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Environmental and Social Management System Arrangement Project Number: 51192-001 October 2019 Proposed Multitranche Financing Facility People’s Republic of China: Inner Mongolia Regional Cooperation and Integration Promotion Investment Program Prepared by Hohhot Branch of China Minsheng Bank Co., Ltd and Bank of Inner Mongolia 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. ii iii iv CURRENCY EQUIVALENTS (as of 02 September 2019) Currency unit – yuan (CNY) €1.00 = CNY 7.8664 $1.00 = CNY 7.1567 NOTE In this report, "$" 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 Asia Regional Economic Cooperation ESMS – Environmental and social management system FIL – Financial intermediation loan FIs – Financial intermediaries GRM – Grievance redress mechanism HCMBC – Hohhot Branch of China Minsheng Bank Co., Ltd IMAR – Inner Mongolia Autonomous Region 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 v I. PROJECT BACKGROUND 1. The proposed Multitranche Financing Facility (the MFF) for Inner Mongolia Regional Cooperation and Integration Promotion Investment Program (Investment Program) will help the Inner Mongolia Autonomous Region (IMAR) of the People’s Republic of China (PRC) to implement its strategies and plans for regional cooperation and integration (RCI) with Mongolia with a focus on developing border crossing points (BCP) and border areas including a key node of Central Asia Regional Economic Cooperation (CAREC) transport corridor 4. The Investment Program is expected to have significant RCI spillover effects, benefiting Mongolia, and promote regional public goods (RPGs). The geographical areas to be covered by the Investment Program include: (i) Erenhot Municipality; (ii) Darhan Muminggan United Banner (Damaoqi County) and Qingshan District in Baotou Municipality, (iii) Arxan City in Xing’an League (Xing’an Municipality); (iv) Alxa Left Banner (Azuoqi County) in Alxa League (Alxa Municipality); (v) Bayannur Municipality; and (vi) small and medium-sized enterprises (SMEs)1 located in IMAR through financial intermediaries (FIs). The first tranche loan for SME financing will be provided through financial intermediation loan (FIL) in in an amount up to €18.20 million (equivalent to $20.00 million). 2. The proposed FIs will (i) provide credit to SMEs2 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. Hohhot Branch of China Minsheng Bank Co., Ltd 3. China Minsheng Banking Co., Ltd (CMBC) was established in January 1996 and is the first national-level joint-stock commercial bank initiated and founded mainly by non-state-owned enterprises. It is also a modern financial enterprise established in strict accordance with the Company Law and the Commercial Bank Law of the PRC. Hohhot Branch of CMBC (HCMBC) was established in November 2011 and it will act one of the FIs to implement the FIL component under the Tranche 1. The main businesses of HCMBC includes corporate banking, retail banking, including small business finance, and other businesses that approved by the People’s Bank of China. The general loan process flow of HCMBC 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. Lending to SMEs is one of the major businesses in HCMBC and has provided many 1 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. 2 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. 1 benefits to such enterprises such as loan approval process improvement, reduction of financing cost, and rate relief. 4. Currently, more than 95% of the HCMBC staff are major in financial or economical and HCMBC does not have staff qualified in environmental or social management or safeguards. In the current loan processing procedures, HCMBC follows PRC’s laws and regulations for environmental and social due diligence, including checking the domestic environmental impact assessment (EIA) approval and land use permit (if applicable). Obtaining these documents are the pre-conditions of loan approval. During implementation period of the approved project, if non- compliance was observed, HCMBC will request borrowers to provide appropriate corrective actions following local authorities’ requirements. If this is not strictly followed, HCMBC will further request the borrowers to immediately repay all amounts and charges outstanding and due to HCMBC, and terminate the loan agreement. Such items are also included in the loan agreement between HCMBC and borrowers. There is no any environmental and social safeguard issue happened so far in all lending portfolio in HCMBC. 5. Overall, the performance of HCMBC shows that it is experienced in domestic loan processing and due diligence (including financial, environmental and social) of project loans. It has its own system of screening and selecting projects to be financed as loan. However, it is noted that the HCMBC staff are not assessing environmental and social risks of the proposed loan but only check the compliance of the project loan including obtaining the copies of approvals from local government authorities. HCMBC staffs are not familiar with the ADB Safeguard Policy Statement (SPS) (2009) requirements. Capacity building will be necessary and crucial during the project implementation. During project preparation, safeguards orientation and training were provided to HCMBC staff by transactional technical assistance (TRTA) consultants. B. Bank of Inner Mongolia 6. Bank of Inner Mongolia (BOIM) is was founded in November 1999 with the approval of People's Bank of China with its headquarters in Hohhot. 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 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 prefectures/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. 7. 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