Documen; of The World Bank

FOR OFFICIAL USE ONLY

Report No. P-6821-CHA

mEMORANDUMAND RECOMMENDATION

OF THE

PRESIDENT OF TRE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

AND THE

INTERNATIONAL DEVELOPMENTASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN OF $125 MILLION

AND A

PROPOSED CREDIT OF SDR 17.4 MILLION

TO THE

PEOPLE'S REPUBLIC OF

FOR A

YUNNAN ENVIRONMENT PROJECT

May 28, 1996

This document has a restricted distribution and may be used by recipients only in the performnanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (as of May 1, 1996)

Currency = Renminbi Currency Unit = Yuan (Y) Y 1.00 = $0.12 $1.00 = Y 8.3

WEIGHTS AND MEASURES

Metric System

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

DEAP - Dianchi Environmental Action Plan EPB - Envirotu-nental Protection Bureau EPCSL - Environmental Pollution Control Subloans LIBOR - London Interbank Borrowing Rate MCon - Ministry of Construction NEPA - National Environmental Protection Agency YPG - Provincial Government

GOVERNMENT FISCAL YEAR

January 1 - December 31 FOROFFICIAL USE ONLY CHINA YUNNAN ENVIRONMENT PROJECT

LOAN/CREDITAND PROJECTSUMMARY

Borrower: The People's Republic of China.

Beneficiaries: Yunnan Province; the Municipalities of Gejiu, and ; the water supply companies of Kunming and Qujing; the wastewater companies of Gejiu, Kunming and Qujing; industrial enterprises.

Poverty: Not applicable.

Amount: Loan: $125 million. Credit: SDR 17.4 million ($25 million equivalent).

Terms: Loan: 20 years including 5 years of grace, at the standard interest rate for LIBOR-based US dollar single currency loans.

Credit: Standard, with 35 years' maturity.

Commitment Fees: Standard

Onlending Terms: From the Government of China through Yunnan Province through the Municipalities to implementing water and wastewater entities: 15 years, including 5 years of grace at the standard interest rate for LIBOR-based US dollar single currency loans, and a commitment charge at the Bank's standard rate, with the entities bearing the foreign exchange risk.

From Yunnan Province and Kunming Municipality to industrial enterprises: up to 10 years including up to 3 years of grace at the standard interest rate for LIBOR-based US dollar single currency loans, plus a spread of no less than 1.5 percent per year and a commitment charge at the Bank's standard rate, with the enterprises bearing the foreign exchange risk.

From Yunnan Province to participating enterprises for environmental pollution control: up to 5 years including up to 2 years of grace at the standard interest rate for LIBOR- based US dollar single currency loans, plus a spread of no

This documenthas a restricteddistribution and maybe used by recipientsonly in the performanceof their officialduties. Itscontents may not otherwise be disclosedwiLhout World Bank authorization. - ii -

less than 1.5 percent per year and a commitment charge at the Bank's standard rate, with the enterprises bearing the foreign exchange risk.

Financing Plan: See Schedule A.

Net Present Value: The water supply, solid waste and wastewater collection and treatment investments in the project were determined through least-cost analysis.

Staff Appraisal Report: 15361-CHA.

Map: IBRD 27911.

Project ID Number: CN-PE-3599. MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND CREDIT TO THE PEOPLE'S REPUBLIC OF CHINA FOR A YUNNAN ENVIRONMENT PROJECT

1. I submit for your approval the following memorandum and recommendation on a proposed loan of $125 million and a proposed credit of SDR 17.4 million ($25 million equivalent) to the People's Republic of China to help finance a Yunnan Environment Project. The loan would be at the standard interest rate for LIBOR-based US dollar single currency loans, with a maturity of 20 years, including 5 years of grace. The credit would be on standard terms, with 35 years' maturity including 10 years of grace. The proceeds of the loan and credit would be onlent through Yunnan Province to the Municipalities of Kunming, Gejiu and Qujing on the following terms: loan-17 years including 5 years of grace at the standard interest rate for LIBOR-based US dollar single currency loans and a commitment charge at the Bank's standard rate; credit-20 years including 5 years of grace at the Association's standard service and commitment charges. The Municipalities would onlend a portion of the loan/credit proceeds allocated to them to the implementing water supply and wastewater entities for up to 15 years, including 5 years of grace, at the standard interest rate for LIBOR-based US dollar single currency loans, with the entities bearing the commitment charges and the foreign exchange risk. Yunnan Province and Kunming Municipality would onlend a portion of the loan/credit proceeds to industrial enterprises for up to 10 years including up to 3 years of grace at the standard interest rate for LIBOR-based US dollar single currency loans, plus a spread of no less than 1.5 percent per year, with the enterprises bearing the commitment charges and the foreign exchange risk. The Province would also make environmental pollution control subloans available to qualifying enterprises for up to five years including up to two years of grace at the standard interest rate for LIBOR-based US dollar single currency loans, plus a spread of no less than 1.5 percent per year, with the enterprises bearing the commitment charges and the foreign exchange risk.

2. Sector and Project Background. Yunnan Province in southwestern China has a very poor rural population living in its mountainous, resource-deficient western half, but rapidly growing urban areas in the east, where the industry and services sectors have been growing at more than 11 percent a year for more than a decade. As a result, per capita provincial Gross Domestic Product remains low, at only about two thirds of the national average in 1992, yet overall GDP has been increasing by about 10 percent a year during the past decade. Yunnan's largest city and the engine of its economic growth is the provincial capital of Kunming, whose urban population of about 1.4 million generates more than 40 percent of provincial gross output. Kunming, situated on Lake Dianchi, typifies the environmental problems often accompanying rapid economic expansion. Owing in part to a lack of adequate, well planned environmental infrastructure, the city's growing prosperity has been accompanied by pollution and environmental degradation. City sewers transmit untreated domestic waste directly into the lake, rather than to the two existing wastewater treatment plants on the lake's outlet, the Tanglangchuan River. Effluent also enters the lake from large industries, including steel mills, smelters, fertilizer plants, a pesticide plant, and about 10 paper mills. The plants' inadequate wastewater treatment facilities and uneven enforcement of environmental regulations by the city's Environmental Protection Bureau have allowed harmful industrial discharges to enter the lake and its catchment. In only about 10 to 15 years, the lake has become eutrophic and would deteriorate further in the absence of immediate, concerted action.

3. The lake's decline has major implications for both the province and the mumicipality,since the lake supplies about half of Kunming's water supply, in a nationally recognized water-short area of China. The other major water supply source is the nearby Songhuaba Reservoir, which also supplies irrigation. One water supply intake in a particularly polluted part of the lake near Kunming has been shut down due to the very poor water quality. But despite the water scarcity, water and environmental services were, until recently, substantially underpriced, leading to wasteful consumption and hence further pressure on water resources. While development of alternative sources of supply is possible, this would not represent an economically efficient or environmentally sound solution to the problem. The provincial and municipal governments have recognized the threat posed by unchecked environmental degradation to Kunming's, and to the province's, further economic growth. Since the early 1990s, the authorities have carried out a range of measures, both physical and institutional, to improve water quality in the lake catchment area. However, financial constraints and a lack of expertise have hampered their efforts. They therefore sought Bank Group assistance to begin the necessarily long-term program to improve environmental conditions in the catchment area, now regarded as a national environmental priority and included in China's Agenda 21 program.

4. The proposed project would initiate implementation of comprehensive Environmental Action Plans prepared for Dianchi Lake and for two smaller cities in the province-Qujing, Yunnan's second largest and fastest growing city, and Gejiu-suffering from problems similar to those in Kunming and regarded as priority areas for remediation. The plans, proposing investments as well as policy and institutional changes, were prepared by the province, with assistance from the United Kingdom's Overseas Development Administration. As the plans recommend, reducing the rate of growth of phosphorus concentrations in the lake, which result from domestic waste and industrial effluent (particularly from two huge fertilizer plants), is the first priority and would therefore be the project's chief physical goal. Phosphorus, and to a lesser extent nitrogen, is considered the primary cause of eutrophication. Other contaminants, including organic matter and toxic metals, would also decline. To this end, the project would expand the sewer system in Kunming and link it to treatment plants now being constructed, provide the additional wastewater treatment capacity still needed, enlarge the water supply system to the city's expanding suburban areas, and provide sanitary controlled landfills to reduce leachate entering water sources from existing unregulated dumpsites. Reducing industrial pollution from the fertilizer plants and other major polluters identified in the area would also be supported, as would key institutional improvements and policy reforms required for long- - 3 - term environmental amelioration. Similar physical and institutional measures would be carried out in Qujing and Gejiu as well.

5. Yunnan's pollution problems are far from unique. China's National Environmental Action Plan and Agenda 21 program both describe past general failures in choices of technology, plant siting, and resource allocation, a diagnosis shared by Bank sector work. Responses to these failures include regulatory oversight and provision of sewerage and other environmental services. The National Environmental Protection Agency (NEPA) and the provincial environmental protection bureaus (EPBs) establish and monitor environmental policy and regulations, while the municipal, county and lower-level EPBs monitor the ambient environment and the effluent output of enterprises within their jurisdictions. Fees, fines, and other sanctions are used to enforce discharge standards, but the low fee levels and collection rates encourage and enable continued pollution, rather than investments in abatement. Project support for the Dianchi Environmental Action Plan (DEAP) and action plans for Gejiu and Qujing would include targets for enhanced fee collection as well as staff training and equipment to improve the EPBs' effectiveness in monitoring and regulation.

6. Municipal environmental services, such as wastewater and solid waste collection and handling, can play an important role in preventing environmental damage. These services are provided under the policy guidance of the Ministry of Construction (MCon) and the provincial Urban Construction Bureaus, but their pricing in much of China, and in Yunnan, often provides little incentive to minimize waste and leaves utilities short of funds for investment, operations, and maintenance. Recognizing these distortions, the three project cities are in the process of increasing their tariffs for water supply and wastewater services.

7. Bank Group Assistance Strategy and Rationale for Bank Group Involvement in the Project. The China Country Assistance Strategy presented to the Board on June 1, 1995, and the Progress Report of March 26, 1996, highlighted enhancing environmental protection and alleviating infrastructure deficiencies as two of the four areas of strategy focus. This project responds to both concerns. It would improve now highly polluted water resources and provide for their subsequent protection, promote more stringent environmental regulation, and reduce current pollution loads. It would also provide urban environmental infrastructure for wastewater, water supply and solid waste collection and disposal backed up by an improved tariff policy to fund infrastructure investments and modern operational techniques. The Bank's strategy flows from and supports China's National Environmental Action Plan and Agenda 21, which provide the basis for joint Government and Bank Group action in the environmental sector. The provincial focus recognizes the effective decentralization of regulatory and investment authority in China, and draws on local political power and commitment to induce wider use of the solutions to be tested under the project.

8. The project follows from previous Bank Group-assisted urban environmental management projects and furthers a recently adopted strategy initiated with a similar project - 4 - in Hubei of moving from the coastal (and wealthier) provinces to inland and less wealthy areas. Another project now being prepared in the very poor province of Guangxi would further test the feasibility of solutions for these areas. With these projects, the Bank Group is facilitating broader national debate on strategies for urban environmental improvement, building on our institutional relationships with groups such as NEPA, MCon, and the Chinese Mayors Association.

9. Lessons Learned from Previous Bank Group Assistance. Important lessons have been learned in three areas of central concern to the present project: provision and management of urban environmental services; pollution control; and project preparation and implementation. With respect to urban environmental services, Bank municipal management sector work ("Urban Service Delivery: Finding the Right Incentives," China: Urban Environmental Service Management, Report 13073-CHA) emphasizes the need to properly assign functional management responsibilities and link revenue to expenditures. In China's case, environmental services are properly provided at the municipal level, where a high percentage of government revenue is also captured. Our sector work concludes that the major failing in urban environmental services has been the dependence on municipal budget transfers to fund services, whereas greater reliance on user charges would be affordable, induce resource conservation, and create a more dependable income stream. For that reason, increasing tariffs has been a focus of the policy dialogue for this project. This also responds to a major finding of a review by the Operations and Evaluations Department of water and sanitation projects (Water Supply and Sanitation Projects: The Bank Experience 1967-1989), wherein physical performance was generally good, but sustaining financial viability and overall sectoral development was less successful.

10. The Bank's experience in industrial pollution control includes recent projects in China, as well as in Mexico, Brazil, India, Indonesia and the Russian Federation. A review of completed projects (Industry and Environment. Patterns in World Bank Lending) emphasizes the need for political commitment, clear standards and regulations, incentives for compliance, and institutional capability to monitor and enforce standards. When industrial pollution abatement subloans are involved, the following conditions increase likelihood of success: a profitable and growing industrial sector, flexibility in choice of technology, availability of funds at close-to-marketterms, and targeting of polluters that can yield significant improvement in the ambient environment. The industrial pollution control component draws on these lessons and those in two sector studies [China: Environmental Strategy Paper (Report No. 9669-CHA) and the report on urban environmental service management]. The latter stresses issues of political commitment, appropriate standards and incentives, and institutional monitoring and enforcement capabilities. This project addresses those issues by upgrading the environmental monitoring capabilities of Yunnan's provincial and municipal EPBs via provision of training and equipment along with targets for stepped-up enforcement of regulations.

11. In project preparation and implementation, international and Chinese experience confirms the importance of strong project offices backed by high-level political commitment to project goals. Implementation experience with similar projects has been - 5 - generally good in China, and the proposed operation benefits from the fact that project ideas have been locally generated and partially developed prior to Bank Group involvement, ensuring a high degree of ownership.

12. Project Objectives. The project is part of a phased development program designed to improve environmental conditions and urban services management in Yunnan Province. The principal objective is to provide a sustainable environmental framework for the long- term economic and social development of the province, while supporting a more conducive foundation for industrial growth. The specific objectives are to: (a) improve policies, regulations and institutional arrangements for pollution control as well as municipal wastewater, water supply, solid waste and nightsoil management; (b) improve the water quality of lakes in Gejiu and Kunming to allow the waters to be used for drinking, agriculture and other purposes; (c) facilitate complementary sustainable investments in pollution control and municipally-provided urban environmental services; and (d) introduce a comprehensive approach to planning, prioritization, and financing of urban environmental infrastructure investments. Improvement in Dianchi Lake's water quality, particularly as reflected in decreased phosphorous loads compared to baseline data, would be the prime indicator of achieving the project's environmental objectives.

13. Project Description. Based on a provincial assessment of cities with the greatest environmental needs, the project would support policy and institutional innovation, and provide physical works for water and wastewater handling and solid waste management in three cities. Activities would focus on Lake Dianchi Basin Water Quality Recovery (65 percent of project costs) through investments supporting the Government's Dianchi Environmental Action Plan (DEAP). This would include: control of point and nonpoint pollution in the lake basin through improved catchment management; wastewater and stormwater collection, treatment and disposal; improved collection, transport and disposal of municipal solid waste and nightsoil; remediation of polluting practices causing lake eutrophication; and measures to strengthen water basin management, safeguarding the long- term quality of lake basin water resources. Investments in upgraded trunk and distribution water mains, water treatment, and associated actions and facilities would protect and increase the water supply in Kunming.

14. The project has four other components. The Industrial Pollution Control Component ( 11percent) would abate pollution from enterprises identified by the province and the DEAP as most threatening water quality. A three-part strategy would be used: (a) direct onlending of funds to two phosphate fertilizer factories in the Dianchi catchment that together account for 16 percent of all phosphate discharged into the lake and 73 percent of industrial discharges. The radical changes to production processes to be introduced would greatly reduce the pollutant load while also improving plant profitability; (b) financing of smaller pollution-control investments through an Environmental Pollution Control Subloans (EPCSL) facility with an initial capital of $10 million; and (c) action plans for cleanup of the Kunming Iron and Steel Plant and the Yunfeng Paper Mill, financed through non-Bank Group sources, and the cessation of operations in the manufacture and handling of pesticides and other toxic materials at the Kunming Pesticide - 6 -

Company plant to protect municipal wastewater treatment facilities. The Provincial Urban Environmental Services Component (16 percent) would support catchment management, wastewater and stormwater collection and treatment systems for the protection of Gejiu Lake and the Nanpanjiang River in Qujing, as well as selective water system expansions and improved solid waste management in Qujing. The Environmental and Water Quality Monitoring Component (2 percent) would upgrade and modernize environmental management and water quality information and monitoring systems.

15. Finally, the Institutional Development and Training Component (6 percent) would enhance policies and operational experience in the municipal utility companies and the province with respect to environmental protection and water, wastewater, municipal solid waste and nightsoil management. Overall provincial management and financial practices would be upgraded through the introduction of capital budgeting techniques, analysis of investment alternatives and performance monitoring. Staff in municipal utility agencies involved in the project would receive training in financial management, accounting systems, and pricing policies, as well as in efficient project implementation. EPB staff at the various government levels would be trained for their roles in implementing the project's Environmental Action Plans for enhanced enforcement of pollution regulations. Technical assistance would also help prepare future projects.

16. The total project cost is estimated at about $308 million equivalent, including foreign exchange of $99.2 million. Interest during construction would require an additional $12.3 million. The proposed credit and loan, totaling $150.0 million equivalent, would cover about 47 percent of the project's total financing requirement. The balance would be provided as follows: 52 percent by the participating municipalities and their water and wastewater entities and 1 percent by enterprises participating in the Industrial Pollution Control component. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in China are given in Schedules C and D, respectively, and recent data on the Chinese economy are presented in Schedule E. A map (IBRD 27911) is also attached. The Staff Appraisal Report, No. 15361-CHA dated May 28, 1996, is being distributed separately.

17. China is eligible for single currency loans under the Bank Group's expanded program. The Government of China and Yunnan Province have selected LIBOR-based US dollar single currency loan terms for the project in order to facilitate management of the foreign exchange risk of their borrowings, by more closely matching the currency of their liabilities with that of their net trade flows, about 60 percent of which are US dollar denominated. The Government selected the LIBOR-based product in order to preserve the full maturity of the loan, compared to the fixed-rate option that would have resulted in a 15- year term, and judges that it can manage the interest rate risk. This loan, when added to previous single currency loans made to China in FY96, is within the 50 percent volume guideline approved by the Board. 18. Project Implementation. The Yunnan Provincial Government established a Leading Group, chaired by a Vice Governor and including heads of the relevant government agencies, to set project policy and coordinate agency inputs. Under the Leading Group, the provincial government established the Yunnan Environment Project Office (YEPO), located in the Yunnan EPB, headed by the EPB Director and drawing staff principally from that Bureau. YEPO's responsibilities include coordination and progress monitoring of project preparation and implementation activities, and consolidation of progress reporting to the provincial government and the Bank Group. Subproject coordinating offices have been established in each of the project cities. The relevant municipal bureau or municipal utility company (including those formed as part of project preparation) would implement municipal environmental service investments.

19. Funds for the two fertilizer factories would be onlent by Yunnan Province and Kunming Municipality at a rate equal to the standard interest rate for LIBOR-based US dollar single currency loans, plus a spread of not less than 1.5 percent per year. The Bank Group appraised the investments for their technical and financial viability, ensuring that environmental assessments met Bank standards. No resettlement would be required. The credit risk would be borne by the Yunnan and Kunming Finance Bureaus, and all other risks by the enterprises. The EPCSL, which would function with independent operating rules and segregated accounting within the Yunnan Finance Bureau, would provide funds for pollution control to small-scale enterprises. EPCSL would coordinate project technical appraisal, with the agent bank performningthe financial appraisal. Loans would be for up to five years, with a grace period of up to two years, at an interest rate no less than the standard rate for LIBOR-based US dollar single currency loans, plus 1.5 percent.

20. Project Sustainability. Increased sewerage and water charges and other anticipated revenue enhancements in the project cities would provide a financing framework for project sustainability. Prior to appraisal, the Yunnan Provincial Government (YPG) took significant steps to enhance the sustainability of water and wastewater services through (a) forming utility companies in the three cities to manage these services; (b) approving and implementing significant tariff increases for these services; and (c) putting in place arrangements for long-term improvement in environmental and financial management. The affordability of the required tariffs and charges to the poorest 10 percent of Kunming's population would further ensure financial viability and sustained operations. Analysis indicates that, in five years, tariffs would increase from 2 percent of incomes at present to about 3 percent, assuming no change in real income and no consumption effect. However, over the past decade, real incomes of the urban poor have risen in line with overall income increases. On the institutional side, training to be provided through the project would provide the municipal environmental services with a foundation for efficient, cost-effective operation of the facilities under their control. Similarly, project training and institutional support of the participating EPBs should enhance their stature and professionalism, both factors critical to sustaining their effectiveriess in pollution regulation. Water quality monitoring, part of the overall EPB monitoring system, would benefit from updated equipment to be provided by the project, and would be able to measure both firm-specific and ambient quality, providing a concrete measure of project performance. - 8 -

21. Agreed Actions. Assurances were obtained on the terms on which loan and credit funds would be made available to the Province, the municipal agencies and participating industries. Assurances were also obtained that YPG would: (a) carry out or cause to be carried out the agreed time-bound action plans for environmental management improvements at the Kunming Iron and Steel Plant and the Yunfeng Paper Mill and the time-bound environmental management action plan for the Kunming Pesticide Plant; (b) monitor project implementation and achievement of development objectives according to the agreed indicators and timetable; (c) carry out the resettlement of persons affected by the project according to the agreed Resettlement Action Plan; (d) allocate about Y 42 million to EPCSL over the three fiscal years commencing in 1997, and cause EPCSL funds to be onlent to participating enterprises on terms and conditions satisfactory to the Bank/IDA.

22. Assurances were also obtained on the following financial performance criteria: (a) the wastewater entities of Gejiu, Kunming and Qujing to produce revenues from their operations sufficient to cover operations and maintenance costs (including depreciation) and the amount by which debt service requirements exceed the provision for depreciation; (b) the Kunming Water Supply Company to produce revenues from its operations sufficient to cover operations and maintenance costs (before depreciation), increases in working capital, debt service, and 20 percent of the average capital expenditures made in a referenced three-year period; (c) the Qujing water supply entity to produce revenues from its operations sufficient to cover operations and maintenance costs (including depreciation) and the amount by which debt service requirements exceed the provision for depreciation; (d) the participating water supply and wastewater entities to incur no additional debt without Bank Group agreement, unless a reasonable forecast shows that the entities would have a debt service coverage of at least 1.3 times; (e) the wastewater and water supply entities to prepare annual forecasts indicating whether they would meet the agreed financial performance indicators in the current and following year and, if requirements would not be met, to take all necessary measures, including adjustments to the structure of tariffs and charges, to meet the requirements; and (f) Kunming and Qujing Municipalities, not later than January 1, 1998, to implement levels of user charges and fees that would recover the full cost of providing solid waste collection and disposal services to industries and commercial users.

23. Effectiveness of the loan and credit would be contingent on: (a) signing of subsidiary loan agreements between project municipalities and their water and wastewater utility companies, with terms and conditions satisfactory to the Bank Group; and (b) implementation of a wastewater tariff by the Kunming Drainage Company satisfactory to the Bank Group.

24. Disbursement of EPCSL would be conditional on approval by the Bank Group of operational regulations for EPCSL and the execution of an acceptable financial agency agreement between YPG and a bank for subloan processing. Disbursements of the loan/ credit proceeds to the Kunming Chemical Fertilizer Factory and the Kunyang Phosphate Fertilizer Factory would be conditional on the execution of acceptable subsidiary loan -9- agreements between Kunming and Yunnan, respectively. Disbursement against the Lake Dianchi Basin Water Quality Recovery component of the project would be conditional on (a) signing of consultants' contracts, acceptable to the Bank Group, for institutional and financial technical assistance, construction supervision and sector institutional strengthening; and (b) a financial forecast, satisfactory to the Bank Group, of the Kunming Drainage Company's performance in fiscal year 1997.

25. Environmental Aspects. The project is classified as Category A for the purposes of Environmental Assessment (EA). YPG has prepared a detailed EA in accordance with the requirements of the Bank and with national EA regulations. The EA has been reviewed within China and by the Bank and has been approved by NEPA. Although the primary focus of the project is the improvement of water quality, the EA has addressed potential impacts upon all environmental media.

26. The environmental impact of the project is on balance substantially positive and the negative impacts can be readily mitigated. There would be major improvements in water quality in watercourses in the cities concerned. In particular water quality in the Dianchi Lake, a very important focus of the project, would be substantially improved by a comprehensive program of interventions based on removal of phosphorus from wastewater discharges to the lake. These interventions would assist in reducing the phosphorus loads to the lake by more than 50 percent in 2010, the remaining loads being some 30 percent less even than those discharged to the lake in 1995, in spite of the substantial population growth in the catchment over the intervening period. This would arrest the eutrophication of the lake, which is reaching a critical stage and causing considerable problems in water treatment, and would permit the sustained use of the lake for water supply.

27. The provision of landfill sites of substantial capacity for two of the project cities would permit environmentally acceptable disposal of municipal wastes for considerable periods of time. To protect ground and surface waters, the sites would be lined and have leachate management facilities. Landfill gas would be flared for safety reasons and to prevent discharges of methane, a potent greenhouse gas.

28. Resettlement. A Resettlement Action Plan (RAP) satisfactory to the Bank Group has been prepared for all components entailing land acquisition and/or resettlement of affected persons. Although the amount of land needed for the project has been substantially minimized through design and location changes, preliminary assessments indicate that about 215 ha of land would need to be acquired for the project, most in green field sites on the urban fringes, and another 100 ha would be leased temporarily during construction. Some 3,090 people would be affected by land acquisition, including 70 enterprise workers. Nobody would require permanent new housing. Of the affected people, some 2,200 can be reabsorbed into agriculture through land redistribution, while jobs would be created for the remainder. Adequate measures have been put in place to ensure that the standards of living and income levels of all categories of affected persons are improved, or at least restored, after resettlement. Arrangements for both internal and external monitoring of RAP implementation have been made. - 10-

29. Project Objective Categories. Although the project would not directly affect the poorest part of Yunnan's population, who are already being assisted under the recently approved Southwest Poverty Reduction Project (Ln. 3906/Cr. 2744-CHA) and other Bank Group education, health, rural water supply and forestry projects targeted to poor, often minority areas, it is likely to benefit relatively poor rural migrants to the project cities. Without project interventions to protect the water resources needed for sustained economic growth, the absorption of poorer rural migrants by Kunming and the other project cities would be expected to slow. Furthermore, continued economic growth at the municipal level would generate provincial tax revenues to fund programs for the province's poorest inhabitants.

30. Project Benefits. Project investments in wastewater infrastructure and treatment would result in significant improvement in the water quality of Dianchi Lake and other water bodies in the project areas, and would in particular allow sustained use of Lake Dianchi as Kunming's primary water source over the next 25 years. Without such improvement, the lake would rapidly become unsuitable as a source of water supply, forcing Kunming to obtain an increasing proportion of its water from more distant, and more expensive, sources. This would adversely affect the welfare of the local population, including rural residents who would also face a continued shortage of irrigation water. Industry would also suffer significant cost increases, resulting in a loss of competitiveness and consequent delays in benefiting from market reforms. Calculation of the net present value of the future costs of doing nothing quantifies the costs of additional treatment of the lake's water to make it potable, then, within five years, investments in major new sources of supply. This cost, at a 12 percent discount rate, is about Y 2,761 million, compared to the net present value of Y 1,719 million needed for wastewater and advanced water treatment investments and operations in Kunming. The proposed investments in Kunming, like those in Qujing and Gejiu, also represent the least-cost solution to reducing phosphorus to the levels envisioned and are therefore well justified. Sensitivity analysis of wastewater investments in Kunming indicates that the costs of doing nothing would equal the project costs only if water were not imported from outside the catchment until the year 2020. Institutionally, the project would provide Yunnan with the basis to sustain and extend the project's gains, by putting in place a framework for financing operations and future investment, for improved service organization, and for improved environmental regulation.

31. Risks. Two main types of project risks exist, one relating to implementation and operations, and the other to environmental regulation. Since the shift to new organizational forms of autonomous utilities managed as enterprises is critical to the successful operation of the project's wastewater investments, slow institutional innovation is a risk. However, each city is well along in this process. In Kunming, wastewater assets have been revalued and formally transferred to the books of the wastewater enterprise. Qujing and Gejiu have both already completed this process. And prospects for continued autonomy of the enterprises are favorable, as their commercialization occurs in the context of the reform of government enterprises nationally. Failure to implement agreed tariffs would also seriously impair the performance of project utilities and their ability to finance ongoing investment programs. To mitigate this risk, a tariff increase for the Kunming Wastewater Company is a -11 -

condition of effectiveness, and the adequacy of existing tariffs would be continuously monitored through annual financial reporting and projections required under the project.

32. There are also regulatory risks: the expected decline in pollution from the project-supported investments and policy initiatives depends not only on the environmental infrastructure to be constructed, but also on point-source control of pollution by industry. EPB's need for a strengthened regulatory capacity was recognized during project preparation, and the project therefore would provide equipment for enhanced environmental monitoring and training of EPB staff, both directed at a stepped-up effort to enforce environmental regulations. The number of violations of pollution discharge licenses would also be monitored during supervision.

33. Recommendation. I am satisfied that the proposed loan and credit would comply with the Articles of Agreement of the Bank and the Association and recommend that the Executive Directors approve the proposed loan and credit.

James D. Wolfensohn President

Washington, D.C. May 28, 1996

Attachments - 12 - Schedule A

CHINA YUNNANENVIRONMENT PROJECT

ESTIMATED COSTS AND FINANCING PLAN ($ million)

Local Foreign Total Estimated Costs A. Lake Dianchi Basin Water Quality Recovery Kunming Wastewater 70.4 25.5 95.9 Kunming Water Supply 23.1 - 10.9 34.0 Kunming Solid Waste 19.4 3.5 22.9 Small Towns 8.9 3.4 12.3 Rural Sanitation 1.5 0.3 1.8 Subtotal 123.3 43.6 166.9 B. Provincial Urban Environmental Services Gejiu Wastewater 4.6 2.0 6.6' Qujing Wastewater 8.3 3.7 12.0 Qujing Water Supply 13.9 3.4 17.3 Qujing Solid Waste 3.0 0.6 3.6 Subtotal 29.8 9.7 39.5 C. Industry and Environment Pollution Control 14.8 15.3 30.1 D. Environment & Water Quality Monitoring 2.7 2.4 5.1 E. Technical Assistance and Training 3.1 12.5 15.6 Total Baseline Costs 173.7 83.5 257.2 Physical Contingencies 21.2 9.6 30.8 Price Contingencies 13.5 6.1 19.6 Total Project Costs 208.4 99.2 307.6 Interest during construction La 1.1 11.2 12.3 Total Financing Required 209.5 110.4 319.9 FinancingPlan Yunnan Provincial Government, municipal govermnents 154.4 11.2 165.6 and municipal enterprises Industrial enterprises 4.3 0.0 4.3 IBRD/IDA 50.8 99.2 150.0 Total 209.5 110.4 319.9

La Interest during construction is based on: (i) onlending rates for projected disbursements of Loan/Credit proceeds and locally secured loans; and (ii) payment of commitment and service charges. - 13 - Schedule B Page 1

CHINA YUNNAN ENVIRONMENT PROJECT

PROCUREMENT ARRANGEMENTS ($ million, including contingencies)

Procurement Method Category ICB NCB Other /a -NBF /b Total

Civil Works 73.8 79.6 0.0 1.1 154.5 (33.2) (35.8) (0.0) (0.0) (69.0)

Equipment & Materials 74.4 1.5 1.5 4.0 81.4 (54.6) (1.2) (1.2) (0.0) (57.0)

Industrial Pollution Control /c 0.0 0.0 10.1 0.0 10.1 (0.0) (0.0) (5.0) (0.0) (5.0)

Institutional Development & Training 0.0 0.0 12.6 0.0 12.6 (0.0) (0.0) (12.6) (0.0) (12.6)

Construction Management Services 0.0 0.0 6.4 0.0 6.4 (0.0) (0.0) (6.4) (0.0) (6.4)

Land Acquisition 0.0 0.0 0.0 17.3 17.3 (0.0) (0.0)

Administration & Project Management 0.0 0.0 0.0 25.3 25.3 (0.0) (0.0)

Total 148.2 81.1 30.6 47.7 307.6 (87.8) (37.0) (25.2) (0.0) (150.0)

LZ Other procurement methods include those under EPCSL, national shopping, consultant services (recruited in accordance with the Bank's Guidelines) and training. Lb NBF = Not Bank/IDA-financed. L/ The Industrial Pollution Control would be disbursed through subloans of YP's EPCSL revolving credit facility.

Note: Figures in parenthesis are amounts to be financed by IBRD/IDA. - 14 - Schedule B Page 2

DISBURSEMENTS

IDA Credit Loan Amount Amount Category ($ million equiv.) ($ million) Expenditures to be Financed (%)

Civil Works 8.3 56.0 45% of expenditures

Goods (a) EPCSL 1.0 4.0 100% of foreign expenditures, (b) Other 8.5 49.2 100% of local expenditures (ex- factory), and 75% of other items procured locally

Consultant Services 7.2 10.8 100% of expenditures and Training

Unallocated - 5.0

Total 25.0 125.0

ESTIMATED DISBURSEMENTS ($ million)

Bank/IDA 1997 1998 1999 2000 2001 2002 2003

Annual 11.1 25.0 40.0 40.8 23.7 8.4 1.0 Cumulative 11.1 36.1 76.1 116.9 140.6 149.0 150.0 - 15 - Schedule C

CHINA

YUNNAN ENVIRONMENT PROJECT

TIMETABLE OF KEY PROJECTPROCESSING EVENTS

Time taken to prepare the project: 19 months

Prepared by: Yunnan Provincial Government, with consultant assistance funded by the United Kingdom

First Bank Group mission: July 1994

Appraisal mission departure: March 20, 1996

Negotiations: May 1996

Board Presentation: June 25, 1996

Planned date of effectiveness: October 21, 1996

List of relevant ICRs: None

This report is based on the findings of an appraisal mission that visited China in March 1996. Project team members included Mr. Geoffrey Read (Municipal Engineer and Task Manager), Mr. Chris Bros (Cost Engineer Consultant), Mr. Jack Fritz (Environmental Engineer), Mr. Lee Travers (Environmental Economist), Mr. Terry Hall (Sanitary Engineering Consultant), Mr. Patrick McCarthy (Financial Consultant), and Dr. George Taylor (Environmental Consultant). Assistance was also provided by Ms. Meredith Dearborn, Ms. Gillian Houston and Ms. Socorro Manila (Report Processing) and Mr. You Ji (Interpreter). Peer reviewers for the project were Ms. Adrienne Nassau (EC3IV), Mr. Heinz Unger (ASTEN), and Mr. Neil Boyle (SA3IE). The managing division is EA2EM. The Division Chief is Ms. Katherine Sierra and the Department Director is Mr. Nicholas C. Hope. - 16 - ScheduleD STATUS OF BANK GROUP OPERATIONSIN THE PEOPLE'S REPUBLIC OF CHINA Page I of 3 A. STATEMIENTOF BANK LOANS AND IDA CREDITS (As of March 31. 1996) Loan/ Amount (USS million) Credit (net orcancellations) Number FY Borrower Purpose Bank IDA Undisb.(a) 42 loans and 47 credits have been disbursed 4.224.7 3.127.9 of which SECAL: 2967/1932 88 PRC Rural Sector Adj. 200.0 93.2 - Active Loans 2723/1713 86 PRC Rural Health & Preventive Med. 15.0 65.0 5.9 2812/1793 87 PRC Gansu Provincial Dev. (20.0)(b) 150.5 4.5 1885 88 PRC Northern Irrieation - 103.0 3.1 2951/1917 88 PRC Sichuan Highway 75.0 (50.0)(b) 3.8 2958 88 PRC Phosphate Dev. 62.7 - 4.3 2968 88 PRC Railway IV 200.0 - 3.0 1997 89 PRC Shaanxi Agricultural Dev. - 106.0 1.6 2009 89 PRC Integrated Reg. Health - 52.0 4.1 3006 89 PRC & Ports 76.4 - 0.4 3022 89 PRC Light Industry 154.0 - 9.6 3060/2014 89 PRC Inner Mongolia Railway 70.0 (80.0)(b) 0.8 3066 89 PRC Hubei Phosphate 137.0 - 8.5 3073/2025 89 PRC Shandong Prov. Highway 60.0 (50.0)(b) 18.3 2097 90 PRC Jiangxi Agric. Dev. - 60.0 1.2 2114 90 PRC Vocational& Tech. Educ. - 50.0 2.0 2145 90 PRC National Afforestation - 300.0 20.5 2159 90 PRC Hebei Agricultural Dev. - 150.0 17.8 2172 91 PRC Mid-Yangtze Agricultural Dev. - 64.0 3.3 3265/2182 91 PRC Rural Credit IV 75.0 200.0 7.5 3274/2186 91 PRC Rural Indust Tech (SPARK) 50.0 64.3 7.5 3286/2201 91 PRC Medium-SizedCities Dev. 79.4 52.9 11.9 2210 91 PRC Key Studies Development - 131.2 16.9 2219 91 PRC Liaoning Urban Infrastructure - 77.8 5.6 3316/2226 91 PRC Jiangsu Provl. Transport 100.0 (53.6)(b) 5.9 2242 91 PRC Henan Agricul. Dev. - 110.0 33.8 3337/2256 91 PRC Irrig. Agricul. Intensif. 147.1 187.9 40.3 3387 92 PRC Ertan Hydroelectric 380.0 - 4.4 2294 92 PRC Tarim Basin - 125.0 23.4 2296 92 PRC Shanghai Metro Transport - 60.0 10.4 3406 92 PRC Railways V 330.0 39.9 3412/2305 92 PRC Daguangba Multipurpose 30.0 37.0 6.1 2307 92 PRC Guangdong ADP - 162.0 68.3 3415/2312 92 PRC Environment 45.0 80.0 52.3 2317 92 PRC Infectious and Endemic Disease Cont. - 129.6 85.9 3433 92 PRC Yanshi Thermal Power 180.0 - 11.9 2336 92 PRC Rural Water Supply and Sanitation - 110.0 44.7 2339 92 PRC Educ. Development in Poor Provs. - 130.0 40.7 3443 92 PRC Regional Cement Industry 82.7 - 14.0 3462 92 PRC Zouxian Thermal Power 310.0 - 80.6 3471 92 PRC Zhejiang Provincial Highway 220.0 95.3 2387 92 PRC Tianjin Urban Devt. & Envir. - 100.0 56.2 2391 92 PRC Ship Waste Disposal - 15.0 15.0 2411 93 PRC Sichuan Agricultural Devt. - 147.0 65.5 3515 93 PRC Shuikou Hydroelectric 11 100.0 - 60.2 2423 93 PRC Financial Sector TA - 60.0 49.3 3530 93 PRC Guangdong Provincial Transport 240.0 - 101.2 3531 93 PRC Henan Provincial Transport 120.0 - 51.7 2447 93 PRC Ref. Inst'l and Preinvest. - 50.0 32.3 3552 93 PRC Shanghai Port Rest. and Devt. 150.0 - 31.9 2457 93 PRC Water Supply & Env. - 120.0 99.1 2462 93 PRC Agriculture Support Services - 115.0 41.6 3560/2463 93 PRC Taihu Basin Flood Control 100.0 100.0 112.4 2471 93 PRC Effective Teaching Services - 100.0 84.2 3572 93 PRC Tianjin Industry 11 150.0 - 134.7 3582 93 PRC South Jiangsu Envir. Prot. 250.0 - 118.1 2475 93 PRC Zhejiang Multicities Devt. - 110.0 85.8 - 17- Schedule D STATUS OF BANK GROUP OPERATIONS IN THE PEOPLE'S REPUBLIC OF CHINA Page 2 of 3 A. STATEMENT OF BANK LOANS AND IDA CREDITS (As of Mlarch31. 1996) Loan/ Amount (USS million) Credit (net of cancellations) Number FY Borrower Purpose Bank IDA Undisb.(a) 3581 93 PRC Railway VI 420.0 - 225.1 3606 93 PRC Tianhuangping Hydroelectric 300.0 - 250.6 3624/2518 93 PRC Grain Distribution 325.0 165.0 465.8 2522 93 PRC Environmental Tech Assist. - 50.0 34.8 2539 94 PRC Rural Health Workers Devt. - 110.0 85.6 3652 94 PRC Shanghai Metro Transport 11 150.0 - 21.9 3681 94 PRC Fujian Provincial Highways 140.0 - 109.4 3687 94 PRC Telecommunications 250.0 - 206.0 2563 94 PRC Second Red Soils Area Devt. - 150.0 85.7 2571 94 PRC Songliao Plain Agric. Devt - 205.0 136.7 3711 94 PRC Shanghai Environment 160.0 - 142.0 3716 94 PRC Sichuan Gas Devt & Conservatn. 255.0 - 200.4 3718 94 PRC Yangzhou Thermal Power 350.0 - 313.3 3727 94 PRC Xiaolangdi Multipurpose 460.0 - 270.0 2605 94 PRC Xiaolangdi Resettlement - 110.0 76.3 2616 94 PRC Loess Plateau Watershed Devt - 150.0 108.4 2623 94 PRC Forest Resource Devt. & Prot. - 200.0 177.0 3748 94 PRC National Highway 380.0 - 268.8 3773/2642 95 PRC Ent. Housing/Soc Sec Reform 275.0 75.0 319.5 3781 95 PRC Liaoning Environment 110.0 - 92.3 3787 95 PRC Xinjiang Prov. Highways 150.0 - 120.2 2651 95 PRC Basic Ed for Poor/Minorities - 100.0 77.3 3788 95 PRC Industrial Reform 175.0 - 164.6 2654 95 PRC Economic Law Reform - 10.0 9.4 2655 95 PRC Comp Maternal/Child Health - 90.0 75.0 3846 95 PRC Zhejiang Power Development 400.0 - 382.0 3847 95 PRC Technology Development 200.0 - 200.0 3848 95 PRC Sichuan Power Transmission 270.0 - 270.0 3873/2709 95 PRC Fiscal TA 25.0 25.0 46.6 3874/2710 95 PRC Yangtze Basin Water Res Devi 100.0 110.0 185.8 3897 95 PRC Railway VII (c) 400.0 - 400.0 3906/2744 95 PRC Southwest Poverty Reduction 47.5 200.0 228 1 3910 95 PRC Inland Waterways 210.0 - 209.0 3914/2756 95 PRC lodine Deficiency Dis. Control (c) 7.0 20.0 26.0 3929 96 PRC Shanghai-Zhejiang Highway 260.0 - 258.0 3933 96 PRC Ertan 11Hydroelectric 400.0 - 385.5 2794 96 PRC Disease Prevention (c) - 1) 0 1000 3966/2799 96 PRC Hubei Urban Environment (c) 125.0 25.0 150.0 3967/2800 96 PRC Labor Market Development (c) 10.0 20.0 30.0 3980 96 PRC Henan (Qinbel) Thermal (c) 440.0 - 440.0 3986 96 PRC Second Shaanxi Prov. Highways (c) 210.0 - 210.0 3987 96 PRC Second Shanghai Sewerage (c) 250.0 - 250.0 2831 96 PRC Third Basic Education (c) - 1(0.0 100.0 2834 96 PRC Shanxi Poverty Alleviation (c) - 100.0 100.0 Total 15,614.4 8,759.9 9.966.3 of which has been repaid 1.412.3 32.2 Total now held by Bank and IDA (a) 14.202 1 9.772.4 Amount sold: Of which repaid - Total Undisbursed 7,302.5 2,663.8 9,966.3

(a) As creditsare denominatedin SDRs (since IDA Replenishment VI). undisbursed SDR credit balances are converted to dollars at the currentexchange race between the dollar and the SDR. In some cases. therefore. the undisbursed balance and total credit amount held indicate a dollar amount greater than the original principal credit amount expressed in dollars. (b) Fully disbursed. (c) Not yet effective. ScheduleD B. STATEMENT OF IFC INVESTMENTS Page3 of 3 (As of March 31, 1996)

Loan Equity Total FY Borrower Type of Business ------(US$ Nlillion)------

85/92 Peugeot Auto Automobile 15.0 4.5 19.5

88/ China Bicycle 17.5 3.4 20.9 92/94 Bicycles Co. Ltd. Manufacture

89 Crown Electronics Manufacturing 15.0 15.0

93 Shenzhen Tai-Yang PCCP Construction Material 4.0 1.0 5.0

93 Mitsubishi Cement Cement 28.7 2.0 30.7

94 Glass Glass 30.5 2.4 32.9

94 China Walden investors Venture Capital - 7.5 7.5

94 Dynamic Growth Fund Venture Capital - 20.0 20.0

95 Newbridge Investment Venture Capital - 10.0 10.0

95 NanEong Wanfu (EEI) Agribusiness 6.6 2.8 9.4

96 Dupont Polyester Textiles 24.9 3.8 28.7

96 Kumho T ire Co.. Ltd. Motor Vehicles 16 3.8 19.8

96 Plantation Timber Product Timber, Pulp & Paper 10.0 1.0 11.0

Total Gross Commitments 230.4

Total Commitments now Held by IFC 181.1

Total Undisbursed 83.8 - 19 - Schedule E China at a glance

POVERTYand SOCIAL East Low- China Asia income Developmentdiamond' Populationmid-1994 (millions) 1,190.9 1,735 3,176 Life expectancy GNP per capita 1994(USS) 530 890 390 Average annual growth, 199084. Population(%) 1.2 1.4 1.8 Laborforce (%) 1.3 1.6 1.8 GNP Gross Most recentestimate (latestyearavailable since 1989) per primary captta \, / enrollment Poverty:headcount index (% orpopulation) 11 .m .. ent Urban population (% of total populatlon) 28 26 26 Life expectancyat birth (yearsJ 69 68 6S Infantmortality (per 1,000live births) 30 34 53 Childmalnutrition (% olchtilden under5) 17 18 38 Access to safe water (% ofpopulaton) 71 67 67 Accessto safewater Illiteracyy(%of populationage 15+) 22 24 41 Grossprimary enrollment (% of school-agepopulation) 118 116 106 -China Male 120 119 112 __Lwicmgou Female 116 115 100 Low-income group

KEYECONOMIC RATIOS and LONG-TERMTRENDS 1975 1985 1994 1995 Economicratios' Grossdomestic investmentUGDP 30.3 37.8 42.1 40.5 Exportsof goodsand non-factorserviceslGDP 5.2 9.2 24.0 222 Opennessof economy Grossdomestic savings/GDP 30.6 33.1 44.0 43.2 Gross nationalsavings/GDP 30.6 33.5 44.0 42.9 1 Curreniaccount balancerGDP -0.2 -3.9 1 4 2.3 Interest paymentstGOP .. 0.2 0.7 Savings Investment Total debVGDP ,, 5.5 19.3 Total debt service/exports .. 8.3 8.9 Present value of debt/GDP .. .. 17.1 Present valueof debtlexports .. .. 71.2 .. Indebtedness

1976-84 19B5-95 1994 1995 1996-04 (averageannual growth) -China GOP 7.7 9.5 11.8 10.2 8.5 GNP per capita 7.0 8.0 10.4 8.9 7.7 Lw-income group Exports of goods and nfs 20.2 13.7 28.6 18.2 8.6 1

STRUCTURE of the ECONOMY 1975 1986 1994 1995 (%ofGDP)

Agriculture 32.0 28.4 21.0 20.5 . iirowth rates of output and investment %t Industry 42.8 43.1 47.2 48.0 20 Manufacturing 31.6 35.4 370 37.6 D Services 25.2 28.5 31.8 31.5 0 - 91,0 92 93 94 95 Private consumption 61.9 53.7 42.7 47.6 Generalgovernment consumption 7.6 13.2 13.2 9.2 -GoI - GDP Imports of goods and non-factor services 5.0 13.9 22.0 19.5

1975-84 1985-95 1994 1995 - (averageannual growth) Agriculture 5.1 4.1 4.0 4.0 Qpwthratesofexports and imports (%l Industry 10.0 12.7 17.4 13.0 h Manufacturing 13.1 12.3 17.2 13.0 30 Services 8.7 9.4 82 10.1 20 10

Privateconsumption 7 5 8.5 5.7 18.9 101 92 93 94 95 Generalgovernment consumption 85 7.7 6.6 [20'2. Grossdomestic investment 8.9 9.4 12.8 8.4 Importsof goodsand non-factorservices 24.1 9.2 8.9 10.8 Gross national product 8.5 9.5 11.6 9.9 Excorts lrnpon

Note: 1995 data are preliminary estimates. The diamonds show four key indicators in the country (in bold) compared with its income-group average. If dala are missing, Ihe diamond will be incomplete. Schedule E -20 - China

PRICES and GOVERNMENT FINANCE 1975 1985 1994 1995 Inflation %) Domestic pnces (% change) 25 - Consumer prices 0.2 9.3 24.1 13.2 20 - Implicit GDP deflator -0.9 10.1 16.6 11.0 ¶5 - Govemment finance (% of GDP) | Current revenue 25.5 12.4 12 3 9g 01 92 93 94 0f Current budget balance 6.7 0.4 013 Overall surplus/deficil -0.5 .1.6 -1.7 -GOPd@t. -CPI

TRADE

(millions US$) 1975 1985 1994 1996 Export and import lievls (mill. USSP Total exports (fob) 27,350 121,038 148.750 i5000 Food 3.803 10,017 12,828 160000 Petroleum 7,132 4,061 4,152 1s20.0.e Manufactures 13,522 101,331 127,638 Dooseos Total imports (cif) 42.252 115.693 132,308 ooDoo Food .. ~~~~~~~~~~~~~1,8814,996 6,582 *s flw Fuel and energy 18172 4,034 5,244 20.010 X Capital goods .. 18,894 55,720 55,882 20 Export price index (1987=100) .. 92 124 130 90 01 02 03 94 95 Import price index (1987=100) .. 78 122 128 oExport. MImpors Terms of trade (1987=100) .. 117 102 102

BALANCE of PAYMENTS 1975 1985 1994 1995 (millions USS) Exports of goods and non-factor services 7,828 28,163 118,811 147,155 Imports of goods and non-factor services 8,097 41,149 111,472 129,279 Conent accountbaance to OOP o 1%) Resource balance -269 -12,986 7,339 17,876 3 -

Net factor income 0 932 -1,018 -3,866 2 - Net current transfers 0 171 836 715 -n

Current account balance, | o _ l I before official transfers -269 -11,883 7.157 14,734 .1 - I' Financing items (net) 9,443 23.370 8 266 12 Changes in net reserves 2,440 -30,527 -23,000 -3 - Memo: Reserves including gold (mill. US$) .. 16,881 57,794 76,592 Conversion rate (local/USS) 1.9 2.9 8.6 8.9

EXTERNAL DEBT and RESOURCE FLOWS 1975 1985 1993 1994 (mlllions USS) Total debt outstanding and disbursed 16,696 84,178 100,536 IBRD 498 4,549 5,933 Compositionoftataidebt 1994(mill. USS) IDA 431 5,160 6.097 Total debt service 2,478 10,168 11.135 | IBRD 26 544 679 G AB IDA 4 38 50 15399593, Composition of net resource flows 1 2 15385 Official grants 117 272 332 Official creditors 1,117 4,615 3,117 F Private creditors 2,867 8.217 8,853 5f1e3 Foreign direct investment 1,659 27.515 33,787 Portfolio equity 0 2.278 3.915 World Bank program Commitments 1,092 2,315 4,077 A - IBRD E - Bilateral Disbursements 565 1.845 2,060 B - iDA 0 - Othermultilateali F - PrWIt | Principal repayments 0 248 323 c - IMF G - Shon-tnrm| Net flows 565 1,597 1,736 Interest payments 29 333 406 Net transfers 536 1.264 1,331

International Economics Department 311/96 Note: The dollar estimate for China's GNP per capita is taken from the World Development Indicators and is a preliminary figure basedon an on-going World Bank study of China's GDP. It was calculated to facilitate inter-country comparisons. Official statistics are used as the basis for all other economic analysis contained in this document. MAP SECTION

IBRD27911

xiaCHIN RUSSIAN -_ FEDERATION CHINA ;57 '--, '" DIANCHILAKE BASIN ~-\ -~--'! , fufK3nz I -/ R/servok MONGOUA ; - A PROPOSED WATER TREATMENT PLANTS SUPPLYUNE _ . _R' . -" - PROPOSEDWATER ,.875-_ o f , PROPOSEDWASTE WATER TREATMENT PLANTS Ho.gshui SANITARYLANDELL ------' A PROPOSED ^A~?< ~ - Yellow o^ORrA ,-PROPOSED SMALLTOWN SANITATION \r-~~.; K.TI A~~REPoE - ND)'-STRIAL PLANTS 1 ¾ N-A~~~~~~~'So OR~~~~~~CTCYMENTBOUNDARY

/2\~~ .< RIVERS= Chn-~ ~~.... 1 cs~~~~~~~~~ 0 SELECTEDTOWNSA,in , ,^stlS~~~~~~~~.-'.. -¾

z , /2/ ING Y~ 1 \ffi)}s ir /S-K st * ~~~.;-~~~~4ZA$'- ~~~~~PAL/ Pl CC 0 _ I ___ I CC"___-- - , V YUJNNA- l OCEAN N. t -LAORws,VIK -u S.Sa 0.0 R HILMANE5 CLOMETERS Loke)

.- ' SanECR,- ,EDR ~~~~5*~~ ~1 PHIDPPINES

B s ang -.0' K\CHINA t rfDY ' YUNNAN ENVIRONMENTPROJECT 4 PROJECTDDfl CITIES Anning Ft -~~~~~~~~~~~~~~N IRONDon, g ~~~~~~~~~~~~~C0KULNMLNG'.,' V o .4 ,, X C ! s .t &S rTEELPLANT Chenggong HUAN / ., " \ 1 ~~~~~:~~~~ T~~hao.ng

0 Wulong I L y 5Dianchi Lake A. ' V ) 4 *GUIZHOU DL

L) C.terLake)

LD'( ChAR,R,g xir~~Chu',N

B 9 < ;t1 }s * _ W 25- Haikon____

'9 Wond,( i 02Sg 5 GUANGXI PUNEEN

S MYANjR _ E _5' - 0 hLEK\JN' PE!31)- R *' .>r\ oJmhong FERTIn

// _- t '>_>./~~~% i 'K* I/S Jinnrrg , / ' / y 0 50 Io0 150 200 . / 0 / L..,.-JI I , ''n' ~ ¾. a KILOMETERS I RLOT215 0 SELEOLS TOWNS A ! KlLMEER ® PROVINCECAPITAL7 LAO P.D.R. RO(- \ 1 az '3/3- 2 0- - LAKES BOUNDAR ES f ( ' '' ' - J' -_ PREFECTURE i . ._ PROVINCEBOUNDNIBES THAILAND ERNERNAONALEUDARES VLP g g \ \\q 0 t Lesu.es j

,O)N : ddAL VHD T T,P -. :ON ;q oda?

rKITLD.VI

lp