China - Liaoning Urban Infrastructure Project

DoCurnenl of The World Bank f(OR OFFW('IAL [SE ONlY 1 / / 2 ' / / // // Report No. 8250-CHA STAFF APPRAISAL REPORT CHINA LIAONING URBAN INFRASTRUCTURE PROJECT FEBRUARY 27, 1991 Environment, Human Resources and Urban Development Operations Division Country Department III Asia Regional Office Thk document has a restricted distribution and mas be used bv recipients only in the performance of their official duties. Its contents ma% not otherwise be disclosed without World Bank authorization.  (URRENCY EQUIVALIENTI'S (as of January 1991) Currency Name - Renminbi (RMB) Currency Unit Yuan (Y) = 100 F(en Yl () = $0.19 $1.0( Y5.22 IhTi(. I rrS ANI) NIEASURES I meter (m) = 3.28 feet I kilometer (km) = 0.62 miles I cubic meter (m3) = 35.3 cubic feet FISCAL YEAR January 1 - December 31 AltBREVIATIONS AND ACRONYMS AIC Average Incremental Cost LUCRPO Liaoning Urban Construction AIDAB Australian International and Renewal Project Office Development Assistance Bureau CBD Central Business District MOC Ministry of Construction CMC China Machinery Corporation MOCOM Ministry of Communications ERR Economic Rate of Return MOF Ministry of Finance FIRR Financial Internal Rate of MPS Ministry of Public Security Return MURCC Municipal Urban and Rural FMG Fuxin Municipal Government Construction Commission FWSC Fuxin Water Supply Company MURCEP Ministry of Urban and Rural FYRR First Year Rate of Return Construction and Environmental GOC Government of the People's Protection Republic of China NEPA National Environmental IDA International Development Protection Agency Association PCBC People's Construction Bank of ICB International Competitive Bidding China LCB Local Competitive Bidding SAA State Audit Administration LCC Liaoning Construction SMG Shenyang Municipal Government Commission SOE Statement of Expenditures Ipcd Liters Per Capita Day SPC State Planning Commission LDOC Liaoning Department of SWSC Shenyang Water Supply Communications Company LDPS Liaoning Department of Public SYMEETC Shenyang Machinery and Electric Safety Equipment Trading Corporation LEPB Liaoning Environmental TCC Technical Cooperation Credit Protection Bureau TOR Terms of Reference LPAB Liaoning Provincial Audit Bureau UNDP United Nations Development LPG Liaoning Provincial Government Program LDPH Liaoning Department of Public VOC Vehicle operating cost Health YMG Yingkou Municipal Government YWSC Yingkou Water Supply Company  FOR 0 iCIAL USE ONLY CIIINA L.IAONING URBAN INFRASTRUCTURE PROJECT Table of Contents Page No. CREDIT AND PROJECT SUMMARY ................................... . v 1. TtlE UKBAN. WATER SUPPLY AND TRANSPORT SECTORS .... .......... 1 Urbanization in China ...................................... 1 Water Supply ............................................... 2 Urban Transport ............................................ 3 Sector Organization .................... ................... 3 Sectoral Issues ........................................... 4 Previous Operations and Sector Work ........................ 5 Bank Group's Role and Sector Lending Strategy .... .......... 6 II. PROJECT BACKGROUND ..... .................................. 7 Project Background ......................................... 7 The Project Area ........................................... 7 Existing Water Supply and Environment Situation .... ........ 8 Status of Existing Urban Transport ......................... 9 III. DEMAND FOR URBAN WATER AND TRANSPORT SERVICES .... ........ 10 Population Growth .......................................... 10 Water Demand ............................................... 10 Urban Transport Needs in Shenyang .......................... 13 Road Maintenance Needs ..................................... 13 This report is based on the findings of an appraisal mission which visited China in September 1989 and a post-appraisal mission which visited China in January 1991. Project team members included Mr. John W. Huang (Task Manager and Sanitary Engineer), Mr. Leon Miller (Economist), Mrs. Ivy Cheng (Financial Analyst) and Mr. Zhang Zhun (Consultant). The Peer Reviewers were Mr. Arthur Bruestle (Environmental Engineer, ASTEN), Mr. Peter Midgley (Urban Transport Planner/Engineer, ASTIN), Mr. Songsu Choi (Urban Planner/Economist, ASTIN) and Mr. Norihiro Noda (Sanitary Engineer, AS3EH). The Division Chief is Mr. Zafer Ecevit (AS3EH). The Department Director is Mr. Shahid Javed Burki (AS3DR). This document has a restricted distribution and may be used by recipients only in the performance l iheir official duties Its Lontents may not otherwise be disclosed without World Bank authorization  - ii. - P.age No, IV. THE PROPOSED PROJECT ...................................... 13 Project Objectives .......................... 13 Rationale for Association Involvement ................... I. , 14 Project Description ........................................ 14 Project Cost Estimates ..... ................. I 16 Project Financing .......................................... 17 Status of Engineering ...................................... 18 Consultant Services ........................................ 19 Staff Training and Development ............................. 19 Project Management ......................................... 20 Procurement ................................................ 20 Disbursement ............................................... 22 Land Acquisition and Resettlement .......................... 23 Monitoring Criteria ........................................ 23 V. THE BENEFICIARIES .......................................... 23 Provincial and Municipal Institutions ...................... 23 The Water Supply Companies .... ............................ 24 Water Billing and Collection ............................... 25 Water Company Accounting ................................... 26 Water Company Management ................................... 27 Shenyang Urban Transport Organization ...................... 28 The Public Transport Companies ............................. 28 Project Accounting ......................................... 29 Audits ....... 29 Insurance .................................................. 29 VI. FINANCE ................................................... 30 Financial System ........................................... 30 Past and Present Financial Position of Water Supply Companies 30 Water Tariffs .............................................. 33 Future Finances of Water Companies ......................... 33 Financing Plan of Water Companies .......................... 35 Public Transport Charges ................................... 37 Municipal Finances ......................................... 37 VII. ECONOMIC. SOCIAL AND ENVIRONMENTAL CONSIDERATIONS ........ 37 Project Justification ...................................... 37 Least-Cost Considerations ......................... 38 Project Benefits ........................................... 38 Affordability .............................................. 40 Environmmental Impact ..... I ................................ 40 Project Risks .............................................. 41  - iii - Page No, VIII. AGREEMENTS REAC1HED AND RECOMMENDATION .... ............... 41 TAB.LE S Table 3.1 Population Projection .10 Table 3.2 Water Demand Projections .11 Table 4.1 Project Cost Estimates .17 Table 4.2 Tentative Financing Plan .17 Table 4.3 Procurement Arrangements .21 Table 5.1 Distribution of Sales .25 Table 5.2 Metering & Frequency of Billing .26 Table 6.1 Key Financial Indicators 1986 - 1990 .31 Table 6.2 Current Water Tariffs .33 Table 6.3 Water Companies' Financial Performance .......... 34 Table 6.4 Financial Plan (1990 - 1995) .36 ANNEXES Annex 1. Particulars of Shenyang, Yingkou and Fuxin Municipalities .43 Annex 2. Water Demand Projections .46 Annex 3. Water Resource and Water Supply Pricing Study - Draft Terms of Reference .49 Annex 4. Shenyang: Urban Transport Project Corridors Selected for Improvement .53 Annex 5. Shenyang Vehicle Inventory .54 Annex 6. Project Components .55 Annex 7. Project Cost Estimate .57 Annex 8. Estimate of Consultant Requirement .65 Annex 9. Project Management Organization .66 Annex 10. Contract Packaging ....................... .... 67 Annex 11. Disbursement Schedule .68 Annex 12. Resettlement Plan .69 Annex 13. Project Implementation Schedule .71 Annex 14. Preparation of Second Stage Project - Darft Terms of Reference .72 Annex 15. Training Program .76 Annex 16. Provincial and Municipal Government Organization 80 Annex 17. Organization of Water Supply Companies .84 Annex 18. Operation Performance Monitors .87 Annex 19. Technical and Financial Advisors for Water Supply Companies - Draft Terms of Reference .88 Annex 20. Shenyang: Road Inventory and Condition .......... 90 Annex 21. Operating Statistics - Shenyang Bus Company and Shenyang Trolley-Bus Company .... ............ 91  - iv - Annex 22. Summary of Key Firnancial Indicators (1989-1996) 93 Annex 23. Assumptions to Financial Projections .94 Annex 24. Calculation of Self-financing Ratios (1989-1996) 98 Annex 25 Shenyang Bus Company and Trolley-Bus Company Summary of Financial Results 1982-1988 .99 Annex 26. Municipal Finances ..................10........ l() Annex 27. Cornputation of IRR ...... ........................ 101 Annex 28. Average Incremental Cost ..... ................... 105 Annex 29. Urban Transport Component Economic Analysis: Basic Assumptions and Data ... 108 Annex 30. Selected Documents and Data available in Project File .110 MAPS IBRD No. 21960 CHINA: Liaoning Province IBRD No. 21964 Shenyang Water Supply Component IBRD No. 21961 Fuxin Water Supply Component IBRD No. 21963 Yingkou Water Supply Component IBRD No. 21962 Shenyang Urban Transport Component  - v - CHINA LIAONING URBAN INFRASTRUCTURE PROJECT CREDIT AND PROJECT SUMMARY Borrower: People's Republic of Chinra. Bencficiaries: Liaoning Province and the Municipalitie-. of Shenyarig, Fuxin and Yingkou. Credit Amount: SDR 54.2 million (US$77.8 million equivalent). Terms: Standard, with 35 years maturity. Onlending From the Government of China to Liaoning Province for 15 Terms: years, including five years of grace, at a fixed interest rate of 5.5 percent per annum; from Liaoning Province to the Municipalities on the same terms. Foreign exchange risks will be borne by the Municipalities. From the Municipalities to the Water Supply Companies: 15 years, including 5 years of grace, at the variable interest rate payable on medium/long-term Renminbi loans by the People's Construction Bank of China. Project The project has the broad objectives of improving the Description: utilization and management of water resources and urban transport services in Liaoning Province, an important industrial base in China. The project would assist in the initial phase of an investment program aimed at addressing the shortages and poor quality of water supply in the cities of Shenyang, Fuxin and Yingkou, and shortcomings in urban transport in Shenyang. The specific objectives of the project are: (a) to improve water supply conditions in the three project cities through physical works and strengthening of institutions, regulations, management, financial and pricing policies; (b) to improve traffic and public transport conditions in Shenyang through a pilot program of selected low-cost physical work,s and institutional strengthening; and (c) to improve measures for water pollution abatement through technical assistance in wastewater treatment, and strengthening of institutions and enforcement measures for water pollution control. The water supplv component in Shenyang, Fuxin and Yingkou would develop physical works, including transmission and distribution pipelines, water intake works, pumping stations, and water treatment works, as well as provide training and technical assistance for the local water companies, the Liaoning Construction Commission, the Urban  - vi - companies, the Liaoning Construction Commission, the Urban and Rural Construction Commissions of the three municipalities and the Liaoning Water Resource Commission. The component would include, iter alia, a study of water resource and water supply pricing. A water pollution control component would provide technical assistance for a study of industrial wastewater treatment arnd environmental regulations. In addition, equipment would he acquired for environmental monitoring. The urban transport component, which would be concentrated in Shenyang, would impro';e about +4 km of arterial road corridors, and provide equipment, technical assistance and training to support management of public transport operations, in particular, road and public vehicle maintenance, road safety measures and operations management. To facilitate project planning and management, training would be provided to staff of the project offices, the Liaoning Construction Commission and the water supply and public transport companies. Technical assistance would be included in the project to assist the Provincial Government in planning and design of a second phase of the investment program, which would focus on water pollution abatement. Benefits: The improved water supply would provide much needed drinking water to the population, as well as inputs for industrial development in the three cities. Benefits from the water components would also come from improved health conditions of the city residents, particularly those residing in lower income areas, through better water availability and reduced ingress of contaminated groundwater into the water mains. The urban transport component would relieve traffic congestion in central city areas of Slienyang. Benefits would accrue from personal savings associated with shorter travel times, savings in vehicle operating costs and reduction in traffic accidents. Other important benefits of this project include improvements in project planning and management, and introduction of better financial discipline for the water supply companies. Risks: Possible project risks include insufficient commitment of the Liaoning Government and the three Municipal Governments to pursue the significant pricing policy reforms and institutional changes required, to provide the necessary counterpart funds for implementing the project, and to raise the necessary funds to fully implement the proposed development program. The project has built-in measures to minimize these risks. These include technical assistance to study tariffs and tariff structures required to meet economic and financial objectives, assurance from Liaoning Government for the timely provision of counterpart funds, and the building up of an effective planning institution to follow up on the implementation of the development program.  - vii - Est imnited Costs Local Foreign Total - -- (US$ million) ----- Water Supply Shtenyang 17.2 26.1 43.3 Fuxin 9.2 13.0 22.2 Yingkou 4.9 10.2 15.1 Urban Traasport Shenyang 5.3 8.0 13.3 Tech. Assistance and Training 0.3 4.7 5.0 Land Acquisition 4.8 0.0 4.8 Base Cost (1990) 41.7 62 0 103.7 Physical Contingency 4.2 6.2 10.4 Price Contingency 5.1 7.0 12.1 Total Project Cost a/ 51.0 75.2 126.2 Interest during Construction 0.0 2.4 2.4 Total Financing Reauired 51.0 77.6 128.6 Financing Plan Local Foreign Total ($ million) ------ Liaoning Prov. Govt. 48.4 2.4 50.8 and municipal Govts. Proposed IDA credit 2.6 75.2 77.8 Total 51.0 77.6 128.6 Estimated Disbursements: IDA FY 1992 1993 1994 1995 1996 --------------- ($ million) ---------------- Annual 14.8 22.5 17.9 13.3 9.3 Cumulative 14.8 37.3 55.2 68.5 77.8 Economic Rate Water Supply - 4 percent for Shenyang, 8 percent for of Return: Fuxin and 5 percent for Yingkou. Water charges reflect average incremental costs. Urban Transport - 43 percent for corridor improvement. a/ Project-financed goods are exempt from import duties and taxes.  CHiiNA LIAONINC URBAN INFRASTRUCTURE PROJECT I. THE URBAN. WATER SUPPLY AND TRANSPORT SECTORS Utb;it-tization in China 1.1 During the 1960s and 1970s, China's cities grew moderately, in terms of population, economic activity, incomes, urban infrastructure, housiing stock and services. Since 1979, however, the urban sector has experienced a dynamism unprecedented since 1950. With the re-introduction of household tarms, the liberalization of agricultural pricing, and the spread of igricultural markets free from government price ceilings, China entered a period of rapid economic growth and rising incomes. In the cities, administrative restrictions on tile expansion of light industries and service activities were lifted, while the growth of household incomes fueled an untprecedented surge in demand for urban goods and services. 1.2 As a result of this expansion, urban managers are being confronted with a growing demand for urban public services and its associated infrastructure, from both enterprises and households. No longer is there any doubt that a strong link exists be.ween the development of the local economic base and the expansion of the area's infrastructure. The legitimacy of household demand for improved public services and better housing is also accepted. Population growth rates have begun to approach levels not experienced since the 1950s, as the demand for labor encourages a relaxation of migration controls. Cities that had stagnated for two decades now find themselves with built-up areal populations expanding at a rate of 4 percent to 5 percent per year. This phenomenon has helped prompt the central government to reconsider its approach to planning, financing, and managing urban development. Recent statistics are, however, showing a decline in the urban built-up population growth rate in large cities, which is expected to stabilize to around 1 percent by the year 2000. 1.3 The central government's modernization-through-reform movement has included new features such as an increased emphasis on foreign trade, greater itnvolvement by foreign investors, directives for state-owned economic enterprises to concentrate on profit-maximizing behavior, 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 accept the fact that, increasingly, cities must compete with one another to attract new economic activity 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 largely to encouraging the process of restructuring urban development by setting broad objectives and parameters. This is the area of densest development, which is provided with a full complement of urban services.  ':It Itji I y China h<a; an average potential water reserve of about 2,800 billion p,i vt';r, or an annual per capita average water reserve of about 2,400 in3 i14 thB 1a jor u';er ot water inl China is agriculture, water needs itl urbani alre rapidly' rising. By the end of 1988 about 34 million m3 per day of I Lter were used by roughly 170 milliont urban dwellers (about 84 percent (ft t II I rban populat ioll covered by piped supply), and another 64 million in3 per daty for industries in tthe cities, giving a total of 98 million m3 per day Or alboLlt f36 billion ml per year. Tentative projections by the cities show watc1 nteeds to grow to 85 billion m3 per year by the year 2000. Industries u;e over 60 percent of the city water supply, with little attention given to onservaLtionl of water.2 Serious water shortages are found in many cities. iow,-ver, inost cities lack the financial resources for the relatively large investments required for water source development, and expansion of water treatment and distribution facilities to meet additional water needs. Faced with this reality, many cities are now moving toward stringent demand management measures. 1.5 Associated with water supply is the related problem of water pollution. Industries are without dispute the worst polluters. Most factories are not equipped for pollution control, and effluents containing high concentrations of toxic matter, heavy metals and organic materials are discharged into the environment with little or no treatment. While water pollution control regulations exist, most polluting industries have thus far been delinquent on the implementation of pollution abatement measures on the grounds of technical and financial difficulties. There is, however, rapidly growing awareness about environmental degradation and its serious impact on living conditions, in particular the effect of pollution on the quality of water resources needed for the country's economic development. Already many cities are tightening enforcement of industrial effluent standards. The law for a country-wide pollution permit system has been passed requiring registration of enterprises that pollute. These permits may be revoked if effective pollution abatement measures are not taken. Implementation of these measures is expected to be gradual, given the time needed for industries to plan and carry out the large investments required. 1.6 Urban wastewater in China is normally collected through separate sanitary sewers or combined sewers (the latter carrying both wastewater and rainwater). Sewage treatment facilities are absent or grossly inadequate in most cities. While sewerage charges are allowed by the Central Authorities, as yet not many cities have adopted these principles, and those that charge have not been doing it in the most efficient way. While the city water supply is usually run on a utility basis in China, most cities have municipal departments that operate the sewerage system on the city budget. That a utility form of organization for sewerage can bring about better management is being accepted in China, and many cities are already exploring suitable organizational changes .3 2 Chinese industries consume about 3 to 10 times the water for similar industries in many industrialized countries. 3 The Shanghai Sewerage Company established with the assistance of the World Bank under the Shanghai Sewerage Project (Credit 1779-CHA and Loan 2794-CHA) Is the first sewerage utility in China.  . 3 - 1./ Water resource allocation and management, and water polltitot i ont t ( I manlagement responsibilities are not clearly defined, arc divided, di f1 n tnt agetic ies arid the measures are often inappropriate. I isst it ti in()nI st rerigt -lini rig and rest ructuring with better finlancial planningi arid ma ia.r(S .(r la ,t tigItetr reguIations to support managemenit, and inore intensive staff trai ti iI are ukrgently needed. Urban Transport 1.8 Urbar. transport problems in all major Chinese cities are sev ,! worseninlg. In the larger cities, transit times are excessive througholt( ti,. day on most main corridors leading to the central business diEtrict (CI3D) a,,d to large industrial areas. These problems stem from: (a) inadequate road space -- roads occupy about 7 percent of the total urban area of cities in China, compared to 20-25 percent in developed countries; (b) poor utilizati(I: of the road space due to the intermixing of motorized and non-motorized vehicles; (c) poor road discipline and safety enforcement; and (d) severe underinvestment in the public transport systems. 1.9 In urban China, the number of persons per motorized vehicle 1an?ge,- from 30-85 persons per vehicle, which is very lcw. On the other hand, the number of persons per bicycle ranges from 1.2 to 2.1. With virtually rio increase in bus fares for about twenty years and difficulties in obtaining municipal funds, investment in the bus and trolley systems has been low. Large numbers of public transport vehicles, which have long passed their useful life and are prone to frequent mechanical breakdowns, are still on the roads. In Shenyang, as in many other cities, the situation has deteriorated to such a point, that it is faster to ride a bicycle (travelling at an average speea of 10.9 km/hr) in the CBD and other congested areas than to use public transport (7.2 km/hr). The number of private cars in China is very low -- about 170 to 320 persons per vehicle, and the number of motorcycles has been restricted in most cities. 1.10 The immediate need is to address the current conflict in use of road space between motorized and non-motorized vehicles. This is proposed to be achieved by (a) increasing the availability of road space through road widening, providing vehicle separation barriers, resurfacing and redesign of road intersections; (b) increasing efficiency of road use through better traffic regulation, enforcement and management; and (c) improving the operation and availability of public transport. Sector Organization 1.11 The Ministry of Water Conservancy is the central organization responsible for determining policies on the allocation and management of surface water resources in the country. The implementation of these policies is carried out through river basin commissions, provincial water conservancy departments and water conservancy bureaus at various local government levels. Allocation and management of groundwater is, however, the responsibility of the Ministry of Geology and Minerals and the corresponding local government departments and bureaus. The National Environmental Protection Agency (NEPA), separated in 1988 from the Ministry of Urban and Rural Construction and Environmental Protection (MURCEP), is responsible for setting environmental policies and providing guidance to the provinces on environmental matters. 1.12 The Ministry of Communications (MOCOM) is responsible for national transport policies and investment strategies (inter-modal and inter-regional).  - 4 - En forcemenit of trat tic and road safety laws and reg,ul at ior; i !, tI it responsibi I itv of t he Ministry of Putblic Security (MPS), which i !; itil!, rk-S'poI0Sishie for inr e mal secur it y. Thlc- Ministry of Construct ion (Mi()W ) i'. the central agellCy reksJpns i )ble tor urban/reg ionaal anid infri astretrictie dtvet l(lpirlet planning at the natiorral level. It also provides guidance to the provill nets and the1 three centtrailly controlied municipalities; otn matters conimig lardd-use and intfras tructure developmenit plans, and recommo(idat ion,; o technica1 standards and criteoria. 1.13 Each province and cenitrally-controlled municipality is responsiblhe for urban infrastructure works in its cities and towns and for (ntivirotimelittal protection under its jurisdiction, executed through various proVin(iatl commissions and departments. Overseeing urban matters are tihe provincial commissions of planning and construction, and the department of finance, wlich approve urban plans and major projects for cities and towns. The actual work of planning and design of projects is carried out by municipal bureaus arid, for large projects, provincial guidance and assistance would be sought. In the past construction work was normally carried out by construction units within the host municipal bureaus. Increasingly it is being contracted out through a competitive bidding process to construction enterprises, most of which have been reorganized from the original construction units, that now compete for work outside of their own complex. All large urban projects are reported to MOC. Large projects (exceeding Y 200 million) require approval by the State Planning Commission (SPC). Those involving foreign loans require approval by both the SPC and the State Council. Sectoral Issues 1.14 For at least two decades prior to the 1980s, China had concentrated on industrialization in urban areas, but had left urban services seriously neglected. Although in the past decade China's cities and towns have invested considerable resources to improve urban infrastructure, the urban sector will need to continue large scale investments for the foreseeable future in order to sustain economic growth and environmental quality. Careful investment planning with prudent selection of investment priorities are therefore critical issues. Increasingly urban investments would need to he funded from local resources, and, therefore, upgrading of local government financing is another area of concern. 1.15 While there is recognition at the various levels of government of excessive water use by industry, measures to convert manufacturing processes to conserve water are often costly. Unless industries are given appropriate incentives, excessive water use cannot be abated. To address the situation, Chinese cities are currently setting water use quotas for various industries with heavy financial penalties for exceeding the quotas. This, in effect, is a form of two tier charging system. The rules for quota levels are, however, arbitrarily defined, and the penalties charged do not reflect resource cost. Formalization of a policy to tie these charges with the marg.nal cost of water production and distribution will be needed, in order to ensure that water is used economically. Realistic consumption levels on this basis could then be obtained to provide a more reasonable base for cities to plan their water supplies. 4 Beijing, Shanghai and Tianjin.  . 5 - I I (f itn Iost c it i e, minunici pal water supply Is organtized as a pub I ic Int ,1 pl,ise(, althbouph if manry restrictions exist whlichi impede its operation Ia!n a II it u1bi IC ut iiitv. Water stipplv companies do not yet have full financial lilt (I ,o,, ilI IOf g t o nn planlnliig, Securing funding for capital t ment , 1.clthiqn water ratt,s tr-eatmenlt of surplus earnings and meetinig operational do l i ( i ts. To impriove performance in the urban water supply subsector, Lthere neet