China - Shanghai Urban Environment Project

Report No. PID10723 Project Name China-Shanghai Urban Environment Project (@) Region East Asia and Pacific Region Sector Urban Environment Project ID CNPE70191 Borrower(s) PEOPLE'S REPUBLIC OF CHINA Implementing Agency Address SHANGHAI MUNICIPAL GOVERNMENT together with the Development & Planning Commission, and the Municipal Construction Commission. Address: Shanghai Municipal People's Government, 200 Renmin Dadao, Shanghai 200003 Contact Person: Mr. Han Zheng, Vice Mayor Tel: 86 21 6355 9829 Fax: 86 21 6311 9462 Shanghai Municipal Finance Bureau Address: 60, Jiu Jiang Road, Shanghai, China, 200002 Contact Person: Liu Hong Wei Tel: 86 21 6321 9610 Fax: 86 21 6321 3896 Email: <smftbwb@publicl.sta.net.cn Shanghai Development & Planning Commission; Shanghai Municipal Construction Commission; Shanghai Water & Wastewater Engineering Company (SWEC). Address: Shanghai Municipal People's Government, 200 Renmin Dadao, Shanghai 200003 Contact Person: Mr. Xu Guo Zhen, Director - Foreign Cooperation Department, Shanghai Development & Planning Commission; Mr. Xiong Jian Ping, Vice Director and Administrator, Shanghai Municipal Construction Commission; Mr. Lu Hong De, Managing Director (SWEC). Tel: 86 21 5895 2065 Fax: 86 21 5855 5563 Email: xgf@public3.sta.net.cn Environment Category A Date PID Prepared March 17, 2002 Auth Appr/Negs Date March 20, 2002  Bank Approval Date June 25, 2002 1. Country and Sector Background Shanghai Municipality is one of four provincial-level cities in China and is the country's largest contiguous urban center, with a permanent, registered population approaching 14 million and an additional temporary population of about 3 million. The city is China's most important industrial base, and the major center of commerce, trade, finance and science. Shanghai accounts for about 1 percent of China's population, and about 5 percent of its gross domestic product (GDP).Shanghai made substantial progress during the last decade of the 20th century in restructuring its economy and in upgrading its environmental infrastructure. However, in spite of the considerable recent investments in urban services, some 3 million of the urban residents live in very crowded conditions, with inadequate access to drinking water and sanitation. Less than 60 percent of wastewater and stormwater in the city is hygienically intercepted and disposed of. Only 40 percent of sewage flows are treated and safely disposed of; the existing sanitary landfill for municipal solid waste disposal has only two years' capacity remaining; and the water quality in the Huangpu River, the main source of drinking water, has become increasingly polluted over the past five years, rendering it only marginally acceptable as a source of drinking water. Air quality has also deteriorated during this period to unsafe levels. The inequality of access to services is also of concern to SMG; this is exacerbated by an emerging disparity of incomes.Government recognizes the need to urgently address these issues, in line with responding to the consequence of rapid economic growth and urbanization of eastern China and the Yangtze Delta, and in order to achieve its objective of becoming an international economic and trade center, and has specific objectives for achieving the highest standards of urban environmental quality. Shanghai considers that good environmental performance will both enhance the quality of life of its citizens and help it to continue to attract high-quality foreign investment. Their development strategy follows that with increasing global concern for the environment, and with many multinational corporations worried about reputational risks, SMG would be able to turn good environmental performance into a competitive advantage in the future; the government intends to make greater strides in changing the role of government from a provider of services to more of an enabler and facilitator.SMG has articulated five policy themes that it proposes to address during implementation of its development plan. The five themes are:developing innovative mechanisms for financing its environmental and other infrastructure investments, including adopting public/private partnership strategies;gaining experience in effectively engaging the nongovernment sector, both stand-alone and in partnership with the public sector;augmenting existing urban infrastructure in a cost-effective manner;enhancing environmental management and pollution control; andimproving the effectiveness of the municipal management and service delivery institutions.Articulation of these themes demonstrates the ambitious and far-reaching nature of SMG's urban environment strategy and program objectives, and SMG's full understanding of the highly complex and interrelated nature of the measures needed to bring these objectives to reality. The themes and proposed measures in the SMG program represent a deepening of the environment sector development agenda, as they progress from the relatively more straightforward issues in water supply and primary types of infrastructure for wastewater collection (where - 2 -  substantial progress has been achieved under previous Bank-supported projects) into more difficult and complex areas such as wastewater treatment, solid-waste management, and air quality. This sequence in itself reflects a progressive evolution in the role of the public sector in environmental services, complemented by a growing prospect for private sector involvement. And as the subsectoral features develop and public/private roles evolve, they also enable a progression from reliance on financial support from the municipal budget, toward the sector's own cash generation and, eventually, to tapping the financial/capital markets to fund capital investment needs. Overarching these themes is the broadening of their development vision in spatial terms beyond the city-center also to include the surrounding nine districts and one county. While administratively separate on some urban environment matters, the city center and the surrounding districts and county have significant mutual interests in pursuing an integrated, metropolitan-wide urban environment management approach.During its Tenth Five-Year Plan, environmental protection investments would account for 3 percent of the municipal GDP, to be financed by enhanced user charges and a range of new and refined financing methods. Quantified targets have been set for water supply, wastewater collection and treatment, and municipal solid waste management. The environmental legal system would also be strengthened and the effectiveness of environmental decision-making processes improved. The City is responding to local, regional and global issues in its development plans, and continued augmentation of its infrastructure is critical for its future competitiveness. SMG recognizes the need to adopt a more holistic approach to environmental management involving not simply the control of point sources of pollution but also measures to influence other urban activities that generate pollution of a dispersed nature. In this connection the Tenth Five-Year Plan recognizes the growing impact of motorization on urban environmental quality. SMG also plans to further modernize its management, establishing an integrated legal framework for urban management with a rational division of responsibilities among local jurisdictions. This would be achieved through: (a) the establishment of a comprehensive urban hierarchy, consisting of major urban centers, satellite cities, suburban areas and towns/townships; (b) a comprehensive urban infrastructure system; and (c) the adoption of an environmentally sustainable approach in all investments. 2. Objectives The proposed series of APLs is designed with the objective of improving environmental conditions by progressive development and implementation of integrated, metropolitan-wide measures.The main development objective of APL1 is to put in place some of the underpinnings and enabling conditions for SMG to pursue this integrated, metropolitan-wide approach. Policies/programs will be formulated to enhance, among others, management of water resources, market-based approaches for solid waste services, development of new financing instruments, and the testing of alternative approaches for improving urban environment services in underserved areas. A second objective would be to install, in both the city center and some of the surrounding districts, facilities already known to be high priority to achieve metropolitan-wide environmental objectives (e.g., protection of upstream sources for water supply, expansion of shared landfills, and complementary investments to increase efficiency of existing wastewater facilities).The development objective of APL2 is to have the surrounding districts participate increasingly in the metropolitan-wide measures to - 3-  improve wastewater and solid waste management, and to deepen the scope of the environmental agenda being addressed across the City-Region. Investments to be financed include those associated with the implementation in the districts and the core city of policies/programs developed in APL1 (including associated human resource development). The environment agenda will be deepened to include, among others, air quality, development of policies/programs for treatment of medical waste, strategy for dealing with agricultural waste, approaches for rehabilitation/upgrading of urban environment services in old urban areas and rehabilitation/redevelopment of old industrial areas in the core city. The development objective of APL3 is to have a technically and operationally effective, financially sustainable urban environmental services system across the City-Region. SMG, with the support of the central government, has proposed that the above objective be achieved with support from an APL over about eight years in three phases commencing about June 27, 2002 and ending about October 1, 2010. The aggregate amount of loans under the APL is expected to be about $799 million, with tranches of $311, $250 and $200 million. 3. Rationale for Bank's Involvement The Bank brings considerable international experience in terms of assisting policy formulation and investment program design. Bank assistance will also draw upon our growing experience in addressing regional environmental issues in priority environmental improvement projects in China, including the cleanup of Dianchi Lake (as part of the Yunnan Environment Project), the Huai River Basin and the Liao River Basin in Liaoning Province, all included in the priority "three rivers, three lakes" program.The Bank has a long and very productive collaboration with SMG in improving the city's urban environment and infrastructure. Past Bank-supported operations have engaged in significant institutional reforms in the water, wastewater, transport and energy sectors in Shanghai. 4. Description APL 1 Project Urban Wastewater Management Urban Solid Waste Management Urban Environmental Infrastructure Services Upgrading Urban Environment Improvement Upper Huangpu Catchment Environmental Management Institutional Strengthening and Training 5. Financing Total ( US$m) BORROWER $0.00 IBRD $311.00 IDA LOCAL GOVTS. (PROV., DISTRICT, CITY) OF BORROWING COUNTRY $960.40 Total Project Cost $1271.40 -4-  6. Implementation A program leading group has been established in SMG to provide policy guidance and to monitor progress in pursuing the overall urban environment improvement strategy. Under the leading group there is a coordination group composed of representatives of the Shanghai Development Planning Commission (SPC), the Shanghai Finance Bureau (SFB), and the Shanghai Environmental Protection Bureau (SEPB). For APL1, the Shanghai Water Authority (SWA) has been designated to act as the Project Office (PO). In APL1, the Shanghai Municipal Sewerage Company (SMSC) together with the Shanghai Water & Environment Construction Company (SWEC) would implement the urban wastewater component. The Shanghai City Appearance & Environmental Sanitation Administration Bureau (SCAESAB) would implement the urban solid waste management component. The Huangpu District Government (HDG), a district government within the core urban area of Shanghai, would implement the Urban Environmental Infrastructure Services Upgrading pilot program. The Shanghai Municipal Landscape Bureau (SMLB) would implement the Urban Environment Improvement component. SPC, SWA and SEPB have tentatively identified three towns in two districts (Jinshan and Fengxian) in the Upper Huangpu River Catchment area of the municipality where wastewater interception and treatment would improve local urban environment conditions, and contribute to the protection of water resources quality in the catchment.Wastewater collection, treatment and disposal investments in Jinshan and Fengxian Districts within the Upper Huangpu Environmental Management component would be implemented by three district wastewater companies yet to be established. The collection, treatment and disposal of animal wastes, also within the same component, would be the responsibility of district government departments. As SMG and the Jinshan and Fengxian district governments require more time to prepare these investments, the Upper Huangpu Environmental Management component would be implemented as a line of credit. The districts would have until December 31, 2002 to complete their feasibility and other reports before Bank appraisal of their proposed investments. After the Bank has appraised and approved a district government subproject, SMG would make a subloan to the district government, and the Bank would make available a portion of its loan from the line of credit to finance agreed investments under the approved subproject. Preparation of subsequent phases and related studies would be undertaken by the appropriate district entities under direction of the program leading group, the PO and appropriate district project offices. The has been retained as the procurement agent for all aspects of civil and electrical and mechanical works requiring bidding through international competitive bidding (ICB) procedures. Institutional and financial strengthening and construction supervision services would be provided by international firms using joint international/national supervision teams.Onlending Arrangements: The proposed loan of $311 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 SM 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 per year. SM would onlend part of the proceeds of the Bank loan to SMSC and to district wastewater entities to be identified, for 15 years including 5 years of grace, at an interest rate not less than the Bank's rate to China plus SM's portion of the front-end fee and a commitment charge of 0.75 percent per year. Financial Management: An assessment of project financial - 5 -  management including an assessment of the relevant revenue-earning implementing agencies was carried out prior to appraisal, to ensure that the Bank's minimum financial management requirements as stipulated in OP/BP 10.02 would be 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 $20 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 SFB.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 Shanghai Municipal 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, SMG 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 that these agencies had taken out adequate insurance on goods and works financed from loan proceeds.Monitoring and Evaluation Arrangements: The more routine aspects of monitoring are already in place. The Shanghai authorities are experienced in managing project investments following the Bank guidelines, and the Project Office will produce semiannual status reports for the Steering Committee and for the Bank. The first such report would be submitted by January 21, 2003. Adequate systems/facilities are in place to monitor the quality of the water and air environment, and the project will assist in the use of GIS to enhance the management information systems for solid waste. The Tenth Five-Year Plan has established interim and final targets for environmental service delivery that can be monitored with existing management information systems in the various utilities and government bureaus, e.g., share of population served, share of sorted collection of domestic solid waste, share of wastewater collected, share of centralized treatment of food waste, m2 of green space per capita, etc.The most important and challenging aspect of monitoring and evaluation will be tracking the pace toward the fulfilling the overall development objectives, due to their longer-term nature and the interlinkages among phases and goals. Bank supervision will therefore give top priority to helping the Shanghai authorities understand the issues facing them, keep track of their progress, and maintain focus on what it takes to achieve their overall goals.Given the innovative nature of some project initiatives and sometimes highly technical features being investigated, Bank supervision will also need to provide expert guidance on some matters. Even though significant technical assistance is provided within the project, it is likely that the Bank will need to supplement its own expertise with world-class practitioners, particularly for overseeing the development of innovative financing arrangements. The supervision strategy would emphasize outcomes, continuity of expertise and the high caliber of Bank supervisory staff.Headquarters and country office staff would cooperate to handle the Bank's supervision responsibilities. Full supervision missions would be scheduled twice a year, with the country office staff also - 6 -  keeping in close contact on a regular basis through phone contacts and field visits as needed. A mid-term review would be undertaken jointly with SMG in 2005 to evaluate the project's achievements and identify any necessary corrective measures. An Implementation Completion Report would be prepared by SMG and submitted to the Bank within six months of the loan closing date. 7. Sustainability The project would be sustainable in three respects: (a) financially; (b) institutionally; and (c) achieving its development objectives. Financially, the establishment of long-term financing mechanisms would lead to improved infrastructure service delivery. The revenue and service charge enhancements proposed under this project, together with the investments to improve the quality of water, the effective treatment and disposal of wastewater and cost-effective solid waste management, would provide a framework for urban service delivery sustainability. The incremental operations and maintenance cost would be provided through increased tariffs and charges. Institutionally, the technical assistance to strengthen utility management will build the necessary capacity to sustain the efforts. Finally, the project addresses an issue of high priority to both the local and the national governments: 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. 8. Lessons learned from past operations in the country/sector Independent Projects Versus a Program Approach. The Bank supported development of urban environmental services in Shanghai through three separate investment projects--Shanghai Sewerage Project (SSP1, 1987-93), Shanghai Environment Project (SEP, 1994-2000) and Second Shanghai Sewerage Project (SSP2, 1996-2000). Total investment costs amounted to nearly $1.4 billion, with Bank financing of $555 million. SSP1 provided a catalyst for institutional and financial innovation in the drainage and sewerage subsector--with the creation of the Shanghai Sewerage Company, with powers to borrow and to charge for its services. However, even with the formal changes into company status, the company continued to operate as if it were still a government department, and introducing sewerage charges for households took longer than initially planned. Through SEP, SMG worked on water supply investments, while at the same time reinforced work on identification and control of sources of pollution, improvements to municipal, environmental and utility management and finances, and supported training and technical assistance, including preparation of the Shanghai Environment Master Plan and the Hazardous Waste Management Study. During preparations for SSP2, SMG made further improvements to the institutional and financial arrangements in the sector, creating the Shanghai Municipal Sewerage Company (SMSC), installing new management and adjusting wastewater tariffs to achieve cost recovery. During the course of these three projects, it became clear that a longer-term framework was necessary to guide work in the sector, in particular the policy and institutional reforms, where it is an iterative process, and the pace of reforms can be uneven and at times out of sync with each other. Trying to justify individual projects and investments against an institutional reform agenda that was still evolving was confusing to the Shanghai authorities and undermined the Bank's ability to engage constructively with a longer-term perspective. However, these three projects did help - 7 -  create enough ingredients and experience for the Shanghai authorities to move to a program approach, where the driving elements are no longer justifying individual investments, but rather how to build up the policies, institutions and infrastructure to contribute to the economic and social development goals of the city.Greater Reliance on User Charges. A major finding from the Operations and Evaluation Department (OED) review of water and sanitation projects across all countries has been generally good achievement of physical targets but less success in sustaining the financial viability of municipal environmental service providers. Preliminary indications from an ongoing OED review of all Bank-financed water supply and wastewater projects in China appear to confirm that these findings also apply to Chinese projects. Therefore, through recent sector work for China ("Urban Environmental Service Management," Report No. 13073-CHA) the Bank is constructively engaged with the Chinese authorities about the need for greater reliance on user charges, which are currently set in most borrowers at levels that would not sustain the services. In the case of SMSC, however, SMG has regularly authorized wastewater tariffs to be adjusted to ensure its financial viability and SMSC has been in full compliance with its financial covenants under SSP2 over the past six years. In the course of preparing the series of APLs, Bank dialogue with the Shanghai authorities has progressed even further, evidenced by SMG's commitment to establish appropriate tariffs for urban environmental services across the metropolitan area, as a key building block to arranging for private participation in urban environment infrastructure services as well as to opening these utilities to opportunities for project finance on the capital markets.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. While wastewater collection and treatment has only recently been given the same autonomy, generally by organizing the existing drainage bureaus and construction management units into separate enterprises, SMG has already demonstrated its commitment to the concept of financial autonomy by establishing SMSC, which continues to perform well--institutionally, financially and technically. The establishment, as necessary, of district wastewater companies in Jinshan and Fengxian Districts prior to project implementation would provide sufficient time for management and operational issues for these district-owned utilities to be clarified. 9. Program of Targeted Intervention (PTI) N 10. Environment Aspects (including any public consultation) Issues : The program and the individual components are designed to help improve the overall environment of the Shanghai urban area and its surroundings, and to improve the quality of life for the inhabitants. Its basic objectives are therefore environmental and fit into the overall strategic planning of SMG. There have been extensive studies over the years into the environmental issues and there is an extensive data and knowledge base. 11. Contact Point: Task Manager Geoffrey Read -8-  The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: (202) 458-4078 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. This PID was processed by the InfoShop during the week ending March 22, 2002. 9