China - Zhejiang Multicities Development Project

Document of The World Bank FOR OFIMCIAL USE ONLY Report No. P-5906-C IEIORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNAION&L DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 79.3 MELLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A ZUEJIANG MlLTICITIES DEVELOPMET PROJECT MARCl 2, 1993 -' A t '+,Z- H This document has a restricted distribution and may be used by recipients only in the performance of their official dutes Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIVALENTS vas of August 1992) Currency X Rerminbi Currency Unit - Yuan (Y) Y 1.00 - $0.18 $1.00 m Y 5.47 WEIGHTS AND MEASURES meter (m) - 3.28 feet hectare (ha) - 10,000 square meters (i) - 15 mu cubic meter (m') - 284 US gallons tonne (T) - 1,000 kilograms kilometer (km) - 1,000 meters PRINCIPAL ABBREVIATIONS AND ACRONYMS LSWM - Liquid and Solid Waste Management ZEF - Zhejiang Environmental Fund ZEPB - Zhejiang Environment Protection Bureau ZUDPO - Zhejiang Urban Development Project Office ISCAL EAR January 1 - December 31  FOR OMCIAL USE ONLY ZHEJIAtiG MULTICITIES DEVELOPMENT PROJECT Credit and Proiect Summary Borrower: People's Republic of China Beneficiaries: Zhejiang Province and the Municipalities of Hangzhou, Ningbo, Shaoxing and Wenzhou Amount: SDR 79.3 million ($110.0 million equivalent) Terms: Standard IDA terms, with 35 years' maturity including a 10-year grace period Onlendint Terms: Proceeds of the Credit would be relent to the Municipalities by Zhejiang Province. The Municipalities would in turn relend the proceeds to the public utilities and land devel- opment companies for 15 years, including five years of grace, at the IBRD standard variable interest rate per annum, with the entities bearing the commitment charges and foreign exchange risks. Financing Plan: Local Foreign Total ----- ($ million) ----- Hangzhou Municipality 27.3 0.5 27.8 Ningbo Municipality 45.0 0.6 45.6 Wenzhou Municipality 14.7 0.3 15.0 Shaoxing Municipality 31.0 0.3 31.3 Zhejiang Environmental Protection Bureau 1.2 0.1 1.3 IDA 0.5 109.5 110.0 Total 119.7 111.3 231.0 Economic Rate of Return: 19 percent Staff Anpraisal * Report: Report No. 11282-CHA Maps: IBRD 24008 Zhejiana Province IBRD 23917 Project Cities rThis document has a restricted distribution and may be used by recipients only in the performanceC of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  MEMORANDUM AND RECONMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOII1ENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE PEOPLE'S REPUBLIC OF CHINA FOR A ZHEJIANG MULTICITIES DEVELOPNENT PROJECT 1. I submit for your approval the following memorandum and recommen- dation on a proposed Development Credit to the People's Republic of China for SDR 79.3 million ($110 million equivalent) to help finance a Zhejiang Multi- cities Development Project. The proposed Credit would be on standard IDA terms, with a maturity of 35 years including a 10-year grace period. The proceeds of the Development Credit would be onlent to Zhejiang Province for 15 years, including a five-year grace period, at a fixed annual interest rate of 5.1 percent and a commitment charge of 0.5 percent. The Zhejiang Province would relend the proceeds of the Credit, on the same terms and conditions, to the project beneficiary municipalities of Hangzhou, Ningbo, Shaoxing, and Wenzhou and to the Zhejiang Environmental Protection Bureau (ZEPB). The municipalities vould further relend the Credit proceeds to the public utili- ties and land development companies for 15 years, including a five-year grace period, at the IBRD standard variable interest rate per annum, with the enti- ties bearing the commitment charges and foreign exchange risks. The Province would also relend a part of the proceeds to the Zhejiang Environmental Fund for an industrial pollution fund, from which industrial enterprises could borrow at the IBRD standard variable interest rate plus a spread of 1.5 per- cent per annum, with the enterprises bearing the commitment charges and for- eign exchange risks. 2. Countr_/Sector Backaround. The rapid economic growth of the urban areas in China, their consequent population increase, and the rising personal incomes of urban dwellers have accelerated the demand for urban public ser- vices as well as for associated infrastructure and housing. However, due to only gradually changing investment priorities, outmoded urban planning prac- tices, and insufficient public resources, these demands have not been satis- fied adequately. Since China's central government, as part of its decentral- ization efforts, has conscientiously limited its influence over the cities to setting broad urban policy guidelines, the cities in Zhejiang and elsewhere face the challenge of having to meet the growing demand for urban services almost entirely on their own. 3. The cities' efforts to improve urban service delivery under rapid demographic and economic expansion is further hampered by the shortage of urban planning and management systems. The cities' development is planner- determined, based largely on academic theories dating back to the 1930s. Rigid and cumbersome planning methods primarily focus on enforcement of strict land-use regulations rather than providing useful management tools. 4. As the urban centers in the provinces of China are critical to economic modernization efforts, the capacity for urban services delivery needs to grow and develop commensurately. In Zhejiang Province, for example, the urban centers alone account for about 90 percent of the gross value of indus- trial output and absorb three fifths of the province's investment in capital  construction and 91 percent of all capital investments. In addition, these centers promote the development of modern business and technical services sectors, and increasingly become the "incubators" for international trade. 5. Zhejiang Province is located on the East China Sea, directly south of Shanghai and Jiangsu Province. With a population of about 42 million, it is one of the most densely populated areas in China. Within the proposed project cities (Hangzhou, Ningbo, Shaoxing, and Wenzhou), water demand exceeds the normal capacity of existing water plants by about 150,000 m3 per day. This shortfall is projected to increase to over 600,000 m3 per day by 1995 as a result of expected population growth and the rapid irdustrial expansion in all four cities. 6. Hangzhou has the only wastewater treatment facilities in Zhejiang Province. Less than half of the industrial effluents receive on-site treat- ment. This has led to a dramatic deterioration of many urban waterways in parallel with the accelerated urbanization and industrialization of Zhejiang's cities. Thus, pollution has ncticeably increased over the past 20 years. While the cities increasingly recognize these problems, and have some propos- als for the primary treatment of wastewater in their future investment pro- grams, no comprehensive policies or a strategy as to how to cope with liquid and solid waste in their cities have been de-eloped. Moreover, the cities are also facing a numaer of other challenges. Sho:tage and deterioration of hous- ing and transportation are putting increasing demands on their resources. 7. In order to help the State Government and the Province better understand the key issues resulting from rapid urbanization and development, the World Bank carried out a sector study in 1987, entitled: Zhejiang: Chal- lenges of Rapid Urbanization (Report No. 6612-CHA). It reported on deficien- cies in (a) urban services delivery; (b) urban planning and housing; (c) the efficient use of muricipal resources; and (d) environmental management and protection. 8. Lessons Learned from Previous Operations. While the Bank did not start actual lending to China's urban sector until December 1990, there are some lessons to be learned from the preparation of the four projects presently under implementation (Medium-Sized Cities Development Project, Liaoning Urban Infrastructure Project, Shanghai Metropolitan Transport Project, and Tianjin Urban Development and Environment Project). Due to the general inexperience with the Bank's requirements and procedures on the one hand, and the often wide-ranging scope of these projects, spanning from water supply and waste treatment to traffic management and urban planning, the preparation process is generally time and resource intensive. As the authorities gain more experi- ence with the Bank Group's methods and procedures in the urban sector, these problems and delays are expected to become less important. Lessons fro, proj- ect implementation have so far been mainly positive. Both disbursement speed and quality of project progress have been impressive. Project cost estimates are rarely overrun. Especially noteworthy is the fact that there is little turnover of Chinese project personnel. 9. Rationale for TDA Involvement. To sustain economic growthr major investments to improve urban infrastructure and measures to alleviate water pollution are now urgently needed in the four project cities. Bank involve- ment will help ensure that these investments are made through sound sector and  - 3 - investment planning, and that appropriate measures are taken to improve man- agement of sector operations. In addition, technology in water treatment and wastewater, as well as urban planning and project management, are far belao international standards and need to be improved substantially to meet the continued demande of rapid urban growth. The Bank's comparative advantages ares (a) its knowledge gained from extensive urban sector work and its ongo- ing experience with four other urban projects currently under implementation; (b) its international frame of reference; and (c) its ability to aasist China with institution building and the financial reforms of water utilities and land development compriies; and (d) its capacity to assist in disseminating this knowledge to other parts of China. 10. Proiect Objective. The objective of the project is to strengthen the planning and delivery of urban services to four major cities in Zhejiang Province. To achieve this objective, the project will provide te'hnical assistance and financing to: (a) develop the priority urban subsectors of water supply and land development for housing and industrial development; (b) introduce new methods of design aimed at improving land use and recovering costs from beneficiaries; (c) improve management and financial performance of water utilities operating in these cities; (d) strengthen environmental pollu- tion policies, planning and control at the provincial and local level, and support the establishment of an Environmental Fund; (e) improve public trans- port and traffic management in Hangzhou, the provincial capital; and (f) upgrade inadequate infrastructure in four areas in the inner city of Ningbo. 11. Prolect Descri2tion. The project would be the first phase of a comprehensive two-stage program for thc improvement of water supply and the disposal of liquid and solid waste in the project cities. The first phase would support improvements in water supply in the cities of Hangzhou, Ningbo and Wenzhou, land development in Shaoxing, traffic management in Hangzhou, and environmental programs and institution building. Water production would be increased by 620,000 mS/day to address the long-term shortage and poor quality of water supplies. More than 207 ha of land would be developed in Shaoxing to stem overcrowding in the old city and to provide expansion of industrial and commercial activities. The environmental programs would consist of: (a) a comprehensive Liquid and Solid Waste Management (LSWM) Study for the Province and the project cities, support to the provincial environmental agency and the detailed preparation of an Environment Project as a proposed follow-up invest- ment to the Zhejiang Multicities Development Project; (b) a basic urban ser- vices upgrading component for Ningbo; and (c) establishment of a Zhejiang Environmental Fund (ZEF) for pollution control investments for small and medium-sized enterprises. The project would also support urban planning and management systems, traffic management, and sector-related training. The project would also support preparation of the second phase of the program, an environment project for the four cities, supporting environmental infrastruc- ture improvements, domestic and industrial wastewater collection and treatment systems, and municipal solid waste management. 12. Prolect Implementation. The project would be coordinated at the provincial level by a Zhejiang Urban Development Project Office (ZUDPO) under the umbrella of the Provincial Urban and Rural Construction Commission. At the municipal level, the project will be implemented by project management offices with full responsibility and authority over their own components. The  environmental elements of the project, including the administration of ZEF, would be carried out under the leadership of ZEPB. The project cost is esti- mated at $231 million equivalent,, with a foreign exchange component of $111.3 million equivalent (48 percent). The Association would finance $110 million equivalent (95 percent of the foreign exchange costs). Retroactive financing of up to $9.7 million equivalent for expenditures incurred after Marc. 31, 1992 for Shaoxing and Wenzhou would be provided, covering urgently needed civil works for access roads, bridges and a raw water tunnel to avoid project implementation delays. A breakdown of project costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disburse- ments, 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 presented in Schedules C and D, respectively. Maps are also attached. The Staff Appraisal Report, No. 11282-CHA, dated February 22, 1993, is being distributed separately. 13. Prolect Sustainabilitv. Technical assistance and training under the project will have a strong focus on improved operational efficiency and maintenance oi all new or expanded plants and equipment systems ensuring their long-term viability. The works planned for the water supply, land development and urban upgrading components have been specifically designed to serve as demonstration projects to be replicated in other cities in Zhejiang Province and even in other provinces. To prove sustainability is thus of vital inter- est to the authorities. Moreover, with continued financial strength of the public utilities under the agreed tariff policies, expected growth in residen- tial ard industrial water demand, and continued affordability of water by the Eopula..ion, no problems are anticipated concerning long-term sustainability. Similarly, the land development component through its land sale pricing poli- cies and ZEF through its sound operating rules will ensure long-term sustaina- bility and replicability. 14. Agreed Actions. In addition to assurances on credit onlending and project organizational requirements, assurances were obtained during negotia- tions that (a) an Operational Action Plan for the project be revised annually by the Municipalities and submitted to and reviewed with the Association; (b) the water companies adequately adjust their water tariffs; (c) land prices in the Shaoxing component be set at appropriate levels; and (d) resettlement be carried out in a satisfactory manner. 15. The following are proposed conditions of effectiveness: (a) receipt by IDA of Subsidiary Loan Agreements between Hangzhou, Ningbo and Wenzhou Municipalities and their water companies, and between Shaoxing Munici- pality and the Shaoxing Land Development Companies; (b) State Council approval of the Development Credit Agreement; (c) mobilization of the consultants to undertake the LSWM Study; (d) receipt of a financial agency agreement between ZEF and its financial agent; and (e) receipt of an initial Operational Action Plan. 16. Environmental Aspects. The project would contribute significantly to improving the environment. The inclusion and implementation under the project of strategic planning and policy studies for LSWM represents a signif- icant move by the Province and the cities toward strengthening their efforts at environmental protection. The studies would provide a rational basis for selective environmental investments to be made considering cost effectiveness  - 5 - and impact. The proposed land development in Shaoxing would bring about a significant change in land use and would entail the resettlement of about 5,000 households, almost all due to the basic urban services upgrading compo- nent for qingbo which vculd result in substantially improved housing condi- tions. Careful planning and extensive landscaping, preserving and using existing natural features and adjusting layouts to reflect existing dwellings would minimize disruption, demolition and resettlement. The water supply civil works proposed would not have a significant impact on the environment; in most cases they are extensions or additions to existing works, which in themselves have not had negative environmental impacts. There are no wet- lands, aquifers or other important features which would be impacted. Opera- tional improvements would reduce system costs, improve water quality and hence improve the external environment through savings in energy, raw and treated water consumption, and chemical usage. With the help of local and external consultants, extensive and detailed resettlement programs for all components of the project have been prepared and reviewed by the Association. 17. Project Benefits. The water supply augmentation of the proposed project would meet the quantity demands of the rapidly growing population of the project cities and the projected increase in industrial water demand, while the improvements in water quality and reliability would protect public health. By establishing firm linkages to the proposed follow-up Environment Project, the cities' wastewater problems would be addressed in a systematic mnner. The project would further create a much-needed urban extension area in Shaoxing, improve basic uri n services in lingbo while preserving valuable historic buildings and important urban fabric, provide transport improvement iu Hangzhou, and strengthen the urban planning service delivery in all four cities. The combined weighted Economic Rate of Return (ERR) for the project is estimated at 19 percent, with the water supply component yielding an ERR of 16 percent, the land development component 25 percent and the Ningbo upgrading component 24 percent. 18. Risks. Risks of the project include: (a) possible delays in implementation and underutilization of investment because of constraints in the management capabilities of the responsible provincial and municipal agen- cies; and (b) inexperience on the part of Shaoxing with full cost recovery on land development. These risks will be addressed during project implementation by providing support to the cities in the form of extensive technical assis- tance and training. 19. Recommendation. I am satisfied that the proposed Development 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. March 2, 1993  - 6 - Schedulo A CHINA ZHEJIANG MULTICITIES DEVELOPMENT PROJECT Estimated Costs and Financina Plan ($ million) Local Foreign Total Estimated Proiect Cost /a Water Supply Hangzhou 20.8 21.9 42.7 Ningbo 16.3 17.4 33.7 Wenshou 11.6 12.0 23.6 Shaoxing Land Development 23.3 13.4 36.7 Envircnmental Management 1.4 4.1 5.5 Institution Strengthening 0.4 6.2 6.6 Ningbo Urban Upgrading 18.5 12.1 30.6 Industrial Pollution 0.5 4.3 4.7 Base Cost 92.7 91.4 184.2 Physical Contingency 11.5 11.1 22.6 Price Contingency 15.5 8.8 24.3 Total Proiect Cost 119.7 111.3 231.0 Financing Plan: Hangzhou Municipality 27.3 0.5 27.8 Ningbo Municipality 45.0 0.6 45.6 Wenzhou Municipality 14.7 0.3 15.0 Shaoxing Municipality 31.0 0.3 31.3 Zhejiang Environmental Protection Bureau 1.2 0.1 1.3 IDA 0.5 109.5 110.0 Total 119.7 111.3 231.0 Note: Figures may not total exactly due to rounding. L/ Project is exempt from duties and taxes.  - 7 - Schedule B Page 1 CHINA ZHEJIANG MULTICITIES DEVELOPMENT PROJECT Summarv of Pro2osed Procurement and Disbursement Arrangements ($ million) Procurement method Total Project Component ICB LCB Other NIF costs Civil Works /a 92.8 44.2 - 6.8 143.8 (51.0) (27.8) (0.0) (78.8) Equipment and Vehicles 3.5 2.0 1.0 - 6.5 (3.3) (1.5) (0.8) (5.6) Technical Assistance - - 26.7 - 26.7 and Training (21.1) (21.1) Land Acquisition - - - 25.2 25.2 (0.0) (0.0) Housing Upgrading - - - 22.2 22.2 (0.0) (0.0) Resettlement and Con- - - - 1.7 1.7 servation Programs (0.0) (0.0) Environmental Pollution - - 5.0 - 5.0 Control (4.5) (4.5) Total 96.3 46.2 32.7 55.9 231.1 (54.3) (29.3) (26.4) (0.0) (110.0) Note: (1) Figures in parentheses are amounts to be financed by the Association. Figures may not total exactly due to rounding. Other procurement methods include local shopping and consultant services for technical assistance and training. (2) NIF - Not IDA-financed. Includes not IDA-financed direct contracting, land acquisition, housing upgrading, resettlement and conservation programs. /a Includes contracts for pipelines, pumps and other vater treatment equipment.  - 8 - Schedule B Page 2 Disbursements Amount Expenditures to Category ($ million) be Financed (2) Civil Works 80.1 552 of total expenditures Goods 8.0 1002 of foreign expenditures or 1002 of local expenditures (ex- factory costs) and 752 of items procured locally Consulting Services 13.6 1002 of foreign expenditures and Training and 75X of local expenditures Unallocated 8.3 Total 110.0 Estimated Disbursements IDA FY 1993 1994 1995 1996 1997 1998 1999