China - Liao River Basin Environment Project

Report No. PID9582 Project Name China-Liao River Basin Project (@) Region East Asia and Pacific Region Sector Urban Environment Project ID CNPE51859 Borrower(s) PEOPLE'S REPUBLIC OF CHINA Implementing Agency Address LIAONING PROVINCE, AND THE RESPECTIVE 3 PROJECT CITIES Liaoning Provincial Government Address: Liaoning Urban Construction and Renewal Project Office (LUCRPO) 19 Caita Street, Shenyang, China 110015 Contact Person: Mr. Zhao Xin Liang, Vice Governor, Liaoning Provincial Government Tel: (024) 2384-2898 Fax: (024) 2392-2290 Email: Lucrpoa@pub.sy.lnpta.net,cn Environment Category A Date PID Prepared updated May 23, 2001, to reflect appraisal & negotiations Projected Appraisal Date March 15, 2001 Projected Board Date June 21, 2001 1. Country and Sector Background The principal sector issue is the rapid deterioration in both surface and groundwater quality that has occurred throughout China, and in the quality of the urban environment, as urbanization increases. This has occurred as a result of (a) inadequate framework for water resources management; (b) ineffective regulatory control: and (c) financial weakness of municipal providers of environmental services. Demands for water for industry, agriculture and domestic use have been steadily increasing, and this has imposed increasing pressure on water resources, in particular in the areas of limited resources in the north of China. Quantities of wastewater have increased rapidly as have the associated pollution loads, since only in the order of 10 percent of wastewater is treated to comply with discharge standards, largely a result of ineffective enforcement of environmental regulations. The discharge of these increasing quantities of inadequately treated wastewater to rivers with limited dilution and assimilative capacity has resulted in severe water quality problems. In the latter half of the 1990s the focus of river basin management in China changed from the traditional hydraulic approach to that of attaching a greater importance to environmental protection. Pollution control as part of water resources management is listed as one of the top priorities in China's tenth Five-Year Environmental Protection Plan. Among the most significant features is the attention paid by the highest levels of central government to the severe environmental degradation in China's major river and lake basins and the formulation of the priority "Three Rivers, Three Lakes"  environmental program within the overall national environmental strategy, of which the Liao River is one of the targeted rivers. Fundamental parts of the overall strategy include the integration of municipal and industrial wastewater treatment, where appropriate, and the establishment of efficient wastewater utilities with sound cost recovery, both to ensure sustained facilities operations and to contribute to capital investment. 2. Objectives The development objective of the proposed project is to assist the environmental recovery of the Liao River Basin (LRB) in Liaoning Province (LP) and to enhance water quality management decision-making on the basis of an integrated river basin management approach. The objective would be pursued through (a) provision of facilities for collection and treatment of wastewater; (b) establishment of competent municipal utilities capable of managing these facilities; (c) upgrading basin-wide water quality management, modeling and monitoring capabilities; (d) infrastructure upgrading; and (e) technical assistance and training.The project water quality objective is to reduce pollution in the LRB in order to achieve a minimum of Class V (agricultural water supply or general amenity use) water quality throughout the basin by 2010. The objective would be achieved through a combination of measures, including: (a) regulation and reduction of pollution from industries; (b) priority wastewater treatment works in all cities in the river basin; (c) improved collection and disposal of sludge from wastewater treatment plants; (d) protection of water used for agriculture and aquaculture; (e) measures to improve water quality in the Bohai Sea; and (f) other initiatives that may include basin transfers, reduction of overall per capita water demand, the adoption of water conservation measures (e.g., low-volume water closets), demand management through economic pricing of water and wastewater, and restriction of water use for certain activities. Depending on dilution available in the receiving waters, treated effluent may require treatment better than Class V, including nitrification. 3. Rationale for Bank's Involvement The Bank brings considerable international experience in terms of assisting policy formulation and investment program design. Bank assistance will also draw upon our growing experience in addressing regional environmental issues through ongoing projects in Liaoning and in other priority environmental improvement projects in China, including the cleanup of Dianchi Lake (as part of the Yunnan Environment Project) and the Huai River Basin, both included in the priority "Three Rivers, Three Lakes" program.Bank assistance in the project design phase will enable the basin municipalities to formulate and evaluate a more programmatic approach to the provision of urban environmental services and to introduce the principles of integrated river basin management into planning of water resource and pollution management strategies. 4. Description Panjin Wastewater Interception & Treatment Yingkou Industry Wastewater Treatment Yingkou Wastewater Interception & Treatment Jincheng Industry Wastewater Treatment Jinzhou Wastewater Interception & Treatment Environmental Water Quality Monitoring -2-  Environment Revolving Fund Institutional Strengthening and Training 5. Financing Total ( US$m) Total Project Cost 203.6 6. Implementation At the provincial and municipal levels, leading groups have been established to give policy direction to the environmental recovery of the LRB. The provincial leading group is headed by the Vice-Governor of the province; municipal leading groups are headed by mayors or vice mayors. The leading groups have established project management offices to coordinate the implementation of their policy decisions. At the provincial level there are (a) the project office of the Liaoning Integrated Environmental Program (LIEP) under the Liaoning Environmental Protection Bureau (LEPB); and (b) the Liaoning Urban Construction and Renewal Project Office (LUCRPO) under the Liaoning Provincial Construction Commission. In order to expedite the preparation of the proposed Liao River Basin Project (LRBP) LPG has brought together LIEP, LUCRPO and the Provincial Water Conservation Department within the offices of LEPB. Each municipality has set up a project management office, either within the municipal government structure or within its designated implementing wastewater agency.The municipal wastewater components of Jinzhou, Panjin, and Yingkou would be implemented by the cities' recently created financially autonomous wastewater companies.. The environmental water quality monitoring component would be implemented by LEPB through provincial and municipal monitoring stations. The urban management information system (UMIS) component would be managed by the Liaoning Provincial Construction Commission (LCC), in affiliation with the LEPB. The Environment Revolving Fund would be managed jointly by the LEPB and the Liaoning Finance Bureau (LFB).Procurement agents yet to be finalized would be retained as the procurement agencies for all aspects of civil and electrical and mechanical works requiring bidding through international competitive bidding (ICB) procedures. Construction supervision services and institutonal and financial strengthening would be provided by international firms collaborating with joint international/national supervision teams.Onlending Arrangements: The proposed loan of $100 million would be made to the People's Republic of China. The loan would be for 20 years, including 5 years of grace, at the Bank's standard interest rate for LIBOR-based US dollar single currency loans. The proceeds of the loan would be onlent to LP on the same terms and conditions as the Bank loan to China, including passing on the Front-End Fee and a commitment charge of 0.75 percent a year. LP would onlend part of the proceeds of the Bank loan to the municipalities of Jinzhou, Panjin, and Yingkou on the same terms and conditions as it received from China. The municipalities would onlend proceeds of the Bank loan to their wastewater companies for 15 years including 5 years of grace, at an interest rate not less than the Bank's rate to China plus the municipalities' portion of the Front-End Fee and a commitment charge of 0.75 percent a year. Jinzhou and Yingkou Municipalities would onlend Bank loan proceeds to their respective paper mills at not less than the Bank rate to China plus a spread of 1.5 percent a year, and a commitment charge of 0.75 percent a year. The maturity of the loans would be up to 10 years including up to 3 years of grace. Under Liaoning's environmental revolving fund facility LP would onlend to small - 3 -  and medium-size industries at an interest rate not less than the Bank rate to China; the maturity of the loans would be for 3 to 5 years, including a 1 to 2-year period of grace. Financial Management: An assessment of project financial management including an assessment of the relevant revenue-earning implementing agencies would be carried out during appraisal, to ensure that the Bank's minimum financial management requirements as stipulated in OP/BP 10.02 are met. It is anticipated that traditional disbursement techniques would be used in accordance with an agreement reached between the Bank and the Ministry of Finance (MOF). To facilitate disbursements, a Special Account would be opened with an authorized allocation of $8.0 million, equivalent to the estimated average expenditures to be financed by the Bank over about a four-month period; the account would be opened in US dollars in a bank acceptable to the Bank and be managed by LFB.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 Liaoning Provincial Audit Department under CNAO's supervision. The Bank currently accepts audits performed under the responsibility of CNAO. Audits of the project accounts and the financial statements of implementing agencies and audits of the Special Account would be submitted to the Bank within six months after the end of the financial year. During appraisal, LPG would be requested to confirm that 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 loan proceeds.Monitoring and Evaluation Arrangements: The project would be supervised through Bank missions scheduled for twice a year. Headquarters and country office staff would cooperate in this activity. During implementation, project performance, including the achievement of project outputs and progress toward the attainment of development objectives, would be monitored through the use of semiannual progress reports prepared by the LUCRPO. The first such monitoring report would be submitted by January 31, 2002, and the last by July 31, 2007. A mid-term review would be undertaken jointly with LPG in 2004 to evaluate the project's achievements and identify any corrective measures needed. An Implementation Completion Report, reviewing the planned objectives and the achievements of the project, including costs and benefits derived, and performance and contribution of all parties associated with project execution, would be prepared by LUCRPO and submitted to the Bank within six months of the project closing date. 7. Sustainability The project is expected to be sustainable in three respects: (a) financially; (b) institutionally; and (c) in achieving its development objectives. Tariff reforms would enhance the financial viability of the municipal service providers. Institutionally, the creation of financially autonomous wastewater companies and continued technical assistance for the participating institutions would strengthen utility management and water quality monitoring capacity. 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, which are a strong motivation to continue implementing the long-term water resource mamagement and protection - 4 -  strategy. 8. Lessons learned from past operations in the country/sector Greater Reliance on User Charges. A major finding from the Operations and Evaluation Department (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. Preliminary indications from an ongoing OED review of the Bank's China water supply and wastewater program appear to confirm these findings. Recent sector work on China ("Urban Environmental Service Management," Report No. 13073-CHA) notes the need for greater reliance on user charges, which are presently levied at unsustainable levels. Hence, tariff reforms will be a centerpiece of the policy dialogue with the LRB municipalities, and adjustments of tariff levels are an integral part of the project design.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 requires that tariff adjustments be implemented during the preparation stage, as early as project appraisal.Experience with Pollution Control in River Basins. Experience with pollution control projects in river basins, e.g., in Brazil (Guarapiranga/Sao Paulo, Parana, and Minas Gerais, as well as in an upcoming project in Paraiba du Sul River Basin) have shown the importance of adequate monitoring and databases, as well as the need to link the data to investment planning with regard to wastewater treatment. 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 will undoubtedly allow a smoother transition, but high levels of technical assistance will 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 establishment of financially autonomous utilities prior to project implementation would allow sufficient time for management and operational issues to be clarified. 9. Program of Targeted Intervention (PTI) N 10. Environment Aspects (including any public consultation) Issues The Liao River Basin is one of the three priority river basins recognized by China's State Council as requiring urgent attention to water resource management and quality improvements. The lack of water resources in the basin means that an integrated approach to water quality planning will be necessary rather than the previous application of uniform concentration based standards regardless of the receiving environment. An environmental assessment (EA) has been carried out for - 5 -  LRBP. During its preparation and evaluation, national procedures, including those indicated in the "Circular on Strengthening Environmental Impact Assessment Management for Construction Projects Financed by International Financial Organizations (June 1993)" as well as those required by the Bank Group, were diligently followed. A comprehensive set of EA documents including an Environmental Assessment Report, an Environment Management Plan (EMP) and an Executive Summary were prepared; these were reviewed by the Bank, comments incorporated, and the revised documents found satisfactory. A detailed annex covering environmental assessment and impact has been prepared in the Project Appraisal Document (Annex 12), summarizing the findings of the Chinese EAs prepared for the various components.Potential Impacts. The environmental impact of the project is on balance substantially positive and the benefits greatly outweigh the adverse impacts. The city wastewater treatment components, particularly those for Shenyang, substantially reduce the pollution loads to the rivers in the Liao River Basin and make a significant contribution towards achieving the desired water quality objectives for these rivers.Mitigation Measures. The EA specified the appropriate mitigation measures, environmental monitoring plans, institutional arrangements and training and equipment requirements, together with cost estimates for implementation of the mitigation measures. Major mitigation measures include controls on construction practices, careful siting of facilities with appropriate buffer zones and controls on noise.Public Consultation and Feedback. During the 12 months leading up to the delivery of the provincial consolidated EAs and RAPs, many meetings took place with LUCRPO, city PMOs, utility companies, city EPBs, and other affected city organizations to discuss the proposed project and the preparation of the sub-component environmental assessment reports. These meetings took place monthly at a minimum and resulted in full collaboration of local officials and community representatives leading to the full support of the project and the EA process. In addition, the Terms of Reference (TOR) for the EAs, the Draft EAs and the Final EAs were made available publicly in each of the project municipalities.Information Disclosure. Extensive details of the information disclosure actions taken are set out in the PAD. Information disclosure has been comprehensive, and is also described in detail in the Environment Assessment Report. This has been in accordance with OD 4.01, OD 4.30, and BP 17.5.Social Aspects: The project is expected to have a significant positive social impact, once the project-financed clean up of the water and land resources in the Liao River basin has been completed. Adverse social impacts of the project are minor in nature, related to land acquisition (some 19 hectare) and structure demolition required for implementation for the construction of the wastewater treatment plants, affecting some 125 people. The construction and rehabilitation of the interceptors would result in the temporary lease of linear strips of land, including in some instances the removal of both residential and commercial structures. About 1,375 people would be affected through removal of residential structures. 154 shops, vendors and government institutions would be affected of whom 110 are street vendors. Altogether about 418 employees would be affected through relocation or temporary cessation of their commercial operations. The city project offices carried out resettlement planning. Planning activities included a census of affected people, the inventory of affected assets and a sample socioeconomic survey in the directly affected areas and extensive consultations with the affected groups on the rehabilitation strategy. As a result, a comprehensive rehabilitation strategy has been - 6 -  developed for the affected population. No minority issues of concern have been identified during project preparation; minority groups in Panjin were consulted and it was concluded that correct proceedures had been followed.The perception by local communities of project outcomes are expected to be increasingly positive, as the river clean up is achieved over the long term. Negative reaction to wastewater tariffs may be experienced initially by the Municipal governments, but these will in all likelihood be counterbalanced by the increasingly high priority given by citizens to the demend for an improved urban environment- during project preparation there was much anecdotal evidence of the high social value placed on urban livability, and a hankering for an improved environment. 11. Contact Point: Task Manager Geoffrey Read The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: 202 458 4078 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 -