PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB2546 Project Name Urban Environmental Project II

Public Disclosure Authorized Region EAST ASIA AND PACIFIC Sector Sewerage (45%), Solid waste management (25%), Sub-national government administration (10%), Flood protection (10%), General water sanitation and flood protection (10%) Project ID P096812 Borrower(s) PEOPLE’S REPUBLIC OF Implementing Agency Yunnan Provincial Project Management Office Environment Category [X] A [ ] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared September 14, 2006 Estimated Date of March 24, 2008 Appraisal Authorization Estimated Date of Board June 24, 2008

Public Disclosure Authorized Approval

1. Key development issues and rationale for Bank involvement

Key Development Issues: Yunnan Province faces urban development issues on two fronts – the need to reverse environmental degradation in its largest urban centers caused by the robust economic growth in the past, and the need to develop urban environmental infrastructure for future growth promotion in secondary urban centers.

Reversing environmental degradation in largest urban centers: Yunnan has experienced robust economic growth over the past two decades, with average GDP growth rate at 8.9%. During Public Disclosure Authorized 2000-2005, its GDP per capita grew from RMB 4,600 to RMB 7,800. The Province has taken advantage of its natural resources -- agriculture, mining and power sectors -- as well as its scenic landscape and cultural heritage. It is one of the largest producers of fresh cut flowers, tobacco and tea in China. Tourism accounts for 12.5 % of its GDP, leveraging its cultural heritage of 26 ethnic minority groups -- 38% of its total population.

This rapid growth has accelerated urbanization in its largest urban centers. While urbanization rate for the Province was only 29.5% in 2005, it already reached 57% in Municipality. Population of has grown to 690,000, comprising 20% of the total population of the prefecture. Despite the considerable efforts made by the Province to mitigate adverse environmental effects, they have not been able to catch up with these rapid developments.

One of the most notable culminations of adverse effects is Dianchi, a lake adjacent to Kunming. Public Disclosure Authorized Its water quality deteriorated to Grade V or worse by mid-2000s from Grade II in 1980s. Its condition has attracted national attention, leading to its inclusion in the national priority environment program “Three Lakes, Three Rivers”. The Er’Hai in Dali experienced rapid eutrophication in mid 1990s. While it has been halted at Grade III level, significant further efforts are required to reverse the worsening trends. Parts of major tributaries to the Pearl River and the Jinshajiang River now experience medium to severe pollution. In addition, major tourism centers such as and Dali now face challenges in balancing commercial development with cultural and environmental conservation.

Developing urban environment infrastructure for secondary urban centers: While Yunnan’s economic growth has been significant, it still remains as one the poorest provinces in China. Its GDP per capita is only 60% of the national average, and 57% of its 129 counties are “nationally- designated” as poor. It must further accelerate economic growth to lift its population out of poverty.

In its “11th Five-Year Plan”, the Province has laid out its growth strategy. It plans to continue leveraging its natural resources, promoting tourism, and developing transport links with neighboring countries. In addition, it seeks to reverse environmental damage, balance urban-rural development, promote higher value-added industries and enhance R&D. The urbanization rate is estimated to reach 35% by 2010.

The “county towns” -- capital towns of counties and semi-urban in nature -- will play significant roles in this strategy. They will represent a significant share of urban growth by absorbing rural population and generating employment opportunities in agricultural processing, natural resource- based manufacturing, tourism, logistical services and trading. Many of them have developed supporting infrastructure, notably in power, water supply and transport: 92% of the population in “poor” counties are connected to electricity grids, 84% of the population has access to water supply connections, and road connectivity has improved. However, province-wide wastewater treatment rate was only 40.5% in 2005, well below the national average of 55%, which implies that coverage to county towns is much lower. Less than a half of non-hazardous solid waste filters through municipal collection systems.

Rationale for Bank Involvement: The project addresses two strategic pillars in the Bank’s “Country Partnership Strategy for China”: (i) to reduce poverty, inequality, social exclusion by improving the quality of urban management and infrastructure as well as the efficiency of urban markets; (ii) to manage resource scarcity and environmental challenges by expanding urban wastewater collection and treatment facilities, piloting improved approaches to natural resource management and promoting sustainable cultural and eco-tourism, which are also consistent with the China’s “11th Five-Year Development Plan”.

The Project is a continuation of Bank’s engagements with Yunnan, which strongly needs Bank’s continuing support. It would be second of the phased programs for urban environment management, following-up on the work of the Yunnan Environment Project (YEP), which financed wastewater and solid waste systems in Kunming, Gejiu, and other small towns. It would complement other programs to improve major water bodies, including the GEF-funded “Lake Dianchi Freshwater Biodiversity Restoration Project” and the “Musseling in on Pollution” funded under the Development Marketplace. It intends to operationalize the findings of the “Waste Management in China: Issues and Recommendations” in which Yunnan actively participated, and the “Development Strategy for Small Towns in China”. It would contribute to narrowing urban-rural gap by complementing the “Poor Rural Community Development Project”. It is also a vehicle to re-establish policy dialogue in cultural heritage management, which was once carried out through rehabilitation of Lijiang under the “Yunnan Earthquake Reconstruction Program” in 1997.

2. Proposed objective(s)

The development objective of the proposed project is to assist in the fostering of environmentally sustainable economic growth of Yunnan Province by abating environmental degradation of lake basins adjacent to its largest urban centers and by providing urban environmental infrastructure critical for development of county towns.

The Project is not only a financing vehicle for investments, but also a forum for experimenting with innovative approaches. In response to client’s strong interest and demand, works are already underway on the following, while not all of them may be implemented under this project: introduction of “integrated lake basin management systems” as key pillar of project design (see the section below), issuance of utility corporate bonds à la APL2, consolidation of intra-municipal utilities as an experimental basis, and a pilot TA program on the development of environment compensation market mechanisms for farmers, for which an EASES study is being carried out. Joint Bank/IFC team composition has also been maintained to promote IFC investments and private sector participation.

3. Preliminary description

The Project would consist of two pillars: i) integrated lake basin management for Dianchi and Er’Hai and ii) urban environmental infrastructure development in about 20 county towns in Kunming Municipality, Dali Prefecture, Lijiang Municipality and Wenshan Prefecture.

Those four prefectures are selected out of 16 prefectures by, among others, the following criteria: national and provincial strategic priorities, high degree of pollution, risk mitigation needs (danger of flood etc.), fiscal needs, rapid urbanization around small towns, fast tourism development, and institutional capacity. Subsequently, participating county towns are selected by applying similar criteria. A more detailed description of the selection process is available upon request.

Component I: Integrated Lake Basin Management: The component will support major policy and institutional reforms for Dianchi management systems while enhancing the existing lake basin management programs in Er’Hai. There are needs for: sustained political will, public support and a strong organization to set program goals and priorities; institutional set-up to control/coordinate the implementation of programs over the entire watershed, including all tributaries; a full scientific understanding of causes and effects (lake basin water quality modeling); control of increasing agricultural run-off; and restoration of streambanks and lake shoreline. Through development of “integrated lake basin management systems” for Dianchi, as well as through enhancement of the existing systems for Er’Hai, these deficiencies would be addressed.

It would also finance measures to manage agriculture run-offs; restore and reserve wetland and shorelines; and expand urban drainage, wastewater collection and treatment, solid waste management, flood control and other sanitation facilities. Development of environmental compensation market mechanisms in Lijiang could potentially be effective instruments to manage agriculture run-offs.

Component II: Urban Environment Infrastructure Development for County Towns: It will assist some 20 county towns in Kunming, Lijiang, Dali and Wenshan in developing urban infrastructure critical for economic growth. It would consist of: (i) construction of sewer collectors and wastewater treatment plants, including drainage; (ii) development of solid waste management systems; (iii) flood protection and control; and (iv) preservation work for natural assets and scenic parks. The viability of these components will be further evaluated during the project preparation. In financing conservation works, it will also engage Lijiang and Dali in policy dialogue on cultural heritage management, in coordination with other supporters such as UNESCO.

To assist further project preparation, the French Government agreed to provide a grant and a consulting company has already been mobilized. Grant funding for project preparation for Dianchi/Kunming components are being considered by USTDA.

4. Safeguard policies that might apply

Environmental Assessment Natural Habitats Involuntary Resettlement Indigenous Peoples Safety of Dams Cultural Property Project on International Waterways

5. Tentative financing

Source: ($m.) BORROWER 150 INTERNATIONAL BANK FOR RECONSTRUCTION AND 150 DEVELOPMENT Total 300 6. Contact point

Contact: Takuya Kamata Title: Sr Financial Analyst Tel: (202) 473-4732 Fax: 552-1787/477-1205 Email: [email protected]