China - Second Liao River Basin Project

Report No. PID10276 Project Name China-Second Liao River Basin Project (@) Region East Asia and Pacific Region Sector Urban Environment Project ID CNPE74409 Borrower(s) PEOPLE'S REPUBLIC OF CHINA Implementing Agency Address LIAONING PROVINCE, THE CITIES OF FUSHUN, PANJIN AND SHENYANG through the Liaoning Urban Construction and Renewal Project Office (LUCRPO) Address: 19 Caita Street, Shenyang 110015, People's Republic of China Contact Person: Mr. Zhao Xin Liang, Vice Governor, Liaoning Provincial Government Tel: (024) 2384-2898 Fax: (024) 2392-2290 Email: lucrpoa@pub.sy.lnpta.net.cn Environment Category A Date PID Prepared March 7, 2002 Auth Appr/Negs Date March 20, 2002 Bank Approval Date June 25, 2002 1. Country and Sector Background The principal sector issue is the rapid deterioration in both surface and groundwater quality and urban environmental quaility that has occurred throughout China and particularly the severe pollution in the Liao River Basin. This has occurred as a result of (a) an inadequate framework for water resource management; (b) ineffective regulatory control of municipal and industrial wastewater discharges; (c) rapid and uncontrolled growth in the industrial and agricultural production sectors, coupled with increased urbanization; and (d) financial weakness of municipal providers of environmental services.Demands for water for industry, agriculture and domestic use have been steadily increasing, and this has imposed increasing pressure on water resources, in particular in the areas of limited resources in the north of China. At the same time, quantities of wastewater have increased rapidly as have the associated pollution loads. Less than 10 percent of wastewater flows are treated to comply with discharge standards, largely the result of ineffective enforcement of environmental regulations and inadequate environmental infrastructure investments. The discharge of these increasing quantities of inadequately treated wastewater to rivers with limited dilution and assimilative capacity has resulted in severe water quality problems in many river systems in China.In the latter half of the 1990s the focus of river basin management in China changed from the traditional hydraulic approach to that of attaching a greater importance to environmental protection. Pollution control as part of water resource management is listed as one of the top priorities in China's Tenth Five-Year Environmental Protection  Plan. Among the most significant features is the attention paid by the highest levels of central Government to the severe environmental degradation in China's major river and lake basins and the formulation of the priority "Three Rivers, Three Lakes" environmental program within the overall national environmental strategy, of which the Liao River is one of the targeted rivers. Fundamental parts of the overall strategy for addressing this continuing degradation include the integration of municipal and industrial wastewater treatment, where appropriate, and the establishment of efficient wastewater utilities with sound cost recovery, both to ensure sustainable facility operations and to contribute to capital investment. 2. Objectives The primary development objective of the proposed Second Liao River Basin Project (LRBP2) is to assist further in enhancing water resource management in the Liao River Basin (LRB) within Liaoning Province (LP), to provide a safe environmental setting for sustainable long-term economic growth. This would be achieved by reducing pollution loads from the project cities in order to achieve a minimum receiving river water quality standard of Class V by 2010. Attaining the objective would lead to the LRB maintaining an acceptable supply of water for the population, industry and agriculture. The objective would be pursued through a combination of measures: (a) regulation and reduction of pollution from industries; (b) priority wastewater treatment plants (WWTPs) in all cities in the LRB; (c) protection of water used for agriculture and aquaculture; (d) investments to improve water quality in the Bohai Sea; and (e) other measures that would include policy initiatives and pilot projects to address: (i) water conservation, including effluent reuse; (ii) wetlands management; (iii) nonpoint-source pollution control; (iv) sludge management; (v) demand management through economic pricing of water and wastewater; (vi) restriction of water use for certain activities; and (vii) protection of a major reservoir in the upper Hun River Basin catchment.The secondary development objective of LRBP2 is improve the urban environment through preserving and promoting cultural heritage in Shenyang City, thereby enhancing awareness of China's historic values, and facilitating tourism, increased employment and commerce. The objective would be pursued through strengthening of urban planning, control of planning and design, and evaluation of sites and buildings. The proposed physical investments would help to arrest further deterioration of selected buildings and monuments as a prelude to applying for World Heritage Status.The project represents the second stage of LP's efforts toward meeting its primary objective. Together with the first Liao River Basin Project (LRBP1-Ln. 4617), the proposed investments fall within the broad framework of LP's "Tenth Five-Year Plan and 2010 Program for the Prevention and Cure of Liao River Valley Water Pollution." The project's main investments would be in the cities of Fushun and Shenyang on the Hun River, in Panjin on the Shuangtaizi River (a tributary of the Liao). The specific investments would be in (a) wastewater collection, treatment and disposal, including sludge management; (b) sewer upgrading; (c) effluent reuse; (d) reservoir catchment protection; (e) wetlands management; (f) urban upgrading; and (g) institutional strengthening and training.The Liao River Basin Project (LRBP1), which was approved by the Board on June 14, 2001, focused on two cities (Panjin and Yingkou) and one paper-making company in the lower reaches of LRB, and one city (Jinzhou) and one paper-making company in an adjacent river basin close to the Bohai Sea. The project also included -2 -  investments in: (a) modern data management systems, including GIS-based systems, complementing the current European Union (EU)-sponsored technical assistance initiative to develop a water resource management strategy for the Liao River Basin in Liaoning Province; (b) environmental (water and air) quality monitoring; (c) environment subprojects through a revolving fund; and (d) institutional strengthening and training. 3. Rationale for Bank's Involvement The Bank brings considerable international experience in terms of assisting policy formulation and investment program design. Bank assistance will also draw upon its growing experience in addressing regional environmental issues through ongoing projects in Liaoning and in other priority environmental improvement projects in China, including the cleanup of Dianchi Lake (as part of the Yunnan Environment Project) and the Huai River Basin, both included in the priority "Three Rivers, Three Lakes" program.Bank assistance in the project design phase will enable the project cities to formulate and evaluate a more programmatic approach to the provision of urban environmental services and to introduce the principles of integrated river basin management into planning of water resource and pollution management strategies. 4. Description Fushun Wastewater Interception & Treatment; Effluent Reuse; and Pilot Project for control of runoff to Dahuofang Reservoir Panjin Wastewater Interception & Treatment; Effluent Reuse; and Pilot Project for Wetlands Management Shenyang Wastewater Interception and Treatment; Sewer Upgrading Shenyang Urban Upgrading Institutional Strengthening and Training 5. Financing Total ( US$m) BORROWER 0 IBRD 136 LOCAL GOVTS. (PROV., DISTRICT, CITY) OF BORROWING COUNTRY 151.7 Total Project Cost 287.7 6. Implementation At both the provincial and municipal levels, leading groups have been established to give policy direction to the environmental recovery of the LRB. The Vice-Governor of LP heads the provincial leading group; vice-mayors head the municipal groups. The leading groups have established project management offices to coordinate the implementation of their policy decisions. At the provincial level there are (a) the project office of the EU-funded LIEP under the Liaoning Environment Protection Bureau (LEPB); and (b) the Liaoning Urban Construction and Renewal Project Office (LUCRPO) under the Liaoning Construction Commission. In order to expedite project preparation, LPG brought together LIEP, LUCRPO and the Liaoning Provincial Water Conservation Department within the office of LEPB. The municipalities have set up their own project management offices within their municipal government structures.The municipal wastewater components of Fushun, Panjin and Shenyang would be implemented by the cities' financially autonomous wastewater companies. The Fushun and Panjin wastewater companies would also invest in effluent reuse facilities. Fushun proposes to take over the ownership and operation and maintenance - 3-  of an existing industrial water treatment plant for such purposes. The reused water would be purchased by targeted industries for cooling and other industrial purposes, thereby reducing their groundwater abstraction. Collection sewer extensions and consumer connection programs would be implemented as a subcomponent to the principal wastewater components of the wastewater companies. This program would be targeted to the unemployed and those of low income. Fushun Municipality (FM) would implement its pilot project for pollution control in the upstream catchment of the Dahuofang Reservoir; Panjin Municipality (PM) would implement its pilot project for wetlands management. Water conservation programs would be coordinated by the municipalities. Under such programs, there would be retrofitting of a specified number of low-consumption water closets in public and private buildings. This would be supplemented by public awareness campaigns to promote water conservation and the implementation of a mix of regulatory actions in addition to the economic pricing of water and wastewater services. The urban upgrading component would be implemented by the Imperial Palace Museum and the SCC. The implementation of the institutional strengthening and training (IST) component would be coordinated by LUCRPO. The has been retained as procurement agents for all aspects of civil and electrical and mechanical works requiring bidding through international competitive bidding (ICB) procedures. Institutional and financial strengthening and construction supervision services would be provided by international firms using joint international/national supervision teams.Onlending Arrangements. The proposed loan of $145 million would be made to the People's Republic of China. The loan would be for 20 years, including 5 years of grace, at the Bank's standard interest rate for LIBOR-based US dollar single-currency loans. The proceeds of the loan would be onlent to LP on the same terms and conditions as the Bank loan to China, including passing on the front-end fee and a commitment charge of 0.75 percent a year. LP would onlend part of the proceeds of the Bank loan to the municipalities of Fushun, Panjin and Shenyang. The municipalities would onlend Bank loan proceeds to their respective wastewater companies for 15 years including 5 years of grace, at an interest rate not less than the Bank's rate to China plus their portion of the front-end fee and a commitment charge of 0.75 percent a year. The onlending rate to the wastewater companies is considered appropriate given that they are relatively new. These arrangements are also consistent with other Bank Group-supported sector projects. With the exception of the Panjin wastewater component, the counterpart funds for construction would be raised by the municipalities and passed on to the wastewater companies as equity. In Panjin, social capital (i.e., nonstate) funding to be provided by two chemical groups would be made available to the Panjin Municipal Drainage Management Company (PDMC) as equity.Financial Management. An assessment of project financial management, including an assessment of the revenue-earning implementing agencies would be carried out during appraisal, to ensure that the Bank's minimum financial management requirements as stipulated in OP/BP 10.02 are met. Traditional disbursement techniques would be used in accordance with an agreement reached between the Bank and the Ministry of Finance (MOF). To facilitate disbursements, a Special Account would be opened with an authorized allocation of $10 million, equivalent to the estimated average expenditures to be financed by the Bank over about a four-month period. The account would be opened in US dollars in a bank acceptable to the Bank and be managed by the Liaoning Finance Department (LFD). Auditing Arrangements. As with other Bank Group-financed projects -4 -  in China, the Foreign Investment Audit Bureau of the China National Audit Office (CNAO), established in 1983 under the name of State Audit Administration, would have overall responsibility for auditing the accounts of the project. The actual auditing work would be conducted by the Liaoning Provincial Audit Department under CNAO's supervision. The Bank currently accepts audits performed under the responsibility of CNAO. Audits of the project accounts and financial statements of implementing agencies and audits of the Special Account and statements of expenditures (SOEs) would be submitted to the Bank within six months after the end of the fiscal year. During appraisal, LPG would be requested to confirm that the audit reports of the implementing agencies would include opinions on whether the agencies were in compliance with their respective financial covenants, and whether these agencies had taken out adequate insurance on goods and works financed from loan proceeds.Monitoring and Evaluation Arrangements. The project would be supervised through Bank missions scheduled for twice a year. Headquarters staff and country office staff would cooperate in this activity. During implementation, project performance, including the achievement of project outputs and progress toward the attainment of development objectives, would be monitored through the use of semiannual progress reports prepared by LUCRPO. The first such monitoring report would be submitted by January 31, 2003, and the last by July 31, 2008. A mid-term review would be jointly undertaken with LPG in 2006 to evaluate the project's achievements and identify any corrective measures necessary. An implementation completion report, reviewing the planned objectives and the achievements of the project, including the costs and benefits derived, and the performance and contribution of all parties associated with project execution, would be prepared by LUCRPO and submitted to the Bank within six months of the loan closing date. 7. Sustainability The project is expected to be sustainable in three respects: (a) financially; (b) institutionally; and (c) in achieving its development objectives. Financially, tariff reforms would enhance the financial viability of the service providers. Institutionally, the creation of financially autonomous wastewater companies and continued technical assistance would strengthen utility management. Finally, the project addresses an issue of high priority to both the local and national government: vital self-interest in achieving environmental conditions necessary for sustained economic growth, which are a strong motivation to continue implementing the long-term water resource strategy. 8. Lessons learned from past operations in the country/sector Greater Reliance on User Charges. A major finding from the Operations and Evaluation Department (OED) review of Bank water and sanitation projects has been a generally good achievement of physical targets but less success in sustaining the financial viability of municipal service providers. Preliminary indications from an ongoing OED review of the Bank's China water supply and wastewater program appear to confirm these findings. Recent sector work on China ("Urban Environmental Services Management," Report No. 13073-CHA) notes the need for greater reliance on user charges, which are presently levied at levels that would not sustain the services. Hence, tariff reforms will be a centerpiece of the policy dialogue with the project cities, and adjustments of tariff levels are an integral part of the project design.Some utility companies in previous urban environment - 5 -  projects in China frequently encountered difficulties implementing covenanted tariff adjustments in a timely manner, sometimes delaying project implementation by six months or more. Tariff adjustments often represent politically difficult decisions for local governments, but are critical for the sustainability of the project. To avoid such delays after loan effectiveness, and to ensure that changes meet the approval of all relevant authorities, this project design requires that tariff adjustments be implemented during the preparation stage, usually before project appraisal. Experience with Pollution Control in River Basins. Experience with pollution control projects in river basins, e.g., in Brazil (Guarapiranga/Sao Paulo, Parana, and Minas Gerais, as well as in an upcoming project in Pariba du Sul River basin) has shown the importance of adequate monitoring and databases, as well as the need to link the data to investment planning with regard to wastewater treatment. The environmental quality monitoring and UMIS components of LRBP1 would address the issues under this project as well as linking the data to urban investment planning with regard to wastewater treatment.Support for Institutional Management. The establishment of financially autonomous utility enterprises to develop and manage urban services is a long-standing Chinese practice, and avoids many of the management difficulties of publicly owned utilities in other countries. However, entities responsible for wastewater collection and treatment have only recently been given the same autonomy. Generally, the existing drainage bureaus and construction management units already active in the sector have been absorbed into separate wastewater enterprises. The prior experience of these bureaus will undoubtedly allow a smoother transition, but high levels of technical assistance will be needed to strengthen the new enterprises' financial, managerial and technical capacities. The project includes provision for such assistance including training for WWTP operators. Tariffs, charges and the reallocation of existing taxes and urban construction fees would help ensure adequate funds for operation and management. The requirement to establish a financially autonomous wastewater utility in JETDZ prior to project implementation provides additional time for management and operational issues to be clarified. 9. Program of Targeted Intervention (PTI) N 10. Environment Aspects (including any public consultation) Issues The Liao River Basin is one of the three priority river basins in China for water quality improvement. The general lack of water resources in the basin means that an integrated approach to water quality planning will be necessary rather than the previous application of uniform concentration-based standards regardless of the receiving environment.Site-specific environmental assessments (EAs) have been carried out for the investment components and a comprehensive Basinwide environmental impact assessment (EIA) has also been prepared. (An overview of the main issues is provided in Annex 12.) The Basinwide EIA addresses the problems of the basin and the improvements expected through the Liao River Basin Plan, to which this project provides support. It summarizes the main components at each city, including alternatives considered for WWTP sites, for main carriers and for sludge disposal. It also outlines the coverage and responsibilities for the Environment Management and Monitoring Plan.The site-specific EAs (and associated resettlement action plans--RAPs) have been reviewed and cleared by the relevant Chinese authorities and by the Bank [to be confirmed with EASES]. There are no - 6 -  significant outstanding issues from the EAs, although there are matters that have been identified as requiring careful attention in design and implementation (such as sludge disposal). 11. Contact Point: Task Manager Geoffrey Read The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: 202 458 4078 Fax: (202) 522 1787 12. For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. This PID was processed by the InfoShop during the week ending March 15, 2002. - 7 -