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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 CHINA 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 - Yunnan 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, Kunming and Qujing; 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