McKinsey 2011 Urban Sustainability Index

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2011 Urban Sustainability Index

Urban China Initiative


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The 2011 Urban Sustainability Index is one of the inaugural studies of the Urban ChinaInitiative (UCI), a think-tank founded in 2010 by Columbia University, McKinsey &Company, and Tsinghua University. UCI was created to help solve some of Chinasmost difficult urbanization challenges. In particular, UCI aspires to three goals:

Solutions: Provide the best and most innovative solutions to urban developmentissues in China.

Talent: Convene Chinas leading domestic and international urban thinkers andprofessionals, and serve as a magnet for the best global thinkers.

Dialogue: Host Chinas leading national, provincial, and local dialogues on urbanissues.

With these complementary goals, UCI aims not only to play a role in advancing theacademic discussion of Chinas rapid urbanization, but also to provide insights andtools that may be directly useful to national and local policy makers, who will havea profound impact on the nature of Chinas urban development. The 2011 UrbanSustainability Index builds on the work published in 2010, The Urban SustainabilityIndex: A New Tool for Measuring Chinas Cities, and is designed to be the first ofyearly updates to the Index and analyses.1

The improvements in the Index methodology reflected in this report are in large partthe result of thoughtful feedback provided by a number of experts in the field, bothin China and abroad. Their insights into the utility of the Index strongly shaped therevisions to the tool itself and the focus of this years analysis, as well as the selectionof the case study cities.

In particular, we would like to thank Robert Beauregard, Professor of Urban Planning,Columbia University; Lv Bin, Director, Department of Urban and Regional Planningat the College of Urban and Environment Science, Peking University; Cui Dapeng,Secretary General, Low Carbon Department of the Chinese Society for SustainableDevelopment; Steve Hammer, Lecturer in Energy Planning, MIT, and co-Director ofthe Urban Climate Change Research Network; Huang Yaozhi, Professor of UrbanPlanning and Design, Suzhou University of Science and Technology; Li Tie, Director,China Center for Urban Development; Li Xun, Deputy Dean, China Academy of UrbanPlanning and Design; Mo Dongsheng, Vice Director, Planning and ConstructionBureau, Suzhou Industrial Park; Yin Chengzhi, Associate Professor, TsinghuaUniversity School of Public Management; Zhao Zhao, Guest Researcher, China CityDevelopment Academy; and Zhu Bide, Vice President, China City Development

Academy.

1 For the full 2010 report, see www.urbanchinainitiative.org.

Preface


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In addition, the report benefited tremendously from interviews with public- andprivate-sector leaders in Chengdu, Liuzhou, and Suzhou, the three cities we studiedin detail. We look forward to engaging with a broadening circle of scholars and publicservants as UCI continues to develop.

The 2011 Urban Sustainability Index research was led by a joint UCI-McKinsey team,including Adriana Akers, Anthony Gao, Xiujun Li, and Molly Lindsay, with support from

numerous others. Special thanks are also offered to Eadie Chen, Director of StrategicEngagement at UCI, and Gengtian Zhang, Research Director at UCI, for ongoinginsight and guidance on the effort.

Prof. Geng Xiao Prof. Lan Xue Dr. Jonathan Woetzel

Special Advisor for Dean, Director,Strategic Development, Tsinghua University McKinsey & Company,Columbia Global Center | School of Public ShanghaiEast Asia Management

December 2011


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Introduction

Urbanization in China is proceeding at a rate and scale unparalleled by any othermigration in recent history. Chinas urban population is projected to grow by about 250million peoplemore than the total population of Brazil todayby 2025. Also by 2025,202 Chinese cities will have more than one million residents, compared with 35 suchcities in all of Europe today, and 50,000 skyscrapers could be built, the equivalent ofconstructing New York City from scratch ten times over. If current trends continue, theproportion of Chinas GDP generated by cities will rise from 80 percent to 90 percent

over the same period. Indeed, Chinas continued urbanization is central to meeting thecountrys aggressive growth targets, with the country currently on track to triple GDPbetween 2010 and 2025.2

Chinas rapid march toward urbanization makes urban planning a priority at all levelsof government. The cities we examined in detail not only had plans for every squarekilometer of urban space, but also are each planning to develop entirely new citycenterseach as big or bigger than the existing urban coresto rise above acreagethat was farmland just a few years ago. Whether measured by its relationship to thecountrys explosive economic growth, the number of people affected, or the quantityof resources that must be marshaled, Chinas urbanization represents perhaps the

most significant migration of the new century.

Why sustainable urbanization matters

Chinas leaders face a choice. As rapid economic growth and urbanization continues,the country could move increasingly toward protecting the environment, conservingresources, and promoting equal access to high quality social services. Alternatively,aggressive GDP growth could lead to unchecked environmental degradation,resource depletion, and growing populations without access to basic public services.The sheer scale of Chinas urbanization makes the stakes between these choices

exceptionally high. In terms of energy, for example, urban China will likely accountfor up to a quarter of global growth in oil demand over the next 20 years, as well as20 percent of overall energy demand.3 Deciding if, and how, aggressive GDP growthcan be coupled with sustainable development is of paramount importance to Chinasfuture.

In terms of social welfare, the massive migration from countryside to city is fuelingurban growth and putting pressure on cities abilities to provide services to allresidents. Chinashukou system of residency permits, designed in the 1950s tocontrol migration between rural and urban areas, means that millions of migrants toChinas cities lack formal access to education or health care. Although data limitations

2 Preparing for Chinas Urban Billion, McKinsey Global Institute, March 2009; China Urbanization Model,

December 2011.

3 Ibid.


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make studying Chinas migrant populations diff icult, the phenomenon deservesspecial attention in any effort to understand the challenges and opportunities linked toChinas rapid growth.

The demand for housing created by the massive influx of population into urban areashas fueled a residential construction boom. Developers looking to profit from thisboom have built large numbers of rapidly-constructed, near-identical housing projects

across China. Unfortunately, the rush to profit from the construction surge has at timesleft low-quality buildings and ill-conceived area layouts. As an alternative, city planningdepartments can take advantage of the rise in housing demand to experiment anddevelop innovative designs for intelligent, environmentally friendly, and mass transit-oriented development.

Chinas rapid economic growth has had a predictable impact on the environment,including increased air and water pollution, which are posing greater and greaterthreats to human health. For example, today an estimated 59 percent of Chinas riverwater is below international potable standards.4 In addition, the resources requiredfor rapid economic growth may become increasingly scarce. Coal, for example, is

needed in ever increasing quantities to fuel the countrys power plants, and arableland is being taken over by rapidly expanding cities.

But while rapid urbanization has unleashed these substantial pressures on societyand environment, it has also given China a great opportunity to develop innovativepolicy solutions that support sustainable development. At a time when easilyaccessible technology can substantially reduce environmental damage, cities havethe opportunity to prevent future harm and reverse the worst of the damage alreadyinflicted. Impending scarcities provide strong incentives to implement and enforcepolicies geared toward conservation.

Many of the most critical decisions on the shape of urban development will be madeby local city leaders. While GDP growth targets are set by the national government,city off icials exercise significant discretion in deciding how to reach those targets,as well as in shaping many policies that directly impact the sustainability of a citysdevelopment. In large part, it is local policy choices that will shape Chinas pathtowardor away fromsustainable development.

It is in this context, with Chinas urbanization presenting both tremendous opportunityand great risks, that analyzing and understanding how China can achieve sustainableurbanization acquires great importance.

4 Ibid.


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The Urban Sustainability Index

The Urban Sustainability Index provides a data-driven evaluation of Chinese citiesbased on selected measures of sustainability. Developed in 2010 as a pilot researchproject of the Urban China Initiative, the Index strives to develop insights into therelative sustainability of Chinas rapidly growing cities, as well as to highlight casestudies of successful policies and outcomes. Ideally, the Index will become a tool

useful not only for academics, but also for policy makers.

The Urban Sustainability Index is the first urban development tool of its kind createdspecifically for Chinese cities. While we believe the methodology can be applicable tocities anywhere in the developing world, the metrics have been tailored to the level ofdevelopment of Chinas cities and take into account the unique data constraints foundin China.

The Index ranks 112 Chinese cities in terms of overall sustainability based on a setof social, economic, and environmental indicators. The cities studied are thosedesignated in 2006 as target cities for sustainable development by Chinas 11th

five-year plan (Exhibit 1). These cities span all regions of the country, range in urbanpopulation from 200,000 to almost 18 million, and represent income levels fromthe relatively poor, with average annual per capita income of just over than 10,000renminbi, to the far more affluent, with average per capita income of 30,000 renminbi.This sample set has the advantage of providing a group of cities large enough to berelatively representative of China as a whole, yet small enough to make data collectionfeasible.5 Furthermore, with the national government primed to seek ways to pursuesustainable growth in these cities, insights derived from these cities may prove ofimmediate interest to policy makers.

5 The sample set excludes urban areas that have not been designated ofcially as cities. McKinsey Global

Institute estimates that between 1996 and 2005, 176 urban centers emerged that behaved like cities

according to the relevant government criteria, but were not designated as such.


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Exhibit 1


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Analysis of the 2011 Urban Sustainability Index revealed a positive correlationbetween a citys income level and its sustainability scores, indicating that in somecases Chinas continued economic development may have a positive impact onsustainable urbanization. In addition to discussing this quantitative analysis, thereport includes a more qualitative exploration of three case study cities that showedparticularly strong improvement in one or more areas of sustainability. The reportexamines the sustainability of urban China through the stories of these cities from

three perspectives: the expansion of the physical city through the planning andconstruction of new urban centers; the social and legal position of migrants to Chinasurban centers; and the impact of government capital investment on environmentalsustainability.


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Constructing the index

The Urban Sustainability Index defines sustainability as economic growth thatimproves the lives of the people without exhausting the environment or otherresources. To measure this concept of sustainability, we created a frameworkincluding four broad categories:6

Social sustainability: Providing for the basic social welfare of the population.

Economic sustainability: Balanced economic growth that supports incomegrowth for the entire population.

Environmental sustainability: Environmental cleanliness and protection, and abuilt environment that encourages sustainable practices.

Resource sustainability: Efficient use of available resources.

We broke down environmental sustainability further into four categoriesair quality,water quality, waste treatment, and built environmentto reflect more specifically thebroad range of environmental impact included under this heading.

Within each category we further delineated a number of component parts andidentified indicators that would best reflect a citys performance in each. Significantdata constraints limited our access to reliable information for some indicators, despiterecent improvements in quality and availability of public data. In some of these cases,we found ways to measure the indicators directly; in others we had to settle forreasonable proxies; and, in some instances, the measure had to be omitted entirelybecause no reasonable metrics could be found or created. For example, we wereunable to measure water quality because uniform national data was not available, sothis category is not reflected in the final Index (Exhibit 2).

6 This framework represents a slight revision of the framework used in the 2010 report. Most notably, we

have excluded the government commitment category because of challenges in measuring government

spending on initiatives directly related to sustainability. Instead, we explore government investments in

sustainability through case studies. We also replaced a number of individual indicators included in the 2010

index due to inconsistent data quality, most notably in the society category.


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Exhibit 2

When calculating each citys overall Index score, we used the following methodology:

Collected raw indicator data and converted raw data to reflect a consistentrelationship to achievement (so higher values reflect higher degrees ofsustainability for all indicators).

Normalized data for each indicator on scale of 1 to 10 based on the minimum andmaximum values for that indicator, with outliers removed in some cases.

Calculated each citys Index score based on weighted average of normalizedscores with each category within the framework receiving equal weight.

Ranked cities within each category based on category score and across the overallIndex based on Index score.

This methodology represents a slight change from the 2010 report, which computedoverall rankings based on rankings in each indicator, rather than normalized scores.

The impact of our decision to define our sustainability framework beyondenvironmental indicators is immediately apparent from the rankingsBeijing,for example, a city which many may associate more with traff ic congestion than


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sustainability, is propelled to the top of the overall rankings by its strong performanceon social welfare spending and economic diversification indicators (Exhibit 3).

Exhibit 3

Approach to analysis

Once the appropriate indicators or their proxies were compiled, we conducteda detailed analysis of the results to examine the characteristics that definehigh-performing cities. Based on discussions with academics, governmentrepresentatives, architects, and urban planners in China and abroad, we decided toexamine the data from the following perspectives:

City groupings: We grouped cities into three categories by population (less than 2million, 2 million to 10 million, and more than 10 million) to support more appropriatecomparisons and analysis. Because comparing the efforts and achievements ofa city of 200,000 people to one of 10 million may not be fair in terms of rankings or

relevant in terms of identifying ongoing trends, we were careful to add the lens ofcity size to both our rankings and analysis.


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Category results: In addition to examining overall Index scores, we also analyzedcities scores in each Index category separately, allowing us to probe for trends thatmight be obscured by the overall results.

Improvements: Important lessons to be learned may come as much fromcities that have shown significant improvement as from cities that sit at the top ofIndex rankings. To capture those stories, we focused on cities that have shown

the greatest improvements in scores from 2005-2009 (the period for which wecollected data), as well as those who ranked highest in 2009.

Between the 2010 and 2011 reports, we also shif ted our emphasis toward casestudies and away from a quantitative evaluation of the Index. While the Index isvaluable in synthesizing available data, by itself it may not provide insights into thechoices cities are making to become more sustainable. A large part of its utility comesfrom allowing us to identify and study cities that have improved their sustainabilityrankings considerably, highlighting achievements that might otherwise have goneunnoticed.


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Key relationships to

sustainabilityWe focused the analysis of the 2011 Index on examining the traits that characterizehigh-performing cities.7 Overall, we found that urban income per capita was the onlytrait that consistently predicted final Index score.8 Higher average incomes per capitawere particularly closely correlated to higher scores in the environment category. Therelationship between income and environment was especially strong in lower-incomecities, with a diminishing impact in higher-income cities.

In conducting this analysis, we tested a number of traits for correlation with Indexscores: population, GDP, GDP growth, real income per capita, governmentexpenditures, estimated migrant population, and share of GDP attributed to theservice, light industrial, and heavy industrial sectors. In addition, we consideredwhether the city was a provincial capital and examined other geographic attributes,particularly comparing coastal cities to inland and southern areas to the rest of thecountry. With traits of potential significance identified, we examined each traitscorrelation to overall Index scores as well as scores within each category, analyzingdata for cities in each population group separately as well as in aggregate. We alsoused multivariate regression to look for collections of traits that might predict Indexscores.9

7 The 2010 report focused on analyzing overall trends in Index scores over time, in particular examining how

performance in indicators changed from 2005 to 2008. In 2011, we chose not to revisit the time series

analysis in detail, because one additional year of data (data from 2009 was added for the 2011 report) is not

enough to alter a ve-year trend signicantly.

8 The 2010 report analyzed individual indicators and found no relationship between wealth and the indicators

examined. The 2011 report challenges this earlier nding for several reasons. First, as previously noted,

we replaced a number of indicators due inconsistent data quality; these were all indicators that showed

no correlation to wealth in last years analysis. Second, the 2010 report compared indicators with GDP

per capita; a number of resource-rich cities measure extremely high on GDP per capita, but low in terms

of residents real income, and including these cities as wealthy cities reduces the observed correlation

between sustainability and wealth. Finally, in the 2011 report, changes to the methodology used to compile

Index data allowed us to compare traits such as income not only to individual indicators, but to category

scores and the overall Index score. Using this more comprehensive correlation and updated indicators,

analysis indicated that per capita income is correlated to sustainability as measured by the Urban Sustain-

ability Index.

9 None of the numerous regressions examined revealed that any combination of traits tested was a stronger

predictor of Index score than per capita income alone. Therefore, we used simple correlation coefcients to

measure this relationship rather than multivariate regression.


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Income and sustainability

Among the variables tested, a citys per capita income was the only significantpredictor of Index scores, with higher incomes correlated with higher scores(Exhibit 4).10 This overall relationship is driven by significant correlations between percapita income and scores in the social sustainability, economic sustainability, andenvironmental sustainability categories.

Exhibit 4

Notably, this finding is consistent with the pattern known as the environmentalKuznets curve. The environmental Kuznets curve predicts that environmentalconditions will initially deteriorate as an economy develops, but at a certain thresholdof development the pattern reverses and environmental impact improves. Thiscould be, for example, because vehicle usage initially rises unchecked as incomes

10 The correlation was equally strong for small- and mid-sized cities, so we combined all population groups

rather than conducting separate analyses. The correlation coefcient between per capita income and

overall Index score for the entire sample set is 0.62. It is also worth noting that population size and per

capita income are highly correlated and therefore both predictors of high Index scores; the top 10 cities

in overall score, for example, are all mid-sized or large cities. However, per capita income is a stronger

predictor of score than population size.


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increase, until a certain point when priorities and resources shift toward environmentalprotection and the government enacts curbs on emissions.

The findings from our analysis suggest that the cities studiedwith per capitaincomes ranging from 10,000 to 30,000 renminbi (approximately 1,600 to 5,000 USdollars)have already passed the stage where income growth leads to increasedenvironmental degradation and have reached the point where further development

predicts improvement in sustainability. Even among the poorest cities in our sampleset (the approximately 20 percent of cities sampled with incomes below 15,000renminbi), the correlation between income and Index score was positive; we weretherefore unable to identify at what point higher income might first begin to predictimprovements in sustainability.

Overall, the demonstrated relationship between cities income and score in the UrbanSustainability Index is encouraging, as it indicates that at least some of Chinas citieshave been able to couple economic growth with gains in sustainability.

The correlation between income and score is strongest in the environmental

sustainability category, which comprises the subcategories air quality, wastemanagement, and built environment. While all cities showed a similar correlationbetween income and overall Index score, the relationship of income to environmentalsustainability score varied significantly for cities of different income levels. Indeed,for lower-income cities the correlation is significant, while cities with incomes above20,000 renminbi per year show no correlation at all (Exhibit 5).11 This indicates thatat some point the Kuznets relationship weakensthat is, past a second threshold,increases in wealth may no longer predict further gains in sustainability.

11 For cities with per capita income below 20,000 renminbi per year the correlation coefcient was 0.53; for

cities with per capita above 20,000 renminbi, minus 0.08. To reach this result, we analyzed cities rst by

population group, nding that small cities show correlation while mid-sized cities show none. However,

population size is strongly correlated with income (small cities tend to be poorer), and upon further

examination, cutting cities by income resulted in stronger correlations than dividing by population.


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Exhibit 5

This pattern indicates that developing Chinas wealthiest cities alone will notnecessarily reduce the countrys overall environmental impact significantly. Instead,raising the income of smaller and poorer cities will likely trigger a much greaterimprovement. This suggests that while the national governments explicit aim tosupport the development of less-advantaged inland cities could support appreciable

gains in environmental sustainability, it should also be combined with a broader effortto raise standards in poor cities nationwide.

Factors with little impact on Index scores

In our investigation, we examined a number of factors that seemed to have little impacton our sustainability scores, a few of which merit further discussion.

Location:We looked for differences based on location through three lenses: region,coastal location compared with inland, and southern cities compared with the rest ofthe country. In each analysis, we controlled for income to ensure that any correlation

between geography and income did not explain the results.

In general, we found no signif icant differences that could be linked to location,although coastal cities enjoyed a marginal advantage among mid-sized cities. Theseresults indicate that geography does not play a determining role in sustainability or


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improvements in sustainability. Rather, level of development and policy choices at thelocal level are more important than any immutable characteristic of a city.

Migrant populations: Because migration is a very important factor in Chinascontinuing urbanization, we also looked for relationships between a citys migrantpopulation and its Index score or change in score. Would cities that have largermigrant populations suffer or benefit from the influx?

The size of migrant populations in China is notoriously difficult to estimate and almostno public data is available on migrants. Official city population figures in China arebased onhukou population only, and do not account for migrants withouthukou.To estimate the size of migrant populations in each city, we first estimated the citysoverall population based on census data, and then subtracted the officialhukoupopulation.12

We found no correlation between this estimate of migrant population and Index scoreor change in Index score in any category. Migrant populations may be absorbedinto cities in such a way that their presence bears no relationship to the sustainability

indicators we measured, or the absence of a correlation could be because oflimitations in our ability to measure migrant populations accurately.

Policy clusters: We also examined the interrelationship between indicators in theIndex, looking for correlations linked to certain types of policies or initiatives that maybe commonly implemented together. For example, would simultaneous improvementin the areas of waste management and pollution control indicate that cities tend toimplement policies in both areas together? However, the only notable correlationswe found were among indicators that are inherently related, such as sulphur-dioxideemissions and energy use, which are both higher in areas of high heavy industrialconcentration.

12 Census gures count migrants who reside in a city for over six months.


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Success stories

Moving beyond the raw data of the Urban Sustainability Index, we selected threecities for an in-depth consideration of how local officials are promoting sustainabledevelopment and addressing the challenges of rapid urbanization. Extensiveinterviews with city leaders in these cities highlighted three trends with broaderrelevance for sustainable urbanization in China:

New urban centers: Urban growth is often being channeled into new city centers

developed outside the existing urban core, reflecting an attempt to ease thepressures on existing infrastructure by creating new, self-sufficient, residential-industrial clusters.

Urban-rural policy reform:The growth of cities has been fueled by thelarge-scale inflow of migrants from the countryside. Pilot reforms to the policiesgoverning these urban migrants may be a precursor of more widespread changeahead.

Investment in sustainability: Major investments in waste management, watertreatment, and public transit have yielded appreciable gains in sustainability in the

cities studied. However, developing models to ensure the longer term financialsustainability of such investments may present a challenge.

Cities selected

Our case analysis focused on three cities that illustrate the diversity among Chinasurban centers as well as accomplishments that can be achieved through policyinitiatives: Chengdu, one of the largest and most advanced cities in the westernregion; Suzhou, a manufacturing hub near Shanghai and an early recipient of foreigndirect investment; and Liuzhou, a heavily industrial, lower-income city set amongmountains in southern Guangxi province (Exhibit 6).


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Exhibit 6

We selected these cities from our overall sample based on their high rankings in theIndex and improvements they have made across various categories between 2005and 2009. Chengdu demonstrated both high scores and significant improvementin the environment category, as well as substantial gains in economic diversificationindicators; Liuzhou was among the top ten most improved cities in the environmentcategory; Suzhou is among the top ten cities in terms of overall score, driven by its

top-ten scores in the economic development and built environment categories. Othercriteria included evidence of notable policies and initiatives related to sustainabledevelopment as well as a conscious intent to showcase a diverse sample of citiesbased on size, location, and economic base.

While we chose these cities based on strength in certain categories of Index scores,we broadened our examination of each to include all facets of sustainability. Byhighlighting common trends across all three case studies, we hope to illuminatepatterns that may be more broadly relevant to Chinas urbanization, rather thanfocusing purely on these cities more outstanding successes.

Chengdu: The economic heart of massive Sichuan province, Chengdu is one of themost developed and fastest growing cities in Chinas western region. The capital ofSichuan, Chengdu rests on a vast plain bordered by mountains on the north and west.With an urban population of 7.4 million, Chengdu is the eighth largest city in China.


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Chengdus economic output accounts for a third of Sichuans total. The cityseconomy has already transitioned substantially toward the service sector, whichaccounts for about half of urban GDP. Chengdu expects to maintain an aggressive15 percent economic growth rate even if national growth slows, in part reflecting thedevelopment gap between the western region and wealthier cities to the east. Thecitys position as a major growth hub in the less-developed western region makes it aparticularly interesting case study to examine.

Alongside its substantial achievements in economic growth and the improvementsin sustainability reflected by the Index, Chengdu faces a number of challenges, manyof which are typical issues in large, rapidly developing cities. It has one of the highestratios of cars per capita in China, and the resulting congestion and air pollution areunchecked by any serious regulation of private vehicles. The citys large investmentin public transportation and its attempts to cluster housing and employment centerstogether have not yet been enough to offset this problem.

Suzhou: One hundred kilometers west of Shanghai in Jiangsu province, Suzhouis a well-known manufacturing center with a relatively long history of foreign direct

investment. Suzhous urban population is 3.9 million, with several million more insatellite cities. With a per capita income of over 27,000 renminbi, the city is relativelywealthy among Chinese cities. Leading industries include machinery manufacturing,electronics manufacturing, textiles, and information technology. The municipalgovernment predicts that economic growth will remain steady at about 8.5 percentper year through 2025, substantially below the average 20 percent per yearmaintained during the first decade of rapid industrialization.

In some ways, Suzhous early industrialization has proved a handicap, as it left thecity with a legacy of environmental degradation and impending resource scarcities.As Suzhou focuses on shifting its economic mix more toward high value-added

manufacturing and services, the local government has made substantial effortsto develop waste management and wastewater treatment systems to restorethe areas natural environment. As an early industrial hub, Suzhous progresstoward sustainability provides potential lessons for other cities in earlier stages ofdevelopment.

Liuzhou: Liuzhou is smaller, poorer, and more dependent on heavy industry than theother cities we studied in detail. Nestled in a bend of the Liu River in Guangxi province,Liuzhou is surrounded by the striking karst mountain peaks that have earned theregion UNESCO World Heritage status. The citys urban population is 1.4 million.

Large steel, chemical, and heavy equipment manufacturing companies remainwithin Liuzhous urban district, and the largest of the newly planned industrial parks isfocused on the auto industry. Manufacturing has seen rapid growth in recent years,with the citys GDP growing by over 60 percent between 2005 and 2009.


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Liuzhou has shown notable improvement in waste management, primarily byextending waste collection systems to the rural outskirts of the urban area. The cityhas also made great strides in improving water quality (although this metric is notreflected in the Index itself); in less than a decade, the percentage of wastewatertreated in Liuzhou has risen from close to zero to 90 percent.

Because it remains in the early stages of development, Liuzhou has yet to face many

of the challenges common in the more developed cities we examined. Significanttraffic congestion, for example, is not yet a problem and the volume of construction isnot high enough to contribute substantially to air pollution.

New urban centers

Each of the cities we studied has crafted a detailed urban plan that lays out theusage of each square kilometer of urban space and meticulously details each newdevelopment. One notable facet of this planning is the construction of new urbancenters outside cities current urban boundaries. Plans call for building new cities fromthe ground up on what wasand in some cases, still isopen farmland. Nowhere

else in the world are so many cities rising from virtually nothing, and these new districtsgive planners tremendous leeway for creative and sustainable design. At the sametime, these new cities risk contributing to the rapid expansion of urban sprawl.

In Suzhou, the Suzhou-Singapore Industrial Park provided an early model forcity-outside-the-city development. Established in 1994 with investment from thegovernment of Singapore, the industrial park was one of the first to be calledyuanqu,a term for an independent administrative division that avoided the politically sensitiveconnotations of foreign concession. Although potential opposition to foreign directinvestment is no longer an issue, the name has stuck for similar industrial parksthroughout the country.

Like the more recent developments we studied, the Suzhou-Singapore Industrial Parkcombines industrial and residential areas. Housing prices in the Park are higher thanthose in the Suzhou city center. Low-tech, high-energy, and high-pollution industrieswere purposefully excluded from the development plans. The Park has experimentedwith ecological zones focused on transit and environmentally friendly buildings,although high costs have limited plans for expansion of such zones.

After almost a decade of successful growth, the Singapore-Suzhou Industrial Parknow finds itself at a crossroads, in need of a model for sustainable growth. Rapidrevenue growth in the Parks first years, which averaged about 15 percent annually,

was driven largely by land acquisition and sales, high labor availability, and high fixed-asset investment. Now, a new model is needed to sustain target growth levels. Thechoices made at Suzhou-Singapore Industrial Park could provide guidance for thefuture of the many new developments still in the rapid-growth phase of expansion.


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Liuzhou is also developing industrial centers outside the current city limits. Althoughthe government is offering subsidies to the service sector and pushing manufacturersaway from the urban core, a number of traditional heavy industries, including steel andchemicals, are still allowed in the city center because of the high costs of relocation.Continued reliance on heavy industry and manufacturing has helped the city increaseGDP by over 60 percent between 2005 and 2009, underscoring the reluctance todramatically change this economic formula. In keeping with the continued focus on

manufacturing, Liuzhous planned new district focuses on the automobile industry.

Liuzhous plans for an ambitious new city center locate the development to theeast of the current urban areathe only side of the city not surrounded closely bymountain peaks. As in many Chinese cities, plans for the new development areshowcased publically. A two story exhibition center built near the city governmentsoffices includes a gigantic scale model of the city and its outlying areas, interactivehistory displays, detailed zoning maps of every district, and narratives on plans fordevelopment of transportation infrastructure, green space, and tourist attractions.

The new industrial center will focus primarily on the automotive industry, but the

design also calls for government offices, schools, residential development, and othersupporting infrastructure to be built in the area. Construction is still in the very earlystages, and basic infrastructure is expected to be in place within two to three years.Once completed, the center is expected to be home to about 700,000 residents,making it almost the size of Liuzhous urban area today.

Of the cities we studied in detail, Chengdu has the most ambitious plan for its new citycenter. The district, Tianfu Xinqu (or Tianfu New District), is to be built on 1,700 squarekilometers, of which 500 square kilometers (an area almost the size of the city ofChicago) will be built-up and the remainder open space.

The planned development is just one aspect of Chengdus land use master plan,which focuses on moving polluting industries from the urban core and replacing themwith service-oriented clusters. Real estate prices have helped Chengdu execute thisplan. Land zoned for industry within the urban core costs about 50 percent more thanin surrounding areas, giving industry a strong economic incentive to relocate. Under apolicy dubbed the One District One Industry plan, city leaders hope to cluster a singleindustrial sector, such as information technology or financial services, in each citydistrict.

Approaching Chengdu from the south, the shifting focus toward service industriesis immediately apparenta new high-tech park presents a striking cityscape with

new, sharply designed buildings towering along the road from the airport to the citycenter. Services already account for a greater share of city employment than eithermanufacturing or construction, although a few traditional manufacturing sectors,


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such as shoe-making and furniture-making, are still encouraged because of the highnumber of jobs they provide.

Tianfu Xinqu is designed around service sector industry clusters, and plans areshaped by several progressive design principles, including the reverse-planningapproach, in which overall design flows from the open spaces rather than from thebuilt-up area. The government advertises a design following ideas from American

urban planner Kevin Lynch, a student of Frank Lloyd Wright, including establishingvisual landmarks, preserving historic districts, and focusing on open public areas.The design calls for 32 integrated industrial-residential clusters, where residents maylive near their jobs, avoiding long commutes. The citys public transit expansion planincludes extending the future metro system through the new development, as well asexpanding bus lines to meet the needs of future residents.

Altogether, 46 public parks are planned for the center, and green space per capitashould reach 15 square meters, more than a third higher than the average for cities inour index.

While plans for Tianfu Xinqu are detailed and thoughtfully conceived, their ultimateexecution remains highly uncertain. Maintaining the planned open space, transit-oriented development, and promised Sichuan feel in the face of developersconstant pressure to build as quickly and cheaply as possible may be a challenge.Like new urban centers planned in other cities, Tianfu Xinqu may serve as a testof local governments commitment to following through on commitments tosustainability.

Urban-rural integration

Chinas rapid urbanization has focused attention on the legal and social position of the

hundreds of millions of migrants flocking from the countryside to cities. The tensionstems from Chinas history of managing urban and rural areas separately, whichbegan in the 1950s with thehukou system of residency permits, designed expresslyto control migration. As Chinas economy has opened, restrictions on migration haverelaxed, but the rural migrants who have poured into cities are still ineligible for socialbenefits available to official residents. In 2007, the national government designatedChongqing and Chengdu pilot cities forhukou reform. Their policy experiments mayserve as a bellwether for national reform to come.

Like other rapidly developing cities in China, Chengdu has seen a massive influxof migrants. According to the city government, more than 4 million migrants live in

the six urban districts of Chengdu, mostly within the urban core, and the number ofmigrant residents has grown 15 percent a year for the past five years. Most come fromelsewhere in Sichuan province or from neighboring Chongqing and work in low-wage,low-skill sectors such as construction. Recently, however, higher-end industries suchas finance and high-tech have been attracting better-educated migrants to the city.


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Chengdu extends greater benefits to migrants than most cities in China, and employedmigrants now enjoy similar benefits as non-migrant residents. Chengdus MigrantManagement Office, a division of city government historically focused more oncontrolling than supporting migrant populations, has an explicit mandate to expandservices for migrants. Among other actions, the Migrant Management Office hasissued specific guidelines to each social service department regarding the servicesthat must be provided to migrants. Some benefits, however, still remain one-sided:

social welfare benefits for low-income residents, for example, are withheld frommigrants on the rationale that overly generous programs could serve as a disincentiveto finding employment.

Chengdu is also a pioneer in rural-urban policy integration. To help change policiesacross city government, the city created the Commission for Balanced Urban andRural Development, a unique government body designed to coordinate policies acrossvarious relevant government departments. The Commissions mission is to narrow thedevelopment gap between rural and urban areas, with an ultimate goal of abolishingthehukou system entirely. The Commission oversees initiatives in the areas of propertyrights reform, land management, and village-level public service management for rural

areas.

Today, rural residents can migrate freely throughout Chengdu, and, unlike inChongqing, migrants retain their property rights in the countryside when they resettlein the city. This is critical for many migrants because rural property serves as a safetynet: if they fail to make ends meet in the city, they can always return to the village.Without this option, many might choose not to migrate, even if offered city residency.Chengdus property rights reform program also eases property transfers by issuingownership certificates, protects family rights (including those of women), and educatesrural residents regarding their property rights.

The impact of Chengdus policies on migration patterns and social welfare of migrantsis not yet apparent, but the pilot policies under development may serve as the firststeps in a reform program to be implemented in a broader set of cities.

The other cities we examined have not yet undertaken similar policy reform. Given itsearly reliance on manufacturing for economic growth, Suzhou has long been mindful ofthe status of migrants within the city, for example grantinghukou residency permits inindustrial parks to migrants with desired skills. However, Suzhou has not undertaken acoordinated reform program like that of Chengdu. In Liuzhou, migrant workers presenta less pressing issue. Liuzhou is a smaller, lower-income urban center and remains anet exporter of migrants to larger urban areas.

Investment in environmental sustainability

In our case study cities, signif icant capital investments have improved environmentalsustainability in three notable areas: public transportation, waste management, and


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wastewater treatment. These improvements indicate that government commitment,particularly capital investments, can result in significant and rapid environmentalgains. They also provide an indication of the practices that may lie behind theobserved correlation between per capita income and gains in environmentalsustainability. As cities develop, they begin to make the types of investment thatdirectly impact environmental sustainability.

Public transportation

The need for effective public transportation increases rapidly as Chinese citiesexperience income and population growth. Greater wealth brings more private carsto the road, causing traffic congestion and increased air pollution. As cities expandacross larger areas, commute times increase and public transit capacity is tested.

As the most developed urban center among our focus cities, Chengdu faces themost acute transportation problems and has, in turn, invested heavily in public transitinfrastructure. In recent years, car ownership in Chengdu has increased by about 20percent annually. With one in five families owning a car, the number of vehicles per

capita in Chengdu is among the highest in China. The explosive growth of vehicles onthe road has led to worsening traffic problems and has contributed substantially to airpollution.

Part of the citys solution has been to expand the road system and enact measuresdesigned to ease congestion. For example, the Chengdu government has increasedparking fees in the downtown area and employed road restrictions during rush hour,including turning certain roads into one-way streets. The city even experimentedwith altering working hours for government employees, but the impact on rushhour congestion was marginal in the face of rapid growth in car ownership. Notably,Chengdu has not deployed substantial limitations on the use of private cars as have

cities such as Beijing, where license plate numbers determine whether a car can enterthe city on certain days.

Chengdus primary response to the pressures on transportation systems has been tomake significant investments in public transit, including building an extensive metro railsystem. A north-south line covering 18.5 kilometers opened in 2011, and a second lineis scheduled to be finished in 2012. The entire system will cover 292 kilometers and isscheduled for completion by 2020.

In the meantime, the city has expanded its bus network, increasing the number ofbuses on the road from 4,000 to 7,000 since 2006. During this period Chengdu also

added 38 dedicated bus lanes (previously, it only had two). As a result, average busspeeds have risen from 12 to 17 kilometers per hour and ridership has grown from2 million to 3.8 million. The mayor has set an explicit target for reducing crowdingon rush hour buses, and the city will aim to decrease bus crowding from the currentaverage of eight people per square meter to five. To help alleviate crowding, the city


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is deploying more buses on heavily used routes during peak times. Ninety percent ofChengdus buses run on low-emission compressed natural gas.

Chengdu is also piloting a bicycle sharing program designed to help public transitriders with the last kilometer of their commutes. While cycling from residences toworkplaces is not seen as a viable transportation option for the many city residentswho face substantial commutes, bicycles can ease access to public transit stops

for those who live or work in areas that arent served well by subway or buses. Publicbicycles are locked at stations around the city and can be borrowed at no cost ifreturned to any station within one hour. The program has already installed 3,000bicycles in limited areas of the city, with plans to eventually increase the public bicyclefleet to 80,000.

Even with these significant investments, anecdotal evidence suggests that Chengduresidents are facing longer commutes and worsening traffic. One government officialnoted that his department recently moved to a new office complex in the rapidly-expanding southern side of the city, near several new high-tech parks and close to theedge of Tianfu Xinqu. As a resident of the city center, he now has to commute ten times

farther to work. He said even with housing available near his new office, he wouldntchoose to relocate his whole family because his wife would face a commute back intothe city every day. As this anecdote illustrates, the focus on co-locating employmentand housing in new developments alone is likely not enough to avoid continuedpressure on transportation systems.

Transportation challenges in the other two focus cities have not become as urgent asthose of Chengdu, but both have included public transit improvements as part of theirdevelopment plans. Congestion is already evident in Suzhou, and the city has takenmeasures to improve public transit, including increasing efficiency by consolidatingthe number of companies running bus lines. Liuzhou does not yet face immediate

traffic problems, but has begun plans for a bus rapid transit (BRT) system to link thenew developments in the east to the city center.

Waste management

All three cities examined have seen significant achievements over the past five yearsin waste management. A common first step in improving waste management systemsseems to be expanding waste collection, followed by adopting increasingly modernand environmentally friendly disposal methods.

Liuzhou has only recently launched comprehensive waste management efforts,

but the city stood out in the Index for achieving almost universal domestic wastedisposal in recent years. Prompted by a province-wide initiative in 2006, Liuzhouextended waste collection coverage to include outlying areas of the urban district, andis currently building several new transfer stations to increase efficiency. In addition,


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the city treats a higher-than-average percentage of industrial waste, even though anumber of heavily polluting industries remain in the city.

Liuzhous sole waste disposal method is landfilling. One site was closed in 2003,and the currently operating facility falls short of the national environmental standardsthat were enacted in 2008. The facility is expected to be sufficient to handle the citysneeds for up to 18 years, even accounting for an expected 5 percent annual increase

in the amount of waste generated. The city is piloting a methane-to-energy initiativeat the new landfill that is expected to generate enough electricity to serve 30,000 to50,000 families.

As part of its waste management efforts, Liuzhou has a governmental office thatoversees industrial solid waste management and recycling. Most of the largercompanies in Liuzhou already recycle their own industrial byproducts. The cityhopes to concentrate smaller industries lacking capacity to recycle their own wasteinto clusters to make third party treatment and collection easier. Regulation andenforcement is needed, however, to ensure that these collection companies disposeof waste properly.

Chengdu is considered a national leader in waste management policy, and in 2011the city was host to a national waste management conference that included visitsto the citys new waste-to-energy incineration facilities. These plants use high-techmethods to produce energy as a byproduct of waste incineration. Two have been builtin the districts of Luodai and Shuangliu, and two more are slated for construction. Thecitys goal is to have none of its waste buried in landfills by 2015. (The United Statesburies more than half its waste in landfills.) Chengdus facilities have been carbon-credit certified by the UN, although critics of waste-to-energy technology point to thepotential release of harmful air pollutants as a significant downside of the technology.Suzhou operates a similar waste-to-energy facility.

In contrast to waste disposal, waste reduction is not a priority in any of our focuscities. Chengdu, for example, generates 500 to 800 grams of waste per capitadaily, which is well below the US average of 2.1 kilograms and European average of1.4 kilograms. However, as the city develops, leaders expect the amount of wastegenerated to increase and its composition to shift toward packaging and away fromorganic material. Although the city government has made preliminary efforts to limitthe volume of waste generated, such as implementing a tax on plastic bags used insupermarkets, an overall increase seems inevitable as development continues.

Wastewater treatment

All three cities examined have made significant efforts to clean up local water supplies.Water quality is not included in our Index calculations because of a lack of nationaldata, but the experience of the focus cities suggests that wastewater treatment, like


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waste management, may improve as cities develop. Liuzhou, Suzhou, and Chengduhave each already mitigated the worst of local water pollution.

Chengdu now offers near universal wastewater treatment. The city treats more than90 percent of urban wastewater and about 80 percent of wastewater in the outlyingareas. Complete coverage is not considered cost-effective, so further infrastructureexpansion is unlikely, at least in the short term.

Suzhou has taken steps to clean up the serious domestic, industrial, and agriculturalpollution of its numerous lakes. Suzhous wastewater treatment rate jumped fromabout 70 percent in 2005 to more than 85 percent in 2009. Under city policies,villages must undertake basic wastewater treatment measures if water cannot betransported to a treatment center. Urban water treatment regulations have also beenstrengthened. For example, the city has enacted regulations for runoff water frombalconies in residential buildings, which is often contaminated with detergent. Toimprove the water quality of Yangcheng Lake, the government has reduced crabcultivation, which muddies the lakeshore severely; it has also invested 600 millionrenminbi to restore a scenic lakefront at Shi Lake.

Liuzhou has seen perhaps the most dramatic improvements in wastewater treatmentover the past few years. Construction of the citys first wastewater treatment facilitieshave resulted in an increase of treatment rates from near zero in 2003 to almost 90percent in 2009. The Liu River, which surrounds the city center on three sides, nowflows a clear green color, a dramatic change for a river that once regularly emitted achemical stench.

Liuzhous wastewater treatment program was enabled by $100 million in funding fromthe World Bank, which covered 30 percent of cost of the first phase of constructionof treatment facilities. Five wastewater treatment plants with a combined capacity

of 680,000 tons of water per day, enough to treat more than 80 percent of domesticwastewater, were opened during the first phase of the project, which ran from 2004to 2009. A second phase, with an additional $150 million in World Bank funding, willfocus on building treatment plants in the northern counties upriver from the city center.

Areas still without wastewater treatment are primarily villages within Liuzhousurban zone, where the cost of extending treatment is high because of poor existinginfrastructure. Further improvements are awaiting overall redevelopment plans forthese areas.

Although the plants are operating effectively under monitoring from the World

Bank, finances have proved a challenge. The fees charged for water usage areinsufficient to cover the operating costs, and collection rates are well below target;furthermore, large industries often divert water directly from the Liu River, making ithard to gauge usage and assess the appropriate fees. With water prices set by theNational Development and Reform Commission, the company lacks the authority to


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generate additional revenue by raising fees. Because of these challenges, the watermanagement company is not yet self-sufficient and relies on government subsidies tomake up budget shortfalls.

This dilemma exemplifies one challenge inherent in improving environmentalsustainability through major capital expenditures: if ongoing investment is required,maintaining gains in sustainability may prove difficult. In addition, cities heavily

reliant on land sales for revenue may find it increasingly challenging to finance majorenvironmental investments as land available for sale becomes increasingly scarce.


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Conclusion

The 2011 Urban Sustainability Index demonstrates the significant progress that anumber of cities in China are making toward achieving higher levels of sustainability.The positive correlation observed between per capita income and sustainabilitysuggests that, in spite of environmental damage already inflicted and the rapidconsumption of resources, further economic growth may in some cases encouragemore sustainable practices.

At the same time, analysis of Index results highlights the need to further study policiesand practices that effectively support sustainable development. Even in cities wheretremendous improvements have been realized, significant questions remain. Howcan cities sustain gains made? How can local governments ensure that plans toprioritize sustainability in new urban developments are carried out? How can cities stillstruggling to meet the most basic benchmarks of sustainability learn from their moresuccessful peers?

The Urban China Initiative aims to play a catalyzing role in identifying and sharingbest practices, offering significant contributions toward answering these and otherquestions. As the importance of sustainable development gains traction with local

policy makers, we look forward to deepening our research and expanding ourcollaboration in cities across China.


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McKinsey 2011 Urban Sustainability Index

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Transcript of McKinsey 2011 Urban Sustainability Index