wb-ho chi minh city environmental sanitation-addition

52664-VN PROJECT PAPER ON A PROPOSED ADDITIONAL CREDIT IN THE AMOUNT OF SDR 58 MILLION US$90.00 MILLION EQUIVALENT TO THE SOCIALIST REPUBLIC OF VIETNAM FOR THE HO CHI MINH CITY ENVIRONM

Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No 52664-VN

PROJECT PAPER

ON A PROPOSED ADDITIONAL CREDIT

IN THE AMOUNT OF SDR 58 MILLION

(US$90.00 MILLION EQUIVALENT)

TO THE SOCIALIST REPUBLIC OF VIETNAM

FOR THE

HO CHI MINH CITY ENVIRONMENTAL SANITATION (NHIEU LOC-THI NGHE BASIN) PROJECT

March 11,2010

Vietnam Sustainable Development Unit

East Asia and the Pacific Region

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

FISCAL YEAR

January 1 - December 3 1

ABBREVIATIONS AND ACRONYMS

Additional Financing

Combined Storm Water Overflow

Community Upgrading Plans

Environmental Assessment

Environmental Management Framework Financial Management

Flood Control Center

Ho Chi Minh City

Implementation Status Report

International Development Association

FOR OFFICIAL USE ONLY

VIETNAM

HO CHI MINH CITY ENVIRONMENTAL SANITATION

ADDITIONAL FINANCING (NHIEU LOC THI NGHE BASIN) PROJECT

CONTENTS

Project Paper Data Sheet 1

I Introduction 2

I1 Background and Rationale for Additional Financing 2

I11 Proposed Changes 6

IV Appraisal Summary 9

Annexes: Annex 1 : Results Matrix 13

Annex 2: Financial Management and Disbursement 15

Annex 3: Procurement 16

Annex 4: Summary o f ISR Ratings 22

Annex 5: Project Description 23

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties I t s contents may not be otherwise disclosed without World Bank authorization

Project Paper Data Sheet

Date: March 11, 2010

Country: Vietnam

Project Name: Ho Chi Minh City

Environmental Sanitation (Nhieu LOC - Thi

Nghe Basin) Project

Original Project ID: PO52037

Team Leader: Dean A Cira Sector Directorhlanager: John Roome/

Hoonae Kim Country Director: Victoria Kwakwa Environmental Category: A

Borrower: Socialist Republic of Vietnam

Responsible agency: Project Management Unit, Department o f Transport, Ho Chi Minh

Revised estimated disbursements (Bank FY/US$m) (Original project T AF)

Current closing date: June 30, 2010

Revised project development objectives/outcomes: Not Applicable

[ 3 Loan [ XI Credit [ ] Grant

For Loans/Credits/Grants:

For Additional Financing

Total Bank financing (US$m.): $90.0 (equivalent)

Proposed terms: Standard IDA Credit terms with total maturity o f thirty-five years

including a grace period o f 10 years

Financing Plan (US$m.) (AF) Source

I Introduction

1 This Project Paper seeks the approval o f the Executive Directors to provide an additional credit in an amount o f SDR 58 million (US$90.00 million equivalent) to the Socialist Republic

of Vietnam for the Ho Chi Minh City Environmental Sanitation Project (P052037; CR3475-VN)

2 The Project Paper also seeks the approval of the Executive Directors to grant a waiver to the eligibility requirements under paragraph 1.8(c) of the Procurement Guidelines to allow for

the credit to finance a contract to be awarded to the Sai Gon Water Corporation (SAWACO) to complete the sensitive and critical temporary bypass and relocation of a two meter diameter water main The estimated cost o f the proposed contract, which i s to be awarded by Direct Contracting, i s US$2.5 million SAWACO i s a state-owned enterprise that i s legally and financially autonomous and operates under commercial law However, it i s a dependent enterprise o f the Ho Chi Minh City People’s Committee, and as such, does not meet the third eligibility criterion under Paragraph 1.8 (c) o f the Procurement Guidelines The waiver request was endorsed by the Managing Director on February 10,201 0 The use of Direct Contracting for the award o f this contract has already been cleared by the Bank’s Operations Procurement Review Committee

3 The additional IDA Credit would bridge a financing gap resulting from a combination of slow implementation during the project’s early years and the high inflationary period of 2007-08

In addition, an extension o f the closing date to December 3 1, 201 1 i s required so that all outstanding works can be completed and allow for the Project Objectives to be met

4 During the period of 2007 and 2008, particularly, world prices for construction materials increased markedly and Vietnam suffered a period of particularly high inflation of such key Construction inputs as steel, cement and labor The revised cost to complete the project i s

consequently estimated at U$317 million compared to the original cost estimate of approximately US$200 million at the time o f the original Project appraisal in 2001

5 To achieve the Project Objectives, therefore, an additional US$90.0 million equivalent of IDA credit i s required O f this, US$5.5 million of the additional financing i s required for the continued construction management and institutional strengthening consultancies, another US$29.0 million i s required for the Wastewater Collection Component, and US$55.5 million i s required to complete the Drainage Component

11 Background and Rationale for Additional Financing

Original Project Objectives and Subsequent Changes

6 The original Credit, in the amount of SDR 127.5 million (equivalent to US$166 million

in 2001) was approved by the Board on March 20, 2001 and became effective on February 3,

2002 The original closing date was December 31, 2007 The Project closing date was subsequently extended to December 31, 2009 and then again to June 30, 2010 to allow time for full processing, signing and effectiveness o f the additional financing

7 The Project’s original development objectives were to (i) achieve sustainable improvements to the public health, particularly o f H o Chi Minh City’s urban poor population, and (ii) increase economic development in the commercial center o f the City These objectives were revised through a project restructuring approved by the Board in April 2009 This change

was made to better align the objectives with the expected and measurable impacts o f the Project

8 The revised PDO i s to reduce the incidence o f flooding and increase the collection o f wastewater in the Nhieu Loc-Thi Nghe (NLTN) Basin in HCMC, in an environmentally and financially sustainable manner

9 The project i s designed to reduce wastewater pollution and the occurrence o f flooding in

the area surrounding the Nhieu Loc-Thi Nghe (NLTN) basin and to develop a more efficient

institution to manage drainage and wastewater services in H o Chi Minh City Located in the central business districts o f the city, the Project comprises a hydraulically integrated system with

65 km o f combined primary and secondary sewers and about 270 km o f tertiary sewers mainly

connecting poor households, which feeds into an approximately 8.4 km long, large diameter, interceptor which runs under the NLTN canal This interceptor delivers effluents to a pumping station, which transfers flows to a temporary discharge point into the middle o f the Saigon River The effluents will be transferred to a wastewater treatment plant in the future

10 In parallel, the Project finances dredging, transportation and safe disposal o f more than 1 million cubic meters o f sludge from the canal along with improvements to 18 km o f canal embankments The Project also provides technical assistance in project design and construction supervision as well as capacity building for the implementing agency and HCMC Flood Control Center When completed, the project will bring direct benefits in the way o f reduced flooding and wastewater collection and its safe disposition to over 240,000 households It will also serve

as a transformational urban project in the city center by turning an open sewer into an important development asset

Status of Implementation

11 Implementation o f the project had been slow and at the time o f the original closing date

o f December 3 1 , 2007 was only about 37 percent ,disbursed However, implementation has picked up as evidenced by the significant progress made in the past year Overall the project i s

now over 70 percent completed Initial delays can be attributed to several factors First, the project took approximately one year to reach effectiveness This slow start was compounded by delays in the approval o f bidding documents by the city authorities who were unfamiliar with the engineering technology and with Bank ICB procurement procedures In addition, the project i s located in the most densely populated central business district o f the city with critical traffic management issues, which has led to a limitation on the hours (night primarily) o f construction and o f the number o f work sites that can be opened at any given time The works progress i s also often affected by difficult removal o f existing underground utilities (i.e., water pipes, power and telecommunication cables)

12 As a result of these delays, the Project’s original closing date of December 31,2007, was extended to December 3 1, 2009, by Bank management in a two stage process (a first extension

of 6 months, and subsequently a second extension of 18 months) The second extension was conditioned on the implementing entity demonstrating solid progress against a set of agreed

implementation indicators, which was largely achieved The closing date was further extended to June 30,20 10, in order to process the additional financing request as a temporary measure before the final closing extension to December 3 1 , 20 1 1 which i s required to complete the works

Contract (Package No.)

Interceptor, CSOs and Outfall

(Package No 7)

Manholes (Package No 7A)

CSOs, Open Cut pipes and

Pumping Station (Package No

Rehabilitation of TLTN Canal

Extension and Replacement of

8)

(Package No 10)

Level 2&3 Sewers

13 Currently there are three major factors which are impacting project implementation First, the Saigon River crossing section of the interceptor was abandoned by the original contractor after encountering technical difficulties with the soil conditions It was agreed that this work would be undertaken by a third party and that process i s now on-going and expected to be completed in September 2010 Second, in order to complete the final section of the interceptor under the canal there i s the need for the relocation of a two-meter diameter water main that crosses the canal As this i s the only water supply pipe for about 4.0 million people, it has taken longer than anticipated for the water company to agree on a methods statement for this diversion However, this work i s now advancing with the fabrication of the diversion pipe and i s expected

JV o f Rotem - Hyundai Corporation, 98%

China State Construction Engineering 64%

Smbo Tosfoc-Cofico Corporation

14 Third, there have been capacity issues with the contractor responsible for the largest contract (Package No 10) which has performed below expectations, although improvements in the dredging and piling have increased and the work i s now considered to be about 70 percent complete This i s the largest contract under the Project The contract was terminated at the end of February 201 0, under the agreed contract extension entitlements The main canal improvement works are completed but there still remain some unfinished work on the contract This includes remaining work o f soils improvement, dredging, canal interface with walls and bridges and final canal landscaping, totaling about US$21 million It i s the expectation that the unfinished work in this contract will be completed by other contractors In order to allow for this, an extension of the closing date to December 3 1 , 20 1 1 , i s required

Progress in Meeting Project Objectives

15 As indicated, the PDO and monitoring indicators were revised (in FY 2009) through a Board approved restructuring to better align the project activities and better measure the overall impact and outcomes o f the project, which are now easier to monitor and evaluate Thus, the objective remains highly relevant and despite delays in implementation the project i s expected to achieve its objectives By project completion, a total o f approximately 8.4 kilometers o f wastewater interceptor and canal improvements (banks and dredging and landscaping) and combined primary and secondary sewers will be constructed This will result in direct benefits to 96,000 households in reduced flooding over a two year storm return period; 240,000 households benefitting from collection and safe disposition o f wastewater; improved water quality o f the NLTN canal as a result o f higher level o f dissolved oxygen; and improved financial sustainability o f wastewater investments through gradual tariff increases In addition, the project

i s located in the central business district o f HCMC, and thus there will be spillover economic benefits from reduced flooding and improved environmental conditions

Compliance with Covenants

16 The project i s in compliance with all covenants In addition, financial management i s satisfactory and there are no overdue or qualified audit reports Procurement i s also moderately satisfactory In addition, safeguards compliance has been rated satisfactory for all relevant policies and there have been no reports o f non-compliance with independent monitoring o f safeguards compliance confirming this Per the legal covenants, the Borrower has established wastewater tariffs aimed at covering operations and maintenance costs However, inflation has resulted in full cost recovery not yet being achieved A tariff strategy i s in place to reach the goal

o f full O&M cost recovery by 201 5 and full economic recovery by 2020

Rationale for Additional Financing

17 The additional financing would be used,to complete the project as designed to cover an unanticipated financing gap, the result o f cost over runs No new or scale-up activities will be financed

18 At the time o f Project appraisal in 2001, the Project cost was estimated to be about US$200 million to complete O f this amount, an IDA Credit of SDR 127,500,000 (US$166 million equivalent in 200 1) was made available to the Government o f Vietnam for the Project This financing was expected to be sufficient to complete the project by the original closing date o f December 3 1 , 2007 However, delays accumulated in the Project implementation

as has been indicated An unanticipated result o f the delays in the Project implementation has been the sharp increase in the overall cost o f the Project due to the high inflationary period of 2007-08 The revised cost to complete the project i s estimated at U$317 million The canal improvements, drainage and wastewater collection component o f the project are an integrated set

o f works It i s imperative to complete the entire scope o f works to achieve the project objectives The city authorities do not have sufficient resources to complete the works without the additional financing There are no technical alternatives available than to complete the project as designed, and which i s now over 70 percent completed

Consistency with CAS or CPS

19 The Project remains consistent with the Country Partnership Strategy Under the pillar of promoting equitable, socially inclusive and environmentally sustainable patterns o f economic growth the Project contributes directly to the strategic and long term objectives of reducing water pollution and also contributes to flood reduction The Project i s specifically identified as a Bank supported intervention that will positively affect the CPS outcomes

111 Proposed Changes

Proposed Changes in Project Development Objectives ancVor Scope

20 There are no proposed changes in the Project Development Objective,

project design, implementation approach or implementing agencies from

approved with the restructuring in April 2009 Additional financing i s required

the original project design and to meet the Project objectives

Revised Financing Plan

21 The total revised Project Costs are presented in the following table

global objective, those that were only to complete

Table 2: Total Additional IDA and Additional Counterpart Financing (US$)'

Estimates are rounded

Additional costs are also financed with exchange rate savings

' Based on costs in original PAD

The PMU was established in 1994 to implement large urban development projects in the NLTN basin and has been involved in the preparation of this Project and its implementation to date The credit proceeds are passed on to HCMC from the Borrower under an internal on-lending and on- granting arrangement Under the original Project design the final built assets were to be transferred to the Urban Drainage Company (UDC), a legal corporate entity dependent on

HCMC The UDC would then become responsible for their operation and management In

March 2008, HCMC established the Management Center of Flood Control Program for HCMC (FCC) which bears, among other responsibilities, the responsibility o f managing the wastewater and drainage infrastructure of all drainage basins within the city’s area, including the NLTN

basin Consequently as of March 2008 FCC has been the entity responsible for managing all assets under the Project, although it may enter into service arrangements with suitably qualified

entities for the assets’ future operations This institutional change was part of the Project restructuring approved by the World Bank’s Board o f Directors in April 2009

Retroactive financing in the amount of SDR 6,440,000 (US$lO million) will be made available from the additional financing to finance eligible expenditures made on or after January 1,201 0

Fin an cia1 Management

25 The same institutional arrangements and financial management system as in the Parent Project will be applied under the additional financing Based on F M supervision missions and

reports, the Project continues to have satisfactory project financial management systems that can provide, with reasonable assurance, accurate and timely information that the loan i s being used for the intended purposes The F M rating i s Satisfactory

26 The assessment for the additional financing has concluded that the project will continue

to meet the minimum Bank financial management requirements, as stipulated in OP/BP10.02 The FM risk rating proposed for this project remains moderate

Procurement

27 Procurement under the proposed Additional Financing will be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits,” published in May 2004, revised October 2006 and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers,” published in May 2004, revised in October 2006 and the provisions stipulated in the Financing Agreement Details on the updated assessment of the PMU’s procurement implementation capacity, risk rating and mitigation measures, proposed changes on procurement arrangement, Bank review and Procurement Plan for the Additional Financing are provided in Annex 3

Safeguards

28 Social safeguards Involuntary resettlement policy (OD4.3 0; currently changed to OP4.12) has been applied to the project The Resettlement Policy Frameworks (RPF) was prepared and approved in the year 2000 The Resettlement Action Plan 1 (RAP1) for the

wastewater component was prepared and approved in 2003 It was implemented successfully during the project implementation Under the RAP1 the 84 Project Affected Households were

resettled or received compensation in accordance with the RAP and Policy Framework The RAP

2 covering temporary impacts on the income o f the businesses located along the road where the drainage component i s taking place was prepared in 2003 and i s being implemented This implementation has been monitored and reported on regularly by the resettlement independent monitoring consultant Among the primary issues which are being addressed under the RAP 2 include the impact of temporary road closures and construction related activities impacting businesses located along the canal Independent monitoring of the RAP 2 implementation indicate that the RAP 2 i s being effectively implemented and there are no issues of non- compliance

29 Environmental Safeguards An Environmental Impact Assessment (EIA) was prepared during project preparation and was approved prior to appraisal A supplemental EIA for the canal dredging and sludge disposal management activities was also prepared In addition, an

Environmental Management Plan (EMP) was approved and i s being implemented with oversight provided by the Construction Management Consultant (CMC) The CMC undertakes supervision

of the environmental impact mitigation measures that are carried-out by the contractors and also

i s responsible for carrying-out the approved environmental monitoring program In turn, the work of the CMC i s monitored by an independent environmental auditor These same arrangements will continue to remain in place to project completion As no new activities will be implemented as part of the additional financing, the EIA and EMP do not require updating Compliance with these arrangements i s satisfactory, with follow-up action taken when required Overall environmental safeguard implementation i s satisfactory Environmental monitoring i s now being carried-out in a satisfactory manner by the CMC This includes monitoring water quality and dredged materials O f the main construction phase impacts, site safety has been the primary concern Since January 2009, however, site safety has improved with strong action taken

by the Project Owner and CMC to address safety issues in a more systematic manner

IV Appraisal Summary

Economic Analysis of Cost Overrun or Financing Gap

30 The economic analysis was updated to take into account the financing gap The same cost benefit analysis methodology used at the time o f appraisal was applied for easy comparison Costs are based on actual costs for already completed works and prevailing market estimates for any contracts which are planned or under implementation Project benefits were updated but are

the same as those in the original analysis: (i) reduced flood damage; (ii) avoided costs o f private flood protection; (iii) savings in septic tank installation and management; (iv) improved public health and (v) increased land values Only the first three o f these benefits were quantifiable at the

time o f appraisal and for the update A discount rate o f 12 percent p.a was used with a resulting economic internal rate o f return (ERR) o f 9.2 percent and a net present value o f US$(119.8) million

Table 4: Economic Analysis

capture only the private benefits o f flood prevention, wastewater improvements and improved water quality thus indicate the lower bound o f the benefits Similar projects in Ho Chi Minh City report at least a 10 percent reduction in the incidence o f water borne diseases pre and post project and property value increases as much as three times The least cost analysis conducted during feasibility stage o f the project indicated that the technical approach followed i s the most economically efficient and the least socially disruptive Eliminating an open sewer and reducing flooding in the city center i s a central component o f the city’s economic development strategy for the area o f influence o f the project and provides a strong economic justification for the project overall

Expected Outcomes

32 The Project outcomes and the indicators to measure the outcomes were updated and approved with the April 2009 Project restructuring By Project completion it i s expected that the benefits will include: (i) a reduction by 96,000 in the number o f households affected by a two year return period storm; (ii) an increase o f 240,000 households whose wastewater i s collected and disposed o f safely; (iii) improvement in the water quality o f the NLTN canal as measured by

the average level o f dissolved oxygen; and (iv) the implementation o f agreed tariff schedule increases Physical outcomes will include 8.4 kilometers o f sewage interceptor constructed, about 65 kilometers o f combined primary and secondary sewers replaced or constructed, 18 kilometers o f canal improvements and embankment stabilization; and 1.024 million cubic meters

o f sludge excavated and disposed o f properly

'

33 Financial sustainability i s another objective o f the Project In 2001 H o Chi Minh City introduced a wastewater fee In 2007, increases in these fees were approved by the HCMC People's Council with a price path for 2008 to 2010, with the intent to achieve 100 percent operations and maintenance cost recovery by 2010 Inflation resulted in cost recovery not yet being achieved In order for the wastewater tariff strategy to meet full cost recovery objectives, changes will need to be made to local Decree 67/2003 The current strategy o f HCMC i s to achieve full cost recovery o f O&M by 2015 and full economic cost recovery in the sector during

201 6-2020 In the immediate term, the current wastewater fees should be increased by 75 percent (plus inflation for 20 10) by 201 1

Benefits

34 The additional financing i s necessary for the Project to realize its full benefits The benefits o f reduced flooding, improved access to basic infrastructure and improved environmental conditions are well documented They include improved health conditions, increase in property values, reduced flood damages and reduction in travel times, among others Without the additional financing these benefits would either be delayed or not realized at all, if funding could not be found to complete the works Over 1.2 million people will benefit from this Project

Risks

35 The overall risk rating o f the Parent Project was rated as High (Substantial) At that time

it was indicated that the most serious risk would be delays in implementation due to ICB procurement processes This risk was borne out Additional risks included potential problems with the tunnel boring process, which have also been encountered during implementation The current risks are well identified and being managed These include: relocation o f the 2 meter diameter water main that crosses the canal and i s being relocated to allow finalization o f the pipe jacking and canal improvements; completion o f the Saigon River crossing and temporary outfall, which i s now moving forward; and the slow implementation o f the canal improvement and dredging works, the implementation o f which has improved in the past six months These risks are considered manageable

36 Site safety remains a highlighted risk due in particular to the very congested conditions in

the project site area, and the expanse o f the canal which makes securing all work sites a challenge Traffic management and safety i s another challenge given the location o f the project

in the city center Notwithstanding the increased safety risk due to the project location, these risks are considered manageable and city authorities have recently put in place an enhanced risk mitigation program including additional measures by the contractors and the city authorities to ensure greater site safety to the general public Part o f this program includes greater site security

with 24 hour patrols, routine inspections o f all sites (active and inactive), securing all active construction sites, and increased public relations regarding the responsibilities o f the general public to respect construction barriers, public property and to report any potential dangers to the project authorities through a hotline

37 The largest single contract i s the Rehabilitation o f the NLTN Canal The contractor

implementing this contract was debarred by the Bank’s Sanctions Board in January 2009 in

conjunction with an unrelated project in another country The original amount for this contract was US$60.88 million The final cost estimate for the works included in this contract i s about US$SO million IDA disbursements for this contract will be capped at US$60.88 million Therefore, no additional financing will be used to the benefit o f the debarred firm The remaining works under this contract will be re-bid competitively or re-allocated through a direct contract process to existing sub-contracts, as appropriate, so that additional financing can be used to cover this gap Under such conditions, those remaining works completed by other qualified contractors would be eligible for the additional financing Therefore, the additional financing request

includes the completion o f uncompleted works currently part o f the debarred firm’s contract (Package no 10) by other contractors and the additional time that would be required to re-bid those works This work will include soils improvement, completion o f dredging, canal wall and bridge interfaces and landscaping

38 In addition, the relocation o f the 2-meter diameter water main, also originally part o f this contract, i s proposed to be completed by the Sai Gon Water Corporation (SAWACO) which is

best positioned to manage the risks associated with this work In order to complete the last section o f the interceptor and the dredging work, a temporary bypass and permanent relocation

o f a 2 meter diameter water main which intersects the canal i s required The existing water main

i s a 45 year old, pre-stressed concrete pipe supplying water to approximately 4 million people There i s no back-up supply Given the criticality o f the works - any failure in carrying out the bypass and relocation o f the main would result in the interruption o f water supply to 4 million HCMC residents - the Borrower has proposed to have this work done directly by SAWACO under a direct contract, so that SAWACO can fully manage and assume sole responsibility for the considerable technical risks (engineering, reputational and institutional) involved with this work The estimated cost o f this contract i s US$2.5 Million As indicated, the contracting o f SAWACO, which i s a legally and financially autonomous State Owned Enterprise operating as a commercial entity, will require a waiver to the dependency criteria o f Paragraph l.S(c) o f the Procurement Guidelines The waiver sought from the Board o f Executive Directors, was cleared

by the Legal Department, OPCR and the EAP Vice President and was submitted to the Managing Director who provided his endorsement on February 10,20 10

39 While these risks are considered manageable, the overall risk rating will remain Substantial due to the complex nature o f the project, its technically challenging location and its earlier poor track record o f implementation

Financial Terms and Conditions for Additional Financing

40

period o f ten years shall apply Standard IDA Credit terms with total maturity o f thirty-five years including a grace