Report and Recommendation of the President to the Board of Directors Sri Lanka Project Number: 40641 November 2009 Proposed Loan and Administration of Grant People’s Republic of China: Hebei Small Cities and Towns Development Demonstration Sector Project CURRENCY EQUIVALENTS (as of 9 September 2009) Currency Unit – yuan (CNY) CNY1.00 = $0.1464 $1.00 = CNY6.8318 For the purpose of calculations in this report, an exchange rate of $1.00 = CNY6.83 has been used. ABBREVIATIONS ADB – Asian Development Bank BCA – benefit–cost analysis EA – executing agency EIA – environmental impact assessment EIRR – economic internal rate of return FIRR – financial internal rate of return FNPV – financial net present value FYP – five-year plan HPG – Hebei provincial government IA – implementing agency ICB – international competitive bidding LCA – least-cost analysis LIBOR – London interbank offered rate MDG – Millennium Development Goal MLSS – minimum living standard scheme MSW – municipal solid waste NCB – national competitive bidding NPV – net present value O&M – operation and maintenance PEAP – public education and awareness program PLG – project leading group PMO – project management office PPMS – project performance management system PRC – People’s Republic of China SAR – subproject appraisal report SEIA – summary environmental impact assessment SI – sensitivity indicator SV – switching value SWM – solid waste management TA – technical assistance WACC – weighted average cost of capital WFPF – Water Financing Partnership Facility WTP – water treatment plant WWTP – wastewater treatment plant WEIGHTS AND MEASURES ha – hectare km – kilometer km2 – square kilometer m2 – square meter m3 – cubic meter m3/d – cubic meter per day MW – megawatt t/d – ton per day NOTES (i) The fiscal year (FY) of the Government ends on 31 December. (ii) In this report, "$" refers to US dollars. Vice-President C. Lawrence Greenwood, Jr., Operations 2 Director General K. Gerhaeusser, East Asia Department (EARD) Director A. Leung, Urban and Social Sectors Division, EARD Team leader T. Villareal, Senior Urban Development Specialist, EARD Team members H. Gunatilake, Senior Economist, Economic and Research Department M. Gupta, Senior Social Development Specialist (Resettlement), EARD S.W. Handayani, Senior Social Development Specialist, Regional and Sustainable Development Department X. Peng, Lead Professional (Counsel), Office of the General Counsel S. Popov, Principal Environment Specialist, EARD W. Walker, Social Development Specialist, EARD J. Wang, Project Officer (Urban Development and Water Supply), EARD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area. CONTENTS Page LOAN AND PROJECT SUMMARY i MAP I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 3 III. THE PROPOSED PROJECT 9 A. Impact and Outcome 9 B. Outputs 9 C. Special Features 10 D. Project Investment Plan 11 E. Financing Plan 11 F. Implementation Arrangements 12 IV. PROJECT BENEFITS, IMPACTS, AND RISKS 16 V. ASSURANCES 19 VI. RECOMMENDATION 20 APPENDIXES 1. Design and Monitoring Framework 21 2. Sector and Subsector Analysis 27 3. Process for Subproject Identification, Selection, Preparation, and Appraisal 31 4. External Assistance 33 5. Summary of Support for Water and Wastewater Utilities 36 6. Summary Cost Estimates and Financing Plan 37 7. Onlending Arrangements and Indicative Funds Flow 39 8. Project Organization 40 9. Implementation Schedule 41 10. Procurement Plan 42 11. Summary Poverty Reduction and Social Strategy 48 12. Summary Resettlement Plan 52 13. Financial Analysis 54 14. Economic Analysis 59 SUPPLEMENTARY APPENDIXES (available on request) A. Problems and Objectives Tree Analyses B. Sector Policy Framework C. Subproject Appraisal Criteria and Report Template D. Technical Analysis of Core Subprojects E. Candidate Subsequent Subprojects F. Support for Water/Wastewater Implementing Agencies/Companies G. Proposal for UN-HABITAT Grant H. Proposal for Water Fund Pilot Demonstration Activity I. Detailed Cost Estimates and Financing Plan J. Institutional Arrangements and Assessment K. Procurement Capacity Assessment L. Detailed Procurement Plan M. Terms of Reference for Consulting Services N. Poverty and Social Assessment and Social Action Plan O. Labor Reemployment Framework and Labor Reemployment Plan P. Health Impact Analysis Q. Ethnic Minority Development Framework R. Resettlement Framework S. Detailed Financial Analysis T. Financial Management Assessment U. Detailed Economic Analysis V. Environmental Assessment and Management Framework W. Detailed Assurances LOAN AND PROJECT SUMMARY Borrower People’s Republic of China (PRC) Classification Targeting classification: Targeted intervention (nonincome Millennium Development Goal) Sector (subsectors): Multisector (water supply and other municipal infrastructure services, water supply and sanitation, waste management, energy utility services) Themes (subthemes): Economic growth (promoting macroeconomic stability), social development (human development), environmental sustainability (urban environmental improvement) Climate change: Climate change adaptation Location impact: Rural (low impact), urban (high impact) Partnership: Multi-Donor Trust Fund under the Water Financing Partnership Facility Environment Category A. An environmental impact assessment was Assessment undertaken. The summary environmental impact assessment was circulated to the Board of Directors of the Asian Development Bank (ADB) and uploaded to the ADB website on 2 December 2008. Project Description The proposed Hebei Small Cities and Towns Development Demonstration Sector Project (the Project) will enable improved urban infrastructure delivery by implementing environmentally sustainable subprojects in selected small cities and towns in Hebei Province. The Project is being processed as a sector loan to allow the Hebei provincial government (HPG) to respond to the rapidly changing needs of cities and towns across the province. The Project includes about 10 subproject small cities and towns. Detailed assessment and analyses have been undertaken for the three core subprojects: Bazhou City, Zhaoxian County, and Zhengding County. Subsequent subprojects will be prepared and appraised during project implementation following an agreed set of criteria and procedures. The Bazhou subproject includes (i) the Mangniu River improvement and sewer network rehabilitation component, which will improve river water quality and flood control, reduce groundwater pollution, and support the integration of environmental infrastructure improvements; and (ii) the Shengfang town water supply component, which will improve water supply reliability and quality and reduce the number of shallow groundwater wells. The Zhaoxian subproject has three components: (i) wastewater treatment, (ii) heating supply, and (iii) solid waste management. These components will improve urban environmental quality by reducing air, water, and land pollution. In Zhengding, the solid waste management component will provide conveniently located collection and transfer points and a processing facility for recyclables and composting for producing natural fertilizer. This component will improve the living ii environment and enhance tourism, as Zhengding has a rich cultural heritage. All components address basic urban infrastructure to support the expansion of small cities and towns, enhance the quality of the urban environment, and attract rural migrants to work in light industry and the service sector. Rationale The Government of the PRC is committed to developing small cities and towns as a way to foster economic growth, generate employment, and narrow the rural–urban income gap. The growth of small cities and towns creates economic opportunities for the rural poor, who are attracted to alternative incomes in urban areas. This is the key to realizing the PRC’s vision of a “harmonious society,” in which the benefits of economic growth are shared more equitably. The PRC’s 11th Five-Year Plan (FYP) 2006–2010 identifies small city and town development as a means to provide a higher standard of living to rural migrants through improved basic urban infrastructure services. Building on the conclusions of the 2004 ADB-financed Town-Based Urbanization Strategy Study, the national town development policy calls for strengthening physical and economic linkages between major cities in metropolitan areas or development corridors and the smaller settlements at their periphery. Hebei’s industrial structure is dominated by traditional capital- intensive resource-processing industries that are state owned, generate limited employment, and are heavy polluters. It has remained a largely underdeveloped province, with limited economic, social, technological, or political linkages with Beijing and Tianjin, despite proximity to these major cities. Hebei suffers from undeveloped urban–rural linkages, underinvestment, weak urban management, and significant deterioration of the natural environment, including the depletion of water resources. The challenge is to improve infrastructure service delivery, safeguard the environment, and improve local living conditions to achieve sustainable development that