Italian Trust Fundfor Environmental Protection in China

Annual Report

(July 2, 2004 – June 30, 2005)

Prepared by the World Bank

Summary

The TF administrative agreement was signed by the Ministry for Environment and Territory of Italy (IMET) and the World Bank on July 2, 2004 at the first meeting of the Steering Committee of the Italian Trust Fund for Environmental Protection in China (the TF). At the same meeting, three study projects in support of the Chinese government in strategy and policy making and the co-financing of Heilongjiang DairyProject were approved by the steering committee. Please see the attached file on the general information of the TF and the members of the Steering Committee.

During the report period from July 1, 2004 to June 30, 2005, the grant agreements of three study projects have been signed between the World Bank and the Government of China (GOC) through its window agency Ministry of Finance. The procurements of consulting services from consulting firms/institutesfor green national accounting (with SEPA) and circular economy (with SEPA and NPC) studies have been completed. Both projects are in inception phase and their inception workshops will take place in July, 2005 in Beijing. The procurement of consulting services for the national climate change study (with NDRC) will be completed in July 2005.

The preparation of the co-financing project, i.e., the climate change component in the Heilongjiang Dairy Project, has been completed and the component has been appraised, together with the entire lending project. The grant agreement for the Italian TF co-financed climate change component has been drafted. However, the final processing and Board presentation of the project has been postponed to the first quarter of the Fiscal Year 2006 due to the need for the Bank to reach agreement with the GOC on the on-lending terms for the loan part of the project.

Several candidate projects for blended or stand-alone operations in the second tranche of the TF have been carefully examined. Two of them have emerged as a strong candidate – Xi’an Urban Transport Project and National Railway Environmental Management Pilot project. With the support of IMET, the TF has obtained additional $159,000 from Italian Consultant Trust Fund at the Bank to hire Italian consultants to conduct analytical studies for the two projects.

In addition, the Harbin Municipal Government (HMG) in HeilongjiangProvincehas expressed an interest in a World Bank loan with a grant from the TF on ecological restoration. The first draft of the project proposal, consisting of the components of desertification control, wetland protection, reforestation, and urban green areas, was reviewed and endorsed by the municipal government in late 2004 and then reviewed and commented by Heilongjiang Provincial Development and Reform Commission. The scope of the proposed project, however, has since been going through a significant revision based on the commentsemphasizing on higher project financial return. HMG staff is seeking the advice from the Bank and others on the new scope of the proposed projects which may include eco-tourism, circular economy and an environmental industrial park.

The disbursement of the TF is summarized in table 1 below.

Component / TF # / Grant amount / Committed / Disbursed / Notes
1. Study component / TF053532
1.1 Green accounting / TF054326 / $350,000 / $350,000 / $35,000 / Initial deposit based on grant agreement
1.2 Climate change / TF054327 / $750,000 / $750,000 / NDRC is coordinating with MOF to set upa special account
1.3 Circular economy / TF054538 / $900,000 / $900,000 / $90,000 / Initial deposit based on grant agreement
2. Co-financing component / TF053533 / $5,500,000 / Grant agreement to be signed together with loan agreement (scheduled in Fall 2005)
3. Project preparation component / TF053531 / $752,400 / $92,938 (as of June 10) / For the costs of Bank staff and international consultants* for preparing projects
Total / $8,252,400** / $217,938

* Douglas Johnson, Eliano Russo, Mario Lazzeri, and Cristiano Piacente.

** The difference between $8.5million and the total available amount is the administrative fee charged by the Bank.

Implementation of study projects

The funding proposals of three study projects - green national accounting, climate change program, and circular economy -were finalized in the fall of 2004 based on the feedback from international consultants and World Bank staff. Procurement plans and grant agreementsbetween the Bank and the Government of China (GOC)on those studies were prepared, signed and countersigned thereafter. NPC’s circular economy legislation study is the first one to complete its procurement of consulting services in April although it started later than the others. SEPA’s green accounting and circular economy policy studies selected consulting firms and signed the contracts with them in late May. NDRC’s climate change study was delayedabout half year because MOF and NDRC had different views on the scope of the study and it took over 5-months for the grant agreement to be countersigned in April. The project has been catching up quickly since then. Procurement of consulting services will be done in July. NDRC and MOF are working on setting up a special account at MOF for the project.

The inception workshop of the NPC circular economy legislation project has been scheduled on July 4, 2005 in Beijing. The inception workshops of the SEPA circular economy policy and green national accounting studies will be held in July, 2005. The exact dates will be fixed shortly based on the schedule of SEPA officials. The detailed information on preparation and procurement of thesestudiesare shown in the tables below.

Table 2. Preparation of the studies.

Current Status / Milestones
Funding proposal finalized / Grant Agreement signed by WB / Grant Agreement counter-signed by MOF / Consulting firm contracted / Completion date*
Green accounting / Inception workshop in July / Sept 2004 / Nov 19, 2004 / Dec 2, 2004 / May 2005 / December 2006
Climate change strategy / Shortlisted, July 8 deadline for proposals / Sept 2004 / Nov 19, 2004 / April 11, 2005 / July 18, 2005 (expected) / September 2007
Circular economy policy study / Inception workshop in July / Nov 2004 / Dec 27, 2004 / Feb 3, 2005 / May 2005 / February 2007
Circular economy legislation study / Inception workshop on July 4 / Nov 2004 / Dec 27, 2004 / Feb 3, 2005 / April 22, 2005 / February 2007

* as indicated in procurement plans.

Table 3. Procurement summary of the studies

Procurement plan cleared / Procurement notice published / Deadline for proposals / Contracts signed / Firm selected / Lead expert / Int’l consultant
Green accounting / Sept 2004 / Jan 17, 2005 / March 16, 2005 / May 27, 2005 / ChinaAcademy of Environmental Planning / Wang Jinnan / Giorgio Vicini, Haakon Vennemo
Climate change strategy / Sept 2004 and revised in April 2004 / May 2005 / July 8, 2005 / July 18, 2005 (expected) / tbd
Circular economy policy component (w/ SEPA) / Nov 2004 / Jan 17, 2005 / March 16, 2005 / May 27, 2005 / PolicyResearchCenter for Environment and Engineering / Ren Yong / Peter Heck
Circular economy legal component (w/ NPC) / Nov 2004 / Jan 17, 2005 / March 24, 2005 / April 22, 2005 / TsinghuaUniversity / Zhang Tianzhu / Gordon Davis

Preparation of the co-financing component

It was decided at the Steering Committee meeting held in July 2004 that the TF would provide a grant of $5.5 million to co-finance the Heilongjiang Dairy Project. In particular, the grant would be used to fund a climate change component in the project. The project management office completed the feasibility study of the climate change component in the fall of 2004. The Bank hired Prof Douglas Johnson as a consultant to help review the design of the component. The Heilongjiang Dairy Development project including the Climate Change Component was appraised by the Bank in April, 2005. However, the final processing and World Bank Board presentation of the project has been postponed due to the need for the Bank to reach agreement with the GOC on the on-lending terms for the loan part of the project. Present expectations are that this issue will be resolved and the project will be presented to the Board of Executive Directors of the World Bank in the first quarter of FY06.

Identification of candidate projects for co-financing or stand-alone

Based on a decision made by the TF steering committee, the World Bank team has been working with Chinese government agencies and relevant World Bank units to identify candidate projects for co-financing and/or stand-alone environmental projects in the second tranche of the TF.

A number of government agencies and Bank units expressed their interests in obtaining the support of the TF in their new projects. Several proposals have been carefully examined. They include Taiyuan Urban Transport Project, Xi’an Urban Infrastructure Project, National Railway Environmental Management Project, Guiyang City Circular Economy Project, and Harbin City Ecological Restoration Project. Two of them– Xi’an Urban Infrastructure Project and National Railway Environmental Management Pilot project – have emerged as a strong candidate for co-financing.

TaiyuanUrban Transport Project. The project was originally on the FY06 list of World Banklending as agreed between GOC and the Bank in the spring of 2004 and was proposed by NDRC at the steering committee meeting as a candidate for the co-financing of the TF. IMET further agreed with the city late 2004 to fund a feasibility study of an air quality management component. The World Bank team has had a couple of project preparation missions to the city since then. The preparation of the project, however, has been very slow partially due to low local commitment. The project wasdropped into FY08 at the recent lending program negotiation between the Bank and GOC in April. Therefore, the Bank team recommends not considering the project at the stage.

Xi’an Urban Transport Project. The project has been advanced due to the strong interest and commitment of the municipal government. It is now a FY07 standby project. The local government is interested in air pollution control. There is a transport-related air quality management component under preparation. The TF helped to request and provide an Italian consultant TF (from IMET) of $88,000 to hire an Italian firm to conduct a study for the component. The project emerges as one of candidates for co-financing.

Railway sector environmental management pilot study/project. The Bank has had two national railway lending projects with China Ministry of Railway (MoR) and the third one is under preparation. MoR is proposing to the Bank a pilot project on improving environmental management of the railway sector. Such a pilot project has a potential to link to a large APL project for railway development. The TF helped to requestand provide an Italian consultant TF (from IMET) of $70,000 to hire two Italian consultants to conduct a study on strategic environmental assessment for the railway sector. The follow-up railway project from the pilot project can be another strong candidate for co-financing.

Project proposal from Harbin. The Municipal Government of Harbin (HMG), the provincial capital of Heilongjiang,has expressed an interest in a World Bank lending project blended with a grant from the TF on ecological restoration. The first draft of the project proposal, consisting of components of desertification control, wetland protection, reforestation, and urban green areas, was reviewed and endorsed by the municipal government in late 2004 and then reviewed and commented by Heilongjiang Provincial Development and Reform Commission. The scope of the proposed lending project has since been going through a significant revision based on the comments on having higher project financial return. HMG staff isseeking the advice from the Bank and others on the new scope of the proposed projects which may include eco-tourism, circular economy, and an environmental industrial park.

GuiyangCityCircular Economy. GuiyangCityis leading in Chinese cities in promoting circular economy. The city has promulgated a circular economy promotion regulation and an investment plan. City officials have expressed a strong interest in seeking World Bank assistance including loans in this area. The Bank team met and discussed with city officials on the city development plan, especially those projects proposed in the current investment plan of circular economy. It turned out that those project proposals, mainly about industries, industrial parks and other infrastructure, are unlikely to be a good candidate for a World Bank loan. In addition, Guizhou province currently has several World Bank projects under preparation or implementation and it is facing a repayment problem according to MOF. Therefore, the Bank mission concludes to consider GuiyangCitylater when the concerns are addressed. The TF manager has suggested SEPA and NPC to consider GuiyangCity as a possible site for case study of circular economy policy and legislation study.

Italian Consultant TF

With the support of IMET, the TF obtained additional $159,000 from Italian Consultant Trust Fund at the Bank to hire consultants to conduct analytical studies for the air quality management component of Xi’an Urban Transport Project and the strategic environmental assessment of National Railway Sector Environmental Management Pilot Project. Two Italian experts have been selected to carry out the SEA study. The selection of an Italian consulting firm for the Xi’an Project will be done in early July, 2005.

New MOF representative inthe Steering Committee

Effective in May 2005, Mr. Wu Jinkang has replaced Mr. Yang Jinlin to represent MOF in the committee. Mr. Wu replaced Mr. Yang Jinlin as the division director of Division IFI II (World Bank) of MOF’s International Department in February 2005. Prior to his returning to MOF, Mr. Wu served as the Alternate ED for China at the World Bank. His position at the World Bank has been taken by Mr. Yang Jinlin.

Date of 2005 Annual meeting

Due to the delay in preparing the Heilongjiang Dairy Project and the Climate Change study caused by the reasons given above, the Bank suggested in March postponing the 2005 annual meeting of the steering committee to the fall of 2005. The TF secretariat contacted all the steering committee members and reached a consensus on the decision of the postponing. Now the steering committee meeting is scheduled tentatively in the second half of October. The secretariat will further work with the steering committee to fix the date and venue of the meeting and prepare meeting agenda and documentation prior to the meeting.

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