Poverty Reduction in Coal Mine Areas (Financed by the Poverty Reduction Fund)

Technical Assistance Consultant’s Report Project Number: 37616 (TA 4566-PRC) December 2006 People’s Republic of China: Poverty Reduction in Coal Mine Areas (Financed by the Poverty Reduction Fund) Prepared by ESSA Technologies Ltd. 1765 West 8th Avenue Vancouver BC. V6J 5C6 For Shanxi Provincial Development and Reform Commission and Asian Development Bank This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project’s design. Toward Poverty Reduction in Coal Mining Areas in Shanxi Province ADB TA: 4566-PRC Final Report Submitted to: Director, Foreign Capital Utilization Division Shanxi Provincial Development and Reform Commission No. 21 Donghouxiaohe Street, Taiyuan, Shanxi, PRC and Asian Development Bank P.O Box 789 0908 Manila by ESSA Technologies Ltd., 1765 West 8th Avenue Vancouver BC. V6J 5C6 December, 2006 CURRENCY EQUIVALENTS (as of 20 December 2006) Currency Unit – YUAN (CNY) CNY 1.00 = $ 0.1276 $1.00 = CNY 7.812 ABBREVIATIONS ADB Asian Development Bank ALC Administration of Land Resources BT Billion Tons CMADP Coal Mine Area Development Project CNNC China National Nonferrous Corporation CNPC China National Petroleum Corporation EA Executing Agency EIA Environmental Impact Assessment EIS Environmental Impact Statement EPB Environmental Protection Bureau JMDRC Jincheng Municipal Development and Reform Commission KSOCM Key State Owned Coal Mine MMI Metallurgical Industry MGMR Ministry of Geology and Mineral Resources MOLAR Ministry of Land and Resources NDRC National Development and Reform Commission NPC National Peoples Congress NSPS National Safety Production Administration Bureau PPMS Project Performance Management System PRC Peoples Republic of China SOCM Local State Owned Coal Mine SPC State Planning Commission ToR Terms of Reference TVCM Town and Village Coal Mine VAT Value Added Tax i ACKNOWLEDGEMENTS Many people were instrumental to the success of this project. On behalf of the project team and ESSA Technologies Ltd., I warmly thank Madame Wang Hong Ya; Director of the Foreign Capital Utilization Division of the Shanxi Development Reform Commission, and her staff for the extensive support and guidance provided throughout the project. Madame Wang's keen interest contributed greatly to the project. Special thanks goes to Mr. Wang Weizhong of the SDRC for his unfailing logistical support and keen insight into project issues. I gratefully thank Mr. Maihui Shen and his staff of the Jincheng Municipality Development Reform Commission for the full support and generous hospitality during the field missions to Jincheng municipality. Ms. Xiafang Ren and Mr. Jianfeng Yang of the JMDRC made each mission a great success as a result of their careful and thorough attention to the logistics, organization, and facilitation of the stakeholder meetings. Their assistance with data and information collection was most helpful. The project could not have been completed without the valuable input provided by the different stakeholders of the coal mine industry on the issues surrounding the closure of small coal mines. I thank the following provincial and municipal stakeholders whom provided their valuable time and assistance to the project team during all field visits to Taiyuan and Jincheng city. Land Resource Bureau Coal Mining Bureau Environmental Protection Bureau Coal Mine Safety Management Bureau Statistical Bureau Labour and Social Security Bureau Bureau of Civil Affairs Poverty Reduction Bureau Price Bureau I express sincere gratitude to Mr. Edu Hassing, Dr. Bo Q. Lin, and Mr. Teruhisa Oi for support and guidance throughout the project. The complexities of the scope of the project necessitated their careful eyes. The project is indebted to Ms. Lorna Enjaynes who provided key administrative direction and contract support throughout the project. Last, but definitely not the least I thank the national and international project team whom have worked hard on a challenging assignment. The intertwined social, economic, and institutional issues underpinning the difficulties with closing small coal mines are not trivial, and are very important to resolve. JDM ii This page is intentionally left blank iii EXECUTIVE SUMMARY 1. The Chinese government has implemented a policy to close small coal mines (< 90,000 tons annually) to consolidate and develop larger mechanized mines. The target mines for closure fall within the town and village level mines (TVCM) category. The small TVCM has shown too often to be inefficient, and operationally unregulated which has lead to safety and lingering local environmental impacts issues. These factors are the reasons the Chinese government is working toward closing these mines. The Asian Development Bank in consultation with the Chinese government has agreed to provide assistance to Shanxi province to alleviate poverty in coal mining areas that stems from the displaced miners whom lose their jobs with mine closures. Shanxi province was selected as the study area for assistance because of the high socioeconomic dependence on coal mining in that province. 2. The economic, institutional, and social implications of the closure of the many thousand small coal mines in Shanxi province are significant due to the importance of the small coal mine industry that has emerged over the last 10-20 years. This report presents the results of an analysis of the economic, institutional, environmental and social impacts of small mine closures in Shanxi province. The report prescribes two options for reducing unemployment caused from mine closures: a) re-employment and vocation redevelopment; and b) development of alternate coal-based industries in the province. 3. The management of small coal mines in China has experienced a history ranging from initial, active encouragement to restrictions and ultimate shutdown. Development of small coal mines occurred during the period of the sixth five-year plan (1981-1985) when coal production could not meet the demand, which became the key constraint to the country’s economic development. However, random and excessive coal exploitation which ensued also brought negative effects such as coal mines operating without licenses and sufficient regard for worker safety, and adverse impacts caused to the community and environment. 4. A series of laws and regulations were implemented starting in 1997 to eliminate the negative effects of small coal mines which focused on shutting down and reducing the production from small coal mines. Though not 100% implemented the closure laws have had an effect on the industry. Unfortunately the trend of mine closure did not continue as a result of the rise in coal prices and lack of coal market support in recent years, which provided the stimulus for the re-opening of many small mines that were closed. However, the central government’s intention of closing down small coal mines in China has not changed. 5. Prior to 2005, the closure of small coal mines in Shanxi province served the national policies and regulations for mine closures. In 2005 the central government appointed Shanxi as the pilot province to combine the closure of small coal mines with the integration of coal resources. As a result, some new policies and regulations were issued and adopted. The key directives of the new policies fall under the umbrella program of: "Implementation of Coal Mines Resources Integration and Reimbursement for the Right of Coal Resource Mining in Shanxi Province", which regulates the procedures of coal resource integration and reimbursement for coal mining rights in Shanxi. iv 6. There still exist problems with the current policies for closing down small mines in Shanxi province as summarized below: (i) Lack of policies to assist economic development in the areas affected by small coal mine closures. (ii) Lack of policies for compensation of small, legal coal mines that are forced to close. (iii) Lack of policies for resettlement of unemployed coal miners. (iv) Weak administration of industry and interacting functions among the relevant government departments. (v) Impracticality of totally closing down all coal mines with an annual production below 90,000 tons pursuant to current policy. 7. The following recommendations are put forward: 1. Boost industrial diversification of local economies affected by small coal mine closures. 2. Design support mechanisms for individual entrepreneurs and small-medium enterprise development. 3. Design compensatory mechanisms for different stakeholders. 4. Combine mitigation action with national development and assistance strategies. 5. Establish a mitigation fund to relieve some of the negative impacts of small coal mine closures. 8. The economic impacts of small coal mine closures in Shanxi province stem from: 1) coal supply reductions; 2) reduction of local fiscal income; 3) political impacts arising from social instability and unemployment; 4) coal resource waste; and 5) cumulative environmental impacts. 9. Using a multivariate econometric model and a time series model, we show that coal demand in China will increase constantly over the next few years. The multivariate econometric model shows that coal demand is statistically related to GDP, price of coal, price of alternative fuel, growth of steel and metallurgy industries, electricity demand, and construction materials. Though closure of TVCMs may

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