T echnical Assistance Final Report

Project Number: 38594 December 2006

People's Republic of China: Integrated Water Resources Management Project

Prepared by:

Black and Veatch (Asia) Ltd., Hong Kong

For the Guiyang Municipal Government

This report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project’s design.)

ADB TA - 4586 – PRC

Project Preparatory Technical Assistance

GUIYANG INTEGRATED WATER RESOURCES MANAGEMENT PROJECT

Final Report

Volume I Main Report

December 2006

Consultant Executing Agency Black & Veatch (Asia) Ltd Guiyang Municipal Government

ADB TA - 4586 – PRC

Project Preparatory Technical Assistance

GUIYANG INTEGRATED WATER RESOURCES MANAGEMENT PROJECT

Final Report

Volume II Appendices

December 2006

Consultant Executing Agency Black & Veatch (Asia) Ltd Guiyang Municipal Government

ADB TA - 4586 – PRC

Project Preparatory Technical Assistance

GUIYANG INTEGRATED WATER RESOURCES MANAGEMENT PROJECT

Final Report

Volume III Project Documents

December 2006

Consultant Executing Agency Black & Veatch (Asia) Ltd Guiyang Municipal Government

ADB TA - 4586 – PRC

Project Preparatory Technical Assistance

GUIYANG INTEGRATED WATER RESOURCES MANAGEMENT PROJECT

Final Report

Volume IV Environmental Safeguard Documents

December 2006

Consultant Executing Agency Black & Veatch (Asia) Ltd Guiyang Municipal Government

ADB TA - 4586 – PRC

Project Preparatory Technical Assistance

GUIYANG INTEGRATED WATER RESOURCES MANAGEMENT PROJECT

Final Report

Volume V Resettlement Safeguard Documents

December 2006

Consultant Executing Agency Black & Veatch (Asia) Ltd Guiyang Municipal Government

ADB TA - 4586 – PRC

Project Preparatory Technical Assistance

GUIYANG INTEGRATED WATER RESOURCES MANAGEMENT PROJECT

Final Report

Volume VI Social Safeguard Documents

December 2006

Consultant Executing Agency Black & Veatch (Asia) Ltd Guiyang Municipal Government

Guiyang Integrated Water Resources Management Project Black & Veatch (Asia) Ltd

Asian Development Bank TA – 4586 – PRC Project Preparatory Technical Assistance GUIYANG INTEGRATED WATER RESOURCES MANAGEMENT PROJECT

FINAL REPORT

Volume I Main Report

Table of Contents

List of Abbreviations Used

Executive Summary

1. Introduction 1-1 1.1 General 1-1 1.2 Objectives 1-2 1.3 International Donors Involvement in Guiyang and Water Sector 1-2 1.4 Implementation Arrangements 1-3 1.5 Layout of Draft Final Report 1-4

2. Water Sector Review and System Analysis 2-1 2.1 Water Sector Review 2-1 2.2 Agricultural Sector 2-5 2.3 Systems Analysis of Guiyang Water Sector based on IWRM 2-6 2.4 Integrated Water Resource Management in GM 2-10 2.5 Future Water Resources Development in GM based on the Master Plan 2-11 2.6 Formulation of Proposed ADB Financed Sector Loan Project. 2-15 2.7 Conclusions and Recommendations 2-16

3. Project Description 3-1 3.1 Project Rationale 3-1 3.2 Selection of Loan Modality 3-4 3.3 Brief Description of the Project and the Core Subprojects 3-4 3.4 Estimated Capital Costs 3-8 3.5 Implementation Schedule 3-8 3.6 Current Project Approval Status 3-9

4. Subproject Feasibility Studies and Appraisal 4-1 4.1 General 4-1 4.2 Yudongxia Reservoir Urban Water Supply Core Subproject 4-2 4.3 Jinlong Reservoir County Water and Irrigation Water Core Subproject 4-3 4.4 Xifeng County Small Tank Rural Water Supply Core Subproject 4-5 4.5 Wudang Midsize Irrigation System Rehabilitation Core Subproject 4-6 4.6 Liaojiuzhai Reservoir Rural Water and Irrigation Water Core Subproject 4-7 4.7 Huaxi Reservoir Catchment Soil and Water Conservation Core Subproject 4-8

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4.8 Issues Relevant to Appraisal of Subprojects 4-9

5. Environmental Impact Assessment 5-1 5.1 General 5-1 5.2 Regulatory Context 5-2 5.3 Environmental Criteria for Subproject Selection 5-4 5.4 Document Requirements and Current Status 5-5 5.5 Summary of Environmental Assessment 5-6 5.6 Non-Core Subprojects Environmental Assessment and Review Procedure 5-10 5.7 Conclusions 5-11

6. Poverty and Social Analysis 6-1 6.1 Introduction 6-1 6.2 Poverty and Social Conditions in Guizhou and Guiyang 6-2 6.3 Ethnic Minorities 6-5 6.4 Gender 6-16 6.5 Stakeholder Analysis 6-20 6.6 Participation Strategy 6-22 6.7 Social Safeguards Documents 6-32 6.8 Issues for Resolution during Loan Processing and Project Implementation 6-32 6.9 Conclusions on Participation and Social Safeguards 6-33

7. Land Acquisition and Resettlement 7-1 7.1 General 7-1 7.2 Summary of Resettlement Impacts 7-2 7.3 Resettlement Policy Framework 7-3 7.4 Compensation Entitlements 7-4 7.5 Resettlement Cost and Fund Management 7-11 7.6 Resettlement Organizational Arrangement 7-12 7.7 Public Participation and Consultation 7-12 7.8 Monitoring and Evaluation 7-13 7.9 Resettlement Safeguards Documents Required and Current Status 7-13 7.10 Issues for Resolution during Loan Processing and Project Implementation 7-13 7.11 Conclusions 7-14

8. Economic and Financial Analysis 8-1 8.1 Economic Evaluation – Core Subprojects 8-1 8.1.1 Introduction 8-1 8.1.2 Existing Conditions 8-1 8.1.3 Economic Sector Analysis 8-10 8.1.4 Least Cost Analysis 8-19 8.1.5 Economic Analysis and Benefit Assessment of Core Subprojects 8-23 8.1.6 Water Resource Pricing and Finance 8-35 8.1.7 Issues for Resolution during Loan Processing 8-39 8.2 Financial Analysis 8-39 8.2.1 Introduction 8-39 8.2.2 Approach and Assumptions 8-40 8.2.3 Financial Sustainability of Revenue Generating Subprojects 8-46 8.2.4 Sustainability at the Level of the Farm Household 8-52 8.2.5 Financial Management Assessment 8-53

9. Institutional Arrangements and Capacity Building 9-1 9.1 Introduction and Overview of Requirements 9-1 9.2 Institutional and Capacity Building Work within the PPTA 9-1 9.3 Analysis of Existing Institutional Arrangements 9-3

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9.4 Policy Framework 9-7 9.5 Review of Proposed Project Implementation Arrangements 9-8 9.6 Institutional Capacity Analysis 9-11 9.7 Capacity Building Needs 9-13 9.8 Issues for Resolution during Loan Processing and Project Implementation 9-15 9.9 Conclusions 9-16

10. Project Design, Monitoring and Evaluation 10-1 10.1 General 10-1 10.2 Project Design and Monitoring Framework 10-1 10.3 Project Monitoring and Evaluation 10-2

Figures

Figure 1-1 Core Subproject Locations Figure 1-2 Personnel Schedule Figure 2-1 Problem Analysis Figure 2-2 Guiyang Water Resources Figure 3-1 GIWRM Reservoir Subproject Locations Figure 3-2 GIWRM Irrigation Subproject Locations Figure 3-2 GIWRM Small Tanks Subproject Locations Figure 3-4 GIWRM S&W Conservation Subproject Locations Figure 3-5 Core Subproject Implementation Schedule Figure 8-1 ADB Flow of Funds and Lending Arrangements Figure 9-1 Organization of Guiyang Municipal Government Figure 9-2 Project Management Arrangements Figure 9-3 Guiyang Municipal Org-structure Chart Figure 9-4 Organizational Structure of Xiuwen WRB Figure 9-5 Organizational Structure of Huaxi WRB Figure 9-6 Organizational Structure of Wudang WRB Figure 9-7 Organizational Structure of Xifeng WRB

Volume II Appendices

Table of Contents

A. General

Appendix A1 Detailed TOR for Consultants Appendix A2 List of Reference Appendix A3 Responses to ADB Comments on the DFR Appendix A4 Coverage of Consultant's TOR

B. Sector Analysis, Project Selection and Review Criteria

Appendix B1 Sector Analysis Appendix B2 Agriculture Sector Review Appendix B3 Irrigation Sector Review Appendix B4 Master Plan Subproject List Appendix B5 Master Plan Review

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C. Project Description

Appendix C1 Selection Criteria for Candidate Subprojects Appendix C2 Non-core Subproject Approval Criteria Appendix C3 Candidate Subprojects for ADB Financing Appendix C4 Core Subprojects List

D. Technical and Subproject Analysis

Appendix D1 Yudongxia subproject FAR Appendix D2 Jinlong subproject FAR Appendix D3 Xifeng small tanks subproject FAR Appendix D4 Wudang Irrigation subproject FAR Appendix D5 Liaojiuzhai subproject FAR Appendix D6 Huaxi Soil Conservation subproject FAR Appendix D7 Dam design flood standards Appendix D8 TOR for Indep Dam Construction Advisory Panel Appendix D9 Small Tank Management Framework Appendix D10 Soil Conservation Review Comments

F. Social & Poverty

Appendix F1 SPRSS Appendix F2 Gender Action Plan Appendix F3 Stakeholder Participation and Consultation Record

G. Resettlement

Appendix G1 Terms of Reference for External Monitoring and Evaluation

H. Finance and Economics

Appendix H1 Costing Categories and Cost Tables Appendix H2 Project Financing Plan Appendix H3 Financial Analysis and Management Assessment Appendix H4 Eighteen Month Procurement Plan Appendix H5 Financing and Funds Flow Appendix H6 Household Surveys and Results Appendix H7 Urban Water Demand Curve Appendix H8 Affordability

I. Institutional

Appendix I1 Analysis of Institutional Capacity Appendix I2 Draft CS TOR Appendix I3 Assessment of Capacity for Project Implementation Appendix I4 Action Plan for Development of WUA Appendix I5 Policy Framework Appendix I6 ADTA Draft Terms of Reference

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Volume III Project Document

Guiyang Integrated Water Resources Development Master Plan (Summary)

Volume IV Environmental Safeguard Documents

Environmental Assessment for the Sector Loan Environmental Assessment and Review Procedures (EARP) Summary Environmental Impact Assessment (SEIA) Summary Initial Environmental Examination (SIEE)

Volume V Resettlement Safeguard Documents

Resettlement Framework (RF) Yudongxia Reservoir Core Subproject Resettlement Plan Jinlong Reservoir Core Subproject Resettlement Plan Wudang Irrigation Rehabilitation Core Subproject Resettlement Plan Liaojiuzhai Reservoir Core Subproject Resettlement Plan

Volume VI Social Safeguard Documents

Ethnic Minorities Development Framework (EMDF) Yudongxia Reservoir Core Subproject Ethnic Minorities Development Plan Jinlong Reservoir Core Subproject Ethnic Minorities Development Plan Wudang Irrigation Rehabilitation Core Subproject Ethnic Minorities Development Plan Huaxi Soil and Water Conservation Core Subproject Ethnic Minorities Development Plan

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LIST OF ABREVIATIONS USED

Abbrev Full name/description

ADB - Asian Development Bank ADTA - advisory technical assistant AF - affected families AIEC - average incremental economic cost AIFC - average incremental financial cost AP - affected person BCR - benefit cost ratio BOO - build-own-operate BOT - build-operate-transfer B&V - Black & Veatch (Asia) Ltd. (the appointed PPTA consulting firm) CFRD - concrete faced rockfill dam CNY - Chinese Yuan CPFPG - Compensation Policy Framework and Procedural Guidelines DCF - discounted cash flow DFR - draft final report DMF - design, monitoring and evaluation DSCR - debt service coverage ratio EA - Executing Agency EARP - environmental assessment and review procedures EIA - environmental impact assessment EIF - environmental impact registration form EIR - environmental impact report EIRR - economic internal rate of return EMDF - ethnic minority development framework EMDP - ethnic minority development plan EMP - environmental management plan EPB - Environmental Protection Bureau ERD - Economic Research Department FAR - feasibility assessment report FB - Finance Bureau FIA - financial impact assessment FIRR - financial internal rate of return FMA - financial management assessment FNPV - financial net present value FS - feasibility study FSR - feasibility study report FR - final report GDP - gross domestic product GIWRMP - Guiyang integrated water resources management project

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Abbrev Full name/description GM - Guiyang Municipality GMDI - Guiyang Municipal Design Institute GMEPB - Guiyang Municipal Environmental Protection Bureau GMG - Guiyang Municipal Government GPEPB - Guizhou Provincial Environmental Protection Bureau GPMO - The Project Management Office of Guiyang Integrated Water Resources Management Project GPDI - Guizhou Provincial Survey/Design Research Institute for Water Resources and Hydropower HH - household IA - Implementing Agency IEE - initial environmental examination IFI - international financial institutions IFO - International Financing Organisation IP - indigenous peoples IR - involuntary resettlement IWRM - integrated water resources management JPY - Japanese Yan LAR - land acquisition and resettlement LARP - land acquisition and resettlement plan LFF - loan fact finding MFF - multi-tranche financing facility MOC - Ministry of Construction MOLR - Ministry of Land Resources MOU - Memorandom of Understanding MOWR - Ministry of Water Resources MTR - mid term NDRC - National Development and Reform Commission NGO - Non-government Organizations NPV - net present value O&M - operations and maintenance OCC - opportunity cost of capital PB - Price Bureau PDMF - project design and monitoring framework PLG - Project Leading Group PME - project monitoring and evaluation PMO - Project Management Office PPMS - project performance monitoring system PPTA - Project Preparatory Technical Assistance PRC - Peoples Republic of China RAP - resettlement action plan RF - resettlement framework RIB - resettlement information booklet RP - resettlement plan

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Abbrev Full name/description RRP - report and recommendation to President of the ADB SA - social assessment SEIA - summary environmental impact assessment SEPA - State Environmental Protection Administration SERF - shadow exchange rate factor SERMD - Social, Environmental and Resettlement Management Division SIDD - self-governing irrigation and drainage districts SIEE - summary initial environmental examination SOE - state owned enterprise SPRSS - summary poverty reduction and social strategy SWC soil and water conservation TOR - terms of reference VAT - value added tax VC - village committees WACC - weighted average cost of capital WPA - water purchase agreement WRB - Water Resources Bureau WS - water supply WSC - water supply company WTO - World Trade Organization WTP - water treatment plant WUA - water user association WUAF - water user association federation WUG - water user group WWTP - wastewater treatment plant YDX - Yudongxia ZWRC - Guiyang Zhushui Water Resources Industry Company

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1. Introduction

1.1 General

1.1.1 This report is the Final Report for ADB TA – 4586, the project preparatory technical assistance (PPTA) for the proposed Guiyang Integrated Water Resources Management Project (the Project). The report is presented in accordance with the requirements of the contract, dated December 16, 2005 between the Asian Development Bank (ADB) and Black & Veatch Asia Ltd (B&V), the appointed PPTA Consultant, and the minutes of contract negotiations dated December 15, 2005. This PPTA is based on an agreement between ADB and the Peoples’ Republic of China (PRC) Government dated June 15, 2005 and funding of the PPTA is under a grant from the ADB.

1.1.2 The ADB notice to proceed was issued on December 20, 2005 and B&V undertook initial mobilization in Guiyang on January 3, 2006. An Inception Report was submitted on January 23, 2006 and the Inception Workshop was subsequently held on January 25, 2006 during the Inception Review Mission from January 22 to 28. The Interim Report was then submitted on April 3, 2006 and followed by two separate Midterm Review Missions from April 18 to 26, and June 6 to 14, respectively. The Draft Final Report was submitted on July 10, and followed by the Loan Fact-finding Missions from July 25 to August 10.

1.1.3 This Final Report describes the Project progress in project preparations which has been made during the PPTA, highlights the principle findings and presents the conclusions of the PPTA team. This introductory chapter of the report covers:

• Confirmation of PPTA objectives; • International donors involvements in Guiyang and Guizhou Water Sector; • An overview of implementation arrangements; • Description of the layout of this Final Report; • Consultant’s coverage on the Terms of Reference, and • Documents reviewed.

1.1.4 Based on the sector loan approach the PPTA team first undertook a review of the Guiyang Integrated Water Resources Management Master Plan, which is the sector plan underpinning the proposed Project. Then six core subprojects for initial implementation under the Project were selected by Guiyang Project Management Office (PMO) on February 10, 2006. These core subprojects are categorized under the five segments of the Project, which are:

• Urban Water Supply Segment - Yudongxia Reservoir, water treatment and urban domestic and industrial water supply subproject in ; • County Township and Rural Water Supply Segment - (i) Jinlong Reservoir, county and rural domestic and irrigation water supply subproject in and (ii) Liaojiuzhai Reservoir, rural domestic and irrigation water supply subproject in Xifeng County; • Midsize Irrigation System Rehabilitation Segment - 6,980 mu subproject in three irrigation areas of Shuitan Town in rural Wudang District; • Small Scale Water Storage Segment - 250 spring and rain water storage structures subproject in rural Xifeng County; and • Soil and Water Conservation Segment - 15 km2 catchment area of Huaxi Reservoir subproject located upstream of Nanming River.

1.1.5 The locations of these six core subprojects within the Guiyang Municipality are shown on Figure 1-1.

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1.2 Objectives

1.2.1 The overall objective of the PPTA was to prepare a project suitable for ADB sector loan financing, by assessment of the water sector investment program to serve Guiyang Municipality. This included an evaluation of the long-term comprehensive Guiyang Integrated Water Resources Management Master Plan (the Master Plan) with respect to technical, environmental, financial, economic, social, resettlement and institutional considerations. The Terms of Reference (TOR) for the PPTA are included as Appendix A1 to this report.

1.2.2 An important objective of the PPTA is to develop a project with a sound rationale that can be implemented within the capabilities of Guiyang Municipal Government (GMG) and the policy framework for the water sector. This was done by examining the Project and individual core subproject proposals within the context of broader development, and environmental plans relevant to the project area. Based on the IWRM approach the PPTA team review has sought to provide assurance that the subprojects will contribute to achieving the objectives and policies of the Yangtze Forum held in Wuhan in April 2005 and they are the optimum choices of integrated water resources investment in the project areas.

1.2.3 The main PPTA output is an investment proposal suitable for ADB financing, comprising (a) an outline long-term water sector investment plan for GMG, for further development during project implementation; (b) an assessment of institutional capacity to implement the investment plan; (c) a capacity building program to strengthen institutional capacity; (d) criteria for the selection and appraisal of subprojects to undergo feasibility studies during project implementation; and (e) a set of model documents and approaches to assist PMO in the process of the non core subprojects to be financed under the sector loan.

1.2.4 Demonstrating sustainability of the Project is another key objective, which has required the identification of counterpart financial plans and gaining GMG commitment to specific institutional capacity building measures as well as fully embracing the concept of IWRM itself.

1.3 International Donors Involvement in Guiyang and Guizhou Water Sector

1.3.1 International donors involved in Guiyang and Guizhou who have assisted local governments in developing and implementing their strategies in the management of the water sector are the World Bank and Japan Bank for International Cooperation (JBIC).

1.3.2 A World Bank proposed $100 million Changing and Pearl River Watershed Rehabilitation Project includes segments for soil and water conservation, and livelihood improvement, including the construction of sediment retention structures and the terracing of slope land, with planting of appropriate crops including fruit trees and other perennial crops, as well as construction of small tanks for household water supply. This project will be implemented in 37 counties of 8 prefectures in four provinces including some of the western counties of Guizhou Province, but it does not overlap the proposed ADB project area.

1.3.3 Another USD 4.1 million World Bank funded project involved Guizhou rural water supply and sanitation system for nine counties, including Kaiyang, Xifeng and Xiuwen Counties of Guiyang Municipality from 2003 to 2004:

• Nine small water treatment plants with a total capacity of 6,050 m3/ day for 57 village domestic water supply, 210 household composting latrines for villagers, and 3 village school composting latrines in Kiang County in an amount of USD 1.5 million; and • Rooftop rainwater collectors and hand pumps in rural areas where rainfall is plentiful, but access to surface water is difficult.

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1.3.4 Two JBIC loan projects involving water sector management in Guiyang are:

• A 5.5 billion JPY ($42 million) for the Xijiao Water Treatment Plant of Guiyang Municipal Water Supply Company in 1998. • A second loan up to JPY 12.14 billion ($110 million) in 2005 for the Guiyang Water Environmental Improvement Project to reduce water pollution by improving sewage treatment facilities and associated wastewater collection systems at seven locations in Guiyang City.

1.4 Implementation Arrangements

1.4.1 The Executing Agency (EA) for the Project is GMG who has established a Project Leading Group (PLG) to oversee project preparation and implementation. The GMG has assigned day-to-day responsibility for project preparations to the PMO under the leadership of the PLG. The Project Leading Group provides a structure for intersect oral coordination among agencies in accordance with the Project objectives for improving integrated water resources management.

1.4.2 The Municipal PLG is chaired by a Vice Mayor and comprises municipal-level staff from the GMG Office, WRB, Finance Bureau, Development and Reform Commission, Urban Planning Bureau, Urban Management Bureau, Urban Construction Bureau, Environmental Protection Bureau (EPB), Land and Resources Bureau, Resettlement Development Bureau and Municipal Water Supply Company. It was subsequently suggested that the Women’s Federation, Civic Bureau, Religious and Minorities Bureau, Agriculture Bureau, Forest Management Bureau, should be considered to join this Group and GMG has agreed the PLG be expanded accordingly.

1.4.3 The proposed Implementing Agencies (Is) of the six core subprojects are as follows:

• Zhushui Water Resources Industry Company for Yudongxia Reservoir Subproject; • Xiuwen County WRB for Jinlong Reservoir Subproject; • Xifeng County WRB for Liaojiuzhai Reservoir Subproject; • Wudang District WRB for Midsize Irrigation Rehabilitation Subproject in Wudang District; • Xifeng County WRB for Small Scale Water Storage Structures Subproject; and • WRB for Soil and Water Conservation Subproject within the catchment of Huaxi Reservoir upstream of Naming River.

1.4.4 The commencement date for the PPTA was January 3, 2006 when the PPTA team began work at the offices provided by Guiyang PMO in Guiyang. Work in Guiyang is scheduled over an eight-month period, ending in late August 2006. The Project work and staffing schedules with some staffing changes for the PPTA are shown in Figure 1-2. Although progress in project preparations has been affected because of delays of final Master Plan, overall Project Proposal preparation, and in FSR preparations of some core subprojects, all three parties (ADB, GMG and Consultant) have made every effort to strictly adhere to the project schedule to ensure the Project can be ready for Board’s consideration and the loan can be approved before the end of 2006.

1.4.5 The Draft Final Report (DFR) was submitted as scheduled on July 10 and the draft RRP was submitted on July 24. The DFR and RRP then formed the basis of discussion during the Loan Fact-Finding Mission held from July 25 to August 12 of August 2006, after which the DFR was refined as necessary to produce the Final Report which is due to be submitted by September 30, 2006. Close communications with the PMO have been

Final Report, Introduction 1-3 4/24/2008 Guiyang Integrated Water Resources Management Project Black & Veatch (Asia) Ltd maintained throughout the PPTA, and the strong support received from them has enabled the PPTA team to accomplish this ADB assignment effectively and in an expedited manner.

1.4.6 The primary reference material for this Final Report consists of the Master Plan (completed on April 10), draft final Project Proposal (completed on June 9) together with six draft core subproject FSRs and EIAs/IEEs. The Master Plan and Project Proposal, FSRs, and EIAs/IEEs have been made available in Chinese, an English version of draft Yudongxia Reservoir FSR is available, and English summaries of the draft and final Master Plans were provided in March and April respectively. Other reference material which has been provided under the PPTA is listed in Appendix A2.

1.5 Layout of Final Report

1.5.1 Based on the Terms of Reference (TOR) and, review comments on the Draft Final Report from ADB and PMO, and ADB’s input on the table of contents of the Final Report, this Final Report includes the following documents:

• Volume I, Main Report; • Volume II, Appendices; • Volume III, Project Documents; • Volume IV, Environmental Safeguards Documents; • Volume V, Resettlement Safeguards Documents; and • Volume VI, Social Safeguards Documents.

1.5.2 Comments received on the Draft Final Report during the Loan Fact- Finding Missions and earlier comments made by ADB missions have been carefully considered by the PPTA team and incorporated into this FR as appropriate. A summary response to the ADB comments on the Draft Final Report and earlier comments on the Interim Report is provided in Appendix A3.

1.5.3 Appendix A4.of this Final Report provides a summary account of how the PPTA team has discharged its obligations under the TOR.

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2. Water Sector Review and System Analysis

2.1 Water Sector Review

Water Resources Overview

2.1.1 Guiyang Municipality, being the capital of Guizhou Province, is the economic hub of the province, and the rapid economic development, together with shifts in population resulting from increased urbanization is putting a severe strain on the existing water resources and supply facilities. Further details on the local economy and economic trends are provided in Chapter 8 of this report.

2.1.2 The average annual rainfall is 1,096 mm, of which 80% occurs during the period between May and September. The total renewable water resource is estimated to be about 8.8 billion m3 of which about 49% (4.3 billion m3) is lost to evaporation and 51% is runoff (4.5 billion m3). The annual water resource in GM is only about 1,288 m3 per capita (3.51 million population in 2004), which is lower than the internationally-recognized water requirement of 1,760 m3 per capita and the national average of 2,180 m3 per capita.

2.1.3 Although the annual rainfall is quite high, the large evaporative losses and uneven distribution present particular challenges for water resource management:

• 74% of rain falls between May and August; • 80% between May and September • Only 4.5% falls between December and February; • Annual fluctuations with a 100% difference (i.e. a 1:2 ratio) between a low rainfall year and a high rainfall year; and • Northern part of Guiyang only gets 60% of the rainfall of the south.

2.1.4 In response to these challenges, major investment in water resources infrastructure has been made over the last 30 to 40 years. There are more than 160 existing reservoirs of various sizes in GM which, together with the Hongfeng and Baihua man-made lakes, are important water sources. Songbaishan, Huaxi and Aha reservoirs are major water reservoirs for the Guiyang City water supply. In addition to reservoir storage, water delivery and supply also rely on river diversion, spring water and ground water pumping, and rainwater collection and storage. Also in the last 10 years, 30,000 small water supply tanks have been provided to rural households. However, additional water resources projects are necessary for the future and long term development of GM, and to make water more accessible to the rural population in order to improve rural livelihoods.

2.1.5 The available water resources and potential demands in Guiyang are evaluated based on the eight river basin/subcatchment (as shown on Figure 2-1) and also on the administrative boundaries. Consequently, the combination of demand management and supply augmentation measures is presented based on these boundaries.

2.1.6 Based on the long term (1951 - date) hydrological data from existing monitoring stations, average water resources in Guiyang in the eight defined watersheds as follows:

• Upstream of Wujiang River, 282 km2 catchment area with an average 213 million m3 of water; • Downstream of Wujiang River, 2,120 km2 catchment area with an average 987 million m3 of water ; • Upstream of Maotioahe River (a major branch of Wujiang River), 507 km2 catchment area with an average 323 million m3 of water;

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• Downstream of Maotioahe River (a major branch of Wujiang River), 1,316 km2 catchment area with an average 833 million m3 water; • Upstream of Nanming River (upstream of Qingshui River), 953 km2 catchment area with an average 559 million m3 of water; • Downstream of Nanming River (upstream of Qingshui River), 668 km2 catchment area with an average 378 million m3 of water; • Qingshui River (another branch of Wujiang River), 1,719 km2 catchment area with an average 951 million m3 of water; and • Lianjiang River, 469 km2 catchment area with an average 271 million m3 of water.

2.1.7 In order to illustrate the need for positive interventions and investment , the extent of projected water shortages in 2010 and 2020, as estimated by the Guizhou Water Resources Design and Research Institute, are set out in Table 2-1 below.

Table 2-1: Summary of Future Water Demand and Supply in Guiyang

2010 (104 m3 per year) 2020 (104 m3 per year) No. Categories Water Water Water Water Water Water Demand Supplied Shortage Demand Supplied Shortage A By function 139,077 100,995 38,082 169,570 104,528 65,042 1 Urban 57,091 39,801 17,290 69,809 41,483 28,326 2 County level 19,859 18,548 1,311 22,455 19,990 2,465 3 Township 3,265 966 2,299 4,263 1,375 2,888 4 People & livestock 5,307 4,855 452 5,967 4,855 1,112 5 Agriculture 53,557 36,825 16,732 67,076 36,825 30,251 B By watershed 139,077 100,995 38,082 169,570 104,528 65,042 1 Wujiang upstream 2,349 696 1,653 3,040 705 2,335 2 Wujiang downstream 21,427 15,744 5,682 26,289 16,145 10,144 3 Qingshuihe 16,867 10,052 6,815 21,132 10,329 10,803 4 Maotiaohe upstream 21,501 17,688 3,813 25,415 18,948 6,467 5 Maotiaohe downstream 17,514 12,605 4,908 22,345 12,856 9,489 6 Nanminghe upstream 47,228 34,525 12,702 56,985 35,719 21,267 7 Nanminghe downstream 9,049 7,025 2,024 10,657 7,164 3,493 8 Lianjianghe 3,142 2,658 484 3,707 2,663 1,045 C By districts 139,077 100,995 38,082 169,570 104,528 65,042 1 8,522 6,094 2,428 10,291 6,328 3,963 2 12,382 8,770 3,612 15,047 9,122 5,924 3 Xiaohe district 3,946 2,866 1,080 4,734 2,970 1,764 4 Huaxi district 18,292 14,079 4,213 22,092 14,430 7,662 5 Wudang district 19,685 14,619 5,066 24,226 15,017 9,208 6 Baiyun district 10,291 7,634 2,657 12,246 7,892 4,354 7 district 23,468 17,576 5,891 28,286 18,657 9,629 8 Xiuwen district 9,815 7,014 2,801 13,979 7,217 6,761 9 Xifeng district 12,471 9,898 2,573 14,775 10,218 4,557 10 Kaiyang district 20,206 12,445 7,760 23,894 12,675 11,219 Source: GIWRMP Master Plan, 2006

Water Quality

2.1.8 Limited general water quality conditions are described in the Environmental Assessment of the proposed Sector Loan (see Chapter 5 and EA for the Sector Loan of the Environmental Safeguard Documents). Water resources for Guiyang domestic drinking purpose met water quality standards 97.96% in 2004. However, one of the major water resources, Aha Reservoir, has been polluted with high contents of iron, manganese, suspended solids with low PH values due to excess coal mining activities in the upstream

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catchment area. Water quality of Hongfeng and Baihua Reservoirs has also been degraded and poses a threat to water supply safety.

2.1.9 Water quality of the rivers feeding the Jinlong and Liaojiuzhai reservoirs core subprojects of the proposed ADB funded Project are good and classified as Category III. During the PPTA some concerns where expressed over the water quality of sources feeding the proposed Yudongxia reservoir core subproject, due to potential problems in respect of high total nitrogen content from the existing resident and farming activities and potential soil wash down. This matter was discussed with the Guizhou Provincial EPB who feels confident that the future water quality of Yudongxia reservoir can be assured due to resettlement of some polluting activities and the control of pollution sources within the Yudongxia catchment area in accordance with the environmental management plan that has been prepared and endorsed by the relevant authorities.

Urban Water Supply

2.1.10 Total water use within the water service area of Guiyang City was 390 million m3 in 2004; including 249 million m3 (63.9%) industrial use, 90 million m3 (23%) residential use, and 37 million m3 (9.4%) commercial use. This level of usage was broadly compatible with water demand and no restrictions to economic development needed to be imposed as a result of water shortages.

2.1.11 Actual urban residential water consumption per person was 116 liters (excluding commercial use and water leakage loss) which is within the range of 100-140 liters range specified in the Urban Residential Consumption Standard (GB/T 50331-2002). However, total average urban consumption is only 213 liters per capita (includes domestic, commercial, and institutional usage), which is below the range specified in the Urban Water Supply Planning and Engineering Guidelines (GB5082-98) promulgated in 1998.

2.1.12 The total capacity of existing 11 water treatment works is about 1.21 million m3/day, but actual water supply in 2004 is only 710,500 m3/day due to the limited water resources, with some raw water sources experiencing water quality problems. The urban water supply infrastructure is old and in poor condition, water pressures are declining, and the supply has to be rationed in dry periods. The unaccounted-for water (caused by leakages from pipes, billing and revenue collection problems, etc) is believed to be in the range (20-30%).

Rural and Township Water Supply and Irrigation

2.1.13 In rural areas only approximately 50% of homes have piped water supply. About 430,000 rural residents use unsafe supplies that fail to meet accepted potable standards, 300,000 rural residents are facing potable water shortages, and 51 out of 61 towns in GM are in need of improved water supply facilities.

2.1.14 In the absence of public water supply systems in the rural areas, the majority of the agricultural population relies on local springs and streams. Some villagers have small storage structures close to their houses for combined domestic, livestock and agricultural use.

2.1.15 Most rural water is needed for agricultural purposes (domestic requirements only account for about 10%). However, due to the steep mountainous terrain, it is very difficult for farmers to obtain either river water or groundwater for irrigation, particularly in the higher elevations of the watersheds.

2.1.16 The existing irrigation facilities are often small in scale and in poor condition. Only about 12% of the municipality area is arable, and less than 50% of this land is served by any

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form of irrigation. Consequently, irrigation coverage is currently only 0.3 mu/capita, lower than the 2004 national average irrigation coverage of 0.8 mu/capita. GMG has set a target to increase this to 0.55-0.6 mu/capita by 2010 and 0.7 mu/capita by 2020.

2.1.17 The uneven seasonal and geographic rainfall events, together with the lack of irrigation facilities, hinder year-round farming despite the mild subtropical monsoon climate in Guiyang. The water constraints for rural household use and irrigation result in subsistence farmers being trapped in poverty, and this situation will likely get worse as the demand for industrial and urban water supply increases, unless other compensatory action is taken to better manage water resources.

2.1.18 Benefits of improving irrigation supplies include an increase in crop yields, (estimated to be by 30% for rice, 20-30% for maize, and 10-15% for wheat and oilseed) and increased crop diversification. Such production increases in drought-prone areas would help to significantly reduce periodic food deficits, and help to alleviate rural poverty.

Wastewater Treatment

2.1.19 The wastewater quantity in the Guiyang City urban area is 497 million m3/year in 2004 but the treatment rate is low, only13%, with an existing wastewater treatment capacity of 210,000 m3/day. The plans are for the treatment rate to be increased to 68% in 2010 with capacity of 1.16 million m3/day. Presently, there are only four wastewater treatment works in Guiyang City, and extensions and the new works that are planned under the Guiyang Urban Development Plan 1996-2010 are shown in Table 2-2.

Table 2-2: Wastewater Treatment Facilities in Guiyang Municipality

Wastewater Treatment Existing Capacity Future Capacity after Extensions/New Works (m3/day) Works at 2010 (m3/day ) Xiaohe 80,000 160,000 Huaxi (newly commissioned) 40,000 40,000 Erqiao (newly commissioned) 40,000 40,000 Xinzhuang (new plant) 0 250,000 Jinyang (new plant) 50,000 100,000 Others 565,000 Total 210,000 1,155,000

2.1.20 Information given during a visit to the existing Xiaohe wastewater treatment works was that it receives an influent flow of 120,000 m3/day, which is beyond the treatment capacity of the plant. The treatment cost is CNY 0.84/m3. The wastewater treatment works was built under a BOT arrangement, financed by Tianjin Environmental Capital, one of the leading Chinese investors and operators in the water sector.

Water Saving and Wastewater Reuse

2.1.21 Water savings and wastewater reuse is relatively low in GM. Industrial water reuse is about 50-60% and water saving features have only been adopted by about 20% of the water users.

2.1.22 Target water savings and wastewater reuse rates for 2010 have been set as follows:

• Industrial water reuse, 85% for urban and 65% for counties and townships; • Wastewater reuse, 25-30% for urban and 15% for counties and townships; and • Non Revenue Water, 15% for urban and 18-20% for counties and townships.

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2.1.23 Urban water saving measures require proper understanding from consumers regarding the importance of economic water resources management under water scarcity. There have been pilot programs to conserve water (development of a “Water Saving Society”) and the development of farming techniques to conserve water. However, the success of these initiatives requires them to be widely disseminated and practiced by water users, and especially farmers.

Soil Erosion

2.1.24 Soil erosion is estimated to affect 2,622 km2 of GM, and watershed management is urgently needed in order to conserve soil and water resources. Many erosion hotspots have been caused by uncontrolled mining, poor agricultural practices on fragile soils and irresponsible road construction leaving unprotected slopes.

Flood Control

2.1.25 The Guiyang urban areas have a good flood protection system designed to withstand floods with at least a 100-year return period, Existing flood protection designs were based on GB 50201-94 standards: a return period of 200 years for downtown Guiyang City and a return period of 100 years for other urban areas in Guiyang City.

2.1.26 However, due to continuing expansion of the urban areas, further construction of flood protection systems for flood-prone areas are required.

Institutional Arrangements

2.1.27 Institutional arrangements for water resources management are analyzed in Chapter 9 and Appendix A1 of this report. The analysis reveals that management of the sector currently suffers from both vertical and horizontal fragmentation in the institutional arrangements and that participatory approaches consistent with IWRM principles are under- developed. GM has given a commitment to institutional reform and this includes a commitment to establish and support Water User Associations.

2.2 Agricultural Sector

2.2.1 As indicated in Table 2-1 above, the demand for irrigation water for agriculture is a very significant component of total water demand in Guiyang and some 45% of the estimated 2020 deficit is attributable to irrigation demand. It has therefore been necessary, prior to considering the merits of individual irrigation subprojects, to undertake a review of the Guiyang agricultural sector in order to ensure that development in both sectors is compatible.

2.2.2 The PPTA assessment of agricultural sector indicates that the rural economy and the condition of farm households will improve over time as a result of market reforms and trade liberalization. Certain measures can be used to reinforce the rural subprojects and increase the likelihood that they will be sustainable,including crop pattern changes to increase agricultural yields.

2.2.3 This is the process by which low productivity, inefficient and substantially subsistence farming is transformed to market driven and responsive high value and integrated cropping. Complementary multiple cropping is highly suited to small holder agriculture where production streams can be adjusted to consumer demands and crops can be grown throughout the year. Such is the situation in Guiyang.

2.2.4 The most important measure needed is probably the re-establishment of a well funded agricultural extension service that can support on-farm efforts to improve crop and

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land management methods. This important measure is both compatible with and complementary to IWRM practices and outreach support required by the fledgling WUAs (see below).

2.2.5 It is also important to identify and overcome significant socio-economic constraints to subproject implementation. In particular it is important to identify any project related impacts that may cause food security risk to increase or on-farm incomes to fall; since these outcomes will likely cause a subproject to fail.

2.2.6 Modernizing irrigation developments and management that are attuned to agricultural transformation and farmer needs as well as empowerment of the farmers through establishment of water user associations (WUAs) are clear needs we can identify. The objective of water resources development to meets irrigation water demand is therefore to raise farming families out of poverty by increasing farm incomes by cultivating higher value crops with greater water management efficiency. This will be achieved by evaluating the needs of:

• The farmers and, through establishing WUAs, preparing them for participatory management of an irrigation system developed to service a developing and complex agricultural situation; • The Agricultural Department for field research, development and farmer training to support appropriate agricultural transformation; • Local Government to support WUA establishment and joint management of irrigation and water supply facilities; • The technical institutes carrying out canal system design to ensure it matches the farmers’ needs and expectations; and • The WRB to ensure water availability and to carry out coordination between the various development partners and stakeholders.

2.2.7 Details of the agricultural and irrigation reviews conducted during the PPTA are described in Appendix B2 and B3, respectively.

2.3 Systems Analysis of Guiyang Water Sector based on IWRM

IWRM Rationale

2.3.1 According to the ADB Water Policy, Integrated Water Resources Management (IWRM) is a process of managing water, land, forest and aquatic resources in a river basin context, to maximize the economic benefits and social welfare in an equitable manner without compromising the sustainability of vital ecosystems. IWRM uses comprehensive water resource assessments in river basins to enable a better understanding of the links between water and land use, the environment and sustainable development.

2.3.2 The IWRM approach emphasizes the need for cross-sectoral integration of water used for people, food, nature and industry, using the river basin as the management domain. The aims of IWRM are to promote social equity, economic efficiency and ecological sustainability with the following guiding principles:

• Fresh water is a finite and vulnerable resource, essential to sustain life, development and the environment, and should be managed using an holistic approach; • Water development and management should be based on a participatory approach, involving users, planners and policy makers at all levels;

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• Women play a central part in the provision, management and safeguarding of water; and • Water has an economic value in all its competing uses and should be recognized as an economic good.

2.3.3 IWRM methodologies and tools can be grouped into three categories:

• Creating an enabling environment: legislation, policy planning and financing; • Developing institutions: organizational frameworks and institutional capacity; and • Management tools.

IWRM and PRC Water Resources Policy

2.3.4 In recent years the Peoples’ Republic of China (PRC) has recognized the need to improve the comprehensive management of water resources, applying approaches consistent with IWRM methodologies, and to shift the emphasis more towards managing demand, including the use of economic mechanisms. A crucial milestone along this path was reached on October 1, 2002 when the revised Water Law was made effective, and in which added emphasis is given to such issues as water resources planning, protection of water resources, the economical use of water, the resolution of disputes concerning water and the enforcement of water use regulations, all of which are common water resources management concerns.

2.3.5 A further indication of changing emphasis in PRC government policy was declared at the Yangtze Forum held in Wuhan in April 2005, when a clear and strong message was given on the need for an integrated approach to river basin and water management. The requirement for cross-agency coordination was strongly emphasized, with a focus on the need to strengthen communications and exchange of information. An updating of master plans to emphasize the balance between protection, development and the environment was called for at the Yangtze Forum, and non-structural measures such as research, monitoring and information systems should be given higher priority so that decisions can be scientifically based. Policy and financial support from central to local governments needs to be strengthened. Complexities of cross-agency management demand a more strategic approach, and greater public involvement is needed to increase the effectiveness of regulatory mechanisms.

2.3.6 The MWR has prepared a draft national guidance on integrated water resources planning, and this is being piloted by a number of Provincial Water Resources Departments including in Liaoning and Gansu Provinces.

IWRM Based Water Resources Systems Analysis

2.3.7 In the context of integrated water resources management (IWRM), the water resources system (WRS) comprises: (i) the natural resources system (NRS), being the natural resources and related infrastructure; (ii) the socio economic system (SES), being the water using and water related human activities; and (iii) the administrative and institutional system (AIS), being the system of administration, legislation and regulation including the authorities responsible for the management of the WRS and the implementation of laws and regulations.1 Each of these WRS sub-systems is now considered in turn.

1 This definition of WRS covers the aspects that are essential for natural resources management: demand, supply and control of the resources. The NRS refers to the supply side of the system (resource base) and SES to the demand side. The control of both sides is provided by the AIS. The external natural boundaries of the NRS usually consist of the water divides of the catchment area, boundaries of the groundwater aquifer(s) belonging to this catchment area and the point where the river or canal discharges into the sea. The geographical boundaries

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2.3.8 The Natural Resources System of the WRS in GM. As described at the beginning of this Chapter, both urban and rural areas of GM are on the mountainous ridge of the watershed boundary between the Yangtze River basin to the north, which drains about 95% of the area, and the Pearl River basin to the south. Annual average precipitation is quite high at 1,096 mm, but large evaporative losses and uneven distribution present particular challenges for capturing and storing water. Total annual renewable freshwater supply is estimated at 8.8 billion m3, almost half of which evaporates due to the poor vegetative cover and rocky terrain of the catchment areas. The remaining water drains into rivers (4.5 billion m3 or 51% of total precipitation) as quick surface flows through numerous short creeks and streams that run deep in valleys, or through fast-flowing deep aquifers (groundwater rivers) through the limestone layers (karst areas). Local surface and underground water resources average 1,300 m3 per capita. This compares poorly with the PRC average of 1,700 m3 per capita. To illustrate these challenges: (i) 74% of rain falls between May and August and 85% falls between May and September; (ii) only 4.5% falls between December and February; (iii) annual fluctuations with a 100% difference (i.e. a 1:2 ratio) between a low rainfall year and a high rainfall year; and (iv) northern GM only gets 60% of the amount of rain that falls in the south.

2.3.9 The Socio Economic System of the WRS in GM. As the economic hub of the province, GM has a rapidly increasing population and industrial development, and hence increasing demand for water. Servicing this population and related municipal and industrial water demands is putting a severe strain on the existing water supply facilities. Urbanization in GM means increased water demand for household, commercial and industrial use. Water quality in local rivers and water sources is also a growing concern.

2.3.10 The GM urban water supply infrastructure is old and in poor condition, water pressures are declining, and the supply is rationed in dry periods. Industrial recycling fails to meet PRC targets of 75% and non-revenue water is believed to be high, probably over 30% on average. Increased urbanization is generating increased volumes of wastewater and currently only about 10% is treated.

2.3.11 In rural areas of GM only 50% of homes have piped water supply. In the absence of public water supply systems, the majority of the rural population relies on local springs and streams, although some have small storage structures near their homes for domestic and livestock use. About 420,000 rural residents face potable water shortages. Most rural water is needed for agricultural purposes (domestic requirements only account for about 10%). However, due to the steep mountainous terrain, it is very difficult for farmers to obtain river water or groundwater for irrigation, particularly at higher elevations.

2.3.12 About 10% of GM land area is arable, only 24% of this land has potential access to irrigation, and only 50% of cultivated land is currently irrigated. Consequently, irrigation coverage is currently only 0.3 mu per capita, lower than the 2004 national average of 0.8 mu per capita. It is estimated that production from the 50% of the cultivated area that is irrigated supplies 70% of production. Surface irrigation systems account for 99% of the irrigation area. Up to 40% of these structures have been abandoned and 28.8 km of canals are damaged. Water conveyance efficiency in larger irrigation schemes is estimated to average 40% and on-farm application efficiency about 90%, implying scheme level efficiencies of no more than 40%. With rehabilitation, conveyance efficiencies of 74% and on-farm application efficiencies of 95% are expected (scheme level 70%). Non point source pollution from agriculture and rural point source pollution from livestock rearing are significant threats to water quality. Soil erosion is estimated to affect 2,600 km2 of GM, and watershed management is urgently needed in order to conserve soil and protect water sources. of the SES and the AIS vary depending on what part of the socio-economic system is considered essential for managing and assessing the impacts of the WRS.

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2.3.13 The Administrative and Institutional System of the WRS in GM. In recent years the PRC has recognized the need to improve the comprehensive management of water resources, applying approaches consistent with IWRM methodologies, and to shift the emphasis more towards managing demand, including the use of economic mechanisms. A crucial milestone along this path was reached on 1 October 2002 when the revised Water Law was made effective, and in which added emphasis is given to such issues as water resources planning, protection of water resources, the economical use of water, the resolution of disputes concerning water and the enforcement of water use regulations, all of which are common water resources management concerns.

2.3.14 The case for solutions based on the principles of IWRM becomes ever stronger as water demands increase and potentially compete with one another. Under the 2002 Water Law the responsibilities of the river basin commissions2 and local water bureaus in respect of integrated water resources planning have been strengthened. The 2002 Water Law also stipulates full cost recovery for urban water services. A further indication of changing emphasis in PRC government policy was declared at the Yangtze Forum held in Wuhan in April 2005, when a clear and strong message was given on the need for an integrated approach to river basin and water management. The requirement for cross-agency coordination was strongly emphasized, with a focus on the need to strengthen communications and exchange of information.

2.3.15 As in other provinces and municipalities, GM level bureaus are subordinate to their relevant central line ministries and agencies. For example, the Guiyang Water Resources Bureau (WRB) is subordinate to the Ministry of Water Resources (MWR) but exercises a coordinating role over water resources management with particular responsibilities for water resource planning, water allocations, water conservation, flood control and rural water supplies at the local level. At the municipal level, the Urban Construction and Urban Management Bureaus (under the Ministry of Construction) are responsible for the management of urban water supply, drainage, and wastewater treatment and also has its subordinates. The provincial and municipal environmental protection bureaus play important regulatory and enforcement roles in environmental protection and pollution control. The Provincial and Municipal Development Reform Commission (DRC), operating under delegations from NDRC are involved in the approval process of investment projects and in most cases are delegated authority for administering the PRC’s Pricing Law. Other Ministries and government offices at the provincial, municipal and lower levels (notably Agriculture, Finance, Health, Civil Affairs, Land, Trade & Industry, and Forestry) are also involved in water sector issues.

2.3.16 As indicated above, the current management of the Guiyang water sector is highly fragmented. There is vertical fragmentation with different responsibilities between Provincial, Municipal and District/County levels and there is horizontal fragmentation with responsibilities for water sector management split between different functional departments of each level of government (mainly Water Resources, Urban Management and Agriculture). Both types of fragmentation lead to problems in water resources management, but generally horizontal fragmentation presents the more difficult problems to deal with. This is because the system of functional supervision within the PRC government allows issues caused by vertical fragmentation to be resolved more easily – although this does not always happen in practise. Problems of horizontal fragmentation have the following major institutional and technical

2 Six catchment-based Water Resources Commissions under the jurisdiction of the Ministry of Water Resources were set up in the 1950s for the purpose improving water resource planning, and coordinating flood control. Most of GM lies in the Yangtze River catchment under the jurisdiction of the Yangtze River Water Resources Commission with its Headquarters in Wuhan. A small part of Guiyang is within the Pearl River catchment under the jurisdiction of the Pearl River Water Resources Commission with its Headquarters in Guangzhou.

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implications: (i) overlap of monitoring functions and lack of data sharing; (ii) inadequate comprehensive water resources planning that includes other sectors; (iii) pollution control planning that is largely unrelated to water resources; and (iv) lack of integration of function zoning with harmonization of quantity and discharge permitting.

2.4 Integrated Water Resource Management in GM

2.4.1 The importance of integrated water management has been acknowledged by the Guiyang Municipal Government (GMG), and there is a strong motivation to establish IWRM practices in line with best national practice, international experience and developments, and the ADB water policy. As a first step they have prepared the Guiyang Integrated Water Resources Master Plan (the Master Plan).

2.4.2 The Master Plan identifies there is good potential for further water resource development in order to overcome shortages in both rural and urban areas. The primary objective of the Master Plan is to ensure an increase in available water resources in line with GM's development needs. The Master Plan provides a comprehensive review of water needs in different sectors including urban and rural domestic water, industrial water, hydropower, irrigation, environmental and ecological water needs, wastewater treatment and reuse, water savings and flood control. Analysis of soil and water conservation needs is also included. The Master Plan presents an economically sound strategy to pursue GM's water resources development and covers all forms of water use, both urban and rural, including: initiatives to (i) develop new resources; (ii) improve irrigation facilities; (iii) manage demand and conserve water; (iv) exercise pollution control and protect existing water resources; (v) reform institutions; and (vi) introduce market-based measures to save water.

2.4.3 As well as enhancing total available water resources, the Master Plan has specific targets to: (i) extend rural water supplies to unserviced areas; (ii) increase irrigation coverage; and (iii) treat areas subject to soil erosion. However, whilst the Master Plan contains a large listing of structural interventions, the level of attention given to resolving institutional constraints, and developing non-structural interventions and practices in keeping with IWRM principles are less well developed. This situation is understandable given the traditional emphasis to supply side water resources planning in the PRC, and the relatively recent attention given to demand side solutions. However, the Master Plan correctly identifies the priorities, which are to provide water to un-serviced or under-provided areas, and recognizes that these priorities require predominantly structural solutions, albeit with greater stakeholder involvement in their design and implementation.

2.4.4 GMG has established a Project Leading Group (PLG) to address cross-sectoral water issues, are seeking to develop initiatives under the PRC “water saving society program", and are in dialogue with the Guizhou Provincial Government to introduce integrated management of reservoirs on the Nanming River. These initiatives will further the development of institutional capacity needed for IWRM, as well as fulfillment of ADB's criteria for sector lending.3

2.4.5 Besides policies mentioned above, a favorable set of government policies to support the implementation of the Master Plan already exists in GM, increased efforts need to be made to ensure they are fully implemented. These policies include:

3 According to ADB guidelines for sector lending, criteria for applying the sector loan modality are: (i) the borrowing entity has a sector development plan to meet the priority development needs of the sector; (ii) the borrowing entity has the institutional capacity to implement the sector development plan; and (iii) if so required, the policies applicable to the sector can be improved.

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• Establishment of water user groups and increased responsibilities conferred on individual households and local communities (including asset ownership), rather than government; • Greater attention in national planning to rural development and livelihood improvement; • Public services to be corporative and not provided directly by government; • The government role should become that of enabler and regulator of services; • Separation of government and the management of enterprises; • Utility services to be financed from user charges, with tariffs set in accordance with full cost recovery principles; and • Competition and private sector participation to be encouraged for both investment in infrastructure construction and for operations and maintenance.

2.5 Future Water Resources Development in GM based on the Master Plan

2.5.1 The Master Plan outlines various water uses: principally domestic, municipal and industrial water supplies, irrigation and hydropower; and balancing these with conservation and matching supply and demand by incorporating storage at critical locations.

2.5.2 It is intended that Urban and rural water resources development be planned with an holistic approach with the following segments:

• Increasing the availability, reliability and sustainability of water resources matched to multipurpose uses (SUPPLY SIDE); • Transforming agricultural practices and establishing the basis for a higher value market-led rural economy and related improvements in water management to all users (DEMAND SIDE); • Improving farmer and water user empowerment through WUAs to ensure participation in irrigation development and management and to ensure rural water development constraints are addressed at grass roots level (BENEFICIARY PARTICIPATION); and • Developing improved regional coordination to deliver integrated intersectoral programs and services including improved water resource management and agricultural information and decision systems (MANAGEMENT).

2.5.3 The above approach suggests an integrated sector approach to project preparation with:

• The WRB responsible for water resources planning, development and management and rehabilitation of irrigation schemes; • The Department of Agriculture responsible for agricultural support and transformation and on-farm improvements; • Local government for farmer empowerment and establishment and training of water user associations; • Municipal Water Companies for domestic, municipal and industrial water supplies and sanitation development and management; and • The agency responsible for interagency coordination and setting up District and Municipal working groups for interagency problem solving and project monitoring. This could be the main implementing agency or the Municipal Planning Bureau.

2.5.4 The Master Plan provides a comprehensive long-term (2005-2020; near-term before 2010, long-term between 2010 and 2020) review on water needs in different sectors including, domestic (human and livestock) for both urban and rural water supplies, municipal and industrial water uses, hydropower, agricultural irrigation water, environmental and

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ecological water needs, wastewater treatment and reuse, water savings and flood control. In addition, soil erosion control and reservoir catchment soil and water conservation are also included.

2.5.5 The Master Plan potentially involves the construction of 108 medium and small reservoirs and dams, 10 hydropower stations, 129 agriculture irrigation system improvements, urban and rural water supply, 102 wastewater treatment schemes, 233,000 rainwater collection structures, 1,500 km2 area of soil and water conservation, and 131 flood control measures as listed in Appendix B4 and they are briefly described as follows:

• Construction of five (5) medium and 103 small reservoirs sized reservoir for urban and rural water supply and irrigation, water conveyance systems, small township treatment facilities, and irrigation systems; • Establishment of 129 river water diversions and spring water pumping systems; • Rehabilitation and upgrading of irrigation schemes at 3,966 locations within 129 areas including installation or repair of intake structures, canals and aqueducts; • Provision of 233,000 small water storage structures (surface impoundments, underground tanks, and mini reservoirs) in rural areas to catch spring water for human consumption, and rainwater for irrigation and livestock; • Construction of 10 hydropower stations; • Construction of 102 wastewater treatment facilities for 57 urban and rural areas; • Protection from soil and water losses in the upper catchments of the water sources (1,500 km2) with farm land restructuring, conversion of sloping farmland to terraces, horticultural tree planting and grass planting areas; and • Flood control of 131 locations.

2.5.6 The Master Plan presents a problem and solution analysis on Guiyang integrated water resources management that is summarized in Table 2-3 as follows.

Table 2-3: Water Resources Problem and Solution Analysis

Problem Solution Water Resources • Medium utilization percentage of • Increases to 30.6 % by 2020 20.5% in 2004 • 927 million m3 utilized in 2004 • 1.38 billion m3 demand by 2020 Urban Water Supply • Shortage of water supply in an • Construction of dams, water conveyance amount of 223 and 337 million m3 per tunnels, transmission pipelines, water year in 2010 and 2020, respectively. treatment plants and extension of the city water distribution networks. • Increase of water supply in an amount of 91.3 and 104 million m3 per year in 2010 and 2020, respectively. County Township and Rural Water Supply • Shortage of water supply in an • Construction of reservoirs for rural water amount of 111 and 158 million m3 per supply and irrigation, water conveyance year in 2010 and 2020, respectively. systems, small township treatment facilities • 51 out of 61 towns have water and irrigation systems. shortage on human and livestock • Provides small water storage tanks in rural uses. areas to catch rainwater for human and livestock consumption and irrigation water. • Increases water supply of 109 and 191 million m3 per year in 2010 and 2020, respectively. • Provides safe potable water to 219,500 rural

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Problem Solution populations by 2010 as established in the Guiyang 11th five- year Plan.

Irrigation system • 908,000 mu of farmland are not • Installs or repairs intake structures, improve irrigated in 2004 canals and distribution systems • Irrigation area decreases 2.45% improvement. annually due to shortage of water and • Changes in cropping patterns, water labor. allocation measures, public awareness and • Irrigation coverage is low only 0.3 participation. mu/capita. • Increases and improves irrigation area of • Shortage of 86 and 147 million m3 438,700 and 138,900 mu by 2020. irrigation water in 2010 and 2020, • Increase irrigation coverage to 0.57 respectively. mu/capita by 2020. • Irrigation water utilization efficiency is only 0.5. Hydropower System • Assessment of additional hydropower • Construction of 10 power stations with a total stations. capacity of 83,100 kW by 2020. Wastewater Treatment • Low treatment rate • Construction of 102 wastewater treatment • Water resources several pollution plants with a total treatment capacity of 1.73 3 • Environmental degradation • million m /day by 2020. • Treatment rate increase to 77% by 2020. Water and Soil Conservation • 2623 km2 area suffering from soil • Slope land restructuring, terracing, fruit and erosion. horticulture tree planting in the upper catchments of the water sources reservoirs and water resource protection area. • Improves soil erosion on 1500 km2 area by 2020. Flood Control • Rural areas, including farmland, still • Basic flood Improvements on 131 locations suffering flooding damage. with 414 km of river and drainage systems by 2020. Integrated Water Resources Management • Lack of horizontal and vertical • Institutional strengthening and capacity coordination. building. • Lack of non-structural measurements. • Participatory approaches, operational changes, monitoring and evaluation.

2.5.7 Irrigation development under the Master Plan will combine improving irrigation supplies with system infrastructure rehabilitation and upgrading, improvements in water management and empowerment of farmers, through establishing WUAs, to participate in all aspects of irrigation development and management. This is expected to extend areas under irrigation, increase crop intensities and crop yields and hence farm incomes. Increases are estimated to be by 30% for rice, 20-30% for maize, and 10-15% for wheat and oilseed as well as increasing crop diversification to higher value products. Such production increases in drought-prone areas would help to significantly reduce periodic food deficits, and help to alleviate rural poverty. The program will cover rehabilitation and upgrading and storage provision to medium, small and micro systems throughout the GM area. Sustainable aquaculture could also provide an additional contribution to increased rural incomes and diets.

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2.5.8 The mild subtropical monsoon climate found in Guiyang allows potential double cropping, but unevenly distributed rainfall together with the lack of effective irrigation facilities hinders year-round farming. Water constraints in the rural slope land areas trap subsistence farmers in poverty. This situation will potentially worsen as the demand for industrial and urban water increases, unless total useable water resources are increased. This is one of key rationales for the proposed Master Plan.

Potential Large Scale Water Transfer

2.5.9 The Master Plan recognizes the potential augmentation of Guiyang water resources by importing Wujiang River water via a water transfer schene from the western and northern boundaries of GM. However, the Master Plan concludes such a transfer scheme should be deferred until after the local water resources are more fully utilized, due to the projected high cost. The following justifications were provided:

• Water resources regulations require cities to make best use of local water resources before considering imports, thus the proposal seems to be based on political boundaries rather than using river catchments as planning boundaries; • Available Wujiang River water for transfer from the west will be 750 million m3 per year, but only 240 (300 max) million m3 of would be for Guiyang urban area by 2020; and • Cost is broadly CNY 1.2/m3 for long distance transfer from the north and high elevation pumping of 500-700 m. It is much more expensive than water supply from Yudongxia Reservoir with an estimated cost of CNY 0.4-0.5/m3.

2.5.10 The reason for this appears to be a result of traditional planning based on administrative (political) jurisdictions within GM, rather than taking the integrated approach based on river catchments beyond the GM boundary. A sub-basin water resources management organization of the Wujiang River is recommended to involve both Guizhou Province and Chongqing Municipality to evaluate further water transfer alternative, safeguard the interest of the people in this sub-basin, analyze and evaluate upstream and downstream effects.

IWRM and the Master Plan

2.5.11 In terms of comprehensive water resources management, the Master Plan has addressed the overall water balance, and options for affecting demand and supply within the boundary of the GM as follows:

• Examining both supply of and demand for water; • Recognizing that supply problems are not due to absolute shortage but rather the timing and location of water and water use efficiency; • Recognizing the need for environmental ecological water flows; • Identifying the benefits of water saving; • Emphasizing pollution prevention through wastewater treatment and water resource protection; • Giving priority to water for drinking while recognizing the need to ensure reliable allocation of water for other needs; • Identifying the prominent role of irrigation and proposing measures to improve efficiency of water use in agriculture while improving farm incomes; and • Identifying the need to increase industrial water use efficiency.

2.5.12 It was not within the scope of the PPTA to examine the impact of the Master Plan in the context of overall Yangtze River basin management, however such review will be made

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during the PRC approval process for the Yudongxia Reservoir and the Project Proposal, in which the Yangtze River Water Resources Commission will become involved.

Estimated Capital Costs and Financing Arrangements

2.5.13 Estimated capital costs are given in the Master Plan for the various initiatives it contains. A total amount of CNY 8.19 billion ($ 1.024 billion) is estimated for the long term subprojects by 2020. These subprojects involve 237,726 project sites for 131 administrative areas, and they comprise the following components:

• CNY 1.132 billion for water supply subprojects in the urban and suburban areas; • CNY 1.925 billion for water supply subprojects in the county and township areas; • CNY 1.156 billion for irrigation, human and animal water supply subprojects; • CNY 623 million for hydropower subprojects; • CNY 2.07 billion for wastewater treatment subprojects; • CNY 750 million for soil and water conservation subprojects; • CNY 482 million for flood control subprojects; and • CNY 50 million for Project management.

2.5.14 It should be noted that no specific investment proposals on water saving and wastewater reuse were included in the Master Plan, and separate financial arrangements on these categories of subprojects will need to be made, once specific investment proposals have been formulated.

2.5.15 The indicative implementation financing plan contained in the Master Plan is as shown in Table 2-4 as below:

Table 2.4: Financing Plan ($ million) Source Total % International Donor 201.0 19.6 Local Bank Loan 143.8 14.1 Beneficiaries 25.0 2.4 Guiyang Municipal Government 653.8 63.9 Total 10,236 100.0

Current Plan Approval Status

2.5.16 The Master Plan was formally approved by GMG on 5 July ，2006 and only needs to be submitted to Guizhou Province for the record.

Implementation Schedule

2.5.17 Implementation of Master Plan subprojects is intended to span a 15 year period commencing in late 2006.

2.6 Formulation of Proposed ADB Financed Sector Loan Project.

2.6.1 The ADB supported project will help GMG to implement the Master Plan and promote the implementation of improved water sector management based on IWRM principles. ADB will finance a slice of the Master Plan, specifically in respect of five priority structural areas related to: (i) alleviating shortfalls in urban water supplies resulting from increased urbanization; (ii) improving rural water supplies for irrigation and domestic use, via small

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reservoirs and (iii) tanks to serve individual households; (iv) rehabilitation and construction of new irrigation infrastructure; and (v) soil conservation and water source protection measures.

2.6.2 The ADB will also support non-structural initiatives with advisory technical assistance to introduce modern principles of IWRM into the management of the water sector in Guiyang, and institutional development through loan financed consulting support to GMG to: (i) develop water demand management initiatives; (ii) support the creation and development of WUAs and other appropriate participatory approaches; and (iii) build Project Management Office and Project implementing agency capacity in IWRM. The process of institutional strengthening will necessarily include policy dialogue with the government on issues such as cost recovery and tariff reform.

2.6.3 Priority subprojects to be funded by ADB within the Master Plan have been identified. Based on the draft Master Plan, preliminary selections of core subprojects for funding under the proposed ADB sector loan were made in late January. Following further discussions among the stakeholders and GMG, the PMO notified the PPTA team of the final selection on February 10, 2006. Yudongxia Reservoir subproject and another five subprojects have been selected by the GMG and confirmed by ADB as suitable core subprojects for the ADB Project.

2.7 Conclusions and Recommendations

2.7.1 Water resources management in Guiyang faces particular challenges as a result of the local topography, geology and the uneven distribution of rainfall. Whilst water demand and water supply are currently in broad balance it is clear that there is a need for major investment if this balance is to be preserved, given the ongoing economic development.

2.7.2 In addition, there are existing local imbalances in water resources and a significant proportion of the rural population are under-provided for. The extent of existing irrigation schemes is inadequate and many of those that have been constructed are ineffective.

2.7.3 GMG has signed up in principle to the concept of integrated water resources management but needs to do much in terms of institutional reform, and the introduction of participatory approaches to make IWRM a reality.

2.7.4 Notwithstanding its shortcomings, including notably the lack of genuine stakeholder participation in its preparation and the absence of defined and cost non-structural interventions, the Master plan is a good first attempt to integrate water resources planning in Guiyang and constitutes in our view a suitable investment plan on which to support an ADB sector loan project.

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3. Project Description

3.1 Project Rationale

Introduction

3.1.1 GM lies on the mountainous watershed that separates the Yangtze River Basin to the north from the Pearl River Basin to the south. Whilst there are adequate natural water resources in GM, there are significant problems that relate to: (i) the capture of sufficient quantities of water and its distribution to users, (ii) the efficiency of water distribution and use, and (iii) increasing concerns over water quality. The nature of problems is common to both urban and rural areas, but the specific causes, and hence potential solutions, are different. Problems associated with cropping patterns, agricultural run-off, and industrial wastewater pollution require cross-sectoral solutions. Problems associated with inefficient water usage and urban wastewater pollution require integrated solutions with inter-agency cooperation. The case for solutions based on the principles of IWRM becomes ever stronger as water demands increase and potentially compete with one another. The GMG recognizes this, and has given a commitment to develop solutions based on IWRM.

3.1.2 To effectively manage increasing demand and potential conflicts among multiple users’ demands for water, GMG and its agencies, particularly the WRB, require further development of an appropriate institutional and legal framework, as well as capacity strengthening. Integrated management and planning requires a coherent direction of quantity development as well as resource management covering also the institutional, legal and watershed aspects. GMG acknowledges the importance of an integrated approach and wishes to establish integrated water resource management (IWRM) in line with advanced international practices and ADB’s water policy

3.1.3 Guizhou Province is one of the poorest provinces in the PRC, with the second lowest rural income after Tibet and the lowest level of urban income of any province. The capital of the province, Guiyang Municipality (GM), is its political, economic, cultural, technical and service center, and a major transportation hub of southwest PRC. In 2004, GM had a reported population of 3.5 million, of which 2.2 million resided in the main urban area, with the remaining 1.3 million in suburban or rural areas. About 540,000 persons (15.4% of the total population) are ethnic minorities who mainly reside in the rural areas. Income differential between the rural and urban populations is high and about 25% of the rural population lives on an income of less than CNY1,200 per capita per year. Like many other areas in the PRC, GM is undergoing rapid urbanization with the urban population increasing at over 3% per annum whilst the rural population is decreasing at an annual rate of 1.6%, a trend which is likely to continue.

3.1.4 GM is one of the PRC's major producers of nonferrous metals and tobacco, and major industries include machinery, steel making, food processing, and chemicals. Total gross domestic product (GDP) of GM in 2004 was CNY44.4 billion of which the tertiary sector accounted for 40% of GDP, the secondary sector for 53%, and the primary sector 7%. However, the primary sector is much more important in terms of employment, accounting for 34% of recorded employment in GM.

Analysis of Key Problems and Opportunities

3.1.5 As the economic hub of the province, GM has a rapidly increasing population and industrial development, and hence increasing demand for water. Servicing this population and related municipal and industrial water demands is putting a severe strain on the existing water supply facilities. Urbanization in GM means increased water demand for household,

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commercial, and industrial use. Water quality in local rivers and water sources is also a growing concern.

3.1.6 Both urban and rural areas of GM are on the mountainous ridge of the watershed boundary between the Yangtze River basin to the north and the Pearl River basin to the south. Annual average precipitation is quite high but large evaporative losses and uneven distribution present particular challenges for capturing and storing water, much of which drains into rivers as quick surface flows through numerous short creeks and streams that run deep in valleys, or through fast-flowing deep aquifers (groundwater rivers) through the limestone layers (karst areas).

3.1.7 The GM urban water supply infrastructure is in poor condition and its rapidly increasing urban population has seriously stretched the existing water supply capacity, resulting in reduced water pressure, and water rationing in dry periods. It is forecasted that the annual water shortage will reach 420 million m3 in 2010 and 642 million m3 in 2020. Industrial recycling fails to meet PRC targets and non-revenue water is high. Increased urbanization is generating increased volumes of wastewater, much of which is being left untreated.

3.1.8 In the surrounding rural area, shortage of water for potable use and irrigation is seen as a critical constraint to improving rural resident incomes and living standards. Only about half of the homes in rural areas of GM have piped water supply and about 420,000 rural residents face potable water shortages. In the absence of public water supply systems, the majority of the rural population relies on local springs and streams, although some have small storage structures near their homes for domestic and livestock use. Most rural water is needed for agricultural purposes. However, due to the steep mountainous terrain, it is very difficult for farmers to obtain river water or groundwater for irrigation, particularly at higher elevations. Seasonal and annual variation in water availability is high and farmers have difficulties growing crops during the dry months from February to April, and due to the short growing season, are not able to further diversify their cropping systems. Irrigation coverage in GM is much lower than the national average and many existing structures have been damaged and abandoned. Scheme level efficiencies in larger irrigation schemes are estimated to be no more than 40%. Non point source pollution from agriculture and rural point source pollution from livestock rearing are significant threats to water quality, and watershed management is urgently needed to prevent soil erosion and protect water sources.

3.1.9 The current management of the GM water sector is highly fragmented. There is vertical fragmentation with different responsibilities between Provincial, Municipal, and District/County levels and there is horizontal fragmentation with responsibilities for water sector management split between different functional departments of each level of government. Specific water sector management issues include: (i) absence of a formal process of stakeholder consultation and involvement; (ii) despite being closely integrated in physical terms, suburban districts continue to have their own water supply companies; (iii) local townships, villages, and in rural areas, sometimes individual households, are charged with managing their own water supplies, thereby losing potential benefits from physical and management integration; and (iv) lack of coordination between water departments, agriculture departments, and local water users, which is needed for better design of irrigation systems and optimization of cropping patterns.

3.1.10 In recent years, the PRC national government has recognized the need to improve the comprehensive management of water resources, applying approaches consistent with integrated water resources management (IWRM) methodologies, and to shift the emphasis more towards managing demand, including the use of economic mechanisms. A crucial milestone along this path was reached on 1 October 2002 when the revised Water Law was

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made effective, and in which added emphasis is given to such issues as water resources planning, protection of water resources, the economical use of water, the resolution of disputes concerning water and the enforcement of water use regulations, all of which are common water resources management concerns.

3.1.11 The case for solutions based on the principles of IWRM becomes ever stronger as water demands increase and potentially compete with one another. Under the 2002 Water Law, the responsibilities of the river basin commissions1 and local water bureaus in respect of integrated water resources planning have been strengthened. The 2002 Water Law also stipulates full cost recovery for urban water services. A further indication of changing emphasis in PRC's government policy was declared at the Yangtze Forum held in Wuhan in April 2005, when a clear and strong message was given on the need for an integrated approach to river basin and water management. The requirement for cross-agency coordination was strongly emphasized, with a focus on the need to strengthen communications and exchange of information.

3.1.12 The GMG recognizes this movement towards IWRM, and has given a commitment to develop solutions based on IWRM, including the Establishment of an inter-agency project leading group (PLG). GMG has also formulated the Guiyang Integrated Water Resources Master Plan which covers all aspects of infrastructure needs whilst also recognizing some of the deficiencies of current water sector management arrangements, including fragmented institutional arrangements and inadequate attention to water demand management. Investments under the Master Plan will focus predominantly on supply side interventions, but there is a need for parallel efforts in institutional reform and demand management, which will be addressed by the Project.

3.1.13 The following challenges to the implementation of IWRM in GM remain to be addressed: (i) lack of experience in involving local stakeholders in the design, implementation and operation of water projects; (ii) duplication of water quality monitoring and lack of coordinated permitting between the Water Resources Bureau (WRB) and the Environmental Protection Bureau (EPB), and conflicting responsibilities for urban water management between WRB and the Urban Construction Bureau; (iii) constraints to the dissemination of information between water management agencies; (iv) lack of awareness and incentives for increased demand management and water conservation activities; (v) poorly integrated institutionalized planning of water resources; (vi) inconsistency of applying economic instruments including water permitting, which is not applied at all to rural water use by farmers; (vii) insufficient implementation of demand management programs; and (viii) a variety of technical issues such as conflicting systems of water/environment function zoning.

3.1.14 These challenges will be partly addressed with the implementation of the Master Plan and the Project will contribute solutions to achieve greater coordination and optimization of water supply and demand management activities in line with IWRM principles. With the development objective of promoting equitable and inclusive growth, ADB's strategy for assistance and operations in China includes support for IWRM to minimize damage from droughts and floods in poor provinces, and protect the fragile ecosystems that many of the poor depend on for livelihoods. The problem tree analysis for the Project is depicted in diagramatic form as shown in Figure 2-1

3.1.15 The Project outputs that will contribute to the outcome and intended impact of the Master Plan comprise: (i) improved water quality; (ii) increased supply of water for domestic,

1 Six catchment-based Water Resources Commissions under the jurisdiction of the Ministry of Water Resources were set up in the 1950s for the purpose improving water resource planning, and coordinating flood control. Most of GM (95%) lies in the Changjiang catchment under the jurisdiction of the Changjiang Water Resources Commission with its Headquarters in Wuhan. A small part of GM (5%) is within the Pearl River catchment under the jurisdiction of the Pearl River Water Resources Commission with its Headquarters in Guangzhou.

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industrial and irrigation purposes; (iii) improved water use efficiency; and (iv) institutional and technical capacity to manage water resources are sustainably developed. The inputs and activities designed to achieve these outputs include a range of non-structural and structural measures for improving the management of water resources, and reducing shortages of water for domestic use and irrigation. Non-structural measures include institutional strengthening and capacity development, stakeholder participation, water tariff adjustments, and other demand-management measures. Structural measures include the design and construction of reservoirs and water supply schemes, and the upgrading of agricultural irrigation systems, soil and water conservation, and rainwater collection and storage structures. The full Project Design and Monitoring Framework is described and presented in Chapter 10.

3.2 Selection of Loan Modality

3.2.1 .Given the potential for a number of separate IWRM subprojects, each requiring feasibility studies and necessary safeguards documents, the sector loan modality has been proposed for the Project and discussions to this effect have been carried out with the PRC Government officials at all levels. The advantages of the sector loan for such a large Project with diverse, albeit integrated components, would be more suitable given the potential flexibility for operational design, while ensuring needed due diligence is carried out for the Project. In addition to reducing administration costs and providing flexibility, an innovative design would also provide PRC with the opportunity to align its internal systems in, for example, environmental and social safeguards to international standards and help build capacity at the provincial, municipality, district and county levels for implementation of other projects of this nature. The sector loan approach could potentially provide added value to:

• Help implement national strategies on IWRM; • Raise understanding on IWRM policy, plans and capacity; • Promote clear roles, responsibilities and incentives for the Municipal Executing Agency (EA), and Provincial, District and County Implementing Agencies (IAs); • Promote balanced mixture of structural and non-structural water supply and conservation measures; • Promote sustainable O&M financing; and • Promote monitoring systems for impact of water management, environmental impact and implementation of resettlement and indigenous people’s development plans.

3.2.2 The Sector Plan from which the Project has been developed is the Guiyang Integrated Water Resources Master Plan, which is a medium term plan (to the year 2020) to respond to current and impending problems in the management of the water sector, and water shortages. The Project will finance and help implement a subset of the measures identified in the Master Plan. These include structural measures focusing on urban and rural water supply capacity (supply management), irrigation water use efficiency (demand management) and protection of source water quality through the control of soil erosion. Other measures, particularly the construction of small water storage tanks for individual households, will target the reduction of poverty amongst vulnerable groups including women and ethnic minorities.

3.3 Brief Description of the Project and the Core Subprojects

3.3.1 The Project scope was originally derived from the Guiyang Water Source Development and Use, Investigation and Analysis Report in 1999, and the Guizhou Provincial Comprehensive Water Resources Plan, Based on these documents, the long-term comprehensive Guiyang Integrated Water Resources Management Project (the Master Plan)

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was prepared and approved by GMG on 5th July 2006. The Project scope is now formally presented in the Guiyang Integrated Water Resources Management and Soil and Water Conservation Project (the Project Proposal) of June 2006, which defines a segment of the master plan for implementation utilizing ADB loan financing. It is intended that the Project will be implemented over a 6 year period starting from early 2007 and with completion in late 2012.

3.3.2 Based on the Master Plan, selection process and criteria for candidate subprojects and approval criteria for selected subprojects were developed and they are stated in full in Appendix C1 and C2, respectively.

3.3.3 The Project involves a range of measures for reducing shortages of water for domestic use and for irrigation, and thereby reducing poverty in urban and rural areas. The Project will improve integrated management of water resources, including institutional development and capacity-building, stakeholder participation, water tariff adjustments, and other demand-management measures, in conjunction with the design and construction of 46 medium and small reservoirs, dams, 9 agriculture irrigation systems, urban and rural water supply schemes, 127,890 rainwater collection and storage structures, 800 km2 area of soil and water conservation as listed in Appendix C3. Key infrastructure segments around which activities will be organized to achieve sustainable benefits are summarized as follows:

• Establishment of one medium reservoirs and 2 small reservoirs for urban water supply, including construction of dams, water conveyance tunnels, transmission pipelines, 4 water treatment plants, and extension of the municipal water distribution networks; • Construction of 43 small reservoirs for county township (3), rural water supply (20), human and livestock water supply and irrigation (20), including water conveyance systems, small township treatment facilities and irrigation systems; • Rehabilitation and upgrading of 197,800 mu (13,187 ha) irrigation schemes in 9 areas including installation or repair of intake structures, canals and aqueducts; • Provision of 127,890 small water storage structures (surface impoundments, underground tanks, and mini reservoirs) in rural areas to catch spring and rain water for human consumption, and rainwater for irrigation and livestock; and • Protection from soil and water losses in the upper catchments of the water sources (800 km2) with farm land restructuring, conversion of sloping farmland to terraces, tree or grass planting areas, and fruit tree planting.

3.3.4 Under the sector loan approach, six core subprojects were selected from the above five segments and they are presented in Appendix C4 and summarized below:

• Urban Water Supply Segment, Yudongxia Reservoir (18.6 million m3 capacity) and water treatment and domestic supply (100,000 m3/d) to Wudang District of Guiyang Municipality; • County Township and Rural Water Supply Segment, Jinlong Reservoir (4.18 million m3 capacity) and water supply (8,822 m3/d for county township and 5,490 rural village population) in Xiuwen County and irrigation water supply (6,468 mu farmland); • Rural Irrigation Supply Segment, Liaojiuzhai Reservoir (183,000 m3 capacity) and water supply (54 m3/d for villagers and livestock, and 1,800 mu farmland) in rural Xifeng County; • Midsize Irrigation System Rehabilitation Segment, 29 km of primary and secondary irrigation canal improvements for 6,980 mu (465 ha) farmland in six villages of three areas within Shuitian town in northern Wudang District;

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• Small Scale Water Storage Segment, 250 (91 covered tanks for human consumption) storage structures in Shiqiao Village of Xiaozaiba Town in rural Xifeng County; and • Soil and Water Conservation Segment, 15 km2 catchment area of Huaxi reservoir located within three towns of Huaxi District, upstream of Nanming River.

3.3.5 These six core subprojects, representing the five main types of infrastructure development activities within the Project Proposal, were appraised and confirmed as potentially suitable for ADB financing. These core subprojects will serve as representative models for the design and implementation of similar non-core subprojects to be financed under the Project. The proposed six core subprojects embody concepts of IWRM including:

• All three core reservoir subprojects involve multi-purpose water resource planning in that they serve both domestic water supply and agriculture and have impacts on downstream flows that need to be considered in operations and management; • Spring and rain water storage tanks are an important segment of an integrated strategy to serve basic water needs in rural slope land areas where alternative sources of water are not readily available; and • In Huaxi reservoir catchment and elsewhere agricultural soil and water conservation measures are proposed to prevent soil erosion and water resource degradation.

3.3.6 Table 3-1： lists the Project Proposal and Relevant Master Plan Project Segments

Table 3-1：Project Proposal and Master Plan Relevant Segments

Project Proposal Master Plan Relevant Segment

• Urban Water Supply Segment 3 • Increase of water supply in an amount of 91.3 and 104 • Increases water supply of 40.08 million m per year in 2012 3 million m per year in 2010 and 2020, respectively. County Township and Rural Water Supply Segment • Increases 94.83 million water supply m3 per year in 2012 • Increases rural water supply of 109 and 191 million m3 per year in 2010 and 2020, respectively.

Medium-sized irrigation system rehabilitation Segment • 9 medium-sized irrigation areas • 129 Irrigation System Rehabilitation • Increases and improves irrigation area of 282, 200 and • Increases and improves irrigation area of 438,700 and 75,000 mu by 2012. 138,900 mu by 2020. • Increases irrigation coverage to 0.5 mu per capita by 2012. • Increase irrigation coverage to 0.57 mu per capita by 2020. Small Water Storage Segment • Provide 127,890 small water storage tanks in rural areas to • 233.000 small tanks by 2020 catch spring and rainwater for drinking, irrigation, and • Provides safe potable water to 422,709 rural livestock by 2012 populations by 2010 as established in the Guiyang 11th five- year Plan. Soil and Water Conservation Segment • farm land restructuring, terracing, naturalization (tree or • Improves soil erosion on 1500 km2 area by 2020. grass), fruit tree planting in the upper catchments of the water sources (800 km2) by 2012

3.3.7 The proposed Yudongxia Reservoir will be located in Wudang District with a catchment area of 118 km² and an average flow of 2.05 m3/s. The storage capacity will be 18.6 million m3 with a double curvature concrete arch dam height of 71.5 m. Raw water will be delivered to the new 100,000 m3/d Dongjiao 2nd Water Treatment Plant via 0.9 km pipeline and tunnel. The total cost of the Yudongxia Reservoir and water treatment plant

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subproject is CNY 356 million. This subproject will start the construction activities in the third quarter of 2007 and is scheduled to be completed in two years.

3.3.8 The Jinlong multipurpose reservoir subproject lies in the south-eastern part of Xiuwen County. This reservoir will supply domestic water to Xiuwen County township, rural domestic and irrigation water. Currently the township population of about 50,000 is supplied by tube wells which have surpassed the sustainable groundwater production rate of 4,000 m3/day. The rural water supply involves domestic water to 5,490 villagers and to rural farm of some 6,468 mu (431 ha) of presently irrigable lands from the Wangguan Reservoir and the Jinlong River. The proposed subproject comprises a concrete face rockfill dam of 52.3 m in height. The reservoir subproject will have a live storage of 4.18 million m3, and a water delivery system of 3.22 million m3 annually for the town of Xiuwen County, where the population is due to increase from 50,000 to 65,000 by 2010, rehabilitation and upgrading of irrigation infrastructure with an annually water supply of 2.15 million m3, and annual supply of 126,000 m3 of water for human and livestock consumption in the rural areas. The total cost of the Jinlong Reservoir subproject is CNY 63 million. This subproject will be constructed from the second quarter of 2007 to the third quarter of 2008, for an eighteen-month period.

3.3.9 The existing Liaojiuzhai Reservoir lies in the valley above Shiqiao Village and feeds irrigation water to the agricultural areas by contour canal. There is a severe water shortfall in this area and currently much water has to be pumped to the village from the Wujiang River (>100 m below) as the supply from the existing reservoir is insufficient. There are two pumping stations on the Wujiang River which are in need of refurbishment and pumping costs are clearly very high. The capacity of the existing reservoir is 12,700 m3 and its catchment area is 1.5 km2. The existing dam height is 5.4 m and it will be raised to 14.5 m high, this will increase its catchment area and capacity to 2.16 km2 and 274,400 m3, respectively to irrigate an area of 1,800 mu (120 ha). The total cost of the Liaojiuzhai Reservoir enlargement subproject is CNY 4.9 million and .it is planned to commence construction in April 2007 with completion some twelve months later.

3.3.10 The construction of 250 small tank water storages in Xifeng County is the core subproject which will provide an additional 3,710 small tanks on micro-irrigation, human and livestock water supplies in rural Xifeng County under the subproject. These small tanks will collect and store rainwater for human and livestock consumption (56 tanks), and irrigation water (194 tanks) to provide emergency water supply in cases of severe drought or for the initial establishment of agricultural seedlings. This subproject will benefit a population of 1998 and arable land of 773 mu. A typical tank (about 2 to 3 m deep) costs CNY 1000 for a 16 m3 masonry tank, however requests for larger tanks up to 100 m3 have been made, and these larger tanks would cost up to CNY 3,000. Consequently, a variety of tank type and construction options, associated irrigation delivery systems, and possible additional agricultural/aquacultural uses of the tanks will be considered. The total cost of the initial core small tank subproject in Xifeng county is CNY 2.2 million and it will be implemented over a nine month period during 2007. The remaining small tank subprojects will be implemented from 2007 to 2012.

3.3.11 The rehabilitation of 27,511 mu (1,834 ha) of irrigation infrastructure in Wudang District comprising small category A reservoirs (capacity is equal to or more than 1 million m3), small category B reservoirs (capacity is less than 1 million m3) and small irrigation schemes. The Wudang WRB has selected a typical Small category A and two typical small category B dams with micro irrigation subproject. Consequently the Qiankanjing multipurpose reservoir (Small A), Bashanqiu reservoir (Small B) and Sanjiang canal (Small B water delivery system), and Shuitian Town small irrigation scheme (44.2 km existing irrigation canals) are nominated with a potential beneficial population of 8,512 and farmland of 6,980 mu in six villages of Shuitian Town in northern Wudang District. The total cost of this

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irrigation rehabilitation scheme is CNY 7.3 million and the construction period will be 9 months starting from the second quarter of 2007.

3.3.12 The soil and water conservation of 15 km2 upstream of Nanming River covering the catchments of the Huaxi Reservoir. The reservoirs have multipurpose use including water supply to Guiyang City and satellite towns, and hydropower and irrigation. It is estimated that about 71% of the catchment area of 2,156 km2 of Huaxi reservoir has been damaged and eroded due to inadequate hillside farming and poor grass and plant coverage on the high slopes. Conservation of their catchment areas and reinstating damaged lands is seen as crucial to the sustainability of these water sources. As the catchment is currently used for agriculture the subproject needs to study a participatory program of developing sustainable agriculture within the study area. This catchment rehabilitation and agricultural development subproject will convert hillside land into terraces, with interception ditches and small water storage tanks for the growth of fruit and nut trees, camphor and silver chain. On the upper hillside degraded slope land with slopes greater than 45 degree, the land will be prohibited for farming activities. The total cost of this subproject is CNY 5.3 million and the construction period will be 12 months, planning to start from the beginning of 2007. .

3.3.13 The Project is categorized as a 2006 Standby Loan, and in an earnest attempt to achieve approval in 2006, the PMO and PPTA are carrying out preparation activities to try to match this timeframe with parallel processing of both PRC domestic and ADB’s requirements.

3.3.14 Subproject locations on reservoir, irrigation rehabilitation, small tanks, and soil conservation is shown on Figure 3-1, 3-2, 3-3 and 3-4, respectively.

3.4 Estimated Capital Costs

3.4.1 Estimated Project capital costs are given in the draft Project Proposal. An amount of CNY 2.59 billion is estimated for 128,248 sites within 131 administrative areas, and they comprise the following segments :

• CNY 409 million for water supply subprojects in the urban and suburban areas; • CNY 998 billion for rural water supply subprojects in the village and township areas; • CNY 834 million for irrigation, human and animal water supply subprojects; • CNY 266 million for soil and water conservation subprojects; and • CNY 80 million for Project management.

3.4.2 This final Project cost will be adjusted to CNY 2.4 billion as only when subprojects are viable and eligible for inclusion in the Project will be submitted for approval. Among this amount of sector loan of CNY 2.4 billion, 50% will be funded by ADB and the balance will be funded by GMG and local financial institutions.

3.5 Implementation Schedule

3.5.1 The Project will be implemented over a period of six years from 2007 to 2012. Implementation of the six core subprojects has already started with the preparation of safeguard documents and public disclosure of their contents. Actual construction of these subprojects will commence early and all except the Yudongxia reservoir subproject will be completed within the first two years of Project implementation. Non core subprojects will be implemented after commencement of the core subprojects; however, it is anticipated that construction for many of these will also commence during the first two years of the Project's implementation.

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3.5.2 The implementation schedule for six core subprojects is provided in Figure 3-5 which is based on the assumption that the Project Proposal will be approved by the end of October 2006. Consequently, this implementation schedule, particularly on Yudongxia Reservoir Core Subproject which requires national approval, should be further adjusted should the approval Project Proposal delays.

3.6 Current Project Approval Status

3.6.1 Key Project milestones already achieved are as follows:

• Approval of the IWRM Master Plan by GMG – July 5, 2006; • Submission of the Project Proposal to NDRC – July 4, 2006; • The GMG/Guizhou Provincial EPB endorsed the disclosure of summary environmental impact assessment (SEIA) of core subprojects in late July, and it was posted on ADB website on August 21); • The GMG/Guizhou Provincial EPB endorsed the disclosure of summary initial environmental evaluation (SIEE) of core subprojects in late September 2006; • The GMG/Guizhou Provincial EPB endorsed the disclosure of environmental review and assessment procedures (EARP) non-core subprojects in late September 2006; • The Draft Resettlement Framework (RF) and Ethnic Minorities Development Plans (EMDP) of core subprojects have been endorsed by GMG in September 2006; and • The Draft Resettlement Plans (RP) and Ethnic Minorities Development Plans (EMDP) of core subprojects, except Yudongxia reservoir, have been endorsed by GMG in September 2006.

3.6.2 Based on the Loan Fact-Finding Mission Aide Memoire, the following PPTA implementation and ADB loan processing schedule was anticipated:

• ADB Disclosure of SEIA – August 21, 2006; • Final PPTA Report – September 30, 2006; • ADB Management Review Meeting – Week 4 of September 2006; • ADB’s uploading of draft RPs, RF, EMDPs, and EMDF on website – Week 2 of October 2006; • ADB’s Loan Appraisal – Week 2-3 of October, 2006; • ADB Staff Review Committee – Week 2 of November 2006; • Loan Negotiations – Week 4 of November 2006; • ADB Board Consideration – Mid December 2006; and • Loan Effectiveness – March 2007.

3.6.3 Major domestic approval milestones compatible with the ADB loan processing stated above are as follows:

• Project Proposal approval by PRC National Government – November, 2006; • The core subproject FSRs, including Yudongxia Reservoir, to be submitted and approved after the Proposal is approved; • Approval of Yudongxia Reservoir EIA by State Environmental Protection Administration (SEPA) and other subproject environmental impact assessment (EIA) / initial environmental examination (IEE) by Guizhou Provincial EPB after the Project Proposal is approved; • Endorsement of Yudongxia RP and EMDP by GMG after the approval of the Project Proposal; and

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• The Capital Utilization Application to be submitted and approved in November 2006.

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4. Subproject Feasibility Studies and Appraisal

4.1 General

4.1.1 This Chapter provides a brief analysis of some of the technical aspects of each of the Project components and their respective subprojects, based upon the PPTA team’s knowledge on the Project, the Master Plan and FSRs of the core subprojects. Further clarification of some of the subprojects has been obtained through discussions with local IAs and meetings with the design institute (DI) in the course of the PPTA.

4.1.2 Earlier, draft feasibility study reports (FSRs) on the Yudongxia and Liaojiuzhai reservoirs subprojects were prepared within a short time frame by the DIs, and an initial review during the PPTA interim stage identified a number of areas for further verification. In addition, the Jinlong reservoir project proposal was prepared by Guizhou Design Institute (GZDI) in 2004 and a preliminary project FSR on the small tank subproject was drafted by the County Water Resource Bureau (WRB) in Xifeng in April. Detailed discussions on ADB’s requirements on the technical, environmental, resettlement, financial, economic and institutional aspects have taken place with the local government agencies, their professional advisors or the DIs. In addition, a typical outline on FSR in accordance with ADB requirements and international practices was prepared and presented to the Guiyang Project Management Office (PMO), implementing agencies (IAs) and DIs for their considerations in the preparation of the draft final FSRs.

4.1.3 Further reviews of the core subproject FSRs and of the Project Proposal have been performed throughout August as and when the relevant documents have been made available to the PPTA team. Consequently, review comments by the consultants led to the identification of improved and more cost effective design options for the core subprojects.

4.1.4 Feasibility assessment reports (FARs) have been prepared for each core subproject including: (i) The PPTA Consultant's judgment on whether the technical design of each core subproject is sound, and whether the Consultant's recommendations have been incorporated into revised FSRs, and why if not incorporated; and (ii) a summary assessment comprising, background analysis, technical design, cost estimate and financing plan, economic and financial assessment, social and resettlement and environment, procurement packaging and procurement plan, operations and maintenance measures, and detailed implementation arrangements. Details of Individual core subproject FAR are presented in Appendix D1 to D6 It is intended that these core FARs, except Yudongxia Reservoir and Xifeng Small Water Storage Tanks, be used as models (in terns of structure and content) for the FARs for non- core subprojects to be designed and prepared during the subsequent implementation period;

4.1.5 The remainder of this chapter deals primarily with the technical review of the individual core subprojects. Environmental, resettlement, and social reviews of the core subproject are dealt with in Chapters 4, 5 & 6 of this report, respectively, and in the individual safeguard documents prepared for the project and as referred to in those chapters. Economic, financial and institutional issues concerning individual subprojects are dealt with in Chapters 8 and 9

4.1.6 In all cases the technical review concluded that the subprojects were technically viable and used proven designs and construction techniques. The emphasis of the technical review was therefore placed on Yudongxia reservoir, given its strategic significance to the overall Project, and also to ensure alternative solutions had been properly investigated and evaluated for all of the core subprojects. In addition issues relevant to the preparation and design of non core subprojects have been identified and are documented in Section 4.8 below.

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4.2 Yudongxia Reservoir Urban Water Supply Core Subproject

4.2.1 The Yudongxia reservoir subproject is the largest of the subprojects and the only subproject with augmentation of urban water supplies to the urban core of Guiyang as the principal subproject objective. The PPTA team has conducted a technical review of the Yudongxia reservoir dam site selection, and a follow-up review on additional work performed by GZDI in response to the PPTA comments was conducted during the 1st MTR Mission.

4.2.2 Review of Yudongxia Reservoir Damsite. The report by the Guizhou Survey/Design Research Institute for Water Resources and Hydropower (GZDI) entitled “Dam Site Comparison of Yudongxia Reservoir” (English version) was reviewed by the International Dam & Structures Specialist of the PPTA team and review comments were provided, as detailed in Attachment A of Appendix D1 (Yudongxia Reservoir FAR).

4.2.3 The scope of this review covers the technical feasibility of building a reservoir at the three locations identified in order to make a recommendation on which site to take forward to the next stage of the Project. Due to the nature of the local geology (karstic limestone) the key technical issue which has been considered is the water-tightness of the reservoir. The hydrology and the reliable yield of the scheme as well as other engineering and construction issues have also been considered.

4.2.4 The comparative costings were reviewed and the cost ranking of the alternatives is considered correct. All dam sites are considered technically feasible. The upper dam site (Option No.1) is by far the most costly but does not offer advantages which would make this worthwhile, so it is excluded from final selection.

4.2.5 The lower dam site presents the best potential for forming a positive cut-off to less permeable strata but also has the risk of significant leakage to an adjacent hanging valley (Miaotian gulley) through a well developed karstic system. A further advantage of the lower site is the ability to regulate inflows from the Yudong Spring which enters the right side of the gorge upstream of this dam site. This source would increase by about 20% of the mean annual flow controlled by the reservoir. However, the arrangement for sealing potential leakage to the Miaotian Gulley also risks diverting this spring source away from the reservoir. Alternative arrangements for sealing have been suggested which would overcome these issues. These will be studied and costed by GZDI.

4.2.6 The middle dam site (Option No.2) is not located near a less permeable stratum and so it is not possible to link the grout curtain under and adjacent to the dam to such a layer. Also, as the dam is just upstream of the Yudong Spring the grout curtain passes very close to it and the high hydraulic head will require a highly effective curtain here. There is a risk that grouting here may require partial sealing or other interference with the Yudong Spring. For this site it would be possible to preserve at least partially the tourist attraction of the caves associated with the Yudong Spring, which would be inundated by the lower dam site.

4.2.7 Based on the advantages/disadvantages of the lower and middle dam sites and the risks associated with them it is recommended that the lower dam site be taken forward to the next stage of the project. This is also the preferred alternative of GZDI and as now appears on the Project Proposal endorsed by Guiyang and Guizhou DRC.

4.2.8 The PPTA review concluded the report by GZDI was generally prepared in a professional and thorough manner. However, some comments regarding the proposed solution for sealing on the right bank at the lower dam site and on the hydrological calculations were made as follows:

• A revised arrangement for sealing on the right bank of the lower dam site will be detailed and costed;

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• An error in the transposition of hydrological data has been corrected and the synthesized flow series for the proposed dam site extended to include the sequence of dry years (1960-63) indicated by other gauging stations; and • Revised yield calculations will be performed to take into account the inflow from the Yudong Spring and the demand profile of downstream users.

4.2.9 A follow-up review on additional work performed was conducted during the 1st MTR Mission and the additional work was satisfactorily completed. Further recommendations for the next phase of engineering design are detailed in Attachment B of Appendix D1 ( Yudongxia Reservoir FAR) and are summarized below:

• Investigations into the area of the Miaotian gulley and the karst K2 should continue to optimize the design the sealing works there and to confirm that there are no less costly ways of achieving the required reservoir water tightness without diverting the Yudong spring away from the reservoir; • The actual usage of water by the downstream irrigation to be investigated and beneficiaries to be involved in design of scheme to provide water to them; • Assumptions on downstream demands and spring flows to be reviewed and yield analysis of the reservoir to be further refined to take into account any changes; • Reservoir operating rules for equitable sharing of water in drier years to be developed; • Resolution of issue of firm water purchase agreements to be agreed by water companies; • Required reservoir storage capacity and dam height to be reviewed in the light of the above yield analysis; and • Check flood of 1 in 1000 years to be used;

Alternatives Considered

4.2.10 As stated above, three possible dam locations were considered for Yudongxia Reservoir, being a low elevation, middle elevation and high elevation for the dam site. A technical study evaluating these options based on primarily technical and economic (unit cost for resources provided) criteria has been prepared under ADB funding and the draft report submitted to ADB. The PPTA team confirmed the GMG’s preferred lower dam site which creates a larger storage capacity and its construction will be easier and cheaper.

4.2.11 Four site options were considered for the Yudongxia WTP all of which would provide an additional 100,000 t/day of capacity. Based on a technical, economic and financial assessment, the Toubao WTP was selected. It is expected to have the lowest investment cost, and the lowest operating cost.

4.2.12 Two alternative processes were compared for purposes of raw water treatment. Both are conventional treatment with flocculation, sedimentation, filtration and disinfection. The designs differ in the configuration of the sedimentation tanks. Both systems are considered effective and the least cost option was selected. Alternative disinfection systems were also evaluated. Disinfection using chlorine dioxide is recommended based on efficacy, cost, ease and safety of operation.

4.3 Jinlong Reservoir County Water and Irrigation Water Core Subproject

4.3.1 The Jinlong multipurpose reservoir project has been selected as a core subproject as an example to three of the multipurpose reservoir schemes on county water and irrigation water supplies of the Project. The PPTA team conducted a technical review of the dam site selection Technical review comments on the dam design are detailed in Attachment A and B of Appendix D2, Jinlong Reservoir FAR and are summarized below:

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• With a width to height ratio of about 3 and the deeply weathered poor quality rock the lower site does not look to be an obvious one for a concrete arch dam. It would appear more suitable to an embankment type dam, either rockfill or of zoned earth/rockfill construction. If a reasonable source of rockfill could be identified a concrete faced rockfill dam (CFRD) would seem to be a possible alternative that would warrant further study; • Further investigations and laboratory testing of the local microcrystalline dolomite rock at the dam site needs to be carried out to confirm whether this material is suitable as a source of rockfill; • If further laboratory tests indicate that the dolomite might be suitable then field trials including excavation by blasting and compaction of a trial embankment should be carried out to ensure that its bulk properties are acceptable; • A CFRD design based on using locally available rockfill should be costed as an alternative; • Areas of known errors on the topographical maps should be re-surveyed and the maps corrected; • Alignment of CFRDs minimizing the area of upstream concrete facing should be considered; • Where possible a free un-gated spillway crest should be used, but where gates are to be proposed a minimum of three gates should be used for reliability reasons; • Flood standards for the dams should be at the highest end of the range given in the national standard, and in particular the check flood should be a 1 in 1000 year flood (0.1%) for an embankment dam and a 1 in 500 year flood (0.2%) for a concrete dam; • A low level outlet for lowering the reservoir level in an emergency should be provided; • The stability of the existing tailings dam and the effect on stored water of the materials there needs to be carefully considered; • The potential for reservoir water to cause cementing of limestone material used in drainage/filter materials in an embankment design needs to be considered further; • A catchment protection and conservation policy needs to be prepared. The mining that has taken place in the catchment has left large amounts of tailings materials deposited on the hillsides which will be subject to erosion and hence increase sedimentation in the reservoir. It will be important that watershed management techniques are employed to stabilize the tailings material in order to minimize subsequent erosion and sedimentation; • The estimated 15 year design life of polyethylene pipes should be allowed for in the economic analysis; • Establish and empower WUA to get involved as early as possible in the way the project is designed and on agreed mechanisms by which water may be used efficiently and shared equitably, particularly in dry years; • Provide adequate flow measurement facilities at key points in irrigation system network; and • Institutional arrangements to achieve the fair and equitable water sharing need to be considered, particularly where there could be a common conveyance pipeline for urban water supply and irrigation use.

4.3.2 In addition to alternative dam type, the following associated irrigation management improvements are suggested by the PPTA team:

• Canals are rehabilitated, extended and made water tight with the many openings closed;

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• Water is only taken directly by farmers from quaternary canals or purpose designed delivery tanks; • Irrigation is practiced during the day only and night flows stored in the reservoir during dry periods; • Farmers rotate supplies around tertiary areas during dry periods and during land preparation; • Flow division between main and secondary canals and, where practical on secondary, into tertiary canals by proportional division of flows; • Water Users Associations (WUAs) are established to be active in managing water around the schemes; • Tertiary and quaternary canals are lined; and • Upslope areas are converted to vegetable irrigation with flexible hosepipe delivery.

Alternatives Considered

4.3.3 Similar to Yudongxia Reservoir, two dam sites were evaluated for the Jinlong Reservoir. Both two sites present topographic challenges to dam construction but the lower site provides a considerably larger storage capacity than the upper site, thus allowing full utilization of available water resources. The lower site also involves a shorter water transmission route. For these reasons the lower site was recommended.

4.3.4 Two options were considered for raw water transmission: pipelines and open canals. The open-canal plan has a higher investment cost and requires more water to service the same irrigation area due to a lower rate of water use efficiency. Consequently, a pipeline system was recommended.

4.4 Xifeng County Small Tank Rural Water Supply Core Subproject

4.4.1 The Shiqiao Village small water tank subproject is developed based on Xifeng County’s experience on rural water supply for human and livestock and on supplemental irrigation water for hillside landform above the command area of typical irrigation schemes. For the Xifeng County small water tank subproject, less expensive tanks, subsequent irrigation water delivery system, and integrated agricultural systems for greater returns on investment were recommended.

4.4.2 Development of more economic tank design, options for water delivery and development of more integrated cropping are detailed in Appendix D3, Xifeng Small Tank FAR, and include the following elements:

• The tanks should also be used for rearing poultry and ducks so waste products are consumed by fish and tank slurry at the end of the year is bio-digested into organic fertilizer; • Tanks can also be used for limited area of aquatic crops such as water chestnuts, lotus and water spinach; • Stems from irrigated crops, where appropriate should be used to feed animals such as buffalos or cattle for traction, dairy and meat products and the animal wastes can be biologically treated by vermiculture; • Worms from vermiculture can be used as a feed for poultry and ducks; • Biologically digested animal waste can be used for fertilization of crops, fruit trees, flowers, shrubs and herbs; • Greenhouses can be used as nurseries for early start crops, flowers and other high value crops;

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• Limited area of paddy fields can be used for minapadi (fish in rice fields) and crayfish; and • Tree crops would also include bamboo for vegetable frames, fruit (with deciduous fruits also supporting a string vegetable) and fast growing timber species.

Alternatives Considered

4.4.3 Consideration was given in the FSR to three alternatives to the small tank subproject and the analysis clearly indicates that the small tank option is the least cost option. These three alternatives been evaluated are as Follows:

• Build a costly pumping station to lift water from the existing Wujiang Reservoir; transmit and distribute the water to 250 locations; • Build a remote new reservoir or pond for water storage which is not feasible in the area; and • Water diversion from the Yujianhe reservoir was considered, but ruled out because of distance from the subproject area.

Framework Document for Non-Core Small Tank Subprojects

4.4.4 In order to assist the smooth subproject design, preparation and implementation of the non-core small tank subprojects a framework document with a checklist of requirements to comply with and report on has been prepared to assist the assigned local PMOs and IAs. This document forms Appendix D9 to this report. The purpose of the framework document is firstly to ensure lesson learned in the design of the Xifeng core subproject and earlier similar projects in Guiyang are documented and secondly, that key ADB concerns over inclusion of vulnerable groups and ethnic minorities, and in ensuring project sustainability are properly addressed.

4.5 Wudang Midsize Irrigation System Rehabilitation Core Subproject

4.5.1 There are 36 locations to be improved within the Wudang Irrigation System with an increase of 7,000 mu and rehabilitation of 27,500 mu farmland.

4.5.2 The 6,980 mu irrigation area rehabilitation core subproject in northern Wudang District is selected for system improvements for the rehabilitation of irrigation infrastructure in the district. Considerable irrigation management improvements, equitable division of water and the involvement of farmers in the irrigation system planning are recommended. This district is close to Guiyang City which offers business opportunities for vegetables, other high value crops and landscaping plants. Therefore considerations should be given to increase agricultural transformation and improvements in irrigation delivery.

4.5.3 There are 20 water resource reservoirs proposed in the Project for agricultural irrigation purpose, including Lioajiuzhai Reservoir, to increase 46,800 mu and to improve 2,600 mu of farmland. These reservoirs will also provide critical human and livestock water supply for rural population of 22,774 and 12,416 livestock.

4.5.4 Review comments on the design of irrigation rehabilitation are detailed in Appendix D4, Wudang Irrigation Rehabilitation FAR and are summarized below:

• It is clear from the FSR that a considerable number of problems and subproject implementation constraints have been highlighted in all aspects of the study. Some of these constraints will be unique to the particular subproject location whilst many will be common to all similar subprojects intended to be included in the Project;

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• Irrigation management improvements should include (i) approach to agricultural development and transformation and support set out. (ii) design of irrigation infrastructure to complement improved irrigation management and safe design of canals on cross slopes, (iii) consultation and participation with WUAs in tertiary planning and design to upgrade irrigation water delivery systems, (iv) means of WUA participation in infrastructure rehabilitation and new construction, (v) greater participation of beneficiaries in irrigation management and maintenance financing; • Institutional aspects to be addressed are (i) proposed project components for IAs covering agricultural support, farmer empowerment and regional coordination, (ii) capacity building for project implementation staff and those who will manage the future scheme, (iii) socialization of government staff and stakeholders to prepare them for greater participation by beneficiaries, (iv) processes for farmer empowerment through formation and operation of WUAs and WUAFs, (v) ensure there are adequate allowances for institutional improvements in the project budgets; • Financial and economic aspects to be addressed are (i) farmers’ training and field works expenses should be added into the cost estimate, (ii) financing scheme and the share responsibilities are fairly subdivided between different funding sources, (iii) financial revenue shall be achieved by capitalizing the funding resources and proper opportunities to maximize financial benefits, (iv) irrigation water fee of CYN 0.20/m3 shall be further analyzed concerning fee affordability, payment inclination, and government policies, (v) alternatives and their cost comparisons, along with the least cost analysis should be performed; and • Environmental sustainability will be an essential component of the project and sufficient budget should be allocated for the environmental management and monitoring plan.

Alternatives Considered

4.5.5 No alternatives were considered in the design of this core subproject as it is a rehabilitated and improvement project.

4.6 Liaojiuzhai Reservoir Rural Water and Irrigation Water Core Subproject

4.6.1 The Liaojiuzhai reservoir subproject is another typical rural irrigation water supply scheme of the Project, more cost-effective dam raising design of the existing dam with local borrow material for dam construction and improvements on the stilling arrangements on the irrigation outlets have been suggested.

4.6.2 Review comments on dam design and feasibility work are presented below and details are included in Attachment A and B of Appendix D5, Liaojiuzhai Reservoir FAR:

• The basic concept design of the dam looks sound but of the two variants it is strongly recommended to use the sloping clay core rather than the geotextile membrane as the impermeable element. Whereas placing of the clay core is less specialized work similar to the rest of the earthworks on the project; • Tests for appropriate impermeability and plasticity to be made on proposed source of clay core material; • Grout curtain to be extended 30-40 m either side of the dam crest; • Reservoir water samples to be analyzed for potential aggressiveness to dissolve or cement limestone filter and drainage materials; • Calculations of water availability to be checked for possible errors and reduce interceptor factor from 80% to 65%, but retain 85% for design of channel flow capacity;

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• Change flood standards to 1 in 300 years (0.33%) for check flood and 1 in 30 years (3.33%) for the design flood; • Flood flow calculations (design and check flows) to be revised to take into account the limited flow capacity of the interceptor channel; • Construction flood flow estimates to be revised without contribution from indirect catchment and to include restriction on timing of completion of interceptor channel with respect to dam; • Include provision for overflows from interceptor channel with erosion protection as necessary; • Review possibility of increasing water supply element of project in line with local stakeholder wishes; • Review design of stilling arrangements at irrigation outlet and provide means to divert water to the river; • Consult stakeholders on future strategy for managing the area around the karst upstream of the reservoir, which is currently cultivated, so that appropriate design of channel may be made; • Establish and empower WUA to get involved as early as possible in the way the project is designed and on agreed mechanisms by which water may be used efficiently and shared equitably, particularly in dry years; and • Provide adequate flow measurement facilities at key points in irrigation system network.

Alternatives Considered

4.6.3 The Liaojiuzhai reservoir is an upgrading from the existing dam, two different types of dam and two locations of spillway were evaluated.

4.6.4 Two variations on an earth filled dam were considered: a sloping clay core earth dam and a geo-membrane impervious earth dam. The two options have virtually identical costs and the second option was selected on technical grounds.

4.7 Huaxi Reservoir Catchment Soil and Water Conservation Core Subproject

4.7.1 The core subproject on reservoir catchment management is the soil and water conservation on Huaxi reservoir upstream of Nanming River. Conservation of this catchment area and reinstating damaged lands is seen as crucial to the sustainability of these water sources. As the catchment is currently used for agriculture and a participatory program of developing sustainable agriculture within the study area is recommended. The current catchment rehabilitation and agricultural development project which includes a combined water interception canal and small irrigation pump scheme within Songbaishan reservoir should be studied in detail.

4.7.2 The FSR has to be integrated with the agricultural development plan with detailed review comments in Appendix D6, Huaxi Soil Conservation FAR and should include:

• Agro-ecological soil classification map based on the erosion hazard conditions and setting out a menu of integrated crop options for each zone; • Identify and evaluate alternative erosion control methods; • Develop a practical and cost-effective approach to managing and controlling erosion over the entire core subproject study area; • Identify, design and cost representative pilot erosion control project ; • Develop a time-bound 5-year implementation plan and budget for erosion control across the entire study area; • Nursery management for tree planning; and

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• Enabling conditions that will create the appropriate environment to enhance the watershed rehabilitation works including (i) a watershed perspective of all the stakeholders, (ii) need for sustained freshwater supply to nurseries, (iii) identification and enhancement of the incentives for the practicing soil and water conservation measures, (iv) training and capability building, and (v) coordination arrangements between the District WRB, Agricultural Bureau, Forestry Bureau, local government and communities, WUAs and farmers organizations.

Alternatives Considered

4.7.3 The draft FSR did not identify alternative design options for the soil and water conservation works in Huaxi District. Moreover the proposed design was conceptual based on a recently completed and expensive demonstration project but with little detail. The PPTA provided the services of a domestic soil and water conservation expert to review the FSR and assist in subproject redesign. A redesign competed prior to preparation of this report resulted in a 44% reduction in the investment cost. Details of review comments were presented in Attachment A of Appendix D6, Huaxi FAR.

4.8 Issues Relevant to Appraisal of Non Core Subprojects

4.8.1 The participating local governments and IAs will, with the assistance of local design institutes and consultants, prepare a feasibility study for each of the noncore subprojects and submit the completed study to PMO. The FSR will include an environmental assessment (in a form stipulated by the Environmental Assessment and Review Procedures [EARP]); resettlement plan (RP) (if required); Ethnic Minority Development Plan (EMDP) (if required); rationale; scope and activities; technical description and analysis; cost estimates and financing plan; implementation arrangements; and financial, economic, and institutional analysis, including financial management assessment and social dimensions. 4.8.2 Based on the completed FSR and in consultation with the Guiyang Development and Reform Commission, the PMO will appraise the subprojects in accordance with the criteria agreed upon by the Government and ADB before tendering and contract award. All subprojects must satisfy these criteria. The result of the appraisal will be summarized in a feasibility assessment report (FAR), following the format of the FARs prepared for the 6 core subprojects. The FARs for the first subproject and for any subproject exceeding $10 million equivalent will be sent to ADB for approval. The remaining FARs will be sent to ADB for information

Reservoirs and Water Supply Systems

4.8.3 The context of an integrated water resources management including demand and supply analysis on different sectors, overall approach to protecting the sources of water and improving delivery of water to domestic user, and addressing leakage reduction and water- saving potential should be fully evaluated in the design of the Project.

4.8.4 The Project preparation has involved stakeholders and public consultations. However water supply company commitment to improve quality and services to continuously deliver safe drinking water to domestic consumption and public consultation on affected people and beneficiaries should be continued.

4.8.5 Catchment soil conservation, environmental (including non point pollution sources), ecological protection and instream water supply, using a participatory approach acceptable to the local people involved should be implemented during different stages of the Project from the design to the operational periods.

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4.8.6 Reservoir yield calculations and water availability should be carefully reviewed along with proper sealing works and alternative dam design, other than the popular concrete arch dam.

4.8.7 Appropriate dam design on flood standards, and independent dam construction advisory panel should be considered during the next stages of design and construction activities. Details on the flood design standards and TOR for dam construction advisory panel are presented in Appendix D7 and D8, respectively.

Irrigation Water Supply and System Rehabilitation

4.8.8 PPTA Consultant worked closely with Design Institute to revisit the analysis of project costs and benefits of Liaojiuzhai small single-purpose irrigation reservoir. With the identification of improved and more cost effective design options, Liaojiuzhai subproject is then finally justifiable with a threshold 10% EIRR, considering non-quantifiable benefits.

4.8.9 Proposed subprojects of Liaojiuzhai type reservoir should be further evaluated to lower costs and/or increase benefits to reach ADB’s threshold EIRR of 10%.

4.8.10 The Project design therefore should consider additional domestic water supply if it is the least-cost option for the rural villages, and ensure the Project is economic justifiable and water is effectively reaching both users.

4.8.11 Sustainable participation for user organization and financing for operation and maintenance on reservoir and irrigation systems have been arranged in the revised FSRs. This will allow adequate revenue to effectively maintain system delivery performance through proper operations and maintenance. Water allocations for domestic, irrigation, and instream flow should be balanced with necessary demand management.

4,8.12 Future cropping pattern changes and agricultural support services should also be designed in the Project on a systemic and integrated approach in addition to the structural improvements on the irrigation systems.

Small Tanks

4.8.13 A through analysis of technical options and project economic of small tanks has been performed and adequate evaluated the performance of existing small tanks.

4.8.14 Tank owners association could be designed to bring benefits in terms of solving common tanks problems on planning and construction efforts, transporting and marketing produce through a cooperative and as a community effort.

Catchment Soil Conservation

4.8.15 Based on the review of Domestic Soil Conservation Specialist on Huaxi Soil Conservation Core Subproject (Appendix D10), a number of weaknesses in project design such as (i) high construction cost with an average CNY 700,000 per km2, (ii) high operation and maintenance costs with pumping water for terrace irrigations, (iii) low level of benefits due to traditional cropping pattern design with tree and cover crops on steep slopes. These design deficiencies were subsequently improved with a reasonable construction cost of CNY 300,000 per Km2 and cropping pattern changes.

4.8.16 Participatory approach with water resources and agricultural services on soil conservation has been considered, and economic viability and sustainability of this core subproject have been incorporated into the revised design of the Project.

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4.8.17 Cost-effective slope land conservation options should be considered for different agro–environmental areas to improve soil retention capability, and prevent soil erosion and silting problem in the lower catchment areas.

4.8.18 Improvements on pumped irrigation or water capture systems design to reduce water delivery costs should be further evaluated during the design phase of the Project.

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5. Environmental Impact Assessment

5.1 General

5.1.1 This section of the report covers progress in the environmental impact assessment of the GIWRMP (the Project). The scope of the Project has been confirmed to be a sector loan with six core subprojects in the first implementation stage, followed by non-core subprojects to be evaluated, appraised and implemented in the later stages (see details in Chapters 1 and 3 of this report). These core subprojects include one medium and two small size reservoirs, irrigation rehabilitation, small water storage and soil conservation, all located in the Guiyang Municipality. During the implementation stage, the Project scope will be expanded in each of these sectors and the current six core subprojects will be a showcase for identification, preparation and execution, including environmental assessment, of the subsequent non- core subprojects.

5.1.2 Following the discussion with the ADB, environmental regulatory authorities of Guizhou Province and Guiyang Municipality, and the Guiyang PMO, and in accordance with relevant ADB guidelines and domestic regulations, the six core subprojects have been categorized as Category A for the three reservoirs, Category B for irrigation and rehabilitation and soil and water conservation and Category C for small water storage. These categories and their corresponding requirements for environmental assessment are discussed in more detail later in this Chapter.

5.1.3 Environmental assessment by PPTA has been based on the following tasks completed since the Project inception:

z Several rounds of site visits and reconnaissance to the Yudongxia reservoir, the largest and most complex of the six core subprojects, together with the project engineers, planners, PMO officials, ADB missions, project environmental assessment team and other relevant design institutions; The site visits also included discussion/consultation with local residents for their concerns and opinions; z Numerous site visits to other five core subproject sites, including also discussion with the nearby residents as informal public consultation for their opinions and concerns on the proposed Project; z Formal public meetings in several subprojects sites, such as Shiqiao village of Xiaozhaiba town in Xifeng County at and near the small water storage tank sites, to supplement the public consultation conducted by the domestic EIA teams during the Project environmental assessment/examination; z Extensive discussions with the provincial and municipal environmental protection bureaus (EPBs) on the document requirements, domestic review and clearance agencies, procedures and timing, for environmental assessment of the sector loan Project and subproject environmental impact assessments (EIAs) and initial environmental examinations (IEEs), and environmental categorization of the six core subprojects. The environmental assessment for sector loan Project is new in the domestic procedure and PPTA consultants have had extensive discussion with the agencies to ensure clear understanding of the domestic requirements on this document; z Consultation with relevant government agencies and other stakeholders including Guiyang Construction Bureau, Forest Bureau, Cultural Relics Bureau, etc. to solicit their concerns on the Project and to collect information on distribution of nature reserves, forest land, sceneries, or any other protected or otherwise sensitive zones within the Guiyang Municipality of the Project area;

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z Several rounds of training of domestic environmental assessment team already engaged for environmental assessment preparation for the Project, particularly the ADB requirements based on the relevant ADB environmental assessment guidelines and PPTA consultants’ previous ADB project experience; z Review and provide detailed comments to assist revise draft EIA and IEE reports in Chinese. This will help the documents to meet the document regulatory requirements as well as providing necessary information and assessment to meet the ADB requirements; z Review relevant Project documents such as Guiyang Integrated Water Resources Management Master Plan (the Master Plan), Guiyang City Development Master Plan, Guiyang Environmental Protection Master Plan, available core subproject feasibility study reports, and communicate with design institutes (DIs)’ engineers and planners to ensure understanding of the Project contents, rationale and water resources management strategies of the municipality; The environmental specialists also provided comments to the Master Plan to ensure sufficient and appropriate considerations be given in the planning document; z Advise closely the Guiyang PMO on ADB requirements, domestic regulatory procedures, environmental assessment team engagements and timing, and other matters related to environmental preparation for the Project; z Completion of Environmental Assessment for Sector Loans for the Project and the Environmental Assessment and Review Procedures (EARP) to cover the environmental requirements for future subprojects in the implementation stage; and z Several rounds of consultation with PMO on EARP to confirm the procedures are acceptable and practical, and to receive commitment to following the procedures for environmental assessment for the future non-core subprojects.

5.2 Regulatory Context

PRC Requirements

5.2.1 The procedures for environmental impact assessment of construction projects in the People’s Republic of China (PRC) using credits and loans from international lenders such as the ADB are described in the Circular on Strengthening Environmental Impact Assessment Management for Construction Projects Financed by International Financial Institutions (IFIs) issued in June 1993 (the Circular), as well as, in more general terms, the Environmental Impact Assessment Law of PRC of September 2003 and other environmental laws and regulations of the country (Table 5-1). Obviously not all these laws and regulations are relevant to all subprojects. In addition to the national level laws and regulations there are also regulations and circulars issued at the Guizhou provincial and Guiyang municipal levels. All these regulations must be compatible with national level documents but they can impose stricter requirements but cannot contradict or allow a relaxation of national standards

Table 5-1: EIA related Laws and Regulations in PR China

Law/Regulation/Circulars Date of Implementation Environmental Protection Law of PRC 26 December 1989 Air Pollution Prevention Act of PRC 29 August 1995 Water Pollution Prevention Act of PRC 15 May 1996 Solid Waste Pollution Prevention Act of PRC 30 October 1995 Environmental Noise Pollution Control Act of PRC 29 October 1996 Environmental Impact Assessment Law of PRC 1 September 2003 An updated EIA Categorization Directory 1 January 2003 Circular on Strengthening Environmental EIA Review and Approval Procedure for December 2004 Construction Projects Circular on Strengthening Environmental Assessment Management for Construction 21 June 1993 Projects Financed by IFIs

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5.2.2 On a technical level, the country’s specific environmental impact assessment guidelines, ambient environmental standards, pollution discharge standards, etc. provide specific technical guides for environmental impact assessment and environmental management for construction projects and development such as the Project. Table 5-2 shows the Chinese standards and guidelines related to EIAs. Subject to Chinese EIA regulations, IFI technical requirements for EIA should be incorporated. The EIA requirements and procedures based on the existing laws and regulations in PR China, particularly the Circular are basically consistent with the ADB requirements and review procedures.

Table 5-2: EIA-Related Standards and Guidelines in PR China

Standard or Guideline Standard No. Environmental Quality Standards for Surface Water GB3838-2002 Integrated Wastewater Discharge Standard GB8978-1996 Environmental Quality Standards for Air GB3095-1996 Standard of Environmental Noise of Urban Area GB3096-93 Noise Limits for Construction Site GB12523-90 Ordinances for Environmental Management for Construction Projects 1986 Technical Guideline for EIA/General, Air, Water Impact Assessment HJ/T 2.1-2.3-1993 Technical Guideline for EIA /Noise Impact Assessment HJ/T 2.4-1995 Technical Guideline for EIA/Ecological Environment and Nature Resources HJ/T 19-1997 Technical Guideline for Environmental Impact Assessment of Water HJ/T 88-2003 Conservancy and Hydropower Project

5.2.3 Construction projects with domestic funding for which the Circular would not apply, tend to be weak in several aspects key to ADB requirements, in such areas as public consultation, assessment of project benefits/positive environmental impacts, analysis of alternatives, and environmental management planning. Upgrading and improvement are needed in the EIAs for the subprojects to satisfy the requirements of the Circular and ADB guidelines.

5.2.4 Review and approval of EIA reports for IFI-funded construction projects should follow PRC EIA review and approval procedures. The EIA reports are reviewed and cleared by the corresponding local government authority and/or the State Environmental Protection Administration (SEPA), subject to the nature, scale and other features of the project in question. In this Project, the PPTA consultants have been advised that the Yudongxia reservoir will be reviewed and approved by SEPA, while for other subprojects this will be done by the Guizhou Provincial Environmental Protection Bureau (GPEPB).

ADB Requirements

5.2.5 In pursuit of its commitment to promote environmentally sustainable economic development in its developing member countries, the ADB has instituted environmental assessment requirements and established environmental review procedures to safeguard the natural and socioeconomic environments while supporting developments and to ensure that environmental considerations be properly integrated and monitored in each stage of the project cycle.

5.2.6 ADB requires some form of environmental assessment for all projects, especially for environmentally-sensitive projects or those projects expected to have significant adverse environmental impacts. The degree of severity of potential project impacts is indicated by the environment category assigned to the project. This in turn determines the need for and the required type of environmental assessment report that is either an IEE or a full EIA.

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5.2.7 The ADB categorization of each proposed project is made according to its potential impact and availability of cost-effective mitigation measures. Based on the results of screening conducted during early ADB Loan Fact-Finding missions, subprojects are assigned to one of the following three categories:

z Category A: Subprojects with significant adverse environmental impact as predicted by the IEE; an EIA is required; z Category B: Subprojects with adverse environmental impacts which are of lesser degree and/or significance than those of Category A; although an EIA may not be required; an IEE is required for these projects; and z Category C: Subprojects unlikely to have adverse environmental impact; no EIA or IEE is normally required

5.2.8 In general, for projects under Category A and selected subprojects under Category B which OENV believes would benefit from external review, a summary environmental impact assessment (SEIA) should be prepared to comply with ADB requirements.

5.3 Environmental Criteria for Subproject Selection

5.3.1 In order to implement environmental considerations across all subprojects the following environmental criteria have been discussed and agreed with the GMG:

z All subprojects shall avoid areas with defined or known environmental sensitivities. While planning and selecting future subprojects, considerations will be given to avoiding environmental sensitive areas such as nature reserves or protected forest land, as defined in PRC’s Nature Protection Reserve Administration Guides to ensure the Project will not impact these highly sensitive environments; z Subprojects requiring environmental assessment must follow the procedures outlined in this report; z Reservoir, small water storage and irrigation subprojects shall avoid apparent pollution sources to minimize the risk of water contamination and ensure safety of water supply; and z Subprojects shall be selected to maximize environmental benefits and minimize adverse environmental impacts to the extent possible.

5.3.2 The underlying limestone geology of the entire Guiyang region is fractured and tilted, and reservoir leakage is typically found in the karst formation. Consequently, environmental assessments for reservoir subprojects must include review of the engineering and construction techniques such as grout curtains, etc., to avoid or minimize reservoir leakage, raising water tables, and water logging. Also, reservoir subprojects will consider ecological water demand with appropriate project design in allocation of water resources, and allow a minimum 10% ecological or instream water. Necessary mitigation measures will be necessary to minimize downstream impacts due to the imbalance of ecological water caused by the subprojects.

5.3.3 Besides site screening and initial site investigation, one of the effective measures to meet the criteria described above is to identify and conduct an analysis of alternatives. Where possible and appropriate, non core subprojects, multiple/alternative sites, designs, and/or scales shall be identified and evaluated during subproject identification and evaluation to allow the selection of optimal or least-impacts alternatives. PMO staff, assisted by qualified consultant environmental specialists and environmental institutions should work closely with the project planners and engineers throughout the project identification and preparation stages, to provide the needed input to ensure that environmental considerations be included in the decision making process.

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5.4 Document Requirements and Current Status

5.4.1 The Project is a sector loan which in its first implementation stage has six core subprojects, which have been classified by ADB as Category A for the three reservoirs, Category B for irrigation and rehabilitation and soil and water conservation subprojects and Category C for the small water storage subproject. An SEIA is thus required for each of the Category A subprojects and a summary initial environmental examination (SIEE) is required for the Category B and C subprojects. In addition, an Environmental Management Plan (EMP) is also required to support the each of the SEIA and SIEE. Except the Yudongxia reservoir subproject, all other subprojects do not need full EIA but only the environmental impact report (EIR) or environmental impact registration form (EIF) under PRC criteria, but the Project must follow the more stringent requirements of the ADB for environmental documentation.

5.4.2 As a sector loan, the Project will also require an environmental assessment for sector loans to cover the entire Project, including the current six core subprojects and future subprojects. EARP document is also required to provide the guidances for environmental assessment for future subprojects.

5.4.3 Environmental documents, as required by PRC and ADB, are summarized in Table 5-3.

Table 5-3: Summary of Environmental Assessment Documents for the Project

No. Segments Required environmental documents

PRC ADB 1 Entire sector loan Project N.A. Environmental Assessment for the Sector Loan 2 Future subprojects N.A. EARP 3 Yudongxia reservoir EIA EIA 4 Jinlong reservoir EIR EIA 5 Liaojiuzhai reservoir EIR EIA 6 3 reservoir subprojects N.A. SEIA 7 Irrigation system rehabilitation EIR IEE 8 Small Water Storage EIR IEE 9 Soil conservation EIR IEE 10 3 non reservoir subprojects N.A. SIEE N.A. – not applicable

5.4.4 As there is no PRC requirement for environmental assessment for sector loans and environmental review and assessment procedures, these two documents will be prepared by the PPTA consultants directly. The consultants have completed the preparation work for these documents. In addition, the PPTA consultants have also prepared the SEIAs and SIEE, also ADB requirements.

5.4.5 The preparation status of EIA and EIRs by domestic institutions is summarized in Table 5-4. As shown, all core subproject environmental documents have been completed. These documents are now in the process of domestic regulatory review and approval. In the meantime, the PPTA consultants have completed the SEIA and SIEE which have been reviewed by ADB and the SEIA has been posed on ADB’s website on 21 August 2006.

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Table 5-4: Summary of EIA and EIRs Preparation Initiations

Core Subproject Engagement Completion Environmental Assessment Institute EIA/EIRs Date Date Yudongxia Guizhou Provincial Water Resources January 1, 2006 August 2006 Reservoir EIA and Hydropower Survey/Design Institute Jinlong Reservoir Guizhou Provincial Water Resources March 15, 2006 June 2006 EIR and Hydropower Survey/Design Institute Liaojiuzhai Guizhou Provincial Water Resources March 16, 2006 July 2006 Reservoir EIR and Hydropower Survey/Design Institute Irrigation Guizhou Provincial Environmental March 20, 2006 July 2006 Rehabilitation EIR Science Design Institute Small Water Guizhou Provincial Water Resources March 16, 2006 July 2006 Tanks EIR and Hydropower Survey/Design Institute Soil and Water Biology and Environment Institute of April 20, 2006 September 2006 Conservation EIR Guizhou University

5.5 Summary of Environmental Assessment

5.5.1 As described above, environmental documents including EIA and EIRs for the six core subprojects have been completed and are in the process for domestic regulatory review and approval. These documents follow the formats and technical guidelines for environmental assessment issued by SEPA. In addition, the documents have also been further strengthened to include additional information and assessment as typically required by ADB, such as public consultation, analysis of alternatives, assessment of project positive impacts/benefits, detailed environmental management plan, etc.

5.5.2 The following environmental issues related to the Project are have been identified during the environmental assessment. These issues have also been discussed with relevant government agencies and other stakeholders, as well as observed during the numerous rounds of site investigation:

z There are no nature reserves, major scenic areas, protected forest lands, known cultural relics and other sensitive receptors in the six core subproject areas, based on the EIA/EIRs;. z There are no significant fisheries resources in the six core subproject areas, including those existing reservoirs. Because of the proximity to human habitats and years of developments, there is little major wildlife and no protected species in these subproject areas; z Reservoir subprojects, particularly the Yudongxia medium sized reservoir1, will flood substantial areas, causing agricultural, forest and other land submersion, soil erosion, resettlement, and in the case of Yudongxia reservoir, loss of tourist resources;. z The irrigation system rehabilitation subprojects, while benefiting agriculture, will occupy farmland, further reduce limited agricultural land availability for the farmers2; and. z The small water storage subprojects will involve safe drinking water for rural population. .

1 PRC classifies reservoirs into four categories: (i) Large-sized reservoir: water storage capacity > 100 million m3; (ii) Medium-sized reservoir: water storage capacity ranging from 10 million to 100 million m3; (iii) Small Type I reservoir: water storage capacity within 1-10 million m3; (iv) Small Type II reservoir: water storage capacity within 100,000-1 million m3. 2 The project area is located mostly in the mountainous areas where arable land is limited.

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5.5.3 The environmental assessment team and PPTA consultant have worked closely with the project planners and engineers in identification and analysis different alternatives to ensure the environmental considerations are given in project design, particularly for dam/reservoir subprojects which could have large impacted areas and significant impacts. The Guiyang WRB and GZDI are prepared to conduct site selection for each dam and, other subprojects, conducting a detailed analysis of alternative sites and dam designs, including in particular the following options which will be conducted during environmental preparation:

z Avoid or postpone the need for dam construction altogether by reducing demand for water by conservation measures, efficiency improvements, or restrictions on regional growth; z Avoid construction of a dam whose primary purpose is for irrigation by expanding and/or intensifying agriculture on the river floodplain or outside the catchment; z Investigate possibilities for locating the subproject on an already dammed river by diversifying the functions of that dam; z locate the proposed dam on the river where it will minimize the negative and social impacts; and z Adjust dam height, inundation area, dam design, and operational procedures to minimize negative environmental impacts.

5.5.4 The final alternatives selected as subprojects have incorporated, but not been limited to, the above considerations to avoid or otherwise minimize potential adverse impacts to the natural and socioeconomic environments.

5.5.5 From the sector perspective, the following potential adverse environmental impacts have been identified as future subproject considerations:

z There will be reservoirs in the Project with 10 to up to 80 m height dams. These dam hights will determine the water levels in the reservoirs, the size of flooded areas, and involve different dam safety risks. The careful determination of dam safety with comprehensive considerations for these environmental factors will need to be included in the planning and engineering design; z In general, the areas of potential reservoirs do not have major human habitats and thus no major resettlement is anticipated. The reservoir construction will however occupy/flood areas including possibly agricultural land or land which local farmers are earning income from; z Guiyang rivers mostly flow through deep valleys with little migrating fisheries resources. While in theory dam construction will block migrating routes for fish, the impact is expected to be limited as no significant fisheries population exist; z The reservoir would blok water flow, causing the reduction of water resources in areas downstream. There will need to be an integrated water resources study to ensure the construction of dams/reservoirs will not cause water usage conflicts in the region and sufficient availability of water resources for agriculture, domestic water supply, scenery and views, and other water usages/functions in downstream areas; z The reservoir may cause water temperature stratification with low temperature at the bottom of the reservoir. Drawing water from this layer for irrigation could have adverse impacts to agriculture due to the low water temperature effect; z The construction of reservoir would significantly increase surface water area and water depth, as a result, slow water movement or cause water to be stagnant. This will result in significant reduction in water natural assimilative capacity and make the water body more vulnerable to surface runoff pollution caused by industrial, domestic and agricultural discharges. The future reservoir subproject will need to have pollution discharge sources surveys and to avoid these sites subjected to

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wastewater discharges and non point pollution, particularly reservoirs which may be served as drinking water sources; z It is only natural that once the reservoirs are constructed, the areas around them may be developed into tourist attractions. Any such developments should be strictly controlled and well planned, if allowed. The environmental authorities must be fully involved in such planning and make sure that related pollution regulations are strictly in compliance; z Environmental geology may involve geological stability of the reservoir areas including land slides or even earthquake. In general, the small scale reservoirs are less likely to be a geology hazard or potential hazard. This stability issue, nevertheless needs to be evaluated in every sites proposed for reservoir construction; z The irrigation system rehabilitation subproject could cause a concern on water quality from agricultural returned water. The returned water may be contaminated due to the use of pesticides and/or fertilizers in the field. If the water is discharged into the natural water bodies or rivers, it can be a pollution source; z The irrigation system construction and small water storage would usually occupy land including some cultivated land. However, the irrigation system will greatly improve farmland yield and productivity, offset the impact of the lost land; z Many of the irrigation system rehabilitation and small water storage subprojects will be small in scale, and scattered all over the places in the municipality. Very likely these subprojects will be constructed by the farmers themselves and the environmental impacts from the construction activities will depending on the environmental awareness of the farmers and environmental management by the WUA during construction; z The irrigation system and small water storage will need to be away from pollution sources as the system may also be used as potable water sources for farmers in remote locations, posing a safe drinking water concern; and z Construction of all these subprojects will be a potential source of environmental impacts, from various construction activities and construction camp daily operations.

5.5.6 While there are potential adverse impacts, the Project will have significant benefits to the water resources management sector in Guiyang. Some of the key benefits are:

z The construction will be a major investment to the local economy, from large amounts of job opportunities to local residents/farmers, purchase of local materials and services as well as input of advanced technologies in water resources management, benefiting the local farmers some of whom are in isolated areas; z The Project will bring 135.05 million t/a water supply to the region, newly added irrigation area of 282,231 mu，improved irrigation of 161,588, providing drinking water to 271,826 people and 246,098 domestic livestock，control soil erosion land of 1,200,000 mu; and z Providing urban water supply to counties, benefiting large population. The Project will improve the drinking water safety, increase farm land productivity and thus farmers’ incomes, and stimulate rural area development.

5.5.7 Two rounds of public consultations have been conducted in each of the six core subproject impacted areas, during the environmental assessment. In each of the public consultation, either through public meetings or public opinion survey, there have been over a dozen government agencies and local township governments as well as subproject directly affected people from the villages near the subproject sites. Roughly the two rounds of public consultation were conducted at the beginning and draft EIA/IEE report stages, respectively, as described below:

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z The first round was conducted at the beginning of the subproject environmental assessment, when the affected people were informed of the proposed construction and possible consequences to the natural and social environments in which the affected people live. Opinions, concerns and suggestions were solicited from the affected people, as well as relevant government agencies and other stakeholders. These concerns and opinions have then been incorporated into the environmental assessment and mitigation planning. Where appreciate, the opinions and concerns such as those related to resettlement compensation have been forwarded to other project preparation teams for consideration and analysis; and z The second round of public consultation was conducted when the environmental teams completed draft EIA or IEE reports, including the mitigation planning. The results of environmental assessment, including the level of impacts identified and evaluated during the assessment, were communicated to the affected people. In addition, the mitigation measures, monitoring programs, rehabilitation plans, etc. from the environmental assessment, as well as the residual impacts following the implementation of the mitigation measures, have also presented to the affected people to see whether they are satisfied or have any further concerns.

5.5.8 The draft environmental documents, including all EIAs for the three reservoirs and EIRs for the irrigation rehabilitation, small water storage and soil and water conservation subprojects have been released to the public. These documents have been placed in public places in the towns where the subprojects are located. The completion of environmental assessment, as well as availability of the reports has been also informed to the public by bulletin or through advertisements in the public media.

5.5.9 During the Project environmental assessment, environmentally sustainable farming practices in terms of soil and water conservation have been evaluated and appropriate measures to support sustainable farming, recommended. It was found that the following traditional farming practices in the Project regions affect adversely the farming sustainability: z Tillage along slope direction: vulnerable to runoff erosion and consequent soil and water losses; z Cultivation on deep slopes: destroy vegetation, causing soil and water losses; z Excavate drainage channel without building water storage tank: resulting in water loss and adverse to water utilization and drought defying; z Slash burning (in some remote ethnic areas): destroy vegetation, causing soil and water losses; z Abandon or fallow of farmland: resulting in stripped surface and soil erosion; and z Large usage of fertilizer and pesticide in hilly tillage: sources of nitrogen and harmful materials, causing non-point source pollution.

5.5.10 Other practices support and help with sustainable farming concepts under the current practices, such as:

z Building terrace or slope terrace: change slope rate, enhance infiltration and reduce soil and water losses; z Intercropping and multiple cropping: extend crop coverage time, avoid water erosion and retain soil and water; z Contour tillage and ridge planting: intercept runoffs, enhance infiltration, and avoid water erosion; and z Combination of drainage, storage and irrigation: utilize rainwater, reduce runoffs, and control soil and water losses.

5.5.11 Given the local topographic and agricultural conditions, the following methods have been recommended to strengthen the sustainable farming practices:

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z Restoring farmland to forestry and grassland and prohibiting destroying forests, slash burning and cultivating crops in steeper slopes with slope rate >25°; z Economic shrub should be closely planted in hilly tillage with slope rate of 20-25°, and contour tillage and ridge planting should be applied for hilly tillage between low banks. Besides, considering the large amount of precipitation and stick soil, an 1-2% gradient should be retained between tillage direction and contour line to facilitate water drainage and prevent water erosion; z Hilly tillage with slope rate <20° should be reconstructed to terrace, and equipped with combined drainage, storage and irrigation facilities to control soil and water losses and enhance the utilization of precipitation; z Inter-planting and multiple cropping of rape, corn, beans, tobacco and so on; z Implement agro-forestry inter-planting to avoid water erosion and increase economic benefits; z Economic shrub should be planted on low banks of terrace to protect low banks and improve economic benefits; and z For tillage in which over 30% are lithoid bare areas (soil thickness<10 cm), economic fruits should be planted to recover vegetation rapidly and increase economic benefits.

5.5.12 To promote and implement the above recommended farming methods, among the farmers who have been farming their land with the traditional methods for generations, there must be training, education and other supporting and demonstration programs in the following aspects:

z As numerous farmer households and their lands and interests have been involved, thus participatory design should be emphasized to combine farmers’ interests with sustainable environmental development. Particularly, during preliminary planning and design phases, the type of land utilization, existing problems, economic feasibility and farmers’ concerns should be analyzed by area to assess proper soil and water conservation measures; z Training on the concept of soil and water conservation to support farming; z Sustainable utilization of rain water storage, and micro irrigation technology for hilly areas; z Closer planting in steeper slope tillage; z Soil and water conservation tillage; z Efficient inter-planting and multiple cropping technology; and z Economic fruit tree planting in barren lands.

5.6 Non-Core Subprojects Environmental Assessment and Review Procedure

5.6.1 As GIWRM is a sector loan Project involving a very large number of subprojects and one of the most challenging issues from the safeguard perspective is how to identify, prepare and appraise future subprojects, when ADB may not be as closely involved as it is now during the project preparation stage. To prepare for the future environmental assessment clearance, the EARP have been prepared and key issues on the EARP have been discussed with major conclusions as below:

5.6.2 With the exception of the small water storage structures segment, all other non-core subprojects involving construction of small reservoirs, irrigation system rehabilitation, and soil conservation subprojects, regardless of their contents and locations have been classified as Category B.

z For the small reservoirs with particular issues raised or identified and to be upgraded to Category A, EIRs will be prepared following ADB’s guidelines on the

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preparation of EIAs with a SEIA in English for each subproject to ADB for review. Each SEIA needs to be posted on the ADB website for 120 days; z For the other small reservoirs, EIRs to be prepared following ADB’s guidelines on the preparation of IEEs with a SIEE in English for each subproject to ADB for review; and z The irrigation rehabilitation and soil conservation subprojects, EIRS to be completed with a SEIR in English to ADB for endorsement.

5.6.3 Small water storage structures will be classified as Category C. Neither EIAs or IEEs (or EIRs) will be required but EIF for each subproject to be completed with a SERR in English for each subproject to ADB for record, as appropriate.

5.6.4 Project EA, the PMO has established a four full time member SERMD. This division is responsible for organizing and coordinating needed environmental studies for the future non-core subprojects. It will also be delegate to conduct review of the complete EIRs with the assistance of a qualified environmental specialist to determine: (i) the needs for improvements with specific comments as to where the improvements will be, (ii) whether the subproject need to be upgraded to Category A and correspondingly the EIR upgraded following ADB guidelines on the preparation of EIAs, based on the findings and assessment contained in the EIRs, and (iii) whether the EIRs meet relevant ADB requirements so that it can recommend to ADB for clearance. The SERMD will also be responsible for review the Category C subprojects to ensure proper environmental considerations.

5.7 Conclusions

5.7.1 All six core subprojects have been identified and confirmed, which includes one medium and two small sized reservoirs, irrigation system rehabilitation, soil and water conservation and small water storage structure. Environmental documentation requirements have been confirmed as three EIAs, three IEEs and corresponding summaries (one SEIA for the three reservoir subprojects and one SIEE for the three non reservoir subprojects) and environmental assessment for sector loans and environmental assessment and review procedures for future subprojects.

5.7.2 The PPTA team has completed the preparation of Environmental Assessment for Sector Loans for the Project and the EARP which is based on extensive discussion with PMO and ADB. The six environmental documents have also been completed by local environmental institutes and based on these documents, the PPTA team has completed SEIA and SIEE. Currently, the Chinese version EIAs and EIRs are in the process of domestic regulatory review and approve process. An EIR for small water storage structure has been approved by GPEPB in July 2006.

5.7.3 Based on the subproject environmental assessment, there are no major issues among the six core subprojects or future subprojects. The Project will have significant positive impacts and benefits to the regional economic development, increase in agricultural productivity, improved drinking water safety to rural and urban residents, and improvement of standard of living for rural residents. Adverse impacts are mostly related to land occupation and inundation and impacts during the construction phase. With appropriate mitigation measures and environmental management and monitoring plans, the adverse impacts can be reduced and minimized to acceptable levels or otherwise compensated.

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6. Poverty and Social Analysis

6.1 Introduction

6.1.1 This Chapter presents information on poverty in Guiyang Municipality and ways in which poverty is linked to lack water. It presents results from social assessment carried out to analyze the potential impact of Project interventions, particularly impacts on ethnic minorities and ways to enhance positive impacts and avoid or mitigate negative impacts. It discusses how gender roles may affect Project impacts, and ways to promote gender equality in Project implementation. The interests of various stakeholders concerning the Project are identified and the strategy for stakeholder participation is presented, including planned participation in operation and maintenance of irrigation systems and in management of multi-purpose reservoirs. The final section summarizes the social safeguards included in the Project design.

Social Implications of Integrated Water Resources Management

6.1.2 Integrated water resources management involves a variety of efforts to manage multiple uses of water within watersheds, balancing supply and demand. Table 6.1 outlines various forms of integration in water resources management and some of their social implications. The social implications identify benefits that can come from integration, which have corresponding risks of negative impacts if suitable arrangements for IWRM are not in place.

Table 6-1: Social Implications of IWRM

Types of Description Related Activities Social Implications Integration River basin Comprehensive Improving information systems for Avoid externalities on downstream allocation of water planning and monitoring areas, e.g. tail-enders lacking resources water Holistic approach to Reservoir watershed management Participatory planning to promote upstream-downstream plans development and mitigate impacts linkages in watershed of land use restrictions in upper watershed areas Environmental Protection of Planning for environmental and Consideration and mitigation of sustainability environment along with ecological flows downstream impacts other water users Intersectoral Multiple use: domestic, Integrated planning for water Balancing needs from multiple agriculture, industry, allocation uses of water environment Equitable arrangements for Win-win arrangements for intersectoral transfers reallocation Surface water Conjunctive Development of surface sources to Public supplies available to all, and management as a replace aquifer over-extraction (not just those who self-supply groundwater unified resource with pumps) Interagency Coordination between Project Leading Group for More effective and efficient public different agencies coordination. expenditure Improve data sharing between Efficient collection and better agencies and with public information systems Water Coordinate Improve capacity for water Considering how reservoir quantity and management measures resources zoning and management operation affects water quality, quality that affect water quality of assimilation flows, interagency assuring adequate quantity and and quantity coordination quality of water supplies Water as a Consider both social Tariff adjustments with mitigation to Target subsidies and ensure social and value of water, maintain affordability, improving access for poor, protect water economic economic costs and water allocation institutions access for rural water users while good financial viability also enabling transfers to raise water productivity Public and Participation of all Public consultation Inclusion to express views and private sector stakeholders, Participatory irrigation influence decisions and civil particularly women management society Advisory panels for reservoir management Sub-basin forums

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6.2 Poverty and Social Conditions in Guizhou and Guiyang

6.2.1 Lack of water limits economic growth and contributes to the persistence of poverty in Guiyang Municipality. In rural areas of the municipality, 23% people still lack satisfactory access to domestic water. During the wet season, Guiyang’s steep limestone terrain means that rainfall rapidly runs off into the soil or deeply entrenched rivers. For many months of the year, there is little rain. Water is therefore not easily available for people to use unless intercepted, stored, and delivered to where it is needed. In agriculture, inadequate and unreliable water supplies, especially during the spring months before the rains arrive, and during dry spells in the rainy season, reduce crop yields and make it hard to shift to more profitable cropping systems. Urban growth is increasing water demand, but urban groundwater resources are already overexploited and suffering from pollution. Future economic growth, including employment opportunities for the poor in rural and urban areas, depends on having reliable supplies of water. Increased investment in water supply systems including physical infrastructure and institutional capacity to deliver effective services is needed to support economic growth and reduce poverty in the Municipality.

6.2.2 Guizhou Province is one of the poorest provinces in China, with the second lowest rural income after Tibet and the lowest level of urban income of any province in China. The Project will provide water supply to enhance industrial and agricultural production activities in some of the poorest and most underserved rural and urban areas of GM. About 25% of the rural population lives below the poverty line (CNY 1,200 per capita per year). The Project would cover 71 towns/townships out of the total of 81 towns/townships in GM, including 18 'poverty' towns/townships designated by Guizhou Province, five of which are designated as Class A 'poverty' towns/townships with an average annual income of less than CNY 700 per person. Poverty intervention, through the provision of improved water supplies, especially in the poorer rural areas, is therefore an important feature of the Project.

Population

6.2.3 The tables below summarize the population data of Guiyang Province. These figures do not include the “floating” population of rural migrants, who are not registered as permanent urban residents. The floating population is estimated to be between 200,000 and 250,000 people. Although statistics in recent years show little growth in permanent residents, informal estimates point towards a sharp increase in the urban population in the future, as a result of the establishment of new enterprises, which are estimated to cause an influx of an additional 80,000 workers. Tables 6-2 and 6-3 give population data based on Guiyang Statistical Yearbooks.

Table 6-2: Population of Guiyang Municipality and Guiyang City

Municipality City Unit 2004 2003 2002 2004 2003 2002 Total year end 1,000 population persons 3,478 3,449 3,404 2,034 1,996 1,949 Total year end number 1,000 of households (HHs) HHs 934 925 889 536 530 513 Registered urban unemployment person 33,018 31,211 30,925 25,646 24,327 26,080 Source: Guiyang Statistical Yearbook (2004 and 2005)

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Table 6-3: Proportion and Rate of Change of Rural and Urban Population

2004 2003 2002 1,000 1,000 1,000 persons % change persons % persons % change Agricultural population 1,858 53 -1.1 1,888 54 1,878 54 +0.5 Non-agriculture 1,651 47 +1.2 1,599 46 1,585 46 +0.9

Urban 2,218 63 +0.96 2,175 62 2,146 62 +1.4 Rural 1,290 37 +0.14 1,312 38 1,317 38 -0.4 Source: Guiyang Statistical Yearbook (2004 and 2005)

Main Economic Sectors

6.2.4 The Gross Domestic Product (GDP) of GM grew by 13% in the last two years. The main economic sector is the service sector (42% in 2003), followed by the industrial sector (40% in 2003) and then construction and agriculture. In spite of its importance in terms of food security and employment for rural people, agriculture only contributes approximately 5% of GDP. The main agricultural crops are wheat, rice, maize, tubers, oilseeds and tobacco. In some areas, specialized high value crops such as vegetables, flowers and fruit trees are expanding. In terms of per capita income, the GDP per capita of GM is much higher that the average figure for Guizhou Province. However, within GM a marked difference is observed between urban and rural income. The data shown below in Table 6-4, which is extracted from official statistics, compares disposable urban income and rural net income. However, it is commonplace for the real gulf between urban and rural disposable incomes to be even larger than that indicated by the official statistics.

Table 6-4: GDP and Average Disposable Income of Urban and Rural Residents

Guizhou Guiyang (CNY) 2004 2003 2002 2004 2003 2002 Per capita GDP 4,215 3,603 3,153 12,683 10,962 9,784 Urban per capita disposable income 7,322 6,569 5,944 8,989 7,985 7,306 Rural per capita net income 1,722 1,565 1,490 2,809 2,510 2,352 Source: Guiyang Statistical Yearbook (2004 and 2005)

Water and Rural Poverty

6.2.5 The rural poor, estimated at 520,000 persons, are mostly dependent on agriculture. All four counties (including the county-level city) in GM are considered poverty concentrated areas. Xifeng County, to the north of Guiyang City, was a nationally designated “poverty county” until its graduation in 2001.

6.2.6 Reasons for poverty include the lack of fertile land, water shortage and lack of profitable crops. On average, the area of per capita irrigated arable land is limited, at only 0.02 ha (0.31 mu). Most households can grow one rice crop a year on paddy fields along with a second non-rice crop, commonly rapeseed (used to make canola oil). Where irrigation is not available or inadequate, the primary crop is corn or wheat.

6.2.7 Due to the slope and soil conditions, many streams and springs only flow intermittently. Even streams that flow all year have low flows in the dry season, and are often located at elevations much lower than villages. Thus, even where piped water networks have been installed, they may have little or no water for a significant portion of the year. As a result, rural people, often women or children, may still have to walk several kilometers and spend many hours a day to obtain water.

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6.2.8 Rice must be planted on schedule to keep the harvest from being harmed by cool temperatures in autumn. Therefore, field preparation must be done in April/May which are generally dry months, with ripening and harvest during August/September which are generally wet. More profitable cropping patterns, e.g. vegetables, flowers, herbs, and fruit, could increase income and use less water. However, higher-value cropping systems are dependent on a reliable supply of water. Problems in irrigation systems such as those in the core subproject sites, including lack of storage capacity, inadequate canal infrastructure, low levels of maintenance, and weak management institutions, mean that often only part of the command (effective) area can actually receive irrigation water when it is needed.

6.2.9 For example, in the Wudang Irrigation Rehabilitation Core Subproject, during a public consultation roundtable the township chief stated that investors had expressed interest in promoting cultivation of new crops, but needed assurance of reliable water supplies, which was not possible with the current condition of the irrigation system. While in theory the existing irrigation system has an effective command area of about 5,000 mu, only about 2,000 mu actually receive irrigation. In the Jinlong Water Supply Core Subproject, there are several small existing weirs along the stream, but low stream flows and lack of storage mean that only areas relatively close to the weirs can receive water when it is most needed in the April-June period. In the Liaojiuzhai Reservoir Core Subproject Site, most farmers have to rely on rainfall, so that in many years they cannot grow rice and instead can only plant corn or wheat, and severe conflicts have occurred over access to water.

6.2.10 The Project will cause water tariffs to increase, however the increase on tariffs do not appear to pose a problem for poor households considering the expenditures shares on tap water and the policy of water supply companies not charging poor HHs for tap water. Details on the affordability of poor HHs on water supply is attached in Appendix H8.

Poverty Programs

6.2.11 GM Government (GMG) has several programs to provide assistance to poor people. These include:

• Minimum livelihood subsidy; • Educational assistance; • Health care assistance; • Housing assistance; and • Reductions in fees for electricity and water.

6.2.12 The urban minimum livelihood subsidy program began in 1998, initially focused narrowly on those with no income, no ability to work, and no one to take care of them (elderly and orphans). At present 592 people who live on their own receive this aid, while some others live in special facilities. In 2001, the program eligibility was expanded to those below a certain income level, e.g. CNY 170 per month per person. Different income levels were used for different counties. In rural areas, aid is also provided for food, clothing, housing, burial expenses and orphans, education and health care.

6.2.13 Beginning in November 2000, assistance was expanded to all those with income below the poverty line in rural area, who would receive CNY 25 per month. The lower poverty line was CNY 625 per year until recently, and is currently CNY 637 per year, with a middle level of CNY 800 per year and a poverty line of CNY 1,200 per year. These levels are set by the Poverty Alleviation Office. Since June 2005, the program provides the rural subsidy needed to raise income to CNY 720 per year. The amount per recipient varies depending on the income gap, but averages CNY 33 per month.

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6.2.14 Those under the rural poverty line, and those not under the line but poor due to severe illness can receive payment or reimbursement for health care costs. Since 2004, about CNY 400,000 has been spent to help about 4,000 people. Another rural health care program also pays part of health care fees, and the rest of the fee can be reimbursed. If the out-of-pocket health care costs are higher than CNY 500, proportional government reimbursement could be made. The program for reimbursing health care costs is funded by the central and local governments, and by farmers who pay an annual membership fee of CNY 10 to CNY 18 per year. Poor people below the CNY 720 per year level can be exempted from the membership fee. The specific income levels vary by district. There are also special policies by which those with severe illness can get more support.

6.2.15 For rural education through the ninth grade, funding has been provided for books and other supplies and equipment, for all pupils in poverty townships and for poor families elsewhere. This began before the program announced in March 2006 to provide government funding for books for all students through the ninth grade in western China.

6.2.16 Discounts for electricity and water fees are managed by the organizations supplying the services. More detailed information on current water fee structures and subsidies, from both service delivery companies and the GMG, targeting the constraints and needs faced by the poor and vulnerable were not available during this PPTA project period, and it should be gathered during the next phase of the Project implementation.

6.2.17 Special assistance is provided for “beggars and vagrants,” but the city has no specific anti-poverty programs to serve the “floating population” of migrants who are not registered as permanent residents of the city.

6.2.18 Overall, the poverty programs demonstrate capacity to identify those who are poor, usage of differentiated poverty line levels, and targeted delivery of means-tested assistance. These principles and the associated institutional capacity are relevant for designing subsidy policies and targeting assistance to efficiently reach poor people. It also shows measures already in place to reduce the vulnerability of poor people.

HIV/AIDS

6.2.19 Guizhou Province is an area of concern for HIV/AIDS transmission in China. In the province and the municipality there is an active program to provide testing, education, and treatment. Establishment of temporary camps for construction workers creates a risk of disease transmission within the camps and in surrounding areas. In order to prevent problems, the Project will include activities to provide education and testing services. For the construction camps, this will be included as part of standard operating procedures required by construction contracts. Specific resources will also be provided as part of the Project to improve outreach capabilities to nearby communities who may be affected, e.g. through mobile clinic services. Information about HIV/AIDS will also be included as part of training on water use and sanitation for subprojects providing domestic water.

6.3 Ethnic Minorities

6.3.1 Guizhou Province is well known for the presence of ethnic minority communities. There is a total population of more than 39 million persons in Guizhou province, of which about 15 million persons are identified as ethnic minorities, composing about 38% of the total provincial population. Tourism, attracted by both beautiful scenery and ethnic diversity, is an important economic activity in the Province. The majority of ethnic minorities whose ancestors have lived in the Province for a long time (i.e. indigenous ethnic minorities) include 17 out of China’s 56 officially recognized nationalities (minzu). They are Miao, Bouyei, Dong,

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Tujia, Yi, Gelao, Shui, Yaolao, Hui, Bai, Yao, Zhuang, Maonan, Mongonia, Man, Qiang and She. Overall, the provincial population includes members of 55 out of 56 of China’s ethnic nationalities. Principal ethnic groups in the province are Miao, Bouyei (or Buoyei), Dong, Tujia, Yi, Gelao, Shui and Yao. The most populous group is the Miao with a population of 3.687 million in the province. There are 9 ethnic minority groups with more than 100,000 population, they are Miao, Bouyei, Dong, Tujia, Yi, Gelao, Shui, Hui and Bai.

6.3.2 The Buoyeis, Shuis and Gelaos in Guizhou account for over 95% of their population in China. Miao population in Guizhou province constitutes 49.8% of the total Miao’ population in the country. Proportions for other groups are Bouyei 97.3%, Dong 55.7%, Gelao’s 98.2% and Shui’s 93.2% of the respective total populations in the country. The main concentration for ethnic minority groups can be found in their respective “autonomous prefectures” in the Province, although these are located outside the Project area. The area of the minority autonomous districts and minority autonomous towns covers 68% of the total provincial area.

Ethnic Minorities in Guiyang Municipality

6.3.3 As of the end of 2004 there was a total population of 3.5 million persons in Guiyang Municipality (GM), of which the non-agricultural population was 1.7 million persons, 48% of the total population. There are 50 ethnic minority groups in Guiyang, some decentralized, with others living together and living in small compact communities in 10 districts, cities and counties. The small compact communities are mainly centralized in 19 ethnic minority group towns and 199 ethnic group compact community villages. The total ethnic minority group population is 540,300 persons in Guiyang Municipality, composing 15.4% of the total population.

6.3.4 Miao and Buoyei are the main ethnic minority groups living in the municipality. As of 2003, GM had a Miao population of about 220,000 and 180,000 Bouyei comprising 71.3% of the total ethnic minority group population, while other ethnic minority groups compose 28.7% of the total. Out of the 50 settlements classified as “towns” in GM, 18 are categorized as “ethnic minority towns.” Of those, 8 are poverty townships. Out of 449 poverty villages in Guiyang, 145 are ethnic minority villages. Most ethnic minority people, about 77%, live in rural areas.

6.3.5 There are 6 ethnic minority groups with more than 10,000 population in Guiyang, they are Miao, Bouyei, Tujia, Yi, Dong and Gelao, totaling 93% of the total ethnic minority groups’ population. There are 7 other ethnic minority groups with more than 1,000 population, they are Bai, Hui, Man, Zhuang, Shui, Mongolian and Li, holding 6% of the total ethnic minority groups’ population. There are 37 ethnic minority groups with population below 1,000 persons. The brief situation of the ethnic minority groups in the varied districts, cities and counties, can be seen in Table 6-5.

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Table 6-5: Distribution of ethnic minority group’s population of Guiyang Municipality, as of the end of 2004

Area Population (10,000 persons) Ethnic minority group (km2) Total Non Agricultural Quantity Percentage Region Population agricultural population (10,000 of the total population persons) population Nanming District 89.1 50.59 47.18 3.41 3.5 6.92 Yunyan District 67.5 55.23 52.37 2.86 7.3 13.22 Huaxi District 961.4 32.36 9.44 22.92 11.7 36.16 Wudang District 962.4 30.73 9.6 21.13 5.36 17.44 Baiyun District 259.6 17.38 11.2 6.18 3.23 18.58 Xiaohe District 63.1 11.93 9.88 2.05 2.3 19.28 2026.2 43.84 6.49 37.35 4.72 10.77 Xifeng County 1036.5 26.05 3.15 22.9 1.36 5.22 Xiuwen County 1075.7 30.77 4.19 26.58 2.36 7.67 Qingzhen City 1492.4 51.97 11.57 40.4 12.2 23.48 Municipality 8034 350.85 169.75 181.11 54.03 15.40

Ethnic Minority Autonomous Towns and Villages

6.3.6 The ethnic minority groups located in varied districts, counties and cities of Guiyang Municipality are relatively decentralized, mainly spread in rural areas, and concentrated in the 18 (until recently 19) ethnic minority group towns. In total, Guiyang Municipality includes 6 districts, 3 counties and one county-level city. The ethnic minority group population living in the ethnic minority group towns is 143,200 persons, holding 43.04% of the total population of the ethnic minority group towns and 4.08% of the total population of Guiyang Municipality, and holding 26.51% of the ethnic minority group’s population of Guiyang Municipality. The main ethnic groups residing in the ethnic minority group towns are Miao and Bouyei, The largest ethnic minority group residing in the various districts, counties and cities of the Project is Bouyei and the second largest is Miao. Table 6-6 shows the distribution of the ethnic minority groups residing in autonomous ethnic minority towns and villages in each district, county and city of the Project area.

Table 6-6: The distribution of the ethnic minority groups in Guiyang Municipality

Total Population Ethnic Minorities Area (10,000 persons) (person) Regions Towns Note (km2) Sub Non % of the total Agricultural Sub total total agricultural population The town has Huaxi Bouyei and Miao been 9.89 2.76 2.66 0.10 16684 60.49 Autonomous Township withdrawn in Oct. of 2005 Gaopo Miao Autonomous 108.9 2.11 2.06 0.04 14982 71.13 Township Qiantao Bouyei and Miao 74.89 0.95 0.84 0.11 4099 43.27 Autonomous Township Huaxi Xiaobi Bouyei and Miao 65.65 1.44 1.39 0.05 5506 38.32 Autonomous Township Maling Bouyei and Miao 81.08 0.89 0.87 0.02 4586 51.77 Autonomous Township Mengguan Miao and Bouyei Autonomous 70.02 1.94 1.66 0.28 8144 42.06 Township Huchao Miao and Bouyei 81.39 3.04 2.48 0.56 9280 30.52 Autonomous Township Xinpu Bouyei 53.92 0.51 0.48 0.02 3849 54.74 Wudang Autonomous Township Pianpo Bouyei 21.92 0.51 0.48 0.02 3650 31.07

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Total Population Ethnic Minorities Area (10,000 persons) (person) Regions Towns Note (km2) Sub Non % of the total Agricultural Sub total total agricultural population Autonomous Township Dula Bouyei Autonomous 36.5 0.70 0.47 0.24 2976 58.61 Township Baiyun Niuchang Bouyei 67.4 1.17 1.14 0.04 1642 32.34 Autonomous Township Liuchang Miao 158 4.68 4.53 0.15 25153 53.79 Autonomous Township Maige Miao and Bouyei 125 2.26 2.20 0.06 7152 31.65 Qingzhen Autonomous Township Wangzhuang Bouyei and Miao Autonomous 75 2.08 2.04 0.04 7375 35.37 Township Dashi Bouyei Xiuwen 51.1 1.37 1.34 0.04 3596 26.18 Autonomous Township Qingshan Miao Xifeng 49.47 0.70 0.68 0.02 2040 29.05 Autonomous Township Nanjiang Bouyei and Miao Autonomous 83.13 2.01 1.94 0.07 8166 40.61 Township Hefeng Bouyei and Miao Kaiyang 119.57 1.64 1.57 0.07 5912 36.02 Autonomous Township Gaozhai Miao and Bouyei Autonomous 177.34 2.53 2.48 0.05 8456 33.40 Township All Subtotal 1510.17 33.29 31.32 1.97 143248 43.04 Autonomous Towns Municipality 8034 350.85 181.11 169.75 540,300 15.40

Socioeconomic conditions

6.3.7 Since they are mainly dependent on agriculture, the rural economic conditions of the ethnic minority groups lived are relatively low. The annual income of ethnic minority farmers is lower than Han farmers, CNY 2,445 per year compared to CNY 3,555 per capita, or CNY 700 lower per year. In Guiyang, about 89,000 ethnic minority persons have incomes below the poverty line of CNY 1,200 per year. Based on national standards, about 40% of ethnic minority people lack good quality water. The 11th Five Year Plan proposes that all ethnic minority people should have access to good quality water by the end of the five-year plan. Average irrigated land per person should also be increased.

6.3.8 The ethnic minority groups of Guiyang Municipality are mainly spread in rural areas. Since opening and reform, the standard of living of farmers of Guiyang Municipality has undergone a distinct improvement, the average annual net income per person of farmers was CNY 266 in 1980 and it was CNY 2,352 in 2002. The average annual net income per person of farmers in the ethnic minority group towns was CNY 1,966 in 2002, and it was CNY 1,800 for the ethnic minorities residing collectively in villages. As Table 6-7 shows, average annual net income for 70% of residents of autonomous ethnic minority towns was below CNY 2,300 and similarly, 56% of residents of ethnic minority autonomous villages had incomes below CNY 2,300.

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Table 6-7: Income Distribution for Ethnic Minority Towns

Average # Towns Population % of EM % of total EM Note Annual Net towns population Income (CNY) > 3,000 2 19,660 13.72 3.64 Huaxi, Dula 2,300-3,000 4 24,572 17.15 4.55 Mengguan, Xiaobi, Huchao and Niuchang <2,300 13 99,016 69.13 18.32 19 # Villages % of EM in Guiyang >3,000 23 33,000 6.11 2,300-3,000 70 80,000 14.81 1,200-2,300 110 13,400 24.8 <1,200 150 170,000 31.46 353

6.3.9 There are 8 towns in the 19 ethnic minority group towns that have been determined to be key towns for the poverty alleviation and development by the provincial government. These constitute 44% of the 18 key towns for poverty alleviation and development in Guiyang Municipality. There are 186 poverty villages of the ethnic minority groups residing collectively in Guiyang Municipality, composing 41% of the 449 poverty villages of Guiyang Municipality and constituting 52.6% of the 353 villages where the ethnic minority groups live in compact communities.

6.3.10 There are cultural differences between the different ethnic groups, notably in women’s dress and celebration of festivals. Many of their daily activities, customs and agricultural practices are similar to those of Han ethnicity.1 Traditional ethnic leaders play a role in some areas, but are subordinate to the regular government hierarchy. Government is supposed to take these ethnic leaders’ opinions into consideration in decision making. According to the 1949 Constitution of the PRC, ethnic groups are to be “appropriately represented” in the People’s Committees at all levels.

The

6.3.11 The population of the Bouyei (Buyi) ethnic group is 2.5 million in the whole of China, mainly living in compact communities in the two Bouyei and Miao autonomous prefectures of Qianxinan Prefecture and Qiannan Prefecture, and in 10 counties (cities), such as , Dushan, Pingtang and Zhenning of Guizhou province, and separately living in other provinces (regions) of Yunnan, Guangxi and Sichuan.

6.3.12 The Bouyei ethnic group is one of the indigenous ones in the southeast part of Yunnan-Guizhou plateau, laboring and living in this area since early times which can be traced back to the Stone Age. The Bouyei people have an original relationship with the ancient “Liao”, “Baiyue” and “Baipu” peoples. According to Tang Dynasty historical documents, the Buiyi people were called “Xinanman.” After the Song Dynasty the Bouyei people were called “Fan” and “Zhongjiaman.” In the Ming and Qing Dynasties the Bouyei people were called as “Zhongman”. Since establishment of the Peoples Republic of China, they have been called “Bouyei people.” The Bouyei have their unique ethnic language which can be read and written phonetically using Chinese characters, but their use of the Guiyang dialect of mandarin Chinese in daily communication has been progressively increasing. The

1 For an overview of ethnic groups in southwest China, discussing similarities in livelihood activities along with complexities and changes in ethnic identification, see Unger, Jonathan. 1997. Not Quite Han: the Ethnic Minorities of China’s Southwest. Bulletin of Concerned Asian Scholars 29 (3): 67-78.

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Bouyei people in the Project areas are mainly distributed in 19 ethnic minority group towns, and villages of the ethnic minority groups living in compact communities.

The Miao people

6.3.13 Miao people mainly live in the southeast part of Guizhou province, Hainan island, Damiaoshan of Guangxi and some common border zones of Guizhou, Hunan, Sichuan, Yunnan and Guangxi. Miao people have their own language and the Miao language has 3 systems of dialects: Xiangxi, Qiandong and Chuan-Dian-Qian. Since 1956, Latin letters have been designated as the Miao people’s written language. Because of long-term contact with Chinese Han, most of Miao people can speak Chinese dialects and write with Chinese characters. The Miao people’s distribution in Guiyang Municipality is similar with those of Bouyei people. Chinese is also the main communication language in daily life because of living together with other ethnic people.

Other ethnic minority peoples

6.3.14 The population of the other ethnic minority groups in the Project areas composes 4.43% of the total population. Most of them live as some single families in the downtown area or separately live in countryside. Many of these ethnic minority groups are not the indigenous people in the Project areas.

Festivals of Bouyei and Miao

6.3.15 The festivals of Bouyei and Miao in Guiyang Municipality are similar. Besides the Spring Festival, Dragon boat festival and Mid-autumn festival, there are festivals of “Siyueba” and “Liuyueliu”. The “Siyueba” could be called the “Cattle king festival.” On that day it is necessary to braise sticky rice as a sacrifice for ancestors and feeding cattle. On that day cattle shall rest without any ploughing. The “Liuyueliu” is the grand festival of Bouyei people, and its importance is only inferior to the Spring Festival.

Gender

6.3.16 Ethnic minority women take part in agriculture just as Chinese women generally. In the ethnic minority group families in the Project areas, the basic family principle is that both a male and female shall commonly carry out agricultural activities. Woman care for children and do housework, for example feeding livestock. Both males and females control income, especially income coming from agricultural activities. Women would like to have agricultural drinking water and irrigation conditions. The drinking water supply in the Project areas is still inadequate. The education level of women is lower than that of men.

Marriage and Family Planning

6.3.17 Bouyei and Miao marry monogamously, with people choosing who they wish to marry (rather than marriages arranged by parents or relatives). Close relatives could not be married to each other. There are now many marriages between ethnic groups. Residence after marriage generally is like Han practices, where women move to their husband’s home.

Education

6.3.18 Educational achievement is lower in the ethnic minority group population. As Table 6- 8 shows, a lower proportion who have attended formal schooling and fewer who have

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Table 6-8: Educational Achievement

Ethnic Minorities All Guiyang All Guiyang City (%) Municipality Illiterate 13.24 11.09 8.7 Elementary School 51.13 46.66 37.67 Middle School 26.56 29.88 40.22 Senior School & Professional 5.95 8.92 14.64 College and above 3.1 3.43 8.03

6.3.19 By law, ethnic minority people are entitled to the same educational opportunities and rights as Han in the Project areas. The average education level of ethnic minorities in Guiyang is at the primary school level. China has a national policy is for nine years of education, which should now be provided for free in all areas of western China, including Guizhou. For university admission, ethnic minority students receive special consideration. For six county-level areas (districts) in GM, students can add 10 points to their score for admissions, while for four other county-level areas, Xifeng, Kaiyang, Qingzhen and Xiuwen (which were added to the municipality more recently), students can add 20 points.

6.3.20 Most schooling is in Chinese, but in a few poor places in Guiyang, bilingual education is provided. Out of two to three hundred primary schools for ethnic minorities, about 24 classrooms have instruction in two languages.

6.3.21 There is a special middle school for minority students, who can enter with lower scores than would otherwise be required. The government provides a partial subsidy for expenses such as food, accommodation, clothing, furniture and travel home on weekends. There are also subsidies for bilingual teachers, laboratories, toilets and lunchrooms.

Development Projects and Programs Affecting Ethnic Minorities

6.3.22 The ethnic minority group autonomous governments are supposed to guide all of the activities in each autonomous region, prefecture and county in China. In other words, the core task of the autonomous government is to accelerate ethnic minority groups’ development. In the Project areas, there is no autonomous county, but there are ethnic minority group autonomous towns distributed through the Project area. The ethnic minority groups in Guiyang Municipality are entitled to equal development opportunities the same as Han people. The development plan for both the ethnic minority groups and Han people includes social foundational facilities (elementary school, middle school, clinics, housing modification and entertainment facilities), economic foundational facilities reform (countryside highway and road modification, water supply and power supply), capacity development (training in farming and training in activities to increase income, with financial support by small loans). The government’s ethnic minority group development plans 3 are often combined with poverty alleviation plans. The government ethnic minority group development plans mainly involve poverty alleviation and development plan, traffic development plan, public sanitation development plan, etc. The following paragraphs give some examples:

2 Figures for Guiyang City refer to the six original urban districts, while figures for the Municipality also include one smaller city and three counties that were added more recently. 3 These refer to the government’s existing plans for ethnic minority development, not specific Subproject Ethnic Minorities Development Plans prepared for this Project.

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• Television. Broadcast television covering all of countryside areas in Guiyang Municipality has basically been achieved, for making the masses in the countryside aware of current affairs and news in a timely way, and enabling them to enjoy rich cultural entertainment; • Cellphone coverage. By August of 2005, the “Village to village” engineering was completed by China Mobile of Guiyang Municipality, with installation carried out over a period of 8 months. This covered 1,170 administrative villages with cellphone signals and the coverage rate is up to 100%. This is the first example of realizing village to village communication in the Southwest area of China. The ethnic minority groups can now enjoy convenient communication; • Roads. “The 10th five year plan” period was based on building roads from administrative village to administrative village in 1,313 villages of Guiyang Municipality, continuously improving the highway network and step by step increasing the capital investment in highway construction. Since 2003, modified countryside highways have been built for 1,000 km and the total mileage of village highways built has reached 7,095 km. After the completion of highways from town to town and from village to village, the ethnic minority groups living in compact community can utilize highway communication; • Biogas. The methane digester construction of Guiyang Municipality started from 2000 and a total of CNY 922,454 has been invested for this Project in Guiyang municipality. There were 35,479 biogas digesters constructed in 9 districts, counties and city areas, (not including those in Nanming District) and approximately 40,000 countryside farmers have been covered. Development of an agricultural recycling economy, should actively carry out biogas homestead engineering. An amount of CNY 80 million /year has been planned to invest from 2005 to establish one methane tank for each farmer, with CNY 1,500 of state subsidy. It is planned to construct 110 biogas agricultural demonstration villages, to develop 50,000 farmers with digesters. In the next 5 years, the quantity of the farm homes with digesters shall reach up to 50%. The biogas homestead engineering shall not only drive development of aquaculture and organic fruit and vegetable industry for promoting farmers to increase incomes, but also change the countryside fuel structure, reduce pollution from crop straw and reduce human and livestock to pollution of the environment, and protect the environment. This Project is mainly to be carried out in the countryside areas and the ethnic minority groups shall be the beneficiaries of the Project; • Village Facilities. In 2004 Guiyang Municipality invested CNY 1.5 million to construct and modify village appearance for 8 poverty villages, and invested CNY 1 million to equip hardware and software facilities of some elementary schools and middle schools located in 3 key poverty ethnic minority group towns. That year CNY 4.4 million were invested to strengthen basic facilities construction in the ethnic minority groups’ areas; • Small Water Storage Tanks. Up to the end of 2004, the “The solving poverty engineering” and “The aspiration engineering” carried out in Guiyang Municipality were completed. In 2005, Guiyang carried out construction of “Ten thousand small tanks.” According to statistics of the related department, till July of 2005, the drinking water problem of 60% of rural population has been solved; and • School Partnership Programs. In 2005, Guiyang started education support projects linking city and countryside. Gaozhai Miao Autonomous Township was one of the first to benefit from this linkage program.

6.3.23 According to “The Economic and Social Development Program (2002-2020) for the Ethnic Minority Groups and the Ethnic Minority Group Regions of Guiyang Municipality” each ethnic minority group village and the ethnic minority groups village living in compact

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Experience with Participation by Ethnic Minority Communities

6.3.24 According to the Municipal Bureau of Ethnic and Religious Affairs, lack of water is still a major problem for minority people. Each year the Bureau receives a budget of about CNY 14 million, which is used for projects for education, agriculture, water, and electricity. In the view of the Bureau, the best way to solve the problems of minorities is through development. “Minority people want rapid development; they want to be rich.” The Bureau does not anticipate that the Project will have any special negative impacts on minorities, aside from the specific impacts of reservoir land acquisition and resettlement that should be handled according to policies for making people better off after the Project.

6.3.25 According to the Bureau of Ethnic and Religious Affairs, collection of information from the public in past projects has been done through field visits at each level from the village group and village upwards. Roundtable-type “symposium” meetings have been the main approach used for public consultation.

6.3.26 Such consultation meetings were primarily held in the local Guiyang dialect of Chinese, which almost all minority people speak. As an estimate, about 98% of minority people in Guiyang can speak and understand the Guiyang dialect of Chinese, while about 2%, mostly older women, do not speak Chinese. Compared to other parts of Guizhou, Guiyang is more developed. Even if people speak their own language within their home, when they go outside they speak Chinese. They are also exposed to Chinese through television, radio, and contact with tourists.

6.3.27 According to the Bureau, the best way to ensure that ethnic minority people receive benefits from the Project is to carry out detailed planning down to the village and household level, and not just to plan based on general estimates or guesses at the county level. There should be public participation, to know people’s specific needs and to include those detailed needs in the design. The design of past projects has considered the needs of minority peoples. Ethnic minority people have experience and are capable of expressing their opinions and needs. Public notices should be posted so people know about the Project. Villagers should be allowed to monitor Project implementation. Irrigation is also very important, household water supply is not the only need.

6.3.28 Monitoring and evaluation for the Project should look at whether the design covers the needs of minority people, and whether the results are really beneficial for minorities (e.g. are facilities still functioning after several months or a year later). From the construction funds, 5% should be withheld until a year later, to ensure that the Project is built without serious latent defects.

Legal and Policy Framework for Ethnic Minorities

6.3.29 The Constitution of the People’s Republic of China endowed equal rights to the ethnic minority groups. “The Revised Resolution on the Constitution of the People’s Republic of China” approved by the 2nd session of the 10th National People’s Congress on March 14, 2004, in the fourth article again stipulates that all of the ethnic groups in the People’s Republic of China are all equal. The State guarantees legal rights and interests of all of the ethnic minority groups, to maintain and develop equality, united and mutual relationship of all of the ethnic minority groups, forbid any discrimination and pressure on any ethnic minority group, forbid any action of destroying ethnic comity and making ethnic division. Each ethnic minority group region living in compact communities could implement regional autonomy, establish autonomous departments and exert autonomous rights. Each ethnic minority

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6.3.30 The Civil Action Law of the People’s Republic of China, approved by the 4th session congress of the 7th National People’s Congress on March 9, 1991, in the 11th article stipulates that citizens of each ethnic minority group have rights to utilize their own language and letters to carry out civil action. In the region of the ethnic minority group living in a compact community or multi-ethnic groups together residing in a community, the People’s court shall utilize local ethnic group language and letters to carry out judgments and issue legal documents.

6.3.31 The Constitution also guarantees that each ethnic minority group has equal political rights. The 59th article stipulates that the National People’s Congress shall be composed of delegates elected from each province, autonomous region, directly under the jurisdiction of city and the armed forces. Each ethnic minority group shall have a suitable quota of delegates. The 113th article indicates furthermore that in the People’s Congress of the autonomous region, the autonomous prefecture and the autonomous county, besides the ethnic group’s delegates of the autonomous region, other ethnic groups residing in this administrative region shall have their suitable quota of delegates.

6.3.32 The 4th article of the Constitution guarantees that all of the ethnic minority groups have equal rights. This means that every member of the ethnic minority groups has the right to put forward his (her) suggestions on this planned Project and take part in the related activities.

6.3.33 “The Women’s Rights and Interests Guarantee Law of the People’s Republic of China” was approved by the 5th session of the 7th National People’s Congress on April 3, 1992 and became effective on October 1, 1992. This law guarantees women equal participation and decision-making rights.

6.3.34 Some important policies stipulated in The Ethnic Minority Group Regional Autonomy Law have shown great support and instructions on the ethnic minority groups’ development. The Ethnic Minority Group Regional Autonomy Law has established detailed development strategies for ethnic minority groups; regions and their people. Some important policies supporting the ethnic minority groups are included in The Ethnic Group Regional Autonomy Law of the People’s Republic of China. This was approved by the 2nd session of the 6th National People’s Congress on May 31, 1984. The revision of “The Decision Regarding Modification of the Ethnic Group Regional Autonomous Law of the People’s Republic of China was approved by the 20th session of the 9th National People’s Congress on February 28, 2001. The main supporting policies are as follows:

• For the fields of finance, materials, technical and personal skills, it should help each autonomous region to speed up development of economy, education, science and technology, culture, sanitation, and sports affairs. The state has constituted favorable policies to pilot and encourage capital at home and abroad to invest in the ethnic autonomous region (the 55th article); • Based on the united plan and market requirements, the state shall give priority reasonably to arrange resources development projects and foundational facilities construction projects in the ethnic group autonomous regions. The state shall suitably increase investment proportion and the proportion of policy bank loans for the large foundational facilities investment projects (the 56th article); • According to the economic development characteristics and requirements of the ethnic group autonomous region, the State shall comprehensively exert money

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market and capital market to enlarge financing support to the ethnic group autonomous regions (the 57th article); • The State shall establish varied special funds to support the ethnic group autonomous regions to develop economic and cultural construction affairs (the 59th article); • The State shall constitute priority policies to support the ethnic group autonomous regions to develop foreign economic trade, to enlarge the operational self- determination right of the local production enterprises in the ethnic group autonomous region for foreign trade, encourage development of local favorable products to be exported and put in practice priority border trade policies (the 61st article); • Along with the national economic development and financial income growth, the higher financial departments shall enlarge the financial transfer payments for the ethnic group local finance. The general financial transfer payment, special project financial transfer payment, ethnic group favorable policy financial transfer payment and other transfer payment manners have been established by the state to increase capital to the ethnic group autonomous regions for the purpose of speeding up local economic development and social progress in the ethnic group autonomous regions, to reduce the difference in comparison with the developed areas step by step (the 62nd article); and • The State and the higher people’s government shall enlarge poverty areas alleviation in the ethnic group autonomous regions for financial, financing, materials, technical and personal skills fields, to help the poverty population rapidly to get rid of poverty and realize increased wealth (the 69th article).

6.3.35 Through issuing related laws, regulations and policies, the State shall enable the ethnic minority group regions to obtain special relief funds, loans, subsidies and reduced taxes, including lower rice taxation to help economic development. Students of the ethnic minority groups could obtain benefits from the added points in their applications to make it easier to obtain university education opportunities in comparison with Han students. In the eight ethnic minority groups concentrated provinces and regions (Guizhou, Yunnan and Qinghai Provinces and Inner Mongolia, Xinjiang, Guangxi, Ningxia and Tibetan Autonomous Regions) the State has continuously given a great deal of capital support.

6.3.36 In 2005 Guizhou Province, enacted “Some Regulations on Implementation of The Ethnic Group Regional Autonomy Law of the People’s Republic of China in Guizhou Province” (approved by the 17th session of the 10th Guizhou Provincial People’s Congress on September 23, 2005) which puts forward some relative rights and development requirements which the ethnic minority groups could take. The articles stipulate the following:

• The 6th article stipulates that the higher people’s government and its functional departments shall take care of ethnic minority group characteristics and requirements while working out and implementing domestic economic and social development plans, shall support and help the local economic development and varied social projects in the ethnic minority group autonomous regions, shall especially arrange key projects for speeding up the economic and social development in the ethnic minority group autonomous regions and shall adopt suitable approaches to enforce dedication and support; • While exploiting resources and carrying out development in ethnic minority group autonomous regions, the interests of the ethnic minority group autonomous regions should be fully considered to be helpful for the economic development and environmental protection of the ethnic minority group autonomous regions and for caring for production and living conditions of the local residents;

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• The 18th article stipulates that the higher state organizations shall enlarge dedication to the ecological construction and the ecological protection in the ethnic minority group autonomous regions, shall prioritize arranging some development projects such as reducing ploughed agricultural areas and restoring forest or grasslands, tree planting and reforestation, preserving mountainous areas and forests, stone-sand-desert treatment and pollution protection, etc; and • The 19th article stipulates that the higher state organizations shall support and help the ethnic minority group autonomous regions to speed up irrigation works foundation facilities construction, to exploit hydro energy resources, to prevent and control natural disasters, such as flood and water logging, drought and to help to solve drinking water problems.

6.3.37 “The Economic and Social Development Program (2002-2020) for the Ethnic Minority Groups and the Ethnic Minority Group Regions of Guiyang Municipality” puts forward the guidance thinking, targets and projects on economic and social development for the ethnic minority groups and the ethnic minority group regions of Guiyang Municipality. The ethnic minority group region referred to in the Guiyang Water Resources Comprehensive Development Project shall be one of the benefited areas of the planned implementation project. All of the above mentioned policies and the related strategies of the laws and regulations, if they are suitable, could all be applied by the Guiyang Water Resources Comprehensive Planned Project. Ethnic Minorities Development Framework and Plans

6.3.38 The Project is expected to have substantial positive impacts on ethnic minority people, while some ethnic minority people will lose land and homes, for example in the Yudongxia Urban Water Supply Subproject.

6.3.39 In accordance with Asian Development Bank (ADB) Policy, an Ethnic Minorities Development Framework (EMDF) has been prepared for the Project, and an Ethnic Minorities Development Plan (EMDP) must be prepared for each subproject expected to have a significant impact on ethnic minority people. The plans will emphasize identification of minority people to be affected, and description of their involvement in the mainstream of project implementation. Each subproject proposal will provide information on the number of ethnic minority people expected to be affected by the subproject. For sites expected to have significant impacts, the EMDP will describe ethnic composition of the communities expected to be affected by the subproject, and explain how ethnic minority people will be involved in project implementation. The EMDP will identify any characteristics of the subproject that might affect impacts on ethnic minority people, and any special measures needed to prevent or mitigate negative impacts and to enhance positive impacts.

6.4 Gender

Gender Policies

6.4.1 China adopted the Law of the People's Republic of China on the Protection of Rights and Interests of Women in 1992 and amended the law in 2005. Article 2 states that “Women shall enjoy equal rights with men in all aspects of political, economic, cultural, social and family life. Equality between men and women is a basic State policy.” Article 11 states that “Women enjoy the equal right, with men, to vote and to stand for election. Among deputies to the National People’s Congress and local people’s congresses at various levels, there shall be an appropriate number of women deputies. The State takes measures to gradually increase the proportion of the women deputies among deputies to the National People’s Congress and local people’s congresses at various levels. Among members of the residents’

Final Report, Poverty and Social Analysis 6-16 4/24/2008 Guiyang Integrated Water Resources Management Project Black & Veatch (Asia) Ltd committees and villager’s committees, there shall be an appropriate number of women members.” At the level of village committees, it appears that current practice is to ensure that at least one out of the seven members of the village committee is female. This policy offers a basis for encouraging appropriate representation of women in WUA and other decision- making in the Project.

Gender Roles

6.4.2 Gender roles in Guiyang shape the activities carried out by women and men, and so may lead to differences in how The Project activities affect women and men. Some key aspects of gender roles in the Project area include the following:

• Women and men both work in farming, with men expected to do “heavy” activities such as ploughing. As more men than women have migrated to work elsewhere, women’s activities in agriculture have increased; • Women are expected to take primary responsibility for cooking, childcare, household water supply and other domestic tasks; • Participation and leadership in community decision-making is seen as primarily a male activity; • Women’s opportunities to participate are also constrained by their domestic responsibilities, especially if meetings are not held nearby or are at times when they are busy with other work in fields or at home; • Within the household, decision-making is usually shared between men and women, particularly for major decisions; • Women work in construction; • Contracts that assign land use rights are given to each household, based on the number of persons in the household with each persons name listed on the document; and • At marriage, women move to their husband’s home, often in a different village. Women then usually lose land use rights in their home village, but will not receive rights in their new village unless land is reallocated (and now land use rights are supposed to be assigned for a thirty year period, without any major reallocation).

6.4.3 Some key implications of these gender roles are that:

• Women will be affected by the Project, in their roles in farming and in obtaining and using water within the household; • Many of the benefits of the Project, in agricultural income and time savings will accrue to women; • Typical patterns of meeting attendance and community leadership create a risk that women’s concerns may not be voiced and might not receive full consideration in decision-making, so additional measures are needed to promote inclusion of women in consultation, in WUA membership and leadership and in other Project activities; and • Women would be interested and able to take part in construction labor.

Women’s Federation

6.4.4 The Guiyang Women’s Federation is a “mass organization” (not a government bureau). It receives support from the government, as well as donations from the public. The Women’s Federation has offices at each level of government down to the township and village level, and includes leaders at the village group level. Federation leaders said that this provides an effective structure for communication within which information can be reported upwards.

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6.4.5 The Chairperson of the Provincial Women’s Federation stated that the Federation could help introduce the Project to women, including education on water use, sanitation, and the role of water charges. Women suffer from the lack of clean water, and this causes health problems. Experience from past projects shows that women and other villagers welcome projects that provide clean water.

6.4.6 Employment opportunities in Project implementation are important for women. Experience from previous projects indicates that women will receive equal pay for equal work.

6.4.7 The Women’s Federation has collected donations and used them for special works to assist women, elderly men and children in west China. In Guiyang, some of these funds were used for the “Mother’s Small Tank Project” to provide good quality water for household use and agriculture. Assistance is not restricted or targeted only to poor households, but to all households in a village. When the project assists a village, all households receive access to individual or shared tanks. Where tanks are shared among households, meters are installed to measure water use. The project provides materials and the villagers provide collective labor for construction. This is based on village customs of helping each other. Women have played a major role in the management of the Mother’s Small Tank Project and could do so in the Project.

6.4.8 The Women’s Federation has organized health lectures by specialists, to provide information and help change women’s attitudes and practices regarding water and sanitation. Good health helps ensure that women are able to work. In many areas of the prefecture, young men have migrated to work in cities, while women remain and take on increased roles in farming. The Women’s Federation has also organized skill training for women. They have a school, headed by the vice-chair of the GMG, for training rural women.

6.4.9 The Women’s Federation has prepared a plan for women’s development, which has been approved by the GMG. It includes detailed policies to protect women and their health.

6.4.10 In the view of the Women’s Federation, women can be expected to be interested to attend public consultation meetings and to express their views. Special preparatory meetings held separately for women would not be necessary. The Women’s Federation can help ask the Implementing Agencies and the Village Committees to call more women to attend symposiums and other activities. They expect that all women farmers will want to take part in Water Users Associations (WUAs) for irrigation management.

Gender Action Plan

6.4.11 A Gender Action Plan has been drafted for the Project summarizing the main approaches to promote gender-equitable development, finalized during the Loan Fact- Finding Mission and is included as Appendix F2 of this report.

6.4.12 Project implementation will respond to the opportunities and risks associated with gender roles of women and men in managing water resources, including household water use, irrigated farming, decision-making in processes and structures and other activities. Gender analysis was done as part of project preparation to understand social conditions and identify ways in which the Project might have different impacts on women and men. Specific measures to promote gender equality in Project implementation, and access to Project opportunities and benefits are as follows:

• Establishment of a Social, Environment and Resettlement Management Division at the PMO to cover social development (GAD, gender and development participatory and community-driven development) and social safeguards aspects related to Project design and implementation;

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• Training of PMO and IAs at Project onset on social development (GAD, participatory and community-driven development); • Inclusion of the All-China Women’s Federation in the Project Leading Group (PLG) at the PMO (municipal) and IAs (district/county) levels; • Ethnic minorities’ and women’s involvement in the planning of subprojects and their proposals, priorities, and options on future arrangement for distributing water and funding O&M to be fully developed in the Feasibility Study Reports (FSRs) and subsequent planning; • Adoption of a 30% quota for women’s participation in public consultations for non- core subprojects; • Adoption of a 30% quota for women’s access to the Training Program on Community Empowerment for IWRM to be imparted to local communities by a team led by the PMO and composed of Government line agencies and relevant Research Institutes/NGOs; • Adoption of a 30% target for women’s access to employment opportunities to be created by the Project in civil works; and • Collection, analysis, and reporting of sex-disaggregated data as a routine part of all Project activities, including on beneficiaries and affected persons; on participation in meetings, training, and other activities, and on representation in decision-making processes and structures.

6.4.13 Additional measures for the multipurpose small scale reservoirs and Irrigation system rehabilitation segments are:

• Employment of female community facilitators (at least 1 per village) to support public consultation and development of WUGs/WUAs; • Ensure availability to women of information for all public consultations at convenient times and locations taking into consideration women’s involvement in fieldwork and household chores; and • Adoption of a 30% quota target for women’s membership and leadership in WUGs (at the relevant tertiary canal/Village Group/natural village level) and WUAs.

6.4.14 Recommended actions specific for the small water tanks segment are as follows:

• All China’s Women’s Federation to work with the PMO/local governments (at municipal and district/county level) to facilitate community-managed O&M of water supply and sanitation systems; • Adoption of a 30% quota targeting poor rural women and female heads of households; and • Implementation modalities for small water tanks to apply lessons from the Mother Tanks Project implemented by the All-China Women’s Federation.

6.4.15 Gender disparities on issues such as willingness to pay, affordability, income levels and distribution and socio-economic benefits were requested during this PPTA but are not readily available to be included in this Final Report. This information is crucial in line with the management and O&M requirements for the subprojects' design and implementation. Gender disaggregated data and analysis of the environmental impact assessment in terms of the impact on women was also absent. However, some related discussions were presented in the chapters of economic and financial, environment, and project design and monitoring.

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6.5 Stakeholder Analysis

6.5.1 Stakeholders have been identified based on activities of the PPTA including project meetings and field visits. Table 6-9 presents a list of primary and secondary stakeholders. The primary stakeholders include rural and urban residents who will obtain domestic water, farmers who will receive irrigation water, and affected persons (APs) who will lose land, homes or businesses. Water resources are also used for recreation. Some current recreation areas will be flooded by dam construction, while new areas will be created. It appears that recreational activities in the Yudongxia Reservoir will be forbidden because of its role in providing domestic water, though some tourist activities may be feasible in surrounding areas.

6.5.2 Through improved drinking water systems, the Project will benefit the general population of urban residents, and an estimated 150,000 rural residents. The Project will also rehabilitate and improve irrigation systems, therefore benefiting rural residents who are dependent on agriculture for their livelihoods by improving crop yields. In addition, some 250,000 rural residents will benefit from the proposed small water storage systems designed to serve more remote areas where provision of a piped supply is not economic.

6.5.3 Secondary stakeholders include various government agencies and other organizations that may be involved in planning, construction, and management. Many of the key government stakeholders are represented on the Leading Group that has been established for the Project. This should provide a forum for organizing interagency cooperation and establishment of suitable institutional arrangements for integrated water resources management. Members of the Leading Group participate in project workshops, including Inception, Interim and Draft Final Report discussions.

6.5.4 One of the important activities for the Project will be institutional development of organizations that will manage completed facilities, such reservoirs and irrigation systems, including water supply companies and WUAs.

6.5.5 As described in the next section, the public consultation process and project design will seek to ensure that stakeholders, particularly primary stakeholders, participate in planning and implementation of the Project.

Table 6-9: Summary Stakeholder Analysis

Stakeholder Key Stakeholders’ Interest in the Project A. Primary Households, rural and New or improved water supply urban Enterprises and other New or improved water supply. Availability of reliable water supplies may organizations be particularly important for encouraging investment in expanded or new industries. Farmers New or improved water supply for agriculture. Irrigate crops, hold use rights for agricultural land. Affected persons Land, homes or businesses taken for Project use. Tourists and tourist Recreational use in and around water resources (some created or businesses expanded, some disrupted or eliminated) Downstream residents Affected by changes in river flows, flood risk, sediment loads, etc. They, and water users and their governments, may oppose changes that would hurt their interests. B. Secondary B.1 Local Water Management Institutions Village Committees Arrangements and management in construction and operation phases. Currently organize some canal operation and maintenance

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Water User To be established for irrigation water use arrangement and management Associations Vegetable Growers Specialized groups marketing products from irrigation agriculture and Flower Growers Associations Contractors for Provide specific services, such as operation of small storage reservoirs, services pumps, and diversion schemes. Workers who clean canals. B.2 GIWMP Leading Group Guiyang Municipal Government for Project area. Promoting economic and social Government development Water Resources Executing and Implementing Agencies, construction management, Bureau operation and maintenance. Development and Sector planning Reform Committee Finance Bureau Financial support and guarantee Environmental Environmental monitoring, management and supervision. Protection Bureau Land and Resources Land acquisition review and approval Bureau Urban Management Public utilities and greenbelts water use Bureau Resettlement Bureau Manages some resettlement projects Urban Planning Review of Water Resources Masterplan for consistency with Municipal Bureau Plan Water Service Operators for major hydraulic facilities: reservoirs, treatment plants and Companies distribution systems. Women’s Federation Mass organization protecting women’s interests and improving their welfare Bureau of Ethnic and Minority and religious affairs: protecting interests of minority nationalities Religious Affairs and improving their welfare. B.3 Related Guiyang Municipal Agencies Health Bureau Drinking water monitoring and safety guarantee Center for Disease Prevention and control of water-caused diseases, protection of public Control and health. Prevention Bureau of Civil Affairs Resettlement and poverty Agriculture Bureau Farming structure adjustment Forestry Bureau Forestland acquisition, protection and restoration. Travel and Tourism Tourism resources development and management Bureau Urban Construction Operator for wastewater treatment plant Bureau Poverty Alleviation Manages anti-poverty programs Office Price Bureau Water tariff regulation Organization and Organization and staffing of new facilities, e.g. reservoir. Staffing Committee B.4 Other Secondary Stakeholders Deputies to the Issues on socioeconomic development and people’s livelihood People’s Congress Civil society Environmental non-government organizations and other groups may organizations advocate for public interests, such as environmental preservation and efficiency in public expenditure. Lower-level District, county, city, township, and administrative villages. governments Responsibilities for local governance and social and economic development. See Implementation Arrangements for discussion of Implementing Agencies and Leading Groups for specific Subprojects. PMO and PPTA Project preparation Consultants

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Design institutes and Carry out Project design and construction activities construction units State Environmental Review of Environmental Impact Assessment (for Yudongxia Reservoir) and Protection Administration Ministry of Water Review of feasibility studies for major reservoirs (for Yudongxia Reservoir) Resources National Development Review of feasibility study of major subproject (for Yudongxia Reservoir) and Reform Commission Ministry of Finance Loan approval and processing Asian Development Loan, performance and sustainability of the Project Bank

6.6 Participation Strategy

Public Consultation

6.6.1 Various forms of public consultation have been carried out as part of irrigation development in the past. However, these have often been relatively informal and focused primarily on local leaders. In preparing irrigation designs, designers involved farmers during field surveys to identify problems and make suggestions. While the results of such consultation were used in preparing design drawings, there was no systematic process for recording farmer proposals and priorities, nor for ensuring broad awareness and agreement among the whole farmer community. The planning process did not require farmers to thoroughly consider and make commitments to future arrangements for distributing water and funding O&M. The Bureau of Ethnic Minorities and Religious Affairs said that they consulted extensively in planning their projects, mainly using “roundtable” type discussions. For the pilot soil conservation projects in Huaxi, it was reported that farmers were consulted about their preferences for the type of economic trees to be grown on steeper slopes. It was also said that farmers who visited the pilot sites as part of considering carrying out terracing were encouraged to talk directly to the farmers who had built terraces, i.e. applying a farmer- to-farmer approach. Thus, past experience has included significant forms of participation, but there are still many opportunities to take a more thorough and systematic approach to participation in subproject planning and implementation.

6.6.2 A public awareness participatory approach for subproject planning is proposed for GIWRMP and is being implemented in the core subproject sites. During the feasibility study stage, at least two public consultation meetings were held for each subproject. Each subproject meeting was held in the corresponding subproject area. In some cases, during a single round of consultation more than one meeting may be held for a subproject, e.g. to cover dispersed communities or discuss specialized issues. For the PPTA, the first round of public consultation meetings was carried out from late March to mid April 2006.This included a general meeting for the Yudongxia subproject, and two separate meetings for the ethnic minority villages affected by land acquisition and resettlement. Various specialized discussions and a second round of consultation were carried out in May and June. Table 6- 10 records the meetings which were held during the PPTA.

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Table 6-10: Public Consultation Record

Subproject Type of Topic of Meeting location Date Public Male Female Notes Name consultation section participants consultation total Xifeng Small PPC Round 1 Xiaozhaiba Town 2006- 40 22 18 tank Consultation Shiqiao Village 3-31 Subproject Jinlong PPC Round 1 Jinlong Reservoir 2006- 48 38 10 Reservoir Consultation Project Junction and 4-5 Subproject Canal Construction Field Huaxi PPC Round 1 Ludi village, Shiban 2006- 19 16 3 2 EMs Reservoir Consultation town Huaxi District 4-6 Subproject Wudang PPC Round 1 Shuitian Town 2006- 40 33 7 8EMs Irrigation Consultation 4-7 Rehabilitation Subproject Liaojiuzhai PPC Round 1 Shiqiao Village, 2006- 56 48 8 4 Ems Reservoir Consultation Xiaozaiba 4-11 Subproject Township, Yudongxia PPC Round 1 The medical station 2006- 84 78 6 25 Ems Reservoir Consultation - of Yongle town 4-12 Subproject, Resettlement Yudongxia PPC Round 1 Conference Room 2006- 97 87 10 25 Ems Reservoir Consultation for Government of 4-17 Subproject, Wudang District All Subproject KII Ethnic School of 2006- 33 Research minority Humanities, 5-18 Institutes on issues Guizhou University Ethnic Groups All Subproject KII Project Guiyang Water 2006- 6 4 2 Guiyang benefits on Resource Bureau 5-18 Water EM Conservancy Association Huaxi FGD Gender group Huajie village, 2006- 20 12 8 Reservoir Shiban town 5-22 Subproject Huaxi FGD Round 2 Huajie village, 2006- 23 12 11 Reservoir Consultation Shiban town 5-22 Subproject Liaojiuzhai GD Round 2 Shiqiao Village, 2006- 36 27 9 2 EMs Subproject Consultation Xiaozaiba 5-24 Township, Xifeng Small GD Round 2 Shiqiao Village, 2006- 36 27 9 2 EMs Tanks Consultation Xiaozaiba Township 5-24 Subproject Yudongxia PPC Round 2 Meeting Room in 2006- 60 39 21 Reservoir Consultation Dongfeng Town 5-26 Subproject Government Yudongxia Round 2 Wudang District 2006- 60 44 16 Subproject Consultation Irrigation Bureau 5-26 Jinlong FGD Gender group Xinzhai Village, 2006- 48 32 16 Reservoir Longchang Town 5-29 Subproject Jinlong PPC Round 2 Xinzhai Village, 2006- 38 22 16 Reservoir Consultation Longchang Town 5-29 Subproject Jinlong KII Crop Xinzhai Village, 2006- 9 N.A N.A Agricultural Reservoir diversification Longchang Town 5-29 Marketing Subproject and Association marketing Yudongxia FGD Dayan Village 2006- 19 14 5 17 Ems Reservoir EM Group Xingshi Town 5-30 Subproject (Miao) Yudongxia FGD Mixed group Dayan Village 2006- 17 13 4 Reservoir Xingshi Town 5-30 Subproject

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Subproject Type of Topic of Meeting location Date Public Male Female Notes Name consultation section participants consultation total Wudang FGD Dongnong Village 2006- 32 14 18 32EMs Irrigation Shuitian Town 6-1 Rehabilitation Subproject EM Group Wudang PPC Round 2 Dongnong Village 2006- 37 19 18 32EMs Irrigation Consultation Shuitian Town 6-1 Rehabilitation Subproject Yudongxia PPC Urban water Wudang Area Water 2006- 20 15 5 Reservoir supply Resource Bureau 6-2 Subproject Yudongxia FGD Dayan Village 2006- 25 18 7 25 EMs Reservoir Xingshi Town 6-5 Subproject EM Group (Bouyei) * PPC: Public Participation and Consultation , KII:Key Informant Interview, FGD: Focused Group Discussion

The relevant meeting process is presented below:

6.6.3 Preparation and Release of Notice. Date, location, objectives and participation approach of the meeting should be prescribed in the Notice, as well as the detailed background of the Project and subproject, and the meeting agenda. In the case of a symposium, the Notice should be released 7 days before the meeting to relevant government departments, neighborhood committees, village committees and other non-government organizations (NGOs) (formal public hearings require 10 days advance notice). Where appropriate, two notice formats have been prepared, one for a public notice in affected villages and one for inviting relevant government agencies and other organizations (e.g. Women’s Federation).

6.6.4 Selection of and Requirements on Participants. During this PPTA, the first round of meetings were organized as “symposiums” (roundtable discussion), and followed one of the formats discussed in the recent Interim Regulation on Public Participation in Environmental Impact Assessment issued by the State Environmental Protection Administration. These were relatively informal discussions, open to all interested persons. Specific invitations were issued to relevant local government organizations. In addition to posting public notices about the meeting, village governments and village committees were asked to assist in encouraging participation by women and poorer villagers. In general, 15 or more members of the public were targeted as a goal, and more members of the public attending than government officials were achieved.

6.6.5 Organization of meetings. The meetings were conducted and organized by the PMO of the Project working with the IAs, with one chairperson and one recorder designated for the meeting. The PPTA team, design institutes, and other teams for preparation of the required reports provided technological support and attended the meeting. The agenda and process for the meetings are as follows:

• The meeting Chairperson declares agenda, objectives and requirements, introduces participants; • Implementing Agency gives a brief description of the proposed Project, showing location on map and discussing expected impacts; • Small group discussions. In general it is useful to randomize the composition of the groups, so each group includes a mix of people from different parts of the system, so the discussion considers the overall needs of the system. Discussion topics should be focused on what can be done to prevent problems and improve performance of the Project, including how to ensure equitable water distribution

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and adequate funding for operation and maintenance. Each group should choose a moderator to coordinate the discussion, and a recorder to write down key points on a large sheet of paper. • Group representatives make presentations on the key conclusions from their discussion, followed by time for plenary discussion and questions and answers; • Relevant departments provide explanations and responses; and • Chairperson makes a summary and closes the meeting.

Records to be Produced

• Name of the subproject, the date, location and major topics of the meeting; • Names of positions of the Chairperson and the recorder; • Basic information of the participants as well as the list of participant signatures; • Handout with a brief description of the Project, prepared by the EA and distributed to participants before the meeting or at the beginning of the meeting; • Issues and opinions put forward by the participants; • Explanations and responses made by relevant departments on the issues and opinions; • Other items that the Chairman thinks necessary to record; and • Photographs.

6.6.6 At the meeting, participants have been requested to provide their names and contact information, put forward real opinions and suggestions according to the facts on the Project, and follow the meeting disciplines and rules.

6.6.7 As stated in the Notices, the PMO also invited public inquiries and comments by mail, e-mail, telephone and fax.

Public Hearings

6.6.8 For the second round of public consultation, a more formal “Public Hearing” format was used, especially if these are combined with the formal hearings on the Draft Environmental Impact Assessments or Initial Environmental Examinations. For hearings, any individual or organization could send notice of their desire to participate in the meeting based on procedures in the Notice. Participants were identified based on those who had expressed interest earlier and additional participants were invited to encourage a full range of stakeholders to be included. If the procedures in the SEPA guidelines are used, then other interested persons may apply to attend as observers. Where appropriate and feasible, the meeting Chairman should make arrangements to accommodate additional interested persons.

Box 6-1. Notes on Preparing for Public Consultation Meetings

These notes cover the activities done for the first round of public consultation meetings and points for further improving preparation and implementation of public consultation meetings. With appropriate adjustments these apply to general public consultation roundtables and hearings, as well as more specialized activities such as discussions with interim advisory task forces, water user associations, stakeholder panels, sub-basin forums and other platforms for discussion. The Project will support specialized training and other capacity development for public consultation and participatory planning and management of water resources.

Before meeting. Organizers should aim to arrive about an hour beforehand, to allow time to review preparations and ensure everything is set up appropriately. Additional time can be

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used for informal discussion with participants as they arrive. Posters and handouts should be available as participants arrive, so they can study and discuss them informally while waiting for the formal start of the meeting. Handout. It is useful to have a paper to distribute for each participant, with an explanation of the proposed subproject, photos or diagrams, and a description of the meeting process, as well as contact information for those who wish to offer comments later on. Introductory Briefing. Provide 10-20 minutes of explanation, focusing on the subproject elements that will directly affect people (i.e. not lots of general background or statistics). Pictures and scale models (miniatures) are particularly helpful. The small group process should then be explained, emphasizing the goal of obtaining practical suggestions and suggestions that help prevent problems and improve benefits. Small Group Discussions. Divide into relatively equal size groups, preferably with 7-12 people per group. Arrange seating in a circle, so participants are facing each other (without some people sitting behind others). Provide plenty of markers, paper, and tape. Have one person prepared to facilitate each group, helping the group to take the main role in organizing its own discussion, starting with selecting a moderator and a recorder (scribe). Depending on the site and availability of facilitators, more specific and structured questions and processes can be used for the small group discussions. If possible, key topics, e.g. cost-sharing, should be identified beforehand, and relevant questions prepared. The type of questions outlined above can be structured using a simple two- column formats, to guide discussion and reporting, e.g. 1. Problems 2. Solutions Local Officials. Arrange a separate group, with specific questions/tasks prepared beforehand. This should include how to monitor subproject inputs, outputs, and impacts. They should draw on their experience to suggest ways to make subproject activities as efficient, equitable, and accountable as possible. This group will probably need extra support from facilitators. Group Report. Emphasis should be on questions and suggestions that can help prevent problems and improve subproject benefits, not on reviewing potential benefits. Encourage presenters to emphasize main points, particularly those not covered by the groups that have already presented. At end of each presentation, allow an opportunity for other group members to add points if they feel something important has been left out. Q&A. Have additional microphones (preferably wireless) and/or hand over the microphone to those asking questions. Written Comments. Hand out forms for written comments as people arrive or during the Q&A session (not at start of small group discussions). Provide a box for people to put forms into.

For additional information on relevant approaches and techniques, see www.iap2.org and www.iied.org/NR/agbioliv/pla_notes/index.html

Water User Association Development

6.6.9 The Project will support development of Water User Associations that will take primary responsibility for local irrigation management. This is particularly important to developing institutional arrangements to provide improved irrigation system operation and maintenance for subprojects. In principle, the benefits expected from improved irrigation should be sufficient to pay for operation and maintenance. However, current arrangements do not yet effectively ensure adequate O&M. Inadequate and unreliable irrigation discourages users from paying irrigation fees. Primary emphasis on area-based fees means that users lack incentives to conserve water. County and higher level governments budget funds which can help pay for more expensive repairs and improvements in response to local requests. However, these do not seem to be linked to systematic planning for operation and

Final Report, Poverty and Social Analysis 6-26 4/24/2008 Guiyang Integrated Water Resources Management Project Black & Veatch (Asia) Ltd maintenance, particularly going beyond annual canal cleaning and emergency repairs to support preventive maintenance and improvements in canal distribution networks.

6.6.10 In China, three broad models for providing local irrigation management can be distinguished. In most areas, village committees (VC) are responsible for managing activities such as cleaning of canals and water distribution. In some areas, water user associations (WUA) have been formed. Under the model for Self-governing Irrigation and Drainage Districts (SIDD) promoted in World Bank projects, larger scale water management is to be handled by autonomous (corporatized) management units (water service companies, WSC) which then have contracts to deliver water to water user associations. In some places, individuals are contracted to take responsibility for water management for specific facilities or sub-units of irrigation systems.

6.6.11 At present in Guiyang, Village Committees (VC) play a role in organizing some maintenance activities for tertiary and quaternary canals, among their many other duties. Government units are responsible for managing primary and secondary canals. Individuals are contracted to manage some small pump schemes. While annual canal cleaning is organized and repairs made for major canal failures, it appears that often funds and organization are insufficient to carry out any higher level of repairs, or improvements. Given the shortage of resources for repairs and improvements under current institutional arrangements, many irrigation systems suffer from problems with leaking canals and broken gates, and lack tertiary canals and water measurement structures, making it difficult or impossible to reliably deliver water to the full command area.

6.6.12 The physical problems of irrigation systems are a symptom of ineffective institutional arrangements, indicating that the benefits of physical rehabilitation of irrigation infrastructure will not be sustained unless institutional arrangements are also improved. Poor service also makes farmers reluctant to pay irrigation charges. Irrigation fees are primarily based on area, and not linked to the quantity or reliability of water delivery.4

6.6.13 In the past, under collective agriculture, local agriculture collectives provided an institutional structure with appropriate scale to coordinate irrigation O&M. Since decollectivization, an effective alternative has not yet been instituted, so that there is often an institutional gap in water management, which has only been partially filled by activities organized by village committees. Current policy in China is to develop water user associations to improve irrigation operation and maintenance.

6.6.14 Giuyang has begun planning for development of WUAs for carrying out irrigation management activities. However, prior to the Project, no WUAs had been formed in Guiyang. Water Management Bureau staff have some knowledge of approaches that have been used elsewhere in China, such as Self-managing Irrigation and Drainage Districts (SIDD) and contract management of irrigation canals. However, conditions in Guiyang differ in important ways from areas such as north China where most institutional reforms in local irrigation management have been carried out. Notably, farmers have a choice of growing irrigated or rain fed crops. Irrigation can be crucial for timely field preparation and planting, and during dry spells, but otherwise irrigation plays a supplementary role in Guiyang.

6.6.15 The lack of experience with WUA development, and lack of detailed planning so far for institutional development of WUA and other water management organizations poses a

4 Current policies for reducing the fiscal burden of taxes and charges also raise questions about irrigation finance. In principle, an irrigation fee is a legitimate fee for service which is still acceptable under the current policies. However, it appears that some localities are deciding that they should stop collecting irrigation fees and instead subsidize irrigation O&M from other sources, This would further weaken the linkage between delivery of irrigation services and funding for the services.

Final Report, Poverty and Social Analysis 6-27 4/24/2008 Guiyang Integrated Water Resources Management Project Black & Veatch (Asia) Ltd risk of a mismatch between physical infrastructure construction and institutional development in the Project, which could adversely affect social capital and sustainability of the Project. It will also be important to have clear policies that provide incentives for water users to help themselves, mobilizing their own resources. In order to avoid the risks of unbalanced emphasis on infrastructure construction, and “crowding out” community management capacity, it will be useful to focus attention on financial arrangements for “smart subsidies” that encourage local initiative, beneficiary resource mobilization, accountability for service delivery, and strengthening of the social capital of local organizations for water management.

6.6.16 Figure 6-1 shows the structure of Water User Associations at the secondary canal or village level, composed of Water User Groups at the tertiary or quaternary level, and which may be joined into a larger federation at one or more higher levels depending on the size and layout of the irrigation system. The WUA and WUAF would be established as legal bodies, with authority to manage water and irrigation infrastructure and collect money for their own activities and for payment of irrigation and water resources fees. WUA/WUAF relationships with the units operating reservoirs would be formally structured through water service agreements laying out the rights and responsibilities of both parties. The WUA/WUAF will prepare an annual operation and maintenance plan for its activities. In the case of multi- purpose reservoirs, the unit managing the reservoir will prepare a reservoir O&M plan, based on consultation with a panel of stakeholder representatives, and in accordance with sub- basin and overall municipal water allocation plans.

Figure 6-1: Structure of Water User Associations

Stakeholder Panel: Multi-purpose Consultation domestic, industry, irrigation, environment, tourism … Reservoir Operation WUAF Service Agreement Unit Water User Association Federation WUA ROLES IN Interagency Working Group WUA INTEGRATED Water User RESERVOIR Associations MANAGEMENT Community Facilitators WUG Water User Groups

6.6.17 During subproject planning and implementation a series of activities will be carried out to promote stakeholder involvement, support WUA development, and prepare for operations and maintenance, as shown in Figure 6-2.

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Figure 6-2: Subproject Planning and WUA Participation

1. Pre- 2. 3. 4. Detailed 56. 6. O&M Feasibility Feasibility Preliminary Design Implement Design -ation •Water •Public •Advisory •WUA,WUAF •Preconstruct •Annual resources consultation task force & Stakeholder ion meetings Reservoir assessment •Social •Design water panel •WUA role Plan&Budget •Public assessment control system established in •Annual WUA consultation •Canal walk- •Initial WUA •WUA O&M supervision O&M (sub-basin throughs O&M Plan & Budget and Plan&Budget level) •O&M Plan&Budget •Service acceptance •Joint canal •Alternatives diagnostic •Initial Agreement •Community- inspection analysis analysis Reservoir •Reservoir managed •Clean canals •Subproject •Cost Management Management construction •Distribute identification estimates Plan&Budget Plan&Budget (e.g. water tertiaries) & including •Canal layout •Collect fees prioritization O&M and for (with tertiaries) •Repairs & tertiary •Plan for improvements development community- •Annual managed Reports - WUA construction & Reservoir

Pre-Feasibility

6.6.18 Assessment of overall water supply and demand in the basin provides a foundation for planning, identifying whether water is available for a subproject to augment supply, without depriving downstream users and while ensuring adequate water for environmental and ecological water needs. Stakeholders should be aware of water problems, e.g. through publication of information about water availability and use, and consulted about priorities for basin management. Plans and other documents can be reviewed with stakeholder representatives during workshops. Formation of a sub-basin council provides a structure for on-going interaction, in which council members can also develop a deeper understanding of sub-basin management. Those who will be affected by measures to develop new subprojects, increase efficiency and make other changes deserve an opportunity to contribute their ideas and concerns, even at the initial stages when issues are being analyzed and potential subprojects identified. The Project provides an opportunity to improve the availability of information about water management in sub-basins, and to use sub-basin level planning to involve stakeholders in contributing to more comprehensive and integrated consideration of how water management can be improved.

Feasibility

6.6.19 The core subprojects have shown the value of carrying out public consultation during the feasibility study stage, and similar methods can be applied in the preparation of future subprojects. This can help to identify ways to prevent problems and increase the benefits from a subproject. Similarly, social assessment should identify potential problems, including the need for resettlement and for ensuring attention to the needs of ethnic minorities. Canal walk-throughs by engineers together with farmers are already a standard part of the design process, but can be strengthened by ensuring good representation of farmers, along with systematic documentation of the problems and proposed improvements suggested by water users.

6.6.20 Traditional water resources planning has tended to focus on the construction of infrastructure, such as new reservoirs and canals, without necessarily paying adequate

Final Report, Poverty and Social Analysis 6-29 4/24/2008 Guiyang Integrated Water Resources Management Project Black & Veatch (Asia) Ltd attention to how to ensure that facilities are used as efficiently as possible. Diagnostic procedures, such as those used in irrigation modernization approaches,5 provide a means for a more systematic approach, analyzing the objectives of water use and constraints and opportunities that integrated attention to both infrastructure (hardware) and management institutions (software), including water user associations. This includes the need to look not just at major canals, but at how water will be delivered to farmers when they need it, with the ability to support changes to higher-value cropping patterns that require precise and reliable water control.

6.6.21 Planning needs to consider how sufficient resources will be provided for future operation and maintenance. Where these are expected to come from user charges, it is particularly important that users are well-informed about the likely future costs and consulted about how O&M will be carried out.

Preliminary Design

6.6.22 The preliminary design stage requires more intensive work, so an advisory task force of water user representatives provides an efficient way to coordinate activities. There is a need to work out specific arrangements about how water will be distributed, to ensure that canals, gates, measurement flumes, and other water control infrastructure fit with the actual organizational arrangements that will be used for water control. An initial draft is needed for a water user association budget that covers all activities for operation and maintenance and the user charges and other sources of funding. Similarly, for the reservoir and any other works not managed by the WUA, a management plan and budget is needed to ensure that appropriate resources and capacity will be available for serving the multiple objectives of reservoir management.

Detailed Design

6.6.23 Detailed plans for construction are needed, including the precise proposed location of canals, specific agreements about how land for canals will be provided, and what part of the works may be implemented by the community.

6.6.24 The water users associations, WUA federations and reservoir stakeholder panels should be established before construction begins. This takes advantage of the interest of users, and helps ensure that all stakeholders are committed to fulfilling their responsibilities (rather than just seeing the subproject as something built by and only the responsibility of the government). Similarly, agreements about allocation of water from the reservoir need to be worked out in advance, and formalized in service agreements between the reservoir operating entity and the WUAF.

Implementation

6.6.25 Coordination meetings at the beginning of the construction process can bring together contractors, WUAs, and construction supervisors to ensure a common

5 Modernization approaches typically require intensive measurement and management, as seems to be envisioned for the core subprojects intended to stretch limited water supplies over large areas, e.g. through time or volume-based measurement of water deliveries and with delivery controlled through pipes. For information on modernization approaches, see for example Plusquellec, Hervé. 2002. How Design, Management, and Policy Affect the Performance of Irrigation Projects: Emerging Modernization Procedures and Design Standards. Bangkok. FAO and Burt, Charles M., and Stuart W. Styles. 2004. Conceptualizing Irrigation Project Modernization Through Benchmarking and the Rapid Appraisal Process. Irrigation and Drainage

Final Report, Poverty and Social Analysis 6-30 4/24/2008 Guiyang Integrated Water Resources Management Project Black & Veatch (Asia) Ltd understanding of what will be done and how activities will be coordinated. This includes the ways in which WUA may participate in assuring construction quality control, and channels for reporting problems and grievances. In many cases, local farmers are in the best position to manage the construction of smaller canals, since they have detailed local knowledge and incentives to ensure that the work is well done.

O&M

6.6.26 Participation in operation and maintenance includes a range of activities. Annual plans for reservoir operation, including budgets, help to integrate multiple demands for water and operating constraints. Stakeholder panels provide a channel for communication and deliberation in determining priorities, budgets and other issues for reservoir operation and maintenance. Similarly, with WUAF and WUA, preparation of O&M plans, including budgets, identifies what should be done and what resources will be needed and how they are to be provided.

6.6.27 Joint canal inspections before the beginning of the cropping season provide a basis for more specific planning of works, which can be supported by technical advice from irrigation agency staff. This would build on existing arrangements for canal cleaning, which is already a major task that water users are involved each year. WUA will have a central responsibility for ensuring effective and equitable water distribution, as well as collecting fees and arranging for repairs and improvement. Annual reports should document the performance of the water resources system, including water productivity in crop production.

Community-managed Implementation

6.6.28 Community participation in implementing subproject activities can be a very important way of building capacity, providing benefits and improving the quality and appropriateness of Project outputs.6 Community capacity has been shown by past experience in which township governments and water resources stations have contracted with village committees to carry out canal construction and repairs, as well as cleaning of secondary canals and other works. In the Mother Small Tanks Project, community members cooperated in groups to help each other in building tanks, including planning and implementation of cooperative work. These examples illustrate opportunities for involving communities directly in implementation.

6.6.29 Once water user associations are established as legal bodies, they should be able to enter into contracts for receiving funds and implementing activities. This would make it possible for them to implement works, particularly construction of tertiary and quaternary canals supported by the Project. During the initial period of the Project, if WUA do not yet have the necessary legal status, the formal responsibility might be arranged through the relevant Village Committee, while the WUA would handle most operational aspects of carrying out the works. However, as quickly as possible, arrangements should be established for WUA to take responsibility directly.

6.6.30 Village committees and village groups could take responsibility for carrying out planning and construction of small water tanks, building on the experience of the Mother Tanks Project.

6.6.31 During the design phase for each subproject, specific activities suitable for community-managed implementation could be identified and proposals prepared. Relevant training should be provided concerning construction management and financial administration of community-managed works.

6 For ADB guidelines on community procurement, see Project Administration Instructions 5.12 (February 2005) on “Implementing Small Projects with Community Participation.”

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6.7 Social Safeguards Documents

6.7.1. The principal documents related to social assessment and social safeguards prepared for the Project and included in the Final Report and the Draft Report and Recommendation to the President are the following:

• Summary Poverty Reduction and Social Strategy (SPRSS); • Social Assessment as part of Core Subproject preparation, with information about poverty, participation, ethnicity, gender and development, and identifying social safeguard needs in the subproject; • Ethnic Minorities Development Framework and Ethnic Minorities Development Plans for subprojects with significant impacts on ethnic minorities. Four EMDPs have been prepared as part of the PPTA, along with the EMDF; These will need to be reviewed by ADB, endorsed by GMG and then publicized, through dissemination to communities in the subproject areas and through posting on the ADB website; • Resettlement Framework (including procedural guidelines for preparation of subprojects and implementation of resettlement activities) and Resettlement Plans, for each individual subproject with land acquisition or resettlement (see Chapter 7 for further discussion of resettlement); and. • A Gender Action Plan.

6.8 Issues for Resolution during Loan Processing and Project Implementation

6.8.1 GMG endorsement of EMDF and EMDPs. The EMDF and EMDPs will need to be reviewed by ADB and endorsed by GMG. They then must be provided to the affected communities and posted on the ADB website.

6.8.2 Bridging phase participation and social safeguards. Further preparation and implementation in core and non-core subprojects, especially where works might begin during FY 2006 or before loan effectiveness, needs to ensure attention to the participation process and the social safeguards. In particular, the terms of reference for preliminary design and detailed design work should include the relevant tasks, expertise, and budgets for public consultation and for establishment and training of WUA and stakeholder panels.

6.8.3 Scope of non-core subprojects. The results of preparation of the core subprojects indicate that careful attention will be needed to ensure that the scope of the non-core subprojects is defined to be fully comprehensive and integrated, including all water uses and stakeholders. It may be particularly important that preliminary design work for non-core subprojects provides adequate scope of work and resources to ensure that consultation and social safeguards are fully addressed.

6.8.4 Capacity-development for IWRM. Institutional development will need to be a continuing process, adapting to lessons learned during implementation. Improving agency capacity to implement participatory approaches and improving inter-agency coordination are likely to pose key challenges and will be crucial to Project success.

6.9 Conclusions on Participation and Social Safeguards

Summary of Beneficiary Participation in Formulation

6.9.1 A total of 24 public consultation meetings were held during the PPTA, with a total of 873 public participants, including 227 women and 646 men. Two rounds of public

Final Report, Poverty and Social Analysis 6-32 4/24/2008 Guiyang Integrated Water Resources Management Project Black & Veatch (Asia) Ltd consultation were carried out for each core subproject site which provided useful information about local priorities and suggestions. Meetings were also held to discuss gender roles, water user association development, and Project impacts on ethnic minorities, as well as additional consultation and surveys of those affected by land acquisition and resettlement.

Summary of Beneficiary Participation in Implementation

6.9.2 Preference will be given to hiring local labor during construction, including women and men, and equal employment of ethnic minority people in the Project area. For subprojects with irrigation, water users will be involved in planning and implementation of improvement works, including tertiary and quaternary canal development, and water user associations will have primary responsibility, with appropriate government support, for planning and implementing irrigation operation and maintenance. For small storage tanks, households may build tanks themselves, or in cooperation with neighbors, or hire workers to do the construction. For terracing and other soil conservation works, farmers themselves will do most of the work, with support from the Project.

Summary of Social Safeguard Documents

6.9.3 The principal documents related to social assessment and social safeguards prepared for the Project are the following:

• Summary Poverty Reduction and Social Strategy (SPRSS); • Social Assessment in each core subproject report, with information about poverty, participation, ethnicity, gender and development, and identifying social safeguard needs in the subproject; • Ethnic Minorities Development Framework and Ethnic Minorities Development Plans for subprojects with significant impacts on ethnic minorities. Four EMDPs have been prepared as part of the PPTA, along with the EMDF; • Resettlement Framework (including procedural guidelines for preparation of subprojects and implementation of resettlement activities) and Resettlement Plans, for each individual subproject with land acquisition or resettlement (see Chapter 7 for further discussion of resettlement); and. • Gender Action Plan.

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7. Land Acquisition and Resettlement

7.1 General

7.1.1 Guiyang integrated Water Resources Management Project (the Project) is categorized as a sector loan project funded by ADB. The Project consists of 5 components. The details are showed in Table 7-1.

Table 7-1: Components of the Project

No. Components Contents Establishment of one medium-sized reservoir and two small reservoirs Urban Water for urban water supply, including construction of dams, water 1 Supply conveyance tunnels, transmission pipelines, water treatment plants, and extension of the municipal water distribution networks Construction of 43 small reservoirs for county, township and rural water Township and supply and irrigation (3 for county water supply, 20 for township water 2 Rural Water supply and 20 for rural water supply and irrigation), water conveyance Supply systems, small township treatment facilities, and irrigation systems Midsize Irrigation Rehabilitation and upgrading of irrigation schemes in 9 areas including 3 System installation or repair of intake structures, canals and aqueducts Rehabilitation Provision of 127,890 small water storage structures (pond, dike, and Small Scale 4 mini reservoir) in rural areas to catch rainwater for drinking, irrigation, Water Storage and livestock protection from water and soil losses in the upper catchments of the Soil and Water water sources (800 km2) with farm land restructuring, conversion of 5 Conservation sloping farmland to terraces, tree or grass planting areas, and fruit tree planting

7.1.2 Six core subprojects, namely Yudongxia Reservoir Urban Water Supply Subproject (Yudongxia subproject), Jinlong Reservoir County Water Supply Subproject (Jinlong subproject), Liaojiuzhai Reservoir Water Supply and Irrigation Subproject (Liaojiuzhai subproject), Wudang District Mid-size Irrigation System Rehabilitation Subproject (Wudang Subproject), Xifeng County Small-scale Water Storage Subproject, and Huaxi Reservoir Soil and Water Conservation Subproject, have been selected the during the Project Preparatory Technical Assistance (PPTA) initial stage and project preparatory activity has therefore focused on these, although the same safeguard arrangements will need to be applied to all subprojects.

7.1.3 Subprojects which involve land acquisition or resettlement (LAR) activity will require relevant approvals under both the domestic and ADB procedures, with suitable safeguards designed into the subproject to ensure compliance with PRC and ADB policies. Where differences in PRC and ADB policies exist, the more rigorous of the two will need to be applied.

7.1.4 The PRC procedure is for LAR implications and safeguard arrangements to be included within the feasibility study, with approval to these given as part of the process for feasibility study approval. Under ADB policies and procedures for any subproject involving LAR activity then preparation of a separate Resettlement Plan following ADB guidelines is required, and which must be submitted for ADB approval.

7.1.5 The objective of the Resettlement Plan (RP) is to ensure that the land acquisition and resettlement of the Project is fulfilled successfully and that the standards of living of all

Final Report, Resettlement 7-1 4/24/2008 Guiyang Integrated Water Resources Management Project Black & Veatch (Asia) Ltd categories of affected persons (APs) will be improved or at least restored after land acquisition and resettlement. Of the core subprojects, the Yudongxia subproject will involve a relatively large amount of land acquisition and resettlement. A full RP has already been prepared based on ADB requirements. Jinlong subproject, Liaojiuzhai subproject and Wudang Subproject will involve relatively small land acquisition and resettlement; so three short RPs have been prepared. For the other core subprojects, RPs are not required since no involuntary resettlement is involved in. The PPTA Consultant has given the guidance in RPs preparation and prepared a Summary RP for the core subprojects, TOR of Resettlement Monitoring and Evaluation and a Resettlement Framework (RF) for the sector loan project. These documents are either appendices to this report and the draft RRP or provided as free-standing documents for ADB review.

7.1.6 Regarding the non-core subprojects, approximately 40 to 42 short RPs and 6 to 8 full RPs will need to be prepared for the Project for ADB approval, mostly for (but not limited to) the Urban Water Supply and Township and Rural Water Supply Components. If any additional, unavoidable, land acquisition or resettlement impacts are identified, then these will be handled according to the same principles, in line with the RF and other ADB safeguard policies. Guiyang Project Management Office (GPMO) under the leadership of Guiyang Municipal Government, as the Executing Agency (EA) will be responsible for ensuring the preparation and implementation of RPs of the Project.

7.1.7 Since seven (7) non-core reservoir subprojects1 may start construction in early 2007, the RPs (5 short RPs and full RPs for Xiguang and Damaixi Reservoir) should be prepared in line with the ADB requirement and then submitted to ADB for approval prior to the subprojects land acquisition and housing demolition. In fact, it is the pre-condition to the commencement of civil works that the approved RP be implemented with full compensation and sufficient time allowed for APs to adjust loss of assets such that they are not impoverished by the process of resettlement.

7.2 Summary of Resettlement Impacts

7.2.1 In order to avoid or minimize land acquisition and resettlement, close consultations have taken place with the local officials, village committees and APs during the PPTA stages, and the best site is recommended by comparison with alternative sites. It is identified that the major resettlement impacts include: i) Permanent loss of land; ii) Voluntary land donation; iii) Temporary land occupation; iv) Residential housing demolition and auxiliaries; v) Non-residential building demolition and facilities; vi) Infrastructures and special facilities, and vii) Other impacts (e.g. impacts on downstream, drinking water protection restriction.)

7.2.2 On the basis of a socioeconomic and resettlement impacts survey which was conducted from 1st, April to 30th, July by GMDI, GPDI and Guiyang Water Recourses Development Ltd under the guidance of PPTA resettlement consultant, the core subprojects will affect 23 villages of 8 townships/streets in Wudang District, Xiuwen County, Xifeng County of Guiyang Prefecture and of Qiannan Prefecture. A total of 1517 persons will be affected directly by land acquisition and/or house demolition and 1788 persons will be affected temporarily. 11.02 mu of stated-owned land will be permanently occupied; 3543.42 mu of collective land will be acquired, of which 939.18 (26.5%) is classified as cultivated land. In addition, 432.69 mu of land will be occupied temporarily during the construction phase. 8626.56 m2 of residential housing and 4132.4 m2 of non-residential housing will be demolished. 2 enterprises will also be affected. The details are summarized in Table 7-2.

1 Bai'anhe Reservoir, Xiguan Reservoir(Full RP), Maozhuling Reservoir, Shanmuling Reservoir, Yunwan Reservoir, Damaixi Reservoir(Full RP) and Hualang Reservoir.

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Table 7-2: Summary of Land Acquisition and Resettlement Impacts of Core Subproject

Yudongxia Jinlong Liaojiuzhai Wudang Core Subproject Total Subproject Subproject Subproject Subproject Guiyang Affected Prefectures Guiyang Guiyang Guiyang / /Qiannan Number of Affected District/ County 2 1 1 1 5 Number of Affected Townships 5 1 1 1 8 Number of Affected Villages 11 5 1 6 23 State-owned mu 0 11.02 0 0 11.02 Permanent Collective mu 3128.71 373.93 39.58 1.2 3543.42 Land owned Acquisition among which, mu 899.91 0 38.07 1.2 939.18 cultivated land Temporary Total mu 119.1 275.3 16.29 22 432.69 Land among which, mu 29.76 94.6 16.29 1 141.65 Occupation cultivated land Residential m2 8626.56 0 0 0 8626.56 Building Housing Demolition Non-residential m2 4132.4 0 0 0 4132.4 Housing Household H.H 319 0 44 11 374 Directly Person P.P 1285 0 185 47 1517 Affected Nos. 1 1 0 0 2 Household Enterprise P.P 26 0 0 0 26 Temporarily Affected Person P.P 173 61 58 1496 1788

7.2.3 Initial review of non-core subprojects indicates, about 48 non-core subprojects will involve land acquisition and resettlement, a total of 4297 persons with 11628.74 mu land or 5230.94 farmland are potentially affected. According to ADB resettlement policies of ADB Involuntary Resettlement (1995) and Resettlement Operations Manual (OM F2), 6 non-core subprojects2 are categorized as having significant3 impacts.

7.3 Resettlement Policy Framework

7.3.1 For people unavoidably affected, the resettlement objective is to achieve equal, or better, income and living standards in line with not only the Chinese laws and regulations, but also ADB’s Resettlement Policies including Involuntary Resettlement (1995) and Resettlement Operations Manual (OM Section F2), etc.

7.3.2 As the Project is located in China, the laws and regulations of China at present can serve as its legal basis, which are the Land Administrative Law of the P.R.C (effective as of

2 Baizhitian Reservoir, Gejiazai Reservoir, Xiguan Reservoir, Liangchahe Reservoir, Zhongba Reservoir and Damaixi Reservoir. 3 The definition is as follows: Category A (Significant) means 200 or more people will experience major impacts, which are defined as (i) being physically displaced from housing, or (ii) losing 10% or more of their productive assets (income generating) (ADB OM Section F2/OP). Category B projects include involuntary resettlement impacts that are not deemed significant. No involuntary resettlement effects are foreseen in category C projects.

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August 28, 2004). Apart from this, The Decision on Reinforcing Reform in Land Administration by the State Council (State Council [2004] No.28) was issued on October 21, 2004 in which compensation and resettlement measures for land acquisition were further clarified. Following this document, China’s Ministry of Land Resources (MOLR) issued the Guidelines on Improving Land Acquisition and Relocation Regulations (MOLR Document No. 238). In addition, Land Acquisition and Resettlement Regulation for Construction of Large and Medium-sized Water Conservancy Projects issued by the State Council on September 1, 2006 is separately applied to the land acquisition and resettlement of Large and Medium-sized Water Conservancy Projects4. Meanwhile, Guizhou Province and Guiyang Municipality also issued related documents. All these policies have provided essential guidelines for the preparation of the RF and individual subproject RPs. The main regulatory framework is shown in Table 7-3.

Table 7-3: Related Resettlement Policies and Regulations in China

Policies Effective Date Remark National policies Land Administrative Law of PRC August 28, 2004 Decision on reinforcing reform in land administration by the state October 21,

council (issued by State Council [2004] No.28) 2004 Guidelines on improving land acquisition and relocation November 3,

regulations (issued by Ministry of Land Resources [2004] No.238) 2004 Notice on Formulating Uniform Annual Output Value and Comprehensive Land Price for Land Acquisition (issued by July 23, 2005 Ministry of Land Resource [2005] No.144） Notice on Related Issues of Land Use for Water Conservancy November 2,

Projects 2001 Land Acquisition and Resettlement Regulation for Construction of Apply for September 1, Large and Medium-sized Water Conservancy Projects (issued by Large and 2006 the State Council of PRC) Medium -sized Water Advice of State Council on perfecting the resettlement follow-up Conservancy support policy for Large and Medium-sized Water Conservancy May 17, 2006 Projects Projects (Guofa[2006] No.17, issued by the State Council of PRC) Separately Provincial Policies Land Administrative Law of Guizhou Province January 1, 2001 Forestry Land Administrative Law of Guizhou Province January 1, 2004 Notice on Further Strengthening the Land Acquisition Management of Key Construction Projects (Guizhou Government March 1, 2004 [2004] No.5) Notice on Adjusting the Housing Compensation Rate for Large September 9, and Medium-sized Water Conservancy Projects in Guizhou 2005 Province (Guizhou Government [2005] No.77) Municipal Policies Notice on Adjusting the Annual Output Value for Land Acquisition July 1, 2002 in Guiyang City (Guiyang City Government [2002] No.52) Methods on Urban House Demolition and Relocation in Guiyang December 1,

City 2001

7.4 Compensation entitlements

7.4.1 The entitlements of APs are summarized in Table 7-4. Based on consultations with local governments and affected persons, and general practices in the project counties/districts, a set of resettlement principles was adopted by the Project implementing agencies (IAs). These include: (i) Avoid or minimize resettlement, wherever feasible; (ii) The compensation

4 The reservoir scale is beyond 10 million m3 capacity.

Final Report, Resettlement 7-4 4/24/2008 Guiyang Integrated Water Resources Management Project Black & Veatch (Asia) Ltd and titles gained by the APs shall at least enable them to maintain the same living standards as “without project” or even better; (iii) Affected persons should be able to derive some direct benefits from the Project; (iv) All affected people regardless of the legal titles shall be entitled to get compensation and demolition assistance; (v) The resettlement compensation shall ensure all APs at least maintain the living standards as before; (vi) If the remaining land after land acquisition fails to safeguard the livelihood of the APs, compensation in forms of cash or land replacement, plus other necessary profit-earning activities shall be provided for the APs; (vii) The APs shall have good understanding of the qualification, means and standards of compensation, livelihood and restoration plan as well as project construction arrangement etc., and participate in the implementation of the resettlement plan; (viii) No land acquisition shall be proceeded with before the APs are satisfied with schemes for compensation and resettlement; (ix) The compensation and resettlement operations shall be monitored by the EA and an independent third party; (x) Vulnerable groups (incl. women) shall receive special assistance and treatment so that they can live better; (xi) The resettlement budget shall be enough to cover all aspects that are caused by the project construction.

7.4.2 All persons affected by the Project will be eligible for compensation and assistance. In principal, the cut-off date for eligibility for compensation and assistances under the Project is the date of each local government approval, which will be announced to all APs immediately thereafter. When the detailed design of each subproject has been finalized. If there are any significant changes5 in land acquisition, resettlement impacts or entitlement, the RP for that component will accordingly be updated, disclosed of APs and submitted to ADB for approval prior to land acquisition or civil works.

7.4.3 In order to minimize the resettlement impacts on APs and restore their living standards, the detailed programs of restoration and relocation have been arranged in each RP. People can choose the available programs according to their requirements. According to the economic characteristics of affected villages, different schemes for income restoration will be carried out. Since the resettlement impacts of Jinlong ,Liaojiuzhai and Wudang subprojects are very slight the affected villages and APs will directly be compensated in cash, or if the APs needs, 40 mu collective reserve land is available for adjustment in Liaojiuzhai. As to villages seriously affected by Yudongxia subproject, additional strategies and measures including adjustment agriculture crops structure to more cash crops, land consolidation and developing tourism will be taken. Also, the assistance measures such as provision of employment for project construction, provision of skills training and employment information will be provided to all APs. Moreover, the persons who are affected by Yudongxia subproject, the Mid-size Water Conservancy Project, are entitled to follow-up support with CNY 600/ year per capita, the duration is 20 years. Through these kinds of measures, APs will be at least as well off as they would have been in absence of the project.

7.4.4 Regarding residential housing demolition, the affected household will receive compensation at replacement cost for the lost structures and attachments without consideration of depreciation. The affected households can rebuild their houses by themselves with free house plot provided according to their wills. To salvage the structural materials will not be prohibited and moving subsidy will also be provided. For non-residential housing and structures, the affected owners will be compensated with cash at replacement cost for the lost structure.

7.4.5 In addition, special attention will be paid to vulnerable groups for their resettlement and rehabilitation. The vulnerable groups will receive additional assistance from the Project: (i) setting up special supporting funds in each subproject; (ii) providing potential employment opportunities to serious affected vulnerable groups, especially women; and (iii) providing labor

5 Significant changes include (i) change of sites or alignments, (ii) +/- 20% change in impact numbers, or (iii) changes in compensation standards or rates.

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7.4.6 Preference will be given to hiring local labor during the construction, including woman and men, with same pay when they are doing the same work, but no child labor should be employed.

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Table 7-4: Entitlement Matrix of Four Core Reservoir Subproject

Type Of Loss Subproject Degree of Impacts Entitled Persons Entitlements Compensation Policy / Standards Land compensation: CNY 1,0870/mu for paddy land; CNY 13,010 /mu for dry land and over 250 slope land; CNY 9,107/mu for forest land, CNY 3,903 /mu for shrub (1) The land compensation shall be paid to APs or land, construction land and unused land; 1,021 persons Village Committees or Groups Resettlement subsidies: CNY 10,842/mu affected in 14 3,128.71 mu of (2) APs shall get full compensation for resettlement for paddy land; CNY 7,806 /mu for dry groups, 9 villages of 0 Permanent permanent subsidies and crop compensation; land and over 25 slope land; CNY 4 towns in Wudang Collective Yudongxia acquisition of (3) During construction period, APs have the priority in 3,903/mu for forest land, shrub land and District, and 264 Land Subproject collective land, getting non-technical jobs of 210 persons per day construction land persons affected in Acquisition incl. 944.49 mu of (4) The PMO shall provide with CNY 65,000 of special Young crops fee: CNY 1,087/mu for 1 group in 1village of cultivated land funds to offer free technical training to the affected paddy land; CNY 1,301/mu for dry land 1 town in Longli households in the field of agricultural technology and over 2 slope land; CNY 1,260/mu County 5° (5) the persons to be resettled gain the follow up support for forest land, CNY 200/mu for shrub land, Follow up support standard: CNY 600/year/person with duration of 20 years (1) Village collective organization shall utilize the land 373.98 mu of compensation fees in a unified manner for the special permanent purpose of infrastructure construction; Land compensation: CNY 2,142/mu for acquisition of (2) Project construction expects to require 196 shrub land; CNY 2,142 /mu for unused Jinlong collective Xinzhai and non-technical workers, and affected rural households shall land; Subproject non-crop land, Xiaoshan Villages have priority in getting these jobs; and Resettlement subsidies: CNY 2,142 /mu affecting Xinzhai (3) The PMO shall provide with CNY 3,000 of special for shrub land. and Xiaoshan funds to offer free technical training to the affected Villages households in the field of agricultural technology.

Liaojiuzhai 39.58 mu of Totally 44 (1) Village group shall get 20% of land compensation fees Land compensation fees: dry land – CNY subproject permanent households in to be used in infrastructure construction; 5,712/mu; paddy field – 10,670/mu; acquisition of Liaojiuzhai and (2) Affected households shall get 80% of land forest land – CNY 4,319/mu; unused collective land, Huangjiagou compensation fees; land – CNY1,851/mu. incl. 38.07 mu of groups, covering (3) Affected households shall get full compensation for Resettlement subsidies: dry land – cultivated land, 185 persons. resettlement subsidies and crop compensation; CNY 7,140/mu; paddy field – 10,670/mu; affecting (4) The village and village group shall coordinate the land forest land – CNY 1,581/mu. Liaojiuzhai and exchange, if necessary; Crops compensation: dry land – Final Report, Resettlement 7-7 4/24/2008 Huangjiagou (5) During construction period, a total labor-day of 65,000 CNY714/mu; paddy field – groups of Shiqiao shall be required, incl. 15,000 of non-technical jobs of CNY1,067/mu. village. payment rate at CNY 20/d. APs have the priority in getting Guiyang Integrated Water Resources Management Project Black & Veatch (Asia) Ltd

Type Of Loss Subproject Degree of Impacts Entitled Persons Entitlements Compensation Policy / Standards jobs. (6) The PMO shall provide with CNY 5,000 of special funds for free training in the field of agricultural technology; Permanent land Affected households Wudang acquisition of 1.2 of 11with a total of Cash compensation Dry land: CNY 16,913/mu Subproject mu of dry land 47 persons 11.02 mu of state-owned land Permanent permanently Occupation Of Jinlong No.1 Aluminum requisitioned, (1) Cash compensation CNY 9,996 /mu State-Owned Subproject Mine of Guizhou affecting 1 Land enterprise – No.1 Aluminum Mine. Crop compensations: CNY 3,614 /mu for paddy field; CNY 2,602/mu for dry land, (1) Compensation for standing crops; Temporary CNY 1,260/mu for forest land and CNY 173 persons (2) Compensation for subsequent lost crops. occupation of 200/mu for shrub land; Yudongxia affected in 8 groups, (3) Compensation for land restoration; 119.3 mu of land, Restoration cost compensations: CNY subproject 7 villages of 3towns (4) Be informed of land occupation in advance; incl. 35.32mu of 10,005 /mu for paddy field; CNY in Wudang District (5) Priority in getting jobs. cultivated land. 6,670/mu for dry land, CNY 4,002/mu for (6) Free training forest land and CNY 2,001/mu for shrub land Charges for crops and land-curing: CNY (1) Compensation for standing crops and land-curing; 2,134 /mu/year for paddy field; CNY Temporary 5 villages (incl. (2) Compensation for subsequent lost crops. 1,428 /mu/year for dry land and shrub Temporary occupation of Jinlong Xinzhai Village) (3) Compensation for land restoration costs; land; CNY 714 /mu/year for unused land; Land 275.3 mu of land, Subproject affected, covering (4) Be informed of land acquisition in advance; Restoration cost compensations: CNY Occupation incl. 94.6 mu of 61 persons. (5) Priority in getting jobs; and 6,667 /mu for paddy field, CNY 3,333 cultivated land. (6) Free training for agricultural technology. /mu for dry land, CNY 2,000 /mu for shrub land. (1) Compensation for standing crops; Totally 16.29 mu 12 households of (2) Compensation for subsequent lost crops. of temporary land Liaojiuzhai group of Temporary land occupation Liaojiuzhai (3) Compensation for land restoration and land curing; occupation, all Shiqiao village, compensation: paddy field - subproject (4) Be informed of land acquisition in advance; belonging to covering 58 CNY3,201/mu; dry land - CNY2,142/mu. (5) Priority in getting jobs. cultivated. persons. (6) Free training for agricultural technology. 1 mu of dry land Affected households (1) Compensation for standing crops; Wudang Dry land: CNY 3,903/mu and 21 mu of of 321with a total of (2) The temporarily occupied land should be restored to be Subproject Grassland: CNY 2,602/mu grassland 1,496 persons used again. Demolition Of 8,626.56m2 29 households with (1) The housing, whether they are licensed or not, will be brick and concrete structure: CNY Yudongxia Residential housing to be 105 persons in compensated at replacement cost. 388/m2 Subproject Housing And demolished, Mitangjin Group and (2) The affected persons can choose options such as cash brick and timber structure: CNY 304/m2

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Type Of Loss Subproject Degree of Impacts Entitled Persons Entitlements Compensation Policy / Standards Auxiliary including main 24 households with compensation, or rebuilt housings on free house timber structure: CNY 238 /m2 Structures housing 107 persons in foundation. other housing: CNY 74/m2 7,055.26m2 and Xiaoyan Group will (3) Moving subsidies shall be paid to the affected persons Compensation rate for infrastructure of other housing be affected in the period of disruption and re-establishment. relocation site: CNY 3,339/person 1,571.3m2 (4) Compensation for structures and all other lost assets Moving subsidy: CNY 630/person will be paid in full before relocation. Insurance fee: CNY 30/person (5) Insurance fee (1) The buildings will be evaluated at replacement cost brick and concrete structure: CNY and the owner can salvage the materials without any 426/m2 interference. brick and timber structure: CNY 332/m2 4,132.4m2 to be Adequate fee will be compensated for transportation and timber structure: CNY 253 /m2 demolished, Demolition Of re-installation of the facilities. other housing: CNY 74/m2 among which Non-Residentia Yudongxia Owner and 26 (2) All affected employees shall be compensated with CNY 2.0 million will compensated for 3,523.66m2 l Structures Subproject employees cash for their income/wage loss resulting from interruption Yugong and CNY 5 million for Jinlong belongs to And Facilities of work Valley (including CNY 0.2 million for Yudongxia (3) The affected employees shall be informed 1 month in wage loss one year of employees). Company advance. During project implementation, the (4) the affected employees gain the opportunities for free compensation will be paid on the basis of skill training and job searching assistance assets appraisal. (1) The labors in the vulnerable families shall be provided with occupational training, various information and guidance for employment so that they can have more opportunities for employment; Yudongxia 21 households with (2) Capable labors in vulnerable group families have the Subproject 93 persons priority in getting jobs; and (3) Establishment of a CNY 93,000 of special support funds through coordination with the Civil Administration Department (1) The labors in the vulnerable families shall be provided with occupational training, various information and Vulnerable guidance for employment so that they can have more Groups 1 household of 3 opportunities for employment; Jinlong persons in Xinzhai (2) Capable labors in vulnerable group families have the subproject Village priority in getting jobs; and (3) Establishment of a CNY 5,000 of special support funds through coordination with the Civil Administration Department of Xiuwen County. 7 households of (1) The labors in the vulnerable families shall be provided Liaojiuzhai group of with occupational training, various information and Liaojiuzhai Shiqiao village, guidance for employment so that they can have more subproject covering 24 opportunities for employment; persons. (2) Laborers in vulnerable group families have the priority

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Type Of Loss Subproject Degree of Impacts Entitled Persons Entitlements Compensation Policy / Standards in getting jobs; (3) Establishment of a CNY 30,000 of special support funds through coordination with the Civil Administration Department of Xifeng County. (1) Have priority in getting jobs; Project construction expects a need of 210 non-technical workers per day, of which, minimum 30% for women; (2) Get priority in free training for agricultural technology, (1)Woman doing the same work as men Yudongxia 552 affected women of which, totally 2,463 person-time of training shall be shall be pay the same; and Subproject provided, including minimum 50% person-time for women; (2) No child labor is allowed. and (3) Be informed of relevant information of resettlement and participate in the discussion of resettlement issues. (1) Have priority in getting jobs; (1) Project construction expects a need of 196 non-technical workers, of which, Women in affected minimum 30% for women; village by the (2) Get priority in free training for agricultural technology, (1)Woman doing the same work as men Jinlong subproject, incl. 30 Women of which, totally 122 person-time of training shall be shall be pay the same; and subproject women affected by provided, including minimum 61 person-time for women (2) No child labor is allowed. temporary land (approx. 50%); and occupation. (3) Be informed of relevant information of resettlement and participate in the discussion of resettlement issues. (1) Have priority in getting jobs. During construction period, a total labor-day of 65,000 shall be required, incl. 15,000 of non-technical jobs, covering a minimum 85 affected women, percentage of 30% for women; (1)Woman doing the same work as men Liaojiuzhai incl. 65 women (2) Get priority in free training for agricultural technology; shall be pay the same; and subproject labors There are totally 175 person-time of training, including (2) No child labor is allowed. minimum 88 person-time for women (approx. 50%); (3) Be informed of relevant information of resettlement and participate in the discussion of resettlement issues. Infrastructure All will be compensated at replacement cost in cash or Property owner And Facilities rebuilt to recover its original functions

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7.5 Resettlement Cost and Fund Management

7.5.1 The cost estimate for land acquisition and resettlement of the 4 core subprojects is CNY 95.17 million in 2005 prices including contingencies and land taxes; and equivalent to $11.90 million6 (25.5% of the total cost of the 4 core subprojects). The detailed estimated resettlement cost is shown in Table 7-5. The land acquisition and resettlement costs are included as part of total project cost and will be funded by Guiyang Municipal Government (GMG). According to the compensation policies and standards defined in the resettlement plans, the payment and usage of compensation funds will be carried out under the supervision of the internal monitoring agencies; with regular audit review and with regular review by the external monitoring agency. Detailed measurement surveys will be conducted in each village, enterprise, and the compensation contracts will be negotiated and signed with village committees, households and enterprises. On this basis, the final costs will be adjusted.

Table 7-5: Estimated Resettlement Cost (CNY 10,000) Yudongxia Jinlong Liaojiuzhai Wudang No. Item Total Subproject Subproject Subproject Subproject Compensation For I Rural Land Acquisition 4098.66 287.56 78.4 7.88 4472.5 And Resettlement Permanent Collective 1 3662.47 133.61 74.58 2.03 3872.69 Land Acquisition 1.1 Land Compensation 2406.5 80.1 34.73 1.1 2522.43 Resettlement 1.2 1077.5 53.51 36.23 0.9 1168.14 Subsidies Compensating For 1.3 178.47 3.61 0.03 182.11 Young Crops Temporary Land 2 59.99 153.95 3.52 5.85 223.31 Occupation Compensation For 2.1 Temporary Land 14.25 78.94 2.35 0.92 96.46 Occupation 2.2 Land Restoration Fee 45.73 75.01 1.17 4.93 126.84 Compensation For 3 Housing Demolition 280.96 0 0 280.96 And Auxiliaries 3.1 Residential Housing 242.15 242.15 Non-Residential 3.2 25.93 25.93 Housing 3.3 Auxiliaries 12.89 12.89 Compensation For 4 72.79 72.79 Infrastructure 5 Moving Subsides 13.73 13.73 Insurance For 6 0.65 0.65 Resettlement Compensation For 7 8.06 0.3 8.36 Scattered Trees Compensation For II 848.93 11.02 859.95 Enterprises Compensation For III 127.74 71.18 15 213.92 Special Facilities Reservoir Cleaning IV 15.65 4.88 20.53 Fee Total Of I～IV 5090.97 374.64 93.4 7.88 5566.89

6 The exchange rate is based on CNY 8 per US Dollar.

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Yudongxia Jinlong Liaojiuzhai Wudang No. Item Total Subproject Subproject Subproject Subproject V Other Fee 402.32 29.97 6.54 1.51 440.34 Total Of I～V 5493.29 404.61 99.94 9.39 6007.23 VI Basic Contingencies 549.33 56.2 9.34 0.8 615.67 Related Fees And VII 2103.44 64.95 55.83 1.09 2225.31 Taxes Follow-Up Support VIII 656.4 656.4 Funds Support Funds For IX 9.3 0.5 3 0 12.8 Vulnerable Groups Total Resettlement Cost 8811.75 526.25 168.1 11.28 9517.38

7.5.2 Compensation for land acquisition, residential housing and non-residential housing (enterprise demolition) will be paid to all users regardless of whether titled or not. For land acquisition, Compensation fee include land compensation, resettlement subsidy as well as compensation for ground attachment and young crops. The land compensation will be paid to the affected village/APs and the resettlement subsidy will be paid to the APs. The land acquisition compensation is rated at the times of land Average Annual output value. For business shops and housing demolition, compensation will be paid to owners who are responsible to rehabilitate the APs. The compensation payments will be made in cash according to the appraised value of the land and fixed property assets. Compensation for standing crops, trees, other attachments and temporary impacts will be paid directly to affected persons. Income losses resulting from reduced production/sales and wages caused by the Project will be assessed and compensated in cash.

7.6 Resettlement Organizational Arrangement

7.6.1 The Project Management Office of Guiyang Integrated Water Resources Management Project (GPMO) will assume the overall responsibility for implementing resettlement. A social, environment & resettlement office within GPMO will coordinate the planning, implementation, financing and reporting of land acquisition and resettlement. The Implementing Agencies (IAs) are Zhushui Water Resources Company for Yudongxia subproject, Xifeng Water Resources Bureau for Liaojiuzhai subproject Xiuwen Water Resources Bureau for Jinlong subproject and Wudang Water Resources Bureau for Wudang subproject. The subproject resettlement offices, which are set up under each subproject IA, will take the primary responsibility for the resettlement consultation, implementation and delivery of entitlements in time.

7.7 Public Participation and Consultation

7.7.1 The consultation with APs has been carried out in the early process of project planning and PPTA periods. The Design Institutions have carried out the DMS of resettlement impacts excluding Longli County of Qianan Prefecture and socioeconomic survey with the APs. A detailed questionnaire also has been drafted to gather the opinions of the APs. Further, the survey team with the PPTA consultants had informal meetings with the village leaders and APs during the survey. During the survey and consultation process, the opinions from vulnerable groups, women, poor, have also been addressed.

7.7.2 A Resettlement Information Booklet (RIB) of Yudongxia subproject including project background, land acquisition and resettlement impacts, compensation policies, resettlement implementation organization, schedule arrangements and grievance procedures has been prepared by DIs and the PPTA Consultants.

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7.7.3 The people affected will be notified about the key elements of the RPs prior to ADB loan appraisal. The RPs will be disclosed to the affected townships and seriously affected villages, and RIB of Yudongxia subproject and short RPs of Jinlong subproject, Liaojiuzhai subproject and Wudang Subproject have been disseminated to affected households including vulnerable group and women in August and September. In accordance with ADB’s Public Communications Policy, the draft RPs will be posted on ADB’s website prior to loan appraisal and the approved RPs will be posted by the time of board approval. The respective project IAs will establish project resettlement units for supervising implementation, continuing public consultation, monitoring progress and responding to grievances.

7.8 Monitoring and Evaluation

7.8.1 Internal and external monitoring of RP implementation will be conducted. Monitoring methodologies are specified in the RPs. A TOR for monitoring and evaluation has been drafted and are attached to the RPs. Internal supervision and monitoring will be done by each IA to ensure compliance with the provisions of the RP. The GPMO and IAs have agreed to a set of supervision milestones with ADB, to ensure timely and effective implementation of the resettlement activities. GPMO and IAs will engage an independent agency for semi-annual monitoring and annual evaluation of overall project land acquisition and resettlement activity until 2 years after the completion of land acquisition and resettlement. External monitoring reports will be forwarded directly to both the GPMO and ADB.

7.9 Resettlement Safeguards Documents Required and Current Status

7.9.1 According to PPTA TOR and Aide Memoire, the RF for the Project and RPs for selected core subprojects should be prepared by PPTA. Based on the resettlement impacts of core subprojects, four full/ short RPs and RF has been prepared and submitted to ADB for approval.

7.9.2 The current status of required PRC domestic resettlement and land use documents is that the land pre-examination of the four core subprojects have been submitted to Guizhou Provincial Land Administrative Bureau and it is anticipated to be approved by the end of November, and then the land use application will be started and hopefully accepted by Guizhou Provincial Land Resources Bureau (for Jinlong, Liaojiuzhai and Wudang) and Ministry of Land Resources (For Yudongxia) prior to land acquisition and resettlement. At the same time, Jinlong RP, Liaojiuzhai RP and Wudang RP integrated with their respective FSR will be reviewed and approved by Guizhou Provincial Government in November, and Yudongxia RP will be submitted to MWR for approval by the end of November.

7.10 Issues for Resolution during Loan Processing and Project Implementation

7.10.1 The RPs of core subprojects are prepared on the basis of Feasibility Study. When the detailed design of each subproject has been finalized, if necessary, the resettlement plans will be amended on the basis of any design changes. And the updated RPs should be approved by ADB before land acquisition and resettlement implementation.

7.10.2 Although a RF and core subprojects RPs served as models have been provided to guide the preparation for non-core subprojects RPs, it is noticed that great challenges and risks exist for the RP preparation of the Project as the IAs and GMDI and GPDI responsible for the RP preparation have no or little experience with ADB resettlement polices and resettlement plan preparation. Therefore for the non-core subprojects, the engagement of professional organizations is highly recommended in order to prepare the RPs or at least an experienced consultant appointed to guide the RPs preparation.

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7.10.3 For water supply subprojects, the protection areas and restrictive polices will be designed and published during the project implementation or at the commencement of operations stage. Although the potential impacts and mitigation measures are considered in each RP, some impacts cannot yet be estimated. Therefore once the protection areas are defined, the compensation and rehabilitation actions will be consulted with APs and then the updated RP will be submitted to ADB for approval.

7.10.4 Primary and Secondary canals in Midsize Irrigation System Rehabilitation Component may involve very small land acquisition due to the improvement of the current irrigation canals, so short RPs will be prepared to mitigate the impacts. As for the tertiary and quaternary canals may be constructed on land of which farmers have land use rights. If this will be done through community-managed construction, then the voluntary and informal consent of each farmer’s agreement to this will be fully documented and then submitted to ADB by EA and IAs.

7.10.5 Beneficiaries’ selection of Small Scale Water Storage Component should be fully consulted with villagers, and women and vulnerable group should receive the benefit without any social exclusion.

7.10.6 Soil and water conservation activities in watershed areas will provide support for more sustainable and productive land uses, including terracing and fruit tree cultivation. But the soil conservation component may involve the conversion of farmland to forest with subsequent loss of income. The normal provisions for income supplement are minimal and can lead to impoverishment. Therefore, additional measures to be included in the FSRs may be required to ensure the affected people will benefit from this component.

7.11 Conclusions

7.11.1 The prepared RPs are in line with not only the PRC laws and regulations, but also ADB’s Policy on Involuntary Resettlement. All people affected, legal and illegal, are to be taken into consideration and accounted for. On the basis of participation and consultation, reasonable and practicable income rehabilitation plans and house restoration plans, resettlement cost estimates, resettlement implementation arrangements, and APs grievance procedures have been established.

7.11.2 The budget in RPs is an estimate of the resettlement cost. The GPMO will guarantee payment for any increase due to physical changes in project scope, actual impacts based on DMS, revision in compensation and price inflation. The budget already has some provision for physical and price contingencies, which can then be utilized or revised as required.

7.11.3 In order to ensure the resettlement implementation compliance with the provisions of the RPs, close monitoring and timely actions will be carried out to identify and resolve any problems during the implementation of the resettlement plans, and regular internal and external monitoring and evaluation reports will be submitted to ADB.

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8. Economic and Financial Analyses

8.1 Economic Evaluation – Core Subprojects

8.1.1 Introduction

The PPTA deals with a sector loan Project for Guiyang Municipality based on the city’s Integrated Water Resources Management Master Plan (GIWRMP or “the Master Plan”). Subprojects proposed for funding with the sector loan fall into the following categories:

• Medium scale reservoir for urban water supply; • Small scale reservoir for irrigation, county and township, and rural water supply; • Medium-sized irrigation system rehabilitation; • Small water storage tanks for irrigation and rural domestic water supply; and • Soil and water conservation

The economic analysis for the PPTA is consistent with the newly published ADB technical note ERD14, Assessing Aid for a Sector Development Plan: Economic Analysis for a Sector Loan, November 2005. However, the terms of reference (TOR) for the PPTA also require the Consultant to undertake specific Project related economic analysis on selected core subprojects within the Project. This secondary analysis was performed in accordance with the ADB’s Guidelines for the Economic Analysis of Projects, and using economic cost benefit analysis wherever feasible. The sector analysis was presented in Chapter 2 with detailed Appendix B1.

8.1.2 Existing Conditions

Urban Economy

8.1.2.1 Guiyang, the capital of Guizhou Province, consists of 6 districts, 1 city, 3 counties, 1 national hi-technology development zone and 1 national economic development zone.

8.1.2.2 Guiyang Municipality is the political, economic, cultural, technical, and service center of the province and the transportation hub of southwest PRC. The tertiary sector accounts for 40% of GDP, the secondary sector for 53%, and the primary sector (agriculture, etc.) for 7%. Industrial development is focused in hi-tech development zones of the Municipality. Total and per capita GDP and per capita urban and rural disposable incomes in the urban area in Guiyang Municipality are provided in Table 8-1.

Table 8-1: Guiyang GDP and Income

Gross Domestic Product Disposable Income

(CNY million) (CNY per capita per year) Year Total per capita urban rural 1990 6,022 2,155 1,558 680 1995 14,911 4,796 4,550 1,343 2000 26,481 7,921 6,453 2,104 2004 44,363 12,683 8,989 2,809 Growth rate 1990-1995 20% 17% 24% 15% 1995-2000 12% 11% 7% 9% 2000-2004 14% 12% 9% 7% Source: Guiyang Statistical Yearbook 2005, China Statistics Press

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8.1.2.3 Guiyang is one of China's major producers of nonferrous metals and tobacco. Its major industries include machinery, steel making, food processing, and chemicals. The major farm products are rice, wheat, oilseed rape and tea.

8.1.2.4 In 2004, Guiyang Municipality had a reported population of 3.5 million, of whom 1.65 million (47%) were classified as non-agricultural and 1.86 million (53%) as agricultural. The main urban area has a population of 2.21 million, with the remaining 1.29 million in suburban areas. The Municipality has an estimated floating population of about 150,000 to 500,000 (4- 14%), they are largely unregistered migrant workers. The non-agricultural population has been increasing at 3.2% per year, whereas the agricultural population has been decreasing at -1.6%. Recorded employment in 2004 was 2.12 million or 61% of the total population, with 34% employed in the primary sector, 26% in the secondary sector and 40% in the tertiary sector.

8.1.2.5 The Guizhou urban unemployment rate is 4.1% in 2004, but the target rate is below 4% in 11th Five Year Plan. This probably underestimates the impact of underemployment. Recent reports in the People’s Republic of China (PRC) media indicate that data collection and statistical methods are being revised and that the official unemployment rate is likely to rise considerably, including more comprehensive coverage of the unemployment register so that more people will be able to benefit from the social welfare system.

8.1.2.6 Average growth in real terms has been impressive, with rates of 20% per year in the early 1990s, followed by 12% per year in the late 1990s. Recorded growth in 2003 was 16% and 13% in 2004. The main engines of growth have been the secondary sectors (industry and construction) and tertiary sectors (mainly service sectors) which accounted for 53% and 40% respectively of GDP in 2004.

8.1.2.7 Reported investment in fixed assets reached CNY 29.3 billion in 2004. Investment in public utility infrastructure, environmental and water sector management accounted for 14.1%, of which water sector investment accounts for 1.1%, environmental management sector investment 1.4% and public utility investment 11.7%.

Rural Economy

8.1.2.8 The rural economy plays an important role in Guizhou and Guiyang. In 2004, 73.7% of the total population in Guihzou Province was rural. The per capita annual net income of rural residents was CNY 1,722. This is 58.6% of the national level and the Province ranked last of the 31 PRC provinces (cities/regions). Poor economic conditions in rural areas pressure the government to improve the rural economy. The major constraints to rural development are (i) pool natural conditions for agriculture; (ii) the poor condition of rural infrastructure due to a lack of investment and maintenance which in turn is caused by a shortage in fund; (iii) a misallocation of economic resources including inadequate technological and sanitation resources and an over reliance on marginal lands for subsistence agriculture; (iv) low education levels resulting in a high proportion of unskilled labour and high levels of rural unemployment; (v) a government function and management style that is poorly suited to the promotion of local economy development.

8.1.2.9 The reported Guiyang rural population was 1.29 million in 2004, which accounts for 37% of the total population. The rural population density is high and rural communities have poverty indicators below the national average. Water provision for irrigation is a key constraint blocking the achievement of development goals that would ease poverty. Proximity to Guiyang urban areas offers marketing opportunities for vegetables and other high value crops. The predominant rural land use is field crop cultivation. The major agricultural crops in Guiyang are shown in Table 8-2 as below:

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Table 8-2: Guiyang Major Agricultural Production (000 tons)

Products Production in 2004 Increase from 2003 % Food Grain 596.5 5.9 Including: 103.9 -7.5 Summer grain Autumn grain 492.5 9.2 Vegetables 868.8 5.4 Oil-bearing crops 61.7 7.7 Rapeseed Oil 58.9 7.7 Peanut 1.7 3.0 Tobacco 18.3 10.9 Fruits 60.4 11.6 Tea 1.4 0 Source: 2005 Guiyang Statistic Year Book

8.1.2.10 Given the prevailing poverty and household concern with food security, rice as a food crop is given preference over commercial income-generating crops. It is planted in the spring and harvested in autumn due to light and heat requirements. The largest water demands occur in the spring which is the area’s normal dry season.1 It can be seen that usual climatic conditions in the area of Guiyang Municipality; dry during April and May and wet in August and September usually mismatch the optimum rice growing conditions of wet during land preparation and dry during harvest.

8.1.2.11 On the deeper soils of the valley bottoms, irrigated rice is grown in the summer followed by vegetables and rape seed for oil during the winter when soil moisture is sufficient and evapotranspiration is low enough that irrigation is rarely needed. These crops are also grown under rain fed conditions during the summer on steeper terraced and sloping soils of the valley sides. Most farmers prefer to grow irrigated rice, but those lacking access to an irrigation system are forced by the unreliable spring and early summer rainfall to grow rain fed maize or to risk unreliable rain fed rice cultivation.

8.1.2.12 Some of the steeper terraces are also used for fruit trees; peach, cherry, pear, orange and apple, and tree nurseries (laurels and pines) for Guiyang City and catchment conservation projects such as carried out by the Roads Department. An early spring vegetable crop is sometimes grown under the deciduous fruit trees.

8.1.2.13 International and domestic prices for rice have increased since 2001 while maize prices have been relatively constant. While these trends support a switch from rain fed corn to rice, increasing international competition in grains due to WTO ascension argues in favour of cropping patterns that take advantage of local comparative advantages. Generally speaking, land intensive farm products produced in PRC such as maize, corn, rice, beans, oil and cotton are 17.3% to 132.6% more expensive than international market prices. The cheaper international farm products will inevitably impact the local market.

8.1.2.14 Despite the prevailing poverty, some farmers do respond to market opportunities. For example, farmers are starting to switch to vegetables grown in relay to suit market demand and prices. Most farmers achieve 2.5 crops a year and some report 3. On higher

1 Spring water requirements are for land presaturation and preparation before transplanting when some 150-250 mm depth of water is required to saturate and starry the soil. Most of this water requirement has to be provided by irrigation. Initial ploughing 2 to 3 days after presaturation is followed after 7 days by harrowing and a second harrowing in another 7 days. The rice plants are nursery grown and transplanted after 25-30 days. Water requirements are critical just before and during tillering and panicle formation when water levels are drawn down for fertilizer application then raised a week later. For the 2 weeks before harvest rice fields should be drained down to facilitate ripening. A hot dry spell will assist this process as well as open air drying of the grain.

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8.1.2.15 Opportunities for reform in agriculture centre on improved irrigation supply and management and ongoing reform of crop cultivation practices. No official crop statistics are compiled for irrigation areas but local experts agree that the irrigated land, representing 50% of the total cultivated area, supplies 70% of production.

8.1.2.16 Surface irrigation systems account for 99% of the irrigation area. Up to 40% of these structures have been abandoned and 28.8km of canals are damaged. Water conveyance efficiency in larger irrigation schemes is estimated to average 40% and on-farm application efficiency about 90%, implying scheme level efficiencies of no more than 40%. Site investigations and analysis by PPTA consultants indicated an efficiency of no more than 26% in one of the core subproject areas. With rehabilitation, conveyance efficiencies of 74% and on-farm application efficiencies of 95% are expected (scheme level efficiencies of 70%).

Government Economic Development Policies

8.1.2.17 Economic policies related to the sector development plan are embodied in the National and Municipal 11th Five-Year Plans and other planning documents.

8.1.2.18 The State Council’s 11th Five-Year Plan for national economic and social development has been released following the fourth session of the 10th National People's Congress. Relevant economic priorities are as follows (Guidelines of the Eleventh Five-Year Plan for National Economic and Social Development):

• Stable macro-economic performance with GDP increase increasing at 7.5% and per capital GDP doubling by 2010; • The urbanization rate reaches 47%; 45 million rural workers take new urban jobs; and • Urban and rural per capita disposable income increase at an rate of 5% per year.

8.1.2.19 Major tasks for poverty reduction for the next 5 years are summarized as follows (National Poverty Relief Office Director Liu Jian’s speech on National Poverty Relief Office Meeting on March 28, 2006):

• Ensure adequate food and clothing for the poor population and improving infrastructure in the poverty-stricken villages; • Ensure access of radio and television programs, roads, electricity supply, drinking water, medical services and nine-year compulsory education for the needy and poor in rural areas; • Improving the sanitary conditions for livestock and humans, improving medical conditions; • While providing subsidies and aid to poor people, efforts should be made to: (i) help them develop job skills; (ii) improve infrastructure in poverty-stricken areas; (iii) nurture profitable businesses; and (iv) mobilize all of society to contribute to poverty relief efforts; • Promote poverty alleviation measurement and development activities at a whole-village scale that suit local conditions; • Ensure that poverty alleviation measures target the poor. Set up and maintain a

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poor farmer registration system and ensure that benefits are received by the farmers. Ensure those who have been escaped poverty remain their living standard and are not vulnerable to new impoverishment due to health problems or loss of jobs; and • Strengthen the management of poverty reduction funds. Improve the effective and efficient use of these funds. Ensure that funds are properly monitored and audited.

8.1.2.20 Key economic development targets for the Municipality as set out in the Guiyang Municipality 11th Five Year Plan (2006 - 2010) and the Urban Master Plan (1996-2010) include the following:

• The population is projected to reach 3.8 million by 2010. The natural rate of increase is projected to be 0.6%; • Maintain high rates of economic growth. Sustain improvements in living standards and continue the drive to reduce poverty. Per capita urban disposable income and rural net income is projected to increase in real term at 8% per year. The urban unemployment rate is to be controlled within 4.5%; • Targeted average annual GDP growth is above 13% to achieve municipal GDP of CNY 100 billion by 2010. Projected per capita annual GDP reaches CNY 24,000; and • Create new employment opportunities through the continuing diversification and modernization of secondary and tertiary sectors. Strengthen district and county level economic condition to gradually overcome the increasing gap between urban and rural income differences.

8.1.2.21 The proposed subprojects help GMG to develop additional water supply facilities, irrigation systems and water and soil conservation facilities in the urban, suburban and rural areas of Guiyang. As it can be seen from Table 8-3 below, the proposed subprojects address GMG’s economic development goals in terms of economic development, rural poverty alleviation, environmental protection and pollution reduction.

Table 8-3: Role of Sector Projects in Achieving Development Goals

Small Small water scale Medium Medium- storage reservoir scale sized tanks for Water - reservoir irrigation irrigation and Soil irrigation, - urban system and rural Conserva township water rehabilita domestic tion and rural supply tion water water supply supply Maintain high rates of economic growth, sustain 9 9 9 9 9 improvements in living standards. Continue drive to reduce poverty. 9 9 9 9 Strengthen sustainable development through increased investment in environmental 9 9 9 9 protection and pollution reduction, coupled with more effective resource conservation policies. Strengthen the urban hazard protection system and promote infrastructure development; improve the public utility service systems. Major 9 9 9 9 9 development will focus on infrastructure work of transportation and water utilization. Strengthen the district and county level 9 9 9 9

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Table 8-3: Role of Sector Projects in Achieving Development Goals

Small Small water scale Medium Medium- storage reservoir scale sized tanks for Water - reservoir irrigation irrigation and Soil irrigation, - urban system and rural Conserva township water rehabilita domestic tion and rural supply tion water water supply supply economic condition to gradually mitigate the trend of increasing gap between urban and rural income differences.

Agricultural Sector Development

8.1.2.22 Rural farm households are major beneficiaries of most of the proposed subprojects. For this reason it is important to understand the agricultural sector and how agricultural developments will influence subproject sustainability. A brief review of conditions and majors trends in agriculture is presented in Table 8-4.2

8.1.2.23 Major factors influencing agricultural development include ongoing market reforms, trade liberalization, grain security policies, new laws governing rights to land use, and fiscal reforms that have seriously impaired local government services including education and agricultural extension service provision. The poor condition of existing irrigation infrastructure in Guiyang is an outcome of the fiscal constraints facing lower level governments. Fiscal constraints at a local level are also limit the capacity to acquire an education in rural areas of Guiyang and this contributes to the high levels of unskilled labour and unemployed labour in the rural work force.

8.1.2.24 Significant transformations now underway in rural communities include an ongoing large scale rural-urban migration; wide spread reliance on non-agricultural sources of income including off-farm work and, increasingly, rural micro-enterprises; and restructuring of production methods including specialization, increased use of fertilizer and pesticides, and increased use of rental land. Rural poverty remains a serious concern and a constraint to the adoption of improved crop management and land stewardship techniques. These trends are evident in Guiyang: there is an ongoing decline in the rural population; average rural household income is only 31% of urban household income and rural household income earners spend an average of 7 months per year in off-farm work.3 The poor condition of irrigation infrastructure in Guiyang contributes to rural poverty.

2 Based largely on Sonntag et al. Op. Cit. 3 Based on responses to the rural household questionnaire.

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Table 8-4: Key Developments in the Agricultural Sector

Description Implications for GIRWMP Market reform Domestic labour markets and agricultural commodity markets that have developed under market reforms in China are transforming the rural landscape. Off-farm work for rural families is the norm and farms are becoming more specialized. National grain markets are among the world’s most competitive and integrated. These market reforms are helping farmers improve their incomes. Farm product trade Trade liberalisation under China’s WTO accession and the Doha Round (2005–2010) Opportunities under trade liberalisation liberalization are expected to increase rural incomes and positively affect rural resource management. will enhance subproject sustainability Liberalisation will result in higher price for horticultural crops and rice, somewhat lower by increasing farm incomes. Extension prices for wheat and maize, and lower fertilizer and pesticide prices. Areas sown to services to support the subprojects vegetables, fruits and rice will expand. Fertiliser and pesticide use are expected to should reinforce this change and strive increase due to changes in crop patterns and higher application rates. to improve management techniques for pesticide and fertilizer use. Agricultural China has had one of the world’s lowest aggregate levels of subsidy for agricultural subsidies products, amounting to between 0 and 2% of agricultural gross domestic product. Grain security Concern over grain security underlies the long standing use of a National grain reserve that focuses on holding large-scale strategic reserves. The costs of this strategy are high due to the excessive size of the reserves and the inefficient location of stocks. A recent resurgence of concern over grain security motivated the government to promote grain production with a direct subsidy program to distribute cash payments to farmers in major grain production areas. Such policies impede the efficient production and marketing of agricultural products. Rural migration The temporary and permanent migration of rural residents to urban areas is an ongoing As forecast in the GMG Water Setor phenomenon that will fundamentally change rural communities. Over 100 million Manster Plan, rural populations will migrants live and work away from their home. This includes over 75% of 16–20-year- decline over the life of the proposed olds who work in cities away from their homes. subprojects. This may affect subproject sustainability. Rural poverty Tens of millions of rural households live at or below the poverty line. Many of these HHs Increased food security for poor HHs experience significant risk to food security. This risk can impair health and productivity. promisses to be a significant outcome The risk to food security is not caused by wide scale food shortage. Rather it is caused of irrigation subprojects. by the inability of poor households to raise sufficient food or to earn the income required Any subproject that increases the risk to buy food. to food security will likely fail.

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Table 8-4: Key Developments in the Agricultural Sector

Description Implications for GIRWMP Capacity to invest A corollary of rural poverty is the difficulty that most rural households have investing in Subprojects must have a positive net in the future the future. Because the returns to education of children are so high and because senior impact on farm incomes if they are to government support for basic education is so weak, rural households often spend up to be sustainable. half of their income on elementary school fees and even more on middle-school fees. There is little income left for on-farm investments in farm productivity let alone environmental stewardship. Off farm work Off-farm work is the main source of income growth for rural HHs. By 2003, half of the The prevalence of off-farm work may rural labour force earned income from off-farm jobs and more than 85% of households jeopardise subprojects that call for in had at least one person working off the farm. kind contributions from farm HHs if Migration is the most common way to get off the farm income, but rural self-employment those HHs can not contribute due to in micro-enterprises is rising rapidly. These labour intensive household-based the absence of family members. enterprises provide employment for more than 80 million rural residents in more than 50 The growing significance of HH million HHs. enterprises provides another an opportunity within the Project to enhance incomes. Crop land Currently land holdings are so small that opportunities to improve income can not be The Soil and Water Conservation availability based on farming activities alone for most rural households. This constraint will ease to Subproject will reduce the crop land some extent since land available to farmers who stay in rural areas will increase as their available to affected farmers. Without neighbours migrate out. Larger land holdings will improve incomes. careful design of compensating measures, this will cause it to fail. Land rental Rental markets for crop land emerged in the late 1980s, but land rental was initially Efforts to encourage and facilitate off- perceived to be risky for the renter because of weak land-use rights. The 2003 Rural farm migration and land rental in Land Contracting Law now gives farmers more secure land-use rights, so that migrant subproject areas will help improve farm households are more likely to rent-out land, while households that do not work off the productivity, boost farm incomes and farm, rent land. By 2003, more than 10% of rural households used rental lands. Land improve subproject sustainability. rental is reallocating land away from those who are less efficient at farming to those who are more efficient. Land rental markets are still in transition since almost half of local leaders and most farmers do not fully understand the new law. Rural financial Improvements in farm productivity require on-farm investment but rural HHs have little or Government intervention to promote services no surplus cash and financial services to rural residents are weak. More secure land-use rural micro-finance would likely help rights created by the Rural Land Contracting Law may improve matters if farmers can improve the sustainability of Master use land as collateral. Plan subprojects.

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Table 8-4: Key Developments in the Agricultural Sector

Description Implications for GIRWMP Grain for Green Grain for Green is a National program to convert cultivated land to permanent vegetative The Soil and Water Conservation cover to reduce soil erosion and increase forested area. It has successfully converted Subproject, like Grain for Green over seven million hectares of crop land while providing compensating farmers so that activities, should leave affected they end up with higher incomes. Contrary to fears, there is no evidence that Grain for farmers better off financially. Green has had a significant impact on grain prices or national food security. Rural Rural environmental problems linked to agriculture include desertification, soil erosion, Rural subprojects that fail to account environmental grassland degradation, salinity on irrigated land, loss of organic matter and fertility, for significant socioeconomic factors problems emissions from burning of crop residues, aquifer depletion, and the contamination of are more likely to fail. soils and related surface and ground waters (e.g. heavy metals, nitrates and other nutrients, pesticide, and pathogens). Many socioeconomic factors contribute to this environmental degradation, for example: prices for water and other inputs do not reflect environmental costs; land tenure arrangements, while improving, are still not conducive to good stewardship; poor access to credit limits the capacity to invest in land and water management. Pesticide and China is the world’s largest consumer of inorganic fertiliser and pesticides. Average Efforts to improve the management of fertilizer use nitrogen use per hectare is 3 times the world average. Nearly 25%of crop land is now fertiliser and pesticides in subproject contaminated due to the over-use of inorganic fertiliser and pesticides. The ongoing areas would increase net farm trade liberalization will increase pesticide and fertilizer use (see below). incomes, create environmental Management options exist to reverse this trend, for example, nitrogen use on rice could benefits and improve subproject be reduced 20 to 30% without yield loss through better nitrogen management. But sustainability. adoption of better management techniques is hampered by the low education level of most farmers, weak extension services (see below), and weak enforcement of regulations concerning crop inputs. Agricultural The nation’s 1 million extension staff are under paid and often poorly trained. Most A well funded and effective extension extension services extension agents work part-time and must pursue commercial activities, such as selling service is probably critical to the pesticides, in order to supplement their income. These activities can conflict with the success implementation of the rural interests of farmers. There is no ongoing training for extension staff and no linkage with subprojects. the research institutes and agricultural universities.

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8.1.3 Economic Sector Analysis

Economic Rationale for Government Involvement

8.1.3.1 The economic rationale for government involvement in economic development and poverty alleviation activities must rest on evidence of market and non-market failure.4 In the current case, these failures involve natural monopoly, an incomplete assignment of property rights in rural land, externalities, the public-goods nature of information, and a failure of markets to provide financial services when loans involve poor households. These market and non-market failures are described in Table 8-5.

Table 8-5: Market and Non-Market Failures

Type of Project Activity Discussion failure Natural Urban Water Supply There appear to be no economically viable alternative monopoly Project, Township and sources of supply at the envisioned scale for proposed Rural Water Supply reservoirs. These facilities are therefore natural Reservoirs monopolies. Property Irrigation Farmers are allocated farm land by their village for a 10- rights in rural improvements, soil and year period. They can not sell the land and lose it if they land water conservation fail to work it. This restricted property right in land will (SWC) activities cause it to be undervalued. This in turn creates a disincentive to invest adequately in erosion control measures or to maintain irrigation works since full benefits from the investments can not be realized in the form of appreciated land values. Externalities SWC activities The failure to control overland flows and soil erosion has a negative impact on down-slope land owners due to sedimentation and the increased erosive force of flows as they move down slope. In addition, sediment delivered to surface waters degrades the quality of those waters and reduces the ecological values and downstream use values of the resource. Public goods Irrigation Both the irrigation improvements and SWC activities and improvements, SWC include an element of capacity building and training in information activities soil and water management. Information that will be acquired by farmers is not subject to market protection (i.e. copyright) and is non-rivalrous. Peasant farmers do not have the capacity to acquire this information on their own but once it is acquired in an area, the demonstration effect can lead to its rapid dissemination. Financial Township and rural Government officials claim that local bank loans are not market failure water supply reservoirs, available for subprojects involving rural poverty small water storage alleviation. In addition, poor farm households do not have tanks, irrigation access to micro-credit for the proposed subprojects. The improvements, SWC underlying issue appears to be an inability of financial activities markets to manage risk at this level.

Goals of the Investment Plan

8.1.3.2 The goals of a public investment plan should be based on social, economic and environmental objectives of the Government. These in turn should reflect public needs and priorities. A water sector investment plan should embody principles of sustainable development, environmental protection, economic net benefit and fiscal prudence.

4 ADB, 1997, Guidelines for the Economic Analysis of Projects

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Sustainable development in water resources is demonstrated through the application of integrated water resources management, including the balanced use of demand and supply management. Environmental protection is achieved through the appropriate use of environmental impact assessment.

8.1.3.3 The proposed sector loan will contribute to implementation of the investment plan developed in the Guiyang Integrated Water Resources Development Master Plan (April 2006). The main problem identified in the Master Plan is a failure of existing developed water resources to support sustainable development of the Guiyang society and economy. Underlying issues include security of supply in terms of both volume and quality. The goals of the Master Plan are stated in the Preface of the Master Plan: “improve water resources safety, unify water resources, realize orderly exploitation, optimize the allocation, utilize water integrally, economize water effectively, united management of water, …” These goals are consistent with and support achievement of the Governments broader economic development goals as described in Section 8.1.2.3. The main thrust of these broad goals is sustainable economic development and poverty alleviation, both of which are consistent with ADB goals. The specific water management goals are supported by an analysis of existing and future imbalances between water demand and available developed water supply capacity. Problems with developed water supply capacity are elaborated in the Master Plan. They include insufficient quantities of water, uneven geographic and seasonal distribution of water resource yields, impairment of supplies due to poor water quality, and water losses due to poor infrastructure maintenance and mismanagement. Proposed measures in the Master Plan cover both demand and supply management using a mix of structural and non– structural measures.

8.1.3.4 Indicators to measure achievement of the goals are described in the project performance management system (Chapter 10). These indicators are developed at the impact, outcome and output level. The PPTA team has confirmed that all proposed indicators are effective measures of goal achievement, and that they are readily measurable, for the most part, using existing government information resources.

Sector Development Plan

8.1.3.5 A detailed review of the sector development plan is provided in Chapter 2 and Appendix B4.

8.1.3.6 The proposed Project will assist in the implementation of a subset of the water resource management measures indicated in the Master Plan, namely medium and small scale reservoirs, irrigation system rehabilitation, small scale water storage tanks, and soil conservation and related water quality protection measures. These are structural measures focussing on urban and rural water supply capacity (supply management), irrigation water use efficiency (demand management) and protection of source water quality through erosion control. All rural measures have features that specifically target rural poverty through crop income measures that increase income and domestic water supply enhancements. The measures are clearly linked to the identified water management problems and to the overall economic development goals of the Government. In addition, it will help finance institutional activities aimed at reinforcing use of an integrated approach to water resources management.

8.1.3.7 Overall the Master Plan develops an investment strategy that is largely consistent with the principles IWRM and that constitutes a sound basis for future infrastructure development. There are certain shortcomings in the plan from the perspective of IWRM. These do not invalidate the plan but they do present an opportunity for its strengthening. Key shortcomings include:

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• Much of the planning based largely on municipal jurisdictions rather than watersheds. This reflects Institutional constraints related to jurisdictional authority of the GMG; • The analysis of water management options is conceptual in nature. Structural measures are proposed without assessment of alternatives. The assessment of alternatives occurs at the stage of the preliminary engineering design documented in the feasibility study reports (FSRs); and • In certain cases involving activities that lie outside the remit of the Water Resources Bureau, such as urban water use efficiency, time bound goals are established but specific management measures are not identified. In keeping with prevailing institutional practice, details regarding approach are developed in other sector plans (e.g. the wastewater management plan).

8.1.3.8 The least cost analyses completed in the FSRs is evaluated in Section 8.1.4 below. No new least cost analysis was undertaken by the PPTA consultants, but review comments by the consultants led to the identification of improved and more cost effective design options. Overall, the FSR least cost analysis is considered acceptable for the core subprojects.

8.1.3.9 The non-core subprojects must also be subjected to a least cost analysis as well as other analyses similar to those undertaken in the PPTA study for the core subprojects. A simple set of selection criteria has already been used by the GMG to establish the long list of candidate subprojects for ADB funding. The final screening to establish eligibility for ADB funding will be based on selection criteria developed in the PPTA study. These are presented in Appendix C1.

8.1.3.10 Project selection criteria to apply to candidate non-core subprojects are designed to ensure compatibility with economic and social objectives of the Master Plan, the financial and economic viability of the subproject, optimization of project benefits and the minimization or mitigation of adverse social and environmental impacts.

Associated Economic Policies

8.1.3.11 The objective in this part of the analysis is to identify and review policies that can have either positive or adverse impacts on the achievement of sector goals. Economic and other policies related to the GMG sector development plan are embodied PRC laws, declared long term development objectives, in the National and Municipal 11th Five-Year Plans, and other planning documents.

8.1.3.12 Policies which are likely to impact on the success or otherwise of the sector plan include the:

• The adoption of integrated water resources planning and management, and associated participatory institutional structures and approaches: • Cost recovery policies for urban water and wastewater services: • Pricing of water resources for both urban and rural use: • Government reforms to separate regulatory activity from service delivery activity, and for the latter to be corporatised: • Government reforms in the transfer of ownership of government funded assets; • Policies for land use and land rights in rural areas; • Policies to encourage the use of private sector for service provision; and • Policies and related initiatives to make micro credit more accessible to the rural population.

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8.1.3.13 Generally the policies in place (such as full cost recovery for urban water services and the IWRM provisions in the 2002 Water Law) are positive and conducive to the achievement of sector goals. Separation of government regulatory and service provision roles would provide for more balanced independent decisions on water resource allocations and avoidance of water conflict, but this remains work in progress. Current land use/ownership controls in rural areas and the lack of access to micro credit are areas where policy either discourages or is ineffective in promoting the efficient use of water and the maintenance and upkeep of rural water infrastructure, although there are increasing signs these policy gaps are now recognized by government and will be addressed in the next few years as part of the national strategy for rural development.

Government Capacity

8.1.3.14 The GIWRP and related policies and targets in the 11th 5-year Plan fulfill the basic requirement for a sector development plan. While the Plan exhibits a number of deficiencies with respect to IWRM, it nevertheless represents a significant step forward in resources planning. This is evidenced by its use of watershed based planning units, a comprehensive assessment of available water resources and of existing and future water resource uses and proposal of subprojects that involve both supply and demand management and pollution prevention. The ADB loan Project will reinforce the use of IWRM principles in the implementation of the Master Plan.

8.1.3.15 Regarding the lending modality, it is apparent that the Project is most suited to ADB sector lending or processing under the new pilot multi-tranche financing facility (MFF) of ADB. The key criteria for sector or MFF modality are that the borrower has a sector development plan to meet the priority development needs of the sector, and has the policy framework and institutional capacity required to implement the plan. Previous parts of this analysis have already considered the sector plan and the policy framework.

8.1.3.16 Institutional capacity is considered at the level of the effectiveness of inter-agency coordination and secondly by an analysis of capacity needed to effectively design and implement the subprojects that make up the plan.

8.1.3.17 Inter-agency coordination occurs now largely by means of ad hoc interactions occurring in response to arising issues and needs. Extensive agency consultations undertaken during preparation of the Master Plan are an example of this form of coordination. The weakness of this approach is clearly documented in the Master Plan which identifies the following problems with existing water resources management (Section 1.13.2):

• Divided management and control of water resources leading to their inefficient utilization and allocation; • Fragmentation of responsibility leading to a failure to adopt a systematic approach to resource utilization and management; • Lack of an overall unified plan for water resources development, utilization and protection supported by capacity in technical and economic management; and • Responsibilities that are not clearly assigned or aligned with authority.

8.1.3.18 The Government’s efforts to redress the institutional weakness include the establishment of a Project Leading Group (PLG) as a basis for inter-sector coordination. Coordination will be facilitated by a proposal to merge offices of the PLG and the PMO. The structure of a PLG and a PMO has been replicated in the subproject districts and counties. Arrangements are being made to broaden the membership of PLGs and the staffing skills of PMOs in line with recommendations made by the ADB MTR mission. These are all viewed as positive developments.

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8.1.3.19 Discussions regarding capacity to execute the plan have covered engineering aspects, financial management, procurement and institutional capacity. Assessment of government capacity to implement the key safeguards in respect of environmental protection, the interests of ethnic minorities, subproject affected persons and to evaluate broader social impacts has been made through members of the PPTA team working alongside local agencies (the PMO and others).

8.1.3.20 It was evident during the peer review of reservoir designs that adequate capacity exists at a local level to deal with reservoir design issues that might arise. The same is true of the small water tank subproject which replicates projects already implemented in the Municipality. Constraints to the effective design of irrigation works have more to do with institutional issues than technical expertise and are being addressed through the institutional analysis and capacity building proposals.

8.1.3.21 The results of the capacity building analysis, presented in Appendix I1, indicate that despite no real previous involvement with ADB there is adequate capacity to implement a sector loan under partial delegation and subject to well targeted consulting services support during loan implementation.

8.1.3.22 Based on the experience of the PPTA team in evaluation of domestic FSRs, resettlement plans and environmental management plans, Government capacity to apply selection criteria for subproject evaluation will need to be reinforced. Provision for this is made in the institutional analysis and capacity building proposals.

Fiscal Impacts

8.1.3.23 The analysis provided here gives a worst case picture of the potential fiscal impact since only impacts on the Guiyang Municipal Government are considered. The assessment assumes that all costs are borne at the Municipal Government level, while in fact a portion will likely be assumed at lower levels. A complete analysis must account for the allocation of costs and debt across all levels of government. Such an analysis was not feasible when this report was prepared since final institutional and funding arrangements had not been determined. Moreover, local government fiscal data were not available.

8.1.3.24 Project financial data are summarised in Table 8-6. while Guiyang Municipal Government fiscal data are provided in Table 8-7. A comparative analysis based on total revenues and expenditures is provided in Table 8-8. Project recurrent costs (debt service, O&M, subsidies) represent small proportions of annual revenues and expenditures. Even the total investment cost and the GMG equity contribution are not large relative to annual revenues and expenditures.

8.1.3.25 The proposed ADB loan amounts to a 19% increase of total debt held at the end of 2005. The ADB loan debt service costs represent just 3% of debt repayment costs scheduled for 2006.

8.1.3.26 Comparisons based on revenues, expenditures and existing debt suggest that the fiscal impact of the proposed loan will not be significant.

8.1.3.27 A cause for concern does however arise when annual project investment costs are compared to recent annual budgets for all government capital works. The Project investments are 138% of total expenditures on capital works in 2006 and 137% of the average expenditure for the period 2002 to 2005. While there may not be a significant fiscal impact associated with the Project, there may be a problem with administrative capacity to implement the proposed capital works

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Table 8-6: Summary of Subproject Financial Information (CNY million)

Subproject Total ADB debt Annual Annual GMG ADB (core + non- Investment servicing O&M cost Subsidy in Equity loan core) cost* cost / yr in 2016** 2011** Yudongxia Mid- 396.6 153.5 193.1 17.4 24.9 12.3 size reservoir Small scale 1,458.9 640.8 590.6 63.4 17.5 53.3 reservoirs Irrigation system 308.7 145.5 138.6 12.0 2.9 0.0 rehabilitation Small Water 313.8 89.1 156.3 10.9 0.0 0.0 Storage Water and Soil 299.3 120.7 118.9 6.5 0.0 0.0 Conservation Capacity 18.0 9.3 8.7 0.8 0.0 0.0 Building Totals 2,795.3 1,158.9 1,206.1 111.1 45.3 65.6 * Includes base costs, contingencies, and financing charges ** Estimated by factoring up core subproject costs based on the ratio of non-core to core subprojects investment costs. Adjusted to 2006 price levels. Years selected for these two items correspond to years when their values will be at or near a peak level.

Table 8-7: Guiyang Municipal Government Fiscal Data (CNY million)

2002-2005 Average Item 2006 budget Expenditures Total Revenues 5,447.8 7,327.6 Total Expenditures 7,301.5 9,682.9 Total debt (2005 year end) 6,226.2 6,226.2 Debt servicing 176.4 464.0 Expenditure for Capital Construction 291.0 289.9

Table 8-8: Comparison to Government Revenues and Expenditures

Total Annual ADB Annual GMG Annual GMG fiscal data, Investment debt servicing O&M Equity Subsidy cost cost budget 2002-2005 avg % of Revenues 7.3% 3.0% 0.3% 0.1% 0.2% % of Expenditures 5.5% 2.3% 0.2% 0.1% 0.1% 2006 budget % of Revenues 5.4% 2.3% 0.2% 0.1% 0.1% % of Expenditures 4.1% 1.7% 0.2% 0.1% 0.1%

Economic Risks

8.1.3.28 Policy, technical and institutional factors give rise to economic risks. Policy and institutional risks arise from deficiencies in policy or institutional arrangements and from a failure to implement policy. Technical risks arise from errors made during planning.

8.1.3.29 Technical factors that may adversely affect the economic performance of the Project include:

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• Increases in investment or operating costs; • Decreases in the benefits achieved by the plan; • Reduced life time of subproject infrastructure; • Delays in implementation; • Slow than forecast growth affecting water demand; and • Exchange rate or interest rate fluctuations.

8.1.3.30 Technical factors have been evaluated for the core subprojects using sensitivity analysis (Section 8.1.5.3). The economic performance of two of the core subprojects is sensitive to adverse shifts in costs and benefits but this risk is not sufficient to jeopardize subproject sustainability. The institutional analysis and capacity building component of the Project includes measures, such as reinforcement of agricultural extension services and promotion of water user associations in irrigation districts, which serve to will mitigate technical risks.

8.1.3.31 Policy and institutional risks are perhaps more challenging to evaluate and to accommodate in the design. Policy and institutional risks that may be significant for this Project are identified in Table 8-9 along with measures for mitigation. Other risks have been evaluated in whole or in part through policy and capacity analysis.

Table 8-9: Policy and Institutional Factors leading to Economic Risk

Risk Factor Mitigation Discussions concerning the need for wholesale level water Failure to adjust urban water purchase agreements stipulating agreed water purchase prices supply tariffs to their full cost and volumes have been initiated. These in combination with levels. established participatory procedures for water supply tariff adjustments will minimise this risk. GMG has now committed to the use of WUAs and has initiated Failure to establish water user their establishment for the Wudang irrigation core subproject. organisations for maintenance of The WUA will adopt a well proven legal and institutional local irrigation assets. structures used by village committees in China. Discussions to date have considered higher level participatory involvement (e.g. a federation of WUAs) to oversee the maintenance activities of the local WRB water stations that Failure to overcome institutional manage central irrigation works. Key issues to resolve in this factors that contribute to poor context are the funding of the water stations and the willingness maintenance of central irrigation and ability of beneficiaries to contribute towards system works. maintenance. The analysis of full cost irrigation charges suggests that affordable tariffs combined with justifiable subsidies can generate sufficient revenue to fund infrastructure repair and maintenance (Section 8.2.3). Failure to achieve the This issue has been addressed in discussions concerning participation of beneficiaries in methods used to establish WUAs. Moreover, the participatory planning and management of model itself follows existing institutional structures at the village rural water supply subprojects. level closely. This critical factor has been raised with the PMO and Failure to increase rural farm discussions have focused on improvements in crop production incomes to levels that allow that will enhance incomes. The assessment of crop budgets and beneficiaries to pay for the financial sustainability suggests that it is reasonable to expect operation and maintenance of increases in farm incomes. Funding support is provided to irrigation and other rural water reinforce agricultural extension services to help assure this supply assets. outcome. Failure to establish safeguards Proposals to mitigate this source of risk include centralisation of against fraud, misappropriation disbursements within the GMG Finance Bureau, involvement of and waste. government anticorruption offices in bidding procedures and

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Table 8-9: Policy and Institutional Factors leading to Economic Risk

Risk Factor Mitigation inclusion of anticorruption clauses in all procurement contracts.

Government Commitment

8.1.3.32 The commitment of government staff to the proposed sector development plan has been clearly evident throughout project design. Actions taken by GMG that demonstrate its commitment to the development plan include:

• Recognition of the benefits of IWRM and initiation of related institutional reforms (e.g. integrated management of existing reservoirs on Nanming river, strengthening of the GMG PMO, early discussions to involve an urban water supply company in development of water supply assets associated with Yuongxia Reservoir); • Use of a level of integrated planning to development of the Master Plan not commonly found in the PRC. While the Master Plan can be improved it represents a serious attempt to integrate all aspects of water reseource planning into a single document, thus providing a basis for improved planning in the future; • Sanctioning WUAs and local water user groups for the Wudong District irrigation subproject and for other subprojects; • Committment to participatory approaches in the design and implementation of non-core subprojects; and • Movement to implement new national regulations allowing individuals and collectives to take ownership and control of state funded assets constructed for their benefit. This, together with particpatory approaches, will improve Project sustainabilty.

8.1.3.33 Government endorsement of the proposed institutional analysis and capacity building component of the Project provides further evidence of their commitment to the Project. This component includes budget provisions, staffing proposals and financing plans to support reform. Consulting services and the proposed ADTA will be used to identify key policy changes required for the success of the investment plan.

Coordination of Foreign Aid

8.1.3.34 To help the PRC Government develop and implement its strategies in the management of the water sector, external assistance has been provided mainly by ADB, World Bank, and Japan Bank for International Cooperation.

8.1.3.35 As shown in Table 8-10, the following foreign funded projects have been identified in Guiyang involving environmental management.

Table 8-10: External Assistance

Donor Project Title Year Amount World Bank Fourth Rural Water Supply and Sanitation Project C 1999 $4.1 million Anhui , Fujian , Guizhou , and Hainan Provinces1

Changjiang and Pearl River Watershed 2006 $100 million Rehabilitation2

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Japan Bank for Guiyang Water Supply Project3 1998 $42.0 million International Cooperation Environment Model Cities C Guiyang , Dalian , and 2000 $284.9 million Chongqing4

Guiyang Water Environmental Improvement Project5 2005 $110.1 million Sources: Japan Bank for International Cooperation and World Bank.

1This World Bank funded project is to provide access to safe and convenient water to 3.1 million poor rural people in four provinces, including Guizhou rural water supply and sanitation system for nine counties, including Kaiyang, Xifeng, and Xiuwen Counties: 3 a. Nine small water treatment plants with a total capacity of 6,050 m /day for 57 villages domestic water supply, 210 household composting latrines for villagers, and 3 village school composting latrines in Kaiyang county in an amount of USD1.5 million, and b. Rooftop rainwater collectors and hand pumps in rural areas where rainfall is plentiful, but access to surface water is difficult.

2The Project includes segments for soil and water conservation, and livelihood improvement, including the construction of sediment retention structures and the terracing of slope land, with planting of appropriate crops including fruit trees and other perennial crops, as well as construction of small tanks for household water supply. The Project will be implemented in 37 counties of 8 prefectures in four provinces including some of the western counties of Guizhou Province. 3The loan amount is 5,500 million Yen for the Xijiao Water Treatment Plant of Guiyang Municipal Water Supply Company. 4The loan amount is 30.7 billion Yen (14.4 billion Yen for Guiyang), and it covered the energy and air quality sectors. 5The loan amount is 12,140 million Yen, and it is to reduce water pollution by improving sewage treatment facilities and associated wastewater collection systems at seven locations. The Loan is funding wastewater collection and treatment facilities at seven locations within the Guiyang Municipality.

Conditions Attached to the Loan

8.1.3.36 Assurances attached to the loan contract serve to mitigate risk factors and increase the likelihood of successful Project implementation. The following topics are proposed for design of loan assurances:

8.1.3.37 Pre-conditions:

• Submission of a staff training plan to build capacity relating to ADB loan implementation procedures, participatory methods for subproject implementation, soil erosion control planning and design, and agricultural extension for improvement in crop production methods; and • Membership of the Project Leading Group is expanded to include all responsible agencies and offices of the PLG and the PMO are merged.

8.1.3.38 Assurances:

• Principles of IWRM are progressively applied in water resources planning and management; • Subproject selection criteria and evaluation procedures are used in the assessment of all non-core subprojects; • Implementation of agreed participatory methods, such as water user associations, in all cases involving communal Project assets (central irrigation systems, soil erosion control). • User charge revenues for subprojects are used only for subproject operation, maintenance and financing; • Operations and maintenance of all subprojects are fully funded through user charge revenues and agreed subsidies;

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• Timely provision in full of all counterpart funding for the Project including agreed counterpart funding and additional counterpart funding required to cover cost overruns. • Annual reviews of all water fees, charges and tariffs and adjustment as required to achieve agreed cost recovery targets; and • Implementation of institutional arrangements to assure that Project assets for urban water supply are managed in an efficient and sustainable manner.

8.1.3.39 Disbursement conditions:

• Anticorruption office of GMG is involved in the contract bidding process; and • Proposed funds flow mechanisms are strictly adhered to and effectively minimize the need for processing of loan proceeds by lower level government offices.

8.1.4 Least Cost Analysis

8.1.4.1 The least cost analyses completed in the FSRs is evaluated here. No new analysis was undertaken by the PPTA consultants, but review comments by the consultants led to the identification of improved and more cost effective design options.

8.1.4.2 The least cost analysis provided in the FSRs is based largely on technical evaluations and investment cost comparisons. Overall, the analysis is considered acceptable since the alternatives that are considered involve familiar technologies and provide similar levels of benefit. Moreover, the margin of error in the costing analysis, at 10% to 30%, means that a more formal least cost analysis would not likely provide information that would lead to more reliable comparisons.

Yudongxia Reservoir

8.1.4.3 Yudongxia Reservoir will serve primarily as a source of supply for the urban areas of Guiyang City and surrounding districts. Urban water supply is designated an allocation of 82% of available water from the reservoir with the balance allocated to ecological needs, fisheries and irrigation. No alternatives to the supply augmentation were considered in the FSR, but urban water conservation is addressed in the Master Plan where targets are set for control of non-revenue water and for industrial water recycling.

8.1.4.4 The least cost analysis in the FSR is completed in 2 stages. Two alternative dam sites were initially identified. The first cost comparison considered dam heights ranging from 1,070 m above sea level to 1,085 m at the 2 sites. In both cases, a height of 1,075 m was chosen based on minimising the investment cost per unit of water supply.Error! Reference source not found..

Table 8-11: Comparison of Yudongxia Reservoir Dam Heights

Dam Height Water supply Investment Unit cost Dam Site (m asl) (1,000m3/year) (CNY 1,000) (CNY/m3) 1,070 23,200 151,840 6.54 1,075 29,000 165,810 5.72 Upper 1,080 35,900 206,990 5.77 1,085 41,400 245,710 5.94 1,070 26,500 141,880 5.35 ,1,075 32,900 153,830 4.68 Lower 1,080 41,200 193,440 4.70 1,085 46,300 236,300 5.10

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asl denotes at sea level.

8.1.4.5 The second comparison considered the merits of alternative dam sites and dam designs. This comparison was based on both cost and an assessment of geologic conditions. Unfavourable topographic and geologic constraints at the upper dam site impacted negatively on the size and uncertainty of Project costs. Due to topographic conditions, only the concrete arch dam was deemed appropriate at the lower dam site. The concrete arch dam at the lower dam site was selected. This option has the lowest overall cost and the lowest unit cost (Table 8-12).

8.1.4.6 Selection based strictly on investment cost is considered to be a reasonable approach since the benefit streams from the alternative dam options is expected to be similar.

Table 8-12: Comparison of Yudongxia Reservoir Sites and Designs

Water supply Investment Unit cost Dam Site Type of dam 3 3 (1,000m /year) (CNY 1,000) (CNY/m ) Concrete slab rock-fill dam 29,000 206,710 7.13 Upper dam site Roller compacted concrete No. 1 dam line 29,000 204,440 7.05 gravity dam Upper dam site Concrete arch dam 31,100 196,270 6.31 No. 2 dam line Lower dam site Concrete arch dam 32,900 192,490 5.85

Yudongxia Water Plant

8.1.4.7 The proposed water treatment plant (WTP) will receive raw water from Yudongxia reservoir. Four options considered for the Yudongxia WTP all provide an additional 100,000 t/day of capacity. Based on a qualitative assessment, the Toubao WTP was selected. It is expected to have the lowest investment cost, and the lowest operating cost. The Toubao site also minimises local environmental impact from construction and disposal of backwash water.

Table 8-13: Comparison of Yudongxia Reservoir Sites and Designs

Site size Transmission Total lift Option Description 2 (m ) mains (km) (m) Yunjin WTP Plant expansion 46,600 45.9 80 Dongjiao WTP Plant expansion 36,600 61 210 Toubao WTP New plant 36,600 31.4 160 Dongfeng WTP New plant 36,600 31.4 160

8.1.4.8 Two process trains were compared for purposes of raw water treatment. Both are conventional treatment with flocculation, sedimentation, filtration and disinfection. The designs differ in the configuration of the sedimentation tanks. Both systems are considered effective and the least cost option was selected. Alternative disinfection systems were also evaluated. Disinfection using chlorine dioxide is recommended based on efficacy, cost, ease and safety of operation.

8.1.4.9 Recommendations for transmission main pipe materials are based on cost, technical performance, and ease of installation and maintenance.

8.1.4.10 The selections are based largely on engineering judgement with respect to cost and performance. This analysis is considered to be acceptable since conventional technologies are considered.

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Jinlong Reservoir

8.1.4.11 Jinlong reservoir will serve as a source of supply for irrigation and for water supply to the urban area of Xiuwen County and rural households within the irrigation service area. Urban water supply is designated an allocation of 55% of available water from the reservoir; irrigation is allocated 36% and the balance allocated to ecological needs and rural domestic water supply. The rural domestic water supply includes water for livestock. No alternatives to the supply augmentation were considered in the FSR, but urban water conservation is addressed in the Master Plan where targets are set to control urban non-revenue water, improve irrigation efficiency and increase industrial water recycling.

8.1.4.12 A technical assessment of alternative sources of supply was completed. Existing sources, Wanggong reservoir and Gelaozhai reservoir, are too small to satisfy the urban and irrigation water supply requirement. Two alternative reservoir sites on other watersheds were evaluated but were rejected based on water availability and water quality.

8.1.4.13 Two alternative sites on the Xiaoqiao River were considered for the new dam. Both sites present topographic challenges to dam construction but the lower site provides a considerably larger storage capacity than the upper site, thus allowing full utilization of available water resources. The lower site also involves a shorter water transmission route. For these reasons the lower site was recommended.

8.1.4.14 Alternative dam design and heights are compared in Table 8-14. The 1,314 m high slab dam was recommended based on the minimising unit investment cost.

Table 8-14: Comparison of Jinlong Reservoir Dam Designs and Heights

Dam Height Water supply Investment Unit cost Dam Type 3 3 (m asl) (1,000m /year) (CNY 1,000) (CNY/m ) 1312 5,130 60,830 11.86 Slab dam 1314 5,500 62,930 11.44 1316 5,710 65,680 11.50 1312 5,130 63,810 12.44 Roller compacted 1314 5,500 66,760 12.14 concrete arc dam 1316 5,710 69,750 12.22 asl denotes at sea level

8.1.4.15 Two options were considered for water transmission: pipelines and open canals. The open-canal plan has a higher investment cost and requires more water to service the same irrigation area due to a lower rate of water use efficiency. This is evident in the comparison of unit costs in Table 8-15. The canal system provides less water for other uses. A pipeline system was recommended.

Table 8-15: Comparison of Jinlong Reservoir Water Conveyance Systems Conveyance Irrigation water supply (1,000m3/year) Investment Unit cost System Gross Net (CNY 1,000) (CNY/m3) Open-canal 2,580 1,806 9,460 5.24 Pipeline 2,150 1,806 9,050 5.01

8.1.4.16 The selections are based largely on engineering judgement with respect to cost and performance. This analysis is acceptable since subproject benefits are similar for compared options.

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Liaojiuzhai Reservoir

8.1.4.17 Liaojiuzhai reservoir will serve as a source of supply for irrigation and for water supply for rural households within the irrigation service area. Irrigation is designated an allocation of 86% of available water from the reservoir and the balance is allocated to ecological needs and rural domestic water supply. The rural domestic water supply includes water for livestock.

8.1.4.18 No alternatives to the supply augmentation were considered in the FSR, but urban water conservation is addressed in the Master Plan where targets are set to control urban non-revenue water, improve irrigation efficiency and increase industrial water recycling.

8.1.4.19 A technical assessment of three alternative sources of supply was completed:

• Building individual water tanks for users; • A water pumping station to lift water 300 m form existing Wujiang reservoir; and • Using other water available resources.

8.1.4.20 The first 2 options involve capital or operating costs that are much higher than the proposed reservoir. A review of alternative water sources indicates that no alternative water resources are available within a reasonable distance of the subproject site.

8.1.4.21 Two variations on an earth filled dam were considered: a sloping clay core earth dam and a geo-membrane impervious earth dam. The two options have virtually identical costs and the second option was selected on technical grounds.

8.1.4.22 Preliminary economic analysis suggested that the proposed reservoir would have a very low economic internal rate of return. Moreover, it was evident that the FSR assessment was very preliminary with further site investigations being called for. A redesign competed just prior to preparation of this report resulted in a 46% reduction in the dam investment cost. The revised cost is used in the economic analysis reported here.

Wudang Irrigation Reconstruction

8.1.4.23 This subproject entails major repairs and replacements for an existing irrigation system. The existing system uses open concrete canals and is estimated, by the PPTA consultants, to have a water delivery efficiency of 26%. Alignments of existing primary and secondary canals are maintained as a matter of cost effectiveness. Lower level water distribution canals and ditches as well as field access paths will be designed in consultation with beneficiaries in order optimise the configuration. A water user association is being established to facilitate this participatory approach. This approach to achievement of a least cost design is considered acceptable.

Small-Scale Water Storage Subproject, Xifeng County

8.1.4.24 This subproject entails construction of 250 small scale water storage tanks for rural domestic and irrigation water supply. The source of supply will be collected rain water or existing springs. Tanks are constructed from local rock and cement and will occupy approximately 80 m2 of land located up slope from the beneficiaries’ field or home. They will vary in size from 25 m3 to 100 m3. Total investment cost for the subproject is 2.1 million and the unit operating expense to pay for disinfection tablets is about CNY 0.4 per m3.

8.1.4.25 Consideration was given in the FSR to three alternatives to the small tank subproject:

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• Build a pumping station to lift water 350 m from the existing Wujiang Reservoir; transmit the water via a 4000 m pipeline; then distribute it via smaller pipes to 250 locations. Total investment cost is 2.28 million. The unit operating and maintenance cost is 2.47 CNY/m3. • Building a new reservoir or pond for water storage was considered. Based on Shiqiao village’s landform, geography, geology and rainfall only one reservoir could be built in Liaojiuzhai, but this location is too distant from the subproject area to be feasible. • Water diversion from the Yujianhe reservoir was considered but ruled out because of distance from the subproject area.

8.1.4.26 The analysis clearly indicates that the small tank option is the least cost option.

Huaxi Water and Soil Conservation

8.1.4.27 The original FSR did not identify alternative design options for the soil and water conservation works in Huaxi District. Moreover the proposed design was prepared to a conceptual level with little detail. Preliminary economic analysis suggested that the proposed design would have a very low economic internal rate of return. The PPTA provided the services of a soil and water conservation expert to review the FSR and assist in subproject redesign. A redesign competed just prior to preparation of this report resulted in a 44% reduction in the investment cost.

8.1.5 Economic Analysis and Benefit Assessment of Core Subprojects

Review of Economic Analysis in the FSRs

8.1.5.1 Brief discussions have been held with design institutes regarding methods for economic analysis used in feasibility study reports. The method of economic analysis for water sector projects in the FSRs is based on the following guidelines:

• Economic Analysis Method and Parameters for Construction Projects (2nd edition), by the Ministry of Construction (MOC) and National Development and Reform Commission (NDRC), 1993; and • Guideline on Water Construction Project Economic Analysis (SL72-94), by Ministry of Water Resources (MOWR), 1994.

8.1.5.2 Core subproject designs and cost estimates provided in subproject FSRs to the PPTA team were reviewed and discussed with the PMO and DIs. In general FSR costing was based on preliminary engineering designs featuring unit costing of quantity take offs for major subproject components. Costing based on preliminary designs is expected to have an estimation margin of error of about 10%. In some cases costs are based only on conceptual design work and will have a larger margin of error (at least 30%).

8.1.5.3 Costing in the FSRs was based largely on official ’quota prices’ which are adjusted based on regional cost indices to reflect market prices. The quota pricing method is known to produce cost estimates in excess of actual tendered costs.5

8.1.5.4 The design institutes have been provided with technical support in design and costing. In certain cases, namely the Huaxi Soil and Water Conservation subproject and the Liaojiuzhao and Jinlong Reservoir subprojects, project costs were high due to the design approach and recommendations were made to modify the design.

5 SOGREAH, 2004. Chongqing Urban Environment Project New Components, Cost Estimation Review.

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8.1.5.5 Estimated operating costs are provided in the FSRs for each subproject based on labour requirements and compensation levels, plus maintenance costs and overheads both estimated as a percentage of the investment cost.

8.1.5.6 The following economic assumptions are used in the FSRs:

• Social discount rate =12%; • Project implementation period of one to three years depending on the subproject; • Operational period of 30 to 40 years depending on the subproject; • Taxes are excluded from the economic costs; and • Aggregate shadow pricing factor for the investment = 0.9 (based on national evaluation standards). • The analysis is conducted at the subproject level and encompasses direct project benefits (e.g. irrigation, tap water). Estimated economic indicators include the economic internal rate of return, net present value and benefit cost ratio. Sensitivity analysis is based on adjustments in investment costs, operating costs, and benefits of 10% and 20%. • Full cost tariffs are calculated for certain of the subprojects based on prevailing Government guidelines.6 These tariffs are compared to existing tariffs and proposals are made for tariff adjustments. There is no consideration of economic instruments for demand management. Recommendations for subproject operating subsidies from government are based on the gap between tariff revenues and expenditures.

Benefit Identification and Quantification

Domestic Water Supply

8.1.5.7 The following core subprojects will provide water for domestic use:

• Yudongxia Reservoir Urban Water Supply – A water treatment plant (capacity 100,000 tonnes per day) and water delivery pipelines will provide treated water to in Wudang and Yunyan Districts of Guiyang Municipality. Yudongxia Reservoir will serve as the source of supply; • Jinglong Reservoir Township and Rural Water Supply - A raw water pipeline will provide 9,700 m3/d to Xiuwen County and an additional amount for 5,700 rural residents within the irrigation area serviced by this subproject. The water for Xiuwen County will be delivered to an existing treatment plant. Jinlong Reservoir will serve as the source of supply; and • Xifeng Small Water Storage Tanks - 250 storage structures in Shiqiao Village of Xiaozhaiba Town in rural Xifeng County, of which 91 will be used for domestic and livestock water supply.

8.1.5.8 The quantification of urban and rural domestic water supply improvements is based on user willingness-to-pay. In the case of urban water supplies, the estimate of willingness- to-pay is a measure of consumers’ surplus based on an estimated urban demand curve for tap water. This approach measures the total benefit associated with provision of a trap water service as the area under the demand curve and above the price line. Comparing consumers’ surplus with and without the subproject gives a measure of the incremental

6 “Water Conservancy Industry Policies” and “The Water Conservancy Water Supply Price Recheck and Water Tariff Collection Management Regulations in Guizhou Province”

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8.1.5.9 In the case of rural domestic water supplies, the demand for water includes both the demand for water used within the household and the demand for water used by livestock. An opportunity cost method is used to estimate willingness-to-pay for this water. This method values willingness-to-pay at the current cost of domestic water comprising primarily the value of household time currently spent obtaining water. Rural labour is valued at cny 15 per day based on prevailing wage rates in township areas. Time spent getting water for household (HH) and livestock needs was estimated using rural HH survey data. 8 On average more isolated rural HHs spend 2.1 hours a day getting water while HHs in larger villages spend 1.3 hours. Assuming water demand of 60 litres per person a day, the times spent getting water imply a value for water of CNY 11 to CNY 12 per cubic meter.9

Irrigation Water Supply

8.1.5.10 The following core subprojects will provide water for irrigation use:

• Jinglong Reservoir Township and Rural Water Supply - irrigation water supply for 6,468 mu of farmland. Jinlong Reservoir will serve as the source of supply; • Liaojiuzhai Reservoir, Irrigation Water and Rural Human and Livestock Water supply – irrigation water supply for 274,400 m3 per year and 19,800 m3 annually for human and livestock water consumption; • Xifeng Small Water Storage Tanks - 250 storage tanks in Shiqiao Village of Xiaozhaiba Town in rural Xifeng County, of which 159 will be used for irrigation water supply; and • Wudang District Midsize Irrigation System Rehabilitation – 17 km of primary and secondary irrigation canal improvements for 6,980 mu farmland in six villages of Shuitian town. Source of supply is from two existing small reservoirs and an existing river diversion weir.

8.1.5.11 The direct impacts of these subprojects include:

• Improved reliability of supply for existing irrigated lands; • Expansion of the area that can be irrigated through increased supply and improved water use efficiency; and • Adoption of complementary improvements in crop production methods.

8.1.5.12 The potential benefits of these subprojects include:

• Immediate on-farm benefit: - Higher income based on the increase in irrigated land and the impact of complementary measures to cropping productivity; - Reduced economic risk due to increased crop diversity; and - Increased food security. • Longer term on-farm benefits: - Assure the long term sustainability of crop production;

7 The analysis of urban water demand is documented in Appendix H7 and affordability is in Appendix H8. 8 The rural HH survey is documented in Appendix H6.3-H6.4. 9 The underlying calculation assumes a family size of 3.7, and a cost of labour of CNY 15 per day. Labour in the Small tanks subproject area is discounted by a shadow price of 0.67 based on evidence from the crop budgeting analysis.

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- Improved health status due to improved nutrition; and. - Increase the household’s capacity to accumulate capital and make other investments to increase their productivity (including educating their children).

8.1.5.13 The economic analysis of irrigation benefits was based on modelling of crop production with and without the subproject using Farmod. Alternative crop patterns were modelled for both rain fed and irrigated systems based on crop production data obtained from a survey of 300 rural households distributed across the irrigation subproject areas.

8.1.5.14 The information used in the analysis included crop budgets and prices for inputs and production, number of households, cropland area by type with and without the subproject, and both cropping patterns and water requirements with and without the subproject. A conversion of crop systems and patterns was assumed to occur with inauguration of the project. Project investment costs include a budget allocation of 0.5% of the base investment cost to finance extension services to support this conversion.10 A 3 to 5 year period of gradually increasing yields is assumed as farmers learn the new systems.

8.1.5.15 Following Table 8-16 of crop pattern conversions are representative of those assumed for the subprojects:

Table 8-16: Crop Pattern Conversions

Without Subproject With Subproject Small Water Storage tanks, core subproject – Xifeng: 64% of the cropland is irrigated. Irrigated land is used to grow rice, maize, pepper, Rain fed maize and rapeseed. No irrigation. Î vegetable and pears. Rain fed land is used to grow ginger, strawberries and peaches. Irrigation system rehabilitation, core subproject – Wudang: 37% of the cropland is irrigated. Rice, 100% of the cropland is irrigated. Irrigated maize, rapeseed, vegetables and tree land is used to grow rice, maize, rapeseed, nursery crops are grown on irrigated and Î vegetables, tree nursery crops and rain fed land. Peaches are also grown on peaches. rain fed land.

8.1.5.16 Estimates of average net increases in crop income are listed in Table 8-17:

Table 8-17: Average Increase of Crop Income

Subproject Increase in net crop Increase in revenue from crop income production Jinlong reservoir 561 CNY per mu 82% Liaojiuzai reservoir 438 CNY per mu 82% Wudang Irrigation system 258 CNY per mu 19% Xifeng Small Water Storage 488 CNY per mu 86%

8.1.5.17 These values represent average gains following the initial on-farm learning period. They account for the implicit value of additional on-farm labour required to implement new cropping practices, but do not include any user charge imposed to recover irrigation system costs. The irrigation user charge is considered separately below.

Soil and Water Conservation

10 This allocation allows for 1 to 3 extension staff working in the subproject community for a 2 or 3 year period.

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8.1.5.18 Soil and water conservation measures proposed in the Master Plan cover a total area of 800km2. Measures include farm land restructuring, terracing, water control structures and permanent vegetative cover (afforestation, grasses, and fruit trees). The core subproject covers 10 to 15 km2 of land in the Nanming River watershed upstream of the Huaxi and Songbai Reservoirs. These are multipurpose reservoirs uses for urban water supply (Guiyang City and satellite towns), hydropower and irrigation.

8.1.5.19 Soil erosion Guiyang is caused by high rainfall intensities often associated with typhoons, combined with steep slopes in the mountainous terrain. 11 Deforestation and cultivation of steep slopes have turned vulnerable lands into highly erosive prone lands. The thin soils found on steep slopes increase the vulnerability to soil erosion, resulting in virtual loss of the soil base to the underlying rock. This degree of degradation affects about 50,000 km2 of land in Guizhou province and is expanding by 1800 km2 per year. Returns to farmers in Guizhou Province declined 50% from 1983 to 1999 due largely to land degradation. The resulting increase in poverty in turn exacerbates land degradation since poor farmers have a greater incentive to intensify cropping and little capacity to improve cropping practices or invest in erosion control measures. In fact the greatest impact of land degradation occurs in the poorest areas and there is a strong correlation between poverty and ecologically sensitive environments. Farm households in degraded areas experience more malnutrition, and a greater incidence of disease.

8.1.5.20 Soil and water conservation measures are not sustainable if they increase production risks faced by the farmer or fail to increase on-farm income enough to offset the cost of the measures. To be sustainable, a strategic approach is required to simultaneously reduce both poverty and soil degradation. Soil and water conservation measures must be combined with income enhancing measures involving, for instance, more profitable crops, improved management of soil fertility, better access to markets or secondary economic activities.

8.1.5.21 Governmental approaches to soil and water conservation can also result in low sustainability because programs:12

• use a top-down approach without regard to local conditions; • rely on short-term solutions such as terracing while ignoring socioeconomic causes of land degradation; • focus on erosion control, overlooking other factors such as soil texture and fertility, cropping and farming systems; and • Are sector driven and lack coordination between responsible agencies (e.g. water resources and agriculture).

8.1.5.22 Benefits of an effective soil and water conservation program include both immediate on-farm benefits and longer term on-farm and down stream benefits:

• Immediate on-farm benefit: - Higher income based on the impact of complementary measures to improve cropping efficiency and household productivity, - Reduced economic risk when changes to cropping systems increase

11 Based on L. Berry, April 2003. Land Degradation In China: Its Extent And Impact (lada.virtualcentre.org/eims/download.asp?pub_id=92084) 12 L. Berry, J. Olson, and D. Campbell, 2003. Assessing The Extent, Cost And Impact Of Land Degradation At The National Level: Findings And Lessons Learned From Seven Pilot Case Studies. Commissioned by Global Mechanism with support from the World Bank (http://www.gm-unccd.org/English/DOCS/Cost%20of%20Land%20Degradation%20Case%20Studies.pdf)

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crop diversity. • Longer term on-farm benefits resulting from prevention of further soil erosion and gradual improvement in soil structure and fertility: - Assurance of the long term sustainability of crop production, - Decreased crop susceptibility to drought by increasing soil organic matter and water holding capacity, - Improved crop yields, - Improved health status due to improved nutrition, - Increased household capacity to accumulate capital and make other investments to increase their productivity (including educating their children). • Off-site benefits due to reduced pollutant loadings to streams: - Reduced loadings of pathogens to surface waters associated with soil erosion and a resulting reduction in the risk of illness from contact with the water, - Improved trophic status of surface waters due to reductions in nutrient concentrations,13 - Improved aesthetic quality of surface water due to increased clarity and reduced growth of nuisance aquatic plants associated with eutrophication, - Reduced loss of reservoir storage capacity from sedimentation, - Reduced impairment of urban water treatment plant processes due to high sediment loadings to treatment plant filters, - Reduced occurrence of taste and odour problems in tap water associated with eutrophication in surface waters used as a source of supply. • Other off-site benefits are associated with the use of permanent vegetative cover: - Sequestering of carbon, - Increased natural habitat, - Improved aesthetic quality of the landscape.

8.1.5.23 Berry reports that returns to farmers from soil and water conservation in the Yangtze Valley were large enough to create an on-farm incentive to invest in improved soil management.14 Annual benefits from soil and water conservation were estimated in an ADB study to be CNY280 per hectare for the Yangtze River basin. The ADB analysis showed that soil and water conservation measures have an on-farm benefit-cost ratio of 1.0 to 1.5, increasing to 1.8 to 2.7 when off-site benefits are included.15 The ratio of off-site to on-site benefits was 1.8.

8.1.5.24 Off site benefits and indirect on-site benefits are identified but not evaluated. Only changes in farm incomes were estimated. This evaluation was based on modelling of crop production with and without the Project using FARMOD. Crop production data for the analysis were obtained from a survey of 60 rural households in the Huaxi subproject area. After accounting for lands treated with permanent vegetative cover, 10,400 mu of land are available for sustainable crop production with the core subproject. Without the Project, a relatively small portion of these lands are cropped on a subsistence basis with cropping on a plot lasting only until the top soil is lost to erosion. The average net crop income on these

13 Trophic status refers to a set of conditions associated with concentrations of plant nutrients in surface waters. A body of water is said to be ‘eutrophic’ if it has high nutrient concentrations leading to excessive growth of aquatic plants and algal ‘blooms’. Eutrophication caused by human activity represents an impairment of water quality. 14 Berry et al, op. cit. 15 ADB TA 3548, Preparing National Strategies for Soil and Water Conservation, 2002

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8.1.5.25 The information used in the analysis included crop budgets and prices for inputs and production, number of households, cropland area by type with and without the Project, and both cropping patterns and water requirements with and without the Project. Subproject lands, located in Huaxi Township, are currently used on an occasional basis by a small number of farmers for subsistence rain fed crops. Plots are cleared and cropped for one or two seasons then abandoned when too much top soil has been lost. Given the low intensity of use, the without Project scenario assumes rain fed crop production on 5% of the total subproject area (22,600 mu). With the Project, moderate slopes are terraced and 70% of the resulting cropland is irrigated and sown to maize, wheat, vegetables, peppers and fruit trees. Steeper lands are planted to permanent vegetative cover including commercial tree crops. After accounting for lands permanently removed from agricultural production, 10,400 mu of land are available for crop production with the subproject. The average net crop income on these lands with the Project is CNY 281 per mu. This value represents the average gain following the initial on-farm learning period and the period during which tree crops mature. It accounts for the value of additional on-farm labour required to implement cropping practices.

Assessment of Economic Soundness of Subprojects

8.1.5.26 An economic analysis was undertaken to determine the subproject EIRR values. The analysis is consistent with ADB’s Guidelines for the Economic Analysis of Projects (February 1997) and Handbook for the Economic Analysis of Water Supply Projects (March 1999). Key features and assumptions of the economic evaluation are:

• Economic costs estimated from financial costs prepared using a pro forma financial model; • Shadow pricing based on domestic market price conversion factors and a shadow exchange rate factor for tradable items; • Economic costs exclude price contingencies and all duties and taxes but include physical contingencies; • Shadow pricing was completed for all costs using a domestic market price conversion factor of 0.9 for the cost of unskilled labour, and a shadow exchange rate factor of 1.013. • Forecast of water demands based on population growth and increases in the tariffs; • Identification and valuation of major economic benefits using willingness-to-pay and net farm income approaches; • Estimation of costs and benefits on a with- and without-Project basis; • Evaluation in real terms using 2006 prices and a domestic price numeraire; • Project cost estimates and financial projections converted from nominal to real values by removing the effects of foreign and domestic inflation and currency fluctuations; • EIRR estimated using incremental annual cash flows over a 30 year period following commissioning of works; • The residual value of physical assets is assumed to equal its remaining book or depreciated value at the end of the evaluation period;

8.1.5.27 A further adjustment of the cost of rural labour was made for the Small Water Storage – Xifeng Subproject and the Small Scale Reservoir – Liaojiuzhai Subproject based on evidence from the crop budgeting analysis. For both these subprojects, the analysis of crop budgets under existing rain fed crop production conditions indicated a negative return to cropping amounting to CNY 101 per mu for the Liaojiuzhai area and CNY 35 per mu for the Xifeng area. The fact that farmers are engaged in crop production suggests that they place a

Final Report, Economic & Financial 8-29 4/24/2008 Guiyang Integrated Water Resources Management Project Black & Veatch (Asia) Ltd lower value on their time than the assumed value of CNY 15 per day, otherwise they would not be farming. Shadow price factors of 0.67 and 0.52 applied to the cost of on-farm labour yielded a zero return to rain fed crop production in the Xifeng and Liaojuizhai areas respectively. These factors were used to shadow price on-farm labour contributions to subproject construction and, in the case of Xifeng, the value of time spent getting water for these subprojects.

8.1.5.28 Sensitivity analysis was completed based on the following scenarios:

• Eliminate purchasing power parity adjustment of the exchange rate; • Delay urban water sales growth 1 year; • Delay urban water tariff increase 1 year; • Switching point analysis based on project investment costs; • Switching point analysis on project operating and maintenance (O&M) costs; • Switching point analysis of willingness-to-pay for urban and rural water; and • Switching point analysis for net crop income.

8.1.5.29 Economic benefits that are assigned a value include urban and rural water supply and increases in on-farm incomes. Given the limited resources available for the analysis, no attempt was made to measure indirect benefits even though these may be substantial.

8.1.5.30 The base case economic internal rate of return (EIRR) was determined for each subproject but an overall Project EIRR was not calculated since this is a sector loan having at this point an indeterminate mix of subprojects. Non-core subprojects will be evaluated prior to funding approval.

8.1.5.31 Results of the economic analysis are reported in Table 8-18. All of the core subprojects except the Liaojiuzhai Reservoir have EIRR values at or in excess of 12%. Liaojiuzhai Reservoir has an EIRR value at the lower threshold for ADB evaluation of 10%. Acceptance of this subprojects at a lower EIRR threshold can be justified on the basis of their beneficial impact on poor rural households who are the principle beneficiaries of all of the rural subprojects.

Table 8-18: Estimated after tax EIRR values and Switching Point Values

Small Irrigation Small Mid-size Small scale Water and scale system Water reservoir reservoir, Soil Con’n reservoir, rehab., Storage, Yudongxia Liaojiuzhai Huaxi Jinglong Wudang Xifeng Base case EIRR 23.2% 12.0% 10.0% 22.7% 12.1% 18.9% Eliminate PPP 1 23.3% 12.0% 10.0% 22.8% 12.1% 18.9% adjustment Delay water sales 2 19.8% 11.0% na na na na growth 1 year (i) Delay water tariff 23.2% 12.3% na na na na increase 1 year Switching value tests* (ii) Investment cost, % 242% na na 197% 101% 178% change (iii) O&M costs, % 900% na na 1357% 121% 2008% change (iv) willingness-to-pay 18% na na na 99% na for water, % change** (v) Net crop income, % na na na 33% 97% 56% change

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Table 8-18: Estimated after tax EIRR values and Switching Point Values

Small Irrigation Small Mid-size Small scale Water and scale system Water reservoir reservoir, Soil Con’n reservoir, rehab., Storage, Yudongxia Liaojiuzhai Huaxi Jinglong Wudang Xifeng * Indicate the percent change required to yield in EIRR value of 12% (10% in the case of Jinlong and Liajiuzhai Reservoirs). ** Applies to urban and rural domestic water supplies.

8.1.5.32 The sensitivity analysis considered how adverse risks would affect the soundness of the subprojects. Three of the projects appear to be very robust, these are the Yudongxia Reservoir, Wudang Irrigation system rehabilitation and the Huaxi Water and Soil Conservation subproject.

8.1.5.33 Relatively small changes in investment costs cause the EIRR to fall below 12% for the Xifeng Small Water Storage and the Jinlong Small Scale Reservoir subprojects. A supplementary test on the Xifeng Small Water Storage subproject considered the impact of irrigation tank size on EIRR. This test is interesting because farmers have asked for larger tanks and the economies of scale in storage tank construction mean that larger tanks are relatively more beneficial. Doubling the size of the irrigation tanks increased EIRR for this subproject to 15.3%.

8.1.5.34 The timing of sales growth has significant impact on EIRR for the Jinlong subproject. A delay in tariff adjustments cause EIRR values to increase in certain cases because of the feedback effect on water consumption through the demand curve for water. Eliminating the purchasing power parity adjustment of the exchange rate has a negligible impact.

8.1.5.35 Overall, the core subprojects are shown to be beneficial. These results provide strong support to the sector loan. The weaker performance of the Liaojiuzhai and Jinlong Reservoirs suggests that individual subprojects must be carefully scrutinised to assure that they are sufficiently beneficial.

Sustainability

8.1.5.36 The assessment of sustainability is based on findings of the economic and financial analysis. These findings are summarised in Table 8-19. The economic and financial performance of four of the subprojects—Yudongxia Mid-size reservoir, Wudang Irrigation system rehabilitation, Huaxi Water and Soil Conservation, Xifeng Small Water Storage subproject and the Jinglong Small scale reservoir—is reasonable and these subprojects are sustainable. The performance of the Liaojiuzhai Small scale reservoir is weak.

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Table 8-19: Summary of the Economic and Financial Evaluations

Core Economic On-Farm Labour Financial Performance Tariffs and Subsidies Subproject Performance Contribution FIRR>WACC, acceptable financial performance Retail tariff increases 98% in Wudang District; 10% ratios, debt service increase in Guiyang City. All tariffs cover O&M costs No on farm Yudongxia Mid- EIRR>12%, coverage ratio (DSCR) is and debt service costs. contribution Size Reservoir robust result below 1.4 but >1.1 for a 9 No subsidies are required. required. year period following

commissioning

FIRR>WACC, DSCR below Retail tariff increases 150% in Xiuwen County. 1.0 for most of the period of Relatively high Jinglong Small EIRR=10%, Irrigation tariff is set at CNY 0.60 per cubic meter. ADB debt servicing but labour Scale Reservoir robust result A subsidy of about CNY 2 m/yr is needed for 6 years other performance requirement. following commissioning to provide adequate DSCR. measures are acceptable Irrigation tariff is set at CNY 0.70 per cubic meter. It Liaojiuzhai FIRR12%, FIRR>WACC, acceptable Irrigation tariff is set at CNY 0.45 per cubic meter. No Low labour System robust result financial performance ratios subsidy required. requirement. Rehabilitation Xifeng Small EIRR=>12%, Very high labour Not applicable Not applicable Water Storage robust result requirement. Huaxi Water EIRR>12%, Moderate labour and Soil Not applicable Not applicable robust result requirement. Conservation

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Economic Design of Subsidies

8.1.5.37 Where economic benefits are significant and financial returns inadequate to support or maintain a subproject investment, a subsidy arrangement was discussed with GMG. Proposed arrangements reflect ADB good practice guidelines.16

8.1.5.38 Capital subsidies take the form of government equity contributions which are made without expectation of a return on investment. The lowest equity contribution is provided for the water supply works associated with Yudongxia Mid-size reservoir and operated by Zhushui Co. (23%). Capital subsidies for other core subprojects vary from 29% to 50%. The returns to net assets for the Yudongxia reservoir and Jinlong Reservoir are 5% or more, an acceptable result for government water supply (WS) investments. These equity contributions are not therefore considered to be subsidies., the return to net assets for Wudang Irrigation rehabilitation scheme is 2% and for liaojuizhai, 0.0%. These returns are sufficiently low that the equity contributions can be viewed as capital subsidies. Equity contributions for the Xifeng Small Water Storage subproject and the Huaxi Water and Soil Conservation subproject are 29% and 38% respectively and earn no financial return at all so that they are strictly subsidies. In all cases of equity contributions that are subsidies, the subprojects provide positive environmental externalities in the form of water allocated to ecological needs or they help alleviate poverty by improving the supply of irrigation or domestic water to poor rural households. These benefits justify the capital subsidies.

8.1.5.39 Specific requirements for operating subsidies are evaluated for each core subproject in Section 8.2.3 below. Subsidies are described and their rationale is provided in Table 8-20. In all cases the operating subsidies are assumed to be in the form of program budget allocations from general government revenues. These subsidies serve to reduce user charges for urban and rural domestic water supply or irrigation.

Table 8-20: Core Subproject Operating Subsidies

Core Subproject Operating Subsidy* Rationale Yudongxia Mid- No operating subsidy. User Not applicable size reservoir charges cover total annual costs. Jinglong Small An operating subsidy of This subsidy offsets initial losses while scale reservoir about CNY 2 million per year demand from the Xiuwen WSC is still low. It is required from 2012 to permits a more gradual adjustment of urban 2017. A subsidy of this tariffs and increases the likelihood that magnitude represents 14% of required tariff adjustments will be accepted by total annual costs over the the public and approved by Government. 7% forecast period. of the reservoir water supply is allocated to ecological uses. Liaojiuzhai Small Operating subsidies of about 8% of the reservoir water supply is allocated to scale reservoir CNY 50,000 per year ecological uses. The high subsidy is justified continue from 2012 to 2028 on the basis of rural poverty alleviation. and cover 21% of total annual costs. Wudang Irrigation No operating subsidy. User Not applicable system charges cover total annual rehabilitation costs.

16 ADB, February 2003, Good Practice Guideline (GPG):Financial Analysis of Revenue-Generating Entities: Sector Analysis, and Financial Ratios and Covenants. MDB Harmonization Technical Working Group as cited in ADB, 2005. Financial Management and Analysis of Projects (Section 4.3.3.5)

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Table 8-20: Core Subproject Operating Subsidies

Core Subproject Operating Subsidy* Rationale Xifeng Small Water No operating subsidy. Assets Not applicable Storage are maintained by beneficiaries Huaxi Water and No operating subsidy. Assets Not applicable Soil Conservation are maintained by beneficiaries * Subsidy amounts at 2006 price levels. Total annual costs include costs of operations, maintenance and debt servicing. ** In the absence of the subsidy, a take-or-pay water purchase contract between Jushui WSC and the the urban WSCs would force reliance on reservoir water instead of lower cost sources.

Distribution of Costs and Benefits

8.1.5.40 Poor rural households will be the primary recipients of project benefits from irrigation and rural domestic water supply. Poverty is comparatively widespread across the rural population.17 Moreover, the subprojects target areas where water supplies are inadequate or unreliable so that benefiting populations are more likely be impoverished due to a lack of water. Under existing conditions there is too much uncertainty about the availability of water for cash crop production. This means that farmers prefer to plant subsistence crops since this lowers the risk of food shortage when drought occurs. With the irrigation subprojects in place, the risk of drought is greatly diminished and cash crop production will be more viable.

8.1.5.41 From 50% to 70% of the investment cost of the rural subprojects is borne by beneficiaries either through their contributed labour or through payment of user charges that cover the cost of debt servicing. The balance of the investment cost is covered by government equity. Despite the high cost burden borne directly by rural beneficiaries, the benefits they receive outweigh the costs as indicated by subproject EIRR values. PPTA estimates indicate that the proportion of the rural population experiencing absolute poverty in the core subproject service areas will drop from 35% to 21% with the subprojects, and the proportion experiencing relative poverty will fall from 59% to 45%.18

8.1.5.42 Project benefits from water supply in urban areas are expected to be uniformly distributed across the affected urban population including poor households. The urban poor are expected however to derive proportionately greater benefit since they have fewer resources with which to cope with existing or potential future water supply service deficiencies that are being redressed by the Project.19

8.1.5.43 The distribution of Project costs falls relatively more heavily on enterprises and relatively well off households. Government equity is the funding source for 42% of total investment costs with the balance funded from the ADB loan (50%), local bank loans (2%) and in-kind labour (6%). Loans for the Juishui WSC water supply assets, amounting to 4% of total Project financing costs, are serviced primarily out of user charges. Other loans are financed out of general government funds and user charges.

8.1.5.44 The urban water supply costs are recovered from water supply customers through the water tariff. Since tariffs are differentiated by customer class water supply cost recovery

17 See Section 6.2 18 Annual per capita income thresholds for absolute and relative poverty are assumed to be CNY 720 and 1200 respectively. 19 Service interruptions occur in the service area of the Guiyang WSC and will get worse without provision of new capacity. The service area of the Wudang District WSC is adequately serviced now but will experience deterioration in service standards without new capacity.

Final Report, Economic & Financial 8-34 4/24/2008 Guiyang Integrated Water Resources Management Project Black & Veatch (Asia) Ltd from users is not necessarily proportional to water use. Overall, domestic customers receive a modest cross-subsidy from non-domestic customers due to the tariff structure (Table 8-21:). This suggests that there will be a reallocation of Project investment costs from the domestic water supply customer to other customers. Poor domestic customers of the Wudang and Xiuwen WSCs receive an additional subsidy since these WSCs sponsor an informal program which waives the water bill for any registered poverty HH. The cost of this policy is borne by the WSCs and therefore by other customers.

Table 8-21:: Urban Water Tariff Cross Subsidies

Domestic Water Use Domestic Tariff Revenue Guiyang WSC 69% 66% Wudang WSC 35% 33% Xiuwen WSC 71% 66%

8.1.5.45 Funding sources for equity contributions and operating subsidies have not been determined. An analysis of general government revenues suggests that if these are the source, then poor households will pay proportionately less than others (Table 8-22:). This is the case because principle revenue sources are either based on business income and sales (i.e. business tax, enterprise income tax), are proportional to consumption (VAT, urban maintenance and construction tax) or are progressive (personal income tax). All of these taxes favour low income households. Urban maintenance and construction tax funds are often used to finance infrastructure investments. If this is the case for Project investments, then poor households are also at an advantage since this tax is based on consumption.

Table 8-22: Analysis of Guiyang municipal Government 2005 Revenues

Amount Percent Revenue Source CNY of Total Comment million Business Tax 1,525.09 31% Tax on gross sales (turnover) Value Added Tax (VAT) 630.40 13% 17% tax on net sales revenue Urban Maintenance 506.38 10% Tax on net sales revenue of 3% applied to VAT and Construction Tax Company Income Tax 490.77 10% 33% flat rate tax on profits Progressive tax (5% for income < CNY 5,000 Personal Income Tax 354.24 7% to 45% for income > CNY 100,000) Other taxes 654.05 13% Primarily property tax and a tax on contracts Miscellaneous From various sources including fees, charges 819.22 16% Revenues and government enterprise profits Total Revenue 4,980.15 100% Source: based on an analysis of revenue data provided by the Guiyang Finance Bureau.

8.1.6 Water Resource Pricing and Finance

8.1.6.1 This section focuses on the level and structure of charges, and whether they reflect ADB’s position on tariffs stated in the ADB Technical Note Series No.9, Setting User Charges for Public Services: Policies and Practice (December 2003) and ERD Technical Note Series No. 10, Beyond Cost Recovery: Setting User Charges for Financial, Economic, and Social Goals (January 2004). Technical Note No.9 sets out five guiding principles for tariff setting, namely good governance, financial sustainability, distributive justice, economic efficiency, and fairness. The Note further states that tariffs should be simple, transparent and predictable; ensure financial sustainability without subsidies; assist the poor to satisfy their basic needs; promote efficient use of resources; and avoid cross-subsidies.

8.1.6.2 In general, user tariffs, fees and charges are levied to satisfy guidelines and

Final Report, Economic & Financial 8-35 4/24/2008 Guiyang Integrated Water Resources Management Project Black & Veatch (Asia) Ltd regulations issued by the central government, and to generate revenue for the water supply companies or to general GMG funds. The overall policy framework is established by the 2002 Water Law of the PRC.20 This law requires that water resource fees be implemented, identifies who should pay (small user exemption), endorses volumetric charges and escalating step tariffs to promote water conservation, and calls for water-supply subproject user charges based on principles of full cost recovery and the equitable allocation of costs to users. This law therefore reflects State government awareness of the potential of user charges for demand management. Other relevant regulations and circulars pertaining to user tariffs, fees and charges are:

• 1810th SDPC notice – National Guidelines on Water Tariffs (1998); • Circular No. 1192 – Enhancing the Collection of Wastewater Treatment Charges and Establishing the Municipal Drainage Discharge and Common Treatment System (Pricing Policy Paper by NDRC, MOC and SEPA, 1999); • Circular No. 36 – Enhancing Water Conservation in Urban Water Supply and Prevention of Water Pollution (Policy Paper by State Council, 2000); • Circular No. 515 – Accelerating the Reform of Urban Water Supply Price (Pricing Policy Paper by NDRC, MOF, MOWR and SEPA, 2002); • Circular No. 1591 – Advancing the Industrialization of Urban Wastewater Treatment and Municipal Solid Waste Disposal Sectors (Policy Paper by NDRC, MOC and SEPA, 2002); • Circular No. 45 – Rural Water Works Reform (State Council, 2002); • Circular No. 36 – Accelerating the Reform of Water Price, Promoting Water Conservation and Protecting Water Resources (Policy Paper by State Council, 2004); • Circular No. 153 – Opinions on Strengthening the Regulation of Urban Wastewater Treatment Plants (Policy Paper by MOC, 2004); • Regulation on Water Price Management in Water Schemes NDRC , MOWR, 2003; • Circular No. 55 – Regulation on Water Resource Fee Collection in Guizhou Province (Policy Paper by Guizhou Provincial Government, 1992); • Regulation on Water and Soil Conservation Fee Collection in Guizhou Province (Trial Policy Paper by Guizhou Provincial WRB, FB and PB, 1994); • Circular No. 330 – Approval of Guiyang Municipality Water Tariff (Policy Paper by Guizhou Provincial PB, 1998); • Circular No. 45 – Implementation Suggestion on Water Charge on Water Use over Quota (by GMG, 1999); • Circular No. 48 – Notice on Guiyang Wastewater Tariff Increase (by Guiyang Municipal PB, 2004); and • Circular No. 132 – Notice on Distribution of (by Guiyang Municipal EPB, FB, PB and Trade Committee, 2003)

8.1.6.3 In the Guiyang urban area, the water fee is based on water user categories, in line with the 2003 national guidelines. Table 8-23: presents the full range of water tariffs, fees and charges for selected years between 1998 and 2006.

20 Adopted at the 29th Session of Standing Committee of the Ninth National People's Congress on August 29, 2002

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Table 8-23: Water Tariffs, Fees and Charges (CNY per m3) (a) Water Tariff (CNY/m3) 2001 2002 2003 2004 2005 Guiyang Water Supply Company* Domestic 0.80 0.80 0.80 1.00 1.40 Industrial 0.85 0.85 0.85 1.05 1.45 Commercial 1.60 1.60 1.60 1.80 2.20 Hotel 2.40 2.40 2.40 1.62 Bath 1.00 1.00 1.00 1.20 Sauna 7.60 7.60 7.60 7.80 8.20 Wudang District Water Supply Company Domestic 0.80 0.80 0.80 0.80 1.00 Institutional 0.80 0.80 0.80 0.80 1.00 Commercial 1.60 1.60 1.60 1.60 1.80 Industrial 0.85 0.85 0.85 0.85 0.85 Special Service 1.00 1.00 1.00 1.00 1.20 XiuWen Water Supply Company** Domestic 1.00 Industrial 1.05 Commercial 1.20 Institutional 1.00 Special Industry 1.80 * Includes wastewater tariff of 0.20 per tonne to 1 June 2004 and 0.40 thereafter. ** Earlier tariff history not provided. This WSC was only established in 2004.

(b) Water Resource Fee*** Surface water Ground water Industrial water abstraction 0.02-0.04 CNY/m3 0.03-0.05 CNY/m3 Domestic water abstraction 0.01-0.02 CNY/m3 0.02-0.03 CNY/m3 Firepower water abstraction 0.001-0.005 CNY/KWH Hydropower water abstraction 0.001 CNY/m3 Other water abstraction 0.01-0.03 CNY/m3 0.02-0.04 CNY/m3 ***Current water resource fee was introduced in 1992.

(c) Water Conservation Charge Threshold for charge Multiplier (Guiyang)**** 1st step 0% to 20% over quota 1 times water tariff 2nd step 20% to 40% over quota 2 times water tariff 3rd step 40% to 60% over quota 3 times water tariff 4th step 60% to 80% over quota 4 times water tariff 5th step 80% to 100% over quota 5 times water tariff 6th step >100% over quota 10 times water tariff ****Water conservation charge was introduced in 1999. It is structured as a multiple of the tariff for water.

8.1.6.4 Urban water tariffs are typical of urban tariffs in China. They are differentiated by customer class. Domestic customers are charged the lowest tariffs (except in Wudang) while certain of the commercial classes, such as entertainment venues and bath houses, are charged the highest.

8.1.6.5 The tariffs setting process in these cities reflect standard practice. Tariffs are adjusted through a process of negotiation between the concerned government bureaus, with final approval made by the city Mayor and Vice-mayors. Proposals to adjust the tariffs are publicised and public hearing meetings are held to allow various stakeholders to comment on the tariff proposals. These meetings entail meaningful review processes that, in other cities in China, have resulted in the defeat of proposed tariff increases.

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8.1.6.6 A number of observations can be made about the level and structure of urban tariffs:

• Tariffs have increased relatively quickly in Guiyang in recent years but not in Wudang. Tariffs in Wudang and Xiuwen are relatively low by PRC standards; • Guiyang first imposed a wastewater treatment tariff in 1998 for all users. It was then adjusted to CNY 0.40/m3 from 1 June 2004. This level is relatively low compared with most PRC cities; and • Current water resource fee was introduced in 1992. • The water conservation charge was introduced in 1999 in Guiyang to encourage water saving. It applies to non-domestic users.

8.1.6.7 With respect to basic guidelines identified by the ADB for setting tariffs, the following comments can be made:

• Good governance – Tariff policies prescribed in the PRC and practiced in Guiyang are compatible with good governance. Policies promote full cost recovery and a participatory approach to tariff adjustments; • Financial sustainability – Policies promote full cost recovery. Tariffs for Wudang WSC and Xiuwen WSC will be too low once Project assets for urban water supply are in place (see financial analysis of Yudongxia and Jinlong reservoirs); • Distributive justice – Tariffs are generally lower for domestic customers and WSCs in Wudang and Xiuwen sponsor an informal program which waives the water bill for any registered poverty HH. The cost of this policy is borne by other WSC customers; • Economic efficiency - The full cost wholesale price of water for urban supplies from new Project water supply assets is a reasonable measure of the long run marginal cost of expanding water supply services. This cost exceeds the existing retail level tariffs for most customer categories for the Wudang and Xiuwen WSCs but not the Guiyang WSC. If proposed retail tariffs are implemented, they will match or exceed the proposed wholesale tariffs; and • Fairness – The unit cost of servicing non-domestic customers in developed countries is typically lower than the cost of servicing domestic customers. ‘Fair’ tariffs in this situation require tariff differentials that favour the non-domestic customer, such as exist for industrial customers in Wudang District. The cost of service data required to assess the fairness of tariffs in the Project cities is not available and can not be generated within the scope of a PPTA study.

8.1.6.8 In the rural areas, irrigation water is priced according to the area that is irrigated. The price is fixed at a county level, and the local Water Management Stations are responsible for its collection. Irrigation charges for existing irrigation schemes are equivalent to CNY 0.30 in Xiuwen County and CNY 0.10 per tonne in Wudang District. The charges are levied on the basis of area irrigated. A resource extraction fee of CNY 0.02 per tonne for extraction from surface water sources is included in these charges. These pricing schemes recover the operating costs of irrigation infrastructure, rather than serving the purpose of a management tool for effective conservation and savings of water or efficient resource allocation in conditions of water scarcity. Government is considering increasing the water resource extraction fee and State Government policies endorse a gradual transition to full cost pricing for water supply infrastructure. The proposed tariffs for irrigation water for the Jinlong Reservoir and Wudang irrigation district are consistent with a full cost tariff policy. The proposed tariff for Liaojiuzhai involves an ongoing and substantial subsidy and is not compatible with a full cost tariff policy.

8.1.6.9 State policies for rural domestic water supply tariffs are less advanced than for irrigation water. According to State policy, rural domestic water supply subprojects are

Final Report, Economic & Financial 8-38 4/24/2008 Guiyang Integrated Water Resources Management Project Black & Veatch (Asia) Ltd classified as non-revenue generating projects. The implementing government is responsible for the construction and maintenance of the supply system (e.g. reservoirs, transmission pipes). Beneficiaries are responsible for the construction of village level facilities (distribution pipelines, storage) and the operation and maintenance of those facilities.

8.1.7 Issues for Resolution during Loan Processing

8.1.7.1 The following issues need to be addressed during loan processing and Project Implementation:

• Can the design and costing of small scale reservoirs be improved to make them more sustainable? Multiple purpose design with early development of higher value water uses such as domestic water supply is one option that can improve economic sustainability; • Are water purchase agreements necessary or can institutional arrangements be developed to assure the efficient and sustainable operation of wholesale urban water supply systems? In the case of the Yudongxia Reservoir subproject, transfer of wholesale water supply assets to existing urban water supply companies would allow integrated management of all water supply assets and eliminate the need for a water purchase agreement; and • Review and discuss proposed tariffs for irrigation, rural and urban water supply with the PMO and IAs. Significant increases are required for the water supply tariffs of Wudang WSC and Xiuwen WSC. Proposed irrigation charges are also high relatively high.

8.2 Financial Analysis

8.2.1 Introduction

8.2.1.1 This section documents the financial projections and financial analysis completed for GIRWMP subprojects. Financial projections were made at the level of the subproject or the operating authority for subprojects involving urban water supply, rural domestic water supply and irrigation. The projections were prepared to assess the financial viability of subprojects. The type of the projection depended on the revenue generating status of the subproject. Projections made for subprojects capable of self-financing from own source revenues treat the subproject as a commercial enterprise. This is the approach used for the urban water supply segments with the objective of achieving full cost user charges. For other segments, where self-financing is less likely, the approach assumes operation by a government office and projections focus on costs, user charges or beneficiary contributions that at least cover operating and maintenance (OM) costs. Net funding requirements are assumed to be covered by government subsidy or budget allocation. Specifics of the approach for each subproject are provided in Table 8-24.

Table 8-24: Approach to the Financial Evaluation

Core Subproject Water Allocation Approach Urban water supply 82% Only the urban WS and ecology segments are to be Rural water supply 0% developed initially. Significant own-source revenues Yudongxia Mid- Irrigation 3% for the water supply segment. Other reservoir uses size reservoir Fishery 8% are non-revenue generating. Reservoir costs are Ecology 6% allocated proportionally between the two types of use based on water allocations. Urban water supply 55% Significant own-source revenues for water supply Jinglong Small Rural water supply 2% segments. User charges revenues and beneficiary scale reservoir Irrigation 36% contributions expected to at least cover irrigation

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Table 8-24: Approach to the Financial Evaluation

Core Subproject Water Allocation Approach Fishery 0% OM costs. Ecology 6% Urban water supply 0% Only the irrigation and ecology segments are to be Rural water supply 6% Liaojiuzhai Small developed initially. User charges revenues and Irrigation 86% scale reservoir beneficiary contributions expected to at least cover Fishery 0% irrigation OM costs. Ecology 8% Wudang Irrigation Irrigation 100% User charges revenues and beneficiary system contributions expected to at least cover irrigation rehabilitation OM costs. Rural water supply User charges revenues and beneficiary Xifeng Small Irrigation contributions expected to at least cover small tank Water Storage OM costs. Huaxi Water and Not applicable User charges revenues and beneficiary Soil Conservation contributions expected to at least cover OM costs.

8.2.1.2 The next section of this appendix describes the approach and assumptions. Following this section, results are presented including financial statements correspond to the base case subproject scenarios that are the basis for estimates of FIRR. The financial statements cover results for the period 2014 to 2023.

8.2.2 Approach and Assumptions

General approach

8.2.2.1 The financial projections are prepared using a pro forma financial analysis. Key features of the analysis are:

• Modelling using MS Excel 2004 spreadsheet software; • Adherence to spreadsheet modelling conventions that help speed production and minimise error (e.g. single point entry of assumed parameters and data, organisation of like data in contiguous blocks, generous use of colour coding and comment tags to clarify and document the model structure); • All calculations based on an annual time step; • Use of standard accounting relationships to develop three basic statements (profit and loss, flow of funds, balance sheet); • Use of mass balance relationships to model the production and use of water; and • Separate projection of ‘with’ and ‘without Project’ relationships.

8.2.2.2 For four of the subprojects a single financial model was used for purposes of evaluation; these subprojects being Liaojiuzhai small scale reservoir, Wudang irrigation system rehabilitation, Xifeng small water storage, and Nanming water and soil conservation. Both the Yudongxia mid-size reservoir and the Jinglong small scale reservoir involve supply of water to existing urban water supply systems. Proper assessment of these subprojects required an additional linked model to describe impacts on the existing urban water supply company (WSC). This modelling arrangement facilitates the analysis of financial sustainability and impacts on the retail water tariff. The following modelling structures were therefore set up for these subprojects:

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Jinglong Small Scale Reservoir

Water station of the Water Resource Bureau operating subproject facilities. Direct water sales to end users for rural water supply and irrigation. Wholesale raw water sales for urban water supply to Xiuwen County WSC. Ð Xiuwen County Urban WSC. Purchase raw water from the Water Station and sell treated water to urban customers.

Yudongxia Mid-Size Reservoir

Water station of the Water Resource Bureau operating the subproject reservoir.

Raw water sales for urban water supply to Zhushui WSC.

Ð Zhushui WSC operating the subproject water treatment plant and transmission pipes.

Purchase raw water from the Water Station and sell treated water to Wudang District WSC and the Guiyang WSC

Ð Ð Wudang District WSC. Guiyang WSC.

Purchase raw water from the Purchase raw water from the Zhushui WSC and sell treated Zhushui WSC and sell treated water to urban customers. water to urban customers.

8.2.2.3 In the case of the Yudongxia reservoir, the water station and Zuishui WSC pro forma financial statements are consolidated to allow an assessment of the overall subproject.

8.2.2.4 Using this modelling structure, wholesale water purchase by the urban WSC generates the revenue stream for the wholesaler and is a cost of operation for the WSC that is recovered through the retail water tariff. Any response of customers to changes in the retail tariff feeds back to the wholesaler as a change in the demand for raw water. Subproject investment assets and related liabilities are assumed to reside with the operating entity for those assets.

Initial financial values

8.2.2.5 Starting values for the existing WSCs are based on the most recent financial statements. Balance sheet opening values in the models first or base year are closing values on the IA’s latest year end balance sheet. Income and expense items are based on information provided by the WSCs on operations and on information in the most recent year financial statements.

8.2.2.6 In the case of a new operating authority structured expressly for the purpose of implementing and operating a subproject, initial balance sheet values are all zero while income and expense items are built up from primary cost and revenue assumptions provided in the FSRs.

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Project construction costs

8.2.2.7 Project construction costs are estimated costs given in base year prices. Base project costs were apportioned to high level cost categories (e.g. civil works, mechanical and electrical, survey and design, etc.) and were distributed over the forecast period of the construction schedule. Cost and schedule information were obtained from the FSRs.

8.2.2.8 For Yudongxia mid-size reservoir, which is the only subproject of its kind and entails a relatively large investment, physical contingencies were estimated as 10% of civil works and 5% of other base costs. In effect, funding for this subproject is treated like a project loan. Physical contingencies for the Project Management and Capacity Building component are estimated at 10% of base costs. All other core and non-core subprojects are eligible for sector loan funding. For these subprojects, physical contingencies are not included in the costing. Price contingencies are calculated for all subprojects as the product of base year costs incurred in each year multiplied by the cumulative cost inflation occurring between the base year and that year.

Project operating costs

8.2.2.9 Forecasts of annual project operating costs were based on estimates of fixed and variable costs reported in FSR documents. Variable costs were forecast forward based on the rate of growth of production as measured by water production. All costs were increased over time based on assumed inflation rates.

8.2.2.10 Recurrent costs associated with capital investments are based on the following assumptions:

• Repairs and maintenance - 1% of inflated value of fixed assets measured before depreciation; and • Depreciation Expense - 4% of original value of fixed assets, declining balance.21

Price Inflation and the exchange rate

8.2.2.11 Domestic and international inflation assumptions are as follows:22

2007 2008 2009 2010 2011 + Domestic rate of price inflation (%/year) 3.00% 3.20% 2.70% 2.80% 2.40% Foreign rate of price inflation (%/year) 2.80% 1.20% 1.20% 1.20% 1.20%

8.2.2.12 These exchange rates are assumed to converge at 1.60% beyond 2012.

8.2.2.13 An initial exchange rate of CNY 8.0 per US dollar was assumed. This was adjusted over time in keeping with a purchasing power parity model of exchange rate determination. This model bases exchange rate movements between two countries on relative price movements in the countries as measured by inflation. By 2012, the exchange rate is forecast to be CNY 8.56 per US dollar using this model. This approach follows the ADB suggested methodology. However, it pre-supposes market conditions apply and that the current exchange rate is set based on market criteria. In reality this may not be the case. No further

21 Although straight line depreciation is the convention in China, the consultant has found that a declining balance algorithm provides a better estimate of actual depreciation expenses when the pro forma analysis uses an aggregate depreciation rate instead of depreciation rates that differ by class of asset. 22 Local and international escalation factors for 2006 provided by the ADB.

Final Report, Economic & Financial 8-42 4/24/2008 Guiyang Integrated Water Resources Management Project Black & Veatch (Asia) Ltd adjustments occur beyond this year since the domestic and foreign rates of inflation are assumed to converge.

Cash flow

8.2.2.14 The principle adjustment used to convert revenues and expenses to cash flow amounts is elimination of depreciation as a cash cost and addition of repayment of the principle portion of debt as a cash requirement. Debt servicing costs are not included in the discounted cash flow analysis to estimate EIRR and FIRR.

8.2.2.15 Revenues and costs are adjusted by year-end receivable and payable amounts to determine cash flows. Receivable revenues are estimated based on assumptions about collection efficiency (see ‘Tariff and revenues’ above). Year-end payable amounts are estimated assuming a one month delay in payment of amounts owing.

Financial assumptions

8.2.2.16 Assumed terms and conditions for loans and other sources of funds are provided in Table 8-25. The ADB interest rate charges are based on the US dollar 6 month floating LIBOR rate for interest charges during loan implementation and the US dollar 10 year fixed swap rate for debt servicing. 23 A lending spread of 0.4% is added to these rates.24

Table 8-25: Interest Rates and Lending Terms

Interest Rate Commitment Period Of Front Grace Funding Source During the For debt Fee The Loan End Fee Period grace period Servicing ADB Loan 5.80% 5.89% 0.75% 26 0% 6 Local bank loan 6.00% 6.00% 0.00% 15 0% 5

8.2.2.17 The commitment fee is applied against the un-disbursed balance of an increasing portion of the loan. Limits for the commitment fee are as follows: first year of loan implementation - 15%, second year - 45%, third year - 85%, fourth and subsequent years - 100%.25

8.2.2.18 Assumptions regarding the opportunity cost of contributed capital are as follows:

• In kind beneficiary contributions 8.00% • Central Government Funds 6.00% • Guiyang Municipal Government funds 6.00%

8.2.2.19 The cost of government funds is based on official targets for urban water supply investments.

Weighted Average Cost of Capital

8.2.2.20 The weighted average cost of capital (WACC) was calculated in real terms for individual subprojects. Funding sources are the ADB loan, local bank loans, labour contributed by beneficiaries and capital contributions from local governments. The cost of foreign debt was calculated based on a nominal interest rate of 5.89 percent, an income tax

23 As posted on 9 August 2006 by the Asian Development Bank Treasury Department 24 Memorandum of 10 April 2006, to heads of departments/offices from the Treasurer, ADB Treasury Department re “20 basis point waiver of the loan spread and 100 basis point waiver of the front end fee” 25 ADB Loan Disbursement Handbook, January, 2001.

Final Report, Economic & Financial 8-43 4/24/2008 Guiyang Integrated Water Resources Management Project Black & Veatch (Asia) Ltd rate of 33% and an international inflation rate of 2.8 percent per annum. The real cost of foreign debt was estimated to be 2.01 percent. The cost of local debt was calculated based on a nominal interest rate of 6.0 percent, an income tax rate of 33% and a domestic inflation rate of 3.0 percent per annum. The real cost of local debt was estimated to be 1.95 percent. Assuming an opportunity cost for contributed capital of 6.0 percent and a domestic inflation rate of 3.0 percent per annum, the real cost of contributed capital was estimated to be 2.91 percent. Following estimates were made of WACC for the revenue generating subprojects:

Mid-size reservoir - Yudongxia 2.5% Mid-size reservoir - Yudongxia WTP 2.2% Small scale reservoir, Core - Jinglong 2.4% Small scale reservoir, Core - Liaojiuzhai 2.4% Irrigation system rehabilitation, Core - Wudang 2.2%

Financial Performance Indicators

8.2.2.21 The assessment of financial performance is based on an analysis of standard performance indicators estimated using information in the projected financial statements. Performance indicators are shown in Table 8-26 as follows:

Table 8-26: Performace Indicators

Ratio Definition Target Operating Ratio (operating expenditures / operating revenues) <1.0 Rate of profit* (net after tax earnings / net assets) 0.06 to 0.08 Current Ratio (current assets/current liabilities) >1.0 Debt over net (total long-term debt / net assets) <2.33 assets** (cash available to pay debt service costs / debt service costs) Debt Service Debt Service Costs = interest costs + repayment of principle >1.4 Coverage amount * The target level reflects numbers in the National Guidelines on Water Tariffs. A target range of 0.00 to 0.06 is used for profit in the case of water resource management entities operating reservoirs. ** A rate of 2.33 is equivalent to the debt:equity threshold 70:30

8.2.2.22 Reported values are averages for the first 20 years of the financial projection, as well as extreme values.

Urban Water Supply

8.2.2.23 The analysis for urban water supply segments is based on an enterprise financial model. Projections are made of complete financial statements.

Sales Volumes and Revenues

8.2.2.24 Revenues are based on charges levied against water sales. Water sales were estimated by customer class using a unit sales approach. Initial values for unit sales for each customer class were determined from an evaluation of available information on water sales revenues, water tariffs, and water sales. The unit consumption rate for each customer category was assumed to change over time in response to higher tariffs (see Appendix H7 for details).

8.2.2.25 In the case of retail operations, the numbers of potential customers in each customer class is assumed to increase in proportion to increases in the total population. The number of serviced domestic customers is based on servicing rates.

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8.2.2.26 In the case of wholesale water supply operations, sales equal total water production less self supplied water of the enterprise’s customer(s) namely the retail water suppliers. Water production at the retail and wholesale levels includes total water sales plus an allowance for non-revenue water based on existing performance or in the case of new entities an assumed percentage rate for non-revenue.

Tariffs and revenues

8.2.2.27 Tariff levels are provided as inputs to the pro forma model. The base year tariff is the existing tariff. This tariff is adjusted over the initial forecast period to a level that yields an acceptable financial performance or the WSC. Subsequently, an annual inflationary assumption is assumed for the tariff.

8.2.2.28 The model develops the full tariff schedule based on customer class tariff differentials, the base year tariff and the assumed tariff adjustments. These tariffs are then used to estimate sales revenues based on forecast sales. A one month delay is assumed in the payment of domestic water bills. Collection efficiency for retail water bills is based on the estimated collection efficiency of the existing WSCs. Collection efficiency for the wholesale water providers is assumed to be 100%. Uncollected bills are written off as bad debt in the following year.

Rural Domestic Water and Irrigation

8.2.2.29 An irrigation water supply service is a feature of the following subprojects: Jinglong Small scale Reservoir, Liaojiuzhai Small scale Reservoir and Wudang Irrigation system rehabilitation. The irrigation water demand accounts for 35%, 88% and 100% of total system water demand respectively for the three systems once their system capacity is fully utilised.

8.2.2.30 Rural domestic water supply is a feature of the Jinlong Reservoir Subproject. The rural domestic water demand accounts for 2% of total system water demand once system capacity is fully utilised.

8.2.2.31 The irrigation supply systems will be managed by reservoir water stations under the local WRB. Water users associations (WUAs) will help manage the irrigation system. The operating budget of the WUA is assumed to be 10% of the budget of the water station. The financial analysis encompasses both the water station and the WUA but, as a matter of analytic convenience, costs and charges for the two entities are not separated in the analysis.

8.2.2.32 Institutional arrangements have not been finalised for rural domestic water. It is assumed that the supply system is managed by the reservoir water station under the Xiuwen WRB.

8.2.2.33 Assumptions regarding the water demand per mu of irrigated land and the size of the serviced area are based on information provided in the crop budgeting analysis. Initial tariff levels are provided as inputs to the financial model and the tariff is subsequently adjusted over the forecast period based on annual inflation. Collection efficiency is assumed to be 100%. The high collection efficiency reflects an assumption that water user associations established for irrigation subprojects are effective in securing beneficiary support for the subproject and overcoming resistance to payment of irrigation water charges.

8.2.2.34 Assumptions regarding the water demand per rural household and the number of households are based on information provided in the subproject FSR. Initial tariff levels are provided as inputs to the financial model and the tariff is subsequently adjusted over the

Final Report, Economic & Financial 8-45 4/24/2008 Guiyang Integrated Water Resources Management Project Black & Veatch (Asia) Ltd forecast period based on annual inflation. Collection efficiency is assumed to be 100%. 8.2.2.35 The analysis of these subprojects is based on an enterprise financial model. Projections are made of complete financial statements. Where the water station provides water for more than one type of service (e.g. irrigation plus rural domestic or urban water) no attempt is made to allocate costs to the different services in a functional manner.

8.2.2.36 The analysis focuses on cash flow costs and the opportunity to recover these from user charges. At the very least, user charges and beneficiary in-kind contributions should cover recurrent OM costs. Requirements for government subsidies are determined based on the assessment of user charge revenues.

Sustainability of Farmer In-Kind Contributions

8.2.2.37 Non-revenue generating subprojects include the Xifeng Small Water Storage subproject, and the Huaxi Water and Soil Conservation subproject. Subproject assets are owned and managed by farm households upon completion of the project. There is no operating entity apart from the households and no revenue generating capacity based on user charges. For these entities, the analysis of financial sustainability focuses on the farm household’s capacity to contribute as assumed to construction activity. This analysis considers available household resources for work.

8.2.3 Financial Sustainability of Revenue Generating Subprojects

Yudongxia Mid-size reservoir - Urban Water Supply

8.2.3.1 Operating arrangements have not yet been finalised for this subproject. For purposes of analysis, the reservoir is assumed to be operated by a water station of the Guiyang Water Resources Bureau (WRB) while the water treatment plant (WTP) is operated by a new entity proposed for this purpose, the Zhushui WSC. The Zhushui WSC is assumed to recover costs through a wholesale water tariff levied against sales of water to retail tap WSCs in Wudang and Yunyan Districts of Guiyang Municipality. The financial analysis encompasses both the wholesale company and the two retail companies, as described above. The wholesale water supply company is fully responsible for the cost of the new Yudongxia water treatment plant and associated raw water and treated water pipelines. A portion of the Yudongxia Reservoir cost is recovered from the Zhushui WSC as a raw water tariff. The water resources fee collected by the Guiyang Water Resources Bureau is included in the raw water tariff.

8.2.3.2 The Guiyang WSC and the Wudang WSC are assumed to purchase treated water from the Zhushui WSC to make up the difference between their total demand and their effective water production capacity. The estimate of effective water production capacity adjusts total capacity to allow for servicing of maximum day production. It also accounts for loss of existing capacity that is or will be decommissioned due to water quality problems in the source of supply for water treatment plants. Total demand is estimated based on existing levels of demand per customer and population growth. Demand is assumed to respond to changes in the tariff (see Appendix H7 for details).

8.2.3.3 Water supply operations from the reservoir begin in 2011. Based on projections of urban water demand, Guiyang WSC will need to purchase wholesale water from Zhushui WSC by 2011 and Wudang WSC by 2019. Full capacity utilisation of the Zhushui WSC treatment plant is achieved in 2021.

8.2.3.4 The water station charge for raw water from the reservoir is set at CNY 0.64 per

Final Report, Economic & Financial 8-46 4/24/2008 Guiyang Integrated Water Resources Management Project Black & Veatch (Asia) Ltd cubic meter.26 The wholesale water tariff charged by the Zhushui WSC is set at CNY 1.55 per cubic meter.

8.2.3.5 Current domestic retail water tariffs charged by Wudang WSC and Guiyang WSC are CNY 1.00 and 1.40 per cubic meter respectively. The domestic tariff for Wudang WSC is increased from CNY 1.00 to CNY 1.80 per cubic meter at the beginning of the forecast period in 2008. This increase is required to allow the company to achieve financial viability and are not related to the purchase of wholesale water.27 An additional tariff increase to CNY 1.98 is required in 2019 to cover the cost of wholesale water purchases from Zhushui WSC. A small increase from CNY 1.00 to CNY 1.10 per tonne is required for the Guiyang WSC tariff. The retail tariffs for other customer classes for these two WSCs increase by the same proportion as the domestic tariff. Tariffs are summarised in Error! Reference source not found.Table 8-27.

Table 8-27: Yudongxia Mid-Size Reservoir Tariffs (CNY per cubic meter) Operating Authority Existing (2006) With Project Yudongxia Water Station Raw water tariff Not applicable 0.64 Zhushui WSC - wholesale Treated water tariff – wholesale Not applicable 1.55 Wudang WSC – retail Year 2007 2008 2019 Domestic 1.00 1.80 1.98 Institutional 1.00 1.80 1.98 Commercial 1.80 3.24 3.57 Industrial 0.85 1.53 1.69 Special Service 1.20 2.16 2.38 Sales weighted average tariff 1.05 1.90 2.09 Guiyang WSC – retail (includes a wastewater tariff of CNY 0.40) Domestic 1.40 1.50 Industrial 1.45 1.55 Commercial 2.20 2.37 Sauna 8.20 8.96 Sales weighted average tariff 1.47 1.58

8.2.3.6 Estimated FIRR values for the operating authorities of Yudongxia assets are provided in Table 8-28 and financial indicators are reported in Table 8-29. These results suggest a reasonable performance overall.

8.2.3.7 The Yudongxia Water Station is not expected to function as a commercial enterprise yet manages to achieve an FIRR that exceeds WACC in most tests. The base case FIRR for Zhushui WSC is well above WACC for both the 30 and 20 year tests, and remains above WACC in all of the sensitivity tests as well.

26 All tariff levels given in terms of 2006 price levels. 27 Without these increases, the WSC would be formally bankrupt based on data in their financial statements. Financial difficulties for Wudang WSC arise due to high levels of debt. Bankruptcy here is assumed to occur when net assets are negative.

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Table 8-28: Estimated after tax FIRR values – Yudongxia Water Supply Yudongxia Water Station – Zhushui WSC –wholesale

raw water water Weighted Average Cost of Capital 2.5% 2.2% Evaluation Period 30 year 20 year 30 year 20 year Base case FIRR 2.9% 2.6% 5.2% 4.6% (i) Eliminate PPP adjustment 2.9% 2.6% 5.2% 4.6% (ii) Delay urban water sales growth 1 year 1.7% 1.3% 3.6% 2.9% (iii) Delay urban water tariff increase 1 year 2.7% 2.4% 5.0% 4.4% Switching value tests (iv) Investment cost switching value, % change 108% 102% 156% 141% (v) O&M costs switching value, % change 124% 106% 123% 118%

8.2.3.8 Financial performance ratios for Zhushui WSC and the WRB water station indicate that this subproject is financially sustainable. Returns to net assets are acceptable given the assumptions regarding tariffs. Other performance indicators are all acceptable with the exception of the debt service coverage ratio which falls below 1.4 but generally stays above 1.0 in initial years of ADB debt repayment. Wudang WSCs experiences very low DSCRs to 2016 in association with servicing of existing debt.

Table 8-29: Financial Ratios for Yudongxia (Values for the 1st 20 years of operations) Target Avg Max Min Yudongxia Water Station – raw water

Operating Ratio <1.0 0.15 0.16 0.15 Rate of profit 0.0 to 0.06 0.04 0.06 0.02 Current Ratio >1.0 8.16 11.71 4.83 Debt over net assets <2.33 0.53 0.97 0.11 Debt Service Coverage >1.4 1.63 2.01 1.32 Zhushui WSC – wholesale water

Operating Ratio <1.0 0.63 0.63 0.63 Rate of profit 0.06 to 0.08 0.08 0.11 -0.01 Current Ratio >1.0 7.86 20.40 1.15 Debt over net assets <2.33 1.12 2.97 0.04 Debt Service Coverage >1.4 2.02 3.39 0.95 Wudang WSC - retail

Operating Ratio <1.0 0.87 0.91 0.81 Rate of profit 0.06 to 0.08 0.09 0.14 0.05 Current Ratio >1.0 0.91 2.78 0.17 Debt over net assets* <2.33 0.00 0.00 0.00 Debt Service Coverage >1.4 1.50 5.51 0.26 Guiyang WSC - retail

Operating Ratio <1.0 0.84 0.85 0.83 Rate of profit 0.06 to 0.08 0.06 0.09 0.03 Current Ratio >1.0 not app. (no debt) Debt over net assets <2.33 not app. (no debt) Debt Service Coverage >1.4 not app. (no debt) * Existing long term debt is paid down before 2011. Short term loans are assumed to be used to finance debt service obligations.

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Jinglong Small scale reservoir - Urban and Rural Water Supply

8.2.3.9 A water station of the Xiuwen Water Resources Bureau is assumed to operate all subproject assets and to recover costs from user charges for irrigation, rural domestic and urban water supply. The user charge for rural domestic water is a retail tariff while the charge for water delivered to Xiuwen County Water Supply Company is a wholesale tariff. The financial analysis encompasses both the water station and the retail company, using 2 linked financial models. The wholesale water supply company is fully responsible for funding of water supply costs associated with the raw water pipes and an allocated portion of the Jinlong Reservoir cost.

8.2.3.10 A water users association (WUA) is assumed to manage the local irrigation system. The operating budget of the WUA is assumed to be 10% of the budget of the water station. This budget provides for 2 full time staff plus overhead costs. The financial analysis encompasses both the water station and the WUA but, as a matter of analytic convenience, costs and charges for the two entities are not separated in the analysis.

8.2.3.11 Subproject water tariffs are shown in Table 8-30. These tariffs achieve an acceptable FIRR for the Subproject. The current rural domestic retail water tariff is CNY 1.00 per cubic meter and is increased to CNY 2.50 per cubic meter by 2012 to finance construction of a new WTP and raw water purchases. In light of the large increase that is required, the increase is assumed to occur in three stages between 2007 and 2012. The proposed tariffs assure that the retail company maintains financial viability. The retail tariff for other customer classes increases by the same proportion.

Table 8-30: Jinlong Reservoir Tariffs (CNY per cubic meter) Operating Authority Existing With Project Jinlong Water Station Irrigation tariff Not applicable 0.60 Rural domestic water supply Not applicable 2.00 Urban raw water supply Not applicable 2.00 Xiuwen WSC – retail Domestic 1.00 2.50 Industrial 1.05 2.62 Commercial 1.20 2.99 Special Industrial 1.80 4.49 Sales weighted average tariff 1.04 2.60

8.2.3.12 Estimated FIRR values for the Jinlong suproject are provided in Table 8-31 and financial indicators are reported in Table 8-32. These results suggest a reasonable performance overall. The Jinlong Water Station is not expected to function as a commercial enterprise yet manages to achieve an FIRR in excess of WACC in most of the tests.

Table 8-31: Estimated after tax FIRR values – Jinlong Water Supply

Weighted Average Cost of Capital 2.4% Evaluation Period 30 year 20 year Base case FIRR 3.7% 2.5% (i) Eliminate PPP adjustment 3.8% 2.5% (ii) Delay urban water sales growth 1 year 3.5% 2.1%

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(iii) Delay urban water tariff increase 1 year 3.7% 2.4% Switching value tests (iv) Investment cost switching value, % change 135% 104% (v) O&M costs switching value, % change 172% 107%

8.2.3.13 Financial performance ratios for Jinlong Water Station and the Xiuwen WSC indicate that this subproject is not financially sustainable even with proposed tariff increases. Returns to net assets are negative and DSCR is below 1.0 for the Jinlong water station for a lengthy initial period. Profitability is low for Xiuwen WSC but its overall performance is acceptable provided the supply of raw water from Jinlong water station is secure. Average DSCRs are reasonable but minimum values are below 1.0 for a few years.

8.2.3.14 The financial sustainability of the Jinlong subproject can be assured by an injection of annual operating funds of about CNY 2 million to 2012. This could come in the form of a District Government subsidy or alternatively an contribution from Xiuwen WSC perhaps in return for equity in the Reservoir.

Table 8-32: Financial Ratios for Jinlong Water Supply (Values for the 1st 20 years of operations) Target Avg Max Min Jinlong Water Station – raw water Operating Ratio <1.0 0.22 0.65 0.12 Rate of profit 0.0 to 0.06 0.06 0.18 -0.17 Current Ratio >1.0 2.92 13.73 0.00 Debt over net assets <2.33 1.14 2.49 0.00 Debt Service Coverage >1.4 1.27 3.40 0.10 Xiuwen County WSC - retail Operating Ratio <1.0 0.79 0.93 0.39 Rate of profit 0.06 to 0.08 0.03 0.12 -0.01 Current Ratio >1.0 3.01 3.70 1.34 Debt over net assets <2.33 0.23 1.14 0.00 Debt Service Coverage >1.4 1.33 1.75 0.70

Liaojiuzhai Small scale reservoir - Irrigation

8.2.3.15 A water station of the Xifeng Water Resources Bureau is assumed to operate subproject assets and to recover costs from user charges for irrigation. A water users association (WUA) is assumed to manage tertiary and higher level irrigation canals. The operating budget of the WUA is assumed to be 10% of the budget of the water station. This budget provides for 1 full time staff plus overhead costs. The financial analysis encompasses both the water station and the WUA but, as a matter of analytic convenience, costs and charges for the two entities are not separated in the analysis. The Subproject irrigation tariff is CNY 0.70 per cubic meter.

8.2.3.16 The Liaojiuzhai Water Station has FIRR values that are well below WACC (Table 8-33). Returns to net assets are virtually zero (Table 8-34). Other performance ratios are acceptable with the exception of DSCR which is below 1.0 at all times. These results suggest that the Water Station can not achieve an acceptable financial performance without an ongoing subsidy. A continuing subsidy of CNY 50,000 per year allows the subproject to maintain DSCR above 1.0 and generates a moderate profit of 2%.

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Table 8-33: Estimated after tax FIRR values – Liaojiuzhai Small scale reservoir Rehabilitation*

Weighted Average Cost of Capital 2.4% Evaluation Period 30 year 20 year Base case FIRR 0.2% 0.1% (i) Eliminate PPP adjustment 0.2% 0.1% (ii) Delay water tariff increase 1 year 0.1% 0.0% * Switching value tests were not conducted since FIRR < WACC

Table 8-34: Financial Ratios for Liaojiuzhai Small scale reservoir (Values for the 1st 20 years of operations) Target Avg Max Min Operating Ratio <1.0 0.23 0.24 0.22 Rate of profit 0.00 to 0.06 0.003 0.03 -0.02 Current Ratio >1.0 2.76 9.39 0.06 Debt over net assets <2.33 0.58 0.91 0.07 Debt Service Coverage >1.4 0.82 0.94 0.49

Wudang Irrigation System Rehabilitation

8.2.3.17 A water station of the Wudang Water Resources Bureau is assumed to operate subproject assets and to recover costs from user charges for irrigation. A water users association (WUA) is assumed to manage tertiary and higher level irrigation canals. The operating budget of the WUA is assumed to be 10% of the budget of the water station. This budget provides for 2 full time staff plus overhead costs. The financial analysis encompasses both the water station and the WUA but, as a matter of analytic convenience, costs and charges for the two entities are not separated in the analysis.

8.2.3.18 The Subproject irrigation tariff is CNY 0.45 per cubic meter. This tariff achieves an acceptable FIRR for the Subproject (Table 8-35). Values for FIRR are reasonably robust. Estimated financial indicators are reported in Table 8-36. These results suggest a marginal but acceptable performance overall.

Table 8-35: Estimated after tax FIRR values – Wudang Irrigation System Rehabilitation

Weighted Average Cost of Capital 3.2% Evaluation Period 30 year 20 year Base case FIRR 4.3% 3.7% (i) Eliminate PPP adjustment 4.3% 3.7% (ii) Delay water tariff increase 1 year 4.1% 3.5% Switching value tests (iii) Investment cost switching value, % change 120% 115% (iv) O&M costs switching value, % change 215% 193%

8.2.3.19 The Wudang Water Station is not expected to function as a commercial enterprise yet manages to achieve an FIRR in excess of WACC in all tests. This performance is achieved without any program budget allocation from the Wudang WRB. Returns to net assets are small but acceptable for a government agency. Other performance ratios are acceptable.

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Table 8-36: Financial Ratios for Wudang Irrigation System Rehabilitation (Values for the 1st 20 years of operations) Target Avg Max Min Operating Ratio <1.0 0.17 0.19 0.15 Rate of profit 0.00 to 0.06 0.02 0.03 0.00 Current Ratio >1.0 21.62 26.04 18.04 Debt over net assets <2.33 0.44 0.69 0.12 Debt Service Coverage >1.4 1.69 1.91 1.48

8.2.4 Sustainability at the Level of the Farm Household

8.2.4.1 Some of the subprojects involve contributions from beneficiaries in the form of labour time for subproject construction and maintenance. A simple analysis was completed at the level of the farm household (HH) to assess whether the assumed levels of contribution are sustainable.

8.2.4.2 The analysis is based on information regarding farm household work activities summarised in Table 8-37 and Table 8-38. On average, surveyed farm HHs can provide 4 months of work to a subproject under existing conditions, or up to 11 months if they forego work away from home. Four months of time is sufficient for all subprojects except the Xifeng Small Water Storage subproject which assumes 4.4 months (Table 8-39) of contributed work time per household.

Table 8-37: Analysis of Farm Household Work time (Months of work time per year) Total Work Time Available for Work Time Spent: Potential the Subproject Work Away From Farm House If no work away Existing Time The Village Work Work from village AVERAGE 37 7 23 3 4 11 MEDIAN 36 0 24 2 0 9 ST DEV 14 9 9 4 9 11 Source: Based on an analysis of rural household survey data. Sample size is 360 respondents NOTES: ‘Total Potential Work Time’ estimated as 12 months for each person 16 years old or older. House work time is adjusted to account for persons reporting a total of farm and house work exceeding 12 months per year. These persons are doing the two simultaneously (e.g. watching children while working in the fields). ‘Existing’ is the amount of time available for subproject work given existing work patterns. ‘If no work away from village’ is the amount of time available for subproject work not accounting for work away from the village.

Table 8-38: Distribution of Farm Households by the Months of Available Work Time Work Time Available for the Subproject Work Time Av ailable for the Subproject - Existing - no work away from village

Number of Number of % of total % of total respondents respondents No available time 187 52% 116 32% 1 Month available 13 4% 12 3% 2 Months available 15 4% 11 3% 3 Months available 7 2% 2 1% 4 Months available 12 3% 15 4% 5 Months available 5 1% 3 1% 6 Months or more 121 34% 201 56% Total count 360 100% 360 100% Source: Based on an analysis of rural household survey data. Sample size is 360 respondents

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Table 8-39: Labour Contributed by Farm Households to Subproject Construction

Labour Months Farm Period of contribution of Work Subproject HHs construction CNY per HH (#) Months (years) 1,000s per year Jinglong Small scale reservoir 1,561 646.8 1,437 2 0.5 Liaojiuzhai Small scale reservoir 138 145.0 322 1 2.3 Wudang Irrigation system 2,301 698.0 1,551 1 0.7 rehabilitation Xifeng Small Water Storage 254 500 1,111 1 4.4 Huaxi Water and Soil 1,650 710.0 1,578 1 1.0 Conservation

8.2.4.3 A consideration of the median time available for contribution tells a different story. The median available time is zero months under existing conditions and Table 8-38 indicates that 60% of HHs can not provide more than 2 months of work to a subproject without foregoing at least some of their paid work time away from home. If paid work time away from home is omitted from the calculation, there still remains 38% of HHs that can not contribute more than 2 months of work time.

8.2.4.4 The analysis of wok time suggests that there may be a problem securing the level of farm labour for project implementation that has been proposed. This conclusion must be qualified since the analysis is indicative only. It does not account for local factors that may modify the conclusion including opportunities for farmers to hire local help and assistance with work provided within the village to poorer households.

8.2.5 Financial Management Assessment

Introduction

8.2.5.1 The financial analysis of the Project involves two major tasks: (i) financial impact assessment (FIA) of Project IAs under current conditions and with the Project in place, and (ii) financial management assessment (FMA) of IAs. These assessments were made for core subprojects. The core subprojects and associated IAs are identified in Table 8-40.

Table 8-40: Project Segments for the Financial Evaluation

Project IA Subproject Guiyang Zhushui Water Resources Industry Limited Co. Mid-size reservoir, Yudongxia Xiuwen County WRB Small scale reservoir, Jinglong Huaxi District WRB Soil and Water Conservation Wudang District WRB Irrigation system rehabilitation, Wudang Xifeng County WRB Small Water Storage, Xifeng Small scale reservoir, Liaojiuzhai

8.2.5.2 The financial analysis follows guidelines provided in ADB’s 2005 publication, Financial Management and Analysis of Projects.

Method

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8.2.5.3 The basis for the financial management assessment conducted here is a model Financial Management Assessment Questionnaire developed within ADB. 28 This questionnaire structure was deemed to be too detailed for use in an interview. Moreover, there was insufficient time to interview all IAs. Consequently the ADB questionnaire structure was used to design a written self-administered questionnaire (provided in Appendix H3). Efforts were made to simplify the wording of questions in the written questionnaire and to arrange material using a logical sequence. The questionnaire was introduced and explained to IA staff at a meeting on 26 May 06.

8.2.5.4 The broad structure of the ADB format is presented in Table 8-41.

Table 8-41: Structure of the ADB Financial Management Assessment Questionnaire

GENERAL TOPIC DETAILED ITEMS 1. IMPLEMENTING Legal status and registration AGENCY Past experience with externally-financed projects Statutory reporting requirements Independence of governing body Organizational structure 2. FUNDS FLOW Nature of project funds flow arrangements ARRANGEMENTS Suitability of project funds flow arrangements Past problems in receipt of funds Past experience with disbursements from ADB Capacity to manage foreign exchange risks Access to counterpart funds Payments from counterpart funds 3. STAFFING Organizational structure of the accounting department Profile of accounts staff Training in ADB procedures Job descriptions Training policy 4. ACCOUNTING POLICIES AND PROCEDURES GENERAL Capability of accounting system to record project transactions Controls for the preparation and approval of transactions Adequate of the chart of accounts Reconciliation of General Ledger and subsidiary ledgers Retention and management of accounting and supporting documents SEGREGATION OF Separation of functional responsibilities DUTIES Separation of responsibilities for procurement Separation of bank reconciliations and payment approvals

BUDGETING Budgets based on physical and financial targets SYSTEM Detail and usefulness of budgets Comparison of expenditures to the budget Approvals for variations from the budget Responsibility for budget preparation and approval PAYMENTS Control features of invoice-processing Reporting features of invoice-processing Controls for payroll POLICIES AND Accounting standards PROCEDURES Accounting policies and procedures manual Policies and procedures for routine financial management and related administrative activities

28 ADB, 2005. Financial Management and Analysis of Projects, Knowledge Management Addendum, pg 16.

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Table 8-41: Structure of the ADB Financial Management Assessment Questionnaire

GENERAL TOPIC DETAILED ITEMS Policies and procedures for conflict of interest Disbursement of policies and procedures manuals CASH AND BANK Authorized signatories in the bank accounts. Use of a cashbook Control and recording of collections Reconciliation of bank and cash Treatment of unusual bank transactions Timely deposit of receipts SAFEGUARD OVER Protection of assets from fraud, waste and abuse ASSETS Subsidiary records of fixed assets and stocks Physical inventories of fixed assets and stocks Insurance coverage of assets OTHER OFFICES Other offices or executing entities AND Controls and procedures for other offices or entities IMPLEMENTING Flow of information among implementing agencies ENTITIES Reconciliations across implementing agencies OTHER Reporting options for whistle bowers29 5. INTERNAL AUDIT Internal audit department Qualifications and experience of audit department staff Internal auditor reporting responsibility Internal audit of the Project Response to internal audit findings 6. EXTERNA Current audit practice L AUDIT Timeliness of audits Audit standards Accountability issues identified in recent audit reports Audit of project accounts Implementation of audit recommendations Audit by an independent governmental entity 7. REPORTING AND Preparation of financial statements MONITORING Frequency of financial statements Need to adapt the reporting system for the Project Capacity of reporting system to link financial and physical information Financial management reporting responsibilities for projects Management use of financial management reports Reporting on actual and budgeted expenditures Use of an automated accounting system to prepare reports 8. INFORMATION Use of a computerized financial management system SYSTEMS Reporting capacity of the system Staff training in system use System safeguards for confidentiality, integrity and availability

Results of The Assessment Of Financial Management

8.2.5.5 An assessment of financial management capacity was completed for the IAs and the prospective operating authorities in accordance with ADB guidelines. The analysis leads to three general observations: (i) the implementing agencies (IAs) are government departments and do not function autonomously; (ii) existing systems for financial management are generally adequate for loan implementation; (iii) most IAs have no experience with

29 “whistle blower” is a term used to describe an individual in a company who informs his superiors or the legal authorities about activities fraudulent or illegal.

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Guiyang Municipal Government PMO (PMO): This agency is responsible for overall Project administration including evaluation of non-core subprojects. It has no experience with internationally funded projects and will need appropriate training. Existing systems for project management at a local level are generally adequate. Improvements in policies will be needed with respect to conflict of interest.

Guiyang Municipal Government Finance Bureau (GMG FB): A limited assessment of the GMFB was completed focussing on matters relating directly to loan administration. Based on discussions to date sign a follow on loan contract for ADB funds, oversee financial management of the project, generate funds from various sources to service the ADB loan, and undertake loan supervision and management including opening the imprest account. The Bureau has experience with a World Bank loan but not ADB funding and will need appropriate training. Currently the Municipal FB accounting system for projects is not computerised. The merits of computerisations should be determined.

Guiyang Huaxi District WRB – Subproject IA: This is the agency of the Huaxi District Government which is responsible for Huaxi Water and Soil Conservation Subproject. It will be responsible for management of subproject construction. As a government office, it is not autonomous. It has no experience with internationally funded projects and will need appropriate training. It will establish a project office and based on ADB loan requirements will recruit financial, engineering, and other project management staffs. Existing systems for project financial management at a local level are generally adequate. Areas of improvement include project budgeting and internal controls.

Guiyang Wudang District WRB – Subproject IA: This is the agency of the Wudang District Government which is responsible for the Wudang Irrigation System Rehabilitation Subproject. The FMA questionnaire was completed by the District Finance Bureau. The District has no experience with foreign funded projects. The WRB will be responsible for management of subproject construction and operation. It has established a project office and based on ADB loan requirements will recruit financial, engineering, and other project management staffs. Existing systems for project financial management at a local level are generally adequate.

Xifeng County WRB – Subproject IA: This is the agency of the Xifeng County Government which is responsible for Liaojiuzhai Reservoir Project and Xifeng Small Tanks Subproject. As a government office, it is not autonomous. It has experience with a World Bank funded projects and will be responsible for management of subproject construction and operation. It has established a project office and based on ADB loan requirements will recruit financial, engineering, and other project management staffs. Existing systems for project financial management at a local level are generally adequate

Guiyang Xiuwen County WRB – Subproject IA: This is the agency of the Xiuwen County Government which is responsible for Jinlong Reservoir Subproject. It will be responsible for management of subproject construction and operation. As a government office, it is not autonomous. It has no experience with internationally funded projects and will need appropriate training. It has established a project office and based on ADB loan requirements will recruit financial, engineering, and other project management staffs. Existing systems for project financial management at a local level are generally adequate. Areas of improvement include project budgeting, internal controls and the timely maintenance of subsidiary records

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Guiyang Zhushui Water Resources Industry Limited Co. – Subproject IA: This is an SOE under the direct control of Guiyang Municipal Water Resources Bureau. It was established in 2001 as a limited company to manage water resource projects of the GWRB and will manage construction and be responsible for the administration, financial management, operation and maintenance of Yudongxia Reservoir. The company structure is not well defined and most of its staffs are government officials seconded from the WRB. The Co. currently has no autonomy, all key decisions being made by the Government. The Co. will set up a PMO and has a clear concept of staffing needs for loan implementation but staffs have not implemented a project involving an international loan. The Company’s capacity to manage the Subproject efficiently may be hampered by the lack of autonomy, organizational structure, job descriptions and an independent staff. This is critical because its scope of responsibility will be considerably expanded when it becomes an operating entity for the reservoir and the urban water supply assets. Recommended improvements include:

• Staff positions should be filled well before project implementation in order to allow time for development of adequate policies, procedures and the required administrative infrastructure; • Staff will need training in ADB procedures; • A proper enterprise accounting system and reporting system must be set up according to relevant standards; and • Other systems are required (e.g. budgeting, payroll, internal controls, assets management).

Xiuwen Finance Bureau

8.2.5.6 Xiuwen Finance Bureau has been selected as one representative county/district level finance bureau. This is a functional agency of the Xiuwen County Government. It is under the direct control of Xiuwen County Government. It has the experience of implementing a World Bank rural water supply and sanitation facility project and will be responsible for agency and project financial management and prepare annual budget for agency and project. ADB training should be provided to ensure staffs are familiar with ADB procedures. Existing systems for project financial management at a local level are generally adequate. Areas of improvement include internal controls and written project policies and procedures.

8.2.5.7 An example of Project Financial Management Manual has been provide to PMO by ADB Beijing Mission Office (PRCM) in late August, and PMO is to use this manual as future financial management reference to be followed by all agencies involved in the implementation of ADB financed Project.

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9. Institutional Arrangements and Capacity Building

9.1 Introduction and Overview of Requirements

9.1.1 This Chapter of the Report deals with the management and institutional arrangements necessary to ensure: (i) that the proposed Guiyang Integrated Water Resources Management Project (the Project) is successfully prepared and implemented and; (ii) that the institutional arrangements facilitate effective and sustainable operations and maintenance of the project facilities. The Chapter is divided into the following sections:

• Introduction and overview of requirements (Section 9.1); • Institutional and Capacity Building Work within the PPTA (Section 9.2); • Analysis of existing institutional arrangements (Section 9.3); • Policy Framework (Section 9.4); • Review of Proposed Project Implementation Arrangements (Section 9.5); • Institutional Capacity Analysis (Section 9.6); • Capacity Building Needs (Section 9.7); • Issues for Resolution during Loan Processing and Project Implementation (Section 9.8); and • Conclusions (Section 9.9).

9.1.2 In order for the Project to be implemented in a successful manner, institutional and project management arrangements need to provide for:

z Ease of project preparation and approval by both ADB and relevant domestic authorities; z Ensuring each Implementing Agency (IA) has the capability to effectively discharge their responsibilities for the implementation of the subprojects for which they are responsible; z There is a clear definition of each IA's responsibilities and its relationship to the relevant local government, Guiyang Municipality Government (GMG) as overall executing agency (EA), and other agencies involved in project implementation; and z The future operations and management of the project facilities, so that the Project is fully sustainable in terms of finance and service provision.

9.1.3 A critical area for examination in assessing the potential financial sustainability of the Project has been the sources of income and the security of these sources. In practical terms this means the political acceptability and customer affordability of required user charges, effective and fully-enforceable income collection, and the reliability of demand forecasts on which tariff estimates are based. Thus, financial sustainability is both a financial and an institutional issue.

9.2 Institutional and Capacity Building Work within the PPTA

9.2.1 The terms of reference (TOR) of the PPTA require the following:

z Review the existing prevalent municipal and local institutional arrangements for similar projects, in particular water affairs bureaus, pilot tested in other Guizhou counties; and propose an appropriate institutional set up and organizational arrangement for integrated water resources management (IWRM); z Assess the roles of water user associations to maintain irrigation schemes in a sustainable manner, in connection with a participatory consultation approach;

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z Review the capacity of village committees and assess strengthening measures required, as well as potential innovative participatory institutional arrangements involving these committees in water resources management; z Examine the Water Resources Bureau (WRB)’s implementation capacity and undertake training needs assessment for the other main project stakeholder institutions (e.g., the key government agencies/institutions for project implementation). Identify the capacity-building needs to secure efficient and effective project implementation, and to secure proper operation and management of the systems in urban areas and townships; z Prepare a brief training plan; z Undertake a financial management assessment of the IAs including corporate planning and budgetary control, financial and management accounting, cost accounting, internal control and audit system, and data processing. In light of the ADB governance policy (1995), recommend ways to improve financial management and corporate governance; and z Identify any technical assistance (TA) needs during project implementation, and prepare terms of reference for such assistance.

9.2.2 The PPTA work has supported the establishment of strong managerial and institutional arrangements by the IAs that will promote the sustainability of individual subprojects. The PPTA has also, and more fundamentally, identified needs and make proposals for institutional reforms that promote integrated water resources management.

9.2.3 The current institutional arrangements in the Guizhou Province water sector have been reviewed, with greatest emphasis placed on Guiyang Municipality (GM). This review has included: relevant laws; the agencies involved and their mandates; organizational structure; staffing etc. Information on the institutional arrangements and experience from other parts of the People’s Republic of China (PRC) and internationally, has been drawn on where appropriate.

9.2.4 The effective management of irrigation systems has been shown to follow the transfer of responsibility of irrigation system assets and management to water users, as long as it is supported by appropriate capacity building and regulatory provisions. Chinese and international experience in establishing and operating water users associations (WUAs) has been used to guide an assessment of the current management of irrigation schemes. This initial assessment has led to recommendations for further development of WUA roles and responsibilities during project implementation. Details are discussed in Section 9.7 below.

9.2.5 During the PPTA a number of required capacity-building measures have been identified, including implementation phase consulting support and training needs. These measures include actions required to strengthen the IAs for the project construction phase and also others to prepare them for the subsequent operations phase. This identification process has continued throughout the PPTA with a full analysis and capacity building program being prepared for discussion during Loan Fact-Finding (LFF) Mission. The program as agreed during the Mission is now presented in this report.

9.2.6 It is immediately apparent that there are key linkages between the institutional arrangements and other aspects of project design. This particularly applies to arrangements for WUAs and participatory structures that are being considered within the social analysis. It is also clear that given the wide variety of the nature and scale of subprojects within the Project no single set of institutional arrangements are appropriate for application across all subprojects and instead implementation arrangements will need to be customized within a framework of core institutional principles and objectives. Paramount in those objectives being the need for financial and management sustainability of the project facilities so they achieve required outcomes.

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9.3 Analysis of Existing Institutional Arrangements

Existing Institutional Arrangements

9.3.1 The existing institutional arrangements for water sector management are documented in Appendix I1 under the following headings:

z An overview of PRC government institutional arrangements; z The allocation of responsibilities within GMG in respect of water sector management; z The responsibilities of lower level governments (District, County, Township, Village); and z GMG initiatives towards IWRM that have taken place so far.

9.3.2 Attachment A of Appendix I1 contains organizational charts for:

z Guiyang Municipal Government, including the main Bureau with responsibilities; z Local Water Resources Bureau; and z Overall Project Management Arrangement and Guiyang PMO.

Institutional Analysis

9.3.3 The detailed institutional analysis is also contained in Appendix I1 and structured as follows:

z The impediments to the implementation of IWRM within Guiyang municipality; z A possible strategy for the progressive implementation of IWRM within Guiyang Municipality and the key actions that need to be taken during the preparatory phase of the Project. This is further discussed in Paragraphs 9.3.13 to 9.3.19 below; z An analysis of the institutional capability of Guiyang Municipality and sub-ordinate agencies to successfully implement the proposed Project. This is further discussed in Section 9.4 below; z The arrangements for the implementation of individual subprojects. These are summarised in Section 9.4 below; and z Capacity building requirements and how these might be provided for during the project implementation phase. This matter is discussed in Sections 9.5 and 9.6 below.

Impediments to the Implementation of IWRM

9.3.4 The institutional impediments to the implementation of IWRM as identified during the PPTA are described in Paragraphs 9.3.5 to 9.3.11 below in the form of specific examples, and can be summarized as resulting from:

z Institutional fragmentation; z An absence of participatory structures and consultative processes; z Poor coordination between different agencies and inadequate information flows; z A lack of comprehensive catchment based systems analysis in the preparation of the Master plan (this was discussed in more detail in Chapter 2); and z A continued emphasis on supply side solutions.

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9.3.5 Analysis shows that the current management of the water sector is highly fragmented. There is vertical fragmentation with different responsibilities between Provincial, Municipal and District/County levels and there is horizontal fragmentation with responsibilities for water sector management split between different functional departments (mainly Water Resources, Urban Management and Agriculture).

9.3.6 Both types of fragmentation can lead to problems in water resources management, but generally the horizontal fragmentation presents the more difficult problems to deal with. This is because the system of functional supervision within PRC government allows issues caused by vertical fragmentation to be resolved more easily - although this does not always happen in practise. Paragraphs 9.3.5 to 9.3.8 provide some specific examples of the fragmented responsibility that exists under current arrangements.

9.3.7 In general the ownership and management responsibilities for reservoirs depend on the storage capacity of the reservoir. Reservoirs with capacity of over 100 million m3 are designated as “provincial”, those between 10 million and 100 million m3 storage are “municipal” and those below 10 million m3 of storage are District/County level facilities. However, these rules are not uniformly applied and the funding and purpose of the reservoir can result in management arrangements that do not follow these rules. For example reservoirs which are constructed primarily for hydropower generation and financed by Power authorities will be managed by the relevant power company. If a reservoir below 100 million m3 capacity is nevertheless constructed/financed primarily by the Provincial level it will likely remain under provincial control after it is completed.

9.3.8 In Guiyang on Nanming River catchment there are three medium sized reservoirs, Songbaishan and Huaxi reservoirs in sequence, and Aha reservoir in a separate branch. Instead of these being managed as an integrated water resource facility the management is fragmented between the Province and Guiyang municipality - although we understand there are possible moves planned to transfer the provincial facility to municipal level control. This is an example of poor coordination of management as a result of vertical fragmentation.

9.3.9 In rural areas responsibilities for irrigation are fragmented between the local Water Resources Bureau (reservoirs, primary and secondary distribution) and the local Agricultural Bureau (cropping pattern changes and agriculture extension services). Often poor distribution and inefficient use of water results from this horizontal fragmentation.

9.3.10 In the central urban area of Guiyang the sewerage system is the responsibility of the Urban Management Bureau, but the responsibility for the operation of wastewater treatment plants is under the functional control of the Urban Construction Bureau. There seems no logic in this particular example of horizontal fragmentation – other than the fact the WWTPs were constructed by the Urban Construction Bureau giving them some presumptive right to manage the facilities.

9.3.11 Not all these examples can or should be cured by institutional adjustments. In some cases improved inter-agency coordination and/or greater user participation would be a more appropriate solution. These examples of fragmentation– and there are many others – do illustrate that implementation of genuine IWRM will need to be carefully considered and planned over a reasonable period of time. There is no quick fix, although some reforms can be made more easily than others.

9.3.12 In addition to the horizontal and vertical fragmentation of responsibilities referred to above, the PPTA work has identified the following specific impediments to the practising of IWRM in Guiyang Municipality:

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z Prior to the commencement of the PPTA there were no water user associations, or water user groups established in Guiyang municipality; z Also prior to the commencement of the PPTA there were limited attempts to involve local stakeholders in the design, implementation and operation of water projects; z There is no formal process of stakeholder consultation/involvement in the allocation of water resources where demand exceeds available resource; z The central urban area and some of the suburban districts are becoming more closely integrated in physical terms, but the suburban districts continue to have their own water supply companies. Almost invariably it would be more efficient to have one single water supply company covering the greater urban area (including the suburban districts) and possibly covering the counties and townships as well; z Similarly, the suburban districts and counties are responsible for their own sewerage systems and (presumably) WWTP, once constructed. Bringing all WWTP under a properly financed wastewater company would greatly; enhance the likelihood of the WWTP being properly managed and operated; z International experience shows WWTP are best managed in conjunction with the collection network that provides their wastewater. (This is commonly referred to as the concept of integrated water resources management). Thus the wastewater company(s) should also be responsible for the management of the wastewater collection networks; z There is duplication of water quality monitoring between the WRB and the EPB, although different parameters are monitored; z There are clear responsibilities for wastewater discharge monitoring into urban sewers by the EPB. z Information does not pass freely within GMG to allow fully effective integrated water resources planning or management; z Local townships, villages, and in rural areas sometimes individual households, are charged with managing their own water supplies. Greater coordination and integration (both physical and management integration) of water supplies is likely to enhance service levels and be more cost effective overall. If merger of water supply companies leads to an equalisation of tariffs between urban and rural areas (as many developed countries practise) then there is almost invariably a cross-subsidisation from urban to rural user , however this can be justified on social grounds - particularly as facilitating improved rural livelihoods and promoting rural development; z Greater coordination between water departments, agriculture departments and local water users would almost certainly lead to better design of irrigation systems and optimisation of cropping patterns; z It was apparent that the initial justification of Yudongxia reservoir was undertaken without involvement of either Wudang District Water Company, or the Guiyang Municipal Water Supply Company – yet these two companies use of Yudongxia water provide the main economic and financial justification for the reservoir; and z Whilst the Guiyang Integrated Water Resources Management Plan (the Master Plan) recognises the need for greater efforts on demand management the priorities in the plan continue to be for the development of new resources.

Action taken by GMG to embrace IWRM

9.3.13 It must be emphasised that although some of the above issues represent serious impediments to IWRM many of them are common to many Chinese cities, and Guiyang is in several respects better than many other cities:

z GMG has recognized the benefits of IWRM and has indicated it is receptive to reform;

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z The preparation and approval of the Master Plan will have involved a level of integrated planning not commonly found in the PRC. Whilst the initial Master Plan can certainly be improved in its content and presentation it does represent a serious attempt to integrate all aspects of water reseource planning into a single document, thus providing a basis for improved planning in the future; z GMG has now sanctioned the setting up of a water user association and a network of local water user groups (WUGs) for the Wudong District irrigation rehabilitation core subproject, and further such user networks will be established for other subprojects; z GMG will commit to following participatory approaches in the design and implementation of non core subprojects; z GMG has moved to take advantage of new national regulations that allow individuals and collectives to take ownership and full control of state funded assets constructed for their benefit. This, together with particpatory approaches, will potentially improve the sustainabilty of such projects; and z GMG has already taken some steps to try to achieve unified management of the reservoirs on Nanming River catchment (see above).

Institutional Reform

9.3.14 It is clear that if GMG is to fully embrace IWRM a degree of instituional reform is necessary, both within GMG and in subordinate levels of government. (note: the same undoubtedly applies at the provincial level, but this was not part of the terms of reference for the PPTA to examine). However, equally, institutional reform cannot in itself provide a comprehensive solution to the effective application of IWRM. Instituional reform is therefore but a part of the required comprehensive solution. The proposed ADTA to run in parallel will propose a specific mix of actions to implement IWRM in an effective manner by examing the situation in one or more sub-catchments in detail. This propsed ADTA is discussed further in Section 9.7 below (Paras 9.7.7 to 9.7.9) and in Appendices I1 and I6.

9.3.15 The Water Resources Bureaus at the municipal and subortdinate level have the responsibility for the integrated planning and management of water resources, but as described above there are also institutional constraints that prevent the WRBs from adopting a fully integrated approach. Nevertheless, based on the 2002 Water Law, it should be the WRBs that take the lead role.

9.3.16 IWRM requires participatory approaches, systems analysis based on river catchments/sub-catchments, and effective information flows and coordination between the various agencies and stakeholders involved.

9.3.17 Whilst some large cities in the PRC have set up water authorities, these have had mixed success and created significant friction between different ministries at national level. These water authorities have achieved greater integration of water resources management by integrating the responsibility for rural and urban water management, but have done not much to overcome fragmentation in water quality management and in providing greater coordination between local water and agriculture departments. It is understood that the State Council has an embargo on the creation of any further water authorities until the experience and performance of those already established can be properly evaluated.

9.3.18 Another key driver for institutional reform is the government’s policy of exposing public services to competitive forces wherever this is practical and might lead to improved performance. This policy leads to a required separation between the roles of water management (e.g. planning, allocation and regulation) and service provision (operation and maintenance of water infrastructure, provision of water supplies, wastewater collection and treatment etc), with service provision progressively outsourced or privatised. It should be

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noted that the policy of competition (or marketisation as it is frequently referred to in the PRC) can be made fully compatible with IWRM, which is a specific and favoured approach to water management. However, outsourcing and fuller forms of private sector involvement in service provision do require careful thought to be given to supervisory and regulatory requirements to ensure service contracts to achieve their intended objectives.

9.3.19 It is beyond the scope of this PPTA to design a specific set of IWRM based institutional and arrangements capable of best serving Guiyang, but it is clear such a package will require the following:

z Selective institutional reforms to remove specific anamolies and constraints to a more integrated approach; z Clearer definition of the role and responsibilty of the WRB as the agency with over-arching responsibilty for overall water resources management; z Establishing particpatory structures, including WUAs in rural areas, and involving other non-governmental stakeholders as appropriate; z Improved coordination through joint working groups and standing committees to address specific problems such as: - Rural water conservation and agricultural outreach to change cropping pattterns; - Industrial water saving; - Promoting urban water saving; and - Providing comprehensive solutions to water quality issues. z Greater focus on water management based on catchments rather than on the basis of administrative jurisdictions.

9.4 Policy Framework

9.4.1 Discussion with the Guiyang PMO and relevant municipal agencies, together with reference to specific national PRC policy documents, reveals a favorable set of government policies in support of the Project and the establishment of institutional arrangements that can provide for project sustainability. These policies, which are written up in the form of a policy framework in Appendix I5, include:

z The promotion of IWRM under the PRC 2002 Water Law; z Establishment of water user groups and increased responsibilities conferred on individual households and local communities (including asset ownership), rather than government; z Greater attention in national planning to rural development and livelihood improvement (this is a particular change of emphasis in the 11th Five year plan 2006 to 2010); z Public services should be corporative and not provided directly by government; z The government role should become that of enabler and regulator of services; z There should be separation of government and the management of enterprises; z Utility services should be financed from user charges, with tariffs set in accordance with full cost recovery principles; and z Where appropriate competition and private sector participation should be encouraged for both investment in infrastructure construction and also for operations and maintenance.

9.4.2 In addition there is a growing convergence of PRC and ADB safeguard and social policies covering environmental protection, compensation and livelihood improvement for project affected persons, and the rights of women and ethnic minorities.

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9.4.3 During the PPTA dialogue has been undertaken on various policy issues and based on these discussions a suggested policy framework has been prepared for ongoing ADB/Government policy dialogue during project implementation. This draft policy framework forms Appendix I5 of this report. It must be emphasized that institutional reform must be compatible with policy development and the two kept broadly in step.

9.5 Review of Proposed Project Implementation Arrangements

9.5.1 The proposed institutional and project management arrangements for the Project can be summarized as follows:

z At Municipal Government level a Project Leading Group (PLG) has been established to oversee the preparation and implementation of the overall project. This group is led by a Vice Mayor of GMG; z Also at Municipal Government level a PMO has been established to represent GMG and assist it to discharge its responsibilities as EA for the Project. The Guiyang PMO will play a vital coordination role both during project preparations and during implementation and ensure smooth communications with the implementing agencies and other project stakeholders; z For large revenue generating subprojects such as Yudongxia Reservoir and its associated water treatment plant, a utility company have or will be established to act as the implementing agency and this company will: - be a properly constituted enterprise company established under the provisions of Chinese law and become largely managerially and financially autonomous; - working and liaise closely with the various departments and agencies of local government; and - Assume management responsibility for future operations and maintenance of project facilities, including responsibility for debt servicing and the repayment of loan principal. z Provision of advice and support services to the EA and IAs will be provided by institutes, consultants and specialist contractors. These will include: - Design and design review; - Tendering and procurement; - Construction supervision; and - Implementation phase consultancy on capacity building and training. z Independent review and scrutiny of project implementation will be undertaken in respect of: - Environmental monitoring and adherence to environmental impact assessment (EIA) provisions; - Compliance with the Resettlement Plan and Ethnic Minorities Development Plan; and - External audit of project accounts and compliance with loan covenants. z Project performance will be reviewed through the establishment of an agreed project performance monitoring system (PPMS) developed from the Project Design and Monitoring Framework (PDMF). See Chapter 10 for preliminary proposals.

9.5.2 It is concluded these arrangements, once fully implemented and effective, will provide a strong framework for overall project management and control. Evidence to support this conclusion exists from earlier ADB financed water sector projects implemented in the PRC. The risk to project success is therefore undoubtedly greatest as a consequence of poorly designed arrangements for operations and management (see Para 9.5.1 below).

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Implementation Arrangements for Core Subprojects

9.5.3 The core subprojects were agreed upon between the Guiyang PMO and the PPTA team in February and were subsequently notified to ADB. This has allowed discussions to proceed on the implementation and supporting institutional arrangements for those core subprojects.

9.5.4 For the Yudongxia reservoir subproject it is proposed the Guiyang Zhushui Water Resources Industry Company (GZWRIC) will be the designated implementing agency for the construction and subsequent operation of the facilities, although the detailed delineation of responsibilities between GZWRIC and the Guiyang WRB over reservoir operation and management, together with the water rights afforded to GZWRIC, has yet to be finally decided upon. ZWRC is an existing enterprise that is already experienced in the construction and operation of water resources facilities in Guiyang. Capacity building needs analysis is in progress in respect of this Company, but preliminary investigations confirm it appears to be the most suitable IA for this subproject. It is currently proposed that GZWRIC be responsible for construction and O&M of reservoir, delivery system and water treatment plant. Water will then be sold to the local water supply company and a water purchase agreement will therefore be needed to ensure the long term financial viability of the subproject.

9.5.5 For the other core subprojects there exists either only limited or no income generating potential for the facilities to be constructed. Under these circumstances it is proposed the local County/District WRB act as the main implementing agency under the overall direction of Guiyang Municipal Water Resources Bureau. Each County/District has or is in the process of establishing a PMO to undertake the required local coordination and implementation activities. It is not proposed that the ADB loan be on-lent to these local WRB. Instead GMG will shoulder the majority of the debt financing burden with disbursements also controlled at the municipal level. Proposed implementation arrangements for each of the individual core subprojects are described and analyzed in Appendix I1 (institutional analysis).

9.5.6 Recent PRC regulatory changes made in November 2005 now permit the ownership of certain types of small water resources infrastructure that is constructed by use of public funds to be subsequently passed to individual households or local communal ownership, as well as responsibility for subsequent upkeep. This will apply to the small household and irrigation water tanks component of the Project, and potentially also to the soil conservation and irrigation subprojects. The intention has been to develop suitable arrangements for the core subprojects that can subsequently be used as models for the remaining subprojects financed under the initially uncommitted part of the sector loan.

Development and Role of Water User Associations

9.5.7 GMG and Wudang District have recently taken steps to establish a Water User Association (WUA) for the Wudang irrigation rehabilitation core subproject. It is proposed that this WUA be established as a legal entity. It is intended it take the form of a committee legal person - that is the committee is the legal entity, and the chair of the committee is the designated “legal person” (with legal and financial responsibility broadly equivalent to the legal person of a Chinese enterprise). It should be noted that village committees in China operate under this arrangement, so it is a well proven legal model. The WUA would be under the supervision of Township government, just as village committees are. Although under the jurisdiction of township government, the WUA would be an autonomous organization primarily accountable to water users. WUAs would be set up for each main irrigation system/or for subsystems where there are large systems. The WUA will then contract with the local water station for the irrigation supplies.

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9.5.8 It is further proposed that at grass roots level informal Water User Groups be established, but these would not be formal legal entities. These local water user groups would have representation on the water user association and be responsible for coordinating activities at the local level, including operations, organizing maintenance, collecting water use fees (and passing these to the WUA) etc.

9.5.9 This model has been selected by the PMO because it fits well with existing local institutional arrangements and thus can be implemented relatively easily. The model is somewhat different from the model initially presented by the PPTA team which envisaged the WUA being a lower level organization operating at village level, with a formal status and also having grass roots WUGs. The PPTA team envisaged a WUA federation being formed at township level, to contract with the local water station, giving a three tier arrangement rather than a two tier arrangement favored by the PMO. However, the two models are sufficiently close and with a broad commonality of objectives, and support should therefore be given to the PMO approach, given the fact it commands local ownership.

9.5.10 Initially the PMO was proposing that only one WUA be established immediately and used as a pilot, with the implementation of other core and non core subprojects being implemented in a more traditional PRC manner. The PPTA team expressed concern that this approach would risk a repeat of past mistakes and we favor setting up WUAs for each irrigation and reservoir subproject. The PMO accepted our point and in discussions during LFF agreed to formation of a WUA as a selection criteria for relevant non core subprojects. The formation of WUAs would therefore be initiated by the local PMO and WRB acting on behalf of the relevant County/District government. An action plan for the establishment of WUAs is provided as Appendix I4 of this report

9.5.11 Consideration has also been given to whether establishment of a WUA should be part of the implementation arrangements for the soil conservation subprojects. The conclusion reached was that as these subprojects involve broader livelihood issues that the relevant village committee should assume ownership and responsibility for the sustainability of these subprojects, under the supervision of the relevant township.

Role of Village Committees in Water Resources Management

9.5.12 Village committees have traditionally played a key role in information collection and dissemination in water resource planning and management. Village committees are involved in a consultative capacity in the setting of rural water charges and they have traditionally organized the collection of water fees (except in collectively-owned schemes). Approval of fees is given by the Price Bureau at the next higher level of government. The relationship between the village committee and WUAs is important in creating an enabling environment for efficient water use and sustainable management of irrigation systems, with the WUA taking over parts of the former village committee role.

9.6 Institutional Capacity Analysis

9.6.1 Many project completion reports on earlier ADB projects have noted the lack of institutional capacity found in local government sectoral agencies, which led to poor operation and maintenance practices and projects not achieving their original targets. Local government agencies at the county and district level were insufficiently prepared to carry out their long term responsibilities for maintenance and repair. The reasons for this were complex, having to do with some or all of the following factors:

z Inability or unwillingness to pay adequate water tariffs to ensure system sustainability; z Lack of technical or management training;

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z Inadequate commitment of beneficiaries to maintain their facilities, in some cases due to unclear ownership; z Poorly designed or poorly constructed water facilities; z Poor selection of water technologies that sometimes reflected neither user demand (e.g. desired level of service) nor affordability; and z Political intervention in site selection, contractor selection, and sometimes tariff setting.

9.6.2 While these are common problems in many developing countries, they emphasize the need to focus considerably more attention on capacity building and targeted training for all levels of the eventual project implementation framework. At the lowest (and most important) level, communities cannot be reasonably expected to operate, finance and maintain facilities where:

z The facilities are not what they wanted in the first place; z The facilities are more expensive to build and maintain than users can reasonably afford; and z They were not properly trained to build, operate, or financially manage their facilities, and do not have access to suitable skilled people who can do so for them.

9.6.3 The basic arrangements for project management of the Project as set up by GMG are very typical of those used for other ADB and internationally funded projects and are well proven. GMG as an executing agency has previous experience in internationally funded projects, including the World Bank, but has no previous experience of ADB projects. In addition GMG has rich experience in implementing water resources projects presenting very similar engineering challenges to the Project. The Guiyang Municipal Finance Bureau is well resourced with staff experienced in general disbursement procedures, but will require specific training on ADB procedures.

9.6.4 The new challenges that the Project will present for GMG relate mainly to the lack of familiarity with ADB procedures and the practical application of participatory IWRM concepts. In particular:

z Capacity to process the preparation of non core subprojects in compliance with ADB requirements (including safeguard issues), and in a timely manner; z Implementation of subprojects in compliance with ADB procurement and other relevant guidelines; and z Revising procedures to include for the participatory approaches commonly associated with IWRM, and so as to address some of the problems identified in Paragraphs 9.5.1 & 9.5.2 above.

9.6.5 Before and during the PPTA a process of capacity building has commenced in order to familiarise relevant offices of GMG with the requirements of ADB and the implications of applying IWRM in practise. The process started in April 2005 with the assignment of an ADB staff consultant to assist GMG, and the PPTA has built on that work. In addition specific training has already been given on key aspects of ADB procedures, including procurement, land acquisition and resettlement, and environmental safeguards.

9.6.6 GMG does not hold all capacity in house but contracts out activities requiring specific expertise. For example, the Guiyang based Guizhou Research and Design Institute for Water Resources and Hydropower (GZDI) was heavily involved in the Project preparation and the FSR for the core Yudongxia and Jinlong reservoir subprojects. GZDI staff has worked both alongside and as part of the PPTA team. Specific knowledge and skills transfers have been occurring in the areas of financial and economic analysis, preparation of environmental,

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resettlement and indigenous peoples safeguard documents, and in the role and responsibilities of water user associations. Involvement of GZDI in the project in the implementation phase, and especially in the processing of non core subprojects will be extremely important. The PMO recognises this fact and have indicated they will retain GZDI involvement after the PPTA has been completed.

9.6.7 During the PPTA, framework documents and specific model examples have been prepared to ADB requirements in respect of:

z Feasibility study assessments (examples only); z Land acquisition and resettlement (framework and examples); z Environmental safeguards (framework and examples); and z Ethnic minorities safeguards (framework and examples).

9.6.8 The example feasibility studies will also act as case studies in the financial, economic and institutional analysis of the subprojects in compliance with ADB requirements. Therefore a basic set of resource material is available, together with PPTA experience acquired by both the PMO and the GZDI.

9.6.9 In addition to the above it is proposed that the PMOs and IAs (at municipal and lower levels) be supported by international and national consulting services financed under the ADB loan. These consultants will be contracted directly by the PMO and provide valuable additional advice and support for Project implementation and are themselves an important safeguard and risk mitigation measure in respect of the implementation phase.

9.6.10 In summary it is felt there exists strong technical capacity and project management in Guiyang for the preparation and physical implementation of most of the project components. Only in the area of soil conservation does some external support appear to be required, based on the experience during the PPTA. Understandably, there are less capacity in relation the specific requirements of ADB, both in how project proposals are presented, the level of justification needed and in demonstrating compliance with safeguard issues. However, the experience during the PPTA is that GMG and the PMO in particular can deal with these requirements and issues effectively if they have appropriate consulting support and training. This matter is dealt with in more detail in Section 9.7 below.

9.7 Capacity Building Needs

9.7.1 The task of strengthening villages, townships, counties and districts to more effectively participate in the provision of improved water services will be a long term effort over many years. Literally thousands of people will require training and information on how to more efficiently and effectively plan for and provide improved services. Promoting such linkages may represent a potential source of growth and empowerment that would both bolster good governance, and contribute tangibly to poverty alleviation. The challenge of this PPTA has been to:

z Assess capacity and capability strengthening needs at all levels of the project institutional support infrastructure (local government agencies, non-government organizations (NGOs), private sector, and communities); z Develop targeted training programs to effectively empower people at each level; z Suggest appropriate incentives (financial and otherwise) that will serve to encourage people at all levels to carry out their responsibilities, so that the facilities and services are suitably financed and sustained over the long term; and z Identify the needs for consulting services support during project implementation and prepare draft terms of reference for this.

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9.7.2 The potential capacity building needs have been identified as relating to:

z the progressive implementation of IWRM principles throughout Guiyang municipality; z processing the approvals for non core subprojects; z use of participatory approaches including the establishment and development of local WUAs/WUGs; z support to farmers over the application of revised cropping patterns to reduce the risk of crop loss increase crop yields; and z implementation support to the municipal PMO, local PMOs and individual IAs.

9.7.3 It is accepted these needs are not free-standing but are closely inter-related, however this classification appears to be a reasonable basis for planning the required capacity building program. Each is considered in more detail in Appendix I1, specific capacity building proposals are made in Paragraphs 9.7.4 to 9.7.11 below, and a capacity building plan is presented in Appendix I3.

Building Capacity for Successful Project Implementation

9.7.4 A series of discussions have been held with the Guiyang PMO on the best means to ensure there is adequate capacity at the local level to support project implementation and make maximum use of ADB delegations in utilizing the sector loan. It is accepted that only partial delegation will be permitted ,but it is anticipated that based on investigations of the core subprojects that the requirement for formal safeguard documents for many small subprojects can be dispensed with.

9.7.5 Every effort has been made during the PPTA to try and transfer implementation knowledge and skills to local organizations. The key recipients of this transfer are the Guiyang PMO itself and the GZDI who have prepared the Project and are responsible for many of the feasibility studies and EIAs being prepared for the core subprojects. It is anticipated these two organizations will play central roles in the subsequent implementation phase of the Project making use of the experience gained during the PPTA.

9.7.6 During the PPTA it has been confirmed that GZDI has excellent experience and capacity in the technical aspects of water resources projects. Experience and capacity is much less solid in the areas of ADB safeguard policies and requirements for social, financial and economic analysis. A degree of strengthening of the domestic part of the PPTA team was therefore proposed and approved to facilitate an improved transfer of skills in these non- technical skills.

Advisory Technical Assistance during Project Implementation

9.7.7 During the ADB inception mission GMG were advised that US$ 400,000 of ADB grant funding had been provisionally earmarked for technical assistance to complement project implementation activities and especially for supporting the implementation of integrated water resources policy initiatives proposed for the Project. This provisional offer was presented as being conditional on the Project being processed as a sector loan (now confirmed by PRC state level authorities), the provision of government counterpart funding (20% of total costs) and preparation, submission and approval of a TA concept paper by both PRC government and ADB.

9.7.8 The PPTA team prepared an initial draft of the concept paper, which has subsequently been reviewed and endorsed by GMG and submitted to the relevant authorities. The defined goal of the TA is

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“to help introduce modern principles of integrated water resources management (IWRM) into the management of the water sector in Guiyang. The ultimate goal is to use IWRM in a way that improves the performance of the water sector and by so doing to facilitate sustained economic growth and improve the livelihood of the citizens”.

9.7.9 This goal would be achieved over approximately a two - year period, and a two phase approach would be taken in implementing the TA. The first phase over 12 months would develop detailed reform proposals and get government approval for trial reforms. The second phase, also over 12 months would support the trial implementation of the reforms, review their initial success and document the lessons learned. A copy of the full TA concept paper is included as Attachment C of Appendix I1 and the draft TA paper as prepared during LFF is presented as Appendix I6, and which contains a full TOR for the proposed TA.

Implementation Phase Consulting Services.

9.7.10 In common with most ADB projects in China it is envisaged that a small part of the loan will be used to finance consulting services support to the PMO and implementing agencies. The appointed consultants will complement the efforts of the proposed ADTA consultants with the latter focusing on policy implementation and institutional development in the area of IWRM. It is currently envisaged the consulting services financed via the ADB loan will need to provide support in the following areas:

z In the preparation of documents for processing subprojects to be financed from the uncommitted part of the ADB loan (i.e. the non core subprojects). This assistance will be most needed to ensure ADB requirements for economic justification and safeguard issues are met; z Project implementation of the core subprojects. Again the emphasis of support needed appears to be in the area of safeguard monitoring, but also in initial procurement advice and other aspects of ADB procedures and reporting; z In the provision of continuing advice and support in first establishing and then capacity building of sustainable institutions/user groups at a local level to provide for sustainability of community based facilities such as irrigation systems. This will likely involve a substantial training effort in participatory approaches and measures to ensure social equity (for example in gender awareness, and protecting the interests of indigenous peoples); and z In water demand management activities to promote the more efficient use of water amongst all categories of user. The perceived priorities in this respect are use of pricing as a demand management tool, the efficiency of irrigation schemes (as these are the largest single use of water), industrial recycling of water, and urban water saving (including the preparation of a water –saving code and the promotion of improved public awareness).

9.7.11 Draft terms of reference for the consulting services were prepared at PPTA interim report stage and these have been updated and represented as Appendix I2. The estimated cost of these services is US$ 1.3 million over a 5 year period and they involve 27 months of international and 150 months of national consulting inputs.

Training Component

9.7.12 Training needs analysis has been conducted during the PPTA in respect of the needs of the core subprojects. The results of this analysis are presented as Annex E to Appendix I1 (institutional analysis). In order to meet the identified training needs a training budget of US$250,000 has been included in the project cost estimate. It is anticipated training initiatives will include:

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z Overseas and Chinese study tours to view the practical application of IWRM and learn lessons relevant to the local Guiyang situation. z Training in IWRM planning and techniques z Training in ADB procedures such as procurement and disbursement, and in the practical application of ADB safeguard policies. z Grass roots training to support WUAs/WUGs and other participatory approaches z Training the trainer program for farmer training in revised cropping patterns.

9.8 Issues for Resolution during Loan Processing and Project Implementation

Yudongxia Reservoir Management and Operations

9.8.1 The detailed delineation of responsibilities between GZWRIC and the Guiyang WRB over reservoir operation and management, together with the water rights afforded to GZWRIC, has yet to be finally decided upon.

Water Purchase Agreements

9.8.2 For Yudongxia reservoir subproject and potentially other reservoirs and irrigation schemes the financial viability of the subprojects will depend on water users purchasing an adequate amount of water from the newly constructed facilities. These water users could be wholesale bodies, such as local water supply companies, community/township groups or individuals. It appears in appropriate cases, including potentially Yudongxia reservoir, that water purchase agreements (WPAs) may be needed to give adequate assurance on future financial viability. The need for the WPAs has been accepted by the PMO, but negotiations on the content of the WPA with both Guiyang Municipal Water Supply Company and the Wudang District Water Supply Company, as the main wholesale users of Yudongxia water, have not yet been concluded.

Legal Documents

9.8.3 A number of legal documents will need to be drawn up, negotiated and executed in order to make the ADB loan effective. Table 9-1 below contains an initial checklist.

Table 9-1: Legal Documentation Required for Project Effectiveness

Description of Document Parties Notes on Content

1. Loan Agreement PRC/ADB ADB standard format

2. Project Agreement ADB/GMG ADB standard format with specific assurances and requirements as agreed at negotiations (see RRP for initial draft)

3 Main On-lending Agreement PRC/Guizhou As in item 2 above. Prov Govt

4. Subsidiary On-lending Agreement GPG/GMG Basic on-lending model document with to Guiyang Municipal Government specific items to be negotiated

5. Subsidiary On-lending to Guiyang GMG/ Basic on-lending model document plus Zhushui Water Resources Company ZWRC specific items to be negotiated (ZWRC)

6 Financial Guarantees Provided By Amount

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6a Main Loan Guarantor PRC Full Loan Government 6b Provincial Project Guarantor GPG Full Loan 6c Municipal Government Guarantor GMG Full loan

7. Water Purchase Agreements ZWRC/GWSC Legally binding obligation for GWSC for Yudongxia reservoir ZWRC/WWSC and WWSC to purchase water from ZWRC and ZWRC to supply same.

9.9 Conclusions

9.9.1 Existing institutional arrangements for water sector management in Guiyang are highly fragmented. This especially applies at the municipal level (i.e. within GMG itself). There is a prime facie case for greater integration in accordance with the principles of IWRM. This is the core policy related challenge for the Project and needs to be investigated at all levels of government. Discussions held to date suggest integration may be easier to achieve at the local level, although within China several large cities have introduced integrated water sector managements arrangements at the municipal level. Shanghai, Beijing, Harbin and Wuhan are specific examples.

9.9.2 GMG has indicated a commitment to implement IWRM approaches and the preparation of the master plan is a positive development and provides a solid base for further initiatives. The ADB TA support now proposed for the implementation phase should greatly assist in designing and testing improved institutional arrangements that can facilitate improved integration in water resources management.

9.9.3 The traditional approach in China to water shortages was to focus on the supply side and construct additional resources. This, together with subsidized pricing, has led to inefficient usage of water and considerable scope exists to improve the efficiency of water use. Lack of integration in water resources management and planning is a common reason for inadequate attention being given to water demand management activity as there is no incentive for taking a holistic view of sector issues and problems. Demand management approaches should be evaluated as alternatives to the construction of new facilities. Initiatives for consideration include:

z Pricing and tariff structure reforms; z Developing a water saving code; z Subsidized provision or credit facilities for water saving devices for farmers (as an alternative to subsidized water prices); z Public awareness initiatives; z Promoting water reuse; and z Leakage detection and prevention.

9.9.4 The implementation modality for the proposed sector project should ideally be based on the fundamental IWRM principles of:

z Decentralization of decision making to the lowest practical level, but with consistent coordination mechanisms to obtain a basin approach; z Full involvement of communities in subproject planning and implementation, particularly women; z Involvement, to the extent possible, of both private and non-government organizations in providing technical and management support to project activities; and z Expanding the facilitation roles of PRC sectoral agencies to ensure more efficient and effective water services, especially for those most in need of these services.

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9.9.5 There is no doubt based on the PPTA work that strong technical and project management capacity exists in Guiyang for the preparation and physical implementation of the project components. The management arrangements proposed for project implementation follow a model well proven in the PRC. It is concluded these arrangements, once fully implemented and effective, will provide a strong framework for overall project management and control.

9.9.6 Understandably as this is the first ADB project to be implemented in Guiyang, there is less capacity in relation the specific requirements of ADB, both in how project proposals are presented, the level of justification needed and in demonstrating compliance with safeguard issues. However, the experience during the PPTA is that GMG and the PMO in particular can deal with these requirements and issues effectively if they have appropriate consulting support and training.

9.9.7 There is also less capacity to apply the somewhat unfamiliar participatory IWRM approaches referred to in Paragraph 9.9.1 and it is in this area that we believe capacity building should be focused. The risk to project success is undoubtedly greatest as a consequence of solutions being implemented without proper user involvement and poorly designed arrangements for operations and management.

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10. Project Design, Monitoring and Evaluation

10.1 General

10.1.1 This Chapter of the Report considers how the success of the proposed Guiyang Integrated Water Resources Management Project (the Project) should be assessed and measured. Draft versions of both a project design and monitoring framework (PDMF) and proposals for project monitoring and evaluation (PME) have been prepared. Use of these tools should provide a robust mechanism for the post completion evaluation of the Project but will require procedures for the necessary data acquisition and analysis to be put in place. It is self-apparent that the PDMF and the PME are closely linked and, as would be expected, many of the PME measures are drawn from the PDMF.

10.2 Project Design and Monitoring Framework

10.2.1 A unified PDMF has been prepared in draft having regard to ADB guidance, and has been subject to the recommended consultative process, using problem tree analysis with the involvement of stakeholders. The analysis conducted is summarized in paragraphs 10.2.2 to 10.2.7 and the resulting PDMF is provided in Table 10-1. Stakeholder consultation has taken place through local discussions, project workshops, tripartite meetings and other report feedback.

10.2.2 The development problem the Project seeks to address is stated as “water resources are currently inadequate to facilitate the further economic development of Guiyang municipality”.

10.2.3 The causes of the problem are viewed by stakeholders as being:

· the Rapid pace of development; · Insufficient Natural Water Resources; · Uneven Seasonal Rainfall; · Uneven Geographical Distribution; · Topography; · Some Resources Polluted; · Wastage of Water; · Inefficient Irrigation; · Losses from pipes; · Poor reuse by Industry; · Poor reuse by domestic users; · Poor awareness of the need for water saving; and · a Lack of incentives to save water

10.2.4 The effects of the current situation are:

· A high % of water runs away without being captured for use; · Future industrial development is constrained; · Farmers’ crop yields are reduced; and · Seasonal shortages of water (especially in rural areas).

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10.2.5 The overall development objective of the Project is seen to be the creation of “Sustainable and inclusive socio-economic growth in Guiyang Municipality”.

10.2.6 The means identified to achieve the stated objective are:

· Construction of Water Infrastructure; (i) Reservoirs (ii) Irrigation Systems (iii) Small storage systems · Soil Conservation Initiatives; · Sustainable Operations; · Integrated Planning to make best use of available resources; · Pollution Prevention; · Incentives to use water economically; · Eradicate Wastage (eg from pipes etc); · Institutional Development; and · Policy refinements.

10.2.7 The desired ends from the project are:

· to satisfy water needs; (i) For Urban Industrial Development (ii) Rural supplies (iii) Increased irrigated area (iv) safe water supplies · to bring about ecological improvements; · to create improved public awareness; and · to achieve the benefits of Integrated Water Resources Management.

10.2.8 Using a problem tree analysis approach the relationships between the causes and potential solutions to the development problem have been defined. Figure 2-1 depicts this in diagrammatic form as shown earlier.

10.3 Project Monitoring and Evaluation

10.3.1 PME is undertaken to measure whether the Project, when completed, achieves what was intended. In order to achieve this, a Project Performance Monitoring System (PPMS) will need to be established for the Project.

10.3.2 To date the PPMS has only been designed in outline conceptual terms and initial consideration given to the source and monitoring mechanism for each of the selected parameters. The current proposals are ones developed initially by the PPTA team and then reviewed in detail with ADB and GPMO during the loan fact-finding. This process resulted in a large degree of consensus over the measures and indicators to be used in the PPMS, to the extent that conceptual design of the system can be considered more or less finalized and agreed upon. Dialogue has taken place over how individual performance measures should be evaluated and to confirm sources of data are viable. Efforts have also been made to identify the baseline position so that the “before and after” project performance levels are each readily identifiable. An initial draft listing of performance indicators for later inclusion in

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the PPMS, together with the baseline measurements so far collected is provided in Table 10- 2.

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Table 10-1: Project Design and Monitoring Framework

Design Summary Performance Indicators and Monitoring Assumptions Targets Mechanisms and Risks

Impact Assumptions Rural poverty incidence in Guiyang Municipality • Government continues Sustainable and Guiyang Municipality is reduced Government statistics. to promote sustainable inclusive socio- to 20.0% by 2020 compared with development. economic growth 2004 incidence of 28.7%. • Farmers have access in Guiyang to adequate rural Municipality. Urban poverty incidence in financing and Guiyang Municipality is reduced marketing to 3.0% by 2020 compared with infrastructure. 2004 incidence of 4.3%. Risks Gross value of agricultural • Drought and excessive production increases from CYN climate variation. 2.0 billion to CNY 3.0 billion by • Rural to urban 2015 and CNY 3.7 billion by migration of people 2020. exceeds forecasts.

Outcome Assumptions Total available water resources Water Resources Bureau • Government Water supply and increases from 0.9 billion m3 p.a. (WRB) statistics. encourages a demand in to 1.4 billion m3 p.a. by 2013 participatory approach Guiyang Guiyang Municipality to water resources Municipality are No adverse cumulative Government statistics. management. balanced in a environment impacts reported as • Incentives for effective sustainable a result of project activities. Environment Protection inter-agency manner. Bureau (EPB) monitoring coordination are 50% of implementation of IWRM data. introduced. related reforms by the end of the • Financing is identified project by 2013. Advisory Technical for the other activities Assistance (ADTA) under the Master Plan. 94% of surface water quality Completion Report. targets met by the end of the Risks project by 2013. Project Completion • Resistance to tariff Report. reforms.

EPB monitoring data.

Outputs Assumptions Reduced water turbidity due to Water Resources Bureau • Community support 1. Improved water sediment content statistics. can be enlisted to help quality. construct and maintain Percentage of rural households in Water Resources Bureau rural water the project area with access to statistics. infrastructure. drinking water (at national drinking water standards) increases from 71.5% to 90.0%. • Mitigation measures proposed in the 2. Increased Total reservoir capacity increases Water Resources Bureau Environmental supply of water from 184.0 million m3 to 366.6 statistics. Management Plan for domestic, million m3. (EMP) which are industrial and outside the direct irrigation Area of irrigated land increases Water Resources Bureau control of GMG are purposes. from 557,600 mu to 914,800 mu. statistics. adequately carried out.

Industrial recycling achieves 75% Risks from 55% for townships and Water Saving Office • Unforeseen achieves 90% from 65% for data. ground/construction urban area. conditions.

Irrigation efficiency increases Water Resources Bureau from 45-50% to 65-70%. statistics.

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Design Summary Performance Indicators and Monitoring Assumptions Targets Mechanisms and Risks

3. Improved water Non revenue water reduced from Water Supply Company use efficiency. 30% to20%. data.

4. Institutional and Water User Associations Project progress reports. technical established and operational in all capacity to irrigation districts by 2013. manage water Project progress reports. resources PMO fully staffed and equipped sustainably by the beginning of Project developed. implementation.

Activities with Milestones Inputs 1. Establish project management and monitoring systems and carry out institutional strengthening and capacity development (contributes to achieving Outputs 1, 2, 3, ADB sector loan: $150.0 & 4). million. a. Establish and equip municipal and local project management offices on a rolling basis according to subproject phasing. Government counterpart b. Establish Water Users Associations (where applicable). financing: $126.2 million. c. Train key government staff at municipal, county and district levels to plan, design, and implement and monitor structural and nonstructural IWRM works Beneficiaries: $16.8 according to PRC regulations and ADB safeguards (on a rolling basis million. according to subproject phasing). d. Supervise and monitor subproject implementation by municipal and local Local Bank Loan: $7.0 project management offices. million e. Strengthen municipal project management capacity (technical, financial, administration, implementation) for annual work planning and the successful implementation and monitoring and evaluation of the Project according to PPMS principles (throughout project implementation).

Milestones - PMOs for all noncore sub-projects to be established by mid 2007. Capacity development milestones to be defined in inception report of loan consultants.

2. Construct one medium and up to two small reservoirs for urban water supply (contributes to achieving Output 2).

3. Construct up to 43 small reservoirs for rural water supply and irrigation (contributes to achieving Output 2).

4. Rehabilitate irrigation schemes in up to nine areas (contributes to achieving Outputs 2, 3 and 4).

5. Carry out soil conservation and water resources protection of up to 800km2 (contributes to achieving Outputs 1 and 2).

6. Construct up to 127,890 small water storage tanks (contributes to achieving Output 2).

Milestones for activities 2-6 above, to be carried out on a rolling basis in accordance with the Project Implementation Schedule include: a. Prepare Feasibility Study reports for each selected subproject. b. Prepare EIRs/EIAs and EMPs for each noncore subproject in accordance with PRC laws and regulations and ADB environmental safeguard policies. c. Prepare required social safeguard documents as needed (RP and/or EMDP) d. Prepare detailed engineering designs for each selected subproject. e. Acquire land where needed to accommodate civil works, and temporarily or permanently relocate affected persons, and provide compensation and other social and economic rehabilitation measures for affected persons in accordance with PRC laws and regulations and ADB resettlement and ethnic minorities safeguard policies. f. Construct water resources infrastructure.

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utline Project Performance Management System

Ref Item Baseline Monitoring Mechanism 1. General Development Measures 1.1 Per capita GDP and GDP growth. CNY12,683 pa 1 GMG statistics 1.2 Level of disposable income CNY 8,989 pa (urban) GMG statistics & CNY2,809 pa (rural)1 1.3 Number and % of urban poor 84,200, 4.33% GMG statistics 1.4 Number and % of rural poor 520,000, 28.73% GMG statistics 1.5 Incidence of waterborne disease GMG Health statistics (i) Total incidence (i) 3,254/100,000 (ii) Number of deaths) (ii) 1/100,000 2. Water Resources Management Measures 2.1 Total available water resources 0.93 billion m3/y (note4) WRB statistics 2.2 Urban water treatment capacity 1.2 million m3 /d (note3) WSC data 2.3 % of urban population with WSC supplies 80% (note 2) WSC data 2.4 Average daily urban water production 620,000 m3 /d (note3) WSC data 2.5 Average daily water sales 433,000 m3 /d (note3) WSC data 2.6 % of non revenue water > 30%, (note4) WSC data 2.7 Daily per capita urban domestic water consumption 213 l/c/d (note 2) WSC data 2.8 Water consumption per unit of industrial output 65m per CNY 10,000 Water Saving Office statistics output. (note 2) 2.9 Industrial water reuse rate 65% (note 2) Water Saving Office statistics 2.10 Percentage of urban wastewater treated 13% (note 2) Wastewater Company data 2.11 % of surface waters meeting quality targets 94% (note 2) EPB monitoring data 2.12 Percentage of cultivated land irrigated 38% (note 2) WRB statistics 2.13 % of rural residents without access to safe and 420,000 without reliable WRB statistics reliable water supplies supplies. (note 2) 2.14 Irrigation efficiency Estimated as 45 -50% WRB statistics (note 4) 3. Project Implementation and Capacity Building 3.1 Compliance with ADB loan covenants N/a ADB review missions 3.2 Percentage of subprojects completed to time N/a IA records 3.3 Sub-project costs versus budget N/a IA records 3.4 Economic costs of reportable accidents N/a IA records 3.5 % satisfaction of persons affected by LAR activities N/a Survey of APs (gender disaggregated) 3.6 Compliance with Resettlement Action Plans N/a Independent monitoring reports 3.7 Compliance with Environmental Management Plans N/a Independent monitoring reports 3.8 Compliance with Institutional milestones N/a Monitoring of agreed plan 3.9 % cost recovery of urban water services WSC data 3.10 % cost recovery of irrigation facilities operations WRB statistical data 4. Social Impact Measures 4.1 Customer affordability of water services Tba Derived from GMG statistics 4.2 WSC income collection rates Tba WSC data 4.3 Permanent Jobs created by the Project Tba IA records % = percentage, ADB = Asian Development Bank, APs = affected persons, CNY = Chinese yuan, EPB = Environmental Protection Bureau, GDP = gross domestic product, GMG = Guiyang municipal government, IA = implementing agency, l/c/d = litres/capita/day, LAR = land acquisition and resettlement, m3/d = cubic meter per day, m3/y = cubic meter per year, n/a = not applicable, pa = per annum, tba = to be advised, WRB = Water Resource Bureau, WSC = Water Supply Company.

Notes: (1) 2004 baseline from official GMG statistics. (2) 2004 baseline from master plan or project proposal. (3) WSC data. (4) PPTA estimate.

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Outline Project Performance Management System

Ref Item Baseline Monitoring Mechanism 1. General Development Measures 1.1 Per capita GDP and GDP growth. CNY12,683 pa 1 GMG statistics 1.2 Level of disposable income CNY 8,989 pa (urban) GMG statistics & CNY2,809 pa (rural)1 1.3 Number and % of urban poor 84,200, 4.33% GMG statistics 1.4 Number and % of rural poor 520,000, 28.73% GMG statistics 1.5 Incidence of waterborne disease GMG Health statistics (iii) Total incidence (i) 3,254/100,000 (iv) Number of deaths) (ii) 1/100,000 2. Water Resources Management Measures 2.1 Total available water resources 0.93 billion m3/y (note4) WRB statistics 2.2 Urban water treatment capacity 1.2 million m3 /d (note3) WSC data 2.3 % of urban population with WSC supplies 80% (note 2) WSC data 2.4 Average daily urban water production 620,000 m3 /d (note3) WSC data 2.5 Average daily water sales 433,000 m3 /d (note3) WSC data 2.6 % of non revenue water > 30%, (note4) WSC data 2.7 Daily per capita urban domestic water consumption 213 l/c/d (note 2) WSC data 2.8 Water consumption per unit of industrial output 65m per CNY 10,000 Water Saving Office statistics output. (note 2) 2.9 Industrial water reuse rate 65% (note 2) Water Saving Office statistics 2.10 Percentage of urban wastewater treated 13% (note 2) Wastewater Company data 2.11 % of surface waters meeting quality targets 94% (note 2) EPB monitoring data 2.12 Percentage of cultivated land irrigated 38% (note 2) WRB statistics 2.13 % of rural residents without access to safe and 420,000 without reliable WRB statistics reliable water supplies supplies. (note 2) 2.14 Irrigation efficiency Estimated as 45 -50% WRB statistics (note 4) 3. Project Implementation and Capacity Building 3.1 Compliance with ADB loan covenants N/a ADB review missions 3.2 Percentage of subprojects completed to time N/a IA records 3.3 Sub-project costs versus budget N/a IA records 3.4 Economic costs of reportable accidents N/a IA records 3.5 % satisfaction of persons affected by LAR activities N/a Survey of APs (gender disaggregated) 3.6 Compliance with Resettlement Action Plans N/a Independent monitoring reports 3.7 Compliance with Environmental Management Plans N/a Independent monitoring reports 3.8 Compliance with Institutional milestones N/a Monitoring of agreed plan 3.9 % cost recovery of urban water services WSC data 3.10 % cost recovery of irrigation facilities operations WRB statistical data 4. Social Impact Measures 4.1 Customer affordability of water services Tba Derived from GMG statistics 4.2 WSC income collection rates Tba WSC data 4.3 Permanent Jobs created by the Project Tba IA records % = percentage, ADB = Asian Development Bank, APs = affected persons, CNY = Chinese yuan, EPB = Environmental Protection Bureau, GDP = gross domestic product, GMG = Guiyang municipal government, IA = implementing agency, l/c/d = litres/capita/day, LAR = land acquisition and resettlement, m3/d = cubic meter per day, m3/y = cubic meter per year, n/a = not applicable, pa = per annum, tba = to be advised, WRB = Water Resource Bureau, WSC = Water Supply Company.

Notes: (1) 2004 baseline from official GMG statistics. (2) 2004 baseline from master plan or project proposal. (3) WSC data. (4) PPTA estimate.

Final Report, Project Design 10 - 7 4/24/2008 Guiyang Integrated Water Resources Management Project Black & Veatch (Asia) Ltd

Table 10-2: Outline Project Performance Management System

Ref Item Baseline Monitoring Mechanism 1. General Development Measures 1.1 Per capita GDP and GDP growth. CNY12,683 pa 1 GMG statistics 1.2 Level of disposable income CNY 8,989 pa (urban) GMG statistics & CNY2,809 pa (rural)1 1.3 Number and % of urban poor 84,200, 4.33% GMG statistics 1.4 Number and % of rural poor 520,000, 28.73% GMG statistics 1.5 Incidence of waterborne disease GMG Health statistics (v) Total incidence (i) 3,254/100,000 (vi) Number of deaths) (ii) 1/100,000 2. Water Resources Management Measures 2.1 Total available water resources 0.93 billion m3/y (note4) WRB statistics 2.2 Urban water treatment capacity 1.2 million m3 /d (note3) WSC data 2.3 % of urban population with WSC supplies 80% (note 2) WSC data 2.4 Average daily urban water production 620,000 m3 /d (note3) WSC data 2.5 Average daily water sales 433,000 m3 /d (note3) WSC data 2.6 % of non revenue water > 30%, (note4) WSC data 2.7 Daily per capita urban domestic water 213 l/c/d (note 2) WSC data consumption 2.8 Water consumption per unit of industrial 65m per CNY 10,000 Water Saving Office statistics output output. (note 2) 2.9 Industrial water reuse rate 65% (note 2) Water Saving Office statistics 2.10 Percentage of urban wastewater treated 13% (note 2) Wastewater Company data 2.11 % of surface waters meeting quality targets 94% (note 2) EPB monitoring data 2.12 Percentage of cultivated land irrigated 38% (note 2) WRB statistics 2.13 % of rural residents without access to safe 420,000 without reliable WRB statistics and reliable water supplies supplies. (note 2) 2.14 Irrigation efficiency Estimated as 45 -50% WRB statistics (note 4) 3. Project Implementation and Capacity Building 3.1 Compliance with ADB loan covenants N/a ADB review missions 3.2 Percentage of subprojects completed to time N/a IA records 3.3 Sub-project costs versus budget N/a IA records 3.4 Economic costs of reportable accidents N/a IA records 3.5 % satisfaction of persons affected by LAR N/a Survey of APs activities (gender disaggregated) 3.6 Compliance with Resettlement Action Plans N/a Independent monitoring reports 3.7 Compliance with Environmental Management N/a Independent monitoring reports Plans 3.8 Compliance with Institutional milestones N/a Monitoring of agreed plan 3.9 % cost recovery of urban water services WSC data 3.10 % cost recovery of irrigation facilities WRB statistical data operations 4. Social Impact Measures 4.1 Customer affordability of water services Tba Derived from GMG statistics 4.2 WSC income collection rates Tba WSC data 4.3 Permanent Jobs created by the Project Tba IA records % = percentage, ADB = Asian Development Bank, APs = affected persons, CNY = Chinese yuan, EPB = Environmental Protection Bureau, GDP = gross domestic product, GMG = Guiyang municipal government, IA = implementing agency, l/c/d = litres/capita/day, LAR = land acquisition and resettlement, m3/d = cubic meter per day, m3/y = cubic meter per year, n/a = not applicable, pa = per annum, tba = to be advised, WRB = Water Resource Bureau, WSC = Water Supply Company.

Notes: (1) 2004 baseline from official GMG statistics. (2) 2004 baseline from master plan or project proposal. (3) WSC data. (4) PPTA estimate.

Final Report, Project Design 10 - 8 4/24/2008