Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No: 67628-CN

PROJECT APPRAISAL DOCUMENT

ON THREE

PROPOSED LOANS

IN A TOTAL AMOUNT OF

Public Disclosure Authorized US$150 MILLION

(US$50 MILLION EACH TO FINANCE PROJECT ACTIVITIES IN GUANGDONG, HUNAN AND GANSU PROVINCES)

TO THE

PEOPLE’S REPUBLIC OF CHINA

FOR THE

Public Disclosure Authorized INTEGRATED ECONOMIC DEVELOPMENT OF SMALL TOWNS PROJECT

April 23, 2012

China and Mongolia Sustainable Development Unit Sustainable Development Department East Asia and Pacific Region

Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

CURRENCY EQUIVALENTS

(Exchange Rate Effective: December 9, 2011)

Currency Unit = Renminbi (RMB) Yuan RMB Yuan 1.0 = US$ 0.156 US$ 1.0 = RMB Yuan 6.39

FISCAL YEAR July 1 – June 30

ABBREVIATIONS AND ACRONYMS

AWP Annual Work Plan CAS Country Assistance Strategy CEA Cost-Effectiveness Analysis CHM Complain Handle Mechanism CNAO Chinese National Audit Office CPMO County Project Management Office CPS Country Partnership Strategy CQ Consultant Qualifications CWG Consulting Working Group DA Designated Account DIs Design Institutes EA Environmental Assessment ECOP Environmental Code of Practice EIA Environmental Impact Assessment EMDP Ethnic Minority Development Plan EMP Environmental Management Plan ERR Economic Rate of Return FM Financial Management FMM Financial Management Manual FSRs Feasibility Study Reports FYP Five Year Plan GHG Green House Gas GoC The Government of China Ha Hectare HH Households IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding IFR Interim Financial Report ISDS Integrated Safeguard Data Sheet M&E Monitoring and Evaluation MIS Management Information System MOF Ministry of Finance

NBF Non-Bank’s Finance NCB National Competitive Bidding NDRC National Development and Reform Commission NSC New Socialist Countryside O&M Operation and Maintenance ORAF Operational Risk Assessment Framework PAD Project Appraisal Document PAO Provincial Audit Office PCN Project Concept Note PDO Project Development Objective PDRC Provincial Development and Reform Commission PFB Provincial Finance Bureaus PLG Project Leading Group PM Procurement Manual PMO Project Management Office PMP Pest Management Plan PP Procurement Plan PPMO Provincial Project Management Office PPP Public Private Partnership PRC People’s Republic of China QBS Quality-Based Selection QCBS Quality-and-Cost-Based Selection RAPs Resettlement Action Plans RF Results Framework RFP Request for Proposals RMB Renminbi RP Resettlement Plan R&D Research & Development SA Social Assessment SBD Standard Bidding Document SIL Sectoral Investment Loan SMEs Small and Medium Enterprises TA Technical Assistance TEG Technical Expert Group TVEs Township and Village Enterprises VSL Variable Spread Loan VCA Value Chain Analysis WWTP Waste Water Treatment Plan WUAs Water Users’ Associations

Regional Vice President: Pamela Cox Country Director: Klaus Rohland Sector Director: John Roome Sector Managers: Paul Kriss Task Team Leader: Wendao Cao

Table of Contents

I. Strategic Context ...... 1 A. Country Context ...... 1 B. Sectoral and Institutional Context ...... 1 C. Higher Level Objectives to which the Project Contributes ...... 4 II. Project Development Objectives...... 4 A. PDO ...... 4 B. Beneficiaries ...... 4 C. PDO Level Results Indicators ...... 5 III. Project Description...... 5 A. Project components ...... 5 B. Project Financing...... 6 C. Lessons Learned ...... 7 IV. Implementation ...... 8 A. Institutional and Implementation Arrangements ...... 8 B. Results Monitoring and Evaluation ...... 8 C. Sustainability ...... 9 V. Key Risks and Mitigation Measures ...... 10 A. Risk Ratings Summary Table ...... 10 B. Overall Risk Rating Explanation...... 10 VI. Appraisal Summary ...... 11 A. Economic Analysis ...... 11 B. Financial and Fiscal ...... 11 C. Technical ...... 12 D. Financial Management ...... 14 E. Procurement ...... 14 F. Social ...... 15 G. Environment ...... 15 Annex 1: Results Framework and Monitoring...... 17 Annex 2: Detailed Project Description ...... 21 Annex 3: Implementation Arrangements ...... 28 Annex 4: Operational Risk Assessment Framework (ORAF) ...... 39 Annex 5: Implementation Support Plan ...... 42

.

PAD DATA SHEET China CN Integrated Economic Development of Small Towns Project (P118597) PROJECT APPRAISAL DOCUMENT

. EAST ASIA AND PACIFIC EASCS

. Basic Information Date: 23-April-2012 Sectors: Rural and Inter-Urban Roads and Highways (55%), Agro- industry, marketing, and trade (20%), Solid waste management (10%), Water supply (10%), Vocational training (5%) Country Director: Klaus Rohland Themes: Rural non-farm income generation (20%), Infrastructure services for private sector development (20%), Other Sector Manager/Director: Paul Kriss/John A. Roome public sector governance (20%), Rural services and infrastructure (20%), Participation and civic engagement (20%) Project ID: P118597 EA Category: B - Partial Assessment Lending Instrument: Specific Investment Loan (SIL) Team Leader(s): Wendao Cao Joint IFC: No

. Borrower: People’s Republic of China (PRC) Responsible Agency: Guangdong Provincial Development and Reform Commission Contact: Chen Xu Title: Deputy Director Telephone No.: (86-20) 8313-3057 Email: [email protected] Responsible Agency: Hunan Provincial Development and Reform Commission Contact: Xiao Xuewen Title: Director Telephone No.: 0731-89990817 Email: [email protected] Responsible Agency: Gansu Provincial Development and Reform Commission Contact: Wang Zhiming Title: Director Telephone No.: 13919085892 Email: [email protected]

. Project Implementation Period: Start Date: 01-Jul-2012 End Date: 30-Jun-2017 Expected Effectiveness Date: 15-Nov-2012 Expected Closing Date: 31-Dec-2017

. Project Financing Data(US$M) [ X ] Loan [ ] Grant [ ] Other [ ] Credit [ ] Guarantee For Loans/Credits/Others Total Project Cost (US$M): 296.64 Total Bank Financing (US$M): 150.00

.

Financing Source Amount(US$M) Borrower 146.64 International Bank for Reconstruction and Development 150.00 Total 296.64

. Expected Total Disbursements (in USD Million) Fiscal Year 2013 2014 2015 2016 2017 2018 Annual 5.00 25.00 40.00 35.00 30.00 15.00 Cumulative 5.00 30.00 70.00 105.00 135.00 150.00

. Project Development Objective(s) The Project Development Objective is to improve public infrastructure and services to contribute to sound development of the selected small towns in Guangdong, Hunan and Gansu Provinces.

. Components Component Name Cost (USD Millions) Component A: Infrastructure Development 244.66 Component B: Institutional Strengthening and Capacity Enhancement 15.64 Component C: Project Managements and M&E 8.17

. Compliance Policy Does the project depart from the CAS in content or in other significant respects? Yes [ ] No [ X ]

. Does the project require any waivers of Bank policies? Yes [ ] No [ X ] Have these been approved by Bank management? Yes [ ] No [ X ] Is approval for any policy waiver sought from the Board? Yes [ ] No [ X ] Does the project meet the Regional criteria for readiness for implementation? Yes [ X ] No [ ]

. Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 X Natural Habitats OP/BP 4.04 X Forests OP/BP 4.36 X Pest Management OP 4.09 X Physical Cultural Resources OP/BP 4.11 X Indigenous Peoples OP/BP 4.10 X Involuntary Resettlement OP/BP 4.12 X Safety of Dams OP/BP 4.37 X Projects on International Waterways OP/BP 7.50 X Projects in Disputed Areas OP/BP 7.60 X

. Legal Covenants Name Recurrent Due Date Frequency

Project Implementation Arrangement X Yearly Description of Covenant Each Project Implementing Entity shall maintain a Provincial Project Leading Group or a Provincial Project Coordinating Group, a Provincial Project Management Office, and a County Project Management Office. Name Recurrent Due Date Frequency Project Implementation Plan X Yearly Description of Covenant Each Project Implementing Entity shall carry out and caused to be carried out its activities under the Project in accordance with the Project Implementation Plan and the Project Agreement. Name Recurrent Due Date Frequency Safeguards Framework-RAP X Yearly Description of Covenant Each Project Implementing Entity shall, apply and caused to be applied the measures and actions set forth in its RAP in a timely and efficient manner satisfactory to the Bank. Name Recurrent Due Date Frequency Safeguards Framework-ECOP and PMP X Yearly Description of Covenant Each Project Implementing Entity shall implement or cause to be implemented its ECOP and PMP in a manner satisfactory to the Bank. In addition, Gansu should also implement its EMDP, and Hunan implement its respective EMP. Name Recurrent Due Date Frequency Process Framework X Yearly Description of Covenant Each Project Implementing Entity shall carry out measures for improving the living standard of Displaced Persons affected by the Project, and include provisions into the implementing contracts entered into for the implementation of the project to ensure fulfillment of the requirements under the ECOPs and EMP. Name Recurrent Due Date Frequency Monitoring and Reporting X Yearly Description of Covenant Each Project Implementing Entity shall engage and retain the services of independent consultants to carry out external monitoring and reporting, and implement the recommended measures. Name Recurrent Due Date Frequency Implementation X Yearly Description of Covenant A Project Implementing Entity shall not amend, suspend, fail to enforce or waive the applicable RAP, ECOP, PMP, EMP, EMDP or any annual implementation plan without the prior written approval of Bank Name Recurrent Due Date Frequency Annual Implementation Plan X Yearly Description of Covenant Each Project Implementing Entity shall furnish to the Bank an annual implementation plan, including Bank's comments, by December 31 in each year, beginning on December 31, 2012. Name Recurrent Due Date Frequency Financial Management Manual X Yearly Description of Covenant

Each Project Implementing Entity shall apply in the implementation of the Project its Financial Management Manual for maintaining the financial management system, satisfactory to the Bank.

. Team Composition Bank Staff Name Title Specialization Unit Wendao Cao Rural Development Specialist Team Lead EASCS Guzman P. Garcia-Rivero Operations Adviser Consultant EASIS Syed I. Ahmed Lead Counsel Lead Counsel LEGES Carter J. Brandon Lead Environmental Specialist Lead Environmental Specialist EASCS Julia Shane Li Monitoring and Evaluation Consultant EASCS Specialist Rabih H. Karaky Senior Economist Senior Economist EASER Andrew D. Goodland Senior Agriculture Economist Senior Agriculture Economist EASCS Jun Zhao Rural Development Specialist Rural Development Specialist EASCS Haixia Li Sr. Financial Management Sr Financial Management EAPFM Specialist Specialist Yiren Feng Senior Environmental Specialist Senior Environmental Specialist EASCS Zijing Niu Program Assistant Program Assistant EACCF Yunqing Tian Team Assistant Team Assistant EACCF Yuan Wang Procurement Specialist Procurement Specialist EAPPR Luquan Tian Transport Specialist Transport Specialist SASDT Non Bank Staff Name Title Office Phone City Eddie Ke-Siong Hum Sanitary Engineer Singapore Aijun Qiu Urban Planning Beijing Yandong Zhao Transport Specialist Beijing Xueming Liu Senior Economist Rome

. Locations Country First Administrative Location Planned Actual Comments Division People’s Republic of Guangdong Province Guzhen Town 7/2012 As per Schedule 4 China Dongli Town; to of the Guangdong Yuecheng Town 12/2017 Loan Agreement Dongcheng Town Rucheng Town Fuxing Town Fucheng Town Hunan Province Zhentou Town 7/2012 As per Schedule 4 Dingzi Town to of the Hunan Loan Yueshan Town 12/2017 Agreement Santang Town Zoushi Town Taizimiao Town

Cangshuipu Town Wanbao Town Xinshi Town Gansu Province Dongwan Town 7/2012 As per Schedule 4 Hongshui Town to of the Gansu Loan Ganquan Town 12/2017 Agreement Zaojiao Town Meichuan Town Wenfeng Town Shizi Town Dongzhi Town Dangzhai Town Hongwansi Town Huahai Town Qili Town

I. Strategic Context

A. Country Context

1. Since the start of reforms in 1978, the People’s Republic of China (PRC or China) has experienced rapid growth and shifted from a centrally planned to a market based economy. During this time, China grew at an average rate of about 9.7% per year and in 2010 became the world’s second largest economy. With a per capita gross national income of about US$4,260 (2010), China is an upper middle-income country with complex development needs. Poverty reduction remains a challenge. Rapid economic growth has meant that issues such as environmental sustainability, income inequality, demographic changes and external geographical or sectoral imbalances demand attention. Primary among these challenges are the widening urban-rural income gap and rapid urbanization. Despite substantial economic development, the Chinese countryside lags far behind the cities and the gap between the incomes of rural residents and urban residents continues to widen.

2. From 1978 to 2007, the urban rural income gap increased by nearly 30%. To address this challenge, the 11th Five Year Plan (FYP) 2006-2010 promoted a program of “sound urbanization‖ to accelerate the absorption of rural labor in urban markets, and a ―new socialist countryside (NSC)” policy to increase farmers’ income and rural living standards. The 12th Five Year Plan (2011-2015) similarly includes as part of its core objectives a rational urbanization and more balanced rural-urban development. The development of China’s small towns is critical to meeting these objectives. Urbanization is expected to continue and reach 70% by 2030, from a current level of about 50%. China is now facing the overwhelming task of absorbing an estimated migration of 300 million people from rural to urban areas between 2010 and 2030 and creating at least 200 million off-farm jobs. In other words, 10 million people need to be employed and housed in urban areas each year during the first thirty years of the 21st century. China’s cities do not have the capacity to absorb all of these migrants and small town development will play a key role in facilitating the world’s largest urbanization process in history.

B. Sectoral and Institutional Context

3. Small town 1 development is an integral part of the Government of China’s (GoC) strategy of inclusive growth and balanced rural and urban development. The 11th FYP (2006- 2010) emphasized small city and town development as a means to provide a higher standard of living to rural immigrants without exacerbating infrastructure and other problems afflicting large cities. The 12th FYP (2011-2015) continues this emphasis. Small towns are expected to provide a necessary bridge for the transition from a rural to urban society, absorbing laborers leaving the countryside and supporting rural industries that contribute a major share of China’s economic growth. Research shows that growth in small towns also helps reduce rural-urban income disparities, when compared with the alternative of growth in larger cities2.

1 In this project context, ―small towns‖ refers to towns with a population of 20,000 to 100,000 people. 2 Luc Christiansen, Poverty Reduction during the Rural-Urban Transformation - The Role of the Missing Middle. 1

4. Small towns already play a major role in China’s economic development and in the urbanization process. As a group, they absorb 40% of the country’s rural-urban migrants and have grown even faster than the country as a whole. Agricultural production in towns represents a significant share of national output for various commodities: 60% for grains; 54% for cotton; 62 % for oilseeds; 38 % for fruits; 67 % for vegetables; 73% for meat; and 70% for aquatic products. In addition, about half of Township and Village Enterprises (TVEs) are located in towns and these enterprises employ up to 70% of the labour force in towns. Notwithstanding these significant achievements, small towns still face a number of challenges.

5. Deficient Infrastructure. Rapid industrialization and high urbanization rates are putting increased pressure on small towns existing infrastructure. Small towns need new roads and maintenance of older ones; expansion of the capacity of water supply plants and waste treatment plants; new marketing infrastructure to facilitate small and medium enterprises development; and rehabilitation and modernization of river embankments and irrigation canals.

6. Inadequate support services. Insufficient support services also constrain small town development. Lack of financial resources and weak delivery systems limit the quality and the quantity of most available services. Services needed to spur economic development include production, marketing and social services.

7. Environmental Sustainability. Small town economic growth has often taken place at the expense of the environment. Industrial pollution and poor waste management present serious environmental and health concerns in many towns. As incomes rise and demand for industrial and consumer products increases, production systems need to internalize the potential environmental externalities. New approaches need to be adopted to reduce adverse environmental impacts and ensure sustainable economic development. These include improved waste management, optimized use of scarce resources and adoption of clean and environmentally friendly technologies to reduce green house gas (GHG) emissions and mitigate climate change impacts.

8. Weak backward and forward coordination. Small towns have the potential to play a pivotal role linking rural and urban markets and in stimulating inclusive and balanced growth. Improved infrastructure and services will help small towns address bottlenecks in the development and upgrading of value chains for different commodities. Investments in these areas will connect the different stakeholders in these value chains and thereby enable local producers to capture more of the surplus generated by the supply chain.

9. To help address these challenges, the Government requested World Bank support to ―develop model towns in Guangdong, Hunan and Gansu, to demonstrate comprehensive economic development approach and promote effective integration of urban and rural development and boost socially, economically and environmentally sustainable development in the demonstration towns‖.3

10. The three project provinces, located in eastern, central and western China, represent different levels of economic development and scales of urbanization as summarized below.

3 Summary of NDRC’s proposal for this project. 2

Province Location Economic Urbaniz Statutory Average Annual Average Level ation Towns Population Population Fiscal Rate (No.) Per Town Increase Revenue (%) (No.) (%) Per Town (RMB M) Guangdong Eastern Most 63.4% 1038 59,100 7.2 53.7 Coastal Developed Hunan Central Mid-level 42.2% 1100 38,100 3.3 10

Gansu Western Least 32.7% 431 26,300 3.7 3.6 China Developed

11. The economic structures of the small towns in the three provinces differ. In Guangdong, a large number of towns have been categorized by the provincial government as ―specialized towns.‖ Featuring ―one town, one product,‖ these towns have specific roles such as manufacturing and home appliance centers, transportation hubs or agro-processing sites, and are a major destination for migrant labor. The economies of small towns in Hunan and Gansu are more rural, with the agriculture sector representing more than 50% of the economic base in Hunan and 61% in Gansu.

12. The towns in the Pearl River Delta (PRD) region of Guangdong Province need to transform growth patterns and sharpen competiveness of the industrial sector, which could provide more leverage for development of towns in the less developed parts of the province. On the other hand, other towns in the less developed parts of Guangdong need improved infrastructure, skilled workers, and better governance to revitalize existing business and attract new firms from the more developed regions. The town development strategy in both Hunan and Gansu is to promote integration of urban and rural development and improve infrastructure to attract scattered Small and Medium Enterprise (SMEs) into clusters sharing common infrastructure. This will reduce land use and environmental impact and enhance job opportunities for migrant workers. To improve farmers’ livelihoods and raise incomes, the strategy promotes value chains and the development of social service systems and extension services.

13. Individual towns were selected for inclusion into the project based on a number of criteria reflecting the development strategies of the three provinces and the geographical, economic and political importance of the town in the provincial development strategy for rural-urban integration. Selected towns met the following conditions: (a) identified by the provincial town development plan as a ―key‖ town and a priority for investment; (b) existence of a satisfactory town master-plan; (c) having one or two pillar industries; (d) demonstrated leadership and commitment; and (e) relatively good capacity in finance and human resources.

14. Rationale for Bank involvement. The Bank and the Government have worked together successfully over the past 15 years on rural-urban integration and economic growth issues. The Bank has supported several projects that have proven to be a testing ground for new ideas and reforms. These have been shared with other municipalities in China, especially in the lagging regions.4 The Bank has a wealth of international experience, lessons learned and technical

4 The main urban-rural projects financed in China include the Chongqing Small Cities Infrastructure Improvement Project, the Sichuan Small Towns Development Project, the Chongqing Urban Rural Integration Project, the Ningbo 3 expertise that it can leverage to assist towns to prioritize investments listed in the town Master Plans, and ensuring that technical standards are appropriate so that towns avoid the common problems of over design and unnecessarily high capital investments. Planning capacity at the town level will benefit from Bank focus on capacity building and institutional strengthening. The Bank has the experience and expertise to be able to assist the participating towns to learn from other countries and regions in areas of industrial cluster and sustainable economic development. Finally, Bank involvement will also facilitate wide dissemination of results and experiences, and expand the model to other provinces and towns.

C. Higher Level Objectives to which the Project Contributes

15. The project will contribute to sustainable economic development in the project small towns by helping to create conditions for increased employment, income generation and improved quality of life. Improved infrastructure and services developed under the project will serve as a model for small town development in other provinces. In general, the project will contribute to GoC’s strategy to encourage balanced and sustainable urban-rural integration and narrowing the rural-urban income gap.

16. Relationship to CAS. The proposed project is consistent with the last Country Partnership Strategy (CPS, FY2006-FY2010), as well as with the new CPS under preparation for FY2013-FY2016. The project will support three of the five Country Partnership Strategy themes: (a) reducing poverty, inequality, and social exclusion; (b) managing resource scarcity and environmental challenges; and (c) improving public and market institutions. By focusing on infrastructure investments, and promoting value chain services and capacity building in selected towns, the project will also support the objectives of China’s 12th FYP (2011-15): sound urbanization, urban-rural integration, and a more environmentally friendly and harmonious society with higher living standards (―Xiaokang‖ society).

II. Project Development Objectives

A. PDO

17. The Project Development Objective is to improve public infrastructure and services to contribute to sound development of the selected small towns in Guangdong, Hunan and Gansu Provinces.

B. Beneficiaries

18. Beneficiaries of the project include residents and businesses that directly and indirectly benefit from access to improved roads, water supply, waste management systems and other infrastructure and services, and from an improved commercial environment and town governing capacity. They include residents (both permanent and migrant), business owners and government employees of 28 small towns in Guangdong, Hunan and Gansu Provinces. There are

Countryside Development Project, the Agricultural Technology Project and the Jilin Agricultural Product Safety and Quality Project. 4 approximately 580,000 residents of the target small towns in Guangdong, 470,000 in Hunan and 460,000 in Gansu.

C. PDO Level Results Indicators

19. Achievement of the development objective will be assessed through the following key performance indicators:

 Roads: Number of people benefiting from the new and rehabilitated roads.  Water Supply: Number of people using potable water supply.  Waste Management: Number of people (residents) with access to water/solid waste management systems.  Service Centers, Agricultural Markets and Irrigation Facilities: Number of effective users of the integrated centers, agricultural markets and land served by irrigation facilities.

III. Project Description

A. Project components

20. The project will finance investments in 28 small towns in Guangdong, Hunan and Gansu Provinces (see list of participating town in Table 1 of Annex 2). It comprises three separate loans (one for each of the three provinces), each of which has three identical components, as described below.

21. Component A: Infrastructure Development (total estimated base cost: US$244.66 million). This component will strengthen high priority infrastructure in selected towns through the implementation of key investment sub-projects focusing on, inter alia:

(a) Gansu Province - construction or rehabilitation of urban and rural roads; expansion and modernization of irrigation infrastructure; and development of agricultural markets, commercial infrastructure and integrated service centers;

(b) Guangdong Province - construction or rehabilitation of urban and rural roads; expansion or modernization of water supply and waste water treatment systems; carrying out of environmental protection activities, including creek rehabilitation; and development of commercial infrastructure and integrated service centers;

(c) Hunan Province - construction or rehabilitation of urban and rural roads; construction of wastewater treatment facilities and improvement of solid waste management systems; carrying out of environmental protection activities, including creek protection and embankment rehabilitation; and development of agriculture markets, and integrated service centers.

22. Component B: Institutional Strengthening and Capacity Enhancement (total estimated base cost: US$ 15.64 million). The component will improve the institutional capacity of the Project Provinces to manage the development and operation of modern and efficient

5 infrastructure, the carrying out business development activities and the provision of support services. It will finance, inter alia: (a) carrying out of policy, technology and marketing studies; (b) carrying out of technical, managerial and financial training, workshops and study tours for stakeholders (Government, Cooperatives, Water Users’ Associations, private entrepreneurs); (c) acquisition of equipment for testing, grading and real time monitoring to be used in infrastructure development to improve the quality and safety of marketable products, and monitor environmental aspects of infrastructure subprojects; (d) establishing training and extension services for rural migrants and farmers.

23. Component C: Project managements and M&E (total estimated base cost: US$ 8.17 million). This component will support the overall development of the Project Provinces to coordinate and manage the implementation of the Project including the establishment and operation of a management information, monitoring and evaluation system.

B. Project Financing

Lending Instrument

24. The Project will be financed by three IBRD Specific Investment Loans (SILs) the People’s Republic of China (PRC) in a total amount of US$150 million, divided into three loans of US$50 million for each province, to be on-lent by PRC to the participating provinces. The Bank Loans will be on standard IBRD terms for LIBOR-based US Dollar denominated, commitment-linked variable spread loans (VSL) based on six-month LIBOR plus additional variable spreads. Repayment periods are 25 years for Guangdong and Gansu Provinces and 30 years for Hunan Province, all inclusive of the 5-year grace periods.

Project Cost and Financing

25. Total project financing requirements are estimated at US$296.64 million (estimated as of December 2011) inclusive of price and physical contingencies, taxes, interest during construction and front-end fee. Table 1 below shows the breakdown of project costs and sources of funding by component, while Table 2 presents the financing by component and by province (see also Annex 2).

Table 1. Project Cost and Financing Plan by Component (million)

IBRD Total IBRD Project Component Financing US$ RMB US$ RMB % 1. Infrastructure Development 244.66 1,564.07 133.34 852.49 55 2. Institutional Strengthening and Capacity Enhancement 15.64 99.94 4.24 27.11 27 3. Project Managements and M&E 8.17 52.19 2.43 15.54 30 Total Baseline Costs 268.46 1,716.20 140.02 895.16 52 Contingencies 19.25 123.12 9.61 61.46 50 Total Project Cost 287.72 1,839.32 149.63 956.60 52 Interest During Implementation 8.55 54.67 0.00 0.00 0

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Front-end Fee 0.38 2.40 0.38 2.40 100 Total Financing Required 296.64 1,896.39 150.00 959.00 51

Table 2. Provincial Project Cost and Financing Plan by Province and Component (US $ million)

Hunan Gansu Guangdong Total IBRD % Total IBRD % Total IBRD % 1. Infrastructure Development 83.60 43.97 53 73.52 43.98 60 87.54 45.40 52 2. Institutional Strengthening and Capacity Enhancement 5.32 1.55 29 3.68 1.33 36 6.64 1.36 21 3. Project Managements and M&E 2.14 0.25 12 2.02 1.34 67 4.01 0.84 21 Total Baseline Costs 91.05 45.77 50 79.21 46.65 59 98.20 47.60 48 Contingencies 8.79 4.11 47 5.83 3.23 55 4.63 2.27 49 Total Project Cost 99.85 49.88 50 85.05 49.88 59 102.82 49.88 49 Interest During Implementation 3.04 0.00 0 2.66 0.00 0 2.85 0.00 0 Front-end Fee 0.13 0.13 100 0.13 0.13 100 0.13 0.13 100 Total Financing Required 103.01 50.00 49 87.83 50.00 57 105.80 50.00 47

C. Lessons Learned

26. Project design has benefited from study of the experience of small and medium town development in China and of similar projects in China and in the East Asia region. Key lessons include:  Ensuring strong links to Master Plans. Problems in small town development often occur when investments are influenced by factors, such as land development or speculation, that do not relate directly to overall objectives. Therefore, only towns with adequate Master Plans have been allowed to participate in the project and sub-projects have been screened to ensure that they conform to Master Plan objectives. In addition, the proposed investments are an integral part of the development strategy and are complementary to the overall public sector investment program in each town.  Investment sub-projects consistent with the planned infrastructure network. During preparation and appraisal, special attention was paid to ensure that the proposed subprojects are consistent with each town’s current medium-term plans for developing the infrastructure network, as well as the related support services, in each town.  Using appropriate design standards for infrastructure components. Overly optimistic forecasts for economic and population growth often result in overdesign of infrastructure facilities. The Bank reviewed the technical standards for infrastructure investments and ensured that appropriate design parameters and conservative population growth forecasts have been used.  Special attention to availability of adequate counterpart funds. Small towns often face particular difficulty in ensuring adequate counterpart funds. Small towns with weak financial capacity were screened out by the Provincial Finance Bureaus in the early stages of project preparation.

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 Use of market based cost estimates. Adherence to traditional government cost estimation methods result in unrealistically high project cost estimates (based on norms rather than market prices). Cost estimates have been reviewed to ensure they are as close to market prices as possible.

IV. Implementation

A. Institutional and Implementation Arrangements

27. Implementation is the responsibility of the Guangdong, Hunan and Gansu Provincial Development and Reform Commissions (PDRCs). Provincial Project Management Offices (PPMOs) have been established in all project provinces. In addition, County Project Management Offices (CPMOs) have already been established jointly by the respective City, county and town, and comprise staff from these three levels. The CPMOs will be responsible for all operational tasks related to project implementation. The CPMOs will work under the guidance of the Project Leading Groups (PLGs) established at provincial and local levels, which are taking a strong leadership role in the project. Technical Expert (Advisory) Groups (TEG), reporting directly to the PLGs, have been set up at the provincial level to provide technical guidance to the project.

B. Results Monitoring and Evaluation

28. The Results Framework identifies overall project outcome and intermediate results indicators, as detailed in Annex 1. Data on the indicators will be collected by the County PMOs, in cooperation with line bureaus and organizations involved in the implementation of town sub- projects. PPMOs may contract outside consultants or specialized agencies to aid in collection of the more complex data. The PPMOs will consolidate the data and produce semi-annual monitoring reports to monitor progress. Each province will collect and report its own set of indicators taking into account small differences between provinces in the types of subprojects to be implemented.

29. Each province will undertake selected qualitative monitoring studies to provide a more complete and holistic understanding of the impact of the project on key groups of beneficiaries.

30. Bank supervision missions on social and environmental aspects, institutional capacity building, financial viability, and technical reviews will also provide effective means of monitoring progress.

31. The M&E will be financed as part of the Project Coordination and Management Component. Costs of M&E activities are estimated to be about US$1.8 million. Loan proceeds would cover approximately 40% of M&E expenses, including goods (equipment), consulting services (including independent impact assessment and environmental and social safeguards monitoring) and incremental operating costs.

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C. Sustainability

32. Sustainability is a key objective of the project, and will be achieved through: (a) government commitment to small town development; (b) ownership of the project interventions by implementing agencies and beneficiaries; and (c) replication of good practice experiences from the pilot towns over large areas. Government at all levels has assured the Bank of the high priority of this project. There is strong ownership of the project on the part of project entities and beneficiaries in the three provinces.

33. In order to strengthen sustainability, the project is designed with the following principles in mind:

(a) Technical Sustainability. To the extent possible, project interventions will be based on technologies and methodologies that are cost-effective, reliable, replicable and environmentally sustainable. The project follows an integrated approach focusing on technical solutions applicable to local conditions that are easy to operate and maintain at low cost. It centers its investments around dominant industries in each town in accordance with their skills, capacity and area of specialization. Consideration of the whole production value chain, a key approach used by the project, will improve competitiveness, value added and long-term sustainability.

(b) Institutional Sustainability. The Government is committed to providing necessary support needed for successful implementation. It will establish project organizations at each level, as well as sufficient counterpart funding for implementation and financial resources for O&M upon completion. Institutional sustainability will be enhanced through consultation with a wide range of stakeholders and through capacity building for implementing agencies, PMOs, and beneficiaries. In particular, the project will build the capacity of self-help groups, such as producers’ groups, to strengthen their voice in decision making. The project includes strong emphasis on exploring possibilities for public-private partnerships (PPP) and for transferring O&M responsibilities to users’ associations and farmers' cooperatives.

(c) Long-term Sustainability. To ensure long-term sustainability, the project has been designed: (i) in conformity with the long-term regional development plan and small town development strategy of the provincial governments and the town Master Plans; (ii) emphasizing adequate TA and specialized training programs to enhance the managerial skills of the participating town governments; and (iii) to include provisions for documenting and disseminating results to other towns and provinces.

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V. Key Risks and Mitigation Measures

A. Risk Ratings Summary Table

Risk Rating Stakeholder Risk Moderate Implementing Agency Risk -Capacity High -Governance Moderate Project Risks -Design Substantial -Social and Environmental Substantial -Program and Donor Low -Delivery Monitoring and Sustainability Substantial Overall Implementation Risk Substantial B. Overall Risk Rating Explanation

34. The overall risk rating for project implementation is substantial. Risks and associated mitigation measures are presented in the Operational Risk Assessment Framework (Annex 4). The main risks arise from the project’s wide geographical coverage, number of institutions involved, different capacity for implementation among participating provinces, and weak financial management and procurement capacities. The main risks to the achievement of the PDO and to overall implementation are presented below.

35. Implementation Risk. There are risks relating to governance capacity and overall financial transparency. The relatively large group of participating counties, many of which have no experience of Bank projects, presents a clear risk. The technical and financial capacity of these counties and towns vary greatly and this will impact the pace of implementation. The geographical spread of the counties and the lack of a central coordinating agency will make it more challenging to ensure that all counties achieve satisfactory implementation performance. Several measures have been put into place to mitigate this risk: (a) only one town has been selected in each county, which reduces the burden on county implementation capacity; (b) substantial funds have been allocated to training and these will be used to ensure that all provinces/counties are up to speed; (c) weaker counties and PMOs will observe and learn from stronger PMOs in a coordinated system of study tours and cross-provincial knowledge exchange; and (d) provinces require all PMOs to be staffed before start of implementation and adequate training to be provided, including the provision of manuals and training on Financial Management and Procurement.

36. Project Risks. This risk relates to the difficulty of designing sub-projects to meet the needs of the large number of diverse towns. Requiring investments to be consistent with Master Plans and other screening criteria and using the value chain approach are mechanisms to ensure that sub-project selection meets project objectives, as well as town capacity and needs. Social and environmental risks due to lack of experience in implementing safeguard instruments are being managed through thorough preparation and design of social safeguard documents and instruments. There are risks associated with project delivery, monitoring and sustainability. Each county has only one participating town, which reduces the implementation burden. 10

Knowledge sharing mechanisms and a relatively simple M&E system will help ensure towns and counties are able to effectively implement the project. Fiscal assessment carried out during preparation indicates that the all provinces have the capacity to provide timely counterparts funds, but Bank supervision will need to focus closely on this issue.

VI. Appraisal Summary

A. Economic Analysis

37. The project includes a diversity of sub-projects in basic infrastructure, including mainly: road construction, water supply, waste water treatment, agricultural markets, service and training centers, etc. The benefits of some project activities are difficult to quantify and different methods of economic analysis have been used depending on the types of sub-projects. For sub- projects where benefits are difficult to quantify, e.g., water supply, waste water treatment, and sanitation sub-projects, the Cost Effectiveness Analysis (CEA) approach has been used to select the most appropriate design and/or least-cost option. Standard cost benefit analysis has been adopted for road sub-projects that are not directly linked to an industrial zone and the ERRs were above 10%. For road sub-projects directly serving industrial areas, as they are an integral part of the basic infrastructure and their contribution to the overall economic activity inside the industrial zones are difficult to quantify, cost-effectiveness analysis was adopted to compare ―alternatives‖ and choose the best one. For irrigation sub-projects, standard cost benefit analysis has been adopted to compare ―with‖ and ―without‖ project situations; the ERRs range from 14 - 22%.

Type of Subproject Estimated Economic Rate of Return (ERR) Road sub-projects 10%-15% Irrigation sub-projects 14%-22%

B. Financial and Fiscal

38. Financial analysis of the sewerage and water supply utilities assessed the tariff levels required to fully cover the system O&M costs. Water tariffs required to cover O&M costs for each sub-project were calculated (see table below) and found comparable to the current water charges that came into effect after the latest round of national increases (early in 2012). They are also considered feasible, as well as a practical and enforceable way to ensure meeting the basic O&M costs. For irrigation sub-projects, comparison of farmers’ incomes ―with‖ and ―without‖ the project demonstrated clear financial benefits that, based on practical experience, indicates it would allow them to cover their O&M costs. Agro-industrial and commercial infrastructure facilities (such as cold storages and wholesale markets) built under the project are public property and will be contracted out to farmer groups for operation, with rents charged set to cover the O&M costs. It should be noted that those recommended levels of rent to be charged for the project facilities (managed by the farmers’ group) could be considered lower than the full current commercial rent charged by the private sector (even though there is no current comparable example available in the selected project areas). The justification for these relatively lower levels of rent is the demonstration purpose of the sub-projects. It is expected that once the purpose is served, local governments would lease the facilities out at full market rates to recover investment costs. The summary results of the financial analysis is shown below. 11

Subproject Sub-projects Recommended Proposed Estimated (No) Tariff Annual Rent Income (RMB/ton) (RMB/m2) increase (percent) Water Supply 1 1.05 N.A. N.A. Waste water treatment 1 0.79 N.A. N.A.

Wholesale market /cold storage 10 N.A 120-780 N.A. Farmers’ income (Irrigation 15 N.A. N.A. 20 - 35 projects)

39. In addition, fiscal analysis of the project confirms that the selected towns have sufficient financial resources to cover: (a) counterpart funds; and (b) loan repayment. O&M costs for the infrastructure works built under the project will be covered by tariff and rent. The 28 townships involved in the project have in the past five years registered GDP growths between 10-20% and this trend is projected to continue. The table below compares Project towns’ projected fiscal revenues and financial obligations.

Projected small town Annual counterpart Debt service as percentage annual fiscal revenue funding as percentage of Province of fiscal revenue (from range (2012-2016, RMB fiscal revenue 2016) Million) (2012-2016) Guangdong 80-500 0.5-2% Negligible Hunan 40-100 1-3% Negligible Gansu 20-60 million 2-5% less than 0.1%

C. Technical

40. Experienced Design Institutes (DIs) helped identify, prioritize, and select optimal subprojects based on pre-agreed criteria. The DIs carried out project feasibility studies in accordance with Chinese national technical standards and incorporated Bank experience with similar projects in China, as well as international good practice. All Feasibility Study Reports (FSRs) have been reviewed by Chinese Expert Teams and the Bank and have been revised to reflect their inputs. The Provincial FSRs have been approved by the respective PDRCs. Project designs are technically feasible, represent the most appropriate cost-effective alternative or least cost option, and are based on sound engineering practices.

41. Urban and Rural Road Networks. Road designs are based on the latest town Master Plans and travel demand forecasts, as well as on the national design and construction standards. They aim to provide safe, convenient and user-friendly road infrastructure for all users, including pedestrians, non-motorized and motorized vehicle users.

42. Water Supply and Distribution. The water supply schemes are mainly associated with new or improved road construction and will be constructed alongside the roads. Water distribution schemes were reviewed to confirm that they are adequate to meet water demand. Pipe materials were evaluated using cost effectiveness analysis and cost effective options were

12 selected. The project includes action plans for water supply source protection. In addition, routine water quality monitoring and spot checks are included in all water supply schemes.

43. The 10,000 m3/d water treatment plant to be constructed in Hunan province will abstract raw water meeting Class II Standards (Water Quality Standard for Drinking Water Sources). The plant has been designed using the least cost option derived from: (a) the analysis of water demand projections for different growth scenarios; and (b) the analysis of per capita water consumption based on projected low population growth.

44. Wastewater Management and Sewage Connection. Wastewater pipelines will be constructed alongside the roads and a 5,000 m3/d wastewater treatment plant (WWTP) will be constructed in Hunan province. The treated effluent will meet domestic regulations of Class 1B of the Municipal Wastewater Discharge Standards. The proposed design is based on (a) wastewater generation projections under scenarios of realistic population growth and (b) the first phase requirements of the current built-up area of the town. A separate sewer system will be used for project funded sewage connections in order to prevent overloading the existing wastewater treatment plant. The design of gravity sewers is in accordance with China’s Water Supply and Drainage Design Manual.

45. Rural Irrigation Systems. Irrigation water demand management tools were used to confirm the scale of the irrigation works proposed in Gansu province. Investments include measures to reduce water losses, and the installation of check gates or pipelines to replace the current open channel systems.

Agro-Industrial and Commercial Infrastructure and Services. The project will invest in agri-business and industry incubator centers; agro-industry parks; bio-tech centers; agricultural wholesale markets; information centers; cold storage/ refrigerated transport; agro-processing equipment; modern supply chain and increased efficiency (by forming producer associations and co-operatives); and establishing systems for certification/branding of agricultural products. These investments will take place in towns where agricultural and bio-tech industries have been identified as the key development priority. Most investments will be in Gansu Province where all the towns are focusing on agricultural industry and competitiveness, but some investments will be in towns in Guangdong Province that have chosen biotechnology as a focus industry.

46. To identify the specific investments, provincial design institutes worked closely with project towns to examine the viability of proposed activities by applying Value Chain Analysis (VCA). The VCA is a diagnostic tool that identifies opportunities that add value and increase competitive advantage and helps to identify investments that connect small producers to high value markets and exploit the towns’ competitive advantages. Supporting public-private partnerships is a key aspect of this component and producer organizations and private companies will be engaged to run wholesale markets and other value-added facilities supported by the project. Capacity assessments will be conducted for producer organizations and private companies to ensure they are capable of managing complex projects in terms of financial, business and strategic management, and to ensure that capacity-building plans will be developed and implemented.

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47. Activities under this component were designed based on a consultative process to determine the priorities to ensure sufficient capacity to implement, operate and maintain the project.

D. Financial Management

48. The responsibility for managing Bank loan proceeds, including the management of the Designated Accounts (DAs) for each of the loans, will be undertaken by the Guangdong, Gansu and Hunan Provincial Financial Bureaus (GDFB, GSFB and HNFB). A financial management capacity assessment has been conducted by the Bank and identified the following principal risks: financial staff in the PPMOs and CPMOs do not have significant experience with Bank-financed projects and their accounting and financial reporting skills are not strong; and counterpart funds are approximately 50% of total project cost and are to be contributed by county and township governments. 49. Actions to strengthen project financial management capacity have been agreed with the relevant implementing agencies, and include the following: (a) prepare an FM training plan, and train all project FM staff before the start of implementation and continuously thereafter; (b) prepare and issue a Financial Management Manual prior to loan negotiations to standardize project FM procedures and provide guidance to FM staff; (c) the three provincial finance bureaus and the Bank implementation support missions to monitor FM matters closely and provide guidance as required; and (d) local government counterpart funds to be confirmed in the annual budget. The FM assessment has concluded that with the implementation of these proposed actions, the financial management arrangements will satisfy the Bank’s minimum requirements under OP/BP 10.02. Annex 3 provides additional information on Financial Management.

E. Procurement

50. Provincial PMOs (PPMOs) Procurement Assessment. The three PPMOs will: (a) play the leading and coordinating roles in procurement activities during implementation; (b) provide guidance to County PMOs (CPMO) on procurement and contract management; (c) review procurement documents prepared by the CPMOs; and (d) supervise and monitor procurement activities carried out by CPMOs. Although the three provincial PDRCs have previously participated in World Bank financed projects, the three PPMOs and their staff are not sufficiently familiar with Bank procurement procedures.

51. County PMOs (CPMOs) Procurement Assessment. Procurement under the Project would be carried out by each respective CPMO for investments in the selected town under its jurisdiction. For each CPMO, full-time procurement staff is in place. However, the designated procurement staff does not have adequate experience with Bank-financed projects. In order to strengthen procurement capacity, procurement staff will attend procurement training organized by the respective PPMO. In addition, procurement staff will attend the training courses on procurement in World Bank financed projects.

52. The main procurement risk is the CPMOs’ lack of experience in procurement for Bank- financed projects and that procurement would be implemented by staff without experience in Bank-financed projects. This risk will be mitigated through: close coordination with PPMOs and

14 guidance from PPMOs; targeted training and capacity building of CPMO staff; and close supervision by PPMOs and the Bank.

F. Social

53. Social Assessment. The project will have a positive social impact as small town infrastructure construction will lead to concrete improvements in the quality of life of the small town inhabitants. The participating provinces selected three towns (Yuecheng in Guangdong, Zhengtou in Hunan and Dongwan in Gansu) as ―pilots‖ for participatory project design based on intensive social assessment (SA). Based on the pilots, a Community Participation Manual was developed in each project province to guide local participation during project implementation. The pilots also contributed to the establishment of a Complaint Handling Mechanism to encourage continuous feedback from residents.

54. Ethnic Minorities. Hongwansi township, in Gansu Province, is the only project town with significant presence of ethnic minority population, where the Yugu, Tibetan and Hui peoples are represented. The project will support the construction of facilities associated with the Qilian Jade Processing Base, where Yugu and Tibetan traditional jade crafts will be the main products. Social assessment was carried out among the Yugu (2731 people in total), Tibetan (1758 people) and Hui (1323 people) groups to consult them on the type of facilities most needed and on the ways in which they could participate in the project activities. An Ethnic Minority Development Plan (EMDP) has been prepared to ensure that ethnic minorities participate fully in the project and achieve beneficial outcomes.

55. Land Acquisition and Resettlement. Resettlement will be required in 26 sub-projects in 16 townships (one in Guangdong, five in Gansu, and ten in Hunan). This will cover about 1419 mu of land to be requisitioned in 40 rural villages, affecting 5941 farmers in 1344 households. A total of 613 people, comprising 109 households, will be relocated because of house demolition. About 74 shops and 9 enterprises will be affected. Consolidated provincial resettlement action plans (RAPs) have been prepared for each province. The RAPs comply with national and Bank requirements.

56. The provincial level RAPs and the EMDP were disclosed locally in November 2011 and became available at the same time in the InfoShop.

G. Environment

57. The draft feasibility studies and environmental assessments for the project show that the project as a whole will have positive environmental impacts, with benefits outweighing the potential negative impacts. During the construction phase, noise and disruption is likely to cause short-term, temporary and site-specific, negative environmental effects. During the operational phase, pesticide use, if not well managed, could be an issue. Proper implementation of the mitigation measures required by the project will minimize the impacts to an acceptable level, or eliminate them entirely.

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58. The Project is classified as a ―Category B.‖ Satisfactory Environment Assessment (EA) reports were prepared in accordance with national and Bank requirements and include: (a) a set of standard Environmental Code of Practice (ECOP); and (b) EIA/EMP for a small size Waste Water Treatment Plant (WWTP) in Hunan. In addition, OP4.09 Pest Management is also triggered, and Pest Management Plans (PMPs) acceptable to the Bank have been prepared.

59. Disclosure Information. In accordance with Bank disclosure policy, prior to project appraisal, the latest environmental safeguards documents, including EIA/EMP, ECOPs, and PMP, were made available in the project areas and are accessible at the PMOs. They were also disclosed on the websites of the local government agencies. All environmental safeguard documents mentioned above were also disclosed at the World Bank Infoshop on November 21, 2011.

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Annex 1: Results Framework and Monitoring

Project Development Objective (PDO): The Project Development Objective is to improve public infrastructure and services to contribute to sound development of the selected small towns in Guangdong, Hunan and Gansu Provinces.

Cumulative Target Values Responsibility Description PDO Level Results Unit of Frequen Data Source/ Baseline for Data (indicator

Indicators* Core Measure cy Methodology YR 1 YR 2 YR3 YR 4 YR5 Collection definition) PO-1: Number of No. Mid- Beneficiaries include: (a) employees of Local PMOs The primary people benefiting from 0 427,980 540,400 term/end enterprises, businesses and shops will coordinate objective of the the new and project served by these roads; (b) tourists collection of the roads is to provide rehabilitated roads. (areas served by these roads); (c) data and the infrastructure 0 vendors (for agricultural markets compile necessary for the (1) Guangdong 38,500 78,000 served by roads). For enterprises indicators based businesses to exist 0 operating in industrial areas, the on inputs from and thrive. (2) Gansu 380,000 448,500 organization responsible for the the data sources. Therefore, 0 industrial area will be the main source indicators

(3) Hunan 9,480 13,900 of data. For shops/businesses served by measuring the the roads, the PMOs will identify the vitality of the shops and coordinate with the tax business are the bureaus to obtain the data. The most direct way to Tourism Bureau will provide the measure the annual number of tourists using these benefits of the roads. For agricultural markets the roads. entity operating the market will provide annual data. PO-2 Number of No. 50,106 76,405 79,665 Mid- Data on population (households and Local PMOs in Potable water people using potable term/end businesses) with access to water coordination supply as defined water supply project meeting national standards is available with local water by GB5749-2006

(1) Guangdong 50,000 68,000 68,000 in all towns. supply Standards for (2) Gansu 106 5,755 7,855 companies. Drinking Water (3) Hunan 0 2,650 3,810 Quality. PO-3: Number of Mid- PMO to collect data from the project Local PMOs in Improved waste people with access to No. 5,000 74,100 99,900 term/end town Construction Bureau (for coordination management water/solid waste project residents) and from enterprises (for with relevant services defined as management systems number of employees), as well as from bureau and GB18918-2002

(1) Guangdong 5,000 68,000 84,000 corresponding bureaus and public enterprises. Discharge (2) Gansu 0 0 0 service companies. Standards for (3) Hunan 0 6,100 15,900 Municipal Wastewater.

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PO-4: Number of users Mid- Number of users includes enterprises, Local PMOs in effectively using the No. 10,085 32,831 64,241 term/end associations, or individual coordination integrated centers, project entrepreneurs of new service centers with new service agricultural markets, and new/rehab. agricultural markets. center operators. and land served by and farmers using irrigation facilities. irrigation facilities. PMO to collect data from operators of (1) Guangdong 0 10,210 30,380 new service centers and the facilities (2) Gansu 9,964 17,820 22,520 (3) Hunan 121 4,801 11,341

Intermediate Result (Component One): Cumulative Target Values Responsibility for Intermediate Result Unit of Data Source/ Baseline Frequency Data Collection Indicators Measure Methodology YR 1 YR 2 YR3 YR 4 YR5 IO-1.1: Roads constructed 25.743 66.317 126.92 130.017 136.937

(1) Guangdong 6.852 17.52 34.529 36.829 36.914 Semi- County & Provincial Km 0 Progress reporting (2) Gansu 18.891 48.797 82.876 83.673 83.673 annual PMOs (3) Hunan 0 0 9.515 9.515 16.35 IO-1.2: Roads rehabilitated (km) 0 1.1 19.042 20.942 20.942 20.942

0 0 17.752 17.752 17.752 17.752 (1) Guangdong Semi- County & Provincial Km progress reporting (2) Gansu 0 1.1 1.29 1.29 1.29 1.29 annual PMOs (3) Hunan 0 0 0 1.9 1.9 1.9 IO-1.3: Volume of potable water 30 0 5632 6185 supply generated. Mid- 3 County & Provincial m /d 0 0 4500 4500 term/end Mid-term report and ICR (1) Guangdong PMOs project (2) Gansu 30 1132 1685 IO-1.4: Household water connections No. 1800 2095 3977 7166 7964 9120 resulting from the new project 1800 500 1500 3000 3000 3000 (1) Guangdong Semi- County & Provincial progress reporting annual PMOs (2) Gansu 0 1595 2477 3482 4237 5088 (3) Hunan 0 0 0 684 727 1032 IO-1.5: Length of pipelines 59064 100479 193931 242195 242195 Semi- County & Provincial installed: progress reporting annual PMOs M 0

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(1) Guangdong 3000 31905 82950 102520 102520 1500 8960 17160 24546 24546 (a)Water supply 1500 14597 38664 48210 48210 (b) Sewers 0 8348 27126 29764 29764 (c) Drainage

(2) Gansu 53254 63604 74962 77612 77612 (a)Water supply 13586 18586 27336 28836 28836 (b) Sewers 19389 23739 25543 26693 26693 (c) Drainage 20279 21279 22083 22083 22083 (3) Hunan 2810 4970 36019 62063 62063 (a)Water supply 850 1500 12450 15383 15383 (b) Sewers 910 1620 17659 40770 40770 (c) Drainage 1050 1850 5910 5910 5910 IO-1.6: New farmers markets, industrial centers, vocational training 2 11 16 20 23 centers, built

0 1 3 4 6 Semi- County & Provincial (1) Guangdong progress reporting annual PMOs No. 0 (2) Gansu 2 8 10 12 12

(3) Hunan 0 2 3 4 5 IO-1.7: Increased areas of irrigation with new and improved facilities 0 415 1520 2300 4450 5960 (canals and pumps) Semi- County & Provincial progress reporting (1) Gansu Ha 0 415 1490 2940 4350 5840 annual PMOs (2) Hunan 0 0 30 60 100 120 IO-1.8: Capacity of WWTP m3/d 0 0 0 3000 3000 3000 Semi- progress reporting County & Provincial (1) Hunan annual PMOs Intermediate Result (Component Two): IO-2.1: Number of studies completed 2 5 12 19 22 based on agreed TA program Semi- (1) Guangdong No. 1 2 6 9 11 progress reporting Provincial PMO annual (2) Gansu 1 2 3 4 5 (3) Hunan 0 1 3 6 6 IO-2.2: Number of farmer organizations (Producers 7 7 14 25 31 40 Semi- County & Provincial Associations, Coops, WUAs etc.) No. progress reporting developed or improved annual PMOs (1) Guangdong 4 4 4 5 5 5

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(2) Gansu 0 0 5 15 21 25 (3) Hunan 3 3 5 5 5 5 IO-2.3: Agricultural Markets (a) number of vendors No. 637 1748 3265

(b) sales revenue Million (rmb) 54.81 136.31 198.89 (1) Gansu PMO to collect data from Mid- County & Provincial No. 516 1247 2524 operators of the markets. term/end PMOs in coordination (a) number of vendors; Million Mid-term/end project project with the market owner. (b) sales revenue (rmb) 47.55 100.64 143.69 report (2) Hunan No. 121 501 741

(a) number of vendors; Million (b) sales revenue (rmb) 7.26 35.67 55.20 IO-2.4: Number of target beneficiaries (enterprises, smallholder 6095 12897 20949 29826 40421 producers and farmers) trained based No. 0 on agreed training program Semi- County PMO/Finance 2450 5862 10614 16861 24861 progress reporting (1) Guangdong annual Bureau (2) Gansu 2800 5600 8300 10300 12200

(3) Hunan 845 1435 2035 2665 3360 Intermediate Result (Component Three): IO-3.1: Number of PMO staff trained (project management, procurement, 385 654 932 1145 1352 financial management, M&E etc.) No. 0 76 144 192 207 227 Semi- County & Provincial (1) Guangdong progress reporting annual PMOs (2) Gansu 180 300 440 550 640 (3) Hunan 129 210 300 388 485

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Annex 2: Detailed Project Description

1. The Project Development Objective is to improve public infrastructure and services to contribute to sound development of selected small towns in Guangdong, Hunan and Gansu Provinces.

Town Selection Criteria

2. Individual towns were selected according to a number of criteria reflecting the development strategies and priorities of the three provinces, as well as the geographical, economic and political relevance of the towns in the provincial strategy for rural-urban integration. The towns were selected to reflect the conditions in the different provincial sub- regions, as well as their potential and capacity for development, current stages of development achieved and their areas of specialization. The intention was to be able to provide valuable lessons and business models for each of the provincial sub-regions, in order to be able to consider an updated and refined replication in the future. According to the requirements for inclusion, each town should satisfy the following basic conditions: (a) to be identified in the provincial town development plan as a ―key‖ town and a priority for investment; (b) the existence of a satisfactory town Master Plan; (c) the existence of a Land Use Plan; (d) previously selected industries with comparative advantages leading the development of the town; (e) clear leadership and commitment from the town government and effective participation of public and private partners operating in the town; and (f) relatively good capacity in finance and human resources.

Sub-project selection Criteria

3. The following criteria were used by the three PDRCs and the PPMOs to select investment sub-projects in each of the towns:

 Investment proposals consistent with the Master Plan and the 12th Five-Year Development Plan;  Land use utilization in agreement with the current Land Use Plan;  Sub-projects consistent with the identified development strategy and directly linked to removing key bottlenecks that constrain the town’s economic development;  Sub-projects should improve the investment environment and contribute to increasing the town’s comparative advantages;  Sub-projects impact favorably on the town’s economic development by providing public goods contributing to, inter alia, the integration of urban and rural sectors, increase in income levels, creation of employment, and improve the quality of life;  Sub-projects should be technically feasible, financially sound, environmentally friendly, and adequately sized for the market situation;  Investment proposals should have adequate financing sources identified for the entire investment, as well as for meeting operations and maintenance costs;  Sub-projects should have identified feasible institutional arrangements capable of adequately addressing the environmental, social and institutional issues arising during construction, as well as for sustainable management.

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4. The list of selected towns is shown in Table 1.

Table 1: List of Participating Towns in the Project Provinces

Province Participating Towns Guangdong 1. Guzhen Town; Zhongshan City; 2. Dongli Town; Chenghai District, Shantou City; 3. Yuecheng Town; Deqing County, Zhaoqing City; 4. Dongcheng Town; Yangdong County, Yangjiang City; 5. Rucheng Town; Ruyuan County. Shaoguan City; 6. Fuxing Town; Xingning City Meizhou City; 7. Fucheng Town; Luoding City, Yunfu County. Hunan 1. Zhentou Town; Liuyang City; Changsha City; 2. Dingzi Town;,Wangcheng County, Changsha City; 3. Yueshan Town; Xiangtan City, Xiangxiang City; 4. Santang Town; Hengyang City, Hengnan County; 5. Zoushi Town; Changde City, Touyuan County; 6. Taizimiao Town; Changde City, Hanshou County; 7. Cangshuipu Town; Yiyang City, Heshan District; 8. Wanbao Town; Loudi City, Louxing District; 9. Xinshi Town; Miluo City; Yueyang City. Gansu 1. Dongwan Town; Jingyuan County; Baiyin City; 2. Hongshui Town; Jingtai County, Baiyin City; 3. Ganquan Town; Maiji District; Tianshui City; 4. Zaojiao Town; Qinzhou District; Tianshui City; 5. Meichuan Town; Min County, Dingxi City; 6. Wenfeng Town; Longxi County; Dingxi City; 7. Shizi Town; Lingtai County; Pingliang City; 8. Dongzhi Town; Xifeng District; Qingyang City; 9. Dangzhai Town; Ganzhou District; Zhangye City; 10. Hongwansi Town; Zhangye City; Sunan County; 11. Huahai Town; Jiuquan City; Yumen City; 12. Qili Town Jiuquan City, Dunhuang City.

Current Situation of the Selected Towns

5. The selected towns represent different sub-regions of each of the provinces, having distinct demographics and constraints, and development strategies with a wide variety of approaches. Some towns aim to specialize in a single high level industry, or to develop an urban industrial park zone, or a more competitive agricultural/agro-industrial complex. Others simply aim to attract basic economic activities (including services or tourism) with a potential for generating employment.

Project Components

6. The project will be implemented over a period of five years. It will finance investments in 28 small towns in Guangdong, Hunan and Gansu Provinces through the implementation of the components described below.

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Component A: Infrastructure Development (estimated base cost: US$ 244.66 million).

7. This component will improve high priority infrastructure in selected small towns by financing sustainable and high priority public investments aimed at expanding, rehabilitating, and modernizing infrastructure facilities or increasing their operational efficiency. In each town, these investments were selected in accordance with the existing development plans and investment strategies, focusing on the mitigation of the main constraints identified, as well as gaps in the investment plans currently being implemented.

8. The main areas for investments are: (a) construction or rehabilitation of urban and rural access roads; (b) expansion or modernization of water supply systems; (c) construction of wastewater treatment facilities and improvement of solid waste management systems; (d) carrying out of creek rehabilitation and embankment protection; (e) expansion and modernization of irrigation infrastructure; and (f) development of agricultural markets, commercial infrastructure and integrated service centers. However, the project would retain the flexibility of adjusting these lists of investments in accordance with new developments and lessons learned in the initial phases of project implementation.

9. Roads investments will support completion and improvement of town road networks and strengthen transportation between the urban and rural areas. The following types of roads are planned for construction:

(a) Agriculture base roads: to provide better access for farmers and traders, reduce input and output costs and increase producer income. (b) Agri-business roads: to provide easier access for agricultural goods to processing, storage and distribution centers thereby raising value-added and increasing competitiveness. (c) Industrial park access roads: by promoting access to local industries, towns can increase revenues and improve services and job opportunities for residents. (d) Commercial zone roads: promote increased economic activity and provide expanded job opportunities, resulting in increased level of income and better quality of living. (e) Tourism roads: by improving access to tourist attractions, towns would increase the number of tourists, tourism income, public revenues and employment opportunities in the tourism industry.

10. Road Design and Approval. The final road designs will be prepared by consultants (local design companies or institutes) in accordance with standards adequate for the purpose (mostly Class III and IV). The local highway authorities or the local construction departments are responsible for approving the design of highway or urban roads, respectively. The highway authorities and construction departments are also responsible for their maintenance.

11. Supervision and Maintenance. Road construction will be supervised by qualified companies contracted by the CPMOs through competitive bidding. The local highway authorities or construction departments, responsible for approving the design of the projects are also responsible for final technical checking and acceptance of the completed highway or urban

23 roads. Responsibility for maintenance of highways will be assigned to local highway authorities, while the urban roads will be maintained by the construction departments in the municipal administration.

12. Water Supply, Wastewater Management, Sewage Connections, and Creek Rehabilitation. Water supply schemes comprise construction of about 358 km of clean water distribution pipelines, which are mainly associated with new or improved road construction and will be constructed alongside the roads in 22 project towns. Wastewater management and sewage connection schemes include construction of about 120 km of wastewater pipelines, which are mainly associated with new or improved road construction and will be constructed alongside the roads in 16 project towns/townships, and construction of a 3,000 m3/day wastewater treatment plant (WWTP) in Yueshan Town of Hunan Province. The project will increase the utilization of wastewater treatment facilities, extend sewerage services in underserved areas, improve quality of life and environment, and upgrade the capacity of wastewater management institutions.

13. Creek rehabilitation of 3km of the Zhouxi Creek, Zhoushi Town, Hunan Province, will improve the environmental conditions for town residents and encourage tourism. The rehabilitation includes dredging and disposal of the creek’s benthic sediments, wastewater interception, restoration or expansion of the creek cross-section and its embankments.

14. Final engineering designs for water supply, waste water, sewage and creek rehabilitation investments will be prepared by design institutes. The PPMO, together with TEGs, will ensure technical standards and quality of the final engineering designs. The Bank will review final engineering designs. Provincial PMOs are responsible for overall coordination, and the CPMO at each project selected site will oversee the implementation. All construction works will be supervised by qualified local construction supervising companies. O&M for these investments will be carried out by Town Housing and Construction Bureaus or county water supply companies.

15. Rural Irrigation Systems. These investments comprise construction of 8 new wells and rehabilitation of 51 existing wells, all associated with pumps and laterals, and construction of 91 km of irrigation canals and associated facilities in three towns in Gansu Province. Irrigation investments will be customized for each orchard based on a specific analysis of each case and on stakeholder input. Activities financed may include civil works, equipment, and incremental operating costs associated with: (a) systems designs and rehabilitation of the infrastructure (canal lining, dredging, cleaning of earth canals and drain channels, small weirs, bridges, culverts, etc.,); (b) water-saving irrigation (drip irrigation, sprinklers, low pressure pipes); (c) rehabilitation and electrification of pumping stations and existing wells; (d) water resources storage systems and farm ponds; and (e) canal bank roads and farm roads.

16. The local county Water Resources Bureaus will be responsible for technical engineering designs. The CPMOs will be responsible for selecting qualified contractors. The final check and acceptance (―yanshou‖) will be undertaken by the CPMOs with the technical support of the corresponding water bureau. Operation and maintenance will be undertaken, depending on the local situation, by WUAs, Farmers Associations and Cooperatives.

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17. Agro-industrial and commercial infrastructure and services. The project will invest in marketing infrastructure to support smallholder competitiveness in dynamic high-value markets. This will include the construction/renovation of market places for agricultural products (horticulture, fruits, vegetables and herbs), including trading sheds and stands, storage houses and cold storage facilities. Other investments include equipment for testing and trading, support for production bases and establishment and operation of farmers’ produce associations and training and extension services.

18. The project will also invest in industrial service centers to improve and expand access to information and technology service and marketing to strengthen industry clusters. Five key industries have been selected by Guangdong DRC and local governments as pilots to spur industrial innovation: bio-breeding and lamp manufacturing in Guzhen, hardware manufacturing in Dongli, building material in Yuecheng, and photovoltaic electronics in Fucheng.

19. Investments will expand access to and improve the quality of training for rural migrants and enhance their employability. Rucheng (Guangdong), Dingzi (Hunan), and Hongwansi (Gansu) have been selected as a pilot reform group to test partnership models with vocational schools, universities and industry. The lessons of the pilot will be captured through monitoring and evaluation and are expected to be applied to other towns and training institutions. In particular, the sub-component will support: (a) constructing/upgrading buildings and providing equipment and workshops to facilitate delivery of training programs; (b) strengthening partnerships between local government and vocational schools, universities and industries; (c) developing and updating curricula and training materials to increase the quality and relevance of training; and (d) providing technical assistance for capacity building, monitoring and evaluation, tracer studies and employer surveys.

20. Appropriately qualified design institutes will be selected by the CPMOs to prepare the technical engineering designs of such facilities and the Bank will review final engineering designs. Checking and acceptance of the facilities will be undertaken by county and township PMOs with participation of farmers and farmer groups.

21. The local governments (owners of the facilities) will either be responsible for operation and maintenance or will contract the responsibility out to the private sector (including farmers associations and co-operatives).

Component B: Institutional Strengthening and Capacity Enhancement (estimated base cost: US$15.64 million).

22. This component will improve the institutional capacity of the Project Provinces to manage the development and operation of modern and efficient infrastructure, carry out business development activities and provide support services. It will finance, mainly: (a) carrying out policy, technology and marketing studies; (b) carrying out technical, managerial and financial training, workshops and study tours for stakeholders (Government, Cooperatives, Water Users’ Associations (WUA), private entrepreneurs); (c) acquisition of equipment for testing, grading and real time monitoring to be used in parallel with infrastructure development to improve the quality and safety of marketable products, and monitor environmental aspects of infrastructure

25 subprojects; and (d) establishment of training and extension services for rural migrants and farmers.

Component C: Project managements and M&E (estimated base cost: US$ 8.17 million).

23. This component will support project management and coordination efforts of the Project Provinces. In particular it will support the PMOs at various levels to manage, monitor, evaluate and report on project implementation. It will help strengthen the institutions in charge of project implementation through funding of incremental project staff, consultants, equipment, training and workshops and incremental operating costs. An essential part of this component is the establishment and operation of a management information, monitoring and evaluation system.

Project Cost by Province

Table 1. Hunan Project Cost and Financing Plan by Component (Million) Project Component Total IBRD IBRD Financing RMB US$ RMB US$ (%) 1. Infrastructure Development 535.04 83.60 281.38 43.97 53 2. Institutional Strengthening and Capacity Enhancement 34.03 5.32 9.92 1.55 29 3. Project Managements and M&E 13.67 2.14 1.60 0.25 12 Total Baseline Costs 582.74 91.05 292.90 45.77 50 Contingencies 56.27 8.79 26.30 4.11 47 Total Project Cost 639.01 99.85 319.20 49.88 50 Interest During Implementation 19.45 3.04 0.00 0.00 0 Front-end Fee 0.80 0.13 0.80 0.13 100 Total Financing Required 659.26 103.01 320.00 50.00 49

Table 2. Gansu Project Cost and Financing Plan by Component (Million) Total IBRD IBRD Project Component Financing RMB US$ RMB US$ (%) 1.Infrastructure Development 470.50 73.52 281.44 43.98 60 2. Institutional Strengthening and Capacity Enhancement 23.54 3.68 8.49 1.33 36 3. Project Managements and M&E 12.93 2.02 8.60 1.34 67 Total Baseline Costs 506.97 79.21 298.53 46.65 59 Contingencies 37.32 5.83 20.67 3.23 55 Total Project Cost 544.29 85.05 319.20 49.88 59 Interest During Implementation 17.01 2.66 0.00 0.00 0 Front-end Fee 0.80 0.13 0.80 0.13 100 Total Financing Required 562.10 87.83 320.00 50.00 57

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Table 3. Guangdong Project Cost and Financing Plan by Component (Million) Project Component Total IBRD IBRD Financing RMB US$ RMB US$ (%) 1.Infrastructure Development 558.53 87.54 289.66 45.40 52 2. Institutional Strengthening and Capacity Enhancement 42.37 6.64 8.70 1.36 21 3. Project Managements and M&E 25.59 4.01 5.34 0.84 21 Total Baseline Costs 626.49 98.20 303.71 47.60 48 Contingencies 29.53 4.63 14.49 2.27 49 Total Project Cost 656.02 102.82 318.20 49.88 49 Interest During Implementation 18.21 2.85 0.00 0.00 0 Front-end Fee 0.80 0.13 0.80 0.13 100 Total Financing Required 675.03 105.80 319.00 50.00 47

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Annex 3: Implementation Arrangements

A. Project institutional and implementation arrangements

1. The provincial governments of Guangdong, Hunan and Gansu established Provincial Project Leading Groups (PPLGs) or Provincial Coordinating Groups (PCG), headed either by a Vice Governor in charge of agriculture (Hunan) or the Director General of Provincial Development and Reform Commission (Guangdong and Gansu), to oversee the preparation and implementation of the proposed project, with representatives from PDRCs, Provincial Finance Department (PFD) and the Construction and Agriculture Departments. PPLGs/PCG are responsible for overall leadership and coordination, guidance, decisions on and oversight of policy matters and project management, operation and dissemination.

2. Provincial Project Management Offices (PPMOs) have been set up under the respective PDRCs, headed by a Deputy Director General in charge of the rural economy. PPMOs will have dedicated divisions responsible for overall coordination, project management, finance and bidding and procurement. PPMOs, staffed with sufficient numbers of competent staff, will act as the main implementation management agency, assisting the PPLG in reviewing and making decisions on major issues, drawing up annual work plans and budgets, reviewing and approving lower level project work plans and designs, undertaking procurement and distributing procurement documents, monitoring the quality and quantity of physical and socio-economic progress, coordinating the mobilization of counterpart funds, verifying disbursement applications from lower level PMOs and combining them into periodic applications to the provincial finance departments. They will also organize research, local training and project supervision, and act as the focal point for communication with the Bank and the central government.

3. A leading group at each city/district/county level has also been set up, led by the respective head of the county or district, and staffed with representatives (head/deputy head) of the town government and the line bureaus. These include the Development and Reform, Finance, Construction, Agriculture, Land, and Environment Bureaus. These county level leading groups, under the guidance of the PPLG and PPMO, are responsible for reviewing project design, coordinating mobilization of counterpart funds and payment of loan proceeds, helping to settle any critical issues encountered during project implementation, overseeing project implementation and engineering completion acceptance.

4. Unified Project Management Offices have been established at the county level (CPMO) for the daily implementation and management of the project. The CPMOs include representatives from key line bureaus and governmental agencies with clearly defined responsibilities related to day to day project management. These include project operations (including financial, payment, bidding, and construction management), monitoring project progress, and producing monthly progress reports and annual assessments.

5. The project will ensure adequate efforts are made and budget allocated to strengthening the capacity of PMO staff, improving skills in the areas of project management, procurement, contract management, disbursement, implementation of safeguard and fiduciary measures, and monitoring and reporting.

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6. Technical Expert Groups (TEG), reporting directly to the PPLGs, have been set up at the provincial level as advisory entities. They are composed of technical experts, inter alia, in urban planning, transport, water supply and sanitation, agro-economics and rural development, environmental and social development, appointed by line agencies, research and extension institutions. The TEG, together with independent specialist consultants, will certify compliance with agreed design criteria, design principles and cost estimations for sub-components and for independent construction supervision arrangements. They will provide technical guidance to the project, review technical documents and designs, evaluate and oversee project processes, identify problems and provide technical solutions. The independent specialist consultants’ services will certify compliance with the agreed RAPs/EMDPs and ECOPs/EMPs/PIPs.

B. Financial Management, Disbursements and Procurement

Financial Management

7. The residual financial management risk for the project is assessed as Substantial. The financial staff in the PPMOs and CPMOs do not have significant experience with Bank-financed projects and their accounting and financial reporting skills are not strong. Counterpart funds are approximately 50% of total project cost and are to be contributed by county and township governments. To avoid any negative impact on implementation, it is crucial that counterpart funds are in place as committed.

8. The following action plan has been identified for addressing weaknesses in financial management:

Significant Actions Responsible Completion weaknesses Person Date PPMOs do not have FM training plan to be prepared and all Each PPMO Before and sufficient project financial staff to be trained (formal and during project experience with and ad hoc) before and during project provincial implementation. Bank-financed implementation. finance projects and their bureau as accounting and well as World financial reporting Bank. knowledge and A Financial Management Manual (FMM) Each PPMO. Before project experience are not will be prepared and issued, which will negotiation. strong. standardize project FM procedures and provide guidance to project financial staff. Close monitoring and guidance from three Provincial During project provincial finance bureaus, as well as the finance implementation. Bank’s supervision, can help mitigate the bureaus and risk and weakness. World Bank. Lack of timely and Local government counterpart funds should PPMO and During project sufficient be confirmed in the government annual CPMOs. implementation. counterpart funds. budget.

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9. Funding sources for the project include the Bank loans and counterpart funds. The Bank loans will be signed between the Bank and the People’s Republic of China (the Borrower), for financing project activities in each of the participating provinces. On-lending arrangements for the Bank loans will be signed between MOF and each provincial government through the Provincial Finance Bureau (PFB). Within each province, there would be additional on-lending arrangements between the provincial government and the municipal governments, through the municipal finance bureau, and finally between the municipal governments and the county governments, through the county finance bureaus. Loan repayment will be borne by the county finance bureaus. Counterpart funds will be from the provincial, county and township government budgets.

10. Budgeting. The annual project implementation plan, including the funding budget and resources, will be prepared by the PPMOs. The budget for counterpart funds committed by the local government will be reviewed and approved by the local People’s Congress and be included in the sectoral budget. Based on the approved budget and implementation progress, the related finance bureaus will provide government appropriations to the project. Budget variance analysis will be conducted on semi-annual basis by the PPMOs and necessary actions will be taken to implement the project as planned. The Bank will work with the PPMOs to enhance their budget preparation and execution during project implementation.

11. Funds Flow. Bank loan proceeds will flow from the Bank into the project provincial Designated Accounts (DAs) to be set up at and managed by the PFBs in each of the three provinces. These PFBs will be directly responsible for the management, maintenance and reconciliation of their respective DA activities. Supporting documents required for Bank disbursements will be prepared and submitted by CPMOs through municipal and county finance bureaus, as well as the PPMOs, for review and verification before sending to the respective PFB for further disbursement processing.

12. Accounting and Reporting. The administration, accounting and reporting of the project will be set up in accordance with Circular No.13: ―Accounting Regulations for World Bank- Financed Projects‖ issued in January 2000 by MOF. Each PPMO and CPMO will manage, monitor, and maintain project accounting records for the activities they execute. Original supporting documents will be retained by each PPMO and CPMO. Each PPMO will work together with its PFB to prepare the project consolidated financial statements for the province. Unaudited semi-annual project IFRs will be prepared and furnished to the Bank by each PPMO no later than 45 days following each semester in form and substance satisfactory to the Bank.

13. Internal Control. The related accounting policy, procedures and regulations were issued by MOF to uniformly align the financial management and disbursement requirements for Bank financed projects. The project FMM will align the entire project financial management policies and procedures which can serve project implementation and management.

14. Auditing. Guangdong, Gansu and Hunan Provincial Audit Offices (GDAO, GSAO and HNAO) have been identified as the auditors for the project. Annual audit reports for each project province will be individually issued by GDAO, GSAO and HNAO. The Bank currently

30 accepts audit reports issued by China National Audit Office (CNAO) or provincial/regional audit bureaus/offices for which CNAO is ultimately responsible.

15. The annual provincial audit report, comprising project financial statements for each province, will be due to the Bank within 6 months after the end of each calendar year. This requirement is stipulated in the loan agreement. The responsible agency and timing is summarized as follows:

Audit Report Submitted by Due date Consolidated Project financial Guangdong PPMO June 30 of each calendar year statements – Guangdong Province Consolidated Project financial Gansu PPMO June 30 of each calendar year statements – Gansu Province Consolidated Project financial Hunan PPMO June 30 of each calendar year statements – Hunan Province

Disbursement

16. Four disbursement methods are available for the project: advance, reimbursement, direct payment and special commitment. Supporting documents required for Bank disbursement under different disbursement methods are documented in the Disbursement Letter issued by the Bank and agreed at negotiations.

17. Each project province will have a DA in US dollars. These DAs will be opened at commercial banks acceptable to the Bank and will be managed by each PFB. The ceilings of the DAs are determined and documented in the Disbursement Letter.

18. The Bank loans would be disbursed against eligible expenditures (including taxes) as per the categories presented in the following table.

Loan Disbursements for Guangdong Province IBRD Loan Allocated Percentage of Disbursement Category Amount Expenditures to be (US$ thousands) financed (percentage)

1. Works for subprojects under 45,736 88 Part A of the Project. 2. Goods and Equipment for 2,271 100 subprojects under Parts A, B and C of the Project. 3. Consultant’s Services and 1,868 100 Training under Parts B and C of the Project 4. Front-end Fee 125 100 Total 50,000

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Loan Disbursements for Hunan Province

IBRD Loan Allocated Percentage of Disbursement Categories Amount Expenditures to be (US$ thousands) financed(percentage) 1. Works for subprojects under 46,469 85 Part A of the Project 2. Goods and Equipment for 1,606 100 subprojects under Parts A, B and C of the Project 3. Consulting Services and 1,800 100 Training under Parts B and C of the Project. 4. Front-end Fee 125 100 Total 50,000

Loan Disbursements for Gansu Province

IBRD Loan Allocated Percentage of Disbursement Category Amount Expenditures to be (US$ thousands) financed (percentage) 1. Works for subprojects under 41,366 83 Part A of the Project. 2. Goods and Equipment for 6,940 100 subprojects under Parts A, B and C of the Project. 3. Consulting Services and 1,569 100 Training under Parts B and C of the Project. 4. Front-end Fee 125 100 Total 50,000

Procurement

19. CPMOs will be responsible for the procurement of most project contracts; however, the provincial PMOs will carry out some procurement of goods and consultant services on behalf of the counties. The procurement plan will show which office is responsible the procurement of each contract. The procurement capacity assessment identified the principal risk as the lack of sufficient experience with Bank financed projects on the part of PMOs and procurement staff in the CPMOs.. Mitigation measures include: (a) implementation of a procurement training plan (prepared by each province before negotiations) to train all procurement staff before and during project implementation; (b) a Procurement Manual (PM) to be prepared and issued by each PPMO to standardize project procurement procedures and provide guidance to project procurement staff; and (c) appointment of independent procurement agents (as consultants) with 32 experience in World Bank procurement procedures by the PPMOs or CPMOs to assist with procurement activities. The overall risk for procurement is considered ―Substantial.‖

20. Procurement will be carried out in accordance with the “Guidelines: Procurement of Goods, Works and Non-Consulting Services under IBRD Loans and IDA Credits & Grants by World Bank Borrowers” dated January 2011; “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated January 2011; and the provisions stipulated in the Loan Agreement. NCB shall be carried out in accordance with the Law on Tendering and Bidding of the People’s Republic of China promulgated by Order of the President of the People’s Republic of China on August 30, 1999 subject to the modifications stipulated in the Legal Agreement in order to ensure broad consistency with Bank Procurement Guidelines.

21. Procurement of Works. Works procured under this project will include: (a) urban and rural roads; (b) water supply and distribution facilities; (c) wastewater management and sewage systems and connection facilities; (d) creek rehabilitation and embankment; (e) expansion and rehabilitation of rural irrigation systems; and (f) agro-industrial and commercial infrastructure support, including the construction/renovation of market places, trading sheds/stands, and storage facilities for agricultural products (horticulture, fruits, vegetables and herbs).

22. Procurement of Goods. Goods procured under this project will include equipment for testing, grading and real time monitoring, refrigerated trucks, forklift, office equipment, training equipment, multimedia presentation/teaching equipment, air-conditioned equipment, etc.

23. Selection of Consultants. Consulting services will include policy, technology and marketing studies.

24. Training and Workshops. Detailed programs will be developed by the Provincial PMOs and the County PMOs and included in the project annual work plan for Bank’s review. Expenditures incurred in accordance with the approved detailed programs will be used as the basis for reimbursement.

25. Procurement Plan. The initial 18-month Procurement Plan (PP) for the project has been prepared by the PPMOs and reviewed by the Bank. These Procurement Plans will be available in the Project’s database and on the Bank’s external website. The PPs will be updated in agreement with the Bank annually, or as frequently as required, to reflect project implementation needs and improvements in institutional capacity.

26. Frequency of Procurement Supervision. In addition to the Prior-Review supervision carried out from Bank offices in accordance with the Prior-Review thresholds, Bank procurement supervision missions will visit the field to carry out post-review of procurement activities every 12 months. The post review sampling ratio will be, at a minimum, one out of five contracts.

27. Prior-Review Thresholds. The Prior-Review thresholds are indicated in the table below.

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Procurement Thresholds Prior Review Thresholds Procurement/Selection Method Thresholds (US$ million) (US$ million) Least ICB NCB Shopping QCBS QBS CQS SSS Cost Goods ≥0.3 ≥1.0 <1.0 <0.1 Works, ≥5.0 ≥20 <20 <0.2 including Supply and Installation Consulting ≥0.2 for -- -- <0.3 -- -- Services firms ≥0.05 for individuals All for SSS Notes: (a) ―—―indicates ―No Threshold‖; and (b) there are no contracts expected to be subject to international competition during the first 18 months.

Environmental and Social

28. Environmental Assessment (OP 4.01). The Project is classified as a ―Category B‖ project based on the type, location, sensitivity, and scale, as well as the nature and magnitude of the potential environmental impacts of the activities to be implemented under the project. Environment Assessment (EA) reports were prepared in accordance with national requirements and the Bank’s OP/BP/GP 4.01. The reports include: (a) a set of standard Environmental Codes of Practice (ECOPs); and (b) EIA/EMP for a small size WWTP in Hunan Province. The EA Report has been prepared, incorporating the Bank’s comments, and found to be satisfactory. Since OP4.09 Pest Management is also triggered, Pest Management Plans (PMPs) acceptable to the Bank have been prepared accordingly.

29. Potential Environmental Impacts/Risks and Mitigation Measures. Some negative short-term construction and long-term operational impacts may potentially result from the project. The main environmental issues are construction related impacts and potential pesticides issues (if not well managed) during the operational phase. These include limited negative impacts during construction on soil erosion, air, water, acoustic environments, waste, worker safety and surrounding communities. These impacts will be temporary and site-specific.

30. To enhance the environmental benefits of the project, the project has integrated the mitigation measures into the project design, construction and operational phases. Preventive and mitigation measures during the construction and operation phases are recorded in the EIA/EMP, ECOPs and PMP respectively. Proper implementation of the mitigation measures during the construction and operation period can minimize the impacts to an acceptable level or even eliminate negative impacts. All mitigation measures related to contractors will be included in the bidding documents and the corresponding contracts.

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31. Environmental Code of Practice (ECOP). A set of ECOPs were prepared for each type of investment, including ECOPs for roads, dredging activities, irrigation facilities, pipeline networks, and small civil works. These will be included as part of the Operational Manual. ECOPs include specific instructions for contractors and engineering supervisors to identify and manage any natural habitat or Physical Cultural Resources (PCR) issues that may be identified in any of the sites during construction. They specify each aspect of environmental management during the project cycle, including but not limited to, project planning and design, site preparation, construction camps, borrow areas, topsoil salvage, storage and replacement, erosion control, construction dust management, air pollution control, noise impact control, water pollution control, waste management, drainage, construction plants and equipment management, public and workers’ health and safety, as well as consultation for environmental aspects. It also includes the monitoring, reporting and supervision arrangements for the implementation phase of the project.

32. EIA/EMP for a small size WWTP (3,000 tons/day) in Hunan Province. This individual EIA/EMP covers baseline information on environmental and socio-economic conditions and also describes alternatives considered as part of the feasibility studies. The overall environmental impact of the sub-project is positive. However, some negative impacts may arise during sub-project implementation, such as limited impacts on soil, air, water, acoustic environments, and surrounding communities. These impacts will be temporary and very localized, and proper mitigation measures during construction can minimize or even eliminate them. Preventive measures, including Environmental Health and Safety (EHS) requirements during the construction and operation phases, were noted in the EIA/EMP.

33. During project preparation, alternative locations and alternative technical processes and designs were explored and considered. The EIA identified, evaluated and compared various options for the sewage system layout, plant location, treatment process, and sludge disposal, with the objective of avoiding or otherwise minimizing potential adverse environmental and social impacts, and to maximize environmental benefits.

34. The EA team worked closely with the project planners and implementing agencies, as well as the feasibility study teams, to evaluate alternatives. Optimal alternatives were selected based on the avoidance of adverse social and environmental impacts, as well as other economic, technical, and financial considerations for the least cost solutions. A ―no project‖ scenario was also considered as an alternative. Details of the alternatives and the review process are in the EIA report.

35. An EMP was developed for this WWTP as a separate and stand-alone document, and an EMP summary table was also prepared. The table included potential impacts, mitigation measures, implementation schedule, implementation and supervision agency, monitoring indicators, frequencies and locations, and EMP budget for the construction and operation phases. Generic measures for environmental management of construction were also designed as technical specifications to be included in contracts.

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36. Pest Management (OP4.09). The project will improve on-going integrated pest management in the project areas of Gansu, Hunan and Guangdong provinces. Specifically, it will: (a) disseminate information on the application of high efficiency, low toxic, low residual effect chemicals and biological pesticides; (b) prohibit the use of high toxic, high residual effect pesticides; (c) reduce the reliance on chemical pesticides and chemical fertilizers; and (d) promote the use of non-chemical technologies for insect and pest control. An acceptable Pest Management Plan (PMP) was prepared for the project in accordance with Bank policy.

37. The PMP describes major pest issues, pesticide management methods, pesticide management organizations and their respective responsibilities in the project areas, environmental, occupational and safety risk assessment, monitoring and evaluation activities, and capacity building. It also describes a range of methods and their application, and provides recommendations for different situations. It lists all chemicals that may be needed for project activities. These chemicals fulfill Bank requirements and the World Health Organization recommendations.

38. Information Disclosure. In accordance with Bank disclosure policy, prior to project appraisal, the latest environmental safeguards documents, including EIA/EMP, ECOPs, and PMP were made available in the project areas and are accessible at the PPMOs and CPMOs. They were also disclosed on the websites of the local government agencies. All environmental safeguard documents mentioned above were also disclosed at the World Bank Infoshop on November 21, 2011.

Social

39. Project entities specifically selected some typical townships to be used as ―pilots‖ for engaging more social development dimensions in project activities, based on project Social Assessments (SAs) conducted by social scientist consultants and local practitioners. In Guangdong, Yuecheng township (including its two sub-projects for construction material production base and tourism development) was selected as pilot township. The SA found that promoting local participation in project design and implementation would help maximize project benefits by the establishment of a public service platform with the effective participation of local government management, construction material enterprises, and local villages/households around the production base. This participation platform will function to balance development opportunities and benefits among the government, market and local communities. For local tourism development, the project would organize the tourism association with the participation of local residents (especially women, vendors and shop owners) so as to ensure that all relevant stakeholders contribute to and benefit from tourism development.

40. Three townships were selected as pilots for participatory project design and implementation: Yuecheng in Guangdong, Zhengtou in Hunan and Dongwan in Gansu. Project Community Participation Manuals were developed according to the nature of the different sub- projects in these three townships, so as to ensure equal and equitable opportunities for local vulnerable groups (including women and poor people) to participate in and benefit from project activities.

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41. Ethnic Minority Groups (OP4.10). Project activities will take place in one township where there is a significant presence of ethnic minorities. This is Hongwansi township in Gansu Province, where there are Yugu (major group), Tibetan and Hui minority communities. In this town, a Qilian Jade Processing Base and a Livestock Trade Center and related infrastructure is being proposed, which would influence about 2731 Yugu farmers and herders, about 1758 Tibetan and 268 Hui residents. Project Social Assessment (SA) was specifically conducted in the Yugu, Tibetan and Hui communities, and included free, prior and informed consultation in accordance with OP4.10 requirements. An Ethnic Minority Development Plan (EMDP) has been developed for this township.

42. The EMDP helped adjust the sub-project activities in Hongwansi township, and helped to set up the participatory framework for project implementation, which was closely connected to the Yugu and Tibetan Community Action Plan. The Action Plan illuminated a series of actions needed for the ethnic minority groups, including training for capacity building, organizing craft artists association, organizing livestock professional association and training, ethnic minority traditional jade processing skill protection and development, and participatory monitoring and evaluation of the actions taken. These actions have been included in the project investment costs and budgeted into the government’s resources.

43. Involuntary Resettlement (OP4.12). Land acquisition and involuntary resettlement will take place due to the construction of roads, commercial centers, and waste water treatment plants. In Gansu Province, nine sub-projects in five townships will result in acquisition of 615 mu of land from 15 villages, affecting 2229 farmers (519 households) and displacing a total of about 94 people in 25 households. An area of 12 mu of state-owned land will be also reallocated and 3 enterprises and 8 shops need to relocate. In addition, 828 people in 191 households will be impacted by temporary land occupation. In Guangdong Province, one sub-project in one township will acquire 241 mu of land from 5 villages, and 1785 farmers (388 households) will be affected by the land acquisition and another 162 people (28 households) will be relocated by house demolition. In Hunan Province, 16 sub-projects in 10 townships will acquire 563 mu of land from 20 villages, which will affect 1927 people in 437 households. Meanwhile, 357 people in 109 households have to relocate by house demolition. In addition, 4 enterprises, 10 shops and 56 vender sheds will be moved as well. Temporary land occupation will affect another 395 people in 115 households.

44. Each of the project provinces invited resettlement experts from Hohai University and China Agricultural University to help the PPMOs prepare their resettlement components by disseminating project information and carrying out consultation among the villages and households likely to be affected. In March 2011, provincial resettlement teams started census and socio-economic surveys, impact inventorying and assessment, and livelihood rehabilitation planning in collaboration with local authorities and affected people. In July 2011, these teams prepared primary RAPs for each township with subprojects causing land acquisition and resettlement, and then developed a consolidated provincial level RAP for each project province. The RAPs will regulate compensation measures, including the replacement costs for asset losses and assistance for relocation and transition, and set up appropriate approaches for livelihood restoration and development of the affected villages, households and enterprises. In addition, because the sub-projects in Hunan province would affect several hundred rural households’

37 graves, some of which might be viewed as connected to local tradition, OP4.11 could be triggered. All compensation and relocation measures for the graves are planned and designed in the Hunan RAPs based on detailed survey and extensive consultation with the owners. Sub- project implementing agencies and the related township authorities will implement resettlement in accordance with the RAPs. The Bank confirmed that the RAPs for Gansu, Guangdong and Hunan are in conformity with OP 4.12.

45. The provincial level RAPs were translated into English and sent to InfoShop for disclosure on November 21, 2011. The township/sub-project level RAPs were disclosed to the public locally in PMO offices, county libraries and affected communities during November 2011.

D. Monitoring & Evaluation

46. The project’s monitoring systems will be designed and implemented by the provinces. Data for the outcome and results indicators will be collected under the responsibility of the County PMOs and compiled by the Provincial PMOs. Semi-annual monitoring reports will be used by the provincial authorities and the Bank to assess performance.

47. Capacity for collection, processing and reporting of the data required by the project is acceptable. The provinces have experience with other donor funded and Bank funded projects and have participated fully in the selection of indicators for this project. Guangdong’s MIS system will be adapted from a system currently used under another World Bank project and the transition is expected to be straightforward. Other provinces will adapt the relevant parts of this system for their own use. The towns do not have as much experience with the type of reporting required by the Bank, but implementation will be under the responsibility of the CPMOs and under coordination of the PPMOs, who would provide assistance and training as needed. However, most data required to compile the indicators is currently collected in some form by existing government systems; project monitoring will require only modest adjustments to these systems. The Bank has ensured that data for all the indicators could be readily available from the town governments, line bureaus and organizations responsible for implementing sub-projects; the data sources are considered to be sufficiently reliable.

48. Since the capacity to collect data does vary across counties and towns, provinces may elect to contract some of the monitoring work to outside consultants and this option may be the most practical for ensuring the establishment and early operation of the system. The project’s emphasis on training and capacity building will help ensure staff responsible for M&E receive adequate training. Towns and provinces with weaker capacity will be able to learn from towns and provinces with stronger capacity through cross-provincial study tours.

49. In order to more fully capture the impact of the project on town residents, qualitative beneficiary studies will be included as part of the M&E approach (opinion surveys based on statistical sampling). Funds from the budget for studies will be set aside for this purpose. These studies will be undertaken prior to the Mid-Term review. The precise focus of the studies will be decided once the initial results from the monitoring system are known.

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Annex 4: Operational Risk Assessment Framework (ORAF)

Project Stakeholder Risks Stakeholder Risk Rating Moderate Strong government ownership and commitment to the project and its objectives confirmed Risk Management: during the preparation/appraisal stages with central and provincial agencies. The project would have positive impact on stakeholders because of the beneficial infrastructure Stakeholder assessments and public consultation at all levels are an integral part of the planning and design process. Public improvement, economic, social and environmental impacts expected. consultation will be continued during implementation. Resp: Bank and Stage: Preparation and Due Date: 30-Jun-2018 Status: In Progress Implementing Implementation Provinces Risk Management: The project will pilot a Complaint Handling Mechanism (CHM) and adopt a Community Participation Manual. Implementing Agency (IA) Risks (including Fiduciary Risks) Capacity Rating High Project towns lack experience in implementing Bank-financed projects. Provincial and Risk Management: county PMOs will have to be sufficiently staffed to be able to efficiently carry out implementation. Lack of experience and knowledge regarding procurement and financial Provincial authorities require all PMOs to be staffed with qualified staff before the start of implementation. The Provincial PMOs management pose risks, as does inadequate financial capacity to release counterpart funds will provide on-the-job-training for staff in the local county level PMOs on Bank procedures and project management. on time. Resp: Implementing Stage: Implementation Due Date: 30-Jun-2018 Status: In Progress Provinces Risk Management: The Bank will provide early training of relevant officials and hands-on support through more frequent short missions to the province. Resp: Bank Stage: Implementation Due Date: 30-Jun-2018 Status: In Progress Risk Management: Project Financial Management and Procurement Manuals will be circulated to all project financial staff. Financial management training will be provided to ensure proper management of Bank loan proceeds. Annual project audit will be conducted as external monitoring mechanism to safeguard Bank loan proceeds. Resp: Implementing Stage: Implementation Due Date: 30-Jun-2018 Status: In Progress Provinces Risk Management:

Counterpart funds will be confirmed by the inclusion in local government's annual budget before and during project implementation.

Resp: Implementing Stage: Implementation Due Date: 30-Jun-2018 Status: In Progress Provinces Governance Rating Moderate Risk Management: The project towns were selected through previously agreed criteria, indicating a strong Governance structure to facilitate effective decision making has been carefully assessed during project preparation/appraisal, and an governance structure, leadership and commitment. The project will follow the typical Implementation Manual has been developed to ensure stakeholders participation and O&M. Project design includes the use of a project three-layer management structure (provincial, county and town). Participation Manual and the establishment of a Complaints Handling Mechanism.

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Project Risks Design Rating Substantial The current proposals from 28 towns in three provinces are very dynamic and multi- Risk Management: sectoral, reflecting different needs, priorities and development stages of towns. The technical design for small scale infrastructure is expected to be straightforward. The production value chain approach is critical to improving competitiveness, value added and long-term sustainability. Capacity Identifying, selecting, and preparing adequate investment sub-projects in a relatively short building for value chains approaches is included in project design. These principles will be maintained during implementation. period of time, fully compliant with Bank policies, will be a challenge. Resp: Bank and Stage: Preparation and Due Date: 30-Jun-2018 Status: In Progress Implementing Implementation Provinces Risk Management: The project follows an integrated approach focusing on technical solutions applicable to local conditions that are cost-effective and easy to operate and maintain. Investments will be considered around main dominant industries in each town in accordance to their skills, capacity and declared areas of specialization. Resp: Implementing Stage: Implementation Due Date: 30-Jun-2018 Status: In Progress Provinces Social and Environmental Rating Substantial Risk Management: Lack of experience and capacity of local PMOs to prepare, manage, and implement World Training will be conducted during implementation on safeguards. Implementation of the ECOPs/EMPs and RAPs will be monitored Bank safeguards policy instruments (ECOP/EIA/EMP/PMP & SIA/ RPF/EMDP). through internal and external monitors, as well as by Bank implementation support missions. Potential negative environmental impact related to the proposed investments are limited, site specific, mainly temporary and readily manageable. Social impact is mainly In addition, project design includes the use of a Participation Manual and the establishment of a Complaints Handling Mechanism. associated with some limited land acquisition and house demolition and participation of two minority groups (Yugu & Hui in Gansu). Resp: Implementing Stage: Implementation Due Date: 30-Jun-2018 Status: In Progress Provinces and Bank. Program and Donor Rating Low Risk Management: This project will be implemented as a free-standing project independent of other donors. The Task Team will keep a continuous dialogue with other key donors in the sector to keep an active coordination. However, the project could potentially benefit from coordination with other ongoing programs. If no cooperation takes place, there will be no negative impact. Resp: Bank Stage: Implementation Due Date: 30-Jun-2018 Status: In Progress

Delivery Monitoring and Sustainability Rating Substantial Description: Risk Management:

PMOs may be unable to measure results, manage contracts, and prepare and implement Each county has only one participating town to reduce the implementation burden. Delivery quality risk will be assessed carefully the project in an efficient and timely manner. Procurement will be done at the county- during the preparation process and updated as needed. level where there is experience in procuring small-scale subprojects. These types of Resp: Bank and Stage: Preparation Due Date: 30-Jun-2018 Status: In Progress investments are carried out regularly by the local government following local procedures. Implementing Provinces The M&E system may not be satisfactory. Risk Management: Project created infrastructure may not be maintained in a sustainable manner A robust M&E system has been established and will be maintained with common outcome and intermediate results indicators. Bank missions will follow-up on shortcomings of the M&E system and propose solutions to address them. Resp: Implementing Stage: Implementation Due Date: 30-Jun-2018 Status: In Progress Provinces and

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Bank. Risk Management: O&M arrangements for proposed infrastructure have been defined for each investment during implementation. Bank missions will highlight the importance of these and will monitor status as each infrastructure investment is completed. Resp: Implementing Stage: Implementation Due Date: 30-Jun-2018 Status: In Progress Provinces and Bank Overall Risk Risk Rating: Substantial

Overall project management capacity was considered relatively weak during preparation. Capacity gaps and the lack of experience with Bank’s fiduciary policies and procedures were taken into account by simplifying project design and by preparing clear manuals to guide implementation. Project implementation includes mechanisms to reduce the risks, including: comprehensive and detailed implementation manuals, substantial institutional strengthening, a strong M&E system, knowledge sharing mechanism to be implemented among the provinces and substantial supervision by the Bank.

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Annex 5: Implementation Support Plan

1. The implementation support plan has been developed based on the project risk profile, with focus on the main risks identified. These risks include: implementation agencies’ capacity in technical aspects, procurement, and financial management; design; safeguards management; and results monitoring. The key principle underpinning this plan is to make it flexible and efficient as much as possible. The summary plan for managing the main risks is provided below.

2. Technical Guidance and Results Monitoring. Bank technical specialists (Transport/Water Supply and Sanitation/Agricultural/Urban Planning/M&E) will review and provide advice to the government project team and its consultants on technical designs, implementation and results monitoring & evaluation, institutional development and related studies, as well as on implementation of the social review pilot activities. The Bank will also facilitate the organization of important exchange visits for project teams to learn from each other and pertinent small town development projects and practices and disseminate the lessons and achievements of the project.

3. Procurement. Procurement implementation support will include: (a) facilitation in targeted training, at different stages, to procurement staff in three Provincial PMOs and implementing agencies; (b) reviewing procurement documents and providing timely feedback on the results of prior reviews and post reviews to the project management offices concerned; (c) providing detailed guidance on Bank Procurement Guidelines to project procurement staff; and (d) monitoring procurement progress against the agreed Procurement Plan.

4. Financial Management (FM). Training will be provided by the Bank before the commencement of project implementation. The Bank will provide guidance on FM to project implementing agencies, help identify FM bottlenecks, and address them in a timely manner.

5. Environmental and Social Safeguards. The Bank will monitor implementation of the agreed EMP, ECOPs, PMPs, RAPs, and EMDP and provide guidance to implementing agencies to address emerging issues. Training will be provided is required on environmental monitoring and reporting, and on implementation and monitoring of the RAP and EMDP. In addition, guidance will be provided by the social development specialist to support the social review pilot and to strengthen participation and the Complaint Handling Mechanism (CHM) in the pilot towns.

6. Most of the Bank task team members are based in the China country office in Beijing to ensure rapid and effective response to the Borrower’s needs for implementation support. Formal supervision and field visits covering all aspects of project implementation will be carried out semi-annually, and will be supplemented by need-based visits by small groups. Estimated inputs from different specialists in different stages of project implementation are outlined below.

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Time Focus Resource Estimate First Procurement review, supervision and twelve Procurement specialist(s) 3 SWs training months FM and disbursement training and FM FM specialist 2 SWs supervision Resettlement, EMDP and Social Review Social development specialist 3 SWs Pilot

Environmental training and supervision Environmental specialist 3 SWs Transportation/WSS/Agricultural/Urban Technical review and support 12 SWs Planning specialists

Team leadership TTL 8 SWs 13-48 Technical support for project Transport/WSS/Agricultural/Urban months implementation Planning 11 SWs (Transport/WSS/Agricultural/Urban

Planning) 3.5 Environment and social safeguards and Environmental specialist(s) SWs pilot monitoring & reporting Social development specialist 6 SWs 4 SWs Financial management &disbursement FM specialist 3.5 and procurement review and support Procurement specialist SWs Monitoring & Evaluation/Institutional M&E specialist 4 SWs Task leadership TTL 6 SWs

Note: SW – Staff Week

7. The skill mix of implementation support team required is summarized below. ` Skills Needed Number of Staff Number of Trip Remark Week TTL/Rural Development 6 SWs annually Two trips Bank staff Transport/WSS/Agricultural/Urban 8 SWs annually Two trips each Bank staff and Team Planning Specialists consultants Procurement specialist 2-3 SWs annually One-Two trips Country office based Social development specialist 2-3 SWs annually One-Two trips Country office based Environment specialist 2-3 SWs annually One-Two trips Country office based Financial management specialist 1-2 SWs annually One-Two trips Country office based

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IBRD 38937 CHINA RUSSIAN FEDERATION

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NOVEMBER 2011 70° 80° 90° 100° 110° 120° 130° 50° RUSSIAN FEDERATION 50° 112° 113° 115° 116° 117° KAZAKHSTAN CHINA

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