Report and Recommendation of the President to the Board of Directors

Project Number: 42383 November 2009

Proposed Loan and Administration of Grant People’s Republic of China: Shanxi Small Cities and Towns Development Demonstration Sector Project

CURRENCY EQUIVALENTS (as of 17 November 2009)

Currency Unit – yuan (CNY)

CNY1.00 = $0.1464 $1.00 = CNY6.8270

ABBREVIATIONS

ADB – Asian Development Bank EIA – environmental impact assessment EIRR – economic internal rate of return FIRR – financial internal rate of return ICB – international competitive bidding LIBOR – London interbank offered rate NCB – national competitive bidding NPV – net present value O&M – operation and maintenance PCG Pingyao county government PLG – project leading group PMO – project management office PRC – People’s Republic of China PPMS – project performance management system QCBS – quality- and cost-based selection SEIA – summary environmental impact assessment SPG – Shanxi provincial government TA – technical assistance WACC – weighted average cost of capital XCG – Xiaoyi city government YCG – Youyu county government

WEIGHTS AND MEASURES km – kilometer km2 – square kilometer m2 – square meter m3 – cubic meter

NOTES

(i) The fiscal year (FY) of the Government ends on 31 December. (ii) In this report, "$" refers to US dollars.

Vice-President C. Lawrence Greenwood, Jr., Operations 2 Director General K. Gerhaeusser, East Asia Department (EARD)

Team leader A. Leung, Director, Urban and Social Sectors, EARD Team members C. Chu, Project Management Officer, EARD H. Gunatilake, Senior Economist, Economics and Research Department M. Gupta, Senior Social Development Specialist (Safeguards), EARD S. W. Handayani, Senior Social Development Specialist, Regional and Sustainable Development Department J. Masic, Urban Development Specialist, EARD S. Noda, Transport Specialist, EARD X. Peng, Lead Professional (Counsel), Office of the General Counsel S. Popov, Senior Environment Specialist, EARD B. Reid, Senior Financial Analysis Specialist, EARD T. Villareal, Senior Urban Development Specialist, EARD W. Walker, Social Development Specialist, EARD J. Wang, Project Officer (Urban Development and Water Supply), EARD

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

CONTENTS

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LOAN AND PROJECT SUMMARY i MAP I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 2 III. THE PROPOSED PROJECT 7 A. Impact and Outcome 7 B. Outputs 7 C. Special Features 8 D. Project Investment Plan 9 E. Financing Plan 9 F. Implementation Arrangements 10 IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 15 V. ASSURANCES AND CONDITIONS 19 VI. RECOMMENDATIONS 20 APPENDIXES 1. Design and Monitoring Framework 21 2. Sector and Subsector Analysis 26 3. Process for Subproject Identification, Selection, Preparation, and Appraisal 29 4. External Assistance 31 5. Summary of Support for Water and Wastewater Utilities 34 6. Summary Cost Estimates and Financing Plan 35 7. Lending Arrangements and Indicative Flow of Funds 37 8. Project Implementation Organization 38 9. Implementation Schedule 39 10. Summary and Detailed Procurement Plan 40 11. Summary Poverty Reduction and Social Strategy 45 12. Summary Resettlement Plan 49 13. Financial Analysis 52 14. Economic Analysis 57

SUPPLEMENTARY APPENDIXES (available on request) A. Problems and Objectives Tree Analyses B. Sector Policy Framework C. Subproject Appraisal Criteria and Report Template D. Candidate Subsequent Subprojects E. Technical Analysis of Core Subprojects F. Support for Water and Wastewater Utilities G. Detailed Cost Estimates and Financing Plan H. Institutional Arrangement and Assessment I. Procurement Capacity Assessment J. Detailed Procurement Plan K. Outline Terms of Reference for Consulting Services L. Poverty and Social Assessment and Social Action Plan M. Labor Reemployment Framework N. Health Impact Analysis O. Ethnic Minority Development Framework P. Resettlement Framework Q. Detailed Financial Analysis R. Financial Management Assessment S. Detailed Economic Analysis T. Environmental Assessment and Management Framework

LOAN AND PROJECT SUMMARY

Borrower People’s Republic of China (PRC)

Classification Targeting classification: Targeted intervention (nonincome Millennium Development Goals) Sector (subsectors): Multisector (water supply and sanitation, other municipal services, waste management, energy utility services, urban transport) Themes (subthemes): Economic growth (promoting macroeconomic stability), social development (human development), environmental sustainability (urban environmental improvement) Climate change: Climate change adaptation Location impact: Rural (low), urban (high)

Environment Category A. An environmental impact assessment was undertaken. The Assessment summary environmental impact assessment was circulated to the Board of Directors of the Asian Development Bank (ADB) and uploaded on the ADB website on 20 October 2008.

Project The Project aims to help promote balanced and environmentally sustainable Description urbanization; narrow the urban–rural gap; and improve production, employment, and living conditions in small cities and towns in Shanxi Province. It includes about seven subproject small cities and towns. The Project is being processed as a sector loan to allow the Shanxi provincial government (SPG) to respond to rapidly changing needs of cities and towns across the province. Detailed assessment and analyses were undertaken for the three core subprojects—Pingyao county, Wutong town, and Youyu county. Subsequent subprojects will be selected, prepared, and appraised during project implementation following an agreed set of criteria and procedures. The Pingyao subproject includes the Huiji River improvement component, which will improve environmental quality, thereby supporting tourism development in the historic city center. The Wutong subproject has five components: (i) Caoxi road and associated services, (ii) heat supply, (iii) gas supply, (iv) wastewater treatment, and (v) education facilities. The subproject will provide basic infrastructure to improve environmental conditions and support expansion of the city to the northwest, where air pollution is lower. The Youyu subproject has five components: (i) heat supply, (ii) water supply, (iii) drainage and wastewater collection, (iv) roads and associated services, and (v) river improvement. In addition to providing citywide environmental improvements, this subproject will provide basic infrastructure to support the development of an urban expansion area to house workers migrating to the county seat to work in agroprocessing and other light industrial jobs.

Rationale The PRC Government is committed to developing small cities and towns as a way to generate jobs, narrow the rural–urban income gap, and increase national economic productivity. Growth of small cities and towns creates economic opportunities for farmers to move to urban areas and gain higher value-added employment; this is the key to realizing the PRC’s vision of a “harmonious society,” in which the benefits of growth will be shared more equitably. The PRC’s 11th Five-Year Plan 2006–2010 identifies small city and ii

town development as a means to provide a higher standard of living to rural migrants without exacerbating infrastructure fatigue and other problems afflicting large cities. Building on the conclusions of the 2004 ADB-financed Town-Based Urbanization Strategy Study, the national town development policy calls for strengthening physical and economic linkages between major cities in metropolitan areas or development corridors and the smaller settlements at their periphery.

Located in northern PRC, Shanxi Province is a national base for coal, coke, and manufacturing of industrial equipment and machinery. Small cities and towns in the province have made substantial progress in recent years in facilitating economic growth through resource extraction, manufacturing, and service sector development. But growth has outstripped infrastructure provision and urban management capacity, resulting in degradation of the natural environment and living conditions of local residents. Coverage rates for urban environmental services are inadequate, and many areas of the province suffer from high rates of air, water, and land pollution. Local governments lack capital and expertise to provide infrastructure in a timely fashion, which would mitigate the negative environmental impacts of their economic success. Many small cities and towns outside of the coal- and coke- producing regions suffer from low investment, low economic growth rates, and underemployment. The SPG policy on development of its small cities and towns mirrors the national policy, which promotes small cities and towns as growth engines for surrounding rural areas, which can absorb rural migrants and relieve population pressure on the province’s large cities.

The Project will increase the economic, social, and environmental sustainability of small city and town development by improving urban infrastructure and municipal services. The improvements will serve to (i) attract economic investment, especially in employment-intensive industries and services, by providing reliable, high-quality infrastructure such as roads, water supply, and sewerage; (ii) provide better living conditions and a decent urban environment to town residents by substituting centralized heating for household coal burning, treating wastewater before discharging it into the natural environment, and introducing sanitary practices in solid waste collection and treatment; and (iii) extend the benefits of growth to all residents by improving coverage and service quality of basic municipal services to households across the socioeconomic spectrum. ADB’s experience and knowledge in urban environmental improvement and management, including supporting utility tariff reforms, will add value to the Project, especially for small cities and towns that are undergoing urbanization and economic transformation.

Impact and The impact of the Project is improved environmental quality and increased Outcome employment generation in small cities and towns in Shanxi Province. The outcome of the Project is improved urban infrastructure and municipal services in about seven small cities and towns in the province.

Project The investment cost of the Project is estimated at $224.7 million, including Investment Plan taxes and duties of $6.4 million.

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Share Financing Plan Amount Source of Total ($ million equivalent) (%) Asian Development Bank loan 100.0 45.0 Multi-Donor Trust Fund under the Water 0.3 0.0 Financing Partnership Facilitya Pingyao County Government (Pingyao subproject) 21.9 10.0 Xiaoyi City Government (Xiaoyi subproject) 15.8 7.0 Youyu County Government (Youyu subproject) 18.3 8.0 Other City and County Governments (subsequent 68.5 31.0 subprojects) Total 224.7 100.0 a Contributors: the governments of Australia, Austria, and Norway. Administered by the Shanxi provincial government. The actual amount is $250,000. b Numbers may not sum precisely because of rounding. Source: Asian Development Bank estimates.

A loan of $100,000,000 from the ordinary capital resources of ADB will be provided under ADB’s London interbank offered rate (LIBOR)-based lending facility. The loan will have a 26-year term including a grace period of 6 years, an interest rate determined in accordance with ADB’s LIBOR-based lending facility, a commitment charge of 0.15% per annum, and such other terms and conditions as set forth in the draft Loan Agreement.

Allocation and The PRC Government will make the loan proceeds available to SPG, the Relending Executing Agency, on the same terms and conditions of the ADB loan. SPG Terms will make the loan proceeds available to subproject municipal and/or country governments on the same terms and conditions as those of the ADB loan. The subproject municipal and county governments will make the loan proceeds available to the implementing agencies on the same terms and conditions as those of the loan with the end-borrowers assuming the foreign exchange and interest rate variation risks of the ADB loan.

Period of Until 30 June 2016 Utilization

Estimated 31 December 2015 Project Completion Date

Implementation SPG will be the Executing Agency for the Project. A project leading group Arrangements (PLG), chaired by a vice-governor and comprising senior government officials of concerned bureaus and commissions, was established to provide overall guidance and support for preparing and implementing the Project. A project management office (PMO), located in the Shanxi Housing and Urban-Rural Development Bureau, was established under the PLG to undertake and manage day-to-day project activities. In each subproject city and town, a PLG and PMO will be set up to liaise with the provincial PMO, and to oversee and manage work undertaken by the implementing agencies.

Executing Shanxi provincial government Agency

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Procurement Goods, works, and services will be procured in accordance with ADB's Procurement Guidelines (2007, as amended from time to time). International competitive bidding, national competitive bidding, or shopping procedures will be used for procurement, based on the circumstances of each contract package.

Consulting The Project will provide funding for international and national consulting Services services to support the PMOs and implementing agencies in project implementation and management, and institutional capacity building. Consultants will be recruited according to ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time).

Project Benefits Shanxi Province has relatively high rural poverty, compared with the PRC and average. More than 50 of its 119 counties and county-level cities are classified Beneficiaries nationally or provincially as poor counties. The percentage of the population in absolute poverty is 3.9%, compared with the national average of 2.5%. The Project will reduce poverty by stimulating economic development, directly and indirectly creating jobs, and providing improved infrastructure and services in small cities and towns. The Project will provide about 250,000 direct beneficiaries in the core subproject cities and towns with access to improved urban services and public facilities. Another 380,000 people in surrounding rural areas of the core subproject cities and towns will benefit from local economic development and increased employment opportunities. About 13% of the beneficiaries are poor. The infrastructure improvements financed under the Project are anticipated to produce substantial environmental and economic benefits. Roads will improve transport networks and connectivity, thereby reducing travel time per trip, lowering vehicle emissions, and helping to improve air quality. Water supply and wastewater treatment will improve public health and reduce the discharge of pollutants to rivers and groundwater. The Project will contribute to reductions in medical costs resulting from lower incidence of waterborne diseases in three core subproject cities and towns. River improvement will provide flood protection, thereby reducing economic loss and public health hazard due to flooding. District heating and gas supply will improve efficiency, eliminate a considerable number of small and inefficient boilers, reduce the quantity of coal used, and replace coal-burning stoves in individual dwelling units, thus reducing the emission of greenhouse gases. This Project will have positive effects on climate change, supporting PRC and ADB initiatives. The Project will contribute to climate change adaptation through measures to improve flood control and strengthen water resources management in the subproject cities and towns that are prone to increasing floods and droughts.

Risks and The Project does not have any unusual technical risks. Conventional Assumptions engineering designs with proven records of reliable performance will be adopted for road construction, installation of municipal services along roads, water supply, wastewater management, solid waste management, heating, and landscaping. Mitigating measures will be put in place during detailed design to address any risks associated with river improvement works such as dams and tidal floodgates. During implementation, the project implementation v consultant will support the PMOs and implementing agencies to ensure that equipment and works comply with the design requirements and quality assurances.

The following risks could affect timely implementation, economic viability, and realization of project benefits: (i) failure to implement institutional strengthening for effective project implementation and management, and corporate governance; (ii) lack of proper operation and maintenance of project facilities; (iii) major amendments and changes in implementation of master plans in the subproject cities and towns; (iv) delay in the provision of counterpart funding; (v) failure to establish or increase water and wastewater tariffs to meet cost-recovery targets; and (vi) unforeseen land acquisition and resettlement issues, which could constrain the efficient implementation of project works and restoration of livelihoods of affected people.

Risks (i) and (ii) will be mitigated through provision of institutional capacity building for the subproject city and town PMOs and implementing agencies, with support of the loan implementation consultant. In addition, the PLG will provide oversight to mitigate project management risk. Risk (iii) will be mitigated by aligning the project design and implementation schedules with other planned projects. Risks (iv) and (v) will be mitigated through covenanted assurances from the subproject city and town governments on the provision of counterpart funding and on regular tariff reviews and increases. Risk (vi) will be mitigated by strengthening the internal monitoring and supervision by Shanxi Province and subproject city and town PMOs and implementing agencies, and by engaging a qualified external agency to monitor and evaluate resettlement.

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I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on (i) a proposed loan, and (ii) proposed administration of a grant to be provided by the Multi-Donor Trust Fund under the Water Financing Partnership Facility to the People’s Republic of China (PRC) for the Shanxi Small Cities and Towns Development Demonstration Sector Project.

2. The Government of the PRC requested the Asian Development Bank (ADB) to help improve environmental conditions and promote employment generation in a number of small cities and towns in Shanxi Province through the provision of urban infrastructure and municipal services, including water supply and sanitation, waste management, urban transport, and other municipal services. The design and monitoring framework of the Project is in Appendix 1. The problems and objectives tree analyses are in Supplementary Appendix A.

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

A. Performance Indicators and Analysis

3. The PRC’s industrial development has driven one of the longest periods of sustained, large-scale economic growth in modern history. To access low-cost labor reserves in rural areas, the Government has progressively relaxed migration policies since the 1980s; an estimated 120 million “floating population” are now working in cities across the country. An additional 12 million–15 million migrate to Chinese cities every year in search of employment. Since 1980, the PRC’s urban population has more than tripled, reaching 577 million in 2006. The current urban share of total population of 45% is expected to exceed 50% by 2015. The scale of urbanization in the PRC is unprecedented.

4. Getting people off the farm and into the urban economy is critical for maintaining the current pace of economic growth, raising national economic productivity, and narrowing the urban–rural income gap. This is the key to realizing the Government’s vision of a “harmonious society,” in which the benefits of growth will be shared more equitably. But there is a limit to what large cities can absorb without corresponding sacrifices in economic efficiency. Small cities and towns must be developed as urban assets capable of generating secondary and tertiary employment, and providing homes to future rural migrants.

5. Nationally, the growth of small cities and towns is not keeping pace with that of large cities. The average annual growth rate of secondary (manufacturing) and tertiary (services) sectors in large and medium-sized cities was 14.2% during 2001–2005, compared with only 5.4% in small cities and towns. Overall county employment (including rural areas) has been essentially flat for the past 30 years, rising from 514 million in 1990 to 546 million in 2005. During that period agricultural employment dropped by 10%, while secondary employment doubled and tertiary employment tripled. About 60% of employment in small cities and towns is now in the tertiary sector, with 35% in the secondary sector. Public sector support for the growth of larger urban settlements partly explains the weak performance of small cities and towns. During 1988–2002, the gap between public investment per capita in large and medium-sized cities versus small cities and towns grew at an average annual rate of 2.8%, while the difference in gross domestic product growth per capita widened at an average annual rate of 3.1%.

6. About 43% of the national labor force is involved in agriculture, but they produce only 12% of the gross domestic product. This is the main reason for rural poverty. It is also a driver of the Government’s pro-urbanization policy. The PRC faces the challenge of creating employment opportunities and housing for some 250 million–300 million rural people during 2000–2020. The PRC’s existing 660 cities cannot absorb the millions of rural migrants. In large PRC cities, infrastructure networks such as transport, water supply, wastewater management, and electrical power are overtaxed and showing signs of fatigue. Heavy congestion of street and highway 2 networks within cities is common, and wastewater treatment systems lag far behind citywide requirements. Also, public transit systems are underdeveloped in relation to road networks. While many large cities are redeveloping and increasing the density of their centers, the inefficient patterns of urban land use and increasingly low-density peripheral development are increasing transportation requirements and associated greenhouse gas emissions. As the PRC’s large cities continue to grow, economic efficiency is being compromised and environmental costs are rising.

7. Small cities and towns represent an underutilized resource in the PRC’s urban system. Through development of physical and social infrastructure, towns can attract investment and in- migration from rural areas, thereby playing a more significant role in the drive to urbanize, raise economic productivity, and more equitably distribute the benefits of economic growth. Development of small cities and towns is aimed to attract investments and create jobs to absorb the rural migrants. Increased disposable income will stimulate domestic demand to support economic growth.1 The PRC’s 11th Five-Year Plan 2006–2010 identifies small city and town development as a means to provide a higher standard of living to rural migrants without exacerbating infrastructure fatigue and other problems afflicting large cities. Building on the conclusions of the ADB-financed Town-Based Urbanization Strategy Study, the new policy calls for strengthening the physical and economic linkages between major cities in metropolitan areas or development corridors and the smaller settlements at their periphery.2

8. In January 2008, the Ministry of Environmental Protection (then the State Environmental Protection Administration) announced the revised criteria for “ecologically sound” provinces, cities, and counties; the criteria balance environmental protection objectives with economic growth goals. The Chinese Public’s Environment and Inhabitant Livelihood Index 2007 reports that 26% of Chinese people are very concerned with air quality.3 Awareness is increasing of the adverse effects of the PRC’s unprecedented industrialization that makes the PRC the world’s second biggest emitter of greenhouse gases. The Government intends to mitigate climate change to manage its adverse impacts on biodiversity, livelihoods, and economic growth.

9. The Project is prepared as one of three small city and town development projects supported by the Government. The aim is to promote the development of selected small cities and towns in Hebei, Liaoning, and Shanxi provinces in a way that can be replicated in other towns in these provinces and elsewhere in the country. The three provinces were selected following the successful outcome of two ADB-financed TA projects—the Town-Based Urbanization and Strategy Study (footnote 2) and Hebei Provincial Development Strategy. 4 While the small cities and towns in these provinces face many similar problems and challenges, they also have different characteristics in terms of their geographic location and economy that offer unique opportunities for promoting inclusive and sustainable development. Appendix 2 provides a sector and subsector analysis.

B. Analysis of Key Problems and Opportunities

10. Project Background. Located in northern PRC, Shanxi Province is a national base for coal mining, coke production, and manufacturing of industrial equipment and machinery. The provincial population of 33.75 million was 43% urbanized in 2006. About 3.9% of the population lives in absolute poverty, compared with 2.5% nationally.

1 This is in line with the Government of the PRC's latest incentive to stimulate sustainable growth by increasing domestic demand and lessening reliance on exports. 2 ADB. 2004. Technical Assistance to the People’s Republic of China for the Town-Based Urbanization Strategy Study. Manila. 3 China Environmental Culture Promotion Association, January 2008. 4 ADB. 2002. Technical Assistance to the People’s Republic of China for the Hebei Provincial Development Strategy. Manila.

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11. In recent years, small cities and towns in Shanxi Province have made substantial progress in facilitating economic growth. Some resource-based small cities and towns have taken advantage of the growth of mining and metals. Some located within metropolitan areas and development corridors play important roles as manufacturing centers, transportation hubs, or agroprocessing sites; while others have been successful in capturing multiplier effects in the service sector. Tourism has been a major driver of economic growth in small cities and towns because of significant historic and cultural assets. From 2001–2005, the secondary sector in Shanxi small cities and towns grew at about 32% per annum and the tertiary sector by 5%.

12. Growth has come at a considerable cost. In many towns, industrial development has outstripped local government capacity for urban management and infrastructure provision, resulting in degradation of local living conditions and the natural environment. Only 70% of households in Shanxi towns have access to piped drinking water as compared with more than 90% in most large cities. The large majority of Shanxi’s 11 small cities and 561 towns lack wastewater treatment capacity. In the absence of widespread centralized heating and natural gas, coal-burning stoves serve as the main energy source for domestic heating and cooking. Only one in five towns have a solid waste treatment station. As a result of these inadequate municipal services, many areas of the province suffer from air, water, and land pollution, which threatens human health and reduces life expectancy. Local governments lack the capital and expertise to provide, in a timely fashion, the infrastructure that would mitigate the negative environmental and social impacts of their economic gains.

13. At the same time, many small cities and towns—especially those outside of the coal- and coke-producing regions—suffer from low investment, low economic growth rates, and underemployment. Household incomes are low, and economic opportunities few. The primary sector still accounts for 61% of total county employment, reflecting the highly agrarian character of much of Shanxi. In 2006, about 43% of the workforce was engaged in agriculture, while producing only 6% of the province’s gross domestic product.5 To be able to absorb rural labor, these towns need to attract investment by providing infrastructure and basic services. Learning from the previous generation of cities, these poor cities have the opportunity to anticipate urban environmental problems, and mitigate them with sufficient investments in key infrastructure and urban services.

14. The Shanxi provincial government (SPG) policy on the development of its small cities and towns mirrors the national policy. The Directives on Accelerating Development of Small Cities and Towns in Shanxi Province identifies small cities and towns as growth engines for surrounding rural areas that can absorb rural migrants and relieve population pressure on the province’s large cities. 6 In this respect, the development of towns and county-level cities contributes directly to the provincial objective of promoting integrated rural–urban development.

15. Project Rationale. The PRC is striving to develop small cities as a means to promote rural–urban integration and the emergence of a more harmonious society. The Project will increase economic, social, and environmental sustainability of small city and town development by improving urban infrastructure and municipal services. The improvements will (i) attract economic investment, especially in employment-intensive industries and services, by providing reliable international standard infrastructure such as roads, water supply, and sewerage; (ii) provide better living conditions and a decent urban environment to town residents by substituting centralized heating for household coal burning, treating wastewater before discharging it into the natural environment, and introducing sanitary practices in solid waste collection and treatment; and (iii) extend the benefits of growth to all residents across the socioeconomic spectrum by improving coverage and quality of basic municipal services.

5 National Bureau of Statistics. 2007. China Rural Statistical Yearbook, 2003–2007. Beijing. 6 Shanxi Provincial Government. 2005. Directives on Accelerating Development of Small Cities and Towns in Shanxi Province. Shanxi Province.

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16. The Project aims to help promote balanced and environmentally sustainable urbanization; narrow the urban–rural gap; and improve production, employment, and living conditions in small cities and towns in Shanxi Province. The Project will assist the provincial and county governments to develop a mechanism for selecting and prioritizing subproject cities and towns with potential for employment generation, economic growth, and environmental improvement. Increased employment opportunities will contribute directly to the Government’s goal of closing the rural–urban income gap, as farm workers will fill new industrial and service jobs in cities and towns. Activities to develop markets and create jobs by supporting urbanization and protecting the environment in small cities and towns are in line with ADB’s strategic objective of promoting equitable growth in the PRC.

17. The subproject towns included in the Project have potential for stronger economic growth and employment generation to support SPG’s policy for development of small cities and towns. The subproject towns are all strategically located in the province and their economy is largely based on tourism, resource processing, and light manufacturing. These are economic sectors that the SPG wants to promote. However, municipal infrastructure and services in these towns are inadequate, and proper environmental infrastructure must be in place to ensure that ongoing and planned development is sustainable.

18. The Project will enable improved urban infrastructure delivery by implementing subprojects in selected small cities and towns. The overarching objectives of these subprojects will be to increase employment and economic growth, improve the urban environment, and enhance urban infrastructure and municipal services. Depending on their assets, towns will target their infrastructure investments to promote industry (including agroprocessing); environmentally sustainable resource extraction; and/or the development of the service sector, including tourism. All targeted small cities and towns have approved development master plans and programs that the subprojects will directly support. Category A environmental assessments will be undertaken to ensure that each subproject will minimize adverse environmental costs and maximize environmental benefits. New vocational training centers and other schools will complement the physical infrastructure by increasing the skills of the workforce. Supplementary Appendix B contains the sector policy framework.

19. The Project is aligned with ADB’s country partnership strategy for the PRC, which includes managing the environment, catalyzing investment, and improving governance.7 ADB’s experience and knowledge in urban environmental improvement and management, including supporting utility tariff reforms, will add value to the Project, especially for small cities and towns that are undergoing urbanization and economic transformation. The Project conforms to ADB’s water policy8 and water financing program,9 which seek to improve urban water investments through technical assistance (TA) and investments in water supply, sanitation and wastewater management, and environmental improvement. It is also consistent with ADB’s urban sector strategy, which supports infrastructure investment in settlements that serve as dynamic engines of economic growth and employment creation, innovation, and entrepreneurship, as well as sources of social services.10 The Project will have a positive impact on the living environment of urban residents, including the poor, through the improvement of roads and transport systems, water supply, wastewater treatment, solid waste management, district heating, and rivers. It also indirectly supports ADB’s various renewable energy, energy efficiency, and climate change initiatives by introducing secondary wastewater treatment and improving traffic management in rapidly growing small cities and towns.11

7 ADB. 2008. Country Partnership Strategy (2008–2010): People’s Republic of China. Manila. 8 ADB. 2003. Water for All: The Water Policy of the Asian Development Bank. Manila (adopted in 2001). 9 ADB. Water Financing Program 2006–2010. http://www.adb.org/Water/WFP/default.asp 10 ADB. 1999. Urban Sector Strategy. Manila. 11 ADB. 2008. ADB’s Climate Change Program. Manila. 5

20. The PRC’s National Climate Change Program calls for reduced greenhouse gas emissions through increased use of clean energy, including natural gas and technologies to reduce pollution caused by coal.12 The Project directly supports the national policy to finance the urban transmission and distribution systems for natural gas (primarily for cooking) and district heating, which together will enable households in Shanxi towns to stop burning coal at home. This will result in lower greenhouse gas emissions and contribute directly to slowing climate change. Additional greenhouse gas reductions will be secured through the development of denser, mixed-use neighborhoods that reduce reliance on private cars. The developments in two of the core subprojects under the Project are examples of this approach and can be replicated elsewhere in the province.

21. Sector Lending Approach. Because of the varying degree of preparedness of the subproject cities and towns to be included in the Project and the possibility that some of them may change during project implementation, the Government agreed that the ADB sector loan modality is more appropriate as it allows greater flexibility during project implementation. The sector loan approach is based on the following: (i) The Government's sector policies, development objectives, and approach to urban infrastructure development and environmental management are well formulated. Progress in implementing policies has been satisfactory and the Government is continually updating its sector policies with ADB support.13 (ii) The sector institutions are well developed; with additional strengthening and support provided under the Project, they will have the capacity to implement the sector investment plan, particularly for county and town governments. SPG, the Executing Agency, has substantial experience implementing similar projects. (iii) The sector investment plan and the planned subprojects are well conceived and appropriately formulated to meet the priority needs of the Shanxi Urban Development Master Plan. SPG has met these conditions and developed subproject identification, selection, and appraisal criteria and procedures to ensure that the Project will facilitate achievement of the objectives of sector policies and plans. Appendix 3 shows the process of subproject identification, selection, preparation, and appraisal. Supplementary Appendix C provides the subproject appraisal criteria and report template.

22. Policy Dialogue. The Project will build on and further ADB’s policy dialogue on (i) integrated development of cities, towns, and rural areas to generate employment and reduce poverty; (ii) sustainable urban environmental management; (iii) economic sustainability of urban infrastructure services; (iv) governance and anticorruption; and (v) participatory approach to project design.

23. With a view to integrated development of urban and rural areas, SPG will use the criteria developed during project design to target resources to small cities and towns that can generate jobs for rural migrants and demand for agricultural products, and reverse environmental degradation. SPG intends to refine its poverty reduction policy to encourage small cities and towns to promote job creation, especially in labor-intensive service sectors, through (i) infrastructure delivery, (ii) effective self-promotion of towns as good places for businesses to invest, and (iii) vocational training services offered by county governments to align labor skills with market demand.

24. SPG will encourage local governments to adopt a more integrated approach to infrastructure planning and delivery. For example, when planning river improvement projects, local governments will examine the possibility of simultaneously improving solid waste and wastewater management services to reduce discharge of waste into the river. Similarly, to

12 National Development and Reform Commission. 2007. National Climate Change Program Report. Beijing. 13 ADB has provided TA to the PRC for updating its urbanization policies and strategies. Recent studies include ADB. 2004. Technical Assistance to the People’s Republic of China for the Town-Based Urbanization Strategy Study. Manila (TA 4335-PRC) and ADB. 2005. Technical Assistance to the People’s Republic of China for the Study on Sustainable Urbanization in Metropolitan Regions. Manila (TA 4702-PRC). The Project will continue to provide support through the capacity development component.

6 maximize the impact of energy services improvements on reducing greenhouse gases and on improved air quality, local governments can simultaneously plan and coordinate district heating and natural gas system extensions. Wastewater collection, treatment, and disposal works could be conceived and built as one integrated system and managed by one agency to improve efficiency and facilitate cost recovery of wastewater collection and treatment services.

25. Economic sustainability of urban infrastructure services requires better financial management on the part of urban infrastructure service providers and more market-oriented pricing of urban services. SPG intends to improve enforcement of the 1999 national government requirement that urban services providers can generate sufficient revenues to cover their costs. In many towns, this would require that user tariffs be increased gradually to the point where tariff revenues cover the costs of operation and maintenance (O&M). To improve affordability for low- income groups, a more rationalized tariff structure is recommended for urban services, in which unit prices are in direct proportion to consumption. SPG will endeavor to formulate a policy and put into effect guidelines for use of block tariffs in water supply, wastewater, district heating, and natural gas services in small cities and towns. The Project will support SPG in tariff reform through the capacity development component. The proposed $250,000 grant from the Multi- Donor Trust Fund under the Water Financing Partnership Facility will complement the support by strengthening the management capacity of water and wastewater service providers involved in the Project.

26. ADB has very strict guidelines and zero tolerance for fraud and corruption. Bidders, suppliers, and contractors must observe the highest ethical standards for the procurement and execution of ADB-financed contracts; sanctions will apply if fraud and corruption in procurement are discovered. SPG and each subproject city and/or town government are recommended to consider undertaking the following actions: (i) involve discipline investigation bureaus in bidding and construction to enhance construction quality control and effective supervision; (ii) introduce a dual-signing system in which each construction contract winner also signs an anticorruption agreement with the implementing agency; (iii) periodically inspect the contractors’ activities related to fund withdrawals and settlements; (iv) engage a loan implementation consultant to support the project management office (PMO) to ensure good governance, accountability, and transparency in project operations; and (v) update rules and regulations on local and corporate governance and anticorruption, and enhance transparency of each implementing agency’s operation in consultation with relevant central government ministries.

27. The Project is formulated to take into consideration and incorporate into the project design the comments and ideas from various levels of government, beneficiaries, and affected people including vulnerable groups, through stakeholder meetings, focus group discussions, informant interviews, and household surveys. This ensures local participation and involvement in subproject identification and implementation, and O&M of improved infrastructure. A design and monitoring framework was created and refined in the process. For future urban interventions, the Shanxi PMO and subproject governments can use the knowledge and experience of this participatory approach to strengthen their ability to guide their development.

28. External Assistance. Since 1992, ADB has provided 32 loans totaling more than $3.8 billion to the PRC for environmental improvement and infrastructure projects. ADB has also provided $56 million for more than 80 TA studies to prepare these projects, and to review and study key issues in environmental improvement and infrastructure. The Project is built on the Town-Based Urbanization Strategy Study TA (footnote 2), which recommends a range of measures to facilitate development of small cities and towns in the PRC. ADB and the World Bank have provided external assistance to Shanxi Province (Appendix 4). The Government closely coordinates external assistance to the sector and ADB missions meet frequently with other development partners to share sectoral information and experiences.

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29. Lessons. Lessons from ADB and SPG experience in urban development projects include the following: (i) strategic master plans play an important role in providing a comprehensive framework for urban development and environmental management; (ii) increased public awareness and education are vital for improving the urban environment, and therefore public consultation and involvement and awareness training on environmental health and protection should be provided; and (iii) the establishment of an effective internal and external monitoring mechanism for resettlement implementation is important to ensure effective coordination and timely implementation of land approval, compensation, and rehabilitation measures. These issues were reviewed and the relevant lessons incorporated in the project design.

30. ADB’s experience in the PRC’s wastewater management and water supply sector indicates that projects are well planned and implemented, and wastewater and water tariffs are increased as required. Willingness-to-pay analysis indicates that consumers are willing to pay substantially higher prices for water, and to a certain extent, are willing to pay for wastewater treatment. The following lessons from previous projects are reflected in the project design: (i) increase focus on institutional strengthening measures to improve corporate governance, (ii) improve provincial coordination, and (iii) ensure financial and institutional arrangements for proper O&M.

31. Lessons from ADB and World Bank experience in urban transport projects highlight the importance of a (i) comprehensive and participatory approach to project preparation; (ii) planned and well-coordinated resettlement scheme preceded by adequate consultation with affected parties before relocation; (iii) professional approach to forecasting traffic demand; (iv) paying attention to issues like public transport and traffic management, road safety, vehicle emission control, and road maintenance to complement investment in urban roads; and (v) participation and coordination of all agencies with responsibilities for urban transport to ensure project sustainability. These lessons were considered for the project design.

III. THE PROPOSED PROJECT

A. Impact and Outcome

32. The impact of the Project is improved environmental quality and increased employment generation in small cities and towns in Shanxi Province. The project outcome is improved urban infrastructure and municipal services in about seven small cities and towns in the province.

B. Outputs

33. The Project includes about seven subproject small cities and towns. Detailed assessment and analyses were undertaken for the three core subprojects—Pingyao county, Wutong town, and Youyu county. Subsequent subprojects will be selected, prepared, and appraised during implementation. Each subproject includes one or more components, consisting of capital improvements to urban infrastructure or municipal services. The eligible subsectors for the components include roads and associated services, water supply, wastewater management, solid waste management, river improvement, district heating, gas supply, area upgrading, and education. Supplementary Appendix D provides the candidate subsequent subprojects, and Supplementary Appendix E the technical analysis of the core subprojects.

34. In 1997, the United Nations Educational, Scientific, and Cultural Organization designated Pingyao, which is located at the heart of a major cultural tourism corridor, a World Heritage site. While tourism is growing rapidly, Pingyao faces significant environmental stress due to the proximity of industrial facilities and inadequate management of wastewater and solid waste. The subproject includes rehabilitation of Huiji River, which will improve flood control, reduce groundwater pollution, and reduce public health risks. The component calls for dredging,

8 construction of embankments, and installation of rubber dams for water storage along a 7.2 kilometer (km) segment of the river.

35. Like many towns across Shanxi Province, Wutong experienced a massive economic boom as a result of increased coal and coke production. Environmental infrastructure has not kept pace with the town’s ability to manage urban growth, and Wutong is now experiencing severe air, ground, and water pollution. With help from Xiaoyi City, the county seat, Wutong proposes to develop a new urban expansion area to house up to 30,000 residents upwind of the coke and aluminum plants. The Project calls for construction of basic horizontal and vertical infrastructure (including schools) on a 100-hectare site that will connect the urbanized area of Wutong with that of adjacent Xiaoyi City. The Wutong subproject has five components: (i) Caoxi road and associated municipal services, (ii) heat supply, (iii) gas supply, (iv) wastewater treatment, and (v) education facilities. The gas and heating investments will allow residents to switch from coal-fired stoves for domestic cooking and heating. The wastewater treatment plant will improve environmental quality. Education facilities, which include a vocational training center, will assist the local population to adapt to changing needs of the labor market.

36. Youyu county enjoys relatively good air quality given its location in northern Shanxi on the windward side of the main coal-producing areas. The county proposes to leverage its superior environmental condition and access to markets to attract agroprocessing, light industry, and service sector firms. The subproject includes basic infrastructure to support the development of a new urban area where workers and managers can live. Other investments in river improvement, wastewater treatment, and district heating will enhance and sustain the city’s urban environmental quality. The combination of job opportunities and good living conditions is anticipated to attract rural migrants from villages in northern Shanxi to Youyu. The Youyu subproject has five components: (i) heat supply, (ii) water supply, (iii) drainage and wastewater collection, (iv) roads and associated municipal services, and (v) flood control.

37. The Project will also provide institutional development and capacity building in small city and town development, municipal infrastructure, environmental management, and policy reforms to ensure sustainability of the Project and related facilities. As this is the first ADB sector loan for the Shanxi PMO, and the subproject cities and towns have limited experience with internationally funded projects and are not familiar with ADB procedures and international best practices, institutional capacity in subproject implementation and operation of project facilities and services must be strengthened so the facilities and services will be sustainable both operationally and financially in the long term.

C. Special Features

38. Development of the Project was directly supported by ADB-financed advisory policy and strategy studies. The underlying technical approach for the Project is based on the findings of a successfully completed advisory TA on a town-based urbanization strategy covering Liaoning and Shanxi as case study provinces, a provincial development strategy study for Hebei Province, and government policies and plans for small city and town development.

39. The Project will achieve a demonstration effect for other small cities and towns. The core subproject towns, which are representative of other towns in Shanxi, will demonstrate to similar small cities and towns how they can achieve economically, socially, and environmentally sustainable urban development and greater economic integration with rural areas and larger cities. The Shanxi PMO will ensure that lessons identified by the project towns are disseminated to nonproject towns through seminars, field visits, promotional materials, and/or the media. ADB will endeavor to support dissemination and sharing of lessons by financing seminars (i) provincially to demonstrate how the advisory TA strategy was operationalized through the different subprojects and their components; and (ii) nationally and internationally to showcase special innovative features of the approach of this sector Project, and those in Liaoning and 9

Hebei to prepare and implement sustainable town development projects.

40. The Multi-Donor Trust Fund under the Water Financing Partnership Facility will provide a $250,000 grant for the Project to strengthen financial management and corporate governance in water and wastewater agencies and companies in participating small cities and towns in Shanxi Province. Appendix 5 is a summary of the support for water and wastewater facilities, and Supplementary Appendix F provides details about the scope of work under the grant.

41. The education component in Wutong is the first social services component in an ADB- supported project in the PRC. By pairing labor market analysis with school construction, the component sets out a comprehensive strategy for upgrading workforce skills in small cities and towns in the PRC to meet the challenges of rapid urbanization and economic growth. The capacity development component will assist the Wutong town government in undertaking the labor market analysis and assessment of the curriculum. ADB is supporting SPG in improving its technical education and vocational training system for urban residents and rural migrants to effectively meet the skill needs and labor markets in Shanxi Province.14

D. Project Investment Plan

42. The project investment cost is estimated at $224.7 million, including taxes and duties. Table 1 provides a summary of the project investment plan, details are in Appendix 6 and Supplementary Appendix G.

Table 1: Project Investment Plan ($ million) Item Amounta A. Base Costb 1. Pingyao Subproject 33.3 2. Wutong Subproject 25.1 3. Youyu Subproject 25.8 4. Subsequent Subprojects 85.5 5. Institutional Strengthening 2.8 Subtotal (A) 172.5 B. Contingenciesc 40.3 C. Financing Charges during Implementationd 12.0 Total (A+B+C) 224.7 a Includes taxes and duties of $6.4 million. The Asian Development Bank loan will cover taxes and duties on items financed by ADB. b In mid-2008 prices. c Physical contingencies computed at 10%. Price contingencies are computed by year and expenditure type based on cumulative domestic and foreign price inflation. Exchange rate fluctuations are estimated using a purchasing power parity adjustment model. d Includes interest and commitment charges, assumed at 4.5% and 0.15% respectively. Note: Numbers may not sum precisely because of rounding. Source: Asian Development Bank estimates.

E. Financing Plan

43. The Government has requested a loan of $100,000,000 from ADB’s ordinary capital resources to help finance the Project. The loan will have a 26-year term, including a grace period of 6 years, an interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.15% per annum, and

14 ADB. 2007. Technical Assistance to the People’s Republic of China for Shanxi Development Strategy for Technical and Vocational Education and Training. Manila.

10 such other terms and conditions set forth in the draft loan and project agreements. The Government has provided ADB with (i) the reasons for its decision to borrow under ADB’s LIBOR-based lending facility on the basis of these terms and conditions, and (ii) an undertaking that these choices were its own independent decision and not made in reliance on any communication or advice from ADB. The loan will finance 45% of the project cost, including civil works; equipment and supplies; project consulting services and training; financial charges on the loan during construction; and taxes, duties, and bank charges. The Government will finance contingencies. The Pingyao county government, Xiaoyi city government, Youyu county government, and subsequent county governments, through tax and nontax revenues, will provide counterpart funding. The three core subproject governments have provided commitment letters. The Multi-Donor Trust Fund15 under the Water Financing Partnership Facility will provide grant cofinancing equivalent to $250,000, to be administered by SPG. The grant will support institutional and financial management capacity development of water and wastewater entities. The financing plan for the Project is summarized in Table 2, with details provided in Appendix 6 and Supplementary Appendix G.

Table 2: Financing Plan ($ million) Share of Total Source Total % Asian Development Bank loana 100.0 45 Multi-Donor Trust Fundb under the Water Financing Partnership Facility 0.3 0 Pingyao county government (Pingyao subproject) 21.9 10 Xiaoyi city government (Wutong subproject) 15.8 7 Youyu county government (Youyu subproject) 18.3 8 Other county governments (subsequent subprojects) 68.5 31 Total 224.7 100 a The ADB loan will cover bank charges, taxes, and duties. b Contributors: the governments of Australia, Austria, and Norway. Administered by SPG. Actual amount is $250,000. Note: Numbers may not sum precisely because of rounding. Source: Asian Development Bank estimates.

44. The PRC is the Borrower of the loan. The PRC will make the entire loan available to SPG, which will make different portions of the loan proceeds available to the concerned municipal and county governments and then to the implementing agencies.16 The terms and conditions of the loan proceeds transferred within the government system will be the same as those of the ADB loan, with the concerned county governments bearing the interest and exchange rate variation risk. Appendix 7 shows the relending and onlending arrangements and indicative flow of funds. The end-borrowers will bear the same terms and conditions as those of the loan, with these implementing agencies bearing the foreign exchange and interest variation risk.

F. Implementation Arrangements

1. Project Management

45. SPG is the Executing Agency for the Project. A project leading group (PLG), chaired by a vice-governor and comprising senior government officials of concerned bureaus and commissions, was established to provide overall guidance and support to project preparation and implementation. A PMO located in the Shanxi Housing and Urban-Rural Development Bureau was established under the PLG to undertake and manage day-to-day project activities.

15 Contributors: the governments of Australia, Austria, and Norway. 16 In loans involving some form of financial intermediation, the term “relend” is used when ADB loans are relent by the borrower to one or more intermediaries. The term “onlend” is used when the funds are then onlent by these intermediaries to subborrowers. 11

In each subproject city and town, a PLG and PMO will be set up to liaise with the provincial PMO and oversee and manage the work undertaken by the implementing agencies. The implementing agencies are (i) in Pingyao, the county Water Affairs Bureau for the Huiji River improvement component; (ii) in Wutong, the Xiaoyi City Engineering and Construction Management Affairs Office for all components; and (iii) in Youyu, the Youyu County Development and Reform Commission for all components. Appendix 8 shows the project implementation organization and Supplementary Appendix H contains the institutional arrangements and assessment.

2. Subproject Preparation and Appraisal

46. In addition to the three core subprojects being prepared, additional subprojects will be selected, prepared, and appraised during sector project implementation using the following three-stage process.

47. Subproject Identification and Selection. The subprojects will be selected in accordance with the following criteria: (i) confirmation by the local government of its ability and willingness to arrange counterpart financing and comply with ADB safeguard policies and other requirements; (ii) confirmation by the concerned local government on its willingness to comply with ADB safeguard policies and other requirements; (iii) the implementation period of the subproject is within 2009–2015; (iv) eligibility of the components (roads and associated municipal services, water supply, wastewater management, river improvement, area upgrading, solid waste management, district heating, or education); and (v) anticipated positive impact on the urban environment, employment generation, economic growth, and coverage or service level of infrastructure and municipal services.

48. Subproject Preparation. The participating city or county government and implementing agency, with the guidance of the Shanxi PMO, will prepare project design documents including a project proposal, feasibility study, and preliminary engineering design for the components of the proposed subproject in accordance with the national project investment specifications. The project design documents will cover subproject rationale; scope; components; technical analysis; cost estimates; financing plan; implementation arrangements; financial management assessment; and financial, economic, social, and institutional analyses. These documents will be submitted to the Shanxi Development and Reform Commission for approval. The participating city or county government will also prepare an environmental impact assessment (EIA) and a resettlement plan to be submitted to the concerned provincial departments and bureaus for approval.

49. Subproject Appraisal and Approval. The Shanxi PMO and other concerned bureaus will be responsible for appraising the subprojects in accordance with criteria agreed upon by the PRC Government and ADB. The subproject PMO will prepare a subproject appraisal report, which will follow the template in the project preparatory TA final report, and submit the appraisal report to the municipal finance bureau and municipal development and reform commission for review and then to the Shanxi PMO for further review. The Shanxi PMO will submit the subproject appraisal report to the Shanxi Finance Bureau and Shanxi Development and Reform Commission for endorsement before submitting it to ADB for review and approval.

50. Subsequent subprojects will receive the same extent of environmental safeguard scrutiny, modeled on the EIAs for the three core subprojects and the summary EIA (SEIA). The Shanxi PMO will submit the EIAs to ADB for review, after which the revised EIAs will be posted on the ADB website. An environmental assessment and management framework was prepared to assess subsequent subprojects. For other safeguard concerns, a resettlement framework and an ethnic minority development framework were prepared for subsequent subprojects. Draft resettlement plans will be prepared using core subproject resettlement plans as models.

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3. Implementation Period

51. Given that this is the first sector project for SPG, appraisal of the initial one or two subsequent subprojects may take more time to meet ADB and domestic requirements. To allow for more flexibility for SPG to select subsequent subprojects to meet the varied pace of development of small cities and towns in Shanxi, the Project will be implemented over 6 years from late-2009 to late-2015 (Appendix 9). This also takes into account the project scope, construction technology requirements, and climatic conditions. The schedule is considered realistic because SPG has experience implementing projects financed by international financial institutions, the project implementation structure is in place, and preparatory works are under way. ADB’s successful experience with similar projects in the PRC combined with the knowledge and experience of SPG in municipal infrastructure and environmental improvement projects indicate that the schedule is achievable.

4. Procurement and Consulting Services

52. Goods, works, and services financed under the loan will be procured in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time). Preliminary contract packages were formulated in consultation with the implementing agencies. The procurement capacity of SPG, the PMOs, and the implementing agencies was assessed (Supplementary Appendix I). Results of the assessment indicate that SPG has the capacity and experience to carry out advance procurement. Contracts for goods estimated to cost $1 million or more, and contracts for works estimated to cost $10 million or more, will be procured using international competitive bidding procedures. Contracts for goods and works estimated to cost less than these thresholds but more than $100,000 will be procured on the basis of national competitive bidding procedures in accordance with the PRC Tendering and Bidding Law, subject to modifications and clarifications agreed with ADB. Contracts for goods and works estimated to cost $100,000 or less will be procured using shopping procedures in accordance with the PRC Tendering and Bidding Law. Prior review will be adopted for all international competitive bidding packages and the first national competitive bidding package. Details of the procurement plan are provided in Appendix 10 and Supplementary Appendix J.

53. The Project includes provision for funding for about 158 person-months of international and national consulting services. The consulting services will cover (i) support to the Shanxi PMO, and city and town PMOs and implementing agencies for project preparation and management including procurement; (ii) project performance management system (PPMS); (iii) procurement; (iv) financial management including ADB disbursement and imprest account procedures; (v) appraisal of subsequent subprojects; (vi) environmental management; (vii) social, ethnic, and resettlement implementation; (viii) vocational education program implementation; and (ix) institutional strengthening. Capacity development for the PMOs and implementing agencies will be achieved through consultant inputs; training courses provided by universities, specialized institutes, and firms; in-country and/or international study visits; and acquisition of equipment financed from the loan. To assist the PMOs and implementing agencies in expediting project implementation start-up, one international project management and procurement specialist (1 person-month) and one national project management and procurement specialist (2 person-months) will be engaged individually prior to recruitment of the consulting firm. The consulting services will be engaged in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time) using the standard 80:20 quality- and cost-based selection method and simplified technical proposal. The outline terms of reference for consulting services are in Supplementary Appendix K.

5. Advance Contracting and Retroactive Financing

54. ADB approved SPG’s request to use advance contracting and retroactive financing for recruitment of consultants, training, and procurement of goods and civil works; and retroactive 13 financing of eligible expenditures up to $20 million (equivalent to 20% of the ADB loan), incurred before loan effectiveness, but not more than 12 months before the signing of the Loan Agreement.17 Advance contracting will include (i) prequalification of contractors, (ii) preparation of tender documents, (iii) evaluation of bids, and (iv) recruitment of consultants. All advance contracting and retroactive financing will be undertaken in conformity with the ADB Procurement Guidelines and Guidelines on the Use of Consultants. The issuance of invitations to bid under advance contracting and retroactive financing will be subject to ADB approval. The PRC Government, SPG, and the implementing agencies have been advised that approval of advance contracting and retroactive financing does not commit ADB to finance the Project.

6. Governance and Anticorruption Policy

55. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the Government, SPG, PMOs, and implementing agencies. Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to investigate directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the Project. To support these efforts, relevant provisions of ADB’s Anticorruption Policy are included in the loan regulations and the bidding documents for the Project. In particular, all contracts financed by ADB in connection with the Project shall include provisions specifying the right of ADB to audit and examine the records and accounts of the Executing Agency and all contractors, suppliers, consultants, and other service providers as they relate to the Project. This is in line with ADB’s PRC country partnership strategy (2008–2010), which includes the promotion of good governance by supporting reform and capacity development in corporate governance (footnote 7). SPG has indicated its commitment to fight corruption and a number of anticorruption actions are included as covenants in the Loan and Project Agreements.18 Under these covenants, SPG will

(i) involve the agencies responsible for oversight of each implementing agency in bidding and construction to enhance construction quality control, and supervise effective work; (ii) introduce a dual-signing system in which the civil works contract winner also signs an anticorruption agreement with the implementing agency; (iii) periodically inspect the contractors’ activities related to fund withdrawals and settlements; and (iv) engage the loan implementation consultant to support the Shanxi PMO and city and town PMOs and implementing agencies to ensure good governance, accountability, and transparency in project operations.

7. Disbursement Arrangements

56. The ADB loan funds will be disbursed in accordance with procedures in ADB’s Loan Disbursement Handbook (2007, as amended from time to time). To expedite project implementation through timely release of loan proceeds, SPG will establish an imprest account promptly after loan effectiveness at a commercial bank acceptable to ADB.19 Only one imprest account will be established at the provincial finance bureau, which will be responsible for municipal and county withdrawal applications. Disbursements from the imprest account to the implementing agencies will be based on actual expenditures with full supporting documents, which is in line with the Ministry of Finance internal regulations. Withdrawal applications will demonstrate, among other things, that the goods and/or services have been produced in or from

17 Advance action on the procurement and recruitment of consultants, and the posting of the general procurement notice on the ADB website, will facilitate the start of the advance action process. ADB Management approved advance contracting and retroactive financing at the management review meeting on 12 November 2008. 18 In line with ADB’s country partnership strategy (2008–2010) for the PRC, which includes the promotion of good governance. 19 Bank charges on the imprest account will be financed from the ADB loan.

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ADB members, and are eligible for ADB financing. The maximum amount to be deposited to the imprest account will not exceed the estimated ADB share of eligible project expenditures to be financed through the imprest account for the next 6 months or 10% of the loan amount, whichever is lower. The statement of expenditure procedure will be used for liquidation and replenishment of the imprest account and reimbursement of eligible expenditures not exceeding $200,000 per individual payment. No withdrawal will be made from the loan account for subprojects in which one or more of the implementing agencies is a legally registered company until the following condition has been met: the Ministry of Finance submits to ADB certification that (i) the subproject government and the company have entered into an onlending agreement; and (ii) such onlending agreement contains the same financial terms and conditions and other obligations as required in the Loan Agreement. SPG will set up a separate bank account for the $250,000 grant from the Multi-Donor Trust Fund under the Water Financing Partnership Facility, which will be used for the engagement of consultants, and conduct of training programs and workshops.

8. Accounting, Auditing, and Reporting

57. The Shanxi PMO will coordinate with the city and town PMOs to prepare semiannual progress reports indicating progress made, problems encountered during the period under review, steps taken or proposed to remedy the problems, proposed program of activities, and progress expected in the coming 6 months. The implementing agencies will keep records to allow the identification of goods and services financed from the loan proceeds, following accounting principles and practices prescribed by the Accounting Law of the PRC. This law requires that the financial statements will generally follow recognized accounting standards. The implementing agencies will set up and maintain separate project accounts and records. The financial statements of the project accounts and the annual corporate financial statements for implementing agencies will be subject to external audit by the SPG audit bureau. The audits will be carried out in accordance with PRC audit regulations and must meet ADB requirements. A separate auditor’s opinion on the use of the imprest account and statement of expenditure will be part of the audit reports. The implementing agencies’ annual audited financial statements and audited project accounts will be submitted to ADB no later than 6 months after the end of the fiscal year throughout the implementation period. SPG and the implementing agencies will submit reports and information to ADB on the use of the loan proceeds, project implementation, and implementing agency performance. These reports will include (i) semiannual progress reports on project implementation, (ii) annual reports, and (iii) a project completion report not later than 3 months after project completion.

9. Project Performance Monitoring and Evaluation

58. The PPMS indicators, their relevance, and monitoring practicalities were discussed with the Shanxi and subproject PMOs and implementing agencies during project preparation. The indicators are based on the monitoring indicators in the design and monitoring framework including (i) job creation; (ii) service level; (iii) water supply, wastewater treatment, district heating coverage, and other operating performance measures; (iv) water quality and incidence of seasonal flooding in rivers in subproject towns; (v) public satisfaction with the urban environment; (vi) relevant social and economic data; (vii) traffic conditions in subproject towns; (viii) air pollution reduction indicators; and (ix) increase in public awareness of environmental protection. At the start of project implementation, the Shanxi, city, and town PMOs and implementing agencies, with the loan implementation consultant’s assistance, will develop comprehensive PPMS procedures to generate data systematically on the inputs and outputs of the components, as well as the indicators to be used to measure the project impact. The PMOs will (i) refine the PPMS by expanding it to include subsequent subprojects and adjusting for any changes in the city master plan, (ii) confirm achievable targets, (iii) finalize monitoring and recording arrangements, and (iv) establish systems and procedures for the PPMS no later than 6 months after loan effectiveness. 15

10. Project Review

59. In addition to joint project reviews carried out at least once a year, ADB, SPG, and the implementing agencies will undertake a comprehensive midterm review 2 years after the start of project implementation. It will include detailed evaluation of the scope, implementation arrangements, resettlement, achievement of scheduled targets, and progress on the agenda for policy reform and capacity development measures. Feedback from the PPMS activities will be analyzed. IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS

60. Social Aspects. The Project will contribute to poverty reduction by creating jobs for existing residents and new migrants in small cities and towns in Shanxi Province. The water supply, wastewater, heating, gas, and other infrastructure improvements will stimulate investment in industry; resource extraction; and the service sector, including tourism. During the construction phase alone, about 10,300 new jobs will be created in the core subproject towns. Follow-on multiplier effects are expected to create an additional 31,500 indirect jobs. About 70% of construction jobs are assumed to be unskilled; many are likely to be filled by currently unemployed people. Since the unemployed are often poor, they will benefit disproportionately from jobs created by the Project. Of the workers’ wages, approximately CNY155.3 million will go back to the local economy. During operation, the core subprojects will create 8,952 direct employment opportunities and another 22,050 jobs indirectly, corresponding to approximately CNY454.4 million in wages per year and indirect benefits of CNY9.6 billion. In total, approximately CNY10.2 billion in benefits will be generated in Shanxi’s small cities and towns. Poor people and women will be given priority access to new employment opportunities, and will be the ultimate beneficiaries of programs provided through the employment training center in Wutong. The summary poverty reduction and social strategy is in Appendix 11. The poverty and social assessment and social action plan is in Supplementary Appendix L, and a labor reemployment framework is in Supplementary Appendix M.

61. The Project will contribute to poverty reduction by reducing the incidence of waterborne and respiratory diseases. Investments in improved water supply and wastewater facilities in Youyu county and Wutong town are expected to contribute to a decrease in medical expenses related to waterborne diseases of CNY23.5 million in Shanxi Province during 2012–2020. The share of that reduction calculated as savings to households is CNY7.0 million. In addition, the incidence of respiratory disease is anticipated to drop in Wutong, where the town’s 27,000 residents will have the opportunity to move to a new housing area located upwind of the main polluting industries. Heat and gas investments will result in the discontinued use of high- polluting individual coal-burning stoves and corresponding improvements to local air quality and respiratory health. Women and children will particularly benefit from reduced time burdens, improved health and household environments, and programs offered through education and employment training infrastructure. Supplementary Appendix N contains the health impact analysis of the Project.

62. Only 0.3% of the population of Shanxi Province belongs to ethnic minority groups. The few ethnic minorities living in the core subproject areas (1,356 people) are not characterized by any marked difference in income or occupational group from the Han majority. The project investments will raise living standards and generate health benefits and job opportunities for ethnic minorities in each subproject area. Due to the requirement of the sector loan modality, an ethnic minority development framework (Supplementary Appendix O) was prepared for subsequent subprojects.

63. The core subprojects are classified as category A for resettlement. Overall, the land acquisition and resettlement impacts of the Project are not excessive. The primary objective of the land acquisition and resettlement program is to ensure that those affected will improve their standard of living, or at least will not be made worse off because of the Project. Based on the

16 resettlement impacts identified (physical and economic displacement), the construction of the three core subprojects in Shanxi Province will affect 1,453 households or 5,007 people. In total, 97 hectares will be acquired permanently. A total of about 19,307 square meters of built area (residential and nonresidential structures) will be removed, causing relocation of 23 households (95 people) and affecting 22 enterprises, one shop, and one institution. The three core subproject governments have endorsed and disclosed the resettlement plans to the affected people. The resettlement plans were posted in neighborhood committees and/or village offices and uploaded on the ADB website in October 2008. Appendix 12 provides the summary resettlement plan of the three core subprojects. To assess the resettlement aspects of subsequent subprojects, a resettlement framework was prepared (Supplementary Appendix P).

64. Financial Aspects. A financial analysis was done for the revenue-generating components: gas, heating, water, and wastewater. Financial sustainability analysis was undertaken for the nonrevenue-generating river improvements, roads, and education. Financial management assessments were made of SPG, implementing agencies, and operating companies. Appendix 13 provides a summary financial analysis, Supplementary Appendix Q the detailed financial analysis, and Supplementary Appendix R the financial management assessment.

65. The financial internal rate of return (FIRR) in constant 2008 prices, computed on an after-tax basis, is (i) for Wutong: 6.0% for the gas supply component, 7.3% for the heat supply component, and 5.0% for the wastewater component; and (ii) for Youyu: 6.6% for the heat component and 6.7% for the water supply component. The FIRRs compare favorably with the weighted average cost of capital in real terms (after tax) of 1.2%. The sensitivity analyses include examination of the risk that project costs will increase by 10%, that revenues will decrease by 10%, and that both costs and revenues will change adversely by 10%. The FIRR is above the weighted average cost of capital threshold in each analysis.

66. Small cities and towns in Shanxi have only recently started collecting tariffs for utilities. The Government is aware of the need to gradually increase tariffs to cover costs. The subproject governments are committed to increasing tariffs in phases taking into consideration affordability for consumers. The current utility tariffs in Wutong need to increase gradually to achieve full cost recovery, i.e., to cover the O&M costs, debt service, and depreciation of proposed facilities. During the first year of operation, tariffs in Wutong will cover 54%–88% of cost; and full cost-recovery will be achieved in 3–5 years. The Youyu heating component will achieve full cost recovery after 2 years of operation, and the water supply component at start-up of project facilities. The Project will provide capacity development on tariff reforms and tariff setting.

67. The assessment of affordability in Wutong shows that utility costs as a percentage of average household income are 1.0% for gas, 3.0% for heat, and less than 1.0% for wastewater. For Youyu, they are 1.0% for water and 3.0% for heat. The results of the household survey indicate that these rates are affordable. The expenditure on utility costs as a percentage of income for the poor is relatively higher in both Wutong and Youyu. Wutong town and Youyu county have provided assurances that the subsidies now given to low-income families through the minimum living standard scheme will continue.

68. Financial sustainability of the nonrevenue-generating components was determined by examining O&M and debt service costs as a percentage of local government revenues. The financial capacity of local governments to undertake investments was assessed by comparing identified financing sources with the annual funds required for the counterpart portion of capital expenditures during subproject implementation. Forecasted debt service and O&M costs for the subproject components represent less than 10% of revenues, indicating acceptable fiscal risk. During the peak project implementation period, counterpart funds for Wutong will not exceed 5% 17 of local government revenue; the figure for Youyu is 2%. Therefore, the nonrevenue-generating components are considered both financially sustainable and affordable.

69. The results of the financial management assessment indicate that SPG has an adequate financial management system and experience in managing projects funded by foreign financial institutions. The implementing agencies operate as bureaus or departments of the Project’s local governments. The accounting and financial management systems for financial reporting and accounting are developed, and are adequate for the purpose of loan implementation. However, improvements to internal control might be required in the area of segregation of duties to ensure that separate individuals handle authorization, recording, and custody of assets and/or transactions. Thus, additional staff should be recruited during project implementation. Audit arrangements are generally adequate and the implementing agencies will be required to submit independently audited annual financial statements and project accounts to ADB as a loan covenant. Each utility will be helped to establish a reliable financial management system at the beginning of project implementation. Each utility will keep accounts in accordance with commercial accounting principles and be subject to an independent external audit by a suitably qualified firm of commercial auditors. Accounting will be in accordance with relevant PRC standards. The Project includes a capacity development component to strengthen financial management.

70. Economic Aspects. The selection of the three core subprojects was based on socioeconomic indicators and the preparedness to undertake investments in municipal infrastructure. Among the considerations in selecting subprojects is the availability of viable investment projects directly supporting approved development master plans and programs, and the potential to serve as models in the preparation of subsequent components during project implementation. Targeting and selection of subsequent subproject cities and towns will be based, among other factors, on their potential to grow economically and to provide jobs to migrants from rural areas. Employment growth is deemed to contribute more than output growth to SPG’s goal of closing the rural–urban income gap.

71. Key urbanization issues in Shanxi are (i) public services are inadequate to meet the needs of the growing population, including roads for the growing number of cars in the province; (ii) severe air, river, and groundwater pollution are resulting from intense industrialization and resource extraction undertaken in the province; (iii) a significant portion of the urban population lives below the poverty line; and (iv) holistic and integrated management of urban development is lacking. The Project aims to address these issues in participating cities to help promote balanced and environmentally sustainable urbanization; narrow the rural–urban gap; and improve production, employment, and living conditions.

72. The economic analysis indicates that the core components are economically viable and that they stand up to sensitivity tests where costs increase and benefits decrease. The economic internal rates of return for subproject components are 20.6% for the Caoxi road and associated municipal services, 14.0% for Wutong heat supply, 16.9% for Wutong gas supply, 13.8% for Wutong wastewater treatment, 16.7% for Youyu heat supply, 20.6% for Youyu water supply, and 18.0% for Youyu roads. Appendix 14 provides a summary economic analysis and Supplementary Appendix S a detailed economic analysis.

73. Environmental Aspects. The Project is classified as environment category A. Extensive public consultations involving surveys, meetings with stakeholders, and focus group discussions were undertaken during project preparation. The project EIA is based on the results of the EIAs prepared for three core subprojects, which present the types and nature of subsequent subprojects under the Project. An SEIA was prepared and circulated to ADB’s Board of Directors, and posted on the ADB website on 20 October 2008. An environmental assessment and management framework for subsequent subprojects was also developed.

18

74. The Project is expected to generate substantial environmental benefits. Improved roads will reduce travel times and vehicle emissions per trip, thereby helping improve air quality. Water supply and wastewater treatment will reduce the discharge of pollutants to rivers and groundwater. River improvement will provide flood protection, thereby reducing economic loss and public health hazard due to flooding. District heating and gas supply will improve efficiency, eliminate a considerable number of small and inefficient boilers, reduce the quantity of coal used, and replace coal-burning stoves in individual dwelling units, thus reducing the emission of greenhouse gases. This Project will have positive effects on climate change, supporting the PRC’s climate change initiatives.

75. Adverse impacts on the physical and natural environment during the construction and operating phases of the Project will be largely insignificant, given strong project management and implementation of recommended mitigation measures identified in the environmental management plan. The plan includes institutional strengthening for implementing mitigation measures and undertaking monitoring requirements, and will be continuously developed as the Project progresses to provide more details so that all mitigation requirements are met.

76. The subsequent subprojects under this sector loan are required to meet ADB’s environmental impact assessment requirements. An environmental assessment and management framework (Supplementary Appendix T) was prepared as an instruction manual to assist the Shanxi PMO, subproject PMOs, implementing agencies, and local design institutes in preparing and reviewing EIA reports and environmental management plans for subsequent subprojects according to ADB requirements. It describes the environmental criteria for selecting and implementing subprojects, key environmental issues, conduct of the EIA, preparation of the EIA reports, and review procedures. Training was provided to SPG on implementing the environmental assessment and management framework.

77. The Project supports climate change adaptation including (i) incorporation of climate change issues, such as energy efficient measures, in urban master plans; (ii) comprehensive water management, such as long-term water availability forecasting for new development areas and adopting comprehensive water balance measures during project implementation; (iii) sustainable wastewater and solid waste management including sludge digestion and biogas extraction; (iv) improved urban roads management and reduced pollution from cars through improved connectivity and better travel conditions; and (v) promotion of clean energy for more efficient central heating.

78. Project Risks and Mitigation Measures. The Project does not have any unusual technical risks. Conventional engineering designs with proven records of reliable performance will be adopted for road construction, installation of municipal services along roads, water supply, wastewater management, and heating. Mitigating measures will be put in place during detailed design to address any risks associated with river improvement works such as dams. During implementation, the project implementation consultant will support the PMOs and implementing agencies to ensure that equipment and works comply with design requirements and quality assurances.

79. The following risks could affect timely implementation, economic viability, and realization of project benefits: (i) failure to implement institutional strengthening for effective project implementation and management and governance; (ii) lack of proper O&M of project facilities; (iii) major amendments and changes to implementation of the master plans in the subproject cities and towns; (iv) delay in the provision of counterpart funding; (v) failure to establish or increase water and wastewater tariffs to meet cost recovery targets; and (vi) unforeseen land acquisition and resettlement issues, which could constrain the efficient implementation of project works and restoration of livelihoods of those affected.

19

80. Risks (i) and (ii) will be mitigated through provision of institutional capacity development for the subproject city and town PMOs and implementing agencies with support of the loan implementation consultant. In addition, the PLG will provide oversight to mitigate project management risk. Risk (iii) will be mitigated by synchronizing the project design and implementation schedules with other projects planned. Risks (iv) and (v) will be mitigated through covenanted assurances from the subproject city and town governments on the provision of counterpart funding and on regular tariff reviews and increases. Risk (vi) will be mitigated by strengthening the internal monitoring and supervision by Shanxi Province and subproject city and town PMOs and implementing agencies, and by engagement of a qualified external agency to monitor and evaluate resettlement.

V. ASSURANCES AND CONDITIONS

81. In addition to the standard assurances, the Government, SPG, the subproject governments, and the implementing agencies have given specific assurances, as summarized below and which are incorporated in the legal documents.

(i) The implementing agencies will ensure (a) timely provision of counterpart financing necessary for the Project and provision of additional counterpart funding for any shortfall of funds or cost overruns, (b) adequate funding for O&M of the project facilities, and (c) that no assets created by the Project will be sold to a third party without ADB’s consent. (ii) SPG will ensure the implementing agencies will (a) set employment targets for the poor and ethnic minorities who meet the job requirements for construction and maintenance activities; (b) take all necessary steps to encourage women living in the project areas to participate in the planning and implementation of the Project; (c) cause the contractors to provide the workers with adequate on-the-job training, use local unskilled labor, maximize employment of women, and not differentiate wages based on gender; and (d) monitor the Project's effects on women during project implementation. (iii) SPG will ensure that the implementing agencies will provide environmental monitoring reports during the construction period to the Shanxi PMO, which will then prepare and submit to ADB semiannual environmental reports in a format acceptable to ADB until project completion. (iv) SPG will cause the subproject governments and implementing agencies to ensure that (a) prior to construction, all land and rights-of-way will be made available in a timely manner; (b) resettlement plans will be implemented promptly and efficiently in accordance with their terms; and (c) adequate staff and resources will be committed for supervision and internal monitoring of resettlement plan implementation. (v) SPG and participating subproject county and city governments will ensure that (a) water supply, wastewater, heating, and gas tariffs will be progressively set at levels required to achieve full cost recovery of O&M, depreciation and debt service obligations, and reasonable profit margin for operations; (b) regular reviews of tariffs and fees are undertaken by the local price bureau; and (c) the impact of the increased heat supply, gas supply, water supply, and wastewater tariffs on the poor are regularly reviewed by the concerned local government agency. The subproject county and city governments will consider providing lifeline heat supply, gas supply, water supply, and wastewater tariffs to the poor. (vi) SPG and the governments of the participating subproject counties, cities, and towns will ensure that wastewater is treated before being discharged into the rivers to be improved or treated as a part of the river improvement and flood control subprojects. (vii) All levels of government of subproject locations in Shanxi Province will ensure that the implementation of subprojects involving roads and municipal services complies with the overall planning and specific planning of the respective cities and towns.

20

(viii) All levels of government of subproject locations in Shanxi Province will ensure that water supply and wastewater treatment works and the wastewater collection networks are of adequate capacity, and that the associated works of the subprojects are constructed on time and in accordance with urban master plans in effect. (ix) All levels of government of subproject locations in Shanxi Province will ensure that the heat and gas supply works comply with the master urban plan, and the specific planning and heat and gas supply works include equipment and networks of adequate capacity to meet the development needs of the Project during a specified period of time. (x) SPG and the governments of the subproject locations will cause the implementing agencies to establish and maintain a sound financial management system in accordance with ADB’s Financial Management and Analysis of Projects,20 including the establishment of a separate bank account for the subproject and the maintenance of minimum balances to ensure smooth cash flow and the timely settlement of project construction liabilities and future debt servicing. (xi) SPG will cause the implementing agencies to ensure that all works under the Project are designed and constructed in accordance with national standards and specifications; and that the construction supervision, quality control, contract management, and completion inspection and acceptance follow applicable national laws and regulations.

VI. RECOMMENDATION

82. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and, acting in the absence of the President, under the provisions of Article 35.1 of the Articles of Agreement of ADB, I recommend that the Board approve

(i) the loan of $100,000,000 to the People’s Republic of China for the Shanxi Small Cities and Towns Development Demonstration Sector Project from ADB’s ordinary capital resources, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; a term of 26 years, including a grace period of 6 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft Loan and Project Agreements presented to the Board; and (ii) the administration by ADB of a grant not exceeding the equivalent of $250,000 to the People’s Republic of China for the Shanxi Small Cities and Towns Development Demonstration Sector Project to be provided by the Multi-Donor Trust Fund under the Water Financing Partnership Facility.

C. Lawrence Greenwood, Jr. Vice President

24 November 2009

20 ADB. 2005. Financial Management and Analysis of Projects. Manila. Appendix 1 21

DESIGN AND MONITORING FRAMEWORK

Data Sources/ Reporting Assumptions and Design Summary Performance Targets/Indicatorsa Mechanisms Risks Impact By 2018 (baseline year 2007), in Assumptions small cities and towns in Shanxi Improved environmental Province Provincial statistics 11th FYP and small quality and increased bureau reports city and town master employment generation in Average days of air quality above plans effectively small cities and towns in grade II in county-level cities Provincial implemented Shanxi Province increased to 240 per year environmental protection bureau Strong provincial Surface water quality in the middle economic development and lower reaches of the Fen River Provincial labor affairs trends continue after increased from class V to class IVb bureau the 11th FYP Applicable Unemployment reduced to and environmental laws are maintained at no more than 4.5% effectively enforced

Per capita annual disposable income of urban households Risks increased by 6% Implementing agencies do not use suitable external monitoring agencies; performance data are not collected Urban development pressures outpace planned infrastructure development

Outcome By 2015 (baseline year 2007), in Assumptions the subproject cities and towns Improved urban (specific indicators provided for Provincial statistics Project financing is infrastructure and three core subproject cities and bureau provided on time municipal services in towns: Pingyao, Wutong, and about seven small cities Youyu) Provincial Relevant authorities and towns in Shanxi environmental offer strong support to Province All components protection bureau the city and town Public satisfaction with PMOs and environmental conditions Provincial housing and implementing agencies increase:c urban-rural on capacity - At least 75% of population development bureau development for project satisfied with environmental implementation and conditionsd County labor bureau operation Effective stakeholder District heating components County poverty relief participation and Percentage of urban population office ownership is developed with access to centralized heating increased: County water affairs Different specialist - Wutong from 0% to 25% bureau disciplines are well - Youyu from 33% to 47% coordinated - Others cities and towns: TBD Annual environmental Land acquisition and statistics resettlement policies River improvement components are effectively Percentage of improved river Municipal records and implemented; course (length) or lake perimeter in statistics stakeholders accept urbanized areas increased: and cooperate with the - At least 80% of river course or Statistical records and implementation lake perimeter in urbanized area data of small cities and process improved towns District heating 22 Appendix 1

Data Sources/ Reporting Assumptions and Design Summary Performance Targets/Indicatorsa Mechanisms Risks Road components companies Project design and Area of paved roads increased: construction are - Wutong by 12% implemented effectively - Youyu by 15% - Others cities and towns: TBD Risks Local geological Education components conditions affect Number of people receiving construction activities municipally provided vocational Exceptional weather training increased: affects the annual - Wutong to 500 per class and 10 effective construction e classes per year period - Others: TBD Costs are much higher Water supply components than anticipated Percent change in urban Major amendments population with access to piped and changes to the water increased: master plans in the - Youyu by 28% subproject cities and - Others: TBD towns

Wastewater management components Percentage of urban population served by wastewater collection system (sewer network) and drainage network increased: - At least 75% of urban population is served by wastewater collection system (sewer network) - At least 50% of the urbanized area is served by the storm-water drainage system

Revenue-generating components (water, wastewater, heating) Tariff gradually increased to achieve full cost recovery

Outputs By 2015 From All: Assumptions

Subproject 1: Pingyao Regular implementing Project financing is County agency reports on provided on time Component 1: Huiji contract expenditure River Improvement and works progress Relevant authorities Riverbed is dredged and 7.2 km of Huiji river rehabilitated offer strong support to embankments are Monitoring of project the city and town constructed implementation and PMOs and progress by ADB implementing agencies review missions on capacity Water storage reservoirs Three rubber dams constructed development for project are built; rubber dams are Works supervision, implementation and installed construction, operation completion, and Effective stakeholder acceptance records participation and ownership is developed Information from final accounts of works

Appendix 1 23

Data Sources/ Reporting Assumptions and Design Summary Performance Targets/Indicatorsa Mechanisms Risks Subproject 2: Wutong Town Component 1: Caoxi 1.8 km of arterial road constructed, Monitoring reports on Different specialist Road and Associated street lighting and traffic lights institutional disciplines are well Municipal Services installed, drainage channel development including coordinated Road is widened and adjacent to Caoxi Road number of staff trained, Land acquisition and reconstructed; drainage reconstructed areas of training, and resettlement policies channel is improved strengthened are effectively organizations and implemented; procedures stakeholders accept and cooperate with the Component 2: Heat 66MW secondary heat substation Xiaoyi Cityf Public implementation Supply and district heating pipeline Affairs Management process New heat exchange constructed Bureau (all stations and distribution components) Project design and network operating construction are Xiaoyi City implemented effectively Component 3: Gas Gas supply system (5.9 million Transportation Bureau 3 Supply m /year) for residential area and Water Affairs Risks New gas supply storage constructed Bureau and distribution system Local geological operating Xiaoyi City District conditions affect Heating Company construction activities Component 4: A new 4,000 m3/day WWTP and Wastewater Treatment 12.3 km of wastewater collection Xiaoyi Gas Supply Exceptional weather WWTP and collection network constructed Company affects the annual network operating effective construction Xiaoyi Wastewater period Component 5: Company Costs are much higher Education Services One vocational school, one junior than foreseen Facilities high school, and two nursery Xiaoyi City Education New schools and schools constructed Department and Unforeseen land vocational training center Wutong town acquisition and in use government resettlement issues, which could constrain Subproject 3: Youyu Youyu Development efficient County and Reform implementation of the Component 1: Heat New boiler station (116 MW), Commission project works and Supply district heating substations, and restoration of New heat stations, heat distribution network constructed Youyu Construction livelihoods of those exchange stations, and Bureau affected distribution network operating County records and

documents Component 2: Water Two new wells (total 1,920 m3/day) Supply and new water distribution network Drinking water production constructed and distribution works operating

Component 3: Drainage Combined storm-water drainage and Wastewater and sewerage network Collection rehabilitated Combined storm-water drainage and sewerage network operating

24 Appendix 1

Data Sources/ Reporting Assumptions and Design Summary Performance Targets/Indicatorsa Mechanisms Risks Component 4: Roads 10.1 km of secondary and tertiary and Associated roads constructed; street lighting, Municipal Services electrical power, and New roads in the new telecommunication lines installed town operating 4.85 km of river course Component 5: Flood rehabilitated and landscaped Control Flood control channel is By 2015 operating

Subsequent subproject TBD cities and/or towns Urban infrastructure and services improved and operating By 2015 Shanxi PMO and the subproject For all subprojects: city and town PMOs and Infrastructure and service implementing agencies: providers have increased capacity to plan, Prepared and implemented a 6- construct, operate, and year (2009–2016) training plan for maintain facilities project management, O&M, financial management, and institutional capacity building

Improved organization structure and financial management systems

Activities Inputs

Subproject 1: Pingyao County ADB 1.1 Huiji River Improvement $100 million loan with Activity (1) Design the facilities, acquire land, and tender the works by 2010. timely disbursement Activity (2) Rehabilitate 7.2 km of Huiji River by 2012. based on the Activity (3) Construct three rubber dams by 2012. construction schedule Subproject 2: Wutong Town of the works: 2.1 Caoxi Road and Associated Municipal Services Activity (4) Design the facilities, acquire land, and tender the works by 2010. Civil works $61.0 Activity (5) Reconstruct 1.8 km of arterial road by 2012. million Activity (6) Install street lighting and traffic lights by 2012. Equipment: $24.5 Activity (7) Reconstruct drainage channel adjacent to road by 2012. million 2.2 Heat Supply Activity (8) Design the facilities, acquire land, and tender the works by 2010. Consulting services: Activity (9) Construct new secondary heat substation (66 MW) by 2013. $2.5 million Activity (10) Construct district heating pipeline network by 2013. Financing charges 2.3 Gas Supply during implementation: Activity (11) Design the facilities, acquire land, and tender the works by 2010. $12.0 million Activity (12) Construct new gas supply system for residential area (5.9 million m3/year) by 2013. WFPF Grant 2.4 Wastewater Treatment $0.25 million Activity (13) Design the facilities, acquire land, and tender the works by 2010. Government and Activity (14) Construct new wastewater treatment plant with capacity of 4,000 m3/day by implementing 2013. agencies Activity (15) Construct 12.3 km of new wastewater collection network. About $124.5 million equivalent

Appendix 1 25

Activities Inputs 2.5 Education Services (CNY859.0 million) in Activity (16) Design the facilities, acquire land, and tender the works by 2010. counterpart funds with Activity (17) Construct two nursery schools by 2012. timely disbursement Activity (18) Construct one junior high school by 2014. based on the Activity (19) Construct one vocational school by 2014. construction schedule of the works Subproject 3: Youyu County 3.1 Heat Supply Activity (20) Design the facilities, acquire land, and tender the works by 2010. Activity (21) Construct new heat-only boiler station (116 MW) by 2015. Activity (22) Construct district heating substations and distribution network by 2015. 3.2 Water Supply Activity (23) Design the facilities, acquire land, and tender the works by 2010. Activity (24) Construct two new wells with production of 1,920 m3/day by 2015. Activity (25) Construct new water distribution network in urban expansion area by 2015. 3.3 Drainage and Wastewater Collection Activity (26) Design the facilities, acquire land, and tender the works by 2010. Activity (27) Rehabilitate the combined storm-water drainage and wastewater collection network by 2015. 3.4 Roads and Associated Municipal Services Activity (28) Design the facilities, acquire land, and tender the works by 2010. Activity (29) Construct 10.1 km of secondary and tertiary streets in new expansion area by 2015. Activity (30) Install street lighting, electrical power, and telecommunications works on new streets by 2015. Activity (31) Carry out landscaping by 2015. 3.5 Flood Control Activity (32) Design the facilities, acquire land, and tender the works by 2011. Activity (33) Reconstruct 4.85 km of river course in urbanized area by 2013. Activity (34) Carry out landscaping by 2013.

Institutional Capacity Building for Project Management Activity (35) Strengthen financial management and corporate governance in water and wastewater agencies and companies in any subproject city or town with a water supply or wastewater component by 2016. Activity (36) Complete necessary organizational arrangements for implementing agencies (hiring staff; setting up accounting systems; and improving financial, administrative, and human resource policies and procedures) by 2010. Activity (37) Develop plans, budgets, and procedures for loan implementation and project control in Shanxi PMO by 2011. Activity (38) Complete Shanxi PMO and implementing agency staff training (training on ADB procedures, procurement, traffic management, road maintenance, water supply, pollution control, environmental monitoring, and financial management) by 2016. Activity (39) Shanxi PMO and implementing agencies refine the PPMS and establish targets and procedures no later than 6 months after loan effectiveness. ADB = Asian Development Bank, FYP = five-year plan, km = kilometer, km2 = square kilometer, m = meter, m2 = square meter, m3 = cubic meter, MW = megawatt, PMO = project management office, PPMS = project performance management system, O&M = operation and maintenance, TBD = to be determined, WFPF = Water Financing Partnership Facility, WWTP = wastewater treatment plant. a The target of impact should be 3–5 years after project completion. b The PRC classifies surface water quality using five categories. Class V is polluted and class IV is water for industrial water supply and recreational waters that have no direct human contact. c Public satisfaction in base year 2008 from project preparatory technical assistance survey. Percent improvement will come from the PMOs. d TBD during subproject appraisal and monitored as part of the PPMS. e Number of students per class and number of classes per year may be revised upon completion of the training curriculum. f Xiaoyi City agencies will operate and maintain heating, gas, roads, and wastewater infrastructure in Wutong.

26 Appendix 2

SECTOR AND SUBSECTOR ANALYSIS

A. Small City and Town Development

1. The People’s Republic of China (PRC) has long promoted the development of towns as a way to achieve a more balanced urban system. To avoid overburdening large, rapidly industrializing cities, the PRC curbed migration for many years through the hukou system and at the same time promoted the development of small cities and towns as alternative destinations for rural migrants. The pro-town development policy catalyzed waves of migration into towns and small cities 1 throughout the 1980s and 1990s. Today, more than 40% of the national population lives in urban areas, up from 18% in 1978. As of 2002, almost 20,000 towns in the country had an average population of 32,300 and a total population of 640 million.

2. The 11th Five-Year Plan (FYP) 2006–2010 takes advantage of the potential of small cities and towns to increase national economic productivity, while narrowing the urban–rural income gap, thereby contributing to social stability. The plan calls for strengthening physical and economic linkages between major cities in metropolitan areas or development corridors and smaller settlements at their periphery.

3. Small cities and towns in Shanxi Province face challenges similar to those of other northern provinces in the PRC. In some towns, industrial development has outstripped infrastructure provision, resulting in environmental degradation and suboptimal conditions for business development. In other towns, the challenge remains attracting substantial investment that will provide employment opportunities to current residents and future migrants. Infrastructure improvements can play a central role in both cases, by enabling economic activity and investment or by improving living conditions and the urban environment.

4. Shanxi’s policy for the development of its small cities and towns mirrors the national policy. The Directives on Accelerating Development of Small Cities and Towns in Shanxi Province identifies small cities and towns as growth engines for surrounding rural areas that can absorb rural migrants and relieve population pressure on the province’s large cities.2 In this respect, the development of towns and county-level cities contributes directly to the provincial objective of promoting integrated rural–urban development.

5. The national and Shanxi provincial policies on small cities and towns are in line with the recommendations in the Asian Development Bank (ADB)-funded Town-Based Urbanization Strategy Study in Liaoning and Shanxi provinces, and form the basis of the Project.3 Poor small cities and towns in Shanxi need to develop their infrastructure to attract investment in natural resource processing, manufacturing, and services. Other towns that have already achieved high economic growth rates require improved infrastructure and services to improve living conditions and protect the natural environment.

1 “Small cities” in the PRC are generally considered to have populations in the range of 100,000–250,000. 2 Shanxi Provincial Government. 2005. Directives on Accelerating Development of Small Cities and Towns in Shanxi Province. Shanxi Province, People’s Republic of China. 3 ADB. 2004. Technical Assistance to the People’s Republic of China for the Town-Based Urbanization Strategy Study. Manila. The study concludes that the overarching factor should not be growth of production, but rather growth of employment, which will contribute more to the Government’s goal of closing the rural–urban income gap. The study recommends growing both cities and towns by facilitating the development of larger urban agglomerations made up of different types of urban settlements. The study proposes that key towns be selected based on their “employment rate of return,” i.e., the number of jobs created per yuan invested by the provincial or central government.

Appendix 2 27

B. Roads and Associated Municipal Services

6. The Ministry of Transport prepares national policies and plans for the roads and highways subsector. The provincial transportation departments develop the provincial road network plan and are responsible for the planning, design, construction, and management of all roads in the plan, including national roads. In 2007 Shanxi had 2.5 million kilometers of roads, of which 85% were county, township, or village roads. In 2007 the national government budget provided about 13.5% of the budget for roads, while provincial and local governments contributed about 34.2%. About 38% of funding was borrowed from the National Development Bank and commercial banks against projected toll revenues.

7. Local governments in high-growth towns are challenged to provide roads and associated services on time to accommodate the need for industrial, commercial, and residential development. Large cities increasingly rely on private developers to build local roads, and water and wastewater networks in subdivisions and other planned developments. But in most small cities and towns, the local government that must build local roads to establish the physical framework for future growth. This is essential for attracting investment in industry and commerce, and for providing decent housing to current and future residents.

C. Water Supply and Wastewater Management

8. The national government sets policies, standards, and guidelines for drinking water quality; wastewater discharge; and planning and constructing water, wastewater, and drainage infrastructure. Provincial agencies set policies, approve selected actions of municipal agencies such as tariff changes and large investment projects, and oversee compliance with water supply and wastewater standards. Local governments provide water and wastewater services. Typically municipalities own the water supply company and have a government bureau for drainage. Wastewater companies have only been established since 2000 and often focus only on treatment, leaving the wastewater collection system to the government bureau.

9. For wastewater, secondary treatment is a minimum requirement for all cities. The Shanxi Housing and Urban-Rural Development Bureau has an emerging policy to finance wastewater treatment plant construction using provincial funds, while cities and towns will be responsible for construction of associated wastewater collection networks.4 Details about budget and schedule are under discussion. National policy calls for cities in water-short areas to aim for 20% reuse of treated wastewater within the city or for industrial uses.

D. Solid Waste Management

10. The PRC Environmental Science Institute estimates that per capita waste generation for small cities varies from 1.0 to 1.3 kilograms/capita/day. National and provincial entities set policy, prepare guidelines, and allocate some resources for solid waste management. The municipal construction bureau is responsible for design, construction, and commissioning of waste treatment and disposal facilities (e.g., landfills). The environmental sanitation bureau is responsible for waste collection, waste transfer, and street sweeping. The municipal environmental protection bureau handles industrial solid waste and hazardous waste including biomedical waste from hospitals. Many small cities and towns have not established a user-pays tariff system; they finance solid waste collection and treatment through general revenues.

4 Wang Guozheng. 2008. Working Report on Shanxi Province Construction Works. Shanxi Province (text of a speech given by Wang Guozheng, Director, Shanxi Provincial Construction Bureau (now Shanxi Provincial Housing and Urban-Rural Development Bureau, 9 April).

28 Appendix 2

E. River Improvement

11. The Ministry of Water Resources is responsible for management of water resources, including river improvement and flood control. The flood control system emphasizes the use of structural measures to reduce flood hazards. Many rivers are seasonal, and the channel beds in urban areas are often littered with solid waste, filled with sediment, and polluted by untreated wastewater. River improvement projects undertaken by local governments (construction bureau) often reshape the river channel, build embankments, and install river-bank landscaping. The result provides attractive urban open space and provides flood control. However, continued dumping of solid and liquid waste into riverbeds can undermine the effectiveness of urban river improvement projects. A more integrated approach to river improvement, wastewater treatment, and solid waste management is required.

F. District Heating

12. Northern provinces in the PRC are replacing local coal-fired boilers by introducing district heating systems that exploit surplus heat generated from power stations. This reduces coal consumption, emissions of greenhouse gases, and air pollution from particulates and coal dust used in small boilers and home heating devices. An integrated approach to district heating and natural gas provision will maximize the positive impacts on air quality.

13. The PRC’s district heating systems have been fixed flow systems using either steam or hot water. With fixed flow, heat supply cannot be automatically adjusted to actual demand; this results in unsatisfactory energy efficiency. Heat customers currently pay on the basis of how many square meters are to be heated. Heat is generally provided during the 5 or 6 coldest months of the year. New district heating systems are being equipped with meters. Existing systems are expected to install such individual measuring equipment no later than 2010.

G. Area Upgrading

14. Upgrading of deteriorated neighborhoods in Chinese cities is generally limited to old, historic districts with significant architectural or urban assets. Low-rise traditional neighborhoods are routinely demolished as part of city-center redevelopment schemes. While redevelopment of derelict housing is often a good option, some traditional housing can be preserved for economic, social, and historical reasons.

15. Upgrading of historic areas has tended to focus on building rehabilitation, however other aspects are progressively being accorded more attention, including stakeholder consultation, cost-sharing mechanisms, and environmental improvements. Provincial government will continue to play a substantial role in improving the quality of area upgrading projects by preparing and disseminating guidelines that place greater emphasis on the social, resettlement, and environmental aspects of project design.

H. Education

16. The PRC has established an education system with government as the major investor and social partners as coinvestors. Local government is playing a key role in compulsory education, while central and provincial governments are dominant in higher education. In occupational and adult education, industrial organizations, businesses, and public institutions may be included. The major source of funds for education is government allocation.

17. The Shanxi Province 11th Five-Year Plan requires that compulsory education covers 100% of the population, retains 95% of students at junior school, and ensures the entry rate of nursery school will reach 60%. The plan calls for of 1.64 million people to receive professional training, thereby helping towns adapt to changing labor market conditions.

Appendix 3 29

PROCESS FOR SUBPROJECT IDENTIFICATION, SELECTION, PREPARATION, AND APPRAISAL

1. Under the sector loan approach, the Shanxi provincial government (SPG), the designated Executing Agency, established a three-stage approach for (i) identification and selection, (ii) preparation, and (iii) appraisal of subprojects for inclusion in the Project. These procedures are currently being used for the selection and preparation of subsequent subprojects. SPG has delegated various actions and decisions for subproject processing to the Shanxi project management office (PMO), located in the Shanxi Housing and Urban-Rural Development Bureau.

A. Stage 1: Subproject Identification and Selection

2. SPG has invited county-level city and county governments in Shanxi Province to express their interest in participating in the Project to be partly financed by an Asian Development Bank (ADB) loan. The following criteria will be used to identify and select subprojects:

(i) The subproject must be in the urban development sector, i.e., related to the physical development of small cities and towns, with particular emphasis on infrastructure development. The eligible subsectors for subproject investment (the components) are roads and associated municipal services, water supply, wastewater management, river improvement, area upgrading, solid waste management, district heating, gas supply, area upgrading, and education. (ii) The proposed subproject city or town must be a county-level city or county, or a town. (iii) The subproject must improve living conditions and/or enable employment generation, as follows: (a) Improve living conditions by accomplishing at least one of the following: (1) remediating polluted areas in cities and towns; (2) lowering the rate of (or slow the rate of increase of) pollution of water, land, and/or air in urban areas; (3) treating solid waste or wastewater prior to discharge into the natural environment; and/or (4) increasing environmental sustainability of town development through more ecologically sensitive settlement patterns or infrastructure services. (b) Increase employment generation by accomplishing at least one of the following: (1) facilitating investment in labor-intensive economic sectors including the service sector; (2) removing a specific infrastructure-related barrier to growth of an economic sector in the city or town (i.e., enabling economic growth through infrastructure service provision); (3) enabling the development of residential and/or mixed-use areas for employees of new or expanding businesses (i.e., providing roads and associated municipal services for urban expansion areas); (4) strengthening linkages of city and/or town economy with the larger metropolitan or subregional economy (including growth corridors and clusters); and/or (5) increasing access of the urban poor to economic opportunities. (iv) The local government must confirm its ability and willingness to arrange counterpart financing. (v) The local government must confirm its willingness for the subproject to comply with ADB safeguard policies and other requirements. (vi) Implementation must be during 2009–2015.

30 Appendix 3

B. Stage 2: Subproject Preparation

3. Preparation by local governments involves designating an implementing agency (or initially an office of the government) to prepare project design documents including a project proposal and feasibility study report under the guidance of the Shanxi Development and Reform Commission (SDRC); with the help of the Shanxi PMO, an environmental impact assessment, and (if required) a resettlement plan to standards necessary to meet both domestic and ADB requirements. Governments must determine suitable institutional arrangements for project implementation and prepare a detailed financing plan.

4. Local governments can contract local design and other specialist institutes to carry out selected tasks involved in subproject preparation, including report production.

5. To facilitate an orderly and consistent appraisal of the subprojects, the Shanxi PMO requires preparation of an integrated feasibility study in a common format (to ADB standards) for each proposed subproject, including technical, social, financial, economic, and institutional analysis.

D. Stage 3: Subproject Appraisal and Approval

6. The ADB project team developed a detailed set of evaluation criteria, which was discussed and agreed with SPG. This is to ensure that appraisal of individual subprojects is conducted in accordance with ADB standards. The appraisal of the three core subprojects will also serve as guidance for the appraisal of subsequent subprojects.

7. Each subsequent subproject PMO will prepare a subproject appraisal report, which will follow the template provided in Supplementary Appendix C (which also shows the summary appraisal criteria), and submit it to the municipal finance bureau and municipal development and reform commission for review and then to the Shanxi PMO for review. The Shanxi PMO will submit the appraisal report to the Shanxi Finance Bureau and SDRC for endorsement.

8. Rejected subprojects are to be referred to the relevant local governments with indications of where the preparations and proposals are deficient, and for additional preparation work (assuming the subprojects have a realistic chance of meeting the agreed evaluation criteria).

9. Subprojects approved by SDRC will be forwarded to ADB for approval.

10. All subproject approvals by ADB or SPG will only be made if

(i) the subproject includes an environmental impact assessment which has been endorsed by the Shanxi Environmental Protection Bureau and ADB, and has been subject to relevant public consultation and disclosure; and (ii) a resettlement plan, meeting ADB requirements, has been prepared and approved by the relevant local government, and endorsed as satisfactory by ADB.

Appendix 4 31

EXTERNAL ASSISTANCE

Table A4.1: ADB Assistance for Infrastructure and Environmental Improvement in the People’s Republic of China

Date of Amount No. Name Approval ($ million) A. Loans 1205 Qingdao Environmental Improvement 10 Dec 92 103.00 1270 Tangshan and Chengde Environmental Improvement 25 Nov 93 140.00 1313 Dalian Water Supply 20 Sep 94 160.00 1336 Beijing Environment Improvement 29 Nov 94 157.00 1490 Anhui Environmental Improvement 26 Nov 96 28.00 1491 Anhui Environmental Improvement (Industrial Component) 26 Nov 96 112.00 1543 Xian–Xianyang–Tongchuan Environmental Improvement 24 Sep 97 156.00 1544 Zhejiang–Shanxi Water Supply (Phase I) 24 Sep 97 100.00 1636 Fuzhou Water Supply and Wastewater Treatment 30 Sep 98 102.00 1692 Suzhou Creek Rehabilitation 29 Jun 99 300.00 1715 Shanxi Environmental Improvement 27 Nov 00 102.00 1797 Tianjin Wastewater Treatment and Water Resources Protection 11 Dec 00 130.00 1985 Hebei Province Wastewater Management 19 Dec 02 82.36 1995 Harbin Water Supply 11 Mar 03 100.00 1996 Wuhan Wastewater Management 25 Apr 03 83.00 2175 Jilin Water Supply and Sewerage Development 27 Jun 05 100.00 2176 Fuzhou Environmental Improvement 08 Jul 05 55.80 2207 Henan Wastewater Management and Water Supply 18 Nov 05 100.00 2237 Shandong Hai River Basin Pollution Control 21 Jun 06 80.00 2239 Guangxi Nanning Urban Environmental Upgrading 26 Jun 06 100.00 2240 Wuhan Wastewater and Stormwater Management 26 Jun 06 100.00 2297 Nanjing Qinhuai River Environmental Improvement 18 Dec 06 100.00 2328 Anhui Hefei Urban Environment Improvement 24 Apr 07 150.00 2360 Jilin Urban Environmental Improvement 29 Oct 07 100.00 2388 Kunming Qingshuihai Water Supply 12 Dec 07 80.00 2407 Gansu Baiyin Urban Development 23 Jan 08 80.00 2420 Xinjiang Municipal Infrastructure and Environmental Improvement 23 Apr 08 105.00 2487 Songhua River Basin Water Pollution Control and Management 11 Dec 08 200.00 2491 Guangxi Wuzhou Urban Development 15 Dec 08 100.00 2526 Xinjiang Urban Transport and Environmental Improvement 29 Jun 09 100.00 2550 Liaoning Small Cities and Towns Development Demonstration Sector Project 18 Sep 2009 100.00 2574 Hebei Small Cities and Towns Development Demonstration Sector Project 6 Nov 2009 100.00 Subtotal (A) 3,880.16 B. Advisory Technical Assistance 987 Institutional Strengthening of National Environmental Protection Agency 10 Jun 88 0.34 1436 Environmental Impact Assessment and Training 10 Dec 90 0.60 1464 Management of Environment and Natural Resources in Hainan 11 Jan 91 0.60 1701 Shanxi Road Project 01 Aug 01 0.25 1772 Institutional Strengthening of the Qingdao Environmental Protection 30 Oct 92 0.60 1835 Haihe Basin Environmental Management and Planning Study 31 Dec 92 1.24 1916 Institutional Strengthening of the Environmental Protection Bureau 28 Jul 93 0.45 1988 Environmental Impact Assessment and Training Phase II 18 Nov 93 0.90 2015 Urban Environmental Improvement Planning 14 Dec 93 0.48 2090 Legislative Reform for Protecting the Environment & Natural Resources 18 May 94 0.50 2210 Capacity Building of Beijing Municipal Environmental Protection Bureau 29 Nov 94 0.60 2398 Improving Environmental Monitoring and Enforcement in Henan 15 Sep 95 0.09

32 Appendix 4

Date of Amount No. Name Approval ($ million) 2456 Pilot Environmental Plans for Selected Medium-Size Cities 4 Dec 95 0.60 2504 Seminar on BOT in Water Supply Sector 22 Dec 95 0.10 2505 Strengthening the Environmental Standards and Enforcement 22 Dec 95 0.60 2693 Formulation Integrated EMPs Chao Lake Basin 26 Nov 96 0.80 2726 Water Quality Management for Suzhou Creek 23 Dec 96 0.60 2726 Water Quality Management for Suzhou Creek (Supplementary) 13 Feb 98 0.40 2751 Capacity Building of Wastewater Treatment Operations in Anhui 27 Jan 97 0.40 2773 Water Supply Tariff Study 24 Mar 97 0.60 2804 BOT Chengdu Water Supply Project 2 Jun 97 0.60 2817 Strategic Operations for the Water Sector (including supplementary) 26 Jun 97 1.24 2873 Improvement of Environmental Management in Shanxi Province 24 Sep 97 0.94 2906 Leadership Training on Urban Environmental Management in Key Cities 3 Nov 97 0.60 2951 Promotion of Market-Based Instruments for Environmental Management 16 Dec 97 0.70 2975 Environmental Impact Assessment Training & Curriculum Development 31 Dec 97 0.60 3079 TA Cluster to the PRC for the Promotion of Clean Technology 29 Sep 98 3.50 3095 Hai River Basin Wastewater Management and Pollution Control 10 Nov 98 0.57 3211 Improving Environmental Management in Suzhou Creek 29 Jun 99 0.84 3250 Water Tariff Study II 3 Sep 99 0.95 3377 Urban Poverty Study 27 Dec 99 0.41 3447 Strengthening Urban Solid Waste Management 25 May 00 0.60 3588 Trans-jurisdiction Environment Management (TA Cluster) 11 Dec 00 2.10 3749 National Guidelines for Urban Wastewater Tariffs & Management Study 25 Oct 01 0.70 4061 Songhua River Water Quality and Pollution Control 10 Jan 03 1.00 4095 Policy Reform Support 11 April 03 0.15 4215 Safe Drinking Water and Sanitation for the Rural Poor 12 Nov 03 0.40 4335 Town-Based Urbanization Strategy Study 06 May 04 0.75 4694 Urban Poverty Strategy Study II 23 Nov 05 0.30 4702 Study on Sustainable Urbanization in Metropolitan Regions 28 Nov 05 0.50 4967 Pilot Study on Market-Based Instruments for Water Pollution Control 11 Sept 07 0.50 4987 National Strategies for Environmental Management and Energy Conservation 13 Nov 07 0.90 7002 Urban Wastewater and Solid Waste Management for Small Cities and Towns 10 Dec 07 1.00 Provincial Development Strategies for Selected Provinces in the Central 7036 12 Dec 07 1.00 Region 7083 Urban Wastewater Reuse and Sludge Utilization Policy Study 26 May 08 1.00 Subtotal (B) 32.35 C. Project Preparatory Technical Assistance 1549 Qingdao Environmental Improvement 18 Jun 91 0.10 1831 Tangshan and Chengde Environmental Improvement 31 Dec 92 0.10 1852 Dalian Water Supply 10 Mar 93 0.10 1917 Beijing Environment Improvement 28 Jul 93 0.60 2187 Anhui Environmental Improvement Project for Wastewater Component 19 Oct 94 0.28 2445 Xian–Xianyang–Tongchuan Environmental Improvement 16 Nov 95 0.50 2770 Fuzhou Water Supply and Wastewater Treatment 14 Mar 97 0.60 2901 Shanxi Environment Improvement 21 Oct 97 0.59 3049 Zhejiang–Shanxi Water Supply (Phase II) 21 Jul 98 0.54 3095 Hai River Basin Wastewater Management and Pollution Control 10 Nov 98 0.57 3215 Heilongjiang Water Supply 1 Jul 99 1.00 3216 Tianjin Wastewater Treatment and Water Resources Protection 2 Jul 99 0.80 3488 Hebei Province Wastewater Management 30 Aug 00 0.85 3571 Harbin Water Supply 12 Dec 00 0.72 3638 Wuhan Wastewater Treatment (including supplementary) 19 Mar 01 0.70 4014 Fuzhou Environmental Improvement 5 Dec 02 0.60

Appendix 4 33

Date of Amount No. Name Approval ($ million) 4223 Shandong Hai River Basin Pollution Control 21 Nov 03 0.60 4227 Jilin Water Supply and Sewerage Development 26 Nov 03 0.65 4233 Henan Wastewater Treatment 3 Dec 03 0.80 4385 Guangxi Nanning Urban Infrastructure Development 3 Sep 04 0.56 4436 Wuhan Wastewater and Storm-Water Management 18 Nov 04 0.70 4617 Nanjing Qinhuai River Environmental Improvement 27 Jul 05 0.60 4628 Hefei Urban Environment Improvement 15 Aug 05 0.75 4804 Jilin Urban Infrastructure 22 Jun 06 0.50 4805 Xinjiang Municipal Infrastructure and Environmental Improvement 23 Jun 06 0.80 4808 Kunming Qingshuihai Water Supply 29 Jun 06 0.60 4818 Gansu Baiyin Urban Development 19 Jul 06 0.50 4867 Preparing the Qingdao Water Resources Management Project 16 Nov 06 0.60 4930 Xinjiang Urban Transport and Environmental Improvement 11 May 07 0.70 4959 Small Cities and Towns Development Demonstration Sector Projects 6 Aug 07 1.70 4960 Guangxi Wuzhou Urban Development 9 Aug 07 0.50 4971 Songhua River Basin Water Pollution Treatment 28 Sep 07 1.30 4995 Lanzhou Sustainable Urban Transport Project 23 Nov 07 0.80 7108 Chongqing Urban–Rural Infrastructure Development Demonstration Project 29 Jul 08 0.90 7160 Guangxi Border Cities Development 4 Nov 08 0.80 7177 Wuhan Urban Environmental Improvement Project 21 Nov 08 0.70 7323 Xinjiang Altay Urban Infrastructure and Environmental Improvement 3 Aug 09 0.80 7344 Gansu Tianshui Urban Development Infrastructure Project 11 Sep 2009 0.70 7360 Guangxi Beibu Gulf Cities Development Project 1 Oct 2009 0.70 Subtotal (C) 25.91 Total (B + C) 58.26 BOT = build–operate–transfer, EMP = environmental management plan, MIS = management information system. Source: Asian Development Bank.

Table A4.2: External Assistance for Infrastructure and Environment Projects in Shanxi Province, 1990–2008

Amount Funding Date of Project Loan No. (million) Agency Signing Education Development Project for Poverty 2339-CHA SDR15.50 World Bank 10 Apr 92 Province (Poverty Education I) Human Development Project for Rural Sanitation 2539-CHA SDR13.20 World Bank 25 Aug 93 (Sanitation IV Project) Human Development Project for Rural Sanitation 2794-CHA SDR5.09 World Bank 19 Mar 96 (Sanitation VII Project) Education Development Project for Poverty 2954-CHA SDR9.41 World Bank 26 Jun 97 Province (Poverty Education IV) Wanjiazhai Water supply 4179-0 $325.00 World Bank 20 Aug 97 Human Development Project for Rural Sanitation 3075-CHA SDR5.32 World Bank 12 Jun 98 (Sanitation VIII Project) Human Development Project for Rural Sanitation 3201-CHA SDR2.27 World Bank 29 Jul 99 (Sanitation IX Project) 4462-CHA $2.04 CR2800, SDR0.12+ Vocational Training and Labor Market Building World Bank 04 Apr 02 LN3967 $0.59 SDR = special drawing rights. Source: Shanxi Planning and Finance Division, People's Republic of China.

34 Appendix 5

SUMMARY OF SUPPORT FOR WATER AND WASTEWATER UTILITIES

A. Objectives

1. To enhance the sustainability of the Asian Development Bank (ADB)-financed water supply and wastewater infrastructure, the Multi-Donor Trust Fund under the Water Financing Partnership Facility will provide a grant to be used to strengthen the institutional and financial management capacity of the entities involved in planning, financing, implementing, operating, and maintaining water and wastewater systems in the subproject small cities and towns. This includes water supply and wastewater service providers participating in core and subsequent subprojects. The assistance, to be administered by the Shanxi provincial government, will also focus on improving the provincial policy and regulatory framework for these providers and, where appropriate, the national framework.

2. The capacity development assistance will improve the ability of water and wastewater service providers to respond to ongoing urbanization challenges by enhancing their ability to deliver sustainable services. Specifically it will (i) help participating entities develop a comprehensive corporate strategy for water and wastewater service provision in which organization structures, personnel, and systems and procedures are aligned with corporate goals and objectives, including attracting private sector investment; (ii) identify appropriate wastewater treatment technology and implementation plans for small towns of less than 20,000 population; (iii) adopt a demand-driven approach for service delivery, in which service levels and coverage for water and wastewater are set and interventions designed in response to the expressed priorities and preferences of end users; and (iv) strengthen financial management and cost recovery so that revenues cover costs to the extent possible, and the service provider is able to meet its substantial financial obligations in an environment of rapidly expanding service provision.

B. Scope of Work

3. The team implementing the capacity development assistance will assess the institutional and financial capacity of the designated service providers, formulate a program to strengthen institutional capacity (including training, assistance with corporate reform, improvement of administrative systems and procedures, and design of pilot interventions), and assist in implementing the program. The team will coordinate closely with the provincial project management office (PMO) and work closely with the subproject PMOs and implementing agencies. The Shanxi provincial government, the Executing Agency, will be responsible for administration of the grant and recruitment of consultants.

C. Period of Performance

4. The work will be carried out over 36 months commencing January 2010.

D. Staffing

5. International consultants will comprise an operation and institutional specialist, and a financial management specialist. National consultants will comprise a team leader and financial specialist, a utility accountant, a water and wastewater pricing specialist, a training specialist, and a customer outreach specialist.

SUMMARY COST ESTIMATES AND FINANCING PLAN

Table A6.1: Summary Cost Estimates CNY million $ million Foreign Local Foreign Local Exchange Currency Total Exchange Currency Total % of Total Item Costs Costs Costs Costs Costs Costs Costs A. Base Costs a

1. Construction

Civil Works 143.5 573.9 717.4 20.5 82.0 102.5 46 Equipment (including installation and materials) 34.3 137.2 171.5 4.9 19.6 24.5 11 Land Acquisition and Resettlement 0.0 145.4 145.4 0.0 20.8 20.8 9 Other Costs b 46.1 107.6 153.8 6.6 15.4 22.0 10 Subtotal (A1) 223.9 964.2 1,188.1 32.0 137.7 169.7 76 2. Institutional Strengthening

Consulting Services and Training 17.5 0.0 17.5 2.5 0.0 2.5 1 Capacity Building (grant) c 1.8 0.0 1.8 0.3 0.0 0.3 0 Subtotal (A2) 19.3 0.0 19.3 2.8 0.0 2.8 1

Total Base Costs 243.2 964.2 1,207.3 34.7 137.7 172.5 77 B. Contingencies

Physical Contingency d 24.3 96.4 120.7 3.5 13.8 17.2 8 Price Contingency e 32.5 128.7 161.2 4.6 18.4 23.0 10 Contingencies Total 56.8 225.1 281.9 8.1 32.2 40.3 18 C. Financing Charges during Implementation f

Interest during implementation—ADB loan 80.2 0.0 80.2 11.5 0.0 11.5 5 Commitment charges—ADB loan 3.5 0.0 3.5 0.5 0.0 0.5 0 Total Financing Charges during Implementation 83.7 0.0 83.7 12.0 0.0 12.0 5 Total Project Costs 383.6 1,189.3 1,572.9 54.8 169.9 224.7 100

Note: Exchange rate used: CNY6.95 = $1. Numbers may not sum precisely because of rounding. a In mid-2008 prices. b Includes expenditures for project preparation, management, survey and design, supervision, bidding, and environmental impact assessment. c Actual grant amount is $250,000. d Physical contingencies computed at 10%. e Price contingencies computed by year and expenditure type based on cumulative domestic and foreign price inflation. Exchange rate fluctuations are estimated using a purchasing power parity adjustment model. f Interest during construction computed at 4.5% based on the London interbank offered rate and spread. Source: Asian Development Bank estimates. 6 Appendix 35

36 Table A6.2: Costs and Financing by Expenditure Account Item Total Cost Financing by Expenditure Account ($ million) Appendix 6 Appendix Multi- Donor ADB Loan (CNY ($ ADB Trust Pingyao Youyu Xiaoyi/ Other Finance million) million) Loana Fundb County County Wutong County Share (%)

A. Base Costs 1. Construction Civil Works 717.4 102.5 61.0 2.0 8.1 8.6 22.7 60 Equipment (including installation and 171.5 24.5 24.5 0.0 0.0 0.0 0.0 100 materials) Land Acquisition and Resettlement 145.4 20.8 0.0 11.9 0.0 0.0 8.8 Other Costs b 153.8 22.0 0.0 2.3 5.2 4.1 10.3 Subtotal (A1) 1,188.1 169.7 85.5 16.3 13.3 12.7 41.9 50 2. Institutional Strengthening Consulting Services and Training 17.5 2.5 2.5 0.0 0.0 0.0 0.0 100 d Capacity Building (grant) c 1.8 0.3 0.0 0.3 0.0 0.0 0.0 0.0 Subtotal (A2) 19.3 2.8 2.5 0.3 0.0 0.0 0.0 0.0 Subtotal Base Costs 1,207.3 172.5 88.0 0.3 16.3 13.3 12.7 41.9 51 B. Contingencies 281.9 40.3 0.0 5.6 4.9 3.1 26.7 C. Financing Charges during Implementation 83.7 12.0 12.0 0.0 0.0 0.0 0.0 100 Total Project Costs 1,572.9 224.7 100.0 0.3 21.9 18.3 15.8 68.5 45 Note: Numbers may not sum precisely because of rounding. a The ADB loan will cover bank charges and taxes and duties of works, supplies, equipment and services financed by ADB. b Includes expenditures for project preparation, management, survey and design, supervision, bidding, and environmental impact assessment. c Under the Water Financing Partnership Facility. Actual amount $250,000. Contributors: the governments of Australia, Austria, and Norway. Administered by the Shanxi provincial government. d Includes project implementation and training-related equipment. Source: Asian Development Bank estimates.

Appendix 7 37

LENDING ARRANGEMENTS AND INDICATIVE FLOW OF FUNDS

Direct Payments to Asian Development Bank Suppliers and Consultants Loan

People’s Republic of China Ministry of Finance

Relending a

Shanxi Provincial Government Finance Bureau

Onlending a

Jingzhong Municipal Shuozhou Municipal Lüliang Municipal Other Municipal Shanxi PMO Government Government Government Governments Finance Bureau Finance Bureau Finance Bureau Finance Bureau

Onlending a

Pingyao County Youyu County Xiaoyi City Other county-level Government Government Government city or county governments

Onlending a

PMO Water Affairs Youyu County Xiaoyi City Other Bureau Development Engineering and Implementing and Reform Construction Agencies Bureau Management Affairs Implementing Bureau AgencyAgency (Wuton g Town)

PMO = project management office, IA = implementing agency. a Relending and onlending of the Asian Development Bank loan will be on the same terms and conditions as those received by the Ministry of Finance. Lending, Relending, Onlending Repayment Source: Asian Development Bank.

38 PROJECT IMPLEMENTATION ORGANIZATION

Shanxi Province Small Cities and Towns 8 Appendix Project Leading Group (PLG)

Shanxi Project Management Office (PMO) Executing Agency (Shanxi Province Housing and Urban-Rural Development Bureau)

Xiaoyi City Youyu County Pingyao County Other Counties

PLG PLG PLG PLG

Subproject PLGs PMOs

PMO PMO PMO PMO

Xiaoyi City Engineering and Youyu County Development Water Affairs Bureau To be determined Construction Management and Reform Bureau - Huiji River Improvement Affairs Bureau for Wutong - Heat Supply Town - Water Supply - Caoxi Road and - Roads and Associated Associated Municipal Municipal Services Services - Flood Control - Wastewater Treatment - Drainage and Wastewater - Heat Supply - Gas Supply - Social Services Facilities

Source: Asian Development Bank.

IMPLEMENTATION SCHEDULE

2010 2011 2012 2013 2014 2015 2016 Task Name Start Finish Duration 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 Pingyao County 1/10 6/12 Land Acquisition and 1/10 9/10 9 Resettlement Design and Tender 1/10 6/10 6 Documentation Tendering 4/10 9/10 6 Huiji River Improvement 10/10 6/12 21 and Flood Control Wutong Township, 1/10 6/13 Xiaoyi County Land Acquisition and 1/10 9/10 9 Resettlement Design and Tender 1/10 12/10 12 Documentation Tendering 4/10 3/11 12 Caoxi Road 7/10 6/11 12 Centralized Heating 7/10 6/12 24 Supply Education Facilities 7/10 6/13 36 Gas Supply 7/10 6/12 24 Waster Water Treatment 7/10 6/12 24 Youyu County 1/10 3/15 Land Acquisition and 1/10 9/10 9 Resettlement Design and Tender 1/10 9/11 21 Documentation Tendering 4/10 12/11 21 District Heating 7/10 12/14 54 Drainage and Wastewater 7/10 12/14 54 Pipe System Flood Control 7/11 12/12 18 Roads 10/10 3/15 54 Water Supply 7/10 12/14 54 Other Subprojects 1/10 12/15 60 Land Acquisition and 1/10 9/10 9 Resettlement Design and Tender 1/10 6/13 42 Documentation Tendering 10/10 9/13 42

Construction Works 7/11 9/15 63 9 Appendix Institutional 7/10 3/16 72 Development Training (including 1/10 9/15 Intermittent procurement) Source: Asian Development Bank. 39

40 Appendix 10

SUMMARY AND DETAILED PROCUREMENT PLAN

Project Name: Shanxi Small Cities and Loan Number______Towns Development Project Executing Agency: Shanxi Provincial Loan Amount: $100 million Government

Date of first Procurement Plan (loan Date of this Procurement Plan: 12 approval date)______November 2009

A. Section 1: Process Thresholds, Review, and 18-Month Procurement Plan

1. Project Procurement Thresholds

1. Except as the Asian Development bank (ADB) may otherwise agree, the following process thresholds shall apply to procurement of goods and works.

Table A10.1: Procurement of Goods and Works Method Threshold ICB for Worksa $ 10,000,000 or more, ICB for Goodsa $ 1,000,000 or more NCB for Worksa More than $100,000 but less than $10 million NCB for Goodsa More than $100,000 but less than $1 million Shopping for Works Below $ 100,000 Shopping for Goods Below $ 100,000 ICB = international competitive bidding, NCB = national competitive bidding. a Refer to ADB. 2008. Local Procurement. Project Administration Instructions. PAI 3.04. Manila (para. 3, national competitive bidding).

2. ADB Prior or Post Review

2. Except as ADB may otherwise agree, the following prior or post review requirements apply to the various procurement and consultant recruitment methods used for the project

Table A10.2: Review Requirements Procurement Method Prior or Post ICB for Works Prior ICB for Goods Prior NCB for Works The first NCB procurement documents should be submitted for ADB NCB for Goods review and approval; subsequent NCB will be reviewed Post Project Shopping for Post Works Shopping for Post Goods ICB = international competitive bidding, NCB = national competitive bidding.

Appendix 10 41

Table A10.3: Review Requirements Procurement Method Prior or Post QCBS Prior QBS Prior Other selection methods: CQS, LCS, FBS, and Prior SSS Individual Consultants Prior CQS = consultant qualification selection, FBS = fixed budget selection, LCS = least- cost selection, QCBS = quality- and cost-based selection, QBS = quality-based selection, SSS = single source selection.

3. Goods and Works Contracts Estimated to Cost More Than $1 Million

3. The following table lists goods and works contracts for which procurement activity is either ongoing or expected to commence within the next 18 months.

Table A10.4: Goods and Works Contracts Estimated to Cost More than $1 Million Shanxi PMO Pre- Reference Procurement Qualification of Expected Date of Number General Description Method Bidders Advertisement Goods B-YY-01-01a Design, supply, and installation of ICB yes Q1 2010 district heating (heat source; sub- stations; pipeline network; automated control; electrical supply) Works A-PY-01-01 Huiji River embankments, rubber NCB yes Q1 2010 dam, pump stations, housing, temporary engineering A-PY-01-02 Huiji River improvement, seepage- NCB yes Q1 2011 prevention in the reservoir, bottom- protecting engineering, power transmission line, other construction A-YY-04-01 Road base and pavement; curbs, NCB no Q1 2012 gutters, drainage, and greening; electric supply and lighting A-XY-03-03 Construct one employment training NCB no Q1 2010 center (adult vocational school) A-XY-02-01 Heat exchange station, supporting NCB no Q1 2010 facilities, and pipeline network A-XY-03-02 Construct one secondary school NCB no Q1 2010 (age 12–15) A-XY-01-01 Caoxi road base and pavement; NCB no Q1 2010 curbs, gutters, drainage; greening A-XY-04-01 Gas supply pressure-adjusted NCB no Q1 2010 station (transmission, and distribution system) ICB = international competitive bidding, NCB = national competitive bidding. First column is Shanxi PMO reference number: A = civil works, B = equipment. a Based on the detailed design, the SPMO will further review this package with the intention of dividing it into several ICB and NCB packages.

42 Appendix 10

4. Consulting Services Contracts Estimated to Cost More Than $100,000

4. The following table lists consulting services contracts for which procurement activity is either ongoing or expected to commence within the next 18 months.

Table A10.5: Consulting Services Contracts Estimated to Cost More Than $100,000 Advertisement International Recruitment Date or National General Description Method (quarter/year) Assignment Comments Project Implementation QCBS Q1 2010 Both Multiple Project Management (80:20) (About 158 Contracts Capacity Building or person-months CQS of international and national consulting services) CQS = consultants qualification selection, QCBS = quality- and cost-based selection.

5. Goods and Works Contracts Estimated to Cost Less than 1 Million and Consulting Services Contracts Less than $100,000

5. This table groups smaller-value goods, works and consulting services contracts for which procurement activity is either ongoing or expected to commence within the next 18 months.

Table 10.6: Goods and Works Contracts Estimated to Cost Less than $1 Million and Consulting Services Contracts Less than $100,000 Procurement/ Number of Recruitment Item General Description Contracts Method Civil Works Civil works for water supply 3 NCB transmission, treatment, and distribution pipeline; drainage; construction of schools Equipment Pipelines for sewage and 9 NCB stormwater, wastewater pumping and treatment equipment, furniture and equipment for schools, heating equipment, rubber dams for river Consulting Training (including project To be Shopping Services and implementation and training determined Capacity Building equipment) NCB = national competitive bidding.

B. Section 2: Project Procurement Plan

1. Indicative List of Packages Required Under the Project

6. The following table provides an indicative list of all procurement (goods, works and consulting services) over the life of the project. Contracts financed by the Borrower and others should also be indicated, with an appropriate notation in the comments section.

Appendix 10 43

Table A10.7: Indicative List of All Procurement Estimated Domestic General Number of Procurement Preference Description Contracts Method Applicable Comments Goods 10 NCB 1 ICB Works 14 NCB Estimated Number of Recruitment Type of Contracts Method Proposal Comments Consulting Multiple (To QCBS, CQS Simplified and Includes Services be and/or S Bio-Data consulting and determined) international services (about Capacity and national 158 person- Building months), training, study tours and project implementation equipment CQS = consultants quality selection, ICB = international competitive bidding, LCS = least-cost selection, NCB = national competitive bidding, QCBS = quality- and cost-based selection, S = shopping See ADB. 2008. Recruiting Consulting Firms. Project Administration Instructions. PAI 2.02G. Manila (full, simplified or biodata proposal).

C. Section 3: National Competitive Bidding Annex for the People's Republic of China

7. The Borrower’s Law of Tendering and Bidding of the People’s Republic of China promulgated by Order No. 21 of the President of the People’s Republic of China on 30 August 1999, are subject to the following clarifications required for compliance with the guidelines:

(i) All invitations to prequalify or to bid shall be advertised in the national press, or official gazette, or a free and open access website in the Borrower’s country. Such advertisement shall be made in sufficient time for prospective bidders to obtain prequalification or bidding documents and prepare and submit their responses. In any event, a minimum preparation period of 30 days shall be given. The preparation period shall count (a) from the date of advertisement, or (b) when the documents are available for issue, whichever date is later. The advertisement and the prequalification and bidding documents shall specify the deadline for such submission. (ii) Qualification requirements of bidders and the method of evaluating the qualification of each bidder shall be specified in detail in the bidding documents, and in the prequalification documents if the bidding is preceded by a prequalification process. (iii) If bidding is preceded by a prequalification process, all bidders that meet the qualification criteria set out in the prequalification document shall be allowed to bid and there shall be no limit on the number of prequalified bidders. (iv) All bidders shall be required to provide a performance security in an amount sufficient to protect the Borrower and Project Executing Agency in case of breach of contract by the contractor, and the bidding documents shall specify the required form and amount of such performance security. (v) Bidders shall be allowed to submit bids by mail or by hand.

44 Appendix 10

(vi) All bids shall be opened in public; all bidders shall be afforded an opportunity to be present (either in person or through their representatives) at the time of bid opening, but bidders shall not be required to be present at the bid opening. (vii) All bid evaluation criteria shall be disclosed in the bidding documents and quantified in monetary terns or expressed in the form of pass/fail requirements. (viii) No bid may be rejected solely on the basis that the bid price falls outside any standard contract estimate, or margin or bracket of average bids established by the Borrower and Project Executing Agency. (ix) Each contract shall be awarded to the lowest evaluated responsive bidder, that is, the bidder who meets the appropriate standards of capability and resources and whose bid has been determined (a) to be substantially responsive to the bidding documents, and (b) to offer the lowest evaluated cost. The winning bidder shall not be required, as a condition of award, to undertake responsibilities for work not stipulated in the bidding documents or otherwise to modify the bid as originally submitted. (x) Each contract financed with the proceeds of the loan shall provide that the suppliers and contractors shall permit ADB, at its request, to inspect their accounts and records relating to the performance of the contract and to have said accounts and records audited by auditors appointed by ADB. (xi) Government owned enterprises in the Borrower’s country may be permitted to bid if they can establish that they (a) are legally and financially autonomous, (b) operate under commercial law and (c) are not a dependent agency of the Borrower and Project Executing Agency. (xii) Rebidding shall not be allowed solely because the number of bids is less than three.

Appendix 11 45

SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY

Country/Project Title: People’s Republic of China (PRC)/Shanxi Small Cities and Towns Development Demonstration Sector Project

Lending Department / East Asia Department Sector Loan Modality: Division: Social Sectors Division

I. POVERTY ANALYSIS AND STRATEGY A. Linkages to the National Poverty Reduction Strategy and Country Partnership Strategy Contribution of the sector or subsector to reduce poverty in the People’s Republic of China (PRC):

The objectives of the Project are to promote balanced and environmentally sustainable urbanization; narrow the urban– rural gap; and improve production, employment, and living conditions in small cities and towns in Shanxi Province. Although the Project will not reduce poverty directly, it will contribute in creating short- and long-term poverty reduction impacts. It is consistent with the PRC national poverty reduction strategy for development of the northeastern region, which aims to decrease the income gap between urban and rural residents. The Project is consistent with the water policy of the Asian Development Bank (ADB), which states that people must have access to safe and reliable water supplies. It will help the PRC achieve the Millennium Development Goal (MDG) 7 (environmental sustainability), and specifically address MDG target 7.C (to halve the proportion of people without sustainable access to safe drinking water and basic sanitation by 2015). The Project adheres to ADB’s country partnership strategy in the PRC to make markets work more efficiently through (i) urban infrastructure development, (ii) promotion of environmental sustainability, and (iii) pro-poor equitable and inclusive growth.

The Project will improve water supply, wastewater collection and treatment, heating and gas systems, river management, roads, and associated services, which will in turn reduce surface and groundwater pollution, improve the environment and public health, and increase the quality of life of local residents. The Project will directly benefit about 200,000 people in the core subproject area (about 10% are living below the local poverty line) and about 400,000 people in subsequent subproject areas. The Project will contribute to poverty reduction by reducing the incidence of water- and airborne diseases and flood risk in small cities and towns, and providing employment opportunities during both construction and operation of project facilities with anticipated flow-on effects to social and economic development. Specific anticipated benefits include the following: (i) Job creation. The three core subprojects will create about 10,300 jobs during construction. Follow-on multiplier effects are expected to create an additional 31,500 indirect jobs. About 70% of the construction jobs are assumed to be unskilled jobs and the poor will benefit disproportionately from jobs created by the Project. Those temporarily employed in construction will benefit from additional training and experience that will provide them with opportunities in future planned infrastructure projects. The associated wages for workers translate to CNY155.3 million that will return to the local economy. Subproject operations will create 8,952 direct employment opportunities and another 22,050 indirect jobs. Indirect impacts on job creation will also be created through the employment training center programs. (ii) Health benefits. The subprojects are expected to provide clean drinking water and better environmental conditions. As a result, the population exposed to water- and airborne diseases will be reduced, as will associated medical costs. The number of schools days and workdays missed due to sickness will be reduced. The estimated reduction in medical expenses associated with the decrease in waterborne diseases in Shanxi during 2012–2020 is CNY23.5 million. The share of that reduction calculated as savings to households is CNY7.0 million. Benefits from improved household environments are expected to particularly accrue to women and children, and will be magnified through implementation of the public education and awareness programs for hygiene and public health. (iii) Flood control. The components of the river course improvement will (i) increase flood prevention and protection capacity; (ii) reduce risk of flooding and corresponding flood damage; (iii) improve discharge capacity to meet the requirement of flood control; and (iv) improve the water environment within the river. In Pingyao, the river improvement component will protect Pingyao ancient city—a United Nations Educational, Scientific, and Cultural Organization designated World Heritage site—and safeguard the life and properties of at least 140,000 people. In Youyu, the river channel is located at the northern part of Youyu urban area; the reconstruction of the riverbed running east–west through existing and new areas will increase the flood control capacity to the 50-year standard, which may result in protection of life and property of about 47,000 people. In addition, the poor are disproportionately affected by flooding either caused by extreme seasonal rainfall, which pools rather than draining away, or overflows from the sewer system. This is because the poor are more likely to live in floodprone areas and in dwelling units that are vulnerable to flooding. For subsequent subprojects, a poverty reduction and social strategy will be prepared as part of the project appraisal report.

46 Appendix 11

B. Poverty Analysis Targeting Classification: Targeted Intervention (TI-M)

1. Key Issues

Shanxi Province is located in northern PRC. In 2006 its population was 33.75 million with an average family size of 3.2. In 2006, about 43% of the population lived in urban areas; this is expected to increase to 47% in 2010. Shanxi is the national base for coal and coke, and manufacturing of industrial equipment and machinery. Some resource-based small cities and towns in the province have made substantial progress in recent years in facilitating economic growth, resulting in some harmful impacts on the environment.

Shanxi Province has relatively high rural poverty, compared to PRC average. Thirty-five of its 119 counties and county- level cities are defined as national impoverished counties, while 17 additional counties and county-level cities are defined as provincial impoverished counties.a Around 3,000 of its villages are defined as poverty villages, accounting for about 2.0% of all the poverty villages in the PRC. The percentage of its population living in absolute poverty (i.e., those with a per capita annual income of

In 2006, the three core subproject counties had a total rural population of 684,761. Of the total rural population, 12.4% were living below the old poverty line of CNY944/month, almost the same as the whole of Shanxi Province. If the proposed new poverty line of CNY1,300/month is used, poverty incidence would increase to 14.9 %. Pingyao county had a total rural population of 416,285, of which 10% was living under the old poverty line and 13.4% was living below the new poverty line. Xiaoyi city, where Wutong town is located, had a total rural population of 206,900, of which 4.8% was classified as poverty population under the old poverty line and 6% was living below the new poverty line. Youyu county, classified as a national impoverished county, had a total rural population of 61,576, of which 53.9% was living below the old poverty line and 61.7% was living below the new poverty line.

Urban areas of Shanxi have no uniform standard poverty line. The urban poverty line in the three core subproject counties and city differed slightly from CNY140–CNY150 per capita per month, the threshold for the minimum living standard scheme subsidy. Approximately 25,197 people in 13,462 households, or 7.3% of the urban population will benefit from this subsidy. The urban poverty incidence in Pingyao is 10.3%, Wutong 3.2%, and Youyu 3.6%. The socioeconomic survey and focus group discussions indicate that most of the poor in the subproject areas are unemployed, disabled, and/or suffering from chronic illness.

2. Design Features

The project design addresses social dimensions, i.e., the poor, public participation, gender, and ethnic minorities. At the same time, the design attempts to reduce impacts on land acquisition and resettlement. Participation strategies include a community-based public education and awareness program (PEAP) for hygiene and public health.

II. SOCIAL ANALYSIS AND STRATEGY A. Findings of Social Analysis

A socioeconomic survey was undertaken with a sample of 603 randomly selected households. The poverty and social analysis identified vulnerable groups and opportunities for pro-poor interventions; and recommended social action measures, participation plans, and mitigation plans to achieve positive social benefits. The analysis indicates that with rapid urbanization, public services in Shanxi cities and towns are inadequate and incapable of meeting the needs of a growing population. Air, river, and groundwater pollution have resulted from intense industrialization and resource extraction undertaken in the province. The Project aims to address these issues and meet the demands of residents by improving the water supply, wastewater collection and treatment, heating and gas, river management, and roads and associated services. The main findings of the social analysis for the three core subprojects follows.

Pingyao county is located at the heart of a significant and growing cultural tourism corridor that includes a number of historic mansions as well as Gutao town, a large and well-preserved traditional Chinese town in Pingyao ancient city. While tourism is growing rapidly, Pingyao faces significant environmental management problems due to proximity of industrial facilities and inadequate management of wastewater and solid waste. The subproject includes the rehabilitation of Huiji River, which will improve flood control, reduce groundwater pollution, and reduce public health risks.

Appendix 11 47

Wutong town is representative of dozens of towns across Shanxi that have experienced a massive economic boom as a result of increased energy production (in particular, coal and coke). While Wutong’s economic growth has increased exponentially since 2000, the town’s ability to manage urban growth and its environmental consequences has not kept pace. Air, ground, and water pollution are all severe. Investment in environmental infrastructure is critical to improve living conditions for residents and safeguard the natural environment. The Project calls for construction of basic infrastructure that will connect the urbanized area of Wutong with the county seat, Xiaoyi city.

Youyu is located in northern Shanxi on the windward side of the main coal-producing areas and as a result enjoys relatively good air quality. The county proposes to leverage its environmental quality and good access to markets to attract investment into a new light industrial area at the southwestern edge of the county seat. The subproject will enhance and sustain urban environmental quality for the entire city. The combination of job opportunities and good living conditions is anticipated to attract rural migrants from villages in northern Shanxi into Youyu. Moreover, the new agroprocessing facilities will help tie regional farmers to the growing urban economy.

B. Consultation and Participation

1. The major stakeholders are (i) groups directly affected by the Project in a positive or negative way, including men, women, elderly, poor, minorities, schools, business and related organizations; and (ii) government organizations such as SPG, implementing agencies, Planning and Reform Commission, Civil Affairs Bureau, Poverty Alleviation Office, Women’s Federation, Minority Affairs Office, Finance Bureau, Health Bureau, Labor and Social Security Bureau, and Environmental Protection Bureau. Several meetings with a number of stakeholders, especially vulnerable groups including women, poor, and ethic minorities in the project areas, were organized in the subproject towns. A number of key informant interviews were held with various bureaus, nongovernment organizations, the women’s federation, and representatives of past and ongoing projects in complementary areas to inform them of the project design.

2. What level of consultation and participation (C&P) is envisaged during the project implementation and monitoring? Information sharing Consultation Collaborative decision making Empowerment

3. Was a C&P plan prepared? Yes No

Public disclosure of all subproject documents will be made at the project management office (PMO) and on the ADB website, including the project information document, design and monitoring framework, resettlement plans, summary environmental impact assessment and environmental management plan, and social and environmental monitoring reports. A project information document was prepared for the Project. Booklets outlining the resettlement plans were distributed to affected households and disclosure meetings held. Copies of the booklet are available at the respective PMO and each affected village office.

The PEAP and training program will be conducted to promote hygiene education and traffic safety education, recycling program, and social acceptance of tariff increase. The following results are expected to be achieved through the PEAP: (i) increased participation and consultation of the local population in project implementation and monitoring, (ii) increased awareness of project benefits and acceptance of the Project, (iii) increased hygiene knowledge and reduced incidence of water- and vectorborne diseases, (iv) increased traffic safety knowledge and reduced incidence of traffic accidents, (v) increased participation of beneficiaries in garbage recycling as part of a solid waste management program, and (vi) increased environmental awareness on the part of business or enterprises.

C. Gender and Development

1. Key Issues

In the project-affected area, females account for almost 50% of the total population and labor force. The major project benefits targeted to women include (i) general benefits from economic development; (ii) improved housing conditions and living environment from river upgrading and flood control; (iii) health benefits from improved water supply, gas supply, and district heating supply; and (iv) job creation. Most of the project benefits accruing in the three subproject towns will benefit men and women equally. The Project will have some added benefits for women, since women are primarily responsible for drinking water collection, wastewater disposal, cleaning the interior and exterior of houses, nursing the children, and caring for the sick and the elderly.

2. Key Actions

Construction projects usually provide job opportunities for women. This is likely to be an additional temporary source of income that women can access. Furthermore, women’s participation in the skilled operation and maintenance work to be generated, will not be constrained—as evidenced by the number of women already working in these sectors and the equal

48 Appendix 11

number of male and female graduates with technical qualifications. The PMOs will ensure that contractors hire female construction laborers and gender-disaggregated data will be monitored.

Women in the community will be actively engage in the PEAP promoting hygiene education, garbage recycling, and acceptance of tariff increases. For the PEAP, the Project will work closely with local women’s organizations such as the All Chinese Women Association and women’s street committees. III. SOCIAL SAFEGUARD ISSUES AND OTHER SOCIAL RISKS Issue Significant/Limited/ Plan or Other Measures Strategy to Address Issue No Impact Included in Design Based on the resettlement impacts identified, Full Plan the construction of three core subprojects will Short Plan affect 1,453 households or 5,007 people by Resettlement

permanent land acquisition; relocate 23 Framework Significant households or 95 people due to the No Action Involuntary demolishment of residential structures; and Resettlement Not significant affect 22 enterprises, one shop, and one

agency with 1,178 employees. Three full None resettlement plans were prepared. For subsequent subprojects, a resettlement framework was prepared. Of the total beneficiary population of the three Plan core subproject towns, 1.5% are ethnic Other Action Significant minority peoples, with Han constituting the Ethnic People largest group. Due to the requirement of the Development Framework Indigenous Not significant sector loan modality and in accordance with No Action Peoples ADB’s Operations Manual F3 on indigenous None peoples, an ethnic minority development framework was prepared for subsequent subprojects. Labor The Project will provide employment Plan Employment opportunities for the poor. Project assurances Other Action opportunities Significant will prioritize local labor, especially vulnerable No Action Labor groups in job opportunities; and ensure retrenchment Not significant employment will comply with national labor Core labor laws and regulations. For subsequent standards None subprojects, if the subprojects have an impact on labor, a labor reemployment framework was prepared. The affordability analysis for public service Action charges including water supply, wastewater No Action treatment, gas supply, and heating supply was assessed and no affordability issue was Significant identified for the nonpoor. For poor

households, preferential policies or subsidy Affordability Not significant will be provided to ensure they benefit from

public services. None

For subsequent subprojects, affordability to pay will be analyzed during subproject appraisal. Other Risks Plan Health and safety training will be provided to and/or Significant Other Action construction workers. The PMO will ensure Vulnerabilities No Action that contractors involved in project HIV/AIDS Not significant implementation disseminate information on the Human risk of socially transmitted infections, including trafficking None HIV to workers they employ under the Project. Others IV. MONITORING AND EVALUATION Are social indicators included in the design and monitoring framework to facilitate monitoring of social development activities and / or social impacts during project implementation? Yes No a A national poverty county has per capita annual income of

Appendix 12 49

SUMMARY RESETTLEMENT PLAN

1. The Project includes three core subprojects and subsequent subprojects—all require some land acquisition and population resettlement. The resettlement planning and implementation is designed to ensure that those affected will be better off, or at least not worse off, as a result of the Project. Overall, the land acquisition and resettlement impacts of the Project will be significant. Three full resettlement plan reports were prepared for the three core subprojects.

2. The scope of the project impacts is mainly determined by the measurement survey on the basis of the feasibility study reports. Based on the resettlement impacts identified (physical and economic displacement), the construction of the three core subprojects will affect 1,453 households or 5,007 people because of permanent land acquisition; relocate 23 households or 95 people due to the demolition of residential structures; and affect 22 enterprises, one shop, and one government agency with 1,151 employees. In total, 96.6 hectares will be acquired permanently, 57.6 hectares are cultivated land (Table A12). Along with land acquisition, 5,604 square meters (m2) of residential houses and 13,703 m2 of nonresidential houses will be demolished, causing relocation of 23 households and 95 people, and affecting 22 enterprises, one shop, and one agency. In addition, associated productive assets, ground attachments, and basic infrastructure and facilities will be affected.

3. To avoid or minimize land acquisition and resettlement, local officials and village and street committees were closely consulted during preliminary and final feasibility study stages.

4. The resettlement plan and compensation for the permanent land loss is based on Document 28: State Council Decision to Deepen Reform and Strictly Enforce Land Administration in October 2004; Land Administration Law of PRC (the People’s Republic of China) in 1998 and updated in 2004; Shanxi Provincial Government Decree on Shanxi Province Compensation and Distribution Method for Land Acquisition of Rural Collectives issued on 17 October 2005; and Shanxi Provincial Government 193 Decree on Opinion on Land Compensation for Construction Project issued in December 2005. The resettlement plan and compensation for house demolition is based on the PRC, provincial, and municipal urban housing demolishment administration regulations. Based on consultations with local governments and affected people, and general practice in Pingyao, Xiaoyi (where Wutong is located), and Youyu counties, the respective municipal project management offices (PMOs) and implementing agencies adopted a set of compensation standards. The resettlement principles established for the Project are (i) land acquisition and involuntary resettlement should be avoided or minimized where feasible by developing and comparing a series of design alternatives; (ii) compensation and entitlements provided are based on market value or replacement value and must be adequate to allow those affected to at least maintain their pre- project standard of living, with the prospect of improvement; (iii) land temporarily occupied and the period for disruption are to be kept to a minimum; (iv) all people affected, legal and illegal, are to be taken into consideration and accounted for; (v) the per capita landholding after land acquisition will be sufficient to maintain the previous livelihood standard; (vi) where land allocation per capita is not sufficient to maintain the previous livelihood standards, other income- generating activities will be provided for; (vii) a preferential policy will be provided to vulnerable groups in such things as compensation, payment of special fund, minimum living guarantee, and employment; (viii) all those affected will be adequately informed about eligibility, compensation rates and standards, livelihood and income restoration plans, and project timing; and (ix) close monitoring and timely actions will be carried out to identify and resolve any problems.

50 Appendix 12

Table A12: Summary of Land Acquisition Permanent Land Acquisition Total Area Of which Farmland Affected Affected Subproject (mu)a (mu)a Households People Pingyao Huiji River Treatmentb 868.92 284.89 579 2,435 Wutong New Town Development 85.68 85.68 758 2,118 Youyu New Town Developmentc 494.00 494.00 116 454 Total 1,448.6 864.57 1,453 5,007 a 15 mu is equivalent to 1 hectare. b For Pingyao Huiji River treatment component, among 19,307 square meters (m2) to be demolished, are 5,604 m2 of residential structures affecting 23 households and 95 people, and 13,703 m2 of nonresidential structures affecting 22 enterprises, one shop, and one agency. c The households affected by the Youyu flood control component are part of households affected by the Youyu new town development component. Source: Asian Development Bank estimates.

5. Those affected will be notified about the key elements of the resettlement plan prior to loan appraisal by the Asian Development Bank (ADB). On various occasions during meetings, interviews, focus group discussions, public consultation workshops, and community consultation meetings, local representatives have participated in the planning; their concerns have been integrated into the resettlement plans. The resettlement information booklet for each subproject was distributed to affected villages and households in August 2008. The resettlement plans will be provided to village offices and resident committees, and posted on the ADB website after their approval. The respective project implementing agencies will establish project resettlement units for supervising implementation, continuing public consultation, monitoring progress, and responding to grievances. The grievance address procedures are well established and explanations are included in the resettlement information booklets.

6. For land acquisition, land compensation will be paid in cash to the affected villages to be used as basic social insurance for the farmers whose land is newly acquired. Resettlement subsidies and payment for standing crops will be paid to those affected. For residential houses and nonresidential buildings (enterprises and shops) to be demolished, compensation will be paid to owners, including those without building title. The payment will be made in cash according to the appraised value of the property. The households that have to relocate will receive a relocation allowance. Compensation for standing crops, auxiliaries, and other assets will be paid directly to those affected. Income losses resulting from reduced production, sales, and wages caused by the Project will be compensated in cash.

7. The resettlement strategy encompasses (i) replacement of housing and (ii) restoration of livelihoods and income. People losing housing in rural areas have two compensation options: to receive cash compensation, or cash compensation plus provision of a land plot for house construction (by the affected person). Assistance will be provided to construct new houses or find available housing close to the original homes, when preferred by those affected. The respective municipal PMOs, implementing agencies, and local governments will provide necessary assistance for house construction and relocation during resettlement implementation.

8. The measures for economic rehabilitation include (i) provision of employment opportunities during construction and operation of the Project; (ii) provision of basic social insurance to those affected whose land is newly acquired; (iii) land compensation and resettlement subsidy deposited in banks for income earnings from interest; (iv) development of economic crops with higher economic value; (v) promotion and development of new enterprises and self-employed secondary and tertiary businesses (i.e., small business, tofu production, transportation, entertainment, and catering services); and (vi) provision of technical training to those affected to increase their marketable skills. Relocated enterprises and shops will be

Appendix 12 51

provided with the options of compensation and resettlement. The same shops will reemploy the affected employees.

9. Vulnerable households will receive additional assistance from the municipal or county civil affairs bureau. The PMO and implementing agency will monitor implementation to ensure vulnerable persons receive adequate compensation, housing arrangements, special funds, and special assistance to restore their living conditions and incomes.

10. Each PMO and implementing agency will have at least two full-time staff responsible for land acquisition and resettlement. The staff from each subproject resettlement unit will take the lead responsibility for coordinating the planning, implementation, financing, and monitoring of land acquisition and resettlement. They will work closely with relevant village officials, land administration bureaus, and house demolishment offices; and will be responsible for supervision and monitoring of resettlement (e.g., delivery of entitlements, selection of new housing sites, restoration of incomes, provision of replacement land, and other economic measures). A training program will be organized for the resettlement officers.

11. The cost estimate for land acquisition and resettlement for the three core subprojects is about $18.0 million, equivalent to CNY122.4 million in 2008 prices, including contingencies. Resettlement implementation will be completed prior to subproject construction. Most resettlement activities will occur between March and June 2009. Detailed measurement surveys will be conducted in each village, neighborhood, house, enterprise, and shop; and the compensation contracts will be negotiated and signed with village committees, households, and enterprises. Based on these surveys, the resettlement plans will be updated and submitted to ADB for review and approval.

12. Internal and external monitoring of resettlement plan implementation will be conducted. Monitoring methodologies are specified in the resettlement plans. Each implementing agency will be responsible for internal supervision and monitoring to ensure compliance with resettlement plan provisions. The PMO and implementing agencies have agreed to a set of supervision milestones with ADB to ensure timely and effective implementation of resettlement activities. External monitoring and evaluation will be carried out by an independent agency under contract to the PMO and implementing agencies. External monitoring reports will be forwarded directly to the Shanxi PMO and ADB.

13. As a sector loan, the Shanxi PMO is responsible for developing subsequent subprojects. A resettlement framework (Supplementary Appendix P) was prepared to assist the local and Shanxi PMOs. The framework is in accordance with relevant ADB publications and provides procedures for informing affected villages and households about the project scope and impacts, identifying affected persons, providing compensation, and resolving complaints. The PMOs have stated their commitment to applying this framework.

52 Appendix 13

FINANCIAL ANALYSIS

1. The financial analysis was prepared in accordance with the Asian Development Bank (ADB) Financial Management and Analysis of Projects.1 The financial performance of Pingyao county government (PCG), Xiaoyi city government (XCG) (where Wutong town is located), and Youyu county government (YCG) was evaluated. Financial analysis was also undertaken for the revenue-generating components in each subproject, i.e., the gas supply, heat supply, and wastewater treatment components in Wutong; and the water supply and heat supply components in Youyu. A financial sustainability analysis was carried out for the nonrevenue- generating components: (i) river upgrading in Pingyao; (ii) road development and education service facilities in Wutong; (iii) and river upgrading, road development, and drainage in Youyu.

A. Revenue-Generating Components

2. Approach and Methodology. The analysis examines revenue streams over 25 years, including 6 years of implementation, and compares these to the costs of operation and maintenance (O&M) and debt servicing. Key assumptions were made for the applicable component’s operations, leading to a with- and without-project basis analysis. All analyses are based on mid-2008 prices. The base-case financial internal rate of return (FIRR) is compared with the component’s weighted average cost of capital (WACC) to determine financial viability. A sensitivity analysis assesses the impact of changes in cost and revenue assumptions on the base case FIRR. This therefore allows a conclusion on the financial sustainability of the project- created assets as well as identification of necessary measures for sustainability. At the entity level, key ratios for profitability, debt service coverage, capital structure, and availability of cash for sustainability are calculated.

3. Weighted Average Cost of Capital. The WACC was calculated in real terms and after tax for each component. Funding sources are the ADB loan and counterpart funds from PCG, XCG, and YCG. The Ministry of Finance will relend the ADB loan to PCG, XCG, and YCG at the same rate as the ADB loan. The average local inflation rate is 5.1% and the average international inflation rate is 1.7%. The post-tax WACC is 1.2% for Wutong gas, heat, and wastewater components; and the Youyu heat and water supply components.

4. Tariffs. The tariffs2 are anticipated to increase gradually to full cost recovery for O&M, depreciation, and debt service on the basis that the Project will improve service delivery. The Government agrees on the gradual tariff increase. During implementation, the weighted average tariff for wastewater treatment in Wutong is CNY1.10/m3 with 54% cost recovery;3 all operating costs will be recovered during project implementation. Full cost recovery will be achieved after about 5 years of operation with gradual tariff increase phased in. The weighted average tariff for gas in Wutong is CNY0.88/m3 with 75% cost recovery during project implementation. Full cost will be recovered after 3 years of operation. The weighted average tariff for heating in Wutong is about CNY3.12/m2/month. Full cost recovery is expected to be achieved within 1 year of operations. The weighted average tariff for heating in Youyu is CNY3.17/m2 per month. Full cost recovery will be achieved after 2 years of operations. The weighted average tariff for Youyu water supply is CNY2.43/m3 during project implementation; full cost recovery is expected to be achieved when new facilities commence operation.

1 ADB. 2005. Financial Management and Analysis of Projects. Manila. 2 Current weighted average tariffs in Wutong are (i) gas CNY0.76/m3, (ii) heat CNY2.6/m2/month, (iii) wastewater CNY0.47/m3; and in Youyu, tariffs are heat CNY 3.66/ m2/month and water CNY1.82/ m3. 3 Cost recovery refers to the getting back operating costs and debt service costs through the tariff. Full cost recovery (100% and above) occurs when all costs (including operating costs, debt service, and depreciation) are recovered.

Appendix 13 53

Table A13.1: Projected Tariffs and Cost Recovery Level (in constant 2008 prices) Item 2012 2015 2016 2017 2018 2019 2020 2021 2022 Wutong Average wastewater tariff (CNY/m3) 1.10 1.51 1.68 1.87 2.08 2.31 2.57 2.87 3.20 Cost recovery (%) 54 100 119 132 146 161 178 197 217 Average gas supply tariff (CNY/m3) 0.88 1.04 1.07 1.13 1.18 1.24 1.30 1.37 1.44 Cost recovery (%) 75 125 136 151 173 178 182 187 191 Average heat supply tariff 3.12 4.17 4.37 4.59 5.06 5.32 5.86 6.15 6.79 (CNY/m2/month) Cost recovery (%) 88 131 140 143 152 155 166 169 180 Youyu Average heat supply tariff 3.17 3.17 3.17 3.25 3.25 3.25 3.34 3.34 (CNY/m2/month) Cost recovery (%) 59 84 106 138 139 140 163 164 Average water supply tariff (CNY/m3) 2.43 2.55 2.68 2.82 2.96 3.10 3.26 3.42 Cost recovery (%) 147 144 152 177 184 237 267 367 Source: Asian Development Bank estimates.

5. Affordability. The assessment of affordability in Wutong and Youyu is based on the combined costs of gas supply, heat supply, and wastewater; and water and heating, using the tariffs in Table A13.1.

6. In Wutong, expenditure on gas, heating, and wastewater is less than 5% of household income. In Youyu, expenditure on water and heating accounts for 4% of household income. In both towns, expenditure on utilities is affordable.

Table A13.2: Affordability of Projected Tariffs (CNY million) Item 2012 2015 2016 2017 2018 2019 2020 2021 2022 Wutong Average annual household 34,729 40,203 42,213 44,324 46,540 48,867 51,310 53,876 56,569 income Annual household expenditure 405 469 492 517 543 570 599 629 660 on gas Expenditure on gas (% of 1 1 1 1 1 1 1 1 1 income) Annual household expenditure 137 200 226 257 291 330 374 425 481 on wastewater Expenditure on wastewater (% 0.4 0.5 0.5 0.6 0.6 0.7 0.7 0.8 0.8 of income) Annual household expenditure 695 928 975 1,025 1,130 1,185 1.308 1,500 1,513 on heating Expenditure on heating (% of 2 2 2 2 2 2 3 3 3 income) Total household 1,237 1,597 1,693 1,799 1,964 2,085 2,281 2,554 2,654 expenditure on gas, wastewater, and heating Total household 3.6 4.0 4.0 4.1 4.2 4.3 4.4 4.7 4.7 expenditure on gas, wastewater, and heating (% of income) Youyu Average annual household 20,232 23,421 24,592 25,821 27,113 28,468 29,892 31,386 32,955 income Annual household expenditure 302 349 367 385 404 425 446 468 491 on water supply Expenditure on water (% of 1 1 1 1 1 1 1 1 1 income)

54 Appendix 13

Item 2012 2015 2016 2017 2018 2019 2020 2021 2022 Annual household expenditure 588 617 648 681 715 750 788 827 869 on heating Expenditure on heating (% of 3 3 3 3 3 3 3 3 3 income) Total household 890 966 1,015 1,066 1,119 1,175 1,234 1,295 1,360 expenditure on water and heating Total household 4 4 4 4 4 4 4 4 4 expenditure on water and heating (% of income) Source: Asian Development Bank estimates.

7. Results of the Financial Analysis. The base case FIRR for each project component is presented in Table A13.3. The after-tax FIRR for Wutong gas is 6.0%, heat 7.3%, and wastewater treatment 5.0%; and for Youyu heat 6.6% and water supply 6.7%. The results compare favorably with the WACC of around 1.2%. A sensitivity analysis was conducted where the costs were increased by 10%, revenue decreased by 10%, and both costs and revenues changed adversely by 10%. The FIRR is above the WACC threshold in all sensitivity cases.

Table A13.3: Financial Internal Rate of Return and Sensitivity Analysis (in constant 2008 prices) Case 1: Cost Plus Case 2: Revenues Case 3: Cases 1 Base Case 10% Less 10% and 2 NPV NPV NPV FIRR (CNY FIRR (CNY FIRR NPV FIRR (CNY Component (%) million) (%) million) % (CNY million) % million) Wutong Gas Supply 6.0 15.5 4.1 10.2 3.9 8.7 1.9 3.5 Heat Supply 7.3 54.4 4.7 32.8 4.4 27.4 1.4 5.8 Wastewater 5.0 12.9 3.4 7.9 3.2 6.2 1.4 0.7 Youyu Heat Supply 6.6 104.9 5.0 78.7 4.8 68.2 3.1 41.9 Water Supply 6.7 23.1 4.8 16.5 4.6 14.2 2.5 7.7 FIRR = financial internal rate of return, NPV = net present value. Source: Asian Development Bank estimates.

B. Nonrevenue-Generating Components

8. Approach and Methodology. Fiscal sustainability was determined by comparing annual revenue of PCG, XCG, and YCG from identified sources with the annual counterpart funds required for (i) capital expenditures during project implementation and (ii) recurrent costs for O&M and debt service of nonrevenue-generating components during operation. Interest and principal repayments for the ADB loan are estimated based on a grace period of 6 years and maturity of 19 years.

9. PCG, XCG, and YCG Financial Performance. The county and city governments receive income from taxation, nontax income, shared revenues with the central government, and transfers and subsidies from the central government. Total income increased by an annual average of 30% for PCG, 41% for XCG, and 33% for YCG during 2003–2007. County and city expenditure increased on average by 25%–30% annually and all three governments reported a fiscal surplus.

Appendix 13 55

Table A13.4: Summary of Financial Performance of Subproject Governments, 2007

Pingyao County Youyu County Item Government Xiaoyi City Government Government AAGR CNY Million (%) CNY Million AAGR (%) CNY Million AAGR (%) Tax Income 119.5 24 566.9 58 45.9 31 Nontax Income 116.8 34 371.9 64 26.7 42 Financial Transfers 471.1 38 213.3 35 247.1 34 Total Income 707.9 30 1,152.1 41 319.7 33 Total Expenditure 669.7 28 1,066.8 39 293.2 30 Fiscal Surplus for Year 38.3 85.3 26.6 AAGR = average annual growth rate 2003–2007. Source: Pingyao county government, Xiaoyi city government, and Youyu county government.

10. Revenue and Expenditure Projections for PCG. Average annual growth rates of revenue and expenditure are used for the projections presented in Table A13.5.

Table A13.5: Pingyao County Government Fiscal Sustainability (year ending 31 December) Item 2009 2010 2011 2015 2020 Revenue (CNY million) 1,191 1,544 2,003 5,021 10,035 Expenditure (CNY million) 1,099 1,409 1,805 4,333 8.370 Fiscal Surplus (Deficit) (CNY million) 91 135 198 687 1,664 Counterpart Funds for Implementation (CNY million) 33 66 66 Counterpart Funds (% of revenue) 3 5 4 O&M Cost (CNY million) 0.7 0.7 Debt Service Cost (CNY million) 12 11 O&M and Debt Service (% of revenue) 0.3 0.1 O&M = operation and maintenance. Source: Pingyao county government.

11. PCG has allocated counterpart funds for project implementation. The counterpart fund requirement is less than 10% of PCG annual revenue. PCG had cash reserves of CNY10 million at end of 2007. O&M and debt service cost is less than 1% of expenditure and indicates acceptable fiscal risk since fiscal revenues of local governments are expected to grow in line with economic development.

12. Revenue and Expenditure Projections for XCG. Average annual growth rates of revenue and expenditure are used for the projections presented in Table A13.6.

Table A13.6: Xiaoyi City Government Fiscal Sustainability (year ending 31 December) Item 2009 2010 2011 2015 2020 Revenue (CNY million) 2,295 3,240 4,574 9,671 19,505 Expenditure (CNY million) 2,046 2,834 3,926 7,941 15,301 Fiscal Surplus (Deficit) (CNY million) 249 406 648 1,730 4,154 Counterpart Funds for Implementation (CNY million) 40 64 12 Counterpart funds (% of revenue) 2 2 0 O&M Cost (CNY million) 0.1 5.5 5.9 Debt Service Cost (CNY million) 0 9.7 8.8 O&M and Debt Service (% of revenue) 0.2 0.1 O&M = operation and maintenance. Source: Xiaoyi city government.

56 Appendix 13

13. XCG has allocated counterpart funds for project implementation The counterpart fund requirement is less than 10% of XCG annual revenue. XCG had CNY220 million in cash reserves at the end of 2007, which by itself is sufficient to finance the Project during implementation. The O&M and debt service cost is less than 1% of expenditure and indicates acceptable fiscal risk since fiscal revenues of local governments are expected to grow in line with economic development.

14. Revenue and Expenditure Projections for Youyu County Government. The average annual growth rates of revenue and expenditure are used for the projections presented in Table A13.7.

Table A13.7: Youyu County Government Fiscal Sustainability (year ending 31 December) Item 2009 2010 2011 2015 2020

Revenue (CNY million) 564 749 994 1,827 3,905 Expenditure (CNY million) 495 645 838 1,468 2,958 Fiscal Surplus (Deficit) (CNY million) 68 104 156 357 947 Counterpart Funds for Implementation (CNY million) 16 31 31 Counterpart funds (% of revenue) 3 4 3 O&M Cost (CNY million) 5 5 Debt Service Cost (CNY million) 9 9 O&M and Debt Service (% of revenue) 0.8 0.4 O&M = operation and maintenance. Source: Youyu county government.

15. YCG has allocated counterpart funds for project implementation. The counterpart fund requirement is less than 10% of XCG annual revenue. The O&M and debt service cost is 1% of expenditure and indicates acceptable fiscal risk since fiscal revenues of local governments are expected to grow in line with economic development.

C. Financial Management Assessment

16. The financial management assessment was carried out in accordance with ADB’s Financial Management and Analysis of Projects (footnote 1) using the financial management assessment questionnaire. The assessment covered the Shanxi Provincial Government (SPG) (the Executing Agency) and the implementing agencies.

17. The financial management capability of SPG, as the Executing Agency, was found to be adequate for implementation of the Project. SPG has previous experience with international financing organizations in executing projects of this nature. Some training in ADB financial management and reporting procedures will, however, be required.

18. All implementing agencies have prescribed financial procedures that define duties of key finance staff and procedures for record keeping and cash management. These procedures are generally followed, and internal controls such as proper authorization of transactions, payroll controls, and regular bank reconciliations, are generally adhered to although improvements to internal control might be required in the area of segregation of duties. To address this, additional staff should be recruited during project implementation. Some implementing agencies have not been audited on a regular basis and SPG and the implementing agencies have agreed that regular audit will be carried out by the Audit Bureau. Since this is the first ADB project that the implementing agencies are undertaking, training in ADB financial management and reporting procedures will be required.

Appendix 14 57

ECONOMIC ANALYSIS

1. The economic analysis covers both the Project as a whole and the three individual core subproject components. For the Project as a whole, the analysis covers the economic rationale for public intervention, the goals of the investment plan, and the general design of the plan, including selection criteria for subprojects. The economic analysis also evaluates the individual core subproject components for least–cost and benefit–cost analyses. Economic analysis was conducted in accordance with the Asian Development Bank (ADB) Guidelines for the Economic Analysis of Projects 1 and Economic Analysis Retrospective 2005: Strengthening Quality-at- Entry of ADB Operations.2

A. Analysis of the Overall Project

2. Rationale for Public Intervention. The primary motivation for the Project results from increasing concern over the inability of infrastructure provision to keep pace with population and economic growth in small cities and towns in Shanxi Province. Due to strong growth of the resource extraction and tourism sectors across the province, many towns are experiencing high economic growth rates, rising household incomes, and increased use of private cars. At the same time, local governments have not been able to provide the basic urban infrastructure needed to support this growth and to mitigate negative environmental impacts of industrialization and urbanization. Roads, water supply, wastewater, solid waste, heating, and other services lag requirements. Local residents, including the poor and other vulnerable groups, are bearing the cost of the deteriorating urban environment.

3. Industrialization and intensive resource extraction are stressing the urban environment in Shanxi Province. High rates of air, water, and land pollution in many areas are creating a serious threat to human health and putting downward pressure on life expectancy. Traffic congestion, inadequate potable water supplies, and inadequate wastewater collection and treatment are acute problems in many small cities and towns. In the absence of widespread centralized heating and natural gas, coal-burning stoves are the main domestic source for heating and cooking. Coal dust pollutes the air and causes respiratory disease. Solid waste management is often rudimentary with poor environmental protection. Industrialization and population growth through migration to urban areas has outstripped local government capacity to provide services.

4. The Project involves government intervention at several different levels. The Shanxi provincial government (SPG) is promoting development of small cities and towns in a more coordinated and cost-effective manner by bringing about more sustainable investments in physical and environmental protection infrastructure that aims to improve quality of life. Involvement of SPG is justified since the development program spans several small cities, counties, and towns. The city, county, and town governments are coordinating and implementing the elements of the urban transport master plans and making individual investments in roads, water supply, heating, and environmental improvement including garbage and solid waste, proper drainage, and connection of households to the wastewater network. They will be involved in owning and managing the completed facilities.

5. Goals of the Investment Plan. The Project is a direct response to SPG’s 11th 5-Year Plan 2006–2010 to promote sustainable economic development and SPG’s policy on the development of its small cities and towns. The Directives on Accelerating Development of Small Cities and Towns in Shanxi Province identifies small cities and towns as growth engines for the surrounding rural areas that can absorb rural migrants and relieve population pressure on the

1 ADB. 1997. Guidelines for the Economic Analysis of Projects. Manila. 2 ADB. 2006. Economic Analysis Retrospective 2005: Strengthening Quality-at-Entry of ADB Operations. Manila.

58 Appendix 14 province’s large cities. 3 In this respect, town and county-level city development contributes directly to the provincial objective of promoting integrated rural–urban development. The 11th Five-Year Plan recognizes that achievement of these goals will require improvement of the basic municipal services and environmental quality in these areas. All components in the Project are integral components of the five-year plan. County governments are required to make investments in roads, water supply, heating, and environmental improvement. The small city and town government master plans are reasonably sound and are integrated with the overall planning process.

6. Selection of Subprojects and Core Components. The selection of the three core subprojects was based on socioeconomic indicators and the preparedness to undertake investments in municipal infrastructure. Among the considerations is the availability of viable investment projects directly supporting approved development master plans and programs, and the potential to serve as models in the preparation of subsequent components during loan sector implementation. Targeting and selection of subsequent key subproject cities and towns will be based, among other factors, on their potential to grow economically and provide jobs to migrants from rural areas. Employment growth is deemed to contribute more to the Government’s goal of closing the rural–urban income gap rather than the growth of production.

7. The criteria for identifying and selecting subprojects and components are (i) confirmation by the participating local government of its ability and willingness to arrange for counterpart funding, (ii) confirmation by the participating local government of its willingness to comply with ADB safeguard policies and other requirements, (iii) implementation of the component between 2009 and 2015, (iv) eligibility of the components (the sectors must be included in the list of eligible infrastructure and municipal services), (v) anticipated positive impact on urban environment, (vi) anticipated positive impact on employment generation and/or economic growth, and (vii) anticipated positive impact on coverage or service level of infrastructure and municipal services.

B. Demand Analysis

8. The demand forecast was reviewed for components that used benefit–cost analysis to determine reasonableness of the proposed designs. These components include gas supply, heating, roads and associated municipal services, water supply, and wastewater components. The demand analysis for the road components in Wutong and Youyu were undertaken in terms of (i) selecting and defining vehicle types, (ii) assessing annual average daily traffic, and (iii) forecasting demand. A vehicle fleet consists of a mix of several vehicle types that use a road network (cars, trucks, buses, motorcycles, and nonmotorized transport). Traffic counts that were conducted on the proposed road component served as the basis for determining average annual daily traffic. To establish the average annual daily traffic from the average daily traffic, seasonal variations were assessed taking into account the main factors for changes in traffic patterns, such as the weather, agricultural cycles, holiday periods, and tourist season. In Wutong, a traffic growth rate of 7% for 2009–2018 and 6% for 2019–2028 was used to forecast traffic, while in Youyu an annual traffic growth rate of 10% was assumed.

9. For the Youyu water supply component, the total water demand for the existing town and the new district is estimated at 15,580 m3/day. The Project will add capacity to the existing production plant and install the pipe network necessary to serve 2020 demand. With this capacity, the Project is estimated to serve 62,000 people or 21,000 households by 2020.

3 Shanxi Provincial Government. 2005. Directives on Accelerating Development of Small Cities and Towns in Shanxi Province. Shanxi Province.

Appendix 14 59

10. The heat supply component of Wutong will provide heating supply for future residents of the planned urban expansion area. The Project will construct seven heat stations with a combined heat capacity of 57.75 megawatts and a total heating area of 1.05 million square meters (m2). The population of the Wutong new town is assumed to reach 10,000 by 2010 and 30,000 by 2020. With an assumed residential dwelling floor area of 30 m2 per person, the total estimated residential dwelling floor area is calculated to be 0.900 million m2 in 2020. Industrial and public facility floor area is estimated at 0.370 million m2. Thus, the total estimated heat demand area is 1.275 million m2 in 2020. For Youyu, the heat supply component is designed for households and industries in the New West District and North Ring District, and is designed at production capacity in 2020. The New West District will be constructed and North Ring District will be expanded. By 2020, the total heating area of Youyu is estimated to increase by 1.5 million m2, in which the existing heated area is 20,000 m2 and the coverage rate would be 83%.

11. The source for the Wutong gas supply component has daily gas production capacity of 300,000 normal cubic meters while the current daily demand is about 60,000 normal cubic meters. Given that the proposed project component is to provide energy for cooking and water heating for future residents of the planned urban expansion area of Wutong town, the remaining volume can be used to meet the demand of future residents of Wutong town. The Wutong wastewater component involves the construction of a wastewater treatment plant for domestic wastewater with a capacity of 4,000 m3/day and a sewerage network 12.3 kilometers long. The design capacity of the proposed treatment plant is based on domestic water consumption of 120 liters per capita per day, a return rate of 85%, and an unforeseen wastewater volume of 10% of domestic wastewater. Actual demand would reach 1,122 cubic meters/day in 2010 and 3,927 cubic meters/day in 2020.

C. Evaluation of Individual Components

12. The methods of economic analysis adopted are benefit–cost analysis and least-cost analysis. Benefit–cost analysis was mainly applied on the revenue-generating components of the Project such as heating, water supply, and wastewater collection and treatment; while least- cost analysis was applied to the river upgrading component, which is not revenue generating. For components that applied benefit–cost analysis (specifically, water supply, wastewater, and solid waste), estimates of economic benefits are based on regression outputs from the contingent valuation survey conducted in selected pilot areas in a neighboring province. The contingent valuation survey aimed at eliciting beneficiary willingness to pay for improved services as a result of the Project. The contingent valuation results are applied using specific area data such as income, education, age, type of dwelling, and other economic variables that are considered in the pilot areas in Wutong wastewater and Youyu water supply.

13. Economic analysis of the project component was conducted over 25 years inclusive of project construction. Economic benefits and costs are denominated in terms of the domestic price numeraire and expressed in constant mid-2008 prices. International costs were converted to local currency costs using an exchange rate of CNY6.8=$1. Tradable components were adjusted to economic prices using a shadow exchange rate factor of 1.08 for effects of foreign exchange, and nontraded components were valued at domestic market prices. A shadow wage rate factor of 0.50 was used to convert the financial wage rate to an economic opportunity cost of labor.

14. Economic costs include (i) capital cost, including land acquisition and resettlement, and environmental mitigation and monitoring costs; and (ii) the costs of operation and maintenance (O&M), including the costs of replacing depreciated equipment. The land acquisition and resettlement costs are estimated based on their opportunity costs, that is, the agricultural output

60 Appendix 14 foregone and the re-siting of displaced activities. 4 Transfer payments, including taxes and interests, are excluded from the economic costs, while physical contingencies are included. Economic benefits quantified include (i) roads (savings in vehicle operating costs, generated traffic benefits, fewer accidents, savings in maintenance costs, cargo and passenger time savings); (ii) water supply and wastewater (contingent valuation to measure willingness to pay); and (iii) gas and heat supply (avoided air emissions caused by burning of coal, savings in fuel costs due to substitution of coal for heating and cooking).

15. The economic viability of each component is determined using the economic internal rate of return (EIRR) as the principal quantitative measuring tool. The EIRR is estimated by comparison of “with-component” and “without-component” scenarios. A core subproject component is considered economically viable if the calculated EIRR is higher than 12%, the social discount rate as prescribed by ADB. The base case EIRR is tested for responsiveness to changes in the values of key project variables with use of sensitivity analysis. The following variables are evaluated for their impact on the Project: (i) 10% increase in cost, (ii) 10% decrease in benefits, (iii) 10% increase in cost and 10% decrease in benefits, (iv) 20% increase in O&M, and (v) 1-year delay in benefits.

D. Results of Economic Analysis of Individual Components

16. The economic analysis indicates that the core components are economically viable and that they stand up to sensitivity tests where costs increase and benefits decrease. The individual component EIRRs are shown in Table A14 for Wutong (16.3%) and Youyu (18.4%), as well as the summary of the results of the economic analysis of the Project by component. The economic analysis demonstrates the economic viability of the three components.

Table A14: Summary of Results for All Components Method of Results of Analysis Economic NPV Project Component Analysis EIRR (%) (CNY million) Caoxi Roads and Associated Municipal Services BCA 20.6 18.5 Wutong Heat Supply BCA 14.0 4.9 Wutong Gas Supply BCA 16.9 3.3 Wutong Wastewater Treatment Plant CV/BCA 13.8 1.6 Total Wutong Subproject 16.3 28.3

Youyu Heat Supply BCA 16.7 14.4 Youyu Water Supply CV/BCA 20.6 14.6 Youyu Roads and Associated Municipal Services BCA 18.0 26.2 Total Youyu Subproject 18.4 55.2 BCA = benefit cost analysis, CV = contingent valuation, EIRR = economic internal rate of return, NPV = net present value. Source: Asian Development Bank estimates.

4 The economic opportunity cost of land will be assumed to be equal to the replacement value of farmland calculated for land compensation.