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Home , Alxa League, Alxa Left Banner, Bayannur, Inner Mongolia, Leagues of China

Environmental and Social Management System Arrangement

Project Number: 51192-001 September 2020

Proposed Multitranche Financing Facility People’s Republic of : Inner Sustainable Cross-Border Development Investment Program

Prepared by Bank of for the Asian Development Bank.

This environmental and social management system arrangement is a document of the borrower. The views expressed herein do not necessarily represent those of ADB's Board of Directors, Management, or staff, and may be preliminary in nature.

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

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CURRENCY EQUIVALENTS (as of 25 August 2020)

Currency unit – yuan (CNY) CNY1.00 = $6.9196 $1.00 = €0.8483 €1.00 = $1.1788

NOTE

In this report, "$" refers to US dollars and "€" refers to Euro

ABBREVIATIONS

ADB – Asian Development Bank AP – affected person BOIM – Bank of Inner Mongolia CAP – corrective action plan CAREC – Central Regional Economic Cooperation ESMS – environmental and social management system FIL – financial intermediation loan FIs – financial intermediaries GRM – grievance redress mechanism IMAR – Inner Mongolia Autonomous IMARG – Government of Inner Mongolia Autonomous Region IPMO – Inner Mongolia Autonomous Region project management office PIAL – Prohibited investment activities list PICs – project implementation consultants PRC – People’s Republic of China SME – small and medium-sized enterprise SPS – Safeguards Policy Statement

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I. PROJECT BACKGROUND

1. The proposed Multitranche Financing Facility (the MFF) for Inner Mongolia Sustainable Cross-Border Development Investment Program (Investment Program) will promote sustainable development of cross-border areas and mutually beneficial regional cooperation and integration (RCI) between Inner Mongolia Autonomous Region (IMAR) of the People’s Republic of China (PRC) and Mongolia. The Investment Program will improve economic inclusion ecosystems, crucial services in the five IMAR border cross point (BCP)1 communities and surrounding areas on bother sides of the 3,200-kilometer (km) PRC–Mongolia frontier which lags in economic and social development and confronts with significant transboundary risks in relation to fragile ecosystems, health security, and other areas. Expanded financial and business support to small and medium-sized enterprises (SMEs) in border with spur local income growth. Establishment of an agricultural value chain will enhance livelihoods on both sides of the frontier. The program will have strong regional spillover benefits to Mongolia: improvement in infrastructure and services at IMAR–Mongolia BCPs will boost the volume and quality of trade, creating about 3,300 direct and indirect jobs in Mongolia. The geographical areas to be covered by the Investment Program include: (i) Municipality; (ii) Darhan Muminggan United Banner (Damaoqi County) and Qingshan in Municipality, (iii) City in Xing’an League (Xing’an Municipality); (iv) (Azuoqi County) in (Alxa Municipality); (v) Municipality; and (vi) SMEs 2 located in IMAR through selected financial intermediaries (FIs). The first tranche loan for SME financing will be provided through financial intermediation loan (FIL) in an amount up to €16,966,000 (equivalent to $20.00 million).

2. The proposed FIs will (i) provide credit to SMEs3 in cross border business in IMAR using the FIL modality; (ii) strengthen IMAR’s business development services system for SMEs including business networking and outreach support, market and technology information, and financial and human resources management; (iii) support IMAR’s pilot project of providing well- designed business support program for female entrepreneurs and women-led SMEs. The proposed SME financing will use the FIL modality, which is best suited to (i) extend reach across multiple sectors and a wide range of enterprises and locations; (ii) aggregate a number of investments in SMEs with a short payback period (1–3 years); (iii) work in close partnerships with commercial banks and government to enhance their understanding of the principals and practice of environmental and social impact assessment when evaluating a project; and (iv) recycle loan proceeds multiple times to leverage impacts of the FIL.

II. DUE DILIGENCE OF FINANCIAL INTERMEDIARIES

A. Bank of Inner Mongolia

3. People’s Bank of China approved in November 1999 the establishment of Bank of Inner Mongolia (BOIM) with its headquarters in . It will serve as one the FIs to implement the FIL component under the Tranche 1. By the end of 2018, the total institutional number of BOIM had reached 135, namely the banking outlet of BOIM, 11 branches (including banking department), 1

1 Five ports open to Mongolia, including Erenhot, Mandula, Ganqimaodu, Arxan and Uliji Ports, will be supported by the Investment Program. 2 The classification of SMEs is defined in Statistical Methods on Classification of Micro-, Small-, Medium-, and Large- Sized Enterprises, which was enclosed by National Bureau of Statistics, PRC on 28 December 2017. 3 SME eligibility criteria: SMEs should be legally registered; should have sustainable business models, and sound business strategy and corporate governance; and average SME subloan size is not to exceed CNY10 million and the maximum is not to exceed CNY20 million. Priority will be given to those SMEs that are engaged in cross-border trade and logistics, agribusiness, manufacturing, and cross-border tourism.

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sub-branch directly under the head office, 121 sub-branches (22 sub-branches in county level), and 1 SME financial service center. Its business has covered 8 /municipalities in IMAR and it has 3,110 employees. BOIM will be working closely with Inner Mongolia Autonomous Region Project Management Office (IPMO) in subproject screening, selection, and due diligence (including financial, environmental and social). As a local bank, BOIM conducts most of its business inside IMAR. The main business of BOIM is traditional retailing banking (deposit, loan and settlement service). The general loan process flow of BOIM is as follows: (i) receiving loan application; (ii) project information collection and site visit; (iii) loan assessment and due diligence (including financial, environmental and social); (iv) risk assessment; (v) loan approval; and (vi) post-lending management.

4. BOIM is a local and regional bank. The branch, sub-branch and banking outlets cover most of the prefectures, municipalities and counties. The bank fully understands the local SME sector including its business requirements and risks. However, BOIM does not have any special environmental and social safeguards screening and selection criteria nor associated due diligence procedure and system for its current loan processing. BOIM staff is not familiar with the ADB SPS requirements since most of their staff are major in financial management and/or economics. Therefore, capacity building will be necessary during the project implementation. During project preparation, safeguards orientation and training were provided to BOIM staff by TRTA consultants.

5. BOIM follows PRC’s laws and regulations for environmental and social due diligence, including obtaining domestic EIA approval and land use permit (if applicable). If any non- compliance is observed during the post loan management period, BOIM will request borrowers to provide appropriate corrective actions to follow the requirement of local government authorities. If this is not strictly followed, BOIM will further request the borrowers to immediately repay all amounts and charges outstanding and due to BOIM, and terminate the loan agreement. Such items are also included in the loan agreement between BOIM and borrowers. There is no any environmental and social safeguard issue happened so far in all lending portfolio in BOIM.

B. Due diligence results

6. According to the ADB SPS (2009), BOIM needs to develop an environmental and social management system arrangement (ESMS) covering environmental and social policies, safeguards screening, categorization and review process, institutional arrangements, and monitoring and reporting procedures for subprojects under the FIL, and will maintain and diligently implement the ESMS. However, based on the initial assessment, the capacity of BOIM to establish and implement the ESMS is currently low as currently BOIM is not assessing environmental and social risks by their staff but only obtaining necessary copies of approvals from local government authorities. Prior to the FIL, BOIM does’t have any staff qualified in environmental or social management or safeguards.

7. As part of ESMS, BOIM has already established its ESMS Unit to implement the ESMS, consisting of an ESMS manager and two ESMS staff (one for environmental safeguard and one for social safeguard). During FIL preparation, safeguards orientation and training were provided to these ESMS managers and staff by TRTA consultants. Furthermore, IPMO will work with the FIs to implement the ESMS. The FIL includes a training program to build capacity of the FIs, with the aim that the FIs can independently conduct the following activities without ADB support: (i) implementing the ESMS; (ii) understanding the principles and practice of environmental and social impact assessment in the project-targeted sectors. Training will be conducted by the Environment safeguard and ESMS specialist, Social safeguard and ESMS specialist, under the Project implementation consultants (PICs) and other technical specialists as needed.

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III. ESTABLISHMENT OF AN ENVIRONMENT AND SOCIAL MANAGEMENT SYSTEM

8. BOIM agreed to adopt an Environmental and Social Management System (ESMS) that complies with ADB SPS. A draft ESMS has been prepared and it will be finalized by BOIM and submitted to ADB for review and concurrence before loan effectiveness.

9. The ESMS will apply to all qualified subprojects supported by the FIL using (i) ADB loan proceeds in the initial batch of qualified subprojects; and (ii) the revolving fund established with reflows from the initial batch of qualified subprojects.

10. The following criteria and requirements will be applied:

(i) All subprojects financed by ADB under the FIL are screened against the Prohibited Investment Activities List (PIAL) in Appendix 5 of the ADB SPS, and that any subprojects involving activities included in the PIAL will not be supported by the FIL; (ii) All subprojects financed by ADB under the FIL are reviewed and evaluated against the PRC laws, regulations, and standards on environment, pollution management, occupational health, safety, involuntary resettlement, ethnic minorities, biodiversity, and physical cultural resources to confirm that they are in compliance; (iii) All subprojects financed by FIL are reviewed and evaluated against Safeguard Requirement 1-3 of ADB SPS and other ADB social requirements; (iv) All qualified subprojects should not be classified as Category A for environment, involuntary resettlement and indigenous people within the meaning of ADB SPS; (v) To facilitate financial inclusiveness for women, FIs will ensure that at least 20% of SMEs receiving financing from the FIs are women-led.

11. The ESMS includes:

(i) Environment and social policies in accordance with PRC national and local laws and regulations and ADB SPS and other social requirements.

(ii) Screening and categorization procedures to ensure that all subprojects are screened, categorized, and properly appraised in terms of their environmental and social impacts or risks as well as for possible improvement on climate mitigation and adaptation. The required environment and social planning documents will be prepared (e.g., environmental assessment documents, corrective action plans, resettlement plans, ethnic minority development plans, environmental and social compliance audit reports and due diligence reports).

(iii) Compliance Monitoring and reporting which will require the preparation of semi- annual monitoring reports to ADB for review and disclosure on the ADB website.

(iv) Grievance Redress Mechanism which will be established at the subproject level where the designated ESMS managers will be the main focal person to record complaints and facilitate timely resolutions in consultation with concerned parties.

(v) Institutional Responsibility, Staffing and Training where IPMO will take ultimate responsibility for the ESMS implementation, while BOIM will perform the day-to-day ESMS implementation tasks on behalf of Government of Inner Mongolia Autonomous

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Region (IMARG). BOIM has already established its ESMS Unit to implement the ESMS. Each ESMS unit consists of an ESMS manager and two ESMS staff (one for environmental safeguard and one for social safeguard). IPMO will work with the FIs to implement the ESMS. They will also maintain a pool of qualified project implementation consultants (PICs) to provide the necessary safeguards training, and support during FIL implementation.

(vi) Review and approval procedures with clear roles and responsibilities of IPMO, HCBMC, BOIM, qualified sub-borrowers, and ADB. It also clarifies ADB’s support during the initial stage of implementation in terms of review and concurrence of safeguards documents considering that HCBMC and BOIM have yet to set up the ESMS and build their capacity to do their own due diligence and review of safeguards documents.

IV. ASSURANCES

12. Prior to loan effectiveness, BOIM will adopt an ESMS satisfactory to ADB.

13. Prior to the first disbursement, BOIM will undertake a series of capacity building measures on ADB safeguards and other ADB social requirements.

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