China - Huai River Basin Pollution Control Project

Report No. PIC4348 Project Name China-Huai River Basin Pollution... Control Project Region East Asia and Pacific Sector Environment Project ID CNPA41888 Borrower Government of China Implementing Agency Anhui Provincial Finance Bureau Shen Weiguo Director Huai River Basin Pollution Control Project 85 Changjiang Road Hefei, Anhui Province 230001 People's Republic of China Tel: (86-551) 264-6633 Fax: (86-551) 264-6633 Date PID Prepared September 17, 1996 Date Initial PID Prepared September 17, 1996 Project Appraisal Date April 1997 Project Board Date September 1997 Country and Sector Background 1. The Huai River Basin is bounded on the north by the Yellow River and on the south by the Yangtze River. It is fed by two major river systems, that of the Huaihe and Yi-shu-shi, with the former rising in the southern part of the Basin and the latter in the north. The Huaihe rises in Henan province, then crosses Anhui before entering Jiangsu and eventually discharging into the Yangtze at Sanjiangying. The Yi-shu-shi system rises in Shandong, flows into Jiangsu, and discharges to the Yellow Sea. The Grand Canal connects the two systems in the east. With a gradient of only 3 in 10,000 in the middle and lower reaches of the Basin as it crosses its ancient flood plain, and very large seasonal and inter-year rainfall and runoff variations, Basin rivers have historically flooded with great frequency and large losses. Flood control works begun early in recorded history have left few Basin tributaries or the main channel unaltered in the plains areas. Dikes line virtually all channels and over 4,000 gates control flows in the system, which might best be characterized as a system of interlocking canals. 2. The Basin covers parts of four provinces and is home to some 150 million people, only 20 million of whom are urban residents. This heavily agricultural area, with 1/8 of the national farmland, produces nearly a quarter of the country's marketed grain, cotton, and oilseeds. Other agricultural undertakings, such as animal husbandry and fish and other aquatic production, have also flourished. However, this  productivity has not translated into high incomes, for Basin residents produce less than two-thirds of the national average per capita GNP. A growing proportion of income is generated in Basin industry, dominated by agricultural product processing, including paper making, brewing, tanneries, chemical production and tobacco and food processing. The Basin also has large coal reserves that fuel thermal power plants. As in other parts of China, township and village enterprises (TVEs) have grown faster than state owned enterprises (SOEs) and now produce over a third of all industrial output. 3. Basin water quality has deteriorated at an accelerating rate over the past twenty years, driven by sustained, rapid growth of industrial, agricultural and municipal pollutants. The Basin water control regime exacerbates pollution problems, because local governments close gates in the dry season to retain water for local supply. While the gates are closed, they also retain the pollutants in the return flows of irrigation, industrial and municipal waste water. The Huai river main channel has an average annual flow of 853 m3/sec, but gate operations drop flows to zero in the dry season of most years. In one recent drought year, the river had zero flows on a major lower section for a record 247 days. When the first rains come, gate operators use them to flush their sections of the river, but if done in too many tributaries at once, a surge of highly polluted water enters the main channel. Such a surge in 1994 resulted in massive fish kills, human illness, and the need to shut down municipal and industrial water intakes all along the river. Publicity over that incident renewed central government interest in Huai Basin pollution (a similar incident in the 1970s generated the first central government directive on Huai Basin pollution control). Pollution surges attract the most public attention, but continuous exposure to lower pollution levels may cause even greater problems. A recent Chinese newspaper report cited death rates a third above average and cancer rates twice the provincial average for one major Huai tributary in Henan province. Equally troubling data have been reported for the Fuyang area in Anhui province. 4. No systematic valuation of pollution-related losses has been done, but the central and provincial governments have finally reacted to the accumulation of individual incidents by committing to China's first ever time-bound, basin-wide mass discharge controls and widespread closure of polluting enterprises. Work already completed in China has identified major industrial point sources of pollution in the Huai Basin, estimated municipal contributions, and linked those with a simple model of assimilative capacity of the river basin. Based on the model, COD discharge quotas for major sections of Basin watercourses have been assigned to local governments. In turn, the affected local government and enterprises together have identified pollution abatement investments that would allow firms and cities to meet their discharge goals. The resulting list of projects has an estimated total cost of $1.2 billion. 5. Basin sector institutions. Basin water and pollution control institutions have evolved with changes in the Basin's water problems. Historically, floods were the main threat and in the 1950s the Huai River Basin Commission (HRBC) superseded existing water bureaus in controlling Basin flood control operations, including the construction of major flood control works. HRBC also allocates overall water offtake - 2 -  in the Basin, but the local water bureaus continue to manage gates and regulate offtake except during the flood season, when HRBC takes direct operational authority over key gates. After the 1994 pollution disaster, HRBC was granted year round authority over four major gates and the right to mandate some water operations during acute pollution emergencies. 6. Although most Basin consumers rely on surface water, groundwater has allowed some areas a temporary escape from Huai pollution problems. Local Geology Bureaus allocate groundwater extraction rights, collect a very modest extraction fee, and monitor groundwater quality and quantity. Groundwater has not escaped pollution, most of which seems to come from agricultural runoff. In one area of heavy surface water pollution and groundwater use, Anhui's Fuyang Municipality, groundwater pollution and overextraction have forced users to move to ever deeper aquifers, with the most recent move going from a 175 meter deep aquifer to one averaging 0 meters. Unsurprisingly, subsidence has accompanied overextraction in Fuyang, with an area of 1,500 km2 having measurably subsided. 7. Basin environmental protection bureaus (EPBs) estimate that about 70 percent of the water pollution loads originate in industry, with the remainder being domestic and commercial (no serious attempt having yet been made to estimate the agricultural contribution to loads). County and municipal EPBs allocate the mass-based pollution permits now being introduced across the Basin and monitor the ambient surface water environment and the effluent output of enterprises within their jurisdictions. Based on monitoring results, EPBs can levy pollution levy fees and fines on enterprises failing to comply with standards. This power does not extend to municipal wastewater discharges, for which there are neither mandatory treatment nor standards. Municipal environmental services, such as wastewater and solid waste collection and handling, fall under the jurisdiction of the Ministry of Construction system, with the Urban Construction Bureau at provincial level and Urban Construction Commissions at municipal level providing services. With the introduction of provincial mass-based pollution discharge limits, means will have to be developed of regulating municipal flows. 8. Environmental regulation. Basin environmental regulatory enforcement historically suffered from problems common to most areas of China--an aost total failure to regulate TVE sector and an unwillingness to levy pollution fees or fines if they threatened the profitability of an enterprise. The thousand-odd TVE pulping and tanning operations closed in the first half of 1996 as uneconomic polluters have been proscribed by national regulations since 1984, yet virtually all began production in the past decade. State-owned enterprises have benefited from the presumption that environmental standards, already low, are negotiable. They have regularly failed to install, or if installed operate, pollution control equipment. The newest, 1995 Huai River Basin pollution regulations stipulate the closing by June 30, 1996, of polluting production lines in small TVEs, and by December 31, 1997, of production in SOEs polluters not in compliance with Basin discharge standards. Compliance with the first deadline has been trumpeted in national and local newspapers and, indeed, in Anhui began as early as -3 -  January, 1996. Also in Anhui, many SOEs in heavily polluted river reaches were forced to cease polluting production for varying periods during this years' dry season. The intense national-level attention on the Basin clearly has SOE managers worried about meeting their compliance deadlines. Objectives 9. Based on the CAS, Bank experience, and discussions with the provincial project office (PPO), various provincial, municipal and county leaders and agencies, enterprises, and the HRBC, a potential project has been identified with the objective of speeding environmental recovery in the Anhui section of the Huai River Basin. A secondary objective is to foster environmental monitoring and investment planning at the Basin level, in order to develop a more efficient alternative to existing plans. Description 10. Environmental Regulation and Enforcement: This component would comprise support for the provincial government plans for improved enforcement of surface water pollution regulations in the Huai River Basin. Key indicators of successful implementation of government plans would be chosen as benchmarks to be tracked during project implementation. Loan support for improved enforcement would be considered. 11. Environmental Monitoring: The current monitoring capacity and information sharing systems do not permit adequate, coordinated oversight and management of surface water quality within the Anhui portion of the Basin, or among Basin provinces. To improve water monitoring and coordinate oversight, the project would work with the Anhui EPC which takes responsibility for water quality monitoring within the Anhui, while the HRBC is charged with monitoring at provincial borders. This project component would include investment and training to improve both of their monitoring systems sufficiently to meet their oversight and management needs. 12. Overall Basin Management: The Anhui portion of the Huai River Basin receives large pollution loads from upstream provinces, and in turn transmits large loads to the downstream province. As yet, the Basin lacks adequate modeling work to identify the most efficient investment program for meeting environmental goals across the entire Basin. Such work would greatly facilitate domestic investment allocation as well as that under the proposed $200 million, FY99 Bank loan. The proposed pilot project would have a component supporting HRBC efforts to improve coordination and information sharing among Basin provinces. It would, as well, help HRBC develop a water quality model, with an economic evaluation module, that could help identify priority investments across the Basin. 13. Industrial Pollution Control: Anhui Province has identified the major industrial polluters within their portion of the Huai River Basin. According to figures provided by local governments, on each of the major tributaries and sections of the main river channel, typically less than - 4 -  a dozen enterprises account for more than 80 percent of all industrial pollution loads. On a COD load basis, the non-wood pulping sector produces 44 percent of all industrial loads Basin-wide. The leather tanning sector produces a small proportion of COD loads in the Basin as a whole, but high proportions in certain localities, as well as toxic wastes. In Anhui's Jieshou City, for example, percent of COD originates in the tanning sector, as do several hundred tons of chromium. Both the pulping and tanning sectors currently generate significant income for local farmers through straw and hide purchases. The pilot project would support Anhui's pollution abatement strategy which involves closing production operations where pollution abatement is economically or technically infeasible and helping enterprises invest to meet environmental standards where feasible. Bank loans would assist those enterprises potentially able to comply with discharge standards. A small number of the existing highly polluting pulp and tanning operations have been short listed for possible support. Project Cost and Financing 14. Total project cost is estimated to be about $100 million. The Bank loan would cover an estimated $50 million of that cost, with the remainder financed by Anhui province, benefiting enterprises, and HRBC. Implementation Arrangements 15. To guide all but the HRBC work, Anhui's vice-governor Wang Xiuzhi chairs a project Leading Group that includes the heads of the relevant government agencies. The Leading Group sets project policy and coordinates agency inputs. The Leading Group established the Anhui Huai River Basin Environmental Project Office within the provincial Finance Bureau, headed by Deputy Director Shen of that bureau and drawing staff principally from the provincial EPB, Planning Commission, and Finance Bureau. Project office responsibilities include coordination and progress monitoring of project preparation and implementation, while detailed preparation of project components will take place within the provincial EPB (monitoring and enforcement); Finance Bureau (project financing) and participating industries. IPC loans will be appraised by the Bank. IPC loans would flow from the provincial finance bureau, through the local finance bureau, to the enterprise. The HRBC work would be managed, and funds would flow, through the Ministry of Water Resources, of which HRBC is a part. Project Benefits, Sustainability and Risks 16. The project strategy would result in significant local reduction of pollution loads entering rivers and streams near existing pulp mills and tanneries. The investments in environmental enforcement and monitoring would help government regulate more efficiently. However, it must be recognized that the pollution abatement benefits could be realized simply through closing the uneconomic production lines. The IPC investments will maintain robust markets for pulping and tanning agricultural inputs and supplement supplies of commercial pulp to paper makers no longer permitted to pulp. No significant direct fiscal impact is expected from the loan, as loan repayment will be an enterprise - 5 -  responsibility for all but the modest sum going to monitoring and enforcement. Pulp and tanning operation closings, primarily among TVEs, and expansion, primarily in SOEs, will have differential fiscal impacts due to the different plant ownership. These effects have not yet been estimated. 17. The economic analysis for the project would build on the existing Chinese work, which extensively describes the pollution situation in the Basin. That description includes source polluters, their locations, and the quality of their effluent-receiving water bodies. As noted earlier, a simple assimilative capacity model also exists. That work can be used to identify the most highly polluted stretches of river and the main local pollution sources. That, in turn, is judged sufficient to justify the short list of potential IPC investments that would, with extremely high probability, be identified as top priorities in any additional sophisticated investment planning exercise. The most efficient investments in terms of pollution abatement are more easily identified than are the benefits of that abatement. The Chinese place values on the most severe pollution episodes, but not on the losses from persistently high pollution levels. The sources of loss can be listed. The project economic analysis proposes to do so and work toward assigning rough magnitudes to the losses incurred. 18. The monitoring work proposed for the Huai River Basin Commission would aid their dispute resolution efforts. The modeling work would help in designing an investment program for possible financing in the second Huai River Basin Pollution Control Project. More generally, the knowledge gained in this pilot will assist Basin provinces and the Bank in the design of any follow-on project. 19. Sustainability. Among potential IPC investments, highest priority would go to identifying process changes that meet pollution abatement needs. Contrasted to end-of-pipe treatment, these have the advantage of being less easily circumvented and thus more likely to remain functional. An end-of-pipe alternative will not be excluded, but the inherent greater risk in this option would be carefully weighed. Investments would also be limited to projects that leave enterprises financially and economically robust, thus supporting proper plant operation. Where needed, operational or other training will be a required part of the IPC investment. 20. That said, the more important sustainability issue arises around overall improvements in ambient environmental quality, rather than the necessary but not sufficient control of individual effluent streams. Here, the looked-for improvements in environmental enforcement will be key. Tracking those improvements will be a critical part of the preparation and implementation dialogue and progress in preparing a follow-on project will be predicated on them. The investments that help maintain raw material markets will partially alleviate the financial pressure, hence inducement to evade regulation, otherwise faced by rural communities as the township or village owned pulping and tanning operations close. 21. Sustainability of HRBC investments will be determined by progress in developing a full partnership between HRBC and Basin provinces. A - 6 -  Basin investment planning model will remain current only if water quality data and pollution source data are continually updated, and most of that data originates with provincial EPBs. A key element of project processing will therefore be an agreed protocol for the needed data exchange. HRBC itself must maintain the staffing, computers, and other facilities necessary for the modeling work. 22. Risks. Project risks are currently perceived to be of two types: investment specific and in the overall policy environment. For the IPC investments, investment risks at plant level range from those of design, finance and operation of the investments to the continued competitiveness of the firm. Design risks include ability to identify the least cost technique to achieve abatement goals. The importance of this risk is highlighted in the Lu'an Paper Mill, which installed but never operated an expensive soda recovery system. The stated reason was that the recovery system was too large for the plant operating scale, a failure of design institute analysis. Even good designs need proper management, and management failures have undone some existing investments in the Basin. An important reason for narrowing IPC eligibility to two industrial sectors was to ensure sufficient knowledge of management issues to protect against this operational risk. Financial risks occur both during construction of abatement measures-- timely provision of counterpart funds during construction--and in their operations. This risk will be moderated by careful financial analysis of enterprises applying for a loan. 23. The policy risks loom larger. As alluded to above, improved regulatory enforcement is necessary to prevent the reopening of closed polluting enterprises or the development of new enterprises that add to the pollution burden. The plant closures and mandatory investments come at a substantial employment and income cost to the local economy. The willingness to bear this cost could be lowered if overall growth were to be threatened by any cause. Furthermore, the costs to date have been borne primarily by rural people and government willingness to bear the social consequences of increased urban unemployment has yet to be tested. The SOEs face a December, 1997 compliance deadline. If substantial numbers remain out of compliance as the deadline approaches, this will increase the risk of a policy reversal. And, if SOEs were to be seen as lacking a good faith effort to comply and yet not truly facing the risk of closure, rural areas might reconsider their own compliance with the policy. Lessons Learned from Past Operations in the Country/Sector 24. The lessons learned focus on three areas of central concern to the present project: river basin management, pollution control, and project preparation and implementation. In summary, the lessons are: (a) Bank experience in river basin management demonstrates the efficiencies in managing at the basin level and the need for management to span water quantity and quality concerns, defined broadly to include land use that may be affected by or affects either ground or surface water. There can be an important Bank role in assisting with institutional reforms to strengthen river basins as the management unit for resource use and in promoting national frameworks to enable such -7 -  management approaches. (b) Bank experience in IPC emphasizes the need for political commitment, clear standards and regulations, incentives to comply, and institutional capability to monitor and enforce standards. When industrial pollution abatement subloans are involved, the following conditions increase likelihood of success: a profitable and growing industrial sector, flexibility in choice of technology, availability of funds at close-to-market terms, and targeting on sources that can yield significant improvement in the ambient environment. (c) International and Chinese experience shows the need for strong project offices backed by high level political commitment to project goals. China does generally benefit from the fact that project ideas have been locally generated and partially developed prior to Bank involvement, ensuring a high degree of ownership. The high level of political commitment has been demonstrated by the direct involvement of central government leaders and recent action in closing polluting enterprises. Poverty Category. 25. Not applicable. Environmental Aspects 26. The project is proposed as environmental Category B. The proposed investments will assist enterprises in abating major water pollution loads. The process changes expected in attaining this goal may have secondary, positive impacts on air pollution. All proposed changes will be evaluated for any potential negative environmental impacts and any major anticipated impacts would necessitate a full environmental impact assessment (EIA) for that subproject. In particular, individual enterprises expanding total production would need a full EIA. Although not presently expected, if any enterprise needs additional land for project purposes, and obtains that land in other than a market transaction, preparation of a resettlement action plan (RAP) will be required. The conditional EIA and RAP requirements would be embodied in appropriate covenants in the legal documents. Program Objective Category: 27. Environmentally Sustainable Development. Contact Point: Public Information Center The World Bank 1818 H Street N.W. Washington D.C. 20433 Telephone No.: (202)458-5454 Fax No.: (202)522-1500 Note: This is information on an evolving project. Certain components - 8 -  may not necessarily be included in the final project. Processed by The Public Information Center week ending October 4, 1996. -9-