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Proposed Loan and Administration of Grant People's Republic of China 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 Page LOAN AND PROJECT SUMMARY i MAP I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 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
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