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 behind other cities in the PRD region, its economy has started to grow rapidly (12% GDP increase in 2005). Jiangmen ranked high in the Bank's recent survey of investment climate competitiveness of Chinese cities, in part, because of its attractive environmental conditions. But, continuous efforts will be needed to protect the environment, especially water quality in the rivers and streams throughout the municipality. At present, about 32% of the wastewater in Jiangmen’s town center is collected and treated, and a corporate wastewater company was just established to manage services. In addition, wastewater tariffs are still well below the level needed to cover full costs of providing this service. Jiangmen also wants to improve its capacity to control and monitor industrial pollution discharges into local rivers and streams.

Expert studies estimate that the municipalities of Foshan and Jiangmen are contributing 9% and 6%, respectively, of the pollution flowing into the Pearl River system. Together, the PRD 1 and PRD 2 project cities contribute about half of total pollution flowing into the PRD Rivers.

2. Objectives

The development objective is to reduce water pollution in the Pearl River system originating from Foshan and Jiangmen municipalities through a package of key initiatives, including wastewater treatment and sludge disposal, industrial pollution control and water quality monitoring, sediment removal from waterways, and flood protection and river embankment improvements. Key outcome indicators would include: (a) reductions in domestic source pollution entering the Pearl River system from Foshan and Jiangmen; (b) improved effectiveness in operations, management and finances of wastewater utility services; (c) improved river water quality at measurement stations in Foshan and Jiangmen; and (d) increases in property values in the areas upgraded under the project.

3. Rationale for Bank Involvement

During preparation and initial implementation of the first Guangdong urban environment project for Guangzhou (PRD 1), the Bank established a strong partnership with Guangdong province and a number of PRD cities in the fields of water pollution, wastewater management, hazardous waste management and water quality monitoring. While Guangzhou city is the main beneficiary of the PRD 1 project, other municipalities including Shenzhen, Foshan and Jiangmen have joined in discussions and innovations under the project such as the updating of the PRD Clean-Up Plan and the piloting of inter-municipal cooperation in environmental facilities. It was earlier intended that Shenzhen would be the beneficiary of the second Bank-funded urban environment project in the PRD region. However, Shenzhen has needed more time to build internal consensus on its wastewater management plan and its proposed project. Because of their eagerness to modernize and share international best practice, Foshan and Jiangmen emerged as participating cities for the PRD 2 project. Thus, the PRD 2 project provides an opportunity for the Bank to partner with the progressive cities of Foshan and Jiangmen to demonstrate ways to effectively prepare and implement comprehensive programs to address water pollution challenges in a sustainable fashion. Beyond PRD 2, there may be possibilities for the Bank to collaborate, through new projects, with other cities in the PRD on water pollution issues, and to explore the development of a “river basin management” approach for the entire PRD region.

With their strong economies, both Foshan and Jiangmen have other financing options. The decisions to request World Bank financing is motivated primarily by the desire of municipal authorities to employ methodologies, standards, and techniques to improve wastewater planning, construction and management. In addition, these authorities have sought the Bank’s advice on emerging environmental concerns like sludge management and river dredging and sediment disposal. Also, in addition to the physical infrastructure, Foshan and Jiangmen will finance technical assistance activities in wastewater planning, utility pricing and regulatory reforms, industrial pollution control and operational improvements for wastewater management.

4. Description

Foshan Components:

(a) Wastewater Management. Expansion of Zhen’an wastewater treatment plant (Phase III) by 50,000m3/d, construction of interceptors, secondary sewers, and pumping stations, and enhancement of wastewater management capacities; (b) Sludge Treatment and Disposal. Construction of a 400 tons/day capacity centralized sludge treatment and disposal facility at Nanzhuang to treat sewage from five wastewater treatment plants in Foshan, and consultancy services for design review of facilities; (c) Flood Protection and Embankment Rehabilitation. Improvements to Fengjiang River north embankment and adjacent areas, and development of an urban management information database; (d) River Water Quality Improvement. Foshan Waterway and Foshan Creek sediment dredging, treatment and disposal; construction supervision services; construction of four automatic water quality monitoring stations and development of a water environment management information system; (e) Institutional Strengthening and Training. (i) Project management services including contract management and monitoring safeguards implementation; (ii) study of environment cost for GDP growth and “green” economic planning; and (iii) training and study tours.

Jiangmen Components:

(f) Wastewater Management. Expansion of Wen Cheng Sha wastewater treatment plant by 150,000 m3/day, construction of interceptors, secondary sewers, pumping stations, and sludge treatment and disposal facilities, and improvements in water quality monitoring system; (g) Institutional Strengthening and Training. Technical assistance to enhance operational and business management capacities of the new Jiangmen Biyuan Wastewater Company.

The total project cost (for both cities) including physical and price contingencies, is estimated at Y1, 487.6 million (US$191.1 million). Corresponding city-wide total costs for Foshan and Jiangmen components are estimated at Y1,177 million and Y310 million, respectively.

Industrial Pollution Control. In parallel with the Bank-financed components, the two cities will implement complementary programs to monitor and control industrial wastewater discharges, as described below. During project implementation, the Bank will monitor progress in implementation of these programs.

Foshan. The goal of the program is to improve industrial compliance with discharge standards from an estimated 89 percent at present to 95 percent by 2010, and to minimize the periods and severity of non-compliance episodes. The program includes: relocation of polluting industries to industrial parks with centralized wastewater treatment facilities, and improved monitoring of industrial enterprises wastewater discharges through automatic on-line analytical equipment and video monitoring of the operations of treatment facilities. A number of industries will be relocated so that they no longer discharge wastewater to the Foshan Waterway. Seven large enterprises are planned for relocation in 2006, prior to dredging, and a further 13 large enterprises in the period 2006-2010. FEPB also plans to install automatic water quality monitoring stations along the Foshan Waterway to monitor water quality, which would be supported by the PRD 2 project. Installation of the monitoring stations will be completed as early as possible so that the benefits of improved monitoring are available during the rest of project implementation.

Jiangmen. The goal of the program is to attain industrial compliance rates of more than 95 percent and to further reduce total pollution discharges. The program includes: adoption of discharge standards higher than national standards, ensuring that enterprise wastewater treatment facilities are adequate, increasing levels of monitoring through sampling and the extending existing system of on-line monitoring both through automatic analysis and video monitoring of treatment plant operation. Jiangmen plans to enhance its monitoring capability through: (a) purchasing automatic on-line monitoring equipment; (b) establishing an information center for processing the monitoring data; (c) acquiring a mobile laboratory to allow quick response to upsets and suspected malfunctioning of on-line equipment and enterprise treatment facilities; and (d) obtaining technical assistance to implement its overall program and to train relevant staff. All of these activities will be supported by the project.

5. Financing Source: ($m.) BORROWER 87 INTERNATIONAL BANK FOR RECONSTRUCTION AND 100 DEVELOPMENT Total 187

6. Implementation The Guangdong Provincial Government Office for World Bank Projects (GDPMO), established within the Guangdong Provincial Finance Bureau (GDFB), will be responsible for overall project coordination. Its responsibilities include: (a) project-wide quality assurance; (b) project reporting to GPG and the Bank; and (c) inter-agency coordination and procurement support. At the city-level, both Foshan and Jiangmen have set up leading groups, headed by a Vice Mayor, to guide project preparation and implementation. Below the leading group, Foshan municipality has set up a Project Management Office (FPMO), which is under the Foshan Environmental Protection Bureau, to oversee implementation of its components. Similarly, Jiangmen municipality has formed a PMO in the Municipal Engineering and Public Utilities Bureau to coordinate implementation of its components.

The sector agencies in both Foshan and Jiangmen will implement their respective components. In accordance with domestic practice, implementing agencies will engage experienced design institutes for investigations and detailed design, and experienced domestic supervision companies for construction supervision services for their works. Additionally, one tendering company will be engaged to assist agencies with national and international bidding for works, goods and services.

Foshan PMO will coordinate project preparation and implementation. Three project implementation agencies/units (PIUs) are responsible for the preparation and implementation of the five project components. The implementation agency for the Zhen’an wastewater management and the Sludge Treatment and Disposal components is the Foshan Water Group Company Ltd. (FWGC) would be responsible for preparation and implementation of these components. The Xinzhiyuan Wastewater Treatment Company (XWTC), a subsidiary of FWGC, will be responsible for the operation of the Zhen’an wastewater treatment plant. The implementation agency for the Flood Protection and Embankment Rehabilitation component is the Foshan Water Resources Construction Management Center under Foshan Water Resource Bureau, which is a part of Foshan Municipal Government. The implementation agency for the Foshan River Quality Improvement component and the Institutional Strengthening and Training component is the Foshan Environmental Protection Bureau, which is also a part of the Foshan Municipal Government.

During PRD 2 preparation, Jiangmen Municipality formed the Biyuan wastewater treatment company, with a business license and charter. All existing wastewater assets will be transferred to the new company after revaluation. The wastewater company will own the assets constructed under the project. The new wastewater company will manage the construction of the Wen Cheng Sha WWTP and water quality monitoring stations, and implement the capacity enhancement for training and financial management.

Onlending Arrangements. The proposed loan of $100 million will be made to the People’s Republic of China at the Bank’s standard interest rate for LIBOR-based US dollar single currency loans. The loan will be for 20 years, including a five-year grace period. China will onlend to Guangdong Province (GP), on the same terms and conditions. GP will onlend part of the loan proceeds ($76 million) to Foshan municipality and another part ($24 million) to Jiangmen municipality, on the same terms and conditions. Foshan will further onlend part of its loan proceeds to the FWGC, which will pass on part of the debt obligation to XWTC, after commissioning of the Zhen’an WWTP, through an onlending arrangement satisfactory to the Bank. Jiangmen will onlend its entire loan proceeds to the Biyuan WWTC. Onlending to FWGC, XWTC and Biyuan WTC will take place on the same terms and conditions as Bank loan.

7. Sustainability

Guangdong Province has shown its commitment to address water pollution issues through the announcement in 2002 of the ambitious PRD Clean-Up Plan, reinforced with signed agreements between the Provincial Governor and all city mayors on the increased level of wastewater treatment coverage and other targets that cities will achieve by 2008. The Province wants the entire PRD region to develop as a model for environmental protection in China.

Jiangmen’s new wastewater company will manage, operate, and construct most of municipality’s wastewater treatment plants, the network, and pumping stations. Wastewater tariffs have been adjusted to a current average of Y0.61/m3, with approval obtained for an additional increase to Y0.71/m3 in 2007.

The existing Foshan water supply company will be restructured as the FWGC, diversifying water and wastewater operations. In addition to operating services in Foshan, it has recently bid and won at least seven BOT contracts for wastewater treatment plants in neighboring municipal districts. The XWTC has been set-up as a separate subsidiary of the FWGC for operating assets created. Wastewater tariffs have been adjusted to a current average of about Y0.60/m3, with approval already obtained for an additional increase to about Y0.70/m3 in 2007. XWTC’s revenues do not directly rely on the actual wastewater tariff charged, as Foshan’s Finance Bureau has agreed to pay XWTC a fixed unit price of Y0.97/m3 for wastewater treated from 2006 onward.

Foshan has demonstrated its strong interest in the project by setting up a well-staffed PMO, and by creating an autonomous company in 2005 to manage water supply and wastewater services in the city. Similarly, Jiangmen has assigned experienced staff to its new PMO, and formally established a new company for wastewater services in 2006. Both cities have spent considerable budget on project preparation, and have worked closely with international and local consultants to ensure that the investments are well prepared. In addition, Foshan and Jiangmen have provided assurances that necessary counterpart funds will be available, and that wastewater tariffs will be raised overtime to reach the goal of full cost recovery by project completion.

8. Lessons Learned from Past Operations in the Country/Sector Since its first loan in 1985, the Bank has committed about US$5 billion under 31 projects for water supply and wastewater in China. A 2002 Operations Evaluation Department (OED) assessment of the Bank’s involvement in the sector in China, and the performance of the Bank and the clients were found to be satisfactory. The key lessons learned and recommendations were:

a) least-cost analysis of future Bank-financed projects should always include improved incentives and support for water demand management; b) tariffs in future Bank-financed projects should be set by the level of average incremental costs, which signal future costs; c) recent policy of conditioning future Bank financing on the establishment of autonomous wastewater companies be continued; and d) the next generation of Bank sector projects should include private sector participation where there is political support in favor of such participation.

In 2005, the Quality Assurance Group (QAG) carried out a review of the “quality at entry” of the PRD 1 project. The overall QAG rating was satisfactory, with compliments given to the pilot initiatives on inter-municipal cooperation and private sector participation. The Bank team was encouraged to focus more attention during project implementation on the “evolution of the institutional framework for the Pearl River basin management, even if the process itself will inevitably be long-term.”

Relatively large loan savings in a number of Bank-financed urban projects in China have demonstrated the importance of using unit rates from recent construction contracts and realistic market rates in the preparation of project cost estimates.

All of the above lessons and recommendations have been taken into account in designing and preparing the project.

9. Safeguard Policies (including public consultation)

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [x ] [ ] Natural Habitats (OP/BP 4.04) [ ] [x ] Pest Management (OP 4.09) [ ] [x ] Cultural Property (OPN 11.03, being revised as OP 4.11) [ ] [x ] Involuntary Resettlement (OP/BP 4.12) [ x] [ ] Indigenous Peoples (OD 4.20, being revised as OP 4.10) [ ] [ x] Forests (OP/BP 4.36) [ ] [x ] Safety of Dams (OP/BP 4.37) [ ] [ x] Projects in Disputed Areas (OP/BP/GP 7.60)* [ ] [x ] Projects on International Waterways (OP/BP/GP 7.50) [ ] [ x]

10. List of Factual Technical Documents

Project feasibility study reports; EAs; RAPs.

11. Contact point Contact: Thomas L. Zearley Title: Lead Operations Officer Tel: 5788+3410 Fax: Email: [email protected] Location: Beijing, China (IBRD)

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties’ claims on the disputed areas 12. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Email: [email protected] Web: http://www.worldbank.org/infoshop