China - Chongqing Urban Environment Project

Report No. PID5607 Project Name China-Chongqing Urban Environment Project (@) Region East Asia & Pacific Sector Urban and Environment Project ID CNPE49436 Borrower(s) Government of China Implementing Agency Chongqing Municipal Government (CMG) Mr. Zhou Lin Jun, Director, Chongqing Municipal Management Office (CPMO) 248 Renmin Road Chongqing 630015 People's Republic of China Tel: 86-77-6387-7677 Fax: 86-23-6387-7822 Environment Category A Date PID Prepared March 17, 2000 Projected Appraisal March 15, 2000 Projected Board Date June 15, 2000 Background 1. Background: Chongqing's Development and Environment Chongqing Municipality, originally part of Sichuan Province, was promoted to municipality rank in March 1997, giving it a status similar to the municipalities of Beijing, Shanghai, and Tianjin. Chongqing is now the world's largest single metropolitan area, with a population of about 43 million, including some 6 million urban residents. Chongqing City, located at the confluence of the Yangtze and Jialing River, is home to 2.5 million people, followed by Wanxian with 0.3 million and Fuling with 0.2 million. The population in these three cities is growing rapidly, and is expected to reach 4 million by 2010. Chongqing has become the largest economic center in southwest China, growing at approximately 10 percent a year between 1980-1994. The central government's policy between 1987 and 1992 of providing incentives for growth in coastal areas left inland cities behind, and Chongqing's per capita income has lagged 30-40 percent behind other major cities. With its recent promotion in status, Chongqing is now poised to catch up. Its location at the confluence of the Yangtze and the Jialing Rivers has made it a commercial hub for shipping; it also has a diverse industrial base which includes coal, iron, petroleum refining, metallurgical, chemical and petrochemical operations. The development of light industry and manufacturing (autos, motorcycles, electronics, food processing, cosmetics) indicates an attempt to move toward higher end production. Chongqing now forms part of an emerging urban industrial corridor which stretches northwest to Chengdu City in Sichuan Province, and is increasingly affected by the Three Gorges Project  construction and related resettlement and infrastructure investments to the northeast. Development in this corridor attracts migrant workers from the surrounding villages, who typically take low income jobs and do not have legal urban registrations. Once in the cities, these workers have only limited access to public services. As income opportunities in agriculture shrink and urban-rural income disparities grow, the size of this "floating population" (already estimated at 20 percent of Chongqing's registered population) would increase substantially, exacerbated by lessening restrictions on in-migrations. As the number of legal and illegal urban residents grows, urban areas would face increasing pressure to provide affordable and accessible municipal services. Urban Environmental Issues: Chongqing's economic growth, in terms of population, industry, and agricultural production, has come at the cost of increased pollution of air, water, and land resources. Within China, Chongqing ranks first among 23 large cities in sulfur dioxide and eighth for levels of suspended air particles; Chongqing City is the largest source of organic water pollution in the Yangtze River Basin upstream of the Three Gorges. The impact on water quality in rivers, however, has been uneven: river modeling indicates that pollution has severely deteriorated the water quality in the Jialing and Wu rivers, while so far the Yangtze River has been able to absorb urban, agricultural, and industrial pollution loads while maintaining acceptable water quality, thanks to its substantial base flow and high velocity. Health impacts due to the poor water quality in the Jialing and Wu, however, have been substantial: intestinal infectious diseases such as hepatitis A and dysentery have incidence rates some 50 percent higher than national average, and coliform bacteria pollution are prevalent in many drinking water sources, as high as 15,000 E. coli/l in some parts of Chongqing. The completion of the Three Gorges Project, some 1000 km downstream of Chongqing, wiould reduce the velocity of the Yangtze River, increase its water depth, and alter the flow regime. From a river basin perspective, Chongqing is concerned with maintaining a water quality which would avoid eutrophication of the future reservoir, and protect its drinking water resources. From a local perspective, Chongqing must ensure that its supply of safe water is not endangered by deteriorating surface water quality, in particular near water intakes. In addition, the municipality plans to update inadequate urban environmental infrastructure taking into account future expected conditions in the adjacent river systems. In Chongqing municipality, almost all urban wastewater flows untreated into the adjacent river systems through open discharge points (in Chongqing city , there are some 200 major open discharge points scattered throughout the city) , mixing untreated sewage and industrial wastes with drinking water supplies. The municipal government recognizes the need to address these matters as a development priority, including remodelling drinking water supply arrangements, providing adequate wastewater discharge systems and wastewater treatment strategies, while addressing the problems of inadequate municipal solid waste management arrangements and open dumpsites located near the river which could be washed out. Currently, the capacity for wastewater treatment in urban areas is limited. Urban water supply has for the most part been adequate, but occasional localized shortages are likely to become increasingly severe, largely due to -2 -  limited capacity of the distribution system. Wastewater collection and treatment is very limited, covering only about 13 percent of the waste stream. Expansion of water and wastewater management capacity is hampered by the weak financial situation of the service providers, which before project preparation commenced were mainly through water supply companies and government departments for drainage and solid waste management. These entities find themselves in a transition phase where the traditional government subsidies have been reduced but the tariffs for municipal services do not yet cover the full cost of operation and investment. The municipality now encourages the creation of financially autonomous municipal companies, though historically such companies tend to lose money due to weak financial and operational management and relatively high per capita water demand, which in part is the result of low tariffs which do not induce efficient water use. Government Strategy: To address the growing need for municipal services, the government plans to curb pollution from urban and industrial sources and to expand and improve municipal water supply systems. Ambitious pollution control targets have been set for the year 2005, including a cap on the total amount of heavy metals in industrial wastewater at 1995 levels, and the improvement of surface water quality to meet national standards. Twenty-five percent of domestic and 65 percent of industrial wastewater would be collected and treated, far more than the present levels. To reach these targets, the municipality proposes to tighten the enforcement of existing standards, in particular for industrial pollution control; expand the capacity of wastewater collection and treatment systems; improve solid waste management; and protect and improve management of the limited urban heritage remaining in this historic Municipality. Water supply plans include the remodeling of existing systems, and construction of new systems to provide water to urban residents. To finance the expansion of urban environmental infrastructure, the Government has to rely increasingly on user charges, given shrinking public investment budgets and subsidies, and encourages the creation of financially autonomous municipal companies. Hence, the Government supports in principle tariffs which allow recovery of operational costs and contribute to financing of capital costs and the government. The high cost of these investments calls for integrated water resource management to identify cost-effective solutions, which would address water supply and wastewater management simultaneously, and would take into account water quality needs of the entire river basin. To reach this goal, the government must overcome the current institutional fragmentation in water resource management and build management support systems for forward looking, long term planning, which would make effective use of the large amount of data periodically generated by various agencies but not yet used in long-range planning. 2. Objectives To implement this ambitious program, Chongqing has requested World Bank assistance in preparing and financing an urban environmental project. The development objective of the proposed project is to provide a safe environmental setting to sustain the long-term growth of Chongqing Municipality. The project would enable Chongqing Municipality to implement a long term program of water resource management, to recover from past environmental degradation of its water and land resources, to provide an -3 -  adequate supply of safe water to its growing urban population and economy, and to maintain water quality at levels which are compatible with the needs of the entire Yangtze River Basin. Progress toward this objective would be measured in terms of : (a) reduction of pollution from the urban sector through selective high-impact wastewater and solid waste management improvements, (b) expansion of capacity for supplying safe water in urban areas; (c) enhanced capacity for region wide water quality monitoring; and (d) strengthened financial viability and institutional autonomy of municipal service providers 3. Description These development objectives would be achieved through a blend of policy and investment initiatives. Financial and policy reform would support a stronger market orientation for municipal service pricing. Targeted investments would support the expansion of urban environmental infrastructure, primarily in the water sector. It would finance technical assistance to strengthen the financial and operational management of municipal services providers, as well as the capacity for region wide environmental water resource management of the Environmental Protection Bureau, and support rehabilitating heritage environment sites in Chongqing City. The project would include the following components: (a) Urban Environmental Infrastructure comprising Chongqing and Fuling wastewater interception and treatment, solid waste management improvements in Chongqing, and water supply improvements in Wanzhou and Nanbin (Shizhu County); (b) Urban Management Information System for the Chongqing Construction Commission and utility companies; (c) Environmental Rehabilitation and Reconstruction comprising improvements in urban planning, development control, and the practice of effective conservation through training, strategy development and planning for rehabilitation, renewal and reconstruction of heritage environment sites in Chongqing City (d) Water Quality Monitoring in the Jialing and Yangtze Rivers; (e) Institutional Strengthening and Training for Chongqing Municipal Government and utility company staff; and (f) Construction Supervision and Management to facilitate project implementation. The total project investment cost estimate including all contingencies at January 2000 prices, is Y 4,455.1 million ($536.8 million). 4. Financing Total project cost including financing costs is estimated to be about $580 million. The Bank Loan would provide an estimated $250 million of that cost, with the remainder financed by the Government and other local sources. 5. Implementation Project Management: Chongqing Municipality has gained familiarity with the development of World Bank-funded projects through the Chongqing Industrial Reform and Pollution Control Project (Loan 4045-CHA) which is under implementation; the scope of this project has been reduced due to significant changes in the local and international steel market. Chongqing Municipality has established a new Leading Group to oversee project management, formulation and preparation, and has expanded the existing World Bank Project Management Office (CPMO). In the municipal government, the Construction Bureau is the - 4 -  lead agency for the project, with support from the Finance Bureau, the Planning Commission, and the Environmental Protection Bureau. The project is expected to be implemented over a period of four years. Implementing agencies: Project components would be responsibility of the following agencies: Newly created Wastewater Companies (WWCs) in the cities of Chongqing and Fuling would be responsible for the implementation of the wastewater and drainage components. These services were earlier provided in a limited form by the wastewater divisions of the respective municipal departments. To improve the financial sustainability of the sector, the project would be implemented through self-accounting and self-financing wastewater entities, the first created in this part of China. The establishment of these wastewater companies was a condition of project processing, and was undertaken by pre- appraisal; Municipal Water Supply Companies (WSCs) would implement the water supply components (in Wanzhou and Nanbin). These would be responsible for construction management, resettlement of effected peoples, production, operation and maintenance, consumer service, and administration of the water supply systems in their respective jurisdictions. The municipal Price Bureau and Planning Commission are responsible for regulation of both the WSCs and the WWCs; Solid waste and nightsoil management would remain the responsibility of the municipal maintenance and sanitation departments; and Water quality monitoring and management would be implemented through the Environmental Protection Bureau using existing monitoring stations and centers. 6. Project Benefits, Sustainability and Risks Benefits. The proposed project would help Chongqing put in place the policies, institutions, and infrastructure to begin to sustain environmental quality and improve urban services in a period of strong growth. The project would generate benefits in the following areas: (a) Environmental Benefits: improved ambient water quality in rivers currently at risk, in particular the Jialing River, through reduced pollution loads from urban wastewater and waste and more effective, GIS-supported, region wide water quality monitoring. (b) Health Benefits: reduced incidence of water pollution-related diseases as a result of improved water supply and wastewater systems and reduced surface water pollution near water intakes. (c) Improved Municipal Services: expanded coverage of water distribution, wastewater collection, treatment, and disposal, as well as municipal solid waste disposal services for the urban population of Chongqing City and selected secondary cities. (d) Institutional Reforms: strengthened financial and management autonomy would enable utilities to sustain and expand the provision of essential services for a growing population. Support for institutional development would - 5 -  ensure the long-term sustainability of the organizations and of the physical investments. Sustainability. The project is expected to be sustainable in three respects: (i) financially; (ii) institutionally; and (iii) in achieving its development objectives. Financially, the revenue and service charge enhancements proposed under this project, together with the investments to improve the quality and supply of water, would provide a framework for sustainable delivery of urban services. The incremental operations and maintenance costs would be provided through wastewater (implemented in this part of China for the first time) and increased water tariffs and charges. Institutionally, the technical assistance to strengthen utility management, and water quality monitoring would strengthen the capacity Chongqing considers it needs to sustain the efforts and maintain the infrastructure. Finally, the project addresses an issue of high priority to both the local and the national government: vital self- interest in achieving environmental conditions necessary for sustained economic growth are a strong motivation to continue implementing the long-term water resource strategy. Risks. Project risks vary across project omponents. Potential delays in implementing wastewater tariff structures and setting up financially autonomous wastewater companies in project cities are countered by making these a condition of project preparation. A slightly higher risk is the possible delay or slow implementation of complementary efforts in the reduction of industrial and agricultural pollution, needed to maximize environmental benefits in the province. As part of project appraisal, CPMO would present an industrial pollution reduction plan for a non-Bank financed program that would simultaneously address pollution control issues in these other sectors. The basin-wide water monitoring and resource management information system financed under this project would track sources of pollution and success in attaining water quality targets, and would allow provincial planners to more precisely target future investments. The main technical risk is with respect to the construction of the main wastewater conveyors when in tunnel: a) under the high rise/high density sections of the central urban areas of Chongqing City; b) the tunnel under the Yangtze River (the first time a major tunnel will have been constructed under the Yangtze); and c) the interceptor tunnel approaching the JiGuanShi Wastewater Treatment Plant site This technical risk have been addressed through CMG investing during project preparation in extensive site investigations including rock mechanics, geophysics and drilling. This risk would be further mitigated by ensuring a high quality of construction management and site supervision, as included in the project design. 7. Lessons learned from past operations in the country/sector Greater Reliance on User Charges: a major finding from the OED review of Bank water and sanitation projects has been a generally good achievement of physical targets but less success in sustaining the financial viability of municipal service providers. Sector work on China ("Urban Environmental Service Management", Report #13073-CHA) stressed the need for greater reliance on user charges, which are presently levied at unsustainable levels: municipal solid waste user charges, for example, would have to triple from present levels to provide sufficient funding for sustainable collection and disposal operations. The report concludes that such charges for solid waste - 6 -  and water supply would be affordable, induce resource conservation and create a more dependable income stream. Hence, tariff reforms have been a centerpiece of the satisfactory policy dialogue with CMG and adjustments of tariff levels are an integral part of the project design; CMG took appropriate steps early in project preparation. Timing of tariff increases: Previous urban environment projects in China have frequently encountered difficulties implementing agreed tariff increases in a timely manner, sometimes delaying project implementation by six months or more. Tariff increases often represent politically difficult decisions for local governments, but are critical for the sustainability of the project. To avoid such delays after loan effectiveness, and to ensure that changes meet the approval of all relevant authorities, this project design required that tariff adjustments be implemented during the preparation stage; these needs were addressed at pre-appraisal. Support for institutional management. The establishment of financially autonomous utility enterprises to develop and manage urban services is a long- standing Chinese practice, and avoids many of the management difficulties of publicly-owned utilities in other countries. However, wastewater collection and treatment has only recently been given the same autonomy, generally by absorbing the existing drainage bureaus and construction management units already active in the sector into separate enterprises. The prior experience of these bureaus would undoubtedly allow a smoother transition, but high levels of technical assistance would be needed to strengthen the new enterprises' financial, managerial, and technical capacities. Tariffs, charges, and reallocation of existing taxes and urban construction charges would help ensure adequate funds for operation and management. The successful establishment by CMG of financially autonomous utilities prior to project implementation by pre-appraisal has allowed sufficient time for management and operational issues to be clarified. Sufficient preparation time and budget. Chongqing is a newly-established municipality, and most senior government positions have been only recently appointed. Experience in preparing the Chongqing Industrial Reform and Pollution Control project has shown the need for above average preparation time to ensure meaningful dialogue, and allowing the borrower sufficient time to seek internal support for project initiatives. Adequate resources were allocated by CMG for preparation; they would also be required for supervision. The technical assistance incorporated in the project design would be essential to underpin effective implementation. The experience gained in this project would ensure smoother implementation for later urban environment loans in the Municipality. 8. Poverty Category The primary Program Objective Category is environmentally sustainable development, to provide a safe environmental setting to sustain the long term growth of Chongqing Municipality. The proposed project would generate benefits in terms of improvements in environmental quality, health, municipal services and institutional capacity. The broad nature and wide social impact of the project benefits would ensure these reach to almost the whole income spectrum. 9. Environmental Aspects -7-  The Bank recommended that the Environmental Assessment (EA) work be carried out with the thoroughness of a Category "A" project, due to the scale of the investments envisaged, the environmental relationship between CUEP and TGP, and the need to secure urban water supplies further into the future. In addition to a standard EA, an analysis was required on the impact of the Three Gorges Dam on the absorptive capacity of receiving water bodies. This approach contributed to the formulation of a long term wastewater management strategy for CMG, including the determination of acceptable pollution levels for discharges from wastewater systems into the major river system in China. In order to ensure a high quality of environmental assessment, experienced local and international consultants were engaged by CMG through CPMO, under the direction of the Municipal Government's Leading Group, and in coordination with the State Environmental Protection Agency of China (SEPA). The objective was to optimize the choice of investments, maximize positive environmental benefits and minimize any negative environmental impacts, and develop a framework for and details of a comprehensive environmental management strategies for the long term. SEPA approved the EA Terms of Reference, and reviewed and consented to the final EA, in accordance with local procedures. Environmental management and intervention strategies and the EA draft were explored and reviewed and updated during project preparation. The EA was submitted to the Bank in late 1999, reviewed and found satisfactory; the documents were satisfactorily submitted to the Bank's Information Center and the Bank Group Board. The EA and the RAPs have also been made available, following public consultation during project preparation, to the public in China. 10. Program Objective Categories Environmentally Sustainable Development 11. Contact Point: The InfoShop The World Bank Group 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Task Manager Geoffrey Read The World Bank Group 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4078 Fax: (202) 522-1787 Note: This is information on an involving project. Certain components may not be necessarily included in the final project. Processed by the InfoShop week ending March 17, 2000. - 8 -