China - Second Shanghai Metropolitan Transport Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 11985-CHA STAFF APPRAISAL REPORT CHINA SECOND SHANGHAI METROPOLITAN TRANSPORT PROJECT SEPTEMBER 10, 1993 MICROGRAPHICS Report No: 11985 CHA Type: SAR Environment and Urban Development Division China and Nongolia Deparment East Asia and Ptcific Regional Office This do_ment bas a restricted dstribution and may be used by recipients only in the perfonnance of their ofcid duties. Its contents may not otherwise be disclosed wihout World Bank authoition.  CURRENCY EQUIVALENTS (as of March 31, 1993) Currency name = Renminbi Currency unit = Yuan (Y) $1.00 = Y 5.70 $0.19 = Y 1.0 FISCAL YEAR January I - December 31 WEIGHT AND MEASURES 1 meter (m) = 3.28 feet (ft) 1 kilometer (kim) = 0.62 mile (mi) I square meter (m) = 10.76 square feet (ft2) 1 square kilometer (km) = 0.4 square miles (mi) 1 hectare (ha) = 0.01 (in2) = 2.47 acres (ac) = 15 mu 1 mu = 666.7 e2 = 0.0667 ha 1 kilogram (kg) = 2.2046 pounds (lbs) I metric ton (m ton) = 2,204 pounds (lbs) ABBREVIATIONS AND ACRONYMS 8FYP - Fighth Five-Year Plan (1991-95) SCPDRI - Shanghai City Planning and Design 9FYP - riinth Five-Year Plan (1996-2000) Research Institute ATC - Area Traffic Control SERAP - Shanghai Economic Reform Action CBD - Central Business District Program EA - Environmental Assessment SESRI - Shanghai Enviromnental Sciences EAP - Environmental Action Plan Research Institute EIRR - Economic Internal Rate of Return SFB - Shanghai Finance Bureau EMP - Environmental Motnitoring Plan SMTICO - Shanghai International Tendering and ERP - Emergency Response Plan Import Company ERR - Economic Rate of Return SM - Shanghai Municipality FYRR .- First Year Rate of Return SMAB - Shanghai Municipal Audit Bureau GDP Gross Domestic Produ!t SMCC - Shanghai Municipal Construction GNP - Gross National Product Commission ICB - International Competitive Bidding SMEAD - Shanghai Municipal Engineering IRR - Inner Ring Road Administration Department LCB - Local Competitive Bidding SMECC - Shanghai Municipal Engineering LIB - Limited International Bidding Construction Company MCon - Ministry of Construction SMTP I - First Shanghai Metropolitan MV - Motor Vehicle Transport Project NEPA - National Environmental Protection SOE - Statement of Expenditure Agency SPC - State Planning Commission NMV - Nonmotorized Vehicle SPSB - Shanghai Public Security Bureau NSC - North-South Corridor ST - Shanghai Transit PIU - Project Implementation Unit TA - Technical Assistance PMS - Pavement Management System TMP - Traffic Management Program PRC - The People's Republic of China TMS - Traffic Management and Safety PSB - Public Security Bureau TVE - Township and Village Enterprise RAP - Resettlement Action Plan UNDP - United Nations Development SAA - State Audit Administration Programme SCCIPI - Shanghai City Comprehensive VIM - Vehicle Inspection and Maintenance Transport Planning Institute VOC - Vehicle Operating Cost  FOR OMCIAL USE ONLY CHINA SECOND SHANGHAI METROPOLITAN TRANSPORT PROJECT LOAN Are PRoJEcT SUMMARY Borrower: People's Republic of China B fdkic : Shanghai Municipality Amount: $150 million equivalent Terms: 20 years, including 5 years of grace, at the Bank's standard variable intere rate. Objectives: The key objectdves of the proposed project, in support of the economic and social development of Shanghai, are: (a) to enhance economic productivity by improving the operational and economic efficiency of the urban transport system; and (b) to strengthen public sector management capacity by improving the planning and management of the urban transport system. Description: The project includes: (a) construction of about 22 km of the Shanghai Inner Ring Road (IRR) Stage 2 as a four-lane viaduct lining the new Nanpu and Yarngpu Bridges over the Huangpu River with the Stage 1 IRR now in construction under the first Bank-financed Shanghai Metropolitan Transport Project (SMTP I); (b) a Traffic Management and Safety component to extend the signalized Area Traffic Control system in the city center, equip a Road Safety Research Center, and extend the Traffic Management Pro-ram started under SMTP I; (c) investments in public transport to istruct and equip two bus depots and one bus interchange for the Shiaxghai Transit Company; and (d) technical assistance to support project implementation and to give further support to transport planning institutions. Beneits: The project would alleviate traffic congestion by both (a) providing much needed additional traffic capacity, and 0b) making travel by public transport and nonmotorized velicles more attractive and safer. The IRR Stage 2 would provide greatly improved access to the Pudong development zone via the new Huangpu River - idges, thus removing a serious impediment to growth in this important region. Benefits This document has a restricted distribution and may be used by recipients only in the performame of their offcW dudes. Its contents may not otherwise be disclosed without Wotid Bank authorization.  would accue in the form of vehicle opert cost savings, savings In person tavel dme, reductions in acdent costs, and in cozjuncto witi Shaghai's economic reform action pla imI, in ger onomic growth in the City, and eseially in Pudong. Risks: Delays are possible in the constrcto of the IRR viaduct, but th risk is cnsdered small. This project is the top-priority road invetment of Shanghai; furthermor, a very smilar project (IRR Stage 1 under the SW"r I project) i under way, and te minor deays and difficulties in its implementation hae xdeady prvided use leson. There is dhe risk that inadequate attention will be paid the surfae traffic engineering works and minor investmts needed to realize the ful benefits of the ng road imvements. These aspects have been conidered to the extent possible in project design, and ShangLal Muniipalit (SM) is iely to resond quickly if problems do omcr. Te is also a risk that road trffic in the IRR corridor may grow much fster than anticipated at the tme this project was identfied, so ta the IRR will once again expiene seious congestion. While this i possible, the extnsve tansport invstment program of SM should enswe a growing taffic capt to counter this rsk. Fmally, the risk that SM will not implement a taffic management strategy with suificient priority, thus diminishing the b-nefits of the tffic mlanagtement components of this priject, cannot be dicouted in the short term, but can be couantred by continuing strong support for the taffic management agencies in Shanghai, building on the progress wchieved in SMP I. Fmated Costs Lad Foredgn ltal ($ million) A. Inner Ring Road 229.7 257.5 487.2 B. Traffic Management and Safety 20.7 13.3 34.0 C. Public TIanspot Investments 17.2 11.8 29.0 D. Technical Assnce 0.0 1.1 1.1 Totl lBase Cost 26t 283. S Physical Contingencies 16.4 18.1 34.5 Price Contingencie 54.7 16.6 71.3 logl Pject Cost 338.7 318.4 671 Financing Plau Municipal Government 338.7 168.4 507.1 IBRD 0.0 150.0 150.0  Bank FY Il r2 1299 1Z 1221 ($S min) Annual 28.3 39.6 43.5 38.5 0.1 Cumulative 28.3 67.9 111.4 149.9 150.0 T'Oveo Cae gory: Not applicable Rate of Return: 20 percent for the IRR Stage 2 Maps: IRD 24983 and 24984.  - iv- CONTENTS 1 The Urban Sector In China .......*..................... 1 A. Demogphicand EonomicTrends ..................... 1 B. Nationa UrbaizationStrategy andIssues .............4 C. UrbanTransport ssues .............. * 7 D. Lessons Learned from PasPjt . ........... ... ......*.*... * 8 2 Urban Tansport In Shanghai . .................... 10 A. Introduction to Urban Shanghai ....................... 10 B. Economic Reforin in Shanghai ........................ 11 C. Master Plnning ............. , ........ 14 D. Road System ..... ....... .......... 14 E. Public Transport System . ................ 17 F. TravelDeimand . ......... .................. ... 19 G. Transport and the Urban Environment.................. 20 H. Urban Tr3ansport Institutions. .................. 21 J. SM Medium- -erm Transpot Investment Program ............ 22 3 The1 ProJect..... .. ... too.. 24 A. Origin and Formulaion . .................... . 24 B. Objectives and Rationale for BanM nvolvement. ........ 25 C. Dlescription..... ...... .. ........ . .... 26 D. Environment.................. 30 E. Lmd Acquisition and Resetement................... 32 F. Cost Estiates ..... ............. . ........ 33 G. Fi n . ... ...... ........... 34 H. Imiplemenitation........ . .. .... 00.0 . ... . .. .. 34 I. Prourement.................. 36 This report is based on the findings of a February 1993 apprai mission comprising Stephen Stares (Senior Transport Specils, Task Manager), Edward Dotson (Urban Transport Specialist), Hubert NovJosserand Tmrnspor Specalt), Randal Vick (ProcurementSpecialist), Gerge Mahoney (Engineer, consutant), (eorgeBeie(Transport Economist, consultant), Youxuan Zhu (estdement Specia, condutant), Husam Anwar (Enviromental Speciaist, consultant) and Gladys Frame Traffic Engineer, consulant). Peer Reviewers for the project were Richard Scurfield Princpal Transport Specialt), Andrew Hamer (Principal Sector Economist), Paul Cadario (Chief Administrative Officer). The Division Chief is Katherine Sierra and the Departent Director is Shahid Javed Burid.  V- J. Audbisgm t . . . . . .. . . . .. .. . . . . . . . . . .. . . . . . . . . . 39 K. Auditig *.......................... *************** Z* 4 L. Suprvion, Rqtig, and Monitoring . ................ . 40 4 Ecoonl EZva o ................. * *............ ..... 42 A. Eoonomic Rationae for Project Design ....... . . . . .............. 42 B. PrqectBeniefits .......................................... 43 C. Eonomic Rates of ReMt ................................. . 44 D. JojectiRWs ....... ......... . . I... ........... 45 S --I t Readied andRoununeio . ...... . . ............... 47 TAILU 2.1 Prmary Cities in a.m 1991 . .............. .. ......... 48 2.2 ShanShai:Projected Popadw ioandEmployment ..... .......... 48 2.3 Shanghai: PubHcTransit Fle,1981-91 ........ ............ 49 2.4 Shanghai: Shanghai Transit (S1) Fnancial Statistics, 1986-92 ....... 49 2.5 Shanghai: JintVenture DouCompaies,,1992 ....... ......... 50 2.6 Shanghai: FerryFlkeeandPasseng Numbers ................ 50 2.7 Shanghai: MototVehidleFleet,1981-91 .................. .. 51 2.8 Shangha: NonmotorVeidce(NM V)Fleet,1981-91 ............ 52 2.9 Shanghai: Projected Fiscal Renues . ........ ... ........ . 53 2.10 Shanghai: Alocaio of Resources in the Transport Sector......... 53 2.11 Shanghai: Mefium-Term nsport hnven" t Program .......... 54 ANNEs 1. Economc Reforni in Sghn i . .................. ....... 56 2. Reforn of Shnghai Trs .................................... . 63 3. Pocedurs for Procesing Tf MProgram Subprojects .. . 68 4. Techical Assistance, inuding Ouline Tms of RefeMr . ....... 73 5. BEnirmentalAsc Asp" oftie IaRingRoadStage2 ........... 89 6. Ree tAspts of the Pject . ........... ........... 99 7. Project Cost Estiniates ............................... 114 8. Project Mna tO aiTechnical Assstance Summary and Impemen Schede ................... -.. ... 119 9. Disbursement Profeand Expenditure Flows .................. 122 10. SupervisionPlan ...................... ............. 129 11 Project Mlottorig indices .............................. . 130 12. Economic Evluaim ................................ 132 13. DocumentsAvailable in the PojecFile ............... .. .... 141  -vi- CRT lwr Ring Road Typical Cs-Sectons MAN IBRD 24983 - Prject Locaion IBRP 24984 - Draft Trffic Maagement Strategy  - 1 - 1. THE URBAN SECTOR IN CHINA A. DMwOGRAPC AN ECONOM IC T s 1.1 Population. China alrady has, in absolute terms, the world's largest urban population. It is undergoing the transiton from a rural to an urban society rapidly enough that, by the start of the riew century, one half of its population wou-ld live in officially desipated cities and towns. In terms %f land mass it is the third-largest country on Earth (after Canada and the Russian Federaion), with a total area coverng approximately 9.6 million lm2 (3.7 million mi) including 80,000 km2 (31,000 mi2) in some 5,000 offshore slands.Jj Its population-estirnated at 1.16 billion in 1991-is the largest of any country in the world and grew at 1.5 percent per year on average during the period 1981-90. About 305 million now live within the boundaries of China's 479 designated towns and cities.2/ Temporary residents swell these numbers by an estimated 60 nmillion or more on any given day. The majority of urban settlements (80 percent) are located in the coastal Areas amd central region where China's arable land resources and economic activity are concentrated. Twenty-eight cities have populations greater than 1 ni}lion (accounting for 6.5 percent of the urban popuation), and 140 have populations between 200,000 and 1 million (32.2 percent). 1.2 Not all urbaniation is occurring within the urban administrative areas. An important phenomenon of recent economic growth has been the mushrooming of township and vfllage enterprises (TVEs) in rural counties on the periphery of larger cities, causing a densification in land use and budding urbanization outside the designated urban areas. It was due largely to administrative boundary reclassification that the registered urban population grew at a rate of 5 percent per year between the census of 1982 and that of 11 Including Taiwan (35,990 km). ZJ Chia's population statistics are unclear as to the urban component. Official staistics differentiaw between agricultural and icultual worers, but eiter class may live legitimately (and sometimes illegally) in an urban or nourban area. The igures quoted here are nonagricultual population registered as ling in urban areas. Estimates of the agdcultual popuation living in cities either as contractors or illegal migrants are uaailable but could be a high as 20 percent of the registred population.  -2- 199C. This rate can be expected to accelera in future as a result of both push and pull factors.Y 1.3 Under the impetus of the government's economic development stagy urban distict populations (including those of older coastl cite) have begun to grow more rapidly in recent years, reflectng an increased use of migrant contrac labor 41 and the relaxatton of wban residency controls in the wake of urban food price reform. Increased retent!- n of revenues at the local level has allowed the ovemrl scale of municipal residential and nonresidential investment to grow rapidly-adding 6 percent to the existing stock each year and aconting for 10 to 15 percent of urban gross domestic product (GDP). Dedensification, however, proceeded slowly in the absence of a well-developed land market The size of the built-up areas of cities and towns expanded only some 3 percent a year on average during the past decade. 1.4 Economy. Most of China's spetcular economic growth is occurring in its cities. Since 1984, urban economic acdvity-which now accounts for more than half of GDP-grew at weUll over 10 percent per annum. Moreover, most of the balance of production occur in the rmal counties within the municipal area surrounding the cities. Municipalities therefore account for over 90 percont of China's otal industdal output. Open unemployment in cities is low, at about 2 prcent, and urban poverty is virtally unknown. Incomes (and savings rates) are relatively high in urbn areas. Annual income per capita in urban areas in 1990 was Y 2,140 compared to Y 630 in rural areas. Total personal savings deposits on balance in 1991 from urban dwellers was Y 539 billion or 59 percent of total deposits. 1.5 For historical reasons related to weak domestic trade facilities and a dliberate policy of self-sufficiency at the local govemment level, Chinese cities and their economic strcture are charactizd by intense, divesified industrial production, high levels of state ownehip of enterprises and low tertiary (service) sector activity. In the past, litde play was given openly to the traditional role of urban centers as facilitators of economic activity. While official statistics d not capture explicitly some of the de facto service sector activity within industry and govemnment, for the 479 cities of China taken as a whole, 13 percent of municipal GDP is recorded as derived from the primary industry l/ A sufficit concentidon of rua industy (to dh extent of a total local GNP of at la Y 200 million) and housing (i.e., a gu popuaion of at least 60,000) is justificaion for designation of the rual area concened as aubn aUdmistrave disrct. no Ministry of Constuon (MCon) estimates ha some 178 new cities will grdu in tis way from among China's more than 44,000 ural townhips by the yea 2000. The prion cf municipal services to such new cities reprst a major challengp in view of u in infrasructu due to th relatively unplanned and unsered natur 4f earier nual industrial and residential growth. 4/ Beas only regst-ted citizen ae reflected, considerable underrportng of the de facto urban population occurs du., to the presenc of an unregisteed m:ant population. Iarger cities reognize the presenco of aflotiDg populatiDons compising up to 20 pect or more of the actual popuation. The reason for large migrant pOpulations is A Ai har to find. China's cities account for over 90 percent of its gross industial output They a a major source of employamt (26 percet of total wokfo) and relative proweity.  - 3 - sector and 56 per t from the cwody sector-in contrast to intnational levels for larer cities of near zero and 30 percent, respectively.dI Impotntly, state-owned enterprises are responsible fr%r between 60 to 70 percent of urban economi acdvity, but some 20 to 30 percent of hese are unprofitable and result in a seious drain on local economic resources. 1.6 Manufacturing in China's cites is ypically very diverse, revealing lttle selectivity or lization, while opating wit . plants that are, by almost any measure, generally obsolete in layout, technology, inventory management, quality control, labor efficiency and raw material udlization rates. Much of this industry is located in the built-up areas of the city, often within the boundaies of the 1949 city, uting 20-30 percent of the land. In Hong Kong, by contrast, industry uses only some 6 percent of the built-up area, while in Seoul, the proportion is 9 pent. In North America, the norm is 10 percent ar Iess.=/ However, if the core areas of the old industial cities are to shift from industial to more intensive commercial uses consistent with land values, investments in infatucture will have to greatly increase the central core area carrying capacity." Road space, for instance, would have to be increased by a factor of two.7/ This would also require a rationalization of land use. 1.7 Admisan. China is a unitary state govemed in many respect similar to a confedertion since ependiture and revenue authority is, to a considerable extent, decentized to local government. In China's local government structure, cities do not appear as separate corporte entities. Urb.izd areas are generally organized as district administraions subordinate to a municipal or prefectural authorty, which also administers a large contiguous rural area. Typically, only about 2 percent of the municipal area is built-up urban development. There are cunrently iiree muncipalites in China with provincial-level rank (i.e., direcdy reporting to the State Council); 183 with prefectural rank reporting to ther respective provincial goernors (although about 20 now have direct reporting pnvileges to central government on economic development matters); and 248 with county-town rank reporung to the county administration.8/ I/ in China, ts lowet percentaes of industia production axe found among tbe cties of the scudie, provns, considered the most advanced in reforn their economy. Even there, the proporion contibuted by the seconday sector totaled or exceeded 40 percent. In Shbnai, th proportin rses to 65 perent. i1 Wo.d Bank China-UrbanLandManagenme: OptionsforanEmegngsMar4 Ebonon. Report No. 10692-CA. The pectg of built-up land area devoted to industrial uses ia die cities studied vaies from 18 peret in Senzhen to 27 percent in Guangriiou. An additional 3 to 6 pert is taken up by wrhaou. (Taken from Lin Ziqun, lhe Developmen of Urban Cotrucion Land in Cna daring Mhe 1980s, Mnsty of Conruction, 1992.) 2/ Within ShaDai's inner-rig road area, equivalent to the 1949 city boundaries, only 5 percent of the land is used for tansportaton, ves t norm in developed country cities is 20 Peren or more, including such high-density centers as Hong Kong and Singpote. I/ *Towns are not ormaly sept admisttvejurisdic but are included in the Stat Statistca Bures' data an urban poplwation when the town population exceeds 3,000, of which 85 perct are involved in n occupations.  -4- 1.8 Chinese municipalities cuently resemble virtual city states in terms of their comprehensive responsibilities and powers for economic as well as social affairs within their jurisdictions. Although cental core and line ministries are replicated in the municipal administration, direct communication with these cental authonties is confined largely to administrative and technical guidance and occasonal negotiations over economic resources.2/ The emergence of a nonstate sector in China is changing the role and responsibilities of local government significantly. Recent measures aimed at separating the roles of govemment and industry are now being implemented aggressively at all levels of government. If such meuns are successful, local governments in China would in all lihlihood come to icreingly resemble their foreign counterparts in terms of their role and rewsponsibilities. These would be mainly directed towards fcilitaon of industrial and commercial activity, and maineance of social order and welfare. These residual responsibilities would include the planning and provision of public services and infrastructure. B. NATIONAL URANMZATION STATWY A ISSUES 1.9 China has, since 1949, tightly managed its urbanization process in order to combat rual-urban migrtion, limit urban welfare subsidy costs and conserve arable land, as wall as to adjust what was regarded as undue economic primacy. However, respoasibility for China's urbanization strategy formialation and implementation does not rest wih a single ministry. The above-mentioned goals were pursued with varying degrees of success thxaugh a number of administrative and fiscal measures by various ministries, as well as economic incentives, all with different emphases and impacts over the years. For example, prior to the recent promotion of rural industry, the development of small- and medium-size cities was promoted-especially in the central and sparsely populated western regions, and in the form of satellite towns adjacent to major cities.lQ/ Nowadays, specal economic zones are the favored strategy and tomorrow, urban renewal may become the dominant mode. 1.10 Notwithstanding ongoing initiatives, the future urbanization strategy is more likely to be subsumed into the current economic transformation since the nexus of 2/ The Ministy of Construction (MCon) s the cenral agency resp_ ble for urba infrastruct development planing at the national level. It also provides guidance to the provinces and the three centraly controlle municipalities (Beijing, Shanghai, and Tianjin) on matters concerning lan-use and infstuctr deelopmnt plans, and oens on technical standards and critea. The National Environmeta Protetion Acy (NEPA), separated in 1988 from the Ministy of Construction, is esponsible for setting environmental policies and providing guidance to the provinc on environmental matters. Enfocemet of traffic and road safety laws and regulations is the rsonsibility of the Ministry of Public Security (MPS), which is also responsible for intemal secuity. IQ/ Some 290 cities were created between 1950 and 1988, of which 69 were located in the westem region and 125 were in the centml tion. According to the Ministry of Construction the number of cities is expected to increase to about 645 by the year 2000. The criteia for creation of a county-level municipality (or town) inclWdes (a) a nonagricultual commumity of at least 60,000, and (b) an economic base with a GNP of Y 200 milion. Applications are processed by the Civil Affairs Bureau for provincial-level approval and confiumation by State Council.  government's reform progm lies in the cities. The eauing transformation to a regulated market economy will impact them significantly in loosening controls and increasing economic activity, thereby causing urbaniztion tc uccur differently than in the past- perhaps somedmes in conflict with the above-mentioned goals. During the last decade, particularly after 1984, China's m palities have already undergone a seres of policy and institutional reforms. Some of the areas affected and issues involved are discussed below. 1.11 Economic Structure. Using indicators from comparative cities in Asia and among developed countries it is expected that, as the Chinese economy develops, the secondwy sector's share of the larger cities' output would fall to about 30 percent, with less than 15 percent of their land being occupied by manufacturing industry of an increasngly hi-tech nonpolluting nature. The displaced industry could be expected to relocate-pricularly as transport links in.prove-bo smaler centers with comparative advantages in land, labor and other input costs. China is already undertaking a swift increase in its fonnal service sector activity, which can be expected over time to shift land use from industrial to commercial purposes. 1.12 China's industrial reform program and the introduction of labor mobility requires that enterpnises divest of their housing and social security responsibilities. Measures adopted in the housing sector with the assistance of the Bank include creation of a housing market and housing finance system which, while likely to accelerate land development, could significantly reduce state involvement in housing and related secondary infrastruct provision. The establishment of a state social security system is being explored, including the creation of large pension and insurance funds with potentially important implications as sources of long-term financing for major infrastructure investments.II/ 1.13 Urban Renewal. InTo troublesome consequences of China's past urbanization strategies are that urban densities are among the highest in the world and that the urban form of many older cities includes a canter frozen largely in the pattern of buildings, infrastructure and uses imposed in the immediate post-1949 era. In China's megacities such as Shanghai, average densities range from 1,200 to 2,900 persons/ha. These characteristics are indicative of very high levels of congestion, poor environment and inappropriate land use, leading to an urgent need for urban renewal as well as expansion- and the infirastructure investnents to accompany them-in order to achieve the efficiency required for local industry and commerce to compete in domestic and international markets. Presuming a sustained real positive increase in personal incomes, it can also be expected that urban dwellers will seek higher standards of housing and services. The resulting investments will be massive in scale, and may involve significant spatial II Assistnce is being provided thwugh a preparatio of a forhoming Housing and Social Security Refoi -in Project basd on earlier studie by the govenm and the Bank including Report No. 7605- CHA, ReoJb,ing Socka Seudly In a Socilist Economy (1989) and Report No. 8415-CSA, C7hi= Urban Housing RJWobmL Isses and Implemenation Options (1992).  - 6- targeting, some of which will be directed at the densdy populated old core areas of the city. 1.14 In a Man ent. Municipaliies are solely responsible for proving, ining and f g a fill range of public services and infastucture in urban aea though a Municipal Construction Commission, which oveees the activities of a large number of public utlity corporations and svice bureaus, and their subordiate departments. Invetmeuts, based on a five-year program conistent with the municipal master plan approved by State Council, are pamned at the municipal or disict level (according to the dgnificance of the service), and annual appropons are sanctioned by the Economic Planning Commission within budget limits established by the Fiace Bureau. All re urban infrastructure projects are reviewed by MCon. Large projects (exceeding Y 200 million) require approval by the State Plnning Commission (SPC). Those involving foreign loans require approval by both the SPC and the State Council. 1.15 In the past, the municipal budget provided all investment funds but increasingly, capitl development finance is now raised by intemal cash generation and domestic borrowing by the agencies concerned, usually from nonbaning sources or intemra revolving funds. Maintenance and recurrent expenditures are planned separate from development activities according to fixed schedules; budgets are financed entirely from charges and ues allocated by the Finance Bureau. Notwiti4anding this process, investment planning suffers from poor coordination among bureaus and between municipal andistrict levels. Moreover, because of the significant role of extrabudgetary funding, many plans escae normal budget scrutiny. with the result that investment efficiency can be quite low. The system also still incorporates many features and nigidities of the supply- driven, planned economy that are inapprate to the emerging market economy. 1.16 The emergence of housing and land markets, the trend towards urban renewal, and the increasing locational flexibility available to industry and housing indicate that land use and sectoral plans reflected in the municipal master plans are becoming obsolete. Such plans nevertheless form the current basis for costly trunk infrastructure network planning (although emphasis on urban waste management services and environmental protectwn was quite weak or given litde prominence). China's urban land use planning mechanism is generally strictly enforced in urban districts and is now ill- suited to future urban development planning needs since it aes litde account of economic impacts of zoning and subdivision controls. The planners, however, have no authority in rural counties where TVE growth is burgeoning without plaming controls. Sectoral planning also suffers from similar rgidities, such as planning and design critena and unit costing methodology imposed by Beijing. The inceased dependance of municipal services on direct cost recovery suggests, however, that such criteia should become more responsive to demand and willingness to pay. Costs are being increasingly contained by competitive bidding, but direct labor or force account construction methods are still used extensively. 1.17 al nance. An important factor in the historical rate of urban growth has been the role of cities in national resource mobilization. Under China's  7 - dcentalized fiscal system, municipal revenues are shared with national govermt for redisribution. Revenue retention rates were often very low in the past; isufficient in many cas to allow significant expanion of fixed assets or even to maintain them adequaty. Capital expenditure funding either in the form of grants or credit was largely unavilable to the municipal services sector and was directed mainly to the production sectors rather than infrastuure. Much of the funding to industry was, and still is, absobed by inefficient and unprofitable state enterpnses. Since enterprs, rather than the municipality, ae responsible for many welfire functions including housing provision, furhe baclogs and shortages arose. Many cides, Shanghai among them, enterd a vicious ial of decline under these mstances-a trend which was arrested in the mid- 1980s with the onset of economic reform in urban areas. 1.18 As a feature of the economic reform program, municipalites have been able to reain a greater share of their revenues. With the s n of induswial income taxes and pofit remiuances as well as increased reliance on nontax revenues, a significant share of economic resources is now raised and allocated outside the budget process. As part of this transiton, wages and prices have ineased substantially, so that urban services prices (water supply, bus fares, town gas, etc) now reflect far fewer subsidies and indicate a more autonomous role for the responsible agencies. In addition, access to external finance through bond issues and joint ventures with foreign investors is being explored and the revenue base is being ecpanded. Recently a land-use rights market has emerged that is allowing icipalites to monetize land values, thereby providing a significant new source of local income to spport both growth and renewal. Notwithstanding this significant prge, the municipal finance system is in urgent need of (a) restructuring, in order to reflect the residual role of the state sector, (b) reforming, to an appropriate role in a more efficient naional fiscal system, and (c) modernizing, to play a more effective role in planning, budgeding and supervision of municipal finances. Towards this end, during 1993/94 the Bank will assist the government with a study of municipal finance as part of its series of cental-local fiscal relations and fiscal reform studies in China.1ZI C. URBAN TRANPORT MISSES 1.19 Urban trsport affects the productivity of cities in many ways. Fftt, the costs of production of goods and services are influenced, both directly and indirecty, through the time required to move people and freight. Production costs are higher when distribution tk place in congested conditions and employee welfare costs are higher when employees have to undertake long and slow joumeys to work. Second, the constuction, oneration and maintenance of the urban transport system is capital-intensive, and to the extent that there is less than full cost recovery, can require a significant prwportion of government resources. Third, the form of city development itself is dependent on the way in which urban tasport is provided; the impact of poorly planned and functioning urban transport on city land-use development can result in an inefficient use of land and in unnecessarily high production and distribution costs. Last, it is AZV Rcpot 7065-S, ana& Reiwe MobilAdon d Tax Polky (1990).  - 8 - incrasingly recognized that urban transport can have a serious negadve impact on the quality of urban life, by creatng air pollution and noise. If these impacts are not mitigated, they can affect the health, working capacity, and lifestyles of urban populaons. 1.20 In urban China, the, number of persons per motorized vehicle ranges from 30 to 85 persons per vehicle, which is very low. The number of private cars in China is also very low-about 170 to 320 persons per vehicle, and the number of motorcycles has been severely restricted in most cities. On the other hand, the number of persons per bicycle ranges from 1.2 to 2.1 and the use of public transport is extensive. Despite the crucial role of public trasport, due to an absence of any increase in bus fares for about 20 years and difficulties in obtaining municipal funds, investnent 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 in use. In many cities, the situation has deteriorated to such a point that it is quicker to ride a bicycle in the central business district (CBD) and other congested areas for shorter joumeys than to use public transport. 1.21 Urban transport problems in all major Chinese cities are severe and worsening. In the larger cities, transit times are excessive throughout the day on most main corridors leading to the CBD and to main 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 pemcent in developed countries; (b) poor utilization of the road space due to mixing of motorized and nonmotorized vehicles; (c) poor road user discipline and safety enforcement; and (d) severe underinvestment in the public transport systems. The traffic situation in cities has been deteriorating over the past few years as indicated by decreasing travel speeds in the CBD and an increasing number of accidents. 1.22 Heavy competition for limited city development funds for capital works suggests that maximum advantage should be extracted from low-cost improvements and operational efficiency. The thrust for such improvements would lie in improving the use of the current road system capacity and upgrading the public transport system to make it a more desirable mode of travel. There is an urgent need to introduce modem concepts and improved design of urban transport and road systems. Central government policies and guidance in this respect are not well developed and local officials in charge of urban transport need to be further tained in design, operation, management, and traffic regulation enforcement. For the public transport system, operations need to be made more efficient through better route and schedule design, and improved maintenance of public transport vehicles. D. LESSONS LEARNED FROM PAST PROJECTS 1.23 The Shanghai Metropolitan Transport Project (SMTP I-Credit 2296-CHA, 1991) is the only stand-alone urban transport project in China, although there are important urban transport components in the ongoing Medium-Sized Cities Development Project (Loan/Credit 3286/2201-CHA, 1991), Liaoning Urban Infrastructure Project (Loan 2219- CHA, 1991), and the Tianjin Urban Development and Environment Project, (Loan 2387- CHA, 1992). Experience of urban transport projects in other countries can be summarized  -9- from a recent review, underftken for the Medium-Sized Cities Urban Transport Ptoject in Mexico (Loan 3559-MB) of 15 Project Completion Reports and/or Project Audit Reports in the rbtn transport and development sectors worldwide. Ihe mai lessons identffied as rlevat to China and the consequent actions in the proposed project are discussed below. (a) Weak itonlcapacity affecdng planning, design and implementation. China is relattvely strong in designg and implementing myjor infrastuce projects. Shanghai has shown this capability clrly in disbursng nearly $0.8 billion in IBRD/IDA assistance on schedule during the past decade. Early indications are that te infrastruc component of SMTP I will be completed ahead of schedule. However, China is not strong in tansport planning and traffic management fields, largely due to lack uf experience (coping with the motor vehicle is a relatively new problem in China), and is receiving assistance through SMrP I in these areas that will be continued under the proposed project. (b) Weak enforcement of traffic regulations. A lack of resources for enforcement has been cited by Shanghai Public Security Bureau (SPSB) as a reason for the somewhat slower than expected implementation of certain parts of the traffic management component of SMTP I. Future schemes would be, as far as ptical, self-enforcing depending on physical rather ta rguatory methods of traffic control. SPSB is fully involved in the project design and is expected to have sufficient "ownership" and commitment to undertake enforcement. (c) Inicient public tmasport operations. Public transport opeations are generlly inefficiently run when in the hands of public enterprises. China is no exception, and the bus services of many Chinese cities, Shanghai included, have been neglected. Bus transport is likely to remain the largest passenger carrier in Shanghai and, in light of urban subsidy concerns, is being transformed to become commercially viable and is receiving technical assistance under SMTP I. (d) Lak of consideration of environmental impacts-a feature of most previous projects, and a potential cause for concem in China as the level of motrization increases. In China, environmental analyses are required for all major projects, but experience and skills are lacking to complete these most effectively. Political awareness in China of environmental issues has grown significantly in recent years to help ensure implementation of findings in project design. 1.24 More generally, Bank experience from environment and urban infrastctue investments in Shanghai and other cities in China confirm the lessons from the urban nport sector. Environment and urban infastructe projects have demonstated high implementation capacity, a tendency to postpone the implementation of financially efficient cost-recovery policies, and the need to adopt long-term plans for the provision of essential urban environmental svices.  - 10- 2. URBAN TRANSPORT IN SHANGHAI A. 1WIRODUCMN To URBA SHANGHA 2.1 Shanghai Municipaity (SM) is one of three provincia-level municipalies in China, the others being Beijing and Tianjin. The municipality compies a total aea of some 6,340 km2 consisting of 12 urbn districts (the city proper) and 9 nud counties. Of the total 12.87 million registred population (1.2 percent of China's total), the nonagricultura (urban) population is about 7.5 million. To this must be added about 2 million unregistered residents, of which 1.9 million live in the urban area. ITe natra population growth rate was just 0.37 percent in 1990, but growing numbers of contact workers are migrating from remote runl areas to fiL jobs in Shanghai and increasing the demand for sevices. By the year 2000, the municipal population (including unregistered residents) is projected to rise to 17 million, with an urban populton of 11 million (ale 2.2). Shanghai's built-up urban area covers only 280 km. Ten contguous urban disicts cover 254 kWn2, and two additional urban districts contai the satellite towns of Mingbang and Wusong. The city proper rankl as one of the densest settlements in the world with 29,646 inhabitants per lkn2. 2.2 Shanghai is one of the country's oldest and most important industial bases and is a center of commerce, science, higher education, trade, and finance. It is the largest port in China and lies at the head of the Yangtze Economic Zone (compsing the Municipality of Shanghai and the Provinces of Jiangsu, Zhejiang, and Anhui), which contains 182 million people and accounts for some 25 percent of the natnl output of industry and agriculture. This region has the potential of becoming one of the largest centers of internatonal trade and commerce in the Pacific region. The total labor force of the Municipality is estimated at 9.5 million, of which 11 percent work in the pfimary sector, and 60 percent and 28 percent in the seondary and ttiary sectors, respectively. Shanghai GDP per capita reached Y 6,663 in 1991, well above the naional average of Y 2,163. 2.3 Growth in the secondary and tertiary employment sctr is exected to expand the labor force to 10.5 million as Shanghai enters the twenty-first century. GNP in 1991 was Y 85.8 billion (4.3 percent of the national totl), with 71 percent of value added coming from primary and secondary industry. Rapid growth in teiry or services sector activity is epet to contnbute to increased GNP gowth in future. Shangh'; average labor productivity of Y 29,183 in industry, average annual wages of Y 3,375 per capita, and savings of Y 1,118 are among the highest in China. Its labor force is among the best educated but also the most elderly in China, and employcrs face steeply rising pay- as-you-go pension costs. Shanghai industry generaed Y 20.2 billion in pretx profits in 1990 (down from Y 22.8 billion in 1988) wivh a net fixed asset base valued at Y 43 billion  - 11 - and woring capital of Y 31 bMion. These stics, however, mask an economic growth rate that has been declining during the past decade and which was among the slowest in China in 1990 (GNP grew by ondy 3.5 percent that year compared to the national average of 5.2 percent-a sian that is typical of China's most heavily industrialized, state-owned local economies). In common with a national surge in economic performance during the first half of 1992, Shanghai showed a 14 pent increase in GNP on an annualized basis. However, the sustainability of strong economic growth will depend on the effectiveness of fte economic reform program on which Shanghai has embarked, as well as the availability of adequate infrastructure and efficient management of the residual public sector and its finances. B. ECONOMIC REFORM IN SHANGUAJ 2.4 Shanghai's development has historically been linked to the fact that it has the largest port fcilities in the Yangtze basin, and indeed all of China. As China's intrnational tade grew through the nineteenth and twentieth centuries, Shanghai prospered, becoming the nation's busiest port, its leading commercial, financial and manufacturing center, and its largest city. After liberation the government was, however, detmined to achieve more balanced regional development. It therefore limited investment in Shanghai and tapped the city's resources to support development of the national economy. Financial constraints limited investment in infrastructure and productive activity, while economic controls restricted the response of industry to changing economic cditions and impeded the naural evoluton of the region's economy. 2.5 A more open policy regime would have seen Shanghai's industry transformed from a low-techmology, energy-intensive sector to one characterized by high technology, high value added and low environmental damage. Moreover, the entire economic structure would have evolved into one where the manufacturing industry was relatively less dominant while the teriary sector, especially commerce and finance, became the major genertors of increased income and new employment. In more recent years, the central government has recognized these problems and has decided to revitalize the economy of the Yangtze basin with Shanghai as "the Dragon's head." It has reduced Shanghai's fiscal burden, encouraged reform experiments and sanctioned the creation of the Pudong Special Area to attract foreign investment, promote export development and stimulate the growth of the entire region. 2.6 The Government of Shanghai recognizes the need to reform and transform the economy. It is also, however, aware that these necessary processes will themselves impose certain costs on the municipal economy. Shifting the structure of the economy to raise the share of tertiary industry from 30 to 40 percent or more, for example, and changing the structure of industry will impose significant costs. A considerable amount of exisdng industrl capacity will be rendered obsolete and large numbers of workers will be displaced. Some of these workers will be reabsorbed easily; others will have to be retrained, but many may find it difficult to find new employment and the living standards of these workers must be protected. It is recognized, however, that failure to carry out reform because of fean about its employment consequences would result in the long-termi  - 12- decay of Shangnai's economy. Increasing numbers of firms would find it difficult to compete with newly emerging firms in other provinces. Attempting to maintain the industries would impose high cost subsidies on the municipal budget, limiting fimds for construction and maintenance of vital infrastructure. The city would thus be fced with a vicious cycle of decying infrastructure, aging industry and fa living standards. 2.7 Policy reforms introduced over the past decade have already significantly increased the exposure of Chinese state industries to market forces, with measurable impacts on productivity growth. Serious constraints remain, however, to the more fundamental economic restructuing of the urban industial sector. Shanghai embodies many of the more serious problems of an obsolescent industw structe and locational patten, and has also suffered from the deterioration of its physical inftrcture base and neglect of pollution control. Although the city was initially slow to adopt system reforms launched in other coastal provinces, the curent leadership is developing ambitious programs for the transformation of Shanghai's economic base, including muliecl reforms and an enhanced role for foreign investment. 2.8 The long-term vision that underlies the quickening pace of change in Shanghai is one of a city whose economic basis will have experienced significant change. The principles include the creation of basic conditions for (a) fair competition among enrpries, and free entry and exit to the market, (b) efficient financial sector management and public revenue generation, and (c) improvement of social iucture and environmental management, together with an integrated, demand-driven approach to xpenditure plamning and land management. The municipal leadership foresees a renewed outward orientation and a revival, especially in the city center, of the service economy (finance, trade, tourism, etc.). Major changes will be called for in industrial structure- some of the old heavy industies will need to be closed or relocated to outlying areas (or outside the province altogether), while more technologically advanced light industies, better suited to Shanghai's location and resource endowment, are expected to be developed on all increasingly decentralized pattern. Implicit in this transformation are such aspects as (a) a satisfaory legal and institutional basis for both the formation and financing of new enterprises, and (through merger, acquisidon, bakruptcy, etc.) the transformation or closure of obso!ete firms; (b) enhanced enterprise autonomy in development, opeations and decision making with regard to pricing, employment, trade, investment and distribution of profits; (c) the ability to deal with redeployment of labor (unemployment protection, retaining, and in some cases relocation and rehousing); (d) the development of land markets to facilitate emergence of more efficient pawrns of spatial distribution of economic activity; (e) a strengthened capacity for integrated urban planning and public sector management; and (f) extensive investments in the expaasion, reconsuction and moderization of the city's neglectd and obsolete physical infrauce, the financing of which (whether through user charges, domestic or foreign bonrowing, or even possible direct private invesUnent, etc.) will also represent a major challenge. 2.9 The task facing Shanghai's policymakers is complex and demanding in its research and investment needs. In 1990, with Bank assistance, a process was begun to (a) articulate Shanghai's comprehensive reform policies, (b) establish detailed acdon plans  - 13 - for memtation f eforms, and (c) link the future public expenditure program and institutional development of Shanghai to the reform program. The main elements of Shanhi's eform prgram are in the ar of enterprise reform, fiscal and financial reform, and housing, ucture and social security reform. Other importa related elements of the program include pricing and trade refom, land reforn, and labor market reform. 2.10 The integrted economic reform planning process was initiated in February 1991, following an Iteraonal Workshop on the Economic Development of Shanghai sponsd by SM, the Bank, the United Nations Development Programme (UNDP) and the Ford Foundation. The workshop's conclusions recommended an agenda of reform piorities that was subsequently developed by SM into a target timetable of preliminary objectves and measures coverng four general, inrrated areas of action. This prteimnary action plan was further developed by SM, through consultation with experts povided by the Bank and UNDP, in September 1991 into the Shanghai Economic Reform Acon Plan (SERAP). Ihe SERAP was subsequently adopted by SM as its guiding policy framework and recogized by the Bank as a basis for its future operations in Shanghai. hi light of (hina's changing icumstnces and growing experence, tie SERAP was also recognized as a evolutionary (or living") document ftat would require amendment from fime to dme as well as dtaed development. The Action Plan was furth refined at an anniversary meig in Shanghai in Mrh 1992. Emphasis has now shifted to more daed acfion planning by SM in the six priority subsectors with further UNDP and Bank aiance. Progress on these subsector action plans and the overall Economic Action Plan was rvwed by the Bank and SM in November 1992. Under the umbrella of SERAP, four projects (two transport, one environment ana one industry) are currently under active prepration for possible future Bank financing. Further details and discussion of the SERAP may be found in Annex 1. 2.11 The SERAP contains several key actions relevant to the transport sector, induding: (a) adjustng public utility tarffs with the medium-term objective of achieving profitable, efficent operation; (b) analyzing the financial and opeational perfonnance of public transport and adoption of a plan fo attaining financial self-sufficiency; (c) stgthening the authority and capacity of selected public utility enterprises to be fuly responsible for their own planning, investment, operation, and adminisaton, and their profits and losses; and (d) revising sector plans and policies to confonn to the revised Shanghai Strategic Master Plan. 2.12 Mobility of labor and the development of a land market are also objectives of the reform prgram. These will have a downstream effect on the transport sectr since  - 14- they will change travel patterns and the demnnd for new facties and services. In addition, SM is placing great emphasis on the development of Pudog, on fte east bank of the Huangpu River (pam. 2.14). This development i seen, inter alia, as facilitting entepris restructing, as wel as utban resgtctrng in thf, existng city center, and is theefoe regarded as contrbutn direcdy to the economic reform progam goals. 2.13 The futue proces of reform in Shanghai has a dual signficanct. First, as indicated above, the transformaton of the city itself is critically dependent on progress in several areas which are at the cutting edge of reform in China (e.g., land and labor market development, enterprise , housing reform). Secondly, there are policy area where, through conscious choice, Shanghai is set to emerge as a leader of reforms. Crucial among these is the refonn of the public sectr and specficaly the infructur sector. Shanghai's experience as a pioneer in a number of these policy are can be edxcted to establish models of market development, legal and regulatory fameworb and instittional desin that will be of considerable influence in future policy formation at the natal level and in or prvinces and cities. C. MASR PLANNG 2.14 Shang's Urban Master Plan was approved in 1986, and a revised plan now in prepation is scheduled for compledon in 1994. The main change to be intoduced by the new Master Plan will be fte development of the Pudong Special Area and the redevelopment of the old city, Puwd. The Pudong development entails developing some 150 km2 of largely agrculal land located on the east bank of the Huangpu River to house a population of between 1.5 and 1.7 million in the year 2000, along with providing between 0.7 and 1.2 million jobs, thus representing more than 10 percent of the whole municipal area. On this greenfield site, SM aims to create a high-technology and terary atvity centr that wil serve the whole Yangtze Basin. Major new port facilities will be coupled with a free trade zone, rail access and a new international airport. The development of Pudong is ewectd to encoumage firms to relocate out of the existing city on the west bank of the Huangpu River, thus reducing densities and permitting the removal of unsuitable industries fom the city center. Planning and development is proceeding at a rapid pa