China - Hebei Urban Environment Project

Report No. PID7677 Project Name China-Hebei Urban Environment Project (@+) Region East Asia and Pacific Region Sector Sewerage; Urban Water Supply Project ID CNPE45910 Borrower(s) Peoples' Republic Of China Implementing Agency Hebei Province, Hebei Project Mgmt Office Environment Category B Date PID Prepared February 29, 2000 Projected Appraisal Date March 4, 2000 Projected Board Date June 20, 2000 1. Country and Sector Background There are three major issues facing Hebei with regard to the urban environment: (i) environmental degradation; (ii) infrastructure constraints; and (iii) financial weakness of the municipal service providers. In order to address the growing need for municipal services, the Hebei Provincial Government (HPG) plans to expand and improve municipal wastewater management and water supply systems. The major concerns of Hebei Province (HP) are therefore the quantity and quality of water it supplies to households and industries, as well as its impact on economic development, and the continuing environmental deterioration of the aquatic environment and subsequent impact of water pollution on public health. The quality of drinking water typically complies with national standards, but the quality of raw water at the water intake frequently does not meet the standard for E.coli and other bacteria and constitutes a significant risk to the water supply in case of operational problems of the water treatment. Pressure to augment capacity for wastewater management and water supply is increasing with sustained economic growth and migration to the cities. Currently, the capacity for wastewater treatment is limited. Except for some industries which undertake their own treatment, facilities for domestic wastewater treatment are limited in Hebei. In Shijiazhuang, the capital city, only 16% of the wastewater is being treated in a centralized facility. The predominant means of treatment is through the use of septic tanks, which are often not operated efficiently and correctly. With regard to water supply, deficits have been projected for several project cities, with the exception of Shijiazhuang which has recently commissioned a new water treatment plant for 300,000 m3/day.Water services in China has historically been provided by wholly government-owned companies, some of which have been in existence for over 70 years. Urban environmental services are the responsibility of municipal governments and are provided either at the municipal or at the district level. Wastewater services are usually run by municipal government department, normally as part of an engineering services department which also has responsibilities for roads, bridges and street lights. Water supply and wastewater services report to different bureaus, although both are the ultimate responsibility of the municipal construction commissions. Municipally-owned service companies maintain segregated accounts, which since July 1993 use accounting system similar to those of international practices. However, this has not been the  case for services run by municipal departments.The water industry has registered a marginal profit (0.1%) in 1996, but 35% of the companies were at a loss. In the case of wastewater, the picture is less clear, but certainly the sector survives by virtue of government subsidies. In a context of serious water pollution and water scarcity, limited coverage (particularly for wastewater treatment) and increasing costs, there is now mounting pressure for the industries to achieve full cost recovery and introduce cost control measures. While several pricing reforms, to inspire tariff increases and introduce more scientific methods of charging for the service received, have been enacted by central government agencies, these can only be successful in the long term if institutional and organizational reforms for the sector providers are also implemented.Water and wastewater entities find themselves in a transition phase where the traditional government subsidies have been reduced, but tariffs for municipal services do not yet cover the full cost of operation and investment. Hebei is no different in the challenges it faces in the sector and has embark in a series of reforms both aimed at improving cost recovery and improve efficiency of service delivery by the companies.Government Strategy: To finance the expansion of urban environmental infrastructure, the Government tends to rely increasingly on user charges, given shrinking public investment budgets and subsidies. As for management, the Government encourages the creation of financially autonomous municipal companies. While this policy has been implemented for some time in the water supply sector, the wastewater subsector remains largely within the government realms and relies entirely on subsidies. However, the recentl State Circular No. 1192 of October 1999, stipulates the need for institutional and financial reforms with regard to wastewater collection, treatment and disposale services, similar to the regulations implemented earlier in 1998 for water supply. In addition, as part of the policies devised to facilitate the project, the Hebei Government has recently decided to delegate the authority for setting water and wastewater tariffs in the three project cities directly to the municipal governments and their price bureaus. This would not only simplify the approval process for tariff revisions, but also enhance the financial sustainability of utility companies. It is hoped that similar regulations will be soon issued for the other cities in HP.The HPG plans to curb pollution from urban and industrial sources and to expand the supply of water. With regard to pollution, ambitious targets have been set for the year 2000 for major rivers in the province. The target for wastewater collection and centralized treatment by the year 2005 is to increase the coverage in Shijiazhuang to 65%, in Tangshan to 85% and Handan to 60%. It is also planned that 75% of industrial wastewater should comply with discharge standards. For the year 2010, the target is to have 75% of all urban wastewater treated and the water quality of all rivers, canals and lakes comply with the standards. To achieve these targets, HPG also wants to expand the capacity of wastewater collection and treatment and improve the enforcement of existing standards, in particular for industrial pollution control. 2. Objectives The development objective of the proposed project is to provide a safe environmental setting to sustain the long-term economic growth of urban areas in Hebei Province. The project would support Hebei Province in implementing a long-term urban environmental services improvement program to recover from past environmental degradation of its water and land resources, to provide an adequate supply of safe water to its growing urban population and economy, and ensure sustainability of delivery through institutional and financial - 2 -  reforms of the service utilities.Progress towards the development objective of the proposed project would be measured in terms of: (a) reduction of pollution load from the urban sector through selective high-impact wastewater collection and disposal improvements; (b) expansion of supply capacity for safe water in urban areas; and (c) strengthened financial viability and institutional autonomy of municipal service companies. 3. Rationale for Bank's Involvement The Bank Group brings considerable international experience to assist in policy formulation and investment program design, in particular with respect to economic, financial and institutional analyses and systematic consideration of alternatives. Bank Group assistance will also draw on our growing experience in addressing institutional and financial reform within water supply and wastewater utilities. Bank Group assistance in the design phase enabled the Province and project entities to widen the scope of possible options and find more cost-effective solutions than the ones originally considered, maximize environmental impact of treatment facilities and introduce energy saving opportunities with significant financial benefits. The Bank Group involvement will enhance the construction quality control of the physical investments, accelerate institutional strengthening and training, and contribute its considerable experience in bringing about meaningful utility reform in the sector. 4. Description The project would include the following components: (a) Water Supply Tangshan: Water Treatment Plant, capacity 150,000 m3/day, including intake pumping station, 19 km raw water transmission main and 9.5 km distribution trunk mains. Handan: Water treatment plant, capacity 100,000 m3/day, 56 km raw water transmission main and some 50 km of water distribution network (b) Wastewater Management Shijiazhuang: Wastewater treatment plant, capacity 500,000 m3/day, including some 40 km of trunk sewer, rehabilitation and expansion; Tangshan: Wastewater treatment plant at Xijiao, capacity 120,000 m3/day and 20 km of sewer infrastructure; Handan: Wastewater treatment plant, capacity 100,000 m3/day with 40 km of trunk sewer infrastructure and sludge treatment expansion at existing plant; (c) Environmental Pollution Control All cities: (i) industrial counseling program for process adjustments to promote water conservation and pollution reduction; (ii) Public awareness campaign for water conservation at households. Provincial EPB: (i) Credit facility for lending to small and medium industries to finance water polluction abatement. (d) Institutional Strengthening: The component would finance the design and equipment for setting up GIS based decision support systems and provide training to staff in order to strengthen: (i) utilities' financial and operational management; (ii) the municipalities' tariff setting policy; and (iii) the provincial government's capacity for region wide water quality - 3-  monitoring. Technical assistance would also support construction management services and future investment project preparation. 5. Financing Total ( US$m) Government 143 IBRD 150 IDA 0 Total Project Cost 293 6. Implementation Project Management: HPG has established a high level Leading Group to oversee project preparation and has set up the Hebei Project Management Office (HEPMO) to prepare and execute the project. The Hebei Finance Bureau (HFB) is the lead agency for the project, with support from the Construction Commission, the Planning Commission, and the Environmental Protection Bureau. The HEPMO's responsibilities include: (a) overall project coordination, macro-level project management and monitoring; (b) annual budget preparation; (c) project-wide quality assurance; (d) progress reporting to HPG and the Bank, including cost management, project impact and environmental improvement assessment; (e) interagency coordination and procurement support; and (f) sectional training facilitation. The personnel mix of HEPMO and municipal project offices would need to be adjusted from time-to-time to reflect the needs of the various phases of the project, including completion of preparation, tendering phase and project implementation. The project cities have established Project Management Offices to facilitiate and monitor the implementation of the respective project components on behalf of the municipal government. Implementing Agencies: The effective implementation of the physical works will be the responsibility of the following municipal utility companies: (a) newly created and existing Wastewater Companies (WWCs) would be responsible for the implementation of the sewerage component, as well as operation of all facilities in the cities. These services traditionally have been provided by municipal utilities management bureaus, but given the magnitude of the project, the city government have recognized the need for establishing autonomous and self-accounting enterprises in the wastewater sector. Wastewater companies have been established in all three project cities and all assets have been transferred to them from the municipal drainage offices.The Water Supply Companies (WSC) in each of the cities would be responsible for the implementation of the water supply component. They would be responsible for construction management, production, operation and maintenance, consumer service and administration of the water supply systems in their respective jurisdictions. The water supply companies will bill and collect wastewater charges on behalf of the wastewater companies. The revenues, minus a fee, will be transferred directly to the wastewater companies.The industrial pollution control action plan (IPCAP) would be managed by the Hebei Environmental Protection Bureau (HEPB) and implemented by the municipal EPBs.The International Tendering Company CMC will be retained as the procurement agency for all aspects of the civil, electrical and mechanical works requiring bidding through international competitive bidding (ICB) procedures. Design review and advisory and construction management services would be carried out by an international firm using joint international/national teams. Construction supervision will be carried out by local supervision companies retained by the Implementing Agencies.Onlending Arrangements: The proposed loan of $150 million would be made to the People's Republic of China. The loan would be - 4 -  for 20 years, including five years of grace, at the Bank's standard interest rate for LIBOR-based US dollar single currency loans. The Ministry of Finance, would make the proceeds of the loan available to Hebei Province on the same terms and conditions as the Bank loan to China. The Province would then onlend to the Muncipalities on same terms and conditions as the Bank loan to China. The onlending from the Municipalities to the water supply and wastewater companies would be 5 years grace plus 10 years maturity. Financial Management: Hebei Province has the required systems and staff to carry out the financial management of the project. HP already has ongoing Bank Group-financed projects in other sectors and the Hebei Finance Bureau (HFB) is familiar with the Bank Group's disbursement procedures. Hebei prepared a Financial Management Systems (FMS) Manual, which was found satisfactory. To facilitate disbursements, a Special Account would be opened with an authorized allocation of $10.0 million, equivalent to the estimated average expenditures to be financed by the Bank Group over a four-month period. The account would be opened in US dollars in a bank acceptable to the Bank Group and would be managed by HFB.Auditing Arrangements: As with other Bank Group-financed projects in China, the Foreign Investment Audit Bureau of the China National Audit Office (CNAO), established in 1983 under the name of State Audit Administration, would have overall responsibility for auditing the accounts of the project. The actual auditing work would be conducted by the Hebei Provincial Audit Department inder CNAO's supervision. The Bank Group currently accepts audits performed under the responsibility of CNAO. Audits of the financial statements of implementing agencies, and audit of the Special Account would be submitted to the Bank group within six months after the end of the financial year. The audit reports of the implementing agencies would include opinions on whether the agencies were in compliance with their respective financial covenants, and whether these agencies had taken out adequate insurance on goods and works financed from the loan proceeds.Monitoring, Reporting, and Evaluation Arrangements: HEPMO has primary responsibility for monitoring and reporting through quarterly project preparation and implementation progress reports, based on information compiled from the implementing agencies. Bank supervision of project implementation will be conducted twice a year by both headquarters and resident mission staff. During implementation, project performance, including the achievements of project outputs and attainment of development objectives, would be monitored through the use of quarterly reports prepared by HEPMO. The first such monitoring report would be submitted by July 31, 2000 and the last one by July 31, 2007. Also a mid-term review will be undertaken jointly with the Government to evaluate the project achievements and identify the need for corrective measures. In addition, an implementation completion report, reviewing the planned objectives and project achievements, including costs and benefits derived, and performance and contribution of all parties associated with project execution, would be prepared by HEPMO and submitted to the Bank Group within six months of the Closing date. 7. Sustainability The project is expected to be sustainable in three respects: (i) financially; (ii) institutionally; and (iii) technically. The tariff reforms, now strongly supported by the Government will enhance the viability of municipal service providers, particularly the newly created wastewater companies. The establishment of autonomous utility companies is also supported by the state and provincial Governments. Finally, the project addresses an issue of high priority to both the local and the national - 5 -  government, i.e. vital self-interest in achieving affordable basic urban services within conducive environmental conditions necessary for sustained economic growth whereby water resources become an increasing scarce commodity. 8. 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 services. This is in line with the findings from a recent sector work on China ("Urban Environmental Service Management," Report #13073-CHA). This report supports the need for greater reliance on user charges and concludes that such charges would be affordable and would encourage resource conservation and create a more dependable income stream. Tariff reforms and improvement of operational efficiency have been a centerpiece of the policy dialogue with the Hebei Government. Adjustments of tariff levels, prior and during implementation, are an integral part of the project design.Timing of Tariff Increases: Previous urban environment projects in China have frequently encountered difficulties in implementing agreed tariff increases in a timely manner, sometimes delaying loan or credit effectiveness. Tariff increases often represent politiclaly difficult decions for local governments, but are critical for the sustainability of the project. This project has required that substantial tariff adjustments be implemented during the preparation stage (four of the five cities have already approved and implemented tariff increases). Two further increases are expected prior to Negotiations. Written assurances were obtained from the Municipal Governments that they will further increase tariffs during project implementation as per schedule agreed with the Bank.Support for institutional reform: 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 companies have 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 will certainly benefit the transition, but substantial levels of technical assistance will be needed to strengthen the new companies' managerial, financial and operational capacities. 9. Program of Targeted Intervention (PTI) No 10. Environment Aspects (including any public consultation) Issues : The environmental impact of the project is, on balance, substantially positive and the benefits greatly outweigh the negative impacts. The proposed project would reduce pollution loads in the Fuyang, Xiao and Quilonghe rivers, allow for the replacement of poor-quality water supply sources, as well as eliminate groundwater mining practices (Handan). Major potential impacts during the construction phase include excavation, dust, noise, spoil disposal and disruption of urban services. Impacts during the operational phase include sludge disposal, noise, and odors. 11. Contact Point: Task Manager -6-  Wiebe Moes The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: (202) 458-0810 Fax: (202) 522-1787 12. For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. - 7 -  Annex Because this is a Category B project, it may be required that the borrower prepare a separate EA report. If a separate EA report is required, once it is prepared and submitted to the Bank, in accordance with OP 4.01, Environmental Assessment, it will be filed as an annex to the Public Information Document (PID) . If no separate EA report is required, the PID will not contain an EA annex; the findings and recommendations of the EA will be reflected in the body of the PID. -8-