PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: 37213 Sichuan Urban Development Project Project Name Public Disclosure Authorized Region EAST ASIA AND PACIFIC Sector Roads and highways (79.8 %), Sewer (10.5%), General Water, Sanitation, and Flood Protection Sector (8.1%), Sub-national Government Administration (1.6%) Project ID P083322 Borrower(s) People’s Republic of China Implementing Agency Provincial Project Management Office (PPMO) 10th floor, Nongzi Building, No.10 East Jinli Rd. Qingyang District, Chengdu Sichuan Province China Public Disclosure Authorized Tel: 86-28-8612-8880 Fax: 86-28-8612-9043 Environment Category [X] A [ ] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared August 31, 2006 Date of Appraisal November 16, 2005 Authorization Date of Board Approval September 7, 2006 1. Country and Sector Background Overview Urbanization has been strong driver of economic growth and poverty reduction in China. Over Public Disclosure Authorized the past quarter of a century, China maintained a high annual economic growth rate exceeding 8%. China’s cities and towns generate more than 60 percent of its GDP – an economic impact that will become even more important as urbanization rises, as projected by the National Development Plan, from 42 to 65 percent over the next 20 years. But while rapid urbanization has been a significant driver of this economic development, it also produced myriad economic, environmental, regional and social challenges due to its unprecedented speed and scale. China’s 11th five year plan (2006-2011) therefore aims to achieve more balanced economic and social development and to address regional and rural-urban imbalances. Urban development challenges Rapid urban development requires well-coordinated and efficient spatial development planning and professional management. These challenges, raised by decentralized market-driven growth, have highlighted the gap between old central planning approaches and modern urban planning Public Disclosure Authorized methods. In addition, urban transport needs must be factored into spatial development plans to ensure convenient in-city and city-to-suburban mobility. However, municipalities currently spend too much on road construction at the expense of road maintenance, traffic management, and public transport, marginalizing pedestrian and non-motorized transport, reducing travel safety and neglecting scenic and environmental conditions, particularly on urban riverbanks. This situation is compounded by car ownership growing faster than anticipated, worsening urban congestion, air pollution, and road accident rates. In the context of these challenges, capacity building in urban planning, management, and service delivery is a high priority. Because of high demand for housing, services, and manufacturing sites, resulting from China’s rapid urban economic growth and the sizeable migration from rural to urban areas, developed land prices in urban areas have risen steeply and such land is becoming increasingly scarce. Chinese cities are enlarging their boundaries by converting peri-urban rural land into urban areas. All rural land is owned by the State, while rights to rural land are held by agricultural collectives. Although urban and rural land use rights were strengthened in recent years, China’s Land Administration Law (LAL) authorizes only governments to acquire land from agricultural collectives and to sell land-use rights to the private sector. This government monopoly over land use rights and the non-competitive land market has distorted incentives governing urban land use decisions. It has led to some municipalities developing new urban areas without proper planning and without long-term economic rationales. Moreover, the gap between real land values and what governments pay is a potential source of social conflict between governments and farmers. Because demand for limited urban land is growing, not to mention the possible future relaxation of the hukou policy (household registration system), which may increase demand further, governments have a strong interest in ensuring that rural to urban land conversion processes are more economically rational and socially equitable in the future. In this context, the economic and social integration of thousands of farmers displaced in peri-urban areas into the growing urban economy is being accorded high priority. This process involves resettlement of thousands of farmers displaced from rural activities in peri-urban areas and their effective economic and social integration into urban communities. Sichuan Urban Development Strategy and Project Regional disparities afflict China’s urbanization. China’s Western Region, which consists of 12 inland provinces, including the Sichuan Province, produces only 20 percent of the national GDP. GNP per capita in the Western Region is only half of the national average. Due to Sichuan’s strategic location, size, resources and growth potential, the province is a driver of development for China’s Western Region. Accounting for a third of the Western Region’s population and GDP, Sichuan is one of the most important inland provinces in China, and a destination for both national and international investment. In Sichuan, urbanization in 2005 was only 28%, significantly less than the national average of about 42%. However, the Sichuan government expects the percent of urbanization to climb by 12% and reach 40% by 2010. A one percent gain in Sichuan’s urbanization represents 900,000 non-urban residents becoming urban residents. Sichuan’s cities will thus need to assimilate over 10 million new inhabitants by 2010, suggesting a significant need for properly planned new urban land, and higher levels of infrastructure investment to meet the economic needs and social and environmental challenges of its rapidly expanding cities. The Bank is already supporting Sichuan’s development through the ongoing Sichuan Urban Environment Project (SUEP), which has financed water and wastewater treatment facilities in the provincial capital, Chengdu, and in three other second-tier cities: Leshan, Luzhou, and Dayang. Complementing this project, the proposed Sichuan Urban Development Project (SUDP) will support an important element of Sichuan’s growth strategy, which is to accelerate infrastructure investment in strategic “second tier cities” and to attract international and national investments to stimulate development and growth. Sichuan’s second-tier cities, like other secondary cities in China, must adapt to new sources of growth and changing industrial structures. Labor- and land-intensive industries are leaving city centers for suburban locations, and being replaced by high technology industries and information-based service industries. Four “second-tier” cities are targeted for Bank assistance under SUDP: Mianyang, Suining, Yibin and Panzhihua. These cities are among the fastest growing urban centers in the province, and have considerable growth potential. However, they face serious bottlenecks that, if not addressed, threaten their future sustainability. Common challenges faced by these cities are: (i) high population densities with scarcity of developed urban land and problems surrounding conversion of land from rural to urban uses; (ii) inefficient, linear development along rivers and inter-city main roads, contrary to city master plans; (iii) underdeveloped peripheral areas, including agricultural enclaves, adjacent to city centers; (iv) congestion, poor overall mobility, and inefficient urban transportation systems; (v) environmental deterioration; and (vi) inadequate municipal human resource capacity in urban service delivery and urban planning. SUDP will address these cities’ challenges by supporting increased infrastructure investments in the context of upgraded spatial planning efforts and strengthened urban management to develop and consolidate new and existing urban areas, improve urban transport networks and sewerage systems and enhance scenic public areas. Though not designed to directly address China’s pervasive distorted land pricing system, the project will significantly improve processes for conversion of land from rural to urban use through improved approaches that include: • Preparing local urban area development and infrastructure investments as an integral part of city-wide comprehensive master plans. Common features of these plans include: (i) redevelopment of older areas, particularly in city cores; (ii) improvements to and consolidation of underused areas and agricultural enclaves within existing urban areas; (iii) enhancement of inter-city urban transport networks; and (iv) improvement of city environmental conditions; • Conducting a rigorous demand analysis to ensure that the proposed urban area development reflects real urban growth requirements, and that least cost options of various development alternatives are chosen; • Developing an innovative framework for resettlement and land compensation. For example, the project will adopt a comprehensive compensation program which is designed to fully restore the livelihoods of project affected people through lifetime compensation allowances, provision, within the project area, of improved housing areas with saleable land use rights (a significant advance for rural people who had previously occupied land and housing under collective ownership), and access to the urban hukou system, which provides better social and welfare services. Further, by supporting a more concentrated and integrated development pattern