China - Changchun Water Supply and Environmental Project

C~~~- AG/$ /- Cf D_cmnt of The World Bank FOR OMCIAL USE ONLY Report NIL P-5863-CHA MEIORANDUM AIND RECOMMIENDATIJN OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO TEIE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT OF SDR 86.6 -ILLION TO THE PEOL'S REPUBLIC OF CHINA FOR THE CHANGCHDN WATER SUPPLY AND ENVIRONMENTAL PROJECT JANUARY 7, 1993 MTCROFICHE C,OPY ;epcOvt No. :F- 363 CHA Type : (PM) Title: CHANGCHUN WATEP SUPPLY AND ENV Autho,r: PIETVELD. C Ext .:!329'/'4 Room:F8059 Dept. :ASTIN This document has .a restricted distribution and may be used by recipients ody In the performance of their officiai duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (as of June 1992) Currency Name = Retminbi (tM) Currency Unit = Yuan (Y) = 100 Fen Y 1.00 = $0.18 $1.00 = Y 5.48 WEIGHTS AND MEASURES 1 millimeter (mm) = 0.0939 inches (in) 1 meter (m) = 3.28 feet 1 square meter (mi) = 10.76 square feet 1 cubic meter (mn) = 35.3 cubic feet 1 kilometer (km) = 0.62 miles 1 hectare (a) = 10,000 square meters ABBREVIATIONS AND ACRONYM CSC Changchun Sewerage Company CWSC Changchun Water Supply Company EIA Environmental Impact Assessment OD Operational Directive PMO roject Management Office PRC People's Republic of China SDR Special Drawing Right WI? Water Treatment Plant FISCAL YEAR January 1 - December 31  FOR OMCLAL USE ONLY CHINA CHANGCHUN WATER SUPPLY AND ENVIRONMENTAL PROJECT CREDIT AND PROJECT SUMMARY Borrower: People's Republic of China Benericiary: Changchun Municipality Amount: SDR 86.6 million ($120 million equivalent) Terms: Standard, with 35 years maturity including a grace period of 10 years Onlending Terms: The Government of China would make the proceeds available to the Changchun Municipatty. The municipality would onlend the proceeds: (a) to the Changchun Water Supply Company (CWSC) at a variable rate equal to the Bank rate plus a spread of 1.5 percent per annum with 15 years maturity including a grace period of 5 years; and (b) to the newly created Changchun Sewerage Company (CSC) at a fixed rate of 5.1 percent per annum with 15 years maturity including a grace period of 5 years. CWSC and CSC will bear a fixed commitment charge of 0.5 percent and assume the foreign exchange risk. Financing Plan: Local Foreign Tota $ milion Government of China 25.5 5.1 30.6 Jilin Province 54.7 0.0 54.7 Changchun Municipality 61.0 0.0 61.0 IDA J. nuz 120.0 Total- 1.41. Economic Rate of Return: 13 percent Staff Appraisal Report: Report No. 11040-CHA Map: IBRD No. 24063 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorizatior  MEMORANDUM AND RECOIMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUT DIRECTORS ON A ]PROPOSED DEVELOPNMENT CREDfT TO THE PEOPLE'S REPUBLIC OF CHINA FOR THE CHANGCHUN WATER SUPPLY AND ENVIRONMENTAL PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed Development Credit to the People's Republic of China (PRC) for SDR 86.6 million ($120 million equivalent) to help finance a Changchun Water Supply and Environmental Project. The proposed Credit would be on standard IDA terms, with a maturity of 35 years, including a grace period of ten years. The Government of China would make the proceeds available to the Changchun Municipality. The Municipality would onlend the proceeds: (a) to the Changchun Water Supply Company (CWSC) at the Bank's variable rate plus a spread of 1.5 percent per annum with 15 years maturity including a grace period of S years; and (O) to the newly created Changchun Sewerage Company (CSC) at a fLxeti rate of 5.1 percent per annum with 15 years maturity including a grace period of 5 years. CWSC and CSC would bear a fixed commitment charge of 0.5 percent and assume the foreign exchange risk. 2. Country/Sector Background. China has made considerable progress in hanessing its rivers and in constucting water supply systems for its urban populations. In 1949 there were only 59 cities with water supplies with a total capacity of 2.4 million cubic meters (m) per day, providing water to only 9 million people. In 1986, 302 cities had potable water supplies with a capracity of about 42 million ni3 per day. To this should be added the water supply developed and used by industries with a capacity of about 63 million ni3 per day. It is estimated that now practically all major cities (353) have water supply systems which provide, mostly through house connections, the minimum necessay supply of water to their populations and industry. Water supply coverage in small county towns is markedly different. In 1989 it was reported that only 26% of those towns (3,068 towns) had water supply facilities, serving about 50 milion people. Only about 30 percent of the roughly 770 million rura population has adequate water supply. The recently approved Rural Water Supply and Sanitation Project focuses on this sub-sector (Credit No. 2336-CHA, approved February 2, 1992). 3. Urban sewerage services are very basic, with almost no water pollution control ficilities. In the past, China has successfully dealt with the human waste problem through nightsoil collection systems which reused waste as fertilizer. However, the rapid growth of the cities has created a siuation that can no longer be dealt with in the traditional manner. 4. Very large investments will be made in the water supply and sewerage sectors in China over the next decade and beyond. It can be assumed that the urban population now served with water supply and sewerage systems is about 120 million and thatthis should increase to 600 million Qess than 50 percent of the total Chinese population) by 2010. This is an increase of 480 million people to be served. A minimum investment of $150 per person to be served would imply an investment of $72 billion over 20 years, or roughly $3.6 billion per year. I- the implementation of such a large program, there is potential for wasting resources and there is a need for increased operaing efficiency, improved consruction practices and operation and maintenan. Chinese urban irsftiutions tend to be comparalized and somewhat inefficient. They are organized in the socialistic, centralized model, with primary emphasis on growth or  production, and little on operating efficiency, including maintenance. There is, therefore, a need for better sector analysis and policy formulation - technical as well as financial, which would lead to rational prioritization of investments and improvements in sector organization and management. 5. Changchun Municipality, located in the northeast Province of Jilin, has a population of 5.8 million, of which 2.0 million are urban. Jilin province is one of the breadbaskets of China and Changchun is an industrial city with predominantly metal-working factories. Currently, over 3,400 factories and enterprises are spread over the city, including tractor, bicycle, railcar and instrument factories. Changchun has been targeted for development as a major vehicle manufacturing center, and to this end a new plant is being constructed to manufacture 100,000 automobiles (Volkswagen) a year by 1995. 6. Urban and industrial growth in Changchun are increasing water supply demand, resulting in serious water shortages. Current potential water demand is estimated to be about 800,000 m3 per day. Existing water treatment capacity is only 400,000 m3 per day. Water demand is projected to grow to about 1,000,000 rm3 per day by 1995. About 90) percent of the population is served by direct service connections and only through extensive water conservation measures has CWSC been able to keep the distribution system continuously pressurized. Changchun Municipality thus needs to make major investments in its water supply system to be able to provide the water supply service level necessary for economic and industrial growth. In so doing, it must deal with two major problems: (a) the serious shortages in water supply and (b) the rapidly increasing water pollution. To this end, a long-erm detailed Water Supply Master Plan was developed and priority investments identified for Changchun Municipality. The investment proposals included additional water transmission mains, water treatment and distribution facilities and institutional development to strengthen CWSC. Key elements of the Plan would be supported under the proposed I -oject. 7. In 1988, a study for a Changchun Water Production Project was completed by three local design institutes. At the suggestion of IDA during the preparation phase, the project expanded from a straight-forward investment project for water production for Changchun to a comprehensive action and investment plan in water supply and pollution control for the city. As a result, a feasibility study was undertaken by international consultants funded by the Canadian International Development Agency (CIDA). 8. Changchun faces also an urgent need to provide for adequate collection and appropriate disposal of domestic and industrial wastewater. Because it is located in an area with limited water resources, water resources management and pollution control are much more important to Changchun than for the coastal areas. Extensive water reuse and water conservation measures are, therefore, necessary in tandem with establishment of an effective regulatory and enforcement framework for water conservation and poilution control. To address this need, a Mlaster Plan for Changchun Wastewater Engineering has been prepared. The Plan includes a 20-year program of investments for trunk sewers and treatment facilities, as well the establishment of CSC, creation of industrial estates, separation of housing from work places, and development of a hazardous waste management program. Priorities identified by the Master Plan would be supported under this project. 9. Rationale for IDA Involvement. The focus of IDA involvement in cities like Changchun is to support and implement the Central Government's program of decetralization and delegation of responsibility, inclvding the financing of water supply and sanitation services to municipalities and development of ufflcient service delivery. Although IDA financing of civil  -3 - works and equipment is the vehicle, institutional strengthening and reform, leading to efficient use of resources and cost recovery, are the goals of this project. Dispersed sector responsibilities and low priority for operation and maintenance are currently the key problems confronting the Municipality as it strives to adequately plan and manage scarce financial, human, and water resources. In addition, water supply and pollution control technology, at all levels, need to be upgraded drastically to meet the growing need for high quality urban services. 10. Lessons Learned from Previous Bank Group Operations. The Bank Group is involved in a number of projects in China's urbad development, water supply and environment sectors, which deal to varying degrees with enviromnental pollution control. Ongoing projects include the Shanghai Sewerage Project, the Medium-Sized Cities Development Project, the Liaoning Urban Infrastructure Project, and the Beijing Environmental Project. In addition, the Tianjin Urban Development and lEnvironment Project was recently approved by the Board. These projects have for the most part proceeded satisfactorily, with timely implementation. Instiutional and financial/commercial reform have been confirmed to be the major issues to be addressed by the Bank Group through sector work combined with sector lending operations. 11. Project Objectives. 'Te project objectives are to: (a) improve water supply in Changchun Municipality to meet the domestic needs of the urban population and to support ndustrial growth; (b) reduce industrial and domestic water pollution through physical works, strengthening of institutions, development of regulations, improvements in operational management, and changes in pricing policy; and (c) create a demonstration project, where the lessons learned can be shared with other municipalities in China. The institutional strengthening objective will adist Changchun Municipality in establishing appropriate sector institutions, policies and regulations. The project attempts to concentrate comprehensive water supply activities in the CWSC, with a similar plan to concentrate urban water pollution control activities being adopted for the recently established CSC. These actions should result in efficient use of water resources, more prudent investment decisions, and strengthened planning and operational capabilties for CWSC and CSC. 12. Project Description. The project's physical works would include (a) construction of a water transmission pipeline to convey water from the Second Songhua River to an impounding reservoir currently serving Changchun; construction of pumping stations, expansion and improvement of water treatment facilities and expansion of the capacity of the water distribution system; and (b) construction of a trunk interceptor sewer and a primay sewage treatment plant and procurement of equipment and instruments for environmental quality monitoring and control. Technical assistance would also be provided to assist with design and construction supervision, to furnish management support to the water and sewerage companies, to prepare a staff training program and to implement a hazardous waste study. Institutionally, the project would reinforce the CWSC, develop the CSC, strengthen water pollution control, establish appropriate pricing policies and operation practices, promote measures for water conservation and improve personnel management, including training of staff. Well organized water supply companies, operating on an efficient and commercial basis, must be assured when consideration is given to expansion of urban water supply or introduction of water pollution control services. Only in this way can cost recovery and operational objectives be achieved. This project is an important step in addressing these issues and establishing a pilot operation as well as opening a dialogue with the Chinese authorities. 13. ProJect Implmentation. The proposed project would be carried out by the Changchun Water Supply and Environmental Project Management Office (PMO) located in CWSC. The project cost is estimated at $251.4 million equivalent, with a foreign exchange  -4- component of $125.1 million equivalent. The total financing required, including interest during construucion, is $266.3 million, of which IDA would finance $120 million equivalent (94 percent of the foreign exchange and 45 percent of the total). Retroactive financing of up to $3 million for expenditures incurred after May 31, 1992 is recommended, covering possible initial civil works and goods contracts, and the design/supervision consultancy contract, that are of urgent nature to be able to start full scale construction at the beginning of the 1994 season, when the frost is ended. A breakdown of project costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, 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 ale given in Schedules C and D, respectively. A map is also attached. The Staff Appraial Report, No. 11040-CHA dated December 30, 1992, is being distributed separately. 14. Agreed Actions. Jilin Province has agreed to maintain and regularly inspect the Xinlicheng Reservoir. Changchun Municipality hb3 agreed to: (a) maintn a PMO with staffing and facilities acceptable to IDA; (b) cause the PMO to submit quarterly progress reports to IDA, and to submit an annual summary report and semiannual reports on main developments and changes in the corporate plars of CWSC and CSC; (c) with the assistance of CWSC and CSC rzt-ttle the persons affected by the project in a manner and according to a schedule which is satisactory to IDA; (d) maintain and regularly inspect the Shitoukoumen Reservoir; (e) make CWSC responsible for water supply and sewerage billing and collection; (f) have CWSC and CSC implement by December 31, ,994, a program for computerized planning, biling and forecasting, and provide by December 1 of each year one copy of the forecasting projections to IDA, and implement by December 31, 1994, a management information system, with monthly iformation on water demand, revenues and costs and every six months provide an updated copy of such projections to IDA; (g) gradually end all commercial and domestic exemptions from sewerage fees, and completely end the practice by the time the project is completed; (h) levy a charge of Y 10 per square meter on new construction; (i) ensui7e that both CWSC and CSC would generate sufficient revenue to cover operation and maitenac cost, including interest, plus depreciation or debt service, whichever is the higher, and that CWSC and CSC wiUl be able to retain all profits during construction and debt repayment periods; and G) will enae consultants to conduct a study of toxic and hazardous waste management and industrW relocation, to be completed by December 31, 1995, and wiUl implement the plan for industrial relocation. CWSC and CSC have agreed to contract consultants by December 31, 1993 to assist in improving the management and operations of CWSC and CSC, on terms and conditions satisfactory to IDA, and carry out an agreed action plan, with timing satisfactory to IDA. 1S. Environmental Aspects. The project has been classified as a Category B project by IDA. An Environmental Impact Assessment (EIA) was prepared by consultans in 1991, which has been found acceptable by IDA. The EIA found, inter alia, that there would be minor impacts on vegetation and wildlife along the routes of pipelines, minor impacts on funa and flora in the Chau and Yitang Rivers from the intebasin transfer of water, and thaw' Aill be a need in the future to introduce wastewater treatment in Jimin City to ensure that the local water quality of the Songhua River to the confluence with the Yitang River is not diminished. The Project involves tributaries to the Songhua River, which eventually flows into an international waterway. Ihe Bank staff has made an assessment that the Project would not cause any appreciable harm to other riparians. Project preparation included preparation of a land acquisitionplan and related resettlement plan for the approximately 800 project-affected persons. Land acquisition will take place in accordamce with th e State Land Magement Laws and Regulations. Resettlement is being addressed by Changchun Municipality and Jilin Province. Carrying out of a Resettlement Plan acceptable to the Association is required under the Project.  .5 - 16. Project Benefits. The project would make sigifiant iprovements to the water supply needed to sustain economic growth and improve thc standard of living in Changchun as wel as the management and operation of the CWSC. The project's sewerage investments would signficantly reduce pollution of streams and rivers in Changchun and establish the framework for municipal and industi wastewater management for the future. Ihe combined Economic Inernal Rate of Retum (EIRR) for the project is estimated at 13 percent, while the EIRR for the water supply and sewerage components are esfimated at 10 and 21 percent respectively. 17. Risks. Project risks are mostly in the execution of the water pollution control works and regulatory reform and enforcement. Much better understanding by the local authorities of the consequences of the present domestic and industrial pollution in Changchun has been gained over the last two years. The strong competition for investment funds for directly productive purposes and the ongoing program of investments to replace outdated production technology may, however, affect the priority given by the Government for investments in pollution control. Water resource shortages affect the living conditions of almost everyone in the urban and rural areas of Changchun and, therefore, also the economy of the Province. As a result there is strong commitment by both the Provincial and the Municipal governments to support appropriate measures to improve the situation. 18. Reforms in pricing are required to ensure that the desired benefits are generated. As these changes affect a wide range and number of provincial and municipal government agencies, difficulty in the implementation of the reforms may be expected. Finally, there is a risk that delays may occur in implementation of the physical works of the project because Changchun Munihipality, CWSC and CSC have never taken up an investment program of this scale in the past; thus, the agreed emphasis on a strong PMO, backed up by experienced consultants. 19. Reconmeudatlon. I am satisfied that the proposed Development Credit would comply with the Articles of Agreement of the Associ:ion and recommend that the Executive Directors approve the proposed credit. Lewis T. Preston President Attachments Washington, D.C. January 7, 1993  Schedule A CHINA CHANGCHUN WATER SUPPLY AND ENVONMENTAL PROJECT ESTIMATED COSTS AND FINANCING PLAN ($ million) Local Foreign Total Bgtimated Project Cost LA water Transmission 36.0 44.5 80.6 Urban Water Supply 34.2 36.1 70.2 Sewage Collection and Treatment 20.3 16.2 36.5 Technical Assistance 6.3 6.5 12.8 Total Base Cost /b 96.8 13.3 2Q0.1I Phyaical Contingencies 14.3 15.0 29.3 Price Contingencies 15.2 6.8 22.0 Total Project Cost 126.3 12S.1 251.4 Interest during Construction /c 14.9 0.0 14.9 Total Financina Reauired "141 266L3 Financina Plan Government of China 25.5 5.1 30.6 Jilin Provincial Government 54.7 0.0 54.7 Changchun Municipality 61.0) 0.0 61.0 IDA 0.0 120.0 120.0. Total 'L-3 ' SI 2_66.3 La Project-financed goods are exempt from import duties and taxes. Ib Includes cost for land ($9.9 million). Lc The Interest during Construction is calculated based on the projected disbursement schedule and the agreed onlending rates.  Sched e Page 1 CHINA CHANGCHUN WATER SUPPLY AND ENVIRONMENTAL PROJECT SuMmARY OF PROPOSED PROCUREMENT ARRANGEMENIS ($ mill'on) Procurement method Total Project element ICa LCB Other NIF costs givil Works water Supply 85.5 14.1 10.6 - 110.2 (30.6) (5.6) (4.2) (40.4) Sewerage 36.7 4.0 0.2 - 40.9 (14.7) (1.6) (0.1) - (16.4) Bouiinment and Materials Water Supply 61.4 9.5 - - 70.9 (45.0) (7.0) (52.0) Sewerage 3.3 - 0.3 - 3.6 (2.4) - (0.2) - (2.6) Land Acquisition - - - 9.9 9.9 (0.0) (0.0) Technical Assistance, - - 15.9 15.9 Training (8.6) (8.6) 29TOL 186.9 27.7 ILA 9.9 251.4