China - Sichuan Urban Environment Project

Report No. PID5606 Project Name China-Sichuan Urban Environment (@+#) Project Region East Asia & Pacific Sector Urban/Environment Project ID CNPE43933 Borrower People's Republic of China Implementing Agency Sichuan Provincial Construction Commission Mr. Lu Qiang, Senior Architect No. 40, South Renmin Road Chengdu, Sichuan Province People's Republic of China Tel: (86-28) 557-1036 Fax: (86-28) 557-1037 Date PID Prepared March 11, 1999 Projected Appraisal March 1999 Projected Board Date June 1999 Background 1. Country and Sector Background Sichuan Province is a traditionally agricultural region in south-central China, home to some 85 million people. The central government's policy between 1987 and 1992 of providing incentives for growth in coastal areas left behind inland provinces such as Sichuan. However, recent attention to the resulting regional income disparities has prompted the government to promote economic incentives and infrastructure investments in the inland areas. Sichuan's economy responded quickly, growing by 12.8 percent in 1993 (compared to a national average of 13.4 percent), with growth led by town and village enterprises (TVEs) and the private sector. More recent estimates show continued strong growth. Sichuan's capital city, Chengdu (1995 urban population 3.0 million), forms part of an emerging urban industrial corridor which stretches southeast as far as the newly-designated municipality of Chongqing, now the world's largest single municipality. Sichuan's economic growth in terms of industrial and agricultural production has come at the cost of increased pollution of its water and land resources. Pollution is concentrated in Sichuan's two major river basins, the Min and the Tuo, both of which drain into the Yangtze River. Wastewater discharges from urban areas contribute substantially to pollution loads. Development in this corridor attracts migrant workers from the surrounding villages, who typically take low income jobs and do not have legal urban registrations. Once in the cities, these workers have only limited access to public services. As income opportunities in agriculture shrink and urban- rural income disparities grow, the size of this "floating population" has increased substantially, exacerbated by lessening restrictions on in- migrations; as the number of registered and non-registered urban residents grows, urban areas are experiencing increasing pressure to provide affordable and accessible municipal services.  Currently, the capacity for wastewater treatment in urban areas is limited. Except for industries which undertake their own treatment, there are few facilities for domestic wastewater treatment in Sichuan; for example, only 13 percent of Chengdu's wastewater is treated in the municipal facility. Deficits in the water supply sector have been projected for several project cities, including Chengdu, unless the present capacity is augmented. Currently, state-owned enterprises (SOEs) provide about one third of Sichuan's domestic water supply, often as part of their services to state employees or nearby residential areas. As the prominence of SOEs in economic development decreases, many of these water supply services will cease operations, putting additional demand on municipal providers. Expansion of water and wastewater management capacity is hampered by the weak financial situation of service providers; typically these are water supply companies, and government departments for drainage and solid waste management. These entities find themselves in a transition phase where the traditional government subsidies have been reduced but tariffs and charges for municipal services do not yet cover the full cost of operation and maintenance. The province now encourages the creation of financially autonomous municipal companies, but such companies tend to lose money due to weak financial and operational management capacity, and relatively high per capita water demand, which in part is the result of low tariffs which do not induce efficient water use. Thus the three major issues facing Sichuan with regard to the urban environment are: (i) environmental degradation, (ii) infrastructure constraints, and (iii) financially weak municipal service providers. Government Strategy: To address the growing need for municipal services, the provincial government plans to curb pollution from urban and industrial sources and to expand and improve municipal water supply systems. Ambitious pollution control targets have been set for the year 2000, including a cap on the total amount of heavy metals in industrial wastewater at 1995 levels, and the improvement of surface water quality to meet national standards. Twenty- five percent of domestic and 65 percent of industrial wastewater will be collected and treated, far more than the present levels. To reach these targets, the province must tighten the enforcement of existing standards, in particular for industrial pollution control; expand the capacity of wastewater collection and treatment systems; and improve solid waste management. Water supply plans include the remodeling of existing systems, and construction of new systems to provide water to urban residents in the Min and Tuo river basins. 2. Objectives The primary objective of the proposed project is to provide a safe environmental setting for sustainable growth of urban areas in Sichuan Province. The project would support the province in implementing a long term program to: a) begin to recover from past environmental degradation of water and land resources; b) provide an adequate supply of safe water to some of the growing urban population and economy; and c) maintain water quality at levels compatible with the needs of the Yangtze River Basin. The proposed project would be the initial phase of a long-term Bank-assisted urban environmental services improvement program for Sichuan. Progress toward this objective would be measured in terms of a) reduction of pollution loads from the urban sector through selective high- - 2 -  impact wastewater and solid waste management improvements; b) expansion of capacity for supplying safe water in urban areas; and c) strengthened financial viability and institutional autonomy of municipal services. 3. Description The project would finance municipal service improvements in five urban areas in the Min and Tuo river basins in Sichuan Province, with a total urban population of about 5.7 million. The project would rely on a blend of policy and investment initiatives. Financial and policy reform would support a stronger market orientation for municipal service pricing. Targeted investments would support the expansion of urban environmental infrastructure, primarily in the wastewater, water, and municipal solid waste sectors in the Min and Tuo river basins. The project would also provide technical assistance to strengthen the financial and operational management of municipal services providers, as well as the province's capacity for region wide environmental and water resource management. The project would include the following components: (a) Wastewater Management and Solid Waste Management: Investments would support sewer and stormwater collection systems, pump stations, and wastewater treatment and disposal facilities in Chengdu City and adjacent urban areas in the cities of Deyang, Leshan and Zigong, growing cities located in the Min and Tuo river basins, and cost-effective solid waste disposal systems in Leshan. (b) Urban Water Supply: Investments would support the remodeling and upgrading of water supply and distribution in Leshan, Luzhou and Zigong, located in the Min and Tuo river basins. (c) Urban Management and Information Systems: Development of an OMSS for wastewater management in Leshan, and water supply management in Luzhou; Underground Pipe Survey: development of a water and wastewater database for Leshan and Luzhou; Topographic Mapping: development of foundation data for Leshan, Luzhou and Zigong. (d) Cultural Heritage Asset Management: Improvements to the Leshan Great Buddha site and Sanxingdui Museum; establishment of a conservation laboratory and associated training program. (e) Institutional Strengthening: Strengthening of provincial, municipal, and project entities in project and financial management; provision of construction management and supervision services; training in utility operations, finance and urban services delivery. 4. Financing Total project cost is estimated to be about $353 million, of which the Bank loan would cover an estimated $152 million. The remainder would be financed by the government and the State Development Bank of China. 5. Implementation Project Management: Sichuan Province has established a Leading Group to oversee project preparation and implementation, led by the provincial Construction Commission, with support from the Finance Bureau, the Planning Commission, and the Environmental Protection Bureau. Under the Leading Group, the Sichuan Project Management Office (SPMO) would coordinate, manage and supervise day-to-day project implementation activities. The project is expected to be implemented over a five-year and a half period. Implementing agencies: Project components would be implemented by the following agencies: -3-  Newly created Wastewater Companies (WWCs) would be responsible for the implementation of the sewerage and drainage components. These services are currently provided by the wastewater divisions of the municipal departments. To improve the financial sustainability of the sector, this project would be implemented through self-accounting and self-financing wastewater entities. The establishment of such wastewater companies would be a condition of project processing, to be undertaken early in the cycle. Municipal Water Supply Companies (WSCs) would implement the water supply component. These would be responsible for construction management, production, operation and maintenance, consumer service, and administration of the water supply systems in their respective jurisdictions. The municipal Price Bureau and Planning Commission are responsible for regulation of both the WSCs and the WWCs. Solid waste and nightsoil management would remain the responsibility of the municipal maintenance and sanitation department. The Urban Information and Cultural Heritage components would be managed by the concerned city government or the provincial government, as appropriate. 6. Project Benefits, Sustainability and Risks Benefits. The proposed project would help Sichuan to put in place the policies, institutions, and infrastructure to sustain environmental quality and improve urban services in a period of strong growth. The project would generate benefits in the following areas: (a) Environmental Benefits: improved ambient water quality in rivers currently at risk, in particular the Tuo and Min Rivers, through reduced pollution loads from urban wastewater and waste and more effective, GIS supported, region wide water quality monitoring. (b) Health Benefits: reduced incidence of water pollution-related diseases as a result of improved water supply and wastewater systems and reduced surface water pollution near water intakes. (c) Improved Municipal Services: expanded coverage of water distribution, waste water collection, treatment, and disposal, as well as municipal solid waste disposal services for the urban population of Chengdu and selected secondary cities; (d) Institutional Reforms: strengthened financial and management autonomy will enable utilities to sustain and expand the provision of essential services for a growing population. Support for institutional development would ensure the long-term sustainability of the organizations and of the physical investments. Sustainability. The project is expected to be sustainable in three respects: (i) financially; (ii) institutionally; and (iii) in achieving its development objectives. Tariff reforms would enhance the financial viability of municipal service providers. Institutionally, the creation of financially independent wastewater companies and continued technical assistance for the participating institutions would strengthen utility management and water quality monitoring capacity. Finally, the project addresses an issue of high priority to both the local and the national governments: vital self-interest in achieving environmental conditions necessary for sustained economic growth would be a strong motivation to continue implementing the long-term water resource strategy. Risks. Project risks vary across subcomponents. Potential delays in implementing wastewater tariff structures and the sustainability of fledging - 4 -  financially autonomous wastewater companies in project cities are countered by ensuring the initial formation steps are taken during project preparation. A slightly higher risk is the possible delay or slow implementation of complementary efforts in the reduction of industrial and agricultural pollution, needed to maximize environmental benefits in the province. As part of project appraisal, SPMO would present a time-bound industrial pollution management Action Plan for a non-Bank financed program that would simultaneously address pollution control issues in these other sectors. The basin-wide water monitoring and resource management information system financed under this project would track sources of pollution and success in attaining water quality targets, and would allow provincial planners to more precisely target future investments. 7. Lessons learned from past operations in the country/sector Greater Reliance on User Charges: OED review of Bank water and sanitation projects has shown a generally good achievement of physical targets but less success in sustaining the financial viability of municipal service providers. Recent sector work on China ("Urban Environmental Service Management", Report #13073-CHA) supports these findings, noting the need for greater reliance on user charges, which are presently levied at unsustainable levels: municipal solid waste user charges, for example, would have to triple from present levels to provide sufficient funding for sustainable collection and disposal operations. The report concludes that adequate charges for solid waste and water supply would be affordable, induce resource conservation and create a more dependable income stream for the sector agencies. Hence, tariff reforms have been a centerpiece of the policy dialogue with the Sichuan government and adjustments of tariff levels are an integral part of the project design. [Note: Lessons learned from completed and ongoing projects financed by the Bank and other development agencies.]Timing of tariff increases: Previous urban environment projects in China have frequently encountered difficulties implementing agreed tariff increases in a timely manner, sometimes delaying project implementation by six months or more. Tariff increases 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, the design of this project intends that tariff adjustments be implemented during the preparation stage, as early as project appraisal. 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, wastewater collection and treatment has only recently been given this same autonomy, generally by absorbing the existing drainage bureaus and construction management units already active in the sector into separate 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. Tariffs, charges, and reallocation of existing taxes and urban construction charges would help ensure adequate funds for operation and management. The establishment of financially autonomous utilities prior to project implementation would allow - 5 -  sufficient time for management and operational issues to be clarified. Sufficient preparation time and budget. Experience in China has shown that first-time projects demand significantly greater time and monetary investments in the preparatory and initial implementation phases than those managed by experienced project entities. As this has been the Bank's first involvement in the urban environmental services sector in Sichuan, a longer lead time than usual has been needed to develop clear understanding of institutional and services delivery arrangements. Resources were allocated for both preparation and supervision, and will be required from government to finance the technical assistance that will be crucial to building strong institutions. The experience gained in this project would ensure smoother implementation for later urban environment loans in the province. 8. Poverty Category The Primary Program Objective Category is environmentally sustainable development, to provide a safe environmental setting to sustain the long term growth of Sichuan Province. 9. Environmental Aspects The project has been categorized as environmental Category A, primarily due to the environmental relationship between the project and the Yangtze River Basin, including the Three Gorges Project, and environmental concerns related to the treatment of wastewater and sludges. In addition to a standard Category A Environmental Assessment, consideration was given to the impact of the Three Gorges Dam on the absorptive capacity of receiving water bodies. This has been allowed for in the determination of acceptable pollution levels for discharges from the wastewater treatment plants. 10. Program Objective Categories Environmentally Sustainable Development Contact Point: The InfoShop 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 activities and/or components may not be included in the final project. Processed by the InfoShop week ending March 12, 1999. - 6 -  Annex Because this is a Category B project, it may be required that the borrower prepare a separate EA report. If a separate EA report is required, once it is prepared and submitted to the Bank, in accordance with OP 4.01, Environmental Assessment, it will be filed as an annex to the Public Information Document (PID) . If no separate EA report is required, the PID will not contain an EA annex; the findings and recommendations of the EA will be reflected in the body of the PID. -7-