Report No. PIC3784

Project Name China-Guangxi Urban Environment Project

Region East Asia and Pacific

Sector Environment/Urban Development

Project ID CNPA36414 Public Disclosure Authorized Borrower People's Republic of China

Beneficiaries Guangxi Region, Nanning Municipality Guilin Municipality, and Guilin Prefecture

Contact Guangxi Urban Environment Project Office Mr. Zhong Senrong, Director 5 Jiaoyu Road, Nanning, Guangxi Fax: (86-771) 586-4670

Tentative Appraisal Date March 1997

Tentative Board Date August 1997 Public Disclosure Authorized Date of This PID March 20, 1996

BACKGROUND: Guangxi's Development and Environment

I. Guangxi Zhuang Autonomous Region has long been known for the picturesque but infertile karst hills and a large number of Zhuang and other ethnic minorities who even now account for close to a half of the total population of about 45 million. Further, as the frontier in the conflict with Viet Nam, it was excluded from China's economic opening during the 1980s. As a result it has remained the poorest area in China in terms of per capita income until 1989, and currently about 8 million residents are officially classified as the absolute poor. With the Public Disclosure Authorized Region's recent "opening", however, the economy grew faster than the national average since 1990, raising its per capita income above ten other provinces' by 1994.

II. The economic growth was led mainly by the industrial sector, which grew by over 20t in each of the past five years. Investments in power and transportation infrastructure are adding both a significant component of the recent growth and a foundation for further sustained growth, taking advantage of the Region's strategic location and abundant water resources. The share of GDP originating from industries and services increased from about a half in the 1980s to about 70t now. Socially, however, the Region is still predominantly rural, with close to 80t of population in agriculture. There are only three cities with urban population over half a million: Nanning, the capital, with about a million urban residents; Liuzhou, the industrial center, with 900,000; Public Disclosure Authorized and Guilin, a tourism center, with 500,000. With a growing industrialization and rural-urban income gap, however, population transition has accelerated, with urban population growing well above 5t a year, and the rural population declining in absolute number.

III. Similarly, Guangxi's environmental problems are less in intensity and scope than larger eastern cities, but are growing much faster. Overall level of industrial pollution, for one, is still moderate due to low levels of industrial production, but are becoming serious in specific sectors and cities. For example, density of industrial pollutant discharge, instead of declining as in most of China recently, has increased in Guangxi due apparently to the especially fast growth of sugar refineries and other food processing industries that generate heavy pollution load per output. Geographically, pollution similar to or worse than those in China's older industrial centers is emerging in fast growing cities and towns. In Liuzhou, the Region's largest industrial center and second largest in terms of population, the heavy industry outputs more than doubled in three years between 1990 and 1993, and brought along severe industrial pollution problems, with, for example, rain acidity often approaching pH value of 3.

IV. In the two other major cities, unique local conditions have helped highlight some symptoms of environmental deterioration. In Guilin, the main concern has always been the quantity and quality of water of the Lijiang (Li River), which flows through a valley considered a top scenic treasure of China and Guilin's economic lifeline. As the population and economic activities in the valley increased in recent years, the water level in the Lijiang during the dry season has decreased to a level insufficient for normal plying of scenic cruises, acceptable dilution or flushing of the city's sewage, or healthy water supply to the city. Incidence and intensity of flooding during the rainy season have also increased. In Nanning, the Regional capital, a steady increase in industrial and domestic discharges into natural waterways spoiled the water supply intake downstream of the main river, Yongjiang. Particularly visible is the pollution of Chaoyang Xi, a small stream that flows through the densely developed commercial and residential center of the city, and is now a virtual open sewer.

V. More prevalent in Guangxi's cities, however, are mundane problems reflecting the low economic level. Many urban neighborhoods suffer from inadequacies in such basic facilities and services as footpaths, drainage, and solid waste management, not to mention sewerage. Need for improved services is growing fast with income and population increases, particularly as the urban growth consists largely of incorporation of rural fringes of the cities and of low-income immigrants from rural areas. In the major cities of Guangxi, population without permanent registration has surged in the last three to four years and is estimated to account for 20-30w of the urban population. Some of this population are concentrated in slums and other visibly poor neighborhoods, but most are scattered throughout the city's residential areas with poor facilities. Reflecting the Region's strong emphasis on poverty alleviation, Guangxi's municipal governments, unlike their counterpart elsewhere, have been accommodating or at least tolerant of the temporary residents, and have provided some basic urban services including garbage collection and schooling to large informal settlements.

Government Response and Strategy

VI. Highly visible problems as described above have served to highlight the environmental risks of economic and urban growths, and to motivate policy makers to begin serious countermeasures. In Liuzhou, a project to reduce air and water pollution has just started with US$100 million

- 2- in financing from OECF of Japan. In Guilin, the desire to protect the Lijiang prompted broad environmental actions early on. The city is one of the few medium-sized cities of China which operate sewage treatment plants and solid waste landfills. Several heavy industrial polluters have been closed or moved away from the city or the river. In Nanning, the polluted Chaoyangxi in the hear of the city has prompted a flurry of environmental actions recently, including development of modern solid waste and wastewater management systems.

VII. Serious policy attention to urban environment being relatively new in Guangxi, with the possible exception of Guilin, most policy actions are ad hoc in nature. Environmental monitoring and regulatory enforcement appear to be spotty, technical and financial capacity of local institutions to plan and deliver environmental services and pollution control support is weak, and environmental concerns are yet to be systematically integrated in the urban and economic development plans.

VIII. Most cities of China have tried to attain a set of uniform environmental and infrastructure standards by relatively uniform means - - building trunk infrastructure with government finances and "modernizing" small areas through redevelopment. While mature eastern cities have had varying degrees of success with this strategy, its feasibility is more questionable in the cities of Guangxi. The fiscal capacity of Guangxi's cities is not the main cause for concern. Municipal budgetary resources per capita, about Y 800 in 1994 in Nanning and Guilin, compare favourably with comparable Chinese cities, and they have been buoyant. The pressure is more from the demand side, as the existing asset base is small and the demand is increasing fast. The situation calls for long-term financing, coupled with adequate cost recovery and appropriate service standards to ensure sustainability and efficiency.

Bank Strategy and Experience

IX. The Country Assistance Strategy for China identifies four areas to focus on operationally: macroeconomic and structural reforms, removal of infrastructure bottlenecks, poverty alleviation, and environmental protection. Urban environmental issues are specified as important challenges relevant to the latter three focus areas. The Bank's sector studies have highlighted contamination of ground and surface water as the most serious consequence of growing industrial pollution, low costs imposed on various pollution, lax regulatory enforcement, and unsanitary waste disposal practices. The Bank has supported successful improvement of these deficiencies in over a dozen major Chinese cities, through projects focusing mostly on wastewater management.

X. The proposed project addresses two of the four CAS focuses: environmental protection and poverty alleviation. Guangxi's urban environmental issues being broadly similar to the pattern seen throughout China, it would help deal with them with an array of components similar to the Bank's other urban environmental projects. In addition, it would attempt to link the environmental improvement directly with poverty alleviation by helping a poor western province, being the second environmental project after Yunnan Environment Project

- 3 - (FY96); and providing, for the first time, direct assistance to the urban poor. Nanning and Guilin, being medium-sized and medium-income with considerable tertiary sector, represent a different class of cities than those helped by earlier Bank projects, that were either very large or predominantly industrial. Of special interest is the large presence of temporary population and neighborhoods with poor environmental quality, whose conditions are unlikely to be improved soon through traditional and costly redevelopment. The Southwest Poverty Reduction Project (SWPR, 1995) is supporting housing development in Nanning mainly to accommodate the migrant population. The Bank has supported many housing and area upgrading operations to help improve living conditions of the urban poor in most parts of the world, but not in China before SWPR. Experience with such projects in other countries has shown substantial benefits at low cost can be obtained through projects focussing on simple investments to meet basic needs and self-help. The proposed project would pilot such an approach to benefit a broader group of low-income residents at low cost.

The Project

XI. Project Objectives. The project would help improve the environment of Nanning and Guilin, in support of sustainable economic growth and poverty alleviation in the Region. Specific objectives of the project include:

To improve quality of major water bodies -- Lijiang and its tributaries in Guilin, Chaoyangxi and Yongjiang in Nanning;

To reduce flow variation of Lijiang between wet and dry seasons;

To improve environmental quality of poor neighborhoods; and

To strengthen systems and institutions for environmental protection and services.

XII. Project Components. The project would support high priority environmental investments along with policy and institutional measures to supplement and sustain the benefits. They consist of investment components identified by the local governments as urgent, and others perceived by the Bank as major needs based on limited mission observations and experience elsewhere. Subject to the on-gong feasibility study, they are briefly described below along with rough cost estimates.

XIII. Sewerage and Channel Clean-Up (Approximate base cost $85M). To reduce the pollution of major water bodies in Nanning and Guilin, the following would be carried out:

Nanning: Chaoyangxi Clean-Up and Sewerage. Building sewage interceptors and conveyors along Chaoyangxi and Yongjiang, and possibly a primary sewage treatment plant with capacity of about 260,000 m3 per day. Cleaning up Chaoyangxi by dredging the stream bed and lining the banks.

Guilin Sewerage. Building sewage treatment plants (up to three)

-4 - and more than 40 km of conveyors and interceptors; and cleaning up two lakes in the city and their intake channel;

Lingchuan Sewerage. Building a 9 km sewer network and a primary wastewater treatment plant in a rapidly industrializing town immediately north of Guilin city and on the bank of Lijiang.

XIV. Lijiang Flow Regulation ($37M). The following are proposed as the most cost-effective means of regulating the Lijiang's flows. The first three would increase the Lijiang water level during the dry season and hence its capacity for assimilation, water supply, and tourism. They would also allow moderate hydro-power generation.

Xiaorongjiang Diversion. Building a dam, about 15 meters high, on Xiaorongjiang, a tributary of Lijiang; and a tunnel to convey the water during rainy months to the Qingshitan Reservoir, an existing major storage and generating facility with excess capacity, on a neighboring tributary.

Wulixia Canal. Rehabilitating and extending an existing 26km irrigation canal conveying water from the Wulixia reservoir to the Lijiang.

Xunjiang dam and diversion. Building a 51-71m high dam on a tributary of Yijiang (which parallels Lijiang) and a series of canals and tunnels to transfer a part of the water to Lijiang during the dry season. The rest of the water would be used for irrigation in the Yijiang valley.

Lijiang Embankment. Building and repairing 80 km embankment between Guilin city and Yangshuo town.

XV. Solid Waste and Nightsoil Management ($10M). Solid waste generation in Guilin has exceeded the existing system capacity, and Nanning is now developing a modern management system. Nightsoil is managed in an unsanitary manner in both cities. To improve this situation, the following are proposed:

Disposal Facilities. Building and equipping a sanitary landfill and possibly an incinerator (450 ton/day) in Guilin, and a number of nightsoil septage and composting plants in both cities. (An adequate landfill is under construction in Nanning).

Collection System. Providing solid waste transportation vehicles, septic tank maintenance equipment (e.g. vacuum truck), transfer stations, and improved individual and collective latrines.

XVI. Small Area Improvement ($9M). Poor quality housing and physical environment are the major element and the best indicator of poverty in urban China. Nanning and Guilin have many such neighborhoods which are unlikely to be redeveloped in the near future. The project would support improvement of basic facilities such as access road, drainage, latrines, and garbage collection, as identified and partly financed by beneficiaries.

-5- XVII. Industrial Pollution Control Investments ($12M). Financing would be provided for waste minimization or treatment by major industrial polluters of Chaoyangxi and Lijiang, to complement the clean-up investments; and to a sample of sugar refineries, as the industry accounts for a dominant share of Guangxi's industrial pollution. A typical subproject would be financed with about 50% from the Bank loan, and the rest from self-financing and the EPB's pollution levy fund. The subloan would carry terms equivalent to loans available from local commercial banks.

XVIII. Institutional Strengthening ($5M). Technical assistance, training, and equipment would be provided to improve, at the Regional and local levels, the capacity of: Environmental Protection Bureaus for environmental monitoring, regulation and planning; Environmental Sanitation Bureaus for solid waste and nightsoil management; Municipal Engineering Bureaus for sewerage and drainage management; and Water Resource Bureaus for Lijiang protection and water savings.

XIX. Water Conservation and Water/Sewerage Tariff Increases. Water being plentiful in Guangxi overall, its use has traditionally been liberal. However, water use by increased population and economic activities, including more intensive farming, in Lijiang valley appears to have been the main factor contributing to the critical fluctuation of the Lijiang water levels. Guilin municipality and prefecture have been carrying out a program of water conservation and reforestation, but there appears to be room for much further savings. Correct pricing of urban, and possibly also rural, water usage would be an important instrument. Also in both Nanning and Guilin, expansion and operation of the sewerage systems would be sustainable only with tariffs to cover the recurrent and at least part of the capital costs.

XX. Environmental Regulation and Planning. Programs would be implemented to control industrial pollution discharges into the major waterways which would be cleaned up under the project. The programs could include actions to reduce pollution by existing industries, stricter control of new industrial permits, and if necessary, closing of some polluters. They would constitute a major element of, and a good way to start, an improved management of overall urban environment. For the latter, environmental master plans are needed to guide management of overall urban environment and development. Such plans for Nanning and Guilin would be prepared with Canadian assistance during project preparation and implementation, and further developed and implemented as official plans under the project.

Benefits, Risks, and Sustainability

XXI. Benefits. The project's principal direct benefits would be the improved quality of major water bodies in the cities, and of environment of poor neighborhoods. These improvements would in turn enhance the conditions and sustainability of Guangxi's economic growth. A modicum of financial benefits would accrue from Lijiang components, from increased irrigation and hydropower generation and possibly tourism.

-6- XXII. Resettlement and Environmental Impacts. The project would belong to the environmental Category A. Most of the project impacts would be positive, but potential environmental risks include: risk of the solid waste landfill to contaminate ground water, changes in hydrologic pattern and water usage resulting from the Lijiang flow regulation scheme, dam safety, dredge material handling and disposal. Environmental assessment and study of mitigation measures are proceeding as part of project preparation. The Chaoyangxi clean-up and sewerage component involves resettlement of some 4,500 people in 770 families who are living on banks of Chaoyangxi and are subject to erosion and flooding. Construction has started on the apartments to resettle 290 of the households this year. A resettlement action plan is being documented to ensure fair and consistent compensation.

XXIII. Implementation Risks. Record of Chinese municipalities in physical implementation under similar Bank-financed projects has been satisfactory overall. However, most suffered delays during start-up while familiarizing themselves with the Bank's procedures especially for procurement. There could be more difficulties in Guangxi due to the water resource components, which experience has shown to take longer, and the relatively weak technical and institutional capacity of the local government entities. Performance of the project entities would be monitored during project preparation and appropriate implementation assistance designed as necessary.

XXIV. Sustainability. In order to enhance and sustain benefits from investment components, complementary measures, such as reduction of pollution at source and conservation of water, would be implemented as an integral part of the project. A preliminary analysis indicates that counterpart financing requirements would be well within the projected local fiscal resources. Fiscal sustainability would be supported partly by the buoyancy of the fiscal resources, but would also require action to raise and maintain water and sewerage tariffs at adequate levels.

Project Preparation and Implementation

XXV. Responsible Government Entities. The project involves four jurisdictions: the Guangxi Region, Nanning Municipality, Guilin Municipality, and Guilin Prefecture. Two proposed investment components, Wulixia canal rehabilitation and Lingchuan sewerage, fall under the Guilin Prefecture. For individual components, local administrative bureaus have been managing the preparation of components according to the normal division of line responsibilities (as indicated in para 18 above), and would continue to oversee further preparation and implementation. For coordination, each local government has established a Project Management Office led by EPB director under the direction of a Vice Mayor or Prefecture Administrator. Guangxi Regional government has similarly established a project office headed by vice director of Regional EPB, under the direction of a Vice Governor.

XXVI. Beneficiaries would play a primary role in identification, design, and maintenance of small area improvement and industrial pollution control components. They would also be responsible for a

-7 - significant part of financing. Works similar to the proposed small area improvement and community mobilization have traditionally been the responsibility of the district governments, drawing upon expertise and financing from responsible municipal bureaus, in this case municipal engineering and environmental sanitation bureaus. The question of whether other organizations would be necessary, available, and acceptable is being reviewed.

XXVII. Preparation Status and Plan. The project proposal discussed with the identification mission in October 1995 was based on prefeasibility studies or more preliminary plans prepared by the local governments and their consultants. Since then, additional design institutes have been mobilized from outside the Region for further preparation. Australian and Canadian consultant teams, mobilized under the respective bilateral assistance programs, are helping them to prepare and refine the feasibility studies. This work is scheduled for completion by June 1996. Preparation schedule is subject to several uncertainties which could be resolved considerably by the time feasibility study is completed and reviewed. That review could add or subtract about three months from the appraisal and board schedule shown on the first page based on experience with similar recent projects.

XXVIII. Program Objective Category. The project would fit in the environment and poverty alleviation categories.

Contact Point: Public Information Center The World Bank 1818 H Street N.W. Washington D.C. 20433 Telephone No.: (202)458-5454 Fax No.: (202)522-1500

Note: This is information on an evolving project. Certain components may not necessarily be included in the final project.

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