith locally-recruited construction supervisors (e.g., from Tonji University). Construction

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workmanship was consistently reported to be of a very high standard. It is also noted thatcomments by visiting Bank missions on construction matters were addressed bothcompetently and expeditiously by SSPCC managing personnel.

15. However, on a number of occasions, missions reported adoption of lowerconstruction standards, with less cover (protection) to reinforcement in culvert constructionthan recommended in current international practice. The cover did, however, comply withnational standards and contract requirements. This concern would be addressed through thefollow-on SSPII project, in which concrete protection to steel would be increased to beconsistent with current international practice. The project also highlights the benefit fromthe bilateral assistance provided by the Australian Government, which supported theplanning, engineering and institutional analysis inputs that clearly contributed to enabling anew organization to successfully implement a large-scale infrastructure program. It alsoshows the benefit of continuity of consultants from the planning/design stage through to theconstruction management/supervision services stage.

16. Land Acquisition and Resettlement. In view of the construction of major worksthrough congested central areas of the city, land acquisition, resettlement of residents, andrelocation of industries were very important project activities. At appraisal, it wasestimated that 15,144 persons would need to be resettled to make way for projectconstruction. SSPCC was able to substantially reduce the actual number of resettledpersons as compared to the appraisal estimate, and about 9,200 people and 394 factorieswere successfully relocated by SSPCC to accommodate the original project componentsand the six additional link sewer systems that were implemented under the project. Thereduced impact of resettlement was achieved by careful routing of the wastewaterconveyors. Bank missions periodically reviewed with SSPCC its procedures and progressfor land acquisition and resettlement, and found both satisfactory.

17. Studies. The project included the following studies: (a) Organization, MIS andTariff Study for SSC; (b) Sewer Rehabilitation Study; and (c) Huangpu River BasinManagement Study. These were all completed satisfactorily (by national/internationalteams), although somewhat later than planned at appraisal. Details of the objectives andimpacts of these studies are presented in Table 7.

18. Procurement. After a slow startup due to SSPCC's unfamiliarity with the Bank'sprocurement procedures, the procurement process was implemented successfully. Worksand goods were initially split into 33 contract packages, but ultimately into 48 packages as aresult of splitting some of the sewer contracts (in order to expedite progress by employingmore contractors), and including some additional link sewer works. While the work wasprobably accelerated in this way, SSPCC was faced with more difficult contractmanagement and administration of the works (although this was stated by SSPCC not to beany problem).

19. In accordance with the legal agreements, civil works contracts of $3.0 million andabove, and goods contracts of $0.27 million and above, were invited under ICB procedures.Cement and reinforcement were procured separately by SSPCC for supply to the

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contractors. In retrospect, the $3.0 million ICB ceiling for civil works proved quiteinappropriate, and international contractors were not attracted to bid for the work. In fact,only two contracts (a length of culvert constructed in tunnel, and a pipe-jacking contract,both awarded during the early days of construction) were awarded to internationalcontractors. All other civil works contracts (ICB and NCB) were won by local firms (withlittle or no international interest). At one stage, SSPCC proposed (and the Bank agreed)that certain culvert construction originally open to international bids, should be restricted tonational bids in view of the lack of international interest in bidding. It may be mentionedthat in the follow-up environment projects in Shanghai (Shanghai Environment Project,Loan 3711 -CHA, and the Second Shanghai Sewerage Project, Loan 3987-CHA), increasingthe ceiling for ICB civil works contracts to $10.0 million does not seem to have encouragedinternational contractors to participate to any great extent. Referring to the contracts forequipment and materials, only two contracts out of 12 were awarded to a foreign supplier.

20. Project Costs. The total project cost at appraisal was estimated at $356 million(Y 1,530.5 million), based on the exchange rate of $1.0 = Y 3.7 at that time (September1986). Subsequently, in 1993, the cost was updated to reflect: (a) unprecedented increasesin the basic costs of local materials and labor; and (b) devaluation of local currency incomparison with the US dollar (from Y 3.7 at appraisal to Y 8.4 in December 1995). Thelatest project cost is estimated at $441 million (Y 3,704.4 million), including the cost of linksewer systems in the six additional catchment areas referred above. In dollar terms, the totalproject cost has increased by about 24 percent since appraisal. When compared in yuan,costs are 242 percent above the appraisal estimate reflecting: (a) the devaluation of localcurrency (by 127 percent); (b) expenditures predominantly incurred in local currency (forcivil works and to a large extent for materials/equipment contracts); and (c) pricecontingencies found to be much higher than the figure of 4.1 percent of base cost that wasestimated at appraisal. A detailed comparison of the appraisal estimate and the final projectcost estimate is presented in Table 8A. Bank Group-financing comprised a Credit of SDR78.9 million and a Loan of $45 million; these were fully disbursed to an amount of $153.34million (35 percent of project costs). The comparison of the financing plans is given inTable 8B. When compared in dollar terms, the actual loan/credit total disbursement is some6 percent above the appraisal figure of $145.0 million due to appreciation of the SDR.Funds were passed on through SMG to SSC through a Subsidiary Loan Agreement.Counterpart funds were provided by SMG in a satisfactory manner, and the financing planwas considered satisfactory.

21. Project Justification. Least-cost solutions were adopted to provide the principalbasis for the justification of the project. The primary benefits of the project come from itscontribution to improving environmental quality in Shanghai's waterways, particularlySuzhou Creek, through the removal of industrial and domestic wastewater that wasformerly discharging to the waterways. A 13 percent economic rate of return (ERR) of thepotential net profitability from property value enhancements along Suzhou Creek wasestimated at appraisal, assuning a 10 percent discount rate. Water quality in Suzhou Creek,measured in terms of biological oxygen demand, has improved by some 29 percent as aresult of commissioning of the project (see data in Table 6). However, the ERR has not

- 8 -

been recalculated due to the major urban renewal programns being undertaken by SMG inthe Suzhou catchment area (and elsewhere) of the city, thus preventing meaningful updateof the ERR calculation on the appraisal basis.

22. There have been significant qualitative benefits, however, including the following:

(a) the formation of a major urban services provider, SMSC, which at the end ofthe project period, was providing (through project-supported investments)wastewater services to about 2.5 million people;

(b) the provision of essential and cost-effective urban infrastructure to Shanghai,enabling orderly and environmentally-safe economic growth in a large partof one of China's premier cities;

(c) the project completes the first stage of a major long-termn environmentalprogram to clean up the environment and promote sound financialmanagement. Suzhou Creek, long known to be one of the most pollutedwaterways in China, has already shown an improvement in water quality;and

(d) the putting in place of essential services for people in need, enabling theremoval of nightsoil systems and the provision of basic wastewater disposalservices to householders, in many cases for the first time. Health benefitsare not quantifiable but will be significant over the medium term.

23. Regarding financial returns from the project, the average incremental wastewatercost was estimated at Y 0.39/m3 at appraisal, using a 10 percent discount rate (adoption ofshadow pricing of inputs increased this figure to Y 0.46/mi3 ). Comparison with the latestdirect wastewater user tariffs, Y 0.14/mi3 for domestic and Y 0.34/m3 for nondomesticconsumers, gives a clear indication of the need for continued indirect charges andgovernmental subsidies to ensure SMSC's financial viability and sustainability of thephysical assets provided under the project, until such time as the direct tariff levels arebrought into line with actual costs of the service.

D. PROJECT SUSTAINABILITY

24. Project sustainability is considered likely. The sustainability of the physical assetscreated under the project is very closely linked to the operation and maintenance capacity ofSMSC and to the budgetary provisions allocated to it by SMG. Institutional capacity is notconsidered a problem-SMSC has a competent staff with substantial experience inoperation and maintenance. On the funding side, achieving financial sustainability of thewastewater system is critical to adequate operation and maintenance of existing facilitiesand to the system expansion required to support Shanghai's continued growth. The projectintroduced tariffs that now meet operating and maintenance expenses (excludingdepreciation). However, with only marginal tariff increases during 1993-95, but wage andadministrative cost increases of about 55 percent and 46 percent a year, respectively, SSChad to rely on government transfers-construction taxes and public utility levies(principally on water supply)-to meet stormwater drainage and debt service costs.

9-

Recently, SMG signaled its intention to press on toward making the system financially self-sustaining by approving substantially increased wastewater tariffs in July 1995, which wereimplemented from March 1996. To meet Shanghai's financial targets for SMSC underSSPII would require further tariff adjustments which, if implemented, would ensurecontinued development of SMSC's financial capacity.

E. BANK PERFORMANCE

25. Throughout the project life, the Bank enjoyed a very close and frank workingrelationship with the concerned government agencies responsible for the project execution(SMG, SSC and SSPCC). Staff continuity on the Bank's side played an important role inthis regard; only two Bank Task Managers (including the current manager) have beeninvolved throughout the life of the project. Initially, the "skills" of mission personnelfielded during the project supervision were predominantly "engineering," reflecting themajor emphasis during the initial years of the project, on designs, tendering andconstruction of works (while assisting SSPCC and SSC in the review of studies, training.and institutional and financial development proposals for SSC). Details of missionresources are provided in Table 13 where it is seen that institutional and financial specialistswere included regularly in later Bank mission teams.

F. BORROWER PERFORMANCE

26. Borrower performance was generally satisfactory, although deficiencies must benoted in implementation of some project aspects. SMG established SSPCC under thedirection of a senior manager for the preparation and implementation of the project.SSPCC was staffed up with a full complement of senior professionals and supportingpersonnel. This organization was maintained throughout the project and has carried out itsduties in a very responsible and professional manner. Management and staff continuitywithin SSPCC has certainly contributed to the very successful implementation of thephysical components of this project (and indeed SSPCC has been entnisted by SMG withconstruction under SSPII).

27. SSC was established by SMG to be responsible, as a self-financing public utilitycompany, for operation and maintenance of existing wastewater facilities and, ultimately,for the operation and maintenance of the assets created under this project. While SSCdemonstrated a capacity to operate and maintain the physical assets that have been created,for various reasons it failed to grow into the self-financing institution envisaged at appraisal.In this respect, the performance of SSC was below that expected at appraisal. The reasonsfor this include: (a) lack of priority given to institutional development during projectformnulation; (b) major emphasis in the project on the construction of works; (c) direct userdomestic charges effectively covenanted only from 1993 onward (five years into theproject); and (d) allocation of construction and operation responsibilities under separatecompanies (e.g., SSPCC had no responsibility with respect to the financial covenantspertaining to SSC).

28. Compliance with the covenants was maintained by SMG/SSC throughout theproject period, although at times reluctantly and with long delays; details are provided at

- 10-

Table 10. In retrospect, institutional development and financial management could havereceived greater emphasis during formulation of the project covenants-actions required tobe taken five years down the line do not always merit serious attention by the executingagencies.

29. The Borrower successfully implemented all the studies identified in the SAR(although with some delay), and the various in-country and overseas training programs thatwere identified at appraisal were successfully completed. Additional language skillstraining needs, which were identified toward the end of the project period, were notfollowed up by the Borrower, despite reminders during Bank missions, principally due topressure of other commitments. These studies made significant contributions to futureinitiatives. The Huangpu River Basin Study provided a design for the ShanghaiEnvironment Project and for the formation of the Upper Huangpu Water Protection Zone,strengthening Shanghai's ability to reduce above-standard wastewater discharges. TheTariff Policy and Organization and Management Study provided a basis for the revisedtariffs, and contributed to SMG's decision to create SMSC. Finally, the training undertakenyielded results as shown by the ability of a small municipal department to manage majorconstruction works, embark on institutional upgrading, and begin to be financiallysustainable.

G. ASSESSMENT OF OUTCOME

30. The project outcome is rated satisfactory. Apart from the technical difficultyencountered with the construction of the southern outfall tunnel, the physical objectives ofthe project were completed very satisfactorily. In fact, SSPCC implemented additional linksewer systems in the further six catchment areas of Guohe, Yiejiazhai, Mudugang,Beixinjing, Wuning, and Guangzhong, improving service delivery for some one millionresidents in these areas.

31. The institutional strengthening of SSC proceeded slowly and its expected financialsustainability was not achieved. In retrospect, this may not have been anticipated due to:(a) the major emphasis on construction of works; (b) newness, as this was the first Bank-supported environmental project for Shanghai (and China); (c) the requirement of actionsby SMG/SSC only from 1993 (five years into the project) by the financial covenantsprovided in the project agreements (these covenants were designed to coincide with theplanned completion of the physical works); and (d) the operation of SSPCC and SSC as twoseparate entities, which was probably appropriate when the project commenced as activitieswere quite separate, but not the optimal organizational structure once assets were servingthe city on a large scale. SMG has now taken action to amalgamate all activities by SSPCCand SSC into a single agency (see below).

H. FUTURE OPERATIONS

32. In November 1995, SMG established the Shanghai Municipal Sewerage Company(SMSC) in order to bring together all the wastewater operations of the city under oneorganization [this may be compared with the Shanghai Municipal Waterworks Company(SMWC), which has been in operation for more than 100 years]. SMSC is headed by a

- 11 -

Construction Company, an Operations Company, a Monitoring Center, and a TrainingCenter. The total staff is around 4,100. The future operation of the project is very muchdependent on SSC's and now SMSC's ability to operate and maintain the assets provided.SMG has upgraded SSC to a self-financing public utility company, and in fact, major directuser tariff enhancements were sanctioned from July 1995. The outcome will be monitoredduring the coming years under SSPII.

1. KEY LESSONS LEARNED

33. The key lessons learned from the Shanghai Sewerage Project are:

(a) Institutional development is a slow process, depending on an enablingenvironment;

(b) Programs of physical works should be closely-linked with actions for theinstitutional and financial development of the utility enterprise;

(c) The Bank can play a meaningful role in supporting large-scale urbaninfrastructure, especially through encouraging the Borrower to give attentionto institutional and financial matters;

(d) The low ICB ceilings of $3.0 million and $270,000 for civil works andequipment contracts, respectively, did not attract international contractors.In future similar lending operations. there may be a strong case for verylarge management contracts moving toward program lending;

(e) High-quality planning and project management yield results on the ground;and

(f) Project design should be formulated to ensure that sufficient time is allowedto put in place arrangements to achieve covenants that could be difficult toimplement.

34. The formation of SMSC, drawing on the experience gained through the project,will make it one of the largest wastewater companies in the world. This will assistShanghai in providing essential urban environmental services well into the next century,providing for growth and reducing the current service backlog. The implementation oftariffs, though levied later than expected, will sustain the provision of services and serveas a role model for other major cities in China.

- 12 -

PART II: STATISTICAL TABLES

TABLE 1: SUMMARY OF ASSESSMENTS

NotAchievement of Objectives Substantial Partial Negligibk Aplicakk

Macroeconomic policies XSector policies XFinancial objectives XInstitutional development XPhysical objectives XPoverty reduction XGender concerns XOther social objectives XEnvironmental objectives XPublic sector management XPrivate sector development X

Project Sustainability Likely Unlikely Uncertain

x

Bank Performance Highly Satisfactory Satisfactorv Deficient

Identification XPreparation assistance XAppraisal XSupervision X

Borrower Performance Highly Satisfactory Satisfactor Deficien

Preparation XImplementation XCovenant compliance X /a

Assessment of Outcome Highly HighlySatisfactory Satisfactori Unsatisfactory Unsatisfactry

x

,'a Marginally satisfactory

- 13 -

TABLE 2: RELATED BANK LOANS

Year ofLoan Title Purpose Approval Status

Preceding OperationsNone

Following OperationsShanghai Environment To provide a sustainable environment for 1994 OngoingProject long-term economic and socialLn 371 1-CHA development in Shanghai.

Second Shanghai To provide a safe environmental setting 1995 ApprovedSewerage Project for the long-term growth of Shanghai. March 31, 1996Ln 3987-CHA

TABLE 3: PROJECT TIMETABLE

Steps in project cycle Date planned Date actual/latest estimate

Identification (Executive Project Summary) 03/85 06/85Preparation 1985-86 1985-86Appraisal 09/86 09/86Negotiations 02/87 02/87Board presentation 04/14/87 04/14/87Signing 07/14/87 11/23/87Effectiveness 10/14/87 03/07/88Project Completion 06/30/92 12/31/95Loan closing 06/30/93 12/31/95

- 14

TABLE 4: CREDIT/LOAN DISBtlRSEMENTS: CUrMUJLATIVE ESTIMATED AND ACTUAL

($ 000,000)

Financial Year Appraisal estimate Actual Actual as % of estimate

1988 /a 12.00 10.26 75.01989 33.00 14.70 44.51990 71 00 29.56 41.61991 104.00 53.63 51.61992 131.00 72.40 55.31993 145.00 98.89 68.21994 - 131.26 90.51995 - 151.09 104.21996 I- l13. 34/b 105.8

/a Includes the initial disbursement of $9.0 million for the Special Account.

/b Due to appreciation of SDR, the actual amount in dollars is increasedsubstantially.

- 15 -

TABLE 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION

Key implementation indicators in SAR Estimated at appraisal (1986) Actual (1995)La

TargetsPopulation million 7.863 9.329% population with water connection 98.0 98.0Water connections (1.000) 962.1 1,853.9Water sold million tons 1,191.0 1,459.0Volume water sold, l/c/d 423.0 428.0

Population with sewer connection 67% 67%Sewerage connections, '000 658.0 1242.0Total sewage billed, millioni tons 1,060.0 989.33Av. tariff/volume hilled, Y.:ton 0.141 0.102

ManaoementOperating expenses/ton of sewage billed 0.07 0.17Days accounts receivable 30.0 30.0Number of employees 5,055.0 3,944.0Employees/1000 sewver connections 7.7 3.2

Financial RatiosSewerage revenues, Y million 149.35 100.58Domiiestic tariff/volume billed. Y/ton 0.043 0.02Nondomestic, Y/ton 0.173 0.156Average tariff. Y/ton 0.141 0.102Working ratio 46.3% 52.6%Operating ratio 81.8% 59.1%Rate of return on net fixed assets 1.8% 22.920%Net income/year on equity 0.6% 14%Slianghai Sewerage Project Stage ITotal investment, Y million 419.0 221.7Internal contribution 4.70% investmilenit finatnced b\ equity 0.0°oDebt service ratio 1.3 1.2l'otal debt/equity ratio 74.5% 15.8%Current ratio 2.0 1.10

Analysis in 1986 Constant PricesDomestic tariff, Y/ton 0.028 - /bNondomestic tariff, Y/ton 0.111 0.14Average tariff. Y/ton 0.091 0.09Real tariff increase 2.3% n.a.Operating revenues, Y mnillion 99.58 149.80

/a Provided by Borrower./lb At current prices.

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TABLE 6: KEY INDICATORS FOR PROJECT OPERATION

Key operating indicators in SAR

I . Interception of ADWF

The planned interception of ADWF is 1,400,000 m3/day. Actual intercepted ADWF of 1995 is1,040,000 m3/day.

2. Water quality indicators of Suzhou Creek

Before 1993 commission 1995

DO 1.27 mg/i 2.12 mg/lBOD5 33.77 mg/I 23.83 mg/lNH,-N 11.71 mg/[ 11.05 mg/l

TABLE 7: STUIDIES INCLUDED IN PROJECT

Study Purpose as defined at appraisal Status Impact of study

Organization, MIS & To dcfine organization and management Complete Recommendations accepted by SMG.TaritT Study for SSC /a and tariff strategies for SSC implemented in part

Sewcr Rehabilitation To inventory and assess physical condi- Complete Recommendations not yet imple-tion of existing sewers and recommend mented. Report provided basis forrehabilitationi needs preparation of SSPII

Huangpu River Basin To develop a strategy for optimal man- Complete Provided a basis for whole basinManagement agement and efficient use of the Huangpu planning management approach of

River water rcsources Huangpu catchment

/a Organization. MIS and Tariff Studies combined into a single consultancy (originally two studies in SAR).

- 17 -

TABLE 8A: PROJECT COSTS($ million)

Appraisal estimate ActualLItem Local Foreign Total Local Foreign Total

Civil works 120.7 75.2 195.9 191.84 77.89 269.73M&E equipment 9.6 26.7 36.3 4.25 54.94 59.19Services 12.5 8.1 20.6 26.59 4.35 30.94Land acquisition 48.4 10.6 59.0 67.60 13.55 81.15

Base Cost 19J12 120 311.8

Physical contingency 19.1 12.1 31.2Price contingency 7.9 5.1 13.0

Total Project Cost 2182 13.7 356 29028 150.73 441.01

/a Costs include contingencies.

TABLE 8B: PROJECT FINANCING

($ million)

Appraisal estimate ActualItem Local Foreign Total Local Foreign TotalLa

IBRD/IDA 7.2 137.8 145.0 2.62 150.73 153.35Shanghai Municipality 287.66 19.30 306.96Central Govemment 211.0 16.6 227.6 290.28 170.03 460.31

Total 2182 ]54.4 72 k

/a Due to appreciation of SDR, the "dollar" total is increased accordingly.

TABLE 9: ECONOMIC COSTS AND BENEFITS

A. Direct Benefits

Not applicable.

B. Economic Impact

Appraisal estimate Actual (at final development)

Economic rate of return 13% Not recalculated due to major urban renewalprograms being undertaken by SMG in catchmentareas of Suzhou Creek and elsewhere in the city,thus preventing any meaningful recalculation ofERR (which was based on assumed increased rentalvalues).

- 18 -

TABLE 10: STATUS OF LEGAL COVENANTS

Cove- Original RevisedAgree- nant Present fulfillment fulfillmentment Section type status date date Description of covenant Comments

Project 2.02 5 C Nov. 1987 Nov. 1987 The staff, functions andresponsibilities of SSPCC would bemaintained in a manner satisfactoryto the Bank.

2.07 10 C Dec. 1990 1994 1 he training program would beimplemented by SSPCC and SSC inaccordance to a schedule agreed withthe Bank, and be completed by Dec31, 1990.

2.08 7 C - - Rescttlement would be carried out ina maniter satisfactory to the Bank.

2.09 5 C Dec. 1990 Dec. 1991 SM would send a draft Transfer andOperations Agreement to the Banktor review by Dec 31, 1990 and havethe agreement conclided with SSChy l)ec 31. 1991.

2.10 10 C Dec. 1988 1992 A maiagement and organizationstudy for SSC would be completed byDcc 31, 1988.

2.11(a) 10 C June 1989 1992 A sewerage tariff study would be Study delayed incompleted by Dec 31. 1988 and the line with overallrecommendations would be project delays,implemented by June 30, 1989. hence

recommendationdelayed

2.11 (b) 2 C - - Sewerage charges agreed with the Once a tariffBank would continue to be system wasimplemented for commercial and implemented,industrial consumers. Borrower showed

increasing resolveto ensure financialsustainability asshown in SSPIIcommitments

2.12 10 C Dec. 1988 1992 A lluangpu River Basin study would Delays due to databe completed by Dec 31, 1988. availability and

inexperienceBorrower

2.13A to C Dec. 1989 1992 Sewer system rehabilitation studywould be completed by Dec 31,1989.

2.14 6 C Dec. 1988 1992 New pollution control regulationswould be enacted by Dec 31, 1988.

3.01(b) I C - Annual financial statements of SSCand auditor's reports on accounts ofSSC, SSPCC, withdrawals on thebasis of SOEs and the SpecialAccount would be fumished to theBank within six months after the endof each fiscal year.

3.02 I C Dec. 1988 Dec. 1995 SSC' would complete and incorporatein its books an inventory andvaluation of its fixed assets by Dec31. 1988.

3.03(a) 2 C FY 1992 FY 1994 For each FY after FY1992, SSC'srevenues should at least cover itsoperating and maintenance expensesand the larger of either depreciationor total debt service.

3.03(b)(c) 2 C - - Before Sept 30 of each FY, SSCsholoid fumish to the Bank result ofreview re compliance with 3.03(a) onthe basis of forecasts prepared, andtake all necessary measures in orderto meet the requirements.

3.04 2 C 1987 1994 Limit further debt unless areasonable

- 19-

Cove- Original RevisedAgree- nant Present fulfillment fulfillmentment Section type status date date Description of covenant Comments

forecast shows that SSC's net revenueis at least 1.3 times its maximum debtservice requirements.

Credit Sched. 3. 5 C - - Consultants satisfactory to the Bank ConsultantsSection 11 would be engaged on a continuous engaged

basis to advise on detailed design, throughout project.preparation of contract documents, Performanceconstruction supervision, and satisfactoryconducting of project-related studies.

Covenant types Present status:I = Accounts/audits 8 = Indigenous people C = covenant complied with2 = Financial performance/revenue 9 = Monitoring, review, and reporting CD = complied with after delay

generation from beneficiaries 10 = Project implementation not CP - complied with partially3 = Flow and utilization of project funds covered by categories 1-9 NC = not complied with4 = Counterpart funding 11 = Sectoral or cross-sectoral5 = Management aspects of the budgetary or other resources allocation

project or executing agency 12 = Sectoral or cross-sectoral policy/6 = Environmental covenants regulatory/institutional action7 = Involuntarv resettlement 13 = Other

- 20 -

TABLE 11: COMPLIANCE WITH OPERATIONAL MANUAL STATEMENTS

No significant "lack of compliance" from applicable Bank Operational Manualstatements has been identified.

TABLE 12: BANK RESOURCES: STAFF INPUTS

ActualStage of project cycle Weeks $'000

Through appraisalAppraisal-Board 161.6 415.6Board-effectiveness

Supervision 97.9 280.3

CompletionLa 5.0 15.0

Total 264.5 710.9

La Estimate.

- 21 -

TABLE 13: BANK RESOURCES: MISSIONS

Performance ratingSpecialized

Stage of project cycle staff skills Imple- Devel-Month/ No. of Days represented mentation opment Type ofyear persons in field /a & status objectives problems

Through appraisal Sep. 1986Appraisal through Board Apr. 1987

ApprovalBoard approval through Mar. 1988

effectivenessSupervision

Apr. 1988 1 2 E I INov. 1988 l 5 E - -

May 1990 I E I IJan. 1991 2 5 EC, F I INov 1991 2 9 E. F I I

May 1992 3 11 ME, E, EE I I

Oct. 1992 4 20 ME, F, EE, I IEC, IN

Dec. 1993 5 ME, E, EE, I IEC, RE

Jul. 1994 4 ? ME, E, F, RE, 5 45TS

Feb. 1995 3 10 ME, F, E 5 5

CompletionFeb. 1996 4 1 EC I IApr. -Jun. 3 1 E, F, EE I I

1996

/a E: Sanitary EngineerEC: EconomistEE: Environmental SpecialistsF: Financial AnalystIN: Institution SpecialistME: Municipal EngineerRE: ResettlementTS: Tunnel Specialist

lb Borrower involved in two Bank-supported follow-on investments (Loans 3711 and 3987) both of which support expandedwastewater infrastructure. Considerable indirect supervision through cost-effective Borrower dialogue as part of projectpreparation benefited both direct supervision of SSP and formulation of follow-on investments.

- 22 - ANNEX I

ANNEX 1: PROJECT REVIEW FROM THE BORROWER'SPERSPECTIVE

1. The Borrower provided substantive and constructive comments on the draft ICRduring discussion with the Bank mission in Shanghai during February 1996 and insubsequent correspondence dated April and May 1996.

2. The Borrower submitted an Implementation Assessment Report. This is shownbelow.

PROJECT COMPLETION REPORT FOR SHANGHAISEWERAGE PROJECT (PHASE I)

I. Successes

Shanghai Sewerage Project (Phase I) (SSPI) is the first environment project financed bythe World Bank in China. The objective of the project is to deal with the water pollutionin the urban section of the Suzhou Creek. The main content of the project is to constructthe intercepting facilities and sewers to collect the wastewater from the service area of70.57 km and convey the wastewater to Zhuyuan near the Changjiang estuary forsubmarine discharge after the preliminary treatment. The construction of the projectcommenced in August 1988 after the preparation of about four years, and in the end of1993 the main body of the project was put into commissioning, and up to the end of 1995the construction of the whole project was completed except the Outfall Tunnel No. 2.The relative successful implementation of the project has been made. The main successesare as follows:

1. Preliminary results of treatment of the Suzhou Creek have been obtained. Theengineering facilities of the project were put into operation in 1994. From 1995 on aboutI million cubic meter of wastewater was intercepted every day, of which 90% were fromthe areas along the Suzhou Creek. The wastewater from the service area of the projectwhich was formerly discharged directly or indirectly into the Suzhou Creek is nowbasically discharged into it no more. The water quality of the Suzhou creek has beenimproved to certain extent, dissolved oxygen has increased and the black and deterioratedappearance of the Creek has been essentially eliminated. The demarcation line betweenthe Huangpu River and the Suzhou Creek caused by the difference in the water qualitycan not be clearly seen any more.

- 23 - ANNEX 1

2. The construction quality is relatively good. The project is mainly comprised ofpipeline works with various construction methods including trenching and pipe-embedding, pipe-jacking, shield tunneling and in-situ reinforcement concrete casting afterexcavation. There is soft ground foundation in Shanghai area and geological conditionsare not so good, but, because of adopting appropriate technical measures aiming atconditions encountered, the construction quality of most project components is fairlygood. The civil works and the installation of mechanical and electrical equipment in twomain pumping stations and the preliminary treatment works are of high quality. 85% ofthe project components were evaluated as of high quality based on the statistics of theengineering cost of the whole project. Four project components were awarded goldenmedal by the Municipality for their construction quality. (An additional one is underapproval.)

3. Application of funds is under good control. Both the loan funds and the domesticcounterpart funds were frequently estimated and reasonably applied. Investment-fixingsystem has been introduced and a series of measures have been adopted so as to save thefunds. For example, under the prerequisite of not changing the function of the project,design was optimized to decrease the engineering cost, amount of land acquisition andresettlement was reduced to save the preliminary cost. International and domesticcompetitive bidding were carried out strictly according to the Guideline of the WorldBank, and this also caused the engineering cost under control. It was ensured throughthese measures that the total cost of the project did not exceed the original project budget.Additionally, a part of the remaining loan funds has been applied to the construction ofconnecting sewer systems in six drainage catchments, that is, Guohe, Guangzhong,Yejiazhai, Wuning, Mudugang and Beixinjing catchments.

4. Introduction of some new technology and equipment

Some new technology and equipment have been introduced. For example, thecontract of a section of the main conveyor was won by the joint venture of ZublinCompany of Germany and the Third Engineering Company of the Second NavigationEngineering Bureau of China. In this contract the curved pipe-jacking technique of bigdiameter and long distance has been introduced. The diamneter of pipe is 3.5 meters (m)and pipe-jacking stretches to 1,275 m and 930 m respectively with a plane radius of 620-1000 m. The construction quality reaches good grade. Another example is Peng Yue PuPumping Station. In this pumping station 8 vertical axial mix flow volute pumps havebeen installed, which were designed by the Sulzer Company and manufacturedcooperatively by Sulzer factory in Leeds UK and Shanghai Pump Works. The flowcapacity of each pump is u[ to 5.75 - 7.39 m3/s with a head of 14.65 - 2.21 m, and theefficiency reaches 85.4% - 86.3%. The performance indicators of the pump set come upto advanced standard.

- 24 - ANNEX I

5. Satisfactory and successful land acquisition and resettlement

The land acquisition and resettlement was implemented timely in accordance withthe government's ordinance and regulations to meet the progress requirements of theproject. Also the buildings for resettlement were constructed in advance and theimpacted residents have been well resettled.

6. Successful testing and commissioning for mechanical and electrical equipmentand the whole system

Before the whole was put in to operation, individual and joint testing of themechanical and electrical equipment were carried out, especially in Peng Yue PuPumping Station, Preliminary Treatment Works and Outfall Pumping Station. Theoperation features of the whole system were basically mastered, some necessaryoperation regulations were established and some problems occurred during testing weresolved. Except for the second outfall tunnel which is still under construction, the wholesystem trends toward normal operation after commissioning for more than two years, andI million cubic meters of dry weather wastewater is intercepted and discharged everyday. A more comprehensive and systematic hydraulic test was made about one year afterthe commencement of project commissioning. The test results showed that the efficiencyof pumpsets in Peng Yue Pu Pumping Station and Outfall Pumping Station were superiorto the national standard, pumpsets were running smoothly, can be started and stopped in aflexible, easy and safe way, reaching a relative high level of automation. Vibration andnoise level met the national requirements. The flowing capacity of both interceptor andpressurized culverts were up to the designed requirements.

7. Reduction in impact on environment as much as possible

In addition to good implementation of land acquisition and resettlement, greatefforts were made during preparation of construction method and progress schedule andconstruction period to reduce disturbance and impact on traffic, surroundings and dailylife of residents. After the Project was put into operation, actual inspection and analysisof water quality was made in the Changjiang estuary. The analysis results showed that nochange of water quality can be measured in water area 500 m from the outfall, indicatingthat dilution and dispersion of wastewater discharged is better than the testing results ofmathematical and physical modeling.

II. Problems

1. During construction of Outfall Tunnel No. 2 unpredictable situations wereencountered, a lot of flowing sand together with methane rushed into the tunnel and thetunnel was deformed. Although many emergency measures were adopted the tunnel wasstill facing collapse. so it was decide to stop construction immediately and fill the tunnelwith water to maintain the existing condition. After repeated studies it was considered tobe more reasonable in technique and economy to build a new tunnel rather than to repairit. So this tunnel was blocked and abandoned, and a new one is constructed.

-25- ANNEX1

2. Strict review and control were not applied in some subcontracting of components,so that difficulties in managing was increased. Some contradictions in progress andconstruction quality need to be dealt with.

3. Mechanism transfer of operation administration organization was not carried outsimultaneously with the engineering construction, and the financial independent publicutility company was not established in due time.

III. Experiences and Lessons

1. The World Bank's mature experiences in project management has been integratedwith the actual situations in Shanghai, and the project administration level has beensignificantly raised up, compared with other similar projects.

The World Bank's assistance is obtained from project setting to project construction. Theproject manager and related specialists assigned by the World bank visited shanghai atregular intervals to inspect the project. This gave promotion to the project progressingand instruction to the project management, and also gave much help for the successfulcompletion of the project.

During the period of the project preparation and implementation, assistance from theAustralian consultants were obtained. They provided assistance in preparing for theproject assessment documents and tender documents, and put forward many valuablesuggestions for engineering design and project management.

The Shanghai Municipal Government established specially the Shanghai SewerageProject Construction Company and the Shanghai Sewerage Project ConstructionHeadquarters for the implementation of the project. Based on the actual situations inSlhanghai, the Shanghai Sewerage Project Construction Company organized rich technicallhuman resources to manage the project in accordance with the World Bank'srequirements. For example, International Competitive Bidding and Local CompetitiveBidding were carried out in accordance with the World Bank's Guidelines forProcurement; construction supervision was carried out according to FIDIC Clauses; fundsadministration and payments were made strictly pursuant to stipulations, etc. So theconstruction quality was greatly raised while the construction cost was controlled.

2. The project options were compared repeatedly to make the project morereasonable in technique and economy. If a project is to be implemented, the first thing isto determine the objectives of the project. After determination of the project objective itis quite important to repeatedly compare options to implement the project. During theperiod of the engineering feasibility study and the engineering design of the project, thenumber of pumping station and the type of intercepting facilities were studied andcompared repeatedly, experiences were gained as well as lessons. Where the decisionwas made after considering comprehensively and listening to both positive and negativeopinions, successful results will be obtained.

- 26 - ANNEX I

3. Engineering measure and non-engineering measures should be adoptedsimultaneously, only with method can the treatment of the Suzhou Creek be moreeffective. It was suggested during the period of strategy study that, in addition toengineering construction, some other measures should be adopted. For example,wastewater from factories should be pre-treated before discharging; administration ofnavigation and loading and unloading in docks should be strengthened. Now the projectis completed, but all these measures have not been fully adopted, and this affects theeffectiveness of treatment for the Suzhou Creek. With the economic development ofShanghai in recent years, some tributaries of the Suzhou Creek is further polluted, and thecomprehensive treatment of the Suzhou Creek should be continued.

SIIANGIIAI MUNICIPAL SEWERAGE COMPANY, LTD.-FINANCIAL PROJECTIONS

INCOAIE STATrAIENrf 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

VW

Sewer revenuie 73,060 76.510 101,968 312,781 471,174 5317.243 612,013 66118,84 1,021.676 1,045,563 1,182,376

SMWC Public Utility Additional Tax 0 0 4 5840 52,167 58,545 64.377 70,169 76,051 22,242 88,946 96,208Z

OPERLATING RVNE73,060 76,510 - 149,808 -385)152 529,719 601.620 -- 702,184 744,935 1,103,917 1,134.509 - 1.279.835;

Personnel 7,7 18 20,326 38.1 52 42.196 45,782 51)366 58,483 62,109 66,301 70,412 75,451

chemicas 0 0 0 0 0 0 0 0 0 0 0

Utiilitie 12,979 23.418 34,968 42,562 48.412 61,125 78,930 90,892 104,759 117,529 137,026

Materials 26,464 53,857 87,692 98,816 109.170 121,870 184,274 197,146 210,905 225.612 264,242

Taues 0 0 0 12,111 17,433 19,878 23.385 24,749 37.802 38.686 43,748

other 66,587 97,924 61,500 68.019 73.800 78.966 84,099 899,313 94,851 100,731 106,977 -

Lems:ecapitatired 0 0 0 0 0 0 0 0 0 0 0

OPERtATING EXPENSE SUBTOTAL 113,748 195,525 222,3 12 263.926 294.598 335,205 429,170 464,208 514.618 552,970 627 443

_ _ _ _ --- ,------~~ ~~~ ~~ ~~~~~~~~~~~~- - -------------- - -------- - - ,- - - - - . - - - - - - ~ ~ ~ 1 .OPEtVIENIUE LESS E.XPENSrI SUBTOTAl. (40,6801) (119.015) (72.504) 121.227 235.121 266,415 273,014 280,726 389,300 581,339 651,140

Losuseon Receivables 0 0 2.079 6.656 9,423 10,745 12,640 13.378 20,414 20.911 23,648 --- -- - - -- -- --- -- . .. .. . -- -- -- .. .. .. -.--------- -----

OPEPATING EXPENSE 113,748 195,525 224.191 2 70,581 304,021 34 5,949 441,811 4 77,586 535,031 573,882 651,091

Prour period adjustments 0

INCOMEIBEFOR1E DEPRECIATION (40,688) (I119,01 5) (74,183) 114,571 22 5,698 255,670 260.373 267,349 568,866 560,628 627,493

Depreciidion 21,838 20,192 74,378 150,593 186,554 216.542 253,844 384,626 512,487 531,712 593,047 i

--.. ..-... . .. ... .. .. .--- -- -. .--- - -. .-- -- --.. -.. .. . .-... . . .. . .. . .. . ..-. . - --- - --

OPERLATING INCOME (62,526) (139.207) (148.961) (16.022) 39.1411 39,129 6,529 (117.278) 56,379 8,916 34,445

Intferes espense 33,250 45,1 30 44.513 60.043 01,517 101.473 127,496 149,610 157,318 151,797 147,21I5

Commitment fees 0 0 9731 13,011 10,61'? 7.216 8,469 5,8159 3,730 2.868 15,501

Stornwater contributilon 610,339 109.340 52.243 59,129 65,131 74,102 95,360 103,273 112.052 120,857 137,168

SMG Subsidies 31.250 45,430 189KW1 32.000 0 0 0 0 0 0

Non-operating revenue 6,04 7 4,813 4,081 5,399 5,8 57 6,268 6,675 7,089 7,529 7,995 8,491- . . . .. .. . .. . .. .. . .. . .. .,... . .. .-.-.. .. .. . .. . .. .-... . .. . .. .. _ . .. .. . .. . .. .. . . . .. .- - --- -- -

NET INCOME 5,880 (25,034) 51.679 (12,568) 17,988 10.809 (27,391) (162.384) 14.911 (16,897) 17,387

SIIANGII %I MUNICIPAL. SEWERAGE COMPANY, LTD.-FINANCIAL PROJECTIONS

DAIANCE SHEET 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Fixed assets 791,473 779.0(14 4.064.504 5.267.06.5 6.142,211 7063.535 11,375,987 14.894,822 16.032.209 i7,243,620 18.507,375

Accumsulated deprmciation 121,847 144.039 218.417 369.010 555,564 712,1 05 1.02 5,949 1.4 10.576 1.923.063 2.474,775 3.067,022

Net fixed assets 657,626 635,76,5 3.846, 007 4.898.855 5,506.647 6,291.4 30 7.349,938 1 3.484.24 7 14,109,147 14,768,846 15.439.553

Work in progress 2,250,630 3.006,161 1.5 180661 2.49 7.400 3,3088100 4,633,300 5,513.600 667,400 1,420.000 1,720,300 2.554,900

Othser long termtasscts 0 0 0 0 0 0 0 0 0 0 0

Ulnrestricted cashr 3 1,020 42,8 2 I 8 7,96.7 151.7 53 200,900 437,572 600,606 735,021 966,025 1,211,455 1.537,261

Deposistt 0 0 0 0 0 0 0 0 0 0 0

Accountos receivable 7,917 4.92.1 7,003 6.656 9,42 3 10,74 5 12,640 1 3.378 20,4 34 20,911 23,648

PNovisiots for dotablful receivables 0 0 (2.079) 10,735) (10,159) (20,903) (4 1,544) (54,921) (75,3 55) (96.266) (119,914)

Inventory 8.606 0,(177 13.0 17 14.6'l1 16,230 10,416 27,396 29,3 10 3 1.356 33,542 39,285

Other cxttrren assets 1,634 1,4 72 1,670 1.056l 2.014 2.155 2,295 2.4 37 2.588 2.749 2.919

TOTAL CURRENT ASSETS 50,053 57.2327 107(600 166.72 . 290,417 4.79,984 601,393 72 5.225 945,047 1,172,391 1,483.199

--- - -- - --- ---- - - - -- - --- ---- ---- --- ----- ---- --- ----- - - ---- --- - --- --- ---- --- - - - - - - _ -- ---- _ --- ---- --- ---- ----

TOTAL ASSETS 2,958.313 3,699,15 3 5,49Z.340 7.562.479 9,265,164 11.364,714 13.464.931 14.8 76,071 16,474,994 17,661,536 19.477,652 00

Accounts payable 25,041 4 3,907 46.23 7 5 2. 570 58,093 66,272 87,197 94,741 103,067 111,443 127,604

Long fermtdebt0,cuffenl 86,803 86.003 86.803 86.803 86,803 86,803 106.803 316,803 316,803 316,803 386,803

Shotitesstloass 0 0 0 0 0 0 0 0 0 0

Other cufrent liabilities 9,734 1.1.31 70.000 II .(60 12.000 12.840 13,675 14,523 15,423 16,319 17,395

TOTAL CURRENT LIABILITIES 12 1,578 13 1.921 143,040 150.441 156,896 165,915 207,67 5 426,066 435,293 444,625 531,802

L.rng tcrrm debl,Iotrg tennm 81.934 972,676 1.02 5.11 7 1.430.5 26 1.666,707 2,032,236 2,4 50,4 21 2,409,667 2,456,742 2,254,766 2,183,330

Vrpo'ils 0 0 0 0 0 0 0 0 0 0 0

TOTAl. L.IABILITfIES 940,512 1,104.54 7 1.160.157 17500.967 1,023.603 2,90.,152 2.666.095 2,91 5,2 34 2.092.036 2,699,390 2.7 15,132

I 9wty' 2.017,801 2,594,606 4,32 3,991 5,901.512 7,44 1.560 9, i66,562 10,798,016 11,961,130 i13,582,950 14,962.146, 16,762.520

Other 0 0 0 0 0 0 0 0 0 0 0>

-- -----............. --- --..... . .--------- - --- . - ---------. --.. . . -- .----- --- ---- ------------.- -.- .-----.. .

TOTAL EQUITY ANT) LIABILITES 2.958.3 13 3.699.1 53 5.492.1408 7.562.4 79 9,265,164 11.364.7 14 13.464,931 14,876,871 16,474,994 17,661,536 19,477,652 ~

Equjity + L.iabililies - Assels 0 0 0 0 0 0 0 (01 (0) 0 0

SIIANGHAI MUNICIPAI. SEIVERAGE COMPANv, LTD.-FINANCIAL PROJECTIONS

SOURCE AND APPLICATION OF FUNDSYooo IS93 I99J 1995 1996 l"7 199S 1999 2000 2001 1002 2003

Incoanebeforedqwecialion (40,688) (119p01S) (74.583) 114.571 225,698 255,670 260,371 267,349 56t,t66 560,628 627,493

SMGStrmwateContuibution 60,359 109,340 52,243 59.129 65,134 74,102 95.360 103,273 112.052 120.857 137,168

SMGSubsid(a 33.250 45,110 189.000 32,000 0 0 0 0 0 0 0

Non-operMi,g income 6.047 4,833 4,881 5.399 5,857 6,268 6.675 7,089 7,529 7,995 8.491

INTERNALCASHIGENERATION 58,963 40,288 171,542 21;1.099 296.688 336,040 362,403 377,711 68S,446 689,480 773,152

Amoulizalion 86,801 86,801 86,S01 8(6,803 86,803 86,803 86,803 106.803 316,803 316,803 316,803

Inacrestexpense 33,250 45,130 44,513 60.0t1 81,537 101,473 127,486 149,610 157.318 151,797 147,215

Commitmal fees 0 0 971 13,031 10,609 7,216 8,469 5,859 3,730 2,868 15.503

TOTALDEDTSERVICE 120,05! 131,931 112.2S7 159.877 171t,949 195.492 222,758 262.271 477,851 471.463 479,521

Workintg aital d 9,155 (14,177) 5.233 (11 105) (10.139) (14.208) (18.861) (17.293) (13.540) (25,544) (28.704)

CONTRhIBUTIONTOINVESTMENr (70,240) (77.468) .14.021 62.127 127,87S 154,756 158,511 132.732 229.136 243,557 322.336

_ …. __... ..... --.----.. .- …------ - ..... ...... ............ _ --_-_ * *- - - --- ---

Capital ecpendulure 846,631 753,362 1.817,200 2.162.100 1,765,0.16 2,166,525 2,192,652 1,672,735 1,890,787 1,510,911 2,098.354

Purchase(Sak)lng lcin assets 0 0 0 0 0 0 0 a 0 0 0

Capitalied interest 0 0 0 0 0 0 0 0 0 0 0

TOTAL INVESTMENTCOSTS U46,631 753,362 1.817.200 2,162,100 1,765,046 2.166,525 2,192,652 1.672,735 1,990,767 1,510.911 2,098,354

REQUIREDFINANCING 916,S71 831,330 1.781.179 2.99.7713 1.637,168 2,011,769 2,034,141 1,540,003 1,661,651 1,267.354 1,776.019

. ...... - -------- - - - --------- - - - - -------- - ----- - ------------------- ------------------ ------------------- - - --- _ - ---- ----- ------------- - -- ----- _ _ . _ - -- - -

Ioans 274,231 240,495 139,494 492,012 322,984 452,332 532,937 348,049 283,878 114,826 315,367

IkpDnils 0 0 0 0 0 0 0 0 0 0 0

F4uily&resencscool,,butions 657,187 601,819 1,677.706 1.670.08A 1.412.060 1,714.193 1.659,665 1,324.636 1.606.909 1,396.084 1.782.9t7

TOTAL FINANCING 931,418 842,334 1,817,21t0 2,162.100 1,765,045 2,166,525 2,192,652 1,672,735 1.890,787 1,510,911 2,093,354

CIIANGEINCASII 14.547 11,004 34.021 62,327 127,877 154,756 156.511 132,732 229.136 243,557 322.336_ .. .. _. .. _ .... .__,............. _ .__ ............_._._ _ .....- - - - - -_....... ............ _..._.__... ........................... _.___..._.

SHANGIIAI MUNICIPAL SEWERAGE COMPANY, LTD.-FINANCIAL PROJECTIONS

rfr*mRIANCF. Ml)2 CAIN2Sia I 1"i 1'191 I"s 19% n1n7 I" m aa an an

, _ _ _ _~~~~. , ............... ._. ... _ . .......... .. ...... _ .. __.. ___...........

WAIr AMED SF:WAGE

Water-Mud t.31y) 1.351 1.400 1,45S 1,501 1,549 1,592 1,629 1.644 1,693 1.724 1,756

6fidSeVSargg8ies 835 S17 836 340 P42 U1 U45 847 MI 850 352W Ja AtaceiWSa 2.135 2,237 2.293 2.343 2.390 2,435 2,474 2,49 2,541 2.574 2,608

NillableWaaerwaQmamhisi(Mm3/y) 2.004 2,052 2,105 2,1S2 2,19h 2,238 2,275 2,291 2.338 2,369 2.400

Pcata BiiMW 45% 42% 55% 61% 63% 64% 64% 64% 65% 65% 66%

Actv.Nybifed(M3/y) 907 t61 1,162 1,147 1,319 1,429 1,463 1,477 1,521 1.550 1,578

Adj.sekdCa2Cecim Raio 907 863 1,139 1,320 1,361 1,400 1.434 1,447 1,491 1,S19 1.547

FINANCIAL(Ilhiodicatai cwm nsima koed 2993 1994 1995 1996 1997 29S 1999 2000 2001 2002 2003

vow(Fpertins grre 73.060 76.510 149,SI0 3l5.152 529.719 601,620 702,124 744,935 1,103.917 1,134,509 1.273,583

Opceingi u 113.743 195,525 224.391 270.581 304.21 345.949 441,811 477,586 535,051 573,U32 651,091

D er ion 21.D3A 20.192 74.378 150.91 1236.554 216.542 253,844 334,626 512,437 551,712 593.047

Dch service 120,053 113.931 112.237 1299.77 178,949 191,492 222,758 262,271 477,851 471,463 479.521

SNIWC Pubic tility Tax 0 0 4i.840 '.t67 S.545 64,377 70,169 76,051 32,242 31,946 96,208 W

SMG Stomuwen Contribuhion 60.159 109,310 52,243 59,129 65.134 74,102 95.360 103,273 112,052 120,357 137,163

SMGSubsWidi 31,250 45,130 159,000 32,0(X0 0 0 0 0 0 0 0

Non-perating Rcvcnuc 6,047 4,833 4.R2I 5.199 5,857 6,268 6,675 7,089 7,529 7,9s 8,491

SNiG Contributiions 4 Non-opeating Revenuie 9,656 159.103 246.125 96,52R 70,990 50,370 102,035 110,362 119,580 122,852 145,659

Opcraingrevenue 4 Stbsidies+ Other Incomne 172,716 235,813 395.933 481,630 600,709 632,989 804.219 855,297 1,223,493 1,263,362 1,424,243

It comverage objeciive 269.817 367.018 396t364 478.421 536,655 600.090 731,396 818,539 1,156,257 1,286,790 1,274,468

Debtawrvicecoverageralio 0.49 (231 1.30 1.32 1266 1.72 1.63 1.44 1.44 1.46 1.61

Operating Expnse + Debt Service 233,801 327.458 156,678 430,458 482,970 541,442 664,569 739,858 1,012,902 1,045,349 1,130.611

Opeating Expense + Depreciation 135,536 215.717 293,769 421.174 490,575 562,491 695,655 862,213 1,047,533 1,125,594 1,244,138

MaxmofO&M+ Dep'n orO&M + Debt Service 233,801 327.458 356,673 430.453 490.575 562.491 695,655 362,213 1,047,538 1,125.594 1,244,13

Operating Expense+ Depreciation + Debt Servi 255,639 347,650 431,057 581,051 669.574 757,983 912.413 1,124,484 1,525.359 1,597,061 1,723,659

Capital Contribution (% 3 year rolling average) 0% 0% 0% 0% S% 5% 5% 5% 10% 10% 10%

Capital Contribition 0 0 0 0 3(9S' 102,070 100,532 95,936 169,148 123,335 210,238

Cash Expenses +Capiial Co;trtibulion Objecliv 233,801 327.1sR 1512415 441.S61 594.6 I' 657,721 783,961 853,086 1,200,590 1,254,229 1,369,554

Rate of returai objecfive 33,377 32,335 112,046 218,624 262,115 296,952 341,034 520,855 689,335 721,950 755.210 zOp. Exp+ Deprt+ Debt Servicc RoR 289,016 379.985 543.103 799,674 931,6( . 1,054,935 1,259,447 1,645,339 2,215,224 2,319.011 2,478,369 z

- - -- - - -- -- . . .. .. .. .. . .. ... . .. .. .. . ... .. .. . .. . ..

Sliangihai Municipal Scvcrage Comipany - Financial Projections

PERFORMANCE INDICATORS 2 1993 1994 1995 1996 1997 1993 1999 2000 2001 2002 2003

FINANCIAL (all indicators current unless noted)

Intenmal Cash Generation 58,968 40,288 171,542 211 t99 296,688 336,040 362,408 377,71 1 688.446 689,480 773,152

Increase inWorkingCapital (9.155) 14,177 (5,211) 11.105 10,139 14,208 18,861 17.293 18,540 25,544 28,704

Cash Balnce 31,820 42,874 87,961 151,751 280,908 437,572 600,606 735,021 966,025 1,211,455 1,537,261

Opcrating income, aAer deprcciation (62,526) (139,207) (148,961) 16.(0272) 39.144 19,129 6,529 (117,278) 56,379 8.916 34.445

Net income, afkerdeppeciation 3,880 (25.0 1.) 51.679 (12 568) 17 989 10.809 (27,391) (162,384) 14.911 (16,897) 17,387

Rateofreturn 5 6% 3 1°. 4 3% 1 4% 2 1. 2 0% 1 6-. -0 I-1 1 3% 1.0% 1.2%

Capital expenditures 846.631 751.8(2 1,817,200 2,162 tOO 1,7(6.04e. 2,166,525 2.192,652 1,672.715 l,890.787 1,510,911 2,098,351

Capital expenditures (real terms) 994,791 753,062 1,S94.01s 1.714.809 1,290.227 1.480,097 1,406,522 1,010,368 1,075.401 809,174 1,058,175

Long ter,n borrowing 274,211 240.495 139,494 492.012 322,984 452,332 532.987 348,049 283,878 114.826 315,367

DebtOulstanding 905,737 1,059.429 1,112.120 1,517.329 1.753,510 2,119.039 2,565,224 2,806,470 2,773,545 2,571,569 2,570,133

Average Triff(V/m3) 0.08 0 09 0 09 0 35 0 35 0 38 0 44 0 46 0 69 0 69 0.76

Average Tariff. incl SMWC Public Utility Tax 008 0 09 0.13 0 29 0 39 0 43 0.49 0 51 0 74 0 75 0 83

5yearrollingaverage 010 015 019 025 012 0.40 046 0.53 061 0.70 080 '

Real terms tariff 0 09 0 09 0 08 0 28 0 25 0 26 0 28 0.28 0 39 0.37 0 39

Average (cash)cost per init collected (V/m3) 0 13 0 23 0 19 0 20 0 22 0.24 0.30 0 32 0 35 0 37 0 41

Average costper nitcollected inc. depreciation 015 025 026 031 0.35 039 048 058 069 0.73 079

SKMG Contributions - Slonmwales + Other 93,609 154.470 241.243 91.129 65.114 74,102 95,360 103,273 112,052 120,857 137,168

SNIG Contribulions - Stortnwater + Other (V/m 0 10 0 18 0 21 0 07 0 05 0 05 0 07 0 07 007 0.0S 0 09

SMIG Contributions - Stormwater + Other (real t 109,991 154,470 211,617 72,276 47,612 50,624 61,170 62,379 63,730 64,725 69,172

SMWC Public Utility Tax (real terms) 0 0 40,210 41,534 42,796 43,980 45,012 45,936 46,776 47,635 48,516

Wolking ratio 1 6 2 6 1.5 0.7 0.6 0 6 0 6 0.6 0.5 0 5 0 5

Operatingratio 1 9 2.8 2 0 1.1 0 9 0 9 1 0 1.2 0 9 1.0 1.0

Cunren ratio 0 4 0 4 0 8 1 1 1 9 2 7 2.9 1.7 2.2 2.6 2 8

Contribution to invesiment -83% -103% 1.9% 29% 7 25 71% 72% 7.9% 12.1% 16.1% 15.4%

Contribution lo inesiment (3 yr average) -9.8% -648° 2.2% 33% 613% 76% 7.9% 6.9% 13.S% 133% 15.3%

Accounltseeeeivable/Average monthly nlcs 1.3 08 10 0.6 07 0.9 10 1.2 1.1 13 1.5

DebLffDbte4-E"uity) rtio 29% 27-. 19% 19% 1R5. 18% 19% 17% 15% 13% 12%

Price deflalor LI18 I n0 0 88 0 79 0 71 0 68 0 64 0.60 0.57 0.54 0.50_ _ _ _ _ _ _ _ _ _ _ _ .. ~~~~~~~~~- -- -- -------- --.------- -- --- -- - .. . - - -

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Repcr t. No: 1 584eTy pe: ICR