42796 CHINA AND THE WORLD BANK: A Partnership for Innovation © 2007 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Internet www.worldbank.org All rights reserved. The findings, interpretations, and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the govern- ments they represent. The World Bank does not guarantee the accuracy of the data included in this work. CONTENTS INTRODUCTION..........................................................................................................................................................................xiii PART I: CASE STUDIES of past China-World Bank cooperation for innovation ................................1 PROJECT MANAGEMENT ...........................................................................................................................................................3 Innovation #1: Introducing modern project management methods in the public investment program .........................................................................................................3 ENVIRONMENT..............................................................................................................................................................................9 Innovation #2: Strengthening the environmental management system .................................................9 Innovation #3: Reducing emissions of ozone-depleting substances (ODS) through market-based instruments........................................................................................................ 12 Innovation #4: Participating in global carbon trading through the Clean Development Mechanism......................................................................................................... 14 HUMAN DEVELOPMENT.......................................................................................................................................................... 19 Innovation #5: Improving targeting of basic education funds for poor children in rural China .................................................................................................................................. 19 Innovation #6: Introducing new analytical tools to strengthen the pension system........................ 22 Innovation #7: Piloting innovations to improve the financing and coverage of basic health services for the rural poor................................................................................. 25 Innovation #8: Supporting distance learning and establishment of the China Development Distance Learning Network ............................................................. 28 INFRASTRUCTURE ..................................................................................................................................................................... 31 Innovation #9: Supporting commercialization and price reform in the power sector...................... 31 Innovation #10: Developing the market for off-grid photovoltaic systems ............................................ 34 Innovation #11: Improving the efficiency and performance of the urban water sector..................... 37 Innovation #12: Incorporating international best practice in highway planning, design, finance, construction, and operation..................................................................... 41 POVERTY REDUCTION AND ECONOMIC MANAGEMENT/ FINANCIAL SECTOR .................................................. 47 Innovation #13: Introducing tools and methods for better macroeconomic management............. 47 Innovation #14: Strengthening banking regulation and supervision to safeguard the soundness of the financial sector ........................................................................................... 50 Innovation #15: Supporting trade liberalization and World Trade Organization accession.............. 53 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION RURAL DEVELOPMENT ............................................................................................................................................................ 57 Innovation #16: Using large-scale land rehabilitation to protect the environment and improve livelihoods on the Loess Plateau........................................................................... 57 Innovation #17: Improving irrigation efficiencies and introducing integrated water resources management for river basin management..................................................... 60 Innovation #18: Formation of a national grain market and introduction of bulk grain handling...................................................................................................................... 65 Innovation #19: Integrating poverty analysis and demonstration projects to identify and test new approaches to rural poverty reduction .............................................................. 68 PART II: FORWARD-LOOKING CASE STUDIES......................................................................................................73 CHINA PARTNERSHIP STRATEGY (CPS) PILLAR 1: INTEGRATING CHINA IN THE GLOBAL ECONOMY.......................................................................................................... 75 New Area of Innovation #1: Working in partnership to support China's increasing role in South-South cooperation and knowledge exchange........................ 76 CPS PILLAR 2: REDUCING POVERTY, INEQUALITY, AND SOCIAL EXCLUSION....................................................... 79 New Area of Innovation #2: Strengthening public finance at the local level for better service delivery................................................................................... 80 New Area of Innovation #3: Promoting participation in building the New Socialist Countryside ........................................................................... 83 New Area of Innovation #4: Controlling the costs of health services to maximize the impact of government resource allocations to health ...................... 86 New Area of Innovation #5: Improving the quality of technical and vocational education (TVE) to respond to labor market demand....................... 88 New Area of Innovation #6: Introducing a new approach to rural-to-urban land conversion and resettlement compensation........................................ 91 New Area of Innovation #7: Supporting cities to address the challenges of rapid motorization and urbanization with sustainable transport systems............................................................................................ 94 New Area of Innovation #8: Integrating cultural heritage conservation, sustainable tourism development, and urban upgrading to benefit local populations.................................................. 98 CPS PILLAR 3: MANAGING RESOURCE SCARCITY AND ENVIRONMENTAL CHALLENGES 101 New Area of Innovation #9: Introducing new approaches to improve energy efficiency in the commercial and industrial sectors and in the heating of buildings.........................................................................102 New Area of Innovation #10: Developing and testing a national water rights administrative system..................................................................................106 New Area of Innovation #11: Mainstreaming adaptation to climate change in water resources management and rural development...................108 New Area of Innovation #12: Demonstrating new models to improve land iv CONTENTS administration and management...........................................................110 New Area of Innovation #13: Integrating small-scale farmers in high-value food chains using farmers'associations and nonpolluting"green"and organic food production ............................................................................113 New Area of Innovation #14: Introducing new methodologies to improve environmental monitoring, estimation of pollution costs, and environmental impact assessments..............................................116 CPS PILLAR 4: FINANCING RAPID GROWTH...................................................................................................................119 New Area of Innovation #15: Introducing new methodologies to improve rural access to finance..........................................................................................................119 CPS PILLAR 5: IMPROVING PUBLIC AND MARKET INSTITUTIONS...........................................................................123 New Area of Innovation #16: Piloting new approaches for monitoring and evaluation at national, sectoral, and project levels......................................................124 New Area of Innovation #17: Improving urban services and governance by involving public participation ..................................................................125 SECTOR-WIDE AND MULTI-SECTOR APPROACHES......................................................................................................129 New Area of Innovation #18: Supporting a province-wide approach to rural road rehabilitation with innovative World Bank financing.......................129 New Area of Innovation #19: Reducing traffic fatalities through introducing a multi-sector approach to improve road traffic safety......................134 v CONTENTS ACKNOWLEDGMENTS T his review was prepared by a team led by Many current and former Bank staff pro- Christopher Finch (Senior Country Officer vided valuable contributions and comments, for China), with overall guidance from David including Alain Dube, Christopher Thomas, R. Dollar, Hsiao-Yun Elaine Sun, and Nancy J. Chung Kek Choo, Deepak Bhattasali, Dingyong Cooke. Sectoral contributions were overseen by Hou, Douglas C. Olsen, Edward Dotson, Glenn Andres Liebenthal, Bert Hofman, Christopher Morgan, Ivy Cheng, Jian Xie, Jie Tang, John R. Bennett, Hiroaki Suzuki, Tunc Uyanik, and Morton, John Scales, Jostein Nygard, Juergen Xiaoqing Yu. Case study drafts were prepared Voegele, Junxue Chu, Leiping Wang, Liping Ji- by Achim Fock, Alan Piazza, Andres Liebenthal, ang, Liping Xiao, Mats Anderson, Michael Kub- Aurelio Menendez, Bert Hofman, Christopher zansky, Neeraj Prasad, Peishen Wang, Ranjit Bennett, David Meerbach, Geoffrey Spencer, Lamech, Richard Reidinger, Sari Soderstrom, Graham Smith, Greg Browder, Guo Li, Halsey Selina Shum, Shaojun Li, Sudarshan Gooptu, Beemer, Helen Chan, Hiroaki Suzuki, Jun Wang, Thomas Zearley, Toshiro Tsutsumi, Tunc Tah- Kin Bing Wu, Mei Wang, Nancy Chen, Naoko sin Uyanik, Xiaofeng Hua, Yi-ling Liu, Weigong Kataoka, Neeraj Prasad, Nourredine Berrah, Cao, Zhengxuan Zhu. Peishen Wang, Philip Karp, Qun Li, Richard Mey- Yukon Huang, Austin C. T. Hu, Nicholas ers, Robert Taylor, Shomik Mehndiratta, William Hope, and Natalie Liechtenstein reviewed drafts J. Martin, Xiaoqing Yu, Yan Wang, and Yoonhee of the cases and provided much appreciated com- Kim. ments and advice on the paper. The Bank team gratefully acknowledges the Lantian Ma helped to develop and edit drafts reviews and comments received from the Gov- of several cases, Alicia Hetzner edited the full set ernment of China's Ministry of Finance, National of cases, Yingnan Jia provided research and edi- Development and Reform Commission, Ministry torial assistance, and Anne Marie Smith helped of Agriculture, Ministry of Commerce, Ministry with final edits and proofreading. Li Li and Ying of Communications, Ministry of Construction, Yu coordinated report cover page design and su- Ministry of Education, Ministry of Health, Min- pervised the final printing of this report. istry of Labor and Social Security, Ministry of Special thank-yous from the report team also Railways, Ministry of Water Resources, People's go to Tianshu Chen who supervised the Chinese Bank of China, Banking Regulatory Commission, translation and to Wendao Cao, Jianqing Chen, Leading Group for Poverty Reduction of the State Feng Ji, Tianxiu Kang, Shaojun Li, Xiaofeng Li, Council, Leading Group for Western Region De- Liping Xiao, Ji You, Chunxiang Zhang, Lansong velopment of the State Council, State Adminis- Zhang, Wenlai Zhang, and Xiuzhen Zhang who tration of Taxation, State Electricity Regulatory helped with the translation and proofreading of Commission, State Environmental Protection the Chinese version of the report. Agency, State Office for Comprehensive Agri- cultural Development. vii CONTENTS ACRONYMS AND ABBREVIATIONS AAA analytical and advisory activities DEC Development Economics ADB Asian Development Bank (World Bank) ADBC Agricultural Development Bank of DfID Department for International China Development APL Adaptable Loan Program DLC distance learning center ASTAE Asia Alternative Energy Unit DRC Development and Reform BMI Basic Medical Insurance Commission BOC Bank of China DRG Diagnosis-Related Group BOCOM Bank of Communications EA environmental assessment BOT build-operate-transfer EAP East Asia and Pacific Vice BRT Bus Rapid Transit Presidency (World Bank) CAD Comprehensive Agricultural EDI Economic Development Institute Development (forerunner of World Bank CAMEL Capital adequacy, Asset quality, Institute) Management, Earnings, and EIA environmental impact assessment Liquidity EMC Energy Management Companies CAS Chinese Academy of Sciences EPB environmental protection bureau CCB China Construction Bank ER Emission Reduction C-CDC Chinese Center for Disease Control ESCO specialized energy efficiency and Prevention business CDB China Development Bank ESMAP Energy Sector Management CDD community-drive development Assistance Program CDDLN China Domestic Development ESW economic and sector work Learning Network ET evapotranspiration CDM Clean Development Mechanism FA farmers'association CEM Country Economic Memorandum FAO United Nations Food and CERNET China Education and Research Agriculture Organization Network FFS fee for service CFC chlorofluorocarbon FHAB Fujian Highway Administration CHUEE China Utility-based Energy Bureau Efficiency Finance Program FIDIC International Federation of CMS cooperative medical financing Consulting Engineers scheme FM financial management CPS Country Partnership Strategy FPCD Fujian Provincial Communications CRC citizen report card Department CTC carbon tetrachloride FPTQIS Fujian Provincial Transport Quality DC CFL compact fluorescent lamp Inspection Station ix CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION FSTA Financial Sector Technical MOFCOM Ministry of Foreign Trade and Assistance Economic Commerce FYP Five-Year Program MOLSS Ministry of Labor and Social GDLN Global Development Learning Security Network MSE micro and small enterprise GEF Global Environment Facility NCMS New Cooperative Medical System GIS geographic information system NDRC National Development and Reform GHG greenhouse gas Commission GOC Government of China NEN National Expressway Network GOVAI gross output value of agriculture NEPA National Environmental Protection and industry Agency GTZ German Technical Cooperation NH2 Second National Highway Project ha hectare(s) NOU National Ozone Unit HFC-23 trifluoromethane NPL nonperforming loan HH household NRSL National Road Safety Law HRBEE China Heat Reform and Building NSB National Statistical Bureau Energy Efficiency Project NYCE-I Nine-Year Compulsory Education IAIL3 Irrigated Agriculture Intensification Program­Phase I III Project NYCE­II Nine Year Compulsory Education­ ICB international competitive bidding Phase II ICBC Industrial and Commercial Bank of ODS ozone-depleting substances China O&M operation and maintenance ICR implementation completion report PAD project appraisal document ICT information and communications PBC The People's Bank of China technology PCD Provincial Communications IDA International Development Agency Department IDF Institutional Development Fund PER public expenditure review IEC International Electrotechnical PRC People's Republic of China Commission PROST Pension Reform Options Simulation IFI international financial institution Toolkit IPM integrated pest management PSCPF Projection System of China Pension IPRCC International Poverty Reduction Funds Center PV photovoltaic ISG Information Solutions Group QA quality assurance (World Bank) RDO Region Development Office LGPR Leading Group for Poverty REDP Renewable Energy Development Reduction Project LIL Learning and Innovation Loan RFI rural financial institution M&E monitoring and evaluation RMB renmínbì (currency) MCM million cubic meters RRIF Rural Roads Improvement MFA Medical Financial Assistance Framework MIS management information system RRIP Rural Roads Improvement Program MOC Ministry of Communications SAT central tax administration MOE Ministry of Education organization MOF Ministry of Finance SCBs state-holding commercial banks x ACRONYMS AND ABBREVIATIONS SDV Social Development Department tce ton of standard coal equivalent (WB) THC Township Health Center SEA Strategic Environmental 3H Basin Huang-Huai-Hai Basin Assessments TVE technical and vocational education SEPA State Environmental Protection TVET technical and vocational education Agency and training SETC State Economic and Trade UDIC Urban Development Investment Commission Corporation (Shanghai) SIDD self-managing irrigation and UNDP United Nations Development drainage district Programme SOCAD State Office for Comprehensive UNESCO United National Scientific, Agricultural Development Educational and Cultural SOE state-owned enterprise Organization SPS sanitary and phytosanitary UNWTO United Nations World Tourism standards Organization SSB State Statistical Bureau WBI World Bank Institute SUDP Sichuan Urban Development WCP Water Conservation Project Project Wp peak-Watt SWPRP Southwest Poverty Reduction WRDO Western Region Development Project Office TA technical assistance WTO World Trade Organization TCA methyl chloroform (trichloroethane) WUA water users association TCC5 China Economic Reform Y yuan Implementation Project xi CONTENTS INTRODUCTION T he relationship between People's Republic of riences, (2) make timely diagnostic studies of China (PRC) and the World Bank was shaped China's challenges and recommendations to ad- at a famous meeting in April 1980 between Vice dress them, (3) follow up with well-considered Premier Deng Xiaoping and World Bank Presi- investment projects to test innovative ideas, and dent Robert McNamara. Mr. Deng told Mr. Mc- (4) implement appropriate capacity building pro- Namara that China was embarking on a program grams to turn some of the more successful ele- of modernization and opening up. It planned to ments into replicable models. take lessons from other countries' experiences Hence, while the financial scale of the Bank's and adapt these to Chinese circumstances. Deng support is significant, a good argument can be expressed the view that China was likely to suc- made that learning­­rather than finance­­has ceed with or without the World Bank's assistance been the most important part of the relationship. but that it was likely to succeed more quickly Even at their peak of $3.2 billion in 1995, Bank dis- with the help. Thus, from the beginning of the bursements never exceeded 1 percent of China's relationship, the World Bank's challenge was to gross domestic product (GDP). Countries that assist China in its modernization, especially using need large amounts of finance typically prefer the Bank's wide international experience, but to large Bank program loans, which disburse quickly. do so in a way that supported China's own efforts Throughout the relationship, China has preferred to learn from abroad and adapt the lessons to its the traditional "project loans," which the Bank dis- own circumstances at its own pace. burses as a particular investment project is imple- By many measures, the relationship devel- mented. oped over the past quarter-century has been very China has made excellent use of the Bank's successful. During this period, China has been traditional services of project appraisal and super- the World Bank's largest client, borrowing over vision by a qualified technical team during proj- $40 billion for more than 280 investment proj- ect preparation and throughout implementation. ects. Its projects have the highest success rate of China has used Bank-financed projects to pilot a any larger World Bank borrower. In addition to wide range of innovations. Once they were found the lending projects, the Bank has conducted a to work, many were scaled up and fine-tuned to wide range of studies, technical assistance (TA), the Chinese context. China also used the projects and training activities in China. as training grounds for large numbers of its of- The country's overall success with reform, ficials. On the Bank's side, too, the projects have growth, and poverty reduction during this time provided invaluable learning experiences­­both is well known. While China should be given full learning about China's institutional and policy en- credit for such positive developments, the Bank vironments and "learning by doing" what works has been recognized for playing an active sup- on the ground and what needs to be fine-tuned to porting role alongside the country. The Bank's suit the client's evolving needs. The best projects four main contributions have been to (1) intro- involved mutual learning about how to approach duce relevant international practices and expe- a particular development challenge. xiii CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION This paper has been prepared to mark the There were some failures along the way. No- quarter-century partnership between China and table among them were several"industrial reform" the Bank and the special role that innovation has projects in the 1990s aimed at reforming state played. ("Innovation" here refers to the intro- enterprises to make them more commercial. In duction of technologies, practices, institutions, them the Bank may have been promoting ideas to and policies that were new to China.) The heart which China was not receptive at the time. Suffice of the paper is two sets of case studies: 19 case it to say that the results during the lives of those studies that highlight important innovations that projects were not satisfactory. However, in a learn- China has introduced, with the Bank playing a ing process, some failure is inevitable, and some supporting role, during the past 25+ years, and restructuring and privatization ideas that did not 19 examples of new areas of innovation where work out in the early 1990s may have influenced China has enlisted Bank support. later efforts at reform that did succeed. In reviewing the Bank's involvement, one The cases also illustrate China's shifting de- striking lesson is that the most important inno- mands for innovation as the country has rapidly vations arose from sustained engagement over a developed. Early in the partnership, China request- long period. While China has successfully used ed from the Bank a focus on analysis, introduction Bank-financed projects to introduce innovations, of basic market principles, and project manage- rarely has a single project by itself led to sustained ment techniques. As market reforms accelerated change. Individual projects typically had at least beginning in the late 1980s, the Bank increasingly small innovations, but subsequent projects built engaged in supporting them and the differentia- on these and went further. This long-term, two- tion of state and private sector roles. In more re- way exchange of ideas and information has been cent years, China has placed a greater emphasis essential to introducing innovation, as Chinese on development that addresses the social and counterparts and Bank teams worked together environmental externalities resulting from rapid to craft solutions to specific development chal- growth and the country's growing influence on lenges. Moreover, usually it was a combination of the world. This focus has brought demands on the investment, studies, and training that yielded the Bank to bring increasingly complex, integrated, best results. In a few cases, most of the learning and China-specific innovations to address China's came through studies and dialogue. However, in changing needs. the Bank's experience, what is distinctive about The nature of the China-World Bank partner- the China program is the interaction among stud- ship has also changed over time. Initially, China ies, training, and investments in developing and looked to the Bank for technical assistance to in- piloting various reforms. As the cases below il- troduce basic economic reforms, modern project lustrate, this interaction catalyzed innovations management methodologies, and new technolo- that often extended far beyond the original proj- gies. With time, the partnership increasingly fo- ect objectives, sometimes in unexpected direc- cused on institutional strengthening and knowl- tions, sometimes years after initial introduction edge transfer. As China has successfully adopted of an innovation. Several other common lessons new practices and registered unprecedented de- emerge: the importance of pacing and sequencing velopment achievements, the remaining develop- innovations in line with the capacity and needs of ment challenges have become less amenable to Chinese institutions; the recognition of the extra standard solutions. Instead, China has engaged time, resources, and effort required to develop the Bank in a two-way exchange to tailor unique and introduce truly innovative approaches; and approaches that match local realities and capac- the importance of building long-term, two-way ity with global experiences. The Bank has also partnerships. increasingly sought to support China in sharing xiv INTRODUCTION its own important development experiences and relevant, because addressing the remaining key knowledge with the rest of the world. It should challenges, which are increasingly more complex also be noted that other multilateral and bilateral and difficult, requires both top-quality technical organizations have played significant and often skills as well as deep knowledge of China. complementary roles in disseminating, promot- Going forward, China is placing an increasing ing, and supporting implementation of innovative emphasis on growth that is balanced with social practices. The ADB has been particularly instru- and environmental concerns. Given the resources mental in its support. constraint and difficult reform challenges, inno- In 2006 China adopted its 11th five-year socio- vative approaches, ideas, and system reforms will economic plan, which outlines the country's im- be critical to China's achieving its goal of a well- portant challenges. They are the need to address off society by 2020. Innovation will be a key for external imbalances, improve energy efficiency, future World Bank cooperation with China. Po- reduce environmental degradation, and enhance tential areas identified for future work include development in rural areas and lagging regions. improving energy efficiency, introducing new At the same time, the Bank prepared an updated approaches to promote more balanced urban- five-year Country Partnership Strategy to guide its ization; introducing new public finance method- future work in China. At an early stage in the prep- ologies that go beyond traditional development aration, the Bank engaged in wide consultations projects to support rural development; reforming around the country with government, academia, land administration; and strengthening public andcivilsociety.Twoquestionsputtothesegroups participation to improve public service delivery were whether the Bank still has a useful role in Chi- and environmental management na at this stage of its development and what this The last section of the paper looks briefly at role is. While there was a range of views, a clear these newer areas of collaboration and the poten- majority felt that China continues to face daunt- tial for the Bank to contribute to the design and ing institutional and policy challenges and that scaling up of new innovations that can bring sig- the Bank could still help in developing innovative nificant development benefits to China. solutions through a combination of lending, stud- ies, and training. However, there also was a sense that the Bank would have to work hard to remain xv PROJECT MANAGEMENT PART I. CASE STUDIES of past China-World Bank cooperation for innovation T he following case studies present a sam- New mechanisms to improve service deliv- pling of the innovations that China in- ery (e.g., the design and implementation of troduced over the past quarter century with a new governmental transfer fund for basic important contributions from the Bank. They education described in Case #5). cover a wide range of types of innovation, time New research and analytical tools that periods, and pathways through which the in- helped authorities to assess the costs and novations were introduced. Though they rep- benefits of different development policy resent a diverse set of experiences, each case and project options. For example, cases be- illustrates how China obtained important spill- low describe China's introduction of new over benefits from Bank engagement. These methodologies for surveying households benefits extended beyond the direct financ- and monitoring poverty, and design of new ing provided and beneficiaries targeted under actuarial tools to assess pension reform op- Bank-financed initiatives. They illustrate how tions. China, where innovations demonstrated im- New market-based policy and institutional pact, effectively scaled them up through asso- arrangements to separate regulatory and ciated policy and institutional reforms, dissem- productive economic functions, introduce ination of the practices within and between greater competition, and commercialize sectors, and institutionalization in training and corporatize utilities. In the power and bodies. The cases illustrate several major areas water sectors, these reforms have helped of innovation that China tested and scaled up, to improve efficiency and sustainability with support from the Bank, including intro- and thereby to enable the sectors to better duction of: cope with rapidly expanding demand. Newtrainingandcapacitybuildingcurricula New project management methodologies, and systems. including modern project cost benefit anal- ysis and appraisal, use of competitive bid- The case studies also illustrate some of the ding,independentengineeringsupervision, key pathways through which the innovations and environmental assessment. These new were introduced. In some cases, Bank-sup- methodologies have been widely adopted ported policy analysis provided direct inputs in across different levels of government and policy reforms. More frequently, innovations across different sectors. Case #1 below were introduced via a combination of analysis, describes some of the practices. demonstration projects, training, and sustained New technologies (e.g., modern grain han- engagement with international counterparts to dling facilities, power generation technol- adapt the innovation to the Chinese context. ogy) that were widely scaled up across China's strong emphasis on learning-by-doing China. through pilot projects and training is particu- 1 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION larly noteworthy. Common pathways through introduce project management concepts which innovations were introduced include: and procedures to Chinese policy makers and practitioners. Training in the underly- Sharing of international good practices and ing economic concepts (e.g. time value of experiences. China has actively sought to money, internal rate of return, opportu- learn about global development practices nity cost, etc.) played a key role in the in- from the Bank. The Bank has responded troduction of innovations in project man- by bringing top international experts to agement methods as well as in technical China, linking Chinese officials with coun- aspects of project management. From terparts around the globe, and with ex- 1982-1987, hundreds of Chinese govern- tensive workshops and discussions with ment officials received training on project authorities to assess the costs, benefits, management through a program execut- and applicability of specific innovations to ed by the Bank's Economic Development the Chinese context. Before piloting, new Institute (predecessor to the World Bank practices and technologies were subject Institute) in partnership with the Central to intensive analysis (often supported by University of Finance and Economics lo- WB studies), study tours and exchanges cated in Beijing, and the Shanghai Uni- to learn how the practice works in other versity of Finance and Economics. The countries. program was jointly financed by the Bank, Adapting and piloting the innovation UNDP and MOF. through project implementation. Where Internalizing and scaling up the innovation. the Government became convinced that a China placed strong emphasis on observ- new approach had potential merit, Bank- ing Bank-financed projects. As new prac- financed projects became a preferred ve- tices demonstrated concrete results, they hicle to test them on the ground in Chinese were scaled up through a combination of conditions. Bank lending projects provided dissemination, revision of related policies opportunities for continuous learning and and institutional arrangements, incorpora- practice, and for sustained dialogue and tion/adaptation into Chinese regulations collaboration needed to adapt and adjust and guidelines, and institutionalization in new practices to Chinese circumstances. training bodies. The adaptation of innovations has long been facilitated by China's establishment Although the cases below document in- of an extensive institutional apparatus to novations that China has already introduced, manage World Bank-financed projects, scaled up, and achieved results through, many with project units established at central, of them are still works-in-progress. Many of provincial, and local levels of government. the forward-looking cases describe next steps Training and capacity building. Training as China builds on its past innovation achieve- and capacity building programs helped ments. 2 PROJECT MANAGEMENT PROJECT MANAGEMENT Innovation #1: Introducing modern project management methods in the public investment program Period: 1981­present project designs and options did not reflect the time value of money. Project procurement was The Innovation: Practices including economic conducted by assignment to local state-owned cost-benefit analysis, competitive bidding to construction companies based largely on their award contracts, new disbursement methods, location rather than on their competitiveness. and independent engineering supervision were Supervision of projects was done piece by piece, introduced in China's publicly financed invest- often without a supervision plan that covered ment system. More recently, China has adopted the full project period. wider use of environmental and social assess- Starting in the early 1980s, China enlisted ments and safeguard practices, as well as partici- donors including the World Bank to assess and patory development approaches, in its own de- test new project management methodologies, velopment projects. mostly targeted at introducing more efficient and cost-effective ways to plan, finance, construct Context: As the Government of China began critical infrastructure. to introduce economic reforms, it also began to seek out and test new, more efficient ways to China-Bank Partnership and Impacts: Shortly implement economic development projects and after China resumed membership in the World build critical infrastructure. Before 1980, under Bank in May 1980, a series of Bank missions vis- the planned economic system, investment deci- ited China to discuss project priorities and assess sions were dictated largely by planning targets. the country's capacity to prepare and implement China's technical ministries served as the own- projects suitable for Bank support. The missions ers, contractors, manufacturers, suppliers, and found that China had achieved a higher level of operators of the projects that they undertook. technical capacity for planning, designing, and Although public investment projects usually implementing even very large projects than many were designed adequately, they generally lacked Bank borrowers. Government counterparts were accurate cost estimates and comprehensive fea- interested to learn about project management sibility studies. Static cost estimates, which took methodologies that could help them to achieve little account of physical or price contingencies, rapid economic development. Lacking, however, and project budgets based on the availability of were innovation capacity, cost-benefit analysis, funds rather than on the project's construction modern accounting standards, and management schedule contributed to regular cost overruns techniques. and construction delays. Methodologies and In response, the Bank designed its project as- skills to assess the costs and benefits of different sistance program to address these weaknesses 3 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION systematically.1 Since then, the Bank has financed of Finance and Economics in Beijing, and the more than 280 investment projects in China. Shanghai University of Finance and Economics. In pursuing a wide range of sectoral objectives, The program was jointly financed by the Bank, the projects applied a common project manage- UNDP, and MOF. On the Chinese side, transfer ment framework and set of tools for designing, and adaptation of new project management prac- appraising, implementing, monitoring, and evalu- tices was facilitated by the creation of an exten- ating development projects. These techniques sive institutional apparatus to manage Bank-fi- brought important spill-over effects as China nanced projects, with project management units tested, adapted, and in many cases incorporat- established at central, provincial, and local levels ed the new project management concepts and of government. methodologies into its own public investment Through the combination of learning-by-do- program. As the Bank began investment lend- ing and training, China acquired extensive expe- ing, it helped to introduce in China practices such rience and knowledge in project management. as economic cost-benefit analysis, competitive It adapted practices learned from the Bank and bidding to award contracts, new disbursement other donors to its own circumstances and pro- methods, and independent engineering supervi- cedures for public investment projects. New sion. Later, as the Bank itself became more sensi- project management innovations introduced in tive to environmental and social assessments and part through World-Bank-financed projects and safeguards, as well as participatory development training programs include: approaches, it helped to impart these concepts and practices to China. Introduction of modern economic project ap- Similar to other innovations, the introduc- praisal techniques, including use of economic tion of project management practices followed cost-benefit analysis in project investment de- the Chinese way of doing things. Prior to intro- cisions. Prior to 1980, projects in China were duction, new practices such as competitive pro- determined by the central planning system curement were subjected to intense scrutiny and developed mainly based on technical and review. They were then typically introduced and administrative criteria. Prices were set through a "learning-by-doing" approach empha- centrally, rather than by supply and demand. sizing the piloting of new practices before consid- As a central feature of Bank projects, the ering their wider application. Though new prac- project appraisal method uses cost-benefit tices often encountered initial skepticism and analysis to quantify and monetize benefits, resistance, once a decision was made to proceed, going beyond financial payments by users, the new practices were implemented rapidly. and uses the time value of money to weigh Training played an important role in introduc- near-term costs against long-term benefits. ing new practices. Training in the underlying eco- To use modern project appraisal techniques nomic concepts­­time value of money, internal during the early years of its engagement, the rate of return, opportunity cost­­supported the Bank introduced and trained Chinese coun- introduction of new project management meth- terparts on new tools including shadow pric- ods, and also helped project managers master the es, used to approximate market prices, and related technical skills. From 1982­87, hundreds the concept of the time value of money. of Chinese government officials received train- ing in project management through a program executed by the Bank's Economic Development 1 Pieter Bottelier, "China and the World Bank: How Institute (predecessor of the World Bank Insti- a Partnership Was Built." Working Paper 277 (Stanford Center for International Development, tute) in partnership with the central University Stanford, CA, April 2006). 4 PROJECT MANAGEMENT Impacts: Chinese planners have fully assimi- started providing development assistance to lated the Bank's project appraisal approach. China, investment projects typically were Most design institutes charged with prepar- awarded to construction enterprises without ing international financial institutions (IFI)- competition. In the early 1980s, when enter- financed projects and many that prepare prises became more autonomous and were domestically financed projects now routinely left to compete on their own for contracts, use this method. Economic analysis is used competitive bidding started under govern- regularly for many foreign and domestic in- ment funding. Even then, a large percentage vestments, and local capacity has expanded of government contracts still was awarded greatly. Local consulting firms specialize in through direct contracting, without compe- providing various types of economic/finan- tition. cial analyses/plans and produce bilingual re- The Bank's first hydropower project in ports for their clients. China, the 1984 Lubuge project, introduced Introduction of competitive bidding practices the concept of international competitive bid- in project procurement. When the Bank first ding (ICB) for large civil works projects. At the time, the idea of bringing a foreign con- tractor to manage a large civil works project in China was almost unthinkable. The Gov- Box 1. Legacy of Lubuge ernment initially had significant reservations about borrowing funds to finance contracts Project: Lubuge Hydroelectric Location: Yunnan Province that domestic firms thought they had little Approved: February 1984 IBRD financing: $145.4 m chance to win, and about the cost-effective- ness of the procurement process, which they Project description: Construction of a 100-meter rockfill dam, feared would be lengthy and strict. However, headrace tunnel, underground powerhouse, tailrace tunnel; as Lubuge and other Bank-financed projects provision and installation of three 150MW generating units; demonstrated significant cost savings, im- construction of two 220kV transmission lines; training. provements in quality, and timely construc- The Bank's first hydropower project in China, Lubuge tion completion, government entities began successfully added capacity to Yunnan's power grid. However, to adopt the Bank's procurement guidelines its impact in China extended far beyond direct project inputs. for their own bidding documents, evaluation Lubuge was selected as a pilot by the Chinese government to procedures, and contracts. Progressively, test its"open door"policy and the Bank's modern project man- Chinese firms began to benefit from the agement techniques. These techniques included international Bank's procurement approach­­first as sub- competitive bidding (ICB) for procurement, use of independent contractors or joint venture partners with engineering supervision, and modern project appraisal tech- foreign firms in construction contracts, later niques. Lubuge also was the first project in China to introduce as independent construction contractors and ICB for civil works and to use foreign consultants to optimize suppliers of goods and services. project design. These major innovations were introduced at a Impacts: Today, Chinese contractors are bid- time in which such civil works customarily were assigned to a ding for contracts under Bank-assisted proj- local construction force. When the project demonstrated out- ects outside of China. For example, from standing results, the results reverberated throughout China's 2000­06, Chinese contractors were award- hydro construction and building industries, were widely as- ed more than $900 million in Bank-financed sessed and disseminated, and gained the attention of senior contracts in the Africa Region. In the late Chinese leaders. 1990s, when China decided to enact laws to improve procurement efficiency, the Gov- 5 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION ernment invited the Bank to advise on the was laid out in the budget plan. Monitoring enactment of the legal framework. Conse- project progress or the use of public finances quently, China introduced two laws: a Ten- was limited. Local governments tended to dering and Bidding Law, effective January focus more on budget allocation and less on 1, 2000, which covered capital investments; project management monitoring. As a result, and a Government Procurement Law, ef- misuse of funds was a common problem, and fective January 1, 2003, which covered re- the funds often did not reach their intended current expenditures. Today, in China, the beneficiaries on time. procurement of goods and works generally is In contrast, the Bank's investment proj- carried out by competitive procurement pro- ects in China linked disbursement with ac- cedures. tual spending. As the practice demonstrated Introduction of independent engineering benefits, the Government started to apply supervision. For large civil works, such as the the same principle in its own-financed de- construction of high dams, Bank-financed velopment projects. These disbursement projects introduced the practice of employ- methods were widely accepted in forestry, ing an independent panel of experts to re- irrigation, poverty reduction, and resettle- view initial project investigation and design ment programs. Concrete examples include and construction plans. The panel also moni- the Ministry of Forestry's adoption, in the tors engineering and safety issues from initial late 1990s, of disbursement regulations simi- project implementation through completion. lar to Bank guidelines under several Bank- When they found that the use of independent financed forestry projects for its nature for- engineers improved project quality and im- est reserve protection program. Similarly, in plementation and brought quick resolution of Hainan Province, in 2001 the Government conflicts between owners and contractors, the issued an internal regulation specifying that practice was widely adopted. Early projects in a new disbursement method for a rural de- particular often relied on foreign experts, fa- velopment fund with a World-Bank-type miliar with new technologies and construc- reimbursement method must be used for all tion methods, to carry out these functions. government funds that provide for rural de- Over time, Chinese engineers acquired the velopment and poverty alleviation. Use of needed skills. Today, engi- neering supervision is regu- larly practiced in China and is conducted primarily by Chinese engineers. Transition to disbursement methods that link disburse- ment to actual spending and specific outputs. Under China's planned economy, disbursement of the funds for publicly financed proj- ects was not linked to ac- tual spending and specific outputs. Instead, disburse- ment was based on what Xiaolangdi Dam after Completion. Courtesy of YRWHDC. 6 PROJECT MANAGEMENT the reimbursement method by some prov- inces also facilitated the introduction of the Box 2. Improving resettlement Single Treasury Account system in China. practices In recent years, some Bank-financed projects in China have demonstrated re- Over the past decade, the Chinese policy on resettlement has port-based disbursement methods under developed significantly. The World Bank has played a role in which individual transactions do not need helping the Government shift the focus of resettlement pro- to be reported to the Bank. Instead, project grams from simply moving people to concentrating greater financial reports generated from an estab- attention on (1) ensuring decent livelihoods for displaced per- lished system are used to support disburse- sons (hence, sustainability) and (2) more accurately assessing ment. With report-based disbursement, the resettlement costs and improving project design accordingly. Bank can focus on helping counterparts to Excellent breakthroughs were made by some early Bank- strengthen their own financial management financedhydroelectricprojects.However,therealturningpoint systems. This brings greater efficiencies and was signaled by a 1997 Bank sector study on resettlement.The enables better integration of project finan- sector study was followed by a dramatic demonstration of the cial management, disbursement, and proj- way things should be done on as large a scale as had ever been ect-results monitoring. Consequently, there attempted in the world­­for the Xiaolangdi Dam. In that proj- is increasing interest among managers of ect, it was decided to separate the resettlement program for domestically financed projects to take the nearly 185,000 people from the dam construction itself, and necessary steps. These actions include im- to finance a separate Xiaolangdi Resettlement Project with a proving financial management and informa- credit of over $100 million. Under this project, compensation tion systems and establishing a good control payments per family reached levels warranted by what the framework. people had lost. Major development efforts were made to cre- ate new livelihoods for them. Families were given considerable Similar to many developing countries and choice of housing design and, in many cases, were allowed to the Bank itself, for many years, China did not supervise the builders during construction. systematically apply environmental and social assessments and safeguards in its development projects. As the Bank began to mainstream these assessments and safeguards in its own projects, doing so influenced the systems of the countries China has made major strides in adopting and it supported, including China. generalizing the use of EAs. Many agencies, including the Ministry of Railways and Hu- Incorporation of environmental assessments bei Provincial Communications Department, and safeguards in project design and imple- have replicated Bank EA practices in their mentation. The Bank's application of its envi- domestically funded projects. The thorough- ronmental assessment (EA) policy in lending ness and quality of their assessments have projects provided a model that the Chinese improved substantially. Greater emphasis State Environmental Protection Agency on the prevention of environmental impacts, (SEPA) and other key agencies (National rather than on mitigating impacts after they Development and Reform Commission, have occurred, has resulted in more techni- Ministry of Finance, and the People's Bank cally sound and cost-effective projects that of China) drew on to formulate China's envi- also are more environmentally and socially ronmental impact assessment (EIA) regula- acceptable. The EA process under Bank-fi- tions and procedures. Over the past decade, nanced projects also demonstrated effective 7 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION public consultations, which Chinese guide- sources and State Ethnic Affairs Commission lines now require. have also strengthened their own regulations Incorporation of social assessments (SAs) and and application of social safeguards with sup- safeguards in project design and implementa- port of the Bank and other multilateral and tion. The Bank's social safeguards work in bilateral development agencies. China has focused primarily on Bank-sup- Collaboration among the World Bank, ported projects, which have routinely applied Asian Development Bank (ADB), China social assessments and safeguards in project Academy of Social Sciences, and leading do- design and implementation. However, in line mestic social development practitioners led with China's policy objectives as well as with to the publication in 2004 of a China social the Bank's growing emphasis on strengthen- assessment manual­­in Chinese, and writ- ing country systems, the Bank increasingly ten for Chinese application.2 Bank social de- has supported the Chinese government's ef- velopment (SDV) staff also assisted GOC forts to strengthen its own social safeguards to formulate a chapter on SA that later was systems. Gradually, the Government has included in the official feasibility study man- enhanced domestic capacity to conduct EA, ual to guide the preparation of all state-sup- resettlement planning and monitoring, and ported development projects.3 As with the other safeguards. Mirroring these improve- social safeguards experience, Bank promo- ments, the initial reliance on headquarters- tion of SA has contributed to development based staff and international consultants has of domestic capacity, with the similar result shifted to domestic experts. For example, in of dramatically increased reliance on domes- several ministries and agencies, personnel tic consultants and design institutes. from among this pool of trained experts are formulating domestic resettlement policy. Several municipal/provincial agencies have relied on their experiences with Bank-sup- 2 "She Hui Ping Jia Zhi Nan" (China International ported projects when establishing their own Engineering Consulting Corporation, 2004). 3 resettlement offices and/or improving re- "The Guideline of Investment Project Feasibility Study," approved by the State Development Plan- settlement practices. Government agencies ning Commission of the People's Republic of China such as the Ministry of Land and Natural Re- (China Electric Power Press, 2002). 8 ENVIRONMENT ENVIRONMENT Innovation #2: Strengthening the environmental management system Period: 1991­2000 and water) were also put in place that introduced new class ranking systems not used in many other The Innovation: To keep up with the country's rap- countries. id pace of development and associated impacts, China introduced essential environmental policies Context: As economic reforms were rolled out and regulations, a new environmental impact as- during the 1980s throughout China, a new set of sessment system, and new information manage- environmental challenges began to emerge par- ment and research capabilities. New EIA, Cleaner ticularly in the context of industrial pollution. In Production and Town and Village Enterprise response, the Government initiated a set of new regulations were put in place that drew on regu- environmental protection policies and programs lations already available in other countries but focusing primarily on large state-owned enter- were crafted for China's specific situation. Specific prises.They included the establishment of an insti- environmental monitoring regulations (e.g. for air tutional and policy framework for environmental protection, pollution guidelines, and environmental assessment Figure 1. Trends in industrial output and pollution emissions in requirements. But with the rapid China, 1990­2003 (indexed 1990 values) expansion of non-state sector industries during the first half of 1,100 Gross Industrial Output and Pollution Emissions the 1990s, particularly in small 900 towns and townships, pollution loads increased dramatically. By 700 the second half of the 1990s, the 500 Government had to apply drastic measures to try to bring rapidly 300 increasing emissions in different 100 industrial sectors under control, 0 which to some extent worked. ­100 China's industrial growth con- 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 tinued at about the same speed GIOV SO2 emissions Industrial COD (%) as before while industry-gener- Source: Partnerships for Enhanced Environmental Management ­ World Bank Environment ated pollution loads were driven Assistance Program in China (World Bank 2005) down (see Figure 1). 9 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION The National Environmental Protection China-Bank environmental cooperation program Agency (NEPA) was established in 1988 to set for the rest of the decade particularly focusing on policy and standards with direct reporting to cooperation with NEPA/SEPA and the Chinese the State Council. With the increased acknowl- Academy of Science (CAS). The partnership ex- edgement of China's environmental challenges panded to strategic and demand-driven engage- throughout the 1990s, NEPA was upgraded to ment on environmental issues. Bank contribu- ministerial status (although not full cabinet min- tions included: istry) and renamed to the State Environmental Protection Administration (SEPA) in 1998. At lo- Helping China introduce international good cal levels, a vast network of provincial, municipal, practices and experiences in its evolving Envi- and local Environmental Management Bureaus ronmental Impact Assessment (EIA) system. was set up for enforcement and implementation. Under the Environmental TA Project, the Several environmental research affiliates were Bank developed guidelines and provided EIA also established both at national and provincial training programs for institutions responsible levels. However, the implementation of the regu- for implementing or administering EIAs. latory framework was not uniform, as responsible This work contributed to China's publication agencies struggled to keep up as the rapid pace of of "Methods of Environmental Impact As- development unleashed growing environmental sessment," establishment of the Institutional impacts. Appraisal System of National Environmental Impact Assessment, and promulgation of En- China-Bank Partnership: The Bank served as a vironmental Impact Assessment Law. In par- partner for China as it sought to introduce and allel, when China began to implement EIA in strengthen its environmental management poli- the early 1990s, multiple Bank-financed proj- cies, institutions, and practices. Bank-supported ects in a range of sectors helped to system- policy analysis helped China to assess and ap- atically introduce international good practice ply international lessons and options as it devel- and build capacity of EA practitioners. oped its policy framework. Technical assistance Introducing Chinese officials to new policy helped China to strengthen key environment in- frameworks and institutional arrangements stitutions. Practical, on-the-ground application to strengthen environmental management. of modern EIA methodologies in Bank-financed The Bank helped expose Chinese officials to projects provided demonstration models. environmental policy frameworks in other The Bank's environmental partnership with countries. For example, support provided China began in 1991-92 around the time of the under the China Cleaner Production Policy United Nations Conference on Environment and Research project provided the foundation for Development (UNCED, or Earth Summit). Fol- national policies to promote cleaner produc- lowing initial introduction to the Bank-applied tion. Under the Environmental TA project, environmental impact assessment (EIA) system, assessment of pollution from town and village the first major analytical the Bank undertook was enterprises from the perspective of an envi- the environmental sector study for China com- ronmentally sound economy helped the Gov- pleted in 1992, a collaboration that contributed to ernment to re-examine the weight that its the formulation of China's Environment Strategy policies were giving to the national economy in 1994. Growing from this initial dialogue, the versus the environment and contributed to engagement became anchored in a 10-year Bank- new national regulations to strengthen envi- financed Environmental Technical Assistance ronmental protection vis-à-vis town and vil- (TA) project that became the cornerstone for the lage enterprises. 10 ENVIRONMENT The TA project also supported the in- the fuel-quality improvement system based troduction of new institutional arrangements on EU standards. This system helped reduce and skills through extended capacity building concentrations of several pollutants in urban programs. Assistance to the university-level areas despite increased urbanization; (4) EIA environmental education system expanded disclosure and consultation regulations; and faculty and courses on environmental eco- (5) EIA regulations including the Regulation nomics and ethics. In addition, the GOC for International Financial Organization Fund- expanded its environmental monitoring and ed Projects (1993). information systems to integrate the pro- In terms of institutions, Bank engagement vincial, national, and global systems and im- helped improve monitoring and enforcement prove their reliability. of water and air pollution standards. In turn, Introducingenvironmentalresearcherstonew these improvements contributed to substan- methodologiesandinternationalgoodpractic- tial increase investments in the country's wa- es, and foreign counterparts. Domestic and in- ter and air pollution emissions equipment. No- ternational training provided to the Chinese tably, the capacity and power of the local EPBs Ecosystem Research Network (CERN) and to enforce regulations were strengthened the Biodiversity Research and Information through higher standards and better monitor- Management (BRIM) program of the CAS ing and by elevating their bureaucratic status helped them learn new biodiversity research and independence. Air and water monitoring techniques and improve information sharing. stations were established in many parts of the This helped them to improve the quality of country and started to provide data crucial for their research, reach broader audiences and policy analysis and decision-making. At the leverage additional funding. national level, SEPA's Policy Research Center of Environment and Economy became finan- Impacts: During this phase, China started to up- cially self-sustaining and played an important grade its environmental regulations and policies role in environmental policy and regulation to gradually meet international standard in some decision-making. In addition, the National respects. The Bank contributions left important Cleaner Production Center was established legacies at both policy and institutional levels, and and has gradually become independent of EIA strarted to be mainstreamed. donor funding as it provides domestic and in- ternational training. The Bank's engagement supported enact- Attheprojectlevel,strengthenedEIAprocess- ment of multiple laws and guidelines. They es demonstrated under Bank-financed proj- included (1) industrial pollution abatement ects have had a ripple effect on other projects laws, including the Cleaner Production Law and improved local capacity to develop and and the Pollution Effluent Levy System. Their implement EIAs. Additionally, key principles enforcement has increased investment in and practices of the Bank's safeguard policies treatment and pollution prevention systems. have been gradually accepted, appreciated, Ultimately, these laws helped the country and internalized by government agencies slow the growth rate of industrial emissions, despite rapid economic growth; (2) regula- tions to strengthen environmental protection 4 National Regulations on Strengthening Environ- measures for town and village enterprises;4 (3) mental Protection Measures for Town and Village Enterprises (1997); Suggestions on Strengthening a national decision to phase out production Ecological Environment Protection Measures for and use of lead in gasoline by 2000 and adopt Town and Village Enterprises (1999). 11 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION (e.g. Ministry of Railways, Hubei Provincial Key Bank inputs: Communication Department) in their regula- tions and practices. Early agency complaints Lending: Environmental TA (1993) about "complicated and costly" policies have AAA: "China: Environmental Strategy Report" gradually been replaced by recognition of the (1992); "China 2020: Clear Water, Blue benefit that they bring to development by Skies: China's Environment in the New Cen- helping to design more sustainable projects. tury"(1997) Innovation #3: Reducing emissions of ozone-depleting substances (ODS) through market-based instruments Period: 1993­present ing chlorofluorocarbon (CFC) production facilities, fulfilling its Montreal Protocol commitments two The Innovation: China developed a compre- and half years ahead of schedule. hensive sector plan and introduced a perfor- mance-based approach to reducing halon, a ma- China-Bank Partnership: The Government and jor ozone-depleting substance. This was a global the Bank agreed to build a partnership in 1993 to breakthrough. With the successful launch in help China meet its obligations as a Party to the 1998, the Montreal Protocol adopted the sec- Montreal Protocol. With support from the Bank, tor approach worldwide. With the halon sec- China's State Environmental Protection Admin- tor as the precedent, the Bank helped China to istration (SEPA) initiated a sector plan to reduce reduce ODS production and consumption and halon, which has the highest ozone-depleting po- to access more than $500 million in supporting tential.The plan provided a comprehensive review grants from the Multilateral Fund of the Mon- of halon policy, production, consumption, and al- treal Protocol. ternatives; and introduced a performance-based approach to reduce halon in China. With the halon Context: As part of its rapid eco- nomic development of the 1980s and 1990s, China's consumption and production of ozone-de- pleting substances (ODS) grew more than 12 percent per year from 1986 to 1997. As a conse- quence, in 1997 China produced roughly 95,800 ozone-depleting potential (ODP) tons, consumed approximately 87,600 ODP tons of ODS, and was the largest producer and consumer in the world. China successfully com- pleted its accelerated phaseout of halon and CFC on July 1, 2007 when it closed its last six remain- Celebration of Accelerated Phaseout of CFC/halon in China, Changshu, Jiangsu Province, July 1, 2007 12 ENVIRONMENT sector as the precedent, the Bank helped China to tion plants and maintain independent records reduceODSproductionandconsumptionthrough of monthly ODS production. Regular rotations seven sector plans.The Bank's involvement helped among representatives from different produc- China to obtain more than US$500 million through ers are enforced. This cross-surveillance helps the Bank in its ODS phase-out activities­­the larg- control over-production by legally registered est in the Bank's ODS portfolio and the largest in ODS producers. the Montreal Protocol. Innovative features in the Use of integrated management teams. For China ODS program contributing to its successful each ODS sector, the SEPA Ozone Unit estab- implementation include: lishes sector management teams that com- prise ministry staff, technical experts, and Introduction of performance-based disburse- local implementing agencies. Because sector ments and audits. All sector plans are based teams include representatives from all rel- on predetermined phase-out schedules, tar- evant parties, team members can effectively gets, and specific performance indicators. Chi- conduct implementation activities. na receives compensation only when annual Capacity building for country compliance. phase-out targets have been met. Conversely, Building the capacity of its National Ozone penalties are applied to China when targets Unit (NOU) is crucial for a country's success- are not met. Independent performance audits ful implementation of the Montreal Protocol. and independent Bank verification of sector For the past 14 years, the Bank has helped the activities confirm that phase-out objectives NOU at SEPA to improve China's compliance have been achieved. capacity by providing training on project Development of a quota system. A tradable management, procurement procedures, and production quota system has been devel- safeguard policies; and by helping to set up oped for ODS production sectors: chlorofluo- a management information system (MIS) on rocarbons (CFCs), halon, carbon tetrachloride the national ODS program. (CTC), and methyl chloroform (trichloroeth- Devolution of ODS phase-out to provincial ane, or TCA). Only established producers are and city levels. In 2005 SEPA initiated the entitled to production quotas. Thus, the sys- ozone-friendly province/city approach in sev- tem has effectively prevented the entry of en provinces and cities, and expanded this ap- new producers to the various sectors. proach to the rest of the country in 2006 and Introduction of bidding system. In 1997 a bid- 2007. ding system was set up in conjunction with production quotas through which ODS pro- Impacts: By 2006 China had reduced its produc- ducers are encouraged to sell their quotas (or tion to roughly 43,000 ODP tons (see Figure 2) and fraction of them) to the Government in return its consumption to approximately 15,000 ODP for grant funds. Starting prices of unit ODS re- tons of ODS. China's ODS production and con- ductions are set by the Government, and win- sumption phase-out in 2006 contributed 29 per- ning bids are those that offer reductions at the cent of global ODS reductions. Under an acceler- lowest costs. This quota buy-back system al- ated schedule that moved the phaseout date from lows the Government to meet annual produc- December 31, 2009 to July 1, 2007, China has fur- tion phase-out targets cost effectively. ther reduced CFC loading into the atmosphere by Introduction of ODS producer self-monitor- 18,700 ODP tons and reduced halon loading into ing. ODS producers designate monitoring the atmosphere by 10,000 ODP tones. As ODS are representatives from their technical person- also potent greenhouse gases, China has effective- nel who are stationed in competitors'produc- 13 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION sions. Correspondingly, in the Figure 2. China Halon Production Phaseout process of converting from ODS, related equipment has often 45,000 been upgraded to be less leaky 40,000 and more energy efficient. Less 35,000 leakage reduces direct emissions 30,000 of substitute materials to the en- onsT 25,000 vironment and greater energy ef- ODP20,000 ficiency requires less power gen- 15,000 eration, which in turn reduces 5,000 greenhouse gasses emitted dur- 0 ing fossil fuel combustion. 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Years Key Bank inputs: Source: Adopted from the Halon Sector Plan (World Bank and China, 1997) Montreal Protocol Projects: ODS I (1993); ODS II (1994); ODS III (1995); ODS IV (1997) ly reduced approximately 200 million GWP (global warming potential) tons of carbon dioxide emis- Innovation #4: Participating in global carbon trading through the Clean Development Mechanism Period: 2004­present change. During the past two decades, China has promulgated dozens of laws and regulations The Innovation: China became a full-fledged par- that promote sustainable development and have ticipant in the global Clean Development Mecha- positively affected climate change, including new nism (CDM) and established a policy framework laws and policies to promote economic restruc- and a domestic CDM Fund to advance the coun- turing, improve energy efficiency, develop and try's clean development agenda (see Figure 3). utilize renewable energy and strengthen eco- logical conservation. China's ratification of the Context: With a rapidly growing and highly fossil- Kyoto Protocol in August 2002 set the stage for fuel-dependent economy, China is critical to the the country to put in place explicit climate miti- global efforts to reduce greenhouse gas (GHG) gation and adaptation policies and to participate emissions. With its long coastlines and vast spans in the CDM activities through project-level coop- of arid and semi-arid lands, China also is vulner- eration with developed countries, which will help able to the impacts of climate change from rising developed country parties to fulfill their obliga- sea levels and storm surges. tions under the Kyoto Protocol while promoting Sustainable development has been a national China's sustainable development. strategy for China, and the country has placed At that time, China was yet to decide on a a strong and increasing emphasis on climate detailed national approach for participating in the 14 ENVIRONMENT Figure 3. China's Current and Historical Share of Global Project-Based Emission Reductions (by volume, 2006) India 500 12% 2e)O (MtC R. of Asia 400 7% edt Africa transac 300 China 3% 61% Other & Unsp. 7% olumesv 200 Brazil 4% annual R. of Latin 100 America CDMy 6% primar 2006 0 2002 2003 2004 2005 2006 (As a share of volumes supplied.) 2002­2006 Other & Unsp. R. of Latin America R. of Asia China Africa Brazil India Source: State and Trends of the Carbon Market 2007 (WBI and IETA) CDM that would fit with China's specific eco- and made positive contributions to the achieve- nomic conditions. Since then, the Chinese Gov- ment of greenhouse gas emission reduction tar- ernment has been actively involved in interna- gets, with the Bank serving as a key partner. tional legislation and technological exchanges to mitigate climate change. Following the entry into NOTE: The CDM is one of the three mechanisms force of the Kyoto Protocol in February 2005, established under the Kyoto Protocol (1997). It China has issued the National Climate Change enables developed countries to invest in GHG Program, Renewable Energy Law, Operation and emission reduction projects in developing coun- Management Methods for Clean Development tries and to claim the resulting certified Emission Mechanism Projects, and has implemented a Reductions (ERs) to fulfill their obligations to number of concrete activities targeted at climate reduce GHG emissions as committed under the change. It has established the National Leading Kyoto Protocol. At the same time, investments Group for Addressing Climate Change and for in GHG emission reduction projects contribute Energy Efficiency and Emission Reduction to be to sustainable development in the host develop- specifically responsible for guiding and coordinat- ing countries. As such, the CDM is considered ing actions for addressing climate change. China as a project-based, win-win mechanism that can has also set up the China Clean Development provide increased flexibility to developed coun- Mechanism Fund to support relevant activities in tries to reduce their overall cost of compliance the field of climate change. In addition, as a de- with Kyoto commitments, while providing the veloping country, China has played an important CDM project hosting partners with additional role in the field of international carbon trading funds and advanced technology. 15 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION China-Bank Partnership: Through a series of facture), carbon sequestration (forestry), and activities including analytical work, TA, carbon industrial gas destruction (trifluoromethane, financing, and project financing, the Bank has or HFC-23). supported China's initiative to become a full- China's two HFC-23 emission reduction fledged participant in the CDM and to establish a projects, developed in 2005, have global sig- policy framework and a domestic CDM Fund to nificance. HFC-23 (trifluoromethane) is one advance the country's clean development agen- of the three most potent greenhouse gases da, including: targeted under the Kyoto Protocol. It has 11,700 times the global warming potential of Collaboration to assess the challenges and carbon dioxide. It is a byproduct of the manu- opportunities presented by the CDM under facture of HCFC-22, a chemical widely used the Kyoto Protocol. In late 2001 the Chinese as a chemical feedstock and as a refrigerant. Ministry of Science and Technology together HFC-23 has marginal economic value so with the Bank, German Technical Coopera- usually is released to the atmosphere dur- tion (GTZ), and the Swiss State Secretariat for ing production. Currently, no regulatory re- Economic Affairs initiated a study project to quirements exist to obligate its capture and help China better analyze and understand the disposal by countries. China is the world's country-specific implications of participation largest source of HFC-23 emissions. In De- in Kyoto activities and the need for related cember 2005, the Bank and two Chinese capacity building. The resulting Bank study, project sponsors supported by the Govern- Clean Development Mechanism: Taking a ment of China signed purchase agreements Proactive and Sustainable Approach (2004), for the largest ever globally recorded CDM provided an estimate of China's potential transaction for 2 HFC-23 emission reduc- share in the world carbon trading market and tion projects, with total emissions reductions identified the specific sectors with potential exceeding 129 million tons, more than 20­30 for immediate CDM application. The study times the reductions of average size carbon also highlighted the need for capacity build- transactions up to 2005. ing through actual CDM project development Helping China tap into the broader carbon fi- and knowledge transfer to the provinces and nance market. In the October 2006 Carbon local areas in China in which CDM projects Expo in Beijing, the Bank brought different were being developed. parties in the global carbon finance market Cooperation with China to develop the to the front doors of many Asian countries, world's largest carbon market portfolio. The creating a platform for market transactions Bank facilitated China's entry into the carbon in the region. finance market by providing technical assis- Promoting the Chinese Government's efforts tance as China developed its national regu- to establish a domestic CDM fund to support latory framework for this participation and domestic climate change activities. In October by helping Chinese counterparts to develop 2005, partly in response to Bank reports and carbon projects, building local capacity in the calculations, China finalized its Measures for process. Starting with three project proposals Operation and Management of CDM Proj- in September 2003, the Bank has supported ects. These measures established a graded nine carbon purchase agreements in the ar- share of ER revenues that would be retained eas of energy (coal-mine methane, run-of- by the Government for CDM projects, and river hydropower, and wind farms), energy provided the basis for the Government to es- efficiency (waste gas recovery in steel manu- tablish a domestic China Clean Development 16 ENVIRONMENT Mechanism Fund, which uses the share of equivalent to 170 million tons of emission reduc- ER revenue proceeds retained by the Gov- tions. By using a global instrument to generate ernment to finance climate change invest- national benefits for China, the Bank also has ments and activities. The Fund will strength- helped bring new technologies to China's energy en basic research on climate change, enhance industry and enhanced local capacity in the pro- national adaptation and mitigation capacity, cess. The establishment of the China CDM Fund ensure effective implementation of the Na- enables the Government to redistribute some of tional Climate Change Program and will fa- the benefits from participating in the global CDM cilitate actions addressing climate change and to address other areas of the country's clean de- international cooperation. It will also support velopment needs. institutional building and capacity building in the field of domestic climate change. Key Bank inputs: Impacts: China has rapidly expanded its share of AAA: "Clean Development Mechanism in China: the world market for CDM credits and accounts Taking a Proactive and Sustainable Approach" for 60 percent of the global total. The nine pur- (2004) chase agreements that the Bank has signed so Other activities: Carbon Expo Asia (Beijing, Octo- far in China are worth a total of $1.1 billion and ber 2006) 17 HUMAN DEVELOPMENT HUMAN DEVELOPMENT Innovation #5: Improving targeting of basic education funds for poor children in rural China Period: 1991­2000 These issues were of course all the more challeng- ing in the poorer regions of the country where The Innovation: To improve basic education en- resource and managerial constraints were more rollment and quality in poor counties, China intro- prevalent. duced new research and survey methodologies and an intergovernmental funds transfer mecha- China-Bank Partnership: In 1991 the Government's nism to improve the pro-poor targeting and distri- Outline of National Economy Development Ten-Year bution of central education funds. These methods Plan and the 8th Five-Year Plan for China set ambi- and mechanisms improved access to good basic tious targets for extending compulsory education. education. They also encouraged more equal and sustainable distribution of budget funds among provinces'poor and less poor counties. Context: Chinese economy began a period of rap- id growth in the late 1980s and early 1990s. The government set goals of universalizing access to basic education, improving education quality, and expanding the tertiary education system. It was pursuing simultaneous reforms in public adminis- tration, decentralizing much authority for educa- tion to provincial and local level authorities. In this context, there were many challenges to address. These included strengthening capacities of provincial and local authorities to meet their growing responsibilities. Reporting on student progress needed to be strengthened to enable government to identify both regions which were doing well and those which needed more atten- tion. Financing systems were to be fine tuned so as to direct resources to policy priorities. And the post-basic education system was both to be ex- panded to create more educational opportunities and strengthened to meet world class standards. 19 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION They aimed to achieve 80 percent enrollment in pri- financed basic education project identified: (1) mary schools and 30 percent in secondary schools burdensome HH education costs (including fees, within 5 years. The Ministry of Education hoped for textbook costs, uniforms) as a major factor that World Bank assistance to help improve basic educa- kept poor children, especially girls, out of school tion in poor areas. and forced families increasingly to borrow for edu- The Bank helped the Government in this cation funding; and (2) where and why female en- pursuit primarily in two ways: (1) identifying the rollments were the lowest, and the levels of sup- key impediments to school enrollments and the port necessary to get girls into school and keep characteristics of those affected, and (2) helping them there. In the preparation of basic education the Government to design an intergovernmental projects that followed, HH surveys confirmed the funds transfer mechanism to address the major need for direct student assistance programs. More obstacles identified. importantly, they emphasized the need to target poverty-focused education assistance programs Bank-supported analytical work in the form of at the village rather than township level. province- and county-level education expenditure studies helped to identify key obstacles to and op- When government designed its own intergovern- tions for improving basic education. These studies mental transfer fund, a poverty-focused education were carried out in the design and preparation of fund developed under a Bank-financed project a series of five basic education projects. The stud- served as a key input. Building on the Bank's ana- ies: (1) illustrated the unequal distribution within lytical findings, the Ministry of Education (MOE), provinces of education financing that deprived working with the Ministry of Finance (MOF), de- poor counties, townships, and villages of equitable veloped an intergovernmental transfer system distribution of necessary resources; (2) confirmed that provided central education budget funds the very low levels of any national education directly to targeted poor counties. This was the funds that reached county education systems; (3) Nine-Year Compulsory Education Program­­Phase confirmed that rural village schools in high pov- I (1995­2000) (NYCE-I). In so doing, the MOE and erty areas had substantially greater numbers of MOF designed their own poverty-focused fund unqualified teachers and principals compared to based on the Bank's Basic Education in Poor and urban, county-center schools; (4) established that Minority Areas Project. China provided financing a disproportionate percentage of national minor- directly to counties based on these proposals and ity children lacked access to good-quality basic targets, and monitored progress using indicators education; and (5) provided an accurate topology and annual reviews of action plans and budgets. for the county and sub county levels of classroom The plan's poverty focus and requirements for pro- construction and rehabilitation needs. One of vincial counterpart funding for education activi- the pieces, a sector study titled "China: Provincial ties encouraged more intra-provincial equalization Education Planning and Finance," was the first to of education financing. These changes benefited recommend that a system of intergovernmental poor counties that could not adequately finance transfers funds be established to provide more their own education budgets. robust financing for education in poor and rural areas. Household survey findings and an experimental Bank-supported student assistance program con- Later, the Bank helped to introduce household tributed key inputs to develop an intergovern- survey methodologies to develop more effective mental grant program under the second phase of basic education interventions. A household (HH) NYCE. Household surveys led to growing national survey conducted for the design of the third Bank- government awareness that high student educa- 20 HUMAN DEVELOPMENT tion fees were a key factor keeping poor children tion of the same project. out of school. An experimental student assistance During the decade in which the projects were program supported by the Bank in several prov- designed and implemented, the Chinese Govern- inces helped to convince provincial governments ment also instituted major reforms to which the that direct assistance from recurrent budgets was Bank contributed: necessary to enroll and keep children in school. When the Government designed its second Nine- GOC increasingly sharpened its targeting of Year Compulsory Education project (NYCE-II), the national education funds, shifting from target- MOE made a larger commitment to reduce the HH ing poor provinces to targeting poor counties, burden of education in poor rural areas. NYCE-II townships, and villages. These policies have essentially was designed as an intergovernmental encouraged a more equitable distribution of grant program, allocating a much higher percent- national and provincial education funds and age of overall grants funds to student assistance. increased fiscal equalization between poor This decision was largely informed by the initial and less-poor counties in poor provinces. In findings of the HH surveys conducted during the addition to providing small but important preparation of the Bank's Third Basic Education student assistance, the programs provided Project, as well as subsequent work carried out by considerably higher levels of financing more Chinese researchers. equitably distributed for civil works, teachers' pay, books and teaching materials, and ad- Impacts: By the end of the fourth basic education ministrative costs. Geographic targeting strat- project, the Chinese government reported that the egies decreased the amount of money going series of projects had had an impact on more than to county seats­­which tended to be better 120,000 schools. Measuring or assigning attribu- endowed­­and increased funding to poorer tion for the impact is not easy, but such coverage townships and villages. Social targeting strat- means that more than 35 million children and 2 egies have enabled the poor, especially girls, million teachers and principals have been affected women, and ethnic minorities, to acquire the by these projects. A few examples illustrate the numeracy and literacy skills necessary to join impact of these projects. During the implementa- the national economy. tion of the third basic education project, official Using household surveys based on China's figures showed that grade six pass rates for mathematics in schools covered by the project increased from 88.0 to 96.2 per- cent, and in Chinese from 89.9 to 97.1 percent. During the fourth basic education project, proj- ect-supported primary school enrollment rates increased from 92 percent to 98 percent; lower secondary enrollment rates in- creased from 75 to 90 percent. Starting from a base of fewer than 5,000, some 317,000 pu- pils received student assistance funds during the implementa- 21 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION State Statistical Bureau's (SSB) protocols and write and distribute new basic education modified with Bank-supported TA, provin- curricula emphasizing creativity and innova- cial education bureaus now are able to more tion­­crucial skills for the 21st century­­and accurately assess the household burden of substantially improved teacher education to education costs in all parts of their provinces. teach the new curricula. They thus make better decisions about the distribution of education financing in poor ar- Key Bank inputs: eas of their provinces. Recognizing that the high HH burden result- Lending: Education Development in Poor Provinc- ing from student education fees was keeping es (1992); Basic Education in Poor and Minor- children out of school, GOC recently eliminat- ity Areas (1994); Third Basic Education (1996); ed all school fees in poor western and central Fourth Basic Education (1997): Basic Educa- provinces. Implemented for the first time na- tion in Western Areas (2003) tionwide in 2006­07, this policy is too young AAA:"China: Provincial Education Planning and Fi- for its impact to be assessed. nance"(1991) Government undertook major initiatives to Innovation #6: Introducing new analytical tools to strengthen the pension system Period: 1995­2006 Context: During China's transition to a market economy and a more industrial and urban soci- The Innovation: Actuarial and economic analysis ety, the pension system inherited from the pre- was introduced in pension policy development; transition era became ill-suited to address the analytical tools were developed for Government emerging economic and social risks. The program agencies to apply in assessing pension reform was costly, fragmented, and constrained the effi- options; and capacity of relevant agencies in pen- cient functioning of the labor market. The lack of sion policy analysis and program implementation was upgraded. These innovations contributed to broader pension reforms that transformed the enterprise- based pension system of the planned economy into a social insurance system. Although the reform is far from complete, de- velopments so far have relieved enterprisesofadministeringpen- sions, established much stronger linkages between individual con- tributions and benefits, reduced system liabilities, and strength- ened pension administration. A neighborhood exhibit to promote the participation in the pension program 22 HUMAN DEVELOPMENT a functioning social insurance program severely China-Bank Partnership: The Bank's assistance hindered deepening the state-owned enterprise program in this area consisted of a combination of (SOE) reform. Moreover, as China's population Bank-led analytical work, TA, capacity building ac- rapidly began to age, the pension system became tivities, and a small investment operation (a Learn- unsustainable and headed for significant financial ing and Innovation Loan, or LIL). difficulties. The six main outputs include: (1) four ma- Recognizing social security as a major priority, jor Bank analytical reports on pension reforms, starting in the mid-1980s, the Government imple- delivered from the mid-1990s to 2006; (2) policy mented a series of reforms to move from an enter- notes on specific pension-related subjects, some prise-based program to a social insurance system in response to specific questions raised by GOC for most of the urban labor force. In 1997 China in- senior leadership; (3) introduction of the Bank- troduced a new policy framework transferring the developed "Pension Reform Options Simulation system to one that consists of three components. Toolkit"(PROST) for long-term financial projection They are a basic social pension financed on a pay- of the pension system, as well as a Chinese version as-you-go basis, a funded individual account pen- of PROST; (4) a short- to medium-term forecasting sion based on the defined contribution principle, model (Projection System of China Pension Funds, and an employer-based voluntary pension com- or PSCPF), developed by the Ministry of Labor and ponent. To achieve a higher degree of unification Social Security (MOLSS) with the support of the in- and policy consistency, adjustments to key pen- vestment lending project; (5) a series of training sion policy parameters also were introduced. The sessions delivered to officials in central ministries adjustments included changes in the contribution and all provinces. The courses include actuarial rates, benefit structure, and policies concerning and economic principles concerning pensions, pension program coverage. Since the early 2000s, international experience in pension reform, and the Government has introduced three phases of the use of PROST to carry out long-term actuarial national pilots to test viability of the funded pen- projection analysis; and (6) TA to establish and de- sion scheme. velop an Actuarial and Policy Analysis Unit in the Such fundamental policy reforms in a fast- Social Security Department of the Ministry of Fi- changing economy and an evolving labor mar- nance. ket implied great needs for knowledge and ex- The Bank's assistance program in the pension perience in pension system design. Three key area has always been conducted in close partner- needs were for (1) solid actuarial, financial, and ship with the Government, namely, MOLSS and economic analyses of various reform options; (2) MOF, and subnational governments. Through analytical tools that could be adapted to support training, the Bank helped eight provinces and the assessment; and (3) the ability to properly as- municipalities carry out their own analyses. The sess reform options, evaluate pilot outcomes, and MOLSS considers the PSCPF model very useful integrate such analyses in the Government's nor- and sought additional support from the Bank to mal policy-making process. Despite strong inter- apply it in the local labor bureaus. est, China lacked technical knowledge, analytical tools, trained staff, and institutional arrangements Impacts: As in any country, pension reform in to meet such needs. With its extensive experience China has been a complex process affected by advising many countries in the world on pension many economic, political, and social factors. Re- reforms and its strong analytical capacity, the Bank form decisions were made by the highest level of made significant contributions to this reform pro- Government. The policies have been continuously cess. evolving since the mid-1990s, and lively debates continue on both fundamental structural issues as 23 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION well as technical details. It is difficult to attribute ernments. At the MOF, such approaches were China's policy changes to the exact pieces of ad- institutionalized in 2004 through the estab- vice provided by the Bank. However, the Bank was lishment of an Actuarial and Policy Analysis actively providing analytical support during the Division within the Social Security Depart- process and was consulted by the Government ment. This division works with local govern- at some critical junctures. To differing extents, the ments to produce periodic actuarial and Bank influenced the following aspects of China's policy reports, using PROST as the primary re- pension development: search tool. While China improved its practice in pension policy analysis by learning from Modification of the public pension system many sources, the impact and contribution of structure. The Bank analysis in the mid-to-late the Bank are acknowledged as significant by 1990s recommended that the Government the Government. move toward a three-pillar system of social se- Strengthening of program management and curity separated from the enterprises. This new administration capacity. The Bank's investment system would consist of a pay-as-you-go basic projects in selected municipalities and provinc- pension, a fully funded mandatory individual es greatly enhanced the capacity of the social pension account, and a voluntary individual insurance administration to maintain and man- pension insurance. The Government by and age contribution and payment information at large adopted this policy framework, as reflect- the individual level and to provide much better ed in its 1997 State Council document. service to program participants. For example, Revision of important pension policy parame- the project in Qingdao enabled local residents ters. The Bank consistently has advised on the to access information on contributions made need to reform key pension policy parameters, by themselves and their employers on an on- recommended specific alternatives, and esti- going basis, either through telephone lines or mated the impact of the proposed changes. touch screens located in local social insurance Some of these recommended changes­­such agencies. In Heilongjiang, the project sup- as revising the pension formula for individual ported the transfer and sharing of contribution account pensions to make it actuarially sound and payment information among the munici- and fair­­have been adopted by the Govern- pal, provincial, and central governments. Such ment over time and now appear in the nation- pilots fit very well into the overall Government al policy. Other recommendations­­such as a program to strengthen pension administration more transparent and systematic approach to and information management. pension benefit indexation and the need to in- crease pension age­­were clearly understood It should be noted that the pension reforms and widely accepted as necessary future steps. in China are not complete. The system needs to However, due to political and social consider- be further rationalized in many ways. In particu- ations, they have yet to be translated into re- lar, the urban system is still very costly; the overall formed policies. pension program has limited coverage, especially Introduction of new approaches to pension for the rural population and urban informal sector; policy analysis. It is now a shared understand- the program is still very fragmented and has very ing that actuarial and economic analysis is a limited portability; the pooling level is still very fundamental basis required for pension policy low; and the overall governance of pension fund discussion. The central authority has started management is still inadequate. to require such analysis as a necessary com- Nevertheless, in the last decade, China has ponent of pilot proposals made by local gov- made substantial progress. The pension system 24 HUMAN DEVELOPMENT has reduced its liabilities due to the parametric Lending & ASEM Grant Financed TA: Liaoning So- reforms and the structural changes. Over the last cial Security Reform (2002) few years, program administration has improved IDF: China IDF Grant for the Development of Insti- significantly. The Bank has helped China through tutional Capacity for China's Research and Ac- this complex transition, and will continue to do so tuarial Division of Ministry of Finance (2006) by helping Government evaluate the results of re- AAA: "China 2020: Old Age Security: Pension Sys- form pilots and initiatives. tem Reform in China"(1997) AAA: Evaluation of Liaoning Social Security Re- Key Bank inputs: form (2005) Lending/TA: Pension Reform (1999) Innovation #7: Piloting innovations to improve the financing and coverage of basic health services for the rural poor Period: 1997­present ral areas were planned and staffed in response to fixed norms, not on the basis of the local popu- The Innovation: New approaches were designed lation's needs and resources. The results were in- and implemented to improve the quality, cover- sufficient care, duplication, and inefficiency. The age, and financing of rural health services in Cen- limited funds reaching local facilities from higher tral and Western China, specifically for households levels were earmarked mainly for facility improve- in poor counties. ments and staff salaries. With the loss of central subsidies, services were provided and priced to Context: From 1980 to 1995, impressive growth maximize revenues for the survival of individual in GDP and personal income occurred in China. health facilities rather than to provide the most However, compared to many other countries, overall gains in health status slowed relative to economic progress. Declining public support of health pro- grams and reduced community financing of health services were the unintended consequences of the economic reforms begun in the 1970s. Therefore, rural health services experienced problems in coverage and use, quality, ef- ficiency, and financial viability Factors that contributed to the weak performance of rural health systems included the fact Young mother and her baby visiting a clinic. Courtesy of Foreign Loan Office, that health facilities in most ru- Ministry of Health 25 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION health benefits or meet client needs. Directors of based on an analysis of the status and trends rural hospitals also had little say in the staff assign- in the county populations, actual health prob- ments received from higher levels and had to ac- lems, patterns of service and care, and an as- cept those assigned, regardless of qualifications. sessment of present and future allocations These structural and financial difficulties, of resources. This approach built on other including the loss of capacity to monitor and as- Bank-supported work in China on integrated sess health problems, left local health bureaus regional health planning.This approach broke ill-equipped to control recognized public health with the tradition of planning health facilities problems, respond to demographic and disease on the basis of administrative boundaries, trends, and meet rising expectations for service which often led to the coexistence of duplica- content and quality. tion and shortage of health resources in the same geographic area. These locally specific China-Bank Partnership: The Bank worked county plans marked a dramatic change in with the Government in the late 1990s to mount county health resource planning from admin- a major initiative to test and demonstrate imple- istratively determined, "norm-based" deci- mentation of national priorities in rural health sion-making undertaken at higher levels to a sector reform for poor areas in selected prov- population-needs-based approach. inces in central and western China. This effort Introducing new practices to improve health was spearheaded by the Basic Health Services service delivery. Key innovations included Project. The project was intended to regain the establishing clear referral and supervisory re- lost momentum in improved health status among lationships among different levels of service the rural poor and improve the accessibility, ef- and reducing the use of dangerous and un- fectiveness, and efficiency of services for this necessary drugs. In addition, a new approach group. Key innovations under this project were was developed to improve the health impact developed in three areas. ofcountyhealthprogramsthroughenhanced implementation and coverage of one or two Developing County Health Resources Plans proven, cost-effective health interventions, to guide resource planning. These plans were such as maternal and child health care, tuber- culosis control, and childhood immunizations. Implementa- tion of each priority health in- tervention followed guidelines and clinical protocols that were developed by (national) project experts. The project also put in place measures to improve the availability and affordability of these priority health interven- tions. Introducing new financing mechanisms to expand access to health care. The effort here was two-fold. The first innova- tion was to introduce coopera- A doctor and his patient. Courtesy of Foreign Loan Office, Ministry of Health tive medical financing schemes 26 HUMAN DEVELOPMENT (CMSs) by helping local governments imple- a proper insurance fund. Nevertheless, the ment the national policy on establishing lessons learned from this failure provided im- CMS schemes in rural areas. The second was portant inputs to the Government's decision to develop a Medical Financial Assistance with respect to the current New Cooperative (MFA) scheme to reduce the financial barri- Medical Scheme (NCMS) to establish the risk ers for the poorest 5 percent of households in pool at the county level. project counties and reduce the risk that they The experience from the establishment of would be further impoverished by medical MFA provided the foundation for the Gov- expenses. ernment's current Medical Assistance pro- gram now administered by the Ministry of Impacts: A final evaluation of this effort is still to Civil Affairs to meet the health expenses of be done. Nevertheless, field observations, par- the poorest segment of the rural population. ticularly by provincial authorities, point to sig- Key national experts in the MFA program have nificant differences between the counties that provided major inputs in the formation of the implemented these reforms versus the counties Medical Assistance scheme, including con- that were not part of the project. Although a full tributing to the development of MA program summary of achievements is not possible here, guidelines. several key differences follow. Counties included The project experimented with purchasing in the project (1) appeared to be better prepared health services. These actions helped to in- and were more effective in meeting the challeng- troduce the advantages of such an approach es of the SARS epidemic due to their strength- over traditional supply-side subsidies. With ened public health orientation; (2) found ways to the new approach, the purchaser can use exercise greater discretion in the hiring, manage- performance and accountability measures to ment, and sometimes dismissal of staff based on hold the provider accountable for the quality performance standards; (3) have been very effec- and extent of services provided. The merits tive in controlling provider provision of non-es- of purchasing health services are widely de- sential and dangerous drugs. This control has sig- bated in China as part of the current health nificant financial as well as health implications for reform discussions. poor households; and (4) have begun to contract with health entities to implement priority health Perhaps the most important indicator of im- interventions. In other words, counties are intro- pact lies in the fact that a number of project prov- ducing measures to hold providers accountable inces are using their own resources to spread the for specific improvements in health status. lessons learned and to implement the approaches The project also has had an important influ- from the project in the counties that did not par- ence on the Government's current deliberations ticipate in the project. on health sector reform. Three such contributions can be cited: Key Bank inputs: Efforts to establish CMS schemes in counties Lending: Basic Health Services (1998) in the late 1990s generally were not very suc- AAA: "China: The Health Sector" (1984); "China cessful. Most notably, the risk pool at the com- 2020: Financing Health Care: Issues and Op- munity level simply was too small to serve as tions in China"(1997) 27 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION Innovation #8: Supporting distance learning and establishment of the China Development Distance Learning Network Period: 2000­present particularly in China's poorer regions. Training and capacity building continued to be offered primar- The Innovation: China introduced the use of mod- ily through traditional face-to-face pedagogical ern distance learning as a tool to develop human approaches that offered limited opportunity to ac- resources and build capacity. With support from cess global knowledge and/or international devel- the World Bank, the country established the China opment experience and lessons. Development Distance Learning Network (CD- DLN), a network of 13 distance learning centers, China-Bank Partnership: To address these gaps, the 11 of which are in western China. Through this Bank partnered with the government and with sev- initiative, key Chinese government agencies and eral key Chinese knowledge institutions through a knowledge institutions have become familiar with combination of advisory support, training, and fi- the technology and pedagogy associated with nancing. Together, they accomplished three mile- the use of distance learning to develop capacity. stones: (1) built understanding of the effective use They also have begun to take advantage of the of distance learning for development; (2) put in technology and network to deliver training and to place the necessary infrastructure and institutional exchange global knowledge and experience. structure to grow a national network of technol- ogy-equipped learning centers dedicated to build- Context: When the Bank launched the Global De- ing capacity for development; and (3) developed velopment Learning Network (GDLN) in June 2000, and delivered programs that demonstrate the ef- knowledge of modern distance learning in China fective use of distance learning in a development was confined largely to the academic commu- context. Innovations were introduced together nity. Despite GOC investments in information and with partners in several phases. communications technology (ICT) infrastructure, a rapid rise in the use of information technology Establishing pilot distance learning centers. Con- (IT) to support development was not taking place, current with the GDLN launch, the Bank set up a distance learning center (DLC) in its Beijing office. The Beijing DLC was one of the original 15 GDLN centers and participated in the global network's inauguration. Recognizing the potential of GDLN to promote development in the poor western provinces, the Western Region Develop- ment Office of the State Council (WRDO) initiated a DLC in Ningx- ia Province as a pilot for the pos- sible establishment of a broader network. China Domestic Distance Learning Network, including State Information Center The Ningxia center was DLC (Beijing) and Shanghai DLC. Source: World Bank Institute inaugurated in October 2001, 28 HUMAN DEVELOPMENT the State Information Center.The Shanghai National Accounting Institute is also connected to the network and serves as a source of content. This network, which operates under the auspices of WRDO, was dubbed the China Development Distance Learn- ing Network (CDDLN). The Bank assisted WRDO in securing DFID financing for it and has provided continuous advice and techni- cal support. Specialized training programs were organized for Scene from a learning activity at the Chongqing DLC. Courtesy of Chonqqing DLC managers, course facilita- DLC tors, and DLC technical staff. Sub- sequent support has involved based on a collaborative effort involving a World "learning by doing" as the Bank has worked hand Bank team, WRDO, the Ningxia provincial govern- in hand with the western provincial DLCs and with ment, the China Education and Research Network WRDO and the Training and Management Center (CERNET). The Bank developed physical design (State Information Center) to organize and deliver and technical specifications, mobilized financing learning programs, drawing increasingly on local from AusAID, procured equipment, and provided content and expertise. training to technical staff from Ningxia University, which hosts the DLC. Training on distance learn- Developing distance learning courses and con- ing design and pedagogy was provided to faculty tent adapted to China. After GDLN's 2000 launch, from Ningxia University and other training institu- it quickly became clear that delivery of programs tions in neighboring provinces. Connectivity was (generally in English) designed mainly for regional provided through CERNET. Based at Tsinghua Uni- audiences would have limited impact in China. To versity, CERNET connects more than 800 educa- fully realize the potential of GDLN, it would be nec- tion and research institutions all across China. essary to invest in the development of customized content and to build the capacity of local knowl- Building a domestic development learning net- edge institutions to develop and deliver relevant work serving Western China. Based on the con- learning programs through the network. crete demonstration of the Ningxia center and the Between 2000 and 2003, WBI invested heavily potential to link western China to global knowl- in"localizing"its courses that had the heaviest de- edge resources, the Government enlisted the Bank mand in China and converting them for distance to help establish a network of similar centers in learning delivery by local partners and networks. the western provinces. Over the next 2-1/2 years, Existing distance learning networks, including 10 additional DLCs were established: in Guizhou those of Tsinghua University, Ministry of Agri- (Guiyang)Yunnan (Kunming), Sichuan (Chengdu), culture, and Ministry of Education, delivered the Chongqing, Guangxi (Nanning), Shaanxi (Xi'an), programs. While use of the existing networks has Qinghai (Xining), Gansu (Lanzhou), Xinjiang been important, their technology platforms (one- (Urumqi), and Inner Mongolia (Hohhot). They are way video and/or closed circuitTV) and traditional connected through a hub in Beijing operated by pedagogical approaches limited the impact of 29 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION their programs. Many of the country's leading uni- Impacts: CDDLN has become fully established as versities had developed a wealth of relevant con- a vehicle to deliver learning and capacity building tent, but it was based in technologies with limited programs that support development in western interactivity. Similarly, the pedagogical approach China. A governance structure has been estab- was one-way knowledge transfer, as compared to lished for the network, and the affiliated DLCs the fully interactive, peer-to-peer knowledge ex- meet regularly to share experiences. According to change that characterizes distance learning and is WRDO, since its establishment, CDDLN has deliv- key for programs that target decision-makers and ered more than 350 programs that have reached change agents. more than 12,000 participants. While programs Accordingly, a key element of the WBI support initially originated mainly from international involved, first, training in instructional design and sources including WBI, Asian Development Bank pedagogy. Second, the Bank collaborated with lo- Institute (ADBI), and GTZ, a growing number are cal universities to develop learning programs that being organized by the Training and Manage- revolve around the exchange of knowledge be- ment Center and CDDLN DLCs. tween eastern and western China. While there is still considerable variability The Bank is also helping to demonstrate how among the CDDLN DLCs in capacity and results, CDDLN can be used by various line ministries and several are well on their way to becoming world- agencies for in-service training. A recent collabo- class development learning centers. CDDLN has ration with the Ministry of Education's National become an active member of the East Asia and Center for Curriculum and Textbook Develop- Pacific Association of Development Learning ment is exposing primary and secondary school Centers and serves on its executive committee. teachers from the western provinces to informa- CDDLN also has emerged as an effective vehicle tion technology and to collaborative learning ap- for knowledge exchange and cooperation within proaches. Through CDDLN, teachers and students China. Furthermore, WRDO has planned a phase from schools in China's Eastern provinces and II of the network that will establish 50 local cen- Hong Kong have been "twinned" with schools in ters and expand coverage to the prefecture level. the western provinces. Finally, CERNET has gone on to establish its own Finally, the Bank has helped to bring to the network of world-class DLCs linking universities CDDLN DLCs a greater awareness of and attention throughout the country and is establishing ex- to client orientation and sustainability through changes with similar networks in other countries. providing training on needs assessment method- ologies and business planning. 30 INFRASTRUCTURE INFRASTRUCTURE Innovation #9: Supporting commercialization and price reform in the power sector Period: 1985­2003 As demand began to rise rapidly in the mid- 1980s, the traditional system began to show seri- The Innovation: To improve economic efficiency ous deficiencies in its ability to mobilize the financ- and manage rapid sector expansion, power utili- ing required to build new capacity quickly and on ties were separated from Government and were a much larger scale. In 1985 the Government in- commercialized, including through price reform, troduced a reform to enable local governments to make them self-financing and sustainable. and other entities to pool their own investment China has established separate power generation funds to build new power plants. The reform also and power network companies. A new State Elec- permitted them to charge a higher "new-plant" tricity Regulatory Commission, together with tra- power price for the specific electricity produced ditional government policy-making institutions, that would enable recovery of investment costs. carries out Government monitoring, supervision, This successful reform led to a vibrant program economic regulation, and policy-making func- of new construction but also brought about basic tions required for the sector. These reforms have contradictions and tensions within the traditional improved the economic efficiency of the power system. By the early 1990s, it was becoming clear sector and helped enable China to carry out the that more fundamental reforms ultimately would largest power expansion program in the world. be required. Context: In the early 1980s, China's power in- China-Bank Partnership: Through a series of dustry operated as a full top-to-bottom system collaborative strategic studies, combined with combining all government policy, specific sec- implementation support in six electric power sup- tor planning, management, financing, and op- ply development loans, the Bank partnered with erational functions under the traditional planned China's government and power utility industry to economy model. The Ministry of Water Re- help introduce new power generating technology sources and Electric Power, and then the Min- and to plan, design, and implement power sector istry of Energy, oversaw the system, which in- reforms and restructuring. cluded 6 regional power administrations and 22 Beginning in the mid-1980s, the Bank's first provincial and municipal power bureaus. Capital series of electric power loans focused on tech- for new investments was allocated based on the nology transfer (including the introduction of the plan. Electricity prices were designed as simple first 300-, 600- and 900-megawatt generating transfer prices between the power system and plants in China) and project management capac- other planned systems, generally covering oper- ity building. Although they represented a small ating costs. share of overall sector investments (less than 5 31 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION percent), the projects were targeted to demon- and mechanisms for application. strate to the rest of the sector the benefits to For each new power loan, the Bank also be gained from modern technology and project helped to develop new financial analysis and roll- management, international procurement, and ing financial forecast models and trained utility good resettlement practices. In the mid-1980s, staff in their use for corporate planning. The lon- through its first series of electric power loans, ger planning horizon and dynamic approach were the Bank provided support for modern project major departures from the prevailing practice, in design, management, and implementation. The which plans and budgets were mere subsets of Bank also began to provide support to introduce the static national five-year plans. Thus, by the economic principles to sector planning and pric- beginning of the 1990s, the Bank was well known ing and for proper utility financial accounting and in the Chinese power sector community for its planning. The Bank introduced the theories and years of work at provincial levels on project im- application principles of economic least-cost sys- plementation and its promotion of new economic tem planning and long-run marginal cost pricing, and commercial concepts. especially through a major 1988 study of eco- The Bank and Ministry of Electric Power nomic pricing of electricity in East China. The were asked to help strategize a new national re- Bank helped build Chinese technical capacity in form program for the sector (See Table 1). In 1993 these areas and generated debate on the speed faced with increasingly thorny issues needing at- Table 1. Changes in China's power sector as a result of reforms Feature Early1980s 2000 Management Power entities managed as administrative departments Most entities have been corporatized and are run as and funding of the Ministry of Energy, fully controlled and funded by for-profit enterprises. Budget allocations have been the government. phased out and subsidies eliminated. Sector structure Vertically integrated companies own and operate Generation is being separated from transmission and generation, transmission, and distribution. distribution. Prices and Tariffs barely cover operational costs. Average prices exceed supply costs in almost all regulations Prices set by the government, often arbitrarily. provinces. Prices still need to be approved by the government, but the Electricity Law requires prices to cover supply costs. Supply Severe energy shortages persist until the mid-1990s. Energy shortages have been eliminated in all reliability provinces."New plant, new price"policy, combined with easy approvals for small projects, increased annual capacity additions from 4­5 gigawatts to 15­17 gigawatts in the mid-1990s. Private Private ownership banned in the power sector. Private ownership permitted in generation. Private ownership investment accounts for significant share of new capacity. Some 35 independent power producers generate 26 gigawatts of power; 33 companies listed on domestic and foreign stock exchanges represent an installed base of about 12 gigawatts. Source: Fostering Competition in China's Power Markets (Fostering Competition in China's Power Markets, World Bank, 2001) 32 INFRASTRUCTURE tention in projects at provincial levels, the Bank (2000), (3) stocktaking of progress and further and Ministry embarked on a joint effort to review strategizing workshop (2000), and (4) a review the status of China's power sector reform to date of how competition in power markets might best and to strategize potential future directions. Sup- be promoted (2001).6 ported in part through the Bank's Institutional Development Fund (IDF), work commenced Impacts: For the past 25 years, China's power under four task forces, each with senior Chinese sector has added capacity at an internationally experts and one international advisor. The task unprecedented rate and scale, broadly meeting forces focused on four reforms: (1) structural re- the electricity needs of the country's rapid eco- form options for the sector, (2) establishment of nomic expansion. These achievements could not a legal and regulatory system, and (3) utility com- have been accomplished without major reforms. mercialization and corporatization, and (4) op- In less than two decades, these reforms have tions for power industry financing. In July 1993, transformed the power sector from a highly cen- a major workshop to discuss interim funding was tralized administrative department to a corpora- held followed by published proceedings. The for- tized, commercialized, and relatively open sector. mal Bank report summarizing the work and con- In turn, these reforms have helped the sector to clusions was issued in early 1994.5 finance and manage its rapid expansion. Key im- The 1993­94 strategy development effort pacts within the power sector include: recommended three fundamental changes dur- ing the first phase of the reform: (1) create a new Power sector tariffs were rationalized to be industry structure that would separate genera- more in line with the long-run marginal cost tion from the power network and establish the of supply. Supported through demonstration network in a "single buyer" position but compete projects (which required pricing reforms) for supply; (2) clearly separate government and and analytical work including the 1988 study enterprise functions and institutions; (3) design mentioned above, the Bank helped to intro- and implement a new legal and regulatory frame- duce the concept of long-run marginal cost work for the sector. pricing, at that time a new concept in China. The new Electricity Law of 1995 provided Since the start of reforms, power prices have the platform to implement the program, and risen more than 5-fold in nominal terms and, it was rolled out. The Bank steadily supported relative to other industrial output, since 1986, implementation of the jointly developed power have risen by 62 percent more. This was cru- reform and restructuring program. Bank support cial for China to meet its rapidly expanding was both for local-level implementation and pilot electricity demand in a least-cost manner. innovations by the beneficiaries of six new large A new, commercialized power utility set-up, power loans, and for a series of detailed national- largely separated from government functions level analytical studies and exchange activities. All and institutions, has been established. First- studies were conducted collaboratively, and most phase power sector reforms have been fully followed the basic model of convening the expert committees used for the original strategic study. 5 The four study topics were determined jointly "China: Power Sector Reform: Toward Competition and Improved Performance"(September 15, 1994). based on the specific implementation needs of 6 "China: Power Sector Regulation in a Socialist the evolving reform process. The topics were a Market Economy" (March 1997); "The Private (1) major effort to design a regulatory framework Sector and Power Generation in China" (February for the new sector structure (1997), (2) review of 2000); "New Waves of Power Sector Reform in China" (October 2000); and "Fostering Competi- the role of the private sector in power generation tion in China's Power Markets"(March 2001). 33 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION implemented. The new arrangements were tion, and strengthening the economic infra- codified in 2002 in the State Council's Docu- structure. ment Number Five. China's newly unbundled power industry now includes 5 large generat- Key Bank inputs: ing companies, as well as a number of smaller generating companies, 2 transmission compa- Lending: Lubuge Hydroelectric (1985): Yantan nies, and a series of local-level power distri- Hydroelectric (1986); Shuikou Hydroelectric bution companies. These power companies (1987); Ertan Hydroelectric (1991);Tianhuang- operate as commercial entities financed on ping Hydroelectric (1993); Yangzhou Thermal commercial terms by the wide range of finan- Power (1994); Zhejiang Power Development cial institutions now operating in the Chinese (1995); Tuoketuo Thermal Power (1997); market. In addition to long-term contractual Waigaoqiao Thermal Power (1997); Hunan arrangements with clear transfer prices cov- Power Development (1998) ering costs, power markets are beginning to AAA: "China: Power Sector Reform: Toward Com- develop to exchange power among the com- petition and Improved Performance" (1994); panies. China has established the State Elec- "China: East China (Jiangsu) Power Pricing tricity Regulatory Commission for the sector. Study" (1988); "China: Power Sector Reform: Government and power enterprises have Toward Competition and Improved Perfor- been successfully separated, and a new regu- mance" (1994); "China: Power Sector Regula- latory agency has been established. These tion in a Socialist Market Economy" (March accomplishments required arduous efforts 1997); "The Private Sector and Power Genera- over many years. China's success is even more tion in China" (February 2000); "New Waves of notable considering that it has occurred at Power Sector Reform in China"(October 2000); the same time the industry has added new "Fostering Competition in China's Power Mar- capacity at levels never before achieved by kets" (March 2001); "Establishment of a State any country. Nevertheless, additional reform Electricity Regulatory Commission in China efforts are still required to enable markets to a Suggested `Roadmap'" (2002); "Streamlin- function reliably and effectively; ensure the ing and Advancing Power Sector Reforms in lowest costs to consumers; and place more China"(2002) emphasis on consumer interests, competi- 34 INFRASTRUCTURE Innovation #10: Developing the market for off-grid photovoltaic systems Period: 1999­present to support the sustainable development of wind and PV technologies. Two project components The Innovation: The Government with the Bank directly support the development of the PV mar- has supported the development of the market for ket by (1) focusing on sales of systems meeting off-grid photovoltaic systems for rural users. quality standards, certification and quality con- trol, and effective after-sales service; and (2) Context: In 1995­96, the GOC's State Economic improving the quality of the products available in and Trade Commission (SETC) asked the World the market and assisting companies to compete Bank to help it identify priorities for power-relat- well. The focus on market, quality, and innova- ed renewable energy development in China. The tion has brought some Chinese companies to the study, carried out jointly, assessed the economic forefront of the global PV market. and financial viability of selected technologies and reviewed the institutional and policy issues Developing the PV market by supporting busi- affecting their development.7 It identified wind nesses to sell high-quality PV systems. The proj- farm development for grid supply and off-grid ect offers grant assistance to qualified, participat- photovoltaic (PV) systems as the most promising ing PV companies to establish businesses to sell technologies. high-quality PV systems on a commercial basis for rural customers in 5 provinces: Gansu, Qing- China-Bank Partnership: From this was born hai, Sha'anxi, Sichuan, and Yunnan; and 4 autono- the Renewable Energy Development Project mous regions: Inner Mongolia, Ninxia, Xinjiang, (REDP), approved on June 8, 1999, which aims and Tibet. In return for meeting minimum quality standards, providing warranties and after-sales service, and keeping adequate sales and finan- cial records, participating companies receive a grant of $1.50 per peak-Watt (Wp) of system ca- pacity sold. The grant recently was increased to $2.00/Wp for the systems that meet the recently introduced GB9535-1998 standard (equivalent to international standard IEC 61215). Participating companies also may apply for cost-shared grants, limited to $20,000 per company per year, to help companies obtain certification for products, im- prove product quality and financial management, conduct market surveys and promotion, and ob- tain technical training. These interventions have contributed to the development of a thriving PV market in China (see Impact section below). The 7"China: Renewable Energy for Electric Power," Re- port 15592-CHA (September 11, 1996). 35 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION result is that approximately 2 million people in To address these problems, REDP launched western China now get electricity where there a TA program to help manufacturers meet was none before. the project specifications and test and certify their products. Currently, 20 types of DC Enhancingtechnologicalimprovementandinnova- CFLs from 8 different manufacturers meet tion. To complement the demand-side activities, the project standards, which have become the project helps suppliers meet quality standards the de facto national standard. Compared and develop new and improved PV products. In- with the test made in 1999, the 2003 com- dustry-wide activities include the development of parative test shows that lamps are brighter, certification and testing facilities that enable man- more efficient, and last longer. ufacturers to have independent confirmation that In 2002 REDP organized a prequalification their components meet the project's standards. An test to assess the extent to which modules extensive program of comparative testing of vari- manufactured in China met the require- ous PV components, including lamps, controllers, ments specified in the international module and batteries, has been conducted so that buyers standard, IEC 61215-1993, and its equiva- can determine which components offer the best lent Chinese standard, GB9535-1998. Ten value for their purposes. Companies whose prod- Chinese module manufacturers participated ucts appear on the approved suppliers list may in the test. The tests were conducted in compete to receive grants to support research and 2003 by the Photovoltaic Testing Laboratory development to improve their products. of Arizona State University. In addition to testing, an international PV module expert Supporting the transition to national and interna- advised the manufacturers participating in tional standards.The project has supported a tran- the test on what modifications would be re- sition from local, project-based standards to na- quired to meet all certification requirements. tionally and internationally recognized standards. The test results with advised modifications China's acceptance of international standards were sent to the participating module suppli- has been reciprocated: two Chinese national ers. Today, PV modules made by 11 Chinese standards­­for PV controllers and inverters­­ manufacturers comply with GB 9535-1998, have been adopted as international standards by equivalent to IEC 61215-1993. Testing and the Photovoltaic Global Approval Programme, certification now can be done locally at two a Geneva-based international standards-setting Chinese centers that have international ac- organization. Two stories illustrate this transfor- creditation, achieved with REDP support. mation from national, project-based standards to Facilitatingaccesstointernationalmarketsfor internationally recognized standards. theparticipatingcompaniesbysupportingtheir appearance at international PV fairs and expo- In 1999 the National Centre for Quality Su- sitions, such as the 19th European Photovol- pervision and Test of Electric Light Sources taic Solar Energy Conference and Exhibition (Beijing) conducted a random inspection in Paris in 2004, and to events organized by of compact fluorescent lamps (DC CFLs) the World Bank. for solar PV systems in China. The results showed that the designed luminous flux and Impacts: Attribution is a difficult matter: REDP power values of all of the lamps were low; the did not create Suntech (see Box 3) one of the ma- measured value of the power of some lamps jor PV companies in the world, nor did it make was lower than the nominal value; and the PV companies become exporters. However, Chi- materials used in some cases were unsafe. nese and international PV experts and industry 36 INFRASTRUCTURE Box 3. Towards international competitiveness ­ Success of Suntech The success of Suntech, Wuxi Shangdu by its Chinese name, characterizes the achievements of REDP. Suntech, was set up in May 2002, at the time when REDP became operational. In 2002, Suntech obtained a grant to develop an intelligent controller for PV systems.The first project was successfully completed in 2003 and the production of the controller not only improved Suntech's own systems, but was marketed to other integrators, who also benefited. The grant provided amounted to 73,000 Yuan (47% percent of a total project cost of 155,000 Yuan). OnJanuary10,2005,ChinaDailyreportedonJanuary10,2005thatSuntechwouldinvestUS$20millioninresearchanddevelopment to explore new technologies. Suntech participated in the prequalification tests on modules and implemented the modifications suggested. It submitted improved modules for formal certification by the Photovoltaic Testing Laboratory of Arizona State University. In 2004 Suntech obtained IEC 61215-1993 certification, allowing and enabling it to enter lucrative export markets in Europe, the USA and Japan. Suntech is now a listed company in the New York Stock exchange (NYSE:STP) with a market capitalization of over US$4 billion and opera- tions in China, Japan, and the USA. In the four years since it started business operations, Suntech has increased its manufacturing capacity by 12 times, becoming one of the world's top 10 manufacturers of PV cells based on production output. participants recognize that the project's strong have been adopted by the Photovoltaic Global focus on market and entrepreneurial behavior, on Approval Programme, a Geneva-based inter- one hand, and on high standards and quality on national standards-setting organization. the other hand, steered the dynamic players in Most importantly, several Chinese PV com- China's nascent PV industry and market toward panieshaveacquiredinternationalrecognition excellence and global competitiveness. The result and are competing in international markets. has been a remarkable increase in the availabil- Many Chinese PV companies are recognized ity of high-quality components made by Chinese internationally and are exporting equipment manufacturers. One year before its closing date, of high quality at competitive prices. Meet- the project had achieved and even surpassed its ing the REDP standards has enabled many of development objectives: the PV companies to compete for PV sales in the context of PV projects funded by Bank The number of participating companies in and IDA loans and GEF grants. the project has doubled from 16 to 32. They report sales of 410,000 systems with a total Lessons: The benefits of a strong and competitive capacity of 9.2 MWp. local market, driving continuous product develop- Costs of PV systems have halved, from $14/ ment and innovation, have already benefited Chi- Wp at the start of the project to approxi- nese consumers and will continue to have a broad mately $7/Wp today. global impact. PV modules made by 11 Chinese manufac- turers now comply with the highest national Key Bank inputs: standard (GB9535-1998), which is equiva- lent to the international standard. Lending: Renewable Energy Development Project Chinese testing centers have secured inter- (1999) national accreditation. Two Chinese stan- AAA: China: Renewable Energy for Electric Power. dards--for PV controllers and inverters­­ Report 15592 CHA (September 11, 1996) 37 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION Innovation #11: Improving the efficiency and performance of the urban water sector Period: 1987­present In more recent years, particularly in major metropolitan areas, urban population growth has The Innovation: To meet the needs of rapidly shifted toward small and medium-sized cities. growing urban populations, Chinese municipali- In addition, the singular focus of many cities on ties have introduced corporatization, tariff reforms expansion has shifted to greater emphasis on im- to improve cost recovery, private sector participa- proving sustainability, efficiency, and equity. tion, and new financing mechanisms in their wa- ter and wastewater utilities. While not complete, China-Bank Partnership: The World Bank has these reforms have helped municipalities to rap- played an active and catalytic role in the evolu- idly expand water and wastewater infrastructure tion of China's water sector. The Bank started and capacity over the past 15 years. its involvement in the sector in the late 1980s through projects in large cities such as Shanghai, Context: In 1990 only 50 percent of China's urban Beijing, Tianjin, and Chongqing. Given their huge residents were covered by their municipal water investment needs and relatively advanced finan- supply, and only approximately 15 percent were cial and technical capabilities, these cities were covered by wastewater treatment systems. Water the logical starting point for Bank involvement. In was considered a public good, so users paid ex- each of these cities, the Bank helped to develop tremely low fees. the water sectors through a series of projects that Since then, Chinese cities have undergone responded to evolving needs. breathtaking growth. Urban populations grew The early Bank-financed urban water proj- from 302 million in 1990 to 564 million in 2005. ects focused on providing an overall planning With the deepening of market reforms, the cities framework and financing critical infrastructure. have undergone fundamental transformations, Subsequent projects turned their attention to in- including how they organize delivery of public stitutional and financial reforms. Long-term part- utility services. Once responsible for planning, nerships of the World Bank with China's "super financing, regulating, and providing service de- cities"enabled the Bank to engage in far-reaching livery, often at highly subsidized rates, municipal institutional development and pilot sector reform governments have sought to disentangle their initiatives, as well as provided the basis for engage- multiple roles. To improve the efficiency and ment with smaller and developing cities in China. sustainability of water infrastructure, they have More recently, a new generation of Bank-financed sought to strengthen the technical, institutional, projects is focusing on providing support to small- and financial capacities of water and wastewater er cities, particularly in the west and northeast of utilities. Since the late 1980s, the central govern- China, and often on a provincial level. ment has taken an increasingly forceful position Between 1990 and 2005, the World Bank sup- regarding environmental protection and directed ported over 30 projects, lending approximately extensive resources to it. Prompted by rising de- US$4 billion in wastewater and US$2 billion in wa- mand and sector reforms promoted by national ter supply. Together, including counterpart funds, government agencies, municipalities have pro- these projects accounted for approximately 5­10 moted corporatization, greater cost recovery, percent of China's overall water and wastewater in- and limited private participation in their urban vestment program. water and wastewater utilities. A 1995 World Bank report on urban environ- 38 INFRASTRUCTURE mental service management in China highlighted the poor state Figure 4. Wastewater treatment in China's Designated Cities: of water supply infrastructure, 1990­2004 almost complete absence of mu- 80 70% nicipal wastewater treatment, y 70 60% low water prices, and inefficient 60 public utilities.8 The report made apacitc y) 50% (%)etra 50 two major recommendations: (1) m3/da 40% 40 increase water prices to enhance 30% 30 water supply utility sustainability (million 20% and reduce water demand; and tmenteatrertawe 20 tmenteatrertawe (2) establish wastewater util- astW 10 10% astW ity companies operating on a 0 0% 1991 1996 2000 2004 2010 commercial basis. These recom- (target) mendations were pursued in all Wastewater treatment capacity Wastewater treatment World-Bank-financed projects, (million m3/day) rate (%) subsequently formalized in Chi- Source: Adopted from the Halon Sector Plan (World Bank and China, 1997) na's policies, and implemented throughout the country. In 2000 the State Council issued a his- toric "Circular on Strengthening Urban Water Sup- wastewater treatment utilities. Since the ear- ply, Water Saving and Water Pollution Prevention ly 1990s, World-Bank-financed projects have and Control." Among other issues, the circular was facilitated the corporatization of the waste- consistent with the Bank's recommendations to ac- water treatment sector throughout China celerate water pricing reforms and set a national by supporting cities to establish independent target of 60 percent urban wastewater treatment wastewater treatment utility companies by 2010 (see Figure 4). that run along commercial lines and generate The Bank's urban work contributed to the sufficient user revenues to cover operating introduction of these new practices and reforms costs and service at least the Bank debt. In through: 1999 this approach was adopted as national policy through a multiministerial notice. It Introducing tariff reforms and financial analy- called on cities to establish wastewater com- sis to improve the sustainability of urban wa- panies, collect wastewater treatment fees as ter and wastewater utilities. Comprehensive part of the water tariff, and start construct- financial analysis undertaken during prepara- ing wastewater treatment plants. tion of Bank-financed projects helps to ensure Developing innovative mechanisms to pro- project sustainability, including raising tariffs, mote more efficient planning and financ- ensuring government transfers, and improv- ing of urban infrastructure. Since 2000, the ing efficiency. Sewerage tariffs were first in- World Bank has promoted innovative financ- troduced to domestic consumers in China in ing mechanisms for the urban water sector. 1989. They were based on a sewerage tariff Shanghai serves as the flagship city for the study included under the Bank-financed 1987 new approaches. The Shanghai Adaptable Shanghai Sewerage Project, the Bank's first ur- ban water sector project in China. 8 World Bank, "China: Urban Environmental Service Demonstrating effective corporatization of Management." 39 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION Program Loan (APL), approved in 2003, sup- mercially oriented utilities, many which have ports new approaches including issuance of entered into arrangements with private sec- the first corporate bond (RMB $1.5 billion) in tor partners for build-operate-transfer (BOT) China's wastewater sector and developing a projects or joint ventures. Since 2000, the level pooled financing vehicle to support periurban of private sector involvement in China has ex- districts to construct urban infrastructure. ploded, and there now are approximately 200 water or wastewater projects with private Impacts: Driven by approximately RMB 350 bil- sector involvement. Commercially oriented lion (US$43 billion) and averaging approximately municipal utilities combined with extensive 0.4 percent of annual GDP, water supply cover- private sector involvement have prompted age in China's 661 designated cities increased the Chinese government to issue new policies from 50 percent in 1990 to 88 percent in 2004. relating to utility regulation, such as the 2004 Over the same period, wastewater treatment Ministry of Construction-issued sector regu- capacity tripled and stands at 45 percent. Overall lation and policy law on the "Management of urban water demand growth stabilized, and pol- Public Utility Concessions." lution discharges into the environment, although still high, decreased. While the Bank cannot take Key Bank inputs: credit for these major accomplishments, its con- tributions have supported China to: Lending: Financing Infrastructure in Large Cities: Shang- Bring tariffs toward greater cost recovery. hai Sewerage I (1987); Beijing Environ- From the mid-1990s, water supply tariffs have ment I (1991); Tianjin Urban Develop- increased substantially throughout China.The ment and Environment I (1992) average weighted water supply tariff has in- Promoting Institutional Innovations in Large creased by 50 percent since 1998 and stands Cities: Shanghai Urban Environment APL at approximately 1.5 RMB/m3. The increase 1 (2003) and 2 (2005); Tianjin Urban De- in the water tariff has significantly lowered velopment and Environment II (2003) water demand. Since 1995, overall industrial Regional Programs for Improved Water Quality water use has decreased by approximately 30 Management: Pearl River Delta Projects percent. Furthermore, despite rapidly increas- 1 (2004) and 2 (2007); Liao River Basin ing urban incomes, which usually result in in- Project (2001); Huai River Pollution Con- creased water demand, per capita domestic trol Project (2003) water use has remained stable. Full-cost wa- Technical Innovations: Ningbo Water and En- ter pricing, although still not achieved in most vironment Project-First Water Supply Ring Chinese cities, has become the national gov- Main in China (2005); Shanghai APL 2­­Larg- ernment policy. est Wastewater Sludge Facility (2005) Develop new models for urban water service Reaching Out to Smaller and Poorer Cities: delivery. Chinese government policy has pro- Henan Water Supply Project (2006); Liaon- moted new forms of water service delivery as ing Medium Cities Infrastructure Project part of the transformation to a market econo- (2007) my to attract investment and improve efficien- AAA: "China: Urban Environmental Service Man- cy. Chinese cities have responded in creative agement" (1995); "Stepping Up ­ Improving ways resulting in a wide variety of different the Performance of China's Urban Water Utili- institutional arrangements. Government de- ties"(2007) partments have corporatized to create com- 40 INFRASTRUCTURE Innovation #12: Incorporating international best practice in highway planning, design, finance, construction, and operation Period: 1985­present traffic, and tourism needs. The planning gave spe- cial consideration to poorer regions and environ- The Innovation: To facilitate the increasingly road- mental issues, such as avoiding environmentally dependent economic and social interactions sensitive areas. Having taken part in the overall among Chinese cities, China adopted interna- definition of the 7­9­18 plan, each province is ex- tional best practices in designing, financing, con- pected to define and design the specific provincial- structing, and operating the National Expressway level expressway routes within its provincial limits Network. to further serve its local economic and social needs based on the national plan. Context:WhenChinastartedbuildingexpressways in the late 1980s, its road network was very sparse China-Bank Partnership: Over the years, the relative to population and land area and of low World Bank has made more than 30 investment standard. From the outset, the Chinese govern- loans to finance construction of China's main ex- ment aimed to leapfrog a stage of development pressways (total value approximately $5 billion). and go straight to the construction of express- ADB has a similar track record. Both IFIs have ad- ways, the highest standard of road practiced in vised the national and provincial governments the US and western Europe. However, at that time, on many aspects of highway planning and man- China lacked any experience in the design, financ- agement, whether a part of project preparation, ing, construction, and operation of such highways. within the projects as TA, or independently as It sought the advice and financing of the World sectoral advisory studies. These aspects include: Bank and the Asian Development Bank. Over the past two decades, the two IFIs have helped carry out a major transfer of knowledge technology from countries with the most experience in this kind of expressway. The knowledge transfer and financial support have resulted in an expressway network that is contributing significantly to Chi- na's growth. Planned through the interaction of entities at the central and provincial levels, China's National Expressway Network (NEN) ultimately will reach all cities with an urban population of more than 200,000 and be some 80,000 km long (see Figure 5). The current NEN plan, also called as the 7­9­18 plan, includes 7 corridors radiating from Beijing, 9 north-south corridors, and 18 east-west corridors. The planning process defined the most important cities to be served and the most efficient network to connect them. In selecting the cities (nodes), the planning process incorporated economic and Expressway completed under Hubei Xiaoxiang Highway transport objectives, including trade and container Project 41 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION er roads. While understand- Figure 5. Investments in China's Expressways Compared to USA ing China's need to enhance and Japan economicbenefitsbyserving 160 population concentrations, 140 the Bank also demonstrated ways to keep environmental billion 120 impacts and resettlement $US 100 to a minimum. In addition, 80 through planning mod- estmentvIn 60 els, the Bank introduced 40 otalT origin-destination surveys 20 and a formal traffic forecast- 0 ing to China. The approach USA 1956­61 1961­66 1966­71 1971­76 1976­81 1981­86 1986­91 1991­96 helped to assess demand, Japan 1963­68 1968­73 1973­78 1978­83 1983­88 1988­93 1993­98 1998­2003 China 1985­90 1990­95 1995­2000 2000­05 project demand distribution throughout a road network, USA Japan China and realistically forecast traf- Source: China Expressways: Connecting People and Markets for Equitable Development fic levels on specific planned (World Bank 2007) new highways. Exposing Chinese profes- sionals to international best Introducing a new macro approach to set practice in expressways. During the 1980s, investment priorities within the National Ex- the Bank provided a long series of transport pressway Network based on economic cost- project courses (mostly on roads) through the benefit analysis and demand forecasting: The Economic Development Institute (EDI), the first Bank project, the China Highway Project, forerunner of the World Bank Institute (WBI). introduced the concept of feasibility studies. These courses lasted 2­3 weeks and covered The Bank team worked closely with local insti- important components of feasibility studies, tutions to understand the concept of vehicle competitive bidding, contract management, operating and economic costs as opposed to andFIDIC(InternationalFederationofConsult- prices. The collaboration re- sulted in an economic and financial feasibility study for the expressway, includ- ing analysis of toll rates and a sensitivity analysis that served as a template for fu- ture projects. The study led to corridor-based, rather than single-highway-based, planning logic to connect two cities, encouragement of the broader consideration of alternative alignments, and improvement of feed- Expressway completed under Hubei Xiaoxiang Highway Project 42 INFRASTRUCTURE ing Engineers) principles. EDI trained trainers hicle purchase fees. The IFIs provided TA in so that ultimately the courses were conducted their projects to enable China to learn quickly with limited foreign assistance. Subsequently, from international experience about financ- every project has had major training compo- ing techniques, toll pricing and management, nents comprised of domestic and overseas and approaches to private participation. The training covering issues such as planning, two banks also helped China review interna- design, economics, construction supervision, tional policies and practices regarding fuel tax and operations and maintenance (O&M) of and road funds. expressways. For many, the overseas training Piloting new institutional arrangements for was their first exposure to highway systems in managing the network. Implementation is not othercountries.Thisexperienceenabledthem the responsibility of the Ministry of Com- to see how others had approached highway munications (MOC) but of the provinces. development and operation. This widespread MOC's roles are to set policy, mobilize fund- training, especially for staff from the provin- ing instruments, and integrate and coordi- cial design institutes, has contributed to the nate the planning process at the strategic lev- rapid uptake of international best practice in el. The Bank's projects have worked closely China's transport sector. with the Provincial Communications Depart- Demonstrating holistic design and construc- ments (PCDs) to improve their planning and tion of road alignments that take aesthetic, management of roads. The activities range environmental, social, and safety concerns from corporatizing in-house services to put- into account. The Bank brought to the atten- ting in place systems to prioritize and allocate tion of the Chinese counterparts many new maintenance investments on the entire road aspects of road alignment that, when treated network, not just expressways. as a package, can significantly enhance the Developingtheconsultingandcontractingin- effectiveness and benefits of the road cor- dustry. The Bank's requirements for feasibility ridors. These include inclusion of systematic studies, properly designed roads, and carry- cross-sections, proximity of interchanges to ing out environmental and social studies have towns and cities, proper road network hierar- helped create a vibrant consulting industry chy with lower class interconnecting roads to in China. The introduction and adoption of link to main corridor nodes, location of service FIDIC created a new way of construction su- and rest areas, and safety requirements for both traffic and pedestrians. In addition, the Bank promoted the health and safety of high- way construction and maintenance workers, including safety at work sites and awareness of HIV/AIDS risks. Adopting international financing mecha- nisms for highway financing. From early on, the Chinese government adopted key deci- sions to mobilize the huge amounts of financ- ing that would be required. It decided that all expressways should rely on tolls, which could be pledged as security for bank loans, while the central government will provide necessary investment support through ve- Hubei Shiman Highway Project Site 43 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION pervision. The Bank's projects were the first in signs. Over 150 different traffic safety TA activ- China with to establish the triangular relation- ities have been undertaken on Bank projects. ship among the client, the contractor and an In 2007 the Bank supported the establish- independent consultant. The early projects ment of the Hubei Road Traffic Safety Train- used foreign supervision consultants who ing Center through a $500,000 grant from the were paired with local consultants to transfer Global Safety Facility. The Bank is currently their knowledge. Today, the Chinese consul- working toward leveraging these individual tants are doing most, if not all, of the supervi- safety activities to a stand-alone road safety sion on projects. The Bank's efforts stimulated project (see related New Area of Innovation contractors to tackle larger projects using Case #19). the appropriate equipment, staffing, and Introducing new techniques to manage and planning. The Bank's projects also financed maintain roads. The Bank supported several equipment for laboratories, environmental projects through training, seminars, and TA management, and maintenance. This support programs, to implement improved tech- has contributed to an overall improvement in niques and processes to plan road manage- the quality of construction and maintenance. ment. Computer applications for rational pri- Several provinces also have implemented a oritization of roads were implemented with significant shift for their intermediate main- assistance from international and domestic tenance (routine and periodic maintenance) consultants. Data collection equipment and work from forced account to contract-based often sophisticated multifunction vehicles procurement. Such schemes first were piloted from overseas were procured to provided and are gaining ground based on good per- comprehensive information on the state of formance and reduced maintenance cost. the road network. The combination of the Enhancing focus on traffic safety. The Bank road network information and the comput- was instrumental in raising the issue of traf- erized planning identified priority areas for fic safety. All project designs were carefully road investment given the available budget reviewed from a safety perspective, and the and investment priorities, thereby optimiz- Bank's comments resulted in improved de- ing the allocation of available resources. Impacts: Bank-financed highway projects have directly reduced travel time/distances and vehicle operating costs, and thus air pol- lution and GHG, in their target areas. Traffic safety improvement also has been observed in many cases. In addition, several proj- ects that took place in less de- veloped provinces contributed to local economic and social de- velopment. From an institutional perspective, these projects have been the means by which to transfer technology and of inter- Hubei Shiman Highway Project Site 44 INFRASTRUCTURE national good management practices that affect 2,123 RMB at project completion (end 1995) many aspects of highway planning, construction, to 3,864 RMB in early 2001. Along another and management. road built under the same project, famous lo- cal products such as flower wise mushrooms Reducing travel time and improving traffic safety. now can be transported quickly and export- The average distance savings from 6 recent Bank- ed to Japan. financed projects is approximately 24 percent.9 A tourism boom followed the completion Over time, the development of the NEN made of the Second Henan Provincial Highway just-in-time delivery possible. Traffic safety also Project, which improved access to the Qinba has improved because the new expressways are mountainous areas. The direct income from of higher standards and better design, even al- tourism between 1996 and 1999 increased though they often attract traffic from other exist- from 24.6 million yuan to 78.8 million, or ing roads of less robust condition. The number of more than 220 percent. The improvement of accidents on the existing roads was reduced by the road network also made relief operations some two-thirds for projects in Hunan, Hubei, possible in the case of earthquake, wild fire, and Anhui. Guangzhou's Second National High- flood, or drought. way Project (NH2) section reported a 40 percent Several hundred thousand surplus farmers reduction. Henan also experienced a significant along the roads took part in the construction reduction in the rate of accidents, although the of approximately 1,700 km of rural roads un- nature of the accidents is more serious, with an in- der the Second Henan Provincial Highway crease in the fatality rate related to higher speed Project. After completion, over 1,000 work- accidents. This statistic points to new challenges ers were employed part-time in road mainte- that will require the collaboration of several road nance activities, potentially increasing their safety stakeholders. annual incomes. Enhancing local economic and social develop- Developing the domestic highway construction ment. This effect came about mainly through im- industry. With the accelerated development of proved access to markets for local produce and to China's transportation network, a full set of service tourist destinations, and the creation of employ- industries also emerged. They range from private ment opportunities for local labor in road con- trucking companies, freight-forwarding compa- struction and maintenance. nies, and roadside facility operators to consul- tants, contractors, equipment suppliers, toll road In Shaanxi, after the improvement and new operating companies, design institutes, research- construction of approximately 3,900 km of ers, and vehicle manufacturers. The emerging ser- rural roads, the gross output value of agricul- vice industry is beginning to resemble the trans- ture and industry (GOVAI) per capita in the portation industry of many developed countries. affected counties increased from Y 1,770 in Notably, Chinese contractors now are capable 1992 to Y 2,730 in 2002 (approximately a 35 of undertaking large and complex projects both percent increase). In Henan, the estimated within and outside China.The capacity of local de- GOVAI in the counties affected experienced sign institutes also has grown with respect to the a 10 percent annual growth between 1999 and 2004. Under the Fujian Provincial Highway Proj- 9 Calculations based on reports from six World Bank- ect, in one road service area, the annual financed projects: Hubei Xiaoxian, Hubei Shiman, Anhui Tonton, Inner Mongolia Haiman, Jiangxi average per capita income increased from Ruigan, and Shaanxi III. 45 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION mendations of the study on the planning, financing, and operation of toll highways provided the analytical and methodological basis for the later development of a plan for the expressway network in Anhui. In Shaanxi Prov- ince, the highway mainte- nance study promoted mar- ket mechanisms in highway maintenance operations and enhanced the mecha- nization of maintenance operations to improve the quality and efficiency of Hubei Shiman Highway Project Site maintenance work. Key Bank inputs: special needs of expressways. Lending: Highway I (1985); Jiangxi Provincial High- Transferring technology and management prac- way (1989); Guangdong Provincial Highway tice. Thousands of domestic staff were trained (1992); National Highways III (1998); National through foreign and domestic studies and tours. Highways IV (1999); Jiangxi Highway II (2001); These transfers often took place during project Inner Mongolia Highway (2002); Third Henan implementation through training, studies, and HighwayProject(2007);HubeiXiaogan-Xiang- participation in implementation supervision. fan Highway (2003); Hubei Shiman Highway Project (2004); Jiangxi Highway III (2006) Local engineers, with foreign experts, super- AAA: "Guangdong Provincial Comprehensive vised the construction of the expressway us- Transport Study" (1991); "China: Highway De- ing the FIDIC contractual approach, which velopment and Management Issues; Options; helped raise the quality of the civil works and and Strategies" (1994); "China: Strategies for enabled the transfer of know-how. Road Freight Development" (1995); "Trans- Experience with competitive bidding was en- port in China: An Evaluation of World Bank hanced through the use of procurement advi- Assistance" (1999); "Roads Improvement for sors and contracting firms. Poverty Alleviation in China"(2000) In Anhui Province, the findings and recom- 46 POVERTY REDUCTION AND ECONOMIC MANAGEMENT/ FINANCIAL SECTOR POVERTY REDUCTION AND ECONOMIC MANAGEMENT/ FINANCIAL SECTOR Innovation #13: Introducing tools and methods for better macroeconomic management Period: 1992­2000 Premier Zhu Rongji and at his request elaborated in a note that was published in full in the People's The Innovation: Introduction of modern institu- Daily.10 The note became the basis of China's tions and policies for macroeconomic manage- "16 point program" for stabilization published in ment, including a modern central bank and tax the fall of 1993. Many of the proposed structural policies for a market economy. measures found their way into the communiqué of the 3rd plenum of the central Committee of Context: In the 1980s, overheating was a repeated the 14th Party Congress on establishing the so- feature of the Chinese economy. Furthermore, the cialist market economy. direct measures of control used to stop it led to a highly disruptive and inefficient stop-go pattern China-Bank Partnership: The Bank's second of growth. Deng Xiao Ping's famous "tour to the economic report on China already contained the south" in 1992 reignited reforms, but again the outlines of a comprehensive economic reform economy started to show signs of overheating. package needed to establish indirect macroeco- In the run-up to the 3rd plenum of the 14th Party nomic control. Similar ideas were circulating at Congress in the fall of 1993, the Bank helped set that time among Chinese reformers,11 but were the agenda for a transition to modern macroeco- rejected in favor of more gradual reforms focused nomic management with indirect, rather than on the enterprise system. The Dalian conference direct, policy tools. In its mission for the 1993 and its focus on fighting inflation helped make the Country Economic Memorandum (CEM), the Bank comprehensive reforms in institutions and instru- signaled the issue; and it was decided to use an already planned conference to pull together mea- sures to fight inflation. 10See Lou Jiwei, 1997, Macroeconomic Reform in Thus, the Dalian Conference became the China: Laying the Foundation for a Socialist Market platform on which the Bank with domestic part- Economy, (World Bank, Washington DC. 1997). ners set out short- and medium-term measures The appendix contains the closing statement of the conference by S.J. Burki, then Country Direc- that would help China fight inflation. These in- tor for China. cluded a revamp of the central bank and the tax 11See World Bank, China Long-Term Development system, commercialization of the banking sys- and Options (1985),14ff; and Wu Jianliang, Under- standingandInterpretingChineseEconomicReforms tem, and reforms in the intergovernmental fiscal (Mason, OH: Thompson, Southwester, 2005), system. The conclusions were presented to then- 78ff. 47 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION ments acceptable to the Government. Among the serve's model, the People's Bank of China estab- innovations proposed were separation of the com- lished inter-provincial branches, so as to reduce mercial banks from policy banks, rationalization impact of the Central Bank decisions on local of the tax structure, reform of intergovernmental governments, strengthen the independence of fiscal relations and budget management, and cor- the Central Bank. Since then, China's Central poratization of state-owned enterprises (SOEs). Bank gradually began to implement monetary The Bank followed up through studies and policy in much the same way as other market TA in each of these areas. The 1988 Tax Reform economies around the world. Report12 and the 1990 Banking Sector Study13 al- The 1989 tax policy report had proposed a val- ready had identified detailed proposals in these ar- ue-added tax (VAT), which required a much more eas. The 1993 report on intergovernmental fiscal sophisticated tax administration than the Chinese relations and budgetary policy14 further specified authorities had at the time. The 1993 report on reforms in these areas, followed by a 1997 pub- intergovernmental fiscal relations and budgetary lic expenditure management report (published in policy observed that much of the decline in the 2000).15 Several reports on state enterprises re- tax share and the central share of taxes was due forms helped set the agenda in this area.16 to weak tax administration. In the 1994 tax-shar- The Financial Sector TA started to address ing system reforms, the Government introduced a the weaknesses in the interbank payments and VAT and split the existing tax administration into a clearance system, and developed the (interbank) central organization and a local organization. The government bond market to replace the prior Fiscal Technical Assistance Project (FY1994) sup- forced placements of bonds. The bond market ported a pilot to establish new procedures, orga- enabled the development of an interbank inter- nization, and information system for the SAT. The est rate--the first market rate in China­­and 1997 public expenditure review (PER) (published gave the central bank indirect means of control- in 2000) observed that the Government's money ling the money supply by means of transactions was unnecessarily scattered in literally thousands on this interbank market. An additional element of bank accounts across the country. Following of the TA was a panel of international advisors consisting of key board members of central banks around the world. They were very influential 12World Bank, China: Revenue Mobilization and Tax in shaping the thinking behind the 1995 central Policy Development (1990). 13World Bank, China: Financial Sector Policies and In- bank law, and even­­unique in those days­­re- stitutional Development (1990). viewed a draft of the law. The 1993 decisions on 14World Bank, China: Budgetary Policy and Intergov- the socialist market economy enabled a more ernmental Fiscal Relations (1993). 15World Bank, China: Managing Public Expenditures professional set-up of the central bank, which for Better Results (2000). was reflected in the 1995 law. Most importantly, 16World Bank, China: Enterprises Management Re- in 1998, the People's Bank of China adopted a form: Issues and Options (1989); World Bank, series of reform measures: abolition of control China: Reform of State-Owned Enterprises (1996); World Bank, China's Management of Enterprise As- over size of loans; adoption of money supply as sets: The State as Shareholder (1997); World Bank, intermediary goal for monetary policy; reform of Enterprise Reform in China: Ownership, Transition, the deposit reserve system; restoration the open and Performance (1999); World Bank, Bankruptcy of State Enterprises in China: A Case and Agenda market in bond trading; and re-discount policy for Reforming the Insolvency System (2001); , World reform. Based on these reform measures, indi- Bank, Corporate Governance and Enterprises Reform rect financial control mechanism was primarily in China: Building the Institutions of Modern Markets (2002); World Bank, Exercising Ownership Rights in established, transforming from direct to indirect State-Owned Enterprise Groups: What China Can control. Making reference to the US Federal Re- Learn from International Experience (2003). 48 POVERTY REDUCTION AND ECONOMIC MANAGEMENT/ FINANCIAL SECTOR up, the authorities adopted the advice on treasury management Figure 6. Better macroeconomic management yields smoother and began to develop a pilot test growth for the Treasury Single Account 18 to consolidate all Government (Charge, in percent) 16 funds in one account. In 2001 14 the concept was gradually intro- 12 duced for all central government 10 spending (including, increas- ingly, extra budgetary funds) and 8 gradually is being rolled out in 6 every locality. 4 2 Impacts: The Bank's advice and 1978 1982 1986 1990 1994 1998 2002 cooperation with Chinese ex- Potential GDP GDP perts contributed to the reori- Source: NBS data and staff estimates entation of reforms toward a socialist market economy and to its implementation. As a result, since the stabilization in the mid- 1990s and despite major disruptions such as the Key Bank inputs Asian crisis and SARS, macroeconomic cycles have been more muted (see Figure 6). Inflation has re- TA: Financial Sector TA (1992) and Supplemental mained below 9 percent. The tax excluding tariff, TA (2000); Fiscal TA (1995) social security contributions and tax rebates, ac- AAA: "China: Country Economic Memorandum: counted for GDP ratio went from a low of 10.5 per- Macroeconomic Stability in a Decentralized cent of GDP in 1995 to 17 percent in 2006. Inter- Economy" (1994); "China: Country Economic est rates gradually were liberalized and, with the Memorandum­­MacroeconomicStabilityand exception of rural credits, no longer have a loan Industrial Growth under Decentralized Social- interest rate cap. Policy lending is channeled pri- ism"(1989);"China: Revenue Mobilization and marily through the three policy banks established Tax Policy Development" (1990); "China: Bud- in 1994. State enterprise reforms were implement- getary Policy and Intergovernmental Fiscal ed in earnest from 1998 onward, followed by rapid Relations"(1993);"China: Managing Public Ex- commercialization of the banks. penditures for Better Results" (2000); "China: Revenue Mobilization and Tax Policy"(1990). 49 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION Innovation #14: Strengthening banking regulation and supervision to safeguard the soundness of the financial sector Period: 1990­2002 growth, much of it financed by bank loans. How- ever, financial sector reform lagged behind, and The Innovation: As part of the establishment of a the sector's contribution to economic develop- framework for prudential regulation and supervi- ment was yet to be optimized. sion of China's banks, in compliance with interna- The Government increasingly saw the need tional best practices, a risk-based loan classifica- to take action. Banking risks had grown as the tion system was put in place. This risk-based loan financial sector had become increasingly liberal- classification system paved the way for reforms in ized without a concomitant prudential regula- banks' financial accounting, including the adop- tory framework. Outdated financial accounting tion of prudent accrual norms, loan loss provision- standards, including practices for classifying loan ing, and bad debt write-offs. These reforms en- portfolio quality and for writing off bad debt, hin- abled the supervisory authority and commercial dered accurate assessment of these risks. Loan banks to determine more accurately the banks' quality classification was based on the length of true performance and contributed to a system of loan repayment delinquency--not a reliable in- more robust risk management procedures. dicator of loan quality, in part because overdue interest could continue to accrue for an extend- Context: Following decades of central planning, ed period of time before a loan was classified as China practiced a mono-banking system similar delinquent. The outdated loan classification also to that of the former Soviet Union and other so- perpetuated a poor credit culture among Chinese cialist countries. In this system, the People's Bank banks. In underwriting loans, banks gave priority of China (PBC) served both as central bank and to collateral and guarantees, or even state own- a commercial bank. Prior to 1990s, the banking ership of the borrower, rather than to analysis of sector was predominated by wholly state-owned the borrower's cash flow. Loan portfolios were commercial banks, complemented by share-hold- typically under-provisioned, with general provi- ing commercial banks, urban and rural credit sioning under 1 percent. Furthermore, bad loan cooperatives. State-owned commercial banks write-offs were equated to debt forgiveness and (SCBs) played a dual role, serving as operating therefore rarely accounted for. As a result, nei- commercial banks and providing funds to desig- ther banks nor regulators had a clear and timely nated sectors according to government instruc- view of the true conditions of loan portfolios. It tions. As such they were quasi-fiscal instruments, was not uncommon for banks to be deeply insol- and lacked a suitable regulatory environment to vent, yet still reporting profit. practice prudential regulation and supervision. In Facing these challenges, the Government took the mid-1980s, the PBC spun off its commercial a number of actions to improve banking regula- banking functions to the newly created Industrial tion and supervision. The central bank had been and Commercial Bank of China to focus exclu- responsible not only for monetary policy, but also sively on the functions of central banking. for supervising banking, insurance, and securities. By the early 1990s, China's financial sec- In October 1992, the China Securities Regula- tor had come to a crossroads. After a decade tory Commission was founded, separating securi- of reforms, an increasingly large portion of the ties market regulatory functions from the Central economy was becoming market-oriented. The Bank. In November 1998, China's insurance indus- economy had registered years of strong annual try Regulatory Commission was created, and in- 50 POVERTY REDUCTION AND ECONOMIC MANAGEMENT/ FINANCIAL SECTOR surance industry regulatory duties were also sepa- An organization study was intended to as- rated from the Central Bank. Building the requisite sist the authorities to put in place a modern capacity to implement these new arrangements banking supervisory function supported by a was a challenging task. The PBC lacked not only rational organizational structure and profes- a prudential regulatory framework but also instru- sional staff. The study highlighted the key ments for continuous supervision. For example, ingredients for effective banking supervision, onsite examination focused on checking compli- includinganincentive-compatiblecompensa- ance with rules and regulations; offsite surveillance tion system, and discussed alternative struc- was rare. While PBC and other banks had been tures of banking supervision. The report operating within a framework defined in several contributed to GOC's subsequent decision government circulars and preliminary regulations, to create an independent banking supervi- there were no officially adopted laws and pruden- sory agency, separate from the central bank. tial regulations governing their business activities. On-siteexamination(andmanuals)ofselected Finally, for all the banks, financial-intermediating banks, with assistance of experienced con- and fiscal-allocating functions were blurred. sultants from then-Price Waterhouse LLP, focusedonrisk-basedratherthancompliance- China-Bank Partnership: The Government based regulation and supervision. The meth- recognized that successful implementation of odology and content of the examinations economic policy reform would require com- played a role in improving off-site monitor- mensurate improvement in the financial sector ing and on-site audit. This subproject was infrastructure. World Bank reports, including a subdivided into comprehensive examinations Financial Sector Policies and Institutional Devel- in which a CAMEL17 framework and rating opment study (December 1990), identified major were tested on selected Chinese banks, and impediments in and priorities for strengthening special asset-quality review using a risk-based, China's financial sector. At the GOC's request, five-category loan classification. The inclu- the Financial Sector Technical Assistance Project sion of pilot examinations helped to dem- was designed to assist the Chinese government onstrate the benefits of effective prudential to create the foundations for continuing financial supervision and, in particular, the need for a sector reform by strengthening financial sector risk-based loan classification system. infrastructure in selected key areas. The project supported adoption of a modern prudential regu- Impacts: The Bank's assistance contributed a latory and supervisory regime, including: step in China's path toward a framework of pru- dential regulation and supervision in compliance Introduction of prudential regulations. A set of with international best practices. Although some prudential rules and regulations was developed project sub-components did not reach intended together with PBC supervisory staff. The reg- results within the project's timeframe, the project ulations per se were not formally adopted, in helped Chinese financial sector regulators to be- part because at that time China did not have come familiar with new concepts and practices, formal legislation on banking regulation and many of which have ultimately been adapted into supervision. Nonetheless, the draft regula- China's banking regulation system. Some outputs tions helped to introduce concepts of modern prudential regulations, consistent with the 17 content and spirit of the subsequent Basel CAMEL is a US-Federal-Reserve-developed di- agnostic tool that measures the Capital adequacy, Core Principles on Effective Banking Supervi- Asset quality, Management, Earnings, and Liquid- sion, and served as an effective training tool. ity of financial institutions. 51 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION brought important direct impacts, in some cases a risk-based loan classification system has exceeding project expectations. For example, been in effect for all Chinese banks with var- the pilot onsite examination and its methodology ied phase-in periods according to specific cir- contributed to major changes in banking regula- cumstances. tion and supervision in China, including: The adoption of a risk-based loan classifica- tion system is believed to have improved the On completion of the Bank assistance in credit culture and underwriting practices of 1996, the PBC adopted and enriched the Chinese banks as well as catalyzed reforms onsite examination manual. Using the re- in related areas. These include more prudent vised manual has improved the effectiveness provisioning policies and bad debt write-offs, of the PBC's banking supervision functions, accrual norms, and more rational tax treat- resulting in the standardization of onsite ex- ment of financial losses. Not long after the amination practices by PBC staff across the adoption, and as a result of close coordina- nation. tion and cooperation of the monetary and In 1996 internal controls received priority at- fiscal authorities, interest accrual norms tention and were strengthened in subsequent were merged with international practices; years. The PBC tightened internal controls banks are subject to both general and specif- in its pilot onsite examination of banks. ic provisioning; and bad debt write-off is no After several years of experiments and dis- longer equated with debt forgiveness. Com- cussion, China abandoned the delinquency- mensurate tax policies also were introduced based loan classification system to adopt the to encourage banks to make provision for risk-based system. (1) In their examination nonperforming loans. Credit culture also has of foreign banks in China and Chinese banks been improved as cash flow increasingly has abroad, a group of professionals in the PBC been regarded as a primary source of loan re- Banking Supervision Department applied payment. the risk-based examination method, includ- ing the risk-based loan classification. (2) The To be fully effective, China's banking regula- proposed replication of the risk-based loan tion and supervision still requires enhancement, classification system received strong support including a coherent approach to risk-based su- from then-Premier Zhu Rongji, and a large pervision and good governance and management pilot was organized in Guangdong Province of banks. However, these positive steps have en- in 1998. After running a parallel or two- abled banks and regulators to better assess bank track system during which banks were asked performance. to report loan portfolio statistics based on both risk- and delinquency-based classifica- Key Bank inputs: tions, in 2001, China adopted the risk-based, five-category loan classification. After its TA: Financial Sector TA (1995); Supplemental Fi- establishment in April 2003, the CBRC has nancial Sector TA (since 2000) been advocating the implementation of the AAA: "China: Financial Sector Policies and Institu- five-category loan classification system, and tional Development"(1990) 52 POVERTY REDUCTION AND ECONOMIC MANAGEMENT/ FINANCIAL SECTOR Innovation #15: Supporting trade liberalization and World Trade Organization accession Period: 1997­present impacts of WTO accession. The efforts shown by the Chinese Government in cooperating with the The Innovation: In the accession process, China Bank to implement these activities also demon- rapidly reformed its trade and economic policies strated China's determination to integrate into the to comply with WTO requirements. The country multilateral trading system. also undertook a major initiative to systematically assess and identify options to reduce the growth Combining research, technical assistance, and poverty impacts of WTO accession on rural and capacity building to help China align and vulnerable populations and specific sectors of the trade regime and institutions with WTO the economy (see Figure 7). requirements. Building on the earlier GATT work, the China 2020 study provided anoth- Context:Fromtheearlydaysofreforms,Chinahad er benchmark on the deepening reforms of been gradually opening up its economy by estab- China's trade regime. In the late 1990s, a trust lishing Special Economic Zones in 1979­81. The fund supported the establishment of an in- Bank's ForeignTrade Reform reports, published in formation and center and training program 1988and1994,werehugelyinfluentialintheearly on WTO accession within the then-Ministry of stages of China's application to resume its status Foreign Trade and Economic Commerce (now as a Contracting Party to WTO's predecessor, the MOFCOM). Follow-up Bank research, capacity General Agreement on Tariffs and Trade (GATT). building for local researchers and analysts on The Bank's reports provided China with informa- trade issues, and TA to the WTO negotiations tion on the menu of reforms needed to move to team further facilitated accession to the WTO. a market-oriented trade regime. However, in the Through the Economic Law Reform project, early 1990s, distortions remained high, with high the Bank and WBI helped responsible agen- tariffs, exchange rate overvalu- ation, many nontariff barriers, and mandatory trade through Figure 7. A great leap outwards foreign trade corporations for a range of goods. Trade policy 70 7 reform at that time focused on 60 6 China's unilateral policy, rather 50 5 than on bi- or multilateral policy GDPof 40 4 frameworks. GDPof centerP 30 3 centerP China-BankPartnership:AsChina 20 2 prepared for accession and then 10 1 implemented its commitments, 0 0 the Bank helped by advising on 1978 1981 1984 1987 1990 1993 1996 1999 2002 the design and implementation Merchandise trade FDI of trade-related laws and regu- lations and by assisting China Source: World Development Indicators data and staff estimates to assess options to reduce the 53 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION cies, including the State Council, to ensure the Bank's development economics group, China compatibility of numerous business laws with country team, and local partner institutions WTO requirements and to build the capacity (including Peking University, Tsinghua Univer- of GOC officials to implement WTO-related sity, CENet, and other training centers), WBI reforms. The Bank provided a conceptual has provided both face-to-face and distance framework (of what to assess and how) that learning activities. Using a research capacity- helped the Chinese assess the potential im- building approach, the Bank worked with Chi- pact of certain negotiating positions, includ- na's Development Research Center (DRC) and ing through the use of computable general other partners in a research project on China equilibrium monitoring. and the WTO. WBI also invested in collaborat- Introducing strategic analysis to help China ing on local research reports; training local assess impacts ofWTO accession and identify trainers; and developing CD-ROMs, DVDs, and complementary policy options. To help the a bilingual website with 7 training modules GOC to design complementary policies, the ("China:WTO and Development: Policy Reform Bank also sought to provide strategic analy- and Strategy in the Post-WTO Era"). sis of the economic impact of WTO-related reforms. With assistance from DFID and Impacts: other donors, major Bank-led studies as- sessed impacts of WTO accession on par- Helped China gain much improved analysis ticular sectors and vulnerable populations. of the implications of WTO accession for dif- The work highlighted the small adverse ef- ferent sectors and for poverty and inequality. fect of WTO accession on rural poverty and Research conducted through the WB-GOC the importance of complementary counter- partnership was among the very first analy- vailing policy measures, especially in rural sis to examine empirically, based on data, the infrastructure and education (which the likely consequences of various WTO-related GOC has undertaken at a rapid rate). Bank- policy reform options. This analysis support- supported studies also strongly articulated ed China's WTO negotiating team, informed the importance of liberalizing labor markets policy-makers of options to deal with these and reducing barriers to internal trade to consequences, and raised the visibility of the reduce poverty following WTO accession. set of issues and options for complementary A 2004 Bank report summarizing analytical actions. work that had been ongoing for a number Helped to build network of people trained to of years helped set the agenda for China to understand WTO rules, make use of them as adjust domestically to the 2001 WTO ac- a path to improve economic development, cession. and design complementary policies. More Developing a complementary training net- than 5000 Chinese officials/managers/train- work. Begun in 1999, theWorld Bank Institute's ers have been trained through WBI learning (WBI) trade program in China (sponsored by activities in the last 7 years. Partly as a result, Italian trust funds) has moved from addressing China generally has met its WTO obligations, pre-WTO accession challenges to post-acces- and accession itself has provided strong im- sion issues. In the earlier years (1999­2003), petus to growth. The work also built capac- theWBI training reached many central govern- ity to design and implement complementary ment ministries and think-tank; it now reaches policies, based on research, which showed officials in the remote provinces via distance that different groups would fare differently learning (2003­present). Together with the under WTO, and capacity building. 54 POVERTY REDUCTION AND ECONOMIC MANAGEMENT/ FINANCIAL SECTOR Together with other sources, provided an im- Key Bank inputs: portant platform for China's move to empha- size the creation of a harmonious society. The TA: Economic Law Reform (1994), WBI trade pro- research galvanized domestic policy-makers gram and researchers to take on these issues and AAA: "China: External Trade and Capital" (1988); to mainstream them in local research insti- "China: Foreign Trade Reform" (1994); "China tutions. At the broadest level, the WTO work and the WTO: Accession, Policy Reform, and sharpened consciousness of the rural-urban Poverty Reduction Strategies"(2004) divide and awareness of the uneven spatial WBI senior policy seminars: and sectoral implications of accession. The Pre-WTO period:"International Trade and Glo- GOC has taken several important steps to ad- balization"with Peking University, Beijing, dress the concerns expressed in Bank reports. China, July 1999; "Global Integration and In particular, the hukou (urban household WTO Accession: Challenges and Oppor- registration) system is being relaxed; rural tunities," jointly organized with Tsinghua out-migration is now actively encouraged; University and linked to 8 cities; "WTO and specific localities are taking steps to im- Accession, Policy Reforms and Corporate prove local investment climates. Strategies," policy seminar held with the Integrating WBI learning activities with advi- State Trade and Economic Commission sory services (jointly with EAP and DEC) was (October 2001) instrumental in improving the quality of do- Post-WTO period: "Trade in Services in the mestic trade liberalization and strengthening Post-WTO Era," face-to-face joint seminar the consensus around pre- and post-WTO re- with National Development and Reform forms. Local capacity has been strengthened Commission (NDRC) (September 2003); as quite a number of trainers /researchers "China's Agricultural and Fiscal Policies in supported by WBI have taught in WB and oth- the Post-WTO Era" joint seminar with the er training courses. Partner institutions have Ministry of Finance (September 2003); offered similar courses by Tsinghua University "Trade in Services: Global Trends and and CENet that were developed jointly with China's Position,"distance learning course WBI. China's continuing demand for trade-re- jointly organized with Ministry of Com- lated learning and analytical contributions by merce (October 2006); "Agricultural Trade the Bank, even following its accession to the and Support Policies to Poverty Reduc- WTO, reflects the success of this program. tion,"distance learning course jointly with the Ministry of Finance (November 2006) 55 RURAL DEVELOPMENT RURAL DEVELOPMENT Innovation #16: Using large-scale land rehabilitation to protect the environment and improve livelihoods on the Loess Plateau Period: 1994­2005 beyond the direct project site, and several prac- tices demonstrated by the project have informed The Innovation: To reverse the vicious cycle of local and national policies. environmental deterioration that had impover- ished generations of local people on the Loess Context: The dry and remote Loess Plateau region Plateau, an integrated package of large-scale is the middle catchment area of the Yellow River land rehabilitation, new agricultural practices, and covers 640,000 km2. The plateau is home to and local economic activities were introduced in more than 50 million poor farmers. Centuries of specific areas. With support from 2 Bank-financed overuse of the natural resources and unsustain- projects, the package of new practices was pi- able farming practices combined with large and loted in 9 watersheds. Gradually refined over growing population pressures have caused mas- time, it came to be regarded as one of the largest sive environmental degradation, downstream and most successful water and soil conservancy floods, and widespread poverty in this area. This programs in the world. The set of interventions region has had the highest erosion rates of any demonstrated on the Loess has been adopted place in the world, low crop yields, and people Contour planting of black locust trees at early project ... the same location in 2004. implementation stage ... 57 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION who live in near-subsistence conditions.The once- yields, and permitted more diversified crop- fertile soil was blown by strong winds that caused ping patterns. dust storms so large that they could be tracked by Key dams built on the sediment deposits, re- satellite and their effects were felt in Beijing. Each duced flood risks, and helped provide water year, 1.6 billion tons of sediment clog the Yellow supplies for irrigation and village use. River and pose a serious flood risk to the lower Reforestation and the development of grass- reaches. lands resulted in planting around 400,000 ha Since the creation of the PRC, China has of shrubs and trees that provided economic had several campaigns, especially in the 1970s, to opportunities and reduced erosion. terrace the slope-lands and to increase the veg- Livestock development provided households etation cover on the plateau. At the same time, (HH) with income alternatives to unsustain- thousands of dams have been built to intercept able farming practices. Over 300,000 m² of sediment run-off in the gullies. These measures animal sheds were built and some 40,000 were aimed primarily at erosion control, and head of livestock were provided, including planners and farmers gave little attention to op- new breeds of sheep and goats. The invest- timizing agricultural production and maximizing ments in livestock and pens enabled the shift farm incomes. At the beginning of the 1990s, from open grazing, which had caused wide- the Government's development strategy for the spread environmental damage. Loess Plateau started to change. The Govern- Training, technical support, and institution- ment started to recognize the potential compat- building activities strengthened the insti- ibility between soil conservation and sustainable tutional capacity for project management, and productive agriculture. Thus, a key element integrated watershed management design, in this development strategy is the comprehensive monitoring and evaluation (M&E), participa- and integrated planning of individual watersheds. tory planning, and extension of new technol- ogies. These three activities also improved China-Bank Partnership: The two Bank-financed the research and development (R&D) capac- Loess Plateau projects (1994­2005) were designed ity of the existing research institutions in dry- to achieve sustainable development in the area land farming techniques, grassland improve- by increasing agricultural incomes and produc- ment, orchard and livestock management, tion and by restoring ecological balance on 15,600 and impact M&E. km2 of land in twelve tributary watersheds of the Yellow River. A secondary objective was to reduce Impacts: These projects helped over 2 million sediment inflows to the Yellow River. people out of poverty in Shanxi, Shaanxi, and These two projects provided an integrated set Gansu provinces and Inner Mongolia Autono- of activities to achieve the aforementioned objec- mous Region. A much greater number of people tives, many of which enjoyed support and par- benefited from positive spillover effects or from ticipation by communities living on the Plateau. the replication of the approach throughout the While many of these activities had been used in- Loess Plateau and China. Even during the proj- dividually, the Loess Plateau was a major testing ects' lifetimes, ecological balance was restored in ground using them in an integrated package: a vast area considered by many to be beyond help. At the same time, the introduction of sustainable Terracing unproductive and marginal slope farming practices­­notably, penning livestock, land to create leveled fields was undertaken and terracing and replanting trees and shrubs­­ on more than 170,000 ha. Terraces virtu- doubled farmers' income, diversified employment, ally eliminated soil erosion, increased crop and reversed the environmental degradation. 58 RURAL DEVELOPMENT Direct income increase. Terracing typically quiring the Government to provide food to doubled crop yields with only a marginal in- the affected communities. Terracing lowered crease in input costs. The grazing ban led to the variability of crops significantly, as was the introduction of modern cut-and-carry- demonstrated in the years of severe drought based livestock production systems, result- experienced during project implementation. ing in an unexpected boost for the livestock sector. As a result of increased agricultural Approaches demonstrated under the project productivity and diversification, annual per extended beyond the target area and contributed capita incomes of project households qua- to broader policy and institutional reforms. drupled, and significantly exceeded those in non-project areas. The integrated approach to small watershed Natural resource protection and securing management has been adopted in other parts of long-term income opportunities. Uncon- of the Loess Plateau and across China. The trolled grazing, fuel gathering and subsis- projects helped convince planners and farm- tence, and slope-land cultivation of crops had ers that land conservation is compatible with left huge areas of Loess Plateau ecologically sustainable and productive agriculture and, devastated and reinforced the poverty of the indeed, that they are mutually reinforcing. poor population that subsisted on agricul- The "small watershed" approach is now a ture in this area. To protect soil and provide well-established concept in many parts of income, the project encouraged natural re- China and supported by numerous line agen- generation of grasslands and tree and shrub cies. China is acknowledged as a country with cover on previously cultivated slope-lands. "best practice"in integrated small-scale water- Replanting and bans on grazing enabled pe- shed management. rennial vegetation cover to increase from 17 The project helped to demonstrate the ef- percent to 35 percent. fective implementation of national policies Reduction in sedimentation. Sediment reten- on long-term land tenure rights, as well as to tion dams and other project activities hugely develop and apply complementary local poli- reduced sediment deposits into the Yellow cies. National legislation and policies focusing River. Much of the retained sediment was used on"capital farmland"were applied to terraced to transform unproductive land into valuable land built under the project. Supervision by cropland and transferred to farmers who for- domestic authorities helped to enforce these merly had cropped nearby steep slopes. tenure rights. The project also extended long- Employment and labor productivity. Labor term land-user rights to slope-lands with saving in crop production and the diversifica- project investments in orchards, forests, and tion of agriculture and livestock production shrubs. Better management, and consequent- enabled new on-farm and off-farm employ- ly higher farm income as a direct consequence ment. During the period of the second proj- of more secure land tenure, convinced many ect, the labor participation rate increased local governments to strengthen land tenure from 70 percent to 87 percent. Opportuni- rights beyond the project areas. ties for women to work have increased sig- The striking results achieved through a graz- nificantly, particularly from the new on-farm ing ban introduced under the project led employment generated by the project. to improvements in livestock management Food security and risk reduction. Before the across the Loess Plateau area. One of the project, frequent droughts had caused crops most significant innovations developed in the cultivated on slopes to fail, sometimes re- course of the project was the introduction of 59 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION a grazing ban. Because it broke with tradition, was well established and had dramatically this policy initially was perceived as opposing changed the landscape over an area many local interests and not possible to implement. times the size of the original project sites. However, when it was adopted in a few juris- dictions to protect plantations grown as part Key Bank inputs: of the project, the vegetation's recovery was so striking that political leadership at various Lending: Loess Plateau Watershed Rehabilitation levels adopted the grazing ban throughout Project (1994); Second Loess Plateau Water- most of the Loess Plateau area. By the end shed Rehabilitation Project (1999) of project implementation, the grazing ban Innovation #17: Improving irrigation efficiencies and introducing integrated water resources management for river basin management The Innovation: To improve water savings and al- resources crisis of multiple dimensions. China's location, and enhance the participation of water per capita availability of natural fresh water re- users, China pioneered integrated water resourc- sources is only one-quarter of the world average. es management approaches. These approaches In northern China, the availability is even lower: included making irrigation management reforms, approximately 700 m³/person. In the Hai Basin, introducing the concept of integrated river basin which includes Beijing, availability is only ap- management organizations and water users as- proximately 300 m³/person, comparable to the sociations (WUAs), introducing water quotas and most water-scarce countries. The problems are volumetric water pricing, and managing evapo- particularly acute in dry northern China--north transpiration (ET) to achieve real water savings. of the Yangtze River Basin--and even more so As a result, GOC's capacities to manage water re- in the catchments of the Yellow, Huai, and Hai sources in an integrated and participatory man- Rivers. These very serious water problems per- ner have greatly improved; water is used more ef- sist despite substantial economic development ficiently by agricultural, municipal, and industrial achievements, strong technical expertise, and users; and environmental flows are maintained. political stability. The importance of improving water resources management is well recognized Context: Over the past 40 years, China has made and considered a priority issue at the highest great strides in developing its water resources, levels of the Chinese Government. particularly in implementing infrastructure for The fundamental challenges in the water flood control, irrigation, hydropower, and water resource sector are not only technical but also supply and sanitation. These works have made concern the institutions and management instru- major contributions to economic growth and the ments. Economic development has had higher pri- provision and use of water to meet human needs. ority than water resources management and the In contrast, China's achievements in man- environment, and the institutional arrangements aging water resources for socioeconomic uses and practices for managing the scarce water re- and the environment have been less satisfac- source are rather inefficient and unsustainable. tory. Since the 1990s, China has faced a water Due to deforestation and destruction of wetlands, 60 RURAL DEVELOPMENT the natural water flow buffering and storage ca- cluded the introduction of new water resources pacity of the watersheds has been degraded. This management models, short- and long-term strat- has led to reduced dry season flows and a notable egies, and policy and legal reform. They encom- increase in the destructiveness of floods. Surface passed (1) the establishment of river basin man- water overexploitation has resulted in lakes and agement organizations; and (2) reforms at main wetlands drying up and insufficient environmental system (establishment of self-managing irrigation flows, including outflows to the seas. Groundwa- and drainage districts), lateral (bulk water supply ter overexploitation is seriously depleting valu- companies), and tertiary levels (water users asso- able water resources in northern China. The results ciations). have been annual lowering of water tables and Via a Bank-financed water resources portfo- eventual exhaustion of groundwater reservoirs, as lio including 21 projects totaling US$4.3 billion of well as extensive subsidence in many major cities. investment lending and analytical work, the Bank The quality of the remaining water resources is in- continued to assist the Chinese Government to creasingly deteriorating because of the discharge further develop innovative approaches to water of wastewater and pollutants from municipalities, management. Each project built on the experience industries, and agriculture. Thus, water users are of the previous one, and through this collabora- facing greater difficulties in acquiring sufficient tion, the Government has introduced a number water of a quality suitable for their purposes, and of new policies and programs in water resources the environment is being seriously degraded. management based on the following Bank-intro- duced innovations: China-Bank Partnership: Although limited in scale, Bank AAA and projects have helped China to in- Irrigation management reform through water troduce a fundamental change in water resource users associations and self-financing water management. Up through the mid-1980s, Bank- enterprises. WUAs are a community-based, supported projects focused mainly on develop- participatory means to improve the equity of ing water resources and rural infrastructure. In total, the Bank supported the rehabilitation of almost 4 million ha of irrigated lands and the expansion of the irrigated area by close to 1 mil- lion ha. However, beginning in the 1990s, projects such as the Yangtze Basin Water Resources Management Project, the Tarim Basin projects, and the Irrigated Agriculture Intensification II Proj- ect, along with irrigation system modernization and improve- ment, successfully introduced the concept of integrated and participatory water resources IntheTarimBasinprojects,farmersreceivingtrainingintheuseoftrichogramma-- management. This approach in- a biological agent for control of pests in cotton 61 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION irrigation water distribution, promote more duced (by approximately 800 MCM/year), and efficient water use, increase agricultural pro- on-farm water fees dropped by 24 percent. ductivity, and reduce water conflicts. Well- Concurrently, because of improved irriga- functioning WUAs open more opportunities tion techniques, agricultural productivity was for family members to work off-farm. The increased, and farm income rose by 29 per- associations thus broaden the economic de- cent. The most notable achievement was the velopment of China while raising household restoration of the environmental water flow incomes considerably. A comprehensive con- through the ecologically important "Green cept for irrigation management reform was Corridor"and the terminal Taitema Lake. first introduced to the Chinese Government "Real"water savings. Building on the achieve- in the beginning of 1990s via the Yangtze Ba- ments of irrigation water reform and the use sin Water Resource Management Project. The of water quotas to improve water use efficien- reform introduced self-managing irrigation cies, the Bank introduced the innovation of and drainage districts (SIDDs), which included "real" water savings, achieved through reduc- water supply companies at the main and sec- ing the consumptive use of water by reducing ondary system level and WUAs at the tertiary evapotranspiration (ET). Evapotranspiration level. The project established 800 WUAs in 15 is water lost to the local hydrologic system SIDDs, and the successful WUA concept was through evaporation from the soil surface or promptly taken up by adjacent counties. The transpiration through the plants. The concept result was the formation of 1,500 WUAs out- was introduced in 2000 with the Water Con- side of the project area. servation Project (WCP). Evapotranspiration is Subsequent projects refined this concept reduced by a change in cropping patterns, ag- and showed a similar pattern of expansion ronomic measures, and irrigation techniques. outside the direct project area. In the Tarim Improving irrigation system efficiencies alone Basin II project, 34 WUAs were established. can result in less return flow and higher water Subsequently, however, an adjacent regional consumption. "Real" water savings concen- program on household water supply adopted trates on reducing ET that directly reduces the concept and created over 6,500WUAs.The surface and groundwater overexploitation Tarim Basin II Project integrated this concept and increases the availability of water for non- within the framework of river basin manage- agricultural uses and the environment. ment through the creation of the Tarim Basin A second innovation introduced by the Water Resources Commission. WCP was to adopt a comprehensive approach Water quotas and volumetric water pricing. to water saving. This approach integrated not Irrigation management reform enabled the only physical improvements to irrigation and introduction of water quotas and volumetric drainage systems but also a broad range of water pricing, instead of area-based water agronomic measures together with improved charges, to increase the efficiency of water water management focused on increasing use and the financial autonomy of irrigation yields per unit of water consumed. districts and WUAs. The concept of water quo- Integrated water and environment manage- tas in combination with volumetric water pric- ment. Integrated water and environment ing was used successfully in the Tarim River management combines the concepts of wa- Basin II project. As a result of this project, total ter management institutional reform, water agricultural water use was significantly re- quotas and volumetric pricing, and "real" wa- 62 RURAL DEVELOPMENT ment through policy and insti- tutional reform by improving horizontal, cross-departmental collaboration and vertical inte- gration between central, provin- cial, and county levels. This integrated approach emphasizes both point-source and nonpoint-source pollution control. A major innovation is the introduction of ET manage- ment as the key to solve the Hai Basin water shortage.The project includes estimating ET through remote-sensing techniques and using these estimates in a series In the Tarim Basin projects , the Green Corridor, including the Taitema Lake Area, of planning and management benefited greatly from the return of water after 30 years tools developed under the proj- ect. One goal is to reduce the net extraction of water resources to ter savings with water pollution control. The sustainable levels to improve water produc- purpose is to arrive at a model of river basin tivity and maintain socioeconomic growth. management that improves the sustainability A second goal is to sustainably allocate and of water resource and water quality manage- manage water resources among the various ment of both surface and groundwater. It re- water uses, including the environment. Six- quires the integration of technical and institu- teen pilot counties and the 2 main cities, Bei- tional innovations as well as comprehensive jing and Tianjin, are preparing Integrated Wa- coordination at the national and subnational terandEnvironmentManagementPlans.Their levels. objective is to reduce water consumption to The Bank first introduced the concept sustainable levels and to reduce pollution to of integrated river basin management in the improve water quality and the environment. Tarim Basin II Project. The project included provincial-level legislation establishing the Impacts: A key element throughout the Bank in- Tarim Basin Water Resources Commission and volvement has been to support the Government basin-wide water-use quota enforcement. For to move toward a system of integrated water re- sustainable groundwater management, the sources management that incorporates water us- Bank introduced the process of sustainable ers' participation. In partnership with the Bank, water and environmental management plans the Government achieved a number of important on the north China plain.The Bank introduced major successes: the concept of integrated water and environ- ment management in 2004 with the GEF Hai Irrigation reform and participatory wa- Basin IntegratedWater and Environment Man- ter management through WUAs. agement Project, to be completed by 2010. WUAs have brought about equity and reliabil- The project aims to integrate water resources ity of water distribution, large water savings, with water quality and environment manage- more efficient water use, higher agricultural 63 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION productivity, lower risks to farmers, increased tural water savings of up to 800 MCM/year, levels of inputs such as fertilizer and high used mainly to restore environmental flows. quality seeds, labor savings, and fewer water This project has received great attention in the conflicts. The introduction of WUAs­­by one Chinese water community and is beginning initial project­­increased water productivity to influence river basin management in much by over 40 percent; increased crop produc- more complicated basins, such as the Hai. It tion by up to 40 percent; doubled farmers' has wide-ranging implications for agricultural, incomes; improved technical, institutional, municipal, and industrial water users. and financial standards of irrigation systems; The focus on reducing water consump- improved cost recovery of irrigation system tion (evapotranspiration) to sustainable lev- management; and successfully integrated a els, while increasing water productivity and range of water storage, transfer, and irrigation incomes, while sustaining the environment infrastructure with irrigation management is being applied in the Hai Basin with cutting- reform. WUAs are now official Government edge remote-sensing techniques. Through policy, supported under the 2002 National AAA, the Bank is assisting to develop a nation- Water Law and by a 2005 policy circular issued al water rights administrative system based jointly by National Development and Reform on ET concepts developed and introduced Commission (DRC), Ministry of Water Resourc- by the Bank. In addition, China's National Ir- es (MWR), and Ministry of Civil Affairs (MOC). rigated Agriculture Water Savings Program The MWR is developing new policies to reform is undergoing changes to better adopt "real" upper-level irrigation management. water savings concepts, and irrigation and ag- Water quotas and volumetric pricing. The riculture are being managed in an integrated adoption of water quotas and water volumetric manner at the township level. pricing introduced in the Tarim Basin II Project The integrated approach is a fundamen- resulted in a fundamental change away from tal concept change. It is having a broad im- area based water charges. This resulted in (1) a pact on the Chinese water community in both significant reduction in water use by farmers; Governmental departments and academic in- (2) corresponding increase of 43 percent in wa- stitutions that address the challenges of wa- ter productivity; (3) incentives to farmers to in- ter resources management in the context of vest in improved irrigation techniques, higher continued socioeconomic development, en- value crops, land leveling, and fertilizer use; (4) vironmental degradation, and water scarcity. improved transparency, reliability and equity Other parts of northern China, particularly the of water distribution; and (5) a 25 percent in- Yellow River Basin, also are beginning to apply crease in farmers'average income. A change to these techniques. volumetric water measurement is now an inte- gral part of GOC's WUA development strategy. Key Bank inputs: Recently, the Government issued SC report 45, which adopts volumetric measurement and Lending: water charges as the nation-wide standard. Irrigation management reform through water Integrated water and environment manage- users associations: Yangtze Basin Water Re- ment. The best practice example of sustain- sources Project, Guanzhong Irrigation Im- able river basin management in the Tarim provement Project, Tarim Basin I and II proj- Basin brought about (1) institutional reform ects, Water Conservation Project, Irrigated at the river basin level with the establishment Agriculture Intensification II Project of the river basin commission; and (2) agricul- Water quotas and volumetric water pricing: 64 RURAL DEVELOPMENT Tarim Basin II Project, Water Conservation Environment Management Project Project, Irrigated Agriculture Intensifica- Integrated water and environment manage- tion II Project ment: GEF Hai Basin Integrated Water and "Real" water savings: Water Conservation Proj- Environment Management Project ect, GEF Hai Basin Integrated Water and Innovation #18: Formation of a national grain market and introduction of bulk grain handling Period: 1991­1995 more than 10 percent of total Government expen- diture. The Innovation: Modern, high-speed, bulk-handling At the time of the project inception, very little technologies were introduced in China to improve grain moved anywhere (at least anywhere outside grain marketing efficiency and increase capacity. of counties or even townships) in China. The idea Although the technologies involved have been well was that each locality should be grain self-suffi- proven and are widely used in developed countries, cient. When grain had to move, it almost always they were not well known to national engineers moved in bags on the backs of men. It could take specializing in grain-handling in China. Interna- many hours just to load a 10-ton truck (with the en- tional technical assistance (TA) consultants, knowl- gine sitting still and earning nothing all the while). edgeable in the current technology and modern A 40-car train could take 2 days to load, again typi- logistical systems, were engaged as counterparts cally with the locomotive sitting still and earning with national design engineers, construction super- nothing. Seagoing ships also were loaded bag by visors, and project implementation managers. This bag in the northeastern China ports for eventual pairing of consultants with national skilled person- shipment for export or to the south, with demur- nel, combined with considerable training, built local rage at $25,000/day for perhaps 2 weeks. At that capacity in the effective management of a national time, less than 10 percent of the Yangtze River's grain market. navigational capacity was being utilized. In all of China, there were only 600 grain rail-hopper cars, Context: As late as 1990, urban Chinese still re- usedonlytoferryimportedwheatfromTianjinport ceived grain ration cards that enabled them to to Beijing and return empty. In comparison, during buy rice, flour, and cooking oil at Government the same period, Canada had 36,000 hopper cars. grain shops at very cheap prices. These consumer The emphasis on local grain self-sufficiency also prices had not been changed since 1965. On the meant that food security was achieved through other hand, farm-gate prices for producers were very large (and very costly) grain stocks, instead of increased substantially during the 1980s. By 1990, through national and international grain trade. It the Government was supplying urban ration re- is estimated that a total of 3 billion jute bags were cipients with rice and wheat products at planned required for grain storage and transport. retail prices which were less than one-half their procurement prices and less than one-quarter China-Bank Partnership: In 1991 the World Bank of the free market prices. As a result, in 1990 the carried out a sector study, "China: Options for Re- Government's fiscal outlays for these grain sub- forms in the Grain Sector," which detailed weak- sidies amounted to approximately Y48 billion, or nesses in the system and potential remedies. This 65 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION A.BagandTraditionalGrainHandlingSystems Jilin Province Intermediate Depot ­"Straw Mat"storages Jilin Province Intermediate Depot ­ Bag Handling B.NewBulkGrainHandlingTechnologiesEstablishedUnderGDMP Dalian Xizui Port Grain Terminal ­ Silo complex and bulk conveyor system Dalian Xizui Port Grain Terminal ­ Loading corn for shipment by sea Jilin Province Intermediate Depot ­ Steel silos and wide diameter tanks Technology updates under the Grain Distribution and Marketing Project (GDMP) 66 RURAL DEVELOPMENT study was followed up with a US$1 billion ($500 documents. While there was much frustration million WB loan) investment operation (Grain Dis- among the international and national specialists tribution and Marketing Project) with the main during the project's early years, barriers to the objectives of modernizing China's grain logistics, new ideas and standards gradually succeeded creating a national grain market, and sharply cur- through a process of sustained engagement. The tailing the Government's losses on urban grain capacity of national bulk grain handling special- subsidies. ists strengthened, and the Bank team's persistent Most importantly, the project aimed to re- emphasis on basic technical adequacy, operation- place bags on all high-volume routes with bulk al cost effectiveness and functionality, and safety handling. Depots on rail and shipping routes were standards contributed to a number of significant equipped with conveyor systems, train and ship advances. The key technical areas in which sig- loaders, and unloading facilities. To effectively use nificant contributions were made include: such high-speed facilities, modern silos had to be built at hundreds of depots­­all of those bags Introducing rational planning methods to op- had been stored in flat warehouses that took up timize storage sizes, handling rates, drying a great deal of valuable space near shipping fa- capacity, and transportation cilities. A new hopper car for China was designed, Introducing flat-bottomed, large-diameter, and the project included funds for roughly 2,400 concrete storage tanks suitable for mechani- of such cars. To make use of the Yangtze River, cal handling, and related layouts design of large self-propelled barges were com- Developing mechanical and electrical techni- missioned. Seven river ports up the Yangtze were cal specifications to suit modern grain-han- equipped with these barges for bulk loading and dling methods and flow sheets unloading. The project constructed one of world's Using explosion proofing and dust-control most modern and largest grain terminals in Xizui systems at the northern edge of the Dalian port. Another Improving construction, manufacturing, and large terminal was constructed on China's south- installation quality ern coast, as the inlet point for an import rail cor- Improving the quality of dryers and other ridor to serve the grain deficit southwest of China. specialized equipment However, it is important to note that these Designing ports for operational flexibility and achievements did not come easily. Much of the potential future growth Bank's supervision effort was focused on guaran- Training programs and manuals for opera- teeing basic operational functionality and safety tions and maintenance. requirements, improving designs to achieve greater efficiency and flexibility, and strength- Impacts: The project's physical implementation ening basic construction and equipment qual- was quite successful. It included some 384 depots ity. There was initial resistance to much of this in half of China's provinces, forming 4.35 million technology transfer, and this resulted in project tons of modernized storage, and annual transfer implementation difficulties and significant delays. capacity of 18 million tons. It saved 55 yuan per For example, international technical assistance ton in handling cost. The Xizui Grain Terminal is for dust control and explosion proofing, improved now the highest throughput and most modern corn drying, and operations management, initial- grain terminal in Northeast Asia. Its advanced ly was not implemented. The procurement pro- facilities have attracted massive new investments cess was suspended for nearly a year until agree- from a variety of international partners. ment could be reached on basic dust control and This successful physical implementation on explosion proofing requirements in the bidding such a massive scale played a key role in devel- 67 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION oping a modern grain logistical system for China. involvement and intervention in the grain sec- Most profoundly, the project greatly expedited tor. The Government's role is now primarily to the the transition from bag to bulk grain handling in areas of operating a grain reserve and establish- China­the world's leading producer of grain. Now, ing producer floor prices. Urban grain prices have as all Chinese provinces are making the transition been completely freed, and rationing and coupons to bulk grain handling, their typical first step is were phased out. to visit the Xizui Grain Terminal and the project's network of modern grain depots in Liaoning, Jilin, Key Bank inputs: Heilongjiang, and Inner Mongolia. The project also supported grain sector re- Lending: Grain Distribution and Marketing (1993) form and liberalization during the preparation and AAA: "China: Options for Reform in the Grain Sec- implementation period. These reforms included: tor"(1991):"China: Managing an Agricultural the (1) deregulation of grain prices at all levels Transformation­Grain Sector Review"(1991) and liberalization of grain markets (including the export market); and (2) reduction of Government Innovation #19: Integrating poverty analysis and demonstration projects to identify and test new approaches to rural poverty reduction Period: 1992­present areas, and in households in which an adult is un- able to work and/or in which education levels are The Innovation: The Government piloted and re- lower. Therefore, although poverty reduction ef- fined new, multi-sectoral approaches in its direct forts have been very successful, the task of lifting poverty reduction programs in rural China. Based the remaining poor out of poverty has become on the findings of poverty research and analysis, increasingly difficult. Bank-financed demonstration projects introduced Prior to 1990, China's poverty reduction pro- new market-friendly, multi-sectoral approaches gram comprised only a limited set of single-year that combined improved poverty targeting, en- and single-sector interventions that were not capa- hanced access to off-farm employment, strength- ble of sustainably overcoming poverty in the worst ened basic social and infrastructure services, and affected areas. The statistical system also was not increased local participation to improve the effec- adequately directed toward rigorous assessments tiveness of direct poverty reduction initiatives. of where the poor were located and why they were poor. To maintain progress in reducing poverty, the Context: China's rapid growth over the past 25 Government wanted to explore new poverty reduc- years has been accompanied by unprecedented tion measures and modalities, including improved poverty reduction. However, although the overall targeting of the remaining poor. GOC also wanted incidence of poverty has dropped, the spatial and to secure more accurate and timely information to economic distribution of the remaining poor has understand the changing distribution and nature changed fundamentally. Remaining poverty has of poverty and the key factors that have restricted become increasingly concentrated in rural areas, the remaining poor. including remote mountainous areas, minority 68 RURAL DEVELOPMENT China-Bank Partnership: For more than 15 years, the World Bank has worked collaboratively with Chinese authorities to de- sign and implement innovations that have contributed to China's success in reducing poverty. This work has been underpinned by a strong two-way Government- Bank partnership between Chi- na's Leading Group for Poverty Reduction (LGPR), the National Statistical Bureau (NSB), and lo- cal and provincial governments on the one hand, with the Bank's rural development network and Development Research Group A Yi family in Yuexi County, Sichuan Province on the other. Also central to this effectiveness has been an integrated cycle of analysis, on-the-ground pilot and Qinba Mountains projects. With TA from projects supported by Bank financing and TA, and the Bank's Development Research Group and continuing feedback into the policy process. The substantial project support, the NSB estab- process began with the 1992 study, "China: Strat- lished a rigorous new poverty monitoring egies for Reducing Poverty in the 1990s," under- system for the projects' 61 counties. This new taken jointly by the Bank and LGPR.This study was poverty monitoring system has now been followed by the Southwest and Qinba Mountains adopted at the national level and rolled out Poverty Reduction Projects in 1995 and 1997; the to all of China's 592 poor counties, and NSB's 2001 study, "China: Overcoming Rural Poverty"; poverty monitoring and analysis capacity has and the ongoing Poor Rural Communities De- expanded greatly. velopment Project. Key Bank contributions have Establishing a new multi-sectoral poverty included assistance to upgrade poverty monitor- reduction model, with a new focus on en- ing, introduce a multi-sectoral and multiyear proj- hancing labor mobility as a key means to ad- ect approach, and strengthened targeting. dress rural poverty. The 1992 study also rec- ommended a multiyear project framework Introducingnewmethodologiestostrengthen for tackling poverty. It identified the need China's poverty monitoring system. The 1992 for a multi-sectoral approach to address Bank-supported poverty assessment analyzed poverty in the worst affected areas. The new the incidence, depth, and severity of poverty approach was to include supporting greater in China; identified key factors contributing to access to off-farm employment opportuni- poverty; and recommended actions to further ties, that is, "labor mobility"; strengthening reduce it. One of the study's key recommen- basic social services including elementary dations was the need to upgrade the poverty school education and health; improving ac- monitoring system. This recommendation cess to safe drinking water, rural roads, and led directly to explicit poverty monitoring other basic infrastructure; and enhancing components in the subsequent Southwest food security and higher incomes through 69 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION ManyProblems ManySolutions The parents of this family Village health stations can are ill and cannot maintain greatly improve health their farm production. and the availability of With very little cash basic health services. The income, the family does establishment of coopera- not have enough to eat tive health care programs and the children cannot is a major challenge in the attend school. poorest areas. Small scale water Iodine deficiency and other diseases storage systems supply are more common in the poor and drinking water during mountainous areas, and are an im- dry season in the Karst portant cause and effect of poverty. Mountains and improve health. A thatch roof school School attendance building in Pinglan nearly doubled in Village. Pinglan Village after completion of the new school building. Ethnic minority people Labor-intensive small enterprise development are heavily overrepre- can provide off-farm employment opportuni- sented among the poor. ties and a market for local farm production. Arable land resources are This worker earns Y450 (about US$50) per often very limited and month making mosquito coils from ground access to transport is tree leaves. very constrained. The agricultural resource Village-based base in some parts of manual the Karst Mountains is construction of not adequate for even rock-wall subsistence produc- terraces can tion. Overgrazing and increase fuelwood collection agricultural contributes to devegeta- productivity, tion of the hillsides and but is a costly some cases, severe solution. environmental collapse. Description of new poverty reduction approaches piloted under the China Southwest Poverty Reduction Project 70 RURAL DEVELOPMENT farm-level investments in terracing and munities and people with disabilities. These other land improvements, better seeds and recommendations are being designed and cultural practices, and diversification into implemented in the Poor Rural Communities high-value crops and animal products. The Development Project, which is underway, and Southwest Poverty and Qinba Mountains the proposed Sustainable Development in projects designed and implemented this Poor Rural Areas Project under preparation. proposed new multi-sectoral approach in 61 poor counties in 6 western provinces. Many Impacts: A key lesson has been the importance of of the projects' key measures, including the combining analysis with practice-oriented proj- multi-sectoral project model, improving the ects that test and demonstrate innovative ideas. poor's access to off-farm jobs, and giving Sustained project engagement provides time to the poor greater choice in determining the refine design issues in a"real world"context; visible activities they adopt to improve their well- results that garner the attention of policy-makers being, have become central components of for broader adaptation and scale-up; and a frame- China's official poverty reduction strategy. work and focal point that have attracted other ex- Working with Chinese partners to translate ternal assistance, such as Handicap International poverty assessment findings and the lessons and DFID financing for participatory approaches ofdemonstrationprojectsintooptionsforChi- to new project design. nese policy-makers. The experiences and les- The combination of analysis and pilot projects sons learned from the Southwest and Qinba conducted in partnership with Chinese authori- Mountains projects in turn informed national ties contributed to several important impacts on poverty reduction priorities and policies in China's poverty reduction programs and efforts. areas including labor mobility, poverty moni- These included: toring, and use of multi-sector approaches that give communities a menu of options. The Enhanced understanding of the changing Southwest project was deemed "best prac- distribution, nature, and causes of rural pov- tice" in terms of the close collaboration with erty in China, and increased poverty monitor- senior policy-makers in the hands-on design, ing capacity. An evaluation of the Southwest implementation, and evaluation of new pov- Poverty Reduction Project (SWPRP) noted erty reduction measures and approaches. that "the SWPRP poverty monitoring exercise Maintaining a long-term partnership with provided the impetus for China to establish a counterparts to refine and adjust poverty re- nationwide poverty monitoring system. Since duction programs based on experiences and 1997, China has conducted a national poverty analysis of changing needs. This cycle­­from survey that covers all nationally designated analysis to practical implementation to scale- poor counties. This national poverty monitor- up­­is being repeated and refined. The 2001 ing system was modeled on and drew heavily "Overcoming Rural Poverty" study included from the experience of the SWPRP." a review of poverty reduction programs in Contributions to the evolution of China's China and highlighted the importance of (1) national poverty reduction policies and pri- strengthening participatory approaches and orities. Poverty assessment findings and the better including civil society, and (2) refining results of demonstration projects informed targeting to better reach the remaining poor, public policy-making: (1) labor mobility be- particularly remote ethnic minority com- came a key element of the Government's own 71 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION poverty reduction program; and (2) projects nership with China, including the Southwest demonstrated the effectiveness of a multisec- Poverty and Qinba Mountain projects, have tor approach in China's most severely affected provided learning grounds for other countries areas and provided poor communities with a implementing poverty reduction programs. In menu of options that encouraged participa- May 2004, the Bank's poverty reduction work tion. Furthermore, in line with the recommen- on these projects was showcased during the dations of the second poverty study, the Gov- Shanghai Conference on Scaling up Poverty ernment has formally shifted from county- to Reduction. In October 2004, the Government village-based poverty targeting to designate chose the Bank to be the first recipient of its 148,000 poor villages. Poverty Eradication Award for International Examplesofgoodpracticethathaveinformed Agencies. other developing countries. The Bank's part- 72 RURAL DEVELOPMENT PART II. FORWARD-LOOKING CASE STUDIES D uring its nearly 30 years of reform and this new concept, the country will focus on opening up, China's development has achieving "five balances": between rural and ur- been wide-ranging and profound. Its economic ban development, inland and coastal develop- achievement is unprecedented. Since 1978, Chi- ment, social and economic development, nature na's GDP has grown at approximately 10 percent and human development, and domestic and in- per year and its per capita income has increased ternational development. In short, the country six-fold. After decades-long GDP-centered seeks to grow more sustainably and equitably. growth, a new set of challenges has emerged. In support of 11th FYP priorities, the World Chief among them is the need to shift from a Bank Group's new Country Partnership Strat- growth pattern that favors capital-intensive egy (CPS), approved in 2006, groups Bank ac- industry to one that is less resource-intensive, tivities under five strategic pillars: more driven by domestic consumption, and more equally shared among the population. Integrating China in the world economy Key to addressing these challenges will be the Reducing poverty, inequality, and social adoption of measures that spur greater domes- exclusion tic consumption, promote the efficient use and Managing resource scarcity and environ- conservation of natural resources, and place mental challenges special emphasis on developing rural areas and Financing sustained and efficient growth disadvantaged populations that have not fully Improving public and market institutions. shared in China's development achievements. How China integrates with the rest of the world, Within these strategic priorities, the "for- how it addresses domestic inequality and the ward-looking" cases below provide a range of challenges of continued rapid urbanization, examples of how the World Bank is working how it addresses natural resource constraints, with Chinese authorities on new approaches to and how it continues to manage the shift from address the new challenges that have emerged. an export-oriented to a more service-oriented The cases capture a broad range of interven- economy will have major impacts on the rest tions, many of which build on the experience, of the world as well as on China's large popula- knowledge,andrelationshipsdevelopedthrough tion. China's quarter-century partnership with the Adopted in 2006, the Government's 11th Bank. Some cases describe the introduction Five -Year Program (FYP) places the highest and adaptation of development approaches priority on promotion of a harmonious society that are very new to China. Others describe and implementation of a scientific concept of ongoing and newly initiated pilot activities that development. The "scientific concept of devel- have potential for scale-up and wider applica- opment"calls for a comprehensive, coordinated tion to address wider development challenges. and sustainable people-centered strategy to Building on the lessons learned through past promote the overall harmonious development collaboration, many of these activities seek to of the economy, society, and its people. Under address systemic reforms ­ through a combi- 73 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION nation of collaborative analysis, dialogue, and improve efficiency and results; new ways to en- pilot activities ­ that require deep knowledge of gage target beneficiaries in the design, imple- China's specific situation and that cannot easily mentation, and monitoring of development be achieved by policy analysis or by traditional activities; and new monitoring and evaluation development investment projects alone. (M&E)arrangements.Theinnovationsbelowalso Whiletheyaddressverydifferentchallenges, share common approaches including increased many of the innovations described below share upstream interaction between Government and common elements, including supporting China Bank teams in designing and implementing de- in introducing: new institutional arrangements velopment initiatives and greater attention to to help multiple agencies and jurisdictions bet- country rather than Bank systems. ter coordinate their development efforts; new development financing mechanisms that can 74 (CPS) PILLAR 1: INTEGRATING CHINA IN THE GLOBAL ECONOMY China Partnership Strategy (CPS) PILLAR 1: INTEGRATING CHINA IN THE GLOBAL ECONOMY I n 2001 the Chinese Government launched a `go and Africa. In November 2004, China established global' investment strategy to adjust its econo- the China-Africa Business Council (CABC) jointly my in line with economic globalization and tech- with the UN Development Program as a public- nological changes. FDI procedures were stream- private partnership aiming to support China's pri- lined and state owned enterprises and smaller vate-sector investment in sub-Saharan Africa. The enterprises and private firms were encouraged to second FOCAC conference was held in October invest abroad. Complementing deepened com- 2006 in Beijing, marking the culmination of Chi- mercial ties, China's foreign assistance programs na's `Year of Africa. A special fund was established also become more prominent, premised on equal- to encourage Chinese investment in Africa, and ity, mutual respect, trust benefit and reciprocity. the China-Africa Joint Chamber of Commerce was As a developing nation itself, China's state to state organized. financial cooperation represents a partnership, With China's heightened impact on global with recipients encouraged to develop in line with trade, capital and commodity markets and in- their national realities. Two policy banks, China Ex- creased interdependence with the global eco- imbank and China Development Bank also began nomic system, it will be important that China to play a more active role in supporting overseas participates effectively in multilateral institutions assistance and investment. and forums and that its policymakers have a good The 11th Five Year Plan fosters the continu- understanding of other large economies. Equally ation of this approach. China's engagement in important is for other countries'policymakers and Africa, which began far back in history along the citizens to understand China's economic system. Silk Road, gained new momentum in the 1990s. In Under the 2006-2010 Country Partnership Strat- October 2000, the First Forum of China-Africa Co- egy, at the Government's request, the Bank is sup- operation was held in Beijing. The Forum reached porting China's enhanced role through a variety of consensus on a wide range of issues and culmi- instruments, notably facilitating participation in nated in the adoption of two policy documents global development partnerships and cross bor- ­ the Beijing Declaration and the Program of Co- der learning and building the tools to understand operation on Economic and Social Development. and assess policy options and trade offs to enable Thereafter, the ministerial conference became a China to reap the full benefits of increased global tri-annual event convened alternately in China integration. 75 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION New Area of Innovation #1: Working in partnership to support China's increasing role in South-South cooperation and knowledge exchange Context/Challenge: Over the past 30 years, China to share these experiences with the rest of the has achieved the fastest economic growth of any world. In recent years, China and the Bank increas- country in the world and has lifted hundreds of ingly have cooperated on initiatives to facilitate millions of people out of poverty. In parallel, as the exchange of development experience and China has embraced economic globalization, its ideas between China and other developing coun- role is gradually shifting from that of a recipient of tries. Most recently, the Government and Bank are aid to that of an active partner with other develop- discussing how the Bank can contribute to China's ing countries. In recent years, China's engagement efforts to strengthen its own overseas develop- in developing countries has dramatically expand- ment initiatives. ed. China has made major commitments for for- As China's global role and integration grow, eign direct investment, trade, and development and its direct engagement with developing coun- assistance, including debt relief and large-scale tries continues to expand, the Bank is well po- training programs, particularly in Africa.18 These sitioned both to facilitate increased South-South Chinese interventions bring direct economic op- cooperation and to work with Chinese agencies portunities for other developing countries. China's that provide assistance directly to developing engagement also opens new opportunities for countries in the following ways: partner countries to tap China's extensive devel- opment knowledge and experience. At the same Working with Chinese partners to distill and time, expanding engagement brings new chal- disseminate China's own development expe- lenges, including the concerns of some nations riences to other countries and facilitate the over China's natural resource needs. sharing of its development knowledge and experiences with other countries. The Bank China-Bank Partnership: Throughout its engage- has supported local institutions to summa- ment, the Bank has worked with Chinese counter- rize China's experiences, and can further help parts to analyze China's unprecedented economic develop direct links between researchers and growth and poverty reduction achievements and trainers in Africa and China. For example, the Bank has helped China to distill and share the experience of China's Loess PlateauWatershed Rehabilitation Project with African countries. Analytically, the Bank also is working with Chinese partners to assess and disseminate analysis of the factors that have contributed to China's development achievements. 18 According to China's Ministry of Commerce, Chi- na's total investment in Africa reached US$6.27 billion in December 2006. Over 720 major projects have been completed in 49 African countries with The Shanghai Conference on Scaling Up Poverty Chinese assistance. In addition, China has trained Reduction opens on May 26, 2004 in Shanghai, China. over 14,600 African personnel in various fields. 76 (CPS) PILLAR 1: INTEGRATING CHINA IN THE GLOBAL ECONOMY Using distance learning to scale up China's debt sustainability and best practices in de- involvement in South-South learning activi- velopment assistance; and share experiences ties. Building on its existing collaboration, the and analysis on the development needs of Af- Bank will help institutions playing lead roles in rican clients. China's South-South exchange efforts­­most Supporting China's EXIM Bank efforts to in- notably the International Poverty Reduction crease use of new international practices to Center (IPRCC)­­expand capacities and net- strengthen the development effectiveness of works of training partners. Distance learning its concessional lending. At the project/prac- offers potential as a cost-effective way to help titioners level, the Bank can support knowl- Chinese institutions expand their networking edge sharing and capacity building in China's and connectivity. The Bank has begun col- EXIM Bank and other outward-investment en- laborating with the Foreign Aid Department tities in various areas, including international of MOFCOM, and its training arm on South- standards on procurement, financial manage- South learning, to coordinate high-level study ment, environmental and social safeguards; visits and to employ distance learning to help international practices such as on anti-money- disseminate poverty reduction experiences. laundering; and implementing results-based These institutions potentially also can play a design, appraisal, supervision, monitoring, role to increase the quality and relevance of and post-completion evaluation of projects. China-supported training and TA in other de- veloping countries. A number of Chinese uni- Potential Impacts: Bank engagement to build versities and knowledge institutions (Tsing- capacity of the key Chinese institutions and net- hua University, Shanghai National Accounting works that have been given responsibility for the Institute, Peking University) have established country's international cooperation can have a or are looking to establish partnerships with large potential impact. By bringing an internation- knowledge institutions in other developing al perspective to Chinese experiences, helping to countries. adapt these experiences to the context of African Facilitating participation of Chinese policy- developing countries, and disseminating current makers in information exchange and dialogue international understanding of critical factors for on global development, the Bank can provide aid effectiveness, the Bank can help to improve them with cross-country data and informa- the quality and impact of China's overseas coop- tion on poverty reduction strategies­­what eration and capacity building programs. worked, what did not, and why­­as well as on 77 CPS PILLAR 2: REDUCING POVERTY, INEQUALITY, AND SOCIAL EXCLUSION CPS PILLAR 2: REDUCING POVERTY, INEQUALITY, AND SOCIAL EXCLUSION C hina's success in reducing extreme poverty more balanced development among the different over the last quarter century has been re- regions, by encouraging cooperation and mutual markable. assistance among them and promoting urban- Despite this tremendous success in reducing ization to take advantage of the leading role of poverty, China's remaining poor still account for city clusters in driving development. The Chinese the second largest concentration of extreme poor government has also reconfirmed its plans to lift in the world after India. A number of assessments 148,000 officially-designated poor villages out of have concluded that as China's poverty rate has poverty by 2010. Substantial funding for poverty declined, it has become increasingly difficult to reduction, from three main channels, underpins overcome remaining poverty. Income inequality the implementation of these ambitious plans. has also risen. Bank Group activities support GOC efforts to To address these concerns, the Government's protect the livelihoods of the rural and urban poor 11th Five Year Plan aims to rebalance growth to who have a limited capacity to participate in Chi- sectors that require less capital and generate na's growth while also building the capacities and more jobs while also strengthening access to opportunities for those that can participate. The key services. It includes plans to construct a New cases below illustrate areas where the Bank is co- Socialist Countryside that will modernize agricul- operating with Government counterparts in their ture, build rural institutions, improve rural infra- efforts to introduce new approaches to eliminate structure and service delivery, and raise farmers' absolute poverty, build capacities of and econom- incomes. It seeks to improve education, health, ic opportunities for the poor, and facilitate the mi- and social protection services, and to promote gration of surplus rural labor to urban areas. 79 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION New Area of Innovation #2: Strengthening public finance at the local level for better service delivery Context/Challenge: Under the Government's 11th projects, mandates, and funds. County and town- FYP and program to build a New Socialist Coun- ship governments today, having lost agricultural tryside, many new programs are being rolled out, tax and fee income, are even more dependent including for rural compulsory education, rural on central, mainly earmarked, transfers. They face health, social security, and various types of small- an ever-growing multitude of tasks that they are scale (village) infrastructure. The central and pro- not adequately prepared to handle. Partly as a re- vincial governments' implementation approach sult, local budgeting and financial management relies heavily on traditional development projects, processes are inadequate and local government with innovations and earmarked transfers chan- incentives do not necessarily align well with na- neled down through the various governmental tional priorities. levels in the form of projects to address specific As a result, specific projects no longer have the development problems and to target specific ar- same relative impact in terms of improving local eas. government performance as before. In the 1980s Although China has greatly improved its ca- and 1990s, World Bank-financed projects often pacity to design and implement such projects, re- were an important "transfer from above" and had cent analytical work by the World Bank discussed a significant impact on county or township man- how accountability relationships (see Figure 8 for agement. Today's projects or programs­­whether a definition) between policy-makers, service pro- national-earmarked san nong programs (address- viders and citizens can be improved. In particular, ing China's three priority rural issues ­ agriculture, the effectiveness and efficiency of a largely proj- rural areas, farmers) or World Bank-financed­­ ect-based approach is undermined by the struc- compete with a multitude of similar interventions ture of the administrative and intergovernmental for attention at the local level. The consequence fiscal system­­and the very proliferation of such is less attention and a tendency to innovate only within a narrow aspect of the implementing line agency rather than improving the capacity of Figure 8. Accountability ­ A Relationship with Five Features local governments, sector-wide or even in overall public man- agement. Delegating Another serious conse- quence of the proliferation of Financing earmarked transfers is that it un- Actors (principals) Accountable actors dermines efforts to improve the including clients, (agents) citizens, policy-makers Performing including policy-makers, M&E of local government activi- providers ties. In an environment in which Informing several projects for the same or similar areas are being imple- Enforcing mented in parallel, interven- tion-specific M&E systems are Source: Adopted from World Bank (2004) inadequate to ensure the con- sistency between funding and 80 CPS PILLAR 2: REDUCING POVERTY, INEQUALITY, AND SOCIAL EXCLUSION Figure 9. Accountability Relationships for Public Service Provision Higher-level Policy-makers Framework / Regulations for Service Providers Framework / Regulations Upward accountability for Participation (objectives/targets; monitoring; scal transfers; appointments) Local Policy-makers Downward accountability Upward accountability ("state power"; (targets; nancing; monitoring; appointments) consultation) Service Providers Rural Citizens / Direct downward accountability Public Service Users (participation) Source: World Bank (2007), adopted from World Bank (2004) implemented activities, thus reducing account- China (see Figure 9), especially between central/ ability and impact. Moreover, narrowly focused in- provincial and local government. terventions do not have the ability to strengthen M&E capacity. Strengthening this capacity is much China-Bank Partnership: Based on its experience needed. The current system relies on monitoring globally, the Bank can support China's efforts to substantial amounts of data by individual imple- pilot new approaches for financing rural develop- menting agencies. Lack of data-sharing and har- ment that can improve the effectiveness of rural monization of definitions and methodologies development programs. Building on ongoing fragments the system, reduces reliability of infor- work in rural development, the Bank and China mation, and thereby hinders comprehensive plan- can work together to introduce new program- ning and budgeting. While the monitoring system matic approaches to finance public goods and is fragmented, comprehensive evaluation of poli- services in rural areas. cies, programs, or even sectoral performance is Moving toward sectoral grants linked to a rig- rare or limited to the central (and provincial) level. orous and transparent M&E system is a promising future innovation for implementing China's am- Rationale/Description: Integrated or sector-wide bitious rural development strategy. The Bank has approaches using block grants can improve the experience from many countries on the design of efficiency and impact of central Government re- performance-based conditional block grants to source transfers for building the New Socialist bring local governments' incentives in line with Countryside program. This would strengthen the that of national Government. This can reduce the accountability relationship for service provision in transaction costs of multiple, relatively small proj- 81 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION ects, each of which needs separate design, ap- sion-making, in particular at local levels. praisal, implementation arrangements, and M&E. It encourages a greater emphasis on achieving Potential Impacts: Through introduction of such and measuring end results while providing prov- approaches, China stands to gain major improve- inces and sectoral ministries greater flexibility in ments in the effectiveness and efficiency of rural achieving these results. public financing and service delivery. Potential A precondition for an effective implementa- benefits include: tion of block grant approaches is that responsi- bilities are at the "right" level. Recent and ongo- Improved delivery of publicly financed rural ing analytical work on rural public finance and services. Planning specific activities from Bei- rural public services provide the underpinnings jing to be implemented in Chinese townships for such innovations. For example, the analyses and villages leads to high transaction costs. suggest that too much is done at the county The possibility that funds allocated at the lo- level. On the one hand, financing (and other) re- cal level are better used is high­­with greater sponsibilities for some sectors such as health, so- impact for local as well as national priorities. cial security, and perhaps education might have Improved accountability of local govern- to move to higher governmental levels. On the ments. Supervising and monitoring an in- other hand, small-scale infrastructure or other dividual rural development project being communal services could be more effectively car- implemented over widespread rural areas in ried out through giving communities the main hundreds and thousands of villages is a formi- responsibilities for design and implementation. dable challenge in itself. As discussed above, Here, GOC can use the Bank to pilot new ways of if other projects or programs are being imple- integrating various rural development transfers. mented in parallel in the same localities, the Some impact already can be seen, for example, accountability established through an inter- in the Government's attempt to strengthen the ventions-specific M&E system is undermined. integration of various rural development trans- A sector-wide approach that combines block fers. Such arrangements can improve the impact grants with capacity-building activities at the of large resource transfers by improving the sus- local level and an M&E system that measures tainability of interventions, reducing the need for sector-wide performance would strengthen local counterpart funds, and demonstrating ap- the accountability system. Rather than relying proaches that achieve better results and increase largely on China's personal responsibility sys- capacities of local administrations. tem, such an approach would complement A second crucial element for implement- this enforcement mechanism with a trans- ing block grant approaches is to strengthen the parent mechanism that links performance to M&E system toward comprehensive, and at least amounts of funding or levels of responsibili- sector-wide, M&E of policies and interventions. ties that local governments receive. Definition and review of performance indicators Reduced costs of service delivery, reduced will strengthen alignment with policy priorities. transaction costs. Managing a multitude of Sharing and publishing data can increase its use rural development projects through many and reliability. China's strong evaluation capacity, different line agencies and governmental existing mainly in universities and research insti- levels carries substantial administrative costs. tutes, provides a base for strengthening capacity Through effective integrations, funding, M&E, and improving information for government deci- and implementation can be simplified; and 82 CPS PILLAR 2: REDUCING POVERTY, INEQUALITY, AND SOCIAL EXCLUSION administrative costs, especially at the local Project under preparation. Valuable lessons can level, can be substantially reduced. be learned from these experiences. However, the scope of integration under these projects is still Ongoing/Planned Bank-supported Activities: Cur- relatively narrow and confined largely within the rent Bank activities are already integrating funds implementing agency. More significant benefits from various programs and projects. For example, can be gained from integrating a broader set of re- the Changjiang and Pearl River Watershed Re- sources and transferring them to provinces, coun- habilitation Project uses funds from both estab- ties, and villages­­with the necessary institutions, lished domestic programs and World Bank loan M&E system, and capacity-building activities in proceeds; the same is planned for the Eco-farming place. New Area of Innovation #3: Promoting participation in building the New Socialist Countryside Context/Challenge: International experience GOC has launched a host of financial and admin- indicates that citizens' involvement can signifi- istrative initiatives, some intended to increase the cantly improve the effectiveness of development capacity of local governments to respond to local programs. Experience also shows that substan- needs.Yet, implementing the"New Socialist Coun- tial technical knowledge­­and political commit- tryside" in counties, townships, and villages is a ment­­are required to make participation work. challenge. Such a change also requires address- Consultation methods and support for local or- ing administrative, technical, financial, and social ganization can encourage effective local articula- constraints so that"the entire society is motivated tion of needs and preferences­­a prerequisite to to participate."19 While the need for increased par- improve local government responsiveness across ticipation is well recognized,20 China's recent No. a wide spectrum of services. To strengthen local 1 Document of 2007 calls explicitly for "bring[ing] accountability, improved information exchange is forth new ideas in the rural society management essential. system and mechanism." Despite great strides on the national level, al- While participatory development obviously leviating poverty is proving very difficult in many promotes a more active role for citizens, local areas of rural China. Among commonly-cited problems are that funds do not reach remote areas, in which poverty is concentrated; poverty 19 The GOC promotes its vision in "Notes of the program inputs do not respond to pressing local Central Committee of the Chinese Communist Party and the State Council on Advancing the needs; a paucity of incentives for local people to Construction of a Socialist New Rural Area" (De- organize has discouraged articulation of needs cember 31, 2005). This vision is reemphasized in and encouraged general passivity; and local gov- the recent No. 1 Document of 2007 titled "Sugges- tions of the central Committee of the Communist ernment agencies make decisions and control Party of China and the State Council on Devel- resources with weak public accountability. oping Modern Agriculture Actively to Foster the Within the 11th Five -Year Program's strong Development of a New Socialist Countryside in a emphasis on building a "New Socialist Country- down-to-Earth Manner." 20 For instance, the No. 1 Document of 2007 asks side," the Government now views enhanced com- to "establish a sound vital villager self-governance munity engagement as an indispensable ingredi- mechanism led by village Party organization, im- ent in "people-centered development."To combat prove the system of transparency of village affairs, and foster healthy development of rural grass-roots lower incomes and inequitable access to services, democracy...." 83 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION governments will need to play a major role in fectively and sustainably manage local water this transformation, actively promoting and ac- systems), farmers' professional cooperatives cepting participatory approaches at the commu- (to enable farmers to organize for more effec- nity level, while adopting more of a"service pro- tive production and marketing), and commu- vision'" mentality for themselves. Governments nity water-sanitation-hygiene committees (to can help to overcome these obstacles through promote integrated community approaches a combination of policy reforms and capacity- to water supply and waste management is- building activities that enable greater participa- sues). tion. Piloting rural public investment and ser- vice delivery that give community residents Rationale/Description: China has the opportunity greater control over local development de- to improve the effectiveness of its poverty reduc- cision-making, revenue to pursue their de- tion initiatives by scaling up successful efforts to velopment priorities, and responsibility for increase community involvement in the design, implementation. Such pilots expand tradi- implementation, and monitoring of development tional participatory processes, such as infor- programs and projects. mation and consultation, and put communi- ties in charge of procurement and financial China-Bank Partnership: Within the broader pro- management of publicly-funded projects. gram of GOC-World Bank cooperation for rural The State Council Leading Group on Poverty development, the Bank is well positioned to Alleviation and the State Ethnic Affairs Com- support the government in two critical aspects mission are piloting (or will pilot) programs of community participation. They are: (1) to to test the applicability of such community- strengthen the responsiveness of local govern- driven development (CDD) models in China. ments by encouraging clearly articulated expres- Similarly, the Ministry of Water Resources is sions of local residents' needs and preferences testing new approaches to involve the com- to which governments are ac- countable; and (2) to strength- en local capacity and design local incentives that encourage residents' active engagement in development processes. In- novative practices in which the Bank is assisting or planning to assist the Government in devel- oping participatory measures include: Identifying and disseminat- ing lessons learned from pi- lots to support the develop- ment of rural associations: Bank project activities are promoting functioning wa- Villagers in Guangxi constructing water storage tank they have chosen and ter users associations (to ef- designed with program assistance 84 CPS PILLAR 2: REDUCING POVERTY, INEQUALITY, AND SOCIAL EXCLUSION munity in integrated wa- tershed management in Gansu. Designing and piloting methods that promote im- proved natural resource management or more eq- uitable distribution of the benefits from resource extraction schemes. In forestry projects, commu- nity co-management pilots have strengthened incen- tives for effective manage- ment in forests and nature reserves. Research on pov- Women in Guangxi carrying stones out from underground water source for which erty-environment linkages community will buy, install and manage pump supports formulation of an incentives-based "poverty- environment nexus approach" to improve Potential Impacts: The potential impact of partici- resource management in poverty reduction patory development approaches is tremendous programs. The State Ethnic Affairs Commis- for China. Most directly, participatory approaches sion and the Bank are studying methods for can substantially increase the effectiveness of more equitable distribution of benefits from public investments through public investments resource extraction schemes in minority na- and services that better target the needs of the tionality areas. A key design aspect is seeking population; eliciting greater financial and other to ensure that benefits are accessible to lo- contributions from communities; encouraging cal minority communities as well as to local cost savings through procurement at the com- governments. munity level; and reducing misallocation of funds through increased financial control and transpar- These activities cut across all of the Bank's ency. Moreover, experiences, including in China, traditional lending sectors. A common element have shown that increased participation builds among them is increased emphasis on participa- better relationships between local governments tory development approaches to pursue institu- and the population, thereby increasing the effec- tional change. tiveness of the Government and diminishing po- tential sources of social instability. 85 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION New Area of Innovation #4: Controlling the costs of health services to maximize the impact of government resource allocations to health Context/Challenge: The 11th Five-Year Plan em- approach probably would be a mix of payment phasizes the need to improve social services deliv- methods. Case-based payments, such as Diagno- ery to the rural population. Toward this end, GOC sis-Related Groups (DRGs), and capitation already is committed to expand the coverage of the New are being used by a few NCMS schemes. In capi- Cooperative Medical System (NCMS) to all rural tation, for example, village doctors and Township counties by 2008. Achieving this goal will help ru- Health Centers (THCs) receive an amount per en- ral residents to meet the frequently overwhelming rollee that varies according to the person's age and financial burdens of medical care.These are impor- gender. tant steps in enhancing the access of China's rural Budgets linked to caseload­­not to popula- population to much needed medical services, par- tion and bed norms, as at present­­also are likely ticularly for patients who require hospitalization to feature in a mixed payment system, at least for for severe illness. However, these developments hospitals. The goal would be to ensure that a pro- on the demand side must be matched by steps to vider receives a fair payment for curative care that curb the escalating costs of care. If not, there is a is linked to the proper diagnosis of the patient, not danger that GOC's increased financial resources an unjustifiably large payment dependent on the devoted to insurance schemes will not improve drugs and tests that the provider chooses to deliv- health outcomes as greatly as desired. er.This change cannot be accomplished overnight, and there will inevitably be some services that, at Rationale/Description: One way to lower the costs least for a time, continue to be paid through FFS. of care is to deliver less unnecessary care. Reduc- Another step the government could take to ing unneeded care requires changing the way that protect the interests of patients and curtail the de- providers are paid. China's fee for service (FFS) system gives pro- viders an incentive to induce de- mand. Inducing demand brings them higher profits, particularly on drugs and high-technology care. Instead, it would be desir- able to shift to a system in which providers deliver only the care that people need and that soci- ety can afford. The innovation to be imple- mented would be to move from FFS toward a system in which providers are compensated for delivering basic care, public health interventions, and cata- strophic care, largely through A patient receiving checkup at a local clinic. Courtesy of Foreign Loan Office, prospective payments. The best Ministry of Health 86 CPS PILLAR 2: REDUCING POVERTY, INEQUALITY, AND SOCIAL EXCLUSION livery of unnecessary care would be to create an in- personal--public health interventions. stitutional separation between "purchasing" health care and providing it. This approach is being widely China-Bank Partnership: The Bank and its Minis- used in many other countries. The "purchaser" try of Health counterparts will use the proposed would be charged with assessing population needs, Rural Health Project to work with selected coun- identifying providers capable of delivering care of a ties in the project provinces to pilot the above sufficiently high quality at a reasonable cost to meet approaches. The Bank can draw on its worldwide these needs, monitoring providers' performance, experience to inform the China projects. However, and paying them through the prospective payment the approaches to be tested inevitably must be method. This arrangement would ensure that pro- tailored to China's specific circumstances and the viders are faced with a knowledgeable "customer," particular provinces in which the pilots are under- instead of poorly informed patients, to perform the taken. Careful evaluation of the pilots will be an purchasing function. essential part of the projects. The approaches of The purchaser would need to be institution- the successful pilots could be scaled up for wider ally separate from the government department application in the government's current health re- responsible for regulating providers. The former form. could be an office within the provincial Bureau of Health, or an agency outside the health bureau Potential Impacts: Reducing costs in the above reporting to the local health and finance bureaus. ways would have two important impacts. (1) It In either case, the purchasing agency would be would help to ensure that the significantly in- looking for technical support from higher levels of creased resources that GOC is planning for health government. The purchasing agency also would would be more likely to result in increased health be held accountable to secure better health out- outcomes, as opposed to merely increasing pro- comes from the additional amounts of govern- viders' incomes. (2) Given that many surveys cite ment health expenditure. The purchasing agency catastrophic care as an important factor in rural would require staff with skills in health care and impoverishment, lowering costs would make an health finance. Staff in NCMS and Basic Medical Insurance (BMI) programs may well have some of the necessary skills. Purchasing public health in- terventions could be either inte- grated in the purchasing of other basic services and catastrophic services, or handled separately. In the second case, the China Center for Disease Control (C- CDC) might be a candidate for the purchasing role. Alterna- tively, C-CDC could be an advisor to the purchasing agency and a partner in the delivery of popu- lation-based--but probably not Welcome new lives. Courtesy of Foreign Loan Office, Ministry of Health 87 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION important contribution to GOC's poverty allevia- completed analytical and advisory activities (AAA) tion objectives.These impacts would be especially study of the rural health sector. As noted above, likelyifgovernmentfinancingweremadeavailable the innovations would be piloted, on small scale, to "deepen"the coverage of the NCMS scheme for in a number of counties in the Rural Health Proj- catastrophic illnesses. ect. If the innovations are found successful, gov- ernment could scale them up in other parts of the Ongoing/Planned Bank-supported Activities: The country. proposed innovation draws heavily from the just- New Area of Innovation #5: Improving the quality of technical and vocational education (TVE) to respond to labor market demand Context/Challenge: With China's economy grow- and service sectors. Eighty percent to 90 percent ing at an average rate of approximately 10 percent of Chinese students in TVE are from the rural ar- in real terms over the past decade, the demand for eas; the rest are from the poorer segments of the skills has been strong, particularly in the coastal urban areas. Rural youths and the urban poor can region. The returns from an additional year of escape poverty through access to TVE. schooling rose from 4.0 percent in 1988 to 11.4 Since the introduction of the market-based percent in 2003. Despite the fact that China has reform, China has made substantial efforts to become the world's workshop, technicians and improve its previously fragmented and supply- senior technicians account for only 1.5 percent of driven technical and vocational education and the skilled workers in China. In contrast, accord- training (TVET) system. However, a significant gap ing to its Ministry of Education, Germany's senior remains between policy and practice. In part due technicians constitute 35 percent of its total skilled to the historically low priority accorded to TVET, workforce. weaknesses remain in, for example, the curricula, Matching the demand for skills with supply is school management capacity, the academic quali- key not only to sustain economic growth but also fication of teachers, and the quality assurance to alleviate poverty. According to findings from the Bank's most recent poverty assessment, only 2.5 percent of households whose adult workers have 9­12 years of education live below the poverty line ($1 per day), compared with 16 percent in households whose workers have fewer than 6 years of schooling. Post-compulsory education includes technical and vocational education (TVE). TVE has become an increasingly via- ble pathway for accessing higher value-added and higher paying urban jobs in the manufacturing Students trained to become technicians. Courtesy of Yantai Automobile School, Shandong Province 88 CPS PILLAR 2: REDUCING POVERTY, INEQUALITY, AND SOCIAL EXCLUSION (QA) mechanism. There are also questions about gether stakeholders from provider and ben- the appropriate role of public and private training eficiary groups to coordinate delivery and institutions. resource allocation. The Bank could also China is taking steps to address these issues. support provinces to use vouchers to buy The 11th Five-Year Plan (2006­2010) identifies services from private and public providers to TVET as one of its strategic priorities, with empha- stimulate the development of a training mar- sis to: (1) strengthen the linkages between enter- ket, as well as supporting MOE to develop prises and schools and the practical orientation of guidelines for accreditation of private train- TVET, (2) improve equity across regions and pro- ing institutions. vide more financial assistance to low-income stu- Improvingqualitybysupportingthecollabor- dents, (3) diversify sources of training by encour- ative efforts among the central line ministries, aging enterprises to provide on-the-job training provinces, employers, and schools to develop and increasing private trainers' participation, and modular, competency-based curricula using (4) increase public investment from each level of industrial standards and on a par with inter- government. national best practices. Developingmodelschoolstogetherwithpro- Rationale/Description: To sustain economic vincial and central authorities to: (1) test and growth and alleviate poverty, the Chinese TVET implement modular, competency-based cur- system must improve quality and become more ricula; (2) support competency-based teacher flexible to respond to market demand. Introduc- and principal training (for example, develop- tion of international benchmarking to gauge qual- ment assignment in industry and overseas ity, participatory processes to involve stakeholders training); (3) build an effective mechanism of developing policies and strategies, and systematic school management through involving indus- learning across government agencies, provinces, try; and (4) pilot innovation in school quality and schools, and piloting means to develop a assurance. An example would be to undertake training market offer opportunities to improve re- job analysis as a basis for developing training sults. specifications, institutional norms, standard equipment lists, course materials, student China-Bank Partnership: The Bank is working to skills assessment, and practical phase tests. support the Government's emphasis on TVET to This would also entail planning for teacher generate public goods through piloting school- professional development and course evalu- based reforms and innovations, strengthening the ation. capacity for policy analysis and evaluation, sup- Improvingequitybysupportingpoorercoun- porting the twinning arrangement between richer tiesandprovincesthroughrobusttwinningar- and poorer counties and provinces, and transfer- rangements. Examples could include provid- ring knowledge nationwide. Specifically, the Bank ing teachers and principals from poor areas and the GOC can partner on the following innova- development assignment opportunities in tions: model schools; providing joint programs to enable students from poor areas to come for Settingupaprovincial-leveltrainingauthority practical training in model schools in their fi- with government, industry, and worker par- nal year; and sending faculty members from ticipation that would have the responsibility project provinces to poor counties and prov- to guide policy development and resource inces. allocation for training. This authority would Supporting policy analysis and monitoring integrate the TVET system by bringing to- and evaluation. Undertake analysis to address 89 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION two key policy questions: (1) what is the ap- Potential Impacts: The project can add value by propriate share of TVE vis-à-vis general sec- (1)developingcompetency-basedcurriculausing ondary education? (2) How can an effective industrial standards in key trades within a quality TVE system be built in these times of rapid assurance framework; (2) undertaking interna- technological change and globalization? Use tional comparative analysis of students'cognitive monitoring and evaluation to inform policy skills and occupational standards for benchmark- concerning the outcomes of the following in- ing; (3) undertaking analytical work on financing terventions: TVET and developing a training market; (4) pilot- At the central level, undertake (a) a na- ing the use of training vouchers and setting up a tional census of public and private training training authority; (5) facilitating national policy providers on their course offerings, sourc- dialogues between industries and public and pri- es, and uses of funds, and internal and ex- vate training providers, across central and provin- ternal efficiency; (b) a survey of enterprises cial agencies, and among the coastal, central, and to assess the quality of training; and (c) an western regions; and (6) providing market infor- international comparative analysis of cur- mation on employment prospects and earnings riculum in key trades and analysis of na- to help students make wise decisions. The Bank's tional qualification frameworks from vari- international experience places it in a unique ous countries for benchmarking purposes position to bring the best technical knowledge to ensure competitiveness. to bear at the provincial level on these interven- At the provincial level, apply baseline mea- tions, which have the potential to more dramati- sure of cognitive outcomes to a sample of cally impact the country's much larger policy and students in general secondary education and investment framework. vocational education at the time of entry and measure again them again at graduation. The Ongoing/Planned Bank-supported Activities: Two instruments used are international tests to Bank-financed vocational education projects and help ensure that all students attain the cogni- a labor market development project have facili- tive skills essential to learn new skills in a rap- tated the adoption of policies to make TVET more idly changing workplace. demand driven, the diversification of sources At the school level, use tracer studies to track of funding and training provision, and develop- graduates' employment success by trade. The ment of occupational standards. In 2006, the State results are made available in the school's web- Council approved a new TVE project for Guang- site to provide market signals to new students dong, Liaoning, and Shandong to demonstrate for them to make informed decisions on their TVE to the rest of the country. Project preparation programs of study. is underway. Disseminate analytical findings and lessons of experience nationwide through periodic workshops. 90 CPS PILLAR 2: REDUCING POVERTY, INEQUALITY, AND SOCIAL EXCLUSION New Area of Innovation #6: Introducing a new approach to rural-to- urban land conversion and resettlement compensation Context/Challenge: China's recent rapid urban structure maintenance costs, and are inefficient economic growth and the sizable rural-urban mi- land use: a typical pattern for many second-tier gration are generating high demand for housing, Chinese cities. services, and manufacturing sites. As a result, such Moreover, the gap between real land market land is becoming increasingly scarce, and land values and what governments pay is a potential prices in urban areas have risen steeply.To respond source of social conflict between governments to this challenge, Chinese cities are enlarging their and farmers. Under the current regulation, the boundaries by converting peri-urban rural land compensation rates for land acquisition are based into urban areas (see Figure 10). While it would en- on agricultural productivity­­usually many times sure sustainable urban development, meeting this lower than the real market value of the land for its challenge also requires a new approach to rural to urban use. In addition to the issue of land value, urban land conversion and resettlement compen- the payment of compensation through agricul- sation. tural collectives requires attention and adequate Currently, all rural land is owned by the State, systems to ensure that compensation paid to the while rights to rural land use are held by agricul- collective reaches individual farmers. tural collectives. In recent years China strength- With growing demand for limited urban land, ened urban and rural land-use rights of individual potentially exacerbated by a possible future re- households. Nevertheless, China's Land Admin- laxation of the hukou policy (household registra- istration Law authorizes only governments to ac- tion system), governments have a strong interest quire land from agricultural collectives and to sell in ensuring that rural-to-urban land conversion land-use rights to the private sector. processes are more economically rational, socially This government monopoly over land-use equitable and better planned. In this context, the rights and the lack of a competitive land market economic and social resettlement and integration has distorted incentives governing urban land-use of thousands of farmers displaced from peri-urban decisions. It has led to some mu- nicipalities developing new ur- ban areas without proper plan- Figure 10. Urbanization Trends in China ning and long-term economic rationale, mainly to generate 60% immediate revenues. The lack 55% of infrastructure construction fi- 50% nancing available to municipali- 45% ties encourages them to develop 40% and sell land alongside major ex- isting highways, thereby reduc- 35% ing infrastructure construction 30% and financing needs in the short 25% term. This practice has resulted 20% 1990 1995 2000 2005 2010 2015 2020 in "ribbon" developments that increase travel distance, impede Source: China Statistical Yearbook 2005 intercity traffic, increase infra- 91 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION areas into the growing urban economy is being accorded high Figure 11. Mianyang Planned Urban Extensions priority. Rationale/Description: To assist China to address the challenge of rural-urban land conversion, the World Bank is working with the Government to pilot a new land acquisition and resettle- ment system through the re- cently approved Bank-financed Sichuan Urban Development Project (SUDP). This project ap- plies a new model to convert rural land to urban land that in- volves resettling rural residents in newly converted urban areas Courtesy of Alain Bertaud (2006) in the cities of Mianyang (see Figure 11) and Suining. The project is designed and data for future land policy reforms. to significantly improve the processes to convert land from rural to urban in China. China-Bank Partnership: SUDP addresses the proj- The main urban problems in Sichuan's cities ect cities' challenges by supporting increased such as Mianyang and Suining are limited urban infrastructure investments in the context of up- space, high population densities, and lack of fi- graded spatial planning efforts and strengthened nancing for infrastructure development.This com- urban management. The project will develop and bination has resulted in linear urban growth along consolidate new and existing urban areas, improve the existing trunk network and along the Fujiang urban transport networks and sewerage systems, River. SUDP will address these challenges by sup- and enhance scenic public areas. It will demon- porting increased infrastructure investments in strate these improved land conversion processes the context of upgraded and rational spatial plan- through the following approaches: ning and strengthened urban land management. The purpose is to consolidate new and existing Preparing local urban area development and urban areas through developing economic devel- infrastructure investments as an integral part opment zones that will be used for a mix of public of city-wide comprehensive master plans. and private purposes, including the development Common features of these plans include (1) of private commercial housing. The project aims redevelopment of older areas, particularly in at stimulating growth and development in ways city cores, (2) improvements to and consoli- that efficiently use available land and avoid inef- dation of underused areas and agricultural ficient linear development along trunk roads and enclaves within existing urban areas, (3) en- riversides. Although not designed to directly ad- hancement of intercity urban transport net- dress China's distorted land pricing system, the works, and (4) improvement of city environ- project will substantially improve processes to mental conditions. convert land from rural to urban use through new Conducting a rigorous demand analysis to approaches and will provide valuable information ensure that the proposed urban area devel- 92 CPS PILLAR 2: REDUCING POVERTY, INEQUALITY, AND SOCIAL EXCLUSION opment reflects real urban growth require- mation technology in city planning and man- ments and that least-cost options of various agement.The project team has contributed to development alternatives are chosen. the review of urban planning, assessment of Developing an innovative framework for land demand, and development of compre- resettlement and land compensation. For hensive resettlement action plans including example, the project will adopt a compre- transparent compensation payment systems. hensive compensation program designed Monitoring and evaluation: To ensure codi- to fully restore the livelihoods of project-af- fication of knowledge, local learning, and fected people through lifetime compensation capacity building, the rural-to-urban land allowances; provision, within the project area, conversion process will be closely monitored of improved housing areas with saleable land- and documented by the project team, in close use rights (a significant advance for rural peo- collaboration with the Provincial Project Man- ple, who previously occupied land and hous- agement Office and the project cities. Land ing under collective ownership), and access to acquisition and resettlement activities will the urban hukou system, which provides bet- also be monitored and evaluated by an exter- ter social and welfare services. Furthermore, nal independent agency. The M&E will focus by supporting a more concentrated and inte- on the project's social and economic impacts grated development pattern of enclave land, as well as its influence on the urban develop- rather than the linear pattern now prevalent, ment pattern. the project will help to minimize land acquisi- Scaling-upinChina:Theinnovativefeaturesof tion and resettlement in the long-term devel- the project, which comprehensively addresses opment of the urban areas. the urban planning, local economic develop- Supporting project municipalities to develop ment, and social issues, are widely recognized their institutional capacities in (1) urban plan- and have drawn attention across the regions ning and land management, (2) infrastructure in China and other countries. Several other services provision, (3) optimization of current provinces in China have already visited Sich- and future infrastructure assets, and (4) infor- uan to learn the experiences of Mianyang and Suining. This new approach could be applied to the ru- ral-urban land conversion in other cities in China, and possibly replicated in other parts of the world. Potential Impacts: The SUDP's new approaches to rural to ur- ban land conversion and re- settlement compensation have significant potentials in terms of local economic development, urban planning, and economic/ social integration of farmers in the urban economy and their SUDP management office officials investigating the project site welfare. The approaches support 93 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION carefully planned interventions that guide their growth, As a result, their land use is suboptimal and inefficient. In this particular-case, two cities­­Mianyang and Suining­­are enhancing the development valueofenclavelandwhichalreadyhasundergone partial and insufficient transformation in land use. They are providing a comprehensive plan to im- prove their environment; provide infrastructure; and ensure well-balanced commercial, economic, and social development. This pilot will contribute A project site of SUDP in Mianyang to development of a replicable rural-to-urban con- version model for other Chinese cities and other countries. achievement of sustainable urban development goals, ensuring rational land resource use, dynam- Ongoing/Planned Bank-supported Activities: The ic economic development, and equitable social implementation of the new approaches to rural- to- development. urban land conversion and resettlement compensa- The significance of this project is that in rela- tion complements ongoing analytical and advisory tively underdeveloped western areas of China, work, Integrating Land Policy Reforms (II), which project cities are being proactive in managing the is carried out by the Rural Development, Natural urbanization process professionally and efficient- Resources, and Environment Sector Unit (EASRE). ly. The usual scenario in developing countries is SUDP will provide valuable information and data for that such peripheral areas of cities are allowed to policy dialogue for this AAA. undergo a densification and urbanization without New Area of Innovation #7: Supporting cities to address the challenges of rapid motorization and urbanization with sustainable transport systems Context/Challenge: Mobility in China's cities is land-use patterns leading to longer trip lengths, in danger of becoming a victim of the country's and inadequate infrastructure. tremendous urban-centric economic growth of Public transport has similarly struggled. A the last two decades. The experience of major relatively small length of urban rail has been de- metropolitan areas such as Beijing and Shanghai veloped in select cities, while urban buses, which suggests that major investments in urban roads carry­­and likely will continue to carry­­an over- by themselves are not enough to solve conges- whelming majority of public transport trips have tion problems resulting from rapid motorization. received inadequate priority. Furthermore, rapidly Access for the car-less majority is even more frag- expanding, transport-led oil consumption elicits ile. Pedestrians and bicyclists account for approxi- concerns over national energy security and rising mately 60 percent of all trips in most Chinese cit- greenhouse gas emissions. ies. They are dealing with decreased safety levels After years in which urban transport respon- due to unfavorable conflicts with automobiles, sibilities fell almost entirely to local governments, 94 CPS PILLAR 2: REDUCING POVERTY, INEQUALITY, AND SOCIAL EXCLUSION Rationale/Description: After two decades of fo- cusing on road development, Chinese cities and national government are now focusing on inte- grated approaches built around"promoting prior- ity to public transport" to address congestion, eq- uity, safety, and the pollution/oil security/climate change impacts of growing motorization in urban areas. Building on recent research, the Bank is well positioned to support China address the urban transport challenge in the coming years, begin- Buses queuing ning with a GEF-financed program that will sup- port policy and institutional change and demon- stration projects. in the last two years, China's national leadership has become very cognizant of the need to change China-Bank Partnership: The Bank has been a course. The National Road Safety Law (NRSL), pro- long-term partner of China in urban transport, mulgated in 2004 and now under implementation, supporting a balanced focus on road infrastruc- explicitly prioritizes safety over mobility, with a spe- ture, public transport, and the needs of pedestri- cial focus on protecting pedestrians and cyclists. ans and cyclists through projects over the last 20 Similarly, official documents and public announce- years. Through these operations, the Bank has ments from the State Council (via Opinion #46 in helped introduce international good practices October 2005), Ministry of Construction, and high- that have included development of bus priority est levels of Chinese leadership are placing greater corridors, integrated planning, and traffic man- priority on public transport in cities. agement approaches. However, limited involve- However, local governments' success in im- ment in the upstream project selection process plementing these priorities remains limited. Mu- has constrained effectiveness. nicipal transport planning and management pro- The combination of increased interest from cesses often focus on large high-profile transport Chinese authorities, new research identifying un- investments, which disproportionately cater to derlying constraints, and the availability of new the needs of the motorized few, to the detriment instruments provide a platform for the Bank to of the most vulnerable, who are left with inad- support China in placing greater "priority to pub- equate transport services and safety. A recently lic transport." completed Bank study in China concludes that in- stitutional arrangements, technical capacity, and Supporting national government agencies to perverse incentives are key barriers to the devel- develop a new, coordinated approach that en- opment of sustainable urban transport systems.21 hances the effectiveness of their urban trans- To address these barriers, the study recommends port interventions. Guided by a six-agency redefining the role of the national government in Steering Committee (Ministry of Finance, urban transport, complementing national fiscal/ National Development and Reform Commis- policy initiatives with continuous capacity build- sion, Ministry of Construction, Ministry of ing initiatives, and implementing high-profile demonstration projects that illustrate successful 21 examples of sustainable transport investments Zhi Liu and Graham Smith, "Building Institutions for Sustainable Urban Transport in China," EASTR and strategies. Working Paper 4 (World Bank, 2006). 95 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION Public Security, Ministry of Land Resources, planning with public participation makes for a and State Environmental Protection Agen- more socially inclusive process that generates cy), the Bank is supporting authorities to widespread benefits while minimizing adverse develop a national urban transport strategy. impacts. The Bank is helping Liaoning, Xian, The strategy will help ensure that national and Taiyuan to develop and implement mean- priorities for social, environmental, and eco- ingfulpublicparticipationprocessesregarding nomic/financial sustainability are better in- urban transport. These processes seek to corporated in local planning processes, while help city leadership and planners understand leaving city-specific policy and project for- the transport-related concerns and priorities mulation to local governments. The work of of ordinary citizens, particularly the vulner- this group already reflects a welcome inno- able, and address these concerns in project vation: this is perhaps the first time that the designs. They also allow the cities to measure six agencies have worked together to under- implementation success with regular perfor- stand and define their roles in the sector. As mance-oriented surveys. Liaoning has used a part of this effort, the Bank also is supporting combination of open meetings, focus groups development of detailed policy and planning targeting vulnerable groups (women, elder- guidelines and extensive public awareness ly, poor, migrants, disabled), and structured and training initiatives. surveys. This information has significantly MovingtheBankinterventionupstream:iden- influenced project design to focus more in- tifying and supporting self-selected cities vestments on "small infrastructure" (second- with an interest and previous track record ary roads, sidewalks and pedestrian facilities, in supporting public transport. Following a lighting), public transport, and pedestrian and competitive selection managed by the Steer- cyclist safety. ing Committee, 14 cities with innovative Moving beyond safeguards to introduce inte- public transport concept proposals have been grated planning approaches. In Guiyang and chosen for support. The Bank is supporting Fuzhou, the Bank is supporting approaches these cities to develop strategies, policies, and that move the consideration of environmen- investment projects that demonstrate "prior- tal concerns upstream in the planning. In Wu- ity to public transport." This gives the Bank han, Fuzhou, and Xian, the Bank is supporting an opportunity to move from a "retail" role in approaches that integrate dynamic land-use supporting individual investment operations impacts into infrastructure planning. to a "wholesale" approach that supports up- Introducing and adapting international ex- stream planning in a set of self-selected cit- ies interested in supporting public transport and "people-centered" approaches. Many of these cities have expressed an interest in fol- low-up Bank-financed investment projects. If a city were to be selected, the Bank could support a stream of public-transport-focused operations rather than stand-alone projects with less well-defined public transport objec- tives. Scalingupandinstitutionalizingnascentsuccess in public participation. International experi- ence suggests that complementing technical Bus pulling up at a RBT bus stop 96 CPS PILLAR 2: REDUCING POVERTY, INEQUALITY, AND SOCIAL EXCLUSION perience in Bus Rapid Transit (BRT) and en- efits include: hanced bus services. BRT has been identified internationally and by Chinese authorities as Lower levels of congestion, fuel use, and GHG a low-cost, high-capacity mass transit system emissions from urban areas. It is estimated with high potential and relevance for China. that cities covered under proposed initiatives The Bank has extensive international experi- would save over 3 million tons of CO2 equiv- ence with BRT and can help bring a "system" alent through 2020. focus to planning and implementation that Higher quality public transport infrastructure integrates operational, technology, and man- and services. Cities that successfully intro- agement issues with physical design. The Xian duce Bus Rapid Transit systems have poten- urban transport project (in preparation) sup- tial to increase public transport ridership by ports the development of one of China's first 25 percent in 5 years. true BRT systems. Elsewhere­­in Liaoning Wu- Lower accident, fatality and injury rates, han, Fuzhou, Urumqi, and Taiyuan­­the Bank lower impact on pedestrians and cyclists. The is supporting Chinese cities to implement Liaoning Medium Cities Infrastructure Proj- incremental solutions to provide bus priority ect, which targets public transport, aims to and enhance services. achieve a 15 percent reduction in fatality rate Piloting comprehensive approaches to traffic (fatalities/10,000 vehicles) in at least 3 par- safety anchored around multiagency institu- ticipating cities. tions with authority and accountability. Inter- Infrastructuredevelopmentthatreflectsabal- national experience suggests that increasing ance of environmental, land-use, and public traffic safety requires an integrated multiagen- transport concerns. There is at least 1 suc- cy approach supported by the establishment cessful example of moving environmental of appropriate institutions. The National Road and land-use issues upstream into a city's Safely Law provides a platform for such an ap- master planning process. proach. In Liaoning, the Bank is supporting a results-based approach to support the agen- Ongoing/Planned Bank-supported Activities: cies created to implement this law. Planned (Xian, Taiyuan) and ongoing (Liaoning, Wuhan, Fuzhou, Urumqi) urban transport lending Potential Impacts: These initiatives can support operations. GEF-financed TA project, Urban Trans- China in developing institutions and policies at port Partnership Program, under preparation. TA both local and national levels that produce more on spatial development and land-use issues being sustainable urban transport systems and also sup- managed by the Urban Unit. port high-impact demonstrations. Potential ben- 97 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION New Area of Innovation #8: Integrating cultural heritage conservation, sustainable tourism development, and urban upgrading to benefit local populations Context/Challenge:The World Bank and GOC have sulting in the destruction of irreplaceable cultural worked in partnership over the past 14 years to ad- property. Rather than seeing that cultural patri- dress threats to the nation's vast and rich cultural mony and its protection and maintenance can in- heritage. These threats are two fold: rapid urban crease a city's competitiveness and economic development and unsustainable tourism develop- growth, municipal officials often see them simply ment. To date, activities implemented under this as drains on government budgets. Consequently, partnership have conserved significant heritage heritage sites do not receive the budgetary com- sites and developed a greater understanding of mitments nor attention necessary to ensure their these issues among stakeholders at the national, sustainable conservation, operation, and mainte- provincial and municipal levels. Despite these suc- nance. cesses, major challenges remain. China has the fastest growing tourism market China-Bank Partnership: To address these chal- in the world in terms of (1) foreign visitors; (2) Chi- lenges, the World Bank and the GOC are working nese residents traveling within China; and (3) out- together to support new approaches in three ar- bound Chinese visiting other countries. The Unit- eas: ed Nations World Tourism Organization (UNWTO) estimates that, by 2020, China will be the world's Introducing integrated planning and ex- leading tourism destination, attracting perhaps panded economic analysis. Under ongoing 130 million arrivals per year. and planned projects, partner agencies and However, recent studies suggest that China`s Bank teams are working to develop project cultural heritage assets have not generated opti- planning and development that integrates mum development returns. Many of China's top heritage conservation, tourism development, cultural sites, historic urban neighborhoods, and urban upgrading, and poverty alleviation. In- ancient towns are experiencing insufficient returns, ternationalorganizationssuchasUNESCOand uncontrolled commercialization, deteriorating in- UNWTO have also been enlisted to help intro- frastructure, environmental degradation but mini- mal related local economic development. Many of China's leaders recognize these problems. However, local officials often lack the knowledge and experi- ence to integrate the planning and management needed for both sustainable heritage conservation and the types of tourism development that can economically benefit local residents. Economic globalization and the rapid pace of urban development also threaten China's cul- tural heritage. New construction in international architectural styles has created a visual sameness throughout the country's urban areas. Pressure Under the Zhejiang Urban Environment Project, the for high-density development, infrastructure up- World Bank supports upgrading low-income housing grading, and the expansion of urban areas are re- in the historic neighborhoods of Shaoxing 98 CPS PILLAR 2: REDUCING POVERTY, INEQUALITY, AND SOCIAL EXCLUSION tected and supported as important cultural monuments through their adaptation for ac- tive use in economically viable roles such as housing, commercial space, or cultural ven- ues. Finding appropriate new uses requires detailed planning and analysis. For this rea- son, Bank-financed projects will support capacity building in estimating the costs of repairing and upgrading old structures; identify the markets for alternative uses; de- termine the future O&M costs; and calculate In Chongqing, the World Bank assisted with the the financial returns that can be expected restoration and adaptive reuse of Huguang Huiguan, a guild hall, in the city center from these projects. Because redeveloping traditional urban areas for active use can require very large investments, the projects duce international best practice in conserva- will support capacity building for municipal tion and tourism. A major Bank-supported governments in negotiating equitable de- study is assessing the links between tourism velopment arrangements with the private and poverty reduction, and ongoing projects sector. In this type of public-private partner- seek to build government capacity to calcu- ship (PPP), local government often takes re- late revenues created by heritage sites, in- sponsibility to upgrade urban services. The cluding indirect revenues from tourist spend- private sector then develops the site under ing on hotels, local transport services, cafes conservation controls that regulate the ex- and restaurants. By taking these revenues into tent, design, methods, and materials to cus- account, the returns from money spent to re- tomize historic buildings and mandate O&M store and maintain China's monuments can practices. be better calculated, often showing them to Scaling up key integrated planning concepts be a good investment rather than a drain on and economic analysis. The projects will pro- government budgets. Improvingfinancialsustain- ability of heritage conser- vation activities). Projects support managers of pub- lic heritage sites to supple- ment often inadequate government allocations for operations and main- tenance (O&M) with rev- enue-generating activities that support the historic and cultural values, such as tea houses and souve- nir sales. They also support the conservation of historic In Gansu, the World Bank will support protection and development at the buildings that are not pro- Jiayuguan Fortress, on the Great Wall 99 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION mote related institutional development and based on tourism services (restaurants, hotels, awareness-raising of key decision-makers to and craft sales), conservation work, and related better enable solutions to financing heritage cultural activities. conservation, urban upgrading, and sustain- able tourism development to be scaled up Ongoing/Planned Bank-supported Activities: across the country. Bank-financed projects under preparation to sup- port these innovative approaches include the Potential Impacts: These innovative approaches Gansu Cultural and Natural Protection and De- can bring two major benefits. First, they can im- velopment Project (P091949), Guizhou Cultural prove urban development and increase city com- and Natural Protection and Development Project petitiveness based on livability and the preserva- (P091950) and Yunnan Urban Environment Proj- tion of a unique and vibrant sense of place and ect (P096812). Projects that are under implemen- living culture, that in turn can help to attract high- tation and have focused on innovative work are value investments, such as corporate headquar- Zhejiang Urban Environmental Project (P066955), ters. Second, they can create more opportunities Shanghai Urban Environment Project (P070191), for significant tourism development and increased and Chongqing Urban Environment Project employment and income-earning opportunities (P049436). 100 CPS PILLAR 3: MANAGING RESOURCE SCARCITY AND ENVIRONMENTAL CHALLENGES CPS PILLAR 3: MANAGING RESOURCE SCARCITY AND ENVIRONMENTAL CHALLENGES C hina has made important progress over the by 10%. Resource conservation is established as a past 10 years in strengthening its environ- basic national policy and a foundation of 11th Five mental regulations and enforcement, and has Year Plan goals to achieve a well-off and harmoni- seen improvement in many environmental indi- ous society. The plan seeks to rebalance China's cators. There has also been steady improvement pattern of growth, by accelerating development in energy efficiency. However, China's economy of the service sector; improving the performance remains highly resource intensive, with some in- and competitiveness of large industry through dustrial processes using 50-100% more energy utilizing technological innovation; and building per unit of GDP than processes in OECD coun- a resource-efficient and environmentally friendly tries. The efficiency of water usage is low despite society through undertaking key energy-saving a scarcity of water relative to China's needs. With projects and developing a"circular" (recycling) a rapidly growing and highly fossil-fuel-depen- economy. It supports the introduction of policies, dent economy, China as the second largest emit- natural resource management practices, and new ter of CO2 in the world, is critical in the global technologies that encourage reuse of wastes, efforts to reduce green house gas (GHG) emis- conservation of energy, water, land, and other sions. Twenty of the 30 most air-polluted cities in natural resources, and improved monitoring and the world are in located in China. Its four climatic enforcement of environmental rules, with greater zones--coastline, permafrost, arid and semi- emphasis on preventing rather than remedying arid--make China vulnerable to many of the environmental damage. negative impacts of climate change. Therefore To support China's initiatives, more than 70 despite progress, the Government of China is percent of the Bank's current IBRD portfolio tar- increasingly concerned about resource use pat- gets environment and natural resource manage- terns that are unsustainable, involving inefficien- ment challenges. A wide range of complemen- cies that further deplete supply, erode resource tary Bank Group activities support China's efforts quality, and generate pollution. to mainstream environmental concerns into the The 11th Five Year Plan reflects the Govern- development process; create a resource-saving ment's growing emphasis on sustainable devel- society through better regulation, pricing and opment by setting ambitious goals for China to taxation of natural resources; and meet China's build a more resource-efficient and environmen- commitments under international environmental tally friendly society. The plan includes mandato- conventions. The following cases are examples of ry targets by 2010 to reduce energy consumption new resource-saving and environmentally friend- per unit of GDP by 20%, reduce water consump- ly practices that China and the Bank are working tion per unit of industrial value added by 30%, and together to pilot and scale up in China. to reduce the total discharge of major pollutants 101 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION New Area of Innovation #9: Introducing new approaches to improve energy efficiency in the commercial and industrial sectors and in the heating of buildings Context/Challenge: China's needs for increasing emerging market economy, some important seg- energy services to power the expanding factories ments of the economy, such as urban heat supply, and lively commercial centers that drive the coun- are just beginning to be commercialized­­a pre- try's economic growth, and to meet the increasing requisite for creation of proper market incentives demands of daily life needs continue to challenge for energy savings. the nation. The quantities of increased energy re- quired each year will continue to surpass that of China-Bank Partnership: The Bank is working with any other country for the foreseeable future. Enor- government and corporate counterparts on two mous challenges exist in sourcing new supply. long-term programs to affect the institutional They range from resource development, new trad- innovation needed for broad impact in two key ing arrangements, construction of infrastructure, parts of the energy efficiency market. and financing to mitigation of alarming potential environmental impacts. 1. Introduction of new business models to de- Among the options, improving the efficiency velop, package and finance financially attrac- of energy use is widely recognized as the least tive energy savings investments in the indus- expensive and most environmentally attractive trial and commercial sectors. means to increase energy services. The poten- 2. Promotion of efficient use of heat among tial for cost-effective energy savings in both new China's 250 million northern urban dwellers and existing facilities in China is also huge. Con- by increasing incentives and capacities to de- sequently, China's leadership has made efforts to sign and construct more energy-efficient new improve energy efficiency a development priority buildings, which will become the mainstay of and as noted above China's 11th FiveYear Plan sets China's future housing stock.. an ambitious target to increase energy efficiency by 20% by 2010. Yet, as in most other countries, The institutional change needed to expand with the investment potential dispersed among energy efficiency investment requires a long-term millions of consumers, achievement of large-scale effort, and both programs are expected to take results continues to be difficult. place over a decade. The process involves devel- Capturing energy savings potential is an insti- opment of new ideas and concepts for change; tutional challenge.22 Financially viable investment implementation of pilots in the Chinese market; opportunities are plentiful, but these life-cycle and development of frameworks for scaling up cost-savings measures are technically and logis- initial, adapted successes followed by roll-out of tically diverse, often small in scope, and typically these frameworks. As with any institutional de- do not compete well with opportunities to use upfront capital for capacity or market expansion. If left unaddressed, high transaction costs, per- 22For a full treatment of this topic, see World Bank, ceptions of uncertain risks, and needs for finan- "Financing Energy Efficiency: Lessons from Re- cial intermediation or outsourced technical input cent Experience with a Focus on Brazil, China and India" (forthcoming 2007). "Institution" is used in mean that much of the potential for energy sav- its broad sense to mean the rules and means for ing remains unimplemented. Moreover, in China's managing (business) interaction, as opposed to "or- ganization." 102 CPS PILLAR 3: MANAGING RESOURCE SCARCITY AND ENVIRONMENTAL CHALLENGES velopment effort, fresh ideas from outside are cepts, helping new ESCO start-ups, and de- useful, but to work, they need to be adapted and veloping financing products and mechanisms customized to match local institutional settings. that cater to the new industry. The ongoing The Bank will help provide new ideas, operation- China Second Energy Conservation Project al expertise from outside, and a program platform (2002) provides a platform for this work. consisting of blends of investment projects and Development of new business models for en- advisory or analytical activities, while collaborat- ergy utilities. The IFC-/GEF-supported China ing with national and local government agencies, Utility-based Energy Efficiency Financing Pro- enterprises, and research units to tailor new ap- gram (CHUEE) (2005) provides a platform to proaches to China's specific circumstances. Past pilot innovative energy efficiency business experience has shown that the most important models revolving around energy utilities--es- key for success is clear, mutual commitment to pecially fast-growing natural gas distributors common strategic objectives. looking to integrate energy efficiency service in their businesses. It includes work to develop Development of energy efficiency investment de- new financing mechanisms with Chinese com- livery systems for the industrial and commercial mercial banks, incorporate use of energy per- sectors. Following several joint sector studies, formance contracting, and develop alliances intensive collaboration to pilot and roll out new with equipment manufacturers. investment business models began in 1997. It has Development of new commercial energy ef- gathered momentum and branched out into new ficiency lending programs in Chinese banks. markets with strong potential for the future: Large-scale financing for industrial energy conservation renovation projects generate Development of specialized energy efficiency cash benefits through energy cost savings. businesses (ESCOs). ESCOs identify, design, This financing represents a new challenge implement, and often finance energy efficien- to Chinese banks, requiring innovation both cy projects in other, "host" enterprises.23 ES- in approaches to the structuring of finance COs are compensated for these services with and in the development of new alliances a share of the energy cost savings achieved with groups specializing in energy efficiency through energy performance contracts with technology for project identification and as- their hosts. In 1998 this idea was adapted sessment. Following TA and diagnostic review and piloted by three new Chinese companies work, the Bank and Chinese counterparts are under the Bank-financed China Energy Con- developing a new initiative aimed at develop- servation Project. Adaptation of the business ing new energy efficiency commercial loan model to the fast-moving market; realities windows in Chinese banks geared especially of economic contracting; and prevailing ac- to relatively large investment projects (gener- counting, taxation, and auditing norms in ally $1­15 million) in industry, to be launched China was not easy. However, the three through the proposed China Energy Efficiency companies succeeded in developing growing Financing Project. and profitable businesses, thereby drawing the attention of public servants looking for Reform of heating systems and promotion of means to better promote energy efficiency more energy efficient buildings. Over 180 million and of other companies looking for new prof- itable business. Since 2002, counterparts and the Bank have concentrated on the problem 23Also called Energy Management Companies of scaling up by propagating the basic con- (EMCs) in China. 103 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION tons of raw coal is currently burned each year for or new subsidy mechanisms for unemployed space heating of urban residential and commercial or disadvantaged persons. (2) Consumers buildings in northern China. Energy use per unit need to be able to control their heat-use of floor area is at least double that of buildings in levels, which would require major technical similar cold climates in Western Europe or North changes in the heating network and its oper- America, with still far less comfort achieved. ational management. (3) Heat consumption Joint analytical work completed by the Bank and must be measured. (4) New heat billing and Ministry of Construction (MOC) in 2000 con- pricing systems based on heat consumption cluded that the key to achieving the possible 2-3 need to be implemented. For heat to become fold gains in energy efficiency is through sustained a commodity that can be bought and sold effort integrating both heat supply industry, bill- commercially, each of these topics must be ing and pricing reform with major efforts to de- resolved. velop and construct new, more efficient heating A second set of issues resolves round the system and urban building designs. Necessary need to reposition the heat supply industry components include: as separate from government. They include the: (1) consolidation of many small urban Heat system reform. The economic system heating companies, developing blocks to for the supply and use of residential heat- franchise, restructuring heating companies ing in northern China are the only remaining into proper corporate entities that can access major unreformed part of the urban welfare new investment financing, and introducing system of the former Chinese planned econ- modern heat utility operations and manage- omy. The still-dominant traditional heat sup- ment practices, and (2) development of a ply systems supply heat to residences through government regulatory and industry over- enterprises directly under local government sight system divorced from heating company management using Soviet-era central heat ownership and O&M. system technology. As a consequence, con- Beginning in 2003, successive and in- sumers are unable to control heating levels, creasingly detailed central Government di- and the bills are paid by employers instead rectives have underlined the necessity of of consumers based on heated floor area tackling all of the above topics urgently. The rather than heat consumption. This system challenge is in implementation. The Bank is is the last to be reformed for a reason. The sharing best practices and ideas, especially reform is technically complex, socially sensi- from its experiences in urban heat system tive, and--in contrast to the housing reform, reform and renovation in Eastern Europe, which generated revenue--requires financial and objective analysis tied in with specific inflows for heating network investment and investment support (below). A review of social safety net systems. experience in new heat billing and metering China's leadership is now determined approaches was followed by a major joint to reform the system. The reform involves study on new approaches to heat pricing. a series of intertwined issues, all of which Additional joint work is being initiated on in- need to be addressed for success. One set stitutional arrangements and analysis to help of issues revolves around the need to "com- shape future regulations to promote the re- modify" heat. (1) The responsibility to pay form across China's northern cities. heat bills needs to shift from employers to Developing more energy-efficient buildings. consumers. In turn, this change would re- Buildings constructed now will shape heating quire the issuance of new wage supplements and air conditioning loads for decades. Af- 104 CPS PILLAR 3: MANAGING RESOURCE SCARCITY AND ENVIRONMENTAL CHALLENGES ter years of effort, China's national building port, market-oriented ideas, and sustained col- energy efficiency standards are now begin- laboration focusing on adapting concepts to ning to exert serious, positive impact on new Chinese institutional and market frameworks. construction. However, much remains to In 2005 alone, the new energy performance be done to rectify long-ingrained design and contracting business model contributed $245 construction practices that result in energy million in new energy conservation investment, waste. Solutions include further strengthen- with life-cycle energy savings of approximately ing local M&E of the standards and further 18 million tons of standard coal equivalent (tce). developing a wide range of energy-efficient The 3 pilot companies directly supported by the designs attractive to the market. To truly Bank accounted for $33 million of this energy achieve energy efficiency results in the north, savings. Scores of new companies scaling up the these efforts must be integrated in parallel concepts invested $212 million. The new, prof- with heat reform and technical overhaul of itable project delivery mechanism has gained heat supply systems. broad market acceptance. Ongoing surveys of An additional major challenge is how 2006 and 2007 investments are expected to to finance and implement energy savings show strong additional growth. schemes in existing building stock. The Bank The hoped-for impact of the introduction is supporting development and implementa- and development of the new energy efficiency tion of new approaches in various municipali- lending business model in Chinese banks that ties. The focus is those that involve integrated targets a different part of the commercial mar- projects combining heat supply renovation, ket also is large. World Bank loan and GEF grant heat reform, and new energy-efficient build- financing are designed to plant the seeds of an ing design and construction through the new additional, profitable lending business that can China Heat Reform and Building Energy Ef- be undertaken by a variety of local banks. New ficiency Project (HRBEE) (2005). energy efficiency investment through the new Heatsupplysystemupgradingandmoderniza- institutional mechanism may reach over $1 bil- tion. To meet urban heating needs efficiently lion in 3­5 years, providing some 70­80 million in the future, current systems must be over- tce of energy savings over the life of the projects hauled on a large scale. The reasons are to supported. achieve scale economies through consolida- Broad national plans for institutional change tion, to adopt variable-flow technology to in urban residential heat supply and use are driv- accommodate control of heat demand by ing technical and managerial change. These consumers, and to completely transform op- plans can almost completely transform the ur- erational and management practices to new, ban heating industry and lay a foundation of commercially oriented approaches required high-efficiency heat supply and use for decades by the reform. The Bank is assisting in local to come. The synergies created through more implementation efforts through the HRBEE efficient supply systems; demand-responsive project and in new proposed lending, par- network operations; monetary incentives to ticularly the Third Liaoning Medium-Cities use energy wisely; and innovative, modern, and Project (planned for 2008). energy-efficient building design and construc- tion can better satisfy urban dwellers. However, Potential Impacts: The positive experience these synergies also can provide indoor heating of China-Bank collaboration in building Chi- levels and use perhaps just one-third of the pri- na's new ESCO industry shows what can be mary energy required by the older heat systems achieved by combining strong government sup- and buildings. 105 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION Ongoing/Planned Bank-supported Activities: Third Liaoning Medium-Cities Infrastructure Project (proposed IBRD $200 million, 2008) China Second Energy Conservation Project Energy Sector Management Assistance Pro- ($26 million GEF, 2002) gram (ESMAP) Heat Industry ReformTechnical China Heat Reform and Building Energy Ef- Assistance (2007­08, under development) ficiency Project ($18 million GEF, 2005) Asia Alternative Energy Program (ASTAE) China Utility-based Energy Efficiency Fi- technical expert support for energy efficiency nancing Program (IFC/GEF) financing and heat reform/building energy ef- China Energy Efficiency Financing Project ficiency (various, ongoing). (proposed IBRD $200 million, GEF $13.5 million, 2008) New Area of Innovation #10: Developing and testing a national water rights administrative system Context/Challenge: Water is one of China's scarc- ing water use and enforcing water rights. est resources, with per capita availability of renew- able water resources approximately one-third of Rationale/Description: A good water allocation the world average. Managing this scarce resource and water user rights administration system cou- is crucial for China's further development, because pled with a functioning water market will go a long without major change, water will become a limit- way toward achieving sustainable water resources ing factor for urban growth and agricultural de- management in China's water-scarce regions. It velopment. The establishment of a national water also will help to ensure that water is available to user rights system and ultimately the creation of a sustain economic growth and to meet environ- market for these rights is one way for China to bet- mental needs. However, reductions in overex- ter manage its scarce water resource. ploitation of water resources and reallocation to A key challenge, however, in China is the lack higher-value uses necessarily will mean less water of a link between the amount of water authorized for low-value agricultural uses. Because water, not for use and an allocation of water determined land, is the limiting resource in water-scarce re- through appropriate water balance analyses and gions, the objective is to increase the productivity overall water resources planning at the river basin of water. Doing so will be particularly important in level. In many cases, the seven river basin commis- irrigated agriculture. sions have undertaken good water balance and This long-term program will be developed water resources planning studies. But there is no taking into account the achievements and lessons effective link with water rights administration at learned from past and on-going projects and will the water user level. River basin commissions are incorporate the achievements in made in water departments of the Ministry of Water Resources, productivity gains. The completed Bank-financed which is responsible for river basin planning, but Water Conservation Project (WCP) and the Tarim the provinces, cities, counties, townships, and vil- Basin II Project both have demonstrated that there lages that administer water rights are not included is considerable potential to increase water produc- in these river basin commissions. A second chal- tivity (yield per unit of water consumed) in north- lenge is the lack of adequate systems for measur- ern China. Productivity could be increased using 106 CPS PILLAR 3: MANAGING RESOURCE SCARCITY AND ENVIRONMENTAL CHALLENGES a combination of irrigation technology, agricul- effective river basin institutional arrangement tural, and management measures. In other words, to allocate manage and enforce water at the maintaining high levels of agriculture production river basin level. At a lower level there are by using much less water is entirely feasible. The now some areas in Shandong, Xinjiang, and water saved then would be used to support other elsewhere in China that have begun to imple- sectoral demands, including the environment. ment a system whereby each water user is is- sued a card on which a record is kept of the China-Bank Partnership:The GOC and the Bank are amount of water used. This has proven quite developing a long-term program for cooperation effective and could be expanded throughout on developing and testing a national water rights water-scarce regions of the country. However, system. The focus of the Bank's contribution is on in areas that use the card and elsewhere, mea- leveraging international experience and the les- surement systems are weak, so the amounts sons-learned from the Bank's support to the water recorded on the cards often are not very ac- sector in China in order to develop both a long- curate. term strategy and a project portfolio to establish Operationalizing analytical recommendations and test a sound and sustainable water rights in the design of pilot water resources invest- system. The Bank is using ongoing AAA activities ment projects like the Second Water Conser- to address these fundamental and critical issues vation Project which is being prepared by the surrounding water scarcity in China. Through this GOC. This project will strive to link sustainable avenue and using both international and national water allocations at the river basin level with technical assistance (TA), the Bank is assisting Chi- the water rights system and integrate it with na to develop national water rights administrative the measurement of water use through remote system tailored to the water resource manage- sensing and/or volumetric measurements. The ment system in China. The establishment of an next evolutionary step up is the establishment appropriate system of water rights will contribute of a water market. Across the globe, properly significantly to the sustainable use of both surface functioning water markets have proved excel- and groundwater. Through analytical work and lent mechanisms to reallocate water from low- future demonstration projects, the Bank can help value to high-value uses. China to develop a more effective water rights ad- ministration system by: Introducing new approaches to more accu- rately determine available water resources and to establish water rights that do not ex- ceed sustainable available amounts. A func- tional water user rights administration system will require an adequate system to measure the amount of water being utilized by each user and enforce/control water use to autho- rized amounts in another. This new approach would build on recent successful experience gained from the Tarim Basin II Project in Xin- jiang Autonomous Region, which has effec- tively established at the river basin level a In the Tarim Basin projects, Volumetric Water Permit issued to each Prefecture and major water user system of water entitlements and created an entity 107 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION Potential Impacts: The impact of the establish- Ongoing/Planned Bank-supported Activities: The ment of a well-functioning water rights adminis- ongoing analytical activities will be completed by trative system and a water market is potentially December 2007. Based on the outputs of the AAA huge. The two mechanisms are fundamental to work, the proposed Water Conservation Project II the sustainable management and use of a pre- (WCPII) will establish pilots in the selected coun- cious natural resource: water. The establishment ties to test and refine the water rights administra- of water rights will protect the rights of the poor tion and pilots to establish a water market. and encourage sustainable use. In addition, over time, market forces will move water from the low- est-value to higher-value uses. New Area of Innovation #11: Mainstreaming adaptation to climate change in water resources management and rural development Context/Challenge: China ranks at the bottom 25 will be achieved by applying cutting-edge mod- percent of countries in water per capita. Within eling techniques to design and empirically test China, the North China Plain, or Huang-Huai-Hai climate change interventions in water saving. The Basin (3H Basin), has only one-third of the China inclusion of climate-change-mitigation features is average and approximately one-half of the per critically important for the success of IAIL3 project, capita water supply specified by the United Na- which is financing water-saving irrigation, agricul- tions standard. At the same time, the 3H Basin is tural modernization, agro-ecological environmen- China's agricultural heartland, producing some 50 tal protection, and institutional strengthening. percent of national grain output, and has a popula- The first innovation is that this project will test tion of 425 million people. Although water demand cutting-edge techniques to economically model in the region is high and growing, available water the impact and adaptation to climate change. It resources are already fully allocated and often will use existing climate change models, which overexploited. Stagnating grain production in the typically are only used for climate forecasting, to region already has been linked to climate change. design and test specific project interventions. The Moreover, global warming could further decrease designing and testing will be done by combining the stream flow and groundwater recharge in the climate change models with existing local hydro- Basin. Only recently are these issues and their re- logical, economic, and crop production models. A lationship to climate change becoming clear and team of the top Chinese and international climate their seriousness understood. In fact, past and cur- change scientists will lead this effort to use their rent investment projects have not accounted for climate change models in real-world applications. the risk of climate change nor been designed to These combined models provide the ability to as- mitigate it. sess both the likely economic impact of climate change scenarios on various farm types and on Rationale/Description: Using Global Environment the economy (both regional and national), and the Facility (GEF) funds, China's State Office for Com- value of adaptation measures. prehensive Agricultural Development (SOCAD) The second innovation is that the project will in the Ministry of Finance worked with the World customize these models to simulate the future Banktoincludeclimatechangemitigationfeatures hydrological, crop production, and economic im- in the design of the Irrigated Agriculture Intensifi- pacts of climate change in three areas known to cation III Project (IAIL3) in the 3H Basin. Inclusion have water-stressed environments. Each model 108 CPS PILLAR 3: MANAGING RESOURCE SCARCITY AND ENVIRONMENTAL CHALLENGES areas. IAIL3 is unusually well suit- ed to introduce and demonstrate climate change adaptation mea- sures. The project's components are closely related to climate change adaptation and highly amenable to modification to in- corporate adaptation measures. The project covers the primary food production region in Chi- na. IAIL3's largest components are water-saving irrigation and water-saving agriculture, which are among the areas most likely to be impacted adversely by cli- Survey on farmers' willingness to participate the GEF Adaptation to Climate Change Project mate change. Moreover, as part of the national Comprehensive Agricultural Development (CAD) will be uniquely adapted to the problems faced Program, IAIL3 offers a clear path to mainstream in these local conditions. In Hebei, the models adaptation measures in a major ongoing national will focus on groundwater shortages; in Henan program. IAIL3 is implemented by SOCAD, which and Shangong, the models will focus on surface has significant influence in all provinces and has water from the Yellow River and on groundwater close working arrangements with the central used in the dry season; and in Jaingsu and Anhui, agencies most concerned with adaptation to cli- the models will focus on the problems of flood- mate change, including the Ministries of Water Re- ing. Once the baseline models have been devel- sources and Agriculture. Finally, IAIL3 is based on a oped to simulate the effects of climate change, flexible "program approach" design, which allows they will be used to test various climate change for adaptation and learning during implementa- mitigation scenarios. tion. The third innovation is that the project will empirically test and refine the models. When the Potential Impacts: This project is the first climate scenario analysis is complete, the optimal climate change adaptation project supported by WB/GEF change interventions will be implemented under in China. As such, it has a high potential to in- IAIL3. The link between the modeling and the in- troduce new concepts of risk management, new vestment project is critical because it provides the standards in irrigation infrastructure, improved ability to refine both the models and the inter- water management and water saving, and more ventions. This is the first time that a GEF climate sustainable use of natural resources such as change initiative has taken this approach. Many groundwater to moderate the impact of climate studies have normatively applied models of this change for millions of Chinese farmers. This proj- nature. However, none has used empirical obser- ect also will provide guidance for Chinese policy- vations to test and update the models. makers to enable them to reconsider existing agricultural development policies, programs, and China-Bank Partnership: The Bank worked with patterns and opt for more sustainable and resil- SOCAD to secure GEF grant financing to model ient agriculture growth. and test the impact of climate change in selected 109 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION New Area of Innovation #12: Demonstrating new models to improve land administration and management Context/Challenge: China has achieved important urban growth increases the rate of farmland progress in the area of land administration in the loss. The need to protect farmland from ineffi- past 25 years. However, the progress has been cient urban growth is critical because in China partial and hence cannot satisfactorily meet the only 14 percent of all land is arable, and the demands of China's profound economic and so- government is strongly committed to food- cial transformation. Compared to other countries' self-sufficiency. systems, two fundamental features of China's land Local governments'over-reliance on revenue system are the persisting duality of rural and ur- from land transfers and land-related financ- ban land tenure systems and the State's monopoly ing. Different studies consistently show that of the primary market for the land used for urban land transfer fees account for at least 30 per- construction. As a consequence of these funda- cent of total sub-provincial government rev- mental characteristics, GOC faces three major enues. In some regions, transfer fee revenues challenges: were even higher than the government's bud- get revenues. This fee is a one-time revenue Weak land rights for all rights holders, particu- item, and its source is not sustainable in the larly farmers. For example, farmers perceive the long-run because land resources are limited. land requisition process and compensation lev- Moreover, the use of these revenues lacks els to be unfair to farmers. In today's China, land transparency and accountability because, requisitions often have been a source of griev- until early 2007, they were kept "off-budget." ances. Data shows that over 60 percent of com- Another worrisome phenomenon is that lo- plaints received by the Ministry of Land and cal governments increasingly are using req- Resources in recent years relates to disputes uisitioned land as collateral for bank loans on land requisition. Farmers essentially can- through a vehicle known as"land banks." not benefit from the higher value of the land as it enters the urban market because the com- Rationale/Description: The project would estab- pensation for requisitioned land is calculated lish a well-functioning land rights registration/ based on the value of land's agricultural use. certification system; explore a viable arrange- The distribution of the compensation within ment for property taxes; and rationalize the land collectives often is nontransparent, and farm- institutional framework for a higher degree of ten- ers are often left out of the decision process ure security, more efficient land-use pattern, and of land requisition. Farmers' rights themselves healthier land market. have limitations. For example, farmers are not allowed to use land as collateral to access credit China-Bank Partnership: The World Bank has from financial institutions. extensive international experience in the area Inefficient forms of urban growth and difficul- of land administration and management. In the ties in reducing the rate of farmland conver- past two decades, the Bank has supported many sion. The artificially low price of rural land en- land administration and management projects courages a land-intensive urban growth that throughout the world, including in six East Asia wastes precious land resources. A 2004 GOC countries: Cambodia, Indonesia, Laos, Philip- survey showed that approximately 43 percent pines, Thailand, and Vietnam. The Bank's ex- of requisitioned land was left idle. Inefficient pertise enables it to provide impartial technical, 110 CPS PILLAR 3: MANAGING RESOURCE SCARCITY AND ENVIRONMENTAL CHALLENGES institutional, and policy advice to China. Joint ple of a unified, conclusive registry system for Bank-GOC efforts can make potential contribu- property rights is stated in the Property Law, tions by: which was passed by the National People's Congress in March 2007 and has been widely Introducing a more efficient, accurate, and us- regarded as a major milestone in the history able land rights registration system, including of modern Chinese legislative reform. farmers' land rights. As a first step, a pilot on Promoting more efficient use of farmland rural land registration could be implemented and urban land. The most important step in one major agricultural province in the next to achieve an efficient land-use pattern is few years. The purpose would be to explore to change the local governments' incentive and test legal, technical, and organizational structure for land conversion. Market-value- solutions for an appropriate registration/cer- based property taxes urgently should be ex- tification model that eventually could be ap- plored as an alternative source of local gov- plied nationwide. A more efficient, reliable ernment finance. As it did in the Philippines, registry that reduces the time, cost, and risks the Bank can help design a large-scale virtual associated with conveyancing is urgently pilot on property taxation to test the possibil- needed in areas in which a vigorous market ity of introducing property taxes. in land rights already exists or is emerging. In addition, as a short-term measure, Particular attention is needed for the regis- the Bank can help GOC review the impact of tration of farmers' contract land and associ- subsidizing land for industrial use by setting ated rights. In the case of rural contract land, artificially low price ceilings. The existing evi- the implementation of a registration system dence indicates that land acquired by local would be an important step in the gradual administrations destined for industrial use enhancement of land rights in terms of clar- is made available to industrial developers at ity, security, and freedom from interference. substantially below what the market would A registration system also would improve the bear. In the present situation of very rapid ur- accountability and transparency of land-re- ban growth, the general impact of such subsi- lated decision-making at all levels. The princi- dies may be simply to generate extensive and relatively inefficient use of land. As demonstrated by both the AAA and SUDP, there also is a need for a greater integration of urban and rural planning func- tions and objectives. As it has done in many other projects, the Bank can assist GOC to formulate specific land policy and regula- tory instruments to achieve a shared planning vision among different agencies. Such a shared vision will be crucial for finding an appropriate balance between urbanization and farmland pres- ervation. China rural land registration pilot, jointly financed by the World Bank and FAO, was launched in January 2006 Rationalizing the institutional 111 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION framework for land. In addition to tightening investments on their land, promoting the de- coordination among agencies, the Govern- velopment of rural financial markets through ment should explore the possibility of harmo- using land titles as collateral, reducing land nizing and unifying land and building regis- conflicts, and accelerating the development of tration.The current complex and non-uniform a healthier and more active land market. Most set of arrangements concerning land and of these benefits have been robustly identified building registration creates confusion for the by socioeconomic impact surveys conducted increasing numbers of people and organiza- for many Bank-financed land projects. tions that wish to use the system. In addition, Land-use efficiency will be improved. Better to be consistent with the requirement of the coordination between land-related agencies Property Law, there is a need to harmonize and a healthier land market will improve land- and unify rural and urban land registration. use efficiency in both urban and rural areas. The Bank can assist in the area of developing Improved land-use efficiency in urban areas and implementing a long-term strategic plan can reduce the pressure on farmland preser- to integrate and harmonize the land-related vation. Simultaneously, better land-use effi- institutional framework. ciency in rural areas can release more land for urbanization without jeopardizing national Potential Impacts: The potential impacts of a well- food security. functioning land administration and management Significant information benefits will result. system can be measured against the above-men- Establishing a well-functioning land admin- tioned three challenges. istration and management system generally represents an investment in a country's infor- Tenure security will be significantly strength- mation infrastructure. It is important to note ened. Consequently, the improved tenure that the land registry and cadastre system security will generate huge positive social provide a framework for a substantially im- and economic benefits. The improved tenure proved tax collection system. A well-function- security has been observed consistently in ing tax collection system could be particularly most, if not all, the Bank-fi- nanced land administration and management projects. For example, in the case of Indonesia, a 2002 project impact survey showed that more than 70 percent of respondents believed that they had a greater security of tenure after registration of land titles. Associated with the improved tenure secu- rity are important social and economic benefits. These in- clude strengthening farmers' A Chinese delegation visiting Indonesia in summer 2006 to study implementation incentivestomakelong-term of World Bank-financed Land Management and Policy Development Project 112 CPS PILLAR 3: MANAGING RESOURCE SCARCITY AND ENVIRONMENTAL CHALLENGES important in today's China since GOC is con- pilot jointly financed by FAO and the Bank. The sidering introducing land-based property tax China Economic Reform Implementation Project to reduce local governments' over-reliance (TCC5) addresses improving the marketability of on revenue from one-time land transfers and collective construction land to explore possible land-related financing. In addition, the infor- ways of enabling farmers to enjoy increasing land mation generated in the titling process, as value from the rapid economic development. In well as the registry and cadastre themselves, its project area, SUDP is exploring a better model can provide useful information for better of farmland conversion and compensation. Given land-use planning. the interlinkages among these issues, more signif- icant benefits could be achieved from having an Ongoing/Planned Bank-supported Activities: On- integrated land administration and management going Bank activities are addressing key aspects of project that focuses on land registration/certifica- the land administration and management system. tion, institutional rationalization, and a possible The ongoing land policy reform AAA is addressing virtual pilot on property taxation. the rural land registration issue through a small New Area of Innovation #13: Integrating small-scale farmers in high- value food chains using farmers'associations and nonpolluting"green" and organic food production Context/Challenge: One of the key objectives gation and on provision of extension services and of the Government's New Socialist Countryside inputs to help farmers increase production out- Program is to increase farmers' incomes and to put to increase farm income. However, increased achieve this through science-based agriculture. output of commodity products often has led to a Given China's limited land and water resources, decline in prices, reducing the effect of increased the only way to increase farmers' incomes is to output on farmers'incomes. produce high-value crops in ways that make In addition, rather than being value driven, more efficient use of limited land and water re- the output approach has led to agronomic prac- sources. However, as modern food supply chains tices that encourage excessive use of chemical become more sophisticated, small-scale farmers inputs. Chinese farmers have boosted the use of become constrained by their inability to assem- chemical fertilizers and pesticides to among the ble enough product and maintain consistently world's highest per hectare (ha), as millions of high standards of production to meet the needs farmers have tried to coax high yields from small of these high-value food chains. A good example plots (land holdings average less than 1 ha each) of this constraint is "green food" production for that have been cultivated for generations, often which large groups of small-scale farmers must with 2 or 3 crops per year. This increased use of work together to produce enough volume to chemicals has adversely affected food safety and be interesting for buyers and also maintain very the environment. Increasing the income of large high standards. One farmer's failure to meet the numbers of small-scale farmer household pro- standards can jeopardize a whole shipment. duction units by enabling them to meet the food Traditionally, in China, as in most other coun- product quality and safety standards demanded tries, the approach to agricultural development by high-value food supply chains, while at the has focused on hardware investments such as irri- same time protecting the environment, is one of 113 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION the biggest challenges facing China's agricultural training for FA management, supporting legal development. registration of associations, drafting charters and bylaws, training in business and market- Rationale/Description: The State Office for Com- ing, establishing quality monitoring and con- prehensive Agricultural Development (SOCAD) is trol systems, and investing in farmer-shared implementing three World-Bank-financed projects (cooperatively owned) infrastructure, such that test different approaches to integrate small as jointly owned seedling propagation facili- farmers in high-value food supply chains, particu- ties, jointly owned machinery pools, or jointly larly for "green food" and safe food products. The owned dairy milking facilities. key innovation of these projects is that they pro- Introducegreentechnologiesandproduction vide an integrated package of both institutional methods that enable farmers to reduce water and technical changes that enable large groups of and chemical input use. Investments include small-scale farmers to enter into high-value food introducing integrated pest management chains. The four key innovations are to: (IPM) methods, better water use modeling and measurement, better waste treatment, Establish public/private partnerships such and testing new varieties or production tech- as "Company-Farmer Association-Farmer" niques. models. In these, the government provides Introduce better monitoring systems for food financing for public investments to support safety and food quality and environmental some small-scale farmers, and private enter- quality through a combination or govern- prises agree make parallel investments and ment and private certification, financing pes- enter into contracts with these farmers. For ticide-residue-testing facilities at local mar- example, the government may make a pub- kets, TA to firms to meet local or international lic investment to assist small-scale farmers certification standards, and training for local to plant mulberry trees, provided that the certification companies. enterprise agrees to make it own parallel in- vestments in a new juicing plant.The project China-Bank Partnership: A key value of World Bank also invests in institutional arrangements participation is its world-wide experience and to make public/private partnerships work. expertise in food safety and sanitary and phytos- For example, developing new contracting anitary (SPS) measures, farmer organization estab- arrangements between farmers and enter- lishment, and the management of public/private prises to make farmers jointly responsible partnerships. In addition, under these projects, the to deliver products to enterprises and make Bank has worked with SOCAD to develop a financ- enterprises commit to long-term contracts ing approach that allows for testing, learning, and with farmers. Another example is outgrow- adjusting methodologies to adapt them to Chi- er programs managed by the enterprise to nese conditions. ensure the delivery of high-quality inputs and enterprise-monitoring production tech- Potential Impacts: niques. Increase incomes for large numbers of small- Invest in farmers associations (FAs) and water scale farmers by enabling them to access users associations (WUAs) that enable farm- high-value food chains ers to aggregate products, maintain the stan- Leverage government financing for small- dards needed for high-value food products, scale farmers by engaging in public/private negotiate higher product prices, and better partnerships that encourage enterprises to manage inputs. These include investing in make complementary private investments 114 CPS PILLAR 3: MANAGING RESOURCE SCARCITY AND ENVIRONMENTAL CHALLENGES and engage in contracts with groups of small-scale farmers Mainstream and "coopera- tize" the small-farm produc- ers so that they can gain the market power of large-scale commercial producers and serve the growing markets of consumers, supermarkets, food manufacturers, and ex- porters Bring certifying organiza- tions down to the grass- rootsleveltoensureproduct Training for farmers on high-value and nonpolluting "green" and organic food quality and enforce nonpol- production technologies in Jiangsu project area under IAIL3 project luting food standards. Improve food safety and food quality, environmental quality, and better health conditions for farm- using this approach. The IAIL 2, IAIL3, and Agricul- ers, through encouraging high-value "green turalTechnologyTransfer projects are working in 9 food"production. provinces to assist farmers to produce and market high-value agricultural products, including "green Ongoing/Planned Bank-supported Activities: The food" products, using new approaches to public/ State Office for Comprehensive Agricultural De- private partnerships, FAs, and WUAs. velopment (SOCAD) in the Ministry of Finance is implementing threeWorld-Bank-financed projects 115 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION New Area of Innovation #14: Introducing new methodologies to improve environmental monitoring, estimation of pollution costs, and environmental impact assessments Context/Challenge: Throughout this new decade, government, GOC and the Bank prepared its up- several developments have changed in the econo- dated environmental sector work in 2001,24which my and thereby China's environmental challenges. reflected China's wider focus on air, water and par- Following a slowdown in energy consumption as a ticularly land resources compared to work during result of the Asian crisis during the last part of the the former decade. Largely as recommended fol- 1990s, it has almost doubled through the first 7 low-ups to this strategic work, a set of new activi- years of this decade. Urbanization has further accel- ties emerged, which include: erated with more than 100 million Chinese becom- ing new urban citizens during the first half of the Moving on from initial EIA work to new ap- decade while industrial development has contin- proaches for Strategic Environmental Assess- ued its growth and the distinctions between state ments. While the former Bank applied EIA owned sector largely located in traditional urban work greatly impacted the design of China's areas and rural-based TVEs have been increasingly EIA law promulgated in 2003 (modeled close- eliminated. Strong development in agricultural pro- ly on the World Bank EA Policy (OP 4.01), en- duction and increased stress on China's large but of- vironmental assessment work continues to ten vulnerable land resources have further brought evolve with China's changing priorities. For China's environmental focus to also include the example, in this period the Bank helped China green agenda. These various development trends to introduce and pilot SEAs required by the have further created a need for expanding China's 2003 China EIA law. Pilot SEAs, which cover a environmental institutions, policies and regulations geographic region or sector rather than a spe- into an overall sustainable development approach, cific project, were applied to the Great West- which is particularly reflected in its 11th Five Year ern Development Plan and to Guizhou Tour- Plan (2006­10). ism Development, while extensive capacity building programs on SEA application have The Innovations: Development of public disclosure been implemented throughout the country. methodologies for environmental performance Establishing new methodologies for Green of industrial enterprises through color-coding National Accounting and the Cost of Pollu- schemes, development of new administrative sys- tion in China. While international experiences tems at the State Environmental Protection Ad- show substantive challenges in developing ministration building upon practices in some other appropriate methods for estimating econom- countries, development of new methodologies for ic cost of environmental deterioration and national green accounting and cost of pollution how to adjust national accounting figures estimations, development of new Strategic Envi- based upon such findings, China has made a ronmental Assessments (SEAs)methodologies for strong effort to develop a green GDP meth- China and new lending programs to reach out to odology, including estimation methods for small cities, townships and villages with severe en- environmental deterioration itself. Through vironmental deterioration. two cooperation projects, SEPA, the Chinese China-Bank Partnership: In close cooperation 24China: Air, Land and Water, Environmental Priori- with particularly SEPA, but also other parts of the ties for a New Millennium, World Bank (2001). 116 CPS PILLAR 3: MANAGING RESOURCE SCARCITY AND ENVIRONMENTAL CHALLENGES Bureau of Statistics, the Ministry of Health and Potential Impacts: During this phase, China has the Ministry of Water Resources have worked continued to upgrade its environmental regula- closely with the Bank to develop such meth- tions and policies and is gradually reaching inter- odologies. Follow-up work is focusing on new national standards in most respects. While more operational methods to in particular control work is needed in implementation and enforce- air pollution impacts on human health. ment, the improvement has been significant, and Proposing new arrangements for how China in some ways China is more advanced than several could set up its environmental administra- other countries in the East Asia Region. tion. Meeting China's enormous environ- SEA has raised awareness among Chinese au- mental challenges requires solid institutions. thorities and public at large about environmental Based upon international comparisons with impacts of larger regional and provincial devel- other particularly larger-scale countries with opment programs. Provinces may enhance their some of the same magnitude of environmen- inter-provincial economic cooperation in order to tal challenges as China, a joint environmental ensure that provinces comparatively vulnerable to administration report was prepared in 2002 certain environmental conditions (e.g. in theWest- for submission to the State Council as inputs ern region) request other provinces to engage in to the National People's Congress in 2003 and economic development activities that are less en- follow-up to this report is being implemented vironmentally vulnerable. in 2007/08. Through the Green National Accounting and Strengthening public understanding of and Cost of Pollution in China projects, both the na- participation on environmental subjects tional and local level officials as well as the public through public disclosure of environmental at large are obtaining information on the impact performances. In order to strengthen pub- of environmental deterioration and the fact that lic participation, China decided to adopt the economic growth figures have to be adjusted ac- Bank's public disclosure and participation pol- cording to such deterioration. (The environmen- icy in its own EIA implementation. In addition, tal conference for the Cost of Pollution in China new public disclosure and participation stud- report, for example, was covered by 85 of China's ies were undertaken particularly focusing on main news-media channels). Beside raising overall the environmental performance of industrial public awareness, a desired impact would be in- enterprises through "color-coding". Following creased resource allocation to the sectors that are initial trials in two provinces, the performance suffering from such deterioration. approach has been applied on a large scale Regarding the impact from the environmen- basis of industrial enterprises throughout tal administration reports, in a period during the China. first part of this decade, where most government Developing lending projects for small cities, agencies became smaller, SEPA was among the towns and villages. As the infrastructure in only agencies that received increased resources these urban settings has been most limited allocation following the NPC in 2003, though it has and thereby their capacities in handling envi- yet to be elevated to a full cabinet ministry. Fol- ronmental pollution control, the Bank started lowing the trial periods for the new environmental to develop new financial strategies and ap- "color-coding"principles for industrial enterprises, proaches for environmental infrastructure the principles have been implemented through- programs to reach urban settings below the out China. city level. 117 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION Key Bank inputs: China: Water Quality Management ­ Policy and Institutional Considerations (2006). Corporate Lending: Urban environmental projects in town Environmental and Social Responsibility in and village in Henan, Liaoning, Yunnan, and the East Asia and Pacific Region (2006). China: Ningbo/Fujian. SEA applications for the Great Western Devel- AAA: China: Air, land and Water, Environmen- opment Program (2008). Cost of Pollution in tal Priorities for a New Millennium, World China Economic Estimates of Physical Dam- Bank (2001). North China Water Quality ages (2007-08). Management Study, World Bank and Minis- try of Construction (2005) 118 CPS PILLAR 4: FINANCING RAPID GROWTH CPS PILLAR 4: FINANCING RAPID GROWTH T he financial system of rural China is dominated selected provinces, and announced measures to by Rural Credit Cooperatives, or RCCs, that are lower entry barriers to new financial services pro- affected by undercapitalization, weak financial viders in rural China. A new round of RCC reforms performance, corporate governance problems, has been launched since the third national finance political interference and inadequate regulation conference in February 2007, however the direc- and supervision. Recently, the People's Bank of tion for transforming the RCC system has yet to be China and the CBRC have started a new wave of finalized. reforms, including micro-lending pilot projects in New Area of Innovation #15: Introducing new methodologies to improve rural access to finance Context/Challenge: Despite China's repeated at- increase risks as multiple new entrants without tempts to reform the rural financial sector, rural track records put heavier demands on the effec- households' and enterprises' access to financial tiveness of banking regulation and supervision. services remains poor and uneven across the re- Both incumbents and new entrants will need to gions. China is among the economies known for be innovative and acquire new methodologies of high savings ratios. Its main problem is not pau- lending and other financial activities to challenge city of financial resources but lack of mechanisms delivering financial services and products at the to allocate savings to the most productive sectors retail level. and users. Delivery of financial services and prod- ucts at the retail level remains constrained by high Rationale/Description: There is great potential in costs and risks, especially in localities with sparse the next few years to improve rural households' populations and idiosyncratic demands. access to finance and enterprises. Means include Additionally complicating access to financial promoting the competitiveness and diversity services is the lack of competitiveness and diver- of the rural financial market, improving corpo- sity in the rural financial market. Poorly governed rate governance of rural financial institutions, rural financial institutions, mainly the rural credit strengthening the regulatory framework for rural cooperatives, dominate the scene. Attempts to ad- finance, and introducing new methodologies to dress the shortcomings of rural finance often are deliver both wholesale and retail financial services ad hoc, distort incentives, and lead to wasteful al- and products. location of scarce resources. The recent relaxation of entry controls coupled with enhanced regula- China-Bank Partnership: The Bank is uniquely tion and supervision could enhance competition positioned on both the policy and technical lev- in the rural financial market. However, these also els to assist China to improve households' and 119 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION enterprises' access to rural and microfinance. On working with the bank regulatory authority the policy level, the Bank has been promoting an to build up a prudential regulatory framework integrated approach to rural finance. Through a will ensure that well-governed RFIs are subject policy note and workshops, it advised the Chinese to effective regulation and supervision in the government on formulating a comprehensive and competitive market environment. coordinated strategy. On the technical level, the Disseminatingbestpracticesintheprovision Bank has a reservoir of knowledge and expertise of retail-level financial services and products that may benefit Chinese policy-makers and finan- to rural households and enterprises. This dis- cial institutions in their search for solutions to ef- seminationcouldbeachievedbydemonstrat- ficiently deliver financial services and products at ing through a lending project (and possible both the wholesale and retail levels. follow-up project) that, with meaningful out- Specific potential areas of cooperation in- reach, lending to micro and small businesses clude: in both rural and urban areas can be com- mercially sustainable. The Micro and Small Further promoting sound strategies and poli- Enterprise (MSE) finance project under cies in rural and microfinance to assist the preparation holds great potential for replica- Chinese authorities to remove remaining tion and scaling up. Preliminary results have distortions in rural financial policies and to indicated that the lending technology and build a diverse and competitive rural financial the downscaling approach can work effec- market. Legal and judicial reforms and further tively in China. improvement of an information framework Introducing best practice in monitoring and will improve contract enforcement, thereby evaluatingruralandmicrofinanceprogramsby encouraging increased flows of financial re- a pilot research project. The project would an- sources to the rural financial market. Introduc- swer key questions: (1) whether rural house- tion of a modern secured transactions frame- holds and businesses are credit constrained, work, including a national registry, stands to (2) whether the MSE lending technology and increase credit supplies with minimal cost. At downscaling approach can improve access to the moment, lending interest rate ceilings still finance through meaningful outreach, and prevent rural financial institutions (RFIs) from (3) whether improved access to finance im- reaching out to borrowers in most remote and proves the welfare of the targeted clients. sparsely populated areas. In addition, liberal- Introducing financial services and products ization of lending interest rates could further other than credit. They would include index- unleash credit supplies in the rural financial based insurance, electronic reverse factor- market. ing, microleasing, mobile banking, and stra- Using fiscal policy to reduce poverty will tegic alliances between commercial banks free RFIs from serving quasi-fiscal functions and RFIs (such as correspondent banking) to and enable them to reorient commercially. leverage a greater supply of comprehensive Building capacity in designated policy banks, rural financial services. such as the Agricultural Development Bank of China, will enable them to become apex Potential Impacts: Through its contributions at organizations. They then can provide whole- both policy and technical levels, the Bank hopes sale funding and TA to retailing financial insti- to assist China in realizing its overarching goal tutions that will help rationalize government of providing efficient financial services to rural intervention in the rural financial market with- households and enterprises in the drive to build out crowding out private initiatives. Finally, a harmonious and well-to-do society and a new 120 CPS PILLAR 4: FINANCING RAPID GROWTH Socialist Countryside. Key impacts are expected finance by rural households and enterprises in two areas: across different regions Assist Agricultural Development Bank of As well-governed and managed RFIs oper- China (ADBC) to assume a development ate under effective prudential regulation and agency role through TA and restructuring supervision, a competitive and diverse rural operations (initial contact; with concept note financial market will be built up. delivered for further discussion) A conducive legal and informational frame- Engage with China Development Bank work will be put in place to facilitate con- (CDB) to promote commercially sustain- tract enforcement and reduce transaction able MSE finance through a lending project costs. This framework will further encour- (Board submission expected in FY07), with age credit flows to the rural financial market. potential to scale up nationwide and repli- This credit will benefit rural households and cate in rural and peri-urban areas enterprises that can use the financial savings Continue to assist China Postal Savings Bank efficiently and productively. to become a meaningful rural financial ser- vice provider by channeling savings deposits Ongoing/Planned Bank-supported Activities: to the most efficient and productive users Potentially assist CBRC to put in place an ef- Advise policy-makers on an integrated ru- fective prudential regulatory framework to ral financial strategy and follow-up policy ensure against systemic risks at a time when dialogues; assist the People's Bank of China entry controls are relaxed thus encouraging (PBC) in conducting a rural household sur- more effective regulation and supervision. vey to understand the true demand for rural 121 CPS PILLAR 4: FINANCING RAPID GROWTH CPS PILLAR 5: IMPROVING PUBLIC AND MARKET INSTITUTIONS T o achieve more sustainable and balanced de- ernmentfunctions,deepenreformofstate-owned velopment, the Government has put an increas- enterprises and supervision of state-owned as- ing emphasis in the 11th Five Year Plan on deep- sets, and increase use of market-based mecha- ening market and public administration reforms to nisms including prices that better reflect supply, improve the functioning of China's economy and demand and resource scarcity. It also stresses the the government's provision of services. China's re- need to address the root causes of corruption and cent growth has been based on high investment to improve administrative efficiency. To achieve and labor mobilization, but over time sustaining these objectives, the 11th FYP stresses the need growth will depend on increasing firm-level com- to strengthen accountability and transparency petitiveness. To be competitive in the long run, of government decision making, improve the Chinese firms need to develop sophisticated prod- rule of law, improve government disclosure and ucts, know their customers, exploit opportunities deepen grassroots democracy. It also seeks to for forward integration, and strengthen interfirm strengthen budget formulation, execution, and cooperation. The GOC can accelerate this process reporting--against an improved M&E framework- by creating a more competitive business environ- -and achieve better alignment between revenue ment and improving corporate governance. The assignments and fiscal responsibilities at sub-na- Government also faces challenges in redefining the tional levels of government, with a view to im- state's role in service delivery, which is still mainly proving the equity and efficiency of public fund- the responsibility of public service units (PSUs), by ing and related service delivery. The cases below deciding where the state should be involved in ser- illustrate two important areas of reform where vice delivery; in what manner; and at what level(s) the Bank is supporting the Government's effort of government. to deepen reform through improving monitoring The 11th Five Year Plan places priority on and evaluation and citizen participation. deepening structural reforms that improve gov- 123 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION New Area of Innovation #16: Piloting new approaches for monitoring and evaluation at national, sectoral, and project levels Context/Challenge:WithChina'ssustainedgrowth, Rationale/Description: Under the new 11th FYP in addition to being economically better off, Chi- (2006­2010), prepared with broad participation, nese people also are more informed and mobile. China established an indicator matrix with out- For example, the emergence of open labor mar- come indicators and targets. It committed itself to kets and products has increased the freedom of conduct a mid-term review of the plan, which will individuals to choose type of employment, work be reported to the National People's Congress. and living places, and consumption bundle. In oth- This initiative was commissioned by the Na- er words, individuals' capabilities have increased tional Development and Reform Commission as a result not only of higher income but also of (NDRC) following its mid-term review of the 10th increased freedom of choices.25 In the meantime, FYP. The main objective is to establish a national under the 11th Five-Year Plan (FYP) and in national monitoring and evaluation (M&E) framework for policies, Chinese leaders are prioritizing increas- the 11th FYP (covering 2006­2010). This country- ing participation, transparency, and accountability level M&E framework will be the first ever devel- in government work to achieve more sustainable oped in China.27 With the Bank's support under and equitable development. an IDF project, a three-tier M&E framework was As an example, in March 2004 Premier Wen established for the 11th FYP--the first ever de- Jiabao highlighted that the country must "speed veloped in China. With additional Bank support, up the formation and improvement of the sys- China will conduct a mid-course evaluation of the tems for making collective decisions on major 11th FYP based on the M&E work of the first phase. issues, for soliciting opinions from experts, for For the first time in history, the evaluation results keeping the public informed and for holding will be reported to the National People's Congress public hearings, and for accountability in policy- through the State Council. making."26 China-Bank Partnership: National M&E is new to China. The Bank's contribution is to introduce the international expertise and experiences in this area to China. Bank actions have included: Helping China to sequentially introduce and strengthen an M&E framework for the 11th FYP based on international good practices. A team of international and domestic experts has created the M&E framework for the 11th 25As termed by Amartya Sen 26"Annual Report on the Work of the Government," presented to the National People's Congress, March 2004. 27Since China did not conduct comprehensive M&E Consulting farmers on government work to address work on its first 9 FYPs, in 2003 the country pre- the new challenges pared a brief mid-course review for the 10th FYP. 124 CPS PILLAR 4: FINANCING RAPID GROWTH FYP following an internationally recognized conference, the China case, based on the In- "Ten Steps" model.28 The model is based on stitutional Development Fund (IDF) project, a sequence of 10 steps or activities that are was selected as the only case for the keynote considered critical to establish a results-based speech at the conference. Presentation of M&E framework. A readiness assessment car- the China case was attended by the heads ried out under the first step of the model of many development agencies and more found that China has a favorable political en- than 500 representatives from 40 countries. vironment and a well-positioned champion A note, co-authored by the counterpart and for M&E, the NDRC's Development Planning the Bank's task manger of the IDF project, Department. was accepted to appear in the Sourcebook Nevertheless, significant bottlenecks ex- on Emerging Good Practice in Managing for ist, including the current statistical system, Development Results. A poster describing the limited M&E knowledge and capacity, and China case also was voted as No.1, and won the disconnect between planning and bud- the Leadership Award at the Results Market- geting. These barriers to M&E will need to place at the Conference. be overcome. Therefore, the team's analysis recommended that, rather than immediately Potential Impacts: The introduction of the output/ launch a more technically comprehensive outcome indicators with targets and implemen- M&E system, China place initial priority on es- tation measures adopted by the central govern- tablishing a basic, workable M&E framework ment will strengthen the accountability and im- that can be strengthened over time as the prove the transparency of the government's work. constraints are addressed. Among other ac- For example, after only 6 months under the 11th tivities, the team reviewed the international Plan, the monitoring results were released. They M&E experiences of the OECD and various acknowledged the initial implementation failures developing countries and convened consul- of some key targets. Such level of transparency by tative meetings with both international and China is unprecedented. The publicity has stimu- domestic experts. lated open and active discussions among policy- Helping China to share M&E experiences with makers, experts, and media. Provincial govern- other developing countries. China's progress ments have developed performance criteria for on M&E was highlighted at the Global Confer- high-ranking officials based on the targets. For the ence on Managing for Development Results, first time, a public opinion poll was chosen as one held February 5­7, 2007 in Hanoi. Through of the means to evaluate officials. careful review of all the country cases recom- mended by a global team working on the 28Jusek and Rist 2004 125 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION New Area of Innovation #17: Improving urban services and governance by involving public participation Context/Challenge: Under the "scientific con- the diagnosis, analysis, and policy recommenda- cept of development" and 11th Five-Year Plan tions based on the survey and the corresponding (FYP), government reform has emerged as a top case studies. priority for China's leaders. For four consecutive At the technical level, obtaining meaningful, years (2004­07), Premier Wen Jiabao's annual truthful, and representative citizen feedback on "Report on the Work of the Government" in the service delivery is neither easy nor straightfor- National People's Congress has emphasized the ward. High ratings of citizen satisfaction with lo- importance of establishing service-oriented gov- cal government performance often are reported ernment, increasing the transparency of govern- in the media. However, these ratings typically are ment work, expanding the participation of the not based on rigorous analyses, and so increasing- general public, and evaluating the public service ly are being questioned by experts, policy-makers, work to improve accountability.29 and ordinary citizens.30 Implementing this reform agenda is very To obtain a more accurate picture, a survey challenging. As pointed out in commentary in must be designed with a rigorous methodology The People's Daily, "Building Service-Oriented that includes a carefully designed questionnaire Government" is a comprehensive undertaking and an appropriate sampling framework. This sur- that requires conceptual changes as well as fun- vey process requires sound technical expertise, damental transformations in rules, accountability thorough knowledge of sectoral issues, and will- mechanisms, and institutional systems. Making ingness to carry out detailed and time-consuming these changes will require defining concrete tasks preparation. with clear objectives, technically sound approach- Once results are obtained, using them to es, and practically implement-able measures. constructively improve public service provision However, related discussions among academics, is another challenging task. It requires careful policy-makers and practitioners have focused pri- analysis of city- or sector-specific institutional, marily on the rationale for government reform and economic, and social conditions to identify criti- the government's role as an economic developer cal bottlenecks and find realistic and innovative vs. service provider.There has been less systematic approaches to improve service provision. attention to define what a more service-oriented government should look like and how it could be China-Bank Partnership: The China Urban Services built. and Governance Study aims to address both issues by using rigorous methodology and international Rationale/Description: In light of government pri- experiences. So far, a citizen feedback survey of 5 orities and the related challenge, the World Bank, cities in China has solicited opinions from nearly Tsinghua University, and the Development Re- 5,000 households on health, education, and water search Center jointly are conducting a China Urban provision. Case studies have been conducted to Services and Governance Study. The study focuses examine cases in different fields and from differ- on two issues of government reform: (1) expand- ing public participation in the service-provision 29 chain of government work by conducting house- See Wen Jiabao, 2004, 2005, 2006, and 2007. "Report on the Work of the Government." hold surveys; and (2) helping local governments 30China Daily, April 2­3, 2005, "Too Many Useless to become more service-oriented by providing Ratings and Too Few Useful Ones." 126 CPS PILLAR 4: FINANCING RAPID GROWTH Box 4. A Framework for Analyzing Public Services and Governance In the ideal situation, three sets of actors are linked in relation- The state ships of power and accountability. Citizens exercise voice over policy-makers. Policymakers have management compacts with Politicians Policymakers organizational providers. Clients exercise client power through interactions with providers. Long route of accountability Compac Voice t Weaknesses in any of the three relationships can result in service failures. A key purpose of the China Urban Services and Governance Study is to use the household (HH) survey Short route Citizens/clients Providers instrument to collect citizens' opinions on public service de- livery. Their opinions then will be conveyed systematically to Coalition/inclusion Client power Management policy-makers and service providers. In other words, the HH survey will initiate and/or strengthen the "voice" links in the Nonpoor Poor Frontline Organizations governance framework. Diagnosis and analysis under the proj- ect will examine the bottlenecks for the problems identified, which could exist in any of the framework links. Services ent aspects. To enhance competition among cit- 4)foranalyzingpublicservicesandgovernance. ies,"league tables"will be prepared to rank the cit- This framework serves as the intellectual un- ies surveyed based on the results. The project also derpinning for this study. It involves primarily will translate the opinions solicited into diagnoses three sets of actors in the service-provision and analyses that will be useful to local govern- chain: policy-makers such as central and local ments to identify bottlenecks for service delivery governments, service providers such as hos- improvement. pitals and schools, and clients such as urban This project is the first, large-scale citizen- residents and migrants. report-card (CRC) type of exercise in China. The broad international experiences and The project enhances CRC in that the survey technical expertise accumulated by the World asks about not only citizens' satisfactions but also Bank in executing the citizen feedback sur- their experiences. Prior successes of the CRC ex- veys in other countries can be useful to China. ercise have been achieved primarily in countries For example, Chinese local scholars and prac- with Western democratic systems. A potentially titioners have relatively little experience with significant value-added of this project is to find "perception biases"that exist in feedback sur- out whether and how a CRC exercise can be ef- vey results. Through these biases, people with fective in a country with different political con- different income levels, different educational text, such as China. backgrounds, different access to informa- The Bank's contribution will be two-fold: tion, and different connections to local gov- ernments could have different perceptions, The World Bank World Development Report which would bias their answers to the sur- 2004 provides a powerful framework (see Box vey questions. The World Bank will introduce 127 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION international experiences in this project to and complaints about public services. Both central ensure the employment of a rigorous meth- and local governments will be able to obtain first- odology that includes addressing perception hand information they would not have otherwise. biases in the survey results. The Bank will take This information will help address the weaknesses this preventive action to ensure that the diag- in official statistics from line ministries or statisti- noses and analysis are accurate so that appro- cal departments, which often are flawed or biased priate incentives and recommendations are since they were provided by local governments provided. themselves. As mentioned, league tables to rank the cities surveyed based on the survey results will Potential Impacts: Through participating in the enhance competition among cities. As a result of feedback survey, citizens will have increased aware- the above, the quality of urban services and the ness of their concrete needs, and their demands for governance structure will be improved. 128 PROJECT MANAGEMENT SECTOR-WIDE AND MULTI-SECTOR APPROACHES New Area of Innovation #18: Supporting a province-wide approach to rural road rehabilitation with innovative World Bank financing Context/Challenge: Over the past 25 years, China transaction-focused approach can be implement- has very ably adopted and refined modern devel- ed. opment project methodology as a key means to address its development challenges. This method- Rationale/Description: Sector- or province-wide ology has drawn on traditional investment proj- approaches offer the opportunity for govern- ects financed by the Bank and other donors. These ments to shift focus from individual projects to a investment projects require the ex-ante planning more holistic view of the sector or program. These and definition of project outputs, implementation alternative approaches provide higher flexibility to arrangements largely outside the normal activities lower-level government entities to define the spe- of the counterpart entity (parallel implementation cific investments or activities and disbursement systems), and compliance mechanisms that rely on mechanisms while enhancing their accountability the review of ex-ante "blueprints." This approach for outputs and outcomes. Such approaches can often is appropriate for projects with singular or enable a greater focus on longer-term sector re- large investment components or those that require forms and capacity building than is possible under substantial policy changes or are implemented by traditional project approaches. They also allow for entities with weak capacity. Other projects make further involvement of country-led partnerships up part of an established government program in with other stakeholders and donors, such as pool- which components can be standardized, are easily ing resources. The table below compares key fea- measured, and have reasonably strong implemen- tures of the traditional and the program-based tation capacity. For these, a more flexible and less approaches. Traditionalprojectapproach Sector-wideapproachorprogram-basedapproach "Blueprint"approach Process-oriented approach Narrowly defined project Holistic view of sector/program Detailed upfront planning of inputs/outputs Agreement of program/approach Project-specific performance results Sector/program performance/results Exclusive donor-recipient relationships Enables country-led partnerships Bilateral negotiation/agreement Coordination and collective dialogue Parallel implementation systems Increased use of counterpart implementation systems and Short-term disbursement and success of projects partnerships with mutual trust Longer-term capacity development Stronger country ownership and leadership 129 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION Figure 12. Schematic representation of the institutional framework of the highway sector in Fujian Province Fujian Provincial Communications Department (FPCD) FPCED FPCD FPCD Expressway Const. Directorate Planning Deputy Directorate Construction Deputy Direct. Planning Funding, oversight, and technical support Construction Expressway Network Planning 5 National & 1,200 km by end 2005 support Cities 17 Provincial Roads +1,000 km by end 2010 and subsidy 9 Communications Bureaus 7,500 km by 2005 +1,100 km by end 2017 +1,100 km by 2010 Technical support 84 Counties Technical Townships/ Communications support and County/Rural Villages Bureaus monitoring Roads Highway Stations 11,000 Sta 35,000 km by 2010 In the context of the 11th Five-Year Program the required quality standards. (2006­2010), the provincial government of Fu- jian advanced a province-wide initiative to im- China-Bank Partnership: Fujian has enlisted the prove rural roads: the Rural Roads Improvement Bank to support the existing RRIP program both Program (RRIP). RRIP focuses on the provincial financially and technically through the Bank- government's support to local entities in the reha- financed Fujian Highway Sector Investment bilitation of mostly unpaved rural roads that link Project.(see Figure 12) This project applies ele- administrative villages to the provincial network. ments of the Bank's "Sector-Wide Approach" Established in 2004, RRIP attempts to rehabilitate (SWAp) to Fujian's Rural Roads Improvement Pro- 35,000 km by end 2010.31 RRIP encompasses a lim- gram. SWAp is a relatively new financing vehicle itednumberofdifferenttypesofinvestments,each that differs from a traditional project investment with similar unit size (for example, cost per kilome- approach. Under the SWAp, the Bank will finance ter) and with technical specifications that are well approximately only 20 percent of the total invest- known and easily measurable. By designing such ment required. Simultaneously, rather than focus- a program, the provincial government sought to ing only on components directly financed by the avoid a shorter-term, piecemeal approach to up- Bank, the Bank will support the introduction of in- grade the rural network. Instead, it established an novative institutional arrangements and manage- incentive structure for local entities to carry out ment capacities across Fujian's entire rural roads the necessary preparation and procurement activ- program. SWAp enables the Bank to emphasize ities while seeking the lower cost solutions within supporting longer-term system reforms and ca- 130 SECTOR-WIDE AND MULTI-SECTOR APPROACHES pacities than would be possible under traditional measures when land acquisition and resettle- project-based investments. The Bank was cogni- ment are required, including the related con- zant of the sheer size of RRIP and the low percent- sultation processes. age of Bank financing­­approximately 20 percent Application of a minority nationalities devel- of the total investment required. Thus, in the con- opmentframeworkthatdescribestheprinciples text of strengthening the RRIP current framework, and measures to guide road planning and im- including the application of fiduciary and safe- plementation in minority nationalities areas; guards elements, the Bank chose an incremental and the provisions regarding consultation, approach that adopts elements of SWAps and participation, and broad support to the proj- preserves the necessary compliance with proven ect by the corresponding communities. fiduciary safeguards and technical requirements Application of competitive approaches to the as the preferred implementation option. procurement of the works, and of engineering By using SWAp, the partnership of the Fujian technical standards during the implementa- Provincial Communications Department (FPCD) tion of works; as well as standards to super- and the World Bank seeks to solidify RRIP by im- vise and monitor their quality. proving the implementation mechanisms of the Conditions for proper financial management original RRIP and enhancing the impact and sus- of the contracts and the contract payments, tainability of the interventions on rural roads. Key such as adequate book-keeping, auditing, innovations in the Bank's partnership with Fujian and reporting the completion of works, and in support of the rural roads program include: evidence of the on-time payment to contrac- tors in line with contract clauses. Helping Fujian Province enhance and operational- ize new environmental, social, and fiduciary stan- Through its Fujian Highway Bureau, FPCD dards across its entire rural road program. Under will be responsible to disseminate the require- the SWAp, the Bank is working with Fujian to ments of the World Bank loan as well as provide strengthen its rural roads implementation frame- training to the local communities to help them work through clear and comprehensive standards learn and implement the procedures and condi- to be applied to rural road rehabilitation across tions required to obtain the financing support the whole province. The province-wide approach from the Bank loan. The FPCD will submit bian- enables Fujian and the Bank to work together to nual progress reports to the Bank during project enhance the overall framework. This framework implementation. The reports will summarize the also enables them to jointly build the implemen- actions and activities undertaken to disseminate tation capacities needed at different levels of the the framework and to implement training in the system, rather than focus primarily on the spe- counties/townships/villages. Additional innova- cific segments directly financed by the Bank. tions to be supported by the Bank under the Fu- The revamped implementation framework-- jian project include: the Rural Roads Implementation Framework (RRIF)--emphasizes a more holistic perspective Introducing an output-based disburse- on the rehabilitation works. RRIF includes: ment approach that provides incentives for poor and less-poor counties to apply road Applicationofenvironmentalmeasuresduring rehabilitation standards. Under the Fujian theexecutionoftheimprovementworks,aswell Project, SWAp incorporates a disbursement as provisions in case of finding cultural relics. mechanism that eliminates ex-ante reviews Resettlementactionsandprocedurestoguide by the Bank. The SWAp focuses on strength- theplanningandimplementationofmitigation ening Fujian's own internal quality controls, 131 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION complemented with ex-post sample reviews the RRIF. Upon receiving these verifications, by the Bank and support from the Provincial FPCD will undertake the necessary comple- Audit Office. Local entities undertaking road mentary checks and issue the certification of rehabilitation are reimbursed (with resources compliance with the RRIF. In addition, besides received as a grant) for their work after it is the normal annual financial audit for all proj- completed and once specialists have issued ect components, the Provincial Audit Office a report confirming that the rehabilitation will audit the verification procedures listed meets the criteria and standards (engineer- above. ing quality, environmental and social safe- guards) set out in FPCD's framework. Under The funds to be withdrawn from the World the Bank's RRIP, loan resources are used to Bank loan account for a particular road shall not reimburse communities according to agreed be higher than the actual cost of the completed amounts based on predefined unit costs per works. Annually, FPCD will compile a summary of km improved.The amounts allow for the level the actual costs of the completed works and as- of reimbursement to vary (40 percent­80 per- sess the disbursement amounts per km of rehabil- cent) according to the poverty level and phys- itated roads to ensure that the previous condition ical characteristics of the area in which the is complied with. Based on this assessment and work takes place, ensuring that poorer com- the World Bank post-reviews, the unit costs that munities and/or those rehabilitating roads in are the basis for the calculation of the disburse- mountainous rural areas receive higher levels ment amounts will be reviewed and revised as of reimbursement than improvements un- necessary. dertaken in nonpoor or coastal areas. Defining new institutional arrangements to Potential Impacts: The Bank's support to strength- monitor compliance with revamped rural en the implementation framework and capaci- road implementation framework. Following ties is expected to instill better practices in the the analysis of several alternatives, the World implementation of the Rural Roads Improvement Bank and the FPCD agree to engage the sup- Program across the province. Even although the port of the Fujian Highway Administration World Bank loan will finance only a part of the Bureau (FHAB) and the Fujian ProvincialTrans- overall rehabilitation program (approximately port Quality Inspection Stations (FPTQIS) to 3,500 km), this strengthened framework is expect- verify the compliance with the elements of ed to enhance the quality and efficiency of rural the Rural Roads Implementation Framework road improvements throughout the province by (RRIF). FHAB and FPTQIS will evaluate the in- providing clear guidelines and enhanced quality formation after it has been elaborated and standards to which all rural road improvements reviewed by the townships/villages/counties will be held. FPCD will take responsibility for dis- and further reviewed by the communication seminating the criteria and procedures. FPCD also bureaus in the corresponding counties and will provide training to local communities so that cities. FHAB and the FPTQIS are staffed with they can access the funds made available under specialists in all the areas of the RRIF. These the World Bank loan. Twice a year, the FPCD will specialists, including those versed in environ- report to the Bank summarizing the department's mental and social safeguards, and in procure- progress in disseminating the framework and in ment and financial management, will make providing training to counties, townships, and the necessary verifications of compliance with villages. To evaluate dissemination of the frame- 132 SECTOR-WIDE AND MULTI-SECTOR APPROACHES work, all 10,000 km are subject to compliance with dards and reduced implementation delays the revised FPCD framework and will be part of a and project management costs. It also is an- random-sample Bank supervision. This process is ticipated that the project will increase the re- expected to encourage local capacity strengthen- sponsiveness and effectiveness of the main- ing. tenance/ rehabilitation investment of RRIP. Specific benefits of using a SWAp to support It is too early to draw definitive conclu- an existing sector or province-wide program and sions on the impact of the sector work ap- country systems include: proach. However, the encouraging prelimi- nary evidence is that communes are willing Encouragingamoreholisticapproachacross to apply the more stringent rehabilitation a province or sector that can better weigh criteria in return for the additional financing options, prioritize resources, and enhance that they receive. It also is apparent that the capacities to monitor outputs and outcomes provincialgovernmentseesadvantagesinthe rather than inputs. Enables GOC-WBG coop- approach, both in the improved standard and eration to strengthen the implementation consistent quality of infrastructure improve- framework for a whole province or sector, ments being made in the province and in the rather than focusing on particular pieces. reduced burden of the transactions oversight Broadening focus of GOC-WBG cooperation enabled by the SWAp methodology. to strengthen systems, capacities, and pro- cedures of counterpart entities across a prov- This approach offers a promising opportunity ince or sector, rather than focus on a specific to scale up Bank-supported criteria to implement investment. For example, the disbursement projects wherever targeted investments are part mechanism in the Fujian project seeks to rely of a broader program of investments with similar on Fujian's own control systems and provides average unit costs and measurable technical spec- a more streamlined and ex-post approach ifications. This approach requires a greater upfront that avoids piecemeal prior reviews of inputs effort to define an enhanced program implemen- and disbursements. The FPCD remains at the tation framework. However, the approach then re- center of the project and is responsible for the lies on the agreed local procurement procedures quality of the final outputs. The mechanism for its implementation without the need for World reinforces the current incentive structure for Bank reviews prior to carrying out the invest- local entities to seek low cost contractual so- ments. It is through Bank post-reviews of a sample lutions that comply with the strengthened of works with the support of the relevant audit implementation framework. entities that the confirmation of compliance with Enablinggreaterflexibilityinimplementation the framework takes place and that further techni- arrangements while requiring greater adher- cal support can be provided. Although requiring ence to agreed outputs and results. In the prefinancing of the works by the responsible local case of Fujian, this combination is expected entities, the disbursement mechanism is flexible to contribute to the implementation of more in disbursing the relevant amounts based on the efficient, cost-effective rural road rehabilita- local government's own certification of compli- tion, with improved road rehabilitation stan- ance with the agreed framework. 133 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION Forward innovation #19: Reducing traffic fatalities through introducing a multi-sector approach to improve road traffic safety Context/Challenge: China has the highest rate of China has taken steps to address the traffic road traffic fatalities in the world. Each year almost safety issue, for example, in the 2004 Road Traffic 100,000 people are killed and several million in- Safety Law. However, inconsistent implementation jured.32 Road accidents are the leading cause of of this law, combined with fragmented road safety death until age 45. The 2005 fatality rate of 11.4 authorities, has limited its impact in reducing ac- per 10,000 vehicles compares with 4.2 for Malay- cidents. Road safety is a shared responsibility and sia, 1.6 for the US, and 0.9 for Japan. Vulnerable requires the commitment of multiple government road users (cyclists, pedestrians, and motorcy- agencies, industries, and research organizations. clists) represent 60 percent of the fatalities and A clear definition of each partner's responsibility, injuries. Traffic safety is a major public health issue strong leadership, and coordination among safety for China since road injury patients take up more partners are essential. A comprehensive road safe- than 25 percent of hospital beds.The cost of traffic ty management system in China would help over- accidents is estimated at 1.0­3.0 percent of China's come the institutionally fragmented approach GDP (see Figure 13). and help all parties coordinate to address road The traffic situation in China resembles that in safety. Such a system could be piloted through a other developing countries. As GDP grows, there is stand-alone, multi-sectoral, second-generation rapid motorization. Simultaneously, investments safety project.33 are made in infrastructure, education, and other activities that reduce the risk of accidents. Interna- Rationale/Description: To realize a multi-sectoral tional experience suggests that the number of fa- approach to improve traffic safety, a first step will talities peaks at a GDP of approximately US$4,000. be to establish an institutional structure to coor- This experience suggests that China's traffic fatal- dinate roles and responsibilities of the different ity rate will increase before declining (see Figure agencies. Such an approach could be supported 14). by a Bank-financed project. Such a project could involve: (1) road agencies (such as the Provincial Communica- tions Department), (2) Public Se- Figure 13. Causes of Fatalities 2004 curity Bureau, (3) health sector, and/or (4) education sector. Proj- Non-Motorized Vehicles ects would be done for a single 2.5% province. Under a common strat- Driver Error Passengers and Pedestrians egy, a second-generation road 87.4 3.7% safety project would combine Road Conditions 0.3% road safety investments with Others activities to improve enforce- 1.8% ment of safe and effective traffic Mechanical Failure management, safer vehicles, im- 4.3% proved emergency response to accidents, and improved driver Source: Compiled by World Bank Task Team based on data provided by Public Security Bureau education and training. Without such a project, Chi- 134 SECTOR-WIDE AND MULTI-SECTOR APPROACHES Figure 14. Impact of GDP on Traffic Fatalities tion x iskR oriza Mot ccidentA GDP GDP = talitiesaF GDP Source: World Bank Project Team na will continue to reduce its accident risk. Howev- different key parties responsible for road safety er, with such a project, the risk would be reduced can work together, China would reduce accidents faster and, potentially, to a lower long-term level at a much faster rate than otherwise (see Figure than otherwise possible. 15). China-Bank Partnership: The Bank is in a unique Ongoing/Planned Bank-supported Activities: Traf- position to bring international best practice and fic safety is a key component of all Bank road trans- resources to help China. These would enable port projects. Since 2005, the Bank has mobilized China move ahead rapidly to improve traffic safety. For exam- ple, the Bank is financing stand- Figure 15. Impact of GDP on Traffic Fatalities alone multi-sectoral road safety projects in Iran and Vietnam. The institution also has access to Accident top road traffic safety specialists Risk from a number of countries who are willing to assist China. Without Comprehensive Project Potential Impacts: The most di- With rect impact would be a reduced Comprehensive traffic accident rate and im- Project proved overall road safety. More Time significantly, by creating an ef- Source: World Bank Project Team fective environment in which the 135 CHINA AND THE WORLD BANK: A PARTNERSHIP FOR INNOVATION additional resources to help China improve traffic project in China; a 2006­07 study on "Road Safety safety. Activities to date include a 2005 Review of in China: Review of Past Experiences and Options Road Traffic Safety in Hubei Province; a 2006 Semi- for Forward Progress"; and establishment of a nar on Road Traffic Safety in Beijing to investigate Road Traffic Safety Training Center in Wuhan. the opportunities for a stand-alone multi-sectoral 136