Inner Mongolia Autonomous Region Environment Improvement Project (Phase II)

Project Administration Manual

Project Number: 40634-01 Loan No.: 2658 December 2016

People's Republic of China: Inner Mongolia Autonomous Region Environment Improvement Project (Phase II)

Contents ABBREVIATIONS 3 I. PROJECT DESCRIPTION 1 A. Rationale, Location and Beneficiaries 1 B. Impact and Outcome 2 C. Outputs 2 II. IMPLEMENTATION PLANS 3 III. PROJECT MANAGEMENT ARRANGEMENTS 6 A. Project Stakeholders – Management Roles and Responsibilities 6 B. Key Persons Involved in Implementation 7 IV. COSTS AND FINANCING 9 A. Detailed Cost Estimates by Expenditure Category 9 B. Detailed Cost Estimate by Financiers 11 C. Allocation and Withdrawal of Loan Proceeds 11 D. Contract and Disbursement S-curve 12 E. Fund Flow Diagram 12 V. FINANCIAL MANAGEMENT 13 A. Financial Management Assessment 13 B. Financial 13 C. Disbursement Arrangements 15 D. Accounting 15 E. Auditing 16 VI. PROCUREMENT AND CONSULTING SERVICES 16 A. Advance Contracting and Retroactive Financing 16 B. Procurement of Goods, Works and Consulting Services 16 C. Procurement Plan 17 D. Procurement Thresholds, Review, and 18-Month Procurement Plan 17 National Competitive Bidding 19 D. Consultant's Terms of Reference 21 VII. SAFEGUARDS 26 A. Land Acquisition and Resettlement 26 B. Environment 26 C. Social Impacts and Poverty Reduction 26 VIII. PERFORMANCE MONITORING, EVALUATION, REPORTING AND COMMUNICATION 27 A. Project Design and Monitoring Framework 27 B. Project Performance Monitoring 28 C. Project Review 34 D. Reporting 34 IX. ANTICORRUPTION POLICY 34 X. ACCOUNTABILITY MECHANISM 35 XI. RECORD OF PAM CHANGES 35

Project Administration Manual Purpose and Process

The project administration manual (PAM) describes the essential administrative and management requirements to implement the project on time, within budget, and in accordance with Government and Asian Development Bank (ADB) policies and procedures.

The Government of Inner Mongolia Autonomous Region (GIMAR), which is the Executing Agency (EA) and the six Project Implementing Agencies (PIAs) (Hohhot Futai Heating Supply Co. Ltd.; Chifeng Fulong Heating Supply Co. Ltd.; Baotou Municipal Heating Supply Company; Zhaqi Xingda Heating Supply Co. Ltd., Aershan Xinguang Heating Supply Co. Ltd; Tuquan Xinguang Heating Supply Co. Ltd.,; and Wengniute Xingyang Heating Co. Ltd.,) are wholly responsible for the implementation of ADB financed projects, as agreed jointly between the borrower and ADB, and in accordance with Government and ADB’s policies and procedures. ADB staff is responsible to support implementation including compliance by the EA and six IAs of their obligations and responsibilities for project implementation in accordance with ADB’s policies and procedures.

At Loan Negotiations on 28 June 2010, the borrower and ADB have agreed to the PAM and it ensures consistency with the Loan agreement. In the event of any discrepancy or contradiction between the PAM and the Loan Agreement, the provisions of the Loan Agreement shall prevail.

After ADB Board approval of the project's report and recommendations of the President (RRP), changes in implementation arrangements are subject to agreement and approval pursuant to relevant Government and ADB administrative procedures (including the Project Administration Instructions) and upon such approval they will be subsequently incorporated in the PAM.

Abbreviations

ADB = Asian Development Bank CO2 = carbon dioxide DHS = district heating supply DRC = Development and Reform Commission EA = executing agency GDP = gross domestic product GIMAR = government of Inner Mongolia Autonomous Region HES = heat-exchange station IA = implementing agency IMAR = Inner Mongolia Autonomous Region IMAR DRC = IMAR Development and Reform Commission NOx = Nitrogen oxide PAM = project administration memorandum PMO = project management office PRC = People's Republic of China SIEE = summary initial environmental examination SCADA = supervisory control and data acquisition SO2 = sulfur dioxide TSP = total suspended particulates

I. PROJECT DESCRIPTION

A. Rationale, Location and Beneficiaries

1. The PRC has experienced a rapid increase in energy consumption in tandem with sustained economic growth, especially since 2000. By the end of 2010, the primary energy demand in the PRC had increased to more than 3.00 billion tons of standard coal equivalent (btce), compared to 1.39 btce in 2000. The PRC relies heavily on carbon- intensive coal, which provided about 70% of its primary energy in 2010. 1 Electricity generation and heat supplies account for about half of the total coal consumption in the PRC. The Government of the PRC has recognized the challenges posed by the rapid rise in energy consumption and associated emissions. It has committed to achieve 40%– 45% carbon intensity reduction by 2020 compared with 2005, primarily by targeting energy intensity reductions.2 During the Eleventh Five-Year Plan, 2006–2010 the energy intensity was reduced by 19.06% compared with a target of 20.00%. During the Twelfth Five-Year Plan, 2011–2015 the PRC has set a further energy intensity reduction target of 16%, an 8% reduction of sulfur dioxide (SO2), and a 10% reduction of nitrogen oxide (NOx).

2. Inner Mongolia Autonomous Region (IMAR) heavily depends on coal, which accounts for 90% of primary energy supply and for 95% of district heating supply. Due to rapid economic growth and aging inefficient energy infrastructure, IMAR is one of the top five energy intensive economies in PRC with 1.92 tons of standard coal equivalent (tsce) per CNY 10,000 of gross regional domestic product (GRDP), while the national average of 1.03 tons. IMAR is also one of the top five air pollutant emitters in PRC with 1.39 million tons of sulfur dioxide (SO2) and 1.31 million tons of nitrogen oxide (NOx) emissions, which account 6.1% of SO2 emission and 5.7% of NOx emission in PRC. During the twelfth five-year-plan (2011-2015), GIMAR has set the target of reducing energy intensity by 15%, SO2 emission by 3.8% (53,000 tons), and NOx emission by 5.8% (76,000 tons) by 2015 compared to 2010 3 . Reliance on coal has a high environmental cost for urban areas in IMAR—out of 15 cities being monitored for air quality, only 6 cities reach class II air quality standards.

3. Due to its remoteness and low population density, IMAR includes some of the poorest areas in the PRC. The population of IMAR was 24.72 million in 2011, which is 1.84% of the national total, though IMAR occupies 12.3% of the land area. Demand for district heating is growing rapidly due to strong economic growth, higher incomes, and the privatization of housing that has increased sharply in recent years. Single-storied residences that are expensive to supply with district heating are rapidly being replaced with high-rise residential buildings that are more suitable for district heating. Relocation policies for rural herders, intended to reduce environmental pressure on fragile pastures, are causing urbanization and increased demand for district heating. The urban share of IMAR’s population increased from 42.2% in 2000 to 56.6% in 2011.4 As a consequence, the district heating area has expanded rapidly, increasing by more than 80% during 2007–2011. This rapid increase has resulted in a demand–supply imbalance.

1 China Statistics Press. 2010. China Energy Statistical Year Book. Beijing. 2 Carbon intensity is the amount of greenhouse gas emissions per unit of gross domestic product (GDP). Energy intensity is the amount of energy consumed per unit of GDP. In the PRC, the energy intensity is generally measured in tons of coal equivalent per CNY10,000 of GDP. 3 State Council. 2011. Circular of the State Council on Issuing the Comprehensive Work Plan for Energy Conservation and Emission Reduction during the Twelfth Five-Year Plan Period. Decree No. 26 4 National Bureau of Statistics of China. 2009. Statistical Communiqué of the Inner Mongolia Autonomous Region on the 2008 National Economic and Social Development. Beijing.

4. The existing district heating infrastructure consists largely of inefficient neighborhood coal-fired boilers with low capacity and efficiency and an aging and poorly insulated pipe network that suffers high distribution losses. The existing coal-fired boilers are highly polluting and lack emission-control devices. In many urban areas, district heating systems were installed in the 1970s and have exceeded their design lives, resulting in unreliable service. Relatively poor economic conditions mean that remote areas have inadequate heating supply, which disproportionately affects the poor.

5. While coal will continue to be a fuel of choice for meeting the heating requirements in IMAR, there are significant opportunities to reduce the use of coal. These include (i) maximizing heat recovery from existing combined heat and power plants, (ii) improving the energy efficiency of district heating systems, (iii) recovering waste heat from industrial processes, and (iv) developing alternative sources. Significant environmental benefits will come from improving the energy efficiency of heating systems, both on the supply side and the demand side. Supply-side energy-efficiency improvements are available from (i) replacing existing small, inefficient boilers with larger, more efficient units; (ii) replacing poorly insulated transmission and distribution pipelines; (iii) optimizing heat-supply management through supervisory control and data acquisition (SCADA) systems; and (iv) rehabilitating heat-exchange substations. Demand-side energy-efficiency improvements are attainable through (i) installing heat valves and meters in apartments and billing by usage rather than by flat area rates, and (ii) public education regarding energy conservation.

6. The project will upgrade infrastructure for district heating that will make it more energy efficient and allow an increase in heat supply for expanding areas. Assistance will be in constructing more efficient boilers, as well as transmission and distribution pipelines.

B. Impact and Outcome

7. The impact of the Project will be improved energy efficiency and environment in IMAR. The outcome of the Project will be improved air quality in six (6) urban areas in IMAR.

C. Outputs

8. Project Output. Output in the revised project scope will rehabilitate or construct infrastructure for 36.61 million m2 of district heating area.5 It comprises seven subprojects and will involve the installation of 494 megawatt (MW) efficient coal-fired boilers, 597 heat exchange substations, 547.03 kilometers (km) heating pipelines, and of 11 supervisory control and data acquisition (SCADA) systems, allowing closure of 453 small coal fired boilers, as summarized in Table 1.

9. The proposed additional DHS expansion in Zhalaite in IMAR will upgrade and expand the district heating infrastructure covering 2.72 million m2. The net reduction in annual coal consumption by replacing 6 old and small inefficient heating boilers with energy efficient heating boilers which improve combustion efficiency from 45-55% to 90- 91%, thereby annually avoiding 68,800 tons of coal consumption, 106,900 ton of carbon dioxide (CO2), 1,680 tons of sulfur dioxide (SO2), 468tons of nitrogen oxide (NOx), and 3,646 tons of total suspended particulate (TSP). The Hohhot DHS subproject originally to finance construction of heating source of 464 MW coal-fired boilers, 94 heating exchange stations, and 344.1 km heating pipelines. Due to air pollution control action plan implemented in Hohhot, no new coal-fired boilers could be constructed in the

5 For comparison, in 2011 installed district heating area in IMAR was 330.6 million m2.

Hohhot main city. The 464 MW coal-fired boilers in the original subproject scope could not be implemented. Domestic funds are being utilized to construct heating source of gas-fired boilers. The subproject scope is proposed to be revised to include 94 heating exchange stations, 344.1 km heating pipelines, and installation of desulfurization and dust removal facilities for existing coal-fired heating boilers in Hohhot.

Table 1: Outputs of the Project New Closure Coverage Subproject Capacity HESs SCADA Pipeline of Small (million Population Remarks (MW) (no.) System (km) Boiler m2) (,000) Hohhot DHS* - 94 5 344.10 144 5.89 240 Revised Chifeng DHS - 194 1 91.35 37 13.04 560 Implementation Baotou DHS - 239 1 50.41 164 9.76 450 Implementation Zhalaite DHS 116 20 1 18.50 27 2.00 110 Implementation Aershan DHS 42 13 1 7.00 39 0.61 15 Implementation Tuquan DHS 220 15 1 35.67 36 2.59 40 Implementation Zhalaite DHS 116 22 1 - 6 2.72 54 Proposed Expansion Wengniute DHS 188 15 1 7.38 - 3.00 50 Cancelled Total (Original) 1,030 590 11 554.41 447 36.89 1,465 Whole Project Total (Revised) 494 597 11 547.03 453 36.61 1,469 Whole Project DHS = district heating supply, HES = heat-exchange station, km = kilometer, MW = megawatt, no. = number, SCADA = supervisory control and data acquisition. *Hohhot DHS originally included heating sources of 464 MW coal-fired boilers; in the revised scope heating sources were changed to gas-fired boilers funded by local funds. Sources: Subproject feasibility studies.

II. IMPLEMENTATION PLANS

10. The project will be implemented over 7 years from March 2010 to December 2017.

Table 2: Project Implementation Plan Subproject 2009 2010 2011 2012 2013 2014 2015 2016 2017 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1. Hohhot DHS Design and prepare bidding documents Bid, evaluation and contract award Boiler house and HES civil work Equipment and installation for

Boiler house, HES and SCADA Commissioning and operation 2. Baotou DHS Design and prepare bidding documents Bid, evaluation and contract award HES civil work Equipment and installation for

HES and SCADA Commissioning and operation 3. Chifeng DHS Design and prepare bidding documents Bid, evaluation and contract award HES civil work Equipment and installation for

HES and SCADA Commissioning and operation 4. Zhalaite DHS Design and prepare bidding documents Bid, evaluation and contract award Boiler house and HES civil

work Equipment’s installation and

Commissioning Commissioning and operation 5. Tuquan DHS Design and prepare bidding documents Bid, evaluation and contract award Boiler house and HES civil work Equipment and installation for

Boiler house, HES and SCADA Commissioning and operation 6. Aershan DHS Design and prepare bidding documents Bid, evaluation and contract award Boiler house and HES civil work Equipment and installation for

Boiler house, HES and SCADA Commissioning and operation 7. Zhalaite DHS Expansion Design and prepare bidding documents Bid, evaluation and contract award Boiler house and HES civil work Equipment and installation for

Boiler house, HES and SCADA Commissioning and operation DHS = district heating supply, HES = heat exchange station, SCADA = supervisory control and data acquisition. Sources: Project implementing agencies and Asian Development Bank estimates.

III. PROJECT MANAGEMENT ARRANGEMENTS

A. Project Stakeholders – Management Roles and Responsibilities

Table 4: Roles and Responsibilities of Key Project Stakeholders Executing Agency Government of Inner Mongolia Autonomous  Will provide overall guidance during Region (GIMAR) preparation and implementation.  Will ensure counterpart contributions are provided for project implementation on time.  The Project leading group is under a vice- chairman of GIMAR and includes representatives from the IMAR Development and Reform Commission (IMAR DRC), IMAR Finance Bureau, IMAR Construction Bureau, and IMAR Environment Protection Bureau.  The Project Management Office (PMO) has been established under the IMAR DRC.  Four separate project coordination offices have been established under the municipal governments of Hohhot, Chifeng, Baotou, and Xing-an (prefecture government) to manage subprojects in their respective jurisdictions.  Six Project Implementing Agencies (PIAs) will implement the seven subprojects. A project implementing unit has been established under each IA.

Implementing Agency  Will implement Hohhot District Heating Hohhot Futai Heating Supply Co., Ltd. Subproject Implementing Agency  Will implement Baotou District Heating Baotou Municipal Heating Supply Company Subproject Implementing Agency  Will implement Chifeng District Heating Chifeng Fulong Heating Supply Co., Ltd. Subproject Implementing Agency  Will implement Zhalaite District Heating Wengiute Xingyang Heating Supply Co., Ltd. Subproject Implementing Agency  Will implement Tuquan District Heating Zhalaite Xingda Heating Supply Co., Ltd. Subproject Implementing Agency  Will implement Aershan District Heating Tuquan Xinguang Heating Supply Co.,Ltd. Subproject Implementing Agency  Will implement Zhalaite District Heating Zhalaite Xingda Heating Supply Co., Ltd. Subproject expansion

 Overall project administration ADB  Orientations to executing agency (EA) and implementing agencies including the PMO  Review of draft bidding documents and approval of bid evaluation report Disbursement of ADB loan proceeds

B. Key Persons Involved in Implementation

Table 5: Key Persons of ADB and EA Executing Agency Government of Inner Mongolia Mr. Li Xueyan Autonomous Region (GIMAR) Executive Director Project Management Office Inner Mongolia Development and Reform Commission Fax: 0471-6604590 Email: [email protected] Office Address: Chilechuan Street, Hohhot, Inner Mongolia, China, 010098 ADB Division Director Mr. Ben Bingham Country Director Asian Development Bank PRC Resident Mission Tel.: +86 10 8573 0909 ext. 0834 Fax: +86 10 8573 0808 17th Floor, China World Tower, No.1 Jian Guo Men Wai Avenue Chaoyang District, Beijing 100004, China Mission Leader Mr. Xinjian Liu Senior Project Officer (Energy) Asian Development Bank Resident Mission in the PRC Tel.: +86 10 8573 0909, 8573 0831 (Direct) Fax: +86 10 8573 0808 E-mail: [email protected] 17th Floor, China World Tower, No.1 Jian Guo Men Wai Avenue Chaoyang District, Beijing 100004, China

Figure 1. Project Organization Structure Executing Agency (Government of Inner Mongolia Autonomous Region)

Project Leading Group (Vice Governor, IMR DRC, IMR FB, and IMR EPB)

Project Management Office (PMO)

Hohhot Municipal Chifeng Municipal Baotou Municipal Xing-an Prefecture Government/Project Government/Project Government/Project Government/Project Coordination Office Coordination Office Coordination Office Coordination Office

FUTAI FULONG BAOTOU XINGDA Tuquan Aershan Figure 1 Project Organization Structure

Name Project Implementing Agency (PIA) Subproject FUTAI Hohhot Futai Heating Supply Co., Ltd. Hohhot District Heating Subproject FULONG Baotou Municipal Heating Supply Company Baotou District Heating Subproject BAOTOU Chifeng Fulong Heating Supply Co., Ltd. Chifeng District Heating Subproject XINGDA Zhalaite Xingda Heating Supply Co., Ltd. Zhalaite District Heating Subproject XINGDA Zhalaite Xingda Heating Supply Co., Ltd. Zhalaite District Heating Subproject Expansion Tuquan XINGUANG Tuquan Xinguang Heating and Power Supply Co., Ltd. Tuquan District Heating Subproject Aershan XINGUANG Aershan Xinguang Pipeline Gas Co., Ltd. Aershan District Heating Subproject Source: Inner Mongolia Autonomous Region Project Management Office.

IV. COSTS AND FINANCING

11. The total cost of proposed Zhalaite DHS Expansion is $44.89 million including such contingency and financial charges, of which $7.5 million is financed by ADB. Inclusion of Zhalaite DHS Expansion and revision of Hohhot DHS will increase the total updated project cost to $415.35 million. The total ADB financing will however remain unchanged at $150 million. The ADB loan will finance 36.1% of the total project cost. The remaining $265.35million (63.9%) will be financed by the implementing agency counterpart fund (35.0%) and domestic bank loans (28.9%). Implementing agency equity includes internally generated funds and parent company or local government contributions. The ADB loan will be used for civil works, equipment and supplies, consulting services, interest, and commitment charges during construction on the ADB loan, and including taxes and duties on the ADB financed portion of the project costs. The Government will finance land acquisition and resettlement costs and contingencies.

A. Detailed Cost Estimates by Expenditure Category

Table 6: Detailed Cost Estimates by Expenditure Category ($ million) Estimated Cost (July ADB Total Expenditure Category 2016) Loan Cost Local currency A. Hohhot District Heating Supply 1. Base cost a. Civil works 0 34.83 34.83 b. Equipment 48.63 12.91 61.54 c. Implementation Cost 0 9.86 9.86 d. Project management 0.58 0 0.58 2. Contingencies a. Physical 0 6.2 6.20 b. Price 0 7.95 7.95 3. a. Interest during construction 0.66 1.89 2.55 b. Commitment charges 0.12 0 0.12 Subtotal (A) 50.00 73.64 123.64 B. Chifeng District Heating Supply Base cost a. Civil works 0 29.77 29.77 b. Equipment 37.35 6.69 44.04 c. Implementation Cost 0 5.69 5.69 d. Project management 0.45 1.77 2.22 Contingencies a. Physical 0 4.11 4.11 b. Price 0 5.37 5.37 a. Interest during construction 1.11 2.84 3.95 b. Commitment charges 0.09 0.00 0.09 Subtotal (B) 39.00 56.24 95.24 C. Baotou District Heating Supply Base cost a. Civil works 0 29.42 29.42 b. Equipment 16.85 25.80 42.65 c. Implementation Cost 0 1.61 1.61 d. Project management 0.21 0.44 0.65 Contingencies a. Physical 0 2.24 2.24 b. Price 0 0.63 0.63 a. Interest during construction 0.89 0.25 1.15 b. Commitment charges 0.05 0.00 0.05 Subtotal (C) 18.00 60.39 78.39 D. Zhalaite District Heating Supply

Estimated Cost (July ADB Total Expenditure Category 2016) Loan Cost Local currency Base cost a. Civil works 3.10 0.78 3.88 b. Equipment 7.60 4.28 11.88 c. Implementation Cost 0 2.72 2.72 d. Project management 0.13 0 0.13 Contingencies a. Physical 0 1.49 1.49 b. Price 0 0.11 0.11 a. Interest during construction 0.14 0.00 0.14 b. Commitment charges 0.03 0.00 0.03 Subtotal (D) 11.00 9.38 20.38 E. Tuquan District Heating Supply Base cost a. Civil works 0 10.32 10.32 b. Equipment 16.34 7.18 23.52 c. Implementation Cost 0 3.86 3.86 d. Project management 0.20 0 0.20 Contingencies a. Physical 0 3.05 3.05 b. Price 0 1.11 1.11 a. Interest during construction 0.40 0.00 0.40 b. Commitment charges 0.06 0.00 0.06 Subtotal (E) 17.00 25.52 42.52 F. Aershan District Heating Supply Base cost a. Civil works 1.60 0.68 2.28 b. Equipment 5.70 0.26 5.96 c. Implementation Cost 0 0 0 d. Project management 0.09 0 0.09 Contingencies a. Physical 0 0.67 0.67 b. Price 0 1.18 1.18 a. Interest during construction 0.09 0 0.09 b. Commitment charges 0.02 0 0.02 Subtotal (F) 7.50 2.79 10.29 G. Zhalaite District Heating Supply Expansion Base cost a. Civil works 0 20.01 20.01 b. Equipment 7.30 8.37 15.67 c. Implementation Cost 0 5.26 5.26 d. Project management 0.09 0 0.09 Contingencies a. Physical 0 2.63 2.63 b. Price 0 0.28 0.28 a. Interest during construction 0.09 0.85 0.94 b. Commitment charges 0.02 0 0.02 Subtotal (G) 7.50 37.39 44.89 Total Project Cost Base cost a. Civil works 4.70 125.81 130.51 b. Equipment 139.77 65.48 205.25 c. Implementation Cost 0 29.00 29.00 d. Project management 1.75 2.21 3.96 Contingencies a. Physical 0 20.39 20.39 b. Price 0 16.63 16.63 a. Interest during construction 3.39 5.83 9.23 b. Commitment charges 0.39 0 0.39 Total 150.00 265.35 415.35

B. Detailed Cost Estimate by Financiers

Table 1 Cost Estimate by Financiers ($ million) Implementing ADB Loan Total agency Item Amount % Amount % Amount % A. Investment Cost 1. Civil works 4.70 3.13 125.57 47.41 130.51 31.42 2. Equipment 139.77 93.18 65.48 24.68 205.25 49.42 3. Implementation costs 0 0 29.00 10.93 29.00 6.98 Subtotal (A) 144.47 96.31 220.29 83.02 364.76 87.82 B. Project Management 1.75 1.17 2.21 0.83 3.96 0.95 C. Contingencies 0 0 37.02 13.95 37.02 8.91 D. Interest during Construction 3.78 2.52 5.83 2.20 9.62 2.31 and Commitment charge Total 150 100 265.35 100 415.35 100 ADB = Asian Development Bank. Sources: Project implementing agencies and Consultant estimates.

C. Allocation and Withdrawal of Loan Proceeds

Table 8: Allocation and Withdrawal of Loan Proceeds ADB Financing Basis Total Amount Allocated for ADB Percentage of ADB Financing Number Item Financing from the [$] Loan Account Category 1 Works 4,700,000 100 percent of total expenditure* 2 Equipment 139,770,000 100 percent of total expenditure* 3 Project Management 1,750,000 100 percent of total expenditure* 4 Interest and Commitment 3,780,000 Charge during Construction 100 percent of total expenditure Total 150,000,000 *Inclusive of taxes and duties imposed within the territory of the Borrower

D. Contract and Disbursement S-curve

2012 1Q 2012 2Q 2012 3Q 2012 4Q 2013 1Q 2013 2Q 2013 3Q 2013 4Q 2014 1Q 2014 2Q 2014 3Q 2014 4Q 2015 1Q 2015 2Q Disbursement 0.00 0.30 8.47 0.00 6.07 6.99 0.14 4.05 3.91 8.29 0.15 11.63 0.16 6.58 Contract Award 0.00 12.13 0.00 18.11 0.00 16.92 7.74 13.18 0.00 7.17 0.00 0.79 0.00 1.50 Cumulative Disbursement 0.00 0.30 8.77 8.77 14.84 21.83 21.97 26.02 29.93 38.22 38.37 50.00 50.16 56.75 Cumulative Contract Award 0.00 12.13 12.13 30.24 30.24 47.16 54.90 68.08 68.08 75.25 75.25 76.03 76.03 77.53

2015 3Q 2015 4Q 2016 1Q 2016 2Q 2016 3Q 2016 4Q 2017 1Q 2017 2Q 2017 3Q 2017 4Q 2018 1Q 2018 2Q Total Disbursement 0.19 12.74 15.02 5.76 4.14 6.68 5.00 5.00 5.00 14.00 15.30 4.42 150.00 Contract Award 7.99 42.97 0.00 0.00 10.74 0.00 0.00 10.78 0.00 0.00 0.00 0.00 150.00 Cumulative Disbursement 56.94 69.69 84.70 90.46 94.60 101.28 106.28 111.28 116.28 130.28 145.58 150.00 150.00 Cumulative Contract Award 85.51 128.48 128.48 128.48 139.22 139.22 139.22 150.00 150.00 150.00 150.00 150.00 150.00

Figure 2: Contract Award S-Curve

Figure 3: Disbursement S-curve

E. Fund Flow Diagram

12. The borrower is the government, which will make the proceeds of the ADB loan available to GIMAR through a subsidiary loan agreement and to the municipality and county governments and implementing agencies through onlending agreements. The implementing agencies will assume the risks for foreign exchange and interest variation. The fund flow diagram is presented in Figure 4.

Figure 4: Fund Flow Diagram

ADB

Withdrawal application, and supporting documents a

reimbursement Executing Agency

imprest fund imprest (IMAR Finance Bureau) paymentdirect

Imprest Account

supporting documents

Implementing Agencies

supporting documents

Contractors/suppliers

= cash fund flow, = documentation flow. ADB = Asian Development Bank, IMAR = Inner Mongolia Autonomous Region. a Supporting documents required for direct payment procedure include contract and invoice. For imprest fund procedure, statement of expenditure, corresponding bank statement, and reconciliation statement. For reimbursement procedure, summary sheet, contract, invoice, receipt of payment, or statement of expenditure. Source: IMAR provincial government.

V. FINANCIAL MANAGEMENT

A. Financial Management Assessment

13. Financial management assessment of IAs indicates that systems generally are in place for financial reporting, and that accounting is developed and adequate for the purpose of loan implementation. As this is the first externally funded project for most of the IAs, extensive training will be required covering ADB procedures and requirements on procurement, disbursement, financial reporting, and various aspects of project monitoring. Financial projections were prepared to assess the financial performance of the IAs. These are presented below. The projections estimate the tariffs required for an appropriate level of financial performance. Periodic tariff reviews will be required to ensure positive financial performance.

B. Financial Performance and Projections

14. Hohhot Futai Heating Supply Co., Ltd (Futai). Futai is a state-owned enterprise that has been supplying heat to Hohhot city since 1983 and was corporatized in 1997. The company is also engaged in supplying heat to some other banners6 in the Inner Mongolia Autonomous Region. It employs about 1,200 people and has a well-established company structure. In 2008, Futai implemented ISO9001 quality management system developed by the International Organization for Standardization in an effort to improve its services to meet customer satisfaction. This is expected to help improve its net income through more efficient use of resources. The Second Inner Mongolia Autonomous Region Environment Improvement Project will enable an increase in the customer base that will be reflected in increased revenue.

15. Chifeng Fulong Heating Supply Co., Ltd. (Fulong). Fulong was formed in 2004 as part of Chifeng Fulong Thermal Power, which produces and distributes heat and electric power and develops infrastructure and real estate. Fulong supplies 82% of the heating needs of Chifeng city, and the project is part of its plan to improve the district heating system in Chifeng. It currently employs about 560 people and has a defined organizational structure for its operations. Until 2008, the Chifeng government had waived connection fees for new consumers. Lifting of this waiver will improve Fulong’s revenue stream, which, together with prudent control of operating costs, should enable Fulong to turn around its net loss position in 2010.

16. Baotou Municipal Heating Supply Company (Baotou). Baotou is a state-owned enterprise established in 1988 and distributes heat to a major portion of Baotou city, covering a heating area of 11.6 million square meters (m2). It has six branch companies for different areas of the city, and operates a heat source plant. Baotou currently employs 1,200 people and has set up a special office to implement the project that is staffed by personnel with experience in other multilateral loan projects. Analysis of financial statements from between 2005 and 2008 shows that revenue growth has been modest whereas cost of producing heat has increased faster—particularly in 2007, which saw marked increase in coal prices. Net losses during these years are also attributed to a receivables collection rate that is less than 90%, which is lower than that of similar businesses. Baotou’s management is taking steps to improve the collection rate to 95%. This, together with appropriate tariff increases and the addition of 9.76 million m2 of heating area it can supply after project completion, should improve its financial performance in the future.

17. Zhalaite Xingda Heating Supply Co., Ltd. (Xingda). Xingda is a privately owned company and the only distributor of heat in Yindeer town of Zhalaite Banner. It was formally incorporated in 2006 by a sole proprietor who had been supplying heat to the area. Xingda services an area of 500,000 m2 and has a high collection rate on its receivables. It has maintained a reasonably healthy current ratio, indicating good liquidity, and operating expenses appear to be effectively controlled. As the town and economy expand, additional area requiring heating in the new economic zone of Yindeer should contribute favorably to the company’s operations.

18. Tuquan Xinguang Heating Supply Co., Ltd (Tuquan). Tuquan Xinguang registered in September 2004 as a limited liability company under the laws of the PRC with the following shareholders: 66.95% by Inner Mongolia Xintai Construction and Installation Group Co., Ltd., (IMXTC); 23.32% by the Tuquan Country Goverment; 9.73% by ten people. Its authorized capital is CNY 59.22 million. It is the only distributor of heat in Tuquan country, covering a heating area of 1.68 million square meters (m2). To carry out this project, the company will

6 A banner is an administrative unit essentially at county level.

increase about 105 people. The Tuquan Xinguang subproject under the ADB project will serve 2.59 million m2 of new building area. The IMXTC registered in March 2006 as a privately-owned enterprise with registered capital of CNY 60 million. Its business scope is housing construction and municipal public works. IMXTC has 15 business units including 8 independent subsidiary companies and employs 2000 staff, and 278 of which are technical and management personnel. Total assets of the company increased from CNY 92 million in 2007 to CNY 183 million in 2011, total equity increased from CNY 48 million in 2007 to CNY 120 million in 2011, revenue from CNY 63 million in 2007 to CNY 470 million in 2010.

19. Aershan Xinguang Heating Supply Co., Ltd (Aershan). Aershan Xinguang was registered as a limited liability company under PRC law in June 2012 with authorized share capital of CNY10 million held by IMXTC (70%) and Aershan Xueyuan Heating Co., Ltd (AXYHC)(30%). AXHC is a state-owned enterprise (SOE). As IA, Aershan Xinguang will be responsible for project management and implementation. Aershan Xinguang has served a heating area of 0.35 million m2. It currently employs 66 people and has a well-defined organizational structure for its operations. The Aershan Xinguang subproject under the ADB project will serve 0.61 million m2 of new building area. Being a newly established entity, senior staffs are mobilized from IMXTC to ensure appropriate project management.

C. Disbursement Arrangements

20. The ADB loan will be disbursed in accordance with ADB's Loan Disbursement Handbook (2007, as amended from time to time). To expedite project implementation through the timely release of loan proceeds, GIMAR will establish an imprest account upon loan effectiveness at a commercial bank acceptable to ADB.7 The imprest account will be established, managed, replenished, and liquidated by GIMAR in accordance with ADB's Loan Disbursement Handbook. The ceiling of the imprest account will be set at either the estimate expenditures for the next 6 months to be funded from the imprest account or 10% of the loan amount, whichever is lower. If GIMAR initially funds eligible expenditures from its own resources, the reimbursement procedure will be used. To expedite funds flow and simplify documentation procedures, the statement of expenditures procedure will be used for the liquidation and replenishment of imprest accounts and the reimbursement of eligible expenditures not exceeding $200,000 per individual payment.

21. Before the submission of the first withdrawal application, the borrower should submit to ADB sufficient evidence of the authority of the person(s) who will sign the withdrawal applications on behalf of the borrower, together with the authenticated specimen signatures of each authorized person. The minimum value per withdrawal application is US$100,000, unless otherwise approved by ADB. The borrower is to consolidate claims to meet this limit for reimbursement and imprest account claims. Withdrawal applications and supporting documents will demonstrate, among other things that the goods, and/or services were produced in or from ADB members, and are eligible for ADB financing.

D. Accounting

22. The EA and each IA will maintain separate project accounts and records that identify goods, work, and services from loan proceeds, financing resources received, expenditures incurred, and use of local funds. These accounts will be established and maintained in

7 Bank charges will be financed under the ADB loan.

16 accordance with sound accounting principles and internationally accepted accounting standards.

E. Auditing

23. The EA and each IA will cause the detailed consolidated project accounts to be audited annually by an external auditor and in accordance with auditing standards acceptable to ADB. Auditing costs will be funded by the IAs. The PMO will submit to ADB in English the auditor's reports on audited project accounts and audited financial statement of each IA within 6 months after the end of the fiscal year. The annual audit report on audited project accounts will include a separate auditor's opinion on the operation of the imprest account and the use of statements of expenditure procedure. The submitted audited project accounts and agency financial statements should be of acceptable quality and be prepared in accordance with internationally accepted accounting standards. The IAs will engage auditing firms with experience and qualifications acceptable to ADB to carry out the annual audits. In addition to the above reports, ADB reserves the right to conduct random financial and performance audits during the implementation of the Project to ensure its economy (keeping the cost low), efficiency (getting best outputs from available resources), and effectiveness (achieving the stipulated objectives).

VI. PROCUREMENT AND CONSULTING SERVICES

A. Advance Contracting and Retroactive Financing

24. To expedite project implementation, GIMAR has requested advance contracting and retroactive financing. This will include the recruitment of consulting services and the procurement of goods and civil works. The issuance of invitations to bid or prequalify under the advance contracting will be subject to ADB approval. All advance contracting will be undertaken in conformity with ADB's Procurement Guidelines and Guidelines on the Use of Consultants (both 2010, as amended from time to time). The amount to be retroactively financed will not exceed $30 million (equivalent to 20% of the ADB loan) and may finance costs incurred prior to loan effectiveness but not earlier than 12 months before the signing date of the loan agreement. The Government and GIMAR have been advised that approval of advance contracting and retroactive financing doest not commit ADB to finance the ensuing project.

B. Procurement of Goods, Works and Consulting Services

25. All procurement of goods and works shall be carried out in accordance with ADB's Procurement Guidelines (2010, as amended from time to time). ADB-financed civil works contracts costing $10 million or more and goods contracts costing $1 million or more will be procured through international competitive bidding procedures using ADB's standard bidding documents. Goods contract packages costing more than $100,000 and less than $1 million will be procured using national competitive bidding, as will civil works contracts costing more than $100,000 and less than $10 million. Civil works and goods contract packages costing less than $100,000 will be procured using shopping procedures. The relevant sections of ADB's Anticorruption Policy (1998, as amended to date) will be included in all documents and contracts.

26. International and national consultants financed under the loan will be recruited in accordance with ADB's Guidelines on the Use of Consultants using the quality- and cost-based selection method with simplified technical proposal (quality—cost ratio of 80:20). Consulting services will be utilized for supervising project implementation and assistance to GIMAR and the

17 implementing agencies with (i) project design and engineering, (ii) procurement, (iii) construction supervision related to equipment and materials procured under ADB financing, (iv) project management, (v) impact monitoring and assistance in preparing progress reports, and (vi) the dissemination of lessons from innovative subprojects. Approximately 15 person-months of international consulting services, and 40 person-months of national consulting services will be required to supervise project implementation. Consultants will be engaged for the duration of project implementation from December 2010 to June 2014. The terms of reference for all consultants to be recruited are detailed in Section D. Additional national consultants will be engaged on an individual basis to assist PMO administration to a total value of $750,000. Terms of reference for PMO administration consultants will be defined at a later stage of project implementation.

C. Procurement Plan Project Information Country People’s Republic of China Name of Borrower People’s Republic of China Project Name Inner Mongolia Autonomous Region Environment Improvement Project (Phase II) Loan Reference Loan 2658-PRC Date of Effectiveness 20 February 2011 Amount $150 million Executing Agencies Government of Inner Mongolia Autonomous Region Approval Date of Original Procurement Plan 15 October 2009 Approval of Most Recent Procurement Plan 16 November 2016 Period Covered by this Plan July 2010 – December 2017

D. Procurement Thresholds, Review, and 18-Month Procurement Plan

1. Project Procurement Thresholds

28. Except as the ADB may otherwise agree, the following process thresholds shall apply to procurement of goods and services:

Procurement of Goods and Services Method Threshold Prior or Post ICB for Works Equal to or more than $10 million Prior ICB for Goods Equal to or more than $1 million Prior NCB for Works Equal to or more than $100,000 and less than $10 million Posta NCB for Goods Equal to or more than $100,000 and less than $1 million Posta Shopping Works Less than $100,000 Prior Shopping Goods Less than $100,000 Prior ICB = international competitive bidding, NCB = national competitive bidding. a The first NCB works and goods packages are required to have prior review by the Asian Development Bank.

2. Goods and Works Contracts Estimates to Cost More Than $1 Million

29. The following table lists goods and works contracts for which procurement activities are either ongoing or expected to commence within the next 18 months. Value Advertising Package No. Package content Method ($ million) Date Hohhot DHS HHHT-EP-01 8.84 ICB 2015.3.9 Procurement of Pre-Insulated Pipe and

Value Advertising Package No. Package content Method ($ million) Date Fittings in Area K

Heat Exchange Unit, Valves, Electrical HHHT-EP-02 4.62 ICB 2012.10.8 Equipment and Control System in area K

2012.10.8 HHHT-EP-03 Boilers and Accessories in area F and G 6.87 ICB (To be cancelled)

Pre-Insulated Pipe and Fittings in area F and HHHT-EP-04 12.03 ICB 2013.10.28 G

Heat Exchange Unit, Valves, Electrical HHHT-EP-05 Equipment and Control System in area F and 3.88 ICB 2012.10.8 G

HHHT-EP-06 Cement and Steel Products 2.33 ICB 2013.2.17

HHHT-EP-07 Valve Equipment 5.95 ICB 2016.7.26

HHHT-EP-08 Heat Exchange Unit and Control Equipment 7.02 ICB 2016.7.26

Prefabricated Insulation Pipe, Pipe Fitting and HHHT-EP-09 5.59 ICB 2016.7.26 Steel Equipment

Q1/2017 (increase estimated budget from USD2.92 Heating Exchange Units, Water Pump and HHHT-EP-10 9.42 ICB million to Relevant Electric Equipment USD9.42 million and change of package content) Chifeng DHS CF-EP-01 Pre-insulated pipe and steel pipe 10.00 ICB 2013.9.3 CF-EP-02 Ball valve and butterfly valve 1.70 ICB 2013.3.20 CF-EP-03 Pipe fitting, filter and ultrasonic flow meter 1.00 ICB 2013.3.22 Heat Exchange Unit, Electrical equipment CF-EP-04 4.70 ICB 2013.3.20 and control system CF-EP-05 Prefabricated Insulating Pipe and Pipe Fitting 5.58 ICB 2015.10.20 CF-EP-06 Ball Valve and Butterfly Valve 1.88 ICB 2015.10.20 CF-EP-07 Prefabricated Insulating Pipe and Pipe Fitting 9.00 ICB 2015.10.20 Heat Exchange Unit, Electrical Equipment CF-EP-08 2.88 ICB 2015.10.20 and Control System Arershan / Tuquan DHS AT-EP-01 Equipment and Installation for boiler house 7.31 ICB 2015.9.1 AT-EP-02 Heat Pump, Heat Exchanger, Pump etc 6.53 ICB 2015.9.1 AT-EP-03 Steel Pipes 8.43 ICB 2015.9.1 AT-EP-04 External Pipe etc 4.05 ICB 2015.9.1

Value Advertising Package No. Package content Method ($ million) Date AT-EP-05 Vehicle 0.68 NCB 2015.9.1 AES-CW-03 Civil Works for Boiler House 1.60 NCB 2015.1.27 Baotou DHS Pre-Insulated Pipe and Fittings for New and BT-EP-01 7.14 ICB 2012.4.20 Rehabilitated Pipeline Net Automatic Heat Exchange Unit for New BT-EP-02 2.45 ICB 2012.6.8 Thermal Power Station Water Pump, Heat Metering Device, SCADA BT-EP-03 and Distributed Frequency Converter For the 2.96 ICB 2012.6.8 Existing Thermal Power Station Water Pump, Frequency Converter Device BT-EP-04 and Valves for the Existing Thermal Source 4.25 ICB 2012.6.8 Station Zhalaite DHS Boiler, Fan Dust Removal and ZLT-EP-01 Desulphurization Equipment, Pump, Water 3.94 ICB 2012.5.10 Treatment System and Materials DCS System and Electrical Equipment for ZLT-EP-02 2.50 ICB 2012.9.25 Thermal Source Station ZLT-CW-03 Civil Works for Thermal Source Station 3.23 ICB 2012.9.25 ZLT-EP-04 Heat Exchange Units Contract 1.90 ICB 2013.5.22 Coal supply system, slag removal system, ZLT-DHS-05 0.51 NCB 2012.9.25 dual removal and installation Zhalaite DHS Expansion Boiler, Fan, Dust Removal and ZLT-EP-06 3.28 ICB Q1/2017 Desulphurization Equipment Heat Exchange Units and Ancillary ZLT-EP-07 4.32 ICB Q1/2017 Equipment Sources: Project Implementing Agencies and ADB estimates.

3. Consulting Services Contracts Estimates to Cost More than $100,000

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

Consulting Services Contracts Estimated to Cost More than $100,000 Estimated Cost Recruitment Post or Prior Review Advertisement Date Contract Description ($ million) Method (quarter/year) Project implementation 1.0 QCBS Prior Q1 2013 supervision consultants PMO administration 0.75 Individual Prior Q1 2013 expenses PMO = project management office, QCBS = quality- and cost-based selection. Sources: Project implementing agencies and Asian Development Bank estimates.

National Competitive Bidding

31. The borrower’s Law of Tendering and Bidding of the People’s Republic of China promulgated by Order No. 21 of the President of the People’s Republic of China on 30 August 1999 is subject to the following clarifications required for compliance with the Procurement Guidelines (2010, as amended from time to time):

(i) All invitations to prequalify or to bid shall be advertised in the national press, or official gazette, or a free and open access website in the borrower’s country. Such advertisement shall be made in sufficient time for prospective bidders to obtain prequalification or bidding documents and prepare and submit their responses. In any event, a minimum preparation period of 30 days shall be given. The preparation period shall be counted from (a) the date of advertisement, or (b) when the documents are available for issue, whichever date is later. The advertisement and the prequalification and bidding documents shall specify the deadline for such submission. (ii) Qualification requirements of bidders and the method of evaluating the qualification of each bidder shall be specified in detail in the bidding documents, and in the prequalification documents if the bidding is preceded by a prequalification process. (iii) If bidding is preceded by a prequalification process, all bidders that meet the qualification criteria set out in the prequalification document shall be allowed to bid and there shall be no limit on the number of prequalified bidders. (iv) All bidders shall be required to provide a performance security in an amount sufficient to protect the borrower and executing agency in case of breach of contract by the contractor, and the bidding documents shall specify the required form and amount of such performance security. (v) Bidders shall be allowed to submit bids by mail or by hand. (vi) All bids shall be opened in public; all bidders shall be afforded an opportunity to be present (either in person or through their representatives) at the time of bid opening, but bidders shall not be required to be present at the bid opening. (vii) All bid evaluation criteria shall be disclosed in the bidding documents and quantified in monetary terms or expressed in the form of pass or fail requirements. (viii) No bid may be rejected solely on the basis that the bid price falls outside any standard contract estimate or margin or bracket of average bids established by the borrower and executing agency. (ix) Each contract shall be awarded to the lowest evaluated responsive bidder, that is, the bidder who meets the appropriate standards of capability and resources and whose bid has been determined (a) to be substantially responsive to the bidding documents, and (b) to offer the lowest evaluated cost. The winning bidder shall not be required, as a condition of award, to undertake responsibilities for work not stipulated in the bidding documents or otherwise to modify the bid as originally submitted. (x) Each contract financed with the proceeds of the loan shall provide that the suppliers and contractors shall permit ADB, at its request, to inspect their accounts and records relating to the performance of the contract and to have said accounts and records audited by auditors appointed by ADB. (xi) Government-owned enterprises in the borrower’s country may be permitted to bid if they can establish that they (a) are legally and financially autonomous, (b) operate under commercial law, and (c) are not a dependent agency of the borrower and/or executing agency. (xii) Rebidding shall not be allowed solely because the number of bids is less than three.

D. Consultant's Terms of Reference

32 International and national consultants financed under the loan for the Inner Mongolia Autonomous Region Environment Improvement Project (Phase II) will be recruited in accordance with the Guidelines on the Use of Consultants (2010, as amended from time to time) of the ADB using the quality- and cost-based selection method with simplified technical proposal (quality–cost ratio of 80:20). Approximately 15 person-months of international and 40 person-months of national consultancy will be required to supervise project implementation. The consultants will be engaged for the duration of project implementation from September 2010 to June 2014.

33 International team leader and energy specialist (6 person-months). The team leader will coordinate the activities of all consultants and must have at least 20 years of experience on similar projects and 10 years of management experience in the energy industry. At least 3 years of working experience on PRC projects is preferred. The team leader should have experience as a team leader of consultants on similar projects and be able to communicate effectively with the GIMAR, the EA, and the IAs. Bilingual candidates will be preferred. Based on knowledge and experience of previous projects, the team leader will establish working arrangements, take responsibility for team performance, provide ongoing support to GIMAR and implementing agencies, and monitor project implementation. The team leader will assist the PMO and IAs in their communications with ADB to ensure smooth project implementation and attend meetings with ADB missions for the project. Specific activities include the following:

(i) Visit the project site at regular intervals during project implementation, monitor progress, and report to GIMAR on critical activities while providing details of progress and recommendations.

(ii) Review equipment manufacturers’ major drawings and calculations for compliance with contract specifications.

(iii) Review procurement and delivery programs for each supply contract financed by ADB to ensure compatibility and coordination with civil works and other contracts.

(iv) Assist in developing and implementing applicable procedures for the control of manufacturing, factory tests, and acceptance of the materials and equipment.

(v) Assist in providing GIMAR with necessary interpretations of technical and commercial issues that may arise from the contracts.

(vi) Assist in the preparation and periodic updating of the project disbursement schedule and financial statements.

(vii) Assist in supervising equipment manufacturing, testing, and commissioning.

(viii) Assist in coordinating various manufacturers and contractors.

(ix) Assist in assessing contract variations and their verification.

(x) Assist in claims-avoidance practices, particularly for international contractors.

(xi) Assist in handling any claims.

34 International district heating and procurement specialist (4 person-months). The specialist should have a solid technical background in the heating sector and the ability to coordinate the procurement process and activities for all procurement packages. He or she must have at least 15 years of working experience on similar projects. At least 3 years of working experience on PRC projects will be preferred. He or she should be able to communicate effectively with GIMAR and the implementing agencies. Bilingual candidates will be preferred. He or she will assist the PMO and implementing agencies in their communications with ADB to ensure smooth project implementation and attend meetings with ADB missions for the project. Specific activities include the following:

(i) Review the preliminary design report, cost estimates, and project implementation schedule to become familiar with the basic requirements of the project and to determine any anomalies prior to the award of the construction contracts.

(ii) Review and assist in the tender design, technical specifications, tender drawings, and all other parts of the bidding documents to ensure that they are technically and contractually in accordance with ADB requirements for international competitive bidding, local competitive bidding, or international shopping and appropriate for international tendering, as required.

(iii) Drawing on international experience, assist the tendering company in preparing the advertisement for prequalifying bidders, bidding documents, etc.

(iv) Assist GIMAR in contract negotiations for contracts controlled under ADB procurement procedures.

(v) Provide technical advice on district heating issues.

35 International resettlement and environmental monitoring specialist (3 person- months). The consultant should have a solid background in resettlement and environmental impact assessment. He or she must have at least 15 years of working experience on similar projects. Work experience in the PRC will be preferred. He or she should be fluent in English and able to communicate effectively with GIMAR and the implementing agencies. Specific activities include the following:

(i) Establish a resettlement and environmental monitoring unit and compliance- monitoring system to ensure that the project meets all PRC resettlement, land- acquisition, and environmental-protection standards, as well as ADB guidelines.

(ii) Direct the monitoring unit in the implementation of a computerized environmental compliance-monitoring system using appropriate off-the-shelf software packages (e.g., Microsoft Office). This system should include spreadsheets, word processing, and digital photography capabilities to facilitate the preparation of required monitoring reports. The system should be set up to manage information and create reports in both English and Chinese.

(iii) Prepare the template in English for the first environmental report.

(iv) Prepare standard operating procedures and guidance documents based on all applicable PRC standards on environment protection (e.g., regarding dust, noise,

and water quality), resettlement, and policy on the acquisition of land, as well as based on ADB requirements and guidelines.

(v) Provide training and supervision for compliance monitoring, including site inspections; sampling; data review, analysis, and compilation; and reporting.

(vi) Coordinate the preparation of semiannual environmental monitoring reports and a project completion report.

(vii) Coordinate the collection of appropriate environmental data, as required, to determine the parameters detailed in the design and monitoring framework.

(viii) Conduct annual site visits to monitor resettlement and environmental activities, as well as adherence to the labor restructuring plan.

36 International institutional specialist (2 person-months). The consultant should have at least 15 years of working experience. Work experience on PRC projects will be preferred. He or she should be fluent in English and able to communicate effectively with GIMAR and the implementing agencies. Specific activities include the following:

(i) Review and assess the institutional arrangements of implementing agencies.

(ii) In coordination with ADB and the PMO, establish a priority list of the implementing agencies for institutional capacity assistance.

(iii) In coordination with the PMO and implementing agencies, develop institutional development plans.

(iv) Develop a training program to improve targeted implementing agencies’ institutional and management capacity. Submit the institutional training program to the PMO and ADB for review.

(v) Monitor the implementation of institutional reform in accordance with the institutional development plan. Visit sites annually to monitor institutional reform and provide ongoing capacity strengthening.

(vi) Assist the PMO in designing field visits for the implementing agencies to improve awareness of and exposure to alternative institutional, technical, and management practices.

(vii) Conduct training workshops as determined in the institutional training program and including training on ADB disbursement and procurement procedures.

(viii) Assist the PMO in monitoring the implementing agencies’ institutional reform performance.

(ix) Prepare periodic progress reports for inclusion in project monitoring reports.

37 National project coordinator and heating specialist (12 person-months). The consultant’s primary role is to supplement the work of the team leader. He or she should have a solid technical background in district heating and the ability to coordinate the activities of the

24 consultant team. Good understanding of ADB project procedures is essential. He or she must have at least 15 years of work experience in the heating sector and 5 years of experience on similar projects. He or she must be fluent in English and be able to communicate effectively with GIMAR and the implementing agencies. He or she will assist the PMO and implementing agencies in their communications with ADB to ensure smooth project implementation and attend meetings with ADB missions for the project. Specific activities include the following:

(i) Visit the project site at regular intervals during project implementation, monitor progress, and report to GIMAR on critical activities while providing details on progress and recommendations.

(ii) Supervise construction, equipment installation, and the commissioning of works.

(iii) Review contractors’ drawings and calculations.

(iv) Establish a computerized schedule for all project activities and periodically update it as required by GIMAR.

(v) Monitor and report on progress and constraints on construction.

(vi) Provide GIMAR with necessary interpretations of technical and commercial issues that may arise from the contracts so that it is aware of impending issues.

(vii) Support the team leader’s coordination of ADB, consultants, GIMAR, and implementing agencies.

(viii) Carry out factory inspection and witness tests of materials and equipment being supplied under the project, as well as monitor and expedite the delivery of materials and equipment.

(ix) Review equipment suppliers’ and manufacturers’ drawings and calculations.

(x) Develop procedures and provide assistance for commissioning components.

(xi) Review the maintenance and operation manuals prepared by the manufacturers and ensure they are adequate for the intended purpose.

(xii) Review and provide technical assessment of all claims.

38 National environment specialist (8 person-months). The consultant must have at least 15 years of working experience on similar projects. Work experience in the PRC will be preferred. He or she should be fluent in English and be able to communicate effectively with GIMAR and the implementing agencies. Specific activities include the following:

(i) Assist in establishing a resettlement and environmental monitoring unit and a compliance-monitoring system to ensure that the project meets all PRC standards on resettlement, land acquisition, and environmental protection, as well as ADB guidelines.

(ii) Assist the PMO in preparing the first semiannual environmental report.

(iii) Prepare standard operating procedures and guidance documents based on all applicable PRC standards regarding environmental protection (e.g., regarding dust, noise, and water quality), resettlement, and policy on land acquisition, as well as based on ADB requirements and guidelines.

(iv) Provide training and supervision for compliance-monitoring activities, including construction site inspections; sampling; and data review, analysis, and reporting.

(v) Work with the PMO to assist in the preparation of semiannual environmental- monitoring reports and the project completion report.

(vi) Coordinate the collection of appropriate environmental data, as required, to determine the parameters detailed in the design and monitoring framework. Collect air quality data from local environment protection bureaus.

(vii) Coordinate directly with seasonal boiler workers who will lose employment due to closure of the small boilers to help them access training programs operated by local labor and social security bureaus. Monitor training activities, including parameters listed in the labor restructuring plan.

(viii) Conduct periodic site visits to monitor resettlement and environmental activities.

39 National institutional specialist (12 person-months). The consultant must have at least 15 years of working experience in institutional management or institutional development. He or she must have excellent English communication skills and be able to communicate effectively with GIMAR and the implementing agencies. He or she will assist the PMO and implementing agencies in their communications with ADB to ensure smooth project implementation and attend meetings with ADB missions for the project. He or she will support the international institutional specialist and undertake the scope of work detailed in para. 26.

40 National procurement specialist (8 person-months). The specialist should have ability to coordinate procurement processes and activities for all procurement packages. He or she must have at least 15 years of working experience on similar projects. He or she should be able to communicate effectively with GIMAR and the implementing agencies. Good English is preferred. He or she will assist the PMO and implementing agencies in their communications with ADB to ensure smooth project implementation and attend meetings with ADB missions. He or she will assist the international district heating and procurement specialist as follows:

(iii) Assist the tendering company in preparing the advertisement for prequalifying bidders, bidding documents, etc.

(iv) Assist GIMAR in contract negotiations for contracts controlled under ADB procurement procedures.

VII. SAFEGUARDS

A. Land Acquisition and Resettlement

41 Zhalaite DHS originally planned to acquire 1.1 ha of government owned land currently used by two private entities-a driving school and closed factory, and (ii) 1,740 m2 of office and factory buildings for these entities. The land acquisition however was no longer necessary as Zhalaite DHS used land owned by the PIA. The remaining subprojects have no resettlement impact, as they will be implemented on government-reserved land or existing premises.

42 GIMAR shall ensure that (a) the resettlement plan is implemented in accordance with its terms; (b) all land and rights-of-way required by the project are made available in a timely manner; (c) the provisions of the resettlement plan, including compensation and entitlements for affected peoples, are carried out promptly and efficiently in accordance with the government's applicable laws and ADB's Involuntary Resettlement Policy; (d) compensation and resettlement assistance is given to the affected peoples prior to dispossession and displacement; (e) counterpart funds for land acquisition and resettlement activities are provided in a timely manner; (f) any obligations in excess of the resettlement plan budget estimates are met; (g) the affected peoples are compensated such that they are at least as well off as they would have been in the absence of the project; (h) the resettlement plan is updated upon completion of the detailed design and detailed measurement survey and submitted to ADB for approval prior to commencement of land acquisition; (i) works contracts include requirements to comply with the resettlement plan and entitlements for permanent and temporary impacts to affected peoples; and (j) implementation of the resettlement plan is monitored, evaluated, and reported to ADB.

B. Environment

43 GIMAR and the IAs shall ensure that the project is designed, constructed, and operated in accordance with the national and local government environmental laws, regulations, procedures, and guidelines: ADB's Environment Policy (2002) and Environmental Assessment Guidelines (2003); and the project summary initial environmental examination (SIEE). GIMAR will ensure the boilers constructed under the project comply with gas emissions standards stipulated in the World Bank Pollution Prevention and Abatement Handbook.8 Environmental monitoring reports will be submitted to ADB two times per year during construction and annually for 2 years during operation. The environmental management plan, with mitigation measures, a monitoring plan, and institutional arrangements, will be updated during engineering design and incorporated in the bidding documents and civil works contracts.

C. Social Impacts and Poverty Reduction

44 The project will result in the loss of 1,229 jobs after the closure of small boilers. The survey of affected workers indicated that 30% of them were formal employees of the heating companies and the remainder were migrant workers with contracts for a single heating season. A labor restructuring plan has been prepared to cover the affected workers. The implementing agencies have agreed to ensure that all permanent employees affected by the closure of the small boilers under the project are reemployed in a timely manner and in accordance with the

8 World Bank Group. 1998. Pollution Prevention and Abatement Handbook. Washington, D.C.

project labor restructuring plan. The implementing agencies have agreed to reemploy casual workers where possible, and employment training will be arranged for the remaining unemployed seasonal workers.

VIII. PERFORMANCE MONITORING, EVALUATION, REPORTING AND COMMUNICATION

A. Project Design and Monitoring Framework Performance Targets and Data Sources and Design Summary Indicators with Baselines Reporting Mechanisms Assumptions and Risks Impact Assumptions Improved energy Compared to 2010, at least IMAR statistical year book Heating sector reforms are efficiency and 15% improvement in energy with annual data on different implemented. environment in IMAR efficiency of district heating sectors of the economy sector by 2020 The energy efficiency improvements in district heating Compared to 2010, all cities remains a priority for the and urban areas of IMAR government meet improved air quality standards of at least class II The required investments are by 2020 made by the government and enterprises in other urban areas of IMAR.

Risk

Air emission improvements are negated by the establishment of new polluting industries.

Outcome Assumptions Improved air quality in By 2018, energy efficient Annual environmental report Both ADB loan projects in IMAR urban areas in IMAR district heating in these in project areas by the IMAR for environment improvements urban areas avoid coal environment protection are implemented as scheduled. consumption by at least bureau 1.76 million tons thereby No new high-polluting industries avoiding annual emissions IMAR statistical yearbooks are set up in project areas of CO2 by more than 2.66 causing the air quality to million tons, SO2 by more Project environmental deteriorate further. than 31,165 tons, TSP by monitoring reports more than 38,440 tons of Risk TSP, and NOx by more than 6,894 tons. Delays in the projects’ implementation and thereby in The air quality in project environmental benefits areas improves to at least Grade II by 2018.

Outputs Assumptions 1. Improved district Upgrading or extension of Quarterly project progress Timely project implementation heating in project district heating services to reports cities and towns 1.469 million urban PMO is adequately staffed and of Huhhot, residents, with coverage of Project environmental counterpart funds are provided Chifeng, Baotou, about 36.61 million m2 by monitoring reports on time. Zhalaite, Aershan, 2018. and Tuquan Loan review missions and Risks Energy efficient district project performance reports heating results in closure of The project implementation is 453 small, inefficient, and delayed due to weak polluting coal-fired boilers performance by contractors,

Performance Targets and Data Sources and Design Summary Indicators with Baselines Reporting Mechanisms Assumptions and Risks by 2018. PIAs, and PMO.

Energy efficient district heating avoids1.05 million tons of coal usage annually in these urban areas reducing the associated emissions of CO2 by 1.59 million tons, SO2 by 13,595 tons, NOx by 4,175 tons, and TSP by 16,893 tons. Activities with Milestones Inputs

1.1 Construction of 494 MW heating capacity, 547.03 km heating pipeline, and 597 ADB: $150.0 million heat exchange substations, and installation of 11 SCADA systems in 6 urban Implementing agencies: $145.3 areas- Hohhot, Chifeng, Baotou, Tuquan, Aershan and Zhalaite by 2017. million Local Bank: $96.24 million Others: $23.81 million

Total project cost: $415.35 million

ADB = Asian Development Bank, CO2 = carbon dioxide, IMAR = Inner Mongolia Autonomous Region, MW = megawatt, NOX = nitrogen oxide, PIA = project implementing agency, PMO = project management office, SCADA = supervisory control and data acquisition, SO2 = sulfur dioxide, TSP = total suspended particulates.

B. Project Performance Monitoring

45 A project performance management system (PPMS) has been prepared, including a set of measurable indicators based on the project design, impact, and risks. The indicators include (i) energy efficiency improvements, (ii) reductions in emissions, (iii) the installation of infrastructure, (iv) improvements in ambient air quality, (v) social impact targets, and (vi) decommissioning of polluting facilities. Performance in meeting proposed indicators will be reported in the quarterly progress reports, the two environmental reports every year, or the annual report on resettlement and social objectives, as suitable. Each IA will establish a safeguard management unit to coordinate environmental and resettlement management issues during construction and operation. The consultants supervising implementation will help GIMAR monitor project impacts and prepare periodic reports. The monitoring and evaluation system will include specific and measurable targets and identify key risks and institutional arrangements for effective monitoring. The consultant supervising implementation will provide training where necessary on monitoring. One month before the midterm review, the PMO will submit to ADB a comprehensive report on each of these issues.

46 Compliance with Major Loan Covenants

Para Remarks/ Schedule Description Type No. Issues PA 1 GIMAR shall ensure that all Being complied Financials necessary financing (other than from with. Counterpart the Loan proceeds) including equity funding is being contributions and local loans are allocated. provided on a timely basis to enable

Para Remarks/ Schedule Description Type No. Issues the full and timely completion of the Project. In the event of any shortfall or disruption in the financing of the Project due to, inter alia, the lack or inadequacy of funding of, or delay in financing by, or change of control within, any of the PIAs, GIMAR shall promptly inform the Borrower and ADB and provide additional funds as maybe necessary for successful implementation of the Project. PA 2 In the event of (a) any change in Not occurred. Others ownership of the Project facilities or (b) any sale, transfer or assignment of share or interest that results in change of control in any PIA is anticipated, GIMAR shall, and shall cause the PIA to, consult with ADB at least 6 months prior to the implementation of such change. GIMAR shall, and shall cause the PIA to, further ensure that the controlling management of the concerned PIA concurs with (a) all Project related agreements executed between ADB and the Borrower or GIMAR; and (b) policies of ADB relevant to the Project. PA 3 From the commencement of the Not yet due. Financials commercial operations of the Project, GIMAR shall ensure that PIAs maintain (i) a debt service coverage ratio of at least 1.2 times; (ii) a current ratio of more than 1:1; and (iii) a debt-equity ratio of not more than 70:30. PA 4 GIMAR shall ensure that the PIAs Being complied Others complete the closure of 383 small with. coal fired heating boilers identified for closure, in the subproject areas in IMAR, under the Project by the end of Project implementation. GIMAR shall further ensure that the said small coal-fired heat boilers are not re-used elsewhere. PA 5 GIMAR shall ensure that all Being complied Social employees who lose their jobs due to with. closure of small Coal-fired heat

Para Remarks/ Schedule Description Type No. Issues boilers will be covered by, and dealt in accordance with, the labor restructuring plan, prepared for the Project and agreed between GIMAR and ADB. GIMAR shall further ensure that compliance with the labor restructuring plan is strictly followed. PA 6 GIMAR shall ensure that the Project Being complied Social areas maintain government-funded with. heating assistance programs to assist the poor to pay heating bills. PA 7 A midterm review of the Project shall Mid-term review Others be undertaken by GIMAR, PIAs and mission ADB in 2011, covering all conducted from institutional, administrative, 28 July to 1 organizational, technical, August 2014. environmental, social, poverty reduction, resettlement, economic, financial, and other relevant aspects that may have an impact on the performance of the Project and its continuing viability. The review shall examine progress in sector reforms, and evaluate development and poverty impact, and compliance with covenants of the Loan and Project Agreements. The review shall also undertake a comprehensive review of potential Loan savings, identify areas for reallocation of Loan proceeds, and change disbursement percentages, as appropriate. PA 8 GIMAR shall, and shall cause the Being complied Others PIAs to ensure that (i) Borrower's with. anticorruption laws and regulations and ADB's Anticorruption Policy, (1998, as amended to date), are strictly enforced and are being complied with during Project implementation, and that relevant provisions of ADB's Anticorruption Policy are included in all bidding documents for the Project, (ii) consultants are engaged promptly to provide assistance in procurement of Goods and services; (iii) full-time officials from the Finance Bureau of

Para Remarks/ Schedule Description Type No. Issues IMAR are involved for the supervision of bidding, construction, and operations, and conducting of periodic inspections of the contractors' activities related to fund withdrawals and settlements; and (iv) within 9 months from the Effective Date, establish a complaints unit to receive and resolve grievances or act upon stakeholders’ reports or irregularities. The unit shall (i) review and address grievances of Project stakeholders; and (ii) set the threshold criteria and procedures for handling and proactively responding to grievances. PA 9 GIMAR shall monitor and evaluate Being complied Others Project impacts, with the assistance with. The draft of consultants, as specified in the first semi-annual PPMS, to ensure that the Project environmental facilities are managed effectively and monitoring and the benefits, particularly to the poor, progress report are maximized. GIMAR shall further was submitted to ensure that (i) consultants for ADB on 5 March monitoring and evaluation are 2016. ADB engaged; (ii) data collection from provided local governments to measure the comments for indicators in the PPMS at the revision on 18 frequency specified in the PPMS is March 2016. facilitated; and (iii) reports as Revised first EMR detailed in the PPMS are submitted was then to ADB. submitted to ADB for further review on 3 July 2016. The Consultant has been communicating with ADB environment officer directly for further revision of the first EMR prior to its disclosure on ADB website. PA 10 GIMAR shall ensure, and shall cause Being complied Safeguard the PIAs to ensure, that (i) the with. The draft s Project is designed, constructed and first semi-annual operated in accordance with national environmental and local government environmental monitoring and

Para Remarks/ Schedule Description Type No. Issues laws, regulations, procedures and progress report guidelines of the Borrower, the ADB was submitted to Environment Policy (2002), and the ADB on 5 March IEE; (ii) the boilers constructed under 2016. the Project comply with air emissions standards stipulated in the World Bank Pollution Prevention and Abatement Handbook, 1998; (iii) the environmental monitoring reports are submitted to ADB two times per year during construction and annually for 2 years during the operational period of the Project; and (iv) the Environmental Management Plan (mitigation measures, monitoring plan, and institutional arrangements), as set forth in the SIEE, is updated during the engineering design stage, and incorporated in the bidding documents and Works contracts. PA 11 GIMAR shall ensure that (i) the RP Being complied Safeguard for the Project is implemented in with. Revised s accordance with its terms; (ii) all land land acquisition and rights–of–way required by the and resettlement Project is made available in a timely due diligence manner; (iii) the provisions of the RP, report for the including compensation and proposed entitlements for AP, are implemented subproject is in accordance with all the Borrower’s agreed to be applicable laws and regulations and submitted to ADB ADB’s Involuntary Resettlement for final review Policy (1995); (iv) compensation and and disclosure on resettlement assistance is given to by 31 July 2016. the AP prior to dispossession and displacement; (v) the timely provision of counterpart funds is made for land acquisition and resettlement activities; (vi) any obligations in excess of the RP budget estimates are met; (vii) the AP are compensated in a manner that they are at least as well off as they would have been in the absence of the Project; (viii) the RP is updated upon completion of the detailed design and detailed measurement survey and submitted to ADB for approval prior to commencement of land acquisition; (ix) Works contract

Para Remarks/ Schedule Description Type No. Issues includes requirements to comply with the RP and entitlements for permanent and temporary impacts to AP; and (x) implementation of the RP is monitored, evaluated and reported to ADB. PA 12 GIMAR shall ensure that the PlAs Being complied Social follow the principles of the ADB's with. Being Policy on Gender and Development monitored with (1998) during implementation of the support of loan Project, including taking all consultants. necessary actions to encourage women living in the Project area to participate in planning and implementing Project activities. GIMAR, in coordination with the appropriate agencies, shall ensure the effective implementation of measures aimed at increasing project benefits and impacts on women in and around the Project area. PA 13 GIMAR shall ensure that the PIAs, Being complied Social together with the appropriate with. government authorities, require contractors employed under the Project to disseminate information (in local languages) on the risks of sexually-transmitted infections, including HIV/AIDS, in health and safety programs to those employed during Project implementation. Specific provisions to this effect shall be included in bidding documents and Works contracts, and compliance shall be strictly monitored by GIMAR and the PIAs. PA 14 GIMAR shall, and shall cause the Being complied Social PlAs to ensure, that the construction with. contractors (i) follow all applicable labor laws and regulations of the Borrower; and (ii) do not employ child labor as required by the relevant laws and regulations of the Borrower. GIMAR shall further ensure that specific clauses concerning compliance with labor and employment laws are included in

Para Remarks/ Schedule Description Type No. Issues bidding documents.

47 Resettlement monitoring: (See para. 41 and 42).

48 Environmental monitoring: (See para. 43).

C. Project Review

49 ADB will undertake annual project reviews. Additionally, ADB, GIMAR, and the IAs will undertake a midterm review of the Project in 2014, covering all institutional, administrative, organizational, technical, environmental, social, poverty reduction, resettlement, economic, financial, and other relevant aspects that may have an impact on the performance of the Project and its continuing viability. The review will examine progress in sector reforms and evaluate development and poverty impact and compliance with assurances in the loan agreement. The review shall also undertake a comprehensive review of potential loan savings, identify areas for reallocation of loan proceeds, and change disbursement percentages, as appropriate.

D. Reporting

50 The EA and each IA, through the PMO, will provide ADB with (i) quarterly progress reports in a format consistent with ADB's project performance reporting system; (ii) consolidated annual reports including (a) the use of the loan proceeds; (b) progress achieved by output as measured through the indicator's performance targets, (c) key implementation issues and solutions; (c) updated procurement plan and (d) updated implementation plan for next 12 months; and (iii) a project completion report within 6 months of physical completion of the Project. To ensure projects continue to be both viable and sustainable, project accounts and the executing agency AFSs, together with the associated auditor's report, should be adequately reviewed. In addition, IAs will also submit (i) two environmental monitoring reports every year, (ii) annual reports on resettlement and social objectives, (iv) annual financial reports, and (a project completion report submitted not later than 3 months after project completion

IX. ANTICORRUPTION POLICY

51 ADB's Anticorruption Policy (1998, as amended to date) was explained to and discussed with the borrower, EA, and implementing agencies. Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to investigate, directly or through its agents, any violations of the Anticorruption Policy relating to the Project. All contracts financed by ADB shall include provisions specifying the right of ADB to audit and examine the records and accounts of the executing agency and all Project contractors, suppliers, consultants and other service providers. Individuals/entities on ADB’s anticorruption debarment list are ineligible to participate in ADB-financed activity and may not be awarded any contracts under the Project. To support these efforts, relevant provisions are included in the loan agreement and the bidding documents for the Project.

52 For the project, EA will undertake anticorruption actions including (i) engaging an international consultant and a national consultant to advise and assist in procurement of goods and services and the engagement of other consultants; and (ii) having full-time officials from the

IMAR Finance Bureau review bidding, construction, and operations, as well as conduct periodic inspection of the contractors’ activities related to fund withdrawals and settlements.

X. ACCOUNTABILITY MECHANISM 53 People who are, or may in the future be, adversely affected by the project may address complaints to ADB, or request the review of ADB's compliance under the Accountability Mechanism.9

XI. RECORD OF PAM CHANGES

54 All revisions/updates during course of implementation should retained in this Section to provide a chronological history of changes to implemented arrangements recorded in the PAM.

Dates PAM Changes 12 December 2012 A change in scope and implementation arrangement 25 November 2016 A change in scope and implementation arrangement

9 For further information see: http://compliance.adb.org/.