Chongqing Urban Environment Project

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 nearly 35 million residents, including 6 million urban residents. Chongqing City proper, 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 3.3 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 Dam 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) will increase substantially, exacerbated by lessening restrictions on in-migrations. As the number of legal and illegal urban residents grows, urban areas will 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 Dam. The impact on water quality in rivers, however, has been uneven: preliminary 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 strong 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 E.coli bacteria are rampant in some water sources, as high as 15,000 E.coli/l in some parts of Chongqing.

The completion of the Three Gorges Dam, some 1000 km downstream of Chongqing, will reduce the velocity of the Yangtze River, increase its water depth, and alter the flow regime. From a river basin perspective, Chongqing needs to be concerned with maintaining a water quality which will avoid eutrophication of the future reservoir. 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 must adjust its urban environmental infrastructure to the heightened water level: for example, two of Wanxian’s water supply plants will be submerged, parts of the sewer system and wastewater treatment plants will be flooded, and open dumpsites located near the river will 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 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 are typically 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, but 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 2000, 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 will be collected and treated, far more than the present levels. To reach these targets, the municipality must tighten the enforcement of existing standards, in particular for industrial pollution control; expand the capacity of wastewater collection and treatment systems; and improve solid waste management. 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 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, and 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. The project would include the following components:

(a) Wastewater Management and Municipal Solid Waste Management: Investments would support sewer and stormwater collection systems, pump stations, wastewater treatment and disposal facilities, and the cost-effective disposal of solid waste including sanitary landfill development, in Chongqing City and adjacent urban centers of Wanxian and Fuling, including pilot activities in Qianjiang

(b) Urban Water Supply: Investments would support remodeling and upgrading of water supply and distribution in Chongqing City and adjacent urban centers of Wanxian and Fuling, including pilot activities in Qianjiang.

(c) Water Quality Monitoring and Management: Investments would support the establishment of regionwide monitoring centers and improved monitoring technology, with a focus on the Yangtze River and two tributaries, the Jialing and Wu rivers.

(d) Institutional Strengthening: The component would finance designs and equipment for GIS-based decision support systems. Staff would receive training in these systems, in order to strengthen (i) utilities’ financial and operational management, (ii) municipal tariff policies; and (iii) the municipal government’s capacity for region wide water quality monitoring. Technical assistance would also support construction management services and the preparation of future environmental investment projects.

4. Financing
Total project cost is estimated to be about $500 million. The Bank Loan would cover an estimated $250 million of that cost, with the remainder financed by the Government and the China State Development Bank.

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 (IRPC, Loan 4045-CHA) which has just begun implementation. For project management, Chongqing Municipality has established a new Leading Group to oversee project formulation and preparation and has expanded the existing World Bank Project Management Office (CUPMO). In the municipal government, the Construction Bureau is the 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) would be responsible for the implementation of the sewerage and drainage components. These services are currently provided by the wastewater divisions of the municipal departments. To improve the financial sustainability of the sector, this project would be implemented through self-accounting and self-financing wastewater entities. The establishment of such wastewater companies would be a condition of project processing, to be undertaken no later than pre-appraisal.

Municipal Water Supply Companies (WSCs) would implement the water supply component. These would be responsible for construction management, 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.

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 Sichuan to put in place the policies, institutions, and infrastructure 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 will enable utilities to sustain and expand the provision of essential services for a growing population. Support for institutional development would 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 increased tariffs and charges. Institutionally, the technical assistance to strengthen utility management and water quality monitoring will build the necessary capacity 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 subcomponents. 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, CUPMO 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.

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. Recent sector work on China (“Urban Environmental Service Management”, Report #13073-CHA) notes 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 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 policy dialogue with the Chongqing government and adjustments of tariff levels are an integral part of the project design.

[Note: Lessons learned from completed and ongoing projects financed by the Bank and other development agencies.]

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.

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.

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 must be allocated for both preparation and supervision, and technical assistance must be sufficient to meet requirements. 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.

9. Environmental Aspects

The bank has recommended that the Environmental Assessment work be carried out with the thoroughness of a Category “A” project, primarily due to the environmental relationship between CUEP and the Three Gorges Project and the need to secure water supplies further into the future. In addition to a standard EA, an analysis will be required on the impact of the Three Gorges Dam on the absorptive capacity of receiving water bodies. This will allow determination of acceptable pollution levels for discharges from wastewater treatment plants.

National consultants have not yet been appointed for the preparation of the Resettlement Action Plans. However the draft RAP will be sent to the Bank for review no later than one-month after the return of the pre-appraisal mission.