China - Tianjin Urban Development and Environment Project

Document of The World Bank FOR OMCLAL USE ONLY MICROFICHE COPY Report No. P- 5710-CHA Type: (PM) R_w N. P-5710-CHA CHOI, S./ X82145 / F8 074/ ASTIN MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT Or SDR 73.3. MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A TIANJIN URBAN DEVELOPMENT AND ENVIRONMENT PROJECT MAY 22, 1992 This document has a restricted distribution and may be used by recipients only in the perfonnance of their official dutes Its contents may not otherwise be disclosed without World Dank authorization.  CURRENCY EOUIVALKNTS (as of March 1992) Currency Name - Reuminbi (RMB) Currency Unit - Yuan (Y) - 100 Fen Y 1.00 - US$0.18 US$1.00 - Y 5.45 ABBREVIATIONS AND ACRONYMS TNG - Tianjin Municipal Government The Fund - The Fund for Industrial Pollution Control FISCAL YEAR January I - December 31  FOR OFFICIAL USE ONLY TIARJIR URBA D n UYXiRW T PROJECT Credit and Proi.ct Som=ary Borrower: People's Republic of China Beeflgic sTianjin Municipal Government Credt Aamt: SDR 73.3 million (US$100 million equivalent) Taog: yStandard, with 35 year. maturity RelendinaTems: Frm the Government of China to the Tianjin Municipal Government (THG)s for 15 years, including five years of grace, at a fixed interest rate of 4.51 per annum. TMG w:ll bear all foreign exchange risks except those borne by the entity borrowing from it. Finaucine Plan: Lal Fore Total ------- US$ Million -------- Tianjin Municipal Government 65.8 12.1 77.9 Industrial Enterprises 17.1 - 17.1 IDA - 100.0 100.0 Total . 1.95.0 Economic Rate of A weighted average of about 251 for investment components Returns accounting for 401 of the total project costs. The main project benefits, institutional and environmental, could not be quantified. Staff Am,raisal Recorts Report No. 10284-CHA gas IBiD No. 23342 Ths documnt hasa rektod distbution and may be uud by rcpients only in te poonance of the offiil dutiLs Its contonts may notothrwie be diuclo without Wod Bank authodon.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE PEOPLE'S REPUBLIC OF CHINA FOR A TIANJIN UMBAN DEmVLOPMENT AND ENVIRONMENT PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed development credit to the People's Republic of China for SDR 73.3 million, the equivalent of US$100 million, on standard IDA terms with a maturity of 35 years to help finance the Tianjin Urban Development and Environment Project. The proceeds of the credit would be relent to the Tianjin Municipal Government for 15 years, including 5 years of grace, with interest at 4.5 percent per annum. The beneficiary will bear the foreign exchange risks. 2. Background. Since the early 1980s, after two decades of stagnation, the cities of China have been undergoing a rapid process of growth and transformation, paralleling that of the country's economy as a whole. The industrial growth has led to increased demand for labor and supporting services, fueling a rapid growth in urban population and infrastructure. It is estimated that China's urban population has grown by about 5 percent a year since 1980 and has now reached about 600 million. The large population and its rising income have resulted in a heavy and growing demand for housing and urban public services. Reform of the country's economic management has also involved a transition in the urban management system. Whereas the central government formerly directed most aspects of local economies, it now limits its role to setting the broad framework and parameters, devolving to local governments broad authority to finance, plan, and manage urban development. 3. Also since the early 1980. the Government has been pursuing an active environmental protection policy. The policy and legal framework now well established require environmental improvement plans as part of the overall development plans of the central and local governments, environmental assessment and permits for investment projects, and penalties for pollution discharges beyond certain l1.mits. The Government has established environmental protection offices in most sector ministries and recently a separate ministerial agency to coordinate and promote environmental improvement efforts. Environmental protection bureaus have been established at all levels of local government, with major responsibilities to set local standards, implement regulations, and coordinate improvement programs. 4. Responding to the rising dem nd and the expanded authority placed on them, the municipal governments have been investing heavily to reverse past deterioration of urban facilities and the environment. A particularly successful example has been Tianjin, the third largest city in China with an urban population of five million. A major port and industrial center for northern China, Tianjin suffered major devastation in the earthquake of 1976, which severely damaged its industrial and urban infrastructure. Through large-scale investments organized by the Tianjin Municipal Government (TMG), however, the city has recovered remarkably fast, doubling its industrial production and housing stock over the last decade. The serious pollution of its air and rivers has also started to abate thanks to renovation of aging industrial plants, TMG's strong regulatory enforcement, and its active investment programs to reduce pollution.  -2- 5. Lessons Learned from On-Gogng Bank Group Onerations. Experience with sector work and four on-going urban and environmental projects in China highlights the large potential benefits from institutional improvements and, on the other hand, the need for major efforts to integrate the improvements with current practices in overall municipal management contexts. 6. Rationale for IDA Involvement. Continued high levels of efforts to improve infrastructure and the environment in Tianjin are called for by remaining deficiencies and the city's v^i-id industrial growth. As it moves beyond reconstruction of basic assets, tMg is finding it increasingly difficult to assign priorities for allocating resources among the diverse and changing demands of the city. It is limited in this by its traditional system of infrastructure and environcental management, which relies heavily on static norms and targets. It therefore needs additional financial resources and, more importantly, institutional capacity to ensure efficiency, equity, and sustainability of its policies and expenditures in the dynamic and decentralized economy. The Association can help TMG to meet these immediate and long-term challenges, with its expertise and experience in helping to develop institutional capacities in market as well as mixed economies aimed at monitoring and responding to actual demands and constraints. 7. Such assistance would fit well into the focus of the Bank Group's strategy for assisting China in the urban and environment sectors, on helping to map a transition to sector management that is efficient, decentralized and responsive to local conditions and the environment. It would also support the central government's strategy to encourage market-oriented innovations in urban and environmental management, especially in large cities at the forefront of industrial and institutional development. The project also supports the Bank Group's strategy to introduce improved institutional models in prominent cities to maximize the demonstration effects. 8. Proiect Obiectives. The project aims at the long-term improvement of Tianjin's urban infrastructure and environment, mainly through increases in the efficiency and responsiveness of TMG's sector management systems and public expenditure programs and through cost-effective physical improvements. Specific objectives are to: (a) Improve infrastructure planning and budgeting; (b) establish a sustainable and cost-effective mechanism for industrial pollution control; and (c) reduce deficiencies in urban environment and transportation and increase the efficiency of the existing assets. 9. Pro1ect DescriDtion. The project would include institutional development and supporting physical investments. Under the infrastructure planmnit and manaRement component, technical assistance and training will be provided to improve techniques and procedures for monitoring infrastructure needs, project planning and evaluation, budgeting and management for the overall sector. The project will also support technical assistance for key sub-sectors, to help develop solid waste disposal, public transport, environmental monitoring and management systems. The project will support investments for environmental sanitation and transportation to improve drainage, sewerage, solid waste management, roads, traffic management, and public bus operations. These improvements would be beneficial in themselves and would also complement and hence increase efficiency of existing assets. Many of these high priority works, in central locations of the city, involve relocation of about four thousand households living in old residential areas that are dilapidated and environmentally unsound. The project will support  - 3 - reaettlemeat of these households in order to minimize disruption, ensure Improvement of resettlers' housng and environmental health conditions, and introduce procedures for expanded housintg choice. Finally, the project will help establish and operate a Rund for Industrial Pollution Control (the Fund), that will help finance investments by industrial enterprises to minimize polluting wastes generated in the production process and thereby yield both environmental and financial benefits. 10. Imolementation. The proposed project would be carried out by TNG over a period of six years. The project is estimated to cost US$195 million equivalent, with a foreign exchange component of US$112 million, of which the Association would finance US$100 million equivalent. An estimated US$19 million equivalent of the credit proceeds will be onlent, through TNG, to the Fund for 15 years, including 5 years of grace, with interest at 5.0X p.a. The Fund will combine this with revenues from a pollution levy to provide pollution control loans to industrial enterprises for three to seven years at market intevest rates, as well as limited grants for certain eligible subprojects. Retroactive financing of up to US$10.0 million equivalent will be provided for expenditures made after April 30, 1991 for urgently needed consultant services and housing construction for initial resettlement. A summary of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and disbursement, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in China are given in Schedules C and D, respectively. A map is also attached. The Staff Appraisal Report, No. 10284- CHA dated May 22, 1992 is being distributed separately. II. Proiect Sustainabilitv. TMG's budgetary policy favoring operation and maintenance over investment as well as its past performance indicate that physical assets created or improved under the project are likely to be well maintained. The sustainability would be further enhanced by improvements in resource mobilization and financial management that will be carried out as part of the project. The Improvements in infrastructure planning and management systems would be made through extensive testing and training, so that the enhancements will be internalized, sustained and expanded. The Fund established under the project would utilize part of pollution levy revenues, currently used mostly for grant financing, in a sustainable combination of market-rate loans and narrowly defined grants so that the Fund could be expanded over time. 12. Agreed Actions. Key agreements were reached during negotiations with TMG on, among others, implementation of a planning and management improvement action plan satisfactory to the Association, and implementation of the resettlement component according to a plan and procedures acceptable to the Association. As conditions of effectiveness, TMG will establish the Fund for Industrial Pollution Control with an organization, operating procedures and financing term satisfactory to the Association, and that an agreement will be signed between the Fund and the People's Construction Bank of China for necessary technical services. 13. KEnvironmental As2ects. More than half of the total investments under the project vould directly help control various sources of pollution, from industrial effluent to solid waste. The resettlement under the project would also greatly improve environmental conditions of the affected households. In order to max4mize the benefits and reduce the risk of  -4- disruption associated with resettlement in general, the project would specifically help finance the resettlement under improved procedures. Compensation, mainly in the form of new housing, has been agreed upon through consultation with each affected household. Other environmental risks of the project have been identified and mitigating measures incorporated through an established environmental impact assessment process. 14. Program Ob10ctve CategorLes. The project would support improvements in public sector management and environment. 15. Aefito. While project benefits cannot be quantified fully, an average economic rate of return of about 251 is indicated for components accounting for about 402 of the total project costs. Most of the physical improvements of the project under drainage, sewerage, solid waste management, resettlement, and industrial pollution control components will result in health and environmental benefits difficult to quantify. The managerial innovations and improvements introduced under the project will yield long-term benefits by increasing efficiency and accountability of public expenditure programs, and by mobilizing resources for pollutiva control in a sustL-4-nble way. These improvements will enhance 11G's effectiveness in the increasingly diverse and decentralized urban economy. Further, improvements in Tianjin could bave wide demonstration effects for municipalities across China, facilitating a needed transition in the country's urban and environmental management system. 16. Risks. Principal project implementation risks relate to the major institutional innovations to be introduced for the industrial pollution control and overall infrastructure planning and management. To minimize the risks, T1G managers and the Association staff paid particular attention during project preparation to defining feasible scopes and details of the components and the necessary organizational arrangements. Substantial levels of consultant input and additional supervision input by the Association are included to provide continued assistance for the institutional aspects during project implementation. 17. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Lewis T. Preston President Attachments Washington, D.C. May 22, 1992  Schedule A TIAJIN URBAN DEVELOPMERT AND ENVIRONMENT PROJECT Esttmated Costs and Financina Plan (US$ Million) Estimated Costs*s Local Foreisn Total Planningt Management and Technical Improvement 2.7 5.9 8.6 Drainage and Sewerage 15.2 10.5 25.7 Solid Waste Management 2.3 10.1 12.4 Urban Transport 18.4 14.9 33.3 Industrial Pollution Control 3.8 35.2 39.0 Resettlement 24.6 10.1 34.7 Total Base Cost 67.0 86.7 153.7 Physical Contingencies 8.4 10.8 19.2 Price Contingencies 7.5 14.6 22.1 Total COSt 112.1 Financint Plan: Tianjin Municipal Government 65.8 12.1 77.9 Industrial Enterprises 17.1 - 17.1 IDA - 100.0 100.0 Total 82.9 * Excluding taxes and duties.  -6- Page 1 of 2 TllnJIN URA34 DEVELOPMENT AND EMVIRSNMENT PROJECT Procub"Sent Method and Disbursements Procurement Method ICB _LCB OTI JTAL -------- US$ Million Equivalent -------- Goods 23.2 3.8 1.5 28.5 (22.5) (2.9) (1.3) (26.7) Training and - - 5.6 - 5.6 Technical Assistance (5.6) (5.6) Works - 45.1 2.2 - 47.3 (27.2) (1.2) (28.4) industrial Pollution - - 48.7 - 48.7 Control (19.0) (19.0) Works for Residential - - 33.6 - 33.6 Resettlement (20.3) (20.3) Land Acquisition - - - 21.6 21.6 (0.0) (0.0) Design, Supervision - - - 9.7 9.7 and Management -- (0.01 0.0Q TOTAL 23.2 48.9 91.6 31.3 195.0 (22.5) (30.1) (47.4) (0.0) (100.0) Note: Figures in parentheses are the amounts financed by IDA. Figures Include physical and price contingencies. NMI - Not financed by IDA.  -7- Schesdule B Page 2 of 2 Disbursement. Amount Amount X of (SDR (US$ Expenditures CiLteLgjy ,EInivalet) Iquivalent) to be 11mnaced (1) Goods 19,600,000 26,750,000 1OOZ of foreign expenditures, 1002 of local expenditures (ex-factory cost) and 702 local expenditures for other items procured locally (2) Works 20,900,000 28,400,000 651 (3) Works for i4,800,000 20,300,000 651 Resettlement (4) Consultants' 4,100,000 5,550,000 100l Services and Traintng (4) Pollution 13,900,000 19,000,000 1001 of amount disbursed as Control subloans Subloans TOTAL 7303000000 100.000.000 EstimatWd Sehedule of Disbursements IDA Fiscal Year 1993 1994 ,1995 1996 1997 1998 ---