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PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB2251 CN: Second Guangdong Pearl River Delta Urban Environment Project Name Project Public Disclosure Authorized Region EAST ASIA AND PACIFIC Sector Sewerage (70%);Flood protection (30%) Project ID P081776 Borrower(s) PEOPLE’S REBULIC OF CHINA Implementing Agency People’s Republic Of China China World Bank Project Management Office Department of Finance, Guangdong Province Level 11, 26 Cangbian Road Guangdong Public Disclosure Authorized China 510030 Tel: 86-20-8317-0063 Fax: 86-20-8333-0007 [email protected] Environment Category [X] A [ ] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared March 14, 2006 Date of Appraisal June 12, 2006 Authorization Date of Board Approval Nov. 21, 2006 1. Country and Sector Background Public Disclosure Authorized Background. The Pearl River Delta (PRD) region in China’s southern Guangdong province is one of the most complex urban systems in Asia; it holds over 40 million people in 25 municipalities, 3 counties and 450 towns in Guangdong province and the two special administrative regions of Hong Kong and Macau. The PRD has ranked at or near the top nationwide in economic growth in recent years (averaging nearly 14% per annum during the 2000-2005), mostly due to large inflows of direct foreign investment initially in low value-added manufacturing, and more recently in higher value-added manufacturing and, in a few cities, in services. Much of the growth has been powered by large inflows of low-cost migrant workers from peripheral areas in Guangdong and from poor provinces. Many parts of the PRD are largely devoted to export processing. The Delta is also complex geographically. There are three branches of the Pearl River which Public Disclosure Authorized join at the city of Guangzhou, the political, economic and cultural hub of the PRD. The Pearl River is China’s third longest river, and is second only to the Yangtze in terms of annual average flow. The Pearl River discharges into the South China Sea through eight principal tributaries. The close proximity of these tributaries, the flat terrain of the delta, the very large number of canals and streams interconnecting tributaries, and tidal flows and surges makes an accurate hydrological definition of “sub-basins” within the PRD very difficult. The high economic growth in the PRD has come at a very heavy environmental cost. Investment in environmental protection has not kept pace with the rapid economic advances, which is evident in the serious deterioration in river water quality during the period. Today many stretches of the Pearl River, especially in the vicinity of Guangzhou, Shenzhen, Dongguan, Foshan and Jiangmen are worse than the lowest national water quality standard (Class V), and therefore unfit as a drinking water source. Domestic and industrial wastewater discharges, urban storm water run-off, and non-point source pollution from agricultural run-off, are the main pollution sources within the PRD. Generally, collected domestic wastewater is discharged to the river systems without treatment, except in the larger municipalities such as Guangzhou, Shenzhen, Foshan, Jiangmen, and Zhuhai, where only a portion of the wastewater is treated. Industrial wastewater is to be treated on site by the polluting industry before discharging into the municipal collection networks or into the Pearl River system. But, local governments’ capacity to monitor and control such pollution varies considerably across PRD cities. Environmentally safe disposal of sludge from wastewater treatment plants is only just beginning in the PRD, with the first plant recently constructed to serve Guangzhou city. Treatment of sludge from the expanding wastewater treatment plant capacity now being installed will present a growing challenge to PRD cities. This deteriorating situation poses a serious threat to river water quality generally, and drinking water sources in particular, including the drinking water supply to Hong Kong. It also renders the river system unsuitable for irrigation, aquaculture, and potential recreational uses. The government response has been to move drinking water intakes upstream to avoid contaminated supplies. This approach is not sustainable. Guangdong Provincial Water Pollution Clean-Up Plan. In 2002, Guangdong provincial government announced a major plan to clean-up the PRD rivers. This is an eight-year campaign which will invest more than US$5 billion in the construction of wastewater treatment systems in cities and towns in the PRD region. The provincial plan sets out ambitious phased targets to meet water quality and other standards, through the following main actions: a) industrial pollution control: monitoring and controlling discharges from 179 key polluting industries, including relocation of the worst polluting industries; b) domestic wastewater treatment: construction of 162 wastewater treatment plants to treat about 12.2 million m3/day; c) agricultural and livestock pollution control: banning and relocating of poultry industries from water catchments of the PRD region, and enforcement of provincial and national pollution control following SEPA guidelines; and d) river rehabilitation, comprising integrated rehabilitation of key rivers, creeks, domestic solid waste treatment, and ecosystem development and protection. The Provincial Governor also signed agreements with all city mayors on the increased level of wastewater treatment coverage and other targets that the cities will achieve by 2010. However, most cities and towns still plan, build and operate their own urban utility system separately, with economies of scale and other potential benefits not being sufficiently realized. Guangdong provincial government and municipalities recognize that regional planning approaches present opportunities for inter-municipal cooperation, jointly-managed facilities, reduced costs, and economies of scale for provision of environmental infrastructure, but they have not yet solved the institutional challenges inherent in this approach. World Bank Support for PRD Reforms. The World Bank is supporting elements of this PRD Clean-Up Plan through a program of investments and policy reforms. Approved in 2004, the first Guangdong PRD urban environment project (PRD 1) focused on financing wastewater treatment facilities and other investments in the provincial capital of Guangzhou, which is the biggest single source of pollution (34% of organic pollution load). In addition, the project, with GEF grant financing, supports numerous innovations and policy reforms including three pilots on inter-municipal cooperation in the planning and operating of shared wastewater facilities (two pilots in Guangzhou and one in Foshan), improvements in water quality monitoring and information dissemination, and encouragement of public-private partnerships (PPP) in utility services. The project is also funding a study to update the PRD Clean-Up Plan to help optimize the number and size of wastewater treatment facilities to be built. This is urgently needed, as the original plan did not give adequate emphasis to regional planning considerations, economies of scale and least-cost strategies. In addition, the issue of how to establish better coordination among various agencies for water issues in the PRD region remains a challenge and will be reviewed in revising the Plan. This updating work, now underway, is scheduled for completion by the end of 2006. These broader sector reforms will be deepened and extended through the implementation of the PRD 2 project, with the inclusion of the two additional PRD cities of Foshan and Jiangmen. Sector Conditions in Foshan and Jiangmen. Foshan municipality is located in south-central Guangdong province, adjacent to Guangzhou city. It has a population of 5.6 million, and has a long history as a cultural and industrial center in south China. Its economic growth has been particularly impressive recently, with GDP expanding 19.2% in 2005. Foshan’s political leadership plans to improve environmental conditions in the city as soon as possible. Currently, only 32% of the wastewater in Foshan is treated, and the lack of adequate wastewater collection and treatment systems is increasing pollution to the Pearl River system and creating public health concerns. The highly-polluted waters running through the city, especially in the Fengjiang River, are smelly and foul, discouraging investments in upgrading along river banks. This has resulted in property values and related municipal tax revenues in these neighborhoods being less than optimal. Foshan has commenced an accelerated program to increase its wastewater treatment plant capacity by mobilizing funds through build-operate-transfer (BOT) operations. Foshan has created a municipal company for managing drinking water and wastewater services, and wishes to introduce this entity to international management techniques as well as sound public-private partnership arrangements. However, the Municipality has to tackle the growing problem of treating and disposing of sludge, and gradually raise wastewater tariffs to cover the full costs of providing wastewater services. It also wants to strengthen its industrial pollution control efforts through improved water monitoring and training of environmental protection personnel. Jiangmen municipality is located just west of Foshan. It has a population of 3.8 million, with more than 60% of the population engaged in agricultural activities. While Jiangmen’s economic development is somewhat