Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 69888-VN

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR32.9 MILLION(US$50.0 MILLION EQUIVALENT)

TO THE

SOCIALIST REPUBLIC OF VIETNAM

FOR THE

INDUSTRIAL POLLUTION MANAGEMENT PROJECT

September 25, 2012

Vietnam Sustainable Development UnitSustainable Development DepartmentEast Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed without WorldBank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective August 31, 2012)

Currency Unit = VND (Vietnamese Dong)VND20,840 = US$1

US$1.519 = SDR1

FISCAL YEARJanuary 1 - December 31

ABBREVIATIONS AND ACRONYMS

AAA Analytical and Advisory ActivitiesAfD French Development AgencyAMS Automatic monitoring stationBOD Biochemical oxygen demandBR-VT Ba Ria-Vung Tau ProvinceCETP Centralized effluent treatment plantCIDA Canadian International Development AgencyCOD Chemical oxygen demandCPS Country Partnership StrategyCQS Selection based on Consultants' QualificationsCSRC Compensation, Support and Resettlement CommitteeDPC District People's CommitteeDPS Department of Public SecurityDONRE Department Natural Resources and EnvironmentECOP Environmental codes of practiceEIA Environmental impact assessmentEPC Engineering, procurement and constructionESMF Environmental and Social Management FrameworkEZMD Economic Zones Management Department, Ministry of

Planning and InvestmentFDI Foreign direct investmentGDP Gross domestic productIC Individual ConsultantICB International Competitive BiddingIDF Institutional Development FacilityIFC International Finance CorporationIZ Industrial zoneIZD Industrial zone developerIZMB Industrial Zone Management BoardJICA Japanese International Cooperation AgencyLCS Least Cost SelectionLDO Land Development OrganizationLEP Law on Environmental ProtectionM&E Monitoring and EvaluationMOF Ministry of Finance

MONRE Ministry of Natural Resources and EnvironmentMPI Ministry of Planning and InvestmentNCB National Competitive BiddingNH 4 AmmoniumOBA Output-based aidO&M Operation and maintenanceORAF Operational Risk Assessment FrameworkPBF Performance-based financingPCEM Provincial Center for Environmental MonitoringPCRA Procurement Capacity and Risk AssessmentPDO Project Development ObjectivePIM Project Implementation ManualPMU Project Management UnitPP Procurement PlanPPC Provincial Peoples' CommitteePSC Project Steering CommitteeQBS Quality Based SelectionQCBS Quality and Cost Based SelectionRAP Resettlement Action PlanRPF Resettlement Policy FrameworkSEDP Social and Economic Development PlanSOEs State-owned enterpriseTA Technical assistanceVDIC Vietnam Development Information CenterVEA Vietnam Environment AdministrationVEPF Vietnam Environment Protection FundVND Vietnamese Dong

Regional Vice President: Pamela CoxCountry Director: Victoria Kwakwa

Sector Director: John RoomeSector Manager: Jennifer Sara

Task Team Leader: Jiang Ru

COUNTRYVietnam Industry Pollution Management Project

TABLE OF CONTENTS

Page

I. STRATEGIC CONTEXT ................................................................................................. 1

A. Country Context ...................... 1..........................

B. Sectoral and Institutional Context............................................ 1

C. Higher Level Objectives to which the Project Contributes ........... ........ 4

II. PROJECT DEVELOPMENT OBJECTIVES ........................................................... 4

A. Project Development Objectives..................4..... .............. 4

B. Project Beneficiaries ................................................. 4

C. PDO Level Results Indicators......................4.... ............ 4

III. PROJECT DESCRIPTION ......................................................................................... 5

A. Project Components ..................................... ........ 5

B. Project Financing .......................................... ..... 6

Lending Instrument ........................................ ........ 6

Project Cost and Financing ............................................ 6

C. Lessons Learned and Reflected in the Project Design. ......... ............. 6

IV. IM PLEM ENTATION .................................................................................................. 7

A. Institutional and Implementation Arrangements ..................... ..... 7

B. Results Monitoring and Evaluation ....................................... 8

C. Sustainability.................................9.... ............ 9

V. KEY RISKS AND MITIGATION MEASURES...................................................... 9

A. Risk Ratings Summary ..................... 9...... ............... 9

B. Description ................................................... 9

VI. APPRAISAL SUM M ARY .............................................................................................. 10

A. Economic and Financial Analyses .......................... ......... 10

B. Technical .................................................... 10

C. Financial Management..................... ................. 11

D. Procurement ........................................... ....... 12

E. Social (including Safeguards): ..................................... 12

F. Environment (including Safeguards) .................................. 13

G. Financial Risk Management at VEPF .......................... ....... 14

Annex 1: Results Framework and Monitoring .................................................................... 15

Annex 2: Detailed Project Description.................................................................................. 17

Annex 3: Implementation Arrangements ............................................................................. 24

Annex 4: Operational Risk Assessment Framework (ORAF).............................................35

Annex 5: Implementation Support Plan ................................................................................ 38

M ap (IBRD 39372).......................................................................................................................40

PAD DATA SHEET

VIETNAM

Industrial Pollution Management Project

PROJECT APPRAISAL DOCUMENT

East Asia and Pacific Region

EASVS

Basic InformationDate: September 25, 2012 Sectors: Other Industry (100%)

Country Director: Victoria Kwakwa Themes: Pollution Management and Environmental Health (100%)

Sector Manager/Director: Jennifer Sara /John Roome EA Category: A - Full Assessment

Project ID: P113151

Lending Instrument: SIL

Team Leader: Jiang Ru

Does the project include any CDD component? No

Joint IFC: No

Borrower: Socialist Republic of Vietnam

Responsible Agency: Department of Economic Zones Management, Ministry of Planning and Investment

Contact: Mr. Tran Duy Dong Title: Deputy Director General

Telephone No.: 04-8044886 Email: tranduydong@mpi.gov.vn

Project Implementation Period: Start Date: 7/20/2012 End Date: 3/31/2018

Expected Effectiveness Date: 3/1/2013

Expected Closing Date: 9/30/2018

Project Financing Data(US$M)[] Loan [] Grant [X] Other

[x] Credit [ Guarantee Terms of the loan: The credit would be on blend terms, with a maturity of 25 years, including a fiveyear grace period.

For Loans/Credits/Others

Total Project Cost :$58.85M Total Bank Financing : US$50M

Total Cofinancing : US$8.85 M Financing Gap:

Financing Source Amount(US$M)

BORROWER/RECIPIENT 8.85

BRD

IDA: New 50.0

IDA: Recommitted

Others

Financing Gap

Total 58.85

Expected Disbursements (in USD Million)

Fiscal Year FY13 FY14 FY15 FY16 FY17 FY18 FY19

Annual 0.5 3.5 8 9 9 10 10

Cumulative 0.5 4 12 21 30 40 50

Project Development Objective(s)

The PDO is to improve compliance with industrial wastewater treatment regulations in four of the most industrializedprovinces in Vietnam.

Components

Component Name Cost (USD Millions)

Environmental policy, monitoring and enforcement 22.68

Performance-based CETP (centralized effluent treatment plants) financing 25.59

Implementation support 10.58

Compliance

Policy

Does the project depart from the CAS in content or in other significant respects? Yes [] No [X]

Does the project require any exceptions from Bank policies? Yes [] No [X]

Have these been approved by Bank management? Yes [] No []

Is approval for any policy exception sought from the Board? Yes [] No [X]

Does the project meet the Regional criteria for readiness for implementation? Yes [X] No []

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment OP/BP 4.01 X

Natural Habitats OP/BP 4.04 X

Forests OP/BP 4.36 X

Pest Management OP 4.09 X

Physical Cultural Resources OP/BP 4.11 X

Indigenous Peoples OP/BP 4.10 X

Involuntary Resettlement OP/BP 4.12 X

Safety of Dams OP/BP 4.37 X

Projects on International Waters OP/BP 7.50 X

Projects in Disputed Areas OP/BP 7.60 X

Legal Covenants

Name Project Steering Committee Recurrent Due Date Frequency

Schedule 2. Section I. A.1 Yes Ongoing Ongoing

Description of Covenant

Maintaining a Project Steering Committee for general technical and policy guidance.

Name Project Management Unit in MPI Recurrent Due Date Frequency

Schedule 2. Section 1. A.2 Yes Ongoing Ongoing

Description of Covenant

Maintaining a Project Management Unit within Ministry of Planning and Investment (MPI), provided with sufficientresources and staffed with competent personnel in adequate numbers.

Name Project Management Unit in MONRE Recurrent Due Date Frequency

Schedule 2. Section 1. A.4 Yes November 15, 2012 Ongoing

Description of Covenant

Establishing and maintaining a Project Management Unit within Ministry of Natural Resources and Environment (MONRE),provided with sufficient resources and staffed with competent personnel in adequate numbers.

Name Project Management Unit in VEPF Recurrent Due Date Frequency

Schedule 2. Section 1. A.6 Yes November 15, 2012 Ongoing

Description of Covenant

Establishing and maintaining a Project Management Unit within the Vietnam Environment Protection Fund (VEPF), providedwith sufficient resources and staffed with competent personnel in adequate numbers.

Name Focal Person in Provincial Peoples' Recurrent Due Date FrequencyCommittee

Schedule 2. Section 1. A.8 Yes November 15, 2012 Ongoing

Description of Covenant

Appointment and maintaining a focal person within the relevant Provincial Peoples' Committee by each Project Province.

Name Project Implementation Manual Recurrent Due Date Frequency

Schedule 2. Section 1. A.9 Yes Ongoing Ongoing

Description of Covenant

MPI adopting a Project Implementation Manual (PIM) setting forth guidelines and procedures for the implementation of the

Project; amendments to the PIM require prior written agreement of IDA.

Name CETP Financial Operations Manual Recurrent Due Date Frequency

Schedule 2. Section 1. B. 1 Yes Ongoing Ongoing

Description of Covenant

VEPF adopting a CETP Financing Operations Manual (OM) setting forth guidelines and procedures for the implementation ofPart 2 of the Project; amendments to the OM require prior written agreement of IDA.

Name Provincial Focal Points and Counterpart Recurrent Due Date FrequencyFunding Commitments

Schedule 2. Section 1. A. 8 No November 15, 2012

Description of Covenant

Submission of Provincial Focal Point and adequate counterpart funding commitments from the project provinces no later thanNovember 15, 2012.

Name Memorandum of Understanding(MOU) Recurrent Due Date Frequencybetween MONRE and Four Project Provinces

Schedule 2. Section 1. E. 2(a) No April 1, 2013

Description of Covenant

Signing of the MOU between MONRE and the project provinces no later than April 1, 2013.

Name Adoption ofEnvironmental and Social Recurrent Due Date FrequencyManagement Framework (ESMF)

Schedule 2. Section I. D. 1 Yes Ongoing Ongoing

Description of Covenant

MPI adopting an Environmental and Social Management Framework (ESMF).

Name Environmental Impact Assessment and Recurrent Due Date FrequencyEnvironmental management Plan

Schedule 2. Section I. B.2 Yes Prior to sub-project Ongoingcommencement

Description of Covenant

Respective CETP investor preparing and implementing an Environmental Impact Assessment, including an EnvironmentalManagement Plan, in accordance with the ESMF.

Name Implementation of Environmental Code of Recurrent Due Date FrequencyPractice (ECOP)

Schedule 2. Section I. D.1 Yes Ongoing Ongoing

Description of Covenant

ECOP (included in the ESMF) implemented for the construction of project supported water quality AMSs.

Name Amendment of Safeguards Instruments Recurrent Due Date Frequency

Schedule 2. Section I. D.2 Yes Ongoing Ongoing

Description of Covenant

No amendments to the Safeguard Instruments without prior written agreement of IDA; maintaining policies and procedures tomonitor and evaluate the implementation of the Safeguard Instruments.

Team Composition

Bank Staff

Name Title Specialization Unit UPI

Jiang Ru Sr. Environment Specialist TTL EASER 199291

Alan Coulthart Lead Municipal Engineer Environmental EASIN (Retired) 21739Engineering

Douglas J. Graham Sr. Environment Specialist Environment AFTN2 75790

Anjali Acharya Sr. Environment Specialist Environment EASVS 95451

Hisham A. Abdo Kahin Sr. Counsel Sr. Counsel LEGES 225681

Miguel-Santiago Oliveira Senior Finance Officer Disbursements CTRLN 260058

Jed Friedman Sr. Economist Economic Analysis DECPI 180665

Yiren Feng Sr. Environment Specialist Environmental Monitoring EASCS 286976

Wei Zhang Financial Sector Specialist Financial Sector EASFP 204533

Ha Thuy Tran Financial Management Specialist Financial Management EAPFM 360402

Tuan Anh Le Social Development Specialist Social Safeguards EASVS 350876

Hoai Van Nguyen Procurement Specialist Procurement EAPPR 354796

Thao Thi Do Finance Analyst Disbursements CTRLN 332130

Huong Thi Mai Nong Jr. Counsel Jr. Counsel EACVF 407948

Bernardita Ledesma Operations Analyst Operations EASER 18902

Thu Thi Le Nguyen Operations Analyst Operations/Environment EASVS 185626

Giang Thanh Huong Le Program Assistant Administrative Support EASVS 231845

Ngozi Blessing Obi Malife Program Assistant Administrative Support EASER 246355

Quyen Thuy Dinh Program Assistant Administrative Support EASVS 342530

Non Bank Staff

Name Title Office Phone City

Locations

Country First Administrative Division Location Planned Actual Comments

Vietnam Four project provinces: Ha Various locationsNam, Nam Dinh, in the 4 provinces,Dong Nai, and Ba Ria - not all determinedVung Tau (also activities at at project appraisalnational scale)

I. STRATEGIC CONTEXT

A. Country Context

1. Vietnam has achieved some striking developmental successes. As noted in the recentCountry Partnership Strategy (CPS), the poverty headcount ratio has fallen from 58 percent in1993 to 14.5 percent in 2008. Vietnam has already attained five of its ten original VietnamDevelopment Goal (based on Millennium Development Goals or MDGs) targets and is well onthe way to attaining two more by 2015. At the end of 2010, Vietnam's per capita income wasUS$1,130, placing it firmly in the ranks of middle-income countries. Strong growth continues: in2010 its GDP grew by 6.8%.

2. Industrial development is the driver of Vietnam's growth. As a percentage of overallnational GDP, industry has risen from 22.7% in 1990 to 41.1% in 2010 (representing a value ofabout $42.5 billion). Rapid industrial development in Vietnam has at the same time generatedserious pollution issues and has exerted tremendous pressure on its natural resources. The Bank's2010 Vietnam Development Report on Natural Resources Management concluded that poormanagement of natural resources and continued environmental degradation are likely tojeopardize the pace, quality and sustainability of the country's economic growth.

B. Sectoral and Institutional Context

3. A key strategy of industrial development in Vietnam is the development of industrialZones (IZs), which contribute about 30% of national industrial output; in 2010, the aggregateturnover of IZs nationwide reached US$20.4 billion equivalent. In the same year, IZs attracted35% of national foreign direct investment (FDI) and created 1.6 million jobs directly and 1.8million more indirectly. The Ministry of Planning and Investment (MPI) is designated as the leadministry for the development of large scale industrial zones to attract external and internalinvestment. Industrial zones have also been established to relocate polluting industries awayfrom urban centers. Most provinces have set up an Industrial Zone Management Board (IZMB)to manage the development of IZs. Industrial Zone Developers (IZDs) build and manage IZs ontheir own or through a third party service provider. They are state-owned enterprises (with publicownership held by provinces), private companies, or public/private joint ventures. The majorityfall in the third category. As of December 2011, MPI had approved the establishment of 283 IZs;of these, 180 have started operations. There is keen competition between provinces to establishIZs. In some cases supply has exceeded demand and serviced space lies unused.

4. IZs have been required by law since 2009 to provide sewer networks and centralizedeffluent treatment plants (CETPs) to collect and treat wastewater discharged by their tenants. 2

IZDs set limits on the quality and quantity of effluent that they will accept in order to protect thetreatment processes and equipment. If needed, tenants are required to provide and operate pre-treatment facilities to bring their effluents to the acceptable level. According to a report by MPI,

I Based on size and approval procedures, industrial estates in Vietnam are classified as: (a) large industrialparks/zones approved by Ministry of Planning and Investment; (b) industrial clusters approved by ProvincialPeoples' Committees; and (c) small industrial points that are often approved by district governments.2 The Vietnam Social and Economic Development Plan (SEDP, 2006-2010) set a target that 100% of IZs should beequipped with CETPs by 2010. This was not achieved. The SEDP (2011-2015) set the same target.

1

only about 60% of the 174 operating IZs had CETPs. There is also scope for improving theoperation and management of effluent collection and treatment facilities. In some cases not alltenants are connected and in others the plants are not being properly operated. Because of theintense competition between provinces to attract investors to IZs, there is strong pressure onprovincial authorities to relax environmental standards and for IZDs to minimize the fees andcharges made to investors/IZ tenants for infrastructure services. Consequently, IZDs endeavor tominimize the cost of wastewater collection and treatment services. Sometimes this results inCETP designs that are sub-optimal (treatment units are under-sized and lower quality equipmentis utilized) and ineffective operation of the plants (some plants are reportedly only operatedintermittently to reduce costs). IZDs also report difficulties in mobilizing affordable long termfinance for collection and treatment systems. 3

5. It is estimated that IZs discharge about one million cubic meters of untreated wastewaterper day directly to receiving water bodies i.e., about 70% of the total industrial effluentdischarge.4 The Nhue-Day River in the north and Dong Nai River in the south that pass throughthe country's most industrialized provinces are recognized as the two most heavily pollutedrivers. Water quality monitoring reveal that many environmental parameters do not meet nationalstandards, and frequent occurrences of severe industrial wastewater pollution have been exposedin the national media. In some cases these incidents have triggered protests by localcommunities. Water pollution issues are a major focus of public complaints to the NationalAssembly. The high pollution levels have severe implications for human health and naturalecosystems and are becoming a constraint to urban development and the sustainability and futuregrowth of industry and agriculture.

6. As in many emerging middle-income countries Vietnam has not yet found a way toaccommodate the costs of environmental externalities of industrial production. These are largelya result of regulatory failures, including: (a) policies that promote industrial growth withoutsufficient regard to environmental consequences; (b) limited resources in terms of trainedpersonnel and funding for environmental monitoring; (c) insufficient enforcement because ofinadequate resources and corruption; (d) low penalties for non-compliance; and (e) limited publicdisclosure of industrial pollution information. Poor compliance, ineffective enforcement andinadequate provision for wastewater treatment reinforce each other to exacerbate the problem. Itis important that this cycle be broken.

7. The Ministry of Natural Resources and Environment (MONRE) is responsible forregulating industrial effluents and water quality. It has the authority by law to close or relocateout-of-compliance industrial polluters. At the provincial level, Departments of Natural Resourcesand Environment (DONREs) are responsible for implementing national policies and regulationspromulgated by MONRE. Recognizing the need to improve environmental performance of IZs,the Government is taking action to address the above-noted policy and regulatory failures. Thegovernment is initiating a thorough review of the existing regulations on IZ environmentalmanagement, including institutional responsibilities for environmental management in IZs,technical standards needed to support environmental monitoring and supervision, levels of

3 The interest rate for commercial loans was 18% in 2010 and commercial banks impose strict collateralrequirements.4 MONRE (Ministry of Natural Resources and Environment), National Environment Report 2009 on IndustrialZones in Vietnam.

2

penalties for non-compliance or violations, and wider disclosure of pollution information. AMaster Plan of National Environment Quality and Natural Resources Monitoring was approvedin 2007 to, amongst other things, develop a national water quality monitoring network.5 Inaddition, Environment Police at the central and provincial levels have been actively pursuingpollution violations at IZs in recent years.

8. The Government has also made efforts to promote concessional financing for CETPconstruction. CETP financing is eligible for subsidized state investment credit support throughthe Vietnam Development Bank.6 The state-managed Vietnam Environment Protection Fund(VEPF) also makes concessional loans for wastewater management in industrial zones. Someprovinces also provide incentives; e.g., Ho Chi Minh City Peoples' Committee has provided aninterest rate subsidy for CETP construction for IZs in its jurisdiction. The Government has alsolisted the treatment of wastewater in IZs as a priority area for concessional on-lending of foreignloans.8 While the intent of these initiatives is encouraging, they have had a very limited effectbecause of the restrictive nature and limited funding availability, and the intense competition toaccess concessional finance. The provision of wastewater collection and treatment facilitiescontinues to be hampered by lack of available affordable credit.

9. Recognizing that pollution is a very serious development issue with significant impactson public health and industrial and agricultural production, the Government has requested Banksupport to help develop an effective multi-faceted pollution management strategy to addresswastewater pollution from its industrial zones.

10. Other Donor Initiatives. The Energy Efficiency and Cleaner Production Program of theInternational Finance Corporation (IFC) was launched in 2010 to promote cleaner production inindustrial firms. The Canadian International Development Agency (CIDA) has provided a grantof $15million to the Vietnam Provincial Environmental Governance Project to improve theimplementation capacity of MONRE and eight DONREs. 9 The Japan International CooperationAgency (JICA) initiated a three year (2010-2013) technical assistance (TA) project,Strengthening Capacity of Water Environmental Management, to improve the capacity ofMONRE and DONREs in five provinces on water environmental management issues.10 UNIDOis supporting MPI to prepare a GEF grant to minimize GHG (green house gas) emissions and thebetter management of key industrial sectors' hazardous waste and wastewater. The IFC andUNIDO GEF activities are related to industrial production technologies and are sector-specific.The CIDA and JICA initiatives focus on human capacity building at the national level and at theprovincial level, but do not support the development of the country's environmental monitoringinfrastructure.

However, so far implementation has been limited due to budget constraints. As of June 2012 there is only onefunctioning Automated Monitoring Station (AMS) in Vietnam.6 Up to 12 years and 70% of total investment cost, with an interest rate around 6% based on MOF Circular TT 181.7 With 5.4% annual interest rate and 5-7 year terms, and secured by collateral or third-party credit guarantee.8 Decision 181/2007/QD-TTg on Regulation on Relending of the Government's Foreign Loan and Aid Capital.9 Initiated in 2008, the project works with 8 provinces: Ha Noi, Bac Ninh, Hai Duong, Da Nang, Binh Duong, LongAn, Quang Ngai and Soc Trang.10 Initiated in late 2010, the project works with the provinces of Hanoi, Hai Phong, Hue, Ba Ria-Vung Tau (BR-VT)and Ho Chi Minh (HCM) with a focus on capacity development for sound policy making at MONRE and forenforcement and pollution control and public awareness and information management at the targeted DONREs.

3

C. Higher Level Objectives to which the Project Contributes

11. By improving compliance with environmental requirements for industrial wastewaterdischarges, this IDA operation will contribute directly to the Sustainability Pillar Outcome 2.2"Strengthened Environmental Protection and Management" of the Bank's Country PartnershipStrategy (CPS) for Vietnam. In doing so, this project contributes to the governancemainstreaming objective of the CPS by addressing the above mentioned challenges faced by thegovernment in regulating the sector's environmental performance.

12. This project is a part of a coordinated and complementary multi-donor program(summarized above) to support Vietnam to manage industrial pollution issues. It draws on theresults of a number of analytical and capacity building activities carried out by the Bank incooperation with Government authorities. Prominent among these were two studies financed bythe Bank-Korean Environment Partnership (BKEP): Study on Industrial WastewaterManagement in Nhue-Day and Dong Nai River Basins (2010); and the Industrial Developmentand Environmental Management report (in press). An important precursor to this project was theImproving the Institutional Capacity for Water Pollution Control in Vietnam Project (2009)financed by the Institutional Development Facility (IDF).

II. PROJECT DEVELOPMENT OBJECTIVES

A. Project Development Objectives

13. The PDO is to improve compliance with industrial wastewater treatment regulations infour of the most industrialized provinces in Vietnam.

B. Project Beneficiaries

14. The project's ultimate beneficiaries will be the general public in the four projectprovinces and beyond, who will benefit from reduced environmental pollution. The project willdeliver direct benefits to: (a) MPI, by improving its capacity to promote sustainable industrialzone development; (b) MONRE, by improving its monitoring and enforcement capacity forindustrial pollution management; and (c) the four project provinces, by strengthening theirindustrial development planning practices and their monitoring and enforcement capacity. IZDsin the four provinces will have access to concessional financing to construct CETPs andtechnical assistance to improve the design, operation and management of the CETPs.

C. PDO Level Results Indicators

15. The PDO level results indicators are the extents of compliance with national regulationsfor effluent discharge from project-financed and non-project-financed industrial zones in the fourproject provinces.

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III. PROJECT DESCRIPTION

A. Project Components

16. Component 1: Environmental Policy, Monitoring and Enforcement. This willcomprise three subcomponents: (a) Policy Review and Revision; (b) Environmental Monitoringand Enforcement; and (c) Information Disclosure and Public Participation. Subcomponent (a)will provide support for a comprehensive review of the legal and regulatory framework onpollution management, including reviewing and revising laws, regulations, and other legaldocuments at central and provincial levels. Subcomponent (b) will support the development ofenvironmental monitoring infrastructure and the improvement in environmental enforcementactivities, including: (i) acquisition of testing laboratory equipment, standard samples,monitoring equipment, protection gears, and vehicles; (ii) acquisition and installation ofautomatic water quality monitoring stations; (iii) monitoring of surface water quality, IZwastewater discharge, and inspection and enforcement; and (iv) development and upgrade of theenvironmental monitoring information management systems of MONRE and the projectprovinces. Subcomponent (c) will support the development of an industrial pollution informationdisclosure system, including: (i) development of an environmental performance ratingmethodology; (ii) disclosure of environmental monitoring, enforcement results, and publiccomplaint records on a website; (iii) maintenance of close communication with CETP investors11

to enable them to understand the rating system and ways to improve their ratings; (iv) disclosureof final performance ratings through various media outlets; (v) awareness raising activities anddissemination of relevant informational materials; and (vi) facilitation of communication withvarious media outlets.

17. Component 2: Performance-based CETP financing. This component will provideperformance-based loans to finance the construction of new CETPs, the expansion of existingCETPs, and the improvement of other relevant infrastructure of industrial wastewatermanagement in the industrial zones of the project provinces.

18. To qualify for such financing, CETP investors will be required to meet robust designcriteria and to adopt improved technical specifications. Performance-based disbursements will besubject to satisfactory quality of construction as assessed by VEPF (90% of loan) and acommitment letter by the CETP investors to meet compliance standards (final 10% of loan).Recognizing that traditional CETP financing (either concessional or commercial) has focusedsolely on CETP construction but paid little attention to actual performance of CETPs, thiscomponent uses performance-based disbursement to incentivize CETP investors to comply withenvironmental regulations during the operation phase. Failure to do so will result in reductions inthe loan repayment term if discharge violations occur: immediate full repayment will be requiredif three violations occur. Together with improved enforcement pressure and improved technicalcapacity at CETP investors, this performance-based concessional financing is expected toimprove compliance of project financed IZs with wastewater effluent standards.

1 A "CETP investor" refers to an 1ZD or an entity assigned by an 1ZD to receive project financing for constructingand operating a CETP.

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19. Component 3: Implementation Support. This Component will support projectbeneficiaries to properly implement project activities through three subcomponents: (a) capacitybuilding; (b) technical assistance (TA); and (c) project management. Subcomponent (a) CapacityBuilding, will support: (i) facilitation of training on, among other things, environmentalmanagement, surface water quality monitoring, CETP operation and maintenance, andenvironmental information disclosure and public participation; (ii) facilitation of stakeholderconsultation workshops; and (iii) participation in overseas training courses, international studytours, domestic study tours on industrial pollution management. Subcomponent (b) TechnicalAssistance, will support the improvement of knowledge on sound industrial pollutionmanagement in the project's river basin context, including: (i) development of manuals; (ii)identification and demonstration of environmental management models with effective economic,administrative and technological instruments; (iii) development of strategies for sustainable IZdevelopment; (iv) establishment of site assessment and remediation strategies for relocation ofIndustrial Zones; (v) institutional capacity assessment of the Nhue-Day River Basin and DongNai River Basin within the scope of the project, with a focus on the project provinces; (vi)development of CETP operation and maintenance manuals; (vii) strengthening of the capacity ofVEPF to perform technical and financial appraisal of CETP proposals, verify relevantperformance targets, and manage relevant credit risks; and (viii) strengthening of the capacity ofCETP investors to design and operate CETPs in a proper manner. Subcomponent (c) ProjectManagement, will support the project management and implementation, including: (i)monitoring and evaluation activities; (ii) Incremental Operating Costs for the ProjectManagement Units; and (iii) acquisition of a vehicle.

B. Project Financing

Lending Instrument

20. The lending instrument for this pilot project is a Specific Investment Loan (SIL). Theproject will be financed by an IDA credit of SDR32.9 million (equivalent to US$50 million).

Project Cost and Financing

% Financing fromProject Components Project Cost IDA Financing IDA

I.Component 1 Environmental Monitoring and Enforcement 22.68 19.18 852.Component 2 Pilot Performance-Based CETP Financing 25.59 20.47 803.Component 3 Implementation Support 10.58 10.35 98

Total Project Costs 58.85 50.00 85

Note: all costs include contingencies.

C. Lessons Learned and Reflected in the Project Design

21. Since the 1980s, the Bank has supported several industrial pollution control activities invarious countries. Lessons learned from these operations that have been taken into account in thedesign of this project include: (a) adopting a complementary combination of technical assistance,capacity building and investment funding interventions; (b) effective targeting to deliver

6

achievable and measurable pollution reduction; and (c) piloting and demonstrating new ideasbefore scaling up to the national level.

22. Combination of Interventions. Previous interventions have shown that pollution controlinfrastructure investments alone are not sufficient to achieve pollution reduction targets. Theproject therefore takes a holistic approach in addressing the issue of industrial wastewaterpollution by not only focusing on the institutional arrangements and the regulatory framework onenvironmental management issues of IZs but also: (i) provides concessional financing andtechnical assistance for CETP design, construction and operation, and environmental monitoringand enforcement; (ii) provides investments for AMS network; (iii) supports increase in capacityfor monitoring and enforcement; (iv) promotes information disclosure among agencies and thepublic; and (v) supports the introduction of sizeable pollution discharge/fines.

23. Pilot First. The project will be the Bank's first stand alone investment project onindustrial pollution management in Vietnam and will pilot the proposed approach in fourprovinces. It is expected that this pilot project will generate valuable lessons for the design offuture pollution management interventions in Vietnam.

24. Effective Targeting. Given the complexity and challenges involved in addressingindustrial pollution and the pilot nature of this project, it was decided not to dissipate theproject's focus by also attempting to tackle air pollution and solid waste management and tolimit geographic coverage to IZs in four highly industrialized provinces.

IV. IMPLEMENTATION

A. Institutional and Implementation Arrangements

25. MPI, which is responsible for IZ development, is the line ministry designated by theGovernment to be the primary executing agency for the proposed project. A Project SteeringCommittee (PSC) will be established consisting of key representatives from MPI, the Ministry ofFinance (MOF), MONRE, and the four project provinces. It will: (a) provide guidance onimplementation, especially on cross-cutting issues which require consensus from the variousagencies involved in the project; (b) review and monitor implementation progress; and (c) ensurethat policy and institutional reforms proposed under the project are consistent with the country'soverall agenda. The PSC will meet once or twice a year and will be chaired by a Vice-Ministerof MPI.

26. A Project Management Unit (PMU) will be established in MPI's Industrial ZoneManagement Department. The MPI PMU will facilitate overall project coordination with otherimplementing agencies and provinces including MONRE, MOF, and VEPF and stakeholdersincluding Departments of Planning and Investment, DONREs, IZMBs, CETP investors, and theEnvironment Police in the four participating provinces. It will be responsible for preparing andconsolidating project documents, including budget and procurement plans for approvals asrequired by the government and the Bank, financial management, monitoring and evaluation(M&E), and reporting. The MPI PMU will also be the implementing agency for Component 3.

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27. A second PMU will be established at the Vietnam Environment Administration (VEA) ofMONRE. The MONRE PMU will be the implementing agency for Component 1. It will beresponsible for coordinating with the MPI PMU, and the DONREs and Environment Police atthe provincial level. The MONRE PMU will also help review and ensure that activitiesundertaken under Component 3 are technically sound.

28. Under Component 2, VEPF will set up the third PMU. Through the PMU, VEPF willsolicit and appraise investment proposals for collection and treatment facilities from eligible IZsof the four project provinces, based on procedures and criteria agreed with MPI, VEPF and theBank. Acting as an agent of MOF, VEPF will sign loan agreements with selected IZs, authorizepayments, monitor proper implementation of CETP investments, and collect loan repayments.VEPF will also establish a designated account for project funds.

29. At each project province, a project focal point will be designated by the provincialauthorities, to be responsible for overall implementation and coordination at the provincial level,primarily involving DPIs and DONREs. MOUs will be signed between the MONRE PMU andthe four project provinces to clearly define procedures and conditions of the project at theprovincial level.

30. The Environment Police of the four project provinces will receive project support forportable environmental monitoring equipment for on-site environmental inspection tasks andproject-specific inspection and enforcement actions on IZs in the four project provinces. Inaddition, Environment Police in the four project provinces will participate in project-supportedcapacity building activities (such as training on environmental regulations, monitoring,inspection and enforcement) organized under Component 3. Monitoring and enforcement data onIZs will be exchanged with DONRE and shared with MPI and MONRE PMUs. Project supportto the Environment Police will be consistent with the recently released Guidelines on WorldBank Support to Criminal Justice Activities.

B. Results Monitoring and Evaluation

31. The monitoring and evaluation framework is detailed in Annex 1. Project implementationstatus will be reported by the MONRE PMU, the VEPF PMU and the four provinces andintegrated by the MPI PMU in one combined report on a semester basis. To monitor projectoutcomes, the project will support a robust environmental monitoring program at four levels: (a)self monitoring and reporting of project-financed CETPs by CETP investors; (b) DONRE'smonitoring of project-financed CETPs at the time of their commissioning; (c) environmentalcompliance monitoring by DONREs and Environment Police of the four provinces; and (d)surface water quality monitoring.

32. In addition to environmental monitoring, the three PMUs will track projectimplementation progress and evaluate the effectiveness of policy studies and capacity buildingactivities. MONRE and MPI PMUs will review collected monitoring, inspection andenforcement data and project implementation data to evaluate the performance of projectinterventions.

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C. Sustainability

33. The improved environmental monitoring and enforcement capacity and environmentalinformation disclosure mechanisms will promote better environmental governance. By linkingcompliance with financing, the proposed performance-based financing scheme could become aneffective model with high replication potential in Vietnam. Sustainability of this project will befurther secured by the institutionalization of policy and regulatory documents developed underthe project.

V. KEY RISKS AND MITIGATION MEASURES

A. Risk Ratings Summary

Stakeholder Risk S Project Risk- Design S

Implementing Agency Risk - Social and Environmental M- Capacity S - Program and Donor L- Governance S - Delivery Monitoring and Sustainability M

Overall Implementation Risk SS: Substantial; M: Moderate; L: Low

B. Description

34. The project overall risk is substantial. Several factors contribute to project risks:

(a) Addressing industrial pollution requires short-term trade-offs with aggressive andcompetitive growth policies. Narrower and short-term economic interests may underminethe Government's efforts to act against industrial pollution. To mitigate this risk, theproject, by design, targets its interventions on a limited but high profile pollution issue -industrial wastewater pollution from large IZs. The project seeks to further mitigate thisrisk by: (i) building general monitoring and enforcement capacity of the environmentalagencies in the four provinces to enable them to properly monitor wastewater dischargesfrom their IZs and take necessary enforcement actions; and (ii) by engaging the public inindustrial pollution monitoring and enforcement through timely disclosure of monitoringinformation and proper processing of public complaints.

(b) Project implementation will involve some stakeholders that do not have prior experiencewith Bank-funded projects. This could give rise to delays and non-compliance withagreed procedures. There is also a potential risk of coordination issues due to overlappingmandates. To mitigate these risks: (i) a national PSC will be established to guide projectimplementation; (ii) a Project Implementation Manual (PIM) and a CETP financingOperations Manual have been prepared to provide detailed guidance on key areas ofproject, financial, and procurement management; and (iii) a responsibility matrix anddraft TORs for activities will be included in the PIM and the CETP Financing OperationsManual in order to clarify the roles and responsibilities of the different agencies involved.National and international consultants will be hired to provide technical assistance.

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Periodic internal audits will be undertaken to minimize the risk of misuse of funds andtraining will be provided on financial management and procurement.

VI. APPRAISAL SUMMARY

A. Economic and Financial Analyses

35. An economic and financial analysis of the project was carried out during projectpreparation. Project economic benefits that would accrue to society include the costs of foregonemedical treatment, the value of avoided lost earnings for individuals made ill as a result ofpollution, the gains from reduced mortality, as well as the avoided cost of reduction inagricultural and aquaculture productivity. The economic analysis adopted a cost-abatementapproach to modeling potential net benefits of the project and compared the benefits todiscounted project costs. The economic analysis concluded that: (a) financing of the project isjustified due to the public goods aspect of the pollution monitoring and dissemination activities,as well as the large externalities of pollution abatement in terms of reduced health relatedmorbidity and mortality and improved agricultural and aquaculture productivity; and (b) projectoutcomes are associated with a substantially higher present value of total costs averted. For (b),the analysis showed that even with highly conservative assumptions, a net-positive social returncan be expected for the project.

36. A detailed financial analysis was done for the two pilot IZ projects under Component 2.The analysis demonstrates that both IZs will need to increase their current wastewater treatmenttariffs to achieve full cost recovery of CETP investments and maintain proper CETP operationsand maintenance. However, IZ developers could subsidize their CETP investment and operatingcosts from their main source of revenue - annual service charges. The analysis estimates thatsuch a subsidy would account for less than 15% of the current tariff for wastewater treatment perm3 in the baseline scenario (the current tariffs in the two IZs are US$0.32 and US$0.34 per M3).

37. In terms of overall fiscal commitments, the Government will repay the loan financing forComponents 1 and 3 from the state budget. It is estimated that at completion the project willresult in modest recurrent costs to the Government (less than $0.3 million), which is less than0.2% of anticipated government environment sector spending.

B. Technical

38. AMSs. Automatic monitoring stations (AMSs) have been used world-wide to monitorsurface water quality. Vietnam has gained limited experience in setting up about four AMSs. Thedesign of the water quality AMS system under this project (types of system, location, monitoringparameters and frequencies, etc.) has incorporated lessons learned from the construction andoperations of the four stations, as well as those from other countries, and is based onconsultations with the four DONREs. A total of 17 AMSs will be financed to monitor overallsurface water quality, with a special focus on potential impacts of wastewater discharges fromIZs of the four provinces. Taking into account operating costs and monitoring objectives, twotypes of AMSs are proposed: basic stations to monitor basic parameters and expanded stations tomonitor additional parameters specific to the sites.

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39. Technical design of the project financed AMS emphasizes the importance of projectsupport to monitoring data transfer, storage, analysis and reporting. An AMS monitoringinformation management system has been designed to transfer monitoring data to DONREs andMONRE simultaneously. Such information could be properly analyzed and disclosed forenforcement and public participation purposes.

40. CETPs. Existing IZs that need increased wastewater treatment capacity and new IZs thatare being developed will be eligible for technical assistance under Component 3 to review andimprove technical designs. Designs will be required to meet defined eligibility criteria that willbe screened by specialists as part of VEPF's appraisal of loan applications. More detailedselection/eligibility criteria are described in Annex 2. It is envisaged that the project will be ableto support the extension/new construction of about 8 CETPs.

41. The project will focus, to the extent possible, on IZs that have full sewerage connections,or are able to ensure this by the time the new treatment capacity is completed. Extensions ofsewerage networks will also be eligible for financing.

42. The following measures will be taken to improve the current design, specification andoperation of CETPs:

a) Design enhancements. Relatively simple design modifications, such as providing largerstorage tanks at the inlets of CETPs, could be introduced to make the treatment plantsmore robust by enabling more balanced flows (volume and strength).

b) Specifications for equipment. Bidding documents, particularly those relating to EPCcontracts, could be improved by including more detailed technical and performancespecifications for treatment equipment. This would likely result in reduced life-cyclecosts.

c) Influent standards. To maximize the economies of scale, CETP acceptance standards willbe set as high as possible, commensurate with the capacity of commercially availabletreatment processes. Inspection/monitoring chambers at connection points between IZtenants connecting sewers and the IZ sewer to allow volumetric and quality monitoring ofeffluent will be eligible for funding under the project. CETP designs will includecontinuous automatic monitoring of both the influent and the effluent.

d) Operation and maintenance (O&M). Component 3 will provide technical support toCETP investors for the design, specifications, and O&M of CETPs.

C. Financial Management

43. A Financial Management (FM) Assessment was conducted for the proposed projectimplementing agencies, including MPI's Economic Zones Management Department (EZMD),MONRE's VEA, selected CETP investors and VEPF. The assessment concluded that the projectmeets the minimum Bank financial management requirements, as stipulated in BP/OP 10.02following completion of an FM Action Plan. The FM action plan includes: (a) appointment ofaccounting staff with qualification and experience acceptable to the Bank at all implementingagencies, including MPI/EZMD, MONRE/VEA, and VEPF; (b) development and disseminationof a Financial Management Manual (FMM) section of the PIM; (c) installation of an accountingsoftware in each implementing agency for project accounting records and financial reporting; (d)

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appointment of at least one internal auditor from its existing internal control team to performinternal audit function for VEPF activities under the project; and (e) training for FM staff of thePMUs on Bank FM and disbursement requirements and procedures. The FM action (b) wascompleted prior to Negotiations; action (a) will be completed no later than November 15, 2012;and the remaining actions will be completed within the first year of project implementation.

D. Procurement

44. A Procurement Capacity and Risk Assessment (PCRA) of the project implementingagencies, including two PMUs under MPI and MONRE, and two CETP investors, wasundertaken in May 2012. The PMUs are unfamiliar with the Bank procurement procedures. Tomitigate procurement risks, the agencies have: (a) prepared and adopted a well-structured PIM,which contains a procurement chapter; (b) undertaken intensive training on procurement; and (c)recruited qualified procurement consultants. More detailed findings of the PCRA, the proposedprocurement arrangements, and measures to address the identified risks are presented in Annex3. A Procurement Plan for the first 18 months of project implementation, acceptable to the Bank,has been prepared by the PMUs.

E. Social (including Safeguards):

45. Social Benefits. The project is expected to have positive social impacts in the target IZareas by contributing to sound environmental governance, sustainable IZ development, and areduction in the risks that IZ's currently pose to public health and the environment.

46. Social Risks. Component 1, construction, installation and operation of automaticmonitoring stations (AMS), and Component 2, construction and operation of CETPs, couldinvolve land acquisition, which would need to be assessed and mitigated.

47. Gender. The project addresses wastewater pollution issues that will benefit women andmen in the project area equally. There are no project investments that are considered to begender-sensitive.

48. Involuntary Resettlement OP 4.12 is triggered by Component 2. CETP sub-projectinvestments will take place on land that was acquired under the Government's eminent domainfor IZ creation. In all cases, involuntary resettlement was completed or substantially completedat the time of project identification. In some cases IZs will have minor involuntary resettlementactivities on-going at the time of their CETP loan appraisal.

49. Due diligence reviews were carried out during project preparation for Nhon Trach 3 IZ(located in Dong Nai Province) and the Chau Duc IZ (located in the province of Ba Ria VungTau, BR-VT), that meet the criteria for the construction of a CETP in the first year of projectimplementation. The due diligence reviews confirm that in both cases the involuntaryresettlement complies with government laws/regulations and are in line with the objectives ofBank OP 4.12.

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F. Environment (including Safeguards)

50. The project does not support the creation of new industrial zones nor will it result inincreased wastewater effluent or CETP sludge production above and beyond what is alreadybeing discharged or is already planned and approved. The targeted IZs will release treatedwastewater effluent under the project that will be of higher quality compared to the scenariowithout project. There will be improved control over disposal of sludge. OP 4.01 onEnvironmental Assessment is nevertheless triggered because of the impact of wastewatereffluents, sludge from CETPs, and construction of AMSs and CETPs. The net environmentalimpacts are positive. Annex 3 includes a more detailed discussion on environmental safeguardsunder the project.

51. Each participating IZ will prepare a CETP EIA consistent with Bank requirements andwhich will draw information from the existing EIA(s) and discharge reports, if available. Thedocuments will be reviewed and approved by VEPF and the Bank. Since not all CETPs wereidentified by appraisal, the Borrower has prepared an Environmental and Social ManagementFramework (ESMF) which lays out the procedures for: screening of potential impacts andreviewing existing EIAs; preparing CETP EIAs; addressing institutional and financingarrangements and capacity building needs; monitoring and reporting; and review and clearance.

52. CETP EIAs will include a summary of information from existing EIA(s) (supplementedas needed by additional analyses) on the wastewater outfalls: location and water quality ofreceiving waters, relevant Vietnamese standards (including a discussion on how they areconsistent with World Bank Group Environment, Health, and Safety [EHS] Guidelines), andpotential sensitive receptors (natural habitats, human uses of the watercourses). It will include ananalysis of site-specific information for each industrial zone (kinds of industries at the IZ, natureof pre-treatment at individual industries, infrastructure providing connection to the CETPs,nature of influents to be expected at the CETP, proposed types of CETPs); guidelines for theoperation and maintenance of the CETP (each will also have more detailed technical operationalmanuals and procedures); occupational, health and safety measures; capacity building programs;monitoring plan of environmental performance; and sludge disposal plan (including a duediligence assessment of any existing or planned sludge disposal by third parties).

53. For the minor construction impacts, both for CETPs and for monitoring stations, simpleenvironmental codes of practice (ECOPs) will be followed by all construction contractors. TheECOPs are included in the ESMF.

54. The ESMF and the two EIAs for the first year IZs (Chau Duc and Nhon Trach 3) areacceptable to the Bank. Public consultations were held and information has been disclosed in linewith Bank policies.

55. There are no known potential large scale, significant and/or irreversible impactsanticipated from the CETP projects. The identity of all the IZs to be supported under the project,and therefore the nature and identity of industries present in the IZ which may be connected tothe CETPs, were not known at appraisal. As a precautionary measure, the project has beenclassified as a Category "A" project. Individual CETP subprojects would be classified asequivalent to Category A or B and will be processed as outlined in the ESMF.

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G. Financial Risk Management at VEPF

56. VEPF will manage the implementation of Component 2 through its PMU. VEPF is astate-owned financial institution established in 2002 under the Prime Minister Decision No. 82 toprovide subsidized financial support to environmental protection activities in Vietnam fundingmainly from the State budget. 12 It reports to MONRE and MOF. It is not subject to the bankingregulations for credit institutions in Vietnam, but needs to comply with specific regulationsissued by the Prime Minister, MONRE and MOF on organization, governance, operations andfinancial management. It currently has a chartered capital of approximately US$25 millionfunded by the State budget. As of end 2011, VEPF had funded about 140 environmentalprotection projects under its Soft Loan program in 44 provinces, with a total disbursement ofapproximately US$40 million (VND800 billion). About half of its investments are on wastemanagement and CETP construction in IZs. As of June 30, 2012, VEPF had three non-performing loans in its total lending portfolio, and none of which was related to CETP projects.

57. A due diligence review of VEPF's technical, financial management, and riskmanagement capacity was performed during appraisal. The assessment was based on the generalrequirement for line of credit operations, even though the project will not trigger a standardOP8.30 review. The focus of the due diligence review was on the specific technical strength ofVEPF in appraising and monitoring CETP projects, its credit risk management capacity, and itsoverall management capacity and quality. The review shows that VEPF, as a special purposestate-owned financing agency, has a strong strategic alignment to this project. It has established areasonably robust credit risk management capacity and has relevant experience in CETPfinancing. VEPF management is also committed to expand its financial support to CETPs.VEPF PMU will develop the specific credit policy, credit review process and credit riskmanagement procedures for Component 2 (such as loan terms, risks tolerance target, maximumrisk exposure, single borrower exposure, etc.) through the technical assistance and capacitybuilding support provided under Component 3 (see Annex 2 for details).

12 VEPF is authorized by the relevant regulations to provide financial support to environmental projects nationwidethrough the following methods: soft loan, interest rate supporting; grant aid; deposits for environmental restorationin mineral exploitation; CDM projects financing; and subsidized finance for wind power. VEPF has establishedreasonably robust in-house technical capacity and has a track record of CETP financing during the last decade. As ofJune 30, 2012, VEPF has provided loans of US$14.23 million (about VND298 billion) to 28 CETPs in 11 provinces,including 11 in Dong Nai, 1 in Nam Din, and 1 in BR-VT (three of the project provinces). One CETP loan has beenfully repaid so far and none of the CETP loans had defaulted. However, constrained by its limited total operatingcapital, VEPF had not been able to meet the increasing demand for CETP financing and is thus keen to acquire newfunding through the project.

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Annex 1: Results Framework and Monitoring

VIETNAM: Industrial Pollution Management ProjectResults Framework

Project Development Objective (PDO):The PDO is to improve compliance with industrial wastewater treatment regulations in selected industrial zones in four of the most polluted provinces in Vietnam.

Q Unit of Base- Cumulative Target Values Data Source! Responsibility DescriptionPDO Level Results Indicators a Frequency for Data (indicatorC) Measure line YR 1 YR 2 YR3 YR 4 YR5 Methodology Collection definition etc.)Indicator One: # 0 0 2 5 8 8 (at least Semi- On-line MONRE PMU DischargesNumber of project financed IZs one from annual monitoring meet nationalin the project provinces in E each unit; AMS; and provincialcompliance with effluent project on-site standards.discharge standards. province) monitoring; Baseline notIndicator Two: % NA 0 10% 20% 30% 50% inspections. MONRE PMU available asPercentage of the 34 non- currently notproject-financed operating IZs all requiredin the four project provinces parameters arecomplying with effluent monitored.discharge standards.

INTERMEDIATE RESULTS

Intermediate Result (Component One): Improved Regulatory, Environmental Monitoring and Enforcement

Intermediate Result Indicator # 0 Decree 29 Decree 67 New Law Regulations New decree Semi-annual MONRE/MPI MONRE andOne: Seven key legal revised revised; on on env. on MPI PMUsdocuments reviewed, revised or circular economic monitoring, pollution

on IZ env. zones info control inadopted. E manage- (incl. IZs) disclosure, river basins

ment proposed public proposedproposed participation

proposedIntermediate Result Indicator % 0 10% 20% 50% 100% On-line; On-line MONRE PMU On-site andTwo: Percentage of operating semi-annual monitoring AMSlZs in the project provinces E unit; AMS; monitoringunder proper wastewater on-site system set up.effluent monitoring. monitoring.

Intermediate Result indicator % 0 20% 50% 100% From annual DONRE/VEA/ MONRE PMU

Three: % of IZs in the project to monthly EnvironmentPolice's

provinces that are rated for E informationtheir environmental disclosureperformance. records.Intermediate Result indicator # 0 5 10 17 17 Annual MONRE PMUFour: Number of AMSs Eestablished and functioning.Intermediate Result (Component Two): Pilot Performance-Based CETP Financing

Intermediate Result indicator # 2 2 5 8 8 8 Annual VEPF/MPIOne: Number of CETP D PMUsfinancing proposals received.

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Intermediate Result indicator # 0 2 5 8 8 Annual VEPF/MPI ProperlyTwo: Number of quality CETPs E PMUs constructed andcompleted/operational. operated CETPsIntermediate Result (Component Three):Implementation SupportIntermediate Result indicator % 0 40% 60% 80% 90% 90% Semi- Training MPI PMUOne: Percentage of trainees annual reports.with improved capacity after Eproject financed trainingevents.Intermediate Result indicator # 0 Reports Reports Reports Semi- MPI/MONREThree: Seven key TA packages drafted finalized disseminated annual PMUson sustainable industrialdevelopment and pollutionbaseline investigationcompleted.Intermediate Result indicator # 0 500 1000 1500 2000 2500 Semi- Training MPI PMUThree: Number of participants annual reports.trained in project financed Ecapacity building activities.

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Annex 2: Detailed Project Description

VIETNAM: Industrial Pollution Management Project

1. The project will support the following three components: (a) Environmental Policy,Monitoring and Enforcement; (b) Performance-Based CETP Financing; and (c) ImplementationSupport. Together the three components will provide an integrated set of incentives for industrialzones in the four project provinces to improve their environmental performance, and thusachieve the project development objective.

2. Component 1: Environmental Policy, Monitoring and Enforcement. This componentfocuses on the regulatory and enforcement aspects of industrial pollution management and willdevelop and strengthen monitoring capacity of MONRE, and DONREs and ProvincialEnvironment Police in the four project provinces. It will promote disclosure of monitoringinformation and engagement of the public in industrial pollution monitoring and enforcement. Itis expected that the general public, empowered by the disclosed information and properparticipation mechanisms, could complement regulatory monitoring and enforcement to improveenvironmental performance of IZs in the four project provinces. This component includes threesub-components: (a) Policy Review and Revision; (b) Environmental Monitoring andEnforcement; and (c) Information Disclosure and Public Participation.

3. Subcomponent 1(a): Policy Review and Revision. This sub-component will support acomprehensive review of legal documents and related technical guidelines of Vietnam onpollution management. Based on the results of the amendment of the 2005 Law on EnvironmentProtection (LEP), expected to be submitted to the National Assembly in 2013 for review andapproval, this sub-component will focus on issues related to: (a) industrial wastewater collection,treatment and discharge, and wastewater fee; (b) effectiveness of environmental managementinstruments such as strategic environmental assessment (SEA), EIA, discharge fees, and fines inpollution management; (c) post-EIA environmental monitoring, inspection, and enforcement;and (d) environmental reporting, information disclosure, and public participation in pollutionmanagement. The review will produce drafts of technical guidelines of the amended LEP.

4. Based on the amended LEP, this sub-component will support review and revision of thefollowing legal documents regulating environmental management issues of IZs and river basins:

(a) Decree 29/2008/ND-CP will be reviewed, possibly resulting in a proposal for a new lawon economic zones development. The new law would define environmental managementresponsibilities of IZs among state agencies. Draft regulations and technical guidelineswould be prepared to support implementation of the new law.

(b) A circular on annual environmental auditing at industrial firms and industrial zones willbe proposed.

(c) Circulars and technical guidelines on preparation and clearance of EIAs of different typesof industrial investments will be drafted.

(d) A draft decree on environmental management of river basins will be proposed tocoordinate environmental management of river basins by strengthening the role of riverbasin environmental protection commissions, adopting an integrated river basinenvironmental management approach, and eliminating or restricting high pollutingindustries in key river basins. This will be consistent with the Prime Minister's Directive

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5181/VPVP-KGVX dated July 26, 2010, which calls for effective environmentalprotection systems in key river basins.

5. This sub-component will also support a targeted review of legal documents related tocollection, treatment and discharge of industrial wastewater:

(a) Decree 67/2003/ND-CP on Wastewater Discharge Charges will be reviewed and revisedto ensure its consistency with Decree 88/2007/ND-CP on Municipal and IndustrialZones' Wastewater Discharge (which is being revised) and strengthen its articles that areinsufficient for curbing industrial wastewater discharge.

(b) Decree 149/2004/ND-CP on Water Resource Exploitation and Use and WastewaterDischarge, and Circular 02/2009/TT-BTNMT on Assessment of Condition of ReceivingWater Bodies of Wastewater Discharges will be reviewed to ensure the wastewaterdischarge permitting process is integrated into the EIA review and clearance process.

6. Finally, this sub-component will support review and revision of decisions and regulationsof the Provincial People's Committees (PPCs) to ensure that their decisions and regulations willbe consistent with the revised national regulations and technical guidelines in the four projectprovinces. In doing so, roles and responsibilities of related provincial agencies in pollutionmanagement (specifically in industrial zones) will be clearly defined. Provincial wastewaterdischarge standards will be reviewed and revised based on national requirements and provincialenvironmental management targets.

7. Subcomponent 1(b) Environmental Monitoring and Enforcement. This sub-component will support the development of environmental monitoring infrastructure,improvement in environmental monitoring activities, and environmental enforcement activities.The development of environmental monitoring infrastructure will include procurement of: (a)laboratory and standard sampling equipment; (b) field sampling and rapid monitoring equipmentand protection gear; and (c) two water quality monitoring vehicles for VEA's Center forEnvironmental Monitoring (CEM) and one water quality monitoring vehicle for each ProvincialCEM (PCEM) of the four project provinces.

8. This sub-component will also support procurement and installation of 17 automatic waterquality monitoring stations in the four project provinces. Two types of AMS will be supported:basic and expanded. The AMSs will be able to perform surface water quality sampling,analyzing, data logging and data transferring tasks. Basic AMSs will monitor only five waterquality parameters (pH/ORP, DO, conductivity, temperature and turbidity). Expanded AMSs willinclude additional parameters of COD/nitrate, NH4+ and total phosphorus. Based on local riverpollution situations, four AMSs (two basic and two expanded each) will be constructed in NamDinh and Ha Nam, two basic and four expanded AMSs will be constructed in Dong Nai, and twobasic and one expanded AMSs will be constructed in BRVT. The distance from the AMSlocation to the sampling point will be less than 100 meters. All AMSs will be located in stateland and if possible existing public facilities. AMSs could also be hosted in containers for easyinstallation, maintenance and transport. All 17 AMSs will be owned by MONRE/VEA andoperated by the DONREs with budget support from the project and the state.

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9. With existing equipment and those procured under this project, CEM and PCEMs willcarry out the following monitoring activities:

(a) Continuous surface water quality monitoring with the 17 AMSs.(b) Routine surface water quality monitoring. CEMNEA will carry out surface water quality

monitoring five times a year in four project provinces. Monitoring parameters includephysico-chemical parameters, bio-parameters and other parameters based on the expectedpollution characteristics at each monitoring point.

(c) Routine IZ wastewater discharge monitoring covering all IZs in the project provinces.The PCEMs of the project provinces will conduct wastewater discharging monitoring atproject-financed IZs with a frequency of six times per year and at non-project financedIZs with a frequency of two times per year. The monitored parameters will be chosenaccording to characteristics of wastewater sources.

(d) DONREs and Environment Police in the four project provinces will carry out projectsponsored and unscheduled on-site inspection and enforcement monitoring at least twicea year. Such inspection and enforcement will be triggered by irregular monitoring results,public complaints, or public reporting.

10. The project will support development and upgrading of the environmental monitoringinformation management systems of MONRENEA and the four project provinces. First, thesystem will enable VEA/CEM and DONREs in the four project provinces to receive monitoringdata directly from data loggers of the 17 project-financed AMSs. It will also allow manual inputsof monitoring results from routine inspection and enforcement monitoring events. Finally, thesystem will enable proper analysis and summary of monitoring data, so that reliable and accuratemonitoring results will be provided for information disclosure. DONREs of the four projectprovinces and MONRENEA will host project-financed data processing and managementcenters.

11. The project will support 100% operating and maintenance costs for project financedAMSs and project specific monitoring activities for the first and second year of projectimplementation. This support will be reduced to 50% for the third year and 25% by the fourthyear, with the state budget supporting 100% of costs by the fifth year.

12. These monitoring activities will be an addition to the government's existing monitoringprograms. Such monitoring will provide reliable data for early and timely warning of potentialenvironmental noncompliance of IZs, and thus trigger timely enforcement actions to prevent,mitigate, or minimize impacts of such events. Eventually, such monitoring data will supportpolicy-makers to better manage water resources of the two river basins.

13. Sub-component 1(c) Information Disclosure and Public Participation. This sub-component will support an IZ pollution information disclosure system which will rate anddisclose environmental performance (focusing on wastewater) of all IZs in the four projectprovinces and will establish it nationally by the end of the project. A rating methodology will bedeveloped based on consultations with all stakeholders. Environmental monitoring andenforcement results, public complaint records, and final performance rating will be disclosed ona project-financed website. Based on an IDF-supported Green Bamboo Program on information

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disclosure and environmental performance rating of pollution enterprises, locally-accepted andeasily recognized color codes or other graphic symbols will be used to classify performance sothat the rating can be easily disseminated by the media and understood by the public. Closecommunication will be maintained with CETP investors to enable them understand the proposedrating system and ways to improve their ratings. Final performance ratings will be disclosed toall affected and interested parties on a timely and regular basis through various media outlets.

14. This sub-component will also facilitate public access to an existing environmental hotlineof Environment Police and websites of MONRE, DONREs and the project. In addition, theproject will support awareness raising activities and disseminate informational material ongeneral industrial pollution issues, and environmental performance rating. The project will alsofacilitate communication with various media outlets to enable them to accurately discloseinformation generated from the project.

15. Component 2: Performance-Based CETP Financing. This component will providesubsidized loans for the construction of about 8 CETPs. Detailed financing arrangements underthis performance-based financing (PBF) scheme have been developed based on Decree78/2010/ND-CP on On-Lending of the Government's Foreign Loans, which defines on-lendingconditions, process, procedures and roles and responsibilities of involved entities. Key featuresof the financing scheme are:

(a) Support to construction of new and expansion of existing CETPs, as well as constructionof wastewater collection sewer systems, monitoring chambers, and automatic monitoringunits in the industrial zones in the selected provinces of the project.

(b) Requirements on pre-treatment, internal connections to the CETP, self monitoring at firmand CETP outlets, and qualified CETP operators.

(c) Loan support up to 75% of total investments.(d) Long term (up to 15 year term and 2 year grace period).(e) Subsidized interest rates based on Decree 78/2010.13(f) Maximum loan size of $4 million.(g) Single borrower limit of $5 million.

16. In addition to the involuntary resettlement requirement highlighted in the SocialSafeguards section of the main text, eligibility criteria for CETP financing include:

(a) CETP investors are financially capable to repay the loans.(b) CETP investors agree to contribute 25% of the investment, and have proof of access to

funding (either through balance sheet or letters from banks ready to provide credit).(c) CETP investors provide proof of technical and financial capacity to operate the CETP.(d) CETP investors are committed to have a sewage collection system that covers all

industrial tenants with individual discharge permits by the time of CETP operation.

At project approval, the interest rate is 6.6% for loans in VND. The rate is adjustable by MOF based on the marketexchange rate risk and cost of borrowing. The on-lending rate for each CETP loan is fixed for the lifetime of theloan. The comparable commercial lending rates in Vietnam for VND loans for CETP construction are around 12 %.

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(e) CETP investors commit to construct in each industrial firm on site an effluent samplingchamber which will permit sampling the firm's effluent before it is discharged to thesewage collection network.

(f) If the support is requested for extending the capacity of an existing CETP, it is requiredthat the existing treatment plant has achieved effluent quality standards. If it has not, anaction plan for improving its performance needs to be provided.

(g) CETP investors are committed to ensuring there will be necessary pre-treatment asneeded.

(h) CETP investors commit to have only one CETP effluent discharge point by the time ofCETP operation.

(i) CETP investors commit to include in the treatment plant flow meters of inflow andoutflow, to install automatic water quality monitoring equipment, and to carry out manualmonitoring of the inflow and outflow as required by the law.

(j) CETP investors commit to operate the CETP continuously after completion of CETPconstruction.

(k) The CETP is fully in compliance with environmental and social performance targetsdeveloped based on the safeguard requirements of the Government and of the Bank.

17. During the validity of the loan agreement, the CETP investors will need to meet allagreed environmental and social performance targets and to not violate any environmentalregulations (prescribed in Decree No.1 17/2009/ND-CP on handling of legal violations in thefield of environmental protection). If any non-compliance is identified, the CETP investor isobliged to pay fines and take remedial measures according to the written administrative sanctionof the competent authorities. In addition, the CETP investor will also be subject to the followingpenalties under the PBF loan agreement:

(a) For the first violation, the loan terms will be reduced by 2 years.(b) For the second violation, the loan terms will be reduced by 4 additional years.(c) For the third violation, the loan will need to be repaid immediately.

18. For the first year of project implementation, two developers are ready to sign loanagreements after project funding becomes available: Chau Duc IZ in BR-VT Province (expectedinvestment cost of US$2.1 million) and Nhon Trach III IZ (Phase 2, expansion of an existingCETP) in Dong Nai Province (US$1.5 million). Detailed information on the two IZs is providedin the ESMF. The two IZs' CETP investment proposals have been appraised.

19. Component 3: Implementation Support. This component supports three sub-components: Capacity Building, Technical Assistance, and Project Management.

20. Subcomponent 3 (a): Capacity Building. This sub-component will support fourmodules of training courses: environmental management; surface water quality monitoring;CETP operation and maintenance; and environmental information disclosure and publicparticipation. The module on environmental management will include ten training courses on: (a)the revised pollution management legislation; (b) concepts and international best practices ofindustrial pollution management; (c) concepts and international best practices of integrated riverbasin water resource management; (d) environmental auditing and certification management; (e)

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green productivity and sound environmental management systems for sustainable IZdevelopment; (f) environmental compliance monitoring, inspection and enforcement; (g)pollution early warning and response systems; (h) environmental assessment for IZs; (i) ISO14000 certification; and (j) project management. The targeted audience for (a), (b), (e), (h) and(i) will be government agencies at the central (MPI, MONRE, Ministry of Industry and Trade(MOIT), VEPF, Environment Police) and provincial (DPI, DONRE, Department of Industry andTrade (DOIT), IZMB, Environment Police) levels and all industrial zones in the four projectprovinces. Course (c) will be tailored to river basin management commissions, water resourcesagencies, and MONRE/DONREs; Courses (d), (f) and (g) will focus on MONRE/DONREs,VEPF and Environment Police; while Course (j) will be held mainly for the three PMUs. Alltraining events will include an evaluation to assess effectiveness of these events in improving thetechnical capacity of trainees, based on surveys or other assessments done before and after suchevents.

21. The second training module will be technical in nature and focus mainly on MONRE,DONREs and Environment Police. IZs' and VEPF's technical staff will also be invited to jointhese courses. Six training courses are proposed: (a) design and development of surface waterquality monitoring systems in the river basin context; (b) water sampling, sample preservationand analysis; (c) monitoring data process, analysis, reporting and database development/management; (d) quality assurance and control process; (e) information technology forenvironmental monitoring; and (f) AMS design, operation and maintenance.

22. The third training module will target on IZs in the four project provinces. Three trainingcourses are proposed: (a) influent and effluent monitoring; (b) CETP design and procurement;and (c) CETP operation and maintenance.

23. The last training module will include three training courses: (a) design andimplementation of environmental education and communication programs; and (b) publicparticipation in environmental planning and management; and (c) information management andexchange for effective public participation.

24. In addition to training courses, this component will also support a total of eightstakeholder consultation workshops throughout project implementation to ensure that allstakeholders are fully engaged in project implementation. Representatives of stakeholders willalso be supported to attend international events on industrial pollution management to presentproject outcomes and learn international best practice. The latter will also be achieved throughfive one-week international study tours to learn industrial pollution management andenvironmental monitoring (including AMS management) in one or two developed countries andin developing countries of East Asia, and to learn about eco-industrial park development in theregion. To facilitate domestic knowledge exchange, study tours will be arranged betweenprovinces to share lessons and experience gained on industrial pollution management inVietnam.

25. Subcomponent 3 (b): Technical Assistance. This sub-component will support thefollowing seven technical assistance (TA) packages: (a) development of manuals and reports onplanning and management of industrial pollution of IZs; (b) identification and demonstration of

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environmental management models with effective economic, administrative and technologicalinstruments; (c) development of strategies for sustainable IZ development based on the conceptsof eco-IZ (d) establishment of site assessment and remediation strategies for relocation of IZs;(e) investigation on environmental carrying capacity of the two river basins with a focus on thefour project provinces; (f) development of inventories of pollution sources in the four projectprovinces; (g) development of CETP operation and maintenance manuals; and (h) review andrevision of the CETP Financing Operations Manual based on actual implementation results.

26. In addition to above research oriented TA activities, this sub-component will providesupport to two additional TA packages for: (a) VEPF and its PMU to strengthen capacity toperform technical and financial appraisal of CETP proposals, to verify performance targetsagreed under the PBF loan agreement, and to manage credit risks associated with CETPfinancing; and (b) CETP investors and their consultants to design, operate, and maintain CETPs.

27. Subcomponent 3 (c): Project Management. This sub-component will support: (a) M&Eactivities on project implementation; (b) incremental operating costs of the three PMUs; and (c)acquisition of a vehicle for the MPI PMU. For the three PMUs, this sub-component will supportas needed recruitment of long-term project management consultants (financial, procurement,M&E, etc.) and short-term experts on specific technical assignments. Costs related to travel,communication, office equipment, furniture and consumables will also be supported.

28. Project M&E activities will be performed by the three PMUs. Such activities include:project launch and completion workshops, annual project implementation review meetings withthe PSC, mid-term and end of project reviews, and participation in Bank supervision missions.

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Annex 3: Implementation Arrangements

VIETNAM: Industrial Pollution Management Project

Project Institutional and Implementation Arrangements

1. A national steering committee will be established to guide project implementation. It willbe headed by a vice-minister of MPI and will include vice-ministers of MONRE and MOF andthe vice chairmen of all four participating provinces. PMUs will be set up at MPI, MONRE andVEPF. The MPI PMU will be responsible for overall project implementation and will lead theimplementation of Component 3; the MONRE PMU will lead the implementation of Component1; and the VEPF PMU will manage the implementation of Component 2. The four projectprovinces will delegate a provincial focal point from the Offices of the PPCs to coordinateproject implementation in the province.

2. Under Component 1, the MONRE PMU will be responsible for procurement anddeployment of: 17 surface water automatic monitoring systems (AMSs); a monitoringinformation management system; and portable and laboratory equipment for CEM and PCEMsof the project provinces. It will also be responsible for a program for regular disclosure ofmonitoring information from the AMSs and from environmental authorities' routine andunscheduled monitoring, inspection and enforcement activities in the four project provinces. TheMONRE PMU will also be in charge of the selection of consultants to carry out the proposedenvironmental policy review and studies, while MPI will manage the selection of consultants forthe review of Decree 29/2008/ND-CP and the draft of the new law on development of economiczones. In addition, MONRE will organize national or regional TA studies, e.g., the proposedstudy on the carrying capacity of the Nhue-Day and Dong Nai river basins, and the nationalcapacity building and technical workshops under Component 3.

3. The VEPF PMU will be responsible for collecting CETP investment proposals frominterested CETP investors, assisting VEPF in performing technical and financial appr