PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB3131 Han River Urban Environment Improvement Project Project Name Public Disclosure Authorized Region EAST ASIA AND PACIFIC Sector Sewerage (50%);Solid waste management (48%);Sub-national government administration (2%) Project ID P087224 Borrower(s) PEOPLE’S REPUBLIC OF CHINA Implementing Agency Government of China China

Ministry of Finance (MOF) Sanlihe, Xicheng District China Public Disclosure Authorized 100820 Tel: 86-10-6855-3166 Fax: 86-10-6855-1125 [email protected] Hubei Provincial Project Management Office Hubei Provincial Government Hubei Province China Tel: 8716 7131 Fax: 8786 1455 [email protected] Environment Category [X] A [ ] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared July, 18, 2007

Public Disclosure Authorized Date of Appraisal July 16, 2007 Authorization Date of Board Approval February 19, 2008

1. Country and Sector Background

Cities generating more than 60 percent of GDP have been the engine of economic growth and driving forces for poverty reduction in China. Urbanization has been accelerated rapidly over the last two decades at an annual rate of about 3.3%. Today, China’s urbanization level is at 40.4%—up from 26.2% in 1990—corresponding to a total urban population of 531 million.1 It is projected to climb to over 55 percent in the next 20 years. The rapid development of the second- tier provincial cities as a consequence of sizable rural-urban migration is considered as one of important factors behind this accelerated urban growth. While this rapid urbanization has

Public Disclosure Authorized significantly increased cities’ GDP and expanded their economic bases, cities’ environmental (water, air and soil) conditions and living standards have considerably deteriorated, particularly

1 1990 from Population Census, 40.4% figure is based on 2005 UN estimates. in the second-tier cities, because of lack of environmental infrastructures such as wastewater treatment plants and solid waste management facilities.

Hubei Province, located in mid-China, has a population of 60.1 million in an area roughly one third the size of France (180,900 km2) of which 24.60 million (41%) are living in the urban areas. Hubei is extending across two major river systems: the Yangtze River and Han River. The middle and lower reaches of Han River are noted for their fertile and broad land mass, huge population, and abundance in natural endowment. The economy of the Han River area is, producing just over half of the Province’s GDP (US$ 82 billion) and supporting 30% of its population.

In 2003, only 2.5 million populations have access to a Wastewater Treatment Plant (WWTP) in Hubei. The total capacity of wastewater treatment plant in Hubei is 880,000 t/d. Most of the existing wastewater treatment plants, including some funded by the World Bank, are located in larger cities (Wuhan, Yichang, Huangshi, and Xiangfan) mainly in the Yangtze River area. The wastewater treatment rate in the urban areas in the Province is at most 15%. This rate is much lower in the Han River area in Hubei, as there is no waste treatment plant, except for few cities. Untreated wastewater contaminate groundwater and river system and impose a major threat to the citizen’s health and the ecological environment. In addition, it is expected that the water quality of the Han River would deteriorate further after the start of South-North Water Diversion in the upper stream of the Han River in 2010.

The current domestic solid waste generation in Hubei Province is about 13 million tons per annum and the 62 existing landfills handle and dispose about 6 million tons of domestic solid waste annually or 45% of the total solid waste generated. In 2005, Hubei province had only 8 sanitary landfills which handle about 1.05 million tons of domestic solid waste annually, accounting for 8% of the total solid waste. There is no sanitary landfill in the Han River area. Thus, most of municipal solid wastes go to dumps without protection from leachate contamination for underlying aquifers or local surface waters, nor any collection of flaring of landfill gas. The migration of polluted surface waters share blame for the high levels of urban aquifer contamination. Malodorous dump sites and some of collection points are a major source of citizen’s environmental complaint and potential sources of diseases.

Hubei is a major industrial province ranking 10th in China in terms of industrial gross regional product. Important sectors are the traditional sectors of chemicals (including fertilizers), pharmaceuticals, food processing, paper, ferrous metals; and the newer sector of light engineering based around automobile manufacturing. Industrial pollution is significant in Hubei with around 65% generated in the Han River area. Although industrial pollution ranks below domestic pollution in terms of quantity, industrial pollution is considerably taxing urban environment and economy through discharge of various pollutants. Its effective control and reduction are indispensable not only for environmental sustainability but also cities’ economic competitiveness.

Recognizing the above mentioned environmental challenges, the Hubei Environmental Protection Bureau adopted the 11th Five-year Plan on Environmental Protection which envisages ambitious investment plan for both wastewater treatment plants (RMB 8.7 billion/US$1.1 billion) and the solid waste management systems (RMB 5.4 billion/US$ 0.7 billion). In addition, the 11th Five-year Plan includes the industrial pollution control action plans for key polluting enterprises. Given that the previous five year plan as well as the Bank-funded Hubei Urban Environment Project (HUEP) focused on environmental investments in larger provincial cities such as Wuhan and Yichang, the new plan directs sizable resources to fast growing and under- invested second-tier cities. The challenge now is to ensure the provincial and municipal governments materialize this ambitious investment plan. Yet, many cities in the province have difficulty finding sufficient funding sources to finance those investments. They also face substantive gap in required technical and managerial capacity to implement the project and to efficiently operate and manage the municipal public utilities in a sustainable manner. HRUEIP is an integral part of the provincial 11th Five-year Plan and finance key environmental investments as well as associated institutional development program in the provincial secondary cities in the Han River area.

Table 1 summarizes basic demographic, economic, and sector-specific indicators.

Table 1 HRUEIP Socioeconomic and Environmental Indicators of the Project Cities.

Municipality Land Area Total Urban GDP per GDP growth Waste water Solid Waste (km2) population in Population in capita in 2006 rate (past 5 treated 2006 ** 2006 (RMB) years) collected disposed of in Sanitary landfill

Danjiangkou 3,121 490,000 200,000 9,436 10.0% - 80% 0% Dawu 1,979 629,150 132,000 5,815 * - 78% 0% Hanchuan 1,663 1,085,000 180,000 9,221 12.0% 0% 92% 0% Honghu 2,519 909,800 176,000 7,429 5.8% 58% 70% 0% Shayang 2,044 576,000 100,000 8,739 7.8% 0% 80% 0% Tianmen 2,622 1,669,550 250,000 7,384 * 0% - - Xiangfan 2,306 5,772,200 2,176,700 10,262 9.8% 91% - - Xiaochang 1,217 636,500 110,000 4,208 9.0% 0% 80% 0% Yunmeng 604 582,000 110,100 8,812 * 0% 80% 0%

2. Objectives

Project Development Objective

The Project Development Objective (PDO) is reduce the urban pollution generated from wastewater and solid waste through their proper collection, treatment and disposal in the selected second-tier cities, mainly located in the Han River areas of Hubei Province.. This will be achieved by undertaking high priority investments in selected project cities in wastewater collection and treatment systems and solid waste management systems as well as institutional reforms and capacity development in the areas of municipal utilities reforms and water pollution control. As its secondary objective, the project is intended to develop well-managed and sustainable municipal utilities which could be referred to as models/best practice for other similar projects or programs to be implemented under the Provincial 11th Five-year Plans. The proposed project is consistent with the 2006-2010 Country Partnership Strategy with its focus on managing resource scarcity and environmental challenges. The project will also support the objectives in China’s the 11th Five-year Plan (2006-10) aiming at creating a “harmonious society” that balances economic growth with distributional and environmental concerns.

Primary Target Group and Estimated Number of Beneficiaries

The project will benefit an estimated 1.84 million people in the short-run (2010) and an estimated 2.58 million people in the long run (2020) in nine cities, providing wastewater services in seven cities to about 1.37 million people by 2010 and to about 1.97 million people by 2020, and solid waste service in seven cities to about 1.19 million people by 2010 and to about 1.72 million people by 2020.

Key Indicators to measure the progress towards the PDO

Proportion of municipal wastewater treated and proportion of domestic solid waste collected and transferred to sanitary landfills will be used to measure the achievement of PDO

3. Rationale for Bank Involvement

This project will allow provincial and municipal governments to finance their needed urban environmental investments and gain access to the Bank’s wide range of the sector knowledge and institutional and technical expertise in China and other countries. Especially, the previous Hubei Urban Environment Project (HUEP) (P003602) which supported mainly large cities in Hubei Province provides valuable lessons in the project preparation and implementation. Furthermore, recently completed Water Sector Strategy Study will allow the Bank to advise the governments on institutional and technical issues based on the systematic analysis of China’s water and wastewater sector

4. Description

The project consists of: (i) waste water treatment investment component; (ii) solid waste management system investment component; (iii) industrial wastewater pollution control component; and (iv) institutional development and capacity building component as summarized below. (See Annex 4 for the detailed description)

Wastewater Treatment Investment Component (US$103.84 million): This component will cover seven cities/counties and include the construction of seven new waste water collection systems in all seven cities/counties and the construction of five new wastewater treatment plants in Hanchuan, Shayang, Tianmen, Xiaochang and Yunmeng.

Solid Waste Management (US$63.22 million): This component will cover seven cities/counties and include the construction of new sanitary landfills and solid waste collection and transfer stations, equipment and closures of existing dumps in all the seven cities/counties. Industrial Pollution Control (US$10.63 million): Under this component, the Hubei Province and the project cities will implement the industrial waste water pollution control programs with their own funds. The activities are carried out at both provincial and city levels, including (a) provincial level program for installation of on line monitoring (OLM) at major pollution sources; and (b) the implementation of specific industrial wastewater pollution control action plans for major polluting enterprises.

Institutional Development and Capacity Building Component (US$6.47 million): This component will include the following activities:

a. Project Management and Implementation Assistance(US$3.55 million): Technical Assistance (TA) for design review advisory services and construction supervision b. Institutional Development (ID) and Capacity Building of Wastewater Utilities (US$1.02 million): TA for ID in financial, technical, operational and human resource management c. Institutional Development (ID) and Capacity Building of Solid Waste Management Organizations (US$0.81 million): TA for developing their optimal institutional framework and ID in financial, technical, operational and human resource management. d. Studies and TA (US$1.09 million): (i) TA for improving the Han River Water Modeling System developed during the project preparation (US$0.88 million); and (ii) a study on non-point source pollution (US$0.20 million).

5. Financing

Source: ($m.) Borrower 104.55 International Bank for Reconstruction and Development 97.60 Total 202.15

6. Implementation

Project Management The Provincial Leading Group led by the Executive Vice Governor and composed of the key provincial bureau including Provincial Finance Bureau, Development and Reform Commission (DRC) and Construction Bureau is responsible for giving policy guidance and overseeing the project implementation of all the Bank-funded projects, including HRUEIP. Beside this Provincial Leading Group, a special Provincial Leading Group led by the same Vice Governor and composed of the representatives of 15 provincial bureau and agencies, is responsible for coordinating pollution control actions in the Han River Basin.

The Provincial Project Management Office (PPMO) will provide management leadership to all aspects of the project implementation. The PPMO consists of the Deputy General Director of Provincial Environmental Protection Bureau, Deputy Directors of Provincial Financial Bureau, DRC, Construction Bureau and Land Resource Administration Bureau, a full time PMO Manager and technical staff (finance expert, engineer, procurement expert, environmental expert and resettlement expert). The roles of PPMO includes: (a) overall project implementation coordination, management, supervision and monitoring; (b) annual budget preparation; (c) project-wide quality assurance; (d) forwarding progress reports to the Hubei Provincial Government and the Bank; (e) interagency coordination and procurement support; and (f) coordination of implementation of TA, studies and trainings for the project cities.

Municipal Level Arrangements. Each city has established its own Leading Group and Municipal Project Management Office (MPMO) in charge of its own component. The sub-projects will be implemented by the project implementing agencies (municipal departments, urban investment companies or utility companies) designated by the cities.

TA, studies and trainings will be implemented by Provincial EPB and/or the project cities with assistance of PPMO.

Procurement will be handled at both provincial and city levels. At the provincial level, PPMO will be responsible for overseeing and overall coordination of the procurement activities of the MPMOs. At the city level, MPMOs will be responsible for carrying out the procurement of the contracts under their sub-projects with the assistance of the procurement agents and design institutes and the guidance of the PPMO.

7. Sustainability

In order to ensure political commitment to sustainable environment protection, the Bank teams has been actively engaged in policy dialogue at various levels including Provincial Vice Governor in charge of environmental affairs and mayors of the project cities in addition to the provincial and municipal governmental officers. Civil societies will also be involved in ensuring the compliance of the industrial discharge by major polluters, though public disclosure of monitoring data of industrial discharge of major polluting enterprises. Institutional Development and Capacity Building component of the project will help the project cities develop technically efficient and financially sustainable wastewater companies and technically efficient and cost effective solid waste management organizations in a phased manner. While the rural Non Point Source pollution will not be directly addressed under the project, the Bank loan will finance a study on the NPS pollution control, which would eventually help the province address more comprehensively all the sources of water pollution in the Han River. On solid waste management, the Bank loan will finance the closures of the existing dump sites according to the EPB’s regulation to ensure safe environment for both closed old dump sites and new landfill sites.

8. Lessons Learned from Past Operations in the Country/Sector

The following lessons learned from the Implementation Completion Report (ICR) of HUEP, the Sector Study (Improving the Performance of China’s Water Utilities, 2007) and other similar Bank project have been reflected in the project design:

Realistic Reform Targets and Timelines: When new project agencies and implementing units are being established in conjunction with a project, and related institutional and financial reforms are to be advanced, this project demonstrated the importance of setting the corresponding reform targets and timelines as realistically as possible, taking into account the readiness of related governmental decision-making bodies to act on the same. Otherwise, with over-ambitious goals, good advances may be accomplished, but all targets still not met. Given generally weak capacities of the project cities, the Institutional Development and Financial Reforms will focus on the enhancement of basic operational efficiency and implementation of gradual financial improvement program. (ICR HUEP)

Timing of TA for Institutional Development: In implementing HUEP, the borrower issued a contract for institutional and financial development support to the newly established utility companies to an international consulting firm shortly after loan effectiveness. This proved to be too early for optimal TA effectiveness. The utility companies were during the initial years of project implementation functioning mostly as construction management companies, with no assets yet under their management and with very limited general utility management and operational activities. For TA support to be most effective, it should be closely coordinated with the project implementation schedule, and be provided at a time when the clients (the TA beneficiaries) are in the best position to make effective use of the TA. TA implementation schedule will be carefully prepared considering the above mentioned optimal timing. (ICR HUEP)

Staffing of Project Agencies and TA: Project agencies and implementing units should include to the extent possible (or actively build) personnel with utility and environmental management skills, in addition to construction management expertise, bearing in mind the utility operational management needs a longer term involvement. Under HUEP, most implementing agencies and project implementing units were newly established, and while focusing on construction implementation, also obtained significant training and technical assistance during project implementation. ID Capacity Building TA component will help the project implementing agencies to recruit necessary professional and operational staff as well as conduct necessary training. (ICR HUEP)

Strategic Institutional Issues: The Sector Study (Improving the Performance of China’s Water Utilities, 2007) has identified many important generic water and wastewater sector issues and recommended key strategic directions. While it is not realistic to pursue all of the recommendations in the Han River Urban Environment Improvement Project (HRUEIP) as the project cities are mostly small secondary cities with limited financial and institutional capacities without the Bank project experience, the following issues will be reflected in the design of TA for Institutional Development for public utilities. (Sector Study/ LMC 2)

• Enhancing municipal oversight and regulatory functions • Managing wastewater as a network utility business • Pursuing opportunities for aggregating urban water services • Engaging with the private sector as part of the reform process. • Selecting and designing appropriate PSP options

Comprehensive System Approach in Municipal Public Utility Businesses: In order to meet the capacity target set by national and provincial governments, Chinese municipalities often focus on the investment of the wastewater treatment plants or the construction of sanitary landfills, without considering the total wastewater collection and treatment system or the total solid waste management system (collection, transfer and final disposal). The consequence is over investment on these facilities and their underutilization without collection capacities. This aspect has been scrutinized through the review of Feasibility Studies. Performance indicators have included not only capacity of the final treatment plants or landfill but also actual connection to sewers and collection of solid waste. (Various WB projects)

Design of industrial pollution control actions plans (IPCAP): IPCAP in Chinese cities are often not backed up with specific measures and specific performance indicators to achieve the target of pollution reduction, the project team will attempt to specify these measures and performance indicators as much as possible in engaging the policy makers, the provincial EPBs and the project cities including the polluters and the citizens in the policy dialogues as the effective implementation of the IPCAP is difficult without ownership and commitment of the key stakeholders. (Liuzhou Environment Management Project/HEUP)

Poor performances of existing leacheate treatment facilities in China. China has about 1,000 major landfills. Few of leacheate treatment facilities of China’s landfill sites have good performance. There are many reasons for the shortcomings, but this is mainly due to the fact that it is hard to predict leacheate characteristics at the planning and design stage. The project team has requested the Design Institutes not to adopt tertiary treatment for leacheate management and also the China authorities to allow partially treated leacheate effluent to be allowed to discharge into city waste water treatment plants even if the partially treated leacheate effluent might exceeds allowable sewage discharge standards.

Inadequate and/or lack of awareness of high costs associated with solid waste collection, transfer and transportation. The cost of solid waste collection, transfer and transportation is usually not received enough attention and is not understood in details. In fact, this cost can be as high as 70% of the total solid waste management costs. This important cost has been examined and evaluated for assessment the efficiency and the effectiveness of the solid waste management sub-projects and will be used as key performance indicator to evaluate the success of the project.

Opposition by people living in the immediate area of the proposed solid waste drop-off points and transfer stations. Land acquisition for solid waste drop-off points and transfer stations is generally a contentious issue most commonly opposed by people living in immediate area of the proposed sites. The project team has incorporated public consultation during project preparation, and will continue public disclosures of proposed on-going monitoring and control that will be implemented in conjunction with facilities and practices and ways information will also be regularly reported.

9. Safeguard Policies (including public consultation)

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

10. List of Factual Technical Documents

1. Eleventh Five-Year Plan on Environmental Protection in Hubei Province 2. Review of Industrial Pollution Control in the Han River and its Tributaries, Prepared by Environmental Resources Management, September 2006 3. Review of Water Quality Protection & Management Strategies, Prepared by DHI Water and Environment, September 2006 4. Review of Solid Waste Management Proposals, Prepared by Environmental Resources Management, June 2007 5. Strategic Review of Institutional Arrangements for Municipal Wastewater Treatment, Prepared by Peter Jaques and Wang Yanhua, December 2005.

11. Contact point

Contact: Hiroaki Suzuki Title: Lead Operations Officer Tel: (202) 458-0329 Fax: 1-202-552-1787/477-1205 Email: [email protected]

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

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties’ claims on the disputed areas