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.