China - Fourth Inland Waterways Project

Report No. PID11526 Project Name CHINA-Fourth Inland Waterways Project Region East Asia and Pacific Region Sector Ports; waterways and shipping (58%); Renewable energy (42%) Project ID P077137 Borrower(s) MINISTRY OF FINANCE Implementing Agency Address GUANGDONG PROVINCE AND GUANGXI AUTONOMOUS REGION Guangdong Province Waterways Bureau Address: 195 Yanjiang Zhong Road, Guangzhou 510120, PR. China Contact Person: Mr. Chen, Zichao Tel: 86-20-8330-5766 Fax: 86-20-8332-3084 Email: wbwblpo@public.guangzhou.gd.cn Guangxi Communications Department Address: 67 Xinmin Road, Nanning, Guangxi 530012, P.R. China Contact Person: Mr. Li, Shangyan Tel: 86-771-262-0575 Fax: 86-771-280-5550 Email: wzbgs@public.nn.gx.cn Environment Category A Date PID Prepared February 14, 2003 Auth Appr/Negs Date June 25, 2003 Bank Approval Date January 15, 2004 1. Country and Sector Background The rapid growth of the Chinese economy has overloaded its transport network, which is struggling to keep pace. In varying degrees the infrastructure of all transport modes has been modernized and upgraded, but the tonnages to be moved have grown so fast and so broadly that there have been long time lags before new capacity could be put into operation. Massive migration to the cities has especially strained urban transport systems designed for far smaller populations. The introduction of higher-capacity and higher-quality transport services -notably long-distance trucking--has also lagged behind demand, deterred by regulatory restrictions and the continued dominance of state-owned enterprises which lack incentives to respond to demand. Bottlenecks in infrastructure have been the main focus of investments in all modes: roads, railways, waterways, and especially urban transport. A sectorwide issue is how to ensure transparency in the awarding of contracts (competitive bidding) and ensuring compliance with their price and quality provisions (supervision). Bottlenecks in services remain serious. Because of the under-development of China's services sector, China's logistics costs (including warehousing and distribution) are high at 18 9  of GDP, in comparison with the US, 9.5 W in the mid-1990s. Moreover, whereas in developed economies transport accounts for 25t of the total logistics cost, in China it is closer to half. Private sector participation in the growth of China's highway system is advanced in terms of both development models and private capital flows. The private sector has contributed nearly 10. of China's total commitment to new construction since the inception of economic reform in the early 1980s (high compared to most countries). However, the degree of risk transfer from the public sector has been limited and obstacles to increased flows of funds are found in the legal and regulatory framework for private participation in infrastructure. Transport's role in promotion of trade: China's exports are crucial to the success of its economy. However, internal transport costs are high, so that coastal provinces enjoy a considerable advantage in competition with inland provinces. Part of the problem for the inland provinces is distance; part is inefficiency or inappropriate pricing. Intermodal logistic chains are weak. If the inland provinces are to share in the export boom --either directly or as suppliers of inputs to manufacturers near the coast--, special efforts are required to improve their access to seaports. China's membership of WTO requires opening up of transport services to foreign participation. This may be good news for exporters but bad news for Chinese transport firms. Issues related to roads: The Government faces many strategic choices: how to balance the population's desire for greater personal mobility (car ownership) with protecting the environment and especially air quality; how to balance spending on highways with rural roads; how to share costs between national and provincial governments; how to finance highways -whether by tolls or through a user charge added to fuel; how to attract private finance and management skills into road construction and maintenance; and how to make all roads safer. It also faces the question: how to promote efficient service-oriented trucking companies in the private sector? Railway issues: After careful deliberation and analysis of international experience, the Government has adopted strategic goals for the national railway system, aiming to make it more responsive to the market. It plans to legally separate transport operations from government oversight, and establish profit centers for passengers separate from freight. It remains to be decided how and when these will be implemented. Secondary strategic goals also need to be decided upon: how far to allow pricing flexibility so that prices can reflect costs more closely, service by service, and carriers and customers can enter into contracts covering not only price but also service quality; and how to deal responsibly with surplus labor, as information technology eliminates the need for many jobs. Government strategy The Government is tackling all the above issues with varying degrees of success. Construction goes well everywhere. The Government has not reached a decision on a fuel surcharge to fund roads, apparently due to opposition from vested interests. Much remains to be done to make the roads safer, especially on driver education and enforcement. A window of opportunity may be closing to take tough action to restrain private car - 2-  use, as one new car-manufacturing joint venture after another is announced. On urban transport the more innovative cities are building undergrounds (metros) or busways; some are improving traffic management and taking steps to make streets safer for cyclists and pedestrians. Many are catering to private cars to excess, without addressing the urgent need for an orderly parking regime (space, charges and enforcement) and other measures to manage demand. The Ministry of Railways, having announced its general intention to undertake 'three separations', needs now to set a timetable to implement them and address its surplus labor issue. The legal framework for private participation in infrastructure needs attention. On export competitiveness the Government is eager to improve access for inland provinces and is seeking ways to lower their transport costs and strengthen the logistics services linking them with external markets. 2. Objectives The Project's main objective is to improve access for poor regions of southern China by upgrading navigation conditions on the region's major east-west river and other waterways feeding traffic into the Pearl River Delta region. A secondary objective is to harness water flow in two of these rivers to generate environmentally clean electricity to help meet growing energy demand in the provinces of Guangdong and Guangxi. 3. Rationale for Bank's Involvement Since both provinces are prior subborrowers from the Bank for major infrastructure, they know what the Bank offers. They appreciate the savings that have accrued to them by virtue of the Bank's international competitive bidding procedures. Even if almost all contracts go to Chinese suppliers, the Bank procedures are recognized as imposing demanding standards of transparency and the bidders respond accordingly. It is also recognized that Bank-imposed contract supervision ensures a high standard of compliance with the conditions of contract. The risk of political interference is minimized. The Bank is also seen as adding value in its probing of project alternatives to ensure adoption of the most cost-effective option, and in the window it opens on international experience regarding complex project management and matters of public policy such as cost recovery and regulation of carriers. On the negative side the Bank's safeguards are seen as onerous and adding not much value relative to compliance with Chinese laws on environmental and social impacts and resettlement. The above applies to all infrastructure. Why waterways? Until the mid-1990s China had spent much on railways and highways but little on waterways; they remained technically outdated. The Bank's support for waterways put the spotlight on them and encouraged the Government to invest in them. The institutional arrangement for implementing the IWW projects and manage the waterways thereafter --proposed by the Bank-- has been innovative for China: legally independent state-owned interprises, which for part of their budget have to rely on revenue streams collected from users. These special-purpose firms have worked well so far but are still young and will benefit from further institutional advice and guidance as they consolidate their roles. As noted above, there remains considerable scope for refining government -3 -  policy on waterway user fees. This project could be a vehicle for advising on how such a policy should be formulated (principles) and how it should be implemented, recognizing that the waterways are managed by the provinces and the provinces enjoy substantial financial autonomy from the national government. If the national government ever adopts the national gasoline tax that it has been considering, waterway user charges may have to be rethought. Management of waterways' navigation function is still insufficiently coordinated with other uses of the rivers. In its recent water resource management strategy paper for China the Bank encourages the national and provincial governments to adopt integrated water resource planning approaches. This project would contribute a working example. For the Naji and Baise dams we recommend a permanent coordination mechanism to plan and oversee water releases from the two dams and resolve conflicts (see Section 4.2). 4. Description A. Guangdong: to improve navigation conditions and generate electricity through civil works and associated investments on three waterways: 1) Construction of the Xiniu Navigation Complex (a low dam to regulate river depth, including a ship lock to assure 2.5m draft and power plant of 6.4 MW capacity) and minor channel improvements on about 13 km of the Lian River, a tributary of the North River (below); 2) Purchase of turbines and other equipment for the above powerhouse, and of lock gates; 3) Construction of two substations to link the Complex to the power grid serving the city of Yingde. 4) Resettlement of about 500 farmers living in the intended Xiniu reservoir zone; 5) Channel improvements on the middle reaches of the North River (Bei Jiang) between Shaoguan and Qingyuan (about 180 km) to allow vessels of up to 300 tons to ply safely year-round; 6) Channel improvements and regulation works on the Laolonghu Waterway (about 16 km), an east-west waterway in the Pearl River Delta network serving mainly traffic between the rural south of Guangdong and the provincial capital, Guangzhou, to allow vessels of up to 1,000 tons to operate safely year-round; and 7) Replacement of 2 bridges over the Laolonghu Waterway, which are too low for the intended larger ships. B. Guangxi: to allow navigation by vessels of up to 500 tons on the Right River (You Jiang) between the cities of Baise and Nanning (357 km) and generate electricity, through civil works and associated investments. 1) Construction of the Naji Navigation Complex, a 20m-high dam to regulate river depth, including a ship lock to assure 2.5m draft and a power plant of 57 MW capacity, about 38 km downstream from Baise; 2) Purchase of turbines and other equipment for the above powerhouse, and of lock gates; 3) Construction of access roads (about 9 km) to the dam on both banks and a bridge over the river; 4) Construction of two substations to link the dam to the Baise power grid; 5) Construction of dikes and dredging of shoals between Baise and Nanning; 6) Upgrading of navigational aids; and 7) Resettlement of about 320 residents (farmers and others) living in the - 4 -  intended reservoir zone and along the alignment of the approach roads. C. Institutional strengthening and technical assistance (TA). To strengthen the technical and management skills of personnel of the two project offices, consulting services and study tours will be provided. Topics are likely to include: (i) integrated water basin management, (ii) flood and drought forecasting, (iii) training of shiplock operators, (iv) waterway user charge and cost recovery policies, (v) policies and principles for vessel and operator licensing, (vi) implementation of computer-based information systems to systematize the licensing process, and (vii) implementation of Internet-based systems to give waterway users information on river flow, tide and draft conditions in real time. If motivated counterparts can be identified, the issue of facilitating transport documentation for containerized cargo (through bills of lading, Customs clearance inland, etc.) could also be included. Guangdong Xiniu Dam (Navigation Complex) Guangdong regulation of North River Middle Reaches Guangdong improvement of Laolonghu Waterway Guangdong study tours & technical assistance Guangxi Naji Dam (Navigation Complex) Guangxi Right River (You Jiang) training works Guangxi study tours & technical assistance Price & physical contingencies (12%) 5. Financing Total ( US$m) BORROWER $137.00 IBRD $95.00 IDA Total Project Cost $232.00 6. Implementation Executing Agencies. The project will be executed by the Guangdong Provincial Waterway Bureau and the Guangxi Communications Department. Each has set up a project office (PO) to manage preparation and implementation of the project. Each PO is set up as a legally independent company wholly owned by the province, with a full-time project team comprising technical staff from the concerned government agencies. Each has prior experience with implementing a World Bank project. The Guangdong PO has managed successfully its component of the on-going Second Inland Waterway Project (IWW2). The Guangxi PO brings together many staff who worked on the PO for the Bank-supported First Inland Waterways Project, completed in 2001, and the Guangxi Highway Project being implemented since 2001. Funds Flow. Arrangements and responsibilities for funds flow will be developed and agreed during preparation. It is anticipated that these will be similar to the arrangements used for the previous inland waterway projects in China. Project Management Activities Procurement. Responsibilities for all procurement activities will be developed and agreed during preparation. An institutional assessment will be completed prior to appraisal in order to ensure that adequate skills - 5-  are available to manage the procurement operations. A procurement plan will be developed as part of the Project Implementation Plan. Financial management. Responsibilities for all financial management activities will be developed and agreed during preparation. Prior to appraisal, a Finance Management Specialist will review the adequacy of the current institutions to manage project funds. A financial management manual will be developed by the Clients. Environment. Each Province has submitted a draft Environmental Assessment (EA) and Environmental Management Plan (EMP), which the Bank is reviewing. These will be completed and cleared before appraisal. Responsibilities for all environmental management activities will be developed and agreed during preparation and included in the EMP. Resettlement. Each Province is currently preparing a Resettlement Action Plan (RAP), which will be subject to clearance before appraisal. Responsibilities for implementation of resettlement will be developed and agreed during preparation and included in the RAP. Construction supervision. Construction supervision will be discussed and agreed during preparation. Project Implementation Plan (PIP). Each Project Office will prepare a PIP for their respective component. 7. Sustainability The potential response of the market to the availability of improved water transport infrastructure will depend on many factors, most of them beyond the control of the project implementing agencies. The extent to which new barge fleets will start operating and will drive down waterway tariffs, and the extent to which new industries will be attracted into this transport corridor, warrant close attention during preparation. Policy analysis was conducted under IWW2 to develop an action plan of incentives for barge operators; it remains to be seen whether this initiative, taken by Jiangsu province, will provide a viable template for Guangxi and Guangdong provinces to copy, whether they will put it into effect, and what response it may elicit. As to the response of cargo owners, the identification mission encouraged the Guangxi PO to consult widely with potential customers with a view to firming up their traffic projections. There is little doubt that the electricity generated by the two proposed dams will be purchased by the local power distribution companies. Today generating capacity is short; in the future the low marginal cost of hydro-electricity will make it attractive. The national government is seeking ways to reduce acid rain, putting hydro-electricity in a strong position. Furthermore, the peak season for electricity demand (air conditioning) coincides with the peak rains; the driest months (late autumn) fortunately are also months of low power demand in the South. 8. Lessons learned from past operations in the country/sector As repeat borrowers, the implementing agencies for the proposed project have drawn useful lessons from the experiences of the one completed inland waterway transport project financed by the Bank in China (the Guigang dam in Guangxi and the Dayuandu dam in Hunan), and the two on-going projects: - 6-  IWW2 in Guangdong and Jiangsu and IWW3 in Hunan (Zhuzhou Dam). The project agencies have learned international good practice on procurement, cost estimation, and preparation of environmental assessments and resettlement plans in accordance with Bank requirements, including wide consultation with stakeholders. Joint ventures of international and Chinese consultants have advised on techniques for efficient collecting of data on fleets and ports, as a basis for monitoring the achievement of project objectives. Consultants have also assessed the potential impact of fleet restructuring on employment in IWT, and developed programs for improved navigational aids and management information systems. The proposed project will enable Guangdong and Guangxi to take these institution-building measures to the next logical stage. 9. Environment Aspects (including any public consultation) Issues : This project includes construction of so-called 'navigation complexes' and regulation of rivers. Major potential environmental issues identified by the draft EIAs are: (1) environmental impacts of dredging and disposal of dredged material, (2) water pollution by construction works and subsequent increases in ship traffic, (3) air pollution and noise by materials transportation, (4) soil erosion, and (5) ecological impacts to inundated areas and aquatic environments. The draft EIAs reported no protected areas or critical natural habitats around the proposed complexes. The Communication Departments of Guangxi and Guangdong have extensive experience with Bank-financed and other inland waterway projects. A combination of conventional mitigation measures and good supervision and monitoring will serve to manage environmental impacts appropriately. Naji Navigation Complex: This complex includes a big dam (19.55m height from foundation to top sill), which triggers the Dam Safety Safeguard Policy. As this component includes construction of an access bridge and access roads and regulation of the Right River (You Jiang), the EIA covers all the relevant civil works. Identification of environmentally sensitive sites or zones associated with regulation works along the river will be further reviewed during the next mission. Xiniu Navigation Complex: This complex is located about 3.5 km above Xiniu town. Current water quality is quite good and attention will be paid to the existing water intakes for the town. The dam part is relatively small, 10 m height from foundation to top sill. North River (Bei Jiang) Regulation Along the 184 km middle reach of North River, dredging and groin/revetment construction will be conducted at five sections totaling about 75 km. Attention will be paid to: (1) disposal sites for the dredged sediment, and (2) water intakes along the river. Laolonghu Regulation This component will provide improvements to about 16 km of existing channel. There is one village along the channel. Attention will be paid to (1) disposal sites for the dredged sediment, and (2) protection of the village from noise and air pollution. -7-  10. Contact Point: Task Manager Graham Smith The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: 5788+3100 11. 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. - 8 -