Report and Recommendation of the President to the Board of Directors ````````````````````````````````````````````````````````Sri Lanka Project Number: 40052 November 2007 Proposed Loan People’s Republic of China: Kunming Qingshuihai Water Supply Project CURRENCY EQUIVALENTS (as of 15 November 2007) Currency Unit – yuan (CNY) CNY1.00 = $0.1347 $1.00 = CNY7.43 ABBREVIATIONS AAOV – average annual output value ADB – Asian Development Bank AH – affected household AP – affected person ASEAN – Association of Southeast Asian Nations EDZ – East Development Zone EIA – environmental impact assessment EIRR – economic internal rate of return EMDP – ethnic minority development plan EMP – environmental management plan FYP – five-year program GDP – gross domestic product IA – implementing agency ICB – international competitive bidding JBIC – Japan Bank for International Cooperation JV – joint venture KMG – Kunming municipal government KWSG – Kunming Water Supply Group Company Limited LIBOR – London interbank offered rate MDG – Millennium Development Goal MLSS – minimum living standard scheme NADZ – New Airport Development Zone NCB – national competitive bidding O&M – operation and maintenance PLG – project leading group PMO – project management office PPMS – project performance monitoring system PRC – People’s Republic of China PSP – private sector participation QCBS – quality- and cost-based selection RP – resettlement plan SEPA – State Environmental Protection Administration TA – technical assistance WACC – weighted average cost of capital WSC – water supply company WWTP – wastewater treatment plant YPG – Yunnan provincial government WEIGHTS AND MEASURES km2 – square kilometer m2 – square meter m3 – cubic meter m3/s – cubic meter per second mu – unit of land measure, 667 m2 NOTES (i) The fiscal year (FY) of the Government ends on 31 December. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY 2007 ends on 31 December 2007. (ii) In this report, “$” refers to US dollars. Vice President C. Lawrence Greenwood, Jr., Operations Group 2 Director General H. S. Rao, East Asia Department (EARD) Director R. Wihtol, Social Sectors Division, EARD Team leader T. Villareal, Urban Development Specialist, EARD Team members A. Djusupbekova, Senior Counsel, Office of the General Counsel M. Gupta, Social Development Specialist, EARD S.W. Handayani, Senior Social Development Specialist, Regional and Sustainable Development Department S. Popov, Senior Environment Specialist, EARD J. Wang, Project Officer (Urban Development and Water Supply), PRC Resident Mission, EARD CONTENTS Page LOAN AND PROJECT SUMMARY i MAP I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 3 III. THE PROPOSED PROJECT 7 A. Impact and Outcome 7 B. Outputs 7 C. Special Features 8 D. Project Investment Plan 9 E. Financing Plan 10 F. Implementation Arrangements 10 IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 14 A. Benefits and Impacts 14 B. Social Dimensions 14 C. Financial Aspects 16 D. Economic Aspects 17 E. Environmental Aspects 17 F. Risks and Mitigation Measures 18 V. ASSURANCES AND CONDITION 19 A. Specific Assurances 19 B. Condition for Disbursement 20 VI. RECOMMENDATION 20 APPENDIXES 1. Design and Monitoring Framework 21 2. Water Sector Analysis 25 3. External Assistance 30 4. Description of Project Components 32 5. Detailed Cost Estimates and Financing Plan 34 6. Flow of Funds and Onlending Arrangements 36 7. Project Organization 37 8. Implementation Schedule 38 9. Procurement Plan 39 10. Summary Resettlement Plan 41 11. Summary Poverty Reduction and Social Strategy 45 12. Financial Analysis 48 13. Tariffs and Affordability 52 14. Economic Analysis 57 SUPPLEMENTARY APPENDIXES (available on request) A. Detailed Sector Analysis B. Policy Dialogue C. Detailed Description of Project Components D. Detailed Cost Estimates and Financing Plan by Component E. Detailed Implementation Plan F. Detailed Institutional Analysis G. Terms of Reference for Consulting Services H. Resettlement Plan I. Detailed Poverty and Social Assessment J. Health Impact Assessment K. Detailed Ethnic Minority Development Plan L. Detailed Financial Analysis and Financial Management M. Detailed Economic Analysis and Least-Cost Analysis N. Detailed Summary Environmental Impact Assessment (SEIA) and Environmental Management Plan (EMP) LOAN AND PROJECT SUMMARY Borrower People’s Republic of China (PRC) Classification Targeting Classification: General intervention Sector: Water supply, sanitation, and waste management Subsector: Water supply and sanitation Themes: Sustainable economic growth, environmental sustainability, inclusive social development Subthemes: Developing urban areas, urban environmental improvement, human development Environment Category A. A summary of the environmental impact assessment Assessment was circulated to the Asian Development Bank (ADB) Board of Directors and uploaded onto the ADB website on 26 June 2007. Project Description The Project is a key urban infrastructure initiative of Kunming municipal government (KMG). It will provide safe, secure water supply and ensure sustainable economic growth of the city of Kunming. The Project will help Kunming to (i) ensure better raw water quantity and quality in the main city and the new development zones; (ii) protect water resources; (iii) encourage more effective water demand management; (iv) strengthen integrated water resources development and environmental management; (v) improve the environment, living conditions, and public health standards; and (vi) ensure effective corporate governance and enterprise reform to improve sector efficiency. The Project consists of three components (i) water resources development, (ii) water conveyance systems, and (iii) capacity development and project management. The Project supports the Government’s 11th Five-Year Program (2006–2010) to improve living conditions and health in the cities of the PRC, and to promote their sustainable economic development. The Project will contribute to achieving Millennium Development Goal (MDG) 7, target 10, which calls for halving by 2015 the proportion of people without access to safe drinking water and basic sanitation. The Project is consistent with ADB’s water policy. Rationale Yunnan provincial government and KMG have identified a priority list of investment projects covering water supply and wastewater management and environmental improvement projects that will help to improve the urban environment, reduce water pollution of reservoirs and lakes, and ensure long-term sustainable development in Kunming. In the medium term, a better quality and low-cost water supply source is needed to meet the projected water demand of Kunming. Without these measures, Kunming will have to revert to the use of the highly polluted water sources of Dianchi Lake with class V water quality. The polluted water source remains a threat to public health, apart from being costly to treat. ii To support these developments, additional raw water supplies are required. The existing water supply, without using Dianchi Lake, is projected to be fully utilized within the existing city because of population growth and the related urban, commercial, and industrial development through to 2010 and beyond. The New Airport Development Zone (NADZ) is a new greenfield development area that has no substantial local water supply source. Because of topography, it can only be supplied with water from the existing city system by pumping, which is contrary to the expressed policy for energy saving. NADZ will be developed from 2007 onwards, to have a projected population of 70,000 in 2010 and 180,000 in 2020. Development of the East Development Zone (EDZ) has already started, but the provision of adequate water supply will soon be a significant constraint as the population grows to 390,000 by 2010, and 950,000 by 2020. KMG has accorded priority in its 11th Five-Year Program to addressing water scarcity through policy reform, increased investment, and improved water and urban infrastructure management. KMG’s strategy focuses on (i) protecting drinking water sources by controlling upstream water pollution, industrial pollution, and other point and nonpoint sources in urban areas; (ii) support to watershed protection and management; (iii) introducing water and energy efficient technologies and operations; and (iv) using appropriate pricing mechanisms to encourage water conservation and generate the necessary funds for operation, maintenance, and investment. In line with the Government’s economic and enterprise reform programs, KMG has taken steps to ensure that water supply and wastewater projects are financially sustainable and capable of cost recovery. The Project will address the critical water requirements of KMG beyond 2012. The Project will provide 111 million cubic meters (m3) of water annually to meet the demand of Kunming city, 104 million m3 for EDZ and NADZ, and 7 million m3 for Xundian County from 2012. In both zones, residents currently depend largely on water from springs and wells to supply water to their homes by village-level systems for domestic use. Impact and Outcome The impact of the Project is improved urban environment, public health, and quality of life for urban residents of Kunming; and sustained economic development of the city through the provision of safe and reliable water supply. The outcome of the Project is the provision of more efficient,