China - Medium-sized Cities Development Project

Document of The World Bank FOR OFFICIAL USE ONLY AU-A 770-5C-C Repot No. 7705-CHA STAFF APPRAISAL REPORT CHINA MEDIUM-SIZED CITIES DEVELOPMENT PROJECT DECEMBER 11, 1990 Environment, Human Resources and Urban Development Operations Division Country Department III Asia Regional Office Ila document has a raicted d__aon may be used by only in thie p _r of theiric6 dudes. Rts ctent may no oteise be ddsloedWoda au s.  CURRENCY EOUIVALENTS (as of November 1990) Currency name - Renminbi (RMB) Currency unit - Yuan (Y)-100 Fen Y1.co - US$0.19 US$1.00 - Y5.22 * FISCAL YEAR v January 1 - December 31 ABBREVIATIONS AND ACRONYMS CAUPD China Academy of Urban Planning & Design CHCLDC China Housing Construction and Land Development Company CIB China Investment Bard. CRWC Changzhou Running Water Company DSM Design and Supervision Management EPB Environmental Protectiva Bureau ETV Education Television GIS Geographic Information System GOC Covernment of China ICB Internatioral Competitive Bidding LCB Local Competitive Bidding LMBC Luoyang Municipal Bus Company LREIS Laboratory of Resources and Environment Information Systems LRWC Luoyang Running Water Company MOC Ministry of Construction MOF Ninistry of Finance MOPH Ministry of Public Health NEPA National Environmental Protection Agency PCBC People's Construction Bank of China PIC Project Implementation Consultants PMO Project Nanagement Office SEdC State Education Commission SMBC Shashi Municipal Bus Compar.y SOE Statement of Expenses SPC State Planning Commission SRWC Shashi Running Water Company TA Technical Assistance TOR Terms of Reference TPMU Traffic Planning and Management Unit TR Training UBE Universal Basic Education UMCT Urban Management and Construction Tax UPMIC Urban Planning and Management Information Center  FOR OMCIAL USE ONLY CHINA MEDIUM-SIZED CITIES DEVELOPMENT PROJECT Table of Contents Page ]No, LOAN/CREDIT AND PROJECT SUMMARY .. . . . . . . . . . . . . . .... i I. URBAN DEVELOPMENT IN CHINA. 1 A. Background. 1 B. Key Sector Issues. 3 C. Government Strategy. 4 D. Bank Group Strategy .5 II. THE PROJECT. 6 A. Project Formulation . . . . . . . . . . . . . . . . . . . . . 6 B. Project Cities . . . . . . . . . . . . . . . . . . . . . . . 7 Basic Characteristics. 7 Common Issues. 8 C. Project Objectives .11 D. Policy and Management Reforms .11 E. Prouject Components . . . . . . . . . . . . . . . . . . . . . 12 Urban Planning and Management Component . . . . . . . . . . 12 Education Component .13 Health Component .14 Transport Component .16 Water Supply and Sewerage Component .17 Housing Component .18 Industrial Component .19 Pollution Control Component .20 III. PROJECT COSTS AND FINANCING ..21 A. Cost Estimate . . . . . . . . . . . . . . . . . . . . . . . 21 B. Financing Plans .23 C. Public Utilities Finances .24 D. Municipal Finances .25 E. Household Finances .26 Housing . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Public Utilities .27 This report is based on the findings of an appraisal mission which visited China in December 1988 and a post-appraisal mission which visited China in September 1990. Project team members were Messrs. A. Hamer (AS3EH-Task Manager); A. Bertaud, S. Choi, E. Motte (ASTIN); Ms. M. Chang (EMlPH), P. Cornwell, A. Pandurangi, W. Krause (CONS); and Dr. M. Young (ENTPH). Ms. T. Bassler (EM4HR) assisted in the preparation of the report. Peer reviewers included: Messers P. Cadario (AS3CO), J. Huang, L. Miller (AS3EH); J. Herbert (Jakarta); D. Williams (ASTEN); J. Chanmugam (AS3IE); Ms. I. Cheng (AS3EH). The Division Chief is Z. Ecevit, (AS3EH) and the Department Director is S. J. Burki (AS3DR). This document has a restricted distribution and may be used by recipients only in the performance of their officia duties. Its contents may not otherwise be disclosed without Wor1d Bank authorization.|  -ii - Pats No. IV. ORGANIZATION AND IMPLEMENTATION . . . . . . . . . . . . . . . . . 27 A. Project Management .................... . 27 B. Project Monitoring and Supervision . . . . . . . . . . . . . 29 C. Procurement ....... .. . .. .. . .. .. .. . .. . 30 D. Disbursement ...... .. . .. .. . .. . .. . .. . . 31 E. Accounts, Audits and Reporting . . . . . . . . . . . . . . . 32 V. PROJECT JUSTIFICATION AND RISKS ..... . ...... . . . . . . 33 A. Benefits ......................... . 33 B. Risks ........ ... .. ... .. ... .. ... . . 35 VI. AGREEMENTS REACHED AND RECOMMENDATION .... . . . . . . . . . . 35 Annexes 1. Policy Reform Programs for Changzhou, Luoyang and Shashi Cities 2. a. Technial Assistance in Urban Planning and Management b. Technical Assistance in Training for Planning Commission and Finance Bureau 3. Technical Assistance and Training in Education Component 4. Technical Assistance and Training in Health Component 5. Technical Assistance and Training in Transport Component 6. Technical Assistance and Training in Water and Sewerage Component 7. Industrial Component Appraisal 8. Pollution Control Revolving Fund Mechanism 9. a. Project Cost Tables - Changzhou b. Project Cost Tables - Luoyang c. Project Cost Tables - Shashi 10. Estimated Schedule of Disbursements 11. Public Utility Companies' F'Tiances 12. Municipal Finance Projections 13. a. Housing Component Finances - Changzhou b. Housing Component Finances - Luoyang c. Housing Component Finances - Shashi 14. Technical Assistance and Training for Planning Commission and Finance Bureau a. Project Monitoring Indicators - Changzhou b. Project Monitoring Indicators - Luoyang c. Project Monitoring Indicators - Shashi 15. Terms of Reference - Project Implementation Consultants 16. Rate of Return Calculations of Transportation Components 17. Documents in Project Files  i -~~~~~~~~~~~~ iii ! Char&s 1. Project Management and Organization Chart 2. Standard Municipal Government Structure 3. Standard Urban Planning and Management System Chart Is &R IBRD 21361  CHIN MEDIUM-SIZED CITIES DEVELOPMENT PROJECT Loan/Credit and Project Summary Borrower: The People's Republic of China Beneficiaries: Changzhou Municipality Luoyang Municipality Shashi Municipality L-oan Amount: US$79.4 million equivalent Credit Amount: SDR 62.2 million (US$89.0 million equivalent) Terms: Loan - 20-year repayment, including 5 years of grace, at the standard variable interest rate. Credit - standard, with 35 years maturity. On-lending Terms: The Government (GOC) will make the proceeds of the Loan and Credit available to the municipal governments at 5% per annum over a period of 20 years, including a 5 year grace period. The municipal governments will bear the foreign exchange risk. The municipal governments will onlend a portion of the loan and credit proceeds to participating local public utility companies and industrial enterprises. For foreign currency sub-loans, the interest rate charge will be the Bank's variable rate plus a 2% spread. Local currency onlending will follow prevailing rates for similar fixed asset loans made by the People's Construction Bank of China. Industrial sub-borrowers will bear the exchange risk for foreign currency loans. Proiect The objective of the proposed project is to assist Descrlption: the three beneficiary cities to improve overall and sector planning and management, formulate and implement policies that better utilize existing facilities, reduce waste in the design of new investments, provide more appropriate financing mechanisms for local development, and promote water pollution control at the industrial enterprise level. The loan/credit would finance investments to support policy reforms in planning, management and municipal services. Benefits2: An estimated 1.8 million people will benefit from the improvement in municipal planning and management and direct investments in various urban services and industrial enterprises in the three cities. The project will introduce a wide range of policy changes that are based on international experience, relevant  - ii - to conditions in China, and replicable in other cities. Improvements in urban planning and management practices will increase local capacity to perform cross-sectoral and sectoral planning and management. These changes will help refine sectoral and cross- sectoral strategies, expand the use of financial planning and management tools, and increase the use of investment alternatives analyses. The project will improve the efficiency with which existing municipal assets are used through greater utilization of facilities and personnel already in place, and by expanding maintenance programs. Local finances will be strengthened by placing public utilities on a financially self-sustaining basis; and by strengthening the economic base of each city through selective capacity expansion in line with local comparative advantage. The project will support the gradual divestiture of public services by enterprises that duplicate those provided by municipal agencies or utilities. The project will accelerate implementation of nationally-mandated housing reforms, gradually shifting the provision of housing from an in-kind wage benefit to a commercial service, while expanding homeownership opportunities and associated private property rights. To complement these policy changes, the project provides for investments, technical assistance, and training to improve the provision of education and health services, to increase water supply and sewerage capacity, to alleviate traffic congestion and support public transportation, to expand the supply of housing, and to increase industrial capacity while helping enterprises meet national standards for water pollution control. Risks: The principal risk lies in the ability of the three municipal governments to manage implementation of a complex, multi-sectoral project. To minimize this risk, technical assistance and training will be provided to support institution-building in the responsible agencies in each city. Project management offices have already been established in each city and will report directly to a high-level steering committee. The project will also incorporate assistance from financial intermediaries as well as regional and national agencies that will provide technical guidance. Detailed implementation plans have been prepared for each sector, along with indicators for monitoring enactment of policy reforms and implementation of investments. The Bank Group will commit more resources for supervision of the project than indicated by the standard norms.  I~~~~~~~~~~~~~ iii - Estimated Costs*: Lo;cal ForeLgn Total ---US$ million---------- Capacity huilding: Planning c.nd Management 2.1 5.3 7.4 Education and Health 21.8 21.7 43.5 Housing 24.9 15.2 40.1 Transportation 14.4 9.7 24.1 Water Supply and Sewerage 12.4 17.0 29.4 Pollutlon Control 1.2 7.2 8.4 Industry 9.5 56.5 66.0 Base Cost 86.3 132.6 218_9 Contingencies Physical 10.4 16.1 26.5 Price 10.6 21.2 31.8 Total Cost 107.3 169.9 277.2 Financing Plan*: Local Foreign Total -----------US$ million---------- Municipal Governments, 68.8 0.0 68.8 Utilities and Households Industrial Firms 38.5 1.5 40.0 World Ba.ik Group 0.0 168.4 168.! Total 107.3 169.9 277.2 Estimated Disbursements*: (US$ million) Bank/IDA FY 21 2 93 2_4 95 96 97 Annual 3.4 21.9 57.2 40.4 27.0 16.3 2.2 Cumulative 3.4 25.3 82.5 122.9 149.9 166.2 168.4 *Figures may not add up due to rounding.  CHINA MEDIUM-SIZED CITIES DEVELOPMENT PROJECT I. Urban Development in China A. Background 1.1 During the 1960s and 1970s, China's cities grew moderately in terms of population, economic activity, incomes, and the stock of housing and urban infrastructure. Beginning in 1979, however, the urban sector experienced a dynamism unprecedented since the 1950s. At the end of 1988, China's urban permanent resident population totalled 562 million; and 51% of the overall population lived in cities and towns.'/ Urban growth since 1979 has averaged 13% per year.2/ Spurred by the reintroduction of 4-ousehol.d farms, liberalization of agricultural pricing, and the spread of agricultural markets, China has entered a period of rapid economic growth and rising incomes. In the cities, administrative restrictions on the expansion o- light industry and services have been eased, and rising household incomes, which have grown at about 10% per annum in the last decade, have fueled demand for urban goods and services. 1.2 The momentum of economic growth has confronted leaders of China's cities with a growing demand for urban public services and associated infrastructure. It is widely recognized that there is a strong link between development of the local economic base and expansion of urban infrastructure. The legitimacy of household demand for improved public services and better housing has also been recognized. As the demand for labor has led to a relaxation of migration controls, urban population has been expanding at rates not experienced since the 1950s. Cities that had stagnated for two decades now find themselves with municipal population growth rates of 3%-4% per year. This phenomenon has prompted the central government to reconsider its approach to planning, financing, and managing urban development. 1.3 Reflected in the central government's modernization-through- reform movement is increased emphasis on foreign trade, greater involvement by foreign investors, directives for state-owned economic enterprises to pay greater attention to profit-maximizing practices, the renewal of private economic activity, and the liberalization of labor markets. As a result, local governments and their public utility companies have begun to acknowledge that cities will need to compete with one another to attract 1/ State Statistical Bureau, China Statistics Abstract 1989, Beijing, 1989. 2/ This includes changes caused by boundary modifications and reclassification of centers. Growth of particular centers within given boundaries is likely to be slower. At the same time, these urban population statistics exclude "temporary" migrants whose official place of residence, usually rural, is not shifted when population data are compiled; they add 10% - 20% to the official population of a typical city at this time, and have been increasing at rates of 10% - 15% per year.  new economic act'vity and encourage existing enterprises to expand as efficiently as possible. The challenge facing China's cities is how best to match the requirements created by rapid and sustained economic growth with a program of urban development investments and accompanying management, fiscal and policy measures. The central government is now limiting itself to a role of encouraging urban development by setting broad objectives and parameters. Implementation is primarily a local responsibility and local governments are being encouraged to use this new freedom to experiment in a manner usually associated only with federal political systems. 1.4 Through economic reforms, the Government has come to understand that the freeing up of the urban economy may bring unforeseen problems. In some cases, such as the growing accumulation of household savings, the Government sees the commercialization of housing services and the large- scale shift to home ownership as a major solution. In others, like the relatively rapid growth of population that has accompanied the liberalization of urban markets and the growth of "temporary" residents, the Government is still searching for long-term solutions. Controls on population influx that were very effective until approximately 1983 have come under increasing pressure. While the rural poor still find it very difficult to gain access to the city, the increased immigration of rural residents is creating pressure for urban infrastructure investments on a scale unanticipated until recently. 1.5 In a market economy, there are usually obvious divisions of responsibility for urban development. In China, however, urban entities are much more likely to have overlapping responsibilities. Local government authorities must plan the orderly expansion of urban infrastructure and public services either directly or through public utilities that have limited autonomy at this stage. The city government controls the majority of the sources of economic activity, whether measured by output or employment; separation of overall regulatory control from management responsibilities is still a goal to be achieved by local governments. Furthermore, the distinction between the social and businnss responsibilities of enterprises remains blurred. Enterprises routinely provide their workers with public transport, health and education services; rental housing; and a long list of subsidies. The city government itself is also a major provider of highly subsidized rental housing and is responsible for maintaining the public/enterprise stock of housing, which encompasses all but a small fraction of the total. 1.6 The concept of a distinct local government has emerged in China only over the last decade, especially in terms of clearly assigned financial resources. The emergence of local authority is also a recent development in terms of urban planning. In the past, line ministries in the central government -- directly or through provincial branches -- have set standards and criteria for urban development initiatives at the local level, often in a compartmentalized manner that involved little local coordination. Virtually all cities suffer from severe infrastructure constraints and weak urban planning and management. Faced with such a wide-ranging demand for improvements, city authorities typically have long  lists of 'priority' investments that seem unrelated either to an urban development strategy or to present and future budget constraints. B. Key Sector Issues 1.7 In response to demand, China's cities and towns nave invested heavily over the last decade in infrastructure and urban services. But, given the dearth of investments in the 1960s and 1970s and the demands of rapid economic growth, the urban sector will need to continue large-scale investment for the foreseeable future. There are five broad issues that need to be addressed to make investment in urban development as efficient as possible. These issues have been explored in a sector study (Zhejiang: Challenges of Rapid Urbanization, Report No. 6612-CHA, dated August 3, 1987). First is the need for better overall planning and management at the local level by core agencies that report directly to the political leadership of each city. Agencies with overall responsibility for planning of economic deve]opment and urban services currently do not provide the mayor with the necessary broad vision of the medium-term urban development challenges and array of options, given financial constraints. 1.8 Planning and management tractices of local line agencies is a second major issue. Municipal government bureaus need to improve coordination with one another and with local core agencies. Sector managers must develop investment programs which are based on systematically gathered data, are responsive to demand and take into account resource constraints. The planning process needs to be redirected away from pre- conceived targets and supply-driven norms and star.ards, which frequently do not reflect local conditions in terms of both .em.rnd and available resources. At the project level, there is a failure to explore alternatives thoroughly and analyze them from economic and financial as well as technical perspectives. In addition, the recurrent expenditure implications of project decisions are often neglected. Finally, sector agencies must begin to plan future investments within an "enterprise reform" framework that is cormitted to helping businesse.i divest themselves of the many public services and housing they routinely provide their work force. 1.9 The third issue involves the efficient use and management of existing municiDal assets. This requires greater use of demand management tools, including higher user charge levels to promote conservation; better management of the use of existing facilities, through measures that increase their utilization rates and make them available to more beneficiaries at any one time; and greater attention to maintenance exDenditures to prevent the premature deterioration of equipment and facilities. Local planners need to adopt non-construction measures as complements to expanding investment. 1.10 A fourth key issue is resource mobilization. Current resource levels are inadequate, and there is a lack of transparency in the flow of subsidies provided for local services. Progress must be made in implementing a financing framework which stresses that, wherever possible,  -4- the direct beneficiary pays the full cost of the services received. Subsidies, particularly when they come from general municipal revenues, need to be justified ard exceptional in nature. This issue lies behind efforts to make public service enterprises more responsible for covering their expenditures as well as of attempts to place the provision of housing services on a more commercial foundation. Finally, greater efforts must be made to improve the collection of charges due to local government; tax administration will have to be improved, particularly as the small business sector grows rapidly in size. 1.11 Finally, local authorities need to take the lead in control of negative externalities that accomnany rapid economic growth. Rarticularly environmental resource mismanagement. Water resources in and around urban areas are threatened by a combination of excessive tapping of groundwater and the release of untreated industrial liquid wastes into area wat--rways. In addition, solid wastes are allowed to accumulate without appropriate storage or cover. Harmful chemicals seep into grouridwater and drs'n into rivers and lakes; ashes from thermal electric plants are dumped into local drainage systems. Air quality is poor, especially in larger cities. Fly ash and sulfur dioxide are emitted in large quantities partly because of the use of coal as the primary source of residential cooking and heating. Industrial coal combustion is also a serious source of pollut-on. Finally, the loss of agricultural land due to urban expansion is a source of concern because institutional mechanisms in plcce do not allow the shadow price of land to have a sufficient impact on the demand for that resource. 1.12 Controls on rural-urban migration have prevented the large-scale movement of the rural poor into urban areas. Permanent residents of urban areas have, during the course of the last three decades, benefitted from the provision of staple foods (particularly grain and vegetable oil) at subsidized prices, near universal curative health care, ar.d primary as well as secondary education. Assigned jobs with lifetime security of tenure and associated housing have also been the norm. Using government definitions of absolute poverty, less than 1% of the urban population is poor. On average, per capita urban money incomes are twice as high as those in rural areas; including the cited in-kind benefits, which are denied most rural households, the gap would rise to a ratio of 4:1. Serious disparities within urban areas may develop over the next decade, however, particularly as labor market behavior adjusts to ongoing enterprise reforms, and as workers from rural areas increasingly are allowed to enter urban areas on a "temporary" basis. It is also possible that access to in-Xind benefits may be eroded. C. Government Strategy 1.13 The central government's overall strategy for urban development is to develop broad principles and regulations to guide local governments and promote local initiative, rather than to impose centrally-conceived blue- prints. Its principal concern is to encourage the development of mech- anisms for planning and management at the local level that reduce waste and enable cities to function effectively using local resources to structure their own solutions. The results of such "learning-by-doiig" are readily  - 5 - disseminated through the press, professional associations, technical intermediaries, and national ministries. Cities nf moderate population size are often the testing ground for bold experimentation. 1.14 The Government acknowledges the need for greater utilization of existing municipal assets, particularly in its stress oi the necessity for conservation of water resources and water supply utilization. There is less awareness, however, of the way current planning practices, particularly the use of abstract supply norms and standards disseminated from central government agencies, hamper the better use of existing facilities. Nor is there clear recognition in all sectors of the interaction between inadequate maintenance and the full utilization of existing investments. 1.15 On resource mobilization, the Government has fundamental reservations about proposals that call for local tapping of additional sources of taxation, particularly if they threaten the revenues due the central government. This concern is not ill-founded since the local governments administer the assessment and collection of many taxes in China. The central government also wishes to eliminate the arbitrary imposition of ad hoc taxes on local enterprises that are owned and regulated by local governments and thus have limited avenues of appeal. Nevertheless, the central government strongly endorses the principle that local public services provided by public utilities and housing be financed largely by the beneficiaries. While this represents a relatively recent departure for the urban sector, it has long been enshrined as a principle of rural development in China. 1.16 Over the last five years, the Government has established a national regulatory framework for environment protection and in 1988 created a ministerial-level National Environment Protection Agency (NEPA). This agency has parallel bureaus at the provincial and local levels. The range of issues involved -- including rural-urban land conversion, air pollution, and water pollution -- is well understood at the central government level and there appears to be a strong commitment to improving environmental conditions. D. Bank Grou2 Strategy 1.17 The Bank Group sees its principal role as fostering a continuing dialogue on sector issues and options, thereby helping to map the transition to urban development planning that is decentralized and more market-responsive, efficient, and sensitive to equity and the need for environmental protection. The Bank Group's approach is to: (a) invest resources in understanding issues and options, through sector studies; (b) provide the central authorities with analyses in areas requiring central government action; including urban transport policy, municipal finance options, and approaches to reforming the planning, construction, and finance of housing; and (c) build on project experience elsewhere and, through the financing of infrastructure and technical assistance, help improve overall local planning and the planning and management practices of those sectors that are primarily the responsibility of local authorities.  The spatial priorities of the program reflect those of the central government: to target the large urban centers most closely linked to the opening to the outside world; to become involved in multi-city coastal provincial projects; and to work selectively with cities of moderate size willing to implement a wide-ranging program of policy, regulatory, financing, and institutional reforms. 1.18 The Bank Group has developed a sector strategy which addresses the key sector issues identified above, taking advantage of the opportunities created for experimentation by local governments. Analytical work and lending operations are aimed toward assisting China's central and local governmente to: (a) introduce tools that better define local spatial and investment priorities; (b) utilize existing facilities more effectively through non-construction measures; (c) enable sector managers at the local level to adopt planning and management tools that are more demand- responsive and utilize project selection criteria that incorporate economic and financial as well as technical perspectives; (d) encourage greater cost recovery from users of public utilities' services and housing; and (e) operationalize environmental resource management in urban areas through establishment of appropriate institutional and financing mechanisms-. II. The Project A. Proiect Formulation 2.1 In June 1987, following the completion of the Zhejiang sector study, the Bank Group was asked by the State Planning Commission (SPC) to undertake a project that would help a small number of medium-sized cities to experiment with new approaches to urban development planning aimed at improving local conditions in the context of a rapidly decentralizing policy-making and fiscal environment. SPC selected the cities of Changzhou, Luoyang and Shashi for several reasons: (a) they are broadly representative of China's large number of medium-size urban areas with populations of between 200,000 and one million that include half of China's city population; (b) economic and social co-iditions reflect issues faced by urban areas nationwide; (c) thleir size corresponds to that of cities in the Zhejiang study and is of a scale appropriate for a program of multi- sectoral changes; and (d) the municipal authorities in these cities are considered capable of adopting the innovative approaches envisioned for the project. The three cities have been picked to operationalize the reforms cited in Section I, involving improved urban management and planning practices. The cities will act as laboratories, and their experience will be evaluated by the central governmen- and the results disseminated by the Ministry of Construction. 2.2 In developing the project, it was agreed that the Bank Group's principal contributions should be to introduce concepts of comprehensive urban development planning and integrate cross-sectoral perspectives into city management. The project would provide opportunities to assist city leaders and departments of municipal governments to formulate specific reform measures, to assign priority to proposed investments, and to implement investments more systematically and with improved technology.  - 7 - Over the course of project preparation, the Bank arranged for teams of technical specialists -- with expertise in urban planning, education, health, water supply, sewerage, Zransport, housing, industrial finance, and water pollution control -- to advise the cities in overall and sector planning. Financing from the Japan Grant Facility, Australian Trust Fund, French Government, Belgium Trust Find, United Nations Development Programme, and the Second Technical Cooperation Credit (Credit No. 1664) were utilized to provide technical assistance. The demand forecasting, resource analyses and investigation of investment alternatives carried out during preparation -- outcomes in themselves -- were essential for determining the appropriate scope and content of the project. 2.3 The result of these planning exercises with the cities is the proposed operation, which comprises urban planning and management improvement in each city with supporting investments. Development of urban information systems under the project would provide a framework for improved coordination among municipal agencies and for planning and evaluation of reforms and investments. Health and education components, incorporating approaches from other recent operations in China, are designed as sector investments and as such are founded on agreed objectives and implementation programs for development of services. Components in transport, water supply and sewerage, to strengthen infrastructure, are more akin to traditional Bank Group project investments and have been appraised accordingly. An innovative housing component supports reforms being undertaken at the national level to place housing on a financially self-sustaining basis, by removing subsidies and promoting homeownership and individual property rights. Industrial and pollution control components provide lines of credit that will support expansion of priority industrial enterprises in each city and provide a basis for improved industrial pollution abatement. B. Project Cities Basic Characteristics 2.4 Changzhou, with a population of 538,000 (1986) and growing at a rate of 3.2% per year, lies in the strategic industrial zone of southern Jiangsu Province, near Shanghai. The economic base is dominated by textiles and machine building. Other important sectors include silk, chemicals, pharmaceuticals, light industry, plastics, packaging, building materials, electronics, tractors, and coal. An above average export orientation, with annual foreign exchange earnings averaging 1.3 billion yuan (US$270 million), helps explain why this city's regional product growth consistently outperforms the nation as a whole. In 1986, Changzhou's regional product totalled V2.2 billion (US$470 million). 2.5 Luoyang, in central Henan Province, has a population of 1,020,000 (1986) and is growing at a rate of 3% per year. The city was heavily favored in the allocation of state investment funds during the 1950s, when it was chosen as the location of saven major industrial projects which dramatically expanded national capacity to produce steel, machine building, and power. The city's development is focused on serving the regional and  -8- national market, and heavy industry accounts for about 60% of industrial output. Export earnings in 1986 totalled only Y180 million (equivalent to US$38 million). 2.6 ShAshi is the smallest of the three cities, with a population of 277,000 (1986) growing at a rate of 3.8% per year, and is located near Wuhan in Hubei Province. Regional output totalled V658 million (US$140 million).in 1986. Shashi's economic base is predominantly in light industry, which ac ounts for eight-tenths of industrial output. The major industrial sector in the city is textiles. It makes up one-half of industrial production; chemicals, domestic~ mnachinery, and electronics add another 25 percentage points. The city is developing a strong export base, and in 1986 foreign exchange earnings tntalled V270 million (US$57 million). Its future growth is being promoted by large investments linking the city by rail, air, road, and improved telecommunications to the rest of the country. Common Issues 2.7 The cities share a heritage of underinvestment in physical and social infrastructure. At present in each city, there is a significant gap between the infrastructure requirement consistent with current economic performance and incomes, and the actual level of public services and facilities. Development planning in the cities is based mainly on physical master plans, which specify detailed long-term arrangements for land use and infrastructure. While the master plan is a valuable tool, the present process results in institutional rigidity, a lack of responsiveness to change, and poorly sequenced development of infrastructure. There is little or no systematic forecasting of demands for services; consequently infrastructure investment and demand are often not well-linked. There is poor linkage between physical planning and resource availability. Priorities among investments are rarely determined on the basis of economic or financial criteria. 2.8 In education, the three cities are well ahead of many rural and inland areas of China in progress toward achieving nine years of basic schooling for all children as mandated in China's Compulsory Education Law of 1986. Nevertheless, issues facing the education sector as a whole are manifest in all three project cities. A majority of primary and secondary school teachers are poorly qualified and workloads are inefficiently low. Many school buildings are dilapidated or unsafe and poorly utilized. Instructional equipment and library services are often inadequate. Inequities in education financing are created by the dependence of some schools on the profits of school-run enterprises to cover program costs. In addition, relatively weak institutions for technical and vocational education must cope with increasing demands tor skilled labor as local urban industry expands. 2.9 Demographic shifts, as a result of increased life expectancy and birth planning, along with shifting epidemiologic patterns, are increasing overall demand for health services and changing health requirements. Yet, relatively weak health infrastructure in the urban areas, poor coordination  -9- and duplication of effort among various health service providers, inefficient hospital planning and management, lead to sub-optimal utilization of existing municipal resources and make it difficult for the cities to reorient and improve health services. 2.10 Poor transBort planning, rapidly inc:easing motorization, problems associated with mass bicycle usage, and limited expertise in transport management are issues in all three urban areas. A physical Transport Master Plan exists for each city, and the municipalities give high priority to "completing" the road system, in accordance with the Plan. All three cities have already invested heavily in roads, and propose further investment to accommodate urban expansion. Nevertheless, urban transport is not yet viewed comprehensively as a single sector: responsibilities are fragmented and coherent transport strategies have not been developed to date. As a result, there has been relative over-emphasis on road construction, under-investment in public transport accompanied by duplication of services by industrial enterprises, and neglect of traffic management opportunities to increase the efficiency of existing systems. 2.11 Each of the cities is experiencing rapid growth in demand for water supply; non-residential demand is growing at 6% - 8% per year, while residential demand is increasing at roughly 5% per year. Non-residential use accounts for about two-thirds of total consumption, and is fueled by rapid economic expansion. However, the constrtction or conversion of housing units to provide individual piped water connections and flush toilets is also promoting increased residential usage. Increased consumption is, in turn, leading to greater effluent flows, of which industrial wastewater is the most problematic. In all three cities there is thus a perceived need for additional water supply as well as a growing concern for wastewater management. 2.12 The central government has established institutions at the national, provincial, and local level to develop and enforce guidelines and regulations to govern industrial wastewater discharges, accompanied by the imposition of pollution or effluent fees for non-compliance, and mandated the recycling of a portion of such fees in the form of municipal government low-cost loans for the installation of pollution control equipment at the source. These mechanisms, however, are still in their infancy and the level of funding is judged inadequate to target even the set of enterprises which exceed standards by very high margins. 2.13 In each of the cities housing conditions fall short of meeting the standards that the national government has set as an objective by the year 2000; i.e. fully-serviced units that include kitchens and bathrooms, providing 8 m2 of living space per capita for all households. Up to half of all households presently lack units with private kitchens and/or bathrooms with flush toilets, and overcrowding afflicts up to one quarter of all households. About 75-80% of housing units are built and owned by work units or local housing bureaus and rented for only about 1% of monthly household income. These rents cover half of average monthly operations and maintenance costs, and none of the construction costs involved. With housing stock use serving as in-kind compensation to workers, labor  - 10 - mobility is aiscouraged and improved living conditions become a function of welfare expenditures and bureaucratic decisions, rather than individual choice. The lack of housing options other than those linked to employment in public sector enterprises or governmental organizations discourages individuals from moving to the private sector. The existing system not only burdens enterprises and municipal governments but proves ill-suited to encourage households to mobilize savings from their rising incomes. The national government has instructed cities to implement locally-managed housing reform programs that will dramatically raise rents, reconfigure wage compensation packages for state-owned enterprise and government unit workers, and draw on household savings to finance housing development for sale to individuals. 2.14 The link between the infrastructure development of the three cities and that of industrial and commercial enterDrises within their boundaries is very close; the bulk of revenues available to local governments consist of sales taxes collected from all enterprises and profit taxes from collectives and municipally-owned enterprises. In turn, particularly as efforts are made to divest enterprises of provision of public services such as hospital care and bus transportation, the enterprises depend on municipal resources for the maintenance of existing municipal assets, and the expansion of physical and social infrastructure required by output growth that has consistently exceeded 10% per annum. Economic expansion of the existing set of enterprises is constrained by a number of other factors, among which are energy supply shortfalls, capacity restrictions in all forms of interregional transportation, and shortages of foreign exchange with which to undertake the necessary technological upgrading to constantly improve output quality, reduce waste, and exploit new market niches. The local governments have limited control over constraints that require national or regional solutions; however, promoting the technological upgrading of industrial enterprises through the identification of new sources of loan funds (particularly foreign exchange) is seen as an important responsibility of municipal governments in the present period of transition to a more market-oriented economv. 2.15 The cities share common fundamental goals which include: (a) rapid growth of the local economic base; (b) better living conditions for the population, including improvement in long-neglected housing, public services such as education and health, and infrastructure conditions, and (c) clearer roles for local institutions. City leaders envision that businesses will concentrate on profit-making activities and divest themselves of obligations (schools, hospitals, and housing) not directly relevant to their business objectives; public utilities will plan, finance, and manage services in a more autonomous fashion; and housing production will evolve into a commercial activity undertaken by housing development companies for profit. Finally, local governments will restrict themselves to a regulatory role with respect to public utilities and environmental management, a coordinating role in the overall management of the municipality and a major role as a supplier of public facilities and services in education and health.  - 11 X C. Project Objectives 2.16 The aim of the project is to improve living conditions in the three cities by linking comprehensive planning with the introduction of reforms that improve the efficiency with which existing facilities are used and provide more appropriate financing mechanisms for urban development. The specific objectives are to: (a) improve planning for the city as a whole, as well as across and within sectors; (b) increase efficiency in the utilization and management of existing facilities; (c) strengthen resource mobilization; (d) support expansion of economic activity; and (e) promote prudent management of environmental resources. This represents a unique departure from past practices, which focused on discrete investments undertaken without the benefit of a clearly-articulated urban management framework, with priorities supported by appropriate policy, financing, and institutional reforms. D. Policy and Management Reforms 2.17 The reforms undertaken as part of this operation are in four main areas: (a) cross-sectoral planning and management; (b) use of existing municipal assets; (c) financial management and cost recovery; and (d) investment and project design criteria. During negotiations, assurances were obtained that each city would carry out its reform package in accordance with an overall program agreed with the Bank Group. The reform program is presented by sector in Annex 1 and summarized below. 2.18 To improve cross-sectoral planning and management, the cities are strengthening newly established institutions to carry out the followirg functions: (a) assemble data and assumptions about the development of the demographic and economic base of each city, both for the city a.s a whole and disaggregated by small zone suitable to the needs of urban planners; (b) establi h and monitor sector-specific indicators for housing, transport, utilities, the environment and the social sectors (health and education); and (c) assist sector planners in the identification, design, and preparation of investments. These functions are very different from the traditional statistical work carried out. The focus, in the past, was on retrospective data collection to list achievements or to record "deficits," with little thought to the management requirements of the end user of information. 2.19 Better use of existing municipal assets is to be achieved in the cities in several ways. In water supply, there will be improved demand management through more rational water tariffs. Traffic management measures will improve the flow of vehicular and passenger traffic on existing city streets. In education, reforms will increase student-teacher ratios at all levels of education and in all urban schools. The resulting savings from this reform will be used to increase by 50% the recurrent expenditures for existing buildings and equipment. For all new school construction, annual maintenance budgets will be set at 3% of the capital costs of buildings and at 10% of the capital cost of equipment. Reforms in health will increase the number of patients treated per hospital bed by  - 12 - opening to the public hospital beds owned by enterprises, railways, and the military; coordinating the provision of primary, secondary and tertiary (hospital) health care to reduce excessive utilization of hospitals; and introducing complementary reforms in hospital procedures and health care finance to create added incentives to reduce the average number of days of hospitalization per patient. Increased fees for physician consultations, hospital beds and procedures will fund greater maintenance, repair, and replacement expenditures. A fund will be created and financed with 3% of all medical services revenues for repair and maintenance at health institutions. 2.20 Financial management and cost recovery will be strengthened mainly in three sectors. In water supply and public transport, the companies involved have agreed that by 1995 they will generate sufficient income to cover costs of operations, bonus and welfare expenditures, depreciation and interest, as well as taxes and other charges. In housing to be developed under the project, units will be sold to households at prices to cover full investment costs. Buyers will, in turn, have the right to resell and to keep the associated capital gains, subject to applicable taxes, while being fully responsible for maintenance expenditures. 2.21 More efficient design criteria are being introduced under the project. Engineering designs associated with proposed water supply, sewerage and road investments have been reviewed and finalized with external assistance. Physical works in the social sectors, such as libraries and hospitals, have benefitted from external reviews of space utilization and functional efficiency during project preparation. New education facilities will be built according to utilization rates that reflect enrollment, curriculum offered and student mix. Transport investments are being planned within a framework that gives greater priority to public transport, increases the role of traffic regulations and their enforcement, introduces traffic management measures, and links road network development more closely to anticipated land use. The housing component provides for innovations in design efficiency, land use and Zloor space planning. These measures will increase the use of existing facilities, while reducing the possible excess dimensions and premature timing of future investments. E. Project Components 2.22 The project includes investment components in eight sectors across the three cities. Detailed implementation programs are included in the project files and cover the urban planning and iainagement, education, health, transport, water and sewerage and housing components. Urban Planninz and Management Component 2.23 The objective is to assist the three cities in devel-ping cross- sectoral planning and management through (a) the building '4 a database for the major urban sectors; (b) data analysis and projectiLn scenarios; and (c) the dissemination of modern management and projecc design tools among municipal line agencies. In each city, key institutions and information  - 13 - systems have been created under the project. An Urban Planning and Management Information Center (UPMIC) was established in each city during project preparation. In addition, a Geographical Information System (GIS) unit and a number of information subsystems have been set up within individual line agencies. 2.24 The UPMIC is located in the Planning Commissions of Changzhou and Luoyang and in the Urban Construction Commission in Shashi. The centers will collect and analyze cross-sector data, provide assistance to line agencies to help create sectoral data bases, and help develop sectoral and general policy tools. The UPMIC will provide to line agencies computer software for management and design and the training necessary to use that software. The GIS is linked to UPMIC but will report directly to the urban planning bureau. The unit will collect information that can be organized geographically and in turn will provide line agencies with information structured by geographic area. Land-use simulation models will be developed to project future land use'at short, medium and long ranges. Data would be included on land use and infrastructure networks, population and population densities per zone, employment per zone, and pollution indicators per zone. 2.25 Information sub-systems are being created in all main line agencies. Line agency staff will be responsible for the establishment and maintenance of their own database. Within each agency, the information sub-system would include a database, software for investment management and project design, and a policy model that would link yearly capital investment in the sector with population projections and the projected level and standarcis of service provided by the agency. 2.26 The component would finance equipment, including computers and software, and associated office improvements needed for the successful start-up operations of the UPMIC, GIS and information sub-systems in each city. Technical assistance in establishing the information centers was provided by the Laboratory of Resources and Environment Information Systems (LREIS), a geographic research institute of the Chinese Academy of Sciences in Beijing. Training and additional consultancy assistance is being provided by LREIS to the three cities in three phases, the first phase of which has been completed (Annex 2). Classes and technical consultation by LREIS specialists will be organized in the three cities. In addition, staff of the information centers will travel to Beijing for instruction. Equipment and technical assistance will also be provided to each city's Planning Commission and Finance Bureau. Education Comnonent 2.27 The objecrive of the component is to improve educational quality and relevance to local needs while simultaneously increasing cost efficiency and reducing the financial burden borne by the municipalities. Reforms will be undertaken at virtually all levels of the education system. Cities will increase teacher-student ratios through revised standards and incentives for increasing teaching loads. All teacher training institutions will begin to qualify teachers in at least two subjects.  - 14 - Budgets for maintenance and repair of buildings and equipmen- will be raised to more reasonable levels (see para. 2.19). All new education facilities will be built according to actual needs and calculated utilization rates instead of pre-set targets for infrastructure development. 2.28 An educational television station and four teacher training institutes will be established to accommodate programs for pre- and in- service teacher training. An educational research center and two libraries will be set up to support these programs. Nine voq.ational centers and schools will be established or upgraded to increase the stock of skilled workers in the three cities. 2.29 The project would upgrade qualitv of facilities, equipment and training. There will be some new construction and considerable rehabilitation of primary and secondary schools. Technical assistance and training -- including specialist services, study tours, overseas and domestic courses -- will develop capability of the local education bureaus to design and improve sducational programs. These activities will be organized jointly and managed by a consulting firm (Annex 3). Under the supervision of a three-city coordinating committee for technical assistance and training, Changzhou Municipality is taking responsibility for handling all the necessary consultant contracts. With assistance, each municipal government will establish a planning system that links development of education programs to actual labor requirements in the urban area. Training will be focused on pedagogy for basic and vocational education, school administration and computerization, and library management. These objectives will be achieved through the provision of specialist services, study tours, overseas training and in-country training. Health Component 2.30 The objective of this component is to improve the quality and availability of health services without a significant infusion of additional local government resources by strengthening coordination among municipal health institutions and increasing their internal efficiency, particularly in city hospitals. 2.31 Specific health reform measures will be undertaken in each city. To reduce the duplication of services, each city will develop and implement a program through which hospital beds owned and operated by enterprises and other institutions not directly affiliated with the municipal government, will be opened to the public; Luoyang met this objective during project preparation. To better integrate management atnd planning, a joint medical service system will be organized among existing health institutions and a "director responsibility system" will be introduced in selected health facilities whereby directors will be responsible for administration, personmel and finance decisions. Efforts will be made to improve health care finance through insurance trials and experimentation with a prospective payment system. Measures to improve hospital efficiency will include: protocols for more frequent use of pre-admission diagnosis to reduce actual length of stay for surgery or other therapies; technical  - 15 - standardization and performance criteria for hospital staff; and experimentation with home-based care to reduce unnecessary hospitalization. 2.32 Proposed investments would aLsist the three municipalities to expand or re-orient the kinds of sevy-jces provided and accelerate the upgrading of health service facilities and training of health workers in accordance with a five-year health plan prepared by the local health bureau. 2.33 Investment in civil works is aimed at rehabilitating or reconstructing debilitated hcalth facilities, especially those deemed to suffer from serious structural damage. New construction will be undertaken to accommodate expanded programs in emergency services and disease prevention and control, occupational health centers and training centers. Budgets for maintenance and repair of buildings and equipment will be raised to more reasonable levels (see para. 2.19). Domestic and foreign technical assistance is being provided to assist in design of medical facilities (Annex 4). 2.34 New equipment will be purchased to replace outdated diagnostic, therapeutic, laboratory and teaching equipment in municipal hospitals, disease prevention stations, maternal and child health centers, county and municipal health training centers and health bureaus. Improved equipment for radiology will be provided to reduce unsafe radiation exposure to workers and patients. New screening and diagnostic equipment, such as air dt'at and fume samplers, worksite noise dosimeters, microscopes, and incubators, will be purchased to expand the services of disease prevention centers. Audio-visual equipment will be acquired for health education and medical training. Ambulances and screening vehicles will also be purchased to aid emergency services and community outreach. 2.35 Each city will upgrade technical and administrative skills of existing medical workers through short-and long-term training. Technical assistance is being provided to municipal health institutions in current knowledge and techniques in key medical specialties, health services management and finance, health education, rehabilitation medicine and emergency medical services. The health bureau in each city has prepared a detailed plan for technical assistance and training of health workers (Annex 4). Under the supervision of the three-city coordination committee for technical assistance and training, Shashi is taking responsibility for handling all the necessary consultant contracts. In addition, each city will host two workshops during project implementation on a principal area of health reform. Changzhou Municipality will host workshops on hospital standardization and quality assurance. Shashi Municipality will con- centrate on health care finance, and the focus in Luoyang Municipality will be on integrated management and planning of health services. Transport Component 2.36 Under the project, each city will pursue a transport strategy which (a) gives higher priority than in the past to public transport; (b) includes development of a road network to serve anticipated land use and to  - 16 - increase capacity to meet projected future demands; (c) introduces traffic engineering and management measures; (d) gives more attention to traffic regulations and their enforcement; and (e) supports price reform and extension of the "director responsibility system" to transport enterprises whereby directors are responsible for administration, personnel and finance. The strategy in each city will be refined during the project, with technical assistance from local and foreign consultants, and through training of municipality staff. The public transport improvement program, by helping to make use of municipal buses more attractive, is a pre- requisite for medium-term efforts to encourage industrial enterprises to (a) cease buying buses to carry employees to atid from work and (b) decrease the size of their bus fleets and gradually discontinue the duplication of passenger trarsport services involved at present. 2.37 To make better use of the existing facilities, traffic management improvements will be made in all three cities. These include: computer- controlled traffic signal systems (Luoyang); vehicle testing facilities (Luoyang); bus priority measures (Shashi and Luoyang); intersection improvements; and traffic equipment. 2.38 The following new road construction and widening would be undertaken: (a) Northern Industrial Road, Luoyang (2.9 km); (b) Jiudu Road East, Luoyang (3.0 km); (c) Sanwan Road, Shashi (3.5 km); (d) Jiang Jing Road West, Shashi (2.0 km); (e) widening of Guanhe Road, Changzhou (1.7 km). Assurances were obtained at negotiations that the project cities will carry out the resettlement and rehabilitation related to road construction in accordance with plans acceptable to the Bank Group. These plans have subsequently been reviewed and found acceptable by the Bank Group. Comprehensive public transport improvements will be undertaken in Shashi and Luoyang, including: (a) extension of the trolley-bus system (Luoyang); (b) provision of buses; (c) new depot and workshop facilities; (d) new terminals; (e) new services (Shashi only). 2.39 To strengthen the municipalities' ability to plan and manage the traffic system, specialized training courses will be run by local institutes in: (a) land use-transport planning, (b) public transport operations and management, (c) traffic management and engineering, and (d) traffic regulation and enforcement. Technical assistance will be provided to the Traffic Planning and Management Units established in each city under the project (with competent staff in adequate numbers with functions and responsibilities acceptable to the Association and the Bank) to carry out a land use-transport study in each city, and to improve traffic management and enforcement (see Annex 5). Under the supervision of the three-city coordination committee for technical assistance and training, Luoyang Municipality is taking responsibility for handling all the necessary  - 17 - consultant contracts. In addition, assurance was obtained at negotiations that the land use transport stildy for each city will be carried out under terms of reference and timing agreed with the Bank Group. Water Supply and Sewerage Comgonent 2.40 The objective is to help satisfy residential and non-residential effective demand for water supply services, while dealing selectively with wastewater disposal. During project preparation, each city was assisted in preparing a ten-year fozecast of demand for water supply. At the same time, water tariffs were revised during project preparation to better reflect economic costs, discipline the growth of wasteful consumption, and generate a resources envelope that helped shape the scale of the proposed works (see para. 3.5). Sewerage surcharges have also been adopted to help finance wastewater disposal operations. On the basis of projected demand and feasibility analyses undertaken by nationally-recognized design institutes, the cities selected priority investments to be financed under the project. These studies identified least-cost solutions that were found to be satisfactory to the Bank Group. 2.41 Investments in Changzhou would expand water capacity by 200,000 m3 per day to satisfy the level of demand through 1995. In Luoyang, the project would include the installation of a waterworks power transformer station and associated transmission and distribution rnetwork. In Shashi, the present facility for water supply and distribution would be expanded to increase capacity by 150,000 m3 per day and thereby meet domestic and industrial demand through the year 2000. The sewerage component in Shashi is derived from that city's wastewater management strategy and would supplement investments already made in the construction of separate networks for sewerage and rainwater. It will intercept most of the domestic and industrial effluent presently disposed of in open canals draining towards agricultural areas, and bring them to a single point prior to disposing them through a river outfall in the Yangtze river. Feasibility analyses reviewed by the Bank Group confirmed that the river flows are significant enough during all seasons to allow sufficient dilution of the effluent and their natural treatment before reaching potential water supply intakes downstream of the river. 2.42 Technical assistance and training will be provided to help upgrade the skills of managers and technicians in the municipal water companies. Training courses will be provided through existing training centers associated with the utility companies as well as through local vocational and technical education institutes. Domestic and overseas study tours are planned to enable project managers to visit ongoing and completed projects to improve water supply and sewerage systems (see Annex 6). Housing Component 2.43 The object in each city is to provide an incentive to shift better-off households first, and other households later, from the heavily  - 18 - subsidized rental housing stock to housing units purchased on commercial terms, while gradually raising rents to levels approaching market rates for households remaining in the rental market. 2.44 The housing component directly supports ongoing national housing reform programs mandated by the national government for all cities by making available a significant amount of new units for sale, and encouraging households to save and invest in housing. These housing units carry the right of resale with household retention of capital gains subject only to applicable taxes. The programs will increase floor space per person substantially for beneficiary households and create homeowners out of two categories of households: those belonging to the burgeoning private and cooperative economy, which operates in a deregulated environment and whose members have therefore limited access to housing benefits reserved for employees of public sector enterprises and governmental units; and those in the state and collective sector, whose compensation package is being altered to "cash out" implicit housing subsidies, and provide an additional 24% in income in the form of housing vouchers. The project will help accelerate implementation of the reform, while ensuring 'lull cost recovery and the use of innovative cost models that link latnd use, construction standards, pricing, and project cash flow. 2.45 With Bank Group assistance, the cities have developed a model to project housing stocks in each city to the year 2005. The projections categorize types of housing units and provide detailed information on the demand for land, floor area, infrastructure, domestic water consumption, and capital costs. The model takes into account demand created by income growth, new household foimation, changes in household size, and displacement by public works and urban renewal. It also provided key inputs into the development of investments under the component. 2.46 The component would provide for construction of about 4,200 units in Changzhou, 1,100 in Luoyang, and 1,600 in Shashi. In each city, units will average 60 square meters in gross terms; 36 square meters in net terms; and 30 square meters in terms of available living space.3/ The component will introduce innovations in the design efficiency of land use and floor space, while significantly improving the amo1at and accessibility of space for service sector activities. The residential floor area ratio will be raised by 50t-75%, and efficiency gains in building design will raise the ratio of usable space in each unit by approximately one-third. Commercial space will be made available on the basis of market potential, instead of traditional housing project norms and standards. The design of the units and the services provided in the new neighborhoods will be substantially more attractive than that found in existing neighborhoods. The three sites in Changzhou and the single sites in Luoyang and Shashi were all selected on the basis of their easy accessibility to the city 3/ Gross space includes all apartment space plus assignable corridor, stairwell, and other such exterior space; net space measures exclude exterior space; living space measures exclude kitchen and bathroom.  - 19 - center and the availability of off-site infrastructure. All sites have bua lines operating on roads bordering the neighborhood. The units would be affordable to 25% to 35% of the urban population (paras 3.11-3.13). Commercial floor space leases will be auctioned at market prices. Differential pricing will be used for residential areas, reflecting locational advantages and consumer preference for different floor levels. The full cost of land, infrastructure, and construction will be recovered from the project beneficiaries, including the cost of community facilities. 2.47 The local branches of the China Housing Construction and Land Development Company (CHCLDC) will be in charge of the design, management and supervision, including preparing tender documents. Commercial housing is usually sold on a "ncsh only" basis. However, under the project, assurances were obtained during negotiations that the housing units constructed under the project will be sold to households at prices to cover full investment costs, including adequate margins for the housing developers and interest during construction; that buyers of such units will have the right to resell them and retain the resulting capital gains subject only to applicable taxes, and that mortgages will be provided to purchasing households on terms acceptable to the Bank Group. Housing loans covering 50% of the purchase costs of the unit will be provided to individual households by the People's Construction Bank of China (PCBC) local branch, repayable in 10 years at prevailing interest rates for comparable investments. Current rates for medium-term commercial loans are 11.16% per annum. Industrial Comnonent 2.48 The component will provide a line of credit for the selective technology upgrading of municipal industrial enterprises in sectors consistent with local comparative advantage. Because the project is meant i to create an appropriate model for local urban planning and management in China, involvement in aspects relating to economic expansion is relevant and provides additional leverage in accomplishing the policy reform * objectives of the project. 2.49 The Bank Group has reviewed the industrial development strategy of each city and found it satisfactory. The strategies stress efficiency improvements and capacity enhancements in manufacturing and processing industries that are in conformity with existing and emerging comparative advantage. Each municipal government has identified a preliminary set of sub-project proposals for appraisal, all involving existing enterprises, and these have been reviewed by the Bank Group and found to be consistent with the aforementioned strateigies. At negotiations, assurances were obtained that appraisal and supervision of industrial sub-loans will be performed on each city's behalf by the China Investment Bank (CIB) on the basis of an agreement between the three cities and CIB on terms and conditions for sub-loans and the implementation of the industrial sub- component satisfactory to the Bank Group (Annex 7). Appraisals will be undertaken by the provincial branch office relevant to each city (Changzhou: Jiangsu; Luoyang: Henan; Shashi: Hubei); each of these has appraised Bank Group-financed sub-loans under previous projects involving  - 20 - CIB. Sub-loans will cover up to 100% of the foreign exchange costs. Project investments for equipment and associated technical assistance will finance sub-loans totalling US$19.7 million in Changzhou, US$15.8 million in Luoyang; and US$14.1 million in Shashi. Counterpart funding will be derived from enterprises' internal reserves L*nd from local bank loans. The terms and conditions of the foreign exchange sub-loans, detailed in para. 3.3, will be consistent with other CIB foreign currency loan operations or with terms prevailing for similar, ordinary medium-term loans made by PCBC, when local currency onlending is involved. Proposed sub-loans above a limit of US$1 million will be reviewed by the Bank Group. Supervision will be performed by the municipal government with the technical assistance of CIB. A condition of effectiveness of the proposed Credit and Loan will be the signature of an agreement between the project cities and CIB on the arrangements for appraising and supervising industrial sub-loans. Pollution Control Co2monent 2.50 The objective of the component is to assist industries in Shashi and Changzhou to achieve prescribed water quality discharge standards mandated by national regulation by providing a line of credit to finance purchases of pollution control equipment by industrial enterprises and associated civil works necessary for installation of such equipment. The project will also assist the establishment of a revolving loan fund in Changzhou and expanding a revolving loan fund in Shashi. The principles for managing these funds are detailed in Annex 8 and are summarized below. In addition, pollution monitoring equipment required by each local Environmental Protection Bureau (EPB) will be provided. 2.51 Administration of the fund in each city will be the responsibility of each municipal government and will be delegated to the local Environment Protection and Finance Bureaus. Technical appraisal of sub-project proposals will be performed on each city's behalf by the local EPB, on the basis of least-cost criteria. The local Finance Bureau will be responsible for determining the terms of the loans within the range prescribed in para. 3.3 as well as the size of any grants, on advice of the local EPB and the sub-borrowers' financial conditions. However, actual financial appraisal of sub-project components, to establish the capacity of sub-borrowers to repay the sub-loan, will be performed on each city's behalf by PCBC on the basis of an agreement signed by each city and PCBC on terms and conditions satisfactory to the Bank Group. Financial evaluatior will focus on the sub-borrowers' ability to repay the sub-loans. The mix of loans and grants will be determined by the borrowers' repayment capacity, given that debt service burden should not exceed 20% of after tax earnings. A condition of disbursement for this component will be signature of the cited agreements between the project cities and PCBC for the pollution control sub-loans. Criteria for selecting among enterprises eligible for participation will follow each city's water pollution abatement strategy, as reviewed and agreed with the Bank Group. The objectives of that strategy are: a) to improve city-wide compliance with national industrial wastewater discharge standards; b) to select, on a priority basis, firms that are among the set of worst violators of those standards, whose compliance would significantly improve city-wide wastewater discharge standards; and c) to first select,  - 21 - among those firms, those that are deemed by PCBC as capable of repaying sub-loans for pollution control investments deemed cost-effective by the local EPB. Sub-loans will cover a varying share of sub-project costs depending on the nature of the investment and the enterprises' own contribution. Subject, however, to annual review by the cities and the Bank Group, the annual average share of sub-project costs which would be financed by sub-loans is expected to be 60% of sub-project costs for pollution control equipment, associated technical assistance and civil works; totalling $3.4 million in each city. Counterpart funds will be derived from enterprise internal reserves and from local bank loans, as well as grants. Proposed sub-loans above a free limit of US$500,000 will be reviewed by the Bank Group. Assurances on terms and conditions for pollution control sub-loans, fund management principles and implementation arrangements acceptable to the Bank Group were obtained at negotiations. III. Proiect Costs and Financing A. Cost Estimate 3.1 Total project costs are estimated at US$277.2 million equivalent, of which US$169.9 million are foreign. Project costs are summarized by component in Table 3.1. Details are shown in Annex 9. The base costs are in September 1990 prices and are based on the engineering design or feasibility study for each sub-component, prepared by design institutes in most cases. Detailed sub-component costs of industrial and pollution control sub-loan facilities are to be prepared and appraised by relevant local institutions during the course of implementation (see paras. 2.48 through 2.51). Physical contingencies of 12.5% are allowed in general, except for the cost of land, acquisition of which is substantially completed. In calculating the base cost and physical contingencies, the prevailing exchange rate of Yuan 5.22 to US$1 was used. The price escalation for foreign costs was calculated on the basis of anticipated annual international price movements of 3.6% per year. Price escalation for local costs was calculated based on projected annual local inflation rates of 10.0% for 1991, 8.0% for 1992, and 5% thereafter. Equipment and materials imported for the project are exempt from import duties. The local companies will pay sales taxes on locally purchased equipment and materials.  - 22 - Table 3.1 Summary of Project Costs by Component in million Yuan in US$ million Component Local Foreign Total Local Foreign Total Planning & Management 10.9 28.0 38.8 2.1 5.3 7.4 Education and Health 113.6 113.4 227.0 21.8 21.7 43.5 Housing 130.1 79.2 209.3 24.9 15.2 40.1 Transportation 75.1 50.6 125.8 14.4 9.7 24.1 Water Supply & Sewerage 64.8 88.6 153.4 12.4 17.0 29.4 Pollution Control 6.4 37.6 44.1 1.2 7.2 8.4 Industry 49.6 294.9 344.5 9.5 56.5 66.0 Base Cost 450.5 692.4 1142.9 86.3 132.6 218.9 Physical Contingencies 54.5 83.7 138.2 10.4 16.1 26.5 Price Contingencies 106.2 283.5 389.6 10.6 21.2 31.8 Total Cost 611.1 1059.6 1670.7 107.3 169.9 277.2 __= ~ in =5n5= 8rn= *  - 23 B. Financing Plans 3.2 The proposed Bank Group loan/credit of US$168.4 million equivalent will meet 61% of the total financing required. The remaining financing will be met by the municipal governments and their bureaus, public utilities and households, and industrial firms and local banks. The proposed financing plan for the project is summarized in Table 3.2. Table 3.2: Financing Plan By City* (in current US$ Million) Changzhou Luoyang Shashi Total World Bank Group 68.3 52.6 47.5 168.4 % of Total (58.3) (61.5) (63.8) (60.8) Municipal Government 16.7 15.2 9.5 41.4 and its Bureaus (14.3) (17.8) (12.7) (14.9) Public Service Units 13.8 7.3 6.2 27.3 and Households (11.8) (8.5) (8.3) (9.9) Industrial Firms 18.3 10.4 11.3 40.0 and Local Banks tl5.6) (12.2) (15.2) (14.4) lotal 117.1 85.5 74.5 277.2 (100.0) (100.0) (100.0) (100.0) * Percentage of city total shown in the parentheses. 3.3 Assurances were obtained at negotiations that Bank Group funds would be onlent by the Government to the project cities on terms and conditions satisfactory to the Bank Group. The three municipalities shall repay at an annual interest rate of 5% over 20 years, including five years of grace. GOC will pass the foreign exchange risk on the loan/credit proceeds to the municipalities. Assurances were obtained at negotiations that the municipal governments will pass on part of the loan/credit proceeds (around 40% of the total in each city) to participating public utility companies and industrial enterprises on terms and conditions satisfactory to the Bank Group. For foreign currency loans, Bank Group funds will be onlent on terms and conditions similar to those of otber CIB loans: the interest rate charged will be the Bank's variable rate plus a 2% spread; maturities for industrial sub-loans shall normally not exceed seven years and never exceed 12 years including up to three years of grace. For pollution control sub-loans, maturities will vary from five to ten years, including one to two years of grace. Local currency loans, which would include all loans to the public utility companies, will follow prevailing rates for similar fixed asset loans to state-owned enterprises made by the PCBC, with five years of grace and repayment over 15 years. The rate is currently 11.16% for loans repayable over 5 to 10 years.  - 24 - Industrial sub-borrowers will bear the US dollar exchange risk for foreign currency loans. Local governments will carry the dollar-currency pool and dollar-SDR risks for foreign currency loans and the entire foreign exchange risk when the proceeds of the loan/credit are onlent for local currency expenditures. Given the history of low inflation and the record of the recent anti-inflationary policies, the cited PCBC lending rates are expected to be positive over the life of the loan/credit. Foreign exchange earnings prospects of the three cities appear to be adequate to cover the debt service obligations created by the project and not unduly constrain overall investment capability or municipal financial stability. C. Public Utilities Finances 3.4 Five public utility companies will receive Bank Group funds on- lent by the respective municipal government: Changzhou Water Company; Shashi Water Company; Luoyang Water Company; Shashi Municipal Bus Company; and Luoyang Municipal Bus Company. The financial status of the companies over the past three years as well as projections fo.- the project period are shown in Annex 11. Net income is defined as revenues minus the operating costs which include: operations, depreciation, bonus and welfare expenditures, and taxes and charges on operation. The three water companies had positive net income in the recent past; but both bus companies experienced increasing losses. As a result of the project preparation discussions, major tariff increases were introduced: in Changzhou, non-residential water tariffs rose 15%; in Luoyang, non- residential water tariff rose 167-170%, and bus fares 25%; in Shashi, non- residential water tariffs rose 20-50% depending on use category, and bus fares 44%. 3.5 Each water company is committed to maintaining a positive net income (as defined in paragraph 3.4) and in addition, beginning in January 1, 1995, to covering the interest payments. Each bus company is committed to: generating adequate income to cover current operating costs, exclusive of taxes, depreciation, interest, and bonus and welfare payments, through 1994; and achieving positive net income beginning on January 1, 1995. Assuming that costs increase in line with inflation, further tariff increases required to meet the above targets for 1995 would be at least: 19-23% for the Luoyang Water Company, depending on user category; 25-73% for the Shashi Water Company, depending on user category; 50-117% for the Changzhou Water Company, depending on user category; 52% for the Luoyang Municipal Bus Company; and 43% for the Shashi Municipal Bus Company. 3.6 In conjunction with tariff increases, the municipalities and the companie. are committed to three important actions to improve financial management of the companies. First, each company will develop and carry out a plan to reduce or contain increases in costs. Second, during the time when any of the companies would need municipal subsidies, they will be based on a set of performance measures, such as passengers carried or volume of residential water supplied. Third, each company is committed to obtaining technical assistance to the extent necessary to improve its financial management and planning capabilities prior to the end of 1993.  - 25 - D. Municipal Finances 3.7 Financial projections for each municipal government demonstrate that during the period 1991-96, project-related capital outlays financed out of the municipal capital budget will average about 16% in Changzhou, 11% in Luoyang, and 21% in Shashi (Annex 12). The municipal governments' debt service obligation for the loan and credit would be less than 7% of Changzhou's capital expenditures, 4% of Luoyang's, and 8% of Shashi's. This burden is deemed reasonable, given the absence of any other outstanding debt. 3.8 Under the project, provisions have been made for dealing with the major sources of increase in operations and maintenance axpenditures: (a) the bus and water companies will generate the required revenues internally, through user charges, as outlined in paras. 3.4 and 3.5; (b) the Shashi Drainage Management Bureau, which maintains separate financial statements, will continue to finance the operating costs of the sewerage system from the proceeds of a sewerage surcharge imposed on industrial enterprises; (c) the education and health bureaus will adhere to new operations and maintenance expenditure standards as part of the reform program introduced under the project (para. 2.19), financing these through cost savings introduced under the project, new fees (health) and allocations from the municipal budget; (d) the increased recurrent expenditures associated with the road and traffic management investments will be met by the municipal budget and by the introduction of vehicle testing fees (Luoyang) to cover the capital and operating costs of the vehicle testing center to be built under the project; during project preparation, vehicle license fees were approved by Changzhou municipal government; (e) the maintenance of the housing units financed under the project will be the responsibility of the home buyers, following long-standing procedures already in place for private housing; (f) recurrent costs associated with the UPMICs and the GIS units, will be financed out of municipal budget revenues. Given that the growth in total local revenues are expected to increase at about 5% per annum t.om 1991 to 2000, in real terms, the increased recurrent expenditure burden created by the impact of the project is deemed reasonable.  - 26 - E. Household Finances 3.9 Housing. The costs of producing units in each city vary somewhat, depending on such factors as the average price of the land involved and the level of public facilities provided. The sale price will cover all relevant costs of production, including land, infrastructure, community facilities, and interest during construction. The following calculations have been made on the financial requirements of homeownership under each scheme (see Annex 13): (a) households buying the average-sized units are expected to have accumulated savings of approximately RMB 16,000 at the time of unit allocation (1991 and later) in Shashi and Changzhou and RIMB 18,000 in Luoyang; these savings will consist of interest-earning "earnest money" (60%) deposited in PCBC and a downpayment (40%); (b) households working for state enterprises, collectives, government, and non-profit institutions will be expected to finance a ten-year mortgage for the remaining half of the sale price through monthly payments amounting to 15% of their monthly income; (c) by the time the units become available for sale, all three cities will have fully implemented the first phase of a housing reform program already underway, as part of a nationally-mandated ef.ort required of all cities; rents for the public housing stock will be boosted to an average 24% of household income (with variations according to unit size, quality and location), while all households will receive uniform income increases (in the form of housing vouchers) has been agreed that for households participating in the project these vouchers will be assigned to cover mortgage payments supplementing the cash payments cited in (b); (d) private-sector households, that are, in effect, self- employed and not subject to public-sector wage scales, will not have vouchers available to supplement cash payments; they will be expected to devote 25% of their monthly income to mortgage payments if they purchase an apartment under the project. For a household now living in public housing and eligible for housing vouchers, the monthly cash income required to service a mortgage will equal roughly Y 510 in Shashi, Y 530 in Changzhou, and Y 580 in Luoyang. This income level corresponds to the top 25% of the applicable income distribution in Shashi, and 35% in Luoyang and 35% in Changzhou. It should be noted that all benefits-in-kind provided by public sector enterprises and governmental units to its employees exceed the level of cash incomes. However, the distribution of housing benefits, given limits on residential mobility, are not necessarily related to the distribution of cash incomes;  - 27 - in fact, the distribution of in-kind benefits actually compresses the distribution of total benefits (wage, bonus, in-kind) so that government efforts to widen income differentials to reflect relative skill scarcities are undercut. Under the project, existing rental apartments vacated by households who move into project-financed housing will be redistributed to enterprise employees eligible for better housing units. Surveys conducted as part of the marketing research associated with the proposed schemes suggest that households in the eligible income groups should experience little difficulty in meeting the downpayment requirements by the time the project-financed units become available for sale. 3.10 The number of units financed by the project over a five-year period would represent from 7% (Luoyang) to 26% (Shashi) of newly formed households, and about 1.2% (Luo--Rng) to 6.3% (Shashi) of the number of all households. 3.11 Local studies suggest that roughly 30% of the households interviewed in random sample surveys are willing to buy units under the terms outlined, primarily because this provides an opportunity to shift to housing of much higher quality than presently available, with the associated right to retain capital gains on resale, and gain a hedge against inflation not otherwise available. 3.12 Public Utilities. To date, average urban household consumption of water and transit services in each city, expressed in money terms, have not varied markedly from the national average for all urban households. Furthermore, in percentage terms, the amount of income devoted to these two activities does not vary significantly between the bottom and top deciles of the income distribution, either nationally or within the three cities. As a rule of thumb, households now spend between 1% and 2% of their income on water tariffs and bus fares. Under the project, these tariffs, expressed in nominal terms, are expected to grow at less than 20% per annum (see Annex 11). Even if these tariffs and fares were to exceed the growth in average houseiold income growth, the relative share of income involved in purchasing these services is so minor that one can confidently assert that the project will have no significant adverse effect on households in the cities involved. IV. ORGANIZATION AND IMPLEMENTATION A. Project Management 4.1 A leading group has been established in each city to oversee the project and ensure cooperation between the various city agencies concerned. Each project leading group comprises one or more deputy mayors; directors of the municipal commissions of planning, economics and urban construction; and representatives of the city bureaus of finanae, transport, public health, education and environmental F otection. Day-to-day project coordination and administration will bet the responsibility of a project managemiat office which reports to the leading group and is staffed largely by personnel seconded from the finance bureau and planning commissions.  - 28 - Each office has divisions of general administration, procurement, technical assistance and training, performance monitoring and finance (Chart 1). Assurances were obtained at negotiations that in each city the leading group will be maintained throughout project implementation with composition and responsibilities acceptable to the Bank Group and that the project management office will be maintained throughout project implementation with staffing and functions satisfactory to the Bank Group. Assurances were obtained at negotiations that in each city training under the urban planning and management, educstion, health, transport, and water supply and sewerage components would be carried out in accordance with terms agreed with the Bank Group (see Annexes 1-6). 4.2 The implementation of individual components will be carried out by the municipal bureau or commission concerned (Chart 2). The key agency responsible will be the Urban Construction Commission assisted as follows: (a) Urban Planning and Management - Planning Commission (b) Education - Bureau of Education (c) Health - Bureau of Public Health (d) Water, Sewerage and Transport - Public Utilities Department (e) Housing - Housing Bureau (f) Industry - Economic Commission (g) Pollution Control - Environment Protection Bureau and Finance Bureau. As a condition of disbursement for the water supply and transport components, the companies under the public utilities departments and the cities will enter into contracts satisfactory to the Bank Group for the implementation of the cited components, including financial performance targets, acceptable to the Bank Group, substantially as described in paras. 3.4 and 3.5. 4.3 Implementation programs for each sector have been prepared (see the project files for project implementation volumes). Detailed steps required during the first year of implementation have also been identified and are available in the project files. Beginning in 1991, each agency along with the Urban Construction Commission, will prepare and submit to the central project management office an annual action plan, which outlines the timing of the major policy measures and project expenditures to be undertaken in the following government fiscal year. The plans will also take note and justify any adjustments needed in the implementation schedule and steps as determined at appraisal. Assurances were obtained at negotiations that each city will prepare and provide to the Bank Group by November 30 of each year the overall action plan for project implementation in the following government fiscal year. For the first year of project implementation, such plans will be reviewed with5n these months after the Bank Board's approval of the project. 4.4 In view of the unfamiliarity of the implementing agencies with Bank Group procurement procedures, and the number and diverse nature of  - 29 - contracts envisaged, the cities have selected Project Implementation Consultants (Annex 15). For the initial 18 months of the Project, the Consultants will assist the implementing agencies to: (a) draw up standardized bid documentation, satisfactory to the Bank; (b) prepare technical specifications for equipment and materials; (c) assist in the prequelification of potential bidders; (d) establish tendering and bid evaluation procedures and assist in the initial evaluation of bids; (e) draw up quality control criteria and procedures and monitor standards; (f) put in place a construction management system for civil works; (g) arrange overseas study tours; (h) liaise with the Bank Group on implementation issues. The Consultants will assist with the management of contracts related to: housing, roads, public transport and traffic equipment, bus termirl and depots, water supply, and sewerage. Appointment of the Project Implementation Consultants is a condition of credit/loan effectiveness. B. Project Monitoring and Supervision 4.5 Project monitoring will be coordinated by the project management office with inputs from the implementing agencies. The UPMIC (paras. 2.23 - 2.26 and Chart 3) will provide technical support in the compilation and analysis of data. Monitoring indicators for each city by component, agreed at negotiations, are provided in Annex 14. Assurance were obtained at negotiations that each city will prepare project progress reports, based on agreed monitoring indicators, to be provided to the Bank Group by March 1 and September 1 of each year and covering the previous six-month period. 4.6 Given that this project is located in three cities, that they will each administer their project implementation program, and that the measures to be undertaken are innovative and multi-sectoral in design, the annual Bank Group supervision requirements are likely to exceed the norm by up to 100. Several measures were taken to help contain supervision costs, aside from the extensive technical assistance during project preparation. First, the citi6s agreed under the project to contract consultants to help manage overall implementation (para. 4.4). Second, reliance on project monitoring indicators agreed upon at negotiations, and the introduction and strengthening of urban planning and information systems at the local core and line agency level should facilitate supervision. C. Procurement 4.7 Table 4.1 summarizes the procurement arrangements for the project. Civil works contracts will be awarded through Local Competitive Bidding (LCB) under procedures and forms of contract acceptable to the Bank Group, except that works estimated to cost less than equivalent of US$50,000 per  - 30 - contract, up to an aggregate equivalent of US$2.9 million, may be procured through force account. Interested foreign bidders will be eligible to participate. LCB is the appropriate method for works because project construction entails the use of conventional technology, will be tendered at different points in time and separately by each city, and will be labor- intensive in an environment where labor recruitment is difficult for foreign firms. Furthermore, the civil works contracts are not expected to be larger than US$5 million and thus unlikely to attract foreign contractors. Equipment and materials contracts estimated to be valued at more than US$200,000 will be awarded through International Competitive Bidding (ICB) procedures in accordance with the Bank Group's Guidelines for Procurement; equipment and materials contracts financed under industrial sub-loans and with an estimated value over $5 million will also be awarded through ICB. Under ICB local manufacturers would be eligible for a margin of preference in bid evaluation of 15 % or the prevailing level of customs duty, whichever is lower. Provincial preferences will not be admissible. 4.8 Equipment and materials contracts estimated to cost between US$50,000 and US$200,000 will be awarded through LCB procedures up to an aggregate limit of US$18.5 million; equipment and materials contracts financed under industrial and pollution control sub-loans and with an estimated value less than US$5 million will be awarded after solicitation and evaluation of at least three written price quotations from eligible suppliers. This is consistent with CIB procedures, which have been applied satisfactorily and efficiently in past and current operations. Procurement tther than specified above will be carried out through prudent shopping after soliciting and comparing at least three price quotations. To achieve wide competition and lowest prices, the cities have been encouraged to undertake most procurement for health sub-sector equipment and materials through the coordination of the Ministry of Public Health in conjunction with other Bank Group financed health projects. Consultants under the project will be recruited according to the Guidelines on the Use of Consultants by World Bank Borrowers. Prior review by the Bank Group will be required for contracts valued above US$300,000 (except for contracts under industrial and pollution control sub-loans where the limit would be US$2 million). This will result in about 30 civil works contracts and about 14 equipment and materials contracts subject to prior reviews, covering approximately 60% of the total equipment and material contracts value. In addition, the Bank Group will review annual procurement plans before the start of the Chinese fiscal year, and may select certain contract packages below these thresholds for prior review. Others will be subject to random post-review.  - 31 - Table 4.1: Estimated Procurement Arrangements (in current US$ million)* Procurement Method ICB LCB OTHER TOTAL Civil Works -- 99.4 2.6 102.0 (68.0) (1.8) (69.8) Equipment 22.7 10.9 5.1 38.7 (92.7) (8.2) (3.7) (34.7) TA & TraininL 1.4 -- 6.4 7.8 (1.4) (6.6) (8.0) Supervision -- -- 10.4 10.4 (0.0) (0.0) Land and Demolition -- -- 23.2 23.2 (0.0) (0.0) Pollution Control 2.9 3.6 4.3 10.8 (2.9) (2.6) (0.8) (6.3) Industry 21.5 29.9 32.9 84.3 (21.5) (19.5) ( 8.6) (49.6) TOTAL 48.5 143.8 84.9 277.2 (48.5) (98.3) (21.6) (168.4) * Bank Group disbursement in parentheses. D. Disbursement 4.9 For project expenditures other than for the sub-loans for the industrial and pollution control components, disbursement will be made against (i) 100% of foreign expenditures for imported equipment and materials, 100% of local expenditures for equipment and materials (ex- factory cost), and 75% of local expenditures for other equipment and materials procured locally; (ii) 65% (Changzhou), 75% (Shashi) and 70% (Luoyang) of civil works; and (iii) 100% of costs for consultant services, technical assistance and training. Disbursements will be made against 100% of amounts disbursed for approved industrial sub-loans and pollution control sub-loans. Retroactive financing of expenditures will be permitted for expenditures made after May 1, 1989. Aggregate expenditures for retroactive financing will not exceed US$16.0 million equivalent. It is expected that US$6.5 million equivalent will be used by Changzhou; USO5.0 million equivalent by Luoyang; and US$4.5 million equivalent by Shashi. Conditions for disbursement are summarized in paras. 4.2 and 2.51.  * 32 - 4.10 Documentation of Expenditures. Withdrawal applications for civil works, goods and services with a contract value of US$200,000 or more will be supported by full documentation. Disbursements for training, and contracts for civil works, goods and services costing less than US$200,000 will be made on the basis of Statements of Expenditure (SOEs). The project offices in each city will be responsible for preparing withdrawal applications for submission to the Bank Group. 4.11 Special Accounts. To facilitate disbursements under the project, Special Accounts will be established and maintained in each of the three ctties. The accounts would be in U.S. dollars and field in a bank acceptable to the Bank Group. Initial deposits, approximately equal to an estimated four months' expenditures, would be made as follows: Changzhou, US$3.6 million; Luoyang, US$2.7 million; and Shashi, US$2.5 millior.. Applications for replenishment of the Special Accounts would be submitted monthly or when the accounts withdrawn are equal to 50% of the initial deposit, whichever comes sooner. 4.12 Completion and Closing. The estimated schedule of disbursements for the total project is provided in Annex 10. As this is the first urban development project in China, the profile of all projects in China is used as a guideline. The estimated project completion date is Decemblr 31, 1996. The closing date would be June 30, 1997. E. Accounts. Audits and Reporting 4.13 Accounts and Audits. Project accounts, including all counterpart funding, and details of the Special Accounts will be maintained separately in each of the cities by the project office. The accounting staff in these offices will, for the most part, be seconded from the Municipal finance bureaus. Accounts and documentation to support the SOEs will be maintained separately and will be readily available in each city for review by visiting Bank Group missions. Accounts and SOEs for each fiscal year will be prepared by the city project offices and audited by provincial audit bureaus of the State Audit Administration. During negotiations, assurance were obtained that annual audit reports of project accounts with separate opinions on the SOEs will be submitted to the Bank Group within six months of the end of the Government's fiscal year. 4.14 &RortLng. Summaries of all proposed investments under the industrial component will be forwarded to the Bank Group in advance for information. The supervision reports prepared by each city on the implementation of these investments will be forwardeca to the Bank Group following review by the GIB. Within six months of the closint date, the coordination committees in each municipality, assisted by the project offices, will submit a project completion report to the Bank Group.  - 33 - V. PROJECT JUSTIFICATION AND RISKS A. Benefits 5.1 Given that the project consists of a large number of components, some of whose benefits cannot be quantified, and a line of credit for industrial and pollution sub-loans which have yet to be appraised in detail, no overall rate of return has been calculated. However, an estimated 1.8 million people would derive direct benefit from improvement of urban services in the three cities. Moreover, the project would introduce a wide range of improvements in planning, management and design techniques that are based on international experience and relevant to conditions In China. The Ministry of Construction, which participated in all phases of project development as an observer, will disseminate project results periodically, with the assistance of World Bank Group staff. 5.2 On a sectoral basis, the urban planning and management component will support the institutional strengthening of cross-sectoral planning and management functions in each city, focussing on three major building blocks: an urban planning and management information center; a geographical information system unit; and information sub-systems located within individual line agencies. Equipment and technical assistance and training will be provided to these units as well as to each city's Planning Commission and Finance Bureau. 5.3 In education, the project introduces major reforms that improve cost efficiency through the increased utilization of facilities and personnel. These policy changes include all levels of education, rather than any one particular sub-sector. In addition, reforms that save recurrent costs due to increasing student: teacher ratios will enable maintenance budgets for buildings and equipment to be increased significantly. In health, the project cities will introduce reforms in financing of health care services and improving the internal efficiency of hospitals through better utilization of existing health services, quality control, and coordination in the management of health services. The experience derived from the new approaches with integrated management, divestiture of health services provided by enterprises, reimbursement by capitation and outcome, improved hospital efficiency and technical standardization could be adapted elsewhere in China. 5.4 In transport, the roads sub-component includes seven road schemes, which together account for 64% of proposed project transport sector investment. The internal rates of return (IRR) of the proposed road investments vary form 21.6 to 33.5%, taking into account vehicle operating cost, accident and time savings (see Annex 16). The proposed road improvements in Shashi are development roads, which are required to provide access to industrial and residential areas, and to the new railway station (which currently has no surfaced road access). Traffic management accounts for 6% of transport investment under the project. in Changzhou and Shashi, proposed low-cost traffic management measures are justified as pilot schemes, to demonstrate the application of traffic engineering techniques for the first time in the cities. In Luoyang, the proposed vehicle testing  - 34 - center would operate on a full cost-recovery basis, and provide an estimated IRR of 55%. The proposed computer-controlled traffic signal system in Luoyang would permit fuel conservation and time savings due to reduced stopping and idling at traffic signals. The IRR for the proposed traffic signal system is estimated at approximately 40%. The public transport sub-components in Luoyang and Shashi, comprising physical and management improvements, account together for 23% to total project transport sector investment. Financial analyses of the Luoyang and Shashi bus companies were carried out, taking into account the proposed investments, and action plans were agreed upon to assure the companies achieve positive cash flows through periodic bus fare revision agreed to under the project. 5.5 In the water supply component, the increase in the production and distribution of water will help remedy the 3eriously inadequate state of a basic needs service, and assist parallel efforts to promote economic development by removing constraints on the growth of industrial and commercial enterprises. Each water company will maintain positive cash flows, with beneficiaries, on average, expected to absorb the costs of expanding production. 5.6 In the housing sector, the project provides support for a significant element of a national reform program that aims, simultaneously, to raise rents in the public housing sector while encouraging the better- off households to exit from this subsidized stock of housing and become homeowners. The vacated rental units will be distributed to eligible households who are on waiting lists because they live in shared units or are otherwise in overcrowded or sub-standard apartments. Under the project, all the relevant costs of the housing units sold will be recovered from the beneficiaries. Regardless of unit costs, the housing units in each city will be priced according to a uniform methodology. As a result it is possible to estimate similar IRR across all three cities for the average-sized unit; using conservative assumptions about market rent to unit value, the IRR averages 14.5%. 5.7 The industrial component line of credit supports the economic development of each city, and will be appraised separately following CIB guidelines agreed to by the Bank (see paras. 2.46 - 2.47). Rates of return consistent with CIB guidelines (minimum of 12%) are expected. 5.8 There are two types of environmental componeL ts: one, in Shashi, promotes the collection and disposal of wastewater; and another provides for a line of credit to help finance pollution abatement investments by local industrial enterprises in Shashi and Luoyang; pollution monitoring equipment required by each local EPB will also be eligible for financing. Such investments assist each city to meet nationally-mandated water discharge standards.  - 35 - B. lAks 5.9 The risks associated with the project are linked to the source of its principal benefits: its comprehensive and cross-sectoral nature. These risks will be minimized in the following ways: (a) project management offices are already in place in each city, reporting directly to the top municipal leaders; technical and financial intermediaries at the provincial, regional, or national level, will assist the cities and their agencies to implement the project; (b) the project is based on detailed sector-specific implementation plans with clearly-defined indicators to be used for supervision; (c) the industrial sub-components will be appraised by CIB. Its long association with the Bank Group will ensure project selection and rates of return comparable to those obtained under other CIB projects financed by the Bank Group. Given the Bank Group's experience that the local-level implementation capacity in China is relatively well developed, these measures and conditions make the risks involved acceptable. VI. AGREEMENTS REACHED AND RECOMMENDATION 6.1 At negotiations, the following were agreed with the project cities: (a) each city will carry out its reform package in accordance with an overall program agreed with the Bank Group (para. 2.17) (b) resettlement and rehabilitation related to road construction will be carried out in accordance with a plan acceptable to the Bank Group (para. 2.38); (c) the Traffic Planning and Management Units will be maintained in each city with composition and responsibilities acceptable to the Bank Group and the land use transport study for each city will be carried out under terms of reference and timing agreed with the Bank Group (para. 2.39); (d) housing units constructed under the project will be sold to households at prices to cover full investment costs, including adequate margins for the housing developers and interest during construction; buyers of such units will have the right to resell them and retain the resulting capital gains subject only to applicable taxes, and mortgages will  - 36 - j be provided to purchasing households on terms acceptable to the Bank Group (para. 2.47); (e) appraisal and suipervision of industrial sub-loans will be performed on each city's behalf by the China Investment Bank (CIB) on the basis of an agreement between the three cities and CIB on terms and conditions for sub-loans, and for the implementation of the industrial sub-component, satisfactory to the Bank Group (para. 2.49); (e) terms and conditions for pollution control sub-loans, fund management principles and implementation arrangements will be acceptable to the Bank Group (para. 2.51); (f) the municipal governments will pass on part of the loan/credit proceeds (around 40% of the total in each city) to participating public utility companies and industrial enterprises on terms and conditions satisfactory to the Bank Group (para. 3.3); (g) Li each city the leading group will be maintained throughout project implementation with composition and responsibilities acceptable to the Bank Group and the project management office will be maintained throughout project implementation with staffing and functions satisfactory to the Bank Group (para 4.1); (h) in each city training under the urban planning and management, education, health, transport, and water and sewerage components will be carried out in accordance with programs agreed with the Bank Group (para. 4.1); Mi) each city will prepare and provide to the Bank Group by November 30 of each year an action plan for overall project implementation during the following government fiscal year (para. 4.3); (j) each city will prepare project progress reports, based on agreed monitoring indicators, to be provided to the Bank Group by March 1 and September 1 of each year and covering the previous six-month period (para. 4.5); (k) annual audit reports of project accounts with separate opinions on the SOEs will be submitted to the Bank Group within six months of the end of the government fiscal year (para. 4.13); 6.2 At negotiations agreement with GOC was obtained that Bank Group funds will be onlent to the cities on terms and conditions satisfactory to the Bank Group (para. 3.3).  . 37 - 6.3 Conditions of loan and credit effectiveness include the following: (a) approval of the Loan, Credit and Project Agreements by the State Council; (b) signing of an agreement, with terms and conditions acceptable to the Bsnk Group, between the municipal governments and CIB on the arrangements for appraising and supervising industrial sub-loans (para. 2.49); (c) appointment of the Project Implementation Consultants (para. 4.4); 6.4 Conditions of disbursement will be: (a) the companies under the public utilities departments and the cities will enter into contracts satisfactory to the Bank Group for the implementation of the water supply and public transport components, including financial performance targets, acceptable to the Bank Group (para. 4.2); and (b) signature of agreements between the project cities and PCBC for the pollution control sub-loans (para. 2.51). 6.5 Subject to the above agreements, the project provides a suitable basis for an IBRD loan of US$79.4 million and IDA credit of SDR 62.2 million (equivalent to US$89.0 million). .  - 38 - Page 1 of 3 CHIN MEDIUM-SIZED CITIES DEVELOPMENT PROJECT Policy Reform Programs for Changzhou. Luoyang and Shashi Cities 1. Each Project city shall carry out a reform program, which shall have been agreed with the Bank Group and shall include the following sector- specific reforms: 2. Under the Urban Planning and Wanafement Component, each city will: (a) establish and maintain for the duration of the project, an Urban Planning and Management Information Center within the Planning Commission in Changzhou and Luoyang, and within the Urban and Rural Construction Commission in Shashi; (b) establish and maintain a Geographic Information System unit within the urban planning bureau; (c) establish and maintain information subsystems within the individual line agencies whose functions and responsibilities include: finance, population (public security bureau), public transport, traffic management, roads and bridges, water supply, power, health, education, post and telecommunications, sewerage, and housing; (d) assign to the units cited in (a) through (c) responsibility for the following functions: the UPYIC will collect aud analyze cross-sector data, and provide assistance to line agencies to help create sectoral data bases, help develop sectoral and general policy tools, and provide computer software on management and design tools and the requisite training to use that software. GIS - linked to UPMIC, but reporting directly to the urban planning bureau--will collect all information required which can be organized geographically (drawn largely from line agencies). The unit will, in return, provide line agencies with information structured geographically. Past, present, and projected land use, population, employment and pollution indicators will be the primary focus of data work. Information sub-systems will be created in all main line agencies by their own staff. Information will be exchanged between the agencies and with UPEIC and GIS. Each agency information subsystem will include a data base; a policy model linking yearly capital investments in the sector to relevant performance and consumption indicators; as well as management and design software.  - 39 - Page 2 of 3 3. Under the Education Component, each city will: (a) build all new or expanded educational facilities according to school-specific classroom and utilization rates for each project and non-project school, so as to meet the average utilization rates cited in Annex 14. (b) increase student-teacher ratios at all levels of education according to the ratios cited in Annex 14; (c) increase the maintenance and repair budget for existing buildings nad equipment by 50%, after inflation, over amounts budgeted in calendar year 1987 according to plans that conform with monitoring indicators cited in Annex 14; (d) allocate, for all new construction, annual maintenance budgets equivalent to 3% of the capital cost of buildings and 10% of the capital cost of equipmer.t; (e) provide training to teachers in dual subjects at teacher training institutions (Shashi Institute of Education, Luoyang Institute of Education, Changzhou Institute of Education) according to plans that conform with monitoring indicators cited in Annex 14. 4. Under the Health Comgonent each city, except as noted, will: (a) organize a joint medical service system among existing health care organizations, to reduce the over-utilization of tertiary hospitals and under-utilization of lower level facilities (Luoyang only); (b) develop and implement a program through which hospital beds owned and operated by enterprises and other institutions not directly affiliated with the municipal government, will be opened to the general public; (c) develop and implement a program that introduces the "director responsibility" system in selected hospitals, centers, and stations, and which give said Jirectors responsibility for administration, personnel and finance (Changzhou only); (d) develop and introduce preset reimbursement schemes covering hospitalization fees for selected services for patients reimbursed by third parties (Shashi only); (e) develop and introduce government insurance reform trials that set fixed capitation fees for each insured government worker; (f) develop and introduce immunization and intrapartum safety insurance schemes;  - 40 - Page 3 of 3 (g) develop and introduce differential pricing for physician consultations, hospital beds, and procedures, to include allowances for depreciation of equipment and capital construction; a fund will be created for repair and maintenance of health institu,ions, and financed with 38 of all medical service revenues; (h) develop and implement programs by the different specialty departments within that provide home beds for management of chronic patients; (i) develop and implement programs for pre-admission diagnosis; (j) develop and implement a program to introduce performance standards for doctors, nurses, and technicians (Changzhou only); (k) develop and implement protocols to evaluate overall performance of hospitals, utilization of health services, length of stay by major disease categorics, quality of care as measured by rate of nosocomial infection, rate of readmission, case fatality rates, and expenditures per patient (Changzhou and Luoyang only). 5. In the Transport Component, each bus company (Luoyang and Shashi) is committed to generate sufficient revenues to cover all current r,-erating costs, and by 1995, to achieve positive net income, i.e., to cover all operating costs, taxes and charges on operations, bonus and welfare payments, and depreciation. In Luoyang, vehicle testing fees will be introduced to cover the capital and operating costs of the vehicle testing component to be implemented under the project. 6. In the Water SuDD1V Component each water company is committed to maintain positive net income during the project period, and in addition, to cover interest payments beginning in 1995. 7. In the Housing Component, each city will (a) recover the full cost of land, infrastructure and construction from project beneficiaries; (b) auction off all commercial space leases; (c) ensure that, subject to collection of applicable capital gains taxes, capital gains earned by a baneficiary who buys a housing unit under the project will be retained by the beneficiary; (d) that housing loans covering 50% of the purchase costs of the units will be provided to eligible buyers by the People's Construction Bank of China, on terms and conditions comparable to those of long-term commercial bank loans, and repayable in 10 years.  - 41 - ANNEX 2 Page 1 of 4 CHINA * MEDIUM-SIZED CITIES DEVELOPNENT PROJECT a. Technical Assistance in Urban Planning and Management A. Overview 1. Urban Planning and Management Information Centers (UPMIC) have already been estabished in each city. Staff in these centers will receive training in use of computers and data analysis and in turn will train staff in municipal line agencies for development of information subsystems. Training and technical assistance to develop the Geographic Information System (GIS) in each city will be provided by or through the Laboratory of Resources and Environment Information System (LREIS), which is part of a national institute for geographical research located in Beijing. Training by LREIS will be conducted in three phases: Phase One: Introduction to GIS, conducted by three specialists from LREIS Beijing for about 30 trainees in each-of three cities. The specialists would help formulate a task plan for preparation of the GIS database; Phase Two: Training in Beijing at LREIS for about ten professionals from each city, which would include hands-on practice in digitizing and plotting; Phase Three: Specialized training in programming for two officers from each city for about one month in Beijing. Additional consultancy assistance of about 60 days per year in each city for 1991-1993 would be provided as needed during implementation of the GIS system. B. Terms of References for Phase One Training Participants 2. The total number of trainees should not exceed 30 persons per ciRy. The trainees will be selected by the Municipal Government and would i.aclude: a. staff of the Municipal Information Centers; b. urban planners, architects and engineers who are working in various bureaus but will lead or staff the GIS unit in the future; and  - 42 - ANEX 2 Page 2 of 4 c. professionals in various line agencies who will either participate in the sub-system, or will be the major users of the GIS information; it is particularly important that staff of line agencies who are responsible for the implementation of a component under the present project participate in the course, (i.e. Housing Construction, Traffic, Public Transport, Water Supply, Health and Education Bureaus). Context 3. The course will be a general introduction to the Geographical Information System with emphasis on urban application. The main part of the course would be sharply focussed on the nature and structure of the data collected, and its potential use in planning and decision-making rather than on hardware and software. Discussion on hardware and software, would have to take place during a separate session with an attendance restricted to the interested parties. 4. The course will contain as much illustrative material as possible with examples from China or foreign countries. The participants will receive a short booklet containing a description of the subjects covered by the course, a copy of which will be sent to the World Bank. 5. At the end of the training session, an agreement should be reached between Laboratory of Resources and Environmental Information System (Beijing) (LREIS) teaching staff, the trainees and the staff of the local Urban Planning and Management Information Center (UPMIC) on the tasks to be carried out on a priority basis. Those would typically consist of: a. selection of type of maps which should be digitized in later stage; b. selection of polygons around which the information will be structured (it is suggested that areas covered by neighborhood committees would constitute the most practical polygons, but final decision should be taken independently by each city); c. preliminary drafting of polygon boundaries and municipal boundaries on the base maps selected in (a) for digitization at a later stage; and d. constitution of sectoral data base with coordinate system for later integration with GIS.  - 43 - ANNEXa Page 3 of 4 Duration and Cost of the Training Course 6. By the end of 1989, a seven-day course has been conducted in each city, at a cost of about Yuan 57,000 in September 1990 prices. See * attached Annex Table 1 for detailed cost breakdown. 7. Cost estimates for the second and third phases of GIS training are provided in Annex Table 2. b. Technical Assistance and Training for Planning Commission and Finance Bureau 8. General: The municipalities of Changzhou, Luoyang, and Shashi will carry out studies and training as outlined below to improve planning and management control practices of the Planning Commission and the Finance Bureau, in particular: i. Financial control and management information system within the Planning Commission and the Finance Bureau as well as in their interaction with sectoral departments; and ii. Annual budgeting and medium-term investment programming for the government and in reference to the city's enterprises. The studies and training, except those implemented within each city, will be planned and organized by a technical intermediary (a central research/training institution to be identified) in a collaborative arrangement with the three cities, including recruitment and supervision of foreign experts and arrangement of overseas tours. The input and cost * specified below refer to all three cities combined, except noted otherwise. 9. Consultancy services to review planning and management systems specified above (1.), recommend medium-term improvements in the system, and design necessary training programs. Input: approximately 45 person-months of national and foreign consultants for the three cities, at least 70% of which will be spent in the municipalities. Cost : Yuan 900,000 in September 1990 prices 10. In-city training to implement recommendations resulting from the above study and adopted by the municipal government.  - 44 - ANNEX 2 Page 4 of 4 Input: 36 person-months of professional trainer to assist in detail design, organization and conduct of training sessions Cost : Yuan 216,000 in September 1990 prices Input: Training Material Cost : Yuan 60,000 in September 1990 prices 11. Computerization of management and planning to be designed and implemented in conjunction with programs to develop municipal information centers, assisted by both the central coordinating agency for this technical assistance program and the one for the information center (LREIS). Input: around 15 personal computers in each municipality with associated software and peripheral equipment. Cost : Yuan 1,800,000 for the three cities in September 1990 prices Input: training of about 20 staff members in each Commission/Bureau by the municipal information center or by outside agencies Cost : Yuan 336,000 in September 1990 prices 12. In-country training of staff (around 10 from each city) through participation in short formal training programs (average duration of 3 months) offered by research and educational instituions; and through observation tour of other municipalities (by about 5 staff members from wach city). Cost : Yuan 190,000 in September 1990 prices 13. Overseas training - observation tours or attendance at high-level policy seminars by 1 or 2 senior staff from each Commission/Bureau. Cost : Yuan 360,000 in September 1990 prices 14. Costs specified above are estimates for three cities combined. Distribution of input and costs among the cities will be determined after a preliminary study by the central coordinating agency according to need and financiel capacity, and refined further after conclusion of the consultants' study described in 2 above. Tentatively, however, the cost distribution is estimated as follows. Three cities total: Yuan 3,792,000 in September 1990 prices Changzhou total: 1,464,000 Luoyang total: 1,224,000 Shashi total: 1,104,000  - 45 - ANNEX 2 Table 1 CHIN * MEDIUM-SIZED CITIES DEVELOPMENT PROJECT Urban Planning and Management Component Training Costs-First Phase Introductory training in GIS by 3 LREIS specialist for 10 days Location: 3 cities Changzhuu Luoyang Shashi Training materials: 5,000 5,000 5,000 @ RMB/person/day Person/days 350 30 10,500 10,500 10,500 Travel RMB/trip No. of trips 600 3 1.800 1.800 1.800 17,300 17,300 17,300 Physical Contingency 10% 1.730 1.730 1.730 Total per City (RMB) 19,030 19,030 19,030 Total Training Preliminary Phase (RMB) 57,090 .  - 46 - ANNEX a Table 2 CHI MEDIUM-SIZED CITIES DEVELOPMENT PROJECT COST ESTIMATES FOR SECOND AND THIRD PHASE GIS TRAINING Changzhou Luoyang Shashi Tuse Two (Hands-on training in LREIS (Beijing) digitizing and plotting for 10 pro- fessionals for 10 days] Tuition (Y 150/person-day for 100 person-days) 15,000 15,000 15,000 Subsistence (Y 100/person-day for 100 person-days 10,000 10,000 10,000 Travel (Y 200/trip for 10 trips) 2,000 2,000 2,000 Foreign lecturer (Y 2,000 for 3 person-days) 2,000 2,000 2,000 Travel for lecturer (Y 2,250 for 1 person-day) 750 750 750 Phase Three Consultancy by LREIS (@ 350/ person-day for 120 person-days 42,000 42,000 42,000 Travel (Y 600/trip for 8 trips) 4,800 4,800 4,800 Specialized training in LREIS (in Beijing for 2 persons/city) (@ Y 200/person-day for 30 person-days) 6,000 6,000 6,000 Travel (Y 200/trip for 2 trips) 400 400 400 Total GIS Training 82.950 82J50 82.950 Management Information Systems (MIS? Training Training in MIS (@ Y 350/person-day for 40 person-days) 14,000 14.000 14,000 Travel (Y 200/trip for 2 trips) 400 400 400 Total MIS Training 14.400 14.400 14.400 Total Base Costs 97.350 97350 97.350 Physical contingency (10%) 9,735 9,735 9,735 Price contingency (25%) 26,771 26,771 26,771 TTLCOST (Y) 133.856 133.856 133.856 Summary of Costs 'Y Total GIS training 248,850 Total MIS training 43,200 TQtal Base Costs 321,255 Physical contingency (10% 29,205 Subtotal 321.255 Price contingency (25%) 80,314 TOTAL TRAINING (rounded) 402.000  - 47 - ANEXHE 3 Page 1 of 2 MEDIUM-SIZED CITIES DEVELOPMENT PROJECT Technical Assistance and Training in Education Component 1. Technical assistance and t_aining will be provided jointly to the three cities under this component to develop capability of the local education bureaus to design and improve educational programs. Approximately 215 person months of foreign and local specialist services, three overseas study tours and about 300 person months of overseas and local training. A consulting firm will be identified to manage and administer these activities for all three cities. The firm will be responsible for subcontracting as necessary additional firms or individual consultants to carry out activities in the following areas: 1) specialist services; 2) overseas study tours; and 3) overseas fellowships. Under the supervision of a three-city coordinating committee for technical assistance and training, Changzhou will take responsibility for handling all the necessary consultant contracts. International Specialist Services 2. A team consisting of a regional economist and labor economist/vocational education planner will be identified to work with a counterpart institution (possibly the Beijing Institute of Economics) for about 60 days to establish a model for economic forecasting and manpower projection and planning. The three cities will send key personnel to the training institution to be trained in how to use the model. The cost of the experts will be shared among the three cities. 3. On a rotating basis, the education bureaus in the three cities will host seminars to update knowledge in specific areas of education. The host city will invite one or two foreign experts in specific areas along with educators or administrators from the other two cities to participate in the seminars. The topics to be covered include technical education, education management techniques for basic education, vocational education and teacher training. 4. The consulting firm will be responsible for liaising with the three cities to coordinate training on the model and the topical seminars. The firm will need to identify experts of international reputation and experience and prepare terms of reference for approval by the Bank Group. The firm will handle all logistical arrangements outside China, including travel and payment of fees in appropriate foreign currency.  - 48 - ANNEX 3 Page 2 of 2 Studv Tours 5. Study tours abroad are included in the component to expose educational administrators and practitioners to current concepts and techriques of teaching, learning and school management in a variety of newly industrialized and industrialized countries. Each study group of five to seven people should have specific objectives for study in a particular field. On the basis of these objectives, itineraries should be arranged in countries with strengths in the area concerned. Proposed fields of study include vocational training techniques, pedagogy, library management, education television and educational administration. Upon return, each stutdy team should prepare a substantive report for submission to the Bank Group. 6. The firm will be responsible for developing a program for each study tour based on objectives and contents agreed with the municipalities. The firm will select and identify organizations and individuals appropriate to the purposes of the study. The firm will provide to the Bank Group the draft 'tineraries and programs for review and approval. The firm will be responsible for all logistical arrangements outside of China, including visas, travel, airport and ground transportation, lodging, payment of per diem in appropriate foreign currency, and interpreter/escort services as required. Overseas Training 7. Overseas training visits of two months or longer duration will be provided to selected personnel for the cities in specific fields such as computerized database management, audiovisual education, automated library management and educational television production. The consulting firm will identify and liaise with universities or training institutions to arrange programs that will meet specific needs of the municipalities. The firm will assist in ensuring that trainees have sufficient language capability or will receive training in the language of the country in which s/he is to receive training. The firm will be responsible for logistics for the trainees' v%ias, travel and accommodations and the payment of per diem and tuition in appropriate foreign currency. Upon completion of the training, the firm together with each individual trainee will prepare an evaluation report, to be submitted to the Bank Group.  - 49 - ANNEX 4 Page 1 of 4 CHIN MEDIUM-SIZED CITIES DEVELOPMENT PROJECT Technical Assistance and Training in Health Component . 1. The objectives of technical assistance and training under this component are to upgrade the skills of health staff in the three cities through in-service training and to support reform in the management of municipal health services. International specialist advice and short- and long-term training will be provided in: (a) hospital design, management and finance; (b) preventive medicine; and (c) medical sub-specialties, including cardio- and cerebrovascular medicine, neurology, oncology, high risk perinatal medicine, rehabilitation medicine and pulmonary medicine. In addition, workshops on health policy reforms will be organized so that cities can exchange experience linked to the introduction of reforms under the project. 2. During project preparation, each city health bureau formulated and agreed with the Bank Group on five-year plans for health training and technical assistance (see Project Files - Implementation volume Tables S3-1 to 6). Most of the training and technical assistance will be from domestic sources that have already been identified through provincial and national health institutions. A relatively small proportion will need to be sought from abroad. The local health bureaus will manage implementation of these activities. Under the supervision of a three-city coordinating committee for technical assistance and training, Shashi will take responsibility for handling all the necessary consultant contracts. Training 3. To upgrade the skills of existing health staff in the cities, individuals or small groups of workers will be sent to provincial or national institutions for short-term training courses. Details on the content and duration of training are provided in the Project Files - Implementation volume. Specialist Visits 4. Consultants, both domestic and foreign, will be appointed to provide assistance for the following purposes: (a) health care finance-to help develop understanding of cost accounting, design and evaluation of health care insurance trials, assessment of prospective payment systems, determination of fees for physician consultations, depreciation of equipment and capital construction and maintenance costing;  - 50 - ANNEX 4 Page 2 of 4 (b) bosRital design--to assist in application of modern planning methodology in hospital architecture design, with focus on newer prototypes and optimal space utilization of facilities; (c) health Rlanning and management--to introduce new methods of management of health services and planning based on situational analysis, priority setting, strategy selection, and integrated resources allocation and implementation of disease prevention programs and to upgrade information management capabilities; (d) guality control--to examine and determine procedures in clinical audit, technical standardization, and management protosols, and provide training in control of nosocomial infections in hospitals; (e) preventive medicine--to introduce a balanced approach in disease control programs and prevention strategies; methods of systematic rehabilitation, occupational hazards control, injury prevention and control, health education; (f) clinical disciRlines--to help upgrade professional skills in areas such as oncology, cerebrovascular medicine, endocrinology, emergency medicine, and perinatalogy to enable existing health workers to provide such services and manage patients requiring specialized care in these areas. Technical specialists will be identified by the health institutions concerned in each of the project cities, from health bureaus, universities and other technical institutions. Stud Tours 5. The cities have identified for improvement a few areas of health services that are currently not well developed anywhere in China. The project therefore includes study tours abroad to be organized jointly by the three cities. Participants will travel to areas where a particular aspect of health services is better developed or alternative approaches are being used successfully. Three study tours, described in the following paragraphs, are planned for the first two years of project implementation. 6. Emergency medical services network. The objectives are to examine: (a) alternative models of the emergency services system; (b) the role of various community services that collaborate in pre-hospital rescue; and (c) cost-effective options in the design of emergency service networks.  - 51 - ANNEX 4 Page 3 of 4 Sites: Hong Kong, U.S. (Baltimore, MD and national institutes in Washington, DC) Timing: Completed in May 1989 (Luoyang); January 1990 (Changzhou * and Shashi) Number of * persons: About 8 representatives from the three municipalities Duration: 3 weeks Cost: $4000 per person Upon return from the study tour, the participants will provide to the Bank a report of their findings along with revised proposals for developing emergency service networks in their respective municipalities. 7. Integrated health systems. The objectives are to review and compare: (a) alternative models of health service delivery and finance; (b) methods of hospital management and administration; and (3) strategies for regional health planning. Sites: Singapore, U.K. Timing: May 1992 Number of persons: About 10 representatives from the three municipalities e Duration: 3 weeks Cost: $4000 per person Upon return, participants will prepare a report on possible applications of alternative management systems to health service delivery in the municipalities and identify areas for further training in management and administration. 8. Health education. The objectives are to (a) learn about experiences of a country with well-established health education programs; (b) study methods of data collection and analysis with respect to health risk factors, design of community surveys and formulation of health education interventions; and (c) review alternative communication strategies for health education.  - 52 - ANNEX 4 Page 4 of 4 Site: Hong Kong Timing: September 1992 Number of persons: 2 representatives from each municipality Duration: 2 weeks Cost: $1500 per person Upon return, each municipality will revise its proposed work in health education under the project and will identify areas for further training and technical assistance in health education. Workshops on Health Policy Reforms 9. The health policy reforms to be implemented under the project can be grouped into three categories: (a) integrated management and planning of health services; (b) health care finance; and (c) improved hospital efficiency. The extent of experimentation with reforms will vary in the cities accordizng to the level of development of health services. To provide fora for discussion and comparison of different methods of implementation and experiences, each municipality will host two workshops (one at the outset of implementation and the other upon project completion) on the principal policy reforms they are carrying out. Changzhou will conduct workshops on hospital standardization and quality assurance. Shashi will be responsible for workshops on health care finance. Workshops in Luoyang will be focused on integrated management and planning of municipal health services. National experts on these areas will be invited to participate in these workshops. Technical assistance will be arranged to provide guidance to the city health bureaus in the monitoring and evaluation of reform experiments.  - 53 - AM=E 5 Page 1 of 6 CHINA MEDIUM-SIZED CITIES DEVELOPMENT PROJECT Technical Assistance and Training in Transnort Component A. Introduction 1. The three Municipalities will jointly appoint a consulting organization to train staff from the cities in modern transport planning and management methods, and to provide technical assistance to apply selected techniques in the three cities. The Consultant will also provide coordinated training management and logistics support required for study visits and overseas training. The international consulting organization will be expected to associate with Tongji University in Shanghai, and/or the China Academy of Urban Planning and Design in Beijing to form a joint team to provide the services required. The terms of reference for the consulting firm are provided below. Under the supervision of a three-city coordinating committee for technical assistance and training, Luoyang will take responsibility for handling all the necessary consultant contracts. B. Terms of Reference 2. Work under these TOR includes both training and technical assistance in urban transport. The training will comprise local training courses, overseas training and study visits; the Consultant will also provide advice on methods of technician and worker training, to be used for in-house training programs by local agencies; the technical assistance will include advice on specific tasks, plus general assistance to implement new planning and management techniques in the three cities. Training 3. Local Training Courses: The Consultant will prepare and run three training courses in China: Course A: Land use-transport planning and evaluation; Course B: Traffic management and engineering, and Course C: Bus operations and management. 4. As a guide, each course is expected to last about 3 months and the Consultant may choose to run each course more than once during the contract period. Courses will be attended by staff drawn from municipal agencies, Public Security Bureaus, Municipal Bus Companies and local design institutes. The number of students to attend each course is tentatively estimated as follows:  - 54 - ANME 5 Page 2 of 6 (a) Land use-transport planning and evaluation: 30 (10 per city, all three cities). (b) Traffic management and engineering: 30 (10 per city, all three cities). (c) Bus operations and management: 20 (10 per city, Shashi and Luoyang). An indication of topics to be covered is given in Annex Table 1. 5. In view of wide differences in the technical knowledge and experience of potential participants, and the need for candidates to be of broadly similar ability, for the courses to be successful, the Consultant will establish and administer an aptitude test as a basis for candidate selection and acceptance. Final decisions concerning course content and the suitability of candidates will be the responsibility of the Consultant. 6. Overseas Training. The Municipalities of Changzhou and Luoyang each intend to send one student for overseas training. It is anticipated that the students will attend a short course, of approximately 3-months duration, at a university or training institute overseas. The Consultant will establish and administer language and aptitude tests as a basis for candidate selection and acceptance. The Consultant will select a suitable course, in consultation with the project management unit in each city and will make all appropriate arrangements. Final decisions concerning course selection, timing and the suitability of candidates will be the responsibility of the Consultant. 7. S=tu Visits. In order to provide a limited number of local staff with the opportunity to experience planning, management and operational techniques used elsewhere, the Consultant will organize appropriate study visits both inside and outside China. The Consultant will organize one study visit outside China for staff from the three cities. An indicative schedule of participants is given in Annex Table 2. The Consultant will organize one study visit inside China for staff from the Municipality of Shashi. 8. The Consultant will select study visit locations taking into account the technical interest of proposed locations and logistic considerations. Locations will be selected where there are examples of planning techniques (e.g. comprehensive transportation studies) or management techniques (e.g. linked traffic signals) relevant to medium- sized cities in China. Final decisions concerning the suitability of candidates for overseas visits will be made jointly by the project management unit in each city and the Consultant, taking into account the technical and linguistic ability of candidates, and relevance of the visit for their training and subsequent work. Participants will be expected to a produce report on the visit. 9. Teghnician and Worker Training. The Shashi Municipal Bus Company wishes to carry out in-house training for mechanics, drivers, conductors and technicians; and the Luoyang Urban Construction Commission  - 55 - Page 3 of 6 wishes to carry out in-house training for construction workers The Consultant will advlse on training methods and course content and, to the extent possible within the time and resources available, will assist with logistlc support. 10. The Consultant will design and administer a monitoring program to provide feedback on the effectiveness of local training courses and to guide future work. Technical Assistance 11. The Consultant will provide advice and assistance in specific areas and, more generally, assist the three Municipalities to apply the techniques covered in the training courses. The technical assistancA will continue work initiated during project preparation and should support the overall project objectives. 12. As part of its on-going work, each city will carry out a land use-transportation study and prepare a Traffic Plan. The study will use analytical planning and evaluation techniques, which will be taught during Course A: Land Use-Transport Planning and Evaluation. This work will build upon the transport modelling work initiated in Changzhou and Luoyang during project preparation. In these two cities, simple models were assembled using the MOTORS suite of computer programs. The MOTORS suite, and access to micro-computer facilities, will be available for future work in these two cities. In Shashi, micro-computer facilities are available, but as yet no transport model has been developed. The work plan for carrying out these studies will be developed jointly by the Municipalities and the Consultant in these studies will be to provide advice and guidance during the contract period. The Municipalities will be entirely responsible for the conduct of the land use-transport studies and the Consultant will have no contractual responsibility to prepare the Traffic Plans. 13. The Consultant will provide advice on specific areas of work, as follows: (a) Changzhou. The Municipality intends to establish an Accident Analysis System in the new Traffic Planning and Management Unit, which is to be created under the Project; the Consultant will provide advice on suitable software available in Chinese (e.g. Shanghai Public Security Bureau Software; TRRL Accident Analysis Package) and will assist with the establishment of analytical procedures and the identification of remedial measures. (b) LM a=ng. The Consultant will assist the Municipality to carry out a Planning and Traffic Study of the Old City; the purpose of the study will be to identify and evaluate options for the development and conservation of the Old City, in order to provide a satisfactory planning context for the Jiudu Road East scheme and to recommend appropriate complementary planning and management measures.  - 56 - ANNEK 5 Page 4 of 6 (c) Luoyang. Luoyang Municipal Bus Company intends to computerize its operations and management; equipment is to be provided under the Project and the Consultant will be expected to provide 12 person-months of local consultant input and 3 person-months of foreign consultant input to assist with the development and implementation of the computerized systems. (d) Luoyanz and Shashi. The Consultant will advise the Municipal Bus Companies on suitable specifications for buses and trolleybuses, to be procured under the Project in accordance with World Bank guidelines. (e) Luoyang and Shashi. The Consultant will assist the Municipalities to prepare, supervise and analyze origin- destination surveys. (f) Shashi. The Consultant will advise on traffic signal specifications and traffic engineering. C. Agencies 14. During the contract, the Consultant will provide technical support to a new Traffic Planning and Management Unit (TPMU), to be established in each city under the project. 15. The contract will be established between the Consultant and Luoyang, which will act on behalf of the three cities. D. Materials. Data and Support Services 16. The Consultant will provide all travel, per diems, residential and office accommodation, equipment and supplies required for both trainers and trainees in connection with the local training courses. All such expenses will be reimbursed under the terms of the contract. 17. The Consultant will provide all local and international travel, per diems and accommodation for approved staff from the three cities for study visits and overseas training. All such expenses, plus the related expenses of the Consultant, will be reimbursed under the terms of the contract. 18. For work carried out in the three cities, the Municipalities will provide appropriate furnished office accommodation, available data and mapping, at no cost to the Consultant. The Consultant wfl.l be responsible for its own travel and subsistence costs. 19. The Municipalities and other local agencies will bear all payroll costs of their staff nominated for training or nominated to work with the Consultant.  - 57 - Page 5 of 6 20. The Consultant will bear all payroll costs of its staff, plus all costs incurred by these staff in connection with international and local travel, accommodation and subsistence. 21. If required, the Municipalities will provide translators during local training courses, study visits and technical assistance visits, at no * cost to the Consultant. 22. The Consultant will provide all required secretarial and other support staff at its own cost. 23. The Consultant will provide sufficient micro-computers for the local training courses, together with suitable software for training and for subsequent use in the three cities, plus all required wordprocessor and photocopy facilities, and teaching materials. 24. Since all costs releted to the local training courses (other than the payroll costs of approved students) are included under this contract, no course fees will be payable by the three Municipalities to the Consultant. However, the Consultant may offer course-attendance to other Municipal Governments on a fee-paying basis, provided the quality of training received by the three cities will not be adversely affected. 25. The Municipalities will bear the costs of survey staff and survey expenses incurred in connection with origin-destination, or other surveys, carried out under these TOR. E. Consultant Team 26. The Consultant will be fully responsible for the provision of appropriate skills within the Team, by local or foreign staff, to meet the requirements of these TOR. Consultant staff will be expected to be appropriately qualified and to have relevant experience in China, or elsewhere in the region, in at least one of the following technical disciplines: (a) transport planning; (b) urban planning; (c) computer modelling; (d) project evaluation; (e) traffic management, engineering and enforcement; (f) accident analysis; (g) bus engineering, operations and management; and (h) computerization. F. Schedule and Reporting 27. The consultancy services to be provided under these TOR are expected to commence at the beginning of 1992 and the contract duration will be two years.  - 58 - Page 6 of 6 28. The Consultant will submit 20 copies of the following reports to the project management unit in each city and 5 copies simultaneously to the Bank Group in Washington, in both the Chinese and English languages: Inception Report end-month 1 Course Outline: Land Use-Transport Planning end-month 2 Course Outline: Traffic management and Engineering end-month 3 Course Outline: Bus Operations and Management end-month 3 Course Completion: Land Use-Transport Planning within 30 days Course Completion: Traffic Management and Engineering within 30 days Course Completion: Bus Operations and Management within 30 days Study Visits within 30 days 29. The Consultant may produce Working Notes from time-to-time during the contract on specific aspects. Five copies of each Working Note, in the Chinese and English languages, should be sent to the Project Coordinator, and five copies to the Bank Group in Washington, for information only. 30. The Consultant will submit short, monthly reports to the Project Coordinator and the Bank Group, in the Chinese and English languages, summarizing progress achieved, difficulties encountered and issues resolved.  - 59 - Table 1 CHINA NEDIUM-SIZED CITIES DEVELOPMENT PROJECT Outline ScoRe of Local training Courses Course A: Land Use-Transport Planning and Evaluation Basic concepts; planning principles; uncertainty; urban development scenarios; elements of transport strategy; data collection and analysis; database systems; computer iodelling; demand forecasting; network analysis; balancing supply and demand; user charges; preparation of alternatives; feasibility studies; project evaluation; programming and budgeting. Course B: Traffic Management and Engineering Management objectives; traffic characteristics; capacity concepts and estimation; accident analysis and remedial measures; environmental management; traffic surveys and analysis; intersection design; traffic priorities; traffic sign&l systems; bicycle management; freight traffic; pedestrians; motor vehicle and bicycle parking; traffic regulations; enforcement objectives and tactics; penalty systems; traffic plan preparation; monitoring and performance indicators. Course C: Bus Operations and Managemont Organization of public transport; corporate objectives; market analysis; network planning; service types; service planning; bus specifications; operating objectives; scheduling and despatching; operating costs; tariffs and ticketing; maintenance practices; bus priorities; computerized techniques; management information systems; management information systems and performance indicators.  - 60 - Table 2 CHINA MEDIUM-SIZED CITIES DEVELOPMENT PROJECT Indicative Schedule of Study Visit Participants F'~~ Oerseas Changzhou 6 persons x 20 days Luoyang 10 persons x 20 days Shashi 5 persons x 20 days Participants would be drawn from Urban Construction Committees, municipal implementing agencies, Public Security Bureaus, Municipal Bus Companies and Design Institutes. Possible sites are: Hongkong (comprehensive transport planning; traffic management); Netherlands (bicycle management); and North America, Australia, Japan or a country in Europe (depeneing upon logistics and the nationality of the consultant organizing the visit). china Shashi : 30 persons x 10-30 days Participants would be drawn from the Urban Construction Comittee, municipal implementing agencies, Public Security Bureau, Municipal Bus Company and Design Institutes. Possible sites to examine traffic management, bus operations and road construction and maintenance methods include Shanghai, Beijing, Tianjin and some medium-sized cities.  - 61 - ANNS 6 cHnrA MEDIUM-SIZED CITIES DEVELOPMENT PROJECT Technical Assistance and TraULnag In Water and Severa&e Couronent A. LuV Water Smtv Dustion: 122 person mnths *bJewtiw: to amare the grading of skills of us. winams aId teniciao of the ElC. T k: -- training of technical prsl tid e_inming staff in bsic skitts at cottegs. universities. or vocanlttn s os. -- training mino an cmsrfwas. *. a_hi Durtim: 51 p.rsmn onths objectives: training of new staff for construction 1d q_eratian activities of the _imi Drainage Nanegment Utemiu. Do ation: 55 person months objectives: upgrading of skilts for mngsriaw fa d sutnwtk epe"r timn of the SIhshi Draina_ -' ,,a Burieau. Disatfon: 20 person months objectives: overseas visit and within Chins Study teur for 4 ad 15 peqpte respectivety, of the Shashi Drainage Nesngemnat mae.... Duration 8 person manths objectivwes: aceterate iapteaewnation. Task: technical msistance for bid prmropation a*d detaited desiw,. sewae cxmwst. C. Sh*si OatM Sul Du tiafn 9 person mnths ObJectFves: to ensm the pgroding of skitt of at s, minoer ad technicia of the SRI. Ta: -- overseas towr on water tedsiqs. -- technical assistance n t, wter ty, softwe Orogrlng. Ouation: 1U person wths ObJectives: to wuren the 4arading of skilts of manaers, engirs md tedmelcim of the SIMC. yTsb: tocat study tesro 0 training on -- nt, wter quatity, softar progrmtng. ad qneratiem and mintamue of targe eIpent. D. mm t&*o t Ourstfns 6-7 parmn months Objective: to enrsre the qpgradifn of skiltt of _ rs, enains and teshnicia of CIc. Tama: study tour to visit other projects in Chimn id abroad to review project Fqpteetation and m_ugmt techniqu.  - 62 - ANNE 7 CHINA MEDIUM-SIZED CITIES DEVELOPMfENT PROJECT Industrial Com2onent Anpraisal 1. Appraisal of project components will be performed on each city's behalf by the CIB on the basis of an agreement signed by the three cities and CIB on terms and conditions satisfactory to the Bank Group including those spelled out below. CIB's work will be undertaken by the Provincial branch office in each case. Proposals will be presented by each municipal government to CIB, based on an industrial strategy appraised and found satisfactory by the Bank Group. CIB will follow the procedures outlined in its appraisal manual, which are acceptable to the Bank Group. Minimum economic and financial rate of return standards followed by CIB in its Bank Group financed projects (12%) will apply. Counterpart funding guidelines and other sum total of subloans financed by the Bank Group, as agreed to by each city and the Bank Group, will be observed by CIB. CIB will retain the riptt to require modifications in the proposals submitted for appraisal or to reject proposals outright. Prevailing environmental pollution and hazardous waste control regulations will be followed by all subproject design and industrial process selection. All appraisal reports involving sub-loans in excess of US$1 million should be sent to the Bank Group for prior reviews. Supervision--including the oversight of investment planning and execution, disbursement of Bank Group funds, performance monitoring, and collection and repayment of Bank Group funds--will be performed by the municipal government with the technical assistance of CIB, following the project supervision guidelines developed by CIB for work on Bank Group projects. CIB will review periodic supervision reports prepared by each city, on a semi-annual basis, and clear such reports in writing, on the basis of periodic inspection visits, before they are forwarded to the Bank Group. A mutually-agreed upon fee will be paid by the cities to CIB as compensation for executing all the tasks assigned to it in the agreement with the cities. 2. Funds will flow from the Bank Group, through the Government, to each city. The municipal governments will carry the risks associated with the currency pool while the industrial borrowers will carry the dollar/renminbi risk. The funds will be onlent at terms and conditions comparable to CIB's (Bank rate plus a 2% spread) for foreign exchange loans and to PCBC's terms and conditions for similar ordinary medium-terms loans for local currency loans. 3. The Finance Bureau of each city will entrust cash management functions -- including loan funds disbursement and allocation of repayments -- to a designated financial intermediary (Shashi branch, PCBC; Changzhou Investment and Trust Company and the Luoyang Finance Development Company), on the basis of an agreement signed by each city and the relevant intermediary, on terms and conditions satisfactory to the Bank Group.  - 63 - ANNEX 8f Page 1 of 2 CHINA MEDIUM-SIZED CITIES DEVELOPMENT PROJECT Pollution Control Revolving Fund Mechanism 1. This component consists of a line of credit extended to Shashi and Changzhou Municipalities. The Bank Group-financed subloan will cover between 40% and 80% of the total cost of each subproject, with (a) grant components contributing up to 20% of the cost, and (b) local bank loan components, and (c) industry own resources contributing the rest. The grant component, financed by the municipal government, will cover 10% of subprojects costs on average, during the project period. The average shares of total subproject costs financed by other sources will be as follows: for Changzhou, firms will finance 40% of investment costs and loans from all sources will finance the remaining 50% not covered by grants; even though local bank loans are expected to finance small portions of each subproject, the Bank Group subloans will be equivalent to 40% of overall subproject costs. For Shashi, firms will finance 35% of investment costs and loans the remaining 55% not covered by grants; though local bank loans are expected to finance small portions of each subproject, the Bank Group subloans will be equivalent to half of the cost of the subprojects. The grant is justified on the grounds that there are positive externalities involved and because of the non-profit nature of the investments involved. The level of grants and financing will depend on the degree of pollution reduction and the profitability of the borrowing enterprise. The terms of the loans, following guidelines in para 2 below, as well as the size of the grants, will be determined by the local Finance Bureau, on the advice of the local EPB and the appraisal of the borrowers' financial conditions. 2. Repayment terms for Bank Group funds will range from five to ten years, including one to two years grace from repayment of principal. The repayment period will be varied so as to limit the debt service burden to the sub-borrower of the pollution control investment to within 20% of earnings after taxes, subject to a maximum of ten years. 3. During the project implementation period, part of the loan (equal to no less than the direct foreign exchange expenditures required) will be made available in foreign exchange (US dollars) to be repaid in the same. The interest rate of the loan drawn in foreign exchange will be the same as that of CIB loans (Bank terms plus a 2% spread). This affords the municipality a substantial spread over the costs of funds (5%). Local currency loans will be made available at rates comparable to similar ordinary term loans made by the PCBC (currently in the 19% to 24% per annum range), fixed for the duration of any loan, but adjusted periodically according to the above reference rate. 4. The fund in each city wf'l draw its resources from (i) the effluent fee allocation to the Fund; (ii) interest and principal repayment on its loans to enterprises; and (iii) liquid reserves and returns on those  - 64 - Page 2 of 2 reserves. For successful implementation of the Fund financing mechanism, each city must allocate at least 25% of the effluent fee collections to the Fund. Furthermore, to sustain a 12% growth in the pollution control investments supported by the Fund, fees will have to be raised by 30% before 1994 and by an additional 30% by 1997. 5. The Finance Bureau in each city will entrust cash management functions -- including disbursement of loan funds and collection of repayments -- to a designated local financial intermediary already contracted to perform similar functions under the industry component (Shashi branch, PCBC; Changzhou Investment and Trust Company), on the basis of an agreement signed by each city and relevant intermediary, on terms and conditions satisfactory to the Bank Group.  ANNEX 8 Table 1 - 65 - Fund fhr Environmental Proection - ChangAhou Financlal and Operating Staiesie, 1901-2000 (n current 10000 Yuan) OPERATIONS SUMMARY 1901 102 1903 1004 1965 1906 1997 1998 le 2000 rates- - Target Insnt ment 400 600 672 753 843 044 1067 1184 1326 1486 Acal Invesbment 400 600 672 73 843 044 1057 114 1326 1486 Cumulatihv 400 1000 1672 2426 3268 4212 5268 6453 7780 0265 FInanin by the Fund Toal by Fund % 70.0 70.0 70.0 70.0 70.0 70.0 70.0 70.0 70.0 70.0 Cumultve Y' 0000 280 700 1170 167 2287 2048 368 4517 5446 6486 as Grant % 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 as Loan q 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 by World Bank % 60.0 60.0 60.0 60.0 60.0 60.0 0.0 0.0 Cumulatie $'0000 46 108 178 284 330 839 339 339 330 339 CASH FLOW UMMARY 1991 1092 1908 1094 100 1096 1907 109 1099 2000 GENERATED FROM: Effluent Charge 84 8 93 09 104 140 148 156 165 174 World Bank Loan 240 360 403 452 06O 346 -224 -226 -227 -22 Fund Reftw 0 0 81 201 337 488 658 768 s86 963 Reserwe 0 40 68 185 445 879 1312 1269 1281 1231 TOTAL RESOURCES 324 489 645 036 1391 1853 1894 1968 2049 2141 APPUED TO: Polluion Cortroi Loan 240 360 403 452 506 566 634 711 790 891 a * Grents 40 60 67 75 84 94 10 118 133 149 OtherFuond Expenees 8 8 8 9 9 10 10 11 11 12 Resent.. 0 37 61 167 401 792 1183 1144 1128 1110 1089 TOTAL FUND OUTLAY 288 428 479 536 699 670 750 840 040 1052 BALANCE SHEET 1991 1992 1993 1994 1996 1990 1097 1098 1990 2000 Munidpal Capita 0 84 173 266 305 469 609 758 914 1079 1253 LeS Accum. Grants 40 100 167 242 327 421 527 645 m 927 W odd Bank Loan 246 941 1105 1S6 2262 2186 2102 2001 1882 1757 Accumulated Sunplus -0 10 44 117 227 992 1217 1515 1860 2245 TOTAL LIABILItY 200 723 1247 1678 26s1 3336 3550 3785 4044 4328 Fund Loans 253 662 1081 1477 1839 2154 2406 2657 2934 3239 Liquld lnvetnent 37 61 167 401 702 1183 1144 1128 1110 1089 TOTAL ASSET 290 723 1247 1878 2631 3336 3560 3785 4044 4328 MEMDJOT 1091 1992 103 1904 1956 10 1097 1998 1900 2000 Tota POl. Charge 280 206 312 329 34? 468 494 521 550 680 (Rote of Groh) 4 5.5 5.6 5.5 5.5 35.0 5.5 5.5 5.5 5.5 Aloc#ted to Fund % 30 30 30 30 39, 30 30 30 30 30 Repamnt Tome Fund Investmnt W. Bank Repay. peod yr 7.0 1 20 Gase Period yr 2.0 0 5 Iterest rate qlyr 11.29 1OAb 8.0011 Fund Losn ubjeatto Repayment 0 0 240 600 1003 1455 1961 2287 2561 2890 World Bank Loan. U8$0000 Loan 46 e4 69 77 85 RepaMent 3 38 30 36 38 Cwn. Pln.Int 46 113 100 278 378 361 343 323 303 282  ANNEX 8 Table 2 - 66 - Fund for Environmental Protton - Shashi FInanoal nd Operatng SaItdic. 1991-2000 OIn ounrent 10000 Yuan) OPERATIONS SUMMARY OUN 1902 1993 09c4 19S 1ss6 1997 19G 1990 2000 . - - -r-a- - Terget Invstment 425 6EO 616 0S0 773 865 GM 1080 1216 1362 Allual Invesment 425 550 616 690 773 8865 ON 1086 1216 1362 Cumultive 426 976 1591 2281 3054 39g19 4686 974 7190 N652 Finanng by the Fund Toal by Fund te 70.0 70.0 70.0 70.0 70.0 70.0 70.0 70.0 70.0 70.0 Cumuldiv Y'OOOO 29 093 1114 1597 2138 2743 3422 4182 5033 5980 s Grnt ta 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 a Loan %e 60.0 60.0 60.0 60.0 60.0 60.0 90.0 90.0 90.0 60.0 by Wodd Bank te 60.0 60.0 60.0 60.0 60.0 60.0 0.0 0.0 Cumuative $'0000 47 106 109 239 317 317 317 317 317 317 CASH FLOW SUMMARY 1001 1092 1S93 1994 1995 1890 1997 198 1999 2000 GENERATED FlOM: EMuent Charoe 36 40 42 44 4e 63 eo 70 74 78 World Bank Loan 265 330 370 414 464 312 -210 -212 -213 -213 Fund Reflow 0 0 86 109 320 450 615 704 788 883 Rssewe 56 48 27 94 284 627 938 799 665 491 TOTAL RESOURCES 348 417 524 748 1115 1461 1409 1381 1305 1238 APPLIED TO: Poliwon Contol Loan 256 330 370 414 464 519 582 651 730 817 a p ^,rant 43 65 62 s9 77 87 97 109 122 136 OtwrFundExpense 6 8 8 o o 10 10 11 11 12 Reserves s0 43 24 84 256 565 848 721 591 442 273 TOTAL FUND OUTLAY 305 396 439 496 55 615 669 770 862 9s6 BALANCESHEET 1991 1992 1003 1994 1995 1996 1997 1998 1969 2000 Muniial Capal 60 88 127 109 213 .'S 322 388 458 632 609 Lon Aoum. Gants 43 99 169 226 305 392 480 97 719 856 World Bnk Loan 261 627 1056 1647 2122 2051 1972 1877 1798 1646 Acumulaed Surplus 6 16 44 104 192 646 1051 1284 1649 1836 TOTAL LABIUTY 312 672 1109 1636 22e6 2627 2922 3022 3127 3237 Fund Loans 269 04 1025 1380 1708 1902 2202 2431 265 2094 Liquid Invewtme 43 24 84 256 56 646 721 591 442 273 TOTALASSET 312 672 1109 16m1 22e6 2827 2922 3022 3127 3237 MEMO ITEM 1991 12 1906 1904 199 1066 1997 1996 1999 2000 Totl FOl. Chaio 125 132 139 147 156 209 221 233 245 259 (ate of Growth) ta 5.5 5.5 6.5 6.6 3.0 5.5 6.5 6.5 5.5 AUaoasd to Fund *b 80 30 30 30 30 30 30 30 30 30 Repayment Tem" Fund Investment W. Bank RpaW. perwd yr 7.0 1 20 Graw perlod W 2.0 0 6 hIttrae w1)1 11.9% 10.09% 5.09% Fund Loan sbjsptto Repayment 0 0 55 566 965 1369 1832 2086 2348 2630 World Bank Loan. USJ0000 Lon 47 58 64 70 78 RPAyent 34 34 34 34 34 Cum.Prln.Init 46 III 161 262 S5 339 321 303 284 264  - 67 - Annex 9 a Project Cost by Component and Category Changzhou Yuan '0000 Land CMI Equipment TA & Sub-Loans 6SM Total % Works Local Foreign Tralning % YOOOO Total MgmiPlanning 0 0 135 0 315 6.0 477 1.0 Education 300 3302 690 239 199 6.0 5014 10.4 Health 198 1922 58 282 193 6.0 2813 5.8 Transport 1054 773 51 29 128 6.0 2156 4.5 Housing 2176 9320 0 0 169 6.0 12365 25.6 Water/Swerage 674 2178 1961 3255 292 6.0 8862 18.3 Pollution Control 2293 0.0 2293 4.7 IndustrIes 14335 0.0 14335 29.7 Total 4402 17495 2896 3805 1295 2293 14335 1794 48314 100.0 Physical 8.0 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.1 Contingency 352 2187 362 476 162 287 1792 224 5841 Total 4754 19681 3258 4280 1457 2579 16127 2018 54155 1990 Prices Price 9 12.5 32.0 32.0 32.0 32.0 32.0 32.0 32.0 30.3 Contingency 594 6298 1043 1370 466 825 5161 646 16403 Total 5348 25979 4300 5650 1924 3405 21288 2663 70558 Cur"nt Prices In US$000 Land CMI Equipment TA & Sub-Loans DSM Total Works Local Foresin Training % US$000 Mgmt/Planning 0 0 259 0 603 0 0 6.0 913 Education 575 6326 1322 458 381 0 fE 6.0 9606 * Health 379 3681 112 540 370 0 0 6.0 5388 Transport 2018 1480 98 55 245 0 0 6.0 4130 Housing 4169 17855 0 0 323 0 0 6.0 23687 WaterO/ewerage 1292 4172 3757 6235 560 0 0 6.0 16977 Pollution Control 0 0 0 0 0 4392 0 0.0 4392 Industries 0 0 0 0 0 0 27462 0.0 27462 Totl 8433 33514 5548 7289 2482 4392 27462 3436 92556 Physi 8o 125 12.5 12.5 12.5 12.5 12.5 12.5 i41 Contingency 675 4189 693 911 310 549 3433 429 11190 Total 9108 37704 6241 8200 2792 4941 30895 3865 103746 1990 Prices Price * 6.8 13 13.5 1&5 13.5 13.5 13.5 13.5 12.9 Contingency 615 5090 843 1107 377 667 4171 522 13391 Total 9722 42794 7084 9307 3169 5608 35066 4387 117137 Current Prices  - 68 - Annex 9 b Project Cost by Component and Category Luoyang Land Cri Equipment TA & Sub- DSM Total % In Yuan 0000 Works Local Foreign Training Loans % YOOOO Total MgmtlPlanning 5 23 223 37 310 6.0 635 1.8 Education 746 3788 738 495 177 6.0 6301 17.8 Health 0 2072 352 1047 190 6.0 3882 11.0 Transport 2852 3937 222 792 281 6.0 8569 24.2 Housing 646 3291 0 0 61 6.0 4238 12.0 Water/Sewerage 0 308 562 103 4 6.0 1036 2.9 Pollution Control 6.0 0 0.0 Industrles 10680 0.0 10680 30.2 Total 4249 13420 2097 2475 1024 10680 1396 35341 100.0 Physical % 8.0 12.5 12.5 12.5 12.5 12.5 12.5 12.0 Contingency 340 1677 262 309 128 1335 174 4226 Total 4589 15097 2360 2784 1152 12015 1570 39568 1990 Prices Price % 14.0 32.0 32.0 32.0 32.0 32.0 32.0 29.9 Contingency 642 4831 755 891 369 3845 503 11836 Total 5231 19928 3115 3675 1521 15860 2073 51403 Current Prices in US$000 Land Civil Equipment TA & Sub- DSM Total Works Local Forelgn Training Loans % US$000 Mgmt/Planning 10 45 428 72 594 0 6.0 1217 Education 1429 7257 1413 949 340 0 6.0 12071 Health 0 3970 675 2006 364 0 6.0 7436 Transport 5464 7542 426 1517 539 0 6.0 16416 Housing 1238 6304 0 0 117 0 6.0 8118 Water/Sewerage 0 591 1076 197 8 0 6.0 1985 Pollution Control 0 0 0 0 0 0 6.0 0 Industries 0 0 0 0 0 20460 0.0 20460 Total 8140 25708 4018 4741 1962 20460 2674 67704 Physlcal b 8.0 12.5 12.5 12.5 12.5 12.5 12.5 12.0 Contingency 651 3214 502 593 245 2558 334 8097 Total 8791 28922 4520 5333 2208 23018 3008 75800 1990 Prices Price 96 7.8 13.5 13.5 13.5 13.5 13.5 13.5 12.8 Contingency 686 3904 610 720 298 3107 406 9732 Total 9477 32826 5130 6053 2506 26125 3415 85532 Current Prices  - 69 - Annex 9 c Prolect Cost by Component and Category Shashi Yuan '0000 Land CMI Equipment TA & Sub-Loans DSM Total % Works Local Foreign Training % Y0000 Total MgmtlPlanning 0 28 36 122 228 6.0 438 1.4 Education 355 2114 733 181 223 6.0 3823 12.S Health 165 801 38 735 140 8.0 1992 6.5 Transport 379 958 324 466 106 6.0 2367 7.7 Housing 580 3718 0 0 41 6.0 4699 15.0 Water/Sewerage 346 3159 1171 725 12e 6.0 5861 19.1 Pollution Control 2115 0.0 2115 6.9 Industries 9437 0.0 9437 30.8 Total 1825 10776 2303 2229 866 2115 9437 1080 30632 100.0 Physical % 8.0 1Z5 12.5 12.5 12.5 1.5 12.5 12.5 12.2 Contingercy 146 1347 288 279 108 264 1160 135 3747 Total 1971 12123 2591 2508 974 2380 10617 1215 34378 1990 Prices Price % 18.0 32.0 37.0 32.0 32.0 32.0 32 0 32.0 31.2 Contingency 355 3880 829 803 312 761 3397 389 10725 Total 2325 16003 3420 3311 1286 3141 14014 1804 45104 Current Prices In US$000 Land Civil Equipment TA & Sub-Loans DSM Total Works Local Foreign Training % US$000 MgmtJPlanning 0 53 69 233 436 0 0 6.0 839 Education 679 4050 1405 347 428 0 0 6.0 7324 Health 316 1534 73 1409 267 0 0 6.0 3816 Transport 726 1835 621 892 204 0 0 6.0 4535 Housing 1111 7122 0 0 78 0 0 6.0 8810 Water/Sowerage 663 6051 2243 1390 245 0 0 6.0 11227 Pollution Control 0 0 0 0 0 4052 0 0.0 4052 Industries 0 0 0 0 0 0 18078 0.0 18078 Total 3496 20645 4412 4271 1658 4052 18078 2069 58681 Physical % 8.0 12.5 12. 12.5 12.5 12.5 12.5 12.5 12.2 Contingency 280 2581 552 534 207 507 2260 259 7178 Total 3775 23225 4964 4806 1866 4559 20338 2328 85859 1980 Prices Prie % 7.3 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.1 Contingency 274 3135 670 649 252 615 2746 314 8655 Total 4049 26360 5634 5454 2118 5174 23084 2642 74614 Currnt Prices  - 70 - ANNE 10 CHINA MEDIUM-SIZED CITIES DEVELOPMENT PROJECT Estimated Schedule Of Disbursements* Bank Group fiscal year Disbursement Cumulative as and semester Semester Cumulative 2 of total (US$ million) Year 1 FY91 2nd 3.4 3.4 2 Year 2 FY92 lst 10.1 13.5 8 2nd 11.8 25.3 15 Year 3 FY93 lst 22.7 48.0 29 2nd 34.5 82.5 49 Year 4 FY94 1st 21.9 104.4 62 2nd 18.5 122.9 73 Year 5 FY95 1st 15.2 138.1 82 2nd 11.8 149.9 89 Year 6 FY96 1st 9.2 159.1 95 2nd 7.1 166.2 99 Year 7 FY97 1st 2.2 168.4 100 Closing date: June 30, 1997 * The same as composite disbursement profile of Bank Group financed projects in China  - 71 - ANNE 11 Page 1 of 2 CHIN MEDIUM-SIZED CITIES DEVELOPMEnT PROJECT Public Utility Com2anies' FEnaces Assumptions and Bases Underlying the Financial Prgjections Summary of Tariff Increases Under Proiect Prelparatio 1. As a result of discussion during project oreparation, each public utility company involved restructured tariffs in September 1988. These can be summarized as follows: (a) Changzhou Running Water CoQmany. Tariffs for industrial and commercial users rose from 20 fen per e3 to 23 fen per i3, or 15%. At the time average costs per m3 were 16.6 fen. (b) Shashi Running Water Company. 10 fen to 12 fen per m (20%), while industrial tariffs rose from 10 fen to 15 fen per m3 (50%). At the time average costs per m' were 11.6 fen. (c) Luoyang Running Water Company. Tariffs for commercial users rose from 9 fen to 24 fen per m3 (167%), while industrial use tariffs rose from 10 fen to 27 fen 1 (170%). At the time average costs of production were 12.25 fen. (d) Shashi Municipal Bus Company. Until September 1988, the fare was 5 fen for every two stops. In September this was revised, increasing the fare to 10 fen for the first two stops; this amounted to an average fare increase of 44%. (e) Luoyang Municigal Bus Co2many. Prior to September 1988, bus riders were charged 5 fen for every 3 stops travelled; the fare has been increased, requiring riders to pay 5 fen for every 2 stops; this has increased average fares by 25%. Imnuligations of Financial Action Plans for Future Tariff Increases 2. The financial action plans under the project, will require each company to make periodic tariff adjustments and/or cost reductions. The forecasts, which assume no cost cutting measures, result in the following projected tariff increases and are indicative, depending, as they do, on various assumptions including those about rates of inflation: (a) Changzhou Running Water Comoany. Residential user tariffs will have to increase from 10 fen per m3 to 12 fen 1991 and 15 fen  - 72 - ANNEX 11 Page 2 of 2 in 1993, or 50%. Non-residential tariffs would have to increase from 23 fen per m3 to 30 fen in 1991, 40 fen in 1993, and 50 fen in 1994, for an increase of 117% by the end of the project implementation period. (b) Shashi Running VWater Company. Only one more tariff adjustment is forecast, for 1993; in that year residential tariffs would rise from 10 fen to 15 fen per m3 (50%); while commercial user tariffs would increase from 12 fen to 15 fen per m3 (25%), and industrial user tariffs would grow from 15 fen to 26 fen (73%). (c) Luoyang Runnin. Water Co2nany. One tariff revision is forecast, for 1993. Residential user tariffs could grow from 9 fen to 12 fen per i3 (33%); institutional user tariffs would increase from 20 fen to 24 fen (20%); commercial user tariffs would increase from 24 fen to 29 fens (21%); and industrial user tariffs would increase from 27 fen to 32 fen per m3 (19%). (d) Shashi Nunicipal Bus Company. The introduction of the second phase of the bus fare revirion, in 1990, would apply the 10 fen fare for every two stops, and raise average fares by 38%. The bus company would have to ralse fares again by an average of 25% in 1993. Overall fares would rise by 43% by the end of project implementation. (e) Luovana Municipal Bus Company. Bus fares are expected to increase by an average of 15% every two years, beginning ir. 1989, for an overall average increase of 52% over the project implementation period.  ANNEX I la - 73 - Table I of 10 CNANOZHOU RUNNING WATER COMPANY PROJECTED PROFIT AND LOSS ACCOUNT ('000 Yuan) 19~88 989 E19p 1001 1992 1098 1994 1995 1906 109? -!Tcu1T Eloomt