China - Chongqing Small Cities Infrastructure Improvement Project

Page 1 PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: 31897 Project Name Chongqing Small Cities Infrastructure Improvement Project Region EAST ASIA AND PACIFIC Sector Water supply (35%); Roads and highways (33%); Sanitation (8%); Flood protection (21%); Sub-national government administration (3) Project ID P081161 Borrower(s) PEOPLE'S REPUBLIC OF CHINA Implementing Agency Chongqing Project Management Office Environment Category [x ] A [] B [ ] C [ ] FI [ ] TBD (to be determined) Safeguard Classification [ ] S 1 [x ] S 2 [ ] S 3 [ ] S F [ ] TBD (to be determined) Date PID Prepared March 28, 2005 Date of Appraisal Authorization February 8, 2005 Date of Board Approval June 7, 2005 1. Country and Sector Background China is experiencing rapid urban growth, with 40% of the population currently living in urban areas, up from 29% in 1995. Over the next 15 years, that trend is expected to continue with the urban population projected to reach 50%. This increase in the urban population is a result of several factors, notably the government's decision to reduce controls governing population mobility and a falling demand for farm labor. This rapid urban growth is pressuring cities to expand their public infrastructure, increase municipal services and provide employment for migrants. To relieve some of these pressures, government policy is now focused on secondary cities and peri-urban areas, where the aim is to create conditions and facilities necessary to attract investments and to accommodate growing populations. Chongqing Municipality is the administrative equivalent to a Chinese province, consisting of the main city of Chongqing, and 31 other units of local government (4 smaller cities, 6 districts and 21 counties). These administrative units govern a land area covering 82,000 square kilometers (size of Austria), with a total population exceeding 31 million. The Municipality has a two-tiered economy, with 67% of the population living in rural areas earning , on average, Y2,098 per capita ($250) in 2002, and the other 33% residing in urban areas earning Y7,238 ($870) per capita in that year. This significant differential in earnings is propelling movement of surplus rural labor to the urban economies at a fast pace. As part of western China, Chongqing's overall development status lags well behind more prosperous regions in many respects. A relative lack of basic infrastructure is a significant development bottleneck, discouraging outside investment, contributing to poor environmental conditions, and limiting opportunities to promote growth. Within the Municipality, Chongqing city is privileged by its relatively large resource base and its position on the Yangtze River. Furthermore, the construction of the Three Gorges Dam and the implementation of the Central Page 2 Government's "Go West" program have created favorable conditions for the city's redevelopment and urban expansion. Since its separation from Sichuan province in 1997, Chongqing Municipality and the main city in particular, have enjoyed a sizable increase in their revenues (although from a low base) and a growing affluence of its citizens. Within the main city, environmental infrastructure development is proceeding at a fast pace. The Bank-financed Chongqing Urban Environment Project (CUEP) is contributing to reducing serious wastewater and solid waste management problems, and was recently restructured to support basic infrastructure improvements in eight districts and counties mostly in the western part of the Municipality. This initiative was an initial step to mobilize more international expertise and financial resources to accelerate urbanization and infrastructure development in the smaller local governments within the Municipality. Infrastructure deficiencies generally found in the smaller cities and towns are: (i) poor quality and intermittent supplies of drinking water due to inadequate water resources and mountainous topography , which hinder the development of reliable urban water supply systems; (ii) inadequate transportation networks, and structurally incomplete road connections between urban centers and new expressways; (iii) low resistance to flooding and other natural disasters, as many cities are built along rivers , on steep valleys or adjacent to flood plains, resulting in insufficient land for urban expansion; and (iv) unsatisfactory sanitation conditions and insufficient drainage and wastewater treatment. The Municipal Government is committed to use its improving financial position to help address these deficiencies, but wants the smaller local governments who are responsible for infrastructure services to adopt better policies and institutional arrangements to ensure their sustainability. This was one of the main reasons for requesting the Bank's recent assistance to focus on the smaller cities, districts and counties. The infrastructure investments proposed for Bank financing under CSCP are consistent with the revised policy directions and urbanization strategy, as confirmed in the Medium-Term Development Plan of Chongqing, developed by international and local experts over the past year. 2. Objectives The project development objective is to support emerging small cities to improve the efficiency and effectiveness of infrastructure service delivery, to accommodate the rapid urban growth. Key outcome indicators include evidence of improvements: (a) in effectiveness and reliability of water supply service delivery; (b) financial viability and sustainability of water supply services; (c) urban service revenues in areas upgraded; and (d) reduced travel times and congestion between, and within main urban areas. 3. Rationale for Bank Involvement The Bank has worked successfully with Chongqing Municipality on numerous projects including CUEP. Through the recent restructuring of CUEP, the Bank and the Municipality have gained valuable experience in helping smaller local governments in the Municipality to design and Page 3 adopt improved processes and procedures for identifying and preparing priority investment projects. Under CSCP, the Bank would expand support to the Municipality by sharing its extensive global and China experience in urban development for water supply, flood protection, road infrastructure, institutional development, and financial management. It would also introduce to a new group of local governments and their local consultants more rigorous analytical methods to prepare and optimize project designs. The value-added during project implementation will include cost savings through procurement under Bank guidelines, as well as improved construction and project management and quality control. Beyond this, addressing urbanization issues in Chongqing's smaller population centers presents a unique opportunity to partner with a progressive municipality in western China. The involvement of the Bank could influence development policies, improve management practices, and introduce public sector reforms for service delivery both in the Municipality and possibly elsewhere in China. Following a PSP Options Study (financed by PPIAF), opportunities exist for introduction of market mechanisms in Chongqing city. The adoption of PSP operations by smaller local governments would, however, be a longer term goal. 4. Description The project consists of five broad components (i) Water Supply