Inner Mongolia Sustainable Cross-Border Development Investment Program

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Report and Recommendation of the President to the Board of Directors

Project Number: 51192-001 September 2020

Proposed Multitranche Financing Facility People’s Republic of China: Inner Mongolia Sustainable Cross-Border Development Investment Program

Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB’s Access to Information Policy.

CURRENCY EQUIVALENTS (as of 25 August 2020)

Currency unit – yuan (CNY) CNY1.00 = $6.9196 $1.00 = €0.8483 €1.00 = $1.1788

ABBREVIATIONS

ADB – Asian Development Bank ALE – agricultural leading enterprise BCP – border crossing point CAREC – Central Asia Regional Economic Cooperation COVID-19 – coronavirus disease ECZ – economic cooperation zone EIRR – economic internal rate of return ESMS – environmental and social management system FAM – facility administration manual FIL – financial intermediation loan FIRR – financial internal rate of return GDP – gross domestic product IMAR – Inner Mongolia Autonomous Region IMARG – Government of Inner Mongolia Autonomous Region km – kilometer MFF – multitranche financing facility PAP – poverty alleviation program PIE – project implementing entity PRC – People’s Republic of China SME – small and medium-sized enterprises SOE – state-owned enterprise

NOTE

In this report, “$” refers to United States dollars.

Vice-President Ahmed M. Saeed, Operations 2 Director General James Lynch, East Asia Department (EARD) Director Xiaoqin Fan, Public Management, Financial Sector, and Regional Cooperation Division (EAPF), EARD

Team leader Seung Min Lee, Senior Financial Sector Specialist, EAPF, EARD Deputy Team Aoxue Ren, Senior Procurement Officer, People’s Republic of China Leader Resident Mission, EARD Team members Bo An, Public Management Specialist, EAPF, EARD Frederic Asseline, Principal Climate Change Specialist (Climate Finance), Sustainable Development and Climate Change Department (SDCC) Ma. Bernadette de Castro, Project Analyst, EAPF, EARD Najibullah Habib, Health Specialist, Urban and Social Sectors Division, EARD Akiko Hagiwara, Principal Economist, Office of the Director General (EAOD), EARD Zulfia Karimova, Principal Regional Cooperation Specialist, EAPF, EARD Mart Khaltarpurev, Principal Procurement Specialist, Procurement, Portfolio and Financial Management Departmenta Kang Hang Leung, Senior Finance Specialist, Environment, Natural Resources and Agriculture Division, (EAER), EARD Veronica Mendizabal Joffre, Social Development Specialist (Gender and Development), EAOD, EARD Masahiro Nishimura, Senior Rural Development Specialist, Environment, Natural Resources and Agriculture Division, South Asia Department Aysha Qadir, Principal Counsel, Office of the General Counsel Suzanne Robertson, Principal Natural Resources and Agriculture Specialist, EAER, EARD Mark Allister Robis, Senior Financial Management Officer, EAOD, EARD Pauline Marie Ruiz, Senior Operations Assistant, EAPF, EARD Peer reviewer Yuebin Zhang, Principal Regional Cooperation Specialist, SDCC a Outposted to the PRC Resident Mission.

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page INVESTMENT PROGRAM AT A GLANCE MAP I. THE PROPOSAL 1 II. RATIONALE 1 A. Development Constraints 1 B. Rationale for the Program 3 III. THE INVESTMENT PROGRAM 5 A. Impact and Outcome 6 B. Outputs 6 C. Summary Cost Estimates and Financing Plan 8 D. Implementation Arrangements 9 IV. DUE DILIGENCE 11 A. Technical 11 B. Economic and Financial 12 C. Governance 12 D. Poverty, Social, and Gender 13 E. Safeguards 13 F. Summary of Risk Assessment and Risk Management Plan 14 V. ASSURANCES AND CONDITIONS 15 VI. RECOMMENDATION 15 APPENDIXES 1. Design and Monitoring Framework for the Investment Program 16 2. List of Linked Documents 20

Project Classification Information Status: Complete

INVESTMENT PROGRAMa AT A GLANCE

1. Basic Data Project Number: 51192-001 Project Name Inner Mongolia Sustainable Department/Division EARD/EAPF Cross-Border Development Investment Program Country China, People's Republic of Executing Agency Government of Inner Borrower PRC Mongolia Autonomous Country Economic https://www.adb.org/Documents/Lin Region Indicators kedDocs/?id=51192-001-CEI Portfolio at a Glance https://www.adb.org/Documents/Lin kedDocs/?id=51192-001-PortAtaGl ance 2. Sector Subsector(s) ADB Financing ($ million) Industry and trade Trade and services 210.00 Water and other urban Other urban services 210.00 infrastructure and services Total 420.00

3. Operational Priorities Climate Change Information Addressing remaining poverty and reducing inequalities GHG reductions (tons per annum) 0 Accelerating progress in gender equality Climate Change impact on the Medium Tackling climate change, building climate and disaster resilience, Project and enhancing environmental sustainability Making cities more livable ADB Financing Fostering regional cooperation and integration Adaptation ($ million) 22.89 Mitigation ($ million) 20.65

Cofinancing Adaptation ($ million) 0.00 Mitigation ($ million) 0.00 Sustainable Development Goals Gender Equity and Mainstreaming SDG 8.9 Effective gender mainstreaming (EGM) SDG 10.2 SDG 13.a Poverty Targeting Geographic Targeting 4. Risk Categorization: Complex . 5. Safeguards Categorization Environment: B Involuntary Resettlement: B Indigenous Peoples: C [Tranche 1] . 6. Financing Modality and Sources Indicative Tranches ($million) Amount I II III ($million) ADB 420.00 Sovereign MFF-Tranche 196.30 118.40 105.30 420.00 (Regular Loan): Ordinary capital resources Cofinancing 0.00 None 0.00 0.00 0.00 0.00 Counterpart 468.35 Government 135.97 100.91 114.54 351.42

Others 74.58 42.35 0.00 116.93

Total 406.85 261.66 219.84 888.35

Currency of ADB Financings: Euro

Source: Asian Development Bank 18092020155437592831 This document must only be generated in eOps. Generated Date: 29-Sep-2020 11:27:27 AM INVESTMENT PROGRAMa AT A GLANCE

7. Country Operations Business Plan CPS https://www.adb.org/documents/peoples-republic-china-country-part nership-strategy-2016-2020 COBP https://www.adb.org/documents/peoples-republic-china-country-ope rations-business-plan-2019-2021 8. Investment Program Summary The investment program will promote sustainable development of cross-border areas and mutually beneficial regional cooperation and integration between Inner Mongolia Autonomous Region (IMAR) of the People's Republic of China (PRC) and Mongolia. The program will improve economic inclusion, ecosystems, and crucial services in the five IMAR border crossing point (BCP) communities and surrounding areas on both sides of the 3,200 kilometer (km) PRC-Mongolia, which lags in economic and social development. The program will enhance infrastructure at key BCPs, related services including health services, and living conditions by improving environment and waste management systems. Expanded financial and business support to small and medium-sized enterprises in border regions will spur local income growth. Establishment of an agricultural value chain will enhance livelihoods on both sides of the frontier. The program will have strong regional spillover benefits to Mongolia: improvement in infrastructure and services at IMAR-Mongolia BCPs will boost the volume and quality of trade, creating about 3,300 direct and indirect jobs in Mongolia; and improvement in health and other services will benefit disadvantaged communities on both sides of the border. Impact: Sustainable economic development and shared prosperity for Central Asia Regional Economic Cooperation (CAREC) region achieved. Outcome: Sustainable economic opportunities and living conditions in areas along the IMAR-Mongolia border improved. Outputs: (i) Sustainable infrastructure for cross-border connectivity and health services improved, (ii) Ecological environment in key border towns improved, (iii) Income generating opportunities expanded, and (iv) Cross-border cooperation mechanisms, technical project management, and institutional capacity strengthened

Implementation Arrangements: Government of Inner Mongolia Autonomous Region will be the executing agency. Project Readiness: Project readiness is high. The executing agency and implementing agencies have conducted detailed feasibility studies and prepared all required reports for the subprojects under the first tranche. 9. Milestones Modality Estimated Approval Estimated Completionb Multitranche financing facility 21 October 2020 30 December 2030 Tranche I 16 November 2020 30 June 2027 Tranche II 29 November 2021 29 June 2029 Tranche III 30 September 2024 30 June 2031 10. Project Data Sheet (PDS) PDS c http://www.adb.org/projects/51192-001/main

a Multitranche Financing Facility (MFF). b For MFF, this refers to the end of the availability period; for tranches, this refers to the tranche closing date. c Safeguard documents can be viewed by clicking the Document's hyperlink in the Project Data Sheet (PDS) page.

Source: Asian Development Bank 18092020155437592831 This document must only be generated in eOps. Generated Date: 29-Sep-2020 11:27:27 AM PEOPLE'S REPUBLIC OF CHINA Project Autonomous Region INNER MONGOLIA SUSTAINABLE CROSS-BORDER DEVELOPMENT Project Location Tranche 1 INVESTMENT PROGRAM Tranche 2 Tranche 3 Inspection Area Construction in Erenhot–Zamiin-Uud Economic Cooperation Zone (ECZ) CAREC Corridor 4 Upgrading Medical Equipment and Facilities for the PRC-Mongolia International Hospital Ecological Restoration for the Erenhot–Zamiin-Uud ECZ National Capital Waste Collection and Transfer Station in Erenhot–Zamiin-Uud ECZ, and Sanitation Intelligent Cloud Platform in Erenhot Provincial Capital Urban Infrastructure Improvement Project Erenhot PRC-Mongolia Ecological Environmental Improvement Project (Phase III) Border Crossing Point Road KHUVSGUL Altanbulag ProvincialUlaangom Boundary HEILONGJIANG International Boundary Sukhbaatar UVS Murun SELENGE PRC-Mongolian Arxan Mutual Trade Zone Project CARECUlgii Central Asia Regional Economic Cooperation Darkhan DORNOD Erdenet DARKHAN-UUL Arxan Port International Logistics Construction Project BAYAN-PRC People’s Republic of China ULGII ORKHON KHENTII Choibalsan Arxan Boundaries are not necessarily authoritative.ZAVKHAN (Xingan Municipality) Khovd ARKHANGAI Bulgan ULAANBAATAR This map was produced by the cartography unit of the Asian Development Bank. The boundaries, colors, denominations, and any other information shown on this map do not imply, BULGAN on the part of the Asian Development Bank, any judgment on the legal status ofUliastai any territory, or Harbin any endorsement or acceptance of such boundaries, colors, denominations, or information. TUV Chinggis Tsetserleg Zuunmod Bichigt KHOVD GOVISUMBER Baruun-Urt MONGOLIA Choir Arvaikheer SUKHBAATAR Altai Zuunkhadavchi JILIN Changchun Bayankhongor Mandalgovi UVURKHANGAI GOVI-ALTAI DUNDGOVI Sainshand INNER MONGOLIA BAYANKHONGOR AUTONOMOUS REGION Urumqi DORNOGOVI Uliji Port Ecological and Environmental Protection Project Zamiin-Uud Erenhot Uliji Port Infrastructure Project Dalanzadgad Shenyang Mandula UMNUGOVI (Baotou Municipality) LIAONING Gashuun Sukhait XINJIANG UYGUR Uliji Mandula Port Infrastructure Project AUTONOMOUS REGION Ganqi–Maodu Mandula Port Quarantine and Breeding Sheep Base Project (Alxa Municipality) (Bayannur Municipality)

BEIJING Ganqi-Maodu Port Expansion Project Hohhot

PEOPLE’S REPUBLIC OF CHINA Tianjin

TIANJIN Yinchuan SHANXI Shijiazhuang Taiyuan HEBEI SHANDONG

NINGXIA HUI Jinan AUTONOMOUS REGION

193517 18EASIA ABV QINGHAI Xining 0 50 125 250 Lanzhou SHAANXI Kilometers GANSU Zhengzhou HENAN Xi'an TIBET ANHUI JIANGSU AUTONOMOUS REGION

Hefei SHANGHAI Nanjing Shanghai

HUBEI Wuhan

SICHUAN Hangzhou

Lhasa Chengdu CHONGQING ZHEJIANG Nanchang Chongqing HUNAN

Changsha FUJIAN

GUIZHOU JIANGXI Fuzhou

Guiyang

Kunming

GUANGDONG

Guangzhou YUNNAN GUANGXI ZHUANG HONG KONG SAR AUTONOMOUS REGION Hong Kong, China

Nanning Macau, China

MACAU SAR

Haikou

HAINAN

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed multitranche financing facility (MFF) to the People’s Republic of China (PRC) for the Inner Mongolia Sustainable Cross-Border Development Investment Program.

2. The investment program will promote sustainable development of cross-border areas and mutually beneficial regional cooperation and integration between the PRC’s Inner Mongolia Autonomous Region (IMAR) and Mongolia. The program will improve economic inclusion, ecosystems, and basic social services in the five IMAR border crossing point (BCP) communities and surrounding areas on both sides of the 3,200-kilometer (km) PRC–Mongolia frontier, which lags in economic and social development. Expanded financial and business support to small and medium-sized enterprises (SMEs) in border regions will spur local income growth. Establishment of an agricultural value chain will enhance livelihoods on both sides of the frontier. The program will have strong regional spillover benefits to Mongolia: improvement in infrastructure and services at IMAR–Mongolia BCPs will boost the volume and quality of trade, creating about 3,300 direct and indirect jobs in Mongolia; and improvement in health and other services will benefit disadvantaged communities on both sides of the border.

II. RATIONALE

A. Development Constraints

3. The BCP communities are located along one of the world’s longest international borders. They are far from urban centers and industrial hubs and located in an often hostile environment of steppe and desert.1 Although they serve as the main cross-border logistics conduits for the rapidly expanding trade between the PRC and Mongolia, socioeconomic development has largely passed them by. Their fragile economies are narrow, and basic infrastructure and basic services are lacking. More jobs and rural development are needed to reduce inequality and income poverty. Better medical services are urgently required, as are effective responses to desertification and many other ecological problems in the frontier region.

4. Interlinked obstacles to borderland development. The key obstacles to greater socioeconomic development in the borderlands include the poor infrastructure and inefficient processes at the IMAR BCPs. This stifles the potential for development on both sides of the border and has curtailed progress under a 2011 strategic partnership between the PRC and Mongolia on greater cross-border tourism, exchanges in health and education services, and cooperation in transboundary environmental protection and food security.2 It is also a barrier to achieving the two countries’ shared goal of developing border port towns and areas into important venues for local trade, cultural exchange, and the movement of people.3 Resolving issues at the IMAR BCPs is also vitally important to the Central Asia Regional Economic Cooperation (CAREC) region overall, since they are crucial logistics facilities—and current bottlenecks—on CAREC corridor 4.4

1 Four of the five BCP communities covered by the program fit this description—Uliji, Ganqi-Maodu, Erenhot, and Mandula. The exception is Arxan. 2 Joint communique issued by the PRC and Mongolia on 17 June 2011. 3 Government of IMAR. Outline for Developing Medium- and Long-Term Strategic Partnership Relationship between PRC and Mongolia. Signed in 2014. Unpublished. 4 The six CAREC corridors link the region’s key economic hubs and connect the landlocked CAREC countries to other Eurasian and global markets. Corridor 4 connects the Russian Federation with East Asia, including the IMAR and Mongolia.

5. Inadequate border crossing point infrastructure and systems. Physical infrastructure and cross-border land connectivity are inadequate at the IMAR BCPs. Storage and quarantine facilities are lacking. The outdated and inefficient management systems, customs procedures, and standards compound the adverse impacts of the infrastructure issues. A one-stop customs process has not been established, and goods clearance is not yet automated or integrated with sanitary and phytosanitary measures. Mongolia is particularly affected. Making lengthy IMAR BCP clearance times 2 hours shorter would save Mongolia an estimated $65 per export shipment.5 Better animal disease prevention and control at the BCPs would reduce transboundary disease transmission.6 Greater efficiency at the IMAR BCPs could further accelerate the growth of trade between the countries. It expanded from $4 billion in 2010 to $8 billion in 2018, and about $5 billion of this total was between Mongolia and the IMAR alone. Trade by the PRC and Mongolia with third party countries, including those in Europe, would also grow. Better BCP processing on the PRC side of the frontier would improve landlocked Mongolia’s access to the PRC’s markets and to the Republic of Korea, Japan and beyond through the PRC’s Tianjin seaport.

6. Poor health and other basic services in the border areas. Public health across broad areas of both countries is negatively impacted by a shortage of medical facilities and health care in the IMAR BCP city of Erenhot. Erenhot’s comprehensive secondary-level international hospital, which serves residents of a transborder region reaching 250 km into Mongolia, is overtaxed and underequipped.7 Diagnostic capacity is limited, and the hospital is unable to treat many serious ailments or properly respond to cross-border health risks from infectious diseases such as coronavirus disease (COVID-19) infection. Delays in care often force patients to spend on high- cost travel to obtain treatment in Beijing or Ulaanbaatar more than 600 km away. Long waits for proper emergency care often result in permanent disability or death. Deficiencies in sanitation and other basic services tend to exacerbate the overall elevated health risks and subpar state of health of the people living in the border areas.

7. Unfavorable environment and unsustainable living conditions. The combination of a harsh environment and poor basic services make most borderland areas inhospitable. Heavy snowstorms are frequent during the bitterly cold winters. Extremely hot, dry, and often windy summers exacerbate the damage caused by desertification. Sandstorms regularly wreak havoc on agriculture, animal husbandry, grasslands, infrastructure, and BCP operations. About 50,000 cubic meters of sand, or more than 2,000 truckloads, must be cleared from the roads each year in Erenhot alone. The poor climate interferes with outdoor activity, drives residents indoors, adds to an already heavy household cleaning and washing burden for women, and leads to heightened incidence and severity of respiratory and eye disease. An absence of proper sanitation services, particularly in Erenhot, makes the situation worse, as pollution from uncollected waste blends with sand particles in the air. Residents of Erenhot appear ready to pay much more for better sanitation services, but the city lacks waste transfer equipment.8 Groundwater in borderlands is scarce and must be used sparingly. More clean energy use is needed to avoid worsening of air pollution.

8. Limited income-generating opportunities. BCP areas are too remote to attract the outside investment needed to create sustainable local employment and income opportunities.

5 ADB. 2018. Central Asia Regional Economic Cooperation Corridor Performance Measurement and Monitoring— Annual Report. Manila. 6 IMAR has 10 ports open to Mongolia. Based on the urgency of the investment required and subprojects readiness, the program will involve five of those: Arxan, Erenhot, Ganqi-Maodu, Mandula, and Uliji. 7 The PRC–Mongolia International Hospital is the only modern comprehensive secondary-level hospital in Erenhot municipality. Only 131 of its 188 beds can be used due to a lack of medical equipment and limited capacity of staff. In addition to pediatrics, obstetrics, and special diagnostic services, it provides emergency response with first aid. The hospital treated 108,339 patients in 2018, including 2,150 from Mongolia. 8 Household survey in July 2019 conducted by ADB during investment program preparation.

SMEs play an important role in cross-border trade and job creation but have little access to bank credit, reliable market information, or business development advice. Businesses led by women are particularly underserved. Important opportunities to bridge the inequalities between urban centers and rural regions in the IMAR remain unrealized. These issues leave agricultural incomes low and poverty levels high. Low productivity, poor product quality, and restricted market access are particularly hard on the 501,000 predominantly small-scale livestock farming households that produce 42.7% of IMAR’s agricultural output and employ about 993,000 people. The same issues afflict sheep herding in the adjacent Mongolian borderlands. Farmers on both sides of the frontier need to be integrated into a well-developed sheep value chain in the agribusiness sector.

9. Weak development institutions and capacities in border areas. Coordination between IMAR and Mongolia is crucial to developing sustainable BCPs and border areas, but the mechanisms for doing so are weak. The governments of IMAR and Mongolia are key to collaboration between the two sides, but have little knowledge of or experience with international best practices for joint BCP area development, including approaches for dealing with transboundary health risks and drug, human, and wildlife trafficking.

B. Rationale for the Program

10. Pandemic impact. The COVID-19 pandemic has caused unprecedented disruptions to the global economy and slowed down the economies of both the PRC and Mongolia, while reducing trade and the movement of people between the two countries. The PRC’s gross domestic product (GDP) growth is expected to fall from 6.1% in 2019 to 1.8% in 2020, while Mongolia’s GDP growth is expected to fall from 5.1% in 2019 to –1.9% in 2020.9 Although the investment program was prepared before the pandemic, the government recognizes that the program remains highly relevant and will be a key driver for post-pandemic economic recovery and revitalization, as it will increase job opportunities, expand trade, improve the livability of border towns, and support SMEs. In addition, the program will strengthen the system of screening and responding to human and animal transboundary health risks. Adopting new technologies to monitor and trace agricultural products and enhancing the exchange of customs, immigration, and inspections data between the PRC and Mongolia will enable the two countries to better manage these risks and ensure safer cross-border movement of goods and people.

11. Regional cooperation road map. The investment program will help to deliver sustainable and inclusive socioeconomic progress in communities and rural areas on both sides of the PRC– Mongolia border. The program design reflects the common objectives and road maps for cooperation of the PRC, the IMAR, and Mongolia. Greater cooperation with Mongolia is a priority under the 2016–2020 5-year economic and social development plan of the Government of IMAR (IMARG).10 The Government of Mongolia has agreed with the IMARG and the Russian Federation on a long-term cooperation strategy and an $18 billion investment plan up to 2035.11 The IMARG and Mongolia have also agreed on a medium- and long-term framework for cooperation during 2015–2025.12 The framework sets directions for eliminating physical and nonphysical restraints on progress toward inclusive and sustainable cross-border development and growth.

9 ADB. 2020. Asian Development Outlook 2020 Update: Wellness in Worrying Times. Manila. 10 Government of IMAR. 2016. Thirteenth Five-Year Economic and Social Development Plan in IMAR, 2016–2020. Hohhot. 11 Government of IMAR. 2015. Medium and Long-Term Plan for Developing Connectivity Infrastructure among IMAR, The Russian Federation, and Mongolia, 2016–2035. Hohhot. 12 Government of IMAR. 2014. The Outline for Developing Medium- and Long-Term Strategic Partnership between PRC and Mongolia, Hohhot.

12. Program priorities. The investment program will support the 2015–2025 IMARG– Mongolia framework’s priorities. These include (i) enhancing connectivity through better transport and energy infrastructure; (ii) strengthening the key BCPs and the economic and social development of border areas; (iii) accelerating the development of economic corridors; (iv) piloting economic cooperation zones (ECZs); and (v) tackling such cross-border risks as those related to public health and environmental fragility. The program is aligned with the framework goals, particularly those of making BCPs and border areas effective bases for cooperation; improving services; and strengthening the two countries’ ability to jointly address cross-border disease control, improve environment protection, and deal with other transboundary challenges.

13. Policy framework. The IMARG has established a lead group under its current 5-year plan (footnote 10) to plan, coordinate, and strengthen collaboration with Mongolia and other CAREC countries. Policies have been set and reforms designed to make IMAR–Mongolia border crossings more efficient, enhance the business environment at BCP ports, and improve the livability of the border towns.13 Among the policy aims are a reduction in the number of permits and the documentation needed to process exports and imports and the institution of online border crossing applications and approvals. Customs is to be integrated with sanitary and phytosanitary measures, and joint customs inspection with Mongolia will be upgraded through electronic transmission of export and import goods lists. One-stop customs processes are to be used to ensure that businesses receive timely inspection results, and public–private partnerships are to be piloted by 2026 in an effort to improve border services. In addition, the policies call for the IMARG to enhance its poverty reduction program by partnering with agricultural leading enterprises and to strengthen border region hospitals to provide better medical services. Plans to create a shared cross-border ECZ centered on the region’s busiest BCP, which links Erenhot in IMAR with the Zamyn-Uud ECZ in Mongolia, are to be accelerated.14

14. Strategic context. The investment program aligns with Strategy 2030 of the Asian Development Bank (ADB), which identifies regional cooperation and integration as one of ADB’s seven operational priority areas.15 It is designed to support the Strategy 2030 operational priorities to (i) address remaining poverty and reduce inequalities (through the delivery of output 3); (ii) accelerate progress in gender equality (all outputs); (iii) tackle climate change, build climate and disaster resilience, and enhance environmental sustainability (output 2); and (iv) promote rural development and food security (output 3). The investment program is also well aligned with Strategy 2030’s approach to support upper middle-income countries by promoting innovation, international best practices, and knowledge sharing for PRC and IMAR. The program aligns with the priorities under ADB’s country partnership strategy for the PRC for 2016–2020 of managing climate change and the environment, promoting regional cooperation and integration, and supporting inclusive economic growth.16

15. Past assistance and lessons. The IMARG has proven capacity to successfully manage ADB-financed projects.17 Lessons relevant to ADB operations in the PRC and Mongolia have

13 Government of IMAR. Opinions on Implementing Measures for Improving Port Business Environment and Promoting Cross-Border Trade Facilitation. 2019. 14 This document uses the most recent English-language spelling of the district name: Zamyn-Uud. The name is also sometimes spelled Zamiin-Uud. 15 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific. Manila. 16 ADB. 2016. Country Partnership Strategy: People’s Republic of China, 2016–2020—Transforming Partnership: People’s Republic of China and Asian Development Bank. Manila. 17 ADB. 2006. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People’s Republic of China for the Inner Mongolia Autonomous Region Environmental Improvement Project. Manila. ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People’s

5 informed the program’s design.18 Concerted efforts will be required on both sides of the border to ensure the program’s success, and these lessons point to the need for strong ownership from the two countries involved and for an effective mechanism for coordination between them. The IMAR investment program will be implemented in close coordination with two complementary ongoing ADB operations in Mongolia—the Developing the Economic Cooperation Zone Project, which is providing targeted support to the Mongolia side of the Erenhot–Zamyn-Uud BCP;19 and the 2016 Regional Improvement of Border Services Project, which is improving Mongolia’s border services at two other BCPs on its frontier with the IMAR.20 Similar past operations also show that a cross- sectoral program approach involving mutually supportive technical, environmental, financial, and economic elements along with stakeholder ownership and coordination will be critical to successfully lifting living standards and living conditions for people in the BCP areas on both sides of the frontier in a sustainable long-term way.

III. THE INVESTMENT PROGRAM

16. Value added by ADB assistance. The program will go beyond the removal of critical logistical obstacles to greater trade between the PRC, Mongolia, and the other CAREC countries. In addition to upgrading and modernizing the facilities and systems at five IMAR BCPs, it is designed holistically to ensure that the BCP communities and the two countries’ border regions long bypassed by the socioeconomic spin-offs of growing bilateral and regional trade also share in the benefits. The program will enhance the livability and sustainability of target border regions by supporting the use of such advanced technologies as smart drip irrigation with reclaimed water for forestation, smart port management based on information and communication technology, and smart waste collection and transfer. International best practices in gender equity will be applied through targeted support for women-led SMEs, the gender-sensitive design of BCP facilities, and poverty alleviation program (PAP) support for low-income households headed by women. The program will promote regional public goods through cross-border spillover effects (para. 17) and measures to address the climate change and adaptation challenges that confront both the IMAR and Mongolia. These will include support for carbon pollution reduction by building protective forest strips and the use of renewable and clean energy for heating supply. The program’s sound technical design, improvements to the environment and ecosystems, and robust economic and financial returns will ensure its long-term sustainability and benefits.

17. Benefits for Mongolia. The investment program aims to provide strong benefits for Mongolia. Half of the jobs created are expected to go to residents of the Mongolia border regions, especially in agriculture, port management, food processing, and retail and wholesale trade. More efficient animal inspection, value-chain development, and high-tech tracing and branding in sheep breeding should increase demand and prices in the PRC for Mongolia’s sheep and raise the exports for the country’s herders from the current level of 300,000 head a year. The upgrading of efficiency of the IMAR BCP at Erenhot will spur Mongolian exports and is projected to generate 2,000 additional jobs in Mongolia by 2030. Direct spill-over benefit measured in gross terms is estimated at about $855 million. Mongolia will benefit alongside the PRC from the coordinated steps to be taken under the program to control the cross-border spread of communicable human

Republic of China for the Inner Mongolia Autonomous Region Environmental Improvement Project (Phase II). Manila; and ADB. 2014. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People’s Republic of China for the Low-Carbon District Heating Project in Hohhot in Inner Mongolia Autonomous Region. Manila. 18 ADB. 2018. Technical Assistance to Mongolia for Preparing Regional Cooperation and Integration Projects. Manila. 19 ADB. Mongolia: Developing the Economic Cooperation Zone Project. 20 ADB. Mongolia: Regional Improvement of Border Services Project; and ADB. Mongolia: Regional Improvement of Border Services Project (Additional Financing).

6 and animal diseases; improve the borderlands environment and health services; and prevent illegal drug, human, and wildlife trafficking. The program’s coordination with ADB’s ongoing operations to develop the ECZ on the Mongolia side of the Erenhot–Zamyn-Uud BCP and upgrade services of two Mongolian BCPs on its border with the IMAR will maximize bilateral sharing in the program benefits (para. 15 and footnote 19).

A. Impact and Outcome

18. The investment program is aligned with the following impact: sustainable economic development and shared prosperity for CAREC region achieved.21 The investment program will have the following outcome: sustainable economic opportunities and living conditions in areas along the IMAR–Mongolia border improved.22

B. Outputs

19. Output 1: Sustainable infrastructure for cross-border connectivity and health services improved. The investment program will support sustainable infrastructure and institutional changes at five key BCPs stretched over 2,000 km along the border between IMAR and Mongolia. This output comprises: (i) establishing a smart port management systems, including one-stop inspection and intelligent vehicle queuing; (ii) installing a wind-powered, clean energy heating supply for the Erenhot–Zamyn-Uud ECZ; (iii) building connecting and access roads at ECZs and BCPs; (iv) improving a transit system to smoothen and speed up BCP logistics and reduce transboundary health risks including storage and transshipment facilities, customs clearance systems, and sanitary and phytosanitary clearance facilities; and (v) enhancing capacity and quality of services at the PRC–Mongolia International Hospital in Erenhot through the provision of advanced medical equipment and training on regional health security issues. In designing the infrastructure, the Group of 20 Principles for Quality Infrastructure Investment will be followed, including the principles of sustainability, resilience, inclusiveness, and innovative technologies.23

20. Output 2: Ecological environment in key border towns improved. This output includes: (i) creating protective forest strips to safeguard BCP communities from sandstorms and improving environmental conditions using smart forestation technologies such as advanced reclaimed-water irrigation and intelligent fertilization, and (ii) piloting a smart municipal waste collection system and introducing recycling systems to reduce negative impacts from human activities on the environment.

21. Output 3: Income-generating opportunities expanded. This output comprises: (i) providing local currency loans to SMEs engaged in cross-border businesses through a financial intermediation loan (FIL); (ii) strengthening IMAR’s business development service system for SMEs with particular support through piloting a program for female entrepreneurs and SMEs led by women; (iii) developing an inclusive sheep value chain to create economic opportunities for farmers in border areas by building (a) animal quarantine facilities, (b) sheep processing logistics park, (c) stud sheep breeding and farming bases at the Mandula port, and (d) a livestock tracing and management system; and (iv) establishing the PAP to ensure that poor households, including those headed by women, are integrated into the value chain.

21 ADB. 2017. CAREC 2030: Connecting the Region for Shared and Sustainable Development. Manila. 22 The design and monitoring framework for the investment program is in Appendix 1. 23 Ministry of Japan. 2019. G20 Principles for Quality Infrastructure Investment.

22. Output 4: Cross-border cooperation mechanisms, technical project management, and institutional capacity strengthened. This output includes: (i) annual international workshops to support existing bilateral coordination mechanisms at the Erenhot–Zamyn-Uud BCP and to facilitate cross-border policy dialogue between the PRC and Mongolia; (ii) training for agricultural enterprises, farming households, and rural cooperatives to improve their use of livestock farming technology, animal disease prevention, and livestock waste management; and (iii) training for executing agency, implementing agencies, project implementing entities (PIEs), and counterpart Mongolian officials in safeguards, procurement, financial management, gender equality, and awareness of sexual exploitation and harassment.

23. Use of the Multitranche Financing Modality. The investment program’s outputs are best financed by an MFF to sustainably achieve the outcome.24 The program aims to address multiple complex and interacting development constraints in a vast, underdeveloped, and environmentally challenged region straddling the border of two countries. This requires a phased, integrated, and sustained response. The three MFF tranches are sequenced according to subprojects readiness, their urgency, geographical locations, results of ongoing coordination between the two countries, and expected progress in similar ADB operations in Mongolia (para. 15). The road maps and policy frameworks of the PRC and IMAR will guide these long-term investments.

24. Modality advantages. The MFF ensures ADB’s predictable long-term financing for these approaches and will help ADB achieve the program’s intended outcome (para. 18). The investment program will cement ADB’s role as an honest broker between IMAR and Mongolia in expanding partnerships for sustainable development and creating institutional mechanisms to support the development of BCPs and border areas up to 2031 and beyond. The program will support sustained, ongoing capacity strengthening of executing and implementing agencies and the IMARG overall, rather than building capacity piecemeal through stand-alone projects. Lessons from tranche 1 will be applied to tranches 2 and 3. The MFF allows for phasing of important components. For example, forestation can be gradually expanded with each tranche to avail of growing wastewater treatment capacity, thereby minimizing the use of precious groundwater.

25. Eligibility of financial intermediary. ADB and the IMARG have selected the Bank of Inner Mongolia as financial intermediary for onlending ADB’s FIL proceeds to qualified SMEs under tranche 1. Other financial institutions selected by the Borrower and acceptable to ADB may participate in the FIL onlending. To be eligible, these banks must have sufficient financial creditworthiness, the institutional capacity to manage SME financing schemes, sufficient reach in the targeted SME markets, and the ability to meet ADB’s reporting and safeguard standards.25 Selected banks will provide matching counterpart funds under tranche 1.26

26. Scope of tranche 1. Tranche 1 will help finance the delivery of all four program outputs. A smart port management system in the Erenhot–Zamyn-Uud ECZ, and a service area and customs supervision center at the Mandula port (IMAR) will be built, and the equipment at the international hospital in Erenhot will be upgraded (output 1). Ecological restoration will be carried out in the ECZ, and a smart waste collection system established in Erenhot (output 2). SME

24 Comparison of Financing Modality (accessible from the list of linked documents in Appendix 2). 25 Detailed eligibility criteria are in Appendix 3 of the Facility Administration Manual (accessible from the list of linked documents in Appendix 2). The Bank of Mongolia was cleared by ADB’s financial and integrity due diligence. The financial intermediation role for the program can be extended to other banks and financial institutions by applying the same criteria and requirements during the program and tranche design and implementation. Financial due diligence and performance review will be conducted on selected financial intermediaries for renewals at the end of loan terms. 26 The eligibility criteria for SME subborrowers have been developed and are in the Facility Administration Manual (accessible from the list of linked documents in Appendix 2).

8 financing support, the construction of a quarantine station at the Mandula port, and the establishment of a product tracing and management system and PAP will contribute to expanding income-generating opportunities (output 3). Output 4 activities under tranche 1 will include the capacity improvements and facilitation of policy dialogue between IMAR and Mongolia Feasibility studies for all subprojects have been undertaken, and the domestic approval process completed. Tranche 1 is representative of the types of investments to be supported under the whole MFF.

27. Subsequent tranches. Some program interventions will be completed in full under tranche 1, including the upgrading of the international hospital in Erenhot, implementation of the PAP, and creation of the inclusive sheep-breeding value chain. Other activities will continue under tranches 2 and 3 to ensure full delivery of the outputs through the program’s phased approach. Tranche 1 lessons will be applied to tranches 2 and 3; and output 1 activities to upgrade the Erenhot and Mandula BCPs will be extended to the ports at Uliji, Ganqi-Maodu, and Arxan. Ecological improvements (output 2) will begin under tranche 1 and expanded in tranche 2. Tranche 3 will include a second phase of environment improvement including smart forestation in Erenhot. The financial intermediation loans for SMEs will continue under tranche 2, and SMEs will receive business development support under tranche 3.27 Prefeasibility studies of indicative tranche 2 and 3 subprojects are complete, and the subprojects’ readiness level is high.

C. Summary Cost Estimates and Financing Plan

28. The investment program is estimated to cost €753.62 million, including taxes and duties, physical and price contingencies, interest, and other charges during implementation (Table 1).

Table 1: Summary Cost Estimates of the Investment Program (€ million) Item Amounta A. Base Costb 1. Sustainable infrastructure for cross-border connectivity and health services improved 377.74 2. Ecological environment in key border towns improved 111.21 3. Income-generating opportunities expanded 156.95 4. Cross-border cooperation mechanisms, technical project management, and

institutional capacity strengthened 6.27 Subtotal (A) 652.16 B. Contingenciesc 97.39 C. Financing Charges During Implementationd 4.06 Total (A+B+C) 753.62 a Includes taxes and duties of €47.98 million for the entire multitranche financing facility to be financed from government resources and ADB loan resources. Such amount does not represent an excessive share of the project cost. ADB will finance taxes and duties of €36.82 million. The government will finance taxes and duties of €11.16 million, which will be provided in cash contribution. b In mid-2019 prices. c Physical contingencies computed at 8% of base cost, excluding initial working capital. Price contingencies computed at 1.5% for 2019, 1.5% for 2020, and 1.6% for 2021 and thereafter on foreign exchange costs; and 1.9% for 2019, 1.8% for 2020, 2.0% for 2021, and 2.1% for 2022 and thereafter on local currency. Contingencies include provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate. d Includes interest, commitment charges and any other financing charges for all sources of financing. Interest during implementation for the ordinary capital resources loan has been computed at the EURIBOR-based 7-year United

27 The MFF and tranche 1 subprojects were prepared by ADB. 2019. Technical Assistance to the People’s Republic of China for Preparing Regional Cooperation and Integration Projects. Manila. Indicative subprojects under tranches 2 and 3 are listed in Appendix 12 of Facility Administration Manual (accessible from the list of linked documents in Appendix 2). Tranche 2 and 3 preparation will be conducted by an ADB team and project implementation consultants. If extensive requirements on safeguard or other due diligence arise, or changes occur in the subprojects, or executing or implementing agencies during tranches 2 and 3 preparation and implementation, additional TA or other ADB resources can be utilized.

States dollar fixed swap rate corresponding to the implementation period plus an effective contractual spread of 0.5% and an average loan maturity premium of 0.1%. Commitment charges for the ordinary capital resources loans are 0.15% per year to be charged on the undisbursed loan amount. Source: Asian Development Bank estimates.

29. Financing plan. The government has requested an MFF denominated in euros of up to €356,295,000 from ADB’s ordinary capital resources to help finance the investment program. The MFF will consist of three tranches, subject to the government’s submission of related periodic financing requests, execution of the related loan and project agreements for each tranche, and fulfillment of terms and conditions and undertakings set forth in the framework financing agreement. The first tranche of €166,525,000 of the MFF will comprise two loans: (i) an investment loan of €149,559,000 with a 25-year term, including a grace period of 6 years; and (ii) a financial intermediation modality loan of €16,966,000 (equivalent to $20 million) with an 18-year term and provision for the bullet repayment method. The FIL funding will have a revolving nature to maximize the availability of the loans during loan terms. Loans from the IMARG to the financial intermediaries will have 6-year terms, while subloans to SMEs are typically 1–2 years. Interest and other charges during construction will not be capitalized. Loan proceeds will have (i) a custom-tailored repayment method, (ii) an annual interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility, (iii) a commitment charge of 0.15% per year, (iv) an average maturity of 15.98 years and an average loan maturity premium of 0.1%, and (v) such other terms and conditions set forth in the draft loan and project agreements. The indicative fund flow and the relending arrangements are specified in the facility administration manual (FAM).28 The ADB loan will finance 47.28% of the program costs, including civil works, goods, and taxes and duties for eligible ADB-financed expenditures. The IMARG will ensure that counterpart funds are available for physical and price contingencies and for financing charges during implementation.

Table 2: Summary Financing Plan (€ million) Tranches 1, 2, and 3 (estimated year of PFR submission) Share of Source T1 (2020) T2 (2022) T3 (2024) MFF Total (%) Asian Development Bank OCR 166.53 100.44 89.33 356.29 47.28 Government 115.35 85.60 97.18 298.13 39.56 Othersa 63.27 35.93 0.00 99.20 13.16 Total 345.14 221.97 186.51 753.62 100.00 MFF = multitranche financing facility, OCR = ordinary capital resources, PFR = periodic financing request, T = tranche. a Resources reflecting contributions by participating financial intermediaries (€57.04 million) and privately owned enterprise (€42.16 million). Source: Asian Development Bank estimates.

30. Climate change and potential cofinancing. Cofinancing is being sought from other multilateral development banks for the potential scaling up of the program’s climate change mitigation and adaptation components. Tranche 1 climate change mitigation components, including smart forestation and clean energy heating supply, are estimated to cost CNY142.87 million (€17.52 million). Costs of the adaptation components, including wastewater treatment facilities, water savings, and smart water recycling system, are estimated at CNY158.41 million (€19.42 million). ADB will finance 45% of mitigation costs and 98% of adaptation costs.

D. Implementation Arrangements

31. The IMARG, as the executing agency, will closely coordinate with other government agencies, key implementing agencies, and project implementation entities to timely resolve any

28 Facility Administration Manual (accessible from the list of linked documents in Appendix 2).

10 issues, expedite the procurement process, and complete the project within the target date. The project leading group will be established to provide overall coordination and supervision and resolve any institutional problems affecting project preparation and implementation. IMAR project management office was established under the executing agency and will be responsible for overall coordination and supervision of subproject preparation and implementation. Implementing agencies will be governments of the five BCP municipalities and selected financial intermediaries. The implementation arrangements of the investment program are summarized in Table 3 and described in detail, including specific arrangements for project 1, in the FAM.

Table 3: Implementation Arrangements Aspects Arrangements MFF availability period March 2021–March 2031 Estimated completion date 30 September 2031 (loan closing date for tranche 3) Implementation period– March 2021–March 2027 tranche 1 Estimated completion 30 September 2027 (loan closing date–tranche 1: 30 September 2027) date–tranche 1 Management (i) Oversight body The project leading group is chaired by the IMAR vice governor and consists of representatives from IDRC, IDOF, the Department of Commerce, the Office of Port Management, vice mayors of project municipal governments, and the chief executive officer of the POE. (ii) Executing agency Government of the Inner Mongolia Autonomous Region (iii) Key implementing Investment program: The governments of the municipalities of Alxa (Uliji BCP), agencies Bayannur (Ganqi-Maodu BCP), Baotou (Mandula BCP), Erenhot, Xingan (Arxan BCP), and selected financial intermediaries Tranche 1: The governments of the municipalities of Baotou and Erenhot, the Bank of Inner Mongolia and other selected financial intermediaries (iv) Implementation Tranche 1: entities 1. Erenhot Yixin Urban & Rural Development and Construction and Asset Management Co., Ltd. (Yixin) (SOE) 2. Damaoqi Pine Boolean Property Service Co., Ltd. (Songbuer) (SOE) 3. Inner Mongolia Xiao Wei Yang Stock Raising Sciences and Technologies Co., Ltd. (Xiaoweiyang) (POE) Tranches 2 and 3: 1. Mulin Port Development Co., Ltd. 2. Ganqi-Maodu Port Management Committee 3. Uliji Port Management Committee Procurement OCB for civil works 10 contracts $139,704,832 OCB for goods 9 contracts $24,509,669 Non-consulting service (embryo 6 contracts $9,848,836 transplantation services) Community participation for sheep raising 300 contracts $11,532,055 servicesa Consulting services Individual consultant selection 4 contracts; 10 $80,000 person-months QCBS (90:10) for consulting firm (project 1 contract; 95 $1,059,000 management support and capacity building) person-months CQS for external environmental monitoring 1 contract; 24 $220,000 firm person-months Retroactive financing and Advance contracting will be undertaken for procurement of goods, works, and advance contracting consulting services for the program management and advisory support. Retroactive financing by the investment loan of up to 20% of the loan amount under a tranche will be available for expenditures incurred prior to loan effectiveness, but not more than 12 months prior to loan signing.

Aspects Arrangements Disbursementa and fund Each of the loan proceeds will be disbursed following ADB's Loan Disbursement flow Handbook (2017, as amended from time to time) and detailed arrangements agreed between the government and ADB. Fund flow: Loan agreements will be signed between ADB and the PRC. For tranche 1, PRC will relend the loan proceeds to IMAR on the same terms and conditions as applicable to the PRC. For the investment loan, IMAR will onlend to Baotou Municipal Government and Erenhot Municipal Government. Baotou Municipal Government will further onlend to Damaoqi County Government and Qingshan District Government. Damaoqi County Government will onlend to Damaoqi Pine Boolean Property Service Co., Ltd and Qingshan District Government will onlend to Inner Mongolia Xiao Wei Yang Stock Raising Sciences and Technologies Co., Ltd. For the financial intermediation modality loan, IMAR will onlend to the eligible financial intermediaries for onlending to qualified subborrowers for qualified subprojects.

ADB = Asian Development Bank, BCP = border crossing point, CQS = consultants’ qualification selection, IDOF = Inner Mongolia Autonomous Region Department of Finance, IDRC = Inner Mongolia Autonomous Region Development and Reform Commission, IMAR = Inner Mongolia Autonomous Region, MFF = multitranche financing facility, OCB = open competitive bidding, POE = privately owned enterprise, PRC = People’s Republic of China, QCBS = quality- and cost- based selection, SOE = state-owned enterprise. a Sheep-raising services involve local communities, use more local knowledge and materials, and use labor-intensive and stud breeding technologies. Community participation is suitable for subprojects in the agriculture sector to ensure sustainability and achievement of social objectives. Source: Asian Development Bank.

32. Poverty alleviation program implementation. The PAP will provide poor households in Baotou Municipality with breeding and extension services and advice on animal health, welfare, and nutrition. The participating poor households will increase their incomes by raising ewes and selling lambs to the selected agricultural leading enterprise, Inner Mongolia Xiao Wei Yang Stock Raising Sciences and Technologies Co., Ltd., Xiaoweiyang. 29 A buy-back guarantee by Xiaoweiyang for lambs will give small farmers greater income security in raising high-quality lambs and help build a more inclusive and resilient sheep value chain. Xiaoweiyang will implement the PAP according to the detailed implementation arrangements in the onlending agreement and project implementation agreement to be signed between the IMARG and Xiaoweiyang. The agreements will specify the onlending terms and conditions, the scope and activity details, the eligibility requirements for selecting cooperatives and poor households for support, and the fund flow and disbursement requirements. Such agreements will be on terms and conditions acceptable to ADB and will provide for a clear and robust monitoring system to ensure that the PAP is implemented effectively. Details are in Appendix 1 of the FAM (footnote 28).

IV. DUE DILIGENCE

A. Technical

33. Tranche 1 will apply innovative and sustainable technologies such as smart port management, under which the BCPs combine one-stop inspection and intelligent vehicle queuing systems; and high-tech drip irrigation using reclaimed water with sensors for remote water application management to create protective forest strips. Heating storage and supply for the

29 The agricultural leading enterprise (ALE), Xiaoweiyang, was eligible and selected to be the project implementation entity for the poverty alleviation program because it (i) was willing to provide counterpart financing of more than 50%, (ii) has export–import business at the Mandula port, and (iii) was willing to participate in the PAP. Although it was the only one of the four national ALEs in Baotou Municipality to express interest, Xiaoweiyang has been recognized as a national ALE since 2008 and as a leading poverty alleviation enterprise since 2010. It has conducted business in sheep-breeding, livestock farming, food processing, restaurant chains, cold chain logistics, and feed sales. The ALEs share responsibility for poverty alleviation by providing income-generation opportunity to farmers and establishing a benefit-sharing mechanism to support poor villages and poor households.

Erenhot–Zamyn-Uud ECZ will use electricity generated by the abundant borderlands wind power. Other technical solutions will include breeding genetically superior sheep and enhancing productivity through sheep embryo transplants, and the establishment of a livestock tracing and management system. Subproject civil works designs will adopt best practices and comply with PRC standards and design codes for architecture, water supply and sewage, firefighting, electric power supply, and lighting and communication systems.

B. Economic and Financial

34. Economic and financial viability. The cost–benefit analysis and financial sustainability assessment of fiscal impacts on the government's counterpart funding and debt servicing conducted for the tranche 1 project and the investment program overall followed ADB guidelines.30 The financial internal rate of return (FIRR) and economic internal rate of return (EIRR) were calculated to determine the program’s financial and economic viability. The economic cost– benefit analysis covered three of the outputs under tranche 1. At 14.3%, the overall tranche 1 EIRR exceeded the economic opportunity cost of capital set at 9.0%—based on EIRRs of 13.3% for output 1, 19.0% for output 2,31 and 21.7% for output 3. The economic net present value under tranche 1 was CNY2,170 million. An overall FIRR of 5.47% was determined for the four revenue- generating outputs which met the ADB requirement that is higher than the weighted average cost of capital (1.27)32 and the financial net present value was CNY825 million.

35. Financial sustainability. For tranche 1, ADB undertook sustainability analysis to determine the capacity of the PAP, its implementing entity (Xiaoweiyang), and the non-revenue- generating subprojects to meet incremental program fund requirements over time (including operation and maintenance costs and debt repayments). Xiaoweiyang was found to have sufficient projected cash flows to finance the required counterpart funding. Financial sustainability requires Xiaoweiyang to keep its current ratio above 2.0 and its debt–equity ratio at not more than 45:55. It should also achieve a debt service coverage ratio of 1.3 by 2025 (a covenant to that effect has been included in the legal agreement). Fiscal projections showed that the Erenhot Municipal Government and the Damaoqi County Government can meet the funding requirements of the nonrevenue subprojects with negligible impacts on their annual budgets.

C. Governance

36. Financial management. A standard financial management assessment carried out by ADB for tranche 1 confirmed that the executing agency, the IMARG, has sufficient financial management capacity and experience with ADB policies and procedures. No major financial management issues have been identified at the municipal governments and financial intermediary that will act as the program’s implementing agencies. Two PIEs—the privately owned Xiaoweiyang and the state-owned enterprise (SOE) Yixin—have sound financial management systems, but the capacity of the third PIE (Songbuer SOE) is relatively weak. The financial management risk is substantial, and the executing and implementing agencies and the PIEs have agreed to implement an action plan to mitigate it by addressing the key deficiencies. Yixin and Songbuer will strengthen their governance, financial management, and audit and disclosure systems by participating in the program and meeting ADB requirements. This will also serve to

30 ADB. 2018. Handbook for the Classification and Economic Analysis of Regional Projects. Manila. 31 The EIRR and FIRR were not determined for the financial intermediation modality loan in accordance with ADB. 2003. Financial Intermediation Loans. Operations Manual. OM D6/BP. Manila. 32 Revenue-generating subprojects are those that generate income through tariffs, fees, or service charges to cover operation and maintenance costs, depreciation, and debt servicing.

13 align their performances with the directions being taken by the PRC’s overall SOE reform. Integrity due diligence on the financial intermediaries and Xiaoweiyang identified no significant risks.

37. Procurement. A strategic procurement planning exercise (summarized in Appendix 13 of the FAM) has been undertaken to ensure value for money through choosing optimal procurement arrangements for subproject activities. The overall pre-mitigation procurement risk for tranche 1 activities is considered moderate. With assistance from ADB and the project implementation consultants, the IMAR project management office and PIEs will have adequate capacity to comply with the ADB Procurement Policy (2017, as amended from time to time) and Procurement Regulations for ADB Borrowers (2017, as amended from time to time). Procurement under the FIL will be undertaken in accordance with commercial practices acceptable to ADB. ADB’s Anticorruption Policy (1998, as amended to date) and Integrity Principles and Guidelines (2015, as amended from time to time) were explained to and discussed with the governments of the PRC and IMAR. The specific policy requirements and supplementary measures are described in FAM.

D. Poverty, Social, and Gender

38. ADB’s poverty and social analysis indicate that the program’s tranche 1 activities will benefit 2.95 million people in Erenhot and Baotou municipalities through greater livelihood opportunities for the poor and the population overall. Socioeconomic benefits will arise from improved border facilities and connectivity, growth in cross-border economic activities, and development of the inclusive sheep-farming value chain. Health care services will be enhanced, as will environmental and living conditions the Erenhot BCP area. Financial intermediation onlending to SMEs engaged in cross-border trade and logistics, agribusiness, manufacturing, and tourism will create jobs and raise incomes. The benefits will spill over to the adjacent border areas of Mongolia, where the impact will be especially strong on a smaller population base with generally lower income levels.

39. Gender. Tranche 1 is categorized as effective gender mainstreaming. A minimum target has been set for providing financial intermediation subloans to SMEs owned or led by women. ADB and the IMARG have prepared a social development and gender action plan that will give women access to 600 newly generated jobs. The plan aims to enhance the capacity of women employees at the Erenhot and Mandula BCPs, the international hospital, and government agencies. It requires that cross-border and customs facilities have gender-sensitive designs and promotes the participation of low-income households headed by women in the PAP.

E. Safeguards

40. In compliance with ADB’s Safeguard Policy Statement (2009), the program’s tranche 1 activities have been assigned safeguard categories.33

41. Environment (category B). An initial environmental examination report and environmental management plan have been prepared for tranche 1 activities, which confirm that the project will not result in significant adverse environmental impacts that are irreversible, diverse, or unprecedented. Implementation of the environmental management plan will prevent or mitigate any minimal adverse environmental impacts. ADB conducted information disclosure and meaningful public consultations on the project activities during the subproject design and will continue to do so throughout implementation. The IMARG will establish a program-level grievance redress mechanism to handle environmental complaints. The Erenhot and Baotou municipal

33 ADB. Safeguard Categories. https://www.adb.org/site/safeguards/safeguard-categories.

14 governments have the capacity to meet the increased demand for materials and municipal services for expanding the infrastructure and facilities under the program. ADB has prepared an environmental assessment and review framework to guide the screening, categorization, assessment, planning, and institutional arrangements for subsequent tranches.

42. Environmental and social management system for financial intermediaries. The Bank of Inner Mongolia will adopt an environmental and social management system (ESMS) prior to loan effectiveness that will cover environmental and social policies; safeguard screening, categorization, and review; institutional arrangements; and monitoring and reporting procedures. The FIL will not fund any subprojects that are on the prohibited investment activities list of ADB’s Safeguard Policy Statement or will trigger category A safeguards for environment, involuntary resettlement, or indigenous people. Although its ability to implement the ESMS is weak, the Bank of Inner Mongolia has established ESMS units and assigned staff to be trained to implement the ESMS independently and properly assess the environmental and social impacts of proposed FIL subprojects.

43. Involuntary resettlement (category B). Three households with family members up to 12 persons will lose 0.6%–1.6% of their total grassland through acquisitions for the Mandula port subproject of 1,170.77 mu34 of land, including 808.66 mu of state-owned land and 279.11 mu of village collective land (grassland). The impact is deemed not significant. All works for the Erenhot subproject will be on state-owned land, and due diligence showed no outstanding or legacy issues. A resettlement plan has been prepared for the investment program, as well as a resettlement framework for the program’s subsequent tranches.

44. Indigenous peoples (category C). Tranche 1 activities are not expected to trigger ADB’s Safeguard Policy Statement for indigenous peoples. Ethnic minority groups comprise 12.4% of Erenhot’s population, the largest being Mongolian (93%) and Manchu (5.4%). However, these groups are widely dispersed through the municipality and will enjoy the same benefits from the investment program as the ethnic Han majority. An ethnic minority development framework has been prepared to guide the screening of subproject impacts on ethnic minorities in subsequent tranches and prepare ethnic minority development plans if ADB’s indigenous peoples safeguard is triggered.

F. Summary of Risk Assessment and Risk Management Plan

45. Significant risks and mitigating measures are summarized in Table 4 and described in detail in the risk assessment and risk management plan.35

Table 4: Summary of Risks and Mitigating Measures Risks Mitigation Measures and Management Plan Inadequate institutional and staff capacity Qualified staff and consultants will be recruited to support the to properly implement the investment executing agency, implementing agencies, and PIEs. program, particularly procurement Training will be provided on program implementation, including procurement, financial, and safeguards management. Lack of implementing agency and PIE Financial management staff will receive training on ADB financial experience in financial management of management, reporting policies, and disbursement procedures during ADB projects program implementation. Implementation delays because of the Capacity building will be conducted for officials at all levels of multiple implementing agencies and Government in IMAR. The Government of IMAR, implementing agencies, and PIEs will allocate sufficient human resources.

34 A mu is a Chinese unit of measurement (1 mu = 666.67 square meters). 35 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

Risks Mitigation Measures and Management Plan unfamiliarity with the multitranche Individual consultants will be recruited for the program and subprojects financing facility modality start-up before loan effectiveness, and project implementation consultants will be recruited afterwards. Frequent staff changes cause delay in Continuous capacity development support will be provided during the approval of subproject implementation program implementation. Manuals for procurement, financial, and plans and funds disbursement safeguard management will be prepared and shared among executing agency, implementing agencies, and PIEs. ADB = Asian Development Bank, IMAR = Inner Mongolia Autonomous Region, PIE = project implementing entity. Source: Asian Development Bank.

V. ASSURANCES AND CONDITIONS

46. The governments of the PRC and IMAR have assured ADB that implementation of the investment program shall conform to all applicable ADB policies, including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the FAM and loan documents.

47. The governments of the PRC and IMAR have given certain undertakings for the MFF, which are set forth in the framework financing agreement. Specific covenants agreed by the governments of the PRC and IMAR with respect to individual tranches under the MFF are set forth in the loan agreement and project agreements for the respective tranches.

48. Conditions for withdrawal. No withdrawals will be made from the ADB loan account (i) for the purposes of the Xiaoweiyang subproject until the IMARG and Xiaoweiyang have entered into the relevant project implementation agreement on terms and conditions acceptable to ADB; or (ii) for the financial intermediation modality loan until the IMARG and the relevant financial intermediary have entered into an onlending agreement on terms and conditions acceptable to ADB, and each financial intermediary has established an ESMS satisfactory to ADB.

VI. RECOMMENDATION

49. I am satisfied that the proposed multitranche financing facility would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the multitranche financing facility to the People’s Republic of China for the Inner Mongolia Sustainable Cross-Border Development Investment Program in an aggregate principal amount not exceeding the equivalent of €356,295,000, which comprises the provision of loans from ADB's ordinary capital resources, in regular terms, with interest and other terms to be determined in accordance with ADB's London interbank offered rate (LIBOR)-based lending facility; and is subject to such other terms and conditions as are substantially in accordance with those set forth in the framework financing agreement presented to the Board.

Masatsugu Asakawa President 30 September 2020

16 Appendix 1

DESIGN AND MONITORING FRAMEWORK FOR THE INVESTMENT PROGRAM

Impact the Investment Program is aligned with Sustainable economic development and shared prosperity for CAREC region achieveda Data Sources and Performance Indicators with Targets Results Chain Reporting Risks and Baselines Mechanisms Outcome By 2031: Sustainable economic a. Jobs at border crossing points a. Annual statistics by External market and opportunities and increased by 150%, and at least 40% of Bureau of Statistics, economic factors living conditions in employment opportunities taken up by IMAR Government cause slow economic areas along the women (2018 baseline: 10,475,b 30%) growth and cross- IMAR–Mongolia (OP 1.2) border trade border improved b. Number of Mongolian patients using b. Hospital records Frequent staff Erenhot international hospital increased and annual report changes cause delay by 100% (2018 baseline: 2,150) (OP in approval of 7.3) subproject implementation plans c. Average incomec of poor households c. Tripartite and funds from poverty alleviation program agreement and lamb disbursement increased by CNY10,000/year purchasing receipts (2018 baseline: 0) Outputs By 2030: External market instability causes 1. Sustainable 1a. Three new smart ports with one- 1a.–c. Semiannual infrastructure for stop inspection systems established progress reports and mutton price to cross-border and operating at Erenhot, Ganqi- subproject completion decrease; connectivity and Maodu, and Uliji ports reports by executing Xiaoweiyang’s health services (2018 baseline: 0) and implementing interest in supporting improved agencies poor households 1b. New logistics park with international declines logistics parking service area and customs inspection center established and operating at Mandula port (2018 baseline: 0)

1c. Mutual trade zone established at Arxan port (2018 baseline: 0)

1d. 50 types of advanced medical 1d. Hospital records equipment purchased to replace outdated equipment in the departments of radiology and laboratory, emergency center, and operating rooms (2018 baseline: 0) (OP 1.1.2)

2a. c. Semiannual 2. Ecological 2a. Protective forest strip covering 500 – progress reports and environment in hectares created in subproject cross- subproject completion key border towns border areas reports by the improved (2018 baseline: 0) (OP 3.3.3) executing and 2b. Garbage collection and transfer implementing system established in Erenhot-Zamyn– agencies Uud ECZ and at Arxan port (2018 baseline: 0) (OP 4.1.2)

2c. Sanitation intelligent cloud service platform operated in Erenhot (2018 baseline: 0) (OP 4.1.2)

Appendix 1 17

Data Sources and Performance Indicators with Targets Results Chain Reporting Risks and Baselines Mechanisms 3. Income- 3a. At least 10 SMEs provided with 3a. Subloan generating credits from the financial intermediation agreement opportunities loan annually expanded (2018 baseline: 0)

3b. At least 20% of SMEs d receiving 3b.–d. Semiannual financing from the selected financial progress reports and intermediary banks are owned or led by subproject completion women (2018 baseline: 4%, women reports by the owned or led SME borrowers in IMAR) executing and (OP 2.1.3) implementing agencies 3c. At least 20 new SMEs receiving business development services (2018 baseline: 0)

3d. At least 30% of SMEs receiving business development services are owned or led by women (2018 baseline: 0)

3e. At least 2,000 poor households 3e. Tripartite have participated in decision-making agreements and and implementation of the PAP, at least social survey results 50% of which are led by women (2018 baseline: 0) (OP 2.3)

3f. At least 100 jobs (including short- 3f.–g. Semiannual term jobs) provided to poor households progress reports and annually starting in 2020 (2018 subproject completion baseline: 0) (OP 1.2 ) reports by the executing and 3g. Animal quarantine station implementing established at Mandula port agencies (2019 baseline: 0) (OP 5.2.4)

4. Cross-border 4a. Improved skills and knowledge on 4a.–b. Semiannual cooperation regional cooperation and services, progress reports and mechanisms, project management, safeguards, and subproject completion technical project gender issues provided to at least 600 reports by the management, government officials, of whom at least executing and and institutional 40% are women implementing capacity (2018 baseline: 0) agencies; capacity strengthened development 4b. At least 200 medical completion reports; professionals—such as managers, and training doctors, and nurses—at least 50% of participants’ survey whom are women, participate in on-site reports job training and report improved skills in diagnosis, treatment, ward management, hospital operation, and operation of upgraded medical equipment (2018 baseline: 0)

4c. Quarterly coordination meetings 4c. Meeting minutes conducted between two ADB projects for Erenhot–Zamyn-Uud ECZ (2018 baseline: 0)

18 Appendix 1

Key Activities with Milestones

1. Sustainable infrastructure for cross-border connectivity and health services improved 1.1 Complete tranche 1 implementation by Q1 2027 1.2 Complete tranche 2 implementation by Q1 2029 1.3 Complete tranche 3 implementation by Q1 2031

2. Ecological environment in key border towns improved 2.1. Complete tranche 1 implementation by Q1 2027 2.2. Complete tranche 2 implementation by Q1 2029 2.3. Complete tranche 3 implementation by Q1 2031

3. Income-generating opportunities expanded 3.1. Complete tranche 1 implementation by Q1 2027 3.2. Complete tranche 2 implementation by Q1 2029 3.3. Complete tranche 3 implementation by Q1 2031

4. Cross-border cooperation mechanisms, technical, project management, and institutional capacity strengthened 4.1. Complete tranche 1 implementation by Q1 2027 4.2. Complete tranche 2 implementation by Q1 2028 4.3. Complete tranche 3 implementation by Q1 2031

Project Management Activities 1. Develop and maintain performance monitoring system and ensure timely delivery of regular progress reports (Q1 2021–Q3 2031). 2. Recruit and manage program start-up consultants and project implementation consultants (Q4 2020–Q3 2031). 3. Carry out program and subproject management and capacity-building activities (Q1 2021–Q3 2031). 4. Organize annual regional cooperation and integration international workshops and share program experience (Q2 2021–Q3 2031). Inputs ADB: €356.29 million Government: €298.13 million Private-owned enterprise: €42.16 million Financial intermediaries: €57.04 million Assumptions for Partner Financing None ADB = Asian Development Bank, CAREC = Central Asia Regional Economic Cooperation, ECZ = economic cooperation zone, IMAR = Inner Mongolia Autonomous Region, PAP = poverty alleviation program, Q = quarter, RFI = results framework indicator, SMEs = small and medium-sized enterprises. a ADB. 2017. CAREC 2030: Connecting the Region for Shared and Sustainable Development. Manila. b The baseline of 10,475 comprises jobs at project ports, including port staff and business employees. Jobs to be created will be mainly from ECZ and border-crossing point for skilled and unskilled positions, based on further increase in trade and improved living conditions in IMAR. c Income increase for poor households is generated directly from participating in the PAP by raising ewes and selling lambs to Xiaoweiyang. d SMEs owned or led by women are defined as: enterprises with majority ownership by one or more women; or enterprises where senior management responsibility is held by one or more women. Contribution to Strategy 2030 Operational Priorities: Expected values and methodological details for all OP indicators to which this operation will contribute results are detailed in Contribution to Strategy 2030 Operational Priorities (accessible from the list of linked documents in Appendix 2 of the report and recommendation of the President). OP 1.2 Jobs generated (number). OP 1.1.2 Health services established or improved (number). OP 2.3 Women represented in decision-making structures and processes (number). OP 2.1.3 Women-owned or -led SME loan accounts opened or women-owned or -led SME end borrowers reached (number). OP 3.3.3 Terrestrial, coastal, and marine areas conserved, restored, and/or enhanced (hectares). OP 4.1.2 Urban infrastructure assets established or improved (number). OP 5.2.4 Food safety and traceability standards improved (number).

Appendix 1 19

OP 7.3 Regional public goods initiatives successfully reducing cross-border environmental or health risks, or providing regional access to education services (number). Source: Asian Development Bank.

20 Appendix 2

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=51192-001-3

1. Loan Agreement 2. Project Agreement 3. Project Agreement: Financial Intermediation 4. Framework Financing Agreement 5. Periodic Financing Request for Tranche 1 6. Sector Assessment Summary: Regional Cooperation and Integration 7. Comparison of Financing Modality 8. Facility Administration Manual 9. Contribution to Strategy 2030 Operational Priorities 10. Development Coordination 11. Financial Analysis 12. Economic Analysis 13. Country Economic Indicators 14. Summary Poverty Reduction and Social Strategy 15. Environmental Assessment and Review Framework 16. Resettlement Framework 17. Ethnic Minority Development Framework 18. Risk Assessment and Risk Management Plan 19. Climate Change Assessment 20. Social Development and Gender Action Plan 21. Initial Environmental Examination 22. Resettlement Plan 23. Financial Intermediary: Environmental and Social Management System Arrangement Supplementary Documents 24. Financial Management Assessment 25. Supplementary Document to the Economic Analysis 26. Project Procurement Risk Assessment 27. Assessment on the Medical Equipment Upgrading for the Erenhot International Traditional Chinese and Mongolian Medicine Hospital 28. Rapid Assessment of the Program’s Impact on Health Security 29. Innovations Matrix Under Tranche 1 Subprojects 30. Gauging Cross-Border Spillover Impacts from Inner Mongolia, PRC to Mongolia—The Case of IMAR Project