China - Medium-sized Cities Development Project

Document of The World Bank FOR OFFMCIAL USE ONLY -ZJ 3 Z p6 - CA MEMORANDUM AND RECOMMENDATION Repot No. P-5045-CHA OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$79.4 MILLION AND A PROPOSED CREDIT OF SDR 62.2 MILLION (US$89.0 MILLION EQUIVALENT) TO THE PEOPLE'S REPUBLIC OF CHINA FOR A MEDIUM-SIZED CITIES DEVELOPMENT PROJECT DECEMBER 11, 1990 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorikation.  CURRENCY EOUIVALENTS (as of November 1990) Currency name - Renminbi (RMB) Currency unit Yuan (Y)-100 Fen Y1.oo - US$0.19 US$1.00 - Y5.22 ABBREVIATIONS AND ACRONYMS CIB - China Investment Bank PCBC - People's Construction Bank of China SPC - State Planning Commission FISCAL YEAR January 1 - December 31  FOR OMCL4 USE ONLY CHIN MEDIUM- SIZED CITIES DEVELOPNENT PROWCT LOAN/CREDIT AND PROJICT SUMMARY Borrower: The People's Republic of China Beneficiaries: Municipalities of Changzhou, Luoyang and Shashi Loan Amount: US$79.4 million equivalent Credit Amount: SDR62.2 million (US$89.0 million equivalent) Terms: Loan - 20-year repayment, including 5 years of grace, at the standard variable interest rate. Credit - standard, with 35 years maturity. Onlendinm Terms: The Government (GOC) will make the proceeds of the Loan and Credit available to the municipal governments at 5% per annum over a period of 20 years, including a 5 year grace period. The municipal governments will bear the foreign exchange risk. The municipal governments will onlend a portion of the loan and credit proceeds to participating local public utility companies and industrial enterprises. For foreign currency sub-loans, the interest rate charge will be the Bank's variable rate plus a 2% spread. Local currency onlending will follow prevailing rates for similar fixed asset loans made by the People's Construction Bank of China. Industrial sub-borrowers will bear the exchange risk for foreign currency loans. Financing Plan: Local Foren Total -----------US$ million---------- Municipal Governments, 68.8 0.0 68.8 Utilities and Households Industrial Firms 38.5 1.5 40.0 World Bank Group 0.0 168.4 168.4 Total 107.3 169.9 277.2 Economic Rate of Return: Not applicable Staff An&raisal PM.ort: Report No. 7705-CHA NME: IBRD No. 21361 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND CREDIT TO THE PEOPLE'S REPUBLIC OF CHINA FOR A MEDIUM-SIZED CITIES DEVELOPMENT PROJECT 1. The following memorandum and recommendation on a proposed loan for US$79.4 million equivalent and credit for SDR 62.2 million (US$89.0 million equivalent) to the People's Republic of China is submitted for approval. The proposed loan would be at the Bank's standard variable interest rate with 20 year repayment, including a five-year grace period. The proposed credit would be on standard IDA terms with 35 year maturity. The loan and credit would help to finance a municipal development project in three cities. 2. Background. 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. Since 1979, however, the urban sector has experienced a dynamism unprecedented since the 1950s. Urban populations have been expanding at rates as high as 4-5% per year, as the demand for urban labor has led to a relaxation of migration controls. 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. 3. Economic reform and growth over the last decade have generated increased demand for public services, public utilities and associated infrastructure in China's cities. Rising household incomes have fueled demand for urban goods and services. Reform is also changing the mechanisms for urban planning and management. In the past, decision-making on major urban policies and expenditures was centralized and often characterized by inadequate consideration of local conditions and poor coordination across sectors. The central government is now limiting its role to setting broad objectives and policy parameters for management of localities, and is devolving to local governments the responsibility for planning, financing and managing urban development. In addition, enterprises are to be gradually freed of the obligation to provide housing and other social welfare benefits. 4. China's cities and towns have invested heavily in infrastructure and services over ti last decade, but given the dearth of investments in the 1960s and 1970s md pressing demand from rapid economic growth, large- scale investment will need to be continued for the foreseeable future. There are four main issues that must be addressed to ensure efficiency in this process: (a) local planning and management weaknesses; (b) inefficient utilization and management of existing assets; (c) inadequate mechanisms for resource mobilization and principles for cost recovery; and (d) the role of local governments in preventing environmental resource mismanagement. Municipal governments are encouraged to experiment with alternative approaches in these areas. "Model cities" of moderate population size are often the testing ground for bold experimentation.  - 2 - 5. Rationale for Bank Group Involvement. The Bank Group strategy for assisting China in the urban sector is to foster dialogue on policy and support investments that will help to map a transition to urban management that is decentralized, more responsive to local conditions, efficient, equitable and responsive to environmental issues. In 1987, the State Planning Commission (SPC) requested Bank Group assistance for the proposed project to help improve local conditions and urban development planning in three urban areas and thereby to develop models for reform in other cities. The project would help 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. As such, it would result in significant modifications of existing practices at the local level. Changzhou, Luoyang and Shashi, each in a different province, were selected by SPC as representative of medium-sized cities and areas capable of and interested in introducing new approaches. 6. The Bank Group's principal contributions will be to introduce concepts of comprehensive urban development planning and integrate cross- sectoral perspectives into city management. The Bank Group will bring to the project its experience in development of systems for city-wide planning and management as well as expertise in specific sectors, such as transport, education and housing. The relevance of this experience has already been explored in detail in a sector study ("Zhejiang: Challenges of Rapid Urbanization," Report No. 6612-CHA, dated August 3, 1987). Over the course of project preparation, the Bank arranged for teams of technical specialists to advise the cities in overall and sector planning, financed by the Japan Grant Facility, United Nations Development Programme, Australian Trust Fund, French Government, Belgium Trust Fund, and the Second Technical Cooperation Credit (Credit 1664-CHA). 7. Proiect Obiectives. 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 use of existing facilities and provide more appropriate financing mechanisms for urban development. The specific objectives are to: (a) improve planning for each 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 activitv; and (e) promote prudent management of environmental resources. 8. Proiect Description. The proposed operation combines urban planning and management improvements in each city with supporting investments. Under the urban planning and management component, centers for urban planning and management and geographic information which have been established in each city will be strengthened to improve data collection, analysis and dissemination. The education component would include improved standards for teacher/student ratios, teacher qualifications, and utilization of school facilities and support investments to upgrade buildings and educational equipment and provide technical assistance for teachers and administrators. A health component would include measures to improve efficiency in service delivery and to upgrade the qualifications of health workers in hospitals, maternal and child health units and disease prevention stations. Efforts would be made to improve health care finance through insurance trials and experimental  payment schemes. The transport component in each city would improve links between transport development and projected demand, and would support investments in roads, public transport, traffic management, and technical assistance and training. A water and sewerage component would improve the tariff structure for water usage to encourage cost recovery and conservation and would finance infrastructure to expand water supply and distribution, as well as sewerage facilities. In housing, the project would help accelerate implementation of national reforms to reduce subsidies and move toward market-based allocation of housing units. Approximately 6900 housing units would be constructed under the project and would be purchased by individual households with appropriate cost recovery. The industry component would make available sub-loans for upgrading technology in selected local enterprises on the basis of municipal strategies for industrial development. Finally, an experimental pollution control component in two cities would assist industries to achieve prescribed standards for water quality discharge by financing purchase of pollution control equipment and associated minor civil works, and would provide equipment for municipal environment bureaus. 9. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and disbursement and the disbursement schedule are shown in Schedule B. Retroactive financing of up to US$16.0 million would be provided for expenditures made after May 1, 1989 that are of urgent nature as reviewed and agreed to by the Bank Group. A timetable of key project processing events and the status of Bank Group operations in Chitia are given in Schedules C and D, respectively. A map is also attached. The Staff Appraisal Report, No. 7705-CHA dated December 11, 1990, is being distributed separately. 10. Agreed Actions. At negotiations, the following key agreements were reached with the three project cities: (a) each city will carry out its reform package as agreed with the Bank Group; (b) resettlement and rehabilitation related to civil works construction will be carried out in accordance with a plan acceptable to the Bank Group; (c) housing units constructed under the project will be sold to households at prices to cover full investment costs; 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 be provided to purchasing households on terms acceptable to the Bank Group; (d) 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 satisfactory to the Bank Group; (e) terms and conditions for pollution control sub-loans, fund management principles and implementation arrangements would be acceptable to the Bank Group; (f) the municipal governments will pass on part of the loan and 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; (g) in each city the leading group (steering committee) 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; and (h) training under the urban planning and management, education, health, transport, and water and sewerage components would be carried out in accordance with programs agreed with the Bank Group.  11. Conditions of loan and credit effectiveness include the following: signing of an agreement, with terms and conditions acceptable to the Bank Group, between the municipal governments and CIB on the arrangements for appraising and supervising industrial sub-loans, and appointment of the Project Implementation Consultants. Conditions of disbursement will be: (a) for the public utility and public transport components, the companies under the public utilities departments and the cities would enter into contracts satisfactory to the Bank Group including financial performance targets, acceptable to the Bank Group; and (b) for the pollution control sub-loans, signature of agreements between the project cities and PCBC. 12. Benefits. An estimated 1.8 million people would derive direct benefit from the improvement of urban services in the three cities. Moreover, the project will be the first integrated urban development project in China and 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 throughout project preparation as an obser"-er, will help disseminate the results of the project through its regional and national seminars for municipal officials. 13. Risks. The principal risk lies in the capacity of the three municipal governments to manage implementation of such 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 and will report directly to a high-level steering committee in each city. The project will also incorporate assistance from financial intermediaries as well as regional and national technical intermediaries. Detailed implementation programs have been prepared for each sector, along with indicators for monitoring progress in policy reform and implementation of investments. The Bank Group will commit relatively large amounts of resources to supervising the project. 14. Recommendation. I am satisfied that the proposed loan and credit would comply with the Articles of Agreement of the Bank and of the Association and recommend that the Executive Directors approve the proposed loan and credit. Barber B. Conable President Attachments Washington, D.C. December 11, 1990  Sch-edule A MEDIUM-SIZED CITIES DEVELOPMENT PROJECT ESTIMATED COST AND FINANCING PLAN Estimated Costs A/ Local Foreign Total -----------US$ million----------- Capacity Building: Planning and 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 & Sewerage 12.4 17.0 29.4 Pollution Control 1.2 7.2 8.4 Industry 9.5 56.5 66.0 Base Cost 8. 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 27Z.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 Bank Group 0.0 168.4 168.4 Total 107..3 169.9 2ZZ.2 A/ Figures may not add due to rounding.  Schedule B Page 1 of 2 MEDIUM-SIZED CITIES DEVELOPMENT PROJECT PROCUREMENT METHOD AND DISBURSEMENT a/ Procurement Arrangements: (US$ million) Procurement Method TOTAL Category of Expenditure ICB LCB OTHER COST Civil Works -- 99.4 2.6 102.0 (68.0) (1.8) (69.8) Equipment 22.7 10.9 5.1 38.7 (22.7) (8.2) (3.8) (34.7) TA & Training 1.4 -- 6.6 8.0 (1.4) (6.6) (8.0) Supervision -- -- 10.2 10.2 (0.0) (0.0) Land and Demolition -- -- 23.2 23.2 (0.0) (0.0) Industry 21.5 29.9 32.9 84.3 (21.5) (19.5) (8.6) (49.6) Pollution Control 2.9 3.6 4.3 10.8 (2.9) (2.6) (0.8) (6.3) TOTAL 48.5 143.8 84.9 277.2 (48.5) (98.3) (21.6) (168.4) a/ Bank Group disbursement in narentheses.  Scbedule X Page 2 of 2 Disburs.smets Category Amount Expenditures to be Financed (%) (US$ million) Equipment and 3'.7 100% of foreign expenditures for Materials directly importid equipment and materials, and 100% of local expenditures (ex-factory); and 75% of local expenditures for equipment and other materials procured locally. Civil Works _/ 69.8 65% (Changzhou), 70% (Shashi) and 75% (Luoyang) Consultants Services 8.0 100% and Training A/ Industry 49.6 100% of amounts disbursed for CIB subloans. Pollution Control 6.3 100% of amounts disbursed for CIB subloans. Total 168.4 Estimated Bank/IDA Disbursements i hank/IDA FY 1991 12 1993 1994 1995 1996 1997 --------------- US$ Million------------------- 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 A/ Retroactive financing of expenditures totalling US$16.0 million equivalent would be permitted for expenditures made after May 1, 1989 that are of urgent nature as reviewed and agreed to by the Bank Group. hi Figures may not add due to rounding.  Schedule C MEDIUM-SIZED CITIES DEVELOPMENT PROJECT TIMETABLE OF KEY PROJECT PROCESIIN EVENTS (a) Tiue take? to prepare 15 months (b) Prepared by Local government bureaus with assistance from consultants financed by the Japan Grant Facility, Australian Trust Fund, French Government, Belgium Trust Fund, United Nations Development Programme, and the Second Technical Cooperation Credit. (c) First Bank Group mission September 1987 (d) Departure of appraisal mission December 1988 (e) Negotiations May 1989 (f) Planned date of effectiveness April 1991 (g) List of relevant PCR and PPARs None  Ichodule D3 STATUS OF BANK GROUP OP:RATIONS IN THE PEOPLE'S REPUBLIC OF CHINA A. STATEMENT QF BANK I0ANS AND IDA CREDITS (As or September 30. 1990) Loantl Amout (US$ mi1lion} Crecl.t Bor- (net o: cancellationsb Number FY rower Purpose Bank IDA Undisb. (a) Six 4.ags and ten credits have been fully disbursed. 447.8 523.9 - 0 wn cn SECALs 296 11932 88 PRC Rural Sector Adj. 200.0 100.0 - 2231 83 PRC Petroleum I (Daqing) 162.4 - 0.5 2252 83 PIC I Zhongyuan-Wenli) 100.8 - 15.0 1411 84 PR o yechniclT University - 80 17.6 1417 84 PRC Nuober Deve opment _ 382 84 PRC Lu uge Hydroelectric J45.4 - 2.5 1394 84 PRC R va sw 20.0 - 1.0 1472 84 PRC Rural ealth & Medical Educ. - 85.0 12.2 246 84 PRO Perleum III (Earamayl, 1)92.5 - 5.7 2434/1491 84 PRO IndysQtial Ire i II (CII II) 105 0 70.0 o.9 2444 1500 84 PRC nra E ucaton II 43 (23. .8 1516 85 PRC Ig1iculjural Research II - . 6. 1551 85 PRC n vers ty Deve opment II - 145.0 26 2493 85 PC -Power II 117.0 - 16. 2501 85 PRO Changcun (Luan) Coal Mining 79.5 5s.2 1577 85 PRC Seed - 40.0 1.1 1578 85 PRC Rura Water Supply - 80.0 4.1 253911594 85 PRC Hi hwa I 26(00() 1. 2540 85 PRC RaIlwa3 II 2350 -O 132.0 2541 85 PRC Fertillzer Rehab. & 97.0 - 0.8 Ener y Savlfn 16Q5 85 PRC Frentf Dev ment - 47.3 13.0 257911606 85 PRC PlShiHang-Chaoh Area Dev. 17.0 75.0 11.1 2580 85 PRC Weiyuan Gas Field Technical 25.0 - 8.1 Assis tance 1642 86 PlC Rural Credit II 90.0 1.1 265911663 86 pRC Industrial Credit 111(CIB III) 75.0 25.0 9.7 1664 86 RC Tech ca Coo erat ion Credit I - 20.0 20.3 16l 71 PRC Pr9vincial Universities - 120.0 15.8 267811680 PRC Third Railway 160.0 70.0 134.8 2o89 86 PRC Tianiin Port 130.0 - 85.8 1689 86 PRC Fres water Fisherles - 60.0 1.9 2706 86 PRC Beilungan Thermal Power 2i5.0 - 2.3 2 707 86 PC Yatan ~yroelectric 522.0 - M 7723/1713 86 PRC Rural Health & Preventive Med. 15.0 65.0 55.1 1733 87 PRO Red Soils - 40.0 1.0 2775 87 PRC Shuikou H{droelectric 140.0 - S8.1 2783 1763 87 PRO Industri t IV (CIB IV) 250.0 50.0 84.7 2784 87 PRO Shanghai Machine Tools 100.0 - 66.5 17 87 PRC XinIan Agricultural Dev. - 70.0 32.6 279411779 87 POaSeve rage 45.0 100.0 116.6 28111792 87 PRC Bei in -T i t-Tanggu Expressway 25 125.0 79.6 2812 1793 87 PRC Gsnlu Prov al Dev. 20.0 150.5 113. 1i35 87 PRC Planing Suuport & Special Studies - 20.7 17.5 2838 87 PRC Fe ti1iaer a ionalikation 97.4 - 64.9 2852 87 PRRC Wu1ingThdfaPower 190.0 1400 1871 88 PRO Rua re i7 III- 170. 2877184 88POaun ~Pr 3.0 25. 71.7 2907/1875 88 PRO Da, ort 71.0 25.0 76.7- 1885 88 PRC Northern Irrigation - 103.0 63.3 2924 1887 88 PRC Coastal Lands Dev. 40.0 60.0 43.0 1908 88 PRC Teacher Trainlng - 50.0 31.2 2943 88 PRC Pharmaceuticals 127.0 - 81.3 2951 L 917 88 PR S~chuan iha 75.0 50.0 116. 2929 - 8S PRO Siaanzi Hihway 50.0 38 1918 88 PRC Daxin An ing Forestry 1 56.9 31.7 2955 88 PRC aeilungang 11 16S.0 111.1 2958 88 PRO Ph oehte Dev. 62.7 - 61.1 2968 88 PRC Raiy IV 200.0 - 135.5  Schedule D Page 2 of,3 Loau/ Amoupt (USS Tll ion) Credit Bor- Inet ot cance latlons) Number FY rower Purpose Bank IDA Uondlsb. (a) 1984 89 PRC Jiangxi Provinclal Highway - 61.0 51.3 1997 89 PRC Saanxi Aric ltural Dev. - 106.0 102.7 2006 89 PRE Text ook Developmen - 52.8 24.3 2009 89 ?RC Inte rated Res. Nealth - 52 49 3006 89 PRO N n io & Sha 5ai Ports 76.4 - 56.5 3007 89 PRC XIJqn Port 36.0 - 34.5 3012 89 PRO T anain Light Industry 154.0 _ 149.4 3060/2014 89 PRC I ner 0onx