Page 1 PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB2267 Project Name Liaoning Third Medium Cities Infrastructure Project Region EAST ASIA AND PACIFIC Sector District heating and energy efficiency services (95%);Oil and gas (5%) Project ID P099224 Borrower(s) GOVT OF CHINA; LIAONING PROVINCE Implementing Agency LDRC FCUPMO No. 13 Shsiweilu Rd. Heping District Liaoning Province China Tel: (86-24) 23264831 Fax: (86-24) 23264831 Kecengsun@hotmail.com China; Liaoning Province China Environment Category [ ] A [ ] B [ ] C [ ] FI [x] TBD (to be determined) Date PID Prepared March 21, 2006 Estimated Date of Appraisal Authorization Estimated Date of Board Approval July 26, 2007 1. Key development issues and rationale for Bank involvement Revitalizing the Northeastern Region of China: The central government, led by the State Council in conjunction with provincial governments, has launched an ambitious program to “revitalize” Northeast China, including initiatives to stimulate economic development. The Northeast of China is often characterized as a “rust-belt,” and there is a need for a major transition to recapture the strong economic performance of the past. Role of the World Bank: Liaoning’s provincial government has requested Bank support for urban environment, transportation, heating and gas sectors in medium-sized cities, which generally lag behind Shenyang, the capital, and Dalian, its major port. The Government of China has programmed a series of Bank urban investment projects in the coming years. The proposed FY08 Liaoning Third Medium Cities Infrastructure Project (LMC3) responds to the Government’s request for assistance with urban heating modernization and gas supply. Heat Reform is high on the government agenda. The proposed heating modernization in Liaoning Province is well timed with recent central Government initiatives in heat reform. Urban central heating is transitioning from a welfare-based system to a market-driven one in China. Page 2 Reform of urban heating system design, pricing, metering and bill payment systems is high on the national agenda and particularly important for Northeast China, which has long, cold winters. Over the past six years the Bank has been working with the national Government on heat reform and building energy efficiency improvements. Several policy support activities were mobilized especially with ESMAP and ASTAE support. A centerpiece of this effort is an $18 million GEF Heat Reform and Building Energy Efficiency Project (effective, FY06) supports integration of heat system modernization, heat reform implementation and building energy efficiency improvements in pilot cities included in the national Government’s reform program. This cooperation will now be extended to Liaoning. Heating operators and city governments have limited experience with sector innovations demanded by reforms. There is little experience with the sector and business innovations needed for implementing heat reform. As in the rest of the cold-climate regions of China, urban space heating in Liaoning is characterized by energy waste and represents one of the last vestiges of the old-style welfare system in China. The currently unreformed heating sector provides no incentives for consumers to respond to market-based energy costs. China’s centralized heating systems are based on standards of Soviet technology that do not allow consumers to control their heating and are generally characterized by severe under- and over- heating. There are practically no meter-based systems and billing is based on a flat per square meter price. Moreover, most individual household heat bills are paid by their employers, mainly state-owned enterprises (SOEs). In addition, demand for modern heating services is rising. China’s construction boom in urban areas is driving efforts to develop high quality, modern space heating systems. i Nationally, China’s urban residential building stock is expected to more than double in the next 20 years. Liaoning’s building stock has grown on annual average 12 % over the last five years and is expected to grow about 10% (residential) and 7% (commercial) annually for the next five years. Replacing small boilers with centralized heating is a local priority. Replacing small boilers with modern, clean centralized heating services in city centers is important for social well being and urban livability. Many small boiler houses were built in the early stages of urbanization, and back then the placement of the boiler house in the center of the heat load was the state-of-the-art. The small boilers now find themselves in dense urban centers after strong urban expansion. Due to its major cost advantage, and shortages of alternatives, coal is expected to continue to be the predominant fuel for urban heating systems for the foreseeable future in China. Liaoning is no exception where large scale central heating supply alone represents about 10% of total coal consumption in the Province. The coal-fired small boiler houses in particular are a primary source of winter air pollution in China’s cold weather cities. In addition to its negative impact on city aesthetics, city air pollution is a major contributor to chronic pulmonary and other health related problems. Urban Gas. In Liaoning, gas supply networks first were constructed in the 1920’s-1930’s. The networks and storage facilities have not been well-maintained, are corroded, leaking and there is Page 3 a growing source of safety concerns. Especially for the Northeast, secure supply of natural gas and other conventional gas resources is an issue. 2. Proposed objective(s) The specific objectives of the proposed LMC3 project are to improve quality and efficiency of urban heating supply and gas services in selected medium cities of Liaoning Province. The project will have a large positive local environmental impact due to the elimination of small boilers located in city centers and will encourage construction of boiler houses that are further away from urban concentrations, taking advantage of advanced piping insulation technologies used widely in similar system worldwide. The quality of gas services will be improved through the rehabilitation of severely deterioriating gas networks and access will be increased through the increased sustainable use of indigenous gas resources. 3. Preliminary description The proposed Project components currently are: Renewal of Heat Supply Services Most of the current proposals include a combination of the following elements (a) replacement of small boiler houses with modern centralized heating services, including construction of new boilers, primary and secondary networks and substations; (b) expansion of modern centralized heating services to new buildings; and (c) rehabilitation of existing boiler and network facilities. A critical element of this investment program is the introduction of the key technical innovations to enable the downstream implementation of heat reform. These are: (i) use of variable speed pumps on the primary side and if feasible on the secondary side of the network; (ii) substations with automatic temperature controls; and (iii) installation of heat meters at substation and possibly at building level. Additional proposals include: one industrial waste heat recovery rehabilitation project and construction of a new, small CHP plant. Gas Supply Improvements Current proposals include switching to LNG and coal mining gas, supply with associated natural gas, pipeline rehabilitation and expansion, storage tank construction and metering. Technical Assistance and Capacity Building in Utility Management and Regulation to support technical implementation of investments improvements in financial management of utilities, including billing systems, and for special topics relating to the implementation of urban heating sector reform. The activities will target the LMC cities in partnership with provincial government. Other Urban Services Renewal. Additional non-energy components may be added provided they have been previously appraised by the urban environment and transport teams. Page 4 4. Safeguard policies that might apply Environmental Assessment (OP/BP 4.01). Overall the proposed Project when completed will have substantial positive environmental benefits. Environmental issues are likely to be site specific, relating to construction activities. Involuntary Resettlment (OP/BP 4.12). It is not likely the project will involve large scale resettlement. Most pipeline routes are expected to follow public rights of way. However, there may be some small scale resettlement and moderate amounts of land acquisition associated with some of the subprojects. 5. Tentative financing Source: ($m.) BORROWER 200 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT 200 Total 400 6. Contact point Contact: Gailius J. Draugelis Title: Senior Energy Specialist Tel: (202) 458-7527 Fax: (202) 522-1648 Email: Gdraugelis@worldbank.org i Unlike district heating systems in Europe, the centralized heating systems in China provide space heating only. Domestic hot water (e.g. for washing) is produced by individual electric, and where available gas, boiler units.